Precision Drilling Corporation (PDS) Q2 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to Precision Drilling Corporation's 2019 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, today's conference is being recorded.I would now like to introduce your host for today's conference call. Mr. Dustin Honing. You may begin.

Thank you, Kevin. Good afternoon, everyone. Welcome Precision Drilling's second quarter 2019 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 2019 results. Please note, 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 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 these forward-looking statements and these risk factors.Carey will begin today's call with a brief discussion of our second quarter operating results. Kevin will then provide an operational update and outlook. With that, I'll turn it over to you, Carey.

Thank you, Dustin. In addition to reviewing the second quarter results, I will provide an update on our 2019 capital plan and management of our capital structure. Precision's strong 2019 financial performance continues, with second quarter adjusted EBITDA of $81 million, 30% higher than the second quarter of 2018.The increase in adjusted EBITDA from last year is primarily the result of higher activity levels and day rates of peak performance offset by lower activity in our Canadian drilling business. Additionally, the quarter benefited from the impact of IFRS 16 and lower share-based incentive compensation. In the quarter, we recognized a $4 million share-based compensation expense compared to $10 million in Q2 2018.In the US, drilling activity for precision increased 6% from Q2 2018, while margins were up approximately $850 US per day, positively impacted by higher day rates and partially offset by higher operating costs. Sequentially, day rates and margins net of turnkey and idle but contracted payments increased approximately $220 US and decreased approximately $240 US respectively. We expect to sustain similar margins into the third quarter. In Canada, drilling activity for precision decreased 15% from Q2 2018 while margins were down approximately $1,160 per day from the prior year. Net of shortfall payments, margins were lower by approximately $1,600 per day.Although we experienced higher activity in the quarter than expected, margins were negatively impacted by rig mix as a higher percentage of shallower rigs worked during the quarter. As we expect Q3 activity to be down this year versus last, weaker overhead absorption is likely to cause margin pressure with daily operating margin down between $250 and $750 per day compared to Q3 2018.Internationally, drilling activity for precision equaled activity in Q2 2018 and average day rates were up $1,710 US per day as a result of recontracting rigs at higher rates. In our C&P division, adjusted EBITDA this quarter was $2.8 million, an increase of approximately $4 million to the prior year, a direct result of business improvement initiatives enacted over the past several quarters. Of note, the improved financial results were delivered with lower industry activity than the prior year.Capital expenditures for the quarter were $43 million and for 2019, our capital plan remains $169 million flat with previous guidance. The 2019 capital plan is comprised of $52 million for sustaining an infrastructure and $117 million for upgrade and expansion. Our capital expenditure plan remains front end loaded as we delivered a US new build rig early in Q1 and completed an SCR to AC ST-1500 conversion, which was delivered in the second quarter. We also delivered our sixth new build rig to Kuwait during the quarter. We expect capital expenditures for the remainder of the year to primarily consist of maintenance expenditures.We have continued to build our contract book during the year and in the quarter, we signed 16 term contracts. As of July 24th, we had an average of 63 contracts in hand for the third quarter and an average of 64 contracts for the full year 2019. As of June 30th, 2019, our long-term debt position net of cash is $1.45 billion. We had $81 million in cash on our balance sheet and our total liquidity position was $770 million. During the first half of 2019, we made open market purchases totaling US $43 million and year to date have called US $50 million of our outstanding 2021 notes. Our year to date 2019 debt reductions total $124 million.We continue to view cash flow generation and debt reduction as top priorities this year and have raised our targeted 2019 debt reduction to $200 million, up from a range of $100 million to $150 million. As of June 30th, our ratio of net debt to trailing 12-month EBTIDA sits at 3.6 times and we continue to work toward our longer-term target ratio of below two times. Our average cash interest cost is 6.7% and with 2019 target debt reduction we expect run rate interest expense will be just under $100 million to exit the year assuming today's US dollar/Canadian dollar exchange rate.Our earliest debt maturity is $116 million US due December 2021 and will be a focus in our near-term debt reduction plans. The next debt maturity is not due until September 2023. For 2019, we expect depreciation to be approximately $330 million and SG&A to be approximately $105 million prior to share-based compensation expense. We would expect cash taxes to remain low and our effective tax rate to be in the 20% to 25% range. Following our successful divestitures in the first half of 2019, generating $82 million in proceeds, we will continue to look for significant opportunities to divest non-core assets for additional cash flow.I will now turn the call over to Kevin for further discussion of the business and outlook.

