Precision Drilling Corporation (PDS) on Q4 2021 Results - Earnings Call Transcript
Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Precision Drilling Corporation 2021 Fourth Quarter and End of Year Results Conference Call and Webcast. At this time, all participants on a listen-only mode. After the speakers presentation there will be a question and answer session. . I would now like to hand the conference over to your speaker host today, Carey Ford, Senior Vice President and Chief Financial Officer for Precision. Please go ahead sir.
Carey Ford: Thank you, Olivia , and good afternoon. Welcome to Precision Drilling's fourth quarter and year end 2021 earnings conference call and webcast. Participating today on the call with me is Kevin Neveu, President and Chief Executive Officer. The earnings release earlier today, Precision reported its fourth quarter and year end 2021 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 adjusted EBITDA and field level results. Our comments will also include forward-looking statements regarding Precision's future results and prospects, which are subject to certain risks and uncertainties. Please see our news release and other regulatory filings for more information on financial measures, forward-looking statements and these risk factors. Kevin will begin today's call by providing and overview of currently market dynamics. I will follow with the discussion of results and our financial position. Kevin will then provide an overview and outlook for our various business. With that, I'll turn it over to you Kevin.
Kevin Neveu: Thank you, Carey, and good afternoon. While the global recovery remains uneven and some lingering and with some lingering uncertainties. The fundamental for Precision maybe the best I've witnessed in four decades. Global oil demands has almost fully recovered, but was sharply reduced activity and virtually zero exploration drilling of last two years. The resulting, oil and gas prices are strong and the markets are firmly acknowledging the rapidly typing oil and gas supply demand equation. The inventors have drilled uncompleted wells or DUCs as they are called, have dwindled. Super-spec rig is tight, tighter than people understand and customer demand will shortly absorb the remaining spare capacity. Labor inflation is here and real, but service price inflation is also here and it is real. As I've said in prior calls, we are marching our day rates back to into positive earnings territory and then driving rates further to achieve a reasonable return on our invested capital. Precision and Super Triple rigs are the most efficient, safe and environmentally responsible rigs that the industry has ever operated. The technologies we are deploying under our EverGreen banner have the capability to measure, track and eliminate GHG emissions at the drilling rig and we can do this with cost-effective proven solutions. The uneven nature of the economic recovery and the risk of further economic interruptions continue to cause some uncertainty. But this uncertainty is mitigated by the laser-like focus on financial discipline by the capital markets. Precision's customers who are generating record levels of cash flow have responded to those investor expectations with highly disciplined capital allocation strategies. Balance sheets are largely repaired and the producers are returning capital shareholders dividends, special dividends and share buybacks further cementing the capital discipline mantra. The boom-like rapid recovery scenario we've seen in prior cycles where rig demand correlates with the commodity price and that overshoots is simply not possible today. Capital discipline is well entranced throughout the industry and this is driving a longer, slower and extended recovery cycle with shareholder returns remaining prioritized. Combining the measured recovery with industries determined focused on emissions and corporate responsibility defines a healthy strong future for Precision and for our customers. And with that, I'll now turn the call back to Carey Ford for our financial results.
Carey Ford: Thank you, Kevin. In early January, we released our capital allocation framework through 2025, where we expect to pay down $400 million in debt over the next four years eclipsing $1 billion in debt reduction since 2018, and reaching a net debt to EBITDA leverage level of below 1.5 times. Importantly, we also announced a prioritization of return of capital directly to shareholders, allocating 10% to 20% of free cash flow before debt reduction toward this goal. We recognize the substantial operating leverage inherent in Precision Drilling and the businesses ability to grow market in a growing market to generate adequate cash flow to fund growth, reduce debt and return capital to shareholders. Moving on to our fourth quarter results. Our fourth quarter adjusted EBITDA, $64 million, increased 16% from the fourth quarter of 2020, supported by higher North American activity. Also included in adjusted EBITDA during the quarter is share-based compensation expense of $6 million, inventory write-downs of $3 million and non-recurring labor impacts of $3 million. Absent these items adjusted EBITDA would have been $76 million for the quarter. In the U.S. drilling activity for Precision average 45 rigs in Q4, an increase of four rigs from Q3. Daily operating margins in the quarter, absent impacts of turnkey and idle but contracted payments were US$5,648, an increase of US$410 from Q3. The increase was impaired by US$620 per day of charges related to non-recurring margin impacts. Absent impacts of turnkey and labor daily operating margins would have been US$1,030 higher than Q3. For Q1, we expect margins absent of IBC and turnkey to increase approximately $500 per day from Q4 levels. In Canada, drilling activity for Precision averaged 52 rigs, an increase of 24 rigs or 87% from Q4, 2020. Daily operating margins in the quarter, absent CEWS and shortfall payments were $7,990, an increase of $1,095 from Q4 2020. Q4 margins net of CEWS and shortfall payments increased $2,701 sequentially from Q3, 2021. For Q1, we expect margins absent of CEWS and shortfall payments to increase between $1,500 and $2,000 per day compared to Q1 2021 and up approximately $500 per day sequentially. Internationally, drilling activity for Precision in the quarter average six rigs and average day rates were $52,069, down approximately 6% from the prior year due to active rig mix. In our C&P segment adjusted EBITDA this quarter was $6.3 million, up over 18% compared to the prior year quarter. Adjusted EBITDA