Good day, ladies and gentlemen, and welcome to the Precision Drilling Corporation 2018 first quarter results conference call and webcast. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session, and instructions will be given at that time. If anyone should require operator assistance, please press star then zero on your touch-tone telephone. As a reminder, this call is being recorded. I would now like to turn the conference over to Ashley Connolly, Manager of Investor Relations. Ma'am, you may begin.
Thank you, Ashley. Good afternoon, everyone. Welcome to Precision Drilling's first 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 first quarter of 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 first quarter operating results and provide a financial overview. Kevin will provide an operational update and outlook. Over to you, Carey.
Thank you, Ashley. In addition to reviewing the first quarter results, I will provide an update on our 2018 capital plan and management of our capital structure. Our 2018 financial performance is off to a strong start, with first quarter adjusted EBITDA of CAD 97 million, 16% higher than the first quarter of 2017. The increase in adjusted EBITDA from last year is primarily the result of higher activity levels in our U.S. business and improved profitability margins. In Canada, drilling activity for Precision decreased 5% from Q1 2017, while margins were approximately CAD 300 per day higher than the prior year. The margins for the quarter were positively impacted by higher day rates, slightly offset by higher operating costs.
In the U.S., drilling activity for Precision increased 38% from Q1 2017, while margins were up approximately $1,300 per day, positively impacted by lower operating costs and slightly higher day rates, offset by lower idle but contracted and rig mobilization revenue in the current period. We continue to see average rates moving up throughout the balance of the year if current market conditions persist. Internationally, drilling activity for Precision equaled activity in Q1 2017. International average day rates were approximately $50,000, a decrease of approximately $400 per day from the prior year. In our CMP division, adjusted EBITDA this quarter was CAD 4.6 million, effectively equal to last year. Capital expenditures for the quarter were CAD 30 million. For 2018, our capital plan is CAD 116 million, up CAD 22 million from previous guidance.
The 2018 capital plan is comprised of CAD 57 million for sustaining and infrastructure, CAD 45 million for upgrade and expansion, and CAD 14 million for intangibles. Our capital plan is expected to align with industry activity and reflects our expectation to upgrade rigs, increase our AC Super Triple active rig count in the U.S., and deploy Process Automation Control technology on additional Super Triple rigs. We have continued to build our contract book, signing 19 term contracts year to date, and as of April 25th, we had an average of 61 contracts in hand for the second quarter and an average of 50 contracts for the full year 2018. As of March 31st, 2018, our long-term debt position net of cash is approximately CAD 1.7 billion. We had CAD 82 million in cash on our balance sheet, and our total liquidity position was CAD 759 million.
We continue to view cash flow generation and debt reduction as top priorities this year and plan to reduce debt CAD 75 million to CAD 125 million by year-end. For 2018, we would expect depreciation to be approximately CAD 350 million and SG&A to be approximately CAD 110 million. We would expect cash taxes to remain low and our effective tax rate to be in the 20%-25% range. Finally, we are happy to report that earlier this month, we had a successful cutover to our new ERP environment and completed the 12-month long project on time and on budget. The success is attributable to hard work and collaboration of hundreds of dedicated Precision employees working together across multiple geographies where Precision operates. I will now turn the call over to Kevin for further discussion of the business and outlook.
Thank you, Carey, and good afternoon. As Carey mentioned earlier, we're very pleased with Precision's strong start to 2018. With the strength in WTI supporting customer demand in the United States and Brent strength generating positive signals in our Arabian Gulf business, our outlook for 2018 remains constructive, and the opportunity set seems to be increasing. Before we dive deep into our operations, I'd like to discuss our strategic priorities for 2018 and give you some additional color on how we'll drive our actions during the year. Recently, we disclosed total debt reduction target range, and to be clear, before the end of 2021, we expect to reduce our total debt by CAD 300 million to CAD 500 million using cash from operations. Carey also mentioned our 2018 debt retirement target range of CAD 75 million to CAD 125 million.
