Good day, ladies and gentlemen. And welcome to the Precision Drilling Corporation 2018 First 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 be given at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to Ashley Connolly, Manager of Investor Relations. Ma'am, you may begin.

Thank you, Ashley. And good afternoon, everyone. Welcome to Precision Drilling's first quarter 2018 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 first quarter of 2018 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 forward-looking statements and these risk factors. Carey will begin today's call with a brief discussion of our first quarter operating results and provide a financial overview. Kevin will then provide an operational update and outlook. Over to you, Carey.

Thank you, Ashley. In addition to reviewing the first quarter results, I will provide an update on our 2018 capital plan and management of our capital structure. Our 2018 financial performance is off to a strong start, with first quarter adjusted EBITDA of $97 million, 16% higher than the first quarter of 2017. The increase in adjusted EBITDA from last year is primarily the result of higher activity levels in our US business and improved profitability margins. In Canada, drilling activity for Precision decreased 5% from Q1 2017, while margins were approximately $300 per day, higher than the prior year. The margins for the quarter were positively impacted by higher dayrates, slightly offset by higher operating cost. In the US, drilling activity for Precision increased 38% from Q1 2017, while margins were up approximately $1,300 per day, positively impacted by lower operating costs and slightly higher dayrates, offset by lower idle of the contracted and rig mobilization revenue in the current period. We continue to see average rates moving up throughout the balance of the year if current market conditions persist. Internationally, drilling activity for Precision equaled activity in Q1 2017. International average dayrates were approximately US$50,000, a decrease of approximately US$400 per day from the prior year. In our C&P division, adjusted EBITDA this quarter was $4.6 million, effectively equal to last year. Capital expenditures for the quarter were $30 million. For 2018, our capital plan is $116 million, up $22 million from previous guidance. The 2018 capital plan is comprised of $57 million for sustaining and infrastructure, $45 million for upgraded and expansion and $14 million for intangibles. Our capital plan is expected to align with industry activity and reflects our expectation to upgrade rigs, increase our AC Super Triple active rig count in the US and deploy…

Thank you, Carey, and good afternoon. So as Carey mentioned earlier, we're very pleased Precision's strong start to 2018. With the strength in WTI supporting customer demand in the United States and Brent strength generating positive signals in our Arabian Gulf business, our outlook for 2018 remains constructive, and the opportunity set seems to be increasing. But before I dive deep into our operations, I'd like to discuss our strategic priorities for 2018 and give you some additional color on how we will drive our actions during the year. So recently, we disclosed total reduction -- total debt reduction target range and to be clear before we hit 2021, we expect to reduce our total debt by $300 million to $500 million using cash from operations. And Carey also mentioned our 2018 debt retirement target range of $75 million to $125 million. Now despite our modest increase in projected capital spending, and attractive U.S. international growth opportunities, our primary use of cash will remain focused on debt reduction. During the first quarter, we demonstrated a strong improvement in cash from operations and a meaningful increase in cash on-hand. It's a very good start to meeting our debt reduction objectives for the year. Our second priority regarding enhanced financial performance is extremely important. Particularly as customer demand increases and growth opportunities emerge, you should read this on two levels. One, we'll maintain intense focus on cost management, tightly controlling our fixed costs and our variable costs. Secondly, we will drive margin improvement via dayrates and operational leverage. So during the first quarter, we demonstrated excellent cost control on all fronts, and that's despite the seasonal ramp-up in Canada and several reactivations in the United States. We expect to stay on track managing our controllable costs throughout the year. On the revenue…

[Operator Instructions] Our first question comes from Sean Meakim of JPMorgan. Your line is open.

So just -- I thought maybe it would be great if we could get a little more feedback on the re-pricing of the contracts during the quarter. Just kind of what precipitated that series of events and receptivity from customers? It would be great to just learn a little bit more about that aim. And maybe if we could quantify to some degree the positive impact of that re-pricing?

