Q1 2022 Precision Drilling Corp Earnings Call

April 28, 2022

[music].

Yeah.

Good day, and thank you for standing by welcome to the precision drilling Corporation 2022.

The conference call and webcast.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

Can I ask a question during the session you will need to press star one on your telephone please.

Be advised that today's conference is being recorded.

Or any further please press star zero.

I'd now like to hand, the conference over to your Speaker today, Carey Ford Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you Shannon and good afternoon, and welcome to precision Drilling's first quarter 2022 earnings conference call and webcast.

With me today is Kevin W, President and Chief Executive Officer.

Precision reported its first quarter results through a press release earlier this morning.

Please note that the financial results are in Canadian dollars unless otherwise indicated also please note some of our comments today will refer to non <unk> financial measures and will include forward looking statements regarding precision future results.

Prospects, which are subject to a number of risks and uncertainties.

Please see our news release and other regulatory filings for more information on financial measures forward looking statements and risk factors.

Prior to Kevin, providing an operational outlook and update.

Review, our first quarter financial results.

Yeah.

Our first quarter results reflect a very good start to the year with increasing activity day rates and margins and leading edge indicators pointing to even stronger financial results in the second half of the year.

Although the first quarter business performance improved dramatically from the first quarter 2021, our adjusted EBITDA of $37 million decreased 32% for the first quarter 2021 the decrease in adjusted EBITDA, primarily results from a 48 million share based compensation accrual charge.

Without which adjusted EBITDA would have been $84 million.

Revenue was $351 million, an increase of 49% from Q1 2021 .

In the U S drilling activity for precision averaged 51 rigs in Q1, an increase of six rigs from Q4 and daily operating margins in the corner quarter absent any turnkey or idle, but contracted impact.

We're a 5000 and 672 U S dollars essentially flat from Q4 2021 .

The normalized margins are slightly lower than the guidance provided due to additional staffing to bricks to build hot crews and startup costs during the quarter.

For Q2, we expect normalized margins to increase approximately $1500 per day.

With repricing of spot market rigs improved fixed cost absorption.

Allergy pull through we expect normalized margins to continue expanding through the second half of the year.

In Canada drilling activity for precision averaged 63 rigs an increase of 21 rigs from Q1 2021 .

Daily operating margins in the quarter were $8865 an increase of $759 for Q1 2021.

And $881 sequentially higher.

Higher than guided margins were supported by higher day rate strict cost control and greater fixed cost absorption.

Absent the impact from the prior year margins would've been approximately $2000 a day higher than Q1.

Okay.

For Q2.

We expect margins absent of queues and onetime cost recoveries to be up approximately $500 per day, compared with last year due to improved pricing and fixed cost absorption.

For reference daily operating margins in Q2, 2021 absent cues and onetime recoveries were $5247.

Internationally drilling activity for precision in the current quarter. After six rigs International average day rates were 50235 U S dollars approximately to 2500 U S dollars lower than the prior year.

Due to exploration of drilling contracts.

And our CMT segment adjusted EBITDA, this quarter was $6 $5 million down 16% compared to the prior year quarter.

Adjusted EBITDA was positively impacted by nine 6% increase in well service hours and improved pricing.

<unk> improved industry activity and higher demand for our services.

But the results for 2022 included zero, two subsidy payments compared to approximately $2 million.

In Q1 of last year.

Okay.

Of note well abandonment work represented 16% of our operating hours in the quarter.

Capital expenditures for the quarter were $36 million and our full year 2022 guidance has increased from $98 million to the $125 million comprised of $72 million for sustaining and infrastructure and $53 million for upgrade and expansion.

Which relates to anticipated contracted rig upgrades and investments supporting Alpha technologies.

As of April 28, we had an average of 41 contracts in hand for the second quarter at an average of 39 contracts for the full year 2021.

We have signed 27 term contracts year to date.

