Precision Drilling Corp (PDS) 2015 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Precision Drilling Corporation 2015 fourth-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.

Thank you. Good afternoon, everyone. I'd also like to welcome you to Precision Drilling Corporation's fourth-quarter and year-end 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 fourth-quarter and year-end 2015 results. Please note that these 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. We caution you that these forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from our expectations. Please see our press release and other regulatory filings for more information on forward-looking statements and these risk factors.

Rob McNally will begin the call with a brief discussion of the fourth-quarter and year-end operating results and a financial overview. Kevin Neveu will then provide a business operations update and our outlook. Rob, over to you.

Thanks, Carey.

I'm going to comment on a number of items today including our balance sheet, liquidity, dividend, capital spending, rig decommissioning, and, of course, the quarterly results. If this downturn persists -- and our visibility into the second half of 2016 is murky at best -- deleveraging the balance sheet has become our key priority. While our balance sheet is very manageable with long-dated senior unsecured notes and a strong liquidity position, we believe it is prudent for us to reduce the net debt levels as we work through this downturn. As of December 31 we had CAD445 million of cash on the balance sheet and an undrawn $550 million revolver. Our first debt maturity is not until 2019. We did also suspend our quarterly dividend, which will further strengthen our liquidity position, as the suspension will save approximately CAD21 million of cash per quarter.

Let's turn to capital spending. As detailed in our press release this morning, capital expenditures for 2015 ended up being CAD459 million, a decrease of CAD72 million since our last conference call. The decrease consisted of CAD50 million of cancelled spending, CAD34 million deferred to 2016, partially offset by CAD12 million of foreign exchange impact. Our 2016 capital budget is now expected to be CAD202 million, up from our third-quarter 2015 press release of CAD180 million due to the CAD34 million of carry-forward, a CAD19 million foreign exchange increase, offset by an additional CAD31 million of cancelled expenditures. For 2016 capital spending, CAD156 million is expansion capital, which is primarily the two 3,000-horsepower new build rigs we announced last quarter that are going to Kuwait. The CAD46 million of maintenance upgrade and infrastructure capital will flex up or down with activity levels. The significant decline in capital spending demonstrates our ability to conserve cash in an extended downturn. So, to be clear, if you adjust for FX changes, we have permanently removed CAD81 million of spending from our 2015 and 2016 capital budgets since our last conference call.

As we detailed this morning in our press release, we have accelerated our transformation to be a pure Tier 1 driller through the decommissioning of 79 drilling rigs, leaving us with a fleet of 236 Tier 1 rigs and 16 Tier 2 rigs that are high-quality candidates to be upgraded in a stronger market. We believe that the Tier 1 rigs will dominate the North American market for the foreseeable future and that the older, slower rigs will have a very difficult time competing.

As for the quarterly results, we reported fourth-quarter revenues of CAD345 million and a net loss of CAD271 million. The net loss included an after-tax asset write-down and impairment of CAD254 million. Fourth-quarter 2015 EBITDA was CAD111 million, which is 53% lower than the fourth quarter of 2014. The weaker Q4 results reflect decreases in North American drilling and C&P activity. EBITDA margins were 32% this quarter versus 38% in the fourth 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 CAD7 million in the quarter, bringing the year-to-date total to CAD21 million. We expect the annualized G&A and operating overhead cost savings from the restructuring initiatives to be approximately CAD100 million.

In the United States during the fourth quarter, margins were up about CAD300 per day over the fourth quarter of 2014, due to strong day rates and the impact of idle-but-contracted revenue, partially offset by lower absorption of overheads and higher repair and maintenance costs. The impact of idle-but-contracted rigs increased margins by approximately CAD1,400 per day year over year, and reduced margins by CAD1,300 per day sequentially. We averaged 9 rigs on idle-but-contracted status during the fourth quarter. Today we have 31 rigs drilling or moving in the US and 5 idle-but-contracted rigs.

In Canada, drilling margins improved by CAD3,300 per day year over year, driven by higher average day rates and shortfall payments, partially offset by less overhead absorption and higher labor costs. Shortfall payments contributed CAD3,600 per day to the fourth-quarter 2015 day rate. Drilling activity decreased 51% over the fourth quarter of 2014 in Canada. Today we have 57 rigs drilling or moving in Canada. In our international business, activity decreased by 23% and revenue was essentially flat versus the fourth quarter of last year. Average day rates increased because of another rig deployment in Kuwait and an early termination payment in Mexico of CAD6 million.

Our completion and production segment revenues were CAD41 million, down 53% from the fourth quarter of 2014. EBITDA in the fourth quarter of 2015 was negative by about CAD400,000 versus a positive CAD16 million a year ago, reflecting the highly competitive pricing and low activities in the C&P market. I would remind you that we did incur restructuring charges of approximately CAD2 million in C&P during the fourth quarter, effectively pushing us to negative EBITDA.

