Q2 2020 Precision Drilling Corp Earnings Call
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Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
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Thank you for standing by and welcome to the precision drilling Corporation second quarter 2020, <unk> results conference call at this time, all participants' lines ARNA listen only mode.
After the speakers presentation, there will be a question and answer session.
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Now I'd like to hand, the conference over to your Speaker today, Mr. Dawson, Tony manager of Investor Relations and corporate development. Thank you. Please go ahead Sir.
Thank you Daniel and good afternoon, everyone welcome to precision drilling second quarter 2020 earnings conference call and web cast.
Participating today on the call with me are Kevin W. President and Chief Executive Officer, Carey Ford Senior Vice President and Chief Financial Officer.
For a news release earlier today precision reported its second quarter 2020 results. Please note. These financial figures are in Canadian dollars unless otherwise indicated.
Some of our comments today or for to non IRS financial measures such as EBITDA and operating earnings. Please see our news release for additional disclosure on these financial measures.
Our comments today will include forward looking statements regarding 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 expectations.
Please 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 our second quarter financial results. Kevin will then follow by providing an operational update and outlook with that I'll turn it over to you carry.
Thanks, Jonathan.
First part to cover several of the cost saving and cash preservation steps taken by the company to confront the sharp decrease in activity experienced our sector.
In March we reduced staffing levels implemented salary reductions throughout the organization closed on profitable business lines.
This capex.
Our share repurchase program and essentially eliminated all discretionary spending.
We prepared for an unprecedent didn't drop and activity levels and ultimately materialize during the second quarter.
We incurred an additional $6 million and severance and restructuring charges during the second quarter unexpected changes to generate an additional $14 million in savings annually from what we communicated in April.
Last quarter, we provided guidance of 30% production fixed cost comprised of overhead and gionee.
We now expect a reduction to be 35%.
We expect cash savings for the year to now be up to $150 million compared to the previous guidance of over $100 million. Furthermore, we expect to exceed the 30 million dollar reduction in annualized DNA target we provided in April.
Cost reduction in cash cash preservation will continue to be priorities throughout our organization.
Additionally, precision has been participating in the Canadian employment wage subsidy program, which we referred to as queues.
This Canadian government programs of course economic activity at all sectors of the economy.
This allowed us to retain a number of positions within our organization by offsetting wage expense with subsidies.
We expect to participate in this program at similar levels to the balance of the year.
I will now review some of the first quarter financial detail.
Sorry second quarter financial detail.
Our second quarter, adjusted EBITDA of $58 million decreased 28% over the second quarter 29 King.
The decrease in adjusted EBITDA, primarily results from a sharp decrease in drilling activity.
Also included in adjusted EBITDA during the quarter is $6 million of severance and restructuring cost.
$7 million, an early termination revenue.
$3 million of which would have been occurred during the quarter and $9 million accused payments.
Absent these items EBITDA would have been $47 million for the quarter.
In the U.S. drilling activity for precision average 30 rigs a decrease of 25 rigs from Q1 2020.
Daily operating margins in the quarter work 15198, U.S. dollars, an increase of 5854 U.S. dollar from Q1.
Q2 margins were positively impacted.
By early termination revenue and I'd be see revenue.
Yeah.
Turnkey margins and lower daily operating cost.
Absent impacts from RBC early termination and turnkey daily operating margins would've been approximately 9250 U.S. dollars were approximately 1000 us dollars higher in Q1.
For Q3, we expect day rates in margins to be supported by contracted rigs and I do see revenue.
In Canada drilling activity for precision averaged nine rigs.
Decrease in 18 rigs from Q2 2019.
The operating margins in a quarter, where $9042 an increase of $4844 from Q2 2019.
Since were supported by a strict focus and operating cost and cues payments.
Absent the cues impact margins would have been $3869 approximately $100 a day higher than Q2 last year.
For Q3, we expect margins to be supported by rig mix and strict cost control.
Internationally drilling activity for precision in the current quarter averaged eight rigs consistent with Q2 2020.
International average day rates were 54779, U.S. dollars up approximately 500 us dollars from Q1 and over $3000 per day from the prior year benefiting from an active rig mix.
And our CMP segment adjusted EBITDA in the quarter was negative $1.2 million down $4 million compared to the prior year quarter.
Adjusted EBITDA was negatively impacted.
$5.3 million restructuring charge.
And an 84% decline and well service activity.
Which was negatively impacted by wet weather.
Reduced customer budgets.
Capital expenditures for the quarter were $24 million are 2020 capital plan remains at $48 million a decrease of approximately 50% from the beginning of the year guidance.
The 2020 capital plan is comprised of 34 million for sustaining infrastructure and 14 million for upgrade and expansion.
As of July 22nd we had an average of 35 contracts in hand for the third quarter and an average at 41 contracts for the full year 2020.
