Precision Drilling Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 10 speakers on the call.

Operator

Welcome to the Precision Drilling Corporation 2023 Third Quarter Conference Call. I would now like to hand the conference over to Levon Sedunik, Director of Investor Relations. Please go ahead.

Speaker 1

Welcome to Precision's Q3 earnings conference call and webcast. Participating on today's call with me will be Kevin Neveu, President and CEO and Cary Ford, our CFO. Earlier this morning, Precision reported Strong Q3 results, which Carrie will review with you, followed by an operational update and outlook commentary from Kevin. Once we have finished our prepared comments, we will open the call to questions. Some of our comments today will refer to non IFRS financial measures and will include forward looking statements, which are subject to a number of risks and uncertainties.

Speaker 1

Please see our news release and other regulatory filings for more information on financial measures, forward looking statements and risk factors. As a reminder, we express our financial results in Canadian dollars unless otherwise indicated. Before I pass the call over to Kevin and Carrie, I would like to remind listeners of our CWC Energy Services acquisition, which we announced in early September. This acquisition will position Precision as the premier well service provider in Canada and bolster our drilling operations in both the U. S.

Speaker 1

And Canada. With the acquisition, Precision adds to its marketed fleet 62 service rigs and 7 drilling rigs in Canada, Plus 11 drilling rigs in the U. S, which includes 7 AC triples. We expect this acquisition to close within the next couple of weeks and generate accretive cash flow on a per share basis in 2024. With that, I'll pass it over to Cary.

Speaker 2

Thank you, Yvonne. Precision's Q3 financial results reflect the resiliency of our high performance, high value business model and organizational focus on cash flow and return of capital, Meeting our expectations for adjusted EBITDA and further strengthening our balance sheet. During the quarter, adjusted EBITDA of $115,000,000 was driven by Healthy drilling activity, improved pricing and strict cost control and included a share based compensation charge of $31,000,000 Without this charge, adjusted EBITDA would have been $146,000,000 which compares to normalized EBITDA of $126,000,000 in Q3 2022, an increase of 16%. Margins in Canada were higher than guidance, resulting from stronger than expected pricing and cost recoveries, higher ancillary revenues and improved cost performance. In the U.

Speaker 2

S, margins were lower than guidance, Largely due to an increase in operating costs driven by increased repair and maintenance costs and lower fixed cost absorption as we're maintaining higher overhead in anticipation of increased activity in the 1st part of 2024. In the U. S, drilling activity for Precision averaged 41 rigs in Q3, A decrease in 10 rigs from Q2. Daily operating margins in Q3, excluding the impact of Turnkey and IBC were US11,941 dollars a decrease of US15.63 dollars from Q2. For Q4, we expect margins Excluding the impacts of Turnkey and IBC to be in line with Q3 margins in the US11500 US dollar to US12000 dollars range.

Speaker 2

In Canada, drilling activity for Precision averaged 57 rigs, A slight decrease in 2 rigs from Q3 2022. Daily operating margins in the quarter were $13,913 an increase of $1,830 from Q2 2023. For Q4, our daily operating margins are expected to average over $15,000 An increase of over $1,000 from Q3 levels due to ancillary winter equipment and improving pricing. We continue to build our North American contract book with Q4 2023 drilling rigs of 57 under take or pay term contracts on average for the Q4 of 2023. In addition, we recently signed several term contracts for work commencing early in 2024.

Speaker 2

Internationally, drilling activity for Precision in the quarter averaged 6 rigs. International average day rates were US51,570 dollars an increase of 3% from the prior year due to rig mix. We recently activated our 4th rig in Kuwait and expect the 5th rig will be activated in the next few weeks. We expect earnings in our international business to increase approximately 50% from 2023 to 2024. Moving to our C and P segment.

Speaker 2

Adjusted EBITDA this quarter was $14,000,000 down slightly compared to the prior year quarter with 10% fewer well servicing hours offset by higher pricing and margins. Moving to the balance sheet. We are committed to reducing debt by over 500 $1,000,000 between 2022 2025 and achieving a normalized leverage level of below 1 time. Our debt reduction target for 2023 is $150,000,000 and we plan to allocate 10% to 20% of free cash flow before principal payments directly to shareholders. During the quarter, we reduced debt by $26,000,000 and have now reduced debt by $126,000,000 year to date.

