Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the precision drilling Corporation, 2021st quarter results conference call and what counts.
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I'd now like to hand, the conference over to your speaker today.
Mr. Delson honing manager Investor Relations and corporate development. Thank you. Please go ahead Sir.
Great. Thank you Daniel Good afternoon, everyone welcome to precision Drillings first quarter 2020 earnings conference call and web cast.
Participating today on the call with me are cabin W. President and Chief Executive Officer, Carryforward, Senior Vice President and Chief Financial Officer.
There are a news release earlier today precision reported its first quarter 2020 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 care a 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 and uncertainties that could cause actual results to differ materially from our expectation.
We see our news release in other regulatory filings for more information on forward looking statements and these risk factors.
Kevin will begin today's call with an overview of precision to response to covert 19 pandemic.
He will then discuss our first quarter financial results, followed by Kevin's operational update and outlook.
With that I'll turn it over to you Kevin.
Good afternoon, Thank you Justin.
The impact of the Cobot 19 endemic has been profound.
That's a global population, we shared the hope listings ideas for ourselves and our families. Your old managing to stay at home orders and troubled dance living through the resulting economic downturn job losses.
Same applies to precision.
We aligned our retrained teams are 15 to 25 people rig crews working in fourth quarter stickier business.
Well, there's central service, where people are required to work. They must also deal to see personal concerns health risks Kotak risks you probably EXONDYS melters.
This was heavily in our people I'm deeply proud of highly professional attitude exceptional level of performance akin to demonstrate these challenging times.
Oh, you may recall on precision fourth quarter mid February earnings call.
Identified the potential risks in impacts we might be student with the emerging virus.
Was included the health risks to where people.
The price risk.
Customer demand risk.
Just a few weeks later those risk we keep real no intensified by the trouble dances digital borders.
Persistent responded immediately living pandemic safety management plan to ensure that health and safety first up north stakeholders. The plan apply to all precision rigs shops and offices.
Happy to report by moving quickly we've avoided any interruptions our service we've experienced no Rick shutdowns no work limited virus outbreak.
Well what to think all the people of precision work safely Lucky Subleases is troubling period fully standing or services to our customers that's essential component of the global energy supply infrastructure.
No. That's the world responded older measures to flatten the curve a little bit to spread the virus, we expected oil demand destruction, we expected reduced commodity prices did this customer demand.
However, we did not anticipate the second compounding blocks one of them the Opex plus break down the oil price war led to negative WT I prices at the end of the prior forward contract Korea.
Nonetheless, we responded quickly and aggressively people that are the series a business measures, which grew one shortly.
All are focused on preserving cash briefing precision point extended downturn.
We believe these measures, which we'll see precision in excess of 100 million doors and casual close this year. Most of these measures the sustainable through the downturn will position.
Precision as a leader and stronger drilling with inevitable recovery.
I do want to express my best wishes portfolio Speedy recovery to anyone who is exposed to were affected by the quarter night grown a corporate 19 virus.
I also want to express my sadness to the thousands of oil field workers and putting those for precision.
Through no fault of their own Buster jobs in some cases their careers their loved ones. It's.
It's my expectation that we will look to be a truck dock needles precision people in this industry recovers.
I'll now turn the call over to report to discuss our second quarter results and the cost saving initiatives.
Thank you Kevin.
Before I cover the first quarter financial details I would like to review some of the cost saving initiatives precision has captured in the past six weeks.
All initiatives outlined in our March 24th press release have been implemented and any associated charges were incurred in the first quarter.
The cash savings impact starting in Q2 will be substantial and the run rate guidance of 30% fixed cost reductions and 30 million dollar reduction in Gionee still stand.
We have scrutinize every cost item within the organization.
Implemented companywide workforce salary and benefit reductions, including executive team and board.
Traveling entertain budgets have been slashed along with every other administrative costs were influence as possible.
We expect to benefit from government programs, such as worker assistance and tax deferrals and have had secured deferral of certain other payments into 2021.
These programs and deferrals.
I will provide precision with up to $20 million, an additional cash this year.
Cost reduction efforts deferrals and Capex reductions.
Our expected to reduce 2020 cash spend by the organization by well over $100 million.
I will now review some of the first quarter financial details.
Our first quarter adjusted EBITDA of $102 million decreased 6% over the first quarter 2019, the decrease in adjusted EBITDA, primarily results from a 30% reduction U.S. activity.
Set by 33%, increasing Canadian <unk> drilling activity.
Also included in adjusted EBITDA during the quarter is $10 million and severance and restructuring cost related to cost reduction initiatives to prepare the business for a lower activity environment.
In the U.S. drilling activity for precision averaged 55 rigs.
Decrease of eight rigs from Q4 2019.
Daily operating margins in the quarter were 9344 U.S. dollars a decrease of 532 U.S. dollar from Q4.
Q1 margins were negatively impacted by lower average day rates and higher average cost offset by.
I'd be see revenue during the quarter.
Absent impacts from I.B.C. turnkey and onetime recoveries in the fourth quarter daily operating margins would have been.
Actually 8300, U.S. dollars per day, or 200, U.S. dollar per day lower.
Thank you for.
For Q2, we expect dairies in margins to be supported by contracted rigs and I'd be see revenue with operating costs negatively impacted.
