Precision Drilling Corporation 2026 Third Quarter Results Conference Call and Webcast - PRECISION DRILLING CORP

Financial Performance:

• Q3 2026 revenue reached $532 million, up 15% year-over-year, driven by higher North American activity and U.S. day rates, partially offset by lower international results.
• Adjusted EBITDA increased to $125 million (approx. $133 million excluding share-based comp) compared to $118 million prior year; net earnings turned positive at $21 million versus a $7 million loss in Q3 2025.
• Operating cash flow was $71 million, impacted by non-cash working capital builds; cash flow from operations and capital expenditures combined supported $31 million in share repurchases.
• Capital expenditures totaled $82 million ($58M maintenance, $24M upgrades); debt reduced by $75 million YTD with $100 million total reduction target for 2026 nearly met.
• Full-year 2026 guidance includes CapEx of $275–$285 million, depreciation of $325 million, cash interest of ~$45 million, and an effective tax rate of 25–30%.

Guidance and Future Outlook:

• Q4 2026 U.S. daily operating margins expected to expand to $9,500–$10,500 per day, up sequentially from Q3 as reactivation costs stabilize.
• Q4 2026 Canada average rig count projected in the low 70s with daily margins of $13,500–$14,500; U.S. rig count expected in the low-to-mid 40s.
• Management anticipates 2027 margin expansion and sustained profitability in the U.S., with a potential to reach ~50 active rigs as reactivation costs become a smaller percentage of fleet margins.
• Full-year 2026 share-based compensation guidance ranges from $25–$50 million; liquidity stands at over $460 million with a net debt-to-EBITDA target below 1.0x expected by year-end.

Business Segments and Product Lines:

• North America Drilling: Canada activity averaged 73 rigs (up 10 YOY) with Super Single rig utilization up 18%; U.S. activity averaged 43 rigs (up 7 YOY), with Permian rigs doubling to 16 from 8 a year ago.
• Completion & Production (C&P): Adjusted EBITDA rose 10% to $21 million, driven by heavy oil well-servicing demand and incremental revenue from rentals.
• International: Averaged 7 active rigs with day rates down 14% to $46,304; one high-performing Kuwait rig idled but expected to return mid-2027 under a five-year contract.
• Fleet Upgrades: Delivered 25 contracted rig upgrades in 2026; low-single-digit upgrades planned for 2027 in Canada (ERD, Montney) and U.S. (Permian, Haynesville).
• Technology: Alpha and Evergreen businesses targeting record revenue and margins; Clarity platform and digital twins now actively deployed via the Calgary Remote Ops Center with 12 customer partners.

Market and Competitive Landscape:

• Canada: Positive macro environment driven by pipeline infrastructure (TMX, Pacific Link, LNG Canada) and potential domestic demand (Greenlight Data Center), though crude differentials remain a headwind.
• U.S.: Permian basin showing significant strength with increased public and private customer demand; Northeast market expected to rebound with multiple rig startups in Q4.
• Contract Trends: Contract duration shifting from 6–12 months to 18–24 months in the U.S. as operators seek to lock in rigs ahead of potential tightness.
• Competition: Customer consolidation in Canada (Montney, Duvernay, heavy oil) is driving demand for efficiency, technology, and long-term partnerships.

Risks and Challenges:

• Operational Costs: Elevated operating expenses in the Middle East and inflationary pressures on labor (retention of high-end field crews), steel (drill pipe wear), and diesel.
• Capital Allocation: Large non-cash working capital builds impacting short-term cash flow; dependency on successful rig reactivations to absorb fixed costs.
• Geopolitical: Ongoing regional tensions in the Middle East affecting international costs; pending CRA tax dispute resolution expected in Q4.
• Market Volatility: Potential for softness in certain U.S. regions (e.g., Northeast previously) and fluctuating crude differentials impacting Canadian producer economics.

Management Commentary and Tone:

• Tone: Management expressed high confidence in the "differentiated positioning" of the fleet, emphasizing strategic alignment of capital investments with customer programs and shareholder returns.
• Strategic Focus: Strong emphasis on the U.S. market turnaround, specifically the Permian growth story and the stabilization of margins following reactivation cycles.
• Technology: Positioned technology (Alpha, Clarity, Remote Ops) as a key differentiator for safety, efficiency, and emissions reduction, with growing customer validation.
• Safety: Acknowledged and commended field crews in the Middle East for operating safely in a dynamic environment.

Analyst Questions and Answers:

• Q: U.S. Margin Sustainability: Management confirmed Q4 margin guidance reflects a sustainable trend, as reactivation impacts will diminish with a higher activity base and single-digit reactivations expected in 2027.
• Q: Capital Return Strategy: With debt reduction nearly complete ($60–$65M remaining), management signaled a shift toward increased share buybacks in 2027 as free cash flow flexibility improves.
• Q: 2027 Upgrade Opportunities: Upgrades are finite and contract-driven; 2027 spending will focus on 2–3 ERD upgrades in Canada and low single-digit Super Triple upgrades in the U.S., rather than unlimited expansion.
• Q: Canadian Market Outlook: While drilling days may increase year-round due to infrastructure projects, no immediate demand for a significantly larger total rig count was identified, though capacity exists via U.S. rig transfers.
• Q: Argentina and Middle East: No immediate Middle East reactivations other than the Kuwait rig; Argentina market is active with demand for U.S. rigs, but contract terms regarding risk mitigation remain a hurdle.
• Q: Inflation Management: Vertically integrated model mitigates some costs; primary inflationary pressures are labor retention and steel/diesel costs, managed through customer pricing dialogue and efficiency tech (Evergreen).

Other Key Points:

• The CRA tax dispute remains unresolved but a formal objection will be submitted in Q4.
• 52 "hot" (ready-to-go) rigs are currently available, supporting future growth without immediate reactivation costs.
• Robotics discussions have intensified with customers in both North America and Canada, indicating potential future growth for this technology segment.
• Management highlighted the strategic shift from spot market to longer-duration contracts as a sign of market maturation and confidence.