Precision Drilling - Earnings Call - Q1 2019

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to your Precision Drilling Corporation First Quarter twenty nineteen Results Conference Call. At this time, participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, today's conference is being recorded. I would now like to turn the call over to Ashley Connolly, Manager, Investor Relations.

You may begin.

Speaker 1

Thank you, Sydney, and good afternoon, everyone. Welcome to Precision Drilling's first quarter twenty nineteen earnings conference call and webcast. Participating today on the call with me are Kevin Nevew, President and Chief Executive Officer and Carey Ford, Senior Vice President and Chief Financial Officer. Through our news release earlier today, Precision reported its first quarter twenty nineteen results. Please note that these financial figures are in Canadian dollars unless otherwise indicated.

Some of our comments today will refer to non IFRS financial measures such as EBITDA and operating earnings. Please see our news release for additional disclosure on these financial measures. Our comments today will include forward looking statements regarding Precision's future results and prospects. We caution you that these forward looking statements are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from our expectations. Please see our news release and other regulatory filings for more information on forward looking statements and these risk factors.

Carey will begin today's call with a brief discussion of our first quarter operating results. Kevin will then provide an operational update and outlook. With that, I'll turn it over to you, Carey.

Speaker 2

Thank you, Ashley. In addition to reviewing the first quarter results, I will provide an update on our 2019 capital plan and management of our capital structure. In 2019, our financial performance is off to a strong start with first quarter adjusted EBITDA of $108,000,000 11% higher than the 2018. The increase in adjusted EBITDA from last year is primarily the result of higher activity levels and dayrates in our U. S.

Business, offset by significantly lower activity in our Canadian market. Additionally, EBITDA was positively impacted by the implementation of a lease accounting standard, has added $3,000,000 to EBITDA and negatively impacted by severance charges of $6,000,000 In the quarter, we recognized a $9,000,000 share based compensation expense compared to a $12,000,000 recovery in Q4 twenty eighteen. We had a similar share based compensation expense in Q1 twenty eighteen. In The U. S, drilling activity for Precision increased 23% from Q1 twenty eighteen, while margins were up $2,257 per day, positively impacted by higher dayrates, partially offset by higher operating costs.

Sequentially, dayrates and margins net of Turnkey and IBC increased $12.66 dollars and $669 respectively. We expect to sustain strong margins into the second quarter. In Canada, drilling activity for Precision decreased 33% from Q1 twenty eighteen, while margins were down $356 per day from the prior year, negatively impacted by lower shortfall payments. Net of shortfall payments, margins were higher by $465 per day. As we expect weaker Canadian Q2 activity in the current quarter, we expect weaker overhead absorption, which is likely to cause margin pressure with daily operating margin down $500 to $1,000 per day compared to Q2 twenty eighteen.

Of note in the quarter, only 36 of our company's revenue was generated in Canada. This is the lowest percentage in the history of Precision, reflecting both the success of our investments outside of the Canadian market and the particularly weak industry activity experienced in Canada this quarter. Internationally, drilling activity for Precision equaled activity in Q1 twenty eighteen and average day rates were approximately US50000 dollars per day consistent with prior year. In our C and P division, adjusted EBITDA this quarter was $10,500,000 an increase of 127% from the prior year, a direct result of cost cutting and business improvement initiatives enacted over the past several quarters. Of note, the improved financial results were delivered with lower industry activity than the prior year.

Capital expenditures for the quarter were $71,000,000 For 2019, our capital plan remains $169,000,000 flat with previous guidance. The 2019 capital plan is comprised of $54,000,000 for sustaining and infrastructure and $115,000,000 for upgrade and expansion. Our capital expenditure plan remains front end loaded as we delivered a previously announced U. S. New build rig in Q1 and will complete the spending of our Kuwait new build rig scheduled for deployment in June and the SCR to AC ST-fifteen 100 conversion announced today.

We have continued to build our contract book, signing 22 term contracts year to date. And as of April 24, we had an average of 64 contracts in hand for the second quarter an average of 57 contracts for the full year 2019. As of March 3139, our long term debt position net of cash is $1,550,000,000 We had $101,000,000 in cash on our balance sheet and our total liquidity position was $800,000,000 During the quarter, we made open market purchases totaling US13 million dollars and year to date have called US50 million dollars of outstanding 2021 notes, which will settle in the second quarter. Our year to date 2019 debt reduction announcements total approximately $84,000,000 We continue to view cash flow generation and debt reduction as top priorities this year and plan to reduce debt by $100,000,000 to $150,000,000 by year end and are highly confident in our ability to meet or exceed the top end of our debt reduction range for the year. Over the past three years, including recent redemption notices, we have reduced total leverage by US393 million dollars For 2019, we expect depreciation to be approximately $340,000,000 and SG and A to be approximately $110,000,000 prior to share based compensation expense, which can fluctuate with the price of our shares.

We would expect cash taxes to remain low and our effective tax rate to be in the 20% to 25% range. In our communication with investors in 2019, we have noted that divestitures would be considered as a means to accelerate our debt reduction targets. Year to date, we have announced three transactions totaling 77,000,000 in proceeds. The cumulative transaction prices were approximately $40,000,000 above book value and had effectively zero impact on EBITDA. We will continue to look for selective opportunities to divest non core assets over the coming quarters.

I will now turn the call over to Kevin for further discussion of the business and outlook.

