Precision Drilling Corp (PDS) 2016 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Precision Drilling Corporation 2016 third-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.

Thank you, Mary, and good afternoon, everyone. Welcome to Precision Drilling Corporations third-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 a news release earlier today Precision Drilling Corporation reported its third-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 measuring.

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 third-quarter operating results and a financial overview. Kevin Neveu will then provide the operation update and outlook.

Carey, over to you.

Thank you, Saber. In addition to reviewing the third-quarter results, I will provide an update on our 2016 capital plan and our liquidity position.

Third-quarter adjusted EBITDA was CAD41 million, which is 63% lower than the third-quarter 2015. The decline in adjusted EBITDA from last year is a result of decreased activity levels across all of our operating segments and lower spot market pricing.

In Canada, drilling activity for Precision decreased 37% from Q3 2015, while margins were CAD2,479 per day lower than the prior year. The margins for the quarter were negatively impacted by rig mix as several of our contracted rigs did not earn days during the quarter, with contracted days representing an unusually low 33% of utilization versus 55% in the prior year. Customer decisions to not utilize contracted rigs will defer revenue to future periods.

Also, compared to the prior year, CAD4.5 million, or CAD685 per day, less revenue was earned from shortfall payments. These negative impacts on day rates were offset by daily operating costs that were 13% lower than the prior year.

In the US, drilling activity for Precision decreased 42% from Q3 2015, while margins were $1,336 per day lower than Q3 2015. The decrease was primarily a result of the impact from lower spot market rates and $7.8 million or $792 per day less revenue earned from idle but contracted rigs. These negative impacts to revenue were offset by daily operating costs that were 6% lower than the prior year.

Internationally, drilling activity for Precision decreased 36% from Q3 2015. The decrease in activity was primarily the result of fewer days in Mexico and the Middle East. International average day rates were $43,879, an increase of $4,984 from the prior year. The increase was largely a result of rig mix as there was a higher percentage of Middle East rigs active during the current quarter.

As mentioned in the press release, we now have one newbuild Kuwait rig earning revenue, and the second should spud its first well in November. Today we have 45 rigs drilling or moving in Canada, 37 drilling or moving in the US, with 4 rigs receiving idle but contracted payments, and 8 rigs active internationally.

In our C&P division, adjusted EBITDA this quarter was CAD736,000, down 83% from the prior year. The decrease is a result of lower activity and lower pricing in all C&P business units.

In the third quarter of 2016 our capital expenditures were CAD78 million, which compares to CAD53 million in the third quarter of 2015. For the full-year 2016, we expect to spend CAD222 million, comprised of CAD159 million for expansion, CAD43 million for maintenance and infrastructure, and CAD20 million for upgrade. Substantially all of our expansion capital is for the two newbuild rigs in Kuwait, which will be fully paid for in 2016.

We will announce our 2017 capital plan at a later date, but as of today we have no expansion capital expenditures planned for 2017. The CAD20 million of upgrade capital to be spent this year is primarily for bolt-on upgrades to Super Triple rigs, and the investments are backed by long-term contracts.

Our contract book continues to perform for Precision. As of October 20, 2016, we had an average of 59 contracts in hand for the fourth quarter, an average of 61 for the full-year 2016 and an average of 42 for the full-year 2017, an increase of 7 rig years from three months ago.

As of September 30, 2016, our long-term debt is approximately CAD2 billion and our net debt is approximately CAD1.6 billion. We have a $550 million revolving credit facility that is undrawn with the exception of $41 million in letters of credit.

We had CAD352 million in cash on our balance sheet at the end of the quarter. And as of September 30, 2016 our total liquidity position was CAD1.1 billion. As stated in our 2016 priorities, our goal is to continue a multi-year plan for net debt reduction, which we will achieve by reducing absolute debt levels and maintaining strong liquidity for maximum flexibility to address our long-term maturities over the next several years.

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

Thank you, Carey. Good afternoon. As we stated in our press release, we're encouraged by the significant improvement in sentiment of our customers and the resulting increase in activity and market share we've achieved. Now, that said, I believe our third-quarter and our year-to-date results demonstrate how very tough, how brutal and unforgiving this business can be; however, as our activity begins to recover we're confident we can sustain the cost savings and efficiencies we've achieved during the downturn. We believe our business will show strong earning leverage as activity improves.

