Precision Drilling Announces 2022 First Quarter Financial Results

Source: www.gulfoilandgas.com 4/28/2022, Location: North America

Precision Drilling announces 2022 first quarter financial results:
- Revenue of $351 million, an increase of 49% compared with the first quarter of 2021, supported by U.S. and Canadian drilling activity growth of 56% and 48%, respectively.
- Day rates increased in the U.S. and Canada by 10% and 15%, respectively, as compared with the first quarter of 2021.
- Strengthened our contract book with year-to-date additions of 27 term contracts.
- Awarded five-year contract extensions for all three active rigs in the Kingdom of Saudi Arabia.
- Achieved a record number of total paid AlphaAutomation™, AlphaApps™ and AlphaAnalytics™ days during the quarter, eclipsing the previous mark by more than 7%.
- Deployed our second EverGreen™ Battery Energy Storage System with four additional deployments scheduled in 2022.
- Adjusted EBITDA (see “FINANCIAL MEASURES AND RATIOS”) of $37 million which included share-based compensation charges of $48 million resulting primarily from our 107% increase in share price from the end of 2021.
- Net loss of $44 million or $3.25 per share compared with a net loss of $36 million or $2.70 per share in 2021.
- Cash used in operations of $65 million and generated $30 million of funds from operations (see “FINANCIAL MEASURES AND RATIOS”).
- Ended the quarter with more than $430 million of available liquidity.
- Increased our capital spending plan to $125 million in response to higher demand and customer contracted rig upgrades.

Precision’s President and CEO Kevin Neveu stated:
“Precision’s first quarter revenue of $351 million exceeded expectations, increasing 49% year-over-year and 19% sequentially from the fourth quarter of 2021. Customer demand for our services in both the U.S. and Canada continues to grow with U.S. activity up 10% sequentially and Canadian winter activity matching 2018 levels. All indications point to the current market momentum continuing through 2022, driven by strong energy supply-demand fundamentals that have taken shape in the early post-pandemic recovery. As a result of our improving outlook, we are increasing our 2022 capital spending plan to $125 million in anticipation of higher activity and additional contracted rig upgrades.”

“Precision’s first quarter Adjusted EBITDA of $37 million (includes $48 million of share-based compensation expense) compares to fourth quarter 2021 Adjusted EBITDA of $64 million (includes $6 million of share-based compensation expense) and the sequential results demonstrate improving field-level profitability. Pricing increases over the past several quarters have largely offset impacts of labor and supply chain inflation and we foresee additional pricing increases throughout the year combined with the continuation of cost savings measures implemented in 2020 resulting in a further expansion of margins. The Precision team remains fully committed to delivering on our 2022 strategic priorities, which include scaling our Alpha™ and EverGreen™ technologies, leveraging our scale to grow free cash flow and improving our balance sheet and shareholder returns.”

“Currently, we have 55 active rigs running in the U.S., an increase of 12% from the start of the year and 38% from a year ago. We expect activity to continue trending upwards throughout the year. Leading-edge day rates experienced a step change during the first quarter, now firmly over $30,000 per day as the tight supply of high-spec rigs has become apparent to all industry participants. Responding to this improved market, we have signed 19 term contracts since early February.”

“In Canada, we peaked at 72 active rigs during the first quarter and recorded a 48% increase in average activity over Q1 2021. Currently, we are running 33 rigs compared to 20 rigs this time last year, continuing the first quarter momentum, and we expect third quarter activity to exceed first quarter activity as our customers take advantage of strong commodity fundamentals.”

“Internationally, we have been notified of five-year contract extensions for all three of our rigs in the Kingdom of Saudi Arabia and are participating in an upcoming tender in Kuwait, where we are bidding three of our idle AC Super Triple rigs currently in country. We see activity increasing in the region and are actively marketing our four remaining idle rigs to address regional opportunities.”