Moving to the balance sheet, while our Q1 results reflect negative cash flow in a revolver draw the second quarter working capital unwind and revolver Paydown is happening in real time, and we expect to pay down the majority of Q1 revolver draw by this summer.

As of March 31, our long term debt position net of cash was approximately $1 $2 billion and our total liquidity position was over $430 million excluding letters of credit.

Our net debt to trailing 12 month EBITDA ratio is approximately six seven times.

And average cost of debt to six 3%.

We expect our net debt to adjusted EBITDA before share based compensation expense to be closer to three times by year end and to decline further into 2023 toward our goal of below one five times.

We remain in compliance with all of our credit facility covenants in the first quarter with an EBITDA to interest coverage ratio of two seven times.

We are committed to reducing debt by over $400 million between 2022, and 2025 and allocating 10% to 20% of free cash flow.

Before principal payments directly to shareholders.

Our debt reduction target for 2000 $20 million to $75 million.

For 2022, we expect to generate free cash flow through operations expected benefit from working capital released in Q2.

With lower activity during Canadian spring breakup and to catch up with customer collections.

From year end 2021 to year end 2022, we expect working capital to build by approximately $50 million.

A $40 million lower than the build we incurred in Q1.

Our guidance for 2022 remains the same depreciation of approximately $270 million and SG&A at 65 million to 75 million to $70 million before share based compensation expense, we expect cash interest expense to be approximately $80 million for the year and cash taxes to remain low with our effective tax rate.

To be approximately 5%.

That concludes my opening comments I'll hand, the call over to Kevin.

Thank you Carrie and good afternoon.

As Terry mentioned earlier customer demand for our high performance high value services is strong and continues to grow we're seeing strength in all our business segments in all our geographies our fleet utilization continues to improve and the rates we charge for our services are likewise responded.

This was most evident in the lower 48, where the tightening supply of Super Triple rigs became apparent to our customers led to a step change in rig rates late in the quarter.

Leaving us rates, excluding alpha for our S. T 1500 rigs equipped to drill long reach horizontal wells have trended into the low 30 U S $30000 per day range.

First of all we're willing to sign term contracts at these higher rates to secure access to the rigs over the course of the next six to 12 months in some cases longer Theres no question that the customers that have a rising sense of urgency is expect high spec rig shortages later this year.

Since our last conference call. We've added 19 term contracts with a handful of those signed most recently a bleeding as rates I mentioned earlier.

Today, we have 55 rigs operating United States up from 48 at the beginning of the year with our contracted rig activations and further ongoing customer negotiations, we see a path to continue this growth trajectory through the year and our visibility into 2023 is taking shape.

Turning to Canada for the first quarter, we experienced strong customer demand matching 2018 activity levels importantly, our customers extended winter drilling program as well as the traditional spring breakup period, driving our first quarter activity up almost 50% from last year, even today in the midst of spring breakup, we have 33 rigs operating compared to 21. This time last year.

Continuing the trend.

Our customer discussions discussions and bookings point to a strong second half, which will be starting almost a month early with several rig activation scheduled for as soon as the first week of May then ramping up from there. We expect Q3 activity will surpass the winter season for only the second time in memory and this would be the busiest second half since 2014.

As I mentioned in our Q1 call customer demand for rigs and the heavy oil play notice the Clearwater Marten Hills is gaining momentum we see strong demand for precision as unique super single rigs and particularly our pad walking Super singles, which we expect will be fully utilized this summer through the fall say.

D and other conventional heavy oil demand is also strong and will drive our super single utilization to its highest level since 2014.

Mind you the Canadian fleet includes 55 Super single rigs.

Our Canadian Pat equipped Super triples are also fully booked for the balance of the year as the Montney and deep basin natural gas activity remained strong.

While we see some rigs did see some rigs relocated from the BC side to Alberta due to the blueberry first nations really we have indications from our customers. The BC could see rig activity rebound later this year and its nearest putting further demand dogs to persist on the Super triples.