Despite our modest increase in projected capital spending and attractive U.S. and international growth opportunities, our primary use of cash will remain focused on debt reduction. During the first quarter, we demonstrated a strong improvement in cash from operations and a meaningful increase in cash on hand. It's a very good start to meeting our debt reduction objectives for the year. Our second priority regarding enhanced financial performance is extremely important, particularly as customer demand increases and growth opportunities emerge. You should read this on 2 levels. One, that we'll maintain intense focus on cost management, tightly controlling our fixed costs and our variable costs. Secondly, we'll drive margin improvement via day rates and operational leverage. During the first quarter, we demonstrated excellent cost control on all fronts, and that's despite the seasonal ramp-up in Canada and several reactivations in the U.S.
We expect to stay on track managing our controllable costs throughout the year. On the revenue front, our sales team is working closely with customers to increase day rates to normalized levels. Limited high-spec rig availability, coupled with strong customer demand, has provided a helpful tailwind to this process. In the U.S., we've demonstrated 3 sequential quarters of average rate increases, and our press release mentions that we successfully repriced every rig renewal during the first quarter. I'll give you a little more color on pricing later. In Canada, the rate increases we mentioned late last year held, and you can see the positive impact on our year-over-year average rates. This all serves to enhance our financial performance, namely our free cash flow, which is a top priority for the year. We certainly have a good start in the first quarter.
Regarding our third priority, this is the wide-scale technology deployment initiative. This is extremely important for Precision, and we remain on track. In our press release, we provided some indicative technology deployment statistics, and I won't repeat those. I will add that we have also deployed revenue-generating drilling performance apps on several rigs during the quarter. We are collaborating with our customers, with vendors, with partners, and working internally to develop additional drilling apps. These apps are targeted for a variety of purposes, including improving rig efficiencies, automating certain rig functions, reducing operating costs, capturing performance data, or providing drilling process quality oversight. Customer interest in our process automation, our directional guidance, and our drilling app development remains extremely high. We count at least one new Precision customer and a rig activation driven by the PAC platform demand.
Now moving to our regional update. Our U.S. operations are performing very well. Today, we have 71 rigs running and further visibility to the mid-to-upper 70s, with several additional rig activations scheduled for the third quarter. As our market share is outpacing the industry, we see this as a journey by our customers to maximize rig efficiency and transition from lower-spec rigs to top-tier performing rigs. I'll remind you that our fleet of Super Triple rigs were designed and constructed to be easily upgradable. Most of the typical upgrades, including pad walking systems, third pump additions, or technology like our NOVOS PAC system, essentially bolt onto our rigs.
We've been describing upgrades that are typically under CAD 3 million to do these upgrades. Our projected increase in capital spending should fund an additional three to four additional upgrades, and that depends on the scope of the customer requirements. As we move past 75 active rigs, we expect the next 10 to 15 upgrades will trend higher in cost. You should be thinking about those in the CAD 3 million-CAD 6 million range per upgrade, and some of these upgrades will likely be SCR to AC rig conversions. Additionally, we believe we have the capability to utilize some of our spare equipment and some of the components we have in our inventory to assemble up to two additional new Super Triple 1500 horsepower rigs with additional cash outlays for drill pipe and some of the non-inventory items of less than CAD 10 million each.
We haven't committed to this spending, we don't plan to commit to this spending. We will continue to monitor customer demand, we'll ensure that any investment we make meets our internal hurdles, and that the incremental cash flow from the contract will fully fund any capital investment we make and not impair our plan to retire debt. As we look at regional activity in the U.S., the Permian remains a key focus. I'll point out that the Permian accounts for only half of our activity. The balance of our activity is distributed between the SCOOP/STACK, the Utica, the Marcellus, the Niobrara, the Haynesville, and the Eagle Ford. I mentioned rate increases earlier.
During the first quarter, 18 rigs renewed, we achieved rate increases ranging from several hundred CAD per day to several thousand CAD per day on those increases, depending on the prior contract tenor and the rig type. I'd also comment that high-spec rig pricing is consistent across all regions, we continue to report that ST-1500 pricing for leading-edge spec rigs is in the mid-CAD 20,000 range. Currently, our customer bid activity remains very strong, we expect a lull in contract awards during the second quarter as our customers evaluate first quarter performance and determine second half needs. Turning to Canada. Despite the longer-than-usual winter season, our customers reduced activity early, primarily due to budgetary constraints. We believe they remain focused on capital discipline, we view this as prudent behavior by our customers.
