Precision Drilling Corp (PDS) 2015 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Precision Drilling Corporation 2015 first-quarter conference call and webcast. I would now like to turn the meeting over to Mr. Carey Ford, Senior Vice President, Operations, Finance. Mr. Ford, please go ahead, sir.

Thank you. Good afternoon, everyone. I'd also like to welcome you to Precision Drilling Corporation's first-quarter 2015 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.

Through a news release earlier today, Precision Drilling Corporation reported on the first-quarter 2015 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 the 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 will begin the call today with a brief discussion of the first-quarter operating results and a financial overview. Kevin will then provide a business operations update and our outlook. Rob, over to you.

Thanks, Carey. I'll apologize up front if I'm a little bit difficult to understand, as I'm fighting a bit of a chest cold.

Earlier today we reported first-quarter results with revenues and net income of CAD512 million and CAD24 million respectively. We also announced a quarterly dividend of CAD0.07 per share. While it was a very difficult quarter because of the sharp declines in year-over-year activity, I'm satisfied that Precision is very well positioned to perform during this downturn and emerge even stronger.

The strength of our balance sheet and liquidity position, our customer contracts and high-quality Tier 1 fleet all help ensure that we'll navigate this industry downturn and perform for our customers even if the industry is in a depressed activity environment for an extended period of time. First-quarter 2015 EBITDA was CAD163 million, which is 31% lower than the first quarter of 2014. The weaker Q1 results primarily reflect decreases in North American drilling and C&P activity.

EBITDA margins were 32% this quarter versus 35% in the first quarter of 2014. Our relatively strong margin performance in the face of significant industry downturn is a reflection of our variable cost operating model, proactive fixed cost management and contract coverage on our Tier 1 assets. In the US, during the first quarter, margins were up about CAD650 a day over the fourth quarter of 2014 due to stronger day rates and the impact of idle but contracted revenue, partially offset by higher daily operating costs and lower turnkey activity.

The impact of turnkey and idle but contracted rigs increased margins by approximately CAD100 per day. Today we have 55 rigs drilling or moving in the US and 9 idle but contracted rigs. In Canada, drilling margins declined by CAD500 per day year-over-year driven by higher labor costs and rig mix, partially offset by higher average day rates. Drilling activity decreased 45% over the first quarter of 2014. Today we have 18 rigs drilling or moving in Canada.

In our international drilling business, activity increased by 15% and revenues by almost 45% over the first quarter of 2014, driven by the rigs deployed to Kuwait and Saudi Arabia in 2014 and the country of Georgia in February 2015. This was partially offset by lower activity in Mexico. Our completion in production segment revenues were CAD66 million, down 36% over the first quarter of 2014. EBITDA in the quarter was CAD7 million, which is a 64% decline from the first quarter 2014, reflecting the highly competitive markets in which we compete in the C&P segment.

As detailed in our press release this morning, planned capital expenditures for 2015 are now expected to be CAD506 million. The increase since our last conference call is primarily the foreign exchange effect of US dollar denominated expenditures. Expansion capital of CAD385 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, either 1200 or 1500 horsepower.

10 of the 17 rigs were delivered in the first quarter and the remainder will be delivered by early Q3. I remind you that all of these rigs are contracted. Our sustaining and infrastructure capital is based on currently anticipated activity levels for 2015 and will be adjusted up or down based on activity levels.

Turning to the balance sheet, it remains strong and flexible. As of March 31, 2015, our total debt was approximately CAD2 billion and net debt was approximately CAD1.5 billion. The increase in total debt since last quarter is due to continued strengthening of the US dollar. 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, however long it may last. As of March 31, we had CAD450 million in cash on the balance sheet. In early April, we received a payment from the Ontario tax authorities of CAD69 million in settlement of our income tax recoverable plus interest. During the quarter, we also received temporary covenant relief from our senior lenders, ensuring that we will have full access to a revolving credit facility as we work through this downturn.

Our contract coverage remains strong. We have an average of 110 rigs committed under term contracts for the second quarter of 2015. For the full year 2015, based on contracts in hand, we have term contracts for 104 rigs, which is 45 rigs in Canada, 48 in the US and 11 internationally. We expect to exit 2015 with approximately 82 contracts in place and have an average of 58 contracts in hand for the full year of 2016.

