Precision Drilling Corp (PDS) 2015 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Precision Drilling Corporation 2015 second 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 second 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 second 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 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 second quarter operating results and a financial overview. Kevin Neveu will then provide business operations update and our outlook. Rob, over to you.

Thanks, Carey. Earlier today we reported second quarter results, with revenues of CAD334 million and a net loss of CAD30 million, or CAD0.10 per share. We also announced a quarterly dividend of CAD0.07 per share. Second quarter 2015 EBITDA was CAD88 million, which is 32% lower than the second quarter of 2014. The weaker Q2 results primarily reflect decreases in North American drilling and C&P activity. EBIDTA margins were 26% this quarter versus 27% in the second quarter of 2014. Our relatively strong margin performance in the face of a significant industry downturn is a reflection of our variable cost operating model, proactive fixed cost management, and contract coverage on our tier 1 rigs. Restructuring costs were approximately CAD3 million in the quarter, bringing the year-to-date total to approximately CAD10 million. We expect annualized cost savings from these initiatives to be approximately CAD25 million per year.

In the US during the second quarter, margins were up approximately CAD1,000 per day over the second quarter of 2014, and CAD600 per day over the first quarter of 2015, due to strong day rates, higher turnkey revenue, and the impact of idle but contract revenue, which was partially offset by lower absorption of overheads and a higher daily cost from turnkey. The impact of turnkey and idle but contracted rigs increased margins by approximately CAD2,400 per day year-over-year. Today, we have 51 rigs drilling or moving in the United States and 11 idle but contracted rigs. Turning to Canada, drilling margins declined by CAD400 per day year-over-year, driven by less overhead absorption, higher labor cost and rig mix, partially offset by higher average day rates. Drilling activity decreased by 52% in the second quarter of 2014. Today, we have 55 rigs drilling or moving in Canada. In our international drilling business, activity increased by 17% and revenues by 37% over the second quarter of 2014, driven by the rigs deployed to Kuwait and Saudi Arabia in 2014 and to Georgia and Kuwait and 2015, partially offset by slightly lower activity in Mexico.

Our completion and production segment revenues were CAD36 million, down 47% over the second quarter of 2014. EBITDA in the second quarter of 2015 was negative CAD1 million versus positive CAD5 million a year ago, reflecting the highly competitive pricing on low activity levels in the C&P market. As detailed in our press release this morning, planned capital expenditures for 2015 are now expected to be CAD546 million. The increase of CAD40 million since our last conference call is for the additional contracted newbuild rig for the Canadian market and additional long lead time items. Purchasing some of our key long lead time items during a downturn allows us to secure rig components that we will utilize for new builds or as fleet spares at a significant discount to normalized pricing. The expansion capital of CAD422 million is comprised of the cost to build 18 new build drilling rigs, 4 for Canada, 13 for the United States and 1 for Kuwait. All of the rigs will be super triples, either 1200- or 1500-horsepower. 17 of the 18 rigs have currently been delivered. The final Canadian rig will be delivered in the fourth quarter. Again, 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 actual activity levels.

Turning to the balance sheet, we believe that our balance sheet is strong and flexible. As of June 30, total debt was approximately CAD2 billion and net debt was approximately CAD1.5 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 an extended downturn. As of June 30, we had CAD434 million of cash in 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. In the first quarter, we also received temporary covenant relief from our senior lenders, ensuring that we will have access to our revolving credit facility as we work through this downturn. Our contract coverage remains strong. For the full year 2015, based on contracts in hand, we have term contracts for 104 rigs, 46 rigs in Canada, 47 in the United States, and 11 internationally. We expect to exit 2015 with approximately 83 contracts in place and have an average of 63 contracts in hand for the full year 2016. Note that our 2016 contracts have increased by five since our Q1 conference call.

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

Thank you, Rob. Good afternoon. I believe Rob has covered off our second quarter results, and I will speak to what we see in the market in the back half of 2015, (inaudible) to seek out and capture opportunities (Inaudible).

So let me begin with the overriding comment, because of the very distressed market. Sub CAD60, and now sub CAD50, WTI prices are very challenging for our customers, who (Inaudible). Through the first half of the year, our customers have focused on reducing cash spending through activity reductions and aggressive price negotiations. The effect of this (Inaudible), yet they have honored our long-term contracts across the boards. We will begin to see indications of customers trying to lock in these lower rates on the non-core (Inaudible) rigs for a longer period of time. And this is usually a good indication of a market evolving force. So it feels like most of that work by our customers has been completed.

Just pausing to change microphones here. I guess we have a problem. So I will start again.

It feels like most of that work has been completed. While the last couple of weeks of oil price pullback is troubling, I don't think our customers have underestimated the downside risk still in play. So we have very limited, virtually no visibility on a fundamentals-based rebound. So it's fair to say that we don't believe in a V-shaped recovery. So at Precision, we've battened down the hatches for the long haul. We've sized our business and our operations for this environment, and that has been our priority for the first half of the year. With this work largely behind us, we're now shifting our focus to searching out and exploiting any opportunities we see through this trough.