Speaker 3

Thank you, Carrie, and good afternoon. I'm pleased with Precision's strong start to 2019. And despite market headwinds in Canada and softening U. S. Industry activity, we delivered better than planned progress on all three strategic priorities for the year.

Terry mentioned our accelerated debt reduction. I am particularly pleased with the strong cash flow from operations as a result of aggressive cost management while leveraging the scale of our Super Triple fleet. We're also pleased with the cash raised through the sale of non core assets. We believe further opportunities remain. Most importantly, we're on track commercializing our technology platform with strong customer support in several basins.

Additionally, over the course of the last twelve months, we've increased our U. S. Super Triple fleet by six rigs through a combination of redeployments, upgrades and new builds. And this demonstrates our ability to continue to invest in our business and maximize the returns for our Super Triple fleet. So first of all, regarding our capital structure and reiterating Carey's comments, we expect to be at or above the top end of our debt target debt repayment range this year.

We believe that lowering Precision's total debt to date and EBITDA leverage below two is well within sight. We're confident that this is the best and most certain path to create value for our shareholders. I think it's also worth pointing out that debt reduction was a key component in our short term incentive plan in 2018 and remains a key component in both our short term and now our long term competition plan awards for 2019, completely aligning shareholder value creation with executive compensation. Touching base on technology programs, this is the most important long term growth and competitive strategic initiative we are executing. Progress during the 2019 was very good.

We drilled over 200 wells utilizing process automation controls, up 46% from last year. We have 15 drilling automation apps under various stages of field hardening with three apps now transitioning to fully commercialized. I'll remind the listeners that Precision is the industry first mover in driller automation with more fully driller automated rigs operating than any other industry participant. It will remain on plan to achieve full commercialization by the 2019. These technologies are capital light, revenue and margin accretive.

Precision's standardized Super Triple fleet will enable fleet wide deployment of these technologies. The competitive advantage we're achieving can be compared to the strong market position Precision enjoys with Super Single rigs in Canada and our AC Super Triple rigs in The United States, Canada and Kuwait. Now turning to our key markets. Demand for Precision Super Triple rigs in The U. S.

Remains very strong. During the first quarter, we commenced our first SCR to AC Super Triple upgrade. This rig will be deployed late in the quarter under a long term take or pay contract, which will support the expected $6,000,000 conversion cost. We have approximately 12 additional SCR rigs that are candidates for similar AC upgrades, although today no further upgrades are planned as debt reduction remains our top priority. Now as I mentioned earlier, our fleet of Super Triple rigs is six rigs larger than a year ago, including two rigs we redeployed from Canada to The U.

S. I'll speak more to Canada in a few minutes, but it's important to note that we have three ST-1500s and 23 ST-1200s in Canada and remain poised to deploy additional SuperTriq triple rigs to The U. S. If Canadian demand weakens or pricing weakens. So currently, we have 80 rigs running in The U.

S. And have sustained activity this activity level through the quarter despite a modest reduction in industry rig activity. As mentioned in our press release, we signed 16 term contracts in The U. S. During the first quarter and two more in April, with several more pending, supporting the view that demand for our Super Triples remains strong.

While customer indications near term are muted, we are confident we can sustain this activity level through the second quarter. The key priorities we hear from our customers are about fiscal discipline, spending within cash flow, returning capital to shareholders, and this is driving customer behavior at all levels. We believe this intense fiscal discipline focus aligns well with Precision's efficiency driven, high performance and technology based rig strategy. Now that said, we believe the improved commodity prices are delivering substantially better than expected cash flows to many of our customers. If the current commodity prices are sustained, we're optimistic regarding overall rig demand in the second half of the year.

Now looking closer at the specific regions, the Permian rig remains our most active and attractive basin with 42 rigs running, 10 of the new long term contracts we mentioned are focused on the Permian. The ST-fifteen 100 removed from Canada from its operations in the Permian in January and two of the three new builds we mentioned earlier, along with the SCR to AC conversion, all target the Permian. We expect the Permian activity for Precision will remain strong and likely be the primary basin responding to strengthening commodity prices. We also note that super majors are ramping up investments in U. S.

Shales with expanded drilling programs and through land and corporate transactions. The super major large scale industrial development program aligns very well with Precision's high performance Super Triple rig strategy. And we already count several Super Majors' large independents among the early adopters of our automation technology. We believe we are very well positioned as the industry transitions to fully industrialized scale, property efficiency and automation technology will drive the economics. Shifting to the Mid Con.

In the SCOOPSTACK, Precision remains active with six rigs operating. However, we expect that later this quarter, we'll relocate two rigs to ST-fifteen Hundred to the Haiti Haynesville, where we expect to have four rigs operating by the end of the second quarter. As our customers continue to control their spending and adjust drilling programs, we'll respond by positioning our rigs at best returns. In the Marcellus, we have eight rigs operating, down from 10 earlier this year as our operators adjust drilling activity. Despite the slight reduction in activity, our rates have remained firm and the Marcellus market is behaving as a mature gas shale play.

The drilling programs are essentially fully industrialized, operating performance is closely measured and good or strong performance is well rewarded by the customers. We are enjoying strong commercial support for automation technology as our customers are realizing the benefits of the efficiency, the consistency and repeatability. So moving back West, we along with everyone else are watching the DJ Basin closely. Precision has 10 rigs operating in the basin with firm contracts and day rates. Our customers are telling us they expect to manage through the new state legislation and they're providing visibility out the next couple of years.

