Precision Drilling Corporation (PDS) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Precision Drilling Corporation 2017 Fourth Quarter Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to turn the conference over to Ashley Connolly, Manager of Investor Relations. Please go ahead.

Thank you. And good afternoon, everyone. Welcome to Precision Drilling's fourth quarter and year-end 2017 earnings conference call and webcast. Participating today on the call with me are Kevin Neveu, President and Chief Executive Officer; and Carey Ford, Senior Vice President and Chief Financial Officer. Through our news release earlier today, Precision reported its fourth quarter and year-end 2017 results. Please note that 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 known and unknown risks and uncertainties that could cause actual results to differ materially from our expectations. Please see our news release and other regulatory filings for more information on the forward-looking statements and these risk factors. Carey will begin today's call with a brief discussion of our fourth quarter and year-end operating results and provide a financial overview. Kevin will then provide an operational update and outlook and then we will turn the call over for questions. Carey?

Thank you, Ashley. In addition to reviewing the fourth quarter and year-end results, I will provide an update on our 2018 capital plan and management of our capital structure. Fourth quarter adjusted EBITDA was $91 million which is 40% higher than the fourth quarter of 2016. The increase in adjusted EBITDA from last year is primarily the result of higher activity levels across our North American businesses. With the company stated focus on fixed cost leverage, I am particularly pleased with the EBITDA margin performance, up 500 basis points from last year to 26%. For the full year 2017, our EBITDA was $305 million a 34% increase from 2016. In Canada, drilling activities for Precision increased 6% from Q4 2016 while margins were approximately $100 per day lower than the prior year. The margins for the quarter were negatively impacted by legacy contracts rolling off and renewing at lower rates offset by improved spot market pricing. In the US drilling activity for Precision increased 50% from Q4 2016, while margins were approximately US$360 per day lower primarily due to lower IBC revenue in the quarter. We continue to see average rates moving up an absent turn key and IBC revenue average day rates increased approximately US$200 per day from Q3 2017. Internationally drilling activity for Precision decreased 1% from Q4 2016. International average day rates were approximately US$50,300 a decrease of approximately US$2500 from the prior year. The decrease was a result of mobilization and demobilization payments received in 2016. During the quarter, we took a $15 million impairment charge relating to our Mexico operations due to a lack of activity in the region. In our CMP division, adjusted EBITDA this quarter was $2.7 million up approximately $2.3 million from the prior year. The increase is a result of significantly higher activity and a lower operating cost structure across most business lines. Capital expenditures for the quarter were $25 million and $98 million for the full year. For 2018 our capital plan of $94 million is consistent with previous guidance. The 2018 capital plan is comprised of $45 million for sustaining infrastructure, $34 million for upgrading existing rigs and $15 million for intangibles. Our capital plan is expected to align with industry activity and reflects the lower dollar cost per upgrade of our super serious fleet. We plan to complete 10 to 20 upgraded in 2018. The intangible capital portion of our plan includes the ongoing upgrade of our ERP system which is on budget and on schedule to complete in Q2. We've continued to build our contract book and as of February 14, we had an average of 50 contracts in hand for the first quarter and an average of 40 contracts for the full year 2018. I will now make a few comments on the balance sheet. We successfully completed several transactions in the fourth quarter which further strengthened our financial position. First, we issued US$400 million in senior notes due 2026 and use the proceeds to repay and redeem our 2020 notes in a portion of our 2021 notes. Second, we used US$49 million of cash up from our balance sheet to reduce overall debt levels and third, we extended the maturity of our US$500 million senior secured revolving credit facility to November 2021. The results of these transactions, is that we have retained a strong liquidity position and have no maturities due for almost four years. I will point out that the US$249 million notes due December 2021 are callable today representing a portion of our debt capital structure we can pay down with free cash flow in the future a stated priority on our last conference call. As of December 31, 2017, our long-term debt position net of cash is $1.67 billion. We had $65 million in cash on our balance sheet and our total liquidity position was $727 million. I will mention our focus on free cash flow generation this year resulted in funds from operation of $184 million with capital expenditures net of disposals of $83 million. I continue to be encouraged by the cash flow generation performance of our business. For 2018, we would expect depreciation to be approximately $360 million and SG&A to be in the range of $100 million to $110 million. We expect cash taxes to remain low and our effective tax rate to be in the 20% to 25% range. I will now turn the call over to Kevin for further discussion of the business and outlook.