Good afternoon and thank you, Carey. Managing a capital-intensive and labor-intensive oil service business during a time of extreme commodity price volatility is a challenge. The second quarter of 2019 was no exception. Our North American customers faced the same issues, as the cycle times to drill and complete wells, especially large pads, is often longer than the commodity price swings.Despite these challenges, investor expectations for capital discipline that is spending within cash flow are being met by the AP community at large and we expect our customers to stay in this mode for the balance of 2019. For Precision, this creates both opportunities for our Super series rigs and technologies and risks with overall AP spending constraints. Precision is extremely well-positioned for these volatile market conditions and I believe our strong second quarter results demonstrate that positioning. I'll discuss this in more detail for each of our geographic markets, but I'll start with a review of Precision's strategic priorities.Regarding the focus on debt reduction, I'll reiterate Carey's comments, that our intention is to accelerate our debt reduction plans at every opportunity. Increasing our debt reduction target this year to $200 million will position us already near the bottom of our four-year target just two years into the plan. Importantly, this also brings our debt to EBTIDA leverage target of under two times clearly into focus.Every investor we've met with over the past several quarters applauds both our stated debt reduction targets and the progress we have achieved toward those targets. I will tell you that our management team has this priority well in hand and will continue to deliver in this key priority throughout this year in the coming periods.Just touching on our second priority, leveraging our scale to deliver free cash flow, I think Carey covered that priority well, but I'll add that the recent organizational changes we announced are designed to leave no stone unturned and look for every single opportunity to create additional cash flow. I know our team is already uncovering some light labor opportunities and I look forward to this increased focus on cost management.Now, before I get to our technology priority, I'll review our regional update giving with the United States. Looking at the US, our second quarter activity came in slightly lower than guidance we provided our on April conference call. Responding to the volatility and crude prices, the E&P operators began paring back active rigs as they defended the narrative of capital discipline. Precision's active rig count pulled back nominally from a prior guidance to the mid-70s during the second quarter and has held in these rates through today with 73 rigs running and one rig idle but contracted. We expect the IBC rig will return to operations later this quarter when its transitions to a new customer contract.Earlier, I mentioned how this volatility also creates opportunities. This is evident as our customers increased focus and attention on all avenues to increase capital efficiency with the rigs they continue to operate. Drilling efficiency, non-productive time, increasing pad sizes, and technologies aimed to improve efficiency all receive substantially increased customer attention during the quarter.For Precision, this led to stable utilization for our Super spec rigs, firm pricing on contract renewals, and the signing of 15 term contracts during the quarter. We also experienced step change and system utilization our PAC automation and app operatings, but I'll have more on this later.Utilization of our Super Triples in the US remains over 90%. We mobilized our first SCR to AC upgrades during the quarter, bringing our fleet to 68 AC pad blocking rigs. I'll remind you that we have grown our US Super Triple fleet 10% for the last 18 months through upgrades, Canadian rig transfers, and new builds, all contracted on favorable terms. We have 12-24 additional candidates for a fleet for similar SCR to AC upgrades and several more Canadian transfer candidates, should US transfer demand and day rate economics support the additional investments. Currently, Precision does not have any further upgrade or transfer plans for this year.E&P Operators will continue to carefully manage spending. Industry activity may further soften, but the focus on drilling efficiency will continue. All of Precision's 68 super triple rigs are configured for XY padlocking and all have long reach drilling capabilities. We expect sustained firm demand for Precision's performance-leading Super Triple rigs and expect stable pricing and activity trends we mentioned earlier will continue for the balance of the year, of course assuming commodity price volatility does not widen.Now turning to Canada, in our Canadian business, besides the commodity price volatility, Canada has the additional challenges of government-mandated production curtailments and constricted explore capacity. These challenges have led to a substantial reduction in industry activity for the first half of 2019 and Precision has not been immune. You will recall that during the first quarter, our activity was down 30% year over year tracking with the overall industry.During the second quarter, we substantially narrowed the gap by gaining the market share. This was achieved through a combination of product mix with our super triple rigs, technology equipment on those rigs, and of course, our highly efficient mobile Super Single rigs. Our market share rose to 30% early in the second quarter and has held with 45 rigs running today.Through the second quarter, we average 27 active rigs, just 15% last year. Rain and wet weather impacted drilling and servicing activities throughout the basin in the latter part of the second quarter and through the third week of July. Things seem to be drying up now and industry activity is improving. I expect for the balance of the third quarter, Precision's Canadian activity will hover in the mid-40s to low-50s.While visibility in the fourth quarter has not yet fully developed, we are not