Precision Drilling's (PDS) CEO Kevin Neveu on Q4 2015 Results - Earnings Call Transcript

| About: Precision Drilling (PDS)

Precision Drilling Corporation (NYSE:PDS)

Q4 2015 Earnings Conference Call

February 11, 2016 2:00 PM ET

Executives

Carey Ford - Senior Vice President, Operations Finance

Kevin Neveu - President and Chief Executive Officer

Rob McNally - Executive Vice President and Chief Financial Officer

Analysts

Scott Treadwell - TD Securities

John Daniel - Simmons & Company International

James Wickland - Credit Suisse

Ole Slorer - Morgan Stanley

Sean Meakim - JPMorgan

Mark Bianchi - Cowen and Company

Jon Morrison - CIBC World Markets

Dan Healing - Calgary Herald

Kelly Cryderman - The Globe and Mail

Operator

All participants, please stand by, your conference is ready to begin. Good afternoon, ladies and gentlemen, welcome to the Precision Drilling Corporation 2015 Fourth Quarter Conference Call and Webcast.

I would now like to turn the meeting over to Mr. Carey Ford, Senior Vice President, Operations Finance. Mr. Ford, please go ahead.

Carey Ford

Thank you, and good afternoon, everyone. I’d also like to welcome you to Precision Drilling Corporation’s fourth quarter and year-end 2015 earnings conference call and webcast. Participating today on the call with me are Kevin Neveu, our Chief Executive Officer; and Rob McNally, our Executive Vice President and Chief Financial Officer. Also present is Gene Stahl, President of Drilling Operations.

Through a news release earlier today Precision Drilling Corporation reported on the fourth quarter and year-end 2015 results. Please note that these financial figures are in Canadian dollars unless otherwise indicated. Some of our comments today will refer to non-IFRS financial measures, such as EBITDA and operating earnings. Please see our press release for additional disclosure on these financial measures.

Our comments today will also include statements reflecting Precision’s views about the future events and their potential impact on the corporation. We caution you that these forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from our expectations.

Please see our press release and other regulatory filings for more information on forward-looking statements and these risk factors.

Rob McNally will begin the call with a brief discussion of the fourth quarter and year-end operating results and a financial overview. Kevin Neveu will then provide business operations update and our outlook.

Rob, over to you.

Rob McNally

Thanks, Carey. I am going to comment on a number of items today including our balance sheet, liquidity, dividend, capital spending, rig decommissioning and, of course, the quarterly results.

As this downturn persists and our visibility into second half of 2016 is murky at best, deleveraging the balance sheet has become our key priority. While our balance sheet is very manageable with long-dated senior unsecured notes and a strong liquidity position, we believe it is prudent for us to reduce the net debt levels as we work through this downturn.

As of December 31, we had CAD445 million of cash in the balance sheet, and an undrawn US$550 million revolver. Our first debt maturity is not until 2019. We did also suspend our quarterly dividend, which will further strengthen our liquidity position, as the suspension was saved approximately CAD21 million of cash per quarter.

Let’s turn to capital spending, as detailed in our press release this morning, capital expenditures for 2015 ended up being CAD459 million, a decrease of CAD72 million, since our last conference call. The decrease consisted a CAD50 million of cancelled spending, CAD34 million deferred to 2016, partially offset by CAD12 million of foreign exchange impact.

Our 2016 capital budget is now expected to be CAD202 million, up from our third quarter 2015 press release of CAD180 million, due to the CAD34 million of carry forward and CAD19 million foreign exchange increase, offset by an additional CAD31 million of cancelled expenditures.

For 2016, capital spending a CAD156 million is expansion capital, which is primarily to two 3,000 horse power new build rigs we announced last quarter that are going to Kuwait. The CAD46 million of maintenance-upgrade and infrastructure capital reflects up or down with actually levels. The significant decline in capital spending demonstrates our ability to conserve cash in an extended downturn.

So it’s to be clear, if you adjust for FX changes, we have permanently removed CAD81 million of spending from our 2015 and 2016 capital budgets, since our last conference call. As we detailed this morning in our press release, we have accelerated our transformation to be a pure Tier 1 driller through the decommissioning of 79 drilling rigs, leaving us with a fleet of 236 Tier 1 rigs, and 16 Tier 2 rigs that are high quality candidates to be upgraded in a stronger market.

We believe that the Tier 1 rigs, will dominate the North American market for the foreseeable future, and that the older slower rigs will have a very difficult time competing.

As for the quarterly results, we reported fourth quarter revenues of CAD345 million, and a net loss of CAD271 million. The net loss included an after tax asset write-down and impairment of CAD254 million. Fourth quarter 2015 EBITDA was a CAD111 million, which is 53% lower than the fourth quarter of 2014. The weaker Q4 results reflect decreases in North American drilling and C&P activity.

EBITDA margins were 32% this quarter, versus 38% in the fourth quarter of 2014. A relatively strong margin performance in the face of a significant industry downturn is a reflection of our variable cost operating model, proactive fixed cost management, and contract coverage on our Tier 1 rigs.

Restructuring costs were approximately CAD7 million in the quarter, bringing the year-to-date total to CAD21 million. We expect the annualized G&A and operating overhead cost savings from the restructuring initiatives to be approximately CAD100 million.

In the United States during the fourth quarter, margins were up about CAD300 per day over the fourth quarter of 2014, due to strong day rates and the impact of idle but contracted revenue, partially offset by lower absorption of overheads and higher repair and maintenance costs.

The impact of idle but contracted rigs increased margins by approximately CAD1,400 per day year-over-year, and reduced margins by CAD1,300 per day sequentially. We averaged 9 rigs on idle but contracted status during the fourth quarter. Today we have 31 rigs drilling or moving in the U.S. and five idle but contracted rigs.

