Trinidad Drilling's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 9.13 | About: Trinidad Drilling (TDGCF)

Trinidad Drilling Lt (OTCPK:TDGCF) Q3 2013 Results Earnings Call November 7, 2013 11:00 AM ET

Executives

Lisa Ciulka - Vice President, Investor Relations

Lyle Whitmarsh - Chief Executive Officer

Brent Conway - President

Lesley Bolster - Chief Financial Officer

Analysts

Dana Benner - AltaCorp Capital

Jon Morrison - CIBC World Markets

Greg Colman - National Bank Financial

Todd Garman - Cormark

Dan MacDonald - RBC Capital Markets

Kevin Lo - First Energy

Scott Treadwell - TD Securities

Jeff Fetterly - Peters & Co

Operator

Good morning my name is Shannon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Trinidad Drilling, Limited Third Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I would now turn the call over to Ms. Lisa Ciulka, Vice President, Investor Relations. Ms. Ciulka, you may begin.

Lisa Ciulka

Thank you, and thank you for joining us today. We'll be discussing Trinidad Drilling Limited's third-quarter and year-to-date 2013 financial and operating results, which we released yesterday. A full copy of the MD&A and financial statement, along with the presentation outlining the quarter highlights, are available on our website TrinidadDrilling.com. Our full third quarter results are also available SEDAR.com.

Please note that during the call we will be discussing forward-looking information relating to various areas of our business, including but not limited to, the completion of reconstruction programs on a timely and economic basis; the assumption that Trinidad's customers will honor their take-or-pay contracts; the ability for Trinidad to attract and retain qualified crews to operate their rigs; assumptions respecting capital expenditure programs by oil and gas exploration and production companies; assumptions made about future performance or operations of the joint venture agreement; and other expectations about future events or performance.

Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information or statements. And you are cautioned to not unduly rely on such forward-looking statements. For a copy of our full forward-looking disclaimer, please refer to the disclaimer included in yesterday's press release and our MD&A.

To discuss our results, our view on the drilling sector, and Trinidad's opportunities going forward are Lyle Whitmarsh, Chief Executive Officer; Brent Conway, President; and Lesley Bolster, Chief Financial Officer.

I'll now turn the call over to Lyle.

Lyle Whitmarsh

Thank you, Lisa. Good morning, everybody. Trinidad performed well in the third quarter. We maintained stable day rates, and continued to exceed Canadian industry average utilization, despite softer demand than last year across North America.

We also announced two major projects that we've been working on for many months; our new LNG-related rig for the Liard Basin; and our joint venture with Halliburton. I will discuss both of these exciting growth opportunities later in the call, but firstly, I would like to review our third-quarter results for you.

During the third quarter, Trinidad's revenue totaled $209 million, down 3% from the same quarter last year, and up 26% from the second quarter of 2013. Revenue decreased year-over-year as a result of lower operating days across our operations, driven by lower industry demand.

When compared to the previous quarter revenue was higher, largely due to spring break-up in the second quarter in Canada, which restricts drilling activity, and leads to lower utilization levels. Despite a strong competitive market, day rates remained relatively unchanged compared to both the same quarter last year and the second quarter of 2013, reflecting Trinidad's fleet of high-performance equipment.

Operating income net percentage, or operating margin, was 39% in the third quarter, down from 40% in the same quarter last year, and up from 36% in the second quarter of 2013. Operating margin was slightly lower year over year because of reduced activity levels and higher repairs and maintenance costs incurred in the quarter. Operating margin increased from the second quarter, largely due to seasonality in the Canadian operations.

Adjusted EBITDA was $62 million in the quarter, down from $68 million in the third quarter of last year, and up from $40 million in the second quarter of 2013. Adjusted EBITDA was lower than the same quarter last year, due to a reduced operating income and higher G&A costs. G&A costs increased in the quarter due to professional fees incurred in setting up our new international joint venture. Adjusted EBITDA increased from the second quarter, largely as a result of spring break-up in Canada.

Year to date in 2013, our G&A costs, excluding stock-based compensation expense, have totaled $44 million, approximately $6 million above the same period last year. We estimate that for the full year our G&A expenses, excluding stock-based compensation, will be between $55 million and $57 million, and will remain at similar levels in 2014.

Net earnings were $9 million in the quarter, down from $20 million in the same quarter last year, and up from $0.3 million in the second quarter of 2013. Net earnings were lower than last year as a result of lower adjusted EBITDA, higher stock-based compensation, and higher deferred income tax. Net earnings increased from the second quarter, largely due to the seasonality in the Canadian operation.

Now, let's turn more specifically to our Canadian operations. Utilization levels in the third quarter lowered from the same quarter last year, as a result of softening customer demand. Despite weaker industry conditions, we continued to demonstrate our ability to outperform the industry, recording activity levels 13 percentage points above the industry average in the quarter. As expected, activity levels were higher in the third quarter then the second quarter because of seasonality.

