Precision Drilling Corp. Q1 FY2024 earnings call

• Business performing well with customers in extended technology adoption and rig high-grading. Team achieving strong safety, efficiency, and cost management. - Lower 48: Industry rig demand muted by weak natural gas prices and operator consolidation, rebound timing unclear. - Northern Rockies/Canada: Customer interest increasing due to Trans Mountain start-up, 48 rigs operating vs 38 last year, 9 of 10 rig increase are Super Singles for heavy oil. Expect momentum to continue, Super Triple demand strong. Deployed NOV Adam rig floor and derrick robotic pipe handling system, early success. Canadian Well Service Group demand strong with CWC acquisition. - International: Bidding idle rigs in Kuwait and Saudi Arabia, competition increased, good opportunities to activate additional rigs.

In Q1, adjusted EBITDA was $143 million, including a $23 million share-based compensation charge. Without the charge, it would have been $166 million, down 13% from Q1 2023. Net earnings were $37 million or $2.53 per share. U.S. drilling activity averaged 38 rigs, daily operating margins excluding turnkey and IBC were $1,057, expected to be above $10,000 per day in Q2. Canada drilling activity averaged 73 rigs, daily operating margins $15,647, expected $13,000 - $14,000 in Q2. International drilling activity averaged 8 rigs, average day rates $52,808, up 2% year-over-year, expected international EBITDA to increase ~50% from 2023 to 2024. C&P segment adjusted EBITDA $19 million, up 7% y-o-y, positively impacted by 28% increase in well service hours and improved pricing. Capital expenditures $56 million, full year 2024 plan $195 million. As of April '24, 46 contracts in hand for Q3 and 44 for full year 2024.

• Q2 U.S. normalized margins expected above $10,000 per day. - Q2 Canada daily operating margins expected between $13,000 and $14,000. - International EBITDA expected to increase ~50% from 2023 to 2024. - Full year 2024 capital plan $195 million. - Net debt to trailing 12-month EBITDA ratio ~1.5x, average cost of debt 7%, expect net debt to adjusted EBITDA before share-based compensation expense to decline. - Debt reduction target for 2024 $150 million to $200 million, plan to allocate 25% to 35% of free cash flow before principal payments to shareholders. - Depreciation ~$290 million, cash interest expense ~$75 million, cash taxes relatively low, effective tax rate ~25%, selling general and administrative expenses $100 million before share-based compensation expense. Share-based compensation charges for year range $40 million to $50 million based on share price range $80 to $100.

Q: Afternoon. Thanks for taking my questions. As we think about the sort of outperformance in the U.S. relative to margin guidance and then the guidance for that step down in Q2 to, I think, $10,000 per day what are the sort of puts and takes for the sequential decrease? Like is it pricing? Are costs increasing? Are you just sort of embedding some continued conservatism in the guide?

A: Aaron, I think it’s a little bit of all of the above, a little bit of pricing pressure and just maintaining a little bit more fixed cost with the lower activity level, puts a bit of pressure on the margins, but we feel pretty good about being able to exceed the $10,000 a day mark.

Q: Afternoon, all. So U.S. outlook is largely similar to your peers. But I’m just wondering, can you give some color on how customer conversations are going? Any big differences between public and private oil versus gas, etcetera?

A: Hi, Cole, it’s Kevin. So fewer conversations on gas than oil these days, and that might be like 3 or 4 to 1. I’d say there isn’t a lot of difference in the type of conversations. But there is one unique piece. So we’re in conversations with many of the companies that are involved in transactions on the buy side. And there’s going to be a real push to move to higher technology rigs, consolidate vendor groups. So I’d say that there’s a high level of engagement right now with some of the larger E&Ps in the U.S. looking to understand how successful we’ve been with Evergreen and with the Alpha and even with our robotics automation. And I think as those transactions close and they begin to rationalize the rig fleets, I feel quite good about our positioning right now.

Q: Yes. Hey, good afternoon. Kevin, just wanted to clarify, you talked about the Canadian rig count being in the 60s in June and ‘70s in Canada? Is that correct?

A: That’s correct, probably in the mid-60s by the end of June and then into the mid-70s by mid-summer. There’s always a comment about whether if it rains hard, we lose rigs very quickly. So forest fires could cause an impact, but I’ll just leave those kind of at the sidelines for a moment. Customers have plans to activate rigs and they’re booking our rigs and they’re having us get our crews lined up to get in the range of 65 rigs by the end of June, 75 rigs in mid-summer. It’s unusual to see the rig count get that close to the winter rig count in the summertime. I mean I’m quite surprised.

Q: Thank you for taking my question. Kevin, as even the heavy oil basins, you see more and more pad drilling. Do you think that you could see maybe customer demand for Tele-Doubles with pad drilling capability kind of pick up more because you can store more pipe, do you expect to see that trend?