In Canada, drilling margins improved by CAD3,300 per day year-over-year, driven by higher average day rates and shortfall payments, partially offset by less overhead absorption and higher labor costs. Shortfall payments contributed CAD3,600 per day to the fourth quarter of 2015 day rate. Drilling activity decreased 51% over the fourth quarter of 2014 in Canada. Today, we have 57 rigs drilling or moving in Canada.

In our international business, activity decreased by 23% and revenue was essentially flat versus the fourth quarter of last year. Average day rates increased because of another rig deployment in Kuwait and an early termination payment in Mexico of CAD6 million.

Our Completion and Production segment revenues were CAD41 million, down 53% from the fourth quarter of 2014. EBITDA in the fourth quarter of 2015 was negative by about CAD400,000 versus a positive CAD16 million a year ago, reflecting the highly competitive pricing and low activities in the C&P market.

I would remind you that we did incur restructuring charges of approximately CAD2 million in C&P during the fourth quarter effectively pushing us to negative EBITDA. Given the recent impairments and asset decommissioning, we want to give some guidance on deprecation. We expect depreciation to be approximately CAD110 million in the first quarter and then declining slightly through the years assuming that exchange rates remain constant.

Our contract coverage remain solid, for the first quarter of 2016 we have 70 rigs under contract and have an average of 60 rigs under contract for the full year of 2016. In 2017, we have contracts in hand to average 30 rigs for the full year.

In conclusion, we believe that we are very well-positioned not only to whether this downturn, but expect to grow market share because of our balance sheet, strong liquidity position, high quality rig fleet, strong operational performance and our portfolio of term contracts.

With that, I will turn it to Kevin, for further discussion of the business and the outlook.

Kevin Neveu

Good afternoon. Thank you, Rob. Normally, I would say it’s good to put a year like 2015 behind us, but unfortunately, the challenge as we enter 2016 has only intensified. Before I begin my operations review, I’d like to make a couple of opening comments.

During the year of 2015 at Precision we have parted way with many, many excellent and loyal Precision employees. While those decisions were incredibly difficult to make, and particularly hard on many families affected, this management team remains focused on preserving our financial strength and our competitive positioning.

The other decisions such as closing and consolidating facilities retiring our legacy rigs and suspending the dividend have all been equally hard but well studied and deeply thoughtful decisions. These actions all serve to improve our liquidity by throttling down capital, cutting costs and reducing spending.

This was demonstrated in the fourth quarter as we maintained our cash balance, while continuing to improve our market share and our competitive positioning. In 2015, Precision achieved our all-time record safety performance, also achieved our all-time record low non-productive time. And these are important metrics that our customers use to differentiate rig performance, particularly when the industry is struggling. And this is a credit to the thousands of Precision field and office employees who remain deeply committed to the success of Precision Drilling.

Now, regarding the retirement of our legacy rigs. Largely the balance of our Tier 2 and PSST fleet, this is absolutely the right decision. We will, of course scour these assets and recover all the usable salvageable components, equipment, spare parts and drill pipe. But we are not in a hurry to cut up our auction our remaining equipment as we look to work to - globally for all opportunities to maximize the disposal value of these assets.

And we are confident of these rigs, whether disposed as components are complete rigs, will never compete with our remaining fleet of Super Series rigs. The majority of Precision’s 238 Super Series rigs, have been commissioned or upgraded over the last five years, and have been funded by customer take-or-pay contracts.

The rigs have all been designed from the ground up with integrated top drives, digital drilling control systems, mechanized pipe handling, and with integrated or clip on pad walking systems. These Super Series rigs already have adequate mud pump capacity or we can easily insert a third mud pump on the rigs that don’t have one, or we could upgrade these rigs easily and quickly with high pressure mud pumping. We do not believe or anticipate any differentiations within the Precision Super Series fleet other than total depth rating.

Now the fleet of Super Series rigs are truly best-in-class, resource dialed pad rigs, that offer our customers maximum drilling efficiency, reliability, consistency and safety. And I believe our growing market share in the key North American resource plays substantiates this view. But the rig that’s only half the story, Precision prides itself on the quality, skills, the commitment and excellent of our field rig crews. And despite, these are very challenging times, we will continue to invest our people and continue to maintain the high standard of performance we achieved in 2015.

During the first quarter of 2016, we are commissioning our Nisku employee development rig. This is the state-of-the-art rig, which includes all Super Series rig features. So we can trade and develop our personnel of the most advanced rig technology in use today. But our customers will tell you that the quality and performance of the crew is one of the most important factors in rig choice.

Continuing to raise the bar on crew performance remains a cornerstone of Precision’s high performance, high value competitive strategy. If you go back to Precision’s October earnings call, we survive some as we spoke to perspective 30% to 50% spending reductions by our customers. So we are all surprise to see this headwinds materialize with customers and further demand erosion first part of 2016.

Specifically in Canada, our peak rig count this winter has been 65 rigs in the third week of January, those currently running 57 rigs. The deep basin gas drilling remains firm, with Precision Holding strong market share with our super-triple 1,200 and 1,500 pad rigs.

I think we know that one LNG participant has formally announced a delay in their investment decision time frame. And this is not come as a surprise in today’s environment. But we are encouraged, this operator did not choose to exit the project. Despite, there are some certainty activity was holding in, and we remain encouraged by the deep basin opportunity for Precision in Canada.

Looking beyond the anemic winter drilling season, we expect muted activity during spring break up. Precision should sustain rig counts in low-teens, but we see our business well-supported by the taken big contractors we have in place.

