Q4 2020 Precision Drilling Corp Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome 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 to ask a question. During the session you will need to press Star then one and your telephone.
Please be advised that today's conference is being recorded.
If you require additional assistance. Please press Star then zero was reached and operator.
And now like to 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.
For 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 IR for <unk> financial measures, such as EBITDA and operating earnings.
We see our news release for additional disclosure on these financial measures.
Our comments today will include forward looking statements regarding precision future results and prospects. We caution you that these forward looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from our expectations.
We see our news release and other regulatory filings for more information on forward looking statements and these risk factors.
Cary will begin today's call by discussing our fourth quarter and year end financial results. Kevin will then followed by providing an operational update and outlook with that I'll turn it over to you Carey.
Yeah.
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.
Despite experiencing year over year ex North American activity declines of over 44 per cent.
Precision of the ability to achieve these results was a function of the 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 established our cost structure, and we believe the sustainable and and increasing activity environment.
Cost control and cash management and debt reduction and will continue to be focus areas for the company and 2021.
Moving on to our fourth quarter results.
Our fourth quarter, adjusted EBITDA was $55 million, a decrease of 47% 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 Qs assistance payments and $11 million of share based compensation expense absent. These items EBITDA would have been $56 million for the quarter.
As a reminder of the Qs program supports employment and Canada and precision has utilized this program to for two.
Preserve jobs within our organization.
We are part of the Canadian government for this program and its impact on support and deployment during the pandemic.
Although the program has extended well into 'twenty and 'twenty. One. It is 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.
The decrease of 1139 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 impacts for my B C and turnkey.
Daily operating margins would have been 716 U S dollars U S dollars higher.
And Q3, which reflects the impact of exceptional operational and cost control during the quarter.
For Q1, we expect normalized margins absent of IPC and turnkey to be down slightly from Q4 levels.
We expect the average one rig on IPC during the first quarter.
And Canada drilling activity for precision averaged 28 rigs a decrease of 15 rigs from Q4 2019.
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 choose the assistance and shortfall payments.
Absent the Qs and shortfall impact margins would have been $6895 for four.
$496 lower than Q4 last year.
With the cost control efforts nearly offsetting the overhead burden from lower activity.
For Q1, we expect the margins margins absent.
Of queues to be relatively in line with last year.
Internationally drilling activity for precision.
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, 4% compared to the prior year quarter. Adjusted EBITDA was negatively impacted by of 32% 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 well.
<unk> abandonment and rehabilitation program.
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.
And for contracted upgrades completed in the fourth quarter and.
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 for heavily supported by precision precision teams at our NICU Tech Center and Rossdale operations.
Our 2021 capital plan is $54 million.
And is comprised of $38 million for sustaining and infrastructure and $16 million for upgrade and expansion, which relates to anticipated investments supporting Alpha technologies.
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 for.
For long term debt position net of cash was approximately $1 4 billion.
And our total total liquidity position was over $700 million when excluding letters of credit.
Our net debt to trailing 12 months EBITDA ratio is approximately four three times.
And the average cost of debt for precision of six 5%.
We remain in compliance with all 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.
For capital allocation program remains substantially weighted to debt reduction.
For 2021, 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 concur.
Concurrent with the activity increase and the fourth quarter, we reported a $24 million increase and working capital from the end of Q3.
Liquidity remains of top priority and we will continue to look for opportunities to reduce leverage and of set our debt reduction targets for.
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 2022.
For 2021, 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 in the 5% to 10% range.
That concludes my remarks, and I will now turn the call over to Kevin.
Good afternoon, and thank you Carey.
Alright 2012.
And he was a deeply challenging year.
But it was one where precision demonstrated the resilience and agility of our business model and the reserve.
First of all of this of our highly skilled people.
Now you may recall that on our conference call of last February we foreshadowed the potential risks from the emerging pandemic.
And within a few weeks the precision team pivoted to a full risk mitigation mode.
Immediately executing our pandemic safety response plan and then.
The spending.
Despite the resulting downturn we successfully achieved.
The 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 underway all.
All while managing the health and operational risks caused by the COVID-19 virus.
I think precision with fourth quarter financial operational results bear the fruits of that hard work through the fourth quarter, we increased our U S activity, 60% over the third quarter bottom and are you.
The activity currently sits at 33 rigs.
Canadian activity today sits at 54 rigs up from Q2 loans of just eight rigs and doubling of our Q4 average of 28 rigs.
The drastic steps our team implemented during the second quarter of 2020 to reduce costs and other expenses are sustainable and will ensure strong cash flow torque as the business continues to recover.
Resilient margins during the fourth quarter for a good indication of precision, earning torque capability.
As we reported in our press release, we continue to make strong progress of our Elfa digital strategy.
The market penetration of Elfa automation, and almost doubled in 2020% to 41% of wells drilled up from 23% of the prior year customer.
Customer utilization time, now exceeds 95 per cent for all of automation and the system uptime will and use as the $99, 6% to 100% range exceeding even our highest mechanical uptime of the expectations for this product.
Precision as the Elfa App store now has 18 active apps and we recorded <unk> 300 up days and 2020.
