Q3 2020 Precision Drilling Corp Earnings Call
Once again, ladies and gentlemen, please stay on the line.
[music].
Ladies and gentlemen, thank you for standing by welcome to the precision drilling Corporation, 2023rd quarter results conference call and webcast.
At this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session. So that's the question during the session will need to press star one on your telephone if your car. He further assistance. Please press Star then zero.
I would now like to do shelters conference call Mr., Dustin Honing manager Investor Relations and corporate development you may begin.
Thank you Kevin and good afternoon, everyone welcome to precision drilling third quarter 2020 earnings conference call and webcast participating today on the call with me are Kevin NAV, you, President and Chief Executive Officer, Carey Ford Senior Vice President and Chief Financial Officer.
Through a news release earlier today precision reported its third quarter 2020 results.
Please note these financial figures are in Canadian dollars unless otherwise indicated.
Some of our comments today will refer 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 call.
We caution you that these forward looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from our expectations. Please.
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 third quarter financial results. Kevin will then follow by providing an operational update and outlook with that I will turn it over to you Kerry.
Thank you Dustin our third quarter financial results reflect the execution and progress.
On our strategic priorities set out at the beginning of 2020, including reducing debt through free cash flow and maximizing financial results through leveraging our high performance high value fleet and scale of operation.
Our third quarter, adjusted EBITDA $48 million decreased 51% over the third quarter of 2019.
The decrease in adjusted EBITDA, primarily results from a sharp decrease in drilling activity in North America, and a slight decrease in our international operations.
Also included in adjusted EBITDA during the quarter is $2 million of severance costs and eight.
And 8 million accuse assistance payments.
Absent these items EBITDA would have been $42 million for the quarter.
We are on track to achieve our guidance of a 35% percent reduction in fixed costs comprised of overhead and DNA and expect cash savings for the year to be $150 million.
We expect to achieve a $35 million reduction in annualized DNA costs.
From the guidance provided at the beginning of the year.
Cost reduction and cash preservation will continue to be priorities throughout our organization.
Precision participate participation and accused program continued in Q3, we Rick.
We recognized $8 million in queues assistants in Q3 and expect to participate in this program at similar levels in Q4.
As a reminder, this Canadian government program supports economic activity in all sectors of the economy and it has allowed us to.
Has allowed us to retain several positions within our organization by offsetting wage expense with support payments.
Although the government has announced a commitment to extend this program through June 2021, they have not communicated the amounts of the sport.
The program will provide.
In the U.S. drilling activity for precision averaged 22 rigs in Q3, a decrease of eight rigs from Q2 2020.
Daily operating margins in the quarter were 12297 U.S. dollars a decrease of 2901 U.S. dollars from Q2.
Q3 margins were positively impacted by.
I do see revenue in turnkey margins offset by higher daily operating costs due to lower fixed cost absorption.
In addition in Q2, we recognized early termination revenue in 2896 us dollars per day versus nil in Q3.
Absent impacts from IVC early termination and turnkey daily operating margins would have been approximately 2015 us.
Dollars per day lower than Q2.
For Q4, we expect margins to be supported by contracted rigs and IVC revenue.
To generally be flat with Q3 levels.
In Canada drilling activity for precision averaged 18 rigs a decrease of 24 rigs from Q3 2019 daily operating margins in the quarter were $8506 per day, an increase of $3834 from Q3 2019 margins.
Margins were supported by a strict focus on operating cost and cues assistance payments.
Aesynt accuse impact margins would have been $6270 per day.
For $1598 per day higher than Q3 last year.
For Q4, we expect margins absent of cues to be down slightly from last year with strict cost control offsetting the overhead burden arising from lower activity.
Internationally drilling activity activity per precision in the current quarter averaged six rigs two fewer than Q2 2020.
International average day rates were 54887 U.S. dollars per day up approximately 100 U.S. dollars from Q2 and.
And $3654.
From the prior year benefiting from the active rig mix during the current third quarter.
All six of our rigs are contracted through 2021.
And we expect financial performance to remain consistent through that period.
And our CMP segment adjusted EBITDA, this quarter was $3.9 million down 14.2% compared to the prior year quarter.
Adjusted EBITDA was negatively impacted by 55% decline in well service hours as a result of lower industry activity. During the quarter. We expect results will improve in Q4, primarily a result of increased industry activity and additional work supported by the Canadian governments $1.7 billion, well site abandonment and rebuild.
Patient program.
Capital expenditures for the quarter were $3 million and our 2020 capital plan remains $48 million a decrease of approximately 50% from the beginning of year guidance.
The 2020 capital plan is comprised of $30 million for sustaining and infrastructure and $18 million for upgrade and expansion.
As of October 20, Onest, we had an average of 34 contracts in hand for the fourth quarter.