Given the recent impairments in asset decommissioning we want to give some guidance on depreciation. We expect depreciation to be approximately CAD110 million in the first quarter and then declining slightly through the year, assuming that exchange rates remain constant. Our contract coverage remains solid. For the first quarter of 2016 we have 70 rigs under contract and have an average of 60 rigs under contract for the full year of 2016. In 2017 we have contracts in hand to average 30 rigs for the full year.

In conclusion, we believe that we are very well-positioned not only to weather this downturn but expect to grow market share because of our balance sheet, strong liquidity position, high-quality rig fleet, strong operational performance, and our portfolio of term contracts.

With that, I'll turn it to Kevin for further discussion of the business and the outlook.

Good afternoon. Thank you, Rob.

Normally I would say it's good to put a year like 2015 behind us, but unfortunately the challenges as we enter 2016 has only intensified. Before I begin my operations review I'd like to make a couple of opening comments.

During the year of 2015 at Precision we have parted way with many excellent and loyal Precision employees. While those decisions were incredibly difficult to make, and particularly hard on many families affected, this management team remains focused on preserving our financial strength and our competitive positioning. The other decisions, such as closing and consolidating facilities, retiring our legacy rigs, and suspending the dividend, have all been equally hard but well-studied and deeply thoughtful decisions. These actions all serve to improve our liquidity by throttling down capital, cutting costs, and reducing spending. This was demonstrated in the fourth quarter as we maintained our cash balance while continuing to improve our market share and our competitive positioning.

In 2015 Precision achieved our all-time record for safety performance; also achieved our all-time record low nonproductive time. And these are important metrics that our customers use to differentiate rig performance, particularly when the industry is struggling. And this is a credit to the thousands of Precision field and office employees who remain deeply committed to the success of Precision Drilling.

Now, regarding the retirement of our legacy rigs, largely the balance of our Tier 2 and PSST fleet, this is absolutely the right decision. We will, of course, scour these assets and recover all the usable, salvageable components, equipment, spare parts and drill pipe. But we are not in a hurry to cut up or auction our remaining equipment as we'll look globally for all opportunities to maximize the disposal value of these assets. We're confident these rigs, whether disposed as components or complete rigs, will never compete with our remaining fleet of Super Series rigs.

The majority of Precision's 238 Super Series rigs have been commissioned or upgraded over the of last five years, and have been funded by customer take-or-pay contracts. The rigs have all been designed from the ground up, with integrated top drives, digital drilling control systems, mechanized pipe handling, and with integrated or clip-on pad walking systems. These Super Series rigs already have adequate mud pump capacity or we can easily insert a third mud pump on the rigs that don't have one, or we could upgrade these rigs easily and quickly with high-pressure mud pumping. We do not believe or anticipate any differentiation within the Precision Super Series fleet other than total depth rating. Now, this fleet of Super Series rigs are truly best-in-class, resource-dialed pad rigs that offer our customers maximum drilling efficiency, reliability, consistency, and safety. And I believe our growing market share in the key North American resource plays substantiates this view.

But the rig -- that's only half the story. Precision prides itself on the quality, skills, the commitment and excellence of our field rig crews. And despite these very challenging times we'll continue to invest in our people and continue to maintain the high standard of performance we achieved in 2015. During the first quarter of 2016, we are commissioning our Nisku employee development rig. This is a state-of-the-art rig, which includes all Super Series rig features, so that we can train and develop our personnel on the most advanced rig technology in use today. Our customers will tell you that the quality and performance of the crew is one of the most important factors in rig choice. Continuing to raise the bar on crew performance remains a cornerstone of Precision's high-performance, high-value competitive strategy.

If you recall back to Precision's October earnings call, we surprised some as we spoke to prospective 30% to 50% spending reductions by our customers. So we are not surprised to see these headwinds materialize with customers, and further demand erosion in the first part of 2016. Specifically, in Canada, our peak rig count this winter has been 65 rigs in the third week of January and is currently running 57 rigs. The deep basin gas drilling segment remains firm, with Precision holding strong market share with our Super Triple 1200 and 1500 pad rigs. Now I think we know that one LNG participant has formally announced a delay in their investment decision time frame. And this should not come as a surprise in today's environment. But we are encouraged this operator did not choose to exit the project. Despite this uncertainty, activity is holding in and we remain encouraged by the deep basin opportunity for Precision in Canada. Looking beyond the anemic winter drilling season, we expect muted activity during spring breakup. Precision should sustain rig counts in the low teens. And we see our business well supported by the take-or-pay contracts we have in place.

Looking beyond Q2 to the latter half of 2016, as visibility fades, we do expect some of our larger customers, particularly those operating in the deep basin, to remain moderately active in the back half of the year. We also believe that the recently announced Alberta royalty framework has potential to encourage additional investment, providing commodity prices are supportive. And we're pleased that the current framework, which has some deep drilling incentive expiries in the fourth quarter, has been extended to year end. However, the shallower basins in Canada remain highly competitive, with limited pricing discipline. It's clear that these depressed rig day rates are not sustainable for the long term. Again, fortunately Precision's strong contract position, our customer quality and diversity are important factors as we manage through this downturn.

