PRECISION DRILLING Corp Q2 FY2022 Earnings Call

Thank you, Michelle, and good afternoon. Before we begin our call, I'm pleased to introduce Lavon, who joined Precision a little over a month ago as Director of Investor Relations. Lavon will be overseeing Investor Relations activities for Precision and we are delighted to have her on our team. With that, I'll hand it over to Lavon.

Welcome to Precision Drilling's 2022 Second Quarter Earnings Conference Call and Webcast. Participating on today's call with me will be Kevin Neveu, President and CEO, and Carey Ford, our CFO. Earlier this morning, Precision reported strong second quarter results, which Carey will review with you, followed by an operational update and outlook commentary from Kevin. Once we have finished our prepared comments, we will open the call to questions. Some of our comments today will refer to non-IFRS financial measures and will include forward-looking statements, which are subject to a number of risks and uncertainties. Please see our news release and other regulatory filings for more information on financial measures, forward-looking statements, and risk factors. As a reminder, we express our financial results in Canadian dollars unless otherwise indicated. Kevin, over to you for some introductory comments.

Thank you, Lavon, and good afternoon. For today's earnings call, I'd like to draw your attention to three key themes. First, customer demand for our super triple drilling rigs in our U.S. and Canadian markets continues to strengthen, and with extremely limited industry supply, rates and margins continue to increase. Second, we continue to make excellent progress maximizing operational leverage, tightly controlling our costs, and expanding our margins. Our well servicing acquisition will deliver cost synergies and fuel margin leverage, and all of our leading indicators are pointing to stronger financial performance for the remainder of this year and through 2023. And third, we are firmly on track to deliver on all 2022 strategic priorities, which include scaling our digital and ESG offerings, generating free cash flow, strengthening our balance sheet, and reducing both debt and debt leverage. I'll now ask Carey to review our second quarter financial results.

