PRECISION DRILLING Corp Q4 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to the Precision Drilling Corporation 2023 Fourth Quarter and Year-End Results Conference Call. I would now like to hand the conference over to Lavonne Zdunich, Director of Investor Relations. Please go ahead.

Thank you and welcome to Precision's Fourth Quarter Earnings Conference Call and Webcast. Participating on today's call with me will be Kevin Neveu, our President and CEO; and Carey Ford, our CFO. Earlier today we reported strong fourth 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 expressed our financial results in Canadian dollars unless otherwise indicated. With that I'll pass it over to Carey.

Thanks, Lavonne and good afternoon. Precision's annual financial results showed continued improvement from 2022 and reflect the focus on the 2023 strategic priorities that Kevin will address in his commentary. Annual highlights include revenue of CAD 1.9 billion, a 20% annual increase, adjusted EBITDA of CAD 611 million, a 96% increase, funds from operations of CAD 533 million, an 89% increase, cash from operations of CAD 501 million, a 111% increase, debt reduction of CAD 152 million and CAD 30 million of share repurchases while funding two acquisitions with cash or assumption of debt totaling approximately CAD 100 million and positive earnings per share every quarter during 2023 and for the past six consecutive quarters. In 2023, we closed the CWC acquisition on November 8 and the Precision team has worked aggressively with our new colleagues at CWC to integrate the business and begin realizing synergies including consolidating facilities, reducing administrative costs and utilizing Precision’s tech centers and supply stores to support the field. To date, we have achieved CAD 12 million of the projected CAD 20 million of annual synergies and expect to achieve most of the remainder in the first half of 2024. Moving on to our fourth quarter results. Our fourth quarter adjusted EBITDA of CAD 151 million included a share-based compensation charge of CAD 13 million in transaction and severance charges of CAD 6 million. Asset lease charges, adjusted EBITDA would have been CAD 170 million. In the US, drilling activity for Precision averaged 45 rigs in Q4, an increase of four rigs from Q3, driven in part by the addition of acquired TWC rigs. Daily operating margins in the quarter absent impacts of IBC and turnkey were US$11,802 in line with our guidance of US$11,500 to US$12,000 and consistent with Q3 levels. IBC revenue for the fourth quarter was US$1,633 per day. And for Q1, we expect minimal IBC revenue and normalized margins to range between US$9,000 and US$10,000. The decrease in margins is mainly due to overhead costs spread over fewer activity days compared to Q4. In Canada, drilling activity for Precision averaged 64 rigs, a decrease of two rigs from Q4 2022. Daily operating margins in the quarter were CAD 15,740, an increase of approximately CAD 1,800 from Q3 2023 and in line with our guidance of margins above CAD 15,000 per day. For Q1, we expect margins to remain above CAD 15,000 per day. Internationally, drilling activity for Precision in the quarter averaged eight rigs and average day rates were US$49,872, in line with the prior year. We expect 2024 activity levels will increase by approximately 40% over our 2023 levels. I will remind the audience that capital expenditures in the International segment are typically lumpy with high CapEx at the front end of projects and lower normalized levels in subsequent years. For 2023, with recertification costs for the four Kuwait rig contracts and a bulk drill pipe purchase order for the region, International capital expenditures were over CAD 50 million. For 2024 we expect capital expenditures to significantly decrease to normalized maintenance levels. In our C&P segment, adjusted EBITDA this quarter was CAD 12 million flat with our prior year quarter. Adjusted EBITDA was positively impacted by a 15% increase in well service hours reflecting the partial impact of the CWC service rig acquisition. We expect results will improve in Q1 with increased rates and activity in the absence of Q4 transaction-related costs and the realization of