Precision Drilling Corp (PDS) 2016 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Precision Drilling Corporation 2016 fourth quarter conference call and webcast. I would now like to turn the meeting over to Mr. Saber Rad, Manager of Investor Relations and Business Development. Mr. Rad, please go ahead, sir.

Thank you, Vince. Thank and good afternoon, everyone. Welcome to Precision Drilling Corporation's fourth 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 fourth-quarter and year-end 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 number of known and unknown risks and uncertainties that could cause our 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 fourth-quarter operating results and a financial overview. Kevin Neveu will then provide a business operations update and outlook. Carey, over to you.

Thanks, Saber. In addition to reviewing the fourth-quarter and year-end results, I will provide an update on our 2017 capital plan and our liquidity position.

Fourth quarter adjusted EBITDA was CAD65 million, which is 42% lower than the fourth quarter 2015. The decline in adjusted EBITDA from last year is the result of expected decreased activity levels across all of our operating segments, except Canada drilling, as well as lower spot market pricing in North America.

In Canada, drilling activity for Precision increased 12% from Q4 2015, while margins were CAD5,234 per day lower than the prior year. The margins for the quarter were negatively impacted by lower spot market pricing, rig mix, and lower year-end shortfall payments compared to the fourth quarter 2015. These negative impacts on day rates were offset by daily operating costs that were approximately CAD500 per day lower than the prior year.

In the US, drilling activity for Precision increased 13% from Q4 2015, while margins were $3,962 per day lower. The decrease was primarily the result of the impact from lower spot market rates, a lower percent of rigs under term contract and lower IBC revenue. Although drilling activity was lower than the prior year, daily operating costs were essentially flat with an increase of only $185 per day.

Internationally, drilling activity for Precision decreased 10% from Q4 2015. The decrease in activity was primarily the result of fewer days in Mexico and the Middle East.

International average day rates were $52,816, an increase of $6,049 from the prior year. The increase was largely a result of rig mix, as two new build rigs were added to Kuwait during the quarter and the division also recognized an early delivery and bonus.

Today, we have 90 rigs drilling or moving in Canada, up 45 rigs from our Q3 conference call in October. And 48 rigs drilling or moving in the US, up 9 rigs over the same period. We have three rigs receiving idle but contracted payments today, and eight rigs active internationally.

In our C&P division, adjusted EBITDA this quarter was CAD390,000 up approximately CAD800,000 from the prior year. The increase is the result of lower operating cost structure, offset by lower activity levels in all divisions except rentals.

Now turning to capital expenditures. We ended the year with capital expenditures totaling CAD203 million, slightly lower than our forecast, and a decrease of CAD255 million from 2015. The 2016 capital expenditures were comprised of CAD149 million for expansion, CAD35 million for maintenance and infrastructure and CAD20 million for upgrade. Substantially all of our expansion capital was for two new build rigs for the Kuwait market, which were fully paid for in 2016.

For 2017, our capital plan totals CAD108 million, consisting of CAD4 million for expansion, CAD52 million for sustaining and infrastructure, and CAD52 million for upgrades. Consistent with 2016 capital spend, upgrade capital is targeted for bolt-on upgrades to super triple rigs as customer demand dictates. We have continued to build our contract book, and as of February 8, 2017 we had an average of 60 contracts in hand for the first quarter and an average of 49 contracts for the full year 2017. An increase of seven rig years from the time of our Q3 call.

During 2016, we completed a number of transactions that improved the strength of our balance sheet and reduced overall risk for Precision. Through open market purchases and a refinancing of Precision's senior notes, we reduced total debt levels by CAD213 million and pushed the nearest maturity on our senior notes to November 2020.

Throughout the year, we maintained a strong liquidity position, with full access to our revolver and a solid cash balance. As of December 31, 2016, our long-term debt is approximately CAD1.9 billion and our net debt is approximately CAD1.8 billion. We had CAD116 million in cash on our balance sheet at the year end, and our total liquidity position was CAD868 million.

At the beginning of this year, we reached an agreement with our lenders to amend our revolving credit facility. Adjusting our EBITDA to interest ratio down by 25 basis points for the first part of 2017, and reducing the overall size of the revolver from $550 million to $525 million. The amendment provides more head room in the first part of 2017, and supports Precision's full access to the facility in a rebounding market.

That concludes my comments. I will now turn the call over to Kevin for further discussion on the business and the outlook.

Thank you, Carey. Good afternoon. So I'll begin by saying that the duration and intensity of the downturn has been troubling and deeply challenging for all in the industry.

But we are pleased that the industry is transitioning into a recovery cycle. It's very good to put 2016 behinds us. For Precision, with two quarters of sequential improvements in customer demand, and it's fair to categorize this as an established recovery period.

Now on prior updates, I've used the term fragility when discussing improving customer sentiment, and I think now stability may be emerging as my new view. So particularly following OPEC's implementation production quotas, commodity prices seem to have firmed into a constructive range and we're gaining confidence that long-term industry stability is returning.

Our customers are taking advantage of this by hedging to protect cash flows, and to fund drilling programs. And we are seeing several customers extend their capital deployment and plans beyond the next well or two through 2017, and in some cases all the way to 2018. This level of visibility we've not experienced since the first half of the decade.

