EX-99.1 4 exh_991.htm EXHIBIT 99.1

Exhibit 99.1

Precision Drilling Corporation

Third Quarter Report for the three and nine months ended September 30, 2018 and 2017

MANAGEMENT’S DISCUSSION AND ANALYSIS

Management’s Discussion and Analysis for the three-month and nine-month periods ended September 30, 2018 of Precision Drilling Corporation (“Precision” or the “Corporation”) prepared as at October 24, 2018 focuses on the unaudited Interim Consolidated Financial Statements and related notes and pertains to known risks and uncertainties relating to the oilfield services sector. This discussion should not be considered all-inclusive as it does not include all changes regarding general economic, political, governmental and environmental events. This discussion should be read in conjunction with the Corporation’s 2017 Annual Report, Annual Information Form, unaudited September 30, 2018 Interim Consolidated Financial Statements and related notes.

This report contains “forward-looking information and statements” within the meaning of applicable securities laws. For a full disclosure of the forward-looking information and statements and the risks to which they are subject, see the “Cautionary Statement Regarding Forward-Looking Information and Statements” on page 15 of this report. This report contains references to Adjusted EBITDA, Covenant EBITDA, Operating Earnings (Loss), Funds Provided by (Used in) Operations and Working Capital. These terms do not have standardized meanings prescribed under International Financial Reporting Standards (IFRS) and may not be comparable to similar measures used by other companies, see “Non-GAAP Measures” on page 14 of this report.

Precision Drilling announces 2018 third quarter financial results:

Revenue of $382 million was an increase of 22% over the prior year comparative quarter.

Net loss of $31 million ($0.10 per share) compares to a net loss of $26 million ($0.09 per share) in the third quarter of 2017.

Earnings before income taxes, loss on repurchase and redemption of unsecured senior notes, finance charges, foreign exchange and depreciation and amortization (adjusted EBITDA see “NON-GAAP MEASURES”) of $81 million was 11% higher than the third quarter of 2017.

Funds provided by operations (see “NON-GAAP MEASURES”) of $64 million versus $85 million in the prior year comparative quarter.

Third quarter ending cash balance was $110 million, up $45 million from December 31, 2017.

Third quarter capital expenditures were $29 million.

On October 5, we announced that we had entered into an arrangement agreement with Trinidad Drilling Limited (Trinidad) pursuant to which Precision agreed to acquire all the issued and outstanding common shares of Trinidad on the basis of 0.445 common shares of Precision for each outstanding Trinidad share. The aggregate transaction value is approximately $1,028 million, based on Precision’s share price as of October 4, 2018 and including the assumption of approximately $477 million in Trinidad net debt as of June 30, 2018. Upon completion of the transaction, existing holders of Trinidad shares will collectively own 29.1% of Precision. The transaction provides for payment of a non-completion fee of $20 million by Trinidad in certain circumstances if the transaction is not completed.

SELECT FINANCIAL AND OPERATING INFORMATION

Adjusted EBITDA and funds provided by operations are Non-GAAP measures. See “NON-GAAP MEASURES.”

Financial Highlights

	Three months ended September 30,									Nine months ended September 30,
(Stated in thousands of Canadian dollars, except per share amounts)	2018			2017			% Change			2018			2017			% Change
Revenue		382,457			314,504			21.6			1,114,179			974,037			14.4
Adjusted EBITDA⁽¹⁾		80,988			73,239			10.6			240,639			214,067			12.4
Net loss		(30,648	)		(26,287	)		16.6			(95,942	)		(85,031	)		12.8
Cash provided by operations		31,961			56,757			(43.7	)		199,845			93,266			114.3
Funds provided by operations⁽¹⁾		64,368			85,140			(24.4	)		218,619			155,612			40.5
Capital spending:
Expansion		9,909			2,336			324.2			26,380			10,980			140.3
Upgrade		11,545			7,168			61.1			28,355			34,102			(16.9	)
Maintenance and infrastructure		6,913			6,257			10.5			30,247			12,238			147.2
Intangibles		660			6,757			(90.2	)		10,880			15,727			(30.8	)
Proceeds on sale		(3,757	)		(4,273	)		(12.1	)		(12,437	)		(10,054	)		23.7
Net capital spending		25,270			18,245			38.5			83,425			62,993			32.4
Net loss per share:
Basic and diluted		(0.10	)		(0.09	)		11.1			(0.33	)		(0.29	)		13.8

(1)

See “NON-GAAP MEASURES”.

Operating Highlights

	Three months ended September 30,							Nine months ended September 30,
	2018		2017		% Change			2018		2017		% Change
Contract drilling rig fleet		257		256		0.4			257		256		0.4
Drilling rig utilization days:
Canada		4,798		4,487		6.9			14,100		13,945		1.1
U.S.		7,013		5,593		25.4			19,396		15,114		28.3
International		736		736		-			2,184		2,184		-
Revenue per utilization day:
Canada⁽¹⁾ (Cdn$)		19,538		19,980		(2.2	)		21,273		21,092		0.9
U.S.⁽²⁾ (US$)		21,399		19,026		12.5			21,296		19,732		7.9
International (US$)		50,007		50,528		(1.0	)		49,959		50,214		(0.5	)
Operating cost per utilization day:
Canada (Cdn$)		14,164		13,656		3.7			14,294		13,764		3.9
U.S. (US$)		14,151		12,591		12.4			14,071		13,917		1.1
Service rig fleet		210		210		-			210		210		-
Service rig operating hours		37,169		42,653		(12.9	)		121,694		128,523		(5.3	)
Revenue per operating hour (Cdn$)		708		638		11.0			696		635		9.6

(1)

Includes lump sum revenue from contract shortfall for the nine months ended September 30, 2018 and prior year comparatives.

