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Earnings call: Precision Drilling reports growth and strategic upgrades

EditorAhmed Abdulazez Abdulkadir
Published 10/31/2024, 12:35 PM
© Reuters.
PDS
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Precision Drilling (NYSE:PDS) Corporation (ticker: PD), a leading provider of drilling services, reported significant financial and operational growth in its third-quarter earnings call on October 25, 2024. The company, led by President and CEO Kevin Neveu and CFO Carey Ford (NYSE:F), highlighted a year-over-year increase in revenue, adjusted EBITDA, and net earnings. Precision Drilling also emphasized its strategic focus on upgrading its rig fleet and reducing debt, while maintaining a disciplined approach to capital allocation.

Key Takeaways

  • Precision Drilling reported year-over-year growth with an adjusted EBITDA of CAD 142 million and net earnings of CAD 39 million (CAD 2.77 per share).
  • The company has reduced its long-term debt to approximately CAD 775 million and aims to lower it further by year-end.
  • Capital spending for 2024 has been increased to CAD 210 million, targeting rig upgrades and drill pipe procurement.
  • U.S. rig activity averaged 35 rigs in Q3, with a slight decrease in Q4 margins expected.
  • Canadian rig demand remains strong, with high utilization rates and a focus on high-efficiency drilling rigs, especially in the Clearwater region.
  • Precision anticipates a busy 2025, following increased customer activity due to the recent Trans Mountain Pipeline service.

Company Outlook

  • Precision aims to reduce debt by CAD 600 million between 2022 and 2026.
  • The company plans to continue enhancing operational efficiency and shareholder returns.
  • Precision expects high utilization of its rigs in Canada to continue into early 2025, with a forecast of 70-80 rigs operational by early January.
  • Internationally, activity in Saudi Arabia and Kuwait is expected to increase.

Bearish Highlights

  • A seasonal slowdown in Q4 and Q1 is anticipated, particularly affecting 2 to 4 rigs in the Rockies.
  • The overall need for additional rigs in the Middle East is low due to OPEC production constraints.

Bullish Highlights

  • Precision has seen increased interest in upgrading Super Single rigs for better performance.
  • The company won seven contracts with major clients, indicating strong market positioning.
  • Improving gas prices and upcoming LNG projects contribute to a growing optimism in gas activity.

Misses

  • There are no significant upgrades planned for CWC-related rigs at the moment.

Q&A Highlights

  • Neveu confirmed seven new contracts, with two renewals and five new awards.
  • Future capital expenditures will prioritize Super Triples in the U.S. and Super Singles in Canada.
  • The company plans to allocate 50% of free cash flow to shareholder returns, focusing on share buybacks next year.

Precision Drilling's third-quarter earnings call underlined the company's robust financial performance and strategic initiatives aimed at further strengthening its market position. With a clear focus on rig efficiency upgrades and a disciplined capital allocation strategy, Precision Drilling is poised for continued growth in the coming year, capitalizing on favorable market conditions and increased customer activity.

InvestingPro Insights

Precision Drilling Corporation's (PDS) strong financial performance, as highlighted in their recent earnings call, is further supported by data from InvestingPro. The company's P/E ratio of 5.4 suggests that it may be undervalued relative to its earnings, which aligns with the company's reported growth in revenue and adjusted EBITDA.

InvestingPro data shows that Precision Drilling's revenue for the last twelve months as of Q3 2024 stood at $1,435.34 million USD, with a gross profit margin of 35.45%. This robust financial performance is reflected in the company's operating income margin of 12.68% for the same period, indicating efficient operations and cost management.

An InvestingPro Tip highlights that Precision Drilling has been profitable over the last twelve months, which is consistent with the positive net earnings reported in the earnings call. Another InvestingPro Tip notes that the company has a high shareholder yield, which could be attractive to investors given Precision's commitment to allocate 50% of free cash flow to shareholder returns, primarily through share buybacks.

It's worth noting that InvestingPro has 6 additional tips available for Precision Drilling, which could provide further insights into the company's financial health and market position.

The company's focus on debt reduction is particularly noteworthy, as InvestingPro data indicates that Precision Drilling's liquid assets exceed its short-term obligations. This financial stability supports the company's ability to invest in rig upgrades and expansion, as outlined in their increased capital spending plans for 2024.

