Precision Drilling Corporation
Q2 2017 Earnings Call Transcript

Published: 31 Jul 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to Precision Drilling Corporation's 2017 Second Quarter Results Conference Call and Webcast. At this time, all participants are in a listen-only-mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Ms. Ashley Connolly, Investor Relations. Ma'am, please go ahead.

[Ashley Connolly:]

Thank you, Michelle, and good afternoon everyone. Welcome to Precision Drilling's second quarter 2017 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 second quarter 2017 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 also 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. Carey will begin with a brief discussion of the second quarter operating results and a financial overview. Kevin will then provide a business operations update and outlook. Over to you, Carey.

[Carey Ford:]

Thank you, Ashley. In addition to reviewing the second quarter results, I will provide an update on our 2017 capital plan and our liquidity position. First quarter adjusted EBITDA was CAD57 million which is 152% higher than the second quarter 2016. The increase in adjusted EBITDA from last year is primarily the result of higher activity levels across all of our businesses and higher day rates internationally offset by lower IBC and shortfall revenue in North American drilling business. In Canada, drilling activity for Precision increased 120% from Q2, 2016, while margins were CAD4,217 per day lower than the prior year. The margins for the quarter were negatively impacted by a decrease in shortfall payments and legacy contracts rolling off and renewing at lower rates offset by lower daily operating cost that were CAD2,518 per day lower than the prior year. In the U.S., drilling activity for Precision increased 143% from Q3, 2016 while margins were $7,042 per day lower. The decrease was primarily result of lower idle but contracted payments offset by daily operating costs which were CAD1,343 lower. Internationally, drilling activity for Precision increased 14% from Q2 2016. The increase in activity was primarily the result of the addition of two new rigs in Kuwait deployed in Q4 2016 offset by no activity in Mexico during the quarter. International average day rates were CAD49,679, an increase of $5,288 from the prior year. The increase was largely the result of rig mix as the Kuwait rigs were added at higher day rates than the Mexico rigs that worked in Q2 2016 and did not work in Q2 2017. Today, we have eight rigs active internationally. In our C&P division, adjusted EBITDA this quarter was CAD336,000, up almost CAD3 million from the prior year. The increase is a result of significantly higher activity and a lower operating cost structure offset by lower pricing in most divisions. Capital expenditures for the quarter were CAD28 million and we now plan for capital expenditures of CAD138 million for the full year 2017. The 2017 capital plan is comprised of 13 million for expansion, 71 million for maintenance and infrastructure and 54 million for upgrades. Consistent with the 2016 capital spend, upgrade capital was targeted for upgrades to approximately 35 super triple rigs as customer demand dictates. Our 2017 upgrade plan for our North American fleet averages approximately CAD1.5 million for the rig. The low dollar amount per rig is a result of our super triple rig design allowing bolt-on upgrades for capacity increases, process automation control technology and walking systems. The increase in maintenance infrastructure capital of CAD19 million primarily relates to the planned upgrade of our ERP system. We have continued to build our contract book. And as of July 31, 2017, we had an average of 58 contracts in hand for the third quarter, an average of 57 for the full year of 2017. Year-to-date, we have added 17 term contracts. As of June 30, 2017, our long-term debt is approximately CAD1.9 billion and our net debt is approximately CAD1.8 billion. As a reminder, all of our long-term senior notes are denominated in US dollars. In the past month, the Canadian dollar has strengthened. And at exchange rates today, our total debt is approximately 1.8 billion and net debt is approximately 1.7 billion. We had CAD95 million in cash on our balance sheet at the end of the quarter. And as of June 30, 2017, our liquidity position was $815 million. The slight reduction in our cash balance for the first quarter is a result of seasonal working capital requirements associated with increased industry activity. Two of our strategic priorities for the year are to demonstrate fixed cost leverage in an increasing activity environment and focusing on free cash flow and debt reduction. We have seen significant activity increases over the past two quarters, and salary to headcount has remained essentially flat. In the first six months of the year, we generated funds from operations of approximately CAD70 million. We continue to review reducing debt levels as a priority and intend to use free cash flow and cash on our balance sheet to de-lever. I will now turn it over to Kevin for further discussion of the business and the outlook.