Looking beyond Q2, it’s a latter half of 2016 have visibility page, we do expect some of our larger customers, particularly those operating in the deep-basin, remain not only active in the back half of the year. We also believe that the recently announced Alberta royalty framework has potential to encourage additional investment providing commodity prices or supported. We were pleased with the current framework, which has some deep drilling incentive expiries in the fourth quarter, has been expected - extended to year end.

However, the shallower basins in Canada remain highly competitive with limited pricing discipline. It’s clear that these depressed rig day rates are sustainable for long-term. Again, fortunately Precision’s strong contract position, our customer quality and diversity are important we managed this downturn.

In the United States, the trend is progressing as we expected with rig demand continuing to weaken, this is not a healthy environment for drillers. I am somewhat comforted by our contract average in our competitor positioning. But like Canada, leaving us day rates, while appearing stable or not sustainable for the industry over the long-term.

The Permian region, we have a strongest basin in the U.S. and the sharply reduced service costs and the goodwill results enjoyed by our customers to helping support activity to the difficult period. I also expect to small component of this activity is to prevent lease expiries, which is also have to support Precision’s activity.

Outside the Permian, all other regions remain intensely challenging. And until commodity prices improve, there is no hope for activity stabilization of pricing improvement. Our market share has shown improvement and some might say that’s due to our strong contract book, but each point out, we wouldn’t have these long-term contracts, we are not for competitive positioning.

Really this year, mid-January, one customer notified Precision to build by two rig contracts with lump-sum payments, we work to be other customer to defer a rig commitment to the following year. So those three and including one-contract termination in Mexico, these are total contract buyout count to just five rigs, since beginning of this downturn. We believe this limited number of contract buyouts speaks to our customers’ view of Precision’s performance and their desire to retain access to our rigs.

Now, while our customers are focused on cutting spending, they are not totally disregarding economic value. And ultimately, the axiom that the best rigs are last to be laid down and the first to be picked up the stands and will advantage Precision when this market inevitably re-bounce.

Turning to our international business, the effects of the low commodity price were somewhat muted, particularly by national interests in the countries where we operate. And while I have heard some questions regarding our decision last year to invest more capital in Kuwait, Kuwait remains the stable market in the world for Precision. We have Super Series assets, support of strong contracts, and most importantly, by a customer who is committed to honoring those contracts through the cycle. And who in fact maybe plan to increase activity in the future.

Now while Precision remains extremely cautious about deploying additional capital in this environment, we do remain encouraged of our long-term prospects in Kuwait, and for that matter, the Arabian Gulf region in general.

Now, our activity in Mexico is 100% supporting IPM contracts with large IPM providers. And late last year, we activated a drilling rig for one of the other IPM providers we didn’t historically do business with. We’d like to see this relationship grow.

And as I mentioned earlier, we had one rig in that Mexico IPM project also terminated during the fourth quarter. Now, looking for a moment at our completions in productions business and as Rob mentioned earlier, we completed a significant organizational restructuring during the fourth quarter. Very low customer demand and the fractured undisciplined nature of the competitive environment will continue to put undue pressure on this business segment.

While cost management will help to mitigate this situation, and for Precision, our scale and size will help produce the impact. The well service industry desperately needs a recovery to ensure some semblance of sustainability.

Now, I think the lay down commodity prices following the December OPEC meeting was generally not anticipated by many including us.

We did however anticipate the sharp reduction in customer spending as we believe that oil commodity prices even in the low 40s were just not healthy. And while some unconventional plays may work today with prices in the $40 range, that works underpinned by unsustainably low oil service pricing in general.

We believe the substantial underinvestment by producers during 2015 and now progressing through 2016, will inevitably lead to real and meaningful production declines and an eventual commodity price recovery. Of course, we do not have a firm view of the timing of that recovery, but at Precision we’ll stay well-focused on ensuring we have the right assets, the financial capacity, the people and the competitive positioning to take full advantage of this inevitable recovery.

I’d like to conclude by thanking all of the people in the Precision family for the hard work, the incredibly tough decisions, and the dedication and the success of our company through this prolonged downturn.

And I’ll turn the call back to the operator for questions.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. [Operator Instructions] Our first question is from Scott Treadwell from TD Securities. Please go ahead.

Scott Treadwell

Thanks. Afternoon, guys. Wanted to jump into the…

Kevin Neveu

Hey, Scott, do you mind if I interrupt you? We can barely hear you.

Scott Treadwell

Is that better?

Kevin Neveu

That’s better. Thank you.

Scott Treadwell

I just wanted to jump in on the cancellations. You talked about the four rigs that have come down. Can you just give us a sense how much time was left on those contracts and the magnitude of the lump-sum revenue you expect to get which I assume is going to come in Q1?

Kevin Neveu

Since we haven’t reported Q1, I don’t give guidance. I won’t say much with lump-sum revenue. But to the contracts, would have been contracts on rigs that were deployed late 2014, early 2015. It would have a long duration left. So we’ll earn back the full cancellation fees or the full projected cash flow for those rigs in lump-sum payments during the first quarter for two of the rigs.

One of the rigs was really a juggling of commitment and really just pushes out a little more revenue into 2017 for a very good customer. And that’s actually - we think that’s okay deal. The third cancellation was in the fourth quarter, late in the fourth quarter in Mexico and that money was recognized in the fourth quarter.

Rob McNally

And we did report that, Scott. That was the $6 million that was mentioned in the press release.

Scott Treadwell

Okay. Perfect. On the - the other thing I wanted to chat about, you gave us some guidance on D&A. That makes sense. On the maintenance capital side, obviously it’s leveraged to activity or correlated but at some point there’s a de minimis number. If you just have the rigs under contract and had nothing else work, what would maintenance capital look like for you guys this year?