For investors seeking a more comprehensive analysis, InvestingPro offers additional metrics and tips that could provide valuable context to Precision Drilling's market performance and future prospects.

Full transcript - Precision Drilling Corp (PDS) Q3 2024:

Operator: Good day, and thank you for standing by. Welcome to the Precision Drilling Corporation 2024 Third Quarter Conference Call. I would now like to hand the call over to Lavonne Zdunich, Vice President of Investor Relations.

Lavonne Zdunich: Welcome to Precision Drilling's third quarter earnings conference column webcast. Today I'm joined by Kevin Neveu, our President and CEO, and Carey Ford, the CFO. Yesterday Precision reported strong third quarter results which Kerry will review, followed by outlook commentary and an operational update 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. With that, I will pass it over to Carey.

Carey Ford: Thank you, Lavonne. In the quarter, Precision delivered year-over-year growth in revenue, adjusted EBITDA, and net earnings. The resilience of our high-performance, high-value business model, geographic diversification, and organizational focus on cash flow and return on capital drove our financial results. We continue to strengthen our balance sheet with CAD49 million of debt reduction during the quarter and CAD152 million year-to-date, reaching the low end of our target range of CAD150 million to CAD200 million in 2024. Share repurchases were CAD17 million during the quarter and CAD50 million year-to-date, tracking the target of 25% to 35% of free cash flow allocated to shareholders. We expect strong cash flow during the fourth quarter and will continue to make progress with these targets. Longer term, we plan to reduce debt by CAD600 million between 2022 and 2026 over the next nine quarters with approximately CAD190 million remaining, achieve a leverage level of low one times net EBITDA, and increase our direct shareholder returns toward 50%. Precision's progress on balance sheet strength and shareholder returns has positioned us to be able to capture opportunistic high-value investments. We are increasing our 2024 capital spending plan from CAD195 million to CAD210 million to fund multiple contracted rig upgrades and take advantage of purchasing in-demand drill pipe for 2025 drilling programs ahead of potential import tariffs. In the past, we pursued similar opportunistic investments while meeting our annual capital allocation goals. These included the High Arctic and CWC acquisitions, as well as year-end pull-forward capital purchases at the end of 2023 and again this year. These investments have all produced excellent returns for our shareholders. In fact, as of the end of third quarter this year, we believe the assets purchased in the High Arctic transaction have paid for themselves in approximately two years. Moving on to Q3 performance. Adjusted EBITDA of CAD142 million included a CAD200,000 share-based compensation recovery. Net earnings were CAD39 million or CAD2.77 per share, representing the ninth consecutive quarter of positive earnings for Precision. Funds provided by operations and cash provided by operations were CAD113 million and CAD80 million respectively. Margins for Canada were CAD12,877, lower than guidance due to rig mix, as we had increased demand for Super Single and double rigs. Margins for Q4 are expected to be approximately CAD15,000 a day, with increased winter seasonal ancillary revenue pull-through. In the U.S., drilling activity for Precision averaged 35 rigs in Q3, a decrease of one rig from the previous quarter. Daily operating margins in Q3, excluding the impacts of turnkey and IBC, were $10,888, essentially flat from Q2. For Q4, we expect margins to decrease slightly to approximately $9,500 a day. Internationally, drilling activity for Precision in the current quarter averaged eight rigs. International average day rates were $47,223, a decrease of 8% from the prior year due to incurring 44 non-billable utilization days for a rig undergoing a certification. This decrease was offset by a positive year-over-year rig mix. In our C&P segment, Adjusted EBITDA this quarter was CAD20 million, up 40% compared to the prior year quarter. Adjusted EBITDA was positively impacted by a 34% increase in well service hours, the integration of the CWC acquisition, and improved pricing. C&P results were further supported by Precision Rental Business, which is realizing increased demand and utilization for centrifuge equipment on super triple rigs for customers in the monotony. Our contract rig fleet continues to support our outlook, with average annual rigs under contract in 2024 of 18 in the U.S., 23 in Canada, and 8 internationally. Now moving to the balance sheet. As of September 30th, our long-term debt position net of cash was approximately CAD775 million, and our total liquidity position was approximately CAD510 million excluding letters of credit. Our net debt to trailing 12 month adjusted EBITDA ratio is approximately 1.4 times and our average cost of debt is approximately 7%. We expect our net debt to adjusted EBITDA ratio to be approximately 1.3 times by year end. Moving on to guidance for 2024, we expect depreciation of approximately CAD300 million, cash interest expense of approximately CAD70 million, cash taxes to remain low, and our effective tax rate to be approximately 25%. We expect SG&A of approximately CAD100 million before share based compensation expense. And we expect share based compensation charges for the year to range between CAD40 million and CAD60 million at a share price range of CAD80 to CAD120. And the charge may increase or decrease by up to CAD20 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. I am pleased with the third quarter