During the fourth quarter, we initiated field hardening trials for our sliding up successfully executing some 30 slides.
Sliding is a very important as it will significantly reduce rig moving by liberating and the directional driller.
And we expect this app will become commercial by mid year.
And I'll say analytics was also introduced to customers early 2020 and trial mode. We transitioned to a commercial model 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 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 report the customer settlements.
And that is also substantially improved.
Hydrocarbon extraction is a capital intensive industry the construct of access to the capital markets is essential for <unk>.
Recent successful debt and equity offerings by our customer base are indicative of the capital market is 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 <unk>.
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% gas, 15% oil of several of our recent rig activations have been for gas directed drilling.
I am pleased with our market position in the U S gas basins with the strong presence in both of the Marcellus the Haynesville gas plays.
I also note that these customers have been technology first movers, adopting and alpha technologies and experiencing the efficiencies we promise.
Well directed Permian activity has also rebounded from 2020 low <unk> <unk>.
For 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 our idle rigs and.
We believe our alpha technologies are important catalysts for our marketing strategy of the Permian.
Carey 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 200 pad walking super Triple rigs the.
The DJ 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 the solution to reduce the footprint and squeezed two rigs on one pad to drill simultaneously.
This was a major rig configuration upgrade.
Vertically stacked the rig utility modules to reduce the rig footprint by about 20%.
Both through upgraded rigs for spud it on location earlier this month and our.
And we're delivering and all of the customers' expectations.
This is a big win for our customer and the very good outcome for precision, but we think this is an excellent example of how a precision can be an integral part of our customers' ESG strategy and we'll have more of this when I discuss for a 2021 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% by mid year of course, presuming, we don't expect 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.
Remained very cautious on this contract to the arrangement.
We continue to have very good success price of our alpha of digital technology offerings.
<unk> additions to the base day rate.
While 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 the delta of enables.
We will continue to pursue both contract the alternatives, but any event. We believe the demonstrated drilling efficiency wellbore placement accuracy and rig safety will win the deal with our customers.
And in Canada for the market has largely stabilized and as <unk>.
Moving to improve Q2 customer demand looks to be almost double what we experienced in 2020.
The visibility of the second half of the year remains less clear, we expect the firm natural gas pricing and stronger WCS prices will drive the activity meaningfully higher on the year over year basis.
Our market positioning and the Montney with our Super Triple rigs and the health of automation remains strong we expect for 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.
And with firm WCS pricing and we expect this trend will continue through the year.
Well positioned with our Super single rigs is the rig of choice for heavy oil drilling.
While price competition remains intense and the shallower conventional oil plays such as the Cardium and Viking and southeast Saskatchewan 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 quarantine requirements for a rooted and cruise for them.
The 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 under the contract for the full year and Kuwait.
And Saudi Arabia, Aramco is they'll begin to reactivate some of the rigs they put loans down by last year, we think they'll work through those RBC rigs before any new rig activations of possible. This is certainly a positive trend, but again the timing on additional opportunities.
And 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 and 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 the improved commodity prices. This is an area that's getting operator attention.
Again, barring a macro dislocation our 2021, well services activity for precision will be substantially improved over 2020.
We believe this business has good earnings for 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 the precision.
However, our newest priority to strengthen our customer and stakeholder positioning through ESG performance is of critical priority is real for covers for the pandemic and we'll look into the future.
As you may of Red and our 2020 of sustainability report precision has a mature and roll it.
And developed ESG culture supported by internal processes controls and systems. However, we believe we can help our customers and 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 is one of the way we can help our customers as they strive to lower their emissions reduced share.
Terminal 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 and natural gas fuel systems and other hybrid hybrid battery power systems and.
And 2021, we will put these GSC initiatives and other is still in plenty of stage to the forefront of our strategy. We will also quantify our 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 for their very hard work and contributed to precision the strong results of the deeply challenging environment.
I certainly appreciate the out of the workload and the <unk>.
<unk> for every employee feels.
And 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 to ask a question. Please press Star then one.
And for your question has been answered and you'd like to remove yourself from the queue press the pound key.
Our first question comes from Taylor Zurcher with Tudor Pickering Holt Your line is open.
Hey, good afternoon, and thank you Kevin you talked about.
The 15% to 20% improvement and the U S and rig count by hopefully sometime around mid year.
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 and.
Any trend behind that and the operators for the.
Those potential incremental rigs and industry wide.
As we look at 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 Great question, certainly what we've seen so far has been weighted towards private the private equity.
E&P companies, adding rigs with.
And with the blend of some publics, but I think looking forward.
And to.
And 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 book for gas and oil is higher than anyone anticipated the either.
And their budgeting process, or even and they're bakeries and terminations.
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.
For the last quarterly earnings releases, you had about a seven term contract for 2021 now you've got.
<unk> the nice improvement there.
I suspect and a leading edge basis.
Spot market pricing and is much lower than.
And certainly what it was a year ago and so I'm just curious if you could help us understand how you're thinking about.
Your contract book and pricing and this sort of environment and the willingness to add some longer term contract that whatever lowered pricing you are able to get today.