Since the beginning of the year, we have converted almost $120 million in receivables to cash and it had essentially no collection issues with all contracts performance.
This in large part is due to the excellent performance of our credit and collections teens and the high quality of our customer base.
Moving to the balance sheet.
We continue to reduce both absolute net debt levels, primarily through free cash flow generation.
And the first half of the year, we've reduced our high yield no balances, but $45 million through redemptions and open market purchases.
As of June 32020, or long term deposition net of cash was 1.275 billion and our total liquidity position was 900 was approximately $900 million.
Our net debt to trailing 12 month EBITDA ratio is approximately 3.5 times and our average cost of debt to 6.7%.
For the remainder of this year, we expect to continue generating free cash flow through operations as well as benefit from additional working capital release.
Liquidity remains a top priority, but we'll look for opportunities to reduce leverage utilizing cash on hand, and we'll evaluate using a limited portion of our revolving credit facility for debt purchases to take advantage of low borrowing costs.
We expect to meet our debt reduction target range of 100 million $250 million in 2020 and remain on track to meet our longer term debt reduction goal of $700 million between 2018 and 2022.
We have reduced debt by over 400 million since the beginning.
2018.
We remain in compliance with all of our credit facility covenants.
And earlier in the second quarter reached an agreement with a 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 this covenant today the extent the extent of the recent downturn is unknown and we want to ensure full access to all sorts of liquidity, including our revolver.
For 2020, we expect depreciation to be approximately 320 million.
We now expect estimate to be under $60 million before share based compensation expense. This guidance compares to the 2020 guidance provided in February of $90 million and the guidance of $65 million to $70 million, we provided in April.
We expect cash interest interest expense to be approximately $800 million and we expect cash taxes to remain low weather effects that effective tax rate in the 20% to 25% ranch.
Ill now turn the call over to Kevin.
Thank you Jerry good afternoon.
Well the last few months the PDP deeply challenging for the oil service sector, that's companies, but the human impact or the industry's large labor forces that profound let me start there.
Sorry described with the deepest with the steep decline in customer demand and drilling activity.
Precision has aggressively cut costs regrettably the speeds on hundreds of long term hardworking loyal precision employees have experienced.
Sorry reductions benefit reductions recruit production work week productions.
Temporary layoffs that for some permanent layoffs.
In Canada, the emergency wave subsidy program has sold through some jobs.
But the outlook for many working this industry remains highly uncertain.
I want to think those employees to longer with precision for their efforts and service to the company.
I sure hope that the global economy recovers soon.
As it was once again return to jobs in this industry.
I also think the employees still a precision many working remotely for their continued hard work and the strong operational financial results are helping precision deliver for our stakeholders.
No as I said really opened this has been a very challenging time.
For most of March April and May all of our customer discussions centered on terminating contracts idling rigs working with our customers to find ways to minimize their spend to.
And nowhere does this happened faster than in Canada, which is already biased for spring break up for the spring breakup seasonal slowdown.
Industry activity level levels in Canada plunged below all time lows during the second quarter and so far the summer seasonal rebound as the new that with industry activity tracking almost 75% behind last year's levels.
Now the Montney and Duvernay plays remained a bright spot.
During the second quarter Precisions Super Triple rigs operating in those plays mid to high percentage of the entire industry is active fleet.
Our market share hitting a record peak at one point, we're close to 50%, albeit with a relatively small denominator.
We expect our strong market positioning to continue as those plays will remain busy for the second half a year.
Well, we do expect some day rate pressure it should be noted that the competition. The segment is narrow with a small competitive field the super Triple category.
Through the second quarter, we demonstrated excellent success with our Alpha technologies. We don't these rigs will have more on that later, but we expect a strong customer uptake from Elfa technologies will continue in Canada has helped pull rig market share forward.
Outside the Montney and Duvernay, we expect to the shallow basins will have light activity compared to last year price competition will continue to be intense.
Scale matters, there with precision scale with the best ability to drive down our costs and sustained positive cash flow, even steeper depressed market.
Free cash flow will be our focus for the balance of the or in the Gideon sheller regions.
Currently we are running 13 rigs in Canada and of another six rigs contracted to activate and coming days.
Well forward visibility remains a pig, we see rig activity moving towards the upper Twentys late in the third quarter and believe this will trend into the thirtys during the fourth quarter.
Turning to us.
Service, our second quarter activity was a little lower than we expected. However, the difference was due to more rigs that anticipated shifting to idle, but contracted status with up to 11 rigs during the quarter.
Being IVC as we call it.
It seems those customers prefer to hold those rigs retained the option to reactivate those rigs.
Alternatively, they have the funnel financial incentive for early termination lump sum payments should they choose.
In the U.S. does in Canada, we delivered very strong performance results, we felt the technologies and we'll have more in that later, but I would say that we expect to continue to grow both our technology revenue and rig market share.
As industry looks to high grade ore at BEC rigs.
