CALGARY Nov 4, 2015 (Thomson StreetEvents) -- Edited Transcript of Trinidad Drilling Ltd earnings conference call or presentation Wednesday, November 4, 2015 at 4:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Lisa Ottman Trinidad Drilling Ltd. - VP of IR * Lyle Whitmarsh Trinidad Drilling Ltd. - Chief Executive Officer * Brent Conway Trinidad Drilling Ltd. - President ================================================================================ Conference Call Participants ================================================================================ * Scott Treadwell TD Securities - Analyst * Dana Benner AltaCorp Capital - Analyst * Ian Gillies FirstEnergy - Analyst * Greg Colman National Bank Financial - Analyst * Jon Morrison CIBC World Markets - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning. My name is Mike and I will be your conference operator today. At this time I would like to welcome everyone to the Trinidad Drilling Limited's third quarter 2015 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question answer session. (Operator Instructions). Lisa Ottmann, Vice-President of Investor Relations, you may begin your conference. -------------------------------------------------------------------------------- Lisa Ottman, Trinidad Drilling Ltd. - VP of IR [2] -------------------------------------------------------------------------------- Thank you. And thank you for joining us today. We'll be discussing Trinidad Drilling Limited's third quarter 2015 financial and operating results which we released yesterday. A full copy of the MD&A and financial statements along with a presentation outlining the quarter highlights are available on our website at Trinidaddrilling.com. Our full third quarter results are also available at SEDAR.com. Please note that during the call we'll be discussing forward-looking information relating to various areas of our business including but not limited to the completion of rig construction programs on a timely and economic basis, the assumption that Trinidad's customers will honor their take-or-pay contracts, the ability for Trinidad to attract and retain qualified crews to operate their rigs. Assumptions respecting capital expenditure programs like oil and gas exploration and production companies. Assumptions made about future performance or operations of the joint venture and partnership agreements. Assumptions made about the acquisition of CanElson, and future liquidity. And other expectations about future events or performance. Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking informational statements. And you are cautioned to not unduly rely on such forward-looking statements. For a copy of our full forward-looking disclaimer, please refer to the disclaimer included in yesterday's press release and MD&A. The conference call may also include non-GAAP measures. For reconciliation to the GAAP measure please refer to our MD&A. To discuss our results, our view on the drilling sector and Trinidad's opportunities going forward our Lyle Whitmarsh, Chief Executive Officer, Brent Conway, President, and (inaudible), Chief Financial Officer. I will now turn the call over to Lyle. -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd. - Chief Executive Officer [3] -------------------------------------------------------------------------------- Thank you, Lisa. Good morning, everybody. 2015 has been a challenging time in the oil and gas industry. Trinidad has proactively adjusted to these difficult conditions by lowering its cost structure, improving efficiencies and staying focused on providing safe, high-performance operations for our customers. Despite the weak industry conditions, the impact of our actions were reflected in our results this quarter. Our activity levels remain above industry average. Our margins remain solid, and our safety performance continued to be one of the best in the industry. During the third quarter we closed the previously announced acquisition of CanElson. With overwhelming approval from both companies' shareholders. The results of CanElson are included in the third quarter results effective from August the 11th. A combination of our operations creates a larger, more diverse fleet that can meet the varied needs of our customers. It expands our customer base, lowers our corporate leverage, and provides increased cash flow to manage through the cycles and take advantage of the future growth opportunities. The integration of CanElson is progressing as expected. We have relocated offices and are currently merging processes and operations. We expect the integration to be mostly complete by the end of this year. With the current weakness in the market, we chose to accelerate the timing of our initial integration plan, in addition to the integration of CanElson, we have also been resizing and centralizing the overall Company to operate more efficiently in what we expect to be a weak environment for some time to come. During the third quarter, Trinidad's revenue totaled CAD124 million, down 49% from the same quarter last year. Revenue decreased as a result of lower activity levels across the drilling fleet and lower external manufacturing revenue. Partly offset by a higher level of early termination revenues in the current period. Revenue was 31% higher than the second quarter of 2015 as Canadian operations increased activity after spring break-up. Operating income net percentage or operating margin was 44% in the third quarter, up from 35% in the third quarter of last year, largely as a result of higher early termination and stand by revenues, and lower operating costs. Operating margin decreased from 46% reported in the second quarter due to less early termination and stand by revenue in the current period. Excluding the impact of early termination and stand by revenue, operating margins remain strong as the impact of the cost-cutting measures was recognized and less lower margin manufacturing work was performed. In addition activity was focused towards high-margin assets. In the third quarter, operating margin excluding early termination and stand by revenue was 38%, compared to 33% in the third quarter of 2014 and 36% in the second quarter of 2015. Adjusted EBITDA was CAD45 million in the quarter, down from the CAD65 million in the third quarter last year and up from CAD35 million in the second quarter of 2015. Adjusted EBITDA lowered from the same quarter last year, largely as a result of lower activity levels. Adjusted EBITDA was higher than the second quarter due to the seasonality slowdown typically experienced in Canada over the spring period. G&A costs excluding stock-based compensation and third party costs in the quarter were approximately CAD14 million, down 9% from the same quarter last year and up from 5% in the second quarter of 2015. To date in 2015 we have implemented several measures to lower G&A costs. We have reduced our head count, rolled back wages and board expenses. We have also significantly cut back G&A costs in areas heavily impacted by lower activity such as our Barge and Manufacturing operations. These changes were partially offset in the third quarter with the addition of the CanElson's G&A expenses from August 11th on. We expect the full year G&A to be about CAD60 million in 2015. Our initial expectation for 2015, before all cost-cutting, was CAD60 to CAD65 million and CanElson was anticipating CAD20 to CAD25 million. Bringing us to a combined total of CAD80 to CAD90 million. In 2016 we will receive a full year's benefit from the cost-cutting measures and we anticipate G&A costs to be approximately CAD50 to CAD55 million of cost savings of approximately CAD30 million. In the quarter we recorded a