In the third quarter, day rates increased by $185 per operating day compared to the same quarter last year, and decreased by $1,825 per operating day compared to the second quarter. Day rates increased from last year largely due to the change in rig mix, as four new high-performance rigs were added over the past year. These rigs generate higher day rates and increase the division's average day rate. In contrast, day rates lowered from the second quarter as a result of the re-activation of smaller and older-style rigs, and the change in rig mix.

Operating margin was 41% in our Canadian operations this quarter, compared to 44% in the third quarter last year, and 22% in the second quarter. Operating margin was lower in the current quarter because of lower revenue generation, and repairs and maintenance cost that were spread over a smaller revenue base. Operating margin increased compared to the second quarter largely due to seasonality.

Activity levels moving into the fourth quarter have been a little weaker than we had expected; however, we expect demand to be firm over the winter drilling season, particularly for our deeper high-performance equipment. Customers have been slower to commit to rigs than in the previous years, and competition is high. Some of our peers have been more focused on maintaining activity levels then rates, which tends to put pressure on day rates across the industry. Trinidad does not lead this type of activity; however, it does impact us to some extent. Our largely high-spec fleet mitigates this somewhat, and allows us to maintain our industry-leading utilization levels, and compete based on performance rather than price.

The industry active rig count currently sits at approximately 394 rigs, three, 3% higher than this time last year. This equates to a utilization level of around 50%. Trinidad currently has about 52% of its Canadian fleet working today. We are continuing to see strong demand for rigs to operate in the Montney and Duvernay. As drilling targets become deeper, with longer-reach horizontals, we are also seeing a growing number of requests for rigs with increased mud-pumping capacity and depth capacity.

Overall, we expect that overall utilization and margins for the full year in 2013 will be flat to slightly lower than what we saw last year. We expect day rates will remain relatively stable for our high-end equipment. However, we may see some weakness in the mid-depth and shallow equipment. It is difficult to get a clear sense of the 2014 market at this point, but we have a significant number of customers with programs starting up in early January, and we expect to have a busy start to the year, and a solid 2014.

LNG-related demand is continuing to drive activity in certain areas, and we expect that over the coming years will play a large part in the Canadian drilling industry. Trinidad has the right style of equipment, the rate experience, and an established relationship with most of the key players in these areas, making us very well positioned to take advantage of this growth opportunity.

During the third quarter, we announced a contract for a new build to drill in the Liard Basin, an area being developed to supply natural gas for the proposed LNG plant on the BC coast. This rig will be one of the largest, most technically advanced rigs operating in Canada once completed. We have signed a five-year, take-or-pay contract with our customer for a minimum of 350 days per year.

Our pay-back requirements have not changed for this new build, and we expect to exceed our project return threshold, and get our initial capital investment back in approximately four years. Trinidad currently has approximately 40% of its Canadian fleet under long-term, take-or-pay contracts, which helps protect our revenue stream from some of the volatility present in the spot market.

Now let's turn to our U.S. and international operations. Day rates in our U.S. and international division have remained relatively unchanged for the past year. In the third quarter they averaged $22,460 per operating day, up slightly from the same quarter last year and the second quarter of 2013.

Trinidad has begun to see a trend of improving activity levels over the past two quarters in its U.S. operations. While the industry as a whole has remained fairly stable, to date in 2013 Trinidad has been able to reactivate several rigs. Our utilization averaged 76% in the quarter, up from 73% in the previous quarter.

If we focus solely on the U.S. market, excluding the three rigs in Mexico, Trinidad actually averaged utilization of 80% in the quarter -- third quarter, up 5 percentage points from the second quarter, and adding 339 more operating days. This trend has been building slowly, and is spread across our operations throughout the U.S., without any particular area driving the improved activity. We expect that the current activity levels should remain for the rest of 2013 and into 2014.

Operating margin in the U.S. and international division was in line with the same quarter last year at 37%, but down from the previous quarter of 40%. Operating margin was lower than the previous quarter, due to the lower contribution from our Mexican operations, and costs incurred to reactivate idle rigs. We currently have approximately 80% of our U.S. fleet operating, and expect it to remain at this level throughout the balance of the year. We expect that day rates and margins will also remain relatively stable for the remainder of 2013 and into 2014.

Well market conditions are also competitive in the U.S. Trinidad's modern, high-performance fleet provides more stable activity and revenue generation than in the industry as a whole. Our customers continue to be committed to our equipment, and we currently have approximately 50% of our U.S. and international fleet under long-term, take-or-pay contract. The contracts on the three rigs we have in Mexico expired at the end of the second quarter. These rates completed their final well, and were largely idle throughout the third quarter.

PMEX currently has several large tenders for work out, and it is expected to award these contracts toward the end of 2013 or into early 2014. We expect that we will be able to restart our Mexican operations once these tenders are awarded, and activity levels in Mexico begin to increase. In the mean time, these rates will remain in Mexico until we have a clearer picture of future contracts.

Moving on to our U.S. barge operations now, conditions in the barge market have remained strong. Day rates in the third quarter were up $3,150 per operating day from the same quarter last year, and $1,663 per operating day from the second quarter, reflecting the ongoing demand for high-quality equipment. Utilization in the quarter was also strong at 97%, compared to 82% for the same quarter last year, and 98% in the second quarter. We expect that both day rates and utilization will remain firm in this division for the remainder of the year.