[Kevin Neveu:]

Good afternoon, and thank you, Carey. So while commodity price volatility has somewhat dampened the broad North American drilling recovery, it's also served to sharpen our customers' focus on drilling efficiency and rig performance. We continue to have high specification rig discussions with customers in every region we operate. Pad walking rigs with long-reach horizontal drilling capabilities remain in high demand and interest in our new technology initiatives is strong. Carey commented that during the second quarter, we added nine term contracts for our Super Series rigs, all of these were pad walking rigs and most were equipped to drill long-reach horizontal wells. But I'll comment that we are in negotiations with several clients for additional term contract opportunities. Now in some cases, these rig contracts have led to industry activity increases, but increasingly more tend to be high-grading by customers looking to displace lower specification rigs. Recently, Precision's May 15 Analyst and Investor Day and the two subsequent following customer days, we performed and demonstrated real-time drilling demonstrations of several new technology initiatives underway at Precision. The rig was Precision's 609, a Precision ST-1500 equipped for pad walking and extended reach horizontal drilling. And the rig, like 105 other Precision rigs, is fitted with an AMPHION AC control system. At this demonstration, we highlighted the new technologies, including Process Automation Controls, directional drilling guidance software, advanced drilling ups and high-speed downhole data transmission via wired drill pipe. All of these technologies are available today and all are capably being uploaded to our full fleet of standardized Super Triple AC rigs and are specifically targeted to improve drilling efficiency, consistency, repeatability, exactly what our customers' demand for horizontal resource style drilling. Our customer interest is extremely high, and we expect that, once we fully commercialized these technologies throughout the balance of this year, we will drive higher fleet utilization, improve day rates, but require only minimal capital investments to affect the implementation. Now we continue to make very good progress with our beta testing. 20 Super Triples have now been fully upgraded with Process Automation Controls. We are continuing to field hardening process. We're increasing uptime for each of these rigs with longer runs with the software and working through the beta punch list and expect to be on schedule to finish the full beta testing this year and be in a full commercial operating mode in 2018. Now you'll recall that we partnered with a major equipment provider for the Process Automation Control, as we believe software development is not our core competency. We know that our strength lies in field application testing and field deployment of new technologies. And we remain fully on track to commercialize this software platform before year-end, which will pave the way for other technologies we discussed to connect and deliver their full efficiency potential. For more information, you can see our website, Investor Day presentation for more details on these technologies. Turning to our markets. In Canada, today, we have 51 rigs running and five rigs waiting on weather, substantially ahead of last year's pace, but a little behind the level we suggested on our last conference call. There's no question that the increased volatility in lower oil prices experienced late in the second quarter combined with poor spring weather proved the drag on our second quarter activity, which is persisting in to the third quarter. And while the outlook for the back half of 2017 is a little less certain, we still expect Precision's activity to rise into the low-60s later this quarter similar to our prior guidance. For our Canadian customers, a WTI price, trending towards $50, is significantly more constructive than the low-40s experienced over the last few weeks. We will watch this trend carefully. Now in the Canadian Montney, the Duvernay and the Deep Basin in general, and the heavy oil regions, pricing remains constructive as our customers are more focused on rig performance and overall rig efficiency and that the supply of pad walking rigs remains tight. We also note a high degree of interest by our Deep Basin customers that are technology initiatives. All of this speaks to the drive by these customers to improve cost -- to improve efficiency cost repeatability. We expect day rates for our deeper Super Triples remain firm in the upper teens to lower 20s, depending on rig spec for the balance of this year, and we expect activity to trend in line with our prior guidance. Now in the shallower Canadian plays, pricing remains highly competitive, particularly Southern Saskatchewan and the Central and Southern Alberta regions with rates of the low teens. But I should note, their Canadian customers will start quickly to commodity price signals. Stabilizing or improving commodity prices could bode well for Canadian fourth quarter activity, as our customers consider ramping up for the winter drilling season. We expect to see further visibility on the 2018 winter more likely later in the third quarter and into the fourth quarter as we watch our customers begin planning their budgets for next year. Our U.S. drilling business had a strong second quarter, demonstrating solid fixed cost absorption, strong contract bookings, firm day rates and high interest to our technology initiatives. We currently have 63 rigs running with the nine term contracts we added during the second quarter and with ongoing customer negotiations for several more. We're encouraged by these signals. However, we're not surprised by the recent flattening of industry activity as we've been saying for some time. We expected U.S. activity to plateau. But the customer migration to high-efficiency rigs will continue, and this is evidenced during our strong Q2 bookings. On that trend, demand for pad walking long-reach capable rigs remain strong. We continue to achieve day rates of low-20s for our Super Triples -- our Super Triple 1500s and high teens for our Super Triple 1200s. Now these rigs remain in extremely tight supply. We expect further opportunities to re-contract into these rates as prior contracts roll over, and we upgrade other idle rigs to meet this demand. The new contracts we booked were distributed with two in the Niobrara, two in the SCOOP/STACK in Oklahoma and five in the Permian Basin. So it's clear that our customers are looking to upgrade rig capability in every basin. Now we see this trend continuing through the third quarter. The high level of customer engagement reinforces our view that superior drilling performance by those drillers who demonstrate efficiency gains will continue to drive the migration to most efficient rigs, which plays exactly to our strategy. Now turning to international business. Most of our efforts are going to hone our operations by focusing on rig performance, rig move times and managing operating costs. Customer demand may finally be bottoming, and we may be seeing some initial green shoots with several new tenders in the Middle East and Latin America. We look to 2018 for these growth opportunities to materialize and remind you that we have four idle rigs in the Middle East and five idle rigs in Mexico that we continue to bid for these opportunities. With no contract renewals for 2017, I do not expect any significant changes in our international business this year other than our drive to reduce cost and improve cash flow. Our Completions and Production business in Canada is coming on a spring breakup with strong cost management in place, well-managed assets and a good opportunity to generate free cash flow. And while this business tends to be very sensitive to short-term commodity prices, with WTI trending closer to $50, customer sentiment should improve and activities respond in step. The well service business segment remains oversupplied, and highly competitive pricing remains a fixture in this business. Our scale and cost leverage are our key competitive advantage and our continued intensive cost management will help us in this very challenging market. Regarding our top three priorities for 2017, I reported earlier on the good progress the team is making on the technology initiative. Similarly, our decision to upgrade our ERP system to support the increasing data flow and to leverage this data to further reduce costs is a key step forward for us. Carey also mentioned our fixed cost management and our administrative headcount freeze, delivering the fixed cost leverage we expect and the cost absorption as we continue to maximize EBITDA at every opportunity. And no question that our commitment to debt reduction and liability management provides every expense action and reinvestment decision we make at Precision. As seasonal activity improves for the third quarter, we remain on track for stronger cash flows and look to decreasing our financial leverage, while we continue to manage our balance sheet and debt maturities to ensure optimum shareholder value. Before I close, I'd like to thank the employees of Precision for the improved safety, environmental performance during the second quarter, while we continue to deliver high performance, high value services to our customers. I'll now turn the call back to our operator for questions. Thank you.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Chase Mulvehill with Wolfe Research. Your line is open. Please go ahead.