anticipating any significant reductions of activities. Pricing in Canada is fickle, we continued pricing pressure on the shallower rigs, we expect those rigs could see margin reductions in the $500 to $1,000 range. While we expect stable versions on our Super Triple rigs operating primarily in the Montney. Overall, we expect average rates and margins for the third quarter down just nominally from the prior year.Now, moving to our international segment, Carey mentioned that we deployed our sixth Super Triple rig in Kuwait and this rig spudded on July 1st, a couple weeks ahead of schedule and the rig build was completed under budget. Both of these are wins from a cash generation perspective. Kuwait and Saudi Arabia remain key to our stable international business. With nine rigs operating, we believe we have achieved the scale we desire. We also have continued to pursue opportunities to operate our rigs in Kurdistan, with several ongoing customer discussions. It certainly seems interest is strengthening in this area.Our international business, primarily with NOCs, national oil companies, ensures a stable revenue stream, isolated to the volatility and seasonality we experience in North American markets.Turning to our completions and productions business, our team locked down another strong quarter during the seasonally slow Canadian spring breakup. While I often refer to this business as non-core, the operating results and contribution cash flow turnaround is remarkable. During the second quarter through intensive cost controls with activity down 7% from last year, the segment reported a $4 million increase in EBITDA. The improvement is excellent and consistent with the gains they've made over the last several quarter. Our C&P team, like all in Precision, are keenly focused on leveraging our scale, reducing cost, and delivering free cash flow. These results are strong.Now, circling back to our 2019 key priorities, our third priority is to fully commercialize our technology. During the second quarter, it feels like we're approaching a tipping point with our customers. As I've discussed in the past, we need to achieve high utilization levels at the rig to demonstrate the efficiency benefits, but even then, field resistance by well consultants has been an obstacle.Clearly, our customers are stepping up with a strategic focus on efficiency. They want to ensure the capital they deploy to operating rigs is delivering the lowest cost and most efficient drilling operation possible. This message is getting through to the field. We see support improving, even those that resisted technology in the past.During the quarter, we drilled 195 wells with our PAC automation suite. We added a new customer, which will see our 34th system deployed in August. We deployed our first fully commercialized drilling app and we have several more apps approaching commercialization.Earlier this year, we kicked off our big data collaboration initiatives with Hitachi, another partnership like we have for other technology initiatives, who's a leader in industrial automation and big data. During the second quarter, we delivered the first phase objectives continuously processing more than 20,000 data streams per second per rig, providing actionable data for the right people at the right time, enabling the best real time decisions.Additionally, we're leveraging insights from Hitachi's IoT analytics platform to optimize our equipment, performance, and to identify improvement opportunities and well delivery for our customers. Our technology initiatives aren't away in every North American region we operate. Our customers include super majors, large intermediates, regional junior producers, and private equity APs.The efficiency and predictability this technology provides reinforces the already remarkable efficiency of our padlocking super series rigs. We are on track to fully commercialize our technology offerings this year and believe this will be a competitive advantage, which positions Precision well ahead of our competitors.So, I know many Precision employees are also shareholders in Precision and I expect many are listening to this call. So, I want to thank all the employees of Precision for their hard work, supporting our customers, driving our competitive advantage, and leveraging our scale to drive the costs down. Thank you.Now, just before I conclude, I've got a couple comments I want to share. Now, most of you know that I spend most of my time based in our Houston office, as does most of our leadership. You also know that Precision has moved of its advanced Super Triple 1500 horsepower rigs from Canada to the US and will consider moving more if their high marks are compelling.I'll say that Precision remains committed to Canada as the leading services provider in the Canadian market. Canada remains important to precision as the source of high-quality key personnel and strong free cash flow. However, I must say I'm very disappointed with the weak energy investment environment in Canada. I believe this is a direct result of the lack of federal government leadership and uncooperative political self-interest evident in British Columbia and Quebec.Like most energy firms operating in a Canadian region, we are deeply frustrated by the Canadian federal government's failure to support the Canadian oil and gas industry's globally recognized leadership for social and environmentally responsible energy development. Further, the federal government's perplexing energy infrastructure and transportation policy with the passage of Bills C69 and C48 is clearly intended to undermine the domestic energy industry.With the federal election in Canada later this year, candidates on all fronts should be supporting and taking credit for the strong, vibrant, environmental and responsible Canadian industry that Precision is a part of. There's no question that responsible Canadian energy production and exports are a critically important component in global, social, environmental, and climate strategies.Now, I'll turn the call back to the Operator for questions. Thank you.

