CALGARY Aug 5, 2015 (Thomson StreetEvents) -- Edited Transcript of Trinidad Drilling Ltd earnings conference call or presentation Wednesday, August 5, 2015 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Lisa Ottmann Trinidad Drilling Ltd - VP of IR * Lyle Whitmarsh Trinidad Drilling Ltd - CEO * Brent Conway Trinidad Drilling Ltd - President ================================================================================ Conference Call Participants ================================================================================ * Dana Benner AltraCorp Capital - Analyst * Jon Morrison CIBC World Markets - Analyst * Ian Gillies FirstEnergy - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, my name is Jody and I will be your conference Operator today. At this time I would like to welcome everyone to the Trinidad Drilling Limited second quarter conference call. (Operator Instructions). Thank you, Lisa Ottmann, you may begin your conference. -------------------------------------------------------------------------------- Lisa Ottmann, Trinidad Drilling Ltd - VP of IR [2] -------------------------------------------------------------------------------- Thank you and thank you for joining us today. We'll be discussing Trinidad Drilling Limited' s second quarter 2015 financial and operating results, which we released yesterday. A full copy of the MD&A and financial statements, along with the presentation outlining the quarter highlights are available on our website at TrinadadDrilling.com. Our full second 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 expenditures programs by oil and gas exploration production companies, assumptions made about future performance or operations of the joint venture agreement, and assumptions made about the purposed business combination with CanElson 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 information or 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 our MD&A. To discuss our results of (inaudible) drilling sector and Trinidad's opportunities going forward are Lyle Whitmarsh, Chief Executive Officer, Brent Conway, President and Leslie Bolster, Chief Financial Officer. I'll now turn the call over to Lyle. -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd - CEO [3] -------------------------------------------------------------------------------- Thank you, Lisa. Good morning, everybody. During the second quarter of 2015, Trinidad was able to report higher adjusted EBITDA than the same quarter last year, despite weak industry conditions. Our long-term contracts helped mitigate the impact of the lower activity levels, keeping rigs operating and providing early termination and stand by revenue during the quarter. As well, the cost reduction initiatives were implemented earlier in the year were more evident in this quarter. During the second quarter we took advantage of the lower asset valuations and announced purposed strategic combination with CanElson. The purposed 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 flows to take advantage of growth opportunities. Materials have been mailed to both company's shareholders and regulatory approvals are in process. Both shareholders meetings will be held on August 10th and we expect to be able to close the transaction before the end of the month. During the second quarter, Trinidad's revenue totaled CAD95 million, down 44% from the same quarter last year. Revenue decreased as a result of lower activity levels across our drilling fleet and lower external manufacturing revenue. Partly offset by a higher level of early termination revenue in the current period. Operating income, net percentage or operating margin was 46% in the second quarter, up from 28% in the second quarter last year largely as a result of higher termination and stand by revenue and lower operating costs. Operating margin increased from the 39% recorded in the first quarter due to a high portion of high-spec rigs operating and the full quarter of our containment measures. Adjusted EBITDA was CAD35 million in the quarter, up from CAD31 million in the second quarter last year and down from CAD60 million in the first quarter of 2015. Adjusted EBITDA increased over the same quarter last year largely as a result of a higher early termination revenue and lower G&A expenses. Adjusted EBITDA was lower than the first quarter due to lower operating days in the current quarter. G&A costs, excluding stock-based compensation and third party costs in the quarter, were approximately CAD14 million, down 12% from the same quarter last year and down 17% from the first quarter of 2015. During the second quarter we were able to see the effect of our cost-cutting measures we implemented earlier in the year. Following these reductions to our corporate cost structure and excluding the impact of the proposed can CanElson combination we expect full year G&A to be about CAD55 million in 2015. A 13% reduction from the 2014 G&A expenses. Upon the successful closing of the CanElson transaction in August we expect the full year G&A to be about CAD60 million. In the quarter we recorded a net loss of CAD1 million, up from a loss of CAD25 million in the same quarter last year. Trinidad's net loss was higher in the prior period largely due to an impairment recorded in the previous quarter and none recorded in the current quarter as well as lower G&A expenses, lower depreciation and lower income tax in the current quarter. Now let's turn more specifically to our Canadian