Precision Drilling Corporation

The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1. Good day, and thank you for standing by. Welcome to the Precision Drilling Corporation 2022 Fourth Quarter and Year-End Results Conference Call. I would now like to hand the conference over to LaVonda Dunick, Director of Investor Relations. Please go ahead.

Thank you, Operator. Welcome, everyone, to Precision Drilling's Fourth Quarter and Year-End Earnings Conference Call and Webcast. Today, I am joined by Kevin Neveu, our President and CEO, and Kerry Ford, our CFO. Hello. Earlier this morning, Precision reported strong fourth quarter results capping off a very successful year. Kerry will review these results 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. Please note that some of our comments today will refer to non-IFRS financial measures and will include forward-looking statements which are subject to a number of risks and uncertainties. For more information on financial measures, forward-looking statements, and risk factors, please refer to our news releases and other regulatory filings. As a reminder, we express our financial results in Canadian dollars unless otherwise indicated. With that, I'll turn it over to Kerry.

Thanks, Yvonne, and good afternoon. Precision's annual financial results showed significant improvement from 2021 and reflect the focus of the 2022 strategic priorities that Kevin will review in his commentary. A few of those highlights include revenue of $1.6 billion, a 64% annual increase, adjusted EBITDA of $312 million, increasing 62%, funds from operations of $283 million, increasing 86%, cash from operations of $237 million, increasing 70%, debt production of $106 million, exceeding our $75 million debt production target, and $10 million in share repurchases. Moving on to our fourth quarter results, our fourth quarter adjusted EBITDA of $91 million increased 43% from the fourth quarter 2021 and was supported by higher North American activity and day rates. Also included in adjusted EBITDA during the quarter a share-based compensation expense of $75 million, and absent this accrual, adjusted EBITDA would have been $166 million. More on the share-based compensation accrual in a moment. The margin performance of the business started to accelerate in the second half of 2020, with Q4 adjusted EBITDA before share-based compensation percentage as a percentage of revenue of 33% compared to 24% in Q4 2021. As we focus on revenue efficiency in 2023, growing these margins further will be a priority. In the U.S., drilling activity for precision averaged 60 rigs in Q4, an increase of 3 rigs from Q3. Daily operating margins in the quarter, absent impacts of turnkey and IBC, were $11,849. An increase of $2,187 from Q3 and exceeding our previous guidance. For Q1, we expect normalized margins to increase another $2,000 per day from Q4 levels. In Canada, drilling activity for precision averaged 66 rigs, an increase of 14 rigs, or 27% from Q4 2021. Daily operating margins in the quarter were $12,348, an increase of $2,314 from Q3 2022 and ahead of our prior guidance. For Q1, we expect margins to be relatively flat due to a higher percentage of shallower rigs active, lower expected boiler revenue at the end of the quarter, and seasonal timing of pricing renewals. Internationally, drilling activity for precision in the quarter averaged six rigs, and average day rates were 49,918 USD, down approximately 4% from the prior year due to active rig mix. We expect to add two additional rigs in Kuwait when the new contracts begin this summer. Because certain of these rigs will be offline and undergoing certification in the first half of the year, we expect 2023 activity to be only slightly higher than 2022 on an annual basis, despite having eight rigs running by the end of the summer. 2024 activities should increase by 30 plus percent over 2023. In our C&P segment, adjusted EBITDA this quarter was $12 million, up over 91% compared to the prior year quarter. Adjusted EBITDA was positively impacted by a 49% increase in well-service hours, reflecting the impact of the high Arctic acquisition and higher industry activity in the quarter. We expect results will further strengthen in Q1 with increased rates and activity and full realization of our transaction synergies. Capital expenditures for the quarter were $57 million and $184 million for the year. Our capital expenditures were slightly higher than our guidance of $165 million due to timing of equipment deliveries. Our 2023 plan is $235 million and is comprised of $163 million for sustaining and infrastructure and $72 million for upgrade and expansion. The upgraded expansion portion relates to anticipated investments supporting Alpha Technologies evergreen environmental solutions and contracted customer upgrades, which includes a super triple conversion for the Canadian market on a three-year contract that requires approximately $17 million of capital from Precision. Kevin will discuss this project in more detail later in the call. Of the $163 million in maintenance, Approximately $30 million relates to the Kuwait rig certifications associated with four rigs contracted for a five-year term. And approximately $20 million relates to international drill pipe deliveries. Our capital spending plan is generally flat year over year before adding the capital for four multi-year contracts in Kuwait and the one multi-year contract in Canada. As of February 8th, we had an average of 58 contracts in hand for the first quarter and an average of 49 contracts for the full year 2023. We now have 17 rigs on contract in Canada for 2023, reflecting an increasing number of customers seeking to lock up rigs ahead of LNG project startups. Moving to the balance sheet, we continue to reduce both absolute and net debt levels primarily through free cash flow generation and succeeded in reducing debt by $106 million in 2022. As of December 31st, our long-term debt position net of cash was approximately $1.1 billion, and our total liquidity position was approximately $600 million, excluding letters of credit. As a reminder, all our outstanding debt is denominated in U.S. dollars, and reported values within our financial statements will vary based on changes in the USD Canadian dollar exchange rate. Our net debt The trailing 12-month EBITDA ratio is approximately 3.4 times and average cost of debt is 7.1%. With continued debt reduction and activity expectations, we believe we will end 2023 with a net debt to EBITDA ratio of between 1.25 and 1.5 times, moving precision closer to our updated goal below one time. For 2023, We expect to generate strong free cash flow for the year with Q1 cash flow impacted by front-end loaded CapEx, working capital build, our semi-annual interest payment, and year-end payments. Our year-end target for debt reduction is at least $150 million, and we will target our revolver balance in 2026 notes that are callable at par in the fourth quarter. Additionally, we plan to allocate 10% to 20% of free cash flow before debt principal payments to share repurchases. Now, I would like to cover some details on the share-based compensation plan Precision has in place. Our plan is similar to other corporate plans, but the cash settled accounting creates quarter-to-quarter volatility in the accruals that can be challenging to follow. We accrued $75 million in share-based compensation charges for the quarter and $134 million for the year, where approximately $74 million relates to potential payments in Q1 2023, and $60 million relates to potential payments in 2024 and 2025. Our long-term incentive awards are granted at the beginning of each year to motivate executives and key employees over a three-year vesting period, and are designed to align precision long-term goals in shareholders' interest. Our share-based portion of compensation have averaged approximately $25 million at the grant date for each of the past five years. The awards vest over time and are impacted positively or negatively by changes in precision share price and a performance multiplier between zero and two times, which is calculated based on relative share performance and certain long-term strategic initiatives. For the 2020 grants, which were made early in Q1 2020 before the impacts of COVID-19, and despite the uncertainty and challenging macroeconomic events caused by COVID-19, no adjustments were made to award amounts, total shareholder return requirements, or long-term strategic initiatives over the three-year period. Precision business and share price performance have performed exceptionally well since the grant date. At the end of 2022, the performance multiple change from one times to 1.49 times for the accrual. This was based on Precision's three-year total shareholder return performance of 186%, the second highest within Precision's defined peer group of 16 companies and indices, which accrued a performance multiplier of one time. Additionally, Precision nearly achieved a long-term debt reduction target, which accrued a multiplier of 0.49 times, and failed to achieve a leverage ratio target, which accrued a multiplier of zero times. The multiplier change impacted the accrual for a portion of share-based compensation to be paid out in Q1 2023. So now we're moving on to the share price. In addition to Precision's exceptionally strong share price performance in the quarter, which increased 48% from the end of Q3, the increase in share price required a change in accrual for the plans to be paid out in the first quarters of 2023, 2024, and 2025. This is a mark to market exercise that is performed every quarter. I'll take a breath. Thank you for your patience with that explanation. Now let's move on to guidance for 2023, where we expect to have depreciation of approximately $285 million, cash interest expense of approximately $80 million, cash taxes to remain low, and our effective tax rate to be approximately 25% as we continue to return to profitability in 2023. SG&A to be approximately $95 million before share-based compensation expense. And share-based compensation expense accruals of approximately $30 million to $40 million per the year with a Canadian dollar share price in the $80 to $100 range. For 2023, we expect the share-based compensation accrual to move approximately $600,000 per $1 change in share price in either direction within this general range. I will now turn the call over to Kevin.

