Precision Drilling Corporation
Q4 2016 Earnings Call Transcript

Published: 10 Feb 2017

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Precision Drilling Corporation 2016 Fourth 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, Vince. Thank you and good afternoon, everyone. Welcome to Precision Drilling Corporation's fourth quarter 2016 earnings 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 fourth quarter and year-end 2016 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 our 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 fourth quarter operating results and a financial overview. Kevin Neveu will then provide business operations update and outlook. Carey, over to you.

[Carey Ford:]

Thank you Saber. In addition to reviewing the fourth quarter results, I will provide an update on our 2017 capital plan and our liquidity position. Fourth quarter adjusted EBITDA was CAD65 million which is 42% lower than the fourth quarter 2015. The decline in adjusted EBITDA from last year is the result of expected decreased activity levels across all of our operating segments, except Canada drilling as well as lower spot market pricing in North America. In Canada, drilling activity for Precision increased 12% from Q4 2015, while margins were CAD$5,234 per day lower than the prior year. The margins for the quarter were negatively impacted by lower spot market pricing, rig mix, and lower year-end shortfall payments compared to the fourth quarter 2015. These negative impacts on day rates were offset by daily operating costs that were approximately CAD500 per day lower than the prior year. In the U.S., drilling activity for Precision increased 13% from Q4 2015, while margins were US$1,962 per day lower. The decrease was primarily result of the impact from the lower spot market rates, a lower percentage of rigs under term contract and lower and lower IBC revenue. Although drilling activity was lower than the prior year, daily operating costs were essentially flat with an increase of only CAD185 per day. Internationally, drilling activity for Precision decreased 10% from Q4 2015. The decrease in activity was primarily the result of fewer days in Mexico and the Middle East. International average day rates were US$52,816, an increase of US$6,049 from the prior year. The increase was largely a result of rig mix, as two new build rigs were added to Kuwait during the quarter and the division also recognized an early delivery and bonus. Today, we have 90 rigs drilling or moving in Canada, up 45 rigs from our Q3 conference call in October. And 48 rigs drilling or moving in the U.S., up nine rigs over the same period. We have three rigs receiving idle but contracted payments today, and eight rigs active internationally. In our C&P division, adjusted EBITDA this quarter was CAD390,000 up approximately CAD800,000 from the prior year. The increase is the result of lower operating cost structure, offset by lower activity levels in all divisions except rentals. Now turning to capital expenditures. We ended the year with capital expenditures totaling CAD203 million slightly lower than our forecast, and a decrease of CAD255 million from 2015. The 2016 capital expenditures were comprised of CAD149 million for expansion, CAD35 million for maintenance and infrastructure and CAD20 million for upgrade. Substantially all of our expansion capital was for two new build rigs for the Kuwait market, which were fully paid for in 2016. For 2017, our capital plan totals CAD108 million, consisting of CAD4 million for expansion, CAD52 million for sustaining and infrastructure, and CAD52 for upgrades. Consistent with 2016 capital spend, upgrade capital is targeted for bolt-on upgrades to super triple rigs as customer demand dictates. We have continue to build our contract book, and as of February 8, 2017 we had an average of 60 contracts in hand for the first quarter and an average of 49 contracts for the full-year 2017, an increase of seven rig years from the time of our Q3 call. During 2016, we completed a number of transactions that improved the strength of our balance sheet and reduced overall risk for Precision. Through open market purchases and a refinancing of Precision's senior notes, we reduced total debt levels by CAD213 million and pushed the nearest maturity on our senior notes to November 2020. Throughout the year, we maintain a strong liquidity position, with full access to our revolver and a solid cash balance. As of December 31, 2016, our long-term debt is approximately CAD1.9 billion and our net debt is approximately CAD1.8 billion. We had a CAD116 million in cash on our balance sheet at the year end, and our total liquidity position was CAD868 million. At the beginning of this year, we reached an agreement with our lenders to amend our revolving credit facility. Adjusting our EBITDA to interest ratio down by 25 basis points for the first part of 2017 and reducing the overall size of the revolver from US$550 million to US$525 million. The amendment provides more headroom in the first part of 2017, and supports Precision's full access to the facility in a rebounding market. That concludes my comments. I will now turn the call over to Kevin for further discussion on the business and the outlook

[Kevin Neveu:]

