Precision Drilling Corp (PDS) 2024 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Precision Drilling Corporation 2024 second-quarter conference call.

I would like to hand the call over to Lavonne Zdunich, Vice President of Investor Relations. Please go ahead.

Thank you. Happen to Precision's second-quarter earnings conference call and webcast. Participating on today's call with me will be Kevin Neveu, our President and CEO; and Carey Ford, our CFO.

Earlier last night, we reported strong second-quarter results, which Carey will review with you, followed by an operational update and outlook commentary from Kevin. Once we have finished our prepared comments, we will open the call to questions.

Some of our comments today will refer to non-IFRS financial measures and will include forward-looking statements which are which are subject to a number of risks and uncertainties. Please see our news release and other regulatory filings for more information on financial measures, forward-looking statements and risk Factors. As a reminder, we express our financial results in Canadian dollars unless otherwise indicated.

With that, I'll pass it over to Carey.

Thank you, Lavonne, Precision's Q2 financial results exceeded our expectations for revenue, adjusted EBITDA, earnings, and cash flow. The resiliency of our high-performance high-value business model, geographic diversification, and organizational focus on cash flow and return on capital drove our financial results. Precision's demonstrated commitment to strengthen our balance sheet continues with year-to-date debt reduction and share repurchases of $103 million and approximately $40 million respectively. For 2024, we expect to reduce debt by $150 million to $200 million and utilize 25% to 35% of free cash flow for debt repayments to repurchase shares.

Longer term, we plan to reduce debt by $600 million between 2022 and 2026 with approximately $240 million remaining over the next 2.5 years. We expect to achieve a leverage level of below 1 times net debt to EBITDA and increase our direct shareholder returns towards 50% over that time period. The progress on these capital allocation targets is clear and the longer term trend remains in place as we've reduced debt by over $1.3 billion since the beginning of 2016.

Moving on to our Q2 performance. The US drilling rig count has declined 15% over the past year, and while this data point is typically used as a proxy for broader oilfield service activity and financial performance, this is not the case for Precision, as we have achieved year-over-year growth in consolidated Q2 revenue driven by substantial growth in international drilling, Canada drilling, and completion and production services. Q2 EBITDA of $115 million included a share-based compensation charge of $10 million. Without this charge, adjusted EBITDA would have been $125 million. Net earnings were $21 million or $1.44 per share, representing the eighth consecutive quarter of positive earnings for Precision. Funds provided by operations and cash provided by operations were $112 million and $174 million respectively.

Margins in both Canada and the US were higher than guidance, resulting from stronger-than-expected pricing and cost recoveries, higher ancillary revenues, and improved cost performance. In the US, drilling activity for Precision averaged 36 rigs in Q2, a decrease of two rigs from the previous quarter. Daily operating margins in Q2, excluding the impacts of turnkey and IBC, were $10,838USD, a decrease of $219 USD from Q1. For Q3, we expect margins to be stable and above $10,000USD per day.

In Canada, drilling activity for Precision averaged averaged 49 rigs, increase of seven rigs or 18% from Q2 2023. Daily operating margins for the quarter were $14,423, an increase of $2,200 from Q2 2023. For Q3, our daily operating margins are expected to be between $13,500 and $14,000 per day with higher fixed cost absorption and improved pricing, largely offsetting the impact of rig mix. Internationally, drilling activity for Precision in Q2 averaged eight rigs, a 61% increase over Q2 2023. International average day rates were $55,301USD, an increase of 9% from the prior year due to rig mix.

In our C&P segment, adjusted EBITDA this quarter was $12.4 million, up 66% compared to the prior-year quarter. Adjusted EBITDA was positively impacted by a 44% increase in well service hours, the integration of the CWC acquisition, and improved pricing. C&P results were further supported by Precision's rental business which is realizing increased demand and utilization for centrifuge equipment on Super Triple rigs for customers in the Montney. Our contracted rig fleet continues to support our outlook with average annual rigs under contract for 2024 of 17 in the US, 23 in Canada, and eight internationally.

