Earnings Labs

Precision Drilling Corporation (PDS)

Q3 2017 Earnings Call· Sat, Oct 28, 2017

$98.92

+2.35%

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Transcript

Operator

Operator

Good afternoon, ladies and gentlemen, and welcome to the Precision Drilling Corporation 2017 Third Quarter Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer sessions and instructions will follow at that time. [Operator Instructions] And as a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Ashley Connolly, Manager of Investor Relations. Ma'am, you may begin.

Ashley Connolly

Analyst

Thank you, Sandra, and good afternoon, everyone. Welcome to Precision Drilling's third quarter 2017 earnings conference call and webcast. Participating in the call with me today are Kevin Neveu, President and Chief Executive Officer; and Carey Ford, Senior Vice President and Chief Financial Officer. Through our news release earlier today, Precision reported its third quarter 2017 results. Please note that these financial figures are in Canadian dollars, unless otherwise indicated. Some of our comments today will refer to non-IFRS financial measures such as EBITDA and operating earnings. Please see our news release for additional disclosure on these financial measures. Our comments today will include forward-looking statements regarding Precision's future results and prospects. We caution you that these forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from our expectations. Please see our news release and other regulatory filings for more information on forward-looking statements and these risk factors. Carey will begin today’s call with a brief discussion of the third quarter operating results and provide a financial overview. Kevin will then provide an operational update and outlook. Before I turn it over to Carey I want to make note of our three strategic priorities for 2017. Deliver high performance high value service offerings and an improving demand environment while demonstrating fixed cost leverage, maintain strict financial discipline in pursuing growth opportunities with a focus on free cash flow and debt reduction and lastly commercialize rig automation and efficiency-driven technologies across our Super Series fleet. We will touch on our progress year-to-date for each of these initiatives throughout today’s call. With that I’ll turn it over to you Carey.

Carey Ford

Analyst

Thank you, Ashley. In addition to reviewing the third quarter results, I will provide an update on our 2017 capital plan and our liquidity position. Third quarter adjusted EBITDA was $73 million, which is 77% higher than the third quarter of 2016. The increase in adjusted EBITDA from last year is primarily the result of higher activity levels across all our businesses, lower North American operating costs and higher day rates internationally. As you have noticed, we introduced some changes to the treatment of certain items that historically netted against operating expenses. These are now treated as revenue, impacting revenue and operating expense particularly in our Canadian drilling segment, but having no impact on EBITDA or profitability. The audience today is likely particularly interested in the impact on current historical day rates and operating costs. We have provided a detailed schedule of the recast figures in our press release. In Canada drilling activity for Precision increased 57% from Q3 2016 while margins were $615 per day lower than prior year. Margins for the quarter were negatively impacted by legacy contracts rolling off and renewing at lower rates, offset by lower daily operating costs that were $451 per day lower than the prior year. In the U.S., drilling activity for Precision increased 108% from Q3 2016, while margins were US$2,452 per day lower. Since the IBC’s payments in lump sum move cost realized in Q3 2016, margins this quarter were essentially flat year-over-year with daily operating costs reaching a multi-year low averaging $12,591. Internationally, drilling activity for Precision increased 15% from Q3 2016. The increase in activity was primarily the result of the addition of two new rigs in Kuwait deployed in Q4 2016, partially offset by a reduction in activity in our Mexico operations. International average day rates were $50,528,…

Kevin Neveu

Analyst

Thank you, Carey, and good afternoon. The third quarter for Precision is shaping up to be a turning point as we reported both year-over-year and sequential increases in revenue, EBITDA and cash for the first time since 2015. Despite lower than expected commodity prices for the WTI and AECO gas in Canada, demand has remained strong for our Super Triple long reach pad rigs. Day rates remained firm. We've always experienced a slight pullback in utilization later the third quarter. We expect strengthening demand from customers as we progress towards 2018. Now with our capital spending largely complete for the year, our improving day rates margins on North American markets, coupled with firm international cash flow, we’re anticipating a solid runway of free cash flow for the foreseeable future. As actually reminded the grocers earlier, our stated priorities for this year include a focus on free cash flow and debt reduction leveraging our fixed costs and commercializing our drilling automation technologies. In this quarter, we’re reporting strong progress to all three priorities. So beginning with our $39 million reduction in capital spending, this is a very important step as we focused on debt reduction. Now, besides Carey’s comments related to the bolt-on nature of our upgrades, we have further leveraged our in-house manufacturing facilities in Calgary and utilized best production techniques to prefabricate these upgrades and the components. We've significantly reduced the cost for each of rig upgrade. Additionally, we upgraded inventory and parts for about two to three more rig upgrades. We can execute later in the year with essentially no additional cash requirements. And finally, our partnership arrangements for technology development have lowered our expected technology spending as we continue the beta testing and improve these technologies. So this drilling execution demonstrated by our manufacturing and operations team…

