Precision Drilling Corp (PDS) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Precision Drilling Corporation 2018 Second Quarter Results Conference Call and Webcast. (Operator Instructions) As a reminder, this conference call may be recorded. I would now like to turn the conference over to Ashley Connolly, Manager, Investor Relations. Please go ahead.

Thank you, George, and thank you, and good afternoon, everyone. Welcome to Precision Drilling's second quarter 2018 earnings conference call and webcast. Participating today on the call with me are Kevin Neveu, President and Chief Executive Officer; and Carey Ford, Senior Vice President and Chief Financial Officer.

Through our news release earlier today, Precision reported its second quarter 2018 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 of these financial measures.

Our comments today will 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 will begin today's call with a brief discussion of our second quarter operating results and provide a financial overview. Kevin will then provide an operational update and outlook. With that, I'll turn it over to you, Carey.

Thank you, Ashley. In addition to reviewing the second quarter results, I will provide an update on our 2018 capital plan and management of our capital structure. Our 2018 financial performance continues to deliver the second quarter adjusted EBITDA of $62 million, 10% higher than the second quarter of 2017. The increase in adjusted EBITDA from last year is primarily the result of higher activity in day rates in our U.S. and Canadian businesses, and strong field margins, supported by efficient cost management. The better-than-expected operating results were negatively impacted by a larger-than-expected share-based compensation accrual during the quarter. If share-based compensation accruals were removed from each quarter, the EBITDA increase year-over-year would have been approximately 34% versus the 10% growth reported. In Canada, drilling activity for Precision increased 7% from Q2 2017, while margins were approximately $450 per day, lower than the prior year. The margins for the quarter were positively impacted by higher day rates, approximately $1,400 per day, higher than the prior year, slightly offset by operating costs that were approximately $300 per day, higher. Removing the shortfall payments from the prior-year quarter, where this quarter we had none, margins increased $1,100 per day year-over-year.

In the U.S., drilling activity for Precision increased 24% from Q2 2017, while margins were up approximately USD 2,200 per day, positively impacted by higher day rates, increased turnkey revenue and stable operating costs, offset by lower idle contracted and rig mobilization revenue in the prior period.

Internationally, drilling activity for Precision equaled activity in Q2 2017. Average day rates were approximately USD 50,000, in line with the prior year.

In our C&P division, adjusted EBITDA this quarter was negative $1.4 million, down $1.7 million compared to the prior year. This quarter was negatively impacted by slightly lower surface rig activity and reorganization cost of $1 million incurred during the quarter. Capital expenditures for the quarter were $37 million.

For 2018, our capital plan is $135 million, up $19 million from previous guidance. The 2018 plan is comprised of $57 million for sustaining and infrastructure, $63 million for upgrade and expansion and $15 million for intangibles related to our recently completed ERP project.

Our capital plan is expected to align with industry activity and reflects our expectation to upgrade rigs, increases to our AC Triple -- Super Triple active rig count in the U.S. and to deploy Process Automation Control technology on additional Super Triple rigs.

We've continued to build our contract book in 2018, signing 31 contracts year-to-date. And as of July 25, we had an average of 63 contracts in hand for the third quarter and an average of 58 contracts for the full year of 2018. As of June 30, 2018, our long-term debt position net of cash is approximately $1.6 billion. We had $95 million in cash on our balance sheet, up $13 million from Q1 and our total liquidity position was $767 million. We continue to view cash flow generation and debt reduction as top priorities this year, and during the quarter, we used cash flow to reduce outstanding debt by $75 million and plan to be in a position later this year to build on our debt reduction achieved year-to-date.

For 2018, we would expect depreciation to be approximately $350 million. We would expect cash taxes to remain low, and our effective tax rate to be in the 20% to 25% range. We continue to aggressively manage all fixed costs, including SG&A, which may swing from quarter-to-quarter due to changes in our share-based compensation accruals and foreign exchange rates. I will now turn the call over to Kevin for further discussion of the business and outlook.

Thank you, Carey. Good afternoon. Precision is experiencing strong and continued customer demand with Super Series rigs in every region and every markets which we anticipate. If there is a takeaway from today's call is that the drilling efficiencies and the cost savings our customers enjoy with high-efficiency pad-walking rigs, combined with market tightness for Triple rig will continue to drive strong demand for Precision services through the second half of 2018 and for the foreseeable future.

