Precision Drilling Corporation
Q1 2015 Earnings Call Transcript

Published: 27 Apr 2015

[Operator:]

Good afternoon, ladies and gentlemen and welcome to the Precision Drilling Corporation 2015 First Quarter Conference Call and Webcast. I would now like to turn the meeting over to Mr. Carey Ford, Senior Vice President, Operations Finance. Mr. Ford please go ahead sir.

[Carey Ford:]

Thank you, good afternoon everyone, I'd also like to welcome you to Precision Drilling Corporation's first quarter 2015 earnings conference call and webcast. Participating today on the call with me are Kevin Neveu, our Chief Executive Officer and Rob McNally our Executive Vice President and Chief Financial Officer, also present is Gene Stahl, President of Drilling Operations. Through a news release earlier today Precision Drilling Corporation reported on the first quarter 2015 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 press release for additional disclosure on these financial measures. Our comments today will also include statements reflecting Precision's views about future events and their potential impact on the corporation's business, operations, structure, rig fleet, balance sheet and financial results, which are forward-looking statements. 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 press release and other regulatory filings for more information on forward-looking statements and these risk factors. Rob will begin the call today with a brief discussion of the first quarter operating results and a financial overview. Kevin will then provide a business operations update and our outlook, Rob, over to you.

[Rob McNally:]

Thanks, Carey. I'll apologize up front if I'm a little bit difficult to understand as I'm fighting a bit of a chest cold. Earlier today we reported first quarter results with revenues and net income of $512 million and $24 million respectively. We also announced a quarterly dividend of $0.07 per share. And while it was a difficult quarter because of the sharp declines in year-over-year activity, I'm satisfied that Precision is very well-positioned to perform during the downturn and emerge even stronger. The strength of our balance sheet and liquidity position, our customer contracts and high quality Tier 1 fleet all help ensure that we'll navigate this industry downturn and perform for our customers even if the industry is in a depressed activity environment for an extended period of time. First quarter 2015 EBITDA was 163 million, which is 31% lower than the first quarter of 2014. The weaker Q1 results primarily reflect decreases in North American drilling and C&P activity. EBITDA margins were 32% this quarter versus 35% in the first quarter of 2014. Our relatively strong margin performance in the face of significant industry downturn is a reflection of our variable cost operating model, proactive fixed cost management and contract coverage on our Tier 1 assets. In the U.S. during the first quarter margins were up about $650 a day over the fourth quarter of 2014 due to stronger day rates and the impact of idle but contracted revenue, partially offset by higher daily operating cost and lower turnkey activity. The impact of turnkey and idle but contracted rigs increased margins by approximately $100 per day. Today, we have 55 rigs drilling or moving in the U.S. and nine idle but contracted rigs. In Canada, drilling margins declined by $500 per day year-over-year, driven by higher labor costs and a rig mix partially offset by higher average day rigs, drilling activity decreased 45% over the first quarter of 2014. Today, we have 18 rigs drilling or moving in Canada. In our international drilling business activity increased by 15% and revenues by almost 45% from the first quarter of 2014, driven by the rigs deployed to Kuwait and Saudi Arabia in 2014 in the country of Georgia in February of 2015, this was partially offset by lower activity in Mexico. Our Completion and Production segment revenues were 66 million, down 36% over the first quarter of 2014. EBITDA in the quarter was 7 million, which is a 64% decline from the first quarter of 2014, reflecting the highly competitive markets in which we compete in the C&P segment. As detailed in our press release this morning, planned capital expenditures for 2015 are now expected to be 506 million. The increase since our last conference call is primarily the foreign exchange effect of U.S. dollar denominated expenditures. The expansion capital of 385 million is comprised of the cost to build 17 new build drilling rigs; three for Canada, 13 for the U.S. and one for Kuwait. All of the rigs will be Super Triples either 1,200 or 1,500 horsepower. 10 of the 17 rigs were delivered in the first quarter and the remainder will be delivered by early Q3. And I would remind you that all of these rigs are contracted. Our sustaining and infrastructure capital is based on currently anticipated activity levels for 2015 and will be adjusted up or down based on activity levels. Turning to the balance sheet, it remains strong and flexible. As of March 31, 2015, our total debt was approximately 2 billion and net debt was approximately 1.5 billion. The increase in total debt since last quarter is due to continued strengthening of the U.S. dollar. Our blended interest rate is just over 6.2% and our earliest debt maturity is in 2019. We believe that our balance sheet is in excellent shape and positions us well to weather the industry downturn, however long it may last. As of March 31, we had 415 of cash on the balance sheet. In early April, we received a payment from the Ontario Tax Authorities of 69 million, in settlement of our income tax recoverable plus interest. During the quarter, we also received temporary covenant relief from our senior lenders, ensuring that we will have full access to a revolving credit facility as we work through this downturn. Our contract coverage remains strong. We have an average of 110 rigs committed under term contracts for the second quarter of 2015. For the full year 2015, based on contracts in-hand, we have term contracts for 104 rigs, which is 45 rigs in Canada, 48 in the U.S. and 11 internationally. We expect to exit 2015 with approximately 82 contracts in place and have an average of 58 contracts in-hand for the full year of 2016. In conclusion, we believe that we’re very well-positioned to not only survive but grow market share through this downturn because of our strong balance sheet and liquidity position, high quality rig fleet, strong operational performance and our portfolio of over 100 term contracts. With that, I will turn it over to Kevin for a further discussion of the business.