operation. Utilization levels in the second quarter averaged 8%, down from the 26% in the same quarter last year, and down from 50% in the first quarter of 2015. Activity decreased from the second quarter last year as the full impact of the lower commodity pricing was felt across the oil and gas sector. Activity lowered compared to the first quarter due to seasonality. In Canada, the second quarter is typically the quietest quarter for the drilling industry. This year, oil and gas developers used spring break-up as a time to pull back on spending and re-evaluate their capital plans and the industry-wide activity levels were well below historical norms. Revenue in the first quarter was CAD12 million, down 68% from the same quarter last year, as a direct result of lower operating days which were down 73% quarter-over-quarter. Dayrates increased by 21% from the second quarter of last year, reflecting the change in active rig mix, as a higher portion of high-spec rigs were working during the quarter. Revenue in the current period was 80% lower than the first quarter of 2015 as a result of 84% fewer operating days, partly offset by a 23% increase in dayrates in the current quarter. Operating margin was 27% in our Canadian operations in the second quarter of 2015, up from 25% in the same quarter of 2014 and down from 42% in the first quarter. Operating margin increased over the same period last year due to the change in rig mix and also the result of the lowering cost structure. Operating margin was lower than the first quarter of 2015 as fixed operating costs were spread over fewer operating days. Since the end of the second quarter, activity levels have improved and we currently have 37% of our Canadian fleet operating. While this is an improvement over what we saw in the second quarter and above the current industry average of 30%, it is still well below what we would historically see for this time of year. Towards the end of the second quarter, improving oil prices began to drive increased inquiries from customers and momentum appeared to be improving. The recent pullback in oil prices to sub CAD50 per barrel has slowed the level of inquiries we are receiving. We haven't seen any planned work canceled but industry appears to be keeping a close eye on the commodity prices and we believe that activity in the second half of 2015 will be very dependent on the movements in oil prices. For the work that is available, competition is high and dayrates remain under pressure. There is a delicate balance currently being managed by drillers between remaining competitive and covering the costs of operating our business. We continue to remain disciplined on maintaining that balance. However, at times this can mean losing work to others more focused on gaining market share. Now let's turn to our U.S. and international operations. Results in our U.S. and international operations were impacted by early termination of four rigs during the second quarter of 2015 and ongoing payments from four rigs terminated earlier in the year. Revenue in the quarter was CAD73 million, down 34% from the second quarter last year, and 20% from the first quarter, 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. In the current quarter we received early termination and stand by of $12 million compared to less than $1 million in the second quarter of 2014 and $16 million in the first quarter of 2015. The early termination and standby 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 type of payments. Dayrates in the quarter were $26,755 per day be, up $5,936 per day from the same quarter last year. Excluding the impact of all early termination and stand by for each quarter, dayrates were $709 per day higher in the second quarter than in the same quarter last year due to the high proportion of high-spec rigs operating in the current quarter. Dayrates decreased from the first quarter excluding early termination stand by revenue by $377 per day, as the impact of lower customer demand offset a change in the active rig mix. Activity levels lowered quickly as we moved into the first quarter of 2015, as customers reacted to the dropping commodity prices. After this initial reaction, Trinidad's activity level stabilized, supported in large by a part, by our contract base. In the second quarter, Trinidad average utilization of 50%, down from 80% in the same quarter last year and down from 61% in the first quarter. Operating margin in the U.S. and international division was 52% in the quarter, up from 32% in the same quarter last year and from 48% in the first quarter. Early termination revenue typically equates to the expected gross margin the rig would have earned over the remaining term of the contract. This is recorded as revenue with no associated operating cost, leading to a positive impact on operating margin in the quarter the revenue is recorded. Excluding the impact of the early termination and stand by revenue, our operating margins were still higher in the current quarter compared to the same quarter last year, as the impact of lower costs and the change in active rig count drove higher profitability. Activity levels appear to have stabilized in the U.S. over the past month. Like in Canada, we have begun to see signs of improvement in our U.S. operations towards the end of the second quarter. Some improvement in oil price was driving increased interest from our customers to high-grade existing equipment. However, the recent reduction in oil prices has put any