In the United States, the trend is progressing as we expected with rig demand continuing to weaken. This is not a healthy environment for drillers. Again, I'm somewhat comforted by our contract coverage and our competitive positioning. But like Canada, leading edge day rates, while appearing stable, are not sustainable for the industry over the long term. The Permian region remains the strongest basin in the US. And the sharply reduced service costs and the good well results enjoyed by our customers are helping support activity through this difficult period. I also expect a small component of this activity is to prevent lease expiries, which should also help to support Precision's activity. Outside the Permian, all other regions remain intensely challenging. And until commodity prices improve, there's no hope for activity stabilization or pricing improvement.

Our market share has shown improvement and some might say that's due to our strong contract book. But I need to point out, we wouldn't have these long-term contracts were it not for our competitive positioning. Earlier this year, in mid January, one customer notified Precision that they will buy out two rig contracts with lump sum payments. We've worked with another customer to defer a rig commitment to the following year. Those three, and including one contract termination in Mexico, brings our total contract buyout count to just five rigs since the beginning of this downturn. We believe this limited number of contract buyouts speaks to our customers' view of Precision's performance and their desire to retain access to our rigs. Now, while our customers are focused on cutting spending, they're not totally disregarding economic value. And ultimately, the axiom that the best rigs are last to be laid down and the first to be picked up stands, and will advantage Precision when this market inevitably rebounds.

Turning to our international business, the effects of the low commodity price are somewhat muted, particularly by national interests in the countries where we operate. While I've heard some questions regarding our decision last year to invest more capital in Kuwait, Kuwait remains the most stable market in the world for Precision. We have Super Series assets supportive of strong contracts and, most importantly, by a customer who's committed to honoring those contracts through the cycle and who, in fact, may be planning to increase activity in the future. Now, while Precision will remain extremely cautious about deploying additional capital in this environment, we do remain encouraged by the long-term prospects in Kuwait and, for that matter, in the Arabian Gulf region in general.

Our activity in Mexico is 100% supporting IPM contracts with large IPM providers. And late last year we activated a drilling rig for one of the other IPM providers we didn't historically do business with. We would like to see this relationship grow. As I mentioned earlier, we had one rig in that Mexico IPM project also terminated during the fourth quarter.

Looking for a moment at our completions and productions business, as Rob mentioned earlier, we completed a significant organizational restructuring during the fourth quarter. Very low customer demand and the fractured undisciplined nature of the competitive environment will continue to put undue pressure on this business segment. While cost management will help to mitigate this situation -- and for Precision our scale and size will help reduce the impact -- the well service industry desperately needs a recovery to ensure some semblance of sustainability.

Now, I think to leg down commodity prices following the December OPEC meeting was generally not anticipated by many, including us. We did, however, anticipate the sharp reduction in customer spending, as we believe that oil commodity prices, even in the low CAD40s were just not healthy. While some unconventional plays may work today with prices in the CAD40 range, that work is underpinned by unsustainably low oil service pricing in general. We believe the substantial under investment by producers during 2015 and now progressing through 2016 will inevitably lead to real and meaningful production declines and an eventual commodity price recovery. Of course, we do not have a firm view of the timing of that recovery. But at Precision we'll stay well-focused on ensuring that have the right assets, the financial capacity, the people, the benefits, and the competitive positioning to take full advantage of this inevitable recovery.

I'd like to conclude by thanking all the people in the Precision family for the hard work, the incredibly tough decisions, and the dedication to the success of our Company through this prolonged downturn.

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

(Operator Instructions)

Our first question is from Scott Treadwell from TD Securities. Please go ahead.

Thanks. Afternoon, guys. I just wanted to just jump into the --

Scott, do you mind if I interrupt you? We can barely hear you.

Is that better?

That's better. Thank you.

I just wanted to jump in on the cancellations. You talked about the four rigs that have come down. Can you just give us a sense how much time was left on those contracts and the magnitude of the lump sum revenue you expect to get, which I assume is going to come in Q1?

Since we haven't reported Q1 and don't give guidance, I won't say much about the lump sum revenue. But two of the contracts would have been contracts on rigs that were deployed late 2014, early 2015, and would have had a long duration left. So, we'll earn back the full cancellation fees, the full projected cash flow for those rigs in lump sum payments during the first quarter for two of the rigs.

One of the rigs was really a juggling of commitment, and really just pushes out a little more revenue into 2017 for a very good customer. And that's actually -- we think that's an okay deal. And the third cancellation was in the fourth quarter -- late in the fourth quarter, in Mexico, and that money was recognized in the fourth quarter.

And we did report that, Scott. That was the CAD6 million that was mentioned in the press release.

Okay. Perfect. The other thing I wanted to chat about, you gave us some guidance on D&A. That makes sense. On the maintenance capital side, obviously it's leveraged to activity, or correlated, but at some point there's a de minimis number. If you just have the rigs under contract and had nothing else work, what would maintenance capital look like for you guys this year?

