Precision Drilling Corporation
Q4 2018 Earnings Call Transcript

Published: 15 Feb 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to your Precision Drilling Corporation 2018 Fourth Quarter Results Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's call will be recorded. I would now like to turn the call over to Ashley Connolly, Manager of Investor Relations. Ma’am, you may begin.

[Ashley Connolly:]

Thank you, Sydney, and good afternoon, everyone. Welcome to Precision Drilling's fourth quarter and year-end 2018 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. Through our news release earlier today, Precision reported its fourth quarter and year-end 2018 results. Please note that 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 Precision's future results and prospects. We caution you that these forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from our expectations. Please see our news release and other regulatory filings for more information on forward-looking statements and these risk factors. Kevin will begin today's call with a brief intro; followed by a discussion of our fourth quarter and year-end operating results from Carey. Kevin will then provide an operational update and outlook. With that, I'll turn it over to you, Kevin.

[Kevin Neveu:]

Thank you, Ashley. Good afternoon. The fourth quarter of 2018 capped off a strong year for Precision, delivering or exceeding all of our key priorities and targets, demonstrating the strength of our business model, the competitive positioning of Precision Super Triple rigs, achieving record U.S. market share. All of this results of the excellent people of Precision, executing, managing, and controlling all aspects of our business. Carey, we'll certainly discuss our strong performance against our financial priorities. But before he begins, I'll add – as we look forward to 2019 or the coming years, we have a very high level of confidence in our free cash flow, we will exercise strict discipline and continue allocating cash to retire debt and improve our capital structure. We will achieve significantly lower debt leverage levels and targeting two times debt to EBITDA with this program. And even with our tightly focused at reduction program, we believe we will continue to capture growth opportunities led by the U.S. international markets through automation technology, low cost rig upgrades and geographic repositioning of our high performance, high value services, but more on that later. So I'll turn the call over to Carey to discuss our Q4 financials.

[Carey Ford:]

