Good day and thank you for standing by. Welcome to the Precision Drilling Corporation 2022 Third Quarter Results Conference Call. I would now like to turn the conference over to sorry, Lavonne Zdunich, Director of Investor Relations. Please go ahead.

Thank you, operator. Welcome everyone to Precision Drilling's third quarter earnings conference call and webcast. Participating on today's call with me is Kevin Neveu, our President and CEO; and Carey Ford, our CFO. Earlier this morning, Precision reported impressive third quarter results which Carey 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. 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. Carey, over to you.

Thanks, Taman. Precision's revenue in the third quarter was $429 million, 69% higher than the same period last year, while adjusted EBITDA was $120 million, an increase of 163% from Q3 2021. On a normalized basis, adjusted EBITDA, excluding stock-based compensation and -- was $130 million, representing a corporate [indiscernible] of approximately 30%. These results reflect steadily increasing North American drilling activity, improved pricing, expansion of our alpha and Evergreen offerings and a continued focus on costs throughout the business. We've been highlighting the operating leverage inherent in our business for several quarters. We believe our key results reflect the beginning of a multi-quarter demonstration of how rising activity and rates translate into expanding EBITDA and margins for Precision. During the quarter, we completed the acquisition of High Arctic's well Service and related rental assets and successfully integrated the business. Having already realized $3 million of the $5 million in expected synergies, we expect to realize substantially by the end of Q1 2023. Moving on to the drilling business. Q3 activity increased 40% in the U.S. and 17% in Canada compared to the same period last year, while day rates increased 37% in the U.S. and 39% in Canada. In the U.S. Our normalized average daily operating margin for the quarter, absent in a Turnkey IBC impact, was USD 9,662, USD 2,488 higher than Q2 and in line with our guidance. With repricing of spot market rigs impact of Alpha Technologies Evergreen solutions, we project normalized average margins to increase to approximately USD 11,500 per day in Q4 and we expect a similar sequential increase to average margins of USD 1,000 per day to USD 2,000 per day in Q1 of 2023. In Canada, our average Q3 daily operating margin was $10,034 and significantly exceeded our guidance of $8,000 to…

Thank you, Carey and good afternoon. Well, as Carey explained, our business performance in every service line in every region is strong and continues to improve. I'm especially thrilled to have returned to profitability. And the next key benchmark we are focusing on is a return on capital target but more on that later. I'll start by recapping our recent Kuwaiti contract award. We are very pleased to have been awarded the 4 contracts which include reactivation of 2 of our idle rigs, bringing our active rig count up to 5 rigs in Kuwait by mid-2023. I want to thank our international team. for their hard work and perseverance on the successful bid process as stressed over several quarters. I remind you that these are very large 3,000-horsepower Super Triple rigs with the revenue and margin profile that looks a lot more like 2 North American rigs reach Kuwaiti rig. Coupled with our recent contract renewals in Saudi Arabia, all 8 international rigs will be operating under 5-year terms. We continue to look for other good opportunities to activate more of our remaining 5 idle rigs in the region. Our international business and on its own is a meaningful and stable contributor to Precision's cash flow profile and now with firm visibility through the latter part of this decade. And now following up on our recent well service acquisition, as Carey mentioned, the financial performance of Precision's well service business is strong. Tom and his team have done an excellent job integrating the acquisition while also keeping their focus on the business at hand. They're ahead of plan, achieving the expected synergies and I believe will just continue to perform well for the foreseeable future. Now as customer budgets wind down later this year and we hit the holiday season…

[Operator Instructions] Our first question comes from Aaron MacNeil with TD Securities.

Based on your Q2 and Q3 disclosures, it looks like there’s decremental rig upgrades. So in other words, going from 20 to 30 rig upgrades in 2022. So I’m just thinking about this in the context of incremental activity and your outlook there. How many of those rigs are already working post upgrade? How many were already working and you’re just doing an add-on upgrade to an already active rig. And I guess what I’m really driving at is of those 30 rig upgrades, like how many of those would be incremental to your current rig count today?

Well, it's actually a very complex question, Aaron. I don't have the details rig by rig. I can tell you that a number of these upgrades were third pump, fourth generator additions on rigs that were working and now they're stepping into much higher day rates with that addition. So of the additional upgrades we've added, I think, probably something like 2/3 of those would be just stepping up the capability of the rig and reaching on to a much higher day rate class with that upgrade. And I think that about 1/3 of those, probably 3 or 4 will be rig additions between now and into Q1.

Okay. That’s perfect. And then maybe Carey and follow up. Maintenance capital is obviously dependent on activity assumptions but can you give us a glimpse of what a preliminary growth or upgrade capital spend might look like in 2023? And how many rig upgrades that might contemplate? And I know what you’re going to say that it depends on getting the right contract and everything but just trying to get your pulse there.