And an average of 42 contracts for the full year 2020.
Moving to the balance sheet, we continue to reduce both absolute and net debt levels, primarily through free cash flow generation.
Year to date, we have reduced our debt levels by $125 million through redemptions and open market purchases.
Of note, we have drawn 97 million us dollars on our revolving credit facility, which matures in November 2023.
We utilize this facility to reduce our overall interest cost per se.
Preserve a strong cash balance and to provide flexibility for continued debt repayment through 2022.
As of October 20, Onest, our senior note balances were as follows.
Notes due 2023 293 million US dollars notes due 2020 for 271 million US dollars in notes due 2026 358 million us dollars.
As of September 32020, long term, our long term debt position net of cash was approximately $1.2 billion and our total liquidity position was over $700 million, our net debt to trailing 12 month EBITDA ratio is approximately 3.8 times and our average cost of debt is 6.5% for the.
For the remainder of this year, we do not expect to.
For the remainder of this year, we expect to continue generate free cash flow through operations and do not expect incremental benefit from working capital release has activity is increasing in both the us and Canada.
Liquidity remains a top priority, but we will continue to look for opportunities to reduce leverage.
We remain on track to meet our longer to meet our longer term debt reduction goal of $700 million between 2018, and 2022 and have already reduced debt by over $500 million since the beginning of 2018.
We remain in compliance with all of our debt covenants with an EBITDA to interest coverage ratio of 2.9 times.
And for 2020, we expect depreciation to be approximately $320 million, we now expect SG and eight to be $55 million before share based company compensation expense.
This guidance compared to 2020 guidance provided in February of $90 million.
And in Q2 of $60 million, we expect cash interest expense to be approximately $100 million for the year and to have an annual run rate of approximately $90 million going forward post Q3.
We expect cash taxes to remain low and our effective tax rate to be in the 20% to 25% range with that.
With that I'll hand, the call over to Kevin.
Good afternoon, and thank you Gary.
Well they are precision, we're simply grinding through the toughest downturns in the history of the oil and gas industry.
And while difficult of the time I'm pleased that the Swift and the gross of actions. We took to address this downturn have resulted in better than expected financial results on.
I'm also very pleased that we continue to make strong progress towards our 2020 strategic goals, which I will remind you of course have well before the pandemic crisis began.
It is the people of precision most who do not have the option to work from home who have continued to drive the strong operational results excellent free cash flow for the remarkable progress our elfa technology rollout.
I think the whole the precision team for their dedication and commitment to the results they produced.
That said it seems like the worst may be behind us, we're beginning to see indications from our customers that they are 2021 drilling plans in Britain harvest will increase at least modestly for the lows of 2020. Furthermore, we have several clients no enquiry about longer term contracts, we will have more of just a few minutes.
Regarding our financial strategic objectives of leveraging ours.
So the Repreve just because of the entire precision organization is aligned or limiting our cash outflows minimizing our spending reducing our costs leveraging our scale and driving system efficiencies all hands are focused on maximizing free cash flow.
I believe that our current six cost structure is optimized and these efficiencies are evident in our financial results as well.
As we look forward to the prospect of increasing activity with our current structure. We believe we can triple rig utilization with only nominal increases in fixed cost in June to expenses the operating.
The operational torque and precision, earning capability has never been better and we will demonstrate the earnings torque as activity improves in the coming quarters.
With no foreseeable need to build new rigs our free cash flow profile strong long term debt reduction targets are achievable and importantly, our ability to generate strong shareholder value is well structured.
Regarding our third strategic priority to leverage our Elfa technology platform, we remain fully on track to achieve this goal.
Our strategy of working with industry partners to develop the offs write the code and debug the software while precision focuses on field deployment and customer value accretion is really paying off in this downturn.
The frontend fixed costs associated with the technology development are spread out among several partners while precision technology costs are largely captured in our rig support infrastructure and we are essentially fully variable and linked to the revenues we achieved our.
Our partners see this technology development as key to their strategy and the resources applied across our technology partnerships have not been affected by the downturn.
Now, let me take a few minutes to update you on our Elfa out progress.
During the drilling and well construction process. There are hundreds of routine sequences control actions and decisions that the rig crew execute a repeat over and over most.
Most if not all of these processes can be controlled in a more efficient repeatable and consistent manner with or through an algorithm. These algorithms are setup as alpha apps always with the goal of producing a consistent repeatable lowest cost wellbore construction program for our customers with.
With six Elfa apps already commercial our growing customer falling dozen more in various stages of field testing, we see the opportunity to continue to grow the alpha up universe to virtually every process function where activity related to the drilling operation.
