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Precision Drilling Corp (NYSE:PDS)
Q3 2019 Earnings Call
Oct 24, 2019, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Precision Drilling Corporation 2019 Third Quarter Results Conference Call and Webcast. [Operator Instructions]

I would now like to hand the conference over to your speaker today Dustin Honing, Manager Investor Relations. Thank you. Please go ahead, sir.

Dustin Honing -- Manager of Investor Relations

Thank you Valerie. And good afternoon everyone. Welcome to Precision Drilling's Third Quarter 2019 Earnings Conference Call and Webcast. Participating today on the call with me are Kevin Neveu, President and Chief Executive Officer; Carey Ford, Senior Vice President and Chief Financial Officer; and Shuja Goraya, Chief Technology Officer. Through our news release earlier today, Precision reported its third quarter 2019 results. Please note these financial figures are in Canadian dollars unless otherwise indicated. Some of our comments today will refer to non-IFRS financial measures such as EBITDA and operating earnings. Please see our news release for additional disclosure on these financial measures.

Our comments today will include forward-looking statements regarding Precision's future results and prospects. We caution you that these forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from our expectations. Please see our news release and other regulatory filings for more information on forward-looking statements and these risk factors. Kevin will begin today's call with opening comments. Carey will then discuss our third quarter financial results followed by Kevin's operational update and outlook. Additionally Shuja will comment on Precision's technology strategy and progress on key initiatives today.

With that, I'll turn it over to you, Kevin.

Kevin A. Neveu -- President and Chief Executive Officer

Thank you Dustin. And good afternoon. So before Carey provides our third quarter financial update, I'd like to make a couple of opening comments. First off, I am pleased with our strong third quarter financial and operating results. We will have much more on that in a few minutes. But I'm also sure that everyone on this call today recognizes that investor interest in our sector is at an all-time low. macroeconomic concerns political uncertainty, and NP Capital exhaustion are all contributing to this loss of investor interest or sector. Precision share price for that matter, effectively, the entire industry is hovering near multi decade lows. This is deeply troubling for investors, for a management team and for our board. You can't imagine how frustrated I am as an investor as a director and as a senior executive.

While the share price is disappointing these macro challenges are not new to the Precision organization. Precision was founded in the depths of 1980's drilling recession, a similar time period characterized by political uncertainty, macroeconomic concerns and weak rig demand. Precision's business systems and our processes, the firm's competitive strategy and core competencies were developed and built to create value of that challenged era. Those systems and processes in the minds of our people have been refined over numerous cycles over the last 3 decades and remain the core DNA of Precision today. And while some firms are just now adjusting to the second half slowdown, our deeply experienced team has been managing our business in a constrained mode since November 2014, and we continue to manage and optimize every business element within our control.

And the results have been remarkable. Strong EBITDA growth, G&A cost reductions, strong cash management, strong operating cash flows and debt reduction well ahead of plan. We are returning capital to shareholders, we achieved record market shares in all geographies, and we have first-mover status on drilling automation technology. So yes, while we are deeply frustrated with the share price, I know that as we follow our strategy, continue to execute, the strong results will follow, the share price will respond and reflect the true value of Precision Drilling.

So now, Carey, over to you to brief us on the third quarter.

Carey T. Ford -- Senior Vice President and Chief Financial Officer

Thank you, Kevin. In addition to reviewing the third quarter results, I'll provide an update on our 2019 capital plan and management of our capital structure. Precision's strong 2019 financial performance continued in the third quarter with adjusted EBITDA of $98 million, 21% higher than the third quarter 2018. The increase in adjusted EBITDA from last year is primarily the result of higher international activity levels, higher day rates in the U.S., lower G&A cost and benefit from nonrecurring items, offset by lower North American drilling activity. Additionally, the quarter benefited from the impact of IFRS 16 and lower share-based incentive compensation. In the quarter, we a recognized $2 million share-based compensation expense compared to $8 million in Q3 of 2018.

In the U.S., drilling activity for Precision decreased 6% from Q3 2018, while margins were up USD 1,357 per day, positively impacted by higher day rates, partially offset by higher operating costs. Sequentially, day rates and margins, net of turnkey and IBC, decreased USD 218 and increased USD 106, respectively. We expect margins to be down USD 400 to USD 800 per day in the fourth quarter. In Canada, drilling activity for Precision increased 20% -- or decreased 20% from Q3 2018, while margins were down $702 per day from the prior year. Net of shortfall payments, margins were lower by $688 per day. Margins were negatively impacted by fixed cost spread across lower activity levels and the timing of certification cost. Last quarter, we gave guidance for Q3 margins to be down $250 to $750 per day year-over-year, and we expect a similar year-over-year trajectory in Q4.

Internationally, drilling activity for Precision was 12% higher than Q3 2018. International average day rates were up USD 1,226 as a result of recontracting rigs at higher rates and the start-up of our sixth Kuwait newbuild rig at the beginning of the quarter. In our C&P division, adjusted EBITDA this quarter was $4.6 million, essentially flat with the prior year despite a 15% decrease in revenue. The increase in profit margin is a direct result of business improvement initiatives enacted over the past several quarters and improved well service pricing. Of note, year-to-date C&P adjusted EBITDA of $18 million is more than double the EBITDA over the same period in 2018. Capital expenditures for the quarter for the corporation were $24 million. For 2019, our capital plan is $144 million, and the plan is comprised of $31 million for sustaining and infrastructure and $113 million for upgrade and expansion. Our capital expenditure plan has been front-end loaded as we delivered a U.S. newbuild rig early in Q1, an SCR to AC ST-1500 conversion delivered during the second quarter and the sixth newbuild rig delivered to Kuwait.