signs of the rebound on hold. Our customers are largely waiting to see what happens before making any material changes to their drilling plans. We currently have about 21 rigs in our U.S. fleet operating, and another 3 rigs idle but contracted, making a total of 24 rigs or 50% of our U.S. fleet currently earning revenue. Since the end of the second quarter, we have not received any additional termination or stand by notices on our equipment. We expect that the monthly payments from previously terminated contracts will add approximately $5 million in early termination and stand by revenue to our third quarter results. The second of our U.S. new builds was completed and began operating in the second quarter. And the third rig is currently under construction. The final rig is expected to be delivered towards the end of the third quarter. All three rigs remain under long-term contracts. Moving on to our U.S. Barge operations now. In the first quarter we choose to stock our barge rates, as a result of weak pricing and the costs associated with operating these rigs. The rigs remained stocked during the second quarter as the weak conditions continued. We also chose to not extend the Bareboat Charter agreement on the three rigs that expired at the end of the first quarter. Now let's look at our joint venture and operations. The contribution from the joint venture we signed with Haliburton last year is growing. Net earnings and adjusted EBITDA continue to grow each quarter as we get more rigs operating. Our share of the adjusted EBITDA from the joint venture in the second quarter was CAD6.7 million. Operating margin was 47% in the quarter and G&A expenses lowered to 12% of revenue. Closer to our long-term expectation of 10% of revenue. During the quarter we had all four rigs operating in Saudi and two rigs operating in Mexico. The remaining two Mexican rigs received standby revenues as they waited on drilling locations. The performance of the first two rigs in Mexico has been very impressive. The first well we drilled in Mexico set a new drilling record for the South Mosaic Basin and the rigs continue to perform very well. 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 could involve redeploying existing idle assets from our U.S. or Canadian operations into the international markets. We are also evaluating opportunities the May 5th, the CanElson assets. Our capital expenditure during the quarter was CAD44 million, including approximately CAD2 million spent on our portion of the joint venture capital projects. Year-to-date, capital expenditures has totaled CAD118 million. The bulk of this spending related to you are U.S. new builds in Trinidad and our Mexican rigs in the joint venture. Excluding the impact of the proposed combination with CanElson our expected full year capital expenditures spend remains unchanged at CAD175 million. At the end of the quarter, we had CAD70 million drawn on our credit facility with CAD130 million available and a further $200 million available. In addition we had CAD160 million of cash on hand at the end of the quarter. We are carefully watching our spending and finding ways to lower our costs across our business. We do not expect to have any liquidity issues as we manage through this downturn. Our main debt to covenant is consolidated total bank debt to consolidated bank EBITDA and has a maximum of four to one. At the end of the quarter we are sitting at a 2.36 to 1. This calculation excludes the EBITDA earned in the joint venture. However, we are able to bring that cash back from the joint venture which would have, had it been included in the EBITDA and also lower our debt outstanding. Including the cumulative joint venture EBITDA our metric would have been 2.21 to 1 at the end of the second quarter. Upon successful completion of the CanElson transaction our leverage is expected to lower. Under our covenants we are able to include the trailing 12 months of CanElson's EBITDA and our maximum is adjusted to 4.5 times debt to EBITDA for the following two quarters. Pro forma, the transaction at the end of the second quarter debt to EBITDA under the covenants excluding the impact of the joint venture, we would have been 1.9 times. As part of our strategy has always been to maintain a contract base that protects a portion of our revenue stream from the variability in the drilling industry, the importance of this strategy is especially evident in times like this. To date our contracts have stood up well, and most of the rigs currently operating are those under take or pay contracts. Of our total fleet we currently have approximately 40% under long-term take or pay contract with an average term of approximately 1.5 years remaining. This number excludes any contracts that have been early terminated unless we are earning monthly payments. Our current level is in the lower end of the range we typically maintain, reflecting the weakened conditions we have witnessed over the past six to nine months. We would expect this level to increase once again, once industry conditions improve and better contract terms return. Initial improvements in the industry conditions we were beginning to see towards the end of the second quarter have stalled with the recent reduction in oil prices. While it is too early to know if these lower prices will persist, the return to volatility increases uncertainty and likely delays a rebound in the drilling sector. Over the past few months, Trinidad and the oil and gas sector have