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Precision Drilling Corp
Symbol PD
Shares Issued 277,299,804
Close 2020-02-13 C$ 1.88
Recent Sedar Documents

Precision Drilling earns $6.61-million in 2019

2020-02-13 09:02 ET - News Release

Mr. Kevin Neveu reports

PRECISION DRILLING CORPORATION ANNOUNCES 2019 FOURTH QUARTER AND YEAR END UNAUDITED FINANCIAL RESULTS

Precision Drilling Corp. has provided its 2019 fourth quarter and year-end highlights.

Revenue of $372-million was a decrease of 13 per cent compared with the fourth quarter of 2018.

Net loss of $1-million or nil per diluted share compared with a net loss of $198-million or 68 cents per diluted share in the fourth quarter of 2018. The company's 2019 earnings per diluted share were two cents, compared with a net loss of $1 per diluted share in 2018. In the quarter the company decommissioned certain drilling and ancillary equipment that no longer met its high performance technology standards for a loss on asset decommissioning of $20-million that, after-tax, increased the company's net loss by $15-million and net loss per diluted share by five cents. During the fourth quarter of 2018, the company incurred goodwill impairment charges that, after-tax, reduced net earnings by $199-million or net earnings per diluted share by 68 cents.

Earnings before income taxes, gain on repurchase and redemption of unsecured senior notes, finance charges, foreign exchange, impairment of goodwill, reversal of impairment of property, plant and equipment, loss on asset decommissioning, gain on asset disposals and depreciation and amortization (adjusted EBITDA) of $105-million was 22 per cent lower than the fourth quarter of 2018.

Funds provided by operations was $76-million versus $93-million in the prior year quarter. Cash provided by operations was $75-million versus $93-million in the prior year quarter. The decrease in funds and cash provided by operations was primarily the result of lower activity and the non-recurring transaction termination fee that was received in the fourth quarter of 2018.

During the quarter the company reduced its debt by $59-million bringing its 2019 debt reduction total to $205-million with an additional $25-million (U.S.) of its 6.5 per cent unsecured seniors notes due 2021 redeemed subsequent to year-end. The company's 2019 debt repayments are expected to reduce its 2020 interest expense by $10-million (U.S.).

Capital expenditures were $22-million in the fourth quarter, $8-million lower than the prior year quarter and consisted of opportunistic deployment of capital on long-lead items, pull-forward spend on certain maintenance capital and $2-million of capitalized recertification costs.

Pursuant to the company's normal course issuer bid, it purchased and cancelled 16 million common shares for $26-million in 2019. Subsequent to Dec. 31, 2019, the company purchased and cancelled an additional two million common shares for $3-million, leaving it with 275 million common shares outstanding at Feb. 12, 2020.

The company's 2019 adjusted EBITDA from its contract drilling services and completion and production services segments were $429-million and $24-million, respectively, representing a 4-per-cent and 62-per-cent increase from 2018.

The company commercialized its AlphaAutomation technology offering with its 32 field-deployed systems earning commercial rates, drilling approximately 613 wells in 2019, an increase of 69 per cent over the prior year.

Precision's president and chief executive officer Kevin Neveu stated: "During the fourth quarter, Precision's strong financial results were led by rising Canadian activity in our contract drilling services and completion and production services segments, firm international activity, and flattening customer demand in the U.S. As a result of Precision's high performance, high-value strategy, market positioning in key basins, commercialization of AlphaAutomation, intense cost control and cash management efforts, we generated adjusted EBITDA of $105-million and cash provided by operations of $75-million. Results delivered this quarter demonstrate Precision's ability to consistently generate cash, reduce debt and repurchase shares.

"In Canada, Precision maintained its record level market share, supported by leading market positions in the Montney, Duvernay and heavy oil regions. Our 26 AC Super Triples and over 60 Super Singles provide Precision an unmatched scale efficiency and competitive advantage throughout all key regions in the Western Canadian market. This momentum has continued into the first quarter of 2020, as seasonal customer demand has remained strong well into February. The company reached a peak of 83 active rigs in January, compared with a peak of 62, up 34 per cent from the first quarter of 2019, and has 80 rigs running today compared to 55 this time last year. Although longer-term Canadian demand will be driven by customer capital discipline and commodity prices, we expect our market positioning and scale in our Canadian drilling segment to continue to generate strong cash flows throughout the course of the year.