By fixed cost absorption.
Moving to Canada.
Drilling activity for precision averaged 63 rigs an increase of 15 rigs from Q1 2019.
Daily operating margins in the quarter were $7205 a decrease of $1317 from Q1 2019.
Absent shortfall payments received in the prior year daily operating margins would have been down approximately $500.
For Q2, we expect margins to be negatively impacted due to fixed cost absorption.
Internationally drilling activity for precision in the current quarter increased 1% from Q1 2019.
International average day rates were up to $54294, a 4354 U.S. dollar increase from the prior year.
And our completion and production segment adjusted EBITDA This quarter was $3.2 million down $7.3 million compared to the prior year quarter. Adjusted EBITDA was negatively impacted by $2.3 million restructuring charges during the quarter and a decline in while service activity, which was negatively impacted by extreme cold weather.
Preventing us from operating many of our rigs during the quarter.
Capital expenditures for the quarter were $12 million, our 2020 capital plan remains $48 million a decrease of approximately 50% from the beginning of your guidance.
The 2020 capital plan is comprised of 36 million for sustained in infrastructure and 12 million for upgrade and expansion.
We added nine contracts through a contract book in the quarter and as of April 29th We had an average of 46 contracts in hand for the second quarter.
In an average of 42 contracts for the full year 2020.
As of March 30, Onest 2020, our long term debt position net of cash is approximately $1.4 billion and our total liquidity position is over $800 million.
Our net debt to trailing 12 month EBITDA ratio is approximately 3.6 times and our average cost of debt is 6.8%.
Maintaining a strong liquidity.
Position is our top financial priority and we plan to resume debt repayments when visibility improves.
For our cash on hand exceeds our expectations.
Further to maintaining strong liquidity, we reached an agreement with our senior secured lending syndicate to relax certain debt covenants in our revolving credit facility through Q1 2022.
Namely the EBITDA to interest Covenant, which is currently 2.5 times.
Although we are well clear of this covenant today, the extent of the recent downturn is unknown and we want to ensure access to all sources of liquidity, including our revolver.
In the first quarter, we purchased in canceled approximately 3 million of our outstanding shares.
I'll note that we have significantly reduce the pace of or share repurchases to a minimize level.
As a component of.
Our cash conservation initiatives.
For 2020, we expect depreciation to be a box approximately $320 million.
We now expect SNA to be approximately 65 million to $70 million before share based compensation expense.
This guidance compares to the 2020 guidance provided in February $90 million.
We expect cash interest expense to be approximately $100 million.
We expect cash taxes to remain low with our effective tax rate to be in the 20% to 25% range.
I'll now turn the call back over to Kevin.
Thank you Gary.
Looking forward into what is likely the deepest and tapas downturn of experienced some at 38 years.
We've been investors should be most focused on a few key parameters the oil service providers. These key parameters.
Are the Companys financial and competitive positioning management's record controlling us business the delivery of those commitments.
For precision, we screen very well across all of these.
Starting with our financial positioning.
There's no question that we are carry more debt that we would like but you should know that this is this management team has been acutely focused on debt reduction and management of maturities for several years.
Progress with very good exceeding further increasing our debt reduction targets, while positioning the company.
A stronger than even just a couple of years ago.
Debt reduction remains a priority of precision.
However, as Gary mentioned, well the drilling well the business is declining long term visibility remains part of our near term focus has shifted to maximizing our liquidity runway maximize your cash generation and ensuring we sustained full who both directions.
Preemptively seeking revolver covenant relaxation speaks to how we intend to stay well in front of any potential limitations managed tightly everything we control.
Regarding cash generation I think juries cover those points in his prepared comments very well, but I'll just add on a daily basis.
Line by line review, all spending all cash receipts for cash commitments and all receivables.
We are very tight grip and every penny with our gross.
We recently upgraded our ERP system, which provides real time granular visibility and oversight on every line other very prospective spend to.
Item proving to be invaluable tools, we try to controlling spending.
I believe we're very well positioned financially to manage through an extended period of very low customer demand.
So turning to our competitive positioning I also believe the precision is very well positioned.
Our strategic priorities of operational excellence and technology commercialization local line to position us very well during the downturn and ideally for the eventual recovery.
Regarding our technology initiatives, we continue to generate the expected commercial returns with our alpha automation systems.
We're making good progress introducing help analytics that help ups in the field.
During the first quarter, we increased our alpha automation coverage by adding six rigs to bring our totaled 40 rigs, including her to printing rigs separately by 38 rigs in the field adult automation.
Currently our plans are taper back further installations until we see customer demand for rigs improve.
In the first quarter, we partnered with the U.S. customer focused on natural gas drilling to trial Ulta analytics on their group of precision rigs. We believe the efficiency improvements are already being your dollars by the customer and we expect to fully demonstrate the value of the services rubber grosses.
Also during the first quarter, an iOS the operating in the Permian has activated elf automation on older precision rigs will also be utilizing several ups.
We believe the success of this program should also leads market share gains this year progresses.
So we expect that when the Rick Rick market stabilizes, our customers will shift their focus back on capital efficiency drilling efficiency and overall well construction cost improvements and there's no question. The digital technology will lead these efficiency gains and cost efforts and precision is very well positioned as a drilling contractor first mover.
