Precision Drilling Corporation
Q1 2016 Earnings Call Transcript

Published: 26 Apr 2016

[Operator:]

All participants, please stand by, your conference is ready to begin. Good afternoon, ladies and gentlemen, and welcome to the Precision Drilling Corporation 2016 First Quarter Conference Call and Webcast. I would now like to turn the meeting over to Mr. Saber Rad, Manager, Investor Relations and Business Development. Mr. Rad, please go ahead, sir.

[Saber Rad:]

Thank you and good afternoon everyone. Welcome to Precision Drilling Corporation's First Quarter 2016 Conference Call and webcast. Participating today on the call with me are Kevin Neveu, Chief Executive Officer; and Carey Ford, Senior Vice President and Chief Financial Officer. Through a news release earlier today, Precision Drilling Corporation reported its first quarter 2016 results. Please note that the 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 new 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 Ford will begin with a brief discussion of the first quarter operating results and financial overview. Kevin Neveu will then provide a business operations update and outlook. Carey, over to you.

[Carey Ford:]

Thank you, Saber. In addition to reviewing the first quarter results, I will provide an update on our 2016 capital plan and our liquidity position. First quarter adjusted EBITDA was 99 million, which is 39% lower than the first quarter of 2015. The decline in adjusted EBITDA from last year is the result of decreasing activity levels across all of our operating segments, offset primarily by one-time contract cancellation payments that brought 23 million forward from future 2016 periods into the first quarter. In Canada, drilling activity for Precision decreased 36% from Q1 2015, while margins were CAD944 per day higher than the prior year. The increase was primarily a result of approximately 4 million of contract cancellation payments relating to two rig contracts that would've been earned in future periods beyond Q1, 2016. Removing these contract cancellation payments would result in margins that were approximately CAD100 per day lower than last year. In the U.S., drilling activity for Precision decreased 60% from Q1 2015, while margins were US$4,181 higher than Q1 2015. The increase was primarily a result of approximately US$13 million of contract cancellation payments that would have been earned in future periods beyond Q1 2016. The payments related to the cancellation of three rig contracts, two of which were referenced on the last conference call. Removing these contract cancellation payments would result in margins that were approximately US$500 per day lower than last year. Internationally, drilling activity for Precision decreased 33% from Q1 2015. The decrease in activity was primarily the result of fewer days in Mexico. International average day rates were US$41,609, a decrease of US$1359 from the prior year. We now expect both the Kuwait new build rigs to begin working in the fourth quarter of 2016, one quarter earlier than expected. Today we have 13 rigs drilling or moving in Canada, 25 rigs drilling or moving in the U.S., with seven rigs receiving idle but contracted payments, and seven rigs active internationally. In our C&P division, adjusted EBITDA this quarter was negative 2.2 million, a 9 million decrease from the prior year. The decrease is a result of lower activity and lower pricing in all C&P business units. We incurred 1.4 million of restricting costs during the quarter as we continue to execute our strategy to right-size the business for the current activity environment, and create a well-serviced business with a more regionalized focus. Total restructuring costs for the corporation this quarter were approximately 3 million, bringing the total since the beginning of the downturn to 24 million. We expect the annual G&A and operating overhead savings from 2014 levels as a result of these restructuring initiatives to be over CAD120 million. As a reminder, a key component of our variable cost model is our ability to ramp down capital expenditures when industry activity declines. In the first quarter of 2016, our capital expenditures were 27 million, which compares to 226 million in the first quarter of 2015. For the full year 2016, we expect to spend 202 million, comprised of 158 million for expansion, 44 million for maintenance and infrastructure, and 2 million for upgrade. Substantially all of our expansion capital is for the two new build rigs for Kuwait, which will be fully paid for in 2016. We will announce our 2017 capital plan later in the year, but as of today, we have no expansion capital expenditures planned for 2017, as all of the 17 million of Kuwait planned spend has been brought into 2016. Our contract book continues to perform for Precision. For the quarter, we had an average of 68 rigs under contract. And as of April 25, 2016, we had an average of 59 contracts in hand for the second quarter, an average of 57 for the full year 2016 and an average of 31 for the full year 2017. We continued our process of net debt de-leveraging by increasing our cash balance by CAD32 million during the quarter, and repurchasing US$10 million of our senior notes in the open market. As of March 31, 2016, our long-term debt is approximately 2.1 billion and our net debt is approximately 1.6 billion. We had 476 million in cash on our balance sheet, and we have a US$550 million revolving credit facility that is undrawn with the exception of US$46 million in letters of credit. During the quarter, we reached an agreement with our bank group to amend our existing revolving credit facility. The facility itself matures in June, 2019, and the amendments are in place through the March 2018 recording period. The adjusted EBITDA to interest expense coverage ratio of 2

[Kevin Neveu:]

