Precision Drilling Corp (PDS) 2014 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Precision Drilling Corporation 2014 First-Quarter Results conference call and webcast.

I would now like to turn the meeting over to Mr. Carey Ford, Vice President, Finance and Investor Relations. Mr. Ford, please go ahead.

Thank you.

Good afternoon, everyone, and I'd also like to welcome you to Precision Drilling Corporation's First-Quarter 2014 Earnings conference call and webcast.

Participating today on the call with me are Kevin Neveu, our President and Chief Executive Officer, and Rob McNally, our Executive Vice President and Chief Financial Officer. Also present is Gene Stahl, President of Drilling Operations.

Through a news release earlier today, Precision Drilling Corporation reported on the First-Quarter 2014 Results and the announcement of a second-quarter dividend. Please note that the financial figures are in Canadian dollars unless otherwise indicated.

Some of our comments today will refer to financial measures such as EBITDA and operating earnings. Please see our press release for additional disclosure on these financial measures.

Our comments today will also include statements reflecting Precision's views about events and their potential impact on the Corporation's business, operations, structure, rig fleet, balance sheet and financial results, which are forward-looking statements. There are risks and uncertainties that could cause actual results to differ materially from those indicated by such forward-looking information and statements.

Please see our press release and other regulatory filings for more information on forward-looking statements and these risk factors.

Rob McNally will begin the call with a brief discussion of the first-quarter operating results and a financial overview. Kevin Neveu will then provide a business operations update and our outlook.

Rob, over to you.

Thanks, Carey.

Earlier today, we reported a strong first quarter, with revenues of CAD672 million and net earnings of CAD102 million or CAD0.35 per diluted share. We also announced a quarterly dividend of CAD0.06 per share.

Revenues were up 13% versus the same quarter in 2013, primarily due to higher US-Canadian international drilling activity.

First-quarter 2014 EBITDA was CAD237 million, which is 10% higher than the first quarter of 2013. The higher first quarter results primarily reflect increases in US, Canadian, and international drilling activity and increased pricing and margins in the US and Canada versus the first quarter of 2013, partially offset by weaker demand in margins for C&P services.

EBITDA margins were 35% this quarter versus 36% in the first quarter of 2013. The lower EBITDA margins were driven by decreased margins in our Completion and Production business and non-cash share-based compensation accruals of CAD10 million.

In the US, during the first quarter of 2014, margins were up about CAD500 per day over the first quarter of 2013, primarily due to cost controls. Margins remained essentially flat from the fourth quarter of 2013 to the first quarter of 2014 with consistent revenue and costs.

Drilling activity in the US improved by 16% year over year, with an average of 94 rigs running during the first quarter of 2014 versus 81 in the first quarter of 2013 and 90 rigs running in the fourth quarter of 2013.

In Canada, in the quarter, drilling margins improved by approximately CAD200 per day year over year and were flat from the first quarter of 2013, maintaining strong margins of over CAD12,500 per day. Drilling activity increased by about 2.5% over the first quarter of 2013.

In our International Drilling Group, revenues were a little over CAD42 million for the first quarter of 2014 versus CAD24 million in the first quarter of 2013. We expect international revenues to continue growing throughout the year, with the addition of previously-announced rigs and contracts.

Our Completion and Production segment revenues were CAD103 million, which is essentially flat with the first quarter of last year, comprised of expansion of services into the US offset by a decline in Canadian activity.

EBITDA in the first quarter of 2014 was CAD19 million, which is 35% below the first quarter of 2013, driven by lower demand in Canada and higher costs in the United States. Additionally, winter weather in the United States impacted our Completion and Production activities in the northern regions of the US for much of the first quarter.

As detailed in our press release this morning, our planned capital expenditures for 2014 are now expected to be CAD833 million, including CAD499 million for expansion capital, CAD199 million for sustaining and infrastructure capital, and CAD135 million to upgrade existing rigs. We expect that the CAD833 million will be split with CAD796 million going towards drilling and CAD37 million towards Completion and Production.

The expansion capital of CAD499 million includes the cost to build 16 new build rigs: six for Canada, seven for the United States, two for Kuwait, and an additional 2,000-horsepower rig for the Middle East. The six rigs for Canada include five Super Triple-1500 rigs for northern gas and gas liquids drilling and one Super Single for heavy oil development.

The US new builds consist of six Super Triple-1500 rigs and one Super Triple-1200. The majority of the remaining capital expansion is related to long-lead items, which we anticipate using for new build rigs that we expect to contract later this year and into 2015 for all of our drilling markets: United States, Canada and International.

Our sustaining and infrastructure capital is based on currently-anticipated activity levels for 2014 and includes a technical and operational support center in Nisku, Alberta, along with other regional support centers and corporate systems.

The Nisku Support Center consolidates Precision's existing Canadian operations and technical support centers and will contain a training center complete with a fully-functioning training rig.

We also plan to upgrade 15 to 19 drilling rigs in 2014 at a cost of approximately CAD135 million.

I'd like to make a couple comments regarding the effectiveness of our upgrade program, which I don't believe we have helped the investment community understand well enough.

From 2010 through the end of 2013, we upgraded a total of 43 rigs for the North American market. During the first quarter of 2014, those 43 rigs had 93% utilization and generated EBITDA of over CAD11,000 per day per rig. We are very pleased with the effectiveness of our ongoing rig upgrade program and expect to see similar results going forward.

We described a change in accounting estimates in our press release this morning.