[Kevin Neveu:]

Thank you, Rob. Good afternoon. As we mentioned in our press release and Rob covered in his comments, Precision’s Canadian and U.S. land drilling and are Completion and Production services groups experienced sharply declining customer demand, while our international activity weathered the depressed commodity prices remarkably well. There is also no doubt that Precision’s variable cost, business model and especially our people have been put to the test this quarter. Starting in Canada, first quarter activity seemed to lag behind the most expected. I think the big difference is related to heavy oil stratification drilling. In a typical winter season, heavy oil strat drilling programs utilized 75 to 125 of the industry’s shallower rigs. This year the strat programs really failed to get off the ground as our customers pulled back hard on heavy oil. And I believe this explains why Canadian activity seemed to trail the U.S. during the first quarter. The sub-segment is likely to lead in activity when commodity prices improve as our customers will need to catch up in these programs if heavy oil drilling activity is returned to similar to long-term normalized levels. Moving to the balance of the white oil activity in Canada, the region saw our customer demand and industry activity tracking the broader trend down about 45% than 2014 levels and roughly in line of our customers’ budgets, and while oil prices have improved from 2015 lows, we believe that substantial oil price increase will be needed to stimulate a significant improvement in our overall activity and customer demand. Now that said, demand for Precision’s Super Triple rigs actually built momentum during the quarter, as the Deep Basin gas and liquid plays principally the Duvernay and Montney experienced high customer interest and we see this trend continuing through 2015. Many of our customers at Duvernay and Montney are transitioning from the delineation and the completions testing phase to the full pad development drilling phase. From a rig perspective, we see the drilling shifting from heavy tele doubles to high performance pad walking Triples. In fact, we deployed five new build and upgraded pad Super Triples to these regions late last year and early this year and expect to see strong demand into 2016 with potential new builds emerging later this year for 2016 deployments. The Deep Basin natural gas liquids in the potential Horn River LNG development projects remain encouraging longer term catalyst for our Canadian business. This ability into the second half of 2015 is much less clear than prior years however, and we expect that our customers have achieved the cost savings from the spending reductions that they sought, they will be in a position to spend money more evenly over the course of the year than some may have expected earlier. For our non-contracted rigs though, we expect stiff pricing competition through the third quarter and while we’re not intending to lead the charge on lower day rates, there is no question that with our scale, our cross-management and the vertical integration this will allow us to support our margins while facing the aggressive market competition head on. Like many in Canada, we believe oil pipeline extension and the development of export markets for our Canadian liquefied natural gas remain critical considerations for the national agenda. We continue to do our part to ensure to be environmentally responsible and seek development of these resources despite the intense pressures to reduce cost. Now moving to the United States, in the U.S. for Precision is much the same story. We believe that broadly our customers have completed most of their works to dial down activity and have achieved the overall cost reductions necessary to bring our spending in line with our budgets. However, we maybe some weeks from a rig activity bottom and further commodity price volatility could be result in additional customer budget recalibrations. During the first quarter, our active rig count dropped at a rate slightly less than industry as the quality of both our Super Series rigs and our strong term contract base provided some breathing room. As Rob mentioned currently in the U.S. we have 55 rigs running, a further nine rigs on contracted standby. And since the beginning of the downturn, we have experienced just one full contract termination payout. It's possible that our active rig count may continue to trend slightly downwards if anymore rigs are moved to idle but contracted or if any further rig contracts expire and the rigs are stacked. With that said, it feels like we are nearing the end of the activity decline cycle but it is just too early to say for sure. Generally it’s our strategy to defend our margins not