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

Thank you, Rob. Good afternoon. As I mentioned in our press release and Rob covered in his comments, Precision's Canadian and US land drilling in our completion and production services groups experienced sharply declining customer demand while international activity weathered the depressed commodity prices remarkably well. There was also no doubt that Precision's variable cost business model and especially our people, have been put to the test this quarter.

Starting in Canada, first quarter activity seemed to lag behind what most expected. I think the big difference is related to heavy oil stratification drilling. In a typical winter season, heavy oil strapped drilling programs utilize 75 to 125 of the industry's shallower rigs. This year the strat programs really failed to get off the ground as our customers pulled back hard on heavy oil. I believe this explains why Canadian activity seemed to trail the US during the first quarter.

The strat segment is likely to lead in activity when commodity prices improve, as our customers will need to catch up on these programs if heavy oil drilling activity is returned to some semblance of long-term normalized levels. Moving to the balance of the light oil activity in Canada, the region saw customer demand and industry activity tracking the broader trend, down about 45% from 2014 levels and roughly in line with our customers' budgets.

While oil prices have improved from 2015 lows, we believe a substantial oil price increase would be needed to stimulate a significant improvement in overall customer demand. That said, demand for Precision's super triple rigs actually built momentum during the quarter, as the deep basin gas and liquid plays, principally the Duvernay and Montney, experienced high customer interest. We see this trend continuing through 2015.

Many of our customers in the Duvernay and Montney are transitioning from the delineation and the completions testing phase to the full-pad development drilling phase. From a rig perspective, we see the drilling shifting from heavy [telly] doubles to high performance powered walking triples. In fact, we deployed five new build-in to upgraded pad super triples to these regions late last year and early this year and expect to see strong demand into 2016 with potential new builds emerging later this year for 2016 deployments.

The deep basin natural gas liquids and potential Horn River LNG development projects remain encouraging, longer-term catalysts for our Canadian business. Visibility into the second half of 2015 is much less clear than prior years, however. We expect that our customers have achieved the cost savings and the spending reductions that they sought, they'll be in a position to spend money more evenly over the course of the year than some may have expected earlier.

For non-contracted rigs though, we expect stiff pricing competition through the third quarter. While we're not intending to lead the charge on lower day rates, there's no question that with our scale, our cost management and vertical integration, this will allow us to support our margins while facing the aggressive market competition head on.

Like many in Canada, we believe oil pipeline expansion and the development of export markets for Canadian liquefied natural gas remain critical considerations for the national agenda. We continue to do our part to ensure the environmentally responsible and safe development of these resources despite the intense pressures to reduce cost.

Moving to United States, in the US for Precision it's much the same story. We believe that broadly, our customers have completed most of their work to dial down activity and have achieved the overall cost reductions necessary to bring their spending in line with their budgets. However, we may be some weeks from rig activity bottom and further commodity price volatility could result in additional customer budget recalibrations.

During the first quarter, our active rig count dropped at a rate slightly less than industry, as the quality of both our Super Series rigs and our strong term contract base provided some breathing room. As Rob mentioned, currently in the US we have 55 rigs running, a further 9 rigs on contracted stand by. Since the beginning of the downturn, we've experienced just one full contract termination payout.

It's possible that our active rig count may continue to trend slightly downwards if anymore rigs are moved to idle but contracted or if any further rig contracts expire and the rigs are stacked. But that said, it feels like we're nearing the end of the activity decline cycle, but it's too early to say for sure.

Generally, it's our strategy to defend our margins, not utilization. We believe a margin-centric strategy has superior, full-cycle value for our Company. We also believe that our preemptive cost reductions, our vertical integration, vendor price concessions and the scale, much like in Canada, all contribute to supporting our operating margins and will continue to provide competitive flexibility in a price-sensitive market.

Now gleaning meaningful points on leading industry day rates is premature, as industry activity is still in decline mode. And no matter how low anecdotal day rates are, rigs are still being idled.

Nonetheless, we are beginning to see some emerging opportunities involving high-grading. Several of these are with new customers for Precision who were not able to secure our super series rigs during prior periods of high demand. We expect this high-grading trend to continue and possibly accelerate, even though the market continues to seek a bottom. We remain encouraged that many of our currently idled Precision Super Series rigs will see improved utilization even in the current quantity price malaise.

