Precision Drilling's (PDS) CEO Kevin Neveu on Q3 2016 Results - Earnings Call Transcript

| About: Precision Drilling (PDS)

Precision Drilling Corporation (NYSE:PDS)

Q3 2016 Earnings Conference Call

October 21, 2016 02:00 PM ET

Executives

Saber Rad - Manager, IR and Business Development

Kevin Neveu - CEO

Carey Ford - SVP and CFO

Analysts

Ole Slorer - Morgan Stanley

Ben Owens - RBC Capital Markets

Ian Gillies - GMP

Sean Meakim - JP Morgan

Jon Morrison - CIBC World Markets

Brad Handler - Jefferies

Operator

Good afternoon, ladies and gentlemen, and welcome to the Precision Drilling Corporation 2016 Third Quarter Conference Call and Webcast.

I would now like to turn the meeting over to Mr. Saber Rad, Manager, Investor Relations and Business Development. Mr. Rad, please go ahead, sir.

Saber Rad

Thank you, Mary and good afternoon, everyone. Welcome to Precision Drilling Corporation's third quarter 2016 earnings conference call and webcast. Participating today on the call with me are Kevin Neveu, Chief Executive Officer and Carey Ford, Senior Vice President and Chief Financial Officer.

Through a news release earlier today, Precision Drilling Corporation reported its third quarter 2016 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 news release for additional disclosure on these financial measures.

Our comments today will also include forward-looking statements regarding Precision's future results and prospects. We caution you that these forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially from our expectations. Please see our news release and other regulatory filings for more information on forward-looking statements and these risk factors.

Carey Ford will begin with a brief discussion of the third quarter operating results and a financial overview. Kevin Neveu will then provide an operations update and outlook.

Carey, over to you.

Carey Ford

Thank you Saber. In addition to reviewing the third quarter results, I will provide an update on our 2016 capital plan and our liquidity position. Third quarter adjusted EBITDA was CAD41 million which is 63% lower than the third quarter 2015. The decline in adjusted EBITDA from last year is a result of decreased activity levels across all of our operating segments and lower spot market pricing. In Canada, drilling activity for Precision decreased 37% from Q3 2015, while margins were [$2,479] [ph] per day lower than the prior year. The margins for the quarter were negatively impacted by rig mix as several of our contracted rigs did not earn days during the quarter with contracted days representing an unusually low 33% of utilization versus 55% in the prior year. Customer decisions to not utilize contracted rigs will defer revenues to future periods. Also compared to the prior year CAD4.5 million or CAD685 per day less revenue was earned from shortfall payments. These negative impacts from day rates were offset by daily operating costs that were 13% lower than the prior year.

In the US, drilling activity for Precision decreased 42% from Q3 2015, while margins were US$1,336 per day lower than Q3 2015. The decrease was primarily a result of the impact from the lower spot market rates and US$7.8 million or US$792 per day less revenue earned from idle but contracted rigs. These negative impacts to revenue were offset by daily operating costs that were 6% lower than the prior year. Internationally, drilling activity for Precision decreased 36% from Q3 2015. The decrease in activity was primarily the result of fewer days in Mexico and the Middle East. International average day rates were US$43,879, an increase of US$4,984 from the prior year. The increase was largely a result of rig mix as there was a higher percentage of Middle East rigs active during the current quarter.

As mentioned in the press release, we now have one new-build Kuwait rig earning revenue and the second should spud its first well in November. Today, we have 45 rigs drilling or moving in Canada, 37 drilling or moving in the US, with four rigs receiving idle but contracted payments and eight rigs active internationally. In our C&P division, adjusted EBITDA this quarter was CAD736,000, down 83% from the prior year. The decrease is a result of lower activity and lower pricing in all C&P business units. In the third quarter of 2016, our capital expenditures were CAD78 million which compares to CAD53 million in the third quarter of 2015. For the full year 2016, we expect to spend CAD222 million comprised of CAD159 million for expansion, CAD43 million for maintenance and infrastructure and CAD20 million for upgrades. Substantially, all of our expansion capital is for the two new-build rigs in Kuwait which will be fully paid for in 2016.

We will announce our 2017 capital plan at a later date, but as of today we have no expansion in capital expenditures planned for 2017. The CAD20 million of upgrade capital to be spent this year is primarily for bolt-on upgrades to super triple rigs and investments are backed by long-term contracts. Our contract book continues to perform for Precision and as of October 20, 2016, we had an average of 59 contracts in hand. For the fourth quarter, an average of 61 for the full year 2016 and an average of 42 for the full year 2017, an increase of 7 rig years from three months ago.

