Good day, ladies and gentlemen, and welcome to the Precision Drilling Corporation 2018 second quarter results conference call and webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require operator assistance during today's conference, please press star then zero on your touchtone telephone. As a reminder, this conference call may be recorded. I would now like to turn the conference over to Ashley Connolly, Manager of Investor Relations. Please go ahead.
Thank you, George, and good afternoon, everyone. Welcome to Precision Drilling's second quarter 2018 earnings conference call and webcast. Participating today on the call with me are Kevin Neveu, President and Chief Executive Officer, and Carey Ford, Senior Vice President and Chief Financial Officer. Through our news release earlier today, Precision reported its second quarter 2018 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 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 will begin today's call with a brief discussion of our second quarter operating results and provide a financial overview. Kevin will then provide an operational update and outlook. With that, I'll turn it over to you, Carey.
Thank you, Ashley. In addition to reviewing the second quarter results, I will provide an update on our 2018 capital plan and management of our capital structure. Our 2018 financial performance continues to deliver, with second quarter adjusted EBITDA of CAD 62 million, 7% higher than the second quarter of 2017. The increase in adjusted EBITDA from last year is primarily the result of higher activity and day rates in our U.S. and Canadian businesses and strong field margins supported by efficient cost management. The better-than-expected operating results were negatively impacted by a larger-than-expected share-based compensation accrual during the quarter. If share-based compensation accruals were removed from each quarter, the EBITDA increase year-over-year would have been approximately 34% versus the 10% growth reported. In Canada, drilling activity for Precision increased 7% from Q2 2017, while margins were approximately CAD 450 per day lower than the prior year.
The margins for the quarter were positively impacted by higher day rates, approximately CAD 1,400 per day higher than the prior year, slightly offset by operating costs that were approximately CAD 300 per day higher. Removing the shortfall payments from the prior year quarter, where this quarter we had none, margins increased CAD 1,100 per day year-over-year. In the U.S., drilling activity for Precision increased 24% from Q2 2017, while margins were up approximately $2,200 per day, positively impacted by higher day rates, increased turnkey revenue, and stable operating costs, offset by lower idle contracted and rig mobilization revenue in the prior period. Internationally, drilling activity for Precision equaled activity in Q2 2017. Average day rates were approximately $50,000, in line with the prior year. In our CMP division, adjusted EBITDA this quarter was negative CAD 1.4 million, down CAD 1.7 million compared to the prior year.
This quarter was negatively impacted by slightly lower service rig activity and reorganization costs of CAD 1 million incurred during the quarter. Capital expenditures for the quarter were CAD 37 million. For 2018, our capital plan is CAD 135 million, up CAD 19 million from previous guidance. The 2018 plan is comprised of CAD 57 million for sustaining infrastructure, CAD 63 million for upgrade and expansion, and CAD 15 million for intangibles related to our recently completed ERP project. Our capital plan is expected to align with industry activity and reflects our expectation to upgrade rigs, increases to our AC Super Triple active rig count in the U.S., and to deploy Process Automation Control technology on additional Super Triple rigs. We have continued to build our contract book in 2018, signing 31 contracts year to date.
As of July 25th, we had an average of 63 contracts in hand for the third quarter and an average of 58 contracts for the full year 2018. As of June 30, 2018, our long-term debt position net of cash is approximately CAD 1.6 billion. We had CAD 95 million in cash on our balance sheet, up CAD 13 million from Q1, and our total liquidity position was CAD 767 million. We continue to view cash flow generation and debt reduction as top priorities this year. During the quarter, we used cash flow to reduce outstanding debt by CAD 75 million and plan to be in a position later this year to build on our debt reduction achieved year to date. For 2018, we would expect depreciation to be approximately CAD 350 million. We would expect cash taxes to remain low and our effective tax rate to be in the 20%-25% range.
We continue to aggressively manage all fixed costs, including SG&A, which may swing from quarter to quarter due to changes in our share-based compensation accrual and foreign exchange rates. I will now turn the call over to Kevin for further discussion of the business and outlook.
Thank you, Carey. Good afternoon
Precision is experiencing strong and continued customer demand for Super Series rigs in every region, in every market in which we participate. If there's a takeaway from today's call, it's that the drilling efficiencies and the cost savings our customers enjoy with high-efficiency pad walking rigs, combined with market tightness for that type of rig, will continue to drive strong demand for Precision services through the second half of 2018 and for the foreseeable future. I'm going to walk through each of our regions and discuss the market signals we're seeing in each of those areas. Beginning with Canada, our second quarter activity, which is typically our weakest quarter, was better than expected and above last year's levels. It's important to note that the day rates we reported significantly exceeded our prior guidance.