Good afternoon, and thank you, Carey. Congratulations. We're all pleased to see interim removed from your title. And clearly, it's been a very busy quarter for our finance team. Turning to operations; customer demand took yet another laid down during the first quarter of the year, with the WTI oil price falling into the 20's in the first weeks of 2016, customers in all markets responded by further trimming spending, reducing drilling plans and well servicing activities. I'd like to give some more color but the situation is rather black and white these days, and more black than white. The Canadian winter drilling season was the weakest in decades, and for an unprecedented second year in a row, Q1 winter drilling activity recorded a decline in the fourth quarter -- from the prior fourth quarter. For Precision, we ramped up to a rather anemic 62 rigs by mid-January, and then watched as activity slowly declined through the end of the first quarter to the 13 rigs we have running today. Fortunately for Precision, our presence in the Canadian Deep Gas Basin with both contracted and un-contracted super-triple pad rigs provided a solid base of revenue and strong cash flow during this period of severely depressed customer demand. We have experienced two Canadian contract cancellations, as Carey mentioned, for rigs drilling in the Cardium play, and I suppose this should not be a surprise as the Cardium remains challenged by the very low commodity prices. Both contracts were set to expire later this year, and this just brings forward current year cash flow into the first quarter. In the U.S., the picture is not much better. We began the year with 42 rigs running, but experienced three cancellations, and have seven others idle but contracted as we finish the quarter with 24 rigs running. The near-term outlook with just the U.S. rig count has not yet bottomed, and while the activity declines have slowed, the current commodity prices are just too low to fully stabilize rig activities at these levels. Including the five contract terminations during the first quarter, we have experienced a total of nine contract terminations since the beginning of this downturn in late 2014. Carey mentioned that we still have 57 rig years on average contracted in 2016 and 31 pushing into 2017, and we believe these contracts will continue to perform as all have over the part several quarters. Now, turning to day rates for a moment; day rates for Precision's uncontracted rigs are over a wide range depending on the rig type and location. We've seen some day rates dipping slightly below the mid-teens in West Texas, a. b. lower still in Southern Saskatchewan, where rig-on-rig competition for those, typically shallower rigs is ramping. However, we still have several super triple rigs working uncontracted earning day rates in the upper teens and even more 20s, particularly in those regions who have had super triples, remain a relatively tight supply. We believe that until customer demand settles and stabilizes, no meaningful spot market will be established, and the off-quoted discussed anecdotal spot market day rates are interesting, but not particularly meaningful. Now, more importantly, in an improving or rebounding market, we know that the best performing rigs of the prior cycle will be the first to go back to work. At Precision, we have over 140 new build rigs, that all worked under long-term customer contracts that performed extremely well for those clients as recently as late 2014 and early 2015. Those rigs will be in short supply when the rebound emerges. I'll discuss our thoughts on the potential rebound in a few moments. Turning to Precision's international activity, this also experienced a slowing in most regions, except Kuwait and Saudi Arabia. Fortunately, supply chain lead times have improved; we've been able to bring forward the delivery and commissioning of the two new build rigs for Kuwait from Q1 2017 to mid Q4 2016. We now expect to be running five rigs in Kuwait for the full year of 2017. We know our customer will be pleased to see these rigs starting early. Now remember, the long duration of these contracts means that these new rigs that we will commission in late 2016 will still be under their initial contract at the end of 2021. Customer expectations for high-performance rigs supported by long stable contracts is a mix, the Kuwait market is a key target and attractive for Precision. We expect our IPM work in Mexico may continue to slow midyear, as IPM service providers deal with the local uncertainty. I believe an improvement is possible during the year in the Mexican market. We also expect that our rigs in Kurdistan are going to remain idle until late 2016, but we do see potential for some reactivations late in Q4. Certainly, all eight idle international rigs could quickly be reactivated as commodity prices and customer demand improves similarly we expect. Nonetheless, Precision's international focus has provided a solid level of revenue and cash flow diversification as North America continues to struggle, and we will continue to look for opportunities to further grow and enhance some important aspect of our strategy. Now turning back to North America, our well service business, our camp business and our rentals businesses, all experienced a severely challenged first quarter. Deeply depressed customer spending and the low drilling activity environment is particularly challenging for these uncontracted service lines. The service rates and pricing for whole of these service lines are well below sustainable levels. While the returns for Precision are unsatisfactory, we certainly have the scale to sustain capabilities to the downturn. However, I'm very concerned that this sector of the industry has many of the earmarks we saw in 1982 Canadian downturn, which saw oversupply and financial distress widely experienced across the full spectrum of well service and equivalently rental lines, this outlook is very concerning. So looking forward, Precision Drilling remains focused on our three stated 2016 priorities, and that is sustaining our liquidity, as Carey discussed, sustaining our high-performance competitive advantage, and turning our minds to potential drilling rebound. Regarding our liquidity, I know every employee at Precision is focused on cash generation, eliminating waste, reducing expense and reducing spending. During the first quarter, the hard work by our employees paid off and we increased our cash balance to 476 million. This remains a key focus for the downturn, well into the next rebound, no matter how long it takes. Very importantly, during the quarter, our finance team negotiated further relaxation of certain bank lender covenants, which will ensure we sustained full revolver access as market conditions continue to deteriorate. And as Carey mentioned, we believe it's very important to stay well in front of potential liquidity limits as we have in the. So regarding sustaining our high-performance competitive advantage, this is critical Precision, and this means that we'll continue the spending to maintain and support our operating rigs, but we're not cannibalizing or borrowing parts or equipments from idle stacked assets. But it also means we continue to support and train our field personnel, and we continue to insist on premium performance in all aspects of our operation. During the first quarter, we began field trials with our new fully-paperless rig operating system. This trial was run on 12 rigs, where they expect the paperless processes we are trialing will further unburden our drillers and rig managers. Ultimately this will lower administration cost, improve information flow, and furthers our scale advantage. During the first quarter we also began the introduction of our new global HSC and field operating system, which consolidates more than six separate field management systems, and four separate field manuals. It's one fully integrated rig HSC operating process management system. And again, this is designed to further improve information flow, support the field operations, ensure procedure integrity, field safety, and performance consistency, all aimed at lowering cost and leveraging Precision's scale. So I mentioned these details to let you know that, at Precision, we're not just cutting cost or reducing headcount to survive. In fact, we are using this downturn to double down and reinforce or quality, safety, and business operating systems. We continue to invest to widen our high performance capability and leverage our scale at the rig level. Ultimately, we expect to continue to strengthen our competitive advantage as we continue to demonstrate high performance excellence to our customers. And this leads to our final priority, which is preparing for the eventual rebound; while there are no signs or early indicators of a rebound, [indiscernible] elusive. We believe it is critically important to be well-positioned to capture the full value for our investors when the rebound arrives. Our focus has turned to ensuring our idle rigs are ready to mobilize, and that we have the bench strength and call-up personnel to staff those rigs. And finally ensure we have ample liquidity to fund the rebounding business activity level. Precision's idle rigs have been stacked, stored, and protected in a fully function-ready state. And these rigs can be reactivated with virtually zero capital spending, and only a small amount of operating expense. At Precision, we have also sustained the leadership depth to provide rig managers and drillers for our full fleet of 238 Tier 1 rigs. And we actively manage, and keep current our employee call-up list to ensure we have field crew availability to provide the balance of the rig crew; it will likely be a tight labor environment. We also expect that in a rebounding market our customers will call back the rigs that performed in the top quartile from a drilling performance, mobility, and safety perspective. And we know that virtually all of Precision's new rigs delivered over the past few years deliver that high performance our customers expect. Precision will not be caught out either due to inadequate rig maintenance or crew challenges during a rebounding market. Rest assured, preparing for a rebound will be the most important pivot we execute this year. So once again, I thank the employees of Precision for their hard work and dedication during a very challenging quarter. And on that note, I'll turn the call back to the operator for questions.

