Precision Drilling Corporation (PDS) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Precision Drilling Corporation 2020 First Quarter Results Conference Call and Webcast. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Dustin Honing, Manager, Investor Relations and Corporate Development. Thank you. Please go ahead, sir.

Great. Thank you, Daniel, and good afternoon, everyone. Welcome to Precision Drilling's First Quarter 2020 Earnings Conference Call and Webcast. Participating today on the call with me are Kevin Neveu, President and Chief Executive Officer; and Carey Ford, Senior Vice President and Chief Financial Officer. Through our news release earlier today, Precision reported its first quarter 2020 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 forward-looking statements and these risk factors. Kevin will begin today's call with an overview of Precision's response to the COVID-19 pandemic. Carey will then discuss our first quarter financial results, followed by Kevin's operational update and outlook. With that, I'll turn it over to you, Kevin.

Good afternoon, and thank you, Dustin. The impact of the COVID-19 pandemic has been profound. As a global population, we share the health risks and anxieties for ourselves and our families. We are all managing the stay-at-home orders with travel bans and living through the resulting economic downturn and job losses. The same applies to Precision. We rely on highly trained teams of 15 to 25 people, the rig crews, working in close quarters to execute our business. As an essential service, our people are required to work, yet they must also deal with the same personal concerns, health risks, contact risks and family anxieties we all face. This weighs heavily in our people, and I am deeply proud of the highly professional attitude and exceptional level of performance they continue to demonstrate these challenging times. Now you may recall, on Precision's fourth quarter mid-February earnings call, we identified the potential risks and impacts we might face due to the emerging virus. And those included the health risks to our people, the commodity price risk and the customer demand risk. In just a few weeks later, those risks became real and then intensified by the travel bans and stay-at-home orders. Precision responded immediately, implementing a pandemic safety management plan to ensure the health and safety of our staff and our stakeholders. The plan applied to all Precision rigs, shops and offices. And I'm very happy to report that by moving quickly, we have avoided any interruptions in our service. We've experienced no rig shutdowns and no work-related virus outbreaks. I want to thank all the people at Precision who work safely and productively through this troubling period, fully sustaining our services to our customers as an essential component of the global energy supply infrastructure. Now as the world responded with all the measures to flatten the curve and limit the spread of the virus, we expected oil demand disruption. We expected reduced commodity prices and reduced customer demand. However, we do not anticipate the second compounding black swan event, the OPEC+ breakdown and the oil price war that led to negative WTI prices at the end of the prior forward contract period. Nonetheless, we responded quickly and aggressively, implemented a series of business measures, which Carey will outline shortly. All are focused on preserving cash and bracing Precision upon extended and deep downturn. We believe these measures, which will save Precision in excess of $100 million in cash outflows this year, and most of these measures are sustainable through the downturn, will position Precision as a leader and stronger driller for the inevitable recovery. I do want to express my best wishes for a full and speedy recovery to anyone who was exposed to or affected by the corona -- COVID-19 virus. And I also want to express my sadness to the thousands of oilfield workers, including those from Precision, who through no fault of their own have lost their jobs, in some cases their careers and their livelihoods. It's my expectation that we will look to be -- attract back any of those Precision people when this industry recovers. I'll now turn the call over to Carey Ford to discuss our first quarter results and the cost-saving initiatives.