So to give you some sets of re-pricing here, I think Carey talked about Q4 to Q1 pricing. Positive impacts were stronger pricing; negative impacts were mix a little bit. I think if you look forward, over time, I'd expect rates on average to move up. Probably in the range of $500 to $1,000 a quarter kind of looking forward on average. But it could go a little bit faster if oil prices stay strong. I'll tell you there's no question that leading-edge spec rigs are pricing very quickly, re-pricing towards a mid-20s range. And even our smaller SG-1200s are moving to low 20s. And we've got some of the less capable rigs coming up with $20,000 a day. So move -- rigs are moving pretty quickly. I commented that some rigs were several hundred dollars, some were several thousand dollars. And that really just comes back to when the rig was last contracted.

And just to be clear, Sean, we didn't re-price any existing contracts. But when the contract term ended and we opened a new contract, that's when we re-priced.

And as we think about the second quarter in Canada, maybe could you give us sense of how do you think mix shift can impact the rates quarter-over-quarter and maybe as a comparison to the year prior? I know we talked about activity being fairly comparable, but maybe just a sense of how that mix could shift over the course of the quarter?

Sean, the mix shift would -- the mix would be pretty similar to last Q2 where we'd have much higher percentage of Super Triple rigs working in the deeper basins, working on pads. So the rates would typically go up from Q1.

Our next question comes from Chase Mulvehill of Wolfe Research. Your line is open.

So on the rig upgrades, it sounds like you're going to have 75 rigs or so kind of active in the US in the next couple of months. Can you talk about what your total fleet size is in the US relative to that 75? So how many do you actually have idled that you think are kind of options to upgrade? And then maybe can you just talk about the average cost to upgrade those? And I've got a follow-up as well.

So, Chase, I think the first comment I'd make is that I did in the prepared comments talk about, if we get beyond 75 rigs, the cost of our next 10 to 15 upgrades will start to move up in the $3 million to $6 million range. The average will move up a little bit. And if you just kind of pile those two together, that gets us to somewhere in the high 80s or maybe 90-ish range. We have 104 -- 103 or 104 rigs in the U.S.?

104.

104 rigs in the US right now, so that gives you a bit of sense what the range could be.

And then thinking about moving rigs from the -- from Canada to the U.S., what rate would you need in the U.S. to actually move those from Canada? And what kind of duration on the contract would you need?

I'd say there's a couple of things we'd look at. So first of all, we'd expect our customer to pay the full relo cost, which is -- it's meaningful. It could be in the range of $1 million to $1.5 million depending on where it's going. And we'd want that paid either as a pure increment to the dayrate or at the most, some upfront, but we do that to be firmly committed. The rates would have to be leading-edge rates. So we'd be looking for the best rates for the market.

Yes, just a follow on that, Chase, on the contract term. Typically, if there's any capital involved or really any cash outlay -- expense or capital, we'd want to make sure that the term was long enough to cover that outlay.

And incremental rate cover the outlay also.

And your next question comes from James West of Evercore.

Kevin, on the Kuwait -- potential contracts in Kuwait, how many rigs would you as Precision be willing to put into that market assuming you're successful on the tendering activity?

So we're running -- today, we have five rigs running. And we've made the comment many times that we think we've achieved the scale we the need to deliver country level returns. So we're pretty happy with our scale today. Adding one rig -- if we're successful adding one rig next year, maybe one rig a year or two later. I think that's kind of pace we like to see. We're really pleased with our business in Kuwait. It's a great relationship with the customer -- demanding customer that expects our performance -- we're able to deliver. But I also worry about becoming too levered to any one country or one area. So yes, I think we balance those things out and look at the market size. I wouldn't want to become 10% of the market or 15% of the market in Kuwait. We're just -- that's not the right mix for us today.

And then maybe a similar question, I know Saudi is out looking for more rigs as well or will be looking for more rigs, how many more rigs would you be willing to put into Saudi?

Well, [indiscernible], that frankly, three rigs operating is sub scale. And while the returns of the rig are adequate, the returns of country level -- we're kind of still positive the returns weren't adequate. And I'm not happy with that. If we could get the idle rig in Saudi and maybe the three rigs in Kurdistan in-country running, I'd be very pleased with that. That would get us up to seven rigs running in that range, that's pretty good. We have to balance out the capital needs and the returns that are focused on paying down debt. So there's no easy answer for us.