Speaker 2

Upon closing the CWC acquisition, we will assume CWC debt, make cash payments to CWC shareholders and incur transaction costs, All totaling in the $60,000,000 to $70,000,000 range. Despite incurring these cash costs, we still expect to meet our annual debt reduction target of $50,000,000 pointing to robust cash flow expectations in the Q4. As of September 30, our long term debt position net of Cash was approximately $915,000,000 and our total liquidity position was $621,000,000 excluding letters of credit. Our net debt to trailing 12 month EBITDA ratio is approximately 1.7x and our average cost of debt is approximately 7%. We expect our net debt to adjusted EBITDA ratio to be below 1.5 times by year end with net debt of approximately $900,000,000 and our run rate interest expense of approximately $65,000,000 Our full year 2023 capital plan has increased from $195,000,000 to $215,000,000 largely results of signing term contracts with upgrade capital paid back inside of the term of the contract.

Speaker 2

For several of these contracts, we received cash upfront from the customer. Additional annual guidance for 2023, Which does not consider impacts from the CWC acquisition, includes depreciation at $290,000,000 And SG and A of $90,000,000 before share based compensation expense. We expect cash interest expense to be approximately $80,000,000 for the year and cash taxes to remain low with an Effective tax rate of approximately 25%. Year to date, we have had share based compensation charges of $22,000,000 As previously stated, we expect our 2023 share based compensation expense to range between $20,000,000 $40,000,000 For the share price range of $60 to $100 with the potential to increase or decrease another $15,000,000 based on Relative share price performance and a multiple between 0 and 2 times. With that, I will now turn the call over to Kevin.

Speaker 3

Thank you, Carrie, and good afternoon. I'm pleased with our 3rd quarter results with improved revenue and cash flow compared to the same period last year despite Lower industry activity in our North American markets. I commend everyone in Precision's organization for their precise execution and safety, Excellent operational performance, strict financial discipline and the continued focus on cash management, which was demonstrated across all Precision Business segments during the quarter. I continue to be very encouraged by the support of commodity price fundamentals, But also by the strict capital discipline evident across this industry. And this discipline begins with the investors' expectations for shareholder returns And a continued assistance for industry capital discipline.

Speaker 3

Our customers are functioning very well in this environment. They are not responding to short term commodity price signals or volatility. They are managing budgets and staying well within cash flow and most importantly, they are focusing on efficiency and performance. And nowhere is this more important than our Canadian segment Our broad industry activity is down 6% during the Q3 compared to last year as our customers remain highly disciplined staying within fixed budgets. Yet, our 29 Super Triple rigs are fully utilized this year compared to 25 at the same time last year.

Speaker 3

And to remind you, we'll be adding 1 more Super Triple to our fleet on January 1st for an upgrade we announced late last year. Today, we're also running 32 Stifers Singles and this would be the highest Q3 utilization for this rig class since early last decade. In light of the high super spec rig demand, we have customers anxious to commit to firm take or pay term contracts Securing rig access. Currently, our Canadian book includes 27 rigs under term contracts and 17 of those have 2 year plus terms. I'll remind you that the Canadian market term take or pay contracts were traditionally exceedingly rare.

Speaker 3

Notably, we recently booked several customer contracts, which include pad walking and depth extending upgrades, And those rigs are required for the winter 2024 drilling season. And this necessitated increasing our current year capital budget as Cary described earlier. I'll also reiterate Kari's comments that the capital will pay back within the contract period and the enhanced margins will continue for the duration of the rigs operational life. Also for several of these contracts, customers provided us with advanced cash payments upfront as we work hard to minimize our cash outflows. Our outlook for Canada remains uniquely strong.

Speaker 3

Early in 2024, 2 major hydrocarbon pipe projects will be started up. The Coastal GasLink pipe set to deliver natural gas of the LNG Canada project and the Trans Mountain expansion adding almost 700,000 barrels per day of oil export capacity. For Canada, these projects are absolute game changers resulting in significantly improved upstream commodity prices for our customers, De bottlenecking production and providing global market access for Canadian Energy. Now I see these independent projects as complementing each other. And that is to say that the liquid condensate produced by the Montney gas wells is sold commercially as diluent to the heavy oil producers to enable heavy oil shipping through pipelines.