net loss of CAD88 million, down from net earnings of CAD19 million in the same quarter last year. Trinidad's net loss was higher in the current quarter, largely due to an impairment recorded on goodwill in our US and international operation and on our Barge rigs. Higher finance and transaction costs partly offset by lower depreciation and income tax expenses. The largest factor affecting net loss in the quarter was the impairment which totaled CAD139 million. Adjusted net earnings, which excludes the impact of the impairment and other non-cash items we have limited control over, such as foreign exchange and stock-based compensation was approximately CAD1 million in the quarter. This includes pre-tax transaction costs of CAD5 million which, if excluded, brings normalized net income to about CAD5 million or CAD0.03 per share compared to the CAD0.11 per share in the third quarter of 2014. Now, let's turn more specifically to our Canadian operations. Utilization levels in the third quarter averaged 34%, down from 66% in the same quarter last year, and up from 8% in the second quarter of 2015. Activity decreased from the third quarter last year as the impact of the lower commodity prices was felt across the oil and gas sector. A brief improvement in oil prices early in the quarter was short-lived, and while activity improved from the second quarter it did not reach levels typically expected in the third quarter. In a very comparative market, Trinidad's fleet performed well, maintaining its typical premium in activity levels and recording activity 8 percentage points higher than the industry averaged in the third quarter. Revenue in the third quarter was CAD51 million, down 40% from the same quarter last year, a direct result of lower operating days, which were down 38% quarter-over-quarter. Day rates were 23,695 in the third quarter, relatively unchanged from the third last year as the impact of more high-spec rigs working during the current quarter offset weaker customer demand. Day rates lowered from the second quarter of 2015 due to change in active rig mix. Revenue in the current period was CAD39 million higher than the second quarter of 2015 as a result of seasonality. Operating margin was 42% in our Canadian operations in the third quarter of 2015, down slightly from the 44% in the same quarter of 2014, and up from 27% in the second quarter. Operating margin decreased slightly over the same period last year due to the fixed nature of some of the operating costs spread over less operating days and slightly lower day rates. Operating margin was higher than the second quarter of 2015 as fixed operating costs were spread over more operating days. Since the end of the third quarter, activity levels have remained fairly stable and we currently have 38% of our Canadian fleet operating. While this is an improvement over what we saw in the third quarter and above the current industry average of 24%, it is still well below what we would historically see this time of year. Activity levels appear to have stalled at the current level, and we expect conditions to remain very competitive for the coming winter drilling season. The areas we are seeing the most activity in are the Montney, the Duvernay and the Cardium. We see activities lower than usual ahead of the holiday season as customers finish their 2015 drilling programs early. Day rates remain under pressure and we have seen some rates come down about 5% in the past few months. We expect conditions to remain weak in 2016 until there is an improvement in commodity prices. Now, let's turn to our US and international operations. Results in our US and international operations were impacted by early termination of one rig during the quarter of 2015 and ongoing payments for four rigs terminated earlier in the year. Revenue in the quarter was CAD67 million, down 47% from the third quarter last year as a result of lower activity levels, partly offset by higher level of early termination and stand by revenue compared to the same quarter last year. Compared to the second quarter, revenue was down 9% due to the early termination and stand by revenue in the current period. In the current quarter we received early termination and stand by of $7 million compared to less than $1 million in the third quarter of 2014. And $12 million in the second quarter of 2015. The early termination and stand by revenue reflects the margin that would have been earned over the contract period for that rig. It is paid as either a lump sum or a monthly payment until the contract period ends. During the quarter we received a combination of these types of payments. Day rates in the quarter were 23,582 US per day, up $2,490 per day from the same quarter last year. Excluding all the early termination and stand by revenue from each quarter, day rates were $864 per day higher in the third quarter than in the same quarter last year, due to the higher portion of high-spec rigs operating in the current quarter. Day rates decreased from the second quarter excluding early termination stand by revenue by $1,017 dollars per day as the impact of lower customer demand offset a change in the active rig mix. Activities lowered quickly, early on in 2015 as customers reacted to dropping commodity prices. After this initial reaction, Trinidad's activity levels lowered, but at a much slower pace, supported in part by our contract base. In the third quarter, Trinidad's average utilization of 40%, down from 96% in the same quarter last year, and down from 50% in the second quarter. Operating margin in the US and international division was 47% in the quarter, up from 34% in the same quarter last year due to the higher level of early termination and stand by revenue received in the current period. Operating margin dropped from 52% recorded in the second quarter as early termination and stand by revenue had a smaller impact in the third quarter than in the second quarter. Excluding the impact of early termination and stand by revenue, our operating margins remain strong at 39% in the current quarter, compared to 34% in the same quarter last year, as the impact of lower costs and a change in active rig count drove higher profitability. Like in Canada, conditions remain challenging in the US market. Trinidad's most active area is the Permian, where we currently have 16 rigs operating. Competition for available work is very high, and downward pressure on day rates continues. Spot day rates in the US are down about 5% in the past few months and we do not expect conditions to improve until we see an increase in commodity prices. We currently have 27 of our rigs in the US fleet operating, and another 4 idle rigs but contracted, making a total of 31 rigs or 41% of our US fleet currently earning revenue. Since the end of the third quarter we have not received any additional termination or stand by notices on equipment. We expect that the monthly payments for the previously terminated contracts will add approximately $1 million in early termination and stand by revenue for the fourth quarter results. Moving on to our Barge operations now. Conditions in the Barge market have deteriorated severely over the past year. Early in the year we chose to stack our Barge rigs and not extend the Bareboat Charter agreement on the three rigs that expired at the end of the first quarter. We do not see any improvement in the market conditions in the near term and have scaled back our staffing levels and overhead costs to reflect these expectations. In the third quarter we reviewed the book value on these rigs and recorded an impairment of CAD27 million, removing all remaining value attributed to these assets. In addition, as a result of further