Now while we've deployed the new rigs that Carey mentioned to Kuwait in the fourth quarter, the international market has been significantly slower to respond to these improved fundamentals. And I'll speak more to that later.

Today, we're operating 48 rigs in the United States. We have 19 in Canada, and 8 rigs internationally, as Carey mentioned earlier. From Q2 lows, we've added 107 rigs and activated 1,800 almost people.

The Precision team has executed this ramp-up in an unprecedented fashion, with virtually no increase in sequential or long-term operating costs, no catch up in maintenance capital spending. This is a testament to Precision's disciplined stacking procedures executed during the downturn, and our strict avoidance of asset cannibalization. Most importantly, it fulfills the commitment that we made to our investors that we would be prepared for an eventual rebound, and we would capture market share during that rebound.

Much is to be said about the challenges of finding people during the upturn cycle, and I think this challenge cannot be overstated. But the fact is, it's very hard to recruit and on-board good people no matter what point we are in the cycle. There is no question that staffing rigs, managing recruiting, training, development and employee development is a heavy lift, but this is something that Precision does very, very well.

Employee management we view as one of our core competencies and a key competitive advantage. Of the 1,800 field personnel added over the last six months, 85% to 90% were previous Precision employees, and by design 10% to 15% are employee activations that are new hires and fully trained and are indoctrinated in our Houston and Nisku Employee Development Centers.

Now moving to regional updates. I expect everyone on the call understands that the Permian is one of the best low-cost oil plays in North America, and for that matter, one of the best in the world. The customer demand we're experiencing is no surprise to us, and the industry transition to full development mode in the Permian is well under way.

So for Precision, we have 24 rigs operating in the region, 11 rigs we've added since the second quarter are all pad walking precision Super Triple rigs all engaged in multi-well pad style drilling. Just as a note, we at Precision find it curious that some have latched onto a new term, and they're referring to super stack rigs to describe pad-walking long-reach capable of triple style drilling rigs.

It's interesting that Precision's been using super, as in Super Triple, as our trade name since we commissioned our first pad-walking AC triple rig over eight years ago. So I suppose I can comfort myself that imitation is the sincerest form of flattery.

Moving on, I'll avoid detailed day rate minutia as we're involved in multiple competitive negotiations on a day-to-day basis. Suffice to say, that our prior guidance on day rates has proven accurate.

Spot market rates are now in the high teens, and we're seeing opportunities to continue increasing prices back to levels that produce normalized long-term returns we desire. The contract rates for our pad-walking Super Triples remain CAD3,000 to CAD5,000 higher than spot market rates.

Now what we've heard from talk or even concern about the industry beginning to deploy new builds, at Precision we'll continue to exercise strict capital discipline regarding new build investments. The investment return and contract durations are dictated by our long-standing criteria, and we require Board approval before we commit any capital to new builds.

Now that said, most of the new build and prototype talk has been by industry participants that are planning or deploying rigs which seemingly resemble the capabilities of our fleet of Precision super Triple rigs. Today in the US, we have over 39 stacked Super Triples that remain available should customer demand continue to improve. We also have eight other Super Series rigs which are now contracted, and will be activated later in the quarter.

While the capital markets seem focused on the Permian Basin, we've also experienced growing demand for our Super Triples in both the mid-continent and Niobrara. As the operators continue to derisk these plays and begin the transition to full-development mode, we expect demand for pad-walking rigs will continue to rise. Currently, we have six rigs in the mid-con and six operating in the Niobrara and see potential for additional deployments in the coming weeks and months.

With stronger natural gas prices, we've also added rigs back in the Marcellus and the Haynesville. Now longer-term visibility on US natural as activity is less clear than oil, but encouragingly these rigs were reactivated with one-year contract commitments.

Finally, in the US, we expect to have a series of turnkey wells commencing later this quarter. I should remind all of you that our turnkey business is a fully integrated service offering which includes Precision managing and providing all of the wellsite services that drill the wells, perform directional drilling, run casing in to cement the wells. Integrating additional well services is a business we fully understand, and we have a long-standing proven capability in this regard.

Should customer receptiveness or additional service integration beyond the directional drilling we currently market broadly, should that receptiveness grow or develop. We're well positioned to capitalize on those opportunities, and certainly our Super Triple rigs are well configured to handle that integration.

Turning to Canada. You may recall on our third-quarter conference call that I suggested Canada would need oil commodity prices CAD3 to CAD5 higher than the US to drive a recovery, well clearly I was wrong. The favorable Canadian exchange rate coupled with the wide scale adoption of several drilling completion efficiency measures has created a substantially busier environment than we expected.

Customer demand has surprised to the upside, and the duration seems to be lasting longer than we expected. We believe the seasonal spring breakup slowdown will be weather driven and not budget constrained, as we saw last year and the year before. This will prove helpful for all service lines in the Western Canadian sedimentary basin.

Now more importantly, visibility on Q2 and Q3 activity levels is beginning to firm up. It's always a little risky to forecast Canadian post breakup activities this early in the first quarter. So before I discuss our expectations, I think walking through the Canadian pricing story will help provide some guidance as to how we see the activity may trend.