Thank you, Kevin. Before I cover the first quarter financial details, I would like to review some of the cost-saving initiatives Precision has captured in the past 6 weeks. All initiatives outlined in our March 24 press release have been implemented, and any associated charges were incurred in the first quarter. The cash savings impact starting in Q2 will be substantial, and the run rate guidance of 30% fixed cost reductions and $30 million reduction in G&A still stand. We have scrutinized every cost item within the organization. We've implemented company-wide workforce, salary and benefit reductions, including executive team and Board. Our travel and entertainment budgets have been slashed, along with every other administrative costs were influenced as possible. We expect to benefit from government programs such as worker assistance and tax deferrals and have secured deferral of certain other payments into 2021. These programs and deferrals will provide Precision with up to $20 million in additional cash this year. Cost reduction efforts, deferrals and CapEx reductions are expected to reduce 2020 cash spend by the organization by well over $100 million. I will now review some of the first quarter financial details. Our first quarter adjusted EBITDA of $102 million decreased 6% over the first quarter of 2019. The decrease in adjusted EBITDA primarily results from a 30% reduction in U.S. activity, offset by a 33% increase in Canadian drilling activity. Also included in adjusted EBITDA during the quarter is $10 million in severance and restructuring costs related to cost reduction initiatives to prepare the business for a lower activity environment. In the U.S., drilling activity for Precision averaged 55 rigs, a decrease of 8 rigs from Q4 2019. Daily operating margins in the quarter were USD 9,344, a decrease of USD 532 from Q4. Q1 margins were negatively impacted by lower average day rates and higher average cost, offset by IBC revenue during the quarter. Absent impacts from IBC, turnkey and onetime recoveries in the fourth quarter, daily operating margins would have been approximately USD 8,300 per day or USD 200 per day lower than Q4. For Q2, we expect day rates and margins to be supported by contracted rigs in IBC revenue, with operating costs negatively impacted by fixed cost absorption. Moving to Canada. Drilling activity for Precision averaged 63 rigs, an increase of 15 rigs from Q1 2019. Daily operating margins in the quarter were $7,205, a decrease of $1,317 from Q1 2019. Absent shortfall payments received in the prior year, daily operating margins would have been down approximately $500. For Q2, we expect margins to be negatively impacted due to fixed cost absorption. Internationally, drilling activity for Precision in the current quarter increased 1% from Q1 2019. International average day rates were up to $54,294, a USD 4,354 increase from the prior year. In our Completion and Production segment, adjusted EBITDA this quarter was $3.2 million, down $7.3 million compared to the prior year quarter. Adjusted EBITDA was negatively impacted by $2.3 million in restructuring charges during the quarter and a decline in well service activity, which was negatively impacted by extreme cold weather, preventing us from operating many of our rigs during the quarter. Capital expenditures for the quarter were $12 million. Our 2020 capital plan remains $48 million, a decrease of approximately 50% from the beginning-of-year guidance. The 2020 capital plan is comprised of $36 million for sustaining and infrastructure and $12 million for upgrade and expansion. We added 9 contracts to our contract book in the quarter. And as of April 29, we had an average of 46 contracts in hand for the second quarter and an average of 42 contracts for the full year 2020. As of March 31, 2020, our long-term debt position, net of cash, is approximately $1.4 billion. And our total liquidity position is over $800 million. Our net debt to trailing 12-month EBITDA ratio is approximately 3.6x, and our average cost of debt is 6.8%. Maintaining a strong liquidity position is our top financial priority, and we plan to resume debt repayments when visibility improves or our cash on hand exceeds our expectations. Further to maintaining strong liquidity, we reached an agreement with our senior secured lending syndicate to relax certain debt covenants in our revolving credit facility through Q1 2022, namely the EBITDA to interest covenant, which is currently 2.5x. Although we are well clear of this covenant today, the extent of the recent downturn is unknown, and we want to ensure access to all sources of liquidity, including our revolver. In the first quarter, we purchased and canceled approximately 3 million of our outstanding shares. I'll note that we have significantly reduced the pace of our share repurchases to a minimized level as a component of our cash conservation initiatives. For 2020, we expect depreciation to be approximately $320 million. We now expect SG&A to be approximately $65 million to $70 million before share-based compensation expense. This guidance compares to the 2020 guidance provided in February of $90 million. We expect cash interest expense to be approximately $100 million and expect cash taxes to remain low, with our effective tax rate to be in the 20% to 25% range. I will now turn the call back over to Kevin.

