Precision Drilling Corp (PDS) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Precision Drilling Corporation First Quarter 2019 Results Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Ashley Connolly, Manager, Investor Relations. You may begin.

Thank you, Sydney, and good afternoon, everyone. Welcome to Precision Drilling's First Quarter 2019 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 first quarter 2019 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 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 introduction of our first quarter operating results, 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 first quarter results, I'll provide an update on our 2019 capital plan and management of our capital structure.

In 2019, our financial performance is off to a strong start with first quarter adjusted EBITDA of $108 million, 11% higher than the first quarter of 2018. The increase in adjusted EBITDA from last year is primarily the result of higher activity levels and day rates in our U.S. business, offset by significantly lower activity in our Canadian market.

Additionally, EBITDA was positively impacted by the implementation of a lease accounting standard, which has added $3 million to EBITDA and negatively impacted by severance charges of $6 million. In the quarter, we recognized a $9 million share-based compensation expense compared to a $12 million recovery in Q4 2018. We had a similar share-based compensation expense in Q1 of 2018.

In the U.S., drilling activity for Precision increased 23% from Q1 2018 while margins were up USD 2,257 per day, positively impacted by higher day rates, partially offset by higher operating cost. Sequentially, day rates and margins net of turnkey and IBC increased USD 120,066 and USD 669, respectively. We expect to sustain strong margins into the second quarter.

In Canada, drilling activity for Precision decreased 33% from Q1 2018 while margins were down $356 per day from the prior year, negatively impacted by lower shortfall payments. Net of shortfall payments, margins were higher by $465 per day. As we expect weaker Canadian Q2 activity, in the current quarter, we expect weaker overhead absorption, which is likely to cause margin pressure with daily operating margin down $500 to $1,000 per day compared to Q2 2018.

Of note in the quarter, only 36% of our company's revenue was generated in Canada. This is the lowest percentage in the history of Precision, reflecting both the success of our investments outside of the Canadian market and the particularly weak industry activity experienced in Canada this quarter. Internationally, drilling activity for Precision equaled activity in Q1 2018 and average day rates were approximately USD 50,000 per day consistent with prior year.

In our C&P division, adjusted EBITDA this quarter was $10.5 million, an increase of 127% from the prior year. A direct result of cost cutting and business improvement initiatives enacted over the past several quarters. Of note, the improved financial results were delivered with lower industry activities than the prior year.

Capital expenditure for the quarter was $71 million. For 2019, our capital plan remains $169 million, flat with previous guidance. The 2019 capital plan is comprised of $54 million for sustaining an infrastructure and $115 million for upgrade and expansion. Our capital expenditure plan remains front-end loaded as we delivered a previously announced U.S. new build rig in Q1 and will complete the spending of our Kuwait new build rig scheduled for deployment in June and the SCR AC ST-1500 conversion announced today.

We have continued to build our contract books, signing 22 term contracts year-to-date and as of April 24, we had an average of 64 contracts in hand for the second quarter, and an average of 57 contracts for the full year of 2019. As of March 31, 2019, our long-term debt position net of cash is $1.55 billion. We had $101 million in cash on our balance sheet and our total liquidity position was $800 million. During the quarter, we made open market purchases totaling USD 13 million and year-to-date, have called USD 50 million of outstanding 2021 notes, which will settle in the second quarter. Our year-to-date 2019 debt reduction announcements total approximately $84 million.

We continue to do cash flow generation and debt reduction as top priorities this year and plan to reduce debt by $100 million to $150 million by year-end and are highly confident in our ability to meet or exceed the top-end of our debt reduction range for the year. Over the past 3 years, including recent redemption notices, we have reduced total leverage by USD 393 million.

For 2019, we expect depreciation to be approximately $340 million and SG&A to be approximately $110 million, prior to share-based compensation expense which can fluctuate with price of our shares. We would expect cash taxes to remain low and our effective tax rate to be in the 20% to 25% range. In our communication with investors in 2019, we have noted that divestitures would be considered as a means to accelerate our debt reduction targets.

Year-to-date, we have announced 3 transactions, totaling $77 million in proceeds. The cumulative transaction prices were approximately $40 million above book value and had effectively 0 impact on EBITDA. We will continue to look for selective opportunities to the best non-core assets over the coming quarters.

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

Thank you, Carey, and good afternoon. I'm pleased with Precision's strong start to 2019 and despite market headwinds in Canada and softening U.S. industry activity, we delivered better than time progress on all of 3 strategic priorities for the year.

Carey mentioned our solid debt reduction. I am particularly pleased with the strong cash flow for operations as a result of aggressive cost management while leveraging the scale of our Super Triple fleet. We're also pleased with the cash raised to the sale of noncore assets. We believe further opportunities remain.

