Mr. J. Blair Goertzen reports

ENERFLEX REPORTS SECOND QUARTER 2016 FINANCIAL RESULTS

Enerflex Ltd. is releasing its financial and operating results for the three and six months ended June 30, 2016.

 FINANCIAL AND OPERATING RESULTS FOR THE SECOND QUARTER AND FIRST HALF
          (in millions of dollars, except per-share amounts, 
                       horsepower and percentages)

                Three months ended June 30,    Six months ended June 30,
                         2016         2015           2016          2015

Revenue             $   253.1    $   389.7      $   524.8     $   845.2
Gross margin             64.2         81.5          110.6         165.0
EBIT gain (loss)
(1)                      21.9         38.2          (69.3)         75.2
Net earnings
(loss),
continuing
operations               16.8         26.8          (76.6)         50.4
Earnings (loss)
per share,
continuing
operations          $    0.21    $    0.34      $   (0.97)    $    0.64
Recurring
revenue (2)             37.7%        30.8%          37.7%         30.8%
Bookings (3)            154.4         86.5          219.4         227.1
Backlog (3)             345.4        532.7          345.4         532.7
Rental
horsepower            499,615      457,862        499,615       457,862
                                                                            
(1) Earnings before interest (finance costs) and taxes (EBIT) is
considered an additional GAAP (generally accepted accounting principles)
measure, which may not be comparable with similar additional GAAP 
measures used by other entities.

(2) Recurring revenue is determined by taking the trailing 12-month 
period.

(3) Bookings and backlog are considered non-GAAP measures that do not 
have standardized meanings as prescribed by GAAP and are therefore 
unlikely to be comparable with similar measures used by other entities.

"Enerflex's second quarter financial results reflected the continuing uncertainty surrounding commodity prices and the associated reduction in customer capital budgets, which resulted in lower revenues. Against this backdrop, the company has increased recurring rental revenues, improved project margins and increased bookings," said J. Blair Goertzen, Enerflex's president and chief executive officer. "Enerflex expects that these challenging conditions will continue through 2016. The company remains focused on controlling costs, preserving the strength of its balance sheet and generating free cash flow, positioning it to weather this prolonged downturn. Enerflex will continue to deploy capital and pursue opportunities in those regions where there is economic growth, including the USA, Middle/East Africa and Latin America regions."

Quarterly and first-half overview:

• Bookings increased by $67.9-million over the second quarter of 2015, and by $89.4-million over the first quarter of 2016, but were lower in the first half of 2016, by $7.7-million.
• Backlog at June 30, 2016, was lower by $81.8-million than Dec. 31, 2015, on reduced bookings, but increased by $10.5-million from March 31, 2016, due to stronger second quarter 2016 bookings.
• EBIT was $28.3-million and $47.5-million for the first three and six months ended June 30, 2016, compared with $42.0-million and $81.7-million for the same periods in 2015, after excluding provisions for continuing warranty disputes, Oman Oil Company Exploration and Production LLC (OOCEP) arbitration process costs, severance and restructuring costs, and, during the first quarter of 2016, the goodwill impairment of $92.1-million.
• The company reduced head count by 153 during the second quarter to just over 1,900 (compared with approximately 2,800 at June 30, 2015). Total global head count reductions were 429 in 2016.
• Rental fleet grew to almost 500,000 horsepower with the completion of a large project in the MEA (Middle East/Africa) region during the first half of 2016. The company has added 105,000 horsepower in the last 15 months.
• The company reduced net indebtedness by $38.9-million during the first half of 2016, while increasing cash balances by $4.6-million.
• Subsequent to quarter-end, it declared a quarterly dividend of 8.5 cents per share, payable Oct. 6, 2016.