Scott, that would be the 60 rigs running for the course of the year. These retirements that we have, we can go to those rigs and scrounge a few pieces and parts off the rigs, that will probably likely end up reducing our maintenance CapEx, in any event. But you can use our longstanding trends for maintenance CapEx on just the 60 rigs. And --

Scott, a pretty good rule of thumb is CAD1,000 per operating day spent on maintenance CapEx. That's not perfect, but that's pretty close. And what I would tell you is that the CAD44 million that we're projecting for maintenance CapEx in 2016 reflects the activity levels as we see them right now, and it also reflects us maintaining the rigs at full capacity, meaning we're not out robbing parts and pieces off of rigs that are stacked.

If things were more desperate and we wanted to drive CapEx down further, we could drive it down to something that rounded off to zero by taking equipment off of stacked rigs. That is not our intent and this maintenance CapEx program is robust enough to keep our full fleet ready to go.

Okay. Perfect. The other question I had was on the working capital side. Typically we get a nice build in working capital in Q1. It's entirely possible that a lot of guys could see a draw. Is there much more, structurally, of working capital to come out of the business, managing inventories lower, anything like that? I'm assuming that payables and receivables have probably run their course largely, but just wondering if there's much more to come out of the business on that side.

We didn't have the normal big increase in the Canadian business in Q1 versus Q4. So, there's not a big working capital change there. Then, as we go into Q2, we're going to see the Canadian business decline because of spring breakup, and the US business there's a few more rigs have come off than what we had running in the fourth quarter. So, I would expect that we will actually have a bit of a working capital recovery as we work through late Q1 and into Q2.

Okay. Perfect. Actually the last one I had was just on the restructuring and headcount reductions that you guys have made. I know in the past you've always referenced an ability to add 100 or 150 rigs on relatively short notice. What does that number look like today in terms of your ability to add rigs? It would be great if that was a problem to deal with. But just wondering what the magnitude looks like now.

Yes, that would be a first-class problem, for sure. Scott, I don't think that we're going to be the bottleneck. When the industry starts to come back up, we will be able to put rigs back to work as fast as we need to. And we still are very focused on maintaining our field leadership -- so our drillers, our rig managers, our field sups -- where they may be working at a lower position in the organization today. We've tried to maintain as much of that capacity as we can because that is the trickiest part of putting rigs back to work, is making sure we have the right leadership for those rigs.

Okay. Perfect. That's all I had, guys. I appreciate the color, as always.

Thank you. The following question is from John Daniel from Simmons & Company. Please go ahead.

Hi, guys. Just a couple housekeeping ones from me, and I don't think you mentioned this in the prepared remarks, Rob. But the press release noted that you received some one-time payments in Canada from customers due to contractual shortfalls. Can you explain what that was and quantify it for us?

The way that it works in Canada is when we have a contract for the year, for a year or longer, during the year they're obligated to X number of days, which is typically 250 days. At the end of the year, oftentimes we'll have customers that didn't achieve all the days that they needed to. And, in the fourth quarter, we had something around CAD10 million of shortfall payments in the Canadian market, which were people just catching up on their obligation for the year.

Okay.

So, those are not cancellations, it's just finishing out their contracted piece.

Right. But we would, in theory, need to adjust going forward, right?

Right. We would not expect to see that every quarter.

But over the course of 12 months that money would still be included.

That's right. Just one on international for me. Can you guys, just broadly speaking, characterize the EBITDA margin trends in the segment over the course of 2015, and just an expectation, again, broadly speaking, going into 2016?

John, it really depends on the rig mix. As we, for instance, have put these new, bigger rigs on long-term contracts into Kuwait, the EBITDA margins are quite high.

Right.

If you look at some of the upgraded rigs, whether that's in Mexico or in Saudi Arabia, the margins will be much more compressed. One of the things that happened in this last quarter was we saw activity decrease in Mexico, and it was a lower margin rig, but then we had the addition of the bigger rig in Kuwait earlier in the year. So, in the year-over-year comparison, the margins start to look better. So, even though activity days were down Q4 of 2015 versus 2014, revenues were about flat because of just the rig mix.

Okay. But it's reasonable to assume that there's some pricing pressures internationally going into this year?

Most of the rigs are contracted, John, so I think that the pricing pressure that we were going to see, we have seen. And, as Kevin mentioned in his remarks, a big chunk of the business today is in Kuwait, and that has been stable. Those are long-term contracts and we have not had pricing pressure there.

In some areas we may have a bit but I don't -- this is how to explain it. The bigger, high-dollar, high-margin rigs are contracted and I don't expect to have any pressure there. A few of the smaller rigs, or older rigs in the case of Saudi, we've had some pressure but I don't expect to see much more of that. I think we're through that at this point.

Okay. Fair enough. I'll turn it over to others. Thank you for the color.

Thank you. The following question is from Jim Wicklund from Credit Suisse. Please go ahead.

