Precision Drilling Corporation

Good day and thank you for standing by. Welcome to the Precision Drilling Corporation 2022 First Quarter Results Conference Call and Webcast. At this time, all participants 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, Kerry Ford, Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you, Shannon, and good afternoon. Welcome to Precision Drilling's first quarter 2022 earnings conference call webcast. Participating with me today is Kevin Nephew, President and Chief Executive Officer. Precision reported its first quarter results through a press release earlier this morning. Please note that the financial results are in Canadian dollars unless otherwise indicated. Also, please note some of our comments today will refer to non-IFRS financial measures and will include forward-looking statements regarding Precision's future results and prospects, 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. Prior to Kevin providing an operational outlook and update, I will pre-review our first quarter financial results. Our first quarter results reflect a very good start to the year with increasing activity, day rates, and margins, and leading edge indicators pointing to even stronger financial results in the second half of the year. Although the first quarter business performance improved dramatically from the first quarter of 2021, our adjusted EBITDA of $37 million decreased 32% from the first quarter of 2021. The decrease in adjusted EBITDA primarily results from a $48 million share-based compensation accrual charge. without which adjusted EBITDA would have been $84 million. Revenue was $351 million, an increase of 49% from Q1 2021. In the U.S., drilling activity for precision averaged 51 rigs in Q1, an increase of six rigs from Q4, and daily operating margins in the quarter absent any turnkey or idle but contracted impact were $5,672, essentially flat from Q4 2021. The normalized margins are slightly lower than the guidance provided due to additional staffing of rigs to build hot crews and startup costs during the quarter. For Q2, we expect normalized margins to increase approximately $1,500 per day. With repricing of spot market rigs, improved fixed cost absorption, and technology pull-through, we expect normalized margins to continue expanding through the second half of the year. In Canada, drilling activity for precision averaged 63 rigs, an increase of 21 rigs from Q1 2021. Daily operating margins in the quarter were $8,865, an increase of $759 from Q1 2021 and $881 sequentially. Higher-than-guided margins were supported by higher day rates, strict cost control, and greater fixed cost absorption. Absent the Q's impact from the prior year, margins would have been approximately $2,000 a day higher than Q1. For Q2, we expect margins absent of Q's and one-time cost recoveries to be up approximately $500 per day compared with last year due to improved pricing and fixed cost absorption. For reference, daily operating margins in Q2 2021 Absent queues and one-time recoveries were $5,247. Internationally, drilling activity for precision in the current quarter averaged six rigs. International average day rates were $50,235, approximately $2,500 from lower than the prior year due to expiration of drilling contracts. In our C&P segment, adjusted EBITDA this quarter was $6.5 million, down 16% compared to the prior year quarter. Adjusted EBITDA was positively impacted by a 9.6% increase in well-service hours and improved pricing, reflecting improved industry activity and higher demand for our services. But the results for 2022 included zero Q subsidy payments compared to approximately $2 million in Q1 of last year. Of note, well-abandonment work represented 16% of our operating hours in the quarter. Capital expenditures for the quarter were $36 million, and our full-year 2022 guidance has increased from $98 million to $125 million, comprised of $72 million for sustaining and infrastructure and $53 million for upgrade and expansion, which relates to anticipated contracted rig upgrades and investments supporting alpha technologies. As of April 28, we had an average of 41 contracts in hand for the second quarter and an average of 39 contracts for the full year of 2021. We have signed 27 term contracts year-to-date. Moving to the balance sheet, while our Q1 results reflect negative cash flow and a revolver draw, the second quarter working capital unwind and revolver pay down is happening in real time, and we expect to pay down the majority of Q1's revolver draw by the summer. As of March 31st, our long-term debt position net of cash was approximately $1.2 billion, and our total liquidity position was over $430 million, excluding letters of credit. Our net debt to trailing 12-month EBITDA ratio is approximately 6.7 times, and average cost of debt is 6.3%. We expect our net debt to adjusted EBITDA before share-based compensation expense to be closer to three times by year-end, and to decline further into 2023 toward our goal of below 1.5 times. We remain in compliance with all of our credit facility covenants in the first quarter with an EBITDA to interest coverage ratio of 2.7 times. We are committed to reducing debt by over $400 million between 2022 and 2025 and allocating 10 to 20 percent of free cash flow before principal payments directly to shareholders. Our debt reduction target for 2022 is $75 million. For 2022, we expect to generate free cash flow through operations, expect to benefit from working capital release in Q2 with lower activity during Canadian Spring Breakup, and to catch up with customer collections. From year end 2021 to year end 2022, we expect working capital to build by approximately $50 million, or $40 million lower than the build we incurred in Q1. Our guidance for 2022 remains the same for depreciation at approximately $270 million and SG&A at $65 million to $70 million before a share-based compensation expense. We expect cash interest expense to be approximately $80 million for the year and cash taxes to remain low with our effective tax rate to be approximately 5%. That concludes my opening comments. I'll hand the call over to Kevin.

