Precision Drilling(PDS) - 2023 Q3 - Quarterly Report

Q3 2023 Financial Results Announcement Precision Drilling reported strong Q3 2023 results, driven by high demand for its Super Series rigs and technology offerings Highlights and CEO Commentary Precision Drilling reported strong Q3 2023 results, driven by high demand for its Super Series rigs and technology offerings. Revenue increased to $447 million, supported by a 20% rise in Canadian and 26% in U.S. daily drilling rates. Despite lower overall activity, the company generated $89 million in cash from operations, reduced debt by $126 million year-to-date, and is on track to meet its $150 million debt reduction target for 2023. The company also increased its 2023 capital spending budget to $215 million to fund rig upgrades and strategic purchases Q3 2023 Key Financial Metrics | Metric | Q3 2023 | Q3 2022 | Change | | :--- | :--- | :--- | :--- | | Revenue | $447 million | $429 million | +4.2% | | Adjusted EBITDA | $115 million | $120 million | -4.2% | | Net Earnings | $20 million | $31 million | -35.5% | | Net Earnings per Share | $1.45 | $2.26 | -35.8% | | Cash from Operations | $89 million | $8 million | +987% | - Revenue growth was driven by higher daily rates, with Canadian rates up 20% to $32,224 and U.S. rates up 26% to US$35,135[3] - Adjusted EBITDA was impacted by a $31 million share-based compensation charge due to a 41% increase in the company's share price during the quarter[3][7] - The company has reduced total debt by $126 million year-to-date and is on track to meet its $150 million debt reduction target for 2023[3][8] - The 2023 capital spending budget was increased from $195 million to $215 million to support customer-funded rig upgrades and purchase long-lead items[3][8] Financial and Operating Performance This section details Precision Drilling's financial and operational performance for Q3 and year-to-date 2023, showing revenue growth and improved Adjusted EBITDA despite lower drilling activity Three-Month Performance Summary (Q3 2023) For the third quarter of 2023, revenue rose 4% year-over-year to $447 million, driven by stronger drilling and service revenue rates which offset lower activity. U.S. drilling rig utilization days fell 28% and Canadian days fell 3%, while international activity was stable. Adjusted EBITDA was $115 million, down from $120 million in Q3 2022, primarily due to a significant increase in share-based compensation charges ($31 million vs. $6 million). Excluding these charges, underlying performance improved, driven by higher revenue rates Q3 2023 vs Q3 2022 Revenue Per Utilization Day | Region | Q3 2023 | Q3 2022 | Change | | :--- | :--- | :--- | :--- | | U.S. (US$) | $35,135 | $27,847 | +26.2% | | Canada (Cdn$) | $32,224 | $26,927 | +19.7% | - Drilling rig utilization days decreased 28% in the U.S. and 3% in Canada compared to Q3 2022[14] - U.S. operating costs per day increased to US$21,655 from US$18,220 YoY due to higher operating costs, repairs, and the impact of fixed costs over fewer activity days[17] - Net finance charges decreased by $3 million to $20 million compared to Q3 2022, as a result of lower outstanding long-term debt[17][45] Nine-Month Performance Summary (YTD 2023) For the first nine months of 2023, Precision reported a 29% increase in revenue to $1.431 billion and a 109% increase in Adjusted EBITDA to $460 million compared to the same period in 2022. This significant growth was driven by higher revenue rates and increased Canadian activity, which more than offset lower U.S. and international drilling activity. The company generated $330 million in cash from operations and reduced total debt by $126 million during this period Nine-Month Financial Highlights (YTD 2023 vs YTD 2022) | Metric | YTD 2023 | YTD 2022 | Change | | :--- | :--- | :--- | :--- | | Revenue | $1,431 million | $1,107 million | +29.3% | | Adjusted EBITDA | $460 million | $221 million | +108.6% | | Net Earnings | $142.5 million | ($37.8 million) | +477.3% | | Cash from Operations | $330 million | $78 million | +323.4% | - Year-to-date, the company has reduced total debt by $126 million and repurchased $13 million of common shares under its NCIB[17] - Capital expenditures for the nine-month period were $148 million, an increase of $21 million from 2022[17] Strategy and Outlook This section outlines Precision Drilling's strategic priorities, including performance delivery, free cash flow maximization, and debt reduction, alongside a positive market outlook and contract updates Strategic Priorities Precision is focused on three strategic priorities for 2023: delivering high-performance service, maximizing free cash flow, and strengthening the balance sheet through debt reduction. Key achievements include activating more rigs internationally, growing revenue from its Alpha™ and EverGreen™ solutions by 30% YoY, and reducing debt by $126 million year-to-date, keeping it on track