weakening in market conditions in the third quarter, we did a full review of the book value of our asset and recognized an impairment of CAD112 million on goodwill in our US operations. The goodwill related to the Cheyenne and Axxis acquisitions that occurred more than five years ago, our impairment analysis estimated discounted future cash flows over the next five years and the terminal value. At September 30, the estimated cash flow supported the remaining book values of our assets. Now let's take a look at our joint venture operations. The contributions from joint venture with Haliburton is continuing to grow. Net earnings and adjusted EBITDA have grown each quarter as we get more rigs operating. Our share of the adjusted EBITDA from the joint venture in the third quarter was CAD7.9 million. Operating margin was 46% in the third quarter, in line with the margin recorded in the second quarter. G&A expenses lowered to 8% of revenue in the current quarter, down from 12% of revenue in the second quarter as a result of higher revenue and more normalized cost. We expect G&A to remain in the 8% to 10% of revenue range going forward. During the quarter, we had all four rigs operating in Saudi and three rigs operating in Mexico. The remaining Mexican rig is receiving standby revenue as it waited on the drilling location. The rig is expected to begin operations before the end of 2015. The performance of the joint venture rigs has been very strong and both Pemex and Saudi Aramco are pleased with our operations to date. We are continuing to evaluate additional opportunities with the joint venture, with opportunities currently being evaluated in the Middle East and Latin America. These opportunities can involve redeploying existing idle assets from our US and Canadian operations into the international markets. As part of the CanElson acquisition we added joint venture operations in Mexico with two land rigs and two service rigs. The joint venture had minimal contribution in the third quarter as there was limited activity. We have since activated one service rig and one land rig in these operations. Our capital expenditure during the quarter was CAD35 million including approximately CAD14 million spent on our portion of the joint venture capital projects. Year-to-date, capital spend tower has totaled CAD153 million. The bulk of this spending related to our US new builds in Trinidad and our Mexican rigs in the joint venture. Our expected full year capital expenditure is CAD185 million, updated only to include the CAD10 million for the CanElson assets. We are in the process of setting our 2016 capital budget so it's a little early for me to give specific guidance on what we expect for next year. What I can say is that we are being extremely prudent on our cash and expect to stay well within the cash flow we generate next year. Any free cash flow that we generate would be used to lower leverage. With our new build program complete and limited capital expenditures planned for the coming year, we have chosen to restructure our manufacturing division to better reflect this lower activity level. We have significantly reduced our staffing and plan to outsource future work that is more basic in nature, keeping only the more advanced and proprietary work to be done in-house. This will limit our overhead costs and provide more flexibility as market conditions change. As part of our ongoing review of our operations and financial position, our Board of Directors reviewed our current dividend policy and felt that it was prudent to lower the quarterly dividend paid to shareholders. We declared a CAD0.01 per share dividend for the fourth quarter of 2015, which is CAD0.04 per share reduction from the previous dividend level. This change provides approximately CAD36 million in annual cash savings for Trinidad that can be used to fund our business or lower debt levels. We are very aware that the dividend is important to a number of investors. However, given the current market conditions, the lack of clarity for the 2016 activity levels, we felt it was more important to keep that portion of cash within the Company. At the end of the quarter we had CAD85 million drawn on our credit facility, with CAD115 available, and a further $200 million available. We also have $450 million of senior notes outstanding. It is important to note that our long-term debt is predominantly made up of the senior note, which is non-covenant unsecured debt. In addition we had CAD25 million of cash on hand at the end of the quarter. Our cash balance is lower in the current quarter largely as a result of the CAD50 million cash consideration in the CanElson acquisition. Our capital expenditures during the quarter and our biannual interest payments on our senior notes. Our main debt covenant is consolidated total bank debt to consolidated bank EBITDA and typically has a maximum of 4 to 1. Following our CanElson acquisition, this moves to 4.5 to 1 for the fourth quarter of 2015 and the first quarter of 2016. We are also able to include the 12-month EBITDA from CanElson in this calculation. At the end of the quarter we are sitting at 2.65 to 1. This calculation excludes the EBITDA earned in our joint venture. However, if we are able to bring cash back from the joint venture, which would then be included in EBITDA and also lower our debt outstanding. Including the cumulative joint venture EBITDA our metric would have been 2.37 to 1 at the end of the third quarter. It is important to remember that this ability to bring cash back from the joint venture relates to cumulative EBITDA. If we do not bring back the cash in 2015, we are able to bring not only the current period's EBITDA in 2016 but the previous period's EBITDA. In addition, we are able to time the payments to coincide with the timing of peak debt levels. The relaxation of the covenants following the acquisition and our ability to bring cash back from our joint venture has given us more room within our covenants. However, we will continue to monitor the market conditions closely and will remain in open dialog with our banking syndicate. To date, in 2015, our long term contracts of health or results by providing stability to our activity and dayrates. And also providing lump sum payments where customers cannot continue to work the rig. Of our total fleet we currently have (inaudible) or approximately 35% under long-term contract with an average term of just under 1.5 years remaining. This number excludes any contracts that have already been terminated unless we are earning monthly payments. As more rigs roll off contract and on the spot market we expect our average dayrates will lower. We currently have rigs rolling off contract in the balance of 2015. We currently have 9 rigs rolling off contract in the balance of 2015 and a further 19 rigs rolling off in 2016. Industry conditions have not improved to date in the fourth quarter, and the environment remains challenging. Trinidad and the oil and gas sector have done a good job at lowering cost structures and improving efficiency. However, persistently weak crude oil and natural gas prices continue to limit drilling activity and we do not expect conditions to improve until commodity prices begin to increase. We have implemented cost-cutting initiatives across our corporate offices and our operations and will continue to look for further efficiency gains. We have cut deeply and made difficult decisions, which in many case meant having to let good people go. These are not decisions we take lightly. But resizing the Company to operate in the current environment is crucial in our ongoing business success. Having made these changes, we are well positioned to manage through the downturn. However, we will continue to monitor conditions closely and respond accordingly. Thank you for listening. I would now like to pass the call back to the Operator and take any questions that may be on the line. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- We have a question from Scott Treadwell, from TD Securities. Your line is now open. -------------------------------------------------------------------------------- Scott Treadwell, TD Securities - Analyst [2] -------------------------------------------------------------------------------- Thanks. Morning, everyone. A couple of questions. You kind of half answered it to start with, Lyle, in your last comments. The nine rigs that come off here in Q4, off contract, since we're almost halfway through that quarter, do you have visibility that those will continue to work through Q4, albeit potentially at a lower day rate or are those rigs likely to go to the yard once their contracts wrap up? -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd. - Chief Executive Officer [3] -------------------------------------------------------------------------------- Great question. We're pretty comfortable that we have been able to re-secure about 50% of the rigs that come off, generally. So we have had success in redeploying the rigs once they roll off. I think for clarity reasons, in Canada, the spot market for where we are in our contract base is much tighter. So when they roll off, they generally have been rolling off at very similar dayrates. In the US we have our contractor rigs are a little bit higher on dayrates, so in the US percentage of the rigs, if they were to be able to go back to work, we expect them to be probably about 15% or so, somewhere in that range, lower than where they currently are in the US. Just gives you an idea that yes, we believe we can put some of them there. In Canada they should be fairly similar in rates but in the US I think we will be looking at a little bit of a reduction to secure further work off of the contract. -------------------------------------------------------------------------------- Scott Treadwell, TD Securities - Analyst [4] -------------------------------------------------------------------------------- Okay, perfect. Second question on the US operation. If I do the math and look at what CanElson reported in Q2 versus the 273 days that they added post the acquisition that feels like something like 15% drop in utilization, which is obviously worse than the industry. Was there something specific there with a specific customer, or was that just market conditions that forced that utilization down? -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd. - Chief Executive Officer [5] -------------------------------------------------------------------------------- Yes, I don't think there's anything specific to a client. It was just more market conditions. I think across the board in the US, where we didn't have long-term contracts, just like everybody else, those are the rigs that got shut down first. But certainly in the last month or two, there's renewed interest from clients. We have put a few rigs back to work. And it's just a matter of reset for everybody. We did cut wages in the US. We have brought in and obviously combined our operations and did some cuts on people. So we're actively out there looking. I don't think there's anything specific to a client. Certainly they are in a very good part of the US, in terms of being in west Texas where the activity levels have probably held up pretty much better than anybody else. So I think we're out there fighting the fight every day. There's nothing specific to a client, though. -------------------------------------------------------------------------------- Scott Treadwell, TD Securities - Analyst [6] -------------------------------------------------------------------------------- Good. Last one for me, you've referenced a couple of times the ability to bring cash back from the joint venture. Can you just give us a sense how much cash is either there at the end of Q3 or that you would expect to be able to be brought back between now and, say, the end of 2016 assuming no major changes to activities and pricing and things like that? -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd. - Chief Executive Officer [7] -------------------------------------------------------------------------------- Well, you know, I know we keep just talking about this. This is cash that's inside our Luxembourg stock share. And basically our share of the EBITDA, we'll just bring it back to our controlled sub and make sure that we can bring that EBITDA into our covenants. It really depends on where were. Right now, that number at the end of Q3 was about CAD21 million and then if you kind of look at where we are, kind of this quarter it was about CAD7.9 million, I think that was our quarterly number for EBITDA. So if you assume those rigs are on contract and you keep going, you kind of just project that out as that's what we could bring back every quarter. You know, it's really just a timing event when we do that. And we can pick our timing. Certainly ourselves. Haliburton has no interest in holding cash. So if we don't have a place to reinvest it, we would bring it back to the two shareholders and bring it back for cash that we could use to fund other things and also bring it back into our EBITDA. -------------------------------------------------------------------------------- Scott Treadwell, TD Securities - Analyst [8] -------------------------------------------------------------------------------- And just a follow-on to that, that CAD21 million, is that carried in receivables right now or is that carried somewhere else? -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd. - Chief Executive Officer [9] -------------------------------------------------------------------------------- It would be in the net investment in the JV, is where it would be. -------------------------------------------------------------------------------- Scott Treadwell, TD Securities - Analyst [10] -------------------------------------------------------------------------------- Okay. So then I guess one more follow-up was just on the receivables, what do you expect in terms of that sort of working capital? It's obviously come down pretty meaningfully. Do you expect further release from working capital here through Q4 and into 2016? Or are we looking at something like a normalized number for you guys, again, given that maybe activity doesn't change much? -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd. - Chief Executive Officer [11] -------------------------------------------------------------------------------- You always get a relief of working capital when you go from a higher level of utilization to a lower level of utilization. Now that we're here, I don't see a lot of big working capital inflows coming back to us because as long as you're at a static level of utilization, you don't see a working capital investment. You don't see a working capital source of cash. So, from this standpoint, if our utilization stays pretty constant going into 2016, I don't see a big source of cash or hopefully, if we have the problem where things pick up and we end up using some working capital because we get busier. We hope that happens. I guess we're not counting it right now. -------------------------------------------------------------------------------- Scott Treadwell, TD Securities - Analyst [12] -------------------------------------------------------------------------------- Okay. That's good. I appreciate the color, guys. I'll turn it back. Thank you. -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd. - Chief