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Precision Says ‘Virtually All’ Its Customers Thinking About Adding Rigs In 2017

Calgary-based Precision Drilling Corp. is seeing activity pick up across all of its U.S. operating regions, with the Permian Basin in West Texas “getting the most attention,” CEO Kevin Neveu told analysts during a 3Q2016 earnings call.

During the company’s 2Q2016 earnings call (see Shale Daily, July 22) management had said that a handful of customers were talking about adding rigs, Neveu noted during Friday’s conference call. “Today, I believe that virtually all of our customers are investigating adding rigs in 2017.”

But Neveu cautioned that spending plans in the exploration and production (E&P) sector in 2017 are still tentative and still very sensitive to commodity prices.

“Our customers are considering a wide range of commodity price scenarios, and we expect to have several different capital spending profiles depending on the realized prices, but the key takeaway is that this is the first time in two years that our customers are even talking about increasing activity and not about how quickly they can lay the rigs down,” he said. “I think it’s a very bullish signal.”

In Canada, producers may need slightly higher crude oil prices to get going compared to their U.S. counterparts, Neveu said. “I think you should think about this in terms of single digits, probably $3-5 higher on WTI [West Texas Intermediate] prices to stimulate a basin-wide recovery in Canada.”

The highlight in Canada for Precision during 3Q2016 was the Canadian Deep Basin. “Significantly tighter rig supplies and our position as industry leader for pad walking rigs have combined to support much better market discipline and better pricing in this region,” Neveu said. “But even this market was hit by a slack third quarter,” he added, pointing to an “unusually low activity rate” of 33% for Precision’s 2,700 contract days on its rigs for 3Q2016 in the region.

When asked to further explain Precision’s outlook on rig activity heading into 2017, Neveu suggested the first part of 2017 is looking a little less certain than normal in terms of E&P budgeting.

“I would normally tell you that we would have a pretty good sense of customer budgets right now...this year, I think our customers are working on several pricing models, several activity models, so they’ve got three or four different price decks to look in, three or four different activity levels. They’re not showing all their cards to us right now, so it’s a pretty uncertain start to the year,” Neveu said.

“...I think we can get back to something in Q1 that looks a bit more like what we expected to see in 2016, so that’s probably 20%-25% higher than we actually realized in 2016. The back half of the year will be completely dependent on commodity prices,” he said. “If OPEC [the Organization of Petroleum Exporting Countries] is serious and commodity prices trend closer to $60/bbl, then I think we end up having a very constructive year in Canada.”

As for whether activity will start to pick up in late 2016 or at the start of 2017, Neveu said Precision’s “customers are afraid of a sudden ramp-up in activity where they’re caught with every single contractor ramping up rigs at the same time on Jan. 1. I think they’re mindful of that.

“I think they’re trying to, if they’re increasing spending in 2017, and certainly most appear to be thinking about increasing spending, I think they’re going to try to bring rigs on a bit earlier, so I think we’re going to see underspent Q1 money from 2016 being spent in Q4,” he said. “I think we’re going to see a rig count trajectory moving up in Q4, particularly if we get through the end of November” with prices still trending “upwards from $50/bbl.”

Still, Neveu said, this comes with that same nagging, ever-present caveat: “If commodity prices waver, this momentum falls out and falls out quickly.”

Since rig activity bottomed out in 2016, Precision has added 51 rigs and hired close to 1,000 field personnel, many of them rehires, management said.

In terms of coping with workforce attrition exiting the downturn, Precision has been keeping a rolling callback list 1,200-strong. The OFS company said it is right-sized to operate up to 150 rigs (compared to about 90 rigs currently active) without an increase in general and administrative costs, Neveu said.

Precision ended the quarter with a contracted drilling rig fleet of 253, down from 330 in the year-ago quarter. Drilling rig utilization days totaled 2,853 in Canada, 2,689 in the United States and 644 for international operations. That’s compared with year-ago totals of 4,505, 4,657 and 999 respectively.

Precision updated its 2016 capital plan to reflect upgrade capital backed by customer contracts, with total 2016 spending increased to C$222 million from the C$202 million announced in July.

Precision posted a net loss of C$47.4 million (minus C$0.16/share) for the third quarter, compared to a net loss of $C86.7 million (minus C$0.30/share) for the year-ago quarter. Revenues for the quarter totaled C$202 million, a 45% decrease from the year-ago quarter.

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