Kevin Neveu

Well, Scott, that would be the 60 rigs running for the course of the year, these retirements that we have and we can go those rigs and scrounge a few pieces and parts off the rigs, that will probably, like we are producing our maintenance CapEx many event. But you can use a kind of our longstanding trends in this CapEx on just 60 rigs. And…

Rob McNally

I mean, Scott, pretty good rule is the CAD1,000 per operating day, it’s expand on maintenance CapEx that’s not perfect, that’s pretty close. And what I would say this that the CAD44 million that we are projecting for maintenance CapEx in 2016, kind of reflects the activity levels as we same, right now. And it also reflects us maintaining the rigs at full capacity, meaning we are not out robbing parts and pieces off of rigs that are stacked.

If thing is were more desperate and we wanted to drive CapEx down further, we can drive it down to something that rounded off to zero by taking equipment off of stacked rigs, that is not our intend. And this maintenance CapEx program is robust and have to keep our four fleet ready to go.

Scott Treadwell

Okay. Perfect. The other question I had was on the working capital side. Typically we get a nice build in working capital in Q1. It’s entirely possible that a lot of guys could see a draw. Is there much more structurally of working capital to come out of the business, managing inventories lower, anything like that? I am assuming that payables and receivables have probably run their course largely, but just wondering if there’s much more to come out of the business on that side?

Rob McNally

We didn’t have the normal big increase in the Canadian business in Q1 versus Q4. So there is not a big working capital change there. Then as we go into Q2, we are going to see the Canadian business decline, because the spring breakup. And the U.S. business there is, few more rigs to come off then what we had in running in the fourth quarter. So I would expect that we will actually have a very working capital recovery, as we work to late Q1 and into Q2.

Scott Treadwell

Okay. Perfect. Actually the last one I had was just on the restructuring and headcount reductions that you guys have made. I know in the past you’ve always referenced an ability to add 100 or 150 rigs on relatively short notice. What does that number look like today in terms of your ability to add rigs? It would be great if that was a problem to deal with. But just wondering what the magnitude looks like now.

Rob McNally

Yes. That would be a first class problem for sure. But - Scott, I don’t think, we are going to be the bottleneck, I think when the industry starts to come back, we will build to put rigs back to work as fast as we need to and we still or very focused on maintaining our field leaderships, so our drillers, our rig managers, our field sups where they may be working at a lower position in the organization today, we try to maintain as much of that capacity as we can. Because that is the trickiest part of putting rigs back to work is making sure, we have the right leadership for those rigs.

Scott Treadwell

Okay, perfect. That’s all I had, guys. I appreciate the colors always.

Kevin Neveu

Thanks, Scott.

Rob McNally

Thanks, Scott.

Operator

Thank you. The following question is from John Daniel from Simmons & Co. Please go ahead.

John Daniel

Hi, guys.

Kevin Neveu

Hi, John.

John Daniel

How are you guys doing?

Kevin Neveu

Good. Just like the environment.

John Daniel

Yes. Okay. It’s depressing. Just a couple housekeeping ones from me, and I don’t think you mentioned this in the prepared remarks, Rob. But the press release noted that you received some one-time payments in Canada from customers due to contractual shortfalls. Can you explain what that was and quantify it for us?

Rob McNally

Yes. So the way that it works in Canada is when we have a contract for the year, for a year or longer. During the year they are obligated to X number of days, which is typically 250 days. And so at the end of the year, oftentimes we’ll have customers they didn’t achieve all the days, if they needed to. And in the fourth quarter we had something around CAD10 million of shortfall payments in the Canadian market, which were people just catching up on their obligation for the year.

John Daniel

Okay.

Rob McNally

Okay. So those are not cancellations, it’s just finishing out there contracted piece.

John Daniel

Right. But we would in theory need to adjust going forward, right?

Rob McNally

Right. So we would not expect to see that every quarter.

Kevin Neveu

But over the course of 12 months that money would still be included.

John Daniel

Correct. That’s right. Just one on international for me. Can you guys, just broadly speaking, characterize the EBITDA margin trends in the segment over the course of 2015, and just an expectation, again broadly speaking, going into 2016?

Kevin Neveu

So it really - John it really depends on the rig mix right. So as we, for instance we put these new bigger rigs on long-term contracts into Kuwait, the EBITDA margins are quite high. If you look at some of the upgraded rigs whether that’s in Mexico or in Saudi Arabia the margins will be much more compressed. So one of the things that happened in this last quarter was we saw activity decrease in Mexico and it was a lower margin rig, but then we have the addition of the bigger rig in Kuwait early in the year.

So in the year over year comparison the margins start to look better. So even though activity days were down Q4 of 15 versus 14 revenues were about flat, because of just the rig mix.

John Daniel

Okay. But, I mean, it’s reasonable to assume that there’s some pricing pressures internationally going into this year?

Kevin Neveu

Well, most of the rigs are contracted John. So I think that the pricing pressure that we’re going to see we have seen. And as Kevin mentioned in his remarks big chunk of the business today is in Kuwait and that has been stable. Those are long-term contracts and we have not had pricing pressure there. So in some areas we may have a bit, but I don’t - satisfy, the bigger high dollar high margin rigs are contracted and I don’t expect to have any pressure there. A few of the smaller rigs are older rigs in the case of Saudi, we’ve had some pressure, but I don’t expect to see much more than I think we’re sort of prudent at this point.

John Daniel

Okay. Fair enough. I’ll turn it over to others. Thank you for the comment.

Kevin Neveu

Thanks John.

Operator

Thank you. The following question is from Jim Wickland from Credit Suisse. Please go ahead.

James Wickland

Good afternoon guys.

Kevin Neveu

Hi Jim.