As I mentioned earlier, we at Precision and likely many in the industry underestimated the winter demand levels that we're experiencing. And as most of you know, our Canadian winter rates are typically negotiated and locked in with our customers in the prior October. Back then, we were certainly seeing improved demand signals compared to 2016, but we're not expecting industry rig counts to reach the 350 range.

As a result, winter pricing is light. In fact, we believe that some rigs in the shallower highly commoditized regions may be priced in the sub-CAD9,000 per day range. I'll comment that nothing in the Precision fleet is priced remotely close to that level.

For Precision, where possible, we began increasing Canadian rates in late Q4 and now into Q1. Traditionally, this is a period when customers expect locked-in pricing. As we look forward to post breakup activity, we expect further direction and expect prices will trend upwards.

In the Canadian [feed] basin, Precision enjoys excellent competitive positioning, with full utilization of our fleet of pad-walking Super Triple rigs this winter. The demand here remains strong, and pricing has held up substantially higher than the shallower more competitive regions. With improving visibility, we also expect these rates will trend upwards.

Also want to highlight that Precision's heavy oil activity is experiencing a strong resurgence from a horrible 2016 winter. Today we have 26 rigs drilling in heavy oil versus 9 rigs last year.

While this is also generally shallower work, the Precision Super Single rigs are well positioned competitively as high-efficiency rigs. And as such, we've sustained constructive pricing and margins on this business segment.

Now moving back to my Canadian activity outlook. Last year, Precision's activity in Q2 bottomed at a record low 10 rigs. This year, we expect a more normalized spring breakup, probably for Precision bottoming at the high 20s or low 30s, suggesting industry activity levels that could approach 100 rigs through spring breakup.

In general, regarding margin guidance. Now assuming the oil price remains stable, as we commented earlier, we believe spot market pricing bottomed in the second quarter of 2016 in both the US and Canada.

We do not expect any cost increases due to reactivations, and you've heard my comments regarding forward pricing. So in this environment, we should begin to see sequential fleet average margin improvements later in 2017, probably in the second half of the year.

Now I'll temper this optimism with my ever present concerns about commodity prices and fundamentals. Our ability to activate rigs, improve pricing and margins is dependent completely on the cash flows and capital access our customers enjoy.

Now turning to the international market for a moment, ultimately the same fundamental drivers that affect domestic markets also impact our international opportunities. However, since most of the markets that Precision pursues are dominated by national oil companies, the volatility is lower but the reaction time is also delayed. Hence, despite difficult fundamentals for most of the last couple of years, our rates have been sticky and our activity has been relatively stable. The demand rebound and pricing power we're experiencing domestically has yet to materialize in most international markets.

The two new rig deployments in Kuwait during the fourth quarter were near flawless. These rigs were commissioned several quarters ahead of customer's expectations, and the commissionings were smooth. All five Precision rigs in country are performing fully to our expectations, and I believe we've achieved critical mass in Kuwait and we expect that further rig additions will provide strong incremental returns for Precision.

In Saudi Arabia, our operations remain stable and we are performing well. But after my recent visit to the region, it's clear that we need to build more scale in this country. We have good opportunities to expand our footprint in KSA, and will remain highly focused on growth.

There are several active tenders in the region, and several other tenders which are imminent to be released. I remind listeners that Precision has four idle rigs in the region, or four stacked rigs in the region, that we believe we are well positioned that we'll be competitive when this region eventually rebounds.

Turning back to Canada and specifically regarding our well service business. During the fourth quarter, we completed the asset exchange with Essential Energy Services.

First of all, I want to welcome the 120 employees we on boarded late in the fourth quarter. The pride of execution by this team is evident in the quality and excellent condition of the 48 service rigs we acquired, not to mention the highly satisfied customers we added. I believe this transaction was one of those very elusive win-win deals, and we are very pleased.

Well service activity has substantially improved from early 2016, but pricing has been slow to react. Fortunately, as Carey mentioned, our focus on cost management, efficient operations, employee retention and safety is delivering positive results on the margin contribution line. And I expect continued progress and sequential improvements in this business through 2017.

Finally, recapping Carey's comments on our financing activities in the fourth quarter. I'm very pleased with our team's work to smooth out and extend our maturities on our long-term debt. I was particularly pleased to apply cash to reduce our long-term debt, and you may recall that we guided debt repayment as a keys of cash till the market visibility improved.

We continue to believe that Precision will produce and accumulate cash from operations, and will remain opportunistic when it comes time to use that cash to reduce total debt. I will now conclude by thanking the employees of Precision for another outstanding quarter of excellent field performance, and I will turn the call back to the operator for questions. Thank you.

Thank you.

(Operator Instructions)

Our first question is from Chase Mulvehill of Wolfe Research. Your line is open.

Hey, good afternoon.

Hey, Chase.

Hey, Chase.

Hey, Carey, hey, Kevin. So I guess the first question, when we think about the mix in Canada, can you talk to the mix like how many Super Triples you had working in 4Q, just so we can understand the mix shift? And then talk about the mix shift as we get into 1Q.

So I don't have the exact numbers at my fingertips right now. We can check back on that later for sure. It's available through our website.

But we've gone from I think around 70% utilization for Super Triples in the third quarter to effectively full utilization in Q1. I commented on the call that we've seen activity pick up in heavy oil, so that's our Super Singles business. That's picked up Q4 to Q1.

