Q4 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby and thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by welcome to the precision drilling Corporation 2019 fourth quarter and end up the year results conference call and webcast.
At this time, all participants on I listen only mode. After the speakers presentation, there will be a question and answer session.
To ask the question during this session we need to press Star then one on your telephone.
Please be advised to today's conference is being recorded.
If you require any further systems. Please press star then several.
I would now like to hand, the conference over to your speaker for today.
Yes, and I wanted you may begin.
Thank you to Wanda and good afternoon, everyone welcome to precision drilling fourth quarter and you're in 2019 earnings conference call and webcast.
Participating today on the call with me are cabin W. President and Chief Executive Officer, Carryforward, 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, we'll refer to non IRS financial measures, such as EBITDA and operating earnings.
We see our news release for additional disclosure on these financial measures.
Our comments today will include forward looking statements regarding precisions future results in 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.
We see our news release and other regulatory filings for more information on forward looking statements and these risk factors.
Gary will begin today's call by discussing or fourth quarter and year end financial results, followed by cabins operational update and outlook with that I'll turn it over to you carry.
Thank you Justin.
Precision once again to fill the strict financial strategic priorities and 2019 retiring $205 million a 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're pleased with our 2019 performance and plan to continue the momentum into Twentytwenty with debt reduction targets of $100 million to $150 million for the year.
In addition, we're providing another year of debt reduction guidance, raising our long term target to $700 million and debt reduction between 2018 in 2020.
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I will now review some of the fourth quarter and year end financial details.
Our 2019 fourth quarter, adjusted EBITDA $105 million decreased 22% over the fourth quarter 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.
Transaction related income received in the prior year period.
Offset by reduced operating in fixed cost in the current quarter.
In the U.S. drilling activity for precision averaged 63 rigs decreased nine rigs from Q3.
Daily operating margins in the quarter were $9876.
An increase of 1271 U.S. dollars from Q3.
Q4 margins were positively impacted by turnkey and I'd be see revenue in certain reversals of prior period provisions during the quarter.
Absent these effects daily operating margins would've been approximately 8500 U.S. dollars for 100, U.S. dollar per day lower than Q3.
For Q1, we expect margins to be in the range of 8700, U.S. dollars to 9000 U.S. dollars per day.
I'd be see revenue more than offsetting lower fixed cost absorption.
Turning to Canada.
Drilling activity for precision averaged 43 rigs a decrease of seven rigs from Q4 2018.
Daily operating margins in the quarter were $7391 a decrease of $296 from Q4 2018.
Absent shortfall payments received in the prior year in certain nonrecurring cost recoveries in the current quarter daily operating margins would've 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 29 team.
Internationally drilling activity for precision in the current quarter increased 11% from Q4 2018.
International average day rates were 52283, U.S. dollars up 301 U.S. dollars.
Today from the prior year.
Turning to our CMP segment adjusted EBITDA this quarter was $6.3 million.
Down approximately $700000 compared to the prior year quarter.
For the year, our CMT segment generated EBITDA of $24.1 million.
Increase of $9.3 million or 62% from 2018.
The improved financial performance as 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 seven additional rigs that did not meet or 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 recognized the current value on our books.
For the full year 2019, EBITDA was $392 million funds from operation.
Were $293 million and earnings per share were positive a two cents.
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 moderate capital spending with industry activity.
While funding only the most attractive capital investment opportunities.
We expect to continue our strict discipline and 2020.
Where our capital plan is $95 million.
The 2020 capital plan is comprised of $58 million for sustaining it infrastructure and $37 million for upgrade and expansion.
Including expanding our up Alpha automation platform by 24 systems.
As a reminder, the 2020 capital thinking contains approximately $25 million and sustaining it 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 that Precisions operations.
We continue to make progress under 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 30, Onest 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 3.5 times.
Our average cost of debt a 6.8%.
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, Twentytwenty, We had repurchase 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 needs to be approximately approximately $90 million before ship 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 cost.
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 I'll turn the call over to Kevin.
Thank you Kerry and good afternoon.
As Curt mentioned, we're pleased with precision fourth quarter and full year 2019 financial and operational results.
I believe precision team performed exceptionally well in 2019 controlling every variable within our control the delivering on our strategic amendments.
