Precision Drilling Corporation (PD) Earnings Call Transcript & Summary

Thank you. Good day and thank you for standing by. Welcome to the Precision Drilling Corporation 2026 Second Quarter Results Conference Call and Webcast. [Operator Instructions] Please be advised, today's conference is being recorded. I would now like to turn the conference over to your speaker today, Lavonne Zadunayski, Vice President of Investor Relations. Please go ahead.

Thank you, Operator, and welcome, everyone. Today, I'm joined by Kevin Neveu, President and CEO, and Carey Ford, our CFO. Yesterday, we reported our second quarter results, highlighted by robust heavy oil drilling and well service activity in Canada and improving rig utilization in the U.S. Kevin and Carey will review these results, provide an operational update and outlook commentary. Once we have finalized our prepared remarks, we will open the call for questions. Please note that some comments today will refer to non-IFRS financial measures and include forward-looking statements which are subject to a number of risks and uncertainties. For more information on financial measures, forward-looking and risk factors, please refer to our news release and other regulatory filings available on SEDAR+ and EDGAR. As a reminder, we express our financial results in Canadian dollars unless otherwise stated. Kevin, over to you.

Thank you, Lavonne, and good morning and good afternoon. Before I hand the call over to Carey, I would like to make a few comments on the progress toward our 2026 strategic priorities. This year, Precision Drilling aims to grow revenue through differentiated service offering and deepening customer relationships, while generating cash flow and returning it to shareholders through debt reduction and share repurchases. Halfway through the year, we are delivering on these priorities. We have grown year-to-date revenue by 8%, significantly expanded our contract book of executed contracted upgrades, and increased activity in both Canada and the U.S. We are on track to meet our return of capital commitments. In short, we are delivering on what we set out to accomplish in 2026. With that, I will turn the call over to Carey to discuss the financial results released yesterday evening in detail.