The numbers I quoted on the call were Q1 numbers, but it's up probably 30% from Q4 activity levels. But we have seen an increase in the non-deep basin and non-heavy oil, more conventional [telly] doubles and singles in Q1 that will put a larger mix in Q1 on those smaller rigs. Carey, can you add to that?

Sure, Chase, the number of Super Triples, it's right and 30 Super Triples that we have in our fleet that are fully utilized today. As Kevin mentioned, we had a few of those that weren't working in Q4 that are working today.

Okay. So as we think about 1Q first quarter cash margins in Canada. Given the mix, do you think that gross margin per day will be up versus the [$10,000] in 4Q?

A couple things going on here, I'll let Carey jump in here. There's more absorption because of activity, and that will make cash margins look a little better then mix will pull some of the day rates down. Carey, do you want to -- ?

That's correct. Plus typically we have a bit more shortfall payments in Q4 than we do in Q1, and that drops straight down to EBITDA.

Okay. All right. So it sounds like a little bit softer, but not a lot softer in 1Q for Canada from a cash margin.

I think that's fair, and there's a lot of moving parts. So it's hard to say at this point.

Understood. All right. And then when we think about cash margins for the US, the commentary that you talked about cash margins improving in the back half of the year, was that a US or was that total drilling?

Well total drilling, but I think it's more -- it will be more noticeable in the US where we don't have the seasonality changing the mix.

Okay, all right. And so in the first quarter, do you care to take a stab about how much cash margins could be down in the first quarter?

No, we don't give any specific guidance, Chase. But I can tell you that we still have a pretty good book of rigs that go back to the 2014 high day rates.

Those were paid new rigs paid for by our customers, and that's still rolling through the next few quarters. Being replaced with these lower rates, which are improving quite nicely for us right now. So I think we crossed that line somewhere around mid-year, a little after, a little before.

To add a bit more color there, Chase, just on the difficulty of pinpointing at this point. We've got daily operating cost where we have higher activity, we spread the fixed cost over more rigs. So that improves margins.

You have the spot market going up, as Kevin mentioned in his comments. And you have legacy contracts that have an even higher margin. So there's a few different moving parts there that we definitely see an improving market, but the margins probably won't in aggregate improve until the second half of the year.

Okay. All right. And you talk about the market improving, and one of your peers was talking about some strong new build day rates where they were getting low to mid [$20,000s]. So could you talk about the Super Triples, and what -- in the US, and what kind of day rates that you're seeing out there for the Super Triples?

I think what it boils down to right now, Chase, is that the availability of a pad-walking fully configured rig, 1500-horsepower with adequate fracking capacity to drill a long-reach horizontal well. I think the market right now is at zero supply.

I think that we can do upgrades very quickly and get rigs mobilized within maybe a few days, and maybe the industry has a few more of those to go. But it's so close to full supply now that I think those day rates will start to come up a little more sharply.

Certainly, the contracts we've been assigning, I mentioned six or eight more rigs going back to work the next few weeks on signed contracts that's part of our contract book. That's all part of this tightness of supply of long-reach horizontal pad-walking rigs.

Are they over [$20,000] a day, what you're seeing on the leading edge?

I'm not going to give specific guidance, but if you do the math on it it's probably the spot numbers I commented on, you can get there.

Okay, all right. I'll turn it back over.

Next question is from John Morrison of CIBC World Markets. Your line is open.

Morning, all.

Hey, John.

Kevin, can you comment on how many of your 90 active rigs in Canada are running two crews versus three crews right now? I ask because I notice that you lost a few active rigs in the last week or so. And I'm wondering how much of that was customer driven versus perhaps maxing out the number of days you can run a crew without giving them a break?

Hey, John. I don't think we've actually had any crew management issues that have caused us to take rigs down. What I can tell you though is, the last 5 to 10 rigs we've put to work were rigs that were going out for a couple wells, one well, windowing opportunities. So there's a little bit of variability in that.

So I don't think you've seen our rig count on publicly available data drop below about 85. It's going to fluctuate of 85 and 92 in that range.

We track drilling days and moving days, so we have slightly more accurate numbers internally. But that fluctuation has really been -- the last handful of rigs we put to work are all on one or two well jobs with a variety of smaller customers spread around the basin, and those are some of the rigs where we're able to get some pricing traction on particularly. So happy to have that last bit of work, but it's not quite as consistent as the other 80 rigs that are running.

Okay. So it's fair to assume that all of your previous comments on crew availability and staffing execution and your HR capabilities really haven't changed, and if you had demand you could ultimately staff more rigs.

If we had visibility on a rig need right now that was more than one or two wells, we will have no trouble staffing it up.

Okay. How much of the strong ramp up in Q1 do you believe was a function of rollover from Q4, given all the weather challenges that we had and producers being behind schedule versus what would have taken place had we not had rollover?

John, that's a really good question, and there's a couple other factors that I'll throw into the same bucket. We've been looking for reasons to explain why it's so strong. Part of the reason might have been trying to spend money early so you get more months of cash flow from the well, pushback from last well didn't get completed last December into this quarter.

But what's interesting is the duration seems to be hanging in longer than we thought. And we're getting better visibility on Q2 and Q3, and we're now looking towards fundamentals driving better activity than we expected.

