Q3 2019 Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to the precision drilling Corporation 2019 third quarter results conference call and webcast at there's some all participants will listen only mode.
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I'd now like to hand, the conference or would you speaker today, that's an accounting manager Investor Relations. Thank you. Please go ahead Sir.
Thank you Valerie and good afternoon, everyone welcome to precision drilling third quarter 2019 earnings conference call and webcast participating today on the call with me for cabin W. President and Chief Executive Officer, Carryforward, Senior Vice President and Chief Financial Officer choose our Gray, our Chief Technology Officer.
So a news release earlier today precision reported third quarter 2019 results.
Please note. These financial figures are in Canadian dollars, unless otherwise indicated so her comments today, we'll refer to non IRS financial measures such as EBITDA operating earnings.
Please see our news release for additional disclosure on these financial measures.
Our comments today will include forward looking statements regarding precisions future results and prospects. We caution you that these forward looking statements are subject to a number of risks uncertainties that could cause actual results to differ materially from our expectations.
We see our news release and other regulatory filings for more information on forward looking statements and these risk factors.
Kevin will begin today's call with opening comments Kerry will then discuss or third quarter financial results, followed by cabins operational update and outlook. Additionally, she'll will comment on precision technology strategy in progress on key initiatives to date with that I'll turn it over to you cabin.
Thank you Justin good afternoon.
So before Curie robots are third quarter financial update.
I would take a couple of opening comments.
First off I am pleased with our strong third quarter financial and operating results.
How much were about the few moments.
But also sure everyone on this call today recognizes doesn't duster interesting or sectors, an all time low.
Macroeconomic concerns political uncertainty and in peak capital exhaustion contributing to this loss of industry interest or sector.
<unk> share price, it's not matter effectively.
Industry is hovering near multi decade lows.
This is deeply troubling for investors for a management team and for our board.
I can't imagine a posters I am as an investor as a director who does the senior executive.
Well the sure person to supporting these macro challenges are not near the precision organization.
Precision was founded jumps up 19 eighties drilling recession. So we're talking period characterized by political uncertainty.
Macroeconomic concerns and weak rig demand.
Precisions business systems that are processes, the firm's competitive strategy and core competencies were developed built to create value that Charlie sure.
Oh systems and processes the mine silver people the refined over numerous cycles over the last three decades.
During the quarter do their persistence right.
And well some firms are just now adjusting to the second half slowdown or deeply experienced teams the manager business not constrained boat since November 2014.
We continue to manage optimize every business on the door control.
And there was also been a remarkable strong EBITDA growth.
Jay cost reductions strong cash management strong operating cash flows a debt reduction voted upon.
We are returning capital to shareholders, we achieved record market shares in all geographies, we're first mover status on drilling automation technology.
So yes, why we're deeply frustrated the share price.
I noticed before strategy to execute.
Strong results will follow the Surepost respond to reflect the troops all your precision going.
So now carry over to you to repurpose some third quarter.
Thank you Kevin in addition to review in the third quarter results I'll provide an update on 29 capital plan a management of our capital structure.
Precision strong 2019 financial performance continued in the third quarter with adjusted EBITDA $98 million, 21% higher than third quarter 2018.
The increase in adjusted EBITDA for last year is primarily the result, apart international activity levels higher day rates in the U.S. lower gionee cost and benefit from nonrecurring items offset by lower North American drilling activity.
Additionally, the quarter benefited from the impact of I addressed 16, and lower share based incentive compensation.
In the quarter, we recognize the 2 million dollar share based compensation expense compared to $8 million from Q3 2018.
In the U.S. drilling I could be for precision decreased 6% from Q3 2018, while margins were up 1357 U.S. dollars per day.
Certainly impacted by higher day rates, partially offset by higher operating costs.
Sequentially they were to margins net of turnkey and I'd be see decreased 218, U.S. dollars, an increased 106 U.S. dollars respectively.
We expect margins to be down four to 400 to 800 U.S. dollar per day in the fourth quarter.
In Canada drilling activity for precision increased 20% for decreased 20% from Q3, 2018, well margins were down $702 per day from the prior year.
Net of shortfall payments margins were lower by $688 per day.
Margins were negatively impacted by fixed cost spread across lower activity levels and the timing to certification costs.
Last quarter.
Guidance for Q3 margins to be down 252, $750 per day year over year, and we expect a similar year over year trajectory in Q4.
Internationally drilling activity for precision was 12% higher than Q3 2018.
International average day rates were up 1226, U.S. dollars as a result, a re country re contracted rigs at higher rates and the startup of our six Kuwait new build rigs at the beginning in the quarter.
In our CMP Division adjusted EBITDA This quarter was $4.6 million essentially flat with the prior year. Despite a 15% decrease in revenue.
The increase in profit margin as a direct result of business improvement initiatives and actually over the past several quarters and improved while service pricing.
No.
Year to date CMP adjusted EBITDA of $18 million is more than double the EBITDA for the same period in 2018.
Capital expenditures for the quarter for the corporation were $24 million.
For 2019.
Our capital plan is $144 million and the plan is comprised of 31 million for sustaining infrastructure and 113 million for upgrade and expansion.