I'll start today by discussing or 2020 priorities.
Certainly our 2020 strategic priorities, we continue to believe the leveraging our scale to maximize free cash flow and prioritizing of regional and pay down debt remains the best tough to create shareholder value.
Secondly by also prioritizing operational excellence, we're 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 barman 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 you all put technology platform, there's lots of our customers urgent need to lower well costs.
Steve This is a clear path to increased market share deliver revenue and margin growth, especially this era capital discipline.
The precision team has a multi year track record of meeting or exceeding our strategic investments. We expect we will continue on this path in 2020.
The priorities are detailed in our press release now does in prior years will provide quarterly updates on our progress.
We'll also see these priorities are captured in performance metrics management's short term in long term of sort of competition bonds.
Now turning to our business update I'll begin with her gradient drilling segment.
As Terry mentioned during the fourth quarter, we experienced early indications of strengthening customer demand.
The up momentum has continued into this year today, we're running 80 rigs versus 55 this time last year.
We expect Precisions Canadian rig activity will remain the mid seventys through the February and that the seasonal spring breakup slowdown will be weather driven rather the functional budget exhaustion.
For precision the increased demand is occurring in two sectors. The natural gas liquids plays of the Montney and Duvernay shales.
Heavy oil sector, including safety.
Conventional heavy oil and oil sands stratification wells.
So first and the Montney and Duvernay plays.
Our transition to full development drilling has led to increased customer demand for pad walking super triple rigs and particularly those equipped with the alpha automation systems as our customers drive to drill the lowest cost most efficient wells.
Pricing on these rigs is becoming more constructive we'll continue to improve.
I was 25 plus industry Super spec rigs have been relocated to United States recently substantially tightening the super spec rigs supply.
This coupled with recent industry consolidation has led to improved improved pricing discipline among the remaining drillers.
We believe this segments of our drilling business is a unique bright spot where customers benefit using super spec rigs Gulf automation to reduced well costs, while we generate solid financial returns.
The modest recovery in heavy oil as long overdue aligns very well precisions well regarded fleet of ultra high 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 the segment as a result of the proven performance of precision Super single rigs precision his ability to crop. 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 the market opportunities arise, we must be well prepared to respond immediately our drilling assets are well being changed with up to date certifications and those rigs reactivate with minimal startup cost to normal lives.
Field leadership is strong and capable of responding to the defensive growth.
Most importantly, our management systems and organizations is up to the challenge of recruiting treating and fully crewing up these additional rigs.
I believe precision his ability to respond on pace with this demand growth is a very good demonstration of the operational excellence precision delivers as a primary driver of our mortgage or gains in Canada.
Looking forward in Canada, we do not believe the strong start simply frontloading of drilling budgets.
Discussion in discussing discussions with our customers for Q2, the second half of 2020, our expectation is for generally flight activity when compared to 29 to there'll be some puts and takes.
Dry gas.
Directed drilling may slow, while montney and Duvernay demand should remain firm will provide some upside for precision.
We also expect heavy oil activity should be stronger for the balance of the 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.
Recent positive developments on the KXOL line three projects bode well for longer term fundamentals in Canada.
Interestingly, the overall customer tones improving.
In fact, we have several customers now discussing 2021 drilling plans.
This is the first time in several years I recall any long term rig operations planning with our customers.
This is a function of modestly improving customer settlement.
And also those customers building more confidence in their own capability to operate in the state environment.
Capital discipline has become the norm where customers have adjusted quite well.
Turning to the U.S., we believe customer demand bottom to the fourth quarter of 2019.
And while we were expecting to see a modest demand improvement following 2020 budget low reloads. It seems short term commodity price volatility installing those decisions.
With global commodity prices were bidding highly sensitive to macro economic risks our customers are quick to adjust spending plan within those risks.
The most recent macro event is of course, the krona virus and its impact 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.
It will not be surprised of new drilling projects are delayed by a few weeks or months as capital disciplined as the prevailing theme across our us customer base, where customers are acting accordingly.
In our press release, we mentioned three rigs in the Marcellus, which were unexpectedly idled.
We will endeavor to redeploy those rigs these rigs as soon as possible, but in the interim will earn full RBC revenue. These rigs are contracted through the full year.