This is a very tight market with strong customer demands and looking at limited rig supply.

In Canada, we began the process of implementing cost.

And price increases over a year ago, but customer resistance has been challenging.

Many of our customers rate discussions, we're having today after several years of weak industry industry demand is uncharted territory.

These customer pricing discussions are continuing as we seek to reprice rigs for the second half of 2022.

During the first quarter, we rejected several opportunities to reactivate rigs due to the lower than desired customer rate expectations. The best pricing signal. We can send our customers is rejecting work at rates below our required thresholds.

Over the last dozen years in Canada precision has invested in 28 Super Triple rigs twenty-five Super singles rigs at our $40 million just your technology center with a fully functioning advanced technology training, Rick We've cryptos Super Triple rigs. It's also automation. We trained over 50 also expert drillers 30 Gulf of expert brick managers with.

These assets technologies and people precision delivers the safest fastest most cost effective and best quality wells, our Canadian customers have ever drilled because.

The value proposition, we offer today is vastly better than any prior rebound cycle are they fully expect to generate the returns from these investments and our investors deserve.

In Kuwait, and Saudi Arabia, we also see a rapidly improving market as.

I mentioned to the press release, all three active rigs in Saudi Arabia.

Have been renewed for a five year period with pricing and margins consistent with the prior contract.

In Kuwait the rig tender we have been anticipating for several months was released late in the first quarter. This will be a typically extended process involving several months of tendering and contracting steps. We tender includes requirements for several classes of rigs with multiple quantities are three idle Kuwait Super spec rigs perfectly meet the complex requirements of the deep drilling rig.

Losses, and I believe we'll have an excellent opportunity to contract or idle rigs reactivation. Later this year. However, the redeployment timing will be dependent fully dependent on our customer scheduling.

[laughter].

Precision technology offerings, including Alpha digital solutions, and our recently introduced evergreen ever environmental solutions continued to demonstrate strong customer appeal over half of our Super triples are now equipped with alpha automation and all Elfa rigs currently deployed our earning commercial revenues for.

Precision <unk>.

Library continues to grow with 18 commercial apps at our Alpha optimization of virus Advisory service, gaining a strong customer following.

Precision is evergreen battery energy storage system, and our fuel and emissions monitoring out for both commercially deployed on several rigs and we expect these products will continue to gain broad customer appeal as our customers look to reduce ghd emissions.

Interestingly several evergreen product solutions have a negative green cost premium and that the energy cost savings generated use like utilizing the evergreen solution exceeds the price premium we charge a highly favorable outcome for the energy transition solution. This is this of course encourages our customers to continue on the path to zero.

We mentioned in our press release that appointment I've never Green electric grid powered rig to the difficult campus of Cornell University. This is an exciting geothermal project to explore the opportunity for Earth source heat as a zero emissions heating source for the Camilo University, we're thrilled to be part of this deal we funded project and look forward to helping derisked.

Zero emission energy opportunity.

Precision is well servicing segment continues the pace that began last year with strong first quarter activity up 8% from last year.

Same period. It was 28 service rigs operating today, we're continuing this trend.

Our team is very effectively managing the material cost inflation and fuel cost increases we've experienced however, the labor challenge has proven much more difficult and as limiting industry well service activity. During the first quarter alone we experienced demand anywhere from 10 to 20 rigs greater than our ability to crew risks.

We have substantially increased our recruiting efforts.

The recently announced hourly labor rate increases, we expect to narrow the rig supply gap as the year progresses.

Overall this business is performing exceedingly well our teams worked well.

To increase rig rates appropriately and we expect to continue to generate strong cash flows.

So I'll conclude by thanking all the employees of precision drilling for their hard work their strong safety performance and excellent results they produced for our stakeholders.

I'll now turn the call back to the operator for questions.

Thank you as a reminder to ask a question you will need to press star one on your telephone.

I draw your question press the turnkey please standby, while we compile the Q&A roster.