(2)

2017 comparative periods include revenue from idle but contracted rig days.

Financial Position

(Stated in thousands of Canadian dollars, except ratios)	September 30, 2018		December 31, 2017
Working capital⁽¹⁾		223,024		232,121
Cash		109,762		65,081
Long-term debt⁽²⁾		1,698,651		1,730,437
Total long-term financial liabilities		1,718,653		1,754,059
Total assets		3,785,874		3,892,931
Long-term debt to long-term debt plus equity ratio		0.50		0.49

(1)

See “NON-GAAP MEASURES”.

(2)

Net of unamortized debt issue costs.

Summary for the three months ended September 30, 2018:

Revenue this quarter was $382 million which is 22% higher than the third quarter of 2017. The increase in revenue is primarily the result of higher activity and higher average day rates in our U.S. contract drilling business. Compared with the third quarter of 2017 our activity for the quarter, as measured by drilling rig utilization days increased 25% and 7% in the U.S. and Canada, respectively, and remained consistent internationally. Revenue from our Contract Drilling Services segment increased over the comparative prior year period by 25% while revenue in our Completion and Production Services segment was down 4%.

Adjusted EBITDA (see “NON-GAAP MEASURES”) this quarter of $81 million is an increase of $8 million from the third quarter of 2017. Our adjusted EBITDA as a percentage of revenue was 21% this quarter, compared with 23% in the comparative quarter of 2017. Adjusted EBITDA this quarter was positively impacted by higher activity and day rates in the U.S. offset by higher share-based incentive compensation from an increase in the Corporation’s share price versus the comparative prior year period. Total share-based incentive compensation expensed in the quarter was $8 million compared to $2 million in the third quarter of 2017. See discussion on share-based incentive compensation under “Other Items” later in this report for additional details.

Operating loss (see “NON-GAAP MEASURES”) this quarter was $10 million compared with an operating loss of $17 million in the third quarter of 2017. Operating results this quarter were positively impacted by the increase in activity and average day rates in our U.S. contract drilling business.

General and administrative expenses this quarter were $30 million, $8 million higher than the third quarter of 2017. The increase is due to higher share-based incentive compensation expense tied to the price of our common shares (see “Other Items” later in this report) partially offset by a strengthening of the Canadian dollar on our U.S. dollar denominated costs.

Net finance charges were $31 million, a decrease of $1 million compared with the third quarter of 2017, primarily due to a reduction in interest expense related to debt retired in the fourth quarter of 2017 and the second quarter of 2018 and the impact of the strengthening of the Canadian dollar on our U.S. dollar denominated interest.

In Canada, average revenue per utilization day for contract drilling rigs was $19,538 in the third quarter compared to $19,980 in the third quarter of 2017. Overall, shortfall payments received in the prior year comparative quarter were largely offset by higher spot market day rates in the current quarter. During the quarter, we did not recognize any shortfall payments in revenue compared with $5 million in the prior year comparative period. Excluding the impact of shortfall payment revenue, average day rates were up 4%. Revenue per utilization day in the U.S. increased in the third quarter of 2018 to US$21,399 from US$19,026 in the prior year third quarter. The increase in the U.S. revenue rate was the result of higher day rates. During the quarter, we had turnkey revenue of US$0.4 million compared with nil in the 2017 comparative period and revenue from idle but contracted rigs of US$0.3 million compared with nil in the prior year comparative period. On a sequential basis, revenue per utilization day excluding revenue from turnkey and idle but contracted rigs increased by US$1,085 due to higher fleet average day rates.

Average operating costs per utilization day for drilling rigs in Canada increased to $14,164 compared with the prior year third quarter of $13,656. The increase in average costs was due to timing of equipment certification costs. On a sequential basis, operating costs per day decreased by $2,548 compared to the second quarter of 2018 due to higher fixed cost absorption from higher activity coming out of spring break-up. In the U.S., operating costs for the quarter on a per day basis increased to US$14,151 in 2018 compared with US$12,591 in 2017 due to costs associated with reactivating and restocking rigs, timing of repair costs and higher labour-related costs due to crew configuration. On a sequential basis, operating costs per day increased by $125 compared to the second quarter of 2018 as higher rig operating costs were partially offset by no turnkey activity in the current period.

We realized revenue from international contract drilling of US$37 million in the third quarter of 2018, in-line with the prior year period. Average revenue per utilization day in our international contract drilling business was US$50,007 consistent with the comparable prior year quarter.

Directional drilling services realized revenue of $7 million in the third quarter of 2018 compared with $6 million in the prior year period.

Funds provided by operations (see “NON-GAAP MEASURES”) in the third quarter of 2018 were $64 million, a decrease of $21 million from the prior year comparative quarter of $85 million. The decrease was primarily the result of the timing of interest payments and tax refunds received in the prior year comparative period partially offset by improved operating results.

Capital expenditures were $29 million in the third quarter, an increase of $7 million over the same period in 2017. Capital spending for the quarter included $21 million for upgrade and expansion capital, $7 million for the maintenance of existing assets and infrastructure spending and $1 million for intangibles related to a new ERP system.

Summary for the nine months ended September 30, 2018:

•

Revenue for the first nine months of 2018 was $1,114 million, an increase of 14% from the 2017 period.

•

Operating loss (see “NON-GAAP MEASURES”) was $26 million, a decrease of $43 million over the same period in 2017. Operating loss was 2% of revenue in 2018 compared with 7% of revenue in 2017. Operating results this year were positively impacted by increased activity and pricing in our North American contract drilling businesses.

