2019 SHARE TRADING SUMMARY
The Toronto Stock Exchange (TSX)
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Toronto (TSX:PD)
High: $4.05
Low: $1.32
Close December 31, 2019: $1.81
Volume Traded: 350,998,252
The New York Stock Exchange (NYSE)
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New York (NYSE: PDS)
High: US$3.01 Low: US$0.99 Close December 31, 2019: US$1.38
Volume Traded: 262,808,200
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MD&A
Management’s
Discussion and
Analysis
information
business
This management’s discussion and analysis
to help you
(MD&A) contains
understand
financial
and
our
performance. Information is as of March 6, 2020.
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 62.
The terms we, us, our, Precision Drilling, Precision,
and
the Corporation 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
2019
1
Management’s Discussion and Analysis
ABOUT PRECISION
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 2020
on page 29.
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 corporate responsibility, safety and field performance
size and scale of operations that provide higher margins and better service capabilities
high quality standardized equipment and control systems with process automation control and advanced digital
backbone systems to deliver efficient, consistent and safe drilling services
a high-quality drilling rig fleet, with AC rigs capable of supporting our AlphaAutomation technology to deliver consistent,
repeatable, high-quality wellbores while improving safety, performance and operational efficiency, 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, the U.S. and
internationally. 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 carry out its responsibilities
effectively:
Audit Committee
Corporate Governance, Nominating and Risk Committee (CGNRC), and
Human Resources and Compensation Committee (HRCC).
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).
Precision Drilling Corporation 2019 Annual Report
2
BUSINESS SEGMENTS
We operate our business in two segments, supported by vertically integrated business and corporate support systems.
3
Management’s Discussion and Analysis
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 28% of the active land drilling market in Canada and 8% of
the active U.S. market. We also have an international presence with operations in the Middle East.
At December 31, 2019, our Contract Drilling Services segment consisted of:
226 land drilling rigs, including:
– 109 in Canada
– 104 in the U.S.
– 6 in Kuwait
– 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.
At December 31, 2019, we had 226 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 drives,
omni-directional pad walking systems for multi-pad well drilling, highly mechanized pipe handling, and high capacity mud pumps.
Contract Drilling
Revenue
$ Millions
$2,000
$1,500
$1,000
$500
$0
Contract Drilling
Adjusted EBITDA
$ Millions
$600
$400
$200
$0
Contract Drilling
Utilization Days
80,000
60,000
40,000
20,000
0
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
Precision Drilling Corporation 2019 Annual Report
4
Completion and Production Services
We provide well completion, workover, abandonment, re-entry preparation services and equipment rentals to oil and natural gas
exploration and production companies in Canada and the U.S. In addition, we provide camp and catering services in Canada.
On an operating hour basis in 2019, we serviced approximately 11% of the well completion and workover service rig market
demand in Canada and less than 1% in the U.S.
At December 31, 2019, our Completion and Production Services segment consisted of:
123 well completion and workover service rigs, including:
– 114 in Canada
– 9 in the U.S.
approximately 1,700 oilfield rental items, including surface storage, small-flow water treatment, power generation, and
solids control equipment, primarily in Canada
132 wellsite accommodation units in Canada
42 drill camps and four base camps in Canada.
In 2019, 75 service rigs were not registered with the industry association and 12 snubbing units were sold.
5
Management’s Discussion and Analysis
CORPORATE RESPONSIBILITY
Corporate Responsibility is integral to Precision’s vision, mission, and competitive strategy because we believe that operating a
sustainable and responsible company is critical to our long-term success. We believe our Corporate Responsibility approach
and initiatives drive business execution and create a competitive advantage. Precision’s High Performance, High Value
competitive strategy is supported by and reliant upon safety performance, environmental stewardship, employee well-being and
training, and community involvement. Our employees, investors and customers reward our commitment to Corporate
Responsibility and recognize that it provides us the ability to attract talent, capital and a premium for our services.
Our High Performance, High Value service offering is made possible through optimized rig designs and efficient processes,
enhancing our ability to drill wells safer and faster, while producing high quality well bores and lowering costs for our customers.
Our ability to produce these results safely, predictably and repeatably minimizes our environmental impact and drives revenues
for our core business.
Our operating cost structure benefits from our commitment to Corporate Responsibility. The costs of creating spill prevention
processes and effective engineering designs are lower than the costs of fluid spill clean-up. The costs associated with
establishing world-class safety processes are lower than work related injury costs. Providing comprehensive training for our
personnel allows us to retain top talent and enhance operational execution. Our investment in rig technology and advanced
digital automation capabilities reduce energy consumption and GHG emissions, lowering the operating costs for both Precision
and our customers. Our focused social and community involvement initiatives enhance our corporate brand, minimize the
potential impact of unforeseen business interruptions and serve to enhance our retention and recruitment processes by allowing
us to choose from the best of the best to join Precision. The strong alignment of Corporate Responsibility with our High
Performance, High Value competitive strategy lowers our operating costs and enhances profitability, while operating in an ethical
and environmentally responsible way.
Corporate Responsibility influences every aspect of our business. We have a long track record of achieving and sustaining
substantial improvements in critical Corporate Responsibility categories. We are committed to continue tracking, improving and
reporting on our Corporate Responsibility metrics.
In 2019, we continued to deliver on our multi-year Corporate Responsibility reporting strategy by significantly increasing
communication and visibility regarding Precision’s environmental, social and governance (ESG) practices.
Last year, we completed several strategic initiatives to advance our Corporate Responsibility communication, including
completing an internal assessment based on an industry standard framework as set forth by the International Petroleum Industry
Environmental Conservation Association, the American Petroleum Institute and the International Association of Oil and Gas
Producers. This assessment allowed us to evaluate the key aspects of our Corporate Responsibility strategy that we believe are
Precision Drilling Corporation 2019 Annual Report
6
most significant to our internal and external stakeholders and with those stakeholders in mind, we subsequently developed and
accomplished the following initiatives in 2019:
integrated sustainability into the mandate of the CGNRC
verified and updated Chemical Inventories, Spill Prevention and Countermeasures plans, and Storm Water Pollution
Prevention Plans
completed an environmental assessment of our Houston Technical Support Centre
developed a more strategic and purposeful approach to company communications by creating opportunities for
voluntary disclosure through existing business processes, our website and annual disclosure documents, ensuring
both quality of disclosure and cost neutrality
updated our Crisis and Emergency Response Plans, conducted global drills, and media training to enhance
emergency preparedness and enable attendees to participate in practical exercises that incorporate best practices for
crisis management, techniques from global experts and expertise from within our organization
integrated voluntary disclosure data into mandatory financial disclosure forms
increased transparent communication with key investors; strengthening our corporate reputation for openness to
dialogue on ESG issues, and
completed a fulsome assessment of our Health, Safety and Environment Management System in order to ensure
alignment with regulatory, industry best practice and customer requirements.
We continue to actively solicit feedback from both external and internal stakeholders in order to enhance our Corporate
Responsibility strategy. Our recent letter to shareholders contains a section specifically requesting feedback regarding
sustainability. Feedback received will be integrated into our 2020 Corporate Responsibility Strategy. This year, our corporate
strategy will also include an ESG component in order to align our priorities with our Corporate Responsibility plan. We have also
linked executive compensation targets to key corporate sustainability goals. Historically we incorporated ESG into our short-
term incentive plan (STIP) scorecard through our safety metrics of Total Recordable Incident Rate (TRIR), Percentage of
Facilities Recordable Free, and Triple Target Zero (see Health, Safety and Environment on page 8). In 2020, we expanded ESG
in our STIP scorecard by including a new Strategic Environmental Initiatives metric to measure management’s advancement of
our multi-year Corporate Responsibility Strategy.
Materiality Assessment
In 2017, we completed a comprehensive materiality assessment to understand and focus our sustainability priorities as a
company (Materiality Assessment). Under the guidance of a highly-experienced independent consultant, we engaged with
internal stakeholders to review multiple sustainability topics through facilitated sessions in order to identify those material to
Precision and to our stakeholders.
In 2019 we updated our Materiality Assessment using data-driven analytics, which involved benchmarking against our peers,
reviewing mandatory regulations and voluntary standards, and examining news and social media to develop a detailed external
view of current sustainability topics. We also focused on areas that we consider to be foundational to our sustainability practices,
including safety, ethics, governance, stakeholder engagement, and diversity and inclusion.
Based on this review, an evaluation of our business risks, the applicability, and the potential for Precision to impact the issue,
our 2019 Materiality Assessment identified the following focus areas as the most significant priorities to our business.
Management and the Board of Directors review our sustainability strategy annually at the Board Strategic Session. Every quarter
our Safety and Corporate responsibility Council and our CGNRC also reviews and discusses updates on our sustainability
efforts.
7
Management’s Discussion and Analysis
Health, Safety and Environment (HSE)
Precision strives to lead and set the standard for HSE in our industry. One of our core values addresses protecting our people,
the environment, customers, and our neighbors. We deliver state-of-the-art technologies, a highly skilled and technically
competent workforce, and a culture that stresses having a plan for every job we perform and that we follow that plan every time;
this is the Precision way. We ensure our employees are kept updated on all new industry standards by actively participating in
industry associations and delivering comprehensive training to our employees. Last year our employees participated in over 75
industry associations events and attended over 1,700 hours of continuous learning within these organizations.
Precision Management System
Our Global Quality Health, Safety and Environmental Management System (HSE Management System) is tightly integrated
into our culture to ensure standardization, consistency, and repeatability throughout our field operations. Our Key Beliefs, Target
Zero Rules and HSE Fundamentals are our guiding principles and serve as the foundational core of our service delivery model.
Our HSE Fundamentals are Hazard and Risk Assessment, Stop Work, Step Back, Incident Investigation, Observations and
Competent and Fit Workforce. We have oversight and Board of Directors’ engagement through our Safety and Corporate
Responsibility Council; continuously reviewing, monitoring, and making recommendations to strengthen our standards, policies,
and procedures.
Precision fosters our safety culture through visible leadership, competency and regulatory training, and proven management
systems. Our commitment to provide comprehensive training and development to our people can be seen through the significant
investment we have made in our Technical Support Centre training facilities located in Houston, Texas, and Nisku, Alberta. In
2019, over 5,488 employees were trained at these facilities on Precision’s culture, rig roles and responsibilities, well control,
tools and equipment, HSE standards, leadership, and communication.
Environment and Climate Change Stewardship
We recognize climate change is an important global issue and actively monitor developments that have the potential to affect
our business. Our ability to reduce our carbon footprint at drilling sites is tied to our customers, as they are responsible for
controlling, measuring and reporting on usage of greenhouse emissions. However, we recognize that our position as a global
technology leader in our industry uniquely situates us to address climate change with technologies that can assist our customers
in both increasing their operational performance while simultaneously reducing environmental impact. By continuously investing
in our rig technology to make our operations safer, more reliable and efficient, we help our customers reduce or eliminate
emissions, reduce water usage, improve chemistry applications and increase oil and natural gas production all while using fewer
resources. Our modern rig fleet and digital enablement strategy allow our customers to rely on real time data driven insights and
automation in order to make faster and smarter decisions. This digital transformation limits energy use, while maximizing output
and productivity throughout the entire drilling process. We have standardized our operating procedures and continually explore
new innovative technologies to maximize our overall performance, which minimizes waste and our environmental footprint,
including reduced greenhouse gas emissions.
Our customers aggregate and report on-site fuel usage with respect to greenhouse gas emissions and we have significantly
invested in technologies allowing them to minimize environmental impact. These alternatives include:
enhancing drilling technologies to generate improved drilling efficiencies, allowing us to drill wells faster and move in
and out of a location more rapidly
scaling our AlphaAutomation offering (34 systems currently deployed in the field) to significantly improve operational
efficiency and reduce overall drilling times
utilizing AlphaApps (15, either active or in development) to further enhance drilling efficiencies and reduce fuel usage
on site
utilizing bi-fuel systems (29 in Canada, 20 in the U.S.) to reduce diesel consumption and greenhouse gas emissions
utilizing natural gas engines (approximately 25% of our North American fleet) that burn lower carbon fuel
designing and building our rigs to employ pad walking systems to reduce our environmental footprint by improving
drilling efficiencies
working with our customers to effectively utilize our products and services to help them reduce their greenhouse gas
emissions in the development of their hydrocarbon resources
including climate strategy in our internal research and development of products
working with educational institutions and other corporations to further develop sustainable solutions in the industry
working with our customers on solutions to mitigate noise pollution in and around highly populated areas, and
utilizing industry best practice processes to ensure spill prevention.
Research and Development
In collaboration with the University of Calgary’s Schulich School of Engineering, we jointly submitted a Collaborative Research
and Development Grant application under the Natural Sciences and Engineering Research Council’s (NSERC) University-
Industry Program. NSERC awarded funding for the project which involves development of sensing and control systems to be
Precision Drilling Corporation 2019 Annual Report
8
utilized in closed loop automated drilling systems. To further the project, Precision entered into a Research Agreement with the
University of Calgary which aims to increase efficiencies in the drilling process and reduce environmental footprint. The project
commenced in 2019 and is scheduled for completion in 2021.
We also support development of alternative energy sources. We partnered with Eavor Technologies Inc. and Shell International
Exploration and Production and as part of our partnership agreement, Shell and Precision provided technical expertise towards
the design of drilling, completion, and construction of geothermal wells and a technological demonstration facility in Alberta.
Precision provided the drilling expertise for the pilot program in which we drilled two deep wells were connected horizontally.
Once implemented, the system will pump water between the two connected wells and harness heat from the planet’s core. This
is a solution that, unlike wind and solar, builds upon our expertise in drilling and uses already created energy infrastructure to
produce steady and dependable heat and electrical power without emissions of any kind. In this process there are no greenhouse
gas emissions, limited water use, and no produced brine or solids. Geothermal technology provides an opportunity for Precision
to utilize its existing rig fleet in the drilling of new geothermal wells. This proposed geothermal recovery technology could one
day provide a sustainable emission-free energy alternative to the world.
Performance Indicators
Our HSE key performance indicators measure injury-free performance, safe driving
behavior, and environmental impact. We have Health, Safety and Environmental goals
devoted to achieving what we call “Triple Target Zero Days”, our internal scorecard that
recognizes injury-free performance, safe driving behavior and “zero spills” that could
impact the environment. Precision’s 2019 safety performance was at the top quartile of
the land drilling industry, as measured by Total Recordable Incident Rate (TRIR), an
industry standard metric for safety performance and benchmarking. The comparative
data was provided by our industry associations (International Association of Drilling
Contractors and Canadian Association of Drilling Contractors).
Our HSE Management Systems at Work
Throughout 2018 and 2019, we performed a comprehensive assessment and realignment of our HSE Management System;
analyzing regulations in the countries and regions in which we work, industry best practices, and internal Precision standards.
From our HSE Management System, Precision created a Safe Operations Verification work-flow process to ensure that all the
core HSE elements are planned for, verified, and reviewed for every job every time – every job we do has a plan and we follow
the plan every time. We realized our investigation methodology and associated processes to incorporate fundamental elements
of human performance.
In 2019, Precision added an HSE Assurance Program that is integrated with our existing highly professional and skilled HSE
team. This team is responsible for testing the effectiveness and implementation of our HSE Management System. This highly
skilled and experienced team of professionals created a protocol that integrates the elements of International Standards
Organization auditing, Canada Certificate of Recognition auditing, key elements of behavior-based safety, and the fundamentals
of human performance.
Crisis and Emergency Preparedness
In 2019, we developed and implemented workplace violence prevention and response plans, disaster relocation plans, and
delivered comprehensive crisis media training for our company spokespersons. To validate our effectiveness, we conduct global
training and tabletop drills annually to prepare our employees and the leadership team for various emergency scenarios.
Our long-standing Disaster Recovery and Business Continuity Plans are continually tested, reviewed, and updated. In 2019, we
completed several IT infrastructure tests, such as a Disaster Recovery Test, a Penetration Test on Precision’s internal and
external network, a Digital Footprint Assessment, a Cloud Access Security Broker, and an Information Management & Data
Privacy Test. No material issues were identified as a result of these tests.
Corporate Governance, Ethics & Compliance
Our principles for sustainability are built on a foundation of ethics and integrity. Precision is committed to ethical behavior through
the oversight provided by our Board, our Code of Business Conduct (the Code), our employment policies and practices and our
internal audit function. Our internal audit function reports directly to the Audit Committee of the Board.
Corporate Governance
Our Corporate Governance Guidelines are reviewed annually and serve as a guidepost for the Board. Topics pertaining to
corporate citizenship, governance and sustainability are routinely reviewed at meetings of the Board and its committees.
The Board provides comprehensive oversight of the management and governance of Precision. During 2019, our Board had
nine members. All directors stand for election at our annual meeting of shareholders. The CGNRC performs an annual evaluation
9
Management’s Discussion and Analysis
of Precision’s director criteria, Board diversity profiles, skills and experience. This committee also performs assessments of the
Board, committees and individual directors.
Diversity and Inclusion
We believe in building a team of exceptional employees who bring a wide range of ideas, perspectives, skills and cultures to our
company. Precision has made a commitment to be a workplace free from discrimination, harassment, workplace violence and
retaliation. Our diversity and inclusion policy prohibits discrimination of any kind and promotes diversity and inclusivity among
our employees, management team and board members.
We adopted a diversity and inclusion policy in 2015 that considers gender, race and other factors with the objective of promoting
diversity and inclusion among our employees, management team and the Board to foster an environment where we can draw
on the widest range of knowledge, skills, perspectives and experience. As a company with operations in several countries, we
place high importance on ensuring that we have a diverse Board and management team.
We aim to create a workplace free from discrimination by posting gender-neutral job listings for positions throughout the
organization. We encourage all employees or individuals, who meet the criteria (irrespective of gender) to apply for all positions.
Board Diversity
When recruiting new directors, the CGNRC considers candidates on merit. It considers our vision and business strategy, the
skills and competencies of the current directors, any gaps in Board skills, and the attributes, knowledge and experience new
directors should have to best enhance our business plan and strategies. The CGNRC also considers diversity as part of this
process, including the level of female representation on the Board. When assessing Board composition or identifying suitable
candidates for appointment to the Board, the CGNRC will include a slate of minority candidates for all open Board seats.
We have not adopted targets for female directors because we believe merit of the candidate and needs of the organization must
remain paramount. We believe our process of reviewing candidates on a variety of factors is more appropriate because it
includes gender as well as ethnicity, geographic location and other experience. However, last year we amended our diversity
policy to ensure qualified female candidates are included for all open Board positions.
In the last five years, two of five of our new directors have been women. We are firmly committed to gender diversity and are
mindful of the need to pursue qualified female candidates. The CGNRC ensures the list of potential director candidates includes
qualified women, but the Board’s decision to appoint or nominate a director is based on qualifications of candidates and the
particular needs of the Board at that time. The Board believes it must also have the flexibility to add qualified board members
when they become available, and this may mean appointing female or male directors, as appropriate.
Management Diversity
Increasing diversity at the management level is essential to maintaining our competitive advantage and is a factor in managing
our talent pool and making strategic hires.
The executive leadership team reviews the talent pool regularly and considers the individual’s development, industry experience,
background, race, gender and other factors before recommending executive appointments to the Board for approval. The Board
also considers the representation of women and geographic diversity, amongst other factors, in executive positions when
reviewing the management succession plan and approving executive appointments. We do not have specific gender targets as
we believe merit of the candidate and needs of the organization must be paramount.
Reporting and Accountability
The human resources department reviews the structure, size, pay equity and composition of our workforce annually and
prepares a report for the Chief Administrative Officer and the CEO. Similarly, the executive leadership team meets regularly to
assess its optimum composition, and annually provides a report to the CGNRC.
The CGNRC also monitors Board diversity and prepares an annual report for the Board that includes information about factors
to consider when recruiting new directors.
Precision Drilling Corporation 2019 Annual Report
10
Clawbacks
Our senior leadership team is held accountable for their decisions. As such, we have designed our compensation program so
any consequences stemming from our policies, employment agreements and incentive plans align with Precision’s best interests.
Our Clawback Policy entitles us to recoup some or all incentive compensation awarded or paid to our senior leadership team,
including our CEO, both past and present, if:
there was a restatement of our financial statements for a fiscal year or fiscal quarter when they were with Precision;
there was an error in calculating executive compensation during their time with Precision; or
the member of the senior leadership team engaged in misconduct, including fraud, non-compliance with applicable
laws and any act or omission that would entitle an employee to be terminated for cause.
The Policy applies to all forms of incentive awards including bonuses, restricted share units, performance share units and stock
options.
Business Ethics
We believe ethical behavior is fundamental to the way we do business. Our Code of Business Conduct and Ethics ensures every
director, executive officer, manager, employee, and contractor represents Precision’s values. The full text of the Code is available
at www.precisiondrilling.com.
We have a robust, proven corporate governance system that is effective in ensuring a transparent culture. It allows for ethical
issues to be reported, assessed and resolved in a timely manner. This system employs a strong body of policies, enforcement
mechanisms and a closed-loop resolution process of issues that are reported.
The Code addresses the following key areas, among others:
financial reporting and accountability
maintaining confidentiality
avoiding conflicts of interest
complying with laws
safeguarding corporate assets
reporting illegal or unethical behavior
fair dealing
disclosure
anti-retaliation
data and privacy security
bribery and corruption
harassment and discrimination
Every director, executive officer, manager, and employee must annually acknowledge that they have read, understood and will
abide by the Code. Each member of the senior management team must also certify quarterly whether they are aware of any
breaches of the Code. In-person and online training is provided annually to all permanent employees and covers an array of
topics related to business conduct and ethics.
A hotline is available for anyone within or outside of Precision to confidentially and anonymously report any suspected illegal or
unethical conduct or breach of our policies. With the oversight of the Audit and HRCC Committees, there were no ethics incidents
in 2019 that required disclosure and 100% of the issues reported through the hotline were reviewed and resolved. An
independent third party operates the hotline and notifies the Audit Committee Chair immediately upon receiving a complaint.
Reports are reviewed by our legal, internal audit and human resources groups, investigated by the appropriate department
based on the allegation, and reported quarterly to the Audit Committee, or the HRCC, depending on the nature of the allegation.
Precision respects Human Rights as a fundamental value. Our objective is to promote Human Rights throughout our
organization, our customers, operations, and entities with which we do business. Our Compliance Department is responsible for
the execution and maintenance of our Human Rights policy detailed in the Code. Our policies aim to help identify and prevent
any threats to Human Rights. If a breach is identified, we work diligently to ensure a fair and impartial remediation.