I'm going to walk through each of our regions and discuss the market signals we're seeing in each of these areas. So beginning with Canada, our second quarter activity, which is typically our weakest quarter, was better-than-expected and above last year's levels. And it's important to note,that the day rates we reported significantly exceeded our prior guidance and those rates -- average rates up over $1,400 per day, and as Carey mentioned, we are largely holding our cost in line, most of this is (inaudible). But for Canada, I think the key leading indicator was the strong seasonal rebound Precision is experiencing post-breakup. The 60 rigs running this morning, we are well ahead of last year's pace. In fact, we are ahead of last year's peak activity level for the third quarter. Our Super Triples are fully committed for the second half of 2018. We do not anticipate any further rig transfers to the U.S. It is becoming clear that Precision's Canadian customers, and especially those with oil and liquids exposure, have realized stronger than expected cash flows and their drilling costs of more than expected primarily due to drilling efficiencies we deliver. We believe that our increased utilization is clear evidence that some of that customer cash flow and efficiency gains are being redirected to extended drilling programs and increasing our expectations for the second half of 2018 and into 2019. Precision's utilization in the third quarter is on track to exceed 2017 levels by 10% to 15% based on current customer indications, and we continue to expect sequential fleet average margin improvements in the $500 to $1,000 per quarter range.

Now moving to the U.S. The strong demand we noted in our Q1 conference call continues through today. During the second quarter, we activated 8 more rigs, bringing our active rig count to 78. We have forward visibility on 4 to 6 additional rig activations later this quarter. And as Carey mentioned, we added 10 contracts to our backlog in the U.S. and reported sequential day rig margin increases of $1,200 per day. All of these are leading indicators for continued customer demand.

On the cost side, our U.S. operations team have delivered excellent cost management by leveraging our scale, utilizing our vertical integration to [indiscernible]on operating cost. Looking forward, we do not expect cost inflation to negatively impact our financial results or our cash flows, and we also reiterate our forward guidance for average fleet margin improvements in the $500 to $1,000 per day range on a quarterly basis.

Leading-edge day rates for our Super Triples are in the mid-20s but in some instances, we are negotiating or considering -- let me, start again. Leading-edge day rates -- leading-edge rates for our Super Triples are in the mid-20s and in some instances, higher rates are being negotiated. notably, we are also seeing opportunities emerge where customers with long-term development plans are considering contract terms longer than 2 years, something we have not experienced since 2014. During the second quarter, 20 rigs repriced with these higher rates, with prices -- price increases ranging between several hundred and several thousand dollars per day, with the highest [big] rigs repricing at the top of the range.

Now, while some oil super segments have been reporting operating constraints in the Permian region, the demand for pad-walking high-efficiency triples remains very strong, and several of our scheduled rig deployments of the coming rigs are set at the Permian. Much of the growth we're experiencing is coming via market share, as customers switch from less-efficient drillers to our high-efficiency pad-walking Super Triples. We currently estimate that fewer than half of the industry's operating fleet is comprised of top-efficiency rigs. So we expect the strong demand and pricing tension and switching will be a market structure for several quarters going forward.

Now turning to our Kuwait and Saudi Arabian business. Earlier this quarter, we announced a sixth contract for new-build rigs in Kuwait to be delivered in mid-2019. This rig will be assembled in Dubai using the same construction team as the previous 5 rigs, and the new rig will essentially be identical equipment, stairs, maintenance and crew training requirements. Deployment of this rig will yield strong operational leverage for Precision and require no additional G&A. Our Kuwait business is performing exceedingly well and continues to be one of our top growth opportunities. The ongoing tenders in Saudi Arabia, it appears we will be closer to possible awards for additional rig activations and contract renewals. As we're involved in negotiation and technical clarifications, I'll prefer not to make any further comments on this opportunity. Suffice it to say that we remain encouraged by the dialogue and it appears international customer sentiment is improving.

Now turning to our technology initiative. Yesterday, we announced the appointment of Shuja Goraya to lead our technology group. I believe this is a meaningful addition to our already strong technology team, and I expect Shuja's leadership and experience will expand Precision's technology opportunities set.

In this morning's press release, we also reported 12 drilling performance apps now under development. I'm surprised how quickly our app portfolio was growing. Customer uptake is strong and today, we have several of those apps already in beta tests on rigs in the field, yielding very good early results. Our long-term value substance for these apps may have been understated, and I expect we'll have much more to say about the impact of drilling apps in the coming periods.

One other positive surprise is that we've successfully drilled over 2 million feet with our directional guidance software. We drilled over 384 wells utilizing process automation controls. But the real surprise is that not a single customer stepped back or walked away from this technology. In my 36 years of experience, I don't recall a complex of that matter as simple new technology deployment initiative with a 0 customer rejection rate. I know our team is working very closely with our customers, relationships are excellent. However, I'm amazed with the remarkable success rate and confident we remain on track to full commercialization.

