PRECISION DRILLING Corp Q1 FY2020 Earnings Call

Thank you for joining us, and welcome to the Precision Drilling Corporation 2020 First Quarter Results Conference Call and Webcast. I will now turn the call over to your speaker today, Mr. Dustin Honing, Manager of Investor Relations and Corporate Development. Please proceed, sir.

Great. Thank you, Daniel, and good afternoon, everyone. Welcome to Precision Drilling's First Quarter 2020 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 2020 results. Please note 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 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. Kevin will begin today's call with an overview of Precision's response to the COVID-19 pandemic. Carey will then discuss our first quarter financial results, followed by Kevin's operational update and outlook. With that, I'll turn it over to you, Kevin.

Good afternoon, and thank you, Dustin. The impact of the COVID-19 pandemic has been profound. As a global population, we share the health risks and anxieties for ourselves and our families. We are all managing the stay-at-home orders with travel bans and living through the resulting economic downturn and job losses. The same applies to Precision. We rely on highly trained teams of 15 to 25 people, the rig crews, working in close quarters to execute our business. As an essential service, our people are required to work, yet they must also deal with the same personal concerns, health risks, contact risks and family anxieties we all face. This weighs heavily in our people, and I am deeply proud of the highly professional attitude and exceptional level of performance they continue to demonstrate during these challenging times. Now you may recall, on Precision's fourth quarter mid-February earnings call, we identified the potential risks and impacts we might face due to the emerging virus. And those included the health risks to our people, the commodity price risk and the customer demand risk. In just a few weeks later, those risks became real and then intensified by the travel bans and stay-at-home orders. Precision responded immediately, implementing a pandemic safety management plan to ensure the health and safety of our staff and our stakeholders. The plan applied to all Precision rigs, shops and offices. And I'm very happy to report that by moving quickly, we have avoided any interruptions in our service. We've experienced no rig shutdowns and no work-related virus outbreaks. I want to thank all the people at Precision who work safely and productively through this troubling period, fully sustaining our services to our customers as an essential component of the global energy supply infrastructure. Now as the world responded with all the measures to flatten the curve and limit the spread of the virus, we expected oil demand disruption. We expected reduced commodity prices and reduced customer demand. However, we did not anticipate the second compounding black swan event, the OPEC+ breakdown and the oil price war that led to negative WTI prices at the end of the prior forward contract period. Nonetheless, we responded quickly and aggressively, implementing a series of business measures, which Carey will outline shortly. All are focused on preserving cash and bracing Precision upon an extended and deep downturn. We believe these measures, which will save Precision in excess of $100 million in cash outflows this year, and most of these measures are sustainable through the downturn, will position Precision as a leader and a stronger driller for the inevitable recovery. I do want to express my best wishes for a full and speedy recovery to anyone who was exposed to or affected by the COVID-19 virus. And I also want to express my sadness to the thousands of oilfield workers, including those from Precision, who through no fault of their own have lost their jobs, in some cases their careers and their livelihoods. It's my expectation that we will look to attract back any of those Precision people when this industry recovers. I'll now turn the call over to Carey Ford to discuss our first quarter results and the cost-saving initiatives.

