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Edited Transcript of PD.TO earnings conference call or presentation 13-Feb-20 7:00pm GMT

·44 mins read

Q4 2019 Precision Drilling Corp Earnings Call Calgary Feb 20, 2020 (Thomson StreetEvents) -- Edited Transcript of Precision Drilling Corp earnings conference call or presentation Thursday, February 13, 2020 at 7:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Carey Thomas Ford Precision Drilling Corporation - Senior VP & CFO * Dustin Honing Precision Drilling Corporation - Manager of IR * Kevin A. Neveu Precision Drilling Corporation - President, CEO & Director ================================================================================ Conference Call Participants ================================================================================ * Blake Geelhoed Gendron Wolfe Research, LLC - SVP of Equity Research * Connor Joseph Lynagh Morgan Stanley, Research Division - Equity Analyst * Ian Brooks Gillies Stifel Nicolaus Canada Inc., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure * John Booth Lowe Citigroup Inc, Research Division - VP * Kurt Kevin Hallead RBC Capital Markets, Research Division - Co-Head of Global Energy Research & Analyst * Sean Christopher Meakim JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst * Taylor Zurcher Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research * Waqar Mustafa Syed AltaCorp Capital Inc., Research Division - MD of North American Energy Services & Head of U.S. Institutional Equity Research ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by. And welcome to the Precision Drilling Corporation 2019 Fourth Quarter and End of the Year Results Conference Call and Webcast. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker for today. Dustin Honing, you may begin. -------------------------------------------------------------------------------- Dustin Honing, Precision Drilling Corporation - Manager of IR [2] -------------------------------------------------------------------------------- Thank you, Towanda, and good afternoon, everyone. Welcome to Precision Drilling's Fourth Quarter and Year-end 2019 Earnings Conference Call and Webcast. Participating today on the call with me are Kevin Neveu, President and Chief Executive Officer; and Carey Ford, Senior Vice President and Chief Financial Officer. Through our news release earlier today, Precision reported its fourth quarter and year-end 2019 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. Carey will begin today's call by discussing our fourth quarter and year-end financial results, followed by Kevin's operational update and outlook. With that, I'll turn it over to you, Carey. -------------------------------------------------------------------------------- Carey Thomas Ford, Precision Drilling Corporation - Senior VP & CFO [3] -------------------------------------------------------------------------------- Thank you, Dustin. Precision once again fulfilled its financial strategic priorities in 2019, retiring $205 million of debt during the year and leveraging our high-performance, high-value strategy and scale, along with disciplined cost management to generate strong cash flow. We are pleased with our 2019 performance and plan to continue the momentum into 2020 with debt reduction targets of $100 million to $150 million for the year. In addition, we're providing another year of debt reduction guidance and raising our long-term target to $700 million of debt reduction between 2018 and 2022. I will now review some of the fourth quarter and year-end financial details. Our 2019 fourth quarter adjusted EBITDA of $105 million decreased 22% over the fourth quarter of 2018. The decrease in adjusted EBITDA primarily results from reduced U.S. and Canadian drilling activity and higher share-based compensation expense during the current quarter and transaction-related income received in the prior year period offset by reduced operating and fixed cost in the current quarter. In the U.S., drilling activity for Precision averaged 63 rigs, a decrease in 9 rigs from Q3. Daily operating margins in the quarter were $9,876, an increase of USD 1,271 from Q3. Q4 margins were positively impacted by turnkey and IBC revenue and certain reversals of prior period provisions during the quarter. Absent these effects, daily operating margins would have been approximately USD 8,500 or USD 100 per day lower than Q3. For Q1, we expect margins to be in the range of USD 8,700 to USD 9,000 per day with IBC revenue more than offsetting lower fixed cost absorption. Turning to Canada. Drilling activity for Precision averaged 43 rigs, a decrease of 7 rigs from Q4 2018. Daily operating margins in the quarter were $7,391, a decrease of $296 from Q4 2018. Absent shortfall payments received in the prior year and certain nonrecurring cost recoveries in the current quarter, daily operating margins would have been down approximately $400 from the prior year. For Q1, we expect normalized margins to be down slightly due to rig mix compared to Q1 2019. Internationally, drilling activity for Precision in the current quarter increased 11% from Q4 2018. International average day rates were USD 52,283, up USD 301 per day from the prior year. Turning to our C&P segment. Adjusted EBITDA this quarter was $6.3 million, down approximately $700,000 compared to the prior year quarter. For the year, our C&P segment generated EBITDA of $24.1 million, an increase of $9.3 million or 62% from 2018. The improved financial performance is a result of continued business improvement initiatives, including cost savings and stronger pricing. At year-end, we recognized a pretax charge of $20 million relating to the decommissioning of the 22 rigs we had held for sale and 7 additional rigs that did not meet our high-performance standards. We expect to utilize certain components from these rigs in our operations, and we'll continue to evaluate equipment sale opportunities but will not recognize the current value on our books. For the full year 2019, EBITDA was $392 million. Funds from operations were $293 million and earnings per share were positive at $0.02. Capital expenditures for the quarter were $22 million and $161 million for the year. In 2019, the Precision team demonstrated our ability to maintain capital discipline and moderated capital spending with industry activity while funding only the most attractive capital investment opportunities. We expect to continue our strict discipline in 2020, where our capital plan is $95 million. The 2020 capital plan is comprised of $58 million for sustaining and infrastructure and $37 million for upgrade and expansion, including expanding our AlphaAutomation platform by 24 systems. As a reminder, the 2020 capital plan contains approximately $25 million in sustaining and infrastructure capital for certifications that historically have been expensed prior to Q4 2019. The impact of this accounting change in Q4 2019 was $2 million for all of Precision's operations. We continue to make progress on our contract book. And as of February 12, we had an average of 54 contracts in hand for the first quarter, an average of 41 contracts for the full year 2020 and 12 contracts for the full year 2021. As of December 31, 2019, our long-term debt position net of cash is approximately $1.35 billion, and our total liquidity position was over $700 million. Our net debt