Thank you, Kevin. Precision fulfilled all its financial strategic priorities in 2018, generating strong free cash flow, exercising strict capital discipline, and retiring $174 million in debt during the year. We are pleased with our 2018 performance and plan to continue the momentum into 2019 with debt reduction targets of $100 million to $150 million for the year. Now I would like to review some of the fourth quarter and year-end financial details. Our 2018 fourth quarter adjusted EBITDA increased 48% of our fourth quarter 2017. The increase in adjusted EBITDA, primarily results from higher activity and day rates in our U.S. drilling business and transaction related income received during the quarter. Our full-year EBITDA was $375 million compared with $305 million in 2017 an increase of 23%. In the U.S., drilling activity for Precision increased 36% from Q4 2017, while margins increased approximately US$1,800 per day positively impacted by US$2,600 per day increase in rates. The day rate increase was offset by operating costs that were up approximately US$1400 per day from Q4 2017. Absent the impact of turnkey year-over-year operating costs were up approximately US$640 per day. We communicated on our Q3 call that some of our U.S. operating expense related to rig activations encouraged during Q3 would not be repeated in Q4 and our Q4 results support this guidance. Operating costs during the quarter absent the impact of turnkey were down approximately US$400 per day or approximately $3 million sequentially. In Canada, drilling activity for Precision decreased 9% from Q4 2017. Margins were approximately $2,200 per day lower than the prior year, almost entirely due to per day impact at shortfall payments earned in the prior year quarter. Absent shortfall payments, margins were up slightly year-over-year. Day rates, absent shortfall payments, were up approximately $1,600 per day over the prior year and costs were up almost $1,600 per day due to timing of certifications and additional costs recouped in the day rate. Internationally, drilling activity for Precision equaled activity in Q4 2017. International average day rates were approximately US$52,000, up approximately US$1,700 per day from the prior year. The increase in average day rates during the quarter was a result of fewer rig move days during the quarter. In our C&P segment, adjusted EBITDA this quarter was $7 million, up $5.3 million compared to the prior year. Well service activity in the quarter was down 19% year-over-year. However, improved pricing and benefits of cost-saving strategies resulted in higher year-over-year margins. Additionally, stronger financial performance from our rentals, and camp and catering businesses contributed to the improved year-over-year financial performance in this segment. Our Corporate segment generated income of $5.3 million during the quarter compared to an expense of $12 million in the prior year quarter. During the quarter, we terminated an agreement to acquire another contract driller and received the transaction termination fee, which net of other transaction related expenses resulted in net income of approximately $14 million. Additionally, we realized a share-based compensation expense recovery of $12 million during the quarter compared to a recovery of $0.4 million in Q4 2017. The share-based compensation costs demonstrated significant volatility in 2018 due to the underlying volatility of our share price in the current market. Capital expenditures for the quarter were $30 million and $126 million for the year. In 2018, the Precision team demonstrated its ability to maintain capital discipline while funding the most attractive investments backed by long-term contracts with returns that meet our internal hurdles. In addition to keeping our fleet well maintained and completing our ERP implementation earlier in the year, we funded upgrades for 31 rigs, completed two new build rigs for the U.S. and began construction of our six new build rig in Kuwait, all within our capital budget. We expect to continue our strict discipline in 2019 where our capital plan remains $169 million. The 2019 capital plan is comprised of $53 million for sustaining and infrastructure and $116 million for upgrade and expansion with approximately $68 million of that required to complete our Kuwait project, which is currently on time and on budget. The remaining growth capital will be allocated almost exclusively to the U.S. market where we are investing in upgrades and technology enhancements to our Super Series rig fleet and the completion of recently deployed new build drilling rig for the U.S. Of note, we expect Precision’s year-over-year capital spending in North America to be down slightly from 2018. We continue to make progress in our contract book and during the fourth quarter through today, we have signed 19 term contracts. And as of February 13, we had an average of 71 contracts in hand for the first quarter, an average of 50 contracts for the full-year 2019 and 14 contracts from full-year 2020. As of December 31, 2018, our long-term debt position net of cash is approximately $1.6 billion, and our total liquidity position was $810 million. Debt repayment remains our top financial priority and we consider our debt repayment objectives before making any capital investments. Of note, we have listed 22 rigs from our fleet that’s held for sale and have already initiated the process to sell that package of rigs. This asset sale, as well as additional non-core asset divestitures have the potential to accelerate progress toward a stated debt reduction targets. For 2019, we would expect depreciation to be approximately $350 million. We would expect cash taxes to remain low and our effective tax rate to be in the 20% to 25% range. We continue to aggressively manage all fixed costs, including SG&A to enhance financial performance. With that, I'll turn the call back over to Kevin.

[Kevin Neveu:]

