Precision Drilling Corp (PDS) 2016 Q2 法說會逐字稿

Welcome to the Precision Drilling Corporation 2016 second-quarter conference call and webcast. I would now like to turn the meeting over to Saber Rad, Manager, Investor Relations and Business Development. Mr. Rad, please go ahead, sir.

Thank you. Good afternoon, everyone. Welcome to Precision Drilling Corporation's second-quarter 2016 earnings 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 our news release earlier today, Precision Drilling Corporation reported its second-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 a 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 second-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 second-quarter results I will provide an update on our 2016 capital plan and our liquidity position.

Second-quarter adjusted EBITDA was CAD22 million, which is 75% lower than the second quarter of 2015. The decline in adjusted EBITDA from last year is the result of decreasing activity levels across all of our operating segments and lower spot market pricing. Included in our second-quarter results are CAD1.6 million in restructuring costs and a share based compensation accrual that increased SG&A expense by CAD4.6 million over Q1 2016 levels.

In Canada, drilling activity for Precision decreased 48% from Q2 2015, while margins were CAD95 per day lower than the prior year. The margins for the quarter were positively impacted relative to the prior year by approximately CAD4,000 per day from shortfall payments received during the quarter and negatively affected by the fixed cost absorption due to lower activity.

In the US, drilling activity for Precision decreased 58% from Q2 2015, while margins were $785 per day higher than Q2 2015. The increase was primarily a result of the impact from revenue earned from idle but contracted rigs, which increased the margins relative to the prior year by approximately $1,600 per day, offset by the negative effects of fixed cost absorption due to lower activity.

Internationally, drilling activity for Precision decreased 44% from Q2 2015. The decrease in activity was primarily the result of fewer days in Mexico and the Middle East. International average day rates were $44,391, a decrease of $309 from the prior year. We now expect both the Kuwait new build rigs to begin working in the fourth quarter on budget and with an early start-up. Today, we have 29 rigs drilling or moving in Canada, 29 rigs drilling or moving in the US, with 6 rigs receiving idle but contracted payments in the US and 7 rigs active internationally.

In our C&P division, adjusted EBITDA this quarter was negative CAD2.6 million, approximately CAD2 million lower than the prior year. This decrease is a result of lower activity and lower pricing in all C&P business units.

We incurred approximately CAD500,000 in 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 [rig] restructuring costs since beginning of the downturn are CAD26 million. We expect the annual G&A and overhead operating savings from 2014 levels as a result of these restructuring initiatives to be approximately 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 second quarter of 2016, our capital expenditures were CAD53 million, which compares to CAD113 million in the second quarter of 2015. For the full year 2016, we expect to spend CAD202 million, comprised of CAD158 million for expansion, CAD42 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.

Our contract book continues to perform for Precision. As of July 20, 2016, we had an average of 57 contracts in hand for the third quarter, an average of 58 for the full year 2016, and an average of 35 for the full year 2017, an increase of 4 rigs from three months ago.

As of June 30, 2016, our long-term debt is approximately CAD2.1 billion, and our net debt is approximately CAD1.6 billion. We have a $550 million US revolving credit facility that is undrawn with the exception of $46 million in letters of credit.

We had CAD456 million in cash on our balance sheet at the end of the quarter. Our continued strong cash balance reflects the organization's focus on cash generation and preservation. Although the cash balance decreased by CAD21 million from the first quarter, we were able to generate CAD32 million in cash net of investments in our fleet. As of June 30, 2016, our total liquidity position was CAD1.2 billion.

As stated in our 2016 priorities, we will continue to place the highest priority on our liquidity position. Also stated in our 2016 priorities, is our goal to continue a multi-year plan for net debt reduction, which we'll achieve by building cash as well as maintaining maximum flexibility to address our long-term maturities over the next several years. I will now turn the call over to Kevin for a further discussion on the business and outlook.

Thank you, Carey. Good morning. The second quarter of 2016 will certainly go down as one of the most challenging quarters the land drilling industry has faced. Not only was it the sixth consecutive quarter of this prolonged downturn, but our customers reacted swiftly, cutting activity reflecting the low commodity prices realized during the first quarter. Industry activity levels dropped to multi-decade lows. For most of the quarter, there was little relief in sight. Just looking at Canada for a brief moment, if you exclude the deep basin, which still remains a bright spot, Q2 industry activity outside the deep basin was less than 20 rigs, amazingly low activity levels.