During the third quarter we signed a joint venture with Halliburton that gives Trinidad the right of first look to provide drilling rights for all of Halliburton's managed projects outside of Canada and the U.S. This was an important accomplishment for Trinidad that took many months of discussions and negotiations. By aligning ourselves with a large, experienced, multi-service provider like Halliburton, we were able to open new doors in international growth, while also lowering risk for the shareholders.

To start, the joint venture has agreed to put four rigs into Saudi Arabia. One rig will be a new build, and the other three rigs will be upgraded from our existing U.S. fleet. The rigs are expected to be operating in Saudi by mid-2014. Halliburton has more than 100 rigs operating in more than 20 countries globally, which gives the joint venture plenty of room to expand as we move forward. Initially, we will be focused on drilling the joint venture in Saudi and Mexico, making sure everything is working well before we expand further. Trinidad has the ability to say no to any opportunity that it does not want to participate in for any reason. We expect to grow the joint venture at a measured pace.

In the third quarter, we spent $18 million on capital expenditures, bringing our year-to-date total to $50 million. We received the proceeds from the sale of our Titan asset in this quarter, dropping our net capital expenditure to $5 million in the quarter, and $37 million year to date.

During the third quarter, we completed work on our final rig carried over from 2012, and delivered it into operations into the Duvenet, where it has been performing well. We have also been working on upgrading a number of existing rigs, adding moving systems, increasing pumping capacity, and overall improving their efficiency, to meet the growing demand for these kind of improvements from our customers.

In the third quarter, we started to work on our new LNG rig, and our new and upgraded joint venture rigs. Early in the year, we estimated that our capital expenditures for 2013 would be approximately $175 million. Costs associated with the LNG rig being built for the Liard Basin have been occurred at a slower rate than we had expected.

In addition, weaker-than-anticipated industry conditions led us to delay certain capital projects and rig upgrades. Because of these factors, we now expect that $40 million to $50 million of our 2013 capital program will be spent in 2014. The delay in cost for the LNG rigs are timing issues only, and are not expected to affect the delivery date of the completed rig.

At the end of the quarter, our total debt to EBITDA was 1.92 times, maintaining our lower leverage level, and within reach of our long-term leverage target of approximately 1.5 times. In fact, if you take the cash on hand at the end of the quarter in account for [recovery] and calculation, our new debt to EBITDA was 1.6 times.

Part of our strategy is to maintain a contract base that protects our portion of our revenue stream from the cyclical of the industry. The strategy allows us to participate in the up side of the market when pricing increases, while limiting the impact on the down cycle. We currently have more than 45% of our fleet under long-term, take-or-pay contract, with an average term of approximately 1.5 years remaining.

To date in 2013, we have seen conditions that are weaker than this time last year, but still remain steady. We are seeing some early indications for improved activity in 2014, and expect a growing demand for high-performance equipment will continue to provide demand for our largely high-spec fleet.

Our recent announcement for a new rig to be built for the LNG development in Canada demonstrates that our existing customer base and reputation as a deep technical driller positions us well to participate in the LNG-focused growth we anticipate increasing in the coming years. This, combined with our expanding international growth profile through our new joint venture with Halliburton, provide Trinidad with some exciting growth opportunities in 2014 and beyond.

Before I conclude, I'd like to take a moment to thank the people at Trinidad. We have met some important milestones over the past few months, and put in place an exciting new future for the Company. These opportunities come with a lot of effort from a large group of people. But just as important are those people at Trinidad who have shown ongoing commitment to running our existing operations, and not losing sight of what is important for us and our shareholders.

On behalf of our Management team, I would like to thank our team here for Trinidad -- for getting Trinidad to this exciting point; and also for the hard work and commitment I know I can rely on, that will take Trinidad successfully to the next step in its future.

Thank you for listening. I would now like to pass the call back to the operator and take any questions that may be on the line.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Dana Benner of AltaCorp Capital. Your line is now open.

Dana Benner - AltaCorp Capital

Good morning all.

Lyle Whitmarsh

Good morning

Dana Benner - AltaCorp Capital

I wanted to start with Canada of course you have so many good things going on I guess now globally and we are so used to seeing you absolutely trounced industry utilization levels and not quite the same premium that we are used to seeing so commendable for sure but not quite the same level -- anything going on there was a just kind of a rig mix this issue this quarter and nothing sustainable?

Lyle Whitmarsh

Yeah Dana I don't think there's nothing -- I don't think there's anything in there that's a trending thing going forward. I think it's more of a timing issue with some of the rigs that were on contract that have been put on Windows and basically I think that's really what it is.

We still expect to have strong fourth quarter and then certainly in the first quarter we have a lot of our activity picking up. Part of it is I think a lot of the E&P's have just kind of backed off with spending in Q3 because they’ve spend their budgets and really, focusing going into 14 and that's kind of happen across-the-board. So I don't think it's any I don't think it's anything that’s changed in the market. I think it's more just a timing event more than anything else.

