Precision Drilling Corporation
Q2 2015 Earnings Call Transcript

Published: 24 Jul 2015

[Operator:]

All participants, please stand by, your conference is ready to begin. Good afternoon, ladies and gentlemen, and welcome to the Precision Drilling Corporation 2015 Second 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 second 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 second 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 McNally will begin the call with a brief discussion of the second quarter operating results and a financial overview. Kevin Neveu will then provide business operations update and our outlook. Rob, over to you.

[Rob McNally:]

Thanks, Carey. Earlier today we reported second quarter results with revenues of $334 million and a net loss of $30 million or $0.10 per share. We also announced a quarterly dividend of $0.07 per share. Second quarter 2015 EBITDA was $88 million, which is 32% lower than the second quarter of 2014. The weaker Q2 results primarily reflect decreases in North American drilling and C&P activity. EBITDA margins were 26% this quarter versus 27% in the second quarter of 2014. A relatively strong margin performance in the face of a significant industry downturn, as a reflection of our variable cost operating model, proactive fixed cost management, and contract coverage on our Tier 1 rigs. Restructuring costs were approximately $3 million in the quarter, bringing the year-to-date total to approximately $10 million. We expect annualized cost savings from these initiatives to be approximately $25 million per year. In the U.S. during the second quarter, margins were up approximately $1,000 per day over the second quarter of 2014 and $600 per day over the first quarter of 2015; due to strong day rates, higher turnkey revenue, and the impact of idle but contracted revenue, which was partially offset by lower absorption of overheads and higher daily cost from turnkey. The impact of turnkey and idle but contracted rigs increased margins by approximately $2,400 per day year-over-year. Today, we have 51 rigs drilling or moving in the United States and 11 idle but contracted rigs. Turning to Canada, drilling margins declined by $400 per day year-over-year, driven by less overhead absorption, higher labor costs and rig mix, partially offset by higher average day rates. Drilling activity decreased by 52% in the second quarter of 2014. Today, we have 55 rigs drilling or moving in Canada. In our international drilling business, activity increased by 17% and revenues by 37% over the second quarter of 2014 driven by the rigs deployed to Kuwait and Saudi Arabia in 2014 and to Georgia and Kuwait in 2015, partially offset by slightly lower activity in Mexico. Our Completion and Production segment revenues were $36 million, down 47% over the second quarter of 2014. EBITDA on the second quarter of 2015 was negative $1 million versus positive $5 million a year ago, reflecting the highly competitive pricing and low activity levels in the C&P market. As detailed in our press release this morning, planned capital expenditures for 2015 are now expected to be $546 million. The increase of $40 million since our last conference call is for the additional contracted new-build rig for the Canadian market and additional long lead-time items, purchasing some of our key long lead-time items during a downturn allows us to secure rig components that we utilized for new-builds or as fleet spares at a significant discount to normalized pricing. The expansion capital of $422 million is comprised of the cost to build 18 new-build drilling rigs, 4 for Canada, 13 for United States, and 1 for Kuwait. All of the rigs will be Super Triples, either 1,200 horsepower or 1,500 horsepower, 17 of the 18 rigs have currently been delivered. The final Canadian rig will be delivered in the fourth quarter. Again, 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 actual activity levels. Turning to the balance sheet, we believe that our balance sheet is strong and flexible. As of June 30, total debt was approximately $2 billion and net debt was approximately $1.5 billion. 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 an extended downturn. As of June 30, we had $434 million of cash in 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. In the first quarter, we also received temporary covenant relief from our senior lenders, ensuring that we will have access to our revolving credit facility as we work through this downturn. Our contract coverage remains strong. For the full year 2015, based on contracts in hand, we have term contracts for 104 rigs

[Kevin Neveu:]