Thank you, Carey and good afternoon. As we stated in the press release [Technical Difficulty]

Ladies and gentlemen, please stand by your conference call will begin momentarily.

I believe, we're online now. Can you hear us operator?

Yes. Now we can hear you.

Okay. Have we been online for the last five minutes.

No, it went silent for a moment when Kevin was starting his remarks.

Okay. I'll begin from the beginning again and I'll say thank your Carey and good afternoon. As we stated in our press release earlier today, I am very pleased with our fourth quarter results. In addition to our improved financial results, the highlights for Precision included achieving our 2017 strategic priorities. Carey mentioned our progress on cash flow, reducing debt and improving our financial position and he also mentioned our strong results managing G&A and our fixed cost leverage and it will add our key operations performance metrics, we exceeded six or our seven performance targets relating to key customer performance measures and that further strengthens our competitive positioning. Finally, I am pleased with our progress in our beta testing of our new technologies including Process Automation Controls and the able Directional Guiding System. By the end of 2017, we achieved our commercialization benchmarks and have begun the market roll-out of these technologies. I'll provide a little more color in our technology initiatives in a few moments. But first, I'll make few comments regarding what we're seeing in the markets. Starting in the lower 48, the improved commodity prices are providing a nice tailwind, but the efficiency and performance of our Super Triple rigs is propelling us forward. With 2017, with our highest market share since entering the United States in 2006, today we have 65 rigs running and expect to be in the low 70's by the end of the first quarter with customer indications for further rig activations during the second quarter. Leading edge rates for our pad walking extended reach ST-1500's, are now in the mid-20's and rates for our similarly equipped ST-1200 are in the low 20's. Now I remind you the Precision Super Triple rigs both our ST-1200 and our ST-1500 were designed to be inexpensively upgradeable with clip-on walking systems costing approximately $1 million third pump installation is less than $700,000 and high-pressure upgrades that cost less than $500,000. As a result, the incremental capital we have used to upgrade our rigs, so we can expect has been substantially lower than others in the industry report. For 2018, we continue to plan 10 to 20 upgrades of similar scope and expect to stand about $34 million in total. Now, should customer demand exceed our estimates, we will consider additional upgrades that is only if the day rates, the incremental margins and contract duration meter hurdles and also provided that we can satisfy our debt reduction term targets. Now you may recall that during the third quarter, we reported only three additional long-term contract bookings. Now since the end of third quarter, we've added 21 long-term contracts primarily all in United States. Pricing momentum picked up, [ph] the fourth quarter is continuing its customer demand for the most efficient rigs remained strong and supply remained very tight. Off those 21 long-term contracts we signed, nine of those are for rigs in the Permian, four in the SCOOP/STACK and the balance are spread between the Utica, Marcellus, the Eagle Ford, the Bakken and DJ basin. Now some of these will be rig additions that we've already mentioned in some of the renewals of the existing contracts. I want to point out that the Precision ST-1200 is a unique high performance high-spec rig. This rig is well suited for the DJ Basin and the Marcellus and the Canadian Montney. Recently at DJ our ST-1200's are drilling 13,000 foot measured depth wells with 5000 foot horizontal sections. These wells are being drilled in less than three days, these rigs are walking on the pads well-to-well in less than 30 minutes and they're able to relocate pad to pad in less than two days, sometimes as quickly as 26 hours. The ST-1200 is unmatched and is drilling and moving efficiency and I believe this might be the most efficient drilling machine anywhere in the world. Similarly, our ST-1500's in the Delaware Basin have drilled wells out to 22,600 feet and these wells have been drilled in less than 21 days. They walk well-to-well also in 30 minutes and they've moved pad-to-pad, complete relocations pad-to-pad in 1.6 days. Now achieving these levels of performance requires the Precision Super Series rig with a well-trained crew and a high degree of collaboration with the operator. It also requires optimized well design. But we believe, our efficiency, our safety, our crew competency in our Super Series rig design creates a substantial competitive advantage which is driving our market share your and our increase utilization. To continue this theme, I want to provide an update on our technology initiatives and how we are demonstrating that these technology initiatives will further drive efficiency and enhance our competitive advantage. So today, we have 23 rigs equipped with the NOVOS process automation package and this includes our training rigs in Houston in this queue. Over the last year, through our beta testing program we've learned that training our crew and automation equipment is a critical step in implementation of this technology. Now we've also learned that the experience driller, drilling a same well over and over focused solely on speed can deliver remarkable results like those I just quoted the DJ Basin and the Delaware Basin. However, the workload, the information intensity, and the demands on today's driller are immense and consistently repeating those results can be challenging. Our automation system takes over