was positively impacted by a 21% increase in wealth servicing hours, reflecting higher industry activity in the quarter. We expect results will further strengthen in Q1 due to increased industry activity and additional work supported by the Canadian government's $1.7 billion well-side abandonment and rehabilitation program. Of note, is the team's success in capturing pricing increases to cover both increased wages and the removal of the CEWS program support in an effort to drive higher margins. Capital expenditures for the quarter were $28 million and $76 million for the year. Our capital expenditures were in line with expectations and higher than 2020 as a result of increased 2021 activity and expectations for continued rig activations in 2022. Our 2022 capital plan is $98 million is comprised of $56 million for sustaining an infrastructure and $42 million for upgrading expansion, which relates to anticipated investments supporting Alpha technologies and contracted customer upgrades. As of February 9th, we had an average of 39 contracts in hand for the first quarter and an average of 31 contracts for the full year 2022. Moving to the balance sheet. We continued to reduce both absolute and net debt levels primarily through free cash flow generation and succeeded in reducing debt by $115 million in 2021. As of December 31st, our long-term debt position net of cash was approximately $1.1 billion and our total liquidity position was approximately $530 million excluding letters of credit. Our net debt to trailing 12-month EBITDA ratio is approximately 5.5 times and average cost of debt is 6.4%. We remain in compliance with all our credit facility covenants in the fourth quarter with EBITDA to interest coverage ratio 2.8 times. With continued debt reduction and activity expectations, we believe we will end 2022 with a substantially lower net debt to EBITDA ratio moving Precision much closer to our goal of below 1.5 times leverage. For 2022, we expect to continue generating free cash flow through operations and do not expect incremental benefit from working capital release as activity is increasing in both U.S. and Canada. For 2022, we expect to generate strong free cash flow for the year with Q1 cash flow impacted by front end loaded CapEx, working capital build, our semi annual interest payment and year-end payments. Our year-end target for debt reduction in 2022 is at least $75 million. For 2022, we expect depreciation to be approximately $270 million. We expect SG&A to be $65 million to $70 million dollars before share-based compensation expense. We expect cash interest expense to be below $80 million for the year. And we expect cash taxes to remain low and our effective tax rate to be in the 5% range. With that, I will turn the call over to Kevin.
Kevin Neveu: All right. Thank you Carey. So beginning in U.S. land, we continue to experience strong demand for our Super Triple rigs. As Carey mentioned, our activity and rates have been tracking well with Q4 activity up 10% for the third quarter. And with 52 rigs running today, Q1 activity is already trending up 12 sequentially and they rise further as our first quarter rig activity approaches the mid 50s. With current customer interest and bidding activity, it seems this trajectory may continue through the year. Leading edge rates upper gross progressed to the mid 20s for active rigs are now moving into the same range for cold rigs due to the rising industry-wide rising activation costs. While Super-Spec rigs are not fully sold out. Industry supply is much tighter than most people believe. Regional shortages have developed and customers are paying full trucking costs for basin to basin moves. Between mid-December and mid-February, Precision's customers have upfronted the cost for basin-to-basins Super Triple rig moves. Regarding Precision's market discipline and pricing strategy, the key pricing signal we can send our customers is a refusal to accept lower than threshold day rates and this means we walk away. I'll tell you that we are not pursuing market share. Our focus is on the economic return for each rig opportunity we pursue. Turning to our Canadian business. The winter drilling season is off to a strong start. Activity is slightly lower than peak levels we anticipated, but this is largely due to some customer driven delays. We expect activity will remain firm with seasonal slowdown driven by weather not by budget exhaustion. Currently, we're running 66 rigs, four additional rigs are delayed for customer supply chain and location preparation issues. This work should be completed later in the quarter. Customer indications for a second quarter look very strong with spring break-up rig demand running 25% to 30% higher than last year. And early indications are that Q3 activity may again exceed winter activity levels. All of this bodes very well for our Canadian business. As Carey mission, we've demonstrated excellent rate correction in Canada during 2021, and we expect that trend to continue in 2022. I know our customers don't like to hear this. But it is essential that the Canadian services industry recovers to sustainable financial returns. Canadian producer economics are very strong indeed with Western Canada select currently trading at its highest level since April 2014 and the Canadian dollar exchange rate in the $0.79 U.S. range. The cash flows for our Canadian customers are all-time highs. And this brings me to discuss a specific play in Canada. And while we have often talked about the Montney, today I want to talk about the Marten Hills Clearwater Play. This is a relatively new heavy oil play, which has grown to 21 industry rigs active today from just a handful of rigs in 2019. With horizontal wells and measured depths in the 2800 meter range, the drilling programs are ideally suited to Precision's high performance Super Single pad style rig. Precision currently is operating 11 Super Single rigs in the Clearwater region holding a 55% market share. And this has grown from just three rigs in 2019 before the pandemic. We think the Clearwater like the Montney has a good long-term -- has good long-term fundamentals with strong commodity price support, very good geology and pad style horizontal drilling where high efficiency drilling rigs de-risk the F&D costs. The Clearwater will continue to be a strong demand driver for Precision Super Single rigs. Now for some, it might be easy to discount or reject the Canadian market. Yet with Precision blanketed Canadian footprint our Super Single and Super Triple rigs combined with our scale efficiency and