Precision Drilling Corporation (NYSE:PDS) Q4 2023 Earnings Call Transcript
Precision Drilling Corporation (NYSE:PDS) Q4 2023 Earnings Call Transcript February 6, 2024
Precision Drilling Corporation isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the Precision Drilling Corporation 2023 Fourth Quarter and Year-End Results Conference Call. I would now like to hand the conference over to Lavonne Zdunich, Director of Investor Relations. Please go ahead.
Lavonne Zdunich: Thank you and welcome to Precision's Fourth Quarter Earnings Conference Call and Webcast. Participating on today's call with me will be Kevin Neveu, our President and CEO; and Carey Ford, our CFO. Earlier today we reported strong fourth quarter results which Carey will review with you, followed by an operational update and outlook commentary from Kevin. Once we have finished our prepared comments, we will open the call to questions. Some of our comments today will refer to non-IFRS financial measures and will include forward-looking statements which are subject to a number of risks and uncertainties. Please see our news release and other regulatory filings for more information on financial measures, forward-looking statements and risk factors. As a reminder, we expressed our financial results in Canadian dollars unless otherwise indicated. With that I'll pass it over to Carey.
Carey Ford: Thanks, Lavonne and good afternoon. Precision's annual financial results showed continued improvement from 2022 and reflect the focus on the 2023 strategic priorities that Kevin will address in his commentary. Annual highlights include revenue of CAD 1.9 billion a 20% annual increase, adjusted EBITDA of CAD 611 million a 96% increase, funds from operations of CAD 533 million and a 89% increase, cash from operations of CAD 501 million, a 111% increase, debt reduction of CAD 152 million and a CAD 30 million of share repurchases while funding two acquisitions with cash or assumption of debt totaling approximately CAD 100 million and positive earnings per share every quarter during 2023 and for the past six consecutive quarters.
In 2023, we closed the CWC acquisition on November 8 and the Precision team has aggressively worked with our new colleagues at CWC to integrate the business to begin realizing synergies including consolidating facilities, reducing administrative costs and utilizing Precision’s tech centers and supply stores to support the field. To date, we have achieved CAD 12 million of the projected CAD 20 million of annual synergies and expect to achieve most of the remainder in the first half of 2024. Moving on to our fourth quarter results. Our fourth quarter adjusted EBITDA of CAD 151 million included a share-based compensation charge of CAD 13 million in transaction and severance charges of CAD 6 million. Asset lease charges, adjusted EBITDA would have been CAD 170 million.
In the US, drilling activity for Precision averaged 45 rigs in Q4, an increase of four rigs from Q3, driven in part by the addition of acquired TWC rigs. Daily operating margins in the quarter absent impacts of IBC and turnkey were US$11,802 in line with our guidance of US$11,500 to US$12,000 and consistent with Q3 levels. IBC revenue for the fourth quarter was US$1,633 per day. And for Q1, we expect minimal IBC revenue and normalized margins to range between US$9,000 and US$10000. The decrease in margins is mainly due to overhead costs spread over fewer activity days compared to Q4. In Canada, drilling activity for Precision averaged 64 rigs, a decrease of two rigs from Q4 2022. Daily operating margins in the quarter were $15,740, an increase of approximately $1,800 from Q3 2023 and in line with our guidance above – of margins above CAD 15,000 per day.
For Q1, we expect margins to remain above CAD 15,000 per day. Internationally, drilling activity for Precision in the quarter average eight rigs and average day rates were US$49,872 in line with the prior year. We expect 2024 activity levels will increase by approximately 40% of our 2023 levels. I will remind the audience that capital expenditures in the International segment are typically lumpy with high CapEx at the front end of projects and lower normalized levels in subsequent years. For 2023, with recertification costs for the four Kuwait rig contracts and a bulk drill pipe purchase order for the region, International capital expenditures were over CAD 50 million. For 2024 we expect capital expenditures to significantly decrease to normalized maintenance levels.
In our C&P segment, adjusted EBITDA this quarter was $12 million flat with our prior year quarter. Adjusted EBITDA was positively impacted by a 15% increase in well service hours reflecting the partial impact of the CWC service rig acquisition. We expect results will improve in Q1 with increased rates and activity the absence of Q4 transaction-related costs and the realization of transaction synergies. Capital expenditures for the quarter were $79 million and for the year $227 million. Our capital expenditures were slightly higher than our guidance of $215 million due to timing of equipment deliveries. Our 2024 capital plan is $195 million and is comprised of $155 million for sustaining and infrastructure and $40 million for contracted upgrades and expansion.