utilization and we believe our margin-centric strategy has superior full cycle value for our company. We also believe that our preemptive cost reductions, our vertical integration, vendor price concessions and the scale much like in Canada all contribute to supporting our operating margins, while continuing to provide competitive flexibility to price sensitive market. Now gleaning meaningful datapoints of leading edge day rates is premature as industry activity is still in decline mode and no matter how low anecdotal day rates are rigs are still being idled. Nonetheless, we're getting to see some of emerging opportunities involving high-grading. Several of these are with new customers for Precision who are not able to secure our Super Series rigs during prior periods of high demand. And we expect this high-grading trend to continue and possibly accelerate even if the market continues to see the bottom. We remain encouraged that many of our currently idle Precision Super Series rigs will see improved utilization even in the current commodity price malaise. Now our strongest U.S. regions are in the Marcellus, Permian and the Niobrara. In these regions we enjoy our highest utilization of our Super Triple rigs and also the best contract coverage. We find that the Bakken remains the most challenged U.S. region followed closely by the U.S. Eagle Ford. And as with Canada, we believe a significant and sustained improvement commodity prices will be necessary to generate a meaningful rebound in demand, but absent the rebound we believe the demand for Tier 1 rigs and especially pad capable rigs will firm up as our clients continue to transition from cost reduction mode to rebalancing and high-grading rigs within those reduced budgets. Now turning to International, this business is certainly demonstrating its resiliency. And as Rob mentioned, our new build rig will start up in Kuwait late this. We're very pleased with the rig deployments late last year and early this year with rigs commencing operation in Georgia, the Kingdom of Saudi Arabia and again shortly in Kuwait. Clearly the lessons we learned in 2013 have led to vastly improved and relatively trouble-free deployments in 2014 and 2015, completely delivering the financial performance we expect. While our international business has shown much more resiliency than North America, the low commodity price is not constructive over the longer term. Four of our international rigs are up for renewal in the coming months and we expect pricing pressure and some strong term utilization risk. Now despite these headwinds, we've continued to believe the longer term outlook continues to be promising for Precision particularly in the Arabian Gulf. Biding activity remains very strong, but firm awards maybe slightly utilized. You should expect a pause in our long-term guidance of 3 to 4 rig additions per year until this market settles out somewhat. Turning to our Completion and Production services group, as Rob mentioned, the first quarter continued the trend of reduced customer spending and sharply lowered revenue. Activity and customer demand for our well service operations are under intense pressure in most regions with Southern Saskatchewan and heavy oil hit the hardest. In line of the drilling activities of the deep gas basin in Northwestern Alberta is showing somewhat better strength. However, we believe this business segment is in for a prolonged downturn and as such our team remains intensely focused on cost management and generating free cash flow. So in summary, Rob mentioned Prevision's downturn positioning, I think it's important to understand for the lessons Precision leaned during the 2009 downturn led to a series of long-term strategic initiatives we executed over the past six years. These initiatives were to ensure that we have the balance sheet strength, the long-term contract backlog, a young high-performance rig fleet and a field reputation for excellent performance, so that when these inevitable downturn struck we’d be well-positioned to create value, could not be more confident regarding the strategy we executed and the position we achieved, and remain highly confident in our ability to create value through this downturn. Now this has been a very challenging period for the people of Precision, the industry-wide layups are burden on us all. At Prevision we deal with this challenge head on, we do the best we can for our staff and field crews during the downturn. But we will also do what is necessary to ensure the Company's stability. I want to thank the employees of Precision for their hard work and high performance results they continue to deliver despite these overwhelming challenges. On that note, I'll turn the call to the operator for questions. Thank you.