to trailing 12-month EBITDA ratio is approximately 3.5x. Our average cost of debt is 6.8%, and debt repayment remains our top financial priority, and we consider our debt repayment objectives before making any growth capital investments or share repurchases. In the third quarter of 2019, we implemented a normal course issuer bid. And as of February 12, 2020, we had repurchased approximately 18.7 million shares for $29.2 million, representing 6.4% of our outstanding shares. For 2020, we expect depreciation to be approximately $320 million. We expect SG&A to be approximately $90 million before share-based compensation expense. This guidance compares to the 2019 guidance provided this time last year of $110 million prior to share-based compensation expense with the reduction reflecting aggressive management of all fixed costs to enhance financial performance. We expect cash interest for 2020 to be $100 million, which compares to $140 million in 2016 before we started our debt reduction efforts. We expect cash taxes to remain low and our effective tax rate to be in the 20% to 25% range. With that, I will now turn the call over to Kevin. -------------------------------------------------------------------------------- Kevin A. Neveu, Precision Drilling Corporation - President, CEO & Director [4] -------------------------------------------------------------------------------- Thank you, Carey, and good afternoon. As Carey mentioned, we are pleased with Precision's fourth quarter and full year 2019 financial and operational results. I believe the Precision team performed exceptionally well in 2019, controlling every variable within our control and delivering on our strategic commitments. I'll start today by discussing our 2020 priorities. In setting our 2020 strategic priorities, we continue to believe that leveraging our scale to maximize free cash flow and prioritizing our free cash flow to pay down debt remains the best path to create shareholder value. Secondly, by also prioritizing operational excellence, we are tightening our focus to deliver operational excellence to our customers, our community and our shareholders. We're measuring and we'll be reporting on several key metrics regarding operational execution, environmental impact, social impact, corporate governance. We believe these priority -- this priority aligns with our high-performance, high-value competitive strategy. And finally, continuing to enhance our technology lead with the Alpha technology platform is aligned with our customers' urgent need to lower well costs. We see this as a clear path to increase market share, deliver revenue and margin growth, especially in this era of capital discipline. The Precision team has a multiyear track record of meeting or exceeding our strategic commitments, and we expect we'll continue on this path in 2020. The priorities are detailed in our press release. And as in prior years, we'll provide quarterly updates on our progress. You will also see that these priorities are captured in performance metrics in management's short-term and long-term incentive compensation plans. Now turning to our business update. I'll begin with our Canadian drilling segment. As Carey mentioned, during the fourth quarter, we experienced early indications of strengthening customer demand. That momentum has continued into this year. Today, we are running 80 rigs versus 55 this time last year. We expect Precision's Canadian rig activity will remain in the mid-70s through the end of February and that the seasonal spring breakup slowdown will be weather-driven rather than a function of budget exhaustion. For Precision, the increased demand is occurring in 2 sectors: the natural gas liquids plays of the Montney and Duvernay shales and the heavy oil sector, including SAGD, conventional heavy oil and oil sands stratification wells. So first, in the Montney and Duvernay plays, their transition to full development drilling has led to increased customer demand for pad walking Super Triple rigs and particularly those equipped with AlphaAutomation systems as our customers strive to drill the lowest-cost, most efficient wells. Pricing on these rigs is becoming more constructive and will continue to improve as 25-plus industry super-spec rigs have been relocated to the United States recently, substantially tightening the super-spec rig supply. This, coupled with recent industry consolidation has led to improved pricing discipline among the remaining drillers. We believe this segment of our drilling business is a unique bright spot, where customers benefit using super-spec rigs, enough automation to reduce well costs, while we generate solid financial returns. The modest recovery in heavy oil is long overdue and aligns very well with Precision's well-regarded fleet of ultrahigh-efficiency Super Single rigs. After several years of essentially curtailed heavy oil activity, particularly stratification drilling, this is a welcome rebound for Precision. I believe our strong market share in this segment is a result of the proven performance of Precision's Super Single rigs and Precision's ability to crew up these rigs after several years of minimal industry activity. Overall, with a 40% increase in rig activity year-over-year, Precision has added 450 new field personnel since mid-2019. We firmly believe that when market opportunities arise, we must be well prepared to respond immediately. Our drilling assets are well maintained with up-to-date certifications, and those rigs reactivate with minimal start-up costs and no delays. Our field leadership is strong and capable of responding to the demands of growth. And most importantly, our management systems and organizations is up to the challenge of recruiting, training and fully crewing up these additional rigs. I believe Precision's ability to respond on pace with this demand growth is a very good demonstration of the operational excellence Precision delivers and is a primary driver of our market share gains in Canada. Looking forward in Canada, we do not believe the strong start is simply front-loading of the drilling budgets. In discussing -- in discussions with our customers for Q2 and the second half of 2020, our expectation is for generally flat activity when compared to 2019. There'll be some puts and takes. Dry gas-directed drilling may slow, while Montney and Duvernay demand should remain firm and provide some upside for Precision. We also expect heavy oil activity should be stronger for the balance of the year when compared to last year. The Canadian industry remains highly sensitive to the energy macro. Commodity prices, both AECO gas and oil differentials, largely influenced customer spending. The recent appeals court decision supporting the Trans Mountain pipeline project and the recent positive developments on the KXL Line 3 projects bode well for longer-term fundamentals in Canada. Interestingly, the overall customer tone is improving. In fact, we have several customers now discussing 2021 drilling plans. This is the first time in several years that I recall any long-term rig operations planning with our customers. And I think this is a function of modestly improving customer sentiment and also those customers building more confidence in their own capability to operate in this tight environment. Capital discipline has become the norm, and our customers have adjusted quite well. Turning