transaction synergies. Capital expenditures for the quarter were CAD 79 million and for the year CAD 227 million. Our capital expenditures were slightly higher than our guidance of CAD 215 million due to timing of equipment deliveries. Our 2024 capital plan is CAD 195 million and is comprised of CAD 155 million for sustaining and infrastructure and CAD 40 million for contracted upgrades and expansion. Sustaining and infrastructure CapEx of CAD 155 million includes CAD 40 million of long lead items. I believe it exemplifies Precision's ability to leverage our scale to reduce costs while positioning the company for growth opportunities. Due to our standardized fleet high activity levels across a broad geographic footprint and a mature supply chain function with core vendor relationships we achieved a bulk purchase discount on these items and plan to utilize the equipment in either the US or Canadian fleet for potential upgrades or as critical spares. This also ties in with daily operating costs, which have increased for us and our peers over the past three years. The wage increases for our crews have been earned and well deserved and as a result they are largely here to stay. Although the field labor portion of our daily operating cost is sticky, opportunities to lower costs exist. Identifying these opportunities and realizing cost savings has been and will remain a key focus area for the finance team and we are working hand in hand with our operations, technology supply chain and equipment maintenance teams to reduce inflationary pressures, optimize equipment performance and produce a lower and less volatile cost structure in the future. Moving to our contract book, as of February 5, we had an average of 52 contracts in hand for the first quarter and an average of 43 contracts for the full year 2023. We now have 21 rigs on contract in Canada for 2024 reflecting an increasing number of customers seeking to lock up rigs ahead of LNG project start-ups. Moving to the balance sheet, as of December 31 our long-term debt position net of cash was approximately CAD 880 million and our total liquidity position was over CAD 600 million excluding letters of credit. Our net debt to trailing 12-month EBITDA ratio is approximately 1.4 times, a decrease from 3.4 times at the end of 2022. Our average cost of debt is 7%. We plan to reduce debt by CAD 150 million to CAD 200 million in 2024 and have increased our long-term debt reduction goal from CAD 500 million to CAD 600 million between 2022 and 2026. As of December 31, 2023 we have reduced debt by CAD 258 million and have CAD 342 million additional reduction necessary over the next three years to reach our goal. We began reducing debt in 2016 and every year we have provided guidance we have met or exceeded our targets. To date we have had only a modest allocation of free cash flow for share repurchases. But as we approach our target debt levels of below one times we are confident in our ability to increase our allocation to direct shareholder payments as a percentage of free cash flow. We plan to allocate 25% to 35% of free cash flow before debt repayments for share repurchases and will expect to continue increasing this allocation in future years moving towards a target allocation of 50% of free cash flow before debt repayments by 2026. Moving on to guidance for 2024, we expect strong free cash flow for the year, but Q1 cash flow to be impacted by front-end loaded CapEx, working capital build, our semiannual interest payment and year-end payments. We expect depreciation of approximately CAD 290 million, cash interest expense of approximately CAD 75 million, cash taxes to remain low, and our effective tax rate to be approximately 25%. SG&A of approximately CAD 100 million before share-based compensation expense and we expect share-based compensation charges for the year to range between CAD 45 million and CAD 55 million at an CAD 80 share price and the range may change based on the share price and the performance of Precision stock relative to Precision's peer group. Please note this is a preliminary estimate and we will provide updated guidance on our Q1 call following the settlement of past grants and issuance of new grants later this quarter.