Moving to the balance sheet. As of June 30, our long-term debt position net of cash was approximately $800 million, and our total liquidity position was over $540 million, excluding letters of credit. Our net debt to trailing 12-month adjusted EBITDA ratio is approximately 1.5 times, and our average cost of debt is approximately 7%. We expect our net debt to adjusted EBITDA ratio to be approximately 1.25 times by year end when we expect net debt to be between $700 million and $750 million. And our run rate interest expense at that time will be approximately $50 million.

Moving on to guidance for 2024. Depreciation is expected to be approximately $290 million, cash interest approximately $75 million. Cash taxes are expected to remain low and effective tax rate to be approximately 25%. SG&A is expected to be approximately $100 million before share-based compensation expense, and we expect share-based compensation charges for the year to range between $40 million and $60 million at a share price range of between $80 and $120 per share, and the charge may increase or decrease by up to $20 million based on the share price performance relative to Precision's peer group. Given Precision's share price performance year to date, we have increased the upper end of our guidance from $100 to $120 per share to provide increased visibility for our investors.

With that, I will now turn the call over to Kevin.

Thank you, Carey, and good morning. As Carey mentioned, we are very pleased with the strong cash flow our business is generating, and we're thrilled with the progress we made with our international and Canadian units. While our US segment is stable, activity is a little slower than we would like.

In the lower 48, customer demand appears to have troughed. The combined drag effects of capital discipline, low natural gas prices, operator consolidation, and delayed drilling plans seems to have bottomed out. We're noting an increase in customer conversations regarding drilling programs and plans or considerations to pick up rigs and modestly increase activity later this year and into 2025. As the E&P consolidation transaction has drawn to a close, and those operators commence integration of the drilling teams, we expected drilling contractor mix to shrink to fewer and larger more capable drillers rather than the fractured vendor base used by many of those acquisition targets.

Some of this contractor rationalization is already underway, and we are encouraged by the sophisticated customer interest in Alpha automation, safety performance, and overall rig performance. We believe Precision is very well positioned to grow market share over the next several quarters. We also see some of these acquired drilling teams falling out of the transactions and reforming with private equity and looking to utilize the most technologically advanced drilling rigs they can find. One of the rigs we added this month was contracted to one of these new private equity startups, and the drilling team is well familiar with Precision's capabilities.

Encouragingly, we are also in discussions with several of our Haynesville customers who are in the early stages of planning and anticipating increasing LNG export demand. The Haynesville is a region that has traditionally been a stronghold for Precision's Super Triple rigs. We currently have six available rigs in the region and it seems possible we will have some additional reactivations before year end.

Currently in the US, we have 38 rigs operating and expect to hold in the upper 30s through the third quarter with a modest increase perhaps to the low 40s in the late fall. Super Triple leading edge rates have remained stable in the low 30s per day. However, we did activate a couple of legacy CWC rigs in Wyoming. And while these are AC rigs, they are not super-spec, and as a result, the day rates a little bit lower.

Turning to our international segment, Precision's activity, revenue, and EBITDA will increase approximately 50% as compared to last year. While we have no new contracts to report, we remain very active bidding our idle rigs. I'll remind the listeners that we have three active rigs in Saudi Arabia. These are deep, high-capacity drilling rigs operating in the strategic Manifa oil field for Aramco. The rigs have been a long-term contract since 2010 and are currently contracted out for several more years.

In Kuwait, we have five Super Triple 3,000 horsepower ultra large drilling rigs, all operating on long-term contracts. We renewed most of the rigs last year including spending the maintenance capital last year to recertify those rigs. We expect a long runway of strong and sustained free cash flow from our international rigs, and we'll continue to bid our idle rigs, including potential redeployed US rigs, but only at rates that meet our return expectations and deliver free cash flow over the full contract duration.