financial results and remain confident with the outlook for the balance of the year as we continue to make progress towards achieving our stated objectives. My confidence stems from the focus and discipline across the Precision organization seeking to maximize free cash flow from every aspect of our business. This is ingrained in our culture and underpins everything we do. I'm also very pleased that Precision's increased international and Canadian rig activity has more than offset the constrained U.S. market. For the third quarter, Precision is one of the few service companies reporting a material increase in overall activity, billing 10% more drilling days compared to the same period last year. And as I'll cover later in my prepared comments, we remain confident in the Canadian and international markets while we expect a modest increase in the U.S. as reloaded budgets for 2025 kick in. Looking forward to next year, our multi-year journey to improve our balance sheet and reset our capital structure will turn an important corner as our debt leverage drops below one times EBITDA. While this may not be our final debt level objective, the company will enjoy substantial increased financial flexibility to further exploit opportunistic growth at investments to increase shareholder capital returns and execute further capital structure improvements. A good example of this opportunistic investment strategy is a multi-million dollar advanced purchase of drill pipe Carey mentioned. We took advantage of excess vendor inventories and vendor discounts while front running possible tariff increases procuring drill pipe that we'll utilize during the upcoming year. There should be no question that Precision shareholders will be the prime beneficiaries of this resetting of the capital structure through increased capital returns and opportunistic growth investments which would all enhance the enterprise value. So now turning to our operations update, in Lower 48, it's steady as she goes is the theme. Customer demand remains constrained by volatile oil prices, soft natural gas prices, customer consolidation, and annual budget exhaustion. Precision's U.S. rig activity continues to be relatively stable, albeit at levels below where I like. Rig activity remained in the mid-30s over the past quarter. We expect to sustain this level through the fourth quarter. With 2025 budget reloads on the horizon, we are seeing signs of a modest rebound in U.S. activity as we've added seven term contracts since the end of the second quarter with activation dates ranging from beginning late this year into the first few days of 2025. The day rates on the ST 1500 contracts remain in the low CAD30,000 per day range while our ST 1200s, also in the booking group, are in the upper 20s range. I want to reiterate comments I've made in the past that we're not looking to defend market share with aggressive pricing, with driller subsidized rig moves, or any other high-value services combined or included in the day rate. We believe it remains fundamental to our high-performance, high-value strategy that we pursue the appropriate financial returns for the exceptional value our rigs provide our customers. Regarding these new contract additions, five of these contracts are with the consolidating majors. We believe this is a good indication that operator consolidation is transitioning to full integration and that Precision is becoming a beneficiary of these majors high grading and rationalizing the driller contractor mix. Also notable is that each of these contracts includes additional premiums for our alpha automation, alpha apps, and several of our evergreen diesel reduction solutions. On that note, 2024 has been a very strong year for Evergreen product rollout. Approximately 50% of our active rigs across our fleet have at least one Evergreen solution installed and are earning incremental revenue. Precision's Evergreen strategy to deliver both economic value and diesel fuel reductions to our customers while earning a premium return on investment for Precision ensures that the full value produced by these solutions is shared equally between precision and the operators. I expect this fleet-wide rollout to continue for the next several years as we continue in our efforts to improve energy efficiency, reduce diesel consumption, and continue the transition to low-emission power solutions for our rigs. Now turning to Canada, demand for our rigs targeting heavy oil, condensate, and LNG remains very high. Consequently, the demand for our Super Singles and super triples remains very high. The importance of the trans-mountain pipe reducing the oil export bottlenecks has been a huge stimulus for heavy oil and condensate drilling activity. So for those of you on the call who may be less familiar with the Canadian heavy oil drilling market, let me provide a brief overview. Heavy oil drilling and production in Alberta is very well understood by the operators and has been technically de-risked for a vast geographic extent ranging from northwestern Alberta across to the western edge of Saskatchewan. These reserves are huge with decades of drilling inventories including conventional heavy oil, SAGD, oil sands, and Clearwater. The scale is immense. And while the technical and geological risk is low, the producing zones are relatively shallow, generally under 3,500 feet vertical depth, and usually involve horizontal wells and in some cases slant-style drilling. The well completion costs are relatively inexpensive as no fracturing or stipulation is needed. The drilling operation is the key cost driver, and hence customers will pay a premium for safe, high-efficiency rigs which can drill and move quickly and efficiently. Specifically in the Clearwater, the operators