Precision Drilling Corp (PDS) 2016 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Precision Drilling Corporation 2016 First Quarter Conference Call and Webcast. I would now like to turn the meeting over to Mr Saber Rad, Manager, Investor Relations and Business Development. Mr Rad, please go ahead, sir.

Thank you and good afternoon, everyone.

Welcome to Precision Drilling Corporation's First Quarter 2016 Conference Call and Webcast. Participating today on the call with me are Kevin Neveu, Chief Executive Officer, and Carey Ford, Senior Vice President and Chief Financial Officer. Through a news release earlier today Precision Drilling Corporation reported its First Quarter 2016 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 news release for additional disclosure on these financial measures.

Our comments today will also include forward-looking statements regarding Precision's future results and prospects. 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 news release and other regulatory filings for more information on forward-looking statements and these Risk Factors.

Carey Ford will begin with a brief discussion of the First Quarter operating results and a financial overview. Kevin Neveu will then provide a Business Operations update and outlook.

Carey, over to you.

Thank you, Saber.

In addition to reviewing the First Quarter results I will provide an update on our 2016 capital plan and our liquidity position. First Quarter adjusted EBITDA was CAD99 million which is 39% lower than the First Quarter of 2015. The decline in adjusted EBITDA from last year is a result of decreasing activity levels across all of our operating segments, offset primarily by one-time contract cancellation payments that brought CAD23 million forward from future 2016 periods into the First Quarter.

In Canada, drilling activity for Precision decreased 36% from Q1 2015, while margins were $944 per day higher than the prior year. The increase was primarily a result of approximately CAD4 million of contract cancellation payments relating to two rig contracts that would have been earned in future periods beyond Q1 2016. Removing these contract cancellation payments would result in margins that were approximately $100 per day lower than last year.

In the US, drilling activity for Precision decreased 60% from Q1 2015, while margins were $4,181 higher than Q1 2015. The increase was primarily a result of approximately $13 million of contract cancellation payments that would have been earned in future periods beyond Q1 2016.

The payments related to the cancellation of three rig contracts, two of which were referenced on the last Conference Call. Removing these contract cancellation payments would result in margins that were approximately $500 per day lower than last year. Internationally, drilling activity for Precision decreased 33% from Q1 2015. The decrease in activity was primarily the result of fewer days in Mexico.

International average day rates were $41,609, a decrease of $1,359 from the prior year. We now expect both the Kuwait new build rigs to begin working in the Fourth Quarter of 2016, one quarter earlier than expected. Today we have 13 rigs drilling or moving in Canada, 25 rigs drilling or moving in the US, with seven rigs receiving idle but contracted payments and seven rigs active internationally.

In our C&P division adjusted EBITDA this quarter was negative CAD2.2 million, a CAD9 million decrease from the prior year. The decrease is the result of lower activity and lower pricing in all C&T business units. We incurred CAD1.4 million of restructuring costs during the quarter as we continued to execute our strategy to right size the business for the current activity environment and create a well service business with a more regionalized focus.

Total restructuring costs for the Corporation this quarter were approximately CAD3 million bringing the total since the beginning of the downturn to CAD24 million. We expect the annual G&A and operating overhead savings from 2014 levels as a result of these restructuring initiatives to be over CAD120 million.

As a reminder, a key component of our variable cost model is our ability to ramp down Capital Expenditures when industry activity declines. In the First Quarter of 2016 our Capital Expenditures were CAD27 million, which compares to CAD226 million in the First Quarter of 2015. For the full year, 2016, we expect to spend CAD202 million comprised of CAD158 million for expansion, CAD44 million for maintenance and infrastructure and CAD2 million for upgrade.

Substantially all of our expansion capital is for the two new build rigs for Kuwait, which will be fully paid for in 2016. We will announce our 2017 capital plan later in the year, but as of today, we have no expansion Capital Expenditures planned for 2017 as all of the CAD17 million of Kuwait planned spend has been brought into 2016.

Our contract book continues to perform for Precision. For the quarter we had an average of 68 rigs under contract, and as of April 25, 2016, we had an average of 59 contracts in hand for the second quarter, an average of 57 for the full year 2016 and an average of 31 for the full year 2017.

We continued our process of net debt deleveraging by increasing our cash balance by CAD32 million during the quarter and repurchasing $10 million of our Senior Notes in the open market. As of March 31, 2016 our long term debt is approximately CAD2.1 billion, and our net debt is approximately CAD1.6 billion. We had CAD476 million in cash on our balance sheet, and we have a $550 million revolving Credit Facility that is undrawn with the exception of $46 million in letters of credit.

During the quarter we reached an agreement with our bank group to amend our existing revolving credit facility. The facility itself matures in June 2019, and the amendments are in place through the March 2018 reporting period. The adjusted EBITDA to interest expense coverage ratio of 2 to 1 was reduced to 1.5 to 1, and a new carve out was provided for second lien debt, which is permitted up to $400 million subject to certain conditions.