Our first question comes from Taylor Zurcher with Tudor Pickering Holt Your line is open.

Hey, Kevin and Kerry. Thanks for taking my question first one is on on pricing within the U S market. So Kevin I think I heard you say, leading edge rates for some of the higher end rigs in the low 30 percents, excluding alpha So you know at Alpha and you're getting pretty close to the mid thirty's.

On a leading edge basis and man, what what a difference a couple of years makes but.

My question is if you know against that pricing backdrop, assuming the market stays tight through 2023, which likely will you know is there any reason why your fleet in the U S isn't isn't generating mid teens type type daily margins, excluding turnkey and another lumpy items.

At some point in 2023.

Hey, Tyler So this is Terry.

Yeah.

You could see.

Portion of the fleet generate that type of margin, but remember that our operating costs have moved up.

2000, $2500 per day, so the the 30 or 31 or $32000 day rate today is similar to the 28 or $29000 day rate from 2018, which is where we saw it there to get to kind of the last up cycle. When you tack on alpha automation.

You would be getting to margins kind of in the low to mid teens.

Okay got it and I had to hit all of us.

Yeah go ahead, just adds up for a moment I think that.

It's we don't expect day rates to stabilize this raise we think if supply stays tight repricing opportunities as the year progresses could see day rates move further yet.

Well, that's encouraging okay and a follow up there you were talking a little bit about the cost structure.

And in the press release, you were talking about how you've oversized some crews that to prepare for that.

Activity ramp here in 2022.

And I'm, just curious I mean as I look at it it sounds like those crew sizes will probably naturally go back to more normalized levels moving forward as more rigs go back to work such that you know what's been a cost headwind for you over the past couple of quarters might turn the other way.

And I'm reading that correctly.

I will turn the other way, but I want to stress the magnitude of it we got it to a 500 $500 a day increase in margins from Q4 to Q1 in the U S and we.

We delivered flat margins in the region.

Why it was about half of that would have been the Hoover crewing of rigs, what we call kind of trying to create hot crews and the other half of that would have been just startup costs.

We activated three or four rigs in.

In Q1, and we experienced startup costs in the 200 to $250000.

Per rig.

So I think.

It will.

Not having those extra crew members.

Reducing operating cost a little bit, but it's just going to be a couple of hundred Bucks a day.

Awesome, Thanks for the answers.

Thank you thanks Taylor.

Our next question comes from Aaron Macneil with TD Securities. Your line is open.

Afternoon, Thanks for taking my questions.

I know the 15, hundreds always seem to attract the headlines but there.

Theres been a good pick up in some of the U S plays that have historically been well suited for the.

1200 horsepower triples, so I'm wondering if you could maybe just give us a sense of how utilization and pricing has trended for that asset class.

Uh huh.

Eric This is Kevin.

The trend of those rigs is kind of similar to the 15 hundreds recognizing it's a little less expensive rig to operate with a smaller rig.

So it's trending along the same direction.

Not quite as tight on the supply side as the 1500. So you know we're not giving we're not seeing day rates are approaching 30000, yet, but we're certainly getting into that mid <unk> range for those rigs, which we're pretty happy with and most of those rigs also have alpha on top and in.

And the opportunity to add alpha if they don't have also of course right now and I think the utilization of those rigs we've got eight.

18 in our fleet and I believe we've got about 12 working right now so we're moving up into that 70% to 80% utilization level, which will give us more pricing power over time.

Well I kind of remind you that we didn't bring one of those rigs up to Canada last year.

When the market was looking pretty strong in Canada.

Sure, we do that again I think that.

Putting the you have the opportunity as the U S might look better overtime, certainly when you factor in the exchange rates and the rates in the U S right now.

I think that we could see those rigs fully utilized later this year.

Okay understood.

I certainly noted the comments on the 19, new contracts, leading edge day rates and durations.

I think you said six to 12 months Kevin.

Yeah.

With rates, where they are I mean.