The capital expenditure plan has been front end loaded as we delivered a U.S. newbuild rig early in Q1, an SCR and AC S. T 1500 conversion delivered during the second quarter.
In the six new build rigs delivered to quit.
We expect capital expenditures for the remainder of the year to primarily consist of maintenance expenditures.
Our capital expenditure guidance for 2020 remains $60 million to $80 million and is expected to be primarily comprised of maintenance upgrade capital expenditures.
We've continued to build our contract book signing six term contracts during the quarter and as of October 20, Threerd. We had an average of 55 contracts in hand for the fourth quarter, an average of 29 contracts for the full year 2020.
As of September Thirtyth, 2019, or long term debt position net of cash is $1.4 billion.
We had $94 million a cash on the balance sheet, our total liquidity position was approximately $800 million.
During the nine months I'm 2019 remain open market purchases told in the U.S. $59 million.
And year to date have called U.S. $50 million ABR outstanding 2021 notes our year to date 2019 debt reductions totaled $146 million.
In the third quarter.
The TSX approved our application to implement a normal course issuer bid and as of today, we have purchasing canceled approximately 3% of our outstanding shares using approximately $12 million in cash.
We continue to place the highest priority on debt reduction as the best Avenue for creating shareholder value and will only continue the share repurchase plan. If we are meeting our debt reduction targets.
For 2019, we plan to meet or exceed our 200 million dollar debt reduction targets for 2020, we plan to reduce reduced debt by 100 million to $150 million.
As of September Thirtyth.
A ratio of net debt to trailing 12 month EBITDA sits at 3.4 times and we continue to work.
Toward our longer term target ratio of two times.
Our average cash interest cost is 6.7% and with the 2019 targeted debt reduction we expect runrate interest expense will be just under $100 million to exit the year, assuming todays U.S. dollar Canadian dollar exchange rate.
Our earliest debt maturity is $116 billion due December 2021, and we expect to retire these notes with cash before the end of 2020.
The next step maturity is not due until December 2023.
For 2019, we expect depreciation to be approximately $330 million an S you need to be.
Under $100 million prior to share based compensation compensation expense.
This guidance is down from guidance of $110 million that we provided earlier in 2019.
The result.
The reduction in SPD guidance is the result of aggressive cost management or fixed cost.
We would expect cash taxes to remain low and our effective tax rate to be in the 20% to 25% range for the year.
I'll now turn the call back over to Kevin for further discussion of the business outlook.
Thank you Gary.
I'll begin with an update our technology initiatives.
As we mentioned on our press release during the third quarter, we achieved a step change in customer acceptance of our CAC POC automation technology.
In a moment I'll turn the call over to Shuja, <unk> Precisions, Chief Technology officer to provide a detailed update.
But first you my prior technology updates, we've been discussing field mobile resistance to change it was the primary obstacle.
I believe we've reached a tipping point acceptance it was up field resistance is quickly transitioning to active field support.
To quote for drilling engineer, a recent multi well pad drilled with park.
Automation has significantly improved operational performance and safety for the organization.
Has consistently delivered top quartile connection performance, we're always scratching the surface of the systems future capabilities.
So I'm hearing more and more of these customer testimonials as we continue on this topic commercialization.
By the end of this month precision will have drilled 1000 wells utilizing process automation controls.
The efficiency gains for the cost savings for our customers are becoming inarguable.
Well sure Joe Please I'm sure your thoughts Doorbusters.
Thank you Kevin and good afternoon, everyone. The last time I spoke with you. It wasn't yet it goes I would say, we along with our customers have known locked in the 12 month.
Looking back to about key learnings on won the best way to improve drilling performance is using the ingenuity off our next to it is supported by these night insights and replicating it's the consistency of precision axis.
Secondly, articulation stocks to deliver my shipping customers value then system utilization crosses 70% Mark.
Q3 was that tipping point decision.
We now have every one of these axis and well above that essentially and actually most of them on running consistently above 90% utilization.
That is good every single sequence, we have automated so far is delivering 25% to 35%.
Formants improvement with a corresponding reduction in cost put on customers.
We have to systematically applied all of these and many other learnings to Arne Haak service delivery process.
And as it isn't in Q3, we doubled the number of attack the customers.
You can imagine in this environment with every dollar that is highly scrutinized. This is a great Testament to the value of these system.
That you'd be systems are delivering to our customers.
One thing for shouldn't you adoption Dirty was not got suite line, we had customers, who we experimented with shutting down the system. One section one when you couldn't multiple lens to validate the performance gains in every single one of them is back to fully utilizing the system.
The last few quarters that made a point to see as many decisions customers as possible.
In their drives to launch cost and industrial nice performance.
Two major thing one.
It's too.
And reliance on real time, they just to make decisions is maturing very quickly.
And it is a huge appetite fun high fidelity data and Gentleman's real time insights.
This synchronizes 31 big data analytics initiated we'll be spending a lot more time on this in the coming in.
Secondly, there's no shortage of the card rather than best practices.
He had challenges.
Students' needs repeating these nit color, but fundamentally.
