Precision Drilling Corporation (PDS) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Precision Drilling Corporation 2018 Second 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] As a reminder, this call may be recorded. I would now like to turn the conference over to Ashley Connolly, Manager of Investor Relations. Please go ahead.

Thank you, George, and good afternoon, everyone. Welcome to Precision Drilling's second 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 second 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 second quarter operating results and provide a financial overview. Kevin will then provide an operational update and outlook. With that, I’ll turn it over to you, Carey.

Thank you, Ashley. In addition to reviewing the second quarter results, I will provide an update on our 2018 capital plan and management of our capital structure. Our 2018 financial performance continues to deliver the second quarter adjusted EBITDA of $62 million, 10% higher than the second quarter of 2017. The increase in adjusted EBITDA from last year's primarily the result of higher activity in pay rates in our U.S. and Canadian business and strong margins, supported by efficient cost management. The better-than-expected operating results were negatively impacted by larger-than-expected share-based compensation accruals during the quarter. The share-based compensation accruals were removed from each quarter, the EBITDA increase year-over-year would have been approximately 34% versus the 10% growth reported. In Canada, drilling activity for Precision increased 7% from Q2 2017, while margins were approximately $450 per day, lower than the prior year. The margins for the quarter were positively impacted by higher day rates, approximately $1,400 per day higher than the prior year, slightly offset by the operating costs and were approximately $300 per day higher. Removing the shortfall payments from the prior year quarter, where this quarter we had none, margins increased $1,100 per day year-over-year. In the US, drilling activity for Precision increased 24% from Q2 2017, while margins were up approximately US$2,200 per day, positively impacted by higher day rates increased turnkey revenue and stable operating costs, offset by lower idle contracted and rig mobilization revenue in the prior period. Internationally, drilling activity for Precision equaled activity in Q2 2017. Average day rates were approximately US$50,000 in line with the prior year. In our C&P division, adjusted EBITDA this quarter was negative $1.4 million, down $1.7 million compare to the prior year. This quarter was negatively impacted by slightly lower surface rig activity and reorganization cost of $1 million incurred during the quarter. Capital expenditures for the quarter were $37 million. For 2018, our capital plan is $135 million, up $19 million from previous guidance. The 2018 plan is comprised of $57 million for sustaining and infrastructure, $63 million for upgraded and expansion and $15 million for intangibles related to our recently completed ERP project. Our capital plan is expected to align with industry activity and reflects our expectation to upgrade rigs, increases to our AC Super Triple active rig count in the U.S. and deploy process automation control technology in additional Super Triple rigs. We have continued to build our contract book in 2018, signing 31 contracts year-to-date. And as of July 25, we have an average of 63 contracts in hand for the third quarter and an average of 58 contracts for the full-year 2018. As of June 30, 2018, our long-term debt position net of cash is approximately $1.6 billion. We had $95 million in cash on our balance sheet of $13 million from Q1, and our total liquidity position was $767 million. We continue to view cash flow generation and debt reduction as top priorities this year, and during the quarter, we used cash flow to reduce outstanding debt by $75 million, and plan to be in a position later this year to build on our debt reduction achieved year-to-date. For 2018, we would expect depreciation to be approximately $350 million. We would expect the cash taxes to remain low and our effective tax rate to be in the 20% to 25% range. We continue to aggressively manage all fixed costs, including SG&A, which may swing from quarter-to-quarter due to changes in our share-based compensation accruals and foreign exchange rates. I will now turn the call over to Kevin for further discussion of the business and outlook.