Operator

Operator

[Operator Instructions] Our first question comes from the line of Sean Meakim with J.P. Morgan. Your line is now open.

Sean Meakim

Analyst

Thanks. Hey, Kevin. Hey, Carey.

Kevin Neveu

Analyst

Hey, Sean.

Sean Meakim

Analyst

So maybe just to start off on the technology front and some of the investments you think you're making there. Can you maybe give us a little bit sense of how you see the timing for commercialization in 2018? And you talked about, in terms of in the marketplace for your rigs, maybe being willing to walk away from market share do you see the economics are not appropriate? But in terms of the technology uplift here, are you able to see line of sight to how that can help you win share over the next several quarters?

Kevin Neveu

Analyst

Sean, the short answer is yes. I think we have line of sight to how we can win share. The performance of the rigs right now running the automation software is looking very, very good. And the data that we've demonstrated back at our Investor Day back in May, we were repeating on multiple rigs, we've been increasing uptime for the systems. So we're pretty encouraged. We have hard to find metrics that we have to achieve what we call commercialization and our board's wholly is accountable to those. I think we are on track to complete this project either by the end of this year or very early into Q1 next year, just depends on the delays we mentioned on the software. But it's coming along well. So I think the efficiency gains are measurable but real. Our customers are seeing yet. We have some customers right now that are paying – actually paying us whole rate and we've got other customers right now that are working on kind of performance-based metrics. But I can tell you this, there is no pushback from our client base right now based on performance, so we are very encouraged by that. Is that helpful?

Sean Meakim

Analyst

It is helpful. And for those customers, are they all using the same suite in terms of the Process Automation Control? Or are people taking shooting certain components, how does that look among the 20 rigs?

Kevin Neveu

Analyst

Sean, on the Process Automation Control, we’re running one version on all the rigs, all the same. We're trying to keep that – the number of variables and systems controllable, so we can compare rig one to rig 20. There is a couple of things that are actually really key here. We're running multiple tests. We've got, I think we said, 14 or 15 different customers that are running the software, 20 rigs spread among 5 different basins. But it's exactly the same hardware, same software, and that's really critical, so we can capture repeatable results. And having multiple tests running concurrently but using the same platform is really important to our test and helps us get that guarantee of consistency and time savings going forward.

Sean Meakim

Analyst

Thank you for that. That’s very helpful. And one more question, if I could. Just – you mentioned one of your key focuses this year and in the next year is going to be on free cash flow. Curious as your latest thoughts about line of sight for the large tenders in the Middle East. It seemed like the one in Kuwait is the one that's at least most promising. Timing is always very difficult for any of these. How are you thinking about balancing, obviously, need for free, but if you're able to secure some of those types of contracts, particularly because of new build component, a stream of good – long-term contracts with a good stream of cash flows attached to this might be really pretty attractive. So just curious how you're thinking about those types of capital allocation decisions.

Kevin Neveu

Analyst

Well, Sean, I'll be clear. So we have active bids in lots of places. I don't want to discuss any specific bid. But our preference today and our preference going forward is our first use of free cash is to pay down debt.

Sean Meakim

Analyst

All right, fair enough. Thank you, Kevin. I appreciate it.

Kevin Neveu

Analyst

Great, thank you.

Operator

Operator

Thank you. And our next question comes from the line of Ben Owens with RBC Capital Markets. Your line is now open.

Ben Owens

Analyst · RBC Capital Markets. Your line is now open.

Hi, how is it going?