Now I believe Carey covered our financial performance against our priorities around operational leverage and debt reduction priorities, but I'm going to add we are deeply focused on financial performance through cash flow and debt reduction. The strong demand for our services is resulting in improving day rates and utilization, and combined with Precision's effective cost management, this will allow us to meet our targets for cash flow generation, debt reduction, even as we see and exercise the continued growth opportunities as they emerge. On that comment, I'll turn the call back to the operator now for questions. Thank you.

(Operator Instructions) And our first question comes from Aaron MacNeil from TD Securities.

On the U.S. new build, I know that you guys had mentioned on the prior call -- or the Q1 call that you could build 2 AC Triples for less than $10 million. So I assume that's what's being contemplated but perhaps, could you give some additional detail in terms of cost, timing of deployment, contract term, return thresholds or any other color you can provide.

Aaron, this is Carey. We analyze this opportunity just like we analyze all capital opportunities and want to be comfortable with both the term and return heralds. And we got comfortable making this investment, and we -- since it's just one rig and the group listening on the call is pretty good at connecting the dots. We really don't want to provide any more detail on what the contract -- what the contract entails. But it was within our normal contract renewal rates.

Okay. Maybe as just a follow-up then. Given that a lot of your SCR rigs are working in the U.S. today, does this new build rank ahead of other higher-cost upgrades, that maybe SCR rigs or others/

Aaron, I think, it was a combination of customer-specific need, contract term and return rates and maintenance investment make a lot of sense for us.

Okay. And then, maybe switching gears to Canada but staying on capital allocation. In Canada, at what point do you think you need to start reinvesting if activity levels continue to improve?

Aaron, really well positioned here in Canada, right. Right now, the fleet we have, both our Super Triples and our -- even the Tele-Doubles we have and the singles, we have right now. But it doesn't require a lot of capital. I would tell you that I think that if the Deep Basin takes another step up, if we see things, kind of, accelerate in the Deep Basin that could be (inaudible). There would probably be a shortage of -- industry-wide shortage of rigs that can meet the rising demand. And that probably means a demand that looks like 3 to 5 rigs more needed in that basin, at which point, definitely, we'll look for further upgrades, maybe upgrading one of our lesser-capable DC SCR rigs or one of our other Super Triples into that need would probably make sense. You know, there's a lot of -- interest right now to possible LNG project FID, something like that. Likewise that next step-up in demand in the Deep Basin.

And our next question comes from Taylor Zurcher from Tudor, Pickering, Holt.

It's encouraging to hear that some of your customers, at least, in the U.S. are coming to you looking for, at least, -- interested in a 2-plus year term. So two-part question. Part one is, have you signed any of those types of contracts yet today? And then secondarily, for the, I think, 10 term contracts you've signed since last quarter, can you just give us a sense as to the relative mix of contract duration in that bucket?

Taylor, I appreciate the question. I would tell you that everything we're doing right now is competitive in some nature. So we don't really want to give too much details on 1 or 2 data points, which is what our comments I'm referring to. And we usually don't give a lot of color on the depth or duration of the contract. But, I think, we gave a roll forward on the contract book, on the total contract book. Carey, is that right?

We did. We've typically -- when -- over the past 2 quarters talking to the market about contracts. We've been signing contracts kind of in the 6-month to 18-month term, and we have more than one contract recently signed over 2 years.

Okay, fair enough. Second question is just on the 4 to 6 incremental rig activations that you're talking about. Are you seeing visibility for moving forward? And can you give us a sense as to which basins and plays those rigs might go to? I suspect they are -- it's fairly broad-based. And then, secondarily, is it fair to assume, as we get into the 80s sort of rig count level in the U.S. that some of those rig activations would be coming from the SCR bucket and be converted to AC rigs?

Yes, the activations we're talking about so far don't include any AC to DC or DC to AC conversions. They are activations. I think it's going to be about roughly, half of those Permian, the other half split among 3 other basins. One to the Niobrara, 1 to the Marcellus, 2 or 3 to the Permian and possibly 1 to the Eagle Ford.

Okay, got it. Then last one from me, if I can, is on the debt reduction target. Obviously, you've done good work year-to-date with reaching the $75 million or the low end of the range that you stated for 2018 in pretty expeditious fashion. So as we think over the back half of the year and into '19, Carey, is there any sort of framework you could give us as it relates to how should -- how we should think about the cadence of incremental debt pay-down from here?

So we feel really good about our opportunities to build cash in the back half of the year. And if you go back to our strategic priorities for the year, we say, pay down debts but don't miss the best growth opportunities. So if there aren't excellent growth opportunities, we will pay down more debt.