Thank you, Rob. Good afternoon. I believe Rob has covered off our second quarter results. And I will speak to you what we see in the market in the back-half of 2015 and the steps we’re taking to seek out and capture opportunities [indiscernible]. So, let me begin with the overriding comments because of the very distressed market, sub-$60 and now sub-$50 WTI pricings are very challenging for our customers who are undoubtedly [indiscernible] industry. Through the first-half of the year our customers are focused on reducing cash spending through activity reductions and aggressive price negotiations. The effect is good for idle [ph] activity and consumer pricing. Yet, they have honored our long-term contracts across the boards. And we’re beginning to see indications that our customers trying to lock in these lower rates on the non-contracted rigs for longer periods of time, which is usually a good indication of a market evolving force. So it feels like most of that work by our customers has been completed. Just pausing to change microphones here, I guess we have a problem. So, I’ll start again. So, it feels like most of that work has been completed. While the last couple of weeks of oil price pullback is troubling, I don’t think our customers have underestimated the downside risks still in play. So, we have a very limited, virtually no visibility on a fundamentals based rebound. So, it’s fair to say that we don’t believe in a V-shaped recovery. So at Precision we have battened down the hatches for the long haul. We sized our business and our operations for this environment and that has been a priority for the first half of the year. Now this work largely behind us, we’re now shifting our focus to searching out and exploiting any opportunities we see through this trough. So, I’ll begin by increasing - or discussing our increase in capital spending. Rob mentioned the $40 million increase in capital spending. About a quarter of this is to complete the fully contracted new-build rig we discussed that will be deployed to the Canadian deep basin gas development drilling. And there are two takeaways from this. One is that by utilizing our fleet inventories of parts and our long lead equipment in our current inventory, we can deliver a new-build rig in less than six months and with a minimal increase or increment to capital spending. And the second point is regarding improved visibility and the customer demand, we see for additional Tier 1 rigs for the Canadian deep gas basin. As such, we’ve made further decision to redeploy several of our underutilized ST-1200 pad walking rigs from certain U.S. regions back to Canada, and we expect at least five of those rigs to be moved up and activated during the second half of 2015. I’ll speak more to the basin dynamics in a few moments, but it’s fair to say that we believe our presence in Canada as a leading Tier 1 triples driller and the deep basin will be further reinforced as we continue to grow this business segment, and we expect to finish 2015 with a fully utilized feet of 27 Super Triples in Canada. Now, the balance of our capital spending, approximately three quarters of the $40 million increase, is opportunistic spending on our part. As we intend to purchase additional long lead equivalent and fleet spares, such as diesel engines, BOPs and drilling equipment. We believe there was a declining backlogs experienced by the oil service manufacturing sector, but this is the perfect time to negotiate favorable pricing in terms for equipment that we will consume into our normal operations even during a sustained downturn. So you should model that portion of our CapEx, while it’s an increase in 2015, it will play out as a decrease in the following years. I think finally, I’ll confirm that our head count is down over 2,200 people from beginning of the year. Of course, the largest element is field personnel reductions in line with our variable cost business model. But additionally, over the first-half of 2015, as Rob mentioned, we experienced $10 million in restructuring charges, which have included consolidating six of our facilities, corporate expense reductions, and certain field overhead expense reductions. All of this, we believe aligns Precision with the current commodity price environment and current customer demand levels. So borrowing another significant step down and customer demand or significantly extended trough, we believe Precision is appropriately sized for the market we see through 2015. Now that said, our laser focus on cost control will note abate. We’ll continue to leverage our scale, our procurement power, our systems, and our processes to drive cost out of every aspect of our business. We’ll protect our margins and we’ll focus on cash flow as a primary short-term objective we can control. Now, turning to operations. Our primary operations objective is to remain and sustain our high-performance competitive advantage at the rig level. And that means, we continue to invest in training and development of our people. And, for example, in Canada, our employee development rigs under construction will be commissioned and operating late in the third quarter. This is a full Tier 1 AC rig, and we’ll train our people in Canada, as we did in United States with our latest available technology. Now, it would be very easy for us to cost defer this project, except, we believe there’s a 10-year competitive advantage, especially for our people, is key to our long-term strategy. Now, the results of this continued focus on high performance are truly remarkable. And most notably, we have achieved our all-time best safety performance in the first-half of 2015 with over 98% of Precision’s operating facilities operating without a single safety recordable incident during the first-half of the year. This is a truly outstanding excellent safety performance. It should be beyond what I would have expected, but the focus and energy we’re putting into safety right now is paying off in dividends. At Precision, we also measure and track our non-productive rig time. And that is downtime in a rig that we cause and therefore impairs customer performance. We measure this to hold ourselves accountable to targets that are scaled to nearest in 0.01%, that’s roughly 4.5 minute downtime increments. During the second quarter, our fleet wide mechanical downtime that’s Canada, United States international in well servicing is less than 0.97%. Again, this is truly remarkable performance and further underpins our high-performance, high value proposition to our customers. We know that continue to deliver field performance better than our competition is a significant competitive advantage and especially in industries in deep distress. Our high-performance strategy is delivering market share for us in Canada and we are seeing emerging opportunities in the U.S. driven by our superior field performance. So turning to the U.S., our rig counts seemed to have stabilized, although we experienced some slowing in the Marcellus during the second quarter, which we now believe is stabilized. We exited Q2 with approximately 52 rigs running in the U.S. and 11 on IBC, again, roughly in line with our activity levels in April/June, our Q1 earnings call. I believe that provided WTI stays in the current range, our U.S. activity has dropped. And from Precision’s perspective, we have visibility on several confirmed reactivations in August and then throughout the end of the year. We expect to see our rig count begin to climb up to the third quarter, as our customers’ high-grade existing lower-tier rigs rolling off contracts. I’m not going to provide any regional detail other than mentioning Texas as likely having good opportunities for high-grading and rig reactivation. Regarding spot day rates or leading edge day rates, and I know that’s the question on everyone’s mind, our last guidance in our Q1 call. And since then, we’ve heard of day rates as low as 17,009 for what people are terming as high-spec rigs. The high grading opportunities that we’re pursuing are padlocking rigs with high pressure mud systems, high capacity mud pumps. And these rigs are attracting substantial higher day rates than those low rates I’m hearing talked about. As always, at Precision, we remain focused on defending our cash margins, not utilization. Hence, we practice strict pricing discipline. And I’m not going to give any further color on day rates right now in this highly competitive market. Looking to Canada, there seems to be an inordinate amount of angst or concern about the Canadian market. While the commodity prices in both gas and oil are huge drag, it’s very important to remember that our Canadian customers have a cost base index to Canadian dollars, and while commodity sales are indexed in U.S. dollars. The Canadian dollar is trading at a decade low relative to the U.S. dollar providing our customers with a substantial cost advantage. I think also, I understand that the recently elected provincial government in Alberta has led to some uncertainty. I’m confident this new government is working closely and hard to engage industry and alleviate those concerns. So our view on Canada is mixed. We see the Cardium, the Viking, the Bakken plays as oversupply, particularly the tele-double rig market. We expect day rates and utilization will remain highly challenged in these areas for that rig category. In heavy oil, our traditional Super Single’s market will also be challenged, but not so much by competition, just a lack of customer growth and investment. Moving to the Deep Basin gas and liquid regions, this is a completely different story. This includes Horn River, the Montney, the Cutbank, Duvernay plays, and other Deep Basin plays in Northwest Alberta and Northeastern British Columbia. The drivers here are combination of favorable NGO economics, substantial drilling efficiency gains, and growing investments by the LNG players. Now, while we’re not at the finish line, we’re very encouraged that we required approval decision continues to move industry closer to full scale long-term LNG development. This is certainly a positive for industry and meaningful for Precision. Now, as we talked earlier, the contracted new-build rig will be deployed to the Deep Basin in late Q4, was a new-build rig. And I’ve already heard several questions today about why we’re building new rigs in this environment. I’m going to add some comments about this particularly. The day rates in our economics fell well within our long-term return expectations, so it’s a good deal for Precision. But more importantly, this ST-1200 has many customer specific features and this customer has a long-term drilling program, and they prefer a new-builds rather than trying to upgrade an existing rig to meet their requirement. We’re very happy to recruit this customer in our business, and I think this is a good opportunity for Precision and very good for the customer. Equally important is that we have further visibility on other Tier 1 pad locking rig opportunities. As we mentioned earlier, we’re deploying, at least, five of our ST-1200s from the U.S. to Canada, and then redeploying these rigs and immediately having them go to work is on our screen. The first two rigs are in process and underway, we expect to have these rigs operating in late Q3. As Rob mentioned, we have 55 rigs running in Canada currently, and expect to see our rig activity gradually increase to the third quarter and year end. Moving to international for a moment, our business remains strong, but will not be unaffected by the depressed commodity prices. Currently, one of our rigs in Saudi Arabia has come off contract and will likely remain down through the quarter. Likewise, our rig in Georgia has completed its contract and was being bid to others in the region. As Rob mentioned, we deployed our third rig to Kuwait late in Q2. This rig was delivered on time, on budget, and started up flawlessly. Now, we remain very encouraged by the growth potential in Kuwait. Our international bid activity remain strong. Our visibility on potential awards is improving, and we expect to resume international organic growth in 2016. Moving to our completions on production services group, they continue to fight anemic customer demand and severe industry oversupply. The cost reduction initiatives and the scale efficiency gains our team achieved during the first-half of the year are designed to drive cash flow. And the group remains focused on cost management, cash flow generation as a key short-term financial objective. We expect well completions activity will have a seasonal improvement and provide some activity relief during the back-half of the year. But on the whole, this business remains - this business segment remains very challenged and oversupplied in the foreseeable future. Our scale, our systems, and most importantly, our excellent people will allow us to sustain our business through this deeply challenged market. So I think I’ll conclude by saying the challenges faced in this market are profound. Precision is very well positioned to execute our strategy through this downturn to continue to capture opportunities through the downturn and emerge a stronger, more diversified player when the business does finally eventually rebound. On that note, I want to thank all of Precision’s employees for their continued efforts and results with excellent safety performance, superb rig efficiency, and excellent cost management. I’ll now turn the call back to the operator for questions.