And most importantly, we're on track commercializing our technology platform with strong customer support in several basins. Additionally, over the course of last 12 months, we've increased our U.S. Super Triple fleet by 6 rigs through a combination of redeployments, upgrades and new builds, and this demonstrates our ability to continue to invest our business and maximize the returns for our Super Triple fleet.

So first of all, regarding our capital structure, and reiterating Carey's comments, we expect to be at or above the top-end of our target debt repayment range this year. We believe that lowering Precision's total debt to the EBITDA leverage below 2 is well within sight. We're confident that this is the best and most certain path to create value for our shareholders.

I think it's also worth pointing out that debt reduction was a key component in our short-term incentive plan in 2018 and remains a key component in both our short-term and now our long-term competition plan awards for 2019, completely aligning shareholder value creation of executive compensation.

Touching base on technology programs. This is the most important long-term growth and competitive strategic initiative we are executing. Progress during the first quarter of 2019 was very good. We drilled over 200 wells, utilizing process automation controls, up 46% from last year. We had 15 drilling automation apps under various stages of field hardening with 3 apps now transitioning to fully commercialized.

I'll remind the listeners that Precision is the industry first mover in driller automation with more fully driller automated rigs operating than any other industry participant. We remain on plan to achieve full commercialization by the end of 2019. These technologies are capital light, revenue and margin accretive. Precision's standardized Super Triple fleet will enable fleet-wide deployment of these technologies. The competitive advantage we're achieving can be compared to the strong market position Precision enjoys with Super Single rigs in Canada and our AC Super Triple rigs in the United States, Canada and Kuwait.

Now turning to our key markets. Demand for Precision's Super Triple rigs in the U.S. remains very strong. During the first quarter, we commenced our first SCR to AC Super Triple upgrade. This rig will be deployed late in the quarter under a long-term take-or-pay contract, which will support the expected $6 million conversion cost. We have approximately 12 additional SCR rigs that are candidates for similar AC upgrades, although today no further upgrades are planned as debt reduction remains our top priority.

Now as I mentioned earlier, our fleet of Super Triple rigs is 6 rigs larger than a year ago, including 2 rigs we redeployed from Canada to the U.S. I'll speak more to Canada in a few minutes. It's important to note that we have 3 ST-1500s and 23 ST-1200s in Canada. We remain poised to deploy additional Super Triple rigs to the U.S. if Canadian demand weakens or pricing weakens.

So currently, we have 80 rigs running in the U.S. and have sustained this activity level through the quarter despite a modest reduction in industry rig activity. As mentioned in our press release, we signed 16 term contracts in the U.S. during the first quarter and 2 more in April, with several more pending, supporting the view that demand for our Super Triple's remains strong.

While customer indication is near-term or muted, we are confident we can sustain this activity level through the second quarter. The key priorities we gave our customers are about fiscal discipline, spending within cash flow, returning capital to shareholders and this is driving customer behaviors at all levels. We believe this intense fiscal discipline focus aligns well with Precision's efficiency-driven, high-performance and technology-based rig strategy. Now that said, we believe the improved commodity prices are delivering substantially better than expected cash flows to many of our customers. If the commodity pricing -- current commodity prices are sustained, we're optimistic regarding overall rig demand in the second half of the year.

Now looking closer at the specific regions, the Permian rig remains the most active and attractive basin with 42 rigs running. 10 of the new long-term contracts I mentioned are focused on the Permian. The ST-1500 we moved from Canada to rest operations in the Permian in January and 2 of the 3 new builds I mentioned earlier, along with the SCR to AC conversion all targeted to Permian. We expect the Permian activity for Precision will remain strong and likely be the primary basin responding to strengthening commodity prices.

We also note that Super Majors are ramping up investments in U.S. shales with expanded drilling programs and through land and corporate transactions. The super major large-scale industrial development program aligns very well with Precision's High Performance Super Triple rig strategy. And we already count several super majors and large independents among the early adopters of our automation technology. We believe we are very well positioned as the industry transitions to fully industrialize scale, proper efficiency and automation technology will drive the economics.

Shifting to MidCon, in the SCOOP/STACK Precision remains active with 6 rigs operating, however, we expect that later this quarter, we'll relocate 2 rigs to ST-1500s in Haynesville where we expect to have 4 rigs operating by the end of the second quarter. As our customers continue to control their spending on just drilling programs, we'll respond by positioning our rigs investment terms. In the Marcellus, we have 8 rigs operating, down from 10 earlier this year as our operators adjust drilling activity. Despite the slight reduction in activity, our rigs remain firm and the Marcellus market is behaving as a mature gas shale play. The drilling programs are essentially fully industrialized, operating performance is closely measured and good or strong performance is well rewarded by the customers. We are enjoying strong commercial support for automation technology as our customers are realizing the benefits of the efficiency, the consistency and the repeatability.

