Precision Drilling Corporation
Annual Report 2018

Plain-text annual report

Precision Drilling Corporation 2018 Annual Report Precision Management’s Discussion and Analysis Consolidated Financial Statements and Notes Precision Drilling Corporation 2018 What’s Inside 5 About Precision 9 2018 Highlights and Outlook 14 5 Understanding Our Business Drivers 14 The Energy Industry 19 A Competitive Operating Model 23 An Effective Strategy 25 2018 Results 26 2018 Compared with 2017 27 2017 Compared with 2016 28 Segmented Results 31 Quarterly Financial Results 34 Financial Condition 34 Liquidity 35 Capital Management 36 Sources and Uses of Cash 37 Capital Structure 401 Accounting Policies and Estimates 44 Risks in Our Business 55 Evaluation of Controls and Procedures 56 Management’s Report to the Shareholders 57 Independent Auditors’ Reports 59 Consolidated Financial Statements and Notes 92 Supplemental Information 94 Shareholder Information 95 Corporate Information 2018 SHARE TRADING SUMMARY The Toronto Stock Exchange (TSX) Volume (millions) Daily Closing Sha re Price ( Cdn $) ) $ n d C ( e c i r P e r a h S $6 $4 $2 $- Jan Feb Mar Apr il May June July Aug Sep t Oct Nov Dec Toronto (TSX:PD) High: $5.33 Low: $2.25 Close December 31, 2018: $2.37 Volume Traded: 514,932,362 The New York Stock Exchange (NYSE) Volume (millions) Daily Closing Sha re Price ( US $) $6 $4 $2 ) $ S U ( e c i r P e r a h S $- Jan Feb Mar Apr il May June July Aug Sep t Oct Nov Dec New York (NYSE: PDS) High: $4.14 Low: $1.62 Close December 31, 2018: $1.74 Volume Traded: 475,910,527 ) s n o i l l mi ( e m u o V l 9 6 3 - 9 6 3 - ) s n o i l l mi ( e m u o V l MD&A Management’s Discussion and Analysis information business This management’s discussion and analysis to help you (MD&A) contains financial and our understand performance. Information is as of March 1, 2019. This MD&A focuses on our Consolidated Financial Statements and Notes and includes a discussion of known risks and uncertainties relating to our business and the oilfield services sector. You should read this MD&A with the accompanying audited Consolidated Financial Statements and Notes, which have been prepared in accordance with International Financial Reporting Standards (IFRS) and with the information in Cautionary Statement About Forward-Looking Information and Statements on page 2. The terms we, us, our, Precision Drilling and Precision mean Precision Drilling Corporation and our subsidiaries and include any partnerships that we are part. All amounts are otherwise stated. in Canadian dollars unless Precision Drilling Corporation 2018 1 Management’s Discussion and Analysis CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING INFORMATION AND STATEMENTS We disclose forward-looking information to help current and prospective investors understand our future prospects. Certain statements contained in this MD&A, including statements that contain words such as could, should, can, anticipate, estimate, intend, plan, expect, believe, will, may, continue, project, potential and similar expressions and statements relating to matters that are not historical facts constitute forward-looking information within the meaning of applicable Canadian securities legislation and forward-looking statements within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995 (collectively, forward-looking information and statements). Our forward-looking information and statements in this MD&A include, but are not limited to, the following:  our outlook on oil and natural gas prices  our expectations about drilling activity in North America and the demand for drilling rigs  our capital expenditure plans for 2019  our 2019 strategic priorities  the potential impact liquefied natural gas export development could have on North American drilling activity  our expectations that new or newer rigs will enter the markets we currently operate in  our ability to remain compliant with our senior secured credit facility financial debt covenants. The forward-looking information and statements are based on certain assumptions and analysis made by Precision in light of our experience and our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate in the circumstances. These include, among other things:  our ability to react to customer spending plans as a result of changes in oil and natural gas prices  the status of current negotiations with our customers and vendors  customer focus on safety performance  existing term contracts are neither renewed or terminated prematurely  continued market demand for drilling rigs  our ability to deliver rigs to customers on a timely basis  the general stability of the economic and political environment in the jurisdictions we operate in  the impact of an increase/decrease in capital spending. Undue reliance should not be placed on forward-looking information and statements. Whether actual results, performance or achievements will conform to our expectations and predictions is subject to a number of known and unknown risks and uncertainties which could cause actual results to differ materially from our expectations. Such risks and uncertainties include, but are not limited to:  volatility in the price and demand for oil and natural gas  fluctuations in the level of oil and natural gas exploration and development activities  fluctuations in the demand for contract drilling, directional drilling, well servicing and ancillary oilfield services  our customers’ inability to obtain adequate credit or financing to support their drilling and production activity  changes in drilling and well servicing technology, which could reduce demand for certain rigs or put us at a competitive advantage  shortages, delays and interruptions in the delivery of equipment supplies and other key inputs  liquidity of the capital markets to fund customer drilling programs  availability of cash flow, debt and equity sources to fund our capital and operating requirements, as needed  the impact of weather and seasonal conditions on operations and facilities  competitive operating risks inherent in contract drilling, directional drilling, well servicing and ancillary oilfield services  ability to improve our rig technology to improve drilling efficiency  general economic, market or business conditions  the availability of qualified personnel and management  a decline in our safety performance which could result in lower demand for our services  changes in laws or regulations, including changes in environmental laws and regulations such as increased regulation of hydraulic fracturing or restrictions on the burning of fossil fuels and greenhouse gas emissions, which could have an adverse impact on the demand for oil and natural gas  terrorism, social, civil and political unrest in the foreign jurisdictions where we operate Precision Drilling Corporation 2018 Annual Report 2  fluctuations in foreign exchange, interest rates and tax rates, and  other unforeseen conditions which could impact the use of services supplied by Precision and our ability to respond to such conditions. Readers are cautioned that the foregoing list of risk factors is not exhaustive. You can find more information about these and other factors that could affect our business, operations or financial results in reports on file with securities regulatory authorities from time to time, including but not limited to our annual information form (AIF) for the year ended December 31, 2018, which you can find in our profile on SEDAR (www.sedar.com) or in our profile on EDGAR ( www.sec.gov). All of the forward-looking information and statements made in this MD&A are expressly qualified by these cautionary statements. There can be no assurance that actual results or developments that we anticipate will be realized. We caution you not to place undue reliance on forward-looking information and statements. The forward-looking information and statements made in this MD&A are made as of the date hereof. We will not necessarily update or revise this forward-looking information as a result of new information, future events or otherwise, unless we are required to by securities law. NON-GAAP MEASURES In this MD&A, we reference additional generally accepted accounting principles (GAAP) measures that are not defined terms under IFRS to assess performance because we believe they provide useful supplemental information to investors. Adjusted EBITDA We believe that adjusted EBITDA (earnings before income taxes, loss or gain on redemption and repurchase of unsecured senior notes, finance charges, foreign exchange, impairment of property, plant and equipment, impairment of goodwill and depreciation and amortization), as reported in our Consolidated Statement of Loss, is a useful measure, because it gives an indication of the results from our principal business activities prior to consideration of how our activities are financed and the impact of foreign exchange, taxation and depreciation and amortization charges. Covenant EBITDA Covenant EBITDA, as defined in our Senior Credit Facility agreement, is used in determining the Corporation’s compliance with its covenants. Covenant EBITDA differs from Adjusted EBITDA by the exclusion of bad debt expense, restructuring costs and certain foreign exchange amounts. Operating Loss We believe that operating loss is a useful measure because it provides an indication of the results of our principal business activities before consideration of how those activities are financed and the impact of foreign exchange and taxation. Operating loss is calculated as follows: Year ended December 31 (thousands of dollars) Revenue Expenses: Operating General and administrative Restructuring Other recoveries Depreciation and amortization Impairment of goodwill Impairment of property, plant and equipment Gain on re-measurement of property, plant and equipment Operating loss Foreign exchange Finance charges Loss (gain) on redemption and repurchase of unsecured senior notes Income taxes Net loss 2018 1,541,189 1,067,871 112,387 - (14,200 ) 365,660 207,544 - - (198,073 ) 4,017 127,178 (5,672 ) (29,326 ) (294,270 ) 2017 1,321,224 926,171 90,072 - - 377,746 - 15,313 - (88,078 ) (2,970 ) 137,928 9,021 (100,021 ) (132,036 ) 2016 951,411 607,295 110,287 5,754 - 391,659 - - (7,605 ) (155,979 ) 6,008 146,360 239 (153,031 ) (155,555 ) 3 Management’s Discussion and Analysis Funds Provided by (Used In) Operations We believe that funds provided by (used in) operations, as reported in our Consolidated Statements of Cash Flow, is a useful measure because it provides an indication of the funds our principal business activities generate prior to consideration of working capital, which is primarily made up of highly liquid balances. Working Capital We define working capital as current assets less current liabilities as reported in our Consolidated Statement of Financial Position. Precision Drilling Corporation 2018 Annual Report 4 About Precision Management’s Discussion and Analysis Precision Drilling Corporation provides onshore drilling and completion and production services to exploration and production companies in the oil and natural gas industry. Headquartered in Calgary, Alberta, Canada, we are a large oilfield services company with broad geographic scope in North America. We also have operations in the Middle East. Our common shares trade on the Toronto Stock Exchange, under the symbol PD, and on the New York Stock Exchange, under the symbol PDS. Vision Our vision is to be globally recognized as the High Performance, High Value provider of land drilling services. You can read about our strategic priorities for 2019 on page 24. COMPETITIVE ADVANTAGE From our founding as a private oilfield drilling contractor in the 1950s, Precision has grown to become one of the most active drillers in North America. Our competitive advantage is underpinned by five distinguishing features:  a competitive operating model that drives efficiency, quality and cost discipline  a culture focused on safety and performance  size and scale of operations that provide higher margins and better service capabilities  high quality standardized equipment and control system with process automation control and advanced digital backbone systems to deliver efficient, consistent and safe drilling services, and  a capital structure that provides long-term stability, flexibility and liquidity that allows us to take advantage of business cycle opportunities. CORPORATE GOVERNANCE At Precision, we believe that a transparent culture of corporate governance and ethical behaviour in decision-making is fundamental to the way we do business. We have a diverse and experienced Board of Directors (Board). Our directors have a history of achievement and an effective mix of skills, knowledge, and business experience. The directors oversee the conduct of our business, provide oversight in support of future operations and monitor regulatory developments and governance best practices in Canada and the U.S. Our Board also reviews our governance charters, guidelines, policies and procedures to make sure they are appropriate and that we maintain high governance standards. Our Board has established three standing committees, comprised of independent directors, to help it carry out its responsibilities effectively:  Audit Committee  Corporate Governance, Nominating and Risk Committee, and  Human Resources and Compensation Committee. The Board may also create special ad hoc committees from time to time to deal with important matters that arise. You can find more information about our approach to governance in our management information circular, available on our website (www.precisiondrilling.com). 5 Management’s Discussion and Analysis TWO BUSINESS SEGMENTS We operate our business in two segments, supported by vertically integrated business support systems. Precision Drilling Corporation Contract Drilling Services ● Drilling rig operations – Canada – U.S. – International ● Directional drilling operations – Canada – U.S. Completion and Production Services ● Canada and U.S. – Service rigs ● Canada – Snubbing – Camps and catering – Equipment Rentals Business support systems ● Sales and marketing ● Procurement and distribution ● Manufacturing ● Equipment maintenance ● Engineering and certification Corporate support ● Information systems ● Health, safety and environment ● Human resources ● Finance ● Legal and enterprise risk management 2018 Revenue by Segment Completion and Production Services 10% 2018 Revenue by Location International 12% Ca nada 37% Contract Drilling Services 90% U.S. 51% Precision Drilling Corporation 2018 Annual Report 6 Contract Drilling Services We provide onshore drilling services to exploration and production companies in the oil and natural gas industry, operating in Canada, the U.S. and internationally. We are a large, multi-basin oilfield operator servicing approximately 26% of the active land drilling market in Canada and 7% of the active U.S. market. We also have an international presence with operations in the Middle East and Mexico. At December 31, 2018, our Contract Drilling Services segment consisted of:  236 land drilling rigs, including: – 117 in Canada – 102 in the U.S. – 5 in Kuwait – 5 in Mexico – 4 in Saudi Arabia – 2 in the Kurdistan region of Iraq – 1 in the country of Georgia  directional drilling services in Canada and the U.S.  engineering, manufacturing and repair services, primarily for Precision’s operations  centralized procurement, inventory and distribution of consumable supplies for our global operations  18 Canadian and four U.S. land drilling rigs designated as held for sale . At December 31, 2018, we had 236 Super Series drilling rigs. Our Super Series rigs are highly mobile and mechanized, which make them safer and more efficient in drilling directional and horizontal wells than older generation drilling rigs. Our Super Series rigs have a broad range of features to meet a diverse range of customer needs with a focus on high efficiency development drilling applications, from drilling shallow- to medium-depth wells to deeper, extended reach horizontal well bores and all depths of conventional wells. Available features include alternating current (AC) power, digital control systems, integrated top drive, omni-directional pad walking systems for multi-pad well drilling, highly mechanized pipe handling, and high capacity mud pumps. Contract Drilling Revenue $ Millions $2,500 $2,000 $1,500 $1,000 $500 $0 2014 2015 2016 2017 2018 Contract Drilling Adjusted EBITDA $ Millions $1,000 $800 $600 $400 $200 $0 Contract Drilling Utilization Days 80,000 60,000 40,000 20,000 0 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 7 Management’s Discussion and Analysis Completion and Production Services We provide well completion, workover, abandonment, and re-entry preparation services, as well as snubbing units for pressure control services and equipment rentals to oil and natural gas exploration and production companies in Canada and the U.S. On an operating hour basis in 2018, we serviced approximately 12% of the well completion and workover service rig market demand in Canada and less than 1% in the U.S. At December 31, 2018, our Completion and Production Services segment consisted of: ∎ 198 well completion and workover service rigs, including: – 190 in Canada – 8 in the U.S. ∎ 12 snubbing units in Canada ∎ approximately 1,700 oilfield rental items, including surface storage, small-flow wastewater treatment, power generation, and solids control equipment, primarily in Canada ∎ 132 wellsite accommodation units in Canada ∎ 43 drill camps and four base camps in Canada ∎ 10 large-flow wastewater treatment units, 22 pumphouses and eight potable water production units in Canada. Completion and Production Revenue $ Millions $400 Completion and Production Adjusted EBITDA $ Millions $100 Completion and Production Service Rig Hours Hours 400,000 $300 $200 $100 $0 $50 $0 -$50 300,000 200,000 100,000 0 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Precision Drilling Corporation 2018 Annual Report 8 2018 Highlights and Outlook Management’s Discussion and Analysis Adjusted EBITDA, funds provided by operations and working capital are Non-GAAP measures. See page 3 for more information. Financial Highlights Year ended December 31 (thousands of dollars, except where noted) Revenue Adjusted EBITDA Adjusted EBITDA % of revenue Net loss Cash provided by operations Funds provided by operations Investing activities Capital spending Expansion Upgrade Maintenance and infrastructure Intangibles Proceeds on sale Net capital spending Business acquisition Loss per share ($) Basic and diluted n/m – calculation not meaningful. Operating Highlights Year ended December 31 Contract drilling rig fleet Drilling rig utilization days Canada U.S. International Revenue per utilization day Canada (Cdn$) U.S. (US$) International (US$) Operating cost per utilization day Canada (Cdn$) U.S. (US$) Service rig fleet Service rig operating hours Revenue per operating hour (Cdn$) 2018 1,541,189 375,131 24.3% (294,270) 293,334 311,214 35,444 30,757 48,375 11,567 (24,457) 101,686 — % increase/ (decrease) 16.6 23.0 122.9 151.7 69.2 196.7 (17.1 ) 87.6 (50.1 ) 64.8 22.3 — 2017 1,321,224 304,981 23.1% (132,036) 116,555 183,935 11,946 37,086 25,791 23,179 (14,841) 83,161 — % increase/ (decrease) 31.7 33.7 2016 1,003,233 228,075 % increase/ (decrease) (38.6) (51.9) (15.1 ) (4.9 ) 74.6 (92.0 ) 86.7 (25.7 ) n/m 89.3 (57.5 ) (100.0 ) 22.7% (155,555) 122,508 105,375 148,887 19,862 34,723 — (7,840) 195,632 12,200 (57.2) (76.3) (70.5) (58.8) (59.0) (28.8) — (19.9) (56.4) n/m (57.3) (1.00) 122.2 (0.45) (15.1 ) (0.53) 2018 236 18,617 26,714 2,920 21,644 21,864 50,469 14,493 14,337 210 157,467 709 % increase/ (decrease) (7.8) (1.4) 30.4 - 2.4 10.1 0.5 10.3 3.5 - (8.9) 11.3 2017 256 18,883 20,479 2,920 21,143 19,861 50,240 13,140 13,846 210 172,848 637 % increase/ (decrease) 0.4 48.4 80.5 4.8 (13.7 ) (24.0 ) 9.8 (7.8 ) (10.9 ) 1.4 73.8 (1.4 ) 2016 255 12,722 11,343 2,786 24,509 26,145 45,753 14,258 15,547 207 99,451 646 % increase/ (decrease) 1.6 (26.2 ) (46.4 ) (31.8 ) (9.1 ) (2.2 ) 5.2 (4.2 ) (0.5 ) 27.0 (33.5 ) (17.6 ) 9 Management’s Discussion and Analysis Financial Position and Ratios December 31, (thousands of dollars, except ratios) Working capital(1) Working capital ratio Long-term debt Total long-term financial liabilities Total assets Enterprise value(2) Long-term debt to long-term debt plus equity(3) Long-term debt to cash provided by operations Long-term debt to enterprise value (1) See NON-GAAP MEASURES on page 3 of this report. (2) Share price multiplied by the number of shares outstanding plus long-term debt minus cash. See page 39 for more information. (3) Net of unamortized debt issue costs. 232,121 2.1 1,730,437 1,754,059 3,892,931 2,782,596 0.5 14.8 0.6 December 31, 2018 240,539 1.9 1,706,253 1,723,350 3,636,043 2,305,890 0.5 5.8 0.7 December 31, 2016 230,874 2.0 1,906,934 1,946,742 4,324,214 3,937,737 0.5 15.6 0.5 2017 2018 OVERVIEW While global commodity prices strengthened in 2018, the year was beleaguered with extreme volatility, particularly in the Canadian market. In the U.S., West Texas Intermediate (WTI) oil prices averaged US$65 per barrel and Henry Hub natural gas prices averaged US$3.07 per MMBtu, levels supportive of unconventional resource development. However, a volatile and uncertain oil price outlook and renewed focus on free cash flow has encouraged conservatism in customer spending. In Canada, acute pipeline takeaway shortfalls and growing uncertainty in regulatory policy caused immense pressure on regional commodity prices and subsequent activity levels, particularly towards the end of the year. In early December the Alberta government instituted mandatory oil production curtailments as a vehicle to address regional oil price differentials relative to WTI oil prices. For the year ended December 31, 2018, our net loss was $294 million, or $1.00 per diluted share, compared with a net loss of $132 million, or $0.45 per diluted share in 2017. During 2018 we incurred a goodwill impairment charge of $208 million related to our Canada contract drilling and U.S. directional drilling businesses, that after tax, increased our net loss by $199 million and net loss per diluted share by $0.68. Revenue in 2018 was $1,541 million, or 17% higher than in 2017, mainly due to higher activity and day rates in our U.S. contract drilling operations. Contract Drilling Services revenue was up 19%, while Completion and Production Services revenue was down 2%. Our U.S. drilling activity increased 30% in 2018 while Canadian and international drilling activity remained consistent with 2017. Adjusted EBITDA in 2018 was $375 million, or 23% higher than in 2017. Our Adjusted EBITDA margin was 24%, slightly higher than 2017. Adjusted EBITDA improved in 2018 primarily due to increased U.S. drilling activity and day rates. Adjusted EBITDA as a percentage of segment revenue for the year in our Contract Drilling Services segment was 30%, compared with 29% in the prior year, while Adjusted EBITDA as a percentage of segment revenue from our Completion and Production Services segment was 10%, compared to 8% in 2017. The improved percentages achieved in our Completion and Production Services segment were the result of improved day rates. Our portfolio of term customer contracts, a scalable operating cost structure, and economies achieved through vertical integration of the supply chain help us manage our Adjusted EBITDA percentages. Capital expenditures for the purchase of property, plant and equipment were $126 million in 2018, an increase of $28 million over 2017. Capital spending for 2018 included $66 million for upgrade and expansion capital, $48 million for the maintenance of existing assets and infrastructure and $12 million for intangibles related to a new enterprise-wide resource planning (ERP) system. In 2018 we continued to invest in our fleet adding two new-build drilling rigs in the U.S., completing 31 rig upgrades, and commencing the build of our sixth Kuwait rig, all of which were backed by long-term contracts and within a constrained expansion and upgrade capital spend of approximately $66 million. Under IFRS, we are required to assess the carrying value of assets in our cash-generating units (CGUs) containing goodwill annually and when indicators of impairment exist. Due to the decrease in oil and natural gas well drilling in Canada and the outlook for activity in Canada and in our directional drilling division in the U.S., we recognized a $208 million goodwill impairment charge. The impairment charge represents the full amount of goodwill attributable to our Canadian contract drilling operation and our U.S. directional drilling operations. During the year we redeemed US$80 million and repurchased and cancelled US$3 million of our 6.5% unsecured senior notes due 2021 and repurchased and cancelled US$49 million principal amount of our 5.25% unsecured senior notes due 2024. Precision Drilling Corporation 2018 Annual Report 10 OUTLOOK Contracts Term customer contracts provide a base level of activity and revenue. As of March 1, 2019, we had term contracts in place for an average of 54 rigs: six in Canada, 40 in the U.S. and eight internationally for 2019. In Canada, term contracted rigs normally generate 250 utilization days per rig year because of the seasonal nature of wellsite access. In most regions in the U.S. and internationally term contracts normally generate 365 utilization days per rig year. In 2018, we had an average of 63 drilling rigs working under term contracts and revenue from these contracts was approximately 49% of our total contract drilling revenue for the year. In 2018, approximately 49% of our total contract drilling revenue was generated from rigs under term contracts. Pricing, Demand and Utilization Volatility in global crude prices remained a key theme throughout 2018, particularly towards the end of the year with concerns over the health of the global economy, ongoing trade wars, varying degrees of OPEC and non-OPEC production cuts and continued growth in U.S. production driving uncertainty in supply and demand fundamentals. The WTI oil price closed the year at US$45.41 per barrel. Since then, WTI has hovered in the mid-US$50’s per barrel range and closed at US$55.80 per barrel on March 1, 2019. A similar phenomenon played out in other grades of crude such as Western Canada Select (WCS) and Permian regional pricing whereby mid-to late 2018 differentials widened to extreme levels largely as a result of takeaway capacity constraints in each respective market. Year-to-date in 2019 differentials have narrowed and are expected to revert to more normalized levels in the Permian with incremental takeaway capacity added mid-year, while in Canada WCS differentials are expected to remain volatile but show greater stability with the province of Alberta having instituted production constraints at the end of 2018 in addition to incremental rail capacity and potential increased pipeline takeaway capacity. Natural gas prices have remained relatively rangebound by historical standards as growth in associated gas from unconventional oil development, higher than average storage levels, infrastructure constraints and the lack of a fully developed export market from North America continue to cap pricing. Natural gas prices in the U.S., referenced by the Henry Hub price on the New York Mercantile Exchange (NYMEX), averaged US$3.07 per MMBtu in 2018, and closed the year at US$2.94 per MMBtu. In Canada, the AECO natural gas benchmark experienced price weakness and volatility in 2018 particularly in the summer months driven by plant maintenance, pipeline shut-ins, and challenges exporting natural gas as a Canadian LNG export industry has not been developed leaving a well-supplied U.S. market as the only export option for Canadian natural gas. Differences between NYMEX (U.S.) prices and AECO (Canada) prices are expected to continue if Canadian export markets remained challenged. The rig count at March 1, 2019 was 30% lower in Canada than it was a year ago while the year-to-date rig count has averaged 48% less than 2018. Activity for the remainder of the year is expected to be determined by the strength in commodity prices and the resulting oil and natural gas customer budgets. In the U.S., strengthening crude prices have resulted in increased drilling activity and demand for our rigs. As a result, spot market pricing and activity each increased throughout 2018 and have improved further year-to-date in 2019. As of March 1, 2019, the rig count was 5% higher than the same time last year and has averaged 10% higher year-to-date compared to 2018. Activity levels for the remainder of 2019 are expected to be dependent on commodity prices and resulting customer budgets. The Canadian to U.S. dollar exchange rate averaged US$0.7712 (Cdn$/US$1.2966) for 2018 and closed the year at US$0.7325 (Cdn$/US$1.36521). The lower Canadian dollar relative to the U.S. dollar serves to partially offset the impact of lower U.S. dollar-denominated crude oil and natural gas prices for Canadian exploration and production companies. Year to date, the Canadian dollar has strengthened against the U.S. dollar and as of March 1, 2019, the Canadian dollar closed at US$0.7518. International We currently have eight rigs working on term contracts with five in Kuwait and three in the Kingdom of Saudi Arabia. During 2018, we announced the award of one new-build ST-3000 drilling rig in Kuwait under a five year take-or-pay contract with an optional one-year extension. We expect the sixth rig to commence drilling operations in the third quarter of 2019. 11 Management’s Discussion and Analysis Upgrading the Fleet The industry trend toward more complex drilling programs has accelerated the retirement of older generation, less capable rigs. Over the past several years, we and some of our competitors have been upgrading the drilling rig fleet by building new rigs, upgrading existing rigs, and decommissioning lower capacity rigs. We believe this retooling of the industry-wide fleet has been making legacy rigs virtually obsolete in North America. With the completion of our new-build rig program and upgrades of existing rigs, our fleet consisted of 236 Super Series rigs and 22 rigs identified and held for sale as at December 31, 2018. Capital Spending Capital spending in 2019 is expected to be $169 million and includes $53 million for sustaining and infrastructure and $116 million for upgrade and expansion, approximately $68 million of which relates to the completion of our sixth new-build rig in Kuwait. We expect that the $169 million will be split $161 million in the Contract Drilling Services segment, $6 million in the Completion and Production Services segment and $2 million to the Corporate segment. Precision Drilling Corporation 2018 Annual Report 12 Revenue and Adjusted EBITDA Revenue Adjusted EBITDA EBITDA Margin s n o i l l i M $ $2,500 $2,000 $1,500 $1,000 $500 $0 2014 2015 2016 2017 2018 50% 40% 30% 20% 10% 0% % n i g r a M Funds and Cash Provided By Operations s n o i l l i M $ Funds provided by operations Cash provided by operations $800 $700 $600 $500 $400 $300 $200 $100 $0 Drilling Utilization Days 80,000 s y a D 60,000 40,000 20,000 0 International U.S. Canada 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 13 Management’s Discussion and Analysis Understanding Our Business Drivers Management’s Discussion and Analysis THE ENERGY INDUSTRY Precision operates in the energy services business, which is an inherently challenging cyclical sector of the energy industry. We depend on oil and natural gas exploration and production companies to contract our services as part of their exploration and development activities. The economics of their businesses are dictated by the current and expected future margin between their finding and development costs and the eventual market price for the commodities they produce: crude oil, natural gas, and natural gas liquids. Conventional / Unconventional wells Oil and natural gas reservoirs can be conventional, where a vertical well is drilled into a highly pressurized reservoir allowing the oil and natural gas to flow freely shortly after completing the drilling process. Unconventional reservoirs are exploited by drilling a vertical section of a well followed by a horizontal section to access a large portion of the oil or natural gas formation. These “unconventional” or “shale” reservoirs are typically lower pressure and require extra stimulation to generate production. The practice of “hydraulic fracturing” follows the unconventional drilling process with high horsepower equipment pumping water and proppant down a wellbore at high pressure to frack the rock, releasing hydrocarbons. The vast majority of the wells we drill in North America are unconventional. We are not involved in the hydraulic fracturing of a well. Commodity Prices Cash flow to fund exploration and development is dependent on commodity prices: higher prices increase cash flow and encourage investment and when prices decline, the opposite is true. Oil can be transported relatively easily, so it is generally priced in a global market that is influenced by an array of economic and political factors. Higher oil prices typically result in stronger demand for drilling services with funding for drilling programs directed toward the most economically attractive drilling opportunities. As the volume of unconventional oil development has dramatically increased over the past decade, generating efficiencies through industrialized processes, more capital has been directed toward unconventional oil development in North America, reflecting the region’s competitiveness globally. Natural gas and natural gas liquids continue to be priced more regionally. In North America, natural gas demand largely depends on the weather. Colder winter temperatures, and to a lesser extent, warmer summer temperatures, result in greater natural gas demand. Other demand drivers, such as natural gas fired power generation, industrial applications, and transportation, have shown positive growth over the past several years driven by a preference for natural gas over coal, and lower prices. The planned liquefied natural gas (LNG) export from Canada and continued development in the U.S. could serve as a catalyst for natural gas directed drilling activity over the medium to long term. The key natural gas price driver continues to be increased production from unconventional shale gas drilling. Since the winter of 2014, pricing for natural gas in North America has generally been depressed, as supplies of unconventional natural gas have increased, and current inventory levels are viewed as adequate to keep North American markets well supplied. Precision Drilling Corporation 2018 Annual Report 14 Average Oil and Natural Gas Prices Oil WTI (US$ per barrel) Natural gas Canada AECO ($ per MMBtu) U.S. Henry Hub (US$ per MMBtu) Source: WTI and Henry; Hub Energy Information Administration, AECO; Gas Alberta Inc. 12 WTI Oil Prices and Henry Hub Natural Gas Prices u t B M M / $ S U 8 4 Henry Hub Natural Gas WTI Oil 0 Jan-14 Source: Energy Information Administration 2018 64.88 1.49 3.12 2016 43.30 2.14 2.48 2017 50.95 2.16 2.98 120 l e r r a b / $ S U 80 40 0 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 New Technology North American exploration and production companies, which comprise the majority of our customer base, have been adapting to a lower commodity price environment and are increasingly focused on drilling and completion efficiency. Most of these companies have adopted large-scale industrialization techniques, utilizing multi-well pads and high-efficiency downhole and surface drilling systems to improve efficiency. Over the past several years, drilling rig enhancements have focused on equipment upgrades, such as walking systems, AC controls and increased fluid pumping capacity. More recently, customer focus has been shifting to rig automation technologies to deliver increased efficiency, consistency and predictability of results, which customers desire in their development-style drilling programs. Exploration and production companies have an increasing appetite for these technologies as they provide an opportunity to push the limits of efficiency and consistency, common in industrialized processes. Our technology strategy is well-aligned with customer efficiency objectives. We leverage our existing base of AC control systems installed on over 100 of our Super Series drilling rigs. These standardized control systems enable us to reliably mass deploy advanced software systems capable of delivering leading-edge digital automation, significantly boosting efficiency of the well construction process. Our technology strategy is centered around partnering with industry experts which allows us to deliver an 15 Management’s Discussion and Analysis extensive suite of offerings to our customers with minimal research and development capital. Our digital technology strategy is currently focused on four fundamentals: 1. Standardized Control System Platform We leverage our standardized rig equipment and control system to deploy a fully integrated Process Automation Control system (PAC), which allows us to consistently implement best practices to eliminate human variance and human error, resulting in significantly improved drilling efficiency. In addition to built-in process automation routines, PAC also hosts Precision Drilling Apps (PD Apps), which leverage advanced algorithms and exploitation of various machine learning techniques to improve complex drilling processes. The standard platform is encouraging innovation in the drilling app space by attracting innovative solutions from customers and third parties inside and outside the oil and gas industry. We installed our first PAC system in late 2016 and currently have 31 PAC systems deployed in the field and more than 15 PD Apps in the trial phase or in development, making Precision an industry leader in automation technology. 