Dana Benner - AltaCorp Capital

With respect to the Halliburton JV, certainly very unique structure, differentiating aspect of your story, of course on the other hand you've already won an LNG rig in Canada. How do you think about capital allocation when you've got two very high marquee demands on your capital etcetera? Is it purely a return based calculation on which one you would go or do you have a preference one way or the other for the next couple three years?

Brent Conway

I think it's for us what you see in the past is return and risk. We are always going to try and chase the highest return projects first balanced with risk. I think what Lyle mentioned in his notes that the Halliburton TV we certainly know that's going to grow over the next two years and we are committed to making that happen, but it's also going to be we are still going to stick to what got us here, which is our domestic fleet and the strength that we have to grow and add to that business to.

So there may be times based on timing in terms of the timing of when the rigs need to be there or where we don't like the returns in a certain situation that we may choose to not put that rig into the JV, but I think for us it's just excited that we have that opportunity.

There's a lot of our competitor that would really like to be in this position where we do have two strong growth avenues that we can pursue and it's really -- it is what -- the areas that we’re looking at, is what we’re really good at which is high spec, higher horsepower rigs. And the clients are really looking for performance in both areas, so I think it's exciting for us and we may have to make some tough capital choices, but I think we've done that before.

Dana Benner - AltaCorp Capital

Just one final question from me, with respect to the Pemex standards that you mentioned is that within the Halliburton JV or have you [beat] that on your own?

Lyle Whitmarsh

We're -- again it's Lyle, we're currently looking at it from both aspects. I think obviously we're probably more involved probably directly as a joint venture but as you know, we can get up to five rigs before we have to operate into the joint venture. So we will be looking at that from a multitude of different ways to try to reinstate our operations down there. It's certainly a goal of ours and we are very focused on it.

So, we'll be taking all opportunities to take a look at that and just in case the spec or we believe is best for shareholders, so we will be really evaluating that as it becomes more clear on these tenders. And some of the more large tenders obviously will be looking at closely, but just looking at all avenues to reinstate that business. So, I think you'll see us get very active down there, but we're going to be looking at all opportunities.

Dana Benner - AltaCorp Capital

Okay, that's great. I'll turn it back.

Lyle Whitmarsh

Thank you

Operator

Your next question comes from the line of Jon Morrison - CIBC World Markets. Your line is now open.

Jon Morrison - CIBC World Markets

Hey guys

Lyle Whitmarsh

Good morning

Jon Morrison - CIBC World Markets

Just following Dana's question about capital priorities, is it safe to say that given that you're new into the Halliburton JV, you have a greater propensity to be more selective about North American new build opportunities to maintain dry powder and be able to execute on any new opportunities that are presented your way from the Halliburton JV?

Lyle Whitmarsh

Yes, I don't think that that's necessarily the case. I think we're going to be -- its still going to be return days. I think the challenge for us and I think it is something that we're looking at now in the middle of going through all our budgets and our capital allocation. We've got a lot a lot of things that are pending and we need to take a good look at that and figure out where we want to put our capital to work.

And I think we're going to try and do it much as much of it as we possibly can, but I think it's a situation where I don't think it would be if like returns and risk that we would be necessarily more motivated to do in the JV versus our domestic business because the domestic business is really the launching pad that's going to allow us to do that. And so I think we're going to be pretty focused on trying to make sure that we find that balance and try and do as much as we possibly can.

Brent Conway

And I think some of it will be dependent on what the specifications internationally are and what we see for ongoing specifications for the rig to domestically and that in turn will drive some other scenarios that management will have to look for shareholders value is how many of them will be able to or will we take up as existing fleet versus how many will be new builds.

And I think that whole calculation gets quite complex as Brent mentioned. I think one of the things that's very apparent that we talk a lot about with the shareholders is that we definitely want to focus and ensure that we have credible size which I think of us are a barrier of entry into some locations like Saudi, where somewhat there probably would like to have a little bit more, but the least we are headed in with four rigs which does get us to a critical size operation.

So, I think you'll see a nice blend of that and again even in the North where we're starting to look for the delivery of our LNG rig announced in the quarter, we would probably look at trying to get incremental assets potentially up in that area as well just to support the operations. So, there will be a lot of moving parts to the future plans and we hope to get that more clarified as they develop, but there's a lot of moving parts, but it will be considered on all aspects.

Jon Morrison - CIBC World Markets

What's the appetite for acquiring existing international rigs in the Middle East that are working and possibly up for sale at this point?

Lyle Whitmarsh

We've taken some look at that for sure. And one of the concerns are, one of the things that we look at when we evaluate that opportunity is this just a specifications how many of them will make today's back and what does the future of that particular fleet look like as we model what we believe is going to be in demand in the future. And we do look at that quite a bit and we don't see a lot fitting into that category at this time.

Most of them are fairly good fleets but we just sometimes seem to struggle to find as well we’d believe would be a longer-term plan where we see the rig specifications going. So fairly tough to find acquisition that would fit the model for the tenders we are currently chasing.

