Q2 2019 Earnings Call
Ladies and gentlemen, please standby your conference call will begin momentarily once again, ladies and gentlemen, please stay on the line.
As a reminder, today's conference is being recorded I would now like to discuss ways conference call Mr. doesn't help you may begin.
Thank you Kevin and good afternoon, everyone welcome to precision drilling second quarter 2019 earnings conference call and webcast participating today on the call with me are Kevin Abbey, President and Chief Executive Officer, and Carey Ford Senior Vice President and Chief Financial Officer.
Through our news release earlier today precision reported its second quarter 2019 results. Please note. These financial figures are in Canadian dollars, unless otherwise indicated some of our comments today will refer to non IFRS financial measures such as EBITDA and operating earnings. Please see our news release for additional disclosure on these financial measures.
Our comments today will include forward looking statements regarding precisions future results and prospects. We caution you that these forward looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from our expectations.
Please see our news release and other regulatory filings for more information on these forward looking statements and these risk factors.
Gary will begin today's call with a brief discussion of our second quarter operating results. Kevin will then provide an operational update and outlook with that I will turn it over to Gary.
Thank you Dustin.
In addition to reviewing the second quarter results I will provide an update on our 2019 capital plan and management of our capital structure.
Precision strong 2019 financial performance continues with second quarter, adjusted EBITDA of $81 million, 30% higher than the second quarter of 2018.
The increase in adjusted EBITDA from last year is primarily the result of higher activity levels and day rates in our us business and improved CMP performance.
Offset by lower activity.
In our Canadian drilling business.
Additionally, the quarter benefited from the impact of IR for US 16, and lower share based incentive compensation.
In the quarter, we recognized a $4 million share based compensation expense compared to $10 million in Q2 2018.
In the us drilling activity per precision increased 6% from Q2 2018, while margins were up approximately 850 U.S. dollars per day.
Positively impacted by higher day rates, and partially offset by higher operating costs.
Sequentially day rates and margins net of turnkey and idle, but contracted payments increased approximately 220 us dollars and decreased approximately 240 U.S. dollars respectively.
We expect to sustain similar margins into the third quarter.
In Canada drilling activity for precision decreased 15% from Q2 2018, while margins were down approximately $1160 per day from the prior year.
Net of shortfall payments margins were lower by approximately $1600 per day.
Although we experienced higher activity in the quarter than expected margins were negatively impacted by rig mix as a higher percentage of shallower rigs work during the quarter.
As we expect Q3 activity activity to be down this year versus last weaker overhead absorption is likely to cause margin pressure with daily operating margin down between 250 and $750 per day compared to Q3 2018.
Internationally drilling activity for precision equaled activity in Q2 2018.
And average day rates were up 1700.
And 10 US dollars per day as a result of re contracting rigs at higher rates.
In our CMP Division adjusted EBITDA This quarter was $2.8 million, an increase of approximately $4 million.
To the prior year, a direct result of business improvement initiatives enacted over the past several quarters.
Of note the improved financial results were delivered with lower industry activity than the prior year.
Capital expenditures for the quarter were $43 million.
And for 2019, our capital plan remains $169 million flat with previous flat with previous guidance.
The 2018 capital plan is comprised of $52 million for sustaining and infrastructure and $117 million for upgrade and expansion.
Our capital expenditure plan remains front end loaded as we delivered a us new build rig early in Q1.
And completed an SCR to two AC S. T 1500 conversion, which was delivered in the second quarter and we also delivered our six new build rig to Kuwait during the quarter.
We expect capital expenditures for the remainder of the year to primarily consist of maintenance expenditures.
We've continued to build our contract book during the year and in the quarter, We signed 16 16 term contracts.
As of July 24th we had an average of 63 contracts in hand for the third quarter and an average of 64 contracts for the full year 2019.
As of June Thirtyth 2019, our long term debt position net of cash is $1.45 billion, we had $81 million in cash on our balance sheet and our total liquidity position was $770 million.
During the first half of 2019.
We made open market purchases totaling usforty $3 million.
And year to date have called US $50 million outstanding of our outstanding 2021 notes.
Our year to date 2019 debt reductions.
Total $124 million.
We continue to view cash flow generation and debt reduction as top priorities this year.
And have raised our targeted 2019 debt reduction to $200 million up from a range of 100 million to $150 million.
As of June Thirtyth.
Our ratio of net debt to trailing 12 month EBITDA sits at 3.6 times and we continue to work towards our longer term target ratio of below two times.
Our average cash interest cost is 6.7% and with 2019 target debt reduction we expect run rate interest expense will be just under $100 million to exit the year, assuming todays us dollar Canadian dollar exchange rate.
Our earliest debt maturity.
Is 116 million US dollars due December 2021, and will be a focus in our near term debt reduction plans. The next debt maturity is not due until December 20 to 23.