Our strongest US regions are in the Marcellus, Permian and the Niobrara. In these regions, we enjoy our highest utilization of our super triple rigs and also the best contract coverage. We find that the Bakken remains the most challenged US region, followed closely by the US Eagle Ford.

As with Canada, we believe a significant and sustained improvement in commodity prices will be necessary to generate a meaningful rebound in demand. But absent of rebound, we believe the demand for Tier 1 rigs and especially pad capable rigs, will firm up as our clients continue to transition from cost reduction mode to rebalancing and high-grading rigs within those reduced budgets.

Turning to international, this business is certainly demonstrating its resiliency. As Rob mentioned, our new-build rig will start up in Kuwait late this quarter. We're very pleased with the rig deployments late last year and early this year with rigs commencing operation in Georgia, the kingdom of Saudi Arabia and again, shortly in Kuwait. Clearly, the lessons we learned in 2013 have led to vastly improved and relatively trouble free deployments in 2014 and 2015, completely delivering the financial performance we expect.

While international business has shown much more resiliency than North America, the low commodity price is not constructive over the longer term. Four of our international rigs are up for renewal in the coming months and we expect pricing pressure and some short-term utilization risk. Despite these headwinds, we continue to believe the longer-term outlook continues to be promising for Precision, particularly in the Arabian gulf.

Bidding activity remains very strong, but firm awards may be slightly delayed. You should expect a pause in our long-term guidance of three to four rig additions per year until this market settles out somewhat.

Turning to our completions, productions service group, as Rob mentioned, the first quarter continues a trend of reduced customer spending and sharply lowered revenue. Activity and customer demand for our well-service operations are under intense pressure in most regions with southern Saskatchewan and heavy oil hit the hardest.

In line with the drilling activity though, the deep gas basin in northwestern Alberta is showing somewhat better strength. However, we believe this business segment is in for a prolonged downturn and as such, our team remains intensely focused on cost management and generating free cash flow.

In summary, Rob mentioned Precision's downturn positioning. I think it's important to understand that the lessons Precision learned during the 2009 downturn led to a series of long-term strategic initiatives we executed over the past six years. These initiatives were to ensure that we have the balance sheet strength, the long-term contract backlog, a young, high-performance rig fleet and a field reputation for excellent performance so that when the inevitable downturn struck, we'd be well positioned to create value. I could not be more confident regarding the strategy we executed and the positioning we achieved. And I remain highly confident in our ability to create value through this downturn.

This has been a very challenging period for the people of Precision. The industry-wide layoffs are a burden on us all. At Precision, we deal with this challenge head on and we do the best we can for our staff and field crews during the downturn. But we also do what is necessary to ensure the Company's stability.

I want to thank the employees of Precision for their hard work and high-performance results they continue to deliver despite these overwhelming challenges. On that note, I'll turn the call back to the operator for questions. Thank you.

Thank you. We will now take questions from the telephone lines.

(Operator Instructions)

James West, Evercore ISI.

Good morning, guys.

Good morning, James.

Kevin, what do you attribute to the fact that you've only had one contract cancellation in the US so far? It seems like -- or one, sorry, contract payout so far. It seems like your peers or your competitors have had a lot more than that.

Well, I think in our previous conference call we alluded to two cancellations. In fact, it's actually become one, as one of the rigs stayed under the IBC terms. I think it's a combination of things, maybe a different customer mix. We certainly think it has partly to do with the performance of our rigs and customers wanting to retain control of the rigs. And certainly it may be just customers picking lowest hanging fruit and the contracts that are easiest to terminate. I think it's a basket of all three of those. We'd like to believe a large portion lies with the quality of our rigs.

Okay. Got it. And you mentioned the Duvernay and the Montney moving into full pad development and there could be an opportunity for some new rigs or particularly, new build rigs. What's the size of that opportunity, do you think, over the next one to two years?

You know, James, it's really hard to say in the current commodity price environment, but these are big tier, big commitments, large players in there. You've got some international E&P companies in there, you've got some of the large Canadian companies, some of the newer, emerging Canadian companies in the play. It could be very, very active. This is an area which is geographically as big as the US Eagle Ford and the liquids have a natural market as diluent for heavy oil.

