Earnings Labs

Precision Drilling Corporation (PDS)

Q4 2023 Earnings Call· Tue, Feb 6, 2024

$98.92

+2.35%

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Transcript

Operator

Operator

Good day, and thank you for standing by. Welcome to the Precision Drilling Corporation 2023 Fourth Quarter and Year-End Results Conference Call. I would now like to hand the conference over to Lavonne Zdunich, Director of Investor Relations. Please go ahead.

Lavonne Zdunich

Management

Thank you and welcome to Precision's Fourth Quarter Earnings Conference Call and Webcast. Participating on today's call with me will be Kevin Neveu, our President and CEO; and Carey Ford, our CFO. Earlier today we reported strong fourth 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 expressed our financial results in Canadian dollars unless otherwise indicated. With that I'll pass it over to Carey.

Carey Ford

Management

Thanks, Lavonne and good afternoon. Precision's annual financial results showed continued improvement from 2022 and reflect the focus on the 2023 strategic priorities that Kevin will address in his commentary. Annual highlights include revenue of CAD 1.9 billion a 20% annual increase, adjusted EBITDA of CAD 611 million a 96% increase, funds from operations of CAD 533 million and a 89% increase, cash from operations of CAD 501 million, a 111% increase, debt reduction of CAD 152 million and a CAD 30 million of share repurchases while funding two acquisitions with cash or assumption of debt totaling approximately CAD 100 million and positive earnings per share every quarter during 2023 and for the past six consecutive quarters. In 2023, we closed the CWC acquisition on November 8 and the Precision team has aggressively worked with our new colleagues at CWC to integrate the business to begin realizing synergies including consolidating facilities, reducing administrative costs and utilizing Precision’s tech centers and supply stores to support the field. To date, we have achieved CAD 12 million of the projected CAD 20 million of annual synergies and expect to achieve most of the remainder in the first half of 2024. Moving on to our fourth quarter results. Our fourth quarter adjusted EBITDA of CAD 151 million included a share-based compensation charge of CAD 13 million in transaction and severance charges of CAD 6 million. Asset lease charges, adjusted EBITDA would have been CAD 170 million. In the US, drilling activity for Precision averaged 45 rigs in Q4, an increase of four rigs from Q3, driven in part by the addition of acquired TWC rigs. Daily operating margins in the quarter absent impacts of IBC and turnkey were US$11,802 in line with our guidance of US$11,500 to US$12,000 and consistent with Q3 levels. IBC…

Kevin Neveu

Management

Thank you, Carey. Good afternoon. Well, we are very pleased with the strong fourth quarter and full year financial results and operational results delivered by the Precision team in 2023. As Carey mentioned the progress achieved over the past several years improving our balance sheet and reducing our debt levels, while growing our revenue and cash flow has positioned us with the financial flexibility to execute on a number of opportunistic financial actions to further enhance shareholder value. And Carey described a few of those. Utilizing our strong free cash flow, we met or exceeded all of our financial priorities for the year including debt reduction share buybacks. We completed two consolidated transactions, we invested in our fleet with high return projects for the Middle East, United States and Canada. Those investments included Alpha technology expansion, evergreen emissions reductions projects along with several rig capability upgrades and the reactivation of the rigs in Kuwait. So beginning with our international segment. In the fourth quarter as Carey mentioned, we reactivated our fifth rig in Kuwait on a five-year contract. And this rig combined with the four other rigs in Kuwait and our three operating rigs in the Kingdom of Saudi Arabia will increase our activity in 2024 by 40% over 2023. With our well-established international infrastructure already generating strong returns, we expect this increased activity to flow through income statement and essentially no increases in our fixed costs or overhead. And despite the recent announcements from the Kingdom of Saudi Arabia regarding capping oil production, we do expect further bidding activity and possible land rig additions, targeting unconventional gas in addition to those recently announced by other industry participants. We have one idle Triple rig in Kuwait and four other idle rigs in the region. In Kuwait, we have active bids…

Operator

Operator

Thank you. [Operator Instructions] Our first question comes from Aaron MacNeil with TD Cowen. Your line is open.

Aaron MacNeil

Analyst

Afternoon. I'm hoping for a bit more detail on the US Q1 margin guide. I guess I'm just wondering approximately how much of that sequential change is a function of higher costs? How much is downward pressure on price? And how much is a function of rig mix, and the seasonal return of those CWC rigs? And I guess another adjacent question would be, do you see that pressure persisting into subsequent quarters absent, an uptick in activity.