I'll begin by discussing our increase in capital spending. Rob mentioned a CAD40 million increase in capital spending. About one-quarter of this is to complete the fully contracted newbuild rig we discussed that will be deployed to the Canadian deep basin gas development drilling. And there's two takeaways from this. One is that by utilizing our fleet inventories of parts and our long lead equipment in our current inventory, we can deliver a newbuild rig in less than six months, and with a minimal increase in our increment to capital spending. And the second point is, regarding improved visibility and customer demand we see for additional tier 1 rigs for the Canadian deep gas basin. As such, we've made further decision to redeploy several of our underutilized FT 1200 pad locking rigs from certain US regions back to Canada. We expect at least five of those rigs being moved up and activated during the second half of 2015.

I'll speak more to the basin dynamics in a few moments. But it's fair to say that we believe our presence in Canada as the leading tier 1 triples driller in the deep basin will be further reinforced as we continue to grow this business segment. We expect to finish 2015 with a fully utilized fleet of 27 super triples in Canada. The balance of our capital spending, approximately 75% of the CAD40 million increase, is opportunistic spending on our part, as we intend to purchase additional long lead equipment and fleet spares, such as diesel engines, BOPs and drilling equipment. We believe that with the declining backlogs experienced by the oil service manufacturing sector, this is a perfect time to negotiate favorable pricing and terms for equipment that we'll consume in our normal operations even during a sustained downturn. So you should model that portion of our CapEx, while it's an increase in 2015, it will play out as a decrease in the following years.

Finally, I'll confirm that our headcount is down over 2,200 people from the beginning of the year. Of course, the largest element is field personnel reductions in line with our variable cost business model. But additionally, over the first half of 2015, as Rob mentioned, we expensed CAD10 million in restructuring charges, which have included consolidating six of our facilities, corporate expense reductions and certain field overhead expense reductions. All of this, we believe, aligns Precision with the current commodity price environment and current customer demand levels. So barring another significant step down in customer demand, or a significantly extended trough, we believe Precision is appropriately sized for the market we see through 2015. Now that said, our laser focus on cost control will not abate. We'll continue to leverage our scale, our procurement power, our systems, and our processes to drive cost out of every aspect of our business. We'll protect our margins and we'll focus on cash flow as the primary short-term objective we can control.

Now turning to operations, our primary operations objective is to remain and sustain our high performance competitive advantage at the rig level. And that means we'll continue to invest in training and developing of our people. For example, in Canada, our employee development rig is under construction and will be commissioned and operating late in the third quarter. This is a full tier 1 AC rig, and we'll train our people in Canada, as we do in the United States, on the latest available technology. Now, it would be very easy for us to cost defer this project, except we believe that sustaining our competitive advantage, especially through our people, is key to our long-term strategy. The results of this continued focus on high performance are truly remarkable. And most notably, we have achieved our all-time best safety performance in the first half of 2015, with over 98% of Precision's operating facilities operating without a single safety recordable incident during the first half of the year. This is a truly outstanding, excellent safety performance, certainly beyond what I would have expected. But the focus and energy we're putting into safety right now is paying off in dividends.

At Precision, we also measure and track our nonproductive rig time. And that is downtime in a rig that we cause and therefore impairs customer performance. We measure this to hold ourselves accountable to target their scale to the nearest 0.01%. That's roughly 4.5 minute downtime increments. During the second quarter, our fleet wide mechanical downtime, that's Canada, United States, international, in well servicing was less than 0.97%. Again, this is truly remarkable performance and further underpins our high- performance, high value proposition to our customers. We will know that continuing to deliver field performance better than our competition is a significant competitive advantage and especially when the industry is in deep distress. Our high performance strategy is delivering market share for us in Canada and we're seeing emerging opportunities in the US, driven by our superior field performance.

So turning to the US, our rig counts seem to have stabilized, although we experienced some slowing in the Marcellus during the second quarter, which we now believe has stabilized. We exited Q2 with approximately 52 rigs running in the US and 11 on IBC; again, roughly in line with our activity levels in April during our Q1 earnings call. I believe that provided WTI stays in the current range, our US activity has troughed. And from Precision's perspective, we have visibility on several confirmed reactivations in August and then throughout the end of the year. We expect to see our rig count begin to climb up through the third quarter, as our customers high grade existing lower tier rigs rolling off contracts. I'm not going to provide any regional detail, other than mentioning Texas as likely having good opportunities for high grading and rig reactivation.

Regarding spot day rates, or leading edge day rates -- and I know that's the question on everyone's mind -- our last guidance was in our Q1 call. And since then, we've heard of day rates as low as CAD17,009 for what people are terming as high spec rigs. The high grading opportunities that we're pursuing are pad locking rigs with high-pressure mud system high capacity mud pumps, and these rigs are attracting substantially higher day rates than those low rates I'm hearing talked about. As always at Precision, we remain focused on defending our cash margins, not utilization. Hence, we practice strict pricing discipline. And I'm not going to give any further color on day rates right now in this highly competitive market.

