Good day, and thank you for standing by. Welcome to the Precision Drilling Corporation 2021 Third Quarter Results Conference Call. . I would now like to hand the conference over to Carey Ford, Senior Vice President, Chief Financial Officer. Please go ahead.

Thank you, Amanda, and good afternoon. Welcome to Precision Drilling's Third Quarter Earnings Conference Call and Webcast. Participating with me today is Kevin Neveu, President and Chief Executive Officer. Precision reported third quarter results through a press release earlier this morning. Please note, these financial results are in Canadian dollars unless otherwise indicated. Also, please note some of our comments today will refer to non-IFRS financial measures and will include forward-looking statements regarding Precision's future results and prospects, which are subject to a number of risks and uncertainties. Please see our news release and other regulatory filings for more information on financial measures, forward-looking statements and risk factors. Prior to Kevin providing an operational outlook and update, I will review our third quarter financial results. Precision's third quarter results were characterized by increasing North American activity, improved spot market pricing and largely temporary increases in U.S. operating costs ahead of a stronger Q4 and Q1 activity outlook. Our second quarter adjusted EBITDA of $45 million included a share-based compensation expense accrual of $14 million. Absent this accrual, adjusted EBITDA would have been $59 million. The share-based compensation accrual resulted from continued strong performance of Precision shares and our cash-settled accounting treatment where each quarter we accrue an expense or benefit based on to market and accounting for planned vesting in the quarter. As noted on our 2021 conference calls, the cash treatment and share price volatility may present higher volatility in financial results. Please keep in mind that we have the ability to pay a portion of these awards in either cash or equity upon vesting. During the quarter, we received $6 million of CEWS assistance payments. And we believe the CEWS program is largely complete for Precision with the 2021 impact of approximately $24 million. Moving to the U.S.…

Thank you, Carey, and good afternoon. While this is the first time in over a decade, where a strong and resilient commodity backdrop lines up with the annual E&P budgeting cycle, unusual territory, indeed. Virtually all, in fact, I believe all the key leading indicators we monitor are trending favorably as we develop Precision's outlook for 2022 and beyond. Following the significant drilling activity reduction during the pandemic and now with energy demand firmly rebounding, we are very encouraged by the strong spot and future strip oil and gas commodity prices. Underlying these key industry fundamentals is the supply discipline demonstrated by OPEC Plus and the capital discipline of the publicly traded oil and gas producers. Looking at our core U.S. and Canadian markets. The cash-generating capabilities of the oil and gas producers will continue to be strong, much stronger than it was expected even just a few months ago. Much of the balance sheet repair work, the industry needed and the investors saw, has been completed or will shortly be complete. We believe the mantra of capital discipline and sustainable shareholder returns will continue to be the key strategic focus of our customers. And we expect this will lead to a healthier and more balanced result for our industry over the longer term. On the near term, the dwindling inventory of uncompleted wells in the U.S. is a key indicator we watch closely. Undoubtedly, the operators will need to shift focus and direct spending back to the drill bit just to sustain current production levels, let alone provide for any increase in demand. Now while many have written off the shales as a swing producer, when you look at the shale industry structure from logistics capability, infrastructure perspective, it's functionally structured to be one of the fastest responding sources…

. The first question comes from the line of Ian MacPherson from Piper Sandler.

We're seeing a lot of stubbed toes in this cost environment, and it's refreshing to hear that it feels -- looks from your results and feels that you have a good handle on containing the cost inflation throughout your labor and elsewhere. But where do you think the differentiation that you spoke to on your part for sourcing quality labor? Can you speak to that? And what other ways maybe your business or your company are unique in insulating you from these pressures that we're seeing elsewhere throughout the industry?

Yes. Well, so there's kind of pressures in two areas. Obviously, labor costs. But generally, our contracts both in U.S. and Canada and internationally have provisions to pass those through to our customers. So we're a little bit less concerned about labor cost inflation. But I want to come back to the recruiting question in just a moment. On the material cost inflation, most of what we experienced in the third quarter was related to start-up costs and some remobilization costs. We're continuing to work with our partners on supply chain. And we think we're able to mitigate inflation in the near term. And we expect over the longer term, our price increases will outstrip the effects of inflation. But you did see us increase capital spending during the quarter to pick up an opportunity to buy some drill pipe at -- there was an inventory at a very good price and kind of get out ahead of the steel price increases are imminent. Now back on the recruiting front. It's a challenge in every market we face. It's a challenge in the U.S. and Canada, particularly in our Well Servicing group. In fact, I spent a couple of days up with our recruiting team in this Q last week, and we're working on some systems there to really amp up our recruiting efforts. It includes everything from referral bonuses to kind of incenting our recruiting team tied to activity levels for the industry. The Precision brand is a very strong attractor for employees, our training systems to attract employees. But I think it's our systematic approach to generating applications, waiting through the applications to find the right types of candidates and then training those candidates and getting them out to our rigs with a good training program that helps us meet that challenge. Hope that answered your question, Ian.

