Precision Drilling Corp (PDS) 2014 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Precision Drilling Corporation 2014 fourth 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. Please go ahead, Mr. Ford.

Thank you. Good afternoon, everyone. I'd also like to welcome you to Precision Drilling Corporation's fourth quarter and year end 2014 earnings conference call and webcast. Participating today 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; and Doug Strong, President of Completion and Production Services.

Through a news release earlier today, Precision Drilling Corporation reported on the fourth quarter and year end 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 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 fourth-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 record fourth quarter with revenues and EBITDA of CAD619 million and CAD234 million respectively. We also announced a quarterly dividend of CAD0.07 per share. Fourth quarter 2014 EBITDA was CAD234 million, which is 18% higher than the fourth quarter of 2013 and 18% higher than the third quarter of 2014.

The higher Q4 results primarily reflect increases in US, Canadian, and international drilling activity and increased US margins. EBITDA margins were 38% this quarter versus 35% in the fourth quarter of 2013. For the year ended December 31, 2014, revenue was CAD2.4 billion, up 15% versus 2013. EBITDA was just over CAD800 million, which is an increase of 25% versus 2013 and an all-time high for Precision Drilling.

Activity was higher in all of our drilling businesses partially offset by declining activity and pricing in the C&P business. In the US during the fourth quarter, margins were up approximately CAD600 per day over the third quarter of 2014 due to lower operating costs partially offset by lower average revenue. Compared to the fourth quarter of 2013, US drilling margins were up approximately CAD900 per day due to higher average day rates and lower cost per day. Precision's drilling activity in the US improved by 12% year over year.

As of today, we have 84 rigs drilling or moving in the US and five idle but contracted rigs. We have also had two contracts terminated in the US. In Canada, drilling margins declined by CAD600 per day year over year driven by higher labor costs and slightly lower average day rates for smaller rigs. Drilling activity increased about 4% over the fourth quarter of 2013. Today, we have 79 rigs drilling or moving in Canada.

Our completion and production segment revenues were CAD89 million, up 5% over the fourth quarter of 2013. EBITDA in the fourth quarter of 2014 was CAD16 million, which is essentially flat with the fourth quarter of 2013. As detailed in our press release this morning, planned capital expenditures for 2015 are now expected to be CAD467 million. Our capital expenditure plan includes CAD355 million for expansion capital, CAD73 million for sustaining and infrastructure capital, and CAD39 million to upgrade existing rigs.

We expect that the CAD467 million will be split CAD461 million into drilling and CAD6 million in the C&P segment. The expansion capital of CAD355 million is comprised of the cost to build 17 new-build drilling rigs: 3 for Canada, 13 for the US, and 1 for Kuwait. All of the rigs will be super triples, 1,200 or 1,500 horsepower. All of these rigs are contracted.

Our sustaining infrastructure capital is based on currently anticipated activity levels for 2015, and will be adjusted up or down based on activity levels. As described in our press release this morning, we incurred asset decommissioning and goodwill impairment charges totaling CAD222 million. The asset decommissioning charge of CAD127 million is associated with 29 drilling rigs, 10 in the US and 19 in Canada, and 35 service rigs and two snubbing units, all of which are in the Canadian market.

The decommissioning and goodwill write-down is consistent with our view that legacy assets in North America will be challenged especially given the current projected commodity price environment. The balance of our remaining Tier 2 and PSST rigs will be largely depreciated over the next three years. 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 of our PP&E, effective January 1, 2014, we are calculating depreciation on our drilling rigs and service rigs on a straight-line basis.

The use of straight-line depreciation results in idle assets being more aggressively depreciated. The additional depreciation expense for 2014 resulting from this change is approximately CAD43 million. Turning to taxes, our effective tax rate for the year was 12% after removing the impact of the decommissioning and the goodwill write-downs. Our lower effective rate is primarily due to income tax to lower rates and the impact of foreign taxes.

As for the balance sheet, it remains strong and flexible. As of December 31, 2014, total debt was approximately CAD1.8 billion, and net debt was approximately CAD1.3 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 weather the industry downturn.

We currently have an average of 124 rigs committed under term contracts for the first quarter of 2015. For the full year 2015, based on contracts in hand, we have term contracts for 105 rigs. By the middle of 2015, we will have 234 Tier 1 rigs up from just 93 five years ago, which puts us in a great position to generate strong returns for our shareholders now and in the future.

In conclusion, we believe that we are very well positioned to not only survive but grow market share through this downturn because of our strong balance sheet and liquidity position, high-quality rig fleet with strong operational performance, and our portfolio of over 100 term contracts. With that, I will conclude my comments and turn it over to Kevin for further discussion of the business.

Thank you, Rob. Good afternoon. And at the risk of being a little repetitive with a few of Rob's comments, I will go on and explain how we plan to manage ourselves through this market. First of all, the land drilling market is once again experiencing an abrupt and severe reduction in demand. Our customers are in a loop of recalibrating capital spending, they're managing cash flows, they're working to sustain production, all while managing their balance sheet stability and ultimately seeking ways to reduce their cash costs.

The result is readily apparent in the sharp rig activity declines already apparent in the pricing pressure and aggressive cost management throughout the oil services supply chain. At Precision, are well honed for this downturn. Our business is structured in variable cost format. Our new investments are secured with long-term take-or-bake customer contracts, and the Precision rig fleet is among the best high performance land rig fleets in the world.