our high performance high value strategy, Canada remains a very strong and key geography for Precision's cash flow generating capabilities. Turning to Canadian business. Carey mentioned our well service group is experiencing very strong customer demand and delivering substantially improved revenue and operating margins. Customer demand looks to remain strong following several years of low activity and pent-up operator demand for both conventional well-servicing and well abandonments. And this demand has been further enhanced by the federally funded well site reclamation program. Labor challenges are constraining the well-serviced industry, yet our team has performed very well, fully staffing the 50 rigs we have running today. And we expect to have further crew capacity activated for what is looking like a strong second half of 2022. The team has worked very hard to justify the value Precision provides our customers and succeeded in pushing rates in the right direction. And again, the service industry hourly rates have improved the lows of 2020. The industry still needs substantially higher prices to be financially sustainable. I know our team is well focused on this challenge and we expect to continue see continued marginal improvement through 2022. Turning to our international business. We continue to operate three rigs in Kuwait and three rigs in Saudi Arabia. We're working with our clients in both markets on upcoming tender specifications and we're bidding for opportunities with other operators in the region that have nothing new to report today. My expectation remains that as OPEC production limits are fully removed in the coming months these potential reactivations will materialize. Turning to our digital strategy. For pad based development style drilling the game has changed and the bar has been reset. The days of pushing our crews and equipment faster and harder has run its course. Today our most cost efficient customers have adopted our Alpha digital automation and digital analytics to optimize and ensure maximum rig efficiency, process and cost control. Customer acceptance and demand for Alpha Digital products continues to grow as we reported in our press release we are expanding our AlphaAutomation footprint across our fleet and expect to have fleet coverage up to 70 by the end of this year. We also continue to add to our library of AlphaApps and continue to demonstrate the value to our customers. I expect this growth trajectory to continue and further drive our competitive advantage. Turning to ESG. I'm very excited about the progress we've made in a very short time with our EverGreen suite of environmental solutions. As I mentioned earlier today, our customers are increasingly focused on rig emissions and sustainability. Precision's EverGreen technologies encompass several lower CO2 emission, combustion power alternatives, hybrid battery power systems, grid power systems and combustion fuel real-time monitoring systems offering our customers a range of solutions to monitor and reduce emissions right down to zero. Customer acceptance and uptake has been strong with 48% of our operating fleet today equipped with at least one EverGreen emission reduction solution. With current bookings we expect to have 10 EverGreen combustion fuel monitoring systems installed and running and six hybrid battery storage systems operating by mid-year. I expected over the next few years all of our rigs will utilize some combination of EverGreen products to reduce GHD emissions meeting our customers targets. Now turning to our annual strategic priorities. I'm very pleased that we completed and delivered on the priorities we outlined at the beginning of 2021. And I thank the employees of Precision for contributing to those priorities. For 2022, I want to be clear that we've adjusted our capital allocation plans by now also prioritizing targeted capital returns to our shareholders. This is a clear indication that we believe we have a strong and stable capital structure with a sustainable runway of deployable free cash flow. We'll continue to reduce debt and deliver us guided. Our other priorities including a strong focus on free cash flow and expanding our technology offerings will continue in 2022. So finally, I want to thank the people of precision out their rigs and our support centers and our offices for the safety and the work execution that underpins everything we do as an oil service provider. And with that, I'll now turn the call back to the operator for comments, questions.
Operator: Thank you, ladies and gentlemen. Now first question coming from the line of Aaron MacNeil with TD Securities. Your line is now open.
Aaron MacNeil: Thanks for taking my questions. You've mentioned the leading-edge day rates in the mid 20s matching a lot of your peers that have reported over the last few weeks. I guess I'm just wondering how much of that is keeping up with cost inflation and how much of it would be capturing more economic rent given the improvement in the sector?
Carey Ford: Aaron, it's Carey. So, I would say that part of it is a labor increase that we implemented in December, which was about $800 a day. I think that was kind of standard for - we're talking about the U.S. market kind of standard for our peers. We do have some reactivation cost that we're still absorbing. We reactivated six rigs in Q4 and we plan to reactivate another six rigs in Q1. And that's kind of trending at $150,000 to $200,000 a day. So it's pushing costs up a little bit. And we do have a little bit of inflation, I think it's a lot lower than other segments of the oil field service sector, but we do have a little bit of inflation. So all-in-all, it might be call it $1500 a day of increased cost that we're passing through. The rest of it would be margin expansion. And as we mentioned our last call, we thought that Q3 would mark the bottom or the trough of the cycle for margins. And we showed increasing margins in Q4. We expect to continue to show increase in margins in Q1 and Q2. So we would be capturing more of the -- more of the margin through higher day rates than we saw through most of 2021.
Aaron MacNeil: Understood. And acknowledging your January press release with the guidance for Q1. But since that time we've seen companies like Exxon and Chevron announce they're going to start growing again in the Permian. And I guess my question for you is on the margin have your expectations for the activity outlook in both Canada and the U.S. changed since you put that press release out? And if so, could you provide any order of magnitude?