Thank you, Carey, and good afternoon. Precision is experiencing strong and continued customer demand with Super Series rigs in every region and every markets which we anticipate. There is a takeaway from today's call is that the drilling efficiencies and the cost saving our customers enjoy with high-efficiency pad walking rigs combined with market tightness in all type of rig will continue to drive strong demand for Precision services through the second half of 2018 and for the foreseeable future. I'm going to walk through each of our regions and discuss the market segments we are seeing in each of these areas. So beginning with Canada. Our second quarter activity, which is typically our weakest quarter was better-than-expected and above last year's levels. And it’s good to note that the day rates we reported, significantly exceeded our prior guidance and those rates – average rate is up over $49 per day, and as Carey mentioned, we are largely holding our cost in line, most of this is point will considered. But for Canada, I think the key leading indicator was the strong seasonal rebound Precision is experiencing post breakup. The 60 rigs we're supporting we're well ahead of last year's pace. In fact, we are ahead of last year’s peak activity level for the third quarter. Our Super Triples are fully committed for the second half of 2018, with unanticipated further rig transfers in the U.S. It is becoming clear that Precision's Canadian customers, and especially those with oil and liquids exposure, have realized stronger than expected cash flows and their drilling costs of more than expected primarily due to drilling efficiency we deliver. We believe that our increased utilization is clear evidence that some of that customer cash flow and efficiency gains are being redirected to expended drilling programs and increasing our expectations for the second half of 2018 and into 2019. Precision’s utilization in the third quarter is on track to exceed 2017 levels by 10% to 15% based on current customer indications, where we continue to expect sequential fleet average improvements in the $500 to $1,000 per quarter range. Now moving to the U.S. The strong demand we noted in our Q1 conference call continues through today. During the second quarter, we activated 8 more rigs, bringing our active rig counts to 78, where we have forward visibility on 46 activations later this quarter. And as Carey mentioned, we added 10 contracts to our backlog in the U.S. and reported sequential day rates and margin increases of $1,200 per day. All of these are leading indicators for continued customer demand. On the cost side, our U.S. operations team has delivered excellent cost management by leveraging our scale, utilizing our vertical integration to outline our operating cost. Looking forward, we do expect the cost inflation to negatively impact our financial results from our cash flows, and we also reiterate our forward guidance for average fleet margin improvements, with a $500 to $1,000 per day range on a quarterly basis. Leading-edge day rates for our Super Triples are into the mid-20s, but in some instances, we are negotiating or considering – let me, start again. Leading-edge rates for our Super Triples are into the mid-20s, but in some instances, higher rates are being negotiated. Globally, we're also seeing opportunities to emerge where customers with long-term plans are considering contract terms longer than two years, something we not experienced since 2014. During the second quarter, 20 rigs repriced with these higher rates, with price increases ranging between several thousand dollars per day with highest day rates repricing at the top of the range. Now, while some oil segments been reporting operating constraints in the Permian region, the demand for pad walking high-efficiency triples remains very strong, and several of our scheduled rig deployments of the coming weeks are slow to the Permian. Much of the growth we are experiencing is coming via market share, as customers switch from low efficient drillers to high-efficiency Super Triples. We currently estimate that a few – fewer than half of the industry's operating fleet is comprised of top efficiency rigs. So we expect the strong demand and pricing tension and switching with the market structure for several quarters going forward. Now turning to our colleague in the Saudi Arabia business, earlier this quarter, we announced the fixed contracts for new-build rig in fleet to be delivered in mid 2019. This week will be assembled in Dubai, using the same construction team as the previous five rigs, while the new rig will essentially be identical with equipment, stairs, maintenance and crew training requirements. Deployment of this rig will yield strong operational leverage for Precision and require no additional G&A. Our Kuwait business is performing exceedingly well and continues to be one of our top growth opportunities. The ongoing tenders in Saudi Arabia, we remain closer to positive awards for additional rig activations and contract renewals. As we're involved in the negotiation and technical clarifications, I'll prefer not to make any further comments on this opportunity. Suffice it to say that we remain encouraged by the dialogue and it appears international customers have this improvement. Now turning to our technology initiative, yesterday, we announced the appointment of Shuja Goraya to lead our technology group. I believe this is a meaningful addition to our already strong technology team, and I expect Shuja has leadership and experience will expand Precision's technology and opportunity set. In this morning's press release, we also reported 12 drilling performance steps now in development. I'm surprised how quickly our out portfolio was growing. Customer uptake is strong and today, we have several of those ups already in beta tests on rigs in the field, yielding very good early results. Our long-term value substance for these apps may have been understated, and I expect a much more in the coming periods. One other positive surprise is that we've successfully drilled over two million feet with our directional guidance software, and we drilled over 384 wells utilizing process automation controls. But the real surprise is that not a single customer has stepped back or walked away from this technology. In my 36 years of experience, I don't recall a complex of that matter as simple new technology deployment initiative with a zero customer rejection rate. I know our team is working very closely with our customers, relationships are excellent. However, I'm amazed with the remarkable success rate and confident we remain on track to full commercialization. Now I believe Carey covered our financial performance, against our priorities around operational leverage and debt reduction priorities, but I'm going to add we are deeply focused on financial performance, free cash flow and debt reduction. The strong demand for our services is resulting in improving day rates and utilization, and combined with Precision's effective cost management, this will allow us to meet our targets for cash flow generation, debt reduction, EBITDAs we see, and exercise the continued growth opportunities as they emerge. On that comment, I'll turn the call back to the operator now for questions. Thank you.

