Yahoo Finance Precision Drilling Corporation (NYSE:PDS) Q1 2024 Earnings Call Transcript
Precision Drilling Corporation (NYSE:PDS) Q1 2024 Earnings Call Transcript April 25, 2024
Precision Drilling Corporation misses on earnings expectations. Reported EPS is $1.88 EPS, expectations were $2. Precision Drilling Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the Precision Drilling Corporation 2024 First Quarter Conference Call. I would now like to hand the conference over to Lavonne Zdunich, Vice President, Investor Relations. Please go ahead.
Lavonne Zdunich: Thank you, operator, and welcome, everyone, to our first quarter conference call. Today, I am joined by Kevin Neveu, Precision’s President and CEO; and Carey Ford, our CFO. Earlier today, we reported our first quarter results. To begin our call today, Carey will review these results and then Kevin will provide an operational update and outlook commentary. Once we have finished our prepared comments, we will open the call for questions. Please note that some comments today will refer to non-IFRS financial measures and include forward-looking statements, which are subject to a number of risks and uncertainties. For more information on financial measures, forward-looking statements and risk factors please refer to our news release and other regulatory filings available on SEDAR and EDGAR. As a reminder, we express our financial results in Canadian dollars, unless otherwise stated. With that, I will turn it over to Carey.
Carey Ford: Thanks, Lavonne. Precision’s Q1 financial results exceeded our expectations for adjusted EBITDA, earnings and cash flow. Adjusted EBITDA of $143 million was driven by strong drilling activity, improved pricing and strict cost control. Our Q1 adjusted EBITDA included a share-based compensation charge of $23 million. Without this charge, adjusted EBITDA would have been $166 million, which compares to $191 million in Q1 2023, a decrease of 13%. Net earnings were $37 million or $2.53 per share, representing the seventh consecutive quarter of positive earnings for Precision. Funds provided by operations and cash provided by operations were $118 million and $66 million, respectively. Margins in the U.S. and Canada were higher than guidance resulting from stronger-than-expected pricing, higher ancillary revenues and improved cost performance.
The importance of cost management and field margin generation cannot be overstated. And on this front, I’m pleased with the performance of the business. Reducing cost remains a high priority for me and I continue to work closely with the finance, operations and supply chain teams to demonstrate continued progress in 2024. In the U.S., drilling activity for Precision averaged 38 rigs in Q1, a decrease of 7 rigs from the previous quarter. Daily operating margins in Q1, excluding the impacts of turnkey and IBC were $1,057, a decrease of $755 from Q4, but significantly higher than guidance. For Q2, we expect normalized margins to be above $10,000 per day. In Canada, drilling activity for Precision averaged 73 rigs, an increase of 4 rigs from Q1 2023.
Daily operating margins in the quarter were $15,647, an increase of $2,089 from Q1 2023. For Q2, our daily operating margins are expected to be between $13,000 and $14,000. Internationally, drilling activity for Precision in the current quarter averaged 8 rigs. International average day rates were $52,808, an increase of 2% from the prior year due to rig mix. With the rig activations completed last year, we expect international EBITDA to increase approximately 50% from 2023 to 2024. In our C&P segment, adjusted EBITDA this quarter was $19 million, up 7% compared to the prior year quarter. Adjusted EBITDA was positively impacted by a 28% increase in well service hours and improved pricing, reflecting the higher demand for our services and the impact of the CWC acquisition completed in November.
We continue to create value with the CWC business on both sides of the border. And to-date, we have achieved $16 million of the projected $20 million of annual synergies. Capital expenditures for the quarter were $56 million and included $14 million for upgrade and expansion and $41 million for maintenance and infrastructure. Our full year 2024 capital plan remains at $195 million and is comprised of $155 million for sustaining and infrastructure and $40 million for upgrade and expansion. If increased rig activity materializes and upgrade demands continue, our capital plan could increase slightly in the second half of the year. As of April ‘24, we had an average of 46 contracts in hand for the third quarter and an average of 44 contracts for the full year 2024.