utilize these complex multi-well designs where wellbore accuracy and placement is critical. These customers desire operational excellence and high efficiency and will pay a premium for well-trained crews on high-performance rigs. Now since this heavy oil is thick or viscous and difficult to pump, gas condensate liquid is blended with the heavy oil to improve or reduce the viscosity for easier pipeline transfer and oil shipping. The Canadian market is short about 275,000 barrels per day of condensate which drives the condensate commodity price roughly in line with WTI prices and then stipulates drilling for this important resource. We've been pleasantly surprised by the near instantaneous customer response to these market drivers with a wide swath of our client base increasing activity almost immediately following the Trans Mountain Pipeline entering service. Utilization for our Super Single rigs, drilling heavy oil, and for our super triple rigs, drilling Montney Gas and gas condensate are both at historic highs for these rig classes. Today we have 75 rigs operating in Canada and expect this pace to continue other than a short few days around Christmas as some customers may give rig crews a break before getting fired up for what looks like a very busy 2025. We expect winter activity to wrap up fast and early this year beginning as soon as December 27th with our activity hitting high-70s or low-80s by the end of the first week of January. Peak activity this winter should exceed last year for precision. Based on current customer plans, the seasonal spring breakup will be weather driven, not budget driven. And we expect a busy spring breakup period similar to last year with many rigs on large multi-well pads operating through breakup. Now I'll remind the listeners that in the spring of 2024, our seasonal activity declined only 33% from winter levels due to that high percentage of pad drilling rigs operating through breakup. And we expect this reduced seasonality trend to be a permanent shift in the Canadian activity profile for precision. Now over the last several weeks we received multiple customer inquiries for additional conversions of our Super Single rigs to full pad systems. These upgrades include increasing the torque the rigs can deliver, increasing the mud handling capacity and capabilities for the rigs, and adding pad equipment to the rig. The payback on these upgrades is less than two years, meeting our capital return expectations. Now following the integration of the CWC transaction from late last year, Precision is also now a meaningful participant in the price sensitive Tele-Double market. While not previously a focus for Precision, today we are operating eight Tele-Doubles and as many 12 rigs of this class at times during the third quarter, with substantially more than combined pre-closed total of six rigs and well above the two Tele-Doubles Precision operated separately last year. Now for those of you less familiar with the Canadian rig market, the rig I'm referring to is a telescoping double or commonly called a Tele-Double. These are shallow to medium depth double stand rigs. And while they lack the overall high efficiency of super triple rig, they can compete on single well pads with some of the lower grade triples. Now the industry overbuilt this rig class between 2005 and 2015, as these were primarily targeting shallow gas at the Cardium and Viking oil plays. During that time Precision largely focused on building out then our newly introduced super triples for the Montney and expending our fleet of well-known Super Singles for heavy oil. Now the Canadian market remains oversupplied with these Tele-Doubles and the market rates of these rigs are still substantially lower than both our super triples and our pad equipped Super Singles. However, this is a market for Precision scale based cost advantage. Our operational leverage, superior safety and crew capabilities enables Precision to operate Tele-Doubles and still earn an accretive margin and deliver meaningful free cash flow. And this rig class will not require any meaningful allocation of capital outside of normal maintenance spending. So turning to our Canadian well service business, the integration of the CWC assets is complete. We've achieved our plan synergies as Carey mentioned earlier. More importantly, we have Canadian basin wide coverage with meaningful exposure in every operating area in Alberta, British Columbia and Saskatchewan. The winter season looks very busy, likely with industry-wide crew shortages keeping tension on the supply side of well servicing availability. We believe our scale and focus on crew safety and retention will give us a leg up on the competition as customers scramble to get the service rigs they need. Now turning to our international business, it's also stead as she goes. As Carey mentioned, we experienced a low in revenue during the third quarter due to an extended recertification of one rig. That rig was back up and operating a few days ago. We expect Q4 revenue for an international group will trend closer to normal levels. We're also expecting a tender package later this year or early next year in Kuwait, which may give us an opportunity to activate our one remaining idle rig during 2025. We'll keep you informed as this progresses. Essentially, Precision's international activity in Saudi Arabia and Kuwait will significantly up from 2023 as a strong stable generator of free cash flow for Precision. So to conclude my comments, I want to thank our customers and our investors for the strong support for Precision. I want to thank the people of Precision once again for a strong operational quarter with excellent financial results. So I'll now turn the call back to the operator for questions.