Thank you, Kevin. Before I cover the first quarter financial details, I would like to review some of the cost-saving initiatives Precision has captured in the past six weeks. All initiatives outlined in our March 24 press release have been implemented, and any associated charges were incurred in the first quarter. The cash savings impact starting in Q2 will be substantial, and the run rate guidance of 30% fixed cost reductions and $30 million reduction in G&A still stand. We have scrutinized every cost item within the organization. We've implemented company-wide workforce, salary and benefit reductions, including the executive team and Board. Our travel and entertainment budgets have been slashed, along with every other administrative costs possible. We expect to benefit from government programs such as worker assistance and tax deferrals and have secured deferral of certain other payments into 2021. These programs and deferrals will provide Precision with up to $20 million in additional cash this year. Cost reduction efforts, deferrals and CapEx reductions are expected to reduce 2020 cash spend by the organization by well over $100 million. I will now review some of the first quarter financial details. Our first quarter adjusted EBITDA of $102 million decreased 6% over the first quarter of 2019. The decrease in adjusted EBITDA primarily results from a 30% reduction in U.S. activity, offset by a 33% increase in Canadian drilling activity. Also included in adjusted EBITDA during the quarter is $10 million in severance and restructuring costs related to cost reduction initiatives to prepare the business for a lower activity environment. In the U.S., drilling activity for Precision averaged 55 rigs, a decrease of 8 rigs from Q4 2019. Daily operating margins in the quarter were USD 9,344, a decrease of USD 532 from Q4. Q1 margins were negatively impacted by lower average day rates and higher average costs, offset by IBC revenue during the quarter. Absent impacts from IBC, turnkey and one-time recoveries in the fourth quarter, daily operating margins would have been approximately USD 8,300 per day or USD 200 per day lower than Q4. For Q2, we expect day rates and margins to be supported by contracted rigs in IBC revenue, with operating costs negatively impacted by fixed cost absorption. Moving to Canada. Drilling activity for Precision averaged 63 rigs, an increase of 15 rigs from Q1 2019. Daily operating margins in the quarter were $7,205, a decrease of $1,317 from Q1 2019. Absent shortfall payments received in the prior year, daily operating margins would have been down approximately $500. For Q2, we expect margins to be negatively impacted due to fixed cost absorption. Internationally, drilling activity for Precision in the current quarter increased 1% from Q1 2019. International average day rates were up to $54,294, a USD 4,354 increase from the prior year. In our Completion and Production segment, adjusted EBITDA this quarter was $3.2 million, down $7.3 million compared to the prior year quarter. Adjusted EBITDA was negatively impacted by $2.3 million in restructuring charges during the quarter and a decline in well service activity, which was negatively impacted by extreme cold weather, preventing us from operating many of our rigs during the quarter. Capital expenditures for the quarter were $12 million. Our 2020 capital plan remains $48 million, a decrease of approximately 50% from the beginning-of-year guidance. The 2020 capital plan is comprised of $36 million for sustaining and infrastructure and $12 million for upgrade and expansion. We added 9 contracts to our contract book in the quarter. And as of April 29, we had an average of 46 contracts in hand for the second quarter and an average of 42 contracts for the full year 2020. As of March 31, 2020, our long-term debt position, net of cash, is approximately $1.4 billion. And our total liquidity position is over $800 million. Our net debt to trailing 12-month EBITDA ratio is approximately 3.6x, and our average cost of debt is 6.8%. Maintaining a strong liquidity position is our top financial priority, and we plan to resume debt repayments when visibility improves or our cash on hand exceeds our expectations. Further to maintaining strong liquidity, we reached an agreement with our senior secured lending syndicate to relax certain debt covenants in our revolving credit facility through Q1 2022, namely the EBITDA to interest covenant, which is currently 2.5x. Although we are well clear of this covenant today, the extent of the recent downturn is unknown, and we want to ensure access to all sources of liquidity, including our revolver. In the first quarter, we purchased and canceled approximately 3 million of our outstanding shares. I'll note that we have significantly reduced the pace of our share repurchases to a minimized level as a component of our cash conservation initiatives. For 2020, we expect depreciation to be approximately $320 million. We now expect SG&A to be approximately $65 million to $70 million before share-based compensation expense. This guidance compares to the 2020 guidance provided in February of $90 million. We expect cash interest expense to be approximately $100 million and expect cash taxes to remain low, with our effective tax rate to be in the 20% to 25% range. I will now turn the call back over to Kevin.

