Precision Drilling - Earnings Call - Q2 2018
July 26, 2018
Transcript
Speaker 0
Good day, ladies and gentlemen, and welcome to the Precision Drilling Corporation twenty eighteen Second Quarter Results Conference Call and Webcast. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call may be recorded. I would now like to turn the conference over to Ashley Connolly, Manager, Investor Relations.
Please go ahead.
Speaker 1
Thank you, George, and thank you and good afternoon, everyone. Welcome to Precision Drilling's second quarter twenty eighteen 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 second quarter twenty eighteen 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 second quarter operating results and provide a financial overview. 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 second quarter results, I will provide an update on our 2018 capital plan and management of our capital structure. Our 2018 financial performance continues to deliver with second quarter adjusted EBITDA of $62,000,000 10% higher than the 2017. The increase in adjusted EBITDA from last year is primarily the result of higher activity in day rates in our U. S.
And Canadian businesses and strong field margins supported by efficient cost management. The better than expected operating results were negatively impacted by a larger than expected share based compensation accrual during the quarter. If share based compensation accruals were removed from each quarter, the EBITDA increase year over year would have been approximately 34% versus the 10% growth reported. In Canada, drilling activity for Precision increased 7% from Q2 twenty seventeen, while margins were approximately $450 per day lower than the prior year. The margins for the quarter were positively impacted by higher day rates, approximately $1,400 per day higher than the prior year, slightly offset by operating costs that were approximately $300 per day higher.
Removing the shortfall payments from the prior year quarter, where this quarter we had none, margins increased $1,100 per day year over year. In The U. S, drilling activity for Precision increased 24% from Q2 twenty seventeen, while margins were up approximately USD 2,200 per day, positively impacted by higher day rates, increased turnkey revenue and stable operating costs, offset by lower idle but contracted and rig mobilization revenue in the prior period. Internationally, drilling activity for Precision equaled activity in Q2 twenty seventeen. Average day rates were approximately $50,000 in line with the prior year.
In our C and P division, adjusted EBITDA this quarter was negative $1,400,000 down $1,700,000 compared to the prior year. This quarter was negatively impacted by slightly lower service rig activity and reorganization cost of $1,000,000 incurred during the quarter. Capital expenditures for the quarter were $37,000,000 For 2018, our capital plan is $135,000,000 up $19,000,000 from previous guidance. The 2018 plan is comprised of $57,000,000 for sustaining infrastructure, 63,000,000 for upgrade and expansion and $15,000,000 for intangibles related to our recently completed ERQ project. Our capital plan is expected to align with industry activity and reflects our expectation to upgrade rigs, increases to our AC triple Super Triple active rig count in The U.
S. And to deploy process automation control technology on additional Super Triple rigs. We have continued to build our contract book in 2018, signing 31 contracts year to date. And as of July 25, we had an average of 63 contracts in hand for the third quarter and an average of 58 contracts for the full year twenty eighteen. As of June 3038, our long term debt position net of cash is approximately $1,600,000,000 We had $95,000,000 in cash on our balance sheet, up $13,000,000 from Q1, and our total liquidity position was $767,000,000 We continue to view cash flow generation and debt reduction as top priorities this year.
And during the quarter, we used cash flow to reduce outstanding debt by $75,000,000 and plan to be in a position later this year to build on our debt reduction achieved year to date. For 2018, we would expect depreciation to be approximately $350,000,000 We would expect cash taxes to remain low and our effective tax rate to be in the 20% to 25% range. We continue to aggressively manage all fixed costs, including SG and A, which may swing from quarter to quarter due to changes in our share based compensation accruals and foreign exchange rates. I will now turn the call over to Kevin for further discussion of the business and outlook. Thank you, Carrie.
Speaker 3
Good afternoon. Precision is experiencing strong and continued customer demand for SuperSeries rigs in every region and every market in which we participate. If there's a takeaway from today's call, it's that the drilling efficiencies and the cost savings our customers enjoy with high efficiency pad blocking rigs, combined with market tightness for that type of rig, will continue to drive strong demand for Precision Services through the 2018 and for the foreseeable future. I'm going to walk through each of our regions and discuss the market cycles we're seeing in each of those areas. So beginning with Canada, our second quarter activity, which is typically our weakest quarter, was better than expected at about last year's levels.
And it's important to note that the day rates we reported significantly exceeded our prior guidance. And with rates average rates up over $1,400 per day, and as Carey mentioned, we are largely holding our costs in line, most of this is flowing through our income statement. But for Canada, I think the key leading indicator is a strong seasonal rebound Precision is experiencing post breakup. With 16 rigs running this morning, we are well ahead of last year's pace. In fact, we're ahead of last year's peak activity level for the third quarter.