Speaker 3

So this significantly improves the economics of the Mountain D gas producers who are ultimately focused on the LNG exports over the longer term. Concurrently, the increased oil export capacity of TMX will serve to reduce the Western Canada Select price discount, Significantly improving economics for our heavy oil customers. So for Precision, the result is that the natural gas drilling in Montney He is growing to meet the imminent needs of LNG Canada and heavy oil drilling has rebounded to levels not experienced since 2014. And all of this is evidenced in our record super triple demand and our strong super single demand. So this is truly a game changer for Precision's Canadian drilling market.

Speaker 3

With term contracts providing revenue stability, reduced seasonality with pad rigs drilling throughout breakup, market visibility extending beyond Commodity price volatility and all of these factors setting us up to deliver sustainable shareholder returns commensurate with our asset base For providing opportunities for further expansion in our video footprint. Today, we have 68 rigs running, Actually up 1 from our press release, which was reporting yesterday's activity, and we expect to be in the low 70s before the Christmas pause. Customer planning for winter suggests a strong and fast start to 2024 with customer demand exceeding 2023 levels. We look forward to the addition of the CWC drilling rigs and crews and we expect that Precision's combined activity this winter could be up 10% to 15% from last year. Leading edge day rates for our super triples are now in the mid-30s and for our conventional super singles in the mid-20s, While our pad equipped super singles have now moved up into the low 30s to 1000s per day range.

Speaker 3

In particular, Excess customer demand for Precision's Alpha equipped Super Triple rigs is seemingly in the range of 7 to 10 additional rig opportunities for considering. I think the likelihood that we secure a customer paid redeployment of at least 1 or 2 Super Trovals in the U. S. To Canada later next year is increasing. With our super singles, the demand tends to be more seasonal with winter being the peak season where demand could outstrip our rig availability by 10 or more rigs.

Speaker 3

So we expect these market demand signals may lead to additional opportunities for customer funded upgrades for pad drilling and longer reach horizontal capabilities and certainly stimulate further customer interest in take or pay term contracts, so they can secure access to the rigs. Now turning to the Lower forty eight, the capital discipline I've described in Canada is outwork in every U. S. Basin. In the near term, it's meant that natural gas drilling has slowed down over the course of 2023 and the increases in oil targeted drilling we expected earlier this year Failed to materialize as our customers continue to tightly manage their drilling budgets.

Speaker 3

However, we continue to see customers optimizing drilling efficiency By high grading rigs, focusing on pad drilling and extending lateral lengths. This focus on efficiency is also continuing to drive customer interest Your Alpha Automation Platform, our Alpha Apps and is driving interest in our evergreen BEST battery energy storage systems and other diesel fuel saving solutions. Today, we have 44 rigs operating in the U. S. And seem to be in the trough.

Speaker 3

Customer indications and interest indicate an increase in activity as budgets reload for 2024 and we expect to see some of these rigs activated later this year. During the Q3, we continued to experience strong customer interest in our Alpha equipped Super Triple Rigs. Since the beginning of the year, we've added 5 public E and Ps to our customer list and increased our share with 2 others as we transition to more oil based Wirth in less private company exposure. Now super spec rig supply remains in tight availability. During the Q3, we secured a paid upgrade commitment from a customer to cover the cost of increasing the horizontal depth capability of a Precision Super Triple.

Speaker 3

And during the year, we've executed 12 other similar upgrades. And these upgrades include enhancements to the mud pumping capability, The drill pipe racking capacity are targeting longer reach horizontal wells. And some of these also include Evergreen enhancements to improve the fuel efficiency of the rig. We expect to see more of these customer paid upgrades emerging in 2024. Rig pricing and litiguez rates remain stable As the most capable high specification rigs remain in tight supply, the pricing discipline remains a core strategy across the super spec land market industry.

Speaker 3

I'm very excited to add the 8 CWC rigs and crews currently operating in Wyoming. And we see the Powder River Basin Excellent opportunity for Precision to expand our U. S. Operations in 2024. Now turning to our international business.

Speaker 3

As Terry mentioned, we activated our 4th rig in Kuwait during the Q3 and expect the 5th rig to start up early to mid November. Both rigs are activating several weeks later than we previously guided, and these delays were entirely due to client planning delays, not precision issues. The capital expenditure we have to build those rigs is largely complete and the 5 year contract for each rig will commence when the rig begins operations. By mid November, we'll have all 5 rigs in Kuwait operating and 3 rigs in King Khemont, Saudi Arabia running for a total of 8 rigs. We will continue to bid all 5 idle rigs to opportunity across the Namibian Gulf.