worked to lower its cost structure and become more efficient. These changes have improved the economics on some plays, making them proceed at a lower commodity price than previously believed. We believe that these changes are some improvement in commodity prices will drive gradually increased activity levels through the remainder of 2015 with further improvements more likely in 2016. We are aware, though, that continued weakness in commodity prices may push the timeline for better conditions out further. Before I conclude I would like to take a moment to thank the people at Trinidad. Challenging marketing conditions such as those we have been going through over the past few months often mean changing what we have been doing, looking for improvements and doing more with less. Our team have done a good job of finding these opportunities, and the impact of these changes showed strongly in the second quarter. I would like to thank our people for their commitment to running safe, efficient operations and let them know that their efforts are appreciated by our entire management team. Thank you for listening. I would like to now pass the call back to the Operator and take any questions that may be on the line. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions). You have a question from the line of Dana Benner of AltaCorp Capital. Your line is open. -------------------------------------------------------------------------------- Dana Benner, AltraCorp Capital - Analyst [2] -------------------------------------------------------------------------------- Thanks. Good morning. -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd - CEO [3] -------------------------------------------------------------------------------- Good morning. -------------------------------------------------------------------------------- Dana Benner, AltraCorp Capital - Analyst [4] -------------------------------------------------------------------------------- Sorry, I was unable to dial in on time. So I'm just playing a little bit of catch-up here and I apologize if you have addressed it. But with respect to the early termination benefit that you received in the quarter, maybe you could give us a forward look as to how you think that may be playing out here in the upcoming quarters or do you think we're mostly past that? -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd - CEO [5] -------------------------------------------------------------------------------- Yes, Dana, we're pretty much, we think we're pretty much through that from what we have seen. Like we said, we'll have, I think it's about another CAD5 million in Q3 for the four rigs that are currently sitting on contract that are being done bimonthly payments, quarterly payments. And that's all we see right now. We have had no more indication that we have any more coming. That possibly could change but right now we don't see it. -------------------------------------------------------------------------------- Dana Benner, AltraCorp Capital - Analyst [6] -------------------------------------------------------------------------------- Right. And my read of the materials, and I apologize if you went through this, but it looked like what you received in the quarter was virtually all in the U.S. And if that's the case, why do you think these things are showing up in the U.S. versus Canada? -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd - CEO [7] -------------------------------------------------------------------------------- I think some of it has to do with probably the fact is that the majority of our rigs are contracted, the bulk of them are, down in there. And I think what we're seeing is some of those customers who would have had them rigs are honestly just looking at reducing their liability. So it really didn't have much more than, depending on how many rigs the operator had contracted, and then they would look and see who was shorter and longer term and how they would find that balance. I think in the past, even in Q1, Dana, it was very evident that it had a lot less to do with performance or even rig spec potentially and was really focused on just their liability over a longer period of time. And we've seen that happened. And that's kind of filtered through the system now. So I think we're starting to see that. So as we look forward to the remainder of 2015 and into 2016 we see some stabilization now and hopefully on to better things. But I think it had more of a function of the fact that most of our contracts are based, line share, in the U.S. side. -------------------------------------------------------------------------------- Dana Benner, AltraCorp Capital - Analyst [8] -------------------------------------------------------------------------------- Right. And then, do you think these clients are simply shutting down these programs for the time being or you could see them coming back in to you and picking up high-spec rigs? But either right away or a little further down the road and thus getting busy again? -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd - CEO [9] -------------------------------------------------------------------------------- Yes, I definitely see them having the demand. Certainly high-spec in the U.S. market is very obvious to us. So we believe that a lot of these customers will, upon either increasing in commodity or an understanding of the balance on the cost side from the services, be looking at firing back up. And I think we'll be beneficial