Our Super Triples are fully committed for the 2018. We do not anticipate any further rig transfers to The U. S. It is becoming clear that Precision's Canadian customers, and especially those with oil and liquids exposure, have realized stronger than expected cash flows and their drilling costs have been lower than expected, primarily due to the drilling efficiencies we deliver. We believe that our increased utilization is clear evidence that some of that customer cash flow and efficiency gains are being redirected to expanded drilling programs and increasing our expectations for the 2018 and into 2019.
Precision's utilization in the third quarter is on track to exceed 2017 levels by 10% to 15% based on current customer indications, and we continue to expect sequential fleet average margin improvements in the $500 to $1,000 per quarter range. Now moving to The U. S. The strong demand we noted in our Q1 conference call continues through today. During the second quarter, we activated eight more rigs, bringing our active rig count to 78, and we have forward visibility on four to six additional rig activations later this quarter.
And as Carey mentioned, we added 10 contracts to our backlog in The U. S. And reported sequential dayrate margin increases of $1,200 per day. All of these are strong leading indicators for continued customer demand. On the cost side, our U.
S. Operations team have delivered excellent cost management by leveraging our scale, utilizing our vertical integration to hold the line on operating cost. Looking forward, we do not expect cost inflation to negatively impact our financial results or our cash flows. And we also reiterate our forward guidance for average fleet margin improvements in the $500 to $1,000 per day range on a quarterly basis. Leading edge day rates for our Super Triples are in the mid-20s, but in some instances, we're negotiating or considering we're let me start again.
Leading day rates leading edge rates for our Super Triples are in the mid-20s, and in some instances, higher rates are being negotiated. Notably, we are also seeing opportunities emerge where customers of long term development plans are considering contract terms longer than two years, something we've not experienced since 2014. During the second quarter, 20 rigs repriced at these higher rates with prices price increases ranging between several thousand dollars per day with the higher spec rigs repricing at the top of the range. Now while some oil service segments may be reporting operating constraints in the Permian region, the demand for pad walking high efficiency triples remains very strong, and several of our scheduled rig deployments weeks are slated for the Permian. Much of the growth we're experiencing is coming via market share as customers switch from less efficient drillers to our high efficiency pad walking super triples.
We currently estimate that fewer than half of the industry's operating fleet is comprised of top efficiency rigs. So we expect the strong demand, pricing tension and switching will be a market structural for several quarters going forward. Now turning to our Kuwait and Saudi Arabia business. Earlier this quarter, we announced a sixth contract for a newbuild rig in Kuwait to be delivered in mid-twenty nineteen. This rig will be assembled in Dubai using the same construction team as the previous five rigs, and the new rig will essentially be identical in equipment, spares, maintenance and crew training requirements.
Deployment of this rig will yield strong operational levers for Precision and require no additional G and A. Our Quake business is performing exceedingly well and continues to be one of our top growth opportunities. The ongoing tenders in Saudi Arabia appear to be moving closer to possible awards for additional rig activations and contract renewals. As we are involved in negotiations and technical clarifications, I prefer not to make any further comments on this opportunity. Suffice to say that we remain encouraged by the dialogue, and it appears international customer sentiment is improving.
Now turning to our technology initiative. Yesterday, we announced the appointment of Shuja Gouria to lead our technology group. I believe this is a meaningful addition to our already strong technology team, and I expect Shuja's leadership and experience will expand Precision's technology opportunity set. In this morning's press release, we also reported 12 drilling performance apps now under development. I'm surprised how quickly our app portfolio is growing.
Customer uptake is strong, and today we have several of those apps already in beta test on rigs in the field, yielding very good early results. Our long term value assumptions for these apps may have been understated, and I expect we'll have much more to say about the impact of drilling apps in the coming periods. One other positive surprise is that we've successfully drilled over 2,000,000 feet with our directional guidance software. We drilled over three eighty four wells utilizing process automation controls. But the real surprise is that not a single customer stepped back or walked away from this technology.
In my thirty six years of experience, don't recall a complex, or for that matter, a simple new technology deployment initiative with a zero customer rejection rate. I know our team is working very closely with our customers. The relationships are excellent. However, I'm amazed with the remarkable success rate and confident we remain on track for full commercialization. Now I believe Carey covered our financial performance against our priorities around operational leverage and debt reduction priorities.
I'm going to add that we are deeply focused on financial performance, free cash flow and debt reduction. The strong demand for our services is resulting in improving day rates and utilization, and combined with Precision's effective cost management, this will allow us to meet our targets for cash flow generation and debt reduction even as we see and exercise the continued growth opportunities as they emerge. On that comment, I'll turn the call back to the operator now for questions. Thank you.
Speaker 0
Thank And our first question comes from Aaron MacNeil from TD Securities. Your line is now open.
Speaker 2
Good afternoon all.
Speaker 3
Hey, Aaron.
Speaker 4
On The U. S. New build, I know that you guys had mentioned on the prior call or the Q1 call that you could build two AC triples for less than $10,000,000 So I assume that's what's being contemplated. But perhaps could you give some additional detail in terms of cost, timing of deployment, contract terms, return thresholds or any other color you'd provide?