For 2019, we expect depreciation to be approximately $330 million and SGN eight to be approximately $105 million prior to share based compensation expense.
We would expect cash taxes to remain low.
The tax rate to be in the 20% to 25% range.
Following our successful divestures in the first half of 2019 generating $82 million in proceeds we will continue to look for selective opportunities to divest non core assets for additional cash flow.
I will now turn the call over to Kevin for further discussion of the business and outlook.
Good afternoon, and thank you Gerry.
Managing a capital intensive labor intensive oil service business during a period of extreme commodity price volatility is a challenge in the second quarter of 2017 was no exception.
Our north American customers face the same issues as the cycle times to drill and complete wells, especially large pads is often longer than the commodity price works.
Despite these challenges investor expectations for capital discipline that is spending within cash flow are being met by the peak unity at large and we expect our customers to stay in this move through the balance of 2019.
For precision this creates both opportunities for our Super series rigs in technologies and risks with overall energy spending constraints.
Precision is extremely well positioned to be volatile market conditions, we believe our strong second quarter results demonstrate deposition.
I will discuss this in more detail for each of our geographic markets, but I'll start with a review of precision strategic priorities.
Regarding the focused on debt reduction.
To reiterate terrys comments that on every that our intention is to accelerate our debt reduction plans at every opportunity.
Increasing our debt reduction target for this year to 200 million will position us already near the bottom end of our four year targets was two years into the plant.
And importantly, this also brings our debt to EBITDA leverage target of under two times clearly to focus.
Every investor we've dealt with over the past several quarters applaud both our stated debt reduction targets for the progress we have achieved towards those targets.
I will tell you that our management team has us pretty well in hand.
We will continue to hover in this key priority throughout this year and the coming periods.
Just touching our second priority leveraging our scale to deliver free cash flow I think carey covered up pretty well, but I'll add that the recent organizational changes we announced our design to leave no stone unturned deliver every single opportunity to create additional cash flow.
Nor teams already uncovering some more leverage opportunities I look forward to this increased focus on cost management.
Now before we get toward technology priority I will review, our regional update giving with United States.
Looking at US our second quarter activity came in slightly lower than the guidance. We provided on our April conference call.
Responding to the volatility in crude prices the operators began trading back active rigs was they defended the narrative of capital discipline.
Precision is active rig count pullback normally from our prior guidance to the mid Seventys through the second quarter was held in this race through today were 73 rigs running one rig idle but contracted.
We expect the IVC rig will return to operations later this quarter with a transition through new customer contracts.
Earlier I mentioned, how this volatility also creates opportunities.
This was evident as our customers increased focus and attention on all avenues to increase capital efficiency with the rigs that continue to operate.
Drilling efficiency non productive time, increasing pad sizes and technologies aimed to improve efficiency all receive substantially increased customer retention during the quarter.
For precision this label led to stable utilization for our Super spec rigs from pricing on contract renewals and the signing of 15 term contracts during the quarter.
We also experienced a step change in system utilization on our PC automation and App offerings will have more on this later.
Utilization of our Super triples in the EU us remains over 90%, we mobilized our first SCR to DC upgrade during the quarter, bringing our fleet to 68 AC pad walking rigs our mind you we have grown our us super Triple from 10% in last 18 months through upgrades.
Canadian rig transfers the newbuilds, while contracted on favorable terms.
We have 12 to 24 additional candidates our fleet for similar SCR did you see upgrades and several more Canadian transfer candidates should use customer demand and day rate economic support the additional investments currently precision does not have any further upgrade or transfer plans for this year.
The MP operators will continue to carefully manage spending.
Industry activity me for this often but the focus on drilling efficiency will continue.
All the precision of 68 Super Triple rigs are configured for X.Y. pad walking in all have long reach result drilling capabilities.
We expect sustained from demand for Precisions performance, leading super Triple rigs and expect stable pricing of activity trends. We mentioned earlier, we continue through the balance of the year.
Of course, assuming commodity price volatility does not one.
Now turning to Canada in our Canadian business. Besides the commodity price volatility Canada has the additional challenges of government mandated production curtailments in constricted export capacity.
These challenges have led to a substantial reduction in industry activity for the first half of 2019 and precision has not been immune.
You will recall that during the first quarter, our activity was down 30% year over year trucking with the overall industry.
During the second quarter, we substantially narrowed the gap by gaining market share. This was achieved through a combination of product mix with our super Triple rigs technology deployment of those rigs and of course, our highly efficient mobile super single rigs.
Our market share rose to 30% earlier, the second quarter and has held 45 rigs running today.
Excuse me to the second quarter, we averaged 27 active rigs just 15% behind last year.
Rain and wet weather impacted drilling and servicing activities throughout the basin in the latter part of the second quarter and through the third week of July things seem to be drawing out now in industry activity is improving I expect for the balance of the third quarter Precisions Canadian activity will hover in the mid fortys to low fiftys.
