Precision Drilling Corp (PDS) 2014 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Precision Drilling Corporation 2014 third-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, sir.

Thank you. Good afternoon everyone. I'd also like to welcome you to Precision Drilling Corporation's third-quarter 2014 earnings conference call and webcast. Participating on the call with me are Kevin Neveu, our 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 third-quarter 2014 results. Please note that the financial figures are in Canadian dollars unless otherwise indicated. Some of our comments today will refer to non-IFRS financial measures such as EBITDA and operating earnings. Please see our press release for additional disclosure on these financial measures.

Our comments today will also include statements reflecting Precision's views about the future events and their potential impact on the Corporation's business, operations, structure, rig fleet, balance sheet and financial results, which are forward-looking statements. We caution you that these forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from our expectations. Please see our 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 third-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 quarter with record third-quarter revenues and EBITDA of CAD585 million and CAD199 million, respectively. We also announced a quarterly dividend of CAD0.07 a share, which is an increase of 17%, reflecting our confidence in the business. Revenues were up 20% versus the same quarter in 2013, primarily due to higher activity and pricing in our drilling segment. Third-quarter 2014 EBITDA of CAD199 million, which was 45% higher than the third quarter of 2013. The higher third-quarter results primarily reflect increases in US, Canadian, and international drilling activity and increased margins versus third quarter of 2013. EBITDA margins were 34% this quarter versus 28% in the third quarter of 2013.

In the United States, during the third quarter margins were up about CAD2,100 per day over the third quarter of 2013, primarily due to higher average pricing of over CAD2,000 per day. Precision's drilling activity in the US improved by 20% year over year with an average of 97 rigs running during the quarter versus 81 in the third quarter of 2013. Today we have 100 rigs drilling or moving in the United States. Year over year, EBITDA generated in our US drilling businesses up over 70% in a market that had activity gains of less than 8%. This performance reflects the high quality Tier 1 rig fleet and excellent operational execution.

Costs in the United States were flat versus the third quarter of 2013 and up about CAD1,300 per day sequentially. The cost increase from the second quarter is due to a few items. Crew training expenses for new build rigs that are coming on, start-up costs related to stacked rigs being reactivated, and a worker's comp rebate that was record in the second quarter. In Canada, drilling margins declined by CAD200 a day year over year, driven by higher labor costs, offset by higher day rates. Drilling activity increased by about 6% over the third quarter of 2013. Today, we have 100 rigs drilling or moving in Canada.

In our international drilling group, revenues were up to CAD60 million for the quarter, which was an increase of CAD23 million, or 53%, over the third quarter of 2013. We expect international revenues and profitability to continue growing with the addition of three rigs going to Kuwait, Saudi and the country of Georgia over the next few quarters. Our completion and production segment revenues were CAD85 million, up 7% over the third quarter of 2013. EBITDA in the third quarter of 2014 was CAD17 million which is 40% above the third quarter of 2013.

As detailed in our press release this morning, planned capital expenditures for 2014 are now expected to be CAD908 million, a decrease of CAD26 million from the second quarter that is primarily the timing of expenditures on infrastructure and upgrades. Our capital expenditure plan includes CAD577 million for expansion capital, CAD187 million for sustaining infrastructure capital and CAD144 million to upgrade existing rigs. We expect that the CAD908 million will be split, CAD871 million in drilling and CAD37 million in the C&P segment.

Expansion capital of CAD577 million includes the cost to build 18 new build drilling rigs, 7 for Canada, 8 for the US, and 2 for Kuwait, and 1 for the Kingdom of Saudi Arabia. The majority of the remaining expansion capital is allocated to long lead items, which we anticipate using for new build rigs that we expect to deliver later this year and into 2015 for the US, Canadian and international markets. Our sustaining infrastructure capital is based on currently anticipated activity levels for 2014 and includes a technical and operation support center in Nisku, Alberta, along with other regional support centers and corporate systems.

We previously described a change in accounting estimates, which I will reiterate. As a result of our annual review of the estimated useful lives and method of depreciation for our PP&E, effective January 1, 2014, we are calculating depreciation on our drilling rigs and service rigs on a straight-line basis. The move to straight line reflects the demand for technologically advanced assets which are expected to depreciation 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 third quarter of 2014, depreciation expense calculated using the straight-line method was CAD108 million. Had we continued to depreciate assets using units of production, depreciation would have been CAD94 million. The estimated additional depreciation expense for full year 2014 from this change is approximately CAD50 million.

Our effective tax rate for the quarter was a little over 13%. Our low effective tax rate is primarily due to income taxed at lower rates and the impact of foreign taxes. We expect our full-year 2014 effective rate to be in the range of 14% to16% and we would expect a similar range for 2015. On August 7, 2014, the Ontario Court of Appeal ruled in favor of Precision, reversing a decision by the Ontario Superior Court dated June 26, 2013 regarding the reassessment of Ontario income tax for the 2001 to 2004 taxation years.

The Ontario Minister of Revenue has made an application to the Supreme Court of Canada seeking leave to appeal this decision. We expect the Supreme Court of Canada to render its decision on the application for leave to appeal by the middle of 2015. The approximately CAD55 million paid to the Ontario tax authorities in 2008 will continue to be reflected as a long term receivable by Precision until this matter is fully resolved.

Turning to the balance sheet, our balance sheet remains strong and flexible. As of September 30, total debt was approximately CAD1.8 billion and net debt was approximately CAD1.2 billion. Our blended interest rate is just over 6.2% 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 or to weather an industry downturn if needed.

Currently we have an average of 125 rigs committed under term contracts for the fourth quarter of 2014. For the full year of 2015, based on contracts currently in hand, we have contracts for 92 rigs - - 40 in Canada, 41 in the United States and 11 international. We expect to see the number of rigs under contract rise as we move through the year and into 2015. By the middle of 2015, we will have 238 Tier 1 rigs, up from just 93 five years ago, which puts us in great position to generate strong returns for our shareholders now and into the future.