Regionally, in Eastern Alberta and Saskatchewan, I believe the day rates for shallow rigs remain too low. This segment is structurally oversupplied, I believe customer price expectations are unrealistic. I mentioned earlier that we implemented modest price increases last year, pricing held during the first quarter. We believe rates for shallow rigs need to increase further and by several thousand CAD per day. If our customers expect the industry segment to deliver on the safety and performance they need, rates must increase. Turning to the deeper plays. Fortunately, in the Montney and Duvernay, the supply and demand remains in good balance. All of Precision's Super Triples were active in Q1, the majority of our Q2 activity will come from these rigs. We expect our Q2 seasonal spring breakup activity will be in line with last year's activity levels.
Early indications are that most, if not all, of our Super Triples will reactivate in Q3 and operate through the second half of the year. That said, we certainly have very strong demand for ST-1500s in the U.S., and I would not be surprised to see a U.S. customer step up and pay the mobilization costs to redeploy a Canadian ST-1500 to the U.S. At this point, we have no firm commitments to move any rigs. We view Canada as a relatively stable market where our fleet quality, our crew performance, our customer reputation, and the scale we have provide a strong foundation for free cash flow. We will continue to invest to sustain this fleet, but we do not see a need for any growth investment in the near future. We view Canada as a stable free cash flow business we will manage very carefully.
Moving to our international business. The stronger commodity prices are causing uptick in customer interest. First off, 2 of our 3 operating rigs in Saudi Arabia are due for contract renewals later this year. We should begin customer negotiations on those rigs mid-summer, and based on our strong operating performance metrics, we expect contract renewals are likely. We also continue to bid our 4 idle rigs in the region and believe interest in those rigs may improve if commodity prices remain strong. Turning to Kuwait. There has been much industry talk of a large multi-rig tender in Kuwait. I want to remind you that for Precision, we are most interested in the 3,000 horsepower high-spec, ultra-deep drilling rigs. Our operating performance in Kuwait has been exemplary, and we believe we are extremely well-positioned.
We hope to achieve a customer commitment for 1 additional newbuild rig, and if successful, we would expect rig construction to commence later this year and deploy mid-2019. We are confident we can fund a single rig project from cash flow while meeting our stated debt reduction targets. Just turning to our Canadian well service division. As you know, we made a management change early in the first quarter. Our team has substantially refocused on internal operational efficiency, and they are working hard to restore pricing to sustainable levels. As I have said in the past, this is a structurally oversupplied sector. Competition is intense, and our customers continue to apply unrealistic price expectations on the Canadian service rig industry. Our team is working hard to demonstrate the value Precision offers with our well-trained crews, excellent logistical management, and appropriately certified service equipment.
We see early signs that this is working and some of the price increases are taking hold. I will tell you, it is absolutely essential for the well service industry participants, for the crews, and for customer performance expectations that pricing needs to improve, and we need to return to some semblance of industry health. As a final comment, with increased activity in the U.S. and Canadian winter seasonal rebound, our field safety performance was very strong, near record levels. I want to thank all the dedicated Precision employees for the effective safety culture they sustained and the excellent results during the first quarter. I also want to reiterate Carey's comments and thank all the Precision employees who worked many extra hours, and particularly through the Easter holiday weekend, to ensure that our ERP go live went off without a hitch. Thank you. Thank you very much.
I'll now turn the call back to the operator for questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once you've asked your question, we ask that you please place your line on mute to prevent any background noise. Our first question comes from Sean Meakim of JPMorgan. Your line is open.
Thanks. Hey, Kevin. Hey, Carey.
Hey, Sean.
Hey, Sean.
Just I thought maybe it'd be great if we could get a little more feedback on the repricing of the contracts during the quarter. Just kind of what precipitated that series of events and the receptivity from customers? It'd be great just to learn a little bit more about that, and maybe if we could quantify to some degree the positive impact of that repricing.
To give you some sense of repricing, I think Carey talked about Q4 to Q1 pricing. Positive impacts were stronger pricing, negative impacts were mixed a little bit. I think if you look forward over time, I'd expect rates on average to move up probably in the range of CAD 500 to CAD 1,000 a quarter kind of looking forward on average. It could move a little faster if oil prices stay strong. I'll tell you, there's no question that leading edge spec rigs are pricing very quickly, repricing towards that mid-20s range. Even our smaller ST-1200s are moving into the low 20s, and we've got some of the less capable rigs coming up on CAD 20,000 a day, so rates are moving pretty quickly.