Yes. So upgrade capital is completely separate from maintenance. So I can tell you a few things about maintenance. It has gotten a bit more expensive per day. We're trending closer to $2,000 a day versus kind of the $1,500, $1,600 a day that we historically have trended at. So that's a function of inflation largely. The other thing I'll tell you is that long lead items are -- we're having the plan a lot earlier to purchase those. So we have -- for the past year, we've been doing advanced drill pipe purchases and the lead time items on those items might be 6 to 9 months. So, we are doing more of those bulk purchases. And the other item I'll point out is just the weaker Canadian dollar and the majority of our capital expenditures, whether it's maintenance or upgrade, they're purchased in U.S. dollars. And when you convert to Canadian that makes that number go a bit higher. So with that all being said, maintenance will still trend along with activity. So I think if your expectations for activity increases next year are a certain percentage say, 20% higher than this year, then the baseline would be a maintenance capital that's 20% higher than what we had in -- or what we're anticipating in 2022.

And on the upgrade side?

On the upgrade side, I think we would -- we'll continue to see the same type of upgrades as we did this year. So increasing capacity of the rig, adding automation, adding EverGreen solutions to the rig but that will run out at some point. And the level of upgrades we have beyond those kind of $1 million, $2 million, $3 million upgrades that we've been pursuing will be related to the demand for an SCR to AC conversion which we've said historically is going to be about $12 million to complete that upgrade. So because we want cash-on-cash payback within the term contract, we're likely going to need to see a 2-year contract and a day rate approaching $40,000 before we undertake that upgrade. So when the super-spec rigs are sold out in the industry and customers start looking for those types of upgrades, we'll be ready to pursue it but we're not quite there yet.

Okay, perfect. And maybe I'll just sneak one more in, if I could. The C&P business had a very strong quarter which sort of quickly proves out the rationale for the High Arctic acquisition. And I guess, Kevin, does this sort of embolden you to pursue more tuck-in acquisitions like this for C&P? And even if you wanted to, do you think you could transact at similar metrics?

So Aaron, I think -- this is an important deal for us -- and the team has been proven, if they can integrate a fleet quickly and efficiently and achieve the synergies we thought we could achieve. So there's a lot of proof of concept going on right now. The market still looks quite strong. And we're seeing work that was kind of delayed for several years and the backlog of work now looking forward as it looks like it several years long. So this -- the well service business has legs to it right now. And I think the market is still too fractured. So if there's an opportunity for us to do further consolidation, we'd be interested but we're not going to overpay. And if the seller expectations are too high, we won't do a deal.

Our next question comes from Waqar Syed with ATB Capital Markets.

Kevin, in the press release, you mentioned that, at least, 8 rigs could be active in the Middle East by the middle of next year. Could you maybe provide some more color? Where would additional rigs be and what are the tenders you’re looking at?

Sure. So the 8 rigs we referenced to the ones that are contracted right now and we have 5 more idle rigs in the region. The -- I'd say the most relevant idle rig would be the rig that we have in Kuwait which is a 1,500-horsepower AC super-spec rig but it's configured for well servicing. That rig could be easily converted to a drilling rig. So I think that's our most likely candidate for early activation, probably somewhere in that same side of the Arabian Gulf, Saudi Arabia, Kuwait, somewhere like that. We have the 1 rig in Saudi, 2 more rigs in Kurdistan, 1 rig in Georgia that we continue to bid into opportunities in the region. I would -- I don't think we'll have all those rigs acted by the end of the year. But I think there's a good chance that we'll see opportunities that allow us to bid competitively on 2 or 3 of those. And we do have active bids right now on -- in multiple locations for those rigs. So the first one that's gone from bid to -- the first tender we've been involved in has actually gone to award was the Kuwaiti tender. All of the tenders are still kind of hanging open.

Okay. And between now and middle of next year when these rigs would be up and running in Kuwait. Is that what the tender stipulates? Or is that because of the time that you require to activate the rig? What’s the reason for that delay of like 6 to 9 months?

Well, it's exactly according to their schedule for activation. They had this multi-rig project that they put out for tender. And they had a schedule of operations that we bid into their schedules. So we're following their schedule. There will be some recertification requirements, we'll do in those rigs early next year. There'll be some capital tied to that, that we'll circle up on later once we have that all determined. But we bid into their schedule, we'll have the rigs ready for their schedule will be up. There's no early start bonus. They seem to be quite tight on their scheduling.

Okay. And then in the U.S., you may have additional 12-horsepower rigs. Are you -- is there demand to move additional rigs on horsepower rigs from the U.S. into Canada?