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

Thank you, Rob. Good afternoon. We are pleased with our third quarter performance and particularly pleased that our strong results are demonstrating the value in our long term strategy. But like most, we are mindful of the commodity price volatility, particularly while our customers are in the midst of developing their 2015 capital budgets. Now, we also know the commodity price uncertainty drives our customers to focus on rig performance and rig efficiency.

It's often said that the best rigs are the last to be laid down. Notably, the greatest performance gains have been delivered by pad-style drilling with walking rigs drilling a series of wells on a single pad. In addition to the reduced mobilization time, operators are able to optimize the drilling plan and develop efficiency improvements as the rig moves down the pad. It's our view that most unconventional development drilling will migrate to multi-well pad-style drilling. Of all the new builds we will deliver -- rather all of the new builds we will deliver to North America this year and all the rigs to be delivered next year are walking rigs for optimized pad drilling. At Precision, we've been a leader in pad drilling operations since the mid-1980s and we believe our experience and capability is an important element of our competitive advantage.

Now before I discuss our regional views, I'd like to draw your attention to several other strategic achievements during the quarter. Year over year, we've increased our US activity, as Rob mentioned, by almost 20%. If you roll forward, by mid next year we'll add a further 20% growth threw new build deliveries to Precision's US operations. I could not be more pleased with how our strategy is succeeding as we continue to build this US market position. However, it remains very important for Precision to manage our growth and continue to deliver the safety and performance we're known for. We have said before, and we'll say it again today, that we believe our maximum growth rate for the US would be in the range of three rigs per month, which we will sustain over the next seven to eight months. Sustaining high performance with one of our top priorities and at times that may mean we manage our growth very carefully.

Now moving on, I'll take a moment to discuss how the joint marketing and technology alliance with Schlumberger is progressing. As mentioned in our press release, the alliance has drilled 27 wells across seven basins in Canada and the United States and to date, Precision during 2014 has completed over 1,800 integrated operating days. And while I usually do not like to discuss individual wells, I'll share a leading example of the potential the alliance is creating. Currently, Precision has two super-triple rigs drilling side by side on the same pad in the Canadian Duvernay field. These rigs have been drilling some of the best wells for this customer since deployment earlier this year.

Now, neither rig was utilizing Precision's integrated services model until we announced the Schlumberger alliance, following which, the client invited us to implement the Schlumberger Precision alliance on just one of the two rigs, but allowing us to compare side-by-side performance. Already, on the first well, we've set a field record running three days ahead of the adjacent rig, which is not utilizing the alliance. We believe this performance demonstrates the value of Precisions integrated services coupled with Schlumberger's technology to help our customers reduce drilling cost and further reinforces our high performance competitive advantage on super series rigs.

Now, continuing on with Canada, activity is developing slower than we expected earlier this year. The heavy snowfall in September, followed by commodity price declines later in quarter, pulled down customary activity to just above last year's levels. Canadian customer sentiment and spending remains always closely tied to commodity prices and there's no question the recent oil price decline is concerning. However, the stronger US dollar may offset some of the concerns as our customers generally have their cash flows linked to US dollars but drilling and development costs are typically denominated in Canadian dollars.

Now, on a very encouraging note, the royalty and tax announcement in British Columbia, coupled with a softer Canadian dollar, should encourage one or more LNG projects to move towards funding approval and we remain hopeful that continued positive news will emerge later this year. Precision Drilling is well positioned to be a driller of choice and key partner for long term LNG development and we've enjoyed good success so far, booking almost half of the new builds related to those investments.

As I mentioned earlier, I believe our efforts to improve drilling efficiency and reduce costs for our customers in the Duvernay are bearing fruit. Like other unconventional developments, pad drilling and down-hole performance will be key to facilitating this field development and these are two fronts where Precision is leading the way, both with our super triple rigs and Schlumberger alliance. We believe separately from the LNG potential, the Duvernay holds good opportunity for Precision's revenue growth in Canada. Today we have 100 rigs running in Canada and expect this to rise for the winter drilling season and while it's far too early to predict full 20 year -- sorry, full 2015 full-year drilling activity, indicators are for a typically strong winter drilling season. We expect that the labor inflation, which persists in the labor constrained Western Canada provinces, will be passed through to our customers.

Moving to the United States, the growth I mentioned earlier has been spread over virtually every unconventional basin, with our new build slated for deployment to the Marcellus, the Woodford Canada, the Niobrara, Eagle Ford and the Permian. Since our new builds are effectively fully booked up through mid-2015, the likelihood that we had more new builds in the short-term or near term is very low. However, currently we continue to be engaged in discussion with over ten different customers and several of these are for multiple new-build rigs. We believe they likely have to finalize their 2015 budgets before they commit to second-half rig deliveries in 2015. While we'll be deploying rigs to the US at a pace of three rigs per month through the end of 2014 and first half of 2015, we do remain mindful of the risks of over building and as such, we will reduce or curtail our build program in the second half of 2015 if need be.

During the third quarter term contract renewals continued at constant pace with a balance of 2014, with 15 rigs renewing their term contracts with continued strengthening rates. While it's possible that new build demand may moderate is somewhat, the drive to high efficiency pad development drilling will likely accelerate and continue to displace lower tier rigs.

Now turning to our international business for a moment, our fourth ring for the Kingdom of Saudi Arabia is mobilizing to location and will commence drilling operations in November. Today we announced a rig redeployment from our US fleet for a drilling opportunity in Georgia. While this is a one-off opportunity, it will leverage off the infrastructure we've established in Dubai and the region and we expect this rig will commence operations in the first quarter of 2015. Also, the third new build rig we're building for Kuwait will deploy during the second quarter of 2015 and should commence operations late June or early July.