So moving back West. We along with everyone else are watching the DJ Basin closely. Precision has 10 rigs operating in the basin with firm contracts and day rates. Our customers are telling us they expect to manage through the new state legislation and they're providing visibility over the next couple of years. Our (inaudible) basin is operating at the highest level of industrialization, the pad size is now stretching to 20 wells. We are consistently drilling 24,000 flip measured depth long-reach horizontal wells in under 12 days and we want rigs on a pad in less than 45 minutes. Our customers manage their drilling and production operations in the DJ, with the world leading focus on their environmental footprint.

We're hopeful that pragmatic and reasonable thinking will balance regulatory requirements with jobs in (inaudible) of Colorado. But should that fail, we believe industry rig demand will pull Precision 7 -- Super Triple rigs to other basins if necessary. So for Precision, while overall U.S. industry demand has softened during the first part of this year, we've experienced sustained utilization for high-performance rigs through redeployments, customer high grading, rig substitution, and our customers' desire for efficiency gains we're delivering via automation technology.

Now turning to Canada. The winter drilling season lasted a little longer than we expected, which tells you how low our expectations were set back in December. The narrow WCS -- WCS differential and weak Canadian dollar both provided our customers with relief and improved cash flows, some of which we saw to extend richer drilling programs. Our rig activity peaked in late January and held up into March, several weeks longer than we expected. We saw 2 well programs extend to become 4 wells. We saw full pads that were drilled better than partial wells or partial pads we planned. We had several rigs that we expected to be idle. They were picked up traditional 1 to 2 well projects.

Looking forward, we expect our Deep Basin Super Triples to be operating near full utilization through Q3 and Q4, however, if that demand fails to materialize or if rates weaken, we are poised to remobilize additional rigs to the U.S. in very short notice. So today, we have 22 rigs operating, it's about 33% lower than this time last year, and we're developing visibility on summer ramp up, it should start commencing in mid-May through mid-July. And current customer indications just that, that wide gap we see today will narrow from current levels during the third quarter.

Precision's Canadian business has adequate scale and even during these very depressed periods, we generate substantial free cash flow with a very minimal investment required. During the first quarter, which again we responded to resize our business since reduced business level, reducing annualized fixed cost by approximately $10 million per year while creating onetime charge of about $6 million in severance. We believe these cost reductions were appropriate, and we believe they're sustainable.

So turning to international business. We see this as a strong and stable business in both Saudi Arabia and Kuwait. Carey mentioned the contract renewals in Saudi and the extensions in Kuwait. We see this revenue stability continuing into the next decade. As Carey mentioned, our 6 rig remains on schedule and on budget, and we are well experienced with the complex customer certification, and approval processes required for new rig deployments in Kuwait and don't expect (inaudible) issues. We expect the 6 rig will commence operations late in the third quarter -- late in the second quarter prior to the third quarter. And we continue to see rising international interest and more bidding opportunities for our 4 idle rigs in the region.

So turning back to Canada for a moment. Precision's completion of production business demonstrated substantially improved financial results for the second consecutive quarter delivering strong free cash flow. And this is due entirely to the efforts of the C&P team to manage all costs. We're working closely with customers to proactively plan jobs, minimizing interruptions in startups, carefully managing pricing, all contributes much improved cash flows this business unit.

Now you know that I've been saying for several years that the well service business is structurally unhealthy, rates and utilization have been running well below survival levels for several years now. And the long-term effects are evident as the industry rig fleet is shrinking due to underinvestment, crew salaries have been frozen or reduced. Workers are reluctant to return to jobs in the sector. However, I do see a scenario where even in a modest increasing demand, both crew shortages and rig availability will be strained. And this should lead to improved supply demand pricing environment and I believe Precision is extremely well positioned, should we see this trend emerge.

Certainly, I congratulate the team for their ongoing efforts to manage our costs, while preserving the competitive capabilities of our well service fleet. So I believe that with the strengthening WTI commodity price, stable and narrowing WCS differentials, favorable currency exchange rates, stronger customer cash flows and a substantially improved political environment following with the recent united conservative party win in Alberta. These all give us many reasons to be encouraged for an improving environment for Canadian services.

So on that note, I want to thank the employees of Precision Drilling for their hard work, the strong operational financial results delivered during this quarter and particularly for the excellent execution of strategic priorities.

And I'll now turn the call back to the operator for questions.

(Operator Instructions) Our first question comes from Sean Meakim with JPMorgan.

So maybe just to start off, Precision has a decent mix of customers in the U.S, the majors, large and small independents, some privates too. I was hoping you maybe could just give us a sense of with the pending news we'll see what happens ultimately with Anadarko but let's say there is an acreage consolidation cycle that gets underway in the U.S. Can you talk about what do you think that means broadly for super spec rig demand and cause a static rig count environment? And then specifically for PD, how you think you're positioned for that type of change in the customer base?