[Operator:]

Thank you. We will now take questions from the telephone lines. [Operator Instructions] The first question is from Scott Treadwell from TD Securities. Please go ahead.

[Scott Treadwell:]

Thanks, afternoon to all. I wanted to just maybe flush out a couple of things you talked about. First, on the rig terminations, you specified the Canadian ones were all 2016 revenue, is that the case across all five that you haven't brought anything forward from 2017?

[Carey Ford:]

Yes, Scott. All five of them are 2016 revenue that we're bringing forward.

[Scott Treadwell:]

Perfect. That was easy. Always give you an easy one to start off.

[Carey Ford:]

Thanks, Scott, appreciate that.

[Scott Treadwell:]

Second on depreciation, it was a pretty meaningful drop quarter-to-quarter. Obviously the activity was with it. I'm just -- want to make sure that that level of depreciation is -- there's nothing noisy going on behind that scenes that in terms of activity and depreciation going forward? That's a decent run rate?

[Carey Ford:]

Yes, Scott. So the two things that impacted the depreciation expense for the quarter that made it lower than what we guided to were the exchange rates. So as the Canadian dollar got stronger, we had a lower U.S. depreciation impact. And then also the decommissioning and impairments that we enacted at the end of 2015 had a little bit different impact than what we're expecting.

[Scott Treadwell:]

Okay, perfect. And I think that's probably the answer to the next one. Accounts receivable dropped pretty meaningfully, was there an FX component there as well, or was that something you alluded to in terms of cash generation?

[Carey Ford:]

Yes. And there's probably a little bit of an FX component there.

[Scott Treadwell:]

Okay. Capital spares, I know you guys have talked in the past about low cost for some capital spares, and now you're turning your eyes to potential uptick. Just as you look at what's in on the shelf today, you guided to not having to have a lot of capital, is that sort of something you would expect in the first three to six months, that you can restock that inventory without meaningfully expanding CapEx?

[Kevin Neveu:]

So, Scott, I think we're very carefully managing both our inventories and our capital inventories down in this downturn to ensure that we don't unnecessarily put more cash out, but we are seeing opportunities to selectively take advantage of the downturn. And later this year, maybe even in the second quarter, we could exercise and use a bit of our balance sheet to capture some very good vendor discounts, but it will be a tactical move, not anything that moves the needle on the balance sheet. But I think our inventories right now are adequate for today's operation, and even through the first several quarters of a downturn we wouldn't need to see a substantial increase in inventories.

[Scott Treadwell:]

Okay, good. Last one for me, you've referenced relatively low OpEx to get rigs back to work. I'm assuming you expect all that to be able to be handled in-house absent a massive hockey-stick-type balance in activity?

[Kevin Neveu:]

Yes, absolutely handled in-house, and really trying to guide the market to realize that the rigs restored, ready to go back to work. So there really is not a big increase in spending to get those rigs fired back up again. We're trying to give a good sense of that. We're still maybe several quarters away from a rebound, but those rigs are sealed up and locked up and ready to go back to work.

[Scott Treadwell:]

Okay, perfect. That's all I have got, guys. I really appreciate the color. Thanks.

[Kevin Neveu:]

Thanks.

[Carey Ford:]

Thanks, Scott.

[Operator:]

Thank you. The following question is from John Daniel from Simmons & Company. Please go ahead.

[John Daniel:]

Hey, guys, thank you, and congrats Carey on [technical difficulty]. Kevin, you noted a wide range in terms of the spot market pricing, I know you generally don't like to comment on it, so thank you for the specifics. I think you mentioned that Permian is receiving rates below the mid teens. Assuming that you've got some of those rigs and are receiving those rates, can you describe for us what type of rig is getting that price, Tier 1 versus Tier 2, walking versus non-walking, just incremental color there would be appreciated?