We will continue to closely monitor developments in Mexico and believe the potential for increased activity will depend on how the international oil companies view Mexico's oil and gas liberalization reforms. Looking forward, our international growth remains a key element in our long term plans and we will continue to guide you towards careful steady growth in the range of three to four rigs per year as we approach what we consider to be critical mass for our operations.

Turning to our completions and productions business. I think our team is focused on the right areas in what remains a very challenged market. I am pleased with the progress they are making, diversifying away from some of the most price-sensitive regions while continuing to manage the elements we control, such as overhead and maintenance costs while maintaining our trading and safety standards. With this business, for the near term, we'll continue to focus on sustaining our high performance capabilities while remaining well positioned for what is an inevitable rebound in customer demand. We're main believers that thousands of horizontal wells drilled in western Canada sedimentary Basin will need a significant component of well servicing over their life cycle and will be there for that work.

So in summary, at Precision Drilling our high performance, high value strategy has its roots in Canada. We are responding to rapid, and at times unpredictable, changes in customer demand as a routine feature of the market and Precisions organizational capability to respond appropriately to these rapid swings in demand and activity remain at our core. Our contracted revenue stream, our fleet quality, the customer and geographic diversity we enjoy, our capital structure and liquidity all support our confidence of long term positioning and strength at Precision. Today's increase in our dividend reflects the confidence in cash flow generation of our business, both over near term and longer term.

So once again, I'm going to thank the over 8,000 Precision employees now in seven countries running and supporting over 300 drilling, service rigs and our various support and back office support groups. During the third quarter, our team delivered outstanding safety and operations performance and it's the performance of our people that truly sets us apart.

So with that, I'll turn the call back to the operator for questions. Thank you.

Thank you.

(Operator Instructions)

The first question is from Dan MacDonald with RBC Capital Markets.

Hi, good afternoon guys.

Hi, Dan.

Just wondering if we could kind of look here at the environment in Canada, Kevin, and are you getting any pushback on passing the labor rate increase through here for the winter, or is it a little too early to tell, or possibly are you even able to get a little bit more here despite what's going on with the commodity of late?

Dan, it's a pretty sensitive time for me to comment on final pricing negotiations with customers but I'll tell you our sales teams are highly confident that labor inflation will be passed through to our customers.

Thanks, and then just staying on the Canadian side. Have you got any feedback from your customers or do you see potential concern where maybe guys you might run out of budget money here a little bit earlier than say, they did last year? And you could see a bit of a slowdown heading into year end before the winter ramp up or have you not had that feedback?

You know, Dan a little hard to say right now. Almost always plays itself out in December but I'll throw a couple comments out. Some other delays during the third quarter may have delayed a bit of spending. We know that our customers, if they have a budget they will spend it, so I don't expect to see anybody crimp back a 2014 budget but I also don't expect them to see them pull forward any 2015 money into late 2014. I expect them to spend all their budgets. Hopefully some of the weather delays we've seen earlier this quarter play themselves out and let us smooth load up to Christmas.

Thanks, and then just lastly on the Duvernay, Kevin, could you maybe characterize on a high level your clients' mind sets when they are looking at 2015? Have you seen a reasonable increase in optimism on higher activity for that play specifically?

Dan, it's hard to talk about optimism but what I will comment on, is an awful lot of kind of front end engineering work done, a lot of rigs, where the specking work done. There's no question the Duvernay looms large as a 2015 program but it's probably a bit early for us to really forecast activity levels next year. But I can tell you there's a lot of work going in by drilling departments that are active up in the Duvernay right now. I'm really encouraged by the work we're doing up there; having two rigs in one pad is a great way to very quickly get the pad drilled out and very quickly go back and frack that pad. And when you combine that with some of the work we're doing with the Schlumberger alliance to really reduce those drilling times, I think we're in a very good path right now to get the Duvernay drilling costs and completion costs down to the targets our customers have set. We both know the fluids that they are producing are relatively just unattached from the oil price. They are generally producing (inaudible) for heavy oil and that need hasn't been reduced yet. Early to be enthusiastic but I think the things we're doing all pointing the right direction.

Great. I'll turn it back over. Thanks, Kevin.

Thanks, Dan.

Thank you. The next question is from James West with ISI Group.

Hey, good afternoon guys.

Hi, James.

Kevin, if we go into next year and let's say that the commodities are in this level or maybe a little bit lower, you've got a pretty good buildout program still scheduled for the US. Would you ratchet that back some or would your intention to be to just continue forward given there's probably going to be a -- if you were in a flattish rig count environment it would be a flight to quality towards your [torcher] rigs?

Yes, so James a couple comments relative to that question. These are all, the 15 rigs we have being delivered in 2015 ones international, sorry 16 rigs. One is international, the balance are for the US. Those are all pad configured rigs. We've got customers lined up on all those rigs. Those rigs will go to work.

Beyond those 15 rigs for the US, it's fair to say we're going to be very careful and make sure we don't get over our skis. We always keep a lead time program running at Precision so we could sustain deliveries into Q3 and Q4 if we see customer demand emerging later this year, early next year. But you know, if these prices discourage our customers from expanding activities, we can throttle right back down to zero rigs, if we chose to. And we've done that; we did that in 2013, as recently as late 2013 even early 2014. So we can do it again. It is a little painful going up and down like that but it's just core to our strategy. I commented earlier that having the ability to respond quickly up and quickly down to that Canadian market is something we built into our operations really around the world.

Now, kind of philosophically speaking, I think even in a soft commodity price environment, the likelihood that our customers push for better efficiency and better reduced cost doesn't go away; and that may still drive demand for additional pad type rigs, whether those are conversions to our Tier 1 rigs or whether they're new builds. I think that demand could stay strong through 2015, even in light of softer commodity prices. Certainly, the lowest speck rigs, lower tier rigs, should be concerned.

I agree completely. Thanks, Kevin.

Thanks, James.

The next question is from Brad Handler with Jefferies.