Thank you. [Operator Instructions] And our first question comes from Aaron MacNeil from TD Securities. Your line is now open.

Good afternoon all.

Hey, Aaron.

On the U.S. newbuild, I know that you guys had mentioned on the prior call or the Q1 call that you can build two AC Triples for less than $10 million. So I assume that's still being contemplated, but perhaps, can you take some additional detail in terms of cost, timing of deployment, contract term, return thresholds or any other color you can provide?

Hi, Aaron. This is Carey. We analyze this opportunity despite reanalyzed all capital opportunities and one of your comfortable with both the term and return heralds, and we got comfortable making this investment, and we – since it's just one rig and the group working on the call is pretty good at connecting the dots, we're really not provide any more detail one of the contract – with the contract details. But it was within our contract renewal rates.

Okay. And maybe as just a follow-up, then given that a lot of your SCR rigs are working in the U.S. today. Does this newbuild rank ahead of other higher-cost upgrades that maybe SCR rigs or other?

Aaron, I think, it was a combination of customers' specific need, contract term and return rates and maintenance investment make a lot of sense for us.

And then, maybe switching gears to Canada but staying on capital allocation. In Canada, at what point do you think you need to start reinvesting if activity levels continue to improve?

Aaron, really well-positioned here in Canada right now, in fact, we have with our Super Triples, and our – even the [indiscernible] we have on the singles, we have right now. But it doesn't require a lot of capital. I would to tell you that I think that if the Deep Basin takes another step up, if we see things, kind of, accelerate the Deep Basin that could be [indiscernible] there would probably be a shortage of – industry-wide shortage of rigs that can meet the rising demand. And that probably means a demand that looks like 3 to 5 rigs more needed in that basin. At which point, looks for further upgrades, maybe upgrading one of our lesser capable DCSCR rigs or one of our other Super Triples into that need would probably makes sense. There's a lot of interest right now to possible LNG, project FID, something like that likewise that next step up in demand in the Deep Basin

Okay. That’s all for me. I will turn it over. Thanks.

Okay. Thanks Aaron.

And our next question comes from Taylor Zurcher from Tudor, Pickering, Holt. Your line is now open.

Hey, thanks, good afternoon. It's encouraging to hear that some of your customers in the U.S. are coming to you looking for at least interested in 2 plus year term. So two-part question, part one is, have you signed any of those types of contracts yet today? And then secondarily, for the, I think, 10 term contracts you've signed since last quarter. Could you just give us a sense of relative mix of contract duration in that bucket?

Taylor, appreciate the question. I would tell you that everything we're doing right now is competitive in some nature. So we don't really want to give too much detail on 1 or 2 data points, which is what our comments are referring to, and we usually don't give a lot of color on the depth or duration of the contract. But, I think, we gave a go forward on the contract book. On new total contract book Carey, is that right?

We've typically – when – over the past two quarters up in the market about contracts, we have been signing contracts kind of in the 6-month to 18-month term and we have more than one contract recently signed over two years.

Okay. Fair enough. Second quarter just the 4 to 6 incremental rig activations you are taking about are you seeing visibility forward – moving forward. And can you give us a sense of the – which basins in place those rigs might go to? I suspect, they are fairly broad-based. And then, secondarily, is it fair to assume, as we get into the 80s sort of rig count level in the U.S. that some of those rig activations will be coming from the SCR bucket and be converted to AC rigs?

Yes, the activation we're talking about so far don't include any AC to DC or DC to AC conversions there activations. I think, it's going to be about roughly, half of those Permian, the other half of those Permian, the other half's split among the other basins.

Okay. Got it.

[Indiscernible] the Marcellus, 2 to 3 to the Permian and cost for Eagle Ford.

Okay. Got it. Last one for me, if I can, on the debt reduction target, obviously you’ve done good work year-to-date with reaching the $75 million or low end of the range. I know, you stated for 2018 and pretty expeditious fashion. So as we think over the back half of the year and into 2018, Carey is there any sort of framework you could give us as it relates to how we should think about the cadence of incremental debt paydown from here?

So we feel really good about our opportunities to build cash in the back half of the year. And did you go back to our strategic priorities for the year, we say, paydown debt but don't miss the best of growth opportunities. So if there aren't excellent growth opportunities we will take on more debt.

Got it. Thanks. I’ll turn it back.

Thank you. And our next question comes from the line of Sean Meakim from JPMorgan. Your line is now open.

Thanks. HI, guys.

Hey, Sean.