2. Data Collection and Analytics Our digital rig control systems with PAC are now generating well above 1 GB/min of data, versus a limited number of data channels from traditional Electronic Data Recorders, knowns as EDR systems. We have a robust data analytics strategy with a dedicated analytics team (PD Analytics) focused on improving rig performance and financial returns through commercialization of performance data. 3. Digitally Enabled Services Our advanced digital infrastructure helps automate repetitive tasks for the driller, freeing up time for the driller to address more value-added responsibilities. For example, we have introduced our Directional Guidance System (DGS) aiming to either replace directional drillers on the wellsite through an advanced algorithm delivered through a PD App and remote support. To date, we have successfully drilled more than 200 wells using this technology and believe these types of solutions will eventually become industry standard. 4. Leading-Edge Corporate-Wide Data Systems and Technology Culture In 2018, we successfully implemented the latest version of SAP S/4HANA to fully realize the benefits of the system’s integration with our digital service delivery platform. This robust SAP enterprise system is built to support the increased data flows from the field, provided by our PAC systems. Precision committed to a digital technology strategy nearly three years ago, enabling us to build a strong digital mindset within the company at all levels. Our combination of High Performance standardized rig fleet, integrated PAC system, PD Apps and PD Analytics position us to help our customers achieve their efficiency goals and generate strong returns for our shareholders through service differentiation. Precision Drilling Corporation 2018 Annual Report 16 U.S. Lower 48 Production 120 100 80 60 40 20 / ) d F C B ( s a G l a r u t a N Natural Gas Production Crude Oil Production Source: Energy Information Administration 0 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 12 10 8 6 4 2 0 ) d / s l b b M M ( l i O e d u r C Natural gas production in Canada has been flat because of lower natural gas directed drilling due to pricing pressure and Canada’s lack of an export market other than the U.S. ) d / s l b b M M ( l i O e d u r C 5 4 3 2 1 0 Canadian Production 20 16 12 8 4 / ) d F C B ( s a G l a r u t a N Natural Gas Production Crude Oil Production Source: Energy Information Administration, FEC 0 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 17 Management’s Discussion and Analysis Drilling Activity Following a decline in activity in 2015 and 2016, the North American land drilling market showed increased activity levels in 2017 and 2018, particularly in the U.S., as customer demand improved with higher oil prices. In 2018, the industry drilled 6,781 wells in western Canada, compared with 6,959 in 2017 and 3,963 in 2016. Total industry drilling operating days were 64,491 in 2018 compared with 66,138 in 2017 and 42,391 in 2016. Average industry drilling operating days per well was 9.5, the same as in 2017 and slightly lower than 10.7 in 2016. From 2017 to 2018 the average depth of a well increased 4% compared with an increase of 5% from 2016 to 2017. In 2018 approximately 19,300 wells were started onshore in the U.S., compared with approximately 15,800 in 2017 and 11,200 in 2016. In Canada, there has been relative strength in natural gas liquids and light tight oil drilling activity in the deeper basins of northwestern Alberta and northeastern British Columbia, while in the U.S. the bias towards oil-directed drilling continues. In 2018, approximately 63% of the Canadian industry’s active rigs and 81% of the U.S. industry’s active rigs were drilling for oil targets, compared with 53% for Canada and 80% for the U.S. in 2017. The graphs below show the shift in drilling activity to oil targets since 2014, in both the U.S. and Canada. The Canadian drilling rig activity graph also shows how Canadian drilling activity fluctuates with the seasons, a market dynamic that generally is not present in the U.S. U.S. Active Rig Count 1,600 1,200 800 400 g n i k r o w s g i R Oil Land Gas Land Source: Baker Hughes 0 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Precision Drilling Corporation 2018 Annual Report 18 Canadian Active Rig Count 400 200 g n i k r o w s g i R Oil Gas Source: Baker Hughes 0 Jan-14 A COMPETITIVE OPERATING MODEL Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 The contract drilling business is highly competitive, with many industry participants. We compete for drilling contracts that are often awarded in a competitive bid process. We believe potential customers focus on pricing and rig availability when selecting a drilling contractor, but also consider many other things, including drilling capabilities, condition of rigs, quality of rig crews, breadth of service, technology offering, and safety record, among others. Providing High Performance, High Value services to our customers is the core of our competitive strategy. We deliver High Performance through passionate people supported by quality business systems, drilling technology, equipment and infrastructure designed to optimize results and reduce risks. We create High Value by operating safely and sustainably, lowering our customers’ risks and costs while improving efficiency, developing our people, and generating superior financial returns for our investors. Operating Efficiency We keep customer well costs down by maximizing the efficiency of operations in several ways: ∎ using innovative and advanced drilling technology that is efficient and reduces costs ∎ having equipment that is geographically dispersed, reliable and well maintained ∎ monitoring our equipment to minimize mechanical downtime ∎ managing operations effectively to keep non-productive time to a minimum ∎ staffing our rigs with well-trained crews with performance measured against defined competencies, and ∎ compensating our executives and eligible employees based on performance against safety, operational, employee retention, and financial measures. Efficient, Cost-Reducing Technologies We focus on providing efficient, cost-reducing drilling technologies. Design innovations and technology improvements, such as multi-well pad capability and rapid mobility between wells, capture incremental time savings during the drilling process. Precision has invested over $3 billion in its drilling rig fleet since 2010, adding over 120 Super Series drilling rigs during the period. With one of the newest and most technically capable fleets in North America and the Middle East, Precision’s Super Series rigs have been designed for industrial-style drilling: highly efficient; mobile; safe; controllable; upgradable; and able to act as a platform for technology delivery to the well location. Precision has completed several relatively low dollar cost upgrades over the past several years including additions of walking systems, higher pressure and capacity mud pumps, increased setback capacity and PAC technology. Precision’s Super Series drilling rig fleet has the features needed to meet essentially all the industrial-style drilling requirements of our customers in North America and deep, high-pressure drilling projects internationally. 19 Management’s Discussion and Analysis Broad Geographic Footprint Geographic proximity and fleet versatility support the High Performance, High Value services we provide to our customers. Our large fleet of rigs is strategically deployed across the most active drilling regions in North America, including all major unconventional oil and natural gas basins. Managing Downtime Minimizing downtime is a key operating metric for us and our customers. Reliable and well-maintained equipment minimizes downtime and non-productive time during operations. We manage mechanical downtime through preventative maintenance programs, detailed inspection processes, an extensive fleet of strategically-located spare equipment, and an in-house supply chain. We minimize non-productive time (to move, rig-up and rig-out) by utilizing walking systems, reducing the number of move loads per rig, and using mechanized equipment for safer and quicker rig component connections. Tracking Our Results We unitize key financial information per day and per hour and compare these measures to established benchmarks and past performance. We evaluate the relative strength of our financial position by monitoring our working capital, debt ratios, and returns on capital employed. We track industry statistics to evaluate our performance against competitors. We reward executives and eligible employees through incentive compensation plans for performance against the following measures: ∎ safety performance – total recordable incident rate per 200,000 man-hours, recordable free facilities and “Triple Target Zero” days (defined on page 22 under ‘Safe Operations’). Measured against prior year performance and current year industry performance in Canada and the U.S. ∎ operational performance – rig down time for repair as measured by time not billed to the customer. Measured against a predetermined target of available billable time ∎ key field employee retention – senior field employee retention rates. Measured against predetermined target rates of retention ∎ strategic initiatives – achieving strategic operational goals. Measured against predetermined target metrics ∎ financial performance – Adjusted EBITDA, adjusted cash flow, return on capital employed and debt reduction. Measured against predetermined targets ∎ investment returns – total shareholder return performance (including dividends) against a group of industry peers, over a three-year period. The peer group consists of a predetermined group of companies with similar business operations that we compete with for investors. Top Tier Service We pride ourselves on providing quality equipment operated by experienced and well-trained crews. We also strive to align our capabilities with evolving technical requirements associated with more complex well bore programs. High Performance Rig Fleet Our fleet of drilling rigs is well positioned to address the unconventional drilling programs of our customers. The vast majority of our drilling rigs have been designed or significantly upgraded to drill horizontal wells. With a breadth of horsepower types and drilling depth capabilities, our large fleet can address every type of onshore unconventional and conventional oil and natural gas drilling opportunity in North America. Our service rigs provide completion, workover, abandonment, well maintenance, high pressure operations and critical sour gas well work, and well re-entry preparation across the Western Canada Sedimentary Basin and in the northern U.S. Service rigs are supported by four field locations in Alberta, two in Saskatchewan, and one each in Manitoba, British Columbia and North Dakota. Snubbing units complement traditional natural gas well servicing by allowing customers to work on wells while they are pressurized and production has been suspended. We have two kinds of snubbing units: rig-assist and self-contained. Self- contained units do not require a service rig on site and are capable of snubbing and performing many other well servicing procedures. Included in our self-contained units are three patented L-frame units, which are more efficient in the rig up and rig out process than standard self-contained units. Precision Drilling Corporation 2018 Annual Report 20 Upgrade Opportunities We leverage our internal manufacturing and repair capabilities and inventory of quality rigs to address market demand through upgraded drilling rigs. For drilling rigs, the upgrade is typically performed at the request of a customer and includes a term contract. Historically, certain upgrades have resulted in a change in tier classification. Ancillary Equipment and Services An inventory of equipment (top drives, loaders, boilers, tubulars, and well control equipment) supports our fleet of drilling and service rigs. We also maintain an inventory of key rig components to minimize downtime due to equipment failure. We benefit from internal services for equipment certifications and component manufacturing from our manufacturing division in Canada and for standardization and distribution of consumable oilfield products through our procurement divisions in Canada and the U.S. Precision Rentals provides specialized equipment and wellsite accommodations to customers on a rental basis. Precision Camp Services provides food and accommodation to personnel working at the wellsite, typically in remote locations in Western Canada. Technical Centres We operate two contract drilling technical centres, one in Nisku, Alberta and one in Houston, Texas. We also operate one completion and production services technical centre in Red Deer, Alberta. These centres accommodate our technical service and field training groups and enable us to consolidate support and training for our operations. Both of our contract drilling technical centres include fully functioning training rigs with the latest drilling technologies. In addition, our Houston facility accommodates our rig manufacturing group. People Having an experienced, high performance crew is a competitive strength and highly valued by our customers. There are often shortages of industry manpower in peak operating periods. We rely heavily on our safety record, investment in employee development, comprehensive employee training, competency development, and reputation to attract and retain employees. Our people strategies focus on initiatives that provide a safe and productive work environment, opportunity for advancement, and added wage security. We have centralized personnel, orientation, and training programs in Canada and the U.S. Our people strategies have enabled us to deliver quality field crews at all points in the industry cycle. Toughnecks (www.toughnecks.com) has been a highly successful field recruiting program for us since we introduced it in 2008. Systems In 2017 we commenced an upgrade to our ERP system that was completed in the second quarter of 2018. The upgraded system fully integrates our drilling rigs with our field facilities and corporate offices increasing operating efficiencies and positioning the organization to better handle the increased data flows associated with our business. All our divisions operate using standardized business processes across marketing, equipment maintenance, procurement, manufacturing, HSE, inventory control, engineering, finance, payroll and human resources. We continue to invest in information systems that provide competitive advantages. Electronic links between field and financial systems provide accuracy and timely processing. This repository of rig data improves response time to customer inquiries. Rig manufacturing projects also benefit from scheduling and budgeting tools, which identify and help leverage economies of scale as construction demands increase. 21 Management’s Discussion and Analysis Safe Operations Safety, environmental stewardship and employee health are critical for us and for our customers and are the foundation of our culture. to operating Safety performance performance and the financial results we generate for our shareholders. We track safety using three separate metrics: fundamental contributor is a ∎ Total Recordable Incident Rate ∎ Facilities Recordable Free ∎ Triple Target Zero Days. Target Zero The health and safety of our employees is a core value at Precision, and daily we work to set the standard for safety in our industry. Total Recordable Incident Rate (TRIR) is an industry standard and benchmarks our success and isolates areas for improvement. We have taken it to another level by tracking and measuring all injuries, regardless of severity, because they are leading indicators for the potential for more serious events. In 2018, 96% of our drilling rigs and 99% of our service rigs achieved Recordable Free Facilities. Facilities recordable free includes all of our rigs, operating centres and offices and measures how many of our facilities do not have a recordable incident during the year. In addition, we have a goal of achieving “Triple Target Zero” every day. A Triple Target Zero day is a day when we have no high potential work-related vehicle incidents, no recordable injuries and no reportable spills. For 2018 we achieved 288 Triple Target Zero days. We foster our safety culture through strong leadership, technical and compliance training, and proven support systems. Every day, we invest in our employees to prepare them for any and every situation on the rig. Our Technical Support Centre training facilities are located in Houston, Texas, and Nisku, Alberta, where more than 6,100 employees were trained in 2018 on our culture, rig personnel and responsibilities, tools and equipment, safety and environmental protocol and procedures, leadership and team-building. We continuously review our rig designs and components and use advanced technology to operate safely, improve the life cycle, maintain operational efficiency, reduce energy use, and maintain our energy and resources. In 2018, 20% of our fleet was configured to be powered by natural gas, which is cleaner-burning than diesel and therefore reduces our, and our customer’s, carbon footprint. Our pad-capable rig fleet has also helped our customers reduce their overall operating footprint by enabling them to drill multiple wells on a single well pad location. Precision Drilling Corporation 2018 Annual Report 22 AN EFFECTIVE STRATEGY Precision’s vision is to be globally recognized as the High Performance, High Value provider of land drilling services. We work toward this vision by defining and measuring our results against strategic priorities we establish at the beginning of every year. 2018 Strategic Priorities 2018 Results Commercial deployment of Process Automation Controls and Directional Guidance Systems on a wide scale. Enhance financial performance through higher utilization and improved margins. Reduce debt by generating free cash flow while continuing to fund only the most attractive investment opportunities. • Target $75 million to $125 million debt repayment in • Target $300 million to $500 million debt repayment 2018. by year-end 2021. Added ten Process Automation Control (PAC) systems with a total of 31 systems deployed in the field at year-end, a 50% increase in installed base during 2018. Equipped both training rigs in Nisku and Houston with PAC technology. Drilled 365 wells in 2018 utilizing PAC technology and drilled 119 wells utilizing its directional guidance system, over half of which were drilled without any directional drillers on location. By year-end, Precision, its partners, customers and several third parties had 15 drilling performance applications under development with several Apps in field trials. Completed ERP system upgrade to position the organization to better handle increased data flows. Consolidated utilization days increased 14% year-over-year. U.S. Drilling margins up 25%, Canadian Drilling margins up 4% and International Drilling margins remained stable. Achieved highest market share on record for Precision in the U.S. of over 7.5%. Generated $311 million in funds provided by operations (Non- GAAP measure – see page 3 information) representing a 69% increase year-over-year. for more Precision’s 2018 debt repayments totaled $174 million, $49 million higher than the top end of Precision’s target 2018 debt repayment range. In conjunction with debt repayments, Precision grew its cash balance by $32 million throughout the year. Completed two new-build rigs in the U.S. market while continuing rig upgrade program (not exceeding $3 million in upgrade cost per rig). Precision also began construction of its sixth new-build rig in Kuwait. Capital expenditures totaled $126 million, $9 million less than planned spending. Net capital expenditures totaled $102 million with $24 million of proceeds on sale of property, plant and equipment. 23 Management’s Discussion and Analysis Our Corporate and Competitive Strategies are designed to optimize resource allocation and differentiate us from the competition, generating value for investors. Unconventional drilling is the primary opportunity in the North American marketplace. Unconventional resource development requires the most efficient and technically capable drilling rigs and other highly developed services that facilitate the drilling of reliable, predictable and repeatable horizontal wells. Customer adoption of large-scale industrialization techniques and high efficiency rig systems continues to increase and Precision’s Super Series rig fleet and High Performance, High Value strategy positions the Company to benefit from that trend. The completion and production work associated with unconventional wells provides the most profitable growth opportunities for our Completion and Production Services segment. Strategic Priorities for 2019 • Generate strong free cash flow and utilize $100 million to $150 million to reduce debt in 2019; increased long-term debt reduction targets to $400 million to $600 million by year-end 2021 (inclusive of 2018 debt repayments). • Maximize financial results by leveraging our High Performance, High Value Super Series rig fleet and scale with disciplined cost management. Full scale commercialization and implementation of our Process Automation Control platform, PD Apps and PD Analytics. • Precision Drilling Corporation 2018 Annual Report 24 2018 Results Management’s Discussion and Analysis Adjusted EBITDA and operating loss are Non-GAAP measures. See page 3 for more information. Consolidated Statements of Loss Summary Year ended December 31 (thousands of dollars) Revenue Contract Drilling Services Completion and Production Services Inter-segment elimination Adjusted EBITDA(1) Contract Drilling Services Completion and Production Services Corporate and Other Depreciation and amortization Impairment of goodwill Impairment of property, plant and equipment Gain on re-measurement of property, plant and equipment Foreign exchange Finance charges Loss (gain) on redemption and repurchase of unsecured senior notes Loss before income taxes Income taxes Net loss (1) See Non-GAAP Measures on page 3 of this report. Results by Geographic Segment Year ended December 31 (thousands of dollars) Revenue Canada U.S. International Inter-segment elimination Total assets Canada U.S. International 2018 2017 2016 1,396,492 150,760 (6,063 ) 1,541,189 412,134 14,881 (51,884 ) 375,131 365,660 207,544 — — 4,017 127,178 (5,672 ) (323,596 ) (29,326 ) (294,270 ) 1,173,930 154,146 (6,852 ) 1,321,224 342,970 11,888 (49,877 ) 304,981 377,746 — 15,313 — (2,970 ) 137,928 9,021 (232,057 ) (100,021 ) (132,036 ) 907,821 100,049 (4,637 ) 1,003,233 296,651 (3,649 ) (64,927 ) 228,075 391,659 — — (7,605 ) 6,008 146,360 239 (308,586 ) (153,031 ) (155,555 ) 2018 2017 2016 571,640 797,217 191,131 (18,799 ) 1,541,189 1,269,542 1,772,850 593,651 3,636,043 578,817 568,573 190,401 (16,567 ) 1,321,224 1,631,838 1,666,368 594,725 3,892,931 418,030 426,546 169,286 (10,629 ) 1,003,233 1,738,853 1,861,908 723,453 4,324,214 25 Management’s Discussion and Analysis 2018 COMPARED WITH 2017 Net loss in 2018 was $294 million, or $1.00 per diluted share, compared with net loss of $132 million, or $0.45 per diluted share, in 2017. The higher net loss in 2018 was primarily the result of a $208 million goodwill impairment charge offset by higher U.S. activity and average day rates. Revenue was $1,541 million (17% higher than 2017) because of higher U.S. activity and improved day rates. Adjusted EBITDA in 2018 was $375 million (23% higher than 2017), mainly because of the increase in U.S. activity. Activity, as measured by drilling utilization days, increased 30% in the U.S. while remaining relatively constant in Canada and internationally compared with 2017. Impairment Under IFRS, we are required to assess the carrying value of assets in our CGUs containing goodwill annually and when indicators of impairment exist. Due to the decrease in oil and natural gas well drilling in Canada and the outlook for activity in Canada and in our directional drilling division in the U.S., we recognized a $208 million goodwill impairment charge. The impairment charge represents the full amount of goodwill attributable to our Canadian contract drilling and U.S. directional drilling operations. Because of no activity in Mexico in 2017, we completed an impairment test for our Mexico contract drilling CGU as of December 31, 2017. As a result of this test it was determined that property, plant and equipment in our Mexico contract drilling business was impaired by US$12 million. Foreign Exchange We recognized a foreign exchange loss of $4 million in 2018 (2017 – $3 million gain) due to the devaluation of the Canadian dollar against the U.S. dollar and this affected the net U.S. dollar denominated monetary position in our Canadian dollar-based companies. Finance Charges Finance charges were $127 million, a decrease of $11 million compared with 2017 primarily due to a reduction in interest expense related to debt retired in 2017 and mid-2018 partially offset by higher interest income earned in the comparative period. Gain on Redemption and Repurchase of Unsecured Senior Notes During the year we redeemed US$80 million and repurchased and cancelled US$3 million of our 6.5% unsecured senior notes due 2021 and repurchased and cancelled US$49 million principal amount of our 5.25% unsecured senior notes due 2024 resulting in a net gain of $6 million. In comparison, during 2017, we redeemed and/or repurchased and cancelled US$442 million of our previously outstanding senior notes incurring a loss of $9 million. Income Taxes Income taxes were a recovery of $29 million, $71 million lower than the $100 million recovery booked in 2017. The reduced recovery in 2018 compared with 2017 was mainly due to a smaller loss prior to the non-taxable portion of the goodwill impairment. Precision Drilling Corporation 2018 Annual Report 26 2017 COMPARED WITH 2016 Net loss in 2017 was $132 million, or $0.45 per diluted share, compared with net loss of $156 million, or $0.53 per diluted share, in 2016. The reduction of net loss in 2017 was primarily the result of improved activity levels compared to 2016. Revenue was $1,321 million (32% higher than 2016) because of higher activity in all our operations. Adjusted EBITDA in 2017 was $305 million (34% higher than 2016), mainly because activity levels were higher in all our operations. Activity, as measured by drilling utilization days, increased 48% in Canada, 81% in the U.S., and 5% internationally compared with 2016. Impairment Under IFRS, we are required to assess the carrying value of assets in our CGUs containing goodwill annually and when indicators of impairment exist. Because of no activity in Mexico in 2017, we completed an impairment test for our Mexico contract drilling CGU as of December 31, 2017. The test involves determining a value in use based on a multi-year discounted cash flow using assumptions on expected future results. The resulting value in use is then compared to the carrying value of the CGU. As a result of this test it was determined that property, plant and equipment in our Mexico contract drilling business was impaired by US$12 million. Foreign Exchange We recognized a foreign exchange gain of $3 million in 2017 (2016 – $6 million loss) because the Canadian dollar strengthened in value against the U.S. dollar and this affected the net U.S. dollar denominated monetary position in our Canadian dollar-based companies. Finance Charges Finance charges were $138 million, a decrease of $8 million compared with 2016. The decrease is the result of a stronger Canadian dollar on our U.S. dollar denominated interest expense and a reduction in interest expense related to debt retired during the past two years. Loss on Redemption and Repurchase of Unsecured Senior Notes During 2017, we redeemed and/or repurchased and cancelled US$442 million of our previously outstanding senior notes incurring a loss of $9 million. In 2016, we redeemed and/or repurchased and cancelled $200 million and US$360 million of our previously outstanding Canadian and U.S. senior notes, respectively, incurring a slight loss. Income Taxes Income taxes were a recovery of $100 million, $53 million lower than the $153 million recovery booked in 2016 mainly due to a smaller loss in 2017 compared with 2016 and from the fourth quarter tax reform implemented in the U.S. reducing tax rates which reduced the benefit of our U.S. losses carried forward. 27 Management’s Discussion and Analysis Segmented Results CONTRACT DRILLING SERVICES Financial Results Adjusted EBITDA and operating loss are Non-GAAP measures. See page 3 for more information. Year ended December 31 (thousands of dollars, except where noted) Revenue Expenses Operating General and administrative Restructuring Adjusted EBITDA (1) Depreciation and amortization Impairment of goodwill Impairment of property, plant and equipment Operating loss (1) (1) See Non-GAAP measures on page 3 of this report. 2018 1,396,492 945,203 39,155 — 412,134 334,555 207,544 — (129,965 ) 2018 Compared with 2017 % of revenue 2017 1,173,930 % of revenue 2016 907,821 % of revenue 67.7 2.8 — 29.5 24.0 14.9 — (9.3 ) 798,655 32,305 — 342,970 334,587 — 15,313 (6,930 ) 68.0 2.8 — 29.2 28.5 — 1.3 (0.6 ) 574,104 34,026 3,040 296,651 348,005 — — (51,354) 63.2 3.7 0.3 32.7 38.3 — — (5.7 ) Revenue from Contract Drilling Services was $1,396 million, 19% higher than 2017, mainly because of higher activity in our U.S. contract drilling operations and higher average day rates in each of our contract drilling operations. In 2018, total shortfall payments in Canada and idle but contracted revenue in the U.S. were $12 million and US$0.6 million, compared with $31 million and US$6 million, respectively in 2017. Operating expenses in 2018 were 68% of revenue and is consistent with the prior year. On a per utilization day basis, operating costs for the drilling rig division in Canada were higher than the prior year period due to timing of equipment certifications and equipment maintenance costs. In the U.S., operating costs on a per day basis were higher than the prior year period primarily due to expenses recovered through the day rate and higher turnkey activity. General and administrative expenses for 2018 were higher due to the devaluation of the Canadian dollar on our U.S. dollar denominated costs. Our 2018 operating loss was $130 million as compared to an operating loss of $7 million in the comparable prior year period. Operating loss in 2018 increased as a result of goodwill impairment charges of $208 million offset by an increase in drilling activity in our U.S. drilling operations and improved day rates in each of our drilling operations. Our 2017 operating results include an impairment of property, plant and equipment charge of $15 million related to certain drilling rigs and spare equipment. Excluding the impairment of goodwill and property, plant and equipment impairment, operating earnings would have been $78 million in 2018 and $8 million in 2017. Our total depreciation expense was consistent year over year. Capital expenditures in 2018 for our Contract Drilling segment were $108 million: ∎ $35 million – to expand our asset base ∎ $31 million – to upgrade existing equipment ∎ $42 million – on maintenance and infrastructure. Precision Drilling Corporation 2018 Annual Report 28 Operating Statistics Year ended December 31 Number of drilling rigs (year-end) Drilling utilization days (operating and moving) Canada U.S. International Drilling revenue per utilization day Canada (Cdn$) U.S. (US$) International (US$) Drilling statistics (Canadian operations only) Wells drilled Average days per well Metres drilled (hundreds) Average metres per well Canadian Drilling % increase/ (decrease) (7.8) (1.4) 30.4 - 2.4 10.1 0.5 (3.8) 2.1 2.1 6.2 2018 236 18,617 26,714 2,920 21,644 21,864 50,469 1,663 9.9 4,694 2,823 2017 256 18,883 20,479 2,920 21,143 19,861 50,240 1,729 9.7 4,597 2,659 % increase/ (decrease) 0.4 48.4 80.5 4.8 (13.7 ) (24.0 ) 9.8 79.7 (17.1 ) 80.4 0.4 2016 255 12,722 11,343 2,786 24,509 26,145 45,753 962 11.7 2,548 2,649 % increase/ (decrease) 1.6 (26.2) (46.4) (31.8) (9.1) (2.2) 5.2 (28.8) 2.6 (21.0) 11.0 Revenue from Canadian drilling was $403 million, 1% lower than 2017. Drilling rig activity, as measured by utilization days, was down slightly by 1% while average day rates were up 2%. Adjusted EBITDA was $124 million, 13% lower than 2017, because of lower drilling activity offset by higher average day rates. Depreciation expense for the year was $112 million, in-line with 2017. Drilling Statistics – Canada In 2018, we transferred one drilling rig from Canada to the U.S. and identified 18 drilling rigs to be held for sale, bringing our Canadian 2018 year-end net rig count to 117 (2017 –136). The industry drilling rig fleet has decreased as there were approximately 592 rigs at the end of 2018 compared with 627 at the end of 2017. Our operating day utilization was 34% (2017 – 34%), compared with industry utilization of 29% (2017 – 29%). U.S. Drilling Revenue from U.S. drilling was US$584 million, 43% higher than 2017. Drilling rig activity, as measured by utilization days, was up 30% while average revenue per day was up 10%. Adjusted EBITDA was US$180 million, 70% higher than 2017, mainly because of higher activity and average day rates offset by lower idle but contracted revenue. Depreciation expense for the year was US$120 million, US$1 million lower than 2017 because of a lower capital asset base. Drilling Statistics – U.S. In 2018, we completed two new-build rigs, transferred one rig from Canada and identified four drilling rigs to be held for sale, leaving our U.S. year-end net rig count at 102. In 2018, we averaged 73 rigs working, an 30% increase from 56 rigs in 2017. The industry drilling fleet increased as well, averaging 1,014 active land rigs in 2018, up 18% from 856 rigs in 2017. Our average day rates in the U.S. increased 10% in 2018 as legacy contracts expired and newly contracted rigs were at higher day rates. Revenue from idle but contracted rigs was US$0.6 million in 2018, a reduction of $6 million from the prior year period. 29 Management’s Discussion and Analysis Turnkey utilization days increased 161% over 2017 and accounted for approximately 2% of our revenue compared with 2% in 2017. Drilling Statistics – U.S. Average number of active land rigs for quarters ended: March 31 June 30 September 30 December 31 Annual average (1) Source: Baker Hughes. 2018 2017 2016 Precision Industry (1) Precision Industry (1) Precision Industry (1) 64 72 76 80 73 951 1,021 1,032 1,050 1,014 47 59 61 58 56 722 874 927 902 856 32 24 29 39 31 516 397 465 567 486 COMPLETION AND PRODUCTION SERVICES Financial Results Adjusted EBITDA and operating loss are Non-GAAP measures. See page 3 for more information. Year ended December 31 (thousands of dollars, except where noted) Revenue Expenses Operating General and administrative Restructuring Adjusted EBITDA (1) Depreciation and amortization Gain on re-measurement of property, plant and equipment Operating loss (1) (1) See Non-GAAP Measures on page 3 of this report. n/m – calculation not meaningful. 