Thank you, Carey. As I look ahead to what is likely the most challenging downturn I have encountered in my 38 years, I believe investors should concentrate on a few essential factors regarding oil service providers. These factors include the company's financial and competitive positioning and management's ability to control the business and fulfill commitments. For Precision, we perform well across all these areas, beginning with our financial positioning. While we are carrying more debt than we would prefer, our management team has been focused on reducing debt and managing maturities for several years. Our progress has been impressive, surpassing and increasing our debt reduction targets while strengthening the company more than it was just a few years ago. Debt reduction remains a top priority for Precision. However, as Carey pointed out, with the business declining and long-term visibility being uncertain, our immediate focus has shifted to maximizing liquidity, cash generation, and maintaining full access to our revolver. We are proactively seeking relaxation of revolver covenants to stay ahead of any potential limitations and to manage closely all we can control. Regarding cash generation, Carey's comments covered this well, but I would like to emphasize that we meticulously review all spending, cash receipts, cash commitments, and receivables on a daily basis. We are closely monitoring every dollar we can manage. We recently upgraded our ERP system, which offers real-time detailed visibility and oversight on every spending item, proving to be an invaluable tool in our efforts to control expenses. I believe we are financially well-equipped to navigate an extended period of low customer demand. On the competitive positioning front, I believe Precision is also in a strong position. Our strategic focus on operational excellence and technology commercialization aligns us well for both the downturn and, ideally, the recovery. In terms of technology initiatives, we continue to see the anticipated commercial returns from our AlphaAutomation systems and are making good progress in introducing AlphaAnalytics and AlphaApps in the field. During the first quarter, we expanded our AlphaAutomation coverage by adding 6 rigs, bringing our total to 40 rigs, which includes 2 training rigs. Consequently, we have 38 rigs in the field utilizing AlphaAutomation. Currently, we plan to slow down additional installations until customer demand for rigs increases. In the first quarter, we partnered with a U.S. customer focused on natural gas drilling to trial AlphaAnalytics with their group of Precision rigs. We believe the customer is already recognizing the efficiency improvements, and we anticipate being able to fully demonstrate the value of this service as the trial continues. Additionally, during the first quarter, an international oil company operating in the Permian activated AlphaAutomation on all their Precision rigs and will be utilizing several apps. We believe the success of this program will contribute to market share gains as the year progresses. When the rig market stabilizes, we expect customers to refocus on capital efficiency, drilling efficiency, and overall cost improvements in well construction. Digital technology will undoubtedly lead these efficiency gains and cost-saving efforts, and Precision is well-positioned as a pioneering drilling contractor. Regarding our focus on operational excellence, I believe our market share success year-to-date is proof of this initiative's effectiveness. According to our mid-February call guidance, Precision's U.S. market share rose by a few rigs, peaking at 58 in late February, a level we maintained until late March. The rig count only began to decline when oil price volatility increased, and we finished the quarter with 56 rigs operational and 3 rigs in standby. In Canada, we peaked at 83 rigs running in late January, achieving a market share in the 32% range, a record high for Precision. We maintained that share with operations in the high 70s until the end of February, with a decline in activity only occurring in mid-March. Overall, Precision's activity in the first quarter in Canada was 33% higher than in 2019, while the industry activity rose by less than 10%, clearly illustrating our activity gains. As we entered this downturn, I was pleased with our competitive positioning, and even during the first 6 weeks of decreasing rig counts, we continued to modestly improve our market share. Currently, we have 35 rigs operational in the U.S., with 5 in standby. Recently, we have noticed a pause in customer discussions regarding activity reduction, suggesting that most near-term spending decisions have been completed and are now being implemented across the industry. We believe industry activity will continue to decline for several weeks as these decisions unfold. For Precision, we expect our U.S. activity to stabilize in the low 30s for the remainder of the second quarter, representing a decline of 40% to 50% from peak levels. We anticipate maintaining the 5 standby rigs throughout the second quarter and see potential to add a few rigs later in the quarter or by July, depending on natural gas price developments. In Canada, the month of March concluded with 15 active rigs for Precision. Presently, we have 11 rigs active, while the industry has only 23, both representing historic lows for the Canadian segment. The prospects for seasonal recovery in Canada appear weak. We foresee potential activity for Precision moving into the upper teens or low 20s in the third quarter, and increasing toward the upper 20s or low 30s later in the year. We expect all-time lows in Canada to persist throughout the year. We believe that our fleet of pad-style Super Triple rigs and the highly efficient Precision Super Single rigs will support a strong market share in Canada for the second half of the year, consistent with the first half. We also anticipate being well-positioned for the eventual recovery in Canada, benefiting from our scale and cost advantages through this downturn. For our international segment, while the business is generally more stable than the seasonal Canadian and cyclic U.S. markets, we foresee that low commodity prices and country lockdowns could impact activity. As noted earlier, two of our ST-3000 drilling rigs in Kuwait are due for contract renewals later this year. We still expect these rigs will renew, but potential delays may occur due to administrative procedures currently happening in Kuwait. However, the rest of our Kuwait fleet is contracted for the full year without interruptions expected. Our 3 rigs in Saudi Arabia are also contracted for operation throughout the year and are expected to continue as planned. We will keep marketing our 4 idle rigs in the region, which are included in several active tenders, but do not expect any near-term contract awards. In general, long-term visibility remains unclear. While all of our term contracts are performing as expected, we believe that customers will exercise caution when it comes to long-term planning, awaiting the normalization of the economy, restoration of oil demand, and management of excess oil inventories. Turning to our well service business, as Carey stated, activity in 2020 began slower than anticipated due to cold weather. Following the decline in WCS prices, we ended March with only a few rigs operational and have faced very low activity since. The Canadian federal government's recent announcement of $1.7 billion for low abandonments is expected to have a significant effect on this business. These funds will be allocated to each province for administration and distribution. Alberta has already provided guidelines for the initial phase of its $1 billion portion and has committed to direct funding to service providers in maximum lots of $30,000 to work with well owners on abandonments. We view this as an excellent strategy for channeling funds to create maximum jobs with positive impacts on the industry. We thank the federal government for making this funding available and congratulate Alberta for establishing a capital-efficient disbursement process that creates jobs while supporting the heavy well services sector. For Precision, we expect to secure our share of this work, significantly enhancing our well service business while preserving several hundred essential field jobs. The direct impact on the well servicing industry is estimated to be in the hundreds of millions of dollars range. In conclusion, I would like to express my gratitude to all Precision employees for their high performance even amid these challenging circumstances. I will now turn the call back to the operator for questions.