We expect capital expenditures for the remainder of the year to primarily consist of maintenance expenditures. Our capital expense guidance for 2020 remains $60 million to $80 million and is expected to be primarily comprised of maintenance and upgrade capital expenditures. We have continued to build our contract book, signing 6 term contracts during the quarter. And as of October 31, we had an average of 55 contracts in hand for the fourth quarter and average of 29 contracts for the full year of 2020. As of September 30, 2019, our long-term debt position net of cash is $1.4 billion. We had $94 million of cash on the balance sheet, and our total liquidity position was approximately $800 million. During the 9 months of 2019, we have made open-market purchases totaling USD 59 million and year-to-date, have called USD 50 million of our outstanding 2021 notes. Our year-to-date 2019 debt reductions totaled $146 million. In the third quarter, the TSX approved our application to amend -- to implement a normal course issuer bid, and as of today, we have purchased and canceled approximately 3% of our outstanding shares using approximately $12 million in cash. We continue to place the highest priority on debt reduction as the best avenue for creating shareholder value and will only continue the share repurchase plan if we are meeting our debt reduction targets. For 2019, we plan to meet or exceed our $200 million debt reduction target. And for 2020, we plan to reduce debt by $100 million to $150 million.

As of September 30, our ratio of net debt to trailing 12-month EBITDA sits at 3.4x, and we continue to work toward our longer-term target ratio of 2x. Our average cash interest cost is 6.7%, and with the 2019 targeted debt reduction, we expect run rate interest expense will be just under $100 million to exit the year assuming today's U.S. dollar/Canadian dollar exchange rate. Our earliest debt maturity is $116 million due December 2021, and we expect to retire these notes with cash before the end of 2020. The next debt maturity is not due until December 2023. For 2019, we expect depreciation to be approximately $330 million and SG&A to be under $100 million prior to share-based compensation expense. This guidance is down from guidance of $110 million that we provided earlier in 2019. The result -- the reduction in SG&A guidance as a result of aggressive cost management of our fixed cost. We would expect cash taxes to remain low and our effective tax rate to be in the 20% to 25% range for the year.

I will now turn the call back over to Kevin for further discussion of the business and outlook.

Kevin A. Neveu -- President and Chief Executive Officer

Thank you, Carey. I will begin with an update on our technology initiatives. As we mentioned on our press release, during the third quarter, we achieved a step change in customer acceptance of our P-A-C, PAC automation technology. In a moment, I'll turn the call over to Shuja Goraya, Precision's Chief Technology Officer, to provide a detailed update. But first, in my prior technology updates, we've been discussing field level assistance to change as a primary obstacle.

I believe we've reached the tipping point of substance as our field resistance is quickly transitioning to active field support. To quote a drilling engineer on the recent multi-well pad drilled with PAC, "Automation has significantly improved the operational performance and safety for the organization. It has consistently delivered top-quartile connection performance, and we're only scratching the surface of the system's future capabilities." So I'm hearing more and more of these customer testimonials as we continue on this path of commercialization. By the end of this month, Precision will have drilled 1,000 wells utilizing process automation controls. The efficiency gains and the cost savings for our customers are becoming inarguable.

So Shuja, please share your thoughts to our listeners.

Shuja Goraya -- Chief Technology Officer

Thank you, Kevin, and good afternoon, everyone. The last time I spoke with you, it was a year ago. And I will say, we, along with our customers, have learned a lot in these 12 months. Looking back, 2 of our key learnings are: one, the best way to improve drilling performance is using the ingenuity of our best drillers, supported by the right insight and replicating it with consistency of Precision's PAC system; secondly, automation starts to deliver measurable customer value when system utilization crosses 70% mark. Q3 was that tipping point for Precision.

We now have every one of these PAC systems well above that threshold, and actually, most of them are running consistently above a 90% utilization. As a result, every single sequence we have automated so far is delivering 25% to 35% performance improvement, with a corresponding reduction in cost for our customers. We have systematically applied all of these and many other learnings to our PAC service delivery processes, and as a result, in Q3, we doubled the number of our PAC-paying customers. You can imagine in this environment where every dollar is highly scrutinized, this is a great testament to the value of these systems -- the value these systems are delivering to our customers. One thing is for sure. The adoption journey was not a straight line. We had customers who experimented with shutting down the system for 1 section, 1 well, even multiple wells to validate the performance gains and every single one of them is back to fully utilizing the system.

In the last few quarters, I have made a point to see as many of Precision's customers as possible. In their drive to lower cost and industrialize performance, there are 2 major themes: One, access to, and reliance on, real-time data to make decisions is maturing very quickly, and there is a huge appetite for high-fidelity data and relevant real-time insights. This synchronizes very well with our data analytics initiative. We'll be spending a lot more time on this in the coming year. Secondly, there is no shortage of record wells and best practices. The real challenge is consistently repeating these record performances.

In my opinion, more and more operators are realizing that the most efficient path to this performance consistency is through Process Automation Control. Let me give you a really good example on delivering this type of performance consistency. Just this month, one of our IOC customers who is heavy user of precision pack systems mobilize a third pack enabled rig from another basin instead of using one of the local rigs since day one by leveraging pack system, this rig is delivering performance at par with the best performing rigs in the field, with quite literally, 0 learning curve required.

I believe we now have successfully crossed the hurdles of platform hardening, field buy-in and required digital competencies. All our efforts are now focused on expanding the current scope of automated activities. This is where apps will play a major role, and we currently have 15 different apps in various stages of field hardening and commercialization. I am highly confident that Precision's technology strategy is perfectly aligned with our customers' goals of improving well construction quality and cost. In this capital-constrained environment, we have the ideal solution for our customers.

Now I will hand the call back to Kevin.