Speaker 2
Hi, Ann. This is Carey. We analyzed this opportunity just like we analyzed all capital opportunities and wanted to get comfortable with both the term and return hurdles. And we got comfortable making this investment. And we since it's just one rig and the group listening on the call is pretty good at connecting the dots, really don't want to provide any more detail on what the contract entailed, but it was within our normal contract from our rigs.
Speaker 4
Okay. Maybe just a follow-up then. Given that a lot of your SCR rigs are working in The U. S. Today, does this new build rank ahead of other, call it, higher cost upgrades of maybe SCR rigs or others?
Speaker 3
Aaron, I think it was a combination of customers' specific need, contract term and return rates have made this investment make a lot of sense for us.
Speaker 4
Okay. And then maybe switching gears to Canada, but staying on capital allocation. In Canada, at what point do you think you need to start reinvesting if activity levels continue to improve?
Speaker 3
Aaron, we're really well positioned here in Canada right now with the fleet we have, both our Super Triples and our even the Teledoubles we have and the singles we have right now, it doesn't require a lot of capital. I would tell you that I think that if the Deep Basin takes another step up, if we see things kind of accelerate in the Deep Basin, that could be Montney Duvernay, there'd probably be a shortage of industry wide shortage of rigs that could meet a rising demand. And that probably means a demand that looks like three to five rigs more needed in that basin, at which point the economics for further upgrades, maybe upgrading one of our lesser capable DCSCR rigs or one of our other super triples into that need would probably make sense. There's a lot of interest right now on a possible LNG project FID, something like that might drive that next step up in demand in the Deep Basin.
Speaker 4
Okay. That's all for me.
Speaker 3
I'll turn
Speaker 4
it over. Thanks.
Speaker 3
Thanks, Aranda.
Speaker 0
And our next question comes from Taylor Zurcher from Tudor, Pickering, Holt. Your line is now open.
Speaker 5
Hey, thanks. Good afternoon. Encouraging to hear that some of your customers, at least in The U. S. Are coming to you looking for or at least interested in a two plus year term.
So two part question. Part one is, have you signed any of those types of contracts yet today? And then secondarily, for the, I think, 10 term contracts you've signed since last quarter. Could you just give us a sense as to the relative mix of contract duration in that bucket?
Speaker 3
Taylor, I appreciate the question. I would tell you that everything we're doing right now is competitive in some nature. So I really don't want give too much details on one or two data points, which is what our comments are referring to. And we usually don't give a lot of color on the depth or duration of the contract book, but I think we gave a roll forward on the contract book, on your total contract book, Kerry. Is that right?
Speaker 2
We did. We've typically, when over the past two quarters talking to market about contracts, we've been signing contracts kind of in the six month to eighteen month term, and we have more than one contract recently signed over two years.
Speaker 5
Okay, fair enough. Second question is just on the four to six incremental rig activations you're talking about or seeing visibility for moving forward. Can you give us a sense as to which basins and plays those rigs might go to? I suspect it's fairly broad based. And then secondarily, is it fair to assume as we get into the 80s sort of rig count level in The U.
S. That some of those rig activations would be coming from the SCR bucket and be converted to AC rigs?
Speaker 3
The activations we're talking about so far don't include any AC to DC or DC to AC conversions. And their activations. I think it's going be about roughly half of those to the Permian, the other half spread among three other basins. It. One to Hiberra, one to the Marcellus, two or three to the Permian and possibly one to the Eagle Ford.
Speaker 5
Okay, got it. And last one for me, if I can, is on the debt reduction target. Obviously, you've done good work year to date with reaching the $75,000,000 or the low end of the range that you stated for 2018 in pretty expeditious fashion. So as we think over the back half of the year and into 2019, Kerry, is there any sort of framework you could give us as it relates to how we should think about the cadence of incremental debt pay down from here?
Speaker 2
So we feel really good about our opportunities to build cash in the back half of the year. And if you go back to our strategic priorities for the year, we say pay down debt, but don't miss the best growth opportunities. So if there aren't excellent growth opportunities, we will pay down more debt.
Speaker 5
Got it. Thanks. I'll turn it back.
Speaker 0
Thank you. And our next question comes from the line of Sean Meakim from JPMorgan. Your line is now open.
Speaker 6
Thanks. Hey, guys. Hey, Sean. So thinking about the Kuwait contract that you signed, obviously, market now is looking very good in terms of cost absorption. It sounds like rig count for you in Saudi is going to be stable.
Still a few idle rigs in the region though, more tenders potentially on the way. Recognizing the strategic initiatives that focus around the balance sheet, What other optionality do you think you see in that part of the world in the near to intermediate term? And are you open to more creative forms of financing with some of your key customers in that region to maybe get some incremental new builds, where there's a bit of give and take between capital cost and day rates to build some more scale in The Middle East?