For Precision, our activity during the second quarter was roughly half of the prior year, averaging low 20s in the US and low teens in Canada. In the US, the Permian remains our strongest region, as did the deep basin in Canada. It's in these areas where Precision's intense focus on efficiency and high performance is delivering us our best market share results.

Early in the quarter, our customers remained defensive, in a survival style mode. As the quarter progressed and commodity prices, both oil and gas recovered, we noticed a significant shift in customer sentiment. Late in the quarter, several of our customers began adding rigs back, as they adjusted near-term spending back up to levels that are reflecting the current commodity prices. This has become evident in the weekly rig activity reports that are published by the industry.

But more encouraging is that select customers are looking further out and planning into 2017 and beyond. As a result, we mentioned, one rig year of new contracts booked for this year and four rig years stretching into 2017. I will give some more details on that later. Specifically, in the US today, we're running 29 rigs. That's up one from our press release earlier today, but seven from the second-quarter lows. Barring another commodity price pull-back or collapse, we expect our rig count to grow modestly through the third quarter. Of the seven rigs added so far, the majority of this increase is in the Permian Basin.

Customer's discussions of late though are not limited to the Permian. The gas plays are gaining attention. But we do expect the Bakken may lag. I believe in the near term, we're seeing customers readjust spending upwards towards the current strip. This is not a rebound, but it's indicative of the early stages of recovery. Our view remains that oil prices need to further strengthen before a full rebound will begin. But based on customer discussions and the long-term opportunities we're exploring, it seems that customers are in the early stages of planning for that improved environment.

I know the most sought after information from Precision is regarding spot market prices and the rates we booked our new contracts at. During the second quarter, we did not experience any further pressure on uncontracted rates. We report that those rigs continue to work at rates in the mid to upper teens. We've achieved better pricing on the recently signed contracts. We believe that we are achieving premium pricing on these contracts with expected EBITDA margins in mid to upper single-digit thousand dollar range -- thousands of dollars range. Now, we view this added 2017 visibility and the firm day rates as a good indication that our customers are shifting to longer term thinking and looking to the improved oil supply demand fundamentals. But I'll not provide any further clarity on rates just due to the highly competitive nature of the business.

In Canada, our activity is trending upwards, following the usual seasonal recovery pattern. But the starting point was very depressed. Most oil and gas regions remain challenged by the commodity prices. Our current rig count in Canada is 29, as Carey mentioned earlier, also up one today from our press release earlier this morning. We expect the seasonal trend to continue through the quarter.

Our market position in the deep basin remains very strong, with our pad walking Super Triples. These rigs continue to deliver pace-setter performance for virtually all of our customers in the region. Those customers are clearly recognising the value we're providing. In the Viking and the Canadian Bakken areas, we expect industry activity should improve. But [rig-on-rig] competition in these areas will remain intense and pricing will stay restrained. We do expect a modest rebound in heavy oil, particularly SAGD drilling. This is where Precision enjoys a strong market position that should be helpful for our business.

I would rather not discuss pricing in detail, but to say that in the areas where we have a strong position, we're able to support more rational pricing environment. Pricing and rig performance are directly tied together. Beyond the near-term seasonal recovery, we have several customers looking out to 2017 and we could see further contract additions depending how the outlook evolves.

I believe the key takeaways from Canada and the US centers around this improved visibility that we're seeing for the first time in several quarters. Stabilized pricing and customers planning higher activity levels, as they watch for improved fundamentals in 2017. Whether this is a green shoot, an improving outlook, or early signs of a rebound, it's all predicated on commodity pricing and strip pricing. I want to stress that we are not viewing this as a V-shaped rebound. We remain mindful that several macro risks are still in play.

Now, turning to our international business for a moment, the best description is steady state. We have experienced no further pricing pressures; however, our customers are not yet reacting to the improved commodity outlook. Bidding activity remains strong, however, the conversion of these bids to contracts and activity is not progressing. Currently we, as Carey mentioned, the seven rigs we have operating. That's the three in Kuwait, three in the kingdom of Saudi Arabia and one in Mexico.