Great question. The market is short rigs in Canada for Q1. We don't know how that's going to play out for the year because not all of our 1,200 horsepower rigs are under firm take-or-pay contracts. We still have a few of these rigs up there that are on the typical Canadian pricing agreement. We're encouraging our customers that if they want to retain those rigs, they need to lock them up with term contracts. And that's good for everybody. It's good for the rig crew. It's good for the customer. You have a very stable high-performance rig. If we're successful, contract up the majority of those rigs and we can get a contract to move another rig up. I entertain at the right economics.

Yes. And Waqar, I'll just add that the utilization on our remaining 1,200 AC rigs are -- is approaching 80% right now. So there is a very strong market in the U.S. for those rigs as well.

Okay. And Carey, what was the cost of mobilization embedded in that $4 million number? And would you be amortizing the reimbursement over the term of the contract?

Right. So it was roughly $ 1 million to move the rig and we took the hit in the third quarter. So those are in our Canadian operating cost. And then we're going to recoup the cost of that rig through the day rate increase that we're charging the customer over the life of the contract.

Our next question comes from Cole Pereira with Stifel.

To start, can you just remind us where leading-edge rates would have maxed out in the 2014 period?

Cole, in Canada, we saw rates to go close to $30,000 a day but most rates were in the high 20s -- in Canada, in the U.S., kind of the same numbers in U.S. dollars.

Got it. And as well, can you just refresh us on how many super-spec rigs you have in your U.S. fleet? How many more are readily available and how many rigs would be the SCR to AC upgrade candidates.

Sure. So our U.S. fleet was comprised of 67 super-spec rigs right now and 56 of those are running -- 57 are running. And we see a pretty good line of sight to get most of those working, as I said earlier, by mid next year or sooner. We have another 15 rigs in the U.S. that are DC SCR rigs. They are very good upgrade candidates for that sort of USD 12 million price range. In Canada, we currently have -- Carey, 28 super-spec rigs?

29.

29 super-spec rigs currently. And they're fully booked up for the winter and some of those contracted up for multiple periods.

Okay, great. That's helpful. And some of your peers are talking about that their leading-edge rigs are generating 50% gross margins. Are you seeing any of that in your U.S. fleet yet? And I mean, is there conceptually a line of sight that, that could occur on a blended reported basis for your U.S. business over the next few quarters?

Cole, so I think Kevin did a good job covering the equipment difference between 2022 and 2014 and how there’s a lot more value being provided by the -- with the rigs delivery. There is an operating cost difference. So our operating costs back in 2014 was probably $13,500. And today, it’s about $17,500 in both markets. It’s about a $4,000 a day difference. So the old $30,000 needs to be $40,000 just to get the same cash margin. On a percentage basis, we now need to get day rates into the upper 30s. And we are seeing that at the leading edge, I think Kevin covered that as well. So I think that we are seeing a handful of rigs that are in that 50% field margin range. And in terms of getting the entire fleet to that range, we’ll see how long the fundamentals of this industry stay strong but we have given guidance Q4 and Q1 that shows pretty significant margin increases for both Canada and the U.S. So they couldn’t expect it if the commodity prices hold together, we expect continued increases in the in margins in both markets.

And Cole, I think we sort of guided in the past. It usually takes about 3 quarters for fleet [Phonetic] rates to flow through into the fleet averages. So that would push us into sort of late Q2, mid-Q3 next year. And the fundamentals certainly look firm through that period.

Okay, got it. And just one more quick one for me. How should we be thinking about working capital in Q4?

We should have kind of flat working capital, maybe a little bit of working capital relief depending on when the winter slowdown happens at the very end of the year. But we did have a -- we’ve had quite a big increase so far this year. It’s been about $80 million and that’s just reflective of higher revenue, higher activity.

Our next question comes from Keith MacKey with RBC.

Just wanted to start out with what you’re seeing on the customer inquiry front, maybe in Canada and the U.S. Can you just talk about the level of inquiries you’re seeing versus the amount of super-spec rigs you have available? And I think importantly, are these inquiries from customers who are looking to pick up rigs or potentially high grade from existing rigs they may be running that are either a current mechanical or SCR rigs that are running now that they look to replace with a super-spec rig?

Yes. So first of all, in Canada, we -- I give guidance. I thought our rig count would get into the high 70s, maybe 80, maybe get a bit above 80 in Q1 which would be about 15% higher than last year for activity and that's based on customer conversations and indications and for bookings that we have. On the super-spec front in Canada, I think the market is probably short -- probably short 4 or 5 rigs in Q1 which means that customers may then look to push some more work into Q2 which should give us a stronger push into Q2. So we increased by that. Also supports work further into Q2 and even into Q3. And if that -- if we see a strong contracting pickup by our customers, to lock in rigs, that might mean that we have room to bring one more rig up. We'll see. So that's how Canada kind of plays out. In the U.S., the rig count in the U.S. is flattening out a little bit, moves up a little bit, goes up a little bit industry-wide. We seem to be keep on -- we're adding rigs to a few of our peers are adding rigs. There clearly is still this trend to increase the capability of rigs in the field of the super-spec for rig operating today only has 2 mud pumps. It will automatically get replaced by a rig that has 3 mud pumps or they're going -- or an upgrade will happen. And the rate moves up with it, so it's a good trade and the capital gets recovered. But we've replaced a few probably decent rigs, not super-spec, decent rigs. They had 2 pumps with some rigs now that have 3 pumps going out. It's -- I'd say that there's still a strong narrative of capital discipline which is really healthy by the operators. But it does feel like when we get into a new budget cycle in 2022, that -- and with fresh capital in the new year and likely strong commodity prices, I think we can see a move up in rig count. And I think you could see rigs being added in January, probably not much before them.