Thank you, Carey, good afternoon. So I'll begin by saying that the duration and intensity of the downturn has been troubling and deeply challenging for all in the industry. But we are pleased that the industry is transitioning into a recovery cycle. It's very good to put 2016 behinds us. For Precision, with two quarters of sequential improvements in customer demand, it's fair to categorize this as an established recovery period. Now on prior updates, I've used the term fragility when discussing improving customer sentiment and I think now stability maybe emerging as my new view. So particularly following OPEC's implementation production quotas, commodity prices seem to have firmed into a constructive range and we're gaining confidence that long-term industry stability is returning. Our customers are taking advantage of this by hedging to protect cash flows and to fund drilling programs and we are seeing several customers extend their capital deployment and plans beyond the next well or two through 2017, and in some cases all the way to 2018. This level of visibility we've now experienced since the first half of the decade. Now while we've deployed the two new rigs that Carey mentioned to Kuwait in the fourth quarter, the international market has been significantly slower to respond to these improved fundamentals. And I'll speak more to that later. Today, we're operating 48 rigs in United States. We have 90 in Canada and 8 rigs internationally as Carey mentioned earlier. From Q2 lose, we’ve added 107 rigs and activated almost 1,800 people. The Precision team has executed this ramp-up in an unprecedented fashion, with virtually no increase in sequential or long-term operating costs, no catch up in maintenance capital spending. And this is a testament to Precision's disciplined stacking procedures executed during the downturn, and our strict avoidance of asset cannibalization. Most importantly, it fulfills the commitment that we made to our investors that we would be prepared for an eventual rebound, and we capture market share during that rebound. Much is to be said about the challenges of finding people during the upturn cycle, and I think this challenge cannot be overstated. But the fact is, it's very hard to recruit and on-board good people no matter what point we are in the cycle. There is no question that staffing rigs, managing recruiting, training, development and employee development is a heavy lift, but this is something that Precision does very, very well. Employee management we view as one of our core competencies and a key competitive advantage, of the 1,800 field personnel added over the last six months, 85% to 90% were previously Precision employees, and by design 10% to 15% are employee activations that are new hires and fully trained and are indoctrinated in our Houston and Nisku Employee Development Centers. Now moving to regional updates, I expect everyone on the call understands that the Permian is one of the best low-cost oil plays in North America, and for that matter, one of the best in the world. The customer demand we're experiencing is no surprise to us, and the industry transition to full development mode in the Permian is well under way. So for Precision, we have 24 rigs operating in the region, the 11 rigs we’ve added since the second quarter are all pad walking Precision’s Super Triple rigs, all engaged in multi-well pad style drilling. Just as a note, we at Precision find it curious that some have latched onto a new term, and they're referring to super stack rigs to describe pad-walking long-reach capable of triple style drilling rigs. It's interesting that Precision's been using super – as in Super Triple, as our trade name since we commissioned our first pad-walking AC triple rig over eight years ago. So I suppose I can comfort myself that imitation is the sincerest form of flattery. Moving on, I'll avoid detailed day rate minutia as we're involved in multiple competitive negotiations on a day-to-day basis. Suffice to say, that our prior guidance on day rates has proven accurate. Spot market rates are now in the high teens, and we're seeing opportunities to continue increasing prices back to levels that produce normalized long-term returns we desire. The contract rates for our pad-walking Super Triples remain CAD3,000 to CAD5,000 higher than spot market rates. Now what we've heard from talk or even concern about the industry beginning to deploy new builds, at Precision we'll continue to exercise strict capital discipline regarding new build investments. The investment return and contract durations are dictated by our long-standing criteria, and we require Board approval before we commit any capital to new builds. Now that said, most of the new build and prototype talk has been by industry participants that are planning or deploying rigs which seemingly resemble the capabilities of our fleet of Precision super Triple rigs. Today in the U.S., we have over 39 stacked Super Triples that remain available should customer demand continue to improve. We also have eight other Super Series rigs which are now contracted, and will be activated later in the quarter. While the capital markets seem focused on the Permian Basin, we've also experienced growing demand for our Super Triples in both the mid-continent and Niobrara. As the operators continue to derisk these plays and begin the transition to full-development mode, we expect demand for pad-walking rigs will continue to rise. Currently, we have six rigs in the mid-con and six operating in the Niobrara and see potential for additional deployments in the coming weeks and months. With stronger natural gas prices, we've also added rigs back in the Marcellus and the Haynesville. Now longer-term visibility on U.S. natural gas activity is less clear than oil, but encouragingly these rigs were reactivated with one-year contract commitments. Finally, in the U.S., we expect to have a series of turnkey wells commencing later this quarter. I should remind all of you that our turnkey business is a fully integrated service offering which includes Precision managing and providing all of the well site services that drill the wells, perform directional drilling, run casing into cement the wells. Integrating additional well services is a business we fully understand, and we have a long-standing proven capability in this regard. Should customer receptiveness or additional service integration beyond the directional drilling we currently market broadly, should that receptiveness grow or develop. We're well positioned to capitalize on those opportunities, and certainly our Super Triple rigs are well configured to handle that integration. Turning to Canada. You may recall on our third quarter conference call that I suggested Canada would need oil commodity prices CAD3 to CAD5 higher than the U.S. to drive a recovery, well clearly I was wrong. The favorable Canadian exchange rate coupled with the wide scale adoption of several drilling completion efficiency measures has created a substantially busier environment than we expected. Customer demand has surprised to the upside, and the duration seems to be lasting longer than we expected. We believe the seasonal spring breakup slowdown will be weather driven and not budget constrained, as we saw last year and the year before. This will prove helpful for all service lines in the Western Canadian sedimentary basin. Now more importantly, visibility on Q2 and Q3 activity levels is beginning to firm up. It's always a little risky to forecast Canadian post breakup activities this early in the first quarter. So before I discuss our expectations, I think walking through the Canadian pricing story will help provide some guidance as to how we see the activity may trend. As I mentioned earlier, we at Precision and likely many in the industry underestimated the winter demand levels that we're experiencing. And as most of you know, our Canadian winter rates are typically negotiated and locked in with our customers in the prior October. Back then, we were certainly seeing improved demand signals compared to 2016, but we're not expecting industry rig counts to reach the 350 range. As a result, winter pricing is light. In fact, we believe that some rigs in the shallower highly commoditized regions may be priced in the sub-CAD9,000 per day range. I'll comment that nothing in the Precision fleet is priced remotely close to that level. For Precision, where possible, we began increasing Canadian rates in late Q4 and now into Q1. Traditionally, this is a period when customers expect locked-in pricing. As we look forward to post breakup activity, we expect further direction and expect prices will trend upwards. In the Canadian deep basin, Precision enjoys excellent competitive positioning, with full utilization of our fleet of pad-walking Super Triple rigs this winter. The demand here remains strong, and pricing has held up substantially higher than the shallower more competitive regions. With improving visibility, we also expect these rates will trend upwards. Also want to highlight that Precision's heavy oil activity is experiencing a strong resurgence from a horrible 2016 winter. Today we have 26 rigs drilling in heavy oil versus nine rigs last year. While this is also generally shallower work, the Precision Super Single rigs are well-positioned competitively as high-efficiency rigs. And as such, we've sustained constructive pricing and margins on this business segment. Now moving back to my Canadian activity outlook. The last year, Precision's activity in Q2 bottomed at a record low 10 rigs. This year, we expect a more normalized spring breakup, probably for Precision bottoming at the high 20s or low 30s, suggesting industry activity levels that could approach 100 rigs through spring breakup. In general, regarding margin guidance. Now assuming the oil price remains stable, as we commented earlier, we believe spot market pricing bottomed in the second quarter of 2016 in both the U.S. and Canada. We do not expect any cost increases due to reactivations, and you've heard my comments regarding forward pricing. So in this environment, we should begin to see sequential fleet average margin improvements later in 2017, probably in the second half of the year. Now I'll temper this optimism with my ever present concerns about commodity prices and fundamentals. Our ability to activate rigs, improve pricing and margins is dependent completely on the cash flows and capital access our customers enjoy. Now turning to the international market for a moment, ultimately the same fundamental drivers that affect domestic markets also impact our international opportunities. However, since most of the markets that Precision pursues are dominated by national oil companies, the volatility is lower but the reaction time is also delayed. Hence, despite difficult fundamentals for most of the last couple of years, our rates have been sticky and our activity has been relatively stable. The demand rebound and pricing power we're experiencing domestically has yet to materialize in most international markets. Now the two new rig deployments in Kuwait during the fourth quarter were near flawless. These rigs were commissioned several quarters ahead of customer's expectations, and the commissionings were smooth. All five Precision rigs in country are performing fully to our expectations, and I believe we've achieved critical mass in Kuwait and we expect that further rig additions will provide strong incremental returns for Precision. In Saudi Arabia, our operations remain stable and we are performing well. But after my recent visit to the region, it's clear that we need to build more scale in this country. We have good opportunities to expand our footprint in KSA, and will remain highly focused on growth. There are several active tenders in the region, and several other tenders which are imminent to be released. Now I remind listeners that Precision has four idle rigs in the region, or four stacked rigs in the region that we believe we are well positioned that we'll be competitive when this region eventually rebounds. Turning back to Canada and specifically regarding our well service business. During the fourth quarter, we completed the asset exchange with Essential Energy Services. First of all, I want to welcome the 120 employees we on boarded late in the fourth quarter. The pride of execution by this team is evident in the quality and excellent condition of the 48 service rigs we acquired, not to mention the highly satisfied customers we added. I believe this transaction was one of those very elusive win-win deals, and we are very pleased. Now well service activity has substantially improved from early 2016, but pricing has been slow to react. Fortunately, as Carey mentioned, our focus on cost management, efficient operations, employee retention and safety is delivering positive results on the margin contribution line. And I expect continued progress and sequential improvements in this business through 2017. Now finally, recapping Carey's comments on our financing activities in the fourth quarter. I'm very pleased with our team's work to smooth out and extend our maturities on our long-term debt. I was particularly pleased to apply cash to reduce our long-term debt, and you may recall that we guided debt repayment as a keys of cash till the market visibility improved. We continue to believe that Precision will produce and accumulate cash from operations, and will remain opportunistic when it comes time to use that cash to reduce total debt. I will now conclude by thanking the employees of Precision for another outstanding quarter of excellent field performance, and I will turn the call back to the operator for questions. Thank you.