Thanks, Kevin. Precision's revenue in the second quarter was CAD326 million, 62% higher than the same period last year, while adjusted EBITDA of CAD64 million more than doubled from Q2 2021. On an annualized basis, adjusted EBITDA, if we exclude stock-based compensation and the well control event, was CAD75 million. The results reflect steadily increasing North American drilling activity and demonstrate our success in maximizing operational leverage to expand margins. Q2 drilling activity increased 41% in the U.S. and 35% in Canada compared to the same period last year, and day rates increased 25% in the U.S. and 30% in Canada. During the quarter, we experienced a well control event on a turnkey project in the U.S. The crew followed proper procedures and was able to evacuate the well site safely with no injuries. We are appreciative of our field leadership's actions resulting in this safe outcome. As per the accounting for the event, we are recognizing a gain on disposal of approximately CAD4 million, the difference between the net book value and the insured value of the rig. We are booking zero revenue, a loss of CAD5 million for the cost of the job and the insurance deductible. We are writing off the net book value of the rig of CAD1 million through depreciation. For the associated well site cleanup and remediation costs, we are accruing CAD12 million in accounts payable and offsetting the payable with CAD16 million in insurance receivables, which covers the expected cleanup and remediation cost and the insured value of the rig minus a CAD1 million deductible associated with the turnkey job. The remediation process is ongoing, and any decreases or increases in costs will be reflected on Precision's balance sheet until insurance proceeds are received. For the quarter, the negative impact to adjusted EBITDA was CAD6.5 million, and we expect this to be the only income statement charge associated with the events. We expect the cash impact of this event to be neutral once insurance proceeds are received. Moving to the U.S., our daily operating margins for the quarter absent any turnkey or IBC impact was CAD7,174, CAD1,505 higher than Q1 and in line with our guidance of CAD1,500 per day increase. With the repricing of the spot market rigs, the impact of Alpha Technologies, and improved fixed cost absorption, we expect normalized margins to increase by approximately CAD2,000 to CAD2,500 per day in Q3, resulting in average margins in the mid CAD9,000s per day for the quarter and moving through CAD10,000 per day into the fourth quarter. As a reminder, on our Q2 call last year, we forecasted U.S. field margins to bottom during the second half of 2021, which played out with daily margins hovering in the low to mid CAD5,000s per day through the first quarter of this year. With our forward guidance, we are projecting field margins to nearly double from Q1 to Q4 and continue to increase into 2023. In Canada, our operating margin was CAD7,736 per day in Q2. Excluding the impact of CEWS in 2021, our quarterly daily margin increased CAD2,489 per day and significantly exceeded our guidance of CAD500 per day increase. A strong margin performance was supported by higher day rates, Alpha Technologies, and increased labor and cost recoveries. Of note, as our higher daily operating costs during the quarter, we have previously communicated inflationary impacts within our daily operating costs, mainly labor and repair and maintenance, and these factors have certainly driven costs higher on both sides of the border. In Canada, during the quarter, we incurred additional operating costs due to higher pass-through costs associated with our operations. We've had productive conversations with our customers about certain operating capital costs such as excess wear and equipment and provincial taxes, and have agreed to pass through the higher costs which has resulted in higher daily operating costs and higher day rates. For Q3, we expect daily operating margins to increase to CAD8,000 to CAD8,500 per day, a year-over-year increase of approximately CAD3,000 due to improved pricing, the impact of Alpha Technologies, increased cost recoveries, and fixed cost absorption. For reference, daily operating margin in Q3 2021 excluding CEWS and one-time recoveries was CAD5,303. Moving to our C&P segments, our revenue increased 60% to CAD33 million, while adjusted EBITDA was CAD5 million. These results were positively impacted by a 14% increase in well service hours and improved pricing as the industry-wide shortage of high-quality assets and skilled labor is driving day rates up. Our recent well service acquisition provides needed consolidation within the well service industry. With our expected cost synergies of CAD5 million annualized and our ability to leverage our scale, we believe this is an accretive transaction with the potential to generate significant cash flow and support our debt reduction strategy. We expect the transaction to close in the coming days. We remain firmly committed to reducing debt by over CAD400 million between 2022 and 2025 with a target of CAD75 million this year. During the quarter, we reduced our senior credit facility balance by CAD70 million and ended the quarter with CAD52 million in cash and more than CAD540 million in available liquidity excluding letters of credit. Our net debt to the trailing 12-month EBITDA ratio is approximately 4.5 times, and the average cost of debt is 6.6%. We expect our net debt to adjusted EBITDA before share-based compensation expense to be closer to three times by year-end and decline further into 2023 toward our goal of below 1.5 times. With rising concerns about high-spec rig availability, customers are seeking longer-term commitments and we're locking in higher day rates with take-or-pay term contracts, particularly for opportunities that require capital for rig upgrades. This is driving an improved outlook for Precision's free cash flow in the second half of the year and into 2023. To deliver on our customer-backed rig upgrades, of which we expect over 20 during 2022 and certain drill pipe commitments, we are increasing our capital budget to CAD149 million for the year, up from CAD125 million. As a reminder, for our upgrades, we require full cash-on-cash payback within the term of the contract and rates of return well above our cost of capital.