“We have installed three AlphaAutomation™ systems year-to-date, bringing our total to 50 Alpha™ rigs, or approximately 50% of our North American Super Triple fleet and see a clear path to all our Super Triple rigs converted to Alpha™ within the next two years. Our Alpha™ technology offering provides excellent customer value by reducing total well cost and mitigating operational risk resulting in customer retention of nearly 100%. We continue to develop our portfolio of EverGreen™ suite of environmental solutions, offering customers multiple combinations of emission-reduction solutions, such as our recently deployed Battery Energy Storage System and Emissions Monitoring System. Both Alpha™ and EverGreen™ are driving revenue growth and establishing a sustainable competitive advantage for Precision.”

“In the second quarter we will be mobilizing an EverGreen™ grid-powered Super Triple rig to drill an exploratory geothermal well on Cornell University’s Ithaca campus as part of Cornell’s Earth Source Heat project. Utilizing direct grid power will significantly decrease rig emissions and mitigate noise in an environmentally sensitive area, key requirements for the project. Precision is thrilled to be selected as the drilling contractor for this important geothermal project and we commend Cornell University for their goal of carbon neutrality.”

“Our capital allocation framework remains in place, paying down $400 million of debt by 2025 and allocating 10% to 20% of free cash flow before principal payments directly to shareholders and reaching a Net Debt to Adjusted EBITDA level of below 1.5 times. During the first quarter we utilized cash flow from the business to invest in our fleet, furthering Alpha™ and EverGreen™ expansion, upgrading rigs with term contracts at attractive returns and securing long-lead items to mitigate supply chain disruption. We expect to release cash from working capital as the Canadian winter drilling season unwinds and use additional operating cash flows toward our capital allocation plan for the remainder of the year.”

“The Precision team has capitalized on the opportunity to meet higher demand for our services and addressed several growth-related operational challenges in the current dynamic marketplace. Our business is highly labor intensive, and we have met the need for people by recruiting and training quality individuals to join our highly-skilled crews who safely operate our Super Series rig fleet. Finally, we have actively managed our supply chain through bulk purchase orders and longer-term pricing and supply arrangements, mitigating many market-based supply chain issues. At present, we believe we are fully capable of satisfying the labor and equipment needs necessary to address growing customer demand throughout 2022. I would like to thank all the people of Precision on superb work meeting these challenges,” concluded Mr. Neveu.

Summary for the three months ended March 31, 2022:
- Revenue for the first quarter was $351 million, 49% higher than in 2021 and was the result of increased North American drilling and service activity and day rates. Drilling rig utilization days increased by 56% in the U.S. and 48% in Canada and well service activity increased 10% as compared with the first quarter of 2021.
- Adjusted EBITDA for the quarter was $37 million, $18 million lower than 2021 mainly due to higher share-based compensation charges. Share-based compensation charges for the quarter were $48 million, $37 million higher than in 2021. The increase was primarily due to our higher share price which rose by 107% from the end of 2021. Please refer to “Other Items” later in this news release for additional information on our share-based compensation charges.
- General and administrative expenses this quarter were $56 million, $34 million higher than in 2021 due to higher share-based compensation charges and lower CEWS program assistance.
- Net finance charges for the quarter were $21 million, $2 million lower than in 2021, primarily due to reduced interest expense from lower debt levels and average cost of borrowings.
- In the U.S., revenue per utilization day for the quarter increased to US$24,299 compared with US$22,133 in 2021. The increase was primarily the result of higher day rates, Alpha™ activity and turnkey activity. During the first quarter, we recognized revenue from turnkey projects of US$12 million compared with US$5 million in 2021. On a sequential basis, revenue per utilization day, excluding revenue from turnkey drilling increased approximately US$1,200 primarily due to higher day rates and Alpha™ activity. Our first quarter operating costs on a per day basis increased to US$18,370, compared with US$15,106 in 2021 due to higher rig operating expenses, repairs and maintenance and turnkey activity, partially offset by the impact of fixed costs being spread over higher activity. Our higher rig operating expenses in 2022 were primarily attributable to higher field wages and larger crew sizes. During the second and fourth quarters of 2021, we implemented field wage increases. In anticipation of increased activity in 2022, we strategically staffed active rigs with larger crews to ensure we have a sufficient number of crew personnel that are trained and available to meet customer demand. Sequentially, excluding the impact of turnkey activity, our operating costs per day increased approximately US$1,180 due primarily to the strategic use of larger crew sizes.
- In Canada, average revenue per utilization day for contract drilling for the quarter was $24,263 compared with $21,131 in 2021. Average operating costs per utilization day for the quarter increased to $15,398 compared with $13,025 in 2021. The increase was mainly due to industry-wide wage increases that were enacted in the latter half of 2021 and lower CEWS program assistance.
- During the quarter, we did not recognize any CEWS program assistance as compared with $9 million in 2021. In 2021, CEWS program assistance was presented as offsets to operating and general and administrative costs of $8 million and $1 million, respectively.
- We realized first quarter revenue from international contract drilling of US$27 million as compared with US$28 million in 2021. The lower revenue in 2022 was primarily due to lower day rates as average revenue per utilization day for the quarter was US$50,235, 5% lower than 2021 due to the expiration of drilling contracts.
- For the first quarter, cash used in operations was $65 million compared with cash provided by operations of $15 million in 2021. We generated $30 million of funds from operations during the quarter as compared with $43 million in 2021. Our increased activity, higher share-based compensation and debt interest payments contributed to lower cash generation for the current quarter.
- Capital expenditures were $36 million as compared with $8 million in 2021. Capital spending by spend category (see “FINANCIAL MEASURES AND RATIOS”) included $10 million for expansion and upgrades and $27 million for the maintenance of existing assets and infrastructure.
- During the first quarter of 2022, we borrowed $80 million on our Senior Credit Facility to meet the seasonal cash demands of our business.
- We settled a portion our Executive Performance Share Units (PSU) through the issuance of 263,900 common shares and issued an additional 21,370 common shares from the exercise of share options.