I commented that some rates were CAD several hundred, some were CAD several thousand, and that really just comes back to when the rig was last contracted. Yeah. Just to be clear, Sean, we didn't reprice any existing contracts, but when the contract term ended and we rolled into new contract, that's when we repriced.
Got it. Okay. Yeah, thank you for that clarification. As we think about the 2Q in Canada, maybe could you give a sense of how you think
Mix shifts can impact the rates, quarter-over-quarter and maybe, as a comparison to the year prior. I know we talked about activity being fairly comparable, just a sense of how that mix could shift over the course of the quarter.
Yeah, Sean, the mix would be pretty similar to last Q2, where we'd have a much higher percentage of Super Triple rigs working in the deeper basins, working on pads, the rates would typically go up from Q1.
Okay, great. Thank you.
Thank you.
Our next question comes from Chase Mulvehill of Wolfe Research. Your line is open.
Hey, good afternoon, Carey and Kevin.
Hey, Chase.
Hey. I guess, on the rig upgrades, it sounds like you're going to have 75 rigs or so kind of active in the U.S., you know, in the next couple of months. Can you talk about what your total fleet size is in the U.S. relative to that 75? How many do you actually have idled that you think are kind of, you know, options to upgrade? Then maybe, can you just talk about the average cost to upgrade those, and I'll I've got a follow-up as well.
Chase, I think the first comment I'd make is that I did, in the prepared comments talk about, if we get the 75 rigs, the cost of our next 10 to 15 upgrades will start to move up in the CAD 3 million-CAD 6 million range. The average will move up a little bit. If you just, you know, kind of pile those two together, that gets us to somewhere in the high 80s or maybe 90-ish range. We have 103 or 104 rigs in the U.S. right now?
104.
104 rigs in the U.S. right now, that gives you a little sense of what the range can be.
Okay. All right. That's helpful. Then, you know, thinking about moving rigs from Canada to the U.S., what rate would you need in the U.S. to actually move those from Canada, and what kind of duration, you know, on the contract would you need?
You know, that's a, that's a really good question, Chase. I'll tell you there's a couple of things we'd look at. First of all, we'd expect our customer to pay the full reload cost, which is, you know, it's meaningful. It could be in the range of CAD 1 million to CAD 1.5 million, depending on where it's going. We'd want that paid, either as a pure increment to the day rate or as a lump sum up front. We'd need that to be firmly committed. The rates would have to be leading edge rates, we'd be looking for the best rates in the market.
Okay. All righty.
Then-
Yeah, turn it back over.
Yeah, just to follow on that, Chase, on the contract term, typically, if there's any capital involved or really any cash outlay, expense or capital, we'd wanna make sure that the term was long enough to cover that outlay.
Okay.
Usually we'll recover the outlay also.
All righty. Thank you.
Thanks.
Our next question comes from James West of Evercore. Your line is open.
Hey, guys. Good afternoon.
Hey, James.
Kevin, on the Kuwait, potential contracts in Kuwait, how many rigs would you as Precision be willing to put into that market, assuming you're successful in the tendering activity?
You know, Today we have five rigs running, we've made the comment many times that we think we've achieved the scale we need to deliver country-level returns. We're pretty happy with our scale today. You know, adding one rig, if we're successful, adding one rig next year, you know, maybe one rig a year or two later, I think that's the kind of pace we'd like to see. We're really pleased with our business in Kuwait. It's a great relationship with the customer, a demanding customer that expects high performance we're able to deliver. I'd also worry about becoming too levered to any one country or one area.
Right.
Yeah, I think we balance those things out and look at the market size. I wouldn't want to become 10% of the market or 15% of the market in Kuwait. It's not the right mix for us today.
Okay, makes sense. Maybe a similar question. I know Saudi is out looking for more rigs as well, or will be out looking for more rigs. How many more rigs would you be willing to put into Saudi?
Well, you know, I've also said in the past that frankly, three rigs operating is subscale. While the returns of the rig are adequate, the returns at the country level, we're cash flow positive, the returns aren't adequate. I'm not happy with that. If we could get the idle rig in Saudi and maybe the three rigs in Kurdistan in country running, I'd be very pleased with that. That would get us up to, you know, seven rigs running in that range. That's pretty good. We have to balance that out with the capital needs and the returns that are focused on paying down debt. There's no easy answer for us.
