Precision Drilling Corp. Q3 FY2026 earnings call

• U.S. Market Strategy: Precision is successfully expanding its footprint in the Permian Basin, doubling rig count to 16 from one year ago. The firm has over 50 'warm' (ready-to-go) rigs in the U.S., reducing future reactivation costs. Management expects margin expansion in Q4 as fixed cost absorption improves.
• Canadian Market Outlook: Activity remains at multi-year highs despite wet weather and price headwinds. Heavy oil utilization for Super Single rigs rose 18% YoY. Positive macro developments include the TMX expansion, Canada LNG Phase 1 completion, and the designation of the Pacific Link Pipeline as a project of national interest, potentially unlocking access to tidewater for 1 million barrels/day.
• Technology & Efficiency: The Alpha and Clarity platforms are delivering record contribution margins. The Calgary Remote Ops Center is actively using AI-driven insights to optimize crew performance. Customers are increasingly seeking emissions and diesel reduction solutions, driving success in the Evergreen service line.
• International Operations: Rig margins in the Middle East were unfavorably impacted by regional tensions and higher operating expenses. One high-performing rig in Kuwait is idled but expected to return in mid-2027 under a five-year contract.
• Contract Book Growth: The Canadian contract book grew to 28 rigs in Q3, up from 16 a year ago, reflecting customer consolidation and a desire for long-term efficiency partnerships.

The company reported total revenues of $532 million, a 15% increase year-over-year. The Canadian drilling segment saw robust activity with an average of 73 active rigs (up 10 from prior year), though daily operating margins slightly declined to $12,817 from $13,007 due to mix shifts toward super single rigs. The U.S. drilling segment averaged 43 active rigs (up 7 from prior year); while revenue per day increased, daily operating margins dropped to $7,653 from $8,700 primarily due to the high costs of reactivating six rigs ($2,125 per utilization day). International operations averaged seven active rigs with daily rates decreasing 14% to $46,304, negatively impacted by elevated Middle East operating costs and an idled rig in Kuwait. The Completion and Production (C&P) services segment delivered adjusted EBITDA of $21 million, up 10% year-over-year, driven by strong heavy oil well servicing demand and growth in the rentals business.

• Q4 2026 Canada: Average active rig count expected in the low 70s; daily operating margins guided to $13,500–$14,500 (consistent with Q4 2025).
• Q4 2026 U.S.: Average active rig count expected in the low to mid 40s; daily operating margins guided to $9,500–$10,500, representing a meaningful sequential improvement from Q3.
• Q4 2026 International: Seven active rigs expected with continued elevated operating costs.
• Q4 2026 C&P: Adjusted EBITDA expected to remain in line with prior year levels.
• Full Year 2026 CapEx: Budget increased to $275 million–$285 million to support long-lead purchases and potential upgrades for a large Canadian producer through 2029.
• Financial Targets: Full-year depreciation expected at $325 million; cash interest expense ~$45 million; effective tax rate 25–30%; SG&A ~$100 million (before share-based comp); share-based compensation guidance $25 million–$50 million.
• Balance Sheet: Committed to $100 million debt reduction target for 2026 and continued share repurchases, targeting net debt/adjusted EBITDA below 1.0x.

• International Operational Risks: Elevated operating costs and logistical challenges in the Middle East due to ongoing regional tensions. Financial risk in emerging markets like Argentina, where contract terms have not yet been agreed upon.
• Cost Inflation Pressures: Significant exposure to inflation in labor (retention of high-end field crews) and steel-intensive purchases (drill pipes), compounded by accelerated wear in certain basins. Diesel price volatility impacts supply chains, particularly in the C&P segment where fuel costs are directly absorbed.
• Reactivation Costs: While improving, rig reactivations in the U.S. previously caused significant margin dilution. Future reactivations carry residual cost risks if activity levels fluctuate unexpectedly.
• Regulatory and Tax Uncertainty: Ongoing dispute with the Canada Revenue Agency (CRA), with a formal objection being submitted in Q4, creating uncertainty regarding future tax liabilities.

Q: Analyst asked about the sustainability of Q4 U.S. margin guidance and how reactivation costs will impact 2027 profitability given the current rig count vs. previous peaks.

A: CEO clarified that Q4 margins reflect a more sustainable baseline because the bulk of reactivations occurred earlier in the year. With a higher base activity level (mid-40s rigs) and only single-digit reactivations expected next year, the marginal impact on fleet-wide margins will be significantly lower than in 2026. CFO added that having over 50 'warm' rigs provides confidence in holding these margins without major new reactivation spikes.

Q: Analyst inquired about the shift in contract durations in the U.S. market, asking if operators are moving toward longer-term commitments as rig counts rise.

A: CEO noted a distinct evolution in contracting behavior throughout 2026. Early in the year, contracts were largely spot-to-six-month terms. By mid-year, this shifted to six-to-twelve months. Currently, there are increasing conversations regarding eighteen-to-twenty-four-month contracts, indicating a move toward greater stability and willingness to lock in capacity ahead of potential market tightening, although the broader market remains shorter-term.

Q: Analyst requested details on the potential upgrade opportunity mentioned in the capital expenditure guidance, specifically regarding the number of rigs, types of upgrades, and timing.

A: CEO explained that the 2026 spend relates to a specific Canadian customer opportunity. For 2027, opportunities are finite and limited to low single-digit numbers. In Canada, this involves ERD upgrades in the Montney and pad upgrades for Super Singles in heavy oil regions. In the U.S., it includes reactivating and upgrading Super Triple 1500s for the Permian and Haynesville. Management emphasized these are discrete opportunities aligned with strong contracts, not unlimited pipeline projects.

Q: Analyst asked about inflation drivers impacting global operations and how Precision is managing cost pressures, specifically regarding labor and diesel.

A: CFO identified high-end labor retention and steel-intensive drill pipe purchases as primary inflationary pressures, alongside diesel costs. The vertically integrated model helps mitigate some costs, but the C&P segment directly absorbs fuel costs, requiring close customer collaboration. CEO highlighted that the 'Evergreen' technology offering (batteries, bi-fuel, hydrogen injection) is a key strategic response, helping customers reduce diesel consumption and emissions, which has driven strong demand for this service line. Additionally, recent wage increases in both Canada and the U.S. were necessary to retain crews amidst infrastructure competition.

Q: Analyst sought clarity on international expansion prospects, specifically regarding Argentina and Middle East rig reactivations.

A: CEO stated that while demand for upgraded U.S. rigs in Argentina is high, negotiations are stalled on financial risk mitigation and contract terms. No other international expansions are currently in work. Regarding the Middle East, one rig in Kuwait is scheduled to reactivate in mid-2027 under a five-year contract. Outside of this specific activation, there are no immediate plans to add rigs or expand presence in the region due to prevailing geopolitical and operational risks.