Precision Drilling Corporation (PDS) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day and thank you for standing by. Welcome to the Precision Drilling Corporation 2021 Second Quarter Results Conference Call and Webcast. I would now like to hand the conference over to your speaker today, Dustin Honing, Director of Investor Relations and Corporate Development. Please go ahead.
Dustin Honing: Thank you, Matti, and good afternoon, everyone. Welcome to Precision Drilling’s second quarter 2021 earnings conference call and webcast. Participating today on the call with me are Kevin Neveu, President and Chief Executive Officer and Carey Ford, Senior Vice President and Chief Financial Officer.
Carey Ford: Thank you, Dustin. Before we discuss our second quarter results, I would like to notify the audience on this call that Dustin will be taking on a new role within Precision overseeing the finance operations and other administrative functions within our well service division. As you all know, Dustin has managed PD’s Investor Relations efforts very well over the past 2.5 years and he is ready for a new challenge within our organization. For the time being, you can contact me with Investor Relations matters. Moving on to our second quarter results, Precision second quarter results were characterized by increasing North American activity, field margin performance exceeding our prior guidance and continued strict focus on cost control and cash flow generation. Our second quarter adjusted EBITDA of $29 million included a share-based compensation expense accrual of $26 million. Absent this accrual, adjusted EBITDA would have been $55 million far exceeding our expectations. The unusually large share-based compensation accrual resulted from our share price of approximately doubling between the end of Q1 and the end of Q2 and our cash settled accounting treatment. As noted on our last conference call, the cash treatment and share price volatility may present higher volatility in financial results. Please keep in mind we have the ability to pay a portion of these awards as either cash or equity upon vesting. During the quarter, we received $9 million of CEWS assistance payments. As a reminder, the CEWS program supports employment in Canada and Precision has utilized this program to preserve jobs within our organization. The CEWS program has continued into the third quarter and we expect the impact to Precision to be approximately $25 million for 2021. In the U.S., drilling activity for Precision averaged 39 rigs in Q2, an increase of 6 rigs from Q1. Daily operating margins in the quarter were $6,752, a decrease of $275 from Q1, primarily due to legacy contracts rolling off into the spot market, offset by higher spot market pricing on new rigs and increasing adoption of Alpha technologies. Absent impacts from IBC and turnkey, daily operating margins would have been $227 lower than Q1. During the quarter, we activated 6 rigs and the reactivation expense remained in the $150,000 to $200,000 range and we expect the same cost per reactivation for the coming quarters.
Kevin Neveu: Thank you, Carey and good afternoon. I will now take a few minutes to discuss the strong recovery developing in our North American businesses and update you on our progress towards our 2021 strategic priorities. But before I start, I want to reflect that the last year has been – last 1.5 years has been extremely challenging for our industry and especially the people who work here at Precision. The pandemic health challenges, the lockdowns, the industry layoffs and the early retirements and the increased individual workloads have taken a huge personal to all of our people. Our fields operations remain fully staffed and unavoidably working in close contact, but have managed the pandemic challenges on the job and at home exceptionally well. Over the last 2 months, we have fully re-staffed our corporate offices in Houston and Calgary and I thank our people for the excellent work they performed in their roles remotely over the past year and I appreciate the challenges they continue to face everyday. We are in the beginning stages of what’s emerging as a strong industry recovery and we rely on the hardworking and loyal Precision team to execute our business, support our customers and help drive the results our investors and stakeholders expect. While Carey fully covered off our recent debt financing activities, I will just add that I am extremely pleased to have substantially resolved our maturity profile, lowered our interest carrying expense and maintained our strong liquidity all while continuing to make excellent progress towards both our short-term and long-term debt reduction targets. We believe that reducing our debt levels and bringing our leverage level below 2x EBITDA will create substantial value for our investors. It should be clearer now than ever before that our scale-based business model, utilizing high-value, long-life assets, coupled with highly skilled crews and leading digital technologies creates a strong full cycle free cash flow profile and the asset base will require minimal capital reinvestment for the foreseeable future.
Operator: And your first question comes from the line of Ian Macpherson from Piper Sandler.
Ian Macpherson: Thanks. Good afternoon. Kevin and Carey, congratulations on the debt refi, that’s a great coup to for you all financially and operationally, so good to see that. I was intimated, Kevin, by your leading edge U.S. day rate data points. Just wanted to clarify, are those base day rates excluding a-la-carte add-ons for the Alpha suite?