Thank you, Kerry. I'm very pleased with the performance of our business during the fourth quarter into the full year of 2022. And as Kerry mentioned, we achieved success on all last year's strategic objectives, and this positions us very well for the running start into 2023. Revenue growth was strong, margin growth was stronger, and capital discipline remains a key element of our financial strategy. Last quarter, we achieved and are sustaining 100% or sold-out utilization with our super triple rigs in the Canadian market. We reactivated and are sustaining approximately 90% utilization on our U.S. Super Triple Rigs. We re-contracted six of our international rigs for a five-year period with over $800 million of contracted international backlog. Alpha Automation is now viewed as an industry standard for rig automation and is a customer desired add-on to virtually all of our operating fleet of Super Triple Rigs. During 2022, we leveraged our successful alpha business model to introduce the Evergreen product line that exceeded our first year market penetration expectations with this exciting new GHG reduction initiative. There's no question that our successes from the efforts, the energy, and the intense focus of Precision's team apply to our strategy and then delivering strong results. Looking back not too long ago, there was a period in 2020 early in the pandemic when many questioned the survivability of our industry, and precision. The pandemic collapse came just after we launched the commercialization of our alpha automation platform. Despite those challenging times, our people stayed focused. They doubled down their efforts on our strategy, our technology, free cash flow, and they reinforced a high performance culture. The momentum we created during that period has served precision well as industry rebounded in 2021, 2022, and this rebound continues in 2023. For 2023, precision strategic objectives are, one, elevating our high-performance, high-value strategy, which encompasses safety, rig efficiency, alpha and evergreen, and most importantly, our value proposition to our customers. Two, maximize free cash flow, including driving field margins towards 50% of the North American drilling business, among other internal financial targets. And three, as Kerry covered earlier, accelerating our capital structure plans by increasing our short-term and long-term debt reduction target, tightening leveraged target, and continuing to prioritize 10-20% of free cash flow for short-term purchases. Capital discipline is critical to precision. We intend to maintain investor confidence with strict capital discipline. Now, turning to our operations, we'll start with the lower 48. Natural gas price weakness likely will have some influence on customer planning, despite the strong gas heads positions across the gas producers. Since the beginning of this year, we've actually recontracted 12 gas rigs with the same clients, and three other gas rigs have been recontracted to new clients. So we've seen minimal turnover so far. Currently, we have 85% utilization of our super triple rigs, and those active or hot rigs remain highly desired by customers, whether in gas or oil. It's our expectation that AA-Lustis and NatGas customer demand will likely be taken up by customers looking closely at precision triple-rigs, especially with our alpha automation capabilities. Day rates remain firm, with day-to-day rates in the $40K range. We expect to continue repricing our currently contracted rigs with this price environment as our contracts renew over the course of 2023. It seems that many, if not most, E&P capital spending programs were based on conservative price decks and then covered with hedges to mitigate the risk to the volatile commodity prices. We did not see rate demand boom like in prior cycles in response to the high commodity prices of early last year, and we expect customer demand should remain moderate and disciplined and somewhat insulated from the commodity volatility we experienced recently. Of course, we all understand the potential risks of a global recession or a meaningful slowdown. and the potential impact on commodity prices and customer demand. Today we have 61 rigs running and expect to be in this range, plus or minus, for the first quarter. We expect our evergreen solutions will gain wider customer penetration at a lower 48 during 2023 with the compelling economics of the diesel fuel savings. And for some regions, the GHG reductions these products offer make good sense for our customers. Turning to Canada, the Canadian market looks very good indeed. Notably, the recent agreement reached between certain First Nations groups and the province of British Columbia has clarified the licensing process for oil and gas activity in Northeastern BC. We see several operators looking to deploy capital for drilling programs, which are likely targeting future LNG exports. And we've already experienced multiple inbound inquiries seeking additional super triple rigs. Several current customers are now inquiring about long-term take-or-pay contracts to lock in rigs for multi-year