Additionally, certain restrictions were added such as prohibition of distributions, anti-cash hoarding and a new covenant that restricts the repurchase and redemption of unsecured debt subject to a minimum liquidity $500 million. As of March 31, 2016 our total liquidity position was CAD1.2 billion.

With limited visibility for the remainder of the year, we will continue to place the highest priority on our liquidity position. As there have been a number of industry financings over the first part of the year I would like to address our intentions with regards to the Capital Markets. We have no near term need for capital with our current liquidity position and contract book.

Now beyond our CAD200 million principal payment due in March 2019, we recognize we have a larger principal payment due in November 2020 and another one due in December 2021. There are a number of ways to address those payments including cash on balance sheet, cash flow from operations, debt refinancing and equity.

We have the benefit of time, but rest assured we are looking at all of our options and will not get stuck making an 11th hour decision with regard to those notes. In fact, the revolver amendment announced today gives us more flexibility to address those note balances over the next two years.

I will now turn the call over to Kevin for a further discussion of the business and outlook.

Good afternoon and thank you, Carey. Congratulations. We are all pleased to see interim removed from your title and clearly it's been a very busy for our finance team.

Turning to operations, customer demand took yet another leg down during the First Quarter of the year,. With the WTI oil price falling into the $20s in the first weeks of 2016 customers in all Markets responded by further trimming spending, reducing drilling plans, and well servicing activities.

I'd like to give some market color, but the situation is rather black and white these days and more black than white. The Canadian winter drilling season was the weakest in decades, and for an unprecedented second year in a row, Q1 winter drilling activity recorded a decline in the Fourth Quarter from the prior Fourth Quarter. For Precision we ramped up to a rather anemic 62 rigs by mid January and then watched as activity slowly declined through the end of the First Quarter to the 13 rigs we have running today.

Fortunately for Precision, our presence in the Canadian deep gas Basin with both contracted and uncontracted super triple pad rigs provided a solid base of revenue and strong cash flow during this period of severely depressed customer demand. We have experienced two Canadian contract cancellations as Carey mentioned for rigs drilling in the Cardium play, and I suppose this should not be a surprise as the Cardium remains challenged by the very low commodity prices.

Both contracts were set to expire later this year, and this just brings forward current year cash flow to the first quarter. In the US the picture is not much better. We began the year with 42 rigs running, but experienced three cancellations and have seven others idle but contracted as we finish the quarter with 24 rigs running.

And the near term outlook would suggest that the US rig count has not yet bottomed, and while the activity declines have slowed, the current commodity prices are just too low to fully stabilize rig activity at these levels. Including the five contract terminations during the First Quarter, we've experienced a total of nine contract terminations since the beginning of this downturn in late 2014. Carey mentioned we still have 57 rig years on average contracted in 2016 and 31 pushing into 2017, and we believe these contracts will continue to perform as all have over the past several quarters.

Now, turning to day rates for a moment, day rates for Precision's uncontracted rigs are over a wide range depending on rig type and location. We have seen some day rates dipping slightly below the mid-teens in West Texas, and then lower still in Southern Saskatchewan where rig on rig competition for those typically shallower rigs is rampant.

However, we still have several super triple rigs working uncontracted, earning day rates in the upper teens and even low 20s particularly in those regions where pad super triples remain in relatively tight supply. We believe that until customer demand settles and stabilizes, no meaningful spot market will be established, and the oft quoted and discussed anecdotal spot market day rates are interesting, but not particularly meaningful.

Now, more importantly, in an improving or rebounding market we know that the best performing rigs in the prior cycle will be the first to go back to work. At Precision we have over 140 new build rigs that all worked under long term customer contracts and performed exceedingly well for those clients as recently as late 2014 and early 2015. Those rigs will be in short supply when the rebound emerges. I'll discuss our thoughts on potential rebound in a few moments.

Turning to Precision's international activity, it's also experienced a slowing in most regions except Kuwait and Saudi Arabia. Fortunately, Supply Chain lead times have improved. We have been able to bring forward the delivery and commissioning of the two new build rigs for Kuwait from Q1 2017 to mid Q4 2016, and we now expect to be running five rigs in Kuwait for the full year of 2017.

We know our customer will be pleased to see these rigs starting early. Now remember, the long duration of these contracts means that these new rigs that we're commissioning in late 2016 will still be under their initial contract at the end of 2021. Customer expectations for high performance rigs supported by long stable contracts is what makes the Kuwait market a key target and attractive for Precision.

We expect our IPM work in Mexico may continue to slow mid year as IPM Service Providers deal with the local uncertainty, but we believe an improvement is possible later in the year in the Mexican market. We also expect that our rigs in Kurdistan are going to remain idle until late 2016, but we do see potential for reactivations late in Q4.

Certainly, all eight idle international rigs could quickly be reactivated should commodity prices and customer demand improve sooner than we expect. Nonetheless Precision's international focus has provided a solid level of revenue and cash flow diversification as North America continues to struggle, and we will continue to look for opportunities to further grow and enhance this important aspect of our strategy.