Precision's capital resources, our balance sheet, and our capital structure provide the dry powder to weather this downturn while we remain poised to capitalize on opportunities if or when they arise. I want to spend a few minutes telling you how we managed through this business cycle. I'll talk about some of the trends we're seeing, and I'll give you a sense of what we expect over the course of the year. I think the first consideration in a downturn is how and where the company is positioned.

In that regard, our fourth quarter was the best on record for the Company, both financially and operationally. Most notably, we increased our contract coverage and the year over growth momentum we carried through the first three quarters of the year continued on through the fourth quarter. So as we enter [recessionary] cycles, our starting points are very strong indeed. Now we talked about the variable cost structure and capital spending flexibility. These are our key flexibility components inside Precision.

So first of all, as Rob discussed earlier, we reduced our 2014 capital spending by almost CAD100 million from the earlier forecasts. Our 2015 spending is expected to come in below CAD470 million, almost CAD400 million less than 2014. Once we complete our new rig deliveries by the end of July, our ongoing capital spending run rates should be less than CAD100 million per year. This is down almost 90% from our high-growth years.

This is clearly the biggest driver we have, and this is driven by our fiscal discipline and our desire to suspend new-build manufacturing when customer demand wanes. We [will lay] this rate into our strategy relative to managing costs on a variable basis. The vast majority of operating cost base is leveraged directly to field activity, and as such, we have a built-in hard wired natural capability to adjust our cost structure in step with activity. Now we demonstrated this in 2009, and we are following exactly the same play book in 2015.

In fact, in late November, the day after the OPEC meeting occurred and they decided not to act, Precision acted and we acted immediately. We implemented a series of expense controls, including hiring, salary and travel freezes. We initiated our vendor engagement process, and we eliminated all discretionary spending. All of these steps took hold immediately and allowed us to dial back our spending [apportionate] with activity.

While implementing these costs controls, we keep a keen focus on our long-term strategy, and that is to reinforce our competitive advantage, ensure that Precision rigs continue to deliver high performance and high-value services to our customers. We will continue to focus the rig efficiency, safety, and utilizing our scale for both consistency and cost efficiency through 2015. Now, I have a strong view that land drillers in general and Precision in particular did not experience significant cost inflation or generate outside profits or returns during the prior up cycle.

In fact, what we did with our high-spec rigs, and particularly our Tier 1 Super Series rigs, was continue to deliver the best efficiency, the best safety, the best predictability the industry has ever seen. We did this through highly efficient optimized business models. I know that our customers recognize this and at a strategic level, they highly value the efficiency and safety gains we've made.

However, in the near term, our customers are striving to reduce spending and that means rig activity across the board will come down. Now when the activity troughs, rest assured that the rigs that will remain running will be the best rigs in the industry staffed by the best trained and best performing crews supported by the best business processes, and there's no doubt that Precision will shine.

Looking at the current market data for Precision, this trend may be emerging. As of February 11, we have increased our 2015 full-year contract position to 105 rigs, and this is up from 92 at the end of the third quarter. And as Rob mentioned earlier, we've only experienced two early contract terminations and currently have just five rigs on idle but contracted status. We don't expect a significant increase in early terminations, but we may see more rigs shift to IBC as our customers balance out spending.

Also to date, Precision's utilization seems to be outperforming the US market slightly as we are down a little less than 20% and the market is down closer to 30%. However, it's a little too early to draw conclusions at this point. In Canada, due to our size, we are tracking industry activity as it declines. It's in these recessionary times that the cost benefits of scale and size and the revenue support from geographic and customer diversification is well demonstrated, and again, Precision will shine.

Moving to the United States, we see activity reductions and pricing pressure across all basins. We expect the busiest basins, the Permian and Bakken, will likely be hard hit as they have been so far. Precision's exposure to the Permian is important with almost a quarter of our US fleet in this region. However, we think that our business is underpinned by strong contract coverage and should insulate us from the full effects of the downturn.

However, spot market rates both here and in the Permian and the Bakken are extremely competitive. We've seen many drillers anxious to try and sustain activity and we have seen spot market rates down as much as 15% or 20% on occasion. We believe it's difficult to draw lasting conclusions from spot market pricing while the rig count is still in rapid decline.

Moving to the Marcellus, we continue to enjoy a strong position with high-quality assets, very good contracts, and a diverse customer mix. We expect this region will hold up well for Precision. In the Eagle Ford, we may be seeing a flattening at least for the time being. Currently we have 13 rigs, and this is down from a peak of about 16 at the beginning of 2014. Here the spot market rates are also challenged, and we're bearing some of the pricing pressure. Again, we're seeing rates discounted as much as 15% and occasionally 20% in this area.

Moving to the smaller plays like the Niobrara and the Woodford, we're expecting our rig activity in the near term will be relatively stable but most of these rigs are covered by long-term contracts. Again, spot rates here have also suffering intense competitive pressure but this shouldn't impact our fixed contract rates. So in general, while our outlook for the US remains clouded, our long-term contract position provides a degree of cash flow visibility in very uncertain times.