As a result of our annual review of estimated useful lives and method of depreciation of our PP&E, effective January 1, 2014, we are calculating depreciation of our drilling rigs and service rigs on a straight-line basis. The move to straight-line reflects the demand for technically-advanced assets, which are expected to depreciate over time rather than on a per-unit basis. The use of straight-line depreciation will result in idle assets being more aggressively depreciated.

In the first quarter of 2014, depreciation expense, calculated using the straight-line method with revised asset life expectancy, was CAD106 million. Had we continued to depreciate assets using units of production, depreciation would have been CAD101 million. The estimated additional depreciation expense for all of 2014 from this change is approximately CAD45 million.

We expect the greatest difference from employing the straight-line method to be seen in the second quarter because we will continue to depreciate assets that are idle during spring breakup in Canada.

As to the balance sheet, we believe that our balance sheet remains strong and flexible. As of March 31, 2014, total debt was approximately CAD1.4 billion and net debt was approximately CAD1.3 billion.

Our blended interest rate is just over 6.5%, and our earliest debt maturity is in 2019. We believe that our balance sheet is in excellent shape and positions us well to address high-return growth opportunities that may be in front of us.

As we detailed in our press release, we are positioning to be able to deliver new build rigs at a pace of two per month beginning in 2015, but I would note that we will only deliver these rigs if suitable customer contracts are obtainable. Our current belief is that the industry demand will support a solid build program from Precision Drilling.

We currently have an average of 117 rigs committed under term contract for the second quarter of 2014. For the full year 2014, we have term contracts for 109 rigs: 52 in Canada, 45 in the United States, and 12 internationally. We expect to see the number of rigs under contract rise as we move throughout the year.

Since our year-end earnings release, we have increased our contract rig averages for 2014 by 10 rigs. Including today's announced new builds, we will have 222 Tier 1 rigs, up from 93 just five years ago, which puts us in a great position to generate strong returns for our shareholders now and into the future.

For the quarter, our effective tax rate was 8%. This is primarily due to income taxed at lower rates and the impact of foreign taxes. We expect the effective tax rate to be in the range of 11% to 13% for the full year.

That concludes my comments. I'll turn it over to Kevin for further discussion of the business.

Thank you, Rob.

Good afternoon.

This is the second consecutive quarter of strengthening customer demand in both Canada and the United States for Precision's drilling services. There's no question that oil and gas commodity prices are at a very constructive range and, coupled with reasonable stability, are providing better-than-anticipated cash flows for our customers.

Notably, the capital markets are also opening for the Canadian junior producers, and we've also seen several corporate transactions involving dry gas assets, both in the US and Canada. We believe the improved cash flow and recent in-flows of capital support optimistic view for the North American energy service fundamentals, and it's just a good stimulus for activity growth. This fundamental improvement, coupled with steady progress towards North American LNG exports, both in the US and Canada, bode very well for Precision.

We've been saying for some time that customer interest in Tier 1 rigs remains strong and that the day rates and returns were in Precision's target range, but that our customers' lack of desire to commit to multi-year contracts was holding us back. With our announcement today of nine additional new builds and ramping up to sustainable production rate of two rigs per month through 2015, it's clear customer demand has pulled the contract duration back into the multi-year range we seek.

Eight of these rigs are secured by firm customer commitments and are in the final stages of contract negotiation, and all eight of these rigs are destined for the United States. We believe further Canadian, US, and international new build opportunities will emerge later this year for 2015 deliveries.

Across all of our North American regions, industry Tier 1 utilization remains very strong, over 90%. At the current projected build rates by ourselves and our peers, an oversupply of these Tier 1 rigs is not imminent.

For these reasons, we believe that implementing a continuous build program has merit. Based on our current visibility, a planned production rate of approximately two rigs per month is warranted.

We have substantially increased our long lead program to support this production rate. But we also reiterate, as Rob did earlier, that Precision's long-term fiscal discipline remains intact.

We will not deliver, nor will we complete rig construction, unless we have long-term customer contracts which meet or exceed Precision's internal financial hurdles. We also believe this production rate can be increased or decreased depending on customer demand.

As I mentioned, all of these rigs are destined for customers in the United States. And we have five different customers, two of which are now customers.

These rigs are planned for deployment to the Permian Basin, the Eagle Ford, Utica, and the Marcellus. I am pleased by both the customer breadth and geographic diversity of this demand. All of these rigs are Precision's Super Triples; six are ST-1500s and two are ST-1200s.

Now, most of our success in the Marcellus and now in the Eagle Ford has been driven by the Precision ST-1200. This rig is unique in the United States.

It employs advanced digital control technology in a compact 1,200-horsepower highly mobile, horizontal drilling rig package. In the Marcellus and Eagle Ford, these rigs are drilling 16,000- to 17,000-foot wells in less than 15 days. In pad configuration, these rigs walk well-to-well with full drill pipe racked to the derrick in less than one hour.

When operating on a single well, these rigs can move location to location in less than two days, requiring only 33 truckloads. The rig offers approximately 25% smaller footprint and is more mobile and less expensive than larger 1,500-horsepower rigs. Few rigs in the US boast this level of mobility.

We also believe that the compact and high efficiency ST-1200 will prove very popular for the Utica, further growth in the Eagle Ford, and for many of the Canadian gas and liquids plays currently under consideration.

The remaining five new builds are primarily Precision's larger ST-1500, targeted for deeper plays in the Permian Basin and in the Northeast. The Precision ST-1500 is similar to our ST-1200 in that it features advanced drilling digital controls and the software and the controls coupled with extremely rapid mobility. On a pad configuration, like the ST-1200, these rigs also walk well-to-well, fully racked to the drill pipe in under one hour.