Thank you, Carey. So I could not be more pleased with our financial performance, our debt repayments, and the capital allocation decisions made over the past year. And to repeat, Carey, you should expect us to repeat this level of discipline in 2019. So moving on to our technology priority, 2018 was a pivotal year as we transitioned through – from beta testing through fields hardening into commercialization. The results we were delivering with Process Automation Controls or PAC we call it are exactly as expected, substantially improving drilling performance, lowering well costs and delivering repeatability, predictability and efficiency. We have this platform installed and running on 31 rigs. We added 10 systems in 2018 and we've drilled 365 wells with PAC during 2018. Most of that detail was in the press release. Now let’s give you a little more color. So despite our operational successes, customer adoption is lower than we would like and that resistance originates in the field. The PAC system takes over many of the tasks or responsibilities previously overseen or supervised by the customer and that’s specifically is the roles like the drilling engineers, the directional drillers and the company man, and changes or alterations of traditional roles at the field level can be unsettling to those involved. We also found that as with most new software technologies, field level technical support is critical during new product rollout. So we determined that we needed to accelerate the training and certification of Precision’s field automation engineers. So we responded late in 2018 and into 2019 by significantly increasing our in-house training and support processes and we'll continue this through 2019. Beside this training and expanding or automation field techs, we also trained and indoctrinated 36 customer representatives from six different operators on the implementation of automation during drilling. We expect Precision’s increased field technician presence and the enhanced customer training program will enabled full scale full field acceptance and PAC commercialization during 2019. Also during 2019, we uncovered the commercial potential and the magnitude of data analytics possible using the PAC platform. And the first byproduct is the rapid development in field testing of drilling outs, which we've talked about in the past. And I'll remind you that the Apps allow us, our customers and other third parties to standardize, to repeat and optimize many of the repetitive or unique tasks in the drilling operation and this improves drilling efficiency, repeatability and eventually lower small costing risk. Currently, we have 15 Apps under development with several Apps now transitioning from the field hardening phase to full commercial mode. App development and growth is moving at a much faster pace than I would have expected earlier on. But the huge volume of data we're capturing, Precision’s drilling optimization group is transitioning to PD-Analytics. We're expanding the mandate of this group to become a big data analytics and optimization team working to measure, monitor and optimize every minute aspect of the drilling operation. We believe this will allow us to further improve our operating costs. Our customers will cost, wellbore quality and enhance our competitive advantage. The group will continuously track and analyze over 10,000 data channels of each rig. Our early win in big data is the virtual elimination of customer disputes and that is when something unexpected or unplanned occurs during drilling, our analytics team can completely recreate and model the event with full transparency for the customer eliminating any disputes. This has been a very good outcome for Precision, now highly valued by our customers. But I believe we're just scratching the surface of what will become possible as we continue to focus on this over the coming years. So for Precision, free cash flow generation debt reduction technology leadership remained the key drivers of shareholder value. And as such are 2019 strategic priorities published earlier this month and reiterated this morning's press release are similar to 2018. And as last year, we will provide updates throughout the year on our progress against each of these goals. So now turning to our key markets and outlook, I'll be given with Canada. So late in the third quarter and through most of the fourth quarter, very wide western Canada select differentials and depressed eco gas prices, severely constrained customer planning for the winter drilling season and that has played out as we mentioned in our press release industry is that activity is down 30% from last year. Currently, Precision’s operating 58 rigs down almost 30 rigs from this time last year. Now we're experiencing better activity mix due to strong utilization from our Super Triples and despite this sharp downturn in activity rates for our Super Triples are in line with last quarter. I think most of you in the call should be familiar with the Alberta provincial governments production curtailment program, which was implemented late in December and has improved those differentials and our customers are realizing better cash flows, we expect this bodes well for the potential for improved drilling and services spending later in the year, but time will tell. For U.S. visibility for the balance of 2019 is cloudy at best, customer indications for Q2 have activity in line with last year, but there is little or no visibility beyond that. So for Precision, we streamlined our Canadian business unit with cost reductions and tight spending controls. We’re planning only minimum capital – maintenance capital spending to