•

General and administrative costs were $91 million, an increase of $23 million from 2017. The increase was due to higher share-based incentive compensation that is tied to the price of our common shares (see “Other Items” later in this report) partially offset by the strengthening of the Canadian dollar on our U.S. dollar denominated costs.

•

Net finance charges were $95 million, a decrease of $5 million from 2017 primarily due to a reduction in interest expense related to debt retired in 2017 and the effect of a stronger Canadian dollar on our U.S. dollar denominated interest expense partially offset by higher interest income earned in the comparative period.

•

Funds provided by operations (see “NON-GAAP MEASURES”) in the first nine months of 2018 were $219 million, an increase of $63 million from the prior year comparative period of $156 million.

•

Capital expenditures for the purchase of property, plant and equipment were $96 million for the nine months of 2018, an increase of $23 million over the same period in 2017. Capital spending for 2018 to date includes $55 million for upgrade and expansion capital, $30 million for the maintenance of existing assets and infrastructure and $11 million for intangibles related to a new ERP system.

STRATEGY

Precision’s strategic priorities for 2018 are as follows:

Reduce debt by generating free cash flow while continuing to fund only the most attractive investment opportunities – we generated $219 million in funds provided by operations (see “NON-GAAP MEASURES”) in the first nine months of 2018, representing a $63 million increase over the prior year comparative period. Utilizing cash generated in the first nine months of 2018, we reduced debt by $77 million through a partial redemption of our 2021 unsecured senior notes and open market debt repurchases of our 2021 and 2024 notes. We communicated a firm goal to reduce debt by $75 to $125 million in 2018 and have successfully achieved the low end of that range in the first nine months of this year. We expect to achieve the upper range of our debt reduction target for 2018. In addition, we ended the third quarter with $110 million of cash on the balance sheet.

Reinforce Precision’s High Performance competitive advantage by deploying Process Automation Controls (PAC), Directional Guidance Systems (DGS) and Drilling Performance Apps (Apps) on a wide scale basis – year to date in 2018 we have drilled over 100 wells using our DGS compared to 58 wells in all of 2017. We have 25 rigs currently running in the field with PAC and have drilled approximately 290 wells with this technology in 2018 compared to 154 in all of 2017. Earlier this year we also equipped our training rigs in Nisku and Houston with PAC technology. Customer adoption is rising, and we expect to be running a total of 31 systems in the field by year end, continuing full scale deployment and commercialization. Additionally, we are deploying revenue generating Apps on several rigs and currently have 15 Apps in varying stages of commercial development showcasing the open platform of our PAC system. Several Apps are customer-built and supported by Precision’s PAC platform with specific hosting agreements in place.

Enhance financial performance through higher utilization and improved operating margins – in the first nine months of 2018 overall utilization days are 14% higher than the prior year comparative period while average operating margins (revenue less operating costs) are up 24%, 4% and 5% in our U.S., international and Canadian contract drilling businesses, respectively.

OUTLOOK

For the third quarter of 2018, the average West Texas Intermediate (WTI) price of oil was 45% higher than the prior year comparative period while the average Henry Hub gas price was in-line and the average AECO price was 25% lower. According to the Petroleum Services Society of Canada for the year to date period ending October 22, 2018 Western Canada Select traded at an average discount to WTI of $33.80 per barrel and was trading at a discount of $56.74 on October 22, 2018.

	Three months ended September 30,				Year ended December 31,
	2018		2017		2017
Average oil and natural gas prices
Oil
West Texas Intermediate (per barrel) (US$)		69.77		48.03		50.95
Natural gas
Canada
AECO (per MMBtu) (CDN$)		1.24		1.66		2.16
United States
Henry Hub (per MMBtu) (US$)		2.93		2.93		2.98

Contracts

Year to date in 2018 we have entered into 54 term contracts. The following chart outlines the average number of drilling rigs by quarter that we had under contract for 2018 and 2019 as of October 24, 2018.

	Average for the quarter ended 2018								Average for the quarter ended 2019
	Mar. 31		June 30		Sept. 30		Dec. 31		Mar. 31		June 30		Sept. 30		Dec. 31
Average rigs under term contract as of October 24, 2018:
Canada		8		9		9		11		8		7		7		6
U.S.		36		48		50		48		37		23		14		10
International		8		8		8		8		6		5		5		5
Total		52		65		67		67		51		35		26		21

The following chart outlines the average number of drilling rigs that we had under contract for 2017 and the average number of rigs we have under contract for 2018 and 2019 as of October 24, 2018.

	Average for the year ended
	2017		2018		2019
Average rigs under term contract as of October 24, 2018:
Canada		20		9		7
U.S.		29		45		21
International		8		7		5
Total		57		61		33

In Canada, term contracted rigs normally generate 250 utilization days per year because of the seasonal nature of well site access. In most regions in the U.S. and internationally, term contracts normally generate 365 utilization days per year.

Drilling Activity

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

	Average for the quarter ended 2017								2018
	Mar. 31		June 30		Sept. 30		Dec. 31		Mar. 31		June 30		Sept. 30
Average Precision active rig count:
Canada		76		29		49		54		72		31		52
U.S.		47		59		61		58		64		72		76
International		8		8		8		8		8		8		8
Total		131		96		118		120		144		111		136

For the first nine months of 2018, drilling activity has increased relative to this time last year in the U.S. and is down slightly in Canada. According to industry sources, as of October 19, 2018, the U.S. active land drilling rig count was up approximately 18% from the same point last year and the Canadian active land drilling rig count was down approximately 5%. To date in 2018, approximately 64% of the Canadian industry’s active rigs and 81% of the U.S. industry’s active rigs were drilling for oil targets, compared with 53% for Canada and 80% for the U.S. at the same time last year.