[Operator Instructions] Our first question comes from Sean Meakim with JP Morgan.

Thank you. Good morning. So, Kevin on the near-term outlook in the US, yours is particularly more constructive than that of your peers that hosted their calls earlier today. I don't think that's new in terms of the consistency of outlook you've been sharing with us over the course of the year.To what would you ascribe that difference? Is it near-term stronger contract coverage as a percentage of your fleet, customer or geographic mix? I'm trying to get a sense of how sustainable it is to stay at fairly flattish activity levels if the rest of the lower 48 continues to move lower. Does that give you any pause beyond the third quarter at some point as contracts start to roll? Could that direction change?

Sean, I'll start by saying I think the biggest risk we face is increasing commodity price volatility. I kind of couched my comments around the current range. Our customers got nervous when we saw the commodity price again drift into the lower 50s for a while early in June but it's come back above that range. Turning back to our fleet for a moment -- I've restressed that we have 68 Super Triple rigs in the US. They're all pad configured, all able to drill long reach horizontal wells. We're deploying technology at a number of those rigs.I think you could call it our customer mix based on pad drilling and development drilling, which I think leads us to a little more stability. I think we're less exposed to de-risking drilling and single one-off pads and small pads. I think it is a focus on development drilling that's holding our activity through the third quarter and probably into the fourth quarter. Certainly, the contract book that we built up during the second quarter carries on in most cases through the balance of this year into next year.

I'll just add to that -- Kevin mentioned we've got 68 AC triples working in the US at above 90% utilization. If you assume a rig count of 73 and 63 AC triples working, we've got 10 rigs that would not have the same characterization. Those would be at risk if the rig count were to decrease, but those are going to be lower margins than the Super Triple rigs.

I want to talk about fresh cash, the number one priority and you guys have been executing very well in that regard. As we think about the two times leverage target, there's clearly a lack of visibility in your business at the moment, but given the leverage you have to pull, it seems like you're pretty confident that within the normal range of expected outcomes, you've got good line of sight to that, even if things are a little better, a little worse than what expected your base case. Is that a fair way of characterizing it?

I think it is, Sean, but what I draw your attention to -- we haven't given 2020 capital guidance yet. But if we're in some market in 2020 that has zero opportunities for growth, our capital spending could be anywhere from $75 million to $100 million less than it was this year if the market is that tight. That gives us confidence that we'll still have a strong free cash flow profile next year.I'm pretty certain we're not going to be building another rig for quite next year. So, that $75 million chunk comes out of our capital spending for sure. We had a pretty good start to the year for upgrades and things like that. If that market is not there, then we're looking at a maintenance capital profile in 2020, which then gives us good flexibility and free cash flow.

Got it. Makes sense. Thank you.

Our next question comes from Connor Lynagh with Morgan Stanley.

Thanks. I was hoping we could build on Sean's question a little there. Certainly, it seems like your activity outlook is pretty full. Could you comment on pricing in the market in general and have you seen any softness? There's been some diverging data points on that today. I was wondering how you're seeing that shake up in the market.

Connor, we'll leave our comments pretty limited in that we expect our pricing margins to remain stable. For new price discovery on new opportunities, there are very few. Some of the other conference calls today would be people we would be competing with. Giving away any sense of how we see pricing right now is not something we want to do, but we do expect our rates will remain broadly stable through the third and fourth quarter.

That's fair. On the technology side, I was wondering if you could -- I think you said in your prepared remarks that you were reaching full commercialization on some of the apps. Can you give us a feel again of the overall technology portfolio, how much is running at a full commercial rate versus early stage testing?