In my opinion mode and board operators are realizing that most efficient spots to this performance consistency.
Process automation control.
Let me give you on really good example on delivering this type of 40 minutes consistency.
Just this month went up on our you'll see customers, who is how do we use it off decisions boxes to mobilize at food pack and able to make from another basin instead of using one of the Lukas mix.
Since day, one by leveraging access Jim. This is Rick is delivering performance act upon the best foot forward appendix into feed.
With quite to literally zero learning so good luck.
I believe we now have quite successfully across the whole does though.
Platform hardening feed buying and required digital competencies all on absolute setting all focused on expanding be cutting scope of automated activities. This is wed absolutely a major food and we currently have 15 different outs in various stages of feed tightening and commercialization.
I'm highly confident that positions technology strategy is perfectly aligned.
Some of those improving when construction quality and cost.
In this capital constrained in Latam and we have the ideal solution for our customers.
No I wouldn't have gone back to kind of.
Thank you shoes you.
So I'll remind the listeners the we see our automation technology as a key element of our competitive strategy.
We believe park will drive drilling rig market share gains, while enhancing our revenue margin growth as we continue to roll this technology across or how they standardize super triple rigs sleep.
Now turning to our regional update I'll begin with domestic United States.
We're currently our activities in the mid Sixtys don't handful of rigs below 70 is reported in July .
Well this is slightly lower than we expected when we provided guidance our second quarter call. It should not be a surprise in light of the subdued customer tone around cash flow management budget exhaustion.
We expect our rig count will range from the low to mid Sixtys for the balance of the year.
As our customers reload spending 2020 budgets, we have several projected brig activations, the maybe left activity to low seventies really next year.
No I also know there's lot of concern and interest around leading edge rates and pricing.
So since you're able to second quarter, we concluded <unk> term contracts, which includes two this month.
For the precision S. T 1500 rigs those rates were were and remain in the mid twentys on the smaller precision SG 1200 rigs the rates are a little lower in the 20000 dollar per day range.
Turning to precision as well to well rigs most of the rigs that don't have locked in contracts pricing remains the low twentys for Precisions of T 15, hundreds and the high teens for precision Dusty 12 hundreds.
As we walk around the market the Permian DJ basin in the Marcellus or precision strongest regions, where we have 51 active rigs today.
Our weakest regions or the scoop stuck in the Bakken with one active rig each.
On the balance of our activity is in Texas, Louisiana spread between the Haynesville Eagle Ford Gulf Coast areas with 12 rigs running.
Looking forward, we believe contract activity contracting activity in rate realization will approve quickly what our budget or customers finalize begin to execute their 2020 building joint budgets.
We do expect intensified customer focus on efficiency technology rig in accrued performance.
We also note where customers are planted smoothed out drilling projects over the course of year. This is also intended to drive efficiency by reducing stop start costs.
This aligns very well the capabilities of precision.
Super Triple rigs are proven performance of our crews.
Fission Cie games achievable Precisions PUC automation technologies.
Turning to Canada, the political and regulatory uncertainty critical high sense, Thanks Ivy from any.
For precision our scale and our strong market positioning remains our key differentiator.
Our Canadian market share for most of the third quarter was sitting in the 30% range, primarily due to our large share of super Triple pad rigs and the operational excellence, our skilled recruit Rick personal deliver.
Today, we have 52 rigs running it's a peak for the fall 2019 season with a slightly over 30% markets you're.
Our rigorous mix a rig mix remained strong or 22 with 22 of our Super triples, currently drilling on pads targeting natural gas liquids and I'll point out that this Ngls drilling program is a key stable wedge of business for precision.
Looking forward in Canada, we expect the Precisions winter 2020 activity levels will be aligned with 29 gene, peaking at the low to mid Sixty's.
Demand remains firm for a super Triple rigs the Montney and deep basin. These rigs are largely committed for the winter season, We expect day rates will be generally in line with 29 gene.
Our hockey automation systems, we're on track to achieve full commercialization further enhancing the rubber revenue opportunity and competitive advantage for those rigs.
In our heavy real segment Precisions Super single rigs have a strong market position, we expect winter 2020 activity and pricing will also be lumpy 29 too.
However, pricing pressure were made intense on the shallower rigs the cardium Viking Socialist government Buck in regions.
Well Precisions Super single rigs will continue to be competitive to these areas, we do expect pricing pressure to be intense.
So turning back to the issues impacting Canadian drilling activity.
We firmly believe but the Alberta government well stocked immediately removed the production curtailments entirely for all conventional oil producers.
We think this is a critically important step for our customers and should lead to stronger utilization importantly jobs in the services industry.
The urgency of this request cannot be overstated as our customers are now in the throws a plenty per 2020 the time to act as no.
I'm also encouraged by the federal governments post election, reaffirmation and commitment to proceed with the Trans Mountain pipeline expansion. This is certainly that purging stance following the heated election.
Both of these regulatory actions would prove constructive catalyst for our energy industry activity. It was certainly encouraged investment in Twoq industry.
Absolutely encouraged government Roberta to act on the World Curtailment reduction and the federal government to proceed trends.