Executive Officer [13] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Your next question comes from Dana Benner, from AltaCorp Capital. Your line is now open. -------------------------------------------------------------------------------- Dana Benner, AltaCorp Capital - Analyst [15] -------------------------------------------------------------------------------- Morning, all. -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd. - Chief Executive Officer [16] -------------------------------------------------------------------------------- Morning, Dana. -------------------------------------------------------------------------------- Dana Benner, AltaCorp Capital - Analyst [17] -------------------------------------------------------------------------------- So I wanted to start with the cost structure in Canada. You've obviously made great progress all over north America, and of course there's a human component of that which is so unfortunate. But I guess with respect to the cost structure in Canada specifically, are there more gains that can be had, whether it's pushing harder in terms of driller wages, or things like that? Or do you think it's probably as low as it's going to get? -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd. - Chief Executive Officer [18] -------------------------------------------------------------------------------- No, Dana, I think that there is some room. One of the challenges, obviously, is retaining any sort of reductions. So I think what Trinidad and the industry is look at is resetting on suppliers, vendors. I think there's still some room there. We're continuing to find efficiencies. I think the industry is being very resilient, Trinidad as well. I think on the crew labor and things like that, we're going to be continuing to be sizing and looking at opportunities to size and get our basin back to being efficient. But I still believe there's still room for improvement there. So I think you're going to continue to see Trinidad be very, very aggressive in trying to find even more and more ways to reduce our overall costs. And I think we continue to do, as an industry, and again more specific to Trinidad, we continue to surprise and find ways to do that and I think that shows the resiliency of the industry. So we're going to continue to push. And again, as you commented, this is a very tough decisions to make. A lot of the in cases involves long-term employees and people every day. But at the end of the day, we are trying to be sensitive to that but also trying to size and get correct on our costing size, to be able to drill in this environment and continue to maintain our performance and continue to do that. So that's kind of a long answer, Dana. But the short answer is yes, I still believe we can find some more savings. -------------------------------------------------------------------------------- Dana Benner, AltaCorp Capital - Analyst [19] -------------------------------------------------------------------------------- Great. A second question relates to the JV. And to the extent that you're looking at other opportunities, you mentioned the Middle East and Latin America. Is it more likely that those would be within the joint venture, or could we see 100% Trinidad rigs in those? -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd. - Chief Executive Officer [20] -------------------------------------------------------------------------------- To the extent that we can use existing rigs, I think we certainly would look at both. I think there's pockets in the Middle East that that's probably easier to do, than others. In Latin America, there's certainly probably more ability to move rigs without spending significant capital. We have opportunities on both sides, Dana, to do direct with clients in the Middle East and to work within the JV. So we're chasing both right now. So there's opportunities on both sides. -------------------------------------------------------------------------------- Dana Benner, AltaCorp Capital - Analyst [21] -------------------------------------------------------------------------------- Do you have any updated sense of timing on when things like this could materialize? Are you any closer? Or is it very much related to winning certain contracts? -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd. - Chief Executive Officer [22] -------------------------------------------------------------------------------- Well, the reality is as much as I think the markets internationally are probably a little bit more stable, and you know than what we're seeing in north America, certainly their investment decisions are getting delayed. It's just there are tenders coming out. There are tenders that are in process. There are tenders that have been awarded that we have a very good likelihood of participating in and winning. But the whole projects are getting delayed in some cases. So I think the timing, it's just so difficult to predict. The contract cycle internationally is longer anyway. But when you get a contract cycle that's a year, sometimes two years, and then you've got governments changing fiscal policies around cash needs related to all revenues being down, it's pretty tough. We're pretty good at predicting some timing on things but that one gets a little tougher. It gets a little foggy when you get into those types of things. Certainly I think there's projects that are probably on the radar right now or in front of us that we've got pretty good visibility to them. But how quickly they push those down the pathway, it's so hard for us to give you any guidance. And I just wouldn't want to mislead anybody in saying, okay, it's imminent. But there are definitely projects that are on the table that they're trying to get in place by end of the year Q1. Now, whether that happens, it's just tough to say right now. -------------------------------------------------------------------------------- Dana Benner, AltaCorp Capital - Analyst [23] -------------------------------------------------------------------------------- Right. And just one final question. You went through, like all companies right now, and did the tests for impairments. You wrote down goodwill in the barges. But nothing on the drilling side. So is it safe to say that unless there's another meaningful step down in oil prices, that the fleet you see today is probably right-sized in terms of its book value? Which has other implications as investors try to understand the meaning of book value and when does it bottom, all else equal? -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd. - Chief Executive Officer [24] -------------------------------------------------------------------------------- We looked at obviously all of that during the quarter. We'll continue to look at it. Based on what we see today, based on a set of facts that are presented to us in terms of where we think we're going to be on utilization, projecting out cash flows and the assumptions that we use to develop those models, we think at this point in time we're fine. But it's something we're going to have to look at every quarter. You guys have lived it too. You know, what's true today may not be true next week. So we don't see anything right now. We did a really, really good thorough look at it for the quarter, and we're comfortable with what we've done and I think, you know, based on what we know right now, we think we're good. -------------------------------------------------------------------------------- Dana Benner, AltaCorp Capital - Analyst [25] -------------------------------------------------------------------------------- Okay. Well, I will turn it back. Thank you. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- Your next question comes from Ian Gillies from FirstEnergy. Your line is now open. -------------------------------------------------------------------------------- Ian Gillies, FirstEnergy - Analyst [27] -------------------------------------------------------------------------------- Morning, all. I was just curious if there's been any material changes to how you're managing the repair and maintenance cycle compared to a year ago, or even the start of the year? I was pleasantly surprised by the Canadian operating margins in the quarter. -------------------------------------------------------------------------------- Brent Conway, Trinidad Drilling Ltd. - President [28] -------------------------------------------------------------------------------- Yes, I think absolutely. Anybody who has been through this before as an operational management team, you know, you manage your repair and maintenance. You make sure you're looking at what you have to do, not what you would like to do. Certainly if you have rigs that are down, if you need a new pump or you need a pump because it's blown up, you're not going to go out and do a pump job or buy a new pump. You're going to use one from inventory. All of that stuff is on the table. In terms of managing repair and maintenance, every day we're looking at the P&L on where we are by the rigs, by contract, based on what we're being asked to quote. So if you aren't doing that in this market, you're going to have a hard time maintaining your margins. We looked at costs in terms of where our cost-cutting has gone, in terms of what Lyle said. We made difficult choices to try and make sure that we've minimized whatever loss we have going from margin to EBITDA. And I think you saw it in the quarter. I think the other thing that's certainly out there, we talked about the CanElson and Trinidad combination synergy number was around CAD10 million and between synergy's and cuts, we have knocked about CAD30 million out of our G&A. So on an all-in number, a 38%, 40% number, I don't think anybody's cut that hard. So we have been here before. We understand how to manage in this type of environment. And we're not done. Lyle said it. I think it's something that we're going to manage every week, every month, every quarter, to make sure that whatever we can get in terms of day rate, that we can keep most of what we can for our shareholders. -------------------------------------------------------------------------------- Ian Gillies, FirstEnergy - Analyst [29] -------------------------------------------------------------------------------- Thanks. That's great color. And then my second question was around potential for real estate divestment or any additional divestments with respect to the CanElson acquisition and whether it may be material in helping you de-lever the balance sheet. -------------------------------------------------------------------------------- Brent Conway, Trinidad Drilling Ltd. - President [30] -------------------------------------------------------------------------------- Yes, we have probably got 3, 4 facilities that are either leased or owned that we are trying to get out of. We've also got facilities on the Trinidad side that we are doing the same thing with. The challenge in this market is do you get out of it at press value or do you lease some of those facilities? Sale, lease back, we're looking at all those types of options, to be honest. Like Lyle said, there's not a rock that we're not overturning to see how we can create, you know, get out of assets that aren't generating any margin or any revenue, or fixed assets that as a result of combination we just don't need. -------------------------------------------------------------------------------- Ian Gillies, FirstEnergy - Analyst [31] -------------------------------------------------------------------------------- Thanks. And then the last question I have, you mentioned Latin America from a JV perspective. If we work under the assumption that it's not in Mexico, and it's in another area, do you work under the idea that you need to bring more than one rig into a new jurisdiction to get a decent amount of economies of scale there? -------------------------------------------------------------------------------- Brent Conway, Trinidad Drilling Ltd. - President [32] -------------------------------------------------------------------------------- Yeah, no, that's a true statement. I think we wouldn't go in with one rig. You know, I think it would be a deal where if we were going to do it, we might start with one or two rigs but certainly we would want to see where we could get to critical mass of, say, 4, 5, 6 rigs and then grow from there. There are markets where there's opportunities to do that. It's just depending on where you're going, you've got to make sure. You've got tax issues, you've got currency issues. You've got to manage that properly. And we're in the process of doing that independently but also with our partner (inaudible) operations. A lot of those countries, they have asked us to go. And in some cases we couldn't go because we didn't have assets to provide. And we're going to look at what we can do here going into next year, to expand in some of those areas. -------------------------------------------------------------------------------- Ian Gillies, FirstEnergy - Analyst [33] -------------------------------------------------------------------------------- Thanks very much, guys. I appreciate the color. I'll turn it back over now. -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd. - Chief Executive Officer [34] -------------------------------------------------------------------------------- Thanks. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- The next question is from Greg Colman with National Bank Financial. -------------------------------------------------------------------------------- Greg Colman, National Bank Financial - Analyst [36] -------------------------------------------------------------------------------- Hi, gentlemen. and Lisa, thanks for taking my questions here. I just have two quick ones. First of all, and I'm sorry to harp on this. Can we come back to the JV accounting? Scott dug into it at the beginning of the call but is it a correct assumption that with CAD21 million sitting in the JV, and Lyle, I think you mentioned CAD7.1 million on a quarterly basis, at some point next year what we see is that 21 plus whatever has accrued from now until then shows up in the income statement, effectively lifting the EBITDA for the combined entity? Am I thinking about that correctly? Or is that not how it works? -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd. - Chief Executive Officer [37] -------------------------------------------------------------------------------- Yes, that's right. There's CAD21 million kind of at the end of the third quarter, and there's CAD7.9 million that we earned in the quarter. So if you kind of project that out, that's the EBITDA, cumulative EBITDA that we could bring back next year that would an inclusion inside of EBITDA on a consolidated basis. -------------------------------------------------------------------------------- Greg Colman, National Bank Financial - Analyst [38] -------------------------------------------------------------------------------- And you can pick when you want to do that? That's at your judgment? -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd. - Chief Executive Officer [39] -------------------------------------------------------------------------------- Right. -------------------------------------------------------------------------------- Greg Colman, National