Thanks, good afternoon. Couple different areas of questions, I guess. In terms of the US could you just clarify, or maybe reconcile, the three rigs a month in the US versus your current path for the 15, which I think is more like two rigs a month? Is there flex in the third or just -- probably just something I'm missing.

Hi, Brad. This is Carey. I think the two rigs we have for the third quarter, those are kind of June, July deliveries, and so the vast majority of those rigs will be delivered in the first six months of the year. So it averages out to about 2.5 rigs a month.

Okay.

If you roll in our Q4 deliveries this year, take it from Q4 through the end of Q2 that gets pretty close to three rigs per month. Whether it's 2.8 or 3, I'll round it off to three.

Yes, okay. If I was missing something about some other rigs or if it was parts or something but no problem. On Canada, your comments about LNG, your optimism around the FIDing of projections and the like were good to hear. I guess, I'm curious for a sense of a couple things. First, how much activity is currently would you describe as LNG based? And I guess the second part of that question is, is there some risk to that activity in the near term if the FIDs wind up coming only next year? If things do get dragged out from a tax arrangement standpoint, for example?

So Brad, you may know that the government of BC has proposed a new tax structure but they still have to pass the legislation through their legislature; so that has to happen. The indications appear to be that they understand the risks with delaying that approval, so I'm not going to handicap whether they do or don't. But they appear to understand the risks and I mean they approach from every angle both sensitivity of timing and getting this to move quickly not slowly. So off the bat, I think you understand the risk and they are prepared to move quickly. I'm not going to bet on whether or not they get it done on time.

I have listened carefully to our customers and what they're saying. And our customers believe that either late this year or sort of first quarter, maybe early second quarter next year, is the latest they want to see this approved by. I think we'll all be disappointed if it doesn't get approved this Fall, but nonetheless, none of our customers seem to be holding a gun to the head of the politicians. So that said, I think a little bit of patience is in mind here for everybody. These are very good projects, particularly with the low cost of lifting this gas out of the ground and this proposed structure is, I think, better than most expected. Again, all the indicators seem to be pointing in the right direction for us. Hopefully, the dominoes continue to line up for us in a nice straight path.

But your question was, could we see a reduction in drilling in the near term? I don't think so. Most of what's going on right now is delineation work and reservoir proving work which is necessary before, long before, optimization and development drilling starts. I think the activity we're seeing now in northwestern Alberta and a little bit of northeastern BC, continues unless something untoward happens to these projects.

Okay, that's very helpful. Thanks, guys. I'll turn it back.

Thanks, Brad.

The next question is from John Daniel with Simmons & Company.

Hey, guys.

Hi, John.

Question for you, Rob. As I recall last quarter there were some comments made which seem to suggest that the cost improvements witnessed in Q2 for the US operations were sustainable and that cash margins would likely improve in the second half of this year, but in this quarter that reversed. Was wondering if you could share with us what the workers' comp rebate was on a per-day basis? And should we assume that the costs incurred in Q3 are one-time in nature?

Yes, hey, John. So the short answer is no, I can't share with you what was on a per-day basis, but it's just a portion of the CAD1300 per-day increase from Q2 to Q3. The other and more significant pieces are training expenses. As we're getting ready to deploy new build rigs, we have crews that are coming on ahead of the rigs for training. And then we had some rig reactivations in the quarter where we were taking some rigs off of fence lines and putting them back to work and there were some meaningful expenses for reactivating those rigs. So, if we kind of got to a steady state where we weren't reactivating rigs and weren't bringing on new build rigs, I expect that the per-day operating expenses would drop back down but we wouldn't get all CAD1300 back because the -- we wouldn't see that rebate again.

Okay, well if you looked at this quarter, rig count is up slightly. You've got the benefit of repricing on some rigs and better mix. I mean I would assume -- are we wrong to assume that cash margins grow in Q4?

Yes, I would think that it's going to be kind of flat to slightly up, is my best estimate.

Okay. Next one, and Kevin, this may be too early for this one. But at this point have you had any customers approach you and ask you to work with them on moderating any of the terms of any of the contracts, either price or term, and do you expect this to happen in Q4?

We've had one customer come to us to ask if we could find some relief between time period for a rig. That's quite common, where we have rigs that either are not needed right now or not required for a short time; so there's a window were we have to remarket the rig for a period of time. That customer remains on the hook and on obligation for that rig, but I'd say that's almost normal course business for any given quarter.

Fair enough. That's all for me. Congrats on the dividend increase.

Thanks, John.

The next question is from Scott Treadwell with TD Securities.

Thanks. Afternoon, guys. Most of the stuff has been answered but I do have some housekeeping. So on the contract coverage, that's moved up. Could you characterize the increase as being kind of fully driven by the new builds or have the older rigs, I know you talked about them recycling, but has that been kind of part of the growth or mostly driven by new builds?

It's both, Scott. I would say that it is, call it, two-thirds driven by new builds and a third by recontracting existing rigs, something in that neighborhood, but it's a combination.

Okay. And you wouldn't, I'm assuming you wouldn't be able to characterize or couldn't really characterize, if Precision or the clients initiating those conversations on the existing rigs; it sounds like it's more normal course?

Yes, I'd say it's normal course.

Okay. So turning to the US on the new builds, I know I'd asked this question last quarter, but maybe an update. With that many rigs going into the Basin, do you still expect that new build to be fully additive to the rig count the way you see things today? Obviously, commodities being what they are, you don't know for sure but any change to that outlook from three months ago?

I'll go. Rob might have some data on it, I heard him about to say something. You know, it's certainly way too early in the cycle for us to pull the plug on 2015, so you were thinking right now that our business holds very strong in 2015. One or two rigs could slide aside but most of these rigs running right now, I think over 90%, are Tier 1 rigs. They are doing a great job for their customers, delivering wells on or ahead of the curve, safety is great; so I think we're doing all the things we need do to make sure that that fleet stays highly utilized. Could one or two or three or four rigs come off if commodity prices stay down? We could see a little bit of attrition but certainly wouldn't guide you to anything dramatic at this point. Rob, do you have any comments?