While visibility on the fourth quarter has not yet fully developed we're not anticipating any significant reductions of activities.
Pricing accounted as fickle with continued pricing pressure on the shallower rigs, we expect those risks could see margin reductions in the $501000 range, while we expect stable margins on our Super Triple rigs operating primarily in the Miami.
Overall, we expect average rates and margins for the third quarter down just nominally from the prior year.
Now moving to our international segment during mentioned, we deployed our six super Triple rigs in Kuwait and this rigs, but it looks spotted on July Onest. A couple of weeks ahead of schedule and the rig build was completed under budget. Both of these are wins from a cash generation perspective.
Kuwait and Saudi Arabia remain key to our stable international business with non rigs operating we believe we have achieved the scale we desire.
We also continue to pursue opportunities to activate our idle rigs in Kurdistan with several ongoing customer discussions, which certainly seems interest is strengthening in this area.
Our international business, primarily with proceeds national oil companies ensures a stable revenue stream isolated with volatility and seasonality we experience in North American markets.
Turning to our completions productions business, our team locked down another strong quarter during the seasonally slow Canadian spring breakup.
Well I often refer to this business is on core operating results and contribution cash flow turnaround is remarkable.
During the second quarter through intensive cost controls with activity down 7% from last year. The segment reported a $4 million increase in EBITDA. The approval is excellent and consistent with the gains have been over the last several quarters or CMP team like all in precision are keenly focused on leveraging our scale, reducing costs and delivering free cash flow. These results are strong.
Now circling back toward 2019 keeper priorities, our third priority is to fully commercialize our technology.
During the second quarter and feels like we're approaching a tipping point with our customers.
As I've discussed in the past, we need to achieve achieve high utilization levels at the rig to demonstrate the efficiency benefits, but even then field resistance by Wellsite consultants has been an obstacle.
Clearly our customers are stepping up the strategic focused on efficiency.
We want to ensure the capital deployed to operating rigs is delivering the lowest cost and most efficient drilling operations possible.
This message is getting through the field and we see support improving even those risk resistance technology in the past.
During the quarter, we drilled 195 wells with our PC automation suite.
We added new customer, which we'll see our 34 system deployed in August .
We deployed our first fully commercialize drilling up and we have several more apps approaching full commercialization.
Earlier this year, we kicked off a big data collaboration initiative with Hitachi and other partnerships like we have a further technology initiatives, who is a leader in industrial automation big data.
During the second quarter, we delivered.
For same sex appeal process.
And data streams.
Per second per rig providing.
Actionable data to the right people at the right time, enabling the best real time decisions.
Additionally, we are leveraging insights from Hitachi is aiotv analytics platform to optimize our equipment performance, which identify improvement opportunities and well delivery for our customers.
Our technology initiatives are underway and every north American region. We operate our customers includes super majors large intermediates regional junior producers and private equity and peace deficiency predictability. This technology provides reinforces the all ready remarkable efficiency of our pad walking Super series rigs, we're on track to fully commercialize our technology offerings. This year and believe this will be a competitive advantage with which physicians precision well ahead of our competitors.
So I know many precision employees are also shareholders in precision and I expect many are listening to this call.
So I want to thank all the employees of precision for their hard work supporting our customers drive their competitive advantage the leveraging our scale to drive the cost down. Thank you.
Now just before I conclude I've got a couple of comments on the share.
Now most of you know that I spend most of my time based in our Houston office as does most of our leadership.
You also know the precision move two of its advanced Super Triple 1500 horsepower rigs from Kevin Reevey of US, we'll consider moving more if the economics are compelling.
I will say that precision remains committed to Canada as a leading service provider in the Canadian market in Canada remains important to precision as a source of high quality key personnel and strong free cash flow.
However, I must say I'm very disappointed with the weak energy investment Barton Canada.
I believe this is a direct result of the lack of federal government leadership and uncooperative political self interest evident British Columbia in Quebec.
Like most energy firms operating a region, we are deeply frustrated by the Canadian federal government's failure to support the Canadian oil and gas industries globally recognized leadership for social and environmental environmentally responsible energy development.
Further.
The federal government's perplexing energy infrastructure and transportation policy with the passage of Bill see six to nine and see 48 is clearly intended to undermined the domestic energy industry.
With the federal election in Canada later this year candidates on all fronts should be supporting the ticket credit for the strong vibrant environmentally and socially responsible Canadian energy industry. The precision as a part of there's no question the responsible Canadian energy production and exports a critically important component in global social environmental and climate strategies.
Now I will turn the call back to the operator for questions. Thank you.
Ladies and gentlemen, if you have a question or comment at this time. Please press Star then the one key on your Touchtone telephone. If your question has been answered the question with yourself from the queue. Please press the pound.