"In the U.S., Precision's fourth quarter average rig count was in line with our expectations and generated sequentially improved margins supported by firm day rates and aggressive cost management. Our rig count ended the year softer than anticipated, due to a large customer reducing operations and idling three contracted AC ST-1500s. Precision remains confident in its ability to redeploy these rigs as the oil and gas operators continue to high-grade drilling operations in 2020. We anticipate capital discipline, operating efficiency and industrial scale will remain central themes in the U.S. market and customer spending behaviour will be largely defined by remaining within cash flow and maximizing drilling efficiencies. These market trends align well with Precision's high performance, high-value strategy, our Alpha technologies offering and our ability to deliver industrial efficiencies to our customers.

"Internationally, the business remains a stable source of cash generation. Looking to 2020, Precision will continue to leverage its expanded scale in Kuwait and will prioritize reactivating idle assets in the Middle East region.

"Precision's completion and production services segment finished the year on firm footing, generating strong free cash flow, improved margins and good progress on both pricing and market share despite a highly fractured market. Our team has focused and delivered on effectively managing all elements within their control including reducing fixed and variable costs, strong operational performance, training and crewing rigs, and ensuring the integrity of the assets, all while continuing to effectively manage customer relationships. We expect customer spending in 2020 will largely be tied to the commodity macro and our scale and operational efficiency will continue to support free cash flow generation in the current environment.

"Precision delivered on its 2019 strategic priorities established at the beginning of the year. First, the company generated substantial free cash flow, allowing us to exceed our annual debt repayment targets for the second consecutive year by paying down $205-million of debt. Since the beginning of 2018, Precision has reduced its debt levels by $412-million, already eclipsing the low end of our four-year targeted debt reduction range of $400-million to $600-million by end of year 2021. For 2020, we plan to reduce debt by $100-million to $150-million and are now providing guidance for an additional year with a goal to reduce debt by $700-million between 2018 and 2022. Second, Precision continued to leverage its scale and high performance Super Series fleet to drive both strong operating margins and market share gains in the U.S. and Canada. Finally, the company delivered on its technology initiatives for the year, achieving full commercialization of our AlphaAutomation system.

"Achieving our AlphaAutomation commercialization milestone was a result of three years of field-hardening the technology with over 1,100 wells drilled to date, extensive training of over 100 crews and close collaboration with our customers to demonstrate the efficiency and value this technology delivers. Looking to 2020, we plan to deploy an additional 24 AlphaAutomation systems, driven by continued customer demand to maximize drilling efficiencies. Additionally, Precision remains focused on commercializing 15 or more AlphaApps, which will further expand our portfolio of technology offerings," concluded Mr. Neveu.

Select financial and operating information

 
                                  FINANCIAL HIGHLIGHTS
               (stated in thousands of dollars, except per share amounts)      
 
                                   Three months ended Dec. 31,       Year ended Dec. 31,      
                                            2019         2018         2019         2018

Revenue                                 $372,301     $427,010   $1,541,320   $1,541,189
Adjusted EBITDA                          105,006      134,492      391,905      375,131
Operating earnings (loss)                  7,699     (172,093)      94,577     (198,073)
Net earnings (loss)                       (1,061)    (198,328)       6,618     (294,270)
Cash provided by operations               74,981       93,489      288,159      293,334
Funds provided by operations              75,779       92,595      292,652      311,214
Capital spending
Expansion                                  7,916        9,064      108,064       35,444
Upgrade                                      199        2,402       12,846       30,757
Maintenance and infrastructure            13,426       18,128       38,976       48,375
Intangibles                                  332          687          808       11,567
Proceeds on sale                          (4,931)     (12,020)     (90,768)     (24,457)
Net capital spending                      16,942       18,261       69,926      101,686
Net earnings (loss) per share
Basic                                     (0.00)       (0.68)         0.02       (1.00)
Diluted                                   (0.00)       (0.68)         0.02       (1.00)