Kevin Neveu

Analyst · RBC Capital Markets. Your line is now open.

Good. Good morning, Ben. Good afternoon here.

Ben Owens

Analyst · RBC Capital Markets. Your line is now open.

Kevin, so you mentioned you expect your rig count in the U.S return to peak 2017 levels later this year, which, I think, was around 63 rigs or so. Is that based on contracts you have on hand? Or is that more of a general comment on how you view the state of the market?

Kevin Neveu

Analyst · RBC Capital Markets. Your line is now open.

So we have rig deployments scheduled between now and the end of the year that, we think, gets us back to that number.

Ben Owens

Analyst · RBC Capital Markets. Your line is now open.

Okay. And then sticking with the U.S., it looks like your daily cash margin has benefited quite a bit from reduction in operating cost. Do you think the third quarter level is sustainable going forward?

Carey Ford

Analyst · RBC Capital Markets. Your line is now open.

Hey, Ben. This is Carey. I think this quarter really shows what the business can do. But remember, we did not have any turnkey revenue this quarter, and we did not have any regional rig moves and that will add some variability to the operating cost. But there weren't any onetime items that drove that cost lower.

Ben Owens

Analyst · RBC Capital Markets. Your line is now open.

Okay. I appreciate that. That’s it for me. I will hand it back. Thanks.

Carey Ford

Analyst · RBC Capital Markets. Your line is now open.

Thanks, Ben.

Operator

Operator

Thank you. And our next question comes from the line of Chase Mulvehill with Wolfe Research. Your line is now open.

Chase Mulvehill

Analyst · Wolfe Research. Your line is now open.

Hey, good afternoon.

Kevin Neveu

Analyst · Wolfe Research. Your line is now open.

Hi, Chase.

Carey Ford

Analyst · Wolfe Research. Your line is now open.

Hi, Chase.

Chase Mulvehill

Analyst · Wolfe Research. Your line is now open.

Hi, Carey. Hi, Kevin. So, I guess, first one, thinking about U.S. land drilling, really nice quarter on operating cost there. As we go into three – or go into 4Q, how should we be thinking about kind of OpEx per day? Should it be kind of flat? Or should we kind of take that higher as we get into 4Q?

Carey Ford

Analyst · Wolfe Research. Your line is now open.

So as I just mentioned, I think that the business performed really well this quarter and really showed that's a true operating cost with a business firing on all cylinders. But we didn't have any turnkey revenue, which is typically an – adds to operating cost. And we don't have any regional rig moves. So it was a very good quarter for operating cost, but there is typically more variability in the cost number quarter-to-quarter.

Chase Mulvehill

Analyst · Wolfe Research. Your line is now open.

Okay, so the rig, I think you said, do you see line of sight for five rigs. Are those within the same basin? Are you going to have rig moves out of basin?

Carey Ford

Analyst · Wolfe Research. Your line is now open.

So I said – I didn't say the number. Actually, I saw line of sight to get back to our peak levels. Your math is close, but not quite right on. But I don't expect at this point that we have any rig moves coming up. But that could change. Customers change plans, and we may end up activating different rig sooner. But nothing on the horizon right now, Chase.

Chase Mulvehill

Analyst · Wolfe Research. Your line is now open.

Okay. All right, also on 4Q, could you talk to kind of how you see rig mix playing out in Canada between the shallow and deep rigs? And then maybe – I don't know if you want to talk at a high level about pricing in Canada through the winter drilling season?

Carey Ford

Analyst · Wolfe Research. Your line is now open.

Yeah, you know, I think activity on the Deep Basin were pretty close to last winter. We said, I think, on my comments, if you're going over it, I said flat or in line with 2017. We think that the heavy oil regions could be a little busier than last winter. And that, combined with our rate increases on the shallower rigs, should be helpful. Now we're right in the middle of pricing rigs for the winter, and our competition is listening to this call. And I don't want to give specific guidance on what we're doing with the rigs, but we are pushing them up on the shallower rigs. And that hits everything outside the Deep Basin in Canada. And we did that and we pressed hard earlier this year. We lost a little bit of market share in Canada because of that. But I feel good about our positioning for the winter. And I think we said in the press release we expect activity levels to be in line with 2017.