Our Canadian businesses, both drilling and well servicing, are performing at the highest levels in over a decade. Starting with our Canadian drilling group, to update you, we've activated three more rigs today raising our active rigs to 77 from the 74 mentioned in our press release last night. Customer demand has been substantially stronger than we anticipated earlier this year. And we have been more than pleasantly surprised by the acceleration in heavy oil drilling across the full spectrum of Clearwater, Mannville, conventional heavy oil, and SAGD.

The Precision Super Single rig is a clear market leader with 26 different heavy oil customers using our rigs. Our Canadian Super Single rig fleet includes 48 rigs with 43 running, and a third of those are pad-equipped, significantly increasing the value for our customers and for Precision. Now as a refresher for listeners, the Precision Super Single rig was specifically designed for shallow to medium depth, high-efficiency slant, and horizontal drilling, and has its origins in the early 1990s.

Between 2010 and 2016, we built out and upgraded our current fleet of 48 fully standardized Super Single rigs. All Precision's Super Singles are manufactured or upgraded in our in-house manufacturing facilities in Calgary and Nisku. Our comprehensive vertical integration on the Super Single underpins the low operating costs we maintain. This high-efficiency design is based on a mechanical drive system with hydraulic controls that enables precise horizontal drilling control and extremely precise wellbore placement. These rigs also incorporate fully mechanized drilling and pipe handling operations.

Super Singles are safe, efficient, and highly reliable with the lowest operating costs of any rigs in our fleet. These rigs can be moved well to well in under one hour and pad to pad in just a few hours, requiring as few as 21 truckloads, almost 10 fewer than similarly capacity-rated tele-doubles. The rigs can be easily upgraded to increase drilling torque, increase hydraulic capacity, or add a pad walking systems for significantly less capital than any competitive rig. This combination of versatility, Precision drilling capabilities, safety, and efficiency has made our Super Single rig the market leader in all complex, shallow to medium depth drilling applications from Manitoba to Northeastern British Columbia.

While we do not break down our revenue and margins by rig type, I have confidence to quote base margins in the range of $7,000 to $14,000 per day with the upper end of the range typical for pad-equipped Super Singles. This overlaps with our triple margins which start in the $12,000 range and move up from there.

During the second quarter, Precision's Evergreen team introduced two new Evergreen products which improve the fuel efficiency, reduced emissions, and improve the safety and versatility of our Super Single rigs. We began rolling these products out to the field and have equipped nine rigs with our hydrogen injection combustion catalyst system, which offers our customers fuel savings and emissions reductions in the 6% to 8% range. Further, Precision's high mass lighting system has also been adapted to our Super Single rigs, and we've deployed four of these to the field. We expect both of these Evergreen systems to rollout across the full Super Single fleet over the next 12 months, adding over $500 per day of additional incremental margin. Leveraging this across our Super Single fleet results in a $6 million to $7 million annualized incremental margin run rate.

Now turning to our Super Triples in the Montney gas condensate play in Canada. Our current fleet of 30 rigs is virtually fully committed with just a few windows available in activity this quarter, which we expect to fill the short-term customer programs. Rates remain strong in the low to mid 30s for the base rig with Alpha automation, Evergreen and other extras pushing those rates in the mid to upper 30s. I mentioned earlier that we've been somewhat surprised by surging customer demand in heavy oil following the TMX opening. It seems we may experience a similar Montney surge once LNG Canada is fully commissioned and shipping LNG by capacity this time next year.

It's conceivable that the market may be several rigs short. Recent customer contracting activity and particularly the contract duration customers are seeking seem to support the notion of a prospective rig shortage. As I've mentioned in the past, we have idle fully winterized, Super Triple 1200s in the DJ Basin, and we'll consider redeploying some of those rigs to Canada if the contracted rates are in the upper 30s and the customers pay the full mobilization costs. We expect to have better visibility on this opportunity later this year and into 2025.

As I mentioned earlier, we have 77 active rigs today and expect to be in the range of 75 to 80 through August and could see our rig activity trend further upwards in September and through the fall as our customers prepare for what looks like a very busy 2025.