Now turning back to North America, our well service business, our camp business and our rentals businesses all experienced a severely challenged First Quarter. Deeply depressed customer spending and the low drilling activity environment is particularly challenging for these uncontracted service lines.

The service rates and pricing for all of these service lines are well below sustainable levels, and while the returns for Precision are unsatisfactory, we certainly have the scale to sustain capabilities through the downturn. However, I'm very concerned that this sector of the industry has many of the earmarks we saw in the 1982 Canadian downturn, which saw oversupply and financial distress widely experienced across the full spectrum of well service and equipment rental lines. This outlook is very concerning.

So looking forward, Precision Drilling remains focused on our three stated 2016 priorities. That is sustaining our liquidity as Carey discussed, sustaining high performance competitive advantage and turning our minds to potential drilling rebound. Regarding our liquidity, I know every employee at Precision is focused on cash generation, eliminating waste, reducing expense and reducing spending. During the First Quarter the hard work by our employees paid off, and we increased our cash balance to CAD476 million.

This remains a key focus for the downturn well into the next rebound, no matter how long it takes. Very importantly, during the quarter our finance team negotiated the further relaxation of certain bank lender covenants which will insure we sustain full revolver access should market conditions continue to deteriorate, and as Carey mentioned, we believe it's very important to stay well out in front of potential liquidity limits as we have in the past.

So regarding sustaining our high performance competitive advantage, this is critical to Precision, and this means that we'll continue the spending to maintain and support our operating rigs, but we aren't Cannibalizing or borrowing parts from idle stacked assets. But it also means that we continue to support and train our field personnel, and we continue to insist on premium performance in all aspects of our operation.

During the First Quarter we began field trials with our new fully paperless rig Operating System. This trial was run on 12 rigs, and we expect the paperless processes we are trialing will further unburden our drillers and rig Managers. Ultimately this will lower administration cost, improve information flow and furthers our scale advantage.

During the First Quarter we also began the introduction of our new global HSC and field Operating System, which consolidates more than six separate field Management systems and four separate field manuals into one fully integrated rig, HSC, operating process Management system. And again, this is designed to further improve information flow, support field operations, insure procedure integrity, field safety and performance consistency, all aimed at lowering cost and leveraging Precision's scale.

So I mentioned these details to let you know that at Precision we're not just cutting cost and reducing headcount to survive. In fact, we are using this downturn to double down and reinforce our quality, safety and business Operating Systems. We continue to invest to widen our high performance capability and leverage our scale at the rig level. Ultimately we expect to continue to strengthen our competitive advantage as we continue to demonstrate high performance excellence to our customers.

And this leads to our final priority, which is preparing for an eventual rebound. While there are no signs or early indicators of a rebound, and the bottom may yet be elusive, we believe it is critically important to be well positioned to capture the full value for our investors when the rebound arrives.

Our focus has turned to insuring our idle rigs are ready to mobilize and that we have the bench strength and call up personnel to staff those rigs and finally insure we have ample liquidity to fund a rebounding business activity level. Precision's idle rigs have been stacked, stored and protected in a fully functioning ready state, and these rigs can be reactivated with virtually zero capital spending and only a small amount of operating expense.

At Precision we have also sustained the leadership depth to provide rig Managers and drillers for our full fleet of 238 Tier 1 rigs, and we actively manage and keep our -- keep current our employee call up list to insure we have field crew availability to provide the balance of the rig crew in what will likely be a tight labor environment.

We also expect that in a rebounding market, our customers will call back the rigs that performed in the top quartile from drilling, performance, mobility and safety perspective, and we know that virtually all of Precision's new rigs delivered over the past few years delivered that high performance our customers expect.

Precision will not be caught out due to inadequate rig maintenance or crew challenges during a rebounding market. Rest assured preparing for a rebound will be the most important pivot we execute this year. So once again I thank the employees at Precision for their hard work and dedication during a very challenging quarter.

And on that note I'll turn the call back to the Operator for questions.

Thank you.

(Operator Instructions)

The first question is from Scott Treadwell from TD Securities.

Thanks, afternoon all. Wanted to just maybe flesh out a couple things you talked about. First on the rig terminations, you specified the Canadian ones were all 2016 revenue. Is that the case across all five that you haven't brought anything forward from 2017?

Yes, Scott, all five of them are 2016 revenue that we're bringing forward.

Perfect, that was easy. Always give you an easy one to start off.

Thanks, Scott.

Appreciate that.

Second on depreciation it was a pretty meaningful drop quarter to quarter. Obviously the activity was with it. I just want to make sure that that level of depreciation -- is there's nothing noisy going on behind the scenes in terms of activity and depreciation going forward that's a decent run rate?

Yes, Scott. The two things that impacted the depreciation expense for the quarter that made it lower than what we guided to were the exchange rate, so as the Canadian dollar got stronger we had a lower US depreciation impact. And then also the de-commissioning and impairments that we enacted at the end of 2015 had a little bit different impact than what we were expecting.