As of September 30, 2016, our long-term debt is approximately CAD2 billion and our net debt is approximately CAD1.6 billion. We have a US$550 million revolving credit facility that is undrawn, with the exception of US$41 million in letters of credit. We had CAD352 million in cash on our balance sheet at the end of the quarter. And as of September 30, 2016, our total liquidity position was CAD1.1 billion. As stated on our 2016 priorities, our goal is to continue a multi-year plan for net debt reduction, which we will achieve by reducing absolute debt levels and maintaining strong liquidity for maximum flexibility to address our long-term maturities over the next several years.

I will now turn the call over to Kevin for further discussion of the business and our outlook.

Kevin Neveu

Thank you, Carey. Good afternoon. As we stated in our press release, we’re encouraged by the significant improvement in sentiment of our customers and the resulting increase in activity and market share we've achieved. Now, that said, I believe our third quarter and our year-to-date results demonstrate how very tough or brutal and unforgiving this business can be. However, as our activity begins to recover, we’re confident we can sustain the cost savings and efficiencies we've achieved during the downturn. We believe our business will show strong earning leverage as activity improves.

The priorities we chose at the beginning of the year, namely preserving our cash, ensuring high performance of the rig and positioning for an eventual rebound have allowed us to stay focused on the key elements we control. In the early stages of this rebound, we've reactivated 37 rigs in Canada, 16 rigs in the US, and we deployed two new international rigs, as Carey mentioned, earlier, more than doubling our total activity from trough levels. And this also means that we've recruited and recalled nearly 1000 field employees and all of this has been accomplished while sustaining our rig efficiency, our safety performance and with virtually no increase to our fixed costs or G&A expenses. We expect to demonstrate the operational leverage and our variable cost model while capturing market share during this rebound.

Now, these market share gains are a direct result of customer acceptance of Precision’s Super Triple pad walking rigs and the superior performance our crews continue to deliver through this downturn. And despite the downturn spending constraints, we have continued to invest in our rigs, sustaining full maintenance programs. We've continued to invest in our people with crew training, recruiting and key employee retention programs and we continue to invest in our facilities with our recently commissioned employee development and training rig in Canada and this is a state-of-the-art rig, which I previously mentioned with a fully functional Precision’s Super Triple AC rig configured completely for employee training.

Now, regarding our top priority and that was preserving cash. Carey commented and we commented in our press release and our last call, as we begin to see improved visibility, we’ve looked to start using our cash to reduce long-term debt. Carey covered the debt reduction in his earlier comments, but I will remind you that we’re turning our minds to reducing debt levels and particularly highlight our view on the uses -- on the priority uses of cash, free cash flow for debt reduction.

Now turning to the market overview, starting with our international operations, today, we are operating the eight rigs as mentioned earlier, with the recent start-up of our newly delivered Kuwait rig. We delivered this rig more than eight months ahead of schedule and we believe our client is pleased. The second rig is in transit, is moving to location, should be up and earning revenue by mid next month. It will be good to have both rigs up and running and to have achieved critical scale in Kuwait and I believe this gives us a good platform for further growth in that country.

Now, these firming commodity prices are certainly stimulating customer interest in the Arabian Gulf region and tender activity is picking up with several projects in key target areas for Precision. With imminent bid submissions, I’m not inclined to provide any detailed comments, but I do believe reminding you that we have four idle 2000 horsepower rigs in the region, it is important information.

Coming back to North America, first of all, let me say that I’m very pleased with Precision's North American market share today, achieving a third quarter record level of market share in North America. It’s clear that our high-performance competitive strategy drives efficiency of the rig, delivers value for our customers and as a result, we are gaining market share.

So I’ll begin with Canada. We’re in the midst of the fall budgeting season in an industry that has been literally kicked on its heels for the past couple of years. The commodity volatility during the first quarter of 2016 resulted in historic low industry activity through the end of the third quarter. For Canada, 2016 has been just awful. Summer and early fall drilling activity has barely achieved activity levels in the industry that we normally experience during a typical Spring break up.

And this exceedingly low customer demand has resulted in a largely undisciplined pricing environment, particularly the shallow less specialized Canadian drilling areas. For Precision, the bright spot has been the Canadian deep basin, significantly tighter rig supplies, our position as industry leader for pad walking rigs have both combined to support much better market discipline and better pricing in this region. But even this market was hit by a slug third quarter, Carey mentioned that on our contracted rigs in the deep basin we only actually earned about 33% of our potential 2,700 contract days that were possible during the quarter that’s an unusual low activity rate for contract rigs. That means we expect these days [indiscernible] near-term future or will our shortfall payments on the anniversary dates of those contracts and please remember that in Canada on our take or pay contracts, these contracts are trued up on the anniversary date every year. We don't invoice on an ongoing basis like we do in the US, it’s just a different operating model. The firming commodity prices undoubtedly improved the outlook for Canada, particularly for a better capitalized customers and it appears the spending increases by these customers into 2017 are inevitable.