Kevin Neveu: Aaron, I'd say, yes, they have changed. And I'd say, we're kind of modestly shifting or moderately shifting more and more positive as we can kind of go through each -- almost each month it passes with these stronger commodity prices. But I would say that our guidance on activity into the back half of the year particularly in my comments both for the U.S. and Canada kind of reflect that optimism. There's no question, this cycle is different than previous cycles. We're not saying our customers overshoot the commodity price. We're seeing a very well managed and kind of controlled had backup rigs. Beginning with the super majors are making small announcements. But it really feels like with the activity we have our bidding team and our sales team right now that the gains that we were showing in Q1 and into Q2, we expect to carry on to the balance of the year. And we think there could be upside to that, but it just depends how quickly our customers pivot back to bringing in some small amounts of growth.
Aaron MacNeil: Understood. Seems like we're in the early stages of an equipment upgrade cycle. I don't know if you agree or disagree. But it also seems like among the four or five top north American drillers that there's discipline on returns and that remains largely intact. But I guess I'm wondering is that also true with some of your smaller competitors that we may not be tracking as closely?
Kevin Neveu: It's kind of hard to say. Generally, when we're competing up with the customer these days, it's almost always a case where it's just us and one or two others. We don't often see a lot of the smaller competitors. That's especially true in Canada, we're talking about Super Triples. But in the U.S. it'll be us, one of the other two or three other large drillers competing. So we're really not getting a good sense of what the smaller drillers are doing. So what -- we just don't see a lot of competition from those smaller drillers.
Aaron MacNeil: Okay. That's helpful. Carey, on the capital program, you mentioned in your prepared remarks that it would be front end loaded. And I guess it sort of begs the question that $42 million that's earmarked for expansion and upgrades. Is that all committed or mostly committed at this point or is it a placeholder? And what I'm ultimately trying to drive at is could we see that number expand throughout the year if activity levels are higher than you expect?
Carey Ford: Okay. So on the growth capital some of it's committed. I think we made some commitments to get out 70 of our Super Triples with Alpha technologies. So that part is committed. And then we have some long-lead items that we've committed for some near-term upgrades. But you're right. If activity does grow faster than we expect and there are more economic upgrade opportunities that number could go up throughout the year.
Aaron MacNeil: Okay, understood. And last question for me, I've already asked. So, I'll turn it over. But it's just been such an unusual winter here in Alberta. So just any comments that you can provide on the shape of spring break-up or potential activities would be helpful?
Kevin Neveu: No guidance yet. Certainly, it's quite warm this week and we've already run into some situations where we have some rigs. They can't get onto location yet. So it's causing a few delays. My sense is, if there's early weather breakup that pushes a lot more work and pricing tension into late Q2, Q3, it might be a short-term drag on activity, but probably a net positive for the year.
Aaron MacNeil: Okay.
Kevin Neveu: Does that makes sense?
Aaron MacNeil: Yes, makes sense. I'll turn it over. Thanks.
Kevin Neveu: Thanks Aaron.
Operator: Our next question coming from the line of James West with Evercore ISI. Your line is open.
James West: Hey, Kevin, Carey, how you doing?
Carey Ford: Good James. How are you?
James West: I'm doing well. First question on North America. What do you see is the biggest constraint to your growth at this point. Is it you need to upgrade rigs for specifications? Is it labor or is it supply chain? I mean, it seems to me like we're going to see a nice pickup in the rig counts. And curious on what you see is the impediment to that?
Carey Ford: Well, I would tell you that I think that the -- it's a bit of a good news story. I think we're going to run out of super-spec rigs in our fleet during this calendar year. And we have another group of rigs, about 15 rigs, they're really strong upgrade candidates. That would probably take day rates that have a three on the left-hand side.
James West: Okay.
Carey Ford: And we need to see some good long-term contracts probably two to three year contracts. But high quality problem for Precision be running out of super spec rigs in calendar year 2022.
Carey Ford: Yes. And I'll just add to that. When we talk about operating leverage within Precision, what we're talking about is the spare capacity that we have to address the super-spec market in the calendar year where limited upgrades are required. We're still -- the upgrades we're doing, adding Alpha automation, adding high torque drill pipe or pumping capacity and you're still kind of in the low single digits millions of dollars. So we don't think that we're going to have to spend a whole lot of capital to address the market.
Kevin Neveu: Carey, we have 55 rigs running or 52 rigs running today, and we have 67 super-spec rigs available in the U.S.
Carey Ford: That's right.
James West: Okay. That's very helpful. Thanks guys. And then maybe just one more for me on the Middle East, we're clearly going to have a call on additional production at some point. And the big large producers you work for are aware of that and that's why of course they're tendering now. Could you comment on the magnitude of, if you were to be successful in some of the tenders? Or when you are successful how many more rigs you might commit to the region? And if those would be -- you would move rigs or would those be upgrades and how would that impact your capital program?
Carey Ford: There's a fair amount of bidding activity right now going on. So we've got the three idle rigs in Kuwait that we expect to get reactivated during the year. We've got one idle rig on the ground in Saudi that could be activated this year. three more idle rigs in Kurdistan and Georgia that are wrecked. Actually one of those rigs is looking like it might be end up Abu Dhabi or Dubai, right? So two in Georgia, two in Kurdistan, one in Dubai that could be activated. And we've had some tenders. Recently, we're looking at possibly utilizing some of our Super Singles and some other tenders that might be in the 1500 horsepower class. However, if we're utilized North America we would probably back away from those tenders.