In other U.S. basins, we are seeing pricing and demand remained consistent with our prior guidance during only by rig SaaS.
Contract renewals for S. T 15, hundreds were made to the low to mid Twentys and for Sta 12, hundreds the renewals or the high teens to low twentys inline with what we reported our Q3 earnings call last October.
This relatively firm pricing is supported during re contracted negotiations by the proven performance of the current rig coupled with the switching costs and operational risks the oil and gas company associated should they choose to change rigs that program.
[noise] diverse spot market rig deployment opportunities that we see the price one or $2000 lower than renewal rates switching cost of risk as big a factor.
However.
The consistency that efficiency achieved utilizing of automation is a strong competitive advantage for precision.
Health automation enables operators to walk in the best most efficient drilling practices reduced risk and drilling time in cost.
We have strong operator interest in the demonstrated our value within the ERP operations drilling departments.
While we have persistent sometimes intense procurement.
For its.
Took a monetize our services in this never seems to abate.
But as we've seen with prior technology transitions and no elfa automation the first movers.
We successfully demonstrated real value when this battle, we gained the revenue would when the market share.
And while I'm on the topic of procurement groups. The reemergence of performance based in 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 derisk risk risque application and this complicates our old or economic model.
In any event, we are exploring these pricing models to ensure we don't crossover into good opportunities.
Turning to our international business, we see generally steady activity.
Precision rig Dido six the newly built rig we delivered in mid 29 teams continue to perform very well delivering good returns for precision fully leveraging our steel in Kuwait.
Precision nano three also in Kuwait was idled again and about 2019. This is an ultra deep workover rig, which completed its planned workover projects well ahead of schedule.
I expect this rig will be reactivated by midyear.
In Kuwait, our primary focus is on extending or re contracting the two drilling rigs up for renewal late this year.
Last year, we were encouraged by strong bidding activity for idle rigs in criticized in Saudi Arabia.
The tenders in Saudi remain active and May lead to contract awards. Later this year. However, the increase tensions in Iraq have indefinitely delayed the projects we were bidding.
We will remain highly focused on finding opportunities in the broader region to reactivate these idle rigs as soon as possible.
Turning to our Apple Alpha technologies to clarify our curb our current market penetration at the end of 2019 34 rigs, we're fully commissioned equipped to Gulf automation, including two rigs upgraded in the last two weeks of 2019. Additionally, our trading rigs in Houston and Nisku are similarly.
Where we just the systems and test our new apps before the point the field.
In 2020, we plan to add an additional 24 systems, who will finish the year with 58 Alpha automation equipped AC Super triples, roughly half of our Super Triple fleet.
We will also trained approximately 100 more drillers I'd, rather just to be alpha automation subject matter experts and we remain highly confident that the.
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 two we have today refund to commercialize our Elfa 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 the segment to 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 cool the western Canada. This delayed well service seasonal rebound.
And this is also business that's very sensitive to short term commodity price volatility has proven to draeger 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 off rates. We achieve 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 to wrap up today by thinking the employs a precision drilling for their dedication their hard work and the strong results achieved in 2019.
I'll now turn the call back the operator for questions. Thank you.
Thank you, ladies and gentlemen, as a reminder to ask the question you would need to press Star then one on your telephone.
Withdraw your question press the pound cake.
So I wanted to ask the question.
Please standby, while we compile the culinary Boston.
First question comes from the line of correct.
RBC capital your line is open.
Hey, good afternoon.
Got it didn't occur.
Hi, 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.
Hey, Good question I had for you in context.
With respect to the.
Automation right you mentioned you had 34 rigs the.
Outfitted exiting 2019, you're going to add another 24 systems through the year.
So when you talk about on 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.
Yes, correct would have been declared commercialization back in December that was when we cross the point, where all systems are being paid.
There may be some although friction if we have a rig thats not operating right now I would comment that not all of the rigs are operating in fact, we mentioned the three in the Marcellus that were at least temporarily laid down but the systems. We have the field raydale that are out on rigs running of operating are being paid for.
Okay.
And then in the context of the evolution is happening with.
Kind of.
Unconventional contracting.
Our non conventional contracts related to performance based dynamics.
