Precision Drilling Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2024

There are 11 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Precision Drilling Corporation 20 24 Second Quarter Conference Call. I would like to hand the call over to Levance Dunick, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, and welcome to Precision's 2nd quarter earnings conference call and webcast. Participating on today's call with me will be Kevin Neveu, our President and CEO and Cary Ford, our CFO. Earlier or last night, we reported strong Q2 results, which Cary 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. With that, I'll pass it over to Cary.

Speaker 2

Thank you, Lavonne. Precision's Q2 financial results exceeded our expectations for revenue, adjusted EBITDA, earnings and cash flow. The resiliency of our high performance, high value business model, geographic diversification and organizational focus on cash flow and return on capital drove our financial results. Precision's demonstrated commitment to strengthen our balance sheet continues with year to date debt reduction and share repurchases of $103,000,000 and approximately $40,000,000 respectively. For 2024, we expect to reduce debt by $150,000,000 to $200,000,000 and utilize 25% to 35% of free cash flow before debt repayments to repurchase shares.

Speaker 2

Longer term, we plan to reduce debt by $600,000,000 between 2022 2026 with approximately $240,000,000 remaining over the next 2.5 years. We expect to achieve a leverage level of below 1x net debt to EBITDA and increase our direct shareholder returns towards 50% over that time period. The progress on these capital allocation targets is clear and the longer term trend remains in place as we've reduced debt by over $1,300,000,000 since the beginning of 2016. Moving on to Q2 performance. The U.

Speaker 2

S. Drilling rig count has declined 15% over the past year. And while this data point is typically used as a proxy for broader oilfield service activity and financial performance. This is not the case for Precision as we have achieved year over year growth in consolidated Q2 revenue, driven by substantial growth in international drilling, Canada Drilling and Completion and Production Services. Q2 EBITDA of $115,000,000 included a share based compensation charge of $10,000,000 Without this charge, adjusted EBITDA would have been $125,000,000 Net earnings were $21,000,000 or $1.44 per share, representing the 8th consecutive quarter of positive earnings for Precision.

Speaker 2

Funds provided by operations and cash provided by operations were $112,000,000 $174,000,000 respectively. Margins in both Canada and the U. S. 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, drilling activity for Precision averaged 36 rigs in Q2, a decrease of 2 rigs from the previous quarter. Daily operating margins in Q2, excluding the impacts of Turnkey and IBC were $10,838 a decrease of $2.19 for Q1. For Q3, we expect margins to be stable and above US10 $1,000 per day. In Canada, drilling activity for Precision averaged 49 rigs, increase of 7 rigs or 18% from Q2 2023. Daily operating margins for the quarter were $14,423 an increase of $2,220 from Q2 2023.

Speaker 2

For Q3, our daily operating margins are expected to be between $13,514,000

Speaker 3

per day

Speaker 2

with higher fixed cost absorption and improved pricing largely offsetting the impact of rig mix. Internationally drilling activity for Precision in Q2 averaged 8 rigs, a 61% increase over Q2 2023. International average day rates were US55,301 dollars an increase of 9% from

Speaker 4

the prior year due to rig mix.

Speaker 2

In our C and P segment, adjusted EBITDA this quarter was $12,400,000 up 66% compared to the prior year quarter. Adjusted EBITDA was positively impacted by a 44% increase in well service hours, the integration of the CWC acquisition and improved pricing. CMP results were further supported by Precision's rental business, which has realized an increased demand and utilization for centrifuge equipment on Super Triple Rigs for customers in the Montney. Our contracted rig fleet continues to support our outlook with average annual rigs under contract for 2024 of 17 in the U. S, 23 in Canada and 8 internationally.