If you go to our website, you'll see several customer case studies detailing the success is achieved with alpha apps. In most cases, we are delivering double digit percentage cost reductions or reducing drilling times on a days per well basis devalue of alpha reducing cost for our customers is inarguable.
The customers using and paying for Elfa ranged from Super majors through a midsized customers, even our smallest private one rig GNP customer half of our American fleet couple of our North American Fleet is currently running Elfa by the end of next year 2021, I expect all of our operating Super spec rigs will have alpha delivering value to our customers and are in commercial.
Returns for precision in our partners.
Now, it's unimaginable that any customer will not want the cost benefit of these digital technologies as they continue to look ways to lower their costs. We expect alpha will continue to drive our near term market share growth and positions us very well for the eventual recovery in land drilling.
Now turning to our markets I'll start with Canada, we are where we are currently in the midst of a muted fall seasonal rebound in activity.
Currently we have 26 rigs running and 10 were scheduled to mobilize over the next couple of weeks, we expect to revenue or activity will trend to the upper Thirtys later this quarter natural.
Natural gas and Ngls will drive customer demand into 2021 as oil recovery takes longer.
It's still early to project, our expectations for winter season, but our curve, but our customers seem more optimistic than even just a few weeks ago. At this point, we're expecting activity, peaking in the 50 to 60 range.
For precision, but a lot can change between now and January.
The recently announced approval of Nova gas transmission expansion, we will.
We will be a positive catalyst for the Canadian drilling as a further solves takeaway constraints in the Western Canada sedimentary basin.
As we have previously commented the Montney and Duvernay gas plays in Canada remains our best region precision.
Precision enjoys strong market share due to our industry, leading fleet of Super Triple pad walking rigs. This is.
This is a market, which is also highly rational from a competition perspective, we've just a couple of competitors in this request.
All of our rigs are on multi well pads with and our market penetration with Elfa is increasing as our customers explore the capabilities of elfa to reduce overall well costs are expect most if not all super tracing super Triple rigs in Canada will be running alpha in 2021.
The shallow oil regions in Canada, nearly the Cardium Viking southern Saskatchewan, and even heavy oil remained depressed.
While activity has modestly improved from second quarter lows. This segment remains oversupplied highly competitive win rate challenged.
Precision scale as a competitive advantage, even with a challenged pricing are shallower rigs deliver solid free cash flow we have.
We expect this physics business segment to recover over the longer term, but only when oil prices improve.
The meantime, I expect substantial industry rationalization as fleet cannibalization and financial stress runs its course and.
And the industry is already restructuring indepth, while 24 drilling contractors are registered with the CA ODC over.
Over 80% of the rigs running today or from just five contractors.
Overall, we believe the Canadian market offers precision a unique opportunity set with our scale, our super Triple rig fleet, our strong market share it with little need for capital investment, we will continue to generate strong free cash flow to the benefit of our investors and Furthermore, precision will remain in a very strong competitive position when this market improves.
In the US our activity has modestly lags the guidance, we provided on our second quarter earnings call.
The commodity price volatility during the quarter delayed some projects, but today, we can report 25 rigs running and seven others on RBC we have.
We have confirmed bookings, which should bring our activity up to near 30 rigs running by the end of the year, we expect that momentum to continue into 2021.
As I mentioned earlier, we are seeing a customer trend.
With asks that are shifting to longer contract terms with those customers trying to lock in lower market rates well into 2021. This.
This is a very good market signal that our customers expect activity in rates to move up but.
But let us be clear we don't see this as a full recovery it is.
It is however, a modest rebound we've.
We believe that if commodity prices, that's both oil and gas pulled in their current range us activity in 2021 will trend upwards. We are thinking that will be in the range of 15% to 20% above current levels. We continue to expect to continue with the precision will gain market share during this time.
They also have success I discussed earlier has been across our full us customer base, we think all customers engaged in development drilling on multi well pads, we'll take a hard look at our elfa capability as a reactivate rigs this will help drive our us market share gains.
So while rig demand is modestly improving a full industry recovery will not occur until global oil demand recovers to near pre pandemic levels, the commodity prices move upwards to at least the mid $50 range for WT.
Our customers like ourselves are highly focused on generating free cash flow and returning that cash to their investors higher commodity prices will improve customer cash flows enable our customers to increase drilling will still demonstrating strong fiscal discipline, we buy.
We believe the prolonged themes of cost management operational efficiency Wellbore manufacturing and pad drilling are not going away. We also believe that our elfa technology suite combined with our Super Triple rigs will provide our customers with the value they need to continue to deliver their investors.
In our international drilling segment as Carey said, our rigs in contracts in Kuwait, and Saudi Arabia remain steady we are seeing a slow returned to office by the national oil companies and are expecting that the increased bidding activity. We are seeing should should soon provide opportunities to reactivate some of our idle rigs. The most likely are the three.
