CALGARY, ALBERTA — (Marketwired) — 10/27/17 — (Canadian dollars except as indicated)
This news release contains “forward-looking information and statements” within the meaning of applicable securities laws. For a full disclosure of the forward-looking information and statements and the risks to which they are subject, see the “Cautionary Statement Regarding Forward-Looking Information and Statements” later in this news release. This news release contains references to Adjusted EBITDA, Operating Earnings (Loss) and Funds Provided by (Used In) Operations. These terms do not have standardized meanings prescribed under International Financial Reporting Standards (IFRS) and may not be comparable to similar measures used by other companies, see “Non-GAAP Measures” later in this news release.
Precision Drilling (TSX: PD)(NYSE: PDS) announces 2017 third quarter financial results:
Kevin Neveu, Precision–s President and Chief Executive Officer, stated: “I am pleased with our reported third quarter results which include solid cash flow generation driving a $37 million increase in our quarter end cash balance, and the first sequential increase in both our U.S. fleet average day rates (excluding idle but contracted revenue) and margins since early in 2015. Despite commodity price volatility and lower than anticipated WTI and Canadian AECO prices during the third quarter, demand and pricing for Precision–s Super Series rigs remained firm through the quarter. We anticipate demand to further strengthen as our customers initiate their 2018 drilling programs.”
“As our customers across the U.S. and Canada have learned to operate in a “lower for longer” commodity price environment, they have focused on drilling and completion efficiency utilizing long or extended-reach horizontal wells and adopted large-scale industrialization techniques, such as multi-well pads and high efficiency rig systems. Precision–s Super Triple rigs are configured to optimize long reach drilling performance combined with pad walking capability, and are active in virtually every resource play in North America.”
“During the third quarter we continued to demonstrate the “next tier” of drilling efficiency improvement with Process Automation Control (PAC) and other technology initiatives we are implementing in our beta testing program. Precision has drilled approximately 70 wells utilizing PAC technology, which is currently installed on 20 Super Triple rigs, and the results continue to show improved efficiency, consistency and repeatability, exactly what our customers desire. Precision along with its partner have made significant strides towards making Precision–s PAC a commercial success in 2018 as outlined as one of our three key priorities for the year. We believe these initiatives will further strengthen the competitive positioning of Precision–s Super Triple fleet while driving additional revenue streams for each of our technology offerings.”
“We are encouraged by the improvement in commodity fundamentals as the global oil supply and demand balance tightens and the WTI/Brent strip has returned to above US$50 per barrel. We believe these fundamentals form a constructive environment as our customers finalize 2018 drilling budgets, with customer bookings for additional rig deployments in late Q4 and Q1 2018 supporting this view.”
“In the U.S. we signed three term contracts in the third quarter and have signed an additional three contracts quarter to date. Volatile and lower than anticipated commodity prices caused industry rig activity to retract mid-Q3 with the trend continuing in recent weeks. Precision experienced a modest reduction in our active rig count with 55 rigs currently active, but overall demand for our Pad Walking Super Triple rigs has remained strong and we expect utilization in the high spec rig market to remain tight and pricing to remain firm. We expect our active rig count to return to 2017 peak levels later this year and into the first quarter of 2018 with the potential for additional utilization improvement as the year progresses should commodity prices hold in the low-to-mid $50–s.”
“Our third quarter activity in Canada was slightly lower than expected as a result of weather delays and a lack of urgency from our customers driven by soft commodity prices, particularly seasonally depressed AECO gas prices which resulted in lower cash flows for some of our customers. Precision–s rig count rose to 57 rigs in the third quarter, with the expectation that activity continues to trend higher as we ramp up into the 2018 winter drilling season. Canadian activity has trended upwards into Q4 hitting 62 rigs last week but has since pulled back to 57 rigs as weather slowed some rig moves. While customer budgets have yet to firm up, early indications point to Q1 peak demand mirroring 2017 levels with a potential for activity to exceed those levels should commodity prices remain firm.”