Ultimately, a full basin wide recovery in Canada and they require a slightly higher commodity price needed in the US. So I think you should think about this in terms of single digits. Probably 3 to 5 dollars higher on WTI prices to stimulate a basin wide recovery in Canada. For Precision, this winter we expected our Canadian super triple will be fully utilized, we expect a significant improvement in the heavy oil drilling, as those customers catch up on last year's anemic winter drilling season. Now moving to the US, Precision is experiencing activity increases in all of operating regions, although there is no question that the Permian is getting the most attention. On our press release, we reported that we have 37 rigs operating today and I will add that we have a couple of additional rigs to West Texas over the next few days. I hope to see us pass through 40 in the not-too-distant future. Customer sentiment has turned substantially more constructive when compared to any of the time in the last two years. You may remember that in our July conference call, we commented that back in June two customers were talking about adding rigs and that we also said that by mid-July this is up to several customers. Today, I believe that virtually all of our customers are investigating adding rigs in 2017.

Now I caution you to be careful with my comments, our customers are considering a wide range of commodity price scenarios and we expect to have several different capital spending profiles pending on the realized prices. But the key takeaway is that this is the first time in two years that our customers are even talking about increasing activity not to how quickly can we lay the rigs down. I think it’s a very bullish signal. The term contracts we are booking constitute our hedge book and will serve to guarantee both revenue and EBITDA through 2017 allowing us to better protect our cash flows in the event that commodity prices bull back. And these rigs are being contracted at profit margins that are $3000 to $5000 higher than our spot market rates. Now regarding the spot market, we’ve consistently stated that for Precision, our spot market for super triples is mid to upper teens. Now we also added on this press release that during the third quarter we begin to implement price increases on these spot market rigs that we can report to the price increase are sticking. We believe that the supply of pad walking triples will remain tight and we believe the price environment for our super triples will continue to remain constructive and likely improve.

Now I know many of you are getting caught up trying to understand and qualify the various levels of high stacked rigs. Look to try and clarify how we see this market. The rig of choice today is an XY walking rig configured for long reach horizontal drilling. For Precision, it’s very simple, all of our super triples were designed to be XY walking rigs and if a walking system was required when the rig was originally delivered, our customers paid for it and the rig is still equipped. Today, if an XY pad walking upgrade is required and the rig doesn’t currently have one, it’s simply a bolt-on kit installed during the rig move and our customers are paying for this upgrade. To give you a sense of the market take on this right now, 32 of the 37 rigs active for Precision today have XY walking systems and we have an additional roughly 20 rigs idle in our fleet right now but also have had walking systems. So we’re well positioned for this demand.

I think it‘s also important to understand why XY pad walking is so desirable for our customers. These specialized walking rigs have virtually no drawbacks, the rigs can self maneuver in any direction on any pad configuration. This enables the customers to efficiently patch drill new pads or maneuver around filled production installations on existing pads or drill wells in any order or any configuration with absolutely no geometric limitations. Our rigs will self walk fully active drill pipe and drilling tools. These rigs can walk well to well usually in less than an hour and the rig gets total flexibility and maximum efficiency to our customers and what this is what we standardized on several years ago when we initiated the Precision Super Triple rig fleet.

Now, to drill long [indiscernible] wells, our customers may also require higher pressure med systems and occasionally a third mud pump. Now, both of these requirements are also bolt-on upgrades to all of Precision’s Super Triple rigs and our customers continue to be willing to pay for these accessories. Today, 27 of the 37 operating rigs that Precision has out are 7500 psi high-pressure mud systems.

In the September edition of Drilling Contractor Magazine, Precision published a paper on the efficiency gains we've achieved by collaborating with Schlumberger and Pason with the able directional drilling software. This is a compelling technology development, which has the potential to further improve drilling efficiencies for horizontal development drilling. We expect to be discussing this exciting product application much more in the future as Precision continues to drive to improving drilling efficiency for our customers.

Now, turning to our completion and production business for a moment. Most of you know that I’ve been very bearish on this business over the last several quarters. And this for us is primarily the Canadian business. The first half of 2016, like our drilling business, has been just awful, but I’m very pleased with the hard work our team completed earlier this year, relative to downsizing, reducing costs and improving efficiency, while focusing on field excellence is paying off. They’ve helped turn this business around for Precision. We’re back in the positive cash flow territory and we’re gaining back market share. We continue to deliver excellent safety and rig performance. I am very proud of our accomplishments in this regard, and still believe the industry suffers underutilization and structural challenges.