Okay, perfect, and I think that's probably the answer to the next one. Accounts receivable dropped pretty meaningful. Was there an FX component as well, or was that something you alluded to in terms of cash generation?

Yes, there's probably a little bit of an FX component there.

Okay, capital spares. I know you guys had talked in the past about low cost for some capital spares and now you're turning your eyes to potential uptick. Just as you look at what's on the shelf today, you guided to not having to have a lot of capital. Is that sort of something you would expect in the first three to six months that you can kind of restock that inventory without meaningfully expanding CapEx?

So, Scott, I think we're very carefully managing both our inventories and our capital inventories down in this downturn to ensure that we don't unnecessarily put more cash out. But you know, we are seeing opportunities to selectively take advantage of the downturn, and later this year maybe even in the second quarter we could exercise and use a bit of our balance sheet to capture some very good vendor discounts.

But it will be a tactical move not anything that moves needle on the balance sheet, but I think our inventories right now are adequate for today's operation and even through the first several quarters of the downturn we would need to see a substantial increase in inventories.

Okay, good, last one for me. You referenced relatively low OpEx to get rigs back to work. I'm assuming you expect all that to be able to be handled in house absent a massive hockey stick type balance in activity?

Yes, absolutely handled in house and really trying to guide the market to realize the rigs are stored and ready to go back to work so really is not a big increase in spending to get those rigs fired back up again. We try to give good sense of that. We still may be several quarters away from a rebound, but those rigs are sealed up and locked up and ready to go back to work.

Okay, perfect. That's all I've got, guys. I really appreciate the color thanks.

Thanks, Scott.

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

Hi, guys. Thank you and congrats, Carey.

Thanks, John.

Kevin, you noted the wide range in terms of the spot market pricing. I know you generally don't like to comment on it, so thank you for the specifics, but I think you mentioned that Permian is receiving rates below the mid-teens. Assuming that you've got some of those rigs and are receiving those rates, can you describe for us what type of rig is getting that price, is it Tier 1 versus tier 2, walking versus non-walking? Just incremental color there would be appreciated.

You know, John, there is so few opportunities to bid on right now that it just doesn't behoove us to give anymore detail or color. There could be one tender come up this week that two or three or four of us might be participating on. I really don't want to get into details at this point.

I would make a point, though, John, all of the rigs we have running today are Tier 1 rigs, since we have just a few tier 2 rigs left.

I'm just trying to differentiate, because you did mention the super triples are getting higher quality rate. That's all.

Actually, the point is, John, that we're actually seeing a range of day rates literally from just below mid-teens to actually just above low 20s right now for our super triple high spec rigs, and it really depends on regional dislocations for supply and vendor preference, customer preference. A lot of variables go in, and we just believe firmly it's too early to set an expectation for a spot market.

Fair enough. I'll go one more and get back in the queue, but you often hear E&P companies talking about their desire to drill best-in-class projects first even during downturns, and assuming that's the case and we begin the recovery process, and E&P companies start having to drill lower quality prospects if you will, do they necessarily need that best-in-class rig? Or will we see maybe some of the lesser rigs come into the workforce there? You know, John, the way I think we should think about the rebound is the capital is going to move back into the space and the E&P space. I think the first bit of capital will go to expand development drilling, but then following that more capital will be used to explore and de risk unconventionals. But I think that the first capital that comes back in is addition all development drilling which likely leads -- lends itself to just the most efficient high spec pad capable best rigs.

So for those for development drilling I don't think Tier 1 rigs see competition from anything but Tier 1 rigs, and frankly pad walking, pad capable rigs that have walking systems integrated will likely garner the best day rates in a rebounding market particularly for development drilling. As we move away from development drilling to more de-risking and more science work to find the best completion for a given play, I think rig spec may have some more room for variability in those areas.

Okay, and you mentioned that the possible tender coming up without getting too specific on that, I'm assuming they are looking for the best-in-class rigs?

Which tender did I mention? I'm trying to recall the comments.

I think you said you're getting ready to bid on is something in the Permian with potentially three or four other bidders?

No, no, I said if any given opportunity that pops up there could be one this week who knows? It was more of an again -- anecdotal example.

Fair enough. Thanks, guys.

Thanks, John.

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

Good morning all. Congrats Carey.

Thanks, John.

Can you give anymore color on the number of producers that were included in the rig cancellations and any additional details on where they were working from a geographic standpoint?

I don't have it at my finger tips right now.

So it was one producer in Canada, and it was two separate producers in the US.

Okay. Kevin you made some fairly bearish comments about what the well servicing segment was going to look like over the coming period given what we've seen in pricing activity levels and margins. Is there any reason why you're making more pointed comments this quarter versus the last year, and as you think about pricing, has it been pushed down by the usual suspects, or are you seeing a step change in call it pricing across the competitive landscape in the last three to six months?