Moving to Canada, the winter season has disappointed both us and I think the industry as a whole. And while overall activity is down a level similar to the US, heavy oil has been hit particularly hard, and this is somewhat offset by the activity, or improved activity in the deep basin gas and liquids plays in the Montney and Duvernay area. In prior down turns in Canada, the first quarter would have accounted for the majority of customers' annual spending leaving a de minimis amount for the balance of the year.

But based on the most recent PSAC and CAODC activity forecasts, it would seem that our customers are exercising some discipline and appear to be balancing spending out more over the course of the year than we might have seen in previous downturns and this might suggest moderated reductions in the later part of the year. Again, it's too early to draw discrete conclusions, but we'll keep our eyes keenly focused on the second half of the year.

Spot market rates in Canada are under similar pressure as in the US. Again, we're seeing pressure in the 10% to 15% range accrue and occasionally 20% reductions. Again, our long-term contract coverage in Canada does provide a level of cash flow and certainty over the course of the year that gives us a great degree of comfort. Again, not all is negative in Canada.

The indications in the Duvernay and Montney plays are that the momentum we experienced in 2014 will continue into 2015. We have a very good rig of fleets including 10 recently delivered new-build fully contracted rigs in this region. We have a strong market position and good contract coverage in the deep basin and expect to continue to benefit from this play through 2015.

On the international front, as Rob mentioned earlier, we started up our new-build rig in Saudi Arabia late last year, and just a few days ago commenced operations in Georgia. Both jobs were on schedule or slightly ahead, and both startups have gone very well. We're on track and expect to commission our new-build rig in Kuwait late in the second quarter.

However, looking forward sub-CAD60 oil has a negative effect on international activity but nowhere near as severe or aggressive as in North America. So generally, we expect the overall international rig count is going to pause its recent growth cycle and if these prices stay at these levels for a sustained period, we will even expect to see a subtle pull-back over the course of the year.

We've been previously guiding you think about Precision's international growth in terms of three to four rigs per year. In this environment, our growth will also take a pause. Now that said, we still see a meaningful flow of tenders in the Middle East and other regions. However, we expect the award cycle will also be protracted until our customers see better pricing visibility.

Turning to our completions and productions group, it should not be surprising that these service lines are being under intense competitive pressure. From our customers, we are hearing about a growing inventory of repair and [abinimun] backlog, but it is clear they continue to defer the spending, prioritize just the highest value well repair work for the short term. In this market, service quality and safety performance do not override our customers' desire to cut costs and as such remains extremely price competitive.

Precision has the competitive advantage on the costs out of this equation. We've begun to play our scale, leveraging the full scope of Precision's procurement power, minimizing our fixed overheads, and utilizing our mature business management systems across our full business operation. This scale helps us reduce our costs and improves our cash flow. We saw this in 2014. Our team's intense focus on free cash flow delivered remarkable results in 2014, and they're continuing that focus in 2015.

To summarize our priorities for 2015, we are consistent with our long-term strategy but have specific attention on cost management and operating efficiency. We will work with our customers to lower overall costs through operating efficiency and bringing in services like [undergrated] directional drilling well. We will maximize cost efficiency throughout our organization and accrue this value for the benefit of the Company.

We will reinforce our high performance competitive advantage by demonstrating our capabilities in a cost constrained environment, and we'll manage our liquidity and focus our activity on cash flow generation and remain positioned to capitalize opportunities as they emerge. We understand the challenges of this market but we view this abrupt recessionary cycle as normal course of business.

So finally, I want to thank the employees of Precision Drilling for the excellent results they delivered in 2014. Namely, a record year for safety performance, a record year for financial performance, all while ensuring superior customer satisfaction. I appreciate all the long hours and hard work our people are putting in as this industry deals with the recession. On that note, I'll turn the call back to the operator for questions. Thank you.

(Operator Instructions)

The first question is from Jeff Spittel from Clarkson Capital Markets.

Thank you. Good afternoon, guys.

Hi, Jeff.

As you guys are aware, in the initial phases of a downturn, typically you see a lot of margin pressure for service companies before the cost containment initiatives can kick in and maybe provide a little insulation but, given that you were very proactive and you started to implement some of these measures late last year, is it reasonable to expect that maybe that margin pressure over the next few quarters won't be as pronounced as it might otherwise be?

Boy, Jeff, really tough question. So what I would tell you is, a couple things I think are interesting. We often say that this downturn is different than the last one or things are different. One thing that is different this time is our customers didn't pause or didn't wait. They came on hard, right at the get-go with pricing pressure. So the pressure on pricing was almost instantaneous and right across the boards.

So as a result, while we may have been ahead of things slightly with our cost containment work internally, customers are quick off the starting blocks also. That's probably a little different than 2009. But I will also tell you that we've worked hard in the past three or four years to leverage our scale and our size. I think we've done a great job over the past couple of years, both controlling and pushing our costs down. So I think we're in a good shape coming into this.

But we've worked with the vendors already. We've got some vendors coming in proactively reducing costs. Very constructive partnership-type negotiations with many of our vendors on the cost side. All that said and done, we're getting single-digit-type cost improvements on the vendor side and customers are expecting and demanding significant cost reductions. So I don't think that we can mitigate pricing pressure with cost control.