[Operator:]

Thank you. We will now take questions from the telephone lines. [Operator Instructions] The first question is from James West of Evercore ISI. Please go ahead.

[James West:]

Kevin what do you attribute the fact that you have only had one contract cancellation in the U.S so far. It seems like or one sort of contract payout so far that seems like your peers or your competitors have had done lot more than that?

[Kevin Neveu:]

Well I think at our previous conference call we alluded to two cancellations in fact it's actually become one as one of those rigs stayed under the IBC terms. But I think it’s a combination of things may be a different customer mix and we certainly think it has probably do with the performance of our rigs and customers wanting to retain control of the rigs. And certainly and maybe just customers picking lowest hanging fruits and contracts that is easiest to terminate so I think it's a basket of all three of those. We'd like to believe a large portion of it lies with the quality of our rigs.

[James West:]

And you mentioned the Duvernay and the Montney moving into full pad development now and there could be an opportunity for some new rigs additional rigs or new build rigs. What's the size of that opportunity you think over the next one to two years?

[Kevin Neveu:]

It's really hard to say in the current commodity price environment. But these are big commitments large player and there you have got some international AP companies in there, you've got some of the large Canadian companies some of the newer emerging Canadian companies in the play. It could be very-very active this is an area which is geographically as big as the U.S. Eagle Ford. And the liquids have a natural market as drilling for heavy oil. So I think there is a lot of reasons to be quite optimistic about the Duvernay moving forward as a liquids play. And then further down the road if we get some light in the tunnel on LNG both Duvernay and Montney have good destination for the dry gas if LNG proceeds. So I don’t want to come across I am too bullish right now we are really please about our positioning this business will grow for us going forward even in these commodity, take commodity price environments. But it could be a very good play if we get a bit of an easing a little more capital coming in this direction.

[Operator:]

The following question is from Scott Treadwell of TD Securities. Please go ahead.

[Scott Treadwell:]

Maybe to follow-up on the high-grade comment, Kevin, I wondered could you generalize to some degree are there basins where that seems to be happening more or maybe just geographies, Canada versus U.S. where that mindset for producers is maybe a little further ahead than others?

[Kevin Neveu:]

That comment Scott was particularly focused on the U.S and I’d be thinking more Southern U.S. I don’t want to get too much more too much clearer on that. We are still a highly competitive environments but certainly we're seeing opportunities go back to customers who are looking for rigs from us a year a two ago and we simply had nothing to satisfy no availability now we do.

[Scott Treadwell:]

And that was actually sort of a follow-up. We know these customers where you may have had a relationship with you just couldn’t get a rig out of the yard to meet their specification and in the time they wanted. Or was it more of a price-driven issue that some of these guys didn’t get the rigs they wanted?

[Kevin Neveu:]

It was availability at the time and I think they took less capable assets and now we are getting a chance to go back and high-grade to high spec Tier 1 super triples.

[Scott Treadwell:]

My last question kind of maintenance CapEx obviously a pretty small spend in Q1. But given the activity levels in Canada it is probably to be expected. With the budget you're sort of putting out there with almost 80 million of maintenance and infrastructure CapEx. Is that sort of anticipating obviously a pretty sort of slow and steady activity gain through the back half of there or is there a step there obviously having to spend nearly 70 million through the remaining three quarters of the year would sort of imply that activity might be picking up in your eyes.

[Rob McNally:]

No Scott I wouldn’t read that into and this is Rob. And we are not assuming any rebound in the second half we're expecting it to remain pretty muted. But as typical maintenance spend in Q1 often times is lower because that’s when we are busy working in Canada and it's will catch up on maintenance throughout the year. But I would not read that to think that we believe there is a meaningful step change in the second half.

[Operator:]

The following question is from Doug Becker of Bank of America Merrill Lynch. Please go ahead.

[Doug Becker:]

Kevin you were alluding to the potential that customers in Canada might split up the spending a little bit more over the course of the year. First quarter was certainly weaker that what we'd seen even back in 2009 is the remaining portion of 2009 a reasonable analogue here where we saw activity in Canada around 25, 50, and 72 over the remainder of the year or is that too optimistic?

[Kevin Neveu:]

I tried to explain a bit about Q1 GAAP by talking about the delineation work that wasn’t happening or the quarrying work that we normally see in heavy oil. We sort of explained why that spending was we think below expectation in Q1. But I think as the second thing going on too I would have told you I expected to see our customers in Canada spend a larger portion of their budget in Q1 than they actually spent. I think what they did was they spent a kind of time proportional amount and they left money in the budget for Q3 and Q4 to return some level kind of in line with that call it 35% to 45% budget reduction, so I don't have 2009’s actual activity numbers in my memory, but I'm thinking we will see slightly better activity levels at the back half of the year than Q1 might project forward, does that make sense to you?

[Doug Becker:]

That does no that's helpful. As we think about U.S. margins per day is it fair to say that they should pretty similar in the second quarter just given the contract coverage presumably there is still some ongoing fixed cost management in the spot market decision, just doesn’t seem to be all that active at this point?

[Kevin Neveu:]

Yes. I wouldn't expect any big changes in the cost reduction in the second quarter, and there is a few competing items going on, we have an average less rigs running, so there is less rigs to absorb the fixed cost, but we will have more rigs on IBC on idle but contracted which tends to improve margins and we will see where turnkey comes out, but I don't think we are going to see a big movement in either direction.

[Doug Becker:]

Makes sense and one last one, Rob you have really done a good job of preserving liquidity previously you mentioned share repurchases kind of on hold just you wanted preserve that cash has that changed and just how sacred is the dividend in this type of environment?

