Q4 2020 Precision Drilling Corp Earnings Call
[music].
Ladies and gentlemen, thank you for state and the bi and walks the precision drilling corporation, 2024th quarter and the peer results conference call and webcast. At this time all participants are in a listen only mode.
After the Speakers' presentation there'll be a question answer session.
And I ask the question during the session you will need to press Star then one on your telephone.
Please be advised that today's conference is being recorded.
And do you require additional assistance. Please press Star then zero it was reached on operator.
And I hand, the call over to Dustin honing manager of Investor Relations and corporate development. Please go ahead.
Thank you Michelle and good afternoon, everyone welcome to precision Drilling's fourth quarter and year end, 'twenty and 'twenty earnings conference call and webcast.
Participating today on the call with me are Kevin W. President and Chief Executive Officer, and Carey Ford Senior Vice President and Chief Financial Officer.
Through a news release earlier today precision reported its fourth quarter and year end 'twenty and 'twenty results.
Please note that these financial figures are in Canadian dollars, unless otherwise indicated some of our comments today will refer to non <unk> 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 precision future results and prospects.
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 see our news release and other regulatory filings for more information on forward looking statements and these risk factors.
Terry will begin today's call by discussing our fourth quarter and your and financial results. Kevin will then followed by providing an operational update and outlook.
I'll turn it over to you Carey.
Okay.
Thank you Dustin.
Precision exceeded the financial targets set out at the beginning of 2020, leveraging our scale to generate $263 million and adjusted EBITDA.
Growing our cash balance by $34 million and reducing debt by $171 million, despite experiencing year over year ex North American activity declines of over 44 per cent.
Precision and the ability to achieve these results was a function of strict cost control and cash management as well as excellent field performance.
Our cost reduction initiatives activated and the second quarter were necessary given the anticipated the steep activity drop in 'twenty and 'twenty.
We successfully reduced fixed costs by over 35 per cent and SG&A by over $30 million, which positioned the company to generate strong financial results for the fourth quarter of this year and the.
Established a cost structure, we believe the sustainable and an increasing activity environment.
Cost control and cash management and debt reduction and we will continue to be focus areas for the company in 'twenty and 'twenty one.
Moving on to our fourth quarter results are.
Our fourth quarter adjusted EBITDA was $55 million a decrease of 47 per cent from the fourth quarter and 2019.
The decrease in adjusted EBITDA, primarily results from a sharp decrease in drilling activity in North America and of flight activity decrease and our international operations.
Also included in adjusted EBITDA during the quarter is $10 million of choose assistance payments of $11 million of share based compensation expense absent. These items EBITDA would have been $56 million per the quarter.
As a reminder of the Qs program supports employment and Canada and precision has utilized this program to for to preserve jobs within our organization.
We are part of the Canadian government for this program and its impact on supporting and employment and during the pandemic.
Although the program has extended well into 'twenty and 'twenty, one and as it is likely participation levels will decrease for precision in 'twenty and 'twenty, one with the expected financial impact to be approximately half of that in 2020.
And the U S drilling activity for precision averaged 26 rigs and Q4 and increase of five rigs from Q3.
Daily operating margins and the quarter were 11158 U S dollars a.
The decrease of 1130 non U S dollars from Q3 the.
The decrease and margins is due to lower IPC revenue earned in Q4 slightly offset by higher turnkey margins are and in Q4.
Absent the impacts from I B C and turnkey.
Daily operating margins would have been 716 U S. Dollar U S dollar is higher.
And Q3, which reflects the impact of exceptional operational and cost control during the quarter.
For Q1, and we expect normalized margins absent of IPC and turnkey to be down slightly from Q4 levels.
We expect to average one rig on the IPC during the first quarter.
And Canada drilling activity per precision averaged 28 rigs a decrease of 15 rigs from Q4 2019 daily.
Daily operating margins and the quarter were $9379 an increase of $1988 from Q4 of 2019.
Margins were supported by a strict focus on operating cost excuse the assistance and shortfall payments.
Absent the Qs and shortfall impact margins would have been $6895 per.