Sure. Sure. Appreciate that color. Maybe, as we think about the balance sheet and capital allocation priorities, it's in great shape heading into the downturn. You get the stock trading below tangible book value.

Does that compel you to revisit share repurchases as a potential option or maybe moving it up in terms of priorities here, or are we just going to strictly focus a little bit more on cash preservation in the near term until we get some more clarity?

Hello, Jeff, this is Rob. I think that it's obviously a compelling idea to repurchase shares when our shares are trading at this level. But until we see how the world settles out, I think we're more inclined to be conservative with the balance sheet and hold cash for now.

That makes sense. Appreciate it, Rob. Thanks for the color, guys.

Thanks, Jeff.

Thank you. The next question is from Dan MacDonald from RBC Capital Markets. Please go ahead.

Hi. Good afternoon, guys.

Hello, Dan.

Just wondering, looking at the new-build schedule, is it safe to assume, at this point, you're past the drop-dead date to defer any further new-builds for 2015?

The short answer, yes.

Dan, I full expect that the 17 rigs that we talked about in the press release today will all get delivered.

And I guess, do you have a sense, then, for what the potential might be for those rigs to displace, perhaps, other of your rigs the clients are using on a shorter-term basis, or do you think they will be fairly incremental?

The rig counts are coming down. The industry rig counts are coming down. While we add these rigs to the market, I don't expect our rig count is going to rise.

And then just on the cost side, in reference to your thoughts, it's the worst, most challenging conditions in a decade. In 2009 we did see the industry roll back wages on the Canadian drilling side. Do you think that the possibility exists for us to see that as well this time around, or is it a little different?

Dan, it's obvious we're looking at every avenue to save money for ourselves and maximize that spread between cost and sell. I kind of personally feel like the field labor-force right now is bearing the full brunt of job risk. And I'm anxious to try to protect the guys who have worked so hard for us over the past few years and let them continue earning at this rate.

Great. Thanks.

Thank you.

Thank you. The next question is from Doug Becker from Bank of America Merrill Lynch. Please go ahead.

Thanks. Kevin, I thought it was pretty notable that only two contracts were terminated. What would you attribute that to? Is there something from a pricing standpoint, a contracting standpoint, or just a performance standpoint? Because that's really pretty remarkable in the context of what's happened to oil prices and what we've seen from competitors.

You know, Doug, in 2009 I think we had one termination during that entire downturn. I know how we interact with the customers. I know. I've been out to our rigs. I've visited rigs as recently as just a few weeks ago. I see the work we're doing in the field. My personal feeling is, [is submitted at the pose] of our people on our rigs.

I don't get a chance to visit every single customer and every single rig, but I'm very impressed with what I see, and I'm very impressed with relationships we manage to maintain. It's early yet to draw ending conclusions here, and I do think we'll have more rigs going to idle, but contracted. We saw that in 2009. My conclusion is that our customers want to hang on to our rigs.

Even if they don't need them today, they might keep them on IBC status so they have control of the rig. If they get a bounce-back in commodity price or if they decide to expand the program, they have access to one of the best rigs in the fleet. So my feeling is, those numbers are driven by great field and operating performance.

And even for the five contracted but idle rigs, you don't see disproportionate risk of those being terminated?

From a financial standpoint, we're kind of indifferent, frankly, because on IBC we're earning full margin. If they're terminated, we get a front-end payment for full margin. Frankly, the best model is, the rig stays working because then everybody gets maximum value. They get the value of the rig drilling and we make the profit off the rig. So I kind of think second best is, they keep control of the rig, but we make the profit.

Got it. If we think about sustaining CapEx going forward, I think you were alluding to something less than CAD100 million. If we stay in a prolonged downturn, should we be thinking about 2016 CapEx to kind round up that level? And I realize, still very early days and a lot of things can change.

Before we get into its [project] in 2016 maintenance CapEx, it's always utilization based. Always utilization based, so you can draw your [math up in that] pretty easy. If you're thinking utilization in 2016 is lower than 2015's averages, then maintenance CapEx would be lower than 2015's maintenance CapEx. In 2009, we ran CAD60 million of maintenance CapEx.

Doug, if the industry is still in the ditch in 2016, I suspect we'd be well below CAD100 million in maintenance CapEx.

Okay. That's helpful. And then maybe a bigger picture question. It sounds like you're getting good traction with the directional drilling lines for Schlumberger. During down cycles in the past, we've seen some reluctance to dock new technologies. Maybe you can give us some color, what type of cautions are being observed and how technology adoption might be a little bit different this cycle than in past cycles.

Industrial logic and commercial decisions don't always line up perfectly. There's no question that our integrated model has great industrial logic and, frankly, great commercial value for our customers. But your comment about taking on new business models during down cycles is common. Doug, what's happening right now is, the pricing work being done by our clients is being done primarily by, let's call it, the procurement elements of our customers, not the value elements.

So there will be a transition in the next few months when they move away from, just drive the price down to really focusing on well value. That's -- rig efficiency will be -- get to be more important. Move times will be back important. And that's when we're getting close to the bottom. And then, I think our integrated model will look and will have the clear value our customers need to see.

So, I think it will be a good market for us, but it's early yet. We're still in the procurement, drive the price down, phase. It will transition, though, into an efficiency and performance phase very soon. And that's where integrated services, I think, will really gain some traction.