So I think there's a lot of reasons to be quite optimistic about the Duvernay moving forward as a liquids play. Further down the road, if we get some light in the tunnel on LNG, both Duverny and Montney have a good destination for the dry gas if LNG proceeds. I don't want to come across sounding too bullish right now. We're really pleased with our positioning. This business will grow for us going forward, even in these tight commodity price environments. It could be a very good play if we get a bit of easing, a little more capital coming in this direction.

Okay, great. Thanks, Kevin.

Thank you.

Scott Treadwell, TD Securities.

Maybe follow up on the high-grading comment. Kevin, could you generalize to some degree, are there basins where that seems to be more or maybe geographies, Canada versus US, where that mindset for producers is maybe a little further ahead than others?

That comment, Scott, was particularly focused on the US and be thinking more southern US. I don't want to get too much clearer on that. We're still in a highly competitive environment. But certainly we're seeing opportunities now to go back to customers who were looking for rigs from us a year or two ago and we simply had nothing to satisfy, no availability and now we do.

Okay. And that was actually sort of a follow-up. We know these customers where you may have had a relationship, was it you couldn't get a rig out of the yard to meet their specification in the time they wanted? Or was it more of a price-driven issue that some of these guys didn't get the rigs they wanted?

It was availability at the time and I think they took less capable assets and now we're getting a chance to go back and high-grade to high spec Tier 1 super triples.

Okay. Perfect. And my last question, kind of maintenance CapEx; obviously a pretty small spend in Q1, but given the activity levels in Canada, that's probably to be expected. With the budget you're sort of putting out there with almost the CAD8 million of maintenance and infrastructure CapEx, is that sort of anticipating obviously a pretty sort of slow and steady activity gain through the back half of the year or is there a step there? Obviously, having to spend nearly CAD70 million through the remaining three quarters of the year would sort of imply that activity might be picking up in your eyes.

No, Scott, I wouldn't read that into it. This is Rob. We're not assuming any rebound in the second half. We're expecting it to remain pretty muted. As typical maintenance spend in Q1 oftentimes is lower, because that's when we're busy working in Canada and it will catch up on maintenance throughout the year. I would not read that to think that we believe there's a meaningful step change in the second half.

Okay, good. That's the color I was looking for. Appreciate it, guys. Thank you.

Thanks, Scott.

Doug Becker, Bank of America Merrill Lynch.

Thanks. Kevin, you were alluding to the potential that customers in Canada might spit out their spending a little bit more over the course of the year. First quarter was certainly weaker than what we'd seen, even back in 2009. Is the remaining portion of 2009 a reasonable analogue here where we saw activity in Canada around [25, 50, 72] over the remainder of the year or is that too optimistic?

Doug, I tried to explain a bit of that Q1 gap by talking about the delineation work that wasn't happening or the quarry work we normally see in heavy oil. I sort of explained why that spending was, we think, below expectation in Q1. But I think there's a second thing going on too. I would have told you I expected to see our customers in Canada spend a larger portion of their budget in Q1 than they actually spent.

I think what they did was they spent a time proportional amount and they left money in the budget for Q3 and Q4 to return to some level kind of in line with that color, 35% to 45% budget reduction. I don't have 2009's actual activity numbers in my memory. But I am thinking we'll see slightly better activity levels in the back half of the year than Q1 might project forward. Does that make sense?

That does. That's helpful. As we think about US margins per day, is it fair to say that they should be pretty similar in the second quarter, just given the contract coverage? Presumably, there's still some ongoing fixed cost management in the spot market because it just doesn't seem to be all that active at this point.

I wouldn't expect any big changes in the cost structure in the second quarter. There's a few competing items going on. We'll have an average less rigs running so there's less rigs to absorb the fixed cost. But we'll have more rigs on IBC, on idle but contracted, which tends to improve margins and we'll see where turnkey comes out. I don't think we're going to see a big movement in either direction.

Makes sense. And one last one. Rob, you've really done a good job of preserving liquidity. Previously mentioned share repurchases on hold, just wanting to preserve that cash. Has that changed and how sacred is the dividend in this type of environment?