Thank you, Carey. Looking forward into what is likely the deepest and toughest downturn I've experienced in my 38 years, I believe that investors should be most focused on a few key parameters for the oil service providers. And these key parameters are the company's financial and competitive positioning, management's record controlling its business and delivering those commitments. For Precision, we screen very well across all of these, starting with our financial positioning. There's no question that we are carrying more debt than we would like, but you should know that this management team has been keenly focused on debt reduction and management maturities for several years. Our progress has been very good, exceeding and further increasing our debt reduction targets while positioning the company much stronger than even just a couple of years ago. Debt reduction remains a priority of Precision. However, as Carey mentioned, while the drilling -- while the business is declining and long-term visibility remains clouded, our near-term focus has shifted to maximizing our liquidity runway, maximizing our cash generation and ensuring we sustain full revolver access. Preemptively seeking revolver covenant relaxation speaks to how we intend to stay well in front of any potential limitations and manage tightly everything we control. Regarding cash generation, I think Carey's covered those points in his prepared comments very well. But I'll just add that on a daily basis, we, line-by-line, review all spending, all cash receipts, all cash commitments and all receivables. We're keeping a very tight grip on every penny within our grasp. We recently upgraded our ERP system, which provides real-time granular visibility and oversight on every line item, very prospective spending item, proving to be an invaluable tool as we try to control our spending. I believe we are very well positioned financially to manage through an extended period of very low customer demand. So turning to our competitive positioning. I also believe that Precision is very well positioned. Our strategic priorities of operational excellence and technology commercialization, both aligned to position us very well during the downturn and ideally for the eventual recovery. Regarding our technology initiatives, we continue to generate the expected commercial returns with our AlphaAutomation systems, and we're making good progress introducing AlphaAnalytics and the AlphaApps to the field. During the first quarter, we increased our AlphaAutomation coverage by adding 6 rigs to bring our total to 40 rigs, including our 2 training rigs. So that would leave 38 rigs in the field with AlphaAutomation. Currently, our plans are to taper back further installations until we see customer demand for rigs improve. In the first quarter, we partnered with a U.S. customer focused on natural gas drilling to trial AlphaAnalytics on their group of Precision rigs. We believe the efficiency improvements are already being acknowledged by the customer, and we expect to fully demonstrate the value of this service as the trial progresses. Also during the first quarter, an IOC operating in the Permian has activated AlphaAutomation on all of their Precision rigs and will also be utilizing several apps. We believe the success of this program should also lead to market share gains as the year progresses. So we expect that when the rig market stabilizes, our customers will shift their focus back on capital efficiency, drilling efficiency and overall well construction cost improvements. And there's no question that digital technology will lead these efficiency gains and cost efforts, and Precision is very well positioned as a drilling contractor first mover. Regarding our operational excellence strategic focus, I believe our year-to-date market share strength is already demonstrating the success of this initiative. In line with our mid-February conference call guidance, Precision's U.S. market share increased by a few rigs to peak at 58 in late February, and we held that level until late March. In fact, only when the oil price volatility escalated that a rig count begin to decline, and we ended the quarter with 56 rigs operating in 3 rigs in IBC. Looking at Canada, you may recall that we peaked at 83 rigs running in late January. I will point out that our market share was in the 32% range, a record high for Precision. We held that share with activity in the high 70s through the end of February, and only in mid-March did activity decline. Overall, Precision's activity in the first quarter in Canada ran 33% higher than 2019 while industry activity was up less than 10%, clearly demonstrating our activity gains. As we entered this downturn, I was pleased with our competitive positioning. And through the first 6 weeks of the rig count decline, we continue to modestly improve our market share. In the U.S. today, we have 35 rigs running, with 5 on IBC. Over the past couple of weeks, we've noticed a pause in customer discussions to reduce activity. It seems that most of the near-term spending decisions have been made and are now being implemented across the rig activity by our customers. As these decisions work through the system, we do believe industry activity should continue declining for the next several weeks. For Precision, we expect our U.S. activity will settle in the low 30s for the balance of the second quarter, reflecting a 40% to 50% decline from the peak. We expect the 5 rigs in IBC will continue through the second quarter. We are seeing potential to add a handful of rigs later this quarter or into July if natural gas prices firm up into the summer months. In Canada, March ended with 15 rigs active for Precision. Currently, we have 11 rigs active, and the industry has only 23 rigs, both setting historic lows for the Canadian segment. Seasonal recovery prospects in Canada are weak. We have visibility on potential activity for Precision moving into the upper teens or low 20s in the third quarter and progressing towards the upper 20s or low 30s later in the year. We do expect all-time industry lows for the Canadian region will persist through the year. We do believe our fleet of pad-style Super Triple rigs and the highly efficient Precision Super Single rigs will support firm Canadian market share in the second half of 2020, in line with the first half. We also believe we'll remain well positioned for the eventual rebound in Canada, and we'll benefit from our scale and cost leverage throughout this downturn. With our international segment, while the business is generally more stable than the seasonal Canadian and cyclic U.S. markets, we expect the low commodity prices and the country lockdowns may have an impact on activity. As we mentioned previously, 2 of our ST-3000 Kuwait drilling rigs are up for contract renewals later this year. While we still believe those rigs will renew, we expect potential delays with the administrative walk down underway in Kuwait. The balance of our Kuwait fleet is under contract for the full year and should continue with no interruptions. We expect our 3 rigs in Saudi Arabia will continue to operate for the full year as those rigs are also contracted through next year. We will continue to market our 4 idle rigs in the region with several active tenders but do not expect any near-term contract awards. Generally, long-term visibility has not developed. All of our term contracts are performing as expected, but we believe customers will remain very cautious regarding long-term planning, waiting until the economy reopens, normalized oil demand is restored and excess oil inventories are well managed. So turning to our well service business. As Carey mentioned, activity in 2020 started slower than expected due to the cold weather. And as the WCS price fell to very low levels, we ended March with just a handful of rigs running and have continued with very low activity through today. The recent Canadian federal government announcement to provide $1.7 billion of funding for low abandonments will have a significant impact on this business. These funds will be distributed to each province for administration and disimbursement. The Province of Alberta has already released guidelines for the first phase of its $1 billion allotment. The province has promised that funding will be provided directly to service providers in maximum $30,000 lots to work with the well owners to manage the abandonments. We believe this is an excellent way to direct the funding to create the maximum number of jobs that have the best industry impact. We thank the federal government for making the funding available, and we congratulate the Alberta government for creating a capital-efficient disimbursement process to both create jobs and support the heaving well services segment. For Precision, we would expect to garner our share of the work in this, and we expect this to reach a significant improvement in this business while preserving several hundred very important field jobs. The direct impact on the well servicing industry should be in the several hundred million dollar range. So to conclude, I'd like to thank all of the employees of Precision for continuing to perform at a very high level despite the challenges we all face during these troubled times. And I'll now turn the call back to the operator for questions.

[Operator Instructions]. Our first question comes from James West with Evercore ISI.