[Chase Mulvehill:]

So I guess first question, if we can just kind of a start in U.S. When we think about gross profit per day in the third quarter, should we expect that to be kind of flat to up when we think about the third quarter?

[Carey Ford:]

Yes, Chase. On the last conference call, we said we thought that margins would trough in the back half of the year and we'd see the margins increase at some point in the back half of the year, either Q3 or Q4. We actually saw margins increase in Q2. Day rates were down a little bit, but costs are down a little bit more. So I think right around this level, if we see an increase in margins or a slight decrease in margins, it'll be in the hundreds of dollars range. It won't be a significant change one way or the other.

[Chase Mulvehill:]

Okay, right. And then shifting over to Canada when we think about gross profit per day, maybe if you could kind of refresh our memory what you've previously said about the back half of the year and the outlook for gross profit per day in Canada.

[Kevin Neveu:]

Chase, it's Kevin. There are a couple of things we previously talked about for the back half of the year. We were talking about increasing day rates and pressuring the market on day rates. I tell you that on the shallower rigs, that's the net flawed resistance. So I think that some of the traction we're expecting on shallower rigs has eroded, particularly with the softness late in Q2. But we still think that the deeper basin remains -- pricing remains firm with some room for increases later this year. So we think that's got some room on the upside. Our mix in Q2 was a little weighted towards shallower rigs with increased activity. So I still think that comments we made earlier in the year around margins trending up in the back half of the year remain firm. Carey, do you have anything to add to that?

[Carey Ford:]

No, I think that covers it.