                                OPERATING HIGHLIGHTS
 
                                    Three months ended Dec. 31, Year ended Dec. 31,    
                                               2019       2018      2019      2018

Contract drilling rig fleet                     226        236       226       236
Drilling rig utilization days
U.S.                                          5,814      7,318    26,544    26,714
Canada                                        3,919      4,517    14,498    18,617
International                                   818        736     3,093     2,920
Revenue per utilization day
U.S. (1) (US$)                               23,949     23,369    23,397    21,864
Canada (Cdn$)                                22,182     22,802    21,569    21,644
International (US$)                          52,283     51,982    51,360    50,469
Operating cost per utilization day
U.S. (US$)                                   14,073     15,042    14,447    14,337
Canada (Cdn$)                                14,791     15,115    15,240    14,493
Service rig fleet (2)                           123        210       123       210
Service rig operating hours                  39,865     35,773   147,154   157,467
Revenue per operating hour (Cdn$)               746        753       739       709

(1) Includes revenue from idle but contracted rig days.

(2) In 2019, 75 rigs were not registered with the industry association and 12 
    snubbing units were sold.

Summary for the three months ended Dec. 31, 2019

Revenue was $372-million, 13 per cent lower than the fourth quarter of 2018. Revenue decreased due to lower activity in the United States and Canada, partially offset by higher average day rates in the U.S. and higher international activity. Compared with the fourth quarter of 2018, the company's drilling activity decreased 21 per cent in the U.S., 13 per cent in Canada and grew 11 per cent internationally. The company's 2019 fourth quarter revenue from its contract drilling services and completion and production services segments decreased 14 per cent and 5 per cent, respectively, from the comparable 2018 quarter.

General and administrative expenses were $26-million, $4-million higher than the fourth quarter of 2018. Excluding the effect of share-based incentive compensation expense for the quarter, the company's general and administrative expenses decreased by $8-million from 2018. The lower expenses in the current quarter were primarily the result of continued fixed cost control initiatives and the impact of lease-related charges due to the adoption of IFRS 16.

Adjusted EBITDA was $105-million, a decrease of $29-million from the fourth quarter of 2018. The company's adjusted EBITDA as a percentage of revenue was 28 per cent this quarter, compared with 31 per cent in the comparative quarter of 2018. Operating earnings were $8-million compared with negative $172-million in the fourth quarter of 2018. Lower adjusted EBITDA and operating earnings in 2019 were primarily due to reduced U.S. and Canadian activity, higher share-based incentive compensation expense, and the non-recurring receipt of the transaction termination fee in the fourth quarter of 2018. In the 2019 quarter, the company decommissioned 29 drilling rigs resulting in a loss on asset decommissioning of $20-million. With the adoption of IFRS 16, lease-related charges of $3-million in the quarter were recognized through finance charges and depreciation and amortization expense. Historically, these charges were reflected in operating and general and administrative expense. Total share-based incentive compensation expense for the quarter was $7-million compared with a recovery of $12-million in the fourth quarter of 2018.

Net finance charges were $28-million, a decrease of $4-million compared with the fourth quarter of 2018, primarily due to a reduction in interest expense related to retired debt, partially offset by $1-million of lease accretion charges resulting from the adoption of IFRS 16.

Revenue per utilization day in the U.S. increased in the fourth quarter of 2019 to $23,949 (U.S.) from $23,369 (U.S.) in the prior year quarter. The increase was the result of higher day rates, idle but contracted rig revenue and rig technology revenue, partially offset by lower turnkey activity. During the quarter, the company had $3-million (U.S.) of revenue from each of idle but contracted rigs and turnkey projects as compared with fourth quarter 2018 idle but contracted rig and turnkey revenue of $300,000 (U.S.) and $11-million (U.S.), respectively. On a sequential basis, revenue per utilization day, excluding revenue from turnkey and idle but contracted rigs, was consistent with the third quarter of 2019. Operating costs on a per day basis decreased to $14,073 (U.S.) in the fourth quarter of 2019 compared with $15,042 (U.S.) in 2018. The decrease was mainly due to lower turnkey activity, the impact from the reversal of prior period provisions and the componentization of rig recertification costs. Excluding the impact of the provision reversals and componentization of recertification costs, the company's operating costs on a per-day basis for the quarter were $14,974 (U.S.).