So guys, Kevin, especially, the fortunate thing here is you've been through several of these, maybe not this sharp and caused the same way this one was. But you got the playbook. You know what to do. I thought it was really interesting, the comment that you made about discussions with customers in the last few weeks have changed. They've changed to -- they're not talking about reduction of activity anymore. Most of those decisions have been made. Could you perhaps elaborate a little further on that? Kind of are they from decisions that have been made? Is it a wait-and-see period? Is there some type of oil price dynamic that they're counting on or budgeting for? Could this quickly reverse and go back to, okay, here's a further cut, I guess, the real key?

Well, maybe the short answer would be yes to everything you said. But James, probably a little more helpfully. Let me kind of walk through what I think is going on. We've seen this over the last 3 or 4 years, really going back to 2014. When our customers have a higher range of uncertainty, they tend to do a lot of action kind of prior to normal cycles of public disclosure like quarter ends. So when there's a lot of uncertainty, we see them cutting rigs. When there's strong prices, we see them adding rigs. And they do most of that work in advance of their public disclosure, so they can come on in their conference call or their press release and say, "We have already changed our budget. We've made the cuts. It's done." So I think that were finished for our customers a couple of weeks back. Now they've been preparing their financials and getting themselves ready for their Q1 reporting, much like we do ourselves. But I think everything right now is ephemeral and could change. Recognize that we've got a nice footprint to natural gas drilling, which I think is stronger than oil right now. We have customers that are hedged, and we'll continue drilling through the year. I think that most of our customers have good rigs. The drilling departments really hate to let the rigs go because the crews are trained up and understand the drilling program. There's a moving cost to demobilize the rig, which you don't see in other services. So I do expect to see a little bit more stability in drilling than maybe some of the other ancillary services, combine that with the hedge books and natural gas drilling. So I feel like we're stable now through the quarter, and we'll see how things look in Q3.

Okay. Okay. Fair enough, Kevin. And then a follow-up for me. With the long-term commitments that you have, would you entertain rate reductions there? Or would it have to be, if I give a little on rate, you got to give me a little more on time, a little blend and extend-type conversation?

Yes. I think the best way to describe it, James, is that we're highly disciplined in tracking our revenue per period. So if we can contain revenue and EBITDA inside a period, I'd say that's very important for us. That's the first guiding principle inside our team, but we also want to show our customers that we're prepared to work with them and show some flexibility. I would say that our least preferred method is blend and extend. I think there's other things we can do to help our customers around their economics.

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

Kevin, I just wanted to follow up on the answer to the last question. I mean it sounds like you expect it to bottom in the U.S. in the low 30s. It looks like you've got, I think, 33 contracted rigs in Q2. So is the inference to make that at least for Precision -- I mean you talked about the opportunity to add a couple or a few natural gas-focused rigs in the next couple of months. Is the correct inference to make it seems to you like the rig count is going to actually bottom in the U.S. in Q2? Or is the visibility still too limited to make that call today?

Well, I'll stop short of calling a bottom. But I would tell you that I think that as far as the second quarter goes, our customers have completed their planning, and they'll start looking into the third quarter once they get through their disclosure period right now. So I'd also add that with this level of uncertainty, I think that the cuts they've made or going to make in the next few weeks are probably going to be overcorrecting for the uncertainty. So I would not -- so I'll summarize that by saying I wouldn't be surprised if the rig count bottoms late in the second quarter, but it's really hard to say.

Okay. Okay. And then just following up in the U.S. I didn't hear any quantitative guidance on margins for Q2, but clearly, there's some negative headwinds both on the pricing and fixed cost absorption side. And is there any way to frame which one is a bigger headwind for you heading into Q2? I suspect on the day rate side, it's going to be essentially 100% contracted activity at fairly good rates. But any way to frame the magnitude of reduction on either the revenue per day side or the cost per day side heading into Q2 in the U.S.?

Taylor, so I would say that quantifying what our margin guidance will be is difficult to do. The day rates will be really well supported from contracted revenue and idle but contracted rigs. We do have a bit of headwinds with fixed cost absorption just with lower activity, but we expect to counter a bit of that with just more intense cost control and some price breaks where we can get them with third parties in our operations.

Our next question comes from Aaron MacNeil with TD Securities.

You've announced some proactive steps today that clearly improve the liquidity position, but you've also alluded to the fact that demand for your services will be significantly reduced well into next year. I also can't help but draw comparisons to 2016 when Precision had much higher debt levels but was also sitting on $475 million in cash. So Carey, I guess I'm wondering, are you more or less comfortable with the overall financial position today than you were, say, in Q1 of 2016? And to the extent that you'd be willing to share it, what kind of stress testing have you done to give yourself comfort over the covenant relief that Precision can not only withstand a prolonged downturn but maybe also be able to quickly rebuild working capital in a recovery?