Great. Thank you.

Thanks.

Thank you. The next question is from Dana Benner from AltaCorp Capital.

Good afternoon, guys. I wanted to start with the notion of pricing, weighted average pricing, et cetera, and to do that, you've mentioned that during the first quarter, I think it's 124 rigs on term, and you've got, let's call it 180 rigs running currently, so that math would put it at 69% to 70% of your active rigs on term. So I guess in that sense, there's pretty good protection of the active rig fleet in terms of pricing and, in reality, it's the minority of rigs that are subject to the pricing pressures that you speak of. Is that a fair conclusion?

Yes. So, Dana, that's a fair conclusion. The rigs that are under contract we expect to get full price on these rigs. What will muddy the water a little bit are the handful of rigs that go to IBC, where we're basically paid the margin, but the costs go away. So that will muddy the water a little bit, but your premise is right.

Right. And then you note that you've got 105 on average, I think, on term for the year. Canadian count comes down in Q2. We'll see what happens in Q3. US may be a road to a little bit more, so. In reality of your active fleet, in fact, you could argue that maybe 80% to 85% of your active rigs are, in fact, somewhat backed by pricing protection, and it's then a very low minority of active rigs that are incurring those low spot rates. True?

That's correct. The percentage, I think, is less important than just the sheer number of rigs under contract, because we may end up having additional rigs working but not generating a lot of cash flow, but the rigs that are under contract -- we're highly confident that that cash flow is safe.

Right. I just wanted to draw that out because I think sometimes people forget exactly the proportion of both categories. Secondly, I'd be curious, Kevin, to know what has surprised you so far in Q1? I think the reasonable comparison is 2009, in terms of the way activity has fallen off. It's even been sharper. And so with the benefit of, I guess, all these years now of watching PD Precision grow and the market change, what has surprised you about what your clients are doing or the way the market has evolved based on what you're seeing?

Dana, great question. I think there's two things that I think are a bit interesting this time around. The first thing I mentioned on the call earlier was, just how quickly our customers responded with this pricing intensity. There's just no [light] time, no pause. We had our internal conference call that Friday morning after the OPEC meeting. I suspect most of our customers did almost the same thing, and they were on the pricing game very quick. No lag time, no waiting, no pause.

So, I think that's balance sheet diligence and cash flow diligence. That's probably a good thing. That's just [plenty in] industry. I'm also a little surprised in Canada, I would expect it to be -- to have probably more drilling intensity in Q1 and roll the dice for the rest of the year. Really feels like there's a bit of throttling back of Q1 to preserve a bit of capital for later in the year. I could be wrong but that's what -- it just feels like there's an inordinate reduction of drilling in Canada.

Interesting. Just one final question before I turn it back. Do you think it's better to be big with all the systems and supply-chain management efforts that you've put in place to date, or is it better to be small and nimble in a market like this?

Well, Dana, it's hard to beat the mom and pop with the husband and wife and five rigs. The overhead is two people. And that's hard to beat. So I understand there's a level at the very bottom which has a de minimis amount of corporate costs. But I would tell you if you're comparing 30, 50, 60 rigs to 240 or 230 Tier 1 rigs, we have a significant operational and cost leverage across that fleet, both customer diversity, geographic diversity, and then pricing leverage and systems leverage. There's no comparison.

Okay. I'll turn it back. Thanks, guys.

Thanks, Dana.

Thank you. The next question is from Scott Treadwell from TD Securities.

Thanks. Afternoon, guys. I wanted to pick up on the customer sentiment angle of things. You know, it seems like the rig cuts have been more driven by expediency than a drive for efficiency. The guys are managing their budgets to a number and just looking for the low-cost way to get out of activity. Have you seen discussions, yet, of any sort of consequence where guys know they've had to lay down rigs they don't want to lay down?

Maybe this goes to the idle-but-contracted phenomenon, and there's potential for high grading of customer fleets and, obviously by extension, the rigs that are going to work, which could impact you guys, or is it still very sort of frenetic and crazy, you can't really talk about anything concrete yet?

No, actually, I think the way you described it is kind of what we're expecting, Scott. Certainly, there's a drive right now to slam down the cost and, so I would tell you, it's very orderly but aggressive reduction of activity. So activity reductions, cost reductions, do everything you can to drive down cash costs and cash spending. There is very little talk right now, so far, regarding high grading or performance enhancements or performance improvements or things we could even do, like bring in directional drilling on a job to improve the efficiency of the job.

We're still in that -- let's figure out how little we need to run before we figure out how better to run mode. We'll transition, I think, probably either late this quarter or early next quarter into more of a -- less of a price crash, more of an efficiency conversation with our customers. That could be as early as late February, early March, or maybe as late as April, May, but I don't think it stretches beyond that.

Okay. Perfect. That's sort of what I thought. Just on the deferrals and cancellations, have you seen those slots go away for a customer, i.e., he's canceled that rig number 6 or 7, or whatever it is he's using, or was it, I don't want the new-build, let's put that on pause or cancel it, and is there another rig that can service that need?

I wouldn't say that there's been zero activity like that, but for us, it's not meaningful.

It really, Scott, is just the two rigs that we ended up being able to fill the needs with existing rigs, but otherwise the new builds will get built and I think that that additional new-build activity will clearly be paused until the industry strengthens.