Can you give us some update on on how you're thinking about that I think in the past you've indicated maybe potentially generating anywhere from $250 a day up to maybe a couple of thousand dollars. They depending on how the rate was outfitted in the technology deployed.
Yes, I think as we as we look of our technology rollout over time and I'll, just I'll I'll comment on performance contracts at the moment, but our technology piece.
The base ALP automation system running of the rig which delivers consistent predictable.
Results, we price at $5900 per day, and then for the apps that we're adding one for various drilling functions or tripping functions or.
Or even survey functions of the well or or surface operations functions. The ups are being price to the range of between 250 at $1000 per day Windows apps are running it is sort of depends on whether or not it's just a hosting fee for a third party up would be the lower end of that scale overs appreciate precision developed up but maybe.
Generator up maybe tired of upscale but.
We see that anywhere from one to four EPS could be activity, given time, and Thats, where we get the.
The guidance towards somewhere between 251000 Boes per day of additional revenue as we develop more apps, but I'll caution you just two or commercial right now and we have a total of 30 more under development that should be commercial during the course of this year and.
Our partnerships on the ops 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 approve drilling performance that we think we'll all have value for customers.
Ill stop there now and just come back on performance contracts for a moment, we've had a couple of operators, particularly for procurement teams looking to.
Try to lever kind of lower day rates, but incenting us with performance type.
Metrics and performance Taipei.
It does meet a little different allocation of risk. So we're looking at those very carefully of ensuring that we don't.
Don't take on something which just really pushed down the rate of the rig.
And.
And in fact gives us more risk.
Okay, and then just just noticed.
No you're relative market share within the U.S. dipped a little bit.
Going into the or through the fourth quarter.
Any any particular cause of concern there.
Yes, I think.
I don't get too worked up over real short term trends.
Yeah, 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 where rigs and for our.
In summary services like automation, so don't expect us to take you say tactics to going to prop up market share will will stay disciplined on the pricing for our super spec rigs.
Okay, great. Thanks, Kevin good thank you.
Thank you.
Next question comes from the line of Connor Lynagh.
Sadly your line is open.
Thanks afternoon.
Hey, Connor.
Maybe just following on the back of Chris' question. There I think you had called out.
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 taking your lumps at this point or do you have any visibility.
Right Thats going to stabilize there just general thoughts around that market this year.
Yes, I think a short answer is yes, I think we're taking our lumps I think we feel like we're pretty stable environment right now I was actually expecting our rig count to be creeping up by now, but some of the jobs that we have lined up with just being pushed off.
With the commodity price radio.
You know, we mentioned up Felicia there was one other note.
Notable us transaction that.
You know eventually resulted us losing a few weeks.
Got it Thats fair.
Maybe just pivoting to Canada here.
What would you attribute that year over strength to is it.
Exemptions and conventional volumes what what.
What's driving that substantial year over year increase.
Yes, I discussed the regions, but didnt really say why so I think I'll talk first of all about the Montney differently I think the primary driver there is a strong natural gas liquids market with the pricing has remained firm and that's because the natural gas liquids get used as a deal you went for heavy oil and as the heavy oil projects like oil sands projects.
Lets get wrapped up the mining projects are increasing in scope right now that demand for that Diluents remaining strong.
I think the primary driver of the Montney and Duvernay activity.
And a little bit of really work happening on the.
LNG project, which will come on stream at about three years Dawn.
And then in heavy oil and particularly stratification drilling.
We watch that business pretty much get turned off several years ago, and a leg of new Sag D. Wells a leg of stratification work a leg of heavy oil work that occurred in 20, you know winter of 2017 winter of 2018, which are pretty 19 and listen this is not a full rebound get back to like 2050 levels, but it's certainly.
He 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.
You'll have a have a leading market share in that area right now and indications those customers are that the pace of Q1 will 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 but that's a that's the answer.
Appreciate I appreciate it I appreciate it.
Which is you have you seen have you seen that improvement in some of that heavier oil drilling support pricing for.
Smaller rigs or is that still pretty challenged.
We've got a rather unique position there and that we've always been large player in that space. I commented that are super singles rigs or ultra efficient and we're able to get a.
What I call unacceptable day rate for those rigs, even even with industry level activity levels being still relatively light kind of long term.
But for the Super singles regards air pricing and heavy oil.