Good afternoon, guys. Kevin, Robert, we've been using the term unsustainable now for about 12 months (laughter), and there's just no telling how long we're going to keep using it. You talk about how day rates -- spot rates in Canada and spot rates in the US are unsustainable long term. Where are those spot rates? You've obviously got some that have gone to work or are working. Where are those spot rates today?

On high-spec rigs right now -- so, the Super Series rigs, padlocking rigs -- mid-to-upper teens. And that really has not changed. We've got a lot of questions about any further day-rate pressure. But I can tell you there is literally, one, two or three opportunities in the market at any given time ever. So it's not like there's a real market to base that on.

But if an operator wants a rig, they probably know Precision or one of the three or four other companies that can offer the type of rig. They probably know us, they probably know the market range is mid-to-upper teens. If we meet that, it isn't a three bids in a buy market going on right now. It's a very (multiple speakers) market.

Is the US market markedly different? I know you talk about how the Permian is the only place where there's really any work. Is the US market markedly different?

I'm referring to the US market in those comments.

Okay.

Now, Canada's a little different. In Canada, particularly in the shallower regions, and that's getting into what we call the Viking play, which is the Alberta/Saskatchewan border, and then the Canadian Bakken, southern Saskatchewan, and some of the Cardium, it's shallow. It's a vastly over supplied market. There's still a component of Tier 2 rigs there. It's a fractured market. Day rates there have gone -- I've heard of examples in the single-digit range, like CAD9,500 per day. That's not sustainable.

In a shallow Canadian over supplied market there has been pricing pressure continuing through 2015 and 2016. It's unhealthy. And, even if you have very low leverage, if your EBITDA's negative, that's unsustainable.

I would agree. It's unhealthy for you guys. I'm not sure about the E&P companies but it's unhealthy for us.

Jim, we're fortunate. We don't have any rigs operating at zero margin or negative EBITDA margins. We've got -- typically our trough margins right now still look like CAD3,000 to CAD5,000. And there appears to be, as I said, discipline on the -- whether it's a Precision Super Series or whatever brand name you're talking about -- high-spec, pad walking-type rig -- there's remaining pricing discipline despite very, very low demand.

That's good granularity. I appreciate that, Kev. My follow-up, if I could, Robert, you talk about your undrawn CAD550 million revolver. We're hearing stories of banks now putting in minimum liquidity requirements in order to access revolvers. Have you seen any of that? And with some of these banks in the US now selling out oilfield service debt at cents on the dollar, I was just wondering, are you tempted to pull that down so that you're ready or do you think you'll be able to?

Jim, first off, we don't have minimum liquidity requirements in the revolver. So, as long as we're in compliance with the covenants -- which we are -- then we have access to it. So, I think that there's not a need for us to pull the revolver down at this point. I think that we're on pretty safe ground right now.

Do you actually build cash or are you going to pay down debt?

Stay tuned. Both are real options. Historically we've been saying that we'd rather sit on the cash for the time being. But our bonds are trading at a bit of a discount in the market and so it may be worthwhile to use some of the cash to buy in bonds.

Very helpful. Thank you very much, sir.

Thank you. The following question is from Ole Slorer from Morgan Stanley. Please go ahead.

Thank you very much. I wondered whether you could give just a little color on the duration of the revolver, how long does it last for?

The revolver renews, I believe it's June of 2019.

Okay, so it's June 2019. And you said you have no other debt maturities before that.

That's correct. Well, actually I think that the Canadian CAD200 million notes come due March of 2019.

Okay. Thanks for that. Kevin, I wonder whether you could be as bold as to just give us a little bit of a prediction here of the trajectory of the US rig counts over the next couple of months? Seems to be a new momentum in the leg down at the moment with capitalization into this oil price tape. How far and how fast down do you think it will move for the industry?

Ole, it's almost a little bit of a public disclosure game -- not for us, but for our customers. We saw the same thing last year. The first months of the year, our customers got really aggressive on pricing and discounts so they could come into their Q1 or Q4 earnings calls in mid-February and report that they've cut service costs. I think this year we're seeing the same thing happening with just rig activity. We're getting a lot of aggressive activity in the first few weeks of 2016 and I think it's driven so that when they come to report their Q4, and they're disclosing in mid-to-late February, they're able to say they've cut their rig counts, they've cut their spending.

Last year that activity, after the earnings season, went calm for a while. They did all their work in the first few weeks. It's not unbelievable to think they'd do the same thing this year.

Any differences in how we should expect the Canadian markets to behave in the first and second quarter? To what extent do you think we will get an unwind or -- and a breakup?

In Canada, the decision making can be very much more day to day. It's quite common to watch how the spring develops before you decide how to spend your money in Q3. We're going through an early breakup right now. This is definitely a budget-driven breakup. Rig counts are starting to tend downwards. And, frankly, early February, that's not a good signal.