The priorities we chose at the beginning of the year, namely preserving our cash, ensuring high performance at the rigs, and positioning for an eventual rebound, have allowed us to stay focused on the key elements we control. In the early stages of this rebound we've reactivated 37 rigs in Canada, 16 rigs in the US, and we deployed the two new international rigs that Carey mentioned earlier, more than doubling our total activity from trough levels.

This also means that we've recruited and recalled nearly 1,000 field employees. And all of this has been accomplished while sustaining our rig efficiency, our safety performance, and with virtually no increase to our fixed costs or G&A expenses. We expect to demonstrate the operational leverage in our variable cost model while capturing market share during this rebound.

Now, these market share gains are a direct result of customer acceptance of Precision's Super Triple pad-walking rigs and the superior performance our crews continue to deliver through this downturn. And despite the downturn spending constraints, we have continued to invest in our rigs, sustaining full maintenance programs; we've continued to invest in our people with crew training, recruiting and key employee retention programs; and we continue to invest in our facilities with our recently commissioned employee development and training rig in Canada and the state-of-the-art training rig, which I've previously mentioned, with a fully functional Precision Super Triple AC rig configured completely for employee training.

Now, regarding our top priority, and that was preserving cash. Carey commented -- and we commented in our press release and our last call -- as we begin to see improved visibility, we'd look to start using our cash to reduce long-term debt. I know Carey covered the debt reduction in his earlier comments, but I'll remind you that we are turning our minds to reducing debt levels, and particularly highlight our view on the priority use of free cash flow for debt reduction.

Now turning to the market overview, starting with our international operations, today we're operating the eight rigs, as mentioned earlier, with the recent start up of our newly delivered Kuwait rig. We delivered this rig more than eight months ahead of schedule and believe our client is pleased. The second rig is in transit; it's moving to location, should be up and earning revenue by mid next month. It will be good to have both rigs up and running and to have achieved critical scale in Kuwait, and I believe this gives us a good platform for further growth in that country.

Now, these firming commodity prices are certainly stimulating customer interest in the Arabian Gulf region, and tender activity is picking up with several projects in key target areas for Precision. With imminent bid submissions, I'm not inclined to provide any detailed comments, but I do believe that reminding you that we have four idle 2000 North Star rigs in the region is important information.

Coming back to North America, first of all, let me say that I'm very pleased with Precision's North America market share today, achieving a third-quarter record level of market share in North America. It's clear that our high-performance competitive strategy drives efficiency at the rig, delivers value for our customers, and, as a result, we're gaining market share.

So I'll begin with Canada. We're in the midst of the fall budgeting season in an industry that's been literally kicked on its heels for the past couple of years. The commodity volatility during the first quarter of 2016 resulted in historic low industry activity through the end of the third quarter.

For Canada, 2016 has been just awful. Summer and early fall drilling activity has barely achieved activity levels industry that we'd normally experience during a typical spring breakup. This exceedingly low customer demand has resulted in a largely undisciplined pricing environment, particularly in the shallow, less specialized Canadian drilling areas.

For Precision, the bright spot has been the Canadian Deep Basin. Significantly tighter rig supply, our position as industry leader for pad-walking rigs have both combined to support much better market discipline and better pricing in this region.

But even this market was hit by a slack third quarter. Carey mentioned that on our contracted rigs in the Deep Basin, we only actually earned about 33% of the potential 2,700 contract days that were possible during the quarter. That's an unusually low activity rate for contract rigs. That means that we expect these days to be made up in the near-term future, or we'll collect our shortfall payments on the anniversary dates of those contracts.

And please remember, that in Canada, on our take-or-pay contracts, these contracts are trued up on the anniversary date every year. We don't invoice on an ongoing basis like we do in the US. It's just a different operating model.

The firming commodity price has undoubtedly improved the outlook for Canada, particularly for our better capitalized customers. And it appears that spending increases by these customers into 2017 are inevitable. Ultimately, a full basin-wide recovery in Canada may require a slightly higher commodity price than needed in the US. So, I think you should think about this in terms of single digits, probably $3 to $5 higher on WTI prices to stimulate a basin-wide recovery in Canada.

For Precision, this winter we expect that our Canadian Super Triple fleet will be fully utilized. And we expect a significant improvement in the heavy oil drillings as those customers catch up on last year's anemic winter drilling season.

Now moving to the US, Precision's experiencing activity increases in all of our operating regions, although there's no question that the Permian is getting the most attention. On our press release we reported that we have 37 rigs operating today. And I'll add that we have a couple of additional rigs starting up in West Texas over the next few days. I hope to see us pass through 40 in the not too distant future.