the repeatable steps, like sequencing and operating the machines allowing the driller to focus on managing the crew, while overseeing the overall process. The result is that with automation we can match that very best driller, we can match him day in day out and can eliminate human variance and deliver consistent repeatable results. While the driller becomes more effective and in a supervisory and oversight role better able to ensure overall rig and crew performance. Now our next steps will be in developing applications for apps and those apps will be targeted at improving well bore quality by automating various drilling algorithms to improve - and algorithms to improve fuel efficiency by managing engine and generator use on the rigs. We believe these apps will continue to augment our competitive advantage while contributing additional revenue streams. Now we know the industry is cautious in implementing new technologies and especially those that are software based. However, we believe the results here have been compelling and those customers that are data and technology savvy will be the early adopters. And as with most new technology introductions the [ph] industry will watch the early adapters and eventually follow. This year our plan will be to increase our PAC installed base from the 23 rigs I mentioned earlier to 33 rigs. They were prepared to respond faster should customer demand accelerate. Now regarding our directional guidance software, this technology was effectively proven in early 2017. As I described earlier, field deployment was limited to early adapters. We believe that in 2018 we may have reached a turning point. Customers interest has picked up substantially who will run as many jobs in the first quarter of this year as we executed during the full year of 2017. Our DGS system is working very well, it will eventually integrate with our PAC system and we believe this also creates a unique combination of value for our rigs. Now turning to Canada. The improved commodity prices providing a tailwind into the US or muted in Canada by transportation bottle mix. In particular, the depressed AECO gas price remains a challenge for our customers. Now that said, our first quarter activity in Canada has been in mid of last year and the rates for our shallow rigs have held up following price increases that were mentioned in our third quarter conference call. Over the last few days we're noticing industry rig count starting to soften as the AECO sensitive customers are beginning to wind down with their drilling programs prior to the normal spring break up timing. However, looking forward and based on numerous customer discussions at this point, it seems Precision's activity levels through the second quarter and the back half of 2018 are generally in low 2017 levels. We expect that the deep basins liquids drilling, particularly the Montney will remain firm through the year and we expect to see constructive demand in the pure oil plays such as the Viking, Cardium and particularly our favorite area in heavy oil. Now these comments should be viewed cautiously as Canadian E&P operators are sensitive to commodity prices who will be prepared to pivot quickly either up or down. Now I think many have concerns about Canada. We believe our competitive positioning, our Super Triples and our Super Single asset base, our scale that are well trained people and our customer relationships will service well as this market evolves. We will focus on sustaining our market position and generating cash flow, while closely monitoring the dynamics of the market. Now turning to our well service business, well some of you know Tom Alfred joined Precision at the beginning of the year to lead our well services group. Tom brings over 35 years of well service experience to Precision and he will be instrumental in our strategy as we continue to evolve this business. Now what Precision is focused heavily on the cost side Tom brings a broad leadership capability who will focus on strengthening our field operations improving our customer exposure while continuing on intense focus on cost. Now, I know all of you know the well service sector remains a very tough business with the structural oversupply of rigs, but we expect the focus and experience Tom brings will help set us apart. Turning to our international business, this remains strong and stable. We have only two contracts renewals occurring late this year and those rigs are performing very well. We anticipate constructed renewal discussions later in the year with our customer. We continue to bid our [ph] rigs in the region interestingly none of the projects we have bid progressed through the reward and several have been delayed for rebid. We do expect to see some movement on some of these tenders in 2018 following the improving Brent crude price. Now in 2016, one of our standard priorities was to be ready for a rebound. In 2017, we re-staffed over 120 rigs from our low of 38 operating rigs at the bottom of the trough. We did so with no increase in fixed costs, no abnormal maintenance capital and minimal start-up costs. Also through 2017, we introduced several new technologies, computer focused on fixed costs leverage while growing Precision's market share and continue to reduce the debt levels. Well we have not disclosed our 2018 priorities yet, rest assured that debt repayment from cash flow along with our technology and fixed cost leverage priorities [ph] liked it. As a closing note, I want to thank the employees of Precision for their hard work and excellent results on all of our strategic priorities and especially the excellent progress made throughout the year on safety and all the very good work our team has done on the implementation of project one our new ERP system. So, on that note, I will now turn the call back to the operator for questions.