Our rigs in that basin are operating at the highest level of industrialization with pad sizes now stretching to 20 wells. We are consistently drilling 24,000 foot measured depth and long reach horizontal wells in under twelve days that we want rigs on a pad in less than forty five minutes. Our customers manage their drilling and production operations in The DJ with a world leading focus on their environmental footprint. We're hopeful that pragmatic and reasonable thinking will balance regulatory requirements with jobs and economic value in Colorado. But should that fail, we believe industry rig demand will pull Precision's seven Super Triple rigs to other basins if necessary.

So for Precision, while overall U. S. Industry demand has softened during the first part of this year, we've experienced sustained utilization for high performance rigs through redeployments, customer high grading, rig substitution and our customers' desire for efficiency gains we're delivering via automation technology. Now turning to Canada. The winter drilling season lasted a little longer than we expected, which tells you how low our expectations were set back in December.

The narrow WCS differential for weak Canadian dollar both provided our customers with relief and improved cash flows, some of which we saw to extend winter drilling programs. Our rig activity peaked in late January and held up into March, several weeks longer than we expected. We saw two well programs extend to become four wells. We saw full pads that were drilled rather than partial wells or partial pads were planned. We had several rigs that we expected to be idle that were picked up for additional one to two well projects.

Looking forward, we expect our Deep Basin Super Triples to be operating near full utilization through Q3 and Q4. However, if that demand fails to materialize or if rates weaken, we are poised to remobilize additional rigs to The U. S. In very short notice. So today, we have 22 rigs operating.

It's about 33% lower than this time last year. And we're developing visibility on summer ramp up that should start commencing in mid May through mid July. And current customer indications suggest that that wide gap we see today will narrow from current levels during the third quarter. Precision's Canadian business has adequate scale. And even during these very depressed periods, we generate substantial free cash flow with a very minimal investment required.

During the first quarter, once again, we responded to resize our business and its reduced business level, reducing annualized fixed costs by approximately $10,000,000 per year, while incurring a onetime charge of about $6,000,000 in severance. We believe these cost reductions were appropriate and we believe they're sustainable. So turning to our international business. We see this as a strong and stable business in both Saudi Arabia and Kuwait. Trey mentioned the contract renewals in Saudi and the extensions in Kuwait.

We see this revenue stability continuing into the next decade. As Carey mentioned, our sixth rig remains on schedule and on budget, and we are well experienced with the complex customer certification and approval processes required new rig deployments in Kuwait and don't expect any laser issues. We expect the six rig will commence operations late in the third quarter late in the second quarter prior to the third quarter. And we continue to see rising international interest and more bidding opportunities for our four idle rigs in the region. So turning back to Canada for a moment.

Precision's completion of production business demonstrated substantially improved financial results for the second consecutive quarter, delivering strong free cash flow. And this is due entirely to the efforts of the C and P team to manage all costs. We're working closely with customers to proactively plan jobs, minimizing interruptions and startups, carefully managing pricing, all contributes much improved cash flows to this business unit. Now you know that I've been saying for several years that the well service business is structurally unhealthy. Rates and utilization have been running well below survival levels for several years now.

And the long term effects are evident as the industry rig fleet is shrinking due to this underinvestment, crew salaries have been frozen or reduced, workers are reluctant to return to jobs in the sector. However, I do see a scenario where even in a modest increase in demand, both crew shortages and rig availability will be strained. And this should lead to improved supply demand pricing environment, and I believe Precision is extremely well positioned should we see this trend emerge. Certainly, congratulate the team for their ongoing efforts to manage our costs while preserving the competitive capabilities of our well service fleet. So I believe that with a strengthening WTI commodity price, stable and narrowing WCS differentials, favorable currency exchange rates, stronger customer cash flows and a substantially improved political environment following the recent United Conservative Party win in Alberta.

These all give us many reasons to be encouraged for an improving environment for Canadian services. So on that note, I want to thank the employees of Precision Drilling for their hard work, the strong operational and financial results delivered during this quarter and particularly for the excellent execution against our strategic priorities. And I'll now turn the call back to the operator for questions.

Speaker 4

Thank

Speaker 0

Our first question comes from Sean Niekin with JPMorgan. Your line is open.

Speaker 5

Thanks. Hey, guys. So maybe just to start off, Precision has a decent mix of customers in U. S, the majors, large and small independents, some privates too. Was hoping you could maybe just give us a sense of with the pending news, we'll see what happens ultimately with Anadarko.

But let's say there is an acreage consolidation cycle that gets underway in The U. S. Can you talk about what you think that means broadly for super spec rig demand and call it a static rig count environment? And then specifically for PD, how you think you're positioned for that type of change in the customer base?

Speaker 3

Hey, Sean, it's Kevin. Thank you for the question. I think it's a really key question as the market continues to kind of industrialize. So you can look at any one of the kind of emerging plays when the majors move in either through acreage or through consolidation or transactions like this, they're targeting kind of two outcomes. One, they try to consolidate acreage and two, they apply industrial level capital to the play.