Regarding our operational excellence strategic focus.
Our year to date market share strength is already demonstrating the success of this initiative.
In line with our mid February conference call guidance Precisions U.S. market. Your increased by a few rigs to peak at 58 in late February we held up level until late March.
Fact, only when the oil price volatility escalated did a rig count begin to decline we ended the quarter with 56 rigs operating three rigs on ITC.
Looking at Canada, you May recall that we picked it peaked at 83 rigs running late January.
I'll point out that our market share was in the 32% range a record high for precision.
We hope that share with activity in the high Seventys through the end of February and only a mid March two activity decline.
Overall precision is activity in the first quarter in Canada ran 33% higher than 2019, well industry activity was up less than 10% clearly just give us ready our activity gains.
As we entered this downturn I was pleased with our competitive positioning and through the first six weeks of the rig count decline, we continue to modestly improve our market share.
Do you have us today, we have 35 rigs running with five on IVC.
Over the past couple of weeks, we've noticed a pause and customer discussions to reduce activity.
It seems that most of the near term spending decisions have been made are now being implemented across the rig activity by our customers.
As these decisions work through the system, we do believe industry activity should continue declining for the next several weeks.
For precision, we expect our U.S. activity will settle low thirtys for the balance of the second quarter, reflecting a 40% to 50% decline from the peak.
We expect the five rigs and IVC will continue through the second quarter.
We are seeing potential to add a.
The handful of rigs later this quarter or into July natural gas prices from up into the summer months.
In Canada March ended with 15 rigs active for precision currently we have 11 rigs active an industry has only 23 rigs both setting historic lows for the Canadian segment.
Seasonal recovery prospects in Canada, our week, we have visibility on potential activity for precision moving into the upper teens, a low twentys third quarter, the progressing towards the upper twentys or low Thirtys later in the year. We do expect all time industry. Most the Canadian priest regional will persist through the year.
We do believe our fleet of had style super Triple rigs and the highly efficient precision Super single rigs will support from Canadian market share in the second half 2021 of the first off we.
We also believe will remain well positioned with the eventual rebound in Canada, we will benefit from our scale cost leverage throughout this downturn.
With our international segment.
Well the businesses generally more stable than the seasonal Canadian and cyclic us markets. We expect the low commodity prices in the country Lockdowns may have an impact on activity.
As we mentioned previously two of our SG 3000, Kuwait drilling rigs are up for contract renewals. Later this year, what we still believe those rigs will review, we expect potential delays with the administrative walk down underway in Kuwait.
The balance of our Kuwait fleet is under contract to a full year and should continue with no interruptions.
We expect our three rigs in Saudi Arabia, we'll continue to operate for the full year as those rigs are also contracted.
Through next year.
We will continue to market, our four idle rigs in the region several active tenders, but do not expect to be near term contract awards.
Really.
Long term visibility has not developed Oliver turn contracts are performing as expected, but we believe customers will remain very cautious regarding long term planning waiting until the economy reopens.
Normalized oil demand it was restored excess oil inventories are well managed.
So turning to our well service business as Terry mentioned activity in 2020 started slower than expected due to the cooler wetter weather.
And as the WCS price felt a very low levels. We ended March just a handful of rigs running.
Continued with very low activity through today.
The recent Canadian Central government announcement to provide $1.7 billion a funding for little about vendor Vince will have a significant impact on this business.
These funds will be distributed to each province for administration and disbursement.
The province of Alberta has already released guidelines.
For the first phase of its $1 billion allotment.
The province has promised the funding will be provided directly to service providers in maximum 30000 dollar watts to work with well order some energy benefits.
We believe this is an excellent way to direct the funding to create the maximum number of jobs that have the best industry impact.
We think the federal government for making the funding available we congratulate the Alberta government for creating a capital efficient disbursement process.
Create jobs and support that you, having well services segment.
For precision.
We expect to garner our share of the work in this and we expect this may lead to a significant improvement in this business, while preserving several hundred very important fuel jobs.
The direct impact on the well servicing industry should be in the several hundred million dollar range.
So to conclude I'd like to thank all of the employees a precision for continuing to perform at a very high level. Despite the challenges will face during these troubled times.
I'll now turn the call back to the operator for questions.
As a reminder to ask a question you will need a press star one on your telephone to withdraw your question press the pound key.
Please standby well, we compile the Q and a roster.
Our first question comes from James West with Evercore ISI. Your line is now open.
Hey, Kevin Berry.
Hi, James.
So.
Yes, Kevin, especially you the fortunate thing here is the you've been through several of these.
Maybe not this sharp and caused the same way this was but.
You got the playbook, you know what to do I thought it was really interesting that the comment that you made about discussions with customers in the last few weeks of.
Of change to the change too.
I'm not talking about reductions activity more most of those decisions have been made could you perhaps elaborate a.
A little further on that kind of.
Are they firm decisions that have been made is that a wait and see period is there some type of oil price dynamics that are counting on or budgeting for you or could this quickly reversed and go back to okay. Here's a further cut I guess the rocky.
Maybe the short answer would be yes to everything you said.
Okay.
But but James probably.