So that's just spending limited. I commented that, on Q2, which is the spring breakup season, we expect to see rig counts in the low teens. We're operating at deep basin which we think is going to stay fairly busy, at least for us. But, nonetheless, I think there will be some breaks taken during Q2.

It could be a very grim Q2 for a lot of the industry, especially shallow rigs and some of that Cardium, Viking-type play in Canada. Then I think Q3 will be predicated on what kind of capital our customers have left. You're seeing some capital raising going on right now. I think just last night there was a capital deal closed with some money flowing back into the Canadian E&P sector. If some of that's successful, there's a likelihood there's a bit of a resurgence in Q3, but well below 2016 -- 2015 levels. Is that helpful?

Yes, very helpful. And for you, specifically, could you talk a little about the sustainability or the visibility that you have on the deep gas drilling? You've been an advocate of that program, and we've seen a slippage on one of the LNG projects. But how has that, if anything, changed your view that this is going to be a more sustainable business for you?

I don't think that particular announcement changed my view. We've got one eye open at nighttime watching to see where this goes. So, it's not 100% certainty in our minds. But we still think it's a good certainty that it moves forward.

Again, these LNG projects are not predicated on the spot price for gas in 2016. They're looking at contracts they have to fill in 2019, 2020, 2021. While I think, currently, the global LNG market is slightly over supplied, looking down the road -- four, five years down the road, I think there's still a growing demand down the road to meet those contracts that aren't fulfilled today.

So, you view that business as being -- you haven't changed your view on that business, you think it's going to continue to be quite stable for you.

Haven't changed our view on that and believe it will be stabilized. I think there's another component that comes into play here, but there is a byproduct of that drilling, and that's the wet gas liquids that are used as diluent for heavy oil. That actually creates cash flow right now that supports the drilling programs, in most cases.

And, just finally, if I may, could you give us your latest thoughts or an update on your co-operation with Schlumberger? Is that still moving ahead for you? Is it having any impact on your business?

We have two. We do the IPM work in Mexico. But I think you're referring to the directional drilling tool alliance that we have with Schlumberger.

Correct.

It's still working really well for us, Ole. We can offer the complete range of tools from really basic mud-pulse telemetry, directional drilling to triple combo downhole tools and rotary steerable. In each of the quarters in 2015, we ran the most comprehensive tool strings from Schlumberger. We ran some very basic tools. So, it's continuing to move forward.

In the fourth quarter, in fact, we ran activity levels in directional drilling that were on par with the fourth quarter a year earlier despite a market size being half the size. So, we feel like this is graining traction. Now, just recently, the day rate for a directional driller individual has come down so low that the economic benefit we're offering has been fractionalized down. But I don't think that changes the business model. And I don't think that you'll see directional drillers in a rebounding market operating on rates for the individual of a couple hundred dollars a day.

But I think our model is being proven out in this market. I think there's a little bit of extra pressure right now in CAD27, CAD26, CAD25 crude. But I'm gaining more confidence this model is going to work long term.

Thanks for that, Kevin.

Thank you. The following question is from Sean Meakim from JPMorgan. Please go ahead.

Hey, gentlemen. To ask the rig-count question in a different way, in the US, would you characterize your base case for utilization this year as being effectively just the rigs you have under contract, meaning minimal spot work from here?

Sean, we don't give forward guidance on our base case.

Okay. And you talked about there's only a handful of opportunities out there at any given time. But you still have more than a handful working the spot market today. Can you give us a little bit of direction in terms of geographically where your rigs that are working in the spot market are working today, or any commentary on that subset of the fleet?

Sean, there really is actually no concentration or trend to even think about on rigs that are not under contract that are currently working. But if they're a Precision Super Series rig, I think the guidance I'll give is the rates are staying in that mid-to-upper teens range right now. And, as I commented earlier, it does appear that the contractors that own those rigs are maintaining discipline on that pricing.

Okay. Fair enough. Just to take the conversation in a different direction, it may seem egregious to talk about pricing power and the recovery in the current market, but as you think about the opportunity set in the next cycle, do you view pad-optimal rigs in the US as a subset, a discrete market that can perhaps gain higher pricing power faster than the rest of the AC or horizontal market? Or do you think that, in a recovery, there will be enough of a substitution effect that you'd need to see higher utilization across the horizontal fleet to get pricing power for your best rigs?

Sean, I think there's actually a bit of a case study. We did move five rigs from the US to Canada late last year that were pad-configured rigs with XY walking systems fully integrated on the rigs. Those rigs went into the market at day rates substantially higher than most of the other high-spec rigs in the market. So, I do believe that the already configured pad-walking rigs are in higher utilization levels than the balance of the Tier 1 US fleet. So, short answer to your question is, yes, pad-configured rigs will get better leverage.