And you've heard companies like XCO, which is an excellent talk about adding 20 or 30 rigs. Certainly by these consolidations, we're seeing kind of similar

Speaker 2

thinking. We think

Speaker 3

that plays very well. We think likely it means our Chuck customers that focus on lean manufacturing, measuring not tens, but hundreds of data points on the rig, optimizing every aspect of the drilling operation, which plays into both our data and our automation technology quite well. So already, our customer sets is probably the farthest down the commercialization path are generally super majors and large E and P customers. Although that said, we have a couple of private equity clients who are also fully commercial adopters too. So it's both ends of the scale.

But no question, IOCs bring in industrial grade capital when they're looking for industrial style execution, both at the rig level and on the development levels. We expect more rigs and those rigs to be very well managed, high performance, high value rigs. I think it plays well for us.

Speaker 5

Thank you for that feedback. I appreciate that. Could you maybe give us a sense of just thinking about Canada and the back half being quite important and still pretty open ended? How you think your discussions with customers could play out as we get through spring breakup and you have that second round of budget discussions your customers will undergo? Do you think that will that cadence be typical?

Or do you think there'll be perhaps a desire to get as much price discovery as they can? When do you think you'll start to get better visibility on what the back half looks like?

Speaker 3

Sean, I expect to have a little bit more visibility by now, but this is really not that much different than any season where our customers want to get through publishing their Q1 results before they get really serious about booking up and locking in rigs for Q3. So they're focused on messaging to their investors what they've done, how they've accomplished the first quarter. And then they get serious about their Q3 plans because really the Q2 period is a real flat period when it's just a lot of bad rigs and a pretty quiet period. So we're maybe just slightly behind that normal negotiating cycle, but it's not that surprising. What we are hearing though is that it looks like activity is going to ramp up like it would normally, but not we're not expecting things to get back to 2018 levels.

But the 33% gap that we saw during Q1 announced Q2 could narrow in July.

Speaker 5

Right. That makes sense. And one more just if I could on free cash, just one data point I wanted to get from you all. Could you maybe just give us a sense of obviously, you've done a very good job of generating free cash here recently and it's the key focus. Could you maybe just give us a sense of the expectations around working capital cadence?

Was a pretty strong draw earlier the year, not unsurprising from that perspective. But as you go through the year, do you expect working capital to be a source of cash for the balance of the year? What can we look like on a full year basis?

Speaker 2

It's Carey. So we did have a bit larger draw in Q1, which is typical when we have higher seasonal activity in Q1. We didn't experience as big of a ramp in Q1 as we typically do, but we had some other draws on cash, year end payments and the new IFRS lease standard put about a $12,000,000 increase in working capital. So I think throughout the rest of the year, it's going to be activity dependent. And I wouldn't expect us to have either a big source of cash from working capital or a big use of cash, given where we see the market trending.

Speaker 5

That's very helpful.

Speaker 2

Right, from the first year to the end of the year.

Speaker 5

Thank you very much.

Speaker 0

our next question comes from Kurt Hallead with RBC. Your line is now.

Speaker 4

Hey, good afternoon. It's good, a pretty good rundown. I think we got a pretty good feel of the kind of near term expectations on kind of what's going on in The U. S, what's going on in Canada from a land drilling perspective. One thing you didn't mention though was, it's kind of been thematic here is higher degree of focus on kind of the federal operations and efficiency companies that have the most efficiency.

And then you referenced demonstrating that performance differential can get you rewarded. I was wondering if you can kind of give us some indications like what the key performance indicators that you're being benchmarked against? How does it maybe differ within the varying basins in The U. S? How does it differ in Canada?

Just kind of give a more kind of perspectives on that, if you can.

Speaker 3

Yes. Kurt, that's a very complex question. The KPIs with our customers range from something as simple as simply our day rate, which would be the most basic and least helpful for us to several customers where we have literally hundreds of KPIs around every process, every activity of the rig. So there's a wide range. I would tell you though that the most sophisticated operators that focus on the drilling process tend towards a higher end of capturing data.

And historically that data has been captured in fifteen minute increments using a tower sheet process. Today we're capturing in two hundred millisecond increments. We're able to break down the drilling process into every single movement on the joystick or every single timing on when we engage the slip. So with our best customers, where the lean philosophy is kind of rolling through everything they do, we're satisfying that quite well. And but even with kind of moderately sophisticated customers, we'll be measuring anywhere from 20 to 100 KPIs per day on a fifty minute or even two hundred millisecond increments.

And all of that's helping us to improve the drilling process. I mentioned on earlier some examples, the DJ Basin where we're drilling these 10,000 foot laterals, 20 some thousand feet long and fourteen days consistently over and over, moving rigs in less than forty five minutes from spud to release on the pad. Those are jobs where we are measuring more than 100 KPIs and managing the operation down to every step of the rig. Is that helpful?

Speaker 4

No, that's helpful in that context. When you talk about getting rewarded for it, does that mean that you get kind of a better day rate or does it just mean that you don't have to give up any day rate like in a market environment we're looking at right now?

Speaker 3

I'll make a couple of comments broadly. It's we're in really sensitive period on day rates right now because some contracts that are being negotiated and signed off. Generally speaking, if we can prove the rig has strong operating efficiency, the day rig discussion is less meaningful. If we can prove through data that the rig has strong operating efficiency.

Speaker 4

Then the price cost is

Speaker 3

part of the discussion, generally speaking. I'll also tell you that we can identify now several rig jobs we have because we have automation on the rigs. We can identify that. We can identify one of the rig moves from Canada to The U. S.