Our next question comes from Ben Owens of RBC Capital Market.

So on that target debt reduction range you guys provided for 2018 of $75 million to $125 million, just wondering what are some of the variables that could impact where you end in that range? Does that contemplate potentially putting additional rigs to work in Kuwait and possibly needing to spend capital to get those rigs up to spec?

So with the capital plan we disclosed today absolutely contemplates that. If we were successful to win Kuwait rig award, it would be much more weighted to 2019 capital spend. So there could be some spend in '18, but it would be a small portion. The variables that would impact that would be how much cash we might keep on the balance sheet -- would be one. So if we continue to build our contract position, we'd probably be more comfortable with a little bit less cash on the balance sheet. And then the overall performance of the business from a cash flow generation standpoint from EBITDA level if we continue to see strong pricing trends and good cost control and good utilization, we would be likely at the higher end of that range.

On the Saudi rigs that are up for renewal later this year, do you think those rigs would require any capital investment to win the contract renewal?

Nothing at all, we think those rigs are well maintained and able to continue working for a long period of time.

Our next question comes from Taylor Zurcher of TPH. Your line is open.

In Canada, maybe I'll start there, if I look back to, I guess, pre-2014 and 2014, the mix of term versus spot to contracted rigs was sort of steady around 40% today. Well, naturally migrated lower over the course of the downturn and, today, it still seems to be moving lower. I think it was 8% this quarter. So I guess, my question is, is that just a function of where commodity prices are today? Part A. And then, I guess, part B, how do you envision that ratio unfolding, the way you see over the back half of the year?

So I think there's a structural difference in the Canadian market and US market. So term contracts in Canada are just far, far less common. That tends to be annual pricing agreements with no obligation for days. However, any time that driller in Canada deploys new capital, they usually seek a contract to cover the capital. So if the capital is a brand new rig, Canadian drillers, ourselves included, look for a contract to cover that entire capital investment. So we get a -- probably, typically, a four year contract. So in 2014, we had a lot of newbuilds deployed in Canada. I think we had, at one point, about 20 newbuilds. So it was 20 four year contracts hanging out there. And then some -- we had some upgrades back then also. So we would have had a number of upgrade contracts. But as that upgrade and capital deployment has gone down year-over-year, then our term contracts just as naturally have gone down. So you just don't see Canadian E&P companies or Canadian service companies doing term contracts unless there's some new investment tied to that rig. I'm not sure that helps you. It's just a fundamental of the business. It's different between Canada and the U.S. Out in the U.S. right now, we have a number of accounts that are locking up rigs for six months, one year, sometimes 18 months, to secure that rig over a long, long horizon. So you know we'll have the same rig and same crew. And that's been a common feature of the US market for over a decade. A decade's enough.

Okay. That makes sense. And then a follow-up in Canada, I think you mentioned in prepared remarks that you would like to see some additional pricing momentum on the shallower rigs. At the back half of the year ends up playing out flattish versus back half of '17, do you think you have the room to keep pushing pricing there or is that likely you'll need to see more demand in order to get that extra $1,000 dollars a day you called out?

Yes, that's actually I said $1,000. I think -- I'll tell you that this is actually quite intentional. We have customers, let's say, they need to understand how weak that business is and how important is for the drillers to get back to some level of sustainability. So I made that comment because I know we have customers listening and they need to understand this is a very tough business for everybody, ourselves included. Last year we raised rates. We immediately saw the impact of market share reductions -- immediately. Our guys worked really hard through the third quarter or fourth quarter to restore that market share. We brought it back. The rates held in quarter one. I'm not going to give any guidance right now on future price negotiations because those are going on every day. But I'll tell you, across the industry those rates need to come up. They need to come up to $2,000, $3,000, $4,000, sometimes $5,000 a day. The industry is suffering right now. We're doing our part, but we need our customers to recognize that the business needs to improve. Otherwise, they're going to suffer. Ultimately, they will be the ones who suffer.