Is that a range right now that we're comfortable with.
Alright fair enough thanks very much.
Great. Thank you Connor.
Our next question comes from the line of core site.
Capital Capital Your line is open.
Thank you for taking my question.
Could you give us some is some numbers around how many of your rigs may be exposed to dry gas in Canada.
Yes.
I think that we probably have led us exposure I've a recall in recent memory because that activities already running pretty slow.
It's generally.
Southern Alberta, southern such an area, where there tends to be a lot of competition. It's just area. We really haven't focused on before so I don't see us having a lot of exposure there at the edge at the edges.
You know two or three rigs, which is kind of why I expect de based will make up for that.
Okay.
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Great and so the fee as Steve 1500 rigs that you have down I'm, assuming those out in the Marcellus area is that correct.
That's right there in the Marcellus right now and we love to get those rigs back up and running given the right opportunity.
So would you consider to read of getting them to another basin or would you keep them in that and that basin.
Well walk here since there.
They are contracted for the full year, they're really under the control of the operator. So in fact be the operative bones contracts to decide whether or not they pay for the move certainly wouldn't be at our expense.
Okay fair enough and what that a 3 million dollar per quarter is that the right number.
So revenues from from those.
Rigs.
That will cause that'd be about right.
Okay. Thank you may might that's that's on a half.
Great. Thank you.
Thank you.
Our next question comes from the line up.
Hello, Sir.
Your line is open.
Hey, good afternoon. Thank you just a follow up to the prior question.
Potentially relocating some rigs from from basins like the Marcellus and others and stronger basins in the U.S. and that namely being the Permian from your competitors have talked about already doing that.
Back by contracts is that something that you've already done over the past couple of months or something that.
You are considering doing moving forward, obviously, assuming that you get a contract to backstop that movement.
Hub Taylor, we have moved rigs in the Permian earlier in 2019, we've actually moved some rigs around the basins in.
Permian Eagle Ford, Texas.
In Haynesville is we've got some injure based and movement.
I'd comment that.
Hey, Tom removal rig, it's going to be backed by a contract period.
And the cost of that move the cost of that move will be baked in the economics of the contract.
Yes or paid upfront other operator.
Would it be fair to assume that the pricing assuming it's an FC 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 three to six month.
As I said my in my prepared comments generally Marcellus aside for a moment generally.
Refunding pricing is pretty homogenous across the us right now.
And it's really more we have we Havent S. T 1500, which is kind of common with the.
For 200 horsepower rigs, we also have a little smaller SG 1200, which is actually quite common both in the DJ basin in the Marcellus, it's a lighter smaller cheaper rig but it offers.
Almost the same vertical depth.
Slightly shallower vertical depth to the same horizontal capability that's necessary for both the Marcellus on the DJ Basin.
And.
So we just see the differential rates between the 1500 1200, we don't see much differential between basins on 15 or gross bar rigs.
Okay got it.
Internationally, you talked about one one rig in Kuwait it sounds like it.
At least go down temporarily here in the first half of the year and into more which will be up for renewal at the end of the year any color on on the sort of the pricing dynamic for for those three rigs relative to the current average revenue per day that you posted this quarter.
We're not I don't think we give you the executive guidance on what we're expecting for international business right now.
You don't comment that we've done a very very good job in Kuwait. These high performance rigs that were essentially all newbuilds.
With.
Hi.
Highly trained precision crucifix are doing a good job, we're drilling deep high pressure wells I don't expect of I don't expect to have any.
Meaningful day rate.
Degradation on negotiations.
Understood. Thanks, guys.
Thank you.
Our next question comes from the line.
With JP Morgan your line is open.
Hi, Thanks.
So just kind of.
Summarizing a bit of some of your comments.
That sounds like you're pretty confident you can grow revenues year on year, just the typical caveats around commodities and customer decisions coming on a breakout for the back half international sounds like it could be getting better as well well servicing sounds pretty flat. You asked is more challenging is given the exit rate.
The outlook is roughly stable from here from our account perspective.
So if we put that altogether.
And 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.
Yeah. So we would definitely I think your assumptions or 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 decision 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 is pretty good.
Right Okay.
Thats helpful. Then just maybe to follow up on the Middle East discussion.