to the U.S. We believe customer demand bottomed in the fourth quarter of 2019. And while we were expecting to see a modest demand improvement following 2020 budget reloads, it seems short-term commodity price volatility is throwing those decisions. With global commodity prices remaining highly sensitive to macroeconomic risks, our customers are quick to adjust spending plans within those risks. The most recent macro event is, of course, the coronavirus and its impact on oil and gas demand. While our biggest concern is for the health and welfare of those affected by the serious virus, we believe the impact on commodity volatility has been impactful. We will not be surprised if new drilling projects are delayed by a few weeks or months as capital discipline is a prevailing theme across our U.S. customer base, and our customers are acting accordingly. In our press release, we mentioned 3 rigs in the Marcellus which were unexpectedly idled. We'll endeavor to redeploy those rigs -- these rigs as soon as possible. But in the interim, we'll earn full IBC revenue as these rigs are contracted through the full year. In other U.S. basins, we are seeing pricing and demand remaining consistent with our prior guidance varying only by rig size. Contract renewals for our ST-1500s remained in the low to mid-20s, and for ST-1200s, the renewals were in the high teens to low-20s, in line with what we reported in our Q3 earnings call last October. This relatively firm pricing is supported during recontracted negotiations by the proven performance of the current rig, coupled with the switching costs and operational risks to the oil and gas company associated should they choose to change rigs mid-program. The rare spot market rig deployment opportunities that we see may price $1,000 or $2,000 lower than renewal rates as switching costs and risk is not as big a factor. However, the consistency and efficiency achieved utilizing AlphaAutomation is a strong competitive advantage for Precision. AlphaAutomation enables operators to lock in the best and most efficient drilling practices, reduce risk and drilling time and cost. We have strong operator interest and have demonstrated our value within the E&P operations drilling departments. Meanwhile, we have persistent and sometimes intense procurement efforts to commoditize our services, and this never seems to abate. But as we've seen with prior technology transitions and now AlphaAutomation, the first movers who successfully demonstrate real value win this battle, regain the revenue and win the market share. And while I'm the topic of procurement groups, the reemergence of performance-based and commodity-linked pricing models have been proposed by some operators. We remain somewhat cautious regarding these pricing models as it also generally adjusts the operator risk allocation, and this complicates our economic model. In any event, we are exploring these pricing models to ensure we do not pass over any good opportunities. Turning to our international business. We see generally steady activity. Precision Rig 906, the newly built rig we delivered in mid-2019, has continued to perform very well, delivering good returns for Precision, fully leveraging our scale in Kuwait. Precision 903, also in Kuwait, was idled at the end of 2019. This is an ultra-deep workover rig, which completed its planned workover projects well ahead of schedule. We expect this rig will be reactivated by midyear. In Kuwait, our primary focus is on extending or recontracting the 2 drilling rigs up for renewal late this year. Last year, we were encouraged by strong bidding activity for idle rigs in Kurdistan and Saudi Arabia. The tenders in Saudi remain active and may lead to contract awards later this year. However, the increased tensions in Iraq have indefinitely delayed the projects we were bidding. We remain highly focused on funding opportunities in the broader region to reactivate these idle rigs as soon as possible. Turning to our Alpha Technologies. To clarify our current market penetration, at the end of 2019, 34 rigs were fully commissioned and equipped with AlphaAutomation, including 2 rigs upgraded in the last 2 weeks of 2019. Additionally, our training rigs in Houston and Nisku are similarly equipped, where we test the systems and test our new ops before deploying to the field. In 2020, we plan to add an additional 24 systems. We will finish the year with 58 AlphaAutomation-equipped AC Super Triples, roughly half of our Super Triple fleet. We will also train approximately 100 more drillers and rig managers to be AlphaAutomation subject matter experts, and we remain highly confident that the (inaudible) deliver market share, revenue and margin growth for Precision even in this capital-constrained environment. Also in 2020, we plan to fully commercial at least 15 more Alpha apps, up from the 2 we have today, and we plan to commercialize our Alpha analytics service, and we'll have more updates on this as the year progresses. Finally, turning to our Canadian completion and production business. We're very pleased with the progress the team made restoring this segment to a strong free cash flow position in 2019. Looking into 2020, as some of you probably know, certainly, those of you in Calgary, it was unusually cold in Western Canada, and this delayed the well service seasonal rebound. And this is also a business that's very sensitive to short-term commodity price volatility and has proven a drag on customer demand. However, we're confident that the progress we achieved on cost is sustainable. We also believe the improved customer mix and the charge-out rates the team achieved last year will be sustained this year. Our expectation for 2020 is for activity and free cash flow largely in line with last year's contribution. So I'd like to wrap up today by thanking the employees of Precision Drilling for their dedication, their hard work and the strong results they achieved in 2019. And I'll now turn the call back to the operator for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from the line of Kurt Hallead with RBC Capital. -------------------------------------------------------------------------------- Kurt Kevin Hallead, RBC Capital Markets, Research Division - Co-Head of Global Energy Research & Analyst [2] -------------------------------------------------------------------------------- Congrats on the continued cash flow and debt reduction. I know it's been an arduous task in a tough market, so kudos to staying on plan. A question I had for you in context with respect to the automation, right? You mentioned you had 34 rigs outfitted exiting 2019. You're going to add another 24 systems through the year. So when you talk about them being outfitted, are those rigs also getting paid for the automation? Or can you give us some general sense as to how many of those rigs you expect to actually get paid for that technology? -------------------------------------------------------------------------------- Kevin A. Neveu, Precision Drilling Corporation - President, CEO & Director [3] -------------------------------------------------------------------------------- Yes. Kurt, when we declared commercialization back in December, that was when we crossed the point where all systems were being paid. There may be some -- a little friction if we have a rig that's not operating right now. And I would comment