for its $150 million annual target - 1. Deliver High Performance, High Value: Activated a seventh rig in the Middle East, with an eighth expected soon, representing over US$500 million in backlog revenue. Announced the acquisition of CWC to expand well servicing[20] - 2. Maximize Free Cash Flow: Grew combined revenue from Alpha™ technologies and EverGreen™ environmental solutions by 30% in Q3 compared to last year. Daily operating margins increased 39% in Canada and 40% in the U.S. YoY[20] - 3. Reduce Debt & Return Capital: On track to reduce debt by at least $150 million in 2023, with $126 million reduced as of September 30. The long-term goal is a $500 million debt reduction between 2022-2025 and a Net Debt to Adjusted EBITDA ratio below 1.0x[20] Market Outlook The market outlook is positive, supported by strong energy fundamentals. In Canada, activity is expected to remain high into 2024, driven by new pipeline capacity (Trans Mountain, Coastal GasLink) and strong demand for Super Triple and Super Single rigs. In the U.S., drilling activity is expected to improve late in Q4 and into 2024 with stable oil prices and new customer budgets. Internationally, earnings are projected to increase by approximately 50% in 2024 due to long-term contracts for eight rigs - Canada: High activity is expected to continue into 2024, supported by the Trans Mountain and Coastal GasLink pipeline expansions. Demand for Super Triple rigs exceeds supply[22] - U.S.: A decline in 2023 activity is expected to reverse, with demand improving late in Q4 2023 and gaining momentum in 2024 as customers set new budgets[24] - International: With eight rigs expected to be active under long-term contracts, international earnings are projected to increase by about 50% in 2024 over 2023 levels[26] - The acquisition of CWC Energy Service Corp. is expected to close in Q4 2023, enhancing the Canadian well service business and providing accretive cash flow in 2024[27] Contracts and Drilling Activity As of October 25, 2023, Precision has an average of 62 rigs under term contract for 2023, a significant increase from 47 in 2022, primarily driven by a doubling of contracted rigs in Canada. For Q4 2023, the company has 57 rigs under term contract. Average active rig count for Q3 2023 was 104, down from 122 in Q3 2022, reflecting lower industry activity in the U.S Average Rigs Under Term Contract (as of Oct 25, 2023) | Region | 2023 (Avg) | 2022 (Avg) | | :--- | :--- | :--- | | U.S. | 34 | 31 | | Canada | 22 | 10 | | International | 6 | 6 | | Total | 62 | 47 | Average Active Rig Count by Quarter | Quarter | 2023 | 2022 | | :--- | :--- | :--- | | Q1 | 134 | 120 | | Q2 | 98 | 98 | | Q3 | 104 | 122 | Capital Allocation This section details Precision Drilling's increased 2023 capital spending budget, primarily for rig upgrades and strategic purchases, and its capital commitments Capital Spending and Free Cash Flow Allocation Precision has increased its 2023 capital spending forecast by $20 million to $215 million. This increase is allocated to support customer-contracted rig upgrades and the strategic purchase of long-lead items. The spending is divided into $155 million for sustaining/infrastructure and $60 million for expansion/upgrades. As of September 30, 2023, the company has capital commitments of approximately $229 million with payments extending through 2026 - 2023 capital spending budget increased to $215 million, up from $195 million[3][34] 2023 Expected Capital Spending Breakdown | Category | Amount | | :--- | :--- | | Sustaining, infrastructure and intangibles | $155 million | | Expansion and upgrades | $60 million | | Total | $215 million | - As of September 30, 2023, Precision had capital commitments of approximately $229 million with payments expected through 2026[35] Segmented Financial Results This section provides a detailed breakdown of Precision Drilling's Q3 2023 financial performance across its Contract Drilling Services, Completion and Production Services, and Corporate segments Segment Overview In Q3 2023, the Contract Drilling Services segment drove performance with an 11% increase in Adjusted EBITDA, while the Completion and Production Services segment remained relatively flat. The Corporate and Other segment reported a larger negative Adjusted EBITDA of $31.2 million, primarily due to higher share-based compensation costs Segment Revenue and Adjusted EBITDA (Q3 2023) | Segment | Revenue (in thousands CAD) | Adjusted EBITDA (in thousands CAD) | | :--- | :--- | :--- | | Contract Drilling Services | 390,728 | 131,701 | | Completion and Production Services | 57,573 | 14,118 | | Corporate and Other | N/A | (31,244) | Contract Drilling Services The Contract Drilling Services segment reported Q3 revenue of $391 million, a 4.3% increase YoY. Adjusted EBITDA grew 11% to $132 million, with the Adjusted EBITDA margin expanding to 33.7% from 31.7% in Q3 2022. This improvement was driven by