And our next question comes from the line of Sean Meakim from JP Morgan.

So thinking about the Kuwait contract that you signed. Obviously, that market now is looking very good in terms of cost absorption. It sounds like rig count for you in Saudi is going to be stable. Still a few idle rigs in the region now, more tenders, especially, on the way, recognizing the strategic initiatives and focus around the balance sheet. What other optionality do you think you see in that part of the world in the near to intermediate term? And are you open to more creative forms of financing with some of your key customers in that region? Can you maybe get some ink around new builds, where there is a better give-and-take between capital cost and day rates to built some more scale in the Middle East?

I think, Sean, really important questions for us and something we're working with the board on all the time. Kind of, to work (inaudible) through that a little bit, the first comment would be that we have one idle rig in Saudi Arabia, 3 idle rigs stored in Kurdistan. All 4 of the idle rigs are being quoted into possible tenders. So the -- at the far side if we're successful, we could go from 3 operating rigs maybe to 7 operating rigs. That would come with some capital needs. We'd be happy to do things like upgrade the BLPs and do some recertifications on the rigs, and kind of guide you to numbers in and around $5 million to $15 million per rig depending on the scope and scale. But my thinking is that the timing probably strike us late in this year into next year. And often, those contracts take longer to sign and finalize than everybody thinks and everybody hopes. But I'm getting more encouraged by the rate of -- interaction with our customers in the Middle East right now and their kind of focus on moving things forward. So it does feel like that's going to move forward, it does feel like it will be something that would likely be late 2018, 2019 type opportunity and could see us deploying rigs in early 2019 or mid-2019, in addition to the one in Kuwait. Now going back to your comments or questions around financing. Obviously, paying down debt remains our top priority, and we're not going to sacrifice our capital structure to stretch or reach for opportunities, but we'd like to find a way to do both. Carey, any further comments?

Yes, I think, look for us to continue doing what we did this year with taking on one new build, stretching the construction of that new build over a year with most of the capital in 2019 and paying down debt. We'd like to pursue both those avenues.

It's a lot of good feedback. So in the U.S., thinking about the 6 rigs that you guys have planned and are coming online here in the next few weeks. Are you -- I'm not sure it'd be so specific to those rigs but just thinking about where you are at this point in the cycle? As you're adding rigs in the U.S, are you displacing less capable rigs? Are you taking share from peers? Are you adding to existing customers as they are adding to their fleet? I'm trying to think about some of the market dynamics as you're putting more rigs back to work in the U.S.

Sean, I think, if you look at progression through the course of 2018, I think, in the first quarter, most of our additions were just additional rigs to the U.S. activity list. But I really think during the second quarter, certainly towards the end of the second quarter, most of additions we made were customers switching from less-efficient rigs to higher-efficiency rigs. So I think that was most of what we saw during the second quarter. As we think about the 6 -- or 4 to 6 rigs going forward, my estimate is that most of that will be switching. So for whatever reason, U.S. rig count ticks up. But nothing right now tells me there's going to be any sharp movement in the U.S. rig count, at least in the near term.

And, Sean, I'll just add that on the last conference call we mentioned that in our capital plan, we didn't contemplate an upgrade of more than $3 million. And that's still the case, and even with this 4 to 6 rigs that we have visibility on over the coming weeks. None of those require upgrades more than $3 million.

Yes, (inaudible) point?

Yes, good point, Carey. I think, also, Sean, if the demand continues to accelerate beyond Precision running 80, 45 rigs, we may have to look at more upgrades down the road.

And so, if your some competitors that are doing as much as -- paying as much as $15 million and getting good rates and terms, sounds like your paybacks on those would be pretty darn fast.

Yes, it would be. I don't think we'll have any $15 million upgrades but we did -- we have signals for the next round of upgrades. So the kind of the final 10 to 15 rigs that we have for upgrade would be, probably in the $3 million to $6 million range and some of those will be closer to $6 million. So if we've got some DC to AC conversions interspaced somewhere down the road. And I wouldn't be surprised if we see contracts later this year that make those conversions make sense for us.

And our next question comes from the line of John Daniel from Simmons & Company.

Just 2 quick ones for me. I'll start with Carey. Just anything if you could provide some color on expectations for the well service business heading into the second half?

Yes. So one of the -- I'll start and let Kevin finish this. We do expect activity to look a little bit better year-over-year in the second half. We did improve pricing a bit. And as we mentioned in the press release, we had some one-time costs this quarter that kind of dragged on margins a bit. So we think all of that will go away and profitability should be better in the second half of the year. So I think...