[Kevin Neveu:]

John, there are so few opportunities to bid on right now that it just doesn't behoove us to give any more detail or color. There could be one tender come up this week that two, or three, or four of us might be participating on. I really don't want to get into details at this point.

[Carey Ford:]

Yes, I would make the point though, John, that all of the rigs that we have running today are Tier 1 rigs, since we have just a few Tier 2 rigs left.

[John Daniel:]

Okay. I'm just trying to differentiate, because you did mention the super-triples are getting still a higher quality rate. That's…

[Kevin Neveu:]

Actually, the point is, John, that we're actually seeing a range of day rates, literally from just below mid-teens to actually just above low-20s right now for our super-triple high-spec rigs, and it really depends on regional dislocations for supply, and vendor preference, customer preference, a lot of variables go in. And we just believe firmly that it's just too early yet to set an expectation for a spot market.

[John Daniel:]

Fair enough. I'll throw one more out and then get back in the queue, but we often hear E&P companies talking about their desire to drill best-in-class projects first even during downturns, and assuming that's the case and we begin the recovery process, and E&P companies start having to drill lower quality prospects, if you will, do they necessarily need that best-in-class rig, or will we see maybe some of the lesser rigs come into the workforce, any thoughts there?

[Kevin Neveu:]

John, the way I think we should think about the rebound is, that capital is going to move back into the space and the E&P space. I think the first bit of capital will go to expand development drilling. But then, following that, more capital will be used to explore and de-risk unconventionals, but I think that the first capital that comes back in is additional development drilling, which likely lends itself to just the most efficient high-spec pad-capable best rigs. For development drilling, I don't think Tier 1 rigs see competition for anything but Tier 1 rigs, and frankly, pad walking, pad-capable rigs that have walking systems integrated likely garner the best day rates in a rebounding market, particularly for development drilling. As we move away from development drilling to more de-risking and more science work to find the best completion for a given play, I think rig spec may have some more room for variability in those areas.

[John Daniel:]

Okay. And you mentioned the possible tender coming up. Without getting too specific on that, I'm assuming they're looking for the best-in-class rigs?

[Kevin Neveu:]

Which tender did I mention? I'm trying to recall the comments.

[John Daniel:]

I think you said you're getting ready to bid on something in the Permian with potentially three or four other bidders.

[Kevin Neveu:]

No, no. I said that if any given opportunity that pops up, there could be one this week, who knows. It was more of an anecdotal example.

[John Daniel:]

All right, fair enough. Thanks guys.

[Kevin Neveu:]

Thanks, John.

[Operator:]

Thank you. The following question is from Jon Morrison from CIBC World Markets. Please go ahead.

[Jon Morrison:]

Good morning all. Congrats, Carey.

[Carey Ford:]

Thanks, Jon.

[Kevin Neveu:]

Thanks, Jon.

[Jon Morrison:]

Can you give a little more color on the number of producers that were included in the rig cancellations, and then any additional details on where they were working from a geographic standpoint?

[Kevin Neveu:]

I don't have it in my fingertips right now. But it was one producer in Canada, and it was two separate producers in the U.S.

[Jon Morrison:]

Okay. Kevin, you made some fairly bearish comments about what the well servicing segment was going to look like over the coming period, given what we've seen in pricing activity levels and margins. Is there any reason why you're making more pointed comments this quarter versus the last year? And as you think about pricing, has it been pushed down by the usual suspects, are you seeing a step change in, call it, pricing across the competitive landscape in the last three to six months?

[Kevin Neveu:]

Jon, first of all, remember that most of our well servicing activity, just for clarity for those in the line, is generally conventional pulling rigs, and that could be for just simple raw jobs or tubing/pulling work. And that business seems a bit under pressure now for a few -- for several quarters in a row, even predating the downturn. We have a small component of coil work, which is seeing far less pressure, but on that conventional well service work, this has been a very, very tough first quarter; clearly very little [indiscernible] work going on. That's being pushed well down the road. Not a lot of completions work going on. It's a tough market. It's still highly fractured. While there may or may not be one or two companies that disappear, the assets still hang around. And structurally, this is looking a lot like the drilling business did back in the early '80s, when there was huge oversupply of rigs. And even though some companies don't survive, the rigs still seem to survive and overweight the market. And this market, the well service market has much of that look to it today. So clearly consolidation is going to be important over time, but also reducing the asset count is going to be important.

[Jon Morrison:]

Okay. Can you give any more color on what was the growth driver behind the turnkey revenue's quarter? I guess it goes somewhat counterintuitive to what I would think would traditionally go on in this type of a market?

[Kevin Neveu:]

Yes, so I would think about it more along the lines of on a relative basis. So turnkey revenue actually decreased from Q1 of 2015, but as a percentage of overall days it was a higher percentage. So when you start looking at day rates and operating costs it had a bigger impact this quarter than last year.

[Jon Morrison:]

Okay. Carey, can you give any more color on the small bond repurchase that you made in the quarter? And whether we should be thinking about the liquidity on the balance sheet possibly going back towards these opportunities if you get back to pricing levels that we say in mid-February for bond pricing in your company?

[Carey Ford:]

Yes, Jon, I'll go back to -- on my opening comments. Our liquidity position remains the most important thing. And with the bond repurchase, we monitor our bond pricing all the time. And we're noticing pretty significant discounts in the quarter. And we weren't quite sure if those were real, if we could actually realize those prices. So we wanted to test the market. We put the mechanism in place to see if we could repurchase some bonds in small dollar amounts at pretty significant discount. And we were able to execute a few trades. But then the market ran away from us. So since we made our trades, our bonds, that particular tranche is up about 35%. So the discounts -- as you've mentioned, the discounts aren't quite there to make it worth parting with our liquidity.