James West: Okay. Got it. Thanks guys.
Kevin Neveu: I just had another comment there kind of along that operating leverage theme. The most likely rig activations near term would be the three Kuwait rigs which are all -- they're all super-spec AC , deep capacity rigs that are six years old and won't require a whole lot of capital to go into a new contract kind of in the $4 million range per rig.
James West: Okay. Got it. Thanks.
Carey Ford: Thanks.
Operator: Our next question coming from the lineup Taylor Zurcher with Tutor, Pickering and Holt. Your line of open.
Taylor Zurcher: Hey, Kevin and Carey, good afternoon. First question on Canada. Over the past few -- really past two weeks down here in the U.S. And there's been so much talk about significant pricing improvements. Again, for the U.S. market, you echoed some of those comments in prepared remarks today. So I'm curious if you could just compare and contrast what's going on from a pricing perspective in the U.S. with what you're seeing in Canada. Obviously, a number of different rig, classes up there in Canada. And just curious where we sit from a pricing improvement standpoint for each of those rig classes up in Canada?
Carey Ford: Yes, Taylor. So I think the pricing movement in Canada is probably a quarter or two ahead of the U.S. And there's a couple reasons for that. One, the market's a bit tighter on the super-spec side, it's fully utilized. It's also more consolidated with primarily just two drillers that have the balance of the fleet for super-spec rigs. Super Triples that is in Canada. And there are Super Singles rig in Canada, it's kind of a cost of its own. There really isn't a strong competitor for Precision Super Single rig and it's a highly efficient rig. So, we've had opportunities with rising demand and tight utilization to move those prices a bit sooner. And there's a seasonality component that comes into Canada. There's kind of a spring for summer Q3 type pricing circle. Sometimes a second pricing round that happens in the fall for the coming winter season. So there's kind of some natural windows when we engage with customers. And there's a third factor in Canada that kind of has driven tension, and that's crewing. It's been particularly hard to recruit personnel in Canada. And that's created a lot of attention right across the oil services space. So I think all of those things have kind of worked to help move rates back into kind of a sustainable range, which are not quite out yet in Canada, but we're hoping to get there in 2022. I think some of those factors now come into play in the U.S., the super-spec rig markets getting -- essentially, it's not sold out, but between regional dislocations and various differences in rig spec, it's almost sold out. And I think you'll see it effectively sold out the next few weeks or a couple of months. So, I do think the U.S. gets on the same track that we see in Canada between Q1 and Q2. And you're hearing the front end piece of that today from us.
Taylor Zurcher: Yes. Good to hear. And against that backdrop you just mentioned, super-spec market is going to be pretty fully utilized here pretty soon not just for your fleet, but for the broader market. I'm curious, I mean, how are customer conversations going with respect to term contract durations? It doesn't feel like many of the larger land drillers including yourselves have significant term contract throughout coverage at least not beyond 2022. And I just wonder if the customer urgency is there to just go ahead and lock up some of these rigs even if it's at much higher pricing over the course of 2023?
Carey Ford: Well, I think we've seen opportunities to contract rigs anywhere from pad-to-pad all the way up to two years. I'd say that this tightening has been kind of sneaking up on everybody a little bit in that. I think the drillers know it well. But I don't think any customers really fully understand how tight the market really is. And Taylor, nobody has a 2023 budget approved yet, like none of our customers do. So there's not a huge preponderance of people looking at long term. I would say that there's just a handful of customers looking to try to lock in lower rates maybe for a longer term, not necessarily locking in higher rates. So I think that certainly in our case, we've been reluctant to jump at those opportunities looking more shorter term higher rate opportunities and the ability to reprice as the market tightens.
Taylor Zurcher: Got it. And then, one last quick question from me. You're basically talking about going from 50 Alpha systems to roughly 70 by year end. And I'm just curious, how that demand pool works for those sorts of systems? I imagine some of those are going to be outfitted on rigs that are already in the field today? And so, I mean, do we go through a trial phase where you put the system on a rig, the operator tries it out and then starts paying for it? Or do you expect to get compensated for that almost immediately?
Kevin Neveu: We expect to be compensated for that almost immediately. We've got a handful of contracts performance based where if we achieve certain performance levels, we'll earn more. So, in that case, you could say that we have to earn the compensation. But those are working quite well. Majority of the applications are the a la carte pricing where we put the system on we run it and we deliver value and the customers see the value, we move on.
Taylor Zurcher: Understood. Thanks for the answers Kevin.
Kevin Neveu: And just, Taylor on that on that deployment, you asked about customer pool. We're working closely with our partners. We've always been kind of standardized on how we do this. And part of what we've done is lock-in low capital costs for that acquisition for an extended period by committing to those installations over the course of the year. So it's both balancing the risk on the inflation side, so we keep the costs low, but also getting the systems across our fleet as fast as possible.
Taylor Zurcher: Yes, make sense. Thank you.
Carey Ford: Great. Thank you.
Operator: And our next question coming from the line of Waqar Syed with ATB Capital Markets. Your line is now open.