So, in summary, looking forward to 2017, it seems that most of our customers and certainly those that are all capitalized are looking to increased activity to mitigate production decline curves and work to restore two years of significant underinvestment. We believe that fiscal discipline will remain the key theme and commodity prices will ultimately drive customer spending. But no question that drilling efficiency will be more important than ever. For Precision, the last several quarters have been very challenging, but I’m pleased with our market positioning and believe it will demonstrate excellent operational leverages the market recovers. Our focus is shifting to generating free cash flow, reducing total debt. We will continue to maintain -- fully maintain our rigs on our competitive advantage.

So, let me conclude by thanking our employees for another excellent quarter of remarkable safety performance. Also, I’ll take this opportunity to welcome on-board almost 1000 new and returning Precision rig personnel.

On that note, thank you for joining our call and I will turn the call back to the Operator for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question is from Ole Slorer from Morgan Stanley. Please go ahead.

Ole Slorer

Yes. Thank you very much and thanks for the information, Kevin. An unusual amount of details around pricing there from you, so I appreciate that. I wonder whether you could just, Carey or Kevin, kick it off by just clarifying on the shelf registration once for all. Why did you put this out there and you highlight organic debt reduction as your key objective, so could you kind of square that for us?

Carey Ford

Yeah. Hey, Ole. This is Carey. Putting the shelf in place is consistent with our strategic objectives of maintaining financial flexibility and frankly, it's a good corporate governance. As you know, the industry has a lot of uncertainty and we think the shelf could be a useful tool as we think about our capital structure over the next couple of years.

Ole Slorer

Okay. So nothing near term in other words?

Kevin Neveu

No, nothing near term, as we see it today.

Ole Slorer

Okay, cool. Just coming out of some of the analysts presentation with Schlumberger over lunch today and all the stuff they gave this morning, a lot of what I talked about was centered around kind of near-term super laterals in West Texas in particular, 18,500 foot laterals with new rotary steerable drilling equipment and how that market was becoming a tight market. So could you talk a little bit about your relationship there as well as what you are seeing in terms of the trend within drilling and how it plays into the kind of the land rig market as a whole. I mean, it appears that as far as I can see, anybody who had wheels, the frac truck has been driving it to the middle in anticipation of work, while on the rig side, there seems to be a slightly different dynamic in a much tighter market, so whatever you can add that would be useful?

Kevin Neveu

Ole, really good questions and I think what you’re highlighting is there is continual push on technology to increase efficiencies at the well bore. And that’s completion efficiency, it’s production efficiency, it’s drilling efficiency. So here we are right now kind of just coming out of the trough of the worst cycle in a couple of decades and we’re talking about 18,000 foot horizontal sections. So, you know, even in this really tough environment, our customers have a willingness to try things out, that can potentially increase capital efficiency, increase drilling efficiency, so we’re encouraged by that trend. We’re watching it pretty carefully, certainly understanding how our rigs play into production numbers is very important for our survivability long term, so I think we are on top of this.

I've been watching those long reach horizontal wells in Utica myself, certainly for the smaller gas molecule I can see how longer reach well is more completion, more standard reservoir has potential value for our customers. And for us that likely means adding a third mud pump, increasing the standpipe pressure to 7,500-psi. I think we’re well positioned to capture that market. Ultimately, technology leads to fewer low spec rigs and more high spec rigs that's been the history since early 1800s. And so for us staying on the front edge of the high spec rig with our super triples rig is how we think we deal with a declining total rig count but in fact growing rig counts on the more technically capable rigs. So long answer but I hope I dealt with your question.

Ole Slorer

Yes, I mean, is this what’s behind some of the - you mentioned CAD3000 to CAD5000 above bolt-on contracts suggesting you can kind of start looking at something in the 20s. Is that sort of for the very high-end rigs that fit this sort of very specific niche of the marker or is it something broader?

Kevin Neveu

Yeah, you know Ole, I’m going to stop short of giving much more guidance on pricing because, I know today we are in front of customers negotiating deals and some of those customers may be in the line, so I’d rather - or competitors for that matter, I mean I really don't want to…

Ole Slorer

But the kind of contracts that you’re signing of that leading edge pricing, how specific is it to having all of this requirements in terms of the technical specification on the rig and how is the competitive environment, how narrow is it in that segment, is a much available capacity sloshing around the market like for example we have in frac pumps?

Carey Ford

I gave a number, 25 of 37 rigs right now have 7,500 psi standpipes. So that is you know it’s two thirds of our active rigs that have 7,500 psi. I can promise you three years ago, three years ago I don't think 5% of rigs had 7,500 psi standpipes. This is remarkable shift, it’s becoming the case now, where they may not need it but they want the optionality, if they’re not drilling long reach wells now they might drill one next time and try a science project, so they need that optionality. Seeing the 32 of 37 rigs are pad walking rigs right now, when we ran the numbers this morning, it actually surprised me. The market no question is looking for leading-edge rigs. The old axiom, the best rigs go back to work first. We’re sort of proving that up right now. I know the first part of this rebound was driven by vertical wells, but as we focused on development drilling, high efficiency drilling, no question the leading edge rigs were the most efficient rigs and the other ones in the tightest demand.