[Chase Mulvehill:]

Okay, last question, and I'll turn it back over. When we think about free cash flow in the back half of the year, should we expect positive free cash in the back half of the year with the raise to CapEx?

[Carey Ford:]

Chase, so in answering that question would be providing guidance, which we don't provide. But we definitely feel good about cash flow generating capability of our business over the next several quarters.

[Operator:]

Thank you. And our next question comes from the line of Sean Meakim with JP Morgan. Your line is open. Please go ahead.

[Sean Meakim:]

So you're seeing other competitors spend as much as $7 million or $8 million to upgrade some of their rigs to Super STACK status. In some cases they're getting 18, 24 months contracts to back those. So I guess, I'm just curious how that -- how you think about that in the context of your own upgrades, which near term have a more capital light and just how you think about upgrading as well as contracting strategy given what's happening among your peers.

[Kevin Neveu:]

I think there's a couple of moving pieces there, Sean. So first of all, you'll recall that we talked about how a lot of these upgrades clip on to our rig or in fact just bolt-on quite simply. So it doesn't require as much capital to put a walking system on a Super Triple as it might to some other rigs, or for that matter, even sliding a third mud pump in for us is a pretty simple upgrade. So I think we've had -- we've enjoyed an advantage with our rig design, in that the upgrades have been much less expensive, and our forward guidance is still for less expensive upgrades. Granted, as we get to the back-end of the fleet, when we talk about a few of our DC SCR rigs needing upgrades, those will be closer to the range that others are talking about. But further upgrades we see right now in the near future for the balance of this year in the fleet changes we've done, we just think they will be a lot less expensive for us. So I think that's the advantage we have in the marketplace. And now speaking to the day rates, I comment that once a rigs have been paid for in the original contract, if we're into the post original contract, if we're going to achieve a day rate on a Super Triple that's, say, a Super Triple 1500 that's north of $20,000 or Super Triple 1200 north of $17,500, we're going to get rates above that. We're pretty happy with those day rates kind of long term, and I'd lock that rate in for a year, two years, maybe even longer if it's available. I think those levels of day rates on an investment that was paid out by the original contract give us a very solid return, higher than our cost of capital. So I think we'd been anxious to do that. And as we see those opportunities, we will. Does that answer your question kind of on both sides?

[Sean Meakim:]

Very much, sir, yes. It's really helpful. I also wanted to -- just to touch base on the technology. So in terms of the Process Automation Control, you're on 20 rigs now to 30 DGS jobs that you highlighted, can you give us a sense of the types of customers that are using it, the types of customers that are engaging with you or maybe using more of this technology? Can give us a sense of who you're knocking with on those?

[Kevin Neveu:]

So what we're doing is we spread it around, so we're actually in Canada and the U.S. We're essentially in, I think, every basin except the Bakken. I think we're spread around probably 12 different customers. The whole idea was to, I'd say, handpick customers who will work with the beta testing process, but try to get as broad a coverage as we could come up with, both geologically and geographically, so we could test the software in every type of application. But I'll tell you it's all horizontal drilling, all conventional resource-type drilling, just spread among many customers, many plays, many basins so we can learn as much as quickly as possible and move from beta to a full commercialized phase within the next few months really.

[Operator:]

Thank you. And our next question comes from the line of Ben Owens with RBC Capital Markets. Your line is open. Please go ahead.

[Ben Owens:]

You guys mentioned that on the -- some of the recent term contracts that you've received and the discussions you're having with customers, that a lot of those rigs were basically for high-grading, replacing existing rigs in the -- with the working fleet. Could you maybe put some more context around the opportunities set there in the U.S. if the rig count in the U.S. maybe didn't change, stayed flat, what's the opportunity to kind of high grade the fleet in terms of number of rigs?

[Carey Ford:]

So Ben, the opportunity is highlighted in our 2017 capital plan. We've got 35 rigs that we're upgrading for $54 million. So we're -- if demand is there for those rigs, we'll pursue those upgrades. And if not, we won't do them.

[Ben Owens:]

Okay, that makes sense. And then I have a follow-up, unrelated, you talked about seeing some green shoots internationally in Latin America. So wondering what country are you guys were talking about. Is that in Mexico? Or is that another country in that region?

[Kevin Neveu:]

I really don't want to get too specific. Since there is just so few opportunities, I'd comment not Mexico, but I'll leave it at that.