With average rates up over CAD 1,400 per day, and as Carey mentioned, we are largely holding our costs in line, most of this is flowing to our income statement. For Canada, I think the key leading indicator is a strong seasonal rebound Precision is experiencing post-breakup. With 60 rigs running this morning, we are well ahead of last year's pace. In fact, we're ahead of last year's peak activity level for the third quarter. Our Super Triples are fully committed for the second half of 2018. We do not anticipate any further rig transfers to the U.S. It is becoming clear that Precision's Canadian customers, and especially those with oil and liquids exposure, have realized stronger than expected cash flows and their drilling costs are lower than expected, primarily due to the drilling efficiencies we deliver.
We believe that our increased utilization is clear evidence that some of that customer cash flow and efficiency gains are being redirected to expanded drilling programs and increasing our expectations for the second half of 2018 and into 2019. Precision's utilization in the third quarter is on track to exceed 2017 levels by 10%-15% based on current customer indications, and we continue to expect sequential fleet average margin improvements in the CAD 500-CAD 1,000 per quarter range. Moving to the U.S., the strong demand we noted in our Q1 conference call continues through today. During the second quarter, we activated eight more rigs, bringing our active rig count to 78, and we have forward visibility on four to six additional rig activations later this quarter.
As Carey mentioned, we added 10 contracts to our backlog in the U.S. and reported sequential day rate margin increases of CAD 1,200 per day. All of these are strong leading indicators for continued customer demand. On the cost side, our U.S. operations team have delivered excellent cost management by leveraging our scale, utilizing our vertical integration to hold the line on operating cost. Looking forward, we do not expect cost inflation to negatively impact our financial results or our cash flows. We also reiterate our forward guidance for average fleet margin improvements in the CAD 500-CAD 1,000 per day range on a quarterly basis. Leading edge rates for our Super Triples are in the mid-20s, and in some instances, higher rates are being negotiated.
Notably, we're also seeing opportunities emerge where customers with long-term development plans are considering contract terms longer than two years, something we've not experienced since 2014. During the second quarter, 20 rigs repriced at these higher rates, with price increases ranging between several thousand CAD per day, with the higher-spec rigs repricing at the top of the range. While some well service segments may be reporting operating constraints in the Permian region, the demand for pad walking high-efficiency triples remains very strong, and several of our scheduled rig deployments over the coming weeks are slated for the Permian. Much of the growth we're experiencing is coming via market share as customers switch from less efficient drillers to our high-efficiency pad walking Super Triples. We currently estimate that fewer than half of the industry's operating fleet is comprised of top efficiency rigs.
We expect the strong demand, the pricing tension, and switching will be a market structural for several quarters going forward. Turning to our Kuwait and Saudi Arabian business. Earlier this quarter, we announced a sixth contract for a new build rig in Kuwait to be delivered mid-2019. This rig will be assembled in Dubai using the same construction team as the previous five rigs, and the new rig will essentially be identical in equipment, spares, maintenance, and crew training requirements. Deployment of this rig will yield strong operational leverage for Precision and require no additional G&A. Our Kuwait business is performing exceedingly well and continues to be one of our top growth opportunities. The ongoing tenders in Saudi Arabia appear to be moving closer to possible awards for additional rig activations and contract renewals.
As we are involved in negotiations and technical clarifications, I prefer not to make any further comments on this opportunity. Suffice to say that we remain encouraged by the dialogue, and it appears international customer sentiment is improving. Turning to our technology initiative. Yesterday, we announced the appointment of Shuja Goraya to lead our technology group. I believe this is a meaningful addition to our already strong technology team, and I expect Shuja's leadership and experience will expand Precision's technology opportunity set. In this morning's press release, we also reported 12 drilling performance apps now in development. I'm surprised how quickly our app portfolio is growing. Customer uptake is strong, and today we have several of those apps already in beta test on rigs in the field, yielding very good early results.
Our long-term value assumptions for these apps may have been understated, and I expect we'll have much more to say about the impact of drilling apps in the coming periods. One other positive surprise is that we've successfully drilled over 2 million feet with our directional guidance software. We drilled over 384 wells utilizing Process Automation Control. The real surprise is that not a single customer has stepped back or walked away from this technology. In my 36 years of experience, I don't recall a complex, or for that matter, a simple new technology deployment initiative with a zero customer rejection rate. I know our team is working very closely with our customers. The relationships are excellent. However, I'm amazed with the remarkable success rate and confident we remain on track for full commercialization.