Speaker 2

Moving to the balance sheet. As of June 30, our long term debt position net of cash was approximately $800,000,000 and our total liquidity position was over $540,000,000 excluding letters of credit. Our net debt to trailing 12 month adjusted EBITDA ratio is approximately 1.5 times and our average cost of debt is approximately 7%. We expect our net debt to adjusted EBITDA ratio to be approximately 1.25x by year end when we expect net debt to be between $700,000,000 $750,000,000 and our run rate interest expense at that time will be approximately $50,000,000 Moving on to guidance for 2024, depreciation is expected to be approximately $290,000,000 cash interest approximately $75,000,000 cash taxes are expected to remain low and our effective tax rate to be approximately 25%. SG and A is expected to be approximately $100,000,000 before share based compensation expense.

Speaker 2

And we expect share based compensation charges for the year to range between $40,000,000 $60,000,000 at a share price range of between $80 $120 per share and the charge may increase or decrease by up to $20,000,000 based on the share price performance relative to Precision's peer group. Given Precision's share price performance year to date, we have increased the upper end of our guidance from $100 to $120 per share to provide increased visibility for our investors. With that, I will now turn the call over to Kevin.

Speaker 4

Thank you, Carrie, and good morning. As Carrie mentioned, we are very pleased with the strong cash flow our business is generating and we're thrilled with the progress we made with our international and Canadian units. While our U. S. Segment is stable, activity is a little slower than we would like.

Speaker 4

In the Lower forty eight, customer demand appears to have troughed. The combined drag effects of capital discipline, low natural gas prices, operator consolidation and delayed drilling plans seems to have bottomed out. We're noting an increase in customer conversations regarding drilling programs and plans or considerations to pick up rigs and modestly increase activity later this year and into 2025. As the E and P consolidation transaction is drawn to a close and those operators commence integration of the drilling teams, we expect the drilling contractor mix to shrink to fewer and larger more capable drillers rather than the fractured vendor base used by many of those acquisition targets. Some of this contractor rationalization is already underway.

Speaker 4

We are encouraged by the sophisticated customer interest in our Alpha Automation, safety performance and overall rig performance. We believe Precision is very well positioned to grow market share over the next several quarters. We also see some of these acquired drilling teams falling out of the transactions and reforming with private equity and looking to utilize the most technologically advanced drilling rigs they can find. 1 of the rigs we added this month was contracted to one of these new private equity startups and the drilling team is well familiar with Precision's capabilities. Encouragingly, we are also in discussions with several of our Haynesville customers who are in the early stages of planning and anticipating increasing LNG export demand.

Speaker 4

The Haynesville is a region that has traditionally been a stronghold for Precision's Super Triple Rigs. We currently have 6 available rigs in the region and it seems plausible we will have some additional reactivations before year end. Currently in the U. S. We have 38 rigs operating and expect to hold in the upper 30s through the Q3 with a modest increase perhaps to the low 40s in the late fall.

Speaker 4

Super Triple leading edge rates have remained stable in the low 30s per day. However, we did activate a couple of legacy CWC rigs in Wyoming. And while these are AC rigs, they are not super spec and as a result the day rates are a little bit lower. Turning to our International segment, Precision's activity revenue EBITDA will increase approximately 50% as compared to last year. While we have no new contracts to report, we remain very active bidding our idle rigs.

Speaker 4

I'll remind the listeners that we have 3 active rigs in Saudi Arabia. These are deep high capacity drilling rigs operating in the strategic Manifa oil field for Ramco. The rigs have been a long term contract since 2010 and are currently contracted up for several more years. In Kuwait, we have 5 Super Triple 3000 horsepower ultra large drilling rigs all operating on long term contracts. We renewed most of the rigs last year, including spending the maintenance capital last year to recertify those rigs.

Speaker 4

We expect a long runway of strong and sustained free cash flow from our international rigs and we'll continue to bid our idle rigs including potential redeployed U. S. Rigs, but only at rates that meet our return expectations and deliver free cash flow over the full contract duration. Our Canadian businesses both drilling and well servicing are performing at the highest levels in over a decade. Starting with our Canadian drilling group, to update you, we have activated 3 more rigs today raising our active rig to 77 from the 74 mentioned in our press release last night.