As you get that fleet up and running and the counts. There is 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.
Yes, I would assume that the the margin profile that we had in Q4 continues on into 2020.
But if we activate more rigs will there'll be no further fixed cost Virginia additions, so it'll be a flow through to the bottom line leveraging our scale correct.
Got it okay. Thank you.
Good thanks.
Thank you.
Your next question comes from the line of JB Lowe with Citi. Your line is open.
Hey, good afternoon guys.
Hi, Jamie just a quick follow up on the on the Workover rig that's rolling off now.
You said you.
Yes, 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 or would that be moving somewhere.
I'm not gonna comment right now we were involved negotiations and a.
One rig one customer one country, it's hard for me to see too much publicly.
Fair enough okay.
[music].
[laughter] on the just a question on the mechanics of the commercial position of the automation.
Is the way that you guys get paid for.
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 thats running.
So we're treating our pricing on automation and for that matter apps and automation.
As one of the Elkhart items, we add to the rig which is quite common the.
I know the.
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 Rick and we charged those as they look hard at or below the day rate for the rig so the rig can compete as a base rig, but if we added on like in Canada will add boilers in the winter will charge for everyday.
There is running.
In the U.S., we might out in the third Shaker to the rig will charge for every day this third shakers running.
In this case with automation will charge everyday the automation is running so it won't run during rig moves will charge for that.
But it will run the rest of the time.
Okay, great. Thanks for the clarification.
Last one from me is.
Canada, the getting a little bit tighter here.
Potent heavy oil side in the and NGL side.
And all the rigs that have moved out of the area do you foresee guys actually bringing rigs back into Canada.
Or would you comment.
I'll take that answer really short not a chance I still think theres still a.
There's still a number of Canadian contractors look into gains are yost exposure, but but that's because I think they've got an asset mix, which doesn't really suit the Canadian market very well some of them because of left the country were tele doubles.
Which are no longer competing with us in the Montney and duvernay because because for these development style drilling projects.
A pad walking triple will simply the best answer.
Hi, Thanks, very much guys.
Great. Thank you.
Thank you next question comes from the line of.
Good.
Your line is open.
Good morning, everyone.
And Ryan.
With respect to I guess, the ERP implementation and how it's going or less of a while I'm. Just curious if there's much left you feel you can squeeze from now with respect to cost savings and perhaps 10 units working capital that will further improve the balance sheet.
So and that's certainly a focus we're always looking for ways to manage the business with lower working capital on to squeeze cost out of the business.
I think most of that has already been achieved but where we think we can really show the performance that system isn't an increased activity environment, we think that where we're actually shown it and in Q1. So far this year. The only people that we've added in terms of headcount had been people in the field working on the rigs and we've increased activity.
45% from from where we are last year. So I think this the same thing in the U.S. International as we add rigs running and activity increases we should be able to keep fixed costs relatively flat.
Okay. That's that's helpful.
With respect to your I guess my fuel rigs are you seeing any increased demand from your customers given the appeared focus on.
And if so is there or is there much in a way of economic opportunity right now in and around those rigs that can offer that service.
Yes, again short answer yes, we are seeing increased interest in bi fuel rigs.
I think the bi fuel solutions is a really good solutions both for us in for the customer in that its a.
Really modest upgrade to the rig.
But does cut the carbon footprint dramatically for the rig and couple of cost of the rig and you know.
Yes, I'll take this comment the generally most things our industry has done going industry has been to reduce fuel content on rigs because.
Fuels, what are the highest input costs in drilling operations outside of labor. So in fact, a have you just respect over the last several years I don't know the industry. This will be reduced its carbon footprint per meter drilled.
Or any other industry that does anything on a per unit basis.
And.
Are you seeing any inc.
Is there any intention I guess to add anything anymore kits. This year or is that is that part of the upgrade capex at this point.
I think likely we will have more kits. This year I think this point, we think we have enough capital in southern current budget to do that.
But and I think will charge extra for those rigs would have the kit on there because there's value both to the customer and for us.
Economic value for the investment we make them 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 a fuel grade gas.
And.
We've got rig for example, the Permian Basin, we have rigs where the gas is being trucked in.
And while it's not an economic solution is a good environmental solutions, but I think the best economic solutions, where those fuel gas available in construction completed application.