Now, I believe Carey covered our financial performance against our priorities around operational leverage and debt reduction priorities. I'm going to add that we are deeply focused on financial performance, free cash flow, debt reduction. The strong demand for our services is resulting in improving day rates and utilization, and combined with Precision's effective cost management, this will allow us to meet our targets for cash flow generation, debt reduction, even as we see and exercise the continued growth opportunities as they emerge. On that comment, I'll turn the call back to the operator now for questions. Thank you.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, then the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. As well, we do ask that you place your line on mute once your question has been stated to prevent any background noise during response. As a reminder, that is star, then one to ask a question. Our first question comes from Aaron MacNeil from TD Securities. Your line's now open.
Afternoon, all.
Hey, Aaron.
On the U.S. new build, I know that you guys had mentioned on the prior call or the Q1 call that you could build two AC triples for less than CAD 10 million. I assume that's what's being contemplated, but perhaps could you give some additional detail in terms of cost, timing of deployment, contract terms, return thresholds, or any other color you'd provide?
Hi, Aaron. This is Carey. We analyzed this opportunity just like we analyze all capital opportunities and wanted to get comfortable with both the term and the return hurdles. We got comfortable making this investment. Since it's just one rig and the group listening on the call is pretty good at connecting the dots, we really don't want to provide any more detail on what the contract entails, but it was within our normal contract hurdle rates.
Okay. Maybe as just a follow-up, given that a lot of your SCR rigs are working in the U.S. today, does this new build rank ahead of other, we'll call it higher cost upgrades of maybe SCR rigs or others?
Aaron, I think it was a combination of customer's specific need, contract term, and return rates that made this investment make a lot of sense for us.
Okay. Then maybe switching gears to Canada, but staying on capital allocation. In Canada, at what point do you think you need to start reinvesting if activity levels continue to improve?
Aaron, we're really well-positioned here in Canada right now with the fleet we have, both our Super Triples and even the twin doubles we have and the singles we have right now, that it doesn't require a lot of capital. I would tell you that I think that if the deep basin takes another step up, if we see things kind of accelerate in the deep basin, that could be Montney/Duvernay, there'd probably be an industry-wide shortage of rigs that can meet the rising demand. That probably means a demand that looks like three to five rigs more needed in that basin. At which point, the economics for further upgrades, maybe upgrading one of our lesser capable DC SCR rigs or one of our other Super Triples into that need would probably make sense. There's a lot of interest right now in a possible LNG project FID.
Something like that might drive that next step up in demand in the deep basin.
Okay. That's all for me. I'll turn it over. Thanks.
Great. Thanks, Aaron.
Our next question comes from Taylor Kirker from Tudor, Pickering Holt. Your line's now open.
Hey, thanks. Good afternoon. Encouraging to hear that some of your customers, at least in the U.S., are coming to you looking for, or at least interested in a two-plus year term. Two-part question. Part one is, have you signed any of those types of contracts yet today? Secondarily, for the, I think, 10 term contracts you've signed since last quarter, could you just give us a sense as to the relative mix of contract duration in that bucket?
Taylor, appreciate the question. I would tell you that everything we're doing right now is competitive in some nature, so I really don't want to give too much details on one or two data points, which is what our comments are referring to. We usually don't give a lot of color on the depth or duration of the contract book, but I think we gave a roll forward on the contract book, on the total contract book, Carey, is that right?
We did. We've typically, over the past two quarters, talked in the market about contracts. We've been signing contracts kind of in the six-month to 18-month term, and we have more than one contract recently signed over two years.
Okay, fair enough. Second question is just on the four to six incremental rig activations you're talking about or seeing visibility for moving forward. Can you give us a sense as to which basins and plays those rigs might go to? I suspect it's fairly broad-based. Then secondarily, is it fair to assume as we get into the 80s sort of rig count level in the U.S., that some of those rig activations would be coming from the SCR bucket and be converted to AC rigs?
The activations we're talking about so far don't include any AC to DC or DC to AC conversions. There are activations. I think it's going to be about roughly half of those to the Permian, the other half spread among three other basins.
Okay, got it.
One to Niobrara, one to the Marcellus, two or three to the Permian, possibly one to Eagle Ford.
Okay, got it. Last one from me, if I can, is on the debt reduction target. Obviously, you've done good work year-to-date with reaching the CAD 75 million or the low end of the range that you stated for 2018 in pretty expeditious fashion. As we think over the back half of the year and into 2019, Carey, is there any sort of framework you could give us as it relates to how we should think about the cadence of incremental debt paydown from here?
We feel really good about our opportunities to build cash in the back half of the year. If you go back to our strategic priorities for the year, we say pay down debt, don't miss the best growth opportunities. If there aren't excellent growth opportunities, we will pay down more debt.
Got it. Thank you. I'll turn it back.
