Precision Drilling Corporation 2026 Q3 Earnings Call

Please go ahead. Welcome everyone to Precision's third quarter earnings conference call and webcast.

Today, I'm joined by Carey Ford, our President and CEO, and Dustin Honing, CFO. Yesterday, Precision reported solid third quarter results, which Dustin will review, followed by operational and outlook commentary from Carey. Once we have finished our prepared comments, we will open the call to questions. Some of our comments today will refer to non-IFRS financial measures and will include forward-looking statements, which are subject to a number of risks and uncertainties. Please see our news release and other regulatory filings for more information on financial measures, forward-looking statements, and risk factors. As a reminder, we express our financial results in Canadian dollars unless otherwise indicated. With that, I will pass it over to Carey to begin.

Thank you, Lavonne. Good morning and good afternoon, everyone. Before I hand the call over to Dustin, I'd like to briefly frame the quarter for our listeners and highlight our progress against our 2026 priorities. Precision delivered differentiated North American revenue growth across the drilling and CMP service lines and continued to make strategic investments in our fleet while meeting our capital return commitments. In short, it is what we said we would do. In our press release, we guided to 25 North American rig upgrades this year. The contracted upgrades remain the best opportunity to deploy capital and create short and long-term shareholder value. Upgrades have attractive contracted returns, improve fleet capabilities, and align our service delivery with longer-term customer programs.

These fleet investments and service delivery by Precision crews, supported by technology and a growing contract book, position our business for continued growth in Q4 and create an improved platform for customer service delivery and cash flow generation in 2027. With that, I'll turn it over to Dustin.

Thank you, Carey, and good morning, good afternoon for those calling in different locations. For the third quarter of 2026, revenues increased 15% from prior year to CAD 532 million, driven by stronger drilling activity levels in North America and higher average U.S. day rates, partially offset by lower international results. Our operating expenses were impacted by a reactivation of six U.S. rigs during the quarter in response to growing oil-driven demand in the Lower 48. Q3 results also included higher international operating costs from ongoing regional tensions in the Middle East. Q3 adjusted EBITDA was CAD 125 million, which equates to approximately CAD 133 million before share-based compensation expense, compared to prior year EBITDA of CAD 118 million, or approximately CAD 129 million before share-based compensation expense. Net earnings were CAD 21 million, compared to a net loss of CAD 7 million in the third quarter of 2025.

Precision generated CAD 71 million of cash from operations, compared with CAD 76 million in the third quarter of 2025. As previously communicated, cash flow was impacted by large non-cash working capital build associated with growing activity levels in Canada and the U.S. in combination with our semi-annual interest payment. Capital expenditures were CAD 82 million, comprised of CAD 58 million for maintenance and infrastructure and CAD 24 million for upgrades. These investments were made in step with our shareholder returns program as we allocated CAD 31 million towards share repurchases during the quarter. Moving on to our operating segments. In Canada, Q3 drilling activity averaged 73 active rigs, an increase of 10 rigs from the third quarter of 2025. Our reported Q3 daily operating margins were CAD 12,817 compared with CAD 13,007 in the third quarter of 2025. Both activity and margins were in line with prior guidance.

During the quarter, robust heavy oil activity led to increased utilization of our Super Single fleet by 18%, resulting in a higher proportion of days from this rig class. Our sustained year-over-year activity growth throughout 2026 continues to demonstrate the value of our differentiated positioning in both Canada's heavy oil and unconventional natural gas condensate basins. In the U.S., we averaged 43 active rigs, an increase of seven rigs from the third quarter of 2025. Our daily operating margins were US$7,653 compared to US$8,700 in the third quarter of 2025, also within our prior guidance range. Although revenue per day increased, margins were notably impacted by reactivating six rigs in the quarter at a cost of US$2,125 per utilization day. Looking ahead, our focus remains on demonstrating notable margin expansion in Q4 and into 2027. Internationally, Precision averaged seven active rigs, relatively in line with prior year Q3 activity levels.