Sean, it's Kevin. Thank you for the question. I think it's a really key question as the market continues to kind of industrialize. So you can look at any one of the emerging plays, when the majors move in, either through acreage or through consolidation or transactions like this, they're targeting kind of 2 outcomes. One, they try to consolidate acreage and two, they apply industrial level capital to the play and you've heard, companies like XCO, which -- and excellent top with adding 20 or 30 rigs, certainly by these consolidations we're seeing kind of similar thinking, which I think plays very well.

We think likely it means lots of customers are focused on lean manufacturing, measuring, not tens but hundreds of data points on the rig, optimizing every aspect of the drilling operation, which plays into both our data and our automation technology quite well. So already, our customer set that is probably farthest down the commercialization path are generally super majors and large NP customers. Although that said, we have a couple of private equity clients, who are also fully commercial adopters too.

So both ends of the scale. But no question, the IOCs bring in industrial grade capital and they're looking for industrial style execution both at the rig level and on the development levels. We expect more rigs and those rigs to be very well managed, high-performance high-value rigs. We think it plays well for us.

Thank you for that feedback. I appreciate that. Can you maybe give us a sense of just thinking about Canada and the back half being quite important and still pretty open-ended. How do you think your discussions with customers could play out as we get through spring breakup and you have that second round of budget discussions, your customers will undergo. Do you think -- will that cadence be typical or do you think they'll be -- press a desire to get as much price discovery as they can? When do you think you'll start to get better visibility on what the back half looks like?

Sean, I expected to have a little bit more visibility by now, but this is really not that much different than any season where our customers want to get through publishing their Q1 results before they get really serious about booking up and locking in rigs for Q3. So their focused on messaging to the investors, what they've done, how they've accomplished their first quarter and then they get serious about their Q3 plans. Because really the Q2 periods a real flat period and just about bad rigs and pretty quiet period. So we're maybe it's slightly behind that normal negotiating cycle but it's not that surprising. What we are hearing though is that it looks like activity is going to ramp up like it would normally but not -- we're not expecting things to get back to 2018 levels. But the 33% gap that we saw during Q1 announced Q2 could narrow in July.

Right. That makes sense. And one more just if I could on free cash, that one data point I wanted to get from you all. Could you maybe just give us a sense of, obviously you've done a very good job of generating free cash recently and it's the key focus. Could you maybe just give us a sense of the expectations around the working capital cadence? It's a pretty strong draw early in the year, not unsurprising from that perspective but as you go through the year, do you expect working capital to be a source of cash for the balance of the year or what can it look like on a full year basis?

Sean, it's Carey. So we did have a bit larger draw in Q1 which is typical when we have a higher seasonal activity in Q1. We didn't experience as big of a ramp in Q1 as we typically do but we had some other draw on cash year-in payments and the new IFRS lease standard put about a $12 million increase in working capital. So I think throughout the rest of the year, it can be activity-dependent and I wouldn't expect us to have either a big source of cash from working capital or a big use of cash given where we see the market trending right from the first year to the end of the year.

And our next question comes from Kurt Hallead with RBC.

So Kevin, pretty good rundown I think we've got a pretty good feel of the kind of near-term expectations on kind of what's going on in the U.S., what's going on in Canada from a land drilling perspective. One thing you didn't mention though was, it's kind of been sematic here is higher degree of focus on kind of the better operations and efficiency, companies that have the most efficiency and then you referenced demonstrating that performance differential can get you rewarded. As what I see, can you give us some indication what are the key performance indicators that you are being benchmarked against. How does it maybe defer within the variant basins in the U.S.? How does it differ in Canada? Can you give a more, kind of perspectives on that if you can?

Yes, Kurt, that's a very complex question. The KPIs with our customers range from something as simple as simply our day rate, which would be the most basic and least helpful for us to several customers where we have literally hundreds of KPIs around every process, every activity of the rig. So it's a wide range. I will tell you though that the most sophisticated operators that focus on the drilling process tend towards higher end of capturing data. And historically, that data's been captured in 50-minute increments using the tower sheet process. So you are capturing 200 millisecond increments. And we're able to break down the drilling process into every single movement on the joystick or every single timing on when we engage the step.

So with our best customers, where the lean philosophy is kind of rolling through everything they do. We're satisfying that quite well. And -- but even with kind of moderately sophisticated customers, we'll be measuring anywhere from 20 to 100 KPIs per day on a 50-minute or even 200-millisecond increment and all of that's helping us to improve the drilling process. I mentioned on earlier, some examples the DJ Basin where we're drilling these 10,000-foot laterals, 20 some thousand feet long and 14 days consistently over and over, moving rigs in less than 45 minutes from start to release on the pad. Those are jobs where we are measuring more than 100 KPIs, and managing the operation down to every step of the rig. Is that helpful?