of that when they do. We have strong performance. Again, it was not based on performance. It had a lot to do on economics. So once they do get better we believe we'll be able to take advantage. As soon as that starts to materialize, I think we'll be well positioned to take advantage of it. -------------------------------------------------------------------------------- Dana Benner, AltraCorp Capital - Analyst [10] -------------------------------------------------------------------------------- Right. One last question, if I may, then I'll turn it back. In Canada we're so used to seeing you meaningfully ahead of whatever industry average that each quarter presents. This quarter, not really the case. And I wonder if that was just client mix. Were you one of the few that went down trying to keep rates high and you realized that even with good rigs you simply weren't able to do it in a market as weak as you saw and you had to readjust, but it might have been too late. How would you characterize that? -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd - CEO [11] -------------------------------------------------------------------------------- Yes, I don't think at that, you know, we have and continue to be, I think in this one it was a couple of key customers that, when you're at such low numbers it doesn't take much to drop below. and we had a couple of key customers slower out of the gate after spring break, which really affected our Canadian utilization. And then, honestly, it did have some to do with pricing. I mean, when margins start to continue to get squeezed in certain areas, you know, we have some fairly stringent return calculations and we're going to pressure them to make sure, because that is a short-term plan. These rigs are very expensive, as you know, Dana and we have got to continue to maintain them. So we're very focused on maintaining our margins and we're going to continue to be that disciplined through that. So I think it was a combination of just an overall lower number of rigs being very impactful but we did have some key customers that just didn't fire up as quickly as some of the rest of the industry. And they weren't in all-weather areas. So there was a bit of a combination. But predominantly more based on the fact that some key customers didn't fire up, and then some pressure on firm rates for sure. You know, we are, and continued to be, focused on that and you'll see us continue to do that. We will not work at margins that get us down in an area where we can't maintain or rigs and can't maintain the safety program. And I believe that that is the short plan over a short window, which we're much longer term focused company and we're going to continue to return shareholder value but also maintain our assets and our safety. -------------------------------------------------------------------------------- Lisa Ottmann, Trinidad Drilling Ltd - VP of IR [12] -------------------------------------------------------------------------------- And as you can see now, Dana, we're above industry again. We're at 37% and the industry is at around 30%. -------------------------------------------------------------------------------- Dana Benner, AltraCorp Capital - Analyst [13] -------------------------------------------------------------------------------- Actually that just reminded me, one more question. What part of the CanElson proposed merger, do you think the market is not paying sufficient attention to? Because when you're clearly buying a company whose utilization is at top tier levels, we've already seen that in their report, and yet I would say that the market's reaction has maybe been lackluster. So clearly there's a divergence of opinion between what the market is seeing. And yes, it's pre-deal and maybe that reverts post-close, etc. But maybe you could address that because I'm sure it's on your mind. -------------------------------------------------------------------------------- Brent Conway, Trinidad Drilling Ltd - President [14] -------------------------------------------------------------------------------- Yes, I think the big thing that we see out there is that a lot of people maybe don't, aren't as focused as what they have done in Western Canada and in the U.S. in terms of utilization and the returns that they have got. Their rigs are still, you know, we consider those high-spec, high (inaudible), big pumps. They're not -- they have done very well competing directly against us and very well against the broader market. So from our standpoint it's just going to help us increase the gap of whatever market that we're in between ourselves and the broader based industry and putting us into a market asset segment that generates great returns. So I think time we'll prove that out. They've already done it on their own and I think now it's just being part of a bigger entity. I think it's going to be a benefit for both sets of shareholders. So that's what we see and that's certainly what we have watched them do in terms of their performance over the last several years and quarters. So it's positive. It's positive for the shareholders going forward. And certainly in this market they have already proved that even in tough market conditions their utilization has kind of been in the low 40s in Canada and doing very well in the U.S. too. So I think the proof is really in the results that they have been able to deliver. -------------------------------------------------------------------------------- Dana Benner, AltraCorp Capital - Analyst [15] -------------------------------------------------------------------------------- Okay. I'll turn it back. Thanks. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Your next question comes from the line of Jon Morrison of CIBC World Markets. Your line is open. -------------------------------------------------------------------------------- Jon Morrison, CIBC World Markets - Analyst [17] -------------------------------------------------------------------------------- Morning, all. -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd - CEO [18] -------------------------------------------------------------------------------- Good morning. -------------------------------------------------------------------------------- Lisa Ottmann, Trinidad Drilling Ltd - VP of IR [19] -------------------------------------------------------------------------------- Good morning. -------------------------------------------------------------------------------- Brent Conway, Trinidad Drilling Ltd - President [20] -------------------------------------------------------------------------------- Good morning. -------------------------------------------------------------------------------- Jon Morrison, CIBC World Markets - Analyst [21] -------------------------------------------------------------------------------- Based on your previous comments, it's fair to assume that you haven't seen any incremental contracted rigs become idled in the last few months? -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd - CEO [22] -------------------------------------------------------------------------------- No. -------------------------------------------------------------------------------- Jon Morrison, CIBC World Markets - Analyst [23] -------------------------------------------------------------------------------- Of the four IBC rigs that you still have in the U.S., how many customers comprise that four number? -------------------------------------------------------------------------------- Lisa Ottmann, Trinidad Drilling Ltd - VP of IR [24] -------------------------------------------------------------------------------- I don't know if I have that number off the top of my head for you, John. But I can give you a call with it later. -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd - CEO [25] -------------------------------------------------------------------------------- I don't think, it's not concentrated, that's for sure. I think it's either three or four. I think it was fairly spread out. -------------------------------------------------------------------------------- Lisa Ottmann, Trinidad Drilling Ltd - VP of IR [26] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Jon Morrison, CIBC World Markets - Analyst [27] -------------------------------------------------------------------------------- Okay. It's not one or two, then? Okay. -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd - CEO [28] -------------------------------------------------------------------------------- No. -------------------------------------------------------------------------------- Jon Morrison, CIBC World Markets - Analyst [29] -------------------------------------------------------------------------------- Is it still geographically spread over a number of regions? -------------------------------------------------------------------------------- Lisa Ottmann, Trinidad Drilling Ltd - VP of IR [30] -------------------------------------------------------------------------------- Largely, yes. -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd - CEO [31] -------------------------------------------------------------------------------- There wasn't any one concentrated play that we felt this in at all. -------------------------------------------------------------------------------- Jon Morrison, CIBC World Markets - Analyst [32] -------------------------------------------------------------------------------- Okay. As you talk to your marketing group in Canada, do you have any sense of firm visibility for incremental adds in Q3 in Canada at this point? Or it's largely stalled out just based on where the commodity price is? -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd - CEO [33] -------------------------------------------------------------------------------- Yes, I would say that it's probably a little bit better than probably towards the tail end of Q1 and into break-up, we are start to see some commitment to it, albeit it I think you're exactly right. They have some timing. And I think we're going to see the clarity in Q4 come pretty quickly here. I think for Q3 we're not seeing a ton of incremental demands. And again, I think as we mentioned, quite a bit of pressure on rates for the work that is out there. So I think that usually we're about a quarter where we see, a quarter or two, where we'll see the utilization pick up. And hopefully from there we will see some pricing rebounds. But right now from the marketing side in Canada, we are out there. Obviously we have picked up the utilization without in this recent few weeks without lowering the rates and we're starting to see some activity, but not of a material nature at this point. -------------------------------------------------------------------------------- Jon Morrison, CIBC World Markets - Analyst [34] -------------------------------------------------------------------------------- Of the incremental rigs you guys have added since Q2, do you have