Jon Morrison - CIBC World Markets

As some of those value or opportunities you've evaluated come for your JV partner putting them into it at this point or…

Lyle Whitmarsh

No, I don't think -- I think our JV partner is a specialist in integrated project management tracking and a lot of other things. They are not -- they wouldn’t profess to be a specialist in drilling. But I think, there's times when I think there's opportunities out there that they know about that we certainly know about. But to a lot of point the market is -- everyone has seen what's happened here in North American in terms of restocks.

The market in Saudi and the market in Mexico is changing as well and walking in and buying something that replacement costs are better than replacement cost knowing that you're going to have to turn around and spend 30% or 40% or 50% more to turn around and make it a marketable rig. Once it comes off contract, it's just something that we have a real struggle with. So I think that's really the gist of why it's hard for us to get our head around some of the fleets that are available out there.

Jon Morrison - CIBC World Markets

On the last call you referenced having comfort with the ability to deliver 8 to 12 new builds in 2014 depending on rig mix, based on your backlog today what’s the likelihood that you get to that number and either deploy or sign up something in that number for 2014?

Lyle Whitmarsh

While, we certainly I guess from our perspective, we certainly have the opportunity, we have the capacity now. We really do have to sit down and take a long look at the evaluating what is real and allocating capital accordingly to that. And then from that back to your earlier question really from that fine tuning and ensuring the internal hurdles are met on all those projects and then unlike they were hoping to get out with some more of that clarity very soon.

Jon Morrison - CIBC World Markets

Can you give a sense of the number of rigs that are remaining in your fleet that are candidates for upgrades in any meaningful way?

Lyle Whitmarsh

For Upgrades for the joint venture or for just upgrades in general?

Jon Morrison - CIBC World Markets

Sorry, independent just in general how many are candidates for meaningful upgrades?

Lyle Whitmarsh

Yeah, I think that that number is increasingly growing and I think that you’ve seen us be -- I wouldn’t call us be aggressive on it. We've been very prudent in continuing to follow as Brent mentioned to the trends we're seeing on request from customers on where we need to go. And we are definitely going to continue to be prudent and in fact if the market conditions continue, we will only be increasing that.

So probably between Canada and the U.S. and certainly take into consideration back in the capital allocation from less than $1 million to potentially up to $3 million, there's probably still within Trinidad day 20 plus rigs that we would be looking at for sure over the next 12 to 16 months.

Jon Morrison - CIBC World Markets

Last one for me, are you guys willing to share the total cost associated with setting up the JV?

Lyle Whitmarsh

We would share if we know it all yet. To be honest I think it's -- we’ve worked on it for almost a year, so I think we're still trying to put all that together. I think it's something we -- as we get into the closure around the JV obviously we will share that with everybody and we're not trying -- I think -- and then trying to make sure that when we do that, there is visibility to all the investors in terms of what that is, but honestly don't know the number today.

Jon Morrison - CIBC World Markets

Appreciate the color. I will turn it back.

Lyle Whitmarsh

Thank you.

Lisa Ciulka

Thank you.

Operator

Greg Colman - National Bank Financial

Lisa, gentlemen thanks a lot. Just a couple quick questions. First on the capital program, you’re not delaying but moving a little bit of your 2013 program into 2014, $40 million to $50 million. Just wondering what the timing is on that? Is that all going to be coming in Q1 or is it sort of stretched out over a couple of quarters?

Lyle Whitmarsh

Most of it will happen in Q1. It's really a combination of the delay on the LNG rig and then also some of the cost happening with the Saudi projects sliding into Q1, but most of that's going to happen in Q1, I'd think.

Greg Colman - National Bank Financial

Okay. Great. And I think you have already answered my question with the way you described it there. But is any of that $40 million to $50 million still subject to industry conditions, meaning could some of it not happen or is it definitely happening, is just going to happen in Q1?

Lyle Whitmarsh

Yeah, I think it is -- I'd be fairly comfortable in saying it's going to happen. We were -- like I said, we constantly monitor the industry what we're seeing and that was just a real way to see kind of where some of the incremental new build capacity would iron out throughout North America and where some of the rates were going to be and get comfortable with that before we spend the capital.

As we've done historically over the history of Trinidad, we're fairly disciplined. And we just wanted to get a better feel before we spent that capital and then upgrading some of the potential projects. And I think we got that feel now and I'm pretty comfortable we will be going ahead with them projects.

Greg Colman - National Bank Financial

Great.

Lesley Bolster

Greg, just so you realize, as Lyle mentioned in the call, we're still doing our 2014 budget, so that's not the full budget that we're giving you right now, that's just part of what we know right now. We expect to come out with something, a little bit more full in the next, maybe month or so.

Greg Colman - National Bank Financial

No. Of course, I anticipated about $40 million to $50 million was finishing up 2013 and then you are coming up 2014 shortly.

Lesley Bolster

Yeah, absolutely.

Greg Colman - National Bank Financial

Just switching gears a little bit on to the contract coverage, good clarity on what's covered and what's not in terms of percentage and average contract. Les, could you just remind us of any substantial rollouts coming up in the near-term in terms of geography or number of rigs in Q4 or Q1, in the first half of 2014?