So, John, first of all remember most of our well servicing activity just for clarity for those on the line is generally conventional pulling rigs. And that could be for just simple raw jobs or tubing pulling work, and that business seems to be under pressure for several quarters in a row even pre-dating the downturn. We have a small component of coil work which is seeing far less pressure, but on that conventional well service work, this has been a very, very tough first quarter. Clearly very little abandonment work going on. That's being pushed well down the road, not a lot of completions work going on.

It's a tough market. It's still highly fractured. While there may or may not be one or two companies that disappear, the assets still hang around, and structurally this is looking a lot like the drilling business did back in the early 80s when there was a huge oversupply of rigs, and even though some companies don't survive the rigs still seem to survive and overweight the market. And this market, the well service market, has much of that look to it today. So clearly consolidation is going to be important over time, but also reducing the asset count will be important.

Okay. Can you give any more color on what was the growth driver behind the turnkey revenue this quarter? I guess it goes somewhat counterintuitive to what I would think would traditionally go on in this type of a market.

Yes. So, I would think it more -- think of long -- think about it more along the lines of on a relative basis. So turnkey revenue actually decreased from Q1 of 2015, but as a percentage of overall days it was a higher percentage so when you start looking at day rates and operating costs, it had a bigger impact this quarter than last year.

Okay. Carey, can you give any more color on the small bond repurchase that you made in the quarter and whether we should be thinking about the liquidity on the balance sheet possibly going back toward these opportunities if you get back to pricing levels that we saw in mid February kind of for bond pricing in your company?

Yes, Jon, go back to my opening comments, our liquidity position remains the most important thing, and with the bond repurchase, we were -- we monitor our bond pricing all the time, and we're noticing pretty significant discounts in the quarter. And we weren't quite sure if those were real, if we could actually realize those prices.

So we wanted to test the market. We put the mechanism in place to see if we could repurchase some bonds, a small dollar amount at a pretty significant discount. And we were able to execute a few trades, but then the market ran away from us. So, since we made those trades, our bonds, that particular tranche is up about 35%, so the discounts -- as you mentioned, the discounts aren't quite there to make it worth parting with our liquidity.

Okay. Kevin, for any rigs that have you coming off contract, and a customer elects to keep it working at this stage, are those essentially moving towards a well by well contract, or is any incremental visibility or term being given by those customers that want those rigs working right now.

I would say broadly there is no pattern or trend right now. One or two customers might want to lock their rig in for a little longer if they can get it at some depressed rate, but I don't think there's a trend emerging yet that we could draw conclusions from, Jon. And Canada remains particularly cloudy in the back half of the year. We are really sensitive here in Canada to both oil and gas commodity prices for cash flows for our customers. Hence, tough to get a good sense of visibility for the back half of the year.

In the US again at today's commodity price I think some of the near term fear has moved away. We're just not seeing a lot of desire by customers to lock in at any price for any period of time yet. So I think those kind of normal indications we see of a bottoming market really haven't emerged yet.

Okay does the headwinds in Mexico make you contemplate pulling assets out of that country, or ultimately there's nowhere else for them to go to work, so you'll just see how the market matures and unfolds in the next 12 to 18 months?

Well, the short answer is, no, it doesn't see us pulling out of Mexico. We've gotten that operation running really well for us, in fact, it kind of runs as an extension of South Texas. The rigs are some of our big deep rigs that were designed for the deep vertical plays, so they are working well in Mexico for some vertical and directional work.

We can ramp that -- the support cost up and down with activity, so whether it's one rigor five rigs it is working pretty well for us. And the customers we are working for down there appreciate the safety and the performance we generate, so whether it's one rig or three or four or five rigs running, it's working well for us. I think we'll just keep it in place.

Last one just for me just a point of clarification. When do you expect the Kuwaiti rigs to actually be in country and generating revenue at this point?

They should be in country at the end of the third quarter, early fourth quarter and generating revenue late October-November for the first rig and maybe as early as November-December for the second rig. They should be running smoothly by the end of Q4.

Perfect, appreciate the clarity. Thanks.

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

Hi, guys, this is Jake on for Jim.

Hi, Jake.

Hey, guys. First question I was wondering if you could just provide some color around how quickly and to what magnitude you can scale up. So you talked about getting ready for the turn. I'm not sure how you would put it in context, but maybe how many rigs you could add in a quarter or whatever way you guys have been looking at it.

Sure. The short answer is that ramping up quickly in Canada is first nature to Precision, first nature to most Canadian drillers for that matter. In fact the industry in Canada is used to ramping up from very low utilization levels at the end of the year to almost fully utilized by mid winter in just a few weeks. So factually in Canada, if called upon we could ramp up 60, 80, 100 rigs in a few weeks, and we'd have -- it ends up being both our bench strength and our rig managers and drillers and our call up lists for rig crews.

But I don't expect that in any kind of Canadian ramp up we would be limited on the Precision side to meeting customer demand, because we've just gotten so many years of doing it every single season, and while some people have left we've kept our call up lists live. So we know the next people to draw down to. So in the US it could be a little bit slower, but we think in the US we can ramp up rigs again at a pretty good pace using the same operating model we run in Canada.