2018 150,760 128,731 7,148 — 14,881 23,879 % of revenue 85.4 4.7 — 9.9 15.8 2017 154,146 134,368 7,890 — 11,888 29,638 % of revenue 2016 100,049 % of revenue 87.2 5.1 — 7.7 19.2 92,248 9,429 2,021 (3,649) 29,272 93.0 8.6 2.0 (3.6) 29.3 n/m (25.3) — (8,998) — (6.0) — (17,750) — (11.5 ) (7,605) (25,316) Revenue from Completion and Production Services was $151 million in 2018, 2% lower than 2017, mainly because of lower activity across all our product lines. Operating loss was $9 million in 2018, compared with an operating loss of $18 million in 2017. The decrease in our operating loss in 2018 was primarily due to higher average day rates and improved cost recoveries offset by lower service rig operating hours. Operating expenses were 85% of revenue, 2% points lower than 2017, mainly because of improved cost recoveries. Depreciation in 2018 decreased by 19% as a higher proportion of the segment’s capital asset base became fully depreciated. Capital expenditures in 2018 for our Completions and Production segment were $5 million, comprised mainly of maintenance capital. Revenue from Precision Well Servicing in Canada was $99 million, up $1 million from 2017 as average revenue rates increased by 12% offset by a reduction in activity of 10% versus the prior year. Revenue from our U.S. based completion and production businesses was US$10 million, 15% lower than 2017. The decrease was the result of lower activity partially offset by higher average rates. Revenue from Precision Rentals was $19 million, 17% lower than 2017. The decrease was due to lower activity and average revenue rates. Precision Drilling Corporation 2018 Annual Report 30 Revenue from Precision Camp Services was $15 million, 15% higher than 2017, because of an increase in camp activity, partially offset by lower average revenue rates. Precision operated four base camps and 43 drill camps during 2018. Operating Results Year ended December 31 Number of service rigs (end of year) Service rig operating hours Revenue per operating hour 2018 210 157,467 709 % increase/ (decrease) - (8.9 ) 11.3 2017 210 172,848 637 % increase/ (decrease) 1.4 73.8 (1.4 ) 2016 207 99,451 646 % increase/ (decrease) (27.0) (33.5) (17.6) Our service operating hours fell by 9% in the current year while our revenue per operating hour increased by 11% over the comparable prior year period. In December 2016, we acquired 48 well service rigs for consideration of $12 million and our coil tubing assets and associated equipment. CORPORATE AND OTHER Financial Results Adjusted EBITDA and operating loss are Non-GAAP measures. See page 3 for more information. Year ended December 31 (thousands of dollars, except where noted) Revenue Expenses Operating General and administrative Other recoveries Restructuring Adjusted EBITDA(1) Depreciation and amortization Operating loss(1) (1) See Non-GAAP Measures on page 3 of this report. 2018 — — 66,084 (14,200 ) — (51,884 ) 7,226 (59,110 ) 2017 — — 49,877 — — (49,877 ) 13,521 (63,398 ) 2016 — — 64,234 — 693 (64,927 ) 14,382 (79,309 ) Our Corporate and Other segment contains support functions that provide assistance to our business segments. It includes costs incurred in corporate groups in both Canada and the U.S. Corporate general and administrative expenses were $66 million in 2018, $16 million more than 2017. The increase is mainly related to higher foreign exchange translation on our U.S. dollar based costs and higher share-based incentive compensation expenses. In 2018, corporate general and administrative costs were 4.3% of consolidated revenue compared with 3.8% in 2017 and 6.4% in 2016. During 2018 we terminated an arrangement agreement to acquire an oil and natural gas drilling contractor. Subsequent to the termination a transaction fee was paid to us which, net of transaction costs, amounted to $14 million. Capital expenditures in 2018 for our Corporate and Other segment were $13 million, primarily related to a new ERP system. QUARTERLY FINANCIAL RESULTS Adjusted EBITDA and funds provided by (used in) operations are Non-GAAP measures. See page 3 for more information. 2018 – Quarters Ended (thousands of dollars, except per share amounts) Revenue Adjusted EBITDA(1) Net loss per basic and diluted share Funds provided by operations(1) Cash provided by operations March 31 401,006 97,469 (18,077 ) (0.06 ) 104,026 38,189 June 30 330,716 62,182 (47,217 ) (0.16 ) 50,225 129,695 September 30 December 31 427,010 134,492 (198,328 ) (0.68 ) 92,595 93,489 382,457 80,988 (30,648 ) (0.10 ) 64,368 31,961 31 Management’s Discussion and Analysis (1) See Non-GAAP measures on page 3 of this report. 2017 – Quarters Ended (thousands of dollars, except per share amounts) Revenue Adjusted EBITDA(1) Net loss per basic and diluted share Funds provided by (used in) operations(1) Cash provided by operations (1) See Non-GAAP measures on page 3 of this report. Seasonality March 31 368,673 84,308 (22,614 ) (0.08 ) 85,659 33,770 June 30 290,860 56,520 (36,130 ) (0.12 ) (15,187 ) 2,739 September 30 314,504 73,239 (26,287 ) (0.09 ) 85,140 56,757 December 31 347,187 90,914 (47,005 ) (0.16 ) 28,323 23,289 Drilling and well servicing activity is affected by seasonal weather patterns and ground conditions. In northern Canada, some drilling sites can only be accessed in the winter once the terrain is frozen, which is usually late in the fourth quarter. As a result activity peaks in the winter, in the fourth and first quarters. In the spring, wet weather and the spring thaw in Canada and the northern U.S. make the ground unstable. Government road bans restrict the movement of rigs and other heavy equipment, reducing activity in the second quarter. This leads to quarterly fluctuations in operating results and working capital requirements. Fourth Quarter 2018 Compared with Fourth Quarter 2017 In the fourth quarter of 2018, we recorded a net loss of $198 million, or net loss per diluted share of $0.68, compared with a net loss of $47 million, or a net loss of $0.16 per diluted share, in the fourth quarter of 2017. During the quarter we incurred goodwill impairment charges totaling $208 million that, after-tax, reduced net earnings by $199 million and net earnings per diluted share by $0.68. Excluding the impact of the goodwill impairment net earnings would have been $1 million ($0.00 per share). Revenue in the fourth quarter was $427 million or 23% higher than the fourth quarter of 2017, mainly due to increased activity and day rates in our U.S. contract drilling business. Compared with the fourth quarter of 2017 our activity, as measured by drilling rig utilization days, increased by 36% in the U.S., decreased 9% in Canada and remained consistent internationally. Revenue from our Contract Drilling Services segment increased by 27% and Completion and Production Services segment decreased 10% over the comparative prior year period. Adjusted EBITDA this quarter was $134 million, an increase of $44 million from the fourth quarter of 2017. Our Adjusted EBITDA as a percentage of revenue was 31% this quarter, compared with 26% in the fourth quarter of 2017. Adjusted EBITDA as a percent of revenue in the fourth quarter of 2018 was positively impacted by higher activity and day rates in the U.S., the receipt of a transaction fee and lower share-based incentive compensation partially offset by lower activity in our Canada contract drilling operations versus 2017. As a percentage of revenue, operating costs were 67% in the fourth quarter of 2018 and was consistent with the same quarter of 2017. Our portfolio of term customer contracts and a highly variable operating cost structure, helped us manage our Adjusted EBITDA margin. Contract Drilling Services Revenue from Contract Drilling Services was $392 million this quarter, or 27% higher than the fourth quarter of 2017, while adjusted EBITDA increased by 22% to $122 million. The increase in revenue was primarily due to higher utilization days as well as higher spot market rates in the U.S. During the quarter we recognized $1 million in shortfall payments in our Canadian contract drilling business compared with $13 million in the prior year comparative period. In the U.S. we recognized turnkey revenue of US$11 million compared with US$3 million in the comparative period and we recognized US$0.3 million in idle but contracted rig revenue compared with US$1 million in the comparative quarter of 2017. Drilling rig utilization days in Canada (drilling days plus move days) were 4,517 during the fourth quarter of 2018, a decrease of 9% compared to 2017 primarily due to decreased industry activity brought on by lower commodity prices and takeaway capacity challenges in Canada. Drilling rig utilization days in the U.S. were 7,318, or 36% higher than the same quarter of 2017 as our U.S. activity was up with higher industry activity. Drilling rig utilization days in our international business were 736, in-line with the same quarter of 2017. Compared with the same quarter in 2017, drilling rig revenue per utilization day in Canada decreased 3% as lower shortfall revenue in the current quarter was partially offset by increases in spot market rates and higher expenses recovered through the Precision Drilling Corporation 2018 Annual Report 32 day rate compared with the prior period. Drilling rig revenue per utilization day for the quarter in the U.S. was up 16% compared to the prior year as we realized higher average day rates and turnkey revenue. International revenue per utilization day for the quarter was up by 3% compared with the prior year comparative period due to fewer rig moves. In Canada, 15% of our utilization days in the quarter were generated from rigs under term contract, compared with 13% in the fourth quarter of 2017. In the U.S., 62% of utilization days were generated from rigs under term contract as compared with 55% in the fourth quarter of 2017. Operating costs were 66% of revenue for the quarter, one percentage point higher than the prior year period. On a per utilization day basis, operating costs for the drilling rig division in Canada were higher than the prior year period due to timing of equipment certifications and equipment maintenance costs and higher expenses recovered through the day rate. In the U.S., operating costs for the quarter on a per day basis were higher than the prior year period primarily due to expenses recovered through the day rate and higher turnkey activity. Depreciation expense in the quarter was $13 million higher than the prior year comparative period due to the recognition of accelerated depreciation on excess spare equipment. Completion and Production Services Revenue from Completion and Production Services was down $4 million or 10% compared with the fourth quarter of 2017 due to lower activity in our Canadian businesses. Our service rig operating hours in the quarter were down 19% from the fourth quarter of 2017 while rates increased an average of 17%. Approximately 81% of our fourth quarter Canadian service rig activity was oil related. During the quarter, Completion and Production Services generated 90% of its revenue from Canadian operations and 10% from U.S. operations compared with the fourth quarter of 2017 where 92% of revenue was generated in Canada and 8% in the U.S. Average service rig revenue per operating hour in the quarter was $753 or $109 higher than the fourth quarter of 2017. The increase was primarily the result of increased costs passed through to the customer and rig mix. Adjusted EBITDA was higher than the fourth quarter of 2017 primarily because of higher average rates and improved cost structure, partially offset by lower activity. Operating costs as a percentage of revenue was 78% compared with the prior year comparative quarter of 88%. Depreciation expense in the quarter was $3 million lower than the prior year comparative period due to the recognition of gains on disposal of capital assets in the current year compared with losses on disposal in the prior year. Corporate and Other Our Corporate and Other segment provides support functions to our operating segments. The Corporate and Other segment had an adjusted EBITDA (see “NON-GAAP MEASURES”) of $5 million, a $17 million increase compared with the fourth quarter of 2017 primarily due to lower share-based incentive compensation and the receipt of the transaction termination fee partially offset by costs associated with our unsuccessful arrangement agreement. Net financial charges for the quarter were $32 million, a decrease of $6 million compared with the fourth quarter of 2017 primarily because of debt retired in 2017 and mid-2018 partially offset by a weaker Canadian dollar on our U.S. dollar denominated interest expense. During the quarter we redeemed US$30 million of our 6.5% unsecured senior notes due 2021 and repurchased and cancelled US$44 million principal amount of our 5.25% unsecured senior notes due 2024 resulting in a net gain of $7 million. Income tax expense for the quarter was a recovery of $2 million compared with a recovery of $17 million in the same quarter in 2017. The tax recovery in 2018 decreased primarily due to a smaller loss prior to the non-taxable portion of the goodwill impairment compared with the prior year quarter. Capital expenditures were $30 million in the fourth quarter compared with $25 million in the fourth quarter of 2017. Spending in the fourth quarter of 2018 included: ∎ $11 million – to expand and upgrade our asset base ∎ $18 million – on maintenance and infrastructure ∎ $1 million – on intangibles. 33 Management’s Discussion and Analysis Financial Condition Management’s Discussion and Analysis The oilfield services business is inherently cyclical. To manage this variability, we focus on maintaining a strong balance sheet so we have the financial flexibility we need to continue to manage our capital expenditures and cash flows, no matter where we are in the business cycle. We apply a disciplined approach to managing and tracking the results of our operations to keep costs down. We maintain a scalable cost structure so we can be responsive to changing competition and market demand. We also invest in our fleet to make sure we remain competitive. Our maintenance capital expenditures are tightly governed by 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 rig programs help provide more certainty of future revenues and return on our growth capital investments. LIQUIDITY During the year we redeemed US$80 million and repurchased and cancelled US$3 million of our 6.5% unsecured senior notes due 2021 and repurchased and cancelled US$49 million principal amount of our 5.25% unsecured senior notes due 2024. On November 30, 2018 we agreed with our lenders to a one-year maturity extension of our Senior Credit Facility to November 2022. In 2017, we issued US$400 million of 7.125% senior notes due in 2026 in a private offering, repurchased pursuant to an early tender offer US$310 million of our 6.625% unsecured senior notes due 2020 and US$70 million of our 6.5% unsecured senior notes due 2021 and redeemed our remaining outstanding 6.625% unsecured senior notes due 2020. On November 21, 2017 we agreed with our lenders to the following amendments to our Senior Credit Facility: ∎ reduce the Covenant EBITDA (as defined in the debt agreement) (See Non-GAAP Measures on page 3 of this report) to interest expense coverage ratio to greater than or equal to 2.0:1 for the periods ending June 30, September 30, December 31, 2018 and March 31, 2019 reverting to 2.5:1 thereafter ∎ reduced the size of the facility to US$500 million ∎ amend certain negative covenants, to among other things, permit the redemption and repurchase of junior debt on a permanent basis subject to a pro forma senior net leverage covenant test of less than or equal to 1.75:1 ∎ add a new covenant that permits distributions post the covenant relief period subject to a pro forma senior net leverage covenant of less than or equal to 1.75:1. On January 20, 2017 we agreed with our lenders to the following amendments to our Senior Credit Facility: ∎ reduce the Covenant EBITDA (as defined in the debt agreement) to interest expense coverage ratio to greater than or equal to 1.25:1 for the periods ending March 31, June 30 and September 30, 2017. For the periods ending December 31, 2017 and March 31, 2018 the ratio is 1.5:1 reverting to 2.5:1 thereafter ∎ reduce the size of the facility to US$525 million. As of December 31, 2018, our liquidity was supported by a cash balance of $97 million, our Senior Credit Facility of US$500 million, operating facilities totaling approximately $60 million, and a US$30 million secured facility for letters of credit. Our ability to draw on our Senior Credit Facility is governed by financial covenants. See Capital Structure – Covenants on page 37. We expect that cash provided by operations and our sources of financing, including our Senior Credit Facility, will be sufficient to meet our debt obligations and to fund future capital expenditures. Precision Drilling Corporation 2018 Annual Report 34 At December 31, 2018, excluding letters of credit, we had approximately $1,729 million (2017 – $1,822 million) outstanding under our secured and unsecured credit facilities and $23 million in unamortized debt issue costs. Our Senior Credit Facility includes financial ratio covenants that are tested quarterly. Key Ratios We ended 2018 with a long-term debt to long-term debt plus equity ratio of 0.5, and a ratio of long-term debt to cash provided by operations of 5.8. We ended 2018 with a long-term debt to long-term debt plus equity ratio of 0.5 (2017 – 0.5) and a ratio of long-term debt to cash provided by operations of 5.8 (2017 – 14.8). The current blended cash interest cost of our debt is approximately 6.7%. Ratios and Key Financial Indicators We evaluate the relative strength of our financial position by monitoring our working capital, debt ratios and liquidity. We also monitor returns on capital, and we link our executives’ incentive compensation to the returns to our shareholders relative to the shareholder returns of our peers. Financial Position and Ratios (in thousands of dollars, except ratios) Working capital(1) Working capital ratio Long-term debt Total long-term financial liabilities Total assets Enterprise value (see table on page 39) Long-term debt to long-term debt plus equity Long-term debt to cash provided by operations Long-term debt to Adjusted EBITDA Long-term debt to enterprise value (1) See Non-GAAP measures on page 3 of this report. Credit Rating December 31, 2018 240,539 1.9 1,706,253 1,723,350 3,636,043 2,305,890 0.5 5.8 4.5 0.7 December 31, 2017 232,121 2.1 1,730,437 1,754,059 3,892,931 2,782,596 0.5 14.8 5.7 0.6 December 31, 2016 230,874 2.0 1,906,934 1,946,742 4,324,214 3,937,737 0.5 15.6 8.4 0.5 Credit ratings affect our ability to obtain short and long-term financing, the cost of this financing, and our ability to engage in certain business activities cost-effectively. At March 1, 2019 Corporate credit rating Senior Credit Facility rating Senior unsecured credit rating CAPITAL MANAGEMENT Moody’s B2 Not rated B3 S&P BB- Not rated BB- Fitch B+ BB+ BB- To maintain and grow our business, we invest in growth, upgrade and sustaining capital. We base expansion and upgrade capital decisions on return on capital employed and payback, and we mitigate the risk that we may not be able to fully recover our capital by requiring two- to five-year term contracts for new-build rigs. We base our maintenance capital decisions on actual activity levels, using key financial indicators that we express as per operating day or per operating hour. Sourcing internally (through our manufacturing and supply divisions) helps keep our maintenance capital costs as low as possible. 35 Management’s Discussion and Analysis Foreign Exchange Risk Our U.S. and international operations have revenue, expenses, assets and liabilities denominated in currencies other than the Canadian dollar (mostly in U.S. dollars and currencies that are pegged to the U.S. dollar). This means that changes in currency exchange rates can materially affect our income statement, balance sheet and statement of cash flow. We manage this risk by matching the currency of our debt obligations with the currency of cash flows generated by the operations that the debt supports. Hedge of Investments in Foreign Operations We utilize foreign currency long-term debt to hedge our exposure to changes in the carrying values of our net investment in certain foreign operations as a result of changes in foreign exchange rates. During 2018, we designated all of our U.S. dollar senior notes as a net investment hedge in our U.S. dollar denominated foreign operations. To be accounted for as a hedge, the foreign currency denominated long-term debt must be designated and documented as such and must be effective at inception and on an ongoing basis. We recognize the effective amount of this hedge (net of tax) in other comprehensive income. We recognize ineffective amounts in earnings. SOURCES AND USES OF CASH At December 31 (thousands of dollars) Cash from operations Cash used in investing Surplus (deficit) Cash used in financing Effect of exchange rate changes on cash Net cash provided (used) Cash from Operations 2018 293,334 (100,794 ) 192,540 (169,085 ) 8,090 31,545 2017 116,555 (91,150 ) 25,405 (73,784 ) (2,245 ) (50,624 ) 2016 122,508 (213,925 ) (91,417 ) (218,324 ) (19,313 ) (329,054 ) In 2018, we generated cash from operations of $293 million compared with $117 million in 2017. The increase is primarily the result of lower interest payments on our long-term debt and higher cash tax recoveries. Investing Activity We made growth and sustaining capital investments of $126 million in 2018: ∎ $66 million on upgrade and expansion capital ∎ $48 million on maintenance and infrastructure capital ∎ $12 million on intangibles. The $126 million in capital expenditures in 2018 was split between segments as follows: ∎ $108 million in Contract Drilling Services ∎ $5 million in Completion and Production Services ∎ $13 million in Corporate and Other. Expansion and upgrade capital includes the cost of long-lead items purchased for our capital inventory, such as integrated top drives, drill pipe, control systems, engines and other items we can use to complete new-build projects or upgrade our rigs in North America and internationally. We sold underutilized capital assets for proceeds of $24 million in 2018 compared with $15 million in 2017. Financing Activity As discussed on page 34, during the year, we redeemed US$80 million and repurchased and cancelled US$3 million of our 6.5% unsecured senior notes due 2021, repurchased and cancelled US$49 million principal amount of our 5.25% unsecured senior notes due 2024 and extended the maturity date of our Senior Credit Facility to November 21, 2022. Precision Drilling Corporation 2018 Annual Report 36 During 2017, we issued US$400 million of senior notes, redeemed US$62 million of senior notes and repurchased and cancelled US$380 million of senior notes. As of December 31, 2018, our operating facility of $40 million with Royal Bank of Canada was undrawn except for $28 million in outstanding letters of credit; our operating facility of US$15 million with Wells Fargo remained undrawn; and our demand facility for letters of credit of US$30 million with HSBC Canada had US$28 million available. CAPITAL STRUCTURE Debt As of December 31, 2018, we had a cash balance of $97 million, available capacity under our secured facilities of $715 million and $1,729 million outstanding under our senior unsecured notes. Amount Senior facility (secured) US$500 million (extendible, revolving term credit facility with US$250 million(1) accordion feature) Operating facilities (secured) $40 million US$15 million Demand letter of credit facility (secured) US$30 million Senior notes (unsecured) US$166 million – 6.5% US$350 million – 7.75% US$351 million – 5.25% Availability Used for Maturity Undrawn, except US$28 million in outstanding letters of credit General corporate purposes November 21, 2022 Undrawn, except $28 million in outstanding letters of credit Undrawn Letters of credit and general corporate purposes Short term working capital requirements Undrawn, except US$2 million in outstanding letters of credit Letters of credit Fully drawn Fully drawn Fully drawn Fully drawn Capital expenditures and general corporate purposes Debt redemption and repurchases Capital expenditures and general corporate purposes Debt redemption and repurchases December 15, 2021 December 15, 2023 November 15, 2024 January 15, 2026 US$400 million – 7.125% (1) Increases to US$300 million at the end of the covenant relief period of March 31, 2019. Covenants Senior Credit Facility The Senior Credit Facility requires that we comply with certain financial covenants including a leverage ratio of consolidated senior debt to earnings before interest, taxes, depreciation and amortization as defined in the agreement (Covenant EBITDA) of less than or equal to 2.5:1. For purposes of calculating the leverage ratio, consolidated senior debt only includes secured indebtedness. Covenant EBITDA as defined in our Senior Credit Facility agreement differs from Adjusted EBITDA as defined under Non-GAAP Measures by the exclusion of bad debt expense and certain foreign exchange amounts. As of December 31, 2018, our consolidated senior debt to Covenant EBITDA ratio was negative 0.16:1. Under the Senior Credit Facility, we are required to maintain a Covenant EBITDA coverage ratio, calculated as Covenant EBITDA to interest expense for the most recent four consecutive fiscal quarters, of greater than or equal to 1.5:1, which, after the November 2017 amendment increased to 2.0:1 for the periods June 30, September 30, December 31, 2018 and March 31, 2019 and reverts to 2.5:1 for periods ending after March 31, 2019 until the maturity date of the facility. As of December 31, 2018, our Covenant EBITDA coverage ratio was 3.31:1. The Senior Credit Facility prevents us from making distributions prior to April 1, 2019, after which, distributions are subject to a pro forma senior net leverage covenant of less than or equal to 1.75:1. The Senior Credit Facility also 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. 37 Management’s Discussion and Analysis In addition, the Senior Credit Facility contains certain covenants that place restrictions on our ability to incur or assume additional indebtedness; dispose of assets; pay dividends, share redemptions or other distributions; change our primary business; incur liens on assets; engage in transactions with affiliates; enter into mergers, consolidations or amalgamations; and enter into speculative swap agreements. At December 31, 2018, we were in compliance with the covenants of the Senior Credit Facility. Senior Notes The senior notes require that we comply with certain covenants including an incurrence based consolidated interest coverage ratio test, as defined in the senior note agreements, of greater than or equal to 2.0:1 for the most recent four consecutive fiscal quarters. In the event that our consolidated interest coverage ratio is less than 2.0:1 for the most recent four consecutive fiscal quarters the senior notes restrict our ability to incur additional indebtedness, except as permitted under the agreements, until such time as we are in compliance with the ratio test but would not restrict our access to available funds under the Senior Credit Facility or refinance our existing debt. Furthermore, it does not give rise to any cross-covenant violations, give the lenders the right to demand repayment of any outstanding portion of the senior notes prior to the stated maturity dates, or provide any other forms of recourse to the lenders. As of December 31, 2018, our senior notes consolidated interest coverage ratio was 2.8:1. The senior notes contain a restricted payments covenant that limits our ability to make payments in the nature of dividends, distributions and repurchases from shareholders. The restricted payments basket grows from a starting point of October 1, 2010 for the 2021 and 2024 Senior Notes, from October 1, 2016 for the 2023 Senior Note and October 1, 2017 for the 2026 Senior Note by, among other things, 50% of cumulative consolidated net earnings, and decreases by 100% of cumulative consolidated net losses as defined in the note agreements, and cumulative payments made to shareholders. Based on our consolidated financial results for the period ended December 31, 2015, the governing net restricted payments basket under the senior notes was negative $152 million prohibiting us from making any further dividend payments for dividends declared on or after December 31, 2015 until the restricted payments baskets become positive. As a result, Precision suspended our dividend on February 11, 2016. Based on our consolidated financial results for the period ended December 31, 2018, the governing net restricted payments basket was negative $496 million. For further information, please see the senior note indentures which are available on SEDAR and EDGAR. In addition, the senior notes contain certain covenants that limit our ability, and the ability of certain subsidiaries, to incur additional indebtedness and issue preferred shares; create liens; create or permit to exist restrictions on our ability or certain subsidiaries to make certain payments and distributions; engage in amalgamations, mergers or consolidations; make certain dispositions and engage in transactions with affiliates. Shelf Registration In August 2016, we completed the filing of a short form base shelf prospectus with the securities regulatory authorities in each of the provinces of Canada and a corresponding registration statement in the U.S., for the offering of up to $1 billion of common shares, preferred shares, debt securities, warrants, subscription receipts or units (the Securities). The Securities may be offered from time to time during the 25-month period for which the short form base shelf prospectus remains valid. During 2018, the shelf registration period lapsed and was not renewed. Contractual Obligations Our contractual obligations include both financial obligations (long-term debt and interest) and non-financial obligations (new- build rig commitments, operating leases, and equity-based compensation for key executives and officers). Precision Drilling Corporation 2018 Annual Report 38 The table below shows the amounts of these obligations and when payments are due for each. At December 31, 2018 (thousands of dollars) Long-term debt(1) Interest on long-term debt(1) Purchase of property, plant and equipment(1)(2) Operating leases(1) Contractual incentive plans(1)(3) Total Payments due (by period) Less than 1 year — 115,802 88,046 13,496 6,221 223,565 1-3 years 226,113 230,992 91,797 20,418 10,439 579,760 4-5 years 477,823 200,667 — 16,221 — 694,711 More than 5 years 1,025,415 101,457 — 17,797 — 1,144,669 Total 1,729,351 648,918 179,843 67,932 16,660 2,642,705 (1) U.S. dollar denominated balances are translated at the period end exchange rate of Cdn$1.00 equals US$0.7325. (2) The balance relates primarily to the costs of rig equipment with a flexible delivery schedule wherein we can take delivery of the equipment between 2019 and 2021 at our discretion. (3) Includes amounts we have not yet accrued but are likely to pay at the end of the contract term. Our long-term incentive plans compensate officers and key employees through cash payments when their awards vest. Equity-based compensation amounts are shown based on the five-day weighted average share price on the TSX of $2.36 at December 31, 2018. Shareholders Capital Shares outstanding Deferred shares outstanding Share options outstanding March 1, 2019 293,781,836 93,173 10,441,601 December 31, 2018 293,781,836 93,173 10,799,006 December 31, 2017 293,238,858 195,743 10,458,981 December 31, 2016 293,238,858 195,743 11,525,742 You can find more information about our capital structure in our AIF, available on our website and on SEDAR. Common Shares Our articles of amalgamation allow us to issue an unlimited number of common shares. In the fourth quarter of 2012, we introduced a quarterly dividend program. The dividend program was suspended in the first quarter of 2016. See Covenants – Senior Notes on page 38 for more information. Preferred Shares We can issue preferred shares in one or more series. The number of preferred shares that may be authorized for issue at any time cannot exceed more than half of the number of issued and outstanding common shares. We currently have no preferred shares issued. Enterprise Value (thousands of dollars, except shares outstanding and per share amounts) Shares outstanding Year-end share price on the TSX Shares at market Long-term debt Less cash Enterprise value December 31, 2018 293,781,836 2.37 696,263 1,706,253 (96,626 ) 2,305,890 December 31, 2017 293,238,858 3.81 1,117,240 1,730,437 (65,081 ) 2,782,596 December 31, 2016 293,238,858 7.32 2,146,508 1,906,934 (115,705 ) 3,937,737 39 Management’s Discussion and Analysis Accounting Policies and Estimates Management’s Discussion and Analysis CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS Because of the nature of our business, we are required to make estimates about the future that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent liabilities. Estimates are based on our past experience, our best judgment and assumptions we think are reasonable. Our significant accounting policies are described in Note 3 to the Consolidated Financial Statements. We believe the following are the most difficult, subjective or complex judgments, and are the most critical to how we report our financial position and results of operations: ∎ impairment of long-lived assets ∎ depreciation and amortization ∎ income taxes. Impairment of Long-Lived Assets Long-lived assets, which include property, plant and equipment, intangibles and goodwill, comprise the majority of our assets. The carrying value of these assets is reviewed for impairment periodically or whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. For property, plant and equipment, this requires us to forecast future cash flows to be derived from the utilization of these assets based on assumptions about future business conditions and technological developments. Significant, unanticipated changes to these assumptions could require a provision for impairment in the future. For goodwill, we conduct impairment tests annually in the fourth quarter or whenever there is a change in circumstance that indicates that the carrying value may not be recoverable. The recoverability of goodwill requires a calculation of the recoverable amount of the CGU or groups of CGUs to which goodwill has been allocated. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Judgment is required in the aggregation of assets into CGUs. The recoverability calculation requires an estimation of the future cash flows from the CGU or group of CGUs, and judgment is required in projecting cash flows and selecting the appropriate discount rate. We use observable market data inputs to develop a discount rate that we believe approximates the discount rate from market participants. In deriving the underlying projected cash flows, assumptions must also be made about future drilling activity, margins and market conditions over the long-term life of the assets or CGUs. We cannot predict if an event that triggers impairment will occur, when it will occur or how it will occur, or how it will affect reported asset amounts. Although we believe the estimates are reasonable and consistent with current conditions, internal planning, and expected future operations, such estimations are subject to significant uncertainty and judgment. Depreciation and Amortization Our property, plant and equipment and intangible assets are depreciated and amortized based on estimates of useful lives and salvage values. These estimates consider data and information from various sources, including vendors, industry practice, and our own historical experience, and may change as more experience is gained, market conditions shift, or new technological advancements are made. Determination of which parts of the drilling rig equipment represent a significant cost relative to the entire rig and identifying the consumption patterns along with the useful lives of these significant parts are matters of judgment. This determination can be complex and subject to differing interpretations and views, particularly when rig equipment comprises individual components for which different depreciation methods or rates are appropriate. Precision Drilling Corporation 2018 Annual Report 40 Income Taxes Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and timing of future taxable income. Differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to taxable income and expenses already recorded. We establish provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities of the respective countries in which we operate. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority. AMENDMENTS TO ACCOUNTING STANDARDS ADOPTED JANUARY 1, 2018 We applied the following mandatorily effective amendments to IFRSs in the current year. Outside of additional disclosure requirements, these amendments had no impact on the amounts recorded in our financial statements. IFRS 9, Financial Instruments IFRS 9 replaced IAS 39 Financial Instruments, Recognition and Measurement. IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost, fair value through other comprehensive income and fair value through profit or loss. The classification of financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and the characteristics of its contractual cash flows. IFRS 9 eliminates the previous IAS 39 categories of held to maturity, loans and receivables and available for sale. Under IFRS 9, derivatives embedded in contracts where the host is a financial asset under the standard are never separated. Instead the hybrid financial instrument as a whole is assessed for classification. Under the new standard, Precision’s accounts receivable, accounts payable and accrued liabilities and long-term debt have been classified and measured at amortized cost. IFRS 9 replaced the incurred loss model of IAS 39 with an expected credit loss model. The loss allowance to be recorded against trade receivables is measured as the lifetime expected credit losses. Due to low historical default rates, there was no material adjustment to the credit loss allowance. IFRS 15, Revenue from Contracts with Customers IFRS 15 established a single comprehensive model to address how and when to recognize revenue as well as requiring entities to provide users of financial statements with more informative, relevant disclosures in order to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. It replaced existing revenue recognition guidance including IAS 18 Revenue and IAS 11 Construction Contracts. The standard provides a principle based five-step model to be applied to all contracts with customers. This five-step model involves identifying the contract(s) with a customer; identifying the performance obligations in the contract; determining the transaction price; allocating the transaction price to the performance obligations in the contract; and recognizing revenue when (or as) the entity satisfies performance obligations. During its initial application of IFRS 15, the Corporation did not apply any of the available practical expedients. The application of IFRS 15 did not result in a material impact to the Corporation’s consolidated financial statements. For additional information about the Corporation’s accounting policies with respect to revenue recognition, see Note 3(j) in our Consolidated Financial Statements. ACCOUNTING STANDARDS, INTERPRETATIONS AND AMENDMENTS TO EXISTING STANDARDS NOT YET EFFECTIVE IFRS 16, Leases On January 1, 2019, Precision will adopt IFRS 16 - Leases. This standard introduces a single, on-balance sheet lease accounting model for lessees and requires a lessee to recognize a right-of-use asset representing its right to direct the use of the underlying asset as well as a lease liability representing its obligation to make future lease payments. IFRS 16 will also cause expenses to be higher at the beginning and lower towards the end of a lease, even when payments are consistent throughout the term. The standard includes recognition exemptions for short-term leases and leases of low-value items. Lessor accounting remains similar to the current standard in which lessors continue to classify leases as either finance or operating leases. 41 Management’s Discussion and Analysis IFRS 16 will replace existing lease guidance, including IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases – Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. Precision has completed its review of the existing contracts that are currently classified as leases under the existing standard, or that could be classified as leases under IFRS 16, in order to identify the contracts that will be impacted by the new standard from the perspective of both a lessor and a lessee. Management has also estimated the impact that the initial application of IFRS 16 will have on its consolidated financial statements, as described below. The actual impact of adopting the standard on January 1, 2019 may differ from what is described below as Precision’s accounting policies, including the election to apply certain practical expedients, are subject to change until presented in its first published financial statements after the date of initial application. Leases in which Precision is a lessee Precision will recognize right-of-use assets and lease liabilities for its real estate, vehicle, office equipment and other contracts that are currently classified as operating leases. The nature of expenses related to those leases will change as Precision will depreciate the right-of-use assets and recognize interest expense on its lease liabilities. Under the existing standard, Precision recognizes operating lease expenses on a straight-line basis over the term of the lease in either operating or general and administrative expense and recognizes assets and liabilities only to the extent there was a timing difference between the payment date and the recognition of the expense. Based on the information currently available, Precision estimates that it will recognize lease liabilities and corresponding right- of-use assets of approximately $60 million - $70 million on January 1, 2019 related to contracts where it is the lessee. Precision does not expect a material adjustment to the opening balance of retained earnings on January 1, 2019 upon the initial application of IFRS 16. The actual impact of adopting the standard on January 1, 2019 may differ from these estimates as the Corporation continues to review its calculations and may refine certain inputs therein, such as the discount rate and lease term. Leases in which Precision is a lessor Precision evaluated its drilling rigs under term contracts longer than one year and determined that these meet the definition of a lease under IFRS 16. Precision expects to classify these as operating leases, and accordingly, will recognize lease income over the term of the respective drilling contract. This is not expected to give rise to differences in the recognition or measurement of revenues from these contracts as compared to Precision’s existing accounting policies. Precision reassessed the classification of its real estate sub-leases in which it is a lessor. These are classified as an operating lease under the existing lease standard and management does not expect to reclassify these as finance leases. Transition There are two methods by which the new standard may be adopted: (1) a full retrospective approach with a restatement of all prior periods presented, or (2) a modified retrospective approach with a cumulative-effect adjustment recognized in opening retained earnings as of the date of adoption, with no restatement of comparative information. Precision will apply IFRS 16 initially on January 1, 2019, using the modified retrospective approach. When applying a modified retrospective approach to leases previously classified as operating leases under IAS 17, the lessee can elect, on a lease-by-lease basis, whether to apply a number of practical expedients on transition. On initial adoption of the new standard, the Corporation intends to use the following practical expedients, where applicable: ∎ not applying the requirements of the standard to short-term leases ∎ treat existing operating leases with a remaining term of less than 12 months at January 1, 2019 as short-term leases ∎ not applying the requirements of the standard to low-value leases, and ∎ applying a single discount rate to a portfolio of leases with reasonably similar characteristics. As a result of the adoption of the new standard, Precision will be required to include significant disclosures in the consolidated financial statements based on the prescribed requirements. These new disclosures will include information regarding the judgments used in determining discount rates and terms of leases including optional renewal periods. The Corporation will include the required disclosures in its 2019 first quarter condensed consolidated interim financial statements. IFRIC 23, Uncertainty over Income Tax Treatments IFRIC 23 clarifies the accounting for uncertainties in income taxes. The interpretation requires the entity to use the most likely amount or the expected value of the tax treatment if it concludes that it is not probable that a particular tax treatment will be accepted. It requires an entity to assume that a taxation authority with the right to examine any amounts reported to it will examine those amounts and will have full knowledge of all relevant information when doing so. Precision Drilling Corporation 2018 Annual Report 42 IFRIC 23 is effective for annual reporting periods beginning on or after January 1, 2019. The requirements are applied by recognizing the cumulative effect of initially applying them in retained earnings, or in other appropriate components of equity, at the start of the reporting period in which an entity first applies them, without adjusting comparative information. Full retrospective application is permitted, if an entity can do so without using hindsight. Precision has reviewed its initial application of IFRIC 23 and determined it will not have a material impact on the consolidated financial statements. The actual impact of adopting the standard on January 1, 2019 may differ as Precision’s accounting policies are subject to change until presented in its first published financial statements after the date of initial application. 43 Management’s Discussion and Analysis Risks in Our Business Management’s Discussion and Analysis Our key business risks are summarized below. Additional information and other risks in our business are discussed in our AIF, available on our website (www.precisiondrilling.com). Our enterprise risk management framework operates at the business and functional levels and is designed to identify, evaluate, and mitigate risks within each of the risk categories below. It leverages the risk framework in each of our businesses, which includes our risk policies, guidelines and review mechanisms. Our businesses routinely encounter and manage risks, some of which may cause our future results to be different, sometimes materially different, than what we presently anticipate. We describe certain important strategic, operational, financial, and legal and compliance risks. Our response to development in those risk areas and our reactions to material future developments will affect our future results. Our operations depend on the price of oil and natural gas, which have been subject to increased volatility in recent years, and the exploration and development activities of oil and natural gas exploration companies We sell our services to oil and natural gas exploration and production companies. Macroeconomic and geopolitical factors associated with oil and natural gas supply and demand are the primary factors driving pricing and profitability in the oilfield services industry. Generally, we experience high demand for our services when commodity prices are relatively high and the opposite is true when commodity prices are relatively low, as is currently the case. The volatility of crude oil and natural gas prices accounts for much of the cyclical nature of the oilfield services business and in recent years, increased volatility has led to greater uncertainty in the demand for our services. The markets for oil and natural gas are separate and distinct. Oil is a global commodity with a vast distribution network, although the differential between benchmarks such as West Texas Intermediate, Western Canadian Select, and European Brent crude oil can fluctuate. As in all markets, when supply, demand, inability to access domestic or export markets and other factors change, so can the spreads between benchmarks. The most economical way to transport natural gas is in its gaseous state by pipeline, and the natural gas market depends on pipeline infrastructure and regional supply and demand. However, developments in the transportation of liquefied natural gas in ocean going tanker ships have introduced an element of globalization to the natural gas market. Worldwide military, political and economic events, such as conflict in the Middle East, expectations for global economic growth, trade disputes, or initiatives by OPEC and other major petroleum exporting countries, can affect supply and demand for oil and natural gas. Weather conditions, governmental regulation (in Canada and elsewhere), levels of consumer demand, the availability and pricing of alternate sources of energy (including renewal energy initiatives), the availability of pipeline capacity and other transportation for oil and natural gas, U.S. and Canadian oil and natural gas storage levels, and other factors beyond our control can also affect the supply of and demand for oil and natural gas and lead to future price volatility. The North American land drilling industry has been in a downturn relative to activity levels experienced prior to 2015, a result of lower commodity prices restricting customer spending and decreasing drilling demand. In 2018, approximately 19,300 wells were started onshore in the U.S., compared to approximately 43,700 in 2014. In 2018, the industry drilled 6,781 wells in western Canada, compared to 10,942 in 2014. According to industry sources, the U.S. average active land drilling rig count was up approximately 18% in 2018, compared to 2017, and the Canadian average active land drilling rig count was down approximately 7% during the same period. However, oil and natural gas prices remained volatile throughout 2018 and could continue at these relatively low levels or lower levels for the foreseeable future. Prices have been negatively affected since late 2014 by a combination of factors, including increased production, the decisions of OPEC and Russia and a strengthening in the U.S. dollar relative to most other currencies. These factors have adversely affected, and could continue to adversely affect, the price of oil and natural gas, which would adversely affect the level of capital spending by our customers and in turn could have a material and adverse effect on our results of operations. As a result of the continued pressure on commodity prices, many of our customers have reduced spending budgets compared to periods prior to the downturn, and further reductions in commodity prices or prices remaining at current levels for a prolonged period may result in further reductions in capital budgets in the future, which could result in cancelled, delayed or reduced drilling programs by our customers and a corresponding decline in demand for our services. Moreover, the prolonged reduction in oil Precision Drilling Corporation 2018 Annual Report 44 and natural gas prices has depressed, and may continue to depress, and the availability and pricing of alternative sources of energy and technological advances may depress, the overall level of exploration and production activity, resulting in corresponding decline in the demand for our services. In late 2018 and into 2019, as a result of oil and natural gas price volatility and regulatory uncertainty, some of our Canadian customers have delayed announcing their 2019 capital budgets, which has created some uncertainty in the level of demand for our services in Canada. If a reduction in exploration and development activities, whether resulting from changes in oil and natural gas prices and reductions in capital budgets described above or otherwise, continues or worsens, it could materially and adversely affect us further by:  negatively impacting our revenue, cash flow, profitability and financial condition  restricting our ability to make capital expenditures compared to periods prior to the downturn and our ability to meet future contracted deliveries of new-build rigs  affecting the existing fair market value of our rig fleet, which in turn could trigger a write-down for accounting purposes  our customers negotiating, terminating, or failing to honour their drilling contracts with us  making our Senior Credit Facility financial covenants more difficult to attain, and  negatively impacting our ability to maintain or increase our borrowing capacity, our ability to obtain additional capital to finance our business and our ability to achieve our debt reduction targets. There is no assurance that demands for our services or conditions in the oil and natural gas and oilfield services sector will not decline in the future, and a significant decline in demand could have a material adverse effect on our financial condition. Additionally, we have accounts receivable with customers in the oil and natural gas industry and their revenues may be affected by fluctuations in commodity prices. Our ability to collect receivables may be adversely affected by any prolonged weakness in oil and natural gas prices. Pipeline constraints in western Canada have an adverse effect on the demand for our services in Canada In western Canada, delays and/or the inability to obtain necessary regulatory approvals for pipeline projects that would provide additional transportation capacity and access to refinery capacity for our customers has led to downward price pressure on oil and natural gas produced in western Canada, which has depressed, and may continue to depress, the overall exploration and production activity of our customers. Additionally, this regulatory uncertainty in Canada has impacted some of our customers’ ability to obtain financing, which has also depressed overall exploration and production activity. These factors result in a corresponding decline in the demand for our services that could have a material adverse effect on our revenue, cash flow, and profitability. In December 2018, the Province of Alberta introduced mandatory curtailment on heavy oil production within the Province of Alberta, which has resulted in reduced differentials between WTI pricing and Western Canada Select Pricing; however, with a limited line of sight to new pipeline additions, customer spending in Canada is expected to be down significantly in the first half of the year with the potential for increased activity later in the year. Intense price competition and the cyclical nature of the contract drilling industry could have an adverse effect on revenue and profitability The contract drilling business is highly competitive with many industry participants. We compete for drilling contracts that are usually awarded based on competitive bids. We believe pricing and rig availability are the primary factors potential customers consider when selecting a drilling contractor. We believe other factors are also important, such as the drilling capabilities and condition of drilling rigs, the quality of service and experience of rig crews, the safety record of the contractor and the particular drilling rig, the offering of ancillary services, the ability to provide drilling equipment that is adaptable to and having personnel familiar with new technologies and drilling techniques, and rig mobility and efficiency. Historically, contract drilling has been cyclical with periods of low demand, excess rig supply and low day rates, followed by periods of high demand, short rig supply and increasing day rates. Periods of excess drilling rig supply intensify the competition and often result in rigs being idle. There are numerous contract drilling companies in the markets where we operate, and an oversupply of drilling rigs can cause greater price competition. Contract drilling companies compete primarily on a regional basis, and the intensity of competition can vary significantly from region to region at any particular time. If demand for drilling services is better in a region where we operate, our competitors might respond by moving suitable drilling rigs in from other regions, reactivating previously stacked rigs or purchasing new drilling rigs. An influx of drilling rigs into a market from any source could rapidly intensify competition and make any improvement in the demand for our drilling rigs short-lived, which could in turn have a material adverse effect on our revenue, cash flow and earnings. 45 Management’s Discussion and Analysis Our business results and the strength of our financial position are affected by our ability to strategically manage our capital expenditure program in a manner consistent with industry cycles and fluctuations in the demand for contract drilling services. If we do not effectively manage our capital expenditures or respond to market signals relating to the supply or demand for contract drilling and oilfield services, it could have a material adverse effect on our revenue, operations and financial condition. New capital expenditures in the contract drilling industry expose us to the risk of oversupply of equipment Periods of high demand often lead to higher capital expenditures on drilling rigs and other oilfield services equipment. The number of newer drilling rigs competing for work in markets where we operate has increased as the industry has added new and upgraded rigs. The industry supply of drilling rigs may exceed actual demand because of the relatively long-life span of oilfield services equipment as well as the typically long time from when a decision is made to upgrade or build new equipment to when the equipment is built and placed into service. Excess supply resulting from industry-wide capital expenditures could lead to lower demand for term drilling contracts and for our equipment and services. The additional supply of drilling rigs has intensified price competition in the past and could continue to do so. This could lead to lower day rates in the oilfield services industry generally and lower utilization of existing rigs. If any of these factors materialize, it would have an adverse effect on our revenue, cash flow, earnings and asset valuation. We require sufficient cash flows to service and repay our debt We will need sufficient cash flows in the future to service and repay our debt. Our ability to generate cash in the future is affected to some extent by general economic, financial, competitive and other factors that may be beyond our control. If we need to borrow funds in the future to service our debt, our ability will depend on covenants in the Senior Credit Facility, the 2021 Note Indenture, the 2023 Note Indenture, the 2024 Note Indenture, the 2026 Note indenture and other debt agreements we may have in the future, and on our credit ratings. We may not be able to access sufficient amounts under the Senior Credit Facility or from the capital markets in the future to pay our obligations as they mature, or to fund other liquidity requirements. If we are not able to borrow a sufficient amount or generate enough cash flow from operations to service and repay our debt, we will need to refinance our debt or we will be in default, and we could be forced to reduce or delay investments and capital expenditures or dispose of material assets or issue equity. We may not be able to refinance or arrange alternative measures on favourable terms or at all. If we are unable to service, repay or refinance our debt, it could have a negative impact on our financial condition and results of operations. Repaying our debt depends on our guarantor subsidiaries generating cash flow and making it available to us by dividend, debt repayment or otherwise. Our guarantor subsidiaries may not be able to, or may not be permitted to, make distributions to allow us to make payments on our debt. Each guarantor subsidiary is a distinct legal entity, and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from the subsidiaries. While the agreements governing certain existing debt limits the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to qualifications and exceptions. A substantial portion of our operations is carried out through subsidiaries, and some of them are not guarantors of our debt. The assets of the non-guarantor subsidiaries represent approximately 15% of Precision’s consolidated assets. These subsidiaries do not have any obligation to pay amounts due on the debt or to make funds available for that purpose. If we do not receive dividends from our guarantor subsidiaries, we may be unable to make the required principal and interest payments, which could have a material adverse effect on our financial position and results of operations. Customers’ inability to obtain credit/financing could lead to lower demand for our services Many of our customers require reasonable access to credit facilities and debt capital markets to finance their oil and natural gas drilling activity. If the availability of credit to our customers is reduced, they may reduce their drilling and production expenditures, thereby decreasing demand for our products and services. In Canada, the Supreme Court of Canada’s 2019 Redwater decision (Orphan Well Association v. Grant Thornton Ltd., which held that abandonment and reclamation obligations of a bankrupt debtor were binding on the debtor’s trustee) may increase the cost of capital for our Canadian customers and could impact the availability for credit for those customers while secured lenders assess the impact of the decision. A reduction in spending by our customers could adversely affect our operating results and financial condition as described further under – “Our operations depend on the price of oil and natural gas, which have been subject to increase volatility in recent years, and the exploration and development activities of oil and natural gas exploration companies” on page 44. Precision Drilling Corporation 2018 Annual Report 46 Our debt facilities contain restrictive covenants The Senior Credit Facility, the 2021 Note Indenture, the 2023 Note Indenture, the 2024 Note Indenture and the 2026 Note indenture contain a number of covenants which, among other things, restrict us and some of our subsidiaries from conducting certain activities (see Capital Structure – Covenants – Senior Notes on page 38). In the event Consolidated Interest Coverage Ratio (as defined in our four senior note indentures) is less than 2.0:1 for the most recent four consecutive fiscal quarters, the senior note indentures restrict our ability to incur additional indebtedness. As at December 31, 2018, our Consolidated Interest Coverage Ratio, as calculated per our senior note indentures, was 2.8:1. In addition, we must satisfy and maintain certain financial ratio tests under the Senior Credit Facility (see Capital Structure – Senior Credit Facility on page 37). Events beyond our control could affect our ability to meet these tests in the future. If we breach any of the covenants, it could result in a default under the Senior Credit Facility or any of the note indentures. If there is a default under our Senior Credit Facility, the applicable lenders could decide to declare all amounts outstanding under the Senior Credit Facility or any of the note indentures to be due and payable immediately and terminate any commitments to extend further credit. If there is an acceleration by the lenders and the accelerated amounts exceed a specific threshold, the applicable noteholders could decide to declare all amounts outstanding under any of the note indentures to be due and payable immediately. At December 31, 2018, we were in compliance with the covenants of the Senior Credit Facility. Uncertainty in Trade Relations Ratification of the United States-Mexico-Canada Agreement (USMCA) deal to replace the North American Free Trade Agreement (NAFTA) may be delayed or prevented in the U.S. House of Representatives following the U.S. mid-term elections. Changes that could have had an impact on the oil and natural gas industry were not included in the USMCA; however, as the final terms and ratification of the USMCA remain uncertain, it is currently unclear how this agreement may affect the U.S., Mexico and Canada and what effects the final terms will have on our operations. In addition, implementation by the U.S. of new legislative or regulatory regimes or tariffs could impose additional costs on us, decrease U.S., Mexico or Canadian demand for our services or otherwise negatively impact us or our customers, which may have a material adverse effect on our business, financial condition and operations. Risks and uncertainties associated with our international operations can negatively affect our business We conduct some of our business in the Middle East. Our growth plans contemplate establishing operations in other international regions, including countries where the political and economic systems may be less stable than in Canada or the U.S. Our international operations are subject to risks normally associated with conducting business in foreign countries, including, but not limited to, the following:  an uncertain political and economic environment  the loss of revenue, property and equipment as a result of expropriation, confiscation, nationalization, contract deprivation and force majeure  war, terrorist acts or threats, civil insurrection and geopolitical and other political risks  fluctuations in foreign currency and exchange controls  restrictions on the repatriation of income or capital  increases in duties, taxes and governmental royalties  renegotiation of contracts with governmental entities  changes in laws and policies governing operations of companies  compliance with anti-corruption and anti-bribery legislation in Canada, the U.S. and other countries, and  trade restrictions or embargoes imposed by the U.S. or other countries. If there is a dispute relating to our international operations, we may be subject to the exclusive jurisdiction of foreign courts or may not be able to subject foreign persons to the jurisdiction of a court in Canada or the U.S. 47 Management’s Discussion and Analysis Government-owned petroleum companies located in some of the countries where we operate now or in the future may have policies, or may be subject to governmental policies, that give preference to the purchase of goods and services from companies that are majority-owned by local nationals. As such, we may rely on joint ventures, license arrangements and other business combinations with local nationals in these countries, which may expose us to certain counterparty risks, including the failure of local nationals to meet contractual obligations or comply with local or international laws that apply to us. In the international markets where we operate, we are subject to various laws and regulations that govern the operation and taxation of our businesses and the import and export of our equipment from country to country. There may be uncertainty about how these laws and regulations are imposed, applied or interpreted, and they could be subject to change. Since we derive a portion of our revenues from subsidiaries outside of Canada and the U.S., the subsidiaries paying dividends or making other cash payments or advances may be restricted from transferring funds in or out of the respective countries, or face exchange controls or taxes on any payments or advances. We have organized our foreign operations partly based on certain assumptions about various tax laws (including capital gains and withholding taxes), foreign currency exchange, and capital repatriation laws and other relevant laws of a variety of foreign jurisdictions. We believe these assumptions are reasonable; however, there is no assurance that foreign taxing or other authorities will reach the same conclusion. If these foreign jurisdictions change or modify the laws, we could suffer adverse tax and financial consequences. While we have developed policies and procedures designed to achieve compliance with applicable international laws, we could be exposed to potential claims, economic sanctions or other restrictions for alleged or actual violations of international laws related to our international operations, including anti-corruption and anti-bribery legislation, trade laws and trade sanctions. The Canadian government, the U.S. Department of Justice, the Securities and Exchange Commission (SEC), the U.S. Office of Foreign Assets Control and similar agencies and authorities in other jurisdictions have a broad range of civil and criminal penalties they may seek to impose against corporations and individuals for such violations, including injunctive relief, disgorgement, fines, penalties and modifications to business practices and compliance programs, among other things. While we cannot accurately predict the impact of any of these factors, if any of those risks materialize, it could have a material adverse effect on our reputation, business, financial condition, results of operations and cash flow. Our and our customer’s operations are subject to numerous environmental laws, regulations and guidelines Our operations are affected by numerous laws, regulations and guidelines relating to the protection of the environment, including those governing the management, transportation and disposal of hazardous substances and other waste materials. These include those relating to spills, releases and discharges of hazardous substances or other waste materials into the environment, requiring removal or remediation of pollutants or contaminants, and imposing civil and criminal penalties for violations. Some of these apply to our operations and authorize the recovery of damages by the government, injunctive relief, and the imposition of stop, control, remediation and abandonment orders. In addition, our land drilling operations may be conducted in or near ecologically sensitive areas, such as wetlands that are subject to special protective measures, which may expose us to additional operating costs and liabilities for noncompliance with certain laws. Some environmental laws and regulations may impose strict and, in certain cases joint and several, liability. This means that in some situations we could be exposed to liability as a result of conduct that was lawful at the time it occurred, or conditions caused by prior operators or other third parties, including any liability related to offsite treatment or disposal facilities. The costs arising from compliance with these laws, regulations and guidelines may be material. Major projects which would benefit our customers, such as new pipelines and other facilities, may be inhibited, delayed or stopped by a variety of factors, including inability to obtain regulatory or governmental approvals or public opposition. We maintain liability insurance, including insurance for certain environmental claims, but coverage is limited and some of our policies exclude coverage for damages resulting from environmental contamination. We cannot assure that insurance will continue to be available to us on commercially reasonable terms, that the possible types of liabilities that we may incur will be covered by insurance, or that the dollar amount of the liabilities will not exceed our policy limits. Even a partially uninsured claim, if successful and of sufficient magnitude, could have a material adverse effect on our business, financial condition, results of operations and future prospects. Environment regulations could have a significant impact on the energy industry The subject of energy and the environment has created intense public debate around the world in recent years. Debate is likely to continue for the foreseeable future and could potentially have a significant impact on all aspects of the economy. The trend in environmental regulation has been to impose more restrictions and limitations on activities that may impact the environment. Any regulatory changes that impose additional environmental restrictions or requirements on us, or our customers, could increase our operating costs and potentially lead to lower demand for our services and have an adverse effect on us. For example, there is growing concern about the apparent connection between the burning of fossil fuels and climate change. Laws, Precision Drilling Corporation 2018 Annual Report 48 regulations or treaties concerning climate change or greenhouse gas emissions can have an adverse impact on the demand for oil and natural gas, which could have a material adverse effect on us. Governments in Canada and the U.S. are also considering more stringent regulation or restriction of hydraulic fracturing, a technology used by most of our customers that involves the injection of water, sand and chemicals under pressure into rock formations to stimulate oil and natural gas production. Increasing regulatory restrictions could have a negative impact on the exploration of unconventional energy resources, which are only commercially viable with the use of hydraulic fracturing. Laws relating to hydraulic fracturing are in various stages of development at levels of governments in markets where we operate and the outcome of these developments and their effect on the regulatory landscape and the contract drilling industry is uncertain. Hydraulic fracturing laws or regulations that cause a decrease in the completion of new oil and natural gas wells and an associated decrease in demand for our services could have a material adverse effect on our operations and financial results. Poor safety performance could lead to lower demand for our services Standards for accident prevention in the oil and natural gas industry are governed by service company safety policies and procedures, accepted industry safety practices, customer-specific safety requirements, and health and safety legislation. Safety is a key factor that customers consider when selecting an oilfield services company. A decline in our safety performance could result in lower demand for services, and this could have a material adverse effect on our revenue, cash flow and earnings. We are subject to various health and safety laws, rules, legislation and guidelines which can impose material liability, increase our costs or lead to lower demand for our services. Relying on third-party suppliers has risks We source certain key rig components, raw materials, equipment and component parts from a variety of suppliers in Canada, the U.S. and internationally. We also outsource some or all construction services for drilling and service rigs, including new-build rigs, as