My only comment, Scott, would be that if there is pressure, which of course there may well be in an CAD80 oil world, it is the lower end of the rig fleet, the 2-2 rigs that will be most impacted. Today that's much less an issue for us than it was three years ago because it's a relatively small portion of our fleet now that it falls in that category. We're going to have 100% rigs added. That's probably not the case but I don't think you should expect a big impact.

Okay, perfect. So next one, based on the activity as you see it today, I know you've done a bunch of maintenance and upgrades. What would 2015 maintenance CapEx look like on flat activity accounting for the new builds in the pipeline right now?

You know, Scott, we haven't finished our budgeting process yet, but a reasonable kind of rule of thumb is a CAD1000 or CAD1200 per day of maintenance capital for ops or whatever your assumption is on operating days, about CAD1000 to CAD1200 a day.

Okay perfect. That's a great formula. So the last two I have, one sort of technical. You mentioned the side by side drill off on the pad in the Duvernay. When you switched, or when the customer switched, to the Schlumberger tools, is that like-for-like so it's an MWD kit against an MWD kit or is there rotary steerable and sort of another level of technology?

Scott both of these are pretty -- let's just leave it kind of broad and say high speck down hole tool strings. And the customer is a long ways down the curve to hitting their targets for drilling efficiency and we're kind of leading that charge right now. So I feel pretty good about it but these are not just straight MWD low speck jobs.

Okay, perfect. And my last question on the balance sheet. A good amount of cash there. Obviously, you've got the luxury of being able to fund increased rig builds if it plays out. Kind of at what point do you have a sort of drop dead date, where you might look to pay out the 2019 notes; where that becomes maybe a more attractive allocation of capital, is it sort of the summertime work? Is it just sort of a fluid you're monitoring it every day and if it looks like it's the best way to go you'll do it?

Yes, I'd say it's more of the latter, Scott. We have the ability to call those notes starting in March of 2015 and depending on what our outlook is for capital plan, uses of cash, we'll consider it. It becomes a more real consideration in the second quarter of next year.

Okay, perfect. That's all I've got guys. Appreciate the color. I'll turn it back.

Thanks, Scott.

The next question is from Klayton Kovac with Tudor, Pickering Holt.

Thanks, and good afternoon, guys.

Hello.

So, my first question is regarding the Schlumberger Precision alliance. How are the 27 wells split between Canada and the US? Was it skewed one way or the other?

There's no meaningful skew that has any value in discussing. We're not disclosing that information, Klayton, specifically, but just fair to say it's spread out among seven different Basins and a variety of different customers. I feel pretty good about the early uptick by our customers and we still have a ways to go yet before this is fully accepted proven model. But both Schlumberger and ourselves are right now doing all the right things to make this work well for our customers.

Okay, thanks. And then as a follow-up, in your earnings release, you cited competitive pricing in Canada for some rig segments which partially offset an increase in revenue rates this quarter. Which rig segments did you experience this in?

It was primarily the smaller rigs.

Okay, great. And that's it for me. I'll turn it back over.

Thank you, Klayton.

The next question is from Dana Benner with AltaCorp.

Afternoon, guys.

Hey, Dana.

I wanted to start with a question that's been asked of me several times today so I'd rather put it to you for the definitive answer. I certainly have my thoughts. That is with respect to the dividend, moving it up at this time heading into what could be a CAD75 to CAD80 oil environment. We'll see how it shakes out. And while that is happening, also deferring a portion of your 2014. Is it a deferral, is it a cancellation ultimately of those infrastructure upgrade projects, et cetera? Thought I'd give you the opportunity to address that.

Dana, those two things are not connected. The decision to increase the dividend is one that we review annually and really people should take that as a reflection in our confidence in this business and the ability to generate cash even in downturn kind of environment; which generally leads to much lower capital spending. Given the quality of our rig fleet and contract position, we feel comfortable it's not going to strain the balance sheet of the Business to increase the dividend modestly. The delay in CapEx is, like I say, it's not a part of the same decision and it really reflects timing on when we think the money is going to get spent. Our estimate of when the projects get done changed.

Okay, excellent. Secondly, thinking about the new build market, it swung so heavily toward the US and almost seems to come to a stand still in Canada. I'd be curious to get your color on why that would be. Obviously, timing of LNG related decisions is going to be a part of that; but one would think there may, for the same reason we seen an upgrade cycle emphasized in the US, one would think there would be a need for that in Canada. So would love to hear your thoughts on that.

So first of all, Dana, I think right now today, sort of October, November, even late September time frame, our customers are really knee deep in their 2015 budgets and some of those we won't even hear about until mid January. So it's going to be a process over the next few months, not weeks, for Canada. No question that our customers in Canada -- some were out drilling cash flows, some were hedged, some were utilizing the capital markets, both equity and debt. So there's a lot of moving pieces right now. Does the Canadian fleet need to be regenerated a bit? It depends on where you think it's going. So I think that the short answer is it's a little hard to read that.

Certainly, if we're developing and continue to develop Duvernay, LNG, the need for deeper pad-style rigs, 1500-horsepower rig, some big 1200-horsepower rigs that have large wrecking capacity; that's evident. So we see potential 2015-2016 to be the building more 1200-and 1500-horsepower high wrecking capacity pad type rigs for horizontal drilling up in Duvernay and potentially for LNG exports. There's been a pretty good market in Canada for the heavy tally double and that market is still around today. Something we're a little under weight on but I'm not compelled to put speculative capital out today for tally doubles in a market where there's a lot of uncertainty going forward. I think I'll leave my comments there, Dana. Is that helpful?