When drilling on a single well configuration, these rigs, which can be transported in less than 45 truckloads, can fully rig down, move, and rig up in less than three days, with some of our best moves under two-and-a-half days. We believe these are industry-leading benchmarks for rig mobility in the 1,500-horsepower plus.

When it comes to drilling performance, Precision's Super Triple rigs employ digital controls with industry-leading software, allowing us to meet or exceed the optimum drilling performance efficiency, reliability, and consistency expected by our customers.

We believe the demand for these rigs will continue as the US transitions to fully unconventional resource development and the operating rig fleet continues to transition from Tier 3 to Tier 1.

Three of our announced new builds are for the Permian Basin as that Basin continues to move to horizontal development. Two of the rigs will expand our presence in the Eagle Ford and the remaining three rigs will be deployed to the Marcellus and Utica regions to further expand our presence in the Northeast.

Now, turning to Canada, the prolonged cold winter that most of North America suffered through and endured extended the Canadian drilling season with some winter activity continuing on into April. At Precision, our peak-activity levels slightly trailed last year, due to reduced heavy oil coring operations by some of our customers; however, our rig mix was constructively into more net drilling days and continued strong margins.

Today, we have 45 rigs running compared to about 32 this time last year. Most of these rigs are in pad operations and will continue to operate through breakup.

We're looking forward to the second half of 2014. The key takeaways from winter drilling season seemed positive. Notably, our customers did not throttle back drilling to conserve cash flow during the year, and the slightly increased activity we're seeing in the second quarter should remain through the quarter.

While it's a little early to confirm Q3 and Q4 rig commitments, our customer discussions point to a stronger second half than last year. The improved cash flows into our customer base mentioned earlier are helpful. And barring any macro dislocations and minding the summer weather in Canada, we're expecting activity increases for the latter half of year in the range of 10% to 15% better year over year.

Now, there seems to be a lot of concern about delays in the proposed Canadian LNG projects. Our view is that the LNG for Canada remains on track. And while it has several key (inaudible) events that must be satisfied, it certainly seems that all parties remain keenly focused on realizing the full LNG potential Canada has to offer.

We expect some key announcements may come later this year, and we're watching particularly for the provincial government to finalize the tax regime. And we're hoping to see FID in at least one project later this year. Nonetheless, we expect additional tenders for new build rigs will emerge over the course of 2014 with 2015 deliveries in mind. This could mean industry orders in the range of 10 to 20 new rigs, but will depend on each project's timing.

We believe Precision is very well-positioned with all of the LNG operators, and we will continue to enjoy success as this business unfolds.

Now, despite the cold winter and the resulting very low North American gas storage levels and firm natural gas commodity price, we've seen very low reaction by our customers to increase dry gas activity in either Canada or the United States.

Now, short of calling for a rebound, I believe that dry gas drilling activity bottomed during the first quarter of 2014. And likely, increased drilling activity will be required to restore gas storage to more traditional levels. We believe Precision is extremely well-positioned with both the available rig assets and the right customer relationships should the industry decide to deploy some capital to dry gas drilling; but I'll be careful not to hold my breath while we wait.

Regarding our directional drilling activity in Canada, we enjoyed a very strong quarter, as we now have several customers adopting the integrated directional drilling model and enjoying economic benefits this model provides. While I believe we have turned the corner with this business in Canada, adoption in the US remains painfully slow.

I believe that a focused sales effort in the US, coupled with integrated directional services linked to some of our new build deliveries, will help spur this business on in the US. Now, the positive momentum we mentioned relative to our North American drilling business has yet to translate into any improvements in our Completion and Production segment.

Canadian Q1 well service activity was soft, and it was clear that our customers continue to widely spread the limited work around to insure all companies sustain some activity, despite low overall demand. Our coil and snubbing activity, as Rob mentioned, in Pennsylvania, was impacted by the cold winter and somewhat softer customer demand than last year. We expect this business to recover with winter now behind us.

Our conventional well service activity in North Dakota remains strong, and we expect this bright spot to continue with further growth potential for Precision.

What is a little frustrating is the traditional lag period between drilling activity and well service activity seems to be disconnected. It is clear that our customers are focusing most of their attention, and virtually all of their capital, to the drill bit and effectively neglecting well remediation.

Looking forward, while we expect an activity rebound to occur when customers look to remediate the huge inventory of oil wells drilled over the last few years, again, I'll avoid holding my breath in anticipation of this rebound.

Looking to our international business, we're coming off a very good quarter with the recent contract award announced in the Middle East, and renewal and increase in our Mexico IPM drilling business.

We announced the CAD50 million new build in an announcement back in March, and this rig is slated for a Q4 start up. And we expect to increase our Mexico rig count by one rig during the second quarter, and we've extended the remaining six rig contracts.

International inquiries continue to surge ahead. We're confident that further growth opportunities for Precision will be realized later this year.

We believe we remain on track, growing international activity at the rate of about three to four rigs per year. It's very important for us not to get ahead of ourselves and to ensure that we sustain the same level of high-performance, high-value drilling internationally as we perform in North America.

Currently, we're in full deployment of our two ST-3000 rigs in Kuwait. Both are in final commissioning and will be operating before the end of this quarter, with sustained operations for the full second half of the year.

On that note, I'll conclude by mentioning the Precision employees, many of whom are investors in Precision and listen to these calls. I want to thank all of our employees for their hard work and excellent results during the first quarter and particularly with their excellent performance in safety.