Chase Mulvehill

Analyst · Wolfe Research. Your line is now open.

It’s hard for us to understand kind of high-spec rigs in Canada and what utilization looks like. So if we kind of look at Tier 1, super-spec type rigs that we call them in the U.S., what kind of utilization do you think that has during the winter season?

Kevin Neveu

Analyst · Wolfe Research. Your line is now open.

I think last winter we had about 35 rigs and we kept that category in Canada running during winter.

Chase Mulvehill

Analyst · Wolfe Research. Your line is now open.

And for the industry what do you think it is, I mean…

Kevin Neveu

Analyst · Wolfe Research. Your line is now open.

So our market share of that base will be a little bit over 30%, probably 35%, less than 100 rigs.

Chase Mulvehill

Analyst · Wolfe Research. Your line is now open.

Okay, all right.

Carey Ford

Analyst · Wolfe Research. Your line is now open.

Yeah, Chase, the utilization on that fleet segment in Q4 and Q1 will be pretty close to 100%.

Chase Mulvehill

Analyst · Wolfe Research. Your line is now open.

Great, so why you are not able to push pricing lower? Why are you not able to get to closer to kind of new build economics? I mean, in the U.S., everybody will upgrade a rig if you get there, so that kind of caps pricing. But I'm just kind of curious why you don't see more pricing momentum in Canada.

Kevin Neveu

Analyst · Wolfe Research. Your line is now open.

So that – Chase, that's a really good question, a great question for people who aren't in the market daily like we are. The short answer is that the – there's a rig spec in Canada called the heavy Tele-Double, which can kind of nibble at the bottom or the shallower applications on the Super Triples.

Chase Mulvehill

Analyst · Wolfe Research. Your line is now open.

Okay, understood.

Kevin Neveu

Analyst · Wolfe Research. Your line is now open.

Okay. So it doesn’t cap the pricing, but it does cause a bit of a drag on pricing. And the other problem with Canada is it's so seasonal right now. It's so sensitive to this AECO gas price that it's really hard to understand what might happen in the back half of the year. It appears as though budgets may be flat to slightly up, but just – it's really, really hard to tell. I can tell you the last year, the problem on pricing wasn't so much on the Super Triples. It was really on the shallower rigs that were underpriced in the winter the last year.

Chase Mulvehill

Analyst · Wolfe Research. Your line is now open.

Okay. That’s helpful. I appreciate the color. I'm going to squeeze one in if you'll allow me one more. On the debt side, I mean, you had some nice debt reduction in the quarter. It's big focus of the company. And so could you talk about maybe targeted leverage ratios or maybe targeted net debt and your path to kind of getting to those levels?

Carey Ford

Analyst · Wolfe Research. Your line is now open.

Yeah, I think, we’re looking at this over three to four year time horizon. As a reminder, our next maturity is November 2020, so we've got about three years until we have our first principal payment. And we really don't have a metric that we're gearing towards. But we have communicated that we would like to reduce our debt by $300 million to $500 million over the next three to four years. And we think we can do that entirely out of cash flow from operations.

Chase Mulvehill

Analyst · Wolfe Research. Your line is now open.

Okay, all right. Thanks, Carey. Thanks, Kevin.

Kevin Neveu

Analyst · Wolfe Research. Your line is now open.

Yeah, thank you.

Carey Ford

Analyst · Wolfe Research. Your line is now open.

Yeah, thank you.

Operator

Operator

Thank you. And our next question comes from line of Jim Wicklund with Credit Suisse. Your line is now open.

Jim Wicklund

Analyst · Credit Suisse. Your line is now open.

Good afternoon guys.

Kevin Neveu

Analyst · Credit Suisse. Your line is now open.

Good afternoon, Jim.

Carey Ford

Analyst · Credit Suisse. Your line is now open.

Hi, Jim.

Jim Wicklund

Analyst · Credit Suisse. Your line is now open.

Usually, when somebody cuts their CapEx, which you guys are doing, your CapEx going forward, it's because there is not as much growth has been expected. Now I appreciate that you're more efficient, reduced input costs. I'm just curious. Do you see fewer opportunities for CapEx – growth CapEx in 2018? Or have you just gotten so efficient that you can shave $39 million off and still have the same trajectory?