Industry Conditions

We expect Tier 1 rigs to remain the preferred rigs of customers globally. The economic value created by the significant drilling and mobility efficiencies delivered by the most advanced XY pad walking rigs has been highlighted and widely accepted by our customers. The trend to longer-reach horizontal completions and importance of the rig delivering these complex wells consistently and efficiently has been well established by the industry. We expect demand for leading edge high efficiency Tier 1 rigs will continue to strengthen, as drilling rig capability has been a key economic facilitator of horizontal/unconventional resource exploitation. Development and field application of drilling equipment process automation coupled with closed loop drilling controls and de-manning of rigs will continue this technical evolution while creating further cost efficiencies and performance value for customers.

Capital Spending

Capital spending in 2018 is expected to be $135 million and includes $52 million for sustaining and infrastructure, $71 million for upgrade and expansion and $12 million on intangibles related to a new ERP system. We expect that the $135 million will be split $115 million in the Contract Drilling Services segment, $6 million in the Completion and Production Services segment and $14 million to the Corporate segment.

SEGMENTED FINANCIAL RESULTS

Precision’s operations are reported in two segments: Contract Drilling Services, which includes the drilling rig, directional drilling, oilfield supply and manufacturing divisions; and Completion and Production Services, which includes the service rig, snubbing, rental, camp and catering and wastewater treatment divisions.

	Three months ended September 30,									Nine months ended September 30,
(Stated in thousands of Canadian dollars)	2018			2017			% Change			2018			2017			% Change
Revenue:
Contract Drilling Services		347,494			278,569			24.7			1,004,649			864,957			16.2
Completion and Production Services		36,297			37,816			(4.0	)		114,045			113,546			0.4
Inter-segment eliminations		(1,334	)		(1,881	)		(29.1	)		(4,515	)		(4,466	)		1.1
		382,457			314,504			21.6			1,114,179			974,037			14.4
Adjusted EBITDA:⁽¹⁾
Contract Drilling Services		95,596			81,994			16.6			290,003			242,690			19.5
Completion and Production Services		4,628			4,251			8.9			7,870			9,174			(14.2	)
Corporate and Other		(19,236	)		(13,006	)		47.9			(57,234	)		(37,797	)		51.4
		80,988			73,239			10.6			240,639			214,067			12.4

(1)

See “NON-GAAP MEASURES”.

SEGMENT REVIEW OF CONTRACT DRILLING SERVICES

	Three months ended September 30,								Nine months ended September 30,
(Stated in thousands of Canadian dollars, except where noted)	2018			2017			% Change		2018			2017			% Change
Revenue		347,494			278,569			24.7		1,004,649			864,957			16.2
Expenses:
Operating		242,792			189,143			28.4		686,948			598,040			14.9
General and administrative		9,106			7,432			22.5		27,698			24,227			14.3
Adjusted EBITDA⁽¹⁾		95,596			81,994			16.6		290,003			242,690			19.5
Depreciation		80,742			80,653			0.1		238,621			251,907			(5.3	)
Operating earnings (loss)⁽¹⁾		14,854			1,341			1,007.7		51,382			(9,217	)		(657.5	)
Operating earnings (loss)⁽¹⁾ as a percentage of revenue		4.3	%		0.5	%				5.1	%		(1.1	)%

(1)

See “NON-GAAP MEASURES”.

	Three months ended September 30,
Canadian onshore drilling statistics:⁽¹⁾	2018						2017
	Precision			Industry⁽²⁾			Precision			Industry⁽²⁾
Number of drilling rigs (end of period)		135			604			136			634
Drilling rig operating days (spud to release)		4,279			16,875			3,998			16,288
Drilling rig operating day utilization		35	%		30	%		32	%		28	%
Number of wells drilled		520			2,046			451			1,977
Average days per well		8.2			8.2			8.9			8.2
Number of metres drilled (000s)		1,313			5,502			1,123			5,179
Average metres per well		2,526			2,689			2,490			2,620
Average metres per day		307			326			281			318

	Nine months ended September 30,
Canadian onshore drilling statistics:⁽¹⁾	2018						2017
	Precision			Industry⁽²⁾			Precision			Industry⁽²⁾
Number of drilling rigs (end of period)		135			604			136			634
Drilling rig operating days (spud to release)		12,459			49,256			12,398			49,889
Drilling rig operating day utilization		34	%		29	%		34	%		29	%
Number of wells drilled		1,262			5,179			1,282			5,285
Average days per well		9.9			9.5			9.7			9.4
Number of metres drilled (000s)		3,542			14,704			3,352			14,267
Average metres per well		2,806			2,839			2,615			2,700
Average metres per day		284			299			270			286

(1)

Canadian operations only.

(2)

Canadian Association of Oilwell Drilling Contractors (“CAODC”), and Precision – excludes non-CAODC rigs and non-reporting CAODC members.

United States onshore drilling statistics:⁽¹⁾	2018				2017
	Precision		Industry⁽²⁾		Precision		Industry⁽²⁾
Average number of active land rigs for quarters ended:
March 31		64		951		47		722
June 30		72		1,021		59		874
September 30		76		1,032		61		927
Year to date average		71		1,001		55		841

(1)

United States lower 48 operations only.

(2)

Baker Hughes rig counts.