Lesley Bolster

So, there is not much more to come off this year, just a couple in Canada and one in the U.S. And then next year we have about 25 that will roll off throughout the year, so it's more in the U.S. and Canada, but is spread throughout the year.

Lyle Whitmarsh

I think the keynote there is most of the rigs there are the high spec rigs that were built for purpose. We've been doing -- the marketed team on both sides of the border, but for sure in the U.S. have done a great job of being able to renegotiate them contracts, so we're fairly comfortable with the classification of rigs.

And then we are taking a look at that rigs as well to really verify if there's anything that we need to do there to ensure what the marketability of those rigs as they roll off as well and that could be part back to the conversation we had earlier about the 20-odd rigs. There will be some of than that particular might be seeing some capital allocation for just a few tweaks and upgrades to ensure they're still marketable.

Greg Colman - National Bank Financial

Great. That was going to be my follow up, so that's good color there. Moving over to the three rigs being upgraded for the Saudi deployment, you just give us a quick reminder what exactly those rigs doing now, are they being upgraded at the moment, or are they -- just wondering if we are going to see a temporary dip in utilization as they come out of the field and then go before they go over to Saudi?

Lyle Whitmarsh

No. They are – they are in the yard, they are being worked on and they have been for probably 30, 60 days

Lesley Bolster

So yes. Two of them we know was now in utilization for two of them during the third quarter and one of them was working for months to quarter. So all three of them will be off utilization in Q4

Greg Colman - National Bank Financial

Great. Great and then just last question. Thanks very much, kind of a little off subject, but wanted to talk quickly about footage work. I am wondering how much if any of your current activity is footage based as opposed to day-rate based?

Lyle Whitmarsh

Right now, Zero.

Greg Colman - National Bank Financial

You foresee that changing anytime in the near-term or…

Lyle Whitmarsh

Well, historically back in early part of the history of Trinidad, we would see footage. Today with some of the legal reasons and liability, I am not sure if we'll see some more. We do tend to see a little bit more of it currently in some of the Panhandle in the U.S. and on the shallow side, but again on some of these, we have historically not seen that in especially since we’ve been into the shale plays on the larger side.

So I haven't been approached a lot by that, that's an interesting question. But we haven't seen a lot of demand or request for that and with today's liability and assigning all of that stuff that we've changed quite a bit drastically over the last few years there will be some struggles with that as well, I'm sure.

Greg Colman - National Bank Financial

That's excellent. Good to hear. I appreciate the color. That's it for me.

Lyle Whitmarsh

Thanks.

Operator

Todd Garman – Cormark

Good morning.

Lyle Whitmarsh

Good morning.

Todd Garman – Cormark

I am wondering if you can help me understand the operating cost per day increase in Canada year-over-year. I'm trying to drive what the change in mix would've been versus leverage on the fixed cost structure versus higher R&M. Could you help me?

Lesley Bolster

Todd, it's a combination of the R&M costs were slightly higher but it's also the fact that the revenue and the number of operating days was less. So it’s spreading this cost over a less revenue base and the lower number of operating days.

Todd Garman – Cormark

And could you try to try to quantify the…

Lesley Bolster

R&M cost were up about 1.5 million for the last year.

Todd Garman – Cormark

Okay. Okay. Thank you.

Lyle Whitmarsh

Todd, I think one of the other things that will really become I think as an industry I think I talked about it on a few calls prior to is I think some of us to in the industry are just still learning historically on what some of the bigger more electrified rigs and the demands and what the longevity of some of these rigs will look like over time and I think we just got to be cautious that these rigs are very expensive, very large rigs and you know some of these rigs have been out now since 2006, 2008 and what we’re really starting to digest now is what is the actual maintenance cost.

And I think as an industry and in Trinidad will be continued to update that and get a better feel and so important to try to understand that that number. Is what active rig makes you have and how many idle rigs you have apart and where are we going with regulatory compliance and that's a real long-winded operational answer, but that's really a lot of the things that we’re digesting as an industry and as Trinidad years in training and all that cost now have really significantly changed and I think we’re going to -- I think we are at a plateau again.

But I think we always have to digest that with a real drilled down of where we are and what style of rig and what is that active rig makes and it gets affected by the size of the rigs obviously which you guys don’t know, but also as we fire these rigs up and to what degree and how long they have been down in such factors is that, so I hope that adds a little incremental color.

Todd Garman – Cormark

No, it sure does. Thank you for that. The second question I have is just on the CapEx side. Is there anything that's changed on the equipment side that you can see or expect to see from your clients that's caused you to delay how you might spend the capital that you have in place or not?

Lyle Whitmarsh

No, I think the same one that we've seen as I opt, I'd have to say that the -- certainly the focus is definitely -- most of the rigs are at capacity size that we're dealing with. So, that's one of the very big advantages Trinidad had with our model going deep and the technology early.

The one thing we are seeing that continues to be at the forefront of request is probably not as good system anymore which we got to be very careful of, I would say that the biggest thing is the walking style system to be able to walk around on the location I'd say that still is the forefront.

