Precision Drilling announces 2023 first quarter financial results:
All key financial metrics including revenue, daily operating margins(1), Adjusted EBITDA(2), and net earnings exceeded results from the same period last year and the fourth quarter of 2022, supported by stronger drilling activity and pricing increases in the U.S. and Canada.
Precision’s North American drilling activity grew 13% over the first quarter of 2022.
Revenue was $559 million, an increase of 59% over the first quarter of 2022 and 9% sequentially.
Revenue per utilization day reached US$34,963 in the U.S. and $32,304 in Canada, while daily operating margins(1) increased to US$14,692 in the U.S. and $13,558 in Canada as drilling rigs continued to reprice at higher day rates.
Precision continued to scale its Alpha™ and EverGreen™ product lines across its Super Triple rig fleet and grew revenue from these technological and environmental offerings by over 60% from the first quarter of 2022.
Adjusted EBITDA(2) increased to $203 million, significantly higher than the $37 million reported in the first quarter of 2022, and included a recovery from share-based compensation plans of $12 million compared to an expense of $48 million in the comparative quarter.
Net earnings were $96 million or $7.02 per share compared with a net loss of $44 million or a $3.25 loss per share in the first quarter of 2022.
Cash provided by operations was $28 million versus cash used in operations of $65 million in the first quarter of 2022. Funds provided by operations(2) was $160 million compared to $30 million in the comparative quarter.
Precision remains committed to its 2023 debt reduction target of $150 million and its longer-term targets of reducing debt by $500 million between 2022 and 2025 and achieving a normalized Net Debt to Adjusted EBITDA(2) ratio of less than 1.0 times by the end of 2025.
Returned $5 million of capital to shareholders through share repurchases.
Ended the quarter with $42 million of cash and approximately $540 million of available liquidity.
Completion and Production Services generated revenue of $75 million and Adjusted EBITDA(2) of $17 million, representing increases of 95% and 166%, respectively, from the first quarter of 2022. Precision successfully integrated its 2022 High Arctic acquisition into its operations and is on track to achieve synergies of $5 million, on an annualized basis, in the second quarter.
Internationally, we have five rigs currently active in the Middle East, increasing to eight by the middle of 2023 as we complete rig recertifications. These eight contracts represent approximately $755 million in backlog revenue that stretches into 2028.
In April, Precision committed to a $5 million equity investment in CleanDesign Income Corp. (CleanDesign), a key supplier of Precision’s EverGreen™ Battery Energy Storage Systems (BESS). The investment provides Precision with key BESS and power management technologies and is aligned with the Company’s overall emissions reduction strategy.
Precision decreased its 2023 capital spending budget to $195 million as compared to its initial budget of $235 million. The decrease mainly reflects fewer drilling rig upgrades and lower maintenance costs.
Precision’s President and CEO, Kevin Neveu, stated:
“Precision’s financial results exceeded expectations, delivering the highest first quarter revenue, Adjusted EBITDA, and net earnings since 2014, demonstrating our customers’ desire for our High Performance, High Value services and the earnings power of our Super Series fleet. During the quarter, we continued to expand margins, scaled our Alpha™ digital technologies and EverGreen™ suite of environmental solutions, and maintained strict cost control. Our efforts delivered returns to shareholders as we generated $7.02 of net earnings on a per-share basis.
“Precision’s current activity levels remain strong with 57 rigs running in the U.S. compared to 55 at the same time last year. First quarter activity was 17% higher, with normalized average day rates almost US$12,000 above day rates for the same period last year. In Canada, we are currently operating 38 rigs, which is 15% higher than the same time last year. Our first quarter activity was 9% higher than last year, with average day rates approximately $8,000 higher. In the Middle East, we are back to five rigs operating again, about one month ahead of plan, and expect to be running eight rigs by mid-year, slightly ahead of plan.
“We are confident in our business, both in the current year and long-term. Land drilling fundamentals remain strong, Super-Spec rig availability is tight, and Canadian drilling and completions momentum continues to build as the Trans Mountain Expansion project for oil export and the LNG Canada project for natural gas export are nearing completion. Although lower gas prices have introduced some uncertainty in the U.S., we expect this market to strengthen in the second half of the year.
“In 2023, we will continue to focus on what we can control, delivering High Performance, High Value service, maximizing free cash flow through margin expansion and revenue efficiency, scaling our Alpha™ and EverGreen™ offerings, and strengthening our balance sheet. I am confident that we will successfully execute these strategic priorities and continue to deliver returns for our shareholders,” concluded Mr. Neveu.