So turning to our international operations as Gary mentioned things are progressing nicely with the six rig in Kuwait operating for the full quarter.
We've achieved our desired desired skill the Gulf region. This will allow us to continue to grow topline and bottom line with minimal fixed cost impacts.
Currently we are seeing increased bidding activity in Kuwait, Saudi Arabia, Kurdistan, even Latin America.
Some of these maybe opportunities to activate are idle rigs in the region and others may involve deploying idle north American rigs.
We expect developments are these tenders later this year, we're early 2020 as the national oil companies transition into 2020 budget spending.
Moving to Precisions completion and production group that continued the strong operating financial momentum we reported earlier this year.
I want to couple and her team for the excellent execution during the quarter.
But from a Canadian perspective, the Industrys marketable rig fleet will continue to suffer attrition of the current market rates not support economic reinvestment the offsets the wall service industry remains very challenged.
This is a business where scale matters and for precision we remain very strong position.
So turning back to our uses of free cash flow Jerry mentioned, our debt reduction in capital spending for 2020.
I will reiterate juries comments the debt reduction will be our top priority.
Maintenance capital will be adjusted to match activity levels and other uses of cash including expansion and upgrade capital and share buybacks will range discretionary will be prioritize behind debt repayment.
There was no doubt the debt reduction will create shareholder value and this will each will significantly improve shoppers.
With a relatively new and standardize fleet Super Triple rigs enhanced with POC, our intense focus on cost control.
Our intense focus on cash management, we fully expect to meet or exceed or short term long term debt reduction targets as we go over the past several years.
So close out my thinking the precision employees for their hard work and the strong results. They delivered during the third quarter, we'll now turn the call back to the operator for questions.
Thank you as a reminder to ask a question you need to press star one on your telephone to withdraw your question. Please press the pound Kim.
Please standby while the compound like you many roster.
Our first question comes from Kurt Hallead RBC. Your line is open.
Hey, good afternoon.
Kurt.
Hey, appreciate that I appreciate that summary.
Very insightful.
Dynamics here, so I wanted to circle back with you Kevin on a couple things you mentioned the first was in the context of the pricing dynamics in the in the U.S. and you kind of gave the varying ranges of your different kind of re glasses and just just wanted to kind of be certain I'm not going to understanding the dynamics at play So you indicated that.
That's a repricing currently is you didn't really kind of referenced that there's any significant pricing pressure.
In Sharp contrast, what you said about the shallow assets up in Canada. So just want to thoughts just want to make sure I understand are you, saying there is pricing pressure in the us or pricing is fairly stable.
You know I think we answer that question right. Now is there is certainly some pricing pressure the U.S. it applies more too.
The well to well rigs and any you know very remote new opportunities or.
The pop up on the rigs that are renewals.
I think we're working closely with customers on those renewal contracts and we're shipping rates of return of the mine with previous quarters.
Okay, Great appreciate that color. Thank you my follow up turns.
I had one will comment on that point, we continue to see we continue to see a high level of pricing discipline, among the multi basin U.S. drillers and it speaks to the still relative tightness of supply of the Super spec or in our case Super Triple rigs.
Our utilization has has softened up a little bit, but it's still in the upper eightys across the industry and certainly for US it's in the upper Eightys.
And.
That is not a loose pricing market, that's actually a price type pricing market type pricing market and.
I see continued disciplined among the drillers with those rigs.
I appreciate that added color.
Well I think I wanted to also follow up on could you kind of made it a very important part of your strategy going forward is the automation in the apps and the software and so on I think last quarter. You indicated that you felt confident about the perspective.
Incremental revenue generation and revenue per day generation so.
With another quarter behind us and with what you see in the pipeline.
Can you give us an update on what you how you see the revenue model evolving and what kind of revenue generation. You think you can provide.
Kurt and answer that question by telling you that our goal for the year was to be commercial fully commercial which really means we're being paid for every system and we're recruiting you expect returns by the end of the year.
We didnt make dot claim on this call.
But expect some news from a shortly on that okay.
And then we'll provide.
Kind of forward looking guidance, we'll talk more about the next steps in the technology and I think.
I think we'll we'll be able to.
Provide concrete details are where the technology is up to their words going.
Okay, all right Kevin.
I'll tell you, but we're very close to we're very encouraged that we're happy with where rough.
That's great. Thanks, Kevin.
Great. Thank you.
Thank you. Our next question comes from James West of Evercore ISI. Your line is open.
Hey, good morning, guys.
Hi, James James bids area.
Kevin You mentioned you thought your U.S. rig count in the low Sixtys could go to the maybe low seventys here as budgets are reloaded or are you having that is that a kind of a gut call or are you having that number of conversations are active dialogues that suggests that that's.
It's something that's more likely to happen.
So I'd say ultimately.
We didnt confirmed that we have signed contracts to take us near because there's still a lot of moving pieces.
Not many of our clients have announced or 2020 budgets, yet I think theres still.
I think there to get through these Q3 conference calls and see how the market reaction of those built to southern 2020 spending, but there's no. We have a high degree of ongoing conversations with customers of the multiple number basins number of opportunities.
Theres lot of anticipation right now around our talk automation controls.