Couple of different questions there. So I would say that as we have mentioned in the past, we put a dividend in place that we believe that we can support through a downturn. Of course this is a discussion we have with the board every quarter, so we'll continue to review it. But the intention was and is that we were able to support our dividend.

In terms of share repurchases or other uses of cash, right now I'm pretty stingy with the cash. I don't really want to spend it until we see for sure where the bottom is. We think there's some kind of green shoots that would make us believe the bottom is somewhat near, but we want to see that before we start using the cash on the balance sheet. That liquidity is pretty important to us.

Makes sense. Thank you very much.

Thank you.

Dana Benner, AltaCorp Capital.

Good afternoon, guys.

Hi, Dana.

I wonder if green shoots would apply to any customer feedback that you've had with oil, WTI in the high CAD50s, that maybe there's a level at which some spending starts to layer back in. Would green shoots be something like that or is it more just looking at the oil price and reasoning up from there?

I'll pull back on the term green shoots a little bit. Certainly rebalancing of rig fleet and substituting a Tier 1 rig for a less performing rig is what we're seeing right now, Dana. I don't think we've seen any response on the activity front due to the slightly higher commodity prices. I think there's a lot of things moving here, a lot of customers are drilling off of a combination of debt and hedge books and things like that.

I don't consider the current price environment to be constructive particularly. I think, as we said in my comments, it's got to be a little bit higher yet before we get in the constructive range. You and I both know that any extra cash our customers get that they can direct towards drilling, they will. But I don't think we've seen that yet.

Fair enough. I guess the second question I'd have would be with respect to wage rates in Canada. So many of the sub-sectors went and put through wage reductions as part of trying to get the cost structure as low as possible. Your margins were truly impressive, down only 300 basis points year over year. But there's a point when anything has to be looked at. So I'd just be curious to know what your updated thinking is on that. I understand employees listen to these calls and these are not easy subjects, but the issue is what it is.

Yes, as I've said in the past and I'll say it again today, our field employees bear 100% risk on rig employment. So if the rig doesn't work, they don't get paid. It's my view that a couple hundred dollars a day isn't going to change economics for any of our customers on their field development plans. So I don't think it deserves like immediate attention.

I think it's something to get deflected over the longer term. I know in Canada, in particular, the CODC has a mechanism to review those annual [basis]. We support that annual review. I don't think it deserves interim review. And again, I don't think that small piece of cost changes economics for our customers in any meaningful way.

Okay. And then just third and finally for me, I wonder if you could give us a little bit more color on how things are ticking along with the Schlumberger.

Actually, pretty well. We had no prepared comments in my text or the press release. It's a tough period of time to sell value when our customers are busy trying to chop cost. So despite that, we've had an ongoing flow of work through Q1.

I think that when our customers get into a real value-focused mode in Q3, when they start looking at efficiencies, invest rigs, that's where it's really going to have an opportunity to get marketed for any other customers. I'd tell you we're happy with our Q1 performance. I think our partner, Schlumberger, is happy with Q1 performance, if you can be happy with much in Q1 of this year.

Right. Okay. I'm sure you've got lots of questioners, so I'll turn it back.

Thanks, Dana.

Jeff Spittel, Clarkson Capital Markets.

Thanks. Good afternoon, gents.

Hi, Jeff.

Maybe if we could touch on trying to preserve new build capacity in your supply chain and environment like this. Could you talk us, I guess, qualitatively through -- there's certainly not much of a new build market today. But thinking about the longer-term picture and weighing that versus cost management in this environment, just what your plans are.

Jeff, we've been pretty aggressive with our capital spending plans, going from high rate of contracted rig builds and committing to (inaudible) right down to zero if necessary in Q3 and Q4. Obviously, as we get better visibility kind of going forward, if we can do things, whether it's build a little bit of inventory or kind of increase our long lead time program a little bit to keep a few of those jobs alive, we'd like to do that.

We still have rigs to deliver yet and those rigs will be delivered through the rest of the quarter into early July. So I'm not forced to those hard decisions quite yet. But I'll comment that we've been quite clear on ramping down our CapEx as low as possible if we think we need to.