Kevin A. Neveu -- President and Chief Executive Officer

Thank you, Shuja. So I will remind the listeners that we see our automation technology as a key element of our competitive strategy. We believe PAC will drive joint rig market share gains, while enhancing our revenue and margin growth, as we continue to roll this technology across our highly standardized Super Triple rig fleet. So now turning to our regional update. I'll begin with the domestic United States, where currently our activity is in the mid 60s, down a handful of rigs from the low 70s we reported in July. And while this is slightly lower than we expected when we provided guidance on our second quarter call, it should not be a surprise in light of the subdued customer tone around cash flow management and budget exhaustion. We expect our rig count will range in the low to mid-60s for balance of the year. As our customers reload spending with 2020 budgets, we have several projected rig activations, that may lift the activity to low 70s early next year.

Now I also know there's lot of concern and interest around leading-edge rates and pricing. So since the end of the second quarter, we concluded 8 term contracts, which includes 2 this month. For the Precision ST-1500 rigs, those rates were, and remain, in the mid-$20,000s. On the smaller Precision ST-1200 rigs, the rates are a little lower in the $20,000 per day range. Turning to Precision's well-to-well rigs, those are the rigs that don't have locked in contracts. Pricing remains in the low $20,000s for Precision's ST-1500s and the high teens for Precision ST-1200s. As we look around the market, the Permian, the DJ Basin and the Marcellus are Precision's strongest regions, where we have 51 active rigs today. Our weakest regions are the SCOOP/STACK and the Bakken with 1 active rig each, and the balance of our activity is in Texas, Louisiana, spread between the Haynesville, Eagle Ford and Gulf coast ADS with 12 rigs running. Looking forward, we believe contract activity -- contracting activity and rig utilization will improve quickly when our budget -- when our customers finalize and begin to execute their 2020 drilling budgets.

We do expect intensified customer focus on efficiency, technology, rigs and crew performance. We also note that our customers are planning to smooth out drilling projects over the course of the year, and this is also intended to drive efficiency by reducing stop/start costs. And this aligns very well with the capabilities of Precision's Super Triple, pad rigs and improving performance of our crews and the efficiency gains achievable with Precision's PAC automation technologies. Turning to Canada. The political and regulatory uncertainty created a high sense of anxiety for many. For Precision, our scale and our strong market positioning remains our key differentiator. Our Canadian market share for most of the third quarter was sitting in the 30% range primarily due to our large share of Super Triple pad rigs and the operational excellence our skilled rig crew -- rig personnel deliver. Today, we have 52 rigs running. It's a peak for the fall 2019 season, with slightly over 30% market share. Our rig mix remains strong.

We've got a 22 with 22 of our Super Triples currently drilling on pads targeting natural gas liquids. And I'll point out that this NGLs drilling program is a key stable wedge of business for Precision. Looking forward in Canada, we expect that Precision's winter 2020 activity levels will be in line with 2019, peaking in the low to mid-60s. Demand remains firm for our Super Triple rigs in the Montney and Deep Basin. These rigs are largely committed for the winter season, and we expect day rates will be generally in line with 2019. Our PAC automation systems are on track to achieve full commercialization, further enhancing the revenue opportunity and competitive advantage for those rigs. In our heavy oil segment, Precision's Super Single rigs have a strong market position, and we expect winter 2020 activity and pricing will also be in line with 2019. However, pricing pressure will remain intense on the shallower rigs.

In the Cardium, the Viking and the South Saskatchewan Bakken regions. While Precision's Super Single rigs will continue to be competitive in these areas, we do expect pricing pressure to be intense. So turning back to the issues impacting Canadian drilling activity. We firmly believe that the Alberta government must act immediately and remove the production curtailments entirely for all conventional oil producers. We think this is a critically important step for our customers and should lead to stronger utilization, and importantly jobs, in the services industry. The urgency of this request cannot be overstated as our customers are now in the throes of planning for 2020.

The time to act is now. I'm also encouraged by the federal government's postelection reaffirmation and commitment to proceed with the Trans Mountain pipeline expansion. This is certainly an encouraging stance following the heated election. Both of these regulatory actions will prove constructive catalysts for our energy industry activity and will certainly encourage investment in the Canadian industry. And I absolutely encourage the Government of Alberta to act on the oil curtailment reduction and the federal government to proceed Trans Mountain. So turning to international operations. As Corey mentioned, things are progressing nicely, with the sixth rig in Kuwait operating for the full quarter.

We've achieved our desired scale in the Gulf region and this will allow us to continue to grow top line and bottom line with minimal fixed cost impacts. Currently, we are seeing increased bidding activity in Kuwait, Saudi Arabia, Kurdistan and even Latin America. Some of these may be opportunities to activate our oil rigs in the regions in the region and others may involve deploying idle North American rigs. We expect developments on these tenders later this year or early 2020 as the national oil companies transition into 2020 budget spending. Moving to Precision's Completion and Production group.

They continued the strong operating financial momentum we reported earlier this year. I'm going to compliment our team for the excellent execution during the quarter. But from a Canadian perspective, the industry's marketable rig fleet will continue to suffer attrition as the current market rates do not support economic reinvestment in the assets. The well service industry remains very challenged. This is a business where scale matters, and for Precision, we remain in a very strong position. So turning back to our uses of free cash flow. Carey mentioned our debt reduction and capital spending for 2020. I'll reiterate Carey's comments: the debt reduction will be our top priority. Maintenance capital will be adjusted to match activity levels and other uses of cash, including expansion and upgrade capital and share buybacks, will remain discretionary and will be prioritized behind debt repayment.

There is no doubt, the debt reduction will create shareholder value and this will lead to a significantly improved share price. With our relatively new and standardized fleet of Super Triple rigs, enhanced with PAC, our intense focus on cost control, our intense focus on cash management, we fully expect to meet or exceed our short-term and long-term debt reduction targets, as we have over the past several years. So I'll close out by thanking the Precision employees for the hard work and the strong results they delivered during the third quarter.

And I'll now turn the call back to the operator for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Kurt Hallead of RBC.

Kurt Hallead -- RBC -- Analyst

Hey, good afternoon.