Now, I'm going to back what I said in our call about our 238 Tier 1 rigs. We can clip on a pad-walking system to our any one of our Tier 1 rigs. If we need to add a third mud pump, we can slide a third mud pump in, in about eight hours, to any of those rigs -- and if we have to replace the standpipe with a 7,500 psi standpipe. So, we believe our entire Tier 1 fleet of high-spec rigs, other than the Super Single, Super Triple, and Super Triple 1,500 depth ratings, we believe that the entire PD asset base is able to access that pad market as soon as it begins to rebound. And it's already in tight supply. So, we think we're well positioned competitively for a rebounding market.

And, Sean, it's our view that the core development drilling in the unconventional resources will be done with pad-walking XY rigs. That's the core development drilling. The delineation drilling, and the production, completion, and testing drilling, will likely be done with Tier 1 rigs.

Okay, that's very helpful. Thanks, Kevin.

Thank you. The following question is from Marc Bianchi from Cowen. Please go ahead.

Thanks, guys. Just following up on the Canadian margins, you mentioned, Rob, the CAD10 million. Is that Canadian or US that impacted the fourth quarter?

It's Canadian.

Okay, great. Thanks. So then, even removing that, it seems like you had a nice margin increase sequentially and year over year. Can you talk to us about that? Is that mix? How much of that should we think as being sustainable going forward? I recognize that pricing is going to be offsetting that, but maybe just talk to us about the year-over-year and sequential change there to think about how to model it.

It really is mix. The rigs that are really generating the EBITDA for us in the Canadian market are the Tier 1 triples, as that are the walking rigs that Kevin alluded to, largely in the deep gas basin. And I think that, as that makes up a bigger percentage of our work, that those margins will hold up reasonably well.

Okay. That's helpful. And then, on the 31 rigs in Canada that you have contracted for 2016 -- maybe following up to the question that was asked earlier on the exposure in the US, can you talk to us about the exposure for those 31 in Canada?

What do you mean by exposure? The rigs are contracted.

Geographically. Sorry, Kevin. How many are --?

Okay. I don't have that at my fingertips, but I'm quite certain the majority are deep basin gas.

They are.

Great. Okay. That's all I had.

I'm not sure if it's 28 out of the 31 or 31 out of the 31.

Okay. Got you. Thanks. I'll turn it back.

Thank you. The following question is from Jon Morrison from CIBC World Markets. Please go ahead.

Afternoon, all. Rob, just to clarify, the bulk of the $6 million payment that you received in Mexico, that would have all traditionally been generated post Q4 end, and there wasn't a big chunk of it that was specific to Q4. Is that correct?

That's correct. That would have gone out through the rest of the life of the contract, which went well into 2017. I don't remember exactly where. It brought forward some revenues that would have otherwise been earned in 2016.

Can you give any color in terms of how much total IBC revenue you had in Canada and the US in Q4?

We had the CAD10 million that I spoke about. And then we had -- let me just think for a second -- call it that much again in the US, that was obviously revenue.

And what have you had customer shortfall similar to Canada in Q4 2014 or it would have been fairly insignificant?

It was almost negligible.

Okay. Of the 70 rigs that you guys quote as having under contract today going to a 60 average throughout the year, are any of those rigs not in the field working today?

The five in the US. When we said that our rig count today included 5 rigs that are IBC in the US, those 5 rigs would be counted as part of the 70 currently.

Okay. Was there any in Canada above and beyond that?

No.

Or those are the five major ones to look out for?

Yes.

Okay. Within C&P how comfortable are you with the long-term marketable of the, call it, 160-ish well-servicing units that you guys exited the year with? I realize that you're not going to work a ton of them in 2016 and 2017.

Jon, these are -- we retired some C&P units earlier this year -- or in 2015. The remaining units that we have are marketable rigs. These are rigs that can work. These are -- have been maintained and can go back to work.

The bigger question is, what does the market demand? In this environment, that's more rigs than the market needs. And so, over time, if the market doesn't improve, more of those rigs will get retired. But, today, these are all marketable, usable rigs.

Okay. So, it's fair to assume that you wouldn't call those like a Tier 3 well-servicing unit that it would have to be an incredibly frothy market to see that go back to work.

No. There's not the technical differentiation in well-service units that there is with drilling rigs. A brand-new well-service rig and a 20-year-old well-service rig that's been well maintained, they perform about the same. There's not a big difference in the performance of those units. And that's not the case on the drilling side. Clearly, there's a real efficiency gain with the Tier 1 rigs.

Kevin, just to clarify on your comment earlier about leveraging the decommissioned rigs and forward operations either in North America, through salvaging it for parts or redeploying it internationally, when you say redeploying them internationally, would you run any of those rigs yourself under the Grey Wolf banner? Or are you ultimately talking about selling those into a different third-party service provider that would potentially market them themselves?

Jon, I think our view is that we'll dispose of those rigs, and we'll dispose of them to whatever the best value we can achieve, whether it's selling them internationally or domestically, or selling them off as pieces. So I think that's -- I'll be clear on that -- we'll dispose of the rigs, we'll scrub off all the parts we can use, all the pieces we can use, all the drill pipe. But we'll dispose of the rig assets either as parts or rigs. And don't anticipate they'll come back to compete against us because we're either operating deeper, bigger rigs internationally or higher-pressure rigs. But, generally, this will be a disposal event for us, not a redeployment for us.