Speaker 4

Customer demand has been substantially stronger than we anticipated earlier this year and we have been more than pleasantly surprised by the acceleration in heavy oil drilling across the full spectrum of Clearwater, Manville, conventional heavy oil and SAGD. The Precision Super Single rig is a clear market leader with 26 different heavy oil customers using our rigs. Our Canadian Super Single rig fleet includes 48 rigs with 43 running and a third of those are pad equipped, significantly increasing the value for our customers and for Precision. Now as a refresher for listeners, the Precision Super Single Rig was specifically designed for shallow to medium depth, high efficiency slant and horizontal drilling and has its origins in the early 1990s. Between 2010 2016, we built out and upgraded our current fleet of 48 fully standardized super single rigs.

Speaker 4

All Precision's super singles are manufactured or upgraded in our in house manufacturing facilities in Calgary and Nisku. Our comprehensive vertical integration on the Super Single underpins the low operating costs we maintain. This high efficiency design is based on a mechanical drive system with hydraulic controls that enables precise horizontal drilling control and extremely precise wellbore placement. These rigs also incorporate fully mechanized drilling and pipe handling operations. Super Singles are safe, efficient and highly reliable with the lowest operating cost of any rigs in our fleet.

Speaker 4

These rigs can be moved well to well in under 1 hour and pad to pad in just a few hours requiring as few as 21 truckloads, almost 10 fewer than similarly capacity rated teledouble. The rigs can be easily upgraded to increase drilling torque, increase hydraulic capacity or add pad walking systems for significantly less capital than any competitive rig. This combination of versatility, precision drilling capabilities, safety and efficiency has made our super single rig the market leader in all complex shallow to medium depth drilling applications from Manitoba to Northeastern British Columbia. While we do not break down our revenue and margins by rig type, I'm confident to quote base margins in the range of $7,000 to $14,000 per day with the upper end of the range typical for pad equipped super singles. This overlaps with our triple margins which start in the $12,000 range and move up from there.

Speaker 4

During the Q2, Precision's evergreen team introduced 2 new Evergreen products, which improve the fuel efficiency, reduce emissions and improve the safety and versatility of our super single rigs. We began rolling these products out to the field and have equipped 9 rigs with our hydrogen injection combustion catalyst system, which offers our customers fuel savings and emissions reductions in the 6% to 8% range. Further, Precision's high mass lighting system has also been adapted to our super single rigs and we've deployed 4 of these to the field. We expect both of these Evergreen systems to roll out across the full Super Single fleet over the next 12 months, adding over $500 per day of additional incremental margin. Leveraging this across our super single fleet results in a $6,000,000 to $7,000,000 annualized incremental margin run rate.

Speaker 4

Now turning to our Super Triples and the Montney gas condensate play in Canada. Our current fleet of 30 rigs is virtually fully committed with just a few windows available in activity this quarter, which we expect to fill with short term customer programs. Rates remain strong in the low to mid-30s for the base rig with Alpha Automation in Evergreen and other extras pushing those rates in the mid to upper 30s. I mentioned earlier that we've been somewhat surprised by surging customer demand in heavy oil following the TMX opening. It seems we may experience a similar Montney surge once LNG Canada is fully commissioned and shipping LNG at capacity this time next year.

Speaker 4

It's conceivable that the market may be several rigs short. Recent customer contracting activity and particularly the contract duration customers are seeking seem to support the notion of a prospective rig shortage. And as I've mentioned in the past, we have idle fully winterized Super Triple 1200s in the DJ Basin. We will consider redeploying some of those rigs to Canada if the contracted rates are in the upper 30s and the customers pay the full mobilization costs. We expect to have better visibility on this opportunity later this year and into 2025.