Yes. No, that's great. That's great, Kevin. You also talked about turning down more work recently in order to, say, help your sales team push rates where you need them to get. Where are we with regard to that? And is it becoming -- are you -- how many more rigs do you think in the U.S. the market needs to absorb before there's really no more turning down rates, it's more liberated pricing power on your part as opposed to cherrypicking your battles?

We are right in the middle of -- I commented on a couple of hundred bids active in the U.S. and our big count in Canada is probably over 100 rigs right now, also 100 different quarries are bidding on. So I really don't want to get into too much narrative that would either upset our customers or our sales team in those discussions. What I would tell you is that our willingness to walk away -- work right now tells you that we think that there are better opportunities to price into imminently.

Our next question comes from Aaron MacNeil with TD Securities.

I think I'll piggyback on Ian's question, Carey. I think you did a good job of covering the cost pressures in the U.S., but I guess I'm wondering from your prepared remarks, was there also labor cost inflation in Q3? And if so, how much of that, call it, $700 a day would say a gross pricing increase versus the net of labor? And implied in your $1,500 to $2,000 sequentially increase in margins in Q4, how much of that would be gross pricing versus lower costs or anything else that you might be able to parse out?

Yes. I can give you a few pieces of information to kind of help you in your calculations. So I would say if we averaged 41 rigs in the quarter, if we're going to activate 4 rigs at some pretty chunky expenses for each one of those rigs, not a whole lot of rigs to spread them out over and then having a rig move, you're probably talking $2 million, maybe, $3 million for those costs spread over 40 rigs. So we don't expect to have similar costs in the fourth quarter. And there may be -- may have been a little bit of higher R&M costs and overhead burden on the rig activity we had this year -- or this quarter. But as we go to next quarter, we expect that to be spread across more activity in Q4, and again, not have those lumpy cost. We didn't have any meaningful wage increases in the U.S. market. There were industry wage increases in the Canadian market during the quarter. So I think those are some data points on the cost side for you to consider. And I can't break out how much of the day rate increase was a gross or net for you.

I really just -- I'm less interested in dissecting onetime costs. Just trying to parse out your implied pricing guidance with Q4 because it would obviously be...

So yes, you can take away that we are planning to have day rate increases in Q4, and we expect the daily operating costs to go down in Q4, which is why the margin jump expectation is so large.

Got it. Okay. Kevin, sequential app growth seemed to be out of step with the growth in automation and analytics. I assume it's a function of new apps that are getting spread across the fleet, but can you maybe give us a bit more on that? And if it is a new app, can you share specifically what you rolled out this quarter that had good uptick?

It's really kind of three components that drive that app pick up. I would tell you that we're having really good success with our managed pressure drilling up. So that's one important piece. And -- but we're also seeing, though, are that more and more rigs are using multiple apps, not just one app as our operators get more comfortable with the value that apps create and then there's word-of-mouth transfer from rig to rig. So good organic new customer sort of adoption of apps, customers adding more apps are getting more comfortable and the app that -- the one app that's out there, that's used pretty good right now is managed pressure drilling.

Understood. Last question for me. You mentioned COVID's impact on the commodity, but did you see that impact on day-to-day operations in your fleet in either Canada or the U.S. in the third quarter?

Okay. You open the door, so I'm going to jump in, if that's okay.

Sure.

We actually did see kind of a surge of infections kind of with the Delta variant in August, and it was so sharp and so quick that we implemented a policy on September 1 that was a mandatory vaccine or provision of negative test, and we are expecting some pushback in the field. There was some noise. But when the procedures went live in mid-September, out of almost 4,000 employees, I think the number of employees that didn't comply is less than 4, 4 people out of 4,000. Everybody else, full compliance with either full vaccine or providing negative tests. And since the implementation of that requirement, we haven't had a rig hour impacted by COVID-19. I'm really pleased with the response of our people and the effectiveness of the program. I wish everybody would do it.