A: I will look at this a couple of different ways, Waqar. First of all, we can store almost infinite pipe on our Super Single because pipes are that close only on pipe rocks. So, we are not limited on rocking capacity. The Super Single is an extremely efficient rig, and it’s got the pipe in the pipe arm right up against the well center line just before you need it. So, it’s a really efficient rig. It doesn’t require anybody in the direct to handle that pipe. So, it’s efficient, it’s safe. We can drill the first hole faster than a Tele-Double because we are not having to build double stands as we go. So, we are drilling ahead all the time. If it’s a single bit run type well, which a lot of these are, we can drill those faster than Tele-Doubles most of the time. There has been some question in the past about the torque capabilities. We are addressing that. The rigs are being hydraulically upgraded to handle the torque. This has been a rig which has a – approaching a 40-year history in heavy oil as a highly efficient rig. And when you look at those drilling times, those rocking times, tripping times and then combine that with either the rocking time to walk well to well, we plan to move the rig. We can move that entire rig in four hours to five hours. That’s if we are moving it location-to-location. It is just an amazingly efficient rig. So,我认为我不会忽视竞争。我们在我们参与的每个细分市场中都处于强势地位。我们希望确保与客户保持良好的生产关系。所以，我们必须也考虑到他们的成本驱动因素。凯里给出了利润率的指导。我们预计不会出现利润率侵蚀。实际上，利润率仍在上升趋势中。所以，我会在回答中保留那种不明确性。 Q: Hi everybody. Good afternoon. Kevin, yes, I just wanted to touch base again on discussions we have had in the past and you have had about the dynamics at play where the Canadian E&P companies are looking to lock in rigs for longer duration contracts to basically take advantage of the LNG export capacity. It sounds like there is maybe a little bit of a lull in that dynamic in the near-term here because of natural gas prices. But I was really just looking to kind of calibrate that and an update for you on how much conviction you still have in that structural change in the Canadian market.

A: Kurt, that’s actually a really good question. So, I will break it up in two halves. So,你谈到了液化天然气。让我从重油和超级单钻机开始。我们今天在超级单钻机上的合同比我们历史上任何时候都多，当时我们没有新的建造周期。这是针对石油开发的，并且与通过跨山管道的石油出口相关。所以，这种活动还在继续。我们目前有一些升级将与带有平台升级的长期合同相关联。这种势头还在继续。我相信我们的三重钻机舰队中用于天然气的比例是合适的。所以，我们不打算增加更多的合同。我们希望保持对现货市场的一些敞口，因为该市场继续改善。我们目前有一些续约即将到来。我们正在与客户处理这些续约。但我认为目前加拿大锁定在长期合同中的钻机比例和暴露在现货市场中的比例是合适的。我们没有披露这个数字。我们不喜欢在30台钻机的钻机舰队上提供太多宏观信息。但我对我们的合同簿感觉非常好，并且我觉得我们将保持与我们的超级三重钻机的稳固合同簿和合同积压。如果我们是正确的，并且液化天然气运输在今年晚些时候或明年初开始，需求增加，如果我们从美国向加拿大转移更多的钻机，它们可能会是签约的钻机。 Q: Hi. Good afternoon. I just wanted to compare and contrast, I guess the Canadian and U.S. outlook, I guess 12 months out, you have got some little insight to LNG exports and additional rig demand. It sounds like the Super Triple market in Canada is pretty tight. But you probably I would think that you will see some upside in U.S. activity as well. Are those triples that you are talking about, would those be coming out of an idle state or rigs that haven’t worked in a long time in the U.S., or would that be reducing your optionality for additional rigs to go back to work?

A: Tim,那些将是 - 在美国，我们有两类超级三重钻机。我们有ST 1200，更常见于DJ盆地和马塞勒斯。然后我们有ST 1500，这是一种1,500到1,800马力的钻机，常见于二叠纪，并且在马塞勒斯和Haynesville也有一点。我们不会移动任何ST 1500，可能只会移动ST 1200。 Q: Good afternoon. I just had one, and it’s kind of more high level. I guess, just looking at the U.S. market and the recent M&A, you touched a little bit on it in the call here. What our M&A could drive additional high grading, how have conversations gone in terms of changing lateral length? Like I have kind of heard the way maybe we could be seeing another step change on this front? And just kind of want to what you are hearing in that regard.

A: Well, I will say that - 我会以不同的方式回答这个问题。所以，我们不设计井。我们的客户设计井。我们有已经钻到20,000英尺的钻机。这些并不常见。我们听到关于更多这种情况的讨论，但似乎并不常见。15,000英尺的水平段相当常见。每个人都希望有能力钻这么长的井，但很少有人继续这样做。所以，看起来范围在10,000到15,000英尺之间。这取决于土地所有权和土地的整合程度。但今天的全规格超级钻机有三个泥浆泵用于发电机，30,000英尺的摆动能力，高扭矩顶部驱动，有能力钻到15,000英尺或更长。