$496 lower than Q4 last year.
With the cost control efforts nearly offsetting the overhead burden from lower activity.
For Q1, we expect margins margins absent.
Accused to be relatively in line with last year.
Internationally drilling activity for precision and.
And the current quarter average six rigs.
International average day rates were at 55000, and 453 U S dollars up approximately 3170 U S dollars from the prior year benefiting from active rig mix.
And our CMT segment adjusted EBITDA This quarter was $5 $3 million down $15 four per cent compared to the prior year quarter. Adjusted EBITDA was negatively impacted by of 32 per cent decline and well service hours, reflecting lower industry activity and the quarter.
We expect results will improve in Q1 due to increased interest industry activity and additional work supported by the Canadian government's $1 7 billion dollar well side of abandonment and rehabilitation program.
Yeah.
Capital expenditures for the quarter were $23 million and $62 million for the year, our capital expenditures were higher than forecast due to higher than expected activity in the fourth quarter anticipated higher activity to start 2021.
For contracted upgrades completed in the fourth quarter.
And discounted year and purchasing of upgrade components ahead of increasing activity in 2021.
Regarding the upgraded rigs completed and the fourth quarter two related to U S operations and two were for the Canadian market.
All four of the upgrades were heavily supported by precision precision teams and our NICU Tech Center and Rossdale operations.
Our 2021 capital plan is $54 million and is comprised of $38 million per sustaining and infrastructure and $16 million per upgrade and expansion, which relates to anticipated investments supporting alpha technologies and.
And contracted customer upgrades.
As of February 10th we had an average of 33 contracts in hand for the first quarter and an average of 28 contracts for the full year 2021.
Moving to the balance sheet, we continued to reduce both absolute and net debt levels, primarily through free cash flow generation.
As of December 31.
Our long term debt position net of cash was approximately one point of one $4 billion and are totally total liquidity position was over $700 million when excluding letters of credit.
Our net debt to trailing 12 month EBITDA ratio is approximately four three times and.
And the average cost of debt for precision of $6 five per cent.
We remain in compliance with all of our credit facility covenants and the fourth quarter with an EBITDA and interest coverage ratio of two seven times.
During the quarter, we utilized $6 million to repurchase shares.
A couple of our capital allocation program.
<unk> substantially weighted to debt reduction.
For 'twenty and 'twenty, one we expect to continue generating free cash flow through operations and do not expect incremental benefit from working capital release as activity is increasing and both the U S and Canada.
Concurrent with the activity increase and the fourth quarter, we reported a $24 million increase in working capital from the end of Q3.
Liquidity remains the top priority and we will continue to look for opportunities to reduce leverage and of.
Our debt reduction targets for 2021.
Two 100 million to $125 million.
We remain we remain on track to meet our recently increased longer term debt reduction goal of $800 million between 2018, and 'twenty and 'twenty two.
For 'twenty and 'twenty, one we expect depreciation to be approximately $290 million, we expect SG&A to be $55 million before share based compensation expense.
We expect cash interest expense to be approximately $85 million for the year.
And we expect cash taxes to remain low and our effective tax rate to be and the five to 10 per cent range.
That concludes my remarks, and I will now turn the call over to Kevin.
Good afternoon, and thank you Carey.
Alright, 'twenty and 'twenty was of deeply challenging year.
But it was one where precision and demonstrated the resilience and agility of our business model and the resource of all this of our highly skilled people.
Now you May recall, that's on our conference call of last February we foreshadowed the potential risks from the emerging pandemic.
And was it a few weeks the precision team pivoted to a full risk mitigation mode.
Ideally executing our pandemic safety response plan and then addressing spending.
Despite the resulting downturn, we successfully achieved or exceeded all of our pre pandemic strategic priorities, we improved our capital structure.
Exceeded our debt reduction targets, we restructured our fixed cost of the expense base and we firmly position the company for the industry recovery, which is now under way.
All while managing the health and operational risks caused by the COVID-19 virus.
I think precision was the fourth quarter financial monopoly operational results bear the fruits of that hard work during the fourth quarter, we increased our U S activity 60 per cent or third quarter bottom and our U S activity currently sits at 33 rigs.