In Canada, average revenue per utilization day for contract drilling rigs was $22,182 compared with $22,802 in the fourth quarter of 2018. The lower average revenue per utilization day in the fourth quarter of 2019 was primarily due to lower rates from a higher proportion of Super Singles in the company's rig mix and lower shortfall payments, partially offset by higher technology revenue. The company did not receive shortfall payments in the fourth quarter of 2019 as compared with $1-million in the 2018 quarter. Average operating costs per utilization day for drilling rigs in Canada decreased to $14,791 compared with the prior year quarter of $15,115. The decrease was mainly caused by the impact of lower repair and maintenance costs due to the componentization of rig recertification costs. Excluding the impact of componentization of recertifications, the company's operating costs on a per-day basis for the quarter were $15,044.

The company realized revenue from international contract drilling of $43-million (U.S.) in the fourth quarter of 2019, an increase of $4-million (U.S.) over the prior year period. Average revenue per utilization day in the company's international contract drilling business was $52,283 (U.S.) compared with $51,982 (U.S.) in the respective prior-year quarter. The higher average rate in 2019 was primarily due to day rate increases from the renewal and extension of drilling contracts and the deployment of the company's sixth Kuwait rig.

Funds provided by operations in the fourth quarter of 2019 was $76-million, a decrease of $17-million from the prior-year comparative quarter. Cash provided by operations was $75-million versus $93-million in the prior year quarter. The decrease in funds and cash provided by operations was primarily the result of lower activity and the non-recurring transaction termination fee that was received in the fourth quarter of 2018.

Capital expenditures were $22-million in the fourth quarter, $8-million lower than the same period in 2018. Capital spending for the quarter included $8-million for upgrade and expansion capital and $14-million for the maintenance of existing assets, infrastructure spending and intangibles.

Summary for the year ended Dec. 31, 2019

Revenue for the year ended Dec. 31, 2019, totalled $1,541-million, consistent with 2018.

Operating earnings were $95-million, an increase of $293-million from 2018. As a percentage of revenue, operating earnings improved to 6 per cent compared with negative 13 per cent in 2018. In 2019, operating earnings were positively impacted by increased international drilling activity, higher U.S. and international average day rates, gains on asset disposals, partially offset by lower Canadian drilling activity, the non-recurring transaction termination fee, and loss on asset decommissioning and higher share-based compensation expense. In addition, during the fourth quarter of 2018, the company incurred goodwill impairment charges of $208-million.

General and administrative costs were $104-million, a decrease of $8-million from 2018. The decrease in costs was primarily the result of continued fixed cost control initiatives and the impact of lease-related charges due to the adoption of IFRS 16, partially offset by higher share-based incentive compensation and the weakening of the Canadian dollar on the company's U.S.-dollar-denominated costs.

Net finance charges were $118-million, a decrease of $9-million from 2018 primarily due to a reduction in interest expense related to debt retired in 2018 and 2019, partially offset by the weakening of the Canadian dollar on the company's U.S.-dollar-denominated interest expense.

Funds provided by operations in 2019 were $293-million, a decrease of $19-million from $311-million in the prior year. Cash provided by operations was $288-million in 2019 as compared with $293-million in 2018. The decrease in funds and cash provided by operations was primarily the result of the non-recurring transaction termination fee that was received in the fourth quarter of 2018.

Capital expenditures were $161-million in 2019, an increase of $35-million over 2018. Capital spending for 2019 included $121-million for upgrade and expansion capital and $40-million on the maintenance of existing assets, infrastructure and intangibles. The company's 2019 upgrade and expansion capital mainly comprised one U.S. new build, one U.S. SCR to AC Triple upgrade, the Kuwait new-build rig and long-lead capital items. The company's new build and upgraded rigs were backed by long-term drilling contracts.