Idle ultra spec rigs in Kuwait, and we believe these rigs could be reactivated in early to mid 2021.
But as with our North American market.
The international recovery will be largely dependent on stronger oil prices.
Turning to our well service business, we continue to benefit from our scale in the lean and mean cost structure, we put in place a couple of years ago. Despite anemic customer demand and continued competitive pressures, we continue to generate free cash flow in this segment during the third quarter.
The winter outlook has substantially improved with both more visibility on customer spending in the initial deployment of the 1.7 billion dollar Canadian wealth reclamation program.
During the third quarter precision was successful receiving almost 800 application approvals for various funding various abandonment projects and thats up from just a handful we talked about on our July earnings call. So to.
So today, we have seven incremental well service rigs working on well abandonments and expect this number to climb to about 15 incremental rigs later this quarter. This program is creating jobs for our field workers, it's addressing the industry wide problem roll abandonments in for us providing a solid base of activity. It was a deeply challenged sector.
So to wrap up all of us at precision have worked very hard through the pandemic and the industry slowdown to preserve the value and service capabilities of our company for the benefit of all our share of stakeholders I believe.
I believe the precision team continues to deliver a remarkable result on all fronts, putting us in a very strong position to sustain our business through the downturn ultimately positioning us firmly for the inevitable rebound when the world Reopens.
Thank you to all the people of precision for the great work and all you were contributing I'll now.
Ill now turn the call back to the operator for questions.
Ladies and gentlemen, if you have a question or comment at this time. Please press. The Star then the one key on your Touchtone telephone. If your question has been answered you wish to move yourself from the queue. Please press the pound key.
Our first question comes from Kelly Searcher with Tudor Pickering Holt.
Hey, good afternoon, and thank you.
My first question.
On the comment you made Kevin about some of your customers New EPS.
At least the trend towards towards wanting longer term contracts.
Kind of lock in some of these.
Lower rates on a leading edge basis and I'm. Just curious is there any sort of both.
Bucket of customer type that that is leading leading that charge is diverse gamma rays of bigger GMP in smaller CMP than fine.
Finally.
Any color.
Color on where.
The rates for for that some of that longer term work in Lincoln to shake out and I suspect, it's going to shake out a little bit higher than than the true leading edge spot market rate.
Yes, jailer I'd say first of all to kind of address the first part of the question.
We're kind of seeing it on a diverse mix of customers generally its customers that probably cut a little deeper than the needed to cut during the downturn another drug that they realize they can still demonstrate good fish.
Demonstrate good fiscal discipline by the fact that need a few more rigs so I think thats the common theme.
Certainly, it's an opportunity by our customers try capture lock in lower rates for longer period, we see that that trend.
[music].
I really don't want to go into rates on today's call.
I'd level I would tell you that.
We do see we do see very good market discipline right now.
Of the competitive mix is quite limited you to really just three or four or five contractors or not really.
Dealing with the.
Non superstar great competition right now so I think it's a fairly disciplined market and.
We feel pretty good over Prestea city, now and it's a mix.
I think as we see this demand continued to strengthen Wilbur.
We will remain disciplined.
Fair enough.
Follow up is on.
The balance sheet, you've continued to generate really strong free cash flow and and accelerate the debt paydown.
Targets or progress when it comes to incremental debt pay down from here.
Should we expect further debt paydown to be to be more.
Coming from cash on the balance sheet or are you comfortable continuing to draw on the credit facility to lease retire some some additional debt in the near term.
Hey, Taylor Kerry So I would just say that we have a lot of Optionality I mentioned last quarter that we expected to be free cash flow positive before working capital benefit for every quarter. This year and that happened in Q3, we expect it to happen in Q4 and.
If you look at where analysts estimates are for next year likely every quarter next year, we'll have the optionality to use free cash flow free cash flow from operations cash on the balance sheet and our revolver and we'll look at each situation and put one of those levers.
Alright, thanks for the responses.
Thanks Taylor.
Our next question comes from Eric and Macneil with TD Securities.
Hey, guys.
Just flipping back and forth between year Q2 in Q3 disclosures I think you said you had signed 10 contract year to date in Q2 and now it's 18, obviously I know you don't want to talk about rates, but can you give us a sense of.
Term life customer type or other factors that you make you think might be helpful.
[music].
So Aaron its Kevin I think first of all if we're announcing a contracted likely be six months in term or longer.
And.
I think we're leaning towards the shorter and right now we don't to lock in that.
At a lower rate, we'd rather have some optionality on higher rates in the future.
So I'd point you towards the shorter end of the range typically those are six month, one year two years I'm pretty sure we haven't.
While slickly true.
The average will be.
Probably in the one year range.