Kevin Neveu

Analyst · Credit Suisse. Your line is now open.

Jim there is a several moving pieces there. But they – I think one of the key numbers you can kind of relate back to is we estimated at the beginning of the year, I think, 3 weeks of 39 upgrades.

Carey Ford

Analyst · Credit Suisse. Your line is now open.

35…

Kevin Neveu

Analyst · Credit Suisse. Your line is now open.

35 upgrades that we actually booked in 30 upgrades, so the 5-year upgrades that we might have talked about earlier this year. I would say there's strong willingness on the customer front to accept the day rates that we were looking for. There's lots of willingness in the third quarter to sign up for the term we wanted. But you'll remember that at Precision, we're a little different. We have to use the incremental value of the day rate to fund the upgrade. So we can't use whole margin on the rig, just the incremental margin above the opportunity cost of the rig. We have the contract that will pay that incremental value back on the upgrade inside the contract life. And the issue during the third quarter was a reluctance of customers and a $42 oil price world to walk in for a year or longer at this premium day rates. The rate wasn't the problem. It was the term of the contract in Q3. why we reduced the numbers slightly.

Jim Wicklund

Analyst · Credit Suisse. Your line is now open.

Okay. And how much – remind me, how much you're spending for rig upgrade?

Carey Ford

Analyst · Credit Suisse. Your line is now open.

Right now, it’s about $1.3 million…

Jim Wicklund

Analyst · Credit Suisse. Your line is now open.

Okay, $1.3 million times, okay.

Kevin Neveu

Analyst · Credit Suisse. Your line is now open.

The $1.3 number is lower than we guided to earlier this year because of the cost savings.

Jim Wicklund

Analyst · Credit Suisse. Your line is now open.

Oh, good, okay.

Carey Ford

Analyst · Credit Suisse. Your line is now open.

And Jim, just to add to what Kevin said. So we typically segment our capital expenditures in three buckets. We have managed infrastructure, we have upgrades and expansion. Expansion has remained the same. That has already been spent. Maintenance is activity driven. And we produce our maintenance capital this year as Q3 activity was softer than we expected in both Canada and the U.S. as the industry was in both markets. And Q4 looks to be a little bit softer than what we would have expected three months ago with the last time we gave a CapEx update. Since we only update it once a quarter, we're only able to reflect theforecasted activity once a quarter in our CapEx numbers.

Jim Wicklund

Analyst · Credit Suisse. Your line is now open.

Gotcha, okay. And since you signed some contracts since the end of the third quarter. Kevin, what is the approximate term or average term of those contracts? Are we doing one-year, two-year, three-year?

Kevin Neveu

Analyst · Credit Suisse. Your line is now open.

We don't – so what I can tell you, nothing at three years. We usually don't publish contract by contract terms as…

Jim Wicklund

Analyst · Credit Suisse. Your line is now open.

No. Just average. I know you can't tell me contract by contract, but just generally on average.

Kevin Neveu

Analyst · Credit Suisse. Your line is now open.

Think about in terms of between six months, 1.5 years with an average of about one year.

Jim Wicklund

Analyst · Credit Suisse. Your line is now open.

Okay, that’s helpful. And the last one if I could sneak in since Chase got one, I get one. You're – how much of your directional drilling business is in the U.S. versus Canada? And how long does your deal with Schlumberger go before it expires? Or is it open-ended?

Kevin Neveu

Analyst · Credit Suisse. Your line is now open.

There is – it's open-ended. There's no expiry. We continually are working with Schlumberger. I can tell you that the third quarter was a soft quarter for us with U.S. and Canada. We push rates on directional. That didn't work very well for us. But typically, if you negate the seasonality, it's about 50:50 between Canada and the U.S. Of course, that means that Q1 is very strong in Canada, Q2 is very light. But for the balance of the year, it's about equally split.

Jim Wicklund

Analyst · Credit Suisse. Your line is now open.

Okay, gentlemen, thank you very much.

Kevin Neveu

Analyst · Credit Suisse. Your line is now open.

Thank you.