Okay. Fair enough. Thanks, Kevin.
Thank you.
Our next question comes from Benjamin Owens of RBC Capital Markets. Your line is open.
Hey, good afternoon, guys.
Hey, Ben.
On the target debt reduction range you guys provided for 2018 of CAD 75 million-CAD 125 million, just wondering, what are some of the variables that could impact where you end up in that range? Does that contemplate potentially putting additional rigs to work in Kuwait and possibly needing to spend capital to get those rigs up to spec?
With the capital plan we disclosed today absolutely contemplates that. If we were successful to win a Kuwait rig award, it would be much more weighted to 2019 capital spend. There could be some spend in 2018, but it would be a small portion. The variables that would impact that would be how much cash we wanna keep on the balance sheet, would be one. If we continue to build our contract position, we'd probably be more comfortable with a little bit less cash on the balance sheet. The overall performance of the business from a cash flow generation standpoint, from the EBITDA level. If we continue to see strong pricing trends and good cost control and good utilization, we would be likely at the higher end of that range.
Okay, thanks. On the Saudi rigs that are up for renewal later this year, do you think those rigs would require any capital investment to win the contract renewals?
Nothing at all. We think those rigs are well-maintained and able to continue working for a long period of time.
Okay, got it. Thanks. I'll hand it back. Appreciate it, guys.
Great. Thank you.
Our next question comes from Taylor Zurcher of TPH. Your line is open.
Hey, guys. Thanks. In Canada, maybe to start there, if I look back to, I guess, pre-2014 and 2014, the mix of term versus spot contracted rigs was sort of steady around 40% today. Well, that naturally migrated lower over the course of the downturn, and today it still seems to be moving lower. I think it was 8% this quarter. I guess my question is: Is that just a function of where commodity prices are today, part A, and then I guess part B, how do you envision that ratio unfolding the way you see it over the back half of the year?
I think there's a structural difference in the Canadian market and U.S. market. Term contracts in Canada are just far less common. It tends to be annual pricing agreements with the obligation for days. However, anytime that driller in Canada deploys new capital, they usually seek a contract to cover the capital. If the capital is a brand-new rig, Canadian drillers, ourselves included, look for a contract to cover that entire capital investment. We get what would be typically a four-year contract. In 2014, we had a lot of new builds deployed in Canada. I think we had at one point about 20 new builds. That was 20 four-year contracts hanging out there. We had some upgrades back then also, so we would have had a number of upgrade contracts.
As that upgrade and capital deployment's gone down year-over-year, the number of term contracts has just naturally gone down. You just don't see Canadian E&P companies or Canadian service companies doing term contracts unless there's some new investment tied to that rig.
Okay.
I'm not sure if that helps you. It's just a fundamental of the business that's different between Canada and the U.S. Whereas in the U.S. right now, we have a number of accounts that are locking up rigs for six months, a year, sometimes 18 months, to secure that rig over a long horizon so they don't have the same rig and same crew, and that's been a common feature of the U.S. market for over a decade, a decade and a half.
Okay. That makes sense. A follow-up in Canada. I think you mentioned prepared remarks that you'd like to see some additional pricing momentum on the shallower rigs. If the back half of the year ends up playing out flattish versus the back half of 2017, do you think you have the room to keep pushing pricing there, or is that likely you'll need to see more demand in order to get that extra CAD 1,000 a day you called out?
Yeah. Actually, I said thousands with an S at the end. I'll tell you that message is actually quite intentional. We have customers listening, they need to understand how weak that business is and how important it is for the drillers to get back to some level of sustainability. I made that comment because I know we have customers listening. They need to understand this is a very tough business for everybody, ourselves included. Last year we raised rates. We immediately saw the impact of market share reductions. Immediately. Our guys worked really hard through the third quarter and fourth quarter to restore that market share. We got it back. The rates held in quarter one. I'm not going to give any guidance right now on future price negotiations because those are going on every day.
I'll tell you, across the industry, those rates need to come up. They need to come up to two, three, four, sometimes CAD 5,000 a day. The industry is suffering right now. We're doing our part, we need our customers to recognize that the business needs to improve, otherwise they're going to suffer. Ultimately, they'll be the ones who suffer.