Okay. That makes sense. And I know we've talked a little bit about high-grading already. Are you seeing any instances with existing customers where they're interested in entering into discussions about revising some contract arrangements or swapping out some Tier 2 rigs for Tier 1 rigs and in exchange for that, trading with some more duration? Or is it just at this point, look, the contracts that we have, have plenty of integrity, customers want to honor those. We're paying early termination fee if it does come to that and we'll leave it at that.

You know, Jeff, I think it's fair to say that still, price and cost dominates every discussion with every customer on everything. With existing customers, I think we're still a bit early yet on kind of replacing Tier 2 rigs with Tier 1 rigs. I think they're still managing their spend rates and getting close to the end. I think any customer out there would allow us to take a current existing contract, lower the price and extend it if we offered to do that.

We've been frankly, quite reluctant to do that. We'd like to protect our current period cash flows. And as Rob gave you clarity, we've got a pretty good book of contracts through both 2015 and 2016. Preserving that current period cash flow is pretty important to us. So really more focused on not getting locked in with lower prices during these declining rig counts and trying to manage our book.

Sure. That makes sense. I appreciate the color, guys. Thanks.

Thanks, Jeff.

John Daniel, Simmons & Company.

Thanks for taking my call. Carey, congrats on the promotion. Kevin, a couple things here. First, housekeeping. I think you mentioned you exit 2015 with 82 rigs under contract and I think you said 58 or Rob said 58 under contract in 2016. If those are the right numbers, can we get the geographic breakdown?

John, this is Rob. We haven't reported the geographic breakdown, but I'd say it's, percentage-wise, not a lot different than what we've reported for 2015. More or less equally split between the US and Canada and then a handful internationally.

Okay.

And the numbers you quoted were correct.

Okay, good. Thank you. Then a question on the Tier 1 fleet. When you guys look back at rig performance over the last year or two, do you see a material difference in drilling performance between your recently built Tier 1 rigs versus those that have been upgraded?

You know, John, since the performance comes down to mud pump capacity and then rig control systems and pipe handling, if the rigs have equivalent control systems and equivalent mud pump capacity, there's no difference in performance.

Okay. As customers look to high-grade, they don't come to you and say I want that rig that was built in 2014 versus the one that was rebuilt completely in 2013.

Not much difference unless -- there's other factors that come in like the pump size, if they want to increase pump capacity. That's still continuing to be a trend. Or if they've run the rig for the past three or four years and they like the crew and like the rig, they might be incented to want to keep that rig even though it's not a 2015 rig, but in fact a 2012 rig.

Okay. And then just last one for me. When we look at the well servicing side of the business, I think the utilization rate was like 29% this quarter and obviously, I understand the market challenges. But as we look forward, the balance this year, end of next year, is it reasonable to expect that we could see that 177 rig count number get revised lower?

On the Precision fleet? Rob, you'll address the depreciation.

John, I would expect that there could be more service rig retirements as we move forward. I don't know about this year, next year. But I suspect there will be more service rigs that get retired in the relatively near future. I don't expect that to have any material impact to our business and our capability to ramp back up when demand is there.

I was just trying to get a sense for like sort of -- not the right way to describe it, but what's the clean slate if you will in terms of what's the right number in terms of truly marketed rigs within that fleet?

All of those rigs could be marketed. All of them are capable of going to work. The ones that have been sitting in the yard for a while would require a little bit of spend to get them out the door, but probably today there's 120 or 140 rigs that go to work on very short notice.

Thank you. Thanks, guys.

Thanks, John.

Jon Morrison, CIBC World Markets.

Good afternoon, all.

Hey, Jon.

How much of the CAD7 million one-time restructuring charge flowed through SG&A versus op cost in the quarter?

The majority was through G&A, but call the split maybe CAD5 million for G&A, CAD2 million for op costs, something of that magnitude.

And was the op cost side principally on the drilling side or C&P?

Both.

Okay. Did all of the restructuring costs get captured in Q1 or is there flow-through we should be thinking about for Q2 or Q3?

The majority happened in Q1. There will be a bit that you'll see in the second quarter, but it won't be nearly as large.

Okay.

Our expectation would be that we're going to see the positive effects of the restructuring start to show up in G&A in Q2, Q3, Q4.

Okay. Kevin, on the rig upgrading conversations that you referenced earlier around efficiencies, do you need to relocate rigs from basin to basin to satisfy those needs? Would you expect any form of decent duration with contracts when you sign? Or are those effectively a spot market replacement of another rig?