Operator

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Jon Morrison with CIBC Capital Markets. Your line is now open.

Jon Morrison

Analyst · CIBC Capital Markets. Your line is now open.

Good afternoon all.

Kevin Neveu

Analyst · CIBC Capital Markets. Your line is now open.

Hi, Jon.

Jon Morrison

Analyst · CIBC Capital Markets. Your line is now open.

Kevin, can you give more color on the order of magnitude that you're seeing in the day rate momentum that you mentioned in the release and your preamble? And how different is it across geographies and rig classes right now?

Kevin Neveu

Analyst · CIBC Capital Markets. Your line is now open.

So, I think, I would gave the rate ranges for the U.S. rigs. I was a little more vague on the Canadian rigs because we're right in the battle right now. I'm sure my I'm sure my sales guys are in front of customers this afternoon and tomorrow. And both our customers and competitors are listening on the call. But think about it this way, Jon. The rates we were pushing through on a quarterly basis, we've been trying to step up rates $1,000 to $2,000 a day. Each time we go to renewal or a step in the market, we have an opportunity to do such. The type of – the magnitude of the type of changes has run across.

Jon Morrison

Analyst · CIBC Capital Markets. Your line is now open.

And it’s fair to assume that the comments you made were fairly specific to Q3 or post Q3, not generally speaking over the last six to 12 months or anything like that?

Kevin Neveu

Analyst · CIBC Capital Markets. Your line is now open.

Absolutely. Q3, post Q3, into Q4 and into Q1. So those rate increases didn't have a huge impact in Canada in Q3, but we expect it to start to help in Q4 and Q1.

Jon Morrison

Analyst · CIBC Capital Markets. Your line is now open.

Carey, can we – just on the operating cost side. Are you expecting any turnkey in Q4 at this point based on everything that you know?

Carey Ford

Analyst · CIBC Capital Markets. Your line is now open.

So we don’t ever provide guidance on how much turnkey we will have. I know that'll be easier to model, but we just – we don't know that going into the quarter. I would say that the turnkey component of our activity in the U.S. has been lower this year than it has in the – in previous years. So we wouldn't expect a big jump. It might be one, maybe two jobs.

Jon Morrison

Analyst · CIBC Capital Markets. Your line is now open.

Okay. Can you give any more color on the six rigs that you signed the contracts for in the quarter and post quarter? Were those straight renewals? Or were they new contracts?

Kevin Neveu

Analyst · CIBC Capital Markets. Your line is now open.

I don’t have that data in front of me. But I know that some of those were new clients, new contracts for new deployments. Some may have been renewals. I can't recall. But I think if you assume that half are new and half are renewals, that's probably…

Carey Ford

Analyst · CIBC Capital Markets. Your line is now open.

I think that's good, Kevin.

Jon Morrison

Analyst · CIBC Capital Markets. Your line is now open.

Okay, in terms of the 2017 CapEx cuts, I know that you've gone through some of the details here. But would it be fair to assume that you deliberately tried to cut your CapEx and went more aggressively at the budget or it was literally a function of going throughout the year and realizing that you probably weren't going to spend what you had originally targeted three months ago.

Kevin Neveu

Analyst · CIBC Capital Markets. Your line is now open.

We saw the – running on the wall back in Q2, but there's too much variability on how the back end of the year was going to look. So we frankly didn't pull any reductions back on our Q2 conference call in July. But with the commodity prices staying lower and the Canadian activity being dragged down by AECO, that maintenance capital number went down. And we're front up into the – it is middle of October now. We have a pretty good sense of capital for the year.

Jon Morrison

Analyst · CIBC Capital Markets. Your line is now open.

Carey, I realize you guys don't have a 2018 CapEx plan yet, but is it fair to assume that it's a low probability that the 2018 spend is going to be at a meaningful premium to what you're outlaying in the new 2017 program?

Carey Ford

Analyst · CIBC Capital Markets. Your line is now open.

Yeah, it’s tough to know what the market is going to be like, Jon. I mean, so much of it is determined by both our activity and the demand for upgrades by customers. But in the world that we're in right now on a $45 to $60 oil world, we're probably going to be no higher than where we are today.