Anti-Bribery and Anti-Corruption
We recognize that we operate in some countries with a low ranking on the Corruption Perception Index, as compiled by
Transparency International. Precision has an Anti-Bribery and Anti-Corruption Policy that sets out the Corporation’s standards
for detecting and preventing corruption. Our Compliance Department provides mandatory, comprehensive training annually on
issues dealing with bribery and corruption for key groups of employees. Additionally, in-person training is delivered throughout
the organization and scheduled as needed. There have been no internal or external investigations regarding non-compliance
with anti-bribery and corruption laws or our policies and there are currently none underway. Our Compliance Department
continually monitors intermediaries through internal reviews and assistance from a third-party vendor. Our due diligence
procedures generate a risk score for intermediaries. Based on the results, due diligence recommendations are completed and
monitored through an intermediary database.
International Trade – Sanctions
Our international trade policies are designed to ensure compliance with applicable laws and regulations governing the export
and import of Precision’s products, services, software, and technology to areas where we conduct or plan to conduct business.
11
Management’s Discussion and Analysis
In 2019, we conducted a comprehensive assessment of our international trade policies and refreshed our international trade
manual.
Precision complies with all export control, sanctions, and hiring, of the countries where we operate, including Canada and the
U.S. Precision also complies with the anti-boycott laws of the U.S.
While Precision’s products, services, software, and technology are generally not military in nature, some purely commercial or
civilian items are regulated because they have a “dual-use,” meaning they could be used for a military, weapons proliferation,
or other nefarious use even though we and our business partners do not use them for such purposes. Therefore, Precision
ensures that no such items are exported without the required authorization.
It is our general policy that no U.S. incorporated or U.S. based affiliate of Precision, no non-U.S. entity subject to U.S. jurisdiction
(including foreign entities owned or controlled by a U.S. party), no U.S. citizen or resident employee wherever located, or no
non-U.S. employee or resident while acting in the United States, may participate in, approve, facilitate, assist, advise on, or
support any transaction involving countries sanctioned by the U.S. government (e.g., Cuba, Iran, Syria); companies organized
in, or owned or controlled by the governments of those countries; or sanctioned parties.
Insider Trading
Our Insider Trading Policy applies to all directors, executive officers, managers, and employees. Reviewed annually by the
CGNRC, the Policy:
sets out our obligations to stock exchanges, regulators and investors
prohibits “tipping” or the purchase or sale of Precision shares while in possession of undisclosed material information
establishes a regular black-out calendar
prohibits short-term trades, purchases on margin, short sales, trading in derivatives, or hedging the value of Precision
shares through specific financial instruments
requires insiders to pre-clear trades of Precision shares, and
prohibits insiders from participating in equity monetization transactions involving any unvested equity awards under our
long-term incentive plans or Precision shares that constitute part or all our terms for meeting our minimum share
ownership guidelines.
Privacy
Precision has a Privacy Policy and our organization respects and is committed to protecting the privacy and security of all
personal information collected by Precision. We recognize the importance of having effective privacy protections in place and
are committed to complying with applicable privacy laws and regulations in our various jurisdictions, supplemented by our internal
policies and standards.
Our Chief Privacy Officer (CPO) is responsible for ensuring our internal policies are implemented and maintained. The CPO
ensures the appropriate personnel understand our Privacy Policy and provides all necessary guidance to assist with
implementing and monitoring of the Privacy Policy.
Our Privacy Policy details what personal information is, how we collect, share, use and protect this information, and how
employees can exercise their privacy rights. We process personal information for the purposes set out in our Privacy Policy and
if we need to process personal information for other purposes, we provide notice to the employee and, if required by law, seek
their consent. In 2019 we updated our Privacy Policy to ensure compliance with various regulations and provided privacy training
to all corporate employees.
We have implemented appropriate physical, technical and organizational security measures to secure personal information
against accidental loss and unauthorized access, use, alteration or disclosure. In addition, we limit access to personal information
to those employees, agents, contractors and other third parties that have a legitimate business need for such access. Each
department is responsible for the security of information in its custody and implement measures to keep such information safe.
Avoiding Conflicts of Interest
The Board is committed to making decisions in the best interests of Precision and considers the interests of our shareholders,
securityholders, customers, employees, suppliers, communities where we operate, the environment, governments, regulators
and the general public.
From time to time, directors will face potential conflicts of interest related to our business. Some directors may hold management
or director positions with customers or with other oilfield services providers that may be in direct competition with us. Some may
also be involved with entities that periodically provide financing or make equity investments in companies that compete with us.
Any conflicts are subject to the procedures and remedies set out under the Business Corporations Act (Alberta). If directors find
themselves in a conflict of interest, they advise the Chairman of the Board, abstain from participating in any discussions and
voting on the matter or excuse themselves from the meeting.
Our employees are also required to disclose any potential conflicts of interest. The conflicts disclosed are reviewed by our Audit
and Compliance departments and resolved in accordance with the Code.
Precision Drilling Corporation 2019 Annual Report
12
Public Policy & Lobbying
Precision is politically neutral and does not engage in political activities or make political contributions. We may not use company
funds or assets for political purposes. However, we are active members of various associations that conduct lobbying on behalf
of the oil and natural gas industry, and we allow lobbying on behalf of Precision’s interests, in accordance with all federal and
provincial regulations. The CEO must approve all such requests for financial support for these associations.
Our employees are required to inform the Chief Compliance Officer of any company communication with government officials,
including elected officials and bureaucratic staff. However, this does not include dealings with regulators on ordinary matters
(the Alberta Energy Regulator, Occupational Health & Safety officials and other regulators in Canada, the U.S. or internationally
that interact with Precision in the ordinary course of business), unless their actions raise questions under our policies.
Talent Management
We strive to have high-performing, passionate people throughout every level of our company. We have implemented systems
and processes that help us execute our talent management strategy to maintain a well-trained, highly competent and capable
talent pool, both in the field and corporate positions with a broad range of business experience throughout market cycles.
and
the School
further enhanced
In 2019, we
the
Precision Drilling University Resource
Centre (PD University), a central online
hub where employees can access
competencies, training resources, and
development programs. PD University is
divided into two segments: the School of
Toughnecks
of
Leadership. The School of Toughnecks
focuses on
the development and
dissemination of training to develop the
best crews in the industry, ensuring that
our
the skills,
knowledge and abilities they need to
deliver
Performance
High
commitment. The School of Leadership is
focused on developing new and
experienced leaders. The curriculum is
designed and delivered by our executives
with support
from our organizational
development and learning professionals.
field employees have
our
Our proactive talent management strategy helps us maintain a strong, agile workforce when the industry experiences manpower
shortages during peak operating periods. In 2019, we onboarded over 1,191 new employees. Between Precision’s technical
centres and traveling field coaches, we have trained 5,488 employees and performed approximately 3,560 rig-based
competency assessments.
Our talent management strategy enables Precision to:
retain experienced field personnel during market cycles
support targeted recruitment initiatives, and
reward the achievement of our short-term and long-term strategic objectives.
As part of our employee engagement strategies, we offer company-supported social activities to promote collaboration, work-
life balance and interaction with the families of our employees. We also hold annal wellness campaigns to support the health
and well-being of our employees and hold ticket draws to concerts, sporting events, and other entertainment to provide
employees with social opportunity incentives.
High School and University Internship Programs
Precision continues to initiate high school industry exposure efforts to broaden students’
technical education and familiarity through Career Days, STEM Day projects and
manages a comprehensive summer internship program. In 2019, we hosted 59 interns
from 30 universities working in Canada and the U.S with nationalities represented from
North and South America, Western and Southern Africa, Southeast Asia, and Northern
Europe. We believe our summer internship program provides an important talent pool for
our permanent hires and provides participants with practical experience that cannot be
obtained in the classroom and is an excellent entry into the oil and natural gas industry.
13
Management’s Discussion and Analysis
Philanthropy & Community Engagement
We are proud to invest in causes
that are important to our employees,
the communities
customers and
where we operate. Throughout
2019, our corporate giving program
contributed to several exceptional
health
services
organizations and youth programs.
human
and
For nearly 30 years, one of our proudest partnerships in Canada has been with the Shock Trauma Air Rescue Services (STARS)
Foundation which provides rapid and specialized emergency care and transportation for critically ill and injured patients. STARS
operate 24/7 bases in Calgary, Edmonton, Grande Prairie, Regina, Saskatoon and Winnipeg which are well aligned to provide
critical support to remote field operations and employees both on and off the job residing across Western Canada.
In 2019 we continued our multi-year partnership with the Heritage Park Society of Calgary to support the Natural Resources
Project, “Keeping Alberta’s Story Alive”. The Heritage Park Society restores, builds and creates programs in the Natural
Resources Area for the education of nearly 700,000 attendees and students at Heritage Park. Additionally, we have continued
our longstanding partnership with the Heart and Stroke Foundation of Canada supporting the Jump-Rope-For-Heart program
which impacts over one million children annually in 4,000 schools across Canada. This program focuses on promoting health,
saving lives and enhancing recovery and provides funding to support medical breakthroughs that tangibly improve Canadians’
heart and brain health.
In 2019, we partnered with the University of Calgary in sponsoring their 2019 Drillbotics team at the
SPE Drilling Systems Automation Technical Section’s International Student Competition. Students
receive hands-on manufacturing and programming experience through this competition to design a
drilling rig and related equipment to autonomously drill a vertical well as quickly as possible while
maintaining borehole quality and integrity of the drilling rig and drill string. We also sponsored the
2019 University of Calgary Chancellor’s Ride which provides scholarships to students drawn from
the best and brightest across the country advancing excellence in research at the undergraduate
level.
A few of our other financial commitments in 2019 included:
Girls, Inc. of Greater Houston to advocate on behalf of girls and deliver life-changing programs
and experiences
Children’s Fund Inc. to support children focused charities in Texas with small budgets, minimal
fund-raising ability, small administrative departments, lack of government or other charity
support, and lack of exposure to the business community to help them grow and succeed
Good Samaritan Community Services to support the Good Sam Sonora Summer Camp, a
summer youth enrichment program located in South Texas
Spindletop Charities of Houston to provide aid programs targeting child abuse prevention,
pediatric medical research, drug and alcohol abuse prevention and rehabilitation, education and
scholarships, school safety, therapeutic services and after-school programs, and family health
Texas Children’s Hospital to provide world-class care to every child who comes to them for help
no matter the financial circumstances
Kids Cancer Care Foundation of Alberta to provide programs to meet the needs of the whole
family at each stage of the cancer journey, from diagnosis through treatment and beyond
Unlocking Potential Foundation of Calgary to provide unparalleled education and community
outreach programs to equip individuals with the knowledge and skills to deal with issues and live
life to its’ fullest
Fraser Institute to improve the quality of life for Canadians, their families, and future generations
by studying, measuring, and broadly communicating the effects of government policies,
entrepreneurship, and choice on their well-being
Calgary Urban Project Society to support their program of over 8,000 vulnerable Calgarians to improve their quality of life
through housing, development and emotional support programs
Canada: Powered by Women a national initiative to empower and mobilize women voters across Canada, and
KidSport to support children to remove the financial barriers that prevent them from playing organized sport in 166
communities across Canada.
Precision Drilling Corporation 2019 Annual Report
14
Volunteering in the Community
We understand the value of volunteering our time and have a desire to do more in the communities where we work. We continue
to find new ways to obtain and attract new talent and establish a more purpose-driven and engaged workforce. We encourage
our employees to participate in company-sponsored volunteer opportunities. In 2019, approximately 593 employees volunteered
over 1,700 hours of time towards numerous organizations aligned with our giving philosophy.
A few of our high impact initiatives in 2019 included:
donation drives for the Houston Food Bank and the Calgary Foodbank to provide nutritious
food to school-aged children at-risk of hunger and to families and individuals facing crisis
completed the annual spring clean-up at Camp Kindle for the Kids Cancer Foundation of
Alberta to create camp experiences for children with cancer
participated in the MS150, an annual bike ride from Houston to Austin raising funds for the
National Multiple Sclerosis Society
held blood drives for Calgary Blood Services to ensure life-saving blood products are
delivered to hundreds of people across the country each day
prepared meals and donated funds to Inn from the Cold in Calgary for shelter residents
held an annual hockey tournament for employees and customers in Calgary with proceeds
donated to the Highbanks Society to provide affordable housing and a nurturing community
where young families can learn and grow
held clothing drives to obtain lightly used professional wear to support people in need who
are re-entering the work force after homelessness and addiction struggles through the
Calgary Dreams Centre
donated over 200 children’s toys, toiletries, and educational items as well as help fund the
bussing to deliver gifts to underprivileged children through the Magic of Christmas so they
can enjoy the holiday season
donated over 600 items to the Ronald McDonald House of Houston including pantry items,
toiletries and gift cards
prepared soup with the Soup Sisters program in Calgary for delivery to the Awo Taan Healing Lodge which provides
services and programs to women and children from all cultures, who have suffered from family violence and all forms of
abuse, in a uniquely Aboriginal atmosphere
donated school supplies and assembled backpacks for children through the Calgary Board of Education and the Houston
YMCA, and
Houston office staff assembled and delivered bikes and skateboards for underprivileged children.
Scholarship Program
Precision recognizes the value of post-secondary education and supports the children of our employees in their efforts to further
their education. Precision has a long-standing scholarship program to assist children of employees who plan to continue their
educational journey in college or vocational school programs. Precision partners with Scholarship America to administer the
application process and all scholarships are granted without regard to race, color, creed, religion, sexual orientation, age, gender,
disability, or national origin. In 2019, scholarships were provided to the children of 30 of our employees. Precision also recognizes
the legacy of numerous long-serving employees who have retired from the company by funding annual scholarships with several
education institutions across North America in the name of the retiree.
We have also been a long-standing contributor to the Houston Livestock Show and Rodeo scholarship program. As one of the
largest scholarship providers in the U.S., the Rodeo has presented more than 19,000 scholarships valued at $230 million since
1957.
Corporate Culture
We believe our greatest asset is our people and we are committed to providing a work environment where employees feel
respected, satisfied and appreciated. We understand the importance of building a culture that will not only make our company
stand out from others but will also give us a competitive advantage. Our Board champions and holds management accountable
for our highly collaborative culture through active oversight and input on initiatives driven by management. In 2019, through a
series of training sessions, operational meetings and townhalls, we asked our employees in the field and our offices to provide
insights about our culture. Over 1,000 employees participated in this process, which resulted in the identification of key focus
areas to continue to foster and grow Precision’s positive culture in 2020.
Feedback
We believe in building a feedback rich culture and encourage ongoing engagement with our employees, shareholders and other
stakeholders. Please contact us at investorrelations@precisiondrilling.com with your feedback.
15
Management’s Discussion and Analysis
2019 HIGHLIGHTS AND OUTLOOK
Adjusted EBITDA, operating earnings (loss), funds provided by (used in) operations and working capital are Non-GAAP
measures. See page 64 for more information.
Financial Highlights
Year ended December 31
(in thousands of dollars, except where noted)
Revenue
Adjusted EBITDA
Adjusted EBITDA % of revenue
Net earnings (loss)
Cash provided by operations
Funds provided by operations
Investing activities
Capital spending
Expansion
Upgrade
Maintenance and infrastructure
Intangibles
Proceeds on sale
Net capital spending
Earnings (loss) per share ($)
Basic
Diluted
n/m – calculation not meaningful.
Operating Highlights
Year ended December 31
Contract drilling rig fleet
Drilling rig utilization days
U.S.
Canada
International
Revenue per utilization day
U.S. (US$)
Canada (Cdn$)
International (US$)
Operating cost per utilization day
U.S. (US$)
Canada (Cdn$)
Service rig fleet
Service rig operating hours
Revenue per operating hour (Cdn$)
2019
1,541,320
391,905
25.4%
6,618
288,159
292,652
108,064
12,846
38,976
808
(90,768 )
69,926
0.02
0.02
% increase/
(decrease)
0.0
4.5
(102.2 )
(1.8)
(6.0)
204.9
(58.2 )
(19.4 )
(93.0 )
271.1
(31.2 )
(102.3 )
(102.3 )
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
(1.00)
(1.00)
% increase/
(decrease)
16.6
23.0
2017
1,321,224
304,981
23.1%
% increase/
(decrease)
31.7
33.7
122.9
151.7
69.2
(132,036 )
116,555
183,935
196.7
(17.1 )
87.6
(50.1 )
64.8
22.3
122.2
122.2
11,946
37,086
25,791
23,179
(14,841 )
83,161
(0.45 )
(0.45 )
(15.1)
(4.9)
74.6
(92.0)
86.7
(25.7)
n/m
89.3
(57.5)
(15.1)
(15.1)
2019
226
26,544
14,498
3,093
23,397
21,569
51,360
14,447
15,240
123
147,154
739
% increase/
(decrease)
(4.2)
(0.6)
(22.1)
5.9
7.0
(0.3)
1.8
0.8
5.2
(41.4)
(6.5)
4.2
2018
236
26,714
18,617
2,920
21,864
21,644
50,469
14,337
14,493
210
157,467
709
% increase/
(decrease)
(7.8 )
30.4
(1.4 )
—
10.1
2.4
0.5
3.5
10.3
—
(8.9 )
11.3
2017
256
20,479
18,883
2,920
19,861
21,143
50,240
13,846
13,140
210
172,848
637
% increase/
(decrease)
0.4
80.5
48.4
4.8
(24.0 )
(13.7 )
9.8
(10.9 )
(7.8 )
1.4
73.8
(1.4 )
Precision Drilling Corporation 2019 Annual Report
16
Financial Position and Ratios
December 31,
(in 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 64 of this report.
(2) Share price multiplied by the number of shares outstanding plus long-term debt minus cash. See page 45 for more information.
(3) Net of unamortized debt issue costs.
240,539
1.9
1,706,253
1,723,350
3,636,043
2,305,890
0.5
5.8
0.7
December 31,
2019
201,696
1.9
1,427,181
1,500,950
3,269,840
1,854,393
0.5
5.0
0.8
December 31,
2017
232,121
2.1
1,730,437
1,754,059
3,892,931
2,782,596
0.5
14.8
0.6
2018
2019 OVERVIEW
2019 was highlighted with extreme volatility, particularly in the Canadian market. In the U.S., WTI averaged US$57.07 per barrel
and Henry Hub natural gas prices averaged US$2.56 per MMBtu, levels supporting unconventional resource development. The
volatile and uncertain outlook on oil prices and stringent focus on free cash flow have encouraged conservatism in customer
spending, leading to a significant industry decrease in rig count late in the year. In Canada, acute pipeline takeaway shortfalls
and continued uncertainty in regulatory policy caused immense pressure on regional commodity prices and subsequent activity
levels, particularly at the beginning of the year.
For the year ended December 31, 2019, our net earnings were $7 million, or $0.02 per diluted share, compared with a net loss
of $294 million, or $1.00 per diluted share in 2018. During 2019, we decommissioned drillings rigs recognizing a loss on asset
decommissioning of $20 million, that after tax, decreased our net earnings by $15 million and net earnings per diluted share by
$0.05. In 2018 we incurred goodwill impairment charges that reduced after-tax net earnings by $199 million or net earnings per
diluted share of $0.68.
Revenue in 2019 was $1,541 million, consistent with 2018. Contract Drilling Services revenue was consistent with 2018, while
Completion and Production Services revenue was down 2%. As compared to 2018, our U.S. drilling activity decreased slightly,
Canadian activity decreased 22% and international activity grew 6% from the addition of our sixth drilling rig in Kuwait.
Adjusted EBITDA in 2019 was $392 million, or 4% higher than in 2018. Our Adjusted EBITDA margin was 25%, slightly higher
than 2018. Our higher Adjusted EBITDA in 2019 was primarily due to increased U.S. and international day rates, higher
international activity, improved operating margins and lower general and administrative costs, partially offset by lower activity in
the U.S. and Canada. Adjusted EBITDA as a percentage of segment revenue for the year in our Contract Drilling Services
segment was 31%, compared with 30% in the prior year, while Adjusted EBITDA as a percentage of segment revenue from our
Completion and Production Services segment was 16%, compared to 10% in 2018. Our improved Adjusted EBITDA margins in
our Completion and Production Services segment were primarily the result of improved service rig rates and operating cost
savings initiatives. 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 and intangible assets were $161 million in 2019, an
increase of $35 million over 2018. Capital spending for 2019 included $121 million for upgrade and expansion capital, $40 million
for the maintenance of existing assets, infrastructure and intangibles. In 2019 we continued to invest in our fleet adding one
new-build drilling rig in the U.S. and completed our sixth Kuwait rig, both of which were backed by long-term contracts.
We decommissioned certain drilling and ancillary equipment that no longer met our High Performance technology standards
and recognized a loss on asset decommissioning of $20 million.
During 2019, we repurchased and cancelled US$30 million of the 7.125% unsecured senior notes due 2026, US$5 million of the
7.75% unsecured senior notes due 2023 and US$43 million of the 5.25% unsecured senior notes due 2024. In addition, we
redeemed US$75 million principal amount of our 6.50% unsecured senior notes due 2021. Subsequent to December 31, 2019,
Precision redeemed US$25 million principal amount of the 6.50% unsecured senior notes due 2021 for an aggregate purchase
price of US$25 million and repurchased and cancelled US$2 million of the 7.125% unsecured senior notes due 2026 and US$5
million of the 5.25% unsecured senior notes due 2024. In addition, we repurchased and cancelled 3 million common shares
under our normal course issuer bid for $5 million subsequent to year end.
17
Management’s Discussion and Analysis
OUTLOOK
Contracts
Term customer contracts provide a base level of activity and revenue.
As of March 6, 2020, we had term contracts in place for an average of
42 rigs: 30 in the U.S., five in Canada and seven internationally for 2020.
In most regions in the U.S. and internationally, term contracts normally
generate 365 utilization days per rig year. In Canada, term contracted
rigs normally generate 250 utilization days per rig year because of the
seasonal nature of wellsite access.
In 2019, approximately 59% of our total contract
drilling revenue was generated from rigs under
term contracts.
In 2019, we had an average of 64 drilling rigs working under term contracts with revenue from these contracts representing
approximately 59% of our total contract drilling revenue for the year.
Pricing, Demand and Utilization
The volatile and uncertain outlook on oil prices and stringent focus on free cash flow have encouraged conservatism in customer
spending, leading to a significant industry decrease in rig count late in the year. In Canada, acute pipeline takeaway shortfalls
and continued uncertainty in regulatory policy caused immense pressure on regional commodity prices and subsequent activity
levels, particularly at the beginning of the year.
