Precision Drilling Corporation Announces 2022 Fourth Quarter And Year-End Unaudited Financial Results

• Grew AlphaTM revenue by over 60% compared with 2021.
• Increased total paid days for AlphaAutomationTM by over 50% from 2021.
• Ended the year with 70 AC Super Triple AlphaTM rigs, a 49% increase from the beginning of the year.
• Expanded our commercial AlphaAppsTM to 21 versus 16 a year ago and increased paid AlphaAppsTM days by 15% from 2021.
• Exited 2022 with seven field deployed EverGreenTM Battery Energy Storage Systems, 15 EverGreenTM Integrated Power and Emissions Monitoring Systems and 21 high mast LED lighting systems.

• Generated cash provided by operations of $237 million, representing a 70% increase over the prior year.
• Grew our average active rig count by 40% in the U.S. and 30% in Canada as compared with 2021.
• Increased our daily operating margins (revenue less operating costs per utilization day) 41% in the U.S. and 36% in Canada.
• Acquired High Arctic Energy Services Inc's ( High Arctic ) well servicing business and associated rental assets and increased our Completion and Production Services' Adjusted EBITDA to $38 million versus $24 million in 2021.
• Awarded four five-year drilling contracts in Kuwait and renewed three contracts in the Kingdom of Saudi Arabia for five years, increasing our international rig count to eight by mid-2023. We expect our eight long-term contracts to generate steady and reliable cash flow into 2028.

• Reduced debt by $106 million, ending the year with approximately $600 million in available liquidity.
• Returned $10 million of capital to shareholders through share repurchases.
• Reinvested $184 million into our equipment and infrastructure and disposed of non-core and underutilized assets for proceeds of $37 million.
• Hired and trained over 1,300 people new to the industry and increased our number of field coaches who conducted 155 site visits and provided over 10,000 hours of training.
  

2023 Strategic Priorities

Precision's strategic priorities for 2023 are focused on service delivery, maximizing free cash flow through margin expansion and revenue efficiency, and continuing to strengthen our balance sheet. Precision's strategic priorities for 2023 are as follows:

OUTLOOK

The rebound of global energy demand and the impact of a multi-year period of underinvestment in upstream oil and natural gas has resulted in reduced inventories of oil and natural gas and higher commodity prices, providing a supportive outlook for the oilfield services industry. The war in Ukraine and sanctions on Russian hydrocarbons have exacerbated the challenged supply situation and many importing countries are looking toward North America and the Middle East to fill the supply gap from exports of crude oil and natural gas through the global Liquified Natural Gas ( LNG ) market. Constrained natural gas production levels and low natural gas storage volumes have resulted in North American natural gas prices strengthening in the last year. With U.S. LNG exports growing as countries look to displace Russian natural gas and various Canadian LNG projects expected to come online by 2025, we anticipate a sustained period of elevated natural gas drilling activity.

A significant shift by the oil and gas exploration and development industry prioritizing shareholder returns over reinvestment for growth has taken hold and is core to the strategy of most industry participants. As a result, the reinvestment criteria for exploration and production companies are generally set at lower commodity prices, ensuring sustainable free cash flows that can be used to strengthen balance sheets and deliver direct returns to shareholders while maintaining or modestly growing production levels. Despite commodity price volatility, producer development programs and drilling rig demand have remained relatively stable and in the absence of a commodity price collapse we expect this stability will remain.

A strict focus on capital discipline extends through the oilfield service value chain and is evident in the land drilling sector, where despite strong customer demand and high utilization of pad drilling rigs, drilling companies remain reluctant to reinvest cash flows to build new rigs. This shift is a critically important change in the oilfield service supply fundamentals, driving a sustainable and predictable operating environment that generates better industry and investor returns.

At current commodity fundamentals, we anticipate higher demand for our services and improved fleet utilization as customers seek to maintain production levels and replenish inventories, as drilled but uncompleted wells have been depleted over the past several years. However, broad economic concerns exist with respect to recession risk, rising interest rates and geopolitical instability. Notwithstanding current economic uncertainty and commodity price volatility, we expect North American industry activity to further increase in 2023 but at a more modest pace and anticipate near full utilization in the high specification rig market with customers seeking term contracts to secure rigs and ensure fulfilment of their development programs. Accordingly, the tightening of available high specification rigs is expected to drive higher day rates and necessitate customer funded rig upgrades.