[Jon Morrison:]

Okay. Kevin, for any rigs that you have coming off a contract and a customer elects to keep it working at this stage, are those essentially moving towards a well-by-well contract or is there any incremental visibility or term being given by those customers that want those rigs working right now?

[Kevin Neveu:]

I would say probably there is no pattern or trend right now. One or two customers might want to lock their rig in for a little longer, if they can get it as some depressed rate, but I don't think there's a trend emerging yet that we can draw conclusions from, Jon. And Canada remains particularly cloudy in the back half of the year. I mean, we are really sensitive, here in Canada, both oil and gas commodity prices for cash flows to our customers. Hence tough to get a good sense of visibility for the back half of the year. In the U.S., again, at today's commodity price, well, I think some of the near-term fear has kind of moved away. We're just not seeing a lot of desire by customers to walk in at any price for any period of time. So I think those kind of normal indications we see of bottoming market really haven't emerged yet.

[Jon Morrison:]

Okay. Does the headwinds in Mexico make you contemplate pulling assets out of that country, or ultimately there's nowhere else for them to go to work? So you'll just see how the market matures and unfolds in the next 12 to 18 months?

[Kevin Neveu:]

Well, the short answer is, no. It doesn't see us pulling out of Mexico. We've gotten that operation running really well for us, in fact, it kind of runs as an extension of South Texas. The rigs are some of our big, deep rigs that were designed for the deep vertical place. They're working well in Mexico, both for some vertical and directional work. We can ramp the support cost up and down with activity. So whether it's one rig or five rigs, it's actually working pretty well for us. And the customers we're working for down there appreciate the safety, the performance we generate. So whether it's one rig, or three, or four, or five rigs running, it's working well for us, I think we'll just keep it in place.

[Jon Morrison:]

Okay. Last one just for me, just a point of clarification. When do you expect the Kuwaiti rigs to actually be in country and generating revenue at this point?

[Kevin Neveu:]

They should be in the country at the end of the third quarter, early fourth quarter, and generating revenue sort of late-October-November for the first rig, and then maybe as early as November-December for the second rig. They should be running smoothly by the end of Q4.

[Jon Morrison:]

Okay, perfect. Appreciate the clarity. Thanks. I'll turn you back.

[Kevin Neveu:]

Thanks, Jon.

[Operator:]

Thank you. The next question is from Jim Wicklund from Credit Suisse. Please go ahead.

[Jake Markham:]

Hi guys, this is Jake on for Jim.

[Kevin Neveu:]

Hi, Jake.

[Jake Markham:]

Hi guys. First question, I was wondering if you could just provide some color around how quickly, and to what magnitude you can scale up. You you've talked about getting ready for the turn. I'm not sure how you would put it in context, but maybe how many rigs you could add in a quarter or whatever way you guys have been looking at it.

[Kevin Neveu:]

Sure. The short answer is that ramping up quickly in Canada is first nature to Precision. I mean the first nature to most Canadian drillers for that matter. In fact, the industry in Canada is used to ramping up from very low utilization levels at the end of the year to almost fully utilized by mid-winter in just a few weeks. So, factually, in Canada, if called upon, we could ramp up 60-80-100 rigs in a few weeks. We have -- it ends up being our bench strength for our rig managers and drillers, and our call-up lists for our rig crews, but I don't expect that in any kind of Canadian ramp up we'd be limited, on the Precision side, to meeting customer demand, because we've just gotten so many years of doing it every single season. And while some people have left, we've kept our call-up lists alive so we know the next people to draw down to. So in the U.S., it could be a little bit slower. But we think, in the U.S., we can ramp up rigs again at a pretty good pace using the same operating model we run in Canada. But getting anywhere from three to five rigs per week ramp back up, depending on truck availability and things like that, we think we can manage the crews, and the rig mobility, and the equipment for those rigs pretty quickly. So again, I don't think in any reasonable upturn scenario that we're going to miss out or be in a situation where a customer wants a PD rig, and we can't support that with a fully rehired crew, and a rig that can go back to work.

[Jake Markham:]

Okay, great. And just a follow-up on that, do you think the magnitude and duration of the downturn has impaired your ability to ramp up in Canada? So, I understand you would ramp up 60-80 rigs in a few weeks in a normal season. But having operated at a much lower level for the past year-plus, do you think that's impaired that ability to ramp up at all or no effect?

[Kevin Neveu:]

Yes. No question it'll be a tougher challenge for the industry. We've worked very hard to keep our drillers and rig managers. That's the key positions on the rig. Those guys frankly probably are still working on Precision rigs right now or maybe taking time off for the spring breakup. But I can tell you that we are certain we have the leadership teams for our Canadian rigs. No question there, but staffing the balance of the rig crew, probably a little tougher now than previous cycles. But I feel confident our guys have that challenge well-understood.

[Jake Markham:]

Okay, great. And a second question if I could; I was just wondering the nature of your conversations with customers changed since getting past the oil price bottom in mid-February and it seems like sort of been stabilizing a little bit here. Have the conversations that you're having on a day-to-day basis with your clients changed at all? And if so, how would you characterize that?