[Operator:]

Thank you. [Operator Instructions] Our first question is from Chase Mulvehill of Wolfe Research. Your line is open.

[Chase Mulvehill:]

Hey, good afternoon.

[Carey Ford:]

Hi, Chase.

[Kevin Neveu:]

Hi, Chase.

[Chase Mulvehill:]

Hi, Carey and hi, Kevin. So I guess the first question when we think about the mix in Canada. Can you talk to mix like how many Super Triples you have working in 4Q just so we can understand the mix shift and then talk about the mix shift as we get into 1Q?

[Kevin Neveu:]

So I don't have exact numbers in my fingertips right now. We could check back on that later for sure, and it's available through our website. But we've gone from – I think around 70% utilization were Super Triples in the third quarter to effectively full utilization in Q1. I commented on the call that we've seen activity pick up in heavy oil, so that's our Super Singles business. And that's picked up Q4 to Q1 numbers I quoted on the call were Q1 numbers, but it's up probably 30% from Q4 activity levels. But we have seen an increase in the non-deep basin, non-heavy oil more conventional doubles and singles in Q1 that will you put a larger mix in Q1 on those smaller rigs. Carey, can you add to that?

[Carey Ford:]

Sure, Chase, the number of Super Triples is right around 30 Super Triples that we have in our fleet that are fully utilized today. As Kevin mentioned, we had a few of those that weren't working in Q4 that are working today.

[Chase Mulvehill:]

Okay, so as we think about 1Q first quarter cash margins in Canada, given the mix, I mean do you think that gross margin per day will be up versus the 10,000 in 4Q?

[Kevin Neveu:]

Yes, this is bit of – a couple things going on here, let’s we jump in here. There is more absorption because of activity and that will make cash margins look a little better then mix will pull some of the day rates down. Carey, do you want…?

[Carey Ford:]

That’s correct, plus typically we have a bit more short fall payments in Q4 than we do in Q1 and that drop straight down the EBITDA.

[Chase Mulvehill:]

Okay, all right. It sounds like a little bit softer, but not a lot softer in Q1 for Canada from a cash margin?

[Kevin Neveu:]

I think that’s fair and there is a lot of moving parts. So it’s kind of hard to say at this point.