He also mentioned the two new build rigs for Kuwait that are making great progress and expect to be deployed soon, the first rig in a few weeks and the second rig following that. Both rigs should be operational later in the fourth quarter. Now, we do have eight idle international rigs, four in the gulf region and four in Mexico. These rigs remain highly competitive and available for immediate reactivation, but we do expect it will take stronger commodity prices to move the needle further for us in the international markets.

Turning to our completion and production business for a moment. As Carey mentioned, we've completed the reorganization and restructuring of this group. Our well service leadership is located in Red Deer, closer to the field and closer to our customers. The business has been significantly streamlined and is performing better than we expected in a very, very challenging and competitive environment.

Activity will improve on a seasonal basis, but we continue to see significant under spending on well service, well abandonment and remediation work by our customers. This remains a highly fragmented, very competitive business with intense pricing pressure. For Precision, we've battened down all the hatches, completed our streamlining, maximized our efficiency and we're well prepared to ride out these challenges.

Now, turning back to our priorities, Carey covered liquidity quite thoroughly, but I'll make a couple more comments. I can tell you that managing liquidity and particularly our cash balance is our absolute top priority. While we believe our total debt levels are higher than we prefer, as Carey mentioned, I tell you, we remain comfortable in this environment with our staggered long-dated debt maturities and the strong liquidity we enjoy. When the market visibility improves, de-leveraging will be a key use of cash. However, while uncertainty remains high, cash and liquidity remain our top priority.

In the near term, I'm very pleased with our cash management. Carey mentioned that we invested CAD56 million in capital spending and offset that with about CAD32 million of positive cash flow. Sustaining a cash balance of CAD455 million is critically important to us. I applaud all Precision employees for doing their part to conserve cash while continuing to execute our business effectively in all areas.

Now, our second priority is ensuring that our current operations continue to deliver the efficiency and the high performance our customers expect. During the second quarter, our employees delivered the best operational performance on record with zero safety -- or zero serious safety incidences, zero serious environmental incidences and an all-time Precision record for mechanical efficiency in our operations. These three key metrics are how our customers rate our rigs. We believe our competitive advantage remains strong, probably stronger than ever.

Our third priority is preparing for the rebound. At Precision, through our structured field HR recruiting processes and our rigid rig maintenance and stacking procedures, we expect that we can easily and quickly respond to the industry's reactivation needs with virtually no incremental costs or capital spending. We believe we have the high quality assets in place in every active basin and the field employees available and willing to return to Precision should we be called upon to do so. We believe that Precision is perfectly positioned to gain market share and deliver excellent operational leverage when a rebound materializes.

In summary, the second quarter was a very tough period for North American land drilling and services. Precision was not immune. As commodity prices improved through the quarter, our customers seemed anxious to pivot, shifting from cash conservation survival mode to more normalized spending, with some looking through this price volatility for improved supply and demand fundamentals over the longer term and beginning their plans accordingly.

I'll conclude by thanking our employees for the excellent, truly excellent operational results during the quarter and their key focus on cost efficiency and safety. On that note, I will pass the call back to the operators.

(Operator Instructions)

James West, Evercore ISI.

Kevin, curious about -- your conversations, obviously getting better, visibility here is improving. Could you break that out between your Canadian customer base and the US customer base? Perhaps, is the visibility better in the Permian, less so in the deep basin in Canada? Or is it the same? Just some color on the two different markets.

It's interesting, I would tell you that I think that the customer is looking to longer term thinking, like late this year or early next year. The conversations are similar in the Canadian deep basin, in the Permian, but also some of the other oil plays in the US right now. So, we're seeing kind of a consistent theme right now of larger, better capitalized or well capitalized customers looking through near-term volatility. Very few clients being signed up yet, but lots of conversations ongoing. So I would describe it as, I think they're expecting to see better commodity prices, but probably not prepared to pull the trigger until that materializes.

Okay. That's helpful. Then your comment about pricing being stable. I think you said that on new contract, or the new contract that pricing was actually higher. Did I catch that right?

Yes, you did. I would tell you that I think that our -- what people refer to as a spot market, our uncontracted rigs, pricing has been stable through the quarter, despite the utilization dropping. But I think we are happy with the premiums we've achieved on the contracts we've signed, both during the quarter and stretching into 2017. We are [priming] out a clear premium on those restarts.