I know all of us are excited to see strong customer demand for our Super Series rigs, and we're thrilled to see a commodity price and cash flow tailwind for our customers.

On that note, I'll turn the call back to our operator for questions. Thank you.

(Operator Instructions) Mike Mazar, BMO Capital Markets.

The expanded CapEx program and now kind of the, I don't know if it's fair to characterize it as a semi-speculatively building cadence of new builds, but whatever, it looks like temporarily, you're going to see the balance sheet not be stretched, but the debt to EBITDA climb up a little bit. You guys have done a great job the last two or three years of getting that back under control.

Can you just kind of walk us through what your philosophy is and whether it be in terms of a debt to cash flow target or whatever and maybe just remind us some of the maturities and structure of the debt capital?

Sure, thanks, Mike. Yes, so our view on the balance sheet and how it fits with a stronger capital build program is that we're not going to be cute with the balance sheet. We're not going to stretch things out too much.

We, typically, want to make sure that we're in that kind of 30% to 40% debt-to-cap which will remain there when we roll this forward, we're not going to get outside of those bands. I think that we're going to be very comfortable from a debt-to-EBITDA perspective and a cash flow or an interest coverage perspective.

But that being said, we're going to be careful to not stretch too far. I think that the build program that we've announced we'll be able to comfortably manage and if in the future we need additional capital to do it, then we'll look at that at the time. But I think that where we sit today, we believe we can manage it within the balance sheet.

Okay, that's terrific, thanks that's all I had.

Sean Meakim, Barclays.

On the new build contracts, congrats on the awards you announced this morning, but do we see, at the 16 new builds for 2014 and now we're starting to roll contracts into 2015, are you at a capacity level here for 2014 that we shouldn't expect any additional contracts?

I think that what we've announced so far would be fairly closely tied to what we've planned to deliver this year. But Sean, I think we always have a little bit of flexibility to squeeze one or two more slots if we have the right kind of contract and the right type of pricing.

But I would say though, Sean, there's not a lot of room in addition to what we've announced today; a little bit, but I would expect that anything in addition will likely roll into 2015.

Okay, that makes sense. Is there a specific bottleneck that prevents you from going to delivery more or is it just a timing factor between now and the end of the year?

Sean, it boils down to lead time to build these rigs and secure a lot of the components and I think we're trying to manage that as well as we can. We've always had a lead time program running. That's always been the foundation of our build thinking to shorten lead times up a little bit, but with 16 rigs in the queue right now and the balance flowing into 2015, I think we're getting into our range.

Okay, that makes sense. You gave some additional color on the upgraded rigs. Can you give us more insight into where those rigs are being deployed? Are they being redeployed from where they are as they get upgraded or how that process works?

When you think about -- it's 43 rigs over the past four years and those have been disbursed throughout Canada and the United States. There's no particular cookie cutter rig or area. They are pretty widely disbursed and those range from Super Singles all the way up to 1,500-horsepower Triples.

I was speaking more specifically to the ones that you'll upgrade this year.

Right now, Sean, we don't usually give a lot of clarity our on where those rigs are going or who they're going for. I can tell you they're spread around North America pretty evenly. There always is a little more appetite in Canada where shorter term contracts help our customers bridge the gap between a short-term contract and a four-year, five-year new build contract. But I'm pretty pleased with the balance we have right now around the US and around Canada with those new builds or with those upgrades.

Okay, great. Thanks a lot.

Brad Handler, Jefferies.

Your larger peers in the US have had opportunities to put SCR rigs back to work here in the last three to four months with the surge in the rig count. You guys have not taken that opportunity, it seems to me, so feel free to correct me if I'm wrong, but it seems like you haven't.

I'm trying to assess whether that's a function of you're only going to put SCR rigs back to work when they have been upgraded and so there are specific programmatic issues with why you just wouldn't have a higher rig count today or if there's some other element at work?

Brad, our US rig count is up from 78 rigs in sort of the end of the second quarter/mid-third quarter to 95 rigs today. We put a bunch of rigs back to work that weren't working earlier in the cycle.

You mentioned SCR rigs, a lot of talk about AC rigs being the pick of the customers. No question, new rigs we're building AC rigs. I completely concur with that.

But a recent customer survey had some interesting results, but we had the number one reason customers liked AC rigs is because of the rapid mobility, which goes a little bit against the apparent ease of control that an AC rig offers. My comment is that with digital controls on a DC rig, we can achieve exactly the same drilling performance that an AC digitally-controlled rig can achieve.

So I don't distinguish between the market value, the margins we can achieve, or our customer expectations on DC digitally-controlled or AC digitally-controlled rig control systems. Now that said, again, if a customer's contracting with us on a three or four-year new build contract, it'll absolutely be an AC rig, no question.

Brad, just one other comment on the rig count. I think if you go back to kind of mid- to end of second quarter last year and look at where we are today versus then, I think we've out stripped the industry in terms of rigs that we've put back to work. The timing of it just came a little sooner than what some of our competitors have done more recently.

That's it. Thank you for clarifying that and I didn't mean to suggest I hadn't noticed it. It's just that you guys were in the mid-90s right at the turn of the year, if I recall, and so you've been steady in the last quarter whereas, as you just suggested, some of your peers have continued to put rigs back to work.

It was kind of that period that I'm wondering about whether it was a question of whether you were out marketing, call it SCR, call it AC, I just don't think you have any AC rigs available. But I'm just sort of trying to understand, over the last two to three months, whether it's a function of you not having rigs made available to customers because they are being upgraded for some specific purpose versus something else that might be at work and the fact your rig count has been steady?