No as commodity prices recovered substantially through a negative oil prices quoted earlier this year.
Customer sentiment is also markedly improved.
Our customer conversations have shifted away from laying down rigs contributed ICANN terminated contracts to more normal conversations about safety efficiency operations and technology.
We have noticed heightened interest in technology, both from a cost considering his perspective, but also for investment perspective.
It seems does our customers transition to using technology to work remotely their acceptance of digital technology as a drilling performance opportunity is normalizing.
Today, we have 23 rigs running up slightly from our low 20 in Q2, we continued our visibility for a handful of potential activation opportunities.
But since the opportunity sets limited and we expected competition will not provide much guidance on rates other than to say the opportunities are in both gas and oil players.
Now, we believe that the absence of industry rebound, we will gain market share interactive brick yet we will move obviously upwards.
Trending towards 30 by the end of the year.
Potentially was six rigs reading on IVC, earning RBC rates.
We have added one term contract during the second quarter for rig in the Haynesville.
With that because the positive indication.
Turning to our international business.
Despite the sharp decline in international drilling activity, we expect stable revenue at our Kuwait and Saudi Arabian business was six rigs operating under long term contracts.
Our biggest challenge is managing the international crews, we have working on those rigs with strict pandemic border controls iridium players.
In Kuwait than the Kingdom of Saudi Arabia, the National oil company offices remain closed orally, partially staffed so we expect no decisions to renew or contract additional rigs until walk down ease as we currently have seven idle rigs in the region continue to believe that opportunities to activate some or all of those rigs will emerge.
Global economy recovers.
Now as I mentioned earlier.
We continue to have very good success with our ultra technologies currently we have alpha automation running and earning revenue on half are active rigs and we expect us to trend upwards through the end of year.
We have also fully commercialized six alfalfa apps and have utilized elfa apps over 100 wells this year.
We have weather doesn't other elfa apps under field trials and expect to commercialize most of those within the year.
Our progress with customer acceptance on to help automation and Alpha apps is excellent and as we mentioned our press release, we believe this digital drilling capability will drive the next technology transformation that our customers will demand to lower well construction costs.
But the real excitement for our technology group this quarter has been with or else analytics trials.
We activated our elfa analytics team with two multi rig clients. The first an io see the Permian basin and also a private client in the Haynesville.
In both trials our teams have analyzed both offset wells at our own drilling keep you guys to uncover process and drilling operational recommendations for those customers.
The recommendations were implemented on a real time basis in repeatable and measurable met or what our health automation platform.
The results of an excellent for the Io see in the Permian on a 28 day well plan, we've reduced the drilling time to under 24 days, providing a 4.1 day average improvement per well.
In the Haynesville, we perform detailed analytics on a group of rigs operating during the first quarter to also uncover process improvement opportunities.
We apply those recommendations across the same group of rigs Fleetwide using our Elfa automation platform. During the second quarter, we averaged we delivered an average 8% or 2.25 days per well savings.
These performance gains a repeatable and scalable as a process recommendations are locked in and executed repeatedly as planned on every rig with her of automation platform.
A key element of the analytics exercise is recommending the appropriate health apps to optimize the various sections of the drilling process in the implementing these accident, perhaps in the drilling point.
With health analytics, we save our customers time and money, we drive automation in up revenue. The most importantly, we've demonstrated our ability to scale this technology and the performance gains across all precision rigs for the same customers almost immediately.
I am confident this technology enabled the revenue for our health services will grow but equally importantly, this will also drive market share revenue growth for Precisions Super Triple rigs fleet.
We will continue to report our progress throughout the year on the Alpha technology growth initiative.
Now turning to our completion and production service business.
Our Didnt well service group experienced a slowest activity level and record during the second quarter.
This was a function of our customers essentially curtailing all discretionary spending and shutting in wells most well service work is largely discretionary there was an operator is already shutting in production any wells needing service will be deferred.
As a third quarter unfolds, we're experiencing a muted seasonal rebound with precision service rig activity trending into the mid upper teens. This has been partially.
Due to weather delays, but also continue spending constraints for many of our customers.
The Canadian government announced a 1.7 billion dollar well recognition program and this was handed over to the province of Alberta, British Columbia and scheduling to administer.
All three provinces kicked off the application process during the second quarter with Alberta, the largest with $1 billion first started to gauge.
Precision is qualified and has been submitting applications directly with our customers. All three provinces, we received approvals for indication of approvals and all three regions.
Unfortunately, the programs have been slow to disperse funds and as of yet little of the subsidy program funding committed to our rigs or jobs where people.
Well this is frustrating for us and especially for our crews we have been a constant contact with the program managers is clear to us the province of Alberta is fully committed to disperse the full $1 billion as efficiently as possible as our British Columbia unscheduled their respective allotments.
We know the first funding round, Alberta received over 35000 contractor applications.