part of our capital expenditure programs. We maintain relationships with several key suppliers and contractors and an inventory of key components, materials, equipment and parts. We also place advance orders for components that have long lead times. We may, however, experience cost increases, delays in delivery due to strong activity or financial hardship of suppliers or contractors, or other unforeseen circumstances relating to third parties. If our current or alternate suppliers are unable to deliver the necessary components, materials, equipment, parts and services we require for our businesses, including the construction of new-build drilling rigs, it can delay service to our customers and have a material adverse effect on our revenue, cash flow and earnings. Acquisitions entail numerous risks and may disrupt our business or distract management We consider and evaluate acquisitions of, or significant investments in, complementary businesses and assets as part of our business strategy. Acquisitions involve numerous risks, including unanticipated costs and liabilities, difficulty in integrating the operations and assets of the acquired business, the ability to properly access and maintain an effective internal control environment over an acquired company to comply with public reporting requirements, potential loss of key employees and customers of the acquired companies, and an increase in our expenses and working capital requirements. Any acquisition could have a material adverse effect on our operating results, financial condition or the price of our securities. We may incur substantial debt to finance future acquisitions and also may issue equity securities or convertible securities for acquisitions. Debt service requirements could be a burden on our results of operations and financial condition. We would also be required to meet certain conditions to borrow money to fund future acquisitions. Acquisitions could also divert the attention of management and other employees from our day-to-day operations and the development of new business opportunities. Even if we are successful in integrating future acquisitions into our operations, we may not derive the benefits such as operational or administrative synergies we expect from acquisitions, which may result in us committing capital resources and not receiving the expected returns. In addition, we may not be able to continue to identify attractive acquisition opportunities or successfully acquire identified targets. New technology could reduce demand for certain rigs or put us at a competitive disadvantage Complex drilling programs for the exploration and development of conventional and unconventional oil and natural gas reserves demand high performance drilling rigs. The ability of drilling rig service providers to meet this demand depends on continuous improvement of existing rig technology, such as drive systems, control systems, automation, mud systems and top drives, to improve drilling efficiency. Our ability to deliver equipment and services that meet customer demand is essential to our continued success. We cannot guarantee that our rig technology will continue to meet the needs of our customers, especially as rigs age 49 Management’s Discussion and Analysis and technology advances, or that our competitors will not develop technological improvements that are more advantageous, timely, or cost effective. Our operations face risks of interruption and casualty losses Our operations face many hazards inherent in the drilling and well servicing industries, including blowouts, cratering, explosions, fires, loss of well control, loss of hole, reservoir damage, loss of directional control, damaged or lost equipment, and damage or loss from inclement weather or natural disasters. Any of these hazards could result in personal injury or death, damage to or destruction of equipment and facilities, suspension of operations, environmental damage, damage to the property of others, and damage to producing or potentially productive oil and natural gas formations that we drill through. Generally, drilling and service rig contracts separate the responsibilities of a drilling or service rig company and the customer, and we try to obtain indemnification from our customers by contract for some of these risks even though we also have insurance coverage to protect us. We cannot assure, however, that any insurance or indemnification agreements will adequately protect us against liability from all the consequences described above. If there is an event that is not fully insured or indemnified against, or a customer or insurer does not meet its indemnification or insurance obligations, it could result in substantial losses. In addition, we may not be able to get insurance to cover any or all these risks, or the coverage may not be adequate. Insurance premiums or other costs may rise significantly in the future, making the insurance prohibitively expensive or uneconomic. Significant events, including terrorist attacks in the U.S., severe hurricane damage and well blowout damage in the U.S. Gulf Coast region, have resulted in significantly higher insurance costs, deductibles and coverage restrictions. When we renew our insurance, we may decide to self-insure at higher levels and assume increased risk in order to reduce costs associated with higher insurance premiums. Business in our industry is seasonal and highly variable Seasonal weather patterns in Canada and the northern U.S. affect activity in the oilfield services industry. During the spring months, wet weather and the spring thaw make the ground unstable, so municipalities and counties and provincial and state transportation departments enforce road bans that restrict the movement of rigs and other heavy equipment. This reduces activity and highlights the importance of the location of our equipment prior to the imposition of the road bans. The timing and length of road bans depend on weather conditions leading to the spring thaw and during the thawing period. Additionally, certain oil and natural gas producing areas are located in parts of western Canada that are only accessible during the winter months because the ground surrounding or containing the drilling sites in these areas consists of terrain known as muskeg. Rigs and other necessary equipment cannot cross this terrain to reach the drilling site until the muskeg freezes. Moreover, once the rigs and other equipment have been moved to a drilling site, they may become stranded or be unable to move to another site if the muskeg thaws unexpectedly. Our business activity depends, at least in part, on the severity and duration of the winter season. Global climate change could impact the timing and length of the spring thaw and the period in which the muskeg freezes and thaws and it could impact the severity of winter, which could adversely affect our business and operating results. Furthermore, extreme climate conditions that could result in natural disasters such as flooding or forest fires, may result in delays or cancellation of some of our customer’s operations, which could adversely affect our operating results. We cannot; however, estimate the degree to which climate change and extreme climate conditions could impact our business and operating results. Our operations are subject to foreign exchange risk Our U.S. and international operations have revenue, expenses, assets and liabilities denominated in currencies other than the Canadian dollar and are mostly in U.S. dollars and currencies that are pegged to the U.S. dollar. This means that currency exchange rates can affect our income statement, balance sheet and statement of cash flow. Translation into Canadian Dollars When preparing our consolidated financial statements, we translate the financial statements for foreign operations that do not have a Canadian dollar functional currency into Canadian dollars. We translate assets and liabilities at exchange rates in effect at the period end date. We translate revenues and expenses using average exchange rates for the month of the transaction. We initially recognize gains or losses from these translation adjustments in other comprehensive income and reclassify them from equity to net earnings on disposal or partial disposal of the foreign operation. Changes in currency exchange rates could materially increase or decrease our foreign currency-denominated net assets, which would increase or decrease shareholders’ equity. Changes in currency exchange rates will affect the amount of revenues and expenses we record for our U.S. and Precision Drilling Corporation 2018 Annual Report 50 international operations, which will increase or decrease our net earnings. If the Canadian dollar strengthens against the U.S. dollar, the net earnings we record in Canadian dollars from our U.S. and international operations will be lower. Transaction exposure We have long-term debt denominated in U.S. dollars. We have designated our U.S. dollar denominated unsecured senior notes as a hedge against the net asset position of our U.S. and foreign operations. This debt is converted at the exchange rate in effect at the period end dates with the resulting gains or losses included in the statement of comprehensive income. If the Canadian dollar strengthens against the U.S. dollar, we will incur a foreign exchange gain from the translation of this debt. Similarly, if the Canadian dollar weakens against the U.S. dollar, we will incur a foreign exchange loss from the translation of this debt. The vast majority of our international operations are transacted in U.S. dollars or U.S. dollar-pegged currencies. Transactions for our Canadian operations are primarily transacted in Canadian dollars. We occasionally purchase goods and supplies in U.S. dollars for our Canadian operations, and we maintain U.S. dollar cash in our Canadian operations. We may be unable to access additional financing We may need to obtain additional debt or equity financing in the future to support ongoing operations, undertake capital expenditures, repay existing or future debt (including the Senior Credit Facility, the 2021 Notes, the 2023 Notes, the 2024 Notes and the 2026 Notes), or pursue acquisitions or other business combination transactions. Volatility or uncertainty in the credit markets may increase costs associated with issuing debt or equity, and there is no assurance that we will be able to access additional financing when we need it, or on terms we find acceptable or favourable. If we are unable to obtain financing to support ongoing operations or to fund capital expenditures, acquisitions, debt repayments, or other business combination transactions, it could limit growth and may have a material adverse effect on our revenue, cash flow and profitability. Increasing Interest Rates may increase our cost of borrowing Both the Bank of Canada and the United States Federal Reserve increased their benchmark interest rates in 2018, and commentary suggests that there may be additional increases in 2019. These rate increases may have an impact on our cost of borrowing under our Senior Credit Facility and any debt financing we may negotiate. On July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop compelling banks to submit LIBOR rates after 2021. The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us. Risks associated with turnkey drilling operations could adversely affect our business We earn some of our revenue from turnkey drilling contracts. We expect that turnkey drilling will continue to be part of our service offering; however, turnkey contracts pose substantially more risk than wells drilled on a daywork basis. Under a typical turnkey drilling contract, we agree to drill a well for a customer to a specified depth and under specified conditions for a fixed price. We typically provide technical expertise and engineering services, as well as most of the equipment required for the drilling of turnkey wells and use subcontractors for related services. We typically do not receive progress payments and are entitled to payment by the customer only after we have met the full terms of the drilling contract. We sometimes encounter difficulties on wells and incur unanticipated costs, and not all the costs are covered by insurance. As a result, under turnkey contracts we assume most of the risks associated with drilling operations that are generally assumed by customers under a daywork contract. Operating cost overruns or operational difficulties on turnkey jobs could have a material adverse effect on our financial position and results of operations. There are risks associated with increased capital expenditures The timing and amount of capital expenditures we incur will directly affect the amount of cash available to us. The cost of equipment generally escalates as a result of high input costs during periods of high demand for our drilling rigs and oilfield services equipment and other factors. There is no assurance that we will be able to recover higher capital costs through rate increases to our customers. A successful challenge by the tax authorities of expense deductions could negatively affect the value of our common shares Taxation authorities may not agree with the classification of expenses we or our subsidiaries have claimed, or they may challenge the amount of interest expense deducted. If the taxation authorities successfully challenge our classifications or deductions, it could have a material adverse effect on our return to shareholders. 51 Management’s Discussion and Analysis Losing key management could reduce our competitiveness and prospects for future success Our future success and growth depend partly on the expertise and experience of our key management. There is no assurance that we will be able to retain key management. Losing these individuals could have a material adverse effect on our operations and financial condition. Our assessment of goodwill or capital assets for impairment may result in a non-cash charge against our consolidated net income We are required to assess our goodwill balance for impairment at least annually, and our capital assets balance for impairment when certain internal and external factors indicate the need for further analysis. We calculate impairment based on management’s estimates and assumptions. We may consider several factors, including any declines in our share price and market capitalization, lower future cash flow and earnings estimates, significantly reduced or depressed markets in our industry, and general economic conditions, among other things. Any impairment write-down to goodwill or capital assets would result in a non-cash charge against net earnings, and it could be material. After recording a goodwill impairment charge for $208 million in the fourth quarter of 2018, we no longer have a goodwill balance. Our credit ratings may change Credit ratings affect our financing costs, liquidity and operations over the long term and are intended as an independent measure of the credit quality of long-term debt. Credit ratings affect our ability to obtain short and long-term financing and the cost of this financing, and our ability to engage in certain business activities cost-effectively. If a rating agency reduces its current rating on our debt, or downgrades us, or we experience a negative change in our ratings outlook, it could have an adverse effect on our financing costs and access to liquidity and capital. The price of our common shares can fluctuate Several factors can cause volatility in our share price, including increases or decreases in revenue or earnings, changes in revenue or earnings estimates by the investment community, failure to meet analysts’ expectations, changes in credit ratings, and speculation in the media or investment community about our financial condition or results of operations. General market conditions and Canadian, U.S. or international economic factors and political events unrelated to our performance may also affect the price of our common shares. Investors should therefore not rely on past performance of our common shares to predict the future performance of our common shares or financial results. Selling additional common shares could affect share value We may issue additional common shares in the future to fund our needs or those of other entities owned directly or indirectly by us, as authorized by the Board. We do not need shareholder approval to issue additional common shares, except as may be required by applicable stock exchange rules, and shareholders do not have any pre-emptive rights related to share issues (see Capital Structure on page 37). Any difficulty in retaining, replacing, or adding personnel could adversely affect our business Our ability to provide reliable services depends on the availability of well-trained, experienced crews to operate our field equipment. We must also balance our need to maintain a skilled workforce with cost structures that fluctuate with activity levels. We retain the most experienced employees during periods of low utilization by having them fill lower level positions on field crews. Many of our businesses experience manpower shortages in peak operating periods, and we may experience more severe shortages if the industry adds more rigs, oilfield services companies expand, and new companies enter the business. We may not be able to find enough skilled labour to meet our needs, and this could limit growth. We may also have difficulty finding enough skilled and unskilled labour in the future if demand for our services increases. Shortages of qualified personnel have occurred in the past during periods of high demand. The demand for qualified rig personnel generally increases with stronger demand for land drilling services and as new and refurbished rigs are brought into service. Increased demand typically leads to higher wages that may or may not be reflected in any increases in service rates. Other factors can also affect our ability to find enough workers to meet our needs. Our business requires skilled workers who can perform physically demanding work. Volatility in oil and natural gas activity and the demanding nature of the work, however, may prompt workers to pursue other kinds of jobs that offer a more desirable work environment and wages competitive to ours. Our success depends on our ability to continue to employ and retain skilled technical personnel and qualified rig personnel. If we are unable to, it could have a material adverse effect on our operations. Precision Drilling Corporation 2018 Annual Report 52 Our business is subject to cybersecurity risks We rely heavily on information technology systems and other digital systems for operating our business. Threats to information technology systems associated with cybersecurity risks and cyber incidents or attacks continue to grow and are increased by the growing complexity of our information technology systems. Cybersecurity attacks could include, but are not limited to, malicious software, attempts to gain unauthorized access to data and the unauthorized release, corruption or loss of data and personal information, account takeovers, and other electronic security breaches that could lead to disruptions in our critical systems. Other cyber incidents may occur as a result of natural disasters, telecommunication failure, utility outages, human error, design defects, and unexpected complications with technology upgrades. Risks associated with these attacks and other incidents include, among other things, loss of intellectual property, reputational harm, leaked information, improper use of our assets, disruption of our and our customers’ business operations and safety procedures, loss or damage to our data delivery systems, unauthorized disclosure of personal information which could result in administrative penalties and increased costs to prevent, respond to or mitigate cybersecurity events. Although we use various procedures and controls to mitigate our exposure to such risk, including cybersecurity risk assessments that are reviewed by our Corporate Governance, Nominating and Risk Committee, cyber security awareness programs for our employees, continuous monitoring of our information technology systems for threats, and insurance that may cover losses incurred as a result of certain cyber security attacks or incidents, cybersecurity attacks and other incidents are evolving and unpredictable. The occurrence of such an attack or incident could go unnoticed for a period of time. Any such attack or incident could have a material adverse effect on our business, financial condition and results of operations. Our business could be negatively affected as a result of actions of activist shareholders and some institutional investors may be discouraged from investing in the industry we operate in Activist shareholders could advocate for changes to our corporate governance, operational practices and strategic direction, which could have an adverse effect on our reputation, business and future operations. In recent years, publicly-traded companies have been increasingly subject to demands from activist shareholders advocating for changes to corporate governance practices, such as executive compensation practices, social issues, or for certain corporate actions or reorganizations. There can be no assurances that activist shareholders won’t publicly advocate for us to make certain corporate governance changes or engage in certain corporate actions. Responding to challenges from activist shareholders, such as proxy contests, media campaigns or other activities, could be costly and time consuming and could have an adverse effect on our reputation and divert the attention and resources of management and our Board, which could have an adverse effect on our business and operational results. Additionally, shareholder activism could create uncertainty about future strategic direction, resulting in loss of future business opportunities, which could adversely affect our business, future operations, profitability and our ability to attract and retain qualified personnel. In addition to risks associated with activist shareholders, some institutional investors are placing an increased emphasis on ESG factors when allocating their capital. These investors may be seeking enhanced ESG disclosures or may implement policies that discourage investment in the hydrocarbon industry. To the extent that certain institutions implement policies that discourage investments in our industry, it could have an adverse effect on our financing costs and access to liquidity and capital. As a foreign private issuer in the U.S., we may file less information with the SEC than a company incorporated in the U.S. As a foreign private issuer, we are exempt from certain rules under the United States Exchange Act of 1934 (the Exchange Act) that impose disclosure requirements, as well as procedural requirements, for proxy solicitations under Section 14 of the Exchange Act. Our directors, officers and principal shareholders are also exempt from the reporting and short-swing profit recovery provisions of Section 16 of the Exchange Act. We are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act, nor are we generally required to comply with Regulation FD, which restricts the selective disclosure of material non-public information. As a result, there may be less publicly available information about us than U.S. public companies and this information may not be provided as promptly. In addition, we are permitted, under a multi-jurisdictional disclosure system adopted by the U.S. and Canada, to prepare our disclosure documents in accordance with Canadian disclosure requirements, including preparing our financial statements in accordance with International Financial Reporting Standards (IFRS), which differs in some respects from U.S. GAAP. We are required to assess our foreign private issuer status under U.S. securities laws annually at the end of the second quarter. If we were to lose our status as a foreign private issuer under U.S. securities laws, we would be required to fully comply with U.S. securities and accounting requirements. We have retained liabilities from prior reorganizations We have retained all liabilities of our predecessor companies, including liabilities relating to corporate and income tax matters. 53 Management’s Discussion and Analysis We may become a passive foreign investment company, which could result in adverse U.S. tax consequences to U.S. investors Management does not believe that we are or will be treated as a passive foreign investment company (PFIC) for U.S. tax purposes. However, because PFIC status is determined annually and will depend on the composition of our income and assets from time to time, it is possible that we could be considered a PFIC in the future. This could result in adverse U.S. tax consequences to a U.S. investor. In particular, a U.S. investor would be subject to U.S. federal income tax at ordinary income rates, plus a possible interest charge, for any gain derived from a disposition of common shares, as well as certain distributions by us. In addition, a step-up in the tax basis of our common shares would not be available if an individual holder dies. An investor who acquires 10% or more of our common shares may be subject to taxation under the controlled foreign corporation (CFC) rules. Under certain circumstances, a U.S. person who directly or indirectly owns 10% or more of the voting power of a foreign corporation that is a CFC (generally, a foreign corporation where 10% of the U.S. shareholders own more than 50% of the voting power or value of the stock of the foreign corporation) for 30 straight days or more during a taxable year and who holds any shares of the foreign corporation on the last day of the corporation’s tax year must include in gross income for U.S. federal income tax purposes its pro rata share of certain income of the CFC even if the share is not distributed to the person. We are not currently a CFC, but this could change in the future. Precision Drilling Corporation 2018 Annual Report 54  Evaluation of Controls and Procedures Management’s Discussion and Analysis Internal Control over Financial Reporting We maintain internal control over financial reporting that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a – 15(f) and 15d – 15(f) under the United States Securities Exchange Act of 1934, as amended (the Exchange Act) and under National Instrument 52-109 Certification of Disclosure in Issuer’s Annual and Interim Filings (NI 52-109). Management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), has conducted an evaluation of our internal control over financial reporting based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013). There were no changes in our internal control over financial reporting in 2018 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. Based on management’s assessment as of December 31, 2018, management has concluded that our internal control over financial reporting is effective. The effectiveness of internal control over financial reporting as of December 31, 2018 was audited by KPMG LLP, an independent registered public accounting firm, as stated in their Report of Independent Registered Public Accounting Firm, which is included in this annual report. Due to its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Further, the evaluation of the effectiveness of internal control over financial reporting was made as of a specific date, and continued effectiveness in future periods is subject to the risks that controls may become inadequate. Disclosure Controls and Procedures We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in our interim and annual filings is reviewed, recognized and disclosed accurately and in the appropriate time period. Management, including the CEO and CFO, carried out an evaluation, as of December 31, 2018, of the effectiveness of the design and operation of Precision’s disclosure controls and procedures, as defined in Rule 13a – 15(e) and 15d – 15(e) under the Exchange Act and NI 52-109. Based on that evaluation, the CEO and CFO have concluded that the design and operation of Precision’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act or Canadian securities legislation is recorded, processed, summarized and reported within the time periods specified in the rules and forms therein. It should be noted that while the CEO and CFO believe that our disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that these disclosure controls and procedures will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. 55 Management’s Discussion and Analysis Management’s Report to the Shareholders The accompanying Consolidated Financial Statements and all information in this Annual Report are the responsibility of management. The Consolidated Financial Statements have been prepared by management in accordance with the accounting policies in the Notes to the Consolidated Financial Statements. When necessary, management has made informed judgments and estimates in accounting for transactions that were not complete at the balance sheet date. In the opinion of management, the Consolidated Financial Statements have been prepared within acceptable limits of materiality and are in accordance with International Financial Reporting Standards (IFRS) appropriate in the circumstances. The financial information elsewhere in this Annual Report has been reviewed to ensure consistency with that in the Consolidated Financial Statements. Management has prepared Management’s Discussion and Analysis (MD&A). The MD&A is based on the financial results of Precision Drilling Corporation (the Corporation) prepared in accordance with IFRS. The MD&A compares the audited financial results for the years ended December 31, 2018 and December 31, 2017. Management is responsible for establishing and maintaining adequate internal control over the Corporation’s financial reporting and is supported by an internal audit function that conducts periodic testing of these controls. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of Consolidated Financial Statements for external reporting purposes in accordance with IFRS. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision of, and with direction from, our principal executive officer and principal financial and accounting officer, management conducted an evaluation of the effectiveness of the Corporation’s internal control over financial reporting. Management’s evaluation of internal control over financial reporting was based on the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013). Based on this evaluation, management concluded that the Corporation’s internal control over financial reporting was effective as of December 31, 2018. Also, management determined that there were no material weaknesses in the Corporation’s internal control over financial reporting as of December 31, 2018. KPMG LLP (KPMG), an independent firm of Chartered Professional Accountants, was engaged, as approved by a vote of shareholders at the Corporation’s most recent annual meeting, to audit the Consolidated Financial Statements and provide an independent professional opinion. KPMG also completed an audit of the design and effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2018, as stated in its report included in this Annual Report and expressed an unqualified opinion on the design and effectiveness of internal control over financial reporting as of December 31, 2018. The Audit Committee of the Board of Directors, which is comprised of six independent directors who are not employees of the Corporation, provides oversight to the financial reporting process. Integral to this process is the Audit Committee’s review and discussion with management and KPMG of the quarterly and annual financial statements and reports prior to their respective release. The Audit Committee is also responsible for reviewing and discussing with management and KPMG major issues as to the adequacy of the Corporation’s internal controls. KPMG has unrestricted access to the Audit Committee to discuss its audit and related matters. The Consolidated Financial Statements have been approved by the Board of Directors and its Audit Committee. Kevin A. Neveu President and Chief Executive Officer Precision Drilling Corporation Carey T. Ford Senior Vice President and Chief Financial Officer Precision Drilling Corporation March 1, 2019 March 1, 2019 Precision Drilling Corporation 2018 Annual Report 56 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of Precision Drilling Corporation Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated statements of financial position of Precision Drilling Corporation (the Corporation) as of December 31, 2018 and 2017, the related consolidated statements of loss, comprehensive loss, changes in equity, and cash flow for the years then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2018 and 2017, and the results of its financial performance and its cash flows for the years then ended, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Corporation’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2019 expressed an unqualified opinion on the effectiveness of the Corporation’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. We have served as the Corporation’s auditor since 1987. Chartered Professional Accountants Calgary, Canada March 1, 2019 57 Consolidated Financial Statements Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of Precision Drilling Corporation Opinion on Internal Control over Financial Reporting We have audited Precision Drilling Corporation’s (the “Corporation”) internal control over financial reporting as of December 31, 2018, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated statements of financial position of the Corporation as of December 31, 2018 and December 31, 2017, the related consolidated statements of loss, comprehensive loss, changes in equity and cash flows for the years then ended, and the related notes (collectively the “consolidated financial statements”) and our report dated March 1, 2019 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report to the Shareholders. Our responsibility is to express an opinion on the Corporation’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Chartered Professional Accountants Calgary, Canada March 1, 2019 Precision Drilling Corporation 2018 Annual Report 58 Consolidated Statements of Financial Position (Stated in thousands of Canadian dollars) ASSETS Current assets: Cash Accounts receivable Income tax recoverable Inventory Assets held for sale Total current assets Non-current assets: Income taxes recoverable Deferred tax assets Property, plant and equipment Intangibles Goodwill Total non-current assets Total assets LIABILITIES AND EQUITY Current liabilities: Accounts payable and accrued liabilities Income tax payable Total current liabilities Non-current liabilities: Share based compensation Provisions and other Long-term debt Deferred tax liabilities Total non-current liabilities Shareholders’ equity: Shareholders’ capital Contributed surplus Deficit Accumulated other comprehensive income Total shareholders’ equity Total liabilities and shareholders’ equity December 31, 2018 December 31, 2017 $ (Note 25) (Note 6) (Note 14) (Note 7) (Note 8) (Note 9) $ (Note 25) $ (Note 13) (Note 16) (Note 10) (Note 14) (Note 17) (Note 19) $ 96,626 372,336 — 34,081 503,043 19,658 522,701 2,449 36,880 3,038,612 35,401 — 3,113,342 3,636,043 274,489 7,673 282,162 6,520 10,577 1,706,253 72,779 1,796,129 2,322,280 52,332 (978,874) 162,014 1,557,752 3,636,043 $ $ $ $ 65,081 322,585 29,449 24,631 441,746 — 441,746 2,256 41,822 3,173,824 28,116 205,167 3,451,185 3,892,931 209,625 — 209,625 13,536 10,086 1,730,437 118,911 1,872,970 2,319,293 44,037 (684,604) 131,610 1,810,336 3,892,931 See accompanying notes to consolidated financial statements. Approved by the Board of Directors: Allen R. Hagerman Director Steven W. Krablin Director 59 Consolidated Financial Statements Consolidated Statements of Loss Years ended December 31, (Stated in thousands of Canadian dollars, except per share amounts) Revenue Expenses: Operating General and administrative Other recoveries Earnings before income taxes, loss (gain) on redemption and repurchase of unsecured senior notes, finance charges, foreign exchange, impairment of property, plant, and equipment, impairment of goodwill and depreciation and amortization Depreciation and amortization Impairment of goodwill Impairment of property, plant and equipment Foreign exchange Finance charges Loss (gain) on redemption and repurchase of unsecured senior notes Loss before income taxes Income taxes: Current Deferred Net loss Loss per share: Basic Diluted See accompanying notes to consolidated financial statements. Consolidated Statements of Comprehensive Loss Years ended December 31, (Stated in thousands of Canadian dollars) Net loss Unrealized gain (loss) on translation of assets and liabilities of operations denominated in foreign currency Foreign exchange gain (loss) on net investment hedge with U.S. denominated debt, net of tax Comprehensive loss See accompanying notes to consolidated financial statements. (Note 9) (Note 7) (Note 12) (Note 14) (Note 18) (Note 4) $ 2018 1,541,189 $ 2017 1,321,224 (Note 25) (Note 25) (Note 11) 1,067,871 112,387 (14,200) 926,171 90,072 — 304,981 377,746 — 15,313 (2,970) 137,928 9,021 (232,057) (1,331) (98,690) (100,021) (132,036) (0.45) (0.45) 375,131 365,660 207,544 — 4,017 127,178 (5,672) (323,596) 8,573 (37,899) (29,326) (294,270) (1.00) (1.00) $ $ $ 2018 (294,270) 175,630 (145,226) (263,866) $ $ 2017 (132,036) (146,545) 121,699 (156,882) $ $ $ $ $ Precision Drilling Corporation 2018 Annual Report 60 Consolidated Statements of Cash Flow Years ended December 31, (Stated in thousands of Canadian dollars) Cash provided by (used in): Operations: Net loss Adjustments for: Long-term compensation plans Depreciation and amortization Impairment of property, plant and equipment Impairment of goodwill Foreign exchange Finance charges Loss (gain) on redemption and repurchase of unsecured senior notes Income taxes Other Income taxes paid Income taxes recovered Interest paid Interest received Funds provided by operations Changes in non-cash working capital balances Cash provided by operations Investments: Purchase of property, plant and equipment Purchase of intangibles Proceeds on sale of property, plant and equipment Changes in non-cash working capital balances Cash used in investing activities Financing: Redemption and repurchase of unsecured senior notes Debt issuance costs Debt amendment fees Proceeds from issuance of long-term debt Issuance of common shares on the exercise of options Cash used in financing activities Effect of exchange rate changes on cash and cash equivalents Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year See accompanying notes to consolidated financial statements. 