Hey, Taylor so first of all of a component of our contract contracts that we've announced are renewals of rigs that are already running it and play. So those are customers of the rigs are on location Theres no more per diem low 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 affected by <unk>.
Spot market rates of the bit lower I would say that.
We think rates of bottomed, we think that.
And there is.
And 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.
One of them and we're and I found the comments about the for upgraded rigs pretty interesting and particularly the two and the U S through reducing the environmental footprint of bit can you talk to.
Whether or not you're you're able to get paid for for those upgrades and then are you getting the term and and the.
Sort of decent pricing for those rig the above and beyond what you can get and the.
One of leading edge basis, and the market to go ahead and do those upgrades.
Absolutely we are being paid for the upgrades. The return on the investment is very very good and fits our long term return expectations.
Great. That's it for me Thanks, guys. Yeah. In fact, the table I'll just elaborate we didnt expect those upgrades.
I wouldn't say of surprise, but we were surprised that our customers are willing to pay for upgrades.
But I think it helps you understand of the market's evolving.
Our next question comes from Connor Lynagh with Morgan Stanley. Your line is open.
Yes. Thanks, just wanted to build on the conversations around contracting and pricing dynamics. 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.
Are you guys seeking to push rate more so of term more so and you're in your negotiations to what extent are customers willing to sign long term contracts are willing to give incremental rate versus quote unquote spot that was sort of obviously.
Pretty pretty hampered by weak demand. So just your thoughts around that would be great. Yes.
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 of certainly when the market speed and to recover early and the recovery.
And customers that have long term plans, we will look to try and lock in the best rigs of the lowest rates. They can for the longest period day 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 locked up for the next 18 months at.
Leading edge rates, so, we'll bell and set out we might take a couple but we'd look to.
We have optionality, so as rates start to improve we can continue.
And capture those rates of day Ross.
And I can tell you our management team has a very sophisticated and spreadsheet the used to manage this.
You can't have a copy of.
[laughter], well see well see maybe maybe if I ask nicely.
But the I.
And I guess, the other dynamic is cost so cost and something that.
Obviously, as you're reactivating rigs and getting things back into the field.
And I imagine that weighs on margins 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 of in the U S. Obviously, Canada is a bit more complex with breakup, but how should we think about your cost per day of the year.
And that impact on margin.
Colorado broadly I think the rigs that we've stacked so far been stacked and pretty good shape and we of de Minimis reactivation costs, certainly nothing regarding towards but.
And I'll, just like carry kind of reiterate his views on.
And our cost guidance.
Hey, Connor.
I'll point out Mike.
Comments and and the introduction debt our efforts to reduce operating costs have largely offset the.
Increased overhead burdened by lower activity levels. So that's been a really good development from a cost standpoint.
We add the next handful of rigs.
We don't expect to have a whole lot of reactivation costs.
It wasn't too long ago, we had 80 rigs running and the U S.
Not too long of about a year and half ago. So 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.
They see a bit for cost to reactivate the rig.
Okay. So just just to.
The squared here and the trend in cost per day, probably be flattish from here or do you think.
The fixed cost absorption helps how should we think about that for the duration of that.
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 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 of disposition as well.
That is a gross number.
Got it okay.
And just on the re contracting and in particular any rigs you've had to add back to the field. Maybe if you can comment on staffing those rigs and being able to.
And we re contract the same crew or is there is the new people that youre going to be dealing with it and the mix.
Thank you for your 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.
And prior precision and drilling.
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 staff. So we have been doing some of that but we've had no trouble staffing up rigs in Canada or the U S.
And this.
Early stages of the rebound now let me just turn to well servicing for a moment, which is a little different story and well servicing.
And 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 the well servicing is that the work is call of work it might be three or four of five days work and their home for two days in the back of work of 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.
First of all problem, but and well servicing labor has gotten very tight and I think the well servicing sector. I know ourselves included are sort 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 the.
The base of employees up and while services.
Got it okay.
And primarily the 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.
Our next question comes from coal per area of Stifel. Your line is open.
Afternoon, everyone.
And as we think about the U S opportunity 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.
A little of it depends on what we get next I'm not sure. What the next award 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 call. It proceeds of a couple of million et cetera is there.
Are 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 beyond 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'll look to sell other.
Sure.
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.
Think about divestitures and the <unk>.
And of $10 million to $20 million range.
Yeah.
Okay got it that's helpful.
So talking about the Es.
The <unk> strategy Youre ESG 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&P and requesting this equipment.
Of course, yes, I think right now the rigs we have not being utilized that either have bi fuel or not and natural gas engines are probably just of the wrong physical locations. So we have demand for biofuel in the montney, but the rig might be sitting in north Dakota, but but but.
And I would tell you almost every E&P conversation now includes a short discussion on the potential the lower <unk> emissions.
Okay got it and so as we think about those.
The conversations as it has it gotten to the point.
I guess very commonly where e&ps are willing to actually pay for call it buy fuel or other opportunities or is it kind of just here and there at this point.
No I would say that.
Our e&ps have been paying for of biofuel.