Understood. One last one for me on Process Automation Control. I think you're still running 21 rigs equipped with PAC systems today. Could you just give us an update as to how many of those customers are paying for those services or how close you are to sort of full commercialization on those 21 rigs?
Yeah. Short answer is, no, I won't. We have internal metrics that we're meeting right now, so we're happy with what we're doing. I'll tell you, we've got a number of customers that are paying full rate, a handful more that we're working with on performance metrics where there's a reduced rate. I'm really pleased with the progress we're making. At this point, we're going to hold back on providing a lot of disclosure on rates and terms. Nothing tells me that the targets we put out for ourselves last year at our investor day need to change or come down.
Okay, I appreciate it. Thanks.
Great. Thank you.
As a reminder, ladies and gentlemen, if you have a question at this time, please press the star then the number 1 key on your touchtone telephone. Our next question comes from Ian Gillies of GMP. Your line is open.
Afternoon, everyone.
Hey, Ian. How are you?
Kevin, was I correct in hearing that you're contemplating building two new build AC rigs out of, I guess, inventory and spares at some point this year?
No, you're not correct. We're not contemplating building anything. We just commented that we could if we saw the right type of contract or demand, we could assemble up to two new rigs probably for less than CAD 10 million of cash out that we could deliver in short order. We could do that. At this point, we have nothing on the books.
Okay. That's good to know. With respect to the SCR to AC conversions, are you able to provide, I guess, a bit of color on what you think that may cost, given that's probably going to be a different sort of upgrade than what you guys have been doing previously? Whether are there any sort of performance limitations if you go and do those sorts of upgrades, or do you think those rigs immediately compete with some of the other super spec AC triples in your fleet once that's done?
I would view those rigs, if we did an AC to DC conversion, or DC to AC conversion, I'd just view it as an additional AC rig in the fleet. It doesn't compete with our existing rigs. Many of those rigs are actually already configured with three pump ups and downwalking, it's just a power system conversion. I think our guidance on CAD 3 million-CAD 6 million for the next 10-15 rigs, is the appropriate guidance.
Okay.
Yeah, up to CAD 875.
With respect to a potential new build heading into Kuwait, in US dollar terms, are they still in that $45 million-$50 million range, or am I way off the mark there?
You're light. Probably closer to $60 million in that range. $55 million-$60 million in that range.
To be clear, that's in US dollars?
Yes.
Okay.
I want to be really clear on a couple things here. First of all, our top priority is to pay down debt. While we just spent the last five minutes talking about areas we can spend capital, we're not spending capital until we are certain we're paying down debt. We gave the range on 2018, and we gave the range by 2021. That target's not going to be modified.
Okay. No, thank you. I think that's helpful for me and I think probably for a number of listeners. I guess the last thing, with respect to when you look across your peer group and you look at the industry, are you concerned at all about the number of potential rig upgrades that may come and end up hampering any sort of pricing gains that you're getting in the U.S. right now?
What we're seeing out there in public disclosure by some of our peers are upgrade costs that are six, eight, nine, 10, sometimes 14 million. That's one thing. The upgrade costs are getting quite high. I'd comment that we've actually watched our competitors operate with very good discipline in that they seek contracts, they want capital returns. The hurdles may be different company to company, but in fact, the industry's behaving in a very disciplined manner right now, and that's encouraging.
Okay. No, that's helpful and I'll turn it back over now. Thanks very much for the color and clarity.
Our next question comes from John Morrison of CIBC Capital Markets. Your line is open.
Afternoon, all. From a high-level perspective, can you talk about whether day rates in Canada are largely holding across rate classes and geographies? Are we starting to see a diversion in trends at this point that could unfold in the back half of the year, just given some of the different supply and demand dynamics for rigs that you're seeing right now in different regions?
John, my comments the other day about shallower rigs were targeted comments because there's some really tough conversations going on right now. Really tough conversations. I'll commend our guys for doing a very good job. Our rigs are running in the field excellently, and our sales team is holding rates.
Okay. Sorry if I missed this in the preamble, but on the upgrade CapEx increases that you announced, can you just clarify whether ultimately that is all being applied to rigs that are in the field working today, or some of it is going to some of the incremental rigs you talked about in the U.S. likely going to work in the coming months?