I don't those numbers at my fingertips right now. We have all our units right now in the field running. We've got utilization over 70% on about two-thirds of our units. Those units are likely going to be earning the full rate or the near full rate. The short answer is we expect to be fully commercial this year. We expect to be earning the full rates across the PAC platforms around the end of the year. The results are good in the field. One app is a few weeks away from being commercial.If you think about this in pieces, each PAC system is about $1,500 per day. Each app could be in the range of $200 to $500 per day. We expect we could see anywhere from one to three apps on a rig sometime this year. I think the new piece we're talking about, the big data piece, we're just getting going on that but that looks pretty interesting. We expect to see some revenue coming through on that as the year progresses. I think for 2020, we'll be able to give better guidance.

Any sort of near-term expectations we should think of in terms of incremental EBITDA?

I think it's fair to begin modeling those into 2020 numbers based on the guidance I've given here. There is nothing right now that I see that's going to allow us to commercialize this year.

Our next question comes from J.B. Lowe with Citi.

Attacking one of Sean's questions from a different way, if activity slows down but you guys are still generating a pretty decent amount of free cash flow given your contract coverage, could we see debt reduction next year at the same level of this year or above?

So, we have put forward a four-year plan. As Kevin mentioned, we will be pretty close to the low end of our range within the first two years of the plan. So, we'll still have $200 million more to pay down over the next two years to recharge the high end of our target range. If we think that we need to pay down more to get down to below two times, we will continue and we'll go beyond that range.I would think about the cash flow as being in that $100 million to $200 million range next year. If there's more opportunities to deploy capital, EBITDA is probably higher. If there are fewer opportunities to deploy capital, EBITDA is lower and capex is lower. We'll keep that cash flow band in that $100 million to $200 million range.

Okay. Perfect. Then on further potential divestitures, I know you guys have done a really good job turning the C&P business around. I don't know if this was one of the business you were going to try to improve up and try to sell to somebody. I know it's a separate entity at this point. Now that it's generating a pretty significant amount of free cash, is that something you'd rather keep in your portfolio at this point? What type of number would it take to pry that out of your hands?

The first comment I want to make is we don't need to be a seller at the low point in the market. That's really important. I think the C&P business in Canada, particularly the well service business, but also rentals and the catering business are in a really tough spot right now industry wide. I think showing return leadership like I think we're starting to develop here is important for us. I think that space needs to consolidate. It probably needs it more than most other segments does in Canada. We've always said that we would like to be part of a consolidation play.I would be clear that we don't see ourselves as a cash seller in the trough of the market. We still think that Q2 and Q1, we're below 2018 activity levels for the industry. The market is still troughing in that space. I'm thrilled the team is working on and did a really good job turning the business around. Cash flow is important to us. It's important to debt reduction. I think we're happy with where we're going right now. I'm not in any panic to do anything at all.

Our next question comes from Taylor Zurcher with Tudor, Pickering, Holt.

Good afternoon. Kevin, it feels like the past several quarters it's been a recurring theme that you're still bidding and there's still some good interest internationally. I think in the prepared remarks, it talks about Kurdistan again. Kind of a two-part question -- one, are you still seeing some good interest in incremental tenders outside of Kurdistan? Two, more broadly in the Middle East where your rigs are at today, is there any appetite today to bring some of your apps technology and process automation control over there moving forward?

Okay. First of all, I'll talk about Kurdistan for a moment. My team over there reminds me they haven't lost a tender yet. The fact is nothing we've tendered the last couple of years has been awarded. Most of the projects have been pushed back or delayed or kind of retendered. We have a couple of ongoing negotiations now that could develop into something. We seem to be getting a little farther down the line than we did in previous tenders. I don't want to build up any false expectations in the market. I think the likelihood those rigs could go to work late this year, early next year, looks a little better than it did a quarter ago, but we'll have to wait and see.If we were awarded something tomorrow, it's probably five or six months before the rigs are actually fired up. It's probably at best a 2020 event. Coming back to technology, I'll tell you both in Kuwait and Saudi, customers are also focused on efficiency. That efficiency trend isn't unique to the US or Canada. It's a global trend. Our fleet in Kuwait is all high-spec super triples, AC rigs, all the same control systems we use in North America. So, we are confident that we can take that technology into Kuwait and deploy it quickly.I'd say we want to be fully commercial in North America first. We want to have learned all there is to learn before we deploy something literally halfway around the world and a plane flight away, not just a pickup driveway. So, that's our current strategy. I'd say that we're working with KOC and sort of pushing back your expectations until we are certain we can deploy this technology in that market with zero down time.I'll comment that working Kuwait, for us, it's very good business, but it's a very -- it's a very un-airing market in that it's deep high-pressure, high temperature drilling. You do not want to have a mechanical failure or a system control failure. You can't afford downtime. You can't afford to have an operational failure. The BOPs on the rigs are 15,000 PSI. One control issue could become fatal quickly. All of these high technology issues have to be very carefully vetted before we apply them to these rigs.