[Chase Mulvehill:]

Yes, understood, all right. And then when we think about cash margins for the U.S., the commentary that you talked about cash margin improving in the back half of the year, was that U.S. or was that total drilling?

[Kevin Neveu:]

Well, total drilling, but I think it will be a more noticeable in the U.S. where we don’t have the seasonality changing the mix.

[Chase Mulvehill:]

Okay, all right. And so in the first quarter, do you care to take a stab about how much cash margins could be down in the first quarter.

[Kevin Neveu:]

Yes. No, we don't give any specific guidance, Chase. But I can tell you that we still have a pretty good book of rigs that go back to the 2014 high day rates. Those are paid, new rigs paid for by our customers and that's still rolling through the next few quarters, being replaced with these lower rates, which are improving quite nicely for us right now.

[Chase Mulvehill:]

Okay.

[Kevin Neveu:]

So I think we crossed our line somewhere around mid-year, a little after, a little before.

[Carey Ford:]

And to add a bit more color there Chase, just on the difficult of kind of pinpointing at this point, we've got daily operating cost where we have higher activity, we spread the fixed cost over more rigs that improves margins. You have spot market going up as Kevin mentioned in his comments. And you have legacy contracts that have an even higher margin. So there is a few different moving parts there that we definitely see improving market, but the margins probably won't in aggregate improve until the second half of the year.

[Chase Mulvehill:]

Okay, all right. And you talk about the market improving and one of your peers was talking about some strong new build day rates where they were getting low to mid 20s. So could you talk about the Super Triples and what’s in the U.S. and what kind of day rates you’re seeing out there for the Super Triples?

[Kevin Neveu:]

I think what it boils down to right now, Chase is that the availability of a pad walking fully configured rig, 1,500 horsepower with adequate fracking capacity to drill a long reach closer to well. I think the market right now is that zero supply. I think that we can do upgrades very quickly and get rigs to mobilized within maybe a few day, maybe the industry has a few more of those to go, but still close to full supply now. I think those day rates will start to come up a little more sharply. Certainly, the contracts we've been you assigning, I mentioned six or eight more rigs going back to work, next few weeks on signed contracts though that’s part of our contract book, that's all part of this tightness of supply of long reach horizontal pad walking rigs.

[Chase Mulvehill:]

Okay. Are they over 20,000 a day that what you’re seeing in the leading hedge?

[Kevin Neveu:]

I’m not going to give specific guidance, but we do the math on the spot rate – spot numbers that I commented on, you can get there.

[Chase Mulvehill:]

Okay, all right. I'll turn it back over.

[Kevin Neveu:]

Thank you.

[Operator:]

Thank you. Our next question is from Jon Morrison of CIBC World Markets. Your line is open.

[Jon Morrison:]

Good morning, all.

[Kevin Neveu:]

Hey, Jon.

[Jon Morrison:]

Kevin, can you comment on how many of your 90 active rigs in Canada are running two crews versus three crews right now? I ask because I notice you lost a few active rigs in the last week or so, and I’m wondering how much of that was customer driven versus perhaps maxing out the number of days you can run a crew without giving them a break.

[Kevin Neveu:]

Hey, Jon. I don’t think we’ve actually had any crew management issues that have caused us to take rigs down. What I can tell you, though is, the last five to 10 rigs we put to work were rigs that were going out for a couple wells, one well, kind of windowing opportunities. So there's a little bit of variability in that. So I don't think you've seen our rig count on publicly available data drop below about 85. It's going to fluctuate, 85 and 92 in that range. We track drilling and moving days. We have stated the more accurate numbers internally, but that fluctuation has really been the last handful of rigs we put to work are on one or two well jobs with a variety of smaller customers spread around the basin, and those are some of the rigs we are able to get some pricing pressure particularly. So we're quite happy to have that last bit of work, but it's not quite as consistent as the other 80 rigs that are running.

[Jon Morrison:]

Okay. So it's fair to assume that all of your previous comments on crew availability, and staffing execution, and your HR capabilities really haven't changed. And if you had demand you could ultimately start more rigs.

[Kevin Neveu:]

If we had visibility on a rig need right now that was more than one or two wells, we would have no trouble staffing it up.

[Jon Morrison:]

How much sort of the strong ramp up in Q1 do you believe was a function well over from Q4 given all the weather challenges that we had and producers being behind schedule versus what have taken place had we not had rollover?

[Carey Ford:]

John that's a really good question. And there's a couple other factors are going to throw in the same bucket. We've been looking for reasons to explain why it's so strong. And part of the reason might have been trying to spend money early, so you get more months of cash flow from the well, pushback from last well didn't get completed last December into this quarter, but what's interesting is the duration seems to be hanging in longer than we thought. We're getting better visibility on Q2 and Q3 and we are now looking towards fundamentals driving better activity than we expected. No conclusion yet and for sure some of the wells drilled in Q1 were wells delayed from Q4. No question about that. Some of the wells drilled in early Q1 were wells getting on early for the full-year revenue stream. No question about that. But we're seeing surprising strength considering the price hasn’t climbed as high as I thought it would need to climb looking into Q2 and Q3. It’s early. Check back with me again in April on the next call.

[Jon Morrison:]

Is it fair to assume that your line of sight in customer conversations so to indicate that it's not a stretch to see similar year-on-year gains in the back half of the year?

[Carey Ford:]

It's not a stretch, but I would think that that's predicated on a slightly higher commodity price in the back half of the year that we are seeing today. I’ll go back to my comments earlier the CAD3 to CAD5 WTI price. I think the WTI climbs CAD3 to CAD5, then seeing back half gains like the front half like the front quarter, I think get very credible.