Revenue from Contract Drilling Services was $347 million this quarter, or 25% higher than the third quarter of 2017, while adjusted EBITDA (see “NON-GAAP MEASURES”) increased by 17% to $96 million. The increase in revenue was primarily due to higher utilization days as well as higher spot market rates in the U.S. During the quarter we did not recognize any shortfall payments in our Canadian contract drilling business compared with $5 million in the prior year comparative period. In the U.S. we recognized turnkey revenue of US$0.4 million compared with nil in the comparative period and we recognized US$0.3 million in idle but contracted revenue compared with nil in the comparative quarter of 2017.

Drilling rig utilization days in Canada (drilling days plus move days) were 4,798 during the third quarter of 2018, an increase of 7% compared to 2017 primarily due to increased industry activity despite wet weather in September which delayed certain rigs from moving to new rig locations. Drilling rig utilization days in the U.S. were 7,013, or 25% higher than the same quarter of 2017 as our U.S. activity was up with higher industry activity. Drilling rig utilization days in our international business were 736, in-line with the same quarter of 2017.

Compared with the same quarter in 2017, drilling rig revenue per utilization day in Canada decreased 2% as lower shortfall revenue in the current quarter was partially offset by increases in spot market compared with the prior period. Drilling rig revenue per utilization day for the quarter in the U.S. was up 12% compared to prior year as we realized higher average day rates. International revenue per utilization day was in-line with the prior year comparative period.

In Canada, 11% of our utilization days in the quarter were generated from rigs under term contract, compared with 18% in the third quarter of 2017. In the U.S., 67% of utilization days were generated from rigs under term contract as compared with 55% in the third quarter of 2017.

Operating costs were 70% of revenue for the quarter, two percentage points higher than the prior year period. On a per utilization day basis, operating costs for the drilling rig division in Canada were higher than the prior year period due to timing of equipment certification costs to prepare rigs for upcoming winter work. In the U.S., operating costs for the quarter on a per day basis were higher than the prior year period primarily due to costs associated with reactivating and restocking rigs, timing of repair costs and higher labour-related costs due crew configuration.

Depreciation expense in the quarter was in-line with the third quarter of 2017.

SEGMENT REVIEW OF COMPLETION AND PRODUCTION SERVICES

	Three months ended September 30,									Nine months ended September 30,
(Stated in thousands of Canadian dollars, except where noted)	2018			2017			% Change			2018			2017			% Change
Revenue		36,297			37,816			(4.0	)		114,045			113,546			0.4
Expenses:
Operating		30,138			31,674			(4.8	)		100,216			98,773			1.5
General and administrative		1,531			1,891			(19.0	)		5,959			5,599			6.4
Adjusted EBITDA⁽¹⁾		4,628			4,251			8.9			7,870			9,174			(14.2	)
Depreciation		6,641			6,731			(1.3	)		18,528			21,228			(12.7	)
Operating loss⁽¹⁾		(2,013	)		(2,480	)		(18.8	)		(10,658	)		(12,054	)		(11.6	)
Operating loss⁽¹⁾ as a percentage of revenue		(5.5	)%		(6.6	)%					(9.3	)%		(10.6	)%
Well servicing statistics:
Number of service rigs (end of period)		210			210			-			210			210			-
Service rig operating hours		37,169			42,653			(12.9	)		121,694			128,523			(5.3	)
Service rig operating hour utilization		19	%		22	%		(13.6	)		21	%		22	%		(4.5	)
Service rig revenue per operating hour		708			638			11.0			696			635			9.6

(1)

See “NON-GAAP MEASURES”.

Revenue from Completion and Production Services was down $2 million or 4% compared with the third quarter of 2017 due to lower activity in our Canadian well servicing and rental businesses partially offset by higher camp activity. Our service rig operating hours in the quarter were down 13% from the third quarter of 2017 while rates increased an average of 11%. Approximately 97% of our third quarter Canadian service rig activity was oil related.

During the quarter, Completion and Production Services generated 92% of its revenue from Canadian operations and 8% from U.S. operations compared with the third quarter of 2017 where 90% of revenue was generated in Canada and 10% in the U.S.

Average service rig revenue per operating hour in the quarter was $708 or $70 higher than the third quarter of 2017. The increase was primarily the result of increased costs passed through to the customer.

Adjusted EBITDA (see “NON-GAAP MEASURES”) was higher than the third quarter of 2017 primarily because of higher average rates and improved cost structure, slightly offset by lower activity.

Operating costs as a percentage of revenue was 83% compared with the prior year comparative quarter of 84%.

Depreciation in the quarter was in-line with the prior year comparative period.

SEGMENT REVIEW OF CORPORATE AND OTHER

Our Corporate and Other segment provides support functions to our operating segments. The Corporate and Other segment had an adjusted EBITDA (see “NON-GAAP MEASURES”) loss of $19 million, a $6 million increase compared with the third quarter of 2017 primarily due to higher share-based incentive compensation (see “Other Items” later in this report) and costs incurred associated with our arrangement agreement with Trinidad.

OTHER ITEMS

Share-based Incentive Compensation Plans

We have several cash-settled share-based incentive plans for non-management directors, officers, and other eligible employees. The fair values of the amounts payable under these plans are recognized as an expense with a corresponding increase in liabilities over the period that the participant becomes entitled to payment. The recorded liability is re-established at the end of each reporting period until settlement with the resultant change to fair value of the liability recognized in net earnings (loss) for the period.

We also have two equity-settled share-based incentive plans. Under the Executive Performance Share plan, which commenced in May 2017, the fair value of the PSUs granted is calculated at the date of grant using a Monte Carlo simulation, and that value is recorded as compensation expense over the grant's vesting period with an offset to contributed surplus. Upon redemption of the PSUs into common shares, the associated amount is reclassified from contributed surplus to shareholders' capital. The share option plan is treated similarly, except that the fair value of the share purchased options granted are valued using the Black-Scholes option pricing model and consideration paid by employees upon exercise of the equity purchase options are recognized in share capital.