that not all of the rigs are operating. In fact, we mentioned the 3 in the Marcellus that were at least temporarily laid down. But the systems we have in the field right now that are out on rigs running and operating are being paid for. -------------------------------------------------------------------------------- Kurt Kevin Hallead, RBC Capital Markets, Research Division - Co-Head of Global Energy Research & Analyst [4] -------------------------------------------------------------------------------- Okay. And then in the context of the evolution that's happening with kind of unconventional contracting -- unconventional contracts related to performance-based dynamics, can you give us some update on how you're thinking about that? I think in the past, you've indicated maybe potentially generating anywhere from like $250 a day up to maybe a couple thousand dollars a day, depending on how the rig was outfitted and the technology deployed. -------------------------------------------------------------------------------- Kevin A. Neveu, Precision Drilling Corporation - President, CEO & Director [5] -------------------------------------------------------------------------------- Yes. I think as we think about our technology rollout over time, and I'll just -- I'll comment on performance contracts in a moment. But our technology piece, the base AlphaAutomation system running on the rig, which delivers consistent predictable results, we priced at $1,500 per day. And then for the apps that we're adding on for various drilling functions or tripping functions or even survey functions of the well or surface operations functions, the apps are being priced in the range of between $250 and $1,000 per day when those apps are running. And it sort of depends on whether or not it's just a hosting fee for a third-party app, it would be the lower end of that scale, or if it's a Precision-developed app like maybe our generator app, it might be at the higher end of that scale. But we've seen that anywhere from 1 to 4 apps could be activated at any given time, and that's where we get the guidance towards somewhere between $250 to $1,000 per day of additional revenue as we develop more apps. But I'll caution you, just 2 are commercial right now, and we have a total of 13 more under development that should be commercial during the course of this year. And our partnerships on the apps include several operators: a couple of third-party service companies and a couple of universities. So we have a number of different constituents working on apps to improve drilling performance that we think will all have value for our customers. So I'll stop there now and just come back on performance contracts for a moment. We've had a couple of operators, particularly procurement teams, looking to try to lever kind of lower day rates but incenting us with performance-type metrics and performance-type pay. It does mean a little different allocation of risk, so we're looking at those very carefully and ensuring that we don't take on something which just really pushes down the rate of the rig and, in fact, gives us more risk. -------------------------------------------------------------------------------- Kurt Kevin Hallead, RBC Capital Markets, Research Division - Co-Head of Global Energy Research & Analyst [6] -------------------------------------------------------------------------------- Okay. And then I just noticed that your relative market share within the U.S., it dipped a little bit going into the -- or through the fourth quarter. Any particular cause of concern there? -------------------------------------------------------------------------------- Kevin A. Neveu, Precision Drilling Corporation - President, CEO & Director [7] -------------------------------------------------------------------------------- Yes. I think -- I don't get too worked up over real short-term trends. I was happy to see our market share rise up in 2019. I would say that we are remaining very disciplined on our pricing, both for our rigs and for our ancillary services like automation. So don't expect us to take -- use any tactics to kind of prop up market share. We'll stay disciplined on the pricing for our super-spec rigs. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Our next question comes from the line of Connor Lynagh with Morgan Stanley. -------------------------------------------------------------------------------- Connor Joseph Lynagh, Morgan Stanley, Research Division - Equity Analyst [9] -------------------------------------------------------------------------------- Maybe just following on the back of Kurt's question there. I think you had called out Appalachia as a source of some of the weakness in the U.S. rig count near term here. Do you feel like you've kind of taken your lumps at this point? Or do you have any visibility that rig count is going to stabilize there, just general thoughts around that market this year. -------------------------------------------------------------------------------- Kevin A. Neveu, Precision Drilling Corporation - President, CEO & Director [10] -------------------------------------------------------------------------------- Yes. I think the short answer is yes, I think we've taken our lumps. I think we feel like we're a pretty stable environment right now. I was actually expecting our rig count to be creeping up by now, but I -- some of the jobs that we have lined up have just been pushed off with the commodity price right now. We mentioned Appalachia, and there was one other notable U.S. transaction that eventually resulted in us losing a few rigs. -------------------------------------------------------------------------------- Connor Joseph Lynagh, Morgan Stanley, Research Division - Equity Analyst [11] -------------------------------------------------------------------------------- Got it. That's fair. Maybe just pivoting to Canada here. What would you attribute the year-over strength to? Is it the exemptions in conventional volumes? What's driving that substantial year-over-year increase? -------------------------------------------------------------------------------- Kevin A. Neveu, Precision Drilling Corporation - President, CEO & Director [12] -------------------------------------------------------------------------------- Yes. So I discussed the regions but didn't really say why. So I think I'll talk first of all about the Montney, Duvernay. I think the primary driver there is a strong natural gas liquids market, where the pricing has remained firm. And that's because the natural gas liquids get used as a diluent for heavy oil. And as the heavy oil projects, like oil sands projects, get wrapped up, the mining projects are increasing in scope right now, that demand for that diluent is remaining strong. That's, I think, the primary driver of the Montney, Duvernay activity. That and a little bit of early work happening on the LNG project, which will come onstream in about 3 years' time. And then in heavy oil, and particularly stratification drilling, we watch that business pretty much get turned off several years ago and a lag of new SAGD wells, a lag of stratification work, a lag of heavy oil work that occurred in winter of 2017, winter of 2018, winter of 2019. And listen, this is not a full rebound yet back to like 2015 levels, but it certainly is a little bit of a catch-up going on right now in heavy oil. And