[Carey Ford:]

And that's more than one country by the way.

[Operator:]

Thank you. And our next question comes from the line of Jon Morrison with CIBC Capital Markets. Your line is open. Please go ahead.

[Jon Morrison:]

Kevin, just as a point of clarification. Of the nine rigs that you signed in the quarter that carried the 7-rig years, were all those signed in the quarter or? Is anything signed post quarter end?

[Kevin Neveu:]

I think we're talking about really during the period of the quarter, starting for the first of the quarter until the end. If you recall in our April conference call, we mentioned a few rigs were being signed between the period of April 1 and 26. So that's the full count for the full quarter. We have ongoing negotiations now, but nothing we've talked about that would be post end of June.

[Jon Morrison:]

You've obviously had some exposure to some of the producers that have talked about trimming their back half of the year CapEx program over Q2 reporting. Have you guys been put on notice for any potential rig lay downs at this point?

[Kevin Neveu:]

I'd commented that, that number would be one or two rigs, and that's across North America at this point. And we'd expect that those rigs will be re-contracted likely, immediately when they get released.

[Jon Morrison:]

You commented around pricing and what you're seeing in the market. Is it fair to assume that you haven't seen leading-edge pricing across any geographies outside of the shallow stuff in Canada, see material change in the last six or eight weeks?

[Kevin Neveu:]

So first of all, I'd say there are attempts to press pricing in Canada on the shallower rigs, failed. But on the mid-class and deeper rigs, Montney, Duvernay and then into the U.S., there's been really no pullback in pricing on the leading-edge rates. And my comments earlier around sort of minimum expectations for day rates going forward, really my comments are tied to, if were to lock a rig in for a period of time, I'd want rates higher than the rates I mentioned.

[Jon Morrison:]

Okay. In the release, you've referenced the 16-term contracts you guys have in Canada year-to-date during the first six months. Is there a fairly wide band around contract durations that you're signing in Canada right now? Or is that six months fairly representative of what you're seeing for opportunities?

[Kevin Neveu:]

So Jon, for the Canadian contracts, I would tell you that's all tied to upgrades of some sort. So we're locking the contract period to ensure we get the full capital investment back during the contract period. It's probably a little bit less about what the customer would like to see. I mean, they'd probably lock the rigs in for a longer period. We're always trying to manage day rate, contract duration and margin, and we do on a full portfolio basis not rig by rig. So I think what we're reporting is appetite by customers to finance upgrades and our desire to lock those returns in for the life of the -- to payback for the upgrade.

[Jon Morrison:]

Okay. Based on your opening comments, it's fair to assume that you're not expecting hourly rates on the well servicing side in Canada to show any momentum in the back half of the year despite some of the staffing challenges that are starting to unfold in the sector.

[Carey Ford:]

Yes, Jon. I think on the well service side, as Kevin mentioned earlier, that business is highly responsive to changes and commodity prices. So if -- I think we're in this commodity price environment that we're in today, probably not a whole lot of change in the hourly rates. But if commodity prices were to improve, then we could see some more pricing strength in that service line.

[Jon Morrison:]

Carey, just on the $20 million of cash outlay that you're going to do in association with the ERP upgrade, can you give any more color on what advantages you would expect to get from that upgrade and talk about some of the improved added capabilities that you'll have on the back of that?

[Carey Ford:]

Yes, so it's really around improving the efficiency within our organization and dealing with more data flows that we're having to handle in our business and helping the organization make better business decisions as a result of implementing this ERP upgrade. I think if you think about all of the paper that has historically been used in the field, digitizing the remaining processes that haven't been digitized and the resulting hours that are saved from a more efficient digital system is what we hope to achieve.

[Jon Morrison:]

Okay. Last one just for me, of the $140 million of CapEx that you now have for 2017, how much is hard committed at this point versus could change depending on customer demand and activity in the back half of the year?

[Carey Ford:]

Yes, it would be likely $5 million to $20 million, I would say, would be kind of the range that, that could swing.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of John Watson with Simmons. Your line is open. Please go ahead.

[John Watson:]

As a follow-up to an earlier question, one of your competitors announced that they're converting 1,000-horsepower rigs to 1,500-horsepower, and I know your Super Triple 1200 is a very different rig. But can you provide us your thoughts on current demand for rigs for the 1500-horsepower in the U.S.?