Looking to Canada, there seems to be an inordinate amount of angst or concern about the Canadian market. While the commodity prices in both gas and oil are a huge drag, it's very important remember that our Canadian customers have a cost base indexed to Canadian dollars, and while commodity sales are indexed in US dollars. The Canadian dollar is trading at a decade low relative to the US dollar, providing our customers with a substantial cost advantage. I think, also, I understand that the recently elected provincial government in Alberta has led to some uncertainty. I'm confident this new government is working closely and hard to engage industry and alleviate those concerns. Our view on Canada is mixed. We see the Cardium, the Viking, the Bakken plays as over supplied, particularly the [telly] double rig market. We expect day rates and utilization lowering and highly challenge in these areas for that rig category. In heavy oil, our traditional super singles market will also be challenged, and not so much by competition, just a lack of customer growth and investment.

Moving to the deep basin gas and liquid regions. This is a completely different story. This includes Horn River, the Montney, the Cutbank, Duvernay plays, and other deep basin plays in Northwest Alberta and Northeaster British Columbia. The drivers here are a combination of favorable NGL economics, substantial drilling efficiency gains, and growing investments by the LNG players. While we are not at the finish line, we are very encouraged with every required approval or decision continues to move the industry closer to full-scale long-term LNG development. This is certainly a positive for the industry and meaningful for Precision.

As we talked earlier, the contracted newbuild rig will be deployed to the deep basin late Q4, was a newbuild rig. And I've already heard several questions today about why we are building new rigs in this environment. I'm going to ad some comments about this, particularly. The day rates in economics fell well within our long-term return expectations. So it's a good deal for Precision. But more importantly, this ST-1200 has many customer specific features, and this customers has a long-term drilling program, and they preferred a new build rather than trying to upgrade an existing rig to meet the requirement. We're very happy to work with this customer on that basis, and think this is a good opportunity for Precision and very good for the customer. Equally important is that we have further visibility on other tier 1 pad locking rig opportunities. As we mentioned earlier, redeploying at least 5 of our ST-1200s from the US to Canada and then redeploying these rigs and immediately having them go to work is on our screen. The first two rigs are in process and underway. We expect to have these rigs operating in late Q3. As Rob mentioned, we have 55 rigs running in Canada currently and expect to see our rig activity gradually increasing through the third quarter and year-end.

Moving to international for a moment, our business remains strong but will not be unaffected by the depressed commodity prices. Currently, one of our rigs in Saudi Arabia has come off contract and will likely remain down through the quarter. Likewise, our rig in Georgia has completed its contract and was being bid out to others in the region. As Rob mentioned, we deployed our third rig to Kuwait late in Q2. This rig was delivered on time, on budget and started up flawlessly. And I remain very encouraged by the growth potential in Kuwait. Our international bid activity remains strong. Our visibility on potential awards is improving, and we expect to resume international organic growth in 2016.

Moving to our completions and production services group. They continue to fight anemic customer demand and severe industry oversupply. The cost reduction initiatives and scale efficiency gains our team achieved during the first half of the year are designed to drive cash flow. Now the group remains focused on cost management cash flow generation as their key short-term financial objective. We expect well completions activity will have a seasonal improvement and provide some activity relief during the back half of the year. But on the whole, this business segment remains very challenged and over supplied for the foreseeable future. Our scale, our systems and, most importantly, our excellent people will allow us to sustain our business through this deeply challenged market.

So I think I will conclude by saying the challenges faced in this market are profound. Precision is very well positioned to execute our strategy through this downturn, to continue to capture opportunities through the downturn and emerge a stronger, more diversified player when the business does finally eventually rebound. On that note, I want to thank all of Precision's employees for their continued efforts and results, with excellency through performance, superb rig efficiency, and excellent cost management.

I'll now turn the call back to the operator for questions.

(Operator Instructions)

Scott Treadwell, TD Securities.

I wanted to maybe just touch on the Canadian marketplace. Obviously, a bit of a win there with the newbuild rig and potential redeployments. Can you characterize what's happening with those customers? Is that truly a high grading where they are looking to maybe keep their rig fleet number about where it is, but they're taking a page out of the US market and moving up to the high spec rigs and away, maybe, from pad capable mechanical rigs? Or is this just organic growth for those specific customers, where there just isn't the rigs to service them in the market today?

Thanks, Scott. Good question. It's a bit of a blend of both. So for example, the newbuild rig is an expansion program, so that's additional capital being deployed in a very good play. We think that the five rigs likely are a combination of transitioning to full development drilling, away from delineation drilling. So while the mechanical [telly] double might have been a good rig to delineate the field, we think that the long-term solution is a high-efficiency industrialized pad-type triples rig. And our customers seem to agree with that. So we think this is part of that natural industrialization or transition from delineation to fully industrialize development drilling.

And then a follow-on to that, have you had any traction or is it part of the strategy to pitch the integrated directional model with the Schlumberger equipment as part of those high spec rigs?

