UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of July 2019
Commission File Number: 001-14534
Precision Drilling Corporation
(Translation of registrant's name into English)
800, 525 - 8 Avenue S.W.
Calgary, Alberta
Canada T2P 1G1
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F [ ] Form 40-F [ X ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Precision Drilling Corporation | ||
(Registrant) | ||
Date: July 25, 2019 | /s/ Carey T Ford | |
Carey T Ford | ||
Senior Vice President and Chief Financial Officer | ||
EXHIBIT INDEX
Exhibit | Description | |
99.1 | Precision Drilling Corporation announces 2019 Second Quarter Unaudited Financial Results |
EXHIBIT 99.1
Precision Drilling Corporation announces 2019 Second Quarter Unaudited Financial Results
CALGARY, Alberta, July 25, 2019 (GLOBE NEWSWIRE) -- (Canadian dollars except as indicated)
This news release contains “forward-looking information and statements” within the meaning of applicable securities laws. For a full disclosure of the forward-looking information and statements and the risks to which they are subject, see the “Cautionary Statement Regarding Forward-Looking Information and Statements” later in this news release. This news release contains references to Adjusted EBITDA, Covenant EBITDA, Operating Earnings (Loss), Funds Provided by (Used in) Operations and Working Capital. These terms do not have standardized meanings prescribed under International Financial Reporting Standards (IFRS) and may not be comparable to similar measures used by other companies, see “Non-GAAP Measures” later in this news release.
Precision Drilling announces 2019 second quarter financial results:
Precision’s President and CEO Kevin Neveu stated:
“Precision delivered strong second quarter operating performance supported by the competitive strength and resulting market share of our Super Triple rigs in our three core markets, the U.S., Canada and Middle East. Precision’s average global activity of 112 rigs for the quarter was in line with last year (111), despite industry headwinds and lower industry activity levels in North America. Second quarter adjusted EBITDA of $81 million increased 30% from prior year due to improved pricing and cost control efforts, yielding stronger than expected cash flow and enabling Precision to reduce debt at a faster rate than planned. With $124 million of debt repayments completed year-to-date, we are increasing our 2019 debt reduction target to $200 million, compared to our previous targeted range of $100 million to $150 million. Reducing debt levels remains a strategic priority and we expect to continue our accelerated pace with strong free cash flow.”
“In the U.S., our High Performance, High Value strategy and Super Triple fleet quality and field performance continue to drive strong financial results. Our 68 AC Super Triples remain over 90% utilized with firm pricing. During the quarter, we signed 15 new term contracts from six months to two years duration, increasing our average 2019 U.S. contract coverage to 48 rigs. We completed our previously announced full SCR to AC Super Triple upgrade, entering service in June and representing the sixth AC ST-1500 walking rig added to our U.S. fleet since early 2018. We expect Super Triple demand and pricing to remain firm in the second half of the year as our customers continue to throttle spending within cash flow while focusing on the most efficient and best performing rigs.”
“In the Middle East, our new-build rig in Kuwait spudded its first well on July 1, ahead of schedule and under budget. Scale is critical to Precision’s strategy and with our ninth active rig in the region, we are delivering excellent results for our customers and adding strong stable contracted cash flow for our business.”
“In Canada, while cash generation remains our key priority, the market relevance of our Super Series fleet is clearly represented with over 30% Canadian market share achieved during the second quarter, our highest market share in recent history. Despite challenges in the Canadian region with industry activity off 30% year-to-date, Precision’s Super Series rigs substantially outperformed industry utilization. We expect this trend of firm utilization and pricing, supported by our 26 AC Super Triple rigs, to continue into the back half of the year.”
“While also weathering Canadian industry challenges and lower activity levels, our Completion and Production segment posted another strong quarter, demonstrating the results of business improvement initiatives and strong execution by our team with a continued focus on cost control across all product lines. The segment delivered a $4 million improvement in EBITDA from the second quarter of 2018.”
“I remain excited about Precision’s progress on technology initiatives, led by continued traction of our 33 Process Automated Control systems installed. During the quarter, 31 of these systems were active in the field and drilled approximately 195 wells, an increase of 65% from the prior year. We continue to demonstrate to customers, our system’s ability to deliver consistent, high-quality results as we progress towards our 2019 commercialization targets. Precision is an industry leader in technological offerings, as demonstrated through our scalable, field-hardened product rapidly commercializing in multiple basins throughout North America.”
“We are confident our firm market position in the U.S., expanding scale internationally, leadership position in Canada and technology initiatives will deliver a runway of free cash flow to facilitate further deleveraging and future growth opportunities.” concluded Mr. Neveu.
IMPACT OF IFRS 16 - LEASES ON FINANCIAL INFORMATION
On January 1, 2019, Precision applied IFRS 16 using the modified retrospective approach under which comparative information has not been restated and continues to be reported under IAS 17 and related interpretations. Please refer to “CHANGES IN ACCOUNTING POLICY” for additional information on the impact to our financial information.