In the U.S., customer focus on free cash flow continues to encourage conservatism in customer spending, leading to a significant
industry decrease in rig counts late in 2019 and into 2020. As of February 28, 2020, the rig count was 24% lower than the same
time last year and has averaged 26% lower year-to-date compared to 2019. Our U.S. activity levels for the remainder of 2020
are expected to be dependent on commodity prices and resulting customer budgets.
The industry rig count at February 28, 2020 was 14% higher in Canada than it was a year ago while the year-to-date rig count
has averaged 10% higher than 2019. Our Canadian activity for the remainder of the year is expected to be determined by the
strength in commodity prices and the resulting customer budgets.
International
We currently have eight rigs working on term contracts with five in Kuwait and three in the Kingdom of Saudi Arabia. During
2019, our new-build ST-3000 drilling rig began drilling operations in Kuwait under a five year take-or-pay contract with an optional
one-year extension. In December 2019 our workover rig in Kuwait came off contract and we are currently bidding this rig for a
contract in the region. During the year we extended the contracts for two of our Saudi Arabia rigs that were expiring for an
additional three-year term.
High Performance Rig 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 made
legacy rigs virtually obsolete in North America. During the year we added two new-build Super Series rigs and upgraded an
SCR rig to a Super Series rig. In addition, we decommissioned seven rigs in Canada that no longer met our High Performance
technology standards and 22 rigs that we had previously identified as held for sale.
With the completion of our new-build rig program, upgrades of existing rigs and the decommissioning of legacy rigs, our fleet
consisted of 226 Super Series rigs at December 31, 2019.
Capital Spending
Capital spending in 2020 is expected to be $95 million and includes $58 million for sustaining, infrastructure and intangibles and
$37 million for upgrade and expansion. We expect our spending to be split $86 million in the Contract Drilling Services segment,
$7 million in the Completion and Production Services segment and $2 million in the Corporate segment.
Precision Drilling Corporation 2019 Annual Report
18
Revenue and
Adjusted EBITDA
Revenue
Adjusted EBITDA
EBITDA Margin
s
n
o
i
l
l
i
M
$
$1,750
$1,500
$1,250
$1,000
$750
$500
$250
$0
2015
2016
2017
2018
2019
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
Drilling Utilization Days
$600
$500
$400
$300
$200
$100
$0
2015
2016
2017
2018
2019
40,000
s
y
a
D
20,000
International
U.S.
Canada
0
2015
2016
2017
2018
2019
19
Management’s Discussion and Analysis
UNDERSTANDING OUR BUSINESS DRIVERS
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 2019 Annual Report
20
Average Oil and Natural Gas Prices
Oil
West Texas Intermediate (per barrel) (US$)
Western Canadian Select (per barrel) (US$)
Natural gas
U.S.
Henry Hub (per MMBtu) (US$)
Canada
AECO (per MMBtu) (Cdn$)
Source: WTI and Henry; Hub Energy Information Administration, AECO; Gas Alberta Inc.
2019
57.07
44.28
2.56
1.77
2018
64.88
38.46
3.12
1.49
2017
50.95
38.97
2.98
2.16
12
WTI Oil Prices and
Henry Hub Natural Gas
Prices
u
t
B
M
M
/
$
S
U
8
4
120
80
40
l
e
r
r
a
b
/
$
S
U
Henry Hub Natrual Gas
WTI Oil
0
Jan-15
Source: Energy Information Administration
Jan-16
Jan-17
Jan-18
Jan-19
0
Jan-20
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 the majority 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
extensive suite of offerings to our customers with minimal research and development capital. Our digital technology strategy is
currently focused on four fundamentals:
21
Management’s Discussion and Analysis
1. Standardized Control System Platform
We leverage our standardized rig equipment and control system to deploy our fully integrated AlphaAutomation system,
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, AlphaAutomation also hosts
Precision Drilling Apps (AlphaApps), which leverage advanced algorithms and exploitation of various machine learning
techniques to improve complex down-hole 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 natural gas
industry. We installed our first AlphaAutomation system in late 2016 and currently have 34 AlphaAutomation systems
deployed in the field and more than 15 AlphaApps either commercialized or in final stages of development, making Precision
an industry leader in automation technology. We intend to deploy an additional 24 AlphaAutomation systems in North
America in 2020.
2. Data Collection and Analytics
Our digital rig control systems with AlphaAutomation 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 (AlphaAnalytics) 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 are leveraging our Directional Guidance System (DGS) aiming to
replace directional drillers on the wellsite through an advanced algorithm delivered through an AlphaApp and remote
support.
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 resource planning (ERP) system is built to
support the increased data flows from the field, provided by our AlphaAutomation 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 AlphaAutomation system, AlphaApps and AlphaAnalytics
position us to help our customers achieve their efficiency goals and generate strong returns for our shareholders through service
differentiation.
Precision Drilling Corporation 2019 Annual Report
22
U.S. Lower 48 Production
140
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-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
14
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 relatively 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-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
23
Management’s Discussion and Analysis
Drilling Activity
In 2019 approximately 18,000 wells were started onshore in the U.S., compared with approximately 19,300 in 2018 and 15,800
in 2017.
The industry drilled 4,679 wells in western Canada in 2019, compared with 6,781 in 2018 and 6,959 in 2017. Total industry
drilling operating days were 45,334 in 2019 compared with 64,491 in 2018 and 66,138 in 2017. For Canada, lower customer
spending in 2019 was due to widened differentials as a result of takeaway capacity constraints.
In Canada, there has been relative strength in natural gas liquids and tight light oil drilling activity in the deeper basins of
northwestern Alberta and northeastern British Columbia, while in the U.S. the bias continues to be towards oil-directed drilling
continues.
The graphs below show the shift in drilling activity to oil targets since 2017, 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
g
n
i
k
r
o
w
s
g
i
R
1,200
800
400
Oil Land
Natural Gas Land
Source: Baker Hughes
0
Jan-15
Canadian Active Rig Count
200
100
g
n
i
k
r
o
w
s
g
i
R
Oil
Natural Gas
Source: Baker Hughes
0
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Precision Drilling Corporation 2019 Annual Report
24
A COMPETITIVE OPERATING MODEL
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
incentivizing 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 this
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 AlphaAutomation 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.
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 27 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
25
Management’s Discussion and Analysis
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.
Upgrade Opportunities
We leverage our internal manufacturing and repair capabilities and inventory of quality rigs to address market demand through
upgraded drilling rigs. Upgrades are typically performed at the request of a customer and includes a term contract. Historically,
certain upgrades have resulted in a change in classification to Super Series.
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.
Precision Drilling Corporation 2019 Annual Report
26
Systems
In 2018 we upgraded our ERP system to fully integrate 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.
Safe Operations
Safety, environmental stewardship and employee health are critical for us and for our customers and are the foundation of our
culture.
is a
fundamental contributor
to operating
Safety performance
performance and the financial results we generate for our shareholders.
We track safety using three separate metrics:
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 2019, 87% of our drilling rigs and 93% of our service rigs achieved facilities
recordable free. 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 2019 we achieved 292 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 field 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 5,488 employees were trained in 2019 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 2019, 20% of our fleet was
configured to be powered by natural gas, which is cleaner-burning than diesel and therefore reduces our customer’s emissions
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.
27
Management’s Discussion and Analysis
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.
2019 Strategic Priorities
2019 Results
Generate strong free cash flow and utilize $200 million to
reduce debt in 2019
By mid-year Precision increased its 2019 debt repayment target to $200
million. We ended the year with a total of $205 million of debt reduction,
exceeding the high end of our original targeted range by $55 million.
Including 2018 repayments, have reduced debt by $380 million, nearing
the low end of our long-term $400 million to $600 million targeted range
just two years into the four-year plan.
Significant cash generation has provided financial flexibility to utilize our
Normal Course Issuer Bid to repurchase and cancel 16 million shares
for $26 million.
Ended the year with a reported cash balance of $75 million and
completed a one-year extension of our US$500 million Senior Credit
Facility, now maturing November 2023.
Divested non-core assets for cash proceeds of $91 million.
Reduced G&A expenses. Anticipating 2020 general and administrative
cost run-rate to be less than $90 million before share-based expenses.
Reduced interest expense from 2019 debt repayments with annual
interest savings in 2020 expected to be approximately $13 million.
Based on average daily land drilling rigs working, sustained highest
market share on record in the U.S. and Canada averaging 8% and 28%,
respectively, in 2019.
U.S. contract drilling margins (revenue less operating costs) were up
19% compared to prior year. Generated strong cash flow in Canada and
international margins remained stable.
Reported significant improvement in our Completion and Production
Services segment, posting a 62% increase in Adjusted EBITDA
compared to prior year.
Revenue was $1,541 million which was in line with 2018 as stable
activity and improved day rates in the U.S. were offset by lower activity
and day rates in Canada.
Adjusted EBITDA in 2019 was $392 million, 5% higher than 2018
despite a significant decrease in industry activity in the Canadian
market.
Ended the year with 32 AlphaAutomation systems deployed in the field
and on both of our training rigs located in Nisku, Alberta and Houston,
Texas.
Achieved full commercialization of AlphaAutomation in November, with
systems deployed achieving over 90% utilization and earning
commercial rates.
Drilled over 1,100 wells since roll-out of AlphaAutomation technology,
which includes more than 600 wells drilled in 2019.
At year-end, Precision had 15 drilling AlphaApps either commercialized or
in final stages of development.
financial
Maximize
leveraging our High
Performance, High Value Super Series rig fleet and scale
with disciplined cost management
results by
Full scale commercialization and implementation of our
AlphaAutomation platform, AlphaApps and AlphaAnalytics
Precision Drilling Corporation 2019 Annual Report
28
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, High Performance, High Value strategy and Alpha Technologies offering, positions us 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 2020
Generate strong free cash flow and reduce debt by $100 million to $150 million in 2020 and by $700 million between
2018 and 2022.
Demonstrate operational excellence in all aspects of our business including operational, financial and ESG
(environmental, social and governance) metrics.
Leverage our Alpha Technology platform as a competitive differentiator and source of financial returns for Precision.
29
Management’s Discussion and Analysis
2019 RESULTS
Adjusted EBITDA, operating earnings (loss), funds provided by (used in) operations and working capital are Non-GAAP
measures. See page 64 for more information.
Consolidated Statements of Net Earnings (Loss) Summary
Year ended December 31 (in thousands of dollars)
Revenue
Contract Drilling Services
Completion and Production Services
Inter-segment elimination
Adjusted EBITDA
Contract Drilling Services
Completion and Production Services
Corporate and Other
Depreciation and amortization
Gain on asset disposals
Loss on asset decommissioning
Impairment (reversal of impairment) of property, plant and equipment
Impairment of goodwill
Foreign exchange
Finance charges
Loss (gain) on redemption and repurchase of unsecured senior notes
Loss before income tax
Income taxes
Net earnings (loss)
Results by Geographic Segment
Year ended December 31 (in thousands of dollars)
Revenue
U.S.
Canada
International
Total assets
U.S.
Canada
International
2019
2018
2017
1,399,068
147,829
(5,577 )
1,541,320
429,483
24,155
(61,733 )
391,905
333,616
(50,741 )
20,263
(5,810 )
—
(8,722 )
118,453
(6,815 )
(8,339 )
(14,957 )
6,618
1,396,492
150,760
(6,063 )
1,541,189
412,134
14,881
(51,884 )
375,131
377,044
(11,384 )
—
—
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
384,096
(6,350 )
—
15,313
—
(2,970 )
137,928
9,021
(232,057 )
(100,021 )
(132,036 )
2019
2018
2017
871,651
459,377
210,292
1,541,320
1,560,523
1,133,591
575,726
3,269,840
791,312
558,746
191,131
1,541,189
1,772,850
1,269,542
593,651
3,636,043
568,573
562,250
190,401
1,321,224
1,666,368
1,631,838
594,725
3,892,931
Precision Drilling Corporation 2019 Annual Report
30
2019 COMPARED WITH 2018
Net earnings in 2019 was $7 million, or $0.02 per diluted share, compared with a net loss of $294 million, or negative $1.00 per
diluted share, in 2018. The higher net earnings were primarily the result of higher operating margins in our U.S. contract drilling
business, lower G&A costs, lower finance charges because of our reduced debt, a current year foreign exchange gain and a
2018 goodwill impairment charge that after-tax reduced net earnings by $199 million, partially offset by lower activity in Canada
and the receipt of a transaction termination fee in 2018.
Revenue was $1,541 million (consistent with 2018) because of higher international activity and improved U.S. and international
day rates, offset by lower U.S. and Canadian activity and lower day rates in Canada.
Adjusted EBITDA in 2019 was $392 million (5% higher than in 2018). Our higher Adjusted EBITDA in 2019 was primarily due
to increased U.S. and international day rates, higher international activity, improved operating margins and lower general and
administrative costs, partially offset by lower activity in the U.S. and Canada.
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. As a result of the goodwill impairments recognized in 2018, at December 31, 2019, we no longer
have any CGUs that contain goodwill. We did not identify an indication of impairment within the Corporation’s CGUs as at
December 31, 2019. Accordingly, no impairment tests were performed.
In the second quarter of 2019, Precision concluded the sale of its Mexico-based drilling rigs and ancillary equipment, contained
within its Contract Drilling Services segment, for total proceeds of US$48 million. Precision recognized a gain on asset disposal
of US$24 million and reversed US$4 million of previous impairment charges.
In 2018, 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.
Foreign Exchange
We recognized a foreign exchange gain of $9 million in 2019 (2018 – $4 million loss) due to the strengthening 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 and the translation of our U.S. denominated intercompany payables.
Finance Charges
Finance charges were $118 million, a decrease of $9 million compared with 2018 primarily due to a reduction in interest expense
related to debt retired in 2018 and 2019, partially offset by the impact of the weakening of the Canadian dollar on our U.S. dollar
denominated interest and lease accretion charges resulting from the adoption of IFRS 16 on January 1, 2019.
Gain on Redemption and Repurchase of Unsecured Senior Notes
During 2019, Precision repurchased and cancelled US$30 million of the 7.125% unsecured senior notes due 2026, US$5 million
of the 7.75% unsecured senior notes due 2023 and US$43 million of the 5.25% unsecured senior notes due 2024. In addition,
Precision redeemed US$75 million principal amount of its 6.50% unsecured senior notes due 2021. We recognized a gain on
the repurchase and redemption of unsecured senior notes of $7 million. In comparison, during 2018, we redeemed and/or
repurchased and cancelled US$132 million of our previously outstanding unsecured senior notes resulting in a gain of $6 million.
Income Taxes
In 2019, we recognized an income tax recovery of $15 million as compared to $30 million in 2018. The reduced recovery in 2019
compared with 2018 was mainly due to a smaller loss in 2019, prior to the non-taxable portion of the goodwill impairment
recorded in 2018.
31
Management’s Discussion and Analysis
2018 COMPARED WITH 2017
Net loss in 2018 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. 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 weakening 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 principal amount of our 6.5%
unsecured senior notes due 2021 and repurchased and cancelled US$49 million 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 unsecured 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 2019 Annual Report
32
SEGMENTED RESULTS
CONTRACT DRILLING SERVICES
Financial Results
Adjusted EBITDA, operating earnings (loss), funds provided by (used in) operations and working capital are Non-GAAP
measures. See page 64 for more information.
Year ended December 31
(in thousands of dollars, except where noted)
Revenue
Expenses
Operating
General and administrative
Restructuring
Adjusted EBITDA
Depreciation and amortization
Gain on asset disposals
Loss on asset decommissioning
Impairment (reversal of impairment) of property, plant
and equipment
Impairment of goodwill
Operating earnings (loss)
2019 Compared with 2018
2019
1,399,068
% of
revenue
2018
1,396,492
% of
revenue
2017
1,173,930
% of
revenue
927,612
38,927
3,046
429,483
300,882
(46,849 )
20,263
(5,810 )
—
160,997
66.3
2.8
0.2
30.7
21.5
(3.3 )
1.4
(0.4 )
—
11.5
945,203
39,155
—
412,134
341,712
(7,157 )
—
—
67.7
2.8
—
29.5
24.5
(0.5 )
—
—
798,655
32,305
—
342,970
341,470
(6,883 )
—
15,313
207,544
(129,965 )
14.9
(9.3 )
—
(6,930 )
68.0
2.8
—
29.2
29.1
(0.6)
—
1.3
—
(0.6)
Revenue from Contract Drilling Services was $1,399 million, slightly higher than 2018, mainly because of higher day rates in our
U.S. and international contract drilling operations partially offset by lower activity in our Canadian contract drilling operations.
In 2019, we recognized idle but contracted rig revenue in the U.S. of US$4 million and shortfall payments in Canada of $4 million,
compared to US$1 million and $12 million, respectively in 2018.
Operating expenses in 2019 were 66% of revenue, 1% lower than the prior year. On a per utilization day basis, in the U.S.,
operating costs were slightly higher than the prior year primarily due to higher repair and maintenance costs and expenses
recovered through the day rate, partially offset by lower turnkey activity. Operating costs on a per day basis for the drilling rig
division in Canada were higher than the prior year period due to larger crew formations, higher repair and maintenance costs
and fixed costs spread over lower activity. General and administrative expenses for 2019 were lower due to our continued cost
savings initiatives and the impact of IFRS 16 on lease-related charges, partially offset by the weakening of the Canadian dollar
against the U.S. dollar on our U.S. dollar denominated costs and higher share-based compensation charges.
Our 2019 operating earnings were $161 million as compared to an operating loss of $130 million in the prior year. Operating
earnings increased in 2019 as a result of lower asset decommissioning and impairment-related charges, depreciation and
amortization and higher gains from asset disposals. During 2019, we decommissioned drilling rigs resulting in a loss on
decommissioning of $20 million and sold our Mexico-based drilling rigs and ancillary equipment recognizing a gain on asset
disposal of US$24 million and reversal of impairment of US$4 million. Our 2018 operating results include an impairment of
goodwill charge of $207 million. Excluding the impact of asset decommissioning and impairment-related charges, operating
earnings would have been $175 million in 2019 and $78 million in 2018.
Our depreciation expense for 2019 was lower by 12% compared with the prior year due to asset sales and assets becoming
fully depreciated.
Capital expenditures in 2019 for our Contract Drilling segment were $154 million:
$108 million – to expand our asset base
$13 million – to upgrade existing equipment
$33 million – on maintenance and infrastructure.
33
Management’s Discussion and Analysis
Operating Statistics
Year ended December 31
Number of drilling rigs (year-end)
Drilling utilization days (operating and moving)
U.S.
Canada
International
Drilling revenue per utilization day
U.S.
Canada
International
Drilling statistics (Canadian operations only)
Wells drilled
Average days per well
Metres drilled (hundreds)
Average metres per well
U.S. Drilling
% increase/
(decrease)
(4.2)
2019
226
26,544
14,498
3,093
23,397
21,569
51,360
1,314
9.8
3,968
3,020
(0.6)
(22.1)
5.9
7.0
(0.3)
1.8
(21.0)
(1.0)
(15.5)
7.0
2018
236
26,714
18,617
2,920
21,864
21,644
50,469
1,663
9.9
4,694
2,823
% increase/
(decrease)
(7.8 )
30.4
(1.4 )
—
10.1
2.4
0.5
(3.8 )
2.1
2.1
6.2
2017
256
20,479
18,883
2,920
19,861
21,143
50,240
1,729
9.7
4,597
2,659
% increase/
(decrease)
0.4
80.5
48.4
4.8
(24.0)
(13.7)
9.8
79.7
(17.1)
80.4
0.4
Revenue from U.S. drilling was US$621 million, 6% higher than 2018. Drilling rig activity, as measured by utilization days, was
down slightly from 2018 while average revenue per day was up 7%.
Adjusted EBITDA was US$214 million, 19% higher than 2018, mainly because of higher average day rates, idle but contracted
revenue and increased expense recoveries, partially offset by turnkey activity.
Depreciation expense for the year was US$112 million, US$8 million lower than 2018 because of a lower capital asset base.
Drilling Statistics – U.S.
In 2019, we completed one new-build rig and transferred one rig from Canada, bringing our U.S. year-end rig count to 104. We
averaged 73 rigs working in 2019, consistent with 2018 despite lower industry activity. In 2019, the average number of active
land rigs for the industry was 921, down 9% from 1,014 rigs in 2018.
Our average day rates in the U.S. increased 7% in 2019 as legacy contracts expired and newly contracted rigs were at higher
day rates and well to well day rates improved. Revenue from idle but contracted rigs was US$4 million in 2019, an increase of
US$3 million from the prior year period.
Turnkey utilization days decreased 92% from 2018 and accounted for less than 1% of our revenue compared with 2% in 2018.
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.
2019
2018
2017
Precision
Industry (1)
Precision
Industry (1) Precision
Industry (1)
79
77
72
63
73
1,023
967
896
798
921
64
72
76
80
73
951
1,021
1,032
1,050
1,014
47
59
61
58
56
722
874
927
902
856
Precision Drilling Corporation 2019 Annual Report
34
Canadian Drilling
Revenue from Canadian drilling was $313 million, 22% lower than 2018. Drilling rig activity, as measured by utilization days,
was down by 22% while average day rates were slightly lower than 2018.
Adjusted EBITDA was $82 million, 34% lower than 2018, because of lower drilling activity and lower average day rates.
Depreciation expense for the year was $110 million, 2% lower than 2018 because of a lower capital asset base.
Drilling Statistics – Canada
During 2019, we transferred one drilling rig to the U.S. and decommissioned 7 rigs, bringing our Canadian year-end rig count to
109.
The industry drilling rig fleet decreased as there were approximately 517 rigs at the end of 2019 compared with 574 at the end
of 2018. Our operating day utilization was 31% (2018 – 34%), compared with industry utilization of 22% (2018 – 29%).
COMPLETION AND PRODUCTION SERVICES
Financial Results
Adjusted EBITDA, operating earnings (loss), funds provided by (used in) operations and working capital are Non-GAAP
measures. See page 64 for more information.