higher day rates, which offset lower activity, particularly in the U.S. where the average active rig count fell to 41 from 57 YoY Contract Drilling Performance (Q3 2023 vs Q3 2022) | Metric | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Revenue (CAD thousands) | 390,728 | 374,465 | | Adjusted EBITDA (CAD thousands) | 131,701 | 118,599 | | Adjusted EBITDA Margin | 33.7% | 31.7% | - The average number of active U.S. land rigs for Precision decreased to 41 in Q3 2023 from 57 in Q3 2022[38] Completion and Production Services The Completion and Production Services segment generated Q3 revenue of $57.6 million, a slight 1.6% increase from Q3 2022. Adjusted EBITDA decreased by 4.5% to $14.1 million, with margins contracting to 24.5% from 26.1%. The performance reflects a 10.4% decrease in service rig operating hours, which was partially offset by stronger pricing Completion and Production Performance (Q3 2023 vs Q3 2022) | Metric | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Revenue (CAD thousands) | 57,573 | 56,642 | | Adjusted EBITDA (CAD thousands) | 14,118 | 14,788 | | Service rig operating hours | 46,894 | 52,340 | Corporate and Other The Corporate and Other segment reported a negative Adjusted EBITDA of $31 million for Q3 2023, a significant increase from the $14 million loss in Q3 2022. This was primarily driven by higher share-based compensation charges and the impact of a weaker Canadian dollar on translated U.S. dollar-denominated costs - Negative Adjusted EBITDA increased to $31 million in Q3 2023 from $14 million in Q3 2022[41] - The increase in loss was mainly due to higher share-based compensation charges[41] Other Financial Items This section covers other significant financial items, including a substantial increase in share-based compensation, reduced finance charges, and asset divestment Share-based Compensation Share-based compensation expense totaled $30.8 million in Q3 2023, a substantial increase from $5.5 million in Q3 2022. The rise is primarily attributed to cash-settled plans, where expense grew to $30.1 million from $5.5 million due to a 41% increase in Precision's share price during the quarter Share-based Compensation Expense (in thousands CAD) | Period | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Cash settled plans | 30,105 | 5,543 | | Equity settled plans | 701 | — | | Total Expense | 30,806 | 5,543 | - The higher expense in 2023 was primarily due to improved share price performance compared with 2022[43] Other Items Other notable financial items for Q3 2023 include a reduction in net finance charges to $20 million due to lower debt, an income tax expense of $8 million, and the renewal of the Normal Course Issuer Bid (NCIB). Additionally, the company divested 11 million shares of Cathedral Energy Services Ltd. for net proceeds of $10 million - Finance Charges: Net finance charges decreased by $3 million to $20 million YoY, resulting from lower outstanding long-term debt[45] - Income Tax: Income tax expense for the quarter was $8 million, compared to $6 million in Q3 2022[46] - NCIB: The company renewed its Normal Course Issuer Bid, authorizing the repurchase of up to 1,326,321 common shares[47] - Asset Divestment: Divested 11 million common shares of Cathedral Energy Services Ltd. for net proceeds of $10 million[48] Liquidity and Capital Resources This section details Precision Drilling's strong liquidity position, compliance with debt covenants, and average shares outstanding for the reporting periods Liquidity Overview As of September 30, 2023, Precision maintained a strong liquidity position with over $600 million available. Cash on hand was $49 million. Total outstanding debt under its main facilities was $978 million, down from $1.103 billion at year-end 2022. During the quarter, the company repurchased and cancelled US$18 million of its 2026 unsecured senior notes - Ended the quarter with $49 million of cash and more than $600 million of available liquidity[3][17] - Total debt under senior notes and credit facilities was $978 million, a reduction from $1,103 million at the end of 2022[50] - The current blended cash interest cost of debt is approximately 7.0%[50] Debt Covenants As of September 30, 2023, Precision was in full compliance with all financial covenants under its Senior Credit Facility and Real Estate Credit Facilities. The company maintained significant headroom on its key covenant ratios Covenant Compliance as of September 30, 2023 | Covenant | Requirement | Actual Ratio | | :--- | :--- | :--- | | Consolidated senior debt to consolidated covenant EBITDA | < 2.50 | 0.05 | | Consolidated covenant EBITDA to consolidated interest expense | > 2.50 | 6.74 | Average Shares Outstanding For the third quarter of 2023, the weighted average number of basic shares outstanding was 13.607 million, and diluted shares were 13.610 million. For the nine months ended September 30, 2023, the weighted average diluted