Thank you, Kerry, and good afternoon. As Kerry mentioned earlier, customer demand for our high-performance, high-value services is strong and continues to grow. We're seeing this strength in all our business segments and all our geographies. Our fleet utilization continues to improve, and the rates we charge for our services are likewise responding. This is most evident in the lower 48, where the tightening supply of super-triple rigs became apparent to our customers and led to a step change in rig rates late in the quarter. Leading-edge rates, excluding alpha, for our ST1500 rigs equipped to drill long-reach horizontal wells have trended into the low US$30,000 per day range. And customers have been willing to sign term contracts at these higher rates to secure access to the rigs over the course of the next six to 12 months, and in some cases longer. There's no question that the customers have a rising sense of urgency as they expect high-spec rig shortages later this year. Since our last conference call, we've added 19 term contracts, with a handful of those signed most recently at bleeding as rates I mentioned earlier. Today, we have 55 rigs operating in the United States, up from 48 at the beginning of the year. With our contracted rig activations and further ongoing customer negotiations, we see a path to continue this growth trajectory through the year, and our visibility into 2023 is taking shape. Turning to Canada, for the first quarter, we experienced strong customer demand matching 2018 activity levels. Importantly, our customers extended the winter drilling programs well into the traditional spring breakup period, driving first quarter activity up almost 50% from last year. Even today in the midst of spring breakup, we have 33 rigs operating compared to 21 this time last year, continuing the trend. Our customer discussions and bookings point to a strong second half, which will be starting almost a month early with several rig activations scheduled for as soon as the first week of May and wrapping up from there. We expect Q3 activity will surpass the winter season for only a second time in memory, and this will be the busiest second half since 2014. As I mentioned in our Q1 call, customer demand for rigs in the heavy oil play known as the Clearwater and Martin Hills is gaining momentum. We see strong demand for Precision's unique super single rig, and particularly our padwalking super singles, which we expect to be fully utilized this summer and through the fall. SAGD and other conventional heavy oil demand is also strong and will drive our super single utilization to its highest level since 2014. And I remind you that our Canadian fleet includes 55 super single rigs. Our Canadian pad-equipped Super Triples are also fully booked for the balance of the year as the Montenean deep basin natural gas activity remains strong. While we did see some rigs relocate from the BC side to Alberta due to the Blueberry First Nations ruling, we have indications from our customers that BC could see rig activity rebound later this year, and it's next to putting further demand on the Super Triples. This is a very tight market with strong customer demand and limited rig supply. In Canada, we began the process of implementing cost and price increases over a year ago, but customer resistance has been challenging. For many of our customers, rate discussions we are having today, after several years of weak industry demand, is uncharted territory. These customer pricing discussions are continuing as we seek to reprice rigs for the second half of 2022. During the first quarter, we rejected several opportunities to reactivate rigs due to lower-than-desired customer rate expectations. The best pricing signal we can send our customers is rejecting work at rates below our required thresholds. Over the last dozen years in Canada, Precision has invested in 28 super triple rigs, 25 super singles rigs, and our $40 million NISQ technology center with a fully functioning advanced technology training rig. We've equipped those super triple rigs with alpha automation. We've trained over 50 alpha expert drillers and 30 alpha expert rig managers. With these assets, technologies and people, Precision delivers the safest, fastest, most cost-effective, and best quality wells our Canadian customers have ever drilled. The value proposition we have for today is vastly better than any prior rebound cycle, and I fully expect to generate the returns from these investments that our investors deserve. In Kuwait and Saudi Arabia, we also see a rapidly improving market. As I mentioned in the press release, all three active rigs in Saudi Arabia have been renewed for a five-year period with pricing and margins consistent with the prior contract. In Kuwait, the rig tender we have been anticipating for several months was released late in the first quarter. This will be a typically extended process involving several months of tendering and contracting steps. The tender includes requirements for several classes of rigs in multiple quantities. Our three idle Kuwait SuperSpec rigs perfectly meet the complex requirements of the deep drilling rig classes and believe we'll have an excellent opportunity to contract our idle rigs for activation later this year. However, the rig deployment timing will be fully dependent fully dependent on our customer scheduling. Precision's technology offerings, including alpha digital solutions and our recently introduced evergreen environmental solutions continue to demonstrate strong customer appeal. Over half our super triples are now equipped with alpha automation and all alpha rigs currently deployed are earning commercial revenues. Precision's app library continues to grow with 18 commercial apps and our alpha optimization advisory service gaining a strong customer following. Precision's Evergreen battery energy storage system and our fuel and emissions monitoring app are both commercially deployed on several rigs, and we expect these products will continue to gain broad customer appeal as our customers look to reduce GHG emissions. Interestingly, several Evergreen product solutions have a negative green cost premium in that the energy cost savings generated utilizing the Evergreen solution exceeds the price premium we charge, a highly favorable outcome for an energy transition solution. This, of course, encourages our customer to continue down the path to net zero. We mentioned in our press release the deployment of an evergreen electric grid-powered rig to the Ithaca campus of Cornell University. This is an exciting geothermal project to explore the opportunity for earth source heat as a zero emissions heating source for the Cornell University. We're thrilled to be part of this DOE-funded project and look forward to helping de-risk this zero emission energy opportunity. Precision's well-servicing segment continued the pace that began last year, with strong first quarter activity up 8% from last year over the same period, and with 28 service rigs operating today, we're continuing this trend. Our team is very effectively managing the material cost inflation and fuel cost increases we've experienced. However, the labor challenge has proven much more difficult and is limiting industry well-service activity. During the first quarter alone, we experienced demand anywhere from 10 to 20 rigs greater than our ability to crew rigs. We have substantially increased our recruiting efforts, and with the recently announced hourly labor rate increases, we expect to narrow the rig supply gap as the year progresses. Overall, this business is performing exceedingly well. Our teams worked well to increase rig rates appropriately, and we expect to continue to generate strong cash flows. So I'll conclude by thanking all the employees of Precision Drilling for their hard work, their strong safety performance, and the excellent results they've produced for our stakeholders. I'll now turn the call back to the operator for questions.