Okay. That's helpful.
Follow up for me there is there's been quite a bit of consolidation recently among you at the MPS and Im obviously, relying on third party data here, but.
The four large transactions recently announced year previously working for six of eight companies involved in those transactions as recently as January.
We're not looking for any of those companies today, but from a market share perspective do you consider your relationships with so.
Some of the combined entities now secondary to some of your competitors and our.
And are you at all concerned that your market share might be negatively impacted as these larger companies comprise an increasing percentage of overall spending in activity.
Yeah.
I don't think the transactions are going to affect our market share certainly the the rapid downturn did impact our market share.
I can go back and look at the Darko Occidental transaction, we had a strong position with Anadarko the rigs are performing very well pad.
Head off.
Oxy not cut their drilling program, we likely would have those rigs still running today.
So I don't think there was a function of the acquisition and it was a function of the of them cutting their program.
As with the transactions are in the market right now today we.
We think we're well positioned both with the companies are being sold in the employees that were there, but also the buying companies and.
Don't expect any market share shifts.
Adversely affect our business.
From these transactions.
Hi, Eric.
I would also add that our value proposition in terms of optimization and efficiency and being able to scale our operation results ourselves towards the larger DMP players. So we think.
The bigger some of these companies get.
The more that they will be attractive to precision services.
Got you Okay last question for me.
More as it relates to kind of.
2021 outlook typically you provide your strategic priorities your capex.
Maybe December early January but.
In terms of your strategic priorities for next year.
When you think you will release them and do you think will be materially different from the debt reduction operational execution and technology priorities. You you focused on this year.
So I won't front run the news for later in the year, but what I would tell you is that debt reduction is not going to come off.
Off our priority list for at least a couple more years.
I'd also comment that our work around.
Our work around operational efficiency operational effectiveness, leveraging our scale, that's not going to lose it.
Any attention added.
Anywhere probably ever in our future, but certainly not next few years.
Thanks.
No. The answer is we'll be on the.
We'll be on the path to.
Reducing debt and improving equity value for our equity holders.
For a long time yet.
Thanks, guys I'll turn it over thanks.
Thank you.
Your next question comes from Kurt Hallead with RBC.
Hey, guys everything going good.
Yes, Kurt how are you today.
All right. Thanks.
[music].
Thank you with the stock up on the day. So thank you.
Hey, Kevin it's pretty it's pretty constructive commentary you had one year. It appears on the conference call earlier today also talk about some positive momentum on the drilling side some visibility out into early part of 2021, obviously that commentary was specific to to the U.S.
So it sounds like Theres, some green generally in the overall direction of the.
The market in the US I think the the other comment that came out that was pretty consistent with what you said was up pretty good pricing discipline.
On on that front and MS competitor, Secondly suggested that the day rates were.
Looking to stick somewhere north of $20000 a day so.
With that backdrop, Kevin as you go out into next year, and we see some improvement in overall drilling activity I know theres. Some general concerns about the marketplace about some of the.
Some of the drilling contractors may be getting a little bit too anxious to put some idle rigs back into the market and.
And maybe not having the same level of discipline that you'd expect that.
A fairly.
Consolidated market dynamics, so I don't know how do you how do you gauge that and what kind of discussion.
How many sites could you give us around some of the discussions you've been having with your customers both in terms of pace and potential magnitude of improved activity.
Kurt I think the.
The answer is obviously complex lots of there are there are.
Actually quite a few customers, we're talking to right now and Thats, a little different from even our Q2.
Q2 conference call, just a handful of customers talking to quite a few customers.
But generally the competitors that we're seeing right now kind of fall into the top three or four public a large drilling contractors. So we're really not coming up against any.
Any of the.
Smaller contractors. These are all going to be development drilling programs are all super spec rigs that are 7500, Dxi pad walking you know large rankings.
Large racking systems and and technology is every single conversation. So that's not the case there simply aren't that many other drilling contractors are going to have those conversations so it's.
The competitors are dealing with are quite disciplined.
I think we know each other quite well in the marketplace and reach of our value proposition I think we all.
We are looking to drive a draw.
Drive EBITDA and drive returns for our investors and.
Okay that sounds good.
So in the in the context of the of the overall Canadian market.
Yes, Hi, how do you how are you trying to.
Are you trying to get sense, the opportunity kind of going forward right. I mean, the biggest player in the market. Unlike didn't get any kind of bigger than that.
How do you perceive the possibility of additional cost.
Consolidation and the Canadian drilling market.
You know.
Theres five drillers miscible heavy I think its 84% of the active rigs in Canada right now.
Theres going to be rationalization, one way or another I think the first phase is rigs can cannibalize that eventually become non marketable.
Thank you.
Driving consolidation early in this kind of rate.