And paying for upgrades to biofuel will continue the discipline.
I don't see a capital upgrade to a rig.
Being a.
The non.
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.
<unk> targets that Youre looking to hit this year and how should we benchmark you against those priorities as the year progresses.
I think the.
The one clear target that carry outlined in his comments was the debt reduction target of a range of $125 million for 2021 of you can benchmark as it gives that all year.
As the year evolves, we'll disclose.
And the steps, we're taking and each of the other priorities and.
And the continued update on those so obviously in the technology market penetration.
Clearly, what we're looking for there'll be disclosing of 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 all of those.
Got it and could you maybe give us a sense of aside from bi fuel and some of the other.
Examples of you've given on what kind of initiatives on the ESG you might be looking at health.
Help your customers.
Yes.
No I didn't I didn't mentioned it in my narrative high line power on the rigs that we've got.
Right now of several projects that are of high line powered and our customers are looking at also the securing their of power contracts on the.
Renewable power contract, so that would be a for a customer of the possibility to have almost a zero emissions Rick.
Okay makes sense and then switching gears.
You, obviously mentioned debt.
U S activity should increase 15% to 20% by mid year and the U S.
Do you think debt in order to facilitate that work and have to start to see and.
Announcements for the E&ps, increasing their capital budgets and the first half of the year.
Well.
Don't think so because I think if you think about it and our case that would be a handful of rigs five or six rigs.
Think necessarily warrants.
Capital announcement for the increase and.
And I don't expect.
But it looks like any E&P the lead with their chin on increasing capital spending.
It's kind of and again.
Yes, I think I think what will happen, though is I think that.
Receipts at $58. There are a lot better of the receipts were going to be at $48 and theres a 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 wells.
Wells as they start to work through their ducts, which is happening right now.
Okay, Great that's helpful.
And there's no question and I expect it to be and all of the above answer for our customers. They are not going to sacrifice investor returns to add rigs, but if they can continue to show strong investor returns.
And add rigs for the margin, we'll do both.
Perfect. Thanks, that's helpful.
And I'll leave it there.
Thank you.
Our next question comes from Blake Gendron with.
Wolfe Research your line is open.
Yes.
Yes. Thanks. Good afternoon. So your peer this morning talked 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 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.
Contractors basically to sell them for scrap.
And the reason why I ask is I'm, just wondering the extent to which you think pricing and maybe materialized middle of this year the back half of this year, considering the rigs and never really have gone away and the past and the spread between tier one and tier two hasnt.
It Hasnt really expanded all too much outside of maybe rapidly increasing activity levels. Just wondering how you think about scrapping vs Super spec utilization and maybe the the.
The outlook for pricing thanks.
Yes, so I didn't hear the comments I don't know exactly what might of been said, but.
We really haven't seen.
D C SCR rigs.
The dragging on.
The price that we've been able to achieve for the marketplace with our super spec horizontal drilling pad walking rigs.
So I'm not too worried about watching rigs being retired I am really looking closely though.
Contract by contract or 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.
The 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 in 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 for the Permian for the DJ Basin.
Ability of friction.
Helping us out there.
I think youll see the once.
I'm not sure if it's a handful of more rigs or maybe 21 rigs of the Permian and get used up.
Really the much tighter market the Permian.
That's helpful in and.
Additionally performance based contracts you've been if I remember correctly pretty staunchly opposed to some of that commerciality and and the peer. This morning, I don't know if you caught the comments.
Noted some traction on the performance based contract side.
Just wondering if you've come up against it in any tendering activity.
And the.
Quite frankly, how do you think it plays out either the receptivity of the customer base or otherwise how do you see this the commerciality of evolving.
So we do have performance contracts and precision right now, we have them and more than one base and more than one customer and the U S for watching this closely.
We're continuing to bid other performance based contracts.
I don't think.
Im still remaining a little skeptical of the US I don't I, just don't know where it ends up but I haven't seen of the past as the <unk>.
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 would also see the same thing about day rates get reset when supply gifts. The extreme so it's a 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 and our technology initiatives with really no competition and no sort of no competitive pressures downwards on our technology initiatives. So we are quite happy with the Ala Carte model day rate for the base rig Elo card for the add ons working quite well for us.
That's the.
The definitely encouraging.
Because I think of it could go other way here.
And I think we will be ready to go either direction, certainly we have the tools and our and our.
And analytics and our Elfa technology to deliver strong performance and as I said.
<unk> comments ultimately those rigs that deliver the best efficiency drilling the best Wellbore placement of the best safety will get the best rates whatever the price of your model. This.
Understood that's encouraging when you do 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 rest assured the procurement teams apply game theory.
Got it thanks for the time.
There are no further questions I'd like to turn the call back over what's the depth of honey.
For any closing remarks.
Alright. 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.
Yeah.
Okay.
Yes.
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Ladies and gentlemen, thank you for standing by and welcome 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 to ask the question during the session. When the press Star then one of your telephone please.
Please be advised that today's conference is being recorded.
The required additional assistance. Please press Star then zero it was reached and operator.