Yes, John, and to give you a little more color on that business kind of a jungle right now. It's really frustrating. I can tell you, we've had some cost drivers in that business that we've tried to pass through to our customers and I'll speak to a couple of them. But there's a carbon tax in the province of Alberta and then tax on cost of fuel. And on surface rigs, fuel was part of the service company's cost. That raises our cost. There's a second cost, it is caused by another government, labor law change that adds cost. We took these costs to our customers and tried to get pass-throughs and the might resistance from our customers is baffling. We pressed hard, we pushed our day rates up, and we lost some market share because of it. Our customers are -- in a lot of cases, they have been willing -- unwilling to absorb any price increase in this space, even for some of these cost pass-throughs. It's really frustrating and it's tough on the industry as a whole. We're not the only company experiencing this, I mean, every service company has the same cost drivers, well service company has the same carbon tax and labor cost problems. And certain customers out there are just really difficult. It's tough in the industry, it's challenging long-term survivability. Certainly, the industry as a whole is barely cash flow positive, and we'll continue doing hard work, both for the cost side and drive costs down, which Carey mentioned, the severance costs in the second quarter, restructuring costs. We think we'll be in a healthy position near the back half of the year. We expect to have enough revenue and enough operating leverage to do okay. But the industry as a whole, probably, it's a little more disciplined but it certainly needs a lot more help and cooperation from the customers to ensure we have sustained, repaired, maintained assets, with well-trained crews to keep us safe and healthy industry alive.

Okay. I appreciate that color. And then just last one for me. I mean, you guys are pretty good about defining your annual strategies and then delivering on them. So I'm curious if you've given any thought to what your '19 objectives might be? And if so, can you give us a preview of things you're looking to do next year?

Well, a little bit. We -- so we don't formalize that into our budget in December. But it's unlikely that debt reduction comes off our 2019. Free cash flow, debt reduction will still be a 2019 focus for us. I'm quite confident technology will be a focus for us in 2019. And, I think, the third-party will have to see how the budget evolves and how the year evolves.

Do you think -- do you see you can solve M&A consolidation being one of those or no?

You know -- I think that's a good question. I think that this space would be served well by consolidation. There's been a couple of deals announced over the past few months. We saw one in the U.S. just last couple of weeks. I think, it really makes sense, if you're small to consolidate. And I think there's some scale advantages if you're doing that. You know, for us and for our larger peers, standardization across the fleet is just so important for our value proposition. But bringing in dissimilar assets is hard to manage. Could be more expensive to manage. So I would tell you, John, that I think our eyes are always open but it's really not high enough on our priority list. But that's a good question.

And our next question comes from the line of Ian Gillies from GMP.

When you're delivering tenders, your customer would -- with respect to technology, I mean, is it getting its own line item now when you guys are identifying the price to that and -- or customer is looking to pay for it? Or is it still getting blended in with, I guess, everything else you would offer?

Ian, a really good question. I think one that we've talked about a bit in the past, but I'll kind of restate where we are at. So each technology item that we're offering is listed as a line item every single time. It's not included in the rig rate. There are cases right now, where we have trial periods, and we have performance metrics. But the technology item, whether it's 1, 2 or 3 apps or whether it's process automation controls or our able directional drilling advisory software, those are separate line items on the invoice. They are identified at a fixed price -- target fix priced for some performance-based price. I'd add that maintaining discipline is a core element of our long-term strategy to preserve the value that we're creating for our customers. Preserve our value, our piece of the value rent coming through us.

And, I mean, as we think back perhaps, over the last year or 2, as you've developed a technology strategy, I mean, is there any pieces of it right now that you feel like you may need to pivot on or change at all, given what you know now that you may not have known then?

You know, that's a really good question. It's a tough one to answer. So I'm encouraged by how quickly apps are ticking up. And I think, I really underappreciated the value of apps. And I say that very quickly but there's a dozen apps we mentioned in the press release, and these range from customer-written apps, they are vendor-written apps, they are other service company written apps and Precision-written apps. Very simple to do and easy to take standard practices and put them into small uploadable algorithm that helps the rig performance. I think, that's got a lot of expandability. I think we will be adding more apps over time and we see possibly every customer having apps. And the rigs that we have to generate revenue on just the residency of the app is a really good arrangement. So, I think, that's an area where we'll put more focus. So the area that we've identified early on but maybe didn't recognize how powerful that could be. So it's one piece. We've talked a lot about wire drill pipe and that's an area we're still working but the customer uptakes are slower than we expected. But I think the -- I think, 2 areas that get the most attention going forward are going to be data and optimization. And one of (inaudible) big challenges, as he gets to the door here and gets working will be to help us develop our strategy around data management, data use and optimization of the well-drilling parameters. So I think there's a lot of work for us to do on the data side, and I think, there's good opportunities to improve what we're doing for our customers and create a stronger competitive advantage.