But getting anywhere from three to five rigs per week ramped back up depending on truck availability and things like that we think we can manage the crews and the rig mobility and the equipment for those rigs pretty quickly. So, again, I don't think in any reasonable upturn scenario that we're going to miss out or be in a situation where a customer wants a PD rig and we can't support that with a fully re-hired crew and a rig that can go back to work.

Just to follow-up on that, do you think the magnitude and duration of the downturn has impaired your ability to ramp up in Canada, so I understand you would ramp up to 60 to 80 rigs in a few weeks in a normal season. But having operated at a much lower level for the past year plus, do you think that's impaired that ability to ramp up at all or no effect?

Yes, no question it has. It will be a tougher challenge for the industry. We've worked very hard to keep our drillers and rig managers. That's the key positions on the rig. Those guys, frankly, probably are still working on Precision rigs right now or maybe taking time off for the spring breakup, but I can tell you that we are certain we have the leadership teams for our Canadian rigs, no question there. But staffing the balance of the rig crew, probably a little tougher now than previous cycles, but I feel confident our guys have that challenge well understood.

Okay great and second question if I could, I was just wondering has the nature of your conversations with customers changed since getting past the oil price bottom in mid February and it seems like sort of been stabilizing a little bit here. Have the conversations you're having on a day-to-day basis with your clients changed at all, and if so how would you characterize that?

Well, the simple answer is, no, they really haven't changed yet, and we wouldn't expect them to change. I would tell you, though, that when the prices dipped into the 20s for awhile there I think many of our customers just didn't know what to say; didn't know what to answer. Some may have had their own job security concerns ranging into their minds, and I think that's pushed to the way side now. And I think our customers are talking to us again and able to plan at least the current wells that they are drilling.

But, no, as far as any kind of future improvement we've seen no change in customer sentiment yet. They are thinking about what happens if oil prices go up, and they are thinking about how they might respond, but that doesn't lead to any change in conversation with us.

Got it. Thanks for the color guys.

Thank you.

Thank you. The following question is from Dan MacDonald from RBC Capital Markets.

Hi, good afternoon. Just one question, Kevin, for your international operations, given some the commentary from some of the international market particularly in the Middle East and their ability to add even more barrels, have you seen any changes in indications to the positive from any of the markets over there that you operate in as of late?

Honestly, no changes to the positive. Again our customers are postulating what they might do if oil prices get back over 50, but in today's environment in fact we've seen -- we've probably seen some things continue to be rebid or pushed down the road a little bit, maybe a few more qualification steps or a few more clarifications.

So nothing's moving closer to the finish line, but the bid activity remains healthy, and we're bidding all around the Gulf region right now. We're in conversations with customers on kind of every corner of the Gulf region save those we can't, aren't allowed to go to. Lots of activity lots of discussions ongoing but nothing moving closer to the Finish Line yet. And I think these commodity prices in the first quarter paused any potential growth.

Thank you, the following question is from Sean Meakim from JPMorgan.

Hi, guys. Kevin, just the deep gas markets held up pretty nicely for you. It doesn't seem like there's much that can change on the supply side, but just curious if there's any shift in tone from your customers in that type of activity.

Well, there has been some shifts, and not all are encouraging. One of our customers that's a potential LNG customer has talked about reducing rig counts in the second half of the year, and that's certainly on the horizon for the back half of 2016. But yet others that are really focused on the liquids component are doing quite well, and we may see -- continue to see strong activity and maybe a couple of additional activations in the third quarter for customers focused on liquid, the liquids component in that play.

So the Canadian deep basin has a lot of similarities geologically with the Eagle Ford, and there's a dry gas region, there's wet gas region, there's actually an oil region, and it's the wet gas region that is drawing the most attention right now. And that -- those liquids are being as diluent for heavy oil. While future investments in heavy oil are certainly going to be paused by these commodity prices, the current projects have an increasing demand for liquids over the next four years. So there's a good core driver in place probably for the balance of the decade for most of that deep basin liquids play.

Got it, and that makes sense, thank you. And then sticking with Canada we had a pretty early spring breakup. I imagine there's not a lot of incentive to start early. Are you getting any sense of activity coming out of the breakup, or do we need to wait another month or so before we start to get a better idea?

Well we are getting some sense right now. It's not encouraging. Just not good enough clarity for me to give any really good information to you right now, but it will be a tough Q3 unless we see commodity prices both natural gas and oil prices tweak up a little bit and give our customers some better cash flows to work with.

There clearly is, like in the US, there's been some equity financings of Canadian E&P companies. We've seen the same thing happening in the US, certainly larger equity financings in the US, but this capital generally is going to just to tighten up balance sheets, less of it is going back to the drill bit. But I think we're going to need to see more capital move into the drilling space either through cash flow or capital generation before we can get a better sense of the latter part of the three -- of the year.

Certainly as you talk to our customers they are leaning plans to late 2016 when they are expecting commodity prices may have a bit more strength to them than today.

Understood okay, fair enough, thank you.

Thanks a lot.