James Wickland

Kevin we’ve been - Rob we’ve been using the term unsustainable now for about 12 months and there is just no telling how long we’re going to keep using it. You talk about how day rates or spot rates in Canada and spot rates in the U.S. are unsustainable long-term. Where are those spot rates, you’ve obviously got some that have gone to work or working. Where are those spot rates today?

Kevin Neveu

You know Jim on high-spec rigs right now, so the Super Series rigs, pad walking rigs, mid to upper teens and that really has not changed, we have lot of questions about any further day rate pressure, but I can tell you there is literally one, two or three opportunities in the market I think even time ever and some like this real market to base that on, but it’s going to who want a rig. They probably know Precision or one of the three or four other companies who offer that type of rig, they probably know us. They probably know the market is mid to upper teens. If we leak that it’s not - isn’t a three bids in a buy market going on right now.

James Wickland

Is the U.S. market markedly different. I know you talk about how the Permian is the only place where there is really any work. Is the U.S. market markedly different?

Kevin Neveu

Yeah. So I’m referring to the U.S. market in those comments. Now Canada is a little different. Canada particularly the shallower regions and that’s getting into, what we call the Viking play which is kind of the Alberta/Saskatchewan border and then the Canadian border in Southern Saskatchewan and some of the Cardium. It’s shallow, it’s a vastly over slide market. There is a still old component of Tier 2 rigs there. It’s a fractured market and day rates there have gone. I have heard of examples in the single digit range like CAD9500 per day, that’s unsustainable.

So the shallow Canadian oversupplied market there has been pricing pressure continue through 2015 and 2016, it’s unhealthy and even if you have very low leverage, if your EBITDA was negative that’s unsustainable.

James Wickland

I would agree. It’s unhealthy for you guys. I’m not sure about the E&P companies but it’s unhealthy for us.

Kevin Neveu

Jim, we’re fortunate. We’ve got - we don’t have any rigs operating at zero margin or negative EBITDA margins. We’ve got typically our trough margins right now still look like CAD3000 to CAD5000. And there appears to be as I said discipline on the whether it’s a Precision Super Series or whatever brand name you talk about high-spec pad walking type rig. There is remaining pricing discipline despite very, very low demand.

James Wickland

That’s good granularity. I appreciate, thank you. My follow-up, if I could, Robert, you talk about your undrawn CAD550 million revolver. We’re hearing stories of banks now putting in minimum liquidity requirements in order to access revolvers. Have you all seen any of that? And with some of these banks in the U.S. now selling out oilfield service debt at cents and the dollar, I was just wondering, are you tempted to pull that down so that you’re ready or do you think you’ll be able to?

Rob McNally

Jim, first off, we don’t have minimum liquidity requirements in the revolver. So as long as were incompliance with the covenants, which we are –then we have access to it. So, I think that there’s not a need for us to pull the revolver down at this point. I think that we’re on pretty safe ground right now.

James Wickland

Do you actually build cash or are you going to pay down debt?

Rob McNally

Stay tuned. Both are real options. Historically we’ve been saying that we’d rather sit on the cash for the time for the time being. But our bonds are trading at a bit of a discount in the market and so it may be worthwhile to use some of the cash to buying bond.

James Wickland

Very helpful. Thank you very much, sir.

Rob McNally

Thank you.

Operator

Thank you. The following question is from Ole Slorer from Morgan Stanley. Please go ahead.

Ole Slorer

Thank you very much. I wondered whether you could give just a little color on the duration of the revolver, how long does it last for?

Rob McNally

The revolver renews, I believe it’s June of 2019.

Ole Slorer

Okay, so June 2019. And you said you have no other debt maturities before that.

Rob McNally

That’s correct. Well, actually I think that the Canadian CAD200 million notes come to March of 2019.

Ole Slorer

Okay. Thanks for that. Kevin, I wonder whether you could be as bold as to just give us a little bit of a prediction here of the trajectory of the U.S. rig counts over the next couple of months? Seems to be this is the new sort of momentum in the leg down at the moment with capitalization into this oil price tape. How far and how fast down do you think it will move for the industry?

Kevin Neveu

Ole, I think, this is - it’s almost a little bit of public disclosure game - not for us, but for our customers. We saw the same thing last year, the first months of the year our customers got really aggressive on pricing and discounts so they could come into their Q1 or Q4 earnings calls in mid-February and report that they’ve cut service costs. I think, this year we are seeing the same thing happening with just rig activity. A lot of aggressive activity in the first few weeks of 2016 and I think it’s driven so that when they come to report their Q4 and they’re disclosing in mid to late February. We are able to say they cut their rig counts or cut their spending.

Last year, that activity after the earnings season, went calm for a while. They did all their work in the first few weeks. It’s not unbelievable to think they’d do the same thing this year.

Ole Slorer

And any differences in how we should expect the Canadian markets to behave in the first and second quarter? To what extent do you think we will get and unwind in the breakup?

Kevin Neveu

So in Canada the decision making is very much more day-to-day. So it’s quite common to watch how the spring develops before you decide how to spend your money in Q3. We are going to an early breakup right now. This is definitely a budget-driven breakup. Rig counts are starting to tend downwards.

And, frankly, early February, that’s not a good signal. So that’s just spending limited. I commented that on Q2, which is the spring breakup season, we expect to see rig counts in the low-teens. We are support - we’re operating at deep basin which we think is going to stay fairly busy, at least for us. But, nonetheless, I think there will be some breaks taken during Q2. It could be a very grim Q2 for a lot of the industry, especially shallow rigs and some of that Cardium, Viking type play in Canada.