[Operator:]

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

[Scott Treadwell:]

Thanks. Afternoon, guys. I wanted to maybe just touch on the Canadian marketplace, obviously, a bit of a win there with the new-build rig and potential redeployments. Can you characterize what’s happening with those customers? Is that truly a high-grading where they are looking to maybe keep their rig fleet number above where it is, but they are taking a page out of the U.S. market and moving up to the high spec rigs. And a way maybe from pad capable mechanical rigs or is this just organic growth for those specific customers, where there just isn’t the rigs to service them in the market today?

[Kevin Neveu:]

Thanks, Scott. Good question. It is a bit of a blend of both. So, for example, the new-build rig is an expansion program, so that’s additional capital being deployed in a very good play. We think that the five rigs likely are kind of a combination of transitioning to full development drilling away from delineation drilling. So, while the mechanical LB [ph] double might have been a good rig to delineate the field, we think that the long-term solution is a high efficiency industrialized pad type triples rig. And our customers seemed to be agreeing with that. So, we think this is part of that natural industrialization or transition from delineation to full industrialized development drilling.

[Scott Treadwell:]

Okay. And then, sort of a follow on to that, have you had any traction or is it part of the strategy that sort of pitched the integrated directional model with the Schlumberger equipment as part of those high-spec rigs?

[Kevin Neveu:]

We were pitching that on every high-spec rig opportunity we have, whether it’s an existing rig running or a new opportunity to go. And Scott, we’re receiving kind of growing enthusiasm. And again, the first-half, as I commented on the call, the first-half of the year, most of the time we spend with customers is around trying to help them get their budgets in line, so that was rig count and price. So the more involved discussion about the benefits and value of integrated directional really didn’t hit the radar screen. But as we move into the third and fourth quarter, it’s gaining more traction and I expect that we’ll see good customer pick-up on this through the third and fourth quarter. But, we are still fighting market right now in directional where everybody is fighting to survive, the business is largely un-contracted, so it’s kind of a spot market. And those that are traditional players are desperate to maintain market share.

[Scott Treadwell:]

Okay, good. And last one for me just on the long lead items, I just want to make sure I understood, Rob, correctly that - we’re modeling a number for maintenance capital next year. Should we think about taking $40 million off of that or is this more just a hedge that you’ll continue to replenish that inventory level through the cycle?

[Kevin Neveu:]

Scott, it’s not quite that simple. If there are no new-build opportunities next year and the year after, this capital will get rolled into maintenance and used up in maintenance. It wouldn’t be all used next year like we spread over two or three years. But we are going to spend this money extremely intelligently buying long lead-time components that can be used either for new-builds or for fleet spares. And - I’m not betting on a new-build rebound, that’s not the point. I think the value here is that we can probably work closely with our vendors, give them some backlog right now, and we desperately need backlog, probably get some very favorable commercial terms. And for us the worst case is that this displaces some maintenance spending in 2016, 2017. So, I think the answer is, we’re spending this year. If there is no growth in business, no growth maintenance in your model - or growth CapEx in your models in upcoming years, then subtract this over two years or three years from your maintenance capital. Rob, is that reasonable?

[Rob McNally:]

Yeah, that’s fair - that’s fair, Scott.

[Scott Treadwell:]

Perfect, and, just the last one on, I guess, on that specific item. Did the reduction in pricing you’ve seen for those input cost, does it material - does it give you sort of buyer power or gunpowder to go into the pricing discussions with a slightly lower threshold where your economics work or is it not enough of the rig build cost to really change that?

[Kevin Neveu:]

Scott, we are always trying to eke out every penny we can out of capital or out of maintenance or out of operating costs, to give us an advantage to the marketplace. Ultimately, we want to widen our margin, our cash EBITDA on the rig. But, do we leverage our scale to reduce our cost and increase our price to business? Absolutely.