Thank you, Kevin. For our second quarter of 2026, revenues increased by 11% from prior year, driven by growing momentum in our Canadian operations and rebounding activity levels in the U.S. Our operating expenses were disproportionately impacted by several U.S. rig activations. That was as we moved from a low of 32 rigs operating in April to an exit of 42 rigs operating on June 30th. Results this quarter also included $3 million in costs related to restructuring our international operation. Q2 adjusted EBITDA was $97 million, which equates to $95 million before share-based compensation recovery, compared to prior year Q2 EBITDA of $108 million, or $112 million before share-based compensation expense. Net earnings were a loss of $1 million compared to net earnings of $16 million in the second quarter of 2025. Precision generated $146 million of cash from operations, equivalent to the second quarter of 2025. Capital expenditures were $76 million, comprised of $46 million for sustaining and infrastructure, and $30 million for rig upgrades. These investments were made in step with our shareholder returns program, reducing debt by $50 million and allocating $12 million towards share buybacks during the quarter. Moving on to our operating segments, in Canada, Q2 drilling activity averaged an all-time record 61 active rigs, an average increase of 11 rigs from Q2 2025, and 1 rig higher than prior guidance. Our reported Q2 daily operating margins were $13,855, inclusive of $3 million in customer upfront payments for upgrades, compared to $15,306 in the second quarter of 2025, which was inclusive of $7 million in upfront payments. Absent these upfront payments, normalized Q2 daily operating margins were $13,331 compared with $13,866 in the second quarter of 2025, exceeding the upper limit of our prior guidance range. Compared to prior year, Precision's normalized operating margins were slightly impacted by rig mix, with a higher proportion of Super Singles and doubles working through the spring. In the U.S., we averaged 35 active rigs compared to an average of 37 sequentially from Q1 and an increase from the 33 rigs we had prior year Q2. Our daily operating margins for the quarter were US$6,212 compared to US$9,291 sequentially from Q1, falling below our prior guidance range. Although revenue per utilization day increased due to stronger pricing and increased technology adoption, margins were negatively impacted by reactivation costs this quarter, as Precision exited Q2 with 42 active rigs, ahead of our prior guidance exit rig count. Internationally, Precision averaged 7 active rigs, relatively in line with prior year Q2 activity levels. International day rates averaged US$50,524, a decrease of 5% from prior year. During the quarter, rig margins were unfavorably impacted by rig mix, with 1 Kuwait rig idled offset by 1 additional rig working in Saudi Arabia. Operating expenses were again impacted by the conflict in the Middle East, and we also incurred $3 million of one-time restructuring charges from closing our office in Dubai. This restructuring is expected to generate annualized savings of $3 million per year. Our C&P segment adjusted EBITDA was $14 million, $4 million higher than prior year Q2. Strong fundamentals in the Canadian market drove increased well servicing demand, primarily in the heavy oil regions. Moving on to forward guidance, I will begin with our expectations for the third quarter of 2026. Starting in Canada, our strong presence in Canada's heavy oil and unconventional natural gas and condensate markets is expected to generate continued activity growth from prior year levels. In the third quarter, we expect average rig counts to average in between the low to mid-70s, which compares to an average of 63 rigs working prior year Q3. As a result of more Super Singles working, our daily operating margins in Canada are expected to range between $12,000 and $13,000. Our expectation is that pricing will remain firm within our Super Single and Super Triple fleet throughout 2026. In the U.S., our third quarter average rig count is expected to be in the low 40s, our highest level since 2023. The coming quarter will again be impacted by reactivations with daily operating margins expected to range between US$7,000 and US$8,000. Our business remains focused on demonstrating margin enhancement following these reactivations, with daily operating margins expected to approach US$10,000 in Q4. Internationally, we expect to run 7 rigs with operating margins lower than prior year due to elevated operating costs in response to the ongoing tensions in the Middle East. Finally, in Q2, Precision secured a 5-year contract for our idled Kuwait rig, bringing our expected international rig count to 8 rigs working by mid-2027, following planned recertification and upgrade work. Our C&P business continues to generate strong free cash flow, driven by our well-servicing and surface rental business lines. For Q3, we expect EBITDA to remain in line with prior year levels. Regarding cash flow, we anticipate Q3 to be a heavier working capital build quarter due to recent activity ramp-up in the Canadian and U.S. operations, in combination with our semi-annual interest payment. In Q4, we expect cash generation to rebound to normal levels. Moving to guidance for the full year 2026, our capital expenditures budget remains at $265 million, and is comprised of $172 million for sustaining and infrastructure and $93 million for upgrades, which remains more weighted to Canada. Full year depreciation is expected to be $320 million, and cash interest expense from debt is expected to be approximately $45 million. Our effective tax rate is expected to be approximately 25% to 30%. PD expects business cash taxes to remain low in 2026, with cash taxes increasing in Canada in 2027. On the tax front, I'll also address our 2018 Notice of Reassessment from the Canada Revenue Agency, just received late July. As disclosed in our press release, Precision will file a notice of objection that intends to vigorously contest this as well as any additional reassessments that may be issued by the CRA. The company and its tax advisors believe that our tax filing position is appropriate and we will provide updates as we work through and resolve this issue in the future. For 2026, we expect SG&A to stay flat at approximately $95 million before share-based compensation expense. As previously communicated, share-based compensation guidance for the year would range between $25 million and $45 million, assuming a share price range of $100 to $140 and a 1x multiplier. Our long-term target to achieve net debt to adjusted EBITDA of less than 1x remains firmly in place. In 2026, we plan to reduce debt levels by $100 million while allocating up to 50% of free cash flow to share repurchases. At the mid-year mark, we have already reduced debt by $75 million and repurchased $16 million worth of shares. Today, we have an average cost of debt of 6.7% and over $502 million in total liquidity. With that, I'll pass it back to Kevin.