Okay. I wanted to maybe touch on the margins a little bit as well. I know you've had some good performance. You opened the Canada Tech Center and you've obviously had the US one up and running for awhile but, I mean, as rig count comes down, there is a fixed cost associated with that. So, was there anything kind of structurally different you did Q4 that sort of managed that, or was it just to sort of a previous question, better performance and just keeping an eye on the nickels and dimes?

I think it's the latter, Scott. We're getting -- in Q4, we're kind of hitting our stride with the Tech Center in the US and getting closer in Canada. So we're seeing the full benefit of that. We're doing a better job of managing labor costs. There's a number of pieces that went into that. And I think those will still continue.

But as you point out, as the rig count comes down, we do lose some of the scale efficiencies where we're supporting less rigs with that overhead. The overhead is not completely fixed, but there is some portion of it is. So that will offset some of the gains that we've had.

I think it's worth pointing out, Scott, that our new Nisku Tech Center didn't actually increase overheads. We just modernized the facility and we'll have operating efficiencies in the shop. But from an overhead G&A perspective, likely that might go down slightly. So we've actually brought three facilities under one roof rather than just three different facilities. But it will be a de minimis reduction as opposed to an increase.

Okay. My last one is on working capital. Obviously, as things slow down, you would expect the receivables to monetize. Are there any trends you are seeing there yet? It's probably a little bit early for anything.

Do you have any idea of what that number might look like as you manage your inventories down on a reduced-capital program and payables would go with it, and then the receivables come down? Is that sort of, could be CAD100 million, if we're down kind of 20%, 25% on activity, or could it be CAD200 million or CAD300 million?

Scott, so directionally, the working capital will come down. We'll get working capital coming back out of the system. And it's probably sits somewhere between CAD100 million and CAD200 million.

Perfect. That was where I was thinking. That's all I've got, guys. As always, appreciate the color.

Thanks, Scott.

The next question is from John Daniel from Simmons & Company. Please go ahead.

Thank you for putting me in. Kevin, you noted in the prepared remarks the opportunity or hope, if you will, to capitalize on opportunities as they arise and cycle. Can you provide some color on what types of opportunities you are interested in? And then just a bit more. How much of your time today is actually spent looking at opportunities versus just dealing with the crisis at hand?

So, John, what's really in our crosshairs, I think, is that the market is going through a rebalancing right now, but I suspect when everything settles out and commodity prices stabilize a bit, it's likely there's still a shortage of high-spec, pad-capable rigs. And it's not apparent right now. There are pad rigs being laid down right now today, but the market hasn't sorted itself out. I think it will.

I don't think there's enough high-spec, pad-capable, super high efficiency rigs to support the market on a sustained basis. We're talking to those customers. We kind of note their long-term plans; they're not short term. I think there will be an opportunity for us to build rigs. Maybe not in 2015 but maybe in 2016 for that high efficiency, core, center-of-the-play type opportunity. So having that opportunity, I think is really important for us.

On the M&A front, we'd like to look and see, and be engaged in everything that's out there. We're pretty picky when it comes to rig spec and quality. And we've been so successful with our own design rig. Hear me loudly on this one. I think a PD Super Triple is among the best rigs in the world, except for us it's the perfect rig.

It's got the standardization and the fit and all the equipment, and our people are trained for it. So having a PD Super Triple 1500 has a lot of value to Precision. That's where most of our crosshairs are centered right now.

If we were to assume that most people like their own designs, do you think that that limits consolidation within the land drilling space later this year?

Well, it certainly makes it tougher to pay a premium for an asset which is vastly different.

Yes. Okay. Rob, thank you for the candor with respect to pricing trends, but I want to follow up on Dana's earlier line of questions. As we try to balance at the lower spot pricing, vis-a-vis the fact that you've got better rig mix working in Q1, as well as the contract coverage, any color with respect to the directional movement and cash margins and perhaps, which I know you will be reluctant to, potential magnitude of change would be appreciated.

I think that, John, it's a bit early to call it, but I think that cash margins probably won't move a lot and that's primarily because of the contract coverage that we have. We are going to realize the full margin on all of those contracted rigs, and that makes up the largest percentage of our rigs. And certainly the rigs in the spot market margins will be impacted as pricing comes down, and we'll offset that some on the cost side but not nearly as much as the revenue moves.

Okay. And then just a last one for me on international. As you look at the current portfolio of rigs you've got the contract coverage, et cetera, how quickly does that customer base react to changes in commodity price with respect to coming back to you? I'm using you as, you can speak from an energy perspective to beat on you on price.

Here in the North America, it's like as soon as there is change, they would be on you right away. When would you expect -- is there any risk that those contracts, perhaps, get amended? Is that a possibility this year in terms of the price?

I think that's a fairly low risk in the way we view the business.

Okay. Fair enough. That's all I had. Thank you for the time.

Thanks, John.

Thank you. The next question is from Jeff Fetterly from Peters & Company. Please go ahead.

Good afternoon, guys. On the contracted side, how many rigs would be under contract for 2016 at this point?

Jeff, we haven't disclosed that. Typically, we'll disclose that later in the year. Let me say that's it a -- we have a meaningful number of contracts in hand already for 2016 that give us some comfort that we've got a good portion of our cash flow for 2016 already locked up.

