Precision Drilling Corp., whose operations extend across Canada, the Lower 48 and overseas, is running more rigs today than in the pre-pandemic days of 2019, with activations now underway, according to CEO Kevin Neveu.
Speaking to investors during the 2Q2021 conference call, Neveu said the Calgary-based oilfield services giant delivered higher-than-expected revenue during 2Q2021.
In Canada, second quarter activity was “up three-fold from 2020 levels, and the strength of the market continues to surprise to the upside,” Neveu said. “Currently, we are running 52 rigs, well above both our 2019 pre-pandemic levels, and in line with our 2021 first quarter activity peak. We expect to activate several more rigs over the coming weeks.”
So good is business in Canada that total drilling days in 3Q2021 are expected to exceed the 1Q2021 winter drilling season. That’s “unusual,” Neveu told investors.
“The only other time I’ve seen this happen was during the 2010 recovery following the global economic recession. That slowdown pales in comparison to what we’ve experienced over the past 18 months.”
Restaffing Houston, Calgary Offices
No doubt the last year was challenging, Neveu said. He cited the lockdowns, industry layoffs and early retirements, which took “a huge personal toll on our people.” However, over the past two months, “we have fully restaffed our corporate offices in Houston and Calgary…
“We are in the beginning stages of what’s emerging as a strong industry recovery, and we rely on the hardworking loyal Precision team to execute our business, support our customers and help drive the results our investors and stakeholders expect.”
The “rebounding customer demand we see in Canadian segment has broad implications as a leading indicator for what we expect to develop in the U.S. From a high level, Canadian customer demand has returned to above pre-pandemic levels.”
For the third quarter, “we see demand levels trending substantially higher than in 2019…Looking closer at our Canadian customer mix, while private equity producers play an important role, over two-thirds of the demand we see comes from publicly listed producers.”
With stronger pricing for AECO natural gas, Western Canada Select oil and natural gas liquids, exploration and production (E&P) customers have “responded quickly but modestly, increasing drilling activity, while remaining highly capital disciplined. This modest increase in spending has a meaningful impact when multiplied across the full producer space. I’m confident we’ll see a similar trend emerge in the U.S.”
A key objective for the sales team is bringing the rigs segment to “positive net income territory.” The rate increases “began this spring, and we’ll continue as pricing discussions commence in the fall for the 2022 winter drilling season.”
Precision recently clinched a multi-year contract to redeploy one of its alternating current (AC) Super Triple rigs to the Montney Shale from Colorado, a sign of building momentum in the gassy basin. The E&P customers also are demanding more super-spec rigs for heavy oil applications, Neveu noted.
In addition to stronger rig demand, field margins also strengthened in the Canada contract drilling business.
“Our Canadian well service business is also experiencing a similar rebound, with activity up over five-fold from July of 2020, supported by commodity prices and the Canadian well abandonment program,” Neveu said. “The outlook for the overall Canadian market over the next 12 months remains exceptionally bright.”
Canada drilling activity averaged 27 rigs in 2Q2021, up 18 year/year. As of last Thursday (July 22), Precision had on average 33 contracts for the third quarter, with on average 34 contracts for the full year.
In the U.S. division, rig activity climbed by more than 30% year/year and 21% sequentially. On average, there were 39 U.S. rigs in operation, up six sequentially.
“Activity is trending in line with our expectations with 42 rigs running today, an increase from 37 at the end of the first quarter,” Neveu said of the U.S. arm.
“We expect steady U.S. activity growth to continue throughout 2021 and are gaining confidence in accelerated rig additions to start 2022 as customers deploy fresh budget capital for drilling projects to address declining drilled but uncompleted well inventories.”
Most of the U.S. business gains “have been with private equity and gas-focused operators,” Neveu said. “Looking forward, we’re expecting a shift toward more oil-related activity than publicly traded producers.”
Customers are embracing Precision’s Alpha suite of rig technologies, which includes AlphaAutomation, AlphaApps and AlphaAnalytics. The suite is designed to help E&P customers automate processes and use smart algorithms to drill more efficient and less expensive wells. The suite has proved particularly enticing for customers contracting for Precision’s super-spec, AC rigs.
The Alpha suite appeared to cross a “tipping point with customer acceptance at the beginning of this year,” Neveu said. “Now we are finding virtually all new rig activations for our AC Super Triple rigs including our full suite of services.”
Alpha automation days were up 30% sequentially in 2Q2021, even with reduced seasonal activity in Canada.
“Clearly, digital enablement is a theme we are hearing from virtually every customer today,” Neveu said. “The second common theme we hear from virtually all customers today is regarding reducing greenhouse gas emissions.”
The decision to target environmental, social and governance initiatives as a strategic priority this year “could not have come at a better time,” he said.
Still, there are obstacles.
“Labor shortages have emerged across the Canadian oil service industry as a serious challenge,” said the CEO. “We are finding that many people have left the industry and are reluctant to return. The East Coast commuting workers are not able to easily travel, and the pandemic-related unemployment insurance programs severely discouraged workers from reentering the workforce, at least for now…”
The labor tightness has provided “a meaningful backdrop for rate increases,” Neveu said. “We began those price increase discussions with our customers during the second quarter and increased rates on all rig classes several hundred dollars above any cost inflation impacts.”
Meanwhile, Precision has completed the sale of its directional drilling business to Cathedral Energy Services Ltd. for C$6.35 million. The transaction included operating assets and personnel for Precision’s directional drilling business, including a facility in Nisku, AB. Precision provided $3 million to support growth and expansion for Cathedral by continuing to build out the RapidFire measurement-while-drilling guidance systems and nDurance drilling motors.
Precision’s chief technology officer, Shuja Goraya, has been appointed to the Cathedral board.
“Our investment and strategic partnership with Cathedral allow for the combined strengths of both entities to further advance directional specific technologies and provide a differentiated service offering,” Neveu said. “The combination of Cathedral’s people, technology and industry-specific focus with our operating platform and Alpha suite of digital technologies will drive further value for our customers as we continue to push efficiency benchmarks within the industry.”
Precision reported net losses in 2Q2021 of C$76 million (minus C$5.71/share), versus a year-ago net loss of C$49 million (minus C$3.56).
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