And one last one from me, on process automation control, I think you're still running 21 rigs equipped with PAC systems today. Could you just give us an update as to how many of those customers are paying for those services? Or how close you are to sort of full commercialization on those 21 rigs?

Yes. So the short answer is that I won't. We have internal metrics that we're meeting right now. So we're happy with what we're doing. I'll tell you we've got a number of customers who are paying full rate and a handful more that are working with performance metrics where there's a reduced rate. And I'm really pleased with the progress we're making. But at this point, we're going to hold back on providing a lot of disclosure on rates and terms. But nothing tells me that the targets we put out for ourselves last year on Investor Day need to change or come down.

[Operator Instructions] Our next question comes from Ian Gillies of GMP.

Kevin, was I correct in hearing that you're contemplating building two new-build AC rigs out of inventory and spares at some point this year?

No. You are not correct. We're not contemplating building anything. We just commented that we could if we saw the right type of contractor demand. We could assemble up to two new rigs probably for less than $10 million of cash out, but we could deliver on short order. So we could that. At this point, we have nothing on the books.

And that's good to know. And I mean, with respect to the SCR-to-AC conversions, are you able to provide, I guess, a bit of color on what you think that may cost given that's probably going to be a different sort of upgrade than what you guys have been doing previously? And whether it may -- are there any performance limitations if you go and do those sorts of upgrades? Or do you think those rigs immediately compete with some of the others super spec AC Triples in your fleet once that's done?

I wouldn't view those rigs -- we -- if we did AC to DC conversion or DC to AC conversion, just view it as an additional AC rig in the fleet. It doesn't compete with our existing rigs. Many of those rigs are actually already configured with three-pump [indiscernible]. So it's just a power system conversion. So I think our guidance on $3 million to $6 million for the next to 10 to 15 rigs is the appropriate guidance.

[indiscernible] 75.

Yes, it's 75.

And with respect to a potential newbuild heading into Kuwait, I mean, in U.S. dollar terms, are they still in that $45 million to $50 million range or am I way off the mark there?

You're right, probably closer to $60 million in that range. $55 million to $60 million in that range.

And then to be clear, that's in U.S. dollars?

Yes.

And then, I guess, as you...

So let me be really clear on a couple of things here. First of all, our top priority is to pay down debt. And while we just spent the last five minutes talking about areas we can spend capital, we're not spending capital until we are certain we are paying down debt. We gave the range on 2018. We gave the range by 2021. And that target is not going to be modified.

And probably for a number of listeners and with -- and then, I guess, the last thing, I mean, with respect to when you look across your peer group and you look at the industry, I mean, are you concerned at all about the number of potential rig upgrades that may come in, end up hampering any sort of price gains you're getting in the US right now?

What we're seeing out there in public disclosure by some of our peers are upgrade costs that are $6 million, $8 million, $9 million, $10 million, sometimes $14 million. And so that's one thing, the upgrade costs are getting quite high. I'd comment that we actually watched our competitors operate with very good discipline in that they see contracts. They want capital returns. The hurdles may be different company-to-company, but in fact, the industry is behaving in a very disciplined manner right now, and that's encouraging.

Our next question comes from Jon Morrison of CIBC Capital Markets. Your line is open.

From a high level perspective, can you talk about whether dayrates in Canada are largely holding across rig classes and geographies or are we starting to see a diversion in trends at this point that could unfold in the back half of the year just given some of the different supply and demand dynamics for rigs that you're seeing right now in different regions?

Jon, there are -- my comments earlier about shallower rigs were targeted comments because there is some really tough conversations going on right now, really tough conversations. But I commend our guys for doing a very good job. We are -- our rigs are running in the field excellently and we -- our sales team is holding rates.

Just wondering if I missed this in the preamble, but on the upgrade CapEx increases that you announced, can you just clarify whether ultimately that is all being applied to rigs that are in the field working today or some of it is going to some of the incremental rigs you talked about in the US likely going to work in coming months?

Yes, some of that capital will be going to rigs that are working today. But as Kevin said earlier, that capital will get us up to 75 rigs running in the U.S.