And now 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 and welcome to precision drilling fourth quarter and year end 2020 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.
For a news release earlier today precision reported its fourth quarter and year end 2020 results.
Please note that these financial figures are in Canadian dollars unless otherwise indicated.
Some of our comments today will refer to non Io for <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. 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 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 with that I'll turn it over to you Carey.
<unk>.
Okay.
Thank you Dustin Chris.
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 of reducing debt by $171 million, despite experiencing year over year ex north American activity the declines of over 44%.
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% and SG&A by over $30 million, which positioned the company to generate strong financial results through the fourth quarter of this year.
And established our cost structure, and we believe the sustainable and an increasing activity environment.
Cost control of cash management and debt reduction and will continue to be focus areas for the company and 2021.
Moving on to our fourth quarter results.
Our fourth quarter, adjusted EBITDA was $55 million, a decrease of 47% 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 for the quarter.
As a reminder of the kids program supports employment and Canada and precision has utilized this program to for two.
Preserve jobs within our organization.
We are part of the Canadian government for this program and its impact on support and employment during the pandemic.
Yeah.
Although the program has extended well into 2021 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 Australia and 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.
The decrease of 1130 non U S dollars from Q3.
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 IDC and turnkey.
Daily operating margins would have been 716 U S. Dollar U S dollar is higher than.
And Q3, which reflects the impact of exceptional operational 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 the average one rig on <unk> during the first quarter.
And Canada drilling activity for precision averaged 28 rigs a decrease of 15 rigs from Q4 2019 daily.
Daily operating margins and the quarter were 9000 and $379 an increase of $1988 from Q4 of 2019.
Margins were supported by a strict focus on operating cost choose the assistance and shortfall payments.
Absent the Qs and shortfall impact margins would have been $6895 for $496 lower than Q4 last year.
With cost control efforts nearly offsetting the overhead burden from lower activity.
For Q1, we expect margins margins absent.
Of queues to be relatively in line with last year.
Internationally drilling activity for precision.
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, 4% compared to the prior year quarter. Adjusted EBITDA was negatively impacted by of 32% 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 $1 7 billion dollar well side of abandonment and rehabilitation program.
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.
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 for heavily supported by precision precision teams at our <unk> Tech Center and Rossdale operations.
Our 2021 capital plan is $54 million and and.
And is comprised of $38 million for sustaining and infrastructure and $16 million for upgrade and expansion, which relates to anticipated investments supporting the alpha technologies.
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 of our.
Our long term debt position net of cash was approximately $1 4 billion and our totally total liquidity position was over $700 million when excluding letters of credit.
Our net debt to trailing 12 months EBITDA ratio is approximately four three times.
And the average cost of debt for precision of six 5%.
We remain in compliance with all 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 remains substantially weighted to debt reduction.
For 2021, 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.
And current with the activity increase and the fourth quarter, we reported a $24 million increase in working capital from the end of Q3.
Liquidity remains of top priority and we will continue to look for opportunities to reduce leverage and of set 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 2022.
For 2021, 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 5% to 10% range.
That concludes my remarks, and I will now turn the call over to Kevin.
Good afternoon, and thank you Carey.
Alright 2010.
And he was a deeply challenging year.
But it was one of our precision demonstrated the resilience and agility of our business model and the results of all of this of our highly skilled people.
Now you may recall that on our conference call of last February we foreshadowed the potential risks from the emerging pandemic.
And within a few weeks the precision team pivoted to a full risk mitigation mode.
Immediately executing our pandemic safety response plan, and then addressing and 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 positioned the company for the industry recovery, which is now underway.
All while managing the health and operational risks caused by the COVID-19 virus.
I think precision was the fourth quarter financial Napoli operational results bear the fruits of that hard work during the fourth quarter, we increased our U S activities and 60% over the third quarter bottom and our U S activity currently sits at 33 rigs.
Canadian activity today sits at 54 rigs up from Q2 loans of just eight rigs and doubling of our Q 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.
The resilient margins during the fourth quarter for a good indication of precision, earning torque capability.
As we reported in our press release, we continue to make strong progress of our Elfa digital strategy.
The market penetration of Elfa automation, almost doubled in 2020% to 41% of wells drilled up from 23% of the prior year customer.
The customer utilization time, now exceeds 95 per cent for all of automation and the system uptime will and use it as the $99, 6% to 100% range exceeding even our highest mechanical uptime and expectations for this product.
Precision of the Elfa App store now has 18 active apps and we recorded 2300 days and 2020.
During the fourth quarter, we initiated field hardening trials for our sliding up successfully executing some 30 slides sliding is a very important now as it was significantly reduced rig mounting by liberating the directional driller.
And we expect 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 mid year and the second half. We built 800 revenue days of the health of analytics.
So there's no doubt the will increase market penetration for all help of digital services and we.
We believe these digital capabilities significantly strengthen our competitive positioning.
So looking forward, we see an improving macro environment with strengthening industry fundamentals and we can also report the customer settlements.
And that is also substantially improved.
Hydrocarbon extraction is a capital intensive industry and constructive access to the capital markets is essential and the <unk>.
