Precision Drilling Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the Precision Drilling Corporation second quarter 2020 results conference call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Dustin Honing, Manager of Investor Relations and Corporate Development. Thank you. Please go ahead, sir.

Thank you, Daniel, and good afternoon, everyone. Welcome to Precision Drilling's second quarter 2020 earnings conference call and webcast. Participating today on the call with me are Kevin Nephew, President and Chief Executive Officer, and Carey Ford, Senior Vice President and Chief Financial Officer. Through our news release earlier today, Precision reported its second quarter 2020 results. Please note 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 risks and uncertainties that could cause actual results to differ materially from 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 by discussing our second quarter financial results. Kevin will then follow by providing an operational update and outlook. With that, I'll turn it over to you Carey.

Thanks Dustin. I'd first like to cover several of the cost-saving and cash preservation steps taken by the company to confront the sharp decrease in activity experienced in our sector. In March, we reduced staffing levels, implemented salary reductions throughout the organization, closed on profitable business lines, reduced CapEx, paused our share repurchase program, and essentially eliminated all discretionary spending. We prepared for an unprecedented drop in activity levels that ultimately materialized during the second quarter. We incurred an additional $6 million in severance and restructuring charges during the second quarter and expect the changes to generate an additional $14 million in savings annually from what we communicated in April. Last quarter, we provided guidance of a 30% reduction in fixed costs comprised of overhead and G&A, and we now expect the reduction to be 35%. We expect cash savings for the year to now be up to $150 million, Thank you for joining us. This Canadian government program supports economic activity in all sectors of the economy and has allowed us to retain a number of positions within our organization by offsetting wage expense with subsidies. We expect to participate in this program at similar levels through the balance of the year. I will now review some of the first quarter financial details. Sorry, second quarter financial details. Our second quarter adjusted EBITDA of $58 million decreased 28% over the second quarter of 2019. The decrease in adjusted EBITDA primarily results from a sharp decrease in drilling activity. Also included in adjusted EBITDA during the quarter is $6 million of severance and restructuring costs, $11 million in early termination revenue, $3 million of which would have been earned during the quarter, and $9 million of Q's payments. Absent these items, EBITDA would have been $47 million for the quarter. In the U.S., drilling activity per precision averaged 30 rigs, a decrease of 25 rigs from Q1 2020. Daily operating margins in the quarter were 15,198 U.S. dollars, an increase of 5,854 U.S. dollars from Q1. Q2 margins were positively impacted by early termination revenue and IBC revenue. Turnkey margins and lower daily operating costs. Absent impacts from IBC early termination and turnkey, daily operating margins would have been approximately $9,250 or approximately $1,000 higher than Q1. For Q3, we expect day rates and margins to be supported by contracted rigs and IBC revenue. In Canada, drilling activity for precision averaged nine rigs, a decrease of 18 rigs from Q2 2019. Daily operating margins in the quarter were $9,042, an increase of $4,844 from Q2 2019. Margins were supported by a strict focus on operating costs and Q's payments. Ascent to Q's impact, margins would have been $3,869, approximately $100 a day higher than Q2 last year. For Q3, we expect margins to be supported by rig mix and strict cost control. Internationally, drilling activity for precision in the current quarter averaged eight rigs, consistent with Q2 2020. International average day rates were $54,779, up approximately $500 from Q1 and over $3,000 per day from the prior year, benefiting from an active rig mix. In our C&P segment, adjusted EBITDA in the quarter was negative $1.2 million, down $4 million, compared to the prior year quarter. Adjusted EBITDA was negatively impacted by a $0.3 million restructuring charge and an 84% decline in well service activity, which was negatively impacted by wet weather and reduced customer budgets. Capital expenditures for the quarter were $24 million. Our 2020 capital plan remains at $48 million, a decrease of approximately 50% from the beginning of the year guidance. The 2020 capital plan is comprised of $34 million for sustaining infrastructure and $14 million for upgrade and expansion. As of July 22nd, we had an average of 35 contracts in hand for the third quarter and an average of 41 contracts for the full year 2020. Since the beginning of the year, we have converted almost $120 million in receivables to cash and have had essentially no collection issues with all contracts performing. in large part is due to the excellent performance of our credit and collections teams and the high quality of our customer base. Moving to the balance sheet, we continue to reduce both absolute and net debt levels, primarily through free cash flow generation. In the first half of the year, we have reduced our high yield note balances by $45 million through redemptions and open market purchases. As of June 30, 2020, our long-term debt position, net of cash, was $1.275 billion, and our total liquidity position was approximately $900 million. Our net debt to trailing 12-month EBITDA ratio is approximately 3.5 times, and our average cost of debt is 6.7%. For the remainder of this year, we expect to continue generating free cash flow through operations as well as benefit from additional working capital release. Liquidity remains a top priority, but we'll look for opportunities to reduce leverage utilizing cash on hand and we'll evaluate using a limited portion of our revolving credit facility for debt purchases to take advantage of low borrowing costs. We expect to meet our debt reduction target range of $100 million to $150 million in 2020 and remain on track to meet our longer-term debt reduction goal of $700 million between 2018 and 2022. We have reduced debt by over $400 million since the beginning of 2018. We remain in compliance with all of our credit facility covenants, and earlier in the second quarter reached an agreement with our secure lending syndicate to relax certain debt covenants in our revolving credit facility through Q1 2022, namely the EBITDA interest covenant, which is currently 2.5 times. Although we are well clear in this covenant today, the extent of the recent downturn is unknown, and we want to ensure full access to all sorts of liquidity, including our revolvers. For 2020, we expect depreciation to be approximately $320 million. We now expect SG&A to be under $60 million before share-based compensation expense. This guidance compares to the 2020 guidance provided in February of $90 million and the guidance of $65 to $70 million we provided in April. We expect cash interest expense to be approximately $100 million, and we expect cash taxes to remain low with our effective tax rate in the 20% to 25% range. I will now turn the call over to Kevin.