Okay, that's good information. I appreciate that. I mean, if we went back to last year in Canada, there was some rig mix commentary about some of the deeper Triples probably, or the ST-1500s and 1200s not going back to work in Canada until Q4. Is that a similar trend that's going to play out this year? Or it is the customer behavior a bit different?

Well, we took one of those rigs out of the market. And I think, that had a little bit of impact on customer sentiment. All of the rigs we have in our Super Triple, including our 1500s in Canada, are booked now through the rest of the fall and into the winter of next 2019. And I'm thinking that anything that drives demand on the Deep Basin side keeps those rigs kind of locked in for quite a long time.

Okay. Last one for me. The costs on the U.S. side have been remarkably resilient and haven't really budged at all. Do you think you can absent rig moves or anything maybe along those lines -- I mean, is it -- is that a reasonable number to expect moving forward?

Yes, I think, the last 2 quarters, if you strip out turnkey, it would be $13,000 a day and it kind of hits the nail on the head there, Ian, if there aren't rig moves, and we don't have 15 rigs added in the quarter. But I think, we can keep those costs in that kind of $13,000 to $13,500 range.

Okay. Sorry,if I can sneak one last one in. Is the restructuring done in the well services division?

Yes, we've had a couple -- some management changes and then, also as you know, we had an ERP implementation last year to separate that business. And so, there's been a little bit ongoing work there. But most of that should be behind us.

(Operator Instructions) And our next question comes from the line of Jon Morrison from CIBC Capital Markets.

Are the technology initiatives that you guys have underway, have any of the rigs that you have Process Automation Control or the directional guidance system currently installed on the rig not been running it based on customer preference? Or has technology uptick been fairly universal where it's available?

Jon, as just kind of what we said earlier, we had no customers step-back where they asked us to turn it off. We've had none of that occurrence. We had some downtime with the software. We had certain (inaudible) to fix a bug or something like that, as we go through the early commercialization phase. But we haven't had an instance where a customer says, I've had enough, turn it off or take it off the rig, please.

So every trial has been effectively, it's either still ongoing or it's been a successful trial?

Every trial is -- every trial running right now is successful and moving forward.

Okay. And, Carey, just on the 2018 CapEx program, outside of ForEx fluctuations, is there anything that could really swing around the 2018 spend or would any incremental investment decisions at this point largely be 2019 based?

So maintenance capital is going to be activity driven but we're in half of the year. So either a rapid increase or decrease in activity could make that move, call it, $5 million or $10 million, one way or the other. And then, as Kevin mentioned, if we get, kind of, outside of this mid-80s rig count, where we start doing some of these $3 million to $6 million upgrades, those are not included in the capital plan. So we have an increased demand, increased activity, we can get to a point where we're adding a bit more upgrade capital.

Do you a base '19 program you'd be willing to share based on an assumption for maintenance CapEx and other upgrades you think are likely?

We don't. About 85% of the Kuwait new-build cost is going to be in 2019. So that's kind of the baseline that we've announced.

Okay. On the contract terms, where you're discussing multi-year durations, can you share, one, whether those are on existing rigs that are just being recontracted or new rigs? And secondarily, do any of those multi-year contracts effectively contemplate you needing to put more capital to work versus in some cases, where the producer is just wanting to lock up visibility?

I think the underpinning -- the reason that I pick the long-term contracts is customer driven, not Precision return driven in that. There's some customer plan that's going to be a long-term drilling plan. They need the rig, they want the rig, they have to pay for it. I would say that we're not driving the 3-year -- the longer-term, it's the client talking the longer term.

And, Jon, I think, I'll try to answer the other part of that question, which was -- there's no ongoing capital commitment. So we sign a contract, the capital is spent before the rig starts drilling.

Yes. So there's really just more -- I was just trying to make sure that I understood, whether each of those is contingent upon you spending more money or some of them are just as simple as customers going, we want to have some form of base visibility for the next 24 months, so to speak?

It's the -- the answer is much nearer to the base visibility for a longer period of time, probably longer than 2 years.

Okay. I recognize you guys are talking about putting more rigs to work in the coming months. But obviously, there's heartburn around, a potential slowdown in the Permian, given some of the pipeline issues that are out there. Are you guys having any discussions with customers about either laying rigs down or horsetrading them for a different geography at this point?

