Precision Drilling - Earnings Call - Q1 2020
April 30, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by and welcome to the Precision Drilling Corporation twenty twenty First Quarter Results Conference Call and Webcast. At this time, all participants' lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr.
Dustin Honey, Manager, Investor Relations and Corporate Development. Thank you. Please go ahead, sir.
Speaker 1
Thank you, Daniel, and good afternoon, everyone. Welcome to Precision Drilling's first quarter twenty twenty 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 twenty results. Please note 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 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.
Kevin will begin today's call with an overview of Precision's response to the COVID-nineteen pandemic. Carey will then discuss our first quarter financial results followed by Kevin's operational update and outlook. With that, I'll turn it over to you, Kevin.
Speaker 2
Good afternoon, and thank you, Dustin. The impact of the COVID-nineteen pandemic has been profound. As a global population, we share the health risk anxieties for ourselves and our families. We are all managing the stay at home orders, travel bans, and living through the resulting economic downturn and job losses. The same applies to precision.
We rely on highly trained teams of 15 to 25 people, the rig crews, working in close quarters to execute our business. As an essential service, our people are required to work, yet they must also deal with the same personal concerns, health risks, contact risks, and family anxieties we all face. This weighs heavily in our people, and I am deeply proud of the highly professional attitude and exceptional level of performance they continue to demonstrate in these challenging times. Now you may recall on Precision's fourth quarter mid February earnings call, we identified the potential risks and impacts we might face due to the emerging virus. And those included the health risks to our people, the commodity price risk, and the customer demand risk.
And just a few weeks later, those risks became real and then intensified by the travel bans and stay at home orders. Precision responded immediately, implementing a pandemic safety management plan to ensure the health and safety of our staff and our stakeholders. The plan applied to all Precision rigs, shops, offices. And I'm very happy to report that by moving quickly, we've avoided any interruptions in our service. We've experienced no rig shutdowns and no work related virus outbreaks.
I wanna thank all the people of Precision who have worked safely and productively through this troubling period, fully sustaining our services to our customers as an essential component of the global energy supply infrastructure. Now as the world responded with all the measures to flatten the curve we expected oil demand destruction. We expected reduced commodity prices, reduced customer demand. However, we did not anticipate the second compounding black swan event, the OPEC plus breakdown in the oil price war that led to negative WTI prices at the end of the prior forward contract period. Nonetheless, we responded quickly and aggressively, implemented a series of business measures, which Carey will outline shortly.
All are focused on preserving cash, embracing Precision for an extended and deep downturn. We believe these measures, which will save Precision in excess of $100,000,000 in cash outflows this year, and most of these measures are sustainable through the downturn, We'll position Precision as a leader and stronger driller for the inevitable recovery. I do want to express my best wishes for a full and speedy recovery to anyone who was exposed to or affected by the corona COVID nineteen virus. I also want to express my sadness to the thousands of oil field workers, including those from Precision, who, through no fault of their own, have lost their jobs, in some cases, careers, their livelihoods. It's my expectation that we will look to be attract back to any of those precision people in this industry recovers.
I'll now turn the call over to Carey Ford to discuss our second quarter results
Speaker 3
Thank you, Kevin. Before I cover the first quarter financial details, I would like to review some of the cost saving initiatives Precision has captured in the past six weeks. All initiatives outlined in our March 24 press release have been implemented and any associated charges were incurred in the first quarter. The cash savings impact starting in Q2 will be substantial. And the rev rank guidance of 30% fixed cost reductions and $30,000,000 reduction in G and A still stand.
We have scrutinized every cost item within the organization. We've implemented company wide workforce salary and benefit reductions including executive team and board. Our travel and entertainment budgets have been slashed along every other administrative cost where influence is possible. We expect to benefit from government programs such as worker assistance and tax deferrals and have secured deferral of certain other payments into 2021. These programs and deferrals will provide Precision with up to $20,000,000 in additional cash this year.
Cost reduction efforts, deferrals, and CapEx reductions are expected to reduce 2020 cash spend by the organization by well over $100,000,000 I will now review some of the first quarter financial details. Our first quarter adjusted EBITDA of $102,000,000 decreased 6% over the 2019. The decrease in adjusted EBITDA primarily results from a 30% reduction in US activity, offset by a 33% increase in Canadian drilling activity. Also included in adjusted EBITDA during the quarter is $10,000,000 in severance and restructuring costs related to cost reduction initiatives to prepare the business for a lower activity environment. In The US, drilling activity for Precision averaged 55 rigs, a decrease of eight rigs from Q4 twenty nineteen.
Daily operating margins in the quarter were $9,344 a decrease of $532 from Q4. Q1 margins were negatively impacted by lower average day rates and higher average cost offset by IBC revenue during the quarter. Absent impacts from IBC, turnkey and onetime recoveries in the fourth quarter, daily operating margins would have been approximately USD 8,300 per day or USD 200 per day lower than Q4. For Q2, we expect day rates and margins to be supported by contracted rigs and IBC revenue with operating costs negatively impacted by fixed cost absorption. Moving to Canada, drilling activity for Precision averaged 63 rigs, an increase of 15 rigs from Q1 twenty nineteen.