I think we were just well positioned with the right types of rigs, the ability to get those rigs fired up to have a leading market share in that area right now. And the indications for those customers are that the pace of Q1 won't continue for the balance of the year, but we do expect heavy oil year-over-year to be stronger on a comparative basis. Complicated answer, but that's the answer. -------------------------------------------------------------------------------- Connor Joseph Lynagh, Morgan Stanley, Research Division - Equity Analyst [13] -------------------------------------------------------------------------------- Yes. Appreciate it. Appreciate it. I'll sneak one more in here, which is, have you seen that improvement in some of the heavier oil drilling support pricing for some of the smaller rigs, or is that still pretty challenged? -------------------------------------------------------------------------------- Kevin A. Neveu, Precision Drilling Corporation - President, CEO & Director [14] -------------------------------------------------------------------------------- We've got a rather unique position there in that we've always been a large player in that space. I commented that our Super Singles rigs are ultraefficient, and we're able to get a, what I call, an acceptable day rate for those rigs. Even with industry level -- activity levels being still relatively light kind of long term. But for the Super Singles rig, I'd say our pricing in heavy oil is in a range right now that we're comfortable with. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- Our next question comes from the line of Waqar Syed, AltaCorp Capital. -------------------------------------------------------------------------------- Waqar Mustafa Syed, AltaCorp Capital Inc., Research Division - MD of North American Energy Services & Head of U.S. Institutional Equity Research [16] -------------------------------------------------------------------------------- Could you give us some numbers around how many of your rigs may be exposed to dry gas in Canada? -------------------------------------------------------------------------------- Kevin A. Neveu, Precision Drilling Corporation - President, CEO & Director [17] -------------------------------------------------------------------------------- Yes. I think that we probably have the lightest exposure I've -- I recall in recent memory because that activity is already running pretty slow. It's generally Southern Alberta, Southern Saskatchewan area where there tends to be a lot of competition. It's just the area we really haven't focused on before. So I don't see us having a lot of exposure there. At the edges, 2 or 3 rigs, which is kind of why I expect Deep Basin will make up for that. -------------------------------------------------------------------------------- Waqar Mustafa Syed, AltaCorp Capital Inc., Research Division - MD of North American Energy Services & Head of U.S. Institutional Equity Research [18] -------------------------------------------------------------------------------- Okay. Great. And so the 3 ST-1500 rigs that you have down, I'm assuming those are in the Marcellus area. Is that correct? -------------------------------------------------------------------------------- Kevin A. Neveu, Precision Drilling Corporation - President, CEO & Director [19] -------------------------------------------------------------------------------- That's right. They're in the Marcellus right now. And we'd love to get those rigs back up and running given the right opportunity. -------------------------------------------------------------------------------- Waqar Mustafa Syed, AltaCorp Capital Inc., Research Division - MD of North American Energy Services & Head of U.S. Institutional Equity Research [20] -------------------------------------------------------------------------------- So would you consider relocating them to another basin, or would you keep them in that basin? -------------------------------------------------------------------------------- Kevin A. Neveu, Precision Drilling Corporation - President, CEO & Director [21] -------------------------------------------------------------------------------- Well, Waqar, since they're contracted for the full year, they're really under the control of the operator. So in fact, the operator who owns the contracts will decide whether or not they pay for the move. Certainly, it wouldn't be at our expense. -------------------------------------------------------------------------------- Waqar Mustafa Syed, AltaCorp Capital Inc., Research Division - MD of North American Energy Services & Head of U.S. Institutional Equity Research [22] -------------------------------------------------------------------------------- Okay. Fair enough. And would that -- $3 million per quarter, is that the right number for revenues from those rigs? -------------------------------------------------------------------------------- Carey Thomas Ford, Precision Drilling Corporation - Senior VP & CFO [23] -------------------------------------------------------------------------------- That -- Waqar, that would be about right. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- Our next question comes from the line of Taylor Zurcher with Tudor, Pickering. -------------------------------------------------------------------------------- Taylor Zurcher, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research [25] -------------------------------------------------------------------------------- Just a follow-up to the prior question on potentially relocating some rigs from basins like the Marcellus and others to the stronger basins in the U.S. and that namely being the Permian. Some of your competitors have talked about already doing that backed by contracts. Is that something that you've already done over the past couple months or something that you're considering doing moving forward, obviously, assuming that you get a contract to backstop that movement? -------------------------------------------------------------------------------- Kevin A. Neveu, Precision Drilling Corporation - President, CEO & Director [26] -------------------------------------------------------------------------------- Taylor, we have moved rigs into the Permian earlier in 2019. We've actually moved some rigs around the basins in Permian, Eagle Ford, Texas and Haynesville. We've got some interbasin movement. I'd comment that any time we move a rig, it's going to be backed by a contract period. And the cost of that move will be baked in the economics of the contract or paid upfront by the operator. -------------------------------------------------------------------------------- Taylor Zurcher, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research [27] -------------------------------------------------------------------------------- Would it be fair to assume that the pricing, assuming it's ST-1500, would be better in the Permian than it is in some of the neighboring regions where we've seen rig count decline over the past 3 to 6 months? -------------------------------------------------------------------------------- Kevin A. Neveu, Precision Drilling Corporation - President, CEO & Director [28] -------------------------------------------------------------------------------- As I said in my prepared comments, generally -- Marcellus aside for a moment. Generally, we're