Also so short of.
You know some further dislocation or uncertainty in the marketplace I think we'll see the rig count a industry wide move up a little bit I think will benefit well and we'll gain some market share again, driven by technology deficiency.
Okay got it and then on the on the Tech automation controls.
I think the number was a double of customers.
Maybe a number of systems a quarter over quarter.
Being driven by the field now.
What do you think spurred this this change this.
Resistance to to switch or switch from in resistance to a pull from the field level.
You know a chooses comments earlier he commented that 70%, it's a bit of a breakeven for customers.
And we crossed over that threshold on every single rig during the quarter. In fact, she's you commented that most of the rigs running over 90% I can tell you the adult level Dermot you money on this and it's clear and its apparent.
And.
And you know the of the field the field is getting yes, it's moving forward.
She is also talked about some rigs where they would turn it off for a section of the well EUR per well those decisions were being made up the field.
And that's turned for US now as we feel quite good about positioning and it's it's moving forward well the technology is Unarguable works and.
I'm pleased.
Okay, great to hear again I.
Thank you.
Thank you. Our next question comes from Sean Meakim of JP Morgan Your line is open.
Thanks, guys.
Sean.
So Kevin in Canada, you're calling her flattish activity and pricing leased the high spec Super triples.
Pretty consolidated market.
Historically pretty low levels of activity just I was curious if you could walk us through what you would seem to be the flex points.
That could cause a significant deviation from that level in either direction.
[laughter] Scoot question really good question.
I would say capital markets reaction to Q3 disclosure by you'd be companies could have an impact.
You know if for whatever reason.
The capital markets seller on the further on the energy companies in Q3 that could be a.
That could be a negative driver and activity.
If our customers continue to show good efficiency and continue returning value to shareholders I think that supports a.
More positive view, so I think it really does depend on.
How good our customers are not.
Delivering efficiency with our capital and showing their investors that could return capital.
Got it I appreciate that feedback and then obviously obviously the macro events can you are the direction you know if.
For whatever reason WCS price firms up into the high Fiftys, a low sixtys that's very positive.
Yes.
If we see no production parts of your declining in the Permian with the reduced activity. That's a positive so theres things are going to happen.
On the edge condition big difference for demand for Super Triple rigs.
Right.
That's fair.
In the U.S. one of the large service companies indicated a desire to become more asset light and North America.
Historically, you've had a constructive partnership and product lines like directional drilling with the same service company.
Have you seen much of a shift in terms of.
It's kind of go to market strategy, there and does that create opportunities for you could we just I mean to explore a little bit about how that could unfold over time and in fact precision.
Sean I would say that the success, we're having with automation right now is gathering attention from the integrated service companies in general.
And I.
I think the will view our platform for technology delivery as a favorable platform. So I think that may create some opportunities but.
If we do if we do create when those opportunities we will be sure Joe known uncertainty for will accomplish.
Okay fair enough. Thank you.
Great. Thank you.
Our next question comes from Carlin.
Morgan Stanley Your line is open.
Thanks afternoon guys.
<unk>.
I'm wondering if we could just do you construct the guidance a little bit here on the margin side. So.
On the U.S. it sounds like rates are holding up pretty well. So I'm just trying to bridge to theres, a little bit of margin pressure it doesn't seem like.
Very extensive but is that is that more related to fixed cost absorption, what's what's driving that the pressure on margins there.
So it's a little bit about Conor, it's a little bit of.
Slight rate pressure and then if we have lower activity covering.
The same fixed cost base will have a little bit of pressure on the cost side.
Do you think would be fair to say, it's 50 50 or you know just split of what's driving that.
Yes I.
I think Thats fair.
Okay got it and then just as we think about next year. If if you were too.
Hi, Sixtys low seventys type activity levels should we expect that to continue to trend lower or do you think the cost offsets any.
I'm, just trying to think through where leading edges versus what you're realizing today.
So we haven't given any guidance for the first part of next year, but ill kind of follow up on what Kevin said about where we're having conversations with customers. We're not having very many conversations with customers about adding rigs over the next two months. The conversations we are having about adding rigs in in January and that is going to be up.
Likely going to be a different pricing dynamic than the spot market today.
Okay. That's fair, maybe one last one Harry.
In some of your competition rig retirements.
Just broadly across service industry that seems to be a theme this quarter. How do you feel about your asset base is there anything in there that you view as sort of non core or.
Competitive in the current market.
So over the past.
Seven years, Weve decommission about 200 rigs across across our fleet. We have 22 rigs that are held for sale right now that we will either sell or or de commissioned by the end of the year and if you look at our utilization rates in both the U.S. and Canada, there right at the top of the industry in terms of.
Our utilization percentage. So we think the fleet. We have is lower affected our balance sheet and is obviously evidenced by oh by the customer demand.
Alright, Thanks, a lot.
Thank you.
Our next question comes Taylor's darker of Tudor Pickering Holt.
Hey, good afternoon, and thanks all.
On the.
If my numbers are correct on the Capex budget. It looks like you budgeted about 5 million for Q4 and.
20, Twentys still 60 to 80 million so.