“Operational performance from our international business continues to be strong with zero recordable incidents in the quarter and a 30% year-over-year improvement in downtime. We expect robust cash flow from the division throughout the year with eight active rigs in the Middle East on contract and no rollovers in 2017. Additionally, we are actively bidding our four idle rigs to attractive opportunities in the region.”
“Precision, as published in 2017 objectives, manages its capital spending based on activity. As such we have reduced our 2017 capital spending program by $34 million to $104 million. The reduction relates primarily to upgrade and maintenance capital. We now plan to spend $39 million in upgrade capital which includes approximately 30 rig upgrades. Precision practices tight capital discipline and will continue to focus on debt reduction until customer demand translates to economics that warrant additional upgrade spending” concluded Mr. Neveu.
SELECT FINANCIAL AND OPERATING INFORMATION
Adjusted EBITDA and funds provided by operations are Non-GAAP measures. See “NON-GAAP MEASURES.”
Financial Highlights
Operating Highlights
Financial Position
RECAST OF COMPARATIVE FINANCIAL INFORMATION
During the third quarter of 2017, we changed our treatment of how certain amounts that were historically netted against operating expense should be classified. In particular, certain amounts that were historically netted against operating expenses are now treated as revenue, with a corresponding increase to operating expenses. The primary nature of these amounts related to additional labour above our standard drilling crew configuration, subsistence allowances paid to the drilling crew which varies depending on whether the crews were staying in a camp or hotel and equipment rental. As a result, previously reported revenues and operating expenses were understated by equivalent amounts.
To conform to current year presentation, certain immaterial reclassifications between operating and general administrative expenses have also been made in the comparative periods.
As a result of these reclassifications, we have recast prior year–s comparative amounts as follows:
The tables below reflect our recast of day rates and operating costs per day for each of the previous six quarters:
There is no impact on net loss or comprehensive loss and the consolidated statement of financial position, consolidated statement of changes in equity and the consolidated statement of cash flows remain unchanged as a result of this recast.
Summary for the three months ended September 30, 2017
Summary for the nine months ended September 30, 2017:
STRATEGY
Precision–s strategic priorities for 2017 are as follows:
OUTLOOK
For the third quarter of 2017, the average West Texas Intermediate price of oil was 7% higher than the prior year comparative period while the average Henry Hub natural gas price was 3% higher. The average AECO price was 29% lower than the prior year comparative period as a result of infrastructure constraints due to planned maintenance and high storage levels.
Contracts
The following chart outlines the average number of drilling rigs that we have under contract as of October 26, 2017 for the remaining quarters of 2017 and the full years 2017 and 2018.
In Canada, term contracted rigs normally generate 250 utilization days per year because of the seasonal nature of well site access. In most regions in the U.S. and internationally, term contracts normally generate 365 utilization days per year. Year to date as of October 26, 2017 we have added 22 term contracts with durations of six months or longer.
Drilling Activity
The following chart outlines the average number of drilling rigs that we had working or moving by quarter for the periods noted.
With improved commodity prices and increasing activity levels, earlier this year we were able to increase prices on spot market rigs across the majority of our fleet. Should commodity prices continue to improve, we expect sequential improvements in pricing in the U.S. and the Deep Basin in Canada. We expect pricing improvements in the shallower parts of the Canadian market; however, the increases are not expected to be of the same magnitude as other North American markets in which we operate.
Industry Conditions
In 2017, drilling activity has increased relative to this time last year for both Canada and the U.S. According to industry sources, as of October 20, 2017, the U.S. active land drilling rig count was up approximately 68% from the same point last year and the Canadian active land drilling rig count was up approximately 41%.
In Canada there has been a strengthening in natural gas and gas liquids drilling activity related to the Deep Basin in northwestern Alberta and northeastern British Columbia although recent weakness in AECO pricing has caused some producers to delay work programs specifically related to dry gas. In the U.S., the trend towards oil-directed drilling continues. To date in 2017, approximately 53% of the Canadian industry–s active rigs and 80% of the U.S. industry–s active rigs were drilling for oil targets, compared with 48% for Canada and 80% for the U.S. at the same time last year.