[Operator Instructions] Our first question is from Sean Meakim with J.P. Morgan. Your line is now open.

Hi, thanks. Kevin, maybe to start off, I was hoping you could maybe give us a little bit of insight into just into the mix as far as the Canadian rates from 40 to 1. So, given you had a pretty strong average day rate in 4Q, seems it was probably somewhat mix driven with more weight towards Super Triples and just thinking about how we translate that into the first quarter. I think you noted shallower markets held up pretty well or you got some increases recently. But perhaps on the incremental activity during winter drilling is more diluted to the average. Just how should we think about modelling that change quarter-to-quarter?

So, it's probably easier to compare Q1 17 to Q1 18 just because the mix in Q1 tends to be a little different. So, what we find happens in Q1 is that the heavy oil delineation work and a lot of the thermal work works only for the winter season. So, we have a mix of shallow rigs coming to the mix every Q1 which are other shallow rigs, the rigs are better than last year, so it's still a good comparison but they are much lower than our Super Triples. Those rates would typically be in the mid-teens or slightly below mid-teens for those rigs versus upper teens, low 20s for the Triples. So, the higher proportion of those thermal and delineation heavy oil rigs, it does pull down the average day rate Q4 to Q1. But I think it's more value to look at Q1 17 to Q1 18 for trajectory in rates.

Okay. That's helpful and then just what do you think about the $10,000 comment in prepared remarks as far as trough to current levels. Could you remind us roughly, where you consider trough levels of rates?

You know I would say that we saw lineage rates drop into the mid-teens, even below the mid-teens back in 2016.

Okay. So that's why you say you think current leading-edge rates for your best rigs are approaching mid 20s at this point.

We'd say they are approaching mid approaching mid-20s yes.

Approaching. Okay. Thank you and one more if you don't mind. It seems to me in the release you're seeing the contract coverage for you in Canada has been eroding the last couple of quarters. Is it fair to say that's strategic or just a function of the customer and commodity mix and lot's been moving in Canada in last few quarters? Just curious how you think about contract strategy and balancing share versus price in 2018?

So, in Canada it's a little bit different in that contracts and all the normal function of the business. They generally relate to capital deployment. So, in Canada its quite common if you build a new rig it's got a long-term contract that might be three-four even five years long. If you upgrade a rig, the drillers of rig just get [ph] contracts cover the upgrade. So, a lot of upgrade contracts will be one, two or three years in duration. But for normal well-to-well throughout the season in Canada there is very very little or almost no contract work. A lot of that relates back to the early 2000's when the workers were very sensitive to natural gas prices and [ph] natural pricing. So, I can tell you, that the notion of just a regular term contract in Canada doesn't really exist when you compare that to the US market. So, it's not really our choice for how many contracts we mixed into how many well-to-well rigs. We tend to insist on contracts for rigs that have upgrades or capital requirements and they certainly assist on contracts for new bills. So, the price here in Canada tends to be more annual price negotiations that don't have any commitment for time required. Is that helpful?

Very helpful. Great, thank you Kevin.

Thank you.

Our next question is from Chase Mulvehill with Wolfe Research. Your line is now open.

So, I guess a quick question on the 10-20 upgrade. How many of those are actually working today?

You will notice, we don't actually give that disclosure. Some of those rigs maybe working, some of the upgrades maybe taking a rig that didn't have a third month, third pump. So we've given guidance and we expect to add five or so more rigs between now and the end of the quarter. We see there might be couple more coming into the second quarter. So, you could assume that some of the upgrades we've done so far will be to existing rigs and some of the upgrades may be the rigs aren't activated yet.

Okay. Right. So, all those is incremental rigs is what you're saying.

Yes. Correct.

And on the upgrades, are there any that you are upgrading either draw works on taking them from SCR to AC rigs?

No, we're not. But we have a handful of rigs in our fleet that are DC SCR rigs and those would come probably if you look at the next 10 after these and the next 10 after that is probably the last 10 rigs we'll be doing that have those SCR to AC upgrades kind of long-term schedules in. Those upgrades will be likely 5 million or 6 million or 7 million per rig something in that range. I don't expect it will get much higher than that. Those are probably 10 to 20 rigs away after we finish the current plan.