finding pricing is pretty homogenous across the U.S. right now, and it is really more -- we have an ST-1500, which is kind of common with the U.S. 1500-horsepower rigs. We also have a little smaller ST-1200, which is actually quite common, both the DJ Basin and the Marcellus. It's a lighter, smaller, cheaper rig, but it offers almost the same vertical depth -- slightly shallower vertical depth but the same horizontal capability that's necessary for both the Marcellus and the DJ Basin. And so we just see the differential rates between the 1500 and 1200. We don't see much differential between basins on 1500-horsepower rigs. -------------------------------------------------------------------------------- Taylor Zurcher, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research [29] -------------------------------------------------------------------------------- Okay, got it. Internationally, you talked about one rig in Kuwait that sounds like it'll at least go down temporarily here in the first half of the year. And then 2 more which will be up for renewal at the end of the year. Any color on the sort of the pricing dynamics for those 3 rigs relative to the current average revenue per day that you posted this quarter? -------------------------------------------------------------------------------- Kevin A. Neveu, Precision Drilling Corporation - President, CEO & Director [30] -------------------------------------------------------------------------------- We're not -- I don't think we're giving any negative guidance on what we're expecting for international business right now. I comment that we've done a very, very good job in Kuwait with these high-performance rigs that were all -- essentially all newbuilds with highly trained Precision crews who are actually doing a good job. We're drilling deep, high-pressure wells. I don't expect to have any meaningful day rate degradation on renegotiations. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- Our next question comes from the line of Sean Meakim with JPMorgan. -------------------------------------------------------------------------------- Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [32] -------------------------------------------------------------------------------- So just kind of summarizing a bit of some of your comments. In Canada, it sounds like you're pretty confident you can grow revenues year-on-year, just with the typical caveats around commodities and customer decisions coming out of breakup for the back half. International, sounds like it could be getting better as well. Well servicing sounds pretty flat. U.S. is more challenging just given the exit rate, even if the outlook is roughly stable from here from a rig count perspective. So if we put that all together, is the suggestion that your revenue could be closer to flattish year-on-year compared to '19 if the year plays out as you see it today? -------------------------------------------------------------------------------- Carey Thomas Ford, Precision Drilling Corporation - Senior VP & CFO [33] -------------------------------------------------------------------------------- Yes, Sean, we would definitely -- I think your assumptions are pretty good, but we definitely would stop short on providing revenue guidance. The one comment I would add to your assessment of the U.S. market is that we have had a little bit of a customer churn, customer decisions to lay down rigs, but these are the best rigs in the industry. These are all AC triples, and many of them have automation already installed. So we think the opportunity for us to add a number of rigs in a flat rig count environment is pretty good. -------------------------------------------------------------------------------- Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [34] -------------------------------------------------------------------------------- Right. Okay. That's helpful. And then just maybe to follow up on the Middle East discussion. As you get that fleet up and running and the count look higher maybe than it has in recent quarters, does that fixed cost absorption help you in terms of the margin profile for that segment? -------------------------------------------------------------------------------- Carey Thomas Ford, Precision Drilling Corporation - Senior VP & CFO [35] -------------------------------------------------------------------------------- Yes. I would assume that the margin profile that we had in Q4 continues on into 2020. -------------------------------------------------------------------------------- Kevin A. Neveu, Precision Drilling Corporation - President, CEO & Director [36] -------------------------------------------------------------------------------- But if we activate more rigs, there'll be no further fixed costs or G&A additions. So it will be a flow-through to the bottom line, leveraging our scale, correct. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- Our next question comes from the line of J.B. Lowe with Citi. -------------------------------------------------------------------------------- John Booth Lowe, Citigroup Inc, Research Division - VP [38] -------------------------------------------------------------------------------- Just a quick follow-up on the workover rig that's rolling off now. You said you had a good line of sight to place it back to work in the second half. Would that be with the same customer in the same area? Or would that be moving somewhere? -------------------------------------------------------------------------------- Kevin A. Neveu, Precision Drilling Corporation - President, CEO & Director [39] -------------------------------------------------------------------------------- I'm not going to comment right now. We're involved in negotiations and one rig, one customer, one country. It's hard for me to say too much publicly. -------------------------------------------------------------------------------- John Booth Lowe, Citigroup Inc, Research Division - VP [40] -------------------------------------------------------------------------------- Fair enough. Okay. On the -- just a question on the mechanics of the commercialization of the AlphaAutomation, is the way that you guys get paid for the automation system, like is it -- whenever the rig is earning a day rate, you're earning a rate for the automation part of it? Or are you getting paid separately for when that's running? -------------------------------------------------------------------------------- Kevin A. Neveu, Precision Drilling Corporation - President, CEO & Director [41] -------------------------------------------------------------------------------- So we're treating our pricing on automation and, for that matter, apps and automation as one of the à la carte items we add to the rig, which is quite common. The -- I know the day rate model is challenged by a lot of people that we don't capture all the value that we might give our operators. But what we do quite well is add capabilities to the rig, and we charge those as the à la carte item below the day rate for the rig. So the rig can compete as a base rig. But if we added on -- like in Canada, we'll add boilers in the winter. We'll charge for every day the boiler is running. In the U.S., we might add a third shaker to the rig, and we'll charge for every day the third shaker is running. In this case, with automation, we'll charge every