Daily operating margins in the quarter were $7,205 a decrease of $13.17 dollars from Q1 twenty nineteen. Absent shortfall payments received in the prior year, daily operating margins would have been down approximately $500 For q two, we expect margins to be negatively impacted due to fixed cost absorption. Internationally, drilling activity for Precision in the current quarter increased 1% from Q1 twenty nineteen. International average day rates were up to $54,294, a $4,354 increase from the prior year. In our Completion and Production segment, adjusted EBITDA this quarter was $3,200,000 down $7,300,000 compared to the prior year quarter.
Adjusted EBITDA was negatively impacted by $2,300,000 in restructuring charges during the quarter and a decline in well service activity, was negatively impacted by extreme cold weather preventing us from operating many of our rigs during the quarter. Capital expenditures for the quarter were $12,000,000 Our 2020 capital plan remains $48,000,000 a decrease of approximately 50% from the beginning of year guidance. The 2020 capital plan is comprised of $36,000,000 for sustaining infrastructure and 12,000,000 for upgrade and expansion. We added nine contracts to our contract book in the quarter. And as of April 29, we had an average of 46 contracts in hand for the second quarter and an average of 42 contracts for the full year 2020.
As of 03/31/2020, our long term debt position net of cash is approximately $1,400,000,000, and our total liquidity position is over $800,000,000. Our net debt to trailing twelve month EBITDA ratio is approximately 3.6 times, and our average cost of debt is 6.8%. Maintaining a strong liquidity position is our top financial priority, and we plan to resume debt repayments when visibility improves or our cash on hand exceeds our expectations. Further to maintaining strong liquidity, we reached an agreement with our senior secured lending syndicate to relax certain debt covenants in our revolving credit facility through Q1 twenty twenty two, namely the EBITDA to interest covenant which is currently 2.5 times. Although we are well clear of this covenant today, the extent of the recent downturn is unknown, and we want to ensure access to all sources of liquidity including our revolver.
In the first quarter we purchased and canceled approximately 3,000,000 of our outstanding shares. I'll note that we have significantly reduced the pace of our share repurchases to a minimized level as a component of our cash conservation initiatives. For 2020, we expect depreciation to be approximately $320,000,000 We now expect SG and A to be approximately $65,000,000 to $70,000,000 before share based compensation expense. This guidance compares to the 2020 guidance provided in February of $90,000,000 We expect cash interest expense to be approximately a $100,000,000 and expect cash taxes to remain low with our effective tax rate to be in the 20 to 25% range. I'll now turn the call back over to Kevin.
Speaker 2
Thank you, Carrie. Looking forward into what is likely the deepest and toughest downturn I've experienced in my thirty eight years, I believe investors should be most focused on a few key parameters for the oil service providers. And these key parameters are the company's financial and competitive positioning, management's record controlling its business and delivering those commitments. For Precision, we screen very well across all of these. Starting with our financial positioning, there's no question that we are carrying more debt than we would like.
But you should know that this management team has been keenly focused on debt reduction and management maturities for several years. Our progress has been very good, exceeding and further increasing our debt reduction targets while positioning the company much stronger than even just a couple of years ago. Debt reduction remains a priority of Precision. However, as Carey mentioned, while the drilling while the business is declining and long term visibility remains clouded, our near term focus has shifted to maximizing our liquidity runway, maximizing our cash generation and ensuring we sustain full revolver access. Preemptively seeking revolver covenant relaxation speaks to how we intend to stay well in front of any potential limitations, manage tightly everything we control.
Regarding cash generation, I think Carrie's covered those points in his prepared comments very well. But I'll just add that on a daily basis, we line by line review all spending, all cash receipts, all cash commitments, and all receivables. We're keeping a very tight grip on every penny within our grasp. We recently upgraded our ERP system, which provides real time granular visibility and oversight on every line item, very prospective spending item, proving to be an invaluable tool to try to control our spending. I believe we're very well positioned financially to manage through an extended period of very low customer demand.
So turning to our competitive positioning, I also believe that Precision is very well positioned. Our strategic priorities of operational excellence and technology commercialization both align to position us very well during the downturn and ideally for the eventual recovery. Regarding our technology initiatives, we continue to generate the expected commercial returns with our Alpha automation systems, and we're making good progress introducing Alpha analytics and Alpha apps to the field. During the first quarter, we increased our Alpha automation coverage by adding six rigs to bring our total to 40 rigs, including our two training rigs. So that would leave 38 rigs in the field with Alpha Automation.
Currently, our plans are to taper back further installations until we see customer demand for rigs improve. In the first quarter, we partnered with a U. S. Customer focused on natural gas drilling to trial Alpha Analytics on their group of precision rigs. We believe the efficiency improvements are already being acknowledged by the customer, and we expect to fully demonstrate the value of this service as the trial progresses.
Also during the first quarter, an IOC operating in the Permian has activated AlphaAutomation on all of their Precision rigs and will also be utilizing several apps. We believe the success of this program should also lead to market share gains as the year progresses. So we expect that when the rig market stabilizes, our customers will shift their focus back on capital efficiency, drilling efficiency, and overall well construction cost improvements. And there's no question that digital technology will lead these efficiency gains and cost efforts, and Precision is very well positioned as a drilling contractor first mover. Regarding our operational excellence, strategic focus, I believe our year to date market share strength is already demonstrating the success of this initiative.
In line with our mid February conference call guidance, Precision's U. S. Market share increased by a few rigs to peak at 58 in late February, and we held that level until late March. In fact, only when the oil price volatility escalated that a rig count begins to decline that we ended the quarter with 56 rigs operating and three rigs in IBC. Looking at Canada, you may recall that we peaked at 83 rigs running in late January.