In Canada, industry activity is supported by imminent hydrocarbon export capacity increases with the Trans Mountain oil pipeline and LNG Canada that are expected to start-up in 2024 and 2025, respectively. Northwestern Alberta and northeastern British Columbia natural gas liquids and natural gas developments are prime beneficiaries of the LNG Canada project. Recent agreements reached in British Columbia with certain First Nations groups are expected to facilitate drilling license approvals and increased activity in that region. Additionally, large pad drilling programs are ideally suited for Super Triple drilling rigs that have strong customer interest indicated for the next several years. On the oil side, the Clearwater heavy oil play is being developed as a long-term conventional heavy oil development that is well suited for Precision's Super Single rigs. Utilization of Precision's Super Single and Super Triple rigs has reached record levels not seen in the last several years and customers are seeking multi-year rig contracts to ensure access to these rigs.

In the United States while customer demand flattened out late in 2022, there is continued interest to high grade rigs to the latest pad drilling, AlphaAutomationTM equipped rigs as these rigs deliver the best drilling cost efficiency available in the industry. In 2023, we expect a modest increase in demand as lower performing rigs are displaced and rig counts modestly increase to balance with completion activity. Tight supply and firm demand are expected to continue to support drilling rig day rates migrating to leading edge rates.

Interest in our EverGreenTM suite of environmental solutions continues to gain momentum as customers seek meaningful solutions to achieve their emission reduction targets and improve their well economics. We expect our growing AlphaTM technologies offering, paired with our EverGreenTM suite of environmental solutions, to be key competitive differentiators as our predictable and repeatable drilling results deliver exceptional value to our customers by reducing risks, well construction costs and carbon footprint.

The outlook for our Precision Well Servicing business remains positive with strong commodity prices supporting maintenance and completion activity. We successfully acquired and integrated High Arctic's well servicing assets and associated rental business. By leveraging our existing platform and continuing our strict focus on cost control, we have realized annual run-rate cost synergies of approximately $4 million and expect to achieve our $5 million target early in 2023.

Commodity Prices

During the fourth quarter of 2022, average West Texas Intermediate and Western Canadian Select oil prices were higher by 7% and 5%, respectively, from the comparative quarter. While average Henry Hub and AECO natural gas prices improved by 26% and 11%, respectively from 2021.

Contracts

Since the start of 2022, we have signed 80 term contracts. The following chart outlines the average number of drilling rigs under term contract by quarter as of February 8, 2023. For those quarters ending after December 31, 2022, this chart represents the minimum number of term contracts from which we will earn revenue. We expect the actual number of contracted rigs to vary in future periods as we sign additional term contracts.

The following chart outlines the average number of drilling rigs that we had under term contract for 2022 and the average number of rigs we have under term contract as of February 8, 2023.

In Canada, term contracted rigs normally generate 250 utilization days per year because of the seasonal nature of well site access. In most regions in the U.S. and internationally, term contracts normally generate 365 utilization days per year. Internationally, we expect to have eight rigs under long term contract beginning in the second half of 2023.

Drilling Activity

The following chart outlines the average number of drilling rigs that we had working or moving by quarter for the periods noted.

According to industry sources, as of February 8, 2023, the U.S. active land drilling rig count has increased 25% from the same point last year while the Canadian active land drilling rig count has increased 14%. To date in 2023, approximately 79% of the U.S. industry's active rigs and 63% of the Canadian industry's active rigs were drilling for oil targets, compared with 81% for the U.S. and 62% for Canada at the same time last year.

Capital Spending and Free Cash Flow Allocation

We remain committed to disciplined cash flow management, capital spending and returning capital to shareholders. Capital spending in 2023 is expected to be $235 million and by spend category includes $163 million for sustaining, infrastructure and intangibles and $72 million for expansion and upgrades. We expect that the $235 million will be split $223 million in the Contract Drilling Services segment, $11 million in the Completion and Production Services segment and $1 million to the Corporate segment. At December 31, 2022, Precision had capital commitments of $184 million with payments expected through 2026.

We remain committed to our debt reduction plans and in 2023 expect to reduce debt by at least $150 million and allocate 10% to 20% of free cash flow before debt repayments for share repurchases. We have increased our long-term debt reduction target from the beginning of 2022 through to the end of 2025 to $500 million and decreased our target Net Debt to Adjusted EBITDA leverage ratio from below 1.5 times to 1.0 times, while continuing to allocate 10% to 20% of free cash flow before debt principal payments to shareholders.