Thank you, Carey. Good afternoon. We are very pleased with the strong fourth quarter and full year financial results and operational results delivered by the Precision team in 2023. As Carey mentioned, the progress achieved over the past several years improving our balance sheet and reducing our debt levels while growing our revenue and cash flow has positioned us with the financial flexibility to execute on a number of opportunistic financial actions to further enhance shareholder value. Utilizing our strong free cash flow, we met or exceeded all of our financial priorities for the year including debt reduction share buybacks. We completed two consolidated transactions; we invested in our fleet with high return projects for the Middle East, United States and Canada. Those investments included Alpha technology expansion, evergreen emissions reductions projects along with several rig capability upgrades and the reactivation of the rigs in Kuwait. In the fourth quarter as Carey mentioned, we reactivated our fifth rig in Kuwait on a five-year contract. This rig combined with the four other rigs in Kuwait and our three operating rigs in the Kingdom of Saudi Arabia will increase our activity in 2024 by 40% over 2023. With our well-established international infrastructure already generating strong returns, we expect this increased activity to flow through the income statement with essentially no increases in our fixed costs or overhead. Despite the recent announcements from the Kingdom of Saudi Arabia regarding capping oil production, we do expect further bidding activity and possible land rig additions targeting unconventional gas in addition to those recently announced by other industry participants. We have one idle Triple rig in Kuwait and four other idle rigs in the region. In Kuwait, we have active bids for the idle rig and believe we have a high likelihood of contracting this rig in 2024. We continue to bid on other international rig tenders in the region and believe we can support regional new country entries from our established base in Dubai. I believe we are well-positioned to grow this business segment as the international land drilling industry continues to recover. Turning to the Lower 48, we continue to work to expand our presence in oil basins and with the public E&P operators particularly. This has been a little more challenging than we expected as US rig activity has been essentially flat for several months with very few new rig deployment opportunities. There continues to be some contract churn and some operator high-grading and our team has been tightly focused on those limited opportunities. However, it's important to understand the customer rig switching costs which I've discussed in the past. When an operator decides to replace an existing rig for whatever reason, they usually need to pay a demobilization cost for the current rig and then mobilize the replacement rig. This mobilization or switching cost can reach anywhere from several hundred thousand dollars over $1 million depending on the drilling locations and the proximity to the contractor's operating base. In addition to those hard mobilization costs, the operator will have to be a little patient as the high-graded rig and new crew come up the learning curve and that specific operator's practice. This switching cost coupled with the very firm drilling contractor market discipline we've seen over the past few years has meant that both rig rates and rig contracts tend to be stickier than most other OFS services. It also means that even for those of us pursuing the high-grading opportunities, the drilling contractor may need to be very creative with initial day rates, escalation parameters or performance incentives to catalyze those high-grading opportunities. Our team has been successful sustaining our activity in the low 40s over the past couple of quarters. I do note an error on the Precision website earlier today which posted Precision's US activity at 37; it actually is 39 rigs as of today and the website error has been corrected. That said, I'm not thrilled with 39 rigs running. With the pace of current customer bids recently signed contracts and planned activations, we expect to be back in the low 40s in the coming weeks. We expect to see our activity modestly increase further during the second quarter. Visibility beyond the next few months is a little less clear, but we continue to see positive leading indicators including customer inquiries, LNG export project startups, exhausted DUCs in the Permian and an increasing focus on drilling inventory quality and of course the desire for longer reach laterals. We expect these factors will help to catalyze upgrading and high-grading growth opportunities particularly for our Super Triples with our Alpha Automation capabilities. No doubt we have some work to do as we continue to expand our presence in the oil plays while remaining well-positioned for an improving gas macro. In our Canadian drilling and our well services businesses both delivered strong operational and financial performance throughout 2023 and we're carrying that momentum into 2024. Now for most of the last decade, the Canadian market has been constrained by hydrocarbon takeaway bottlenecks and constraints. As a result, the discount for Western Canada Select oil has ranged in the CAD 25 to CAD 40 below WTI range. While the Alberta Natural Gas commodity price AECO has been a function of highly cyclic seasonal weather patterns and regional market energy needs, also limited by bottlenecks and takeaway capacity. Later this year two major transmission projects, the Trans Mountain oil pipe and the Coastal GasLink natural gas pipe will begin full operation and serve to fully alleviate the Canadian constraints. WCS discounts are expected to moderate to high single-digit discounts and LNG Canada exposes Canadian natural gas to the global LNG market. Our customers, the Canadian oil and gas operators remain among the most disciplined E&P group in the world, yet they fully understand the long-term implications of this transformation in the Canadian market. We expect they will thoughtfully and carefully align their capital programs, imbalance their rig and well servicing demands to track the takeaway capacity in the market while continuing to generate stable cash flows and most importantly fund their shareholder return programs. This lays out a long-term thesis for the Canadian OFS market, fundamentally supported by global energy prices with no constraints. Those Canadian oil and gas operators will remain highly disciplined and will utilize large-scale multi-well pad drilling programs, where efficiency, safety, industrial scale, technology and digital capabilities will define the development model. This also explains Precision's current market positioning in the Montney and heavy oil plays and aligns perfectly with our strategy over the past several years. We can look back to the introduction of our Super Triple rig last decade, the introduction of our AlphaAutomation system five years ago and more recently our EverGreen emissions reduction solution just