Our first question comes from Sean Meakim with JP Morgan.
Thank you Hey, good morning.
Good afternoon John .
So Kevin just on the near term outlook in the us in out years is particularly.
More constructive than that of your peers that has their call earlier today.
I think thats, new in terms of the consistency of reality than sharing with us over the course of the year, but I was hoping you could just maybe opine a little bit.
About.
Two what would you ascribe that different than it is it near term stronger contract coverage as a percentage of your fleet.
Customer or geographic mix I'm trying to get a sense of.
Hi, how are you how sustainable that is to stay at home.
Fairly.
Flattish activity levels, if the rest of it.
Lower 48 continues to move lower.
And then just does that give you any pause beyond the third quarter at some point as contracts start to roll could that could that.
At direction change.
Sean I'll start by saying that I think the biggest risk we face is increasing commodity price volatility. So I kind of couch my comments around the current range.
And I can tell you that our customers got nervous when we saw the commodity price again drift into the lower fiftys for little while earlier.
Early in June but is come back above that range. So I think thats, a risk, but just turning back to our fleet for a moment.
We stress that we have 68.
Super Triple rigs in the U.S, they're all pad configured they're all was able to drill long reach horizontal wells, we're deploying technology in a number of those rigs.
I think that.
That you could call it our customer mix based on pad drilling and development drilling, which I think.
Leads us to a little more stability. So I think we are less exposed to de risking drilling and kind of single one off pads are small pads. So I think it really is a focus on development drilling is holding our stability and our activity through the third quarter and probably into the fourth quarter certainly the.
The contract book that we built up during the second quarter carries on in most cases through the balance of this year into next year.
Yeah, and Sean I'll, just add to that Kevin mentioned, we've got 68 AC triples that are working in the U.S. at above 90% utilization. So if you assume the rig count of.
73, and lets say 63 AC triples, working we've got 10 rigs that would not have the same characterization. So those would be at risk. It at a if the rig count or to decrease.
But those are going to be lower margins than the super triple rigs.
Right right that makes sense. Thank you for that.
And then just yeah I want to touch on free cash as has been the number one priority and you guys have an executed very well in that regard.
As we think about the two times leverage target and you mentioned some of the volatility is clearly a lack of visibility.
In in your business at the moment.
But given the levers you have to pull it seems like you're pretty confident that.
Within a normal range of expected outcomes that you got good line of sight to that two turns.
Even if things are a little better a little worse than what we expected. Your base case is that a fair way of characterizing it.
Well I think it is Sean, but what I would I really drawing attention to we haven't given 2019 or 2020 capital guidance yet.
But.
If we're in some market in 2020 that just has zero opportunities for growth our capital spending could be anywhere from 75 $200 million less than it was this year.
If the market does that tight so that gives us confidence that we will still have a strong free cash flow free cash flow profile next year.
That's right you have that flexibility that issue on our side and within that band Okay.
I am pretty certain were not to be building other rigs for Kuwait next year so that.
No that's $75 million Chuck comes out of our capital spending for sure.
And and then we had a pretty good start to the year for upgrades and things like that.
If that market is not there then we're looking at a maintenance capital profile in 2020, which then gives us good flexibility and free cash flow.
Got it makes sense. Thank you.
Our next question comes from Connor Lynagh with Morgan Stanley .
Thanks afternoon guys.
I think I got it.
I was hoping if we could build on John's question, a little there so.
Certainly it seems like your activity.
Outlook is pretty could you comment on pricing in the market in general and just have you seen.
Any softness there has been.
The emerging data points on that today. So just wondering if you could clarify how you're seeing that shakeup in the market.
Yes.
Conor will leave leave our comments pretty limited in that we expect our pricing and margins to remain stable.
You know I would tell you that for new price discovery on new opportunities with very few and so some of the other conference calls today would be people would be competing with.
So giving away any kind of sense of how we see pricing right. Now is not something you want to do but we do expect our rates will remain broadly stable through the third and the fourth quarter.
That's fair that's fair.
On the on the technology side I was wondering if you could.
I think you said in your prepared remarks that you're reaching full commercialization on some of the apps can you just give us a feel again.
The overall technology portfolio, how much is running at sort of full commercial rate versus.
Early stage testing.
I don't have an update at my fingertips right now we have all of our units right now the field running we've got utilization.
Over 70% on about two thirds of our units those units are likely going to be earning uniform later some of something near full rate.
The short answer is.
We expect to be fully commercial this year, we expect to be earning.
Full rates across the PC platforms around the end of the year, that's looking pretty good and the results are good in the field.
One of the happiest commercial we have two or three more apps that are.
Likely.
A few weeks away from being commercial so if you just think about this in pieces EPA system as PDAC systems above $50 per day.
Each app could be in the range of 200 to $500 per day, and we expect we can see anywhere from one to three apps on a rig.