Now, I've been describing this over the past few months, as we do believe that as customers begin to reactivate rigs, it will be customers that likely used those rigs during the previous cycle and probably paid for those rigs and probably know the performance of those rigs. They are looking for us to restaff those rigs with the same crews, the same drillers, same rig managers. They will be willing to pay, I would describe it as, a small premium for that capability. I think we're achieving that.

Okay. Got it, great. Thanks, Kevin.

Great.

Sean Meakim, JPMorgan.

So, I was just curious if you could maybe give us a little more detail on the recent rig adds in the US? If you could maybe elaborate on types of drilling or customers that you're seeing, either the work you what or just some of the broader tendering that you're seeing? I think, I guess what I'm trying to ask is, could you characterize the mix of work in some of the incremental activity, similar to what you've seen as we get to some of the base levels in the trough? Or have you seen a shift?

I don't want to give too much detail here because there's just so little work out there right now that it's likely if our competitors are listening, they will know who we're talking about. What I'd comment on is every rig we've added is a horizontal drilling resource rig. We are not adding any vertical drilling rigs. So, we're participating in the most important part of the plays. I think every one of these rigs is a pad walking Precision Super Triple. So I think we're kind of expecting -- it's what we're expecting to see in a rebound. It's been focused on the Permian, on the Canadian Duvernay, but we are seeing traction in other plays.

Okay. Fair enough. Then just to touch on the deep basin, you highlighted still a bright spot. Obviously, it's been a great anchor position for you. The recent FID delay for one of the LNG export projects, do you have a sense that could have an impact to activity? Or how does that factor into your thoughts looking forward?

Sean, that's not what I would call good news for sure. Fortunately, our customers right now in the deep basin are focusing on the Duvernay and the Montney. It's a wet portion of the play they're focusing on. I would argue that some of those customers were long-term LNG players for sure. But in the meantime, they're selling these products. They're especially selling the natural gas liquids, the NGLs, as [delayment] for heavy oil. That portion of the revenue stream from the three days fluid, is driving the economics right now. So I don't think the delays on the LNG projects are going to have a material impact on near-term activity. Certainly, I think Canada is missing an opportunity long term by not helping the operators get an approval faster.

Got it. That's very helpful. Thanks, Kevin.

Scott Treadwell, TD Securities.

Just maybe building on that last question, the contracts that you've added here, were those recontracting an extension of the active rigs? Or I think you let it slip, were those restart of idle rigs?

Actually, Scott, there was both. We didn't give that level of clarity, but I can tell you we had both. We had a couple of recontracts. We had a couple of recontracts, but with known customers that know our performance and were likely involved in the original contract of those rigs.

Okay. I'm assuming then that there was a mixed set of direct negotiations and tenders in that?

Yes, a mix, but I think most were just direct point to point negotiations.

Okay, perfect.

Most, if not all.

Okay. Perfect. The second one for me, the OpEx in Canada, obviously part of that you referenced the lower revenue basin and the fixed costs. Can you quantify or give us some sense, was there an impact from seasonal costs that as some of the active rigs went down, you only had -- you had that one quarter window to do any sort of R&M that you needed to get done? Did that contribute to the higher OpEx in Q2? Or was it almost entirely the fixed cost absorption?

It was almost entirely the fixed cost absorption, Scott. Also, if there are minor repairs to do, it's going to have a much bigger impact on the daily operating cost as well, just because the volume is so low.

Okay. Turning to the IBC side, just wondering if you've got any visibility -- if any of those IBC rigs could be moving to active any time in the near future? If you do get any kind of notification, is it 30 or 60 days? Or can they call you Friday to go to work Monday?

They can call us Friday to go to work Monday. We think we can put the rig back to work that quickly. We're in touch with those customers almost every day. I would say, that all right now are likely to go back to work at some point. The timing is hard for us to anticipate.

Okay. Looking a little bit further out, you guys have referenced a number of times, your ability to ramp up. At some point, there's got to be some CapEx that comes down the pipe. Would the likely contributors to that be recertifications, drill pipe, and things like that? Or is there something else that once you've added the first, say, 100 rigs, that's going to drive some, call it, maintenance or reactivation capital?