[Kevin Neveu:]

The simple answer is, no, they really haven't changed yet, and we're reflecting the change. I would tell you though that when the prices dipped into the 20s for a while there, I think many of our customers just didn't know what to say, didn't what to answer, some may have had their own job security concerns arranging in their minds. I think some of that's kind of pushed to the wayside now, and I think our customers are talking to us again and are able to plan at least the current wells that they're drilling, but no, as far as kind of future improvement we have seen no change in customer sentiment yet. They're thinking about what happens if oil prices go up, and they're thinking about how they might respond, but that doesn't lead into any change in conversation with us.

[Jake Markham:]

Okay, got it. Thanks for the color, guys.

[Kevin Neveu:]

Thank you.

[Operator:]

Thank you. The following question is from Dan MacDonald from RBC Capital Markets. Please go ahead.

[Dan MacDonald:]

Hi, good afternoon. Just one question, Kevin, looking at your international operations, given some of the commentary that some of the international market, particularly in the Middle East and their ability to add even more barrels, have you seen any changes in indications to the positive from any of their markets over there that you operate in as of late?

[Kevin Neveu:]

Honestly, no changes to the positive. Again, our customers are postulating what they might do if oil prices get back over 50, but in today's environment, the fact we've seen -- we have probably seen some things continue to re-bid or pushed down the road a little bit, maybe a few more qualification steps, or few more clarifications. So, nothing is moving closer to the finish line, but the bid activity remains healthy, and we're bidding all around the Gulf region right now. We are in conversations with customers on kind of every corner of the Gulf region save those we can't or aren't allowed to go to, but lots of activity, lots of discussions ongoing, but nothing moving closer to finish line yet. And I think these commodity prices in the first quarter paused any potential growth.

[Dan MacDonald:]

Okay. Thanks, Kevin.

[Kevin Neveu:]

Okay. Thanks, Dan.

[Operator:]

Thank you. The following question is from Sean Meakim from JPMorgan. Please go ahead.

[Sean Meakim:]

Hey, guys.

[Kevin Neveu:]

Hey, Sean.

[Sean Meakim:]

Kevin, just the deep gas markets held up pretty nicely for you, it doesn't seem like there is much that can change on the supply side, but I'm just curious if there has been any shift in tone from your customers in that type of activity?

[Kevin Neveu:]

Well, there has been some shifts, but not all are encouraging. One of our customers at the potential LNG customers talked about reducing rig counts in the second half of the year, and that's certainly on the horizon for the back half of 2016. But yet others that are really focused on the liquids components are doing quite well and we may continue to see strong activity and maybe a couple of additional activations in the third quarter for customers focused on liquid deliverables component in that play. So the Canadian deep basin has lot of similarities geologically with the Eagle Ford and there is a dry gas region, there is a wet gas region, there is actually oil region, and it's the wet gas region that's drawing the most attention right now. And those liquids are being used as [indiscernible] for heavy oil, and while future investments in heavy oil are certainly going to be paused by these commodity prices, the current projects have an increasing demand for liquids over the next four years. So there is a good core driver in place, probably for the balance of the decade for most of that deep basin liquids play.

[Sean Meakim:]

Got it, and that makes sense, thank you. And then, speaking with Canada, you got a pretty early spring breakup; I imagine there is not of incentive to start early, are you getting any sense of activity coming out of the breakup, or do we need to wait another month or so before we start to get better idea?

[Kevin Neveu:]

Well, we're getting some sense right now. It's not encouraging. Just not good enough clarity if we give any really good information to you right now, but it will be a tough Q3 unless we see commodity prices, both natural gas and oil prices peak up a little bit, and give our customers better cash flows to work with. There clearly is like in the U.S. there has been some equity financings of Canadian -- E&P companies are seeing the same thing happening in the U.S. Certainly, larger equity financings in the U.S., but this capital generally is going to just tighten up balance sheet, less of its going back to the drill bit. But I think we're going to need to see some more capital move into the drilling space either through cash flow or capital generation before we get better sense of latter part of the tree of the year. Certainly, if you talk to our customers, they're kind of leaning finance to late 2016 when they're expecting commodity prices we have a bit more strength than they are today.

[Sean Meakim:]

Understood. Okay, fair enough. Thank you.

[Kevin Neveu:]

Thanks a lot.

[Operator:]

Thank you. The following question is from Ian Gillies from First Energy. Please go ahead.

[Ian Gillies:]

How are you doing, guys?

[Kevin Neveu:]

Fine. Hi, Ian.

[Ian Gillies:]

Do you have any sense for the contractor rolling off the remainder of the year of what rigs will go back to work for those customers, I guess on the spot market and what will be docked at this point, or is still too early to say?

[Kevin Neveu:]

Well, it's really a bit too early to say, I mean, I don't think our customers have much beyond a few weeks right now, [indiscernible] certainty level. So I think if you get closer to those contracts rolling up, we will get a sense from the customers whether or not they will re-up their rig at some negotiated rate. What we typically find by the way is if a customer desires to keep one of our rigs when it rolls off contract, the spot market rate is usually not that relevant. The rigs have been performing well. They need to keep the rig running. It's a point-to-point negotiation, and I would say spot market rates are relevant, but they're usually far or less relevant, and that a new opportunity popping up or somebody hasn't used Precision in the past.

[Ian Gillies:]

Okay. Perhaps maybe thinking of it in a different way, I mean we can back into what spot activity was in Q1, and do you think -- do you think like it's better or worse in the back half of the year, I guess, at this point?

[Kevin Neveu:]

Well, it probably gets a little better in the summer and fall, because unless commodity prices dip back down in the 20s, our customers should see better cash flow.