Operator

Thank you. The following question is from Ben Owens from RBC Capital Markets. Please go ahead.

Ben Owens

On the 20 million in additional CapEx for upgrades, how many rigs you guys upgrading with that and where are those rigs headed?

Carey Ford

So that's going to be a mix of rigs in Canada and rigs in the US. We’re not going to give the number of rigs we are upgrading but I think the bolt-on feature that Kevin has been talking about in his opening comments walking systems, increased pump capacity and higher pressure stands then those are going to be types of bolt-on additions that we’re investing in.

Ben Owens

And then what kind of day rate increases do you need to see the support those kind of upgrades?

Carey Ford

Well, we look at any of our capital investments on an investment return hurdle basis, so we’re looking for returns on our investments in the high teens and we want the vast majority of the investment recouped in the term of the contract.

Kevin Neveu

And on upgrades, we’re looking for higher returns in high teens, probably mid to upper 20s for the upgrades.

Ben Owens

Then just one last one. Given the big step down in G&A in the quarter, can you guys give us a sense of how many rigs you keep running in the US and Canada based on the current cost structure before you have to add cost on the G&A side?

Kevin Neveu

Yeah, Ben, that's a great question. So I would tell you that right now, I think we have been very prescriptive in how we’ve sized Precision Drilling. So if we do the math right now, we’re probably running 88 rigs roughly, and Carey or 90 rigs. Yeah. I think we’re sized right now today. We're kind of sized, sized for about 100 rigs constant activity. We think we can probably go up to about 140 or 150 rigs before we have to begin to deal with any of our fixed costs or G&A. So I think we’ve got a fair amount of leverage in our cost base right now before there is any changes to G&A or fixed costs and then I think after you sort of break through probably 150 rigs, from that point forward, there will be some activity based G&A, whether it’s more safety supervisors per rigs or whether it’s payroll personnel, things like that. Just activity-based personnel, no structural G&A additions.

Ben Owens

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

Operator

Thank you. The following question is from Ian Gillies from GMP. Please go ahead.

Ian Gillies

The US market share took a noticeable step up quarter-over-quarter in Q3 and I just wanted to maybe touch base on how you view the sustainability of that and whether you think it moves higher or lower I guess depending on your conversations today with customers?

Kevin Neveu

I would say it’s CAD50.65 question. Well, I think, it’s highly dependent on commodity price and I don't mean to make light of the question, Ian. It feels like we have some stability around CAD450, and if that were the case, if there is stability at this current price range then I think our rig count right now probably has a little bit more room to move up a little bit, a handful of rigs upwards in the US. But the conversations with our customers seem to be targeting broader spending plans into 2017 and we will have to see how it plays out.

Ian Gillies

Okay, that's helpful. And in Canada, there was, I guess, the day rates were probably a bit lower than I was expecting and how much would you tie to that to rig mix versus, say, actual spot market pricing pressure?

Kevin Neveu

It's completely tied to rig mix. In fact, if you did the math on the contracted rigs that we normally would have expected to work during that period, you’d find that probably completely fills the gap.

Carey Ford

Yeah. I think, Ian, we had 27 rigs under contract for the quarter and we had 10 rigs that were under contract.

Kevin Neveu

So those days are days [inaudible] always eventually, if you don’t make them up. Take the days. We've had some inbound enquiries about that missing revenue or that day rate gap in the US, in Canada rather. I’m tempted to quote one of the candidates in the US right now, but I won’t. It's going to be tied directly back to the missing days on the contracted rigs.

Ian Gillies

Yes. I think I may have some sort of idea of what you're talking about. The other thing I wanted to ask about in Canada was, has there been any shift in demand for the Super Triple rigs with walking systems, just given that some of the larger players in Canada have been slowing their spending down or using less rigs?

Kevin Neveu

Ian, a really good question. We won’t get into the specific names, but a couple of those companies have gone from large programs to very small programs. Most of that is tied to rig sentiment is on LNG, but we are fully booked this winter. We don't expect to be moving any rigs out of Canada, at this point, probably not moving anything back in, in the near-term, but if something stimulates, if there is any activity stimulus, and I'm kind of curious about this one transaction today where we see some more assets moving back into Tourmaline’s possession. I expect they will be adding rigs to drill that property. Any kind of catalyst that causes drilling in Canada could cause increasing demand for more Super Triples. So we’re on top of this market and watching it very closely. We’re drilling for virtually everybody up there. That's kind of helpful to see some of that property move back into Tourmaline’s controls, we’re pleased with the transaction.