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

	Three months ended September 30,				Nine months ended September 30,
(Stated in thousands of Canadian dollars)	2018		2017		2018		2017
Cash settled share-based incentive plans		5,128		770		20,599		(1,544	)
Equity settled share-based incentive plans:
Executive PSU		1,595		540		4,344		1,361
Stock option plan		937		823		2,655		2,543
Total share-based incentive compensation plan expense		7,660		2,133		27,598		2,360

Allocated:
Operating		2,292		691		9,093		1,125
General and Administrative		5,368		1,442		18,505		1,235
		7,660		2,133		27,598		2,360

Cash settled shared-based compensation expense increased $4 million in the current quarter to $5 million compared to $1 million in the same quarter in 2017. The increase is primarily due to the increasing share price experienced in the current quarter compared to a declining share price in the comparative 2017 period.

Executive PSU share-based incentive compensation expense for the quarter was $2 million compared to $1 million in the same quarter in 2017. This increase is a result of the plan being implemented part way through the second quarter in 2017 and from additional grants in 2018.

Financing Charges

Net financial charges for the quarter were $31 million, a decrease of $1 million compared with the third quarter of 2017 primarily because of a stronger Canadian dollar on our U.S. dollar denominated interest expense and a reduction in interest expense related to debt retired in the fourth quarter of 2017 and the second quarter of 2018.

Income Tax

Income tax expense for the quarter was a recovery of $9 million compared with a recovery of $23 million in the same quarter in 2017. The recoveries are due to negative pretax earnings.

LIQUIDITY AND CAPITAL RESOURCES

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

Our maintenance capital expenditures are tightly governed 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 and upgrade rig programs provide more certainty of future revenues and return on our capital investments.

Liquidity

Amount	Availability	Used for	Maturity
Senior facility (secured)
US$500 million⁽¹⁾ (extendible, revolving term credit facility with US$250 million⁽²⁾ accordion feature)	Undrawn, except US$28 million in outstanding letters of credit	General corporate purposes	November 21, 2021
Operating facilities (secured)
$40 million	Undrawn, except $26 million in outstanding letters of credit	Letters of credit and general corporate purposes
US$15 million	Undrawn	Short term working capital requirements
Demand letter of credit facility (secured)
US$30 million	Undrawn, except US$3 million in outstanding letters of credit	Letters of credit
Senior notes (unsecured)
US$196 million – 6.5%	Fully drawn	Capital expenditures and general corporate purposes	December 15, 2021
US$350 million – 7.75%	Fully drawn	Debt redemption and repurchases	December 15, 2023
US$395 million – 5.25%	Fully drawn	Capital expenditures and general corporate purposes	November 15, 2024
US$400 million – 7.125%	Fully drawn	Debt redemption and repurchases	January 15, 2026

(1)

Upon closing of the arrangement agreement to acquire Trinidad we have a commitment from one of our lenders to increase the size of our revolving credit facility to US$600 million.

(2)

Increases to US$300 million at the end of the covenant relief period of March 31, 2019.

As at September 30, 2018, we had $1,724 million outstanding under our unsecured senior notes. The current blended cash interest cost of our debt is approximately 6.6%.

In the second quarter we redeemed US$50 million of our 6.5% unsecured senior notes due 2021 and repurchased and cancelled US$3 million principal amount of our 2021 notes and US$5 million principal of our 2024 notes.

Covenants

Following is a listing of our currently applicable financial covenants and the calculations as at September 30, 2018.

	Covenant		As at September 30, 2018
Senior Facility
Consolidated senior debt to consolidated covenant EBITDA⁽¹⁾		<2.50		0.00
Consolidated covenant EBITDA to consolidated interest expense⁽¹⁾		>2.00		2.52
Senior Notes
Consolidated interest coverage ratio		>2.00		2.46

(1)

For purposes of calculating the leverage ratio consolidated senior debt only includes secured indebtedness.

At September 30, 2018, we were in compliance with the covenants of our senior credit facility and unsecured senior notes.

Senior Facility

The senior credit facility requires that we comply with certain covenants including a leverage ratio of consolidated senior debt to consolidated Covenant EBITDA (see “NON-GAAP MEASURES”) of less than 2.5:1. For purposes of calculating the leverage ratio consolidated senior debt only includes secured indebtedness.

Under the senior credit facility, we are required to maintain a ratio of consolidated Covenant EBITDA (see “NON-GAAP MEASURES”) to consolidated interest expense for the most recent four consecutive quarters, of greater than 2.0:1 for the periods ending September 30, and December 31, 2018 and March 31, 2019. For periods ending after March 31, 2019 the ratio reverts to 2.5:1.

The senior credit facility prevents us from making distributions prior to April 1, 2019, after which, distributions are subject to a pro forma consolidated 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 consolidated senior net leverage covenant ratio 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, undertake 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 senior notes require that we comply with financial covenants including an incurrence based consolidated interest coverage ratio test of consolidated cash flow, as defined in the senior note agreements, to consolidated interest expense of greater than 2.0:1 for the most recent four consecutive fiscal quarters. In the event that our consolidated interest coverage ratio is less than 2.0:1 for the most recent four consecutive fiscal quarters, the senior notes restrict our ability to incur additional indebtedness.

The senior notes contain a restricted payments 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 senior notes, from October 1, 2016 for the 2023 senior notes and October 1, 2017 for the 2026 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 and as of that date we were no longer able to declare and make dividend payments until such time as the restricted payments baskets once again become positive. For further information, please see the senior note indentures which are available on SEDAR and EDGAR.