Our first question comes from James West with Evercore ISI.

So, Kevin, the good thing is you have experience with situations like this, although perhaps not this intense or sudden. You have the knowledge to navigate it. I found your recent comments about customer discussions noteworthy. They've shifted from discussing activity reductions to more finalized decisions. Can you provide more details on this? Are these from decisions that have already been made? Is it a wait-and-see situation? Is there a specific oil price expectation they're considering or preparing for? Could there be a rapid reversal leading to further cuts? That's really the crucial point.

Well, maybe the short answer would be yes to everything you said. But James, probably a little more helpfully. Let me kind of walk through what I think is going on. We've seen this over the last 3 or 4 years, really going back to 2014. When our customers have a higher range of uncertainty, they tend to do a lot of action kind of prior to normal cycles of public disclosure like quarter ends. So when there's a lot of uncertainty, we see them cutting rigs. When there's strong prices, we see them adding rigs. And they do most of that work in advance of their public disclosure, so they can come on in their conference call or their press release and say, 'We have already changed our budget. We've made the cuts. It's done.' So I think that were finished for our customers a couple of weeks back. Now they've been preparing their financials and getting themselves ready for their Q1 reporting, much like we do ourselves. But I think everything right now is ephemeral and could change. Recognize that we've got a nice footprint for natural gas drilling, which I think is stronger than oil right now. We have customers that are hedged, and we'll continue drilling through the year. I think that most of our customers have good rigs. The drilling departments really hate to let the rigs go because the crews are trained up and understand the drilling program. There's a moving cost to demobilize the rig, which you don't see in other services. So I do expect to see a little bit more stability in drilling than maybe some of the other ancillary services, combine that with the hedge books and natural gas drilling. So I feel like we're stable now through the quarter, and we'll see how things look in Q3.

Okay. Okay. Fair enough, Kevin. And then a follow-up for me. With the long-term commitments that you have, would you entertain rate reductions there? Or would it have to be, if I give a little on rate, you got to give me a little more on time, a little blend and extend-type conversation?

Yes. I think the best way to describe it, James, is that we're highly disciplined in tracking our revenue per period. So if we can contain revenue and EBITDA inside a period, I'd say that's very important for us. That's the first guiding principle inside our team, but we also want to show our customers that we're prepared to work with them and show some flexibility. I would say that our least preferred method is blend and extend. I think there's other things we can do to help our customers around their economics.

Our next question comes from Taylor Zurcher with Tudor, Pickering, Holt.

Kevin, I wanted to follow up on your previous answer. It seems you anticipate the U.S. market to bottom out in the low 30s. You mentioned having about 33 contracted rigs in Q2. Should we infer that for Precision, with the potential opportunity to add a few natural gas-focused rigs in the coming months, you believe the rig count will actually reach its lowest point in the U.S. in Q2? Or is the visibility still insufficient to make that prediction at this time?

I won't go so far as to declare a bottom, but I believe that for the second quarter, our customers have finished their planning and will start focusing on the third quarter after their current disclosure period. Additionally, given the current level of uncertainty, I think the reductions they have made or will make in the next few weeks might be excessive. To summarize, I wouldn't be surprised if the rig count reaches its lowest point late in the second quarter, though it's difficult to predict.

Okay. Okay. And then just following up in the U.S. I didn't hear any quantitative guidance on margins for Q2, but clearly, there's some negative headwinds both on the pricing and fixed cost absorption side. And is there any way to frame which one is a bigger headwind for you heading into Q2? I suspect on the day rate side, it's going to be essentially 100% contracted activity at fairly good rates. But any way to frame the magnitude of reduction on either the revenue per day side or the cost per day side heading into Q2 in the U.S.?

Taylor, so I would say that quantifying what our margin guidance will be is difficult to do. The day rates will be really well supported from contracted revenue and idle but contracted rigs. We do have a bit of headwinds with fixed cost absorption just with lower activity, but we expect to counter a bit of that with just more intense cost control and some price breaks where we can get them with third parties in our operations.

Our next question comes from Aaron MacNeil with TD Securities.

You've announced some proactive steps today that clearly improve the liquidity position, but you've also alluded to the fact that demand for your services will be significantly reduced well into next year. I also can't help but draw comparisons to 2016 when Precision had much higher debt levels but was also sitting on $475 million in cash. So Carey, I guess I'm wondering, are you more or less comfortable with the overall financial position today than you were, say, in Q1 of 2016? And to the extent that you'd be willing to share it, what kind of stress testing have you done to give yourself comfort over the covenant relief that Precision can withstand not only during a prolonged downturn but may also be able to quickly rebuild working capital in a recovery?