STRATEGY

Precision’s strategic priorities for 2022 are as follows:
- Grow revenue through scaling Alpha™ technologies and EverGreen™ suite of environmental solutions across Precision's Super Series rig fleet and further competitive differentiation through ESG initiatives – We exited the quarter with 50 AC Super Triple Alpha™ rigs equipped with our AlphaAutomation™ platform and 16 commercialized AlphaApps™. As compared with 2021, our first quarter paid days for AlphaAutomation™, AlphaApps™ and AlphaAnalytics™ increased 76%, 210% and 83%, respectively, from further uptake of customers fully utilizing our suite of Alpha™ technologies. During the quarter, we deployed our second EverGreen™ Battery Energy Storage System (BESS) with three additional contracted deployments scheduled for the second quarter and one in the third quarter. Customer interest in BESS continues to grow and we anticipate additional deployments this year continuing into 2023. We currently have seven active Integrated Power & Emissions Monitoring Systems with three additional systems expected to be deployed later this year. Our monitoring system provides a real-time wellsite Greenhouse Gas (GHG) footprint and insights into the correlation between power demand, fuel consumption and resulting GHG emissions throughout the well construction process. During the quarter, we installed LED lighting at our Nisku Drilling Support Centre (DSC). The project was completed with partial funding coming from the Emissions Reduction Alberta’s ‘Energy Savings for Business’ program and is expected to reduce our Scope 2 emissions at the Nisku DSC by 20%.
- Grow free cash flow by maximizing operating leverage as demand for our High Performance, High Value services continues to rebound – In the U.S., we had a first quarter average active rig count of 51, 56% higher than in 2021. In Canada, our first quarter activity peaked at 72 active rigs and averaged 63 active rigs for the quarter, a 48% increase from 2021. Despite industry-wide inflationary pressures, our first quarter daily operating margins (average revenue less operating costs per utilization day) in our North American contract drilling business improved as compared with the fourth quarter of 2021. Our first quarter daily operating margin in the U.S. was $5,929, slightly up from the fourth quarter of 2021 while our Canadian daily operating margin increased 11% to $8,865. Our daily operating margins were secured by our strengthening day rates and disciplined supply chain management. With the tightening of available Super Series rigs, pricing increases are expected to continue in the U.S. and Canada.
- Utilize free cash flow to continue strengthening our balance sheet while investing in our people, equipment and returning capital to shareholders – In the first quarter of 2022, cash used in operations was $65 million due primarily to the build-up of working capital from the seasonal cash demands of our business, annual share-based compensation payments and $38 million of interest payments. Our reinvestment into our drilling fleet included $36 million of capital expenditures and we generated $3 million of cash proceeds from the divestiture of non-core assets. During the quarter, we drew $80 million on our Senior Credit Facility to help fund the cash requirements of our business. We expect to repay the majority of our first quarter borrowings by the end of the second quarter and progress further debt reduction by the end of the year with a $75 million debt reduction target and a longer-term goal of Net Debt to Adjusted EBITDA less than 1.5 times. We ended the quarter with a cash balance of $24 million, US$182 million drawn on our US$500 million Senior Credit Facility and over $430 million of available liquidity.