Speaker 3
I think, Sean, really important questions for us and something we're working with the Board on all the time. Kind of to work our way through that a little bit, the first comment would be that we have one idle rig in Saudi and we have three idle rigs stored in Kurdistan. All four of the idle rigs are being quoted into possible tenders. So at the far side, if we're successful, we could go from three operating rigs, maybe to seven operating rigs. That would come with some capital needs.
We'd be happy to do things like upgrade the BOPs and do some recertifications of the rigs and kind of guide you to the numbers in around $5 to $15,000,000 per rig depending on the scope and scale. My thinking is that the timing probably stretches late this year into next year. And often those contracts take longer to sign and finalize than everybody thinks everybody hopes. But I'm getting more encouraged by the rate of interaction with our customers in The Middle East right now and they're kind of focused on moving things forward. So it does feel like that's going to move forward.
It does feel like it'll be something that likely be late twenty eighteen, 2019 type opportunity and could see us deploying rigs in early twenty nineteen or mid-twenty nineteen, in addition to the one in Kuwait. Now going back to your comments or questions around financing, obviously, paying down debt remains our top priority, and we're not going to sacrifice our capital structure to stretch our reach for opportunities, but we'd like to find a way to do both. Terry, any further comments?
Speaker 2
Yes. I think look for us to continue doing what we did this year with taking on one new build, stretching the construction of that new build over a year with most of the capital in 2019 and paying down debt. We'd like to pursue both those avenues.
Speaker 6
Yes. Thank you for that. It's a lot of good feedback. So in The U. S, thinking about the six rigs that you guys have that you plan to have coming online here in the next few weeks, are you I'm not trying to be so specific to those rigs, but just thinking about where you are at this point in the cycle.
As you're adding rigs in The U. S, are you displacing less capable rigs? Are you taking share from peers? Are you adding to existing customers as they're adding to their fleets? Just trying to think about some of the market dynamics as you're putting more rigs back to work in The U.
S.
Speaker 3
Sean, I think if you look at the progression through the course of 2018, I think in the first quarter, most of our additions were just additional rigs to The U. S. Activity list. But I really think during the second quarter, certainly towards the end of the second quarter, most of the additions we made were customers switching from less efficient rigs to higher efficiency rigs. I think that was most of what we saw during the second quarter.
As we think about the six rigs to four rigs, six rigs going forward, my estimate is that most of that will be switching unless for whatever reason U. S. Rig count ticks up. But nothing right now tells me there's going to be any sharp movement in U. S.
Rig count, at least in the near term.
Speaker 2
And Sean, I'll just add to that. On the last conference call, we mentioned that in our capital plan, we didn't contemplate an upgrade of more than $3,000,000 and that's still the case. And even with this four to six rigs that we have visibility on over the coming weeks, none of those require upgrades more than $3,000,000
Speaker 3
think that's Yes. A good Good point, Jerry. I think also, Sean, that if the demand continues to accelerate beyond Precision running 84, 85 rigs, we may have to look at more upgrades down the road.
Speaker 6
And so if some you competitors that are doing as much spending as much as $15,000,000 and getting good rates and terms, it sounds like your paybacks on those would be pretty darn fast.
Speaker 3
Yes, it would be. I don't think we'll have a $15,000,000 upgrade, but we did we have signaled that the next round of upgrades, that kind of the final 10 to 15 rigs that we have for upgrade would be probably in the 3,000,000 to $6,000,000 range and some of those will be closer to 6,000,000 So we've got some DC to DC conversions we anticipate somewhere down the road. And I wouldn't be surprised if we see contracts later this year that make those conversions make sense for us.
Speaker 6
Got it. Great. Thank you very much.
Speaker 3
Great. Thank you.
Speaker 0
And our next question comes from the line of John Daniel from Simmons and Company. Your line is now open.
Speaker 6
Guys, just
Speaker 7
two quick ones for me. I'll start with Carey. Just any chance you can provide some color on expectations for the well service business heading into the second half?
Speaker 3
Yes. So, one of the I'll start
Speaker 2
and I'll let Kevin finish. But we do expect activity to look a little bit better year over year in the second half. We did improve pricing a bit. And as we mentioned in the press release, we had some onetime costs this quarter that kind of drag on margins a bit. So we think all of that will go away, profitability should be better in the second half of the year.
Speaker 3
Yes. Joe, I'll give you a little more color on that business kind of in general right now. It's really frustrating. I can tell you we've had some cost drivers in that business that we've tried to pass through our customers. I'll speak to a couple of them.
But there's a carbon tax in the province of Alberta that impacts the cost of fuel. And on service rigs, fuel is part of the service company's cost. That raises our cost. There's a second cost that's caused by another government labor law change that has cost. We took these costs to our customers and tried to get pass throughs.
And the amount of resistance from our customers was baffling. We pressed hard. We pushed our day rates up and we lost some market share because of it. Our customers are, a lot of cases, right now have been unwilling to absorb any price increases in this space, even for some these cost pass throughs. It's really frustrating and it's tough on the industry as a whole.