Doesn't it.

The conversation start to turn to whether you can lock in those high prices and longer term contracts or do.

Do you have to have a major upgrade to our multi year contract.

You know I'd say that there's still a.

So a fair amount of caution kind of on all sides of the.

Energy industry right now are not wanting to get over our skis and I wanted to commit to too much.

We do have some customers looking out beyond 12 months, we've signed a couple of contracts beyond 12 months I'd say that there's still a fair amount of just.

Just connor carried cautioned around.

Again, not making huge capital commitments on making huge contract commitments there might extend out.

Got it too far in the future so.

I just read it as capital discipline is still quite.

Quite important across the E&P space and certainly does for us.

Certainly as a holding about customers from contract to you two years of their budgets aren't approved yet.

Okay understood and maybe if you'll indulge me I'll sneak one more in.

I can appreciate that there might be some reluctance to reverse course on your capital allocation framework that you announced in January but.

Stocks' nearly doubled since that time, so I guess the question is would it not make more sense to just.

Continue to focus on debt reduction for the time being.

Yes, so erinn I think we've put a our four year capital allocation plan in place. So that we have a little bit of flexibility to manage through the cycles, both with needs for cash like we expected the first quarter. When we're building working capital and spending some capex and then also to where we can kind of pick and choose.

Times too.

To buy back shares. So we're as we said in the press release in my opening comments that plan is in place. We will continue to execute on that plan, but it's not going to be a.

It's not going to be the same capital allocation every quarter over the next four years.

Okay. Thanks, I appreciate that and I'll turn it over.

Thanks Sharon.

Our next question comes from Waqar Sayed with ATV. Your line is open.

Thanks for taking my question.

Kevin you announced some developments from the geothermal front and one your one of your competitors also announced today some some investments in due time.

It could be a coincidence or is there's some acceleration in geothermal developments that you're seeing or is it still the same kind of.

The growth rate.

Just wanted to see whether theres something going on behind the scene.

Exploration and in demand for geothermal.

Certainly I think that 2022 will be much busier than 2021 of the geothermal front.

And probably 'twenty three is going to be busier than 'twenty. Two so I mean, we're in a.

In a world, which is putting a lot of capital towards energy transition write down I think geothermal is one of those.

<unk> solutions is going to be part of the energy transition mix. So short answer is.

Certainly rising levels of interest nothing.

Nothing remotely close to displacing our rig activity in the oil and gas side, yet but.

I think having having involved in these projects is important.

As important from.

Oh, showing we're doing our part perspective, but it is also important because I think there's there will be some solutions here and I'm a big believer that this year.

Using geothermal just for Heath buffer not for power conversion to refer steam but using that as a heating source might be an economic solution. So we're quite excited about this if I can project dimension.

Campus.

Okay.

And then in the U S. B do you expect.

The active rig count to be.

End of the year.

Well Carlo hard to say, but if you kind of project forward. The growth we've had so far we'd be probably getting close to 60 by the end of the second quarter.

You know, maybe hitting 60, maybe not quite hitting 60, but I could see us with.

What I see right now today, probably have enough go up by another five rigs a quarter for the second half of the year, assuming the customer interest received today.

<unk> remains in.

And the macro stays in place.

Hate to have to qualify every forecast these days, but it seems like as soon as I make a comment on our forecast there's some major macro change.

Yeah.

And.

In terms of your operating cost labor cost and all do you see.

But pressures still going forward do you think for this year at least.

You've captured inflation from a labor perspective.

I would I would say electuary hookup, IP I would say that between kind.

Kind of a rising absorption as we have more rigs active and I think our kind of leveling probably of our crew salaries and things like that.

<unk>.

We might we might have seen the peak of inflation that might be managed under control at this point or do you have any comments or just that if there are further wage increases in the year there'll be a pass through.

Within the contract.

Yes.

Okay.

Yes.

The one thing that really kind of helps the drilling industry out is that it.

