Drilling Tools' 2026 Q2 Earnings Call: North America Outlook Shifts from Uncertain to Confident, Capital Allocation Priorities Diverge

Date of Call: Aug 7, 2026

Financials Results

• Revenue: $38.1M
• EPS: Loss of $0.05 per share (adjusted loss of 2 cents per share)
• Gross Margin: Above 70% for tool rental (strong baseline)

Guidance:

• Revenue for 2026 expected to be in the range of $155 to $170 million.
• Adjusted EBITDA for 2026 expected to be within the range of $35 to $45 million.
• Adjusted free cash flow for 2026 expected to be in the range of $17 to $22 million.
• Guidance implies a stronger second half of the year, including substantial free cash flow generation.
• Elevated CapEx plan due to targeted spending on ClearPath technology; full-year adjusted free cash flow may be toward the lower end of the range.

Business Commentary:

Revenue and Cash Flow Performance:

• Drilling Tools International reported revenue of $38.1 million for Q2 2026, with an adjusted free cash flow of $4.1 million.
• The company noted a decline in the global rig count, particularly in the Middle East, yet still managed to generate strong cash flow, highlighting the resilience of its business model and geographic diversification.

Regional Activity and Market Outlook:

• The U.S. land rig count finished the quarter above the prior year's level, with additions in June and July, while Canada's July activations were at their highest since February.
• The improvement was attributed to higher commodity prices and a shift in operator activity, providing a positive outlook for North American drilling activity.

Eastern Hemisphere Operations:

• The Eastern Hemisphere segment contributed approximately 18% of the total revenue, with ongoing operational disruptions in the Middle East.
• Despite challenges, the segment is expected to play a larger role in future results, driven by stabilization in the region and increased utilization of specialized tools.

Technology and Market Positioning:

• The ClearPath stabilizer technology is gaining traction in offshore markets, with high-spec operators valuing its performance.
• This technology is expected to drive material step-ups in European contributions and supports long-term growth through strategic investments.

Capital Expenditure and Strategic Investments:

• Capital expenditures in Q2 were approximately $4.2 million, with plans for further strategic investments in the ClearPath technology.
• The elevated CapEx is aimed at supporting long-term rental agreements and is expected to enhance revenue growth in the latter half of 2026 and beyond.

Sentiment Analysis:

Overall Tone: Positive

• Management expressed being 'pleased with our performance,' noted 'solid momentum,' 'strong adjusted free cash flow,' and 'building for the future' with activity 'building, utilization is improving, and industry outlook is strengthening.' They are 'encouraged by our recent conversations with customers,' see 'market share gains,' and 'reaffirmed our full 2026 guidance ranges, which would indicate a strong second half.'

Q&A:

• Question from Steve Ferrazani (Sidoti & Company): What is the breakdown of second half guidance between North America and international, and what's the outlook for U.S. drilling activity?
  Response: Relies on Canada rebound and U.S. rebounding with some operator shuffling, but higher commodity prices and confidence support more activity in the second half. Internationally, making strides with new technology in offshore markets despite Middle East volatility.

• Question from Steve Ferrazani (Sidoti & Company): Are you sensing momentum in Canada from government pro-oil and gas stance that could drive into 2027?
  Response: Yes, Alberta government's focus on takeaway capacity and midstream infrastructure supports operators increasing production, with higher rig counts year-over-year in Canada.

• Question from Steve Ferrazani (Sidoti & Company): How has the ClearPath stabilizer technology ramped so quickly post-acquisition?
  Response: It evolved from a geometric design to a systems approach, providing repeatable data that improves hydraulic profiles in managed pressure drilling, contributing to operators' success and economic value.

• Question from Steve Ferrazani (Sidoti & Company): Can you provide CapEx guidance and how should we think about it given the investment in Eastern Hemisphere?
  Response: CapEx will not taper significantly in the second half due to strategic investments in ClearPath technology, placing spending on the higher end, which affects free cash flow but supports durable revenue growth into 2027.