Thank you, Carey. There's no doubt that the customer demand and market tightness we discussed in our first quarter conference call is gaining momentum, and we see this across all North American service lines. In the United States, we're currently operating 57 rigs with confirmed bookings and contracts. We expect activity to climb into the high 60s later this year, and virtually all Precision Super Triple rigs will be active. Day rates continue to rise as industry supply is very tight for this rig class, and customers sensing rig shortages are willingly entering term contracts at the highest leading edge rates. Since the beginning of this year, we've added 39 term contracts. Some of these involve rig upgrades, as Carey mentioned earlier, ranging from automation to the addition of third pumps with generators and padlocking systems. Also included are several EverGreen Battery Energy Storage systems, EverGreen Highline Power systems, and the EverGreen Power Management and Emissions Monitoring apps. As Carey mentioned, all capital upgrades are backed by take-or-pay contracts which will return the capital invested both in the contract term. Today all of Precision's active Superior Triple rigs are drilling on multi-well pads and virtually all have extended horizontal drilling capabilities. Over two-thirds of these rigs utilize Alpha Automation and Alpha Apps, and many are adopting Alpha Analytics to further enhance drilling performance. Leading edge day rates for these rigs are now approaching the mid CAD30,000 range, with Alpha Digital Services over and above that rate. Market pricing discipline remains a key tactical consideration, and during the quarter we rejected several bid opportunities with customer pricing expectations below our desired thresholds. We remain keenly focused on improving day rates and margin levels, which will ensure an appropriate financial return on our fleet investment, something we've not seen in several years. As Carey mentioned, our fleet-wide margins bottomed early in the third quarter of last year. We've already recovered by approximately CAD1,500, and we expect this margin recovery to pick up pace, as leading edge rates in Alpha Automation revenues filter through our fleet. As you can see from our previously reported day rate trends guidance, the lag time for fleet averages to approach leading edge rates is typically six to nine months. As such, we project a strong cash flow profile for the U.S. drilling business through 2023. Turning to our Canadian market, activity has rebounded to well above 2019 levels supported by the strong oil and gas commodity prices. Currently, we are operating 61 rigs and have visibility to over 70 rigs later this quarter. I previously mentioned the Clearwater play, which emerged late last year. We are seeing a strong rebound in conventional heavy oil, SAGD, and strengthening activity in most other oil and gas regions in Canada. The Precision Super Single rig is a rig of choice for conventional heavy oil safety in the Clearwater region, and we expect our utilization to exceed 80%, with leading edge rates progressing into the low CAD20,000 range for this highly cost-effective request. In the Montney and Deep Basin, gas and liquid activity remains strong. Permitting delays in British Columbia have led to several operators diverting activity to Alberta in the mid-term. Precision's Super Triple 1,200 remains a clear rig of choice in the region with well over half the pad triple market share. Currently, we're fully booked for a fleet of 28 Super Triples, but we see customer demand exceeding the available rates by several rigs for the first quarter of next year. While we do not believe that rising rig rates or even contract terms will stimulate new builds, the pricing potential of Super Triples will continue. This may also drive some incremental demand for the less efficient heavy tele doubles as customers compete for the most efficient rates available in the market. It is possible that we could mobilize one or two more rigs to Canada through the DJ Basin, as leading rates in Canada continue to push into the CAD30,000 range for these rigs. Returning to a healthy, profitable, and self-funded service industry is essential for our customers and for our investors. Precision's market position in Canada dictates that we lead the industry recovery for rates, margins, and financial performance. As I mentioned in the prior calls, our sales team has committed to pushing rates and marching Precision back to profitability, and there's no question this has led to uncomfortable conversations with some customers who have grown accustomed to the excess services supply and price deflation of the last several years, especially through the pandemic. Precision's pricing discipline has involved rejecting some work where customer pricing expectations are simply too low or customers are unwilling to accept take-or-pay contracts to cover rig upgrades. The short-term impact is that we've given up market share on the order of 10 to 12 rigs for Q3 and Q4 projects. However, this pricing discipline emphasizes our commitment to returning to profitability and sustaining a strong free cash flow profile. Customer adoption of Delta Automation in Canada has caught up with our U.S. market penetration, and the benefits of Alpha have become widely accepted by our Canadian customers. Today, over 60% of our Canadian Super Triple rigs are running Alpha, where we expect this will rise to over 80% by year-end. We're experiencing strong customer demands in our well servicing business segment and are thrilled to be adding 250 highly regarded people in 51 marketed rigs from High Arctic, branded as the Concord Well Servicing Group. With 48 Precision service rigs running this week, we are already hitting our Q1 peak, and we expect with the Concord team that our combined activity level will be in the 80 to 85 range later this quarter. Our highest-rated rigs are pushing over CAD1,000 per hour, and with several service rigs currently working 24-hour projects, we see a revenue profile that's very encouraging. Yet we believe we still have a ways to go with pricing and utilization gains as the segment continues to recover. Now, I've been talking about the importance and value of consolidation in this business line for several years now, and it's very good to execute this deal and bring these leads together. As mentioned in a press release, we expect short-term synergies valued at the CAD5 million range. I also believe that from a revenue and cash flow standpoint, the margin synergies will be much stronger over time. This acquisition will further demonstrate the operational leverage and scale value inherent to the Precision business model. The shortage of skilled labor is stressing all parts of our economy, and the oil service sector is not immune. Now, Precision's recruiting and retention performance has been excellent in all regions. Yet, we note the emerging safety challenges associated with a larger component of our field crews staffed with less experienced or green workers. This safety challenge has been intensified by those customers who seem overly focused on capital discipline, which prioritizes speed and efficiency. The safety of our people and the integrity of our safety processes are far away Precision's top operational priority. I mention this as it's imperative that the service providers and customers remain tightly aligned on safety as a key priority in the field. Now, turning to our international segments, the most important development is a large multi-rig tender we mentioned in our press release. This is a project we've been discussing for several quarters, and we expect to hear more over the coming weeks as the submitted tenders are now under evaluation by our customer. We remain confident that our idle rigs in Kuwait will be reactivated with long-term contracts later this year or early next year, and we continue to explore several other opportunities in the region for all of our idle rigs. Our business in the Kingdom of Saudi Arabia remains stable with three operating rigs recently renewed for a further five-year period. Finally, regarding our debt reduction and capital return commitments, we remain firmly on track to deliver on both targets. We'll continue to carefully manage our cash flow and uses of cash to ensure we hit both our short-term and long-term debt reduction and capital return commitments. You can see this in our opportunistic contract-backed capital spending programs, the creative consideration payment terms for the well service acquisition, and our intense focus on pricing, cost, and margin. I'll wrap up by thanking the people of Precision for their hard work and the excellent results they are delivering, and again, welcome the 250 employees joining Precision in our well service business. I'll now turn the call back to the operator for questions.