We're pitching that on every high spec rig opportunity we have, whether it's an existing rig running or a new opportunity to go. And Scott, we are receiving growing enthusiasm. And again, the first half, as I commented on the call, the first half of the year, most of the time we spent with customers was around trying to help them get their budgets in line. That was rig count and price. The more involved discussion about the benefits and value of integrated directional really didn't hit their radar screen. But as we move into the third and fourth quarter, it's gaining more traction. I expect that we will see good customer pick up on this through the third and fourth quarter. But we're still fighting a market right now in directional where everybody is fighting to survive. The business is largely uncontracted, so it's kind of a spot market. And those that are traditional players are desperate to maintain market share.

Okay. Good. And last one for me, just on the long lead items. I just want to make sure I understood Rob correctly. We are modeling a number for maintenance capital next year. Should we think about taking CAD40 million off of that? Or is this more a hedge that you continue to replenish that inventory level through the cycle?

Scott, it's not quite that simple. If there are no newbuild opportunities next year and the year after, this capital will get rolled into maintenance and used up in maintenance. It wouldn't be all used next year, likely spread over two or three years. But we are going to spend this money extremely intelligently, buying long lead time components that can be used either for new builds or for fleet spares. I'm not betting on a newbuild rebound, that's not the point. I think the value here is that we can probably work closely with our vendors, give them some backlog right now when they desperately need backlog, probably get some very favorable commercial terms. And for us, the worst case is that this displaces some maintenance spending in 2016, 2017.

So I think the answer is, we are spending it this year. If there is no growth in the business, no growth CapEx in your model in the upcoming years, then subtract this over two or three years from your maintenance capital. Rob, is that reasonable?

Yes, that's fair. That's fair, Scott.

Perfect. And just the last one on that specific item, did the reduction in pricing you've seen for those input costs, does it give you firepower or gunpowder to go into pricing discussions with a slightly lower threshold where your economics work? Or is it not enough of the rig build cost to really change that?

Scott, we are always trying to eke out every penny we can out of capital or out of maintenance or out of operating cost to give us an advantage in the marketplace. Ultimately, we want to widen our margin, our cash EBITDA on the rig. But do we leverage our scale to reduce our cost, to increase our price competitiveness? Absolutely. The answer is yes.

Right. Okay. I appreciate the color, guys. That's all for me. I will turn it back.

James West, Evercore ISI.

Kevin, Rob, it sounds from your commentary, you're looking at a US market where high grade is going on, and we're hearing that from others, Canadian market where some plays are adding incremental rigs, and a fairly healthy bidding environment internationally. And I think Rob made the comment, you've added more contracts, I think 5 more contracts to your 16 contracted backlog. The question that I have, we've got the one newbuild to announce today. When do you think you see more opportunities to pull the trigger on additional newbuilds for next year?

I made the comment, James, that we're seeing customers trying to lock in these well-to-well day rates that are out in the marketplace right now. That's a long, long ways from newbuild economics. So we would need to see day rates come back into the return range that we traditionally want to stay. We'd want to see contract term be out in that two-, three-, four-year range. So I think we're a little ways away from that.

What I think could happen, I think if the tier 1 market tightens over the balance of 2015, which I think is possible, we could see all of the tier 1 rigs that are -- not pad capable, but pad able right now -- go back to work. We could see opportunities to further upgrade some of our tier 1 rigs to put pad moving systems on. And that for us is about a CAD1 million upgrade, not substantial, but minor. But I think if there's a shortage of pad rigs for core plays, and rigs to upgrade get exhausted, then I think you'd be into a newbuild environment, and that could emerge in 2016.

Right. I agree. I think we're getting close to that, actually a little bit more rapidly than some may realize. Can you remind me, Kevin, how many of your rigs right now you would consider pad optimal?

What do you mean by pad optimal? (Laughter)

Walking.

Currently configured pad walking rigs, we don't disclose that through our IR. I think if you go through our website and comb through it, you might find the detail there. I'm not going to give it out today. What I would tell you is every one of our tier 1 rigs can be converted to a pad walking rig for about CAD1 million, give or take some change.

Okay. I had to try. Thanks, Kevin.

Good. Thank you.

Ben McDonald, RBC Capital Markets.

Just wondering, Kevin, if the nature or the tone of the discussions you're having with some of your US clients, in terms of high-grading rigs and maybe potentially the odd additional one being added here. Has that changed at all over the last two weeks, given the slide in the commodity price?

The short answer is no, it hasn't. I think everybody's a little bit nervous. I think that a $10 drop in commodity price makes them a little more nervous. Behavior hasn't changed. Don't read that as me being enthusiastic or pessimistic. These prices, sub $60, are not helpful prices, in general. But I'll tell you, once the decision moves back to the drilling department to manage their rig fleet and have the best rigs, once they've got that and their budget's in place, the commodity price doesn't affect what they do day to day. They're not watching that commodity price making their buying decision based on today's spot price Royal. They have a budget. It's going to be in place for the rest of the year. And they're going to manage the rig fleet and pick the best rigs they can choose. So I wouldn't expect it to change their behaviors on the short term.