Carey Ford

Management

Aaron this is Carey here. I'd say, it's a combination of all of those. The one that we think has the biggest impact is the operating cost. And just the fact that we were running 45 rigs on average in Q4, and we're going -- likely going to be running, a lower number than that. We've got a bit more fixed cost with the CWC acquisition. So it is going to be a little bit of a drag on margins in Q1. And as we get activity a bit higher in the second quarter, we think that margins have an opportunity to expand. Q – Aaron MacNeil: Got it. You mentioned the Kuwait tender, what's a realistic deployment time line, if you get that work or deployment time lines for other international rigs that may not have as clear of a tender opportunity.

Kevin Neveu

Management

Aaron, good question. Certainly, the -- even the bid cycle time can be measured in months and quarters, not necessarily days or weeks like we see in North America. The Kuwait tender right now is actually in process. We've been through a couple of rounds of clarifications. If their prior history is an indication, I'd expect the awards could come within a quarter, maybe a little more maybe a little less, with deployments occurring before the end of the year. Q – Aaron MacNeil: Got it. And what would the associated CapEx be for that if you were to win an award?

Kevin Neveu

Management

Yes, it's not currently part of our plan, but it will likely be in the same range that we've had in the past somewhere between probably CAD3 million to CAD8 million per rig, depending on the clarification we're going through right now. Q – Aaron MacNeil: Got it. Thanks, guys. Will turn it over.

Kevin Neveu

Management

Great. Thank you, Aaron.

Operator

Operator

Our next question comes from Kurt Hallead with Benchmark. Your line is open Q – Kurt Hallead: Hi – good afternoon. How you guys doing.

Kevin Neveu

Management

Great, Kurt. Q – Kurt Hallead: Good. I appreciate the update as always. So I kind of curious on the coming back full circle on Canadian market. You referenced contracted rigs 24 in the first quarter 23. I don't know Kevin, where do you think that could go as we progress through the year? I know you and I have had discussions about E&P companies want to lock in rigs for the export capacity especially, ground LNG. So I don't know, what's your best guess on where you think it might be able to go?

Kevin Neveu

Management

Yes. This has happened actually quite quickly. Just looking at the trajectory of contracting. I can tell you that we were a little surprised last year like early 2023, to hear customers willing to take or pay contracts for long term, be it one to two to three years when historically in Canada, long-term contracts simply didn't exist. So, now to have a book a couple of dozen in long-term contracts starting this year off, is a great place to start. Kurt, it would be logical that any operator that's tied to a long-term LNG delivery contract would lock in rigs for a long term. And by long term, I mean two, three years, it starts looking much more like an industrialized process where you're trying to maintain consistency predictability, repeatability over a long haul and then using all your digital capabilities to lower cost. So I think to answer your question, I think once those projects start running and once we see gas flowing and once they see our customers become more comfortable the long-term nature of their supply contracts. I'd be surprised, if the majority of the LNG rigs weren't tied to term take-or-pay contracts in the range of two to four years. Q – Kurt Hallead: Okay. Appreciate that. A follow-up question, again in the past you thought it's good to see the adoption on the AlphaAutomation and AlphaApps. Can you give us an update as to what the incremental cash margin is on adding those apps to the rigs?

Carey Ford

Management

Yes, Kurt. So it's going to be on the bottom end it's going to be about CAD1,500 a day. And then with apps and EverGreen solutions, we've got rigs that are making closer to CAD4,000 a day, with all of the additional ancillary products and services. Q – Kurt Hallead: Okay. And then you referenced 75% of your rigs had some sort of -- or your Super Triples had some sort of AlphaApps on it. Is that evenly split between the US and Canada?

Kevin Neveu

Management

Let me qualify that. So I think I said 95% of our rigs have Alpha on. And I think as I said 75% of our rigs have EverGreen solutions on. And yes, it's evenly split both are evenly split between both markets. I might also add that on EverGreen, I've been quite surprised by the uptake in the U.S. was maybe a little less environmental focus due to the lack of a carbon tax, but good customer take up on both sides of the border all due to the value we create through fuel savings. Q – Kurt Hallead: Great. All right. Thanks Kevin. Thanks, Carey.

Kevin Neveu

Management

Thank you.

Operator

Operator

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

Luke Lemoine

Analyst · Piper Sandler. Your line is open.

Hey, good morning. Kevin you kind of loosely touched on it with Kurt's question, but you've previously mentioned that maybe make some idle U.S. works to Canada. Can you just update us on that maybe how you're thinking about industry equipment demand in Canada shaping up with the trends on pipeline expansion in Coastal GasLink?