Speaker 4

As I mentioned earlier, we have 77 active rigs today and expect to be in the range of 75 to 80 through August and could see our rig activity trend further upwards in September and through the fall as our customers prepare for what looks like a very busy 2025. In our Canadian Well Servicing operations, we see much of the same customer demand and fundamentals. Additionally, government mandated well abandonment activity is a 22% and growing wedge in that business. We have fully integrated the CWC fleet into Precision and the results are clear in our average rates, our margins and our total activity. Now well servicing activity can be heavily influenced by weather, namely rain and by forest fires.

Speaker 4

Through the Q2 now into July on any given day, we may have had anywhere from 5 to 20 rigs delayed or postponed due to those issues. Typically, if these deferrals are material, it will push demand later into the fall when drier and lower fire conditions normally persist. Today, we're operating 71 service rigs and expect to be in the range of 70 to 85 rigs for the balance of the 3rd quarter and expect the higher end of that range may trend closer to 95 in the 4th quarter. So to wrap up, we have many Precision employees who listen in on this earnings call and we encourage our staff to do so. I want to thank all the Precision people who once again delivered a strong quarter of Safety Performance for their intense focus on operational efficiency and their outstanding efforts on cost control.

Speaker 4

So great work to the PD team and thank you all. I'll now turn the call back to the operator for questions.

Operator

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

Speaker 5

Hey, good morning everybody.

Speaker 4

Good morning, Kurt.

Speaker 5

Good afternoon if you're in Houston. So, yes, Kevin, things really playing out, as you mentioned, better than expected in Canada despite some dynamics at play with wildfires. So I don't know, Kate, can you just give us an update on what you think kind of triggered this acceleration, if you will, in overall customer activity? And then I know you kind of referenced some additional things that are coming up for 2025, but is the customer base at this juncture as concerned about a shortage of rigs as you seem to be?

Speaker 4

I'll start with kind of why I think we're a little surprised by the activity. And I think what we underestimated, so first of all, the math for our customers works out quite well right now. They're realizing somewhere between $77 $82 a barrel U. S. Minus the Canadian discount, which has shrunk with the opening of Trans Mountain expansion.

Speaker 4

So they're realizing somewhere typically around US65 dollars for oil. When you convert that to Canadian dollars, it's between $90 $100 depending on the range. So it's the highest realized returns they made in oil in a long time. But I think what this really means now is that they've got certainty of export capacity and there's no uncertainty. They're not relying on train cars to move oil out.

Speaker 4

They've got a pipeline slowing and they can move the oil. So I think besides having a firm and better price than they've ever realized in the past, They also have certainty of export capacity. So I think when you reduce the risk and the uncertainty, increase the price, it unlocked more drilling demand than we expected. So that's been clearly our experience in the oil side. And my comments on LNG Canada opening up, so there's an awful lot of drilling that's gone on over the past 3 years in the Montney.

Speaker 4

Most of it's been funded by the condensate that's produced by those wells and that condensate gets sold into actually the heavy oil market to help ship heavy oil down the pipeline. So condensates driven the economics, the gas has actually kind of oversupplied the system. But they've built up an inventory of gas supply now for the opening of LNG Canada. No question about that. But we're sensing that once that plant gets running and sustained operations, they'll need to continue drilling and probably increase drilling.

Speaker 4

So that's why we're sensing that there's probably going to be kind of a further step up in rig demand once that plant is running, which should be about mid next year when it's at full capacity. When we combine that with the behavior of our customers around trying to contract rigs, lock them in, maybe windowing right now, but getting the rigs going again on January 1, it really seems like there's behavior pushing towards increased activity in 2025.

Speaker 5

Okay. That's great color. Now maybe a follow-up to that would be, I think in past calls and discussions you've mentioned the prospect for some of these rigs that are going to be filling that LNG export capacity to be booked on some sort of long term contract dynamic. I think you referenced there might be kind of the limit to how many of those rigs might ultimately be on a long term contract. Can you just give us an update on your thoughts with that?