We have the data technology. So we're moving beyond aspirational thinking about automation and aspirational stories about data into measurable market share and measurable activity tied to performance.

Speaker 4

Okay. That's helpful. So maybe we could segue from there. You talked about the automation and the technology and the expectation to be that be commercially viable, I think, by the end of the year on a certain number of rigs. Could you elaborate that on that a little bit more and give us some sense of kind of what the uptake has been and kind of what the feedback loop has been with E and P companies?

Speaker 3

Sure, Ken. So first of all, on our last conference call, talked about field resistance being greater than we expected. And I'll just come back to that because that's what we're managing right now and doing a pretty good job. So what we're doing, Kurt, is there are two pieces. We're automating everything the driller does and we're also putting drilling apps that control things like sticks, lift and vibration, harmonics and digital guidance for the wellbore.

So we call our process automation automating all the driller functions so the driller can sit back and actually watch the operation rather than control all the equipment on an ongoing basis. So that piece, that changes the jobs dramatically. It changes the driller's job. It changes the company man's job. You can even change the drilling engineer's job.

That requires a lot of training, lot of interaction, lot of work with customers. If we can get that driller hands off more than 70% of the time, the value is broadly demonstrable. So getting the company man, getting the drilling engineer, getting our driller all synced, and we'll let the driller go hands off 70% of the time is the tipping point for us where the value is apparent and we can charge our $1,500 per day and everybody wins. The value is delivered, we get the EBITDA and the rig performs better. That's on the process automation control.

Moving to the drilling apps like Stickslip and Harmonics and Digital Guidance, those are apps that control bit position and string dynamics and kind of things that are happening when you're full weight on the bit. And as I mentioned, we've got three of those that are transitioning now and We expect that likely in the third quarter, those will be earning revenue as line items.

Speaker 4

Is that helpful? Yes. No, that's helpful. And then just one last thing, Kevin, you referenced the ability to mobilize rigs from Canada down to The U. S.

On a moment's notice if depending on the relative opportunity. So can you give us some indications as to what's that relative opportunity? What does it mean in terms of potential activity levels in Canada in the back half of the year? What would have to transpire or not have to transpire for you to say, hey, it's better for us to move some stuff out of Canada? And I'm really referencing that, Kevin, in the context of I would imagine you'd have to think that it's just more than just, hey, the back half of 'nineteen doesn't look that great.

It's got to be more perspective, I would imagine. Do you think not only the back half of 'nineteen in Canada may not look great, but it may be more like 2020, 2021 or '21 or longer term dynamic. Can you give us some perspectives on that please?

Speaker 3

Yes, I sure can. I think that's also a pretty key question. So far we've only moved two rigs from Canada to The U. S. Just to leaving over 25, 26 rigs in Canada.

And through Q1, those rigs were over 90% utilized. It looks like they'll be over 90% utilized in Q3 and Q4. If that utilization plays out and if the pricing stays strong, I doubt we move any more rigs. And if the performance of those rigs continues, then as we begin to roll up more of the automation, I think that performance will just look better and better. It's quite likely that we move no more rigs to The U.

S, quite likely. Now if something changes and things for whatever reason turn more negative in Canada, there's nothing holding us stock.

Speaker 4

That's great, Kevin. Thanks for that color. Appreciate

Speaker 6

it. Thank

Speaker 0

Thank you. And our next question comes from Taylor Zurcher with Tudor, Pickering, Holt. Your line is open.

Speaker 3

Hey, good afternoon. Taylor?

Speaker 7

Kevin, in The U. S, your rig count activity levels have remained frankly remarkably resilient over the past several quarters. And so clearly, you're adding an additional or performing additional upgrade for, I think, Q3. Question is, the recent oil price momentum, it feels like $65 WTI is generating a bit of a buzz as it relates to a potential second half rig count recovery at least on the margin. My question is with what you're seeing today, has the tone or dialogue with some of your customers noticeably changed at all over the past several months with respect to adding activity?

Right is now really just kind of a wait and see type thing as it relates to how improved this oil price momentum might translate into increased drilling activity in the back half?

Speaker 3

Taylor, some of those comments made earlier about our Canadian customers and messaging around end of the quarter. I would tell you that everything we hear from our customers in The U. S. Remains focused on fiscal discipline, capital efficiency, returning capital to shareholders. There's been no change in the narrative by our customers.

Now that's worked up quite well for us. In fact, we've if we've had rigs that have been leased by one operator, we've had no troubles getting those rigs rebooked with other operators looking to improve his efficiency. So I think that I think you mentioned that our activities have been resilient. I think that's a result of $3,500,000,000 of investment in the first half of the second year in high quality rigs. And rigs that if they get released by one operator, they're quick picked up without a miss, without a day being missed by another operator through high grading.

But the fundamental question you asked me was, has there been a change in Homebuyer customers? Not at the operating level, not at the corporate level. They are focused on fiscal discipline. And we'll see what happens once they get through Q1, once they get through Q2. My expectation is that they're achieving substantially higher cash receipts halfway through the year, they might have a way to do both, both return capital to shareholders and slightly increase drilling.