We're not the only company experiencing this. I mean, every service company has a same cost driver as well service company and the same carbon tax, same labor cost problems. And certain customers out there are just really difficult. It's tough in the industry. It's challenging long term survivability.
Certainly, the industry as a whole is fairly cash flow positive. And we'll continue doing our work both on the cost side and drive costs down, Frey mentioned, the severance costs in the second quarter restructuring costs. We think we'll be in a healthy position in the back half of the year. We expect to have enough revenue and enough operating leverage to do okay. But the industry as a whole probably needs a little more discipline, but it certainly needs a little more cooperation from the customers to ensure we have sustained, repaired and maintained assets with voluntary crews to keep a safe and healthy industry alive.
Speaker 0
Okay.
Speaker 7
I appreciate that color. And then just last one for me. I mean, guys are pretty good about defining your annual strategies delivering on them. So I'm curious if you've given any thought to what your 2019 objectives might be. And if so, if
Speaker 8
you could give us a preview
Speaker 7
of things you're looking to do next year?
Speaker 3
Well, a little bit. So we don't formalize that until we do our budget in December, but it's unlikely that debt reduction comes off our 2019. Free cash flow debt reduction will still be a 2019 focus for us. I'm quite confident technology will be a focus for us in 2019. And I think the third party, we'll have to see how the budget evolves and how the year evolves.
Speaker 5
Do you think do
Speaker 7
you see consolidated M and A consolidation being one of those or no?
Speaker 3
I think it's a good question. I think that the space would be served well by consolidation. There's been a couple of deals announced over the past few months. We saw one in The U. S.
Just last couple of weeks. I think it really makes sense if you're small to consolidate, and I think there's some scale advantages if you're doing that. For us and for our larger peers, standardization across the fleet is just so important in our value proposition. That bringing in dissimilar assets is hard to manage, can be more expensive to manage. So I would tell you, John, that I think our eyes are always open, but it's really not high in our priority list.
Thanks for the question.
Speaker 7
Thank you.
Speaker 0
And our next question comes from the line of Ian Gillies from GMP. Your line is now open.
Speaker 8
Good afternoon, everyone.
Speaker 3
Hi, Ian.
Speaker 8
When you're delivering tenders to your customer with respect to technology, I mean, it getting its own line item now when you guys are identifying the price to that and customers looking to pay for it? Or is it still getting blended in with, I guess, everything else you would offer?
Speaker 3
Ian, a really good question. I think one that we've talked about a bit in the past, but I'll kind of restate where we're at. So each technology item that we're offering is listed as a line item every single time. It's not included in rig rate. There are occasions right now where we have trial periods and we have performance metrics.
But the technology item, whether it's one, two or three apps or whether it's process innovation controls or our Able directional drilling advisory software, those are separate line items on the invoice. Either identified at a fixed price, a target fixed price or some performance based price.
Speaker 0
Okay. And
Speaker 3
I'd add that maintaining that discipline is a core element of our long term strategy to preserve the value that we're creating for our customers, both preserve our value, our piece of the value rent coming through us.
Speaker 8
And I mean, as we think back perhaps over the last little while or last year or two as you've developed the technology strategy, I mean, is there any pieces of it right now that you feel like you may need to pivot on or change at all given what you know now that you may not have known then?
Speaker 3
Boy, that's a really good question and a tough one to answer. So I'm encouraged by how quickly apps are taking up. And I think I really underappreciate the value of apps. And I say that very quickly, but there's a dozen apps we mentioned in the press release. And these range from customer written apps, they're vendor written apps, they're other service company written apps and precision written apps.
Very simple to do and easy to take standard practices and put them into a small kind of uploadable algorithm that helps the rig performance. I think that's got a lot of expandability. I think we'll be adding more apps over time than we see possibly every customer having apps. And the arrangement we have to generate revenue or just the residency of the app is a really good arrangement. So I think that's an area where we'll put more focus.
So it's an area that we identified early on, but maybe didn't recognize how powerful that could be. So that's one piece. We've talked a lot about wired drill pipe and that's very, we're still working, but the customer uptake has been slower than we expected. But I think the I think two areas that get the most attention going forward are going to be data and optimization. And one of Shuja's big challenges as he gets to the door here and gets working will be to help us develop our strategy around data management, data use and optimization of the well drilling parameters.
So I think there's a lot of work for us to do on the data side. And I think there's good opportunities to improve what we're doing for our customers and create a stronger competitive advantage.
Speaker 8
Okay. That's good information. I appreciate that.
Speaker 0
The other thing I mean,
Speaker 8
if we went back to last year in Canada, there were some rig mix commentary about some of the deeper triples probably or the ST-1500s and 1200s not going back to work in Canada until Q4. Is that a similar trend that's going to play out this year? Is the customer behavior a bit different?