So no conclusion yet, and for sure some of the wells drilled in Q1 were wells delayed from Q4, no question about that. Some of the wells drilled in early Q1 were wells getting on early for the full-year revenue stream, no question about that.

But we're seeing surprising strength considering the price hasn't climbed as high as I thought it needed to climb looking into Q2 and Q3. It's early. Check back with me again in April on the next call.

Is it fair to assume that your line of sight and customer conversations would indicate that it's not a stretch to see similar year-on-year gains in the back half of the year?

It's not a stretch. But I would think that that's predicated on a slightly higher commodity price in the back half of the year than we're seeing today.

I'll go back to my comments earlier, the CAD3 to CAD5 WTI price. I think if WTI climbs CAD3 to CAD5, then seeing back half gains like the front quarter I think get very credible.

I appreciated all the comments you made on pricing across rig specs and classes. I guess the one question I would have is, if you think about the mix of rigs that you have active in the spot market today and the pricing increases that you mentioned could be on the come, what would you guess the average price increase would be on a percentage basis where it was in Q4 versus where it's going to go?

Okay, that's a confidential question. I can't answer that one.

Okay. You referenced a new build opportunity -- .

John, let me give you a little bit of color. I can tell you that historically when effectively every rig competed for every job, that's not the case today. But when every rig is competing for every job, price increases were typically CAD500. That was typically the benchmark increase back in the day, back in the previous rebounds also when the rig cost was a big part of the well cost.

That is not the case today. We are -- we talked about it on the last conference call. Price increases of CAD1,000 to CAD2,000, term contracts CAD3,000 to CAD5,000 a day higher. The magnitude of the price increases that's used to be normal is higher now.

I think it's because it's not every single rig competing for every job. There's very specific competition in various basins, and the rig itself is a far smaller cost relative to the entire well cost than it used to be. And I think that's giving the industry room for sharper increases in rig rates.

You referenced the new build opportunities that you're seeing, and we're seeing some of your competitors ultimately pull the trigger on that. How far away is the pricing away from making sense to meet your internal thresholds to start building new rigs in North America?

Setting aside the fact that you probably wouldn't want to do it in terms of your debt priority repayments, and ultimately some of the idle capacity you still have. But is the delta CAD5,000 a day or is it getting tighter than that?

Give you a couple comments on that. First of all, I would tell you that I think capital discipline is ultra important in this business. We have the reputation for over-building, the industry does.

So I start by saying capital discipline is critical, it's certainly critical for Precision Drilling. Right now, the spread between what we would be looking for for day rates and a leading edge Super Triple 1500 is more than $5,000 per day, and the term commitments customer has prepared to beg. I think at those prices, it's not even close to our term expectation yet.

So we have in the US almost 40 rigs, in Canada we might be getting tight on Super Triples. But some of those US rigs could come up here. I think that we're a ways away from worrying about new builds at Precision yet.

Last one from me. You've made reference to the Middle East bidding opportunities that are either out there or ongoing right now. Are all the ones that you're engaged in largely contemplating a reactivation of the idle rigs you have in the region or relocation from a different region, or are you contemplating some new builds in the Middle East right now?

Yes across all those frontiers. Ideally, activating the four rigs would be our top priority. Following that, we've seen some opportunities to export some North American rigs.

We don't want to take many out of North America, but if we found a way to ship over a couple of our ST1500s to the Middle East and start to build out that reputation we'd be thrilled with that. And I do expect they that if all of the tenders we see come to fruition, there could be one or two new builds we'd be looking at in 2018. So I'm sorry, the answer is all of the above, preference towards reactivating the rigs that are idle.

Appreciate the color. I'll turn it back. Good quarter, guys.

Thanks, John.

Great, thanks, John.

Thank you. Our next question is from Sean Meakim of JPMorgan. Your line is open.

Hey, guys. Kevin, so thinking about under your improving oil scenario, say CAD3 to CAD5 back half of the year, how do you think about potential for divergence in terms of activity and maybe pricing between the US and Canada?

Well, I guess short answer is that we haven't really seen divergence. We've just seen a lag. And I'm not predicting CAD3 to CAD5 higher prices, I'm saying that I think if we see CAD3 to CAD5 higher prices, Canada will have a strong back half of the year.

Short of that, I expect a stable back half of the year. But it seems like the trends are parallel with the lag in Canada. Does that answer your question?

I think that's fair enough. I was also hoping to highlight the automation opportunity that you guys gave some more details in the press release. Is there anything you could elaborate on today just with respect to over time what that potential opportunity could look like for you across the US and Canada?

We're pretty excited about the potential. And I want to be cautious about getting too much excitement out there. We're excited about the potential.

We can see that there's a huge amount of value in automating a lot of the repetitive functions of the rig. Clearly a huge amount of value in giving real-time down-hole data and using that to help control the drilling process. So we have good indications of the value.

This is very complex, sophisticated technology. We've got excellent partners, and the partners we're working with are pleased with the progress.

We're actually involved in writing a couple of technical papers on some of the early wins. We'll look forward to seeing those published. But I can tell you I think we could put together the combination of technologies here on our platform of standardized rigs and deliver a pretty good solution.