Strategy

Precision's strategic priorities for 2019 were as follows:

  • Generate strong free cash flow and utilize $200-million to reduce debt in 2019 -- In the fourth quarter of 2019, the company generated $75-million in cash provided by operations and further reduced its debt balance by $59-million through open market repurchases and redemptions of its unsecured senior notes. For the full year 2019, Precision exceeded its 2019 debt reduction target with total debt repayments of $205-million.
  • Maximize financial results by leveraging the company's high performance, high-value Super Series rig fleet and scale with disciplined cost management -- In the fourth quarter of 2019, Precision continued operating at record market share levels in the U.S. and Canada and has leveraged its size and scale to maximize cash flow. In the U.S., operating margins (revenue less operating costs) were up 19 per cent compared with the prior year quarter. Despite decreased Canadian industry activity levels, the company's Canadian drilling operations generated strong cash flow and its completion and production services business contributed $6-million of adjusted EBITDA. Precision also continued to leverage its expanded footprint in Kuwait, with its sixth Kuwait rig commencing drilling on July 1, 2019, increasing its economies of scale and operating margins in the region.
  • For the full year 2019, Precision reported adjusted EBITDA of $392-million, up 5 per cent from 2018 despite a 22-per-cent reduction in Canadian drilling activity levels.
  • Full-scale commercialization and implementation of Precision's AlphaAutomation platform, AlphaApps and AlphaAnalytics -- In the fourth quarter, the company announced full commercialization of its AlphaAutomation offering, with its 32 systems over 90 per cent utilized and earning commercial rates. The company currently has its AlphaAutomation platform deployed throughout various basins in the U.S. and Canada, drilling 613 wells in 2019, an increase of 69 per cent over the prior year comparative. With more than 15 revenue generating AlphaApps commercialized or in development, the company's portfolio of technology offerings continues to expand. It has demonstrated to its customers its system's ability to deliver consistent, high-quality results, and as a result of continued demand to lower well costs and maximize efficiencies, Precision intends to deploy an additional 24 AlphaAutomation systems in North America during 2020.

Precision's strategic priorities for 2020 are as follows:

  • Generate strong free cash flow and reduce debt by $100-million to $150-million in 2020 and by $700-million between 2018 and 2022;
  • Demonstrate operational excellence in all aspects of the company's business including operational, financial and ESG (environmental, social and governance) metrics;
  • Leverage its Alpha technology platform as a competitive differentiator and source of financial returns for Precision.

Outlook

For the fourth quarter of 2019, the average price of West Texas Intermediate and Henry Hub were down 3 per cent and 37 per cent, respectively. The average price of Western Canadian Select and AECO gas prices were 111 per cent and 66 per cent higher, respectively.

                                               Three months ended            Year ended
                                                          Dec. 31,              Dec. 31,
                                                  2019       2018       2019       2018 

Average oil and natural gas prices                                                                 
Oil                                                                                                
West Texas Intermediate (per barrel) (US$)      $57.02     $58.89     $57.07     $64.88 
Western Canadian Select (per barrel) (US$)       41.12      19.47      44.28      38.46 
Natural gas                                   
United States                                                                                      
Henry Hub (per MMBtu) (US$)                       2.40       3.81       2.56       3.12 
Canada                                                                                             
AECO (per MMBtu) (Cdn$)                           2.47       1.49       1.77       1.49 

Contracts

During 2019 the company entered into 56 term contracts. An attached table outlines the average number of drilling rigs by quarter that the company had under contract for 2019 and 2020 as of Feb. 12, 2020. For those quarters ended after Dec. 31, 2019, this chart represents the minimum number of term contracts where the company will be earning revenue. Its expect the actual number of contracted rigs to be higher in future periods as it continue to sign contracts.

                                                           Average for the                           Average for the
                                                        quarter ended 2019                        quarter ended 2020  
                                   March 31   June 30   Sept. 30   Dec. 31   March 31   June 30   Sept. 30   Dec. 31 
Average rigs under term contract   
as of Feb. 12, 2020                                                                          
U.S.                                     56        52         49        41         41        34         26        20 
Canada                                    8         5          5         5          5         4          3         3 
International                             8         8          9         9          8         8          6         6 
Total                                    72        65         63        55         54        46         35        29 

An attached table outlines the average number of drilling rigs under contract for 2019 and the average number of rigs the company has under contract for 2020 and 2021 as of Feb. 12, 2020.