SEGMENTED FINANCIAL RESULTS

Precision's operations are reported in two segments: Contract Drilling Services, which includes our drilling rig, oilfield supply and manufacturing divisions; and Completion and Production Services, which includes our service rig, rental and camp and catering divisions.

(1) See“FINANCIAL MEASURES AND RATIOS.”

SEGMENT REVIEW OF CONTRACT DRILLING SERVICES

(1) See“FINANCIAL MEASURES AND RATIOS.”

(1) United States lower 48 operations only.
(2) Baker Hughes rig counts.

(1) Canadian operations only.
(2) Baker Hughes rig counts.

Revenue from Contract Drilling Services was $453 million this quarter, 71% higher than 2021, while Adjusted EBITDA increased 101% to $138 million. The increase in revenue and Adjusted EBITDA was primarily due to higher North American activity and day rates.

Drilling rig utilization days (drilling days plus move days) in the U.S. were 5,482, 31% higher than 2021. Drilling rig utilization days in Canada were 6,058, 26% higher than 2021. The increase in utilization days in both the U.S. and Canada was consistent with higher industry activity. Drilling rig utilization days in our international business were 552, consistent with 2021.

Our fourth quarter revenue per utilization day in the U.S. increased 42% from the comparable quarter. The increase was primarily the result of improved pricing, partially offset by lower turnkey revenue. During the fourth quarter, we recognized revenue from turnkey projects of US$4 million compared with US$6 million in 2021. Compared with the same quarter in 2021, drilling rig revenue per utilization day in Canada increased 30% due to higher day rates and increased labor and cost recoveries, partially offset by rig mix. Our international revenue per utilization day for the quarter was slightly lower than 2021 primarily due to the expiration of drilling contracts.

In the U.S., 59% of utilization days were generated from rigs under term contract as compared with 51% in 2021. In Canada, 20% of our utilization days were generated from rigs under term contract, compared with 13% in 2021.

In the U.S., operating costs per utilization day for the quarter were higher by 20% compared with 2021 primarily due to higher repairs and maintenance, field wages and larger crew sizes. Our U.S. daily operating costs during the quarter, excluding turnkey, was US$18,655 compared with US$14,916 the prior year. Our Canadian operating costs on a per utilization day increased 17% as compared with 2021 due to higher field wages, larger crew sizes and higher repairs and maintenance expenses.

Our general and administrative expenses increased $12 million as compared with the fourth quarter of 2021. The higher expense for the quarter pertains to higher share-based compensation charges from our increasing share price and performance multiplier. In the fourth quarter, we recognized $8 million of share-based compensation charges as compared with $1 million in 2021.

SEGMENT REVIEW OF COMPLETION AND PRODUCTION SERVICES

(1) See“FINANCIAL MEASURES AND RATIOS.”

Completion and Production Services revenue for the fourth quarter of 2022 increased to $59 million as compared with $32 million in 2021. The higher revenue was primarily due to increased average service rates and activity. Our fourth quarter service rig operating hours increased 49% from 2021.

During the quarter, Completion and Production Services generated 9% of its revenue from U.S. operations compared with 11% in the comparative period.

Operating costs as a percentage of revenue were 77%, consistent with 2021. As compared to 2021, our fourth quarter general and administrative expenses increased 56%. The higher expense for the quarter is primarily due to incremental costs resulting from our well servicing acquisition in the third quarter of 2022.

Our fourth quarter Adjusted EBITDA increased to $12 million as compared with $6 million in 2021, primarily due to increased average service rates and activity, partially offset by higher share-based compensation expense.

Subsequent to December 31, 2022, we made our remaining payment of $28 million to complete our acquisition of High Arctic's well servicing business and associated rental assets.

SEGMENT REVIEW OF CORPORATE AND OTHER

Our Corporate and Other segment provides support functions to our operating segments. The Corporate and Other segment had negative Adjusted EBITDA of $58 million as compared with $11 million in the fourth quarter of 2021. Our current quarter Adjusted EBITDA was impacted by higher share-based compensation costs from our increased share price and the impact of the increased performance multiplier.

OTHER ITEMS

Share-based Incentive Compensation Plans

We have several cash and equity-settled share-based incentive plans for non-management directors, officers, and other eligible employees. Our accounting policies for each share-based incentive plan can be found in our 2021 Annual Report.