[Scott Treadwell:]

Okay.

[Kevin Neveu:]

So, the answer is yes.

[Scott Treadwell:]

Right. Yeah, okay. I appreciate the color, guys. That’s all from me. I’ll turn it back.

[Kevin Neveu:]

Thanks, Scott.

[Operator:]

Thank you. The following question is from James West from Evercore ISI. Please go ahead.

[James West:]

Hey, good afternoon, gentlemen.

[Kevin Neveu:]

Hi, James.

[James West:]

Hey, Kevin, Rob, it sounds from your commentary you’re looking at a U.S. market where high-grade is going on, and we’re hearing from others; Canadian market, where some plays are adding the incremental rigs in a fairly healthy bidding environment internationally. So - and I think Rob made the comments, you’ve added more contracts, I think five more contracts to your 2016 contracted backlog. So the question that I have, we’ve got the one new-build to announce today. When do you think you see more opportunities to pull the trigger on additional new-builds for next year?

[Rob McNally:]

Well, I made the comment, James, that we’re seeing customers trying to lock in all of these well-to-well day rates that are out in the marketplace right now. That’s a long, long ways from new-build economics.

[James West:]

Yeah, sure.

[Rob McNally:]

So, we would need to see day rates come back into the return range where we traditionally want to see. We’d want to see contract term be out in a two, three, four year range. So, I think we’re little bit away from that. What I think could happen? I think if the Tier 1 market tightens over the balance of 2015, which I think is possible.

[James West:]

Right.

[Rob McNally:]

We could see all of the Tier 1 rigs that are pad, not pad, pad capable, but pad able right now go back to work.

[James West:]

Right, right.

[Rob McNally:]

We could see opportunities to further upgrade some of our Tier 1 rigs to put pad moving systems on. And that for us is about $1 million upgrade, not substantial, minor. But I think, if there’s a shortage of pad rigs for core plays and rigs to upgrade get exhausted, then I think it would be into a new-build environment, and that could emerge in 2016.

[James West:]

Right. I agree. I think we’re getting pretty - I think we’re getting close to that actually little bit more rapidly than some may realize. How many - can you remind me, Kevin, how many of your rigs right now you would consider pad optimal?

[Kevin Neveu:]

What do you mean by pad optimal?

[James West:]

Walking.

[Kevin Neveu:]

Okay. So, currently configured pad walking rigs, we don’t disclose that through our IR. I think if you go through our website and comb through it you might find the detail there. I’m not going to give it out today. What I would tell you is every one of our Tier 1 rigs can be converted to a pad walking rig for about $1 million, give or take some change.

[James West:]

Sure. Okay. Well, I had to try. Thanks, Kevin.

[Kevin Neveu:]

Good. Thank you.

[Operator:]

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

[Dan MacDonald:]

Hi, good afternoon, guys. Just wondering, Kevin, if the nature or the tone of the discussions you’re having with some of your U.S. clients in terms of high grading rigs and maybe potentially the odd additional one being added here, has that changed at all over the last two weeks, given the slide in the commodity price?

[Kevin Neveu:]

Yes. The short answer is, no, it hasn’t. I think everybody is a little bit nervous. So I think the $10 drop at commodity price makes them a little more nervous. Behavior hasn’t changed. So don’t read that as me being enthusiastic or pessimistic. These prices sub-$60s are not helpful prices in general. But I’ll tell you, once the decision moves back to the drilling department to manage their rig fleet and have the best rigs, once they’ve got that - their budgets in place, the commodity price doesn’t affect what they do day-to-day. They don’t watch in that commodity price in making their buying decision based on today’s spot price for oil. They have a budget, it’s going to be in place for the rest of the year and they’re going to manage the rig fleet and pick the best rigs they can choose. So I wouldn’t expect it to change their behaviors in the short-term.

[Dan MacDonald:]

Great. Thanks. And then just - when you look to the Canadian market and recognizing there is a shortage of that higher spec, high horsepower IEC [ph] rigs up here. How many more rigs would you really be comfortable redeploying to the Canadian market versus putting new capital to work? How should we kind of think about that?

[Kevin Neveu:]

So, I’m not anxious to put new capital to work unless we can get a long-term contract and the returns we want. It’s as simple as that. So, there really is no math between how many rigs move across the border. This is a kind of a unique opportunity. We’ve got some of our ST-1200s right now. They were underutilized in the U.S. They are perfect for much of what we see in the Montney. And they’re designed that way from the get-go. So, there is no surprise to us, they’re going to move north and south. I think this works out well. It’s - other than trucking cost, it’s relatively easy for us to move these rigs across the broader, but we have the visibility to make that trucking cost a good investment for us. There is no limit on what we can do, but I’m not going to rob from Peter to pay Paul. So, we have opportunities in the U.S. I’d love to pursue those in the U.S.

[Dan MacDonald:]

Okay. So, we should kind of think about the new-builds for Canada is bit of a customer-specific one-off and the preference does remain until things at least start to improve to put the idle stuff to work first?

[Kevin Neveu:]

Yeah. We discussed this earlier today and it’s a Precision ST-1200. So, it’s not a custom-built rig, it’s an ST-1200 with additional features on rig that customer wanted. So, the additional features, we could have done on an upgrade, but the customer wanted the rig for a number of years and really preferred a new-build rig and is prepared to deliver us the appropriate economics. So, yes, it’s customized for the customer, it’s not unique in its ability though, and the returns are good, and the contact duration is what we prefer.

[Dan MacDonald:]

Great.

[Rob McNally:]

Yes. Thank you. But the rest of your question I think is, yes, we are. We have a definite preference to put the existing fleet back to work before we would add any capacities to the fleet.

[Dan MacDonald:]

Great. Thanks a lot, guys. I’ll turn it back over.

[Kevin Neveu:]

Thanks, Dan.