SELECT FINANCIAL AND OPERATING INFORMATION
Financial Highlights
Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
(Stated in thousands of Canadian dollars, except per share amounts) | 2019 | 2018 | % Change | 2019 | 2018 | % Change | |||||||||||||||||
Revenue | 359,424 | 330,716 | 8.7 | 793,467 | 731,722 | 8.4 | |||||||||||||||||
Adjusted EBITDA(1) | 81,037 | 62,182 | 30.3 | 189,004 | 159,651 | 18.4 | |||||||||||||||||
Operating earnings (loss)(1) | 5,569 | (26,439 | ) | (121.1 | ) | 67,643 | (16,278 | ) | (515.5 | ) | |||||||||||||
Net earnings (loss) | (13,801 | ) | (47,217 | ) | (70.8 | ) | 11,213 | (65,294 | ) | (117.2 | ) | ||||||||||||
Cash provided by operations | 106,035 | 129,695 | (18.2 | ) | 146,622 | 167,884 | (12.7 | ) | |||||||||||||||
Funds provided by operations(1) | 40,950 | 50,225 | (18.5 | ) | 136,943 | 154,251 | (11.2 | ) | |||||||||||||||
Capital spending: | |||||||||||||||||||||||
Expansion | 29,543 | 15,786 | 87.1 | 91,986 | 16,471 | 458.5 | |||||||||||||||||
Upgrade | 4,052 | 5,447 | (25.6 | ) | 7,726 | 16,810 | (54.0 | ) | |||||||||||||||
Maintenance and infrastructure | 9,874 | 13,091 | (24.6 | ) | 14,719 | 23,334 | (36.9 | ) | |||||||||||||||
Intangibles | 26 | 2,429 | (98.9 | ) | 464 | 10,220 | (95.5 | ) | |||||||||||||||
Proceeds on sale | (24,575 | ) | (2,630 | ) | 834.4 | (82,452 | ) | (8,680 | ) | 849.9 | |||||||||||||
Net capital spending | 18,920 | 34,123 | (44.6 | ) | 32,443 | 58,155 | (44.2 | ) | |||||||||||||||
Net earnings (loss) per share: | |||||||||||||||||||||||
Basic | (0.05 | ) | (0.16 | ) | (68.8 | ) | 0.04 | (0.22 | ) | (118.2 | ) | ||||||||||||
Diluted | (0.05 | ) | (0.16 | ) | (68.8 | ) | 0.04 | (0.22 | ) | (118.2 | ) |
(1) See “NON-GAAP MEASURES”.
Operating Highlights
Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
2019 | 2018 | % Change | 2019 | 2018 | % Change | ||||||||||||||||||
Contract drilling rig fleet | 232 | 257 | (9.7 | ) | 232 | 257 | (9.7 | ) | |||||||||||||||
Drilling rig utilization days: | |||||||||||||||||||||||
U.S. | 6,994 | 6,588 | 6.2 | 14,117 | 12,383 | 14.0 | |||||||||||||||||
Canada | 2,413 | 2,834 | (14.9 | ) | 6,757 | 9,302 | (27.4 | ) | |||||||||||||||
International | 728 | 728 | - | 1,448 | 1,448 | - | |||||||||||||||||
Revenue per utilization day: | |||||||||||||||||||||||
U.S.(1) (US$) | 23,425 | 21,795 | 7.5 | 23,312 | 21,237 | 9.8 | |||||||||||||||||
Canada(2) (Cdn$) | 21,613 | 22,072 | (2.1 | ) | 22,490 | 22,167 | 1.5 | ||||||||||||||||
International (US$) | 51,542 | 49,832 | 3.4 | 50,746 | 49,935 | 1.6 | |||||||||||||||||
Operating cost per utilization day: | |||||||||||||||||||||||
U.S. (US$) | 14,803 | 14,026 | 5.5 | 14,584 | 14,026 | 4.0 | |||||||||||||||||
Canada (Cdn$) | 17,414 | 16,712 | 4.2 | 15,840 | 14,361 | 10.3 | |||||||||||||||||
Service rig fleet(3) | 123 | 210 | (41.4 | ) | 123 | 210 | (41.4 | ) | |||||||||||||||
Service rig operating hours | 29,540 | 31,824 | (7.2 | ) | 72,438 | 84,525 | (14.3 | ) | |||||||||||||||
Revenue per operating hour (Cdn$) | 733 | 676 | 8.4 | 748 | 691 | 8.2 |
(1) 2019 period includes revenue from idle but contracted rig days.
(2) Includes lump sum revenue from contract shortfall payments.
(3) In 2019, 75 rigs were not registered with the industry association and 12 snubbing units were sold.
Financial Position
(Stated in thousands of Canadian dollars, except ratios) | June 30, 2019 | December 31, 2018 | |||||
Working capital(1) | 200,964 | 240,539 | |||||
Cash | 80,580 | 96,626 | |||||
Long-term debt | 1,514,964 | 1,706,253 | |||||
Total long-term financial liabilities | 1,592,822 | 1,723,350 | |||||
Total assets | 3,440,348 | 3,636,043 | |||||
Long-term debt to long-term debt plus equity ratio | 0.49 | 0.52 |
(1) See “NON-GAAP MEASURES”.
Summary for the three months ended June 30, 2019:
Summary for the six months ended June 30, 2019:
STRATEGY
Precision’s strategic priorities for 2019 are as follows:
OUTLOOK
Contracts
Year to date in 2019 we have entered into 35 term contracts. The following chart outlines the average number of drilling rigs by quarter that we had under contract for 2018 and 2019 as of July 24, 2019. For those quarters ended after June 30, 2019, this chart represents the minimum number of long-term contracts where we will be earning revenue. We expect the actual number of contracted rigs to be higher in future periods as we continue to sign contracts.
Average for the quarter ended 2018 | Average for the quarter ended 2019 | |||||||||||||||||||||||||||||||
Mar. 31 | June 30 | Sept. 30 | Dec. 31 | Mar. 31 | June 30 | Sept. 30 | Dec. 31 | |||||||||||||||||||||||||
Average rigs under term contract as of July 24, 2019: | ||||||||||||||||||||||||||||||||
U.S. | 36 | 48 | 50 | 51 | 56 | 52 | 47 | 36 | ||||||||||||||||||||||||
Canada | 8 | 9 | 9 | 11 | 8 | 7 | 7 | 6 | ||||||||||||||||||||||||
International | 8 | 8 | 8 | 8 | 8 | 8 | 9 | 9 | ||||||||||||||||||||||||
Total | 52 | 65 | 67 | 70 | 72 | 67 | 63 | 51 |
The following chart outlines the average number of drilling rigs that we had under contract for 2018 and the average number of rigs we have under contract as of July 24, 2019.