Operator: Thank you. [Operator Instructions] Our first question comes from Kurt Hallead with Benchmark. Your line is open.

Kurt Hallead: Hey, good afternoon everybody or good morning wherever you may be. Thanks for all that detail on the call and I think Kevin, you referenced a much more stable or relatively stable kind of outlook for Canada going out into next year with the potential for the Canadian LNG to cause a shortage and Super Triples. Can you expand upon that a little bit? To what magnitude do you think there -- if there is to be a shortage, what that magnitude would be?

Kevin Neveu: That's a great question and you'll notice my comments were a little brief on LNG and our prepared comments. First thing I'll say is we were surprised by how quickly customers responded to the takeaway capacity for the Trans Mountain pipeline. And I'd say the demand was probably 10% to 15% higher than we expected resulting from that pipeline expansion. So we're watching anxiously to see how LNG Canada fires up. We know the gas is going to the pipe now to get the facility commissioned. We're still hearing the first shipments are going to be happening at the end of the second quarter in 2025 for LNG Canada. So I think that we'll see rig demand increase and it might be two or three rigs or it could be a little more, maybe four or five rigs. But it feels like demand is in that kind of two to five rig range to balance out the needs for LNG Canada.

Kurt Hallead: Okay, great, appreciate that color. Then maybe for Carey, I've kind of referenced the dynamics around some of the potential upgrades that you got coming for some of these Super Single rigs and so on. How should we think about free cash flow conversions in 2025?

Carey Ford: Yeah, if you remember, Kurt, all of the rigs, whether it's a Super Single or Super Triple, they're modular and the upgrades that we're doing are really bolt-on upgrades. Typically they're going to kind of be in the CAD1 million to CAD3 million dollar range. So an individual upgrade won't upset a prescribed capital allocation plan whether it's 2024 or 2025. So I would before we announce our formal plan at the beginning of next year, I would say that it will likely look pretty similar to this year with allocations towards debt reduction and share repurchases. And I'll just leave it there.

Kevin Neveu: Yeah, I think we'll give more clear guidance on our plans in 2025 early in the year like we typically do.

Kurt Hallead: Okay, great. And one more thing, just for clarity, Kevin, again in your press release and reference you got seven contracts starting up at the end of the year for projects in 2025. Is that going to be sufficient to kind of keep your run-rate in the mid-30s or is that going to be are those seven rigs going to wind up being additive to that 35 rig count that you had in third quarter?

Kevin Neveu: Kurt, that's a really great detail question. And I'll do the best I can to answer it. There's still a fair amount of churn in the uncontracted rigs. You've got a block of rigs that are uncontracted, they're welded well. There has been churn and that churn is going to continue between now and the end of the year. I'd say that the range is kind of low to mid-30s to maybe as high as low-40s early in the next year. But there's a range and I think increasing commodity volatility probably keeps it towards the low end of the range and more commodity price stability probably moves us to the higher end of the range. So I hate to give you such a wide range. I don't think it's going to impact our capital or free cash flow plans dramatically because I think we're covering a lot of that with our international and our Canadian businesses.