day the automation is running. So it won't run during rig moves. We won't charge for that, but it will run the rest of the time. -------------------------------------------------------------------------------- John Booth Lowe, Citigroup Inc, Research Division - VP [42] -------------------------------------------------------------------------------- Okay, great. Last one from me is, with Canada getting a little bit tighter here, both on the heavy oil side and the NGL side? In all the rigs that have moved out of the area, do you foresee guys actually bringing rigs back into Canada? Or would you contemplate that? -------------------------------------------------------------------------------- Kevin A. Neveu, Precision Drilling Corporation - President, CEO & Director [43] -------------------------------------------------------------------------------- I'll make that answer really short. Not a chance. I still think there's still a number of Canadian contractors looking to gain some U.S. exposure, but that's because I think they've got an asset mix which doesn't really suit the Canadian market very well. In fact, some of the rigs that left the country were Tele-Doubles, which are no longer competing with us in the Montney, Duvernay because, for these development-style drilling projects, the -- a pad walking triple is simply the best answer. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- Our next question comes from the line of Ian Gillies with Stifel. -------------------------------------------------------------------------------- Ian Brooks Gillies, Stifel Nicolaus Canada Inc., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [45] -------------------------------------------------------------------------------- With respect to, I guess, the ERP implementation and how it's gone over the last little while, I'm just curious if there's much left you feel you can squeeze from that with respect to cost savings and perhaps tightening up working capital to help further improve the balance sheet? -------------------------------------------------------------------------------- Carey Thomas Ford, Precision Drilling Corporation - Senior VP & CFO [46] -------------------------------------------------------------------------------- So Ian, that's certainly a focus. We're always looking for ways to manage the business with lower working capital and then squeeze costs out of the business. I think most of that has already been achieved, but where we think we can really show the performance of that system is in an increased activity environment. We think that we've actually shown it in Q1 so far this year. The only people that we've added in terms of headcount have been people in the field working on the rigs, and we've increased activity 45% from where we were last year. So I think it's the same thing in the U.S. and international. As we add rigs and activity increases, we should be able to keep fixed costs relatively flat. -------------------------------------------------------------------------------- Ian Brooks Gillies, Stifel Nicolaus Canada Inc., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [47] -------------------------------------------------------------------------------- Okay. That's helpful. With respect to your, I guess, biofuel rigs, are you seeing any increased demand from your customers given the appeared focus on ESG. And if so, is there much in the way of economic opportunity right now in and around those rigs that can offer that service? -------------------------------------------------------------------------------- Kevin A. Neveu, Precision Drilling Corporation - President, CEO & Director [48] -------------------------------------------------------------------------------- Yes. Again, short answer, yes, we are seeing increased interest in biofuel rigs. I think the biofuel solutions is a really good solution both for us and for the customer in that it's a fairly modest upgrade to the rig but does cut the carbon footprint dramatically for the rig and cut the costs for the rig. And I'll make this comment that, generally, most things our industry has done in the drilling industry has been to reduce fuel content on rigs because fuel is one of the highest input costs in the drilling operation outside of labor. So in fact, if you just raced back over the last several years, I don't know that any industry has probably reduced its carbon footprint per meter drilled or that any other industry that does anything on a per-unit basis. -------------------------------------------------------------------------------- Ian Brooks Gillies, Stifel Nicolaus Canada Inc., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [49] -------------------------------------------------------------------------------- And are you seeing any -- is there any intention, I guess, to add any more kits this year? Or is that part of the upgrade CapEx at this point? -------------------------------------------------------------------------------- Kevin A. Neveu, Precision Drilling Corporation - President, CEO & Director [50] -------------------------------------------------------------------------------- I think likely, we'll add more kits this year. I think, at this point, we think we have enough capital inside our current budget to do that. But -- and I think we'll charge extra for those rigs that have the kit on there because there's value both for the customer and for us, economic value for the investment we make and, of course, fuel savings value for them. So we'll make sure that we get paid for the investment. But there has to be a pretty good alignment of infrastructure. You have to have gas available. The gas has to be fuel-grade gas. And we've got rig -- for example, in the Permian Basin, we have rigs where the gas is being trucked in. And while it's not an economic solution, it is a good environmental solution. But I think the best economic solution is where there's fuel gas available and you can scrub it and clean it application. -------------------------------------------------------------------------------- Ian Brooks Gillies, Stifel Nicolaus Canada Inc., Research Division - Director of Institutional Research and Research Analyst of Energy Services & Infrastructure [51] -------------------------------------------------------------------------------- Okay. And last one from me. But I mean, wells are still being drilled. Focus -- I know E&Ps are focusing on free cash flow. But as you go out in market, some of the rigs that have been laid down or you're looking for new customers, are you noticing any changes in, I guess, rig specs that producers may be looking for at this point in time that may require capital? -------------------------------------------------------------------------------- Kevin A. Neveu, Precision Drilling Corporation - President, CEO & Director [52] -------------------------------------------------------------------------------- I don't expect we'll have to do any meaningful upgrades to the fleet to change. The -- I'll give you my definition of super-spec or Precision's definition of super-spec, and that would be an AC digitally powered rig that had digital controls. So it's an AC rig. It's got a pad walking system. So we're going to walk X and Y in all directions in the pad. It has 3 mud pumps and 7,500 psi capacity. It's got hoisting and racking capacity to drill out 10,000 foot laterals. I think