Jon Morrison

Analyst · CIBC Capital Markets. Your line is now open.

Is there any expected ERP rollover into 2018?

Carey Ford

Analyst · CIBC Capital Markets. Your line is now open.

There will be a bit.

Jon Morrison

Analyst · CIBC Capital Markets. Your line is now open.

Okay.

Carey Ford

Analyst · CIBC Capital Markets. Your line is now open.

It will be, but It won't – it will be inside our infrastructure maintenance capital number and it won't be – won't move the needle relative to top line number.

Jon Morrison

Analyst · CIBC Capital Markets. Your line is now open.

Kevin, turning back to your three priorities and wanting to make sure that you're an industry leader in terms of automation and installing NOVOS, would it be fair to assume that you're not willing to make those investments on any rig that isn't operating with a customer that has some form of a base contract and the customer has clearly indicated a willingness to pay for that technology at this point? Like, are you willing to install it on a rig and hope to get paid for it or only do so if it's with a customer that's willing to pay for it today?

Kevin Neveu

Analyst · CIBC Capital Markets. Your line is now open.

Okay, so the answer is not quite simply yes or no, but it's really a good question, Jon. So the first part of the answer is I'd like to have the hardware and software, the steel box on every rig with the red and green light off or on. So customers have the option to pay for it or not pay for it. And I'd also like to have a hard evidence, so it's very compelling. So they're highly incented to want to turn the system on. That said, we will want to play capital on the rigs, unless we have clear line of sight to revenue. Now this is a really minor capital investment, like in the case of sell box inside a few months. So you don't – we don't need a two-year commitment to make that decision and we might need it to welcome it and to make the decision.

Jon Morrison

Analyst · CIBC Capital Markets. Your line is now open.

Okay. It’s fair to assume probably that the uptake on it, of everything that you've done today would have to be very strong with customers to keep going forward at the same pace in 2018.

Kevin Neveu

Analyst · CIBC Capital Markets. Your line is now open.

I think our expectation is the pace probably accelerates.

Jon Morrison

Analyst · CIBC Capital Markets. Your line is now open.

Okay. Just – sorry one last one for me.

Carey Ford

Analyst · CIBC Capital Markets. Your line is now open.

Yeah, yeah, the initial 20 rigs, it's a bit of a push by us in talking to customers and getting them on the rigs and trying it out. And the reason why we're – we have them installed on 20 rigs is we want to test it with enough good data to verify it.

Kevin Neveu

Analyst · CIBC Capital Markets. Your line is now open.

And ring out all the field heartening bugs and things like that.

Carey Ford

Analyst · CIBC Capital Markets. Your line is now open.

Very difficult to do that when you have it running on one or two rigs.

Jon Morrison

Analyst · CIBC Capital Markets. Your line is now open.

Okay, just to go back to the comment around international bids because any time that you're in the upper 50s on Brent, all the chatter on international contracts and Middle East seems to come back. Would you be comfortable being free cash flow neutral in 2018 if there was contracts in the market that provided similar economic rates of return to 2014 levels and contract durations that were four, five years in duration? I'm just trying to understand how you prioritize the free cash flow focus versus aspirations to, perhaps, get bigger in certain countries.

Kevin Neveu

Analyst · CIBC Capital Markets. Your line is now open.

Jon, we haven’t actually put forward our 2018 budget to our board for approval. But I suspect if I put forward a cash flow-neutral budget, it will be a different CEO talking to you next year.

Jon Morrison

Analyst · CIBC Capital Markets. Your line is now open.

Okay, so it is– you're free to assume that out of the three priorities, that's the number one through and through.

Kevin Neveu

Analyst · CIBC Capital Markets. Your line is now open.

It’s number one.

Jon Morrison

Analyst · CIBC Capital Markets. Your line is now open.

Okay. Last one just for me, Kevin. On the well servicing market, improvement, obviously, in economics in the quarter, which was positive to see in pricing. Do you believe that you need to see industry consolidation in Canada for that market to get meaningfully more healthy in the next two to three years?

Kevin Neveu

Analyst · CIBC Capital Markets. Your line is now open.