During the recovery period or even through this downturn in Canada.
I think the larger companies have positions are strong and there you would feel pretty good about certainly we do we don't we don't plan to do it in the crude market other than the.
Got to maximize free cash flow, but.
I don't I don't know that we need to have 25 drilling contractors in Canada or markets as right now it needs five.
I think that's where things play out if you look at the deep basin, where we're making most of our money right now Thats Montney Duvernay and the.
The deep basin is.
It was really just three contractors that EPS super Triple rigs.
And I think we're probably the only contractor right now that's running a mature sustained automation.
And so.
Technology program.
So I think that I think competition to go drive going to drive.
A smaller and smaller set of people who can compete.
And then you may see some kind of at the lower end of the scale consolidation is going to create scale, but thats scale doesnt solve the asset liability those companies will have or the technology problem GAAP, they're going to have.
And Kurt I'll add that Thats kind of that look going forward, but in the 2016 to 2019 timeframe. There was one very large consolidating transaction and there were two or three other kind of net.
Kind of next step down consolidating transaction. So there there have been a lot of deals but.
But as Kevin said, there's probably more to come.
Okay, that's great color I really appreciate it thank you.
Great. Thanks, Kurt.
Again, ladies and gentlemen, if you have a question or comment at this time. Please press. The Star then the one key on your Touchtone telephone.
Your next question comes from co primary Stifel.
Hey, good afternoon guys.
So we've all kind of heard a lot of commentary around us oil producers.
Spending minimal growth capex until WT hits call it maybe $50.
With some of the recent strength in Nymex gas can you just talk about how conversations with some of your gas clients and you guys have been going and how you might see some of those dynamics playing out from an activity standpoint 10 2021.
Sure coal.
If you just go look back even to our Q2 conference call. Given back then we talked about the expected increase in activity driven largely by gas with.
With 25 rigs running today I think we're I think our guest mix has moved up a little bit from where it was earlier this year. So clearly some of this early move we've been seeing in the us have been driven by gas.
And I think we'll pick up a couple of oil rigs yet between now and the end of year. So I think most of what we'll see in 2024 rig additions from the trough I'd say, probably two thirds gas one third oil.
Gotcha.
That's helpful. Thanks.
Moving onto a Canada as we just think about Q1, you guys have always had a great market share on some of the oil sands coring work and can you maybe just share how some of that is firming up for the quarter, just with the lower oil price quote.
It seems to be starting out a little bit slow and our customers seem to be waiting to see if that might get a better better bid on oil late.
Later in the season and you know those decisions could be delayed even as late as the first week of January we can you know those rigs can be fired up a couple of days notice so.
So far with the price.
Pricing in place right now EPS discussions are slow.
Hence my comments in the prepared comments around the group.
Grouping heavy oil with other shallow plays in Canada, typically I'd break those out separately, but.
Right no demand seems to be soft.
But that could change if we could see a surge even even later this year early in early in January so.
I can comment that it's been almost a three.
Three year gap in heavy oil drilling we saw a little bit of a bump up early this year, though so.
So the winter season, actually such a bump up to that even caught us by surprise a little bit in January but.
We know our customers need to replace production that need to drill wells, but theyre going to throttle that carefully with quality prices.
Gotcha, Yeah, that's a that's good color.
Yep.
Right.
I was just thinking of that as I said that though but what's happening is there is a backlog of drilling this building and building and when commodity prices do bump up just a little bit there is going to be a surge of heavy oil stratification drilling and.
Like all of these.
Oil and gas.
Drilling gas when you stop exploring and stop drilling for assisted sustained period of time that creates a larger and larger rebound of the backside. So.
Those wells are going to get drilled.
If you don't get drilled this year that may get drilled extra there will be a larger recovery period if.
If the if we delay through this year sorry for the long answer I don't know that said that's great detail.
Gary you made a comment earlier that you.
If you Triple your rig count you don't see much of a change to fixed costs in DNA.
Would it be fair to say under that same kind of guys that you would see maintenance capital staying in that 30 to 35 range if that makes sense.
Now so some maintenance capital would be completely correlated with activity levels. So we would see our maintenance capital go up proportionally with rig activity.
And think of it as kind of 15, eight and $800 a day.
Drilling day.
Okay got it okay that makes sense.
That's all for me guys. Thanks for the questions I'll turn it back.
Thank you Michael.
Your next question comes from Blake Gendron with Wolfe Research.
Hey, Thanks, Thanks, good afternoon guys.
I might have Miss heard but I think you did.
I mentioned attrition earlier on in the call in the prepared remarks.
Maybe you didn't but it's typically not phrase we hear on the rig side more so on the Frac side, just wondering how that's manifesting in the south.
On the Super spec contingent maybe in the US is this attrition of equipment is that attrition by.