[Operator:]

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

[Dana Benner:]

Afternoon, guys.

[Kevin Neveu:]

Hi, Dana.

[Rob McNally:]

Hi, Dana.

[Dana Benner:]

I wanted to start with the issue of market share. It’s certainly a very favorable part of the Precision story right now. And I wonder if you can give us some more color on where that’s happening undoubtedly? It’s probably in the deeper market, but whether you want to talk Canada, or certain regions of the U.S.? Any color would be great.

[Kevin Neveu:]

So, just looking at Canada right now, I think there’s a lot of moving pieces, Dana. We are running 55 rigs today, 21 of those are super triples and we expect that that will increase over the course of the year. We could be at 27 by the end of the year with the new-builds and with the five new deployments. As the market share percentage, that puts us, high 30s, low 40s of that market. And I’m quite pleased with that, but that’s not untypical for Precision on resource-type plays in Canada. We have that type of market share in heavy oil when it was a resource play, it slowed down right now. We still have a good market share of a much smaller market. But the balance of our activity is running, we still have those 34 rigs running in non-Deep Basin gas. And around the profits, we’re competitive, we’re making good returns in those rigs. But that gives you a sense of our positioning right now today. I’m quite pleased with the way Q2 went. We ran - we kind of trough down at, I think, each of 19 rigs. But the industry really took it on the chin in Q2. And we had a pretty good run through Q2 with our pad rigs running through the quarter. So, I’m - in a challenged market right now, I’m feeling good about our position of where we are today and where we will be at the end of the year. Moving to the U.S., I don’t have the basin-by-basin details, but I’d mention that we saw a bit of a pullback, a broad-based pullback in the Marcellus that we also experienced in Q2, and that took us down from kind of mid-50s to low-50s rig count. But we’ve been stable on the balance of the basins. And what we’re seeing in the U.S. right now is an opportunity to start increasing our rig count, particularly in Texas. I don’t want to get to basins specific there, because it’s very competitive. But expected in August and September, October, we could pick up one, two, three, four, five, it could be 10 rigs over time, and all of that’s high grading. I think that happens even if the U.S. rig count stays flat.

[Dana Benner:]

Right.

[Kevin Neveu:]

Hope, that’s helpful.

[Dana Benner:]

That’s very helpful. And I recognize what you said about - it’s so easy to take anecdotes on spot day rates and lots of people love to apply that across an entire rig fleet. But to the extent that you put these additional rigs back to work later this year, presumably, you’d be doing that at somewhere in-between the type of spot rate metrics people love to quote and say, where those would have been on their last term?

[Kevin Neveu:]

Yes. We didn’t come prepared today with good disclosure on or good detail on EBITDA margins per day. I would like to help clarify it over time, but not really today. Short answer is, we will be tactical with what we do, but I expect the way you described it that the day rates will be something higher than those troughs you’re hearing about. And it will be off the peaks, it will be off the peaks by $4,000 or $5,000 or $6,000 a day.

[Dana Benner:]

All right. Okay. I just want to….

[Kevin Neveu:]

But I’ll add to that. If you’re upgrading a rig to make it a pad walking rig, for example, we’ll charge that upgrade and we’ll return that capital to Precision inside or normal economics. So if we’re investing capital on a rig that return comes back to us as it would with any invested capital at any point in the cycle, just like the new-build for Canada.

[Dana Benner:]

Right. Okay, third and final question. I’ve asked you this before and I just wonder if, maybe, you’ve changed your thinking a little bit. That is, given the bid activity going on in the Middle East right now. I just wonder if you are getting maybe a little bit more aggressive in the way you look at that region. I know you’ve laid out kind of a long-term strategy of how many rigs you want to add internationally per year and that certainly makes sense. But if the opportunity is there and you certainly have the capacity to bid and to move rigs into that region, I just wonder if, maybe, you’d get more aggressive?

[Kevin Neveu:]

Dana, we desperately seek critical mass market share, maybe getting another 10 rigs would be really good for us. We’ve also learned enough now in the last several years working internationally, but these long-term contracts are stable, delivered fixed returns. We’re sort of little less focused on trying to get peek returns every time we make the investment, we’re looking full cycle. So, I would probably give a little bit more of the way on the competitive edge. But I’m also going to tell you, we’re not going to loss lead to gain market share. So you don’t - our simple guidance is a very controlled, measured three to four rigs per year in a better market, I’d be happy with. And I’m thinking that 12 months from now, we’ll be back in our path. And I commented that we like certain markets. I commented that we’ve got good visibility on our bid book right now. And I think we’re well on the path to growing that business, and we may have some news later this year on growth.

[Dana Benner:]

Right. So let me ask the question this way. If there were a 10-rig contract and I have no idea if there is - if there was a10-rig contract in Saudi, a place you’re already operating, what would prevent you from bidding on that, if you thought you could get good metrics, notwithstanding the fact that you’d like to grow at a more measured pace, generally?

[Kevin Neveu:]

Nothing prevents us from bidding. What might prevent us from winning the contract is that if it’s a six or seven tender - six or seven company tender bid, we will never be lowest on the six or seven company tender. So if Saudi were not to bid for 10 rigs, and if there were seven or eight qualified bidders, we’ll never win that one.

[Dana Benner:]

Right.

[Kevin Neveu:]

If there is three qualified bidders and they’re all kind of high spec type dealers like us, we’ve done a pretty good job. Our scale and our size and our competitiveness, and things we talked about give us an advantage.

[Dana Benner:]

Okay. That’s great color. I’ll turn it back. Thank you.

[Kevin Neveu:]

Thank you, Dana.

[Rob McNally:]

Thanks, Dana.

[Operator:]

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

[Jon Morrison:]

Good afternoon, all.

[Kevin Neveu:]

Hi, Jon.

[Jon Morrison:]

Was there any material ongoing monthly revenue or one-time payments from idle but contracted rigs in the quarter?

