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.