Bank Financial - Analyst [40] -------------------------------------------------------------------------------- Okay, great. Thanks for the clarity on that. Secondly, it's a bit more of a bigger picture question. We've seen rig efficiencies globally, north America globally, increasing as we have been high-grading the fleet, high-grading targets on the E&P side, and high-grading the labor pool, making those unfortunate decisions. I was wondering if you could comment on the quality of the fleet that you have got working today? If we were to see another leg down in rig activity, if we were to see another big move with the fleet coming down by say 20% or 30% from where it is today, would the average quality of rig that you have working materially improve? Or is the average quality of the rig that you have today, it's all your best stuff already so you wouldn't see that additional improvement in sort of average rig efficiency if we were to see another leg down? -------------------------------------------------------------------------------- Brent Conway, Trinidad Drilling Ltd. - President [41] -------------------------------------------------------------------------------- Great question. When we look at it, and we look at the industry and more specifically to Trinidad, predominantly what we have operating to now is premier rigs with mostly the high-efficiency packages on them, whether that be walking systems, high pumping pressure, all of the efficiencies. I think where the industry and Trinidad specifically are, we're in this now, and I think if we do see another reduction, we're not going to see a lot more of the efficiencies. It's very few rigs operating today, and almost zero for Trinidad to fall into anything but Tier 1 rigs. So when we look at that style of modeling, we don't see a lot more efficiency gains, even with some more reductions. And I think generally speaking, and I have used that word "generally", the industry is very similar. I think what you're seeing operating today within the industry is very high performance, the top rigs in both Canada and the US and now starting to be somewhat even in the international market. So I think if we do come under pressure, we won't see a lot more efficiency gain. We have fairly standardized throughout the industry what kind of the boutique-style rig is now. There might be some slight alterations for that on an efficiency gain but not of a material nature that we see. Hopefully that gives you the color. We are certainly running some of the Trinidad's best rigs in the fleet and we see that continuing until commodity price changes. -------------------------------------------------------------------------------- Greg Colman, National Bank Financial - Analyst [42] -------------------------------------------------------------------------------- Would it be fair to say that same logic would apply to, I'm not going to use the word quality of labor but experience of the labor pool that's on the fleet today? You're obviously going with your more senior drillers, people with more tenure. If you were to have to make further staffing reductions, it's not like it would change the experience level on your rigs either? -------------------------------------------------------------------------------- Brent Conway, Trinidad Drilling Ltd. - President [43] -------------------------------------------------------------------------------- No. I think you're correct. We also, as many have, have loaded up our experience as much as we can on a retention basis, but also tied to performance. I think this industry I think the flip side to that will be something that we'll have to start to address once commodity pricing improves, is how well have we done on that, and how fast can we respond? Because you're absolutely right, the downside to what has actually occurred is what's going to happen when we do see the rebound. But right now we definitely have the most experienced crews that because of the reduction in overall utilization. Obviously we have very experienced crews, like the industry does right now. So we're probably running at peak. Even if we were to see another reduction, as you mentioned, on the employee side we wouldn't gain a whole bunch from there. -------------------------------------------------------------------------------- Greg Colman, National Bank Financial - Analyst [44] -------------------------------------------------------------------------------- Great. That's it for me. Appreciate the color. -------------------------------------------------------------------------------- Brent Conway, Trinidad Drilling Ltd. - President [45] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Your next question is from John Morrison with CIBC. -------------------------------------------------------------------------------- Jon Morrison, CIBC World Markets - Analyst [47] -------------------------------------------------------------------------------- Morning, all. -------------------------------------------------------------------------------- Lisa Ottman, Trinidad Drilling Ltd. - VP of IR [48] -------------------------------------------------------------------------------- Morning. -------------------------------------------------------------------------------- Jon Morrison, CIBC World Markets - Analyst [49] -------------------------------------------------------------------------------- Based on your comments in the preamble, it's fair to say that you don't expect any incremental rig adds in Canada in the next four to six weeks and we should largely assume that the 30 or 32 rigs that you're running in Canada is probably the peak for the rest of the year? -------------------------------------------------------------------------------- Brent Conway, Trinidad Drilling Ltd. - President [50] -------------------------------------------------------------------------------- Yes, John, I think what we've really seen in the last few weeks has been the realization that some of these projects are probably going to end a little earlier than what we normally, you know, mid-November to early December. So that's fairly good. I think we're good as an industry and as Trinidad, I think we're probably going to see some more downward pressure before we get into 2016. -------------------------------------------------------------------------------- Jon Morrison, CIBC World Markets - Analyst [51] -------------------------------------------------------------------------------- Of the 27 rigs you're running in the US right now, are any of those under spot market conditions or short-term contracts? Or are all of those long-term contract based at this point? -------------------------------------------------------------------------------- Brent Conway, Trinidad Drilling Ltd. - President [52] -------------------------------------------------------------------------------- No, there is some on the spot market as well. -------------------------------------------------------------------------------- Lisa Ottman, Trinidad Drilling Ltd. - VP of IR [53] -------------------------------------------------------------------------------- We are about 30% contracted in the US right now. So the remaining of the rigs would be working on spot. -------------------------------------------------------------------------------- Jon Morrison, CIBC World Markets - Analyst [54] -------------------------------------------------------------------------------- Of the 4 rigs that you mentioned were still getting IBC, do those roll off in the 2015 number that you quoted in terms of rigs rolling off contract? Or do they carry on into 2016 at this point? -------------------------------------------------------------------------------- Lisa