programs. Breaking away from the traditional Canadian no-obligation pricing agreement style contracts are the best. Currently, we are 100% utilized with 28 Super Triples running. This is the first time this has happened for precision in any rig class in our history. In response to this demand, we have previously announced one additional Super Triple rig expected to go to work in March. This rig was redeployed from the US late last year. Additionally, we have recently signed a contract for a substantial upgrade to create another super triple class rig, which will be deployed in January of 2024. This rig class upgrade is backed by a three-year term contract and mid $40,000 day rate for the base rig. By early next year, and I should clarify, a mid $40,000 day rate for the base rig. By early next year, we will have 30 super triple rigs in the Canadian market. We have a couple more redeployment candidates for the US and several other possible upgrade candidates. but we'll remain highly disciplined in how we proceed, ensuring we meet our expected returns and sustain market supply tension. Now moving to the Clearwater play for a moment, I thought it would be beneficial to spend a little time explaining this play to our investors. First of all, the Clearwater formation is a high permeability conventional heavy oil play that doesn't require steam, it doesn't require hydroxylation. These are relatively inexpensive and low cost curve oil wells typically costing $1.2 to $1.7 million per well. The operators are reporting that these wells are one half cycle break even at around US $20 per barrel of oil equivalent, which on that basis is the lowest cost oil wells in North America. The clean water wells are actually fairly complex. The vertical legs are 6 to 900 meters, and the horizontal section is a multilateral with anywhere from two to eight separate horizontal legs built from one vertical well bore. The horizontal legs can be from 1,000 to 2,500 meters or longer for cumulative wellboard horizontal sections of 10,000 meters or more per vertical wellboard. From a drilling perspective, the Clearwater Clay has legs, both metaphorically and physically. These wells are drilled on pads, and the pad sizes range from two to eight wells per pad. As we've said in prior calls, this drilling is ideally suited to precision's super-spingle-style rig. With this rig, we typically drill these complex multilateral wells in 12 to 14 days each. Decision enjoys a 45% market share in the third water, where we have similar market shares for all heavy oil and FAD drilling in Canada. Today we have 43 super singles running with about 85% utilization, again the highest since 2014. We're operating 78 rigs total in Canada and expect to peak at 79 or 80 later this month, with spring break-up linked to weather, not customer budgets. Customer demand looks strong for the balance of 2023 and beyond. For the second quarter, our break-up trough activity level looks to be around 40 rigs compared to 19 last year. This higher level is driven largely by sustained pad activity in the Montney and Clearwater. We're projecting our average activity per quarter to be in the 45 to 46 rate range, up approximately 25% last year. In our Canadian well service business, as Kerry mentioned, the integration of the high Arctic business is effectively behind us, and we're on track to achieve the expected synergies. Activity and customer demand remains strong. Industry service rate retirements and labor constraints continue to support strong pricing tension. Precision's well service team continues to manage strong customer demand labor recruiting challenges, cost inflation, all driving increasing margins and returns for investors. Today, we're operating 68 service rigs, but we see additional customer demand for anywhere up to 10 rigs any given day. Last year, we combined the management of our oil field rentals business with our cabin catering business to reduce overhead and streamline the operation. These changes, along with growing customer demand, that approved equipment utilization transformed this business segment, becoming a meaningful contributor to our completion of production services unit. Turning to our international segment, we mentioned earlier the previously announced contract awards in Kuwait and Saudi Arabia. We remain on schedule to be running at least eight rigs for that region later this year. Currently, we're bidding for multiple opportunities to activate several of our idle rigs also in the region. And we're also looking at other Arabian Gulf regional opportunities for both our super singles and our super triples. international demand that's certainly on the rise, but the tender to contract to rig activation cycle is usually measured in months and quarters. We hope to have more news on this front to report later this year. I'll now turn the call back to the operator for questions, but before I do, I'd like to thank the employees of Precision Drilling for their hard work, dedication, and the results they helped us deliver last quarter and last year. Thank you, and now back to the operator for questions.

Ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your touch-tone telephone. If your question has been answered or you wish to move yourself from the queue, please press star 1-1. Sorry? Can you hear me?

Hello?

So while we're waiting on the operator, I assume there's a technical issue with the feed right now. Can you hear me? We do expect questions and prepared to have any questions.

One moment.

We're still waiting on the operator to interject here and take questions. There seems to be an issue right now with the conference provider. I'll just comment that on the feed that we have right now, we can see that we have at least seven questions from the analysts that we're trying to insert. But we're still waiting on the operator to join the call.

And this is the operator. I'm back. Can you hear me?

Yes, we can hear you now. Thank you.

Okay. My apologies. Again, ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your touch-tone telephone. If your question has been answered, you should move yourself in the queue. Please press star 1-1 again. One moment for our first question. First question comes from Makar Saeed with ATB. Your line is open.

Thank you for taking my question. Kevin, I didn't hear you clearly. For this rig upgrade, the super spec in Canada, did you say the day rate was mid $40,000 a day? What was the day rate at which it was contracted?

Makar, yeah, thanks for the question. And I understand there may have been some muffling on the call, so I'll clarify that. What I was saying was the day rate is the mid $40,000 So it takes that to be in the range of $44,000 to $46,000 per day.

Wow. Is this a new high for that class of rig in Canada?

Certainly it is. It's going to be a super triple ST1500 rig with three mud pumps, four generators, and we expect to have some additional add-ons above that rate that will include our technology, alpha technology, and We expect also that there'll be some evergreen products on top of that rig. So the all-in rates for that rig could easily move into the low 50s.

And is there anything in particular that would keep the cost maybe higher than the average in Canada?

You know, this is simply a rig upgrade. We're seeking economics that meet our thresholds. hence the day rate being in the mid-40s for the base rig. But it's an ST1500 winterized with full weather gear. Otherwise, you can refer someone to the ST1500 tree pump rig in West Texas.

Sure.

And then my... You can have a full-time walking and all the basic equipment on the rig you'd expect on a 1500 horsepower high-spec rig.

And what was the class of rig before the upgrade?

It was actually a DC-SER 1500-horsepower rig.

Okay, great.

In the past, we talked about those upgrades being 10 to 12 million, but this would be a Canadian-style, you know, inflated, heated boilers, so that's why the cost would be a little higher than Canadian dollars. Thank you, Gary.

Yeah, okay. Thank you. And then my second question relates to the Hanes wealth. You have a number of rigs working for one particular private customer. Could you talk about the contract status there for those rigs and maybe any color that you can provide for your Hainesville Expo year?

Well, I can't, but what I can tell you is I did give a comment on, I think it was 12 rigs that repriced and renewed during the first month of the year, and most of those were Hainesville rigs.

Okay. Wow. Okay. That's wonderful. Thank you very much.

Yeah.

Thank you. That's all I have. Okay.

Thank you. One moment for our next question. Our next question comes from Keith Mackey with RBC.

Your line is open.

Hi, thanks very much for taking my questions. Maybe just to start off, Kevin, in your comment in the press release, you talk about moving margins to 50%. Can you just talk a little bit more about what's required to get there? Do you need to increase the rig count from where it currently is, or with the 60 rig number, can you actually get to the 50%? And then just what time frame do you think there is on that? Do you see getting to 50%

cash gross margins in the u.s by the end of the end of this year or or if you just kind of help us frame that up that'd be that'd be good sure so we uh we have an internal target which i'm not going to publish at this point but i tell you we're trying to move in the direction of 50 over the longer term uh i do think that uh if the retail stays flat for the rest of the year maybe a little more of a challenge but we have a number of rigs they're still rolling over and repricing We expect to see wider deployment of both Alpha and Evergreen on the rigs, which are both high-margin product lines. So I think we've got a number of pieces in place between repricing existing contracts in the U.S. and adding on additional services to the rig and additional analytics where we'll have good traction to move that direction. I'd rather not give the exact target for this year. It's something our customers would not be supportive of.

Yeah, makes sense. Just on this Canadian 1,500 horsepower conversion, what was the genesis or the reasoning, I guess, behind why was this rig the rig that was upgraded. The customer specifically won a 1500 horsepower rig for this application and this play or was it a matter of it was the rig available in Canada and it was the most expedient to convert? Just curious if we should expect to see more of that migration to the 1500 horsepower rig level in Canada or was this a unique situation?

So we actually have two other 1500 horsepower rigs running in the country right now. And these are just going to be the deeper, longer reaching rigs. I don't expect a wide scale migration, but I think that that market could grow. by maybe one or two more rigs over time. So we'll end up, I think, this rig going to work next year. This particular customer, I don't think they'll do another rig this size in the near future. And we've said in the past that we have around 10, 12, or 14 DCSER rigs. They're good candidates for upgrades. I think that fits into the equation. We still have a small handful of 1,500 horsepower rigs in the US that are available. There's an economic mix between either redeploying a rig from West Texas and winterizing it or upgrading a DCSER rig to an AC rig. And between what the customer is looking for, the spec, the size, the timing, this worked out best for both us and our customer.

Got it. Thanks for the call.