Thank you. Our next question comes from the line of Sean Meacham from J.P. Morgan. Your line's now open.
Thanks. Hey, guys.
Hey, Sean.
Thinking about the Kuwait contract that you signed, obviously that market now is looking very good in terms of cost absorption. Sounds like rig count for you in Saudi is gonna be stable. Still a few idle rigs in the region, though. More tenders potentially on the way. Recognizing the strategic initiatives that focus around the balance sheet, what other optionality do you think you see in that part of the world in the near to intermediate term? Are you open to more creative forms of financing with some of your key customers in that region to maybe get some incremental new builds, where there's a bit of give and take between capital cost and day rates to build some more scale in the Middle East?
I think, Sean, really important questions for us and something we're working with the board on all the time. To work our way through that a little bit, the first comment would be that we have one idle rig in Saudi, and we have three idle rigs stored in Kurdistan. All four of the idle rigs are being quoted into possible tenders. At the far side, if we're successful, we could go from three operating rigs maybe to seven operating rigs. That would come with some capital needs. We'd be having to do things like upgrade the BOPs and do some recertifications of the rigs and kind of guide you to the numbers in around CAD 5 million-CAD 15 million per rig, depending on the scope and scale.
My thinking is that the timing probably stretches late this year into next year, often those contracts take longer to sign and finalize than everybody thinks, everybody hopes. I'm getting more encouraged by the rate of interaction with our customers in the Middle East right now and their kind of focus on moving things forward. It does feel like that's gonna move forward. It does feel like it'll be something that'll likely be late 2018, 2019 type opportunity, and could see us deploying rigs in early 2019 or mid-2019, in addition to the one in Kuwait. Going back to your comments or questions around financing. Obviously, paying down debt remains our top priority, and we're not going to sacrifice our capital structure to stretch or reach for opportunities, but we'd like to find a way to do both. Carey, any further comments?
I think, look for us to continue doing what we did this year with taking on one new build, stretching the construction of that new build over a year with most of the capital in 2019 and paying down debt. We'd like to pursue both those avenues.
Thank you for that. It's a lot of good feedback. In the U.S., thinking about the 6 rigs that you plan to have coming online here in the next few weeks, I'm not trying to be so specific to those rigs, but just thinking about where you are at this point in the cycle. As you're adding rigs in the U.S., are you displacing less capable rigs? Are you taking share from peers? Are you adding to existing customers as they're adding to their fleets? Just trying to think about some of the market dynamics as you're putting more rigs back to work in the U.S.
Sean, I think if you look at the progression through the course of 2018, I think in the first quarter, most of our additions were just additional rigs to the U.S. activity list. I really think during the second quarter, certainly towards the end of the second quarter, most of the additions we made were customers switching from less efficient rigs to higher efficiency rigs. I think that was most of what we saw during the second quarter. As we think about the 4, 6 rigs going forward, my estimate is that most of that will be switching unless, for whatever reason, U.S. rig count ticks up. Nothing right now tells me there's gonna be any sharp movement in U.S. rig count, at least in the near term.
Sean, I'll just add to that. On the last conference call, we mentioned that in our capital plan, we didn't contemplate an upgrade of more than $3 million, and that's still the case. Even with this 4 to 6 rigs that we have visibility on over the coming weeks, none of those require upgrades more than $3 million.
I think that's a great point.
It's a three-
Yeah, good point, Carey. I think also, Sean, that if the demand continues to accelerate beyond Precision running 84, 85 rigs, we may have to look at more upgrades down the road.
If you have some competitors that are doing as much, spending as much as CAD 15 million and getting good rates and terms
Sounds like your paybacks on those would be pretty darn fast.
Yeah, it would be. I don't think we'll have any CAD 15 million upgrades, but we have signals that the next round of upgrades, so the final 10-15 rigs that we have for upgrade, would be probably in the CAD 3 million-CAD 6 million range, and some of those will be closer to six. We've got some DC/DC conversions we anticipate somewhere down the road, and I wouldn't be surprised if we see contracts later this year that make those conversions make sense for us.
Got it. Great. Thank you very much.
Great. Thank you.
Our next question comes from the line of John Daniel from Simmons & Company. Your line's now open.
Guys, just two quick ones for me. I'll start with Carey. Just any chance you could provide some color on expectations for the well service business heading into the second half?
Yeah. I'll start, I'll let Kevin finish. We do expect activity to look a little bit better year-over-year in the second half. We did improve pricing a bit, and as we mentioned in the press release, we had some one-time cost this quarter that kind of drag on margins a bit. We think all of that will go away, and profitability should be better in the second half of the year. What do you think?