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

Kevin and Carey, I've got a bit of a high-level one to start. So for 2021, the strategic 3 primary strategic priorities have been digital leadership, balance sheet deleveraging and delivering -- leading ESG performance, all of which you've made pretty good progress on as we progress through the year. And I guess, my question is without front run in 2022, just curious if you could give us a sneak peek or a sneak preview of -- if there are any sort of buckets that might change on the strategic direction for 2022? We're obviously in a much different commodity price environment as well as a much different activity environment, seems like improving pricing is going to be right there at the top in terms of strategic priorities. But where we sit today, just curious if there are any sort of items that stick out to you that there might be different in terms of strategic priorities for 2022?

Taylor, good question. We'll release those in February with our Q4 conference call. But I'd tell you, ESG is not going away anytime soon. It's going to be up there on the top priority for quite a while, leveraging our scale and delivering strong shareholder returns will be up there. And I think we may get to the point where the technology digital initiatives become common, of course, business for us, but I'm not sure we're there quite yet. But I think it's a fair question. And just I'm reinforced, I'm sure ESG will be there, I'm sure financial performance will be there.

Okay. Fair enough. And again, for 2022, if we think about pricing, you've got a number of different rig classes in Canada and then more of a uniformed rig class at the high end of the market in the U.S. And just curious, as we think about the next 12 months, is there one bucket where whether it's just U.S. versus Canada where you see the best chance of improving pricing? Clearly, pricing is going to be trending higher across both markets. But particularly in Canada at the high end of the Super Triple market feels like it's fully sold out today. So you probably have a great chance of pushing pricing there. But I'm just curious if you could maybe rank for us where you're seeing the strongest tightness today and best chance of significant pricing momentum as we get into 2022?

Taylor, unless something changes from the macro that we kind of described at the beginning of my prepared comments, it's probably a rising tide across all classes.

And that's what we're seeing right now.

And that's what we're seeing so far. And that's what this macro is kind of laying out there for us.

Okay. And then last question for me on CapEx. The 2021 budget has come up, a piece of that's maintenance, some of it is just opportunistic spending. And again, for 2022, I mean we can kind of build up a CapEx forecast starting with maintenance, you probably had some growth for Alpha and maybe some growth for EverGreen. Any other sort of opportunistic or growth-oriented buckets that -- whether it's in the back half of 2022 for Q4 -- excuse me, Q4 2021 or full year 2022. Any sort of growth areas that's been intriguing to you today from a capital allocation perspective?

Taylor, from North American perspective, it's going to be maintenance capital, which will be linear with activity and then these contracted upgrades that we're doing, which are kind of $0.5 million to $2 million per rig to increase pump interacting capacity or adding Alpha to the rig. So don't expect real big dollar amounts per rig in North America. And internationally, it would likely be the same thing if we're reactivating rigs internationally. We're not talking about a USD 60 million newbuild. It will probably be anywhere from $3 million to $6 million to reactivate a rig in the international market, that might be a little bit chunkier. But I would say that the CapEx plan, given our activity increases -- activity expectations would be similar to the plan this year with probably an increase in dollar amount mirroring the increase in activity.

Our next question comes from Waqar Syed from ATB Capital Markets.

Yes. So first of all, congrats for rejecting a job rather than taking a lower rate. I hope all other management teams take similar kind of steps. This is certainly needed in the industry, and thank you for taking a leadership in that respect. My question is, Carey, in terms of international rig reactivations, you mentioned the cost that would go into the CapEx budget. Would there be any cost on the OpEx side as well as you reactivate some rigs?

It would be a lot smaller than the CapEx side. It would be $100 million type OpEx per rig reactivation. And what we're talking about is the 3 idle rigs in Kuwait as we reactivate those and then potentially moving some rigs from North America for opportunities where they will need some modifications, but it would be well less than $10 million per rig.

Okay. Secondly, Kevin, you mentioned that there were about 200-or-so bids out there in the U.S. market. Could you give us a split between like privates and public amongst those bids?

Waqar, the weighting has shifted kind of back to more traditional. Yes, I think we're setting kind of majority would be public, but still a large percentage of private equity. I don't have the numbers in front of me, but think about it like it's 60-40.