Moving to the balance sheet. Our Q1 results reflect the seasonal working capital build within our business and onetime payments highlighted in our press release. During the second quarter, we expect to have a – during the first quarter, we had a slight decrease in cash, as we have lower seasonal activity in Canada during the second quarter and no semiannual interest payments. Cash is coming in the door, and we expect to begin reducing debt in Q2. As of March 31, our long-term debt position net of cash was approximately $900 million, and our total liquidity position was over $600 million, excluding letters of credit. Our net debt to trailing 12-month EBITDA ratio is approximately 1.5x, and our average cost of debt is 7%. We expect our net debt to adjusted EBITDA before share-based compensation expense to continue to decline throughout the year.
And we are committed to reducing debt by $600 million between 2022 and 2026 and achieving a normalized leverage level of below 1x. Our debt reduction target for 2024 is $150 million to $200 million, and we plan to allocate 25% to 35% of free cash flow before principal payments directly to shareholders. Based on the robust free cash flow outlook, we were repurchased $10 million of shares during the quarter, twice the pace of last year, a pace we plan to meet or exceed throughout 2024. Moving on to additional guidance for the year, which remains largely unchanged from the prior call. We expect depreciation of approximately $290 million, cash interest expense of approximately $75 million, cash taxes to remain relatively low and our effective tax rate to be approximately 25%.
Selling general and administrative expenses of $100 million before share-based compensation expense. We expect share-based compensation charges for the year to range between $40 million and $50 million at a share price range of $80 to $100 and the charge may increase or decrease by up to $15 million based on the share price performance relative to Precision’s peer group. With that, I’ll turn the call over to Kevin.
Kevin Neveu: Thank you, Carey, and good afternoon. As Carey described, our business is performing very well. From a market perspective, our customers are in an extended period of increasing technology adoption and rig high-grading, which aligns perfectly with our high-performance and Alpha technology-focused competitive strategy. Our team is achieving strong safety execution, excellent rig efficiency and delivering highly disciplined cost management. We see firm day rates and stable margins across our business with excellent incremental growth opportunities in Canada and the Middle East. We expect normal maintenance investments and some upgrade investments while yielding strong free cash flow for the foreseeable future. For our investors, the majority of our heavy lifting on debt reduction is almost complete.
And as Carey mentioned, we have prioritized increasing the turn of capital to shareholders. I believe all of this demonstrates the success of our long-term strategy and the value we offer our shareholders. Moving on to the Lower 48. Industry rig demand remains muted by weak natural gas prices and operator consolidation. While the leading indicators we monitor continue to point to a likely rebound in demand, the timing of that rebound is not clear. Those indicators include oil prices trending in the range of the upper 70s to lower 80s, exhausted inventories of drilled and uncompleted wells, a wave of LNG export facilities set to commence operations late this year and into next and ongoing operated discussions regarding high-grading rigs once the consolidating transactions are complete.
Yet the visibility and timing of rebound is not clear, and we expect a muted demand will persist during the second quarter.
Northern Rockies : Turning to Canada. It’s a much different story. If the question is, do we see customer interest increasing in anticipation of the Trans Mountain start-up? The answer is resoundingly yes. Today, we have 48 rigs operating compared to 38 this time last year. 9 of the 10 rig increase are Super Singles targeting heavy oil. We see this momentum continuing throughout the summer and exceeding our prior view on Canadian rig demand. With our pad equipped Super Singles fully utilized, several customers are seeking to upgrade additional Super Singles to Pad our rigs. These $2 million to $3 million upgrades come with market-leading day rates and long-term take-or-pay contracts. During the winter drilling season, we peaked up 43 Super Singles, operating and surprisingly expect to get back to that range during mid-summer as activity recovers from spring breakup.