Yes. I think that if we get through a large number of rigs, if we were to add 50, 75, 100 rigs to the fleet, I do think things like drill pipe start to catch up a little bit. There would be probably increased recertification activity. Some of those rigs will have been down at that point probably two or three years. There's probably a little bit of catch up on the rubber products. Then Scott, there will be more of a trend to 7,500 psi stand pipes and larger mud pumps. For us it's a bolt-on, but it does mean capital. So, I don't think we have any obsolescence issues, but there will be some rigs that require higher pressure stand pipes. There will be some rigs that we add walking systems on to.

I expect that if you play this forward, I don't know if it's two or three years or four years, but when commodity prices -- if they move back into a CAD60, CAD65 range, I expect that all of our Tier 1 rigs are working, probably all working on pads, and probably all drilling core resource plays where walking systems have real value for our customers. So I do think that moving from where we are today to having virtually all of our Tier 1 rigs as walking systems is possible. I do think that for that to happen, there has to be a pretty good commodity tailwind and a good tension on pricing, there's a good opportunity for us to get returns.

Okay. Last one from me on the outlook. As you've referenced in the past that the contracts kind of roll off at a steady pace. Are you seeing any difference in the discussions -- obviously, this last addition has been welcome, but as you've got customers, you've got rigs expiring, Q3, Q4, Q1. A difference in the tempo or at least the, I guess the tone of those discussions with customers about recontracting, what kind of -- where the day rate goes. Has it shifted to some sort of worry about security of supply at this point? Or is it maybe just a little more friendly than it was six months ago?

Scott, I don't know if friendly is the right term. I would tell you that if you had asked me the same question six weeks ago, nobody would have been talking to us about a renewal of a contract or anything. They were just trying to figure out ways to cut costs, six weeks ago, maybe seven weeks ago. The sentiment swing in the past 1.5 months has been phenomenal. So I think I'll stop with what we have done so far, the contracts we've booked up for 2017, clearly, the tone has changed. The sentiment has changed, but it's fragile. If commodity price were to take another leg down back into the 30s or 20s, any bit of this momentum we see right now could disappear very quickly.

Okay. Perfect. That's all I've got, guys. I appreciate the color. Thanks.

Thank you.

Jim Wickland, Credit Suisse.

Kevin, I noticed that on the Canadian seasonality that normally third-quarter rig count is up about 80% from the second-quarter rig count on an historical basis. So putting some rigs to work in Canada, I guess really shouldn't come as a shock, but do you think you are going to get as big of an uplift in activity in Canada in Q3 as historically we have seen?

Well, the law of small numbers should get us there, Jim. We started the quarter off with 12 or 13 rigs in Q2. So getting a 78% lift I think is pretty easy. But I don't think it's very helpful. I think that's the wrong answer. We're at 29 rigs today. We expect just to follow the typical trend for the rest of this quarter. I would tell you that I think access capital in Canada is slightly limited compared to the US today. But remember our customers here deal in selling their products in US dollars but their costs are in Canadian dollars.

So even a slight movement in the commodity price, if we get closer to 50 rather than 45, I think that frees up more opportunities for Canadian customers. So, while I think we're lagging in Canada to the rebound of the US a little bit, it's pretty sensitive. A small increase in commodity price between now and even early September could see activity in Canada come up nicely for us. I mentioned a little more pressure in the Viking and Canadian Bakken, but another CAD5 on the barrel would be really helpful for our customers. I want to see activity move up nicely.

Every little bit helps. Do you normally see -- when do you normally see in the normal course of a year, because this one obviously isn't normal, when do you start to see your customers look to contract rigs for the coming year? I'm asking that because of the significant seasonality in Canada. I didn't know if it's normal for a third quarter, people start looking into next year because we don't do it in the US until easily the first quarter.

Yes. There's a real seasonal based cyclicality here. I would tell you that as you get closer to the beginning of September, the conversations about 2017 get more and more focused.

Okay. My last question --

I would tell you that when people come back from vacation, whether it's the second week of August or third week of August, they are now focused on 2017. So, as we get in late August, early September, they're building their budgets for 2017. We start getting clear with our customers about needs in winter.

My last question, Kev, what are cash costs for rigs in the Permian these days?

We're not giving clear guidance on that, but I think we've done a great job managing our costs down.

Okay. Thanks, guys.

Thank you.

Marc Bianchi, Cowen.