[Rob McNally:]

Well it is a couple of different questions there. So, I would say that as we have mentioned in the past, we put a dividend in place that we believe that we could support through a downturn. Of course this is a discussion we have with the Board every quarter, so we will continue to review it, but the intention was and is that we were able to support a dividend. And in terms of share repurchases or other uses of cash right now I'm pretty stingy with the cash I don't really want to spend it, until we see for sure where the bottom is, we think that there is some kind of green shoots that would make us believe the bottom is somewhat near, but we want to see that before we start using the cash in the balance sheet that liquidity is pretty important us.

[Operator:]

Thank you. The following question is from Dana Benner of AltaCorp Capital. Please go ahead.

[Dana Benner:]

I wonder if green shoots would apply to maybe any customer feedback that you've had with oil, WTI in the high 50s that maybe there is level at which some spending starts to layer back in would green shoots be something like that or is it more just looking at the oil price and reasoning up from there?

[Kevin Neveu:]

I'll pull back and assume green shoots a little bit certainly rebalancing of a rig fleet and substituting a Tier 1 rig for a less performing rig is what we're seeing right now Dana. I don' think we've seen any response on the activity front due to the slightly higher commodity prices. Because I think with lot of things moving, we have a lot of customers are drilling off of a combination of debt and hedge books and things like that, I don't consider the current pricing environment to be constructive particularly I think it's got to go as we said in my comments it is got to be a little bit higher yet before we get into constructive range and then you and I both know that any extra cash our customers get that they can direct towards drilling their well, but I don’t think we have seen that yet.

[Dana Benner:]

Okay, fair enough. I guess the second question I would have would be with respect to wage rates in Canada, so many of the sub-sectors went and put through wage reductions as part of just trying to get the cost structures as low as possible I mean your margins were truly impressive down only 300 basis points year-over-year, but I mean there is a point when I guess anything has to be looked at, so I’d be curious to know what your updated thinking is on that I understand employees listen to these calls and these are not easy subjects, but the issue is what it is?

[Kevin Neveu:]

Yes Dana as I said in the past and I will say it again today our field employees bear 100% risk on rig employment and so if your rig doesn't work they don't get paid and it's my view that a couple of hundred dollars a day isn’t going to change the economics for any of our customers on their field development plans. So, I don't think it deserves like immediate attention I think it’s something that you can pick it over longer term and I know that in Canada particularly the CODC has a mechanism to review those annual basis and we support that annual review, I don't think it deserves a intra review and again, I just don't think that that small piece of cost changes economics for our customers in a meaningful way.

[Dana Benner:]

Okay and then just third and finally from me I wonder if you could give us a little bit more color on how things are taken along with the Schlumberger joint venture?

[Kevin Neveu:]

Actually pretty well, if you heard my prepared comments in my text or the press release it's tough period of time to sell value when our customers are busy trying to chop cost, so despite that we had an ongoing flow of work through Q1, I think that when our customers get into real value focused mode in Q3 in a selected efficiency, and best rigs, that's when it is really going to have an opportunity to get marketed, I think that firmly at our customers, but I would tell you that we’re happy with our Q1 performance I think our partner Schlumberger is happy with Q1 performance if you could be happy with much in Q1 of this year.

[Operator:]

Thank you. The following question is from Jeff Spittel of Clarkson Capital Markets. Please go ahead.

[Jeff Spittel:]

Maybe if we could touch on trying to preserve new build capacity in your supply chain and environment like this and can you talk I guess qualitatively through -- there is certainly not much of a new build market today, but thinking about the longer term picture and laying that versus cost management in this environment, just what your plans are?

[Kevin Neveu:]

Jeff, we’ve been pretty aggressive of our capital spending plans, going from high rate of contracted rig builds and committing to drop right down to zero if necessary in Q3 and Q4. Obviously, if we get better visibility -- kind of going forward, if we can do things whether it's built a little bit of inventory or kind of decrease our long lead time for them a little bit to keep a few of those jobs alive, we’d like to do that. But we still have rigs to deliver yet and those rigs will be delivered through roughly this quarter and into July. So I am not forced to those hard decisions quite yet. But I will comment that we’ve been quite clear on ramping down our CapEx as low as possible if we think we need to.

[Jeff Spittel:]

And I know we’ve talked a little bit about high grading already. Are you seeing any instances with maybe existing customers where they are interested in entering into discussions about maybe reviving some contract arrangements, or swapping out maybe some Tier 2 rigs for Tier 1 rigs in exchange for that maybe trading with some more duration, or is it just at this point -- look, the contracts that we have, have plenty of integrity. Customers who weren’t on those were paying early termination fee if it does come to that and we’ll leave at that?