sustain an active rigs, and we expect to be in a strong free cash flow mode in Canada for the balance of the year. As mentioned in our press release, we are redeploying a second Super Triple 1,500 from Canada to the U.S. and we have three more Canadian Super Triple 1,500 which are all candidates for U.S. redeployment. Additionally, we have 23 Super Triple 1,200 in Canada and these rigs could be redeployed to any one of several U.S. basins where that rig class in the U.S. is experiencing for Precision 100% utilization. Now these are very much like ST-1500 rig, but they are lighter, they're highly mobile, and they can drill the medium long reach wells as efficiently or more efficiently than some of ST-1500. During the first quarter, Canadian utilization on this group of rigs was approximately 90%. Now, as I mentioned earlier, our day rates for these rigs have remained constructive. However, should customer demand weekend we are prepared to mobilize some of these rigs to the U.S., but I'll add that we're not moving any rigs to any other markets on speculation. We will continue to require customer term contracts and customer paid moves to facilitate that redeployment. So turning to the U.S., we currently have 81 rigs running and we're in line to their peak activity from 2018 and enjoying our highest market share since entering the U.S. over a decade ago. Earlier, Carey you mentioned the 31 rig upgrades completed last year, which substantially expands the capability of our U.S. Super Triples. Those along with the three new build ST-1500 and the two rigs redeployed from Canada increases our ST-1500 fleet by over 10%. These investments are consistent with both our short-term priorities and our long-term high performance high value strategy. That's said, meeting or exceeding debt reduction targets remains our top strategic priority. So Precision is Super Triple assets in our operational model with highly trained and skilled crews deploying leading edge automation capabilities remains in high demand and short supply. While we are not immune to customer uncertainty, it should be evident to investors that our customers are intensely focused on driving down costs, improving efficiency and that's exactly what we're delivering with our high performance rig fleet. So during the fourth quarter, we booked 11 term contracts and since the beginning of this year eight more including four just this week. There's been a lot of talk and maybe too much significance based on leading-edge day rates. In fact, we reported leading-edge day rates trending into the upper 20s late last year. I believe that dynamic still exists, particularly for the high spec rigs with proven crews. But as you overall rig count is flattened, and at this point budget still remain uncertain. We've experienced pricing competition in around the $23,000 to $25,000 range. I expect the ones our customers finalize the 2019 drilling budgets and the drilling departments formalized full-year drilling plans, capital discipline by our customers will rule decision making. And that means the rig performance, proven crew experience, proven rig efficiency will once again drive demand for the best rigs, pricing we'll quickly tighten on what is already a fully utilized industry category. Customer indications suggest that this high grade trends will play out even if overall budgets remain constrained. With two thirds of our current U.S. activity under term contract, we feel very good about activity and cash flow visibility through the first quarter and based on recent customer inquiries, we expect a slight improvement in WTI or even a stabilizing WTI environment could drive incremental activity for Precision. So turning to international. Our new build project for Kuwait, Carey mentioned earlier remains on track and on budget. And I'll remind you that these ST-3000 Kuwait rigs are huge rigs almost three times the cost and scale of ST-1500. Project management during construction as key as the client is unwavering, that's technical and contractual requirements. This rig will be completed and mobilized in Kuwait by July 1st who will benefit from the scale effect of the other five rigs in country with no expected increases in G&A or fixed costs to support the rig. As we've said many times our Kuwait business is a jewel in our portfolio with six high performance latest technology rigs all covered by long-term contracts? In the Kingdom of Saudi Arabia. We have three rigs running. You may recall that two of those rigs I've been up for contract renewal since the end of August and they’ve been on temporary extensions since that period. We've finished negotiating the terms of the extension, the long-term extension, and expect to have those signed in the coming few weeks. That would bring us to over to having nine rigs operating in the Arabian Gulf region by early July. So turning back to Canada for a moment. Our well services business while experiencing the same Canadian macro headwinds I discussed earlier is performing very well. And following a year of management transition, cost reductions and functional realignment, I believe this business is very well positioned. It is generating strong free cash flow despite these market challenges. Believe our team has got a very huge lift over the past 12 months and that work is paying off for us today. So in that note, I'll turn the call back to the operator for questions. But before I do, I want to thank all the employees of Precision for their hard work and the great results they delivered in 2018. Operator, the call is back to you.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Sean Meakim with JPMorgan. Your line is now open.