It's obviously a lot of maintenance and some upgrade and there could you help us parse how much of that as maintenance how much is upgrade.
In 2019 looks like you're spending around 30 million in maintenance. So it seems like there's a decent wedge in there for upgrade I'm just curious what sort of upgrade projects are contemplated in that budget as it sits today.
Sure. So the maintenance spend is going to be driven by activity that'll be in the low end if activity is lower than this year it'll be on the high end if activity a little bit higher than what we experienced in 2019.
On the upgrade side, we'll be looking at doing minor upgrades to rig so it might be a increasing pump capacity or walking system, we wouldn't contemplate any major SCR and AC conversions unless the market improved a bit I will also be Kevin and Chujah, both talked a lot about the success, we're having with our two.
Acknowledge initiative and if we commercialize this year, which were confident that we will will likely be adding addition.
Sure for Triple fleet in 2020, and that'll comprise some of the upgrade expenditures.
Okay got it.
I guess just to clarify on on the some of the pricing comments you made it sounds like at least for the Ft 15, hundreds that are.
Getting extended with their existing operators. The pricing pressures is is really not exist in or not that great. As you think about your rig count potentially taking higher in Q1 I suspect the some of those rigs it might be trading hands into different operators and.
Pricing pressure there even if those are term contract is gonna be.
A little bit greater and so I guess the question my characterizing that correctly and if so at some point down the road do you think that delta between.
Rigs getting extended with their current operators and kind of the new leading edge rate for 2020 startups conversions moving forward.
You know Taylor I think.
I think it's more complicated than just the current leading edge spot market rate becomes a starting point.
The growth.
Marketer or even a nominal growth market.
No I think we demonstrated that with some of our renewals this quarter that we're still holding of the previous pricing range of mid Twentys.
Hi, Mike My answers my short answer is it's really hard to define price realization when the rig counts are softening and drilling budgets are winding down no new opportunities are merging with.
When you enter new markets, which is a sort of new year with the new drilling budget and the activity is stable and likely rigs or recounts moving up slightly you're in a bit over growth market and pricing will be different utilization of those high spec rigs still remains an upper upper eightys discipline has been quite strong across the top four drillers.
So you know I'm not going to give any hard pricing guidance on Q1 pricing right now, but we believe it will be constructive.
Okay fair enough I'm trying to squeeze one more and I thought the stat on on the pack system utilization breakeven at around 70% for your customers and it was pretty interesting just want to make sure I understand what that means I assume utilizations just.
The number of wells, they're drilling with attack system during the quarter, but but from a revenue perspective.
Break even or using the full 1500 dollar day type day rate for the pack system that come to that calculation.
Yes, so what we find is that if they use the pack system on any given well 70% of the time.
And we charge the full commercial rates.
They will recover that at 70% utilization.
In savings.
On the rig.
They could use at a higher percentage of the time.
So we get criticized for letting all the value on our technology flow through to our customers. We've been very disciplined here to make sure. The recapture the value of two point and then and then we shared the value not going forward.
Okay I appreciate thanks for the answers great. Thank you.
Thank you.
Our next question comes from JB Lowe Citi. Your line is open.
Hey afternoon, guys I just.
A couple of your wanted to follow up on counters question about the margin profile in Fourq.
In the U.S. The 400 800 decline in margin is there any offset there from.
Revenue from the PSC systems or from App revenue like if absent those two things with margin be lower.
As a way to think about that.
So.
Kevin and shoes are both pointed to.
US being confident there we're going to announce full commercialization before the end of the year maybe of the in the next month or so.
And at that point, we will start getting more significant revenue from the system, which will show up much more in Q1 that it will in Q4, but theres a little bit of an impact in Q4.
Okay. Thanks.
Then on the.
Kevin you were mentioning that theres, some tendering activity on the international side I know you have some idle rigs abroad. If if you weren't going to be able to put any of those rigs to work. In 2020, you said you already have scale.
In the Middle East would any of.
Those idle rigs be divesture candidates.
No. We don't have any kind of a formal decision to those rigs whether we'd sell them or not we did sell rigs in Mexico earlier. This year there was a good transaction for us.
The assets that we have in Kurdistan, and Georgia, or and Saudi Arabia are excellent assets.
You know.
The right for the right traded it took us for sale.
Sure.
Okay. Thanks.
Great. Thank you.
Thank you next question comes from John Watson of Smith.
Thank you good afternoon.
Hey, John John .
Hi.
Quick follow up on on GBS question. Appreciate if we should hold tight in here more later, but.
Could you help us think about what the revenue uplift from the full commercialization of P.C. might be in Q1.
So I can tell you what would the guidance we've given before there's $1500 today on roughly 30 systems that.
Would be commercial in the field. So you can you can think about that is having an impact in Q1.
And that's that's going from zero in Q4 minimal in Q4 to that type of figure and one Q is that fair.
So we haven't given any any color on what that impact would be in Q4, because we haven't announced full commercialization yet.
Okay.
Understood.
Kevin you made some commentary on helpful commentary on the rate environment, and mentioned that well to well rigs and are receiving lower rates relative to some others.