So that's -- I think there's a lot of factors that play into those decisions and those sentiments. I would say that the thing that gives our team some of the most comfort is our ability to ramp up and down cost. And that's operating cost of business, fixed cost and capital expenditures. So the amount of EBITDA we'd need to generate free cash flow is -- can be pretty low. So I think from that standpoint, being -- remaining free cash flow positive is something we're confident we can do. Obviously, getting access to the revolver is quite important, and that's why we went and got the covenant relief a lot earlier than I think probably what most people would expect. And you will notice, I think, a slight shift in our tone on uses of cash. I think when we were going through 2018 and 2019 and we had pretty good visibility and we're signing contracts, we could put all that free cash flow towards debt reduction. And we committed to do that, and we exceeded our targets just about every quarter. Now there's a little bit less visibility. We've got a good cash balance. We've got full revolver access, and I would say we're likely going to focus on maintaining strong liquidity. Until we get more visibility or if the cash generation we realize is greater than what we expect, we're going to wait for either one of those things to happen before we start reducing debt more.

Aaron, I might add a couple of points on the kind of more market positioning today versus 2016, and I would say that even over the past 4 years, you've seen a tightening or a consolidation in the space around the Tier 1 rigs and kind of the top 4 or 5 builders in the U.S. and Canada. In Canada, you've seen actual M&A consolidation. So the markets are more constructive now than they were back in 2016. So we think our market position is a bit better than it was back in '16, both in the U.S. and Canada and expect to see good discipline through this downturn and on the rebound side by ourselves, the other major industry players. So we think that gives us probably more confidence in the torque, in the bottom and the rebound.

And Aaron, I'll add one other point there, and I think this is a comment for Precision but also probably for the industry. In 2014, the industry in the U.S., we're running about 2,000 rigs and then went into a really steep downturn. So I think company's mentalities, cost structures, a lot of things had to be changed pretty drastically. As we enter this downturn, although on a percentage basis, it's very steep and steeper than what we've seen, I think the industry has been through 6 years of cost controls, efficiency gains. And the mindset is already there, so I think we can act a little bit quicker to adjust to lower activity environment.

Okay. That's it's helpful. And Kevin, you already sort of alluded to it, and I can appreciate there's effectively no price discovery today. So rather than getting into specifics on where you think pricing may or may not go, perhaps you can kind of outline for us, at least anecdotally, what we can expect from Precision in a scenario where even super rigs are featuring much lower utilization than they have in the past.

Yes. So I think we talked on my prepared comments about technology. We talked about analytics and AlphaAutomation. I do expect that those will be differentiators during the trough and absolutely during a rebound. The performance will be notable on those rigs. And it's not just Precision. There are others doing similar things in the industry right now, but it's really limited to just 3 or 4 contractors. So I expect that -- I expect you'll see unusual discipline, both around service provision and quality of service and pricing through this downturn. But beyond telling you, I expect to be much more disciplined that our customers are able to measure this better, and we can demonstrate it better, the performance. I'll stop short of giving you any numerical guidance.

Our next question comes from Connor Lynagh with Morgan Stanley.

Wondering if you could discuss -- and maybe it's too early to tell, but has there been any material shift in the number of services your customers are asking you to run them? I'm specifically referring to the apps and other digital services. Is that -- has that been a target for cost cutting? Or is the sort of mix generally similar across your rig fleet as it was, say, 6 months ago?

Well, there's been a whole bunch of changes between today and even 10 weeks ago, Connor. But I mean we've been dealing with the procurement departments, the legal departments, the finance departments for the last 6 weeks. We're not getting calls from operations about turning down rigs or getting calls from the Chief Procurement Officer who reports to the CFO about how to exit the contract. So most of our discussions have been commercial and legal in nature, not so much around operations but the exceptions I mentioned around technology, which is why I kind of hinted that we expected that once that exercise is finished, which may be finished right now for the meantime, that we'll see our customers lean back into their operations teams to optimize the fuel performance. So in fact, I can tell you, in most -- in many cases, the operations teams have been shuttled aside while the finance teams, the procurement teams have managed these contract books. And it's become a liability management exercise for their customers, not so much an operations management exercise. But we do expect that'll tip back, and we think it could tip back pretty quickly. And for two accounts I mentioned, the IOC and for the natural gas driller, they remain focused on efficiency, and they've got their plan in place. And we're pursuing new elements of technology with both of those right now. I don't know if I've answered your question directly or indirectly, but I think I've covered the topics.

Yes, I think you got the gist of it. I guess the one remaining question on the technology side of things is, in these discussions, have there been just conversations about potentially lowering or altering the price or pricing arrangement on these services? Or is it entirely focused on rig day rate?

Well, I'll give you my standard lines. So from the procurement teams, there have been pricing pressure on every single lever they can pull. So if we're dealing with a procurement officer in an E&P company, any lever he can pull. So we -- and we heard a lot of talk about these performance-based contracts back in February and these oil index contracts. Those contracts have more levers, and we watched these procurement agents to try to pull more levers. And if you have additional items like technology and even maybe casing running, every price point on that contract is a lever for that procurement officer to pull and will try to pull it. And our job is to stay disciplined and justify our value. So I don't think the game has really changed. I think the more price points we give them to negotiate, the more work they think they have in front of them. And our job is stay disciplined and validate our value.

Our next question comes from Kurt Hallead with RBC.