[Sean Meakim:]

Hey guys.

[Kevin Neveu:]

Good afternoon, Sean.

[Sean Meakim:]

So maybe to start, Kevin, I'd love to hear more about the recent term contracts that you guys signed. It’s obviously a pretty impressive start to the year. Maybe could you give us just some context for that group in terms of customer mix across majors, large independence versus smaller private ones? And I'm curious also what that mix looks like roughly across your U.S. fleet of active rigs across those three buckets?

[Kevin Neveu:]

Sean, that's a really good question. It's certainly been on investor's minds over the past few months. They'd be looking for trends moving away from maybe private equity to IOC’s, but what's interesting is the mix of customers really hasn't changed. I think we've been successful kind of carving our footprint into a couple of the IOC’s are planning to expand spending in the Permian this year. But the overall mix of contract signings hasn't changed. And I think you had a couple of follow-ons to that question.

[Carey Ford:]

Yes. Sean, I’d say that a lot of these contracts signing that we've completed here in the past week have been under discussion for the past several months. This is just a completing the contract and setting firm dates for rig deployments. But they are in discussions that just started to pop up in the last week or two. I’d also note that and talking with investors, they've been trying to distinguish trends between the private companies and the larger public companies on capital spending programs. What we've really seen is where the weaker part of the market, it's not really customer driven, but it's rig driven. And so we're seeing a lot less demand for less efficient rigs in the market. Whereas the demand for the high efficiency rigs like our Super Triples remains quite strong.

[Sean Meakim:]

Got it. Thank you for that. I think that’s helpful. I'm also hoping just to touch on free cash expectations for the year. I think, I'd love to hear if you agree with the biggest sources of upside to maybe where you were on free cash flow coming into 2018 or probably stronger contract additions in the U.S. and probably be a better pricing than you would model throughout the year. Is that fair? And as you think about 2019, what are those flex points around free cash that you would emphasize in contrast to 2018?

[Carey Ford:]

Well, as we sit today, we've got probably $110 million in interest expense that we would assume cash taxes would be relatively low. We've got a capital plan of $169 million in place right now that could flex down a little bit with a decrease in activity, but there's not a whole lot of room there. If we had more demand and EBITDA was going higher, we could spend a bit more to fulfill demand for, let's say, additional upgrades. So those are the cost that draws on cash. We don't provide guidance for EBITDA, but that's what you guys do. So your estimate for EBITDA less those cash cost would be a pretty good estimate for where our free cash flow could be at the end of the year.

[Kevin Neveu:]

But I think you could add to that Carey that the levers would be rates going forward if there's upward momentum in rates, levers could include non-core asset sales.

[Sean Meakim:]

Right, right. That's a good point. And would you point Canadian – second half of 2019 Canadian activity as a particularly important flex point in terms of what happens there?

[Kevin Neveu:]

Yes. I would tell you that our debt reduction targets and the guidance we've given is not based – it doesn't require any Canadian response. So to answer your question, improvement in Canada would be a benefit to us in the back half of the year.

[Carey Ford:]

Yes, I draw a distinction there between the two markets. An improvement in activity in the Canadian market would be straight cash flow. We don't really see opportunities right now to spend capital on upgrades, whereas an increase in demand in the U.S. market, may require a bit more capital because that would mean we're converting 1,500 horsepower SCR rigs to Super Triple AC rigs.

[Sean Meakim:]

That's right. The point I'm trying to make their, yes, very good. Thank you.

[Kevin Neveu:]

Okay. Thanks, Sean.

[Carey Ford:]

Thanks, Sean.

[Operator:]

Thank you. Our following question comes from Taylor Zurcher with Tudor, Pickering, Holt. Your line is now open.

[Taylor Zurcher:]

Hey, good afternoon.

[Kevin Neveu:]

Hey, Taylor.

[Taylor Zurcher:]

Kevin, you talked about with the recent stabilization, I guess firming up of WTI that some customers that you've gotten some increase about additional or better U.S. plan rig utilization moving forward, for you guys where your rig counts that today that likely means additional rig upgrades from the idol supply stack? So my question is, are the economics still there today? Clearly the rates are still there even though you've got some price competition in the mid twenties, but from a term perspective, are you still able to get sort of that 18 months or 24 month type term? That you need to do some of these rig upgrades moving forward?