Year ended December 31
(in thousands of dollars, except where noted)
Revenue
Expenses
Operating
General and administrative
Restructuring
Adjusted EBITDA
Depreciation and amortization
Loss (gain) on asset disposals
Operating earnings (loss)
2019 Compared with 2018
2019
147,829
116,932
6,285
457
24,155
17,881
(3,767)
10,041
% of
revenue
79.1
4.3
0.3
16.3
12.1
(2.5)
6.8
2018
150,760
128,124
6,591
1,164
14,881
22,801
1,078
(8,998)
% of
revenue
2017
154,146
% of
revenue
85.0
4.4
0.8
9.9
15.1
0.7
(6.0 )
134,368
7,890
—
11,888
29,136
502
(17,750)
87.2
5.1
—
7.7
18.9
0.3
(11.5)
Revenue from Completion and Production Services was $148 million in 2019, 2% lower than 2018, mainly because of lower
activity in our well service and rental divisions and impact of the disposal of our snubbing units and water treatment assets
partially offset by higher well service rates in Canada and the U.S.
Operating expenses were 79% of revenue, 6% lower than 2018, mainly because of our improved cost structure.
Operating earnings were $10 million in 2019, compared with an operating loss of $9 million in 2018. The increased operating
earnings in 2019 was primarily due to higher average day rates and improved cost recoveries offset by lower service rig operating
hours.
Depreciation in 2019 decreased by 22% as a result of the disposal of snubbing units and water treatment assets and a higher
proportion of the segment’s capital asset base became fully depreciated.
During 2019, we disposed of certain snubbing units and related equipment, recognizing a gain on disposal of $3 million.
Capital expenditures in 2019 for our Completion and Production Services segment were $5 million, comprised mainly of
maintenance capital.
Revenue from Precision Well Servicing in Canada was $89 million, down $10 million from 2018 due to the disposal of our
snubbing units in 2019 and a 9% reduction in activity excluding snubbing, partially offset by a 5% increase in average revenue
rates excluding snubbing versus the prior year.
Revenue from our U.S. based completion and production business was US$15 million, 51% higher than 2018. The increase was
the result of higher activity and average rates.
Revenue from Precision Rentals was $16 million, 13% lower than 2018. The decrease was due to lower activity and average
revenue rates.
Revenue from Precision Camp Services was $23 million, 46% higher than 2018, because of an increase in camp activity and
higher average revenue rates. Precision operated four base camps and 42 drill camps during 2019.
35
Management’s Discussion and Analysis
Operating Statistics
Year ended December 31
Number of service rigs (end of year)
Service rig operating hours
Revenue per operating hour
2019
123
147,154
739
% increase/
(decrease)
(41.4 )
(6.5 )
4.2
2018
210
157,467
709
% increase/
(decrease)
—
2017
210
(8.9 ) 172,848
637
11.3
% increase/
(decrease)
1.4
73.8
(1.4 )
In 2019, 75 service rigs were not registered with the industry association and 12 snubbing units were sold.
Our service operating hours fell by 7% in the current year while our revenue per operating hour increased by 4% over the
comparable prior year period.
CORPORATE AND OTHER
Financial Results
Adjusted EBITDA, operating earnings (loss), funds provided by (used in) operations and working capital are Non-GAAP
measures. See page 64 for more information.
Year ended December 31
(in thousands of dollars, except where noted)
Revenue
Expenses
Operating
General and administrative
Restructuring
Other recoveries
Adjusted EBITDA
Depreciation and amortization
Loss (gain) on asset disposals
Operating loss
2019 Compared with 2018
2019
—
—
58,798
2,935
—
(61,733 )
14,853
(125 )
(76,461 )
2018
—
—
66,084
—
(14,200 )
(51,884 )
12,531
(5,305 )
(59,110 )
2017
—
—
49,877
—
—
(49,877 )
13,490
31
(63,398 )
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 $59 million in 2019, $7 million lower than 2018. The decrease was mainly
related to our efforts to realign our cost structure including the reduction of fixed overhead costs and the impact of IFRS 16 on
our lease-related charges, partially offset by higher foreign exchange translation on our U.S. dollar based costs and higher
share-based incentive compensation expenses. In 2019, corporate general and administrative costs were 3.8% of consolidated
revenue compared with 4.3% in 2018 and 3.8% in 2017.
During the year, we recognized $3 million in restructuring costs relating to severance costs as we continued to align our cost
structure with our reduced activity levels.
During 2018, we terminated an arrangement agreement to acquire an oilfield services 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 2019 for our Corporate and Other segment were $1 million, primarily related to infrastructure.
Precision Drilling Corporation 2019 Annual Report
36
QUARTERLY FINANCIAL RESULTS
Adjusted EBITDA, operating earnings (loss), funds provided by (used in) operations and working capital are Non-GAAP
measures. See page 64 for more information.
2019 – Quarters Ended
(in thousands of dollars, except per share amounts)
Revenue
Adjusted EBITDA
Net earnings (loss)
per basic share
per diluted share
Funds provided by operations
Cash provided by operations
2018 – Quarters Ended
(in thousands of dollars, except per share amounts)
Revenue
Adjusted EBITDA
Net loss
per basic share
per diluted share
Funds provided by operations
Cash provided by operations
Seasonality
March 31
434,043
107,967
25,014
0.09
0.08
95,993
40,587
March 31
401,006
97,469
(18,077 )
(0.06 )
(0.06 )
104,026
38,189
June 30
359,424
81,037
(13,801 )
(0.05 )
(0.05 )
40,950
106,035
September 30 December 31
372,301
105,006
(1,061 )
(0.00 )
(0.00 )
75,779
74,981
375,552
97,895
(3,534 )
(0.01 )
(0.01 )
79,930
66,556
June 30
330,716
62,182
(47,217 )
(0.16 )
(0.16 )
50,225
129,695
September 30
382,457
80,988
(30,648 )
(0.10 )
(0.10 )
64,368
31,961
December 31
427,010
134,492
(198,328 )
(0.68 )
(0.68 )
92,595
93,489
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 2019 Compared with Fourth Quarter 2018
In the fourth quarter of 2019, we recorded a net loss of $1 million or $0.00 per diluted share compared to a net loss of $198
million or $0.68 per diluted share in the fourth quarter of 2018. During the quarter, we incurred a loss on asset decommissioning
of $20 million that, after tax, reduced net earnings by $15 million or $0.05 per diluted share. In the fourth quarter of 2018, we
recognized goodwill impairment charges totaling $208 million that, after-tax, reduced net earnings by $199 million or $0.68 per
diluted share. Excluding the impact of asset decommissioning and goodwill impairment, our 2019 net earnings would have been
$14 million ($0.05 per diluted share) as compared to 2018 net earnings of $1 million ($0.00 per diluted share).
Revenue in the fourth quarter was $372 million or 13% lower than the fourth quarter of 2018, mainly due to lower activity in the
U.S. and Canada, partially offset by higher average day rates in the U.S. and higher international activity. Compared with the
fourth quarter of 2018, our drilling activity decreased 21% in the U.S., 13% in Canada and grew 11% internationally. Our 2019
fourth quarter revenue from our Contract Drilling Services and Completion and Production Services segments decreased 14%
and 5%, respectively, from the comparable 2018 quarter.
Adjusted EBITDA was $105 million, a decrease of $29 million from the fourth quarter of 2018. Our lower Adjusted EBITDA in
2019 was primarily due to reduced U.S. and Canadian activity, higher share-based incentive compensation expense and the
non-recurring receipt of the transaction termination fee in the fourth quarter of 2018.
As a percentage of revenue, operating costs were 65% in the fourth quarter of 2019, 2% lower than the same quarter of 2018.
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 for the fourth quarter of 2019 was $339 million, $53 million lower than the fourth quarter
of 2018, while Adjusted EBITDA decreased 9% to $113 million. The lower revenue in 2019 was primarily due to lower utilization
days in the U.S. and Canada, partially offset by higher international activity and U.S. pricing. During the quarter, we had US$3
million of revenue from each of idle but contracted rigs and turnkey projects as compared with fourth quarter 2018 idle but
contracted rig and turnkey revenue of US$0.3 million and US$11 million, respectively.
37
Management’s Discussion and Analysis
Drilling rig utilization days (drilling days plus move days) in the U.S. and Canada were down in the fourth quarter of 2019 as
compared to 2018. In the U.S., we had 5,814 drilling rig utilization days, 21% lower than the same quarter of 2018. Canada had
3,919 days in the quarter, a decrease of 13% compared to 2018. The reduced activity in both regions was consistent with lower
industry activity. Drilling rig utilization days in our international business was 818, 11% higher than the same quarter of 2018, as
we deployed our sixth Kuwait rig in the third quarter of 2019.
Revenue per utilization day in the U.S. increased in the fourth quarter of 2019 to US$23,949 from US$23,369 in the prior year
quarter. The increase was the result of higher day rates, idle but contracted rig revenue and rig technology revenue, partially
offset by lower turnkey activity. In Canada, average revenue per utilization day for contract drilling rigs was $22,182 compared
with $22,802 in the fourth quarter of 2018. The lower average revenue per utilization day in the fourth quarter of 2019 was
primarily due to lower rates from a higher proportion of Super Singles in our rig mix and lower shortfall payments, partially offset
by higher technology revenue. We did not receive shortfall payments in the fourth quarter of 2019 as compared to $1 million in
the 2018 quarter. Average revenue per utilization day in our international contract drilling business was US$52,283 compared
with US$51,982 in the respective prior year quarter. The higher average rate in 2019 was primarily due to day rate increases
from the renewal and extension of drilling contracts and the deployment of the sixth Kuwait rig, partially offset by lower
amortization of the initial upfront mobilization revenue on initial contracts. Directional drilling services realized revenue of $9
million in the fourth quarter of 2019, consistent with 2018.
In the U.S., 66% of utilization days were generated from rigs under term contract as compared with 70% in the fourth quarter of
2018. In Canada, 9% of our utilization days in the quarter were generated from rigs under term contract, compared with 15% in
the fourth quarter of 2018.
Operating costs were 64% of revenue for the quarter, 2% lower than the prior year quarter. Our U.S. operating costs on a per
day basis decreased to US$14,073 in the fourth quarter of 2019 compared with US$15,042 in 2018. The decrease was mainly
due to lower turnkey activity, the impact from the reversal of prior period provisions and the componentization of rig recertification
costs. Excluding the impact of the provision reversals and componentization of recertification costs, our operating costs on a per
day basis for the quarter were US$14,974. Average operating costs per utilization day for drilling rigs in Canada decreased to
$14,791 compared with the prior year quarter of $15,115. The decrease was mainly caused by the impact of lower repair and
maintenance costs due to the componentization of rig recertification costs. Excluding the impact of componentization of
recertifications, our operating costs on a per day basis for the quarter were $15,044.
Depreciation expense in the quarter was 26% lower than the fourth quarter of 2018. The lower 2019 expense was primarily due
to asset sales, assets becoming fully depreciated and non-recurring accelerated depreciation of excess spare equipment
recorded in the fourth quarter of 2018. In 2019, we recognized a loss on the decommissioning of drilling rigs and ancillary
equipment of $20 million.
In the fourth quarter of 2019, through the completion of normal course business operations, we sold used assets resulting in a
gain on asset disposals of $4 million as compared to $3 million in the comparable 2018 quarter.
Completion and Production Services
Revenue from Completion and Production Services decreased $2 million compared with the fourth quarter of 2018 due to lower
activity in our rental and camp and catering divisions and the impact of the disposal of our snubbing units and water treatment
assets partially offset by higher well service activity in Canada and the U.S. Our service rig operating hours in the quarter were
up 11% from the fourth quarter of 2018 while average service rig revenue per operating hour decreased slightly to $746.
Excluding the impact of snubbing assets, which were disposed in the first quarter, our fourth quarter 2019 service activity and
rates increased 20% and 5%, respectively, over the comparative 2018 period. Approximately 78% of our fourth quarter Canadian
service rig activity was oil related.
Adjusted EBITDA of $6 million in the fourth quarter of 2019 was 11% lower than the 2018 quarter primarily due to lower activity
in our non-well servicing divisions and the impact of asset disposals, partially offset by higher well service activity and lower
costs resulting from our cost control measures.
During the fourth quarter, the segment generated 81% of its revenue from Canadian operations and 19% from U.S. operations
compared with 90% from Canada and 10% in the U.S. in the 2018 quarter.
Operating costs as a percentage of revenue was 77% compared with the prior year comparative quarter of 78%. The reduction
of operating costs as a percentage of revenue was primarily the result of a higher proportion of 24-hour well service work and
continued cost control.
Depreciation expense in the quarter was 20% lower than the prior year comparative period. The decrease in depreciation
expense was primarily due to a lower capital asset base resulting from the disposition of snubbing units and water treatment
assets and assets becoming fully depreciated.
Corporate and Other
Our Corporate and Other segment provides support functions to our operating segments. The Corporate and Other segment
had negative Adjusted EBITDA of $14 million compared with Adjusted EBITDA of $5 million in the comparative 2018 quarter.
Precision Drilling Corporation 2019 Annual Report
38
The lower Adjusted EBITDA in 2019 was primarily the result of higher share-based incentive compensation in the current quarter
and the non-recurring receipt of the transaction termination fee in the fourth quarter of 2018.
Net finance charges were $28 million, a decrease of $4 million compared with the fourth quarter of 2018, primarily due to a
reduction in interest expense related to the debt retired in 2018 and 2019, partially offset by $1 million of lease accretion charges
resulting from the adoption of IFRS 16 on January 1, 2019.
During the quarter, we repurchased and cancelled US$4 million of the 7.125% unsecured senior notes due 2026, US$5 million
of the 7.75% unsecured senior notes due 2023 and US$11 million of the 5.25% unsecured senior notes due 2024. In addition,
we redeemed US$25 million principal amount of our 6.50% unsecured senior notes due 2021. Our debt reduction resulted in a
net gain of $3 million.
Income tax recovery for the quarter was $12 million compared with $2 million in the same quarter in 2018. In 2019, the Province
of Alberta announced various reductions to corporate income tax rates, that when fully implemented over the next three years
will decrease the provincial corporate income tax rate from 12% to 8% by 2022. The increase in the income tax recovery for the
quarter is mainly due to a larger fourth quarter loss prior to the non-taxable portion of the goodwill impairment in 2018;
adjustments for prior period taxes; the reversal of unrecognized tax benefits; and U.S. tax reform legislation clarification enacted
in December 2019, offset by a reduction in the benefit from the Alberta income tax rate reductions.
Capital expenditures were $1 million in the fourth quarter of 2019 were primarily related to infrastructure.
39
Management’s Discussion and Analysis
FINANCIAL CONDITION
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 repurchased and cancelled US$30 million of the 7.125% unsecured senior notes due 2026, US$5 million of
the 7.75% unsecured senior notes due 2023 and US$43 million of the 5.25% unsecured senior notes due 2024. We redeemed
US$75 million principal amount of our 6.50% unsecured senior notes due 2021. We extended the maturity date of our Senior
Credit Facility to November 21, 2023. Subsequent to December 31, 2019, Precision redeemed US$25 million principal amount
of the 6.50% unsecured senior notes due 2021 for an aggregate purchase price of US$25 million and repurchased and cancelled
US$2 million of the 7.125% unsecured senior notes due 2026 and US$5 million of the 5.25% unsecured senior notes due 2024.
In 2018, we redeemed US$80 million and repurchased and cancelled US$3 million principal amount of our 6.5% unsecured
senior notes due 2021 and repurchased and cancelled US$49 million of our 5.25% unsecured senior notes due 2024.
As of December 31, 2019, our liquidity was supported by a cash balance of $75 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
43.
At December 31, 2019, our operating facility of $40 million with Royal Bank of Canada was undrawn except for $26 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.
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.
At December 31, 2019, excluding letters of credit, we had approximately
$1,445 million (2018 – $1,729 million) outstanding under our secured
and unsecured credit facilities and $18 million in unamortized debt issue
costs. Our Senior Credit Facility includes financial ratio covenants that
are tested quarterly.
Key Ratios
We ended 2019 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 5.0.
We ended 2019 with a long-term debt to long-term debt plus equity ratio of 0.5 (2018 – 0.5) and a ratio of long-term debt to cash
provided by operations of 5.0 (2018 – 5.8).
The current blended cash interest cost of our debt is approximately 6.8%.
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.
Precision Drilling Corporation 2019 Annual Report
40
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 45)
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 64 of this report.
Credit Rating
December 31,
2019
201,696
1.9
1,427,181
1,500,950
3,269,840
1,854,393
0.5
5.0
3.6
0.8
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
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 6, 2020
Corporate credit rating
Senior Credit Facility rating
Senior unsecured credit rating
CAPITAL MANAGEMENT
Moody’s
B1
Not rated
B2
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.
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 2019, we designated all of our U.S. dollar unsecured 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.
41
Management’s Discussion and Analysis
SOURCES AND USES OF CASH
At December 31 (in 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 used
Cash from Operations
2019
288,159
(74,500 )
213,659
(231,814 )
(3,770 )
(21,925 )
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 )
In 2019, we generated cash from operations of $288 million compared with $293 million in 2018. The decrease is primarily the
result of higher interest payments on our long-term debt because of deferral of a payment in 2019 partially offset by improved
margins in the current year.
Investing Activity
We made growth and sustaining capital investments of $161 million in 2019:
$121 million on upgrade and expansion capital
$40 million on maintenance, infrastructure capital and intangibles.
The $161 million in capital expenditures in 2019 was split between segments as follows:
$154 million in Contract Drilling Services
$5 million in Completion and Production Services
$2 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 $91 million in 2019 compared with $24 million in 2018.
CAPITAL STRUCTURE
Debt
As of December 31, 2019, we had a cash balance of $75 million, available capacity under our secured facilities of $645 million
and $1,445 million outstanding under our unsecured senior notes.
Precision Drilling Corporation 2019 Annual Report
42
Amount
Senior credit facility (secured)
US$500 million (extendible, revolving term
credit facility with US$300 million accordion
feature)
Operating facilities (secured)
$40 million
US$15 million
Demand letter of credit facility (secured)
US$30 million
Unsecured senior notes (unsecured)
US$91 million – 6.5%
US$345 million – 7.75%
US$308 million – 5.25%
Availability
Used for
Maturity
Undrawn, except US$25 million in
outstanding letters of credit
General corporate purposes
November 21, 2023
Undrawn, except $26 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
December 15, 2021
Capital expenditures and general
corporate purposes
Debt redemption and repurchases December 15, 2023
November 15, 2024
Capital expenditures and general
corporate purposes
Debt redemption and repurchases January 15, 2026
US$370 million – 7.125%
Fully drawn
Covenants
Following is a listing of our currently applicable covenants and the calculations as of December 31, 2019:
Senior Credit Facility
Consolidated senior debt to consolidated Covenant EBITDA(1)
Consolidated Covenant EBITDA to consolidated interest expense
Unsecured Senior Notes
Consolidated interest coverage ratio
(1) For purposes of calculating the leverage ratio consolidated senior debt only includes secured indebtedness.
Covenant
At December 31, 2019
≤ 2.50
≥ 2.50
≥ 2.00
0.00
3.39
3.30
At December 31, 2019, we were in compliance with the covenants of our Senior Credit Facility and unsecured senior notes.
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,
see Non-GAAP measures on page 64 of this report) 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,
restructuring costs, certain foreign exchange amounts and with the adoption of the new lease standard IFRS 16 – Leases, the
deduction of cash lease payments incurred after December 31, 2018.
Under the Senior Credit Facility, we are required to maintain a Covenant EBITDA to consolidated interest expense ratio for the
most recent four consecutive fiscal quarters, of greater than or equal to 2.5:1.
The Senior Credit Facility limits distributions 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 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.
Unsecured Senior Notes
The unsecured senior notes require that we comply with restrictive and financial covenants including an incurrence based
consolidated interest coverage ratio test of consolidated cash flow, as defined in the unsecured senior note agreements, to
consolidated interest expense of greater than 2.0:1 for the most recent four consecutive fiscal quarters. In the event our
consolidated interest coverage ratio is less than 2.0:1 for the most recent four consecutive fiscal quarters, the unsecured senior
notes restrict our ability to incur additional indebtedness.
43
Management’s Discussion and Analysis
The unsecured senior notes contain a restricted payment covenant that limits our ability to make payments in the nature of
dividends, distributions and for repurchases from shareholders. This restricted payment basket grows from a starting point of
October 1, 2010 for the 2021 and 2024 unsecured senior notes, from October 1, 2016 for the 2023 unsecured senior notes and
October 1, 2017 for the 2026 unsecured senior notes by, among other things, 50% of consolidated cumulative net earnings and
decreases by 100% of consolidated cumulative net losses, as defined in the note agreements, and payments made to
shareholders. Beginning with the December 31, 2015 calculation the governing net restricted payments basket was negative
which limits our ability to declare and make dividend payments and share repurchases until such time as the restricted payments
baskets once again become positive.
Based on our consolidated financial results for the period ended December 31, 2019, the governing net restricted payments
basket was negative $517 million.
For further information, please see the unsecured senior note indentures which are available on SEDAR and EDGAR.
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).
The table below shows the amounts of these obligations and when payments are due for each.
At December 31, 2019
(in 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
Less than
1 year
32,463
95,427
24,858
11,954
5,130
169,832
Payments due (by period)
1-3 years
85,215
185,084
87,716
21,728
12,675
392,418
4-5 years
847,337
141,004
—
11,838
—
1,000,179
More than
5 years
480,112
35,633
—
11,117
—
526,862
Total
1,445,127
457,148
112,574
56,637
17,805
2,089,291
(1) U.S. dollar denominated balances are translated at the period end exchange rate of Cdn$1.00 equals US$0.7701.
(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 2020 and 2022 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 $1.86 at December 31, 2019.
Shareholders Capital
Shares outstanding
Deferred shares outstanding
Share options outstanding
March 6,
2020
272,099,037
93,173
9,184,484
December 31,
2019
277,299,804
93,173
10,384,634
December 31,
2018
293,781,836
93,173
10,799,006
December 31,
2017
293,238,858
195,743
10,458,981
You can find more information about our capital structure in our Annual Information Form, 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 Unsecured Senior Notes on page 43 for more information.
Precision Drilling Corporation 2019 Annual Report
44
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,
2019
277,299,804
1.81
501,913
1,427,181
(74,701 )
1,854,393
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
45
Management’s Discussion and Analysis
ACCOUNTING POLICIES AND ESTIMATES
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.
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.
Precision Drilling Corporation 2019 Annual Report
46
AMENDMENTS TO ACCOUNTING STANDARDS ADOPTED JANUARY 1, 2019
We applied the following mandatorily effective amendments to IFRS in the current year. Outside of additional disclosure
requirements, the impact to our consolidated financial statements have been described below.