Kevin Neveu: Correct. Those are base day rates for the base Super Triple rig, excluding technology add-ons.
Ian Macpherson: Okay. Yes, that’s certainly improving higher than we would have recently expected. And you mentioned the consolidation of your customer base across Canada and the U.S. But there has also been some consolidation in your space in Canada, which I think makes that competitive framework even probably a little bit tighter than it is in the U.S. Are you seeing accelerating pricing power more so in Canada than in the U.S. at this point? And any – would you lean further out in time to hazard where pricing is going in both markets by the end of the year?
Kevin Neveu: Ian, I think that’s a very good question, first of all, but the transactions for consolidation in Canada and the one in the U.S. also haven’t closed yet, but we expect them to close soon. I do think that brings an appropriate level of rational thinking to the market space. And the way I say that is that in Canada, for example, the Montney play in the Deep Basin and Duvernay are unconventional resource plays with large pad horizontal drilling. These are very much industrialized operations. They require drillers of scale with high-quality technology-driven assets to operate those as economically as possible. So I think that this rationalization we are seeing among the customer base and being echoed in the supply base is constructive. It creates – frankly, it does create a better pricing environment for our services, but probably a more appropriate pricing environment for the services we provide. But I think the core driver right now for pricing in Canada has been just industry overall demand and then some of the labor tightness tightening up the supply side. So, I think those two combinations are driving the near-term pricing. But we do expect to see very rational behavior over the long-term on – particularly on the Deep Basin in Canada. And I think the same thing will develop in the U.S. as that consolidation play takes place also.
Ian Macpherson: That’s great. Thanks, Kevin. I will pass it over.
Kevin Neveu: Thanks, Ian.
Operator: Your next question comes from the line of Taylor Zurcher with Tudor, Pickering and Holt.
Taylor Zurcher: Hey, thanks guys. First question, Kevin, you talked about the Canada market backdrop has clearly improved and you talked about how we might see a similar dynamic as what’s going on in Canada right now, eventually play out in the U.S. In the U.S., we are still well below pre-pandemic levels. And so just hoping you could give us a little bit more color on the dynamics at play that you see in the U.S. maybe over the next 12 months? And maybe any suggestion on timing as to when we might get back to sort of pre-pandemic type levels in the U.S.?
Kevin Neveu: Taylor, I think the number one answer I kind of focused on is that the investor desire for returns and discipline is not going to go away in the U.S. and it hasn’t gone away in Canada either. But I do think what happens is that as our customers hedges roll over, into the much more constructive strip that we see today versus 6 months ago or a year ago. I think that’s going to free up more cash flow. I think it’s going to allow additional debt repayments, additional investor returns and the room for modest increases in capital spending like we’ve seen in Canada. Again, the pivot in Canada isn’t a substantial pivot in spending. It’s a modest pivot in spending. But when spread among 30, 40, 50 companies, if you have 50 producers in the U.S. to add one rig, that’s a meaningful step-up in demand for super-spec rigs in the U.S. So I think you’ll see a dynamic emerge in the U.S. with modest increases in spending, one rig additions here and there that across the fleet adds up to 50, 60, 75 rigs maybe between now and the end of the year. And that puts a very strong pull on the super-spec fleet, especially when you bake in kind of regional dislocations, the Permian might have excess super-spec rigs, but most of the basins don’t.
Taylor Zurcher: Yes, makes sense. Good to hear and my follow-up maybe for you, Carey. You talked about robust cash flow for the back half of the year. I suspect with the seasonality in Canada and U.S. activity continues to trend higher, that working capital likely becomes a drag on cash in the back half of the year. So just wondering if you could kind of button up how we should be thinking about that cash flow outlook translating into free cash flow and getting to the midpoint of your debt reduction range would take about $50 million to $60 million of incremental debt pay down? When we think about robust cash flow, should we expect $50 million to $60 million as being kind of the right number to think about for the back half of the year?
Carey Ford: Yes, Taylor, I appreciate the question. So we don’t typically give guidance for EBITDA for – we will give enough information so you can calculate that, but I can walk you through some of the guidance we do provide. So I pointed out we have only $22 million of cash interest in the second half of the year. So that will be helpful to cash flow. We’ve given our capital guidance where we’ve got another $30 million or so that we’re going to spend on capital expenditures. And those will really be the two main draws of cash. The working capital build since we exited Q2 with such a strong activity in Canada, won’t be the typical seasonal working capital build that we would see. We think probably it will be $5 million or $10 million of working capital build and likely that’s offset somewhat by used asset sales that we typically do in normal course.