International day rates averaged US$46,304, a decrease of 14% from prior year Q3. During the quarter, rig margins were unfavorably impacted by elevated operating expenses in the Middle East and rig mix with one of our higher performing rigs in Kuwait being idled this year. That rig is expected to return to work in mid-2027 under a five-year contract. In our Completion and Production Services segment, adjusted EBITDA increased 10% to CAD 21 million. Strong fundamentals in the Canadian market again drove increased well servicing demand, primarily in the heavy oil regions. Our growing rentals business is also delivering incremental year-over-year revenue and EBITDA while strengthening our differentiated full service offering to our customers. Moving on to forward guidance, I will begin with our expectations for the fourth quarter.

Starting in Canada, we continue to see robust demand for our Super Series rigs and expect our Super Triple and Super Single fleets to operate at near full utilization through the winter drilling season. For the fourth quarter, we expect average active rig count to be in the low 70s, which compares to 66 average rigs working in prior year Q4. Keep in mind that Canadian Q4 activity levels are impacted by temporary shutdowns over the Christmas season. Daily operating margins are expected to range between CAD 13,500 and CAD 14,500, consistent with fourth quarter of 2025. In the U.S., our fourth quarter average rig count is expected to be in the low to mid-40s. Margin expansion remains a critical deliverable for the business following the completed reactivations in the second and third quarters.

For Q4, we expect daily operating margins to climb between US$9,500 and US$10,500, a meaningful increase sequentially from Q3. Internationally, we expect to continue operating seven rigs through Q4 with elevated operating costs in the quarter. Our CMP business continues to generate strong free cash flow, driven by our well servicing and surface rental business lines. For Q4, we expect EBITDA to remain in line with prior year levels. Moving to guidance for the full year 2026, our capital expenditures budget increased to a range between CAD 275 million and CAD 285 million. Our increase towards the lower end of the range supports committed long lead purchases for projects to be completed next year. The higher end of the range provides for a pending upgrade opportunity, which would have multiple rigs contracted through 2029 for a large Canadian producer.

Full-year depreciation is expected to be CAD 325 million, and cash interest expense from debt is expected to be approximately CAD 45 million. Our effective tax rate is expected to be approximately 25%-30%. Precision expects business cash taxes to remain low in 2026, with cash taxes slightly increasing in Canada in 2027. There are no updates regarding the CRA dispute, and we are submitting our formal objection in Q4. For 2026, we expect SG&A to be CAD 100 million before share-based compensation expense, inclusive of one-time restructuring costs incurred this year. Share-based compensation guidance for the year ranges between CAD 25 million and CAD 50 million, assuming a share price between $100 and $150 and a one times multiplier. The multiplier can range between zero and two times, which can either reduce or increase our guidance range.

We enter the fourth quarter with over CAD 460 million in total liquidity and are closing in on our long-term target of net debt to adjusted EBITDA ratio below one times. Through the first nine months of 2026, we have reduced debt by CAD 75 million and repurchased CAD 47 million worth of shares. Despite the higher working capital build that is expected this year, we remain committed to reaching our CAD 100 million debt reduction target for 2026 while continuing to repurchase shares in the fourth quarter. With that, I'll pass it over to Carey.

Thank you, Dustin. For my prepared remarks, I will cover three areas. First, the early results of our U.S. market strategy. Second, the improving outlook for Precision in the Canadian market, and third, how our technology offering is critical to delivering for our customers. Before I get to those topics, I want to acknowledge our field crews and leadership in the Middle East who are working in a dynamic environment and keeping people safe. They are delivering for our customers in the region and for the families of all Precision employees. Thank you. Moving on to the U.S., where Precision's strategic approach to strengthening the business is producing results. With an average of 43 active rigs during the quarter compared to 35 active in Q2. Our team has led field performance with well-trained crews supported by our Alpha and Clarity platforms, delivering critical customer KPIs across the fleet.