[Ian Gillies:]

Okay. That's helpful.

[Kevin Neveu:]

So, I think Q1 was really hammered by a negative, and frankly, surprising commodity prices for our customers in the early part of the year, and so, on that alone there is probably a likelihood of that we will see a little stronger uncontracted market in Q3 and Q4 than we saw in Q1.

[Ian Gillies:]

Okay. Sorry, excuse me. Last one…

[Kevin Neveu:]

Good question though, I think I didn't do a very good job explaining in my prepared comments. Thank you.

[Ian Gillies:]

And then the last one on the idle but contracted rigs, any revenue -- yes, you said there were seven in the quarter, are you able to provide, I guess, any detail on how that rig count…

[Kevin Neveu:]

Actually we ended the quarter with seven. I really don't have a profile for the average number during the quarter.

[Ian Gillies:]

And how many…

[Kevin Neveu:]

I think we started with three or four, and then by the end of the quarter we have done seven, but I don't think that can give you any kind of average count through the quarter.

[Ian Gillies:]

Okay. And no sense for the remainder of the year?

[Kevin Neveu:]

It varies. It varies almost week-to-week or day-to-day sometimes where a rig might get pulled back up again, or protect down, so, no sense.

[Ian Gillies:]

Okay…

[Kevin Neveu:]

I use the term black, and I shouldn't say cloudy.

[Ian Gillies:]

Yes, yes. Fair enough. I think they're all there right now, but anyway thanks for the color. I will turn back over, guys.

[Operator:]

Thank you. The following question is from Mark Bianchi from Cowen. Please go ahead.

[Mark Bianchi:]

Hey, Kevin, I was hoping you could -- you have a few moving parts here it seems like in first quarter for U.S. sort of revenue per day and also cost per day. Rigs that were early terminated, wondering if those are assuming there's negative mix impact to your revenue per day there, and then also the comments you made about sort of the spot or shorter term contracts kind of being at those really low levels. Just sort of wondering as you roll into second quarter, are there sort of additional downside we should be expecting on the day rate side just as a result of those kind of comments that you made already?

[Carey Ford:]

Yes, so -- Mark, this is Carey. I think it's hard to predict what the day rates are going to be, because we do have such a strong contract position, and those rigs that are working on contract are earning top of the market day rates. We also have the idle but contracted rigs that influenced day rates. So, to the extent that we have -- still have six or seven or eight idle but contracted rigs in Q2, it will have a bigger impact than the idle but contracted payments did in Q1. So -- and you are right, there are a few moving parts, but most of those are out of our control.

[Mark Bianchi:]

Okay, got it. And then on the cost side, it seem like cost per day increased pretty significantly, and you mentioned sort of the fixed cost absorption there, but is there anything else that we should be aware of that might have been one-time or any to keep in mind as you roll through to second quarter?

[Carey Ford:]

Yes, sure. So the big thing in the U.S. would have been the impact of turnkey. So if we think about the turnkey projects been very high day rates and very high daily operating cost, when there is a larger impact from turnkey, it's going to influence both of those. And from the OpEx side, that was about $1800 a day higher due to turnkey activity.

[Mark Bianchi:]

Okay. That's helpful, Carey. Thanks. And I guess just thinking about that turnkey into the second quarter, is that going to be at a similar level, or do you have any visibility to that?

[Carey Ford:]

No. I mean, the other nuance of the turnkey business is it's lumpy. We had about one rig working on average on turnkey project during Q1, and I think that's probably a good estimate as any for the rest of the year.

[Mark Bianchi:]

Got it, okay. Just one more on the turnkey, you mentioned that the cost was $1800 higher, but if I look at it overall in the margins, would you say that it was a net neutral on the margin?

[Carey Ford:]

I think that's fair, yes. That's probably fair.

[Mark Bianchi:]

Okay, great. Thanks. I will turn it back.

[Carey Ford:]

Thanks, Mark.

[Operator:]

Thank you. The following question is from Brad Handler from Jefferies. Please go ahead.

[Brad Handler:]

Thanks, guys. Carey, let me offer my congratulations as well, I think I will hop back, because Mark asked exactly what I was hoping to get out with both questions. So I'm going to turn it back. Thank you.

[Kevin Neveu:]

Okay. Thanks, Brad.

[Operator:]

Thank you. The following question is from Jeff Fetterly from Peters & Company. Please go ahead.

[Jeff Fetterly:]

Good afternoon, guys. Three different questions…

[Kevin Neveu:]

Hi, Jeff.

[Jeff Fetterly:]

First off, in the release you talked about how 65% of utilization days in the U.S. were from rigs under contract, and 44% Canada; when you think about the second half of the year, what do you expect the ratios to look like over those two quarters?

[Kevin Neveu:]

It's fairly discrete forward guidance, Jeff, which we usually don't give a lot of forward guidance. I think it's probably reasonable to expect those kind of ratios don't change a whole lot. I'm just thinking back to the Q1 being so heavily affected on the non-contracted side by the low commodity price. I mean, you could see uncontracted rig activity pick up a little bit just based on that in the second half of the year.

[Jeff Fetterly:]

I think you commented a few minutes ago about the potential to see more spot-based activity in the second half of the year…

[Kevin Neveu:]

Yes. We are trying to forecast too much forward in that front, but just thinking about what happened in the first quarter with commodity prices, it would not be unreasonable to think you could see more spot-based activity in the second half of the year with prices now north of 40 at least hopefully staying there today.

