Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Precision Drilling Corp (PDS, Financial) reported strong Q2 financial results, exceeding expectations for revenue, adjusted EBITDA, earnings, and cash flow.
- The company achieved year-over-year growth in consolidated Q2 revenue driven by substantial growth in international drilling, Canada drilling, and completion and production services.
- Precision Drilling Corp (PDS) has demonstrated a commitment to strengthening its balance sheet with significant debt reduction and share repurchases.
- Margins in both Canada and the US were higher than guidance, resulting from stronger-than-expected pricing and cost recoveries, higher ancillary revenues, and improved cost performance.
- The company has a clear plan to reduce debt by $600 million between 2022 and 2026, with significant progress already made.
Negative Points
- The US drilling rig count has declined by 15% over the past year, impacting overall activity levels.
- Daily operating margins in the US decreased slightly from Q1, indicating some pressure on profitability.
- The company faces challenges in the US segment, with activity being slower than desired.
- Precision Drilling Corp (PDS) has experienced some delays and postponements in well servicing activity due to weather conditions such as rain and forest fires.
- The company has no new international contracts to report and has faced unsuccessful tenders, indicating potential challenges in expanding its international footprint.
Q & A Highlights
Q: Kevin, things are really playing out better than expected in Canada despite some dynamics at play with wildfires. Can you give us an update on what triggered this acceleration in overall customer activity? Are customers concerned about a shortage of rigs?
A: We underestimated the impact of the Trans Mountain expansion, which has reduced the Canadian discount on oil prices. Customers are realizing higher returns and have certainty of export capacity, which has unlocked more drilling demand. Additionally, LNG Canada’s opening is expected to further increase rig demand in 2025.
Q: In past calls, you mentioned the prospect for rigs filling LNG export capacity to be booked on long-term contracts. Can you update us on this?
A: Canadian customers have been cautious about long-term contracts due to past uncertainties. However, there is now a trend towards more long-term contracts, especially for development drilling in Montney. We aim to keep a blend of contracted and exposed rigs to maintain optionality for increased rates.
Q: Kevin, last call you talked about US land visibility and timing of the rebound being unclear. Have your views changed?
A: Yes, we believe activity has troughed. We expect larger drillers to gain rigs while smaller ones may lose rigs due to consolidation. We see potential for modest rig count increases in the US, particularly in the Haynesville region.
Q: Carey, you mentioned looking for opportunities to lower costs. Can you elaborate, especially on the US drilling side?
A: We are focusing on optimizing repair and maintenance expenses, centralized purchasing, and third-party labor on rigs. We saw some performance improvements in Q2 and expect to maintain this for the rest of the year.
Q: Carey, margins have come in better than guidance for two quarters now. Is your Q3 margin guide similarly conservative?
A: We aim to provide realistic guidance that we can meet or exceed. The Canadian market has new dynamics with more Super Single work, making margins less predictable. We believe we can beat the guidance but prefer to err on the conservative side.
Q: Kevin, how do you see Precision evolving over the next three to five years? Will you remain focused on current operations or expand into new businesses?
A: We will remain focused on drilling and well servicing in Canada and drilling in the US. We are open to opportunistic tuck-in acquisitions that are leverage-neutral or de-levering and accretive.
Q: Carey, you mentioned a goal of bringing net debt to EBITDA ratio below 1 times and expanding cash returns to shareholders to 50% of free cash flow. What is the timing for this?
A: We expect to reach a net debt to EBITDA ratio of 1.25 times by year-end and below 1 times at some point next year. We will look at all options for increasing shareholder returns, including share buybacks and potentially dividends.
Q: Kevin, can you talk about the Canadian market dynamics given the weak AECO and Station 2 gas markets? Are operators discussing deferring drilling activity?
A: Our rig count in the Montney is slightly higher than a year ago. Some operators are slowing down but plan to resume drilling by January 1. Most wells produce condensate, which drives the economics despite weak gas prices.
Q: Can you provide details on the daily margins for international rigs and potential rig activations?
A: International margins are better than mid-cycle margins in North America. We are actively pursuing opportunities in Kuwait and Saudi Arabia but have no new contracts to report for Q3.
Q: Can you touch on day rates and margins for Super Single rigs in Canada? Have you been able to push pricing higher?
A: Margins for Super Single rigs range from $7,000 to $14,000 per day, with pad-equipped rigs at the higher end. We expect to convert more non-pad rigs to pad rigs, which will improve margins.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