Kevin A. Neveu -- President and Chief Executive Officer

Hey, Kurt

Kurt Hallead -- RBC -- Analyst

I appreciate that summary, very insightful dynamics here. So I want to circle back with you, Kevin, on a couple of things you mentioned. The first was in the context of pricing dynamics in the U.S., and you kind of give the varying ranges of your different, kind of, rate classes. And just wanted to kind of be certain on kind of understanding the dynamic to play. So you indicated that that's where pricing currently is, you didn't really kind of reference that there was any significant pricing pressure in sharp contrast to what you should about the shallow assets up in Canada. So I just want to make sure I understand. Are you saying there is pricing pressure in the U.S. or pricing is fairly stable?

Kevin A. Neveu -- President and Chief Executive Officer

I think we answered that question right now. There is certainly some pricing pressure in U.S. It applies more to the well-to-well rigs and any very remote new opportunities that pop up. On the rigs that are renewals, I think we're working closely with our customers on those renewal contracts and we're achieving rates that are kind of in line with previous quarters.

Kurt Hallead -- RBC -- Analyst

Okay. Great. Appreciate that color. And then you have my follow-up...

Kevin A. Neveu -- President and Chief Executive Officer

Let me add one more comment on that point. We continue to see a high level of pricing discipline among the multi-basin U.S. drillers, and it speaks to the still relative tightness of supply of the super-spec, or in our case, Super Triple rigs. Our utilization has softened up a little bit, but it's still in the upper 80s across the industry and certainly for us, it's in the upper 80s. And that is not a loose pricing market, that's actually a price -- a tight pricing market, and I see continued discipline among the drillers with those rigs.

Kurt Hallead -- RBC -- Analyst

Appreciate that added color. One thing I wanted to also follow up on because you kind of made it a very important part of your strategy going forward is the automation and the apps and the software and so on. I think last quarter, you indicated that you felt confident about the prospective incremental revenue generation and revenue per day generation. So with another quarter behind us and with what you see in the pipeline, can you give us an update on what you -- how you see the revenue model evolving? And what kind of revenue generation you think you can provide?

Kevin A. Neveu -- President and Chief Executive Officer

Kurt, let me answer that question by telling you that our goal for the year was to be commercial -- fully commercial, which really means we're being paid for every system and earning the expected returns by the end of the year. We didn't make that claim on this call, but expect some news from us shortly on that, OK? And then we'll provide, kind of, forward-looking guidance. We'll talk more about the next steps in technology, and I think we'll be able to provide concrete details of where the technology is at today and where it's going. But I can tell you that we are very close to and we're very encouraged, and we're very happy about where we're at.

Kurt Hallead -- RBC -- Analyst

That's great. Thanks, Kevin. Great. Thank you.

Operator

Thank you Our next question comes from James West of Evercore ISI.

James West -- Evercore ISI -- Analyst

Good morning, guys

Kevin A. Neveu -- President and Chief Executive Officer

AJ James, very good

James West -- Evercore ISI -- Analyst

Kevin, you mentioned you thought your U.S. rig count in the low 60s could go to the maybe low 70s here as budgets are reloaded. Are you having that -- is that kind of a gut call? Or are you having that number of conversations or active dialogues that suggests that that's -- it's something that's more likely to happen?

Kevin A. Neveu -- President and Chief Executive Officer

So I'd say ultimately, we didn't confirm that we have signed contracts to take us there because there's still a lot of moving pieces. Not many of our clients have announced their 2020 budgets yet, and I think they're still -- I think they're going to get through these Q3 conference calls and see how the market reacts and then they'll decide on their 2020 spending. But there is -- we have a high degree of ongoing conversations with customers in a number of basins, number of opportunities. There's a lot of anticipation right now around our PAC automation controls. So short of some further dislocation around certainty in the marketplace, I think we'll see the rig count industrywide move up a little bit. I think we'll benefit well, and we'll gain some market share again, kind of, driven by technology and efficiency.

James West -- Evercore ISI -- Analyst

Okay. Got it. And then on the PAC automation controls, I think the number was a double of customers, maybe number of systems quarter-over-quarter, being driven by the field now. What do you think spurred this change, this -- the resistance to -- or switch being resistance to a pull from the field level?

Kevin A. Neveu -- President and Chief Executive Officer

On Shuja's comments earlier, he commented that at 70%, it's bit of a breakeven for our customers, and we crossed over that threshold on every single rig during the quarter. In fact, Shuja commented that most of the rigs are running over 90%. I can tell you that, at that level, they're making money on this, and it's clear and it's apparent. And the field is getting it and is moving forward. Shuja also talked about some rigs where they would turn it off for a section of the well or for a well. Those decisions were being made at the field. And that's turned for us now. So we feel quite good about our positioning and it's moving forward well. The technology is inarguable at works. And I'm pleased.

James West -- Evercore ISI -- Analyst

Thank you. Thank you

Operator

Our next question comes from Sean Meakim of JPMorgan.

Sean Meakim -- JP Morgan -- Analyst

Thanks. Hey guys.So Kevin, in Canada, you're calling for a flattish activity in pricing, at least for the high-spec Super Triples. It's pretty consolidated market and with historically, pretty low levels of activity. I was just curious if you could walk us through what you would perceive to be the flex point that could cause a significant deviation from that level in either direction?

Kevin A. Neveu -- President and Chief Executive Officer

That's a good question, a really good question. I would say, capital markets' reaction to Q3 disclosure by E&P companies could have an impact. If, for whatever reason, the capital markets sour on the -- further on the E&P companies in Q3, that could be a negative driver in activity. If our customers continue to show good efficiency and continue returning value to shareholders, I think that supports a more positive year. So I think it really does depend on how good our customers are at delivering efficiency with our capital and showing their investors they can return capital. And obviously, macro events can go either direction. If, for whatever reason, the WTI price firms up into the high 50s or low 60s, that's very positive. If we see production flattening or declining in the Permian with reduced activity, that's positive. So there's things that can happen that on the edge, can make a big difference for demand for Super Triple rigs.