Does the percentage of rigs that a percentage of precision rigs on wealth. The well work does that increase in Q4 is that part of the the margin decline or not at all.
Don't have the tables in front of me, but.
Essentially the contracted rigs are kind of holding steady as its the wells are all rigs was that a little bit of pressure on rates.
And the rig counts come down a little bit so, it's probably well to well rigs.
Right.
I don't have the mixed for me Okay. Okay. I was I was trying to think towards.
2020 excited assume you'd have more well the wild type of rigs in Q4 than you would.
20, but that's fair.
Yes, So I think that's I think it's fair to think that we wouldn't have more more well to well rigs in Q4, and certainly with all the uncertainty the market customers have not been.
Anxious to book up rigs for 2020, yet we did announce a contracts, but I'd expect to see more contracts emerge in the first quarter.
Yeah, right, Okay that throws at it and then last floor or certainly after budgeting season, even this fall because you know later this later this year.
Okay.
Lastly on the on the International front you deployed the incremental rig during the third quarter should should we be thinking about a margin uplift in fourq you. Since you won't have that to a deployment type expense and you'll get a completely full quarter from that rig in Fourq, you, which I think has a higher.
Revenue per day relative to some of your other international rig.
So so John on in Q2, we said that we would get a full full quarter of EBITDA from the new rig in Q3.
So we wouldn't expect to see an uplift in Q4, that's our sixth rig deployed to that country for the same customer and it's the same rate design, we didnt have.
They have any startup cost in the quarter that were unique to.
To that startup.
Got it okay. Thanks, guys I'll turn it back.
Thank you next question comes from Inklings of GMP <unk>.
Good afternoon, everyone.
Hi Inn.
With respect to growth from U.S. rig count as you had new you're probably next year.
Do you expect that will be continued market share capture or do you think it's part of a broader rig count recovery.
I think there's a I think there's a rig count recovery I'm not sure I'd call. It brought her but there will be a rig count recovery in next year.
I think it's going be driven by.
Our customers trying to drive to more.
Smooth loading over the course of the year.
At the point is ramping activity up in the first off and ramping down the second half is very expensive, we'll drill wells. If you can leveled out during the year.
That saves our customers money, along with pad operations in technology and things like that so I think.
You will see the rig count tick up from the trough of 2019 into whatever the levels going to be in 2020.
Sort of whether that's 30 or 40 rigs up it's hard to say I would bet that every single week, because that is a super spec or precisions Super Triple type Rick.
We've done quite well during the upticks in grabbing market share in those high spec rigs so I think our gains.
Well come through a slight uplift in the industry and.
And some market share traction with equal game.
Okay.
Deleveraging has obviously been an important part of the story over the last number of years I mean, when you look at Q3 actuals I mean, you provided some context around Q4 it looks like.
I mean does that give you any pause or you may or may not be able to meet that 100 150 million debt reduction target in 2020 based on what you've seen so far and maybe on a risk and saying maybe it doesn't recover in 2020.
We have a high degree of confidence will meet our targets in 2020.
Okay and.
I could walk through a couple numbers there I mean, we gave guidance on interest expense, which we think we'll be right around 100 million, maybe little bit less our capex of 60 80 million and cash taxes been relatively low we won't have much potential working capital up activity similar.
So you're looking at 170 million of.
Fixed cost so take whatever you have for your EBITDA estimate and the difference would be our cash flow. In addition to that if you look at our Q4 outlook. We've given the relatively low capex number our interest expense for the quarter in Q4 will be $30 million to $35 million.
We should have another very good cash flow quarter in Q4, and we've got almost $100 million occassional balance sheet today. So.
All of those things taken together I think we're very confident we can meet or exceed our target this year and.
All the same next year.
Okay.
That point Delta, we did add the word exceed our target this year the disclosure this period.
I did I did note that so.
And then I.
I guess I mean, following I guess following on the enter the international piece that was asked upon earlier.
I mean are you guys trying to just as you look at those of you just trying to carve out additional work if possible in areas that you currently operate in or would you be willing to step out where you currently are for the right opportunities that arise.
I'll give you a bit of a sensible looking right now so the rigs we have their idle the middle east are looking to deploy a likely somewhere in the middle East in one of the countries. We currently operate.
So I think Thats, there's no step out envisioned in the middle East Arabian Gulf.
But we're looking at some other opportunities that might involve redeploying idled North American assets to Latin America.
Okay. That's that's helpful and the scale the scale would have to be adequate for us to make that decision.
But we're exploring opportunities, yes, I would add that the scale would have to be adequate and the.
Capital expenditures requirements would have to be relatively low yeah.
Just one quick clarification, there and scale should I be thinking about that from a dollar asset perspective or is it.
Thanks.
Because obviously one rig in the middle East is much different I'm wondering in Latin America.
I would think about it as number of rigs.
Okay.
Thanks, very much guys I'll turn the call back over.
Thank you.
Thank you again, if you like to ask a question. Please press Star then one when you touched on telephone.
One moment please.
Our next question comes from John Morris NFC RBC capital markets. Your line is open.
I'll turn it off.
Can you.