2018 2017 $ (294,270) $ (132,036) 17,401 365,660 — 207,544 2,341 127,178 (5,672) (29,326) (1,269) (4,446) 33,283 (108,622) 1,412 311,214 (17,880) 293,334 (114,576) (11,567) 24,457 892 (100,794) (168,722) — (638) — 275 (169,085) 8,090 31,545 65,081 96,626 $ 6,795 377,746 15,313 — (2,873) 137,928 9,021 (100,021) (2,025) (3,645) 11,932 (136,065) 1,865 183,935 (67,380) 116,555 (74,823) (23,179) 14,841 (7,989) (91,150) (571,975) (9,196) (1,793) 509,180 — (73,784) (2,245) (50,624) 115,705 65,081 (Note 25) (Note 7) (Note 8) (Note 7) (Note 25) (Note 10) (Note 10) (Note 8) (Note 10) $ 61 Consolidated Financial Statements Consolidated Statements of Changes in Equity (Stated in thousands of Canadian dollars) Balance at January 1, 2018 Net loss for the period Other comprehensive income for the period Redemption of non-management directors DSUs Share options exercised Share based compensation expense Balance at December 31, 2018 (Note 13) (Note 13) (Note 13) 2,609 378 — 2,322,280 $ (Stated in thousands of Canadian dollars) Balance at January 1, 2017 Net loss for the period Other comprehensive loss for the period Share based compensation expense Balance at December 31, 2017 (Note 13) $ Shareholders’ Capital (Note 17) 2,319,293 — — — 2,319,293 $ Shareholders’ Capital (Note 17) 2,319,293 — $ Contributed Surplus 44,037 — $ Accumulated other Comprehensive Income (Note 19) 131,610 — $ — — 30,404 Deficit (684,604) $ (294,270) Total Equity 1,810,336 (294,270) — 30,404 — — — (978,874) $ 1,800 275 9,207 1,557,752 Deficit (552,568) $ (132,036) — — (684,604) $ Total Equity 1,962,118 (132,036) (24,846) 5,100 1,810,336 $ $ $ $ (809) (103) 9,207 52,332 $ — — — 162,014 Accumulated other Comprehensive Income (Note 19) 156,456 — (24,846) — 131,610 $ $ Contributed Surplus 38,937 — — 5,100 44,037 $ $ $ See accompanying notes to consolidated financial statements. Precision Drilling Corporation 2018 Annual Report 62 Notes to Consolidated Financial Statements (Tabular amounts are stated in thousands of Canadian dollars except share numbers and per share amounts) NOTE 1. DESCRIPTION OF BUSINESS Precision Drilling Corporation (Precision or the Corporation) is incorporated under the laws of the Province of Alberta, Canada and is a provider of contract drilling and completion and production services primarily to oil and natural gas exploration and production companies in Canada, the United States and certain international locations. The address of the registered office is 800, 525 – 8th Avenue S.W., Calgary, Alberta, Canada, T2P 1G1. NOTE 2. BASIS OF PREPARATION (a) Statement of Compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). These consolidated financial statements were authorized for issue by the Board of Directors on March 1, 2019. (b) Basis of Measurement The consolidated financial statements have been prepared using the historical cost basis and are presented in thousands of Canadian dollars. (c) Use of Estimates and Judgments The preparation of the consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingencies. These estimates and judgments are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The estimation of anticipated future events involves uncertainty and, consequently, the estimates used in preparation of the consolidated financial statements may change as future events unfold, more experience is acquired, or the Corporation’s operating environment changes. The Corporation reviews its estimates and assumptions on an ongoing basis. Adjustments that result from a change in estimate are recorded in the period in which they become known. Significant estimates and judgments used in the preparation of the financial statements are described in Note 3(d), (g), (i), (j) and (s). NOTE 3. SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Consolidation These consolidated financial statements include the accounts of the Corporation and all of its subsidiaries and partnerships, substantially all of which are wholly-owned. The financial statements of the subsidiaries are prepared for the same period as the parent entity, using consistent accounting policies. All significant intercompany balances and transactions and any unrealized gains and losses arising from intercompany transactions, have been eliminated. Subsidiaries are entities controlled by the Corporation. Control exists when Precision has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that currently are exercisable are considered. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Precision does not hold investments in any companies where it exerts significant influence and does not hold interests in any special-purpose entities. The acquisition method is used to account for acquisitions of subsidiaries and assets that meet the definition of a business under IFRS. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued, and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the identifiable assets, liabilities and contingent liabilities acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized immediately in the statement of earnings. Transaction costs, other than those associated with the issuance of debt or equity securities, that the Corporation incurs in connection with a business combination are expensed as incurred. (b) Cash and Cash Equivalents Cash and cash equivalents consist of cash and short-term investments with original maturities of three months or less. (c) Inventory Inventory is primarily comprised of operating supplies and carried at the lower of average cost, being the cost to acquire the inventory, and net realizable value. Inventory is charged to operating expenses as items are sold or consumed at the amount of the average cost of the item. 63 Notes to Consolidated Financial Statements (d) Property, Plant and Equipment Property, plant and equipment are carried at cost, less accumulated depreciation and any accumulated impairment losses. Cost includes an expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, and borrowing costs on qualifying assets. The cost of replacing a part of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Corporation, and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing of property, plant and equipment (repair and maintenance) are recognized in profit or loss as incurred. Property, plant, and equipment are depreciated as follows: Drilling rig equipment: – Power & Tubulars – Dynamic – Structural Service rig equipment Drilling rig spare equipment Service rig spare equipment Rental equipment Other equipment Light duty vehicles Heavy duty vehicles Buildings Expected Life Salvage Value Basis of Depreciation 5 years 10 years 20 years 20 years up to 15 years up to 15 years up to 15 years 3 to 10 years 4 years 7 to 10 years 10 to 20 years – – 10% 10% – – 0 to 25% – – – – straight-line straight-line straight-line straight-line straight-line straight-line straight-line straight-line straight-line straight-line straight-line Property, plant and equipment are depreciated based on estimates of useful lives and salvage values. These estimates consider data and information from various sources including vendors, industry practice, and Precision’ s own historical experience and may change as more experience is gained, market conditions shift, or technological advancements are made. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal to the carrying amount of property, plant and equipment, and are recognized in the consolidated statements of loss. Determination of which parts of the drilling rig equipment represent significant cost relative to the entire rig and identifying the consumption patterns along with the useful lives of these significant parts, are matters of judgment. This determination can be complex and subject to differing interpretations and views, particularly when rig equipment comprises individual components for which different depreciation methods or rates are appropriate. The estimated useful lives, residual values and methods of depreciation are reviewed annually, and adjusted prospectively if appropriate. (e) Intangibles Intangible assets that are acquired by the Corporation with finite lives are initially recorded at estimated fair value and subsequently measured at cost less accumulated amortization and any accumulated impairment losses. Subsequent expenditures are capitalized only when they increase the future economic benefits of the specific asset to which they relate. Intangible assets are amortized based on estimates of useful lives. These estimates consider data and information from various sources including vendors and Precision’s own historical experience and may change as more experience is gained or technological advancements are made. Amortization is recognized in profit and loss using the straight-line method over the estimated useful lives of the respective assets. Precision’s loan commitment fees are amortized over the term of the respective facility. Software is amortized over its expected useful life of up to 10 years. The estimated useful lives and methods of amortization are reviewed annually and adjusted prospectively if appropriate. (f) Goodwill Goodwill is the amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the assets acquired, less liabilities assumed, based on their fair values. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, attributed to the cash-generating unit (CGU) or groups of cash-generating units that are expected to benefit and as identified in the business combination. Precision Drilling Corporation 2018 Annual Report 64 (g) Impairment of Non-Financial Assets The carrying amounts of the Corporation’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the cash-generating unit). Judgment is required in the aggregation of assets into CGUs. If any such indication exists, then the asset or CGU’s recoverable amount is estimated. Judgement is required when evaluating whether a CGU has indications of impairment. For CGUs that contain goodwill and other intangible assets that have indefinite lives or that are not yet available for use, an impairment test is, at a minimum, completed annually as of December 31. The recoverable amount of an asset or a CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using an after-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Value in use is generally computed by reference to the present value of the future cash flows expected to be derived from the cash-generating unit. An impairment loss is recognized if the carrying amount of an asset or a CGU exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior years are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. (h) Borrowing Costs Interest and borrowing costs that are directly attributable to the acquisition, construction or production of assets that take a substantial period of time to prepare for their intended use are capitalized as part of the cost of those assets. Capitalization ceases during any extended period of suspension of construction or when substantially all activities necessary to prepare the asset for its intended use are complete. All other interest and borrowing costs are recognized in earnings in the period in which they are incurred. (i) Income Taxes Income tax expense is recognized in profit or loss except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. Current tax is the expected tax payable or receivable on the taxable earnings or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognized using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized on the initial recognition of assets or liabilities in a transaction that is not a business combination. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted at the reporting date. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in profit or loss in the period that includes the date of enactment or substantive enactment. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities that are expected to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. The Corporation is subject to taxation in numerous jurisdictions. Uncertainties exist with respect to the interpretation of complex tax regulations and requires significant judgement. Differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to taxable income and expense already recorded. The Corporation establishes provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities of the respective countries in which it operates. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority. (j) Revenue from Contracts with Customers The Corporation initially applied IFRS 15 on January 1, 2018, as described in Note 3(t). Precision recognizes revenue from a variety of sources. In general, customer invoices are issued upon rendering all performance obligations for an individual well- 65 Notes to Consolidated Financial Statements site job. Under the Corporation’s standard contract terms, customer payments are to be received within 30 days of the customer’s receipt of an invoice. Contract Drilling Services The Corporation contracts individual drilling rig packages, including crews and support equipment, to its customers. Depending on the customer’s drilling program, contracts may be for a single well, multiple wells or a fixed term. Revenue from contract drilling services is recognized over time from spud to rig release on a daily basis. Operating days are measured through industry standard tour sheets that document the daily activity of the rig. Revenue is recognized at the applicable day rate for each well, based on rates specified in the drilling contract. The Corporation provides services under turnkey contracts, whereby Precision is required to drill a well to an agreed upon depth under specified conditions for a fixed price, regardless of the time required or problems encountered in drilling the well. Revenue from turnkey drilling contracts is recognized over time using the input method based on costs incurred to date in relation to estimated total contract costs, as that most accurately depicts the Corporation’s performance. The Corporation also provides directional drilling services, which include the provision of directional drilling equipment, tools and personnel to the wellsite, and performance of daily directional drilling services. Directional drilling revenue is recognized over time, upon the daily completion of operating activities. Operating days are measured through daily tour sheets. Revenue is recognized at the applicable day rate, as stipulated in the directional drilling contract. Completion and Production Services The Corporation provides a variety of well completion and production services including well servicing and snubbing. In general, service rigs do not involve long-term contracts or penalties for termination. Revenue is recognized daily upon completion of services. Operating days are measured through daily tour sheets and field tickets. Revenue is recognized at the applicable daily or hourly rate, as stipulated in the contract. The Corporation offers a variety of oilfield equipment for rental to its customers. Rental revenue is recognized daily at the applicable rate stated in the rental contract. Rental days are measured through field tickets. The Corporation provides accommodation and catering services to customers in remote locations. Customers contract these services either as a package or individually for a fixed term. For accommodation services, the Corporation supplies camp equipment and revenue is recognized over time on a daily basis, once the equipment is on-site and available for use, at the applicable rate stated in the contract. For catering services, the Corporation recognizes revenue daily according to meals served. Accommodation and catering services provided are measured through field tickets. (k) Employee Benefit Plans Precision sponsors various defined contribution retirement plans for its employees. The Corporation’s contributions to defined contribution plans are expensed as employees earn the entitlement. (l) Provisions Provisions are recognized when the Corporation has a present obligation as a result of a past event, when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and when a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. (m) Share Based Incentive Compensation Plans The Corporation has established several cash-settled share based incentive compensation plans for non-management directors, officers, and other eligible employees. As estimated by management, the fair values of the amounts payable to eligible participants under these plans are recognized as an expense with a corresponding increase in liabilities over the period that the participants become unconditionally entitled to payment. The recorded liability is re-measured at the end of each reporting period until settlement with the resultant change to the fair value of the liability recognized in profit or loss for the period. When the plans are settled, the cash paid reduces the outstanding liability. The Corporation has implemented an employee share purchase plan that allows eligible employees to purchase common shares through payroll deductions. Under this plan, contributions made by employees are matched to a specific percentage by the Corporation. The contributions made by the Corporation are expensed as incurred. Prior to January 1, 2012, the Corporation had an equity-settled deferred share unit plan whereby non-management directors of Precision could elect to receive all or a portion of their compensation in fully-vested deferred share units. Compensation expense was recognized based on the fair value price of the Corporation’s shares at the date of grant with a corresponding increase to contributed surplus. Upon redemption of the deferred share units into common shares, the amount previously recognized in contributed surplus is recorded as an increase to shareholders’ capital. The Corporation continues to have obligations under this plan. Precision Drilling Corporation 2018 Annual Report 66 A share option plan has been established for certain eligible employees. Under this plan, the fair value of share purchase options is calculated at the date of grant using the Black-Scholes option pricing model, and that value is recorded as compensation expense over the grant’s vesting period with an offsetting credit to contributed surplus. A forfeiture rate is estimated on the grant date and is adjusted to reflect the actual number of options that vest. Upon exercise of the equity purchase option, the associated amount is reclassified from contributed surplus to shareholders’ capital. Consideration paid by employees upon exercise of the equity purchase options is credited to shareholders’ capital. (n) Foreign Currency Translation Transactions of the Corporation’s individual entities are recorded in the currency of the primary economic environment in which it operates (its functional currency). Transactions in currencies other than the entities’ functional currency are translated at rates in effect at the time of the transaction. At each period end, monetary assets and liabilities are translated at the prevailing period-end rates. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Gains and losses are included in profit or loss except for gains and losses on translation of long-term debt designated as a hedge of foreign operations, which are deferred and included in other comprehensive income. For the purpose of preparing the Corporation’s consolidated financial statements, the financial statements of each foreign operation that does not have a Canadian dollar functional currency are translated into Canadian dollars. Assets and liabilities are translated at exchange rates in effect at the period end date. Revenues and expenses are translated using average exchange rates for the month of the respective transaction. Gains or losses resulting from these translation adjustments are recognized initially in other comprehensive income and reclassified from equity to profit or loss on disposal or partial disposal of the foreign operation. (o) Per Share Amounts Basic per share amounts are calculated using the weighted average number of shares outstanding during the period. Diluted per share amounts are calculated by using the treasury stock method for equity based compensation arrangements. The treasury stock method assumes that any proceeds obtained on exercise of equity based compensation arrangements would be used to purchase common shares at the average market price during the period. The weighted average number of shares outstanding is then adjusted by the difference between the number of shares issued from the exercise of equity based compensation arrangements and shares repurchased from the related proceeds. (p) Financial Instruments i) Non-Derivative Financial Instruments: The Corporation initially applied IFRS 9, Financial Instruments, on January 1, 2018 as described in Note 3(s). Financial assets and liabilities are classified and measured at amortized cost, fair value through other comprehensive income or fair value through profit and loss. The classification of financial assets and liabilities is generally based on the business model in which the asset or liability is managed and its contractual cash flow characteristics. Financial assets held within a business model whose objective is to collect contractual cash flows and whose contractual terms give rise to cash flows on specified dates that are solely payments of principal and interest on the principal amount outstanding are measured at amortized cost. After their initial fair value measurement, accounts receivable, accounts payable and accrued liabilities and long-term debt are classified and measured at amortized cost using the effective interest rate method. Upon initial recognition of a non-derivative financial asset a loss allowance is recorded for expected credit losses (ECL). Loss allowances for trade receivables are measured based on lifetime ECL that incorporates historical loss information and is adjusted for current economic and credit conditions. ii) Derivative Financial Instruments: The Corporation may enter into certain financial derivative contracts in order to manage the exposure to market risks from fluctuations in interest rates or exchange rates. These instruments are not used for trading or speculative purposes. Precision has not designated its financial derivative contracts as effective accounting hedges, and thus has not applied hedge accounting, even though it considers certain financial contracts to be economic hedges. As a result, financial derivative contracts are classified as fair value through profit or loss and are recorded on the statement of financial position at estimated fair value. Transaction costs are recognized in profit or loss when incurred. Derivatives embedded in financial assets are never separated. Rather, the financial instrument as a whole is assessed for classification. Derivatives embedded in financial liabilities are separated from the host contract and accounted for separately when their economic characteristics and risks are not closely related to the host contract. Embedded derivatives in financial liabilities are recorded on the statement of financial position at estimated fair value and changes in the fair value are recognized in earnings. 67 Notes to Consolidated Financial Statements (q) Hedge Accounting The Corporation utilizes foreign currency long-term debt to hedge its exposure to changes in the carrying values of the Corporation’s net investment in certain foreign operations from fluctuations in foreign exchange rates. To be accounted for as a hedge, the foreign currency long-term debt must be designated and documented as a hedge and must be effective at inception and on an ongoing basis. The documentation defines the relationship between the foreign currency long-term debt and the net investment in the foreign operations, as well as the Corporation’s risk management objective and strategy for undertaking the hedging transaction. The Corporation formally assesses, both at inception and on an ongoing basis, whether the changes in fair value of the foreign currency long-term debt is highly effective in offsetting changes in fair value of the net investment in the foreign operations. The portion of gains or losses on the hedging item determined to be an effective hedge is recognized in other comprehensive income, net of tax, and is limited to the translation gain or loss on the net investment, while ineffective portions are recorded through profit or loss. A reduction in the fair value of the net investment in the foreign operations or increase in the foreign currency long-term debt balance may result in a portion of the hedge becoming ineffective. If the hedging relationship ceases to be effective or is terminated, hedge accounting is not applied to subsequent gains or losses. The amounts recognized in other comprehensive income are reclassified to profit and loss and the corresponding exchange gains or losses arising from the translation of the foreign operation are recorded through profit and loss upon dissolution or substantial dissolution of the foreign operation. (r) Assets Held For Sale Non-current assets, or disposal groups, are classified as held-for sale if it is highly probable that their carrying amount will be recovered primarily through a sale transaction rather than through continued use. Such assets, or disposal groups, are measured at the lower of their carrying amount and fair value less costs to sell. Impairment losses on initial classification as held-for-sale and subsequent gains or losses on remeasurement are recognized in profit or loss. (s) Critical Accounting Assumptions and Estimates i) Impairment of Long-Lived Assets When indications of impairment exist within a CGU, a recoverable amount is determined and requires assumptions to estimate future discounted cash flows. These estimates and assumptions include future drilling activity, margins and market conditions over the long-term life of the CGU. In selecting a discount rate, we use observable market data inputs to develop a rate that we believe approximates the discount rate of market participants. Although we believe the estimates are reasonable and consistent with current conditions, internal planning, and expected future operations, such estimations are subject to significant uncertainty and judgment. ii) Income Taxes Significant estimation and assumptions are required in determining the provision for income taxes. The recognition of deferred tax assets in respect of deductible temporary differences and unused tax losses and credits is based on the Corporation’s estimation of future taxable profit against which these differences, losses and credits may be used. The assessment is based upon existing tax laws and estimates of the Corporation’s future taxable income. These estimates may be materially different from the actual final tax return in future periods. (t) Accounting Standards Adopted January 1, 2018 The following standards were adopted by the Corporation on January 1, 2018 using the cumulative-effect method of adoption. The adoption of these standards had no material impact on the amounts recorded in these financial statements. i) IFRS 9, Financial Instruments Effective January 1, 2018, IFRS 9 replaced IAS 39 Financial Instruments, Recognition and Measurement. IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost, fair value through other comprehensive income and fair value through profit or loss. The classification of financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and the characteristics of its contractual cash flows. IFRS 9 eliminates the previous IAS 39 categories of held to maturity, loans and receivables and available for sale. Under IFRS 9, derivatives embedded in contracts where the host is a financial asset under the standard are never separated. Instead the hybrid financial instrument as a whole is assessed for classification. Under the new standard, Precision’s accounts receivable, accounts payable and accrued liabilities and long-term debt have been classified and measured at amortized cost. The following table shows the original measurement categories and carrying amounts for each financial asset and liability under IAS 39 and the subsequent measurement and carrying amount upon adoption of IFRS 9 as at January 1, 2018. Precision Drilling Corporation 2018 Annual Report 68 (Stated in thousands of Canadian dollars) Financial Assets Cash and cash equivalents Accounts receivable Loans and receivables Loans and receivables Amortized cost Amortized cost Measurement Category Carrying Amount IAS 39 IFRS 9 IAS 39 IFRS 9 Financial Liabilities Accounts payable and accrued liabilities Other financial liabilities Other financial liabilities Long-term debt Amortized cost Amortized cost $ $ $ $ 65,081 $ 322,585 387,666 $ 65,081 322,585 387,666 209,625 $ 1,730,437 1,940,062 $ 209,625 1,730,437 1,940,062 IFRS 9 replaced the incurred loss model of IAS 39 with an expected credit loss model. The loss allowance to be recorded against trade receivables is measured as the lifetime expected credit losses. Due to low historical default rates, there was no material adjustment to the credit loss allowance. ii) IFRS 15, Revenue from Contracts with Customers IFRS 15 established a single comprehensive model to address how and when to recognize revenue as well as requiring entities to provide users of financial statements with more informative, relevant disclosures in order to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. It replaced existing revenue recognition guidance including IAS 18 Revenue and IAS 11 Construction Contracts. The standard provides a principle based five-step model to be applied to all contracts with customers. This five-step model involves identifying the contract(s) with a customer; identifying the performance obligations in the contract; determining the transaction price; allocating the transaction price to the performance obligations in the contract; and recognizing revenue when (or as) the entity satisfies performance obligations. During its initial application of IFRS 15, the Corporation did not apply any of the available practical expedients. The application of IFRS 15 did not result in a material impact to the Corporation’s consolidated financial statements. For additional information about the Corporation’s accounting policies with respect to revenue recognition, see Note 3(j). (u) Accounting Standards, Interpretations and Amendments to Existing Standards not yet Effective i) IFRS 16, Leases On January 1, 2019, Precision will adopt IFRS 16 - Leases. This standard introduces a single, on-balance sheet lease accounting model for lessees and requires a lessee to recognize a right-of-use asset representing its right to direct the use of the underlying asset as well as a lease liability representing its obligation to make future lease payments. IFRS 16 will also cause expenses to be higher at the beginning and lower towards the end of a lease, even when payments are consistent throughout the term. The standard includes recognition exemptions for short-term leases and leases of low- value items. Lessor accounting remains similar to the current standard in which lessors continue to classify leases as either finance or operating leases. IFRS 16 will replace existing lease guidance, including IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases – Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. Precision has completed its review of the existing contracts that are currently classified as leases under the existing standard, or that could be classified as leases under IFRS 16, in order to identify the contracts that will be impacted by the new standard from the perspective of both a lessor and a lessee. Management has also estimated the impact that the initial application of IFRS 16 will have on its consolidated financial statements, as described below. The actual impact of adopting the standard on January 1, 2019 may differ from what is described below as Precision’s accounting policies, including the election to apply certain practical expedients, are subject to change until presented in its first published financial statements after the date of initial application. Leases in which Precision is a lessee Precision will recognize right-of-use assets and lease liabilities for its real estate, vehicle, office equipment and other contracts that are currently classified as operating leases. The nature of expenses related to those leases will change as Precision will depreciate the right-of-use assets and recognize interest expense on its lease liabilities. Under the existing standard, Precision recognizes operating lease expenses on a straight-line basis over the term of the lease in either operating or general and administrative expense and recognizes assets and liabilities only to the extent there was a timing difference between the payment date and the recognition of the expense. Based on the information currently available, Precision estimates that it will recognize lease liabilities and corresponding right-of-use assets of approximately $60 million - $70 million on January 1, 2019 related to contracts where it is the lessee. Precision does not expect a material adjustment to the opening balance of retained earnings on January 1, 2019 upon the initial application of IFRS 16. The actual impact of adopting the standard on January 1, 2019 may differ from 69 Notes to Consolidated Financial Statements these estimates as the Corporation continues to review its calculations and may refine certain inputs therein, such as the discount rate and lease term. Leases in which Precision is a lessor Precision evaluated its drilling rigs under term contracts longer than one year and determined that these meet the definition of a lease under IFRS 16. Precision expects to classify these as operating leases, and accordingly, will recognize lease income over the term of the respective drilling contract. This is not expected to give rise to differences in the recognition or measurement of revenues from these contracts as compared to Precision’s existing accounting policies. Precision reassessed the classification of its real estate sub-leases in which it is a lessor. These are classified as an operating lease under the existing lease standard and management does not expect to reclassify these as finance leases. Transition There are two methods by which the new standard may be adopted: (1) a full retrospective approach with a restatement of all prior periods presented, or (2) a modified retrospective approach with a cumulative-effect adjustment recognized in opening retained earnings as of the date of adoption, with no restatement of comparative information. Precision will apply IFRS 16 initially on January 1, 2019, using the modified retrospective approach. When applying a modified retrospective approach to leases previously classified as operating leases under IAS 17, the lessee can elect, on a lease-by-lease basis, whether to apply a number of practical expedients on transition. On initial adoption of the new standard, the Corporation intends to use the following practical expedients, where applicable: • not applying the requirements of the standard to short-term leases; • treat existing operating leases with a remaining term of less than 12 months at January 1, 2019 as short-term leases; • not applying the requirements of the standard to low-value leases; and • applying a single discount rate to a portfolio of leases with reasonably similar characteristics. As a result of the adoption of the new standard, Precision will be required to include significant disclosures in the consolidated financial statements based on the prescribed requirements. These new disclosures will include information regarding the judgments used in determining discount rates and terms of leases including optional renewal periods. The Corporation will include the required disclosures in its 2019 first quarter condensed consolidated interim financial statements. ii) IFRIC 23, Uncertainty over Income Tax Treatments IFRIC 23 clarifies the accounting for uncertainties in income taxes. The interpretation requires the entity to use the most likely amount or the expected value of the tax treatment if it concludes that it is not probable that a particular tax treatment will be accepted. It requires an entity to assume that a taxation authority with the right to examine any amounts reported to it will examine those amounts and will have full knowledge of all relevant information when doing so. IFRIC 23 is effective for annual reporting periods beginning on or after January 1, 2019. The requirements are applied by recognizing the cumulative effect of initially applying them in retained earnings, or in other appropriate components of equity, at the start of the reporting period in which an entity first applies them, without adjusting comparative information. Full retrospective application is permitted, if an entity can do so without using hindsight. Precision has reviewed its initial application of IFRIC 23 and determined it will not have a material impact on the consolidated financial statements. The actual impact of adopting the standard on January 1, 2019 may differ as Precision’s accounting policies are subject to change until presented in its first published financial statements after the date of initial application. Precision Drilling Corporation 2018 Annual Report 70 NOTE 4. REVENUE The following table includes a reconciliation of disaggregated revenue by reportable segment (Note 5). Revenue has been disaggregated by primary geographical market and type of service provided. Twelve months ended December 31, 2018 Canada United States International Day rate/hourly services Shortfall payments/idle but contracted Turnkey drilling services Directional services Other Twelve months ended December 31, 2017 (1) Canada United States International Contract Drilling Services 426,475 $ 778,886 191,131 1,396,492 $ 1,302,575 $ 12,520 37,811 31,943 11,643 1,396,492 $ Completion and Production Services 138,030 $ 12,730 — 150,760 $ 150,760 $ — — — — 150,760 $ Contract Drilling Services 429,119 $ 554,410 190,401 1,173,930 $ Completion and Production Services 139,113 $ 15,033 — 154,146 $ $ $ $ $ $ $ Corporate and Other Inter- Segment Eliminations — $ — — — $ — $ — — — — — $ (5,759) $ (304) — (6,063) $ (1,009) $ — — — (5,054) (6,063) $ Corporate and Other Inter- Segment Eliminations — $ — — — $ (5,982) $ (870) — (6,852) $ $ Day rate/hourly services Shortfall payments/idle but contracted Turnkey drilling services Directional services Other (1,614) $ — — — (5,238) (6,852) $ (1) IFRS 15 initially applied at January 1, 2018; under the transition method chosen, comparative information is not restated. 