A little more helpfully, let me kind of walk through what I think is going on we've seen this over the last three or four years really going back to 2014 win.
Our customers have higher range of uncertainty they tend to do a lot of action kind of prior to.
Normal cycles of public disclosure like quarter ends so when there's lot of uncertainty, we see them cutting rigs. When there is strong price, we said, adding rigs they do most of that work in advance of their public disclosure. So they can come on their conference call or their press release and say we have already changed our budget. We've made the cuts is done.
So I think that I think that work finished for our customers couple of weeks stock now they have been preparing their financials and getting there was still is ready for their Q1 reporting much like we do ourselves.
But I think everything right now is femoral and could change recognized that.
We've got a nice footprint to natural gas drilling, which I think is.
Stronger than oil right now we have customers are hedged double digit will continue drilling through the year.
I think that most of our customers have good rigs.
The joined departments really hate to Rick let the rigs go because the crews are trained up and understand the drilling program. There is a moving costs to be mobile was the rig which you don't you know the services.
So I do expect to see a little bit more stability and drilling than maybe some of the other ancillary services.
Combined that with the hedge books and natural gas drilling.
So I feel like were stable now through the quarter, you'll see all things look in Q3.
Okay, Okay fair enough, Kevin and then a follow up for me with the long term commitments that you have.
Would you entertain rate reductions there or would it have to be.
Give a little on rate you got to give me a little more on timing of blend and extend type conversation.
Yeah.
I think the best way to describe it James is that.
We are highly disciplined in tracking our revenue per period. So we can contain revenue and EBITDA inside a period Thats is very important for us thats. The first guiding principle inside our team, but we also want to show our customers that were prepared to work with them and show some flexibility.
I would say that are leased preferred method has led to an extent I think there's other things we can do.
Over to help our customers around their economics.
Okay, Okay got it thanks.
Great. Thank you thanks James.
Thank you.
Our next question custom tailored searcher with Tudor Pickering Holt. Your line is now open.
Hey, good afternoon. Thank you Kevin I just wanted to follow up on on the answer to the last question it sounds like.
You expect us to bottom in the U.S. and the low Thirtys looks like you've got I think 33 contracted rigs in in Q2.
So.
Inference to make that at least for precision I mean, you talked about the opportunity to add a couple or a few natural gas focus rigs.
In the next couple of months is correct in France to make that.
Seems do you like the rig counts going to actually bottom in the U.S. in Q2.
Or is the visibility, it's still too limited to make that call today.
Well I.
I'll stop short of calling a bottom, but I would tell you that I think that as far as the second quarter goes our customers have have completed their planning.
And they'll start looking at the third quarter once they get through their disclosure period right now so.
I'd also add that.
With this level of uncertainty I think that the cuts they've made aren't going to become next few weeks.
Are probably going up.
Over correcting for the uncertainty.
So.
I would not so I'll summarize by saying I wouldn't be surprised rig count bottoms late in the second quarter.
But it's really hard to say.
Okay, Okay, and just following up in the U.S. and hearing you Quantative guidance on margin for Q2, clearly, there's some negative headwinds both on the on the pricing and fixed cost absorption side, there anyway to frame, which ones a bigger headwind for you heading into Q2 I suspect on the on the day rate side.
Going to be essentially 100% contracting activity at fairly good.
Rates for the anyway to frame the magnitude reduction on either the revenue per day side and the cost per new side heading into Q2 in the U.S.
Hey, Taylor, so I would say that quantifying what what our margin guidance will be is difficult to do the day rates will be really well supported from contracted revenue and idle but contracted rates.
We do have a bit of headwinds with fixed cost absorption just for lower activity.
But we expect to counter a bit of that with just more intense cost control and.
Some price breaks where we can get them with.
Third parties and our operation.
Okay, guys. Thanks, guys.
Thanks dealer.
Thank you. Our next question comes from Aaron Neil with TD Securities. Your line is now open.
Afternoon, guys.
You've announced some proactive steps today clearly.
Improve the liquidity position, but you've also alluded the fact that demand for your services will be significantly reduced well into next year.
Also can't help but draw comparisons to 2016 precision that much higher debt levels, but was also sitting on 475.
So carry I guess Im wondering are you more or less comfortable with the overall financial position today than you were saying in Q1 in 2016 and to the extent as you'd be willing to share it.
What kind of stress testing of you down to give yourself comfort over the covenant release.
That precision cannot stand up prolong downturn, maybe also be able to quickly rebuilds working capital and recovery.
So that's I.
I think there's there's a lot of factors that plan to those decisions in those sentiment I would say that the thing that gives our team some of the most comfort is our ability to ramp up and down cost and that's operating cost the business fixed cost.
And capital expenditures so the the amount of EBITDA, we need to generate free cash flow is can be pretty low. So I think from that standpoint being remaining free cash flow positive. It's something we're confident we can do obviously getting access to the revolver is quite important.
And that's why we went and got the Covenant relief a lot earlier than I think probably what most people would expect.
And you will notice I think a a slight shift in our tone on uses of cash I think when.
We were going through 2018 in 2019 and we've had.
Pretty good visibility and we're signing contracts or we could put all that free cash flow towards debt reduction and we committed to do that we exceeded our targets.