In addition, the senior notes contain certain covenants that limit our ability, and the ability of certain subsidiaries, to incur additional indebtedness and issue preferred shares; create liens; create or permit to exist restrictions on our ability or certain subsidiaries to make certain payments and distributions; engage in amalgamations, mergers or consolidations; make certain dispositions and engage in transactions with affiliates.

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.

We have designated our U.S. dollar denominated long-term debt as a net investment hedge in our U.S. operations and other foreign operations that have a U.S. dollar functional currency. 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 (if any) in net earnings (loss).

QUARTERLY FINANCIAL SUMMARY

(Stated in thousands of Canadian dollars, except per share amounts)	2017			2018
Quarters ended	December 31			March 31			June 30			September 30
Revenue		347,187			401,006			330,716			382,457
Adjusted EBITDA⁽²⁾		90,914			97,469			62,182			80,988
Net loss		(47,005	)		(18,077	)		(47,217	)		(30,648	)
Net loss per basic and diluted share		(0.16	)		(0.06	)		(0.16	)		(0.10	)
Funds provided by operations⁽²⁾		28,323			104,026			50,225			64,368
Cash provided by operations		23,289			38,189			129,695			31,961

(Stated in thousands of Canadian dollars, except per share amounts)	2016			2017
Quarters ended	December 31			March 31			June 30			September 30
Revenue⁽¹⁾		302,653			368,673			290,860			314,504
Adjusted EBITDA⁽²⁾		65,000			84,308			56,520			73,239
Net loss		(30,618	)		(22,614	)		(36,130	)		(26,287	)
Net loss per basic and diluted share		(0.10	)		(0.08	)		(0.12	)		(0.09	)
Funds provided by (used in) operations⁽²⁾		11,466			85,659			(15,187	)		85,140
Cash provided by (used in) operations		(27,846	)		33,770			2,739			56,757

(1)

Comparatives for revenue have changed for the periods ending December 2016, March 2017 and June 2017 to reflect a recast of certain amounts previously netted against operating expense. See our 2017 Annual Report.

(2)

See “NON-GAAP MEASURES”.

CRITICAL ACCOUNTING JUDGEMENTS AND ESTIMATES

Because of the nature of our business, we are required to make judgments and estimates in preparing our Consolidated Interim Financial Statements that could materially affect the amounts recognized. Our judgments and estimates are based on our past experiences and assumptions we believe are reasonable in the circumstances. The critical judgments and estimates used in preparing the Interim Financial Statements are described in our 2017 Annual Report and there have been no material changes to our critical accounting judgments and estimates during the three and nine-months ended September 30, 2018 except for those impacted by the adoption of new accounting standards.

CHANGES IN ACCOUNTING POLICY

New standards adopted

The following standards became effective on January 1, 2018:

IFRS 9 Financial Instruments

IFRS 15 Revenue from Contracts with Customers

The Corporation adopted these standards using the cumulative-effect method with no material impact or adjustment to the consolidated financial statements on the date of adoption. Please see the unaudited September 30, 2018 Interim Consolidated Financial Statements and related notes for further details on the adoption of these standards.

New standards not yet adopted

IFRS 16 Leases

IFRS 16 introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessors and lessees. It replaces existing lease guidance including IAS 17 Leases and IFRIC 4 Determining whether an Arrangement contains a lease. The new standard is effective for annual periods beginning on or after January 1, 2019, with earlier application permitted for entities that apply IFRS 15 at or before the date of initial adoption of IFRS 16.

IFRS 16 brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. A right-of use asset and a corresponding liability will be recognized for all leases by the lessee except for short-term leases and leases of low value assets.

The Corporation’s assessment indicates that many of the operating lease arrangements will meet the definition of a lease under IFRS 16 and thus be recognized in the Statement of Financial Position as a right-of-use asset with a corresponding liability. In addition, the nature of expenses related to these arrangements will change as the current presentation of lease expense will be replaced with a depreciation charge for the right-of use asset and interest expense on the lease liabilities. As well, the classification of cash flows will be impacted as the current presentation of lease payments as operating cash flows will be split into financing (principal portion) and operating (interest portion) cash flows under IFRS 16.

Lessor accounting will not significantly change under the new standard. However, some differences may arise as a result of new guidance on the definition of a lease. Under IFRS 16 a contract is, or contains a lease if the contract conveys control of the use of an identified asset for a period of time in exchange for some form of consideration. Precision is assessing whether this new guidance will impact the treatment of its drilling rigs under long term contracts.

Additional disclosures will also be required under IFRS 16.

Precision plans to apply IFRS 16 initially on January 1, 2019 using the cumulative effect method whereby the cumulative impact of adopting the standard will be recognized in retained earnings as of January 1, 2019 and the comparative periods will not be restated.

IFRIC 23 Uncertainty over Income Tax Treatments

IFRIC 23 clarifies the accounting for uncertainties in income taxes. The interpretation requires the entity to use the most likely amount or the expected value of the tax treatment if it concludes that it is not probable that a particular tax treatment will be accepted. It requires an entity to assume that a taxation authority with the right to examine any amounts reported to it will examine those amounts and will have full knowledge of all relevant information when doing so.

IFRIC 23 is effective for annual reporting periods beginning on or after January 1, 2019. Earlier application is permitted. The requirements are applied by recognizing the cumulative effect of initially applying them in retained earnings, or in other appropriate components of equity, at the start of the reporting period in which an entity first applies them, without adjusting comparative information. Full retrospective application is permitted, if an entity can do so without using hindsight. The Corporation has yet to determine the impact this standard will have on its consolidated financial statements.