But if you think about the cycle from research, through development, through application and through full commercialization, we're really at the first phase of the application phase. So we've got a little ways to go through application development before we get to full commercialization.

Fair enough. Looking forward to hearing more. Thanks, Kevin.

Thank you very much.

Thank you. Our next question is from Ben Owens of RBC Capital Markets. Your line is open.

Hey, guys. Good afternoon.

Hello, Ben.

Hey, Ben.

So, Kevin, you made the comment that you thought the US market was at something close to zero supply for high spec rigs. Given the pickup in drilling activity, are you seeing an increased willingness on the part of customers to enter into contracts? And then what kind of term are you seeing on those contracts, is it still in the 12 to 18 months range or has that started to extend out?

The terms have ranged from 6 to 18 months. That's the range. I can't give you any real mix of how many are 6 or 18, it's evenly spread. I will tell you, I commented that we've got six more rigs to activate in the next few weeks.

Those are all long-reach horizontal pad-style rigs, and that's using up some of the expansion -- not expansion, some of the upgrade CapEx we announced earlier this year. Every indication is right now that the next long-reach high-pressure pad-walking rig to go out is going to be an upgraded rig from ourselves or somebody else. I think most of the rigs that were available that had that capability are operating now.

Okay, thanks. And then on the upgrade budget of CAD52 million for 2017, at what level of customer demand or I guess what total level of rig count in the US do you think you would start to think about increasing that upgrade budget?

There's an interesting balance for us. I think for us remaining cash flow positive this year is a high priority. And balancing that with good opportunities is what we're focused on.

But I can comment that for Precision Drilling a good opportunity is a customer for a long-term contract that pays back the upgrade, we'd have a hard time turning down. But we remain focused on generating positive cash flow. So if I'm pressed with that decision later this year, I'll try to find a way to do both.

Okay. And then the last one from me. How much did the early delivery bonus for the Kuwait rigs affect the international average day rate during the quarter?

It was a little over $1 million was the bonus, so spread over 720 days, you can do the math. Straight down to profit.

That works. I'll turn it back. Thanks, guys.

Great, thank you.

Thank you. Our next question's from Ian Gillies of GMP. Your line is open.

Afternoon, everyone. I was just curious with the number of rig upgrades that are happening in the US, have you started to see any cost inflation from your suppliers on whether it be the pad-walking systems or mud circulation systems, et cetera, et cetera, yet?

That's actually a really good question, and there may be some of that going on in the industry. What I can tell you is that this is where Precision's vertically integrated model shines.

The components for the pad-walking systems, for 7500 PSI upgrades, even the third bud pump upgrades are handled through our in-house manufacturing facility in Calgary, [Rostol] Manufacturing. So in fact, we've had no inflation and don't expect any inflation.

Okay, thanks. That's helpful. One of the other things that's been noted throughout the call is the better cost absorption on the variable cost per day on both sides of the border. Are you able to provide any details around what percent of that variable cost per day is fixed just to help get a better sense of you how that may trend as activity picks up through the remainder of this year and into 2018?

I think in Canada you see it a bit more through the seasonality, and you can really see it every year in Q2. We always have a bit higher operating cost because we have fewer activity days to cover that fixed cost. In the US, I think the -- with running 48 rigs today, we're getting to the point where the gains on covering that fixed cost are minimized at each incremental rig, so it's going to be a bit harder to see.

Okay, thanks. That's helpful. And the last one a bit more qualitative. With the US high spec rig count largely being taken up, are you seeing any opportunities to perhaps gain a foothold with customers you haven't historically worked for or have wanted to work for and haven't had the opportunity?

Because we've had some good successes late in 2016 and early in 2017, I really don't want to comment with any detail.

Okay. No problem. I'll turn the call back over. Thanks very much.

Great. Thanks, Ian.

Thank you. Our next question is from John Daniel of Simmons & Company. Your line is open.

Hey, guys. Thanks for fitting me in. Carey, a couple of just quick modeling ones, if I may. The Q4 G&A jump because the equity-based comp costs, what's the right normalized G&A number as we head into 2017?

There's some moving parts in there. There's some parts that are fixed, things like rent and salaries and software costs, things like that. There are some costs that move around based on exchange rates.

So our G&A cost in international as well as the US will -- if the Canadian dollar depreciates more, that will show up as higher G&A cost. But I think in the CAD100 million to CAD115 million range for G&A at this point, that looks pretty good for 2017.

Okay. And then just given the lower levels of capital spending anticipated for this year, presumably depreciation bleeds lower from the Q4 run rate?

It should be below CAD400 million for the year.

Okay.

Probably CAD90 million, CAD95 million quarter.

Got it, thank you. By the way, nice market share gains this quarter on the rig count.

Thanks, John.

You guys did reference the upcoming international rig tenders. Can you frame for us what the -- everything went swimmingly, what the magnitude of these tenders could be in terms of rigs? Let's assume that you were to win some of these, when could we start seeing them go back to work? And I apologize if you said this earlier.

I didn't really cover it off earlier, John, and good questions and good detail. So a couple comments.

One of the bids was originally October, then November, then December, and then January 1. We've submitted the bid, and the bid hasn't been opened yet. So for whatever reason, it's just going he slow.