Just about every quarter.
Now, there's a bit less visibility we've got a good cash balance we've got full revolver access and I would say, where we are likely going to focus on maintaining strong liquidity.
Until we get more visibility or if the cash generation.
We realize is greater than what we expect.
Our wafer either one of those needs to happen before we start reducing debt more.
Darren I might add a couple of points.
On the kind of more a market positioning today versus 2016.
Now, let's say that.
Even over the past four years, you've seen a tightening or consolidation in the space.
Around the tier one rigs and kind of the top four or five pillars in the Western Canada, Canada, you've seen actual oh.
M&A consolidation so the markets and were constructive now than they were back in 2016.
So we think our market position is a bit better than it was back in 16, both in the Western Canada and expect to see good discipline through this downturn and other rebound side by ourselves. The other major industry players. So we think that gives us probably a more confidence and network in the bottom in the rebound.
And then I'll, let him one other point there and I think this is a comment for precision, but also probably for the industry.
In 2014.
The industry in the U.S., we were running about 2000 rigs and then went into us really steep downturn. So I think.
Companies mentalities cost structures, a lot of things had to be changed.
Pretty drastically as we enter this downturn, although in percentage basis, it's it's very steep and steeper than what we've seen I.
I think the industry has been through six years of cost controls efficiency gains and the mindset is already there. So I think we can act a little bit quicker.
To adjust to lower activity environment.
Okay, that's helpful and Kevin you already.
Sort of alluded to it and I can appreciate there is effectively no price discovery today.
So rather than getting specifics on where you think pricing may or may not know, perhaps you can.
Kind of outline for us at least anecdotally, what we can expect some precision in a scenario where even super spec rigs are.
Trading much lower utilization.
They have in the past.
Yes, so I think.
We talked on my prepared comments about technology, we talked about.
Analytics and.
Health automation I do expect that those will be differentiators.
During the trough.
And absolutely during rebound the performance will be notable on those rigs and it's not just precision there are others doing similar things industry right now, but it's really limited to just three or four contractors. So I expect that expert you'll see unusual disciplined both around service provision and quality of service.
And pricing through this downturn.
Beyond the until you expect against much more disciplined but our customers are able to measure this better we demonstrated better performance.
I'll stop short of giving you any numerical guidance.
Hey, Thanks, guys I'll turn it over.
Thanks, a lot.
Thank you. Our next question comes from Connor Lynagh with Morgan Stanley. Your line is now open.
Yes, Thanks afternoon everybody.
Garner.
I'm wondering if you could discuss and maybe it's too early to tell but has there been any material shift in the number of services. Your customers are asking you to run them I'm, specifically, referring to the apps.
Other digital services that has that been a target for cost cutting or is the sort of mix generally similar across your rig fleet as it was say six months ago.
Well, there's been a whole bunch of changes between today and even even 10 weeks ago corner, but I mean, we've been dealing with the procurement departments. The legal departments. The finance departments for the last six weeks, we're not getting calls from operations about turning down rigs running calls from the Chief procurement officer, who reports to the CFO.
How about how to exit the contract so most of our discussions have been.
Commercial legal in nature.
Not so much round operations with the exception as I mentioned around technology.
Which is why I kind of hinted that we expected the once that that exercise. It's finished which would maybe maybe you can just right now for the meantime that we'll see our customers lean back into their operations teams to optimize the fuel performance. So.
In fact, I can tell you most in many cases the operations teams have been.
Shuttled aside while the finance teams the procurement teams amenities contract books.
And it's become a liability management exercise for their customers not so much and operations management exercise, but we do expect that will ship dock and.
We think it could get back pretty quickly and for two accounts I mentioned, the AOCI and for the natural gas driller, there remain focused on efficiency and they've got upon in place we're pursuing new elements of technology with both of those right now.
I don't know if I've answered your question directly or indirectly, but they've got covered the topic [laughter] I think you got to just I.
I guess the new one remaining question on on the technology side of things.
In these discussions have there been just conversations about potentially lowering altering the price more pricing arrangement on the services or is it entirely focused on rig day rate.
Well I'll give you my standard lines. So from the procurement teams there have been pricing pressure on every single levered they can pull.
So for dealing with the procurement officer to lead the company any leverage you can pull so.
And we heard while talk with his performance based contracts tuck in February and these oil index contracts those contracts up more levers and we watson's procurement agents to try to pull more levers and if you have additional items like technology and.
Even maybe casing running.
Every price point on that contract as a lever for that procurement office and pull we'll try to put and our job is stay disciplined and justify our value.
So I don't think the game has really changed.
I think the more the more price points, we give them to negotiate the more work. They think they have in front of them in our job to stay disciplined and validate our value.
Yes, that's fair thanks very much.
Q.
Thank you. Our next question comes from current Holland with RBC. Your line is now open.
Hey, good afternoon.
Sure.
Yes.
You guys I just wanted to do just give an update in the context of your comments yes.
Very specific debt reduction targets and have been plugging along on that for last couple of years now.
And then just wanted to calibrate carry you made a comment about your resume your debt repayments.
Once you get a little bit more visibility and enormous cash were to exceed expectations. So can you just give us a general sense and as to maybe what the cash level.