two years ago. These rig technology advancements enable large-scale optimized pad-style oil and gas developments perfectly. We also commissioned our 30th Super Triple rig in Canada earlier this quarter. And as we discussed on prior calls, this is a highly upgraded rig to full Super Triple capacity. The rig is equipped with the full suite of AlphaAutomation, AlphaApps. It's got our Alpha Clarity optimization system and a full suite of EverGreen environmental solutions, easily making this the most advanced technology land rig in the world today. Oh, and one more item. The rig is equipped with three fully automated robotic arms to handle rig floor and racking board pipe handling operations. Now this is the first fully automated deployment of the NOV Adam racking board and Rig four robotic system. In partnership with NOV and our customer, this is a fully functional and commercial deployment. While we believe we still have some modest field hardening work over the coming weeks, this is essentially a bolt-on robotic upgrade that we can install in any Precision Super Triple rig fully demand in the red zones on the rig floor in the pipe racking area and the racking board. I believe there is much more to come on this over the next few months and we'll continue to update you. Today, we are operating 80 drilling rigs in Canada, which includes the recently acquired CWC Tele-Double rigs. Now the Canadian Tele-Double drilling market remains oversaturated and highly fractured with too many rigs, too many contractors and intense competition. Now Precision's scale, our highly skilled crews, vertical integration and a procurement advantage allows us to improve the returns that CWC achieved on these rigs while we remain a price-competitive and relative participant in this rig class. While Precision is unlikely to be a further consolidator in the segment, it's our view that consolidation and rationalization in the Tele-Doubles rig market is essential for the long-term benefit of all stakeholders. Precision Super Triples and our pad-equipped Super Singles remain generally sold out with customers increasingly locking in access these highly capable rigs and crews with firm take-or-pay contract commitments. For comparison purposes, in the first quarter of 2021, nine Canadian Super Series rigs were contracted with take-or-pay term contracts. In 2022, this increased from nine rigs in 2021 to 19 rigs. Now for the first quarter of this year, 24 rigs are contracted on firm take-or-pay terms; a significant shift in the market. This transformation towards take-or-pay term contracts improves our revenue visibility, improves crude performance and stability and it keeps those rigs off the market supporting tight supply fundamentals for the non-contracted rigs. Looking forward, we expect to run 40 to 45 rigs throughout the spring and then quickly ramp back up into the mid-60s during the summer and again to higher levels closer this year in the fall preparing for winter next year. Longer term, through the end of this year into next, it appears the rig demand will remain firm and likely tighten up further as the pipeline commences full operations. Our Alpha and EverGreen products both in Canada and the US continue to demonstrate broad market penetration. Our customers recognize the efficiency that Alpha delivers with now 96% of our active Super Triple rigs running AlphaAutomation and AlphaApps. Our experience with automated drilling is growing quickly with over 20 million feet now for our Canadian analysts, that is 6.1 million meters drilled with Alpha in 2023, up 43% from 2022 despite the noted decline in US drilling activity. Late last year, we introduced a new tool face control app for directional drilling. Since then, we have drilled 43 wells with over 3,000 autonomous slide sequences, fully proving the value of this app to further automate the drilling processes now approaching 98% of the sequences being automated. Our EverGreen emission solutions have strong customer support. Currently, 65% of our active Super Triple rigs are running at least one EverGreen system. Customer commitments now booked at EverGreen solutions total at least 90% of the Super Triple rigs as soon as we can install the systems. I'll remind you that these solutions include battery energy storage systems, diesel fuel and emissions monitoring apps, grid power connection systems, low-emission lighting systems, and blended natural gas fuel systems. Our strategy to deploy products which provide a meaningful reduction in rig emissions while reducing our customers' fuel costs and providing a solid investment for return for Precision is a known emissions reduction strategy and I certainly wish that our government policymakers would take a similar approach to their policies on the emissions challenge. We believe both Alpha and EverGreen will be important as we look to continue strengthening our market presence in the US, Canada, and international regions. Turning to our Well Service business in Canada. The integration of the CWC rigs and personnel was the key focus in the fourth quarter and working their way through the synergies was a strong result for the combined team. Our Well Service activity remained firm through the fourth quarter and this is carrying on the momentum into 2024. We experienced a roller coaster of weather first losing activity in mid-January due to extremely cold weather conditions in Western Canada. And then things turned warm, causing some intermittent road bans and with the unusually warm weather in late January making some well locations inaccessible, again negatively impacting our activity. Yet the combined business is performing very well. Today we're operating 83 service rigs with 11 of those on 24-hour operations, doubling the asset's revenue efficiency. Later this month it looks like our activity will break past 100 operating rigs as customer demand remains firm. The outlook for the balance of the year looks good with the strong Canadian macro supporting customer activity. So, turning to our strategic priorities. As we reported in our press release, we achieved all of our 2023 priorities and we posted Precision's 2024 priorities. We believe it's important that our investors understand exactly how we intend to create shareholder value and we'll continue to provide that quarterly update on our progress. I can also report that the feedback from our investors continues to be highly positive. Investors tell us they appreciate the transparency and they ask us to please keep doing what we say we're going to do. So, with that in mind, you can see from our longer-term guidance, we're shifting our priority towards increasing capital returns to shareholders while continuing to reduce debt with a more balanced approach. Over the next several years, we believe this will deliver very good shareholder returns. So, on that note, I'll conclude by again thanking the people of Precision Drilling for their dedication, hard work, great safety results and great operating results in 2023. We look forward to a good year in 2024. I'll now turn the call back to the operator for questions.