Okay and.
Last one for me, but.
I mean wells are still being drilled books I know you Peter focusing on free cash flow.
As you go loaded markets 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 maybe looking for at this point in time that may require capital.
I don't expect will have to do any meaningful upgrades the fleet to change.
The.
I'll give you my definition of Super spec.
Or precisions definition super spec and that would be.
They see digitally powered rig that had digital controls. So it's an AC rig it's got a pad walking system.
So can walk X and Y in all directions. The pad. It has three mud pumps and 7500 PSR capacity, it's got hoisting in racking capacity to drill out 10000 foot laterals.
I think we have adequate number of rigs in the fleet right now to service to demand that we expect.
Unless there's some meaningful change and the commodity fundamentals upwards.
Okay. Thanks, very much guys appreciate the color.
Thank you.
Thank you as a reminder, ladies and gentlemen asked a question you would need to press Star then one on your telephone.
Our next question comes from the line of Blake General.
Wolfe Research your line is open.
Hey, good afternoon. Thanks for taking my questions wanted to start in the U.S. here.
We haven't really seen a flattish rig count or the expectation of a flattish for account for the foreseeable future I was wondering I'm just given some of the push by that we've gone from investors on where day rates could go from here theoretically in a flat rig count environment.
Given some of the Superset 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. So you can kind of pull levers in terms of a flattish rate kind of environment, maybe getting a little bit more juice on the margin.
Thanks, Yeah. So I think first off in a flattish overall industry recount environment I still think there's.
I.
I think the numbers in the two to 300 range number of rigs that would be hybrid and thats rigs that are operating right. Now we're pleased 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.
Our qualities high quality rigs that we know that even increased one super major right now just looking at reducing their contractor count dramatically. That's a high grading our SaaS delivery of picking <unk>, our grid rigs. So we think thats going to drive demand on super spec rigs, but beyond that.
There's no question that we are delivering.
Measurable real value with health automation that we think that further enhances our ability to differentiate the precision rigs that we think that will drive our market share independent of overall rig count So I do see.
A clear Avenue in clear path to get additional revenue per rig with automation and additional market share with automation. So I think we have to clear.
Growth vectors that are independent of rig count that but I think I think that it's logical to expect there to be high grading of lower quality lower prices lower performing rigs industry right now we've seen that over the last 18 months, we'll see it again for the next 12 months.
Okay. That's helpful. And then just seeing your alpha comments and turning to directional drilling integrated directional drilling in some of that you've implemented for a while now any sort of customer preference now that were overlaying the digital side on sort of a bundled 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.
Well, we still have directional drilling capabilities in house in the Western 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.
Continues drive price down which is attractive to the operators and.
No I commented that Theres, a cost of switching drilling rigs, it's interesting often when operators change directional drilling contractors.
Theres no cost or could even be a cost benefit to them just wish they can sometimes get somebody coming to replace the existing contractor mid hole and save money. So there is if you could view it as a negative cost to to switch.
And I think that dynamic is making the directional drilling business still rather bumpy.
Ultimately, we sit back and look in five years time, I think that the rig software will will dictate directional drilling, but but it gets going to be a transition period.
And it sink.
We need to see the directional drilling business really.
Really count ticket on the on the Chen for Wild boar, that's going to tick tick route.
What's happening right now.
Got it and then one more thing squeeze it in you mentioned the debt reduction targets for this year you upsize the four year reduction target to 700 million you've been opportunists 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 deploy that would you deploy that too to operations would you continue to buy backs.
Errors or would you allocate any excess cash flow to debt pay down.
I think we look at all of those opportunities it depends if the at their good economic opportunities to deploy upgrade capital at good contracts that would probably be our first preference after debt pay down a then after that we'd look at.
Where our bonds are trading the open market, where our shares are trading and see it makes sense to play access capital. Neither one of those spaces. So I think we're in a in a pretty good position without having strong free cash flow. We we have some options on how how we can deploy that cash.
Got it really appreciate the time thanks.
Thank you. Thank you.
Thank you.
Tom I would now like to turn the call back over to death.
Thank you for joining today's call and look forward to speaking with.
First quarter 2020 result.
Ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect everyone have a wonderful day.
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