Benchmark is for you to start going to restart their processes of paying down debt or just to clarify if I'm misinterpreting your comments about that reduction would be helpful too.
Yes first of all I would say that the the goal for the year remains the same.
But we're probably going to slow down a bit on the the pace. We did 40 million in the first quarter and I wouldn't expect of $40 million reduction in the second quarter and in terms of.
Cash on hand.
It's been a function on what our.
Contract books looks like and what our visibility is on how much cash we're comfortable.
A little cash we're comfortable holding up but just a ballpark. It I think kind of in that 75 to 100 million range is right now.
The amount that we want to.
I want to make sure we have access to it.
Okay I appreciate that and then I just want also kind of gauge based on our working capital.
Do you expect working capital to to provide a.
Positive contributor to cash this year.
Yes, absolutely on on the press release in.
In March on kind of our cost reductions and an update our liquidity, we said we expected.
Kind of 80 to 100 million of working capital to convert to cash.
From the first quarter onwards, I think we got a little bit of that in the first quarter, we'll have a good chunk in the second quarter and maybe a bit more in the third quarter. So I think that guidance still holds.
Okay. Thanks for that Kevin given.
Like almost a trying to trying to think through okay, everybody is managing through the downturn.
He is going to reduce costs both on the front on on the drilling front.
And then you get to the point, where you know economy rebounds, you get some demand oil demand rebound and some oil price recovery and then the restart.
Inquiring about putting rigs back to work or whatever.
Given the sharp reductions and workforce and so on what kind of lag effect do you think there might be.
When they're starts to be some signs of recovery and Nene piece want to put put rigs back to work and how many of these people do you think you can ultimately kind of draw back into the industry any any perspective on that will be really helpful.
Kurt I think it's a it's a really good question is actually fairly complicated, but I can give you a couple of case examples so.
Q1 in Canada activity exceeded what we expected and we still met the demand by stuffing rigs and getting probably.
10 to 12 more rigs running that we expected to be period.
And that was going from a base of.
During the Christmas break period got done those around 30 rigs we fired Buck up.
50, or 60 rigs in about a three week period.
I think that shows our short term ability to flex up and down in Canada. So weve hardwired in Canada to deal with seasonality separate calorie short term long term cycle. So I think the demand rises in Canada, our team up there.
Despite having gone through some pretty major cost reductions in our basis and our headquarters in Canada. So responded and getting to expect work.
In the U.S. here.
You know the business is not seasonal were not used to having to ramp up and down seasonally.
But I can tell you we've been very.
Very targeted with our staffing so we preserved our rig managers our field super attendance at our drillers by shuffling around onto rigs so that.
Our crews are getting better and better because we're getting we've got more rig managers operating as drillers have more field services rig managers right now so when it does come to re staffing.
I think bumping backup into that 50 60 rig range, we already have leadership teams on hand, right now in the company and will preserve them.
For the coming quarters, So I think getting back up to what the activity levels. We had in Q1, we can do that.
Quickly efficiently.
You know in a matter of weeks or a month or two.
Getting beyond our Q1 activity level say, we want to go from.
You know 60 us rigs into the rig range.
Sites are taking a few more weeks up to that weeks and maybe into a month or two.
I hope to get the plan for those days someday soon.
[laughter] all of us with for sure, but maybe just one follow up as well you Kevin I know that again, Theres limited kind of data points to work with send us.
With respect to pricing, but I'm sure there's multiple.
Data points to work ways in terms of letters from client customers asking for price concessions.
What's what's your sense on that and I ask the question just because in the us.
As in Canada, as an oligopoly stake business.
You're not really going to incentivize more rigs going to work by dropping price. So just want to get general sense for how you think the industry may they react on on that dynamic as we kind of going through this downturn.
You know.
There is no price of which we can offer a drilling rig that will lower their cost to breakeven WT at $18.41.
So it's simply not price cut we can give will make them breakeven.
We don't that.
Our our large public peers know that well quite disciplined.
I think we're going to want to show flexibility responsiveness, but I don't think weekend transfer value from our rigs.
And wrote our rigs to support our customers I don't think it'll happen.
So.
No I just don't expect you to see a large public companies operating a cash breakeven levels, which it which would not paid and appreciation or the maintenance capital those rigs.
Which supports pricing.
Upper teens, low twentys not not low teens.
Excellent I appreciate that color Kevin very helpful. Thanks.
Thanks for.
Thank you Sir our next question comes from Blake Gendron with Wolfe Research. Your line is now up.
Hey, good afternoon, thanks, guys.
Pretty interesting commentary the federal government the federal DNA program that you mentioned.
Just wondering out of the one or 2 billion that that was cited how much of that falls into.
Part of the value chain that your CMP segment operates and then what your market share is and then potentially what the timing I guess of this.
Program could be over the coming quarters, it's been a small part of the model, obviously, but just help us gauge potentially as a buffer to downside risks and other segments.
So the first comment I'll make sure that after the political announcements gets made it often takes a few weeks to get the.
The bureaucracy in place to actually execute these plans but.
What we have seen so far is that the 1.7 billion split between Alberta, British Columbia discussion with Alberta, getting the largest portion Alberta hit the ground running and they announced they're going to be opened for application starting tonight.