OUTLOOK
The return of global energy demand against the backdrop of a multi-year period of upstream oil and natural gas underinvestment and imposed sanctions on Russian oil exports have resulted in higher commodity prices, providing a promising outlook for the oilfield services industry. At current commodity price levels, we anticipate higher demand for our services and improved fleet utilization as customers seek to maintain production levels and replenish inventories, as drilled but uncompleted wells have been depleted over the past several years.

With the expected rise in North American industry activity in 2022, we anticipate further tightness in the high specification rig market with customers seeking term contracts to secure rigs and ensure fulfilment of their development programs. Accordingly, the tightening of available high specification rigs is expected to drive higher day rates and necessitate customer funded rig upgrades.

Interest in our EverGreen™ suite of environmental solutions continues to gain momentum as customers seek meaningful solutions to achieve their emission reduction targets and improve their well economics. We expect our growing suite of Alpha™ technologies paired with our EverGreen™ suite of environmental solutions to be key competitive differentiators as our predictable and repeatable drilling results deliver exceptional value to our customers by reducing risks, well construction costs and carbon footprint.

The Government of Canada’s $1.7 billion well site abandonment and rehabilitation program continues to bolster industry activity levels. During the first quarter of 2022, our abandonment activity remained strong, and we expect this to continue through to the end of the program in 2022.

Contracts
Year-to-date in 2022, we have entered into 27 term contracts. The following chart outlines the average number of drilling rigs under contract by quarter as of April 27, 2022. For those quarters ending after March 31, 2022, this chart represents the minimum number of long-term contracts from which we will earn revenue. We expect the actual number of contracted rigs to vary in future periods as we sign additional contracts.

The following chart outlines the average number of drilling rigs that we had under contract for 2021 and the average number of rigs we have under contract as of April 27, 2022.

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

Drilling Activity
The following chart outlines the average number of drilling rigs that we had working or moving by quarter for the periods noted.

According to industry sources, as of April 27, 2022, the U.S. active land drilling rig count has increased 60% from the same point last year while the Canadian active land drilling rig count has increased by 84%. To date in 2022, approximately 80% of the U.S. industry’s active rigs and 59% of the Canadian industry’s active rigs were drilling for oil targets, compared with 76% for the U.S. and 52% for Canada at the same time last year.

Capital Spending and Free Cash Flow Allocation
During the quarter, we increased our capital spending plan to reflect higher maintenance capital from our increasing activity, strategic purchase of drill pipe and customer funded rig upgrades. Capital spending in 2022 is expected to be $125 million and by spend category includes $72 million for sustaining, infrastructure and intangibles and $53 million for expansion and upgrades. We expect that the $125 million will be split $113 million in the Contract Drilling Services segment, $11 million in the Completion and Production Services segment and $1 million to the Corporate segment. At March 31, 2022, Precision had capital commitments of $135 million with payments expected through 2024.

Our debt reduction plans continue with the goal of repaying over $400 million of debt over the next four years and reaching a sustained Net Debt to Adjusted EBITDA ratio (See “FINANCIAL MEASURES AND RATIOS”) of below 1.5 times. At the end of 2025, we expect to have reduced debt by well over $1 billion since 2018. In addition to our debt reduction target through 2025, we plan to allocate 10% to 20% of free cash flow before debt principal repayments toward the return of capital to shareholders.