So thinking about the Kuwait contract you signed, obviously that market’s now looking very good in terms of cost observation. It sounds like rig count for you in Saudi is going to be stable both the idle rigs in the region now tenders, especially, on the way, recognizing the strategic initiatives and focus around the balance sheet. What about optionality do you think you see in that part of the world in the near to intermediate term and are you open to more creative forms of financing with some of your key customers in that region? Can you maybe get some incremental new builds, where there is a better give-and-take between capital cost and day rates to build some more scale in the Middle East?

I think, Sean, really important questions for us and something we're working with the board on all the time. To look over through that a little bit, the first comment would be that we have one idle rig in Saudi Arabia, 3 idle rigs stored in Kurdistan. All four of the idle rigs are being quoted into possible tenders. So at the far side we're successful, we could go from three operating rigs to maybe to seven operating rigs that will come with some capital needs. We'd be happy to do things like upgrade the BOPs and do some recertifications on the rigs, and, kind of, guide you to numbers in and around 5 million to 15 million per rig depending on the scope and scale. But my thinking is that the timing to probably structures late this year into next year. And profit in those contract taking over to sign and finalize than everybody thinks that reverse. I'm getting more encouraged by the rate of interaction with our customers in the Middle East right now and they are kind of focused on moving things forward. So it does feel like that's going to move forward, it does feel like it will be something that would likely be late 2018, 2019 type opportunity, and could see us deploying rigs in early 2019 to mid-2019, in addition to the one in Kuwait. Now going back to your comments or questions around financing. Obviously, paying down debt remains our top priority, and we're not going to sacrifice our capital structure to stretch or reach for opportunities, but we'd like to further do that. Carey any further comments?

Yes, I think, for us to continue doing what we did this year with taking on one new build, stretching the construction of that new build over a year with most of the capital in 2019 and paying down debt. We’ve got to pursue both those avenues.

Thank you for that. That’s a lot of good feedback. So in the U.S., thinking about the six rigs that you guys have – that you planned and coming on line here next two weeks, are you – I’m not sure we’re still specific to those rigs, but just thinking about where you are at this point in the cycle. As you're adding rigs in the U.S, are you displacing less capable rigs? Are you taking share from peers? Are you adding to existing customers as they are adding to their fleet? Just want to think about some of the market dynamics, as you're putting more rigs back to work in the U.S.?

Sean, I think, if you look at the progression through the course of 2018, I think, in the first quarter, most of our additions were just additional rigs to the U.S. activity list. But I think during the second quarter, certain towards the end of the second quarter, most of the additions we made will customer switching for less efficient rigs to higher efficient rigs. I think that was most of what we saw during the second quarter. As we think about six rigs going forward, my estimate is that most of that will be switching to less for whatever reason U.S. rig count ticks up. But nothing right now tells me there is going to be short move in the U.S. rig cont at least in the near-term.

And Sean, I’ll just add to that. On the last conference call we mentioned that in our capital plan, we didn't contemplate an upgrade of more than $3 million. And that's still the case, and even with this four to six rig that we have visibility on over the coming weeks. None of those upgrades more than $3 million.

Yes. I think that’s a very good point. Good point Carey. I think, also Sean, if the demand continues to accelerate beyond Precision running 80 to 45 rigs, we may have to look at more upgrades down the road.

Maybe you have some competitors that are doing as much as – paying as much as $50 million and getting good rates and terms, sounds like your paybacks on those would be pretty darn fast.

Yes, would be. I don’t think $50 million, but we have signals for the next round of upgrades, so that kind of the final 10 to 15 rigs that we have to upgrade would be probably in the $3 million to $6 million range, and some of those will be closer to $6 million. So we’ve got some DC to AC conversions space down the road. And I wouldn't be surprised if we see contracts later this year that make those conversions make sense for us.

Got it. Great. Thank you very much.

Thank you.

And our next question comes from the line of John Daniel from Simmons & Company. Your line is now open.

Two quick ones for me, I'll start with Carey. Just, any chance you could provide some color on expectations or the well service business heading into the second half?

Yes, so one of the – I'll start and let Kevin finish this. We do expect activity to look a little bit better year-over-year in the second half. We did improve pricing a bit. As we mentioned in the press release, we had some one-time costs this quarter that, kind of drag on margins a bit. So we think all that will go away and profitability should be better in the second half of the year.