Sustaining and infrastructure CapEx of $155 million includes $40 million of long lead items. And I'd like to take a moment to comment on the strategic decision to purchase these long lead items because I believe it exemplifies Precision's ability to leverage our scale to reduce costs while positioning the company for growth opportunities. Due to our standardized fleet high activity levels across a broad geographic footprint and a mature supply chain function with core vendor relationships we achieved a bulk purchase discount on these items and plan to utilize the equipment in either the US or Canadian fleet for potential upgrades or as critical spares. This also ties in with daily operating costs, which have increased for us and our peers over the past three years.
The wage increases for our crews have been earned and well deserved and as a result they are largely here to stay. Although, the field labor portion of our daily operating cost is sticky, opportunities to lower cost exists. Identifying these opportunities and realizing cost savings has been and will remain a key focus area for the finance team and we are working hand in hand with our operations, technology supply chain and equipment maintenance teams to reduce inflationary pressures, optimize equipment performance and produce a lower and less volatile cost structure in the future. Moving to our contract book. As of February 5, we had an average of 52 contracts in hand for the first quarter at an average of 43 contracts for the full year 2023.
We now have 21 rigs on contract in Canada for 2024 reflecting an increasing number of customers seeking to lock up rigs ahead of LNG project start-ups. Moving to the balance sheet. As of December 31 our long-term debt position net of cash was approximately $880 million and our total liquidity position was over $600 million excluding letters of credit. Our net debt to trailing 12-month EBITDA ratio is approximately 1.4 times a decrease from 3.4 times at the end of 2022. Our average cost of debt is 7%. We plan to reduce debt by $150 million to $200 million in 2024 and have increased our long-term debt reduction goal from $500 million to $600 million between 2022 and 2026. As of December 31, 2023 we have reduced debt by $258 million and have $342 million additional reduction necessary over the next three years to reach our goal.
We began reducing debt in 2016 and every year we have provided guidance we have met or exceeded our targets. To-date we have had only a modest allocation of free cash flow for share repurchases. But as we approach our target debt levels of below one times we are confident in our ability to increase our allocation to direct shareholder payments as a percentage of free cash flow. We plan to allocate 25% to 35% of free cash flow before debt repayments for share repurchases and we'll expect to continue increasing this allocation in future years moving towards a target allocation of 50% of free cash flow before debt repayments by 2026. Moving on to guidance for 2024. We expect strong free cash flow for the year, but Q1 cash flow to be impacted by front-end loaded CapEx, working capital build, our semiannual interest payment and year-end payments.
We expect depreciation of approximately $290 million, cash interest expense of approximately $75 million, cash taxes to remain low, and our effective tax rate to be approximately 25%. SG&A of approximately $100 million before share-based compensation expense and we expect share-based compensation charges for the year to range between $45 million and $55 million at an $80 share price and the range may change based on the share price and the performance of Precision stock relative to Precision's peer group. Please note this is a preliminary estimate and we will provide updated guidance on our Q1 call following the settlement of past grants and issuance of new grants later this quarter. With that I will hand the call over to Kevin.
Kevin Neveu: Thank you, Carey. Good afternoon. Well, we are very pleased with the strong fourth quarter and full year financial results and operational results delivered by the Precision team in 2023. As Carey mentioned the progress achieved over the past several years improving our balance sheet and reducing our debt levels, while growing our revenue and cash flow has positioned us with the financial flexibility to execute on a number of opportunistic financial actions to further enhance shareholder value. And Carey described a few of those. Utilizing our strong free cash flow, we met or exceeded all of our financial priorities for the year including debt reduction share buybacks. We completed two consolidated transactions, we invested in our fleet with high return projects for the Middle East, United States and Canada.
Those investments included Alpha technology expansion, evergreen emissions reductions projects along with several rig capability upgrades and the reactivation of the rigs in Kuwait. So beginning with our international segment. In the fourth quarter as Carey mentioned, we reactivated our fifth rig in Kuwait on a five-year contract. And this rig combined with the four other rigs in Kuwait and our three operating rigs in the Kingdom of Saudi Arabia will increase our activity in 2024 by 40% over 2023. With our well-established international infrastructure already generating strong returns, we expect this increased activity to flow through income statement and essentially no increases in our fixed costs or overhead. And despite the recent announcements from the Kingdom of Saudi Arabia regarding capping oil production, we do expect further bidding activity and possible land rig additions, targeting unconventional gas in addition to those recently announced by other industry participants.
We have one idle Triple rig in Kuwait and four other idle rigs in the region. In Kuwait, we have active bids for the idle rig and believe we have a high likelihood of contracting this rig in 2024. And we continue to bid on other international rig tenders in the region and believe we can support regional new country entries from our established base in Dubai. I believe we are well-positioned to grow this business segment as the international land drilling industry continues to recover. Turning to the Lower 48. We continue to work to expand our presence in oil basins and with the public E&P operators particularly. This has been a little more challenging than we expected as US rig activity has been essentially flat for several months with very few new rig deployment opportunities.