And I'll point out that our market share was in the 32% range, a record high for Precision. We held that share with activity in the high 70s through the February, and only in mid March did activity decline. Overall, Precision's activity in the first quarter in Canada ran 33% higher than 2019, while industry activity was up less than 10%, clearly demonstrating our activity gains. As we entered this downturn, was pleased with our competitive positioning. And through the first six weeks of the rig count decline, we continue to modestly improve our market share.
In The U. S. Today, we have 35 rigs running with five on IBC. Over the past couple of weeks, we've noticed a pause in customer discussions to reduce activity. It seems that most of the near term spending decisions have been made and are now being implemented across the rig activity by our customers.
As these decisions work through the system, we do believe industry activity should continue declining for the next several weeks. For Precision, we expect our U. S. Activity will settle in the low 30s for the balance of the second quarter, reflecting a 40% to 50% decline from the peak. We expect the five rigs in IBC will continue through the second quarter.
We are seeing potential to add a handful of rigs later this quarter or into July if natural gas prices firm up into the summer months. In Canada, March ended with 15 rigs active for Precision. Currently, have 11 rigs active and the industry has only 23 rigs, both setting historic lows for the Canadian segment. Seasonal recovery prospects in Canada are weak. We have visibility on potential activity for Precision moving into the upper teens and low 20s in the third quarter and progressing towards the upper 20s or low 30s later in the year.
We do expect all time industry lows for the Canadian region will persist through the year. We do believe our fleet of pad style Super Triple rigs and the highly efficient precision Super Single rigs will support firm Canadian market share in the 2020 in line with the first half. We also believe we'll remain well positioned for the eventual rebound in Canada and will benefit from our scale and cost leverage throughout this downturn. With our international segment, while the business is generally more stable than the seasonal Canadian and cyclic U. S.
Markets, we expect the low commodity prices and the country lockdowns may have an impact on activity. As we mentioned previously, two of our ST 3,000 Kuwait drilling rigs are up for contract renewals later this year. While we still believe those rigs will renew, we expect potential delays with the administrative lockdown underway in Kuwait. The balance of our Kuwait fleet is under contract for the full year and should continue with no interruptions. We expect our three rigs in Saudi Arabia will continue to operate for the full year as those rigs are also contracted through next year.
We will continue to market our four idle rigs in the region with several active tenders, but do not expect any near term contract awards. Generally, long term visibility has not developed. All of our term contracts are performing as expected, but we believe customers will remain very cautious regarding long term planning, waiting until the economy reopens, normalized oil demand is restored, and excess oil inventories are well managed. So turning to our well service business. As Kerry mentioned, activity in 2020 started slower than expected due to the cold weather.
And as the WCS price fell to very low levels, we ended March with just a handful of rigs running and have continued with very low activity through today. The recent Canadian federal government announcement to provide $1,700,000,000 of funding for low abandonments will have a significant impact on this business. These funds will be distributed to each province for administration and disbursement. The province of Alberta has already released guidelines for the first phase of its $1,000,000,000 allotment. The province has promised that funding will be provided directly to service providers in maximum $30,000 lots to work with the well owners of energy abandonments.
We believe this is an excellent way to direct the funding to create the maximum number of jobs that have the best industry impact. We thank the federal government for making the funding available. We congratulate the Alberta government for creating a capital efficient, just investment process to both create jobs and support the healing well services segment. For Precision, we would expect to garner our share of the work in this, and we expect this may lead to a significant improvement to this business while preserving several 100 very important field jobs. The direct impact on the well servicing industry should be in the several $100,000,000 range.
So to conclude, I'd like to thank all of the employees of Precision for continuing to perform at a very high level despite the challenges we all face during these troubled times. And I'll now turn the call back to the operator for questions.
Speaker 0
Our first question comes from James West with Evercore ISI. Your line is now open. Hey Kevin, Gary.
Speaker 2
Hey James. So
Speaker 4
guys Kevin especially, the fortunate thing here is, you've been through, several of these, maybe not this sharp and caused the same way this one was, but, you've got the playbook, you know what to do. I thought it was really interesting that the comment that you made about, discussions with customers in the last few weeks have changed. They've changed to they're not talking about reductions in activity anymore. Most of those decisions have been made. Could you perhaps elaborate a little further, on that kind of are they firm decisions that have been made?
Is it a wait and see period? Is there some type of oil price dynamic that they're counting on or budgeting for? Could this quickly reverse and go back to, okay, here's a further cut, I guess, real key?
Speaker 2
Maybe the short answer would be yes to everything you said. But James, a little more helpfully, let me kind of walk you what I think is going on. We've seen this over the last three or four years, really going back to 2014, when our customers have a higher range of uncertainty. They tend to do a lot of action kind of prior to normal cycles of public disclosure like quarter ends. So when there's lot of uncertainty, see them cutting rigs.
When there's strong prices, we see them adding rigs. They do most of that work in advance of their public disclosure so they can come on their conference call or their press release and say, we have already changed our budget. We've made the cuts. It's done. So I think that work finished for our customers a couple weeks back.
Now they've been preparing their financials and getting themselves ready for their Q1 reporting much like we do ourselves. But I think everything right now is ephemeral and could change. Recognize that we've got a nice footprint in natural gas drilling, which I think is stronger than oil right now. We have customers that are hedged and we'll continue drilling through the year. I think that most of our customers have good rigs.