Yeah. Some of that capital will be going to rigs that are working today, as Kevin said earlier, that capital will get us up to 75 rigs running in the U.S.
Okay. When you talk about the capital investments needed to meet your thresholds, also talking about how you can lean on inventory, obviously from a strategic advantage, that limits the amount of cash outflow that you have to put out. When you're talking about running your economic thresholds on making sure that you meet your return thresholds, am I right assuming that you're treating all of those inventory items as essentially having to pay new cost for it and not reducing that from the total build cost to meet your thresholds when you're thinking about building a new rig? Are you agnostic to whether you spent the money already versus having to spend the money on the horizon?
No, we would always look at opportunity cost, John.
Okay.
Okay.
Is the day rate to build a new rig in the U.S. right now of a very high two handle or low three handle still at this point?
I can only speak for Precision Drilling. I think there's 2 different things to think about, John. I talked about building a couple rigs out of inventory. I think others can build rigs out of inventory like we can. We're not unique in having spare parts. I think you get into a cadence of new builds where you've got people talking about building 1 rig every 2 months or 1 rig a month into a cadence. I expect day rates likely need to move up around CAD 30,000 a day or maybe even higher for a leading spec high steel rig today.
In a term longer than what we're seeing.
A much longer term. I think we're a long ways away from the kind of pricing and term duration required to get into a cadence of new builds. I noticed that 1 other driller in the U.S. announced converting some inventory into a rig a while ago, and I think you could see a few of those this year with day rate sub 30. To get into a cadence of new builds, rates need to move up quite a bit.
Just to clarify on the potential SCR to AC conversions, that would all be based on demand from customers and none of it would be a speculative read of the market, correct?
No investments in rigs will be spec. It will all be based on contracts.
If the market continues to improve and your ratios start to look a lot better two years out, is there any way that your absolute debt repayment goals get diminished by virtue of your leverage ratios improving, and then you could look at adding more rigs if the economics make sense? Or are you definitive in that those are the debt repayment goals that you intend to meet?
John, it's really hard for us to answer a long-term question that has "if" in it three times.
I apologize for being annoying.
No, if this happens and if that happens, and if this happens, what would you do? It's a hard one to answer. What I'd tell you is, we have no intent to change our targets.
Okay. Last one just from me on the international side. When you talk about needing better fixed cost absorption in Saudi, are you agnostic to the region in which more rigs go to work in that, whether it was Kurdistan getting reactivated or putting more rigs into Kuwait, do you need better fixed cost absorption in Saudi specifically, or is it just more activity in the Middle East?
Well, more activity in the Middle East would be helpful, but we're really focused on trying to get more activity in Saudi.
Okay. Sorry, I'm going to be annoying.
The answer is, we wouldn't turn down an opportunity to fire up three rigs in Kurdistan, but that would not help Saudi.
Okay. I'm going to be annoying and ask one more, sorry. On the Kuwait opportunity, is it fair to assume that the economic payback for the current bids that are out there in the market is probably somewhat in line with what you're currently generating, at least at the rig level?
Not really following you there, John.
I think he's saying, are the returns on the potential new build in line with the previous rigs?
Exactly.
Yeah.
Naturally, you'll get better fixed cost absorption, but at the rig level, are they likely in line?
They're at least as good.
Okay. Appreciate the color. I'll turn it back.
Thanks, John.
Our next question comes from Jeff Fetterley of Peters & Co. Your line is open.
Hi, all. Couple of clarification questions. On the capital program side, previously you talked about the program contemplating between 10 and 20 upgrades in 2018. Is that still the range with the pro forma change?
You should think about this like it might go up two, three, or four rigs, depending on what the scope of some of these upgrades end up being. It could go from 10 to 20 to 12 to 23 or 24. I think the real key here is it's a range, I wouldn't get too hung up on 20 or 21.
Can you give us a sense of how many rig upgrades you've committed to or completed so far in 2018?
It would be pretty close to the low end of that range.
Okay. The increase both to maintenance capital and upgrade capital, does that essentially contemplate your U.S. rig count getting to 75, or does that contemplate the rig count moving above 75?
