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

Financial Performance:

• Q3 2026 revenue reached $532 million, a 15% year-over-year increase driven by higher North American drilling activity and U.S. day rates, partially offset by lower international results.
• Adjusted EBITDA for Q3 was $125 million ($133 million excluding share-based compensation), up from $118 million ($129 million pre-comp) in Q3 2025; net earnings improved to $21 million versus a $7 million net loss the prior year.
• Operating cash flow was $71 million, impacted by working capital buildup associated with growing activity; capital expenditures totaled $82 million ($58 million maintenance, $24 million upgrades).
• The company returned $31 million to shareholders via share repurchases in the quarter.
• Liquidity stands at over $460 million; debt was reduced by $75 million year-to-date, with a target to reach a net debt-to-EBITDA ratio below 1.0x by year-end.
• Full-year 2026 capital expenditures are guided to $275–$285 million; depreciation expected at $325 million, cash interest at ~$45 million, and effective tax rate between 25–30%.

Guidance and Future Outlook:

• Q4 Canada: Average active rig count expected in the low 70s (vs. 66 in Q4 2025) with daily operating margins of $13,500–$14,500.
• Q4 U.S.: Average active rig count forecast for low to mid-40s; daily operating margins anticipated to rise significantly to $9,500–$10,500 following reactivation costs in previous quarters.
• Q4 International: Operating 7 rigs with elevated costs; C&P EBITDA expected to remain flat year-over-year.
• Full-year 2026 Share-based compensation guidance is $25–$50 million; SG&A is $100 million (including one-time restructuring).
• Management targets $100 million debt reduction for 2026 and anticipates a shift in free cash flow focus toward buybacks in 2027.
• 2027 outlook includes potential single-digit rig upgrades in Canada and U.S., with a specific pending upgrade opportunity in Canada for a large producer extending through 2029.

Business Segments and Product Lines:

• Canada: Averaged 73 active rigs (up 10 YoY); Super Single utilization increased 18% YoY due to heavy oil demand; reported daily margins of $12,817.
• U.S.: Averaged 43 active rigs (up 7 YoY); margins ($7,653) impacted by reactivation costs ($2,125 per day); Permian presence doubled to 16 rigs vs. 8 last year.
• International: Averaged 7 active rigs; margins unfavorably impacted by Middle East operating costs and one idle high-performing rig in Kuwait expected to return mid-2027.
• Completion & Production Services: Adjusted EBITDA up 10% to $21 million, driven by Canadian heavy oil well-servicing and growing surface rentals.
• Technology: Alpha and Evergreen (diesel/emissions reduction) lines achieved record revenue/margins; Clarity digital twin and Remote Ops Center now operational with 100+ customer visits.

Market and Competitive Landscape:

• Canada: Positive macro developments include the TMX expansion, Canada LNG Phase 1 completion, and the federal designation of the Pacific Link Pipeline as a national interest project, potentially adding 1M bbl/day capacity.
• U.S.: Permian Basin is the primary growth engine; Northeast market showing signs of recovery with multiple rigs starting soon; customer contract durations are lengthening from 6–12 months toward 18–24 months.
• Customer Dynamics: Consolidation among Canadian producers is driving demand for efficiency and technology; U.S. public and private operators are requesting rig startups early next year.
• Technology Adoption: Growing customer interest in robotics and AI-driven optimization to improve efficiency and reduce emissions.

Risks and Challenges:

• International Geopolitics: Ongoing regional tensions in the Middle East have elevated international operating costs and caused idle assets.
• Inflationary Pressures: Key cost drivers include high-end labor retention (wage increases implemented in Canada and U.S.), steel-intensive purchases (drill pipe), and higher diesel prices.
• Weather/Seasonality: Canadian activity impacted by wet conditions extending into late October.
• Tax Disputes: Formal objection submitted to CRA regarding tax disputes; no update on resolution timeline.
• Capital Allocation: Balancing capital returns, debt reduction, and the need for strategic fleet upgrades in a finite opportunity environment.

Management Commentary and Tone:

• Management tone was confident and strategic, emphasizing that Q3 results delivered on prior commitments.
• CEO Kerry Ford highlighted the "differentiated positioning" in heavy oil and the successful execution of the U.S. strategy, particularly in the Permian.
• CFO Dustin Honing emphasized the improvement in margin sustainability as reactivation costs recede and the fleet base expands.
• Leadership expressed strong support for the field crews and safety performance in challenging environments.

Analyst Questions and Answers:

• Rig Upgrades (Aaron McNeil, TD Cowan): Upgrades in 2027 will be low-to-mid single digits in both Canada and U.S., primarily for ERD (Extended Reach Drilling) and Pad upgrades; U.S. margin guidance is considered sustainable as reactivation frequency drops to single digits next year.
• Shareholder Returns (Aaron McNeil): Debt reduction target of $100 million is nearly met; flexibility for buybacks will increase in 2027 as debt repayment competition eases.
• Canadian Market Dynamics (Keith Mackey, RBC): Increased drilling days may not require significant fleet expansion immediately, but pad upgrades add capability; potential to shift U.S. rigs to Canada if demand shifts.
• Inflation Management (Sean Mitchell, Daniels Energy): Mitigated via vertical integration (in-house manufacturing/supply); key cost pressures are labor, steel (drill pipe), and diesel; Evergreen offerings help customers reduce fuel costs.
• Contract Lengths (Sean Mitchell): Shift observed from 6-month contracts to 1–2 year discussions, indicating market tightening.
  Pricing and Rig Count (Tim Monticello, ATB): Pricing increases are occurring via feature additions rather than immediate reclass moves; U.S. rig count may reach 50 by year-end or early 2027; Argentina discussions ongoing but no deals signed yet due to risk terms.
• Basin Specifics (Derek Pothacer, Piper Sander): Rig inquiries for Q1 2027 are primarily Permian, with smaller demand in Haynesville and Rockies; current footprint includes Rockies, Permian, Haynesville, and Marcellus.

Other Key Points:

• The company maintains over 50 "hot" rigs (warm-ready) in the U.S. fleet, allowing for low-cost reactivation if demand spikes.
• A pending Canadian upgrade opportunity involves multiple rigs contracted through 2029 for a major producer.
• The Argentina market is identified as a high-demand area for U.S. high-spec rigs, requiring negotiation on financial risk mitigation.
• The CRA tax dispute formal objection will be filed in Q4.
• Labor wage increases were recently enacted in both Canada and the U.S. to retain skilled crews amidst infrastructure growth.