Sometime this year.
I think the new piece, we're talking about the big data piece.
We are just getting going on that but that looks pretty interesting and we expect to see some revenue coming through on that.
As the year progresses.
I think that in.
For 2020, we will be able to give better guidance.
Okay. So any sort of near term expectations, we should think of in terms of incremental EBITDA.
I think it started to get modeling goes into 2020 numbers kind of based on the guidance I've given here, but.
There is nothing right now that I see is not going to allow us to commercialize this year.
All right great. Thanks.
Thank you.
Our next question comes from JB Lowe with Citi.
Afternoon, guys.
Hi, Judy.
Kind of attacking the motor Sean's questions from a different way, if if activity kind of slows down.
But you guys are still generating a pretty decent amount of free cash flow given your contract coverage.
Could we see no debt reduction next year at the same level of this year or above.
So we have put forward a four year plan and if as Kevin mentioned, we will be pretty close to the low end of our four year range within the first two years the plant. So we'll still have.
Think about it as 200 million more to to pay down over the next two years.
To to recharge the high end of our target range.
And.
If we think that we need to pay down more to get to below two times, we will continue and will go beyond that range.
But I would think about a the cash flow as being in that $100 million to $200 million range next year.
And if a if theres more opportunities to deploy capital EBITDA is probably higher and theres fewer opportunities to deploy capital Ebitdas lower and Capex is lower but we'll keep that to that cash flow band in that $100 million to $200 million range.
Okay perfect.
And then just on.
You know further potential divestitures I know that you guys have done a really good job turning to CMP business or I don't know if this was one of the businesses that you were going to try to kind of prove up and then and then try to sell it to somebody I know, it's a kind of a separate entity at this point, but now that it's generating a pretty significant amount of free cash.
I mean is that something you'd rather just keeping your portfolio at this point I mean or what type of number would it take the private out of your hands.
You know I think for someone to me because we're not we don't need to be a seller at a low point in the market and that's a really important.
I think that the CMP business in Canada, particularly the well service business, but also rentals in the company catering business.
Our in a really tough spot right now industry wide.
I think that's showing.
You know return leadership like I think we're starting to develop here is important for us.
I think thats base needs to consolidate.
Following these more than most of the segments does in Canada.
And we've always said that we'd like to be part of a consolidation play, but I'd be clear that.
We don't see ourselves as a cash seller in the trough of the market, we still think that.
No Q1, Q2, and Q1 were below 2018 activity levels for the industry. So the market is still troughing in that in that space I'm thrilled that the team is working hard at a really good job turning the business around.
And Uh huh.
Cash was important to us it's important to debt reduction.
So I think we're happy with where we're going right now not in any panic to do anything at all.
All right. Thanks, very much great. Thank you.
Our next question comes from Taylor Searcher with Tudor Pickering Holt.
Hey, good afternoon.
Hi, Kevin it feels like the past several quarters it's been.
Recurring theme that.
You're still bidding and there's still some good interest for.
Tenders internationally and I think in prepared remarks talked about Kurdistan again.
Kind of a two part question one.
Are you still seeing some good interest in.
Incremental tenders outside of Kurdistan and then.
Due to more broadly in the middle East where your rigs are at today.
Is there any appetite today to bring some of your apps technology and and process automation control over there moving forward.
Okay. So first of all talk about.
Kurdistan for a moment my my team over there reminds me they haven't lost a tender yet.
The fact is nothing we've tended in the past couple of years has been awarded most of the projects have been pushed back or delay or going retendered.
We have a couple ongoing negotiations now the could develop into something so we seem to be getting a little farther down the line and we did in previous tenders.
So I want to build up at a false.
Expectations of the market, but I think the likelihood those rigs and go to work.
You know late this year early next year looks a little better there did a quarter ago, but we'll have to wait and see.
Yes, if we were awarded something tomorrow, it was probably five or six months, where the rigs actually find out so it's probably.
At Best 2020.
Events coming back to technology, I'll tell you that up.
Both in Kuwait and Saudi.
Customers are also focused on efficiency that efficiency trend isn't unique to the U.S. are counter it's a global trend.
And our fleet in.
Kuwait is all high spec Super triples AC rigs.
You know all the same control systems. He is North America. So we are confident that we can take that technology into Kuwait and deploy quickly.
I'd say, we want to be fully commercial in North America first we won't have learned onerous to learn before we deploy something literally halfway around the world in a plane flight away not just a pickup truck drive away. So that's our current strategy I'd say that we're working with KFC and sort of sort of pushing back your expectations until we are certainly we can deploy this technology in that market zero downtime.
So I'll comment that you are working in Kuwait is for us it's very good business, but it's a very.
It's a very and airing market in that its deep high pressure high temperature drilling.