Speaker 4

Yes. Kurt, that contracting strategy has kind of got 2 parts. It's got our willingness to contract rigs and the customers desire to take contracts. I'd say that the Canadian industry has been really cautious over the past decade. They've been through heck and back with commodity prices and pipeline constraints.

Speaker 4

And they're finally getting a bit of room to run right now. But as a result, Canadian customers have been reluctant to sign too many long term contracts because of the long term uncertainty that they've faced in the past 10 years. That is changing now. We see certainly for development drilling the Montney more and more of a trend for long term contracts. So they're more willing to sign the contracts that might have been a few years ago.

Speaker 4

And we want to remain and keep some of the fleet with optionality for increased rates. So we're not anxious to tie up the entire fleet with long term contracts. But a blend of half the rigs contracted, half the rigs exposed, maybe a little more contracted is kind of how we look at things.

Speaker 5

That's great color. Thank you.

Speaker 4

Great. Thanks, Kurt.

Speaker 2

Thank you, Kurt.

Operator

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

Speaker 6

Yes. Hey, good morning.

Speaker 2

Good morning, Luke.

Speaker 6

Kevin, last call you talked about in U. S. Land the visibility and timing of the rebound just being a little bit unclear. And then you just talked about activity troughing now. So your views changed a little bit.

Speaker 6

It sounded like the customer conversations around rig ads were basically due to new capital formation along with Haynesville as next year. I guess, first, anything you'd point out there, any other factors? And then second, you talked about your rig counts in the U. S. Maybe increasing from the high 30s to low 40s from 3Q to 4Q.

Speaker 6

Do you think that's representative of the overall super spec rig count or maybe specific to Precision?

Speaker 4

Luca, I think, so for us a couple of rigs moves us from 38 to 40. So it's not a big market indicator. So I think keep that in mind. Even if we had 3 rigs are now 41, so that doesn't really mean the whole industry is changing. I do think between now and the end of the year, it's likely that the larger drillers and I think we're in that bucket gain rigs and some of the smaller drillers may lose rigs.

Speaker 4

As some of these consolidation transactions complete and they rationalize their fleets. So I think you could see any one of the larger drillers pick up a few rigs and 2, 3, 4 rigs, not 50 rigs, be clear on that. Just through the kind of conclusion of these consolidation transactions, If you layer in for us 1 or 2 rigs in the Haynesville, which isn't a big move, now you're at 42, 43 rigs. So the path to get 43 isn't that complicated. But I wouldn't I don't see the market moving and adding 50 or 60 rigs to be now at the end of the year.

Speaker 4

So I don't think that 3 or 4 rigs for Precision means 10% of the market.

Speaker 6

Okay. And then, Carey, in the press release, you talked about looking for opportunities to lower costs. Could you maybe elaborate on that, especially on the U. S. Drilling side and maybe what that can mean?

Speaker 5

Yes. I'll hit that from

Speaker 2

a couple of different points. So we've talked a bit in the past about wearing a bit more fixed cost in our U. S. Business than we have in the past. Just we're operating 6 different operating regions and running 38 rigs.

Speaker 2

So we've got fixed cost to spread over a few days. So that's been a little bit of a headwind to margins. On the items we can control, we've really had a focus on repair and maintenance expense and working with our vendor list and optimizing centralizing centralized purchasing and optimizing 3rd party labor on our rigs. So we're looking at all avenues to address reducing costs on our rigs. And we saw some of that performance really start to show up in the Q2 and we expect to maintain that performance through the rest of the year.

Speaker 6

Okay, great. I'll turn it back.

Speaker 4

Thanks, Luke.

Operator

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

Speaker 7

Hi, everyone. Thanks for taking my questions. Carrie, we've had 2 quarters now where margins have come in generally better than the guide. And I guess the question is, is your Q3 margin guide similarly sort of conservative in your view?