Sean Meakim -- JP Morgan -- Analyst

Right. That's fair. In the U.S., one of the large service companies indicated a desire to become more asset-light North America. Historically, you've had a constructive partnership in product lines like directional drilling with the same service company. Have you seen much of a shift in terms of kind of go-to-market strategy there? And does that create opportunities for you? Can we just maybe explore a little bit about how that could unfold over time and impact Precision?

Kevin A. Neveu -- President and Chief Executive Officer

Yes, Sean, I would say that the success we're having with automation right now is gathering attention from the integrated service companies in general. And I think they will view our platform for technology delivery as a favorable platform. So I think that may create some opportunities. But if we do create one of those opportunities, we'll be sure to announce and be clear when they're accomplished.

Sean Meakim -- JP Morgan -- Analyst

Okay, fair enough. Thank you

Kevin A. Neveu -- President and Chief Executive Officer

Great, thank you.

Operator

Our next question comes from Connor Lynagh of Morgan Stanley.

Connor Lynagh -- Morgan Stanley -- Analyst

I'm wondering if we could just deconstruct the guidance a little bit here on the margin side. So on the U.S., it sounds like rates are holding up very well. So I'm just trying to bridge to -- there's a little bit of margin pressure. It doesn't seem like very extensive, but the -- is that more related to fixed cost absorption? What's driving the pressure on margins there?

Carey T. Ford -- Senior Vice President and Chief Financial Officer

So it's a little bit of both, Connor, it's a little bit of slight rig pressure and then if we have lower activity covering the same fixed cost base, we'll have a little bit of pressure on the cost side.

Connor Lynagh -- Morgan Stanley -- Analyst

Do you think it would be fair to say it's 50-50 or just the split of what's driving that?

Carey T. Ford -- Senior Vice President and Chief Financial Officer

Yes. I think that's fair.

Connor Lynagh -- Morgan Stanley -- Analyst

Okay. Got it. And then just as we think about next year, if you were to high reach 60s, low 70s type activity levels, should we expect that to continue to trend lower? Or do you think the cost offsets any marginal mark-to-market lower rate? Just trying to think through where are leading edges versus what you're realizing today.

Carey T. Ford -- Senior Vice President and Chief Financial Officer

So we haven't given any guidance for the first part of next year, but I'll kind of follow up with what Kevin said about where we're having conversations with customers. We're not having very many conversations with customers about having rigs over the next 2 months. The conversations we are having are about adding rigs in January, and that is going to be a -- likely going to be a different pricing dynamic than the spot market today.

Connor Lynagh -- Morgan Stanley -- Analyst

Okay. That's fair. Maybe one last one here. We've seen some of your competition announce rig retirements and just broadly across the service industry, that seems to be a theme this quarter. How do you feel about your asset basis? Is there anything in there that you view as sort of noncore or noncompetitive in the current market?

Carey T. Ford -- Senior Vice President and Chief Financial Officer

So over the past 7 years, we've decommissioned about 200 rigs across our fleet. We have 22 rigs that are held for sale right now that we will either sell or decommission by the end of the year. And if you look at our utilization rates in both the U.S. and Canada, they are right at the top of the industry in terms of our utilization percentage. So we think that the fleet we have is well reflected on our balance sheet and is obviously, evident by the customer demand.

Connor Lynagh -- Morgan Stanley -- Analyst

Alright, thanks a lot.

Carey T. Ford -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

Our next question comes from Taylor Zurcher of Tudor, Pickering, Holt.

Taylor Zurcher -- Tudor, Pickering, Holt -- Analyst

Hey, good afternoon On the -- if my numbers are correct on the capex budget, it looks like you budgeted about $5 million for Q4 and 2020 is still $60 million to $80 million, so it's obviously a lot of maintenance and some upgrade in there. Could you help us parse how much of that is maintenance, how much of that is upgrade in 2019? It looks like you're spending around $30 million in maintenance. So it seems like there's a decent wage in there for upgrade. I'm just curious what sort of upgrade projects are complemented in that budget as it sits today.

Carey T. Ford -- Senior Vice President and Chief Financial Officer

Sure. So the maintenance spend is going to be driven by activity, and it will be in the low end if activity is lower than this year, it will be in the high-end if activity is little bit higher than what we experienced in 2019. On the upgrade side, we'll be looking at doing minor upgrade to rigs. So it might be increasing pump capacity or walking system. We wouldn't contemplate any major SCR to AC conversions unless the market improved a bit. We'll also be -- Kevin and Shuja both talked a lot about the success we're having with our technology initiative. And if we commercialize this year, which we're confident that we will, we'll likely be adding additional Process Automation Control systems to our Super Triple fleet in 2020, and that will comprise some of the upgrade expenditures.

Taylor Zurcher -- Tudor, Pickering, Holt -- Analyst

Okay. Got it. And, I guess, just to clarify on some of the pricing comments you made, it sounds like at least for the ST-1500s that are getting extended with their existing operators, the pricing pressure is really nonexistent or not that great. As you think about your rig count potentially ticking higher in Q1, I suspect some of those rigs might be trading hands into different operators and the pricing pressure there, even if those are term contract, is going to be a little bit greater. And so I guess question is, am I characterizing that correctly? And if so, at some point down the road, do you think that delta between rigs getting extended with their current operators and kind of the new leading-edge rate for 2020 start-ups converges moving forward?