Great. Thanks. When we look to the Canadian market, and recognizing there is a shortage of that higher spec, high horse power IEC rigs up here, how many more rigs would you really be comfortable redeploying to the Canadian market versus putting new capital to work? How should we think about that?

So I'm not anxious to put new capital to work unless we can get a long-term contract at the returns we want. It's as simple as that. So there really is no math between how many rigs I'll move across the border. This is a unique opportunity. We've got some of our ST1200s right now. They were underutilized in the US. They are perfect for much of what we see in the Montney. And they were designed that way from the get-go. So there's not surprise to us they're going to move north and south.

I think this works out well. Other than trucking costs, it's relatively easy for us to move these rigs across the border. But we have the visibility to make that trucking cost a good investment for us. There is no limit on what we can do. I'm not going to rob from Peter to pay Paul. If we have opportunities in the US, I'd love to pursue those in the US.

So we should think about the newbuild for Canada as a bit of a customer specific one-off and the preference does remain, until things at least start to improve, to put the idle stuff to work first?

Yes. You know, we discussed this earlier today. It's a Precision ST-1200. So it's not a custom-build rig. It's an ST-1200 with additional features on the rig the customer wanted. So the additional features we could have done on an upgrade, but the customer wanted the rig for a number of years and really preferred a newbuild rig and was prepared to build for us the appropriate economics. So yes, it's customized for the customer. It's not unique in its ability, though. And the returns are good and the contract duration is what we prefer.

But the rest of your question, I think, is, yes, we have a definite preference to put the existing fleet back to work before we would add any capacity to the fleet.

Great. Thanks a lot, guys. I'll turn it back over.

Dana Benner, AltaCorp Capital.

I wanted to start with the issue of market share. It's certainly a very favorable part of the Precision story right now. And I wonder if you can give us some more color on where that's happening. Undoubtedly, it's probably in the deeper market. But whether you want to talk Canada or certain regions of the US, any color would be great.

Looking at Canada right now, where I think there's a lot of moving pieces, Dana. We're running 55 rigs today. 21 of those are super triples. And we expect that that will increase over the course of the year. We could be at 27 by the end of the year with the newbuild and with the 5 redeployments. As a market share percentage, that puts us high 30s, low 40s of that market. And I'm quite pleased with that. That's not untypical for Precision on resource type plays in Canada. We had that type of market share in heavy oil, when it was a resource play. It's slowed down right now. We still have a good market share of a much smaller market. But the balance of our activity is right there. We still have another 34 rigs running in non-deep basin gas. And around the province, we're competitive. We're making good returns on those rigs. But that gives you a good sense of our positioning, right now, today.

I'm quite pleased with the way Q2 went. We troughed down at 18 or 19 rigs. But the industry really took it on the chin in Q2. We had a pretty good run through Q2, with our pad rigs running through the quarter. So in a challenged market right now, I'm feeling good about our positioning and where we are today and where we'll be at the end of the year.

Moving to the US, I don't have the basin by basin details, but I had mentioned that we saw a bit of a pullback, a broad-based pullback in the Marcellus that we also experienced in Q2, and that took us down from mid 50s to low 50s in rig count. But we've been stable in the balance of the basins. And what we're seeing in the US right now is an opportunity to start increasing our rig count, particularly in Texas. I don't want to get basin specific there, because it's very competitive. But expect that in August and September, October, we could pick up 1, 2, 3, 4,5, it could be 10 rigs over time. And all of that is high grading. I think that happens, even if the US rig count stays flat.

Right. That's very helpful. I recognize what you said about it's so easy to take anecdotes on spot day rates, and lots of people love to apply that across an entire rig fleet. But to the extent that you put these additional rigs back to work later this year, presumably you'd be doing that at somewhere in between the type of spot rate metrics people love to quote and say where those would have been on their last term.

Yes. We didn't come prepare today with good disclosure or good detail on EBIDTA margins per day. I'd like to help clarify it over time, but not ready today. The short answer is, we'll be tactical with what we do. But I expect the way you described it, the day rates will be something higher than those troughs you're hearing about. They will be off the peaks. They will be off the peaks by CAD4,000 or CAD5,000 or CAD6,000 a day.

Right.

But I will add to that. If we're upgrading a rig to make it a pad walking rig, for example, we will charge for that upgrade and we'll returning that capital to Precision inside our normal economics. So if we're investing capital in a rig, that return comes back to us as it would for any invested capital at any point in the cycle, just like the newbuild for Canada.

Right. Okay. Third and final question. I've asked you this before and I just wonder if maybe you've changed your thinking a little bit. That is, given the bid activity going on in the Middle East right now, I just wonder if you are getting maybe a little bit more aggressive in the way you look at that region. I know you've laid out kind of a long-term strategy about how many rigs you want to add internationally per year and that certainly makes sense. But if the opportunity is there and you certainly have the capacity to bid and to move rigs into that region, I just wonder if maybe you'd get a bit more aggressive.

Dana, we desperately seek critical mass market share. Getting another 10 rigs would be really good for us. We've also learned enough, now in the last several years of working internationally, that these are long-term contracts, they're stable. They deliver fixed returns. So we're a little less focused on trying to get peak returns every time we make the investment and we're looking more full cycle. So that probably gives us a little bit more leeway on the competitive edge. But I'm also going to tell you we're not going to loss lead to gain market share.