Canadian activity today sits at 54 rigs up from Q2 lows of just eight rigs and doubling of our two of your Q4 average of 28 rigs.
The drastic steps our team implemented during the second quarter of 2020 to reduce costs and expenses are sustainable and will ensure strong cash flow torque as the business continues to recover.
Our resilient margins during the fourth quarter are good indication of precision, earning torque capability.
As we reported in our press release, we continue to make strong progress on our Elfa digital strategy.
The market penetration of Elfa automation, and almost doubled in 2020% to 41% of wells drilled up from 23 per cent the prior year customer.
Customer utilization time, now exceeds 95 per cent for all of automation and the system uptime will and use it as the $99 six to 100 per cent range exceeding even our highest mechanical uptime the expectations for this product.
Precision is the Elfa App store now has 18 active apps and we recorded 2300, <unk> and 'twenty and 'twenty.
During the fourth quarter, we initiated field hardening trials for our sliding up successfully executing some 30 slides.
Sliding is a very important out because it was significantly reduced rig mounting by liberating and the directional driller and you'll be ex.
This app will become commercial by mid year.
And also analytics was also introduced to customers early 2020 and trial mode. We transitioned to a commercial model of mid year and the second half. We built 800 revenue days with the health of analytics.
So there's no doubt the will increased market penetration for all of Alpha digital services and we.
We believe these digital capabilities significantly strengthen our competitive positioning.
So looking forward, we see and improving macro environment with strengthening industry fundamentals and we could also reports of contract customer settlements and suddenly.
And that is also substantially improved.
Hydrocarbon extraction is a capital intensive industry the construct of access to the capital markets is essential the.
Recent successful of debt and equity offerings by our customer base are indicative of the capital markets beginning to recognize the capital discipline. The industry is demonstrating we believe this is a very important with the indicator of the industry's recovery.
We also expect global oil demand will continue its recovery of the COVID-19 vaccines are distributed for the fed.
Debit restrictions begin to ease later this year.
And the U S. The improved natural gas prices are driving increased E&P gas directed interest.
Precision rig mix has shifted to 50 per cent gas, 15% oil of several of our recent rig activations have been for gas directed drilling.
I am pleased with our market position and U S gas basins with the strong presence in both of the Marcellus to the Haynesville gas plays.
And I also note. The these customers have been technology first movers, adopting alphatec topologies and <unk>.
<unk> seen the efficiencies be promise.
Well directed Permian activity has also rebounded from 2020 low <unk>. However, the regional excess supply of idle high spec rigs has led to some creative pricing strategies.
At precision we remain.
Highly disciplined and we'll continue to look for the best return opportunities to reactivate of idle rigs and.
We believe our alpha technologies are important catalysts for our marketing strategy of the Permian.
And I'm Carrie mentioned several rigs were upgraded during the fourth quarter and will elaborate on the two U S upgrades.
The two U S rigs are precision S. T 1200 pad walking Super Triple rigs the D. J basin, operator wanted to reduce the environmental footprint and reduce the time on location with the drilling operations to minimize the community impact.
We proposed a solution to reduce the footprint and squeeze two rigs on one pad to drill simultaneously.
And this was a major rig configuration upgrade we vertically stacked the rig utility modules to reduce the rig footprint by about 20%.
Both of our upgraded rigs were spud it on location earlier this month and our.
We are delivering on all of the customers' expectations.
The big win for our customer and the very good I'll come from precision, but we think this is an excellent example of all of precision can be an integral part of our customers' ESG strategy.
More on this when I discuss of our 'twenty 'twenty one priorities.
Currently we have line of sight for additional U S rig Activations later, this quarter and into the second quarter and we expect our activity to increase by 15 to 20 per cent by mid year of course, presuming, we don't expect and other external macro disruption.
Now there's been much talk of performance based contracts displacing the day rate model and while some of our contracts are performance based.
We remain very cautious on this contract the arrangement.
We continue to have very good success price of our alpha of digital technology offerings, and Elkhart additions to the base day rate.