Speaker 2

I think what we want to do is provide some guidance for the market that is realistic that we can meet and hopefully exceed. I think on the Canadian market, we have a dynamic that we haven't really had in the past several years where we're getting, as Kevin mentioned, a lot more super single work and some tele double work. And so when you get that rig mix blend into the fleet average, The pricing is a little bit lower, margins are a little bit lower. So it's a little bit less predictable. We think that we can beat the guidance that we provided, but want to air a little bit on the conservative side just because of that new dynamic.

Speaker 2

And then in the U. S, same thing. I think that if we if a rig count remains flat or decreases a bit, we're wearing a bit more fixed cost per rig. And if it increases on kind of Kevin's potential, getting to the low 40s, I think we're wearing a little bit less fixed cost, so the margin should be a little bit better. So I think in short, there's some moving parts.

Speaker 2

So we want to make sure that we're providing a realistic margin guidance for the market.

Speaker 7

Makes total sense. And I think this one might be for you as well, but excuse the napkin math here, but at least on my estimates, you're sort of on pace to hit the lower end of the 25% to 35% share buyback target. I mean, is that sort of maybe you can't guide to this if it's consistent with your view, but like is that sort of the intention or do you think we'll maybe see that you ramp up the share buyback pace in the second half of the year?

Speaker 2

Yes. So we are intentionally not prescriptive on how we're going to on what side of the range we're going to be on for the share buybacks. I think it depends on how much cash the business generates and also where the shares are trading in the market. You can in my comments, I mentioned that we bought back about $40,000,000 worth of shares year to date. That includes some shares that we bought back in the month of July.

Speaker 2

And if you kind of double that and look at the midpoint of our debt reduction range, I think we'd actually be at the high end of the 25% to 35% range. So I think we're definitely going to be within that range and where we are within that range will depend on both the cash flow and then where the shares trade between now and the end of the year.

Speaker 7

Makes sense. I'll turn it

Speaker 8

back. Thanks guys.

Speaker 4

Okay. Thanks.

Operator

Our next question comes from wakar Sajid with ATB Capital Markets. Your line is open.

Speaker 8

Thank you for taking my questions. Kevin, you've seen a number of M and A transactions in the market with your peers. Some have decided to expand their pressure pump business and become more kind of providing full services in the U. S. Others have increased exposure to Middle East, drill bit acquisitions have happened as well.

Speaker 8

How do you see Precision kind of evolving over the next like 3 to 5 years' time? Do you remain focused on what you do now? Or do you think that 5 years from now, Precision could be offering more businesses?

Speaker 4

Look, Ari, that's a great question. In fact, something we talk about with our Board pretty much every Board meeting, especially during our strategy sessions. So it is nice to have options kind of going forward. We've been so focused on debt reduction for the past decade that that's been kind of our top priority and it's been really clear with our annual priorities. But we did do a couple of tuck in acquisitions that worked out quite well.

Speaker 4

We did the High Arctic deal 2 years ago and then CWC last year and those worked out well. So I think that as we go forward, we'll keep our eyes open, we'll be opportunistic. If we can transact and do another tuck in type, another or more tuck in style acquisitions to supplement our current businesses, I think we'd be anxious to do that. A couple of comments. We have no strategic objectives right now around acquisitions.

Speaker 4

We don't need to make a big bet internationally. We don't need to go buy a block of business in any geography in North America as we have those blocks. We're not looking to grow well servicing in the U. S. We're looking to grow well servicing in Canada to grow drilling in the U.

Speaker 4

S. So I think we'd stick with our knitting right now, which is drilling and well servicing in Canada, drilling in the U. S. And if we can find good tuck in opportunities that we can do at least neutral on leverage or delevering and accretive, we'd be thrilled to do it.

Speaker 8

Makes sense. And then, Terry, you mentioned as a goal of being below 1x net debt to EBITDA ratio and then maybe expanding cash return to shareholders to about percent of free cash flow. In your view, from a timing perspective, when do you think you're going to get there? And then that 50% return of cash to free cash flow to shareholders, what would it look like? Would this be still buybacks or combination of buybacks and dividends?

Speaker 8

Or how do you intend to proceed there?