Yes, I wouldn't make too much out of it.

Okay, okay. That's all for me, thanks.

Scott Treadwell, TD Securities.

I wanted to maybe step into Mexico just for a second. You talked about having renewed the contracts on the rigs that are down there and adding a rig. We can infer then that you've got pretty decent visibility on work volumes through the remainder of 2014.

I'm just wondering what the tempo of discussions is for 2015? Is there potential new build opportunities down there or are the IPM partners sort of relying on the rigs that are either in country or sort of quickly able to be mobilized into Mexico?

Scott, great question. First of all, with us, those are multi-year contracts. We'll give you more clarity than that. We have visibility beyond 2014 on those rigs.

For us, with our partners, we don't see a need for new builds. We think that we can service that market with our existing rig fleet. We think there may be additional opportunities down the road in the 1,500 to 3,000-horsepower range, which we think we have the assets available to go back to work.

Those rigs might need some upgrades to go back to work because of the size of the BLPs and type of drilling we're doing, but I don't anticipate we'll have to have any new builds to work with our partners and satisfy their needs over the next year or two.

There has been a lot of talk about liberalization of the industry in Mexico. That's a whole different story and we'll have to see how it plays itself out. But if we see the large US intermediates or Canadian intermediates and large cap international oil companies move in there, that might be a market where we could see new builds coming on if it moves into full development drilling for those customers.

Okay, great. On your build capacity, so you've talked about accelerating the long lead items. I'm just trying to go back, and mentally, my memory is not quite as good as it was, I seem to remember at an Analyst Day a couple years ago, I think the upper end for build capacity was about three a month, kind of depending on rig mix. Is that sort of the physical limitations of the system and right now it would just take more inventory to accelerate that?

Scott, we actually got to a rate of over four rigs per month about a 1 1/2 years ago or about one year ago, so I don't think we're really limited three or four. We'd probably get beyond four if the demand is there.

With our expansion of our facility in Nisku right now that'll open up more space for us. Getting our Houston facility fully running also has good capacity. I think that we're not so much limited by geography, like we might have been a couple years ago, and now it just becomes a matter of scaling our activities to meet customer demand.

But I don't want to build any false expectations here, I'm not thinking we're going to see demand in the near term spiking up to four rigs per month. But could we respond to that? Yes, we could.

Obviously, it doesn't sound like there's any capital investment required. It would just be working capital and getting the components in the shop?

Yes, that's correct.

Okay. You talked about a potential 10% to15% bump in activity for the back half in Canada. I want to, if I can, maybe dive into that a little bit. If I look back last year, I'd think the assumption would be that the Tier 1 rigs were relatively well-utilized, but there's probably lift on some of those rigs.

But would I be right in assuming that the majority of those incremental drilling days are probably going to come from Tier 2 rigs? If that's the case, do you see that sort of daily EBITDA margin for Tier 2 rigs moving substantially higher or is it maybe a little too early to have those discussions just yet?

Probably too early for me to give any guidance right now. We're right in the middle of discussing our drilling plans with our customers, so I don't want to put too much of a marker out there and I know our customers listen to these calls, also.

But the fact is, last year, the summer played out a little slower than we expected, certainly the first part of the summer, and things look a little bit more positive this year. That's why we're guiding towards better activity year-over-year, Scott, and it'll come across our fleet.

Okay, so it's fair to assume that the Tier 1 Canadian fleet couldn't absorb all of that increase over the summer?

Yes.

Okay, perfect. That's all I've got guys. As always, appreciate the color.

Jon Morrison, CIBC World Markets.

Rob, does the change in Precision's depreciation policy alter the way you think about maintenance spending requirements on the asset base go-forward?

No, not at all. We just think that it's a better reflection of the economic life of these rigs and so it shouldn't change anything with respect to how we're spending money to maintain the rigs.

Are you willing to share the total dollar value of your 2014 spending program that's earmarked for ordering of long lien time items at this point that falls outside of announced new build contracts?

Here is what I'd say Jon. We won't give you the exact dollar amount, as it's going to move around a bit, but back in 2011 and 2012 when we established a long lead program, we were in the range of CAD50 million to CAD60 million and we're going to be a bit higher than that now because we're shortening this lead time right down to a few months as opposed to six months.

Is there a total dollar figure max in your mind that you don't want to exceed on the basis that, to a degree, there is the speculative component of ordering things that customers, right now, it seems like they want, but ultimately the cycle could turn? Is there like a max CAD70 million, CAD80 million that we wouldn't exceed that unless we hear from customer contracts?

Yes, Jon, so let me explain it this way, we wouldn't want to get much more than CAD100 million tied up in long lead items. If we went a little above or a little below, that's okay, but those long lead items are things that if the build program, if we need to stop it because the industry is not supporting the additional new builds, those things will go into inventory and they'll get used up in over the normal course over the next couple years anyway, and so it's not that they'll be wasted dollars. They may be stranded for a little while, but ultimately we'll use that inventory even if we don't build the rigs.

Appreciate the color. Of the five rigs that'll be delivered in 2015 at this point, can you get any sense of how much of the spend will be realized in those five rigs in 2014 versus 2015, just from a modeling perspective?

Yes, call it half and half-ish.

Okay, Rob, back to your comment about the upgrading and the amount of rigs that you've put into the market, how many rigs are left in your fleet that you consider candidates for meaningful upgrades at this point?