IFRS 16, Leases
IFRS 16 introduced 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 obligation representing the
Corporation’s obligation to make future lease payments. Lessor accounting remained similar to the current standard in which
lessors classify leases as either finance or operating leases.
On January 1, 2019, Precision adopted IFRS 16 using the modified retrospective approach. Under this approach, comparative
information has not been restated and continues to be reported under IAS 17 and related interpretations. The adopted accounting
policies and impact of applying IFRS 16 are disclosed below.
At inception, Precision assesses whether its contracts contain a lease. A contract contains a lease if it conveys the right to
control the use of an identified asset for a period of time in exchange for consideration. The assessment of whether a contract
conveys the right to control the use of an identified asset considers whether:
the contract involves the use of an identified asset and the substantive substitution rights of the supplier. If the supplier
has a substantive substitution right, then the asset is not identified;
the lessee’s right to obtain substantially all of the economic benefits from the use of the asset; and
the lessee’s right to direct the use of the asset, including decision-making to change how and for what purpose the
asset is used.
At inception or on reassessment of a contract that contains a lease component, Precision allocates the consideration in the
contract to each lease component on the basis of their relative stand-alone prices.
Leases in which Precision is a lessee
Precision recognizes a right of use asset and corresponding lease obligation at the lease commencement date. The right of use
asset is initially measured at cost, which comprises the initial amount of the lease obligation adjusted for lease payments made
on or before commencement date, incurred initial direct costs, estimated site retirement costs and any lease incentives received.
The right of use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of
the end of the useful life of the right of use asset or the end of the lease term. The estimated useful lives of right of use assets
are consistent with those of property, plant and equipment. In addition, the right of use asset is reduced by impairment losses,
if any, and adjusted for certain remeasurements of the lease obligation.
The lease obligation is initially measured at the present value of the minimum lease payments not paid at commencement date,
discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, Precision’s incremental
borrowing rate. Generally, Precision uses its incremental borrowing rate as the discount rate for those leases in which it is the
lessee.
Lease payments included in the measurement of the lease obligation comprise the following:
fixed payments, including in-substance fixed payments;
variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the
commencement date;
amounts expected to be payable under a residual value guarantee; and
the exercise price under a purchase option that Precision is reasonably certain to exercise, lease payments in an
optional renewal period if Precision is reasonably certain to exercise an extension option, and penalties for early
termination of a lease unless Precision is reasonably certain not to terminate early.
The lease obligation is measured at amortized cost using the effective interest method. The measurement of lease obligations
require the use of certain estimates and assumptions including discount rates, exercise of lease term extension options, and
escalating lease rates. It is remeasured when there is a change in:
future lease payments arising from a change in an index or rate;
the estimated amount expected to be payable under a residual value guarantee; or
the assessment of whether Precision will exercise a purchase, extension or termination option.
When the lease obligation is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right of
use asset, or is recorded in profit or loss if the carrying amount of the right of use asset has been reduced to zero.
Leases in which Precision is a lessor
When Precision acts as a lessor, at inception, Precision evaluates the classification as either a finance or operating lease.
47
Management’s Discussion and Analysis
To classify each lease, Precision makes an overall assessment of whether the lease transfers substantially all of the risks and
rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease; if not, then it is an
operating lease.
When acting as a sub-lessor, Precision accounts for its interests in the head lease and the sub-lease separately. It assesses
the lease classification of a sub-lease with reference to the right of use asset arising from the head lease, not with reference to
the underlying asset. If a head lease is a short-term lease then Precision classifies the sub-lease as an operating lease.
If an arrangement contains lease and non-lease components, Precision applies IFRS 15 to allocate the consideration in the
contract. Precision recognizes lease payments received under operating leases for drilling rigs as income on a systematic basis,
drilling days, over the lease term as part of revenue.
The accounting policies applicable to Precision as a lessor in the comparative period were not different from IFRS 16. However,
when Precision was an intermediate lessor the sub-leases were classified with reference to the underlying asset.
Transition
Precision adopted IFRS 16 on January 1, 2019 using the modified retrospective method of adoption. When applying the modified
retrospective approach to leases previously classified as operating leases under IAS 17 and related interpretations, 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, Precision elected to use the following practical expedients, where applicable, to:
grandfather the assessment of which contracts contained leases under IFRS 16 to only those previously identified as
leases under IAS 17 and related interpretations;
not apply the requirements of the standard to short-term and low-value leases;
treat existing operating leases with a remaining term of less than 12 months at January 1, 2019 as short-term leases;
and
apply a single discount rate to a portfolio of leases with reasonably similar characteristics.
In addition, at the date of initial application, for those leases previously classified as an operating lease under IAS 17,
Management elected to recognize and measure the respective right of use assets at the amount equal to the lease obligation,
adjusted for any prepaid or accrued lease payment immediately before the date of initial application. The opening balance sheet
adjustment in relation to these leases was:
Right of use asset
Accounts payables and accrued liabilities
Lease obligation
Deficit
$
January 1, 2019
73,464
(2,800 )
(73,464 )
2,800
When measuring certain lease obligations at the date of transition, minimum lease payments were discounted using Precision’s
incremental borrowing rate. The weighted average of the incremental borrowing rates applied was 6.1%. At the date of transition,
Precision derecognized $3 million of its deferred base rent balance which was established to straight-line amortize escalating
corporate office rent expenses over the term of the lease.
In the comparative period, Precision classified its leases that transferred substantially all the risks and rewards of ownership as
finance leases. These leased assets were measured initially at an amount equal to the lower of their fair value and the present
value of the minimum lease payments, excluding any contingent payments. Subsequently, these assets were accounted for in
accordance with the applicable accounting policy respective to that asset.
Assets held under other leases were classified as operating leases and were not recognized on the consolidated statement of
financial position. Payments made under operating leases were recognized in profit or loss on a straight-line basis over the term
of the lease. Lease incentives received were recognized as an integral part of the total lease expense, over the term of the lease.
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 income tax treatment if it concludes that it is not probable that a particular income 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. Using the modified
retrospective method of adoption, Precision initially applied IFRIC 23 on January 1, 2019 and it did not have a material impact
on the consolidated financial statements.
Precision Drilling Corporation 2019 Annual Report
48
RISKS IN OUR BUSINESS
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 Precision’s policies, guidelines and review mechanisms.
Our businesses routinely encounter and manage risks, some of which may cause our future results to be different, and
sometimes materially different than what we presently anticipate. We describe certain important strategic, operational, financial,
legal and compliance risks. Our response to developments 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 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 renewable energy initiatives), the availability of pipeline capacity
and other transportation for oil and natural gas, global 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 2019, approximately 18,000 wells
were started onshore in the U.S., compared to approximately 43,700 in 2014. In 2019, the industry drilled 4,679 wells in western
Canada, compared to 10,942 in 2014. According to industry sources, the U.S. average active land drilling rig count was down
approximately 9% in 2019, compared to 2018, and the Canadian average active land drilling rig count was down approximately
29% during the same period. However, oil and natural gas prices remained volatile throughout 2019 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
adverse effect on our business, financial condition, results of operations and cash flow.
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. Reductions in commodity prices or factors that impact the supply and demand for oil and natural
gas and lead to price volatility 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 and natural gas prices has depressed, and may continue to depress, the overall level of exploration
and production activity, resulting in a corresponding decline in the demand for our services. Additionally, the availability and
pricing of alternative sources of energy, a potential shift to lower carbon intensive energy sources or a shift to a lower carbon
economy, and technological advances may also depress the overall level of exploration and production activity, similarly
impacting the demand for our services.
If a reduction in exploration and development activities, whether resulting from changes in oil and natural gas prices or reductions
in capital budgets as 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
49
Management’s Discussion and Analysis
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 business, financial condition,
results of operations and cash flow.
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. Construction has commenced on the Trans Mountain and Coastal Gaslink pipelines in
Western Canada; however, both projects may face further regulatory delays or disruptions. The regulatory uncertainty in Canada
has impacted some of our customers’ ability to obtain financing, which has also depressed overall exploration and production
activity.
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
limited certainty of timing for new pipeline additions, customer spending in Canada may remain at relatively depressed levels.
These factors could result in a corresponding decline in the demand for our services that could have a material adverse effect
on our business, financial condition, results of operations and cash flow.
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, the offering of
ancillary services, the ability to provide drilling equipment that is adaptable, 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 business, financial condition, results of operations and cash flow.
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 business, financial condition, results of operations and
cash flow.
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
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50
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 could have a material adverse effect
on our business, financial condition, results of operations and cash flow.
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 our Senior Credit Facility and the indentures
associated with the unsecured senior 2021, 2023, 2024 and 2026 notes (the Senior Note Indentures) 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 business, financial condition, results of operations and cash flow.
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 are carried out through subsidiaries, and some of them are not guarantors of our debt.
The assets of the non-guarantor subsidiaries represent approximately 18% 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 funds 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 business, financial condition, results of operations and cash flow.
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 of credit for those customers. A reduction in spending by our customers could have a material adverse effect on our
business, financial condition, results of operations and cash flow as described further under – “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” on page 49.
Our debt facilities contain restrictive covenants
The Senior Credit Facility and the Senior Note Indentures contain a number of covenants which, among other things, restrict us
and some of our subsidiaries from conducting certain activities (see Capital Structure –Debt – Unsecured Senior Notes on page
43). In the event our 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, 2019, our Consolidated Interest Coverage Ratio, as calculated per our senior note indentures, was 3.30:1.
In addition, we must satisfy and maintain certain financial ratio tests under the Senior Credit Facility (see Capital Structure – Debt
on page 42). 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 Senior 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 Senior 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 Senior Note Indentures to be due and payable immediately.
At December 31, 2019, we were in compliance with the covenants of our Senior Credit Facility.
Uncertainty in Trade Relations
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
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Management’s Discussion and Analysis
adverse effect on our business, financial condition, results of operations and cash flow. A revised U.S.-Mexico-Canada
Agreement (USMCA) deal to replace the North American Free Trade Agreement (NAFTA) has recently been ratified in the U.S.
and Mexico and the process to ratify has commenced in Canada. Changes that could have had an impact on the oil and natural
gas industry were not included in the revised USMCA; however, it is currently unclear how this agreement may affect the U.S.,
Mexico and Canada and what effects USMCA will have on our 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 United States.
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
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.
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.
We are subject to compliance with the United States Foreign Corrupt Practices Act (FCPA) and the Corruption of Foreign Public
Official Act (Canada) (CFPOA), which generally prohibit companies from making improper payments to foreign government
officials for the purpose of obtaining business. While we have developed policies and procedures designed to achieve
compliance with the FCPA, CFPOA and other 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.
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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 cash flow.
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. Laws, regulations
or treaties concerning climate change or greenhouse gas emissions, including incentives to conserve energy or use alternate
sources of energy, can have an adverse impact on the demand for oil and natural gas, which could have a material adverse
effect on us. Such laws, regulations or treatises are evolving and it is difficult to estimate with certainty the impact they will have
on our business.
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 business, financial condition, results
of operations and cash flow.
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 business, financial condition, results of
operations and cash flow.
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 and shortages in supply of equipment could adversely impact our business
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. In times of increased demand for drilling
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Management’s Discussion and Analysis
services, there may be shortages of components, materials, equipment, parts and services required for our business. 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 business, financial condition, results of operations and cash flow.
The loss of one or more of our larger customers could have a material adverse effect on our business and our current
backlog of contract drilling revenue may decline
In 2019, approximately 39% of our revenue was received from our 10 largest drilling customers and approximately 20% of our
revenue was received from our three largest drilling customers. The loss of one or more of our larger customers could have a
material adverse effect on our business, financial condition, results of operations and cash flow. In addition, financial difficulties
experienced by customers could adversely impact their demand for our services and cause them to request amendments to our
contracts with them. Further, consolidation among oil and natural gas exploration and production companies may reduce the
number of available customers.
Our fixed-term drilling contracts generally provide our customers with an ability to terminate the contracts at their election, with
an early termination payment to us if the contract is terminated prior to the expiration of the fixed term. During depressed
market conditions or otherwise, customers may be unable to satisfy their contractual obligations or may seek to terminate or
renegotiate or otherwise fail to honor their contractual obligations. In addition, we may not be able to perform under these
contracts due to events beyond our control, and our customers may seek to terminate or renegotiate our contracts for various
reasons, without paying an early termination payment. As a result, we may not realize all of our contract drilling backlog. In
addition, the termination or renegotiation of fixed-term contracts without the receipt of early termination payments could have
a material adverse effect on our business, financial condition, results of operations and cash flows. Our contract drilling backlog
may decline, as fixed-term drilling contract coverage over time may not be offset by new or renegotiated contracts or may be
reduced by price adjustments to existing contracts, including as a result of the decline in the price of oil and natural gas, capital
spending reductions by our customers or other factors.
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 business, financial condition, results of operations and cash flow.
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
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, which could have a material
adverse effect on our business, financial condition, results of operations and cash flow. Additionally, unexpected events such as
unplanned power outages, natural disasters, supply disruptions, pandemic illness or other unforeseeable circumstances could
have a material adverse effect on our business, financial condition, results of operations and cash flow.
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Our worldwide operations could be disrupted by terrorism, acts of war, earthquakes, telecommunications failures, power or water
shortages, tsunamis, floods, hurricanes, typhoons, fires, extreme weather conditions (whether as a result of climate change or
otherwise), medical epidemics or pandemics and other natural or manmade disasters or catastrophic events, for some of which
we may be self-insured. The occurrence of any of these business disruptions could result in difficulties in transporting our crews,
hiring or managing personnel as well as other significant losses, that may adversely affect our business, financial conditions,
results of operations and cash flow, and require substantial expenditures and recovery time in order to fully resume operations.
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., wildfires, 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. We cannot,
however, estimate the degree to which climate change and extreme climate conditions could impact our business and operating
results.
Litigation and legal claims could have an adverse impact on our business
We may be subject to legal proceedings and governmental investigations from time to time related to our business and
operations. Lawsuits or claims against us could have a material adverse effect on our business, financial condition, results of
operations and cash flow. While we maintain insurance that may cover the cost of certain litigation or have indemnity provisions
in our favor, we cannot assure that any insurance or indemnification agreement will cover the cost of theses liabilities, thus
litigation or claims could negatively impact our business, reputation, financial condition and cash flow.
Unionization efforts and labor regulations could materially increase our costs or limit our flexibility
Efforts may be made from time to time to unionize portions of our workforce. We may be subject to strikes or work stoppages
and other labor disruptions in connection with unionization efforts or renegotiation of existing contracts with unions. Unionization
efforts, if successful, new collective bargaining agreements or work stoppages could materially increase our labor costs, reduce
our revenues and adversely impact our operations and cash flow.
Effects of climate change, including physical and regulatory impacts, could have a negative impact on our business
The effects of climate change, including physical and regulatory impacts, could have a negative impact on our operations and
the demand for oil and natural gas. There is growing concern about the apparent connection between the burning of fossil fuels
and climate change. Laws, regulations or treaties concerning climate change or greenhouse gas emissions, including incentives
to conserve energy or use alternate sources of energy, can have an adverse impact on the demand for oil and natural gas,
which could have a material adverse effect on us.
As discussed above, under “Business in our industry is seasonal and highly variable”, weather patterns in Canada and the
northern U.S. affect activity in the oilfield services industry. Global climate change could impact the timing and length of the
spring thaw and the period in which the muskeg freezes and thaws and could impact the severity of winter, which could have a
material adverse affect on our business and operating results. Furthermore, extreme climate conditions that could result in
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Management’s Discussion and Analysis
natural disasters such as flooding or forest fires, may result in delays or cancellation of some of our customer’s operations or
could increase our operating costs (such as insurance costs), which could have a material adverse affect on our business and
operating results. We cannot, however, estimate the degree to which climate change and extreme climate conditions could
impact our business and operating results.
Canada and the U.S. are signatories to the Paris Agreement drafted at the United Nations Framework Convention on Climate
Change in December 2015. The goals of the Paris Agreement are to prevent global temperature rise from exceeding 2 degrees
Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 degrees Celsius above pre-
industrial levels. On August 4, 2017, the U.S. submitted formal notice of intention to withdraw from the Paris Agreement; however,
under the terms of the Paris Agreement, the U.S. will remain a party until approximately August 2020. It is uncertain whether the
U.S. will adhere to the exit process and/or enter into separately negotiated agreements related to climate change. In Canada, in
connection with its commitments under the Paris Agreement, the federal government developed the Pan-Canadian Framework
on Clean Growth and Climate Change in 2016 (the “PCF”). The PCF requires all provinces and territories to have a carbon price
of $20 per tonne in 2019 and rising by $10 per year to $50 per tonne in 2022. Provinces and territories can implement either an
explicit price-based system (such as the systems implemented in British Columbia and Alberta) or a cap and trade system.
Saskatchewan remains the only Canadian jurisdiction that has not joined the national plan set out in the PCF. Saskatchewan
released its own output-based performance standards approach, which is applied only to certain large industrial facilities. The
proposed system in Saskatchewan only partially meets the PCF standards, therefore the federal carbon pollution pricing system
will apply in Saskatchewan to sources not covered by Saskatchewan’s system. It is not possible at this time to predict the effect
of the Paris Agreement and climate change-related legislation in Canada and the U.S. or whether additional climate-change
legislation, regulations or other measures will be adopted at the federal, state, provincial or local levels in Canada and the U.S.
However, further efforts by governments and non-governmental organizations to reduce greenhouse gas emissions appear
likely, which may reduce demand for oil and natural gas.
In addition to physical and regulatory effects of climate change on our business, an increasing focus on reduction of greenhouse
gas emissions and a potential shift to lower carbon intensive energy sources or a shift to a lower carbon economy may depress
the overall level of exploration and production activity, impacting the demand for our services. Certain investors may discourage
investments into 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 our access to liquidity and capital. Additionally, if our
reputation is diminished as a result of the industry we operate in or service, it could result in increased operating or regulatory
costs, lower shareholder confidence or loss of public support for our business.
Disease Outbreak may impact our business
A local, regional, national or international outbreak of a contagious disease, such as COVID-19, could have an adverse effect
on local economies and potentially the global economy, which may adversely impact the price of and demand for oil and gas
(and correspondingly, decrease the demand for our services, which could have a material adverse effect on our business,
financial condition, results of operations and cash flows). Additionally, such an outbreak, if uncontrolled, may result in temporary
shortages of staff to the extent our work force is impacted, which may have a material adverse effect on our business.
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
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.
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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 and the Senior Note Indentures, 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. Such volatility and uncertainty may be adversely impacted by potential
negative perception of investing in the hydrocarbon industry. 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 business, financial condition, results of operations, and cash flow.
Increasing Interest Rates may increase our cost of borrowing
Increases to the Canadian or United States benchmark interest rates 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 business, financial condition,
results of operations and cash flow.
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 business financial condition, results of operations and cash flow.
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 business,
financial condition, results of operations and cash flow.
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.
57
Management’s Discussion and Analysis
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, the perception of the industry we operate in and service and Canadian, U.S. or international economic and social
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. At times when our share price is relatively low, we may be subject to takeover attempts by certain companies
or institutions acting opportunistically.
While there is currently an active trading market for our shares in both the United States and Canada, we cannot guarantee that
an active trading market will be sustained in either country. There could cease to be an active trading market due to, among
other factors, minimum listing requirements of stock exchanges. If an active trading market in our shares is not sustained, the
trading liquidity of our shares will be limited and the market value of our shares may be reduced. The removal of our shares from
stock exchanges due to the failure to maintain minimum listing requirements may have an adverse impact on the value of our
shares.
Selling additional common shares could affect share value
While we implemented a normal course issuer bid under which we may acquire our own common shares, in the future we may
issue additional common shares 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 42).
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 business, financial condition, results of operations and cash
flow.
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
Precision Drilling Corporation 2019 Annual Report
58
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 CGNRC, 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 results of operations and cash flow.
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. Additionally,
if our reputation is diminished as a result of the industry we operate in or service, it could result in increased operation or
regulatory costs, lower shareholder confidence or loss of public support for our business.
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.
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.
59
Management’s Discussion and Analysis
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% or more 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 income is not distributed to the person. We are
not currently a CFC, but this could change in the future.
Precision Drilling Corporation 2019 Annual Report
60
EVALUATION OF CONTROLS AND PROCEDURES
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 2019 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,
2019, management has concluded that our internal control over financial reporting is effective.
The effectiveness of internal control over financial reporting as of December 31, 2019 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, 2019, 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.
61
Management’s Discussion and Analysis
ADVISORIES
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 2020
our 2020 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
our reduction in general and administrative expenses anticipated in 2020, and
our reduced annualized interest expense for 2020.
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 in which we operate, and
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
Precision Drilling Corporation 2019 Annual Report
62
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
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, 2019, 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.
63
Management’s Discussion and Analysis
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 (gain) on redemption and repurchase of unsecured senior
notes, finance charges, foreign exchange, impairment of goodwill, impairment (reversal of impairment) of property, plant and
equipment, loss on asset decommissioning, gain on asset disposals and depreciation and amortization), as reported in our
Consolidated Statement of Net Earnings (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, certain
foreign exchange amounts and with the adoption of the new lease standard IFRS 16 - Leases, the deduction of cash lease
payments incurred after December 31, 2018.
Operating Earnings (Loss)
We believe that operating earnings (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 earnings (loss) is calculated as follows:
Year ended December 31 (in thousands of dollars)
Revenue
Expenses:
Operating
General and administrative
Restructuring
Other recoveries
Depreciation and amortization
Gain on asset disposals
Loss on asset decommissioning
Impairment (reversal of impairment) of property, plant and equipment
Impairment of goodwill
Operating earnings (loss)
Foreign exchange
Finance charges
Loss (gain) on redemption and repurchase of unsecured senior notes
Income taxes
Net earnings (loss)
Funds Provided by (Used In) Operations
2019
1,541,320
1,038,967
104,010
6,438
—
333,616
(50,741 )
20,263
(5,810 )
—
94,577
(8,722 )
118,453
(6,815 )
(14,957 )
6,618
2018
1,541,189
2017
1,321,224
1,067,264
111,830
1,164
(14,200 )
377,044
(11,384 )
—
—
207,544
(198,073 )
4,017
127,178
(5,672 )
(29,326 )
(294,270 )
926,171
90,072
—
—
384,096
(6,350 )
—
15,313
—
(88,078 )
(2,970 )
137,928
9,021
(100,021 )
(132,036 )
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 2019 Annual Report
64
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, 2019 and December 31, 2018.
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, 2019.
Also, management determined that there were no material weaknesses in the Corporation’s internal control over financial
reporting as of December 31, 2019.