Speaker 2

Well, first of all, I think we're kind of taking one thing at a time. So we've got our guidance for this year and then our guidance through 2026. So we definitely are going to be looking to increase that allocation of our free cash flow directly to shareholders. This year it's going to be share buybacks. We'll look at all options in the coming years as we get closer to that leverage level, but nothing to report on today.

Speaker 2

I think on in terms of timing on when we can get to below one times, I think it's a lot sooner than we thought. I mentioned in my comments that by the end of the year, we expect to be kind of around 1.25 times. And assuming we can continue the strong cash flow performance and EBITDA generation in 2025 that we produced so far this year, we should be below one times at some point next year.

Speaker 8

That's good. Well, thank you very much and congrats on a great quarter.

Speaker 4

Thanks, Sakar. Thank you.

Operator

Our next question comes from Jamie Kubik with CIBC. Your line is

Speaker 9

open. Yes. Good morning, guys. Thanks for taking my question here. I just have a question on the Canadian market here a bit.

Speaker 9

Kevin and Kerry, you do reference LNG directed drilling remaining very active in Canada. But the AECO and Station 2 gas markets on a forward basis expected to be very weak for the next several months in Canada. Respecting the Precision's rig count is north of 70. Can you talk a bit more on the dynamic in the Canadian market here? And if operators have been discussing potentially deferring drilling activity given pricing outlook is so weak.

Speaker 9

Can you just expand a little bit around that market if you could? Thanks.

Speaker 4

Yes, I can. I don't want to speak to specific customer comments because they'll know who they are and they'll know what they said. So we hear a lot, no question about that. I think our rig count today is actually run rig higher than a year ago drilling in the Montney, I think it is. I also know that we've got a couple of operators that are slowing down drilling programs this year, but asking us to have that rig for them for January 1.

Speaker 4

So I think you're getting to the point now where they there's enough gas to meet the demand when they start operating. But I think as I plan for kind of full scale run operations next year, probably need those rigs back. So I did mention that we've got a few windows of rig availability right now in Q3, expect to fill those up with other customers. And I'd also comment that I don't think we're drilling a single dry gas well. I think all of these wells produce condensate that still fires the economics of the well.

Speaker 4

Shouldn't use that term fires, still drives the economics of the well.

Speaker 9

Okay. That's good. That's all for me. Thank you.

Speaker 4

Thank you.

Operator

Our next question comes from John Gibson with BMO Capital Markets. Your line is open.

Speaker 3

Good morning all. Maybe touching on your international rigs and just sort of presence, obviously, to be up 50% year over year, which is outstanding. Can you provide details on the daily margins on those rigs and maybe some further details on potential rig activations that you referenced in the press release? Have they moved closer or further from prior quarters?

Speaker 2

Yes. So, hey, John. I think on the international margin, we don't disclose the margins just because we have 2 customers in the international market. So like to keep that confidential. But I would say that they are a little bit better than mid cycle margins what we would experience in North America.

Speaker 2

And when you think about the dynamics, we're getting 5 year contracts on those rigs. And so the payback period and the IRR on the rigs is going to be just a little bit lower than what we would require in North America because there's more certainty and longer term horizon.

Speaker 3

And last one, just any update on the potential reactivations of the outstanding rigs in your international regions?

Speaker 4

Yes, John, no, we have no news right now, nothing to report other than we were unsuccessful on a tender in Saudi Arabia. The rates were well below the levels we ever upgrade rig and deploy to. But we understand some people making strategic decisions. It's just that's their call. I do think that we have opportunities to continue pursuing in Kuwait and Saudi Arabia and in the region right now.

Speaker 4

And I think we'll be successful. I think but I don't see anything happening likely during the Q3, maybe during the Q4.

Speaker 3

Okay, great. Last one for me. Sorry if I missed this. Could you touch on day rates and margins on the super single class of rigs in Canada? I mean, it looks like you gained some market share here.