The drilling industry, we're not building and don't plan to build and don't see any opportunity and your reason to even think about building new rigs, but if there was a build build build.

Build cycle going on that would cause all kinds of supply chain issues, but we're just operating a rig fleet, which still operating activity levels lower than most of the past 10 years. So supply chain is a pretty good completions are under control.

I don't see a lot of things that riser another impact rig operations.

Meaningful way now for Ron will be again, pushing prices upwards I think we're ready we've got the contract book that allows us gives us flexibility to reprice rigs or whatever the market cost is at the time.

But you had to do the same let me ask you on that.

In terms of getting engines mud pumps things like that.

Reactivation of just for replacement on existing fleets.

Not seeing any issues at all in getting that and what kind of inflation are you seeing on equipment.

Uh huh.

So I haven't actually check the price of a new engine recently and I don't Caterpillar.

One of the large suppliers as.

Is suffering some inflation.

And unless we get into some kind of major upgrade program I, just don't see us out there.

Large numbers of engines.

Yeah, I think that we've got.

Our fleet of rigs right now.

In this environment and that's what we see going forward.

Those procedures and.

Repairs and upgrades on engines will handle within our.

Current inventory.

Okay, great. Thank you very much on the on the mud pump front.

We would upgrade five more rigs those five mud pumps, that's a drop in the bucket.

Yeah.

Thank you Sir.

Thank you Waqar.

Our next question comes from John Gibson with BMO capital markets. Your line is open.

Thanks, guys.

Just in terms of leading edge rates I'm, just wondering how how do they compare to prior peaks and then maybe.

Maybe if you could walk through how cost compares well I guess, what I'm trying to get at is net.

Net net how profitable are leading edge rates right now relative to prior upturns, and I guess, where could they get two moving forward.

Gary why don't you start and I'll just come in for sure. So I think when when we had prior peaks in call. It 2014 or 2018 two.

2017 2018.

<unk> got 28 or $29000 a day and so you had a good operating cost of right around $14000 in those time periods had a 50%.

Field margin.

Right now operating cost with wage increases and a little bit higher cost of operating the rig.

Operating costs are going to have 16000 to 16500, so if you're assuming a.

50% margin youre going to be at 32 to $33000 a day, so I think thats.

They are comparable the topline looks a lot different but on the on the margin.

From a dollar standpoint, they are pretty comparable and from a.

Margin percentage standpoint, they're almost exactly comparable.

I guess moving forward then if we do see a bit of a bump in rates is it fair to assume that you could get above that 50% fuel margins.

Or even significantly above it.

I think it is possible I think when you.

Technology and some of the things that will move outside the contract or have already moved outside the contract I think margins are going to have a little bit more runway.

What I would say is that.

I think we've hit these rates quite early.

And in.

The market has changed from the last peak is changed in that.

Really the only rigs are going to be drilling on these types of large well the orbitz ipads are going to be super spec rigs without seeing any drag from non super spec rigs on the rates.

Got it.

And then if I could 2014, it wasn't a perfect market when it came to us with respect to day. This.

Fair enough.

And last one for me last call you talked about having somewhere in the range of 200 bid requests in USA, we fast forward a few months obviously the world's changed what are bidding inquiries like today in the U S. And then have these bid request largely trying to lay it into new rig additions better or worse than you expected three months ago.

So.

This is a non-GAAP metric.

That jokingly.

The big the bid book Hasnt.

Declined in size.

And I'd say that the hit rate is starting to increase modestly.

Fair enough. Thanks, a lot for the color I'll turn it back.

Thanks, a lot Jonathan Johnson.

Our next question comes from Colby <unk> with Stifel. Your line is open.

Hi, everyone I just wanted to go back to day rates from a spot market.

Contract perspective, and so at a high level. So for example, if leading edge day rates or U S $30000 a day in the spot market right. Now I mean is there sort of a rule or anything or how how we should be thinking about what it would pay to contract that rig for six months or something like that I'm, just trying to think about the discount between the spot.