Waqar Syed: Thanks for taking my question. Carey, the potential reactivation cost for the Kuwait rigs. Are they included in the CapEx number or not yet?
Carey Ford: Yes. We haven't specified. I think we've got a basket of upgrades that we see on the board and we're trying to put a percentage of likelihood of securing those upgrades. So you can say that somewhat included in that basket.
Waqar Syed: Okay. All right. Kevin, one of your competitors today mentioned that there is a further segmentation of the super-spec rig market in the U.S. And that customers are demanding rigs that have rig floors with very high clearance, 21 to 23 foot and draw works on the rig floors. Are you seeing the same kind of differentiation as well as you talk to your customers?
Kevin Neveu: So, Waqar, first of all, I guess the good thing and bad thing is there is no API definition of super-spec. And I would say that each drilling contractor has an interpretation of what they view as the optimum rig design. And whether that includes skidding or walking can be a debate. Whether it includes three mud pumps or two mud pumps could be a debate. In our case, we actually have a wide fleet of super-spec rigs that have elevated rig floors with the draw works up on the rig floor. In fact a split LER drive assembly, so that we keep all the rig controls up on the rig floor. So that particular need we can meet with our Super Triple rigs.
Waqar Syed: Okay. But is there a differentiation in day rates for those rigs versus those that do not have that capability and still in super-spec?
Kevin Neveu: What it comes down to is if you have a client who has a pad where he wants to maybe he walk the rig over existing well heads, he might want that extra clearance. If you've got a pad which is a new pad and you're drilling it in a line, you may not need that clearance. So it just depends. It's -- I'd say, it's more customer specific than industry specific.
Waqar Syed: Okay, great. And then -
Kevin Neveu: Waqar, we have both. We have some of those rigs walking over wellheads. They're existing other ones where we have clear pads, we're drilling new wells on.
Waqar Syed: Okay, great. And then in the international market you have -- your six rigs currently working with two contract expirations coming up. Do you see any down time before they start up again or do you think there -- you would be able to renegotiate the contracts before the current contract expire?
Kevin Neveu: We don't. We expect no down time.
Waqar Syed: Okay. And then for the Kuwait rigs, do you see them -- in Kuwait, typically tenders get delayed. Do you think that this year they may happen relatively quickly?
Carey Ford: Well, I've been talking about that tender. I think almost all of 2021 and now into 2022. So, it's already delayed one year from my early conversations. And the other thing I'd say, is it seems like every time I make a projection about four weeks later a new variant pops up and slows down decision making. So I'm really reluctant too. Try to predict what's going to happen in Kuwait. But Waqar, I would say that if Kuwait has their production curtailments removed, I think those tenders go ahead very quickly.
Waqar Syed: Yes.
Carey Ford: Or, I should say when they have their production curtailments removed, I think those tenders move quickly.
Waqar Syed: Right. Makes sense. Thank you very much. Those were all my questions.
Carey Ford: Thank you, Waqar.
Operator: And our next question coming from the line of Ian MacPherson with Piper Sandler. Your line is open.
Ian MacPherson : Thanks. Good afternoon, Kevin and Carey.
Carey Ford: Hi, Ian.
Ian MacPherson : I appreciate the description of what's happening in the Martin Hill, Clearwater play, and I think it was asked a little bit, but I wanted to ask again. If you could talk about your breakout of Super Singles versus Super Triples in Canada? And speak maybe a little bit more to the differential and day rates or margins between the two if that's a material consideration for us as we think about that play folding into your mix?
Kevin Neveu: Sure. I'll give a bit of coverage and Carey just fill in the gaps where I missed something here. The Precision Super Single rig was developed back in 1992, specifically for heavy oil drilling. I mean, exactly for this type of play. They were designed to be small fast-moving, light pad capable rigs that have a small footprint, can run kind of throughout spring break up if necessary, and have a really low efficient operating cost. So it's really cool design, that's really kind of stuck with us last 30 years now. And really kept that competitive edge out there. So the rig fits up market very well. Carey, operating costs of that rig would typically be about $4,000 or $5,000 less than a Super Triple?
Carey Ford: Correct.
Kevin Neveu: In that range. And we're getting day rates for that rig now in the mid to upper teens and pushing those levels even.
Ian MacPherson : Okay, great.
Kevin Neveu: And that rig actually does overlap with what in Canada is called the Tele-Double. So people will try to use the Tele-Double to compete with us, which typically has a slightly higher operating cost and again probably needs a higher day rate to get the same margins.
Ian MacPherson : Okay.
Kevin Neveu: In Canada, we have 27 Super Triples. They're all fully utilized right now. And here we've given guidance on those rates. Those rates are in the low to mid 20's range right now for the base rig. Technology charges are above that. And a lot of the things you put on the rig are also above that.
Ian MacPherson : Okay. That's great. Thank you. Sort of a simple high-level question for the U.S. market. If you were able to pro forma your fleet for all of the upgrades that you're planning for this year? And where that takes your fleet wide spec at the end of this year? And the market pricing stops moving today and you repriced everything at leading edge and absorb all your reactivation costs.? Is they asking if you do a model for you
Kevin Neveu: Are they asking if you do a model for you?