Thank you. Our first question comes from Aaron MacNeil with TD Cowen. Your line is open.

Afternoon. I'm hoping for a bit more detail on the US Q1 margin guide. I guess I'm just wondering approximately how much of that sequential change is a function of higher costs? How much is downward pressure on price? And how much is a function of rig mix, and the seasonal return of those CWC rigs? And I guess another adjacent question would be, do you see that pressure persisting into subsequent quarters absent an uptick in activity.

Aaron this is Carey here. I'd say it's a combination of all of those. The one that we think has the biggest impact is the operating cost. Just the fact that we were running 45 rigs on average in Q4, and we're likely going to be running a lower number than that. We've got a bit more fixed cost with the CWC acquisition. So it is going to be a little bit of a drag on margins in Q1. As we get activity a bit higher in the second quarter, we think that margins have an opportunity to expand.

Got it. You mentioned the Kuwait tender, what's a realistic deployment timeline if you get that work or deployment timelines for other international rigs that may not have as clear of a tender opportunity.

Aaron, good question. Certainly, the bid cycle time can be measured in months and quarters, not necessarily days or weeks like we see in North America. The Kuwait tender right now is actually in process. We've been through a couple of rounds of clarifications. If their prior history is an indication, I'd expect the awards could come within a quarter, maybe a little more maybe a little less, with deployments occurring before the end of the year.

Got it. And what would the associated CapEx be for that if you were to win an award?

Yes, it's not currently part of our plan, but it will likely be in the same range that we've had in the past, somewhere between probably CAD 3 million to CAD 8 million per rig, depending on the clarification we're going through right now.

Got it. Thanks, guys. Will turn it over.

Great. Thank you, Aaron.

Our next question comes from Kurt Hallead with Benchmark. Your line is open.

Hi – good afternoon. How are you guys doing?

Great, Kurt.

Good. I appreciate the update as always. So I'm kind of curious on coming back full circle on the Canadian market. You referenced contracted rigs 24 in the first quarter 23. I don’t know, Kevin, where do you think that could go as we progress through the year? I know you and I have had discussions about E&P companies wanting to lock in rigs for the export capacity, especially for ground LNG. So I don’t know, what’s your best guess on where you think it might be able to go?

Yes. This has happened actually quite quickly. Just looking at the trajectory of contracting. I can tell you that we were a little surprised last year, like early 2023, to hear customers willing to take-or-pay contracts for long term, be it one to two to three years when historically in Canada long-term contracts simply didn't exist. So now to have a book a couple of dozen in long-term contracts starting this year off is a great place to start. Kurt, it would be logical that any operator that's tied to a long-term LNG delivery contract would lock in rigs for a long term. By long term, I mean two, three years, it starts looking much more like an industrialized process where you're trying to maintain consistency, predictability, repeatability over a long haul and then using all your digital capabilities to lower cost. So I think to answer your question, I think once those projects start running and once we see gas flowing and once they see our customers become more comfortable with the long-term nature of their supply contracts, I'd be surprised if the majority of LNG rigs weren't tied to term take-or-pay contracts in the range of two to four years.

Okay. Appreciate that. A follow-up question, again in the past you thought it was good to see the adoption of AlphaAutomation and AlphaApps. Can you give us an update as to what the incremental cash margin is on adding those apps to the rigs?

Yes, Kurt. So it's going to be on the bottom end it's going to be about CAD 1,500 a day. And then with apps and EverGreen solutions, we've got rigs that are making closer to CAD 4,000 a day, with all of the additional ancillary products and services.

Okay. You mentioned that 75% of your Super Triples have some type of AlphaApps installed. Is that distribution balanced between the US and Canada?

Let me qualify that. So I think I said 95% of our rigs have Alpha on. And I think as I said 75% of our rigs have EverGreen solutions on. Yes, it's evenly split; both are evenly split between both markets. I might also add that on EverGreen, I've been quite surprised by the uptake in the U.S. was maybe a little less environmental focus due to the lack of a carbon tax, but good customer take up on both sides of the border due to the value we create through fuel savings.