I believe there are many factors influencing these decisions and sentiments. What reassures our team the most is our ability to adjust costs, including operating expenses, fixed costs, and capital expenditures. As a result, the amount of EBITDA needed to achieve free cash flow can be relatively low. From this perspective, we are confident in our ability to remain free cash flow positive. Access to the revolver is crucial, which is why we sought covenant relief earlier than most would have anticipated. You may notice a slight shift in our approach to cash usage. During 2018 and 2019, with good visibility and contract signings, we allocated all our free cash flow to debt reduction, exceeding our targets each quarter. Currently, visibility is not as clear. We have a solid cash balance and full access to the revolver, so we are likely to prioritize maintaining strong liquidity. We will wait for greater visibility or for actual cash generation to exceed expectations before we begin to focus on reducing debt further.

Aaron, I might add a couple of points on the kind of more market positioning today versus 2016, and I would say that even over the past 4 years, you've seen a tightening or a consolidation in the space around the Tier 1 rigs and kind of the top 4 or 5 builders in the U.S. and Canada. In Canada, you've seen actual M&A consolidation. So the markets are more constructive now than they were back in 2016. So we think our market position is a bit better than it was back in '16, both in the U.S. and Canada, and expect to see good discipline through this downturn and on the rebound side by ourselves, the other major industry players. So we think that gives us probably more confidence in the torque, in the bottom and the rebound.

And Aaron, I'll add one other point there, and I think this is a comment for Precision but also probably for the industry. In 2014, the industry in the U.S., we're running about 2,000 rigs and then went into a really steep downturn. So I think company's mentalities, cost structures, a lot of things had to be changed pretty drastically. As we enter this downturn, although on a percentage basis, it's very steep and steeper than what we've seen, I think the industry has been through 6 years of cost controls, efficiency gains. And the mindset is already there, so I think we can act a little bit quicker to adjust to a lower activity environment.

Okay. That's helpful. And Kevin, you already sort of alluded to it, and I can appreciate there's effectively no price discovery today. So rather than getting into specifics on where you think pricing may or may not go, perhaps you can kind of outline for us, at least anecdotally, what we can expect from Precision in a scenario where even super rigs are featuring much lower utilization than they have in the past.

I believe we discussed technology in my prepared remarks, specifically analytics and AlphaAutomation. I anticipate these will stand out, especially during the downturn and recovery phase, with noticeable performance on those rigs. This isn't only applicable to Precision; a few other contractors are implementing similar strategies within the industry, although it is mostly confined to around three or four companies. I expect to see strong discipline in service delivery, service quality, and pricing during this downturn. Additionally, I expect our customers will have better metrics to evaluate our performance, which we will be able to showcase effectively. However, I will refrain from providing any specific numerical guidance.

Our next question comes from Connor Lynagh with Morgan Stanley.

Could you discuss whether there has been any significant change in the number of services your customers are requesting from you, particularly concerning the apps and other digital services? Has this been a focus for cost cutting, or is the overall mix across your rig fleet similar to what it was about six months ago?

There have been a lot of changes in just the last 10 weeks, Connor. We've been in discussions with procurement, legal, and finance departments for the past 6 weeks. We're not hearing from operations about cutting back on rigs or discussing contract exits. Most of our talks have focused on commercial and legal aspects rather than operations, except for the points I mentioned about technology. I hinted that once this process concludes, which might be the case now, we expect our customers to re-engage their operations teams to enhance fuel performance. In many cases, operations teams have been sidelined as finance and procurement teams have handled contracts, shifting focus to liability management instead of operations management. However, we anticipate a shift back to operations management soon, possibly quite rapidly. For the two accounts I previously mentioned, the IOC and the natural gas driller, they continue to prioritize efficiency, and they have their plans ready. We're also exploring new technology opportunities with both of them. I'm not sure if I answered your question directly or indirectly, but I believe I touched on the relevant points.

Yes, I think you got the gist of it. I guess the one remaining question on the technology side of things is, in these discussions, have there been just conversations about potentially lowering or altering the price or pricing arrangement on these services? Or is it entirely focused on rig day rate?

Well, I'll give you my standard lines. The procurement teams are facing pricing pressure on every aspect they can influence. When interacting with a procurement officer at an exploration and production company, any aspect is a potential area for negotiation. We've heard a lot about performance-based contracts and oil index contracts recently. These contracts provide more avenues for negotiation, and we've observed procurement agents trying to leverage these opportunities. Additional factors like technology or casing running also serve as price points that the procurement officer will try to negotiate. Our responsibility is to remain disciplined and demonstrate our value. I don't believe the situation has really changed; the more price points we offer for negotiation, the more work they perceive they have. Our focus is to maintain our discipline and affirm our value.