Kevin A. Neveu -- President and Chief Executive Officer

Taylor, I think it's more complicated than just the current leading-edge spot market rate becomes a starting point in a growth market or even a nominal growth market. I think we demonstrated that with some of our renewals this quarter that we're still holding previous pricing ranges in mid-$20,000s. My answer -- my short answer is, it's really hard to define price realization when the rig counts are softening and drilling budgets are winding down and no new opportunities are emerging. When you enter into a new market, which is start of a new year with the new drilling budget and the activity is stable and likely, rigs are -- rig counts are moving up slightly, you're in a bit of a growth market and pricing will be different. Utilization on those high-spec rigs still remains in the upper 80s, and discipline's been quite strong across the top 4 drillers. So I'm not going to give any hard pricing guidance on Q1 pricing right now, but we believe it will be constructive.

Taylor Zurcher -- Tudor, Pickering, Holt -- Analyst

Okay. Fair enough. I'm trying to squeeze one more in. I thought the stat on the PAC system utilization breakeven at around 70% for your customers was pretty interesting. Just want to make sure I understand what that means. I assume utilization is just the number of wells they're drilling with the PAC system during the quarter. But from a revenue perspective to breakeven, are you using the full $1,500 a day type day rate for the PAC system that come to that calculation?

Kevin A. Neveu -- President and Chief Executive Officer

Yes. So what we find is that if they use the PAC system on any given well 70% of the time, and we charge the full commercial rate, they will recover that at 70% utilization in savings on the rig. If they can use it at a higher percentage of the time -- so we get criticized for letting all the value on our technology flow through to our customers. We've been very disciplined here to make sure that we capture the value up to a point and then we're sharing the value from that point forward.

Taylor Zurcher -- Tudor, Pickering, Holt -- Analyst

Okay, I appreciate it. Thanks for the answers

Kevin A. Neveu -- President and Chief Executive Officer

Great, thank you

Operator

Our next question comes from J.B. Lowe with Citi.

JB Lowe -- Citi -- Analyst

The afternoon guys I just had a couple here. I wanted to follow up on Conner's question about the margin profile in 4Q. In the U.S., the $400 to $800 decline in margin, is there any offset there from revenue from the PAC systems or from app revenue? Like if absent those 2 things, would margin be lower? Or how's the way to think about that?

Carey T. Ford -- Senior Vice President and Chief Financial Officer

So, Kevin and Shuja both pointed to us being confident that we're going to announce full commercialization before the end of the year, maybe in the next month or so. And at that point, we will start getting more significant revenue from the system, which will show up much more in Q1 than it will in Q4, but there's a little bit of an impact in Q4.

JB Lowe -- Citi -- Analyst

Okay. And then on the -- Kevin, you're mentioning that there is some tendering activity on the international side. I know you have some idle rigs abroad. If you weren't going to be able to put any of those rigs to work in 2020, you said you already have scale in the Middle East, would any of those idle rigs be divestiture candidates?

Kevin A. Neveu -- President and Chief Executive Officer

We don't have any, kind of, a formal decision on those rigs, whether we'd sell them or not. We did sell rigs in Mexico earlier this year, and it was a good transaction for us. The assets that we have in Kurdistan, in Georgia are -- and Saudi Arabia are excellent assets. The right -- for the right rate, anything is for sale.

JB Lowe -- Citi -- Analyst

Sure. Okay. Thanks

Kevin A. Neveu -- President and Chief Executive Officer

Great. Thank you.

Operator

Thank you Our next question comes from John Watson of Simmons Energy.

John Watson -- Simmons Energy -- Analyst

Thank you. Good afternoon,A quick follow-up on J.B.'s question. Appreciate if we should hold tight and hear more later, but could you help us think about what the revenue uplift from the full commercialization of PAC might be in Q1?

Carey T. Ford -- Senior Vice President and Chief Financial Officer

So I can tell you what we -- the guidance we've given before, there's $1,500 a day on roughly 30 systems that would be commercial in the field, so you can think about that as having an impact in Q1.

John Watson -- Simmons Energy -- Analyst

And that's going from 0 in Q4 or minimal in Q4 to that type of figure in 1Q, is that fair?

Carey T. Ford -- Senior Vice President and Chief Financial Officer

So we haven't given any color on what that impact would be in Q4 because we haven't announced the full commercialization yet.

John Watson -- Simmons Energy -- Analyst

Okay. Understood. Kevin, you made some commentary on -- helpful commentary on the rate environment and mentioned that well-to-well rigs are receiving lower rates relative to some others. Does the percentage of rigs that -- a percentage of Precision rigs on well-to-well work, does that increase in Q4? Is that part of the margin decline or not at all?

Kevin A. Neveu -- President and Chief Executive Officer

I don't have the tables in front of me but essentially, the contracted rigs are kind of holding steady and it's the well-to-well rigs who has been a little bit of pressure on rate, and the rig count has come down a little bit so that's probably well-to-well rigs. I don't have the mix in front of me.

John Watson -- Simmons Energy -- Analyst

Okay. Okay. I was trying to think toward 2020. So I'd assume you'd have more well-to-well type of rigs in Q4 than you would in 2020, but that's fair.

Kevin A. Neveu -- President and Chief Executive Officer

Yes, we -- so I think that's -- I think it's fair to think that we would have more well-to-well rigs in Q4. And certainly, with all the uncertainty in the market, customers have not been anxious to book up rigs for 2020 yet. We did announce 8 contracts, but I'd expect to see more contracts emerge in the first quarter.

John Watson -- Simmons Energy -- Analyst

Yes, right. Okay. That's where I was headed. And then lastly...

Kevin A. Neveu -- President and Chief Executive Officer

Or certainly after budgeting season even this fall, it could be later this year.

John Watson -- Simmons Energy -- Analyst

Okay. Lastly, on the international front, you deployed the incremental rig during the third quarter. Should we be thinking about a margin uplift in 4Q since you won't have that -- a deployment-type expense and you'll get a completely full quarter from that rig in 4Q, which I think has a higher revenue per day relative to some of your other international rigs?