Okay. So, it's fair to assume that you wouldn't put any more capital into those rigs even if you saw a two-year contract opportunity in LatAm or something like that.

Well, first of all, never say never. But if somebody came along tomorrow and offered us, let's call it, a 45% or 55% IRR to take two of those rigs and reinvest in them, we wouldn't turn that down. But that's not a very high likelihood.

Okay. Rob, just in terms of the write-downs that you guys took in Q4, how comfortable are you that there isn't more to come in 2016? And whether you use either the 60 rigs on average that you have running or contracted in 2016, or whatever your base case is internally, do you believe that there's going to be limited to no write-downs on the count?

Here's what I would say, Jon, is that, when we talk about retiring rigs, I'm confident that we've retired the rigs that needed to be retired. These are all very high-quality rigs, even the 16 that are not Tier 1. But these are good rigs, in some cases 2,000-horsepower rigs that are drilling salt cavern wells. None of these rigs are going to be obsoleted any time in the future that we can see.

Now, in terms of impairments, we have to do a CGU test on the different business units every year. So, I can't guarantee that if we're sitting here in a year's time and oil's still CAD25, and the outlook is dismal, that there wouldn't be additional impairments. But I don't think that, that would be decommissioning of particular assets. And, on the impairment side, I think we've done it the right way. We took a significant amount of value out and the models that we used to do that math were not optimistic models. We were trying to take a very realistic look at the world and not be optimistic.

But, Rob, it's also fair to say that if the outlook turns markedly better, we may have to write those rigs back up.

The impairments could go back the other way, yes.

For sure. Okay. Just to clarify, you haven't been put on notice of any additional rig cancellations post Q4 quarter end other than the five rigs in its entirety in 2015 that you referenced earlier at this point, right?

Post quarter end, we were put on notice that two rigs will be terminated included in that five.

Okay. Nothing above that.

Yes.

Last one just from me, Rob, earlier you made a comment about possibly buying back bonds with cash. That isn't concrete at this stage or anything, but is there a maximum level of cash that you'd look at deploying to buy back bonds that you'd want to keep a certain base liquidity no matter what?

Let me say this. Liquidity is king right now. We are not going to put ourselves in a position where we don't have more than ample liquidity. So, take my comment as we see where the bonds are trading, it's interesting, but there is no plan in place to go out and buy back bonds. And we certainly are not going to use up a meaningful portion of our cash on anything right now, buying bonds or anything else. So, don't read more into that comment than what it was.

Okay. Appreciate the color. Thanks. I'll turn it back.

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

Hi, guys, thanks for taking my question. I was a bit late on the call so I apologize if this has been asked. Have any of the legacy rigs, are they actually working?

I think there's a couple of rigs drilling salt cavern wells that are big 2,000-horsepower rigs. But otherwise it's all Tier 1 rigs working.

Okay, so they -- the ones that are working then, are they --? (Multiple speakers). Sorry?

Sorry -- was your question the rigs that we're retiring?

Yes.

Yes, so I think, Rob, the retirement --.

The rigs that we're retiring, none of those are operating today.

Okay. And I know this is a bit of a sensitive topic but I wanted to get an idea of how -- the human cost of what's going on. Can you give me an idea of what the headcount is at Precision and how it's changed over the past year in the fourth quarter?

Dan, I don't have those numbers at my fingertips and I'm not anxious to see Precision printing or taking credit for layoffs. I don't like that. We have a strong, loyal workforce that we care about everybody on.

What I can tell you, you should think about is that we're running about half the number of rigs now that we were a year ago. And, in that structure, there's probably 30 to 40 jobs tied to a rig, between the rig crew and support operations. So, it's been deep and meaningful and painful for our Company and for our employees and for the people who are at home right now.

Okay. I notice that there's a charge of CAD7 million for the fourth quarter. Can you give me any color on what that is for?

We do the best we can to take care of the people that we have to lay off. Those would be severance charges. I'll tell you, in every case, we do the best we can to take care of our people that are leaving the Company.

Okay. Thanks.

Thank you. The following question is from Kelly Cryderman from The Globe and Mail. Please go ahead.

Hi, there. Just following up on Dan's question, I'm wondering, when you talk about the cut to your employees, are those actual employees or are they paid on a daily basis? Have hours been reduced? Have wages been reduced? Can you provide any more color on that?

Kelly, those are great questions. We have effectively two types of employees. We've got field labor employees that are paid hourly but they're employed under regular employment terms. We have office hourly employees and office salaried employees. We have basically salaried or hourly employees. But they're all employees of the Company, long-standing employees. And, in the case of their seniority, if there's a separation there may be a severance obligation. We try to do the best we can to pay people at or above that obligation.

Thank you.

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

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

Thank you. That concludes today's conference call. Please disconnect your lines at this time. And we thank you for your participation.