Average for the year ended | ||||||||||||
2018 | 2019 | 2020 | ||||||||||
Average rigs under term contract as of July 24, 2019: | ||||||||||||
U.S. | 46 | 48 | 13 | |||||||||
Canada | 9 | 7 | 3 | |||||||||
International | 8 | 9 | 8 | |||||||||
Total | 63 | 64 | 24 |
In Canada, term contracted rigs normally generate 250 utilization days per year because of the seasonal nature of well site access. In most regions in the U.S. and internationally, term contracts normally generate 365 utilization days per year.
Drilling Activity
The following chart outlines the average number of drilling rigs that we had working or moving by quarter for the periods noted.
Average for the quarter ended 2018 | 2019 | ||||||||||||||||||||||
Mar. 31 | June 30 | Sept. 30 | Dec. 31 | Mar. 31 | June 30 | ||||||||||||||||||
Average Precision active rig count: | |||||||||||||||||||||||
U.S. | 64 | 72 | 76 | 80 | 79 | 77 | |||||||||||||||||
Canada | 72 | 31 | 52 | 49 | 48 | 27 | |||||||||||||||||
International | 8 | 8 | 8 | 8 | 8 | 8 | |||||||||||||||||
Total | 144 | 111 | 136 | 137 | 135 | 112 |
For the first half of 2019, drilling activity has decreased relative to this time last year in the U.S. and Canada. According to industry sources, as of July 19, 2019, the U.S. active land drilling rig count was down 10% compared with the same point last year and the Canadian active land drilling rig count was down approximately 31%. To date in 2019, approximately 81% of the U.S. industry’s active rigs and 58% of the Canadian industry’s active rigs were drilling for oil targets, compared with 81% for the U.S. and 63% for Canada at the same time last year.
Capital Spending
Capital spending in 2019 is expected to be $169 million and includes $52 million for sustaining, infrastructure and intangibles and $117 million for upgrade and expansion. We expect that the $169 million will be split $162 million in the Contract Drilling Services segment, $5 million in the Completion and Production Services segment and $2 million to the Corporate segment.
SEGMENTED FINANCIAL RESULTS
Precision’s operations are reported in two segments: Contract Drilling Services, which includes the drilling rig, directional drilling, oilfield supply and manufacturing divisions; and Completion and Production Services, which includes the service rig, rental and camp and catering divisions.
Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
(Stated in thousands of Canadian dollars) | 2019 | 2018 | % Change | 2019 | 2018 | % Change | |||||||||||||||||
Revenue: | |||||||||||||||||||||||
Contract Drilling Services | 334,475 | 304,353 | 9.9 | 713,739 | 657,155 | 8.6 | |||||||||||||||||
Completion and Production Services | 26,145 | 27,706 | (5.6 | ) | 81,964 | 77,748 | 5.4 | ||||||||||||||||
Inter-segment eliminations | (1,196 | ) | (1,343 | ) | (10.9 | ) | (2,236 | ) | (3,181 | ) | (29.7 | ) | |||||||||||
359,424 | 330,716 | 8.7 | 793,467 | 731,722 | 8.4 | ||||||||||||||||||
Adjusted EBITDA:(1) | |||||||||||||||||||||||
Contract Drilling Services | 93,295 | 83,441 | 11.8 | 211,750 | 194,407 | 8.9 | |||||||||||||||||
Completion and Production Services | 2,781 | (1,402 | ) | (298.4 | ) | 13,299 | 3,242 | 310.2 | |||||||||||||||
Corporate and Other | (15,039 | ) | (19,857 | ) | (24.3 | ) | (36,045 | ) | (37,998 | ) | (5.1 | ) | |||||||||||
81,037 | 62,182 | 30.3 | 189,004 | 159,651 | 18.4 |
(1) See “NON-GAAP MEASURES”.
SEGMENT REVIEW OF CONTRACT DRILLING SERVICES
Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
(Stated in thousands of Canadian dollars, except where noted) | 2019 | 2018 | % Change | 2019 | 2018 | % Change | |||||||||||||||||
Revenue | 334,475 | 304,353 | 9.9 | 713,739 | 657,155 | 8.6 | |||||||||||||||||
Expenses: | |||||||||||||||||||||||
Operating | 231,422 | 211,008 | 9.7 | 477,937 | 444,156 | 7.6 | |||||||||||||||||
General and administrative | 9,758 | 9,904 | (1.5 | ) | 21,006 | 18,592 | 13.0 | ||||||||||||||||
Restructuring | - | - | n/m | 3,046 | - | n/m | |||||||||||||||||
Adjusted EBITDA(1) | 93,295 | 83,441 | 11.8 | 211,750 | 194,407 | 8.9 | |||||||||||||||||
Depreciation | 75,155 | 81,100 | (7.3 | ) | 153,154 | 160,838 | (4.8 | ) | |||||||||||||||
Gain on asset disposals | (4,271 | ) | (921 | ) | 363.7 | (39,272 | ) | (2,959 | ) | 1,227.2 | |||||||||||||
Impairment reversal | - | - | n/m | (5,810 | ) | - | n/m | ||||||||||||||||
Operating earnings(1) | 22,411 | 3,262 | 587.0 | 103,678 | 36,528 | 183.8 | |||||||||||||||||
Operating earnings(1) as a percentage of revenue | 6.7 | % | 1.1 | % | 14.5 | % | 5.6 | % |
(1) See “NON-GAAP MEASURES”.
n/m Calculation not meaningful.
United States onshore drilling statistics:(1) | 2019 | 2018 | |||||||||||||
Precision | Industry(2) | Precision | Industry(2) | ||||||||||||
Average number of active land rigs for quarters ended: | |||||||||||||||
March 31 | 79 | 1,023 | 64 | 951 | |||||||||||
June 30 | 77 | 967 | 72 | 1,021 | |||||||||||
Year to date average | 78 | 995 | 68 | 986 |
(1) United States lower 48 operations only.
(2) Baker Hughes rig counts.
