Customer optimism returned during the second quarter as prices improved, Precision Drilling Corp. CEO Kevin Neveu said, with drillers adding back rigs in both the United States and Canada in anticipation of a potential recovery heading into 2017.
The second quarter, the sixth straight quarter of the downturn, marked “one of the most challenging quarters the land drilling industry has faced,” Neveu told investors during the Calgary-based oilfield service company’s 2Q2016 earnings call Thursday.
“Early in the quarter, our customers remained defensive, in a survival-style mode, but as the quarter progressed and as commodity prices, both oil and gas, recovered, we noticed a significant shift in customer sentiment,” Neveu said.
“Late in the quarter, several of our customers began adding rigs back as they adjusted near-term spending back up to levels better reflecting the current commodity prices...but more encouraging is that select customers are looking further out and planning into 2017 and beyond.”
Precision has added one rig-year of new contracts for 2016 and four rig-years looking out through 2017. The company has seen its rigs deployed in the United States increase to 29 active rigs, Neveu said, up seven rigs from 2Q2016’s trough. In Canada, active rigs have increased to 26, he said.
Precision’s rig count should continue to “grow modestly” through 3Q2016 “barring another commodity price pullback or collapse,” Neveu said.
Most of the seven U.S. rigs added recently are in the Permian Basin, he said. “Customer discussions of late are not limited to the Permian, and the gas plays are getting attention…I believe in the near-term we’re seeing customers readjust spending upwards towards the current strip. This is not a rebound, but it’s indicative of the early stages of a recovery.
“...I believe the key takeaways from Canada and the U.S. center around this improved visibility that we’re seeing for the first time in several quarters, stabilized pricing and customers planning higher activity levels as they watch for improved fundamentals in 2017,” he said. This activity increase “is all predicated on commodity pricing and strip pricing. I want to stress that we’re not viewing this as a V-shaped rebound, and we remain mindful that several macro risks are still in play.”
This shift in customer sentiment is recent, Neveu said, with the prospective recovery still in a delicate early stage. He said that just “six weeks ago, nobody would’ve been talking to us about a renewal of contract or anything. They just wanted to get ways to cut costs -- six weeks ago, maybe seven weeks ago. And the sentiment swing in the past month and a half has been phenomenal.
“...Clearly the tone has changed. The sentiment has changed, but it’s fragile, and if commodity prices were to take another leg down back into the 30s or 20s, any bit of this momentum we see right now could disappear very quickly.”
Despite the recent uptick in rig deployment and customer optimism, Precision’s financial results for the quarter pointed to the difficult pricing and drilling cutbacks that have characterized the downturn.
Precision saw an operating loss of C$74 million for the quarter, representing negative 45% of total revenue, compared with an operating loss of C$32 million (negative 9% of revenue) in the year-ago quarter.
Revenues were down 51% year/year for the quarter, coming in at just under C$164 million, compared with revenues of C$465.7 million in the year-ago period.
Average revenue per utilization day for Precision’s contract drilling rigs actually increased year/year from C$22,939 to C$24,980 in the second quarter in Canada, while decreasing slightly in the United States from US$27,731 to US$27,519.
The company attributed the increase in revenue per utilization day in Canada to a higher proportion of its Super Triple rigs and contract shortfall payments received during the quarter, offset by lower spot market rates. In the United States, a higher daily revenue impact from contracted idle rigs was offset by lower spot market rates and lower turnkey activity, management said.
Precision posted a net loss for the quarter of C$57.7 million (minus C20 cents/share), compared with a net loss of C$29.8 million (minus C10 cents/share) in the year-ago quarter.
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