we have adequate number of rigs in the fleet right now to service the demand that we expect, unless there's some meaningful change in the commodity fundamentals upwards. -------------------------------------------------------------------------------- Operator [53] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from the line of Blake Gendron with Wolfe Research. -------------------------------------------------------------------------------- Blake Geelhoed Gendron, Wolfe Research, LLC - SVP of Equity Research [54] -------------------------------------------------------------------------------- I wanted to start in the U.S. here. We haven't really seen a flattish rig count or the expectation of a flattish rig count for the foreseeable future. I was wondering, just given some of the pushback that we've gotten from investors on where day rates could go from here, theoretically in a flat rig count environment, even some of the super-spec peers maybe get a little bit more predatory on pricing. Where would you push back, I guess, on that sentiment? And then flipping to the cost side, you mentioned doing some things on the fuel side, but anything on the labor side or elsewhere in OpEx that you can kind of pull levers in terms of a flattish rig count environment maybe getting a little bit more juice on the margin? -------------------------------------------------------------------------------- Kevin A. Neveu, Precision Drilling Corporation - President, CEO & Director [55] -------------------------------------------------------------------------------- Yes. I -- so I think, first off, in a flattish overall industry rig count environment, I still think there's -- I think numbers in the 200 to 300 range number of rigs that are to be high-graded, and that's rigs that are operating right now replaced with better-quality rigs that can drill quicker, safer, more efficiently. So I expect that the demand for super-spec rigs will continue through the balance of the year as customers operating lower-quality rigs upgrade those to higher qualities -- high-quality rigs. And we know that, even in case of one super major right now just looking at reducing their contractor count dramatically, that's a high-grading exercise over there and picking higher-grade rigs. So we think that's going to drive demand on super-spec rigs. But beyond that, there's no question that we are delivering measurable, real value with AlphaAutomation. We think that further enhances our ability to differentiate the Precision rigs, and we think that will drive our market share independent of overall rig count. So I do see a clear avenue and clear path to get additional revenue per rig with automation and additional market share with automation. So I think we have 2 clear growth vectors that are independent of rig count. But I think that it's logical to expect there to be high-grading of lower-quality, lower-performing rigs in the industry right now. We've seen that over the last 18 months. We'll see it again for the next 12 months. -------------------------------------------------------------------------------- Blake Geelhoed Gendron, Wolfe Research, LLC - SVP of Equity Research [56] -------------------------------------------------------------------------------- Okay. That's helpful. And then just seeing your Alpha comments and turning to directional drilling. Integrated directional drilling is something that you've implemented for a while now. Any sort of customer preference now that we're overlaying the digital side on sort of a bundle package and the importance, I guess, from the drilling perspective to have directional drilling capabilities in-house? Are you seeing any major changes in the marketplace there? -------------------------------------------------------------------------------- Kevin A. Neveu, Precision Drilling Corporation - President, CEO & Director [57] -------------------------------------------------------------------------------- Well, we still have directional drilling capabilities in-house in the U.S. and Canada. It's something that we continue to focus on. However, the directional drilling industry is still quite challenged, and what we're finding is that the competitors out there in the highly fractured space continue to drive price down, which is attractive to the operators. And I commented that there's a cost of switching drilling rigs. It's interesting, often when operators change directional drilling contractors, there's no cost, or it could even be a cost benefit to them to switch. They can sometimes get somebody to come in and replace the existing contractor mid-hole and save money. So there's -- you could view it as a negative cost to switch. And I think that dynamic is making the directional drilling business still rather bumpy. Ultimately, if we sit back and look in 5 years' time, I think that the rig software will dictate directional drilling. But I think that's going to be a transition period. And I think we need to see the directional drilling business really kind of take it on the chin for a while before it's going to take root. And it's happening right now. -------------------------------------------------------------------------------- Blake Geelhoed Gendron, Wolfe Research, LLC - SVP of Equity Research [58] -------------------------------------------------------------------------------- Got it. And then one more if I can squeeze it in. You mentioned the debt reduction targets for this year. You upsized the 4-year reduction target to $700 million. You've been opportunistic about the buyback. If we do see upside to what we're modeling in terms of free cash flow for 2020, where would you suspect you would deploy that? Would you deploy that to operations? Would you continue to buy back shares? Or would you allocate any excess cash flow to debt paydown? -------------------------------------------------------------------------------- Carey Thomas Ford, Precision Drilling Corporation - Senior VP & CFO [59] -------------------------------------------------------------------------------- Yes. I think we look at all of those opportunities. It depends if the -- if there are good economic opportunities to deploy upgrade capital at good contracts. That would probably be our first reference after debt paydown. Then after that, we'd look at where our bonds are trading in the open market and where our shares are trading and see if it makes sense to apply excess capital to either one of those spaces. So I think we're in a pretty good position with having strong free cash flow. We have some options on how we can deploy that cash. -------------------------------------------------------------------------------- Operator [60] -------------------------------------------------------------------------------- Thank you. At this time, I would now like to turn the call back over to Dustin for closing remarks. -------------------------------------------------------------------------------- Dustin Honing, Precision Drilling Corporation - Manager of IR [61] -------------------------------------------------------------------------------- Thank you for joining today's call and look forward to speaking with you when we report our first quarter 2020 results. -------------------------------------------------------------------------------- Operator [62] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect. Everyone, have a wonderful day.