• Question from Steve Ferrazani (Sidoti & Company): Does acquisition success like ClearPath give confidence for future M&A, focusing more on product-driven deals?
  Response: Yes, they have a backlog of opportunities and are always evaluating targets with technological advantages or clever product lines, with M&A being a key growth opportunity layered with organic initiatives.

• Question from Steve Ferrazani (Sidoti & Company): How are valuations looking for potential M&A targets?
  Response: They continue to incubate opportunities and are actively engaged in evaluating various targets, as M&A is a core growth strategy.

Contradiction Point 1

North American Drilling Activity Outlook

Guidance for North America shifts from uncertain to confident in momentum.

Steve Ferrazani (Sidoti & Company) - Steve Ferrazani (Sidoti & Company)

2026Q2: The second half outlook relies on Canada rebounding strongly and the U.S. rebounding with some shifting of rigs between operators. Higher commodity prices and market confidence support increasing activity. - Wayne Prejean(CEO)

Can you provide a breakdown of the guidance between North America and international, and what assumptions are built into the guidance regarding U.S. or North American drilling activity for the second half? - Steve Ferazani (Sidoti & Company)

2026Q1: The decline was driven by softer North American land activity... The company is navigating as a 'price maker,' not a taker, and expects improvement. - Wayne Prejean(CEO)

Contradiction Point 2

Financial Impact of Seasonal Events

The impact of the Canadian spring breakup shifts from compressing Q1 revenue to compressing Q2.

Steve Ferrazani (Sidoti & Company) - Steve Ferrazani (Sidoti & Company)

2026Q2: The earlier-than-expected Canadian spring breakup... compressing revenue. A rebound is expected to begin earlier than usual. - Wayne Prejean(CEO)

Can you provide a breakdown of North America versus international growth in the second half and share your outlook on U.S. drilling activity and how it's factored into the guidance? - Steve Ferazani (Sidoti & Company)

2026Q1: The decline was driven by... the earlier-than-expected Canadian spring breakup, and pricing pressure in some segments. - Wayne Prejean(CEO)

Contradiction Point 3

Capital Allocation Strategy and Future Cash Flow Outlook

The focus and prioritization of capital deployment shifted significantly.

Steve Ferrazani (Sidoti & Company) - Steve Ferrazani (Sidoti & Company)

2026Q2: Capital expenditures will not taper in the second half... This means adjusted free cash flow will be toward the lower end of the guidance. - David Johnson(CFO)

Did you provide a range or guidance for the higher CapEx on new value-add equipment in the Eastern Hemisphere, and how should we think about it? - Steve Ferazani (Sidoti & Company, LLC)

2025Q4: The durable free cash flow generation is a strategic focus... as that spending cycles through, free cash flow strengthens, as seen in Q3 and Q4. - R. Prejean(CEO)

Contradiction Point 4

Outlook on U.S. Market Activity and Revenue Per Rig

The expected trajectory for U.S. drilling activity and its impact on revenue per active rig shifted.

Steve Ferrazani (Sidoti & Company) - Steve Ferrazani (Sidoti & Company)

2026Q2: The second half outlook relies on... the U.S. rebounding with some shifting of rigs between operators. - Wayne Prejean(CEO)

How is the second-half growth guidance allocated between North America and international regions? - Steve Ferazani (Sidoti & Company, LLC)

2025Q4: The outlook assumes a steady-state U.S. market with the potential to overachieve... - R. Prejean(CEO)

Contradiction Point 5

The Outlook for the Saudi Arabian Market and Drilling Activity

Assessment of Saudi drilling momentum shifts from expecting a future pickup to citing current volatility and delays.

Steve Ferrazani (Sidoti & Company) - Steve Ferrazani (Sidoti & Company)

2026Q2: In the Middle East, volatility has caused delays, particularly in Saudi Arabia, but momentum is building in countries like Oman and Kuwait. - Wayne Prejean(CEO)

How is the second-half growth in your guidance split between North America and international, and what assumptions are built into the guidance regarding U.S. drilling activity? - Sean Mitchell (Daniel Energy Partners, LLC)

2025Q3: Positive indicators suggest Saudi Arabia may pick up rigs and resume drilling programs in the future. - R. Prejean(CEO)