However, like the Lower 48, the weak natural gas price has been a drag on some Canadian dry gas activity with some operators reducing or delaying near-term gas projects. The impact on Precision has been negligible as Super Triple demand remains very strong with year-over-year activity for Precision flat and our fleet essentially fully utilized. Despite the weak AECO pricing, customer sentiment for nat gas remains surprisingly positive. The Coastal GasLink pipe is complete and LNG Canada is targeting final commissioning later this year with first gas shipments to follow. Based on preliminary customer conversations, LNG shipments will reinforce demand for our Super Triples like we’ve experienced in heavy oil with our Super Singles. It appears that customer demand will exceed Super Triple rig supply and we may have the opportunity to mobilize additional capacity from the U.S. back to Canada early next year.
Currently, we have 48 rigs running and expect trend to the mid-60s by the end of June and into the 70s in July, well ahead of last year’s pace. Keep in mind that during the Canadian spring and summer, weather and forest fires may have a temporary impact on activity, but should that happen, we expect it would serve to increase demand later in the year as those projects delay projects pile up. On our February earnings call, we mentioned that we deployed to the field, the NOV Adam rig floor and derrick robotic pipe handling system. This is essentially a bolt-on robotic system, which can be installed on any Precision Super Triple drilling rig. The first system is performing much better than I expected, with 97% of all rig floor and derrick pipe handling operations fully automated.
We have no people working on the rig floor or up in the racking board. Now of course, this is a highly sophisticated system, and we expect several more months of field hardening to fully commercialize this product. However, in just the first 65 days of operations, we’ve drilled over 15,000 meters and that’s 50,000 feet for our U.S. listeners. We’ve tripped over 60,000 meters or almost 200,000 feet of drill pipe. We’ve completed 8 whole sections that run the casing for all those sections with the robotic system. We believe that once we have fully field hardened and commercialized item, we will match or exceed the maximum efficiency possible with manual pipe handling. We’ll eliminate human work from the red zone on the drill rig floor and in the mast while ensuring our customer safe, consistent, predictable and highly efficient rig floor performance.
Our early operational success with the NOV robotics system mirrors the technical success we’ve previously achieved with our Alpha Automation, Alpha Apps and EverGreen initiatives. Most importantly, it demonstrates our approach to new technology development. I’ll remind you that our technology strategy has been to collaborate with industry partners who invest in the product R&D while we focus on field deployment and field hardening. Our technology team is comprised of highly experienced engineers and operations experts who work hand-in-hand with our field operations management team to ensure new technology is deployed with a well-supported highly structured process. The process is designed to learn and solve deployment challenges quickly and efficiently with minimal cost over hits.
Our robotic system is well on this path, and we are the industry’s first mover with field robotic technology. We believe that the comprehensive skills and operational IP, we are developing because we feel harden the system reinforces our first-mover competitive advantage and does so with virtually no overhead burdening our financial performance. Now turning to our Canadian Well Service Group, the TMX tailwind is having a similar impact on well servicing demand. During the first quarter, Precision Well Servicing averaged daily two active rigs with peak utilization exceeding 100 rigs several times. On a snapshot in time basis, today, we are running 65 well service rigs, which compares to approximately 40 rigs for Precision and CWC combined at the same time last year, and we expect this demand profile to continue.
With the CWC acquisition, our team has leveraged our scale with significantly increased access to labor and a larger customer base, we have widely expanded our capabilities across Western Canada Sedimentary Basin. Customer demand through the year is expected to remain strong, driven by the improved oil price differentials, supporting activity in oil-focused areas and increased abandonment spending for the remainder of 2024 and into 2025. Moving to our international business. In Kuwait and the Kingdom of Saudi Arabia, we continue to bid our idle rigs for opportunities in both markets and also for other opportunities in the region. Now competition in these regions has increased as other international drillers are looking to enter the Middle East.
The eight Precision rigs currently running are delivering a 40% activity growth for Precision. We believe there are good opportunities to activate additional rigs this year or early next year as we look to continue our growth in that region. So I’ll wrap up our comments by thanking the people of Precision for their hard work and dedication and the excellent results they are achieving for our customers, for our investors and for the company. With that, I’ll now hand the call back to the operator for your questions.
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