When you talk about the capital investments needed to meet your thresholds but also talking about how you can lean on inventory. Obviously from a strategic advantage, that limits the amount of cash outflow that you have to put out. But when you're talking about running your economic thresholds on making sure that you meet your return thresholds, am I right assuming that you're treating all of those inventory items as essentially having to pay new cost for it and not reducing that from the total bill cost to meet your thresholds when you're thinking about building a new rig? Like are you agnostic to whether you spent the money already versus having to spend the money on the horizon?

No, we would always look at opportunity costs, Jon.

Is the dayrate to build a new rig in the US right now of a very high two handle or low three handle still at this point?

So, yes, I can only speak for Precision. I think there's two different things to think about, Jon. I think that -- I talked about building a couple of rigs out of inventory. I think others can build rigs out of inventory like we can. We're not unique in having spare parts. But I think you get into a cadence of new builds where you've got a -- people talking about building one rig every two months or one rig a month into a cadence. I expect dayrates likely need to move up around $30,000 a day or maybe even higher for a leading-edge spec high speed rig today.

And a term longer than what we're seeing?

Yes, much longer term. So I think we're a long ways away from kind of the pricing and term duration required to get into a cadence of new builds. I noticed that one other driller in the U.S. announced a -- converting some inventory to a rig [indiscernible] and I think you could see a few of those this year with dayrates up 30, but to get into a cadence of newbuilds rigs need to move up a little bit.

And just to clarify on the potential SCR-to-AC conversions, that would all be based on demand from customers and none of it would be a speculative read of the market, correct?

No investments in rigs will be spec. They will all be based on contracts.

If the market continues to improve and your ratios start to look a lot better two years out, is there any way that your absolute debt repayment goals get diminished by virtue of your leverage ratios improving? And then you could look at adding more rigs if the economics makes sense? Or are you definitive in that those are the debt repayment goals that you intend to meet?

Jon, it's really hard for us to answer a long-term question that has 'if' in it three times.

I apologize for being annoying.

No, no, no. If this happens, if this happens, and if this happens, what would you do? It's a hard one to answer, but what I'd tell you is, we have no intention to change our targets.

Last one just from me on the international side. When you talked about meeting better fixed-cost absorption in Saudi, are you agnostic to the region in which more rigs go to work in that, whether it was Kurdistan getting reactivated or putting more rigs into Kuwait? Are you -- do you need better fixed cost absorption in Saudi specifically? Or is it just more activity in the Middle East?

Well, more activity in the Middle East would be helpful, but we're really focused on trying to get more activity in Saudi. The answer is, we wouldn't turn down an opportunity to fire up three rigs in Kurdistan, but that would not help Saudi.

I'm going to be annoying and ask one more. Sorry. On the Kuwait opportunity, is it fair to assume that the economic payback for the current bids that are out there in the market is probably somewhat in line with what you're currently generating, at least at the rig level?

Not really following you there, Jon.

I think he's saying are there returns on the potential newbuilds in line with the previous rigs?

Exactly, and naturally you get better fixed cost absorption, but at the rig level, are they likely in line?

They're at least as good.

Our next question comes from Jeff Fetterly of Peters and Co.

Couple of clarification questions. On the capital program side, so previously you talked about the program contemplating between 10 to 20 upgrades in 2018. Is that still the range with the pro forma change?

You should think about this. Like, it may go up two, three or four rigs depending on the scope of some of these final upgrades end up being. So it could go from 10 to 20, to like 12 to 23 or 24. I think the real key here is, it's a range and we can turn up on 20 or 21.

Can you give us a sense of how many rig upgrades you've committed to or completed so far in '18?

It would be pretty close to the low end of that range.

Okay. And the increase both to maintenance capital and upgrade capital, does that essentially contemplate your US rig count getting to 75 or does that contemplate the rig count moving above 75?

Since we don't forecast forward, hard revenue or activity levels -- I've given numbers for upcoming quarter, like I've given the 75 and sort of mid-70s by the end of this quarter. I think the simplest answer is that it's a proxy for our view and activity for the balance of year.