Yes, John. I’ll give you a little more color on that business kind of the jump right now. It's really frustrating. I can tell you, we've had some cost drivers in that business that we try to pass through to our customers and speak to a couple of them. But there's a carbon tax in the province of Alberta that impacts the cost of fuel. And on surface rigs, fuel was part of the service company's cost. That raises our cost. There's a second cost which is caused by another government, labor law change that's cost. We took these costs to our customers and try to get pass-throughs and the resistance for our customers is backlog. We pressed hard. We pushed our day rates are, and we lost some market share because it. Our customers are, in a lot of cases, unwilling to absorb any price increase in this space, even for some of these cost pass throughs. It's really frustrating and some of the industry as a whole. We're not the only company experiencing this, I mean, every service company has the same cost drivers, well service company have the same private tax and [motor cost] problems. And certain customers out there are just really difficult. It's tough in the industry, it's challenging, long-term survivability. Certainly, the industry as a whole is barely cash flow positive, and we'll continue doing hard work, both for the cost side and drive costs down, which Carey mentioned, the severance costs in the second quarter, restructuring costs. We think we'll be in a healthy position near the back half of the year. We expect to have enough revenue and enough operating leverage to do what okay. But the industry as a whole, probably it's a little more disciplined, but there certainly is a lot more cooperation from the customers to ensure we have sustained, repaired, maintained assets, which also improves to help us keep the industry of live.

Okay. I appreciate that color. And then just, last one for me. I mean, you guys are pretty good about defining your annual strategies and then delivering on them. So I'm curious if you've given any thought to what your 2019 objectives might be and if so if you can give us a preview, things you're looking to do next year?

Well, a little bit. So we don't formalize that to our budget in December. But it's unlikely that debt reduction comes up on 2019. Free cash flow debt reduction will still be a 2019 focus for us. I'm quite confident technology will be a focus for us in 2019. And I think the third-party will have to see how the budget evolves and how the year evolves?

Do you think DC can solve M&A consolidation being one of this are now?

I think that's a good question. I think that this space would be served well by consolidation. There's been a couple of deals announced over the past few months, and we're on the U.S. just last couple of weeks. I think, it really makes sense, if you small the consolidated, and I think there's some scale advantages if you're doing that. For us and for our larger peers, standardization across the fleet is just so important for our value proposition. But bringing into similar assets is hard to manage, to be more sensitive advantage. So I would tell you John, I think our eyes are open but it's really not high enough on our priority list.

Okay?

But that's a good question. Operator

Thank you.

And our next question comes from the line of Ian Gillies with GMP FirstEnergy. Your line is no open.

When you’re delivering tenders, your customer would – with respect to technology, I mean, is it getting its own line item now when you guys are identifying the price to that and customers are looking to pay for it or is it still getting blended in with. I guess everything else you would offer?

Ian, a really good question, I think one that we talked about a bit in the past, but I'll, kind of restate for that. So each technology item but we're offering is listed as a line item every single time, it's not for the rig rate. There are cases right now, where we have trial periods, and we have trial periods and we have performance metrics but for the technology item, whether it's one, two, three app. So whether it's process automation controls or our able directional drilling advisory software. Those are separate line items on the invoice. They are identified at a fixed price – target fixed price for some performance-based price. I'd maintaining discipline is a core element of our long-term strategy to preserve the value that we're creating for our customers. Preserve our value, our piece of the value range for insurance.

And, I mean, as we think back perhaps, over the last year or two, as you've developed a technology strategy, I mean, is there any pieces of it right now that you feel like you may need to pivot on or change at all, given what you know now that you may not have known then?

Well, that’s a really good question. It's a little tougher to answer. So I'm encouraged by how quickly apps are taking up, and I think, I really under appreciated the value of apps. And I say that very quickly but there's a dozen apps we mentioned in the press release, and these range from customer-written apps, they are vendor-written apps, part of the other service company written apps and Precision written apps. Very simple to do but easier today to take standard practices and put them into small uploadable algorithm that helps the rig performance. I think that's got a lot of expendability. I think will be adding more apps over time we see every customer having apps and the range that we have to generate revenue on just the residency of the app is a really good arrangement. So, I think, that's an area where we'll put more focus. So the area that we've identified early on maybe didn't recognized how powerful that could be, so that's one piece. We've talked a lot about wire drill pipe and that's an area we're still working but the customer uptakes are slower than we expected. But I think two areas to give the most attention going forward are going to be data and optimization. And one of those big challenges, as you get to the drawing area and it gets working will be to help us develop our strategy around data management, data use and optimization of the roll drilling parameters. So I think there is a lot of for us to do on the data side, and I think, there's good opportunities for what we're doing for our customers and create a stronger competitive advantage.