The rig day rate may be exposed to market competition. The alpha services are not we are seeing new customers and market share gains due to the efficiency and data analytics that also have the tables.
We'll continue to pursue both contract the alternatives, but any event, we believe the demonstrated drilling efficiency wellbore placement accuracy and the rig safety well when the deal with our customers.
And in Canada, and if the market has largely stabilized and is beginning to improve Q2 customer demand looks to be almost double what we experienced in 2020 and.
The more visibility of the second half of the year remains less clear, we expect of firm natural gas pricing and stronger WCS prices will drive the activity meaningfully higher on a year over year basis.
Our market positioning and the Montney with our Super Triple rigs and the health of automation remains strong we expect firm montney activity through spring into the second half of the year.
Heavy oil has also rebounded from recent lows reflected and our improved heavy oil activity is winter drilling season.
With firm WCS price of can we expect this trend will continue through the year, we are well positioned.
Positioned with our Super single rigs is the rig of choice where heavy oil drilling.
While the price competition remains intense and the shallower conventional oil plays such as the Cardium and Viking and southeast, Saskatchewan and firming customer demand should help stabilize those prices later of the year.
And our international segment, we continue to manage the complicated logistics caused by the pandemic travel restrictions and coordinate and requirements for our rooted and crews and our financial performance remains strong and consistent.
We're getting some indications of the rig renewals and the Activations were waiting for and Kuwait, They start to get some attention, but as yet we have no clear indication of timing.
Currently we have three rigs running another contract for the full year and Kuwait.
And Saudi Arabia, Aramco is they'll begin to reactivate some of the rigs they put them on standby last year, we think they'll work through those all of you see rigs before any new rig activations of possible. This is certainly a positive trend, but again the timing on additional opportunities is uncertain. At this point currently we have three rigs operating and Saudi Arabia.
Under contract for the full year.
Our Canadian well service segment is experiencing an increase of demand driven in part by the Canadian well abandonment program, but also a broad based increase and customer demand.
We believe there has been a multiyear leg of the wall surface work and now with improved commodity prices. This is an area that's getting operator attention and.
Again, barring a macro dislocation, our 'twenty and 'twenty, one well services activity for precision will be substantially improved over 'twenty and 'twenty one.
We believe this business has good earnings are good cash flow torque following the restructuring efforts we've undertaken over the past couple of years.
Now turning to our 'twenty 'twenty, one priorities I think our continued management focus on free cash flow debt reduction and the market penetration for Alpha technology will be no surprise to those who follow of precision.
However, our newest priority to strengthen our customer and stakeholder positioning through ESG performance is of critical priority is real and recovers from the pandemic will of.
Look into the future.
As you may of Red and our 2020 of sustainability report precision has a mature and well developed.
Developed ESG culture supported by internal processes controls and systems. However, we believe we can help our customers of our investors and other stakeholders better recognize the performance, we deliver and how we will continue to evolve our ESG strategy going forward.
And My example earlier regarding the reduced footprint compact rig to supplement our customers' environmental strategy. It was one of the way we can help our customers as they strive to lower their emissions reduced by the <unk>.
The mill footprint and improve their ESG scores.
Precision of high performance service offerings, which deliver better drilling efficiency also deliver reduce <unk> emissions such as our Elfa digital technologies, our pad walking systems on natural gas fuel systems matter of hybrid hybrid battery power systems and.
And 2021, we will put these GSC initiatives and the others still have plenty of stage to the forefront of our strategy. We will also quantified a full range of ESG initiatives and the performance for all of our stakeholders.
So I'll conclude my comments by thanking all of the employees of precision of for their very hard work and contributed the precision the strong results of the deeply challenging environment.
And I certainly appreciate that the out of the workload and independent of extra sales to every employee feels.
I, especially want to commend our rig crews who of manage the pandemic risk excellently and delivered our all time best field safety performance.
So thank you very much and I'll now turn the call back to the operator for questions.
As a reminder, task of question. Please press Star then one.
Your question has been answered and you like to remove yourself from the queue press the pound key.