SELECT FINANCIAL AND OPERATING INFORMATION
Summary for the three months ended March 31, 2023:
Revenue of $559 million was 59% higher than in 2022 and the result of increased North American drilling and service activity and day rates, partially offset by lower international activity. Drilling rig utilization days increased 17% in the U.S. and 9% in Canada, and well service activity increased 53% as compared with the first quarter of 2022.
Adjusted EBITDA was $203 million, $166 million higher than 2022, mainly due to increased activity and day rates and lower share-based compensation. Share-based compensation recovery was $12 million, approximately $60 million lower than in 2022 as a result of our lower share price. Please refer to “Other Items” later in this news release for additional information on share-based compensation charges.
Adjusted EBITDA as a percentage of revenue was 36% as compared with 10% in 2022.
General and administrative expenses were $16 million, $40 million lower than in 2022 due to lower share-based compensation charges.
Net finance charges were $23 million, an increase of $2 million from 2022 due to higher variable interest rates and the impact of the weakening of the Canadian dollar on our U.S. dollar denominated interest.
Our U.S. revenue per utilization day was US$34,963 compared with US$24,299 in 2022. The increase was primarily the result of higher fleet average day rates, partially offset by lower turnkey revenue. We recognized revenue from turnkey projects of US$7 million compared with US$12 million in 2022. Revenue per utilization day, excluding the impact of turnkey, was US$33,721, compared to US$21,765 in the previous quarter, an increase of $11,956 or 55%. Revenue per utilization day, excluding turnkey revenue, increased US$3,169 from the fourth quarter of 2022.
Our U.S. operating costs per utilization day increased to US$20,271, compared with US$18,370 in 2022 due to higher repairs and maintenance costs and field wages, partially offset by lower turnkey activity. Operating costs per utilization day, excluding turnkey, were US$19,421 compared with US$16,095 in the previous quarter. Sequentially, excluding the impact of turnkey activity, operating costs per utilization day increased US$766.
In Canada, revenue per utilization day was $32,304 compared with $24,263 in 2022. The increase was a result of higher day rates and increased labor and cost recoveries. Sequentially, revenue per utilization day increased $2,418.
Our Canadian operating costs per utilization day increased to $18,746, compared with $15,398 in 2022, due to higher field wages and repairs and maintenance expenses. Sequentially, our daily operating costs increased $1,208.
Completion and Production Services revenue and Adjusted EBITDA were $75 million and $17 million, respectively, compared with $38 million and $7 million in 2022.
We realized US$22 million of international contract drilling revenue compared with US$27 million in 2022.
Cash provided by operations was $28 million compared with cash used in operations of $65 million in 2022. We generated $160 million of funds provided by operations compared with $30 million in 2022. Our increased activity, revenue efficiency, operational leverage and day rates contributed to higher cash generation in the current quarter.
Capital expenditures were $51 million compared with $36 million in 2022. Capital spending by spend category (see “FINANCIAL MEASURES AND RATIOS”) included $16 million for expansion and upgrades and $35 million for the maintenance of existing assets and infrastructure.
We ended the quarter with $42 million of cash and approximately $540 million of available liquidity.
STRATEGY
Precision’s 2023 strategic priorities and the progress made during the first quarter are as follows:
Deliver High Performance, High Value service through operational excellence.
Grew our average active rig count by 17% in the U.S. and 9% in Canada as compared with the same period last year.
Increased service rig operating hours 53% over the first quarter of 2022. With the successful acquisition of High Arctic’s well servicing business in July 2022, Precision is now the leading provider of high-quality and reliable services in Canada.
Reinvested $51 million into our equipment and infrastructure and expect a total investment of $195 million in 2023.
Subsequent to quarter end, we committed to a $5 million equity investment in CleanDesign, a key supplier of our EverGreenTM BESS. The investment provides Precision with key BESS and power management technologies and is aligned with the Company’s overall ESG strategy.
Maximize free cash flow by increasing Adjusted EBITDA margins, revenue efficiency, and growing revenue from AlphaTM technologies and EverGreenTM suite of environmental solutions.
Realized daily operating margins (revenue less operating costs per utilization day) of US$14,692 in the U.S. and $13,558 in Canada. Sequentially, our daily operating margins have increased in the U.S. and Canada 23% and 10%, respectively.