Taylor Zurcher: Got it. That’s it for me. Thanks for the answers.
Operator: Your next question comes from the line of Aaron MacNeil with TD Securities.
Aaron MacNeil: Hi, guys. Thanks for taking my questions and Dustin, congrats on the new gig. My first question is on the rig move from Colorado, the BC Montney. I assume the customer is paying for the full mode but wanted to confirm. I’m also wondering if the rig already has the alpha automation technology embedded, and if it will, when the rate kicks off under the contract? And then from a pricing perspective, just based on the – where you describe current day rate ranges, how should we think about the pricing on this specific contract, given that you entered into a multiyear contract not a short-term contract?
Kevin Neveu: Yes. I’ll make a couple of comments. I’m pretty sure the customer will identify himself if he’s listening to our call. So I want to be cautious with how much transparency I give out. But the mob cost is inside the contract, meaning that the customer is paying the cost of the mob. The rig is equipped with Alpha digital technologies and the customer is quite pleased with the performance of Alpha digital technologies. There will be some recertification costs as we bring the rig back into Canada. We will spend under $2 million to the recertifications on the rig. I think I hit all the points. Aaron, I think I answered all your questions, but if I missed one, let me know.
Aaron MacNeil: Just on the – with the – I guess, is the pricing materially different, given that it’s a multiyear contract versus the rate you described?
Kevin Neveu: I would say that the pricing is structured to give us a return on our investment that we think is well above our cost of capital and in the appropriate long-term range. I mean – the bottom line is it’s not a – they are not walking in a low market price for the long-term. It’s a price that we’re happy with and that we’ve negotiated carefully with the customer and delevers us a good return.
Carey Ford: Yes. And Aaron, I’d also add, we’re not executing this move for strategic reasons. It’s – we’re getting an appropriate financial return.
Aaron MacNeil: Should I interpret the rig move is just a signal that there is extremely limited capacity in this asset class in Canada?
Kevin Neveu: I think so. I think that – I think the demand could move up further, maybe another two to four rigs into 2022. And I don’t think we will be successful in all four of those or three of those or whatever it turns out to be. But we would expect that if we mobilize further rigs at the cost of mobilization is covered by the customer.
Aaron MacNeil: And how many 1200s are in the U.S. and idle or otherwise able to move up to Canada?
Carey Ford: So I can tell you how many 1200s we have in the U.S. We have – after this one, I think we have about 15, 1200s and several of those are working them. I think utilization would be over 50%, but we do have enough idle ones to satisfy the demand that Kevin just outlined.
Aaron MacNeil: Got it. And then final question for me, Carey, can you give us a sense of what your expectations are for the wage subsidy for the balance of the year just because those mixed signals on whether the program is wrapping up or not or...
Carey Ford: Yes. Right now, we’re saying for the whole year, we expect around $25 million. So that would mean in Q3, if it wraps up in Q3 that will be $6 million or $7 million.
Aaron MacNeil: Understood. That’s all for me. I will turn it over. Thanks.
Kevin Neveu: Thanks, Aaron.
Operator: Your next question comes from the line of J.B. Lowe from Citi.
J.B. Lowe: Hi, guys. How are you doing?
Kevin Neveu: Good, J.B. How are you?
J.B. Lowe: I am pretty good. Question, I think, Kevin, you were just – you were mentioning something about potential rig reactivations being in the mid-teens. Can you just clarify what – which geographies you’re talking about?
Kevin Neveu: So actually, J.B., I submit to upper teens, so I’ll be clear on that. We see rates moving up, and we see rates moving up for a couple of reasons. Labor is getting tight. And it seems that industry reactivation costs are moving up a little bit. You can hang your hat on the guidance. Carey gave for our activation cost in that $150,000 to...
Carey Ford: $200,000.
Kevin Neveu: $200,000 range. But I think industry-wide, there may have been some cannibalization of idle assets, but it seems that industry-wide that activation number seems to be a little bit higher. So that’s causing a better pricing discipline among the industry. So we’re seeing that price that cold rig activation cost price go up a little bit to mid to upper teens. I think that applies pretty much across any oily basin right now and the gas basins are kind of fully utilized.