NON-GAAP MEASURES

In this press release we reference non-GAAP (Generally Accepted Accounting Principles) measures. Adjusted EBITDA, Covenant EBITDA, Operating Earnings (Loss), Funds Provided by (Used in) Operations and Working Capital are terms used by us to assess performance as we believe they provide useful supplemental information to investors. These terms do not have standardized meanings prescribed under International Financial Reporting Standards (IFRS) and may not be comparable to similar measures used by other companies.

Adjusted EBITDA

We believe that adjusted EBITDA (earnings before income taxes, loss on repurchase and redemption of unsecured senior notes, finance charges, foreign exchange, and depreciation and amortization), as reported in the Interim Consolidated Statement of Loss, is a useful measure, because it gives an indication of the results from our principal business activities prior to consideration of how our activities are financed and the impact of foreign exchange, taxation and depreciation and amortization charges.

Covenant EBITDA

Covenant EBITDA, as defined in our senior credit facility agreement, is used in determining the Corporation’s compliance with its covenants. Covenant EBITDA differs from Adjusted EBITDA by the exclusion of bad debt expense, restructuring costs and certain foreign exchange amounts.

Operating Earnings (Loss)

We believe that operating earnings (loss), as reported in the Interim Consolidated Statements of 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.

Funds Provided By (Used In) Operations

We believe that funds provided by (used in) operations, as reported in the Interim 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 on the Interim Consolidated Statement of Financial Position.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS

Certain statements contained in this report, 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").

In particular, forward looking information and statements include, but are not limited to, the following:

our strategic priorities for 2018;

our capital expenditure plans for 2018;

anticipated activity levels in 2018 and our scheduled infrastructure projects;

anticipated demand for Tier 1 rigs;

the average number of term contracts in place for 2018 and 2019;

expectation for U.S. operating costs to be lower in the fourth quarter of 2018;

our future debt reduction plans beyond 2018; and

the anticipated financial, operational and strategic benefits of the proposed Trinidad Drilling transaction.

These 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, expected future developments and other factors we believe are appropriate under the circumstances. These include, among other things:

the fluctuation in oil prices may pressure customers into reducing or limiting their drilling budgets;

the status of current negotiations with our customers and vendors;

customer focus on safety performance;

existing term contracts are neither renewed nor terminated prematurely;

our ability to deliver rigs to customers on a timely basis; and

the general stability of the economic and political environments in the jurisdictions where we operate.

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 demand for contract 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 disadvantage;

shortages, delays and interruptions in the delivery of equipment supplies and other key inputs;

the effects of seasonal and weather conditions on operations and facilities;

the availability of qualified personnel and management;

a decline in our safety performance which could result in lower demand for our services;

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 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 Precision’s ability to respond to such conditions.

Readers are cautioned that the forgoing list of risk factors is not exhaustive. Additional information on these and other factors that could affect our business, operations or financial results are included in reports on file with applicable securities regulatory authorities, including but not limited to Precision’s Annual Information Form for the year ended December 31, 2017, which may be accessed on Precision’s SEDAR profile at www.sedar.com or under Precision’s EDGAR profile at www.sec.gov. The forward-looking information and statements contained in this news release are made as of the date hereof and Precision undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, except as required by law.

INFORMATION

STOCK EXCHANGE LISTINGS

Shares of Precision Drilling Corporation are listed on the Toronto Stock Exchange under the trading symbol PD and on the New York Stock Exchange under the trading symbol PDS.

TRANSFER AGENT AND REGISTRAR

Computershare Trust Company of Canada

Calgary, Alberta

TRANSFER POINT

Computershare Trust Company NA

Canton, Massachusetts

Q3 2018 TRADING PROFILE

Toronto (TSX: PD)

High: $5.33

Low: $4.26

Close: $4.46

Volume Traded: 89,564,822

New York (NYSE: PDS)

High: US$4.12

Low: US$3.18

Close: US$3.46

Volume Traded: 85,281,400

ACCOUNT QUESTIONS

Precision’s Transfer Agent can help you with a variety of shareholder related services, including:

• change of address

• lost unit certificates

• transfer of shares to another person

• estate settlement

Computershare Trust Company of Canada

100 University Avenue

9th Floor, North Tower

Toronto, Ontario M5J 2Y1

Canada

1-800-564-6253 (toll free in Canada and the United States)

1-514-982-7555 (international direct dialing)

Email: service@computershare.com

ONLINE INFORMATION

To receive news releases by email, or to view this interim report online, please visit Precision’s website at www.precisiondrilling.com and refer to the Investor Relations section. Additional information relating to Precision, including the Annual Information Form, Annual Report and Management Information Circular has been filed with SEDAR and is available at www.sedar.com and on the EDGAR website www.sec.gov

CORPORATE INFORMATION

DIRECTORS

Michael R. Culbert

William T. Donovan

Brian J. Gibson

Allen R. Hagerman, FCA

Steven W. Krablin

Susan M. MacKenzie

Kevin O. Meyers

Kevin A. Neveu

David W. Williams

OFFICERS

Kevin A. Neveu

President and Chief Executive Officer

Douglas B. Evasiuk

Senior Vice President, Sales and Marketing

Veronica H. Foley

Senior Vice President, General Counsel and Corporate Secretary

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

President, Drilling Operations

AUDITORS

KPMG LLP

Calgary, Alberta

HEAD OFFICE

Suite 800, 525 8th Avenue SW

Calgary, Alberta, Canada T2P 1G1

Telephone: 403-716-4500

Facsimile: 403-264-0251

Email: info@precisiondrilling.com