And that was supposed to begin deployments in April through the end of the year. Well there's no way a rig is going to be deployed in April now if the tender hasn't been opened yet. And that would likely have been redeployments, not new builds.

So we're tendering right now in three or four different countries on different tenders, and we're expecting one or two more to come out that have also been delayed several quarters. So there just seems to be a go slow right now.

I'm not thinking we're going to be spending a lot of capital in 2017 if we're successful on one of these. But if we are, we could be spending capital in 2018 is what my thinking feels like right now.

Okay. Then just a last one for me. Soft question for you, but also a big picture one. And it relates to the concept of drilling efficiencies.

But when you visit with your top customers and discuss potential incremental rig opportunities from here. I'm curious if you could share what the discussion is with respect to the new normalized rig demand in light of drilling efficiencies versus what they may have used in the 2014 timeframe? If that makes any sense.

Yes, it does. I think that that level of analysis is being done a lot by you analysts and a lot by the commodity specialists, less so by our E&P customers. They're planning their capital spending right now on a by-field basis, and looking at how many rigs they need going forward. But there's the comment that matters.

I think every development phase now will be done with pad drilling, and not single-well pads but multi-well pads and that does change the -- changes the market. I would think that what used to take 1,400 rigs for drilling is probably more like 800 to 900 rigs today for development drilling.

Fair enough. I know we all try to take a stab at it, but it's ultimately what your customer is telling -- .

The 1,850 or 1,950 rig count that we saw back in 2014 included a lot of other drilling besides pure development drilling. It included derisking, a lot of trying to find the next sweet spot. But I think of pure development work, the rig need is probably 75% of what it used to be.

That's primarily mobility gains. The drilling times haven't improved much from the best wells we drilled in 2010.

And, John, just to add to that. The number of tier 1 rigs that we're running in 2014 probably isn't too different from the total number of rigs that Kevin said will be needed in this new efficiency world.

Okay. All right, guys. Thank you for your time and for all the color.

Thanks, John.

Thanks.

Thank you. Our next question's from Jim Wicklund of Credit Suisse. Your line is open.

Good afternoon, guys.

Hey, Jim.

The 6 to 18 month contracts that you're signing in the US for rigs, are they in any particular market, the Permian or the Haynesville for BHP? Or are they just scattered all over? Is the interest basically the same in locking up rigs for 6 to 18 months?

Jim, we've actually distributed I'd say half of what we booked has been in the Permian, and the other half has been spread among the basins I mentioned in my prepared comments. I think it was one in the Haynesville. So it's not like it's four or five.

It was one in the Haynesville. But the balance would have been spread between the mid-con, the Niobrara, a little bit in coming back in the Eagle Ford and then Permian Basin was the other half of the rigs.

So that's very broad. That's good. You talked a little bit about the international tenders and how they constantly get delayed, and having worked international it's no surprise. You've got stacked rigs in the area.

How aggressive do you have to be or do you need to be or will you be in terms of trying to put those rigs to work since you mentioned the scale is important? And I know it's hard to ask how much rate will you give up to get scale, but can you give us an idea of how your thinking is in that regard?

Our Board holds us accountable to earn a full cycle return on our investment, and so we're unlikely to go in at some metric that's slightly above cash breakeven or a handful of dollars on a cash basis on an operation. We're going to be looking for IRRs that get close to our cost of capital or slightly above our cost of capital if we're trying to enter a new market as a worse case.

Okay. And what were the -- what's the payback period on the two rigs? How long does it take for you to get a payback on the two new rigs you put in the Middle East? Is that a six-year payback which is normal for international rigs.

Those rigs have five-year contracts. They'll be paid back inside the original contract term. Those $63 million rigs, Carey? $63 million per rig.

Interestingly, so they cost three times as much as a North American rig. They've got about three times the amount of headcount, and they've got about three times EBITDA. So the returns are pretty much on par with the best returns we achieve in North America.

But those were contracted a couple years ago and then built and then delivered. We haven't had to deal with a renegotiation along the way.

What horsepower are those rigs?

They're 3,000-horsepower hoisting capacity. They're extremely high drill force to accommodate large BOPs, large capacity mud systems, large capacity hydraulic pump systems, big top drives. They're very big rigs.

Part of our CapEx includes the camp for the rig, and part of our CapEx includes some of the moving equipment. It's a fully self-contained rig.

Okay. That's very helpful. My last one if I could sneak one in, this is a philosophy question.

In the US in the last three months, oil prices have averaged just about exactly $50 and the horizontal rig count is up 44%. Does it worry you that we might have gotten a little ahead of ourselves on activity versus price? And I know inherent in that question is asking what oil prices are and none of us know.

But does it bother you a little bit that if the rig count doesn't go up from here the rest of the year, we're up 50% year over year? That just seems high to me on a cash flow basis. Does that worry you at all?

Probably a better question for one of the 300 or 400 the E&P companies we work for. But a couple comments.

I think they're still getting the benefit of depressed service pricing across a lot of services, and I think that's helping them. I think a lot of companies right now are dealing on half-cycle economics probably, not full cycle cost. The land is bought. It's bought.

Good point.

Now you can drill it. So I think there's some things in our favor there. I think the problem back in 2016 wasn't just the commodity price in the first half, it was the trajectory.