I know they expect to the strong uptick but it seems there are quickly overwhelmed with the tens of thousands of applications.
All indications are that the funding will begin to flow in the coming weeks and they appear to be better prepared for the subsequent rounds, it's clear, they're working hard to get the money flowing to our rigs in our crews.
We still expect when our share of the work expect this will provide a strong till into this business segment of later this quarter and through 2022, when the programs expect to wrap up.
So to conclude my prepared comments, our focus will remain on leveraging all aspects of our business to generate free cash flow.
Maintaining adequate cash liquidity, while focusing on reducing our debt and we'll continue to grow our revenue in market share.
Leveraging our digital Elfa technologies.
So with that I'll turn the call over the operator for questions.
As a reminder to ask the question you will need a press star one on your telephone.
To withdraw your question press the pound key please standby, while we compile the Q on a roster.
Our first question comes from Kurt Hallead with RBC. Your line is no.
Hey, good afternoon everybody.
Great.
Correct.
Paul as well on your on your front.
Hey, Kevin.
I see that when you're one of your primary use competitors is looking to sell its Canadian land drilling rigs.
Just wondering what you think the prospect of.
Those rigs being acquired.
Would be as we kind of move forward from there what do you think the value proposition is for those assets from an industry standpoint.
Kurt I think it's hard for you called it does that other companies.
Process right now.
I would just say that.
Free free available capital in Canada, Brig acquisitions is pretty tight right now but.
But I really don't comment on another processes running.
Okay, all right that's fair enough.
So on on on the precision drilling front, Kevin it's good to see that you continue to get traction with your with your Alpha apps.
I mean, a lot of discussion here over the last week or so from other oil service companies talking about an increase.
So remote.
Operations and.
Advances in technology seems to be coming a lot more like getting a lot more traction here during the downturn that some may have expected. So can you give us some general sense as to argue pleased with kind of the traction that's been happening and you have you seen NPS be more willing to kind of take on this technology through this downturn.
You know Kurt I think Thats a good observation certainly all of our customers use are using a lot more technology themselves just to do their jobs are they were even just a few months ago and remote mode. So I think they very quickly become comfortable with the notion of both remote operations and technology, enabling performance. So I think thats, helping us.
But was really helping is.
So hard core results on the rig.
When we go and show that we can drill about 4.2 days faster and do that too and I also see.
Catches everybody's attention. So we've had a number meetings with.
With clients have looked on rigs are kind of at a quiet period right now it's not a lot of activity we Brian.
I think four or five other customers through our demonstration facility in Houston demonstrated technology showing them. The case studies. So these are clients that don't have rigs running today, but expect to fire up rigs later this year or to next year. So there's no question that both for the customers. We have a prospective customers down the road I'd I see a high.
High degree of interest in digital technologies, all tied to drilling wells, a little more efficient, but but also repeatedly and predictably and managing our cost exactly as expected.
That's great that's great color and maybe on a on a follow up.
Basis, you talked about having some idle rigs in the us that are generating revenue. What do you think the prospects of those rigs are what's their contract terminations going to kind of run through the process and you think you'd be able to kind of re sign those rigs with existing customer base and you think be able to maintain pricing on those assets.
Kurt I think you know kind of EBITDA as a longtime customer has had a strong preference to keep the crew.
The rig that they have worked for them for a long time. So on those rigs are currently RBC I think part of the reason that customers didn't choose the early termination option. We kept the obviously offshore to keep control of the rig in the crew.
I wouldn't expect did renew the rig if they don't have a drilling budget, but if they if they come into 2021 of the drilling budget, even a partial budget im highly confident that what the same rig back so while it might have fallen off IVC maybe October November December.
Come January I'm quite confident those end customers what the same rigs back if you have a program starting in 2021 does that answer your question.
Yeah. That's also good color, Kevin I'll I'll keep it there and turn it over.
Thank you Kurt.
Thank you.
Our next question custom tailor nurture with Tudor Pickering Holt. Your line is now open.
Hey, Thanks, and good afternoon. My first question incurred kind of took part of it there, but it sounds like in the U.S. you talked about potentially getting to somewhere close to 30 rigs by year end I think you said.
Up to 11, IVC rigs in Q2 and at year end you'd have close to six.
And so two part question.
Going from the low twentys today the 30.
I assume that's not just IVC rigs going back to work.
Employed it's probably.
On a net net rig additions or rigs that are that aren't working today that are going back to work in the back half and too I'm. Just curious if those are our operators.
Formerly had those rigs at least operate as you're talking to for those rigs or others potentially new customers.
Taylor.
So my comment was trending towards 30, and I could have said trending towards 25.
23 rigs today, I think we have a pretty good try to punching cost 25 of moving towards 30, I don't know if we hit 30, that's a bit of a stretch just doing what we know about the world This moment, but.
No it only takes three or four rigs and.
