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Precision Reports Continuing Bias for U.S. Oil Drilling, More NatGas Focus in Canada

Calgary-based Precision Drilling Corp., whose contract drilling business works in all of North America's major onshore basins, said Monday it used 14 fewer rigs in the United States and Canada in the first quarter than it did in the final three months of 2015, with more Canadian rigs looking for natural gas.

The average active U.S. rig count during 1Q2016 was 32, down 48 from a year ago and 13 from 4Q2015. To date this year, 73% of the active rigs were drilling for oil versus 71% in 2015, with 25 rigs now active in the United States. In Canada, the average active rig count in 1Q2016 was 44, a decrease of 25 year/year and one less than in the fourth quarter. To date this year, 40% of the active rigs were drilling for oil targets versus 62% in 2015. However, only 13 rigs now are active in Canada.

"For an unprecedented second consecutive year, first quarter Canadian industry activity, typically the busiest quarter of the year, recorded a decline from the fourth quarter of the prior year," CEO Kevin Neveu said. "We also experienced five rig contract cancellations, demonstrating the challenges facing our customers. Precision has recorded a total of nine contract cancellations since the beginning of this downturn cycle."

In Canada, he said, "there continues to be strength in natural gas and gas liquids drilling activity related to Deep Basin drilling in northwestern Alberta and northeastern British Columbia, while the bias toward oil-directed drilling in the U.S. continues. To date in 2016, approximately 80% of the U.S. industry's active rigs and 46% of the Canadian industry's active rigs were drilling for oil targets, compared to 79% for the U.S. and 45% for Canada at the same time last year."

The company, which reports in Canadian dollars, had a net loss in 1Q2016 of $20 million (minus 7 cents/share), versus profits in the year-ago period of $24 million (8 cents). Cash provided by operations was $112 million, 48% lower than a year earlier. Revenue fell 41% overall, with contract drilling services down 39% and completion/production services slumping 57%.

During the latest period, Precision received one-time contract cancellation payments related to five contract terminations, three in the United States and two in Canada for $23 million, which were expected to be earned beyond the first quarter, and incurred $3 million in restructuring costs.

Activity for the quarter, as measured by drilling rig utilization days, decreased year/year by 36% in Canada, 60% in the United States and 33% internationally.

The timing of a rebound "remains uncertain," Neveu said, but "we are turning our minds from cost reduction and downsizing to stabilization and preparation for a rebound, ensuring we are a first choice in the minds of customers. Our priority will be to have access to the rig leadership and crews to staff up rigs in a rebound, and sustaining the expense reductions achieved during this downturn."

Average revenue/utilization day for contract drilling rigs increased in year/year in both the United States and Canada -- but from rig contract cancellations, not higher day rates.

As of Monday (April 25), Precision had term contracts in place for an average of 30 rigs in Canada, 22 in the United States and seven internationally for 2Q2016. It also had for full-year 2016 an average of 29 rig contracts in Canada, 21 in the United States and seven internationally. It also had an average of 31 rigs for  2017.

"In Canada, term contracted rigs normally generate 250 utilization days per year because of the seasonal nature of well site access," Neveu noted. "In most regions in the U.S. and internationally, term contracts normally generate 365 utilization days per year."

Capital spending in 2016 is expected to be $202 million, including $158 million for expansion capital, $42 million for sustaining and infrastructure expenditures, and $2 million to upgrade existing rigs.

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