Recent successful 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 leading indicator of the industry's recovery.
We also expect global oil demand will continuous recovery and as the COVID-19 vaccines are distributed because of the pandemic restrictions begin to ease later this year.
And the U S. The improved natural gas prices are driving increased A&P gas directed interest.
Precision rig mix has shifted to 50% gas, 15% oil and 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 Haynesville gas plays.
I also note for these customers have been technology first movers, adopting alpha technologies and experiencing the efficiencies to be promise.
Oil directed Permian activity has also rebounded from 2020 lows.
For the regional excess supply of idle high spec rigs has led to some creative pricing strategies.
And precision we remain.
Highly disciplined and we'll continue to look for the best return opportunities to reactivate our idle rigs and.
We believe our alpha technologies are important catalysts for our marketing strategy of the Permian.
Now 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 now 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 was spud on location earlier this month and our.
We are delivering and all of the customers expectations.
This is a big win for our customer and the very good outcome for precision, but we think this is an excellent example of how a precision can be an integral part of our customers' ESG strategy and we'll have more of this when I discuss of our 2021 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% by mid year of course, presuming, we don't expect and other external macro disruption.
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 RF Alpha digital technology offerings and as <unk>.
Elkhart additions to the base day rate.
While the rig day rate may be exposed to merchant competition. The alpha services are not we are seeing new customers and market share gains due to the efficiency and data analytics that alpha and enables.
We will continue to pursue both contract the alternatives, but did the event. We believe the demonstrated drilling efficiency wellbore placement accuracy and rig safety will win the day with our customers.
And Canada as 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 low 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 position and the Montney with our Super Triple rigs and the health of automation remains strong we expect firm montney activity through the spring into the second half of the year.
Heavy oil is also rebounding from recent lows reflected and our improved heavy oil activity is winter drilling season.
And with firm WCS pricing can we expect this trend will continue through the year and where.
We are well positioned with our super single rigs as the regulatory for heavy oil drilling.
While the price competition remains intense and the shallower conventional oil plays such as the Cardium Viking and southeast Saskatchewan 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 quarantine requirements for originating crews and our financial performance remained strong and consistent.
We're getting some indications of the rig renewals and the Activations were waiting for and Kuwait may start to get the attention, but as yet we have no clear indication of timing.
Currently we have three rigs running under the contract for the full year and Kuwait.
And Saudi Arabia around co is they'll begin to reactivate some of the rigs they put loans down by last year, we think they'll work through those RBC 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 and demand driven in part by the Canadian well abandonment program, but also a broad based increase and customer demand.
We believe theres been a multi year leg of the wall surface work and now with the improved commodity prices. This is an area that's getting operator attention and.
Again, barring a macro dislocation our 2021, well service activity for precision will be substantially improved over 2020.
We believe this business has good earnings for 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 the precision.
However, our newest priority to strengthen our customer and stakeholder positioning through ESG performance is of critical priority is real for covers for the pandemic and we are.
And for future.
As you may of Red and our 2020 sustainability report precision has of mature and roll of developed ESG culture supported by internal processes controls and systems.
We believe we can help our customers of our investors and other stakeholders better recognized performance, we deliver and how we will continue to evolve our ESG strategy going forward.
My example earlier regarding the reduced footprint compact rig to supplement our customers' environmental strategy and is one of the way we can help our customers as they strive to lower their emissions reduced share of our environmental footprint and improve their ESG scores.
Precision of high performance service offerings, which deliver better drilling efficiency also deliver reduce GSC emissions such as our alpha digital technologies, our pad walking systems or natural gas fuel systems that are hybrid hybrid battery power systems and.
And 2021, we will put these GSC initiatives and other still plenty of stage to the forefront of our strategy. We will also quantified our full range of ESG initiatives and performance for all of our stakeholders.
So I'll conclude my comments by thanking all of the employees of the precision for their very hard work and contributing to precision the strong results of the deeply challenging environment.
I certainly appreciate the out of the workload and the pandemic stress every employee of fields.
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 to ask the question. Please press Star then one.
For your question has been answered and the likes you lose yourself and the Q press the pound key.
Our first question comes from Taylor Zurcher.
And with Tudor Pickering Holt your line is open.
Hey, good afternoon, and thank you, Kevin you talked about items, 15% to 20% improvement and the U S and rig count by hopefully sometime around midyear.
On the top of my head it looks like five to seven additional rigs can you talk about what sort of the operator groups, whether it be private or public if theres any any trend behind the the operators for for those potential incremental rigs and an industry wide.
As we look at the next leg of growth from here do you expect it to be driven.
Most of them 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 the private equity.
The company is adding rigs with.
With the blend of some publics, but I think looking forward.
Into the how things sort of play out for 2021, I'm really encouraged by the strong discipline of our public customers of showing around capital discipline I'm encouraged that the market seem to be recognizing that.
I do think that the commodity price range. We're in right now book for gas and oil is higher than anyone anticipated either.
And the budgeting process or even and their bakery and the terminations. So 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 that as of the the last quarterly earnings releases you had about seven term contracts for for 2021 now you've got I think.