Yes, Chase it's safe to say that the upgrade plan that we have for this year in the capital plan not only upgrades for more than $3 million.

Okay. Right. That's helpful thank you. On the technology initiatives, do you all care to kind of quantify how much EBITDA you are generating from this technology. The new technology initiatives and kind of where you think you can go by the end of this year?

So, we gave guidance back at our Investor Day and we really haven't come up that guidance you know. We commented of the 20's we have sold right now, number of customers are paying the full ticket as we move through various performance benchmarks for those customers eventually all will trend towards the full price that we gave on our Investor Day. So, for example on the automation system, we're looking for $1500 per day fixed charge.

Okay. I'll squeeze one more in and I'll turn it back over. On the international side, with the idle rigs as these look to kind of restart in 2018 there are few of them. How should we think about incremental CapEx and the potential for restart of rigs and is that included in the CapEx guidance?

So, we haven't announced any contract awards for reactivating any of those four idle rigs. If we were to reactivate them, it will likely be a contract in the range of three years and the capital required would be $10 million to $15 million to get them up to start.

And any within that three years?

The payback of the capital and then some sort of base rate on the existing rig. Yes, but to answer your question on if any of that capital is included in our capital plan it is not.

Okay. Alright. Thanks Kevin, thanks Carey I'll turn it back over.

Our next question is from Taylor Zurcher with Tudor Pickering & Holt. Your line is now open.

Hi, thanks guys. Just wanted to follow-up on the prior question as it relates to international. Could you shed some more light as to which specific geo markets are seeing the most incremental demand or tenders on horizon and then secondarily, I think some qualitative color would be helpful as it relates to the changes you could reactivate some of those four rigs in the Middle East in 2018. In other words, how many of these tenders that you are actively participating in today would have 2018 start date?

Good questions. So, first of all if we want to tender in the second quarter of this year the rig might reactivate in 2018, so that's kind of the time you're probably looking at three to four months post tender to reactivate the rig and that would be in line with most deployment schedules customers look for. So that's kind of first piece of guidance. I don't have high degree of confidence - any awards in the first half of this year.

Okay.

And it must be start of real sharp move upwards in the commodity price and it can be driven by clearly defined oil supply demand fundamentals that get these countries moving a little quicker with the joint plans. But the issues going on right now and I think it's going to be hard for the buy side especially is supply and demand, because a lot of the things we're bidding on or projects that were scheduled to happen two or three years ago and they haven't started. So, the concern that there is a growing sync hole in production should be gaining momentum this year. Well these projects that we're bidding on now, well somebody has bid on two years ago and the rigs haven't been deployed yet and the projects are falling farther and farther behind.

Okay. Thanks for that and second quarter just as it relates to the US. With pricing now still in the mid-20s thousand dollars a day as the customer, operator mindset change at all, as it relates to extending the duration of some of these contracts. At least those are in the spot market today longer than six months or what are you seeing on that front is contract duration increasing at all?

Yes, it is. Certainly, because we will put it on Q3 call, we could get pricing but we couldn't get duration. So, going from zero duration to anything between six months and two years is a notable increase. So, yes duration is increasing. But you know there is always a game theory or negotiating ploy, we try to get the maximum day rate and they would like to get the lowest day rate for the longest term and that happens every time. But the short answer is that we have contracts ranging between six months and two years. Right now, we don't give out an average. But the 21 new contracts that we signed, some renewal some new deployments. They are in that range of anywhere between six months and two years.

Okay great. And last one from me if I can squeeze it in. You talked about process automation controller or NOVOS employed on 23 rigs today, I think that was 20 rigs few weeks or months ago. Are those three incremental rigs new customers relative to the customer base you had for the original 20 rigs and if so, the three incremental customers or less than that.

So, as we've commented we are putting these on our training rigs. So, two of three go in our training rigs and that's a very important element and leaving the third one which is a new customer.

Got it. Thanks. I'll turn it back.

Our next question is from Benjamin Owens with RBC. Your line is now open.

How many of the rigs that you mentioned having one a site on adding through the first quarter and end of the second quarter do already have contracts in hand for?