We expect Tier 1 rigs to remain the preferred rigs of customers globally. The economic value created by the significant drilling and mobility efficiencies delivered by the most advanced XY pad walking rigs has been highlighted and widely accepted by our customers. The trend to longer-reach horizontal completions and the importance of the rig delivering these complex wells consistently and efficiently has been well established by the industry. We expect that demand for leading edge high efficiency Tier 1 rigs will continue to strengthen, as the drilling rig capability has been a key economic facilitator of horizontal/unconventional resource exploitation. Development and field application of drilling equipment process automation coupled with closed loop drilling controls and de-manning of the rigs will continue this technical evolution while creating further cost efficiencies and performance value for customers and further differentiating the specific capabilities of the leading edge Tier 1 rigs and those rig contractors capable of widely deploying those technologies.
Capital Spending
Capital spending in 2017 is expected to be $104 million:
SEGMENTED FINANCIAL RESULTS
Precision–s operations are reported in two segments: the Contract Drilling Services segment, which includes the drilling rig, directional drilling, oilfield supply and manufacturing divisions; and the Completion and Production Services segment, which includes the service rig, snubbing, rental, camp and catering and wastewater treatment divisions.
SEGMENT REVIEW OF CONTRACT DRILLING SERVICES
Revenue from Contract Drilling Services was $279 million this quarter, or 46% higher than the third quarter of 2016, while adjusted EBITDA increased by 57% to $82 million. The increase in revenue was primarily due to higher utilization days in Canada and the U.S. and higher average day rates for international contracts. During the quarter we recognized $5 million in shortfall payments in our Canadian contract drilling business, which was $3 million higher than in the prior year. During the quarter in the U.S. we did not recognize any idle but contracted or turnkey revenue compared with US$6 million and US$3 million, respectively, in the comparative quarter of 2016.
Drilling rig utilization days in Canada (drilling days plus move days) were 4,487 during the third quarter of 2017, an increase of 57% compared to 2016 primarily due to the increase in industry activity resulting from higher oil prices. Drilling rig utilization days in the U.S. were 5,593, or 108% higher than the same quarter of 2016 as U.S. activity was up with higher industry activity. Drilling rig utilization days in our international business were 736 or 14% higher than the same quarter of 2016 due to the addition of two rigs in Kuwait during the fourth quarter of 2016, partially offset by no activity in Mexico.
Compared with the same quarter in 2016, drilling rig revenue per utilization day was down 5% in Canada due to fewer legacy contracts. Drilling rig revenue per utilization day for the quarter in the U.S. was down 22% from the prior comparative period, while international revenue per utilization day was up 15%. The decrease in the U.S. average rate was due to long-term contracts ending and rigs being re-contracted at lower spot market rates, no idle but contracted revenue and no turnkey activity in the current quarter. International revenue per utilization day was up due to rig mix with a higher proportion of days from Kuwait during the quarter and no activity in Mexico.
In Canada, 18% of our utilization days in the quarter were generated from rigs under term contract, compared with 33% in the third quarter of 2016. In the U.S., 55% of utilization days were generated from rigs under term contract as compared with 53% in the third quarter of 2016.
Operating costs were 68% of revenue for the quarter which was in line with the prior year period. On a per utilization day basis, operating costs for the drilling rig division in Canada were lower than the prior year period primarily because of improved absorption of fixed costs with higher utilization. In the U.S., operating costs for the quarter on a per day basis were lower than the prior year period primarily due to no turnkey activity in the current year quarter and the impact of fixed costs spread over higher activity. Both Canada and U.S. operating costs benefited from cost saving initiatives taken in 2015 and 2016.
Depreciation expense in the quarter was 7% lower than in the third quarter of 2016.
SEGMENT REVIEW OF COMPLETION AND PRODUCTION SERVICES
Revenue from Completion and Production Services was up $14 million or 57% compared with the third quarter of 2016 due to higher activity levels in all service lines. As oil prices have recovered, customers have increased spending and activity in well completion and production programs. Our well servicing activity in the quarter was up 60% from the third quarter of 2016 as a result of improved industry activity levels and a larger fleet following the acquisition of service rigs late in the fourth quarter of 2016. Approximately 97% of our third quarter Canadian service rig activity was oil related.