Our first question comes from Aaron MacNeil with TD Securities. Your line is now open.

Afternoon all. Thanks for taking my questions. Kevin, can you speak to what the capital commitment and scope of upgrade might be for the range of contracts you signed this quarter and maybe a particular focus on a handful of multiyear contracts that you signed? I guess, to ask the question more specifically, are those longer-term contracts a result of a higher upgrade cost? And where are you at in terms of the marginal capital cost of reactivation?

I'll catch part of this, and Carey will pick up part of it, Aaron. So, first of all, let me kind of cover what we're seeing in customer trends from contracting. I would say that the longer-term contracts are linked to longer-term customer spending plans. They're not linked to trying to extend the payback terms on a capital investment. We're targeting IRRs on these investments that are well above our cost of capital, but really looking at payback terms that return that capital probably in most cases in less than a year, despite contracts might be 18 months or two years. The scope of the upgrades are typically in the CAD1 million to CAD3 million range. If the rig needs a third pump, if it needs a fourth generator and a padlocking system, that would be the upper end of that range. We'll call that CAD3 million and maybe in some cases, CAD4 million if you're adding on Alpha. Many of these though, it might just be like a third pump with generator or just an Alpha upgrade. So, there's a range. The range is really from CAD0.5 million to CAD3 million or a little beyond CAD3 million.

I want to mention that some of these upgrades include EverGreen products like battery packs, falling within the range of about CAD0.5 million to CAD3 million or CAD4 million. This expenditure will be on the capital side. In the U.S. market, we are continuing to face costs in reactivating rigs, which have become more expensive. Previously, we quoted a range of CAD150,000 to CAD250,000 for these reactivations most of last year and early this year. Currently, the rig reactivations are exceeding that CAD250,000 range and potentially reaching CAD500,000. Therefore, we are experiencing higher operating expenses as we bring rigs back online in the U.S.

Understood. Kevin, on the paid Alpha days, I was surprised to see they're only at 4% year-over-year. Was there anything unusual going on this quarter? And do you expect to see growth in percentage terms over the balance of the year or?

I believe my team is improving utilization, which should contribute to our growth. We're at a stage where we added five Alpha systems in the first quarter. Consequently, the base numbers have grown significantly, making it challenging to anticipate a 50% growth going forward.

Understood.

And certainly there's no resistance. If you make it a little bit of seasonality in Canada, there's a bit of an explanation for some of that reduction. So, just a few moving pieces in the second quarter, I think Q3 results should be a little more indicative of the trajectory.