Okay. That's helpful. Thanks for that. More of a modeling related question in the US -- I think you said that over the back half, the outlook is still for relatively flattish pricing versus today and then rig count hold pretty firm versus today. My question it's my inference that margins over the back half stay relatively flattish. Is that the correct inference to make there?

Yeah. I think the guidance we gave, Taylor, is on margins to be flat into the third quarter. I think Kevin's comment that if the market is similar to how it is today, we would expect that to continue on in terms of the fourth quarter.

That's it for me. Thanks, guys.

Our next question comes from Waqar Syed with AltaCorp Capital.

Thanks for taking my question. Kevin, your turnkey revenue in the US has been falling lately. Could you talk about the trends? Why is that?

Turnkey is a real cyclic business for us. It's certainly natural gas related. It's tied closely to gas prices. It's a Gulf Coast, deep wells, select opportunities. The fundraising that those customers or those types of clients usually do has been slower than usual. We just haven't seen a lot of turnkey business the last few months. I think in a stronger natural gas environment in the Gulf Coast, that might improve. For us, I would tell you turnkey isn't strategic but it's a nice opportunity to deploy some of our bigger rigs and do what we do very well.

Should your rig and Kurdistan go back to work, what would be the reactivation cost there?

It depends. We have two rigs in Kurdistan we're looking at and possibly the rig in Georgia, but reactivation costs could be in the range of $5 million to $15 million per rig depending on what type of job it goes to. Obviously, we expect that capital to come back quickly if we activate the rig and the contract.

How many of your Super Triple 1,500 horsepower rigs are idle in the US right now?

Just a small handful, but all of those rigs are either contracted to go to work shortly or spoken for. We commented our utilization is over 90%, so the math is pretty straightforward.

Our next question comes from Kurt Hallead with RBC.

That was good color, Kevin. Some things I just want to try to calibrate based on some of the things that we heard today from a couple of your competitors and then maybe get a clarification on your view on the Canadian market. So, first on US, the general dynamic here is kind of echoing your comments that pricing for super spec rates has remained pretty firm even though the rate count has come down a tad.Yet, we have also heard that there was some signs of pricing pressure. So, we know that you mentioned stability and pricing. You've mentioned that you've been able to move contracts at firm pricing. Can you maybe just talk about leading edge, what you may be seeing in the market and round out the picture for me? That would be great.

Kurt, there aren't many what I'd call brand new price discovery opportunities. So, I think leading edge rates for new opportunities price discovery opportunities is a little bit meaningless. Most of what we're doing is either renewing contracts with customers that have rigs where there's a switching cost if they decide to switch the rig. Obviously, that supports more stable pricing or we're going to customers who are increasing pad size and looking for pad blocking rigs.So, we're really not seeing a lot of rig on rig competition, which, again, I think supports firm pricing. You've been around us long enough to know that when the whole tide goes down, everything gets affected a little bit, I'd say that the least affect we're seeing is on padlocking Super spec rigs.I will comment that I do think there are a handful of idle AC rigs in the market. Not all of those are Super spec but they're AC and our customers work hard to try to use any AC rig that's available against maybe the most leading-edge rig. So, we have to be smart and thoughtful with how we market and how we sell into that environment.

Then on the Canadian side, I probably didn't pick up on something you guys mentioned -- early on, Carey, when you were talking about the Canadian market, you suggested the cash margin for the Canadian land rig business would be down something like 250 to 750 a day. Did I hear that correct?

Yeah. That's compared to last year. If our activity is down 10% to 20% in the third quarter relative to last year, there will be lower overheard absorption, which will have a negative impact on margins compared to last year.