If you look at our Permian Basin right now, you'll see that we have 2, 3 of our Super Singles drilling in the Permian. And when you're drilling in kind of the batch flow where the Super Single goes on to the pad first and drills the vertical section, then it leaves and our Super Triple comes in and drills the rest of the well, it moves on -- walks down the pad. I would tell you that, as we think about our risks going forward, we would say that if we get too far ahead of the curve, those 3 Super Singles could see a bit of a slowdown. Recognized as the lowest margin rigs we probably have in the U.S., they are some 1000-horsepower Super Single rigs.

Okay. Last one just from me. On the idle rigs that you have in the Middle East right now that you're bidding on certain tenders, do any of those require incremental upgrades for the tenders that you're involved in? And sorry if I missed that earlier on the call.

Yes, Jon. For sure, those rigs will need some incremental upgrades in the $5 million to $15 million per rig range. Think about it in terms of either BLP upgrades or BLP replacements and some recertifications on masts and things like that time out over time. We would be looking to recover that capital, both in the early part of the term and still have a return on the rig itself. So, I think, there would be good financial decisions of long-term contracts and build out our base in Saudi Arabia and make that country get either above or close to critical mass force. So, I think, there's a good strategic value, good financial value and long-term stability in pricing, if we have to spend that capital.

And our next question comes from the line of Jeff Fetterly from Peters & Company.

A few random questions for you. On the technology side, when you aggregate together PAC and directional guidance, et cetera, do you have a sense of what impact that's had on your consolidated day rate in the U.S. or in North America?

So we know exactly what impact it has, we're not going to disclose that. Highly competitive and we don't want to supply a lot of visibility to our competition and to customers generally, on how this is playing out right now.

When you look at the 9.5% year-over-year increase in Q2 day rate in the U.S. excluding turnkey and any lump sums, is it safe to say that it's still spot market pricing and rig mix that's the biggest driver for that increase versus anything from the technology side?

Yes, if you put it that way, you're right. It's probably weighted towards both term contract renewals, spot market rates, more so than technology at this point. But we do see effective technology layering itself in, but we see the wedge beginning to build.

Okay. On the capital side, just trying to understand how the pieces within the capital program have moved. So you've added about $15 million to the sustaining and infrastructure side. Have you changed the number of rigs you're contemplating in the upgrade program for this year?

No, it's still in the 12 to 24 range.

And will -- on the last call, you talked about how the upgrade program is currently contemplated would largely exhaust the lower cost upgrades. Is that still the case? Or are you starting to dabble into, right at the edge of that $3 million level?

Yes, Not yet. And I, think, we -- a couple of questions ago, that had the same question. And In our capital plan, the $135 million doesn't contemplate any rigs upgraded for more than $3 million and the visibility that Kevin highlighted, where we have 4 to 6 rigs that we expect to activate in the coming weeks, none of those rigs require more than $3 million of upgrade capital. And they would be included in our $135 million annual capital budget.

Okay. And then the cost of -- I know you said earlier, 10% of the cost of Kuwait -- or sorry, 85% of the cost of the Kuwait rig build will be incurred in '19. But when you look at the cost of that this year plus the new build that you disclosed for the U.S, your upgrade and expansion program is only up by 3%. Is it just sort of a shifting of things going on there? Or is that stuff that's been previously capitalized that's essentially flowing into the new rig?

Jeff, I understand part of your question and maybe, it would be better if we took it off-line. We haven't had any major changes in our capital plan other than adding the Kuwait new build and then a little bit more upgrade cost and then foreign exchange.

Okay, I'll move on. International. You mentioned the one idle rig in Saudi and the 3 in Kurdistan. Is that the scope of what you are tendering into the opportunities in Saudi? I guess, the maximum opportunity 4 rigs for you or would you contemplate some transfers or new builds there too?

Jeff, good question. At this point, just those 4 rigs. We aren't considering any other transfers and new builds at this point in Saudi. We also have the other -- we have 2 renewals we've talked about, they're also coming up in the third quarter in Saudi. And we think those 2 renewals plus the 4 new builds for -- I'm sorry, hang up, 1 new build, 4 redeployments, thank you, are a part of the package we're working on.

Okay. And then last thing...

I'll be very clear that we have no new builds anticipated for Saudi Arabia. Nothing on the horizon, nothing within the above.

Okay. Last piece on the Canadian side, you mentioned that the Triples are fully committed through Spring of '19. Is that include the 1500s and the 1200s?

Correct.

And from a pricing standpoint, you mentioned that aggregate Canadian rates are expected to be up $500 to $1,000 per quarter going forward. What magnitude of increases do you contemplate within the Triples segment?