In our Canadian well servicing operations, we see much of the same customer demand and fundamentals. Additionally, government-mandated well abandonment activity is a 22% and growing wedge in that business. We have fully integrated the CWC fleet into precision, and the results are clear their average rates, our margins, and our total activity. Now well servicing activity can be heavily influenced by weather namely rain and by forest fires.

Through the second quarter now into July, on any given day, we may have had anywhere from 5 to 20 rigs delayed or postponed due to those issues. Typically, if these deferrals are material, it will push demand later into the fall when drier and lower fire conditions normally persist. Today, we're operating 71 service rigs and expect to be in the range of 70 to 85 rigs for the balance of the third quarter and expect a higher end of that range may trend closer to 95 in the fourth quarter.

So to wrap up, we have many Precision employees listening on this earnings call, and we encourage our staff to do so. I want to thank all the Precision people who once again delivered a strong quarter of safety performance, for their intense focus on operational efficiency, and their outstanding efforts on cost control. So great work to the PD team, and thank you all.

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

Thank you. (Operator Instructions)

Kurt Hallead, Benchmark.

So yeah, Kevin, things are really playing out, as you mentioned, better than expected in Canada despite obviously some dynamics at play with wildfires. So can you just give us give us an update on what you think triggered this acceleration, if you will, in overall customer activity? And I know you referenced some additional things that are coming up for 2025, but is the customer base at this juncture as concerned about a shortage of rigs as you seem to be?

I'll start with why I think we were a little surprised by the activity that I think we underestimated. So first of all, the math for our customers works out quite quite well right now. They're realizing somewhere between USD77 and USD80 a barrel minus the Canadian discount which has shrunk with the opening of Trans Mountain expansion. So they're realizing somewhere typically around USD65 for oil. When you compare that to Canadian dollars, it will be CAD90 to CAD100 depending on the range. So it's the highest realized returns they've made in a long time.

But I think what this really means now is that they've got certainty of export capacity, and there's no uncertainty relying on train cars to move oil out. They've got a pipeline slowing, and they can move the oil. So I think besides having a firm and a better price than they've ever realized in the past, they also have certainty of export capacity. So I think when you reduce the risk and the uncertainty, increase the price, it unlocked more drilling demand than we expected. So that has been clearly our experience in the well side.

And my comments on LNG Canada opening up. So there's an awful lot of drilling that has gone on over the past three years in the Montney. Most of it has been funded by the condensate that's produced by those wells. And that condensate gets sold into actually the heavy oil market to help ship heavy oil on pipelines. So condensate has driven the economics. The gas has actually kind of oversupplied the system, but they built up an inventory of gas supply now for the opening of LNG Canada. No question about that.

But we're sensing that once that plant gets running and sustained operations, they'll need to continue drilling and probably increase drilling. So that's why we're sensing that there's probably going to be a further step up in rig demand once that plant's running, which should be above mid next year when it's at full capacity. When we combine that with the behavior of our customers around trying to contract rigs, lock them in, maybe not working right now, but getting the rigs going again on January 1, it really seems like there's behavior pushing towards increased activity in 2025.

That's great color. Now maybe maybe a follow-up to that would be, I think in past calls and discussions, you've mentioned the prospect for some of these rigs that are going to be filling that LNG export capacity to be booked on some sort of long-term contract dynamic. I think you referenced there might be kind of a limit to how many of those rigs might ultimately be on a long-term contract? Can you just give us an update on your thoughts with that?

Yeah, Kurt. Contracting strategy has got two parts. It has got our willingness to contract rigs and the customers' desire to take contracts. I'd say that the Canadian Canadian industry has been really cautious over the past decade. They've been through heck and back with commodity prices and pipeline constraints, and they finally get a bit of room to run right now. But as a result, Canadian customers have been reluctant to sign too many long-term contracts because of the long-term uncertainty they faced the past 10 years.