Customer sentiment has turned substantially more constructive when compared to any other time in the last two years. You may remember that in our July conference call, we commented that back in June two customers were talking about adding rigs, and that we also said that by mid July this was up to several customers. Today, I believe that virtually all of our customers are investigating adding rigs in 2017.

Now, I caution you to be careful with my comments. Our customers are considering a wide range of commodity price scenarios, and we expect to have several different capital spending profiles, depending on the realized prices. But the key take away is that this is the first time in two years that our customers are even talking about increasing activity, not how quickly can we lay the rigs down. I think it's a very bullish signal.

The term contracts we're booking constitute our hedge book, and they'll serve to guarantee both revenue and EBITDA through 2017, allowing us to better protect our cash flows in the event that commodity prices pull back. These rigs are being contracted at profit margins that are CAD3,000 to CAD5,000 higher than our spot market rates.

Now, regarding the spot market, we've consistently stated that for Precision our spot market for our Super Triples is mid- to upper-teens. And we also added on this press release that during the third quarter we begin to implement price increases on these spot market rigs. We can report that the price increases are sticking. We believe that the supply of pad-walking triples will remain tight. We believe the price environment for our Super Triples will continue to remain constructive and likely improve.

Now, I know many of us are getting caught up trying to understand and qualify the various levels of high-spec rigs. I'd like to try and clarify how we see this market. The rig of choice today is an XY walking rig configured for long-reach horizontal drilling. For Precision it's very simple; all of our Super Triples were designed to be XY walking rigs. And if a walking system was required when the rig was originally delivered, our customers paid for it and the rig is so equipped.

Today, if an XY pad-walking upgrade is required and the rig doesn't currently have one, it's simply a bolt-on kit installed during a rig move; and our customers are paying for this upgrade. To give you a sense of the market take on this right now, 32 of the 37 rigs active for Precision today have XY walking systems, and we have an additional roughly 20 rigs idle in our fleet right now that also have pad-walking systems. So, we're well positioned for this demand.

I think it's also important to understand why XY pad walking is so desirable for our customers. These XY self-walking rigs have virtually no drawbacks. The rigs can self-maneuver in any direction on any pad configuration. This enables the customer to efficiently batch drill new pads or maneuver around fixed production installations on existing pads or drill wells in any order or any configuration with absolutely no geometric limitations.

Our rigs will self-walk fully active drill pipe and drilling tools. These rigs can walk well to well usually in less than an hour. And the rig gives total flexibility and maximum efficiency to our customers, and it's what we standardized on several years ago when we initiated the Precision Super Triple rig fleet.

Now, to drill long-reach horizontal wells, our customers may also require higher pressure mud systems and occasionally a third mud pump. Both of these requirements are also bolt-on upgrades to all of Precision's Super Triple rigs, and our customers continue to be willing to pay for these accessories. Today 27 of the 37 operating rigs that Precision have out are 7,500 psi high-pressure mud systems.

In the September edition of Drilling Contractor Magazine, Precision published a paper on the efficiency gains we've achieved by collaborating with Schlumberger and Pason with the abbl directional drilling software. This is a compelling technology development, which has the potential to further improve drilling efficiencies for horizontal development drilling. We expect to be discussing this exciting product application much more in the future as Precision continues to drive to improving drilling efficiency for our customers.

Now turning to our completion and production business for a moment, most of you know that I have been very bearish on this business over the last several quarters, and for us this is primarily a Canadian business. The first half of 2016, like our drilling business, has been just awful. But I'm very pleased with the hard work our team completed earlier this year relative to downsizing, reducing costs and improving efficiency, while focusing on field excellence is paying off.

They've helped turn this business around for Precision. We are back into positive cash flow territory, and we're gaining back market share. We continue to deliver excellent safety and rig performance. I'm very proud of our accomplishments in this regard but still believe the industry suffers underutilization and structural challenges.

So in summary, looking forward to 2017, it seems that most of our customers, and certainly those that are well-capitalized, are looking to increase activity, to mitigate production decline curves, and work to restore two years of significant underinvestment. We believe that fiscal discipline will remain a key theme and commodity prices will ultimately drive customer spending. But no question that drilling efficiency will be more important than ever.

For Precision, the last several quarters have been very challenging. But I'm pleased with our market positioning and believe we'll demonstrate excellent operational leverage as the market recovers. Our focus is shifting to generating free cash flow, reducing total debt levels, while we continue to fully maintain our rigs and our competitive advantage.