Grew Alpha™ and EverGreen™ revenue by over 60% compared with the first quarter of 2022.
Ended the quarter with 73 of our AC Super Triple rigs equipped with Alpha™, representing a 46% increase over the same quarter last year.
Continued to scale our EverGreen™ product line, adding two EverGreen™ BESS, three EverGreen™ Integrated Power and Emissions Monitoring Systems and 11 high mast LED lighting systems to our fleet.
Reduce debt by at least $150 million and allocate 10% to 20% of free cash flow before debt repayments for share repurchases. Long-term debt reduction target of $500 million between 2022 and 2025 and sustained Net Debt to Adjusted EBITDA ratio of below 1.0 times by the end of 2025.
Returned $5 million of capital to shareholders by repurchasing and cancelling 67,073 common shares.
Cash provided by operations during the quarter was $28 million, $131 million lower than in the fourth quarter of 2022 due to the build-up of working capital from seasonal cash demands of our business, annual compensation payments and $39 million of cash interest payments.
Expect to generate positive cash flow from operations in the second quarter and repay the majority of the $78 million drawn on our Senior Credit Facility in the first quarter.
Remain committed to reducing debt by at least $150 million in 2023, with the majority of this expected to occur in the second half of the year.
OUTLOOK
Over the past few years, our customer base has shifted priorities from growth to shareholder returns. Similarly, the land drilling sector is demonstrating strict capital discipline, where despite strong customer demand and high utilization of Super Specification (Super-Spec) rigs, drilling contractors are funding only the most attractive capital investment opportunities and dismissing discussions of new rig builds. These dynamics are producing a more sustainable and predictable operating environment and ultimately generating better investor returns.
Energy industry fundamentals continue to support drilling activity for oil and natural gas despite broad economic concerns and geopolitical instability. Oil prices are supported by demand growth reemerging in China, OPEC holding steady on production quotas, and years of underinvestment and capital discipline by producers, which are limiting supply growth. We therefore expect drilling activity to improve in oil basins in the second half of the year as customers seek to generate appropriate investment returns, maintain production levels and replenish inventories. Natural gas is demonstrating short-term price weaknesses; however, this lower-carbon energy source is becoming increasingly favorable as countries around the world stress the importance of sustainability, decarbonization and energy security. With demand for Liquified Natural Gas (LNG) exports growing and the next wave of North America LNG projects expected to begin coming online in 2025 (including LNG Canada), we anticipate a sustained period of elevated natural gas drilling activity.
In Canada, industry activity is supported by imminent hydrocarbon export capacity increases with the Trans Mountain oil pipeline and the Coastal GasLink pipeline, each expected to begin operations within the next 12 months. Northwestern Alberta and northeastern British Columbia natural gas developments are prime beneficiaries of the LNG Canada project and the January 2023 agreement between the British Columbia government and the Blueberry River First Nation has facilitated a significant increase in 2023 drilling license approvals, which should lead to more drilling activity in the region. Large pad drilling programs are ideally suited for Super Triple drilling rigs, resulting in strong customer interest for these rigs for the next several years. On the oil side, we expect activity to remain strong as Canadian producers are benefitting from a favorable U.S. exchange rate and a reduced heavy oil differential. Precision’s Super Single rigs are well suited for long-term conventional heavy oil development in the oil sands and Clearwater formation. Looking at the second half of the year, we expect our Super Triple fleet to be fully utilized with demand exceeding supply and our Super Single pad capable rigs to be highly utilized. Accordingly, the tightening of available Super-Spec rigs is expected to drive higher day rates, increase demand for term contracts, and could necessitate customer-funded rig upgrades or rig moves from the U.S.
In the U.S., drilling activity has been increasing since mid-2020 but recently declined due to lower natural gas prices. We expect demand to improve in the second half of the year as customers continue to high-grade rigs to the latest pad drilling, AlphaAutomationTM equipped rigs and modestly increase rig counts in oily basins to maintain production.
Our AlphaTM technologies and EverGreenTM suite of environmental solutions continue to gain momentum and have become key competitive differentiators for our rigs as these offerings deliver exceptional value to our customers by reducing risks, well construction costs and carbon footprint. We currently have nine EverGreen™ BESS deployed in the field and have commitments for two additional deployments in the second quarter as customer interest continues to rise for this low emission power source. We recently expanded our partnership with CleanDesign, a key supplier of EverGreenTM BESS, through a $5 million equity investment commitment. This partnership will ensure we can meet the expected demand for BESS and is aligned with our overall emissions reduction strategy.