Ottman, Trinidad Drilling Ltd. - VP of IR [55] -------------------------------------------------------------------------------- Yes, there's basically no impact in 2016 on that. -------------------------------------------------------------------------------- Jon Morrison, CIBC World Markets - Analyst [56] -------------------------------------------------------------------------------- Okay. Can you share the rationale behind keeping the dividend at CAD0.01 instead of eliminating it? I know you said it's important to try to pay back shareholders. But just given the market that we're in, why not try to retain all the cash that you can? -------------------------------------------------------------------------------- Brent Conway, Trinidad Drilling Ltd. - President [57] -------------------------------------------------------------------------------- We spent a lot of time thinking about what we needed to do with the dividend and our Directors certainly helped us make those decisions. I think when we looked at what we did with CAD0.01, we do have a lot of investors that would like some yields as part of their investment choice. There's some that require yield as part of their investment criteria. And we wanted to make sure that we listen to those shareholders. So that's why we decided to keep a yield as part of our, I guess, the return that we give to the shareholders. I think it's something that we think is important. We have been doing it for a very long time. But we had to look at what the reality was of the market that we're, and the challenges that we're having. As a board and as a management team we felt that it made sense to retain certainly a bigger portion of that cash in the Company to allow us to execute on the things we're trying to do. -------------------------------------------------------------------------------- Jon Morrison, CIBC World Markets - Analyst [58] -------------------------------------------------------------------------------- Just a point of clarification, and I apologize for being the third person to ask about JV accounting. But are you actually planning to repatriate cash to Canada in the next few quarters, or are you merely highlighting that that's an opportunity for you to do so should you be tight on the covenants and ultimately need it to keep your leverage ratios in line? -------------------------------------------------------------------------------- Lisa Ottman, Trinidad Drilling Ltd. - VP of IR [59] -------------------------------------------------------------------------------- So it would not pay back to Canada. We would pay back to the shareholder. Basically we're just monitoring where we are in our covenants. Keep in mind that we have relief for Q4 and also Q1 as well. So we'll monitor it as it goes. And obviously we'll see where we are. -------------------------------------------------------------------------------- Jon Morrison, CIBC World Markets - Analyst [60] -------------------------------------------------------------------------------- When you're looking at 2016 CapEx, is there any scenario where you're actually reporting basically zero CapEx or a modest cash in-flow if you deploy more US rigs into the JV and have basically just ongoing modest maintenance expenditures? -------------------------------------------------------------------------------- Brent Conway, Trinidad Drilling Ltd. - President [61] -------------------------------------------------------------------------------- Yes, I think there's definitely an option where if we use existing assets and roll them into the JV, that we just wouldn't have a big capital outflow in terms of capital spending. It just depends on where the rigs go. If we have to do significant upgrades, you know, there could be some net cash that leaves. But right now, certainly we wouldn't be looking at taking on big capital projects that would exhaust cash flow. To Lyle's comment, we're going to live within cash flow and be very prudent in terms of how we manage that. If the opportunities come up, then I guess we'll have to make those decisions. But it would have to be a situation where we really think that the financing or the way we finance that (inaudible) makes sense. In this market we have to make sure. That is probably even more important than it is when we have got better commodity pricings and a more favorable market. So we certainly, it's in front of our minds in terms of how we would do that. To your point, if we did use existing assets, and that's why we said that. If we use existing assets, basically we don't need to spend a big bunch of capital depending on where we go and we put idle assets to work. So, everybody wins if we can do that. -------------------------------------------------------------------------------- Jon Morrison, CIBC World Markets - Analyst [62] -------------------------------------------------------------------------------- Last one just for me, Lyle you mentioned 50% of the rigs, when they're coming off contracts, being re-termed out. Is that with the existing contract or with a new customer. And if you're signing up a new customer, can you give any sense of what contract duration you're getting from a new customer if they're signing up a rig for the first time? -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd. - Chief Executive Officer [63] -------------------------------------------------------------------------------- Good question. Most of the times that we are recontracting, I would say that it's predominantly been with new customers, to be honest. And the term is usually around anywhere from one or two out, to six months. And honestly, in this pricing, that's probably right in our wheelhouse as you're seeing our contract base go down. That's part of it. We are reluctant to go much longer. But right now the market down there is much shorter in duration, 1 to 2 wells, potentially around 6 months type work. But we are actually getting quite a few new customers as we branch out and look at chasing all opportunities. So it is helping us on building that base. But predominantly it's shorter in duration and predominantly I would say with newer customers. But I think it's worth noting we're being very careful in this market too on who we're working for and what their balance sheets look like as well, because that has to be as much prudent work done in that as we go through these tough times, and securing that they have the balance sheet to withstand what we're spending on these wells is also a big part of our business right now. -------------------------------------------------------------------------------- Jon Morrison, CIBC World Markets - Analyst [64] -------------------------------------------------------------------------------- Appreciate the color. I'll turn it back. -------------------------------------------------------------------------------- Operator [65] -------------------------------------------------------------------------------- There are no further questions at this time. I will turn the call back over to Lisa Ottmann for closing comments. -------------------------------------------------------------------------------- Lisa Ottman, Trinidad Drilling Ltd. - VP of IR [66] -------------------------------------------------------------------------------- Thank you. And thanks for taking the time to participate in our conference call. We look forward to talking to you again in the future. -------------------------------------------------------------------------------- Operator [67] -------------------------------------------------------------------------------- This concludes today's conference call. You may now disconnect.
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