Executive Summary / Key Takeaways

• Strategic Transformation Amidst Volatility: Drilling Tools International (DTI) is executing an aggressive M&A-driven strategy, expanding its global footprint and technological portfolio to become a premier drilling tools rental provider. This proactive approach is critical for scale and resilience in a consolidating, volatile energy market.
• Differentiated Technology Driving Value: DTI's core investment thesis is underpinned by its technologically differentiated tools like Drill-N-Ream, MechLOK Swivel, Rubblizer, and RotoSteer, which offer superior performance and efficiency in complex wellbore construction, providing a competitive moat against larger, more commoditized offerings.
• Resilient Financial Performance & Disciplined Capital: Despite significant industry headwinds, DTI reported Q2 2025 revenue growth of nearly 5% and adjusted EBITDA growth of 4% year-over-year, exceeding internal forecasts. The company achieved positive adjusted free cash flow in Q2 2025 for the first time since going public, demonstrating strong operational discipline and effective cost reduction programs.
• Eastern Hemisphere as a Growth Engine: Recent acquisitions have significantly bolstered DTI's Eastern Hemisphere operations, which grew sequential revenue by 21% in Q2 2025 and contributed 14% of total revenue in H1 2025. This segment is expected to drive future growth, offsetting some North American softness.
• Outlook & Shareholder Value Focus: DTI reaffirmed its 2025 guidance, anticipating continued pricing pressures and activity declines but confident in its ability to adapt. The company's $10 million share repurchase program underscores management's belief in the stock's intrinsic value and commitment to maximizing shareholder returns.

A Global Ascent: DTI's Strategic Imperative in a Shifting Energy Landscape

Drilling Tools International Corporation (DTI), founded in 1984, has evolved into a global oilfield services powerhouse, specializing in the design, engineering, manufacturing, and rental of advanced tools for onshore and offshore horizontal and directional drilling. The company's core business revolves around providing critical downhole tool rentals, machining, and inspection services that support the intricate demands of global drilling and wellbore construction. DTI's operational footprint spans 15 locations across North America, including key U.S. basins and Canada, complemented by 11 international service and support centers in the UK, Europe, the Middle East, and Asia-Pacific.

The energy industry, particularly the oil and gas sector, is currently characterized by dynamic interplay of geopolitical tensions, shifting demand, and evolving economic factors. While U.S. oil production has reached record highs, driven by regions like the Permian Basin, a global surplus has exerted downward pressure on prices, with WTI crude declining from $78.41/barrel in Q4 2024 to $64.63/barrel in Q2 2025. Conversely, U.S. natural gas prices have seen a rebound, with Henry Hub spot prices averaging $3.19/MMBtu in Q1 2025, a 30% increase over Q4 2024, driven by seasonal demand and expectations of tightening inventories. This complex backdrop, coupled with declining global rig counts—Western Hemisphere rigs down to 832 in Q2 2025 from 897 in Q2 2024, and Eastern Hemisphere rigs down to 714 from 764 over the same period—underscores the challenging environment in which DTI operates. Despite these headwinds, longer laterals and improved rig efficiencies have partially mitigated the impact of reduced rig counts.

DTI's overarching strategy is to achieve significant scale and become the premier drilling tools rental solution provider. This ambition has fueled an aggressive M&A campaign, profoundly reshaping the company's structure and capabilities. In 2024, DTI acquired Deep Casing Tools, Superior Drilling Products (SDPI), and European Drilling Projects (EDP), followed by Titan Tools Group in early 2025. These acquisitions were not merely about growth; they were strategic moves to expand DTI's global geographical presence, particularly in the Middle East, enhance its intellectual property portfolio with over 90 patents (from CTG and SDPI alone), and integrate cutting-edge technologies.

Technological Edge: DTI's Differentiated Moat

DTI's competitive advantage is deeply rooted in its technologically differentiated offerings, which provide tangible benefits in complex drilling environments. The company's portfolio includes a range of specialized tools that address critical wellbore construction and optimization challenges.

The Drill-N-Ream (DNR) tool, acquired through the SDPI merger, is a cornerstone of DTI's offering. This proven technology is designed to optimize wellbore conditions, reducing friction and improving drilling efficiency, particularly in challenging horizontal and directional wells. The company has seen a significant increase in DNR tool utilization in the Middle East and Eastern Hemisphere, a testament to its performance. To further enhance its efficiency, DTI strategically relocated its U.S. Drill-N-Ream repair facility from Vernal, Utah, to Houston, Texas, two years ahead of schedule, generating expected cost savings and efficiency benefits.

Beyond DNR, DTI's acquisitions have brought a suite of innovative solutions. The MechLOK Drill Pipe Swivel, acquired with Deep Casing Tools, is crucial for installing complex casing strings in horizontal wells. This technology is now moving into its full commercial stage, offering customers enhanced capabilities in challenging well completions. Similarly, the Rubblizer P&A Tool, also from Deep Casing, is a plug-in-abandonment technology gaining traction in various wellbore abandonment applications. These tools provide superior operational performance, enabling faster and more reliable execution in critical well operations.