I just wanted to just get an update in the context of your comments. You had -- there were just very specific debt reduction targets and have been plugging along on that for the last couple of years now. And then just wanted to calibrate, Carey, you made a comment about you resume your debt repayments once you get a little bit more visibility and/or if cash were to exceed expectations. So can you just give us a general sense then as to maybe what the cash level benchmark is for you to start -- kind of restart the process of paying down debt or just to clarify if I'm misinterpreting your comments about that reduction? That would be helpful, too.

Yes. First of all, I would say that the goal for the year remains the same, but we're probably going to slow down a bit on the pace. We did $40 million in the first quarter, and I wouldn't expect a $40 million reduction in the second quarter. And in terms of cash on hand, it's a bit of a function on what our contract book looks like and what our visibility is on how much cash we're comfortable or how little cash we're comfortable holding. But just to ballpark it, I think kind of in that $75 million to $100 million range is right now the amount that we want to make sure we have access to.

Okay. I appreciate that. And then I just want to also kind of gauge just on working capital. Do you expect working capital to provide a -- be a positive contributor to cash this year?

Yes, absolutely. On the press release in March on kind of our cost reductions and update on our liquidity, we said we expected kind of $80 million to $100 million of working capital to convert to cash from the first quarter onwards. I think we got a little bit of that in the first quarter. We'll have a good chunk in the second quarter and maybe a bit more in the third quarter. So I think that guidance still holds.

Okay. And Kevin, given like almost a -- trying to think through, okay, everybody's managing through the downturn. Everybody's going to reduce costs, both on the E&P front, on the drilling front. And then you get to the point where the economy rebounds. You get some oil demand rebound and some oil price recovery, and then the E&P start inquiring about putting rigs back to work or whatever. Given the sharp reductions in workforce and so on, what kind of lag effect do you think there might be when there starts to be some signs of recovery and E&Ps want to put rigs back to work? And how many of these people do you think you can ultimately kind of draw back into the industry? Any perspectives on that would be really helpful.

Kurt, I think it's a really good question. It's actually fairly complicated, but I can give you a couple of case examples. So in Q1, in Canada, activity exceeded what we expected, and we still met the demand by staffing rigs and getting probably 10 to 12 more rigs running than we expected in about a 2-week period. And that was going from a base of -- during that Christmas break period, got down as low as around 30 rigs. We fired back up 50 or 60 rigs in about a 3-week period. I think that shows our short-term ability to flex up and down in Canada. So we hardwired in Canada to deal with seasonality, cyclicality, short-term/long-term cycle. So I think if the demand rises in Canada, our team up there, despite having gone through some pretty major cost reductions in our bases and our headquarters in Canada, can still respond and get rigs back to work. In the U.S. here, the business is not seasonal. We're not used to having to ramp up and down seasonally. But I can tell you, we've been very, very targeted with our staffing. So we preserved our rig managers, our field superintendents and our drillers by shuffling around onto rigs, so that our crews are getting better and better because we're getting -- we've got more rig managers operating as drillers and more field sups as rig managers right now. So when it does come to restaffing, I think bumping back up into that 50-, 60-rig range -- we already have the leadership teams on hand right now in the company, and we'll preserve them for the coming quarters. So I think getting back up to what the activity levels we had in Q1, we can do that quickly, efficiently, in a matter of weeks or a month or two. Getting beyond our Q1 activity levels, say, we want to go from 60-ish rigs into the 80-rig range, that might start taking a few more weeks after that, weeks and maybe into a month or two. I hope to get the plan for those days someday soon.

Yes. All of us would, for sure. Maybe just one follow-up as well for you, Kevin. I know that again, there's limited kind of data points to work with in the U.S. with respect to pricing, but I'm sure there's multiple data points to work with in terms of letters from clients, customers asking for price concessions. What's your sense on that? And I asked the question just because in the U.S. as in Canada, it's an old, a capitalistic business. You're not really going to incentivize more rigs going to work by dropping price. So just want to get a general sense for how you think the industry may react on that dynamic as we kind of go through this downturn.

There's no price at which we can offer a drilling rig that will lower their cost to breakeven with WTI at $18.41. So simply, no price companies can give that will make them breakeven. We know that. Our large public peers know that. We're all quite disciplined. I think we're going to want to show flexibility and responsiveness, but I don't think we can transfer value from our rigs and erode our rigs to support our customers. I don't think that'll happen. So I just don't expect you to see large public companies operating at cash breakeven levels, which would not pay the depreciation or the maintenance capital on those rigs, which supports pricing upper teens, low 20s, not low teens.

Our next question comes from Blake Gendron with Wolfe Research.

Pretty interesting commentary, the federal government, the federal P&A program that you mentioned. Just wondering, out of the $1 billion or $2 billion that was cited, how much of that falls into the part of the value chain that your C&P segment operates? And then what your market share? Is, and potentially what the timing, I guess, of this program could be over the coming quarters? It's been a small part of the model, obviously, but just to help us gauge potentially as a buffer to downside risk in other segments.