There continues to be some contract churn and some operator high-grading and our team has been tightly focused on those limited opportunities. However, it's important to understand the customer rig switching costs, which I've discussed in the past. When an operator decides to replace an existing rig for whatever reason, they usually need to pay a demobilization cost for the current rig and then mobilize the replacement rig. This mobilization or switching cost can reach anywhere from several hundred thousand dollars over $1 million depending on the drilling locations and the proximity to the contractor's operating base. In addition to those hard mobilization costs, the operator will have to be a little patient as the high-graded rig and new crew come up the learning curve and that specific operator's practice.
This switching cost coupled with the very firm drilling contractor market discipline we've seen over the past few years has meant that both rig rates and rig contracts tend to be stickier than most other OFS services. It also means that even for those of us pursuing the high-grading opportunities, the drilling contractor may need to be very creative with initial day rates, escalation parameters or performance incentives to catalyze those high-grading opportunities. Our team has been successful sustaining our activity in the low 40s over the past couple of quarters. I do note a mistake on the Precision website earlier today, which posted Precision's US activity at 37; it actually is 39 rigs as of today and the website error has been corrected.
That said I'm not thrilled with 39 rigs running. With the pace of current customer bids recently signed contracts and planned activations, we expect will be back in the low 40s in the coming weeks. We expect to see our activity modestly increase further during the second quarter. Visibility beyond the next few months is a little less clear, but we continue to see positive leading indicators including customer inquiries, LNG export, project startups, exhausted DUCs in the Permian and an increasing focus on drilling inventory quality and of course the desire for longer reach laterals. We expect these factors will help to catalyze upgrading and high-grading growth opportunities particularly for our Super Triples with our Alpha Automation capabilities.
No doubt we have some work to do as we continue to expand our presence in the oil plays, while remaining well-positioned for an improving gas macro. In our Canadian drilling and our well services businesses both delivered strong operational and financial performance throughout 2023 and we're carrying that momentum on into 2024. Now for most of the last decade, the Canadian market has been constrained by hydrocarbon takeaway bottlenecks and constraints. As a result, the discount for Western Canada Select oil has ranged in the CAD 25 to CAD 40 below WTI range. While the Alberta Natural Gas commodity price AECO has been a function of highly cyclic seasonal weather patterns and regional market energy needs also limited by bottlenecks and takeaway capacity.
Now I think most of us know that later this year two major transmission projects, the Trans Mountain oil pipe and the Coastal GasLink natural gas pipe will begin full operation and serve to fully alleviate the Canadian constraints. WCS discounts are expected to moderate to high single-digit discounts and LNG Canada exposes Canadian natural gas to the global LNG market. Our customers, the Canadian oil and gas operators remain among the most disciplined E&P group in the world, yet they fully understand the long-term implications of this transformation in the Canadian market. We expect they will thoughtfully and carefully align their capital programs, imbalance their rig and well servicing demands to track the takeaway capacity in the market, while continuing to generate stable cash flows and most importantly funding their shareholder return programs.
This lays out a long-term thesis for the Canadian OFS market, fundamentally supported by global energy prices with no constraints. Those Canadian oil and gas operators will remain highly disciplined and we'll utilize large-scale multi-well pad drilling programs, where efficiency, safety, industrial scale, technology and digital capabilities will define the development model. And this also explains Precision's current market positioning in the Montney and heavy oil plays and aligns perfectly with our strategy over the past several years. We can look back to the introduction of our Super Triple rig last decade, the introduction of our AlphaAutomation system five years ago and more recently our EverGreen emissions reduction solution just two years ago.
These rig technology advancements enable large-scale optimized pad-style oil and gas developments perfectly. We also commissioned our 30th Super Triple rig in Canada earlier this quarter. And as we discussed on prior calls, this is a highly upgraded rig to full Super Triple capacity. The rig is equipped with the full suite of AlphaAutomation, AlphaApps. It's got our Alpha Clarity optimization system and a full suite of EverGreen environmental solutions, easily making this the most advanced technology land rig in the world today. Oh, and one more item. The rig is equipped with three fully automated robotic arms to handle rig floor and rocking board pipe handling operations. Now this is the first fully automated deployment of the NOV Adam racking board and Rig four robotic system.
And in partnership with NOV and our customer, this is a fully functional and commercial deployment. While we believe we still have some modest field hardening work over the coming weeks, this is essentially a bolt-on robotic upgrade that we can install in any Precision Super Triple rig fully demand the red zones on the rig floor in the pipe racking area and the racking board. I believe there is much more to come on this over the next few months and we'll continue to update you. Today, we are operating 80 drilling rigs in Canada, which includes the recently acquired CWC Tele-Double rigs. Now the Canadian Tele-Double drilling market remains oversaturated and highly fractured too many rigs, too many contractors and the competition is intense. Now Precision scale, our highly skilled crews, vertical integration and a procurement advantage allows us to improve the returns that CWC achieved on these rigs, while we remain a price competitive and relative participant in this rig class.