Carey Ford: This would be the U.S. market, J.B., if that was what you’re asking.
J.B. Lowe: Got it. Got it. Okay, cool. My other question was just could you – I know Ian kind of touched on this with asking about the grades that they include the office suite or not. Could you break out potentially like what your total Alpha suite revenue was in 2Q or like a percentage of your total revenue or anything like anything to give us some guidepost on how much that’s really impacting the P&L at this point?
Carey Ford: Yes. So far, J.B., we’ve given guidance on what we’re getting per item ordered for service utilized. So it’s $1,500 a day for AlphaAutomation, and then we’re charging on apps anywhere from $250 a day up to $2,000 a day per app. And then we have additional fees for AlphaAnalytics. We have not yet provided any guidance on what the consolidated revenue number is. That’s something that would likely do in the future. But for Q2 and Q3, it’s unlikely that we provide that guidance.
J.B. Lowe: Okay. Alright, thanks guys.
Operator: Your next question comes from the line of Cole Pereira with Stifel.
Cole Pereira: Hi, afternoon everyone.
Kevin Neveu: Hey, Cole.
Carey Ford: Hi, Cole.
Cole Pereira: So I want start with Carey’s comments on U.S. drilling margin. So I just want to be clear. You kind of see margins moving kind of flat to up after Q3. So I would interpret that the additional activations coming on in Q4 and Q1 in the U.S. are offset by higher economies of scale and higher pricing. Did I kind of get that correct?
Carey Ford: Yes. You’ve got that exactly correct. And what we’ve said there is that we think that margins are bottoming this summer. And that probably means that at some point in July or August, is when we’re going to see margins bottom where average margins in Q3 are on par with average margins in Q2.
Cole Pereira: Okay, great. No, that’s super helpful. Thanks. And a lot of concerns about labor tightness kind of around the Canadian oilfield services market. I mean, do you guys worry at all that the labor issues might kind of put a lid on the rig count heading into Q1? Or how do you think about that?
Kevin Neveu: Cole, I think it’s going to be a struggle, and there is a number of things driving that right now. The drillers have actually in pretty much every other rebound cycle that’s always been quite sharp, the joys have found a way to re-staff rigs, I’m quite comfortable that we will re-staff our rigs. I know there is probably a few PD people listening to doing that work right now, and they are working pretty hard to find crews. But between our brand and our recruiting our training, I expect we will be successful. And I don’t think it will put a lid on our activity. Obviously, if a customer wants a rig for one well for 7 days, we might not do that. But any kind of meaningful program, we – I think we will be able to step up our crews for that. Industry-wide, I think it will vary. Certainly, I can kind of go back to the . This one might be one of the tougher environments I’ve seen for recruiting. Again, fortunately, our brand carries a lot of weight out there.
Cole Pereira: Okay, great. That’s helpful, thanks. And I mean with the additional upgrade CapEx, can you just provide a little color exactly on what that is? And with the increase in – small increase in maintenance CapEx, fair to assume that’s just because of a more Canadian outlook?
Carey Ford: Yes, I think that’s a little bit higher activity expectations in both markets would be the maintenance capital and then the upgrade capital is a combination of additional AlphaAutomation systems and contracted upgrades for customers, things like a third-month pump.
Cole Pereira: Got it. Got it. Okay, perfect. That’s all for me. Appreciate the color. Thanks guys.
Carey Ford: Thank you, Cole.
Kevin Neveu: Thanks, Cole.
Operator: Your next question comes from the line of Waqar Syed with ATB Markets.
Waqar Syed: Thank you very much and again, congrats, Dustin on the move. I’ve enjoyed working with you, and thank you for all your help you provided to me during your stay in IR. Thanks a lot.
Dustin Honing: Thanks, Waqar.
Waqar Syed: Carey, just one – first, a quick modeling question, for the rig that’s moving to Canada, the rig mobilization costs, are you going to take a lump sum kind of cost in Q3? Or is this the cost going to be spread over the term of the contract?
Carey Ford: So it – so the revenue that we’re going to be getting for that move to cover that move will be spread over the course of the contract, but I actually don’t know right now what – how we’re going to account for the cost. I can get back to you on that.
Waqar Syed: Okay, sure. Secondly, you have six rigs working in the Middle East right now. Kevin, do you expect incremental rigs to generate some revenues this year?