Carey T. Ford -- Senior Vice President and Chief Financial Officer

So John, in Q2, we said that we would get a full quarter of EBITDA from the new rig in Q3. So we wouldn't expect to see an uplift in Q4. That's our sixth rig deployed to that country, to the same customer and it's the same rig design. We didn't have any start-up cost in the quarter that were unique to that start-up.

John Watson -- Simmons Energy -- Analyst

Got it. Okay. Thanks, guys

Operator

Thank you Our next question comes from Ian Gillies with GMP.

Ian Gillies -- GMP -- Analyst

Good afternoon, everyone.With respect to growth in the U.S. or Canada as you head into the early part of next year, I mean, do you expect that will be continued market share capture or do you think it's part of a broader rig count recovery?

Kevin A. Neveu -- President and Chief Executive Officer

I think there's a rig count recovery, I'm not sure I'd call it broader, but there will be a rig count recovery in next year. And I think it's going to be driven by our customers trying to drive to more smooth loading over the course of the year. And the point is, ramping activity up in the first half and ramping it down in the second half is very expensive way to drill wells. If you can level out during the year, that saves our customers' money along with pad operations and technology and things like that. So I think you'll see the rig count tick up from the trough of 2019 into whatever the level's going to be in 2020. So whether that's 30 or 40 rigs up, it's hard to say. I would -- that every single rig that gets added is a super-spec or a Precision Super Triple type rig. We have done quite well during the upticks in grabby market share on those high-spec rigs. So I think our gains will come through a slight uplift in the industry and some market share traction we think we'll gain.

Ian Gillies -- GMP -- Analyst

Okay. Deleveraging has obviously an important part of the story over the last number of years. I mean, when you look at Q3 actuals, I mean you provided some context around what Q4 looks like. I mean does that give you any pause that you may or may not be able to meet that $100 million to $150 million debt reduction target in 2020 based on what you've seen so far and if you're at risk at saying maybe it doesn't recover in 2020?

Kevin A. Neveu -- President and Chief Executive Officer

We have a high degree of confidence that we'll meet our targets in 2020.

Carey T. Ford -- Senior Vice President and Chief Financial Officer

And Ian, I can walk you through a number of numbers there. We gave guidance on interest expense which we think will be right around $100 million, maybe a little bit less. Our capex at $60 million, $80 million and cash taxes being relatively low, we won't have much of a change in working capital activity similar. So you're looking at $170 million of fixed cost. So take whatever you have for your EBITDA estimate and the difference will be our cash flow. In addition to that, if you look at our Q4 outlook, we've a given relatively low capex number. Our interest expense for the quarter in Q4 will be $30 million to $35 million. So we should have another very good cash flow quarter in Q4, and we've got almost $100 million of cash on the balance sheet today. So all of those things taken together, I think, we're very confident we can meet or exceed our target this year and follow the same next year.

Kevin A. Neveu -- President and Chief Executive Officer

And I'll point out that we did add the word exceed our target this year in the disclosure this period.

Ian Gillies -- GMP -- Analyst

I did note that. So -- and then I guess, I mean following -- I guess following on the international piece that was asked upon earlier, I mean, are you guys trying to just -- as you look at those, are you just trying to carve out additional work, if possible, in areas that you currently operate in? Or would you be willing to step out of where you currently are for the right opportunity, should it arise?

Kevin A. Neveu -- President and Chief Executive Officer

I'll give you a bit of a sense of what we are looking at right now. So the rigs we have that are idle in Middle East are looking to deploy likely somewhere in the Middle East in one of the countries we currently operate. So I think there's no step out in vision in the Middle East in the Arabian Gulf. But we are looking at some other opportunities that might involve redeploying idle North American assets to Latin America. And the scale would have to be adequate for us to make that decision. But we are exploring the opportunities.

Carey T. Ford -- Senior Vice President and Chief Financial Officer

Yes. I would add that the scale would have to be adequate, and the capital expenditure requirements would have to be relatively low.

Ian Gillies -- GMP -- Analyst

Yes. And just one quick clarification there on scale. Should I be thinking about that from a dollar asset perspective? Or is it the number of rigs? Because obviously 1 rig in the Middle East is much different than 1 rig in Latin America.

Carey T. Ford -- Senior Vice President and Chief Financial Officer

Yes, I would think about it as number of rigs.

Ian Gillies -- GMP -- Analyst

Thanks very much, guys

Operator

Thank you [Operator Instructions] Our next question comes from Jon Morrison of CIBC Capital Markets.

Jon Morrison -- CIBC Capital Markets -- Analyst

Can you just talk about -- can you talk about the level of rate inquiry in the last 4 to 6 weeks and whether you see any meaningful change up or down in, kind of, that duration? Obviously, activity has been coming down, we all see that. But I'm just trying to get a sense of whether there is any heightened level of RFPs in the market that could be indicative of guys shopping around for price and perhaps getting ready to grind on contract renewals? Or do you believe that that's fairly representative of what they're actually going to need in the coming period?

Kevin A. Neveu -- President and Chief Executive Officer

Jon, it's pretty easy for our sales team to parse through the guys in price discovery versus 2020 new opportunities. So I think that we are pretty clear on which we are pursuing. And most of what we are putting our energy into is around new opportunities in 2020, not price discovery.

Jon Morrison -- CIBC Capital Markets -- Analyst

Okay. And it's fair to assume that your rate of renewal or hit rate is fairly steady with what you've seen over the past 6, 12 or 18 months?

Kevin A. Neveu -- President and Chief Executive Officer

Well, our rate of renewal slowed down this quarter. I think this is the slowest quarter this year for bookings -- for contract renewals. And no surprise in the marketplace, nobody is looking to lock in a lot of rigs in the third quarter of 2019. But those people may be looking to do that late in the fourth quarter, early first quarter, as they think about a full year of drilling in 2020.