Kurt Hallead: Got it. Thank you. Appreciate it.

Kevin Neveu: Great, thank you.

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

Waqar Syed: Thank you for taking my question. Carey or Kevin, when do you expect U.S. drilling margins to bottom?

Kevin Neveu: So that's -- they may have already bottomed but if there's more weakness in the industry rig count, maybe they haven't. I think the resiliency this year has been really impressive for us and for the industry. One dynamic of our margins that I think you probably would see comparing to some of our peers that have already reported. They're several thousand dollars a day lower and there's a couple reasons for that. We had about 60% of our rigs that were working in the third quarter were Super Triple 1500s. The rest were 1200s or a few of the CWC rigs that we acquired at the end of last year. When we strip out the non-Super Triple 1500 rigs, our day rates were right in line with where our peers that have already reported day rates and our margins would have been a couple thousand dollars a day lower, which is a result of the lower fixed cost absorption that I've mentioned a couple times on previous calls. So I think the margins for Precision are quite a bit better for our Super Triple 1500s than what we're reporting on average. And we would expect certainly to have some stability in those margins in the coming quarters.

Waqar Syed: Okay, and you now have some seasonality in your activity in Q4 and Q1 primarily for some of those CWC rigs acquired in the Rockies area. Do you expect that seasonality this winter as well and if so what would be the impact like?

Kevin Neveu: Well, that seasonality is in the range of two to four rigs, which normally wouldn't trouble me too much, but with 35 rigs running, two to four rigs starts to sound like a bigger number. I think there's a fair amount of churn and there's a pretty good chance we can mitigate that, but it'll be a day-to-day review with our operations team and sales team.

Waqar Syed: And how many rigs are -- and I can look up as well. But how many rigs are working in the Rockies right now for you?

Kevin Neveu: Yeah, it's in the range of two to four rigs depending on what's happening on a day-to-day basis.

Carey Ford: And that would just be Wyoming. We've got -- we have another six rigs or so working in Colorado.

Waqar Syed: Okay. And Kevin, you mentioned about these seven contracts that you've won with majors and consolidators. Do you know if this is incremental demand or if you are, you said that there was some high grading going on. Are they high grading from some of these small grading contractors or it's also happening with some of your large four peers as well?

Kevin Neveu: It doesn't appear that we're taking market share away from a large peer. It probably looks like we're replacing lower grade rigs. Sometimes it's hard to tell exactly.

Waqar Syed: Sure. Okay. That's all for me. Thank you very much.

Kevin Neveu: Great. Thanks, Waqar.

Operator: Our next question comes from Sean Mitchell with Daniel Energy Partners. Your line is open.

Sean Mitchell: Hey, guys. Thanks for taking the question. A couple of thoughts. We've heard some rumblings about, obviously, a seasonal slowdown in Q4 in North America over the course of the last week or two. But with gas prices in the strip showing some signs of life, are you guys hearing anything from your customers on increasing activity on the gas side?

Kevin Neveu: Sean, a great question. I think there's probably a little bit more optimism on gas now than there might have been a few weeks ago. And certainly, seeing seasonal prices improve and then LNG coming on this in the next 12 months, I think there is a little more focus on gas and I think that you'll see the gas rate move up at least modestly.

Sean Mitchell: Got it. And then maybe one follow-up --

Kevin Neveu: Let me qualify that. Every time I've made a rig count prediction, the rig count's going up a week after the conference call. Something changes that.

Sean Mitchell: No, that's fair. It's tricky. Maybe a follow-up here. Can you share your thoughts about kind of growth in your current service lines and any additional service lines you guys might pursue in the world of M&A?

Kevin Neveu: Sean, we've really worked hard to look at consolidating in the areas where we currently have business. So, the last couple of transactions in Canada have been consolidating transactions. Before that, we exited coiled tubing and swapped into more well-serviced rigs. I think we remain a believer that this industry requires more consolidation. We can see some of the benefits to the service industry in Canada where the returns are approaching a more normalized industrial-style return on the assets in Canada. So I think that as we look at consolidation, it's less likely that we go sideways to other product lines and more focused on the things we do well.