Speaker 3

In our Well Servicing segment, Canadian industry well servicing activity noticeably slowed during the Q3 as our customers digested the cost increases related to services inflation, Labor costs and material costs. We see a backlog of previously planned activity building up, but are now beginning to see a significant increase in activity We expect this to continue into next year. I'm also very encouraged by the strong performance we see in the CWC Well Services Group and look forward to integrating the people of CWC and their operations into our business later this quarter. So to wrap up my comments today, I'm thrilled that despite a weaker market than most would have expected Precision is on track on all three strategic priorities. We also created the financial flexibility to to execute a meaningful Canadian consolidation transaction and we continue to have the flexibility to invest in our fleet to meet customer backed rig upgrade opportunities.

Speaker 3

And with that, I'll now turn the call back to the operator for your questions. Thank

Operator

Our first question comes from Aaron MacNeil with TD Cowen. Your line is open.

Speaker 4

Afternoon and thanks for taking my questions. Kevin, I can appreciate that there's a lot of value in keeping your promises on the debt reduction, especially in light of the track record Over multiple years, but sort of putting that aside, how does debt reduction compete today for capital with the NCIB Given the prevailing valuation and how should we think about that in the context of your strategic priorities for next year?

Speaker 2

Yes. Go ahead, Terry. Hey, Aaron, so I'll take that one. Debt reduction still remains Front and center, and we've put out very specific targets for 2023 and then the 2 years following this year. So we're committed to doing that.

Speaker 2

As we have more free cash flow, we should be able to expand the amount that we allocate towards Share repurchases. This year, it's 10% to 20% of our free cash flow, which would put it kind of in the $15,000,000 to $30,000,000 range of share repurchases. Next year, if our cash flow outlook improves, we should be able to increase that.

Speaker 4

Got it. And Carey, I know you gave guidance for Q4 margins in the U. S. In your prepared remarks, but I'm hoping you can sort of Give us a better sense of the moving parts. I mean, you mentioned the higher staffing levels.

Speaker 4

You mentioned R and M. Like how much of that was Lavonne. I don't want to call it one time, but maybe abnormal and what's sort of recurring?

Speaker 2

Yes. So I think if you think about Q3 and Q4, Top line, there won't be a whole lot of movement and the costs that we incurred in Q3, a lot of those will repeat in Q4. So That goes into the margin guidance that we provided. As Kevin mentioned on our Q2 call, we were going to have the rig count kind of moving up and down a little bit around this kind of low 40s level. And that means there's a bit more rig churn than we typically have, which causes a little bit more cost.

Speaker 2

And as I mentioned, we're carrying a bit more overhead than we typically would at this activity level because we do think that activity is going to increase. The full year guidance, I would point to a similar operating cost in Q4 than we had in Q3.

Speaker 4

Got it. Okay. Thanks. I'll turn it back.

Speaker 2

Thanks, Sharon.

Operator

Our next question comes from Luke Lamoy with Piper Sandler. Your line is open.

Speaker 5

Hey, good afternoon. Kevin, I believe you talked about 7 to 10 additional opportunities in Canada and maybe You can move 1 to 2 U. S. Super Triples into Canada. When you're looking at opportunities like that, are these Kind of 2 year terms that you're targeting to make the move from the U.

Speaker 5

S. To Canada or how are you thinking about that?

Speaker 3

Luke, that's a great question and it's real important strategy question for us as we think about it. And some of these opportunities might not be full year work, Might be for the winter, maybe for the summer. So we'll look at that very carefully and determine what we think is best. What we look for though, number 1 is that the operator Needs to be paying a leading edge market rate. We've in the past talked about that being around $37,000 per day.

Speaker 3

We've talked about the operator Needing to pay the full mobilization costs, you can think about that being around $1,000,000 to move the rig up and get it ready to work in Canada. So there's a lot of Requirements we'll have on our customers if that rig is going to move up. But we also don't want to be a situation where we oversupply the market. So we'll think very carefully to make sure that we think it's sustainable work and that there's a long horizon of work for that rig. So we won a contract that was 1 to 2 years in duration, We want to have good visibility and work beyond that.