[Jon Morrison:]

I appreciated all the comments you made kind of on pricing across rig specs and classes. I guess the one question I would have is, if you think about the mix of rigs that you have active in the spot market today and the pricing increases that you mentioned could be on the come, what would us guess the average price increase would be on a percentage basis, where it was in Q4 versus where it's going to go?

[Carey Ford:]

Okay, that's a confidential question. I can't answer that one.

[Jon Morrison:]

Okay. You referenced a new build opportunity…

[Kevin Neveu:]

John, let me give you a little bit of color. I can tell you that historically when effectively every rig competed for every job, that's not the case today. But when every rig is convenient to every job, price increases were typically CAD500. That was typically sort of the benchmark increase back in the day, back in the previous rebounds. Also when the rig count was a big part of the well cost. That is not the case today. We talked about in the last conference call price increases of CAD1,000 to CAD2,000 term contracts CAD3,000 to CAD5,000 a day higher. The magnitude of the price increase that's used to be normal is higher now and I think it’s because it's not every single rig competing for every job. There's very specific competition in various basins and the rig itself is a far smaller cost relative to the entire well cost than it used to be. And I think that’s giving the industry room for sharper increases in rig rates.

[Jon Morrison:]

You referenced the new build opportunities that you're seeing and we're seeing some of your competitors ultimately pull the trigger on that. How far away is the pricing for making sense to meet your internal thresholds to start building new rigs in North America. Setting aside the fact that you probably wouldn't want to do it in terms of our debt priority repayments and ultimately some of the idle capacity you still have, but if the delta CAD5,000 a day or is it getting tighter than that?

[Carey Ford:]

A couple comments on that so first of all I would say that I think capital discipline is ultra important in this business. We have a reputation for over-building, the industry does. So I can start by saying capital deployment is critical certainly critical for position drilling. Right now the spread between what we would be looking for day rates and a kind of leading edge Super Triple CAD1,500 is more than CAD5,000 per day. And the term commitments customer as where to big I think of those prices is not even close to our term expectation yet. So we have in the U.S. almost 40 rigs in Canada we might be getting tight on Super Triples, but some of the U.S. rigs could come up here. I think there were a ways away from worrying about new builds a position yet.

[Jon Morrison:]

Last one just for me. You made reference to the Middle East bedding opportunities that are either out there ongoing right now. Older ones that you are engaged in largely contemplating a reactivation of the idle rigs you have in the region or relocation from a different region or are you contemplating some new builds in the Middle East right now.

[Carey Ford:]

Yes, across all those frontiers. Ideally activating the four rigs would be our top priority. Following that we've seen opportunities to export some North American rigs that we don't want to take many of their working but if we found a way to ship over a couple of ST 1,500 still Middle East and start to build out that reputation would be thrilled with that. And I do expect that if all of the tenders we see come to fruition. There could be one to two new builds we'd be looking at in 2018. So I am sorry the answer is going to all of the above, preference storage reactivating the rigs that are idle.

[Jon Morrison:]

I appreciate the color. I will turn it back. Good quarter guys.

[Kevin Neveu:]

Thanks John.

[Carey Ford:]

Great. Thanks John.

[Operator:]

Thank you. Our next question is from Sean Meakim of J.P. Morgan. Your line is open.

[Sean Meakim:]

Hey, guys. Kevin so you thinking about under your improving oil scenario CAD3 to CAD5 back half of the year. How do you think about potential for divergence in terms of activity maybe pricing between the U.S. and Canada?

[Kevin Neveu:]

Well, I guess sort answer is we haven't seen divergence we've just seen a leg. I'm not predicting CAD3 to CAD5 higher prices I'm saying I think if we see CAD3 to CAD5 higher price is Canada have a strong half of the year. Short of that I expect to stable back half of the year, but it seems like the trends are kind of parallel with the leg in Canada. Is that's your question.

[Sean Meakim:]

I think that's fair enough. I was hoping that to highlight the automation opportunity that you guys gave some more details in the press release? Is there anything you could elaborate on today just respect to over time what that potential opportunity could look like for you across the U.S. and Canada?

[Kevin Neveu:]

We're pretty excited about the potential, I want to be cautious both getting too much excitement of there are some of the potential we can see that there's a huge amount of value in automating a lot of repent of the functions of the rig. Clearly a huge amount of value giving real time down whole data using that to help control the drilling process. So we have good communication of the value. This is a very complex sophisticated technology we've got excellent partners and the partners are working with are pleased with the progress rashly involved in reading a couple of technical papers and some of the early wins we'll look forward to seeing those published. But I can tell you that I think we can put together the combination of technologies here on our platform of standardize rigs and deliver pre good solution. But if you think about the cycle for a research through development, through application and through the full commercialization to really of the first phase of the application face. So we've got little ways to go through application development and before we get to full commercialization.

[Sean Meakim:]

Fair enough. Thanks Kevin.

[Kevin Neveu:]

Thank you very much.

[Operator:]

Thank you. Our next question is from Ben Owens of RBC Capital Markets. Your line is open.

[Ben Owens:]

Hey, guys, good afternoon.

[Kevin Neveu:]

Hey, Ben.

[Carey Ford:]

Hey, Ben.

[Ben Owens:]

So Kevin you made the made the comment that you thought the U.S. market was that something close to zero supply for high spec rig. Given the pick up and drilling activity are you seeing a increased willingness on the part of customers to entering into contract. And then you know what kind of term are you seen on those contracts it is still in the 12 months to 18 months range or has that started to extend out?