Three months ended June 30, | ||||||||||||||||
Canadian onshore drilling statistics:(1) | 2019 | 2018 | ||||||||||||||
Precision | Industry(2) | Precision | Industry(2) | |||||||||||||
Number of drilling rigs (end of period) | 116 | 548 | 135 | 618 | ||||||||||||
Drilling rig operating days (spud to release) | 2,192 | 7,266 | 2,526 | 9,536 | ||||||||||||
Drilling rig operating day utilization | 21 | % | 15 | % | 21 | % | 17 | % | ||||||||
Number of wells drilled | 230 | 752 | 227 | 903 | ||||||||||||
Average days per well | 9.5 | 9.7 | 11.1 | 10.6 | ||||||||||||
Number of metres drilled (000s) | 721 | 2,301 | 731 | 2,756 | ||||||||||||
Average metres per well | 3,135 | 3,059 | 3,218 | 3,052 | ||||||||||||
Average metres per day | 329 | 317 | 289 | 289 |
Six months ended June 30, | ||||||||||||||||
Canadian onshore drilling statistics:(1) | 2019 | 2018 | ||||||||||||||
Precision | Industry(2) | Precision | Industry(2) | |||||||||||||
Number of drilling rigs (end of period) | 116 | 548 | 135 | 618 | ||||||||||||
Drilling rig operating days (spud to release) | 5,972 | 22,580 | 8,180 | 32,381 | ||||||||||||
Drilling rig operating day utilization | 29 | % | 22 | % | 34 | % | 29 | % | ||||||||
Number of wells drilled | 594 | 2,228 | 742 | 3,133 | ||||||||||||
Average days per well | 10.1 | 10.1 | 11.0 | 10.3 | ||||||||||||
Number of metres drilled (000s) | 1,772 | 6,692 | 2,228 | 9,201 | ||||||||||||
Average metres per well | 2,983 | 3,004 | 3,003 | 2,937 | ||||||||||||
Average metres per day | 297 | 296 | 272 | 284 |
(1) Canadian operations only.
(2) Canadian Association of Oilwell Drilling Contractors (“CAODC”), and Precision – excludes non-CAODC rigs and non-reporting CAODC members.
SEGMENT REVIEW OF COMPLETION AND PRODUCTION SERVICES
Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
(Stated in thousands of Canadian dollars, except where noted) | 2019 | 2018 | % Change | 2019 | 2018 | % Change | |||||||||||||||||
Revenue | 26,145 | 27,706 | (5.6 | ) | 81,964 | 77,748 | 5.4 | ||||||||||||||||
Expenses: | |||||||||||||||||||||||
Operating | 21,823 | 26,207 | (16.7 | ) | 64,956 | 69,471 | (6.5 | ) | |||||||||||||||
General and administrative | 1,541 | 1,737 | (11.3 | ) | 3,252 | 3,871 | (16.0 | ) | |||||||||||||||
Restructuring | - | 1,164 | (100.0 | ) | 457 | 1,164 | (60.7 | ) | |||||||||||||||
Adjusted EBITDA(1) | 2,781 | (1,402 | ) | (298.4 | ) | 13,299 | 3,242 | 310.2 | |||||||||||||||
Depreciation | 4,341 | 5,785 | (25.0 | ) | 9,290 | 11,749 | (20.9 | ) | |||||||||||||||
Loss (gain) on asset disposals | (3,546 | ) | (773 | ) | 358.7 | (3,602 | ) | 138 | (2,710.1 | ) | |||||||||||||
Operating earnings (loss)(1) | 1,986 | (6,414 | ) | (131.0 | ) | 7,611 | (8,645 | ) | (188.0 | ) | |||||||||||||
Operating earnings (loss)(1) as a percentage of revenue | 7.6 | % | (23.2 | )% | 9.3 | % | (11.1 | )% | |||||||||||||||
Well servicing statistics: | |||||||||||||||||||||||
Number of service rigs (end of period)(2) | 123 | 210 | (41.4 | ) | 123 | 210 | (41.4 | ) | |||||||||||||||
Service rig operating hours | 29,540 | 31,824 | (7.2 | ) | 72,438 | 84,525 | (14.3 | ) | |||||||||||||||
Service rig operating hour utilization | 26 | % | 17 | % | 31 | % | 22 | % | |||||||||||||||
Service rig revenue per operating hour | 733 | 676 | 8.4 | 748 | 691 | 8.2 |
(1) See “NON-GAAP MEASURES”.
(2) In 2019, 75 rigs were not registered with the industry association and 12 snubbing units were sold.
SEGMENT REVIEW OF CORPORATE AND OTHER
Our Corporate and Other segment provides support functions to our operating segments. The Corporate and Other segment had negative Adjusted EBITDA (see “NON-GAAP MEASURES”) of $15 million, a $5 million decrease compared with the second quarter of 2018 primarily due to lower share-based incentive compensation.
OTHER ITEMS
Asset Disposals
In the second quarter of 2019, Precision concluded the sale of its five Mexico-based drilling rigs and ancillary equipment for total proceeds of US$48 million. In the first quarter, Precision received US$40 million for the sale of four drilling rigs and ancillary equipment and recognized a gain on asset disposal of US$24 million. Precision reversed US$4 million of previous impairment charges pertaining to the fifth rig. The impairment reversal brought the drilling rig’s carrying value up to its fair value of US$8 million and was reclassified as held for sale at March 31, 2019. In the second quarter of 2019, Precision delivered the fifth rig to its buyer and received final proceeds of US$8 million. As the rig was carried at fair value, no gain or loss was recognized on disposal.
During the second quarter of 2019, Precision disposed of certain snubbing units and related equipment for proceeds of $8 million resulting in a gain on asset disposal of $3 million.
In addition to the above disposals, through the completion of normal course business operations, we sell used assets incurring gains or losses on disposal.