Our first question comes from Taylor Zurcher of Tudor Pickering Holt Your line is open.
Hey, good afternoon, and thank you Kevin you talked about items.
The 15% to 20% improvement and the U S rig count by hopefully sometime around midyear and.
On top of my head it looks like five to seven additional rigs can you talk about what sort of operator groups, whether it'd be private or public if theres any any trend behind the the operators from for those potential incremental rigs and an industry wide.
As we look at the the next leg of growth from here do you expect it to be driven mostly from the private side of the equation or fairly balanced between private and public.
Taylor a great question and certainly what we've seen so far has been weighted towards private and private equity.
The company's adding rigs with.
With the blend of some publics, but I think looking forward.
Into the how things sort of play out over 'twenty and 'twenty, one I'm really encouraged by the strong discipline of our public customers are showing around capital discipline and incur.
<unk> that the markets seem to be recognizing that I do think that the commodity price range. We're in right now both for gas and oil is higher than anyone anticipated either.
And their budgeting process or even and they're our bakeries and terminations.
And I think the outlook is improving and I do think looking forward the mix of new rigs will be more of a blend of publics and privates less weighted to the privates.
Understood. Okay, and then my follow ups also and the U S.
On the last quarterly earnings are released you had about a seven term contracts for 'twenty and 'twenty, one and now you've got.
16th and the nice improvement there.
I suspect on the leading edge basis the.
BOPP market pricing and is much lower than.
Certainly what it was a year ago and so I'm just curious if you could help us understand how you're thinking about them.
And your contract book and pricing and the sort of environment and the willingness to add some longer term contract that you know whatever lower pricing you are able to get today.
Hey, Taylor so first of all of our component of our contract contracts that we've announced are renewals of rigs that are already running it and play. So those are customers that have the rigs are on location Theres no Marlborough depo cost so in fact.
Those rates tend to be closer to prior year's rates.
Okay, New Activations will certainly be a little bit more effected by a bunch of spot market rates of a bit lower I would say that.
We think rates of bottomed, we think that there.
There is.
Sort of a concerted effort to start to move rates upwards.
And we expect that will play itself out nicely in Q1 and Q2.
Okay, I'll squeeze one of them aware and I found the the comments about the four of upgraded rigs pretty interesting and particularly the two and the U S and reducing the environmental footprint of bit can you talk to two and whether or not you're and you're able to get paid for those upgrades and now you're getting term and and some sort of decent pricing for those rigs.
Above and beyond what you can get and the one.
On a leading edge basis and the market to go ahead and do those upgrades.
<unk>, we're being paid for the upgrades are the return on the investment is very very good and fits our long term return expectations.
Great. That's it from me thanks, guys.
In fact, the table I'll just elaborate we didnt expect those upgrades and it goes up.
And I wouldn't say of surprise, but we were surprised that our customers are willing to pay for upgrades, but.
But I think it helps you understand the the market's evolving.
Our next question comes from Connor Lynagh with Morgan Stanley. Your line is open.
Yeah. Thanks.
Just wanted to build on the conversations around contracting and pricing dynamics and I. Appreciate you don't want to go to and the detail on rates for competitive reasons, but I guess, what I'm wondering is.
You know are you guys seeking to push rate more so or term more so and you're in your negotiations to what extent are customers willing to sign long term contracts and are willing to give incremental rate versus.
And what unquote spot that was sort of obviously.
Pretty pretty hampered by weak demand and so just your thoughts around that would be great.
Kona again I think these are really key questions and once everybody would like to get some really good clarity on.
There is always the balance sheet, certainly when the market speed and to recover early and the recovery.
The customers that have long term plans, we'll look to try and lock in the best rigs at the lowest rates. They can from the longest period. The count. So we've had customers asking for contracts and the range of anywhere from six months to 18 months trying to walk and the lowest rate.
Certainly we don't want to have.
A large volume of Super spec rigs are locked up for the next 18 months at a leading edge rates. So we'll balance that out we might take a couple but we'd look to.
We have optionality so as rates are to improve we can continue.
The capture of those rates as they rise.