Kevin, we hear a lot about 1,500-horsepower AC rigs being kind of the ideal rig that's being demanded, with all the other bells and whistles as well, such as walking and mud pumps and [hook loads], but you guys have 1,500s and you also have some 1,200 and 1,800-horsepower rigs. Can you maybe talk to us about how that factors into what an E&P might command? Maybe if you can say what of those rigs that you contracted were 1,500 versus 1,200 versus 1,800?

Yes, I don't have the breakdown between 1,500 and 1,200. In fact, what you're referring to on our website where you found those 1,800 is really a 1,500-horsepower class rig. We're really dealing with two Super Triples in the US, a Super Triple 1,500 and Super Triple 1,200. The 1,200 rigs are more commonly being used in the Niobrara and the Marcellus. The 1,500-horsepower rigs are in the Marcellus and the Niobrara and every other basin in the US, Permian especially.

Okay.

So that's a regional mix. I'd expect over time that we may see as horizontal reach starts stretching out a little further, some of those 1,200s may migrate back to Canada. We may backfill 1,500-horsepower rigs in the US. We'll see how that trends out.

Okay. Thanks for that. Then, I guess on CapEx, either for you or Carey, for 2017, I know you're not sort of guiding but it sounded like maybe maintenance is the starting point there. I think we're about CAD40 million of maintenance this year. Is that really the type of number to be thinking about? Or are there -- how should we think about how getting upgrades or anything else would play into that?

Well, the base maintenance CapEx we can tell you, if you can tell us what the rig count is going to be next year. (laughter) Because that's all activity based. But this year, I think in the mid-30s level is probably where we're going to be for maintenance. So, if activity is similar, mid-30s would be a good estimate. As Kevin said, I think the first part of the reactivations of our fleet won't require any sort of upgrade capital. But as we get deeper into the Tier 1 rig fleet reactivations there may be a little bit, maybe a CAD0.5 million, CAD1 million, CAD2 million a rig, if we're adding walking systems or third mud pumps.

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

Thanks, Marc.

Jon Morrison, CIBC World Markets.

Can you give a sense of how many incremental rigs you could be running in Canada or the US based on your current cost structure of not adding on the SG&A or corporate side of things, at this point?

Jon, we -- I would tell you that the resizing, restructuring we did in the first quarter was designed to bring us down to sort of a midpoint of about 100 operating rigs. Today, we're operating about 60 rigs. So I can tell you, we can certainly add, from today's rig count, 40 rigs with no impact on G&A or fixed costs. But we also think that we can probably go beyond that by about another 50 rigs. We'd be running a little bit fast and hard and a little bit lean. So I would tell you, I think we can probably get to about 150 operating rigs without a meaningful change in G&A.

After that, there's no question we'd have to add utilization or activity based costs throughout the system. But I think that we were very thoughtful in the restructuring we did back in the first quarter and really sized for that mid winter activity level, recognizing that we carry a bit of extra costs during the spring breakup. But believing that we're probably going to get back to that kind of activity level in this commodity environment, in this CAD45 to CAD50 commodity environment and believing we need optionality to go beyond that. So, the short answer is, we can probably add up to about 90 rigs with today's rig count, with a minimal impact on G&A.

Okay. You talk about having a large pool of pre-screened candidates in the system and ready to go back to work. But ultimately, as time goes on, people end up doing different things. I guess the question is, how do you know that's an accurate number and you can ultimately meet the demand on the field employment side?

I will let Gene Stahl -- I'll let Gene answer that question.

Yes. So we have a very formal process through HR and our Personnel Department. We're reaching out to our inactive employees all the time on a regular basis, either through the rig managers or directly. So we have a real good sense of where guys are at, what they're doing, and their expectations on when to come back to work.

Jon, we keep that list live. If somebody falls off the list, we dig down a little deeper and just call up the next group of people below that. So, I'll tell you that we're probably always within 30 days of knowing where people are and what they're doing.

Kevin, I realize you don't want to make too many comments on pricing as your reference, but do you expect to put out any rigs at little to no margin just to get equipment warm in the coming period? I guess what I'm getting at there is, I'm thinking about some of your Heavy Doubles, or Super Singles, as having different supply/demand dynamics than your Triples over the next, call it, two to four quarters?