We are seeing some incremental demand on pipe sizes and pumping pressure then kind of leading in order and then some by fuel as well for sure in there. So I would say then we're still at the high points, we are not seen anything outside of that in technology or anything that is leading us to delay in order to research more advanced technology than outside of that at this time.

Todd Garman – Cormark

Okay. Thank you.

Operator

Dan MacDonald - RBC Capital Markets

Hi, good morning.

Lyle Whitmarsh

Hi, Dan.

Dan MacDonald - RBC Capital Markets

Just wondering if we can get your updated thoughts with the barge rig business finally showing some momentum here in both rates and utilization, does it make it more attractive as a divestiture candidate given the amount of capital deployment opportunities you have in your land business?

Lyle Whitmarsh

Yeah, I think we're – we continue to evaluate that business for sure. It's a very, very tough business as we've learned over the years. We are seeing some much better returns there obviously utilization rate. That market could turn very quickly based on the fact that most of the contracts in that area are well to well, maybe six-month term is the longest you get there.

But we will certainly be evaluating it as we move forward and it's just like we have been -- we make then decisions based on what's best for the bigger picture of Trinidad and the shareholder. So we'll continue to evaluate that. We don't see a lot of opportunity to grow at this time because it is hard to take a look and make economical decisions based on that and returns based on the fact of the short-term contract.

So, we're continuing to monitor. We're like where we're headed with the business, but we'll always be very prudent in understanding what our opportunities are, so what we are evaluating and continuing to look at that business from different avenues quarterly.

Dan MacDonald - RBC Capital Markets

Than just looking at the U.S. market, obviously lots of new build focuses is around the JV and what we see in Canada. But a lot of your U.S. peers have announced a number of new builds for that market over the last month or so. How does the U.S. new build market look for you guys specifically here as we go forward and how you would kind of rank it between the opportunities in Canada and internationally?

Lyle Whitmarsh

I think, the good thing is they are actually there. There actually are some good new build opportunities or long-term contracts that are there. So a lot of point, a lot of cases, its – it is a high spec rig with the walking system and it is a mixed bag. You've got some E&P clients that are trying to curtail the programs and some that are in the right areas where their economics make sense are getting a lot busier. So I think it's an opportunity to take that on as well.

We've got clients asking for rigs, so I think it's just one more -- one more opportunity that goes into the bucket in terms of all the things we can do and where we could allocate capital and we are working hard at trying make some of those allocations choices and try and get some color out to everybody, but it's a lot -- there's a lot right now that's on the plate in terms of what we could do and we are just trying to make sure that we -- I guess carefully as we can select the right projects.

Dan MacDonald - RBC Capital Markets

Can you give us a sense as to what areas might be closer to the finish line than others?

Lyle Whitmarsh

No. Sorry. I think there's lots of balls in the air and we all chatted about and we -- there's some plays and some clients in the U.S. that are really close and there is some stuff on the JV that's really close and there's some stuff that's further out and I think in Canada we are in the same position.

I think in Canada the LNG specifically pretty much any name you mention in LNG is client. So we are in the market we know will get a share of those. In the U.S. we've got the same fishing going on. And in the JV the amount of tenders, the size of the tenders, the amount of rates that they are looking for is very, very high right now in terms of global demand for integrated projects. So it's kind of a situation where we have lots of opportunity and we just we really just need to kind of get to the point where we can select what were going to chase based on return.

Dan MacDonald - RBC Capital Markets

Okay. Great. That's all I have. Thanks

Lyle Whitmarsh

Great. Thanks.

Operator

Kevin Lo - First Energy

Hey fellows.

Lyle Whitmarsh

Good morning.

Kevin Lo - First Energy

Just I guess the focus is on new opportunities here, are you seen any sort of shift in terms of customer demand for upgrades versus new builds? Or I guess another way to ask the same question is, a guy saying I don’t want to upgrades I want the new rig I want over the specs and window weights, just give me the new commitment.

Lyle Whitmarsh

No, I actually work continuing to redeploy assets both sides of the border and into the earlier point where there's some conversation in the U.S., we know that there's still some announced new builds coming out and supplying to the industry and meanwhile we are still upgrading and putting them rigs on year plus, contracts that about at or above market rates.

So we don't see that demand as high as it is and again it maybe a little unique to just certain ones within the peer group that have the original base assets and have the -- like I mentioned earlier, I think the real pivotal point to that is do you have the base package that brings 80% to 85% of the spec. And then, I think you are right there, if you have to put a little bit of capital say $1 million to $2 million into that, we are still seeing lots of operators pick that up instead of securing, because generally we are just starting to see where a lot of some of the peer group with a new build still are looking for a much longer contract and I think that's the difference.

Kevin Lo - First Energy

Okay. And in terms of cost for components now has that changed at all?

Lyle Whitmarsh

No, I think it's pretty -- from the last couple of years we had, although there's been decent sizable build programs within the industry. It's still -- they are fairly readily available and even from 2009 forward we had a kind of a readjustment obviously. Everything is fairly flat to down from the peak in 2008.

Brent Conway

The only thing I would say, to add to Lyle is the cause of the components for a big LNG rig or a Saudi rig is a shift. The BOC's, the tubulars going into those markets, it's just everything is more expensive just because of the depth and the requirements of Saudi Aramco. So that part is more expensive, but the base package for North America is pretty similar to where we were in the last few years.