[Rob McNally:]

Well, call it an average of about 10 idle but contracted rigs throughout the quarter, kind of range from 9 to 12. And there were no contract cancellations that were just paid out, but they - we continue to have, I think today it’s 11 rigs that are idle but contracted. And that did have an impact on revenues and margins as I mentioned in my prepared comments.

[Jon Morrison:]

Can you give us sense of breakdown, Canada and U.S.?

[Rob McNally:]

That’s primarily all U.S. In the Canadian market, I don’t have it in front of me, but it wasn’t nearly a significant numbers, it was in the U.S.

[Unidentified company representative:]

[indiscernible] Canada it’s a little different.

[Jon Morrison:]

And is it fair to assume that that’s going to carry on into Q3 and Q4 to some extent?

[Rob McNally:]

I think that’s largely dependent on what happens with commodity prices. I think in this commodity price environment, it’s likely that we’ll have, call it, high single-digit or low double-digit number of rigs that are idle but contracted through the balance of the year.

[Jon Morrison:]

And then on your comments about the new-build, can you give any idea of what’s different about this rig versus something that you’d have to upgrade on a current SC-1200 rig? How’s it different than the rigs…

[Rob McNally:]

The short answer is no, I will not, because this is - we’re doing this for a customer specific drilling program, we’ve never disclosed the detail. But nothing we’ve done in the upgrade makes the rig unique and that it can’t drill anywhere for anybody else.

[Jon Morrison:]

Okay. You mentioned five being the base case for redeployments. Do you care to share any sense of what an upper end of a redeployment from the U.S. to Canada could be at this point?

[Rob McNally:]

I’d say, it’d be driven by customer pool in Canada and by this high grading that we expect to happen in the U.S. All things being equal, I would rather leave the rigs in the U.S, if we can put the rig to work in the U.S. But at the same time, if we have an opportunity to continue to grow our market share in Canada, I would like to do that too. But if it’s a head of the equal decision, the rig will stay in U.S. So beyond those five, there is room for more, not going to quantify how many more at this point. But I do expect that whether over two or five, by the end of year those rigs are likely work in somewhere big U.S. or Canada.

[Jon Morrison:]

Is it fair to assume that you need some sort of a base duration from a contract, from a customer to incur the travel costs, or it’s just a broad read on the market at this point?

[Rob McNally:]

We wouldn’t bring these rigs up without a firm commitment.

[Jon Morrison:]

Rob, on the ordering of long lead time items, can you give any sense of the pricing discounts that you are able to get on those to ultimately pay up for the assets today that you might not use until 2016 or 2017 under a bearish scenario?

[Rob McNally:]

Yes, John, we’re in the middle of negotiating these, and it varies depending on vendor. So, I’d rather not comment on what the number might be. But it’s a range of discounts, and let’s just say, that it’s - they’re good enough - we expect they’re going to be good enough that it really does makes sense to commit to this equipment now, versus waiting for the next year or two there.

[Kevin Neveu:]

Alternatively, if it’s not we may not commit to the equipment.

[Rob McNally:]

Yes.

[Jon Morrison:]

Okay. In Canada, you’re obviously going to follow the CAODC wage rate schedule, but can you give any idea of whether there’s been a material change in field rates in the U.S. at this point?

[Kevin Neveu:]

Sorry, could you repeat the question?

[Jon Morrison:]

I realized you’re going to follow the CAODC wage schedule in Canada, but in the U.S., has there been any material change on what you’re paying guys on the field level on an hourly or daily basis at this stage?

[Kevin Neveu:]

Yes. We adjust our day rates in the U.S. kind of on the basin-by-basin basis depending on the competitiveness of the basin. We don’t disclose what we’re doing on a rig-by-rig or area-by-area basis. And generally, our contracts are structured. So, if there are increases, we pass those through to the customer, but we’re also compelled to pass through decreases. So, we’re doing the best we can by both our people and by our customers to manage costs. So the bottom line is, if we get a decrease there is no effect to Precision, because that benefits our customers. If we hold our prices, there is no effect to Precision. If we increase prices or grades, there is no effect to Precision. So we’re neutral and that we’re compelled to in this kind of market try protect our people.

[Jon Morrison:]

Of the incremental contracts you guys have signed since the Q1 results, was it a material change in rate on those re-contracts relative to what you’ve got contracted previously going into the downturn?

[Kevin Neveu:]

Yes, for those....

[Jon Morrison:]

I mean, the spot markets have been all over the place. I’m just trying to get a sense. If you’re signing a contract whether it’s materially different than what you would have signed?

[Kevin Neveu:]

If we’re locking in for a long-term contract that is adding to our 2016 backlog, those rates would not be what you’re hearing specified for trough market rates, maybe much closer to our traditional rates.

[Jon Morrison:]

On the international side, how many rigs do you guys expect to run in Mexico in the back-half of the year? You gave good color on other regions, but…

[Kevin Neveu:]

We don’t expect any changes in Mexico for the back-half of the year. Our current activity level should stay in place. If for whatever reason, the IPM project picks up steam, we could have more rigs go back to work.

[Jon Morrison:]

And, in your comment earlier, Kevin, about going back to an organic growth market - or organic growth within the international market, is it fair to assume that you’re going to preference redeployments over new-builds in that opportunity as well or ultimately, you want to keep idle rigs in the U.S. for when the market turns?

[Kevin Neveu:]

I would tell you that I preference utilization. So, if we can move rigs internationally and get similar returns and better utilization, I’d be happy to do that. But, it’s generally driven by customer specification. So, if the specification allows redeployment, we’d be happy to redeploy. If the returns are good, if the specification requires new-build, and the returns are adequate, and the contract duration is appropriate, we’ll new-build.

[Jon Morrison:]

Appreciate the color. Thanks.

[Kevin Neveu:]

Thank you.

[Operator:]

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

[John Daniel:]

Hey, guys, good afternoon.

[Kevin Neveu:]

Hi, John.