Okay. That’s good information. I appreciate that. The other thing I mean, if you went back to last year in Canada, there was some rig mix commentary about some of the deeper Triples probably, or the ST-1500s and 1200s not going back to work in Canada until Q4. Is that a similar trend that's going to play out this year or is the customer behavior a different?

I think, that has had a little bit of impact on Triple the customer sentiment. All of the rigs we have in our Super Triple, including our 1500s in Canada, are booked now through the rest the fall and into once you have next 2019. And I am thinking that anything that drives demand on the Deep Basin side keeps that those rigs, kind of [indiscernible].

Last one for me the cost on the U.S. side have been remarkably resilient and having really budgeted all. You think you can absent rig moves or anything maybe along those lines. I mean you did – that some reasonable number to expect moving forward?

Yes, I think the last quarters if you strip out turnkey, it would be $13,000 a day and if you encouraged that has if there aren't rig moves, and we don’t have 15 rigs added in the quarter. But anything we keep those costs in that, kind of, $15,000 to $13,500.

Okay. Anything I think one last one. Is the restructuring done in the well services division.

Yes, we’ve had a couple some management changes and then also as you know we had a ERP implementation last year to separate that business. And so, there's been a little bit ongoing there. But most of that should be behind us.

Okay. Thanks very much everyone. I will turn go back.

Thank you, Ian.

[Operator Instructions] And our next question comes from the line of Jon Morrison from CIBC Capital Markets. Your line is now open.

Good afternoon all. Are the technology initiatives that you guys have underway, have any of the rigs that you have Process Automation Control or the directional guidance system currently installed on the rig not been running it based on customer preference or has technology uptake been fairly universal where it's available?

Jon, this is Kevin. Just to, kind of, what we said earlier. We've had no customers step back where just turned off. We've had none of that occurrence. We've had some downtime with the software with certain uptick as we have to fix [indiscernible] go through the commercialization phase. But we haven't had an instance where a customer says, I've had enough, turn it off or take it off and replace.

So every trial has been effectively see that still ongoing or it's been a successful trial?

Every trial running right now are successful and moving forward.

Carey just on the 2018 CapEx program, outside of forex fluctuations, is there anything that could really swing around the 2018 spend or what any incremental decisions at this point largely be 2019 base?

So maintenance capital is going to be activity driven, but it would only be half of the year. So either rapid increase or decrease in activity could make that move, call it, $5 million or $10 million one way or the other. And then as Kevin mentioned, if we get, kind of, outside of this mid-80’s rig count, but we started doing some of these $3 million to $6 million upgrade. Those are not included in the capital plans that we have increased demand, increased activity, which you can get to a point where we're adding a bit more operating capital.

Do you have a base 2019 program you would be willing to share based on assumption for maintenance CapEx and other upgrades you think are likely?

We don’t. About 85% of the new build cost is going to be in 2019, so that’s kind of the base line that we’ve announced.

Okay. On the contract terms, where you are discussing multiyear durations, can you share one whether those are on existing rigs that are just being recontracted or new rigs? And secondarily, do any of those multiyear contracts effectively contemplate you needing to put more capital to work versus in some cases, where the producers just wanted to lock up visibility?

Yes. I think the underpinning – the reason that our pits long-term contract is customer driven, not Precision return driven in that, there's some customer plan that's going to be a long-term drilling plan. They need the rig, they want the rig, they have to pay for it. I would say that we are not driving the three-year for the longer term as the clients already in the longer term.

And Jon, I think I’ll try to answer the other part of that question, which was – there is no ongoing capital commitment. So we signed the contract and the capital spend is before the rig starts drilling.

Yes. So there is really just more, I was just trying to make sure that I understood whether each of those is contingent upon you spending more money or some of them were just as simple as customers going, we want to have some form of base visibility for the next 24 months, so to speak.

The answer is much nearer to the base visibility for longer period of time, probably longer than two years.

Okay. I recommend you guys are talking about putting more rigs to work in the coming months, but obviously there is higher burn around, a potential slowdown in the Permian, given some of the pipeline issues that are out there. Are you guys having any discussions with customers about either laying rigs down or horsetrading them for a different geography at this point?

If you look at our Permian Basin right now, you’ll see that we have two or three of our Super Singles drilling in the Permian. When you are drilling in kind of the – where the Super Singles goes on to the path first and drills the vertical section then it leaves and our Super Triple comes in and drills the rest of the well, it looks like seven pad. I would tell you that, as we think about our risks going forward, we would say that if we get too far ahead of the curve, those three Super Singles could see a bit of a slowdown. Recognize those are lowest margin rigs that we probably have in the U.S. There are 1,000 Super Singles rigs.