That's helpful in that context. When you talk about getting rewarded for it, does that mean that you get kind of a better day rate or is just mean that you don't have to give up any day rate like in a market environment we're looking at right now?

I'll make a couple of comments broadly and it's -- since the period on day rates right now, there are some contracts that are being negotiated and signed off. Generally speaking, if we can prove the rig has strong operating efficiency, the day rate discussion is less meaningful. If we can prove through data that a rig has strong operating efficiency. And the price will have some further discussion, generally speaking. I'll also tell you that we'd identified now several rig jobs we have because we have automation on the rigs, we identify that, we can identify one of the rig moves from Canada to U.S. because we have the data technology. So we're moving beyond aspirational thinking about automation aspirational stories about data into measurable market share and measurable activity tied to performance.

Okay, that's helpful. So maybe we could segue from there, you talked about the automation and the technology and the expectation to be commercially viable I think by the end of the year on a certain number of rigs. Could you elaborate that on that a little bit more and give us some sense of kind of what the uptake has been and kind of what the feedback loop has been with the E&P companies?

Sure can. So first of all, on our last conference call, I talked about field resistance being greater than expected and I'll just come back to that because that's what we're managing right now. Doing a pretty good job. So what we're doing, Kurt is there are two pieces. We're automating everything the driller does, and we're also putting drilling apps that control things like sticks' length and vibration harmonics and digital guidance for the wellbore. So we call our process automation automating all the driller functions so the driller can sit back and actually watch the operation rather than control all of the equipment on an ongoing basis. So that piece on that piece, that changes the jobs dramatically, changes the drillers job, it change company man's job, it could even change the drilling engineer's job. That requires a lot of training, a lot of interaction, a lot of work with customers.

If we can get the driller hands-off, within 70% of the time, the value is broadly demonstrable. So again a company man, getting the drilling engineer, getting our driller all synched, and have the driller go hands-off 70% of the time is the tipping point for us where the value is apparent and we can charge our $1,500 per day and everybody wins. The value is delivered, we get the EBITDA and the rig performs better. That's on the Process Automation Control. Moving to the drilling apps like stick-slip, and harmonics and digital guidance, those are apps that control dip position and streak dynamics and kind of things that are happening when you pull weight on the bit, and as I mentioned, we have got 3 of those that are transitioning now and we expect likely in the third quarter those will be earning revenue as line items. Is that helpful?

Yes, no, that's helpful. And then just one last thing Kevin, you referenced the ability to mobilize rigs from Canada down to the U.S. on a moment's notice depending on the relative opportunity. So can you give us some indications as to what's that relative opportunity? What does it mean in terms of the potential activity levels in Canada in the back half of the year? What would have to transpire or not have to transpire for you to say, "Hey, it's better for us to move some stuff out of Canada." I'm really referencing that, Kevin, in the context of you, I would imagine, you'd have think that it's more than just say the back half of '19 doesn't look that great. It's got to be more perspective I would imagine you think only in the back half of '19 in Canada, may not look great but it may be more like 2020, 2021 or longer-term dynamic. Can you give us some perspectives on that please?

Yes, I sure can. That's also a pretty key question. So far, we've only moved 2 rigs from Canada to the U.S. Just 2, leaving over 25, 26 rigs in Canada. And through Q1, those rigs were over 90% utilized. It looks like they'll be over 90% utilized in Q3 and Q4. If that utilization plays out, if the pricing stay strong, I doubt we'll move anymore rigs. And if the performance of those rigs continues, and as we begin the roll out for the automation, I think that performance will just look better and better. It's quite likely that we move no more rigs to the U.S. quite likely. Now if something changes and things for whatever reason turn more negative in Canada resulting won't be a stock.

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

Kevin, in the U.S, your rig account activity levels have remained frankly remarkably resilient over the past several quarters and so clearly you're adding an additional or performing additional upgrade for I think Q3. My question is, with the recent oil price momentum, it feels like $65 WTI is generating a bit of a buzz as it relates to a potential second-half rig count recovery, at least on the margin.

My question is, with what you're seeing today, has the tone or dialogue with some of your customers noticeably changed at all over the past several months with respect to adding activity or is it right now, really just kind of a wait-and-see type thing as it relates to how improved this oil price momentum might translate into increased drilling activity in the back half?

Taylor, some of those comments made earlier about our Canadian customers and messaging around end of the quarter I will tell you that everything we hear from our customers in the U.S. remains focused on fiscal discipline, capital efficiency, returning capital to shareholders. There has been no change in the narrative by our customers. Now that's worked up quite well for us. In fact, if we have rigs that have been leased by 1 operator we've got no trouble getting those rigs rebooked with other operators looking to improve his efficiency.