John, it's Kevin. If we look at our Tier 2 fleet that's remaining, there's about 100 rigs left. We think probably about half of those are pretty good candidates for upgrades now. Of that half, maybe about half of that will go international, maybe 20-ish will go to national, and 30 will end up in North America. The other 50 we think will just work out their effective lives.

Okay. Just outside of the Nisku facility that'll be completed at the end of this fall, is there anything meaningful on the infrastructure side that you see on the horizon over the coming, call it, two to three years, either in North America or international that will require capital at this point?

Nothing that sticks out. There may be a few odds and ends or if there were significant country entrance internationally, although there's nothing on the horizon. I would say the short answer to that question is no, we don't see any big infrastructure spend in the next few years.

Appreciate the color.

Dana Benner, AltaCorp Capital.

I wanted to come back to the CapEx announcement and the press release and ultimately square it with the press release you put out roughly a month ago. So that I understand this, you've moved the expansion capital up by, let's call it, CAD180 million and in the press release, you talk about eight additional rigs. Yet, what was interesting in that press release is there were 11 rigs that were actually specified as having a geographic destination: I think it was two US, six Canada, three international, so 11 rigs.

Here we now have definition geographically on 16 rigs where it looks like the delta, in terms of the new build announcement, is five rigs to the US. It's interesting because it almost feels like the announcement a month ago was just sort of one of a much larger step. Maybe you didn't have perfect definition on the full contemplated step up, so you gave us what you could then, but now we get full clarity.

So it looks like a bit of a mixing of numbers, as it were. The question is it five new builds that are really incremental in this press release or is it a greater number?

No. The difference, Dana, is we're giving you geographic information on the ones that are going to be delivered in 2014. We're not specifying geographic information on the ones that are being provided in 2015, so it is an actual addition of nine new build rigs.

We just haven't given clarity on 2015, which really goes to what past practices have been, because the CAD833 million of capital, that's the capital we're spending in 2014. It does not include any carryover capital to complete the five rigs in 2015 and any additional rigs that we might build. There's just a bit of a cutoff that is maybe what the confusion is.

Okay, well, that makes sense. Because ultimately, CAD320 million to almost CAD500 million, CAD180 million, CAD20 million a rig, that makes sense. Otherwise the number was quite a bit higher and obviously there are other things going on with long lead items, et cetera. Okay, that's great. Just wanted clarity on that.

Secondly, to the extent you are both giving us guidance on a presumed increased manufacturing rate, you've given us guidance on an increase in long lead items, not a specific number, but clearly the number is pushing higher. Clearly, you've got new build interest that you're trying to communicate to the market, even if you don't have the signed contracts yet.

I know in the press release, you talked about some more potentially coming on the international side, but to me that wouldn't justify the telegraphing that you're doing in this press release in these various areas. Is that a fair way to think about it?

Dana, this is Kevin speaking. In the past, I've often talked about how many customers and roughly how many rig inquiries we have. I'll go ahead and give you that data point.

In addition to the eight additional North American rigs we've mentioned today that are contracted, we have ongoing negotiations with 13 or 14 customers totaling about 30 rigs. I don't think we'll win all 30 of those, but we have very good line of sight visibility right now and it's still pretty early in the year. I think that number could grow as the year goes forward.

I've made a reference that it could be 10 or 20 new builds in Canada alone. Only a couple those are actually captured in that number I quoted you a moment ago of 30. So there could be something like say 35 to 50 opportunities for us to look at over the coming months.

Wow, that's spectacular.

The key is, we'll always be taking our clearing our investment hurdles and looking for multi-year contracts. That's always the key. Carey just corrected me on a note here.

We mentioned that we have eight rigs right now that are committed and they're in the final stages of contract negotiation.

Great. That's great. It would appear and again, obviously, there's only so much you're able to talk about on calls like this. But it would appear on the margin right now, there's maybe a little bit more incremental interest in new builds on the US side than Canada, just looking at the deltas here. Not that's how it's playing out over the next, let's call it, six months, but is that a fair characterization of the two markets right now?

I think it is, Dana, for a couple reasons. Obviously, the US market's much larger and there's more capital involved down here. But also, it's a bit early for the Canadian market because we're still in the throws of digesting what your drilling season and it's a bit early, yet, for the Canadians to be out with a lot of tenders.

I'd expect that closer to the end of the second quarter, kind of like last year and the year before, we'll have a better sense of the balance of the opportunities for this year in Canada; so partly timing, partly market size.

Okay, well, that's great.

Kevin Lo, FirstEnergy.

Can you guys talk about the Canadian rates? It's down a little bit from Q4 and realize that could be a mix issue or weather. Could you talk a little bit about that and why that is?

Rig by rig, our rates haven't really moved. It's just a bit of a mix issue into the first quarter, Kevin, and beyond that, we talked about very strong dayrates in Q4. We've sustained those into Q1 and it's a just a mix that's adjusting the average rate down a little bit right now.

But I expect that our comments around dayrates that we made on the fourth quarter call will carry through 2014 and certainly, it looks like we'll be in good shape for the balance of the year.

Okay, so the relative potential increases in dayrates on a year-over-year basis, will that be driven more from the upgraded rigs and new builds as opposed to spot pricing improvements? Would that be a fair assessment?

I think there'll be some opportunities for spot pricing in the summer if, in fact, demand goes the way we think it's going to go. But putting that aside for a moment, our mix is looking better each sequential quarter with new rig deliveries, so I think your assumptions are right.

Even if you just assume that the market pricing is flat, our effective dayrates will improve, effective averages will improve because of mix.