Since we don't forecast forward hard revenue or activity levels, I've given numbers for a coming quarter, like I've given the 75 and mid-70s by the end of this quarter. I think the simplest answer is that it's a proxy for our view on activity for the balance of the year.
Okay.
Yeah. I think we've said a couple of times that that capital is enough to fund upgrades to get us to 75 rigs.
He's talking about the maintenance capital piece, I think was the question.
Yeah.
Well, sorry, it's on both sides. Previously, Kevin, you talked about how the upgrade capital is sufficient to get you to 75 rigs. At the beginning of the call, you mentioned that you had line of sight for somewhere between 75 and high 70s.
Yes.
If you were to get to high 70s, does that mean that your upgrade capital and your maintenance capital will increase from the budget that you talked about today?
I think our upgrade capital is fine, I think our maintenance capital is fine.
Yeah.
Okay. Even though it's less than CAD 3 million per rig to get to 75, and then CAD 3 million-CAD 6 million per rig above 75, yet that's essentially contemplated or blended within the sustaining capital.
We may have some rigs that require no capital.
Yeah.
There's no direct correlation between the number of upgrades, the number of rigs to get to 75. We're trying to give you some ways to judge what it's going to take to move to the next step up, which is why we gave the next 15 rigs will be CAD 3 million-CAD 6 million per upgrade.
Okay. Sorry, go ahead.
One more clarification there, Jeff. Our upgrade plan that we announced today does not contemplate an upgrade above CAD 3 million on a rig.
Okay. Just to clarify, you said earlier that CAD 3 million-CAD 6 million per rig range, that would include some DC to AC conversions that would have about 10-15 rigs in the fleet that would be potentially available for that?
That's correct.
Okay. Just to follow up on the new builds question. I know you said 30-ish or higher, and obviously longer term. Does that apply even though your cash outlay would be, as you said, less than CAD 10 million for those two inventory new builds?
First of all, my guidance on the day rate was to get back into a cadence of new builds. A cadence would be, we're going to build one rig a quarter, one rig a month. Some kind of an ongoing manufacturing process, rather than just taking surplus inventory like some others have done, and taking essentially idle inventory and turning it into a rig. I think that our expectations will be different for converting inventory to a rig versus a cadence of new build rigs.
What do you need to see, either rate or term from where the market sits today to convert inventory into two new rigs?
We're not going to give guidance at that level because we're going to be giving away our marketing strategy to our peers.
safely say is-
We expect that our hurdles on returns and our opportunity cost calculations don't change from the way we view things in the past.
Last item. On the Canadian side, the potential transfers you alluded to earlier. I know there's nothing committed to at this point, but when you look at the fleet profile in Canada and the customer commitments that are tied to either the 1,200 horsepower triples, how many rigs realistically could be available to move to the U.S. later this year if the U.S. customers step up?
It could be a number close to the 20s. It could be that much, but that's not highly unlikely. I don't think that would happen at all. I think the chance of that would be zero. I think the most desirable rig to move to the U.S. would be an ST-1500. We have five of those in Canada, but I can tell you all five right now are utilized. Again, what I don't want to do is have you come along in seven months time and say, "You didn't tell us you'd move rigs to the U.S." We would consider moving one if it becomes available in Canada and if a customer in the U.S. pays to move, and that the rates and terms in the U.S. are quite supportive.
Okay. Conceptually, when you balance customer commitments and your inventory in Canada, the five ST-1500s, as you said, are committed, but there would be upwards of 20 on the ST-1200 side that could conceptually be available.
I think the more desirable rig in the U.S. right now would be the ST-1500. We're doing quite well with our ST-1200s in the U.S., but I don't think there'd be a market for 20 of those dropped to the market at once. I think that the ST-1200 is performing quite well in the Montney. Jeff, I really don't think Precision is going to be moving any mass amount of rigs from Canada to the U.S. Could be one, could be two, if we find a customer who pays for the low cost. I think the common idea is we have an option on that, but it really isn't core strategy.
Great. I'll turn it over. Thank you.
Thanks, Jeff.
I'm showing no further questions in queue. I would now like to turn the call back to Kevin Neveu, President and CEO, for closing remarks.
All right. Thank you for joining us on our first quarter conference call, and we'll be hosting our annual general meeting in Calgary in the coming weeks. Look forward to having you join us on our Q2 conference call in mid-July. Thank you very much.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.