So I think that you mentioned that our activities are resilient I think that's a result of $3.5 billion of investments in the first half on high quality rigs and rigs that if they get released by an operator, they get picked up without a miss, without a day being missed by another operator through high grading. But the fundamental question you asked me was has there been a change in tone by our customers? Not at the operating level, not at the corporate level, they're focused on fiscal discipline and we'll see what happens once they get through Q1, once they get through Q2. My expectation is that they're achieving substantially higher cash receipts halfway through the year, they might have a way to do both. Both return capital to shareholders and despite the increased drilling.

Okay, that's helpful. Follow-up to the -- in the C&P segment, I think Q1 is probably the second or third straight quarter of really strong improved performance. Looking ahead, it looked like in Q1 that at least part of the top line improvement sequentially and year-over-year was due to some nontraditional well servicing type activities. So my question is, looking beyond spring breakup, do you think you can sustain that type of strong top line performance and is the sort of mid-to-high teens even the margin that you've been run rating the past couple of quarters, is that something that you think is sustainable for the back half of the year?

We do. One part of our business and the decision in the C&P division was to the accounts business that had a slightly better quarter than what we expected. But it's not one that we don't think is repeatable.

And our following question comes from J.B. Lowe with Citi.

Just had a question on the upgrade you guys did to the ST-1500. You said it was $6 million for the upgrade?

It was actually a DC SCR rig that was a full-time walking rig. So we're just converting rig from DC SCR to a full AC suite which needs more -- and so it's more power lineup -- power control lineup at driller's cabin and some accessories like that on the rig. But the comment I'd make is that our rig fleet, both our DC SCR rigs or AC rigs were configured to handle the higher hook loads and larger racking capacity that is required along these wells. So we just don't expect to have to have the large magnitude upgrades that have been required in some cases to get rigs up to leading a start.

Right, no, for sure. Is that $6 million, that's going to be all paid back within the contract term of the contracts you have going on with the Permian, right?

It will be more than paid back.

Yes, okay, perfect. And how many more, I guess opportunities would you have on the DC-AC side to kind of duplicate this type of upgrade?

Well, we have a dozen more of those rigs parked in the U.S. right now. Some of those are running actually right now. They can go through a similar upgrade, but I'll be clear, at this point, nothing's in our capital plan and hitting our debt reduction targets are the priority.

How many of those -- how many of the 12 are actually running?

We don't a number to say but it could be 3 or 4. And many of those rigs have full capabilities already built-in.

Right, right. I get that. Follow-up question is on the Marcellus rigs, that you guys moved, where did you end up placing those rigs?

So we moved 1 rig from Canada to the Marcellus. I think that rig, Gene, can you tell me where the rig is, is it in Pennsylvania or is it West Virginia? It's in West Virginia. We have 2 rigs we expect to move from the SCOOP/STACK to the Haynesville later this quarter.

Okay. Sorry, I thought I heard you say you were moving rigs out of the Marcellus.

No, nothing moving out of the Marcellus. We did have our rig crane pull back a rig or 2 to the Marcellus during the first quarter but we've been able to maintain our rig count.

Okay, perfect. Last question, just on the international day rate came down a little bit. Is any of that due to the contract extensions you received with Saudi or were those kind of at the same rate they were already working on, this is just kind of regular rate fluctuations?

The contract extensions in Saudi will be incremental to EBITDA. And the contract extensions in Kuwait are flat at the current EBITDA rates. And the small variance in day rate is just a function of how many move days we have in any given month.

And our next question comes from Connor Lynagh of Morgan Stanley.

Obviously you guys have been doing a great job on the debt reduction. I wanted to just clarify, you referenced a 2x leverage target. Is that on the current EBITDA run rate, is that on a -- eventually higher run rate if things improved particularly in Canada, how do you think about that?

I'll let Carey kind of follow behind, but we said we see potentially down below 2x debt to EBITDA on the horizon. Carey, you want to give anymore color?

Sure. So I think Connor, you look at where consensus for this year and I'll point you to the specific number but if you look at us getting to the high-end of our first our debt reduction range and where consensus is, we should be somewhere in mid-3s on a net debt to EBITDA at the end of the year with slightly improving activity next year in a similar debt reduction, where we'll be into the 2s. So I think we are not putting a point in time in the future when we think we'll get there but in the next 2 to 3 years, we think, without anything drastic changing, we should get there.

And with steps for assets sale we think we can accelerate our plans.

Yes, on that note, Kevin, how do you think about the remaining potential assets for sale, I mean you've got the legacy rigs in Canada correct. What else is there potentially to -- that you can part with?