Ian MacPherson : Yes. Wouldn't your pro forma cash margin easily be above 10,000 on that hypothetical basis?
Carey Ford: I think if you're looking at leading-edge being in the mid 20s. And we're getting better fixed cost absorption and we don't have any reactivation cost. Daily operating costs probably go down a bit from where we're reporting right now. So, I think you could see the fleet generating on average above $10,000 a day margin
Ian MacPherson : Yes. I think so. I just -- the one thing I want to be careful with is not extrapolating your -- your sort of tip of the spear data point on pricing and inappropriately extrapolating it across the entire fleet. But it seems to me that your whole fleet or the vast majority will be at that leading-edge capability and probably with the higher saturation of Alpha and other a la carte add-ons that it would not be unfair to project that. So I just wanted that ? Okay.
Carey Ford: Yes. I think that if you go back to 2018 and you looked at where our super-spec rigs were pricing and you're getting one and two in some cases three year contracts without Alpha, we were well above $10,000 a day in margin on that segment of our fleet.
Ian MacPherson : Yep. Thanks. And then the other one for me, I don't know if we've talked about this already on the call. Have you discussed the framework through which you're examining dividends versus buybacks with the capital return plan?
Carey Ford: So it's a four-year plan. For the first couple of years this is almost exclusively going to be share buybacks. And as we get closer to the target leverage level and there's a little bit more visibility in the business, a dividend becomes more likely. But for the first couple years of this capital framework plan assume it's going to be share buybacks.
Ian MacPherson : Got it. Thanks Carey. Thanks Kevin.
Kevin Neveu: Thank you.
Operator: Our next question coming from the line of Cole Pereira with Stifel. Your line is open.
Cole Pereira: Afternoon everyone. So some pretty good color so far on Canada verse the U.S. And a couple of quarters you highlighted that the outlook for Canada was especially bright relative to the U.S. in the near term. Just wondering if you really currently see either Canada or the U.S. is being relatively stronger. Right now, obviously factoring in some of the seasonality in Canada?
Kevin Neveu: I think, Cole, what kind of drives me to leave that is a little farther down the pricing trajectory with our Canadian customers. So that's helping make Canada look better. I think part of that is the tighter market consolidation in those two rig areas, in the Super Triple area and in our heavy oil Super Singles area. So you've got a much more rational market with generally public players that are more rational in their thinking so. It's just a -- it behaves more -- it behaves more industrial or more structured and more disciplined than the less mature markets. That's the way it feels right now. Does that make sense?
Cole Pereira: Yes. That's a good color. Thanks. And so you kind of touch briefly on Q1 in Canada talking about some customer logistics issues maybe putting a bit of a lid on activity. I'm just curious, I mean, have you seen labor really be much of a restriction into getting rigs activated in the quarter?
Kevin Neveu: On the drilling side, it's been a pretty heavy lift for our team, and I know some of them are listening today. They've worked pretty hard, but they've met the objective in drilling. It's been much, much tougher and well servicing. And there's a couple good reasons for that. The drilling jobs have a slightly higher hourly rate, but the work is more consistent and repeatable and they typically get a lot more over time and more consistent over time. So the total pay is much higher that attracts people that stick a little more to drilling. And well servicing, it could be good or could be bad, it's call-out work, it's sort of day-to-day work and it's been much tougher to recruit a lot -- like a lot of the other oil field call-out services. So in drilling, no hard work for our team, but they've accomplished the task in drilling. And well servicing really hard work. You guys have done a great job. We've got 50 rigs stepped up right now. Expect to have more stepped up for Q3 after breakup. But I would say that in well servicing it's limited activity.
Cole Pereira: Okay, perfect. That's great. Thanks. And so just to clarify on the international rig awards, I mean, reasonable to think that maybe an announcement might occur by mid-year. Is there still just not enough clarity on timelines?
Kevin Neveu: No clarity on timeline, but this has been, I mean, the entire process has been imminent for several quarters now. And I recognize that eminent middle east means slightly different terms than limited in North America. But there's a lot of work that's gone into these tenders behind the scenes at our customer. We know they're ready and we know that they're I think waiting for the right oil production signals to start making the next step.
Cole Pereira: Okay, perfect. That's all for me. Thanks. I'll turn it back.
Kevin Neveu: Thanks Cole.
Operator: Our next question coming from the line of Keith Mackey with RBC Capital. Your line is open.
Keith Mackey: Hi. Good afternoon and thanks for taking my questions. I just wanted to start off. Kevin, I think I heard you say Q2 looks like it's going to be trying to break out or break up, but anyways it's going to be 25% to 30% higher than last year. And then I thought, and you said Q3 is going to be strong as well potentially stronger than the winter level. Did I hear that right? Or what was the comment there to them?
Kevin Neveu: Well, you heard it right. I guess all that I'll say is the previous projections I've given that after Q3 and Q4. It seems like a few weeks after I gave the projection another COVID variant popped up and slowed down decision making. So barring any kind of macro dislocation, I think those projections are what I said, I think Q2 looks like it's 25% or maybe a little more better than last year. And once again we could see Q3 matching or exceeding Q1 activity levels. Again, barring any kind of macro dislocation.