[Kevin Neveu:]

Sure can. I would tell you that, in the U.S., the Precision Super Triple 1200 has applications in the Marcellus and now very strong applications in the DJ Basin in Colorado. So we think it's got good running room -- or good legs for the shallower parts of the Marcellus and specifically for the DJ Basin.

[Carey Ford:]

Yes, and just to add to Kevin's comment there. The utilization of our Super Triple 1200 fleet in the U.S. right now is right around 80%, so we're seeing good demand for that rig class. And I think if we were going to upgrade 1,000-horsepower SCR, 1,000-horsepower AC rig, it would be a different situation coming from a very low utilization rate on that rig class.

[John Watson:]

Right, that's helpful. And more of a conceptual one. If we saw the rig count dip lower industry-wide in the U.S. in the coming months and then go back half in '18 and '19, do you think operators would choose to drop Tier 2 rigs and then add Tier 1 rigs? And maybe any color on what that might do for day rates or margins in '18 and '19?

[Kevin Neveu:]

So first of all, John, the decline we saw in 2015, '16 was really sharper. At one point, oil was touching below $30 and every contract, every rig customers had operated, trying to lay down. And discrimination between good and bad sort of went away for a short period of time. But in most downturns, the best rigs stay working the longest and certainly with that conventional drilling right now, the best most efficient drilling rig, the best most efficient crew, pad walking rigs, the most desirable rigs you're going to be hung on to for a very long time. In fact, I still think that even in a declining rig count world, we'll see customers high grading rigs. If you can save 10 or 12 days per pad just by moving to the pad walking rig versus a skidding rid or expand your pad size by one well and actually drill that well almost for free in the number of days you saved, I think those economics will be compiling even in a constrained rig count world. So while I'm not expecting our rig count to go to 100% in the next short time, I do think the demand for the high rig, for the high spec, leading-edge, long-reach pad walking rigs will stay strong. And I don't expect the rates to fall back much in a modestly constrained world. Now if we see commodity prices drop down below $40, well then we will have to have another conversation about models. But we saw prices drop into the low-40s, and there's really no pressure on pricing for leading-edge rigs, but there is a lot of pressure on performance. So the promise to perform is going to be honored with the rig maybe moved up. So again, performance becomes really, really important.

[John Watson:]

Great. And one last one on the C&P front. Can you talk us through some of the puts and takes to get back to EBIT profitability for that sub-segment? Is it as simple as industry-wide utilization going up leading to better pricing? Or are there some company-specific ways that Precision is pursuing to help lift margins?

[Carey Ford:]

I think on the company-specific ways, there's -- we've been undertaking that exercise for the past 18 months, reducing the cost structure in the business and making the business more scalable for higher activity levels. So you've seen that really come down, all of the short-term costs associated with making that transition in 2016 are paying benefits here in the second quarter and then the third and fourth quarter this year. So I think we've done that for sure. And then I think if you look at the potential for a bit of increased activity and better pricing in the back half of the year, we should be in that situation.

[Kevin Neveu:]

But I was pleased to see us remain cash flow positive in the seasonally slowest quarter.

[Carey Ford:]

Yes, a good point. One thing to remember, all of that business are -- or essentially, all the businesses in the Canadian market, where the second quarter is the lowest activity level for their entire year.

[Operator:]

Thank you. And our next question comes from the line of Jeff Jones with Globe and Mail. Your line is open. Please go ahead.

[Jeffrey Jones:]

My question is a little bit more high level for Kevin. I mean, given that the results are better than the consensus and you've made some strides in terms of efficiencies in your operations. I'm wondering where you see the disconnect between that and where the market is valuing the company?

[Kevin Neveu:]

Jeff, I think that all the volatility and commodity price has been tough for investors to understand the business on the short term. And I think the sense we have really for our customers is much more confident, and I just -- I think they -- our customers and their planning cycles are not necessarily based on the immediate short-term price of the oil commodity. But for investors, it's hard to find good core data. They don't see the same production numbers our customers see, and I think it's just really challenging period for investors, myself included in that. I'm a large investor in Precision, and it's been a challenging period to ride this storm out about commodity prices. But the fact is we've got commodity prices down, hovering close to $50 WTI. That will improve customer sentiment with time, and the things we're doing with technology and efficiency is delivering very good results for our customers and activity is relatively strong. So I think our outlook in the business is certainly very sensitive commodity price, but the trend the last few days seems to be improving. But we'll need to see more, I think more fundamental data on global supply, global demand to get more confidence in that before the market's going to react.