Speaker 3

Now what I'd say is that with the LNG project coming on right now in Canada, We are expecting additional rig demand to meet the requirements of that project and that's why we're targeting kind of something like 1 or 2 rigs we think Mark, you can probably handle and perhaps we're late. Maybe you can handle a 3rd or 4th rig. We'll take it 1 by 1.

Speaker 5

Okay. And then Just still on Canada, I believe CWC has some non utilized rigs. What's the outlook on those going back to work?

Speaker 3

So their fleet is Primarily, what are classified as Kelly double rigs, those are generally shallower rigs that are triples and maybe a little deeper than some of our super singles. They're commonly used in Central Southern Alberta and Saskatchewan. It's an area that Precision hasn't had a lot of focus in the past. We've been really focused on the resource plays, the conventional heavy oil and the Montney. But we'll certainly bring the WSE team on, we're anxious to see how They've worked they've been very effective in the winter season.

Speaker 3

They've had often all of those rigs running through the winter, all 6 rigs running quite commonly. So see us running all 6 CWC rigs and maybe pulling through a few more of the precision teledoubles would be a very good outcome. Yes, we think that sales team of CWC can bring some strong market intelligence on that market segment for us.

Speaker 5

Okay. If I could sneak one more in real quick. On the U. S. Side, I think you said you have 44 rigs operating and some could be reactivated later this year.

Speaker 5

We've seen momentum in Verisk count in the last few weeks, especially in the Permian, just on a daily basis. Where do you think kind of your rig count could be maybe Levon 6 months from now or 3 to 6 months in the U. S. Just kind of based on conversations you're having and what you're seeing?

Speaker 3

Yes. I think we'll be in a fresh budget year Come January and certainly we've already got customer indications there'll be more rigs going to work. We're playing that against a couple of these large Acquisitions that have been announced recently between Exxon and Chevron, everyone knows that 3 plus 2 equals 4, not 5. So there's going to be a slight rig count reduction with those transactions. But other E and Ps right now, they're looking to replace DUCs and kind of get back into Ensuring they can sustain production.

Speaker 3

It does feel like rig counts are moving up next year. Whether that's 50 or 75 rigs is a bit hard to project. But if we picked up our share of that and what we see in our pipeline right now, adding The 8 rigs that are operating right now at CWC, we're going to have a rig count back in the low 60s pretty quickly.

Speaker 5

Okay, Perfect. Thanks, Kevin.

Speaker 3

Great. Thank you.

Operator

Our next question comes from Kurt Hallead with Benchmark. Your line is open.

Speaker 6

Hey, good afternoon.

Speaker 3

Hey, Kurt.

Speaker 6

Hey, Kevin, I know you guys referenced here on the press release and your commentary About a potential doubling of profitability in the international market. Is that Lavonne. It looks like you're adding what 1 plus rig, 1.5, 2 rig on average going into next year. So Doesn't seem like it's going to be all volume driven per se. So is there a significant step up in kind of day rate and cash margins that you expect from these rigs that you're going to be bringing online?

Speaker 2

So Kurt, there's a couple of things there. We're going to average a little bit less than 6 rigs this year, and then next year we'll average 8 for Full year, the 2 rigs we're adding are higher margin than the other rigs that are running on average. And we also incurred a bit of cost reactivating these last two rigs that won't recur next year. So Mixing all of that together, we think that an increase in 50% now that's a 50% increase, it's not a doubling And EBITDA, it's just a 50% increase. So going from 6% to 8% with a bit more profitability.

Speaker 6

Okay, that's great. Appreciate that clarity. And then Kevin, kind of follow-up for you. As you referenced the increased term contract dynamics happening in Canada and 27 rigs now on term contract. Crystal ball it in the next 1 to 2 years given the dynamics around LNG and heavy oil as you referenced, what do you think that 27 could become?

Speaker 3

I have to preface everything with macro. The macro could affect everywhere all the time. But assuming the macro doesn't have some massive shift like a pandemic or another war, but we're dealing with The Canadian market as it sits today with Trans Mountain pipeline coming on and the Coastal GasLink project and then likely Follow on approval of Phase 2 for LNG Canada. So if we're running 30 rigs today that could be as much as mid-30s 3 or 4 years down the road, could even be a low 30s just by the end of next year. So we could see that rig count go from 30 to 32 or 33 next year.