[Kevin Neveu:]

The terms of range from six to 18 months that’s the range, I can give you real mix of how many six or 18. It’s going to be evenly spread. I will tell you, I commented that are six more rigs to activate in the next few weeks. Those are all long reach horizontal pad style rigs. And that’s using up some of the expansion – not expansion, some of the upgrade CapEx we announced earlier this year. Every indication is right now that the next long reach, high pressure, pad walking rate go out is going be an upgraded rig from ourselves or somebody else. I think most of the rigs that were available that had that capability are operating now.

[Ben Owens:]

Okay, thanks. And then on the upgrade budget of CAD52 million for 2017, at what level of customer demand or I guess what total level of rig count in the U.S.? Do you think you would start to think about increasing that upgrade budget?

[Kevin Neveu:]

There is an interesting balance for us. I think for us remaining cash flow positive this year is a high priority. And balances that with good opportunities is what we're focused on. But I can comment that for Precision Drilling, a good opportunity, the good customer for long-term contract that pays back the upgrade, we would have a hard time turning down.

[Ben Owens:]

Okay, all right. That makes sense.

[Kevin Neveu:]

But we remain focused on generating positive cash flow. So if I’m trust that decision later this year, I'll try to find a way to do both.

[Ben Owens:]

Okay, and then last one for me. How much did early delivery bonus for the Kuwait rigs affect the international average day rates in the quarter?

[Kevin Neveu:]

It was a little over CAD1 million was the bonus. So it will spread over 720 days, you do the math, straight down to profit.

[Ben Owens:]

Okay. I’ll turn it back. Thanks guys.

[Kevin Neveu:]

Great, thank you.

[Operator:]

Thank you. Our next question is from Ian Gillies of GMP. Your line is open.

[Ian Gillies:]

Good afternoon everyone.

[Kevin Neveu:]

Hey, Ian.

[Ian Gillies:]

I was just curious with the number of rig upgrades that are happening in the U.S., have you started to see any cost inflation from your suppliers on whether it be the pad walking systems or mud circulation systems, et cetera yet?

[Kevin Neveu:]

Yes, that’s actually really good question. There maybe some of that going on in the industry. What I can tell you is that this is were Precision’s vertically integrated model shines. The components to the pad walking system is 7,500 psi upgrades, even the third month upgrades are handled through our in-house manufacturing facility in Calgary [indiscernible] manufacturing. So in fact we've had no inflation and don't expect inflation.

[Ian Gillies:]

Okay, thanks. That's helpful. One of the other things that's been noted throughout the call is to better cost absorption on the variable cost per day on both sides of the border. Are you able to provide any details around what percent of that to have that variable cost per day? Is fixed just to help get a better sense of how that may trend as activity picks up through the remainder of this year and into 2018?

[Kevin Neveu:]

Well, I think in Canada, you see it a bit more through the seasonality and you can really see it every year in Q2. We always have a bit higher operating costs because we have fewer activity days to cover that fixed cost. In the U.S., I think we're running 48 rigs today. We're getting to the point where the gains on covering that fixed costs are kind of minimized that each incremental rig, which can be a bit harder to see.

[Ian Gillies:]

Okay, thanks. That's helpful and the last one a bit more qualitative with the U.S. high spec rig count largely being taken up, are you seen any opportunities to perhaps gain a foothold with customers you haven't historically worked for – wanted to work for and haven't had the opportunity?

[Kevin Neveu:]

Because we've had some good successes late in 2016 and early into 2017, I really don't want to comment with any detail.

[Ian Gillies:]

Okay, no problem. I’ll turn the call back over. Thanks very much.

[Kevin Neveu:]

Thanks, Ian.

[Operator:]

Thank you. Our next question is from John Daniel of Simmons and Company. Your line is open.

[John Daniel:]

Hey guys. Thanks for fitting me in.

[Kevin Neveu:]

Hi, John.

[John Daniel:]

Carey, a couple of just quick modeling once if I may, the Q4 G&A jump because the equity based comp cost, what’s the right normalized G&A number as we head into 2017?

[Carey Ford:]

So there's some moving parts in there. There's some parts that are fixed things like rent and salaries and software costs, things like that. There are some costs that move around based on exchange rate. So our G&A cost in international as well as the U.S. will hit the Canadian dollar depreciates more that will show up as higher G&A cost. But I think kind of in CAD100 million, CAD115 million range for G&A at this point that looks pretty good for 2017.

[John Daniel:]

Okay. And just given the lower levels of capital spending anticipated for this year presumably depreciation bleeds lower from the Q4 run rate?

[Carey Ford:]

Yes. It should be below CAD400 million for the year, so probably CAD90 million, CAD95 million a quarter.

[John Daniel:]

Got it. Thank you. And by the way nice market share gains this quarter on the rig count.

[Carey Ford:]

Thanks, John.

[John Daniel:]

You guys did reference the upcoming international rig tenders, can you just sort of frame for us what everything went swimmingly. What the magnitude of these tenders could be in terms of rigs and let's assume you were to win some of these. When could we start seeing it go back to work and I apologize if you said this earlier.

[Kevin Neveu:]

I didn't really covered off earlier, John and good questions and good detail. So a couple comments. One of the bids was originally October, then November, then December and then January 1. We submitted the bid and the bid hasn't been opened yet. So whatever reason it's just going slow and that was supposed to begin deployments in April through the end of the year. Well, there's no way the rigs can be deployed in April, that tender hasn’t been opened yet. That would likely have been redeployments not new builds. So we are tendering right now in three or four different countries and different tenders and we're expecting one or two more to come out that have also been delayed several quarters. So that just seems to be a go slow rate now. I'm not thinking we’d be spending a lot of capital in 2017 if we're successful on one of these, but don’t forget we could be spending capital in 2018. What my thinking feels like right now.