Obsolescence is attrition just on the on the competitor side and just pure is going out of business.
And how do you expect it to evolve.
Could be presumably see maybe more obsolescence as well can you.
Well construction and design continues to scale and.
Things like floor clearance and other specs are more important.
Yes.
But we really didnt address.
The quality or the age or the relevance of the Super spec fleet and.
I guess, what makes it even more complex there really is no.
No agreed upon definition of what constitutes super spec for.
For sure for sure I can guarantee that all of the AC rigs in the us or not.
Leading EPS Super specs, all throw definitional bells feature for a second and I will review at precision right now as leading edge spec Super spec rig would be a.
12, or 1500 horsepower rig that is powered digitally through an AC system.
It will.
We will have three mud pumps configured for 7500, PXI will do long reach horizontal drilling it will have a pad walking system to walk in X y directions.
Now I can tell you not all of our AC rigs meet every checkmark enough that the amount of capital to make it do that is diminimus for our fleet.
When you look across the us fleet of AC rigs some of those rigs were built.
Really back just passed the turn of the century back in 2002 2003, so for sure some of those rigs probably don't have three mud pumps to 7500 PXI. The racking capacity. So I guess you could call the technical obsolescence, but for some of these rigs really the age of the rig plus the upgrade cost probably make some obsolete.
We haven't done that analysis on the us roughly in several months certainly not through this downturn, but I think thats something we will do in 2021, So we understand how the fleet looks as the market begins to rebound.
It does seem like there is no the supply of leaving a super spec rigs is not limitless and.
And the location of the rig plays into the day, we would get if we've got a rig nearby location to meet superstar. We can for sure get a higher day rates of one that might be.
Based on the way.
And I would just add I think kevin's comments about attrition in.
In the us and Canadian fleet had more has more to do with financial constraints of competitors, where they don't have the funds to keep rigs well maintained.
And to to buy new critical components. When they were out typically they will tick them off of idle rigs and effectively leaving those idle rigs has not worked.
Understood I must have miss heard or misconstrue, what I heard on one to focus on the on the shallow basins and the elasticities oil I thought. It was interesting you said that these rigs are pretty highly cash generative all things considered you leverage your scaling in some smaller regional competitors I'd imagine you have to be pretty compare.
Live on price. So can you give us an idea first.
As to how cash generative. These rigs are relative to say some of the deep basin rigs that up a bit more visibility, but are more expensive to run on the super spec side and then your thoughts around.
Activity levels in these basins relative to the oil price. So what is the elasticity.
In in the Cardium and the Viking and scatter on needs the shallower basins.
Your best guess I I know its seasonal but it'd be helpful to maybe understand how your customers might be thinking right now.
Okay.
Okay I'll take the first part of that on the on the cash generation of the show.
Shallower rigs so the day rates are going to be a little bit lower than what we would see with the super triples that are working in the montney. The duvernay, but the operating cost is a bit lower and the maintenance capital spending is a bit lower so given that the day richer are lower than the Super triples, we get a better care.
A better cash for.
For comparable cash return on some of the shallower rigs.
And when you layer in the scale effect of large drillers that precision that has.
Vertical integration through our supply chain through a repair and maintenance systems and services, we could probably operate those rigs anywhere from 1000 to $2000 the cheaper than most of our peers.
Got it thanks guys.
Our next question comes from John Gibson with BMO capital markets.
Thanks, Good afternoon guys.
I know you don't want to get into exact degree discussions, but when you think about adding rigs across North America towards the end of the year and even into next year with these MSB rigs that are currently graft on site or purely you get ops.
John Good question in Canada, good likelihood summer summer rush on site for Russia.
Correct most of location in the us were.
More likely the rigs a lot last summer in the field.
It's early on location.
Okay, Great and are you still seeing a large difference between renewal and new bid ops in terms of pricing.
Yes, we are.
The.
The the switching cost.
On a renewal is playing out quite nicely for us our renewals were certainly able to get.
Great much closer to the prior rate than on a new.
The new startup because.
They move our rig off location bring another rig onto a location we've got some moving costs both directions, plus they've got the crew.
Commission and trading and getting up to speed up the efficiency. So that does give us a pretty.
Pretty meaningful advantage on renewals.
I think that.
Publish a case study.
Okay study actually on the.
Switching costs bridges will be on our website to refer you to look about zika.
We have good clarity on switching costs.
Okay sounds good and then just last one for me. So you received 8 million in Q this quarter.
Let's just say in a world without Hughes, but we're still still be able to still dealing with cold and how much would you do you think you can recover EPS 80 million in terms of just further cost improvements that you would have undertaken had you not receive them.
Yeah, I don't think that we're not going to point to a punt exact number but it would be meaningful.