Thank you, Carey. For my prepared remarks, I plan to cover three areas. First, progress on growing revenue aligned with our first 2026 strategic priority. Second, an update on our international business. And finally, our North American activity outlook. For the company, second quarter revenue increased 11% year-over-year with a 14% increase in North American operations, offset by an 11% decrease internationally. The Precision team has delivered revenue growth by completing contracted drilling rig upgrades in North America and by demonstrating differentiated technology-driven performance. The progress on contracted upgrades and deepening customer relationships in the second quarter is reflected in the increase in our contract book, with fourth quarter contracts increasing by 12 rigs in Canada and 9 rigs in the U.S., compared to our prior Q1 disclosure in April. On the topic of deepening customer relationships, in addition to rig upgrades and contracts, we view this to mean partnering with our customers, scaling digital technology and operational improvements across multiple rigs, and, in many cases, providing greater flexibility for our customers to execute their drilling plans with Precision. I mentioned at the beginning of this year that Precision had multiple drilling rigs with 25 different customers globally and that we wanted this number to grow. Today, that number is 30 customers, and it is growing, primarily in the U.S. Staying with the U.S., we have made significant progress not only in growing revenue, but also in strengthening the business. We have increased our active rig count by 30% since our last conference call, expanded activity with existing customers, and further concentrated operations in our core markets. We expect reactivation costs and return to continue through the third quarter. However, the foundation we have built positions us for meaningful margin improvement beginning in the fourth quarter and continuing into 2027. The U.S. reactivation costs are certainly a temporary drag on margins, but we view the expenditure as an investment. We are investing in crew training and development, equipment recertification, and technology-driven startup plans to ensure flawless rig activations. The strategy is paying off. This past quarter we had several startups in the Permian and multiple customers who, after working with Precision for a short period, began discussing with our team the addition of a second rig. On the technology front, I want to highlight three recent developments. First, progress on robotics continues with Precision's Alpha™ Robotics rig working for a major in the Montney, continuously outpacing pacesetter wells and setting efficiency and speed records. This technology has been continuously operated for the past two and a half years with 54 wells drilled, over 3 million feet of tubulars handled hands-free, and 17,000 man-free hours on the rig floor. Second, this summer Precision Drilling was awarded a grant from Emissions Reduction Alberta to support the pursuit of a rig floor robotic solution for a Super Triple 1200 rig in the Canadian market. Engineering and planning are well underway and we are in discussions with multiple Canadian customers about our next robotics rig in the country. In addition, we continue to have conversations about Alpha™ Robotics with key existing and potential customers in the U.S. Finally, on the technology front, next month we will open our Canadian Alpha™ Remote Operations Centre on the seventh floor of our Calgary headquarters. The Calgary AROC complements our Houston AROC capabilities by bringing real-time collaboration and local drilling engineering expertise closer to the Canadian customers, while remaining connected to Houston's broader operational expertise. As the scope of remote support expands, the two centers will operate as a single network, bringing together operations, sales, engineering, and other functions across our two headquarters to collaborate on a broader range of rig activities. If you are interested in learning more about how Precision utilizes real-time data-driven insights to drive performance and exceed customer expectations, and you plan to be in Calgary or Houston, please reach out to a member of the Precision team. We would love to give you a tour. For an update on our international operations, I want to once again recognize Precision's leadership and crews for their performance over the past few months amidst the dynamic regional environment. In the face of these challenges, our team continues to focus on personnel safety and with all 7 rigs on delivering excellent results for our customers. As Carey has covered, we are planning for our eighth rig activation next year. During the quarter, we streamlined our regional structure by closing our Dubai office and relocating leadership closer to our customers in Saudi Arabia and Kuwait. The move also helps reduce our cost structure in a region where we expect to have 8 rigs running for the foreseeable future. In Argentina, we, along with our partner, continue to have active conversations with all major operators about potential rig deployments in the region, and we'll update the market as those discussions progress. Moving on to our North American outlook. We expect the Canadian market to continue to demonstrate strength for the foreseeable future. Optimism around Western Canadian infrastructure projects, lower break-even costs for operators, and the return of foreign capital to the basin have provided a unique foundation for increased industry activity. And Precision continues to deliver for customers in the most active Canadian regions with 32 Super Triple rigs available to work in the Montney and related gas and condensate producing areas and 48 Super Single rigs available to work in SAGD applications, the Clearwater and other heavy oil regions. We are running 75 rigs today and expect to reach 80 rigs within the next two weeks. We expect to have full utilization of our Super Triple and Super Single fleets between now and the end of the year and maintain activity levels between 70 and 80 rigs during the third and fourth quarters. Our Canadian drilling fleet continues to advance and we will deliver our 20th Super Single pad rig in September and major Super Triple upgrades in October and November, expanding our ability to deliver for our customers. The outlook for our C&P segment in Canada is also positive. Despite one of the wettest Q2s on record, our business delivered exceptional financial performance with year-over-year growth in activity, revenue, and EBITDA. Our industry leadership position, crew and rig quality, and support systems continue to meet increasing customer requirements in Canada. Q3 is off to a solid start with over 80 rigs working in the field today. In the U.S., in an effort to reposition the business, Precision is meeting a growing set of opportunities with high-quality Super Series assets, a leading digital technology platform, exceptional crews, and robust operational support systems. Our strategy is working not only through increased activity and customer concentration, but also through onboarding new key customers. Based on our conversations with customers, we expect gas activity to be steady, with some temporary pauses in the Northeast drilling programs this fall. Supportive oil pricing is presenting an opportunity for our customers to either add a rig or high-grade their existing service provider. We believe this market presents an excellent backdrop for Precision to increase activity and expand margins between now and the end of the year, setting the foundation for continued success in 2027. I would like to conclude by thanking the Precision crews, field leadership, and all Precision employees for their commitment to safety, customer service, and dedication to Precision. With that, I will hand the call back to the operator for questions.