Ian Gillies

Okay. And just last quick cleanup question, you mentioned you had 20 rigs in the US that you can put back to work with walking systems, but to confirm, do they have XY walking systems or are some of those skidding systems?

Kevin Neveu

They are all XY walking systems, we only have XY walking systems. The number might actually be closer to 25, but recognize some of those rigs are actually idle, but contracted or held by customers. So I think we will be able to match market demand, to meet market demand through the cycle quite well with XY walking systems.

Ian Gillies

Okay, perfect. I’ll turn it back over. Thank you very much.

Operator

Thank you. The next question is from Sean Meakim from JP Morgan. Please go ahead.

Sean Meakim

We've heard about these pocket of tightness for the pad optimal rigs, places like the Permian, we're hearing a lot from [indiscernible]. So you’re getting a broader pickup just trying to think about the optionality of mobilizing rigs versus some of these bolt-on capital upgrades. We have some rigs that are idle but the pockets of tightness of where the opportunities are a bit broader, so how do you think about balancing the opportunity for capital upgrade versus mobilizing some rigs?

Carey Ford

Sean, we‘re relatively indifferent if our customers are going to be pay for the upgrade or for the rig move. We’re less likely to subsidize rig moves or upgrades ourselves. I’d never say never, but the fact is our strategy is that we’ll reinvest capital, we want contracts to cover it. So, we really don't have a reference of whether we have a paid move, relocation from basin to basin or if we a paid upgrade of the rig, but I think ultimately I prefer to see those upgraded by customers rather than relocating rigs frankly.

Sean Meakim

But you are saying that [indiscernible] but the E&P won’t pay for it, what they said it’s going to market at this stage that would be the more likely outcome?

Carey Ford

I think we’ve only moved one or two rigs basin and basin so far in this cycle that is not a strategy.

Sean Meakim

And then talk about the E&Ps want the optionality, so as the supply for these types of rigs get tighter, we’ll continue to see more upgrades and we’ll be kind of chasing that tightness for a little bit there. But presuming there is a limit at some point, just curious as you think about kind of the economics of the desire for that optionality versus the substitution effect of maybe a less capable rate curve for some of these guys, as activity increases and perhaps goes outside of some of these core of a core locations?

Carey Ford

I think that – so it’s different things there, so first of all the higher pressure 7,500 psi is becoming more and more common. I think for any driller that is effectively a bolt on upgrade, I think our cost is probably less than $500,000 per rig, it’s a very low cost. We are pleased with that, part of it is through our sourcing message. But I'm pleased with our upgrade cost. But I think it is a bolt-on for us, it’s a bolt-on probably for any rig. I think that the third mud pump becomes a little less of a bolt-on for some rig configurations. The Precision rig was designed from the onset to slide in a third pump to slide in a third drive and slide in an additional generator if necessary. So I think that for us is a bolt-on but not a very meaningful bolt-on. And finally the walking system, I think that's where it gets a bit more complicated. Arguably you can make any rig walk that’s straightforward, it’s just a question how much capital you want to spend. The Precision super triple was designed from the onset to clip-on walking feet onto the substructure, insert an extension utility corridor between the substructure and joint complex and that’s it because those structural changes to the rig to make it walk. So, for us it’s just a clip on addition, I don't think that can be said for all North American AC rigs.

Operator

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

Jon Morrison

Carey, on the contracts where you’re pending the incremental CAD20 million of CapEx, do you expect to solely recover the CapEx or cash outlay in terms of the base duration of the contract or you expecting to recover the CapEx and then get some contracted cash flow on top of that? I'm just trying to get a sense of how much of a duration you’re getting with that capital outlay?

Carey Ford

We will get the capital back within the term of the contract almost all of the time, but we also put in economics an opportunity cost in our economics to take into account the return we’re getting on the existing rig.

Jon Morrison

When you’re signing a new contract today other than the rate obviously being lower today than it was in the past, say two years ago, is there any other major changes in the contract that would give the producer greater flexibility either in terms of a lower base number of operating days per year or some form enhanced cancellation provision?

Kevin Neveu

Jon, there is no material or for that matter immaterial differences in the contract, we’re using the same contract form today that we used three years ago. I’ve had a couple of comments or questions today about whether we’re including more but getting the same day rate or whether we’re - often about including loaders and things like that. The rates we’re quoting right now are like-for-like. So if there is a loader included to maybe create higher, but we are not including that in our guidance here on day rates.

Jon Morrison

Okay. So in summary, equipment doesn't come for free with anything you're talking about?

Kevin Neveu

It does not come for free.

Jon Morrison

Of the 1000ish hires that you’ve made today, can you give a sense of how many of those were previous Precision employee versus true new hires?

Kevin Neveu

About 70% previous and 30% new hires, but recognize that the international rigs are much higher percentage of new hires.