Our next question comes from Kurt Hallead with RBC.

I would like to get an update based on your previous comments. You mentioned specific debt reduction targets that you have been working on for the last couple of years. Carey, you commented that you would resume your debt repayments once you have more visibility or if cash exceeds expectations. Could you provide some guidance on what cash level would trigger the resumption of debt payments, or clarify if I've misunderstood your comments regarding debt reduction? That would be helpful.

Yes. First of all, I would say that the goal for the year remains the same, but we're probably going to slow down a bit on the pace. We did $40 million in the first quarter, and I wouldn't expect a $40 million reduction in the second quarter. And in terms of cash on hand, it's a bit of a function on what our contract book looks like and what our visibility is on how much cash we're comfortable or how little cash we're comfortable holding. But just to ballpark it, I think kind of in that $75 million to $100 million range is right now the amount that we want to make sure we have access to.

I appreciate that. I also want to understand if you expect working capital to be a positive contributor to cash this year.

Yes, absolutely. On the press release in March on kind of our cost reductions and update on our liquidity, we said we expected kind of $80 million to $100 million of working capital to convert to cash from the first quarter onwards. I think we got a little bit of that in the first quarter. We'll have a good chunk in the second quarter and maybe a bit more in the third quarter. So I think that guidance still holds.

Okay, Kevin, as we consider the current downturn, everyone is focused on reducing costs in both exploration and production as well as drilling. Eventually, as the economy recovers, we should see a pickup in oil demand and prices. At that point, exploration and production companies might start looking to deploy rigs again. Given the significant workforce reductions we've seen, what kind of delay do you anticipate when recovery signs emerge and E&Ps look to restart operations? Additionally, how many of the affected workforce do you believe will be willing to return to the industry? Any insights on this would be greatly appreciated.

Kurt, that's a very good question. It's quite complex, but I can share a couple of examples. In the first quarter in Canada, we experienced more activity than we anticipated, and we managed to meet that demand by increasing our rig operations, running 10 to 12 more rigs than expected in about two weeks. Starting from a low of around 30 rigs during the Christmas break, we ramped up to 50 or 60 rigs within a three-week period. This illustrates our capability to quickly adjust operations in Canada. We have structured our operations there to handle seasonal and cyclical changes effectively. If demand rises in Canada, our team can respond and bring rigs back to work, even after significant cost reductions at our bases and headquarters. In the U.S., though our business isn't seasonal, we have been strategic with our staffing. We’ve retained our rig managers, field superintendents, and drillers by reallocating them across rigs, allowing our teams to improve. When it comes time to restaff, we already have the leadership ready, which will help us quickly return to the 50- to 60-rig capacity. I believe we can get back to our Q1 activity levels efficiently within weeks or a couple of months. However, if we aim to increase from around 60 rigs to the 80-rig range, that may require more time, possibly several weeks to a couple of months. I hope to finalize those plans soon.

Yes. All of us would, for sure. Maybe just one follow-up as well for you, Kevin. I know that again, there's limited kind of data points to work with in the U.S. with respect to pricing, but I'm sure there's multiple data points to work with in terms of letters from clients, customers asking for price concessions. What's your sense on that? And I asked the question just because in the U.S. as in Canada, it's a not really going to incentivize more rigs going to work by dropping price. So just want to get a general sense for how you think the industry may react on that dynamic as we kind of go through this downturn.

There's no price at which we can offer a drilling rig that will lower their cost to breakeven with WTI at $18.41. So simply, no price companies can give that will make them breakeven. We know that. Our large public peers know that. We're all quite disciplined. I think we're going to want to show flexibility and responsiveness, but I don't think we can transfer value from our rigs and erode our rigs to support our customers. I don't think that'll happen. So I just don't expect you to see large public companies operating at cash breakeven levels, which would not pay the depreciation or the maintenance capital on those rigs, which supports pricing upper teens, low 20s, not low teens.

Our next question comes from Blake Gendron with Wolfe Research.

Pretty interesting commentary, the federal government, the federal P&A program that you mentioned. Just wondering, out of the $1 billion or $2 billion that was cited, how much of that falls into the part of the value chain that your C&P segment operates? And then what your market share? Is, and potentially what the timing, I guess, of this program could be over the coming quarters? It's been a small part of the model, obviously, but just to help us gauge potentially as a buffer to downside risk in other segments.