Kevin Neveu: Waqar, it’s a little hard to say. Certainly, the tenders are drag a little longer than we would have thought even just a month or 2 ago. Nothing is changing that. I think I can comment that vaccination rates in Kuwait and Saudi Arabia are extremely high. Fully re-staffing office seems to be on the agenda following the current Eid holiday right now, which has wrapped up. I think there is likelihood we can activate some rigs and quite before the end of the year, but it’s – it might be November, December and then rolling into January.
Waqar Syed: So is it the COVID issue that’s keep preventing them from awarding the contract or is it more the current OPEC plus quota, which has eased now?
Kevin Neveu: Yes. The simple answer might be yes to your question in that I think it’s both. I think it’s hard to make a strategic decision the international oil company when you’re still operating remotely or partly remotely.
Waqar Syed: Right.
Kevin Neveu: But I also think that they are – they understand their production depletion curves quite well. They are shutting capacities. And drilling activity in both countries is down for oil, and they need to time the restart with when they expect their – the wells that they have got shut in to come back on again. So it’s going to be, I think, a pretty careful model about when to bring those rigs back on.
Waqar Syed: No. Saudi Aramco has a contract to build 50 additional rigs over the next, I believe, 10 years. Do you think they have need for current idle rigs there or they will continue to just bring in these new builds into the market?
Kevin Neveu: So there are tenders right now that are in the region, including some in Saudi. Some of those are IPM tenders, some are direct drilling tenders as an active tender in Saudi that we’ve been working on for a while. I think we’ve got opportunities to activate silver idle rigs. And that could be in Saudi or it could be in other Arabian Gulf perimeter countries.
Waqar Syed: Okay. And do you have Alpha suite of services running on any of the international rigs?
Kevin Neveu: No, we don’t. And we’ve been careful to deploy Alpha, where we can well support it well. We want to make sure we can go out and have 99.9% uptime. I would say that we will be ready to start introducing Alpha internationally in 2022.
Waqar Syed: Okay. Great. Thank you very much, Kevin. Appreciate the answers.
Kevin Neveu: Thank you. Thank you, Waqar.
Operator: Your next question comes from the line of Sean Mitchell with Daniel Energy Partners.
Sean Mitchell: Hi, guy. Thanks for taking my question. I’m going to hit the hot topic here again, labor just one more time. I want to understand, as we move into the back half of ‘21, and it sounds like at least according to your work and some of the work we’ve done, we agree with you that the rig count will continue to rise. How do you think about labor today if you had to crew one rig or two rigs versus having to accrue five or 10, what’s the lead time for crew and a rig today versus one rig versus fivce rigs, for example?
Kevin Neveu: Yes, Sean. So typically, when we started working with our customers, we will have anywhere from 2 weeks to a month or in the – I mentioned we have three contracts we signed in the U.S. on those three rigs. I think one rig activates in either in late July, early August, and then the next two activate a month or 2 behind that. So we will have plenty of time to build those crews out. The rig managers and drillers already worked for Precision. So the leadership teams are on staff right now, working on a rig somewhere else. So we will pull those guys to the rigs that are being reactivated and then we will backfill the positions that we’ve opened and we will recruit for the positions we need to fill. We’ve got a very sophisticated staffing model and a really sophisticated recruiting model. We typically keep anywhere from 500 to 1,000 people on kind of a call back list. I’d admit we’ve worked our way down that call back list a long ways. And now we’re out recruiting kind of beyond that list. I can tell you that in both U.S. and Canada, the next five rigs that we need to activate and we have crews identified for. Beyond that, we need to continue building crews up. So for each market, five-rig for Canada, five the U.S. identified crews, identified leadership and be able to execute. Beyond that, we will rely on our recruiting training methods.
Sean Mitchell: Got it. Thank you.
Kevin Neveu: I don’t want to underplay how much work it is. We have a really dedicated team in Houston, a very strong team in Nisku that do the recruiting, do the training, and they work really hard to do this, but the results are excellent. They deliver great results for us.
Sean Mitchell: Thanks.
Kevin Neveu: Great. Thank you.
Operator: And Mr. Honing, we have no more questions at this time.
Dustin Honing: Great. Well, thank you all for joining today’s call. We look forward to speaking with you when we report third quarter results in October. Operator, you may disconnect.
Operator: This concludes today’s conference call, thank you for participating. You may now disconnect.