Okay. Great. And then you have 45 rigs currently working...

What I costed you on that number, the 200, don't take that. We don't -- we're not projecting that as 200 rig adds. We are in budgeting season, price discovery season. There's a lot of moving pieces, but it certainly is easily in order of magnitude higher than a year ago of interest and inquiries.

Yes. Great. And then you're currently running 45 rigs in the U.S. You still expect to exit the year around 50? Or has that number changed now given some of your recent actions?

It seems like every time I projected a rig count going forward I come up short the last couple of calls. So I am a little nervous about say anything about rig count going forward. Certainly, we have a really good line of sight and would appear to be pretty solid opportunities to get rigs deployed by the end of the year. And get through that 50 threshold. And as soon as we have this meeting, something might change, but it looks quite promising. First of all, I've been cracked the previous couple of quarters.

That's okay. That's okay. So then just final question on the well abandonment program. When do you expect that to be exhausted? And when your well servicing revenues may come in, in the Canadian market?

Yes. That's a really good question, Waqar. So first of all, in the well servicing program, it's actually scheduled to end the funding at the end of next year. But they have only used up a fraction of the available funds because it's been quite slow and kind of -- I wouldn't say bureaucratic, but it's kind of complicated in how they've been distributing the funds in Alberta, BC and Saskatchewan. I think there's going to be a good push to extend it. So it could be extended. But there's been no indication yet. I think that will be mid-to-late 2022 government decision if it goes that way. So I think we commented that 15% of our activity has been tied to that work. There is enough, I'd say, traditional demand that I think it could replace that work and not see the work pull back in. We went through about a 5-year period from 2014 through 2020 even before the pandemic and before this program, where the first thing that got cut by the operating companies as they moved into discipline was reducing and eliminating well service work and really focusing on the drill bit. But now in this period of real capital efficiency, it actually makes good sense to work over a lot of wells. So I think there's a lot of core demand both in heavy oil and conventional oil, gas, for core well service work, core abandonment work that we'll continue when that program finally runs out.

Okay. Great. And if I may just sneak in one more question. Carey mentioned that there may be some rig mobs out of the U.S. into the international markets. Would those be for super-spec rigs or more traditional SCR-type rigs? And would it be to the same kind of markets where you already have a presence? Or are you looking to enter into new markets as well?

So I'll be a bit vague with my answer, but I think I'll still answer your question. So we're looking in the Arabian Gulf region, the bordering countries, the Arabian Gulf, including Kuwait and Saudi Arabia. There is a high interest in pad-style drilling. So the AC, Super Triple rig, I think, will have attractiveness. We saw one of our other competitors actually do a deal with the Abu Dhabi National Drilling Company a couple of months back. So I think that all points to kind of a growing opportunity for pad drilling. And we also see opportunities right now for some heavy oil drilling with shallower rigs. So it's -- again, what we see in international markets are that they tend to be a bit slower, but then they react in an industrialized manner to both technology and opportunities at North America uncovers. So I think pad drilling will grow in the Middle East. I do think that even have the oil drilling will have a future in the Middle East. And there's things that -- several North American drillers will bring into play. They are certainly precisioned with our super singles and our pad Super Triples will have very interesting opportunities, both in the places we work and adjacent countries.

Our next question comes from Keith MacKey with RBC.

So just wanted to start out, in Canada, we've heard anecdotal evidence of labor restrictions keeping, say, rigs from going back into the field through kind of Q3 time frame. So just curious what gives you the confidence? And I guess, how confident are you that the industry can reach that 250 to 300 rig count level in Q1?

Well, you may notice that my comments were demand, not necessarily activity. So I commented, for sure, we see that level of demand. Whether or not the industry can actually step those rigs, I think, is a challenge. The industry has a good history of staffing rigs and getting rigs fired up. Generally, in every previous rebound that has been this sharp or even sharper, the drillers have been successful staffing rigs. But boy, I'll tell you, it's a big challenged right now.

Yes. Got it. Is it challenging in any particular areas, singles versus triples or is it across the board?