That is changing now. We see, certainly for development drilling in Montney, more and more of a trend for long-term contracts. So they're more willing to sign the contracts than might have been a few years ago. And we want to remain -- keep some of the fleet with optionality for increased rates. So we're not anxious to tie up the entire fleet with long-term contracts, but blend of half the rigs contracted, half the rigs exposed, maybe a little more contracted. It's kind of how we look at things.

Luke Lemoine, Piper Sandler.

Kevin, last call you talked about US land visibility and timing of the rebound just being a little bit unclear. And then you just talked about activity troughing out, so your views changed a little bit. It sounded like the customer conversations around rig adds were basically new due to new capital formation along with Haynesville adds next year? I mean, I guess, first, anything to point out there in the other factors?

And then second, you talked about your rig counts in the US maybe increasing to high 30s to low 40s from 3Q to 4Q. Do you think that's representative of the overall Super-Spec rig count or maybe specific to a Precision?

Look, I think -- for us, a couple of rigs moves us from 30 to 40. So it's not a big market indicator. So I think keep that in mind. Even if we had three rigs with 41, that doesn't really mean the whole industry is changing. I do think between now and the end of the year, it's likely that the larger drillers, and I think we're in that bucket, gain rigs, and some of the smaller drillers, they lose rigs. Some of these consolidation transactions complete, and they rationalize their fleets.

So I think you could see any one of the larger drillers pick up a few rigs and -- two, three, four rigs, not 50 rigs, be clear on that. Just through the conclusion of these consolidation transactions, if you layer in for us one or two rigs in the Haynesville, which is the big move, now you're at 42, 43 rigs. So the path to get to 43 isn't that complicated.

But I don't see the market moving at adding 50 or 60 rigs between now and the end of the year. So I don't think that three or four rigs for Precision means 10% of the market.

Okay. And then, Carey, in the press release, you talked about looking for opportunities to lower cost. Could you maybe elaborate on that and especially on the US drilling side and maybe what that could mean?

Yeah. I'll hit that from a couple of different points. So we've talked a bit in the past about we're in a bit more fixed cost in our US business than we have in the past just we're operating six different operating regions and running 38 rigs, so we've got fixed cost spread over fewer days. So that has been a little bit of a headwind to margins.

On the items we can control, we've really had to focus on repair and maintenance expense and working with our vendor list and optimizing centralized purchasing and optimizing third-party labor on our rigs. So we're looking at all avenues to address reducing costs on our rigs. And we saw some of that performance really start to show up in the second quarter, and we expect to maintain that performance the rest of the year.

Aaron MacNeil, TD Cowen.

Carey, we've had two quarters now where margins have come in generally better than the guide. And I guess the question is, is your Q3 margin guide similarly sort of conservative in your view?

I think what we wanted to do is provide some guidance for the market that is realistic that we can meet and hopefully exceed. I think on the Canadian market, we have a dynamic that we haven't really had in the past several years where we're getting, as Kevin mentioned, a lot more Super Single work and some tele-double work. And so when you get that rig mix blend into the fleet average, the pricing is a little bit lower. Margins are a little bit lower. So it's a little bit less predictable.

We think that we can beat the guidance that we've provided but want to err a little bit on the conservative side just because of that new dynamic. And then in the US, same thing, I think that if the rig count remains flat or decreases a bit, we're wearing a bit more fixed cost per rig. And if it increases on kind of Kevin's potential getting to low 40s, I think we're running a little bit less fixed cost, so the margins should be a little bit better.

So I think in short, there's some moving parts. So we want to make sure that we're providing a realistic margin guidance for the market.

Makes total sense, and I think this one may be for you as well, but -- excuse the napkin math here, but at least on my estimates, you sort of on pace hit the lower end of the 25% to 35% share buyback target. I mean, is that sort of -- maybe you can't guide to this if it's consistent with your view, but like is that sort of the intention or do you think we'll maybe see that you've ramped up the share buyback pace in the second half of the year?