Speaker 3
Well, we took one of those rigs out of the market and I think that had a bit of an impact on customer sentiment. All of the rigs we have in our Super Triple fleet, including our 1500s in Canada are booked now through the rest of the fall and into the 2019. And I'm thinking that anything that drives demand on the Deep Basin side keeps those rigs kind of locked in for quite a long time.
Speaker 8
Okay. Last one for me. The costs on The U. S. Side have been remarkably resilient, didn't have really budged at all.
Do you think you can absent rig moves or anything maybe along those lines, I mean, is it a is that some a reasonable number to expect moving forward?
Speaker 2
Yes. I think the last two quarters, if you strip out turnkey, would be $13,000 a day. And if you kind of hit the nail on the head there, Ian. If there aren't rig moves and we don't have 15 rigs added in a quarter, we think we can keep those costs in that kind of 13,000 to 13.5 range. Okay.
And sorry, was going
Speaker 8
to sneak one last one in. Is the restructuring done in the Well Services division?
Speaker 2
Yes. We've a couple some management changes and then also, as you know, had an ERP implementation last year to separate that business. And so there's been a little bit of ongoing work there, but most of that should be behind us.
Speaker 8
Okay. Thanks very much, everyone.
Speaker 2
Thank you. Thank you, Ian.
Speaker 0
And our next question comes from the line of John Morrison from CIBC Capital Markets. Your line is now open.
Speaker 9
Afternoon all. Of the technology initiatives that you guys have underway, have any of the rigs that you have process automation control or the directional guidance system currently installed on the rig not been running it based on customer preference? Or has technology uptake been fairly universal where it's available?
Speaker 3
John, just to kind of reconfirm what I said earlier, we've had no customers step back when they've asked us to turn it off. We've had none of that occurrence. We've had some downtime with the software. We have to turn it off because we have to fix a bug or something like that as we go through the early commercialization phase. But we haven't had an instance where our customer says, I've had enough, turn it off or take it off the right place.
Speaker 9
So every trial has been effectively, it's either still ongoing or it's been a successful trial?
Speaker 3
Every trial every trial we're running right now is successful and moving forward.
Speaker 9
Okay. Gary, just on the 2018 CapEx program, outside of ForEx fluctuations, is there anything that could really swing around the 2018 spend? Or would any incremental investment decisions at this point largely be 2019 based?
Speaker 2
So maintenance capital is always activity driven, but we're only dealing with half of the year. So either rapid increase or decrease in activity could make that move, call it, 5,000,000 or $10,000,000 one way or the other. And then as Kevin mentioned, if we get kind of outside of this mid-80s rig count where we start doing some of these 3,000,000 to $6,000,000 upgrades, those are not included in the capital plan. So if we have increased demand, increased activity, we can get to a point where we're adding a bit more upgrade capital.
Speaker 9
Do you have a base 2019 program you'd be willing to share based on an assumption for maintenance CapEx and other upgrades you think are likely?
Speaker 2
We don't. About 85% of the Kuwait newbuild cost is going to be in 2019. So that's kind of the baseline that we've announced.
Speaker 9
Okay. On the contract terms where you're discussing multiyear durations, can you share one, whether those are on existing rigs that are just being recontracted or new rigs? And secondarily, do any of those multiyear contracts effectively contemplate you needing to put more capital to work? Or is it some cases where the producer is just wanting to lock up visibility?
Speaker 3
I think the underpinning the reason that it pits a long term contract is customer driven, not precision return driven in that there's some customer plan that's going be a long term drilling plan. They need the rig, they want the rig, and they're prepared to pay for I would say that we're not driving the three year the longer term. It's the client driving the longer term. And John,
Speaker 2
I think I'm trying to answer the other part of that question, which was there's no ongoing capital commitment. So if we sign the contract, the capital is spent before the rig starts drilling.
Speaker 9
Yes. So it was really just more I was trying to make sure that I understood whether each of those is contingent upon you spending more money or some of them are just as simple as customers going, we want to have some form of base visibility for the next twenty four months, so to speak?
Speaker 3
See the answer is much nearer to the base visibility for a longer period of time, probably longer than two years.
Speaker 9
Okay. I recognize you guys are talking about putting more rigs to work in the coming months. But obviously, there's heartburn around a potential slowdown in the Permian given some of the pipeline issues that are out there. Are you guys having any discussions with customers about either laying rigs down or horse trading them for a different geography at this point?
Speaker 3
If you look at our Permian Basin right now, you'll see that we have two or three of our super singles drilling in the Permian. And then we are drilling in kind of a dashboard where the super single goes off the pad first and drills the vertical section, then it leaves and our super trouble comes in and drills the rest of the well and moves and walks down the pad. I would tell you that as we think about our risks going forward, we would say that if we get too far ahead of the curve, those three super singles could see a bit of a slowdown. Recognize those are the lowest margin rigs we probably have in The U. S.
There are some 1,000 horsepower super singles rigs.
Speaker 9
Okay. Last one just for me. On the idle rigs that you have in The Middle East right now that you're bidding on certain tenders, do any of those require incremental upgrades for the tenders that you're involved in? And sorry if I missed that earlier on the call.