And then I think, Q3 will be predicated on what kind of capital our customers have left. You’re seeing some capital raising going on right now. I think just last night there was a capital deal closed with some money flowing back into the Canadian E&P sector. If some of that’s successful there’s a likelihood there’s a bit of a resurgence in Q3, but well below 2016 levels - 2015 levels. Is that helpful?

Ole Slorer

Yes, very helpful. And for you specifically, could you talk a little about the sustainability or the visibility that you have on the deep gas drilling? And you’ve been an advocate of that program, and we’ve seen a slippage on one of the LNG projects. But how has that, if anything, changed your view that this is going to be a more sustainable business for you?

Kevin Neveu

I don’t think, that particular announcement changed my view and we’ve got kind of one eye open at night time watching to see where this goes. So we’re not sort of in 100% certainty in our minds. But we still think it’s a good certainty that it moves forward. Again, these LNG projects are not predicated on the spot price for gas in 2016. They’re looking at contracts they have to unveil in 2019, 2020, 2021. And well I think currently the global LNG market is slightly oversupplied.

Looking down the road, four, five years down the road I think there is still a growing demand down the road to meet those contracts that aren’t fulfilled today.

Ole Slorer

So, you view that business as being - you haven’t changed your view on that business, you think it’s going to be, it continue to be quite stable for you.

Kevin Neveu

I haven’t changed your view in that and we believe it to be stable. I think there is another component that comes into play here. But there is a byproduct of drilling and that’s the wet gas liquids that are used as diluent for heavy oil and that actually creates cash flow right now that supports the drilling programs in most cases.

Ole Slorer

And, just finally, if I may, could you give us your latest thoughts or an update on your corporation with Schlumberger? Is that still moving ahead for you? Is it having any impact on your business?

Kevin Neveu

We have two. We do the IPM work in Mexico. But I think you’re referring to the directional drilling tool alliance that we have with Schlumberger.

Ole Slorer

Correct, correct. Yeah.

Kevin Neveu

Yeah. It’s always still working really well for us, Ole. We can offer the complete range of tools from really basic mud pulse telemetry directional drilling to a couple of combo down hold tools and order steerable. And in each of the quarters in 2015 we ran the most comprehensive tool strings from Schlumberger. We ran some very basic tools. So, it’s continuing to move forward. In the fourth quarter in fact, we ran activity levels under actual drilling, they are on par with the fourth quarter a year earlier despite the market size being half the size. So, we feel like this is gaining traction.

Now, just recently the day rate for a directional driller individual has come down so low, that the economic benefit we’re offering has been fractionalized down. But I don’t think that changes the business model. And I don’t think that they will see directional drillers in a rebounding market operating on rates for the individual of a couple hundred dollars a day. I think our model has been improving out in this market and a little bit of extra pressure right now in CAD27, CAD26, CAD25 crewed. But I’m gaining more confidence this model is going to work long-term.

Ole Slorer

Okay. Thanks for that. Kevin.

Kevin Neveu

Great. Thank you.

Operator

Thank you. The following question is from Sean Meakim from JPMorgan. Please go ahead.

Sean Meakim

Hey, gentlemen.

Kevin Neveu

Hi, Sean.

Sean Meakim

So to ask the rig count question in a different way in the U.S., would you characterize your base case for utilization this year as being effectively just the rigs you have under contract, meaning minimal spot work from here?

Kevin Neveu

Sean, we don’t think it’s a forward guidance on our base case.

Sean Meakim

Okay. And you talked about there’s only a handful of opportunities out there at any given time. But you still have more than a handful working the spot market today. Can you give us a little bit of direction in terms of geographically where your rigs that are working in the spot market are working today, or any commentary on that subset of the fleet?

Kevin Neveu

Sean, there really is actually no concentration or trend to even think about on rigs are not on the contracts we’re currently working, but the Precision Super Series rig I think the guidance I would give there, the rate of range staying in that mid to upper teens range right now. And as I commented earlier it does appear that the contracts of all those rigs are maintaining this point in our pricing.

Sean Meakim

Okay. Fair enough. Just to take the conversation in a different direction, it may seem egregious to talk about pricing power and the recovery in the current market, but I guess just - you know as you think about the opportunity set in the next cycle, do you view pad optimal rigs in the U.S. as kind of a subset, a discrete market that can perhaps gain higher pricing power faster than the rest of the AC or horizontal market? Or do you think that in a recovery there will be enough of a substitution effect that you need to see higher utilization across the horizontal fleet to get pricing power for your best rigs?

Kevin Neveu

So, Sean, I think there is actually a good bit of a case study. We did move five rigs from U.S. to Canada. Late last year there were pad configured rigs with XY walking systems fully integrated on the rigs. And those rigs went to the market at day rates substantially higher than most of the other high-spec rigs in the market.

So I do believe that the already configured pad walking rigs are in higher utilization levels than the balance of the Tier 1 U.S. fleet. So a short answer to your question is, yes, pad configured rigs will get better leverage. Now, I’m going to go back to what I said in our call about our 238 Tier 1 rigs. We can clip on a pad walking system to anyone of our Tier 1 rigs.

If we need to add a third mud pump, we can slide a third mud pump in about eight hours to any one of those rigs, and if we have to replace the standpipe with a 7,500 psi standpipe. So we believe our entire Tier 1 fleet of high-spec rigs other than the super single, super triple and super triple 1,500 depth ratings, we believe that the entire PD asset base is able to access that pad market as soon as it begins to rebound and it’s already in tight supplies. So we think we’re well-positioned competitively for a rebounding market.

And, Sean, it’s our view that the core development drilling in the unconventional resources will be done with pad walking XY rigs. That’s the core development drilling. The delineation drilling and the production, completion, testing drilling will likely to be done with Tier 1 rigs.