[Kevin Neveu:]

Taylor, I'll clarify what I said in my script, and that was that, if we see a slight improvement in the price and stabilization is WTI, then I think there is room for additional customer demand.

[Taylor Zurcher:]

Okay.

[Kevin Neveu:]

So with that preface in place, if we see an oil price that looks like 55 as a floor and the market is a little bit more stable and I think there's a bit of room to see rig counts go up and that probably does mean we activate possibly some idle rigs or rig count could creep up in the single digits, maybe three or four or five rigs. I don't know that that drives a big demand for upgrades. I think it might need to see a stronger price and planned increases in capital spending by our customers to drive a market that might be looking for more upgrades, beyond what we already included in our current planning.

[Taylor Zurcher:]

Got it. And follow-up on sort of the same line of questioning, and the CapEx budget, if you exclude the $68 million for Kuwait on the upgrade and expansion piece, that leaves about $50 million of upgrade capital for 2019. In prepared remarks, you said that's mostly for or nearly all for the U.S. Can you frame for us may be how much of that will go towards some of your technology initiatives and how much of that is budgeted for perspective rig upgrades in 2019?

[Carey Ford:]

Taylor, I think the short answer is we're actually being a favor of flexibility in that range right now. But my thinking is that probably something in the range of a quarter of that goes into technology, but we haven't made any commitments at this point. And the balance would be used for, again more pad upgrades or things like that.

[Taylor Zurcher:]

Okay, great. Thanks. I'll turn it back.

[Operator:]

Thank you. Our next question comes from Kurt Hallead with RBC. Your line is now open.

[Kurt Hallead:]

Thanks. Good afternoon.

[Kevin Neveu:]

Hi, Kurt.

[Kurt Hallead:]

So Kevin, we've heard from a couple other drillers – land drillers so far this quarter, fairly similar commentary from what you said. But yes, I'm just trying to kind of calibrate here. One of the differences that I may be picking up on here is that a day rates seem to have flattened out and not really gone down. And maybe more particularly, it really hasn't been any kind of competitive bidding for super-spec rig. So I was wondering if he could put that for your comment about the day rate dynamic going from the high 20s maybe to the 23 to 25 range. Is that really for super-spec rigs or is that just kind of a dynamic, that that's excluding those two super-spec rig?

[Kevin Neveu:]

Kurt, there's a – I'm actually surprised at the signing for contracts this week. So my comment would be there's a lot of market activity going on right now. We have sales guys out this afternoon, talking to customers. We had customers reading our press release this morning and our competitors doing the same thing. I don't want to give a lot more specifics around rates. That's why we left the comments rather vague. So we're in a bit of a dynamic market right now. I would tell you though that, we really haven't seen any degradation on customers have long-term thinking, long-term plans and that measure and monitor performance effectively.

[Kurt Hallead:]

Okay. And the other dynamic at play here is that for sure, when the decline in oil price occurred in the fourth quarter, it just so happened to be at the same time E&Ps were going through budgeting. I don’t think that opportunity to maybe some of them will take the opportunity to reset near-term dynamics. And again, we have since heard that the E&Ps have come back to a variety of different land drillers looking to actually pickup some rigs starting in the second quarter. Is that a dynamic that you mentioned, some element of conversation, but is that a dynamic you're experiencing as well?

[Kevin Neveu:]

Well, we actually saw that pickup happened to the first quarter. So we got down into the sort of mid-70s for a few days in December. We were back up into the 80s now. So I think it's real. I think we might have been a little bit in the coal mine on that. And we do have, I think on our Q3 call we commented about some contracts. We have our activations happened in the second quarter. So we do have activations and our current book. The rigs will come up to work in the second quarter. So I think that's all consistent.