[Rob McNally:]

Hi, John.

[John Daniel:]

Rob, given where your rig count is today, it would appear that your U.S. rig count for Q3 will be down slightly quarter-over-quarter. If that’s the case, would you expect to see the operating cost per day increase?

[Rob McNally:]

We’re on - in as much as we’d have less rigs running to absorb the overhead. Yes, that would be true. But, we’re down in a couple of rigs from where we were on average in Q2. So, I don’t think we’re talking about a huge effect here, John.

[John Daniel:]

Okay. Hope springs eternal. But when the rig count recovers, let’s say you get back to, say, Q1 levels, I don’t - pick a quarter, it doesn’t matter, maybe it’s 80 rigs running, given all of the - and I’m focusing on the US here, all of the cost reduction initiatives that you guys have been putting forth, would your operating cost per day be lower in a new environment?

[Rob McNally:]

That’s likely true.

[John Daniel:]

Okay. You mentioned that you wouldn’t move rigs unless you had a firm commitment, but can you say if the rig moves are being paid by the customer or will that show up in the Q3 cost?

[Rob McNally:]

The rig - the moves will show up as an expense in Q3 as most of our moves show up as expense during the quarters, but the contract - the commitments will cover the cost of the move over time.

[John Daniel:]

Okay. And would that be U.S. costs or Canada costs, you know?

[Rob McNally:]

Yes. There is a - it’s a combination, John. It’s not split exactly 50-50, but it will be little bit weighted to the Canadian side of the business.

[John Daniel:]

Okay. And then, last one for me and I’ll jump in the queue because I got few more, but can you provide the geographical breakdown of the contracts in 2016?

[Rob McNally:]

No. We haven’t provided that color. But if you look at the contract split, today it’s roughly 46 in the U.S., 47 in Canada, or maybe I got that backwards, and then 11 internationally. That ratio doesn’t change a lot.

[John Daniel:]

Okay. Right. I’ll get back in. Thanks, guys.

[Rob McNally:]

Okay. Thanks, John.

[Operator:]

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

[Sean Meakim:]

Hey, good afternoon, guys.

[Rob McNally:]

Hi, Sean.

[Sean Meakim:]

So, as you said, you’re not planning for a V-shaped recovery?

[Kevin Neveu:]

No, no. Actually, we’re calling this is not a V-shaped recovery, it’s done.

[Sean Meakim:]

Right. That’s what I’m saying. So you’re not planning for something of that nature, right? So if the market troughs for several quarters or even, let’s say, demand improvement is limited to a certain selection of the high-spec part of the market, just the most ideal 1,500 horsepower walking capable, et cetera, do you think there is potential for greater bifurcation between day rates for high-spec rigs than what we’re seeing historically?

[Kevin Neveu:]

So, right now, kind of our conclusions about day rates during the first-half of this year, really hard to stretch out longer term. That’s the first comment. Second comment is there was bifurcation in day rates in 2014 between fully pad-walking rigs and non pad-walking rigs. So that bifurcation was already in place in 2014. Our day rates were higher for pad-walking rates versus non-pad-walking rigs. The difference was the capital investment in the pad-walking system. For us, it’s about $1 million or $1.5 million improvement to make it a pad-walking rig for any of our Tier 1 rigs. So, I don’t think it changes.

[Sean Meakim:]

Okay.

[Kevin Neveu:]

And I think, there is - I think we’re really tied on pad-walking rigs right now in the industry. Maybe it’s 70% utilization, maybe it’s 60% utilization. But I think that quickly rebalances. I think you could see a balanced out in - during the third quarter or early fourth quarter. And then, we’re back probably adding some pad-walking systems on to other Tier 1 rigs. So, if there is some variance in pricing between pad-walking versus non-pad-walking it’s logical, it should be there and we can probably take advantage of with our Tier 1 rigs.

[Sean Meakim:]

Okay, fair enough. We spent a lot of time talking on cost, especially on the CapEx side, anything else as we think about - Rob mentioned the prospect of lower cost absorption as the rig count ticks a bit lower in the second-half. Are there any other leverage you have to pull on the cost side procurement, anything else that’s out there, or anything that you’ve done in the first-half that haven’t shown up yet and may materialize in the second-half?

[Rob McNally:]

Sean, for the most part the cost savings initiatives are largely complete, there are few things on the fringe to tweak. And we’ll continue to be as diligent as we can be on the costs side. But there is, there is no big step down on daily operating costs that I foresee.

[Kevin Neveu:]

I guess, other than the cost savings you described haven’t been fully recognized yet.

[Rob McNally:]

Yeah I mean, what we said in the comments were that we spent $10 million year-to-date restructuring, so obviously that $10 million is not going to get spent again. And that’s going to generate an annualized cost savings of about $25 million. Which - a mix of that is in operating expenses and G&A.

[Sean Meakim:]

Okay. All right. Fair enough. Thank you.

[Kevin Neveu:]

Thanks, Sean.

[Operator:]

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

[Jeff Fetterly:]

Hey, guys.

[Kevin Neveu:]

Hey Jeff.

[Rob McNally:]

Hey, Jeff.

[Jeff Fetterly:]

Rob, just to clarify your comments earlier, you said the IBC revenue impacted margins by $2,400 per day?

[Rob McNally:]

It was a - what I said was that IBC and turnkey, the higher turnkey revenue impacted margins by $2,400 per day and let me see if I have the break-out handy. I don’t have it in front of me on the same. Yes, and IBC made up about two-thirds of that.

[Jeff Fetterly:]

Okay. And that’s referring to - that’s an absolute metric, or is that a relative or year-over-year metric?

[Rob McNally:]

It was year-over-year, but a year ago, there was no IBC revenue.

[Jeff Fetterly:]

Yes, okay. You said on the Q1 call, you guys have had one rig buy-out to-date, is that still accurate?

[Rob McNally:]

Yes, it is. Nothing’s changed on that front.