During the quarter, Completion and Production Services generated 90% of its revenue from Canadian operations and 10% from U.S. operations which is in line with the third quarter of 2016.
Average service rig revenue per operating hour in the quarter was $638 or $39 higher than the third quarter of 2016. The increase was primarily the result of increased labour costs which are passed through to the customer.
Adjusted EBITDA was $4 million higher than the third quarter of 2016 due to increased activity in all divisions.
Operating costs as a percentage of revenue decreased to 84% in the third quarter of 2017, from 90% in the third quarter of 2016. The decrease is the result of the impact of fixed costs spread across greater activity combined with our reduced cost structure.
Depreciation in the quarter was $7 million in line with the previous year comparative period. The added depreciation costs in the quarter associated with additional well service units was offset by assets becoming fully depreciated.
SEGMENT REVIEW OF CORPORATE AND OTHER
Our Corporate and Other segment provides support functions to our operating segments. The Corporate and Other segment had an adjusted EBITDA loss of $13 million an increase of $2 million compared with the third quarter of 2016 primarily due to higher share based incentive compensation.
OTHER ITEMS
Net financial charges for the quarter were $32 million, a decrease of $2 million compared with the third quarter of 2016 primarily due to the effect of a stronger Canadian dollar on our U.S. dollar denominated interest expense and a reduction in interest expense related to debt retired in 2016. For the current quarter we incurred a foreign exchange gain of $1 million in line with the third quarter of 2016.
Income tax expense for the quarter was a recovery of $23 million compared with a recovery of $36 million in the same quarter in 2016. The recoveries are due to negative pretax earnings.
LIQUIDITY AND CAPITAL RESOURCES
The oilfield services business is inherently cyclical in nature. To manage this, we focus on maintaining a strong balance sheet so we have the financial flexibility we need to continue to manage our growth and cash flow, regardless of where we are in the business cycle.
We apply a disciplined approach to managing and tracking results of our operations to keep costs down. We maintain a variable cost structure so we can be responsive to changes in demand.
Our maintenance capital expenditures are tightly governed by and highly responsive to activity levels with additional cost savings leverage provided through our internal manufacturing and supply divisions. Term contracts on expansion capital for new-build rig programs provide more certainty of future revenues and return on our capital investments.
Liquidity
In January, 2017 we agreed with our lending group to the following amendments to our senior credit facility:
As at September 30, 2017 we had $1,802 million outstanding under our senior unsecured notes. The current blended cash interest cost of our debt is approximately 6.5%.
Covenants
Senior Facility
The senior credit facility requires that we comply with certain covenants including a leverage ratio of consolidated senior debt to earnings before interest, taxes, depreciation and amortization as defined in the agreement (Adjusted EBITDA) of less than 2.5:1. For purposes of calculating the leverage ratio consolidated senior debt only includes secured indebtedness. Adjusted EBITDA, as defined in our revolving term facility agreement differs from Adjusted EBITDA as defined under Non-GAAP Measures by the exclusion of bad debt expense, restructuring costs and certain foreign exchange amounts. As at September 30, 2017 our consolidated senior debt to Adjusted EBITDA ratio was negative 0.14:1.
Effective January 20, 2017, under the senior credit facility, we are required to maintain a ratio of consolidated Adjusted EBITDA to consolidated interest expense for the most recent four consecutive quarters, of greater than 1.25:1 for the periods ending March 31, June 30 and September 30, 2017. For the periods ending December 31, 2017 and March 31, 2018 the ratio is 1.5:1 reverting to 2.5:1 thereafter. As at September 30, 2017 our senior credit facility consolidated Adjusted EBITDA to consolidated interest expense ratio was 2.04:1.
The senior credit facility also prevents us from making distributions prior to April 1, 2018 and restricts our ability to repurchase our unsecured senior notes subject to a pro forma liquidity test of US$500 million.