So I'll just mention that we're not in a position where we're in a hurry to do anything. We've got a great liquidity position. We've almost chipped away all of our December 2021 note and the next one's not due until December '23. So I would look for us to do something similar to what we've done this quarter, which is opportunistically when we find a good transaction it makes sense at a good price and it doesn't really impact our cash flow generation capability. We'd like to move on that. So I think the Mexican transactions, the Saudi transaction and the Terra Water transaction were all opportunistic transactions for us.

Makes sense. Just one, unrelated follow-up here. And I apologize if I missed this in your comments, Kevin. Have you guys quantified when you get full commercialization on these apps, what the incremental EBITDA impact could be, as we exit the year here?

We're giving guidance around the rigs for each sort of line items, so of course we've been saying with the process automation control platform would be $1,500 per day, we have 31 of those deployed in the field. We've been talking about apps having pricing in the $200 to $600 range depending on whether we're hosting the app or relieving the app. We've got it towards something like 1 to 4 apps per rig and that number may go up actually because the app demand seems to be stronger than I would have expected originally. But I expect later this year, we can start to update our guidance on the technology stream.

And our next question comes from John Watson with Simmons.

Kevin, I think in response to Taylor's question, you talked about the resilience of Precision's rig count, which we've clearly seen, I have a quick follow-up on that. I know you haven't seen any net losses in your rig count thus far in 2019. Have you seen gross losses or could you quantify how many of those might be where you lose a rig and you pick one up right after?

I think our rig count dropped -- our active rig count dropped below 80 for about 4 days this month. Sorry, in fact that would have been the month of April, not even March. I think we reported an average rig count to the first quarter was 79 rigs. And so that gives you a sense of where we're at. We really haven't lost many days where we've had a rig down for any kind of period of time beyond the rig move itself as we transition from 1 customer to another customer. I commented that our rig count at Marcellus came down 1 or 2, obviously we picked up something else in another basin to balance that out.

That's perfect. Okay, okay. Got it. And understand if this is too sensitive and you rather not answer but I think on the last call, you mentioned intense competition in the 23,000 to 25,000 day rate range. Is that still the case today? Have there been any been changes in that environment?

No, I actually think that, that's been the case through most of the fourth -- first quarter into the second quarter. I think until we see rig counts at the gross level moving up, I think that there will be a little bit more rig-on-rig competition. But I'll come back and say that actually I think we achieved a little better EBITDA margins in the first quarter than we guided to. So in fact the rate increases that we felt are going through that we guided towards earlier for Q1 materialize plus a little more and we've guided towards a strong margin through the second quarter. So I don't expect any negative impacts from the renewal prices at this point.

Okay, okay, great. And the new contract that you've signed should we think about those in terms of regardless of price should we think about those being a similar term and structure to your other contracts?

Short answer, yes.

And our following question comes from Ian Gillies with GMP.

In Canada, are you seeing any signs of margin tailwinds or potential for margin improvements just on the basis of the changing government here?

Certainly, I would tell you the mood of our customers has changed dramatically. No question about that. And that's right across the boards. But I think the mood of our customers are also being propped up by narrow differentials and by the supportive exchange rate and you don't -- we'll watch how our customers report their first quarter results, and almost had great results a few days with cash flow and have got 10 or 15 days of results come through right now. I think there's going to be a little better tone for a client base today than there might have been even just 3 weeks ago, Ian.

Few minutes ago I came back from a federal government meeting, federal government approved financing for a small geothermal project, the Precision's partner in and we attended the awards just a couple of hours ago and had a chance to talk to federal energy minister. He assured us that, for example, the review process on - the federal government review process on the Trans Mountain pipeline will be concluded by the June 18 deadline and the cabinet would be in a position to make a decision. That was encouraging to hear. So there are certainly positive signals popping up both provincially and federally.

That's helpful. I'll believe the TMX piece when I see it but.

So the government cabinet will be in a position to make a decision.

For sure. Maybe switching gears a bit, I know there's only a couple ST-1500's in Canada, but can you maybe can you walk us through the decision to the process of converting the SCR rather than just transferring rigs from Canada at this point in time?

That was simply the best use of cash and the fastest payback. The 3 ST-1500s in Canada have good opportunities in front of them apparently, we'll see if they emerge later in the quarter.

Okay, on the rig technology side, I mean there's been a lot of talk about it on the call. Do you think you're a long ways from it having its own line item in the financial statements or some sort of disclosure there. I mean just given the focus there?

I'm not sure that we'll report a line item for rig technology, we don't report whether it is a line item, or other a la carte items on the drilling rig but it does flow through our EBITDA margins and I would expect to see -- we've always had a favorable position relative to our competition in Canada margins, part of it due to our value part of it due to a rig mix and we think this both in Canada and U.S. will flow through our margins.

(Operator Instructions) Our next question comes from Jon Morrison with CIBC Capital Markets.

In terms of the improvement in profitability within CPS, how much of that was cost cutting versus being more selective with the work that you're willing to take on in that businesses? I'm assuming the core pricing across the industry isn't going higher within that business.