Jon Morrison -- CIBC Capital Markets -- Analyst

Apologies, I misspoke. I meant your win rate hasn't really changed based on the number of things that you're bidding on.

Kevin A. Neveu -- President and Chief Executive Officer

I don't look that closely at win rate. I'm pretty happy with the contracts we have achieved and the pricing we've gotten. And I also know we walked away from contracts because the pricing wasn't adequate.

Jon Morrison -- CIBC Capital Markets -- Analyst

Okay. That's helpful. Just in terms of Canada, Kevin. Some of your peers have been talking about cold stacking some of the heavy doubles in the market. Do you think that, that has a chance of actually improving pricing at the lower spec part of the market? Or that just kind of reduces some of the pressure that we're seeing?

Kevin A. Neveu -- President and Chief Executive Officer

Jon, some of my comments on the well service business applied to shallower part of the drilling business too. The rates are too low for the industry. It's unhealthy for the industry. I think every drilling contractor that's stuck in that business is trying to find ways to tighten the market. Certainly, if our customers want a healthy supply business, they have to be a little more flexible on pricing, especially on the shallow rigs. it's hard to maintain high-quality assets, the expectation for safety in Canada is quite high, the environment responsibility is quite high. You can't tap on the contracting industry for the shallower rigs to do that at these rates. So my message is quite loud and clear. Our customers have to work with us a little more than they have on those shallow rigs. I can tell you the drilling contractors are doing all they can to try to ensure they are not wasting any of their operating costs. So they're cold stacking rigs, they're trying to be as smart as we can. And the industry is quite resilient, but the rates are too low.

Jon Morrison -- CIBC Capital Markets -- Analyst

Okay. Kevin, you've talked about being open in terms of well servicing consolidation in Canada in the past if it made sense for Precision to do it, you might not be the leader of doing it within the platform. But are you surprised that we haven't seen more consolidation in that market in past 12 months because the conversations we would have with the private operators would obviously highlight acute distress, and I'm surprised we haven't seen more things happen today. Is that in line with your views?

Kevin A. Neveu -- President and Chief Executive Officer

Yes. I sort of have in my mind that by the end of Q3 or Q4 2019, the business would have been through the ringer long enough to narrow some of that bid-ask spread. I don't think it has, and I still think that enough of the rigs are controlled by companies like Precision that are probably doing -- we're doing a very good job. I think I was doing an OK job. And it's not strategic in the business yet, but it will become strategic if it stays in this position. So you can look at the active industry right now. I think probably 40%, 45% of the active service rigs are owned by drilling contractors. I'll finish up my point though, Jon. I think the industrial logic and the economic logic is getting closer and closer to making sense. I do expect that something will start emerging in 2020 in that space.

Jon Morrison -- CIBC Capital Markets -- Analyst

It always just takes longer than you would logically think for that to actually happen.

Kevin A. Neveu -- President and Chief Executive Officer

It does.

Jon Morrison -- CIBC Capital Markets -- Analyst

Carey, in terms of the capex guidance that you gave for 2020, would incremental inflation or deflation of those numbers just largely go in line with the number of drilling days that you actually get? And is there anything that would push it meaningfully above that in any scenario that you can foresee being logical?

Carey T. Ford -- Senior Vice President and Chief Financial Officer

If we're in an activity range that looks plus or minus 10% or 15% from this year, that's probably a pretty good range. But if we have a higher demand scenario, that will probably trigger some more SCR to AC conversions and the upgrade piece could creep up. But again, we would need the right contracts for -- to spend that money.

Kevin A. Neveu -- President and Chief Executive Officer

And it's difficult to come up with any scenario where we wouldn't pay down debt first.

Carey T. Ford -- Senior Vice President and Chief Financial Officer

Correct.

Jon Morrison -- CIBC Capital Markets -- Analyst

Okay. So basically the capital priorities, the right way to think about it is one, you're essentially maintaining the marketability of the asset base; two, you'll need at least the base debt reduction target that you put out but probably going to exceed; and three, you're really only lean on the buyback when you're very comfortable with the fact that you're going to achieve bucket 1 and 2 and you've got excess cash, is that the right way to think about the NCIB at this point?

Carey T. Ford -- Senior Vice President and Chief Financial Officer

I would answer that, that is in general absent any upgrade opportunities, but if we have upgrade opportunities that provide us a good return on our investment, that would likely take the place of buying back shares.

Jon Morrison -- CIBC Capital Markets -- Analyst

Okay. And those would be in line with your traditional metrics that you've talked about?

Carey T. Ford -- Senior Vice President and Chief Financial Officer

Correct.

Thank you, john

Kevin A. Neveu -- President and Chief Executive Officer

Thank you, john

Jon Morrison -- CIBC Capital Markets -- Analyst

Thank you.

Operator

I'm showing no further questions at this time. I'd like to turn the conference back over to Dustin Honing for any closing remarks.

Dustin Honing -- Manager of Investor Relations

Thank you all for joining today's call. We look forward to speaking with you when we report our fourth quarter results in February.

Operator

[Operator Closing Remarks]

Duration: 56 minutes

Call participants:

Dustin Honing -- Manager of Investor Relations

Kevin A. Neveu -- President and Chief Executive Officer

Carey T. Ford -- Senior Vice President and Chief Financial Officer

Shuja Goraya -- Chief Technology Officer

Kurt Hallead -- RBC -- Analyst

James West -- Evercore ISI -- Analyst

Sean Meakim -- JP Morgan -- Analyst

Connor Lynagh -- Morgan Stanley -- Analyst

Taylor Zurcher -- Tudor, Pickering, Holt -- Analyst

JB Lowe -- Citi -- Analyst

John Watson -- Simmons Energy -- Analyst

Ian Gillies -- GMP -- Analyst

Jon Morrison -- CIBC Capital Markets -- Analyst

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