Our contract profile, today, is frankly much better than it was back in 2009, both for duration and for number of rigs under the contract. So we feel pretty good about our positioning for short-term or a sustained downturn.

Just to clarify the comment earlier, you said 124 rigs under contract for Q1?

I think that's the number.

So is it safe to assume that your exit contract number will be 75 or 70 rigs?

You can do the math. It's not exactly linear, but that's close enough. It gives you a pretty good sense.

Okay. The rigs that come off of contract over the course of 2015, how much of a discrepancy in terms of day rate do you expect them to go -- to move on?

Luckily, not many are coming off contract right now, because right now [where we've been discussed] where the spot market prices are. Probably a better sense for that, Jeff, at the end of our Q1, recall, than into Q2. Probably a better question for us [there]. We really don't have a good visibility right now.

Rigs coming off today or that are in the spot market today, you really are looking at 15% or 20%, straight away.

Okay. Do you have any visibility in terms of when or how you think that might flatten itself out?

Not yet.

I guess the ultimate question in that is, how much are you willing to take from a pricing standpoint before it doesn't make sense to redeploy immediately?

Well, Jeff, it's probably not just as simple as a rig comes off contract and it goes straight to spot market. It isn't that simple. So, for example, if we have a rig drilling for an operator, and Eagle Ford's drilling on a certain type of pad, on a certain type of well, and it rolls off contract in, let's say, May of this year, if it's drilled for the last two years or three years, under a long-term contract, it knows the wells, it knows the field, it knows the company men. Chances are we don't need to go right down to spot market rates for that rig.

Chances are, some nominal discount to that customer for that rig that has no risk for them, will keep that rig working. So I don't know if that's going to happen or not. You'll have to ask us again in April. But our experience has been that on the first rollover of a new-build rig with a long-term proven program, spot market rates are less impactful.

And I think it's important, too, to differentiate. We've been talking, kind of generally, about spot market rates. But it's not as defined right now, but it will clean up again.

There is a real difference between the spot market rates for Legacy Tier 2 rigs versus high-spec, Tier 1 rigs that are walking rigs on pads. These are two different markets and that will get differentiated again as we move forward.

The comments you made earlier about 15% to 20% in the Permian and Eagle Ford, et cetera, would you define that as a Tier 2 pricing pressure right now or is that a Tier 1 spot market rate?

Just broad market comments. As I said earlier, we're not really in efficiency discussions with customers right now. This is more of a procurement exercise to try to drive down prices. So the guys we're talking to at this point, and I've called myself into a number of customer meetings, being introduced to the head procurement officer or the Senior VP of procurement, not the head of drilling. Right now today, the discussions aren't about value or performance. They're just about price.

As you manage the business through this downturn, are you expecting this to be worse than 2009, or do you expect the trough on the rig count in the US to be lower than 2009?

So, Jeff, the answer is, we don't know. It looks pretty similar, in terms of the pace at which rigs are being laid down, and so we don't know if it's going to be more rigs laid down or not.

I think actually, the more important question is, what's the duration? In 2009, we hit the bottom and bounced back pretty fast. I think that the bigger question here is how long are we going to be in this kind of CAD50 or CAD60 oil world, because that's going to have a bigger effect than how deep we go if we bounce right back.

But the other difference for us is, we're a way-different company today than we were in 2009. Our balance sheet is in far better shape. We've added well over 100 Tier 1 rigs. We've got a better contract position.

So for us, this is a lot less intimidating than 2009. In fact, as we look at what's coming, whether it lasts for two quarters or six quarters, we're highly confident that we're going to work our way through this and come out on the other side in good shape.

And I would also throw in that in 2009, we had just completed the Grey Wolf merger. Our customers in the US weren't completely familiar with Precision at that point. Today, we've got multiple years of track record in this client base. So we just feel much more comfortable in this market today than we could have possibly felt in 2009.

Okay. Different vein. What's your assessment of the Schlumberger partnership success so far and performance of the directional drilling business to date?

We're very, very pleased with the progress so far and very pleased with customer uptick so far, despite the market challenges and the broad base. So that's why I'm quite optimistic that, when the market moves back into focusing on value, we'll have some good traction.

Okay. So how do you reconcile that against the financial performance for that business in recent quarters, being essentially stagnant to modestly declining?

I think the margins and day rates and directional drilling are under a lot of pressure right now.

Just to clarify your comment earlier, do you expect or will, strategically, you guys be looking at trying to make some bundling pitches to the client side?

We'll -- this is a great time for us to use some of our ancillary services like rental packages and camps, to help lever more volume out of the customer. If the customer is looking for us to save money, we can include things like rental packages or camps and catering services to help lower the cost for them. I don't really think there's a lot of value in bundling. It's more a strategy for us to try to create more value for our customer.

Thank you. Appreciate the clarity.

Okay. Thanks, Jeff.

Thank you.

(Operator Instructions)

The next question is from David Wishnow from GMP Securities. Please go ahead.

Good morning, guys.

Good morning, David.

Quick question. Apologies if I missed this. But if I look at the new-build schedule, it looks like two rigs in Canada got pushed from 4Q 2014 to 1Q 2015. Is that the case, or was that a manufacturing delay? Or was that a customer who requested delay on taking delivery of those rigs? Just kind of wondering what's going on there.