Short answer, yes to all of the above. But so far it's been a handful. So let's kind of look at that question again in about three months time. There could be some relocation involved. We'd probably not do that unless we saw some duration of contract, unless it was a strategic customer.

I think it's early to draw any hard conclusions yet. Certainly, we know that we can go out and satisfy some customers with some good high-spec rigs that we couldn't achieve a year ago. We're strategically aligned to do that. I think we'll make the best efforts to make sure we do it with the same returns we always get.

Can you talk about whether you expect to see any step changes in day rates in the remainder of the year? They were fairly resilient, both Canada and the US in Q1.

[URs] are covered by the contracts and by the IBC. I did allude to spot market in Canada for Q3 looking highly competitive, so that will be good pressure on day rates there. If we end up getting quite a few rigs moving back into contract status, that would be at lower than prior day rates. So I think in the US, less likely. In Canada, it's going to be a pretty rocky Q3 for day rates, depending on total spending levels by customers. Again, coverage with our deep super triples and our contracts in Canada set us up pretty well to weather through the day rates in Canada.

Can you give any sense for what the pricing delta would be between your contracted rigs versus the spot market, high level Canada and the US right now?

We'd like to see those Tier 1 rigs stay within about a 20% band of peak rates and in most cases hope to achieve that, maybe a little bit lower at times. In Canada, that could mean prices look more like the high teens. Generally, smaller rigs.

If North American activity levels were to stay flat for the balance of the year, would you expect any incremental rigs to go back to work based on the upgrading efficiency conversation you referenced earlier?

I commented on my prepared comments, we expect to see utilization of our Tier 1 rigs in a flat demand environment continue to improve through the course of the year.

Last one for me, just on the international side. Is there any displacement opportunities there that you would look at redeploying right now or you need to see better markets all around?

No, we've got the bid book right now that's as long as it's ever been, in fact with bids in three or four different countries where we have, we think, a reasonable shot. I may be a little bit pessimistic here. My experience has been that generally these awards slow down a little bit when the commodity prices are really soft. But I know we've got guys over there right now working on two different prospects and both look pretty interesting. One of them might involve some North American rigs being redeployed.

Appreciate the color. Thanks, guys.

Thanks, Jon.

David Wishnow, GMP Securities.

Good afternoon, guys. Thank you for taking the call. I guess to follow up on the comments on potentially moving North American rigs to international markets, would those be kind of pad capable, shell-type rigs, Tier 1 rigs? Or would those be older, potentially idle Tier 2 and Tier 3 rigs?

David, it's Kevin. I think there's a couple of opportunities right now to see us move some Tier 1 rigs, but likely not pad-walking rigs to international locations. Remember, for our fleet of Tier 1 rigs, they're either pad-walking right now or they can be converted to pad-walking for almost a nominal amount of capital. It's unlikely that I see us taking configured pad-walking rigs out of the US or Canada.

Okay, great. And geographically within the US, these early signs of fleet high-gradings you're seeing, is there a differential between from the stronger basins versus weaker basins or is it kind of across the board?

I think that the stronger basins are a little bit stronger. I kind of alluded to where we thought there was a bit more strength. I'm not going to get into specific day rates line by line right now. So let us report back next quarter and see how those develops.

Okay. Great. And I guess one housekeeping question. Should I think about the tax rate dropping back to historical levels for the balance of the year, or is there something going on with revenue mix that we should be aware of?

It's a little bit, the way that the IFRS has us estimate tax impacts caused a little bit of an odd answer for Q1. But I would expect that you'll see most of that tax expense get reversed out during the course of the year and will migrate towards a pretty low overall tax rate.

Okay, great. Thanks a lot, guys. Appreciate it.

Thanks, David.

(Operator instructions)

Jeff Fetterly, Peters & Company.

On the capital spending side, you reference CAD43 million of capital for rig upgrades. And then further on in the press release you talked about minimal rig upgrades or capital allocated to that. Can you reconcile those two comments first?

There's CAD43 million that's allocated to rigs that we've previously contracted and are upgrading. That number went up a little bit, primarily because of FX effect on US dollar denominated upgrades. But our expectation is we won't see a lot more through the rest of the year.