So, I'd like to conclude by thanking our employees for another excellent quarter of remarkable safety performance. Also take this opportunity to welcome onboard almost 1,000 new and returning Precision rig personnel.

On that note, thank you for joining our call. I'll turn the call back to the operator for questions.

(Operator Instructions)

The first question is from Ole Slorer from Morgan Stanley.

Thank you very much, and thanks for the information, Kevin, an unusual amount of details around pricing there from you. I appreciate that. I wonder if you could just, Carey or Kevin, kick it off with just clarifying on the shelf registration once for all. Why did you put this out there? And you highlight organic debt reduction as a key objective, so could you square it up for us?

Hi, Ole. This is Carey. Putting the shelf in place, it's consistent with our strategic objectives of maintaining financial flexibility and, frankly, it's a good corporate governance. As you know, the industry has a lot of uncertainty, and we think this shelf could be a useful tool as we think about our capital structure over the next couple of years.

Okay. So, nothing near term, in other words?

No, nothing near term as we see it today.

Okay, cool. Just coming out of the analysts presentation at Schlumberger over lunch today and all the stuff they gave this morning. A lot of what they talked about was centered around near-term super laterals in West Texas, in particular, 18,500-foot laterals with new rotary steerable drilling equipment and how that market was becoming a tight market. Could you talk a little bit about your relationship there, as well as what you are seeing in terms of the trend within drilling and how it plays into the land rig market as a whole? It appears that, as far as I can see, anybody who had wheels and a frac truck has been driving it to the midland in anticipation of work, while on the rig side it seems to be a slightly different dynamic and much tighter market. So, whatever you add there would be useful.

Ole, really good questions. I think what you're highlighting is this continual push on technology to increase efficiency at the well bore, and that's completion efficiency; it's production efficiency; it's drilling efficiency. So, here we are right now just coming out of the trough of the worst cycle in a couple of decades, we're talking about 18,000-foot horizontal sections.

Even in this really tough environment our customers have a willingness to try things out that could potentially increase capital efficiency, increase drilling efficiency. So, we're encouraged by that trend. We're watching it pretty carefully. Certainly understanding how rigs play into production numbers is very important for our survivability long term, so I think we're on top of this.

I've been watching those long-reach horizontal wells in Utica myself. Certainly for those smaller gas molecule I can see how longer-reach well with more completion, more sand on the reservoir has potential value for our customers. And for us, that likely means adding a third mud pump, increasing the standpipe pressure to 7,500 psi. I think we're well positioned to capture that market.

Ultimately, technology leads to fewer low-spec rigs and more high-spec rigs. That's been the history since early 1800s. So for us, staying on front edge of the high-spec rig with our Super Triples rig is how we think we deal with a declining total rig count, but, in fact, growing rig counts on the more technically capable rigs. So, long answer but I hope I dealt with your question.

Yes. Is this what's behind some of the -- you mentioned CAD3,000 to CAD 5,000 above spot on contract, suggesting you can now start looking at something in the 20s. Is that for the very high-end rigs that fit this very specific niche of the market, or is it something broader?

Ole, I'm going to stop short of giving much more guidance on pricing because I know today we're in front of customers negotiating deals and some of those customers may be in the line -- or competitors, for that matter. I really don't want to give any of our coverage.

Okay. But the kind of contracts you're signing off, that leading edge price thing, how specific is it to having all of this requirement in terms of the technical specification on the rig? And how is the competitive environment, how narrow is it in that segment? Is there much available capacity sloshing around America like the stuff we have in frac pumps?

I gave a number, 25 of 37 rigs right now have 7,500 psi standpipes. That is two-thirds of our active rigs have 7,500 psi. I can promise you three years ago I don't think 5% of rigs had 7,500 psi standpipes. This is a remarkable shift.

It's becoming the case now where they may not need it but they want the optionality. If they're not drilling long-reach wells now, they might drill one next time and try a science project. So they need that optionality.

Seeing that 32 of 37 rigs are pad-walking rigs right now, when we ran the numbers this morning it actually surprised me. The market, no question, is looking for leading-edge rigs. The old axiom -- the best rigs go back to work first -- we're proving that up right now. I know the first part of this rebound is driven by vertical wells, but as we focus on development drilling, high-efficiency drilling, no question the leading edge rigs are the most efficient rigs, and they're the ones that are in the tightest demand.

Okay, Kevin. Thanks for that. I'll hand it back.