To start applying for those 30000 dollar chunks that will come straight to the service company. So ourselves along with cementing companies consulting companies will be applying for those 30000 dollar walks in and working with our customers to identify targets for.
For a you know well abandonment and.
That's what's going to progress forward, just thinking about the full value of the 1.7 billion probably in the range of between 50, and 70% will flow to well service companies like ourselves.
And this is targeted to lost through 2022, so it's a.
Two and half your program.
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Our market share in Canada would be anywhere from 12% to 15%.
We would think that.
There has been some attrition in the Canadian fleet and that could continue because.
I think some companies cannot survive becoming weeks, even with this incentive program.
So we could see our market share gains even in a a tough market in Canada as we could garner even larger than our regular market share of that spending.
But if you just flow through the math, that's a material change for us I could be.
The tends or 20 million dollar range this year alone, which would be very helpful for that business.
Got it and that's a that's helpful. And then just following the market positioning questions. The rig count fell pretty substantially in the last downturn just like it is now but underpinning the last downturn was a secular adoption of pad optimal rigs I was just wondering these are long lived assets. If there's anything from a hardware standpoint that might see some of the old.
They're even pad capable units start to come out of the market in this downturn and then if you could specifically call out which attributes of the rig kind of be a threshold for that.
Phenomenon, playing out or do you think it's going to be more the digital side in terms of differentiation as we as we exited this downturn.
Yeah, you know I think that's a good question you know for sure some of the pad rigs that were delivered early in the cycle.
I have worked hard for a long time mud pumps get went up pretty quickly top drives get worn out.
While the rotating machinery gets worn down the mud tanks are being used a lot walking systems get used a lot. So.
And then when you hit a downturn like this I'm sure some companies will get into a cannibalization mode, where they're not maintaining things quite as well as they might have a two or three years ago and cash flows are better. So I do expect that even some of the pad optimal rigs.
We will be become economically and viable require so much capital that that market size will shrink a little bit.
I'd expect it to larger druthers ourselves and put it up done a pretty good job maintaining their assets.
I don't I have I don't foresee any retirements that precision pad optimal fleet or Super Triple fleet.
The next couple of years I would think a larger peers are much the same position. So I do think several small but smaller players that maybe more stressed or distressed you find the rest it's become a little less relevant.
David argue with that and.
I don't see inside their numbers like empty for sure.
Got it we'll see it play out over several years I appreciate the thoughts and Chandra I'll turn it back.
Thank you.
Thank you. Our next question comes from well car seat without a quarter. Your line is now open.
Thanks for taking my question good afternoon, Kevin Kelly.
Justin.
My question relates to your international contracts, but these OPEC production cuts it could there be any impact to the activity of the six rigs that you have under contract longer term and then second is any pressure on.
Giving some any kinds of price concessions.
So there has been talk in inside Saudi Arabia about aramco, sending out letters.
We've been through got before were pretty small player in Saudi Arabia unexpectedly.
Material changes where business in Saudi Arabia, how your bigger question, though about Opex reductions.
I guess the good thing about those national oil companies are there there are thinking long term.
And while on the short to mid term, they're going to be constraining production and construction constraining shipments and deliveries and probably even more in the coming weeks.
Longer term they still have decline curves. So I expect oil drilling in Saudi probably were men remains fairly stable.
Quits a little tougher to call they've been transitioning more to an IPO model the past few years.
We did expect those two rigs we have we're doing this year to renew.
But we pick up the whole back there isn't going to be curtailments or OPEC actions. We think it's really going to be just the shutdown going on of the country right now because we understand that they were had drilling plans for those rigs going forward. We just.
Because there's nobody in the office too.
Execute the contracts.
Okay, and you made some comments about the of natural gas rig activity coming up in the us.
And David could you maybe elaborate on that do you any in any kind of discussions to footings to go back to lift there or that's just an expectation at this point.
Oh, no we have a handful of customers were in discussions with.
And.
Even so you we've got some turnkey opportunities looking out right now, which almost surprises me, but we think are real and could materialize injectivity.
This quarter or next quarter.
I think it's highly dependent on gas prices and and contracts and funding and things like that these are all.
They are all small opportunities, we're not talking about a five rig contract or a two year contract but.
Well, we're looking for any opportunity right now to keep our rigs busy.
Sure.
Okay, and then in terms of the NFL cities of.
Technology that you have.
Is there any opportunity in this kind of environment in international markets as well that needs to late in the market improves.
Well that's a that's a really good question then when it didnt even come here thinking about four we got here today.
I can tell you there zero opportunity while the offices are closed.
He kept drilling engineers in their office, we can bring the technology and give the demonstration before we can.
Executed but.
And it any market, which is kind of opening backup again that things are normalizing and the office closures or ended and the Canadian and us activity stays a stays low we will absolutely be pushing that technology into Kuwait and Saudi Arabia.
For sure.
Okay.
Great. Thank you very much great. Thank you.
Thank you. Our next question comes from Ian Gillies with Stifel. Your line is now open.
[noise] afternoon, everyone.
Hey.
With respect to debt retirement, this year acknowledging that some pause right now.
Should we be thinking about 102, 150 is absolute dollars deployed or face value retired.