You're talking about eight of the nine rigs that you guys are building or have announced are committed and you're in talks with potentially 30 new rigs. Of the 16 rigs you're building right now, how many in total are already committed?

I think the number is bigger than 16 total.

It's 20 rigs total if you count the five that carryover into 2015 and all but one are committed.

Okay, thanks for clarification. That's all for me, thank you.

John Daniel, Simmons.

Congrats on the new build announcements.

Thank you.

Kevin, I want to follow-up on Dana's question, because I'm now confused. I thought earlier in the call, you guys said eight of the nine rigs that were announced today were going to the US?

Right. Rob was talking about 2014 versus 2015 and five of these rigs carry into 2015. Typically, on our press release, we don't describe where the 2015 rigs will go, but in my comments, I said that all of those eight rigs are going to the US.

Okay, fair enough. How many of the 15 to 19 rigs that will be upgraded this year are working today?

You referenced earlier an CAD11,000 cash margin on the 43 that have been upgraded over the last three years. Of the 15 to 19 that might be working today, what is a ballpark cash margin on those?

Jon, this is Rob. Of the rigs that we're upgrading, most of those rigs are working today and some have already been upgraded, some have not, and they'll be done ratably throughout the year. In general, I made the comment earlier on what we've seen in terms of utilization and margins on the upgraded rigs that we've done over the past four years.

I would expect that we're going to be in a similar range for all of these rigs. I don't have them rig by rig in front of me, but that's typically where we've been with Tier 1 utilization and Tier 1 margins on these rigs.

I'll just add to that, some of the upgraded rigs were active rigs that are out of the active fleet and they're in the process of being upgraded and will come back into the fleet at some point later in the year.

Is it a noticeable uptick is where really where I'm going with this, when you upgrade? Not in terms of the quality, I know the quality is significant, but in terms of the cash margin attended to that.

Yes, it is. If you think about cash margins for the Tier 2 fleet as a whole, us and other people, it's lower single digit, thousands a day, CAD3,000 or CAD4,000 a day. When you think about the cash margin for Tier 1 rigs, which would include most of the upgrades that we do, then you're kind of CAD10,000 to CAD14,000 a day in day margins.

So there is a real uptick in margins and almost always, these come with a contract, we're doing these to a customer contract, so utilization is higher. It's the step change in financial performance for these rigs.

Got it. Pretty good return, okay. The CAD37 million in C&P capital spending, does that include any money for new coil tubing spreads for the US market?

It does not.

I know you don't prefer to give long term guidance, but as we listen to the prior conference calls from the other drilling competitors, you have different views in terms of the outlook for their blended cash margins. One calling for flattish just because of changes of rig mix and contract roll-overs, another one saying, in their US business, specifically, 300 a day improvement Q2, then another 400 in Q3. Can you just give us some trajectory in terms of where your US cash margins go from here?

Jon, it's Kevin. From a rig mix perspective, along with the new builds we're adding into this year and into next year, those are all Tier 1 rigs, Tier 1 dayrates. I think that impacts our margin maybe a little differently than some others, so we're looking at a pretty solid picture going forward in the margins strengthening. Rob, you want to add to that?

I'd say overall that for the legacy rigs, that's really going to be dependent on what overall demand is and if we see demand pick up, then there'll be some positive movement in margins. But then, the rig mix it's going to help us as we're adding the upgrades and the new builds.

But I also think our exposure in Canada probably makes us a little more positive than maybe some with Canada. We're pretty pleased with our positioning and where we think that's going to play out over the next few months.

Thanks, guys.

Ole Slorer, Morgan Stanley.

Kevin, what's the average per rig upgrade cost to take it to a Tier 1 or Tier 1-equivalent rig?

This is Rob. There's quite a variation from rig to rig, but you ought to think about it in that CAD7 million to CAD8 million range is the typical upgrade for the rigs that we have that would be upgraded to full Tier 1 rigs.

Ole, there will be mixed in that number a few pad rig upgrades with some rigs, where it's closer to CAD1 million dollars, but as is always the case, if we're upgrading a rig to go from single well configuration to multi well with a pad, we pass that through to our customers as an increase in day rate and an upgrade to the rig. Some component of our upgrade capital will go to those upgrades.

I'm trying to put it in context of a customer new rig and a pay back on a new rig versus your pay back on the incremental day rate relative to the incremental CapEx. Talking about an average [three] of pay back?

The upgrades are generally better than that so we generally do better on upgrades in terms of economic returns than on new builds. It's just there's not an infinite number of upgrades to be done and therefore there's only so many that we can do in our fleet.

The average of what you're doing right now?

I'd call that probably in the CAD7 million to CAD8 million range for an average.

Okay. The incremental CAD3 million of cash flow generated on that investment?

I think your numbers are pretty close to--

That's reasonable.

Good way to model it.

Okay, I understand just thinking about it. Outside the US and Canada, could you give a little bit more of a feel for how you see the market? We've had some of the large service companies talk about 10% increase in the global land rig count this year, so this has been very busy. You're focusing on Kuwait.

So far you seem to have done a good job operating all the 3,000-horsepower rigs to work, but are there any glaring opportunities beyond that? If we look at Argentina, if you look at Argentina and Saudi probably in particular, how do you measure that or do you just view North America as being that much more attractive in terms of rates and return on capital?

Ole, our returns internationally are, in some cases, slightly better in North America and the contract duration is longer, but on average, we kind of balance these out evenly. What's throttling Precision right now is a desire not to outgrow our shoes. We had a little bit of a rough start in Saudi when we first got going there and we don't want to repeat that experience. We want to grow at a very careful measured pace.