Great. All right. Thanks Kevin. Thanks, Carey.

Thank you.

Our next question comes from Luke Lemoine with Piper Sandler. Your line is open.

Hey, good morning. Kevin you kind of loosely touched on it with Kurt's question, but you've previously mentioned that maybe there might be some idle U.S. rigs coming to Canada. Can you just update us on that, maybe how you're thinking about industry equipment demand in Canada shaping up with the trends on pipeline expansion in Coastal GasLink?

Yes. Luke, it's interesting there's a supply and demand for us in pulling opposite directions. No question. The E&P base in Canada, United States, Kuwait, anywhere would rather see the market oversupplied. And I understand that because they want to have oversupplied rig supply, so that that keeps rates as low as possible. We need, as a drilling contractor, to have the market tightly supplied. We need the rigs to be fully utilized; the day rates generate returns that exceed our cost of capital. It's incumbent upon us to be really careful about not oversupplying the market. I do expect that as these projects start to function and operate as the Coastal GasLink starts running as the Trans Mountain pipeline starts going, I expect rig demand will increase. I do think there might be a potential to bring up one or two more rigs in the U.S. depending on customer needs. But we'll be very careful not to set us up for returns on these assets that are less than our cost of capital.

Okay.

Not much of an answer, but we're going to manage the market carefully.

Yes. All good. And then on the U.S. side, you talked about at the current crude price maybe increasing activity in the second half of the industry. And you just provided some details about what type of customer you think or indications from basins or what you're seeing from incremental demand into 2Q?

Yes. Look it's interesting. So our bid volume really hasn't changed much in the past couple of years. Lots of activity going on. Lots of drilling departments looking at rigs, lots and lots of drilling departments looking at upgrading rigs and high grading rigs. So that activity remains strong. That's a good indicator. We've got a bunch of M&A activity right now that hasn't cleared yet and these consolidation transactions on the E&P side need to clear, the dust needs to settle and the drilling programs need to be established, kind of post-transaction. So it's just really hard to time how soon the market gets clear. I don't think the problem is $75 or $76 crude. I think the problem is volatility in the crude price that maybe you can go into the $60s maybe you can go to the $50s. I mean, who knows when does the risk on low prices decline to the point when an operator feels comfortable increasing rig count by one or two rigs? So that's kind of the negative side of things. On the positive side of things, we are watching DUC counts. We're watching U.S. production kind of ramping up unreasonably high compared to rig count. So there's certainly some optimization going on. It's probably our view that rig counts need to move up at least modestly to sustain production levels anywhere near this level over time. So I think we are expecting over time the rig counts ease their way up. But if you had I don't know, say 20 of these transactions are finalized and take 20 rigs out of circulation and then 30 companies add one rig, we're still up 10 rigs.

Yeah. Okay. Got it. Yeah. Appreciate it. Thanks, Kevin.

And those numbers I gave are just a random decision; nothing we see right now points to rig count declines or for that matter imminent rig count increases.

Our next question comes from Waqar Syed with ATB Capital Markets. Your line is open.

Thanks for taking my question. Good afternoon guys. Great quarter. Kevin, in the US market some of your major competitors have guided to activity going up slightly quarter-over-quarter. I think your comments indicate that maybe rig activity could be a little bit down. What do you attribute that to? Is it just some gas versus oil or customer mix still? Or is it some of the M&A that you talked about that's happening in the industry that's contributing to that?

Yeah. Waqar, I think there's a few things. So I mean, if I have your question correctly, you indicated that some of our peers have guided to rig counts modestly moving up. I did comment that we expect our rig count to modestly move up a little bit from the current 39%, but maybe a bit more in the second quarter, but again, very modest movements. There's no question that we're still transitioning from being very gas-focused a couple of years ago, which served us well during the pandemic to pushing more into West Texas, more into the oilier basins. And it's tough when there are not a lot of new opportunities popping up. So we've got to be very good. We've got to have a good value proposition, great technology. And it's still a one-rig-at-a-time game. No question it will be a little tougher for us to do that than somebody who's got 50 or 60 rigs already running in the Permian Basin. So I think we're pushing uphill a little bit. But our guys understand that and are working hard and they're doing a really good job.