Speaker 3

And beyond that could be 35 or it could be 40 rigs kind of down the road. I don't think we're building new rigs. I think we've got opportunities to upgrade existing rigs like we did the one rigger moving into Canada on January 1. To give you a sense of the capital needs for that, we could probably upgrade One of our older SCR rigs to a full super stack for the range of $10,000,000 to $15,000,000 far less expensive than Building a new winterized rig. So I don't think we would need a ton of capital to see our rig count in Canada go up Quite a bit if the LNG projects continue as they look and heavy oil continues to remain strong.

Speaker 6

That's great. Really appreciate the color. Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from Keith McKeay with RBC Capital Markets. Your line is open.

Speaker 7

Hi, good afternoon. First question is just on the U. S. Now Kevin, we know that your rig count over the last Year or so had been more private company weighted and you talked about adding 6 public companies this year and increasing your share with 2. Just curious, what do you think is the right customer mix for PD in the U.

Speaker 7

S. In terms of publics, private, Etcetera. And what do you think needs to happen in order for you to get

Speaker 3

there? Yes. Keith, I think that sort of changes with time a little bit. I do think that As U. S.

Speaker 3

LNG exports start to ramp up in 2024 2025, we might be a little less worried about Private equity style E and P companies that they're drilling for gas, if there's a stronger LNG export market. If I look back at FY 2020, FY 2021, having that private company exposure and gas exposure was Excellent for Precision. Now at this point in time today, having more public company exposure, having exposure to the majors, super majors, Having more oil exposure is what we're targeting and we're delivering on that. It's not we can't make these changes in a week or 2. It takes a quarter, 2 quarters, 3 quarters.

Speaker 3

Our customer mix at the end of this year will look vastly different than it did at the beginning of the year, and I'm really pleased with the progress our sales team is making on that.

Speaker 7

Yes, got it. Appreciate the color. And maybe one for Kerry. What are you seeing in terms of maintenance CapEx per rig or maintenance CapEx per day, I guess more specifically on your U. S.

Speaker 7

Fleet, has there been much inflation from that 1500 a day level we used to always Quote or where are things trending there?

Speaker 2

Yes. So there has been inflation. We've quoted on prior conference calls that The managed capital cost per day was trending closer to $2,000 Now it's closer to the mid-2000s, but I would point out that That includes drill pipe replacement. And then a lot of cases, we are getting customers to pay for excess wear on drill pipe. And so we're it's showing up as a higher cost in maintenance CapEx, but then we're recouping it in margin.

Speaker 7

Got it. Okay. So drill pipe and some other things. What are besides the drill pipe, what have been kind of the big drivers in terms of the maintenance capital number increasing?

Speaker 2

So it would be mud pumps, mud pump maintenance, engines, top drives, all the critical components on the rig, The repair costs have gone up. If you think about R and M, you've got consumable components When you do repairs, which have a little bit of inflation in them and then you have labor. And so labor is up across the board and that's what's driving Yes,

Speaker 7

got it. And just one last one. On any activations that you might see in the U. S, is there are we talking about Any substantial capital requirements to bring any of those rigs back or are they all pretty warm still?

Speaker 2

Likely not much maintenance capital. We might have a little bit of operating expense. And if there's upgrades associated with the reactivation, there'd be some Yes. But you make the correct point that a lot of these rigs were working 6 months or a year ago and they're not going to be the same type of reactivations that we had to Put forward at the end of 2021 beginning of 2022.

Speaker 7

Okay. Thanks very much.

Operator

Our next question comes from Cole Pereira with Stifel. Your line is open.

Speaker 8

Afternoon all. I just want to start on the margin front in the U. S. So it sounds like some of the costs there were going to reoccur in Q4. Is there anything transitory that is in both Q3 and Q4?

Speaker 8

Or in the event that the rig count in the U. S. Doesn't increase, is that kind of a reasonable run rate going forward? Just as From your last call, I mean, your rig count in the U. S.

Speaker 8

Is down a little bit, but the margin outlook is quite a bit lower.