The drilling departments really hate to let the rigs go because the crews are trained up and understand the drilling program. There's a moving cost to demobilize the rig, which you don't see in other services. I do expect to see a little bit more stability in drilling than maybe some of the other ancillary services. Combined that with the hedge books and natural gas drilling. So I feel like we're stable now through the quarter, and we'll see how things look in Q3.
Speaker 4
Okay. Okay. Fair enough, Kevin. And then a follow-up for me. With the long term commitments that you have, would you entertain rate reductions there?
Or would it have to be if I give a little on rate, you got to give me a little more on time, a little blend and extend type conversation?
Speaker 2
Yeah, you know, I think the best way to describe it, James, is that we're highly disciplined in tracking our revenue per period. So if we can contain revenue and EBITDA inside a period, I'd say that's very important for us. That's the first guiding principle inside our team. But we also want to show our customers that we're prepared to work with them and show some flexibility. Would say that our least preferred method is blend and extend.
I think there's other things we can do
Speaker 4
to
Speaker 2
help our customers around their economics.
Speaker 4
Okay, got it. Thanks, Kevin.
Speaker 2
Great, thank you. Thanks, James.
Speaker 0
Thank you. Our next question comes from Taylor Zurcher with Tudor Pickering Holt. Your line is now open.
Speaker 5
Hey good afternoon. Thank you. Kevin I just wanted to follow-up on the answer to the last question. I mean it sounds like you expect to bottom in The U. S.
In the low-30s. It looks like you've got, I think, 33 contracted rigs in Q2. So is the inference to make that at least for Precision, mean, you talked about the opportunity to add a couple or a few natural gas focused rigs in the next couple of months. Is the correct inference to make that it seems to you like the rig count is going to actually bottom in The U. S.
In Q2? Or is the visibility still too limited to make that call today?
Speaker 2
Well, I'll stop short of calling a bottom. But I would tell you that I think that as far as the second quarter goes, our customers have completed their planning. And they'll start looking into the third quarter once they get through their disclosure period right now. So I'd also add that with this level of uncertainty, think that the cuts they've made aren't going to make in the next few weeks are probably going to be over correcting for the uncertainty. So I'll summarize up by saying I wouldn't be surprised if the rig count bottoms late in the second quarter, but it's really hard to say.
Speaker 5
Okay. Okay. And then just following up in The U. S, I didn't hear any quantitative guidance on margins for Q2. But clearly, there's some negative headwinds both on the pricing and fixed cost absorption side.
Is there any way to frame which one's a bigger headwind for you heading into Q2? I suspect on the day rate side, it's going to be essentially 100% contracted activity at fairly good rates. But any way to frame the magnitude reduction on either the revenue per day side or the cost per day side heading into q two in The US?
Speaker 3
Hey, Taylor. So I I would say that quantifying what what our margin guidance will be is is difficult to do. The the day rates will be really well supported from contracted revenue and idle but contracted rates. We we do have a bit of headwinds with fixed cost absorption just with lower activity, but we expect to counter a bit of that with just more intense cost control and some price breaks where we can get them with third parties in our operation.
Speaker 5
Okay, got it. Thanks guys.
Speaker 2
Thanks, Taylor.
Speaker 0
Thank you. Our next question comes from Aaron MacNeil with TD Securities. Your line is now open.
Speaker 6
Good afternoon, guys. You've announced some proactive steps today that clearly improve the liquidity position, but you've also alluded to the fact that demand for your services will be significantly reduced well into next year. I also can't help but draw comparisons to 2016 when Precision had much higher debt levels but was also sitting on 475,000,000 in cash. So, Carrie, I guess I'm wondering, are you more or less comfortable with the overall financial position today than you were, say, in 2016? And to the extent that you'd be willing to share it, what kind of stress testing have you done to give yourself comfort over the covenant relief, that Precision can not only withstand a prolonged downturn, but maybe also be able to quickly rebuild working capital and recovery?
Speaker 3
So that's, I I think there's a there's a lot of factors that play into those decisions and those sentiments. I would say that, the thing that gives our team some of the most comfort is our ability to ramp up and down cost, and that's, operating cost of business, fixed cost, and capital expenditures. So the, the amount of EBITDA we'd need to generate free cash flow is can be pretty low. So I think the from that standpoint, being remaining free cash flow positive is something we're confident we can do. Obviously getting access to the revolver is quite important.
And that's why we went and got the covenant relief a lot earlier than I think probably what most people would expect. And you will notice I think a slight shift in our tone on uses of cash. I think when we were going through 2018 and 2019 and we had pretty good visibility and we were signing contracts, we could put all that free cash flow towards debt reduction. And we committed to do that and we exceeded our targets just about every quarter. Now there's a little bit less visibility.
We've got a good cash balance. We've got full revolver access. And I would say we're likely going to focus on maintaining strong liquidity until we get more visibility or if the cash generation we realize is greater than what we expect. We wait for either one of those things to happen before we start reducing debt more.
Speaker 2
Aaron, I might add a couple points on the kind of a more market positioning today versus 2016. I would say that even over the past four years, you've seen a tightening or consolidation in the space around the Tier one rigs and kind of the top four or five drillers in The US and Canada. In Canada, you've seen actual M and A consolidation. So the markets are more constructive now than they were back in 2016. So we think our market position is a bit better than it was back in 2016, both in The US and Canada.