Yes. So we are intentionally not prescriptive on how we're going to -- on what side of the range we're going to be on for the share buybacks. It depends on how much cash the business generates and also where the shares are traded in the market. In my comments, I mentioned that we've bought back about $40 million worth of shares year to date. That includes some shares that we bought back in the month of July.

And if you double that and look at the midpoint of our debt reduction range, I think we'd actually be at the high end of the 25% to 35% range. So I think we're definitely going to be within that range, and where we are within that range will depend on both cash flow and where the shares trade between now and the end of the year.

Waqar Syed, ATB Capital Markets.

Kevin, you've seen a number of M&A transactions in the market with your peers. Some have decided to expand their pressure pump and become more kind of providing for services in the US and does have increased exposure to Middle East. Drill bit acquisitions have happened as well. How do you see Precision kind of evolving over the next like three to five years' time? Do you remain focused on what you do now or you think that five years from now, Precision could be offering more businesses?

Waqar, that's a great question. And in fact, something we've talked about with our Board pretty much every Board meeting and especially during our strategy sessions. So it is nice to have options kind of going forward. We've been so focused on debt reduction for the past decade that that has been kind of our top priority is to really clear with our annual priorities.

But we did do a couple of tuck-in acquisitions that we're doing quite well. We did the High Arctic deal two years ago and then CWC last year. Those worked out well. So I think that as we go forward, we'll keep our eyes open. We'll be opportunistic. If we can transact and do another tuck-in type, another or more tuck-in style acquisitions to supplement our current businesses, I think we'd be anxious to do that.

A couple of comments. We have no strategic objectives right now around acquisitions. We don't need to make a big bet internationally. We don't need to go buy a block of business in any geography in North America as we have those blocks. We're not looking to grow well servicing in the US. We're looking to grow well servicing in Canada to grow drilling in the US.

So I think we'd stick with our knitting right now, which is drilling and well servicing in Canada, drilling in the US. And if we can find good tuck-in opportunities that we can do at least neutral on leverage or de-levering and accretive, we'd be thrilled to do it.

Makes sense. And then, Carey, you mentioned that the goal of bringing below 1 times net debt to EBITDA ratio and then maybe expanding cash return to shareholders to about 50% of free cash flow, your view from a timing perspective, when do you think you're going to get there? And then at 50% return of cash to free cash flow to shareholders, what would it look like? Would this be still buybacks or a combination of buybacks and dividends? Or how do you intend to proceed there?

First of all, I think we're kind of taking one thing at a time so we've got our guidance for this year and then our guidance through 2026. So we definitely are going to be looking to increase that allocation of our free cash flow directly to shareholders. At this year, it can be share buybacks. We'll look at all options in the coming years as we get closer to that leverage level, but nothing to report on today.

I think in terms of timing on when we can get to below 1 times, I think it's a lot sooner than we thought. And I mentioned in my comments that by the end of the year, we expect to around 1.25 times. And assuming we can continue the strong cash flow performance and EBITDA generation in 2025 that we've produced so far this year, we should be below 1 times at some point next year.

Sounds good. And thank you very much. And congrats on a great quarter.

(Operator Instructions)

Jamie Kubik, CIBC.

I just have a question on the Canadian market here. Kevin and Carey, you referenced LNG-directed drilling remaining very active in Canada, but the AECO and Station 2 gas markets on a forward basis expected to be very weak for the next several months in Canada, respecting the Precision's rig count is north of 70. Can you talk a bit more on the dynamic in the Canadian market here and if operators have been discussing potentially deferring drilling activity given the pricing outlook? So can you just expand a little bit around that market, if you could?

Yeah, I can. I don't want to speak to specific customer comments because they'll know who they are. They'll know what they said. So we hear a lot, no question about that. I think our rig count today is actually a little bit higher than a year ago drilling in the Montney, I think it is. I also know that we've got a couple of operators who are slowing down drilling programs this year but asking us to have that rig for them for January 1.