Sean Mitchell: Okay. That's helpful. All right, guys. Thanks for the color.

Kevin Neveu: Thanks, Sean.

Operator: Our next question comes from John Gibson with BMO Capital Markets. Your line is open.

John Gibson: Good morning, and thanks for taking my question. I just wanted some clarification on the margin guidance for Q4. Did you say CAD15,000 for Canada?

Carey Ford: Yeah, approximately CAD15,000, John.

John Gibson: I'm just wondering, what is the delta from Q3? Is it mostly rig mix? Are you seeing some pricing improvements?

Carey Ford: So I think the pricing is stable to slightly up across rig classes. The rig mix will be pretty similar. We have a couple of super triples that will be firing up in Q4, which will help. And then there's ancillary winter revenue that will be supporting margins like it typically does in Q4.

John Gibson: Got it. On your capital return program, you talked about a shift to 50% of free cash flow being allocated to shareholder returns. Is that still a 2025 story, and are buybacks the focus or could you look at maybe mixing a dividend in next year?

Carey Ford: Yeah, I think we've never said that 2025 would be a 50% allocation. We said we'd be continually moving towards that number. So I think it's fair to assume we will be increasing our allocation towards shareholders. And I think when we get to below one times net debt to EBITDA, it'll be much more likely that we'll be at that 50% level. Right now, share buybacks have worked really well for us. I think that's going to be the mechanism to return capital directly to shareholders next year. And we will be talking about a dividend more frequently. We talk about capital allocation with our board every quarter, but I'm sure it'll become more prominent in the discussion.

John Gibson: Okay, that's fair. Last for me, on the international bids, apologies if I missed this, but have you seen much improvement or movement there, sorry, either positive or negatively, as you look out to potential signings moving forward?

Kevin Neveu: John, what you might not have heard or seen is that in Saudi Arabia, Aramco (TADAWUL:2222) suspended some offshore rigs, offshore jackups and some land rigs. Some of the other contractors saw their land rigs be suspended for a period of time, up to a year, maybe longer. We weren't under any of that. Our rigs are still running. We have no suspensions. But I think that tells you a bit about what's going on in the Middle East right now, that as long as OPEC has production constraints in place. The need for additional rigs is quite low or muted. So in fact, Saudi Arabia is pulling down drilling a little bit. I think that the tender delays in Kuwait have been linked to production constraints. I think as they start planning to release constraints over time that those rig needs will go up. But of course, we're coming to another OPEC meeting here in a few days' time in December, where they'll talk about whether they delay or not releasing more production. I would tell you -- I've been really surprised at how disciplined OPEC has been and how important it is to the OPEC members to, I'd say, support investable prices, as they call it. So I think there's going to be strong support to keep a narrow ban on oil prices, which likely means that production constraints stay in place a little longer, which probably means they don't need more rigs for a little longer. Long answer to a pretty simple question. I'm sorry.

John Gibson: No, I appreciate that. It's all very good colors. So thanks again and congrats on the strong quarter. Glad to see the reaction in the markets today.

Kevin Neveu: Thank you.

Operator: Our next question comes from Keith Mackey with RBC Capital Markets. Your line is open.

Keith Mackey: Hi, good morning. I just wanted to start out on the rig market in Canada. Kevin, you gave some helpful color on the three different classes of rigs. My question is, if the Tele-Double market is overbuilt, as you alluded to. Is there a risk or a meaningful risk that you see that some of those rigs can compete either in your Super Single category or Triple category and take away some of the pricing or market share? Or are you not seeing that and don't expect to see that yet?