That's a cross the U.S. right now that's a pretty small numbers, if we added three or four rigs between now and.
End of October I'd be pretty happy with that.
This is the high twentys.
That could be.
It could be.
But by the way I think the rigs we have an IVC unless something changes with those clients. We're just keeping some of their to stay IVC and that we'd be adding additional rigs beyond that so it could be customers that use rigs in the past what are we activated rig thats off contract.
It could be into opportunity creeping up and there is a.
Very limited number one or two or three of those opportunities but.
I do think with the results, we're having with technology efficiency right now that we're going to stick a couple of years.
Got it not understood there and.
A follow up internationally.
Realized essentially all your rigs are on contract in long term contracts.
Just in the middle East so there seems to be growing talk that activity.
Broadly in the middle East, but particularly in Saudi you could could come down in the back half of the year and beyond and I'm. Just curious if that some you're seeing and for the customer you work with.
Realizes those rigs on term contracts today, but are you talking to those customers about any sort of pricing concessions today or do those contracts seem pretty firm where they're out today.
So those are from take or pay contracts.
I'd be remiss, if I said that we did not have pricing pressure.
But I think we've dealt with that and don't have any adjustments to our guidance. So I think we've worked to their customers kept them happy but keep things moving.
I comment that.
We've had two rigs in Kuwait that we've talked about renewals on.
And those rigs or idling now and.
We expected to have renewals by now, but with the shutdown in Kuwait.
Until those offices restocking to get their drilling plans back figured out again and organize those renewals are delayed so I don't see any further changes in Kuwait turning to Saudi I.
I think were stable and Saudi unless something changes dramatically.
I think the three weeks revenue contract will those contracts will continue for the year in Saudi.
But but I will tell you that.
What a world of uncertainty right now so.
Thanks, James quickly and surprise us sometimes.
Got it now squeeze one more in probably for carried on the working capital inflows.
Expectedly strong in Q2, I think you said in the prepared remarks that working capital should be a source of cash.
Continue to be a source of cash in the back half of the years, So anyway to help us think about what magnitude of.
Cash inflows from working capital you might get in Q3 in Q4 this year.
Sure. So in April we gave guidance that we thought we would have $80 million to $100 million, a working capital converting to cash Oh by the end of this year I think we're probably pretty close to the high end of the range. So far with what we captured in Q1 and in Q2.
But look at now to the end of the year it might be another $10 million to $20 million. So I think we've gotten the bulk of it but I think will end up converting.
Little bit more than what we guided.
Perfect well, thanks for the answers I'll turn it back.
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Thanks to our.
Thank you as a reminder, ladies and gentlemen that Star then one SASSA question.
Our next question comes from Waqar Syed with 80. These capital markets. Your line is now open.
Thanks for taking my question.
Kevin you mentioned in India.
I think is release that.
You know as the outlook improves then you'll be back buying bank debt, what do you need to see to do that you know you generated free cash flow in the quarter.
Cash balances the guts, so what do you need seemed to be back in the market.
I think.
Well here, we're going to keep our.
Some of our strategy around how we manage our.
Repurchases.
To ourselves at this point I would tell you that.
You know sitting with.
North of $150 million Occassional Belge, there's 75 million of cash balance sheet.
Feels a lot better than $75 million of cash on the balance sheet, but.
I think managing our total liquidity managing our debt maturities and trying to capture some discover market are all things we think about every day.
So the target that you have the tonnage within 50 is that it I know you repeated that in the E. In the in your earnings release is that still if.
Some target our this flexibility around that based on the outlook.
So.
Reaches 100, 150 million and I'd say that target secular change, it's hard wired into our.
Incentive metrics.
And so we're not not likely to change targets that are tied to compensation.
And now.
No in the us markets.
As you had having conversations with customers and you indicated there was saying that you could be couple of Phoenix.
Hi, Good go back to what are those mostly related to private customers on those with public in fees.
That's that's a really good question, we've been looking hard to try to figure out any.
Trends that might be emerging what's your at this point there aren't.
We have a couple of private opportunity is a couple of going to immediate opportunities from gas oil Doug. There's there's so little that theres really not a trend emerging yet, but we're watching closely as if anything sort of pops up on the front.
Okay.
You know what would we talked earlier I think we talk to you back in the back in June there was a little bit of a gassy sort of trend, but that's going to equalize both gas and oil.
And now.
And then you mentioned that there was a new term contract signing in the quarter.
What would you care to comment how the divvied scan dependent on that particular contract versus.
The reason for.
You know.
Just because there's so few data points over marketplace I would say that that the rates under contract in line with prior guidance, we've given a run rates.
Okay.
Yes, I've heard I've heard of rates kind of all over the mouth, but our guidance for the past has been.
Upper teens to low twentys, depending on the spec of the rig and location and timing in size and nothing changed on that contract that's outside that guidance.
And now and you talked about this as wireless.