So I would comment that the rigs we expect to add are all contracted. Of course, we have component of our fleet which is uncontracted, so the commodity price closer to happen between now and the end of March; some of the young contracted rigs could be laid down, so I will give that qualification but the additional rigs we're adding are under these term contracts.

And I was wondering if you could tell us what the average day rate in backlog for the 34 rigs they have under contract in the first quarter in the U.S.?

Ben, that's not something we would disclose.

Last one for me, little bit different topic but would you consider moving any idle rigs from other geographies into the U.S. if you had customer demand that supported the move?

Ben, I can tell you that I think I've heard at least a couple of other key contractors talk about moving rigs from Canada or from Saudi Arabia down to the U.S,; we have no plans to relocate rigs from Canada to the U.S. right now, we have moved rigs both directions over the past several years, we've moved some rigs from Canada to the U.S. and some from U.S. to Canada. So we'll do it if the market pull us there but my comment on is that if we see continued price trajectory upwards in the U.S. and if for whatever reason we saw prices eroding in Canada, we might change our view.

Our next question is from John Daniels with Simmons & Company. Your line is now open.

Congrats on hiring Tom, it's a good add. Should we look at his hiring as a sign you might consider tactical acquisitions on the well service business?

I think that the space needs consolidation John, I think that's really important. I think you understand what's going to be going down here in the U.S., it's a tough market in the U.S., tough market in Canada; Canada needs consolidation, no question. I think Tom has a history of consolidating companies and building businesses in this space and he has done that a couple of times over, I think we does it quite well. I would tell you -- like we've said it in the past, we like to be part of the consolidation, most likely we'd use precision capital to execute that.

Labor challenges is a frequent obstacle cited by the industry; is your shift to more automation having any noticeable impact yet to your HR initiatives? Specifically, do you need a more sophisticated hire who is comfortable with that technology or is it the opposite where automation allows you to have a less talented work experience person?

It's kind of an awkward question; as I said earlier, I really experienced driller kind of working just fully focused, it's pretty hard to beat. So automation allows you to replicate that, we're even -- even a good driller, like a good experienced driller rather than just leading as perfect performance. But I would tell you that the skillset needed -- as you increase technology on the rig, that increases the skillset needed by the driller to be an effective driller; so we've added these two novel systems onto our training rig so that we can train drillers to this new level of technology. So I tell you that probably he has to be a little lesser trigger on timing, he does need a broader skillset and more software knowledge; so it probably increases the skillset and job doesn't decrease it. But we really think if this is going to really improve all the rigs, not just to have really good rigs and then kind of normalize normal curve performance on the rigs, we think we'll first add normal curve to the right. But you know, I'm quite proud of how Precision handles it's staffing challenge and it's entirety; I think last year we processed close to 40,000 job applications, we ran over 1,000 people to our training rigs and restaffed that entire 120 rigs in United States with narrowing operational issue.

Just you had pretty impressive data on and comments on your rig performance; just given how well the superspec rigs are performing -- do you see any demand for non-superspec rigs?

If you look directly, now you'll see that we have some of our SER rigs running.

But when we look at the U.S. land rig conference, since a lot of the rig guides have been from private, so are they being as discriminating if you will?

On those rigs we have running the DSCR rigs, they have digital controls and they have pad-walking systems and they've got high pressure mud systems, so they are well -- while they are not AC rigs, they are able to -- and by the way John, those rigs are all AC tough drives [ph]; so they are microprocessor controlled rigs. We'd argue you could drill us well with that rig as you [indiscernible] Super Triple but that's nothing about overall customers.

Our next question is from Ian Gillies with GMP. Your line is now open.

As you work through the rig upgrade program, acknowledging the next five rigs or so and that expensive but as you certainly move into perhaps some of the SER rigs that mean there is an opportunity cost associated with now moving rigs from Canada. So I mean, how are you thinking about rig upgrades in the U.S. versus just moving rigs from Canada given what I assume to be higher rates in margins being earned?

Right now in all of our Super Triple's in Canada are running and they are booked, and -- so that gives us real clear definition of opportunity cost.

So I guess, then the follow-up would be -- I mean, do you -- are there returns or that margin is widely different from one area versus the other that it may warrant perhaps pulling some of those rigs at some point and moving them down south?