Speaker 7

Okay. That's helpful. Follow-up in the C and P segment, I think Q1 is probably the second or third straight quarter of really strong improved performance. I mean looking ahead, it looked like in Q1, at least part of the top line improvement sequentially and year over year was due to some non traditional well servicing type activity. So my question is looking beyond spring breakup, do you think you can sustain that type of strong top line performance?

And is the sort of mid to high teens EBITDA margin that you've been run rating the past couple of quarters, is that something that you think is sustainable for the back half of the year?

Speaker 2

We do. One part of our business units in the C and P division was the campus business that had a slightly better quarter than what we expected, but it's not one that we don't think is repeatable.

Speaker 7

Okay, got it. Thanks. That's it for me.

Speaker 4

Thank you.

Speaker 0

Thank you. And our following question comes from JB Lau with Citi. Your line is open.

Speaker 3

Hey, good morning guys.

Speaker 8

Just had a question on the upgrade that you guys did to the ST-fifteen 100. You said it was $6,000,000 for the upgrade?

Speaker 3

That was the conversion cost to go from it was actually a it was a DCSER rig. It was

Speaker 2

a full pad walking rig.

Speaker 3

So we're just converting that rig from DCSER to a full AC suite, which means power lineup, power control lineup, a driller's cabin and some accessories like that on the rig. But the comment I'd make is that our rig fleet, our DCSR rigs and our AC rigs, we're configured to handle the higher hook loads and the larger racking capacity that's required for these long reach wells. So we just don't expect to have to have a large magnitude upgrades that have been required in some cases to get rigs up to leading edge track.

Speaker 8

Right now, for sure. Is that $6,000,000 that's going be all paid back within the contract term of the contract you have going on in the Permian, right?

Speaker 2

It will be more than paid back.

Speaker 8

Yes. Okay, perfect. And how many more, I guess, opportunities would you have on the DC and AC side to kind of duplicate this type of upgrade?

Speaker 3

Well, we have a dozen more of those rigs parked in The U. S. Right now. Some of those are running actually right now that can go through a similar upgrade. But I'll be clear, at this point, nothing's in our capital plan and hitting our debt reduction targets are the priority.

Speaker 8

How many of those how many of the 12 are actually running?

Speaker 3

I don't have a number to you, but it could be three or four. And many of those rigs have full time capabilities already built in.

Speaker 8

Right, right. Yes, no, I get that. Follow-up question is on the Marcellus rigs that you guys moved. Where did end up placing those rigs?

Speaker 2

So

Speaker 3

we moved one rig from Canada to the Marcellus. I think that rig Gene, can you tell me where that rig is? Is it Pennsylvania or is it in West Virginia? West Virginia. It's in West Virginia.

We have two rigs we expect to move from the SCOOPSTACK to the Haynesville later this quarter.

Speaker 8

Okay. Sorry, I thought I heard you say you were moving rigs out of the Marcellus.

Speaker 3

No, nothing moving out of the Marcellus. We did have our rig count pull back a rig or two of Marcellus during the first quarter, but we've been able to maintain our flat rig count.

Speaker 8

Okay, perfect. Last question, just on the international day rate came down a little bit. Is any of that due to the contract extensions you received with Saudi? Or were those kind of at the same rate they were already working on and this is just kind of like regular rate fluctuations?

Speaker 3

The contract extensions in Saudi will be incremental to EBITDA.

Speaker 2

Got you.

Speaker 3

And the contract extensions in Kuwait are flat at current EBITDA rates. And the small variance in day rate is just a function of how many move days we have in a given month.

Speaker 8

Got you. All right. That was it for me. Thanks guys.

Speaker 0

Thank you. And our next question comes from Connor Lynagh with Morgan Stanley. Your line is open.

Speaker 6

Thanks. Good afternoon.

Speaker 3

Hey,

Speaker 6

Obviously, you guys have been doing a great job on the debt reduction. I wanted to just clarify, you referenced a two times leverage target. Is that on the current EBITDA run rate? Is that on a potentially higher run rate if things improve particularly in Canada? How do you think about that?

Speaker 3

I'll let Terry kind of follow on behind, but we said we see potentially get down below two times debt to EBITDA on the horizon. And Terry, do want to give any more color?

Speaker 2

Sure. So I think, Conor, you look at where consensus is for this year, and we're not going to point to a specific number. But if you look at us getting to the high end or past our debt reduction range and where consensus is, we should be somewhere in the mid-3s on a net debt to EBITDA at the end of the year with slightly improving activity next year and a similar debt reduction, we'll be into the 2s. So I think we're not putting a point in time in the future where we think we'll get there. But in the next two or three years, we think without anything drastic changing, we should get there.

Speaker 3

The successful asset sales, we think we can accelerate our plans.

Speaker 6

Yes. On that note, Kevin, how do you think about the remaining potential assets for sale? I mean, you've got the legacy rigs in Canada, correct? What else is there potentially to that you could part with?

Speaker 2

So I'll just mention that we're not in a position where we're in a hurry to do anything. We've got a great liquidity position. We've almost chipped away all of our December 2021 note and the next one is not due until December 2023. So I would look for us to do something similar to what we've done this quarter, which is opportunistically when we find a good transaction that makes sense at a good price and it doesn't really impact our cash flow generation capability, we'd like to move on that. So I think the Mexico transaction, the SONMI transaction and the Terra Water transaction were all opportunistic transactions for us.