[Kevin Neveu:]

Jeff, I think it's fair to say that still price and cost dominates every discussion, every customer, about everything. With existing customers, I think we’re still little bit early yet on kind of replacing Tier 2 rigs with Tier 1 rigs, So I think they’re still managing their spend rates and getting close to the end. I think any customer out there would allow us to take the current existing contract, lower the price and extended if we offer to do that. We’ve been frankly quite reluctant to do that. We’d like to protect our current period cash flows and as Rob gave you clarity, we’ve got a pretty book of contracts through both ’15 and ’16 and say I’d preserving that current period cash flow is pretty important to us. So really more focused on not getting locked in with lower prices during these declining rig counts and trying to manage our book.

[Operator:]

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

[John Daniel:]

Kevin couple of things here. First housekeeping. I think you mentioned you exited 2015 with 82 rigs under contract, and I think you said 58 or Rob said 58 I think under contract in 2015. If those are the right numbers, can we get the geographic breakdown?

[Rob McNally:]

This is Rob. We haven’t reported the geographic breakdown, but I would say that its percentage wise not a lot different than what we reported for 2015, more or less equally split between the U.S. and Canada and then a handful internationally. And the numbers that you quoted were correct.

[John Daniel:]

And then a question on the Tier 1 fleet. When you guys look back at rig performance over this last year or two, do you see a material difference in drilling performance between your recently built Tier 1 rigs versus those that have been upgraded?

[Rob McNally:]

John, since the performance, it was down to mud pump capacity and then rig control systems and pipe handling. If the rigs have equivalent control systems and equivalent mud pump capacity, there is no difference in performance.

[John Daniel:]

If customers look the high grade, they don’t come to you say, I want the rig in '14 versus the one that was rebuilt completely in ’13?

[Rob McNally:]

Well not much difference unless they -- there is other factors that come in, like the pump size, if they want to increase pump capacity. There still continues to be a trend. Or if they've run the rig for the past three or four years and they like the crude and like the rig, they might be incented to only keep that rig, even though it's not a 2015 rig but in fact a 2012 rig.

[John Daniel:]

And then just last one for me, when we look at the well servicing side of the business, I think the utilization rate was 29% this quarter and obviously honestly the market challenges. But as you look forward, balance of this year and of next year, is it reasonable to expect that we could see that 177 rig count number get revised lower?

[Kevin Neveu:]

On the Precision fleet?

[John Daniel:]

Yes.

[Kevin Neveu:]

Rob, you address these depreciation.

[Rob McNally:]

John, I would expect that there could be more service rig retirements as we move forward. I don’t know about this year and next year, but as we suspected, there will be more service rigs that get retired in the relatively near future. I don’t expect that to have any material impact to our business and capability to ramp back up when demand is there.

[John Daniel:]

I am just trying to get a sense for like sort of -- not the right way to describe it, but what’s the clean fleet if you will in terms of what’s the right number in terms of truly marketed rigs within that fleet?

[Rob McNally:]

So all of those rigs could be marketed. All of them are capable of going to work. And ones that have been sitting in the yard for a while require a little bit of spend to get them out the door. But probably today there is 120 or 140 rigs that go to work on very short notice.

[Operator:]

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

[Jon Morrison:]

How much of the 7 million onetime restructuring charge flow-through SG&A versus op cost in the quarter?

[Rob McNally:]

The majority was through G&A but call it a split maybe $5 million for G&A, $2 million for op costs and something of that magnitude.

[Jon Morrison:]

And was the op cost side principally on the drilling side or the C&P?

[Rob McNally:]

Both.

[Jon Morrison:]

Okay. Did all of the restructuring costs get captured in Q1 or is there flow through we should thinking about for Q2 or Q3?

[Rob McNally:]

The majority happened in Q1. There will be a bit that you will see in the second quarter, but it won't be nearly as large. Our expectation would be, Jon that we're going to see the positive effects of the restructuring start to show up in G&A in Q2, Q3, Q4.

[Jon Morrison:]

Okay, Kevin, on the rig upgrading conversions that you referenced earlier around efficiencies, do you need to relocate rigs from basin to basin to satisfy those needs, and would you expect any form of descent duration with contracts when you sign, or are those effectively a spot market replacement of another rig?