<unk> to the nice improvement there I suspect on the leading edge basis, the spot market pricing and is much lower than.
And 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 debt whatever lower pricing you were able to get today.
Hey, Taylor, so first of all a 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 low per diem low cost so in fact.
And those rates tend to be closer to the prior year's rates.
Okay, New Activations will certainly be a little bit more affected by <unk>.
Spot market rates of the bit lower I would say that.
We think rates of bottomed, we think that.
And 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 I'll squeeze one of them aware and I found the comments about the for upgraded rigs pretty interesting and particularly the two and the U S. Reducing the environmental footprint of it can you talk.
And whether or not you're you're able to get paid for for those upgrades and are you getting term and and the.
And some sort of decent pricing for those rig the above and beyond what you can get in the one.
On the leading edge of basis and the market to go ahead and do those upgrades.
Absolutely we are being paid for the upgrades. The return on the investment is very very good and fits our long term return expectations.
Great. That's it for me. Thanks, guys, Yes in fact, the table I'll just elaborate we didnt expect those upgrades of those up.
I wouldn't say surprised but we were surprised that our customers are willing to pay for upgrades.
But I think it helps you understand of the market's evolving.
Our next question comes from kind of the ne 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 into detail on rates for competitive reasons, but I guess, what I'm wondering is.
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 quote unquote spot that was sort of obviously.
Pretty pretty hampered by weak demand. So just your thoughts around that would be great. Yes.
Corner again, and I think these are really key questions and once everybody I'd like to get the release good clarity on.
There is always the balance sheet and 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 of the lowest rates. They can for the longest period. The account. So we've had customers asking for contracts and the range of anywhere from six months to 18 months trying to work 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.
Leading edge rates, so, we'll bell and set out we might take a couple but we'd look to.
We have optionality, so as rates of our to improve we can continue.
The capture of those rates of they rush.
I can tell you our management team has a very sophisticated spreadsheet the used to manage this.
You can't have a copy of.
[laughter], well see well see maybe if I ask nicely.
But the I.
And I guess the other dynamic is cost so cost was something that.
Obviously, as you're reactivating rigs and getting things back into the field.
And I imagine that weighs on margins 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 candidates of a bit more complex of a breakup, but how should we think about your cost per day of your.
And that impact on margin.
Colorado broadly I think the rigs that we've stack, so far been stacked and pretty good shape and we have the de minimis reactivation costs. So the only.
Regarding towards but I'll.
And I'll, just like Kerry and kind of reiterate his views on it.
And our cost guidance.
Hey, Connor.
I'll point out Mike.
Comments and and the introduction debt our efforts to reduce operating costs have largely offset the.
Increased overhead burden and by lower activity levels. So that's that's been a really good development from a cost standpoint.
We add the next handful of rigs.
We don't expect to have a whole lot of reactivation cost and <unk>.
It wasn't too long ago, we had 80 rigs running and the U S and I'd say.
Not too long of you know 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 for cost to reactivate the rig.
Okay. So just just to.
Squared here of the trend and cost per day, probably be flattish from here or do you think.
The fixed cost absorption helps how should we think about that for the duration of that.
For.
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 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 net 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 of disposition as well.
That is a gross number of teams.
Got it okay.
And just 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 is there is there new people out of that youre going to be dealing with and the mix.
Thank you for your question typically we're always trying to bring in some new people, we've been quite successful re staffing and Canada and the U S pulling back.
Prior precision of Enzo vertical 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 staff. So we have been doing some of that but we've had no 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 and well servicing.
We find we're competing with.
Some of the.
Unemployment subsidy program is underway and Canada right now as part of the pandemic relief and.
And the challenge and well servicing is of the workers callout work it might be three or four of five days work and their home for two days in the back of work for 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 we don't have that debt personal.
Personal problem, but and 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 and recruiting and.
And looking at the referral programs and things like that to start getting.
The base of employees up and well servicing.
Got it okay.
And primarily of Canadian problem for us.
Got it okay.
Okay. Thanks, Thanks, Nicole and I'll turn it back.
Again to ask a question. Please press Star then one.
Our next question comes from coal per area of Stifel. Your line is open.
Afternoon, everyone.
As we think about the U S opportunity that should we be think you've made and continuing to be split between oil and gas basins or how do you expect that evolves.
A little of it depends on what we get next I'm not sure what what's the next award will be we have a pretty good line of sight of several but the cold my expectation is the a little more weighting towards oil going forward.
Okay. That's helpful. Thanks.
And so over the past few quarters, you guys have kind of been able to divest the non core assets for call. It proceeds net of a couple of million et cetera is there any line of sight that and that should continue into 2021 to help offset some of that Capex program.
Okay.
Michael So we typically will sell drill pipe when it we use it beyond the standards debt beyond 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.
Other.
And 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.
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 Es.
<unk> strategy Youre ESG reported some pretty good disclosures on your bi fuel and gas powered rig fleet 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&P and requesting this equipment.
Cole I think right now the rigs we have not being utilized that either have biofuel or not natural gas engines are probably just of the wrong physical location. So we may have demand for biofuel in the montney, but the rig might be sitting in north Dakota, but but.