Got it. Then given the malaise that's happening Canada at least for the rest of the year, is there any reason we could think there could be some uplift or is there still potential for cash margins on a sequential quarter basis going into the fourth quarter? Is there a risk of it going down further?

I don't want to build any false expectations. Usually, the fourth quarter in Canada ends up being a proxy for what's going to happen for the year in 2020. So, if for whatever reason, 2020 ends up being an improving market over 2019, then you might see a lift in the fourth quarter. But if in fact, 2020 appears to be flat with 2019, likely what we see now will flow into the fourth quarter. I really don't expect a lot further erosion.In Canada, we've seen a recent consolidating transaction with two of our large competitors bridging and that's brought a fair amount of discipline into the market. It's kind of blocked out one drilling control that had might have been trying to price mark rigs to gain market share. Now, it's a matter where there's good market discipline, especially on the deep basin. I'd say rates are holding it well because of that.

Great. That's it for me. Thanks so much.

Our next question from Greg Coleman with National Bank Financial.

Thanks for taking the questions. Not to beat a dead horse here, but I just want to come back to capital spending and free cash flow. Kevin, based on your comments. So far this year, you've invested something in the range of $82 million, $83 million worth of assets. Based on your commentary about net selling equipment at the bottom, is it reasonable to assume that's it from the divestiture side for the foreseeable future?

We have 18 rigs in Canada, 4 rigs in the US whose assets are held for sale. I think there's still a chance those rigs see some activity this year, but nothing else in our portfolio right now is in any sort of process or any active sales process. That doesn't mean that something might not sell. We have calls all the time with people who might be interested in some rental equipment or something else. I think there's still a chance of a transaction. As we said at the beginning of this process, we're driving our debt reduction based on free cash flow and if we're successful selling assets that will accelerate the program, it's not required to generate our debt reduction targets.

Got it. Then understanding, of course, that you haven't provided your 2020 capital budget, we could be thinking about $75 million to $100 million gross capex next year that would be netted down by any potential asset sales. Is that a good base level to think of?

We're not giving any 2020 guidance yet. I think we'll do that later this year. My comment was if you believe that 2020 has no growth opportunities, we could throttle back capital spending by $75 million to $100 million if you believe there are no growth opportunities.

From a level this year of $175 million.

That's correct.

Okay. That's it for me. Thanks, guys.

Our next question comes from John Watson with Simmons Energy.

For the Kuwait rig -- congrats on getting it working ahead of schedule -- are there any start-up costs? What should we be thinking about the margin impact on the cost side for that rig going to work?

So, we already have established scale in that market and this is the sixth almost identical rig we've deployed to the market. You can assume that rig will start generating its full EBTIDA in the third quarter.

Similarly, in the US, for your flat margin guidance, are you contemplating opex moving lower in that guide? If so, could you talk about what those levers to lower opex might be?

As Kevin mentioned earlier, we are looking at every opportunity to lower opex. We're working hard on trying to get that number lower. At the same time, I would say running a rig count in the low to mid-70s in the third quarter, we would expect the opex to be in a similar range to Q2.

And then lastly, I think on the 1Q call, Carey, I think you said that we should monitoring neutral working capital for the year. Does that still hold after the nice working capital quarter in 2Q?

Right. So, we have a benefit from working capital in the second quarter because of activity in Canada. There will be a slight build throughout the year, but it will be in the tens of millions of dollars.

Perfect. Thank you.

Our next question comes from Ian Gillies with GMP.

Good afternoon, guys. With respect to the process automation control systems, has there been any change in your customers' intention for rate of adoption there just given some of the skittishness you've noticed in the spending profiles or does interest remain very high there?

I'd say during the second quarter, interest picked up. I think the push on capital efficiency is driving two things -- let me just backstep here for a moment -- the whole concept of capital efficiency and staying within cash flow is up and down companies from company location through CEO and I think capital markets have been effective getting the message into the NPEs.We see it day in and day out, right up and down our customer base and right up and down the vertical inside the customer. If the rig is running, they are working on ways to run more efficiently faster and maximize their efficiency. That's putting a real spotlight on the benefit of technology for us.So, I think it's actually helping. I made a comment in our Q1 conference call that we saw field resistance because people's jobs were changing, their decision making was changing. They didn't like that. They were looking back. As this message in efficiency is being pounded into the field by the NPE companies, those resistors are very quickly becoming supporters. We saw that transition during the second quarter. It feels like a tipping point. Hopefully, when I finish the third quarter, I will report that it was the tipping point.