I can tell you our management team has a very sophisticated and spreadsheet they use to manage this.
But you kept out of a copy of.
[laughter], well see well see maybe maybe if I ask nicely.
But the the I guess the other dynamic is cost so cost with something that you know, obviously as you're reactivating rigs and getting things back into the field.
And I imagine that weighs on margins and somewhat I guess, the offset is idle, but contracted rigs. So can you help us think through the next couple of quarters here, how we should think about the and I'm, particularly thinking and the U S. Obviously, Canada is a bit more complex of a breakup, but how should we think about your cost per day of your.
And on margin.
Colorado are broadly I think the rigs that we've stopped so far been stacked and pretty good shape and we have a de minimis reactivation costs, certainly nothing regarding towards but it.
And I'll, just kind of reiterate his views on on.
Our cost guidance.
Yeah, Hey, Ed Conner.
I'll point out of my.
And my comments and and the introduction that our efforts to reduce operating costs have largely offset the.
Increased overhead burden by lower activity levels.
That's been a really good development from a cost standpoint.
As we add the next handful of rigs.
We don't expect to have a whole lot of reactivation cost and we had it wasn't too long ago, we had 80 rigs running and the U S.
And not too long ago, and about a year and a half ago. So all of a lot of those rigs are in really good condition to go back to work, so it's not going to be and.
Overly burdensome and reactivation costs, but as we get deeper into the pool.
You may see a bit more cost to reactivate the rig.
Okay. So just just to.
Squared here and the trend in cost per day, probably be flattish from here or do you think are some.
On a fixed cost absorption helps how should we think about that for the duration of the category.
For the for the next couple of quarters with.
The activity forecast that debt, Kevin provided we should have relatively flat cost per day absent.
Variations and and turnkey.
And if we're talking about the U S market.
Alright, thank you.
Our next question comes from Keith Mackey with RBC. Your line is open.
Hi, Thanks for taking my question just a question on the Capex number of the 54 million.
Should we assume that that is a gross number or is that going to be net of some kind.
Kind of disposition as well.
That is a gross number.
Got it okay.
And just on on the re contracting and in particular any rigs you've had to add back to the field. Maybe if you can comment on on staffing those rigs and being able to re re contract. The same crew or or is there a is there new people out of that you're going to be younger and the mix.
Keith Good question typically we're always trying to bring in some new people, we've been quite successful re stuffing and Canada and the U S pulling back our prior precision and sort of let go during the downturn, but we but we still like to see it in some of some new greenhouse we continue to keep the build our base of the staffs and we'd be.
And doing some of that.
But we've had to of trouble staffing up rigs in Canada or the U S.
And this.
Early stage of the rebound now let me just turn to well servicing for a moment, which is a little different story.
Well servicing.
We find we're competing with.
Some of the.
Unemployment subsidy programs are underway and Canada right now as part of the pandemic relief and.
And the challenge of well servicing is that the work is call of work it might be three or four of five days work and the their home for two days on the back of work the three or four days, whereas and drilling we can guarantee months and months of working on typically six months of a year's worth of work. So.
So we don't have that debt.
Personal problem, but well servicing labor has gotten very tight and I think the well servicing sector. I know ourselves included are kind of reaching the limits of what we can do for recruiting Subaru of having to become very creative on recruiting and.
And looking at the referral programs and things like that to start getting a the b.
This of employees up in well services.
Got it okay.
And I mean, primarily of Canadian problem for us.
Yeah.
Got it okay.
Okay. Thanks, Thanks, Nicole and I'll turn it back.
Again to ask a question. Please press Star then one on.
The next question comes from coal per area of Stifel. Your line is open.
Afternoon, everyone.
And as we think about the U S and opportunities that should we be think you've made as continuing to be split between oil and gas basins or how do you expect that evolves.
Uh huh.
It depends on what we get next I'm not sure what the rest of world will be we have a pretty good line of sight of several but colby expectations and see a little more weighting towards oil going forward.
Okay. That's helpful. Thanks.
And so over the past few quarters, you guys of kind of being able to divest the non core assets for coli proceeds of a couple of million et cetera is there any line of sight that and that should continue into 'twenty and 'twenty one to help offset some of that Capex program.
