Precision Drilling: U.S. Inflection Arrives, But a $155M Tax Sword Hangs Overhead
Record Canadian activity and a clear U.S. re-acceleration are clouded by a fresh CRA reassessment and reactivation-cost margin drag.
PD.TO · Earnings Call · 2026-07-29
Precision Drilling's second-quarter report offers a classic story of operational momentum colliding with a sudden financial overhang. Revenue climbed 11% year over year, Canada posted an all-time record average of 61 active rigs, and the U.S. exited June with 42 rigs — a 30% increase from the prior call. Yet the quarter still produced a net loss of $1 million, dragged down by U.S. reactivation costs and $3 million of international restructuring. “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.” — Dustin Honing, Chief Financial Officer (CFO) · 2026-07-29 The more consequential news came after the numbers: a Canada Revenue Agency reassessment that could cost up to $155 million plus interest. The juxtaposition sets up a fascinating back-half of 2026.
The U.S. Inflection: Real, But Priced in Margin Sacrifice
Precision's U.S. story has been one of deliberate customer concentration and upgrading high-quality assets. In Q2, that translated to 35 average rigs and a daily margin of US$6,210, below the prior guidance range, as the company moved from a low of 32 rigs in April to 42 at quarter-end. The cost of reactivation was front-loaded — seven major reactivations, with per-day costs ranging from $1,500 to $2,000. “We expect reactivation costs and rig churn 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.” — Carey Ford, President and Chief Executive Officer (CEO) · 2026-07-29 That expectation is unusually specific: management guides Q3 daily margins to US$7,000–8,000 and Q4 to approach US$10,000, a level that would imply a sharp reset in profit power. The company believes it has roughly 50 "warm" rigs that won't need reactivation spending to return to work, giving it a lever to push rig counts into the high 40s by year-end without repeated cost hits. “we have around 50 rigs that are warm and, you know, upgraded warm, have recently worked, that will not require any reactivation costs to go back to work.” — Carey Ford, President and Chief Executive Officer (CEO) · 2026-07-29 This is a genuine inflection, but it bears the fingerprint of prior cycles. In the 2025-04-24 call, Carey Ford was already framing the U.S. scale-up as a fixed-cost absorption story: “There are going to be a little bit of noise in those margins as we increase the number of rigs running with rig mobilizations and rig reactivations... when we get to an appropriate scale level, you should see those margins continue to go up.” — Carey Ford, Chief Financial Officer · 2025-04-24 What's new is the explicit Q4 target and the confidence that 2027 will be better. Whether the market will reward the patience depends on whether oil price stability and gas demand hold. Recall that a year ago, the ramp was largely driven by natural gas basins; today, Precision is adding rigs more weighted toward public operators and at least two known displacements of competitors. That suggests share gains rather than a broad industry upturn, but the company is also seeing rate increases of $500 to $1,000 per day per quarter across the fleet.The CRA Bomb and the Capital Allocation Blind Spot
The biggest single new element of the call was the disclosure of a notice of reassessment from the Canada Revenue Agency, received in late July. The company will contest it, but the potential liability is material: a maximum of $155 million plus interest, with an upfront payment of 50% (~$80 million) likely required even while disputing. Management estimates about $40 million could fall due in late 2026 or early 2027. CFO Dustin Honing was measured but candid:This is a company that has been guiding to a long-term net debt-to-EBITDA target of below 1x and planned $100 million of debt reduction and up to half of free cash flow to buybacks in 2026. The tax overhang injects real uncertainty. In prior quarters, management repeatedly emphasized its commitment to delever and conservative capital allocation, even as it returned increasing amounts to shareholders. Now, a potentially large cash outflow could either be reimbursed with interest if the company prevails or force a slowdown in share repurchases or debt paydown if it loses. The market will likely handicap this as a tail risk, but the immediate impact on capital allocation planning appears contained — management explicitly said its plans "have not changed at all." Still, analysts will press for more detail on exactly which tax years are affected and how tax pools might offset the cash damage.First and foremost, I will start by saying that we have a very strong conviction in our position and our external advisers believe that our filing position is appropriate. Although we think it is highly unlikely, Aaron, the max liability that we disclosed for any potential future reassessments on this issue would be $155 million plus interest.