It feels that the rig the few to now is the small rig.
On the.
The Digitization now, Duke and would the Super spec rigs into a small box rig.
What kind of investment has acquired.
Carry once you grab the investment piece and I'll talk about the trading.
Sure for for US what we're doing as are putting into a kit from third party, which enables our automation platform and we haven't given specific numbers. So that we can fits well less than half a million dollars to put that kit onto our rig.
So curious thats essentially a server and the software that gets hardwired into the rig plugged into the rig.
And.
And then the probably the more meaningful component.
Is treating our our three drillers are for drillers are Religare then for that matter the company management really engineer for the company.
All the apps and utilization of the system and that usually takes the range of anywhere from kind of water two wells maybe to as much as fiber six wells what could be a one month to three month process to get that.
The full trading and the full value realized on a Rick.
Yes.
I'd also say that we've got 39 of our rigs in North America that already kitted out with automation.
And then.
Even with 19, if you look at the industry's super spec need maybe like numbers, maybe but it could be between Nick 652 750.
And bulk up at 80% of that is in the hands a five companies.
All of then have to varying degrees some component of that automation.
We can debate, which is better than not but some degree of that everybody feels comfortable with so we had none of those 650 750 rigs could be converted into.
Into.
These small can rigs with.
Admittedly like a million Donna type investment is the is that a fair observation.
I think it depends on the platform. So I think ours is relatively inexpensive because we're using.
Kind of a standard.
Stetter platform, a standard operating system with all of our rigs that's the it'll be unfeeling system.
And.
We're buying a mass produced.
Server hardware package for also middleby for their employees for their.
Noble's control system, and then as we train our team and give the reconfigured it becomes self automation.
I don't think.
The other drill or has that plug and play capability that we have.
So I think thats sort of vendors we have.
Of course, all of our Super Triple rigs have exactly the same version of Npls. So it's very simple.
Scalable opportunity for us so we've got some advantages there.
I think philosophical you're right all risks can be converted but I think it's with varying degrees of.
Of capital and time across the fleet now what here we've been told by a couple of the iOS sees we're working with that.
While all drillers are our dabbling in this area.
We are delivering full full process automation control full app performance there were charging commercial rates put all of these rigs receiving commercial returns so.
I'm confident that we're in a.
Any full first mover position on this and.
And I would tell you that the.
The time and trading and does carry comments at 38 rigs 38 crews and 115 drillers that are all trained on the system already we have scale that we can put into play immediately that we expect that to happen over the coming months.
Great and just one last question.
The opportunities with the effort for this trend in Saudi Kuwait as well.
There is for sure.
80 rigs are all if you on rigs so it'd be very easy for us in Kuwait to upgrade those rigs we do know that.
Our customer there is very interested in technology, but I.
I would tell you that any forward thinking right now until they get back to fully staffed offices is just on hold.
Yes.
Thank you Sir Thank you. Thank you answers thanks very much.
Thank you. Our next question comes from Ian Gillies with Stifel. Your line is now open.
Good afternoon, everyone.
Ian.
With respect to accuse and and the remainder of the year I mean recovery still looks like it's going to be reasonably large.
Can you maybe explain how you're right getting to what the anticipated recoveries are and maybe why even at the rig count goes up that recovery may not be bigger than what happened in Q2.
Sure and so obviously that that subsidy is is based on the number of employees we have.
Working for our company, while it's in place and and as you know the land drilling business employs a lot of people so and some some extend it is dependent on activity as people on that if we have more people in the field it could be higher.
Where the comment we made in our press release that.
We expect to.
Receive kind of the same participation level in Q3 in Q4 as we did in Q2.
That is a function of both.
Our expected activity levels, and I think Kevin covered that in his opening comments and the way that that program changes throughout the back half of the year that the government has.
Funded certain percentages and they ratchet down a little bit more in the in the fourth quarter.
Okay. That's helpful.
The other question I wanted to hit on was with the Specter of another federal election coming up from US in November I'm. Just curious what are your customers have begun asking about job dual fuel rigs or anything along those lines or whether you're looking at anything you'd maybe do around the carbon emission side in the event that.
Policy, perhaps goes a bit more negative mid 30 change administration.
Great question.
And we have a surprising about of customer interest on both sides of the border right now on dual fuel engines.
And natural gas engines with the customers working for currently the customers are looking kind of down the road.
I would say that.
I'll kind of a market wide right now I've, probably never see the interest higher in dual fuel engines. In fact, we're involved in a.
At a project Red no tourmaline, we've developed a complete the portable.
Dual fuel.
Actual gas and electric storage.
Package, where we can move this full powerpack to any one of our super Triple rigs essentially plug it into and provide power. This is a project that terminal in applied for energy funding under the old pretty government incentive program.
There are successful so its ourselves tourmaline and caterpillar partnered together for this power system, it's a hybrid power system using.
Batteries.