[Operator Instructions] We'll pause for a moment while we compile our Q&A roster. Our first question comes from Aaron MacNeil with TD Cowen. Your line is open.

We're fielding a lot of questions on the U.S. margin guide for the third quarter. I guess, what assumptions are you making around both the number of rigs being reactivated in Q3, as well as the quantum and total dollars? And how would that have compared to the second quarter?

So, Aaron, I'll let Carey talk about the reactivation cost and the number of reactivations. And I'll give a little bit of commentary about the market backdrop.

Yes. So, Aaron, on the reactivation front, in Q2, we moved, as you know, from 32 rigs up to 42. We had 7 major reactivations during that timeframe. And that climb certainly exceeded our expectations. We thought we would exit with the rig count in the high 30s. So really good traction Q2, but certainly had some impact on margin. When you look at Q3, it's a bit of a rebalancing. We're seeing more increased opportunity in the Permian. And on a per day basis, think of a reactivation cost ranging between $1,500 to upward of $2,000 a day. And that's inclusive of the extra labor required to make sure that we can hit the ground running, we can crew these rigs adequately, and we are ready to go and execute for our customers.

Yes, I'll just add, we're guiding to kind of low 40s rig count in Q3, and that's a result of activating rigs in oil basins. And I mentioned in my comments that we expect a couple of our customers to have pauses in their programs in Q4, which kind of looks for a two- or three-month pause before picking up rigs again in November and December. So that's why we have reactivations with effectively a flat guide.

Got you. Sorry, maybe just another clarification. You guys had mentioned that there was the 7 reactivations more in the second quarter. And so how many are being reactivated in the third quarter or switching basins as you described it?

I think we're expecting to have about 5 rigs reactivated.

Got you. Okay. Okay, great.

Yes, and just since everybody would have the question about when does the reactivation period fall, we've given guidance for Q4 margins of approaching $10,000 a day to kind of point to where, when we have kind of normal activity levels without a high number of reactivations, where we expect margins to shake out, yes.

Yes, no, makes sense. And then Carey, maybe a follow-up on this CRA issue. In the event it comes into play and maybe just a bigger picture, like do you see it as impacting sort of your return of capital commitments?

Okay, so I'm not going to go into specifics, but let me just go through the contingency announcement and I'm sure others would have questions. So, first and foremost, I'll start by saying that we have a very strong conviction in our position and our external advisors believe that our filing position is appropriate. Although we think it's highly unlikely, Aaron, the max liability that we disclosed for any potential future reassessments on this issue would be $155 million plus interest. So to defend our position as a large business case, PD would be required to make an upfront payment of 50% of the assessed amount and the interest. So I would say think of that as about $80 million all in. Paid out over two years. It's difficult to estimate as far as timing. This has been quite sudden, but our estimate today is about $40 million that would be due late 2026 or into early 2027, and then the rest would be spread over the next 24 months. So we could do either a letter of credit, cash or a combination of both, that is yet to be determined. But if we are successful defending our position, we would be reimbursed any cash that we put into this plus interest. And I also state that these processes, they do take a long time. This is likely several years, but we'll be sure to report on progress in a timely manner. So as far as the cash outlay, whether it's a letter of credit or cash, that's to be determined. But our plans as far as capital allocation and how we manage the business hasn't changed at all. And this is an issue that came up. We will work to get through this with the CRA, and we'll move forward.

And sorry, on the tax pools, like I'm not a tax expert at all, but like, are you able to offset that cash outlay with existing tax pools or is it a cash outlay?

But it would accelerate us becoming cash taxable. So that would be a cash outlay payment in a worst-case scenario.

Got you. Okay. Thanks everyone. I'll turn it back.

Next question comes from Keith MacKey with RBC Capital Markets. Your line is open.

Maybe just starting on the Middle East reactivation, can you just maybe, Kevin, speak more broadly what you're seeing in the Middle East now as far as operations, continuity, incremental costs, disruptions, etc.? And then for the reactivation of the Kuwait rig, what are you seeing as far as reactivation costs? And do you expect those to be incurred in 2026 or 2027?