The simple guidance is a very controlled, measured, three to four rigs per year in a better market, I'd be happy with. And I'm thinking that 12 months from now, we'll be back on that path. And I commented that we like certain markets. I commented that we've got good visibility on our bid book right now. I think we are well on the path to growing that business, and we may have some news later this year on growth.

Let me ask the question this way. If there were a 10-rig contract -- and I have no idea if there is -- if there was a10-rig contract in Saudi, a place you're already operating, what would prevent you from bidding on that, if you thought you could get good metrics, notwithstanding the fact that you'd like to grow at a more measured pace, generally?

Nothing prevents us from bidding. What might prevent us from winning the contract is that it's a six or seven tender, six or seven company tender bid, we will never be lowest on the six or seven company tender. If Saudi went out to bid for 10 rigs and if there were seven or eight qualified bidders, we will never win that one.

Right.

If there's three qualified bidders and they are all kind of high spec type dealers like us, we've got a pretty good shot. Our scale and our size, and our competitiveness and things we talked about, give us an advantage.

Okay. That's great color. I'll turn it back. Thank you.

Jon Morrison, CIBC World Markets.

Was there any material ongoing monthly revenue or one-time payments from idle but contracted rigs in the quarter?

Call it an average of about 10 idle but contracted rigs throughout the quarter, ranged from 9 to 12. And there were no contract cancellations that were just paid out. But we continue to have, I think today, it's 11 rigs that are idle but contracted, and that did have an impact on revenues and margins, as I mentioned in my prepared comments.

Can you give a sense of breakdown, Canada, US?

That's primarily all US. In the Canadian market -- I don't have it in front of me -- but it wasn't nearly as significant a number as it was in the US.

(Inaudible) in Canada it's a little different.

Is it fair to assume that that's going to carry on into Q3 and Q4, to some extent?

I think that's largely dependent, Jon, on what happens with commodity prices. I think in this commodity price environment, it's likely that we'll have either, call it, high single-digit or low double digit number of rigs that are idle but contracted through the balance of the year.

On your comments about the newbuild, can you give any idea of what's different about this rig versus something that you'd have to upgrade on a current SC-1200 rig? How's it different --

The short answer is, no, I will not, because we're doing this for our customer's specific drilling program. We would never disclose that detail. But nothing we've done in the upgrade makes the rig unique in that it can't drill anywhere for anybody else.

You mentioned five being the base case for redeployments. Do you care to share any sense of what an upper end of a redeployment from the US to Canada could be at this point?

You know, I'd say it would be driven by customer pull in Canada, and by this high grading that we expect to happen in the US. All things being equal, I would rather leave the rig in the US, if we can put the rig to work in the US. But at the same time, if we have an opportunity to continue to grow our market share in Canada, I'd like to do that, too. But if it's a head up equal decision, the rig will stay in the US. Beyond those five, there's room for more. Not going to quantify how many more at this point. I do expect that whether two or five, by the end of the year, those rigs are likely working somewhere, be it in the US or Canada.

Is it fair to assume that you need some sort of a base duration from a contract, from a customer, to incur the travel costs? Or it's just a broad read on the market at this point?

We wouldn't bring these bring these rigs up without a firm commitment.

Rob, on the ordering of long lead time items, can you give any sense of the pricing discounts that you are able to get on those to ultimately pay up for the assets today that you might not use until 2016 or 2017 under a bearish scenario?

Jon, we're in the middle of negotiating these. And it varies, depending on vendor. So I'd rather not comment on what the number might be. But it's a range of discounts. And let's just say that they're good enough, we expect they're going to be good enough that it really does make sense to commit to this equipment now versus waiting for the next year or two.

Alternatively, if it's not, we may not commit to the equipment.

In Canada, you are obviously going to follow the CODC wage rate schedule. Can you give any idea of whether there's been a material change in field rates from the US at this point?

Sorry, could you repeat the question?

I realize you are going to follow the CODC wage schedule in Canada. But in the US, has there been any material change on what you're paying guys at the field level on an hourly or daily basis, at this stage?

We adjust our day rates in the US on a basin by basin basis, depending on the competitiveness of the basin. We don't disclose what we're doing on a rig by rig or area by area basis. Generally, our contracts are structured so that if there's increases, we pass those through to the customer, but we're also compelled to pass through decreases. So we're doing the best we can both by our people and by our customers to manage costs.

The bottom line is, if we get a decrease, there's no effect to Precision, because that benefits our customers. If we hold our prices, no effect to Precision. If we increase prices or rates, there's no effect to Precision. So we are neutral and we are compelled to, in this kind of market, try to protect our people.

Of the incremental contracts you guys have signed since the Q1 results, was it a material change in rate on those recontracts relative to what you've got contracted previously going into the downturn? Spot markets have been all over the place. I'm just trying to get a sense, if you're signing a contract, whether it's materially different than what you would've signed.