I think that's correct, John. It's a mix of cost cutting so we've had a lot of initiatives here in the last 2 years on reducing the cost structure in that business and we've been successful. I'd say the other part of it, as you characterize it, it's being more selective about the business, a little bit more 24-hour work and matching up investor rigs with the best opportunities.

Is there anything that you guys are seeing right now in terms of a shift in customer willingness to sign different duration contracts than you typically see in the U.S.? I guess the question is, was the duration on the most recent contracts signed meaningfully shorter, longer than the last 18 rigs that were signed?

No, on the average it might be just slightly shorter but we've had some contracts stretching into years and some as short as 6 months, so I think the mix really hasn't changed that much.

Jon, I'm actually a little surprised by the number of term contracts that were signed during the quarter, especially with all of the rhetoric around uncertainty and quality concern. I think our team did a great job getting the right customers and getting those rates locked in.

And obviously, given the crude momentum today, we feel that, that could be re-signed. But given what went on in the quarter, it was obviously a good win.

Yes. It's been one that was signed before crude began moving in a meaningful way.

For sure. I realize, I was always focused on leading-edge pricing as that seemed to be the core indicator of where things are heading. But just broad strokes, how do you think about average realized pricing for Precision in Canada and the U.S., call it the next 6, 12 months, 18 months? Broadly flat? Up a touch? Down a touch? What should people expect?

Which commodity price deck do you want me to answer to?

We'll use the current strip.

If we use the current pricing trends, I expect rates will trend up in the U.S., on average. Expect utilization will trend up, again, looking into the third and fourth quarter, not the second quarter. And I think Canada has room to move up from the really depressed levels that we saw in the first quarter on utilization. And if we hold rates from Q1 and Q4 into Q3 and Q4 this year, I'd be pretty happy if utilization picks up, and we get closer to 2018 levels.

Is it fair to assume that you wouldn't expect any incremental pricing pressure in Canada from this point forward across any rig class given what's already transpired for pricing in Canada?

Yes. Jon, outside the Deep Basin, outside that Super Triple market, I think there will be pricing pressure. But we're attributing most of our cash flow to the big Deep Basin rigs. If for whatever -- I said on the call, if for whatever reason we see pricing erosion on our Super Triples, we know to put those rigs to work in the U.S., and we know there how much we pay for the move.

Okay. Is there any additional commentary you can give around the deeper and higher-spec market in Canada? And I guess is there growing concerns of scarcity emerging with your customers that would be more willing to sign a long-term contract today than may have existed 3 or 6 months ago? Just considering the amount of rigs that have left the basin, like we're down 25, it's probably only mid 50s left for a higher-spec triple in Canada. So is this causing enough heartburn that you're actually seeing guys willing to engage in conversations today than maybe they did in the past.

Jon, I think, theoretically, you're correct, and I think that's already into their minds. We just haven't seen it play -- it hasn't played out yet in customer discussions yet. And it's probably a timing question not a market question. I mean timing's been -- Q1 has been lousy. Get through Q1, figure out where the world lies, figure out what the strip looks like and get your Q1 reports out to the public, get Q2 planned-- get Q3 planned later this quarter. I think it's possible those discussions could start late this quarter into next quarter for long-term contracts, maybe even better pricing on our Triple rigs. But it goes the other direction, for whatever reason, we see negative momentum pricing or reduced utilization. I think ourselves and I think others will move rigs out of this market. There's no question we can put an ST-1500 to work in the U.S. right now. Right now, today, a U.S. day rate would probably give us a better return than a depressed rate up in Canada.

Is the decision to move an incremental rig from Canada to the U.S. largely a function of covering the molt cost and contract duration then? Or you're really waiting to see what happens with spending profiles in Canada before you really comment?

Well, short answer is, the rigs are booked right now. Those are booked at rates we like. If that changes, then our view would change.

Okay. Just the last one for me. In terms of the idle rigs you have in Kurdistan, would you need to win a multi-rig program to mobilize those rigs in a new country? Or can you operate 1 or 2 rigs outside of Saudi and Kuwait and make money?

We could probably operate anywhere in the Gulf region, which would include -- could be Bahrain, could be Qatar, could be Oman or Iraq or Kurdistan on a 1-rig basis because we can mobilize out of Kuwait, out of Saudi or out of Dubai to support that rig. We have to look at that investment to make sure that whatever upgrades or work we need to do to the rig is paid back in the contract, we make the move. But I think we can operate one rig on an accretive basis anywhere in the Gulf region.

And I'm showing no further questions at this time. I would now like to turn the call back to Ashley Connolly for closing remarks.

Thank you. And thank you all for joining today's call. Look forward to speaking with you when we report our second quarter results in July. Have a good day.

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.