Speaker 3

And just wondering if what drove this and if you've been able to push pricing higher on this class of rigs?

Speaker 4

Yes. I'm not sure we've actually gained any market share because our market it's really hard tell exactly, but our market share still seem to be in the same range. And we're mainly competing with rigs that probably aren't quite as efficient. So we get a little higher day rate. I gave guidance on the margins of the range of $7,000 to $14,000 a day.

Speaker 4

You can assume that the pad rigs are going to be the top half of that range and the non pad rigs will be the bottom half of the range. I suggested that a third of the rigs are pad style rigs. The upgrade cost to convert a rig to pad style is quite low compared to the triples. And I expect we'll have several more of those super singles that are non pad converted to pad rigs probably in the second half of this year.

Speaker 3

Okay, great. Awesome quarter. I'll turn it back.

Speaker 4

Thanks. Thanks a lot, John.

Operator

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

Speaker 10

Hey, guys. Thanks for having me on. Just one question. One of the frequent complaints I get from like private well service guys in the U. S.

Speaker 10

Is the cost of insurance and the ability to get it. I'm just curious if that same dynamic is at play in Canada and is that going to create some opportunities for more tuck ins?

Speaker 4

John, that's a really prickly question. I just came back from our insurance renewals in the spring. We go to London, we do a comprehensive insurance renewal with our insurance group. I would tell you that I think that larger service companies with scale right now have very good access to insurance, but the rates have gone up. I would say that smaller and the smaller you get the access to insurance gets trickier and more expensive.

Speaker 4

The insurance industry is dealing with a lot of their investors and they're being pushed not to insure this industry. We see that. We sat with several insurers who used to cover Precision, who won't cover oil and gas again. So the market size is decreasing and those that are in the space want to focus on the lower risk, larger, more capable companies. So I think that's a real risk for a small company.

Speaker 4

I would tell you that I think any large service provider that's kind of multi basin tens or hundreds of assets will have access to insurance. It may be tougher for smaller companies.

Speaker 10

Okay. Is it your sense that the customers are being smart in auditing this?

Speaker 4

For every contract we have, we have to have proof of insurance. Okay. Got it. And we have to typically go through that liability assessment with our clients. Fair

Speaker 10

enough. That's all I got. Thanks guys.

Speaker 4

Great. Thanks John.

Operator

And I'm not showing any further questions at this time. I'd like to turn the call back over to Levon for any closing remarks.

Speaker 1

On behalf of the Precision team, I would like to thank everyone for joining in on our call today and wish you a great day. Thank you.

Operator

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

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Key Takeaways

  • Strong Q2 results: Revenue and adjusted EBITDA beat expectations with Q2 EBITDA of $115 million (or $125 million adjusted) and net earnings of $21 million ($1.44/share), marking the eighth consecutive profitable quarter.
  • Balance sheet focus: Year-to-date debt reduction of $103 million and $40 million of share repurchases, with 2024 targets to reduce debt by $150 million–$200 million and return 25%–35% of free cash flow to buybacks, aiming for under 1× net debt/EBITDA by 2026.
  • Geographic growth drivers: Consolidated revenue rose despite a 15% drop in US rig count, fueled by a 61% increase in international drilling rigs, an 18% rise in Canadian rigs, and 66% year-over-year growth in Completion & Production Services EBITDA.
  • Canadian drilling strength: Active rig count reached 77 driven by heavy oil and Montney drilling, with 43 of 48 Super Single rigs operational, delivering margins of $7,000–$14,000/day and adding an estimated $6–$7 million in annualized incremental margin through new efficiency technologies.
  • Stable outlook and new tech: US rig activity is expected to hold in the upper 30s (with a modest uptick to low 40s later), while roll-out of hydrogen injection catalysts and high-mass lighting is projected to enhance fleet margins by ~$500/rig/day over the next year.
A.I. generated. May contain errors.
Earnings Conference Call
Precision Drilling Q2 2024
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