While Precision is unlikely to be a further consolidator in the segment, it's our view that consolidation and rationalization in the Tele-Doubles rig market is essential for the long-term benefit of all stakeholders. Precision Super Triples and our pad equipped Super Singles remain generally sold out with customers increasingly locking and access these highly capable rigs and crews with firm take-or-pay contract commitments. For comparison purposes, in the first quarter of 2021, nine Canadian Super Series rigs were contracted with take-or-pay term contracts. In 2022, this increased from nine rigs in 2021 to 19 rigs. And now for the first quarter of this year 24 rigs are contracted on firm take-or-pay terms significant shift in the market. And this transformation towards take-or-pay term contracts improves our revenue visibility, it improves crude performance and stability and it keeps those rigs off the market supporting tight supply fundamentals for the non-contracted rigs.
Looking forward, we expect to run 40 to 45 rigs throughout the spring and then quickly ramp back up into the mid-60s during the summer and again, higher levels closer this year in the fall preparing for winter next year. Longer term, through the end of this year into next, it appears the rig demand will remain firm and likely tighten up further as the pipeline commenced full operations. Our Alpha and EverGreen products both in Canada and the US continue to demonstrate broad market penetration. Our customers recognize the efficiency that Alpha delivers with now 96% of our active Super Triple rigs running AlphaAutomation and AlphaApps. Our experience on automated drilling is growing quickly with over 20 million feet now for our Canadian analysts that 6.1 million meters drilled with Alpha in 2023, up 43% from 2022 despite the noted decline in US drilling activity.
Late last year, we introduced a new tool face control app for directional drilling. And since we have drilled 43 wells with over 3,000 autonomous slide sequences fully proven the value of this app to further automate the drilling processes now approaching 98% of the sequences being automated. Our EverGreen emission solutions have strong customer support. Currently, 65% of our active Super Triple rigs currently running at least on EverGreen system. And customer commitments now booked at EverGreen solutions to a total of at least 90% of the Super Triple rigs as soon as we can install the systems. I'll remind you that these solutions include battery energy storage systems diesel fuel and emissions monitoring apps, grid power connection systems, low-emission lighting systems, and blended natural gas fuel systems.
Our strategy to deploy products which provide a meaningful reduction in rig emissions, while reducing our customers' fuel costs and providing a solid investment for return for Precision is a known nonsense emissions reduction strategy and I certainly wish that our government policymakers would take a similar approach to their policies on the emissions challenge. We believe both Alpha and EverGreen will be important as we look to continue strengthening our market presence in the US, Canada, and international regions. Turning to our Well Service business in Canada. The integration of the CWC rigs and personnel was the key focus in the fourth quarter. and working their way through the synergies was a strong result for the combined team. Our Well Service activity remained firm through the fourth quarter and this is carried on the momentum into 2024.
Now, we experienced a roller coaster of weather first losing activity in mid-January due to extremely cold weather conditions in Western Canada. And then things turn to warm, causing some intermittent road bans and with the unusually warm weather in late January making some well locations and accessible, again, negatively impacting the activity. Yet the combined business is performing very well. Today we're operating 83 service rigs with 11 of those on 24 our operations, doubling the asset's revenue efficiency. Later this month it looks like our activity will break past 100 operating rigs as customer demand remains firm. And the outlook for the balance of the year looks good with the strong Canadian macro supporting customer activity. So, turning to our strategic priorities.
As we reported in our press release, we achieved all of our 2023 priorities and we posted Precision's 2024 priorities. We believe it's important that our investors understand exactly how we intend to create shareholder value and we'll continue to provide that quarterly update on our progress. I can also report that the feedback from our investors continues to be highly positive. Investors tell us we appreciate the transparency and they ask us to please keep doing what we say we're going to do. So, with that in mind, you can see from our longer term guidance, we're shifting our priority towards increasing capital returns to shareholders, while continuing to reduce debt both with the more balanced approach. Over the next several years, we believe this will deliver very good shareholder returns.
So, on that note, I'll conclude by again thanking the people of Precision Drilling for their dedication their hard work and great safety results and the great operating results in 2023. We look forward to -- all look forward to a good year in 2024. I'll now turn the call back to the operator for questions.
See also 20 Countries With The Best English Accent in The World and 15 Largest Sovereign Wealth Funds: One Earned $213 Billion in 2023.
To continue reading the Q&A session, please click here.