Thank you. The following question is from Ian Gillies from First Energy.

Afternoon guys.

Hi, Ian.

Do you have any sense for the contracts that are rolling off through the remainder of the year of what rigs will go back to work for those customers I guess on the spot market and what will be stacked at this point, or is it still too early to say?

It's really, Ian, a bit too early to say. I mean I don't think our customers can think much beyond a few weeks right now, probably much beyond a few weeks with any certainty level. So I think as we get closer to those contracts rolling off we'll get a sense from the customers whether or not they will re-up that rig at some negotiated rate.

What we typically find, by the way, is if a customer desires to keep one of our rigs when it rolls off contract, the spot market-rate is usually not that relevant. If they like the rig, if the rig has been performing well and they need to keep the rig running, it's a point to point negotiation, and I won't say spot market rates are irrelevant, but they are usually far less relevant than a new opportunity popping up where somebody hasn't used Precision in the past.

Okay, perhaps maybe thinking of it a different way. I mean we can back into what spot activity was in Q1, and do you think that gets better or worse in the back half of the year I guess at this point?

Well probably gets a little better in the Summer and Fall because I'm -- unless commodity prices dip back down in the 20s our customers should see better cash flow.

Okay. That's helpful.

I think Q1 was really hammered by a negative and frankly surprising turn of commodity prices for our customers in the early part of the year, and so on that alone there's probably a likelihood that we will see a stronger uncontracted market in Q3 and Q4 than we saw in Q1.

Okay.

Good question, though. It's a nuance that I think didn't do a good job explaining my prepared comments, thank you.

And then the last one on the idle but contracted rigs, or any revenue -- yes, you said there were seven in the quarter. Are you able to provide any detail on how that rig count--

Actually we ended the quarter with seven. I don't really have a profile for the average number during the quarter. (multiple speakers) I think we started with three or four, and then by the end of the quarter they were down to seven, but I don't think I can give you any average count during the quarter.

Okay, and no sense for the remainder of the year?

It varies almost week to week or day-to-day sometimes where a rig might get pulled back up again or put back down, so no sense.

Okay. Thank you very much.

I'm -- I use the term black and white. I should have said cloudy.

Fair enough. I think we're all there right now, but thanks for the color. I'll turn it back over, guys.

Thank you. The following question is from Marc Bianchi from Cowen.

Hey, Kevin. I was hoping you could -- you have a few moving parts here it seems like in first quarter for US sort of revenue per day and also cost per day. You have rigs that were early terminated, wondering if those are -- assuming they are a negative mix impact to your revenue per day there. And then also the comments you made about sort of the spot or shorter term contracts kind of being at those really low levels. Just wondering as you roll into second quarter are there sort of additional downside we should be expecting on the day rate side just as a result of those kind of comments that you made already?

Yes, Marc, so this is Carey. It's hard to predict what the day rates are going to be because we do have such a strong contract position, and those rigs that are working on contract are earning top of the market day rates. We also have the idle but contracted rigs that influence day rates, so to the extent that we have -- still have six or seven or eight idle but contracted rigs in Q2, it will have a bigger impact than the idle but contracted payments did in Q1, so you're right. There are a few moving parts, but most of those are out of our control.

Got it. And then on the cost side it seemed like cost per day increased pretty significantly, and you mentioned sort of the fixed cost absorption there, but is there anything else that we should be aware of that might have been one-time or anything to keep in mind as you roll through to second quarter?

Yes, sure so the big thing in the US would have been the impact of turnkey. So if you think about the turnkey projects being very high day rates and very high daily operating cost, when there's a larger impact from turnkey it's going to influence both of those, and from the OpEx side that was about CAD1800 a day higher due to turnkey activity.

Okay, that's helpful, Carey, thanks. And I guess just thinking about that turnkey into the second quarter, is that going to be at a similar level, or do you have any visibility to that?

No, I mean the other nuance of the turnkey business is it's lumpy. We had about one rig working on average on a turnkey project during Q1, and I think that's probably as good of estimate as any for the rest of the year.

Got it okay just one more on the turnkey. You did mention that the cost was CAD1800 higher, but if I look at it overall on the margins would you say it was a net neutral on the margin?

You know, it -- I think that's fair, yes. That's probably fair.

Okay. Great thanks I'll turn it back.

Thanks, Marc.

Thank you. The following question is from Brad Handler from Jefferies.

Thanks, guys. Carey, let me offer my congratulations as well, but I think I'll let you off the hook, because Marc asked exactly what I was hoping to get at with both questions. So I'm going to turn it back. Thank you.

Thanks, Brad.

Thank you. The following question is from Jeff Fetterly from Peters & Company.

Afternoon guys. Three different questions. First off, in the release you talked about how 65% of utilization days in the US were from rigs under contract and 44% in Canada. When you think about the second half of the year, what do you expect the ratios to look like over those two quarters?