Absolutely. Just thirdly and finally, moving to the rig announcement in Georgia. Today I understand that you're going to be serving that rig sort of regionally as it were, but to date you've tried to have a focus on certain regions. I wonder if this marks maybe the beginning of what could be a cluster of rigs elsewhere. Were the terms of this sufficiently good that it outweighed the desire to try to keep more of a concentration in certain areas?

You know, Dana, there's a couple of pieces there that played into that opportunity for us. The first piece is there's a bit of a shortage right now on 2000-horsepower rigs that are ready to go to work on a moments notice. If you have a rig like that, that's available to be deployed immediately, there's a very strong pricing scenario that plays out nicely; whether it's one rig in Georgia or another rig into, say, Kurdistan. So we're really happy right now to get that contract. We think that rig could stay there for a long time or it might migrate back into Kurdistan in some point in time. We've got optionality there. I would say, though, that generally what we're looking to do is buildout meaningful footprints. So, having 2 rigs in Kurdistan is nice but getting up to 5 or 6 or 10 would be nicer. I think as the risks in Kurdistan become better understood that business will get back on its feet and start moving forward, and probably sooner rather an later. I'd say majority of our focus remains on Kurdistan, Kuwait, and Saudi, but if we can be opportunistic with the assets we have and pick off adjacents like Georgia, I'm okay with that.

Okay, I'm sure that would have been an idled rig otherwise so makes sense. I'll turn it back, thank you.

Thanks, Dana.

Thank you. The next question is from Jim Wicklund with Credit Suisse.

Good afternoon, guys.

Hi, Jim.

I think about the deepwater market and while six generation rigs, Tier 1 rigs to them, aren't going to be stacked, we've already started to see the stacking of the lower end rigs, to your mention. But we've also seen a fairly dramatic hit to the dayrates of the Tier 1 rigs and we had somewhat of the same confluence we were accelerating construction into a weakening demand market. Appreciating your comments about it's too early to know and you can be flexible, why couldn't, not just for you guys, but overall -- we've got one analyst out today talking about a 200 rig -- horizontal rig reduction in the US in 2015. Would you just dramatically gain market share and would it be at the expensive dayrates? What would be your strategy or what you think may be the reality of some of these things, these parallels come true?

So Jim, I would tell you that off the top, I'm a believer when the tide goes down the tide goes down for everyone.

Rational, okay.

I beg your pardon?

Rational, okay good.

Yes, so in a declining market and particularly a sharply declining market, there will be pressure on dayrates, I understand that. But we very carefully model out customer demand. We're looking carefully at where the rigs are and what type of rigs we're drilling right now. I think our model would suggest that the Tier 1 market, high speck Tier 1 rigs, is probably a little less than half of total activity in the US or right in that range. And we think customer demand versus supply of those rigs stays tilted towards the drillers to some extent.

But could there be 200 horizontal rigs come off? Absolutely. There's a lot of Tier 2 rigs drilling horizontal wells in the domestic US. It's unlikely you see a pier high speck Tier 1 rig drilling, take for example, drilling 11-day Eagle Ford wells or drilling 20-day Permian wells, unlikely you see one of those rigs coming off. We feel really good about our positioning right now and how well our rigs are performing.

So it would be fair to say that while come what may with lower commodity prices, on a relative basis, you could easily be the best-looking girl in the room?

Well, I think there's us and a couple others really doing a good job right now and really distinguishing themselves and performance of their rigs, their people and technology. We might not be the only one out there that looks pretty good but I would say that the most important thing -- and we've got several customers where we've got five or six rigs running across several different basins. The performance of those rigs, whether they are in the Marcellus or Niobrara or Permian Basin is identical. That's really important to our customers right now that they can get that, I'll call it, industrialized quality, wherever they go with us.

We're doing that, we're not the only driller doing that. A couple other large drillers are doing that but I think it's a lot tougher when you move down below the top three or four drilling contractors to get that multi-basin consistency. Again, I'll say that when the tide comes down it comes down for all of us. I understand that, but I do think the best look better in this kind of a market and some of that technical performance differentiation really becomes an apparent in a declining market.

Okay, Kevin, thank you. That's very helpful. Yes, Rob?

One stat that I thought was really interesting we looked at list quarter, was if you took the largest four drillers in the US and looked at the number of rigs they added over the trailing 12 months, it was like 105 rigs that they'd added. If you took everybody else combined it was a decline of 15 rigs, so it really kind of paints a picture of where the market's headed.

Perfect. Thanks, guys, very much.

Thanks, Jim.

Thank you. The next question is from Jon Morrison with CIBC World Markets.

Afternoon, all.

Afternoon, John.

Was the Georgia opportunity with an existing customer or new customer?

It's a drilling team that we know well and have known for a long time well. But they're operating under a new concession, I believe, in Georgia or a recent concession in Georgia.

So does it contemplate expansion in that market or profitability off that one rig and country is relatively in line with your other international operations. It makes sense.

I just categorized this as a one-off opportunistic opportunity with the rig that we have ready to go to work. It's going to deliver great returns for us and it will be in the area, high degree of certainly it gets recontracted in Georgia or somewhere nearby. While it's not core in our strategy to be one market with one rig, it is close enough to our existing footprint that we'll support it with a minimal amount of infrastructure and overhead support. It's a good one-off deal for us but it's just a one-off deal.

Rob, what's the expected 2015 CapEx expected to be without maintenance spending? So, what's the rollover to deliver those 16 rigs that you have coming?

Well you can think about the -- first off, we haven't done our capital budgeting yet for 2015, or at least we haven't announced it. But for the16 rigs that are coming, some of that spend has happened in 2014, although the majority will be in 2015; so you can think of it as CAD20 million per rig and then it will be a shade lower than that because we've spent some of the money in 2014.

In the context of the current commodity price environment, does your view towards long term contracts change, i.e. a lower dayrate or are you willing to take a lower dayrate for improved visibility relative to your expectations, call it, the last few years?