shares outstanding were 14.858 million Weighted Average Shares Outstanding (in thousands) | Period | Basic Shares | Diluted Shares | | :--- | :--- | :--- | | Three Months Ended Sep 30, 2023 | 13,607 | 13,610 | | Nine Months Ended Sep 30, 2023 | 13,643 | 14,858 | Financial Statements This section presents Precision Drilling's condensed interim consolidated financial statements, including the balance sheet, income statement, and cash flow statement Quarterly Financial Summary This section provides a summary of key financial metrics, including revenue, Adjusted EBITDA, and net earnings, for the past several quarters, allowing for an analysis of recent trends. Q3 2023 revenue of $447 million shows a decrease from the prior two quarters but an increase over Q3 2022 Quarterly Revenue and Net Earnings (in thousands CAD) | Quarter Ended | Revenue | Net Earnings | | :--- | :--- | :--- | | Dec 31, 2022 | 510,504 | 3,483 | | Mar 31, 2023 | 558,607 | 95,830 | | Jun 30, 2023 | 425,622 | 26,900 | | Sep 30, 2023 | 446,754 | 19,792 | Consolidated Statements of Financial Position The balance sheet as of September 30, 2023, shows total assets of $2.81 billion, a slight decrease from $2.88 billion at year-end 2022. Key changes include a reduction in long-term debt to $964 million from $1.09 billion and an increase in total shareholders' equity to $1.38 billion from $1.23 billion Balance Sheet Highlights (in thousands CAD) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | 2,808,201 | 2,876,123 | | Long-term Debt | 963,827 | 1,085,970 | | Total Shareholders' Equity | 1,383,735 | 1,230,529 | Consolidated Statements of Net Earnings (Loss) The income statement for Q3 2023 reports net earnings of $19.8 million on revenue of $446.8 million. This compares to net earnings of $30.7 million in Q3 2022. For the nine-month period, net earnings were $142.5 million, a significant turnaround from a net loss of $37.8 million in the same period of 2022 Income Statement Summary (in thousands CAD) | Period | Revenue | Net Earnings (Loss) | | :--- | :--- | :--- | | Three Months Ended Sep 30, 2023 | 446,754 | 19,792 | | Three Months Ended Sep 30, 2022 | 429,335 | 30,679 | | Nine Months Ended Sep 30, 2023 | 1,430,983 | 142,522 | | Nine Months Ended Sep 30, 2022 | 1,106,690 | (37,776) | Consolidated Statements of Cash Flows The cash flow statement for Q3 2023 shows strong cash generation, with $88.5 million provided by operations, a dramatic increase from $8.1 million in Q3 2022. For the nine-month period, cash from operations was $330.3 million. Key uses of cash included $49.5 million in debt repayments and $51.5 million in property, plant, and equipment purchases during the quarter Cash Flow Summary (in thousands CAD) | Period | Cash from Operations | Cash from Investing | Cash from Financing | | :--- | :--- | :--- | :--- | | Three Months Ended Sep 30, 2023 | 88,500 | (34,278) | (28,327) | | Nine Months Ended Sep 30, 2023 | 330,316 | (157,157) | (145,253) | Supplementary Information This section provides definitions and reconciliations for non-GAAP financial measures and includes a cautionary statement regarding forward-looking information Non-GAAP Financial Measures and Ratios This section defines non-IFRS measures used by management to evaluate performance, such as Adjusted EBITDA, Funds Provided by Operations, Net Capital Spending, and Working Capital. It provides reconciliations of these measures to their most directly comparable IFRS counterparts. For example, Adjusted EBITDA is reconciled to net earnings by adding back items like depreciation, interest, and taxes - Adjusted EBITDA is defined as earnings before income taxes, loss/gain on investments, gain on debt repurchase, finance charges, foreign exchange, gain on asset disposals, and depreciation/amortization[57] - Net Capital Spending is defined as capital expenditures for expansion, maintenance, and infrastructure, less the proceeds from the sale of property, plant, and equipment[60][61] Forward-Looking Statements This section contains a standard safe harbor statement, cautioning investors that the report includes forward-looking information and statements. These statements, which relate to future expectations such as activity levels, day rates, debt reduction, and capital expenditures, are based on current assumptions but are subject to numerous known and unknown risks and uncertainties. These risks include commodity price volatility, customer spending, and geopolitical instability, which could cause actual results to differ materially from expectations - Forward-looking statements in the report cover strategic priorities, capital expenditures, debt reduction plans, anticipated activity levels, and customer adoption of new technologies[71] - Key risks that could affect results include volatility in oil and gas prices, changes in exploration and development activities, competitive risks, and changes in environmental regulations[71]