any sense of what the pricing Delta is versus where those rigs would have been in 2014, for instance? -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd - CEO [35] -------------------------------------------------------------------------------- Yes, I think that we're definitely above, you know, if I had to guess, we're probably, on the rigs that we're contracting out in the U.S. now, we're probably about 15%. Probably maybe a bit higher above where the spot market currently is. Because we still made our internal hurdles on our return calculation on them rigs when we contracted them. So we're holding them, and the contracts are holding. So we're sizeably, not sizeably, we're a fair notch above where the spot market is currently. -------------------------------------------------------------------------------- Jon Morrison, CIBC World Markets - Analyst [36] -------------------------------------------------------------------------------- Is there any change in expectation or line of sight for the [Liard] rig continuing to work in the back half of the year in Canada? -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd - CEO [37] -------------------------------------------------------------------------------- No. We've had no indication. It's operating well, performing well. And we continue to be positive on that. And we're learning and getting smart about that environment there. It's rigs running extremely well and we see that continuing. We have had no indication that that would change in the near term. -------------------------------------------------------------------------------- Jon Morrison, CIBC World Markets - Analyst [38] -------------------------------------------------------------------------------- Can you talk about the rig highlighting trend that you previously referenced. And, in theory, it should start to unfold in the next six months as rigs come off contract for some lower spec units. But if a customer has a rig come off contract and they come to you and they want to reactivate a Trinidad rig, are you willing to do it on a well by well basis or would you need some form of visibility in terms of a three or six month contract to reactivate a crew, at this stage? -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd - CEO [39] -------------------------------------------------------------------------------- Yes, I think if we look at that, we would be willing, I think we'd take each one fairly individual, believe it or not. And we'd really drill down on it. I think some of it would be depending on if it's a one well and where that well was, obviously we'd drill down to look at what it costs. You know, where would that leave the rig in demobilization costs. But we wouldn't, in any market, we wouldn't not take a serious look at it. We would be interested in firing up on a well by well basis, depending, again, on what it looked like. We have crews ready. We have retained a lot of our field personnel. So we would be ready to respond. I think the only thing that would probably make us look at that is, again, rates. And then obviously, to get a rig into an area that we would have trouble demobilizing out of it at some point. So, no, absolutely we would take a look at that. Again, part of our strategy or I guess our mandate is to continue to keep the rigs in good maintenance and safety, ready to go. So we don't see that that would be an issue on that, and keeping the crews busy on our 40% plus contracted rigs is helping us respond to that. So we would absolutely look at putting them up on a one to two well basis, or hopefully more than that. But again it would be very, we look at one almost individually by nature. -------------------------------------------------------------------------------- Jon Morrison, CIBC World Markets - Analyst [40] -------------------------------------------------------------------------------- Appreciate the color. Good quarter, guys. -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd - CEO [41] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Brent Conway, Trinidad Drilling Ltd - President [42] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- Your next question comes from the line of [Ian Gillies] of FirstEnergy. Your line is open. -------------------------------------------------------------------------------- Ian Gillies, FirstEnergy - Analyst [44] -------------------------------------------------------------------------------- Good morning, guys. -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd - CEO [45] -------------------------------------------------------------------------------- Good morning. -------------------------------------------------------------------------------- Ian Gillies, FirstEnergy - Analyst [46] -------------------------------------------------------------------------------- Has your view of contribution from CanElson's U.S. fleet changed at all over the last six weeks, given the utilization in Q2 for CanElson came in at 31% and is down materially year-over-year? -------------------------------------------------------------------------------- Brent Conway, Trinidad Drilling Ltd - President [47] -------------------------------------------------------------------------------- I don't think it's changed. I think certainly we are talking to those guys every day, and talking about what they are seeing and what we're seeing. I think it's more just a reflection of some of what their clients are doing, and the plays that they're in. They certainly