Thank you. The following question is from Ben Owens from RBC Capital Markets.

Hi, good afternoon. On the CAD20 million in additional CapEx for upgrades, how many rigs are you guys upgrading with that and where are those rigs headed?

That's going to be a mix of rigs in Canada and rigs in the US. We're not going to give the number of rigs that we're upgrading, but I think the bolt-on features that Kevin has been talking about in his opening comments -- walking systems, increased pump capacity and higher pressure stands -- then, those are going to be the types of bolt-on additions that we're investing in.

Okay. Thanks. Then what kind of day rate increases do you need to see to support those kind of upgrades?

We look at any of our capital investments on an investment return hurdle basis, so we're looking for returns on our investments in the high teens. And we want the vast majority of the investment recouped in the term of the contract.

And on upgrades we are looking for higher returns in high teens, probably mid to upper 20%s for the upgrades.

Okay. Got it. Just one last one, given the big step down in G&A in the quarter, could you guys give us a sense of how many rigs you see running in the US and Canada based on the current cost structure before you have to add cost on the G&A side?

Yes, Ben, that's a great question. I would tell you that right now I think we have been very prescriptive in how we size Precision Drilling. So, if you do the math, right now we're probably running 88 rigs roughly, Carey? -- or 90 rigs.

Yes.

I think we're sized right now today. We're sized on size for about 100 rigs constant activity. We think we can probably go up to about 140 or 150 rigs before we have to begin to deal with any of our fixed costs or G&A. So, I think we've got a fair amount of leverage in our cost base right now before there's any changes to G&A or fixed cost.

And then I think after you breakthrough probably 150 rigs, from that point forward there would be some activity-based G&A, whether it's more safety supervisors per rig or whether it's payroll personnel, things like that. So it is activity-based personnel. No structural G&A additions.

Okay. That's great. I'll turn it back.

Thank you. The following question is from Ian Gillies from GMP.

Hi, everyone. The US market share took a noticeable step-up quarter over quarter in Q3. I just wanted to maybe touch base on how you view the sustainability of that and whether you think it moves higher or lower, dependent on your conversations today with customers.

That's a CAD50.65 question. (laughter) I think it's highly dependent on commodity price. I don't mean to make light of the question, Ian. It feels like we have some stability around a floor of CAD50. And if that were the case, if there's stability at this current price range, then I think our rig count right now probably has a little bit more room to move up -- a little bit, a handful of rigs upwards in the US. But the conversations on the customers seem to be targeting broader spending plans into 2017. Now, we'll have to see how it plays out.

Okay. That's helpful. In Canada, the day rates were probably a bit lower than I was expecting. How much would you tie to that rig mix versus, say, actual spot market pricing pressure?

It's completely tied to rig mix. In fact, if you did the math on the contracted rigs that we normally would have expected to work during that period, you'd find it probably completely fills the gap.

Yes, Ian, we had 27 rigs under contract for the quarter, and we had 10 rigs that worked that were under contract.

So, those days are days that they will owe us eventually if they don't make them up.

Okay.

Take-for-pay days. We've had some inbound inquiries about that missing revenue or that day rate gap in the US.

Canada.

Canada, rather. I'm tempted to quote one of the candidates in the US right now but I won't. It's going to be tied directly back to the missing days on the contracted rigs.

Yes, I think I may have some sort of idea of what you're talking about. The other thing I wanted to ask about in Canada was, has there been any shift in demand for the Super Triple rigs with walking systems, just given that some of the larger players in Canada have been slowing their spending down or using less rigs?

Ian, a really good question. We won't get into any specific names, but a couple of those companies have gone from large programs to very small programs, most of that tied to what sentiment is on LNG. But we're fully booked this winter. We don't expect to be moving any rigs out of Canada. At this point probably not moving anything back in in the near term.

But if something stimulates -- if there's any activity stimulus -- and I'm curious about this one transaction today where we see some more assets moving back into Tourmaline's possession. I expect they will be adding rigs to drill that property. Any kind of catalyst that causes drilling in Canada could cause increasing demand for more Super Triples.

So, so we're on top of this market, watching it very closely. We're drilling for virtually everybody up there. It's helpful to see some of that property move back into Tourmaline's control, so we're pleased with that transaction.

Okay. Just a last quick clean-up question. You mentioned you had 20 rigs in the US that you could go back to work with walking systems. But to confirm, do they have XY walking systems or are some of those skidding systems?