And expect to see good discipline through this downturn and on the rebound side by ourselves and other major industry players. So we think that gives us probably more confidence in the torque in the bottom and the rebound.
Speaker 3
And and, Aaron, I'll I'll add one other point there. I think this is a a comment for Precision, but also probably for the industry. You know, in, in 2014, the industry in The US, were running about 2,000 rigs and then went into a really steep downturn. So I think, companies' mentalities, cost structures, a lot of things had to be changed pretty drastically. As we entered this downturn, although on a percentage basis, it's very steep and steeper than what we've seen, I think the industry has been through six years of, cost controls, efficiency gains, and the mindset is already there.
So I think we can act a little bit quicker to adjust to lower activity environment.
Speaker 6
Okay. That's helpful. And, Kevin, you already sort of alluded to it, and I I can appreciate there's effectively no price discovery today. So rather than getting into specifics on where you think pricing may or may not go, perhaps you can kinda outline for us at least anecdotally what we can expect from Precision in a scenario where even super spec rigs are featuring much lower utilization than, you know, they have in the past?
Speaker 2
Yeah. So I think, you know, we talked on my prepared comments about technology. We talked about, you know, analytics and alpha automation. I do expect that those will be differentiators during the trough and absolutely during a rebound. Performance will be notable on those rigs.
And it's not just precision. There are others doing similar things in the industry right now. But it's really limited to just three or four contractors. So I expect that I expect you'll see unusual discipline both around service provision and quality of service and pricing through this downturn. But beyond telling you, I expect to be much more disciplined that our customers are able to measure this better and we can demonstrate it better, the performance.
I'll stop short of giving you any numerical guidance.
Speaker 6
Thanks, guys. I'll turn it over.
Speaker 7
Thanks a lot, Aaron.
Speaker 0
Thank you. Our next question comes from Connor Lynagh with Morgan Stanley. Your line is now open.
Speaker 8
Yes, thanks. Good afternoon, everybody.
Speaker 7
Good afternoon, Connor.
Speaker 8
Wondering if you could discuss, and maybe it's too early to tell, but has there been any material shift in the number of services your customers are asking you to run them? I'm specifically referring to the apps and other digital services. Has that been a target for cost cutting? Or is the sort of mix generally similar across your rent fleet as it was, say, six months ago?
Speaker 2
Well, there's been a whole bunch of changes between today and even ten weeks ago, Connor. But, I mean, we've been dealing with the procurement departments, the legal departments, the finance departments for the last six weeks. We're not getting calls from operations about turning down rigs. We're getting calls from the chief procurement officer who reports to the CFO about how to exit the contract. So most of our discussions have been commercial and legal in nature, not so much around operations, with the exceptions I mentioned around technology.
Which is why I kind of hinted that we expected that once that exercise is finished, which maybe finished right now for the meantime, that we'll see our customers lean back into their operations teams to optimize the fuel performance. So in fact, can tell you in many cases, the operations teams have been shuttled aside while the finance teams, the procurement teams have managed these contract books. And it's become a liability management exercise for the customers, not so much an operations management exercise. But we do expect that will tip back. And I think it could tip back pretty quickly.
And for two accounts I mentioned, the IOC and for the natural gas driller, they remain focused on efficiency and they've got their plan in place. And we're pursuing new elements of technology with both of those right now. I don't know if I've answered your question directly or indirectly, I think I've covered the topic. Yes,
Speaker 8
think you got the gist of it. I guess the one remaining question on the technology side of things is, in these discussions, have there been conversations about potentially lowering or altering the price or pricing arrangement on these services? Or is it entirely focused on day rate?
Speaker 2
Well, I'll give you my standard line. So from the procurement teams, there have been pricing pressure on every single lever they can pull. So if we're dealing with a procurement officer at an E and P company, any lever he can pull. So we've heard a lot of talk about these performance based contracts back in February and these oil index contracts. Those contracts have more levers.
And we've watched those procurement agents try to pull more levers. And if you have additional items like technology and even maybe casing running, every price point on that contract is a lever for that procurement officer to pull. And they'll try to pull it. And our job is to stay disciplined and justify our value. So I don't think the game has really changed.
I think the more price points we give them to negotiate, the more work they think they have in front of them. Our job is to stay disciplined and validate our value.
Speaker 8
Yes, that's fair. Thanks very much.
Speaker 7
Thank you.
Speaker 0
Thank you. Our next question comes from Kurt Hallead with RBC. Your line is now open.
Speaker 7
Hey, good afternoon. Hey, Hey, Kurt. Hey, I just wanted to just get an update in the context of your comments. You had very specific debt reduction targets and have been plugging along on that for the last couple of years now. And then just wanted to calibrate.
Carrie, you made a comment about you resume your debt repayments once you get a little bit more visibility and or if cash were to exceed expectations. So can you just give us a general sense then as to maybe what the cash level benchmark is for you to start kind of restart the process of paying down debt? Or just to clarify, if I'm misinterpreting your comments about debt reduction, that'd be helpful too.
Speaker 3
Yeah. First of all, I would say that the goal for the year remains the same, But we're probably gonna slow down a bit on the pace. You know, we did 40,000,000 in the first quarter, and I wouldn't expect a $40,000,000 reduction in the second quarter. And in terms of cash on hand, you know, it's it's a bit of function on what our contract looks looks like and what our visibility is on how much cash we're comfortable or how little cash we're comfortable holding. But just to ballpark it, I think kind of in that 75 to 100,000,000 range is right now the the amount that we wanna wanna make sure we have access to.