From European Drilling Projects, DTI gained next-generation stabilizers, specialty reamers, and wellbore optimization technology. These products are designed to address specific industry challenges in extended reach horizontal and directional drilling, offering premium value-added solutions in a market often characterized by commoditization. These technologies are gaining traction in both hemispheres, across land and offshore markets, demonstrating their broad applicability and effectiveness. DTI's organic RotoSteer product line is also experiencing steady growth in the U.S., finding its niche in specific directional and horizontal drilling applications.

The "so what" for investors is clear: DTI's focus on proprietary, high-performance technology creates a strong competitive moat. These tools enable customers to achieve greater drilling efficiency, reduce non-productive time, and successfully complete complex wells, translating into higher value for DTI's offerings. This technological differentiation supports stronger customer loyalty, potentially higher average selling prices (ASPs) for specialized rentals, and more resilient margins, even in a challenging market. The company's ongoing investment in these growth-oriented technologies, even amidst market softness, is a strategic play for long-term market positioning and sustained growth.

Competitive Landscape: DTI's Position Against Industry Giants

DTI operates in a highly competitive oilfield services market, contending with both global behemoths and specialized niche players. Its primary direct competitors include industry leaders such as Halliburton Company (HAL), Schlumberger NV (SLB), Baker Hughes Company (BKR), and National Oilwell Varco, Inc. (NOV). These companies offer broad portfolios of drilling, completion, and production services, often with greater scale and R&D budgets.

Compared to these larger rivals, DTI distinguishes itself through its specialized, rental-focused offering and technologically differentiated tools. While Halliburton and Schlumberger offer integrated solutions for large-scale projects, DTI's strength lies in providing precision tools for specific drilling needs, such as extended reach drilling and wellbore conditioning. For instance, DTI's Drill-N-Ream tool offers superior efficiency in specific wellbore applications, providing a distinct advantage over more generalized offerings from competitors. DTI's gross profit margin of 76.81% (TTM) significantly outpaces Halliburton's 19%, Schlumberger's 21%, Baker Hughes' 21%, and NOV's 23% (all 2024 annual), suggesting a strong pricing power and cost efficiency within its specialized rental model. However, DTI's smaller scale is reflected in its operating profit margin of 6.80% (TTM) and negative net profit margin of -2.81% (TTM), which lag behind the generally higher profitability of its larger, more diversified competitors.

DTI's strategy of acquiring companies like EDP and Titan Tools, which bring innovative technologies and established international footprints, aims to counter the scale advantage of its larger competitors. By securing EDP's innovative technology, intellectual property, and key personnel, DTI can offer premium value-added tools in segments typically characterized by commoditization. This allows DTI to lead in operational execution for targeted projects, where its modular designs and durability-focused products can offer significantly greater efficiency and faster deployment compared to more standardized offerings from rivals.

The company's customer relationships are robust, with DTI tools utilized by 60% of drilling rigs in North America. Management emphasizes ongoing communication and negotiation with major operators to maintain incumbent status, noting that DTI has "won more than we've lost in this cycle" despite pricing pressures. This suggests a strong value proposition that resonates with clients. However, the company's smaller scale and potential supply chain dependencies remain vulnerabilities, as larger competitors can leverage their global efficiency and extensive R&D to compete on price and innovation speed. DTI's "One DTI" integration strategy, aiming to synergize operations and centralize systems, is a direct response to these competitive pressures, seeking to maximize internal efficiencies and enhance its competitive stance globally.

Financial Performance: Resilience in a Challenging Environment

DTI's financial performance in the first half of 2025 demonstrates remarkable resilience amidst significant industry headwinds. For the second quarter of 2025, DTI reported total consolidated revenue of $39.42 million, marking a nearly 5% increase year-over-year. Adjusted EBITDA for the quarter grew 4% year-over-year to $9.3 million, tracking ahead of the company's internal forecast. This performance was largely driven by strong execution, the successful integration of Eastern Hemisphere acquisitions, and effective cost reduction programs.

Tool rental services remain the dominant revenue stream, contributing 83% of total revenue in Q2 2025, reaching $32.76 million, a 15.6% year-over-year increase. This growth was bolstered by outperformance in Directional Tool Rentals (DTR) and pipe rentals in the Western Hemisphere, and a significant increase in Drill-N-Ream (DNR) tool utilization in the Middle East and Eastern Hemisphere. Conversely, product sales revenue declined by 27.6% year-over-year to $6.67 million in Q2 2025, primarily due to softness in the Deep Casing product line stemming from rig declines in the Middle East and Mexico. However, tool recovery revenue, which underpins product sales, remained elevated and continued to fund maintenance CapEx.