Maybe I'll ask for some clarification as well. The CAD5 million in operating costs related to the well control event, even with the CAD1 million deductible, seems quite high. What exactly is included in that figure, and are there mediations accounted for separately? It just seems like a significant amount considering what it typically costs to drill a well.

Aaron, we're drilling turnkey wells along the Gulf Coast in the typically gas wells. These wells could be anywhere in total cost from let's say, CAD1 million to CAD10 million. What you're seeing in this case is kind of the full cost of the well. At this point, we haven't begun to re-drill or reenter this well. We're still finishing up the remediation. I'd expect that we'll go back in and sidetrack and redraw this well and finish it off and recover a significant portion of that, but we're not giving any guidance on that yet.

Got it. Understood. Thanks for taking my questions. I'll turn it over.

Thank you.

One moment please for our next question. Our next question comes from Waqar Syed with ATB Financial. Your line is open.

Thank you for taking my question. Kevin, in terms of the well abandonment programs, it looks like there's a lot of runway in Alberta, it requires a lot of additional work. But you also have the federal program that could end at some point. How do you see the well abandonment program playing out in the long term for your business? And how does this acquisition kind of fit into that?

Waqar, good question. There are several moving pieces right now around abandonment. I think probably one of the more important things we didn't necessarily call is that the Alberta energy regulator is increasing the requirements on the operators to invest in abandonment. So, there's an increasing push, forcing operators to manage those abandonments to approve the abandonment and manage abandonment. We're seeing rising, I call it core demand on abandonments over and above the funded program that the federal government administered by the province. So, you've got three things playing together right now: a really heavy business driven by higher commodity prices stimulating some of that catch-up maintenance work; the regulator requirements that are going to increase the amount of maintenance work to abandon wells; and the tail end of the federal abandonment program that needs to be spent between now and next February. We see a lot of drivers kind of in the short term, but some longer-term drivers around company obligations to manage abandoned wells and increasing requirements. Certainly, we think that the well servicing business has a very strong outlook, with moderate to high commodity prices. Looking at the activity we have booked for the fall and winter right now, I think our timing of this acquisition was key for us, and we're keen to get that rig count up into the 80s, maybe higher as we bring on more staff.

And certainly you have critical mass in Canada in well servicing. How do you see your U.S. business? Is that the core business for you?

For us, we have a kind of like a wedge or a sliver in North Dakota, which borders on Saskatchewan. The assets are similar, the type of customers are similar, and we serve similar customers on both sides of the border. So, while it is U.S. revenue, it's adjacent to what we're doing in Canada. Here is adjacency than a strategic push in the U.S.

And Carey, the leading edge margins look to be in the U.S. and CAD13,500 to CAD15,000 type of range. Do you still think it takes six to nine months to get the fleet to those kinds of margins?

I think, as Kevin said, we've got historical precedence that usually is how long it takes to get the leading edge into complete averages. We've given guidance on specific guidance for Q3. I think we've gotten some soft guidance for Q4, and then look for continuing guidance quarter or two forward. Certainly, for the Super Triple 1,500, we're seeing the fleet reprice to that leading edge range, and then the 1200s are pricing a little bit lower. So, I think we've got some runway to get it meaningfully over CAD10,000. But I'll stop short of giving guidance on what the ultimate fleet average margin is going to be next year.

Sure. Just one final question. In terms of the rig involved in the well control incident, I understand that total write-off. What type of rig was involved?

It was one of our legacy 2,000 horsepower rigs that was upgraded to horizontal capabilities. We have another rig in the fleet that we'll be bringing in to re-drill that well, and continue with our turnkey business.

Great. Thank you very much.

Thank you, Waqar.

Thanks, Waqar.

Operator, you can queue the next question for us, please.

Yes, our next question comes from Cole Pereira with Stifel. Your line is open, please go ahead.

Afternoon, everyone. Kevin, you talked on it a little bit, but thinking about leading-edge Canadian day rates in the low CAD30,000 a day range, so from your comments, is that enough you think to move a rig up from the DJ? Or does it have to move a little bit higher? And from some of your discussions today? Where do you think these leading edge rates in Canada could go in the winter?