It's fairly discrete forward guidance, Jeff, which we usually don't give a lot of forward guidance. I think that it's probably reasonable to expect those kind of ratios don't change a whole lot. I'm just thinking back to the Q1 being so heavily affected on the non-contracted side by the low commodity price. You could see uncontracted rig activity pick up a little bit just based on that in the second half of the year.

Your comment a few minutes ago about the potential to see more spot based activity in the second half of the year (multiple speakers)

We try not to forecast too much forward on that front, but just thinking about what happened in the first quarter with commodity prices, it would not be unreasonable to think you could see more spot based activity in the second half of the year with prices now North of 40 at least hopefully staying there today.

On the rig term --

I don't mean to sound too bearish, just visibility right now is very hard to glean into Q3 and Q4.

Yes, I understand. On the terminations in the US, could you give us a sense of geography? For those three rigs?

Two of the three in Texas, I think?

Yes, I think it would be Texas and Colorado.

Okay. And then lastly, capital allocations. So Kevin your comment earlier about evaluating, making, call it a strategic purchase on the inventory or capital equipment side. What are you looking for in the market, or what do you need to see to be comfortable to make those decisions either from your suppliers or on the demand side?

You know we are seeing opportunities to buy things at substantial cash discounts right now, and, frankly, whether it's engines, pumps, top drives or mud -- or drill pipe, if we could find a way to make an investment, a small investment, in some parts or assets that have no declining value with time and likely those get used up in the period of 2017, we might do it a bit in advance. I don't think it's going to change our cash balance in any meaningful way. You aren't going to use up -- we're not going to take CAD10 million or CAD20 million and use it to buy inventory at this point in time.

How do you think about doing something like that versus repurchasing incremental debt at a discount?

Like every investment we make with cash we look at the investment value and the liquidity that we're giving up and the cost of liquidity replacing net cash value. I just -- my comment really was based on we are seeing opportunities as probably too early to pull many triggers right now, but I think there will be things develop through the year that we will see due to stress in the supply chain, due to vendors trying to clear out inventory. But maybe later in the year, maybe even in the early stages of a rebound we can capitalize quickly with our liquidity and save some cash costs in a rebounding market.

And that's something you would likely prioritize ahead of deleveraging the balance sheet through those repurchases?

Our top priority is deleveraging, absolute top priority. In fact can tell you that nothing weighs on us more heavily than making sure we understand our balance sheet and how we manage it today, tomorrow and over the next three, four, five years.

Great, thanks for the color.

Thanks, Jeff.

Thank you.

(Operator Instructions)

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

Hi, thanks for letting me back in, and, Carey, if you answered this already my apologies. But just a real quick modeling question given the lower working rig count in Q2 for both Canada and the US should we then see operating cost per day go up just given cost spread out over fewer rigs?

In general you're correct. We have had some overhead reductions as I mentioned earlier. We've had some wage reductions in our Canadian operations, but, yes, there is some fixed cost that will be spread over fewer activity days if that's what you're modeling. But also remind you typically in Q2 we have larger rigs working, and we have a bit more operating cost on a daily basis for that reason, too, in Q2 in Canada.

And then conversely on the revenue per day presumably goes higher just given the better mix of contracted rigs?

Yes, it will depend what the total activity level is, but, yes, in Canada for sure, you would have almost all of your rigs being under contract.

Thanks. Kevin, just a big picture question for you but we -- as you go through updates and talk to companies, a message that is pounded home to us is that service companies won't seek to deploy idle equipment until pricing moves higher. So first I guess is that your view and if so, during the early part of recovery would you be willing to lose market share in order to hold off for higher pricing if some of your peers elected to focus on market share? Just how will you approach that?

So I think as I was kind of saying earlier how the rebound looks in our minds we actually think the better capitalized customers will probably start rebounding before the weaker capitalized customers, and those that have access to capital to get back into drilling programs. We think we're pretty well positioned with those companies.

My guess is that we participate with the rebound fairly early on, but it's also likely that we're doing it with customers who used our rigs recently and want those same rigs back. So we're thinking that there's probably a little less rig on rig competition during the early stages of a rebound, and that may come in more mid rebound than early rebound.

If you were wrong with that assumption and it was more say of the more nimble customers that are just well to well type players, smaller E&Ps, they came back first, would your answer change?

We would probably be anxious to put rigs back to work in a rebounding market. I wouldn't want to walk in at low day rates for an extended period that's for sure, so if we're putting rig back to work at mid to upper teens, I don't want a two year contract and probably look at something much shorter.

Fair enough, thanks, guys.

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

So I want to just add a couple comments at the end which is a bit unusual for us, but number one, while we have limited visibility on additional work during the third and fourth quarter of this year, we have a strong contract book that remains in place. We have a strong contract book pushing into 2017, and we are focused entirely on managing and sustaining our liquidity through this downturn as we begin to think about a rebound to the market. But rest assured that we think that the combination of our balance sheet strength, our operating competitive advantage and our cash liquidity leaves us in a very strong position in a very tough market.

So with that comment, I'll thank you for joining us today and look forward to talking to you on our Q2 conference call in July. Thank you.

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