Yeah, you know, Jon, I've actually, I think, and said that in a couple of calls back that the market right now is just structurally in really tough spot. Consolidation would be – would really help. And I think we've even said that we'd like to be a part of a consolidation, but it's not something that we're going to put capital towards ourselves.

Jon Morrison

Analyst · CIBC Capital Markets. Your line is now open.

I appreciate the color. I’ll turn it back. Good quarter.

Kevin Neveu

Analyst · CIBC Capital Markets. Your line is now open.

Thank you.

Carey Ford

Analyst · CIBC Capital Markets. Your line is now open.

Thanks, Jon.

Operator

Operator

Thank you. And our next question comes from line of Ian Gillies with GMP. Your line is now open.

Ian Gillies

Analyst · GMP. Your line is now open.

Good afternoon everyone.

Kevin Neveu

Analyst · GMP. Your line is now open.

Hi.

Ian Gillies

Analyst · GMP. Your line is now open.

Kevin, I wanted to go back to Canadian day rates and if we think about the evolution into, I guess, Q1 2018, is it fair to assume that we should expect more than just additional boiler revenue right now based on what you know today?

Kevin Neveu

Analyst · GMP. Your line is now open.

Ian, so I think I did give some sort of comments. We did push rigs through on the shallower rigs everything outside the Deep Basin, and we're expecting to have a stronger average day rate in 2018 for those shallower rigs than we saw in 2017. So, yes, pricing power beyond the boilers. Now that said, I also commented the market is really price-sensitive. And the exercise isn't finished yet. We're still working with customers daily as well as with our competitors. And things are lining up for us nicely right now, but the deals aren't done yet.

Ian Gillies

Analyst · GMP. Your line is now open.

Okay, thanks that’s helpful.

Kevin Neveu

Analyst · GMP. Your line is now open.

Thanks.

Ian Gillies

Analyst · GMP. Your line is now open.

In the U.S., can you provide any commentary around what you’re seeing from a drilling efficiencies perspective and whether they're starting to plateau or whether you're still starting to see, I guess, additional efficiencies? If you exclude some of the additional technologies you're putting on the rig right now, they're obviously saving people’s – saving people time.

Kevin Neveu

Analyst · GMP. Your line is now open.

Yeah, so we’re pretty important part of the efficiency chain on the drilling completion circuit. But frankly, over the last year or so, most of those efficiency gains haven't been coming from rigs other than more pad rigs being used. So I kind of back this up a little bit and tell you that we're hitting really fast drilling performance days in Eagle Ford back in 2010. We're hitting really – with the best rigs and really fast drilling performance in the Permian in 2014. But there is just more rigs drilling at that level now, so that's still – that's been part of the trend. And if you look at it today, we'd say that probably, a little over half of the rigs in the Permian are premium-efficiency rigs. And the balance of the rigs in the Permian probably have room for improvement. And we think that some of our rigs will displace some of those. So – but the rig itself – our best rigs right now, without automation, have been drilling at their maximum speed now for several years. But we are displacing lower-performing rigs in the marketplace as our other high-spec or super-spec rigs displacing lower-performing rigs. So that run rate in the Permian is probably half the Permian activity. And across the U.S., it's probably 300 to 400 more rigs of displacement that are possible.

Ian Gillies

Analyst · GMP. Your line is now open.

Okay, that’s helpful. And then last one for me. With respect to deleveraging and paying off $300 million to $500 million of debt over the next, call it, 3 to 4 years, should we just expect that cash position to continue to build on the balance sheet until the next maturity in 2020? Or is there something more immediate that you may look try to do if you get a sizable enough cash position?

Kevin Neveu

Analyst · GMP. Your line is now open.

Yes, I think the 2020 bonds are callable next month at 101, so that will be an obvious target. But there might be opportunities for us to buy back debt in the open market over that time frame.

Ian Gillies

Analyst · GMP. Your line is now open.

Okay, thanks very much. I will turn the call back over.

Operator

Operator

Thank you. And I am showing no further questions at this time. So, I like to return the call to Mr. Kevin Neveu for any closing remarks.

Kevin Neveu

Analyst

Well, right, thank you for joining us on our Q3 call. We look forward to sharing our end-of-year results in February with you. Thank you very much.

Operator

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.