Quarterly and first-half results summary

Net earnings for the first three and six months of 2016 were lower as a result of reduced gross margin, partially offset by lower SG&A (selling, general and administrative) expenses and lower income tax expense, and for the first half of 2016, due to the goodwill impairment recorded in the Canada segment. Gross margin in the second quarter and first half of 2016 decreased by $17.3-million and $54.4-million, respectively, on lower revenues in the Canada and U.S. segments. Rest-of-world gross margin increased during the second quarter but was lower for the first six months of 2016. The gross margin percentage increased for the three and six months on project margin improvements and an increased proportion of higher-margin rental revenue, more than offsetting costs related to continuing warranty disputes, severance costs and, for the first six months of 2016, higher inventory allowances. The goodwill impairment in the first quarter of 2016 resulted from the effect of the continuing deterioration in commodity prices and the impact on customer budgets, and therefore the outlook for activity in Canada in 2016 and beyond. SG&A expenses decreased during the three and six months ended June 30, 2016, by $2.1-million and $4.3-million, respectively, on lower compensation expense due primarily to head count reductions, partially offset by costs associated with the OOCEP arbitration process and bad debt expenses. In addition, SG&A expense was lower during the first six months on unfavourable foreign exchange movements and restructuring costs. Compensation expense decreased due to lower head count, reduced incentive accruals based on decreased profitability, partially offset by larger mark-to-market share-based compensation during the second quarter and first half of 2015.

Enerflex remains focused on maintaining a strong balance sheet and generating operating cash flow. During the second quarter, the company generated $18.0-million of cash flows from operations and, for the first six months, $68.3-million. The company recorded reductions on its borrowings of $38.9-million during the first half of 2016. The resulting impact on net debt to EBITDA for covenant purposes has been positive but has not offset the impact of the decrease in EBITDA for the trailing 12-month period. Net debt to EBITDA continues to be under 2:1, compared with under 3:1 required for covenant purposes.

Bookings, backlog and outlook

The company expects the current market weakness to continue, particularly in Canada. That being said, the improvement in oil and gas prices over the second quarter has led to increased enquiries, particularly in the U.S. and rest-of-world segments. If current prices hold, a slight uptick in bookings is expected, however, further increases in commodity prices would be required to bring activity back to historical levels. During the second quarter of 2016, bookings increased by $67.9-million, compared with the same period in 2015, with increases in the U.S. and rest-of-world segments, partially offset by a decrease in the Canada segment. While bookings improved sequentially by $89.4-million during the second quarter of 2016, compared with the first quarter of 2016, the lower bookings in the first quarter of 2016 resulted in a drop in bookings of $7.7-million for the first six months of 2016, compared with the same period in 2015. There were no project cancellations during the first six months of 2016. Over all, backlog increased by $10.5-million during the quarter but fell by $81.8-million during the first half of 2016.

The improved bookings trend experienced during the second quarter of 2016 continued into the third quarter, with large bookings of over $100-million in the U.S. and MEA regions. Enerflex's financial performance also continues to benefit from the recurring revenue stream derived from existing and new long-term rental and service contract progress, and from a geographically diversified business. Inclusive of 30,000 compression horsepower added in the MEA region during the first quarter, the company has added approximately 105,000 horsepower in rental projects in the MEA and Latin America regions over the last 15 months, which will continue to contribute to increased recurring revenue going forward. Enerflex will continue to strategically deploy capital to rental opportunities in growth markets that meet internal return goals.

Progress on 2016 strategic objectives

Although the current weak market environment has challenged the achievement of several 2016 objectives, the company reduced its total recordable injury rate, a key strategic objective, by 7 per cent over the 2016 goal. Enerflex is tracking above its 20-per-cent growth target for processing bookings and is currently within the range of its 35-per-cent to 40-per-cent recurring revenue target.

Segmented results

Canada

Canada segment revenue in the second quarter of 2016 was $58.1-million, down $71.8-million or 55.3 per cent, from $129.8-million in the same period of 2015. For the first half of 2016, revenue was $119.2-million, down $162.6-million or 57.7 per cent, from $281.9-million in the same period of 2015. The segment has been negatively affected by the significant decline in activity levels from low natural gas prices and by the changes to distribution arrangements for GE products. Engineered systems revenue was down on lower 2016 opening backlog of $150.9-million, compared with $332.0-million at the start of 2015. Lower service revenue reflects lower parts sales, while lower rental revenue was due to a decrease in rental unit sales. Utilization levels by horsepower were 49 per cent, compared with 66 per cent in the second quarter of 2015.