[Jeff Fetterly:]

Okay. On the rig…

[Kevin Neveu:]

I don't want to sound too bearish. Just as the visibility right now, it's very had to glean into Q3 and Q4.

[Jeff Fetterly:]

Yes, I understand. On the terminations in the U.S., could you give us a sense of geography for those three rigs? Two or three rigs in Texas, I think, or…

[Kevin Neveu:]

Yes, I think it would be Texas and Colorado.

[Jeff Fetterly:]

Okay. Texas and Colorado, okay. And then lastly, capital allocation, so Kevin you commented earlier about evaluating, making -- I'd call it a strategic purchase on the inventory on your capital equipment side, what are you looking for in the market, or what do you need to see to be comfortable to make those decisions, either from your suppliers or in the demand side?

[Kevin Neveu:]

We're seeing opportunities to buy things at substantial cash discounts right now, and frankly, whether it's engines, pumps, [indiscernible] drives or mud -- or drill pipe, if we can find a way to make investments -- some small investments -- some parts or assets that have no declining value withdrawn and likely those get used up in the period of 2017, we might do it a bit in advance. I don't think it's going to change our cash balance in any meaningful way. You're not going to use it up or rake $10 million or $20 million and use it by inventory at this point in time.

[Jeff Fetterly:]

How do you think about doing something like that versus repurchasing incremental debt…

[Kevin Neveu:]

Like every investment we make with cash, we look at the investment value and liquidity that we're giving up in the cost of liquidity replacing net cash value. My comment really was based on -- we're seeing opportunities, it's probably too early to pull any triggers right now, but I think there will be things through the year that we will see due to stress in the supply chain, due to vendors running for any cleared inventory, but maybe later in the year, maybe even in early stages of rebound we can capitalize quickly with our liquidity, and save some cash cost in the rebounding market.

[Jeff Fetterly:]

And that's something you would likely prioritize ahead of de-leveraging the balance sheet through those repurchases?

[Kevin Neveu:]

Our top priority is de-leveraging. Absolute top priority, in fact I can tell you that nothing weighs us more heavily than making sure we understand our balance sheet and how we manage it, today, tomorrow, or the next three, four and five years.

[Jeff Fetterly:]

Great. Thanks for the color.

[Kevin Neveu:]

Thanks, Jeff.

[Operator:]

Thank you. [Operator Instructions] The next question is from John Daniel with Simmons & Company. Please go ahead.

[John Daniel:]

Hi, thanks for letting me back in. And Carey, if you'd answered this already, my apologies, but just a real quick modeling question; given the lower work in rig count in Q2 for both Canada and U.S., shall we then see operating cost per day go up just given cost spread out of fewer rigs?

[Carey Ford:]

In general, you're correct. We have had some overhead reductions. As I mentioned earlier, we've had some weight reductions in our Canadian operations, but yes, there are fixed cost that will be spread over activity days if that's what you're modeling, but I also remind you that typically in Q2 we have larger rigs working and we have a bit more operating cost on a daily basis to that region too in Q2 in Canada.

[John Daniel:]

And then conversely on the revenue per day, there is only -- those higher just given the better mix of contracted rigs?

[Carey Ford:]

Yes, it will depend what the total activity level is, but yes, in Canada for sure you'd have almost all of your rigs being under contract.

[John Daniel:]

Okay, thanks. Kevin, just sort of a big picture question for you, but we -- as you go through updates, you talk to companies, you know, a message that has put a pounded home to us is that service companies won't seek to deploy idle equipment until pricing moves higher. So first, I guess, is that your view? And if so, during the early part of recovery, would you be willing to lose market share in order to hold off higher pricing if some of your peers elected to focus on market share, just how will you approach that?

[Kevin Neveu:]

I think I was always trying to say earlier how the rebound looks in our minds. We're shifting to better capitalized customers, probably start rebounding before the weaker capitalized customers, and those that have excess capital did get back into joint programs. We think we're pretty well-positioned with those companies. My guess is that we participate with the rebounds early, early on, but it's also likely that we're doing with customers who have used our rigs recently, and they want those rigs back. So we're thinking that there is probably a little less rig on rig competitions during the early stages of a rebound and that may come in more mid-rebound than early rebound.

[John Daniel:]

Okay. If you are rolling with that assumption and it was more, say, some of the more nimble customers that are just well-to-well type players, smaller E&Ps, they came back first, would your answer change?

[Kevin Neveu:]

We probably would be anxious to put rigs back to work in a rebounding market. I wouldn't want to walk in that low day rates would extend the period, that's for sure. So if we are putting rig back to work at mid to upper teens, I probably don't want to do your contract and probably look at something much shorter.

[John Daniel:]

Okay, fair enough. Thanks, guys.

[Kevin Neveu:]

Thank you, John.

[Operator:]

Thank you. There are no further questions registered at this time. Please go ahead.

[Kevin Neveu:]

All right. So I want to just add a couple of comments at the end, which is a bit unusual for us, but number one, while we have limited visibility on additional work during the third and fourth quarter of this year, we have a strong contract with the remaining place. We have a strong contract pushing into 2017, and we're focused entirely on managing and sustaining our liquidity to this downturn, as we begin to think about a rebound of the market. The rest is assured that we think that's the combination of our balanced strength, our operating competitive advantage, and our cash liquidity leads us a very strong positive in a very tough market. So with that comment, I'll thank you for joining us today, and look forward to talking to you on our Q2 conference call in July. Thank you.

[Operator:]

Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.