I think it's too early to say in.
Okay.
With respect to the incremental of $20 million in savings.
Are you able to provide any additional detail.
Where that came from.
So some of its tax deferral some of it is weighted assistance program some of it is.
Let's call it recurring lease expenses that we've been able to differ so just a its number of different things that go into that bucket.
Okay.
Blasting on.
The SAPIEN front now are able to provide.
Any detail around where you may be stock now from a rig count perspective, reviewing you could run maybe in the U.S. and Canada given.
How many people you're holding is it relatively in line to what your guidance was heading into Q3 here.
Yeah.
I think we have a pretty good sense internally I don't want to be point, you to market up or down based on what we've done around Judy.
In sizing organization, but I'd tell you that.
Running somewhere in the range of.
30 to 50 rigs in the U.S., we think we can handle with our current size and running somewhere between you know the dismal 11 rigs right now and maybe.
30, or 40 rigs agenda is probably where right now.
Perfect.
Maybe last one for me.
From a strategic aspect is perspective looking longer out I know you guys have wanted to.
We hope to grow internationally is there any particular areas you're paying attention to is paying I guess goes on and.
The main you might like to enter once things start to settle out a little bit here and it's been more clarity moving forward.
It's a little hard to for US right now to determine how the recovery is going to how the how the truck recoveries going to play itself out.
I would tell you that there are probably more distressed international rigs and there are domestic north American works.
So I would say that our eyes are kind of focus a bit on international market ended on North America, but certainly there is a large volume.
International rigs that are in distressed debt situations.
So you know I don't think we're looking to.
Deploy capital flows rigs, but there might be a possibility for management contracts.
You know utilizing our scale in our systems to manage other other assets.
I'm not sure were those rigs going to end up or is going to end up with them, but we've got pretty good system right now, particularly in Saudi Kuwait.
Essentially in criticized answers support manage operations with no increases in cost.
Got it thanks very much for your time.
Thank you.
Thank you as a reminder, ladies and gentlemen that Star then one to ask a question.
Our next question comes from Dillon Glosser with Simmons Energy. Your line is now open.
Hey, good afternoon guys.
You mentioned, a peak market share in Canada, roughly 32% comes back in January.
And that you expect to efficiently get back up and running or do you mind discussing how you expect to maintain a greater market share through the next several quarters in Canada.
Well I think if you do the math on 11, not a 24 in Canada right now, we're probably 46% market share.
But I think that's a little bit of a mix issue between.
Based on rigs into our heavy oil footprint.
You know.
I do think of what's going to keep on running in Canada will be the montney play to some extent.
And then it gets pretty sporadic after that and our.
Footprint with our Super Triple rigs the Monty and.
The natural consolidation, that's taking place you've only really got three drilling contractors that are active with Super triples, net station so mix river consolidated competitive environment.
I think that plays into Precisions has a little bit for Canada.
Is that helpful.
Yes, yes, Sir thank you and.
Kind of on another topic here you guys look at free cash flow generation through 2020, and without taking into account working capital do you expect to be free cash flow breakeven through Q2 in Q3.
Yeah, I would expect us to be cash flow breakeven in every quarter.
And thats without the impact of working capital release.
Yes.
Okay. Thanks, Gary Thanks, guys I'll turn it back thank you.
Thank you. Our next question comes from Dan Healing with Canadian Press. Your line is now open.
Hi, good afternoon, thanks, guys.
Hey, I was just wondering if you could give me an idea of what the headcount is now versus same time last year or the ended last year in Canada in U.S.
Dan I don't have those numbers at my fingertips right now.
Substantially less you know the U.S. right now we're running 35 rigs.
Versus almost 80 this time last year, so that alone.
All that 45 rigs less times.
Our company wide about 40 people per rig. So you know gets into the 1800 person range in the U.S. in Canada kind of much the same thing revolving 1000 people lighter than last year across a our drilling and well servicing groups right now.
I think the one part that sub hardest on precision is that.
Historically, we tried not to layoff people in our offices will be done that book in Houston, Mcgladrey Red deer, and number of long term employees, some ranging on more than 30 years.
I've been asked to retire lead the company, it's been a real tough.
Really tough on the employees, the past or will be the cost eight weeks and.
We're really hoping that didnt recovered pulls most people dock, but.
You know the numbers are overwhelming support.
Okay and the the.
The Trillium Service Association put out a revised forecast to the than called for more help from the federal government on top of the.
The well cleanup.
Program that they announced is do you see the need for more aid for the drilling and services.
Sector as well.
Dan the.
1.7 billion, they've announced so far.
We are grateful for it supports the well services business very well.
But ah, but unfortunately doesn't do much for the drilling contractors of drilling segment, which is going to go into the all time record lows.
Yeah.
So I do think that the you know this year you already see as a petitioning for more help for the drillers, There's no question industry needs that because.
You don't number drilling contractors have zero rigs running right now it's a very tough.
Environment for low the smaller drillers I think that help is needed.
Okay. Thank you.
Great. Thank you.
Thank you.
I'm not showing any further questions at this time, so now let's turn the call that sort of duston honing for any closing remarks.
Thanks for joining us on our Q1 call I'll look forward to talking with you in the future.
Yes.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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