Speaker 3
Yes, John, for sure those rigs will need some incremental upgrades of the 5,000,000 to $15,000,000 per rig range. Think about it in terms of either BOP upgrades or BOP replacements and some recertifications on masts and things like that that time out over time. We would be looking to recover that capital both in the early part of the term and still have a return on the rig itself. So I think there'd be good financial decisions and long term contracts and build out our base in Saudi Arabia and make that country get either above or close to critical mass force. So I think there's a good strategic value, good financial value and long term stability in pricing if we have to spend that capital.
Speaker 9
Okay. Appreciate the color. I'll turn it back.
Speaker 3
Thanks, John. And
Speaker 0
our next question comes from the line of Jeff Sutterley from Peters and Company. Your line is now open.
Speaker 10
Hi, everyone. A few random questions for you. The technology side, when you aggregate together PAC and directional guidance, etcetera, do you have a sense of what impact that's had on your consolidated dayrate in The U. S. Or in North America?
Speaker 3
So we know exactly what the impact it has. We're not going to disclose that. Highly competitive and really don't want provide a lot of visibility to our to our competition and to customers generally on how this is playing out right now.
Speaker 10
When you look at the 9.5% year over year increase in Q2 day rate in The U. S, excluding Turnkey and any lump sums, is it safe to say that it's still spot market pricing and rig mix that's the biggest driver for that increase versus anything from the technology side?
Speaker 3
Yes. If you put it that way, yes, you're right. It's probably weighted towards both term contract renewals, spot market rates, more so than technology at this point. But we do see the impact of technology layering itself in. But we see the wedge beginning to build.
Speaker 10
Okay. On the capital side, just trying to understand how the pieces within the capital program have moved. So you've added about $15,000,000 to the sustaining and infrastructure side. Have you changed the number of rigs you're contemplating in the upgrade program for this year?
Speaker 2
No, it's still in the twelve to twenty four range.
Speaker 10
And will on the last call, you talked about how the upgrade program is currently contemplated would largely exhaust the lower cost upgrades. Is that still the case? Or are you starting to dabble into right at the edge of that $3,000,000 level?
Speaker 2
Yes, not yet. And I think we a couple of questions ago, I had the same question. In our capital plan, 135,000,000 doesn't contemplate any rigs upgraded for more than $3,000,000 and the visibility that Kevin highlighted where we have four to six rigs that we expect to activate in the coming weeks, none of those rigs require more than $3,000,000 of upgrade capital. And they would be included in our $135,000,000 annual capital budget.
Speaker 10
Okay. And then the cost of I know you said earlier 10% of the cost of the Kuwait or sorry, 85% of the cost of the Kuwait rig build will be incurred in 2019. But when you look at the cost of that this year plus the new build that you disclosed for The U. S, your upgrade and expansion program is only up by three. Is it just sort of a shifting of things going on there?
Or is there stuff that's been previously capitalized that's essentially flowing into the new rig?
Speaker 2
Jeff, I understand part of your question, and maybe it'd be better if we took it offline. We haven't had any major changes in our capital plan other than adding the Kuwait newbuild and then a little bit more upgrade cost and then foreign exchange.
Speaker 10
Okay. I'll move on. International, you mentioned the one idle rig in Saudi and the three in Kurdistan. Is that the scope of what you're tendering into the opportunities in Saudi? Like is the maximum opportunity four rigs for you?
Or would you contemplate some transfers or new builds there too?
Speaker 3
Jeff, good question. At this point, just those four rigs, we're not considering any other transfers or new builds at this point in Saudi. We also have the other we have two renewals we talked about. They're also coming up in the third quarter in Saudi. And we think those two renewals plus the four newbuilds.
Yes, not four I'm sorry, not four newbuilds. The four redeployments, thank you, are part of the package we're working on.
Speaker 10
Okay. And then last thing
Speaker 3
I'll be very clear there. We have no newbuild anticipated for Saudi Arabia, nothing on the horizon, nothing we're thinking about.
Speaker 10
Okay. Last piece on the Canadian side. You mentioned that the triples are fully committed through 2019. Does that include the 1500s and the 1200s?
Speaker 3
Correct.
Speaker 10
And from a pricing standpoint, you mentioned that aggregate Canadian rates are expected to be up 500 to 1,000 per quarter going forward. What magnitude of increases do you contemplate within the triple segment?
Speaker 3
So I don't think I'd like to give that level of transparency right now. Certainly, we're going be starting negotiations with clients very soon. And I would take those comments to be more of the margin line than the day rate line.
Speaker 10
The $500 per $2,000 per quarter for Canada?
Speaker 3
That's right.
Speaker 10
Okay. Got it. And Kerry, just a housekeeping item. SG and A, if you back out stock based comp, it was up in Q2. What do you expect your run rate to look like absent stock based comp going forward?