Yeah.
Michael So we typically will sell.
Drill pipe when it we use it beyond the standards that be on the time standards that we've established and we're able to sell that into the secondary market. That's typically anywhere between five and $15 million a year and then we will look to sell other.
Kind of older assets that don't have much of the use within the precision of organization anymore. So I think absent.
Larger idle rig sales or non core divisions think about.
And think about divestitures and the.
Kind of $10 million to $20 million range.
Okay got it that's helpful.
So talking about some of the ESG strategy.
<unk> reported some pretty good disclosures on your bi fuel and gas powered rig fleets can you just comment on the level of utilization Youre seeing for this equipment specifically.
And if you've seen notable change and the volume of E&ps requesting this equipment.
Cool, Yeah, I think right now the rigs we have that are not being utilized that either have biofuel or not natural gas engines are probably just on the wrong physical location and so we'd be of demand for biofuel in the montney, but the rig might be sitting in north Dakota say, but but.
I would tell you almost every E&P conversation now includes a short discussion on the potential the lower GHT emissions.
Okay got it and so as we think about those conversations is it has it gotten to the point.
I guess very commonly where e&ps are willing to actually pay per call. It by fuel or other opportunities or is it kind of just here and there at this point.
No I would say that.
E&ps have been paying for of biofuel.
And paying for upgrades to buy of fuel will continue the discipline.
And I don't see a capital upgrade to a rig.
Being a.
And on the non revenue opportunity for us.
Okay got it and that's helpful I'll turn it back thanks.
Great. Thanks, Paul.
Our next question comes from Aaron Macneil with TD Securities. Your line is open.
Hey, everyone.
In the context of the three strategic priorities on technology debt reduction and the ESG.
Are there any specific.
Targets that you're looking to hit this year and how should we benchmark you against those priorities of the year progresses.
I think the.
The one clear targets that carry outlined in his comments was the debt reduction target of a range of of $125 million for 'twenty 'twenty. One of you could benchmark us against that all year.
As the year evolves, we'll disclose.
And the steps, we're taking and each of the other priorities and and continued update on those so obviously on the technology market penetration. That's clearly what we're looking for there'll be disclosing on market penetration and ESG initiatives that.
We believe either are important to our investors or important to our customers. We'll just we'll disclose successes on those.
Got it and could you maybe give us a sense.
<unk> from bi fuel and some of the other.
The examples you've given on what kind of initiatives on the ESG you might be looking at and help your customers.
No I didn't I didn't mentioned it in my narrative Highline power on the rigs and that we've got the right now of several projects that are of high line powered and our customers of looking at also and securing their of power contracts on the renewable.
The renewable power contract so that would be a from a customer of possibility to have almost a zero emissions Rick.
Okay makes sense and then switching gears.
You mentioned that you.
U S activity should increase 15% to 20% by midyear and the U S.
Do you think debt in order to facilitate that we're gonna have to start to see.
Announcements from the E&ps and increasing their capital budgets and the <unk>.
First half of the year.
Well I don't think so because I think if you think about it and our case that would be you know a handful of rigs five or six rigs I don't think that necessarily warrants.
Capital announcement for the increase.
And Eric.
And I don't expect.
And it looks like any E&P to lead with the chin on increasing capital spending.
It's kind of whatever and again.
I think what will happen, though is I think that.
The receipts at $58. There are a lot better of the receipts, we're gonna be of $48 and theirs.
They demonstrate strong free cash flow as they demonstrate.
Sustained or improved dividends or share buybacks or debt reduction I think they'll start to earmark additional capital.
And to replace the inventory of of the.
Wells as they start to work through their their ducks, which is happening right now.
Okay, Great that's all from me.
And there's no question and I expect it to be and all of the above answer for our customers, they're not going to sacrifice investor returns to add rigs, but if they can continue to show strong investor returns.
And add rigs at the margin and they'll do both.
Perfect. Thanks, that's helpful. All right I'll leave it there.
And thank you.