I'll turn it back. Thank you. One moment for our next question. Our next question comes from Cole Pereira with Stifel. Your line is open.

Hi, afternoon, everyone. I wanted to start on maintenance capex. So Q4 spending was well above the prior budget. 2023 is also fairly high. I mean, I assume activity expectations haven't changed that much. So did something else change from a cost perspective there?

Yeah, hey Cole, this is Kerry. So we're not quite sure how clear the communication was on the front end of the conference call because it sounded like there was a technical difficulty with the provider. But we did give some guidance on the 2023 capital plan. So it's $235 million, but that includes about $30 million to do recertifications for the Kuwait rig contracts. It also includes about $16 million or $17 million for the Canadian rig that we're discussing as an upgrade. And if you take off those two, it's pretty flat year over year, the capital spend. If you're looking at going from 22 to 23, and then the slight increase in 2022 was just a function of taking some early deliveries of capital. Late in the year, yes. So we're not seeing a ramp up in maintenance capital spend per day.

Okay, got it. I just wanted to come back to Kevin's comments. Did you say that you had 17 natural gas rigs recontracted so far this year? I assume those were at higher rates. Anything you can say on the term?

We had 12 rigs recontracted already in the month of January, so this year to date. Most of those were Hainesville-type rigs. There were a couple up in the Marshallis. The 12 existing rigs recontracted with the same customers

Okay, got it. On the share based comp side, I can appreciate the plan is formulaic, but how do you square the materiality for the perspective of shareholders? Realize cash share based comp was three quarters of your total debt reduction and share buybacks.

Yes, so we haven't disclosed the total cash share-based comp. We've accrued for it, and we've accrued out of the $134 million, there's $60 million of that share-based comp is accrued for 2024 and 2025 payments. The rest of it's for Q1, and that's going to be a mix of settlement in shares and settlement in cash. When we look at the alignment of the plan with shareholders, particularly the absolute return of almost 200% over the three-year period, and the performance versus the peer group of being second highest out of 16 companies, and then the strategic objectives of achieving long-term debt reduction. We thought that it is aligned with shareholder interest, and I think that's reflected in the share price performance.

Got it. That's all for me. Thanks. I'll turn it back.

One moment for our next question. Our next question comes from Andrew Bradford with Raymond James. Your line is open.

Thanks. Good afternoon, guys. Hey, Andrew. Good evening. Thank you for taking my call. I'm just curious about the cost item in the U.S., the U.S. day costs. know bumped up a bit sequentially i i saw in your discussion that it was attributed to extra crews and slightly higher r d but is is so are we setting a new level here going forward should we be thinking should we be thinking about daily costs in the 18 plus thousand dollar range yeah so it's just just clarifying it would be r m would be uh repair maintenance would be a driver yeah i'm sorry about that yeah no problem uh the

the driver of cost primarily well over half of the cost increase over the past year has been wage increases in both canada and the u.s and so the cost bumped up a little bit more because of wage increases and i do think that you know we might see fluctuate fluctuations of you know 500 maybe 750 plus or minus where we came out in q4 going forward but i do think that the uh the baseline has has moved up a bit and i assume that

Do you have very little difficulty passing those costs straight through on the new contracts?

On labor, it's a pass-through, so no difficulty there. And then it's our job to keep getting higher dairies to protect our margins and grow our margins, which is one of our goals for 2023. Okay.

Okay, thank you very much, Dan. And then, so with respect to the gas rigs rolling over, that's a good accomplishment. year to date with the 12 rigs that renewed within the context of the current market price. I'm just wondering if, as we look down through the year here, Kevin alluded to the idea that we might see even a flat rig count market, but let's just for argument's sake suggest that maybe we even drop a few rigs through the year, through 2023. If somebody had that view, I appreciate that most of the rigs coming off would probably be the SCR or even mechanical rig variants, but I wonder if you could explain what sort of happens at the margin or what you think would happen at the margin to leading edge rates in that set of circumstances.