[Jeff Fetterly:]

Okay. And what’s your line of sight? I know you mentioned the IBC side should bounce between high single-digits and low double-digits. How long do you think that carries for in this type of environment, and what’s your line of sight for any future contract buyouts?

[Rob McNally:]

Don’t expect any future contract buyouts. We’ve been told that some of those rigs might come back in late Q3 or Q4, but it might not a promise yet. Obviously, these are obviously the rig running and collecting a return to be part, because that’s not creating value for our customers. But it just depends on how our customers manage their drilling budgets between now and at the end of the year. Expect, likely, all those rigs start up next year and run in 2016, as they’ve got full budgets again reloaded for 2016 for a while.

[Jeff Fetterly:]

Your commentary earlier about displacement opportunities in the U.S. especially, is that in the context of IBC rigs going back to work with customers, or is that incremental to that?

[Rob McNally:]

Absolutely incremental rig count in addition to the 55 rigs or 51 rigs running and 10 on or 11 on IBC.

[Jeff Fetterly:]

Okay. From a CapEx standpoint, I know you said $78 million is the sustaining and infrastructure expenditure. But what would you view in this type of environment your base maintenance CapEx right now?

[Rob McNally:]

Call it somewhere between $50 million and $75 million per year. So we’re kind of in this sub-$60 or sub-$50 WTI environment. We can run this business for $15 million a quarter in maintenance CapEx.

[Jeff Fetterly:]

And when you think about 2016, agnostic of any new-builds, incremental new-builds, how should we be thinking about your base level spending for next year?

[Rob McNally:]

Yes, I think that would be it, Jeff. I mean, that is, our maintenance capital would be somewhere between $50 million and $75 million. If there are no opportunities with proper contracts and good returns then they would be very limited expansion capital. And so that your total CapEx could be in that $50 million to $75 million range.

[Kevin Neveu:]

And it could be reduced by some of this long lead purchase we’re doing this year, if it’s that dire, because we’re pre-spending this year.

[Jeff Fetterly:]

Yes.

[Kevin Neveu:]

If that program delivers the results we expected it to deliver.

[Jeff Fetterly:]

Okay. Last item, around the rig transfers. When you say commitment, what sort of commitment length or structure are you looking for in order to move rigs back into Canada, or into Canada?

[Kevin Neveu:]

Since we’re deep in negotiation with customers, I’ll make no comment.

[Jeff Fetterly:]

Okay. Is it...

[Kevin Neveu:]

But just - simple comment is, this is a very good investment for Precision to make, both from a financial return perspective and from a market share perspective, we’re not comprising.

[Unidentified company representative:]

Jeff, it’s, I mean, this is limited expenditure to move these rigs and these are existing assets. So it’s limited expenditure to move the rigs, and we’re going to move these rigs only when we’re highly confident that they are going to go to work.

[Jeff Fetterly:]

Is it safe to assume that the majority of the transfers are coming out of the Marcellus?

[Rob McNally:]

No, several basins.

[Jeff Fetterly:]

Okay. Great. Thank you, guys. I appreciate the color.

[Rob McNally:]

Thank you, Jeff.

[Kevin Neveu:]

Thank you, Jeff.

[Operator:]

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

[Rob McNally:]

Hey, John didn’t we just talk to you?

[John Daniel:]

You guys are kind to put me back in. But I appreciate it. I know you want to avoid the pricing commentary, for competitive reasons, I get that. But when you go out and talk to folks in the field, and I know others do, too, but you get these guys that are saying that they’re putting rigs to work and bidding it in the $16,000 to $17,000 a day, they talk about stuff that’s going off less than that. Everybody’s got a good rig, or so they say. And I’m - but I’m wondering here, and I know that typically the smaller guys are going to undercut the larger players. But do you see any risk that the large guys, you being one of them, for sure, you may be more focused on defending rates and emphasizing value propositions to customers. But in the short term, let’s call it the next one to two quarters, could lose market share to the smaller players, because they are a bit more willing to compete on price?

[Rob McNally:]

John, short answer is, probably not at all. We really don’t come up against what you’re terming as smaller players. I mean, we’re competing against one of the other top two or three drilling contractors and that’s really it.

[John Daniel:]

Okay.

[Kevin Neveu:]

And part of it is that we’re smaller, we don’t have the same breadth of exposure as some of the other larger U.S. drillers might have it. But we’re focused on those top 10, 20 E&P companies and that’s where opportunities lie, and they placed a higher premium on, let’s call it, the industrialization of the process, large capabilities, safety. The big company things we deliver around process and management and consistency, predictability. So we just don’t come up against whether it’s a private equity drilling contractor, or a mom-and-pop, or even a smaller public.

[John Daniel:]

Okay. Fair enough. A point of clarification, when you guys talk about your Q2 rig counts averaging 58 rigs, did that include the idle but contracted rigs, or was that just the rigs turning to the right?

[Rob McNally:]

That’s just the rigs that are turning to the right or moving, and being paid for the IBC rigs or on top of that.

[John Daniel:]

Okay. And then just a final one for me. And it’s going to show my ignorance as it comes to Western Canada. But if you had to guess, what’s the right market size up there in terms of rigs needed, super triples that could be needed in the marketplace?

[Rob McNally:]

All right. That’s dependent on how much the Deep Gas play, that’s dependent on how much the Deep Gas play grows and that’s - it continues to look to us like that’s got legs. And that’s a market where the Super Triple market is just about fully utilized. And so, it’s a - it looks like a very attractive market for us. And as Kevin mentioned earlier, our market share in that play is much higher than our overall market share in the Canadian market and our intention is to keep it that way.

[John Daniel:]

Fair enough. Okay. Thanks for putting me back in.

[Rob McNally:]

Okay, John.

[Kevin Neveu:]

Thanks, John.

[Operator:]

Thank you. There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Ford.

[Carey Ford:]

Thank you for joining us on our Q2 2015 conference call.

[Operator:]

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