If we're locking in for a long-term contract and it's adding to our 2016 backlog, those rates would not be what you're hearing specified for trough market rates, and they'd be much closer to our traditional rates.

On the international side, how many rigs do you guys expect to run in Mexico in the back half of the year? You gave good color on other regions.

We don't expect any changes in Mexico for the back half of the year. Our current activity level should stay in place. If, for whatever reason, the IPM project picks up steam, we could have more rigs go back to work.

In your comment earlier, Kevin, about going back to an organic growth market, or organic growth within the international market, is it fair to assume that you are going to preference redeployments over newbuilds in that opportunity, as well? Or ultimately you want to keep idle rigs in the US for when the market turns?

I would tell you that I preference utilization. So if we can move rigs internationally and get similar returns and better utilization, I'd be happy to do that. But it's generally driven by customer specification. So if the specification allows redeployment, we'd be happy to redeploy, if the returns are good. If the specification requires newbuild and the returns are adequate and the contract duration's appropriate, we'll newbuild.

Appreciate the color. Thanks.

John Daniel, Simmons & Company.

Rob, given where your rig count is today, it would appear that your US rig count for Q3 will be down slightly quarter over quarter. If that's the case, would expect to see the operating cost per day increase?

In as much as we'd have less rigs running to absorb the overhead, yes, that would be true. But we're down a couple of rigs from where we were, on average, in Q2. So I don't think we're talking about a huge effect here, John.

Okay. Hope springs eternal, though. When the rig count recovers, let's say you get back to Q1 levels, pick a quarter, it doesn't matter, maybe it's 80 rigs running. Given all of the -- and I'm going to focus on the US here -- all of the cost reduction initiatives that you guys have been putting forth, would your operating cost per day be lower in a new environment?

That's likely true.

Okay. You mentioned that you wouldn't move rigs unless you had a firm commitment. But can you say if the rig moves are being paid by the customer, or will that show up in the Q3 costs?

The moves will show up as expense in Q3, as most of our moves show up as expense through the quarters. But the commitments will cover the cost of the move, over time.

Okay. Would that be US costs or Canada costs?

It's a combination, John. It's not split exactly 50/50. But it would be a little bit weighted to the Canadian side of the business.

Okay. Last one for now and I'll jump back in the queue, because I've got a few more. But can you provide the geographical breakdown of the contracts in 2016?

No. We haven't provided that color. If you look at the contract split today, it's roughly 46 in the US, 47 Canada -- or maybe I've got that backwards -- and then 11 internationally. That ratio doesn't change a lot.

Okay. I will get back in. Thanks, guys.

Sean Meacham, JPMorgan.

As you said, you're not planning for a V-shaped recovery.

Actually, we're calling -- this is not a V-shaped recovery. That's done.

That's what I'm saying. So you're not planning for something of that nature, right? So if the market troughs for several quarters, or even, let's say, demand improvement is limited to a certain selection of the high spec part of the market, just the most ideal 1500-horsepower, walking capable, et cetera, do think there's potential for greater bifurcation between day rates for high spec rigs than what we've seen historically?

Right now, all conclusions about day rates during the first half of this year are really hard to stretch out longer term. That's the first comment. Second comment is there was bifurcation in day rates in 2014 between full V-pad walking rigs and non-pad walking rigs. So that bifurcation was already in place in 2014. Our day rates were higher for pad walking rigs versus non-pad walking rigs. The difference was that capital investment in the pad walking system. For us, it's about CAD1 million, CAD1.5 million improvement to make it a pad walking rig for any of our tier 1 rigs.

So I don't think it changes. I think we are really tight on pad walking rigs right now in the industry. Maybe it's 70% utilization, maybe it's 60% utilization. But I think that quickly rebalances. I think you could see that balanced out during the third quarter, early fourth quarter. And then we're back, probably adding some pad walking systems on to our other tier 1 rigs. So if there is some variance in pricing between pad walking versus non-pad walking, it's logical, it should be there. And we can probably take advantage of it with our tier 1 rigs.

Okay. Fair enough. We spent a lot of time talking on cost, especially on the CapEx side. Anything else, as we think about -- Rob mentioned the prospect of lower cost absorption as rig count ticks a bit lower in the second half. And are there any other levers you have to pull on the cost side, procurement, anything else that's out there, or maybe things that you've done in the first half that haven't shown up yet and may materialize in the second half?

Sean, for the most part, the cost savings initiatives are largely complete. There are a few things on the fringe to tweak, and we'll continue to be as diligent as we can be on the cost side. But there is no big step down on daily operating cost that I foresee.

Other than the cost savings you described having been fully recognized yet.

What we said in the comments, we've spent CAD10 million-year to date restructuring. So obviously, that CAD10 million is not going to get spent again. And that's going to generate an annualized cost savings of about CAD25 million, which is a mix of that is in operating expenses and G&A.

Okay. Fair enough. Thank you.

Jeff Fetterly, Peters & Company.

Rob, just to clarify your comments earlier. You said the IBC revenue impacted margins by CAD2,400 per day?