Speaker 2

Right. So I think that they will the cost will trend down a bit more in Q1 regardless of whether we increase our rig count. There if you think about it, if you have a lower rig count, you're absorbing a bit more fixed costs, but also if you have A high maintenance cost on a rig, if you have a critical component that needs to be replaced, it just shows up It's more prevalent in the average operating cost If you're running fewer rigs. And so we've had a few of those, where we just had higher R and M costs on a particular rig, and It just shows up a little bit more in the daily operating cost because of it. So We do think that some of there's a bit of transitory cost in there and we should see that trending down a bit more in Q1.

Speaker 8

Okay, got it. And then coming back to shareholder returns, you talked about it a little bit and there's obviously a few different ways activity can go next year, but Free cash flow should be pretty strong in any reasonable scenario. I mean from your standpoint is that you maybe think about paying down call it $150,000,000 of debt or something in that range and should have a lot left over and then you think about growth CapEx and kind of put the rest in the buyback?

Speaker 2

Yes. So we'll put forward our capital allocation targets at the beginning of next year. I think in general, you're thinking about it right correctly, Kaul. We will continue our debt reduction schedule. We will have capital allocated towards share buybacks.

Speaker 2

And then I would look at our growth capital the same way that we've always looked at it. We're going to look for opportunities to spend upgrade capital, Match the contracts where we get that capital paid back and to the extent that there's opportunity to do that in the market, we'll pursue it.

Speaker 8

Got it. Thanks. And you've done a few of these bolt ons now. How do you think about further consolidation just as a part of the overall PD strategy?

Speaker 3

I think we've demonstrated over the past couple of years that if we can be opportunistic, we will. But really clearly, it's not one of our top three strategic priorities. So I don't think we're going to pivot and all of a sudden become highly Acquisitionally focused, we like the stability of the strong balance sheet, but Cary, do you have anything to add to that?

Speaker 2

Sure. It's important to note that when we executed the High Arctic acquisition, we were able to remain committed to our debt reduction target for 2021 2022. And if you look at what we've communicated on this conference call that we're going Complete the CWC acquisition and still meet our debt reduction targets for this year. It shows you where our priorities are to get the balance sheet in order. And We're in a favorable place right now where we've got some flexibility where we can do some of these tuck in acquisition, The debt reduction is still going to be the number one and the number one focus of the company for the next year or 2.

Speaker 8

Got it. Okay, that's all for me. Thanks. I'll turn

Speaker 3

it back. Thank you, Cole.

Operator

Our next question comes from Makar Sied with ATB Capital Markets. Your line is

Speaker 9

Thank you. Kerry, do you expect shortfall revenues in Q4?

Speaker 2

Yes. They'll be similar to what we reported in Q3 in that kind of $6,000,000 range.

Speaker 9

And when do they fall off? Is Q4 going to be the last quarter for those? Or do you expect them next year as well?

Speaker 2

We might have a little bit at the beginning of next year, but the bulk of this level of IBC revenue will fall off In Q4 or after Q4. Yes.

Speaker 9

Okay. And then as the CWC rigs Get on the payroll in next year in the U. S, how would those impact your daily Operating costs and dairy rig rates?

Speaker 2

I think it's a little bit too early to talk about how that's going to impact our daily operating margins and rates, we're planning to close the acquisition here in the next couple of weeks and we'll be able to talk about that a bit more clearly.

Speaker 9

Okay. So let's assume then without CWC, on your own fleet, When do you expect U. S. Margins to bottom?

Speaker 2

Well, They could be bottoming right now. We're not seeing much of a change from Q3 to Q4. It just depends on whether the rig count Continues to trend up in Q1.

Speaker 9

Okay.

Speaker 4

Yes.

Speaker 3

Well, Carr, I might answer that kind of focused on what you model for rig count next year. But if you're modeling the rig count to move up in Q1, And I think that rates have bought that margins have bottomed.

Speaker 9

Yes. That's good to hear. And then Kevin, you touched upon these big mergers that are happening. And It was mentioned in one case that they would be looking at these 4 mile type laterals and some other companies have talked about those as well. What type of rig would be required to drill that?

Speaker 9

I imagine not every Super Triple rig can do that. There may be Lavonne. Even a further subset within Super Triple that would do that. So maybe could you talk about like what Exactly what type of equipment would be required on a rig?

Speaker 3

Yes, a little bit I can. So we've drilled some 3 mile laterals. We've actually drilled a couple of 4 mile laterals. They've been in shallower plays, not the deeper plays. But anytime you extend the length of the well or the vertical depth of the well, either one, You're increasing the required hook load capacity for the rigs.