Sean Meakim

Okay. Yes, that’s very helpful. Thanks, guys.

Kevin Neveu

Thank you.

Operator

Thank you. The following question is from Mark Bianchi from Cowen. Please go ahead.

Mark Bianchi

Hey, thanks, guys. Just following up on the Canadian margins you mentioned, Rob, the 10 million. Is that Canadian or U.S. that impacted the fourth quarter?

Rob McNally

Excuse me, Mark. Yes, it’s Canadian.

Mark Bianchi

Okay, great. Thanks. So then even removing that it seems like you had a nice margin increase sequentially and year over year; can you kind of talk to us about that? Is that mix? How much of that should we think as being sustainable going forward? I recognize that pricing is going to be offsetting that, but maybe just talk to us about the year-over-year and sequential change there to think about how to model it.

Rob McNally

Yes, it really is mix. I mean, the rigs that are really generating EBITDA for us in the Canadian market are the Tier 1 triples, that are the walking rigs that Kevin alluded to largely in the deep gas basin. And I think that makes up a bigger percentage of work that those margins will hold up reasonably well.

Mark Bianchi

Okay. Okay. That’s helpful. And then, on the 31 rigs in Canada that you have contracted for 2016, maybe following up to the question that was asked earlier on the exposure in the US, can you talk to us about the exposure for those 31 in Canada?

Kevin Neveu

Rating by exposure the rigs are contracted…

Mark Bianchi

Geographically, sorry, Kevin, so how many are…?

Kevin Neveu

Okay. I don’t have it in my fingertips but I can - I’m quite certain that majority are deep basin gas, they are, yes.

Mark Bianchi

Great. Okay. That’s all I had. Thank you.

Kevin Neveu

I’m not sure if it’s 28 or 31, or 31, or 31.

Mark Bianchi

All right. Got you. Okay. Thanks. I’ll turn it back.

Operator

Thank you. The following question is from Jon Morrison from CIBC World Markets. Please go ahead.

Jon Morrison

Afternoon, all.

Kevin Neveu

Hi, Jon.

Jon Morrison

Rob, just to clarify, the bulk of the 6 million U.S. payment that you received in Mexico, that would have all traditionally been generated post Q4 end, and there wasn’t a big chunk of it that was specific to Q4. Is that correct?

Rob McNally

That’s correct. That would have been. That would have gone out through the rest of the life of the contract, which went well into 2017, I don’t remember exactly where. So it brought forward some revenues that would have otherwise been earned in 2016.

Jon Morrison

Can you give any color on in terms of how much total IBC revenue you had in Canada and U.S. in Q4?

Rob McNally

Well, we had the CAD10 million in Canada that I spoke. And then we had - let me just think for a second; probably, that much again in the U.S.

Jon Morrison

Okay.

Rob McNally

That was IBC revenue.

Jon Morrison

And would have you had customer shortfall similar to Canada in Q4 2014 or would have been fairly insignificant?

Rob McNally

It was at almost negligible.

Jon Morrison

Okay. Of the 70 rigs that you guys quoted as having under contract today going to a 60 average throughout the year, are any of those rigs not in the field working today?

Rob McNally

Well, the five in the U.S. that we - and when we said that our rig count included five rigs that are IBC in the U.S. that was five rigs would be counted as part of the 70 currently.

Jon Morrison

Okay. Was there any in Canada above and beyond that or those are the five major ones to look out for?

Rob McNally

Yes.

Jon Morrison

Within C&P how comfortable are you with the long-term marketability of the, call it, 160-ish well servicing units that you guys exited the year with? I realized that you’re not going to work a ton of them in 2016 and 2017. But…

Kevin Neveu

Rob will give you the accounting answer first of all.

Rob McNally

Yes, I mean, Jon, these are - we have retired some C&P units earlier this year or in 2015. And the remaining units that we have are marketable rigs. These are rigs that can’t work. These are - have been maintained and can go back to work. The bigger question is what is the market demand, right? I mean, in this environment that’s more rigs than the market needs. And so over time, if the market doesn’t improve more of those rigs will get retired. But today these are all marketable, usable rigs.

Jon Morrison

Okay. So it’s fair to assume that you wouldn’t call those like a Tier 3 well servicing unit that it would have to be an incredibly frothy market to see that go back to work.

Rob McNally

No, I mean, there is not the technical differentiation in well service units that there is with drilling rigs. A brand new drilling or well service rig and a 20-year-old well service rig that’s been well maintained, they perform about the same. There is not a big difference in the performance of those units. And that’s not the case on the drilling side. Clearly, there is a real efficiency gain with the Tier 1 rigs.

Jon Morrison

Kevin, just to clarify your comment earlier about leveraging the decommissioned rigs and forward operations either in North America through salvaging it for parts or redeploying it internationally, when you say redeploying them internationally would you run any of those rigs yourself under the Grey Wolf banner or are you ultimately talking about selling those into a different third-party service provider that would potentially market them themselves?

Kevin Neveu

Yes, Jon, I think our view is that we’ll dispose of those rigs and we’ll dispose of them to the, whatever the best value we can achieve, whether it’s selling them internationally or domestically or selling off as pieces. And so I think that’s all. I’d be clear on that. We’ll dispose of the rigs. We’ll scrub off all the parts we can use and the pieces we can use on the drill pipe. But we’ll dispose of the rigs assets either as parts of rigs.

And don’t anticipate they’ll come back to compete against, because we’re either operating deeper, bigger rigs internationally or higher pressure rigs. But generally, this will be disposal then for us, not redeployment for us.

Jon Morrison

Okay. So is it fair to assume that you wouldn’t put any more capital into those rigs even if you saw a two year contract opportunity in LatAm or something like that?