I think we said a couple times that, that capital is enough to fund upgrades to get us to 75 rigs.

But he is talking about the maintenance capital piece. I think that was the question.

It's on both sides. So previously, Kevin, you talked about how the upgrade capital was sufficient to get to you 75 rigs. At the beginning of the call, you mentioned that you had line of sight for somewhere between 75 and high 70s. So if you really get to high 70s, does that mean that your upgrade capital and your maintenance capital will increase from the budget that you talked about today?

I think our upgrade capital is fine. And I think our maintenance capital is fine.

So even though it's less than $3 million per rig to get the 75 and then $3 million to $6 million per rig above 75, yet that's essentially contemplated or blended within the sustaining capital?

You can add some rigs when talking about capital. There's no direct correlation between the number of upgrades, the number of rigs to get to 75. We're trying to give you some ways to judge what it's going to take to move to the next step up, which is why we gave the -- the next 15 rigs will be $3 million to $6 million per upgrade.

One more clarification there, Jeff. Our upgrade plan that we announced today does not contemplate an upgrade above $3 million on a rig.

And just to clarify, you said earlier that the $3 million to $6 million per rig range that would include some DC to AC conversions, that would have about 10 to 15 rigs in the fleet that would be potentially available for that?

That's correct.

It's just a follow-up on the newbuild question. So I know you said 30-ish or higher and obviously longer term. Even though -- does that apply even though your cash outlay would be, as you said, less than $10 million for those two inventory newbuilds?

So first of all, my guidance on dayrate was to get back into a cadence of newbuilds. So my cadence would be, we're going to build one rig a quarter, one rig a month, some kind of ongoing manufacturing process rather than just taking spare parts inventory like some others have done and taking essentially idle inventory and turning it into a rig. So I think that our expectations will be different for converting inventory to a rig versus some newbuild rigs.

So what you need to see either rate or term from where the market sits today to convert inventory into two new rigs?

So we're not going to give guidance at that level because we're going to be giving away our marketing strategy to our peers.

But safe to say...

Expect that our hurdles and our hurdles on returns and our opportunity cost calculations don't change the way we do things the past.

Last item, on the Canadian side, the potential transfers you alluded to earlier, I know there's nothing committed to it at this point. But when you look at the fleet profile in Canada and the customer commitments that are tied to the either the 1200 to 1500 -- sorry, the 1200 horsepower triples, how many rigs realistically could be available to move to the U.S. later this year if the U.S. customers step up?

So it could be a number close to the 20s. It could be that much, but that's not -- highly unlikely. I don't think that happens at all. I think the chance of that would be zero. I think the most desirable rig to move to the U.S., would be an ST-1500, we have five of those in Canada, but I can tell you, all five right now are utilized. So again, what I don't want to do is have you come along in seven months' time and say, you didn't tell us you were going to move rigs into the U.S. We would consider moving one if it becomes available in Canada and if a customer in the U.S. pays to move and the rates and terms in U.S. are quite supportive.

But conceptually, when you balance customer commitments and your inventory in Canada, the five ST-1500s, as you said, are committed, but there would be upwards of 20 on ST-1200 side that could conceptually be available.

But I think the more desirable rig in U.S. right now would be the ST-1500. And we're doing quite well, there are ST-1200s in the U.S. But I don't think there would be market for 20 of those, dropped into the market at once. So that's why -- I think that the ST-1200 is performing quite well in the Montney. Jeff, I really don't think we should be moving any mass amount of rigs down into the U.S. Could be one, could be two, if we find the customer who pays for the load cost, but I think the comment is the option -- we had an option on that, but it really isn't a core strategy.

And I'm showing no further questions in queue, I'd now like to turn the call back to Kevin Neveu, President and CEO, for closing remarks.

All right. Thank you for joining us on our first quarter conference call. And we will be hosting our Annual General Meeting in Calgary in coming weeks. And then, I'll look forward to have you join us at our Q2 conference call in mid-July. Thank you very much.

Ladies and gentlemen, thank you participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.