Internationally, we currently have five rigs working on term contracts, two in Kuwait and three in the Kingdom of Saudi Arabia, increasing to eight by the middle of the year following successful contracting in 2022. We continue to bid our remaining idle rigs within the region and remain optimistic in our ability to secure rig reactivations.
The outlook for our Precision Well Servicing business remains positive with strong customer demand supporting maintenance and completion activity. We have successfully integrated High Arctic’s well servicing assets and associated rental business that we acquired in July 2022. By leveraging our existing platform and continuing our strict focus on cost control, we have realized annual run-rate cost synergies of approximately $4 million and expect to achieve our $5 million target in the second quarter.
Commodity Prices
First quarter average West Texas Intermediate and Western Canadian Select oil prices decreased 19% and 29%, respectively, from 2022. Average Henry Hub and AECO natural gas prices declined 39% and 32%, respectively from 2022.
Contracts
The following chart outlines the average number of drilling rigs under term contract by quarter as at April 25, 2023. For those quarters ending after March 31, 2023, this chart represents the minimum number of 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 term contracts.
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. Internationally, we expect to have eight rigs under long term contract beginning in the second half of 2023.
According to industry sources, as at April 25, 2023, the U.S. active land drilling rig count has increased 8% from the same point last year while the Canadian active land drilling rig count has increased 4%. To date in 2023, approximately 79% of the U.S. industry’s active rigs and 59% of the Canadian industry’s active rigs were drilling for oil targets, compared with 80% for the U.S. and 59% for Canada at the same time last year.
Capital Spending and Free Cash Flow Allocation
We remain committed to disciplined cash flow management, capital spending and returning capital to shareholders. We reduced our 2023 capital spending budget from $235 million to $195 million in response to lower expected capital upgrades and maintenance capital. Capital spending by spend category includes $146 million for sustaining, infrastructure and intangibles and $49 million for expansion and upgrades. We expect that the $195 million will be split as follows: $183 million in the Contract Drilling Services segment, $11 million in the Completion and Production Services segment, and $1 million in the Corporate segment. At March 31, 2023, Precision had capital commitments of approximately $199 million with payments expected through 2026.
We remain committed to our debt reduction plans and in 2023 expect to reduce debt by at least $150 million and allocate 10% to 20% of free cash flow before debt repayments for share repurchases. Our long-term debt reduction target from the beginning of 2022 through to the end of 2025 is $500 million and target Net Debt to Adjusted EBITDA leverage ratio of below 1.0 times, while continuing to allocate 10% to 20% of free cash flow before debt principal payments to shareholders.
On April 11, 2023, S&P Global Ratings raised our issuer credit rating on our Unsecured Senior Notes to ‘B+’ from ‘B’.
SEGMENTED FINANCIAL RESULTS
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 $3 million as compared with $41 million in the first quarter of 2022. Our current quarter Adjusted EBITDA was positively impacted by decreased share-based compensation costs due to our lower share price.
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 2022 Annual Report.
Cash settled share-based compensation recovery for the quarter was $12 million as compared with an expense of $47 million in 2022. Our 2023 recovery was primarily due to a 33% decrease in our share price from the start of the year, whereas the expense in 2022 reflected our share price increasing by approximately 100% over the comparable period.
As at March 31, 2023, 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.
Finance Charges
Finance charges were $23 million as compared with $21 million in 2022. Our increased finance charges were primarily due to higher variable interest rates and the impact of the weakening of the Canadian dollar on our U.S. dollar denominated interest. Interest charges on our U.S. denominated long-term debt were US$15 million ($21 million) as compared with US$15 million ($19 million) in 2022.
Income Tax
Income tax expense for the quarter was $18 million as compared with $1 million in 2022. During the first quarter, we did not recognize deferred tax assets on certain Canadian and international operating losses.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
At March 31, 2022, we had $1,178 million outstanding under our Senior Credit Facility, Real Estate Credit Facilities and unsecured senior notes as compared with $1,103 million at December 31, 2022. The current blended cash interest cost of our debt is approximately 7.0%.
On April 11, 2023, S&P Global Ratings raised our issuer credit rating on our Unsecured Senior Notes to ‘B+’ from ‘B’.
Covenants
At March 31, 2023, we were in compliance with the covenants of our Senior Credit Facility and Real Estate Credit Facilities.