It's a little hard to predict. Certainly, we've seen an unusual level of discipline among the U.S. drilling contractor uh, industry, you know, and it's, you know, mainly five of us that are all public companies, all focused on returns, all fitting targets around margins and day rates. It's pretty constant theme. So, uh, we don't expect that, that discipline to dissolve in, uh, in a flattish market or even a slightly softer market. Don't expect it to dissolve. Certainly there are, you know, there's nobody in that group right now that is facing going concern risk or trying to, you know, puff themselves up for a transaction. So we'd expect to see, let's say, pretty firm discipline. And we've seen, you know, really good discipline over the last few months, even around limiting the number of potential rigs for upgrades and setting high return thresholds. So it just feels like that discipline is going to stay in place. And, you know, we're watching it closely. And as I made my comments, we're certainly aware of what happens if we get into a material slowdown. But I think in a modest slowdown, Maybe the renewals aren't at $42,000. Maybe they're at $38,000.

Right. Perfect. Thank you. I appreciate that. One of the prior questions related to the term that was on those contract rollovers, did you say a number or did you give a range on that? I just didn't hear it.

It's based in the term contract format.

Yes, those will be updated in the press release. But those contracts that Kevin referenced are anywhere from six months to two years.

Okay, thank you. And then the last question for me, just related to the CapEx guidance, Kerry, you had $30 million for recertifications. I think $17 million for the Canadian rig. I think you said $20 million per pipe. Is that all? That adds up to about $67 million. And is that all sort of the upgrade slash expansion capital?

So the two buckets we have are maintenance, and then we have upgrade and expansion is the other bucket. The Canadian rig would go in the upgrade bucket. and the rest of the capital that you identified, so the recertifications and the drill pipe would go into maintenance.

Okay.

But the way that international maintenance works is since we have pure rigs running, we will typically buy both drill pipe at the beginning of a contract. When those contracts roll over, we'll buy new drill pipe. So it's really front end loaded. And that's why on this explanation of the conference call, we separated out that international drill pipe purchase, the recertifications, And then the Canadian upgrade is being contracted capital spend opportunities that were different from 2022. You take those out, it's pretty much flat year over year.

Okay. And sorry, I lied. I have one more question then. Of the expansion capital outlined in the budget for 2023, what portion of that would be committed capital today?

I don't know if I can give you a percentage. It's a lot of smaller dollar items. It's ALP automation systems. It's evergreen products. It could be walking systems and mud pumps and those types of things. Some are committed. Some are expected. But I would say probably over half of it would be committed.

Thank you very much. That's it for me. Thank you.

One moment for our next question. Our next question comes from Kurt Hillied with the Benchmark Company. Your line is open.

Hey, thanks. Hey, good afternoon.

Hi, Kurt. Hi, Kurt.

Hey. So, Kevin, I'm kind of curious. Looks like you got 19 rigs on contract through September, 14 as of December. So I guess simple math would suggest you got about 40 rigs in the U.S. market that could reprice during the second half of the year. Is that about ballpark?

Yeah, it sounds about right. Your math is a little bit faster than I am right now, but that sounds reasonable.

Okay. And so, Kerry, you mentioned that the kind of incremental cash margin in the U.S. could increase by about $2,000 per day. So it seems like that could be a pretty good cadence for the rest of the year. Would that be kind of a good assumption on our part?

It all depends on the country's rate of cash. I think if we're at a flat to slightly growing rate count, then that's a little bit more fuel to the fire for pushing day rates and margins.

Right. I think what we've been hearing so far is that leading edge rates are, I don't know, $35,000 to $40,000 a day. Their kind of average rates in the fourth quarter were around $32,000. So that leaves a lot of headroom for this repricing without even rate count going higher. Is that fair? Yeah.

Yeah, we would agree. And that's reflected in our Q1 guidance.

Yeah, gotcha. All right, and then second question. So, Kevin, you mentioned a pretty decent rate count for kind of second quarter seasonality. What kind of visibility do you have on third quarter activity in Canada?

It looks pretty good. And, you know, just that I know that Canada seems to be quite sensitive to a lot of macro issues, but certainly our Our AC triple count will get back to that 30 range if any rigs go down during Q2, they'll be back up in Q3 for sure. And the activity we seem to have lined up has us in that mid to upper 60s range very early in July. And it just depends on how quickly our customers keep going, whether it moves back into the 70s or not. In Q3, we'll have to see how that goes.

Okay, great. Thanks. That's it for me. Appreciate it.

I'm not showing any further questions at this time. I'll turn the call back over to Yvonne for any closing remarks.

Thank you, Operator, and thank you for everyone who participated on today's call. If you have any further questions, you can reach out to the Investor Relations team. Thank you, and have a good day.

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

The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1.