Keith Mackey: Yes, for sure. Appreciate that it certainly is difficult to forecast what's happening in the macro these days. But certainly that would be an incredibly strong level for Q3. Can you maybe just talk about what gives you the confidence. So, based on what today to say that and maybe just talk a little bit about the rig types that will sort of make up the gap. Will the mix be similar to Q1 do you think? Or will be different based on the seasonal drilling at that time?
Carey Ford: Yes. So I just a little bit qualified kind of good, great and better. So it does look pretty good compared to 2020 and 2021. Just kind of go back to 2016 or 2014, we're still well below those levels. So while it looks like a pretty strong year relative to what we've just been through, it wasn't very long ago, it's a much, much better times. So keep that in mind. But the mix would look like the winter mix right now. We'd have our Super Triples pretty much fully utilized. We have a potential to maybe bring one more Super Triple up out of the U.S. We're working with customers to see if that happens. So we could add one more Super Triple in Canada. But that's fully -- that'll be fully maxed out. And then with the Super Singles, we've got a pretty good mix right now with kind of this resurgence in heavy oil kind of driven by clearwater. But I think there's a little more room to run there. We certainly have more Super Singles. And to reactivate another five, 10 or 15 Super Singles as well within our current opportunity cycle set.
Keith Mackey: Got it. And just need to follow up eventually potentially bringing up and I think there was another couple that moved around basins in the U.S. Can maybe just talk about some of those regional tightness in rig supply? And where you're seeing things be the most the most tight in Canada, I imagine it's the Super Triple category and maybe if you could then just talk about the U.S. as well and kind of where you're seeing that tightness and where you think rigs could move as a result?
Kevin Neveu: That's a really great question. I'm actually glad you raised it. Because probably the biggest surprise I've had in 2022 was a customer asking, if they could move one of our rigs from Oklahoma to the Permian basin? I thought there was still some slock capacity in the Permian basin. But for this particular customer that we're working for, they're paying to move one of a rig smoke limit of the Permian. Last year late in December we moved a rig from the Permian to Eagleford. We're looking at some opportunities right now maybe to redeploy some rigs into the Haynesville. So it seems like it seems like the regional tightness is kind of coming on everywhere. The only place we have a couple of excess rigs right now is DJ basin.
Keith Mackey: Got it. Okay. Very good. And just on the tech adoption. I know historically I think you've talked that U.S. customers were a little quicker to adopt than Canada. Has that changed of Canada caught up or you know and maybe as a follow-on to that has the EverGreen line gained traction faster in Canada or the us or has it been fairly similar as well?
Kevin Neveu: So, first the EverGreen lines have been actually getting good traction in both markets with almost no differentiation. And I'd say that ESG emissions responsibility focus is universal across particularly our public customers, but actually most of our private customers too. So, that's a trend we're seeing right across the customer mixed and geographic mix. On the technology piece, so the simple answer is this. On longer duration wells technology has more room to show clear improvements. So in shorter duration wells whether they're shallower or faster, the gains tend to be a little bit narrower for the customer and maybe a little tougher sell. So Canadian wells tend to be a little shallower and there are some areas that are really short duration wells. Tougher style and short duration wells much easier sell long duration wells.
Keith Mackey: Got it. Thanks so much.
Kevin Neveu: And by the way, but I -- I'm talking about long and short. Long would be eight days and short would be four days.
Keith Mackey: Great. Thank you.
Operator: Our next question coming from the lineup of John Daniel of Daniel Energy Partners. Your line is open.
John Daniel: Good afternoon, guys.
Kevin Neveu: Hey, John.
John Daniel: Kevin, just one quick reference for me. There's obviously lots of people in our space talked about us being that potentially at the start of a multi-year cycle. I think as we look at just the commodity backdrop. And I'm curious if customers are -- if they're looking at it the same way, are they actually talking to you about multi-year arrangements if that belief is true? Just kind of see you can provide some color on how they're viewing life beyond this year?
Kevin Neveu: John, short answer is not really. Other than a few customers looking at trying to lock in low rates for longer. I would say that there isn't -- there's a lot of long-term planning that's transmitted down to the land dwellers yet around long-term contracts take or pay. We have a handful of customers as a less than a half dozen where they are seriously making plans beyond one year. But that I wouldn't call that a trend.
John Daniel: Fair enough. Do you suspect that's just because of just how the recent volatility, because it seemed to me if and it kind of a bit of a follow-on to Ian's questions. When you look at where the business is today, the pricing trends and all of that? If all else being equal it seems your rates are going higher next year if this commodity price environment stays where it is. So why wouldn't you want to be proactive in mitigating that risk if you're the customer. Just kind of a thought and any color would be great?
Kevin Neveu: Well, John part of it might be that the drilling rig on these high efficiency wells is still just a very small fraction of the cost of the total well. So if they're putting their focus on an area where they have a lot of financial exposure, it would be sand profit, it would be pressure pumping, it probably wouldn't be the rig.
John Daniel: Okay. Fair enough. I appreciate the time as always. Thanks.
Kevin Neveu: Thank you.
Operator: I'm showing no further questions at this time. I would not like to turn the call back over to Mr. Carey Ford for any closing remarks.
Carey Ford: Okay. Thank you for joining us this afternoon. We look forward to connecting with you on our Q1 conference call in April. Have a good day.
Operator: Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.