[Jeffrey Jones:]

Just as a follow-up on that then. I mean, among your customers, and I don't know specifically your customers, but certainly the E&P sector has started to announce the odd budget cut here and there, some of them larger than others and I wanted to know if that is something that is a major concern to you.

[Kevin Neveu:]

So we watch those very closely because obviously their spending directly relates to the type of activity they're going to have in the field, whether it's drilling rigs or service rigs. Watching it closely, kind of mindful of who's making the cuts, where they're making them, but we also speak with the drilling departments and understand what the bookings look like, and I've given some pretty good guidance on how we see activity trending over the next few quarters. So I think barring another downturn in commodity price. I mean, prices is getting below $42, below $40 for some sustained period of time. I think we're feeling much more confident about the business now than we might have been in the more volatile periods.

[Operator:]

And I'm showing no further questions at this time. And I would like to turn the conference back over to…

[Kevin Neveu:]

I see a question may have come up.

[Operator:]

We do. We do have another question from the line of Jeff Fetterly with Peters & Co. Your line is open. Please go ahead.

[Jeff Fetterly:]

A couple of random questions. On the ERP side, I know you mentioned, Carey, the improvement in efficiency within the organization, but how do you think about the return on that $19 million investment?

[Carey Ford:]

Yes, there's a couple different ways to think about it. Cost savings is one of them. Cost savings you can achieve over a number of years is one way to look at it. Other ways, making better business decisions going forward, a system that's easier for our employees to operate, an environment that is better to operate within are all things that point to it being a good business decision. But if you're looking for straight IRR, it's really a cost savings.

[Jeff Fetterly:]

And so you've talked in the past about the payback on the rig upgrades being targeted to two years or less. Should we be thinking about the ERP investment in a similar context?

[Carey Ford:]

Well, it's a different asset life. Our ERP system is -- the life of that could be 15 or 20 years. An upgrade, we're really trying to get an upgrade on a mud pump or walking system that might have a shorter useful life.

[Jeff Fetterly:]

Okay. And I guess last piece of it is just your priority of free cash flow generation on the $19 million increase in the near-term capital program. How do those two sort of weigh against each other decision-making wise?

[Kevin Neveu:]

Jeff, like virtually every decision we make every day right now around any spending decision, be it expense or capital versus holding cash in the balance sheet to offset debt. But we looked at the timing right now. We looked at the cost savings due to the competitive nature of the environment and just how slow the IT business is in Calgary right now. We felt that the combination of cost savings, timing, and resource capability inside Precision made it a very good time to do this. We're moving off of an SAP platform in Precision. It's more than 20 years old to the latest version of SAP, and we're synchronizing that with our rig automation project allows us to bring both of those systems in line at the same time and make sure the data flows through the system with a 2018 ERP system, not a 1992 ERP system. So the timing worked out quite well with both the cost of the system and with the implementation of new technology at the rig and the availability of resources both in Calgary and in Houston and inside our own company.

[Jeff Fetterly:]

Okay. Last question on the contract side. So it looks the term additions have been more biased to the 6-month range. Follow up to the question earlier, are you open to an 18- or 24-month structure? Or are you biasing towards the shorter-term commitments at this point?

[Kevin Neveu:]

So you can read a couple of things into that, probably we're pressing a higher price than our customers want to pay for a longer term, which might bias them back to a shorter term. And also, hear me loud and clear that if we can get north of $20,000 per day locked in for paid off rig or paid off investments, be it a rig that was upgraded and fully paid off or a rig that's brand new and fully paid off, I'm happy to lock in for longer terms on those rigs at day rates that are north of $20,000 for our deeper rigs and north of $17,500 for some of our shallower rigs. But probably the bias on the more recent signings has been our desire to see higher rates and quicker payouts on the investments.

[Operator:]

And now I'm showing no further questions, and I'd like to turn the conference back over to Kevin Neveu for closing remarks.

[Kevin Neveu:]

Great. Thank you for joining us on our second quarter conference call and look forward to telling you about our results on our third quarter call in late October. Thank you very much.

[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.