You do not want to have a mechanical failure or system control failure, you cant afford downtime you can't afford to have an operational failure. The bill piece on the rigs or 15000 PXI.
And well control issue could become payable quickly so all of these up.
No.
Hi, technology issues have to be very carefully vetted for deployment these rigs.
Okay. That's helpful. Thanks for that and more of a modeling related question the U.S.
I think you said that over the back half of the outlook is still relatively kind of flattish pricing, whereas today and and rig count holding then pretty farmers today and so I guess my question is is my inference that margins over the back half day.
Relatively flattish is that the correct.
Yes, I think the guidance, we gave Taylor was on margins to be flat into the third quarter.
And if I had to Kevin's comment that if the market is similar to how it is today, we would expect that to continue on into the fourth quarter.
Okay, Great. That's it for me thanks, guys.
Great. Thank you.
Our next question comes from Waqar Syed with Altacorp capital.
Hi, Thanks for taking my question.
Kevin Yes.
The dental revenues in the <unk> in the U.S. had been falling lately could you.
Maybe talk about defense and why is that.
You know turnkey as a hub.
It's a real a cyclic business for us, it's certainly natural gas related.
So its tied closely to gas prices it depends it's a.
Gulf Coast deep wells kind of selective opportunities.
And just the yes.
I think if the fund raising that those customers are those types of clients usually do has been slower than usual. So we just haven't seen a lot of turnkey business lost view.
Last few months.
I think at a stronger natural gas environment in the Gulf Coast I might improve.
You know for us.
But for US I would tell you that turnkey isn't strategic but it's a nice opportunity to deploy some of our bigger rigs and to do what we do very well.
Great now should you should your rig in Kurdistan go back to what the what would be the reactivation cost it.
It depends we have two rigs in Kurdistan, we're looking at and possibly the rigging Georges just truckload truck truck trip away, but reactivation costs could be in the range of.
Five to 15 million per rig depending on what type of job it goes to.
Obviously next year.
We expect that capital to come back quickly.
If we think that we're going to contract.
Yeah.
And then just one finally, how many of your Super Triple S. 1500 horsepower rigs are idle in the U.S. right now.
Just a small handful, but all of those rigs are either.
Either contracted to go to work shortly or.
Spoken for.
Great. We think we've commented our utilization is over 90%. So the math is pretty straightforward.
Right.
Thank you very much.
Great. Thank you.
Our next question comes from currently with RBC.
Hey, everybody doing.
Good.
All right. Thanks.
That's good color.
Hello, Kevin.
Thing that I, just want to try to calibrate predicated on some other things that we heard today Brown couple of your competitors and then maybe get a point of clarification on on your view on the Canadian market. So first first on the web.
The general dynamic here is that the correct.
Echoing your comments that pricing for Super spec rigs remain pretty firm, even though the rig count has come down and down a tad Ron Yes, we had also heard.
And there are some signs of pricing pressure. So I know that you mentioned stability in pricing you mentioned that you've been able to new contracts at current pricing.
Can you, maybe just talk a little bit about leading edge, what you may be seeing in the marketplace.
Just kind of round out the fixturing, forming that'd be great.
Kurt you know there there aren't many what I call Grand New price discovery opportunities. So you know I think we didn't get rates for new opportunities for the price discovery opportunities is a little bit meaningless most of what we're doing is.
Either renewing contracts with customers that have rigs, where theres a switching cost if we decide to switch the rig so obviously that supports more stable pricing.
Moreover, we are going to customers, who are increasing pad size looking for pad walking rigs. So we're really not seeing a lot of rig on rig competition, which again I think supports from pricing you've been around as long as no that was the whole tide goes down.
Everything gets affected a little bit I'd say that at least in fact, we're seeing is on pad walking super spec rigs.
Hey, Rob I will comment I do think that there are.
A handful of idle AC rigs in the market not all of those are respected their AC and our customers work hard to try to use any AC rig that's available against maybe the most leading edge rigs. So we have to be smart and talk about how the market now we sell into that environment.
Okay. Appreciate that and then on that on the Canadian side of things.
Long days and I probably.
Didn't pick up on something you guys make and so early on I thought.
Gary when when you're kind of talking about the Canadian market you suggested that the cash margin for Canadian land rig business will be down to like 57 50, a day did I did I hear that correctly.
Yes, that's compared to last year, so if our activity is down.
Call it 10% to 20% in the third quarter relative to last year that will be lower overhead absorption, which will have a negative impact on margins.
Compared to last year given.
Got it I got it now given the delays that's happening in Canada at least for the rest of the year.
Is there any reason we think that there can be done uplift or is there still potential for cash margins on a sequential quarter basis going into fourth quarter.
Is there is a risk of it going down further.
You know I guess.
I'll give it over to build any false expectations, usually the fourth quarter in Canada, as a being a bit of a proxy for what's going to happen in the coming year in 2020.