[John Daniel:]

Okay. And then just sort of a last one for me, a soft question for you, but also big picture one that relates to concept of drilling efficiencies, but when you visit with your top customers and discuss potential incremental rig opportunities from here, I'm curious if you could share sort of what the discussion is with respect to the new normalized rig demand in light of drilling efficiency versus what they may have used sort of in the 2014 timeframe. If that makes any sense?

[Kevin Neveu:]

Yes, it does. I think that that level of sort of analysis is being done a lot by you analysts and a lot by the commodity specialists, less so by our E&P customers. They’re planning their capital spending right now on a by field basis, looking at how many rigs they need going forward. But here's a comment that matters. I think every development phase now will be done with pad drilling and not single well pads, but multi well pads and that does changes the market. I would think that what used to take 1,400 rigs for – and drilling is probably more like 800 to 900 rigs there for development drilling.

[John Daniel:]

Fair enough. I know we try to take a stab at it, but it’s ultimately what your customer is telling…

[Kevin Neveu:]

Yes. The 1,850 or 1,950 rig count we saw back in 2014 included a lot of other drilling sites, pure development drilling included derisking, trying to find the next sweet spot, but I think a pure development work. The rig need is probably 75% what it used to be and that’s primarily mobility gains. The drilling times haven’t much from the best wells we drilled in 2010.

[Carey Ford:]

And Jon just to add to that, the number of tier 1 rigs that we are running in 2014 probably isn’t too different from the total number of rigs that Kevin said will be needed in this kind of new efficiency world.

[John Daniel:]

All right, guys. Thank you for your time and for all the color.

[Carey Ford:]

Thanks, John.

[Operator:]

Thank you. Our next question is from Jim Wicklund of Credit Suisse. Your line is open.

[James Wicklund:]

Good afternoon, guys.

[Carey Ford:]

Hey, Jim.

[James Wicklund:]

The 6 to 18-month contracts that you are signing in the U.S. for rigs, are they in any particular market, the Permian or the Haynesville for BHP are they just kind of scattered all over? Is the interest basically the same in locking up rigs for 6 to 18 months?

[Carey Ford:]

Jim, we've actually sort of distributed, I'd say half of what we booked is been in the Permian and the other half has been spread amongst the basins I mentioned in my prepared comments. And I think it was one in the Haynesville, so it's not like it's four or five, it was one in the Haynesville, but the balance would have been spread between the mid-conference, the Niobrara, a little bit coming back in the Eagle Ford and then Permian Basin was the other half of the rigs.

[James Wicklund:]

So that's very broad. That's good. You talked about a little bit about the international tenders and how they constantly get delayed, having worked internationally, it's no surprise. You you've got stacked rigs in the area. How aggressive do you have to be or do you need to be or will you be in terms of trying to put those rigs to work since you mentioned the scale is important. And I know it's hard to ask you know how much rate we give up to get scale, but that's can you give us an idea of how you’re thinking is in that regard?

[Kevin Neveu:]

Our board hold those accountable to earn a full cycle return our investment and so we're unlikely to go in at some metric that slightly above cash break-even or a handful of dollars on a cash basis on the operation. We're really looking [IURs] that get close to our cost of capital or slightly above our cost of capital for trying to enter a new market as a worst case.

[James Wicklund:]

Okay. And what were the cut what’s the payback period on the two rigs. How long does it take for you to get a payback on to new rigs you put in the Middle East. Secure payback which is normal for international rigs.

[Kevin Neveu:]

Yes, those rigs above five-year contract we payback inside the original contract term. Those are CAD63 million rigs Carey what do CAD63 million U.S. per rig. Interestingly of the cost three times as much of the North American rig that going to three times the amount of headcount and they've got about three times EBITDA so the returns are pretty much on par with the best returns we would achieve in North America. But you know those are contracted a couple years ago in the build and then delivered and we haven't had to deal with a renegotiation along the way.

[James Wicklund:]

What horsepower are those rigs?

[Kevin Neveu:]

The 3000 horsepower of course the capacity they're extremely high drill force to accommodate large [deal piece], large capacity mud systems, large capacity hydraulic pump systems big top drives here very big rigs part of our CapEx includes the camp for the rig and part of our CapEx includes some of the moving equipment. It's a fully soft contained rig.

[James Wicklund:]

Got it. It's very helpful and my last one, if I could sneak one in and this is kind of the philosophy question. In the U.S. in the last three months oil prices have average just about exactly CAD50 and the horizontal rig count is 44%. Does it does it worry you that we might have gotten a little head of ourselves on activity versus price and I don't hear that question is kind of asking what oil prices are none of this no, but I mean does it bobby or little bit that and if the rig count doesn't go up from here the rest of the year we're up you know 50% year-over-year that just seems had to me on a cash flow basis does that worry you at all.

[Kevin Neveu:]

Probably better question for one of the 300 or 400 and even becomes work for that. But a couple comments so I think they're still getting the benefit of the press service pricing across a lot of services I think helping them, I think a lot of companies right now are dealing on have cycle economics probably not full cycle, cost the lenses but it's bought now you can drill it so I think there's some things on our favor there. I think the problem back in 2016 wasn't just the commodity price in the first half. It was the trajectory. With the prices falling through 50 and no one knew where the bottom was. They were extremely risk averse. So I think stability here is as important as the price. I think CAD50 isn’t necessarily about price, especially when they can hedge it and lock it in and drill the well and produce it. But I also think there's a sentiment or a sense that prices are going to a little higher, maybe closer to CAD60, so I agree with you. I think there's a bit of a risk that the prices don’t move up a little bit, we could see rig counts flatten out, maybe even come down. I think I said that in our Q3 conference call.

[James Wicklund:]

Okay. Gentlemen thank you very much, good quarter.