So the first comment I'll make is after the political announcement gets made, it often takes a few weeks to get the bureaucracy in place to actually execute these plans. But what we have seen so far is that the $1.7 billion is split between Alberta, British Columbia and Saskatchewan, with Alberta getting the largest portion. Alberta hit the ground running, and they announced that they're going to be open for applications starting tonight to start applying for those $30,000 chunks that will come straight to the service company. So ourselves, along with cementing companies, consulting companies, will be applying for those $30,000 blocks and then working with our customers to identify targets for well abandonment, and that's how it's going to progress forward. Just thinking about the full value of the $1.7 billion, probably in the range of between 50% and 70% will flow to well service companies like ourselves, and this is targeted to last through 2022. So it's a 2.5-year program. Our market share in Canada would be anywhere from 12% to 15%. We would think that there has been some attrition in the Canadian fleet, and that could continue because I think some companies cannot survive the coming weeks even with this incentive program. So we could see our market share gains even in a tough market in Canada. So we could garner even larger than our regular market share of that spending. But if you just flow through that math, that's a material change for us. That could be in the $10 million or $20 million range this year alone, which would be very helpful for that business.

Got it. That's helpful. And then just a follow on the market positioning questions. The rig count fell pretty substantially in the last downturn, just like it is now. But underpinning the last downturn was a secular adoption of pad optimal rigs. I was just wondering, these are long-lived assets, if there's anything from a hardware standpoint that might see some of the older, even pad-capable units start to come out of the market in this downturn, and then if you could specifically call out which attributes of the rig would kind of be a threshold for that phenomenon playing out. Or do you think it's going to be more on the digital side in terms of differentiation as we exit this downturn?

Yes. I think that's a good question. For sure, some of the pad rigs that were delivered early in the cycle have worked hard for a long time. Mud pumps get worn out pretty quickly. Top drives get worn out. A lot of the rotating machinery gets worn down. The mud tanks are being used a lot. The walking system is getting used a lot. So -- and then when you hit a downturn like this, I'm sure some companies will get into a cannibalization mode, where they're not maintaining things quite as well as they might have 2 or 3 years ago and cash flows are better. So I do expect that even some of the pad optimal rigs will be -- become economically unviable or require so much capital that, that market size will shrink a little bit. I'd expect that the larger drillers, ourselves included, have done a pretty good job maintaining their assets. I don't foresee any retirements in the Precision pad optimal fleet or Super Triple fleet the next couple of years, and I would think our larger peers are much in the same position. But I do think some of the smaller players that may be more stressed or distressed, they find their assets become a little less relevant. They may argue with that, and I don't see inside their numbers, so I can't say for sure.

Our next question comes from Waqar Syed with AltaCorp.

My question relates to your international contracts. With these OPEC production cuts, is -- could there be any impact to the activity of the 6 rigs that you have under contract longer term? And then second, is there any pressure on giving any kinds of price concessions?

So there has been talk inside Saudi Arabia about Aramco sending out letters. We've been through that before. We're a pretty small player in Saudi Arabia, so I don't expect any material changes to our business in Saudi Arabia. Your bigger question, though, about OPEC reductions. I guess, the good thing about those national oil companies are they are thinking long term. And while on the short to mid-term, there are going to be constraining production and constraining shipments and deliveries and probably even more in the coming weeks. Longer term, they still have declined curves. So I expect the oil drilling in Saudi probably remains fairly stable. Kuwait's a little tougher to call. They've been transitioning more to an IPM model in the past few years. We did expect those 2 rigs we have renewing this year to renew. But we think the holdback there isn't going to be curtailments or OPEC actions. We think it's really going to be just a shutdown going on in the country right now because we understand that they were -- they had drilling plans for those rigs going forward. There's just nobody in the office to execute the contracts.

Okay. And you made some comments about natural gas rig activity coming up in the U.S. And could you maybe elaborate on that? Are you any -- in any kind of discussions to -- for rigs to go back to work there? Or that's just an expectation at this point?

No. We have a handful of customers we're in discussions with. And I'd even tell you, we've got some turnkey opportunities we're looking at right now, which almost surprises me, but we think they're real and could materialize into activity this quarter or next quarter. I think it's highly dependent on gas prices and contracts and funding and things like that. These are all -- they're all small opportunities. We're not talking about a 5-rig contract or a 2-year contract, but we're looking for any opportunity right now to keep our rigs busy.

Sure. Okay. And then in terms of the Alpha series of technology that you have, is there any opportunity in this kind of environment in the international markets as well? Or that needs to wait until the market improves?

Well, that's a really good question, one I didn't even come here thinking about before we got here today. I can tell you there's 0 opportunity while the offices are closed. We need to have drilling engineers in their office so we can bring the technology and give the demonstration before we can execute it. But in a market which is kind of opening back up again and things are normalizing and the office closures are ended, and if Canadian and U.S. activity stays low, we will absolutely be pushing that technology into Kuwait and Saudi Arabia for sure.