So I think we're getting to the point now where there's enough gas to meet the demand when they start operating. But I think as they plan for full-scale run operations next year, they probably need those rigs back. So I did mention that we've got a few windows of rig availability right now in Q3. Expect to fill those up with other customers.

And I'd also comment that I don't think we're drilling a single dry gas well. I think all of these wells produce condensate that still fires the economics of the well. Shouldn't use that term, fires. Still drives the economics of the well

Okay. That's good. That's all for me.

John Gibson, BMO Capital Markets.

Maybe touching on your international rigs and just presence obviously going to be up 30% year over year, which is outstanding. Can you provide details on the daily margins on those rigs and maybe some further details on potential rig activation that you've referenced in the press release. Have they moved closer or further from prior quarters?

Yeah. So, hey, John. I think on the international margins, we don't disclose the margins because we have two customers in the international market. So we'd like to keep that confidential. But I would say that they are a little bit better than mid-cycle margins, what we would experience in North America.

And when you think about kind of the dynamics, we're getting five-year contracts on those rigs and so the payback period and the IRR on the rigs is going to be just a little bit lower than what we would require in North America because there's more certainty and longer term horizon.

And last one, just any update on the potential reactivations of the outstanding rigs and your international regions?

Yeah, John, no, we have no news right now. Nothing to report other than we were unsuccessful on a tender in Saudi Arabia. The rates were well below the levels we have ever upgrade we're going to deploy to. But we understand some people making strategic decisions. That's just -- that's their call.

I do think that we have opportunities to continue pursuing in Kuwait and Saudi Arabia and in the region right now. And I think we'll be successful. But I don't see anything happening likely during the third quarter, maybe during the fourth quarter.

Okay, great. Last one for me. Sorry, if I missed this, could you touch on day rates and margins on the Super Single class of rigs in Canada? I mean, it looks like you've gained some market share here and just wondering what drove this and if you've been able to push pricing higher on this class of rigs?

Yeah. I'm not sure we've actually gained any market share. It's really hard to tell exactly, but our market share is still soon to be in the same range, and we're mainly competing with rigs that probably aren't quite as efficient. So we give higher day rate. I gave guidance on the margins with a range of $7,000 to $14,000 a day. You can assume that the pad rigs are going to be at the top half of that range and the non-pad rigs will be at the bottom half of the range.

I suggested that a third of the rigs are pad style rigs. The upgrade cost to convert a rig to pad style is quite low compared to the triples, and I expect we'll have several more of those super singles that are non pad-converted pad rigs probably the second half of this year.

John Daniel, Daniel Energy Partners.

Just one question. One of the frequent complaints I get from private well service guys in the US is the cost of insurance and the ability to get it. I'm just curious if that same dynamic is at play in Canada, and is that going to create some opportunities for more tuck-ins?

John, that's a really prickly question. I just came back from our insurance renewals in the spring. We go to London. We did a comprehensive insurance renewal with our insuring group.

I would tell you that I think that larger service companies with scale right now have very good access to insurance, but the rates have gone up. I would say that smaller -- and the smaller you get, the access to insurance gets trickier and more expensive. The insurance industry is dealing with a lot of their investors, and they're being pushed not to insure this industry. We see that.

We sat with several insurers who used to cover Precision, who won't cover oil and gas again. So the market size is decreasing, and those that are in the space want to focus on the lower risk, larger, more capable companies. So I think that's a real risk for a small company. I would tell you that I think any large service provider that's kind of multi-basin, tens or hundreds of assets, will have access to insurance and may be tougher for smaller companies.

Okay. Is it your sense that the customers are being smart in auditing this?

For every contract we have, we have to have proof of insurance.

Okay.

We typically go through that liability assessment with our clients.

Fair enough. That's all I got.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Lavonne for any closing remarks.

On behalf of the Precision team, I would like to thank everyone for joining in on our call today and wish you a great day. Thank you.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.