Kevin Neveu

Management

Yes. Luke, it's interesting there's a supply and demand for us in pulling opposite directions. No question. The E&P base in Canada, United States, Kuwait, anywhere would rather see the market oversupplied. And I understand that because they want to have oversupplied rig supply, so that that keep rates as low as possible. We need -- as a drilling contractor we need to have the market tightly supply. We need the rigs to be fully utilized the day rates generate returns that exceed our cost of capital. So it's incumbent on us to be really careful about not oversupplying the market. I do expect that as these projects start to function and operate as the Coastal GasLink starts running as the Trans Mountain pipeline starts going. I expect rig demand will increase. I do think there might be a potential to bring up one or two more rigs in the U.S. depending on customer needs. But we'll be very careful not to set us up for returns on these assets that are less than our cost of capital.

Luke Lemoine

Analyst · Piper Sandler. Your line is open.

Okay.

Kevin Neveu

Management

Not much of an answer, but we're going to manage the market carefully.

Luke Lemoine

Analyst · Piper Sandler. Your line is open.

Yes. All good. And then on the U.S. side, you talked about at the current crude price maybe increasing activity in the second half of the industry. And you just provided some details there around like what type of customer you think or indications from basins or what you're just kind of seeing from incremental demand into 2Q?

Kevin Neveu

Management

Yes. Look it's interesting. So our bid volume really hasn't changed much in the past couple of years. So, lots of bit of activity going on. Lots of drilling departments looking at rigs lots and lots of drilling departments looking at upgrading rigs and high grading rigs. So that's -- that activity remains strong. That's a good indicator. We've got a bunch of M&A activity right now that hasn't cleared yet. And these consolidation transactions on the E&P side need to clear the dust needs to settle and the drilling programs need to be established kind of post transaction. So it's just really hard to time how soon the market gets clear. I don't think the problem is $75 or $76 crude. I think the problem is volatility in the crude price that maybe you can go into the $60s maybe you can go to the $50s. I mean, who knows when does the risk on low price declined to the point when an operator feels comfortable increasing rig count by one or two rigs. So that's kind of the negative side of things. On the positive side of things, we are watching DUC counts. We're watching U.S. production kind of ramping up unreasonably high compared to rig count. So there's certainly some optimization going on. It's probably our view that rig counts need to move up at least modestly to sustain production levels anywhere near this level over time. So I think we are expecting over time the rig counts ease their way up. But if you had I don't know say 20 of these transactions are finalized and take 20 rigs out of circulation and then 30 companies add one rig, we're still up 10 rigs.

Luke Lemoine

Analyst · Piper Sandler. Your line is open.

Yeah. Okay. Got it. Yeah. Appreciate it. Thanks Kevin.

Kevin Neveu

Management

And those numbers I gave are just a random decision, nothing we see right now points to rig count declines or for that matter imminently rig count increases.

Operator

Operator

Our next question comes from Waqar Syed with ATB Capital Markets. Your line is open.

Waqar Syed

Analyst · ATB Capital Markets. Your line is open.

Thanks for taking my question. Good afternoon guys. Great quarter. Kevin in the US market some of your major competitors have guided to activity going up slightly quarter-over-quarter. I think your comments say that maybe rig activity could be a little bit down. What you attribute that to? Is it just some gas versus oil or customer mix still? Or is it some of the M&A that you talked about that's happening in the industry that's contributing to that?

Kevin Neveu

Management

Yeah. Waqar, I think there's a few things. So I mean, if I have your question correctly, you indicated that some of our peers have guided to rig counts modestly moving up, I did comment that we expect our rig count to modestly move up a little bit from the current 39%, but maybe a bit more in the second quarter, but again, very modest movements. There's no question, that we're still transitioning from being very gas-focused a couple of years ago, which served us quite well during the pandemic to pushing more into West Texas more into the oilier basins. And it's tough when there's, not a lot of new opportunities popping up. So we've got to be very good. We've got to have a good value proposition, great technology. And it's still a one rig at a time game. No question it will be a little tougher for us to do that than somebody who's got 50 or 60 rigs already running in the Permian Basin. So I think we're pushing uphill a little bit. But our guys understand that and are working hard. And they're doing a really good job.

Waqar Syed

Analyst · ATB Capital Markets. Your line is open.

Great. And then on automation, do you think that's going to develop into a trend that type of equipment on drilling rigs in Canada? Or is it still very early stages to see more of that type of equipment on drilling rigs?

Kevin Neveu

Management

I can tell you a funny story about this Waqar. I was in Mechanical Engineering school back in 1982. And my fourth year graduation -- fourth year senior year project was a request by a drilling contractor to find a way to automate the racking board. So back in 1982 the biggest challenge of drilling contracts could bring to a Technical Engineering school was how do you automate the racking board to make -- to take that person out the racking board. It has taking 42 years, but I think we have a solution. And we're pretty happy about this. It looks really good.