Jon, we usually always try to maximize the term of our contracts and we also try to maximize the dayrates and margins. I would say that EBITDA margin always receives the highest priority of Precision, so if you're looking for one or the other, always drive maximum EBITDA margin. Little less worried about utilization and for that matter little less worried about contract coverage as the market's going down.

In the release you talked about cost reductions and focus on efficiency gains in the CMP division. Is that something new that took place in the quarter or that's just a continuation of what you guys have been focused on over the last, call it, 12 or 18 months?

That's really been since kind of early 2014 where we have come to the realization, as an organization, that the CMP business is likely to be slow for a little while. And so we've just taken some more direct steps to reduce costs in that business over the last, call it, three quarters.

But John, the short answer is our guys are working really hard right now to make sure they don't spend or waste any money anywhere.

Just a follow on Scott's question about the senior note purchase buyback opportunity. If the market is, call it, sideways for some time and there isn't a lot of growth opportunity in front of you for the next 12 to18 months that aren't already in your capital program, is that the most likely use of proceeds of the CAD500 million plus cash on the balance sheet? Or would you look at share buybacks or how do you think about allocating capital?

We'll consider all of the normal options for uses of excess capital but certainly in that discussion will be those, the CAD200 million of Canadian notes that comes -- that we can call starting in March.

Last one, can you give an update on Mexico and the realistic chances of adding any incremental rigs in the next 12 to18 months in that market?

John, it really depends on what happens at Pemex. They are at the end of the year so they haven't announced their 2015 budget yet. We're kind of waiting for that to move through, but I think the work we're doing right now under the IPM umbrella is going very well and that could increase if Pemex increases their IPM spending. There's no question they are desperate to bring in foreign direct investment we know that. If it ends up being large cap E&B companies onshore, the likelihood we move rigs down there goes up quickly.

It's fair to say that nothing would signal a slowdown at this point in your eyes?

You know, I think that, that country is on a track to bring in foreign direct investment and if it's the right kind of investment we'll be there with it.

Appreciate the color.

Thanks, Jon.

The next question is from Kevin Lo with First Energy.

Hey, fellas. Good morning.

Hi, Kevin.

Just want to follow up on Jon's question in Mexico. What is the utilization today? Are all the rigs fully utilized after that CAD8 million one-time gain?

We have four rigs running right now in Mexico and -- four, right?

Yes, well there's two rigs that are on short-term stand by but to get full EBITDA rate and two rigs that are operating and the other two are expected to go back to work here shortly.

Okay, so for Q4 then, should we expect that all the rigs will be working or at least getting paid 100%?

Yes.

Great. Second thing is what is your -- what is the percentage of rigs right now in your Tier 2, or Tier 3 category that's working? You had like 220 rigs that are Tier 1, a little bit more maybe. What's that percentage?

We've commented publicly a bunch of times that Tier 2 utilization is in that kind of 25% to 35% range and I think that, that's probably true today. That's pretty close, whereas for the Tier 1 rigs we're 90% or better.

Okay, great. Last thing for me is of the long lead items you're building into 2014 & 2015 how many of those parts are committed to long term contracts?

Of long lead time components, which we always keep a float going, none of those are committed as yet but they are sort of shadowing some of the discussions we're having with customers over the longer haul, Kevin. And of course our view has always been that if we see a slowdown in business, we terminate the program and reutilize those components in our maintenance CapEx so very quickly that offsets some of our maintenance needs. Remember, those are things like BOPs and engines and drill pipe and top drives; all things that when it's busy the lead times tend to stretch out and when things quiet down, lead times narrow. But having 3 or 4 excess top drives or 6 or 7 or 10 engines excess in our fleet, in a downturn, is never a bad thing because those end up offsetting some of our maintenance capital overtime. So we think it's prudent to have that ability to ramp up our delivery periods through long lead time programs.

That's great. In terms of renewals, the rates that you're renewing that the rigs are at today, the ones coming off contract, are they at current market or are they at where they were renewed before? Can you give us a sense of where those are being renewed at?

Kevin, we usually don't give a lot of clarity on renewals. It's not something we want to get into a cycle of reporting on, but I think we had 15 renewals during the quarter and the average renewal rate would have been at a higher day rate and higher margin than the prior renewal contract. Think about those like they are six-month and one-year renewals, I don't have the average amount of the renewal, but six-month to one year terms and the vast majority would have been six-month to one-year contracts rolling over. That's a good indicator of the tightness on Tier 1 rigs, which is something we've been speaking about through most of this call.

Okay, great. Thanks for the color. Thanks, guys.

Thanks, Kevin.

(Operator Instructions)

The next question is from Jeff Fetterly with Peters & Company.

Afternoon, everyone. Just a couple random questions. On the CapEx program reduction, the decrease in upgrade CapEx relative to your last update in July, is that a function of the timing of upgrades on rigs or is there a change in that market?

It's a timing issue, Jeff.

So should we expect you guys to be upgrading at a similar pace in 2015 as what you've done this year?

Well yes. I mean, the last few years we've had pretty substantial upgrade programs, somewhere between CAD150 million and CAD200 million of upgrades and we'll have more upgrades in 2015, but the pace is going to slow at some point because the low-hanging fruit gets picked. So when we look at the list of candidates there are still a good number of rigs to update. But it's going to slow as we get into 2015 and 2016.

I guess the key factor for us, Jeff, as always is receiving contracts to cover the cost of that upgrade and give us a pretty decent return. If we continue to see uptake by customers on upgrades, that program stays in place. If we see that soften for any reason, we could slow that program down to zero if need be.

Has demand for that type of spend changed at all relative to where it was in the summer?

You know, the shorter answer is yes, because we're in budget season for 2015 and our customers are trying to figure out commodity prices. So the short answer is yes, it has, but I'd say all new capital spending by our customers is under review right now, with no conclusions as yet.