                                                            Average for the year ended 
                                                              2019      2020      2021 
Average rigs under term contract as of Feb. 12, 2020                            
U.S.                                                            49        30         5 
Canada                                                           6         4         1 
International                                                    9         7         6 
Total                                                           64        41        12 

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.

Drilling activity

An attached table outlines the company's average number of drilling rigs working or moving by quarter for the periods noted.

                                          Average for the quarter ended 2018        Average for the quarter ended 2019  
                                     March 31   June 30   Sept. 30   Dec. 31   March 31   June 30   Sept. 30   Dec. 31 
Average Precision active rig count
U.S.                                       64         72        76        80         79        77         72        63 
Canada                                     72         31        52        49         48        27         42        43 
International                               8          8         8         8          8         8          9         9 
Total                                     144        111       136       137        135       112        123       115 

To start 2020, drilling activity has decreased relative to the prior year in the U.S. and Canada. According to industry sources, as of Feb. 12, 2020, the U.S. active land drilling rig count was down 26 per cent compared with the same point last year and the Canadian active land drilling rig count was up approximately 8 per cent. Furthermore, approximately 85 per cent of the U.S. industry's active rigs and 61 per cent of the Canadian industry's active rigs were drilling for oil targets, compared with 81 per cent for the U.S. and 60 per cent for Canada at the same time last year.

Industry conditions

The company expects 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 the company's customers. The trend to longer-reach horizontal completions and importance of the rig delivering these complex wells consistently and efficiently has been well established by the industry. The company expects demand for leading-edge high-efficiency Tier 1 rigs will continue to strengthen relative to less capable rigs, as 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 demanning of rigs will continue this technical evolution while creating further cost-efficiencies and performance value for customers.

Capital spending

Capital spending in 2020 is expected to be $95-million and includes $58-million for sustaining, infrastructure and intangibles, and $37-million for upgrade and expansion. The company expects its spending to be split $86-million in the contract drilling services segment, $7-million in the completion and production services segment, and $2-million to the corporate segment.

  
          
                CONDENSED INTERIM CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
                    (in thousands of dollars, except per share amounts)

                                        Three months ended Dec. 31,       Year ended Dec. 31,
                                                 2019         2018         2019         2018  

Revenue                                      $372,301     $427,010   $1,541,320   $1,541,189 
Expenses
Operating                                     241,717      285,222    1,038,967    1,067,264 
General and administrative                     25,578       21,496      104,010      111,830 
Restructuring                                       -            -        6,438        1,164 
Other recoveries                                    -      (14,200)           -      (14,200)
Earnings before income taxes, gain on 
repurchase and redemption of unsecured 
senior notes, finance charges, foreign 
exchange, impairment of goodwill, 
reversal of impairment of property, 
plant and equipment, loss on asset 
decommissioning, gain on asset disposals, 
and depreciation and amortization             105,006      134,492      391,905      375,131 
Depreciation and amortization                  80,932      106,946      333,616      377,044 
(Gain) on asset disposals                      (3,888)      (7,905)     (50,741)     (11,384)
Loss on asset decommissioning                  20,263            -       20,263            - 
Reversal of impairment of property, 
plant and equipment                                 -            -       (5,810)           - 
Impairment of goodwill                              -      207,544            -      207,544 
Foreign exchange                               (4,306)       3,198       (8,722)       4,017 
Finance charges                                28,275       32,220      118,453      127,178 
Gain on repurchase and redemption of 
unsecured senior notes                         (3,178)      (6,848)      (6,815)      (5,672)
(Loss) before income taxes                    (13,092)    (200,663)      (8,339)    (323,596)
Income taxes
Current                                        (3,473)       2,177        1,080        8,573 
Deferred                                       (8,558)      (4,512)     (16,037)     (37,899)
                                              (12,031)      (2,335)     (14,957)     (29,326)
Net earnings (loss)                           $(1,061)   $(198,328)      $6,618    $(294,270)
Net earnings (loss) per share                                                                
Basic                                          $(0.00)      $(0.68)       $0.02       $(1.00)
Diluted                                        $(0.00)      $(0.68)       $0.02       $(1.00)
                                                                                                                                                                                                                                                                                                                                                                 


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