[Kurt Hallead:]

Okay. And then one last thing for me. Let's just say, leading-edge rates go from the high-20s to mid-20s, right? My understanding is that the average cash margin still has room to catch up to what those leading-edge rates will be. So even if the three flatten out there is a prospect for cash margins in the U.S. to continue to improve. Am I misinterpreting that?

[Kevin Neveu:]

No, I think your interpretation is accurate.

[Kurt Hallead:]

Okay. All right. That's it for me. Thank you.

[Kevin Neveu:]

Great. Thanks Kurt.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from John Watson with Simmons Energy. Your line is now open.

[John Watson:]

Hey, good afternoon

[Kevin Neveu:]

Hi, John.

[Carey Ford:]

Hi, John.

[John Watson:]

I want to start in Canada. Kevin, I think in the script you mentioned improved mix year-over-year which makes sense, but a pretty substantial decline in activity year-over-year. Can you frame for us how we should think about margins on a year-over-year basis in Q1 and Q2?

[Carey Ford:]

So I think for Q1 we would expect margins to be up slightly year-over-year. And Q2 is a bit more challenging to give guidance on margin just because activities typically it's dropping it would be low and just a minor change in rig activity could have a big swing on the margins. But right now we would think activity would look pretty similar to the last year in Q2.

[John Watson:]

Okay. That's fair. Super helpful. Thanks Carey. Turnkey revenues for the quarter there are higher than they've been at least in a couple of quarters. Is there anything for us to read into there? You're at least one of your peers just talked about new pricing structure for day rates and for the drilling business more generally? Do you expect more turnkey revenues moving forward or is that an anomaly?

[Carey Ford:]

So I would say first that the turnkey business that we ran in Q4 was exactly the same as the turnkey business we've been running for many years, so there's no change in the business model there. That business historically has been lumpy. We might have three or four jobs in one quarter and then no jobs in another quarter. It was a little bit more active than our typical quarter, but we would expect it to continue to be project-based and pretty lumpy going forward. So it’s tough to give guidance.

[John Watson:]

Okay. Understood. One last one for me on C&P. Obviously a really strong quarter and we got some nice color on why that was. I'm thinking about moving into Q1 for some of those other businesses and accommodations, et cetera. It was our seasonality in Q4, do you expect continued strength as we head into the first quarter?

[Carey Ford:]

We would expect activity in Q1 – our financial performance in Q1 to track activity in Q1. So the industry would be down – will be down a bit year-over-year as Kevin said. And right now we're down 30% on rig activity. So activity on those business lines will be down a bit. But as we mentioned, the cost structure has improved in our C&P division, so we should be able to produce better margins than last year.

[John Watson:]

Perfect. Thanks for that. Congrats on the strong quarter. I'll turn it back.

[Kevin Neveu:]

Thanks, John.

[Carey Ford:]

Thanks, John.

[Operator:]

Thank you. I have a question from Ian Gillies from GMP. Your line is now open.

[Ian Gillies:]

Thanks for thinking of me Kevin.

[Kevin Neveu:]

We're glad we didn't lose you there Ian.

[Ian Gillies:]

To go back to the rig upgrade piece, is there much left to do on the active rig count with respect to upgrades at this point in time? Or as you think about that spending, is it primarily have to be spent, I guess on rigs that are going to go back to work could be incremental to your current count?

[Kevin Neveu:]

Ian that's a very good question. And in fact, we probably still have a handful of running rigs where we can do a few more improvements out of third month pump with a few of those. But the real game changer is going to be moving into the round of DC to AC conversions. Nothing on the books right now. But we have in the range of 10 to 15, DC SCR rigs that we'd look to upgrade at some point in time when the demand is in contract, opportunities look good and providing we can make debt repayments first. And those upgrades are going to be pushing anywhere from 6 million to 10 million per upgrade Canadian.

[Ian Gillies:]

Okay. That’s helpful.

[Kevin Neveu:]

But nothing planned right now. And at this point, no visibility on that type of upgrade. But we have that opportunity we think down the road.