Okay. Last one just for me on the idle rigs that you have in the Middle East right now that you are bidding on certain tenders, do any of those require incremental upgrades for the tenders that you are involved in, and sorry if I missed that earlier on the call.

Yes. Jon, for sure those rigs will need some incremental upgrades in the $5 million to $15 million per rig range. I think about it in terms of either BOP upgrades or BOP replacements and some recertifications on that and things like that over time. We would be looking to recover that capital growth in the early part of the term and still they returned a little bit itself. So I think the good financial decisions on long-term contracts and build at our basin in South Arabia and make that country get either above or close to critical mass for us. So, I think, there's good intrinsic value and good finance value on long-term stability and pricing, if we have to spend that capital.

Okay. Appreciate the color. I’ll turn it back.

Thanks.

And our next question comes from the line of Jeff Fetterly from Peters & Co. Your line is now open.

Hey everyone. A few random questions for you, the technology side, when you aggregate together PAC and directional guidance, et cetera. Do you have a sense of what impact that's had on your consolidated rate in the U.S. or in North America?

So we know exactly what impact it has, we're not going to disclose that highly competitive and we're going to a lot of visibility to our competition and to customers generally, on how this is playing up right now.

When you look at the 9.5% year-over-year increase in Q2 day rate in the U.S., excluding turnkey and any lump sums, is it safe to say safe to say that it's still spot market pricing and rig mix that's the biggest driver for that increase versus anything from the technology side?

Yes, if you put it that way, you're right. It's probably weighted towards both turn contract renewals, spot market rates, more so than technology at this point. But we do see technology layering itself in, and we see the [indiscernible] to go.

Okay. On the capital side, just trying to understand how the pieces within the capital program have moved. So you've added about $50 million to the sustaining and infrastructure side, have you changed the number of rigs you're contemplating in the upgrade program for this program for this year?

No, it’s still on the 12 to 24 range.

On the last call, you talked about how the upgrade program is currently contemplated with largely exhaust the lower cost upgrades. Is that still the case or are you starting to dabble into, right at the edge in that $3 million level?

Yes, Not yet. And I, think, we – a couple of questions ago, that had the same question. And In our capital plan, the $135 million doesn't contemplate any rigs upgrades for more than $3 million and the visibility that Kevin highlighted, where we have four to six rigs that we expect to activate in the coming weeks, none of those rigs require more than $3 million about freight capital, and they would be included in our $135 million annual capital budget.

Okay. Then in the cost of – I know you said earlier 10% of the cost of Kuwait – 85% of the cost of Kuwait rig build will be incurred in 2019. But when you look at the cost of that this year plus the newbuild that you disclosed for the U.S, your upgrade in expansion program is only up by $3 million. Is it just sort of a shifting of things going on there or is there stuff that's been previously capitalized that's essentially, flowing into the new rig?

Jeff, I understand part of your question, and maybe it would be better if we took it off-line. We haven't had any major changes in our capital plan other than adding the Kuwait new build and then, a little bit more upgrading cost and then foreign exchange.

Okay. I’ll move on. International, you mentioned the one idle rig in Saudi and the three in Kurdistan. Is that the scope of what you are tendering into the opportunities in Saudi? I guess the maximum opportunity four rigs for you or would you contemplate some transfers or new builds there too?

Jeff, good question at this point, just those four rigs not considering any other transfers in newbuild at this point in Saudi, we also have the other – we have two renewals we've talked about, they're also coming up in the third quarter in Saudi. And we think those two renewals plus the four newbuilds for – hang up for newbuilds before redeployments, thank you, part of the package we’re looking with.

Okay. And then last thing…

I’ll be very clear that we have no newbuilds anticipated for Saudi Arabia, nothing on the horizon, nothing with the newbuild.

Okay. Last piece on the Canadian side, you mentioned that the Triples are fully committed through Spring of 2019. Does that include the 1,500s and the 1,200s?

Correct.

And from a pricing standpoint, you mentioned that aggregate Canadian rates are expected to be up $500 to $1000 per quarter going forward. What magnitude of increases would you contemplate within the Triples segment?

So I don't think I would like to give that level of transparency right now. Certainly, when we're starting negotiations with clients very soon, and I would take those comments to be more of the margin line than they [indiscernible].

The $500 to $2000 per quarter for Canada.

That’s right.