So if for whatever reason.
2020 ends up being an improving market over 2019, then you might see a lift in the fourth quarter.
But if in fact 2019 appears to be flat 2020 years before 2019 and likely we'll see.
What we see now will flow into the fourth quarter.
I really don't expect a lot further erosion you don't Canada, we've seen.
A recent consolidating transaction with one of our largest two large competitors Virgin and Thats brought.
A fair amount of discipline into the market and.
It's kind of blocked out.
One drilling contractor that might have been trying to price more rigs to gain market share now, it's a matter where there's a good market discipline, especially on the deep basin.
I'd say rates are holding up well because of the.
Okay.
Okay great.
All right that's it for me. Thank you so much.
Thank you thanks.
Our next question comes from Greg Coleman with National Bank financial.
Hey, guys. Thanks for taking the questions.
Not to beat a dead horse here, but just want to come back to capital spending and free cash flow. So Kevin based on your comments I think so far this year you have asked us something in the range of kind of $80 million to $83 million worth of assets I'm, just sort of wondering twosies here and there based on your commentary about not selling equipment down are at the bottom is it reasonable to assume that sort of hit from the divestiture side at least in the foreseeable future.
Well you know we have 18 rigs in Canada for rigs the U.S. as assets held for sale.
Yeah, I think it's still chance those rigs just some activity this year, but nothing else in our portfolio right now is in any sort of process or any active sales process.
No that doesn't mean that something might not sell.
We have calls all the time with people who might be interested in some rental agreement or something else I think there's still a chance of a transaction but.
As we said at the beginning of this process, we were driving our debt reduction based on free cash flow and if we're successful selling assets I will accelerate the program, but it's not required to generate our debt reduction targets.
Got it and then understanding of course that you haven't provided your 2020 capital budget, but that was great color earlier on the call. When you said 75 to 100 million lower than what we saw this year, mainly because of that and Kuwait built so just.
Make sure I'm not screen anything up here, we could be thinking about $75 million to $100 million gross capex next year that would be netted down by any potential asset sales is that a good base level to think of it.
No, we're not giving any guidance, yet really not giving a 2020 guide to see I think we'll do that later this year.
My comment was really.
If if you believe the 2020 has no growth opportunities, we can throttle back capital spending by $75 million to $200 million. If you believe there is no growth opportunities from a from a level of this year of around 175 million Thats correct.
Got it okay thats it from me thanks, guys.
Great. Thank you.
Our next question comes from John Watson with Simmons energy.
Thank you good afternoon.
John Hi, John .
For the equate rig congrats on getting that working ahead of schedule are there any startup cost what should we be thinking about for the margin impact on the cost side and that we're going to work.
So we already have a establish scale in that market and this is the.
Six almost identical rig that we've deployed to the market. So you can assume that that rig is going to start generating its full EBITDA in the third quarter.
Okay. Thank you Gary.
Similarly in the U.S. for your flat margin guidance.
Are you contemplating opex moving lower Opex per day, moving lower in that guide and if so can you talk about what those levers to lower opex might be.
So I would.
As Kevin mentioned earlier, we are looking at every opportunity to lower Opex. So we're working hard on trying to figure out ways to get that number lower.
But at the same time I would say that at running a rig count in the low to mid Seventys in that in the third quarter, we would expect the opera opex to be in a similar range to Q2.
Okay.
And then lastly, I think on the one Q call Kerry you said that we should be modeling neutral working capital for the year does that still hold after that a nice working capital quarter into Q.
Right. So we always have a we have a benefit from working capital in the second quarter because it.
Activity in Canada that will there will be a slight build throughout the year, but it will be.
In the tens of millions of dollars.
Okay perfect. Thank you.
Thanks, John .
Our next question comes from each all the GP GMP.
Afternoon, guys.
The financing.
With respect to the processing automation control systems.
Has there been any change in your customers intention for rate of adoption there just given.
Some of the skittishness, you've noticed in their spending profiles or is it does interest remain very high there.
I'd say during the second quarter interest picked up.
So.
You know I think that the the push on capital efficiency is is driving.
Two things let me, let me just kind of backed up here for a moment the whole concept of capital efficiency and stay within cash flow is up and down the energy companies from company mountain location through CEO and I think the capital markets have been effective getting that message into the piece and we see it day in day out right up and down the our customer base and relevant on down the vertical inside the customer and.
If the rig is running they are working on ways to run more efficiently faster and maximize efficiency and that's putting a real spotlight on the benefit of technology for US right now so I think it's actually helping and.
You know I made a comment in our Q1 conference call that we saw field resistance because people's jobs, we are changing their decision, making was changing and they didn't like that they were pushing back.
As this message on efficiency as being pounded into the field by the NP companies.
Are those resistors are very quickly becoming supporters. So we saw that transition during the second quarter. It feels like a tipping point.