Jon Morrison

Okay. So in terms of –

Kevin Neveu

In North America, I think it's 95% reactivations inside North America.

Jon Morrison

Okay. And if I was to compare you guys against a lot of the North American industry, you’re fairly confident that hiring wasn't going to be an issue for you guys, do you believe that's true today and on a go forward basis that labor isn't going to become a major limiting factor to adding another 20, 30, 40 rigs from here?

Kevin Neveu

Jon, that's the question we get probably second most in investor meetings. So I want to answer that one again on the call here really clearly. We an aggressively manage a call of list of about 1200 people. So as we draw in to that list, we keep on pushing down further. So right now, if I go back to mid-April, when the rig count was at the trough, we had 1200 people on callback that we’re staying in touch with regularly, ready to go. We've added 1000 people. Today, we have 1200 people on callback that come back to our position. So that would be 45, 50 rigs that we think we can staff with people, we know who they are, where they are and what they are doing.

Jon Morrison

And is it fair to assume that when you make a rehire of a previous Precision employee that they are largely in the field and working within two, three, four weeks, something along those lines?

Kevin Neveu

Well, for an employee, depending on how long they’ve been away from the rig, whether they’re Precision employee or a new employee, if they've been away from the rigs for longer than a prescribed period of time, they come back through our new employee orientation, so they’re treated like a brand new employee. So three-day program in Houston and they go through a full orientation cycle. But they could be back in the rig within a few days, not a few weeks and then we manage those rigs to ensure that we have a good mix of strong retained leadership and experienced personnel, so we don't have too many rigs with too many reactivated employees on them, part of the HR model that we run across the fleet.

Jon Morrison

Okay. You added seven rig gears in the quarter to the contract profile, can you give any sense of how many number of rigs that included, I'm just trying to get some sense of what average duration you’re signing up today?

Kevin Neveu

So actually I don’t want to disclose other one of those data points, because I think we're doing a pretty good job in front of our customers right now. What I would tell you it's more than seven rigs and the rig count we've given as an average for the year, little of that spills into 2018 though. So we're not locking ourselves up with day rates in 2016 that we think we will be living with in 2018.

Jon Morrison

Is it fair to assume most of those are renewals that are actually new contracts?

Kevin Neveu

No. Actually, not many of these are renewals right now. Some of these are customers that had our rigs before, that are reactivating rigs, but in fact, I don't think any in this quarter were renewals.

Jon Morrison

You talked about needing another 3 to 5 bucks in the crude code to get a basin light recovery in Canada?

Kevin Neveu

What I would say is 3 to 5 more than would be required in the US to deliver the same type of response.

Jon Morrison

Okay. So based on that comment, is it fair to assume that Canadian customers appetite to engage in contract is still decently below the US right now?

Kevin Neveu

Generally, I would say yes. I think the prices we’re seeing right now, CAD50 are probably a little more constructive in the US than they are in Canada. Recognize that the exchange rate helps Canadians out a lot, but we've seen a lot more capital move in the US than we've seen move in Canada, more than the typical ratio. So capital is moving in the US. We’ve even seen equity raised to fund the drilling program in the US. So I'm quite impressed by Capital’s willingness to fund E&Ps in the US. It's been a little slower in Canada, of course, there are some [indiscernible] that are attracting capital, but it’s not widespread in Canada yet.

Jon Morrison

Okay. You talked about the pricing power on the high spec rigs and specifically the Super Triples in your fleet. Can you give any sense of how you think about pricing shaping out across your broader rig class, including some of your other triples and Super Singles and even some of the smaller number of doubles that you have?

Kevin Neveu

Yes. Right now, most of that’s in Canada and pricing competition is extremely tough. So the day rates are still a bit of a dogfight outside the deep basin. I can tell you that the heavy oil drilling season in Canada looks pretty decent. I think it's going to be -- I think rates will be okay and I activity will be pretty good. I think there's a catch up from the lack of drilling in 2016 is going to happen in 2017, but I would tell you that I think that [indiscernible], Shaunavon, Saskatchewan I think Bakken, I think those Canadian plays probably needs to see commodity prices move near 60 and the rig activity big up a 150 rigs before we see much pricing power in that space.

Jon Morrison

Last one just from me, Kevin you’re much more constructive on the C&P business this quarter and I'm just trying to get a sense of whether that's based on greater discipline across the industry or you guys just becoming more selective about the type of work that you’re going to take on and the type of margins that you’re going to pursue?

Kevin Neveu

I’ll be really clear in this, I'm really pleased with the work our team has done in that business right now to pound cost out of the business. We've turned that business around to positive cash flow, they have improved safety, they have increased market share in their holding - doing a great job with their pricing and margins right now, this is entirely the work of our team.

Operator

Thank you. The following question on this from Brad Handler from Jefferies. Please go ahead.