In addition, the senior credit facility contains certain covenants that place restrictions on our ability to incur or assume additional indebtedness; dispose of assets; pay dividends, undertake share redemptions or other distributions; change our primary business; incur liens on assets; engage in transactions with affiliates; enter into mergers, consolidations or amalgamations; and enter into speculative swap agreements.
At September 30, 2017, we were in compliance with the covenants of the senior credit facility.
Senior Notes
The senior notes require that we comply with financial covenants including an incurrence based consolidated interest coverage ratio test of consolidated cashflow, as defined in the senior note agreements, to consolidated interest expense of greater than 2.0:1 for the most recent four consecutive fiscal quarters. In the event that our consolidated interest coverage ratio is less than 2.0:1 for the most recent four consecutive fiscal quarters the senior notes restrict our ability to incur additional indebtedness. As at September 30, 2017, our senior notes consolidated interest coverage ratio was 1.89:1 which limits our ability to incur additional indebtedness, except as permitted under the agreements, until such time as we are in compliance with the ratio test, but would not restrict our access to available funds under the senior credit facility or to refinance our existing debt. Furthermore, it does not give rise to any cross-covenant violations, give the lenders the right to demand repayment of any outstanding portion of the senior notes prior to the stated maturity dates, or provide any other forms of recourse to the lenders.
The senior notes contain a restricted payments covenant that limits our ability to make payments in the nature of dividends, distributions and repurchases from shareholders. This restricted payment basket grows from a starting point of October 1, 2010 for the 2020, 2021 and 2024 Senior Notes and from October 1, 2016 for the 2023 Senior Notes by, among other things, 50% of cumulative net earnings and decreases by 100% of cumulative net losses, as defined in the note agreements, and payments made to shareholders. Beginning with the December 31, 2015 calculation the governing net restricted payments basket was negative and as of that date we were no longer able to declare and make dividend payments until such time as the restricted payments baskets once again become positive. For further information, please see the senior note indentures which are available on SEDAR and EDGAR.
In addition, the senior notes contain certain covenants that limit our ability, and the ability of certain subsidiaries, to incur additional indebtedness and issue preferred shares; create liens; create or permit to exist restrictions on our ability or certain subsidiaries to make certain payments and distributions; engage in amalgamations, mergers or consolidations; make certain dispositions and engage in transactions with affiliates.
Hedge of investments in foreign operations
We utilize foreign currency long-term debt to hedge our exposure to changes in the carrying values of our net investment in certain foreign operations as a result of changes in foreign exchange rates.
We have designated our U.S. dollar denominated long-term debt as a net investment hedge in our U.S. operations and other foreign operations that have a U.S. dollar functional currency. To be accounted for as a hedge, the foreign currency denominated long-term debt must be designated and documented as such and must be effective at inception and on an ongoing basis. We recognize the effective amount of this hedge (net of tax) in other comprehensive income. We recognize ineffective amounts (if any) in net earnings (loss).
Average shares outstanding
The following table reconciles the weighted average shares outstanding used in computing basic and diluted net loss per share:
QUARTERLY FINANCIAL SUMMARY
(Stated in thousands of Canadian dollars, except per share amounts)
(Stated in thousands of Canadian dollars, except per share amounts)
CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES
Because of the nature of our business, we are required to make judgments and estimates in preparing our Consolidated Interim Financial Statements that could materially affect the amounts recognized. Our judgments and estimates are based on our past experiences and assumptions we believe are reasonable in the circumstances. The critical judgments and estimates used in preparing the Interim Financial Statements are described in our 2016 Annual Report and there have been no material changes to our critical accounting judgments and estimates during the three and nine month periods ended September 30, 2017.
NON-GAAP MEASURES
In this press release we reference non-GAAP (Generally Accepted Accounting Principles) measures. Adjusted EBITDA, Operating Earnings (Loss) and Funds Provided by (Used In) Operations are terms used by us to assess performance as we believe they provide useful supplemental information to investors. These terms do not have standardized meanings prescribed under International Financial Reporting Standards (IFRS) and may not be comparable to similar measures used by other companies.