Yeah, John, to give you a little more color on that business, kind of in general right now, it's really frustrating. I can tell you, we've had some cost drivers in that business that we've tried to pass through to our customers, I'll speak to a couple of them. There's a carbon tax in the province of Alberta that impacts the cost of fuel. On service rigs, fuel is part of the service company's cost. That raises our cost. There's a second cost that's caused by another government labor law change that adds cost. We took these costs to our customers and tried to get pass-throughs, the amount of resistance from our customers was baffling. We pressed hard, we pushed our day rates up, we lost some market share because of it.
Our customers just in a lot of cases right now have been unwilling to absorb any price increases in this space, even for some of these cost pass-throughs. It's really frustrating, it's tough on the industry as a whole. We're not the only company experiencing this. Every service company has the same cost drivers, well service company, the same carbon tax, same labor cost problems. Certain customers out there are just really difficult. It's tough on the industry. It's challenging long-term survivability. Certainly, the industry as a whole is barely cash flow positive. We'll continue doing our work both on the cost side and drive costs down, which Carey mentioned, the severance costs in the second quarter, restructuring costs. We think we'll be in a healthy position in the back half of the year.
We expect to have enough revenue and enough operating leverage to do okay. The industry as a whole probably needs a little more discipline, but it certainly needs a little more cooperation from the customers to ensure we have sustained, repaired, maintained assets with volunteering crews to keep a safe and healthy industry alive.
All right. I appreciate that color. Just last one from me. You guys are pretty good about defining your annual strategies and then delivering on them. I'm curious if you've given any thought to what your 2019 objectives might be, and if so, if you could give us a preview of things you're looking to do next year.
Well, a little bit. We don't formalize that until we do our budget in December, but it's unlikely that debt reduction comes off our 2019. Free cash flow debt reduction will still be a 2019 focus for us. I'm quite confident technology will be a focus for us in 2019. I think the third priority, we'll have to see how the budget evolves and how the year evolves.
Do you see M&A consolidation being one of those or no?
I think it's a good question. I think the space would be served well by consolidation. There's been a couple of deals announced over the past few months. We saw one in the U.S. just last couple of weeks. I think it really makes sense if you're small to consolidate, and I think there's some scale advantages if you're doing that. For us and for our larger peers, standardization across the fleet is just so important to our value proposition that bringing in dissimilar assets is hard to manage, can be more expensive to manage. I would tell you, John, that I think our eyes are always open, but it's really not high on our priority list.
Okay. Fair enough.
Thanks for the question.
Thank you.
Our next question comes from the line of Ian Gillies from GMP. Your line's now open.
Good afternoon, everyone.
Hi, Ian.
When you're delivering tenders to your customer with respect to technology, is it getting its own line item now when you guys are identifying the price to that and are customers looking to pay for it, or is it still getting blended in with, I guess, everything else you would offer?
Ian, a really good question, and I think one that we've talked about a bit in the past, I'll kind of restate where we're at. Each technology item that we're offering is listed as a line item every single time. It's not included in the rig rate. There are occasions right now where we have trial periods and we have performance metrics. The technology item, whether it's one, two, or three Apps, or whether it's Process Automation Control or our ABEL directional drilling advisory software, those are separate line items on the invoice, either identified at a target fixed price or some performance-based price.
Okay.
Ian, I'd add that maintaining that discipline is a core element of our long-term strategy to preserve the value that we're creating for our customers. We'll preserve our value, our piece of the value rent coming to us.
We think back perhaps over the last year or two as you've developed the technology strategy, is there any pieces of it right now that you feel like you may need to pivot on or change at all, given what you know now that you may not have known then?
Boy, that's a really good question and a tough one to answer. I'm encouraged by how quickly apps are taking off. I think I really underappreciated the value of apps. I say that very quickly, but there's 12 apps we mentioned in the press release, and these range from customer-written apps, they're vendor-written apps, they're other service company-written apps, and Precision-written apps. Very simple to do and easy to take standard practices and put them into a small kind of uploadable algorithm that helps the rig performance. I think that's got a lot of expandability. I think we'll be adding more apps over time, and we see possibly every customer having apps. The arrangement we have to generate revenue on just the residency of the app is a really good arrangement. I think that's an area where we'll put more focus.
It's an area that we identified early on, but maybe didn't recognize how powerful that could be. That's one piece. We've talked a lot about Wired Drill Pipe, and that's an area we're still working, but the customer uptake's been slower than we expected. I think the two areas that get the most attention going forward are going to be data and optimization. One of Shuja's big challenges as he gets in the door here and gets working will be to help us develop our strategy around data management, data use, and optimization of the well drilling parameters. I think there's a lot of work for us to do on the data side, and I think there's good opportunities to improve what we're doing for our customers and create a stronger competitive advantage.
Okay. That's good information. I appreciate that. Yeah. The other thing, if we went back to last year in Canada, there was some rig mix commentary about some of the deeper Super Triples, probably, or the ST-1500s and ST-1200 not going back to work in Canada until Q4. Is that a similar trend that's going to play out this year, or is the customer behavior a bit different?
Well, we took one of those rigs out of the market, and I think that had a bit of an impact on customer sentiment. All of the rigs we have in our Super Triple fleet, including our 1500s in Canada, are booked now through the rest of the fall and into the winter of 2019. I'm thinking that anything that drives demand on the deep basin side keeps those rigs kind of locked in for quite a long time.
Okay. Last one from me. The costs on the U.S. side have been remarkably resilient, didn't have really budged at all. Do you think you can absent rig moves or anything maybe along those lines, is that a reasonable number to expect moving forward?
Yeah. I think the last two quarters, if you strip out turnkey, would be CAD 13,000 a day. You kind of hit the nail on the head there, Ian. If there aren't rig moves and we don't have 15 rigs added in a quarter, we think we can keep those costs, in that kind of CAD 13,000-CAD 13,500 range.
Okay. Sorry, I'm just going to sneak one last one in. Is the restructuring done in the well services division?
Yes. We've had some management changes, then also, as you know, we had an ERP implementation last year to separate that business. There's been a little bit ongoing work there. Most of that should be behind us.
Okay. Thanks very much, everyone. I'll turn the call back.
Thank you.
Thank you.
Thank you, Ian.
Ladies and gentlemen, if you have a question at this time, please press the star, then the one key on your touchtone telephone. Our next question comes from the line of John Morrison from CIBC Capital Markets. Your line is now open.
Afternoon, all. Of the technology initiatives that you guys have underway, have any of the rigs that you have Process Automation Control or the directional guidance system currently installed on the rig not been running it based on customer preference? Or has technology uptake been fairly universal where it's available?
John, I just got to reconfirm what I said earlier. We've had no customers step back where they've asked us to turn it off. We've had none of that occurrence. We've had some downtime with the software. We had to turn it off because we had to fix a bug or something like that as we go through the early commercialization phase. We haven't had an instance where a customer says, "I've had enough, turn it off, or take it off the rig, please.
Every trial has been effectively, it's either still ongoing or it's been a successful trial.
Every trial we are running right now is successful and moving forward.
Okay. Carey, just on the 2018 CapEx program, outside of ForEx fluctuations, is there anything that could really swing around the 2018 spend, or would any incremental investment decisions at this point largely be 2019 based?
Maintenance capital is always activity-driven, but we are only dealing with half of a year, either rapid increase or decrease in activity could make that move, call it CAD 5 million or CAD 10 million one way or the other. As Kevin mentioned, if we get kind of outside of this mid-80s rig count where we start doing some of these CAD 3 million-CAD 6 million upgrades, those are not included in the capital plan. If we have increased demand, increased activity, we could get to a point where we are adding a bit more upgrade capital.
Do you have a base 2019 program you would be willing to share based on an assumption for maintenance CapEx and other upgrades you think are likely?
We don't. About 85% of the Kuwait new build cost is going to be in 2019. That's the baseline that we've announced.
Okay.
Yeah.
On the contract terms where you're discussing multi-year durations, can you share, one, whether those are on existing rigs that are just being recontracted or new rigs? Secondarily, do any of those multi-year contracts effectively contemplate you needing to put more capital to work? Is it some cases where the producer is just wanting to lock up visibility?
I think the reason that it pins long-term contracts is customer driven, not Precision Drilling return driven, in that there's some customer plan that's going to be a long-term drilling plan. They need the rig, they want the rig, and they're prepared to pay for it. I would say that we're not driving the three-year, the longer term. It's the client driving the longer term.
John, I think I'm trying to answer the other part of that question, which was, there's no ongoing capital commitment. If we sign the contract, the capital is spent before the rig starts drilling.
Yeah. It was really just more, I was trying to make sure that I understood whether each of those is contingent upon you spending more money or some of them are as just as simple as customers going, "We want to have some form of base visibility for the next 24 months," so to speak.
The answer's much nearer to the base visibility for a longer period of time, probably longer than two years.
Okay. I recognize you guys are talking about putting more rigs to work in the coming months. Obviously there's heartburn around a potential slowdown in the Permian given some of the pipeline issues that are out there. Are you guys having any discussions with customers about either laying rigs down or horse trading them for a different geography at this point?