And locking in rigs.

Cool I think that there is.

Really zero discount.

From a strategy standpoint, with our pricing.

There might be a discount tied to a customer or they've got multiple rigs or.

They were with US back in 2021 was quite slow, but from a conversion of spot to termed it.

I wouldn't view that as a reason to discount.

Our price to our customer.

Okay perfect no. That's a that's helpful and maybe coming back to some of the questions about 2023 revenue per day and margin. So I mean, if if drilling.

Leading edge day rates stay in the low $30000 a day I mean as you get some of the churn through your contracting is it reasonable to think we could see that reported day rate hit $30000 a day sometime in 2023 or would it probably be you.

You know high Twenty's I know you don't give guidance I'm, just trying to sort of fill out the differences there.

So all good.

Commerce luxury for the pipe and whenever he wants to hear but I would say that.

I do expect most rigs of this class to be trending into that range as they reprice overtime.

And so.

We won't get a.

Full price at every single repricing opportunity there are several reasons why we might.

We do it in one or two steps over a period of time, but I do think that if you're looking at a year out from now.

I would expect the leading those rates probably will have moved up.

And the average rate will moved up quite a bit. So it's likely you can see the average rate in the $30000 range, leading rates could be higher than that yet.

The momentum on rates Hasnt really backed off yet because we are into a real tight phase with rigs right now.

Okay, Great that's helpful. Thanks.

So once they come and.

Go ahead, while I guess I had a couple of comments to that I think that the.

The term loan b to use for precision I think you'll hear from most of the public drillers are.

We are extremely disciplined around our capital returns right now whether it's investing in the upgrade on the rig or whether it's.

Trying to get the returns for the rigs we have right now that are already already out there in the field, but I think the discipline that we're seeing.

In the marketplace right now is likely the best I've seen in my in my career, which almost 40 years now and and you've got large.

Public drillers in both markets, Canada, and the U S.

Highly focused on generating returns for their shareholders as our customers have been and I think that discipline is not going to weaken as time goes forward is going to sort of firm up yes.

Yes, I would just add maybe what's causing a little bit of uncertainty of where the rates will stop when they rise is the replacement cost of these rigs is much higher today than what they were originally built for.

Rates that made the economics go around them when the when the rig was built.

Wouldn't work today, if you are going to try to build a new rig.

With.

With kind of the infrastructure to build new rigs not really been in place and commodity price inflation and labor inflation that replacement cost, which is significantly higher than it would've been in 2014 and 15.

Okay, great that makes sense, thanks, and turning to drill pipe I mean, a lot of commentary from some of your peers on that talking about one year lead times I mean, just out of curiosity, how much call. It months of inventory do you typically keep on hand.

Hum.

You might recall that last conference call, we talked about the drill pipe order replace last August and we just had a bit of a sense of this shortage or tied to market company. We certainly didn't expect.

What's been the tragedy, that's been going on in the Ukraine, right now and that is impacting steel but.

But we did get ahead of the this a bit we did make a large purchase last year of inventory inventory drill pipe. So they're zero lead time on that we took delivery of that in the third and fourth quarter of last year.

As we began taking those deliveries we placed additional orders in the fourth quarter.

We placed additional orders for pipe in the first and second quarter of this year. So we think were.

Dancing kind of ahead of that one year lead time that you've heard about talked about and some other.

Calls over the last few days and I think that we've got the pipe we need to run our business.

Okay, Great that's helpful. Thanks.

And just out of curiosity, I mean, any instances in whether in Canada or the U S where you've seen the inability of an E&P to get casing impact any of your drilling operations.

Coal we have.

Mainly with small operators that.

Are you, having kind of drilling a well to well and not not able to plant or buy in volume.

With the larger players who like us they placed orders in advance. So you had a sense of these things coming.

Have not seen that creep up.

We have a we have a small turnkey business, which is.