They are all XY walking systems. We only have XY walking systems. The number might actually be closer to 25. But recognize some of those rigs are actually idle but contracted or held by customers. I think we'll be able to match market demand or meet market demand through the cycle quite well with XY walking systems.

Okay. Perfect. I'll turn it back over. Thank you very much.

Thank you. The next question is from Sean Meakim from JPMorgan.

Hey, gentlemen. We've heard about these pockets of tightness for the pad optimal rigs, places like the Permian. We're hearing about some of these actives. You're getting a broader pick up. I'm just trying to think about the optionality of mobilizing rigs versus some of these bolt-on capital upgrades. We have some rigs that are idle, but the pockets of tightness or where the opportunities are a bit broader. So, how do you think about balancing the opportunity for capital upgrades versus mobilizing some rigs?

Sean, we're relatively indifferent, if our customer is going to pay for the upgrade or for the rig move. We're less likely to want to subsidize rig moves or upgrades ourselves. Never say never, but the fact is our strategy is that when we invest capital we want contracts to cover it. We really don't have a preference of whether we have a paid move, a relocation from basin to basin, or if we have a paid upgrade on the rig. I think ultimately I prefer to see those rigs upgraded by customers rather than relocating rigs, frankly.

Okay. So you're saying that because now between the mobile rigs, the E&P won't pay for it, you let that rig sit in its current market, at this stage. That would be the more likely outcome.

I think we've only moved one or two rigs basin to basin so far in this cycle. It's not a strategy.

Okay. Fair enough. You talked about, and the E&Ps want the optionality. So as the supply for these types of rigs gets tighter, then we'll continue to see more upgrades and we'll be chasing that tightness for a little bit here. But there's a limit at some point. Just curious, as you think about the economics of the desire for that optionality versus the substitution effect of maybe a less capable rig for some of these guys, as activity increases and perhaps goes outside of some of these core of the core locations.

There's different things here. First of all, the higher pressure, 7,500 psi, is becoming more and more common. I think that for any driller, that's effectively a bolt-on upgrade. Our cost is probably less than CAD500,000 per rig. It's a very low cost. We're pleased with that. Part of it's through our sourcing methods, but I'm pleased with our upgrade cost. I think it's a bolt-on for us; it's a bolt-on probably for any rig.

I think that the third mud pump becomes a little bit less of a bolt-on for some rig configurations. The Precision rig was designed from the onset to slide in a third pump, to slide in a third drive, and slide in an additional generator, if necessary. So, I think that for us, it's a bolt-on but not a very meaningful bolt-on.

Finally, the walking system, I think that's where it gets a bit more complicated. Arguably, you could make any rig walk. That's straightforward. It's just a question on how much capital you want to spend. The Precision Super Triple was designed from the onset to clip on walking feet onto the substructure, insert an extension utility corridor between the substructure and the drilling complex, and that's it. There's no structural changes to the rig to make it walk. So, for us it's just a clip-on addition. I don't think that can be said for all North American AC rigs.

Fair enough. Okay. That makes sense. Thank you, Kevin.

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

Afternoon, all. Carey, on the contracts where you're spending the incremental CAD20 million of CapEx, do you expect to solely recover the CapEx or cash outlay in terms of the base duration of the contract? Or are you expecting to recover the CapEx and then get some contracted cash flow on top of that? I'm just trying to get a sense of how much of a duration you're get with that capital outlay?

Hey, Jon. We will get the capital back within the term of the contract, almost all of the time. But we also put in economics, and opportunity costs in our economics, to take into account the return we're getting on the existing rig.

Okay. When you're signing a new contract today, other than the rate, obviously, being lower today than it was in the past, say, two years ago, is there any other major changes in the contract that would give the producer greater flexibility, either in terms of a lower base number of operating days per year or some form of an enhanced cancellation provision?

Jon, there's no material -- or, for that matter, immaterial differences in the contract. We're using the same contract form today that we used three years ago.

I've had a couple comments or questions today about whether we're including more but getting the same day rate or whether we're -- often about including loaders and things like that. The rates we're quoting right now are like-for-like. So, if there's a loader included it may make the rate higher, but we're not including that in our guidance here on day rates.

Okay. So, ancillary equipment doesn't come for free with anything you're talking about?

It does not come for free.

Of the 1,000-ish hires that you've made to date, can you give a sense of how many of those were previous Precision employees versus true new hires?

About 70% previous and 30% new hires, but recognize that the international rigs are much higher percentage of new hires.

Okay. So in terms of the --

In North America I think it's 95% reactivations inside North America.