Speaker 7
Yeah. Okay. I appreciate that. And then I just wanna also kinda gauge just on working capital. You know, do you expect working capital to to provide a be a positive contributor to to cash this year?
Speaker 3
Yeah. Absolutely. On on the press release in in March on kind of our cost reductions and an update on our liquidity, we said we expected kind of eighty to one hundred million of working capital to convert to cash from the first quarter onwards. I think we got a little bit of that in the first quarter. We'll have a good chunk in the second quarter and maybe a bit more in the third quarter.
So I think that guidance still holds.
Speaker 7
Okay. Thanks for that. Kevin, given kinda like almost a a try trying to think through, okay, everybody's managing through the downturn, but it's gonna reduce costs both on the EP front, on on the drilling front. And then you get to the point where, you know, the economy rebounds, you get some demand oil demand rebound and some oil price recovery, and then the EEP start, you know, inquiring about putting rigs back to work or whatever. Given the sharp reductions in in workforce and so on, what kind of lag effect do you think there might be when there starts to be some signs of recovery and E and Ps want to put rigs back to work?
And how many of these people do you think you can ultimately kind of draw back into the industry? Any perspectives on that would be really helpful.
Speaker 2
Kurt, I think it's a really good question. It's actually fairly complicated, but I can give you a couple of case examples. So in Q1 in Canada, activity exceeded what we expected. We still met the demand by staffing rigs and getting probably 10 to 12 more rigs running than we expected in about a two week period. And that was going from a base of during that Christmas break period got down as low as around 30 rigs.
We fired back up 50 or 60 rigs in about a three week period. I think that shows our short term ability to flex up and down in Canada. So we've hardwired in Canada to deal with seasonality, cyclicality, short term, long term cycle. So I think if the demand rises in Canada, our team up there, despite having gone through some pretty major cost reductions in our bases and our headquarters in Canada, can still respond and get rigs back to work. In The US here, you know, the business is not seasonal.
We're not used to having to ramp up and down seasonally. But I can tell you, we've been very, very targeted with our staffing. So we preserved our rig managers, our field superintendents, and our drillers by shuffling around onto rigs so that our crews are getting better and better because we've got more rig managers operating as drillers and more field soups as rig managers right now. So when it does come to restaffing, I think bumping back up into that fifty, sixty rig range, we already have leadership teams on hand right now in the company, and we'll preserve them for the coming quarters. So I think getting back up to what the activity levels we had in Q1, we can do that quickly, efficiently, in a matter of weeks or a month or two.
Getting beyond our q one activity levels, say we want to go from 60 ish rigs into the 80 rig range, that might start taking a few more weeks after that, you know, weeks and maybe into a month or two. I hope to get the plan for those days someday soon.
Speaker 0
Yeah. All of us would for sure.
Speaker 7
May maybe just one follow-up as well for you, Kevin. I know that, again, there's limited kind of data points to work with in The US with respect to pricing, but I'm I'm sure there's multiple, data points to work with in terms of letters from clients, customers asking for price concessions. What what's what's your sense on that? And and I I asked the question just because in The US, as in Canada, it's a it's an oligopolistic business. You're not really going to incentivize more rigs going to work by dropping price.
So just want to get a general sense for how you think the industry may react on that dynamic as we kind of go through this downturn.
Speaker 2
There's no price at which we can offer a drilling rig that will lower their cost to break even with WTI at $18.41 So simply no price cut we can give that will make them break even. We know that. Our large public peers know that. We're all quite disciplined. I think we're going to want to show flexibility and responsiveness, but I don't think we can transfer value from our rigs and erode our rigs to support our customers.
I don't think that will happen. So I just don't expect you to see large public companies operating at cash breakeven levels, which would not pay the depreciation or the maintenance capital on those rigs, which supports pricing upper teens, low 20s, not low teens.
Speaker 7
Excellent. I appreciate that color, Kevin. Very helpful. Thanks. Great.
Thanks, Kurt.
Speaker 0
Thank you. Our next question comes from Blake Gendron with Wolfe Research. Your line is now open.
Speaker 9
Hey, good afternoon. Thanks, guys. Pretty interesting commentary, the federal government, the federal P and A program, that you mentioned. Just wondering out of the 1,000,000,000 to $2,000,000,000 that was cited, how much of that falls into the part of the value chain that your C and P segment operates? And then what your market share is?
And then potentially what the timing, I guess, of this program could be over the coming quarters. It's been a small part of the model obviously, but just to help us gauge potentially as a buffer to downside risk in other segments.
Speaker 2
So the first comment I'll make is that after the political announcement gets made, it often takes a few weeks to get the bureaucracy in place to actually execute these plans. But what we have seen so far is that the 1,700,000,000 has been split between Alberta, British Columbia, and Saskatchewan, with Alberta getting the largest portion. Alberta hit the ground running, and they announced they're going be open for applications starting tonight to start applying for those $30,000 chunks that will come straight to the service company. So ourselves, with cementing companies, consulting companies will be applying for those $30,000 blocks. And they're working with our customers to identify targets for well abandonment.