Speaker 3

You need to have the mast has to either be strong enough or be reinforced to be strong enough. You're increasing the amount of pipe you need to build a rack in the mast, so you have to increase the racking capacity of both the racking board and the substructure to support that pipe. And now that you've got more pipe, there's more weight, so everything has to support that weight. And then because you're drilling farther and you're adding more Pipe in the ground, you need more hydraulic horsepower. So typically going from 2 pumps to 3 pumps or going from 1600 to 2000 horsepower mud pumps.

Speaker 3

So most of these rigs that in our fleet, all of these changes for us are kind of bolt ons. We can bolt on A mass upgrade, we can bolt on the rock in capacity upgrade. We can slide in a 3rd pump, slide in a 4th generator. So the rig doesn't become obsolete, but these are capital increases. So they had a third pump and a 4th generator is over $1,000,000 to upgrade the mass capacity to handle more pipe might be in our case might be less than $500,000 If If you want to do all of these things together for 1 of our rigs, it's probably the rigs that are worth $3,000,000 to 5,000,000 And the other component is the top drive usually has to have a higher torque capacity.

Speaker 3

So there's a bit of work to do with the top drive.

Speaker 9

Great. Thank you very much. That's all I have.

Speaker 3

Great. Thank you, Bakkar.

Operator

Our next question comes from Sean Mitchell with Daniel Energy Partners. Your line is open.

Speaker 6

Thanks guys for taking my question here. You guys have got the 3 rigs in Saudi, the 4th and 5th rig in Kuwait. Any thoughts around exploring other international markets? I know Luke hit Canada and U. S, but we haven't really talked about are there other opportunities international that you guys are looking at?

Speaker 6

And Any color you can add?

Speaker 3

Sean, we've been clearly focused on maximizing our footprint in Kuwait and Saudi. So for sure those two countries, We've been bidding around the Gulf. We think we can support rigs in Qatar, Bahrain, maybe Abu Dhabi, places like that From the base of operations we have either in Saudi or Kuwait and our regional offices in Dubai. So we think the entire Gulf region is open to us. We're not looking really aggressively outside the Gulf.

Speaker 3

We have had inquiries from Argentina. We've had inquiries from Central Africa. I'm not anxious to see us in Livon. 6 to 7 different countries around the world, but if we had a one off chance to put a rig somewhere at a really good day rate, we'd look at that. Okay.

Speaker 3

Thank you. Thanks, Sean.

Operator

And I'm not showing any further questions

Speaker 3

at this time. I'd like

Operator

to turn the call back over to Lavonne for any closing remarks.

Speaker 1

On behalf of the team here at Precision, I'd like to thank people for joining us today. And that concludes our conference call. Thank you.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful

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Key Takeaways

  • Precision announced the CWC Energy Services acquisition, adding 62 Canadian service rigs, 7 Canadian drilling rigs and 11 U.S. drilling rigs (including 7 AC triples), expected to close shortly and deliver accretive cash flow per share in 2024.
  • In Q3, Precision generated adjusted EBITDA of CA$115 million (CA$146 million excluding a CA$31 million share-based compensation charge), a 16 % increase over Q3 2022, driven by strong Canadian margins and disciplined cost control, while U.S. margins were pressured by higher operating costs and overhead.
  • Drilling activity averaged 41 rigs in the U.S. (Q3 margins US$11,941/day; Q4 guidance US$11,500–12,000) and 57 rigs in Canada (Q3 margins CA$13,913/day; Q4 expected >CA$15,000), supported by growing term-contract backlog and customer-funded upgrades.
  • Precision reduced debt by CA$26 million in Q3 (CA$126 million ytd) toward its CA$150 million 2023 target, with net debt/EBITDA at 1.7× (guidance to fall below 1.5× by year-end) and plans to allocate 10–20 % of free cash flow to share buybacks.
  • “Game-changer” pipeline projects (Coastal GasLink & Trans Mountain expansion) are de-bottlenecking production and boosting Montney gas and heavy oil drilling, underpinning term contracts, reduced seasonality and sustainable returns in Precision’s Canadian market.
A.I. generated. May contain errors.
Earnings Conference Call
Precision Drilling Q3 2023
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