Kevin Neveu

Well, so, first of all, never say never. But if somebody came along tomorrow and offered us a, let’s call it, a 45% or 50% IRR to take those rigs and reinvest in them. We wouldn’t turn that down, but that’s not a very high likelihood.

Jon Morrison

Okay. Rob, just in terms of the write-downs that you guys took in Q4, how comfortable are you that there isn’t more to come in 2016? And whether you see there the 60 rigs on average that you have running or contracted in 2016 or whatever your base case is internally, do you believe that there is going to be limited to no write-downs on the count?

Rob McNally

Yes, so here is what I would say, Jon, is that when we talk about retiring rigs, I’m confident that we retired the rigs that needed to be retired. These are all very high quality rigs, even 16 that are not Tier 1, but these are good rigs. In some cases, 2,000 horse power rigs that are drilling Salt Cavern wells. And we don’t - none of these rigs are going to be obsolete at any time in the future that we’re going to see.

Now, in terms of impairments, we have to do a CGU test on the different business units every year. So I can’t guarantee that if we’re sitting here in a year’s time and oil still $25 and the outlook is dismal, that there could - there wouldn’t be additional impairments. But I don’t think that that would be decommissioning of particular assets.

And on the impairment side, I think we’ve done it the right way. We took a significant amount of value out. And the models that we used to do that math were not optimistic models. We were trying to take a very realistic look at the world and not be optimistic.

Kevin Neveu

But, Rob, it’s also fair to say that if the outlook turns markedly better, we may have to write those rigs back up.

Rob McNally

Yes, the impairments could go back the other way, yes.

Kevin Neveu

Right.

Jon Morrison

For sure, okay. Just to clarify, you haven’t been put on notice of any additional rig cancellations post Q4 quarter-end other than the five rigs in its entirety in 2015 that you referenced earlier at this point, right?

Rob McNally

Still - so post quarter-end, we put a notice that two rigs will be terminated included in that five.

Jon Morrison

Okay, nothing about that, okay.

Rob McNally

Yes.

Jon Morrison

Last one just for me. Rob, earlier you made a comment about possibly buying back bonds with cash and that isn’t concrete at this stage or anything. But is there a maximum level of cash that you look at deploying to buy back bonds that you’d want to keep a certain base liquidity no matter what?

Rob McNally

Yes, so let me say this. Liquidity is king right now. We are not going to put ourselves in a position where we don’t have more than ample liquidity. So take my comment as we see where the bonds are trading. It’s interesting. But there is no plan in place to go out and buy back bonds. And we certainly are not going to use up a meaningful portion of our cash on anything right now, buying bonds or anything else. So don’t read more into that comment than what it was.

Jon Morrison

Okay. I appreciate the color. Thanks. I’ll turn it back.

Kevin Neveu

Thanks, Jon.

Operator

Thank you. The following question is from Dan Healing from the Calgary Herald. Please go ahead.

Dan Healing

Hi, guys. Thanks for taking my question. I was a bit late on the call. So I apologize if this has been asked. But have any of the legacy rigs - are they actually working?

Rob McNally

I think there are a couple of rigs drilling Salt Cavern wells that are big 2,000 horse power rigs, but otherwise it’s all Tier 1 rigs working.

Dan Healing

Okay. So they - the ones that are working then are they - sorry?

Kevin Neveu

Sorry, was your question the rigs that were retiring?

Dan Healing

Yes.

Kevin Neveu

Yes, so I think, Rob, retirement.

Rob McNally

The rigs that we’re retiring, none of those are operating today.

Dan Healing

Okay. Okay. And, I guess, I know it’s a bit of a sensitive topic, but I wanted to get an idea of how the kind of the human cost of what’s going on. Can you give me an idea of what the headcount is at Precision and how it’s changed over the past year and the fourth quarter?

Kevin Neveu

Dan, I don’t have those numbers in my fingertips. And I’m not anxious to see Precision printing or taking credit for layoffs. I don’t like that. We have a strong loyal workforce that we care about everybody on. What can I tell you - you should think about is that we’re running about half the number of rigs now than we were a year ago. And in that structure there is probably 30 to 40 jobs tied to a rig, both between the rig crew and support operations.

So it’s been deep and meaningful and painful for our company and for our employees and for the people who are at home right now.

Dan Healing

Okay. I noticed that there is a charge of $7 million for the fourth quarter. Can you give a color on what that is for?

Kevin Neveu

Just as we do the best we can to take care of the people who we have to lay off and those will be severance charges. And I’ll tell you, in every case, we do the best we can to take care of our people that are big in the company.

Dan Healing

Okay. Thanks.

Kevin Neveu

Thank you.

Operator

Thank you. The following question is from Kelly Cryderman from The Globe and Mail. Please go ahead.

Kelly Cryderman

Hi, there. Just following up on Dan’s question, I’m wondering when you talk about the cut to your employees, are those actual employees or are they paid on a daily basis, have hours been reduced, have wages been reduced? Can you provide any more color on that?

Kevin Neveu

Kelly, those are great questions. So we have effectively kind of two types of employees. We got field labor employees that are paid hourly, but they’re employed under regular employment terms. We have office - hourly employees in office, salaried employees. We have basically salaried to hourly employees. But they’re all employees of the company, longstanding employees.

And in the case of their seniority, if there is a separation there may be a severance obligation. And we try to do the best we can to pay people at or above that obligation.

Kelly Cryderman

Thank you.

Operator

Thank you. There are no further questions registered at this time. I would like to return the meeting to Mr. Ford.

Carey Ford

That concludes our fourth quarter conference call. Thanks for joining us today.

Operator

Thank you. That concludes today’s conference call. Please disconnect your lines at this time. And we thank you for your participation.

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