Yes. And Keith, I'll just add one other point to answer your question. When we talk about customers looking to increase the capabilities of the rigs and the performance. We are not seeing customers switch which from mechanical and SCR rigs to Precision AC rig, we're seeing competitors, AC rigs, running for the customers and the customer deciding to make a switch to improve performance by taking on a Precision rig.

Got it. Kevin, maybe just a follow-up on your question about -- or on your comment, rather, about Canada being short, 4 or 5 rigs, super-spec rigs in Q1 and then maybe some of that gets into Q2 and beyond. It seems like we have seen more of a flattened -- a little bit more of a flattened seasonality structure in Canada with a little bit more of that happening. We're always going to have breakup and always going to have times of the year when it's more amenable to getting equipment in and out of the field. But do you see that being more of a trend where the industry looks to supply maybe more of an average basis year-over-year or during the year rather than the peak demand as much which ultimately may bode well for overall margins and activity levels? Or is it just more of a circumstance that we've seen the curve shape up that way?

Keith, I’d say that there’s always been a desire in healthier times by E&P companies to try and level load. That was rounded in the mid-2000s when gas activity was going strong. Level loading was around in 2010, 2012, we had strong commodity prices. What’s changed and made it probably more likely now is this broad abundance of super-spec pad-walking rigs. We can load the pad up with enough casing and mud and maybe bring some fuel in across road bands but you can keep that rig running deep into breakup. And if it’s a dried up spring, you can get for the back, fired up and keep things going without losing any time at all. So I’d say that development-style drilling with large pad rigs really plays into that level loading. We’ve got a healthy commodity price environment which is what we see today.

[Operator Instructions] Our next question comes from John Daniel with Daniel Energy Partners.

Thank you for squeezing me in. I guess, Kevin, might not a numbers question for you or Carey, if you go back the last several quarters, the whole labor topic was a big company discussion point just across the industry, the challenges and so forth. And during that same time frame, ESG was also a big question talking point from the sell side, buy side. I’m just curious, speak to us on both of those, what you see today.

I'd say that virtually every buy-side investor meeting, we have the labor question comes up and -- because it's really a huge issue for the industry. And I've used that term industry, John, in my comments a number of times. The industry is challenged. The drilling contractors in general and Precision, for sure, I think have been able to manage that a little better, particularly with contracted rigs where you can attract crews because they know they've got a stable work for a long period of time and it's a structured, not call out-style work. So for us and for most of the drilling contractors, labor has been a challenge but easier than a lot of the other oil services had to deal with. Even our well service group struggles because of the -- we call it nature of the business on labor. But I'd say that question still remains a big question on the buy side. And we haven't seen a limit on our business or limit our business to be able to move forward because we've been able to stock rigs and most of our peers have done the same. On the other question about ESP, I’d say that if it’s raised by an investor, the investor is also now thinking about energy security to some degree. So more balances coming into the discussion. And it’s being raised by a lot fewer investors of late.

Yes. And John, I would just add. It seems like the larger institutional investors are still interested in ESG. They want to have us communicate the things that we're doing that touch ESG but we're seeing very few investors who tell us they are not able to invest in our securities because of ESG.

Right. And real quick going back on the labor. I mean -- you guys have done a great job of deploying a couple of [indiscernible], the demand has shown up on. But when we hear comments from companies about labor could be a headwind to activity growth, I mean -- and again, making an industry question and not Precision. But it really -- it doesn't seem that obvious I just -- would you characterize it as a headwind that limits activity growth next year at all? I'm just trying to make sure I understand that.

I think from the drilling side, actually no. And kind of here’s my theory. The drilling rig operates -- the further term factory drilling or industrialized drilling is pretty common. Once you set up a rig and get running, you really don’t want to stop it because there’s a huge start-stop cost, a huge switching costs associated with rigs. So our customers tend to plan drilling operations which is why they’ll let their DUCs build up at times, if they can’t get the rest of the services. So the customers are incentivized to keep the rig running kind of independent of whether they can complete the rest of the well or not.

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

Thank you. And I’d like to thank everyone for your interest in Precision and joining us today. That wraps up our third quarter conference call. Have a great day. Bye.

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