Yes, okay. So more broadly in the region, we've had minor disruptions in activity, measured in single digits, numbers of days over the course of the quarter. But there has been disruptions on primarily getting people in and out of the countries with flights getting canceled and airports being closed. And so that's been the main driver of increased cost. In terms of the opportunity set, so we have 6 rigs in Kuwait. Four are working today. We have the fifth one going to work next year. So we'll have 1 idle rig that we'll continue to market. In Saudi Arabia, we effectively have 3 rigs that are running, and we expect those to run into the foreseeable future. And that really explains the opportunity set for Precision. We've looked at a lot of growth opportunities that require new capital outside of our existing fleet. And what we've seen in recent years is just that the paybacks on that capital investment are way too long for us to be deploying new capital. And so we have a business that's, I wouldn't say it's optimal scale, but it's appropriate scale, generates a lot of cash flow, and it's a good foundation for if market conditions change to where the returns become more attractive, we'll be able to grow. But I think the comment in my opening remarks that we kind of see this as an 8-rig business for the foreseeable future, and that's how we're positioning it. And that really drove into our decision on streamlining our operations and closing our Dubai office because the Dubai office was, I would say, put in place for us to grow the business beyond an 8-rig business. And I think for the foreseeable future, we're going to be maximizing margins and cash flow. In terms of the eighth rig, the rig going back to work in Kuwait, there'll be some capital spend this year, a lot more next year. Think of it kind of in the mid-double digits, kind of in the $12 million to $15 million capital range, that we would recoup that within the first couple of years of the 5-year plus two 1-year extensions contract that we're signing.

Okay, very detailed, appreciate the comments. So appreciate that you've added a lot of rigs to your contract book in the U.S. this quarter. Can you just speak to your strategy there as far as what you expect to contract? One of your competitors just talked about having 50% of their rigs on 6-month plus contracts and the customer is sort of the gating factor as far as how they do that. But what's your approach to term versus spot in this market? Do you see a lot of opportunity to increase margins by getting better rates in the spot market or are you looking to contract more on a longer-term basis with strategic customers?

Okay, well, I think you've covered all the points on the marketing strategy. Let's see if I can hit those. We are seeing rate increases, and we have pushed through rate increases. Some of those showed up in our Q2 day rate numbers, but we expect the rates to continue to move up throughout the course of the year. So that's just a general comment on rates. And as far as term, there's some customer-specific preferences on whether they want a shorter-term contract or a longer-term contract. But a lot of it's driven by kind of where the market is. And I would characterize the market today as being a, call it a 6-month to 1-year term. We have a few customers that want 2-year contracts, but I would say that it's moved a little bit longer term in the past couple of months as customers are looking to lock up high-quality rigs, but it's still in that kind of 6 months to a year type timeframe. In terms of strategy, I covered this in my opening remarks, and I would just point back to how we started the year, what we communicated at our investment day in March. This is deliberate. We're not going after activity and scale for activity and scale's sake. We want to target our existing customers. We want to expand our business with existing customers. We do have a handful of target customers within the U.S. market. The ones that we think are really well aligned with our philosophies on digital technology and safety and performance. And we are making progress on onboarding some new customers. So we're really excited about that. And then the last comment I would make is we're trying to create a more resilient business that will have more stable activity, that will help with business planning, it will help with spreading our fixed cost over a large number of rigs and align with the customer base that really value what we can offer. So I would just say that we're executing exactly how we want to. We're not where we want to be yet, but we're making good progress and some margin pressure in Q2 and Q3 as a result of success is something we're willing to live with.

Got it. Thanks very much. That's it for me.

Thanks, Keith.

Our next question comes from Derek Podhaizer with Piper Sandler. Your line is open.

I wanted to go back to U.S. land and kind of talk through some of these rig moves. So you exited the quarter at 42. Sounds like you're expecting another 5 rigs to be reactivated. That brings you up to 47. Appreciate the guide of low 40s because you have some rig churn up in the Northeast and pause that you've already talked about. But just trying to think through Q4 and into 2027, is 47 rigs kind of the right starting point if all those rigs get contracted for 2027? And then you also talked about supply side, I'm just trying to think through these reactivation expenses into 2027 and maybe your supply side, how many rigs could go back to work. Just trying to work through the upside here. And if my numbers are right on that 42 plus 5, kind of a starting level at 47. So just any help on that would be great.