Yes. Jon, strategically, no. Technically, occasionally. If there's a good customer or a place we want to be or something we're trying to accomplish, we would put a small number of rigs out at a lower price, but generally our strategy is to defend our margins.

Okay. Is it fair to assume that there could be an inflection point in Mexico coming where, if you don't see any uptick in activity levels or ultimately interest in the market from a foreign capital perspective that you would have to look at redeploying those rigs to other markets, if demand rises in other countries?

Probably not. I think the cost to move those rigs would make them probably uncompetitive in other areas, plus we have excess rigs now in the list that we can deploy there. I mean, if we used up all four rigs in inventory in the Middle East and we could get a moat fee paid from Mexico to the Middle East, absolutely. But I also don't think Mexico is dead forever. I think the Schlumberger and Halliburton and IPM model will work in Mexico.

It does give PEMEX a high quality strong, intelligent drilling program through Schlumberger and through Halliburton that we think we'd be part of it. So, I think the answer is, I expect that business will rebound at some point, probably commodity price sensitive. I think the Schlumberger model and Halliburton model is effective in Mexico. It's been down there for 1.5 decades, working quite well actually. If we use up our rigs in the Middle East, we would certainly look to redeploy rigs to the Middle East, if demand was there.

Throughout every downturn -- this is just going back to your comment on CapEx and cash outlay over the coming period, through every downturn, pretty much every service company says that all of your equipment being laid down is in excellent shape, ready to back to work, and there's going to be almost no capital needed to ultimately get that back in the field. Inevitably, a large capital upgrading or cost cycle follows. What gives you comfort or confidence that it's not going to be the case for Precision this time around, outside of the small upgrades like adding a walking system that you mentioned earlier?

Jon, 145 new build rigs delivered in the past four or five years. The rig fleet is extremely current, extremely new, that's one big piece. We retired a large block of our Tier 2 rigs back in December. Every spare part off those rigs from a 3X4 transfer pump to expendable parts, we've robbed off those rigs, we've pulled those in. I think we're in pretty good shape with our rig fleet. For sure, if a rig has been down two or three years, there's little more cost to get it back up again, no question there. But I think what we'll see is that when we work through the first 50 or 60 rigs, then we're probably into walking systems and high pressure mud systems and things like that. Carey, anything to add?

Yes. Just a couple other things I would add there, is just taking a look at our daily operating costs. We're reducing overhead where we can, but we're still spending the required repair and maintenance to keep our rigs in good shape. The same thing with our maintenance capital expenditures. It's down over 2014 and 2015, but relative to the activity level, we're still investing the appropriate amount in our rigs.

I think the one area that people get caught out is on drill pipe, where they will -- if you can save money in the short term by cannibalizing your fleet on the rigs that are operating, then when business rebounds, you're short a drill pipe and you're paying a premium. We're being very careful to keep our rig fleet -- our drill pipe fleet current and not cannibalizing the fleet. So I think that's one area, where a lot of drillers get caught out. It's just so easy to do. You can save cash costs in the short term. I can see a point in time where that might be necessary for anybody, if the downturn were to last half a decade. But we've been refreshing that fleet from [Deersville] over the course of this downturn.

Carey, I realize that the market is largely focused on growth at this point and in putting rigs back to work, but do you have any major concerns about extending additional credit to any of your customers that are ultimately asking for incremental rigs? Even as we go through this upturn, balance sheets are fairly stretched. How comfortable are with you the receivables that you have on the balance sheet?

I would say we're very comfortable. We have a rigorous credit review process that is upfront and then on a quarterly basis. So we're always looking at customer credit quality and feel very good about our customer base and credit quality as it sits right now.

Last one just from me. On the service rig side, it looks like you guys gave up some market share in the quarter. Are you unwilling to work at some of the negative rates that are being mentioned in the market at this point and you're more than happy to give up market share and unwilling to go into negative territory to defend market share at this juncture?

The short answer might be yes to that. But also kind of expanding on that, it might be a bit of a -- they're all small numbers, a couple rigs here and there, all of a sudden meets five market share points. Jon, that is a highly fragmented market. It includes mom-and-pops, it includes small private companies, medium sized private companies, and then a bunch of companies like us that have the full service rigs as kind of a secondary or tertiary product line. But it's just highly fractured. It's structurally in trouble right now. I think we've done all the right things.