I think we'll be growing our business probably better than 10% going forward, but that still only amounts to three or four rigs at a time over the course of the year. But I think the way you're hearing about the markets right know are generally accurate, around 10% international growth. Now recognizing there's probably more tenders right now than we have capacity to handle, so we're focusing our efforts on strengthening our footprint in the Arabian Gulf.

If we can get up to 15 or 20 rigs in the Arabian Gulf, we'll be doing quite well and that'll give us the kind of mass we're looking for there. Being mindful of unconventional plays as they emerge outside of North America, we're keeping a close eye on Argentina, but we think that's a well supplied market.

We know that they'd love to see us down there, but we don't really want to be the fifth or sixth or seventh driller showing up, so we're happy to be a place where it's a bid list of just two or three of us. I'm not sure I gave you much direction there, but (multiple speakers)

Yes, that's helpful. You want to build your critical size 15, 16 rigs in the Gulf and then the rest of that is consolidating Canada and fixing US?

But let me say further, if one of our North American customers came to us and said listen, we'd like to take five of your rigs and run you guys on a contract like we have in North America, but we want to do that in some new country, something like that might be worth it for us. We might consider a step up in that for one of our key North American global-type customers.

Are you in any of those kind of negotiations?

I'd say it's a bit early yet, but that may emerge later this year into next year.

Okay, well, thanks a lot Kevin.

Jeff Fetterly, Peters & Company.

First off, Kevin, the 10% to 15% year-over-year increase in activity, was that a Canadian-specific comment or North American for the second half of the year?

Jeff, I'm kind of looking at the second half of the year in Canada right now and projecting forward that it's looking like it could be 10% to 15% busier than last year.

What are your expectations or thoughts in terms of US activity year-over-year for the second half of the year?

I was hoping somebody would ask that question.

Glad I could help.

Thank you. It's a little tougher to call. I am expecting gas activity to start easing up a little bit. Now, I'm not expecting a boom in gas drilling, but I think as we get into the summer season, you might see a few more rigs go back to work in gas. I think that's the piece people are afraid to model in right now.

Now that aside, oil activity is rolling and we're happy with the way the market's trending in oil. Likely, we could see a few more rigs reactivated for Precision and certainly, the new rig deployments. But if you just do the math on the new rig deployments, we'll be into 100-some rigs through the course of this year.

Let me put it a different way: based on the new build schedule you have and if you had a handful of rig reactivations, do you expect your market share to increase in the back half of the year or do you hold steady?

Yes, I think our market share's going to increase, Jeff. What we look at, probably more than overall market share, is market share on the horizontal wells and that's why I have more comfort saying that our market share will increase as the year progresses and I think that's true, actually, for the leading drillers in the US. I think the transformation from vertical drilling to horizontal drilling favors the larger drillers, ourselves included.

Okay. Cost inflation, have you guys seen anything material, either on the Canadian or US side of the last couple quarters, excluding the labor cost increase on the Canadian side?

Nothing meaningful at this point. I think it's something we have to keep our eyes on every day and just manage carefully. We've done a really good job of cost control, both in Canada and the US, and I applaud our people for working hard on that.

But keeping our fingers on cost all the time is pretty important and I think our customers are concerned about fuel costs, so there's a few peripheral items like that driving the cost of drilling and both ourselves as drillers and our customers are watching it carefully.

Jeff, I'd just remind you that just about the entire CAD500 per day gain in margin in the US year-over-year was cost-driven. It's cost controls that we've been effectively implementing that drove that increase in margin and we've been consistent now for a couple quarters on that, so we're pretty pleased with that.

With the depreciation of the Canadian dollar, how much has the capital cost of the rig builds changed over the last six months for you guys?

Rigs that we're building and deploying in the US, the costs are typically in US dollars, so it would track pretty much dollar for dollar on the exchange rate. Then, in Canada, it's largely with the rigs that we're building in Canada are for the Canadian market, so there's not an effect there.

I think probably about 1/3 of the rig will be directly tied to exchange rates like Caterpillar engines and BOPs and things like that, but we'll expect to push that through to our clients. It's a real cost.

Last thing on the C&P side, what is your outlook in terms of performance of the business? At what point do you look at scaling back the size of it or reducing the overall footprint and cost structure of that business, given performance?

Jeff, so scaling back any service business usually means people's jobs and I hate to speak too much about that in the public domain, but it's an area we're focused keenly on right now is costs in that business. Clearly, market demand levels are below what we would have expected, so big focus for us in the second quarter and into the rest of this year.

Okay. For that business, I know you talked about some of the weather impacts in the US on the Northeast. If I look at the year-over-year, the revenue was flat, the operating expenses were up 15%. How much of that was weather-specific and how much of that was associated with business mix or just adding general cost to the overall infrastructure?

This was a very early stage business for us last year, speaking of the coil business in the Northeast, so we only had a couple units on the ground and now we've got eight. The utilization on those eight units was poor in the first quarter because of weather-driven issues. I think you saw a number of our peers that had either pressure pumping or coil or just general services that struggled with the same issue.

We had the cost increase that came because of building out the business in the Northeast and then coupled by a decline in overall activity of the Canadian business, so while we were able to keep revenues flat, we added quite a lot of costs in order to do that, so those were the two effects that were going on.

Okay, thank you, appreciate it.

There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Ford.

Thank you for joining us on our earnings call. Have a good afternoon.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.