How many rigs are earmarked at this point for upgrade capital?

It's four or five rigs, off the top of my head. These were contracts that were initiated late last year, previously announced.

On the US side, you referenced 55 rigs running today and the potential for that to decline in coming weeks or broader rig activity to decline in coming weeks. Where do you expect your rig count could trough?

Jeff, could you speak up a little and repeat the question, please?

Sorry. For the US, where do you expect your rig count could trough from the 55 it's at today?

I think I'm just trying to -- we're stopping short of calling this a bottom. I think it's fairly safe for me to call Canada a bottom right now, but in the US we have a few renewals over the course of the next quarter or two that could be renewed or could turn into rigs to get racked. We're trying to be a little cautious with our forward guidance right now. I don't have any specific indication of any rig right now that I'm worried about, but that could change tomorrow.

Okay. And what do you expect in terms of the idle but contracted, the nine rigs that are in that category right now?

I'm actually a little surprised how that number stayed quite low. Because if you remember during 2009, this time in 2009 we had 20 or 22 rigs on IBC. So I'm surprised how that number has been minimized. I wouldn't be surprised to see that drift around. It's almost drifted week to week, anywhere from six to eight or nine. I wouldn't be surprised to see it go up to a dozen or stay where it is now.

Okay. Last thing for me, on the directional drilling side, I know you've referenced in your commentary it being one of your strategic priorities this year to grow the Schlumberger partnership. With revenue for that business down 56% year over year in the first quarter, how do you reconcile that with your comments earlier about seeing some success and happy with the progress of the Schlumberger partnership to date?

As I said, happy with the progress in light of a quarter where activity is off 45%. So yes, not much more to say. Right now today it's a little tough to sell, to upsell value-based services. Customers are busy trying to cut budgets. Like we're seeing with the high-grading of rigs, we expect to see an opportunity to high-grade with Schlumberger directional on our rigs as we start getting deeper into the end of this quarter and into next quarter.

Jeff, I think it's also fair to say that the total volume of directional work is way off, obviously, and it's highly competitive. But what we are seeing that's positive, is the percentage of our work that we're doing on our own rigs and the percentage of work that's done with the Schlumberger alliance has continued to improve. So the total volumes are way down, but the mix is a lot better.

That was my follow-up question, is of the directional drilling side pulling back. Have you seen gains or incremental revenue on the Schlumberger side and a greater loss on Precision directional work? Or has it been fairly proportional between the two?

First of all, I think we've pretty much wound down third party directional work to minimal. We're just worried about our own rigs and our own integrative services, which on a net basis right now is looking pretty good for us. But when you remove those third party jobs that might have been on somebody else's rig, overall our directional days are down.

Great. Thanks for the perspective.

Thanks, Jeff.

Brad Handler, Jefferies.

Thanks. Good afternoon, guys.

Hi, Brad.

I guess just following up on the Schlumberger relationship, Schlumberger has talked a little bit about offering different business models to try to encourage work. I don't know whether that wraps into your business at all. Is that something that you are also engaged in as part of -- and Kevin, I respect your comments about wrong time to start offering value in some respect, but this creates some different potential to save money for your customers as well. Is that something that you all are involved with as well?

Actually, Brad, I think we are one of those different models. I think you hit the nail on the head. I think Schlumberger is embarking on several different ways to try to create value in North America. I can't speak to their strategy, but I think one of those ways includes our alliance. I think we're one of the strategies they're using to address the market in a different way.

Understand. That I do understand. I'm wondering from a commercial term standpoint, some of their ideas involve fronting capital, there's some performance metrics related to getting paid and that sort of thing. Is that something that you all are part and parcel with them on? Is there room for you to work on the same basis?

I think broadly, we have the ability to go to Schlumberger with any type of arrangement that would satisfy both us and Schlumberger proposed that. We'd tell you that generally, in the land drilling North American space, performance-based contracts are often a feature of either a trough market or bottoming market or last ditch efforts to try to squeeze some more cost out of the service companies. We'll watch it carefully. If there is a real value play to emerge here that makes sense for Precision that involves us working with Schlumberger, there's an opportunity for us.

Good enough. Thanks, Kevin.

Thanks, Brad.

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

That concludes our first-quarter conference call. Thank you for participating today.

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