David, I think those are rigs that were -- they were third week of December deliveries, and when you get to that late in the year, Christmas breaks, they end up sliding into the first week of January. There's no meaningful or material difference by customers or by us.

If there was any movement, it's a matter of weeks.

Okay. Got it. That's what I figured. Another question. To follow up, clearly it's still very early in this cycle, but this is probably the first cycle where you have enough, kind of, AC Tier 1 rigs out there to really be a critical mass. Are you guys expecting to see bifurcation develop within what is historically been the Tier 1 fleets, perhaps older AC rigs or some of the very high-spec SCRs where, going forward they may not be considered the new level Tier 1?

You know -- so a couple things. There will be some bifurcation between pad-walking rigs and non-pad, walking Tier 1 rigs. So I think that's what I was alluding to earlier, about the demand for potentially more pad-walking rigs. I think that the most efficient way to drill a core property is going to be with the pad-walking rig that can walk well to well in 45 minutes. There will be a day rate premium and a shortage of those types of rigs.

Now, moving to the broader category of Tier 1 rigs, AC or DC. I think our customers actually know, rig by rig, which rigs perform very well. We have some DC SER microprocessor controlled E-drill rigs that can drill as well or better than any AC rig anywhere on ROP. Our customers know that. I think our customers know which rigs work well and which rigs maybe don't quite work as well. And I think that's why you see variance in day rates between various drilling contractors.

Okay. Got it. So it's safe to assume that you could see, what historically we would call Tier 1, assets potentially not recover as quickly coming out of the trough, whenever that does happen?

Sorry. You broke up for a minute. Repeat the question.

I was saying, so, in theory, you could see, whenever this rig count does trough and people start focusing on rig efficiencies, clearly the pad-walking rigs will be the first to recover, but it sounds like it's safe to assume that, what historically we would call all Tier 1 rigs don't necessarily recover at the same rate.

No, I wouldn't agree. I think the Tier 1 high-spec market is going to do well when the market rebalances and commodity prices respond. There's -- while I say the best wells will be drilled in the core by pad rigs, there's still going to be a broad, wide market for high-spec, high efficiency drilling and moving rigs. So I'm not bearish on the broad -- on the Precision definition of Tier 1 rigs.

Okay. Got it. Appreciate it.

Thanks, David.

Thank you. The next question is from John Daniel from Simmons & Company.

Thanks for putting me back in. Kevin, more of a sort of a theoretical question, if you will. If you have discussions with your customers, are any of them telling you that they will not ever need to return to the sort of the prior peak levels recorded in the Q4 timeframe, just due to the efficiencies?

No. But again, John, the short answer is, no, not at all. No one has said that. But beyond that, right now again, the guys that make those decisions aren't the guys we're talking to. We're talking to the guys who are charged with getting 15%, 20% out of their vendor base.

Okay. That's all I had.

John, you do know I spend time with another E&P company. That type of conversation, I don't think it's common that you're suggesting.

Okay. Fair enough. Thank you.

Thanks, John.

Thank you. The next question is from Dan Healing from the Calgary Herald. Please go ahead.

Hi, guys. I just wanted to ask a bit about how this downturn is affecting your employees that aren't out in the field. I think you mentioned earlier there's a hiring freeze and a wage increase freeze. Is there anything else going on, or is there anything planned in terms of reducing staff or doing anything like that?

You know, Dan, our sort of fixed headcounts float up and down with activity levels all the time. They go up, and they go down. There is no company-wide or newsworthy event there to talk about.

Okay. And you're cutting back a bit on manufacturing. Is that part of the Company being affected?

We're slowing down -- our -- and deferring rig building, and as I said earlier, I think that business will return at some point in time. So sustaining capabilities is important for us, but we're also mindful of managing our costs in that area. Now, what we do is, we utilize a lot of third-party vendors and outside sourcing. So as for as Precision goes, we can manage that pretty easily internally.

Okay. And maybe one larger-picture question. When do you think this is going to turn around? Do you have any forecasts or prediction?

Well, you know, for those of us in the oil service industry, if we knew that answer we wouldn't be doing this job.

Okay, thanks.

But, hey, Dan, just to hit that point, though, this whole cycle is not new to anybody in the Calgary oil service business. I think most of us know how to manage our businesses through this, well, and make sure that we're healthy and strong coming out the back side, and that's what we're doing.

Okay.

Great. Thank you.

Thanks.

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

Operator, I think we have maybe one more question.

We do have time for one more question from Brad Handler from Jefferies. Please go ahead.

Thanks, guys.

Hello, Brad.

We've obviously covered a lot of ground. I guess I was curious about something that's -- the conversation that's floating around and curious if you have some perspective on it. Are you sensing that your clients are drilling and not completing wells? I was wondering if you could speak to both.

We don't have any visibility on that at all. We can't comment.

Yes. That makes sense. I just figured I would throw it out there.

When we finish the rig or the pad, we're gone. We see lots of pressure-pumping trucks driving up and down the road. We don't know where they're going.

Right. Right. Understand. Okay. That's fine. I'll go offline. Thank you.

Thank you. There are no further questions registered at this time.

That concludes our fourth-quarter conference call. Thanks for joining us today.

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