And back to a follow-up on one of the previous questions. You guys are scheduled to deploy six rigs in Q1, seven in Q2, you talked about three rigs per month. But if we go back to the July conference call you talked about minimum three potentially moving to four rigs per month in 2015. How much has the market changed since you guys provided those comments a few months ago?

So Jeff, great question and I think a little more explanation is warranted from us. When we said three, four, even possibly talking about five at one point, when we said those numbers what we were suggesting was three for the US on average, one for Canada or two for Canada; so what's changed is we just haven't seen any demand pop up yet for Canada that might drive those numbers to a different place. And of course, nobody is prepared to commit to a contract or delivery really past the end of Q2 yet and that would be typical anyway. We aren't seeing much materializing later in the year. So for us right now, today, looking forward, the likelihood that we deliver more than three rigs per month in any given month in Q1 and Q2 is getting very close to zero because we'd have to be signing rigs back in September and October to have deliveries, for March and April. So I think, modeling us out through the pace that we've shown on our charts, which is about an average over the next three quarters of three rigs per month, is the right way to model us and the potential to increase really wouldn't come in until Q3 at this point.

Just to clarify--

If commodity prices turn around demand really picks up between Canada and the US, we could ramp up beginning some time in Q3 2015, but probably no sooner.

Just to clarify your comments earlier, you basically have no available spots for the first half of the year?

Currently we have no more available spots for the first half of the year as we managed our build program.

Last thing, just from a vulnerability standpoint, so when you look at activity today and assuming that the high grading process is beginning in terms of active rigs in North America, is it correct to assume that of the active rigs that Precision has running today, the number of Tier 2 rigs would be in that 20 to 30?

Yes, that's the right range.

Then how would that 20 to 30 be split between the Canadian and US side?

It's pretty even. I just don't know off the top of my head but I would guess it's pretty even. Maybe weighted a little bit towards Canada.

Yes, Jeff it's Carey. One easy way to think about this, if you think 90% utilization with about 210 Tier 1 rigs in North America, you get to about 180 rigs running that are Tier 1 rigs and the remainder would be the tier 2 rigs.

And then for, 2015 would those 20-30 Tier 2 rigs that are active, would those be the most likely ones to be upgraded or would it be the idle rigs that you would look at first?

Some of the upgrading rigs and some of the idle rigs is a bit of a blend depending on where the rig is and what the speck for the customer looks like. Cut it in half, say, half operating half idle.

Okay. Thank you. Appreciate the color.

Thanks, Jeff.

Thank you. The next question is from Carrie Tait with The Globe and Mail.

Hi. Thanks for taking my question. You showed a lot of enthusiasm for LNG in BC. I'm wondering if you think there may be enough potential activity there to replace any slowdown that could come in oil development with low prices there?

You know, Carrie, there are almost two separate markets with almost two different types of rig speck required and it's going to be slow evolving for LNG. I mean, if one project gets FIDed this December, if that were to happen and they went out to bid on more rigs, those rigs wouldn't be delivered until later 2015, second half 2015. So there could be a lag period, where if Canadian oil drilling slows down, if that Viking Cardium work slows down it might be awhile before the LNG work starts to pick up and offset that.

Okay, that's all I have. Thank you.

Thanks, Carrie.

Thank you. The next question is a follow-up question from John Daniel with Simons & Company.

Hi, Kevin. Quick one for me. In the international markets where you operate, broadly speaking what are the typical drilling times? And are you seeing any of the efficiency improvements that we're seeing in North America?

So, most of what we're doing internationally are straight, deep vertical wells, with the exception of some of the work in Saudi which has been directional pointed at actually offshore targets from onshore drilling. But nothing that's horizontal in nature like we'd think about North America unconventional horizontal drilling. I can tell you that it's still all reservoir drilling and most of the emphasis is on hitting the target rather than maximizing efficiency for the work we're doing. Deep, high pressure high temperature. You know the areas where they're really focused on efficiency are mechanical up time, safety, the things we're actually quite good at in our normal day-to-day operations.

Okay.

It's not speed of drilling. A lot of these wells are 180 day or 270 day wells. These are big long wells.

Fair enough. Thanks, guys.

Thanks, John.

The next question is from Andrew Bradford with Raymond James.

Hi guys, I'll be very quick here. Are any of the upgrades that you're planning either the original 20 or now on the 17, are they to be effected on what are already Tier 1 rigs?

Probably a couple of locking systems that we had in our upgrade numbers. Those convert the Tier 1 rigs into fully pad rigs but those are small enhancements to the rig and not material to the overall dollar change, Andrew.

Okay, is there anything about the architecture of rigs that you -- if you go all the way back to when you started constructing rigs in fairly big programs, say six, eight years ago; is there anything about the architecture of those earlier rigs that limit their upgrade ability today?

You know, as we upgraded our rigs all the way along, Andrew, really from 2007 forward, we've converted these rigs into more of a, call it, a Canadian footprint, where you have all of the utility buildings kind of compact in the back and you have kind of unitized drilling module. So in fact, our Tier 1 fleet right now, as we've upgraded tier 2 rigs to become Tier 1 rigs, those rigs have been made easier to accommodate pad drilling. So in fact our Tier 1 fleet, if it's not a pad configured rig right now can be made pad configured for a very minor upgrade.

That applies to all of the Tier 1 rigs?

Some of our Tier 1 rigs are super singles, that you well know, are the high-revenue making, high-return rigs for us. Those rigs actually can be skidded on a pad in a couple of hours, so it's unlikely they ever become a pad walking rig where you can skid them in two hours well to well. So if you subtract the number of super singles from our fleet and look at the balance of the fleet, that number of rigs would either be already pad configured or easily pad configurable.

Perfect. Thank you very much.

Great. Thanks a lot, Andrew.

Thank you. There are no further questions registered at this time. I would now like to turn the meeting over to Mr. Ford.

That concludes our third-quarter 2014 conference call. Thank you for your participation today.

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