If you look at our Permian Basin right now, you'll see that we have two or three of our Super Singles drilling in the Permian. Those are drilling in a kind of a batch mode where the Super Single goes onto the pad first and drills the vertical section, then it leaves, and our Super Triple comes in and drills the rest of the well, and it moves and walks down the pad. I would tell you that as we think about our risks going forward, we would say that if we get too far ahead of the curve, those three Super Singles could see a bit of a slowdown. Recognize those are the lowest margin rigs we probably have in the U.S. They are sub-1,000 horsepower Super Singles rigs.
Okay. Last one just from me. On the idle rigs that you have in the Middle East right now that you're bidding on certain tenders, do any of those require incremental upgrades for the tenders that you're involved in? Sorry if I missed that earlier on the call.
Yeah, John. For sure, those rigs will need some incremental upgrades in the CAD 5 million to CAD 15 million per rig range. Think about it in terms of either BOP upgrades or BOP replacements and some recertifications on masts and things like that time out over time. We would be looking to recover that capital both in the early part of the term and still have a return on the rig itself. I think they'd be good financial decisions and long-term contracts and build out our base in Saudi Arabia and make that country get either above or close to critical mass for us. I think there's good strategic value, good financial value and long-term stability in pricing if we have to spend that capital.
Okay. Appreciate the color. I'll turn it back.
Thanks, John. Thank you.
Our next question comes from the line of Jeff Satterlee from Peters & Co. Your line's now open.
Hi, everyone. A few random questions for you. The technology side, when you aggregate together PAC and directional guidance, et cetera, do you have a sense of what impact that's had on your consolidated day rate in the U.S. or in North America?
We know exactly what impact it has. We're not gonna disclose that. Highly competitive and really don't want to provide a lot of visibility to our competition and to customers generally on how this is playing out right now.
When you look at the 9.5% year-over-year increase in Q2 day rate in the U.S. excluding turnkey and any lump sums, is it safe to say that it's still spot market pricing and rig mix that's the biggest driver for that increase versus anything from the technology side?
Yeah, if you put it that way, yes, you're right. It's probably weighted towards both term contract renewals, spot market rates, more so than technology at this point. We do see the effect of technology layering itself in, but we see the rates beginning to build.
Okay. On the capital side, I'm just trying to understand how the pieces within the capital program have moved. You've added about CAD 15 million to the sustaining and infrastructure side. Have you changed the number of rigs you're contemplating in the upgrade program for this year?
No, it's still in the 12 to 24 range.
On the last call, you talked about how the upgrade program as currently contemplated would largely exhaust the lower cost upgrades. Is that still the case, or are you starting to dabble into right at the edge of that CAD 3 million level?
Yeah, not yet. I think a couple of questions ago that had the same question. In our capital plan, the CAD 135 million doesn't contemplate any rigs upgraded for more than CAD 3 million. The visibility that Kevin highlighted where we have four to six rigs that we expect to activate in the coming weeks. None of those rigs require more than CAD 3 million of upgrade capital, and they would be included in our CAD 135 million annual capital budget.
Okay. The cost of, I know you said earlier 10% of the cost of the Kuwait or sorry, 85% of the cost of the Kuwait rig build will be incurred in 2019. When you look at the cost of that this year plus the new build that you disclosed for the U.S., your upgrade and expansion program is only up by three. Is it just sort of a shifting of things going on there, or is there stuff that's been previously capitalized that's essentially flowing into the new rig?
Jeff, I understand part of your question, and maybe it'd be better if we took it offline. We haven't had any major changes in our capital plan other than adding the Kuwait new build and then a little bit more upgrade cost and then ForEx.
Okay. I'll move on. International. You mentioned the one idle rig in Saudi and the three in Kurdistan. Is that the scope of what you're tendering into the opportunities in Saudi? Like, is the maximum opportunity four rigs for you, or would you contemplate some transfers or new builds there, too?
Jeff, good question. At this point, just those four rigs. We are not considering any other transfers or new builds at this point in Saudi. We also have two renewals we talked about. They are also coming up in the third quarter in Saudi, and we think those two renewals plus the four new builds-
No, not four.
I am sorry, not four new builds. The four redeployments, thank you, are part of the package we are working on.
Okay. Last thing on-
I'll be very clear there. We have no new builds anticipated for Saudi Arabia. Nothing on the horizon, nothing we're thinking about.
Okay. Last piece on the Canadian side, you mentioned that the triples are fully committed through spring of 2019. Does that include the 1500s and the ST-1200?
Correct.
From a pricing standpoint, you mentioned that aggregate Canadian rates are expected to be up CAD 500-CAD 1,000 per quarter going forward. What magnitude of increases do you contemplate within the triple segment?
I don't think I'd like to give that level of transparency right now, certainly when gonna be starting negotiations with clients very soon. I would take those comments to be more at the margin line than the day rate line.
The CAD 500-CAD 1,000 per quarter for Canada.
That's right.
Okay, got it. Carey, just a housekeeping item, SG&A. If you back out stock-based comp, it was up in Q2. What do you expect your run rate to look like absent stock-based comp going forward?
If we take out stock-based comp, it would be kind of in that CAD 95 million-CAD 100 million range. Since we have such a large part of our business that's either international or in the U.S., when the Canadian dollar weakens, it makes our SG&A go up. Then obviously, as we've talked a lot about this quarter, when our share price moves significantly in a quarter, it can make the share-based portion of SG&A move up or down.
Okay, great. Thank you very much. Appreciate the color.
Thanks, Jeff.
Our next question comes from Brad Handler from Jefferies. Your line's now open.
Thanks. Good afternoon, guys.
Good afternoon.
Couple of unrelated things. First, I'm not sure I'm clear, I probably just sort of missed it along the way. The margin expectations in Canada, what's the visibility for how many quarters we're talking about?
Brad, we said on a roll-forward basis, we should be thinking of margins kind of increasing CAD 500 to CAD 1,000 a quarter. Think about our forward guidance here as speaking to the balance of 2018 and maybe into Q1 2019.
Okay. Gotcha. Thanks.
I'll comment. A lot of our business in Canada is not contracted day rates, they are seasonal day rates. Any major macro shift can have a very quick impact on Canadian rates and activities. Leave that out there as a warning.
Sure. I recall hearing the comment. I think I lost track for how long it, in a sense, you were thinking it applied. That's fine to frame it. Thank you. I guess I'm hoping you can speak without giving up anything meaningfully from a strategic or a bidding standpoint, a little bit more to the Saudi tender or to the international tenders in general. Maybe the first question is, the competitive landscape does seem like it's expanding or at least shifting. Obviously, we have a rig of the future which is being bid by a new entrant into the rig space, I guess.
I've seen references to a Chinese contractor winning a 3,000 horsepower rig, and I don't know if that's as new as it struck me, but I felt like they were starting to emerge in larger deep drilling rigs, as opposed to the little stuff that they had been winning, the Chinese companies had been winning for a while. I guess I was wondering if you could speak to that competitive landscape. Am I in the right ballpark? On the other hand, maybe some old competitors are falling away because of their own capital constraints. Maybe it's not that there are more competitors, maybe it's just that they're different. Any of that sort of color would be very interesting to hear.
Brad, even the way you framed the question kind of tells you where the market's at right now. The market's been stagnant now for a couple of years. There's no question that there's some new emerging or new growing contractors that are kind of basing their rigs on low-cost designs. There's been a transaction recently announced that involves a large chunk of other rigs. A lot of moving pieces right now in that market. In the really near term, the tenders we have right now, the 4 idle rigs for tendering and the 2 renewals for tendering in Saudi, those are 2,000 horsepower rigs that are really available for either immediate deployment or very quick deployment. We're not really competing against new-built rigs or 3,000 horsepower rigs.
It's almost a little bit of a niche for us right now, the way it's been in Saudi Arabia for the past few years. Saudi Arabia is a tough place for the deeper, heavier rigs to be successful if you're a new entrant. We've been successful there. Some others have come in and failed and left. The people who are there and established have been successful or remain successful. It is a tough place to enter. On the near term, with these tenders we have right now, we don't really think it's a lot of new entrant competition. We think it may be existing rig competition, but we think we're well-positioned.
That's encouraging, for sure. Is it worth me asking the same question outside of Saudi? Are the tenders active enough in a couple of other countries to try to assess maybe, if you will, especially that Chinese threat that I was sort of referring to?
We saw some of that when we were tendering in Kuwait on this last round. I think our view, I think we commented previously that the Kuwaitis were unsuccessful awarding as many rigs as they intended. We ended up with one rig. We probably could have had two or three if we would've decided to be more aggressive, both with our capital spending and our bidding style. The Saudis, it wouldn't have taken much. We decided that the right decision for Precision was having just one rig to build in Kuwait and fund one rig right now. The two rigs we didn't take didn't go to somebody else. Those rigs remained un-awarded. I think we saw some of it at the edges, but didn't really affect our competitive position.
Interesting. Thank you for that. I appreciate it. I'll turn it back.
There seem no further questions at this time. I would like to turn the call back over to Kevin Neveu for closing remarks.
All right. Thank you. I'd like to thank all of you for joining our call today. Also thank the employees at Precision Drilling for their hard work and their dedication over the last few months and the very strong financial performance and excellent operational results delivered this quarter. With that note, please join us on our third quarter conference call in October. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.