Our next question comes from Ian Gillies with Stifel.

With respect to the debt retirements this year, acknowledging it's on pause right now, should we be thinking of that 100 to 150 as absolute dollars deployed or face value retired?

I think it's too early to say, Ian.

Okay. With respect to the incremental of $20 million of savings, are you able to provide any additional detail of where that demand came from?

So some of it's tax deferrals. Some of it is way the system's programmed. Some of it is, let's call it, recurring lease expenses that we've been able to defer. So it's just -- it's a number of different things that go into that bucket.

Okay. Last thing on the staffing front now. Are you able to provide any detail around where you may be staffed now from a rig count perspective? How many rigs do you think you could run maybe in the U.S. and Canada, given how many people you're holding? Is it relatively in line to what your guidance was heading into Q3 here?

Yes. I think we have a pretty good sense internally. I don't want to be pointing the market up or down based on what we've done around G&A and sizing our organization. But I'd tell you that running somewhere in the range of 30 to 50 rigs in the U.S. We think we can handle with our current size and running somewhere between the dismal 11 rigs right now, and maybe 30 or 40 rigs in Canada is probably where we're at right now.

Perfect. Maybe last one for me. From a strategic perspective looking longer out, I know you guys have wanted to or hoped to grow internationally. Is there any particular areas you're paying attention to as this pain, I guess, goes on and that you might like to enter once things start to settle out a little bit here and there's a bit more clarity moving forward?

It's a little hard to -- for us right now to determine how the recovery's going to -- how the trough recovery is going to play itself out. I would tell you that there are probably more distressed international rigs than there are domestic North American rigs. So I would say that our eyes are kind of focused a bit on the international market and a bit on North America. But certainly, there's a large volume of international rigs that are in distressed debt situations. So I don't think we're looking to deploy capital for those rigs, but there might be a possibility for management contracts, utilizing our scale and our systems to manage other assets. I'm not sure where those rigs are going to end up or who's going to end up with them, but we've got a pretty good system right now, particularly in Saudi, Kuwait and eventually in Kurdistan to support and manage operations with no increases in cost.

[Operator Instructions]. Our next question comes from Dylan Glosser with Simmons Energy.

You mentioned a peak market share in Canada of roughly 32%, I think it was back in January, and that you expect to efficiently get back up and running. Do you mind discussing how you expect to maintain or grow your market share through the next several quarters in Canada?

Well, I think if you do the math on 11 out of 24 in Canada right now, we're probably 46% market share. But I think that's a little bit of a mix issue between our Deep Basin rigs and our heavy oil footprint. I do think that what's going to keep on running in Canada will be the Montney play to some extent, and then it gets pretty sporadic after that. And our footprint with our Super Triple rigs, the Montney and the natural consolidation that's taken place, you've only really got 3 drilling contractors that are active with Super Triple net basin. So it makes for a very consolidated competitive environment. I think that plays into Precision's hand a little bit for Canada. Is that helpful?

Yes. Yes, sir. And kind of another topic here. As you guys look at free cash flow generation through 2020, and without taking into account working capital, do you expect to be free cash flow breakeven through Q2 and Q3?

Yes. I would expect us to be cash flow breakeven in every quarter.

And that's without the impact of working capital release?

Yes.

Our next question comes from Dan Healing with Canadian Press.

I was just wondering if you could give me an idea of what the headcount is now versus same time last year or the end of last year in Canada and the U.S.?

Dan, I don't have those numbers at my fingertips right now, but substantially less. In the U.S. right now, we're running 35 rigs versus almost 80 this time last year. So that alone, call that 45 rigs less times -- or company-wide, about 40 people per rig. So it gets into the 1,800-person range in the U.S. In Canada, kind of much the same thing. We're probably 1,000 people lighter than last year across our drilling and well servicing groups right now. I think the one part that's hardest on Precision is that, historically, we tried not to lay off people in our offices, but we've done that both in Houston and Calgary and Red Deer. And a number of long-term employees, some ranging on more than 30 years, have been asked to retire, leave the company. It's been a real tough -- really tough on the employees the past -- maybe the past 8 weeks. And we're really hoping that in a recovery, pull some of those people back. But the numbers are overwhelming at some point.

Okay. The Petroleum Services Association put out a revised forecast today that called for more help from the federal government on top of the well cleanup program that they announced. Do you see the need for more aid for the drilling and services sector as well?

Dan, the $1.7 billion they've announced so far, we're grateful for. It supports the well services business very well. But unfortunately, it doesn't do much for the drilling contractors or the drilling segment, which is going to go into kind of all-time record lows. So I do think that the CAODC is petitioning for more help for the drillers. There's no question the industry needs it because a number of drilling contractors have zero rigs running right now. It's a very tough environment for a lot of the smaller drillers, and I think that help is needed.

I'm not showing any further questions at this time. I would now like to turn the call back over to Dustin Honing for any closing remarks.

Thanks for joining us on our Q1 call. I look forward to talking with you in the future.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.