But I would tell you almost every E&P conversation now includes a short discussion on the potential to lower <unk> 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 for call it buy fuel or other opportunities or is it kind of just here and there at this point.
No I would say that our.
Our e&ps have been paying for a biofuel.
And paying for upgrades to biofuel will continue the discipline.
And I don't see a capital upgrade to a rig.
Being a.
Non non.
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 priority on technology debt reduction and the ESG.
Are there any specific targets that youre looking to hit this year and how should we benchmark you against those priorities of the progresses.
I think the.
And the one clear target that carry outlined in his comments was the debt reduction target of a range of 110 and $25 million for 'twenty and 'twenty one of you benchmark us against that all year.
As the year evolves, we'll disclose.
The steps, we're taking and each of the other priorities and.
And the continued update on those obviously on the technology market penetration.
Clearly, what we're looking for there'll be disclosing of 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 all of those.
Got it and could you maybe give us a sense aside 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 to help your customers.
I didn't I didn't mentioned it in my narrative high line power on the rigs that we've got the.
Right now of several projects that are of high line powered and our customers and looking at.
Also and securing their of power contracts.
The renewable power contract so that would be a for a customer of the possibility to have almost a zero emissions Rick.
Okay makes sense and then switching gears.
You, obviously mentioned debt.
U S activity should increase 15% to 20% by mid year and the U S.
Do you think debt in order to facilitate that work and have to start to see.
Announcements for the E&ps, increasing their capital budgets and the.
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 a handful of rigs five or six rigs I don't think that necessarily of warrants a capital announcement for the increase.
And.
Eric I don't expect.
I would also like any.
The E&P to lead with our chin on increasing capital spending.
Okay.
Yes, I think I think what will happen, though is I think that.
Receipts at $58 or a lot better of the receipts were going to be at $48 and us.
And it demonstrates strong free cash flow as the demonstrate.
The 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 ducks, which is happening right now.
Okay, Great that's helpful and I expect that day.
There's no question 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 of the margin and they'll do both.
Perfect. Thanks, that's helpful.
Great I'll leave it there and thank you.
Ya.
Our next question comes from Blake debt.
With Wolfe Research your line is open.
Yes. Thanks. Good afternoon. So your peer this morning talked through some of the math and the U S and terms of Super spec utilization and maybe some of the mechanisms and start getting pricing and part of that was the stacking of older rigs and the.
Potentially the retirement of those older rigs theoretically tier two and maybe the SCR rigs.
I'm just wondering what the mechanism for that would be I mean would would contract or is basically to 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 at the back half of this year, considering the rigs and never really had to have gone away and the past and you know the spread between tier one and tier two hasnt.
It Hasnt really expand it all too much outside of maybe rapidly increasing activity levels. Just wondering how you think about scrapping vs Super spec utilization and maybe the.
The outlook for pricing.
Yes, 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 kind of walking rigs.
So I'm not too worried about watching rigs being retired I am really looking closely the OLED.
Contractor by contractor utilization of their super spec pad walking rigs.
I think the market is is really tight I mean, we've added back of 100 rigs off bottom.
The 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 in 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 for the Permian to the DJ Basin.
Ability of friction.
And yourself there.
<unk>.
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.
We're going to get a much tighter market in the Permian.
That's helpful. In addition, and performance based contracts you've been if I remember correctly pretty socially opposed to some of that commerciality and the peer. This morning, I don't know if you caught the comments.
Noted some traction on the performance based contract side.
Just wondering if you've come up against it in any tendering activity.
And for.
Quite frankly, how do you think it plays out either receptivity of the customer base or otherwise how do you see this this commerciality evolving.
So we do have performance contracts and precision right now, we have them and more than one base and 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.
Im still remaining a little skeptical of this I don't I, just don't know where it ends up but I have seen in the past as of <unk>.
And 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 guess the extreme so it's a little hard to sales going to play out.
And we're keeping our avenues open here and we.
We're certainly going to miss out on a performance based contract.
The trend of that continues.
And I remain a little skeptical on this I can tell you that we are.
The sustaining our pricing and our technology initiatives with really no competition and those sort of the more competitive pressures downwards on our technology initiatives.
Are you happy with the Ala Carte model day rate for the base rig Ala card for the add ons.
And quite well for us.
That's the.
Definitely.
I think Blake it could go either way here.
And I think it will be ready to go either direction.
We have the tools and our and our.
Analytics, and our Alpha technology to deliver strong performance and as I said in my prepared comments ultimately those rigs that deliver the best efficiency drilling the best Wellbore placement of the best safety, we will get the best rates whatever the price of your model is.
Understood that's encouraging when you do bid for a performance based contract do the other contractors see 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 rest assured the procurement team and supply game theory.
Got it thanks for the time.
There are no further questions I'd like to turn the call back over to the desktop for any closing remarks.
Great. Thank you everyone for joining today's call and look forward to speaking to you. When we reported 2021 first quarter results and April.
And you may disconnect.
Ladies and gentlemen, this does conclude the conference you may now disconnect everyone have a great day.