Our next question comes from Blake Gendron with Wolfe Research Your line is open.
Yes.
Yeah. Thanks, good afternoon.
And your peer this morning talked us through some of the math and the U S and terms of Super spec utilization and maybe some of the mechanisms start getting pricing and part of that was the stacking of older rigs and.
Potentially of the retirement of those older rigs theoretically tier two and maybe the SCR rigs and I'm just wondering what the mechanism for that would be I mean would would contract or is basically just sell them for scrap.
And the reason why I ask is I'm, just wondering the extent to which you think pricing could maybe materialized middle of this year the back half of this year, considering the rigs you and I never really haven't have gone away and the past and you know the spread between tier one and tier two.
Hasn't really expand it all too much of our.
Outside of maybe you know rapidly increasing activity levels. Just just wondering how you think about scrapping versus the super spec utilization and maybe the the.
The outlook for pricing thanks.
Yeah. So I didn't hear the comments I don't know exactly what might of been said, but.
We really haven't seen.
DC SCR rigs.
And dragging on.
The price that we've been able to achieve and the marketplace with our super spec horizontal drilling and kind of walking rigs.
I'm not too worried about watching rigs being retired I am really looking closely though.
The contractor by contractor utilization of their super spec pad walking rigs.
I think the market is really tight I mean, we've added back of 100 rigs off bottom.
And I think utilization of the Super spec rigs is getting.
Getting into the territory of pricing power.
There are some regional dislocations right now so for example.
We're doing quite well with the rigs and the DJ basin, because we've got the right sized rigs of the right place and it wouldn't make sense to move a rig from the Permian to the DJ Basin.
Mobility of friction is helping us out there.
I think youll see the once.
I'm not sure if it's a handful of more rigs or maybe 24 rigs of the Permian and get used up I'll take the.
We're gonna be the much tighter market in the Permian.
That's helpful.
In addition performance based contracts you've been if I remember correctly pretty socially opposed to some of that commerciality and and the peer. This morning, I don't know if you caught the comments.
Did some traction on the performance based contract side I'm, just wondering if you've come up against it and any tendering activity and you know how.
Quite frankly, how do you think it plays out either the receptivity of the customer base or otherwise how do you see this this commerciality of evolving.
So we do have performance contract and precision right now we have them in and more than one based on more than one customer and the U S. We're watching this closely.
We're continuing to bid other performance based contracts.
I don't think.
I'm still remaining a little skeptical of all of this I don't I, just don't know where it ends up but I haven't seen of the past two of the ones.
Once you achieve a new performance.
Shell for barrier for a sustained period of time, it ends of being a bit of a reset and.
But you'd also see the same thing about day rates get reset when supply gets the extreme so its little hard to sales going to play out.
We're keeping our avenues open the here and we're certainly going to Miss out on a performance based contract.
Trend of that continues.
I remain a little skeptical on this I can tell you that we are.
And sustaining our pricing on our technology initiatives with the really no competition to know sort of no competitive pressures downwards on our technology initiatives. So we're quite happy with the Ala Carte model day rate for the base rig Elo card for the add ons are working quite well for us.
Our debt.
The that's definitely encouraging.
I think Blake because all of you could go either way here.
And I think it will be ready to go either direction, certainly we have the tools and R. R.
Political and our Alpha technology to deliver strong performance and as I said in on my prepared comments ultimately those rigs that deliver the the best efficiency drilling the best Wellbore placement of the best safety will get the best rates whatever the price of your model is.
Understood that that's encouraging when you do a bid for a performance based contract do the other contractors see use of the kpis that you're submitting and is there any back and forth in that regard.
And there's a lot of game theory by the operators.
And with Kpis and rates and all aspects of every negotiable term.
You can just you can rest assured the procurement teams to play game theory on.
Got it thanks for the time.
There are no further questions I'd like to turn the call back over to the desktop hunting for any closing remarks.
Great. Thank you everyone for joining today's call and look forward to speaking to you. When we report 2021 first quarter results and April operator, you may disconnect.
Ladies and gentlemen, this does conclude the conference you may now disconnect everyone have a great day.
And then.
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