What I said was that IBC and turnkey, the higher turnkey revenue, impacted margins by CAD2,400 per day. And let me see if I have the breakout handy. I don't have it in front of me. Let's see -- IBC made up about two-thirds of that.

And that's referring to -- that's an absolute metric, or is that a relative or year-over-year metric?

It was year-over-year. But a year ago, there was no IBC revenue.

Okay. You said on the Q1 call you guys have had one rig buy-out to date. Is that still accurate?

Yes, it is. Nothing's changed on that front.

Okay. What's your line of sight? I know you mentioned the IBC side should bounce between high single digits and low double digits. How long do you think that carries for in this type of environment, and what's your line of sight for any future contract buyouts?

Don't expect any future contract buyouts. We've been told that some of those rigs might come back in late Q3, Q4, but it's a might, not a promise yet. Obviously, we'd rather see the rig running than collecting a returning to be parked, because that's not creating value for our customers. But it depends on how our customers manage their drilling budgets between now and the end of the year. Expect, likely, all those rigs start up next year and run in 2016, as they've got full budgets again reloaded for 2016 for a while.

Your commentary earlier about displacement opportunities in the US especially, is that in the context of IBC rigs going back to work with customers, or is that incremental to that?

Absolutely incremental rig count, in addition to the 51 rigs running and 11 on IBC.

Okay. From a CapEx standpoint, I know you said CAD78 million is the sustaining and infrastructure expenditure. But what would you view, in this type of environment, your base maintenance CapEx right now?

Call it somewhere between CAD50 million and CAD75 million per year. So if we're in this sub $60 or sub $50 WTI environment, we can run this business for CAD15 million a quarter in maintenance CapEx.

And when you think about 2016, agnostic of any new builds, incremental new builds, how should we be thinking about your base level spending for next year?

I think that would be it, Jeff. Our maintenance capital would be somewhere between CAD50 million and CAD75 million. If there are no opportunities with proper contracts and good returns, then there will be very limited expansion capital. So our total CapEx could be in that CAD50 million to CAD75 million range.

It could be reduced by some of this long lead purchase we're doing this year, if it's that dire. Because we are pre-spending this year. If that program delivers the results we expect it to deliver.

Last item, around the rig transfers. When you say commitment, what sort of commitment length or structure are you looking for in order to move rigs back into Canada, or into Canada?

Since we're deep in negotiation with customers, I'll make no comment.

Okay.

Simple comment is this is a very good investment for Precision to make, both from a financial return perspective and from a market share perspective. We're not compromising.

Jeff, this is limited expenditure to move these rigs. These are existing assets, so it's limited expenditure to move the rigs. We're going to move these rigs only when we're highly confident that they are going to go to work.

Is it safe to assume that the majority of the transfers are coming out of the Marcellus?

No, several basins.

Okay. Great. Thank you, guys. Appreciate the color.

John Daniel, Simmons & Company.

John, didn't we just talk to you?

You guys are kind to put me back in. I appreciate it. I know you want to avoid the pricing commentary, for competitive reasons. I get that. But when you go out and talk to folks in the field -- and I know others do, too -- but you get these guys that are saying that they're putting rigs to work and bidding it in the CAD16,000 to CAD17,000 a day. They talk about stuff that's going off less than that. Everybody's got a good rig, or so they say. But I'm wondering here, and I know that typically the smaller guys are going to undercut the larger players. Do you see any risk that the large guys, you being one of them, for sure, who may be more focused on defending rates and emphasizing value propositions to customers, but in the short term, let's call it the next one to two quarters, could lose market share to the smaller players because they are a bit more willing to compete on price?

John, short answer is, probably not at all. We really don't come up against what you are terming as smaller players. We are competing against one of the other top two or three drilling contractors, and that's really it.

Okay.

Part of it is that we're smaller, so we don't have the same breadth of exposure as some of the other larger US drillers might have it. We are focused on those top 10, 20 E&P companies. And that's where our opportunities lie. And they place a higher premium on -- let's call it the industrialization of the process -- large capabilities, safety, the big company things we deliver around process and management and consistency, predictability. We just don't come up against -- whether it's a private equity drilling contractor or a mom-and-pop or even a smaller public.

Okay. Fair enough. A point of clarification. When you guys talk about your Q2 rig counts averaging 58 rigs, did that include the idle but contracted rigs, or was that just the rigs turning to the right?

That's just the rigs that are turning to the right or moving and being paid for. The IBC rigs are on top of that.

Okay. Just a final one for me. It's going to show my ignorance as it comes to Western Canada. But if you had to guess, what's the right market size up there in terms of rigs needed, super triples that could be needed in the marketplace?

That's dependent on how much the deep gas play -- that's dependent on how much the deep gas play grows, and it continues to look to us like that's got legs. That's a market where the super triples market is just about fully utilized. And so it looks like a very attractive market for us. And as Kevin mentioned earlier, our market share in that play is much higher than our overall market share in the Canadian market. And our intention is to keep it that way.

Fair enough. Thanks for putting me back in.

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

Thank you for joining us on our Q2 2015 conference call.

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