Kevin Neveu: Keith, those rigs do compete with us in the Super Single category. They do compete with us in the Super Triple category. The math of the day rates works so that if a drilling pad is bigger than three wells per pad. Then there's almost nothing a tele-double can do to compete with a Super Triple, even at a very low price. The value a Super Triple produces on medium to large pads, you can't overcome that with a low rate on a Tele-Double. On one-well pads, two-well pads, yes, there is head-to-head competition. Virtually all of our work is on multi-well pads right now. I think 100% of our Super Triples are on multi-well pads. On the Super Single side, no question that a Tele-Double can compete. There's a meaningful difference in the cost to mobilize that Tele-Double compared to a Super Single. We can move a Super Single in about a third fewer truckloads. In short-duration wells, trucking costs become material. Again, it means that Tele-Doubles can compete, but the rate has to be substantially lower to balance out with that trucking cost. So as a result, we can achieve higher day rates for the Super Single. Then when we make a pad Super Single, then that Tele-Double can't compete.

Carey Ford: Yeah, further to that point, if you look at our utilization on Super Singles this quarter and going into Q4, we're kind of in the 90% range on Super Singles. When our Tele-Doubles were around 50%, we think that 50% is representative of where the Tele-Doubles in the industry are working right now. The Super Single is just really in a class of its own in terms of what it can do in the heavy oil markets and best reflected in the utilization.

Keith Mackey: Yeah, understood. How would roughly that CAD15,000 per day margin break out between your different rig classes, if you had to describe it that way?

Carey Ford: Yeah, I think the way I would describe it is the Super Triples are on average higher than CAD15,000. The Super Singles are a bit lower than CAD15,000, and the Tele-Doubles are a bit lower than that.

Keith Mackey: Got it. Okay, I'll leave it there. Thanks very much.

Carey Ford: Thank you, Keith.

Operator: Our next question comes from Ali Hemraj with TD Cowen. Your line is open.

Aaron MacNeil: Is that me?

Carey Ford: Yes.

Aaron MacNeil: Aaron MacNeil. Sorry about that. Kevin, maybe I'll ask Kurt's question a bit differently. As it relates to the seven new contracts, are you reactivating idle rigs or are these essentially already working? Are they essentially extensions or finding new homes for rigs that have contracts winding down?

Kevin Neveu: Of the seven, two would be contract renewals or extensions, five would be new customer, new contract awards. Some of those rigs will have worked in the past four or five months. Some of those rigs have not worked this year.

Aaron MacNeil: Got you. That's super helpful. And then, any other color on what types of upgrades that are occurring? I'm particularly interested on the CWC-related rig side, if that's applicable? And also curious to know if you're moving rigs to new bases.

Kevin Neveu: We're not moving any rigs in this current round. Nothing we've got scheduled to move in the near term. Perhaps one rig -- I'm wrong. There might be one rig moving up to the DJ basin, actually, 1,500-horsepower rig moving to the DJ basin. I think that's in the mix. And that move is paid for by the client, not paid for by us. Be clear on that. The upgrades are going to be things like racking capacity and pressure capacity on the rigs. We're going from 5,000 to 7,500 PSI adding a third mud pump on one or two rigs.

Carey Ford: Kevin said in his comments on the Tele-Double Fleet, we don't foresee a whole lot of upgrade capital going forward as screen maintenance capital on the Tele-Double Fleet. All of the upgrade capital that we will be spending in Q4 and going into the first part of next year will be on Super Triples in the U.S., Super Singles in Canada and maybe a little bit on Super Triples in the Canadian market.

Aaron MacNeil: I was referring to the Triples in the U.S., the CWC Triples if there were any --

Kevin Neveu: Aaron, none of those Triples are currently scheduled for an upgrade at this point.

Aaron MacNeil: Got it. That's helpful. And then maybe one more for Carey, expanding on John's question. Year-to-date, the pace of the buyback would suggest you're shooting for the bottom end of the range. The debt target has already been achieved. If we're just thinking exclusively about Q4, should kick off a decent amount of free cash flow. What's the capital allocation priority for the last two months of the year?

Kevin Neveu: We put forward an annual guidance for how we're going to allocate capital, and we're going to continue to follow that annual guidance, but it's going to be a mix between debt reduction share buybacks and cash flow.

Aaron MacNeil: Fair enough. I'll leave it there. Thanks, guys.

Operator: 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.

Lavonne Zdunich: I'd like to thank everyone for joining us today. And if you have any follow-up questions, you can give me a call later today. Thanks, and have a great afternoon.

Operator: Ladies and gentlemen, let's conclude today's presentation. You may now disconnect and have a wonderful day.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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