have plans to go back to work as they get further into the year a get a bit of visibility on what their cash flow is going to be. But I don't think it's changed anything. The market, piece of the market that they work in, in the U.S., certainly they have proven over time that they can continue to be busy and their clients are telling them that they are still going to be. It's just they're like everybody else, watching commodity pricing to try and make sure that they make the decisions to spend the capital and it's going to make sense. So I don't think long-term it's changed anything. It's just everybody trying to deal with what we're faced with in a tough market. That's all it is. -------------------------------------------------------------------------------- Ian Gillies, FirstEnergy - Analyst [48] -------------------------------------------------------------------------------- Okay. Thanks. And then with respect, in the release, you mentioned the sale of a rig in the U.S. plus a marketable rig in the Middle East. Can you provide any color around that? I may have missed it in the preamble. -------------------------------------------------------------------------------- Lisa Ottmann, Trinidad Drilling Ltd - VP of IR [49] -------------------------------------------------------------------------------- The new rig that we added in the U.S. was the new-build that we were building. Do you remember we had three new-builds that we were building? -------------------------------------------------------------------------------- Ian Gillies, FirstEnergy - Analyst [50] -------------------------------------------------------------------------------- Yes, and I am referring to, you mentioned a marketed rig in Saudi Arabia. -------------------------------------------------------------------------------- Lisa Ottmann, Trinidad Drilling Ltd - VP of IR [51] -------------------------------------------------------------------------------- Oh, the one that was (inaudible). Sorry, yes. So that's a rig that's being held for sale right now. -------------------------------------------------------------------------------- Ian Gillies, FirstEnergy - Analyst [52] -------------------------------------------------------------------------------- (Inaudible). -------------------------------------------------------------------------------- Lisa Ottmann, Trinidad Drilling Ltd - VP of IR [53] -------------------------------------------------------------------------------- It hasn't worked since December of last year. So it hasn't been contributing any EBITDA anyway. And then the Middle East rig is the rig that we purchased back in Q3 last year from Australia. We were doing some upgrades on it and having it ready for work. -------------------------------------------------------------------------------- Ian Gillies, FirstEnergy - Analyst [54] -------------------------------------------------------------------------------- Okay. Perfect. And then some of your peers have noted lower R&M spending in Q2. I mean, whether it's on a per-rig basis or per operating day basis, have you guys made any changes to your R&M spending? Or are you just, kind of, trying to keep it steady as she goes so when activity comes back, you're able to put rigs back to work quickly without any additional costs? -------------------------------------------------------------------------------- Lyle Whitmarsh, Trinidad Drilling Ltd - CEO [55] -------------------------------------------------------------------------------- Yes, no, I think it's, I think we have been very carefully having managed through these downturns. We are still maintaining the rigs at the high standard. And we're ready to go back to work. I think where we're seeing some efficiencies obviously is in our own corporate structure but also just on our vendors and how we are seeing some savings there, which is really start to, I think, show up in the first quarter. It was hard, you know, I don't think that some of our vendors were prepared or maybe weren't getting pressured enough. We're starting to see some of that come through. I think from our perspective we're certainly maintaining and continuing to do that at a high level. So once we do get into the rebound, we should be able to fire these rigs that are idle up with minimal costs. And then, of course, the ones we have running, we're maintaining at a high level as we move through this quarter and into next year. -------------------------------------------------------------------------------- Ian Gillies, FirstEnergy - Analyst [56] -------------------------------------------------------------------------------- Perfect. Thanks very much, guys. I'll turn it back now. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- (Operator Instructions). There are no further questions at this time. I'll turn the call back over to Lisa Ottmann. -------------------------------------------------------------------------------- Lisa Ottmann, Trinidad Drilling Ltd - VP of IR [58] -------------------------------------------------------------------------------- Thank you. And thank you for taking the time to participate in our conference call. We look forward to talking to you again in the future. -------------------------------------------------------------------------------- Operator [59] -------------------------------------------------------------------------------- This concludes today's conference call. You may now disconnect.
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