Talk about can you talk about the level of rig inquiry in the last four to six weeks and whether you see any meaningful change up or down in kind of that duration. Obviously activity has been coming down we all see that but I'm just trying to get a sense of whether there's any heightened level of RF piece on the market that.
Could be indicative of guys shopping around for price and perhaps getting ready to grind on contract renewals or where do you believe that that's fairly representative of what they are actually going to need in the coming period.
John it's pretty easy for our sales team to parse through.
No the guys and price discovery versus 2020, new opportunities. So I think that we're pretty clear or which were pursuing and most of what we're putting our energy into is around new opportunities and 2020 not price discovery.
Okay, and it's fair to assume that your rate of renewal or hit rate is fairly steady with what you've seen over the past 612 18 months.
Well, our rid of renewals slowed down this quarter. We would think this is the slowest quarter. This year for bookings for contract for contract renewals.
And then no no surprise the marketplace nobody is looking to lock in a lot of rigs.
The third quarter of 29 gene.
But those people maybe looking to do that late in the fourth quarter early first quarter as if you want to full year of drilling in 2020.
[laughter] apologies I misspoke I meant your win rate hasn't really changed based on the number of things that you're bidding on.
Oh, yes, I don't looked closely at win rate.
Pretty happy with the contracts we've achieved in the pricing we've gotten and I also know we've walked away from contracts because the pricing was not a glut.
Okay. That's helpful. Just in terms of Canada, Kevin as some of your peers have been talking about cold stacking some of the heavy doubles in the market do you think that that has a chance of actually improving pricing at the lower spec part of the market or not just kind of reduces some of the pressure that we've seen.
John somewhat comments on the well service business apply to the shallower part of the drilling business to the rates are too low for the industry its unhealthy for the industry.
I think every drilling contractor that's.
No stuck it stuck in that business.
Is trying to find ways to tighten the market.
Certainly.
Our customers want to be healthy supply business, you have to be a little more flexible and pricing, especially on the shallower rigs.
No it's hard to maintain.
Hi quality assets, you know the expectation for safety and Ken It was quite high from Barbara response lose quite high it's going to supplement on the contracting industry for those shallower rigs do that.
As rates. So my message is quite loud and clear or customers have to work with us a little more than they have in the shallow rigs I can tell you. The drilling contractors are doing all the Kim to try to ensure the not wasting any any of their operating cost sort of cold stacking rigs there.
Trying to be as far as we counted that the industry is quite resilient, but the Richard tullo.
Okay, Kevin you've talked about being open in terms of a welcome well servicing consolidation in Canada in the past have been made sense for precision to do it to you when might not be the leader of doing it within the platform but.
Are you surprised said.
We haven't seen more consolidation that mark in past 12 months, because the conversations we would have the private operators would obviously highlight.
Acute distress and I'm surprised we haven't seen more things happen today does that inline with your views.
Yeah, you know I had my mind that buys into Q3 year Q4, 2019, the business would have been through the ringer long enough to narrow some of that bid ask spread.
I don't think it has and I still think that enough of the rigs are controlled by companies like precision that are probably doing.
We are doing very good job they've got the doing okay job.
And it's not.
The strategic in their business, yes, but it will become strategic if we get if it stays.
Disposition. So you can look at the active industry right now.
I think probably 40, 45% active service rigs are owned by drilling contractors.
Okay.
But but curious just in terms of.
I'll finish off my point, though John I think the industrial logic and the economic logic is getting closer and closer to making sense.
I do expect that.
Suddenly start emerging and 2020 units Miss.
It is just takes longer than you would logically thanks for that time actually happen.
It does.
Hi, Kerry in terms of the Capex guidance, you gave for 2020 would incremental inflation or deflation of those numbers just largely go in line with a number of drilling days you actually QED and is there anything that would push it meaningfully above that.
So in any scenario that you could for seeping logical.
If we're in an activity range that looks plus or minus 10 or 15% from from this year.
It's probably a pretty good range, but if we have a higher demand scenario that'll probably trigger some more SCR and AC conversions and the upgrade piece could.
Could creep up.
But again, we don't get if we would need we would need to write contracts for.
The spend that money.
And it's so difficult to come up with the scenario, where we wouldn't fit on July onest.
Correct.
Okay.
So basically the capital priorities the right way to think about it as one you're essentially maintaining the marketability of asset base to you'll need at least the base debt reduction targets, you put out but probably in exceed and three you really only lean on the buyback when you're very comfortable with the fact that you're going to achieve bucket wanting to and you've got excess cash says that they're able to think about PNC.
Okay, that's fine.
I would also that is in general absent any upgrade opportunities, but if we have upgrade opportunities that provide us a good return on our investment that would that would likely take the place of buying back shares.
Okay, and those would be inline with your traditional metrics that youve talked about.
Correct.
Perfect I appreciate the color I'll turn it back.
Thank you John maybe John .
Thank you.
I'm showing no further questions at this time.
Conference back over to death, and honing for any closing remarks.
Thank you all for joining today's call and look forward to speaking with you when we reported fourth quarter results in February .
Ladies and gentlemen, this concludes today's conference call. Thank.
You may now disconnect.