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, 2019, 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, 2019.
The Audit Committee of the Board of Directors, which is comprised of eight 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 6, 2020
March 6, 2020
65
Consolidated Financial Statements
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, 2019 and 2018, the related consolidated statements of net earnings (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, 2019 and 2018, 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, 2019, 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 6, 2020 expressed an unqualified opinion on the effectiveness of the Corporation’s
internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 3(u) to the consolidated financial statements, the Corporation has changed its method of accounting for
leases as of January 1, 2019 due to the adoption of International Financial Reporting Standard 16, Leases.
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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or
disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of indicators of impairment for the Canadian cash generating units
As discussed in note 3(t) to the consolidated financial statements the Corporation reviews the carrying amount of each of the
cash generating units (“CGUs”) at each reporting date to determine whether an indicator of impairment exists based on an
analysis of relevant internal and external factors. The Corporation analyzes indicators that an asset may be impaired such as
financial performance of the CGUs compared to historical results and forecasts and consideration of the Corporation’s market
capitalization. The Corporation did not identify an indication of impairment within the Corporation’s Canadian CGUs as at
December 31, 2019. Accordingly, no impairment tests were performed. Total assets recognized in Canada at December 31,
2019 were approximately $1,134 million.
We identified the assessment of indicators of impairment for the Corporation’s Canadian CGUs as a critical audit matter.
Complex auditor judgement was required in evaluating certain of the internal and external impairment indicators included in the
Corporation’s indicators of impairment analysis including the financial performance of the CGUs compared to historical results
and forecasts and consideration of the Corporation’s market capitalization.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal
controls over the Corporation’s identification and evaluation of indicators that CGUs may be impaired, including controls related
Precision Drilling Corporation 2019 Annual Report
66
to the Corporation’s preparation and approval of the annual forecast which is used to identify possible indicators of impairment.
We evaluated the internal and external factors analyzed by the Corporation in their impairment indicators analysis and compared
them to relevant external market data or internal source documents. We evaluated the Corporation’s 2020 forecasted earnings
before interest, taxes, depreciation and amortization for the Canadian CGUs by comparing growth assumptions to historical
results. We compared the Corporation’s 2019 forecasted earnings before interest, taxes, depreciation and amortization for the
Canadian CGUs to actual results to assess the Corporation’s ability to accurately forecast. We evaluated the changes in market
capitalization over 2019 and its impact on the Corporation’s impairment indicator analysis.
Chartered Professional Accountants
We have served as the Corporation’s auditor since 1987.
Calgary, Canada
March 6, 2020
67
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,
2019, 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, 2019, 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, 2019 and 2018, the related
consolidated statements of net earnings (loss), comprehensive loss, changes in equity and cash flow for the years then ended,
and the related notes (collectively referred to as the “consolidated financial statements”) and our report dated March 6, 2020
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 6, 2020
Precision Drilling Corporation 2019 Annual Report
68
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
Right of use assets
Total non-current assets
Total assets
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and accrued liabilities
Current portion of lease obligation
Income tax payable
Total current liabilities
Non-current liabilities:
Share based compensation
Provisions and other
Long-term debt
Lease obligation
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,
2019
December 31,
2018
(Note 26)
(Note 6)
(Note 15)
(Note 7)
(Note 8)
(Note 13)
(Note 26)
(Note 13)
(Note 14)
(Note 17)
(Note 10)
(Note 13)
(Note 15)
(Note 18)
(Note 20)
$
$
$
$
74,701
310,204
1,142
31,718
417,765
—
417,765
—
4,724
2,749,463
31,746
66,142
2,852,075
3,269,840
199,478
12,449
4,142
216,069
8,830
9,959
1,427,181
54,980
25,389
1,526,339
2,296,378
66,255
(969,456 )
134,255
1,527,432
3,269,840
$
$
$
$
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
See accompanying notes to consolidated financial statements.
Approved by the Board of Directors:
Allen R. Hagerman
Director
Steven W. Krablin
Director
69
Consolidated Financial Statements
Consolidated Statements of Net Earnings (Loss)
Years ended December 31,
(Stated in thousands of Canadian dollars, except per share amounts)
Revenue
Expenses:
Operating
General and administrative
Restructuring
Other recoveries
Earnings before income taxes, gain on redemption and repurchase of unsecured
senior notes, finance charges, foreign exchange, impairment of goodwill, reversal
of impairment of property, plant and equipment, loss on asset decommissioning,
gain on asset disposals and depreciation and amortization
Depreciation and amortization
Gain on asset disposals
Loss on asset decommissioning
Reversal of impairment of property, plant and equipment
Impairment of goodwill
Foreign exchange
Finance charges
Gain on redemption and repurchase of unsecured senior notes
Loss before income taxes
Income taxes:
Current
Deferred
Net earnings (loss)
Net earnings (loss) per share:
Basic
Diluted
See accompanying notes to consolidated financial statements.
(Note 7)
(Note 7)
(Note 9)
(Note 12)
(Note 15)
(Note 19)
Consolidated Statements of Comprehensive Loss
Years ended December 31,
(Stated in thousands of Canadian dollars)
Net earnings (loss)
Unrealized gain on translation of assets and liabilities of operations
denominated in foreign currency
Foreign exchange loss on net investment hedge with U.S. denominated debt,
net of tax
Comprehensive loss
See accompanying notes to consolidated financial statements.
(Note 4)
$
2019
1,541,320
$
2018
1,541,189
(Note 26)
(Note 26)
(Note 11)
(Note 11)
1,038,967
104,010
6,438
—
391,905
1,067,264
111,830
1,164
(14,200 )
375,131
333,616
(50,741 )
20,263
(5,810 )
—
(8,722 )
118,453
(6,815 )
(8,339 )
1,080
(16,037 )
(14,957 )
6,618
0.02
0.02
$
$
$
377,044
(11,384 )
—
—
207,544
4,017
127,178
(5,672 )
(323,596 )
8,573
(37,899 )
(29,326 )
(294,270 )
(1.00 )
(1.00 )
2019
6,618
(106,781 )
$
2018
(294,270 )
175,630
79,022
(145,226 )
(21,141 )
$
(263,866 )
$
$
$
$
$
Precision Drilling Corporation 2019 Annual Report
70
Consolidated Statements of Cash Flow
Years ended December 31,
(Stated in thousands of Canadian dollars)
Cash provided by:
Operations:
Net earnings (loss)
Adjustments for:
Long-term compensation plans
Depreciation and amortization
Gain on asset disposals
Loss on asset decommissioning
Reversal of impairment of property, plant and equipment
Impairment of goodwill
Foreign exchange
Finance charges
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
Repurchase of share capital
Debt amendment fees
Lease payments
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.
2019
2018
$
6,618
$
(294,270 )
19,457
333,616
(50,741 )
20,263
(5,810 )
—
(8,585 )
118,453
(6,815 )
(14,957 )
(981 )
(5,060 )
2,479
(116,655 )
1,370
292,652
(4,493 )
288,159
(159,886 )
(808 )
90,768
(4,574 )
(74,500 )
(198,387 )
(25,902 )
(702 )
(6,823 )
—
(231,814 )
(3,770 )
(21,925 )
96,626
74,701
$
17,401
377,044
(11,384 )
—
—
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
(Note 26)
(Note 7)
(Note 8)
(Note 7)
(Note 26)
(Note 10)
(Note 18)
(Note 8)
(Note 18)
$
71
Consolidated Financial Statements
Consolidated Statements of Changes in Equity
(Stated in thousands of Canadian dollars)
Balance at January 1, 2019
Lease transition adjustment
Net earnings for the period
Other comprehensive loss
Share repurchase
Share based compensation expense
Balance at December 31, 2019
(Note 3)
(Note 18)
(Note 14)
(Stated in thousands of Canadian dollars)
Balance at January 1, 2018
Net loss for the period
Other comprehensive income
Share options exercised
Redemption of non-management directors’
DSUs
Share based compensation expense
Balance at December 31, 2018
(Note 18)
(Note 18)
(Note 14)
Shareholders’
Capital
(Note 18)
2,322,280
—
—
—
(25,902)
—
2,296,378
$
$
Shareholders’
Capital
(Note 18)
2,319,293
—
—
378
2,609
Contributed
Surplus
52,332
—
—
—
—
13,923
66,255
Contributed
Surplus
44,037
—
—
(103)
(809)
$
$
Accumulated
Other
Comprehensive
Income
(Note 20)
162,014
—
—
(27,759 )
—
—
134,255
$
Accumulated
Other
Comprehensive
Income
(Note 20)
131,610
—
30,404
—
—
$
$
$
Deficit
(978,874) $
2,800
6,618
—
—
—
(969,456) $
Total Equity
1,557,752
2,800
6,618
(27,759 )
(25,902 )
13,923
1,527,432
Deficit
(684,604) $
(294,270)
—
—
—
Total Equity
1,810,336
(294,270 )
30,404
275
1,800
—
2,322,280
$
$
9,207
52,332
$
—
162,014
$
—
(978,874) $
9,207
1,557,752
See accompanying notes to consolidated financial statements.
Precision Drilling Corporation 2019 Annual Report
72
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 6, 2020.
(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), (e), (g), (i), (j), (l), (s) and (t).
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.
73
Consolidated Financial Statements
(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.
(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 earnings
(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 method and components 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.
Precision Drilling Corporation 2019 Annual Report
74
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.
(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 asset and 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.
75
Consolidated Financial Statements
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
Precision recognizes revenue from a variety of sources. In general, customer invoices are issued upon rendering all performance
obligations for an individual well-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. The estimated fair value of 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
Precision Drilling Corporation 2019 Annual Report
76
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 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.
The Corporation has a share option plan 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:
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:
77
Consolidated Financial Statements
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.
(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) Leases
At inception, Precision assesses whether its contracts contain a lease. A contract contains a lease if it conveys the right to
control the use of an identified asset for a period of time in exchange for consideration. The assessment of whether a contract
conveys the right to control the use of an identified asset considers whether:
•
•
•
the contract involves the use of an identified asset and the substantive substitution rights of the supplier. If the supplier has
a substantive substitution right, then the asset is not identified;
the lessee’s right to obtain substantially all of the economic benefits from the use of the asset; and
the lessee’s right to direct the use of the asset, including decision-making to change how and for what purpose the asset is
used.
At inception or on reassessment of a contract that contains a lease component, Precision allocates the consideration in the
contract to each lease component on the basis of their relative stand-alone prices.
Leases in which Precision is a lessee
Precision recognizes a right of use asset and corresponding lease obligation at the lease commencement date. The right of use
asset is initially measured at cost, which comprises the initial amount of the lease obligation adjusted for lease payments made
on or before commencement date, incurred initial direct costs, estimated site retirement costs and any lease incentives received.
The right of use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of
the end of the useful life of the right of use asset or the end of the lease term. The estimated useful lives of right of use assets
are consistent with those of property, plant and equipment. In addition, the right of use asset is reduced by impairment losses,
if any, and adjusted for certain remeasurements of the lease obligation.
The lease obligation is initially measured at the present value of the minimum lease payments not paid at commencement date,
discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, Precision’s incremental
Precision Drilling Corporation 2019 Annual Report
78
borrowing rate. Generally, Precision uses its incremental borrowing rate as the discount rate for those leases in which it is the
lessee.
Lease payments included in the measurement of the lease obligation comprise the following:
•
•
•
•
fixed payments, including in-substance fixed payments;
variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the
commencement date;
amounts expected to be payable under a residual value guarantee; and
the exercise price under a purchase option that Precision is reasonably certain to exercise, lease payments in an optional
renewal period if Precision is reasonably certain to exercise an extension option, and penalties for early termination of a
lease unless Precision is reasonably certain not to terminate early.
The lease obligation is measured at amortized cost using the effective interest method. The measurement of lease obligations
require the use of certain estimates and assumptions including discount rates, exercise of lease term extension options, and
escalating lease rates. It is remeasured when there is a change in:
•
•
•
future lease payments arising from a change in an index or rate;
the estimated amount expected to be payable under a residual value guarantee; or
the assessment of whether Precision will exercise a purchase, extension or termination option.
When the lease obligation is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right of
use asset, or is recorded in profit or loss if the carrying amount of the right of use asset has been reduced to zero.
Leases in which Precision is a lessor
When Precision acts as a lessor, at inception, Precision evaluates the classification as either a finance or operating lease.
To classify each lease, Precision makes an overall assessment of whether the lease transfers substantially all of the risks and
rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease; if not, then it is an
operating lease.
When acting as a sub-lessor, Precision accounts for its interests in the head lease and the sub-lease separately. It assesses
the lease classification of a sub-lease with reference to the right of use asset arising from the head lease, not with reference to
the underlying asset. If a head lease is a short-term lease then Precision classifies the sub-lease as an operating lease.
If an arrangement contains lease and non-lease components, Precision applies IFRS 15 to allocate the consideration in the
contract. Precision recognizes lease payments received under operating leases for drilling rigs as income on a systematic basis,
drilling days, over the lease term as part of revenue.
The accounting policies applicable to Precision as a lessor in the comparative period were not different from IFRS 16. However,
when Precision was an intermediate lessor the sub-leases were classified with reference to the underlying asset.
(t) Critical Accounting Assumptions and Estimates
i) Impairment of Long-Lived Assets
At each reporting date, the Corporation reviews the carrying amount of assets in each CGU to determine whether an
indicator of impairment exists. The Corporation’s analysis is based on relevant internal and external factors that indicate
a CGU may be impaired such as the obsolescence or planned disposal of significant assets, financial performance of the
CGU compared to forecasts and consideration of the Corporation’s market capitalization.
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, the Corporation uses observable market
data inputs to develop a rate that the Corporation believes approximates the discount rate of market participants.
Although the Corporation believes the assumptions and estimates are reasonable and consistent with current conditions,
internal planning, and expected future operations, such assumptions and 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.
79
Consolidated Financial Statements
(u) Accounting Standards Adopted January 1, 2019
i) IFRS 16, Leases
IFRS 16 introduced 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 obligation representing
the Corporation’s obligation to make future lease payments. Lessor accounting remained similar to the prior lease standard
in which lessors classify leases as either finance or operating leases.
On January 1, 2019, Precision adopted IFRS 16 using the modified retrospective approach. Under this approach,
comparative information has not been restated and continues to be reported under IAS 17 and related interpretations.
Transition
Precision adopted IFRS 16 on January 1, 2019 using the modified retrospective method of adoption. When applying the
modified retrospective approach to leases previously classified as operating leases under IAS 17 and related
interpretations, 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, Precision elected to use the following practical expedients, where
applicable, to:
•
•
•
•
grandfather the assessment of which contracts contained leases under IFRS 16 to only those previously identified as
leases under IAS 17 and related interpretations;
not apply the requirements of the standard to short-term and low-value leases;
treat existing operating leases with a remaining term of less than 12 months at January 1, 2019 as short-term leases;
and
apply a single discount rate to a portfolio of leases with reasonably similar characteristics.
In addition, at the date of initial application, for those leases previously classified as an operating lease under IAS 17,
Management elected to recognize and measure the respective right of use assets at the amount equal to the lease
obligation, adjusted for any prepaid or accrued lease payment immediately before the date of initial application. The
opening balance sheet adjustment in relation to these leases was:
Right of use asset
Accounts payable and accrued liabilities
Lease obligation
Deficit
January 1, 2019
73,464
$
(2,800)
(73,464)
2,800
When measuring certain lease obligations at the date of transition, minimum lease payments were discounted using
Precision’s incremental borrowing rate. The weighted average incremental borrowing rates applied was 6.1%. At the date
of transition, Precision derecognized $3 million of its deferred base rent balance which was established to straight-line
amortize escalating corporate office rent expenses over the term of the lease.
Operating lease commitment at December 31, 2018
Discounted using the incremental borrowing rate at January 1, 2019
Extension options reasonably certain to be exercised
Lease obligation
January 1, 2019
67,392
$
54,517
18,947
73,464
$
In the comparative period, Precision classified its leases that transferred substantially all the risks and rewards of
ownership as finance leases. These leased assets were measured initially at an amount equal to the lower of their fair
value and the present value of the minimum lease payments, excluding any contingent payments. Subsequently, these
assets were accounted for in accordance with the applicable accounting policy respective to that asset.
Assets held under other leases were classified as operating leases and were not recognized on the consolidated statement
of financial position. Payments made under operating leases were recognized in profit or loss on a straight-line basis over
the term of the lease. Lease incentives received were recognized as an integral part of the total lease expense, over the
term of the lease.
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 income tax treatment if it concludes that it is not probable that a particular
income 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
Precision Drilling Corporation 2019 Annual Report
80
so. Using the modified retrospective method of adoption, Precision initially applied IFRIC 23 on January 1, 2019 and it did
not have a material impact on the consolidated financial statements.
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, 2019
Canada
United States
International
Day rate/hourly services
Shortfall payments/idle but contracted
Turnkey drilling services
Directional services
Other
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
NOTE 5. SEGMENTED INFORMATION
Contract
Drilling
Services
336,483 $
852,293
210,292
1,399,068 $
1,333,114 $
9,789
3,754
41,876
10,535
1,399,068 $
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
Corporate
and Other
Inter-
Segment
Eliminations
128,202 $
19,627
—
147,829 $
147,829 $
—
—
—
—
147,829 $
Completion
and
Production
Services
138,030 $
12,730
—
150,760 $
150,760 $
—
—
—
—
150,760 $
— $
—
—
— $
— $
—
—
—
—
— $
(5,308 ) $
(269 )
—
(5,577 ) $
(905 ) $
—
—
—
(4,672 )
(5,577 ) $
Corporate
and Other
Inter-
Segment
Eliminations
— $
—
—
— $
— $
—
—
—
—
— $
(5,759 ) $
(304 )
—
(6,063 ) $
(1,009 ) $
—
—
—
(5,054 )
(6,063 ) $
Total
459,377
871,651
210,292
1,541,320
1,480,038
9,789
3,754
41,876
5,863
1,541,320
Total
558,746
791,312
191,131
1,541,189
1,452,326
12,520
37,811
31,943
6,589
1,541,189
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, oilfield equipment rental, and camp and catering services.
2019
Revenue
Operating earnings (loss)
Depreciation and amortization
Gain on asset disposals
Loss on asset decommissioning
Reversal of impairment of property, plant and
equipment
Total assets
Capital expenditures
$
Contract
Drilling
Services
1,399,068 $
160,997
300,882
(46,849)
20,263
(5,810)
Completion
and
Production
Services
Corporate
and Other
Inter-
Segment
Eliminations
147,829 $
10,041
17,881
(3,767)
—
—
— $
(76,461)
14,853
(125)
—
—
(5,577 ) $
—
—
—
—
—
Total
1,541,320
94,577
333,616
(50,741 )
20,263
(5,810 )
2,963,260
154,066
152,611
5,448
153,969
1,180
—
—
3,269,840
160,694
81
Consolidated Financial Statements
2018
Revenue
Operating loss
Depreciation and amortization
Loss (gain) on asset disposals
Impairment of goodwill
Total assets
Capital expenditures
$
Contract
Drilling
Services
1,396,492 $
(129,965)
341,712
(7,157)
207,544
3,301,457
108,610
Completion
and
Production
Services
150,760 $
(8,998)
22,801
1,078
—
170,113
5,004
Corporate
and Other
Inter-
Segment
Eliminations
— $
(59,110)
12,531
(5,305)
—
164,473
12,529
(6,063 ) $
—
—
—
—
—
—
Total
1,541,189
(198,073 )
377,044
(11,384 )
207,544
3,636,043
126,143
A reconciliation of operating earnings (loss) to loss before income taxes is as follows:
Operating earnings (loss)
Add (deduct):
Foreign exchange
Finance charges
Gain on redemption and repurchase of unsecured
senior notes
Loss before income taxes
$
2019
94,577
$
2018
(198,073)
(8,722 )
118,453
(6,815 )
4,017
127,178
(5,672)
$
(8,339 ) $
(323,596)
The Corporation’s operations are carried on in the following geographic locations:
2019
Revenue
Total assets
2018
Revenue
Total assets
$
$
United States
871,651
1,560,523
United States
791,312
1,772,850
$
$
Canada
459,377
1,133,591
Canada
558,746
1,269,542
$
$
International
210,292 $
575,726
International
191,131 $
593,651
Total
1,541,320
3,269,840
Total
1,541,189
3,636,043
NOTE 6. ASSETS HELD FOR SALE
In December 2018, Precision commenced a process 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, was 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 $20 million, which was less than its estimated fair value. In 2019, Precision’s efforts to sell the
disposal group were unsuccessful and the drilling rigs were decommissioned.
NOTE 7. PROPERTY, PLANT AND EQUIPMENT
Cost
Accumulated depreciation
Rig equipment
Rental equipment
Other equipment
Vehicles
Buildings
Assets under construction
Land
$
$
$
$
$
2019
6,670,979
(3,921,516 )
2,749,463
2,510,505
34,437
38,604
7,796
56,834
67,740
33,547
2,749,463 $
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
Precision Drilling Corporation 2019 Annual Report
82
Cost
Balance, December 31, 2017
Additions
Disposals
Reclassifications
Reclassification to assets held for sale
Effect of foreign currency exchange
differences
Assets
Under
Construction
Other
Rental
Equipment
Equipment Vehicles Buildings
Rig
Equipment
$ 6,034,166 $ 148,011 $ 244,950 $ 43,201 $127,385 $
569
(3,663 )
—
—
4,036
—
(228 )
—
—
5,351 2,483
7,013
(32,153 )
127,668
(135,398 )
321,240
—
(18,227)
—
—
679
347
(59,865)
507
—
Total
Land
102,035 $ 33,886 $6,733,634
114,576
106,647
(115,029 )
—
—
(128,175 )
(135,398 )
—
339,279
—
(893 )
—
—
4,054 1,436
Balance, December 31, 2018
6,322,536
130,463
191,290
45,456
Additions
Disposals
Reclassifications
Asset decommissioning
Effect of foreign currency exchange
differences
18,436
(69,945 )
150,674
(4,364 )
(307,954 )
—
(19,982)
—
—
(174)
976
(4,708)
1,197
—
(3,436)
224
(6,014 )
—
—
(1,160 )
128,327
415
(58 )
—
—
(2,507 )
84,561 34,429
139,835
—
(151,871 )
—
(4,785 )
—
—
—
—
(882 )
6,937,062
159,886
(100,707 )
—
(4,364 )
(320,898 )
Balance, December 31, 2019
$ 6,109,383 $ 110,307 $ 185,319 $ 38,506 $126,177 $
67,740 $ 33,547 $6,670,979
Accumulated Depreciation
Balance, December 31, 2017
Depreciation expense
Disposals
Reclassification to assets held for sale
Effect of foreign currency exchange
differences
Balance, December 31, 2018
Depreciation expense
Disposals
Asset decommissioning
Reversal of impairment of property, plant
and equipment
Effect of foreign currency exchange
differences
Assets
Under
Construction
Rig
Equipment
$ 3,210,384 $
335,215
(28,399 )
(115,740 )
175,904
Rental
Equipment
Other
Equipment Vehicles Buildings
87,832 $ 178,390 $ 26,921 $ 56,283 $
8,126
15,993 4,820
(3,161)
(220)
(59,857)
—
—
—
1,518
4,569 1,233
9,418
(11,249)
—
470
3,577,364
289,056
(33,929 )
(3,518 )
(5,810 )
86,471 139,095 32,754 62,766
7,663
13,023 3,521
(58)
(4,768)
(3,274)
—
—
—
—
—
—
7,473
(17,933)
—
—
Land
Total
— $3,559,810
373,572
—
(102,886 )
—
(115,740 )
—
183,694
—
— 3,898,450
320,736
—
(59,962 )
—
(3,518 )
—
(5,810 )
—
— $
—
—
—
—
—
—
—
—
—
(224,285 )
(141)
(2,129)
(797)
(1,028)
—
—
(228,380 )
Balance, December 31, 2019
$ 3,598,878 $
75,870 $ 146,715 $ 30,710 $ 69,343 $
— $
— $3,921,516
(a) Asset Disposals
In addition to those items below, through the completion of normal course business operations, the Corporation sold used assets
incurring gains or losses on disposal.