Well, for sure, well servicing, which is called-out style business where the job isn't as secure as a rig job that would likely be for months on end with defined rotation. So I'd say drilling is a bit easier than well servicing. Certainly, through the summer, both in every market -- simply every market we participate, in every geographic market we participate in, there seems to be a reluctance for people to go back to work. We saw that improve in September, maybe those young men we're recruiting wanted to take the summer off, we're not sure. But certainly recruiting improved in September. And we really, really doubled down our recruiting process starting September. So it's actually working well for us now. I think that -- so going back to that original question, if the demand is 300 rigs as a peak, that means Precision has to staff up 75, 80, 85, 90 rigs. So I think that we'll be able to get there.

Got it. Okay. No, that's very helpful. Just shifting gears to your comment about seeking to get day rates so that you can get back to positive EPS levels and things like that. Can you maybe just comment on relative to 2019 levels what, say, activity levels in general and day rates in general would be required to hit that target?

Yes. I actually don't have those numbers at my fingertips here, but it's going to be...

Yes, I think we've got to cover our depreciation, interest and taxes. So depreciation, $280 million; interest, call it, $80 million; tax rate would be relatively low. But we need to get to an EBITDA level that's getting close to $400 million, which is where we were in both 2018 and 2019. And we think that the mix of activity could be a little bit lower than it was then. Number one, we've got a lower fixed cost base than we did back in 2018 and 2019. And number two, we have a rapidly growing but maturing technology business that we did not have in 2018, and that's helping drive pricing and EBITDA.

. Our next question comes from .

With your discussions with customers, are you finding them wanting to lock in the equipment they're comfortable with, with crews they are comfortable with, the technologies they're using, longer than into the end of 2022, pushing into '23? And is there a difference in the customer discussions between Canada and the States on longevity of contracts given the desire to have the rigs and the crews that they've worked with regularly for a while?

Joseph, good question, and it's a bit complicated. But I would tell you that the human behavior in both markets is relatively similar, corporate behavior is relatively similar, and so one answer kind of applies to both markets. I would tell you that for most operators, they will have some base level of activity that they're highly certain they're going to be running even though their budgets haven't been approved. So for those rigs, yes, absolutely, we're seeing customers trying to lock in new rigs and crews for full year 2022 and sometimes even a little bit beyond that. Certainly, they're trying to capture, call it, 2020 rates, if they can, or even early 2021 rates are locked in for a longer period of time. So a little opportunistic on their front. But then also, there's a larger component of rigs that probably haven't been approved yet, but are in their sites and budget, and that's where they're being either running those rigs on a well-to-well basis right now or on shorter-term contracts. So it's a bit of a mix. But I would say that the behavior we've seen so far has been a bit more opportunistic and a little less strategic, if that makes sense to you.

Okay. And do you see much contracting pushing into '23 yet or anything material in terms of the book of business?

We're not anxious to project current rates so far out. We're not digging those up and pushing for them. There would be the odd opportunity where a customer comes forward and says we all like to book it for 2 years. But there's no real trend yet and no momentum in that direction. And I wouldn't read that as any certainty or uncertainty in the market right now. I still think that the market is firming up its pace, spending is going to increase to some degree, activity is going to increase and the best rigs already get contracted. I expect that as our book builds for 2022, there will be a mix of 1-year contracts and probably a growing mix of 2-year contracts the deeper we get into this recovery.

Super. Last question for Carey. In the fourth -- in the quarter that you just released under your adjusted EBITDA corporate with $15.455 million expense versus $7.8 million. And then you look at the first 9 months, it was up by 49%. The quarter was up by 99%. Can you walk me through what happened in the quarter that, that number was such a big difference?

So the big variable on our corporate expense is share-based compensation accrual. So our 3-year long-term share-based plans, we mark-to-market based on the share price at the end of the quarter and then based on the time vesting of each planned participant. So we had a -- we continue to have really strong share price performance this year. So the value of the plan has increased, and so we just took an accrual during the quarter. I would say on SG&A broadly, at the very beginning of the year, we gave guidance that our G&A before share-based comp accrual would be $55 million for the year, and we've tracked that every quarter and are still providing that guidance even though we've had a significant increase in activity throughout the year. So it's really been a big focus of the management team to try to keep the cost structure as long as we can as we're going into this recovery.

I'm showing no further questions at this time. I'd like to turn the call back over to Carey Ford for any closing remarks.

Thank you. That concludes our conference call. I appreciate you joining us today, and we look forward to meeting with you all again for our Q4 conference call in February.

This concludes today's conference call. Thank you for participating. You may now disconnect.