As we think about this time next year -- growth year over year in units was about 65% -- do you think by this time next year you'll have another 15 to 25 of these units deployed in the field?

I mentioned that we're deployed one more right now. I was really preferring not to do that until we had every single unit fully commercial. We didn't mention on the call, but we did sign a contract for a multinational EMP. That rig will be an activation of one of our Super Triples. It will include the full automation suite and some apps.That's a piece of information that wasn't in our prepared comments, but that's the additional unit we're deploying right now. I do expect that if we're commercial by the end of this year, which we expect to be, we'll deploy more units next year. We'll deploy them as quickly as we can install them and train our people. We can't afford to have failures at the rig due to lack of training of our people or the customers' personnel. That could be 15 units next year, but we haven't given any guidance yet.

There seems to be an increasing push on the ESG side across all businesses at this point. Are you seeing any increased demand for Bi-fuel kits on the rigs, whether it be in Canada or the US right now?

It's interesting right now. I think that question comes up in almost every customer conversation. What I would say right now is that if we're going to add a bi-fuel kit, it's going to mean the customer is going to pay for that with an adder to the contract, we're also going to source your fuel and put in place the supply chain for fuel for the natural gas and location. That's a complicated number of steps which we haven't seen kick off during the second quarter.So, the short answer is not during the second quarter. Certainly, I'll tell you. We just finished our quarterly board meetings. It was a topic through our committee and board meetings around our ESG footprint, our reporting, it's important for us. We've taken a number of steps internally and we expect to continue to both enhance our reporting and enhance our performance.

Last one from me -- acknowledging some of the market headwinds that are appearing broadly in the US, but as you look around and look at what's working in the US, do you think there is still an opportunity for some of the ST-1200s in Canada to capture market share or are customers not willing to do that right now?

Are you referring to move some of our Super Triples from Canada to the US?

Yeah, sorry. That's correct, moving some of the ST-1200s from Canada to the US.

Yeah. We have three ST-1500s and the balance of our Super Triples in Canada, ST-1200s -- it looks like all the 1200s will be spoken for through the balance of the third and fourth quarter. So, we don't have anything free to move down. I would say it's more likely if anything moves it's an ST-1500, but we also see some leading-edge demand for those in Canada. At this point, I don't see any likelihood of rigs moving down this year. It will sort of depend how 2020 starts. If we saw a negative effect in Canada or positive effect in the US, I could guarantee rigs would move.

Thanks very much. I'll turn the call back over.

Our next question comes from Dan Healing with the Canadian Press.

Hi, guys. Thanks for taking my question. I was going to ask about plans for Canada given what seems to be a pretty negative outlook for the industry for the rest of the year. You said you probably won't move any rigs down this year, but going forward, is that something you're looking at seriously?

Dan, it's something we're looking at all the time. I don't see opportunities for the balance of this year to do that. We're an important player in Canada. We're a leading service provider here. It troubles me every time we divert people, capital, or assets out of Canada knowing how well this industry operates in Canada both from in an environmentally and socially responsible manner.My preference is to continue to support Canada the best way we can. I'd love to see some political support in that front, especially in an election year. I think it depends. As I said to Ian a moment ago, if for whatever reason Canada goes more negative in 2020 and the US stays where it is or gets stronger, there's no doubt that we'll move more assets out.

You mentioned the election earlier and just now, what are the implications for the fall election federally? What do you see happening if the current government is returned or maybe forms a minority government?

I think this current government has made its policies pretty clear. We have a history of engaging. We continue trying to engage with this government to explain the benefits of industry and work as closely as we can. I'd expect that Trans Mountain proceeds and that will be helpful for our business. I think LNG continues to have support provincially, federally. I think that will be helpful for our business. It's a tough situation. It doesn't need to be this tough. It's also not as bad as the capital markets thing. Right now, there is literally zero capital markets interest in Canada and that's just not right.

Thank you.

I'm not showing any further questions at this time. I'd like to turn the call back to our host.

Thank you all for joining today's call. We look forward to speaking with you when we report third quarter results in October.

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