Adjusted EBITDA
We believe that adjusted EBITDA (earnings before income taxes, gain on repurchase of unsecured senior notes, financing charges, foreign exchange and depreciation and amortization), as reported in the Interim Consolidated Statement of Loss, is a useful measure, because it gives an indication of the results from our principal business activities prior to consideration of how our activities are financed and the impact of foreign exchange, taxation and depreciation and amortization charges.
Operating Earnings (Loss)
We believe that operating earnings (loss), as reported in the Interim Consolidated Statements of Loss, is a useful measure because it provides an indication of the results of our principal business activities before consideration of how those activities are financed and the impact of foreign exchange and taxation.
Funds Provided By (Used In) Operations
We believe that funds provided by (used in) operations, as reported in the Interim Consolidated Statements of Cash Flow, is a useful measure because it provides an indication of the funds our principal business activities generate prior to consideration of working capital, which is primarily made up of highly liquid balances.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS
Certain statements contained in this report, including statements that contain words such as “could”, “should”, “can”, “anticipate”, “estimate”, “intend”, “plan”, “expect”, “believe”, “will”, “may”, “continue”, “project”, “potential” and similar expressions and statements relating to matters that are not historical facts constitute “forward-looking information” within the meaning of applicable Canadian securities legislation and “forward-looking statements” within the meaning of the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995 (collectively, “forward-looking information and statements”).
In particular, forward looking information and statements include, but are not limited to, the following:
These forward-looking information and statements are based on certain assumptions and analysis made by Precision in light of our experience and our perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. These include, among other things:
Undue reliance should not be placed on forward-looking information and statements. Whether actual results, performance or achievements will conform to our expectations and predictions is subject to a number of known and unknown risks and uncertainties which could cause actual results to differ materially from our expectations. Such risks and uncertainties include, but are not limited to:
Readers are cautioned that the forgoing list of risk factors is not exhaustive. Additional information on these and other factors that could affect our business, operations or financial results are included in reports on file with applicable securities regulatory authorities, including but not limited to Precision–s Annual Information Form for the year ended December 31, 2016, which may be accessed on Precision–s SEDAR profile at or under Precision–s EDGAR profile at . The forward-looking information and statements contained in this news release are made as of the date hereof and Precision undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a results of new information, future events or otherwise, except as required by law.
INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
INTERIM CONSOLIDATED STATEMENTS OF LOSS (UNAUDITED)
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
THIRD QUARTER 2017 EARNINGS CONFERENCE CALL AND WEBCAST
Precision Drilling Corporation has scheduled a conference call and webcast to begin promptly at 12:00 noon MT (2:00 p.m. ET) on Friday, October 27, 2017.
The conference call dial in numbers are 1-844-515-9176 or 614-999-9312.
A live webcast of the conference call will be accessible on Precision–s website at by selecting “Investor Relations”, then “Webcasts & Presentations”. Shortly after the live webcast, an archived version will be available for approximately 60 days.
An archived recording of the conference call will be available approximately one hour after the completion of the call until October 30, 2017 by dialing 1-855-859-2056 or 404-537-3406, pass code 93161565.
About Precision
Precision is a leading provider of safe and High Performance, High Value services to the oil and gas industry. Precision provides customers with access to an extensive fleet of contract drilling rigs, directional drilling services, well service and snubbing rigs, camps, rental equipment, and water treatment units backed by a comprehensive mix of technical support services and skilled, experienced personnel.
Precision is headquartered in Calgary, Alberta, Canada. Precision is listed on the Toronto Stock Exchange under the trading symbol “PD” and on the New York Stock Exchange under the trading symbol “PDS”.
Contacts:
Carey Ford
Senior Vice President and Chief Financial Officer
403.716.4566
Ashley Connolly, CFA
Manager, Investor Relations
403.716.4725
Precision Drilling Corporation
800, 525 – 8th Avenue S.W.
Calgary, Alberta, Canada T2P 1G1
Website: