Precision Drilling Corporation Q2 FY2024 earnings call

Management Statement and Operational Highlights

• Financial Resilience: Q2 financial results exceeded expectations with revenue, adjusted EBITDA, earnings, and cash flow growth. Committed to balance sheet strength with debt reduction and share repurchases.
• Regional Updates:
  • U.S.: Customer demand in Lower 48 appears to have troughed; expecting modest activity increase later in 2024 and 2025.
  • International: Activity revenue EBITDA up ~50% y/y; three active rigs in Saudi Arabia and five in Kuwait on long-term contracts.
  • Canada: Canadian drilling and well servicing performing at highest levels in over a decade. Super Single rigs leading in heavy oil; Super Triples in Montney virtually fully committed.
• Innovation and Margins: Introduced evergreen products for Super Single rigs to improve fuel efficiency, reduce emissions, and increase margins.

Segment Performance

• U.S. Drilling: Q2 averaged 36 rigs, down 2 from prior quarter. Daily operating margins (excluding turnkey and IBC) were US $10,838 in Q2, down from Q1. Expected Q3 margins stable and above US $10,000 per day.
• Canada Drilling: Averaged 49 rigs in Q2, up 7 from Q2 2023. Daily operating margins $14,423, up $2,220 from Q2 2023. Q3 expected margins between 13,500 and 14,000 per day.
• International Drilling: Averaged 8 rigs in Q2, up 61% from Q2 2023. International average day rates US $55,301, up 9% from prior year.
• C&P Segment: Adjusted EBITDA $12.4 million in Q2, up 66% y/y, driven by 44% increase in well service hours, CWC acquisition integration, and improved pricing.

Guidance

• 2024: Expect to reduce debt by $150 million to $200 million; utilize 25%-35% of free cash flow for share repurchases. Share-based compensation charges range $40M-$60M, increased upper end of share price guidance to $120 per share.
• Long-Term: Aim to reduce debt by $600M by 2026, achieve net debt to EBITDA below 1x, and increase direct shareholder returns to ~50%.

Risks

• Insurance Dynamics: Smaller service companies face challenges in accessing insurance due to industry trends, with insurers focusing on lower-risk, larger companies.
• Market Uncertainties: Fluctuations in rig counts, pricing dynamics, and customer contract behaviors can impact margins and financial performance.

Question and Answer

Q: Kurt Hallead on Canadian customer activity acceleration and rig contracting strategy A: Kevin Neveu explained Canadian customers are more willing to sign long-term contracts now due to improved price and export capacity certainty, but Precision aims for a blend of contracted and exposed rigs.

Q: Luke Lemoine on U.S. rig count and cost reduction A: Kevin Neveu noted U.S. rig count may increase slightly, and Carey Ford discussed focus on repair/maintenance, vendor optimization, and centralized purchasing to reduce costs.

Q: Aaron MacNeil on Q3 margin guidance A: Carey Ford said Q3 margin guidance is conservative due to changing rig mix dynamics in Canada and U.S. fixed cost considerations.

Q: Waqar Syed on Precision's evolution and acquisitions A: Kevin Neveu stated Precision remains focused on core drilling and well servicing in Canada and U.S., open to tuck-in acquisitions that are de-levering and accretive.

Q: John Gibson on international rigs and Super Single margins A: Carey Ford mentioned international margins are better than North American mid-cycle, and Kevin Neveu discussed Super Single rig margins range and pad rig upgrades.

Q: John Daniel on insurance challenges for small service companies A: Kevin Neveu highlighted smaller companies face tougher access to insurance due to insurers focusing on lower-risk, larger entities.