[Kevin Neveu:]

Thank you.

[Operator:]

Thank you. Our next question is from Jeff Fetterly of Peters & Company. Your line is open.

[Jeff Fetterly:]

Hey guys, just a few clarification things.

[Kevin Neveu:]

Hi, Jeff.

[Jeff Fetterly:]

Question you commented earlier Kevin. You said spot rate is now “high-teens”. Did I hear that correctly?

[Kevin Neveu:]

Yes, you did.

[Jeff Fetterly:]

And is that what you would define is sort of the highest spec of triple rig in the U.S.?

[Kevin Neveu:]

No, pretty much across the fleet for us

[Jeff Fetterly:]

Okay.

[Kevin Neveu:]

That's domestic U.S.

[Jeff Fetterly:]

Domestic U.S. and you were saying that the contracted rates were typically CAD3,000 to CAD5,000 higher than that number?

[Kevin Neveu:]

We’re achieving rates to the CAD3,000 to CAD5,000 higher, yes.

[Jeff Fetterly:]

Okay, and the delta between those contracted rates and where you would deem your new build threshold is still above CAD5,000?

[Kevin Neveu:]

Well, I think the cost of a new build rig is probably in the same range it was when we were building large volumes of rigs. So depending on the spec, between CAD18 million and CAD22 million, if you do the math, probably new day rates is getting close to CAD30,000 per day to make that rig payoff.

[Jeff Fetterly:]

Okay.

[Carey Ford:]

My comments on the rates by the way, the deep basin is behaving very much like the U.S. right now. So the deep basin other than being a Canadian dollars, the numbers, the rates the performances inline with the U.S. numbers I gave, just third-party.

[Jeff Fetterly:]

Okay, great. On the U.S. side from a visibility standpoint, you talked about your 48 rigs today, should we be expecting those six or eight additions to be in the U.S. would be incremental to that number and call it coming weeks or coming months?

[Kevin Neveu:]

So number of those rigs are still spot markets rates, and some will come up and some will go down. We’re 48 today, maybe we’re 46 next week, and maybe we’re 50 the week after that. Expected rates are little more normalized market with the rig count doesn’t just go straight up. And we’ve had some weeks where we've outperformed the markets, otherwise we underperformed the market. I did kind of comment earlier about the stability. This is looking a lot more like a normalize market and we have those six confirmed contracts, those rigs will be added and a few of the 48 we have may falloff or may not falloff.

[Jeff Fetterly:]

Okay. So if we look forward to the end of Q1 or over the course of Q2, where do you think your rig count in the U.S could get to?

[Carey Ford:]

If I add up every opportunity our sales team is excited about right now it would be really high. But I know that our success rates like most sales team isn’t 100%. I think to get a lot higher, we probably did see a little more firmness in commodity prices. I go back to the last question we entertained. I think commodity prices continue to trend in the CAD52 to CAD53 range, I think this trajectory could run out of steam. I think we need to see prices move north of CAD55 to keep the trajectory moving. There's been some remarkable week-over-week increases, but again that's probably let's get these rigs going early in the year, so we can maximize the during the course of 20, get the rig well drilled now to get 11 months production.

[Jeff Fetterly:]

But in a stable commodity price environment the high 40s or low 50s is potentially a threshold for you.

[Kevin Neveu:]

I feel pretty good about our current rig count, plus or minus five rigs. I'll use that range in the stable commodity price environment, I think we are just going to be at stable range right now, and 48 plus or minus five is probably a stable range.

[Jeff Fetterly:]

Upgrade, the CAD52 million of upgrade capital in the 2017 budget, is that still contemplated across 33 rigs?

[Kevin Neveu:]

It could be 33 rigs. That was our estimate as of the end of last year, but if you think about those upgrades being kind of somewhere between CAD500,000 to CAD2 million per rig, some rigs are going to use all of that capital, all CAD2 million some rigs might be less, so I would say that the actual range is probably more or like 20 to 40 rigs. And it’s all going to be based on customer demand, not all of the customers want the third month in the walking system in 7500 psi standpipe, but some of them will.

[Jeff Fetterly:]

Okay. We use 30 as a midpoint in that range. How many rigs do you think over and above that would be candidates for upgrade?

[Kevin Neveu:]

Yes, not a whole lot.

[Jeff Fetterly:]

Okay. And so when you think about the next level of capital investment assuming those incremental demand. Is the logical next step to be looking at building new rigs if the high quality assets were all deployed the rigs that makes sense the upgrade have been upgraded. Do you have to go into a new build scenario in the next leg of this if there is incremental demand or is there is still a retrofit element that you could look at?

[Kevin Neveu:]

Jeff, to get to new build demand, I'd have to say if about three times, so if this happened, and if this happened, and if this happened will be building new rigs. I don’t have that visibility yet, so I don’t think new builds are being contemplated by Precision at this time.

[Jeff Fetterly:]

Okay, great.

[Carey Ford:]

Yes. Jeff, I’ll just point back to the numbers we referenced earlier was 40 Super Triples that are idle that could be going back to work. All of those would be upgrade candidates.

[Jeff Fetterly:]

And would that be incremental to the average of 30 contemplated in the 2017 program?

[Carey Ford:]

Some of those will be contemplated in the 33 that we have in the program.

[Jeff Fetterly:]

Okay, great. Thank you, guys. I appreciate the color. End of Q&A

[Operator:]

Thank you. At this time, there is no other questions in queue. I’ll turn it back to Mr. Neveu for any closing remarks.

[Kevin Neveu:]

All right. Thank you for joining our conference call today. We look forward to updating you on our Q1 in April. Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program. You may now disconnect. Everyone have a great day.