Speaker 6

Makes sense. Just one unrelated follow-up here and I apologize if I missed this in your comments Kevin, but have you guys quantified when you get full commercialization on these apps what the incremental EBITDA impact could be as we exit the year here?

Speaker 3

We've given guidance around the rates for each sort of line item. So of course, we've been saying that the Process Automation Control platform would be 1,500 per day. We have 31 of those deployed to the field. We've been talking about apps having pricing in the 2 to $600 range depending on whether we're hosting the app or owning the app. And we've guided towards something like one to four apps per rig and that number may go up actually because the app demand seems to be stronger than I would have expected originally.

But I expect that later this year, we can start to update our guidance on the technology stream.

Speaker 6

Okay, great. Thanks for that then. Thank you.

Speaker 0

Thank you. And our next question comes from John Watson with Cynos. Your line is open.

Speaker 9

Thank you. Good afternoon.

Speaker 3

Good afternoon.

Speaker 9

I think in response to Taylor's question, you talked about the resilience of Precision's rig count, which we've clearly seen. I have a quick follow-up on that. I know you haven't seen any net losses in your rig count thus far in 2019. Have you seen gross losses? Or could you quantify how many of those might be where you lose a rig and you pick one up right after?

Speaker 3

I think our count dropped our active rig count dropped below 80 for about four days this month. Sorry, in fact, that might have been in the month of April, not even March. I think we reported an average rig count for the first quarter, was it 79 rigs? 79. Yes.

So that gives you a sense of where we're at. We really haven't lost many days where we've had a rig down for any kind of period of time beyond the rig move itself as we transition from kind of one customer to another customer. I commented that our rig count in Marcellus came down one or two. Obviously, we picked up something else in another basin to balance that out. John, the short answer is nothing meaningful in the way of that's perfect.

Speaker 9

Okay. Okay, got it. Thank you. And understand if this is too sensitive and you'd rather not answer, but I think on the last call you mentioned intense competition in the twenty three thousand to twenty five thousand day rate range. Is that still the case today?

Have there been any changes in that environment?

Speaker 3

I actually think that that's been the case through most of the fourth first quarter to the second quarter. I think until we see rig counts on at the gross level moving up, I think that there'll be a little bit more rig on rig competition. But I'll come back and say that actually, I think we achieved a little better EBITDA margins in the first quarter than we guided to. So in fact, the rate increases that we thought we were putting through that we guided towards earlier for Q1 materialized plus a little more. And we've guided towards strong margins through the second quarter.

So I don't expect any negative impacts from the renewal prices at this point.

Speaker 9

Okay, great. And the new contracts that you've signed, should we think about those in terms of regardless of price, should we think about those being a similar term and structure to your other contracts?

Speaker 3

Short answer, yes.

Speaker 9

Okay, great. Thanks guys. I'll turn it back.

Speaker 3

Thank you.

Speaker 0

Thank you. And our following question comes from Ian Gillies with GMP. Your line is open.

Speaker 10

Good afternoon, everyone. Hey, In Canada, are you seeing any signs of margin tailwinds or potential for margin improvements just on the basis of the change in government here?

Speaker 3

Certainly, I would tell you the mood of our customers has changed dramatically. No question about that. And that's right across the boards. But I think the mood of our customers are also being propped up by narrow differentials and by supportive exchange rate. And we'll watch how our customers report their first quarter results.

Enomas had great results a few days ago with cash flow. And we've got ten or fifteen days of results to come through right now. I think there is going to be a little better tone for our client base today than there might have been even just three weeks ago in. Okay. Just a few minutes ago, came back from a federal government meeting.

Federal government approved financing for a small geothermal project that Precision is a partner in and we attended the award just a couple of hours ago and had a chance to talk to the Federal Energy Minister. He assured us that, for example, the review process on the federal government review process on the TransAlpine pipeline will be concluded by the June 18 deadline and the cabinet would be in a position to make a decision. That was encouraging to hear. So there are certainly positive signals popping up both at the political front provincially and federally.

Speaker 10

That's helpful. I'll believe the TMX piece when I see it, but

Speaker 3

So just at the government cabinet, we'll be in a position to make a decision.

Speaker 10

For sure. Maybe switching gears a bit. I mean, I know there's only a couple of ST-1500s in Canada, but can you maybe walk us through the decision tree process of converting the SCR rather than just transferring rigs from Canada at this point in time?

Speaker 3

That was simply the best use of cash and the fastest payback. The three ST-1500s in Canada have good opportunities in front of them apparently. We'll see if they emerge later in the quarter.

Speaker 10

Okay. On the RIC technology side, I mean, there's been a lot of talk about it on the call. I mean, you think you're a long ways from it having its own line item, I guess, the financial statements or some sort of disclosure there? I mean, given the focus there?

Speaker 3

Yes. I'm not sure that we'll report a line item for rig technology. We don't report Reuters as a line item or other a la carte items on the drilling rig, but it does flow through our EBITDA margins. And I would expect to see we've always had a favorable position relative to our competition in Canada margins, Part of it due to our value, of it due to our rig mix. And we think this both in Canada and The U.

S. Will play through our margins. Got it. That's all for

Speaker 10

me guys. Thanks very much.

Speaker 4

Great. Thank you.

Speaker 0

Thank you. Our next question comes from Jon Morrison with CIBC Capital Markets. Your line is open.