[Kevin Neveu:]

The shorter answer is yes to all of the above, but so far it's been handful. So let's look that question again in about three months' time. There could be some relocation involved. We’d probably not do that unless we saw some duration of contract, unless it was a strategic customer. So I think it's early to draw any sort of hard conclusions yet. Certainly we know that we can go and satisfy some customers with some good high-spec rigs that we couldn’t choose a year ago. And we're strategically aligned to do that and I think we'll do make the best efforts to make sure we do it at the same returns we always got.

[Jon Morrison:]

Can you talk about whether you expect to see any step changes in day rates in the remainder of the year? They were fairly resilient, both Canada and the U.S. in Q1?

[Kevin Neveu:]

Now US [ph] are covered by contracts and by the IBC. I did allude to spot market in Canada for Q3 looking highly competitive. There will good pressure on day rates there. If we're getting quite a few rigs moving back into a contract status, that would be at lower than prior day rates. So I think in the U.S., mostly likely in Canada, it's going to be a pretty rocky Q3 for day rates depending on total spending levels by customers. Again, coverage with our deep Super Triples on contracts in Canada set us up pretty well to whether through the day rates in Canada.

[Jon Morrison:]

Can you give any sense for what the pricing delta would be between your contracted rigs versus the spot market, high level Canada and U.S. right now?

[Kevin Neveu:]

We’d like to see those tier 1 rigs stay within about 20% band of peak rates, and the most pieces have to achieve that maybe a little bit lower at times. In Canada that could mean prices of more like the high teens, generally smaller rigs.

[Jon Morrison:]

If North American activity levels were to stay flat for the balance of the year, would you expect any incremental rigs to go back to work, based on the upgrading efficiency conversation you referenced earlier?

[Kevin Neveu:]

There was a comment in my prepared comments. We expect to see our utilization on tier one rigs in a flat demand environment continue to improve for the course of the year.

[Jon Morrison:]

Last one for me just on the international side, is there any displacement opportunities there that you would look at redeploying right now or you need to see better markets all around?

[Kevin Neveu:]

Well, no. We've got the bid book right now that’s as long as it’s ever been with effective bids in three or four different countries where we have we think a reasonable shot and I may be a little bit customer secure. My experience has been that generally these awards slow down a little bit when the commodity prices are really soft, but right now we've got guys over there right now working on two different prospects of both liquidity and trusting. One of them might involve some North American rigs being redeployed.

[Operator:]

Thank you. The following question is from David Wishnow of JMP Securities. Please go ahead.

[David Wishnow:]

I guess to follow up on that comments on potentially moving North American rigs to international markets, would those be kind of pad capable shale-type rigs, Tier 1 rigs or are those older potentially idle Tier 2, Tier 3 rigs?

[Kevin Neveu:]

David, it's Kevin. I think there is a couple of opportunities right now that would see us move some Tier 1 rigs, but likely not pad walking rigs to international locations. And remember for our fleet of Tier 1 rigs, they can -- they're either pad walking right now or they can be converted to pad walking for almost a nominal amount of capital. But it's unlikely that I see a seeking configured pad walking rigs out of the U.S. or Canada.

[David Wishnow:]

Okay, great. And geographically within the U.S. these I guess early signs of high grading, fleet high grading you're seeing, is there a differential between from the stronger basins versus weaker basins or is it kind of across the board?

[Kevin Neveu:]

I think that the shorter basins are a little bit stronger. I kind of alluded to where we thought there was a bit more strength. Yes, I am not going get into specific day rates line by line right now. So let us report back next quarter and see how this develops.

[David Wishnow:]

Okay, great and I guess one just housekeeping question. Should I think about the tax rate dropping back to historical levels for the balance of the year or is there something going on with revenue mix that we should be aware of?

[Kevin Neveu:]

It's a little -- the weighted IFRS has us estimate tax impacts and caused a little bit of an odd answer for Q1. But I would expect that you’ll see most of that tax expense get reversed out during the course of the year and we’ll migrate towards a pretty low overall tax rate.

[Operator:]

(Operator Instructions) The following question is from Jeff Fetterly of Peters & Company. Please go ahead.

[Jeff Fetterly:]

On the capital spending side, you referenced $43 million of capital for rig upgrades and further on in the press release you talked about minimal rig upgrades or capital allocated to that. Can you reconcile those two comments for us?

[Kevin Neveu:]

Where there is $43 million that’s allocated to rigs that we’ve previously contracted and upgrading. That number went up a little bit primarily because of FX effect on U.S dollar denominated upgrades. But our expectation is we won't see a lot more through the rest of the year.

[Jeff Fetterly:]

How many rigs are earmarked at this point for upgrade capital?