Dual fuel engines, so a lot of the carbon footprint and use hybrid technology.
Thanks, that's actually really helpful to know I'll turn the call back over.
Thanks.
Thank you. Our next question comes from Jeff federally with Peterson Cowen Your line is now.
Good afternoon guys.
Jeff.
First question is rooms, the debt repayment, just trying to understand the evolution and youre thinking over the last few months so going back to the end of April you talked about carrying.
Due to $100 million, a cash and then repaying the notes on the 2021 notes by the end of the year.
Comment earlier in the call about now using a modest amount of the credit facility to repay notes and you're carrying.
Well above $100 million of cash how do you think.
About those variables and where do you think the cash balance goes to as the year progresses.
So I will go back to what Kevin said earlier about our specific tactics for restarted Devil, we'll keep ourselves, but I can answer some of your questions.
I think we've given pretty quick items that the cash balance is expected to increase throughout the year. Both as we expect to generate positive operating cash flow and then get some benefit from working capital release, and I would say that how are thinking has evolved as Kevin also touched on a little bit earlier we.
We had just under $100 million of cash at the of less in Q1, and we've been able to get basically 100% collection from all of our receivables and convert that to cash now we sit on the cash balance of under 75 million, which gives us a little bit more flexibility with.
How would which pieces of that we go after.
Because it's a bit more comfort comfort using our revolver, which has an all in borrowing rate for us of less than 3%.
That has them at the facility has maturity and at the end of 23, and so I think we'll we're looking at all of those and trying to figure out what.
What gives us the best return.
Potentially extends our maturity runway and.
Also provides us the most liquidity.
Is your intentions to retire the 2021 note.
The end of this year.
There's a chance we do that.
And is it reasonable to assume that the credit facility will be used at least.
Partially to to retire those tools.
Said in my opening comments that we are evaluating that option.
Okay.
On the working capital so I would carry.
Your comment about $10 million to $20 million of incremental working capital in the second for the year.
Should we assume that the majority of the comes from or do you assume declining from the 90 interesting.
Q2.
So we expect to get a little bit from accounts receivable and a little bit from inventory.
And obviously, if theres a ramp up an activity in the back half of the year in Q4, we won't be able to recoup that but if the activity level is kind of how Kevin projected where it's a kind of a slow ramp we should be able to do that.
And just to confirm your comment earlier from a collection standpoint.
The small increase in your deal so nothing to do with.
Any delays and payments is just a function of cowen nuance of timing.
Correct.
Okay.
Last question dystrophin cost reductions.
Hundred 50 million annualize that you know reference in the 30 plus million invest you in a.
How much of that would be reflected in your Q2 cost structure and do you expect that to be fully reflected in your Q3 cost structure.
I would tell the majority of it is reflected in our Q2 cost structure with the exception to the $6 million restructuring charge, we took in the quarter, which were changes we made at the ended the quarter. So we had mentioned that there is $14 million of additional savings that will be reflected in Q3 in Q4.
So.
When you talk about the $150 million cash savings that's a combination of.
Reducing capex by $40 million paying back the share buyback program.
Getting taxed referrals other rent deferrals and then absolute.
Productions to.
SGN and field overhead.
That's a combination of a lot of different things.
A lot of those are captured in in Q2, but we'll see even greater savings in Q3 in Q4, and I think the run rate Gionee.
Prior to share based comp and.
In Q3 in Q4 will be.
Well below $60 million.
Thanks for the code.
Welcome.
Thank you. Our next question comes from John Daniel Daniel Energy Partners. Your line is now open.
Hi, guys. Thanks, Good man.
Kevin You mentioned the interest is really high on the dual fuel can you speak to what.
Hi, the conversion or upgrade opportunities you'd expect to do over the next one or two years in or customers willing to share on the cost of your investment.
So during the second quarter of 2020 customers willing to share nothing.
That's tied to increased rates, but I do think going forward the fuel savings benefits.
Likely will help us drive economics that pay for those upgrades.
Particularly have a handful of idle rigs right now that have dual fuel. So we can activate rigs.
It's a demand for for the time being it's probably more of a 2021.
Event for us, where we have to start investing in.
We are dual fuel systems probably.
Yeah.
And the cost of that as John I think it's I think I think that's a trend that's going to continue for a long time sure. They make sense in the eastern though that this cost benefit you don't what's interesting is.
What I find with on the entire CNG file on drilling everything we do on drilling that saves US money also almost always saves us energy and saves us emissions. So there is a really this is one business, where there's a very good alignment between.
Doing the right thing and actually making more money.
And as we.
For the develop our own yes, you disclosure is really really clear on helping explain that to both our investors and our customers.
Okay.
Got it and then just one final one for me I should probably notice of adults I apologize, but can you just walk us through that time and process to install the alpha apps that technology on rig.
Time to train someone up on it.
Yes, so the installation time is.