Share-based Incentive Compensation Plans
We have several cash-settled share-based incentive plans for non-management directors, officers, and other eligible employees. The fair values of the amounts payable under these plans are recognized as an expense with a corresponding increase in liabilities over the period that the participant becomes entitled to payment. The recorded liability is re-established at the end of each reporting period until settlement with the resultant change to fair value of the liability recognized in net earnings (loss) for the period.
We also have two equity-settled share-based incentive plans. Under the Executive Performance Share (Executive PSU) plan, the fair value of PSUs granted is calculated at the date of grant using a Monte Carlo simulation and Black-Scholes option pricing model, and that value is recorded as compensation expense over the grant's vesting period with an offset to contributed surplus. Upon redemption of the Executive PSUs into common shares, the associated amount is reclassified from contributed surplus to shareholders' capital. The share option plan is treated similarly, whereby, the fair value of the share purchased options granted are valued using the Black-Scholes option pricing model and consideration paid by employees upon exercise of the equity purchase options are recognized in share capital.
A summary of the amounts expensed under these plans during the reporting periods are as follows:
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
(Stated in thousands of Canadian dollars) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Cash settled share-based incentive plans | 515 | 7,681 | 6,319 | 15,471 | |||||||||||
Equity settled share-based incentive plans: | |||||||||||||||
Executive PSU | 3,024 | 1,696 | 5,396 | 2,749 | |||||||||||
Stock option plan | 506 | 901 | 1,237 | 1,718 | |||||||||||
Total share-based incentive compensation plan expense | 4,045 | 10,278 | 12,952 | 19,938 | |||||||||||
Allocated: | |||||||||||||||
Operating | 798 | 3,305 | 3,227 | 6,801 | |||||||||||
General and Administrative | 3,247 | 6,973 | 9,725 | 13,137 | |||||||||||
4,045 | 10,278 | 12,952 | 19,938 |
Cash settled shared-based compensation expense decreased $7 million in the current quarter to $1 million compared with $8 million in the same quarter in 2018. The decrease is primarily due to the decreasing share price in the second quarter of 2019.
Executive PSU share-based incentive compensation expense for the quarter was $3 million compared with $2 million in the same quarter in 2018. The increased compensation expense was the result of additional Executive PSUs granted in 2019 offset partially by lower fair values for the 2019 grants.
Finance Charges
Net finance charges were $30 million, a decrease of $2 million compared with the second quarter of 2018, primarily due to a reduction in interest expense related to the debt retired in 2018 and 2019, partially offset by the impact of the weakening of the Canadian dollar on our U.S. dollar denominated interest and $1 million of lease accretion charges resulting from the adoption of IFRS 16 on January 1, 2019.
Interest charges on our U.S. denominated long-term debt in the second quarter of 2019 were US$21 million ($28 million) as compared with US$24 million ($31 million) in 2018.
Income Tax
Income tax recovery for the quarter was $6 million compared with $13 million in the same quarter in 2018. In 2019, the Province of Alberta announced various reductions to corporate income tax rates, that when fully implemented over the next three years will decrease the provincial corporate income tax rate from 12% to 8% by 2022. The reduction in the Alberta provincial corporate income tax rate is considered substantially enacted and resulted in a deferred tax recovery of $4 million.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Amount | Availability | Used for | Maturity | |||
Senior facility (secured) | ||||||
US$500 million (extendible, revolving term credit facility with US$300 million accordion feature) | Undrawn, except US$25 million in outstanding letters of credit | General corporate purposes | November 21, 2022 | |||
Operating facilities (secured) | ||||||
$40 million | Undrawn, except $27 million in outstanding letters of credit | Letters of credit and general corporate purposes | ||||
US$15 million | Undrawn | Short term working capital requirements | ||||
Demand letter of credit facility (secured) | ||||||
US$30 million | Undrawn, except US$2 million in outstanding letters of credit | Letters of credit | ||||
Senior notes (unsecured) | ||||||
US$116 million – 6.5% | Fully drawn | Capital expenditures and general corporate purposes | December 15, 2021 | |||
US$350 million – 7.75% | Fully drawn | Debt redemption and repurchases | December 15, 2023 | |||
US$334 million – 5.25% | Fully drawn | Capital expenditures and general corporate purposes | November 15, 2024 | |||
US$374 million – 7.125% | Fully drawn | Debt redemption and repurchases | January 15, 2026 |
As of June 30, 2019, we had US$1,174 million ($1,535 million) outstanding under our unsecured senior notes as compared with US$1,267 million ($1,729 million) at December 31, 2018. The current blended cash interest cost of our debt is approximately 6.7%.
During the first half of 2019, Precision repurchased and cancelled US$26 million of the 7.125% unsecured senior notes due 2026 and US$17 million of the 5.25% notes due 2024 and redeemed US$50 million principal amount of our 6.50% senior notes due 2021.
Covenants
Following is a listing of our currently applicable covenants and the calculations as of June 30, 2019:
Covenant | As at June 30, 2019 | ||||
Senior Facility | |||||
Consolidated senior debt to consolidated covenant EBITDA(1) | ≤ 2.50 | (0.60 | ) | ||
Consolidated covenant EBITDA to consolidated interest expense(1) | ≥ 2.50 | 3.10 | |||
Senior Notes | |||||
Consolidated interest coverage ratio | ≥ 2.00 | 3.10 |
(1) For purposes of calculating the leverage ratio consolidated senior debt only includes secured indebtedness.
At June 30, 2019, we were in compliance with the covenants of our senior credit facility and unsecured senior notes.