It's too early to say right now. I mean, I think that what we're hearing about them normally stays in place; the answer is easily no. If there are -- and especially, if some of our peers take rigs out of Canada, I think that tightens us by -- in our sector; so I'd be not troubled to see other AC rigs leave Canada and move to the U.S. because we've got a pretty good business base right now. Now, if market changed in Canada and utilization drops in those rigs or if there is -- for whatever reason, intensity way pressure that might change our way.

And along that same topic, on the last quarterly call you talked about mechanical doubles kind of looking at the yields a bit on some of the AC triple's performance; is that something that's continued to be a theme through -- went through drilling season or you've seen anything that made -- change your view on that at all, did help separate those rigs from the mechanical doubles?

We're doing pretty well this winter. And we have that pressure -- as I said earlier, if we see pressure that pressure starts to cause our rates to go down later in 2018; that might change our view. But right now for this winter I don't see it impairing our rates on the rigs.

And with respect to some of the more expensive rig upgrades in the U.S. as you certain move towards the higher rig count; I mean would it be fair to assume that we would need to think that -- I guess, the day rate for those rigs would need to be in the $25,000 to $30,000 per day range to start doing some of those more expensive upgrades.

Our next question is from Jeff Fetterly with Peters & Co. Your line is now open.

On the US day rate front in Q4 versus Q3 you are up about 5% sequentially. Is that a magnitude that you would expect to carry in coming quarters given the spot market traction and some of the renewal rollovers?

So, Jeff we commented in my prepared comments I mentioned that if you kind of strip away the turnkey impact and the IBC impact. Our day rates were up about $200 per day on average quarter-to-quarter. We would expect that trend to continue on of what we see today in the next couple of quarter as we have rigs coming up contract pricing and to higher day rates in spot market maybe now.

Okay. Let me derive off of that. What is your visibility for turnkey then?

We don't provide guidance quarter-to-quarter on turnkey. Typically, we have one to two rates running at a time. So, a quarter like this quarter where we had $3 million in revenue, I think the kind of $3 million to $4 million or $5 million of revenue per quarter is a decent estimate for the next couple of quarters.

Okay. With contract term extending rates now in the mid-20s on a spot basis or leading-edge basis. How far are you from contemplating a new build or the more aggressive refurbishment program, upgrade refurbishment program?

So, Jeff let me make sure I understood the question properly. How far are we from contemplating renewal programs?

Well, the reference earlier in the call about the next 10 to 20 rigs beyond the upgrades you've disclosed through this year being obviously much more capital intensive and then obviously the new build extension off of that how far do you think rates need to move up further or our contract term is long enough now to start to contemplate either one of those?

Well so for us contract terms are not long enough yet and day rates probably need to be much closer to or even over 30,000 per day. So, I think we're still, I think we're still little ways away for us to be completing new builds, but I think if the markets moves that direction we would probably have utilization levels of our US fleet approaching 90 rigs or maybe higher. We have day rates across the fleet that looks essentially stronger. So, I think we have a building book of shorter term contracts but it we see both rates move out to high-20s, low-30s and terms move beyond two years and to three and four-year terms that's couple of big steps. Because I think the market will be delivering a few new goals.

On the directional side, Q4 was one of the lowest quarterly revenues you guys have reported. How do you think about that business right now and in the context of the broader automation and optimization what are you trying to do?

The directional business remains quite competitive and would tell you that we've gone through some organizational changes in the US that caused us a bit of a drop in utilization in the US, but we are on pretty good track right now in the US. In Canada, extremely competitive. If you know the mid-size companies are working hard to grow their market share. So, I would tell you that we're really focusing hard on the able assisted job where we're using the software with our directional jobs and that's going quite well. And as I commented in my prepared comments having essentially the same number of jobs in Q1 that we saw all of last year tells us from a good structure there and the software is working well. So, feeling good about directional going forward and particularly good about linking a directional service that are able software advisory guide package.

And Carey just a couple of clarifications. On the SG&A side, you said 100 to 110, does that include stock-based compensation.

Yes, that would include it. So, let's assuming we kind of go closer to historical levels in stock-based comp versus where we were in 2017.

And then on the upgrade side you indicated $10 million to $15 million is that an absolute number or a per rig number?

That would be per rig number.

Okay. Thank you. Appreciate the color.

Thanks Jeff.

Now I'm showing no further questions. I would now like to turn the call back to Kevin Neveu for any further remarks.

Thanks for joining our fourth quarter call and look forward to sharing our first quarter results in April. Thank you.