That's how it's going to progress forward. Just thinking about the full value of the 1,700,000,000.0 probably in the range of between 5070% will flow to well service companies like ourselves. And this is targeted to last through 2022. So it's a two point five year program. Our market share in Canada would be anywhere from 12% to 15%.
We would think that there has been some attrition in the Canadian fleet and that could continue because I think some companies do not survive the coming weeks even with this incentive program. So we could see our market share gains even in a tough market in Canada. So we could garner even larger than our regular market share of that spending. But if you just flow through that math, that's a material change for us. That could be in the 10,000,000 to $20,000,000 range this year alone, which would be very helpful for that business.
Speaker 9
Got it. That's helpful. And then just to follow on the market positioning questions. The rig count fell pretty substantially in the last downturn just like it is now. But underpinning the last downturn was a secular adoption of pad optimal rigs.
I was just wondering, these are long lived assets, if there's anything from a hardware standpoint that might see some of the older, even pad capable units start to come out of the market in this downturn? And then if you could specifically call out which attributes of the rig would kind of be a threshold for that phenomenon playing out? Or do you think going to be more the digital side in terms of differentiation as we exit this downturn?
Speaker 2
Yes. I think that's a good question. For sure, some of the pad rigs that were delivered early in the cycle have worked hard for a long time. Mud pumps get worn out pretty quickly, top drives get worn out. A lot of the rotating machinery gets worn down.
The mud tanks are being used a lot. The locking systems get used a lot. And then when you hit a downturn like this, I'm sure some companies will get into a cannibalization mode where they're not maintaining things quite as well as they might have two or three years ago and cash flows are better. So I do expect that even some of the pad optimal rigs will become economically unviable or require so much capital that that market size will shrink a little bit. I'd expect that the larger drillers, ourselves included, have done a pretty good job maintaining their assets.
I don't foresee any retirements in the Precision Fat Optimal fleet or Super Triple fleet in the next couple of years. Would think our larger peers are much in the same position. But I do think some of the smaller players that may be more stressed or distressed may find their assets become a little less relevant. They may argue with that. And I don't
Speaker 10
see inside their numbers, so I can't say for sure.
Speaker 9
Got it. We'll see it play out over several years. I appreciate the thoughts and candor. I'll turn it back.
Speaker 7
Thank you.
Speaker 0
Thank you. Our next question comes from Waqar Syed with AltaCorp. Your line is now open.
Speaker 11
Thanks for taking my question. Good afternoon, Kevin, Gary, Dustin. My question relates to your international contracts. With these OPEC production cuts, is could there be any impact to the activity of the six rigs that you have under contract longer term? And then second, is there any pressure on giving some any kinds of price concessions?
Speaker 2
So there has been talk inside Saudi Arabia about Aramco sending out letters. We've been through that before. We're a pretty small player in Saudi Arabia. So don't expect any material changes for business in Saudi Arabia. Your bigger question though about OPEC reductions.
You know, I guess the good thing about those national oil companies are they are thinking long term. And while on the short to midterm, they're going to be constraining production and constraining shipments and deliveries, they're probably even more in the coming weeks. Longer term, they still have decline curves. So I expect the oil drilling in Saudi probably remains fairly stable. Kuwait's a little tougher to call.
They've been transitioning more to an IPM model in past few years. We did expect those two rigs we have renewing this year to renew. But we think the hold back there isn't going to be curtailments or OPEC actions. We think it's really going be just the shutdown going on in the country right now because we understand that they were they had drilling plans for those rigs going forward. We just there's just nobody in the office to execute the contracts.
Speaker 11
Okay. And you made some comments about natural gas rig activity coming up in The U. S. And could you maybe elaborate on that? Are you in any kind of discussions to for rigs to go back to work there?
Or that's just an expectation at this point?
Speaker 2
No. We have a handful of customers we're in discussions with. And I've even tell you we've got some turnkey opportunities we're looking at right now, which almost surprises me, but we think they're real and could materialize into activity this quarter or next quarter. I think it's highly dependent on gas prices and contracts and funding and things like that. These are all small opportunities.
We're not talking about a five rig contract or a two year contract, but we're looking for any opportunity right now to keep our rigs busy.
Speaker 7
Sure.
Speaker 11
And then in terms of the Elfa series of technology that you have, Is there any opportunity in this kind of environment in international markets as well or that needs to wait till the market improves?
Speaker 2
Well, that's a really good question. One I didn't even come here thinking about before we got here today. I can tell you there's zero opportunity while the offices are closed. We need to have drilling engineers in their office so we can bring the technology and get the demonstration before we can execute it. But in a market which is kind of opening back up again and things are normalizing and the office closures are ended, and if Canadian and US activity stays low, we will absolutely be pushing that technology into Kuwait and Saudi Arabia for sure.
Speaker 11
Okay, great. Thank you very much.
Speaker 2
Great, thank you.
Speaker 0
Thank you. Our next question comes from Ian Gillies with Stifel. Your line is now open.
Speaker 10
Good afternoon, everyone.
Speaker 7
Hi, Ian.
Speaker 10
With respect to the debt retirement this year, acknowledging it's on pause right now, should we be thinking of that a 100 to a 150 as absolute dollars deployed or face value retired?
Speaker 3
I think it's too early to say, Ian.
Speaker 7
Okay.
Speaker 10
With respect to the incremental of $20,000,000 of savings, are you able to provide any additional detail of, where that may have came from?
Speaker 3
So some of it's tax deferrals.