Great. And then on automation, do you think that's going to develop into a trend for that type of equipment on drilling rigs in Canada? Or is it still very early stages to see more of that type of equipment on drilling rigs?

I can tell you a funny story about this Waqar. I was in Mechanical Engineering school back in 1982. My fourth-year graduation project was a request by a drilling contractor to find a way to automate the racking board. So back in 1982 the biggest challenge of drilling contractors could bring to a Technical Engineering school was how to automate the racking board to take that person out of the racking board. It has taken 42 years, but I think we have a solution. And we're pretty happy about this. It looks really good.

Yeah.

It's not; the cost isn't zero. There's going to be incremental cost, but it moves everybody from that red zone on the rig floor and the racking board, bolts onto our super-spec rig class. It doesn't require a rig redesign. We're supported by NOV. So the software and the programming are not; it's not Precision Drilling trying to write software. This is industrial-grade robotics software being performed by the company which also designed the same software for the offshore industry. We feel really good about this relationship.

Yeah. Great. And then, just on the capital spending CAD 195 million, Carey, could you provide a breakdown of how those dollars are going to be spent Domestic, International and US?

Sure. I would say less than 10% would be International. And then, based on activity levels that we're currently seeing today, we’d probably have a pretty even split between Canada and the US. I think it could shift if we see higher activity in the second half of the year. We could see more CapEx in the US because that's probably where we have a few more higher dollar upgrade opportunities if we see a big jump in the rig count.

And Carey, the portion of that capital that's long lead will actually just be for nowhere until we have an identified target.

Correct.

Okay. And just a final question. Kevin congrats on raising the capital return to shareholders for 2024 this 25% to 35% number, how do you think about that? Is it exclusively a return in the form of share buybacks? Or when should investors start to expect some dividend as well?

Yes, I think this year Waqar, it's more than likely going to be all share buybacks. And then I think we're positioning the company and our cash flow profile to introduce some other ways to return capital to shareholders. But I think it's too soon to say exactly what format that's going to be.

Okay. Well, thank you very much.

Thanks, Waqar.

Our next question comes from Keith MacKey with RBC Capital Markets. Your line is open.

Hi there. Just curious first, can you talk a little bit about what you're seeing in terms of the old leading-edge rate question in the US? Are things still in that CAD 30,000 to CAD 35,000 a day range? Or has it moved one way or the other from there?

Keith, I think that's a fair way to categorize the market broadly; CAD 30,000 to CAD 35,000 a day range. I think the discipline that we've been talking about for several quarters now remains intact. I believe that there are some small contractors that might try to bid at lower rates than that, but we really don't see that come across our bow very often.

Yes. Okay. Got it. And just sticking with the tendering activity. Can you just maybe speak a little bit to any trends you might be seeing in terms of rig spec in tenders, whether it's digital or physical? Is the required rig changing at all from what we would have been considered a super-spec rig in recent years, particularly I'm thinking as some of the larger integrated in the Permian look to drill longer and longer wells? Are you seeing a change in what rig they're looking for in these bids? And does that match up with what you've got available in your fleet or at least what's within your upgrade capital spending for the next little bit?

The straightforward answer to the question is yes, but with a bit more detail. All of our rigs currently available in the US are pad walking AC digitally controlled triples. The rigs are fully capable, although a few may need minor upgrades to increase their racking capacity for long-reach wells, which would cost Precision a couple of hundred thousand dollars per rig. This minor upgrade would enhance the rig's capacity by 5,000 to 6,000 feet. Additionally, a second upgrade would likely involve increasing the operating pressure from 5,000 psi to 7,500 psi, which could cost around CAD 1 million for rigs not already equipped with 7,500 psi. If you aim for 100 psi for a long-reach well, you may also need to add a third mud pump and a fourth generator, translating to roughly CAD 1.5 million. We currently have fully spec rigs that meet these requirements, including the necessary racking capacity, the fourth generator, and third mud pumps, as well as 7,500 psi capability. As we progress down the list of options, after the next five or ten rigs, we may encounter the need for some of those incremental upgrades. Some of these upgrades are accounted for in our planned capital, while others will involve long lead times.

Okay. That’s it for me. Thank you very much, Kevin.

Great. Thanks.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Lavonne for any closing remarks.

Thanks everyone for joining our call today. On behalf of the Precision team, have a great afternoon. If there's any follow-up questions, you know how to reach me. Thank you.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.