Okay. Got it. And Carey just a housekeeping SG&A, if you back out stock-based comps, it was up in Q2. What do you expect your run rate to look absent stock-based comp going forward?

We take out stock-based comp, it would be time than that $95 million to $100 million range. Since we have a - such a large part of our business that's either international or in the U.S. when the Canadian dollar weakens to make sure SG&A go up. And then, obviously, as we've talked a lot about this quarter, when our share price moves significantly in the quarter, I think the share-based portion of SG&A move up or down.

Okay. Great. Thank you very much. Appreciate the color.

And our next question comes from Brad Handler from Jefferies. Your line is now open.

Thanks. Good afternoon, guys.

Hi, Brad.

A couple of unrelated things. First, I am not sure I am clear, I probably just sort of missed it along the way. The margin expectations in Canada, what’s the visibility for how many quarters we are talking about?

So Brad we said our go forward basis we should be of margins of increasing $500 to $1000 at quarter and think about our forward guidance here speaking balance of 2018 and maybe into Q1 2019.

Okay. Gotcha. Thanks. And then I guess…

Obviously, I'll comment, a lot of our business in Canada is not contract day rates, seasonal day rates and any major macro shirt can have very quick impact to Canadian rates and activities. So we've got out there as a warning.

Sure, I recall hearing the comment, I think, I lost track for how long it in the sense you were thinking it applied. So that's fine to frame it, thank you. I guess, I'm hoping you can speak without giving up anything meaningfully from a strategic or bidding standpoint, a little bit more to the Saudi tender or to the international tenders in general. May be the first is the competitive landscape does seem like it’s expanding or at least shifting obviously we have rig of the future which is being bed by one of the – a new entrant into the rig space, I guess, I have seen reference to a Chinese contractor, winning a 3000 horsepower rig and I don’t know if that's as new as it struck me, but it felt like they were starting to emergence in larger deep drilling rigs as opposed to the little stuff that they had been winning, all the Chinese companies had been winning for a while. So I guess I was wondering if you could speak to that competitive landscape. Am I in the right ballpark? Maybe some – on the other hand, maybe some old competitors are falling away because of their own capital constraints. And so maybe it's not that there are more competitors, maybe it's just that they are different. But any of that, sort of color would be very interesting to hear?

Brad, even the way you bring the question kind of tells you where the markets are operating now. So market has been stagnant now for a couple of years. There's no question that, kind of, there is a new emerging or new drilling contractors are, kind of, facing the rigs on full cost designs. There's been transaction recently announced that involves a large chunk of other rigs. A lot of moving pieces right now that in the market. And they are really near-term. The tenders we have right now, there are four idle rigs for tendering and two renewals we are tendering in Saudi, those are 2000-horsepower rigs, really available for either immediate deployment or very quick deployment. So we are not really competing against new build rigs or 3000-horsepower rigs. It's almost a little bit of niche for us right now. The way it’s been in Saudi Arabia over the past few years, and Saudi Arabia is a tough place for the deeper, heavier rigs to be successful if you're a new entrant. You know, we've been successful there. Some others have come in and failed and left. The people that are there established have been successful or unsuccessful. But there is the new place, it's a tough place to enter. So on the near-term, with these tenders we have right now, we don’t really think it’s a lot of the new entrant competition. We think maybe existing rig competition, but we think we are well positioned.

That’s encouraging for sure. And is it worth me asking the same question outside of Saudi, are there tenders active enough in a couple of other countries to try to assess maybe, if you will, especially that Chinese threat that I was, sort of referring to?

Yes. We saw some of that when we were tendering in Kuwait on this last round. And, I think, our view I didn't commented previously that the Kuwaities were unsuccessful awarding as many rigs as they intended. So we ended up with one rig. We probably could have had two or three if we had decided to be more aggressive, both with our capital spending and our bidding style, the Saudis, it wouldn't have taken much. But we decided that the right decision for Precision was having just one rig to build in Kuwait, to fund one rig right now. But the two rigs we didn't take didn't go to somebody else. Those rigs remained unrewarded. And so, I think, we saw some of those at the edges but it didn't really affect our competitive position.

Interesting. Okay, thank you for that. I appreciate it. I’ll turn it back.

And I'm showing no further questions at this time. I would like to turn the call over to Kevin Neveu for closing remarks.

I’d like to thank you. I’d like to thank all of you for joining our call today. Also thank the employees of Precision Drilling for their hard work and their dedication over the last few months and a very strong financial performance excellent operational results delivered this quarter. On that note, please join us on our third quarter conference call in October. Thank you.

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