Okay. And if I was to compare you guys against a lot of the North American industry, you were fairly confident that hiring wasn't going to be an issue for you guys. Do you believe that's true today, and on a go-forward basis, that labor isn't going to become a major limiting factor to adding another 20, 30, 40 rigs from here?

Jon, that's the question we get probably second most in investor meetings, so I want to answer that one again on the call here really clearly. We aggressively manage a call-up list of about 1,200 people. So as we draw into that list we keep on pushing down further. Right now, if I go back to mid-April when the rig count was at the trough, we had 1,200 people on callback that we were staying in touch with regularly to confirm they'd come back, ready to go. We've added 1,000 people. Today we have 1,200 people on callback that they say they will come back to work for Precision. So, that would be 45, 50 rigs that we think we can staff with people who we know who they are, where they are and what they are doing.

Is it fair to assume that when you make a rehire of a previous Precision employee that they're largely in the field and working within two, three, four weeks, something along those lines?

For any employee, depending on how long they have been away from the rig, whether they are a Precision employee or new employee, if they've been away from the rigs for longer than a prescribed period of time they come back through our new employee orientation, so they are treated like a brand new employee. It's a three-day program in Houston or Nisku, and they go through a full orientation cycle. But they could be back on the rig within a few days, not a few weeks.

And then we manage those rigs to ensure that we have a good mix of strong, retained leadership and experienced personnel, so we don't have too many rigs with too many reactivated employees on them. Part of the HR model that we run across the fleet.

Okay. You added seven rig years in the quarter to the contract profile. Can you give any sense of how many number of rigs that included? I'm just trying to get some sense of what average duration you're signing up today.

What we're actually doing -- I don't want to disclose either one of those data points because I think we're doing a pretty good job in front of our customers right now. What I'd tell you is it's more than seven rigs. The rig count we've given is an average for the year. Little of that spills into 2018, though, so we're not locking ourselves up with day rates in 2016 that we think we'll be living with in 2018.

Is it fair to assume most of those are renewals or they're actually new contracts?

No, actually not many of these are renewals right now. Some of these are customers that had our rigs before that are reactivating rigs. In fact, I don't think any this quarter were renewals.

You talked about needing another $3 to $5 in the crude quote to get a basin-wide recovery in Canada. Would that imply --?

What I'd say is $3 to $5 more than would be required in the US to deliver the same type of response.

Okay. So based on that comment, is it fair to assume that Canadian customers' appetite to engage in contracts is still decently below the US right now?

Generally, I'd say yes. I think that the prices we're seeing right now in $50 are probably a little more constructive in the US than they are in Canada; recognize that the exchange rate helps Canadians out a lot. We've seen a lot more capital move in the US than we've seen move in Canada, more than the typical ratio. Some capital is moving in the US. We've even seen an equity raise to fund a drilling programming in the US. So, I'm quite impressed by capital's willingness to fund E&Ps in the US. It's been a little slower in Canada. Of course, there are some favored names that are attracting capital, but it's not widespread in Canada yet.

Okay. You talked about the pricing power on the high-spec rigs, and specifically the Super Triples in your fleet. Can you give any sense of how you think about pricing shaping out across your broader rig class, including some of your other triples and super singles and even some of the smaller number of doubles that you have?

Yes. Right now most of that's in Canada. The pricing competition is extremely tough, so the day rates are -- it's still a bit of a dog fight outside the Deep Basin. I can tell you that the heavy oil drilling season in Canada looks pretty decent. I think rates will be okay and I think activity will be pretty good. There's a catch up from the lack of drilling in 2016 that's going to happen in 2017.

But I would tell you that I think that Cardium, Viking, Shaunavon, Saskatchewan, I think Bakken, I think those Canadian plays probably need to see commodity prices move nearer $60 and the rig activity pick up 150 rigs before we see much pricing power in that space.

Last one just for me. Kevin, you were much more constructive on the C&P business this quarter, and I'm just trying to get a sense of whether that's based on greater discipline across the industry, or are you guys just becoming more selective about the type of work that you're going to take on and the type of margins that you're going to pursue?

I'll be really clear on this; I'm really pleased with the work our team have done in that business right now to pound cost out of the business. We've turned that business around to a positive cash flow. They have improved safety. They have increased market share, and they're holding -- doing a great job with the pricing on margins right now. This is entirely the work of our team.

Appreciate the color. I'll turn it back.