A summary of amounts expensed under these plans during the reporting periods are as follows:

We recognize a financial liability associated with our cash settled share-based incentive plans. The financial liability is remeasured each reporting period with the resultant change in fair value, caused primarily by movements in our share price and incremental vesting of units, recognized as share-based compensation expense in net earnings. As units vest, cash payments reduce the outstanding financial liability. In addition, our PSU plans incorporate performance criteria, established at the date of grant, that adjust the available number of PSUs for settlement from zero to two times the amount originally granted.

Cash settled share-based compensation expense for the quarter was $75 million as compared with $2 million in 2021. The higher expense in 2022 was primarily due to our increasing share price and the impact of a higher performance multiplier. Our closing fourth quarter share price increased 48% from the end of the third quarter. Calculated in accordance with our omnibus equity incentive plan, we increased the performance multiplier applied to vesting PSUs that were granted in the first quarter of 2020. The impact from our increased share price and PSU multiplier resulted in higher share-based compensation charges upon remeasurement at the end of the fourth quarter.

Our equity settled share-based compensation expense for the fourth quarter of 2022 was nil as our Executive PSUs and share options fully vested in the first quarter of 2022.

For the year, share-based compensation expense was $134 million as compared with $57 million in 2021 due primarily to our increased share price, which increased 132% from the start of the year, and the impact of the higher performance multiplier.

As at December 31, 2022, the majority of our share-based compensation plans were classified as cash-settled and will be impacted by changes in our share price. Although accounted for as cash-settled, Precision retains the ability to settle certain vested units in common shares at its discretion.

Finance Charges

Fourth quarter net finance charges were $24 million as compared with $21 million in 2021. The increased finance charges were primarily due to higher variable interest rates on our Senior Credit Facility and the impact of the weaker Canadian dollar on our U.S. dollar denominated long-term debt. Interest charges on our U.S. dollar denominated long-term debt in the fourth quarter were US$15 million ($21 million) as compared with US$15 million ($19 million) in 2021.

Income Tax

Income tax expense for the quarter was $9 million as compared with $1 million in 2021. During the fourth quarter, we did not recognize deferred tax assets on certain Canadian and international operating losses.

LIQUIDITY AND CAPITAL RESOURCES

The oilfield services business is inherently cyclical in nature. To manage this, we focus on maintaining a strong balance sheet, so we have the financial flexibility to manage our growth and cash flow regardless of where we are in the business cycle. We maintain a variable operating cost structure so we can be responsive to changes in demand.

Our maintenance capital expenditures are tightly governed and highly responsive to activity levels with additional cost savings leverage provided through our internal manufacturing and supply divisions. Term contracts on expansion capital for new-build and upgrade rig programs provide more certainty of future revenues and return on our capital investments.

Liquidity

(1) US$53 million expires on November 21, 2023.

At December 31, 2022, we had $1,103 million outstanding under our Senior Credit Facility, Real Estate Credit Facilities and unsecured senior notes as compared with $1,126 million at December 31, 2021. The current blended cash interest cost of our debt is approximately 7.1%.

During the quarter, we increased the capacity of our secured demand letter of credit facility to US$40 million to allow us to issue additional letters of credit after securing certain international drilling contracts.

Senior Credit Facility

The Senior Credit Facility requires we comply with certain covenants including a leverage ratio of consolidated senior debt to consolidated Covenant EBITDA of less than 2.5:1. For purposes of calculating the leverage ratio, consolidated senior debt only includes secured indebtedness.

On June 18, 2021, we agreed with the lenders of our Senior Credit Facility to extend the facility's maturity date and extend and amend certain financial covenants during the Covenant Relief Period. The Covenant Relief Period ended on September 30, 2022. The maturity date of the Senior Credit Facility was extended to June 18, 2025; however, US$53 million of the US$500 million will expire on November 21, 2023. The Senior Credit Facility limits the redemption and repurchase of junior debt subject to a pro forma senior net leverage covenant test of less than or equal to 1.75:1.

Unsecured Senior Notes

The unsecured senior notes require that we comply with certain restrictive and financial covenants including an incurrence based consolidated interest coverage ratio test of consolidated cash flow, as defined in the senior note agreements, to consolidated interest expense of greater than 2.0:1 for the most recent four consecutive fiscal quarters. In the event our consolidated interest coverage ratio is less than 2.0:1 for the most recent four consecutive fiscal quarters, the unsecured senior notes restrict our ability to incur additional indebtedness.

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