Calgary-based Precision Drilling Corp., the largest driller in Canada with a substantial share of the U.S. market, held its own during the second quarter, but the third quarter is looking more bleak, the CEO told investors last week.

“Managing a capital-intensive, labor-intensive oil service business during a period of extreme commodity price volatility is a challenge,” CEO Kevin Neveu said during the second quarter conference call. “The second quarter of 2019 was no exception. Our North American customers face the same issues as a cycle time to drill and complete wells, especially large pads, is often longer than the commodity price works.

“Despite these challenges, investor expectations for capital discipline that is spending within cash flow are being met by the community at large,” he said of the exploration and production (E&P) customers. “For Precision, this creates both opportunities...and risks with overall, E&Ps spending to stretch.”

Overall activity during the second quarter came in slightly lower than the guidance provided in the first quarter, said the CEO.

In the United States, drilling activity increased 6% year/year. Margins were up by around US$850/day, positively impacted by higher debt rates that were partially offset by higher operating costs.

In Canada, drilling activity decreased 15% year/year and margins were down by around $1,160/day. Although Precision had higher activity in the quarter than expected, margins were negatively impacted by the rig mix, as a higher percentage of shallower rigs worked during the quarter.

“Responding to the volatility and crude prices, the E&P operators began trading back active rigs” during the second quarter to defend their capital discipline mantra, Neveu noted. 

“As we expect third quarter activity to be down this year versus last, weaker overhead absorption is likely to cause margin pressure, with daily operating margin down between $250 and $750/day compared to 3Q2018,” CFO Carey Ford said.

The volatility for now is creating opportunities, “evident as our customers increased focused attention on all avenues to increase capital efficiency with the rigs they continue to operate,” Neveu said. Drilling efficiency, nonproductive time, increasing pad sizes and technologies aimed to improve efficiency all received substantially increased customer retention during the quarter.”

For Precision, the efficiency focus helped utilization rates for the top-of-the-line Super Series rigs, led by the company’s Super Triples (ST).

“During the quarter, we signed 15 new term contracts from six months to two years duration, increasing our average 2019 U.S. contract coverage to 48 rigs,” Neveu said. “Utilization of our Super Triples in the U.S. remains over 90%.”

The ST fleet gained market share in the core U.S. market, as well as in Canada and the Middle East. Precision averaged 112 rigs in the second quarter, flat from a year ago (111), even with industry headwinds and lower activity levels in North America.

“We expect Super Triple demand and pricing to remain firm in the second half of the year as our customers continue to throttle spending within cash flow while focusing on the most efficient and best performing rigs,” Neveu said.

“In Canada, while cash generation remains our key priority, the market relevance of our Super Series fleet is clearly represented with over 30% Canadian market share achieved during the second quarter, our highest market share in recent history.”

There are challenges in the Canadian region, he noted, “with industry activity off 30% year-to-date,” but Precision’s Super Series rigs outperformed industry utilization. “We expect this trend of firm utilization and pricing, supported by our 26 AC Super Triple rigs, to continue into the back half of the year.”

Progress also was reported on the technology initiatives, led by the installation of 33 process automated control systems. During the quarter, 31 of the systems were active in the field and drilled 195 wells, an increase of 65% from a year ago.

Precision, which reports in Canadian dollars, reported a net loss of $14 million (minus 5 cents/share) in 2Q2019, versus a year-ago loss of $47 million (minus 16 cents). Revenue climbed 9% to $359 million. Operating earnings were $6 million, compared with a year-ago loss of $26 million. Capital expenditures totaled $43 million, and to date Precision has spent about 68% of its 2019 budget.

U.S. revenue/utilization climbed 7.5% year/year in the second quarter to $23,425/day, while Canada declined by 2.1% to $21,613/day.