Speaker 11

Afternoon, all. In terms of the improvement in profitability within CPS, how much of that was cost cutting versus being more selective with the work that you're willing to take on in that businesses? I'm assuming that core pricing across the industry isn't going higher within that business.

Speaker 2

I think that's correct, John. It's a mix of cost cutting. So we've had a lot of initiatives here in the last two years on reducing the cost structure in that business, and we've been successful. I would say the other part of it is, as you characterize it, it's being more selective about the business, a little bit more 24 work and matching up the best rigs with the best opportunities.

Speaker 11

Is there anything that you guys are seeing right now in terms of a shift in customer willingness to sign different duration contracts than you typically see in The U. S? I guess the question is of the was the duration on the most recent contracts signed meaningfully shorter or longer than the last 18 rigs that were signed?

Speaker 3

On average, it might be just slightly shorter, but we've had some contracts reaching into years and some as short as six months. So I think the mix really hasn't changed that much. Actually a little surprised by the number of term contracts that were signed during the quarter, especially with all of the rhetoric around uncertainty and commodity concern. I think our team did a great job getting to the right customers and getting those rigs locked in.

Speaker 11

Yes. And obviously, the crude momentum today, you would feel that that could be resigned. But given what went on in the quarter, was obviously a good win.

Speaker 3

Yes. 16 was one direction signed before it could begin moving in a meaningful way.

Speaker 11

For sure. I realize everyone's always focused on leading edge pricing as that seemed to be the core indicator of where things are heading. But just broad strokes, how do you think about average realized pricing for Precision in Canada and The U. S. Over the, call it, the next six, twelve, eighteen months?

Broadly flat, up a touch, down a touch? What should people expect?

Speaker 3

Which commodity price deck do want me to answer to?

Speaker 11

We'll use the current strip.

Speaker 3

We use the current price and current strip. I expect rates will trend up in The U. S. On average. I expect utilization will trend up, again looking into the third and fourth quarter, not the second quarter.

And I think Canada has room to move up from the really depressed levels we saw in the first quarter on utilization. And if we hold rates from Q1 and Q4 into Q3 and Q4 of this year, I'd be pretty happy if utilization picks up and we get closer to twenty eighteen levels.

Speaker 11

Is it fair to assume that you wouldn't expect any incremental pricing pressure in Canada from this point forward across any rig class given what's already transpired for pricing in Canada?

Speaker 4

Yes, John.

Speaker 3

Outside the Deep Basin, outside that Super Triple market, I think there will be pricing pressure, but we're attributing most of our cash flow to the big Deep Basin rigs. If for whatever reason I said on the call, if for whatever reason we see pricing erosion on our Super Triples, we know we can put those rigs to work in The U. S. And we know the economics probably paid for the move.

Speaker 11

Okay. Is there any additional commentary you can give around the deeper and higher spec market in Canada? And I guess, is there growing concerns of scarcity emerging with your customers that would be more willing to sign a long term contract today than may have existed three or six months ago, just considering the amount of rigs that have left the basin, like we're down 25, it's probably only mid-50s left for a higher spec triple in Canada. So is this causing enough heartburn that you're actually seeing guys willing to engage in conversations today than maybe they didn't in the past?

Speaker 3

John, I think theoretically, you're correct, and I think that's starting to enter their minds. We just haven't seen it play it hasn't played out yet in customer discussions yet. And it's probably a timing question, not a market question. I mean, timing has been Q1 has been lousy, get through Q1, figure out where the world lies, figure out what the strip looks like and get your Q1 reports out to the public, get Q2 planned, get Q3 planned later this quarter. I think it's possible those discussions could start late this quarter into next quarter for longer term contracts, maybe even better pricing on our triples rigs.

But it goes the other direction. For whatever reason, for whatever reason we see negative momentum in pricing or reduced utilization. I think ourselves, I think others will move rigs out of this market, put their rigs out. There's no question we can put an ST-fifteen 100 to work in The U. S.

Right now. Right now, today, at a U. S. Day rate, it probably gives a better return than any depressed rig from Canada.

Speaker 11

Is the decision to move an incremental rig from Canada to The U. S. Largely a function of covering the mold cost and contract duration then? Or are you really waiting to see what happens with spending profiles in Canada before you really comment?

Speaker 3

The short answer is the rigs are booked right now. Rigs are booked at rates we like. If that changes, then our view would change.

Speaker 11

Okay. Just a last one for me. In terms of the idle rigs that you have in Kurdistan, would you need to win a multi rig program to mobilize those rigs in a new country? Or can you operate one or two rigs outside of Saudi and Kuwait and make money?

Speaker 3

We could probably operate anywhere in the Gulf Region, which would include could be Bahrain, could be Qatar, could be Oman or Iraq or Kurdistan on a one rig basis because we can mobilize out of Kuwait, of Saudi or out of Dubai and support that rig. We have to look at that investment to make sure that whatever upgrades or work we need to do the rig is paid back in the contract, we make the move. But I think we can operate one rig on an accretive basis anywhere in the Gulf Region.

Speaker 11

Appreciate the color. I'll turn it back.

Speaker 3

Thank you.

Speaker 0

Thank you. And I am showing no further questions at this time. I would now like to turn the call back to Ashley Connolly for closing remarks.

Speaker 1

Thank you, and thank you all for joining today's call. Look forward to speaking with you when we report second quarter results in July. Have a good day.

Speaker 0

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.