Speaker 2
If we take out stock based comp, it would be kind of in that 95,000,000 to $100,000,000 range. So since
Speaker 3
we have such a large part
Speaker 2
of our business that's either international or in The U. S, when the Canadian dollar weakens, it makes our SG and A go up. Then obviously, as we've talked a lot about this quarter, when our share price moves significantly in a quarter, it can make the share based portion of SG and A move up or down.
Speaker 10
Okay, great. Thank you very much. Appreciate the color.
Speaker 3
Thanks, Jeff.
Speaker 0
And our next question comes from Brad Handler from Jefferies. Your line is now open.
Speaker 11
Thanks. Good afternoon, guys.
Speaker 3
Hi, Brad.
Speaker 11
Couple of unrelated things. First, I'm not sure I'm clear. I probably just sort of missed it along the way. The margin expectations in Canada, what's the visibility for how many quarters we're talking about?
Speaker 3
So Brad, we said on a roll forward basis, we should be thinking of margins kind of increasing $500 to $1,000 a quarter. And think about our forward guidance here speaking to the balance of 2018 and maybe into Q1 twenty nineteen. Got you.
Speaker 11
Thanks. Then I guess I'm hoping
Speaker 3
Obviously, I'll comment. A lot of our business in Canada is not contracted dayrates. Are seasonal dayrates. And any major macro shift can have a very quick impact on Canadian rates and activities. So leave that out there as a warning.
Speaker 11
Sure. I just sort of had I recall hearing the comment, I think I lost track for how long it in a sense you were thinking it applied. So that's fine to frame it. Thank you. I guess I'm hoping you can speak without giving up anything meaningfully from a strategic or bidding standpoint a little bit more to the Saudi tender or to the international tenders in general.
Maybe the first question is the competitive landscape does seem like it's expanding or at least shifting. Obviously, we have a rig of the future, which is being bid by one of a new entrant into the rig space, I guess. I've seen references to a Chinese contractor winning a 3,000 horsepower rig. And I don't know if that's as new as it struck me, but I felt like they were starting to emerge in larger deep drilling rigs as opposed to the little stuff that they had been winning, if you call the Chinese companies had been willing for a while. So I guess I was wondering if you could speak to that competitive landscape.
Am I in the right ballpark? Maybe some on the other hand, maybe some old competitors are falling away because of their own capital constraints. And so maybe it's not that there are more competitors, maybe it's just that they're different. But any of that sort of color would be very interesting to hear.
Speaker 3
Brad, even the way you framed the question kind of tells you where the market's at right now. So the market has been stagnant now for a couple of years. There's no question that kind of there's some new emerging or new growing contractors that are kind of basing their rigs on low cost designs. There's been a transaction recently announced that involves a large chunk of other rigs, a lot of moving pieces right now in that market. In the really near term, the tenders we have right now, four idle rigs we're tendering and the two renewals we're tendering in Saudi, those are 2,000 horsepower rigs that are really available for either immediate deployment or very quick deployment.
So we're not really competing against new built rigs or 3,000 horsepower rigs. It's almost a little bit of a niche for us right now, the way it's been in Saudi Arabia over the past few years. And Saudi Arabia is a tough place for the deeper, heavier rigs to be successful if you're a new entrant. We've been successful there. Some others have come in and failed and not.
The people who are there and established have been successful or successful. But it is a new place to it's a tough place to enter. So on the near term, with these changes we have right now, we don't really think it's a lot of new entrant competition. We think it may be existing rig competition, but we think we're well positioned.
Speaker 11
That's encouraging for sure. Is it worth me asking the same question outside of Saudi? Are the tenders active enough in a couple of other countries to try to assess maybe, if you will, especially that Chinese threat that I was sort of referring to?
Speaker 3
Yes. We saw some of that when we were tendering in Kuwait on this last round. And I think our view, I think we commented previously that the Kuwaitis were unsuccessful awarding as many rigs as they intended. So we ended up with one rig. We probably could have had two or three if we would have decided to be more aggressive, both with our capital spending and our bidding style facades, it wouldn't have taken much.
But we decided that the right decision for Precision was having just one rig to build in Kuwait and fund one rig right now. But the two rigs we didn't take didn't go to somebody else. Those rigs were made unawarded. And so I think we saw some of it at the edges, but didn't really affect our competitive position.
Speaker 11
Interesting. Interesting. Okay. Thank you for that. I appreciate it.
I'll turn it back.
Speaker 0
And I show no further questions at this time. I would like to turn the call back over to Kevin Naviu for closing remarks.
Speaker 3
All right. Thank you. I'd like to thank all of you for joining our call today. Also thank the employees of Precision Drilling for their hard work and their dedication over the last few months and their very strong financial performance and excellent operational results delivered this quarter. Now on that note, please join us on our third quarter conference call in October.
Thank you.
Speaker 0
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, you may all disconnect. Everyone, have
Speaker 3
a
Speaker 0
great day.