[Kevin Neveu:]

It's four or five rigs off the top of my head. These were contracts that were initiated late year, previously announced.

[Jeff Fetterly:]

On the U.S side you referenced 55 rigs running today and potential for that to decline in coming weeks with broader rig activity decline and coming. Where do you expect your rig count could trough?

[Kevin Neveu:]

Jeff, could you speak up a little bit and repeat the question please.

[Jeff Fetterly:]

For the U.S where do you expect your rig count could trough from the 55 it sits at today?

[Kevin Neveu:]

I think we’re stopping short of calling this a bottom. I think it's fairly safe to call Canada our bottom right now. But in the U.S. we have a few renewals over the course of the next quarter or two that could be renewed or can turn into rigs that get wrapped. So we're just trying to be a little cautious about their forward guidance right now. I don’t have any specific indication of any rig right now that I'm worried about but that could change tomorrow.

[Jeff Fetterly:]

And would you expect in terms of ideal book contracted, the nine rigs that are in that category right now.

[Kevin Neveu:]

I am actually little surprised how that number stayed quite low, because if you remember during 2009, at this time in '09 we had 20 or 22 rigs on IBC. So I'm surprised how that number is minimized. So I wouldn’t be surprised if we drift around it. It's almost drifted week to week anywhere from six to eight or nine. I wouldn’t be surprised to see it go up to a dozen or stay where it is now.

[Jeff Fetterly:]

Last thing from me, on the directional drilling side, I know you've referenced in your commentary it being one of your strategic priorities this year to grow the Schlumberger partnership. With revenue for that business down 56% year-over-year in the first quarter, how do you reconcile that with your comments earlier about seeing some success and happy with the progress of those Schlumberger partnership today.

[Kevin Neveu:]

As I said happy with the progress in light of the quarter where activities are off 45%. So yes, much or more to say. Right now today it's a little tough to sell -- to upsell value based services. Customers are busy trying to cut budgets. Like we see with the high grading of rigs we expect to see an opportunity to high grade with Schlumberger directional on our rigs as we start getting deeper into the end of this quarter and into next quarter.

[Rob McNally:]

Jeff, I think it's also fair to say that just the total volume of directional work is way off obviously and it's highly competitive. But what we are seeing that’s positive is the percentage of our work that we're doing on our own rigs and the percentage of work that’s done with the Schlumberger alliance and has continued to improve. So the total volumes are way down, but the mix is a lot better.

[Jeff Fetterly:]

That was my follow up question, is of those directional drilling side pulling back. Have you seen gains or incremental revenue on the Schlumberger side and a greater loss on Precision directional work, or has it been fairly proportional between the two?

[Kevin Neveu:]

First of all I think we've been pretty much wound down third party directional work to minimal. So we're just worried about our own rigs and our own greater services, which on net basis right now is looking pretty good for us. But when you remove those third party jobs, [indiscernible] somebody else’s rig, overall our directional days are down.

[Operator:]

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

[Brad Handler:]

I guess just following up on that Schlumberger relationship, Schlumberger has talked a little bit about offering different business models to try to encourage work. I don’t know whether that wraps into your business at all. Is that something that you are also engaged in as part of -- and Kevin, I respect your comments about sort of wrong time to start off and value in some respect. But this creates some different potential to save money for your customers as well. Is that something that you all are involved with as well?

[Kevin Neveu:]

Actually Brad, I think we are one of those different models. I think you hit the nail on the head. I think Schlumberger is embarking on several different ways try to create value in North America. I can't speak to their strategy. But I think one of those ways includes our alliance. So I think we are one of the strategies they are using to address the market in a different way.

[Brad Handler:]

That I do understand. I'm wondering from a commercial terms standpoint, again, some of their ideas involved fronting capital, getting some performance metrics related to getting paid and that sort of thing. Is that something that you all are part and parcel with them on? Is there room in your -- is there room for you to work on the same basis.

[Kevin Neveu:]

I t think broadly, we have the ability to go to Schlumberger with any type of arrangement that looks outside of what Schlumberger proposed at. I would tell you that generally in the land going North American space, performance based contracts are often a feature of either a trough market or a bottoming market of kind of elastish efforts, try and squeeze some more cost out of the service companies. We’re watching carefully that there is a real value play to emerge here that makes sense for Precision that involves us working with Schlumberger. There’s opportunity for us.

[Operator:]

Thank you. There are no further questions registered at this time. I’d like to turn the meeting back over to Mr. Ford. That concludes our first quarter conference call. Thank you for participating today.

[Operator:]

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