Speaker 4
Some of
Speaker 3
it is wage assistance program. Some of it is, let's call it recurring lease expenses that we've been able to defer. So it's just a it's a number of different things that go into that bucket.
Speaker 2
Okay.
Speaker 10
Last thing on, the staffing front now. Are you able to provide any detail around where you may be staffed now from a rig count perspective? How many rigs do you think you could run maybe in The US and Canada given how many people you're holding? Is it relatively in line to what your guidance was heading into Q3 here?
Speaker 2
Yeah. I think we have a pretty good sense internally. I don't want to be pointing the market up or down based on what we've done around G and A and sizing our organization. But I tell you that running somewhere in the range of you know, 30 to 50 rigs in The US, we think we can handle with our current size. And running somewhere between, you know, the dismal 11 rigs right now and maybe 30 or 40 rigs in Canada is probably where we're at right now.
Speaker 10
Perfect. Maybe last one for me. From a strategic spec perspective looking longer out, I know you guys have wanted to or hope to grow internationally. Is there any particular areas you're paying attention to as this pain, I guess, goes on and that you might like to enter once things start
Speaker 6
to settle out a little bit
Speaker 10
here and there's bit more clarity moving forward?
Speaker 2
It's a little hard for us right now to determine how the trough recovery is going to play itself out. I would tell you that there are probably more distressed international rigs than there are domestic North American rigs. So I would say that our eyes are kind of focused a bit on the international market, America, certainly there's a large volume of international rigs that are in distressed debt situations. So you know, I don't think we're looking to deploy capital for those rigs, but there might be a possibility for management contracts. Utilizing our scale and our systems to manage other assets.
I'm not sure where those rigs are going end up or who's going end up with them, but we've got a pretty good system right now, particularly in Saudi, Kuwait, and in Kurdistan to support and manage operations with no increases in cost.
Speaker 4
Got it.
Speaker 10
Thanks very much for your time.
Speaker 2
Thank you.
Speaker 0
Our next question comes from Dylan Glosser with Simmons Energy. Your line is now open.
Speaker 12
Hey, good afternoon, guys. You mentioned a peak market share in Canada of roughly 32%, think it was back January. And that you expect to efficiently get back up and running. Do you mind discussing how you expect to maintain or grow your market share through the next several quarters in Canada?
Speaker 2
Well, I think if you do the math on 11 out of 24 in Canada right now, we're probably 46% market share. But I think that's a little bit of a mix issue between our deep basin rigs and our heavy oil footprint. You know, I do think that what's going to keep on running in Canada will be the Montney play to some extent. And then it gets pretty sporadic after that. And our footprint with our Super Triple rigs, the Montney, and, you know, the natural consolidation that's taking place, you've only really got three drilling contractors that are active with Super Triples in that basin.
So it makes for a very consolidated competitive environment. I think that plays into Precision's hand a little bit for Canada. Is that helpful?
Speaker 12
Yes. Yes, sir. And kind of on another topic here. As you guys look at free cash flow generation through 2020, without taking into account working capital, do you expect to be free cash flow breakeven through Q2 and Q3?
Speaker 3
Yeah. I I would expect us to be cash flow breakeven in every quarter.
Speaker 12
And that's without the impact of of working capital release?
Speaker 3
Yes.
Speaker 7
Okay.
Speaker 12
Thanks, Tahira. Thanks, guys. I'll turn it back.
Speaker 2
Thank you.
Speaker 0
Thank you. Our next question comes from Dan Healing with Canadian Press. Your line is now open.
Speaker 13
Good afternoon. Thanks, you guys.
Speaker 7
Hey, I was just wondering if
Speaker 13
you could give me an idea of what the headcount is now versus same time last year or the end of last year in Canada and The U. S?
Speaker 2
Dan, I don't have those numbers at my fingertips right now, but substantially less. You know, in The US right now, we're running 35 rigs versus almost 80 this time last year. So, you know, that alone, call that 45 rigs less times, our company wide, about 40 people per rig. So it gets into the 1,800 person range in The US. In Canada, kind of much the same thing.
We're probably 1,000 people lighter than last year across our drilling and well servicing groups right now. I think the one part that's hardest on Precision is that, you know, historically, tried not to lay off people in our offices, but we've done that both in Houston and Calgary in Red Deer. And a number of long term employees, some ranging on more than thirty years, have been asked to retire and leave the company. It's been a real tough, really tough on the employees the past, really the past eight weeks. And, you know, we're really hoping that in a recovery, can pull some of those people back.
But, you know, the numbers are overwhelming at some point.
Speaker 13
Oh, okay. The Petroleum Services Association put out a revised forecast today that called for more help from the federal government on top of the well cleanup program that they announced. Do you see the need for more aid for the drilling and services sector as well?
Speaker 2
Dan, the $1,700,000,000 they've announced so far, we're grateful for. It supports the well services business very well. But unfortunately, doesn't do much for the drilling contractors of the drilling segment, which is going to go into kind of all time record lows. So I do think that the, you know, the CAODC is petitioning for more help for the drillers. There's no question the industry needs it because, you know, a number of drilling contractors have zero rigs running right now.
It's a very tough environment for a lot of smaller drillers. I think that help is needed.
Speaker 7
Okay, thank you. Great, thank you.
Speaker 0
Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Dustin Honing for any closing remarks.
Speaker 3
Thanks for joining us on our Q1 call. I look forward to talking with you in the future.
Speaker 0
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.