Impact of foreign exchange rates
The devaluation of the Canadian dollar during the first half of 2019 resulted in higher translated U.S. denominated revenue and costs. On average for the three and six months ended June 30, 2019, the Canadian dollar weakened by 4% from the comparable 2018 periods. The following table summarizes the average and closing Canada-U.S. foreign exchanges rates:
Three months ended June 30, | Six months ended June 30, | December 31, | |||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2018 | |||||||||||||||
Canada-U.S. foreign exchange rates | |||||||||||||||||||
Average | 1.34 | 1.29 | 1.33 | 1.28 | 1.30 | ||||||||||||||
Closing | 1.31 | 1.31 | 1.31 | 1.31 | 1.37 |
Average shares outstanding
The following table reconciles the weighted average shares outstanding used in computing basic and diluted net earnings (loss) per share:
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
(Stated in thousands) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Weighted average shares outstanding – basic | 293,782 | 293,471 | 293,782 | 293,355 | |||||||||||
Effect of stock options and other equity compensation plans | — | — | 5,959 | — | |||||||||||
Weighted average shares outstanding – diluted | 293,782 | 293,471 | 299,741 | 293,355 |
NON-GAAP MEASURES
In this report we reference non-GAAP (Generally Accepted Accounting Principles) measures. Adjusted EBITDA, Covenant EBITDA, Operating Earnings (Loss), Funds Provided by (Used in) Operations and Working Capital are terms used by us to assess performance as we believe they provide useful supplemental information to investors. These terms do not have standardized meanings prescribed under International Financial Reporting Standards (IFRS) and may not be comparable to similar measures used by other companies.
Adjusted EBITDA
We believe that Adjusted EBITDA (earnings before income taxes, loss (gain) on repurchase of unsecured senior notes, finance charges, foreign exchange, impairment reversal, loss (gain) on assets disposals and depreciation and amortization), as reported in the Interim Consolidated Statement of Earnings (Loss), is a useful measure, because it gives an indication of the results from our principal business activities prior to consideration of how our activities are financed and the impact of foreign exchange, taxation and depreciation and amortization charges.
Covenant EBITDA
Covenant EBITDA, as defined in our senior credit facility agreement, is used in determining the Corporation’s compliance with its covenants. Covenant EBITDA differs from Adjusted EBITDA by the exclusion of bad debt expense, restructuring costs, certain foreign exchange amounts and with the adoption of the new lease standard IFRS 16 - Leases, the deduction of cash lease payments incurred after December 31, 2018.
Operating Earnings (Loss)
We believe that operating earnings (loss) is a useful measure because it provides an indication of the results of our principal business activities before consideration of how those activities are financed and the impact of foreign exchange and taxation. Operating earnings is calculated as follows:
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
(Stated in thousands of Canadian dollars) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Revenue | 359,424 | 330,716 | 793,467 | 731,722 | |||||||||||
Expenses: | |||||||||||||||
Operating | 252,049 | 235,872 | 540,657 | 510,446 | |||||||||||
General and administrative | 26,338 | 31,498 | 57,368 | 60,461 | |||||||||||
Restructuring | — | 1,164 | 6,438 | 1,164 | |||||||||||
Depreciation and amortization | 83,327 | 90,315 | 170,080 | 178,750 | |||||||||||
Gain on asset disposals | (7,859 | ) | (1,694 | ) | (42,909 | ) | (2,821 | ) | |||||||
Impairment reversal | — | — | (5,810 | ) | — | ||||||||||
Operating earnings (loss) | 5,569 | (26,439 | ) | 67,643 | (16,278 | ) | |||||||||
Foreign exchange | (3,763 | ) | 556 | (5,886 | ) | 1,771 | |||||||||
Finance charges | 30,385 | 32,103 | 61,688 | 63,782 | |||||||||||
Loss (gain) on repurchase of unsecured notes | (1,085 | ) | 1,176 | (1,398 | ) | 1,176 | |||||||||
Earnings (loss) before income taxes | (19,968 | ) | (60,274 | ) | 13,239 | (83,007 | ) |
Funds Provided By (Used In) Operations
We believe that funds provided by (used in) operations, as reported in the Interim Consolidated Statements of Cash Flow, is a useful measure because it provides an indication of the funds our principal business activities generate prior to consideration of working capital, which is primarily made up of highly liquid balances.
Working Capital
We define working capital as current assets less current liabilities as reported on the Interim Consolidated Statement of Financial Position.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS
Certain statements contained in this report, including statements that contain words such as "could", "should", "can", "anticipate", "estimate", "intend", "plan", "expect", "believe", "will", "may", "continue", "project", "potential" and similar expressions and statements relating to matters that are not historical facts constitute "forward-looking information" within the meaning of applicable Canadian securities legislation and "forward-looking statements" within the meaning of the "safe harbor" provisions of the United States Private Securities Litigation Reform Act of 1995 (collectively, "forward-looking information and statements").
In particular, forward looking information and statements include, but are not limited to, the following:
These forward-looking information and statements are based on certain assumptions and analysis made by Precision in light of our experience and our perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. These include, among other things:
Undue reliance should not be placed on forward-looking information and statements. Whether actual results, performance or achievements will conform to our expectations and predictions is subject to a number of known and unknown risks and uncertainties which could cause actual results to differ materially from our expectations. Such risks and uncertainties include, but are not limited to:
Readers are cautioned that the forgoing list of risk factors is not exhaustive. Additional information on these and other factors that could affect our business, operations or financial results are included in reports on file with applicable securities regulatory authorities, including but not limited to Precision’s Annual Information Form for the year ended December 31, 2018, which may be accessed on Precision’s SEDAR profile at www.sedar.com or under Precision’s EDGAR profile at www.sec.gov. The forward-looking information and statements contained in this report are made as of the date hereof and Precision undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, except as required by law.
INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
(Stated in thousands of Canadian dollars) | June 30, 2019 | December 31, 2018 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 80,580 | $ | 96,626 | ||||
Accounts receivable | 313,446 | 372,336 | ||||||
Inventory | 30,559 | 34,081 | ||||||
Assets held for sale | 19,373 | 19,658 | ||||||
Total current assets | 443,958 | 522,701 | ||||||
Non-current assets: | ||||||||
Income tax recoverable | 2,347 | 2,449 | ||||||
Deferred tax assets | 12,209 | 36,880 | ||||||
Right of use assets | 71,454 | — | ||||||
Property, plant and equipment | 2,877,153 | 3,038,612 | ||||||
Intangibles | 33,227 | 35,401 | ||||||
Total non-current assets | 2,996,390 | 3,113,342 | ||||||
Total assets | $ | 3,440,348 | $ | 3,636,043 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | 223,115 | $ | 274,489 | |||||
Income taxes payable | 7,268 | 7,673 | ||||||
Lease obligation | 12,611 | — | ||||||
Total current liabilities | 242,994 | 282,162 | ||||||
Non-current liabilities: | ||||||||
Share-based compensation | 7,965 | 6,520 | ||||||
Provisions and other | 10,150 | 10,577 | ||||||
Lease obligation | 59,743 | — | ||||||
Long-term debt | 1,514,964 | 1,706,253 | ||||||
Deferred tax liabilities | 48,625 | 72,779 | ||||||
Total non-current liabilities | 1,641,447 | 1,796,129 | ||||||
Shareholders’ equity: | ||||||||
Shareholders’ capital | 2,322,280 | 2,322,280 | ||||||
Contributed surplus | 58,965 | 52,332 | ||||||
Deficit | (964,861 | ) | (978,874 | ) | ||||
Accumulated other comprehensive income | 139,523 | 162,014 | ||||||
Total shareholders’ equity | 1,555,907 | 1,557,752 | ||||||
Total liabilities and shareholders’ equity | $ | 3,440,348 | $ | 3,636,043 |
INTERIM CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) (UNAUDITED)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(Stated in thousands of Canadian dollars, except per share amounts) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Revenue | $ | 359,424 | $ | 330,716 | $ | 793,467 | $ | 731,722 | ||||||||
Expenses: | ||||||||||||||||
Operating | 252,049 | 235,872 | 540,657 | 510,446 | ||||||||||||
General and administrative | 26,338 | 31,498 | 57,368 | 60,461 | ||||||||||||
Restructuring | — | 1,164 | 6,438 | 1,164 | ||||||||||||
Earnings before income taxes, loss (gain) on repurchase of unsecured senior notes, finance charges, foreign exchange, impairment reversal, gain on asset disposals and depreciation and amortization | 81,037 | 62,182 | 189,004 | 159,651 | ||||||||||||
Depreciation and amortization | 83,327 | 90,315 | 170,080 | 178,750 | ||||||||||||
Gain on asset disposals | (7,859 | ) | (1,694 | ) | (42,909 | ) | (2,821 | ) | ||||||||
Impairment reversal | — | — | (5,810 | ) | — | |||||||||||
Foreign exchange | (3,763 | ) | 556 | (5,886 | ) | 1,771 | ||||||||||
Finance charges | 30,385 | 32,103 | 61,688 | 63,782 | ||||||||||||
Loss (gain) on repurchase of unsecured senior notes | (1,085 | ) | 1,176 | (1,398 | ) | 1,176 | ||||||||||
Earnings (loss) before income taxes | (19,968 | ) | (60,274 | ) | 13,239 | (83,007 | ) | |||||||||
Income taxes: | ||||||||||||||||
Current | 1,403 | 3,599 | 3,013 | 5,165 | ||||||||||||
Deferred | (7,570 | ) | (16,656 | ) | (987 | ) | (22,878 | ) | ||||||||
(6,167 | ) | (13,057 | ) | 2,026 | (17,713 | ) | ||||||||||
Net earnings (loss) | $ | (13,801 | ) | $ | (47,217 | ) | $ | 11,213 | $ | (65,294 | ) | |||||
Net earnings (loss) per share: | ||||||||||||||||
Basic | $ | (0.05 | ) | $ | (0.16 | ) | $ | 0.04 | $ | (0.22 | ) | |||||
Diluted | $ | (0.05 | ) | $ | (0.16 | ) | $ | 0.04 | $ | (0.22 | ) |
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(Stated in thousands of Canadian dollars) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Net earnings (loss) | $ | (13,801 | ) | $ | (47,217 | ) | $ | 11,213 | $ | (65,294 | ) | |||||
Unrealized gain (loss) on translation of assets and liabilities of operations denominated in foreign currency | (42,846 | ) | 39,592 | (91,364 | ) | 93,326 | ||||||||||
Foreign exchange gain (loss) on net investment hedge with U.S. denominated debt, net of tax | 29,859 | (33,115 | ) | 68,873 | (78,570 | ) | ||||||||||
Comprehensive loss | $ | (26,788 | ) | $ | (40,740 | ) | $ | (11,278 | ) | $ | (50,538 | ) |
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(Stated in thousands of Canadian dollars) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Cash provided by (used in): | ||||||||||||||||
Operations: | ||||||||||||||||
Net earnings (loss) | $ | (13,801 | ) | $ | (47,217 | ) | $ | 11,213 | $ | (65,294 | ) | |||||
Adjustments for: | ||||||||||||||||
Long-term compensation plans | 3,612 | 6,027 | 10,924 | 13,926 | ||||||||||||
Depreciation and amortization | 83,327 | 90,315 | 170,080 | 178,750 | ||||||||||||
Gain on asset disposals | (7,859 | ) | (1,694 | ) | (42,909 | ) | (2,821 | ) | ||||||||
Impairment reversal | — | — | (5,810 | ) | — | |||||||||||
Foreign exchange | (3,880 | ) | (15 | ) | (6,118 | ) | 1,433 | |||||||||
Finance charges | 30,385 | 32,103 | 61,688 | 63,782 | ||||||||||||
Income taxes | (6,167 | ) | (13,057 | ) | 2,026 | (17,713 | ) | |||||||||
Other | (281 | ) | (217 | ) | (159 | ) | (1,133 | ) | ||||||||