Hopefully one if theres a third quarter I will report that it was the tipping point.
And.
And as we.
Think about maybe this time next year and I mean growth year over year and units I think it was about 65% do you think yet by this time next year you'll have enough.
I have another call. It 15 to 25 of these units deployed in the field.
I mentioned that we're deploying one more right now and I was really referring not to do that until we had every single unit fully commercial but in fact, I Didnt mentioned on the call who decide to contract in Canada for.
Multinational NP and that rig will be activation of one of our Super triples will include the the full automation suite and some apps. So that's a piece of information that wasn't in our prepared comments, but that's the additional unit that were deploying right now.
I do expect the different commercial but into this year, which we expect to be we'll deploy more units next year.
We'll deploy them as quickly as we can install them and train our people because we can't afford to have failures at the rig due to lack of training of our people are the customers personnel.
That could be 15% next year, but we haven't given any guidance yet.
Okay.
And there seems to be an increasing push on the SG side across I mean, all businesses at this point.
Are you seeing any increased demand for biofuel kits or anything of that like on the rigs whether it be in Canada or the U.S.
Right now.
You know, it's addressing right now I think that that question comes up in almost every customer conversation, but I would say right now is that.
If were to add a bi fuel kit, it's going to mean, the customer is going to pay for that.
With the.
Added to the contract, but also you have to source their fuel and put in place the supply chain for fuel for the natural gas to location.
That's a complicated number of steps, which we haven't seen.
Kicked off during the second quarter.
Okay. So you to sort of answer is not during the second quarter.
Okay.
But we'll see.
Well see now certainly I'll tell you.
We just finished our quarterly board meetings it was a topic.
Throughout our George many board meetings around.
Yes, you footprint, our reporting it's important for us.
And we've taken a number of steps internally and we expect to continue to.
Both enhance our reporting and enhance our performance.
And.
Last one from me acknowledging some of the market headwinds that are appearing broadly in the U.S., but.
As you look around and look at what's working in the U.S. today do you think there there is still an opportunity for some of the.
Sta 12, hundreds of Canada to capture market share or is it just is it is there are customers just not willing to do that right now.
Are you referring to move some of our Super triples from Canada to the U.S.. So sorry, I missed the question, yes, sorry, yes, sorry, that's correct, yes, moving some of the ft tall hundreds from Canada into the U.S.. Yes. So we have we have 350, hundreds and the balance of our.
Super triples in counters to 12 hundreds.
It looks like all of his holdings be spoken for.
Through the balance of the third and fourth quarter.
So we don't have anything free to move down.
I would say that it's more likely if anything moves existing 1500, but we also see some.
Living as demand for those in Canada. So I at this point I don't see any likely to move rigs will be down this year.
You know sort of depend how 2020 starts.
You know if club.
If we saw you know.
A negative factor in Canada, and a positive vector the U.S.
I can guarantee which will move okay.
Thanks, very much I will turn the call back over.
Great. Thank you.
Our next question comes from Dan healing with the Canadian Press.
Hi, guys. Thanks for taking my question.
I was going to ask about plans for for Canada, given the with what seems to be a pretty negative outlook for the for the industry for the rest of the year. You said, you probably won't move any rigs down this year, but going forward is that something that you're looking at seriously.
Dan It's something we're looking at kind of all the time I just don't see any opportunities for the balance of this year to do that.
You know were.
We're.
Important player in Canada were leading service provider here.
It it troubles me.
Every time, we divert people capital or assets out of Canada.
Knowing how well this industry operates in Canada, both from Oh, I said on my comments environmental and socially responsible manner.
So my preference is to continue to support kind of the best we've again.
Love to see some political support in that front, especially in an election year.
But I think it depends you know it.
As I said to you in a moment ago.
If for whatever reason, Canada goes more negative in 20.
2020, and the U.S. stays where it is or get stronger theres no doubt that we'll move were assets.
Okay and you had this you mentioned the election earlier end and just now what what are the implications for the fall.
The election federally what do you see happening if.
The current government is return of or maybe farms a minority government.
You know I think that we this current government's made its policy is pretty clear.
We have a history of engaging so we we continue trying to engage with US government trying to explain the benefits of industry and work as closely as we can.
I would expect that Trans mountain proceeds and that'll be helpful. For our business. You know I think LNG continues to have support both principally federally I think there will be helpful for our business.
You know it's up it's a tough situation it doesn't need to be this tough, but it's also knows that not as bad as the capital markets. Thanks.
Right now there is literally zero capital markets interest in Canada, and that's just not right.
Okay. Thank you.
Great. Thank you.
And I'm not showing any further questions at some like turn the call back over to our host.
Thank you all for joining today's call and look forward to speaking with you when we report third quarter results in October .
Ladies and gentlemen. This concludes today's presentation you may now disconnect and have a wonderful day.