SEGMENTED FINANCIAL RESULTS
Precision’s operations are reported in two segments: Contract Drilling Services, which includes our drilling rig, oilfield supply and manufacturing divisions; and Completion and Production Services, which includes our service rig, rental and camp and catering divisions.

SEGMENT REVIEW OF CORPORATE AND OTHER
Our Corporate and Other segment provides support functions to our operating segments. The Corporate and Other segment had negative Adjusted EBITDA of $41 million as compared with $13 million in the first quarter of 2021. Our Adjusted EBITDA was negatively impacted by higher share-based compensation costs from our increased share price and lower CEWS program assistance. During the quarter, we did not recognize any CEWS program assistance as compared with $1 million in 2021.

OTHER ITEMS

Share-based Incentive Compensation Plans
We have several cash and equity-settled share-based incentive plans for non-management directors, officers, and other eligible employees. Our accounting policies for each share-based incentive plan can be found in our 2021 Annual Report.

A summary of amounts expensed under these plans during the reporting periods are as follows:
Cash settled share-based compensation expense for the quarter was $47 million as compared with $10 million in 2021. The higher expense in 2022 was primarily due to the strengthening of our share price which increased by 107% over the first quarter. Our equity settled share-based compensation expense for the first quarter of 2022 decreased to $0.4 million as our Executive PSUs and share options fully vested early in the quarter.

As of March 31, 2021, the majority of our share-based compensation plans were classified as cash-settled and will be impacted by changes in our share price. Although accounted for as cash-settled, Precision retains the ability to settle certain vested units in common shares at its discretion.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity
At March 31, 2022, we had $1,193 million outstanding under our Senior Credit Facility, Real Estate Credit Facilities and unsecured senior notes as compared with $1,126 million at December 31, 2021.

The current blended cash interest cost of our debt is approximately 6.3%.

Senior Credit Facility
The Senior Credit Facility requires we comply with certain covenants including a leverage ratio of consolidated senior debt to consolidated Covenant EBITDA (see “NON-GAAP MEASURES”) of less than 2.5:1. For purposes of calculating the leverage ratio consolidated senior debt only includes secured indebtedness.

On June 18, 2021, we agreed with the lenders of our Senior Credit Facility to extend the facility’s maturity date and extend and amend certain financial covenants during the Covenant Relief Period. The maturity date of the Senior Credit Facility was extended to June 18, 2025; however, US$53 million of the US$500 million will expire on November 21, 2023.

The lenders agreed to extend the Covenant Relief Period to September 30, 2022 and amend the consolidated Covenant EBITDA to consolidated interest coverage ratio for the most recent four consecutive quarters to be greater than or equal to 2.0:1 for the period ending March 31, 2022, 2.25:1 for the periods ending June 30, 2022 and September 30, 2022 and 2.5:1 for periods ending thereafter. During the Covenant Relief Period, our distributions in the form of dividends, distributions and share repurchases are restricted to a maximum of US$25 million in 2022, subject to a pro forma senior net leverage ratio (as defined in the credit agreement) of less than or equal to 1.75:1. We also have the option to voluntarily terminate the Covenant Relief Period prior September 30, 2022.

The Senior Credit Facility limits the redemption and repurchase of junior debt subject to a pro forma senior net leverage covenant test of less than or equal to 1.75:1.

Unsecured Senior Notes
The unsecured senior notes require that we comply with certain restrictive and financial covenants including an incurrence based consolidated interest coverage ratio test of consolidated cash flow, as defined in the senior note agreements, to consolidated interest expense of greater than 2.0:1 for the most recent four consecutive fiscal quarters. In the event our consolidated interest coverage ratio is less than 2.0:1 for the most recent four consecutive fiscal quarters, the unsecured senior notes restrict our ability to incur additional indebtedness.

For further information, please see the unsecured senior note indentures which are available on SEDAR and EDGAR.

Covenants
At March 31, 2022, we were in compliance with the covenants of our Senior Credit Facility and Real Estate Credit Facilities.


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