Thanks.
Okay.
Thanks.
That.
The.
Especially in our well service group and in the field, we've been able to run a bunch of small little projects in house that we wouldn't have done otherwise from critter jobs for blue collar workers, the field and in our yards and I'm really happy about that so I'm happy with the effectiveness of the program and.
The fact that we get a bit of maintenance work done thats important.
Important for us to say lets up Theres, a good benefit to that program right now and we'll certainly take advantage of it.
Yeah.
Okay, great. Thanks.
Thanks, and I'll turn it back.
Thank you John.
Your next question comes from just totally with Pietersen Cookie.
Good afternoon, guys couple around the definitions when the drilling side.
In terms of the incremental rig adds I know you talked to both the gas oil mix earlier, but more specifically pull from the us from the Canadian side, where do you see those incremental rigs going.
So we will in Canada, there will be a couple more rigs activating.
Montney Duvernay and the balance will be spread around the province.
So.
I don't have numbers right in front of me and in the us.
Couple of DJ basin of one or two in the.
Permian over the balance of the gas directed.
And we just are going to do so.
Angela owners on northeast.
It's both.
And on the Canadian side as you.
Move to a peak rig count in Q1 in that 50 to 60 range as you talk to them.
He is our most of the incremental rigs going to be in oil or coal it regions outside of the Montney Duvernay, Andy basin or is you're going to continue to be that bias.
Well I think that we've had a high activity level in the Montney Duvernay region, even right now so boasted incremental rigs will look at.
We'll get a handful a couple more of them onto different over the balance of the outside those deep basin regions.
The delineation reference you made before about some pent up demand do you think that stirs to show up in your Q1 activity on the Super singles.
Well you know, Jeff it did a little bit.
In.
Back in January February this year, we have certainly higher rig count this Q1 behind us driven by.
No safety or heavy oil drilling.
And that's.
Thats after three years of really low drilling levels. So I would tell you that the likely swing and drilling this coming 2020 winter season 2021 winter season, if we're at.
If we're at the high end closer to 60 or even getting over 60, it will be because that delineation and say drilling picks up if we're at the lower end closer to 50, it's because it doesnt.
A clarification on the rationalization side, so I know your reference to the Canadian side, specifically, but how do you think about your fleet in terms of productivity and.
Rationalization on a go forward basis, both Canada and U.S.
This downturn to come so quickly and so sharply that we really havent.
Changed our strategic view on our fleet, we think our fleet is well positioned we think we're taking the right steps from an accounting perspective devalue of the fleet properly.
You know as the dust settles on Twitch Whalen budgets that we kind of get a sense of what the recovery looks like longer term.
It doesn't change as the fleet.
Orientation, we will certainly let the market know.
Yes, and Jeff I, just remind you weve.
We've decommissioned over 200 rigs in the play.
In the past eight years.
And if you look at utilization levels. If you just look at the take prepaid.
Pre pandemic Q4 Q1.
Utilization level of our fleet in Canada was the highest of all the contractors and in the US I believe we were either one or two.
Out of all the contractors. So we think it's.
At least compared to the rest of the drilling contractor universe. It's the most.
The most relevant.
The last thing on the US side, what does your contract coverage for Q1 of 2021.
Let's see.
We actually have not disclosed I think we will just to close.
Annually 2021.
So forth for annually, we have 18 total rigs under contract and seven for the year. So obviously it will be higher in Q1 and as these just contracts in hand today and as we move closer towards the end of the year and into Q1 will be.
Building up that contract but.
And so how do you think about mitigating the rate impact.
On your use fleet given your contract profile is dropping significantly as it is set to as of today.
Yes.
So I mean, I think thats part of that part of the drilling business jet Weve.
Obviously significant reduced our cost structure, we focused on.
Our field operating cost we have managed our existing contract book and.
On new rig.
Rig opportunities, we'll we'll balance.
Both the day rate that's available in the spot market versus one that were willing and turn it into four I'm sorry.
Six month to two year contract.
I guess, what I'm also trying to get out there is to the question earlier about some rigs interact on location or the difference in pricing between Greenfield spot and renewals is there a meaningful number of those 24 rigs under contract.
Under contract for Q4 that you think are likely to roll over on to a new contract to build that 2021 number and therefore protect you from leading edge.
That's a big part of it.
We've seen that happen here over the past six months.
Our new contracts have been existing rigs there.
Existing rigs that are rolling over into new contracts.
Thanks for that going for sure.
Mr.
I'm not showing any further questions at this time I'd like turn the call back over to Dustin.
Thank you all for joining todays call look forward to speaking with you. When we report our 2020 year end results in February.
Ladies and gentlemen, this will conclude today's presentation. You may now disconnect and have a wonderful day.
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