Mexico
In the second quarter of 2019, Precision concluded the sale of its Mexico-based drilling rigs and ancillary equipment, contained
within its Contract Drilling Services segment, for total proceeds of US$48 million. Precision recognized a gain on asset disposal
of US$24 million and reversed US$4 million of previous impairment charges.
Snubbing
In the second quarter of 2019, Precision disposed of certain snubbing units and related equipment, contained within the
Completion and Production Services segment, for proceeds of $8 million resulting in a gain on asset disposal of $3 million.
(b) Impairment Test
Precision reviews the carrying value of its long-lived assets at each reporting period for indications of impairment. The
Corporation did not identify an indication of impairment within the Corporation’s CGUs as at December 31, 2019. Accordingly,
no impairment tests were performed.
83
Consolidated Financial Statements
For the year ended December 31, 2018, impairment charges of $208 million were recorded against goodwill. Refer to Note 9 for
discussion of impairment tests performed.
(c) Decommissioned Drilling Rigs
In 2019, the Corporation incurred a $20 million (2018 – nil) loss on the decommissioning of certain drilling and ancillary
equipment, contained within the Contract Drilling Services segment, that no longer met the Corporation’s High Performance
technology standards. The decommissioning charge included those drilling rigs that were previously held for sale.
(d) Change in Rig Components
In the fourth quarter of 2019, Precision performed its annual review of estimated useful lives, residual values and methods and
components of depreciation of property, plant and equipment. Due to changes in the timing, nature and complexity of certain rig
recertifications, the Corporation determined the associated costs represent a separate component of property, plant and
equipment. This change has been recognized prospectively and is expected to increase the Corporation’s 2020 depreciation
expense by approximately $3 million.
NOTE 8. INTANGIBLES
Cost
Accumulated amortization
Loan commitment fees related to Senior Credit Facility
Software
Cost
Balance, December 31, 2017
Additions
Balance, December 31, 2018
Additions
Effect of foreign currency exchange differences
Balance, December 31, 2019
Accumulated Amortization
Balance, December 31, 2017
Amortization expense
Balance, December 31, 2018
Amortization expense
Balance, December 31, 2019
NOTE 9. GOODWILL
Balance, December 31, 2017
Impairment charge
Exchange adjustment
Balance, December 31, 2018 and 2019
$
$
$
$
2019
53,416 $
(21,670 )
31,746 $
2,272 $
29,474
31,746 $
Loan
Commitment
Fees
14,138
638
14,776
702
—
15,478
Loan
Commitment
Fees
11,018
1,451
12,469
737
13,206
$
$
$
$
$
$
$
$
Software
25,569 $
11,567
37,136
808
(6 )
37,938 $
Software
573 $
3,469
4,042
4,422
8,464 $
2018
51,912
(16,511 )
35,401
2,307
33,094
35,401
Total
39,707
12,205
51,912
1,510
(6)
53,416
Total
11,591
4,920
16,511
5,159
21,670
$
$
205,167
(207,544 )
2,377
—
In 2018, Precision performed its annual impairment test for those CGUs containing goodwill and determined the goodwill
associated with the Canadian Contract Drilling and U.S. Directional Drilling CGUs were not recoverable. Accordingly, an
impairment charge of $208 million was recorded in the statement of net earnings (loss) for the period ended December 31, 2018.
Both CGUs were contained within the Contract Drilling Services segment.
Precision Drilling Corporation 2019 Annual Report
84
In performing the 2018 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 plan
approved by the Corporation’s Board of Directors. These strategic plans were developed based on benchmark commodity prices
and industry supply-demand fundamentals.
Canadian Contract Drilling
Cash flows used in the impairment calculation were discounted using a discount rate specific to the Canadian 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 Canadian Contract Drilling CGU was 11.66%. The test resulted
in a goodwill impairment charge of $172 million as the carrying value of the CGU’s assets exceeded its value in use of $942
million.
The key assumptions used in the calculation of the CGU’s value in use included the discount rate and a terminal value growth
rate of nil. An increase of 0.5% to the discount rate would result in approximately $37 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%. The test resulted
in a goodwill impairment charge of $35 million as the carrying value of the CGU’s assets exceeded its value in use of $39 million.
The key assumptions used in the calculation of the CGU’s value in use included the discount rate and a terminal value growth
rate of nil. An increase of 0.5% to the discount rate would result in approximately $2 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
US $
2019
— US $
2018
— $
2019
— $
2018
—
90,625
344,845
307,690
369,735
US $
1,112,895 US $
165,625
350,000
351,104
400,000
1,266,729
117,678
447,792
399,545
480,112
1,445,127
(17,946 )
$
1,427,181
226,113
477,823
479,331
546,084
1,729,351
(23,098)
1,706,253
$
Balance December 31, 2017
Changes from financing cash flows:
Redemption / repurchase of senior notes
Non-cash changes:
Gain on redemption / repurchase of unsecured senior notes
Amortization of debt issue costs
Foreign exchange adjustment
Balance December 31, 2018
Changes from financing cash flows:
Redemption / repurchase of senior notes
Non-cash changes:
Senior Credit
Facility
Unsecured
Senior Notes
$
— $
1,758,519 $
Debt Issue
Costs
(28,082 ) $
Total
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
(198,387 )
—
(198,387 )
Gain on redemption / repurchase of unsecured senior notes
Amortization of debt issue costs
Foreign exchange adjustment
Balance December 31, 2019
$
—
—
—
— $
(6,815 )
—
(79,022 )
1,445,127 $
—
5,152
—
(17,946 ) $
(6,815 )
5,152
(79,022 )
1,427,181
85
Consolidated Financial Statements
Long-term debt obligations at December 31, 2019 will mature as follows:
2020
2021
2022
2023
Thereafter
(a) Senior Credit Facility:
$
$
—
117,678
—
447,792
879,657
1,445,127
The senior secured revolving credit facility (Senior Credit Facility) provides Precision with senior secured financing for general
corporate purposes, including for acquisitions, of up to US$500 million with a provision for an increase in the facility of up to an
additional US$300 million. 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 restrictive and 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 2.5:1.
Distributions under the Senior Credit Facility 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.
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, 2023.
Under the Senior Credit Facility, amounts can be drawn in U.S. dollars and/or Canadian dollars. At December 31, 2019, no
amounts were drawn under this facility (2018 – nil). Up to US$200 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,
2019 outstanding letters of credit amounted to US$25 million (2018 – US$28 million).
The interest rate on loans that are denominated in U.S. dollars is, at the option of Precision, either a margin over a U.S. base
rate or a margin over LIBOR. The interest rate on loans denominated in Canadian dollars is, at the option of Precision, either a
margin over the Canadian prime rate or a margin over the Canadian Dollar Offered Rate (CDOR); such margins will be based
on the then applicable ratio of consolidated total debt to EBITDA.
(b) Unsecured Senior Notes:
Precision has outstanding the following unsecured senior notes:
6.5% US$ 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 after December 15, 2019 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 2019, Precision redeemed US$75 million principal amount of these notes for an aggregate purchase price of
US$76 million. The difference was recognized as a loss on redemption of unsecured senior notes within the consolidated
statement of earnings (loss).
Subsequent to December 31, 2019, Precision redeemed US$25 million principal amount of these notes for an aggregate
purchase price of US$25 million.
7.75% US$ 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.
Precision Drilling Corporation 2019 Annual Report
86
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.
During 2019, Precision repurchased and cancelled US$5 million of these notes for an aggregate purchase price of US$5
million. The difference was recognized as a gain on redemption of unsecured senior notes within the consolidated
statement of earnings (loss).
5.25% US$ 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 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 2019, Precision repurchased and cancelled US$43 million of these notes for an aggregate purchase price of US$39
million. The difference was recognized as a gain on repurchase of unsecured senior notes within the consolidated
statement of earnings (loss).
Subsequent to December 31, 2019, Precision repurchased and cancelled US$5 million of these notes for an aggregate
purchase price of US$4 million.
7.125% US$ senior notes due 2026
These notes 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.
During 2019, Precision repurchased and cancelled US$30 million of these notes for an aggregate purchase price of US$29
million. The difference was recognized as a gain on repurchase of unsecured senior notes within the consolidated
statement of earnings (loss).
Subsequent to December 31, 2019, Precision repurchased and cancelled US$2 million of these notes for an aggregate
purchase price of US$2 million.
The unsecured senior notes require Precision to comply with certain restrictive and 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 the 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.
The unsecured senior notes also contain a restricted payments covenant that limits Precision’s ability to make payments in the
nature of dividends, distributions and for 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, 2019, the governing net restricted
payments basket was negative $517 million (2018 – negative $496 million), therefore limiting us from making any further dividend
payments or share repurchases until the governing restricted payments basket once again becomes positive.
Precision’s 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 the Corporation has included in Note 28 condensed consolidating
financial statements based on Rule 3-10 of the U.S. Securities and Exchange Commission’s Regulation S-X.
87
Consolidated Financial Statements
(c) Covenants:
Following is a listing of the currently applicable restrictive and financial covenants as at December 31, 2019:
Senior Credit Facility
Consolidated senior debt to consolidated covenant EBITDA(1)
Consolidated covenant EBITDA to consolidated interest expense
Unsecured Senior Notes
Consolidated interest coverage ratio
(1) For purposes of calculating the leverage ratio consolidated senior debt only includes secured indebtedness.
Covenant
At December 31, 2019
≤ 2.50
≥ 2.50
≥ 2.00
0.00
3.39
3.30
At December 31, 2019, Precision was in compliance with the covenants of the Senior Credit Facility and unsecured senior
notes.
NOTE 11. RESTRUCTURING AND OTHER RECOVERIES
For the period ended December 31, 2019, the Corporation had restructuring charges of $6 million (2018 - $1 million) and other
recoveries of nil (2018 - $14 million). Restructuring costs incurred in 2019 pertained to severance costs as the Corporation
continued to align its cost structure to reflect reduced activity levels. In 2018, the Corporation had other recoveries of $14 million
relating to the recovery of transactions costs resulting from the termination of an arrangement agreement to acquire an oilfield
services drilling contractor.
NOTE 12. FINANCE CHARGES
Interest:
Long-term debt
Lease obligation
Other
Income
Amortization of debt issue costs
Finance charges
NOTE 13. LEASES
(a) As a lessee
2019
2018
110,730
3,389
21
(1,576 )
5,889
118,453
$
$
121,810
—
378
(1,444 )
6,434
127,178
$
$
Precision recognizes right of use assets primarily from its leases of real estate and vehicles and equipment.
Balance, January 1, 2019
Transition adjustments
Additions
Derecognition
Depreciation
Lease remeasurements
Effect of foreign currency exchange differences
Balance, December 31, 2019
Real Estate
—
58,635
—
(29 )
(4,055 )
163
(688 )
54,026
$
$
$
$
Vehicles and
Equipment
— $
14,829
1,947
—
(4,403 )
—
(257 )
12,116 $
Total
—
73,464
1,947
(29)
(8,458)
163
(945)
66,142
Precision Drilling Corporation 2019 Annual Report
88
Precision’s real estate lease contracts often contain renewal options which may impact the determination of the lease term for
purposes of calculating the lease obligation. If it is reasonably certain that a renewal option will be exercised, the renewal period
is included in the lease term. When entering into a lease, Precision assesses whether it is reasonably certain renewal options
will be exercised. Reasonable certainty is established if all relevant facts and circumstances indicate an economic incentive to
exercise the renewal option. For the majority of its real estate leases, Precision is reasonably certain it will exercise its renewal
option. Accordingly, the renewal period has been included in the lease term used to calculate the lease obligation.
For the period ended December 31, 2019, Precision had total cash outflows of $10 million in relation to its lease obligations.
The Corporation has commitments under various lease agreements, primarily for real estate and vehicles and equipment. Terms
of our real estate 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
One to five years
More than five years
(b) As a lessor
$
$
2019
11,954 $
33,566
11,117
56,637 $
2018
13,496
36,639
17,797
67,932
Precision leases its rig equipment under long-term drilling contracts with terms ranging from one to five years. For the year
ended December 31, 2019, approximately 59% of our total contract drilling revenue pertained to drilling rigs working under term
contracts. At December 31, 2019, the net book value of the underlying rig equipment subject to long-term drilling contracts was
$1 billion.
The following table sets out a maturity analysis of lease payments, showing the undiscounted lease payments to be received
after December 31, 2019.
Less than one year
One to five years
More than five years
$
$
297,425
207,746
12,437
517,608
NOTE 14. 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.
Liability Classified Plans
Balance, December 31, 2017
Expensed during the period
Payments
Balance, December 31, 2018
Expensed during the period
Payments
Balance, December 31, 2019
Current
Long-term
Restricted
Share Units
Performance
Share Units
$
$
$
$
6,950 $
5,223
(6,764)
5,409
5,755
(3,846)
7,318 $
3,956 $
3,362
7,318 $
Non-
Management
Directors’
DSUs
3,512 $
769
(1,800 )
2,481
855
—
3,336 $
— $
3,336
3,336 $
11,407 $
398
(7,284 )
4,521
1,583
(3,246 )
2,858 $
726 $
2,132
2,858 $
Total
21,869
6,390
(15,848 )
12,411
8,193
(7,092 )
13,512
4,682
8,830
13,512
(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
89
Consolidated Financial Statements
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:
December 31, 2017
Granted
Redeemed
Forfeited
December 31, 2018
Granted
Redeemed
Forfeited
December 31, 2019
(b) Non-Management Directors
RSUs
Outstanding
2,796,858
2,918,912
(1,404,284 )
(255,572 )
4,055,914
4,187,350
(1,505,683 )
(399,518 )
6,338,063
PSUs
Outstanding
5,726,259
1,292,550
(2,137,163 )
(338,656 )
4,542,990
2,038,900
(1,322,758 )
(1,923,782 )
3,335,350
Precision has 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, 2017
Granted
Redeemed
Balance December 31, 2018
Granted
Balance December 31, 2019
Equity Settled Plans
(c) Option Plan
Outstanding
953,277
474,766
(374,408)
1,053,635
738,619
1,792,254
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, 2017
Granted
Forfeited
December 31, 2018
Forfeited
December 31, 2019
Options
Outstanding
4,900,360
490,200
(657,404 )
4,733,156
(711,572 )
4,021,584
Range of
Exercise Prices
$ 4.46 – 14.50 $
4.35 – 4.35
10.44 – 14.50
4.35 – 14.31
7.15 – 10.67
$ 4.35 – 14.31 $
Weighted
Average
Exercise Price
8.50
4.35
10.58
7.78
10.51
7.29
Options
Exercisable
3,734,019
3,786,473
3,569,069
Precision Drilling Corporation 2019 Annual Report
90
U.S. Share Options
December 31, 2017
Granted
Exercised
Forfeited
December 31, 2018
Granted
Forfeited
December 31, 2019
Options
Outstanding
5,558,621
1,569,250
(66,000 )
(996,021)
6,065,850
599,300
(302,100)
6,363,050
Range of
Exercise Prices
(US$)
$ 3.21 – 15.21 $
3.44 – 3.62
3.21 – 3.21
3.21 – 15.21
3.21 – 10.74
2.56 – 2.56
7.79 – 10.74
$ 2.56 – 9.18 $
Weighted
Average
Exercise Price
(US$)
6.16
3.45
3.21
8.08
5.17
2.56
10.68
4.67
Options
Exercisable
2,891,808
3,224,078
4,348,824
No options were exercised in 2019. 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:
$ 4.35 – 6.99
7.00 – 8.99
9.00 – 14.31
$ 4.35 – 14.31
Number
1,105,400 $
1,533,334
1,382,850
4,021,584 $
Weighted
Average
Exercise Price
4.41
7.32
9.57
7.29
Weighted Average
Remaining
Contractual Life
(Years)
4.04
2.59
0.56
2.29
Number
778,595 $
1,407,624
1,382,850
3,569,069 $
Weighted
Average
Exercise Price
4.44
7.32
9.57
7.56
U.S. Share Options
Total Options Outstanding
Options Exercisable
Range of Exercise Prices
(US$):
$ 2.56 – 3.99
4.00 – 6.99
7.00 – 9.18
$ 2.56 – 9.18
Weighted
Average
Exercise Price
(US$)
Weighted Average
Remaining
Contractual Life
(Years)
3.21
5.61
9.08
4.67
4.50
3.37
0.60
3.67
Number
3,646,250 $
1,924,500
792,300
6,363,050 $
Weighted
Average
Exercise Price
(US$)
3.27
5.62
9.08
5.17
Number
2,011,540 $
1,544,984
792,300
4,348,824 $
The per option weighted average fair value of the share options granted during 2019 was $1.54 (2018 – $1.96) estimated on the
grant date using the Black-Scholes option pricing model with the following assumptions: average risk-free interest rate of 2.5%
(2018 – 2%), average expected life of four years (2018 – four years), expected forfeiture rate of 5% (2018 – 5%) and expected
volatility of 57% (2018 – 56%). Included in net earnings for the year ended December 31, 2019 is an expense of $2 million (2018
– $3 million).
(d) Executive Performance Share Units
Precision grants 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 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:
Executive Performance Share Units
December 31, 2017
Granted
Forfeited
December 31, 2018
Granted
Forfeited
December 31, 2019
Outstanding
1,159,000 $
2,082,800
(50,733 )
3,191,067
4,211,600
(25,767 )
7,376,900
Weighted
Fair Value
6.00
6.22
6.12
6.14
4.11
6.02
4.98
The per unit weighted average fair value of the performance share units granted during 2019 was $4.11 (2018 – $6.22) estimated
on the grant date using a Monte Carlo simulation and Black-Scholes option pricing model with the following assumptions: share
price of $3.23 (2018 – $4.29), average risk-free interest rate of 2.3% (2018 – 2.3%), average expected life of three years (2018
– three years), average expected volatility of 56% (2018 – 59%), and an expected dividend yield of nil (2018 – nil). Included in
net earnings for year ended December 31, 2019 is an expense of $12 million (2018 - $6 million).
91
Consolidated Financial Statements
(e) 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, 2017
Redeemed
December 31, 2018 and 2019
Employee Share Purchase Plan
Outstanding
195,743
(102,570)
93,173
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 2019, the Corporation recorded compensation
expense of $1 million (2018 – $1 million) related to this plan.
NOTE 15. 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
Impact of foreign tax rates
Withholding taxes
Taxes related to prior years
Other
Income tax recovery
$
$
$
2019
(8,339 ) $
27 %
(2,252 ) $
1,597
(1,408 )
(13,549 )
1,262
(1,975 )
1,368
(14,957 ) $
2018
(323,596)
27%
(87,371)
49,455
(845)
4,861
1,061
3,803
(290)
(29,326)
In 2019, the Province of Alberta announced various reductions to corporate income tax rates, that when fully implemented over
the next three years will decrease the provincial corporate income tax rate from 12% to 8% by 2022. The impact of this rate
reduction is nominal and has been reflected in the current year tax recovery.
On December 22, 2017, the United States government enacted new tax legislation which, in addition to changing certain U.S.
federal income tax laws, reduced the U.S. federal income tax rate from 35% to 21% effective January 1, 2018. The impact of
the lower U.S. federal income tax rate on Precision’s U.S. subsidiaries was reflected as at December 31, 2017.
Precision Drilling Corporation 2019 Annual Report
92
The net deferred tax liability is comprised of the tax effect of the following temporary differences:
Deferred tax liability:
Property, plant and equipment and intangibles
Debt issue costs
Partnership deferrals
Other
Offsetting of assets and liabilities
Deferred tax assets:
Losses (expire from time to time up to 2038)
Long-term incentive plan
Other
Offsetting of assets and liabilities
$
2019
2018
426,934 $
3,280
850
7,926
438,990
(413,601 )
25,389
402,025
6,131
10,169
418,325
(413,601 )
4,724
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
Net deferred tax liability
$
20,665 $
35,899
Included in the deferred tax assets at December 31, 2019 is $5 million of tax-effected temporary differences related to the
Corporation’s international operations and at December 31, 2018, $37 million related to the Corporation’s U.S. and international
operations.
The Corporation has certain loss carryforwards in U.S. and international locations and capital loss carry forwards in Canada for
which it is unlikely that sufficient future taxable income will be available. Accordingly, the Corporation has not recognized a
deferred tax asset on these losses totaling $31 million and $33 million, respectively.