As part of our disclosure this period and we see some of the challenges getting casing.

What we're drilling in turnkey tends to be bigger bore wells deeper gas wells in the Gulf Coast region, where the shortages are a little less pronounced than the common more common sizes to be used for oil and gas retail.

Okay got it so if I wanted to qualify your comments fair to say that certain customers are having that issue, but it's not material at a larger scale is that fair.

Certainly not material at a larger scale for our activity right now it could be plus or minus one rig.

And that could could grow I mean, we don't have the visibility on what our customers are buying for casing.

But I'd also say that I think it's going to be short lived I think that there's opportunity here for the pipe companies to get things fired up to make probably some pretty good margins.

While there might be.

A leg of a couple of quarters I think for catch up.

Okay, Great. That's all for me, Thanks, I'll turn it back.

Thanks.

Our next question comes from Keith Mackey with RBC capital markets. Your line is open.

Hi, Thanks for taking my questions.

Hi, Keith.

Hey, I just wanted to.

Kevin go back to some of your comments about Canada shaping up to be the second.

The busier second half since 2014, though.

Customers are still trying to.

To ground you on rates it sounds like can you just maybe walk through how the discussions are going.

What realities, you're kind of trying to bring into the conversation with customers and then what that ultimately means do you think for your second half cash margins I know the rig mix is quite a bit different than it would've been in 2014, but you would have had much higher cash margins back and back in those days so.

Maybe a lot to unpack there, but any commentary on that would be helpful.

Sure Keith this is actually a pretty insightful question.

Our customers have worked really hard over the past several years in Canada going back to 2014 to really fine tune their cost base structure to become as efficient as they become they've gotten they've taken the whole notion of capital discipline deep to heart, they restructure their businesses to deliver capital discipline to their investors.

And part of that was getting very aggressive on the costing side getting very aggressive on the contracting side and institutionalizing that they've done a great job with that and the investors should be very proud of the work the e&ps have done managing their costs.

They've done that in an environment, where rig demand was weak and often declining.

So.

Managing that capital discipline to the market, where rig demand is increasing and in fact in some areas where demand exceeds supply I think there is something they need to get up to speed on <unk>.

Trying to help them get up to speed on that we're certainly working to demonstrate the efficiency of the rigs I kind of went through a litany of things we've done since.

That last cycle around improving our rigs with Super Super spec rigs with Alpha.

On the rigs and training, our guys to run it and execute it very well.

No question, we are delivering a much better value proposition than we were talking about previous peak and I think it's our job to help our customers understand that and recognize the need to pay more for it so.

You've got these two competing forces we've invested the rigs that are people and have a higher.

<unk> proposition they've worked really hard to lower their cost to manage down it up in a very soft market and.

Ultimately market dynamics play out here in supply and demand works and.

I expect rates will move up.

Got it.

That's helpful.

And then just secondly, turning to the U S.

Can you talk about 60 ish rigs by the end of Q2, and then adding five per quarter in the second half.

Would you expect your maybe basin mix in the U S to stay roughly the same or or can you see that changing from current levels. If we think about those as you know.

45, or so percent Permian, maybe 25% Haynesville and then and then I know theres some northeast in there, which are which is maybe a little bit more constrained takeaway capacity wise than some of the other areas, but just curious if you can help us kind of walk through where you expect to see some of those rig additions.

I'd say, probably focused more towards oil more towards the Permian, but quite surprisingly.

What are the contracts we've signed recently.

<unk> customer paying for mobilization of a rig.

From carry remind me the rigs coming out of his way.

For Colorado, and moving back to the Marcellus that's an expensive move.

A couple of that move cost with the day rates that we're.

We're able to achieve right now.

Pretty meaningful move back to the Marcellus.

So I'm surprised by that but but we do see a lot of strength in the Permian.

We've also seen a few more rig contract signed recently for the Eagle Ford.

Got it very good and just just finally.

Maybe circling back to one of the other.

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