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

Hi. Thanks. Good afternoon, guys. A couple of follow-ups on prior questions and not too many questions overall, though I suppose. Kevin, I wasn't quite clear on your answer about the workforce. If you still have 1,200 people on the callback list, are you saying you've replenished that list as you've hired from it so that now you have a different -- is that the point?

Yes. The point would be that we think it's important to always have a 1,200-person deep list all the time. So, as we draw into the list we draw down deeper and deeper. So, the answer is, yes, we have gone 1,200 people deeper since we've hired 1,000.

Okay. And that presumption, therefore, is that that 1,200 people would presumably be available, so you're not yet finding -- you not seeing exodus to other industries or something that's crossing people off your list?

Brad, I'd tell you that probably something between 10% and 20% of the people that we've been engaging with, over time, have left the business and told us they don't want to come back, so then we dig deeper.

Okay.

I think we've reduced almost 4,000 or 5,000 field personnel in the US, plus last year we processed 30,000 job applications. The pool we have to look through is extremely deep, both of ex-Precision people and beyond, so the 1,200 people we're calling right now, most of them were previous Precision employees. The next 1,200 probably were previous Precision employees. Long ways to go before we run through the guys who used to work for us.

And it looks like 10% to 20% of that 5,000 have left and say they've left for good. We'll see how that really plays out. But I think that we feel -- staffing up the next 50 rigs -- likely, staffing up the next 70 or 100 rigs -- is well within our managed sphere right now.

Okay. That's really helpful. For those of us south of the border, maybe, do you expect that the 2017 budgeting cycle and day-rate cycle and all of that in Canada to look like prior years? Are things still setting up normally, or does yet another year of uncertainty somehow change the dynamics in Canada for arranging rigs, contracting pricing, and all that?

Brad, you couldn't have asked a more tricky question, and I think it's worth trying to work my way through answering this one. I would normally tell you that we'd have a pretty good sense of customer budgets right now, and there would be -- I can tell you that we have a really good sense of Q1, Q2. Q3 and Q4 are often depending on how the first half of the year works out. So, we have some variability, but pricing usually stands. That would be a normal pricing model.

This year, I think our customers are working on several pricing models, several activity models. So, they've got three or four different price decks they're looking at and three or four different activity levels. They're not showing all their cards to us right now, so it's a pretty uncertain start to the year. It does feel like activity is going to look like we would have expected 2016 should have looked like, so that's probably 20% or 30% higher in Q1 than 2016 played out. That commodity price drop in the middle of Q1 really screwed up the Canadian winter.

But I think we can get back to something in Q1 that looks a bit more like we expected to see in 2016. That's probably 20% or 25% higher than we actually realized in 2016. The back half of the year will be completely dependent on commodity prices. If OPEC is serious and commodity prices trend closer to $60, then I think we end up having a very constructive year in Canada. At $60 WTI, with the Canadian exchange rate of CAD0.75 to CAD0.80, it's a very productive basin that has a good cost base in Canadian dollars and a good selling price in US dollars. That would be a wonderful layout for the second half of the year in Canada.

Okay. Appreciate that. And if I could squeeze in just one more? I'm curious about the idea of E&Ps -- perhaps it's more of a US comment -- don't know why it necessarily has to be, though -- but if E&Ps are mindful of momentum in their own activity. So, if they want to hit 2017 at a certain pace of activity, then there might be some gearing up in the fourth quarter, as opposed to the opposite view which is that you're saving -- that there's budget exhaustion, or that they're just going to save those dollars for 2017 and really hit it harder in the first quarter. I'm curious what you're seeing and if you have a sense of it falling one way or the other, or what?

Brad, what I would tell you is I think all of our customers are afraid of a sudden ramp up in activity where they get caught with every single contractor trying to ramp up rigs at the same time on January 1. I think they are mindful of that. I think they're trying to -- if they are increasing spending in 2017 -- and certainly most people appear to be thinking about increasing spending -- I think they're going to try to bring rigs on a bit earlier.

I think we're going to see underspent Q1 money from 2016 being spent in Q4. I think you're going to see a rig count trajectory moving up in Q4, particularly if we get through the end of November with commodity prices still staying north of $50, maybe trending upwards from $50. But I will tell you that our customers have learned to be very responsive to commodity price, so if commodity prices waiver, this momentum falls out and falls out quickly.

Right. Makes sense. Great. That's very helpful color. Thank you.

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

Great. Thank you for joining our call today. We look forward to talking with you in early February when we report our fourth-quarter earnings. Thank you.

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