Precision Drilling has provided a series of announcements in response to the COVID-19 pandemic and current market conditions. These include:
- Risk mitigation and employee health plan;
- Changes to 2020 capital expenditure plan;
- Reductions to fixed costs;
- Liquidity update; and
- Updated strategic priorities.
COVID-19 Transmission Risk Mitigation and Employee Health
Beginning in February, Precision implemented a comprehensive global pandemic response plan to ensure the wellbeing of its employees and the communities in which it operates.
The company’s response plan includes:
- Providing all employees access to clear and consistent communications, a crisis management response plan and a crisis management website;
- Implementing prescriptive personal hygiene, distancing and self-quarantine standards along with work area disinfecting requirements based on CDC and WHO standards;
- Implementing employee health support and revised leave plans to assist employees who may be at risk;
- Banning non-essential travel globally;
- Strongly encouraging staff to work remotely;
- Ensuring that all employees are fit-for-duty on a regular basis by checking for health and wellness and prior social contacts;
- Implementing standards for interacting with third party contractors and visitors to minimize risk of exposure; and
- Establishing operational recovery and disinfecting plans for rigs and facilities in case of an infectious virus contamination event.
Precision’s operations and supply chain functions have experienced minimal disruptions and we do not anticipate any supply chain impacts for the foreseeable future. The company will continue to monitor the situation and will adjust business and safety management procedures if conditions change. The company remains firmly committed to providing support to its people and operations as the company continues to meet the needs of its customers.
Capital Expenditure Plan Reduction
In response to the expected reduction in demand as customers reduce spending due to lower than anticipated commodity prices, Precision is reducing its 2020 capital expenditure plan to $48 million, down approximately 50% from its previously set plan of $95 million. Further adjustments may be considered depending on activity levels realized as the year progresses.
Fixed Cost Reductions
Precision is taking measures to enhance free cash flow by reducing fixed operating overhead and G&A costs throughout the organization, including:
- CEO salary reduction of 20%;
- Board of Director compensation reductions of 20%;
- Executive officer salary reductions of 10%;
- Staff headcount and salary reductions; and
- Elimination of all non-essential travel, entertaining and other discretionary spending.
We expect these fixed cost reduction measures will reduce annualized fixed costs by over 30%, including up to a $30 million reduction in G&A expense.
Preserving Precision’s strong liquidity profile will remain a key financial priority in 2020 for the company. At 2019 year-end, Precision reported a cash balance of $75 million and the completion of a one-year extension of its $500 million revolving credit facility, maturing November 2023. Excluding letters of credit, the company’s revolving credit facility remains undrawn, and with the year-end cash balance, Precision reported access to over $700 million in liquidity.
In addition, the company has materially reduced share repurchase activity under its Normal Course Issuer Bid program to maintain liquidity.
During Q2 of this year, Precision is estimating receipt of an additional $80 million to $100 million of cash from released working capital as a result of seasonal and commodity price driven activity declines in North America. The company remains well in line with its covenants and will continue to ensure full access to its credit facility.
Considering the new macro environment with highly volatile commodity prices, Precision reaffirms its strategic priorities for 2020:
- Generate strong free cash flow and utilize $100 million to $150 million to reduce debt in 2020: Precision reaffirms its 2020 debt reduction targeted range. As a component of this priority, in the near term, the company will focus on maximizing free cash flow by reducing capital spending by 50% and fixed costs by over 30%. The company has redeemed $41 million of its debt in 2020 and will continue prioritizing its 2021 senior notes during the year.
- Demonstrate operational excellence in all aspects of business, including operational, financial and environmental, social and governance (ESG) metrics: Precision believes its comprehensive actions to mitigate the health risks to its employees and its communities while supporting and sustaining its business operations is in full alignment with its operational excellence strategic priority.
- Leverage the Precision’s Alpha technology platform as a competitive differentiator and source of financial returns for the company: Precision will continue to focus on optimization and customer interface with its technology offerings during 2020. The company will continue to pursue further customer traction with its AlphaAutomation and AlphaApps; however, will temporarily scale back its previously disclosed plans to roll out an additional 24 AlphaAutomation systems during the year.
“Precision extends our thoughts to those affected by the COVID-19 pandemic and we remain committed to doing our part to minimize the spread of this very serious virus,” Kevin Neveu, Precision’s CEO, said. “Our top priority is the well-being of our people and local communities, and we have taken comprehensive proactive measures to make sure that their health and safety is not compromised while we continue to provide our high performance, high value service to our customers.”
“Financially, the progress we have achieved over the last three years to generate free cash flow, prioritize aggressive debt reduction, manage debt maturities and preserve cash liquidity through stringent cost management and responsible capital deployment, leaves Precision well positioned to navigate this challenging environment,” Mr Neveu added. “Our reaffirmed debt reduction targets demonstrate the financial flexibility of the company and we will continue to ensure that our liquidity needs are not compromised. With future drilling activity levels uncertain, the capital spending and fixed cost reductions announced will continue to support Precision’s strong free cash flow capability and financial flexibility. We remain actively engaged in managing the business accordingly and will continue to heavily scrutinize all expenditures to further protect the interests of our stakeholders.”