Brad Handler

I guess a couple of follow-ups on prior questions and not too many questions overall though. Kevin, I wasn't quite clear on your answer about the workforce, if you still have 1,200 people on the callback list, have you just - are you saying you’ve replenished that list as you hired from it, so that now you have a different, is that the point?

Kevin Neveu

Yeah, the point would be that we think it’s important to always have a 1,200 person deep list all the time. So as we draw into list, we drawdown deeper and deeper. So the answer is yes we have - we’ve drawn 1,200 people deeper since we fired 1,000.

Brad Handler

And the presumption therefore is that 1,200 people would presumably be available, so you're not yet finding - you're not yet seeing exit to other industries or something that’s crossing people of your list?

Kevin Neveu

Brad I'll tell you that probably something between 10% and 20% of the people that we’ve been engaging with over time have left the business and told us they don’t want to come back, so then we dig deeper. I think we reduced almost 4,000 or 5,000 field personnel in the US, plus last year we processed 30,000 job applications. So the pool we have to look through is extremely deep, both of ex-Precision people and beyond. So the 1,200 people we’re calling right now, most of them were previous Precision employees. The next 1,200 probably will be previous Precision employees. Long ways to go before we run through the guys who used to work for us and it looks like 10% to 20% of that 5,000 have left and say they’ve left for good. We’ll see how that plays out. But I think that we feel that staffing up the next 50 rigs likely is staffing up the next 70 or 200 rigs is well within our managed sphere right now.

Brad Handler

For those of us south of the border may be, do you expect that the 2017 budgeting cycle and day rate cycle and all that in Canada to look like prior years or things still kind of setting up normally or does the - there is yet another year of uncertainty somehow changed the dynamics in Canada for arranging rigs, contracting, pricing and all that?

Kevin Neveu

Yeah Brad, you couldn't have asked a more tricky question and I think it’s worth trying to work my way through answering this one. I would normally tell you that we would have a pretty good sense of customer budgets right now and it would be, I can tell you that we have a really good sense of Q1, Q2. Q3 and Q4 are often depending on how the first half of the year works out, so we have some variability but pricing usually stands. That would be a normal pricing model. This year, I think our customers are working on several pricing models, several activity models, so they've got three or four different price decks to look in, three or four different activity levels, they’re not showing all their cards to us right now. So it’s a pretty uncertain start to the year.

It does feel like activity is going to look like we would have expected 2016 should have looked like, so that's probably 20% or 30% higher in Q1 than 2016 played out. That commodity price drop in the middle of Q1 really screwed up the Canadian winter. But, I think we can get back to something in Q1 that looks a bit more like we expected to see in 2016. So that's probably 20% or 25% higher than we actually realized in ‘16. The back half of the year will be completely dependent on commodity prices, if OPEC is serious and commodity prices trend closer to 60 then I think we end up having a very constructive year in Canada. At 60 WTI with the Canadian exchange rate of $0.75 to $0.80 [ph], it’s a very productive base and that has a good cost base Canadian dollars and a good selling price in US dollars. That would be a wonderful layout for the second half of the year in Canada.

Brad Handler

Okay. I appreciate that. And if I could squeeze in just one more, I’m curious about the idea of E&Ps perhaps just more of a US comment, don’t know why it necessarily has to be though, but if E&Ps are mindful of momentum in their own activity, so if they want to hit 2017 at a certain pace of activity, then there might be some gearing up in the fourth quarter as opposed to the opposite view, which is that you’re saving right at this budget exhaustion or that they’re just going to kind of save those dollars for 2017 and really hit it harder in the first quarter. I guess I’m curious what you’re seeing and if you have a sense of it falling one way or the other or you know what?

Kevin Neveu

Yeah. Brad, what I would tell you is I think all of our customers are afraid of a sudden ramp up in activity where they caught with, every single contractor is going to ramp up rigs at the same time on January 1st. So I think they’re mindful of that. I think they’re trying to, if they’re increasing spending in ‘17 and certainly most people appear to be thinking about increasing spending. I think they are going to try bring rigs on a bit earlier, so I think we’re going to see under spent Q1 money from 2016 being spent in Q4. I think we’re going to see a rig count trajectory moving up in Q4, particularly if we get through the end of November with commodity prices still staying north of ‘15, maybe trending upwards from 50, but I’ll tell you that our customers are going to be very responsive for commodity price. So if commodity prices waver, this momentum falls out and falls out quickly.

Brad Handler

Right. Makes sense. Great. That’s very helpful color. Thank you.

Operator

Thank you. There are no further questions registered at this time. I will now like to turn the meeting back over to Mr. Neveu.

Kevin Neveu

Great. Well, thank you for joining our call today and we look forward to talking with you in early February when we report our fourth quarter earnings. Thank you.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!