Loss (gain) on repurchase of unsecured senior notes | (1,085 | ) | 1,176 | (1,398 | ) | 1,176 | ||||||||||
Income taxes paid | (3,550 | ) | (3,282 | ) | (3,887 | ) | (3,606 | ) | ||||||||
Income taxes recovered | — | 27,551 | 1,071 | 27,587 | ||||||||||||
Interest paid | (40,263 | ) | (42,021 | ) | (60,496 | ) | (42,521 | ) | ||||||||
Interest received | 512 | 556 | 718 | 685 | ||||||||||||
Funds provided by operations | 40,950 | 50,225 | 136,943 | 154,251 | ||||||||||||
Changes in non-cash working capital balances | 65,085 | 79,470 | 9,679 | 13,633 | ||||||||||||
106,035 | 129,695 | 146,622 | 167,884 | |||||||||||||
Investments: | ||||||||||||||||
Purchase of property, plant and equipment | (43,469 | ) | (34,324 | ) | (114,431 | ) | (56,615 | ) | ||||||||
Purchase of intangibles | (26 | ) | (2,429 | ) | (464 | ) | (10,220 | ) | ||||||||
Proceeds on sale of property, plant and equipment | 24,575 | 2,630 | 82,452 | 8,680 | ||||||||||||
Changes in non-cash working capital balances | 2,536 | (8,204 | ) | (727 | ) | (8,032 | ) | |||||||||
(16,384 | ) | (42,327 | ) | (33,170 | ) | (66,187 | ) | |||||||||
Financing: | ||||||||||||||||
Lease payments | (1,685 | ) | — | (3,357 | ) | — | ||||||||||
Repurchase of unsecured senior notes | (107,161 | ) | (76,657 | ) | (123,833 | ) | (76,657 | ) | ||||||||
(108,846 | ) | (76,657 | ) | (127,190 | ) | (76,657 | ) | |||||||||
Effect of exchange rate changes on cash and cash equivalents | (1,255 | ) | 2,085 | (2,308 | ) | 4,548 | ||||||||||
Increase (decrease) in cash and cash equivalents | (20,450 | ) | 12,796 | (16,046 | ) | 29,588 | ||||||||||
Cash and cash equivalents, beginning of period | 101,030 | 81,873 | 96,626 | 65,081 | ||||||||||||
Cash and cash equivalents, end of period | $ | 80,580 | $ | 94,669 | $ | 80,580 | $ | 94,669 |
.
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)
(Stated in thousands of Canadian dollars) | Shareholders’ capital | Contributed surplus | Accumulated other comprehensive income | Deficit | Total equity | |||||||||||||||
Balance at January 1, 2019 | $ | 2,322,280 | $ | 52,332 | $ | 162,014 | $ | (978,874 | ) | $ | 1,557,752 | |||||||||
Lease transition adjustment | - | - | - | 2,800 | 2,800 | |||||||||||||||
Net earnings for the period | - | - | - | 11,213 | 11,213 | |||||||||||||||
Other comprehensive loss for the period | - | - | (22,491 | ) | - | (22,491 | ) | |||||||||||||
Share-based compensation expense | - | 6,633 | - | - | 6,633 | |||||||||||||||
Balance at June 30, 2019 | $ | 2,322,280 | $ | 58,965 | $ | 139,523 | $ | (964,861 | ) | $ | 1,555,907 |
(Stated in thousands of Canadian dollars) | Shareholders’ capital | Contributed surplus | Accumulated other comprehensive income | Deficit | Total equity | |||||||||||||||
Balance at January 1, 2018 | $ | 2,319,293 | $ | 44,037 | $ | 131,610 | $ | (684,604 | ) | $ | 1,810,336 | |||||||||
Net loss for the period | - | - | - | (65,294 | ) | (65,294 | ) | |||||||||||||
Other comprehensive income for the period | - | - | 14,756 | - | 14,756 | |||||||||||||||
Shares issued on redemption non-management directors' DSUs | 2,609 | (809 | ) | - | - | 1,800 | ||||||||||||||
Share-based compensation expense | - | 4,467 | - | - | 4,467 | |||||||||||||||
Balance at June 30, 2018 | $ | 2,321,902 | $ | 47,695 | $ | 146,366 | $ | (749,898 | ) | $ | 1,766,065 |
SECOND QUARTER 2019 EARNINGS CONFERENCE CALL AND WEBCAST
Precision Drilling Corporation has scheduled a conference call and webcast to begin promptly at 12:00 noon MT (2:00 p.m. ET) on Thursday, July 25, 2019.
The conference call dial in numbers are 1-844-515-9176 or 614-999-9312.
A live webcast of the conference call will be accessible on Precision’s website at www.precisiondrilling.com by selecting “Investor Relations”, then “Webcasts & Presentations”. Shortly after the live webcast, an archived version will be available for approximately 60 days.
An archived version of the webcast will be available for approximately 60 days. An archived recording of the conference call will be available approximately one hour after the completion of the call until July 31, 2019 by dialing 855-859-2056 or 404-537-3406, passcode 9282557.
About Precision
Precision is a leading provider of safe and High Performance, High Value services to the oil and gas industry. Precision provides customers with access to an extensive fleet of Super Series drilling rigs supported by an industry leading technology platform that offers the most innovative drilling solutions to deliver efficient, predictable and repeatable results through service differentiation. Precision also offers directional drilling services, well service rigs, camps and rental equipment all backed by a comprehensive mix of technical support services and skilled, experienced personnel.
Precision is headquartered in Calgary, Alberta, Canada. Precision is listed on the Toronto Stock Exchange under the trading symbol “PD” and on the New York Stock Exchange under the trading symbol “PDS”.
For further information, please contact:
Carey Ford, Senior Vice President and Chief Financial Officer
713.435.6136
Dustin Honing, Manager, Investor Relations
403.716.4515
800, 525 - 8th Avenue S.W.
Calgary, Alberta, Canada T2P 1G1
Website: www.precisiondrilling.com