Less than a dozen hours, it's very simple physical.
Electrical hook up on the rig so installation time is irrelevant. It happens during a rig move while they're ready for trucks. There is no no delay.
Well generally.
Do both costumes rating trading rig trading and then on the job training for our people, but you can presume that a new drill there who is going from just strictly a super spec AC rig to be becoming a fully.
Call It elfa.
Expert there's about a three month cycle.
Right now today, we have 60 or probably about 30 rigs sorry, but 15 rigs of crews that are.
We'll go back to works, we don't need to trade Buddy for the near term.
But if we activate 15 more rigs, we're going to be trading where people.
Okay, Thanks for putting him.
Yes. This is.
Just want to make sure that you got your question answered Kevin was describing the installation of Alf automation you had asked about alpha apps.
Yes.
Well you guys just.
Yes, the absence I was asked 1000 front I'm sorry.
The upside install in seconds and typically trading time has been its.
It's making sure okay.
That's all had thanks guys that thank you.
Thank you.
Our next question comes from Blake Johndroe with Wolfe Research. Your line is now.
Yes, Hey, thanks, guys. Good afternoon, just following on the Alpha top line of questioning here just wondering if clients customers or give you specific feedback on specific apps.
Maybe to give us a better understanding of what specifically what parts of the drilling process are maybe the most impactful from from an App perspective.
So short answer is yes, we're getting specific feedback and once we have.
Customers willing to pay for the up on a repeat of basis, that's really depart commercialization. So we've declared commercialization on six apps meeting their commercial hurting capable of writing commercial rates up most of what we're doing right now is tied to rid of penetration.
Specific energy at the bit vibration to the drill strength.
Gotcha, and if we do see meant for each of these dynamics drilled during dynamics. There may end up being several different apps that the applied different biases to minimize optimize RFP or optimize vibration and.
Just like we have several different mapping apps for telephones.
I'm quite certain wonderful several different types of apps to control different parts of it that whole process.
And.
That's a refund or analytics team is quite good at is helping determine which perhaps work best for which geology and which customer working with.
Got it understood.
And then this lower.
Perhaps pricing environment or whatever the outlook is for the medium to longer term. If we don't see a concerted recovery here in the North American rig count would you consider licensing this technology in any form to maybe insulate yourself from some of the service delivery cyclicality and just take down the the software portion of the value.
Yup.
Most of the ops.
Russia notwithstanding ownership. These are owned by other parties. So far we have a few that we own but many are being owned by other parties. They can sell they can sell those apps or license those apps to anybody that's running the novos automation platform.
But we still think the larger portion of value isn't in the software, it's and having the cruise.
Able to operate and run the software having the company man up to speed up the software. So we think theres a lot of intellectual property and the trading and developments of the rig teams.
Where are you probably didn't see a whole lot of crude differentiation. Obviously in the second quarter is things were just rolling off as quickly as possible see more tied to when contracts were actually up as opposed to recruit were requalified.
You think this could be a differentiator as even in a steadier recovery environment customers that have signaled to you that they would rather have the alpha capable crews and rigs back to work first.
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So it's still pretty early in this business trough period.
But that seems to be what we're hearing from customers.
But what we also know what we've seen with previous.
Installations, we talked about I think it was our Q4 conference call, we talked about operator up in the northeast and Marcellus. It had two rigs running alpha we brought a third region. There was a green rig with a green crew and by the second well, they're drilling pacesetter wells using automation because they had the parameters for the other two rigs they could loaded.
So we think that as rigs get added back.
If a customer has to PD rigs going out a third rig we can almost certainly guarantee.
Levy as performance or the second well if there any also on the other two rigs and forget alpha in the third rig. So I do think there'll be a strong pull when rigs get added back, especially if the customers going from two PD rigs to a third PD Rick.
For three to four or whatever that whatever that may actually be right right that makes sense and one more if I could squeeze it in here the 40 million capital spending program can you just help us calibrate relative to maintenance levels for the active rig count what kind of tailwinds are getting from equipment equipment harvesting if at all and then if you look out into 2021 and beyond that we think a.
And ability to that in a flattish recount environment.
Anything we should be aware of you mentioned, the dual fuel upgrades, but anything like research or drill pipe.
More lumpy expenditures that we should be aware of across your fleet.
Yes, I think I think we're doing pretty good job keeping your most of our maintenance current.
Certainly we need a little less drill pipe today than we did we were running 80 rigs are the Pos and 80 rich and get a year ago started if we get back into a sharp ramp up there maybe some drill pipe needs popping up I.
I don't think it's anything that would.
Distort our long term maintenance spending profiles.
Got it thanks a lot.
Great. Thank you book.
Thank you.
Im not showing any further questions at this time I would now like to turn the call back over to Duston honing for any closing remarks.
Thank you all for joining todays call and look forward to speaking with you. When we report third quarter results in October. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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