So the first comment I'll make is after the political announcement gets made, it often takes a few weeks to get the bureaucracy in place to actually execute these plans. But what we have seen so far is that the $1.7 billion is split between Alberta, British Columbia and Saskatchewan, with Alberta getting the largest portion. Alberta hit the ground running, and they announced that they're going to be open for applications starting tonight to start applying for those $30,000 chunks that will come straight to the service company. So ourselves, along with cementing companies, consulting companies, will be applying for those $30,000 blocks and then working with our customers to identify targets for well abandonment, and that's how it's going to progress forward. Just thinking about the full value of the $1.7 billion, probably in the range of between 50% and 70% will flow to well service companies like ourselves, and this is targeted to last through 2022. So it's a 2.5-year program. Our market share in Canada would be anywhere from 12% to 15%. We would think that there has been some attrition in the Canadian fleet, and that could continue because I think some companies cannot survive the coming weeks even with this incentive program. So we could see our market share gains even in a tough market in Canada. So we could garner even larger than our regular market share of that spending. But if you just flow through that math, that's a material change for us. That could be in the $10 million or $20 million range this year alone, which would be very helpful for that business.

Got it. That's helpful. And then just a follow on the market positioning questions. The rig count fell pretty substantially in the last downturn, just like it is now. But underpinning the last downturn was a secular adoption of pad optimal rigs. I was just wondering, these are long-lived assets, if there's anything from a hardware standpoint that might see some of the older, even pad-capable units start to come out of the market in this downturn, and then if you could specifically call out which attributes of the rig would kind of be a threshold for that phenomenon playing out. Or do you think it's going to be more on the digital side in terms of differentiation as we exit this downturn?

Yes, that's a good question. Some of the pad rigs delivered early on have been in heavy use for quite some time. Mud pumps and top drives wear out quickly, and many components of the rotating machinery are wearing down as well. The mud tanks and walking systems are also seeing a lot of use. During a downturn like this, some companies may enter a phase where they're not maintaining their equipment as well as they did a few years ago when cash flows were stronger. I expect that even some of the pad optimal rigs may become economically unviable or require so much capital that the market size will diminish a bit. I believe that larger drilling companies, including us, have been effective in maintaining their assets. I do not anticipate any retirements in the Precision pad optimal fleet or Super Triple fleet in the next few years, and I think our larger counterparts are in a similar situation. However, some smaller players who may be under more financial stress may find their assets becoming less relevant. They may disagree with that assessment, and without access to their financials, I cannot say for certain.

Our next question comes from Waqar Syed with AltaCorp.

My question is about your international contracts. With the OPEC production cuts, could there be any impact on the activity of the six rigs you have under long-term contract? Additionally, is there any pressure to give price concessions?

There has been discussion in Saudi Arabia about Aramco sending out letters. We have experienced this before, and since we are a relatively small player in the region, I do not anticipate any significant changes to our operations in Saudi Arabia. Regarding the question about OPEC reductions, it’s positive to note that national oil companies are focused on long-term strategies. In the short to mid-term, production and shipment constraints are expected to continue, likely increasing in the next few weeks. However, in the long run, they still face declining production curves, so I believe oil drilling in Saudi Arabia will remain fairly stable. The situation in Kuwait is harder to predict as they have been moving towards an Integrated Project Management model in recent years. We anticipated renewing the two rigs we have this year, but the delay is not due to OPEC actions or curtailments; rather, it seems to stem from a shutdown occurring within the country. We understand there were drilling plans for those rigs, but there is currently no one available in the office to execute the contracts.

Okay. You mentioned that there is an increase in natural gas rig activity in the U.S. Can you provide more details on that? Are you currently in discussions about getting rigs back to work there, or is this just an expectation for now?

No, we have a few customers we are talking to, and we even have some turnkey opportunities we are currently considering, which unexpectedly seems promising. We believe these could lead to activity in this quarter or the next. However, this largely depends on factors like gas prices, contracts, and funding. These are all smaller opportunities; we're not dealing with large contracts, but we're actively looking for any chance to keep our rigs busy.

Sure. Okay. And then in terms of the Alpha series of technology that you have, is there any opportunity in this kind of environment in the international markets as well? Or that needs to wait until the market improves?

Well, that's a really good question, one I didn't even come here thinking about before we got here today. I can tell you there's 0 opportunity while the offices are closed. We need to have drilling engineers in their office so we can bring the technology and give the demonstration before we can execute it. But in a market which is kind of opening back up again and things are normalizing and the office closures are ended, and if Canadian and U.S. activity stays low, we will absolutely be pushing that technology into Kuwait and Saudi Arabia for sure.

Our next question comes from Ian Gillies with Stifel.