[Ian Gillies:]

Got it. That’s helpful. With respect to Canada, I mean, if you look at conventional E&P budgets, they look to be down, call it 10% to 15% year-over-year. Canadian rig count is down, call it 30% so far through Q1. I mean, so does that provide a level of optimism for you in the back half of year that there will be more spending? Or are you just viewing current budgets where they are or I guess with caution?

[Kevin Neveu:]

I think the answer is yes and yes, but let me try to answer that one a little more succinctly. I think that our customers are going to have to drill at some point and going to have to service wells. And when they are facing the really wide differentials, they just slam the brakes on and that's what we're seeing right now. The brakes are being slammed on. In fact, I didn't say in my script, but activity levels right now, kind of echo 2016 which would be the worst year on record in several decades. So what we're experiencing right now is the brakes full on in Canada. With the differential narrowing, with strengthening WTI, it just doesn't feel like that will persist through the year. So I have a sense or a feeling that we'll see a better, better activity levels of the back half of the year. But then I'll tell you, we're not betting on that are hoping for that we're running this business right now with that complete view that there is no certainty.

[Ian Gillies:]

Okay. And moving I guess quickly at international, I mean for a long period of time the Kuwait, I guess bid program was top of mine for I think a lot of investors and a lot of the analysts and I mean when you look through the international market today, are there – do you see much in the way of tendering going on in either areas you're currently operating in or new areas that you would perhaps like to participate in?

[Kevin Neveu:]

Yes, I think we've just had in our Q3 conference calls, we talking to the surge of tenders and certainly late in the year, we saw the tender surge up a little bit. Now it's kind of gone down a little bit. We know that in Kuwait. The only awarded less than a 40% of the rigs they planned to award. So we know there's work going on in the next round of tenders in Kuwait. The timing for us might be quite good in a year or so, two years down the road. We have multiple tenders of the rigs. We have idled in the region right now. So activity – bidding activity is moderate to strong award activity is a little slow.

[Ian Gillies:]

Okay. That's okay. That's good to know.

[Kevin Neveu:]

And frankly, right now today, we probably have enough, under our belts on that international fund getting Kuwait up and running. I'm not anxious to see something else, while you're up next to a month or two.

[Ian Gillies:]

I guess maybe putting in a bit of a different way, if you only had a dollar to spend, would it be fair to assume that you'd put it towards rig upgrades in the U.S. rather than international? Just give – I would assume that those paybacks are a bit stronger?

[Carey Ford:]

Hi, Gary. If we had a dollar to spend, we'd want put that towards debt reduction first and then we would look at the expansion opportunities.

[Ian Gillies:]

Okay. Thanks very much guys. I'll turn the call back over.

[Kevin Neveu:]

Thanks again.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from J.B. Lowe with Citi. Your line is now open.

[J.B. Lowe:]

Hey, good afternoon everyone. I was just wondering if we could get kind of an update on the cadence of commercialization of the different PAC systems and Apps that you have on your various rigs, like just trying to think of how we can think about the revenue proposition just for 2019. I know what your targets are, but I'm going to get any color that would be great?

[Kevin Neveu:]

Yes, that's a good question. We haven't given that guidance yet this year. We're going to hold off right now on the guidance. I commented about a little slower than we had hoped for adoption, but we do have good traction, but I'd like to not give that guidance today. I think that as we look at publishing our year-end report in our proxy, we’ll probably get more clarity there.

[J.B. Lowe:]

All right. Thanks, Kevin.

[Kevin Neveu:]

We're going to be helpful at this point.

[J.B. Lowe:]

Thank you.

[Operator:]

At this time, I'm showing no further questions. I would now like to turn the call back to Ashley Connolly for any closing remarks.

[Ashley Connolly:]

Thank you all for joining us on today's call, and we look forward to speaking with you when we report first quarter in April. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.