With the prices falling through CAD50 and no one knew where the bottom was, they were extremely risk averse. So I think stability here is as important as the price.

And I think CAD50 isn't necessarily a bad price, especially when they're going to hedge it and lock it in and drill the well and produce it. But I also think there's a sentiment or a sense that prices are going to a little higher, maybe closer to CAD60. So I agree with you.

I think there's a bit of a risk that if prices move up a little bit, we could see rig counts flatten out or maybe even come down. And I think I said that in our Q3 conference call.

Okay. Gentlemen, thank you very much. Good quarter.

Thank you.

Thank you.

Thank you. Our next question's from Jeff Fetterly of Peters and Company. Your line is open.

Hey, guys. Just a few clarification things. Pricing commentary earlier, Kevin. So you said spot rates now quote unquote high teens. Did I hear that correctly?

Yes, you did.

Is that what you would define at the highest spec of triple rig in the US?

No, pretty much across the fleet for us. That's domestic US.

Domestic US. And you were saying the contracted rates are typically CAD3,000 to CAD5,000 higher than that number?

We're achieving rates that are CAD3,000 to CAD5,000 higher, yes.

Okay. And the delta between those contracted rates and where you would deem your new build threshold is still about CAD5,000?

Well I think the cost of a new build rig is probably in the same range it was when we were building large volumes of rigs. So that's, depending on the spec, between CAD18 million and CAD22 million. If you do the math on that, you probably need a day rate that's getting close to CAD30,000 per day to make that rig pay off.

My comments on the rates by the way, the deep basin is behaving very much like the US. So our Canadian deep basin other than being in Canadian dollars, the numbers, the rates, the performance is in line with the US numbers I gave. Just for clarity.

Okay, great. On the US side from a visibility standpoint, so you talked about your 48 rigs today. Should we with be expecting those six or eight additions to be in the US and be incremental to that number in call it coming weeks or coming months?

So a number of those rigs are still spot market rates, and some will come up and some will go down. We're at 48 today, maybe we're 46 next week, and then maybe we're at 50 the week after that.

Expect the rigs at a little more normalized market where the rig count doesn't just go straight up. We've had some weeks where we've outperformed the market, other weeks we've underperformed the market. I did comment earlier about the stability, we're seeing stability -- and this is looking a lot more like normalized market, and we have those six confirmed contracts. Those rigs will be added and a few of the 48 we have may fall off or may not fall off.

Okay. So if we look forward to the end of Q1 or over the course of Q2, where do you think your rig count in the US could get to? Or what do you (multiple speakers) for the rig count to get to?

If I add up every opportunity our sales team is excited about right now, it would be really high. But I know that our success rate like most sales teams isn't 100%. I think to get a lot higher we probably need to see a little more firmness in commodity prices.

I go back to the last question we entertained. But I think commodity prices continue to trend in the CAD52 to CAD53 range, I think this trajectory could run out of steam. I think we need to see prices move north of CAD55 to keep the trajectory moving.

There's been some remarkable week-over-week increases. But again, that's probably let's get these rigs going early in the year so we can maximize the value during the course of 2017 -- get the well drilled now so you get 11 months of production.

But in a stable commodity price environment, the high 40s or low 50s is potentially a threshold for you (multiple speakers).

I feel pretty good about our current rig count, plus or minus five rigs. I'll use that range in a stable commodity price environment. I think we're in a stable range right now, and 48 plus or minus 5 is probably a stable range.

Okay. The upgrade, the CAD52 million of upgrade capital in the 2017 budget, is that still contemplated across 33 rigs?

It could be 33 rigs. That was our estimate as of the end of last year. But if you think about those upgrades being somewhere between CAD500,000 to CAD2 million per rig, some rigs are going to use all of that capital, all CAD2 million, some rigs might be less.

So I would say that the actual range is probably more like 20 to 40 rigs, and it's all going to be based on customer demand. Not all of the customers want the third mud pump and the walk-in system in and the poor of 10-7, 7,500 PSI stand pipe. But some of them will.

Okay. So if we use 30 as a mid point in that range, how many rigs do you think over and above that that would be candidates for upgrade?

Not a whole lot.

Okay. And so when you think about the next level of capital investment, assuming there's incremental demand, is the logical next step to be looking at building new rigs? If the high-quality assets are all deployed, the rigs that make sense to upgrade have been upgraded. Do you have to go into a new build scenario in the next leg of this if there's incremental demand, or is there still a retrofit element that you could look at?

Jeff, to get to new build demand, I'd have to say if about three times. So if this happened, and if this happened, and if this happened we'd be building new rigs. I don't have that level of visibility yet. So I don't think new builds are being contemplated by Precision at this time.

Okay. Great. Thanks for the color.

Jeff, I'll just point back to a number we referenced earlier with about 40 Super Triples that are idle that could be going back to work, all of those would be upgrade candidates.

And would that be incremental to the call it 30 contemplated in the 2017 program?

Some of those would be contemplated in the 33 that we have in the program.

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

Thank you. At this time, there's no other questions in queue. I'll turn it back to Mr. Neveu for any closing remarks.

Thank you for joining our conference call today. We look forward to updating you on our Q1 in April. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program. You may now disconnect. Everyone have a great day.