Waqar Syed

Analyst · ATB Capital Markets. Your line is open.

Yeah.

Kevin Neveu

Management

It's not -- the cost isn't zero, there's going to be incremental cost, but it moves everybody from that red zone on the rig floor and the racking board, bolts on to our super-spec rig class. It doesn't require a rig redesign. And we're supported by NOV. So the software and the programming, is not -- it's not Precision Drilling trying to write software. This is industrial-grade robotics software being performed by the company which is also designed the same software for the offshore industry. So we feel really good about this relationship.

Waqar Syed

Analyst · ATB Capital Markets. Your line is open.

Yeah. Great. And then, just on the capital spending $195 million Carey, could you provide a breakdown of how those dollars are going to be spent Domestic, International and US.

Carey Ford

Management

Sure. I would say less than 10% would be International. And then, based on activity levels that we're currently seeing today, we'd probably have a pretty even split between Canada and the US. I think, it could shift if we see higher activity in the second half of the year. We could see more CapEx in the US because that's probably where we have a few more higher dollar upgrade opportunities, if we see a big jump up in the rig count.

Kevin Neveu

Management

And Carey the portion of that capital that's long lead will actually just be for nowhere until we have an identified target.

Carey Ford

Management

Correct.

Waqar Syed

Analyst · ATB Capital Markets. Your line is open.

Okay. And just a final question. Kevin congrats on raising the capital return to shareholders for 2024 this 25% to 35% number, how do you think about that? Is it exclusively or return in the form of share buybacks? Or when should investors be start to expect some dividend as well?

Carey Ford

Management

Yes. I think this year Waqar, it's more than likely going to be all share buybacks. And then I think we're positioning the company and our cash flow profile to introduce some other ways to return capital to shareholders. But I think it's too soon to say exactly what format that's going to be.

Waqar Syed

Analyst · ATB Capital Markets. Your line is open.

Okay. Well, thank you, very much.

Carey Ford

Management

Thanks, Waqar.

Operator

Operator

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

Keith MacKey

Analyst · RBC Capital Markets. Your line is open.

Hi there. Just curious first, can you talk a little bit about what you're seeing in terms of the old leading-edge rate question in the US. Are things still in that $30000 to $35000 a day range? Or has it moved one way or the other from there?

Kevin Neveu

Management

Keith, I think that's a favor to categorize the market broadly is that $30000 to $35000 a day range. I think the discipline that we've been talking about for several quarters now remains intact. I would believe that there are some small contractors that might try to bid at lower rates than that, but we really don't see that come across our bow very often.

Keith MacKey

Analyst · RBC Capital Markets. Your line is open.

Yes. Okay. Got it. And just sticking with the tendering activity. Can you just maybe speak a little bit to any trends you might be seeing in terms of rig spec in tenders, whether it's digital or physical is the required rig changing at all from what we would have been considered a super-spec rig in recent years particularly I'm thinking as some of the larger integrated in the Permian look to drill longer and longer wells. Are you seeing a change in what rig they're looking for in these bids? And does that match up with kind of what you've got available in your fleet or at least what's within your upgrade capital spending for the next little bid?

Kevin Neveu

Management

The easy answer to the entire question is yes, but a little more detail. So all of our rigs that are available in the US right now are pad walking AC digitally controlled triples. So the rig itself is fully capable. There might be a handful of rigs that require minor upgrades to handle the racking capacity of a long reach well, but for Precision that's a couple of hundred thousand dollars per rig. It's really a minor upgrade to the rig to add 5,000 or 6,000 feet of rocking capacity. The second upgrade to be required is likely going from 5,000 psi operating pressure to 7,500 psi. That's probably about $1 million upgrade for a rig that's not equipped with 7,500 psi. And then typically, if you're going to 100-psi for a long reach well, you mind you to bolt on a third mud pump and a fourth generator. And that's more like a $1.5 million upgrade. We have title rigs right now that are full spec. They have the racking capacity. They've got the fourth generator third mud pumps 7,500 psi. As we get deeper down the batting order, probably when we get the next -- after the next five or 10 rigs we'd be in some of those incremental upgrades. And some of that's in our planned capital and some of us are long lead time capital.

Keith MacKey

Analyst · RBC Capital Markets. Your line is open.

Okay. That’s it for me. Thank you, very much, Kevin.

Kevin Neveu

Management

Great. Thanks.

Operator

Operator

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

Lavonne Zdunich

Management

Thanks everyone for joining our call today. On behalf of the Precision team, have a great afternoon. If there's any follow-up questions, you know how to reach me. Thank you.

Operator

Operator

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