1,076,018 $ 39,468 12,306 34,481 11,657 1,173,930 $ 154,146 $ — — — — 154,146 $ — $ — — — — — $ $ Total 558,746 791,312 191,131 1,541,189 1,452,326 12,520 37,811 31,943 6,589 1,541,189 Total 562,250 568,573 190,401 1,321,224 1,228,550 39,468 12,306 34,481 6,419 1,321,224 NOTE 5. SEGMENTED INFORMATION The Corporation operates primarily in Canada, the United States and certain international locations, in two industry segments; Contract Drilling Services and Completion and Production Services. Contract Drilling Services includes drilling rigs, directional drilling, procurement and distribution of oilfield supplies, and the manufacture, sale and repair of drilling equipment. Completion and Production Services includes service rigs, snubbing units, oilfield equipment rental, camp and catering services, and wastewater treatment units. 2018 Revenue Operating loss Depreciation and amortization Impairment of goodwill Total assets Goodwill Capital expenditures $ Contract Drilling Services 1,396,492 $ (129,965) 334,555 207,544 3,301,457 — 108,610 Completion and Production Services 150,760 $ (8,998) 23,879 — 170,113 — 5,004 Corporate and Other Inter- Segment Eliminations — $ (59,110) 7,226 — 164,473 — 12,529 (6,063) $ — — — — — — Total 1,541,189 (198,073) 365,660 207,544 3,636,043 — 126,143 71 Notes to Consolidated Financial Statements 2017 Revenue Operating loss Depreciation and amortization Impairment of property, plant and equipment Total assets Goodwill Capital expenditures $ Contract Drilling Services 1,173,930 $ (6,930) 334,587 15,313 3,491,393 205,167 69,076 Completion and Production Services 154,146 $ (17,750) 29,638 — 209,353 — 4,509 Corporate and Other Inter- Segment Eliminations — $ (63,398) 13,521 — 192,185 — 24,417 (6,852) $ — — — — — — A reconciliation of operating loss to loss before income taxes is as follows: Total 1,321,224 (88,078) 377,746 15,313 3,892,931 205,167 98,002 2017 (88,078) (2,970) 137,928 2018 $ (198,073) $ 4,017 127,178 (5,672) (323,596) $ 9,021 (232,057) $ Total segment operating loss Add (deduct): Foreign exchange Finance charges Loss (gain) on redemption and repurchase of unsecured senior notes Loss before income taxes The Corporation’s operations are carried on in the following geographic locations: 2018 Revenue Total assets 2017 Revenue Total assets $ $ Canada 571,640 $ 1,269,542 United States International Eliminations 797,217 $ 1,772,850 191,131 $ 593,651 (18,799) $ — Canada 578,817 $ 1,631,838 United States International Eliminations 568,573 $ 1,666,368 190,401 $ 594,725 (16,567) $ — Total 1,541,189 3,636,043 Total 1,321,224 3,892,931 NOTE 6. ASSETS HELD FOR SALE In December 2018, Precision committed to a plan to sell drilling rigs that no longer met the Corporation’s High-Performance technology standards. The disposal group, contained within its Contract Drilling Services segment, has been classified as held for sale and measured at the lower of its carrying value and fair value less costs to sell. At December 31, 2018, the disposal group was stated at its carrying value of $19.7 million, which is less than its estimated fair value. Efforts to sell the disposal group have started and are expected to be completed prior to December 31, 2019. NOTE 7. PROPERTY, PLANT AND EQUIPMENT Cost Accumulated depreciation Rig equipment Rental equipment Other equipment Vehicles Buildings Assets under construction Land $ $ $ $ $ 2018 6,937,062 (3,898,450) 3,038,612 2,745,172 43,992 52,195 12,702 65,561 84,561 34,429 3,038,612 $ 2017 6,733,634 (3,559,810) 3,173,824 2,823,782 60,179 66,560 16,280 71,102 102,035 33,886 3,173,824 Precision Drilling Corporation 2018 Annual Report 72 Cost Balance, December 31, 2016 Additions Disposals Reclassifications Effect of foreign currency exchange differences Balance, December 31, 2017 Additions Disposals Reclassifications Reclassification to assets held for sale Effect of foreign currency exchange differences Balance, December 31, 2018 Accumulated Depreciation Balance, December 31, 2016 Depreciation expense Disposals Impairment Effect of foreign currency exchange differences Balance, December 31, 2017 Depreciation expense Disposals Reclassification to assets held for sale Effect of foreign currency exchange differences Balance, December 31, 2018 a) Impairment Test Rig Rental Other Assets Under Equipment Equipment Equipment Vehicles Buildings $6,266,991 $ 159,144 $ 247,073 $ 45,147 $131,361 $ 235 (930) — 21,268 (71,014) 67,779 71 (9,758) 84 49 (785) 216 42 (339) 113 Construction Total Land 126,430 $35,032 $7,011,178 74,823 (82,826) (374) 53,158 — (68,566) — — — (1,530) (1,762) (1,603) (250,858) (3,281) 6,034,166 148,011 244,950 43,201 127,385 569 (3,663) — — 7,013 (32,153) 127,668 (135,398) 347 (59,865) 507 — — (18,227) — — — (228) — — 321,240 4,036 $6,322,536 $ 130,463 $ 191,290 $ 45,456 $128,327 $ 5,351 2,483 679 (8,987) (1,146) (269,167) 102,035 33,886 6,733,634 114,576 106,647 (115,029) — — (128,175) (135,398) — — (893) — — 4,054 1,436 339,279 84,561 $34,429 $6,937,062 Rig Rental Other Assets Under Equipment $3,056,058 $ 334,896 (67,304) 15,313 Equipment Equipment Vehicles Buildings 79,746 $ 161,342 $ 23,117 $ 49,026 $ 8,488 19,914 5,064 15,159 (208) (320) (6,331) — — — (592) — Construction — $ — — — Land Total — $3,369,289 383,521 — (74,755) — 15,313 — (128,579) 3,210,384 335,215 (28,399) (115,740) (742) (940) (2,274) (1,023) 87,832 178,390 26,921 56,283 8,126 15,993 4,820 (3,161) (220) (59,857) — — — 9,418 (11,249) — 175,904 $3,577,364 $ 470 1,518 4,569 1,233 86,471 $ 139,095 $ 32,754 $ 62,766 $ — — — — — — — $ — (133,558) — 3,559,810 373,572 — (102,886) — (115,740) — 183,694 — — $3,898,450 Precision reviews the carrying value of its long-lived assets at each reporting period for indications of impairment. Precision completed its review as at December 31, 2018 and impairment charges of $207.5 million were recorded against goodwill. Refer to Note 9 for additional discussion of impairment testing performed in the current year. As at December 31, 2017, the Corporation determined that the uncertainty around future activity levels within Mexico was an indication of impairment and a comprehensive assessment of the carrying values of property, plant and equipment of the Mexico drilling CGU within the Contract Drilling Services segment was performed. The recoverable amount of the Mexico drilling CGU was determined using a value in use calculation. Projected cash flows covered a five-year period and were based on future expected outcomes taking into account existing contracts, past experience and management’s expectation of future market conditions. The primary source of cash flow information was the strategic plan approved by executives of the Corporation. The strategic plan was developed based on benchmark commodity prices and industry supply-demand fundamentals. Cash flows used in the calculation were discounted using a discount rate specific to the Mexico drilling CGU. The after-tax discount rate derived from Precision’s weighted average cost of capital, adjusted for risk factors specific to the CGU and used in determining the recoverable amount for the Mexico drilling CGU was 17.1%. The test resulted in an impairment charge of $15.3 million as the carrying value of the CGU’s assets exceeded its value in use of $26.3 million. 73 Notes to Consolidated Financial Statements NOTE 8. INTANGIBLES Cost Accumulated amortization Loan commitment fees related to Senior Credit Facility Software Cost Balance, December 31, 2016 Additions Reclassifications Balance, December 31, 2017 Additions Balance, December 31, 2018 Accumulated Amortization Balance, December 31, 2016 Amortization expense Balance, December 31, 2017 Amortization expense Balance, December 31, 2018 NOTE 9. GOODWILL Balance, December 31, 2016 Exchange adjustment Balance, December 31, 2017 Exchange adjustment Impairment charge Balance, December 31, 2018 $ $ $ $ 2018 51,912 $ (16,511) 35,401 $ 2,307 $ 33,094 35,401 $ Loan Commitment Fees 12,345 $ 1,793 — 14,138 638 14,776 $ Loan Commitment Fees 9,029 $ 1,989 11,018 1,451 12,469 $ $ $ $ $ Software — $ 23,179 2,390 25,569 11,567 37,136 $ Software — $ 573 573 3,469 4,042 $ 2017 39,707 (11,591) 28,116 3,120 24,996 28,116 Total 12,345 24,972 2,390 39,707 12,205 51,912 Total 9,029 2,562 11,591 4,920 16,511 $ $ 207,399 (2,232) 205,167 2,377 (207,544) — Management performed its annual impairment test for those CGUs containing goodwill and determined the goodwill associated with the Canada contract drilling CGU of $172.2 million and U.S. directional drilling CGU of $35.3 million were not recoverable at December 31, 2018. Accordingly, an impairment charge of $207.5 million was recorded in the statement of loss for the period ended December 31, 2018. Both CGUs are contained within the Contract Drilling Services segment. In performing its annual goodwill impairment tests, the Corporation used a value in use approach. Projected cash flows covered a five-year period and were based on future expected outcomes taking into account existing term contracts, past experience and management’s expectation of future market conditions. The primary source of cash flow information was the strategic plans approved by the Corporation’s Board of Directors. These strategic plans were developed based on benchmark commodity prices and industry supply-demand fundamentals. Canada Contract Drilling Cash flows used in the impairment calculation were discounted using a discount rate specific to the Canada contract drilling CGU. The after-tax discount rate derived from Precision’s weighted average cost of capital, adjusted for risk factors specific to the CGU and used in determining the recoverable amount for the Canada contract drilling CGU was 11.66% (2017 – 9.72%). The test resulted in a goodwill impairment charge of $172.2 million as the carrying value of the CGU’s assets exceeded its value in use of $941.6 million. Precision Drilling Corporation 2018 Annual Report 74 The key assumptions used in the calculation of the CGU’s value in use included the discount rate and terminal value growth rates of nil. An increase of 0.5% to the discount rate would result in approximately $37.3 million of additional impairment charges to the remaining assets within the CGU. US Directional Drilling Cash flows used in the impairment calculation were discounted using a discount rate specific to the U.S. directional drilling CGU. The after-tax discount rate derived from Precision’s weighted average cost of capital, adjusted for risk factors specific to the CGU and used in determining the recoverable amount for the U.S. directional drilling CGU was 12.16% (2017 – 11.72%). The test resulted in a goodwill impairment charge of $35.3 million as the carrying value of the CGU’s assets exceeded its value in use of $38.8 million. The key assumptions used in the calculation of the CGU’s value in use included the discount rate and terminal value growth rates of nil. An increase of 0.5% to the discount rate would result in approximately $2.4 million of additional impairment charges to the remaining assets within the CGU. NOTE 10. LONG-TERM DEBT Senior Credit Facility Unsecured senior notes: 6.5% senior notes due 2021 7.75% senior notes due 2023 5.25% senior notes due 2024 7.125% senior notes due 2026 Less net unamortized debt issue costs Balance December 31, 2016 Changes from financing cash flows: Proceeds from issue of senior notes Redemption of senior notes Payment of debt issue costs Non-cash changes: Loss on redemption of unsecured senior notes Amortization of debt issue costs Foreign exchange adjustment Balance December 31, 2017 Changes from financing cash flows: Redemption of senior notes Non-cash changes: Gain on redemption of unsecured senior notes Amortization of debt issue costs Foreign exchange adjustment US$ US$ 2018 — US$ 2017 — $ 2018 — $ 2017 — 165,625 350,000 351,104 400,000 1,266,729 US$ 248,625 350,000 400,000 400,000 1,398,625 $ 226,113 477,823 479,331 546,084 1,729,351 (23,098) 1,706,253 $ 312,601 440,062 502,928 502,928 1,758,519 (28,082) 1,730,437 Senior Credit Facility Unsecured senior notes $ — $ 1,933,993 $ Debt issue costs (27,059) $ Total 1,906,934 — — — — — — — — 509,180 (571,975) — (62,795) 9,021 — (121,700) 1,758,519 — — (9,196) (9,196) 509,180 (571,975) (9,196) (71,991) — 8,173 — (28,082) 9,021 8,173 (121,700) 1,730,437 — (168,722) — (168,722) — — — — $ (5,672) — 145,226 1,729,351 $ — 4,984 — $ (23,098) (5,672) 4,984 145,226 1,706,253 Balance December 31, 2018 $ (a) Senior Credit Facility: The senior secured revolving credit facility (as amended, the Senior Credit Facility) provides Precision with senior secured financing for general corporate purposes, including for acquisitions, of up to US$500.0 million with a provision for an increase in the facility of up to an additional US$250.0 million (US$300.0 million after March 31, 2019). The Senior Credit Facility is secured by charges on substantially all of the present and future assets of Precision, its material U.S. and Canadian subsidiaries and, if necessary, to adhere to covenants under the Senior Credit Facility, certain subsidiaries organized in jurisdictions outside of Canada and the U.S. The Senior Credit Facility requires that Precision comply with certain financial covenants including a leverage ratio of consolidated senior debt to consolidated Covenant EBITDA (as defined in the debt agreement) of less than 2.5:1. For purposes of calculating the leverage ratio consolidated senior debt only includes secured indebtedness. It also requires the Corporation to maintain a ratio of consolidated Covenant EBITDA to consolidated interest expense for the most recent four consecutive quarters, of greater than 2.0:1 for the periods ending December 31, 2018 and March 31, 2019. For periods ending after March 31, 2019 the ratio reverts to 2.5:1. 75 Notes to Consolidated Financial Statements The Senior Credit Facility prevents us from making distributions prior to April 1, 2019, after which, distributions are subject to a pro-forma senior net leverage covenant of less than or equal to 1.75:1. The Senior Credit Facility also 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. In addition, the Senior Credit Facility contains certain restrictive covenants that limit Precision’s ability to incur additional indebtedness; dispose of assets; make or pay dividends, share redemptions or other distributions; change its primary business; incur liens on assets; engage in transactions with affiliates; enter into mergers, consolidations or amalgamations; and enter into speculative swap agreements. At December 31, 2018, Precision was in compliance with the covenants of the Senior Credit Facility. The Senior Credit Facility has a term of four years, with an annual option on Precision’s part to request that the lenders extend, at their discretion, the facility to a new maturity date not to exceed five years from the date of the extension request. The current maturity date of the Senior Credit Facility is November 21, 2022. Under the Senior Credit Facility, amounts can be drawn in U.S. dollars and/or Canadian dollars and, as at December 31, 2018 and 2017 no amounts were drawn under this facility. Up to US$200.0 million of the Senior Credit Facility is available for letters of credit denominated in U.S and/or Canadian dollars and other currencies acceptable to the fronting lender. As at December 31, 2018 outstanding letters of credit amounted to US$28.2 million (2017 – US$20.9 million). The interest rate on loans that are denominated in U.S. dollars is, at the option of Precision, either a margin over a U.S. base rate or a margin over LIBOR. The interest rate on loans denominated in Canadian dollars is, at the option of Precision, either a margin over the Canadian prime rate or a margin over the bankers’ acceptance rate; such margins will be based on the then applicable ratio of consolidated total debt to EBITDA. (b) Unsecured Senior Notes: Precision has outstanding the following unsecured senior notes: 6.5% US$ senior notes due 2021 These notes bear interest at a fixed rate of 6.5% per annum and mature on December 15, 2021. Interest is payable semi-annually on June 15 and December 15 of each year. Precision may redeem these notes in whole or in part before December 15, 2019, at a redemption price of 101.083% of their principal amount plus accrued interest. Any time on or after December 15, 2019, these notes can be redeemed for their principal amount plus accrued interest. Upon specified change of control events, each holder of a note will have the right to sell to Precision all or a portion of its notes at a purchase price in cash equal to 101% of the principal amount, plus accrued interest to the date of purchase. During 2018, Precision redeemed US$80.0 million and repurchased and cancelled US$3.0 million of these notes for an aggregate purchase price of US$84.5 million. The difference was recognized as a loss on redemption of unsecured senior notes within the consolidated statement of loss. 7.75% US$ senior notes due 2023 These notes bear interest at a fixed rate of 7.75% per annum and mature on December 15, 2023. Interest is payable semi-annually on June 15 and December 15 of each year. Prior to December 15, 2019, Precision may redeem up to 35% of the 7.75% senior notes due 2023 with the net proceeds of certain equity offerings at a redemption price equal to 107.75% of the principal amount plus accrued interest. Prior to December 15, 2019, Precision may redeem these notes in whole or in part at 100.0% of their principal amount, plus accrued interest and the greater of 1.0% of the principal amount of the note to be redeemed and the excess, if any, of the present value of the December 15, 2019 redemption price plus required interest payments through December 15, 2019 (calculated using the U.S. Treasury rate plus 50 basis points) over the principal amount of the note. As well, Precision may redeem these notes in whole or in part at any time on or after December 15, 2019 and before December 15, 2021, at redemption prices ranging between 103.875% and 101.938% of their principal amount plus accrued interest. Any time on or after December 15, 2021, these notes can be redeemed for their principal amount plus accrued interest. Upon specified change of control events, each holder of a note will have the right to sell to Precision all or a portion of its notes at a purchase price in cash equal to 101% of the principal amount, plus accrued interest to the date of purchase. 5.25% US$ senior notes due 2024 These notes bear interest at a fixed rate of 5.25% per annum and mature on November 15, 2024. Interest is payable semi-annually on May 15 and November 15 of each year. Precision Drilling Corporation 2018 Annual Report 76 Prior to May 15, 2019, Precision may redeem these notes in whole or in part at 100.0% of their principal amount, plus accrued interest and the greater of 1.0% of the principal amount of the note to be redeemed and the excess, if any, of the present value of the May 15, 2019 redemption price plus required interest payments through May 15, 2019 (calculated using the U.S. Treasury rate plus 50 basis points) over the principal amount of the note. As well, Precision may redeem these notes in whole or in part at any time on or after May 15, 2019 and before May 15, 2022, at redemption prices ranging between 102.625% and 100.875% of their principal amount plus accrued interest. Any time on or after May 15, 2022, these notes can be redeemed for their principal amount plus accrued interest. Upon specified change of control events, each holder of a note will have the right to sell to Precision all or a portion of its notes at a purchase price in cash equal to 101% of the principal amount, plus accrued interest to the date of purchase. During 2018, Precision repurchased and cancelled US$48.9 million of these notes for an aggregate purchase price of US$43.2 million. The difference was recognized as a gain on repurchase of unsecured senior notes within the consolidated statement of loss. 7.125% US$ senior notes due 2026 These notes, issued in 2017, bear interest at a fixed rate of 7.125% per annum and mature on January 15, 2026. Interest is payable semi-annually on January 15 and July 15 of each year, commencing July 15, 2018. Prior to November 15, 2020, Precision may redeem up to 35% of the 7.125% senior notes due 2026 with the net proceeds of certain equity offerings at a redemption price equal to 107.125% of the principal amount plus accrued interest. Prior to November 15, 2020, Precision may redeem these notes in whole or in part at 100.0% of their principal amount, plus accrued interest and the greater of 1.0% of the principal amount of the note to be redeemed and the excess, if any, of the present value of the November 15, 2020 redemption price plus required interest payments through November 15, 2020 (calculated using the U.S. Treasury rate plus 50 basis points) over the principal amount of the note. As well, Precision may redeem these notes in whole or in part at any time on or after November 15, 2020 and before November 15, 2022, at redemption prices ranging between 105.344% and 101.781% of their principal amount plus accrued interest. Any time on or after November 15, 2023, these notes can be redeemed for their principal amount plus accrued interest. Upon specified change of control events, each holder of a note will have the right to sell to Precision all or a portion of its notes at a purchase price in cash equal to 101% of the principal amount, plus accrued interest to the date of purchase. The senior notes require that we comply with certain financial covenants including an incurrence based test of Consolidated Interest Coverage Ratio, as defined in the senior note agreements, of greater than or equal to 2.0:1 for the most recent four consecutive fiscal quarters. In the event that our Consolidated Interest Coverage Ratio is less than 2.0:1 for the most recent four consecutive fiscal quarters the senior notes restrict our ability to incur additional indebtedness. As at December 31, 2018, our senior notes Consolidated Interest Coverage Ratio was 2.80:1. The senior notes also contain a restricted payments covenant that limits our ability to make payments in the nature of dividends, distributions and repurchases from shareholders. This restricted payment basket grows by, among other things, 50% of cumulative consolidated net earnings, and decreases by 100% of cumulative consolidated net losses as defined in the note agreements, and cumulative payments made to shareholders. As at December 31, 2018, the governing restricted payments basket was negative $496 million (2017 – negative $213 million), therefore prohibiting us from making any further dividend payments until the governing restricted payments basket once again becomes positive. No dividends have been declared or paid subsequent to December 31, 2018. Our unsecured senior notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all U.S. and Canadian subsidiaries that guaranteed the Senior Credit Facility (Guarantor Subsidiaries). These Guarantor Subsidiaries are directly or indirectly 100% owned by the parent company. Separate financial statements for each of the Guarantor Subsidiaries have not been provided; instead we have included in Note 27 condensed consolidating financial statements based on Rule 3-10 of the U.S. Securities and Exchange Commission’s Regulation S-X. Long-term debt obligations at December 31, 2018 will mature as follows: 2021 2023 Thereafter $ $ 226,113 477,823 1,025,415 1,729,351 77 Notes to Consolidated Financial Statements NOTE 11. OTHER RECOVERIES For the period ended December 31, 2018, the Corporation had other recoveries of $14.2 million (2017 – nil) relating to the recovery of Corporate transactions costs resulting from the termination of an arrangement agreement to acquire an oil and gas drilling contractor. NOTE 12. FINANCE CHARGES Interest: Long-term debt Other Income Amortization of debt issue costs Other Finance charges 2018 121,810 378 (1,444) 6,434 — 127,178 $ $ 2017 128,381 1,083 (1,858) 10,162 160 137,928 $ $ NOTE 13. SHARE BASED COMPENSATION PLANS In May 2017 shareholders approved an omnibus equity incentive plan (Omnibus Plan) that allows the Corporation to settle short-term incentive awards (annual bonus) and long-term incentive awards (options, performance share units and restricted share units) issued on or after February 8, 2017 in voting shares of Precision (either issued from treasury or purchased in the open market), cash, or a combination of both. Precision intends to settle all short-term incentive, restricted share unit and non- executive performance share unit awards issued under the Omnibus Plan in cash and to settle performance share awards issued to senior executives and all options in voting shares. No further grants will be made under the legacy stock option plan, performance share unit plan or restricted share unit plan. Vesting conditions for incentive awards issued under the Omnibus Plan are unchanged from what existed under the legacy plans. Liability Classified Plans Restricted Share Units Performance Share Units Share Appreciation Rights Balance, December 31, 2016 Expensed (recovered) during the period Payments Balance, December 31, 2017 Expensed during the period Payments Balance, December 31, 2018 Current Long-term $ $ $ $ 15,592 $ 2,115 (10,757) 6,950 5,223 (6,764) 5,409 $ 3,112 $ 2,297 5,409 $ 29,045 $ (4,188) (13,450) 11,407 398 (7,284) 4,521 $ 2,779 $ 1,742 4,521 $ Non- Management Directors’ DSUs 4,602 $ (1,090) — 3,512 769 (1,800) 2,481 $ — $ 2,481 2,481 $ 3 $ (3) — — — — — $ — $ — — $ Total 49,242 (3,166) (24,207) 21,869 6,390 (15,848) 12,411 5,891 6,520 12,411 (a) Restricted Share Units and Performance Share Units Precision has two cash-settled share based incentive plans for officers and other eligible employees. Under the Restricted Share Unit (RSU) incentive plan, shares granted to eligible employees vest annually over a three-year term. Vested shares are automatically paid out in cash at a value determined by the fair market value of the shares at the vesting date. Under the Performance Share Unit (PSU) incentive plan, shares granted to eligible employees vest at the end of a three-year term. Vested shares are automatically paid out in cash in the first quarter following the vested term at a value determined by the fair market value of the shares at the vesting date and based on the number of performance shares held multiplied by a performance factor that ranges from zero to two times. The performance factor is based on Precision’s share price performance compared to a peer group over the three-year period. A summary of the RSUs and PSUs outstanding under these share based incentive plans is presented below: Precision Drilling Corporation 2018 Annual Report 78 December 31, 2016 Granted Redeemed Forfeited December 31, 2017 Granted Redeemed Forfeited December 31, 2018 RSUs Outstanding 3,129,039 1,343,669 (1,404,271) (271,579) 2,796,858 2,918,912 (1,404,284) (255,572) 4,055,914 PSUs Outstanding 6,493,798 828,400 (1,325,692) (270,247) 5,726,259 1,292,550 (2,137,163) (338,656) 4,542,990 (b) Share Appreciation Rights The Corporation had a U.S. dollar denominated Share Appreciation Rights (SAR) plan under which eligible participants were granted SARs that entitle the rights holder to receive cash payments calculated as the excess of the market price over the exercise price per share on the exercise date. There were no SARs outstanding at December 31, 2018. The SARs vested over a period of five years and expired 10 years from the date of grant. At December 31, 2018 and 2017 the intrinsic value of these awards was $nil. Range of Exercise Price Weighted Average Exercise Share Appreciation Rights December 31, 2016 Forfeited December 31, 2017 Forfeited December 31, 2018 Outstanding (US$) Price (US$) Exercisable 253,376 253,376 $ 15.22 – 15.79 $ 15.22 – 17.38 (117,207) 15.22 – 15.22 136,169 15.22 – 15.22 (136,169) — $ — $ 15.47 15.75 15.22 — — 136,169 — (c) Non-Management Directors Effective January 1, 2012, Precision instituted a deferred share unit (DSU) plan for non-management directors whereby fully vested DSUs are granted quarterly based on an election by the non-management director to receive all or a portion of his or her compensation in DSUs. These DSUs are redeemable in cash or for an equal number of common shares upon the director’s retirement. The redemption of DSUs in cash or common shares is solely at Precision’s discretion. Non-management directors can receive a lump sum payment or two separate payments any time up until December 15 of the year following retirement. If the non-management director does not specify a redemption date, the DSUs will be redeemed on a single date six months after retirement. The cash settlement amount is based on the weighted average trading price for Precision’s shares on the Toronto Stock Exchange for the five days immediately prior to payout. A summary of the DSUs outstanding under this share based incentive plan is presented below: Deferred Share Units Balance December 31, 2016 Granted Balance December 31, 2017 Granted Redeemed Balance December 31, 2018 Equity Settled Plans Outstanding 621,821 331,456 953,277 474,766 (374,408) 1,053,635 (d) Non-Management Directors Prior to January 1, 2012, Precision had a deferred share unit plan for non-management directors. Under the plan, fully vested deferred share units were granted quarterly based on an election by the non-management director to receive all or a portion of his or her compensation in deferred share units. These deferred share units are redeemable into an equal number of common shares any time after the director’s retirement. A summary of this share based incentive plan is presented below: Deferred Share Units December 31, 2016 and 2017 Redeemed December 31, 2018 Outstanding 195,743 (102,570) 93,173 79 Notes to Consolidated Financial Statements (e) Option Plan Under this plan, the exercise price of each option equals the fair market value of the option at the date of grant determined by the weighted average trading price for the five days preceding the grant. The options are denominated in either Canadian or U.S. dollars, and vest over a period of three years from the date of grant, as employees render continuous service to the Corporation, and have a term of seven years. A summary of the status of the equity incentive plan is presented below: Canadian Share Options December 31, 2016 Granted Forfeited December 31, 2017 Granted Forfeited December 31, 2018 U.S. Share Options December 31, 2016 Granted Forfeited December 31, 2017 Granted Exercised Forfeited December 31, 2018 Options Outstanding Range of Exercise Prices 6,188,672 $ 4.46 – 14.50 $ 7.30 – 7.30 377,100 7.32 – 14.50 (1,665,412) 4.46 – 14.50 4,900,360 4.35 – 4.35 490,200 10.44 – 14.50 (657,404) 4,733,156 $ 4.35 – 14.31 $ Options Outstanding Range of Exercise Prices (US$) 5,337,070 $ 3.21 – 15.21 $ 3.99 – 5.57 1,165,900 5.79 – 10.96 (944,349) 3.21 – 15.21 5,558,621 3.44 – 3.62 1,569,250 3.21 – 3.21 (66,000) 3.21 – 15.21 (996,021) 6,065,850 $ 3.21 – 10.74 $ Weighted Average Exercise Options Price Exercisable 8.70 4,369,155 7.30 8.98 8.50 3,734,019 4.35 10.58 7.78 3,786,473 Weighted Average Exercise Price (US$) Options Exercisable 6.69 2,626,326 5.56 8.42 6.16 2,891,808 3.45 3.21 8.08 5.17 3,224,078 The weighted average share price at the date of exercise for the U.S. share options exercised in 2018 was US$4.02. Canadian Share Options Total Options Outstanding Options Exercisable Range of Exercise Prices: $ 4.34 – 6.99 7.00 – 8.99 9.00 – 14.31 $ 4.34 – 14.31 U.S. Share Options Range of Exercise Prices (US$): $ 3.21 – 3.99 4.00 – 6.99 7.00 – 10.74 $ 3.21 – 10.74 Weighted Average Number 1,105,400 $ 1,539,001 2,088,755 4,733,156 $ Exercise Price 4.41 7.32 9.90 7.78 Weighted Average Remaining Contractual Life (Years) 5.04 3.58 1.12 2.83 Number 410,122 $ 1,287,596 2,088,755 3,786,473 $ Weighted Average Exercise Price 4.46 7.33 9.90 8.43 Total Options Outstanding Options Exercisable Weighted Average Exercise Price (US$) Weighted Average Remaining Contractual Life (Years) 3.33 5.61 9.52 5.17 5.18 4.37 1.19 4.20 Number 3,046,950 $ 1,924,500 1,094,400 6,065,850 $ Weighted Average Exercise Price (US$) 3.21 5.66 9.52 6.22 Number 995,888 $ 1,133,790 1,094,400 3,224,078 $ The per option weighted average fair value of the share options granted during 2018 was $1.96 (2017 – $1.59) estimated on the grant date using the Black-Scholes option pricing model with the following assumptions: average risk-free interest rate of 2% (2017 – 1%), average expected life of four years (2017 – four years), expected forfeiture rate of 5% (2017 – 5%) and expected volatility of 56% (2017 – 54%). Included in net loss for the year ended December 31, 2018 is an expense of $3.3 million (2017 – $3.2 million). (f) Executive Performance Share Units During 2018 Precision granted PSUs to certain senior executives with the intention of settling them in voting shares of the Corporation either issued from treasury or purchased in the open market. These PSUs vest over a three year period and Precision Drilling Corporation 2018 Annual Report 80 incorporate performance criteria established at the date of grant that can adjust the number of performance share units available for settlement from zero to two times the amount originally granted. A summary of the activity under this share based incentive plan is presented below: December 31, 2016 Granted December 31, 2017 Granted Forfeited December 31, 2018 Outstanding — $ 1,159,000 1,159,000 2,082,800 (50,733) 3,191,067 $ Weighted Fair Value — 6.00 6.00 6.22 6.12 6.14 The per unit weighted average fair value of the performance share units granted during 2018 was $6.22 (2017 – $6.00) estimated on the grant date using a Monte Carlo simulation with the following assumptions: share price of $4.29 (2017 – $5.08), average risk-free interest rate of 2.3% (2017 – 1.2%), average expected life of three years (2017 – three years), expected volatility of 59% (2017 – 60%), and an expected dividend yield of nil (2017 – nil). Included in net loss for year ended December 31, 2018 is an expense of $5.9 million (2017 - $1.9 million). Employee Share Purchase Plan The Corporation has an employee share purchase plan to encourage employees to become Precision shareholders and to attract and retain people. Under the plan, eligible employees can contribute up to 10% of their regular base salary through payroll deduction with Precision matching 20% of the employee’s contribution. These contributions are used to purchase the Corporation’s shares in the open market. No vesting conditions apply. During 2018, the Corporation recorded compensation expense of $0.7 million (2017 – $0.8 million) related to this plan. NOTE 14. INCOME TAXES The provision for income taxes differs from that which would be expected by applying statutory Canadian income tax rates. A reconciliation of the difference for the years ended December 31, is as follows: Loss before income taxes Federal and provincial statutory rates Tax at statutory rates Adjusted for the effect of: Non-deductible expenses Non-taxable capital gains Income taxed at lower rates Impact of foreign tax rates Withholding taxes Taxes related to prior years Other Income tax recovery $ $ $ 2018 (323,596) $ 27% (87,371) $ 49,455 (845) — 4,861 1,061 3,803 (290) (29,326) $ 2017 (232,057) 27% (62,655) 2,672 (175) (42,334) (2,814) 1,165 (618) 4,738 (100,021) 81 Notes to Consolidated Financial Statements On December 22, 2017, the United States government enacted new tax legislation which affects the taxation of Precision’s U.S. subsidiaries. In additional to changing certain U.S. federal income tax laws, this new tax legislation reduced the U.S. federal income tax rate from 35% to 21% effective January 1, 2018. For the period ending December 31, 2017 Precision recorded a $15.8 million deferred income tax expense on the revaluation of its U.S. subsidiaries net deferred income tax assets which incorporates the reduction in the U.S. federal income tax rate and the expected impact of other applicable provisions within the new U.S tax legislation. The Corporation has also recognized a $2.4 million long-term receivable for the recovery of its U.S. subsidiaries alternative minimum tax carryforward balance. The net deferred tax liability is comprised of the tax effect of the following temporary differences: Deferred income tax liability: Property, plant and equipment and intangibles Debt issue costs Partnership deferrals Other Offsetting of assets and liabilities Deferred income tax assets: Losses (expire from time to time up to 2037) Partnership deferrals Long-term incentive plan Other Offsetting of assets and liabilities $ 2018 2017 467,109 $ 3,534 1,730 5,722 478,095 (405,316) 72,779 423,595 — 6,849 11,752 442,196 (405,316) 36,880 454,613 3,352 — 6,709 464,674 (345,763) 118,911 368,133 335 7,935 11,182 387,585 (345,763) 41,822 Net deferred income tax liability $ 35,899 $ 77,089 Included in the deferred income tax assets is $33.2 million (2017 – $38.8 million) of tax-effected temporary differences related to the Corporation’s U.S. operations. The Corporation has certain loss carryforwards in U.S. and international locations for which it is unlikely that sufficient future taxable income will be available. Accordingly, the Corporation has not recognized a deferred income tax asset on these losses totaling $37.1 million. The movement in temporary differences is as follows: Property, Plant and Equipment and Partnership Other Deferred Income Tax Debt Issue Long-Term Incentive Other Deferred Income Tax Intangibles Deferrals Liabilities Losses Costs Plan Assets Net Deferred Income Tax Liability Balance, December 31, 2016 Recognized in net loss Effect of foreign currency exchange differences Balance, December 31, 2017 Recognized in net loss Effect of foreign currency exchange differences Balance, December 31, 2018 $ $ $ 629,967 $ (149,489 ) (16,447 ) $ 16,112 6,159 $ 545 (418,253 ) $ 24,124 4,215 $ (863 ) (18,270 ) $ 9,651 (12,753 ) $ 1,230 174,618 (98,690 ) (25,865 ) 454,613 $ (9,667 ) 22,163 467,109 $ — (335 ) $ 2,065 — 1,730 $ 5 6,709 $ (1,005 ) 25,996 (368,133 ) $ (30,660 ) — 3,352 $ 182 684 (7,935 ) $ 1,325 341 (11,182 ) $ (139 ) 1,161 77,089 (37,899 ) 18 5,722 $ (24,802 ) (423,595 ) $ — 3,534 $ (239 ) (6,849 ) $ (431 ) (11,752 ) $ (3,291 ) 35,899 On December 31, 2018, Precision had $2.0 million (2017 – $2.0 million) of unrecognized tax benefits that, if recognized, would have a favourable impact on Precision’s effective income tax rate in future periods. Precision classifies interest accrued on unrecognized tax benefits and income tax penalties as income tax expense. Included in the unrecognized tax benefit, as at December 31, 2018 was interest and penalties of $0.5 million (2017 – $0.5 million). Precision Drilling Corporation 2018 Annual Report 82 Reconciliation of Uncertain Tax Positions Unrecognized tax benefits, beginning of year Additions: Prior year’s tax positions Reductions: Prior year’s tax positions Unrecognized tax benefits, end of year $ $ 2018 1,980 $ 60 — 2,040 $ 2017 1,923 57 — 1,980 It is anticipated that approximately $2.0 million (2017 – $nil) of unrecognized tax positions that relate to prior year activities will be realized during the next 12 months. Subject to the results of audit examinations by taxing authorities and/or legislative changes by taxing jurisdictions, Precision does not anticipate further adjustments of unrecognized tax positions during the next 12 months that would have a material impact on the financial statements. NOTE 15. BANK INDEBTEDNESS At December 31, 2018, Precision had available $40.0 million (2017 – $40.0 million) and US$15.0 million (2017 – US$15.0 million) under secured operating facilities, and a secured US$30.0 million (2017 – US$30.0 million) facility for the issuance of letters of credit and performance and bid bonds to support international operations. As at December 31, 2018 and 2017, no amounts had been drawn on any of the facilities. Availability of the $40.0 million and US$30.0 million facility were reduced by outstanding letters of credit in the amount of $27.8 million (2017 – $20.8 million) and US$2.1 million (2017 – US$13.3 million), respectively. The facilities are primarily secured by charges on substantially all present and future property of Precision and its material subsidiaries. Advances under the $40.0 million facility are available at the bank’s prime lending rate, U.S. base rate, U.S. LIBOR rate plus 80% of applicable margin, or Banker’s Acceptance plus 80% of applicable margin, or in combination, and under the US$15.0 million facility at the bank’s prime lending rate. NOTE 16. PROVISIONS AND OTHER Balance December 31, 2016 Expensed during the year Payment of deductibles and uninsured claims Effects of foreign currency exchange differences Balance December 31, 2017 Expensed during the year Payment of deductibles and uninsured claims Effects of foreign currency exchange differences Balance December 31, 2018 Current Long-term $ $ 2018 2,796 $ 10,577 13,373 $ $ $ Workers’ Compensation 15,461 2,613 (3,929) (913) 13,232 3,359 (4,271) 1,053 13,373 2017 3,146 10,086 13,232 Precision maintains a provision for the deductible and uninsured portions of workers’ compensation and general liability claims. The amount accrued for the provision for losses incurred varies depending on the number and nature of the claims outstanding at the balance sheet dates. In addition, the accrual includes management’s estimate of the future cost to settle each claim such as future changes in the severity of the claim and increases in medical costs. Precision uses third parties to assist in developing the estimate of the ultimate costs to settle each claim, which is based on historical experience associated with the type of each claim and specific information related to each claim. The specific circumstances of each claim may change over time prior to settlement and, as a result, the estimates made as of the balance sheet dates may change. 83 Notes to Consolidated Financial Statements NOTE 17. SHAREHOLDERS’ CAPITAL (a) Authorized – unlimited number of voting common shares – unlimited number of preferred shares, issuable in series, limited to an amount equal to one half of the issued and outstanding common shares (b) Issued Common shares Balance, December 31, 2016 and 2017 Issued on redemption of non-management directors' DSUs Options exercised – cash consideration – reclassification from contributed surplus Balance, December 31, 2018 Number 293,238,858 $ 476,978 $ 66,000 — 293,781,836 $ Amount 2,319,293 2,609 275 103 2,322,280 NOTE 18. PER SHARE AMOUNTS The following tables reconcile the net loss and weighted average shares outstanding used in computing basic and diluted loss per share: Net loss – basic and diluted (Stated in thousands) Weighted average shares outstanding – basic Effect of stock options and other equity compensation plans Weighted average shares outstanding – diluted NOTE 19. ACCUMULATED OTHER COMPREHENSIVE INCOME $ 2018 (294,270) $ 2018 293,560 — 293,560 2017 (132,036) 2017 293,239 — 293,239 Unrealized Foreign Currency Translation Gains (Losses) 587,278 $ (146,545) 440,733 175,630 616,363 $ Foreign Exchange Gain (Loss) on Net Investment Hedge (430,822) 121,699 (309,123) (145,226) (454,349) $ $ $ $ Accumulated Other Comprehensive Income 156,456 (24,846) 131,610 30,404 162,014 December 31, 2016 Other comprehensive loss December 31, 2017 Other comprehensive income December 31, 2018 NOTE 20. EMPLOYEE BENEFIT PLANS The Corporation has a defined contribution pension plan covering a significant number of its employees. Under this plan, the Corporation matches individual contributions up to 5% of the employee’s eligible compensation. Total expense under the defined contribution plan in 2018 was $12.0 million (2017 – $10.4 million). NOTE 21. RELATED PARTY TRANSACTIONS Compensation of Key Management Personnel The remuneration of key management personnel is as follows: Salaries and other benefits Equity settled share based compensation Cash settled share based compensation $ $ 2018 6,732 $ 5,562 722 13,016 $ 2017 6,078 3,036 (3,945) 5,169 Key management personnel are comprised of the directors and executive officers of the Corporation. Certain executive officers have entered into employment agreements with Precision that provide termination benefits of up to 24 months base salary plus up to two times targeted incentive compensation upon dismissal without cause. Precision Drilling Corporation 2018 Annual Report 84 NOTE 22. COMMITMENTS Operating Lease Commitments The Corporation has commitments under various operating lease agreements, primarily for vehicles and office space. Terms of the office leases run for a period of one to 10 years while the vehicle leases are typically for terms of between three and four years. Expected non-cancellable operating lease payments are as follows: Less than one year Between one and five years Later than five years $ $ 2018 13,496 $ 36,639 17,797 67,932 $ 2017 12,248 27,445 21,909 61,602 Certain leased properties were sublet by the Corporation. The following amounts were recognized as expenses in respect of operating leases in the consolidated statements of loss: Operating leases Sub-lease recoveries Capital Commitments $ $ 2018 17,187 $ (540) 16,647 $ 2017 16,311 (441) 15,870 At December 31, 2018, the Corporation had commitments to purchase property, plant and equipment totaling $179.8 million (2017 – $132.9 million). Payments of $88.0 million for these commitments are expected to be made in 2019, $73.6 million in 2020 and $18.2 million in 2021. NOTE 23. FINANCIAL INSTRUMENTS Financial Risk Management The Board of Directors is responsible for identifying the principal risks of Precision’s business and for ensuring the implementation of systems to manage these risks. With the assistance of senior management, who report to the Board of Directors on the risks of Precision’s business, the Board of Directors considers such risks and discusses the management of such risks on a regular basis. Precision has exposure to the following risks from its use of financial instruments: (a) Credit Risk Accounts receivable includes balances from a large number of customers primarily operating in the oil and gas industry. The Corporation manages credit risk by assessing the creditworthiness of its customers before providing services and on an ongoing basis, and by monitoring the amount and age of balances outstanding. In some instances, the Corporation will take additional measures to reduce credit risk including obtaining letters of credit and prepayments from customers. When indicators of credit problems appear, the Corporation takes appropriate steps to reduce its exposure including negotiating with the customer, filing liens and entering into litigation. Precision’s most significant customer accounted for $18.1 million of the trade receivables amount at December 31, 2018 (2017 – $11.7 million). The movement in the expected credit loss allowance during the year was as follows: Balance at January 1 Impairment loss recognized Amounts written-off as uncollectible Impairment loss reversed Effect of movement in exchange rates Balance at December 31 $ $ 2018 2,596 $ 483 (416) (1,247) 54 1,470 $ 2017 6,072 56 (3,296) (30) (206) 2,596 85 Notes to Consolidated Financial Statements The ageing of trade receivables at December 31 was as follows: Not past due Past due 0 – 30 days Past due 31 – 120 days Past due more than 120 days 2018 Provision for Gross 175,277 $ 64,351 25,032 1,399 266,059 $ $ $ Impairment — $ — 71 1,399 1,470 $ 2017 Gross 92,880 $ 66,723 19,410 2,016 181,029 $ Provision for Impairment — — 580 2,016 2,596 (b) Interest Rate Risk As at December 31, 2018 and 2017, all of Precision’s outstanding long-term debt bears fixed interest rates. As a result, Precision is not exposed to significant fluctuations in interest expense as a result of changes in interest rates. The Corporation would have exposure to interest rates if it were to draw upon its Senior Credit Facility. (c) Foreign Currency Risk The Corporation is primarily exposed to foreign currency fluctuations in relation to the working capital of its foreign operations and certain long-term debt facilities of its Canadian operations. The Corporation has no significant exposures to foreign currencies other than the U.S. dollar. The Corporation monitors its foreign currency exposure and attempts to minimize the impact by aligning appropriate levels of U.S. denominated debt with cash flows from U.S. based operations. The following financial instruments were denominated in U.S. dollars: 2018 2017 Cash Accounts receivable Accounts payable and accrued liabilities Long-term liabilities, excluding long-term incentive plans Net foreign currency exposure Impact of $0.01 change in the U.S. dollar to Canadian dollar exchange rate on net loss Impact of $0.01 change in the U.S. dollar to Canadian dollar exchange rate on comprehensive loss Canadian Operations (1) 957 $ 482 (20,655) — (19,216) $ $ $ (192) — $ $ $ $ Foreign Operations 49,302 181,609 (122,417) (7,747) 100,747 — 1,007 $ $ $ Canadian Operations (1) $ 1,720 $ — (13,221) — (11,501) $ Foreign. Operations 39,636 152,216 (98,008) (8,023) 85,821 (115) $ — $ — 858 (1) Excludes U.S. dollar long-term debt that has been designated as a hedge of the Corporation’s net investment in certain self-sustaining foreign operations. (d) Liquidity Risk Liquidity risk is the exposure of the Corporation to the risk of not being able to meet its financial obligations as they become due. The Corporation manages liquidity risk by monitoring and reviewing actual and forecasted cash flows to ensure there are available cash resources to meet these needs. The following are the contractual maturities of the Corporation’s financial liabilities and other contractual commitments as at December 31, 2018: Accounts payable and accrued liabilities Share based compensation Long-term debt Interest on long-term debt (1) Commitments Total 2019 $ 274,489 6,221 — 115,802 101,542 $ 498,054 $ 2020 — 4,357 — 115,802 84,404 $ 204,563 $ 2021 — 6,082 226,113 115,190 27,811 $ 375,196 $ 2022 — — — 101,105 8,604 $ 109,709 2023 Thereafter $ — — 477,823 99,562 7,617 $ 585,002 $ — — 1,025,415 101,457 17,797 $ 1,144,669 Total $ 274,489 16,660 1,729,351 648,918 247,775 $ 2,917,193 (1) Interest has been calculated based on debt balances, interest rates, and foreign exchange rates in effect as at December 31, 2018 and excludes amortization of long-term debt issue costs. Fair Values The carrying value of cash, accounts receivable, and accounts payable and accrued liabilities approximates their fair value due to the relatively short period to maturity of the instruments. The fair value of the unsecured senior notes at December 31, 2018 was approximately $1,548 million (2017 – $1,765 million). Financial assets and liabilities recorded or disclosed at fair value in the consolidated statements of financial position are categorized based on the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels are based on the amount of subjectivity associated with the inputs in the fair determination and are as follows: Level I—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. Precision Drilling Corporation 2018 Annual Report 86 Level II—Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. Level III—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. The estimated fair value of unsecured senior notes is based on level II inputs. The fair value is estimated considering the risk free interest rates on government debt instruments of similar maturities, adjusted for estimated credit risk, industry risk and market risk premiums. NOTE 24. CAPITAL MANAGEMENT The Corporation’s strategy is to carry a capital base to maintain investor, creditor and market confidence and to sustain future development of the business. The Corporation seeks to maintain a balance between the level of long-term debt and shareholders’ equity to ensure access to capital markets to fund growth and working capital given the cyclical nature of the oilfield services sector. The Corporation strives to maintain a conservative ratio of long-term debt to long-term debt plus equity. As at December 31, 2018 and 2017, these ratios were as follows: Long-term debt Shareholders’ equity Total capitalization Long-term debt to long-term debt plus equity ratio $ $ 2018 1,706,253 1,557,752 3,264,005 0.52 $ $ 2017 1,730,437 1,810,336 3,540,773 0.49 As at December 31, 2018, liquidity remained sufficient as Precision had $96.6 million (2017 – $65.1 million) in cash and access to the US$500.0 million Senior Credit Facility (2017 – US$500.0 million) and $101.4 million (2017 – $96.6 million) secured operating facilities. As at December 31, 2018, no amounts (2017 – US$ nil) were drawn on the Senior Credit Facility with availability reduced by US$28.2 million (2017 – US$20.9 million) in outstanding letters of credit. Availability of the $40.0 million secured operating facility and US$30.0 million secured facility for the issuance of letters of credit and performance and bid bonds were reduced by outstanding letters of credit of $27.8 million (2017 – $20.8 million) and US$2.1 million (2017 – US$ 13.3 million), respectively. There was no amount drawn on the US$15.0 million secured operating facility. NOTE 25. SUPPLEMENTAL INFORMATION Components of changes in non-cash working capital balances are as follows: Accounts receivable Inventory Accounts payable and accrued liabilities Pertaining to: Operations Investments The components of accounts receivable are as follows: Trade Accrued trade Prepaids and other The components of accounts payable and accrued liabilities are as follows: Accounts payable Accrued liabilities: Payroll Other 87 Notes to Consolidated Financial Statements $ $ $ $ $ $ $ $ 2018 (32,709) (7,504) 23,225 (16,988) (17,880) 892 2018 264,589 47,426 60,321 372,336 2018 129,493 73,682 71,314 274,489 $ $ $ $ $ $ $ $ 2017 (41,309) (3,902) (30,158) (75,369) (67,380) (7,989) 2017 178,433 91,708 52,444 322,585 2017 87,436 58,550 63,639 209,625 Precision presents expenses in the consolidated statements of earnings by function with the exception of depreciation and amortization and impairment of property, plant and equipment, which are presented by nature. Operating expense and general and administrative expense would include $358.4 million and $7.2 million (2017 – $364.2 million and $13.5 million), respectively, of depreciation and amortization and impairment of property, plant and equipment if the statements of earnings were presented purely by function. The following table presents operating and general and administrative expenses by nature: Wages, salaries and benefits Purchased materials, supplies and services Share based compensation Allocated to: Operating expense General and administrative Other recoveries $ $ $ $ 2018 2017 728,101 $ 422,359 15,598 1,166,058 $ 1,067,871 $ 112,387 (14,200) 1,166,058 $ 580,482 433,827 1,934 1,016,243 926,171 90,072 — 1,016,243 NOTE 26. CONTINGENCIES AND GUARANTEES The business and operations of the Corporation are complex and the Corporation has executed a number of significant financings, business combinations, acquisitions and dispositions over the course of its history. The computation of income taxes payable as a result of these transactions involves many complex factors as well as the Corporation’s interpretation of relevant tax legislation and regulations. The Corporation’s management believes that the provision for income tax is adequate and in accordance with IFRS and applicable legislation and regulations. However, there are tax filing positions that have been and can still be the subject of review by taxation authorities who may successfully challenge the Corporation’s interpretation of the applicable tax legislation and regulations, with the result that additional taxes could be payable by the Corporation. The Corporation, through the performance of its services, product sales and business arrangements, is sometimes named as a defendant in litigation. The outcome of such claims against the Corporation is not determinable at this time; however, their ultimate resolution is not expected to have a material adverse effect on the Corporation. The Corporation has entered into agreements indemnifying certain parties primarily with respect to tax and specific third-party claims associated with businesses sold by the Corporation. Due to the nature of the indemnifications, the maximum exposure under these agreements cannot be estimated. No amounts have been recorded for the indemnities as the Corporation’s obligations under them are not probable or estimable. NOTE 27. LONG-TERM DEBT GUARANTOR DISCLOSURE Condensed Consolidating Statement of Financial Position as at December 31, 2018 Parent Guarantor Subsidiaries Non- Guarantor Subsidiaries Consolidating Adjustments Total Assets Cash Other current assets Intercompany receivables Investments in subsidiaries Assets held for sale Property, plant and equipment Intangibles Goodwill Other long-term assets Total assets Liabilities and shareholders’ equity Current liabilities Intercompany payables and debt Long-term debt Other long-term liabilities Total liabilities Shareholders’ equity Total liabilities and shareholders’ equity $ 4,522,964 — 28,626 $ 4,798 37,138 $ 308,450 51,616 1,887,405 68 19,658 55,430 2,541,060 1,853 33,548 — — 46,620 — $ $ 4,842,252 30,862 $ 93,166 80,735 — — 441,509 — — 5,479 — $ 3 (2,019,756) (4,523,032) — 96,626 406,417 — — 19,658 613 3,038,612 35,401 — 39,329 $ 3,636,043 — — (12,770) $ 4,696,982 651,751 $ (6,554,942) $ 42,211 $ 1,918,306 1,706,253 88,983 3,755,753 190,239 $ 60,101 — 13,160 263,500 941,229 4,578,752 $ $ 4,842,252 $ 4,696,982 49,712 $ 41,349 — 503 91,564 560,187 651,751 — $ (2,019,756) 282,162 — — 1,706,253 89,876 (2,032,526) 2,078,291 (4,522,416) 1,557,752 $ 3,636,043 (12,770) $ (6,554,942) Precision Drilling Corporation 2018 Annual Report 88 Condensed Consolidating Statement of Financial Position as at December 31, 2017 Parent Guarantor Subsidiaries Non- Guarantor Subsidiaries Consolidating Adjustments Total Assets Cash Other current assets Intercompany receivables Investments in subsidiaries Property, plant and equipment Intangibles Goodwill Other long-term assets Total assets Liabilities and shareholders’ equity Current liabilities Intercompany payables and debt Long-term debt Other long-term liabilities Total liabilities Shareholders’ equity Total liabilities and shareholders’ equity $ 4,822,876 5,422 $ 20,843 $ 38,558 261,883 93,662 2,669,280 61 64,605 2,659,831 2,472 25,644 205,167 — 53,908 — $ $ 5,858,024 38,816 $ 76,221 84,861 — 449,917 — — 3,051 — $ 3 (2,847,803) (4,822,937) 65,081 376,665 — — (529) 3,173,824 28,116 205,167 44,078 $ 3,892,931 — — (12,881) $ 5,066,188 652,866 $ (7,684,147) 36,331 $ $ 124,482 $ 1,795,141 1,000,167 — 1,730,437 17,978 135,053 3,696,962 1,142,627 1,369,226 4,715,397 $ $ 5,858,024 $ 5,066,188 48,812 $ 52,495 — 2,383 103,690 549,176 652,866 — $ (2,847,803) 209,625 — — 1,730,437 142,533 (2,860,684) 2,082,595 (4,823,463) 1,810,336 $ 3,892,931 (12,881) $ (7,684,147) Condensed Consolidating Statement of Loss for the Year ended December 31, 2018 $ Revenue Operating expense General and administrative expense Other recoveries Earnings (loss) before income taxes, equity in loss of subsidiaries, gain on redemption and repurchase of unsecured senior notes, finance charges, foreign exchange, impairment of goodwill and depreciation and amortization Depreciation and amortization Impairment of goodwill Foreign exchange Finance charges Gain on redemption and repurchase of unsecured senior notes Equity in loss of subsidiaries Loss before income taxes Income taxes Net loss Parent Guarantor Subsidiaries 104 $ 1,356,913 $ 950,058 49,305 — 83 52,638 (14,200) Non- Guarantor Subsidiaries Consolidating Adjustments 191,131 $ 124,689 10,444 — Total (6,959) $ 1,541,189 (6,959) 1,067,871 112,387 (14,200) — — (38,417) 6,882 — 4,819 126,758 (5,672) 168,975 (340,179) (46,125) 357,550 298,019 207,544 (443) (233) — — (147,337) 13,863 $ (294,054) $ (161,200) $ 55,998 60,542 — (359) 653 — — (4,838) 2,936 (7,774) $ — 217 — — — — (168,975) 168,758 — 375,131 365,660 207,544 4,017 127,178 (5,672) — (323,596) (29,326) 168,758 $ (294,270) 89 Notes to Consolidated Financial Statements Condensed Consolidating Statement of Earnings (Loss) for the Year ended December 31, 2017 Parent Guarantor Subsidiaries Non- Guarantor Subsidiaries 89 $ 1,138,049 $ 809,233 44,932 138 35,605 190,401 $ 124,115 9,535 Consolidating Adjustments Total (7,315) $ 1,321,224 926,171 (7,315) 90,072 — $ Revenue Operating expense General and administrative expense Earnings (loss) before income taxes, equity in loss of subsidiaries, loss on redemption and repurchase of unsecured senior notes, finance charges, foreign exchange, impairment of property, plant and equipment and depreciation and amortization Depreciation and amortization Impairment of property, plant and equipment Foreign exchange Finance charges Loss on redemption and repurchase of unsecured senior notes Equity in loss of subsidiaries Loss before income taxes Income taxes Net income (loss) (35,654) 13,118 — (2,375) 138,027 9,021 (12,383) (181,062) (47,567) $ (133,495) $ 283,884 302,958 15,313 (889) (68) — — (33,430) (59,120) 25,690 $ 56,751 61,450 — 294 (31) — — (4,962) 6,666 (11,628) $ — 220 — — — — 12,383 (12,603) — 304,981 377,746 15,313 (2,970) 137,928 9,021 — (232,057) (100,021) (12,603) $ (132,036) Condensed Consolidating Statement of Comprehensive Income (Loss) for the Year ended December 31, 2018 Net loss Other comprehensive income (loss) Comprehensive Income (loss) Parent (294,054) (145,226) $ (439,280) $ Guarantor Subsidiaries Non- Guarantor Subsidiaries (161,200) 129,804 (31,396) $ (7,774) 45,190 37,416 $ Consolidating Adjustments Total 168,758 $ (294,270) 30,404 169,394 $ (263,866) 636 Condensed Consolidating Statement of Comprehensive Loss for the Year ended December 31, 2017 Net income (loss) Other comprehensive income (loss) Comprehensive loss $ (133,495) $ 121,699 (11,796) $ $ 25,690 $ (110,717) (85,027) $ (11,628) $ (35,661) (47,289) $ Condensed Consolidating Statement of Cash Flow for the Year ended December 31, 2018 Parent Guarantor Subsidiaries Non- Guarantor Subsidiaries Consolidating Adjustments Total (12,603) $ (132,036) (24,846) (12,770) $ (156,882) (167) Cash provided by (used in): Operations Investments Financing Effects of exchange rate changes on cash and cash equivalents Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Parent Guarantor Subsidiaries Non- Guarantor Subsidiaries Consolidating Adjustments Total $ (102,901) $ 277,501 (169,085) 351,782 $ (75,740) (247,017) 44,453 $ (16,253) (39,285) — $ (286,302) 286,302 293,334 (100,794) (169,085) 2,268 7,783 20,843 28,626 $ 2,691 31,716 5,422 37,138 $ 3,131 (7,954) 38,816 30,862 $ $ — — — — $ 8,090 31,545 65,081 96,626 Precision Drilling Corporation 2018 Annual Report 90 Condensed Consolidating Statement of Cash Flow for the Year ended December 31, 2017 Cash provided by (used in): Operations Investments Financing Effects of exchange rate changes on cash and cash equivalents Decrease in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year NOTE 28. SUBSIDIARIES Significant Subsidiaries Precision Limited Partnership Precision Drilling Canada Limited Partnership Precision Diversified Oilfield Services Corp. Precision Directional Services Ltd. Precision Drilling (US) Corporation Precision Drilling Company LP Precision Completion & Production Services Ltd. Precision Directional Services, Inc. Grey Wolf Drilling Limited Grey Wolf Drilling (Barbados) Ltd. Parent Guarantor Subsidiaries Non- Guarantor Subsidiaries Consolidating Adjustments Total $ (160,698) $ 191,638 (73,784) 243,364 $ (58,942) (190,360) 33,889 $ (11,152) (22,334) — $ (212,694) 212,694 116,555 (91,150) (73,784) 1,893 (40,951) 61,794 20,843 $ (1,778) (7,716) 13,138 5,422 $ (2,360) (1,957) 40,773 38,816 $ $ — — — — $ (2,245) (50,624) 115,705 65,081 Ownership Interest Country of Incorporation Canada Canada Canada Canada United States United States United States United States Barbados Barbados 2018 100 100 100 100 100 100 100 100 100 100 2017 100 100 100 100 100 100 100 100 100 100 91 Notes to Consolidated Financial Statements Supplemental Information Precision Drilling Corporation Consolidated Statements of Earnings (Loss) Years ended December 31, (Stated in millions of Canadian dollars, except per share amounts) Revenue(1) Expenses: Operating(1) General and administrative(1) Other Restructuring Earnings (loss) before taxes, loss on redemption and repurchase of unsecured senior notes, finance charges, foreign exchange, loss on asset decommissioning, gain on re-measurement of property, plant and equipment, impairment of property, plant and equipment, impairment of goodwill and depreciation and amortization Depreciation and amortization Impairment of goodwill Impairment of property, plant and equipment Gain on re-measurement of property, plant and equipment Loss on asset decommissioning Foreign exchange Finance charges Loss on redemption and repurchase of unsecured senior notes Earnings (loss) before income taxes Income taxes Net earnings (loss) Earnings (loss) per share: $ 2018 1,541 $ 2017 1,321 $ 2016 1,003 $ 2015 1,635 $ 2014 2,488 $ 1,068 112 (14) - 375 366 207 - - - 4 127 (6) (323) (29) (294) $ 926 90 - 305 378 - 15 - - (3) 138 9 (232) (100) (132) 662 107 6 1,021 119 1,564 124 21 - 228 392 - - (8) - 6 147 - (309) (153) (156) $ 474 487 17 282 - 166 (33) 121 - (566) (203) (363) $ 800 448 95 - - 127 (1) 110 - 21 (12) 33 $ Basic Diluted (1.00) (1.00) (0.45) (0.45) (0.53) (0.53) (1.24) (1.24) 0.11 0.11 (1) For years prior to 2017 comparatives have changed to conform to current year presentation. Precision Drilling Corporation 2018 Annual Report 92 Additional Select Financial Information Years ended December 31, (Stated in millions of Canadian dollars, except per share amounts) Return on sales - %(1) Return on assets - %(2) Return on equity - %(3) Working Capital Current ratio Property, plant and equipment Total assets Long-term debt Shareholders' equity Long-term debt to long-term debt plus equity Interest coverage(4) Net capital expenditures excluding business acquisitions Adjusted EBITDA Adjusted EBITDA - % of revenue Operating earnings (loss) Operating earnings (loss) - % of revenue Cash provided by operations Cash provided by operations per share: Basic Diluted Book value per share(5) Price earnings (loss) ratio(6) Basic weighted average shares outstanding (millions) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2018 (19.1) (8.1) (0.2) 248 1.9 3,039 3,636 1,706 1,558 0.5 (1.6) $ 102 375 $ 24.3% (198) $ (0.1) 293 $ $ 2017 (10.0) (3.4) (0.1) 232 2.1 3,174 3,893 1,730 1,810 0.5 (0.6) $ 83 305 $ 23.1% $ $ $ $ $ (88) (0.1) 117 $ $ $ $ $ $ $ $ $ 2016 (15.6) (3.6) (7.7) 231 2.0 3,642 4,324 1,907 1,962 0.5 (1.1) $ 196 228 $ 22.7% (156) $ (0.2) 123 $ $ $ $ $ $ 2015 (22.2) (7.0) (15.3) 654 2.3 3,887 4,879 2,181 2,121 0.5 (4.0) $ 449 474 $ 29.0% (478) $ (0.3) 517 $ $ $ $ 0.42 0.42 6.69 (13.8) 293 $ $ $ 1.77 1.77 7.24 (4.4) 293 2014 1.3 0.7 1.3 306 1.9 3,932 5,309 1,852 2,441 0.4 1.2 755 800 32.2% 130 0.1 680 2.33 2.32 8.34 64.2 293 $ $ $ 1.00 1.00 5.31 (3.8) 294 0.40 0.40 6.17 (8.5) 293 (1) Return on sales was calculated by dividing earnings (loss) by total revenue. (2) Return on assets was calculated by dividing net earnings (loss) by quarter average total assets. (3) Return on equity was calculated by dividing net earnings (loss) by quarter average total shareholders’ equity. (4) Interest coverage was calculated by dividing operating earnings (loss) by net interest expense. (5) Book value per share was calculated by dividing shareholders’ equity by shares outstanding. (6) Price earnings ratio was calculated using year-end closing price divided by basic earnings (loss) per share. 93 Supplemental Information ACCOUNT QUESTIONS Our transfer agent can help you with shareholder related services, including: • change of address • lost share certificates • transferring shares to another person • estate settlement. Computershare Trust Company of Canada 100 University Avenue, 9th Floor, North Tower Toronto, Ontario, Canada M5J 2Y1 Telephone: 1.800.564.6253 (toll free in Canada and the U.S.) 1.514.982.7555 (international direct dialing) Email: service@computershare.com Shareholder Information STOCK EXCHANGE LISTINGS Our shares are listed on the Toronto Stock Exchange under the trading symbol PD and on the New York Stock Exchange under the trading symbol PDS. TRANSFER AGENT AND REGISTRAR Computershare Trust Company of Canada Calgary, Alberta TRANSFER POINT Computershare Trust Company NA Canton, Massachusetts 2018 TRADING PROFILE Toronto (TSX: PD) High: $5.33 Low: $2.25 Close: $2.37 Volume Traded: 514,932,362 New York (NYSE: PDS) High: US$4.14 Low: US$1.62 Close: US$1.74 Volume Traded: 475,910,527 ONLINE INFORMATION To receive news releases by email, or to view this report online, please visit the Investor Relations section of our website at www.precisiondrilling.com. You can find additional information about Precision, including our annual information form and management information circular, under our profile on at www.sedar.com and on the EDGAR website at www.sec.gov. SEDAR website the PUBLISHED INFORMATION Please contact us if you would like additional copies of this annual report, or copies of our 2018 annual the information Canadian securities commissions and under Form 40-F with the U.S. Securities and Exchange Commission: filed with form as Investor Relations Suite 800, 525 – 8th Avenue SW Calgary, Alberta, Canada T2P 1G1 Telephone: 403.716.4500 Precision Drilling Corporation 2018 Annual Report 94 Corporate Information DIRECTORS Michael R. Culbert(1)(3) Calgary, Alberta, Canada William T. Donovan(1)(2) North Palm Beach, Florida, USA Brian J. Gibson(1)(2) Mississauga, Ontario, Canada Allen R. Hagerman, FCA(1)(3) Millarville, Alberta, Canada Steven W. Krablin(1)(2)(3) Spring, Texas, USA Susan M. MacKenzie(2)(3) Calgary, Alberta, Canada Kevin O. Meyers(2)(3) Anchorage, Alaska, USA Kevin A. Neveu Houston, Texas, USA David W. Williams(1)(3) Houston, Texas, USA 1. Member of Audit Committee 2. Member of Corporate Governance, Nominating and Risk Committee 3. Member of Human Resources and Compensation Committee LEAD BANK Royal Bank of Canada Calgary, Alberta AUDITORS KPMG LLP Calgary, Alberta HEAD OFFICE Suite 800, 525 – 8th Avenue SW Calgary, Alberta, Canada T2P 1G1 Telephone: 403.716.4500 Email: info@precisiondrilling.com www.precisiondrilling.com OFFICERS Kevin A. Neveu President and Chief Executive Officer Doug B. Evasiuk Senior Vice President, Sales and Marketing Veronica H. Foley Senior Vice President, General Counsel and Corporate Secretary Cary T. Ford Senior Vice President and Chief Financial Officer Shuja U. Goraya Chief Technology Officer Darren J. Ruhr Chief Administrative Officer Gene C. Stahl President, Drilling Operations 95 Corporate Information Precision Drilling Corporation Suite 800, 525 – 8th Avenue SW Calgary, Alberta, Canada T2P 1G1 Phone: 403.716.4500 Email: info@precisiondrilling.com www.precisiondrilling.com 

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