Well, Cole, those are really great questions. I've got at least 35 customers who would like to have the same answer. That said, that rig that we're talking about that could move up in the U.S. also has an opportunity cost tied to U.S. operations. So, we would need to see a differential in rates that would cover the move cost, at least. And I'd say that probably rates below CAD30,000 don't do that. But as you get into the 30s, and if we have the opportunity to bring health on and things like that, then we're getting into the right territory.

Okay, got it. And you talked a little bit about in Canada, but just the significant tailwinds for U.S. rates. I mean, are you concerned at all that other drillers could start thinking about new builds? Or does it just not make sense, as you can do a large-scale upgrade more economically?

Certainly, I think there's a pool of rigs in the U.S. We have some of those ourselves. Looking at our fleet for just a moment, we have beyond our current fleet of super triples in the U.S., we have another 12 to 15 high spec DC rigs that have AC tough drives, and the conversion cost to bring those rigs into full super spec, we think about in the range of CAD12 million to CAD14 million per rig, substantially less than a new build. If day rates move up into the upper 30s for the rig itself, which to the trajectory certainly appears that way, that we're probably looking at those upgrades sometime in calendar 2023 and stretching beyond that. I think our industry has probably collectively somewhere between 75 and 100 rigs that look like that, that can do the same thing. So, I think that we're still quite a ways away from a full-on shortage of rigs. I'd also comment that Precision Drilling, being a public company and most of our large-scale peers are all public companies, this capital discipline theme remains fundamental to everything we're doing. We certainly see that behavior among our peers. So, I think there's a lot of reluctance to growing rig fleets and investing capital right now when capital is so scarce, and we're being valued based on the returns we can generate, not on the growth profile. So, I just don't see new builds on the horizon; I do see potential for these moderately costed upgrades. And in a world where you can get CAD36,000 or CAD38,000 a day for a rig, which is drilling wells in 10 days, that's really not a big incremental cost on the well. I think we have another 12 or 15 rigs we could bring into play next year.

Okay, got it. That's helpful. Thanks. That's all for me. I'll turn it back.

Thank you. Operator, please queue up the question for us.

And our next question comes from Keith MacKey from RBC.

Hi, good afternoon, and thanks for taking my questions. Just wanted to start out on the rig contracts and the additions coming into the field in the second half of this year. It looks like your current customer mix in the U.S. is predominantly private company-weighted, a little bit more gas-weighted than oil. Can you just comment on where and what types of customers these upcoming rigs might be working for?

I see a probably more blended mix of both public and private looking forward. Public have been more reluctant to add rigs, and it's certainly seen year-to-date, industry-wide and Precision for sure, much more traction on the private side of the business. I can even tell you I'm looking forward at our bid book, which still remains quite strong. It's still primarily comprised of ones and twos, and we don't see the huge shifts into growth yet. We do see public E&Ps looking to start to focus on recovering and rebuilding or balancing their completions with their drilling. So, I'd say that it's really early weighted looking forward and more public weighted looking forward.

Thanks for that, Kevin. Maybe just turning to the capital. So CAD149 million now for 2022, maybe if you could just comment on your average maintenance capital per rig, that'll give us a bit of a baseline to get into 2023. And then is there any growth capital associated with these latest contracts that will also spill into 2023?

Okay, so Keith, this is Carey. We haven't given guidance for 2023 spend; we'll do that later this year. We'll give an indication of what that looks like. But in terms of the maintenance, think about it as about CAD1,600 to CAD1,800 per activity day is what our maintenance capital costs are trending.

Got it. Perfect. And then, regarding the latest contracts, is all of that capital being spent this year, including the incremental budget for this year? Or will some of it carry over into next year? We need to estimate how much of that will be based on rig upgrades and so forth.

Yes, so the outlook that we gave, the CAD149 million upgrade capital will all be spent this year, the rigs that will be going to work at the end of this year. There may be some drill pipe in the maintenance that we've pre-purchased that will take delivery of at the end of the year, that's for 2023 activity. In terms of the upgrades, they're all rigs going to go to work before the end of the year.