I think we've -- we took a pretty big write-down in the fourth quarter on those assets. We think they're appropriately valued in the market now. But I look at Grand Prairie -- I think at last count, I think we counted 14 or 15 operation bases in Grand Prairie, I guessed about 25 operating rigs. So the industry has a structural issue that we need to work our way through. We're taking our steps, others to have take their steps, but it's hard. It's a hard market right now. I'm not running a business here to be cash flow negative, full stop.

I appreciate the color. I will turn it back.

Ian Gillies, First Energy.

Just out of curiosity, is there any rig specifications you're seeing that customers want that has been surprising and perhaps different than what you've seen over the past two quarters, as they look to go back to work in certain key plays?

No. The answer is, no, absolutely not. We are getting a few customers who didn't have access to our Super Triples maybe a year ago that are getting a little bit of capital and they'll be getting access to the Super Triples. The performance has been really good. You can call a few of the Alberta customers that you see on our list -- the public list today, that didn't use us a year ago and ask them how our performance is. You'll get -- you'll hear the redrilling [pace] in our wells. The same thing holds true in the Permian Basin.

Okay. Then with respect to -- you mentioned sales tax and the operating costs. I don't know if you mentioned it earlier, I was -- it took me a little while to get into the call. Are you able to elaborate a bit more on what happened with the sales tax in the US? How that affects your operating costs and perhaps go-forward impact?

There was a bit of one-time impact that was, I think, less than CAD1,000 impact on daily operating costs, but it's just a -- it's reversing accruals on sales tax on a quarterly basis. We'll review this every quarter and make adjustments as necessary.

Okay. Thanks, Carey. That's really helpful. Last one from me, I mean, it sounds like Precision thinks they're okay with respect to staffing rigs as they go back. They're comfortable with where the equipment is right now. So from your perspective, what are the potential bottlenecks as activity recovers? Because it's never as seamless as we would all like to think it's going to be.

Ian, I look back on the last five cycles at the industry as a whole and I was surprised -- Carey reminded me, the drillers aren't actually the backlog -- aren't the critical path out of recovery. It's a heavy lift. The drillers, whether it's Precision with great systems or maybe a small mom-and-pop trying to fire up a couple rigs. The drillers somehow find the staffing. I think it's because we've -- in Canada, CAODC has good rates. In the US, the drillers have quite good at paying people appropriately. But I think the jobs on rigs appear to be attractive jobs. I think the industry has done a pretty good job staffing up. I don't think the critical path is staffing rigs. It's a heavy lift, a lot of work. It's tough and training is required. So don't mishear me that it's easy.

But I think the critical path is people that have either robbed rigs or taken things off rigs, engines, generators. There's a rebounding market. I can tell you the supply chain winds down their inventories, whether it's drill pipe or Caterpiller engines or mud pumps. In a rebounding market, the larger companies, larger drilling contractors get priority. The balance of the industry struggles to try to find that source. The drill pipe gets tight, the Caterpillar engines get tight, mud pumps get tight in a rebounding world. I'm pretty comfortable with where Precision sits today.

Okay. Thanks very much. I'll turn it back over.

Okay. Thank you.

(Operator Instructions)

John Watson, Simmons.

Apologies if I missed this, Kevin. Did you specify if the new term contracts with mid to high single EBITDA margins were destined for Canada or the US?

I didn't say that. I don't know if it's in our disclosure, but it's a blend of both.

Okay, that's helpful.

Because these markets are so sensitive right now, so little activity in all regions, I really don't want to be more specific than that.

Right. That's fair. Then just one more from me. Looking at consolidated EBITDA within contract drilling, it appears as if international margins fell significantly. Is that the case? If so, why?

We don't disclose that, so I can't give you specific numbers. But I can say that a big part of the international margin performance on a month-to-month basis and sometimes on a quarter-to-quarter basis is when the rig moves occur. So that will have a bit of a -- in this quarter, I think we had an extra rig move or two that we didn't have last quarter. So it did impact it a bit.

It creates a little bit of lumpiness, but averages out over the course of two or three quarters.

Okay. That's helpful. Thank you.

Thank you, John.

Okay. Thanks.

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

Thank you for joining our second-quarter conference call. Looking forward to talking to you again in October on our third-quarter results. Thank you.

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