With respect to the debt retirements this year, acknowledging it's on pause right now, should we be thinking of that 100 to 150 as absolute dollars deployed or face value retired?

I think it's too early to say, Ian.

Okay. With respect to the incremental of $20 million of savings, are you able to provide any additional detail of where that demand came from?

Some of it is related to tax deferrals, some pertains to the system's programming, and there are also recurring lease expenses that we've managed to defer. Overall, it’s a combination of various factors that contribute to that total.

Okay. Last thing on the staffing front now. Are you able to provide any detail around where you may be staffed now from a rig count perspective? How many rigs do you think you could run maybe in the U.S. and Canada, given how many people you're holding? Is it relatively in line to what your guidance was heading into Q3 here?

Yes. I think we have a pretty good sense internally. I don't want to be pointing the market up or down based on what we've done around G&A and sizing our organization. But I'd tell you that running somewhere in the range of 30 to 50 rigs in the U.S. We think we can handle with our current size and running somewhere between the dismal 11 rigs right now, and maybe 30 or 40 rigs in Canada is probably where we're at right now.

Perfect. Maybe last one for me. From a strategic perspective looking longer out, I know you guys have wanted to or hoped to grow internationally. Is there any particular areas you're paying attention to as this pain, I guess, goes on and that you might like to enter once things start to settle out a little bit here and there's a bit more clarity moving forward?

It's currently difficult for us to assess how the recovery will unfold. I would say there are likely more distressed international rigs compared to domestic North American rigs. Therefore, our focus is somewhat divided between the international market and North America. There is a significant number of international rigs facing debt issues. We are not considering deploying capital for those rigs, but there may be opportunities for management contracts, leveraging our scale and systems to manage other assets. I am uncertain about the future of those rigs or who will acquire them, but we have a solid system in place, especially in Saudi Arabia, Kuwait, and eventually in Kurdistan, to support and manage operations without incurring additional costs.

Our next question comes from Dylan Glosser with Simmons Energy.

You mentioned a peak market share in Canada of roughly 32%, I think it was back in January, and that you expect to efficiently get back up and running. Do you mind discussing how you expect to maintain or grow your market share through the next several quarters in Canada?

Well, I think if you do the math on 11 out of 24 in Canada right now, we're probably 46% market share. But I think that's a little bit of a mix issue between our Deep Basin rigs and our heavy oil footprint. I do think that what's going to keep on running in Canada will be the Montney play to some extent, and then it gets pretty sporadic after that. And our footprint with our Super Triple rigs, the Montney and the natural consolidation that's taken place, you've only really got 3 drilling contractors that are active with Super Triple net basin. So it makes for a very consolidated competitive environment. I think that plays into Precision's hand a little bit for Canada. Is that helpful?

Yes. Yes, sir. And kind of another topic here. As you guys look at free cash flow generation through 2020, and without taking into account working capital, do you expect to be free cash flow breakeven through Q2 and Q3?

Yes. I would expect us to be cash flow breakeven in every quarter.

Our next question comes from Dan Healing with Canadian Press.

I was just wondering if you could give me an idea of what the headcount is now versus same time last year or the end of last year in Canada and the U.S.?

I don't have the exact numbers right now, but it's significantly lower. In the U.S., we are currently operating 35 rigs compared to nearly 80 at this time last year. That's approximately 45 rigs less, or about 40 people per rig across the company. This brings us to around 1,800 people in the U.S. In Canada, the situation is similar, with about 1,000 fewer people than last year across our drilling and well servicing teams. One of the hardest aspects for Precision has been that, traditionally, we avoided layoffs in our offices, but we've had to make cuts in Houston, Calgary, and Red Deer. Several long-term employees, some with over 30 years of service, have been asked to retire or leave the company. This has been very challenging for the employees over the past several weeks. We are hopeful that in a recovery, we can bring some of those individuals back. However, the numbers are quite overwhelming at times.

Okay. The Petroleum Services Association put out a revised forecast today that called for more help from the federal government on top of the well cleanup program that they announced. Do you see the need for more aid for the drilling and services sector as well?

Dan, the $1.7 billion they've announced so far, we're grateful for. It supports the well services business very well. But unfortunately, it doesn't do much for the drilling contractors or the drilling segment, which is going to go into kind of all-time record lows. So I do think that the CAODC is petitioning for more help for the drillers. There's no question the industry needs it because a number of drilling contractors have zero rigs running right now. It's a very tough environment for a lot of the smaller drillers, and I think that help is needed.

I'm not showing any further questions at this time. I would now like to turn the call back over to Dustin Honing for any closing remarks.

Thanks for joining us on our Q1 call. I look forward to talking with you in the future.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.