The movement in temporary differences is as follows:
Property,
Plant and
Equipment
and
Intangibles
Other
Deferred
Tax
Liabilities
Partnership
Deferrals
Debt
Issue
Costs
Long-
Term
Incentive
Plan
Other
Deferred
Tax
Assets
Net
Deferred
Tax
Liability
Losses
Balance, December 31, 2017
Recognized in net loss
Effect of foreign currency exchange
differences
Balance, December 31, 2018
Recognized in net earnings
Effect of foreign currency exchange
differences
Balance, December 31, 2019
$ 454,613 $
(9,667 )
22,163
(335 )$ 6,709 $ (368,133 )$ 3,352 $ (7,935 )
(30,660 )
(24,802 )
1,325
(239 )
2,065
—
$ (11,182 )$ 77,089
(37,899 )
(3,291 )
(139 )
(431 )
(1,005 )
—
182
18
$ 467,109 $
(26,825 )
(13,350 )
1,730 $
(880 )
—
5,722 $ (423,595 )$
2,216
(12)
7,874
13,696
3,534 $
(254 )
—
(6,849 ) $ (11,752 )$
572 1,260
323
146
35,899
(16,037 )
803
$ 426,934 $
850 $
7,926 $ (402,025 )$
3,280 $
(6,131 ) $ (10,169 )$
20,665
At December 31, 2019, Precision had unrecognized tax benefits of $nil. At December 31, 2018, Precision had $2 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 $1 million.
NOTE 16. BANK INDEBTEDNESS
At December 31, 2019, Precision had available $40 million (2018 – $40 million) and US$15 million (2018 – US$15 million) under
secured operating facilities, and a secured US$30 million (2018 – US$30 million) facility for the issuance of letters of credit and
performance and bid bonds to support international operations. As at December 31, 2019 and 2018, no amounts had been
drawn on any of the facilities. Availability of the $40 million and US$30 million facility were reduced by outstanding letters of
credit in the amount of $26 million (2018 – $28 million) and US$2 million (2018 – US$2 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 million facility are available at the bank’s prime lending rate, U.S. base rate, U.S. LIBOR rate plus 80% of
93
Consolidated Financial Statements
applicable margin, or 80% of the applicable margin for Banker’s Acceptances, or in combination, and under the US$15 million
facility at the bank’s prime lending rate.
NOTE 17. PROVISIONS AND OTHER
Balance December 31, 2017
Expensed during the year
Payment of deductibles and uninsured claims
Effects of foreign currency exchange differences
Balance December 31, 2018
Expensed during the year
Payment of deductibles and uninsured claims
Effects of foreign currency exchange differences
Balance December 31, 2019
Current
Long-term
$
$
2019
1,907 $
9,959
11,866 $
$
$
Workers’
Compensation
13,232
3,359
(4,271 )
1,053
13,373
4,047
(4,915 )
(639 )
11,866
2018
2,796
10,577
13,373
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.
NOTE 18. 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, 2017
Issued on redemption of non-management directors' DSUs
Options exercised – cash consideration
– reclassification from contributed surplus
Balance, December 31, 2018
Share repurchase
Balance, December 31, 2019
(c) Normal Course Issuer Bid
Number
293,238,858 $
476,978
66,000
—
293,781,836 $
(16,482,032 )
277,299,804 $
Amount
2,319,293
2,609
275
103
2,322,280
(25,902 )
2,296,378
In 2019, the Toronto Stock Exchange (“TSX”) approved Precision’s application to implement a Normal Course Issuer Bid
(“NCIB”). Under the terms of the NCIB, Precision may purchase and cancel up to a maximum of 29,170,887 common shares,
representing 10% of the public float of common shares at the time the NCIB was approved. The NCIB commenced on August
27, 2019 and will terminate no later than August 26, 2020. Purchases under the NCIB were made through the facilities of the
TSX, the New York Stock Exchange and various other designated exchanges in accordance with applicable regulatory
requirements at a price per common share representative of the market price at the time of acquisition. Pursuant to the NCIB,
16 million common shares were purchased and cancelled as of December 31, 2019 for $26 million. Subsequent to December
31, 2019, Precision purchased and cancelled an additional 3 million common shares, under the NCIB, for $5 million.
Precision Drilling Corporation 2019 Annual Report
94
NOTE 19. PER SHARE AMOUNTS
The following tables reconcile the net earnings (loss) and weighted average shares outstanding used in computing basic and
diluted earnings (loss) per share:
Net earnings (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 20. ACCUMULATED OTHER COMPREHENSIVE INCOME
$
2019
6,618 $
2018
(294,270 )
2019
290,782
6,397
297,179
2018
293,560
—
293,560
Unrealized
Foreign Currency
Translation Gains
(Losses)
440,733
175,630
616,363
(106,781 )
509,582
$
$
Foreign Exchange
Gain (Loss) on Net
Investment Hedge
(309,123 )
(145,226 )
(454,349 )
79,022
(375,327 )
$
$
Accumulated
Other
Comprehensive
Income
131,610
30,404
162,014
(27,759 )
134,255
$
$
December 31, 2017
Other comprehensive income
December 31, 2018
Other comprehensive loss
December 31, 2019
NOTE 21. 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 2019 was $13 million (2018 – $12 million).
NOTE 22. 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
$
$
2019
8,747 $
9,047
1,432
19,226 $
2018
6,732
5,562
722
13,016
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.
NOTE 23. CAPITAL COMMITMENTS
At December 31, 2019, the Corporation had commitments to purchase property, plant and equipment totaling $113 million (2018
– $180 million). Payments of $25 million for these commitments are expected to be made in 2020, $53 million in 2021 and $35
million in 2022.
95
Consolidated Financial Statements
NOTE 24. 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 natural 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 $12 million of the trade
receivables amount at December 31, 2019 (2018 – $18 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,
The ageing of trade receivables at December 31 was as follows:
$
$
2019
1,470 $
72
(537 )
(24 )
(52 )
929 $
2018
2,596
483
(416 )
(1,247 )
54
1,470
Not past due
Past due 0 – 30 days
Past due 31 – 120 days
Past due more than 120 days
(b) Interest Rate Risk
2019
Provision for
Gross
Impairment
$
$
144,292 $
47,965
19,166
1,303
212,726
$
1 $
8
28
892
929 $
2018
Gross
175,277 $
64,351
25,032
1,399
266,059
$
Provision for
Impairment
—
—
71
1,399
1,470
As at December 31, 2019 and 2018, 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.
Precision Drilling Corporation 2019 Annual Report
96
The following financial instruments were denominated in U.S. dollars:
2019
2018
Canadian
Operations
Foreign
Operations
Canadian
Operations
US$
Cash
Accounts receivable
Accounts payable and accrued liabilities
Long-term liabilities, excluding long-term incentive plans(1)
Net foreign currency exposure
Impact of $0.01 change in the U.S. dollar to Canadian dollar
exchange rate on net earnings (loss)
Impact of $0.01 change in the U.S. dollar to Canadian dollar
exchange rate on comprehensive loss
(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.
242
(17,730)
—
(7,761) US $
$
(78)
150,873
(86,324 )
(7,669 )
98,034 US $
$
—
41,154 US $
9,727 US $
US$
$
980
—
$
$
$
Foreign
Operations
49,302
181,609
(122,417)
(7,747)
100,747
—
957 US$
482
(20,655 )
—
(19,216 ) US$
$
(192 )
—
$
1,007
(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, 2019:
2020
2021
2022
2023
$ 199,478 $
— $
Accounts payable and accrued liabilities
—
Share based compensation
Long-term debt (1)
447,792
Interest on long-term debt (2)(3)
88,442
6,643
Commitments
Total
$ 542,877
(1) At December 31, 2019, Precision committed to redeem US$25 million of its 6.5% unsecured senior notes due 2021 in the first quarter of 2020.
(2) Calculated based on December 31, 2019 debt balance less first quarter unsecured senior notes redemptions, interest rates, and foreign exchange rates in effect as at December 31, 2019.
(3) Excludes amortization of long-term debt issue costs.
—
—
399,545
52,562
5,195
$ 457,302
5,130
32,463
95,427
36,812
$ 369,310
6,649
85,215
95,196
64,098
$ 251,158
6,026
—
89,888
45,346
$ 141,260
— $
— $
2024 Thereafter
$
Total
— $ 199,478
17,805
—
1,445,127
480,112
457,148
35,633
169,211
11,117
$ 2,288,769
$ 526,862
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, 2019
was approximately $1,428 million (2018 – $1,548 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.
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.
97
Consolidated Financial Statements
NOTE 25. 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, 2019 and 2018, these ratios were as follows:
Long-term debt
Shareholders’ equity
Total capitalization
Long-term debt to long-term debt plus equity ratio
$
$
2019
1,427,181
1,527,432
2,954,613
0.48
$
$
2018
1,706,253
1,557,752
3,264,005
0.52
As at December 31, 2019, liquidity remained sufficient as Precision had $75 million (2018 – $97 million) in cash and access to
the US$500 million Senior Credit Facility (2018 – US$500 million) and $98 million (2018 – $101 million) secured operating
facilities. As at December 31, 2019, no amounts (2018 – US$ nil) were drawn on the Senior Credit Facility with availability
reduced by US$25 million (2018 – US$28 million) in outstanding letters of credit. Availability of the $40 million secured operating
facility and US$30 million secured facility for the issuance of letters of credit and performance and bid bonds were reduced by
outstanding letters of credit of $26 million (2018 – $28 million) and US$2 million (2018 – US$2 million), respectively. There was
no amount drawn on the US$15 million secured operating facility.
NOTE 26. 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
$
$
$
$
$
$
$
2019
51,152
1,157
(61,376 )
(9,067 )
(4,493 )
(4,574 )
2019
211,797
32,167
66,240
310,204
$
$
$
$
$
2019
91,468
$
54,334
53,676
199,478
$
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
Precision presents expenses in the consolidated statements of earnings by function with the exception of depreciation and
amortization, gain on asset disposals, loss on asset decommissioning and reversal of impairment of property, plant and
equipment, which are presented by nature. Operating expense and general and administrative expense would include $282
million and $15 million (2018 – $358 million and $7 million), respectively, of depreciation and amortization, gain on asset
disposals, loss on asset decommissioning and reversal of impairment of property, plant and equipment if the statements of
Precision Drilling Corporation 2019 Annual Report
98
earnings (loss) 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
Restructuring
Other recoveries
2019
2018
697,935 $
429,365
22,115
1,149,415 $
1,038,967 $
104,010
6,438
—
1,149,415 $
728,101
422,359
15,598
1,166,058
1,067,264
111,830
1,164
(14,200 )
1,166,058
$
$
$
$
NOTE 27. 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.
99
Consolidated Financial Statements
NOTE 28. LONG-TERM DEBT GUARANTOR DISCLOSURE
Condensed Consolidated Statement of Financial Position as at December 31, 2019
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments
Total
Assets
Cash
Other current assets
Intercompany receivables
Investments in subsidiaries
Property, plant and equipment
Intangibles
Right of use assets
Other long-term assets
Total assets
Liabilities and shareholders’ equity
Current liabilities
Intercompany payables and debt
Long-term debt
Lease obligation
Other long-term liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
$
20,952
3,952
82,101
4,535,625
48,416
30,434
23,070
—
$ 4,744,550
$
33,862
2,217,790
1,427,181
20,877
26,927
3,726,637
1,017,913
$ 4,744,550
$
20,651
242,968
2,205,834
30
2,263,355
1,312
39,267
—
$ 4,773,417
$
130,232
84,901
—
31,614
18,454
265,201
4,508,216
$ 4,773,417
$
$
$
$
33,098 $
96,140
67,377
—
437,413
—
3,805
6,595
— $
4
(2,355,312)
(4,535,655)
279
—
—
(1,871)
74,701
343,064
—
—
2,749,463
31,746
66,142
4,724
$ (6,892,555) $ 3,269,840
644,428
— $
51,975 $
52,621
—
2,489
668
107,753
536,675
644,428
216,069
—
1,427,181
54,980
44,178
1,742,408
1,527,432
$ (6,892,555) $ 3,269,840
(2,355,312)
—
—
(1,871)
(2,357,183)
(4,535,372)
Condensed Consolidated 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
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
$
28,626
4,798
51,616
4,522,964
—
55,430
33,548
—
$ 4,696,982
$
42,211
1,918,306
1,706,253
88,983
3,755,753
941,229
$ 4,696,982
$
37,138
308,450
1,887,405
68
19,658
2,541,060
1,853
46,620
$ 4,842,252
$
190,239
60,101
—
13,160
263,500
4,578,752
$ 4,842,252
$
$
$
$
30,862 $
93,166
80,735
—
—
441,509
—
5,479
— $
3
(2,019,756)
(4,523,032)
—
613
—
(12,770)
96,626
406,417
—
—
19,658
3,038,612
35,401
39,329
$ (6,554,942) $ 3,636,043
651,751
— $
49,712 $
41,349
—
503
91,564
560,187
651,751
282,162
—
1,706,253
89,876
2,078,291
1,557,752
$ (6,554,942) $ 3,636,043
(2,019,756)
—
(12,770)
(2,032,526)
(4,522,416)
Precision Drilling Corporation 2019 Annual Report
100
Condensed Consolidated Statement of Net Earnings (Loss) for the year ended December 31, 2019
Revenue
Operating expense
General and administrative
Restructuring
Earnings (loss) before income taxes, equity in earnings of
subsidiaries, gain on redemption and repurchase of
unsecured senior notes, finance charges, foreign
exchange, reversal of impairment of property,
plant and equipment, loss on asset decommissioning,
gain on asset disposals and depreciation and amortization
Depreciation and amortization
Gain on asset disposals
Loss on asset decommissioning
Reversal of impairment of property, plant and equipment
Foreign exchange
Finance charges
Gain on redemption and repurchase of
unsecured senior notes
Equity in earnings of subsidiaries
Earnings (loss) before income taxes
Income taxes
Net earnings (loss)
$
Parent
92
56
38,418
2,822
(41,204)
Guarantor
Subsidiaries
$ 1,341,624
909,898
57,119
3,616
370,991
$
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments
210,292 $
139,701
8,473
—
62,118
Total
(10,688 ) $ 1,541,320
1,038,967
(10,688 )
—
104,010
—
6,438
391,905
—
13,272
(47)
—
—
(8,499)
118,775
(6,815)
262,914
(50,439)
20,263
(5,810)
(758)
(354)
—
57,205
(255 )
—
—
535
32
—
225
—
—
—
—
—
—
(102,114)
(55,776)
(62,619)
6,843
$
—
145,175
44,809
100,366
$
$
—
4,601
2,853
1,748 $
102,114
(102,339 )
—
(102,339 ) $
333,616
(50,741 )
20,263
(5,810 )
(8,722 )
118,453
(6,815 )
—
(8,339 )
(14,957 )
6,618
Condensed Consolidated Statement of Net Loss for the year ended December 31, 2018
$
Parent
104
83
52,638
—
(14,200)
(38,417)
Guarantor
Subsidiaries
$ 1,356,913
949,451
48,748
1,164
—
357,550
Non-
Guarantor
Subsidiaries
$
191,131 $
124,689
10,444
—
—
55,998
Consolidating
Adjustments
Total
(6,959) $ 1,541,189
1,067,264
(6,959)
—
111,830
—
1,164
—
(14,200 )
375,131
—
12,196
(5,314)
—
4,819
126,758
(5,672)
168,975
(340,179)
(46,125)
304,070
(6,051)
207,544
(443)
(233)
—
—
(147,337)
13,863
$ (294,054) $ (161,200) $
60,562
(19 )
—
(359 )
653
—
216
—
—
—
—
—
377,044
(11,384 )
207,544
4,017
127,178
(5,672 )
—
(4,839 )
2,936
(7,775 ) $
(168,975)
168,759
—
168,759
—
(323,596 )
(29,326 )
$ (294,270 )
Revenue
Operating expense
General and administrative
Restructuring
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, gain on asset disposals
and depreciation and amortization
Depreciation and amortization
Gain on asset disposals
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
101
Consolidated Financial Statements
Condensed Consolidated Statement of Comprehensive Income (Loss) for the year ended December 31, 2019
Net earnings
Other comprehensive income (loss)
Comprehensive income (loss)
Parent
6,843
79,022
85,865
$
$
Guarantor
Subsidiaries
100,366
$
(79,018)
21,348
$
Non-
Guarantor
Subsidiaries
$
1,748 $
(27,655 )
(25,907 ) $
$
Consolidating
Adjustments
(102,339) $
(108)
(102,447) $
Total
6,618
(27,759 )
(21,141 )
Condensed Consolidated Statement of Comprehensive Income (Loss) for the year ended December 31, 2018
Net loss
Other comprehensive income (loss)
Comprehensive income (loss)
$ (294,054 ) $ (161,200) $
(145,226 )
$ (439,280 ) $
129,804
(31,396) $
Condensed Consolidated Statement of Cash Flow for the year ended December 31, 2019
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments
168,759
636
169,395
(7,775 ) $
45,190
37,415 $
Total
$ (294,270 )
30,404
$ (263,866 )
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments
Cash provided by (used in):
Operations
Investments
Financing
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
$ (189,376 ) $
408,753
(226,379 )
(672 )
480,215
(56,937)
(438,350)
(1,415)
(7,674 )
28,626
20,952
$
(16,487)
37,138
20,651
$
$
$
(2,680 ) $
(15,337 )
21,936
(1,683 )
— $
(410,979)
410,979
—
Total
288,159
(74,500 )
(231,814 )
(3,770 )
2,236
30,862
33,098 $
—
—
— $
(21,925 )
96,626
74,701
Condensed Consolidated Statement of Cash Flow for the year ended December 31, 2018
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Consolidating
Adjustments
Cash provided by (used in):
Operations
Investments
Financing
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
$ (102,901 ) $
277,501
(169,085 )
2,268
351,782
(75,740)
(247,017)
2,691
7,783
20,843
28,626
$
31,716
5,422
37,138
$
$
$
44,453 $
(16,253 )
(39,285 )
3,131
— $
(286,302)
286,302
—
Total
293,334
(100,794 )
(169,085 )
8,090
(7,954 )
38,816
30,862 $
—
—
— $
31,545
65,081
96,626
Precision Drilling Corporation 2019 Annual Report
102
NOTE 29. 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 Holdings Company
Precision Drilling Company LP
Precision Completion & Production Services Ltd.
Precision Directional Services, Inc.
Grey Wolf Drilling Limited
Grey Wolf Drilling (Barbados) Ltd.
Country of
Incorporation
Canada
Canada
Canada
Canada
United States
United States
United States
United States
United States
Barbados
Barbados
Ownership Interest
2019
100
100
100
100
100
100
100
100
100
100
100
2018
100
100
100
100
100
100
100
100
100
100
100
103
Consolidated Financial Statements
SUPPLEMENTAL INFORMATION
CONSOLIDATED STATEMENTS OF NET 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 income taxes, loss on redemption and
repurchase of unsecured senior notes, finance charges, foreign
exchange, gain on re-measurement of property, plant and
equipment, impairment of goodwill, impairment (reversal of
impairment) of property, plant and equipment, loss on asset
decommissioning, loss (gain) on asset disposals and depreciation
and amortization
Depreciation and amortization
Loss (gain) on asset disposals
Loss on asset decommissioning
Impairment (reversal of impairment) of property, plant and equipment
Impairment of goodwill
Gain on re-measurement of property, plant and equipment
Foreign exchange
Finance charges
Loss on redemption and repurchase of unsecured senior notes
Earnings (loss) before income tax
Income taxes
Net earnings (loss)
Earnings (loss) per share:
Basic
Diluted
2019
1,541
2018
1,541
$
2017
1,321
2016
$ 1,003
$
$
$
1,039
104
6
—
392
1,067
112
1
(14 )
375
926
90
—
305
662
107
6
228
2015
1,635
1,021
119
21
474
334
(51)
20
(6)
—
—
(9)
118
(6)
(8)
(15)
7
$
377
(11 )
—
—
207
—
4
127
(6 )
(323 )
(29 )
$
(294 ) $
384
(6 )
—
15
—
—
(3 )
138
9
(232 )
(100 )
(132 )
$
402
(10)
—
—
—
(8)
6
147
—
(309)
(153)
(156) $
486
1
166
282
17
—
(33)
121
—
(566)
(203)
(363)
0.02
0.02
(1.00 )
(1.00 )
(0.45 )
(0.45 )
(0.53)
(0.53)
(1.24)
(1.24)
(1) For years prior to 2017 comparatives have been changed to conform to current year presentation.
Precision Drilling Corporation 2019 Annual Report
104
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)
2019
0.5
0.2
0.5
202
1.9
2,749
3,270
1,427
1,527
0.5
0.8
70
392
25.4%
95
6.2
288
0.99
0.97
5.51
90.5
291
$
$
$
$
$
$
$
$
$
$
$
$
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 )
(12.8 )
293
1.00
1.00
5.31
(3.8 )
294
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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 )
$
(6.7 )
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 ) $
(15.6 )
123
$
$
$
$
$
$
0.40
0.40
6.17
(8.5 )
293
$
$
$
0.42
0.42
6.69
(13.8 )
293
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)
(29.2)
517
1.77
1.77
7.24
(4.4)
293
(1) Return on sales was calculated by dividing net 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
105
Supplemental Information
SHAREHOLDER INFORMATION
STOCK EXCHANGE LISTINGS
Our shares are listed on the Toronto
Stock Exchange under
trading
symbol PD and on the New York Stock
trading symbol
Exchange under
PDS.
the
the
TRANSFER AGENT AND
REGISTRAR
Computershare Trust Company of
Canada
Calgary, Alberta
TRANSFER POINT
Computershare Trust Company NA
Canton, Massachusetts
2019 TRADING PROFILE
Toronto (TSX: PD)
High: $4.05
Low: $1.32
Close: $1.81
Volume Traded: 350,998,252
New York (NYSE: PDS)
High: US$3.01
Low: US$0.99
Close: US$1.38
Volume Traded: 262,808,200
ACCOUNT QUESTIONS
ONLINE INFORMATION
related
Our transfer agent can help you with
shareholder
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,
Tower
North
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
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
form and management
information
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 2019 annual
information
the
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 2019 Annual Report
106
OFFICERS
Kevin A. Neveu
President a nd
Chief Executive Officer
Veronica H. Foley
Senior Vice President, General
Counsel and Corporate Secretary
LEAD BANK
Royal Bank of
Canada
Calgary, Alberta
AUDITORS
KPMG LLP
Calgary, Alberta
Carey T. Ford
Senior Vice President and
Chief Financial Officer
Shuja U. Goraya
Chief Technology Officer
Darren J. Ruhr
Chief Administrative Officer
Gene C. Stahl
Chief Marketing Officer
HEAD OFFICE
Suite 800, 525 – 8th
Avenue SW Calgary,
Alberta, Canada
T2P 1G1
Telephone: 403.716.4500
Email:
info@precisiondrilling.com
www.precisiondrilling.com
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
107
Supplemental Information