The Eastern Hemisphere segment emerged as a key growth driver, with sequential revenue growth of 21% in Q2 2025, contributing approximately 14% of total revenue in the first half of the year. This segment also achieved its first positive adjusted EBITDA month during the quarter for its Drill-N-Ream operations, signaling successful integration and market penetration. While the Western Hemisphere experienced a slowdown in Q2 2025 compared to Q1 2025, its revenue still grew 5.7% year-over-year to $37.59 million.

Liquidity and capital allocation remain a core focus. At the end of Q2 2025, DTI held $1.15 million in cash and cash equivalents, with net debt at $55.8 million. A significant achievement was the generation of positive adjusted free cash flow of $1.8 million in Q2 2025, a notable turnaround given that this quarter has historically been the weakest due to front-loaded CapEx and Canadian seasonality. The company's capital expenditure strategy is disciplined, with CapEx in Q2 2025 considerably lower than Q1, and expected to be significantly lower in the second half of the year. Maintenance CapEx, primarily funded by tool recovery revenue, ensures the rental fleet remains relevant and sustainable.

Outlook and Strategic Initiatives

DTI has reaffirmed its full-year 2025 guidance, projecting revenue in the range of $145 million to $165 million, adjusted EBITDA between $32 million and $42 million, gross capital expenditures from $18 million to $23 million, and adjusted free cash flow ranging from $14 million to $19 million. This reaffirmation, despite ongoing market volatility, reflects management's confidence in its strategic initiatives and operational agility.

The guidance incorporates assumptions of continued pricing pressure and activity declines in the latter half of 2025, albeit at a slower pace than previously anticipated. Management explicitly stated that the anticipated negative impact of new tariff policies has been "baked in" to this guidance. To mitigate these pressures, DTI implemented a cost reduction program in H1 2025 targeting $6 million in annual savings, which is on track to be exceeded. This proactive measure, alongside contingency plans for further adjustments, underscores the company's commitment to aligning spending with activity levels.

The "One DTI" integration strategy is central to the company's future. This initiative involves consolidating all operating divisions onto common systems and processes, including relocating the U.S. Drill-N-Ream repair facility to Houston and integrating Eastern Hemisphere operations into a centralized accounting platform. All acquired business units are being onboarded to the Compass asset management platform, aiming to streamline workflows, maximize accountability, and enhance cost savings. This strategic integration is expected to yield valuable synergies, benefiting DTI's long-term growth trajectory and improving its consolidated margin profile over time.

DTI's M&A pipeline remains robust, with management actively evaluating opportunities ranging from tuck-ins to transformational mergers. The company believes that acquiring high-quality companies at attractive multiples positions it to successfully participate in the next three-to-five-year expected growth cycle. The Board's authorization of a $10 million share repurchase program, with $600,000 already executed in Q2 2025 at an average price of $3 per share, signals management's belief in the significant disconnect between the stock price and its perceived intrinsic value, aiming to maximize shareholder value.

Risks and Challenges

Despite DTI's strategic advancements, several risks warrant investor attention. The oil and gas market remains highly volatile, influenced by geopolitical tensions, shifting demand, and commodity price fluctuations. Crude oil price declines and persistent customer caution could lead to further reductions in rig count and drilling activity, impacting DTI's revenue and profitability. Management anticipates continued pricing pressure and potential margin compression in Q3 and Q4 2025.

Global inflation is increasing personnel costs and the prices of goods and services, which is expected to continue impacting profitability in the near term. New tariff policies also pose a risk, although DTI has proactively adjusted its guidance to account for their anticipated negative impact and relies on a diversified supply chain for mitigation. The company also faces risks related to its ongoing acquisition integration, including the material weakness in internal control over financial reporting identified during prior audits, which is currently undergoing remediation. While non-cash, the $1.9 million goodwill impairment recognized in H1 2025 highlights the subjective nature of fair value estimates and the potential for future impairments.

Conclusion

Drilling Tools International is executing a compelling investment thesis centered on strategic global expansion and technological differentiation within the dynamic oilfield services sector. By aggressively pursuing synergistic acquisitions and implementing its "One DTI" integration strategy, the company is building scale and enhancing its competitive moat with a portfolio of high-performance tools. DTI's ability to deliver revenue and adjusted EBITDA growth in Q2 2025, alongside achieving positive adjusted free cash flow in a historically weak quarter, underscores its operational resilience and disciplined capital management amidst industry headwinds.

The company's reaffirmed 2025 guidance, supported by proactive cost reductions and a strategic focus on its growing Eastern Hemisphere operations, signals a pragmatic yet ambitious outlook. While market volatility, pricing pressures, and integration challenges persist, DTI's commitment to its technologically advanced offerings like Drill-N-Ream, MechLOK Swivel, and RotoSteer positions it to capture value in complex wellbore solutions. For discerning investors, DTI presents an opportunity to participate in a company that is not merely enduring market challenges but actively transforming its competitive landscape through strategic growth and a clear focus on shareholder value, as evidenced by its share repurchase program. The long-term demand for natural gas, driven by new LNG capacity and rising electricity needs from data centers, provides a favorable backdrop for DTI's specialized services, reinforcing its potential for sustained growth as energy markets evolve.