Kevin Lo - First Energy

Yes. And I guess -- that leads to my last question in terms of what customers are looking for, for the base package, you were just talking about walking systems and bigger tank system, has the average new build the customers are looking for increased in the last year or so, I know individually the cost are the same but more components etcetera.

Lyle Whitmarsh

I think you're correct. To quantify that though I think the depth is increased as well. So the depth I mentioned in the notes earlier is that we are going deeper on almost all aspects but definitely the specifications now on the North American side are definitely continuing to push the pop end.

I think we’ve got – the industry as a whole knows that template now. There's a lot more desire and then what we see globally is that demand for that style of performance. What isn’t quite clear yet is even in some of the tenders out of Mexico and some of the ones that we currently be looking with either through the joint venture or directly as Trinidad is are they going to hold to that top respect and pay what most of the peer group will be requiring.

So that's I think we'll unfold in the next few months as we look at that spec in that cost but for sure the spec is what we all I think everybody knows, like again, building a new rig today that just has the skidding ability probably would be in your best interest you'd want to be able to walk it for example. You want to have on the big side for example, you’ll want to have 7500 PSI fluid and that is pretty much the common standard spec on all of these bigger rigs today.

Kevin Lo - First Energy

Great. I’ll turn it back. Thank you.

Lyle Whitmarsh

Thank you.

Operator

(Operator Instructions)

Scott Treadwell - TD Securities

Thanks. Morning guys. Most of my questions answered but to turn back to the international side. This is probably a little bit further down the road, but at some point the number of rigs in that JV, I’m sure you'd hope would be a substantial number.

Right now you get to piggyback off of Halliburton sort of country infrastructure, is there a certain number of rigs you would have where you would look at the JV establishing a sort of standalone second line maintenance yard or perhaps even Trinidad building a sort of second rig construction and overhaul facility somewhere outside of North America?

Lyle Whitmarsh

I think we’re already there, but honestly we, few years ago the critical component to what we do is our engineering and our project management and the smart people we call them in and we’ve really tooled up on that side, so that we can take pieces of the rig and get a put into other areas and get it built in other areas.

The mud tank system for example and the mud pumps are actually -- are engineered spec but they are being built in over in UAE. And so we've got stuff that's being built in Houston that's being supervised by our engineers. so it doesn't -- to the extent that we can, we try and build it closer to the market and we are -- as we've evolved and as we've built more rigs and think that that’s just going to be a natural progression for us because we can save money we can do that with a supplier that's got the right capabilities and an API shop and allows us to kind of bring down the overall cost of the rig and help us on the return side.

Scott Treadwell - TD Securities

Okay. And I guess to build on that, would be the human side. Obviously Hi-Tech requires some level of expertise to operate properly. But at the same time, a lot of countries have sort of local labor content is there likely to be a need for Trinidad to establish again some sort of overseas training hub or is it going to be mostly done on the job as you bring these guys to the rigs?

Lyle Whitmarsh

Yes I'll be mostly on the job and we move into an area, we don't take that risk. We usually bring in our technical people especially at the rig manager on the driver side of things and we then start training there and you’ve seen us do that and start that way in the U.S. market. You've seen us start that way in the Mexican market.

We are not going there to show up and learn and get better over the next year or two. We're going to show up the people that know what to do, how we want to do it, and make the rigs perform and then we start training the people and in Mexico that took us a year or two, but basically we got to nationalized workforce fairly quickly.

And we learned I think over the years that having the best rigs and great technology and the good design and everything that goes into the packages is all great, but if you don't have the right people on the rig to run it, with the right training, you'll fail and so we work hard at making sure that when we go into a new market, we are bringing the guys that know how to run these rigs.

Scott Treadwell - TD Securities

Okay. Perfect that answers all I had left. Thanks very much guys

Lyle Whitmarsh

Thank you.

Operator

Jeff Fetterly - Peters & Company

Good morning all. Just a quick follow-up question. CapEx wise, is it correct to assume that 60% of your 2013 budget will be spent in Q4?

Lesley Bolster

Well there will be a lot baked in Q4 because we have delayed quite a bit during the year. So I don't know off the top of my head if I calculate 50%, but if you take off the 40% to 50% that we said that we were going to move into next year, that leaves about 130 for this year, so backing off the of my head, and actually that comes to 60%, but it would be around there yes.

Jeff Fetterly - Peters & Company

Okay. So the 130 is about the right cash of the door number for this year?

Lesley Bolster

Yes.

Jeff Fetterly - Peters & Company

Okay. I know you're still in the process of formulating your 2014 budget, but if you look at the Saudi rigs, the [yard] new build and what you carried over now, what is the minimum base spend for next year?

Lesley Bolster

That equates to about $100 million.

Lyle Whitmarsh

About $100 million.

Jeff Fetterly - Peters & Company

Okay. Perfect. Thank you very much.

Lyle Whitmarsh

Thank you.

Operator

As there are no further questions on the phone lines at this…

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