So I don't think I would like to give that level of transparency right now. Certainly, we start negotiations with clients very soon. And I would take those comments to be more at the margin line than the day rate line.

The $500 to $1,000 per quarter for Canada?

That's right.

Okay, got it. And, Carey, just a housekeeping item. SG&A, if you back out stock-based comp, it was up in Q2. What do you expect your run-rate to look absent stock-based comp going forward?

If we take out stock-based comp, it would be kind of in that $95 million to $100 million range. So the -- since we have such a large part of our business that's either international or in the U.S. When the Canadian dollar weakens, it makes our SG&A go up. And then, obviously, as we've talked a lot about this quarter when our share price moves significantly in the quarter, I think, the share-based portion of SG&A moves up or down.

And our next question comes from Brad Handler from Jefferies.

Couple of unrelated things. First, I'm not sure, I'm clear, I probably just sort of missed it along the way. The margin expectations in Canada, what's the visibility for how many quarters we're talking about?

So Brad, we said, on a roll-forward basis, we should be thinking of margins of increasing $500 to $1,000 a quarter. And think about our forward guidance you're speaking to, balance of 2018 and maybe into Q1 2019. Obviously, I'll comment, a lot of our business in Canada is not contracted day rates, they are seasonal day rates. And any major macro shift can have a very quick impact to Canadian rates and activities. So we've got out there as a warning.

Sure, sure. No, I just -- I sort of had a -- I recall hearing the comment, I think, I lost track for how long in the sense you were thinking it applied. So that's fine to frame it. I guess I'm hoping you can speak without giving up anything meaningfully from a strategic or bidding standpoint, a little bit more into the Saudi tender or to the international tenders in general. Maybe the first question is the competitive landscape does seem like it's expanding or at least, shifting. Obviously, we have a rig of the future, which is being bid by one of the -- a new entrant into the rig space, I guess. I've seen references to a Chinese contractor winning a 3000-horsepower rig, and I don't know if that's as new as it struck me, but it felt like they were starting to emerge in larger deep drilling rigs as opposed to the little stuff that they had been winning, all the Chinese companies had been winning for a while. So, I guess, I was wondering if you could speak to that competitive landscape. Am I in the right ballpark? Maybe some -- on the other hand, maybe some old competitors are falling away because of their own capital constraints. So maybe it's not that there are more competitors, maybe it's just that they are different. But any of that sort of color would be very interesting to hear.

You know, Brad, even the way you framed the question, kind of, tells you where the market is at right now. So the market has been stagnant now for a couple of years. There's no question that kind of new emerging or new drilling contractors are kind of basing the rigs on low-cost designs. There's been transaction recently announced that involves a large chunk of other rigs, a lot of moving pieces right now in the market. And they are really near term. The tenders we have right now, the 4 idle rigs we're tendering and the 2 renewals we're tendering in Saudi, those are 2000-horsepower rigs, really available for either immediate deployment or very quick deployment. So we're not really competing against new-build drills or 3000-horsepower rigs. It's almost a little bit of a niche for us right now, the way it's been in Saudi Arabia for the past few years. And Saudi Arabia is a tough place for the deeper, heavier rigs to be successful if you're a new entrant. You know, we've been successful there. Some others have come in and failed and left. The people that are there established have been successful or [made it] successful. But there is the new place, it's a tough place to enter. So on the near term, with these changes we have right now, we don't really think it's a lot new entrant competition. We think maybe existing rig competition, but we think we are well-positioned.

That's encouraging for sure. Is it worth me asking the same question outside of Saudi, are there tenders active enough in a couple of other countries to try to assess maybe, if you will, especially that Chinese threat that I was sort of referring to?

Yes. We saw some of that when we were tendering in Kuwait on this last round. And, I think, our view I commented previously that the Kuwaitis were unsuccessful awarding as many rigs as they intended. So we ended up with one rig. We probably could have had 2 or 3 if we would have decided to be more aggressive, both with our capital spending and our bidding style, the Saudis, it wouldn't have taken much. But we decided that the right decision for Precision was having just one rig to build in Kuwait, to fund one rig right now. But the 2 rigs we didn't take didn't go to somebody else. Those rigs remained unawarded. And so, I think, we saw some of of it at the edges but it didn't really affect our competitive position.

And I'm showing no further questions at this time. I would like to turn the call back over to Kevin Neveu for closing remarks.

All right. Thank you. I'd like to thank all of you for joining our call today. I also thank the employees of Precision Drilling for their hard work and their dedication over the last few months and a very strong financial performance and excellent operational results delivered this quarter. On that note, please join us on our third quarter conference call in October. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.