Okay, thanks. That's helpful. That's it for me. Back to the operator.

Thanks, Keith.

Thanks, Keith.

Thank you. Kevin Neveu: Okay, operator, please proceed. Okay, at this time, I am not showing any other questions in the queue.

We see one more question.

One moment please. Okay, our next question comes from John Daniel. Sir, your line is open.

Hey, thanks for fitting me in. I apologize for the delay. Kevin, I hope you can address this. Looking ahead, what do you think the U.S. rig count could reasonably peak at next year? A range would be helpful. I'm trying to gauge if it's in the low 70s, high 70s, or low 80s—just what your instincts tell you at this time.

Yes, as I described in the last question around these next round of upgrades, I think it's quite likely that the industry is upgrading DC rigs to AC and making those rigs superstack rigs. I think will be just based on that. I can see us easily upgrading anywhere from five to 15 of those rigs next year. So, it's better activity, I'd think into the mid-80s. John, that's assuming I would call that all development drilling.

Right.

I think there's potential for some of our legacy rigs to be used for exploration drilling and delineation self-drilling. So, we could see rig activity move a little higher. But it's probably easier for me to get my arms around development drilling increasing. But at some point, we know these operators have to do some exploration work or some delineation work. So, I think there's opportunities for Super Triple rigs, and we can upgrade some Super Triple rigs to get those median day rates. But I also think we'll see some emerging opportunities for some of the vertical rigs to do delineation work or kind of low spec horizontal drilling.

If they wanted to see inquiries for the next call of five to 15, we keep hearing about lead-time issues with all the companies we talked to. What would be the time required to get that first one out if you receive the call next year?

Yes. I actually think the call probably comes late this year. But I would say that least on our type of upgrade is probably something like three to four months.

Okay.

We identified some product inventories that we can utilize and remove from the non-operational rigs if we need to expedite the deployment of those rigs. We have prioritized relationships with some of our vendors. I believe that drill pipe is crucial, but I feel confident about the AC systems, generators, and top drives.

And John, this is Carey. I would just add in that, if that does happen, that seems like a lot of capital for growth, but the implied day rates in that type of environment would generate a significant amount of cash flow to where we would be able to fund those upgrades within cash flow for the year and still meet our debt reduction goals.

That's a good problem, okay. A bit of a softball, not intended to be a softball, but more of an educational question for me. But on Alpha Automation, I mean, you guys have made great progress over the last several quarters. And I would assume with more and more systems, you've got much better data about the rig performance, those with it versus those without it, can you just remind us, elaborate a little bit on sort of the differences you've seen to-date and where it might go?

So, there are a few points to consider. We can definitely confirm the time savings and the value provided by the Alpha Automation platform. Different customers have varying preferences for applications; some find certain apps useful while others do not. It's similar to how phone users might prefer either Google Maps or Apple Maps. We're observing this trend as well. Looking ahead three or four years, it's difficult to envision a scenario where every development drilling rig on a site isn't utilizing some form of automation, whether it's our solution or another. Every rig should be employing automation along with a selection of applications that the operator deems suitable for their specific needs.

But you can see, I presume, a demonstrable difference in performance between those without versus as with or no?

Well, here's what I'll say: certain operators with intense engineering and company man oversight can convince themselves that they can make the rig run as fast as that driller working really fast at his peak performance. It is really hard for a driller to be at 100% on for 12 hours a day, 10 days in a row. Software eliminates all of that human uncertainty, and what we have seen is that we can get that best well, every single time with every driller. We don't have to have the best driller; we don't have to have the driller fully rested.

Right. Okay.

And we've got case studies that demonstrate that quite clearly.

That's what I was asking. Okay, cool. That's all I needed. Guys, hey, thank you for including me.

Great. Thanks a lot, John.

I would now like to turn the conference back to Lavon for closing remarks.

Thank you to everyone for joining and participating in our call. If you have any follow-up questions, please don't hesitate to reach out to Carey or myself. With that, we will sign-off. Have a great day.