Operating income for the second quarter of 2016 of $600,000 decreased by $10.7-million or 94.9 per cent, and operating loss for the first six months of 2016, of $10.8-million, decreased $31.8-million or 151.7 per cent, on lower gross margin, partially offset by lower SG&A expenses. The decrease in gross margin resulted primarily from lower revenues, lower project margins, and severance costs of $500,000 and $1.7-million in the first three and six months of 2016, partially offset by improved warranty experience. For the first six months of 2016, an increase in inventory allowances also reduced gross margin. The reduction in SG&A expense was attributable to lower compensation expense on a drop in head count, and lower office and occupancy costs, due to branch and facility closures, partially offset by higher bad debt expenses, compared with the second quarter of 2015. For the first half of 2016, severance and restructuring costs of $3.8-million increased SG&A expenses, compared with $800,000 in the same period of 2015.

United States

U.S. segment revenue in the second quarter of 2016 was $94.3-million, down $40.3-million or 29.9 per cent, from $134.6-million a year earlier. For the first half of 2016, revenue was $204.1-million, down $137.5-million or 40.2 per cent, from $341.6-million in the same period of 2015. The reductions in revenue resulted from lower engineered systems revenue on lower opening backlog and lower service revenue on lower parts sales, partially offset by higher rental revenue.

Operating income for the second quarter of $5.0-million decreased by $6.6-million or 57.1 per cent, and operating income of $13.0-million decreased by $9.8-million or 43.0 per cent during the first half of 2016, due to lower gross margin, partially offset by reduced SG&A expenses. Gross margin decreased primarily as a result of lower revenues and increased warranty expenses, partially offset by project margin improvements. The decreases in SG&A expenses were primarily a result of lower compensation on reduced head count.

Rest of world

Rest-of-world segment revenue in the second quarter of 2016 was $100.7-million, down $24.6-million or 19.7 per cent from 2015. For the first half of 2016, revenue was $201.4-million, down $20.3-million or 9.2 per cent from 2015. The decreases in revenue were a result of a reduction in engineered systems revenue on lower opening backlog, and a decrease in service revenue, partially offset by an increase in rental revenue with new rental projects in the Middle East and Latin America. Service revenue decreased on lower service activity in Latin America and Australia, and reduced part sales into Australia and Asia, partially offset by higher activity in the MEA region.

Operating income of $16.3-million increased by $2.2-million or 15.8 per cent in the second quarter as a result of improved gross margin, partially offset by higher SG&A expenses. The increase in gross margin was a result of project margin improvements and an increased proportion of higher-margin rental revenue, partially offset by the impact of lower revenues. SG&A expenses increased due to costs associated with the OOCEP arbitration process, partially offset by lower compensation expense on reduced head count.

Operating income of $18.3-million decreased by $8.5-million or 31.7 per cent in the first half of 2016, as a result of lower gross margin and higher SG&A expenses. Lower gross margin was attributable to the impact of reduced revenues, lower awarded margins and increased costs associated with unresolved customer warranty disputes, partially offset by project margin improvements and an increased proportion of higher-margin rental revenue. SG&A expenses were higher in 2016, compared with 2015, due to costs associated with the OOCEP arbitration process and unfavourable foreign exchange movements, partially offset by lower compensation expense on reduced head count.

There were no significant developments related to the OOCEP dispute during the second quarter. The variation claims remain subject to arbitration and the approximately $30.0-million in milestone payments due from OOCEP remains outstanding. Enerflex is unable to predict when the arbitration will be resolved.

Dividend

Subsequent to the end of the second quarter of 2016, Enerflex declared a quarterly dividend of 8.5 cents per share, payable on Oct. 6, 2016, to shareholders of record on Aug. 17, 2016.

Quarterly results material

Enerflex's interim condensed financial statements as at and for the three and six months ended June 30, 2016, and the accompanying management's discussion and analysis, will be available on the Enerflex website under the investors section and on SEDAR.

Conference call and webcast details

Enerflex will host a conference call for analysts, investors, members of the media and other interested parties on Friday, Aug. 5, 2016, at 8 a.m. MST (10 a.m. EST), to discuss the second quarter 2016 financial results and operating highlights. The call will be hosted by Mr. Goertzen and D. James Harbilas, executive vice-president and chief financial officer of Enerflex.

If you wish to participate in this conference call, please call 1-800-745-9476. Please dial in 10 minutes prior to the start of the call. No passcode is required. The live audio webcast of the conference call will be available on the Enerflex website under the investors section on Aug. 5, 2016, at 8 a.m. MST (10 a.m. EST). Approximately one hour after the call, a recording of the event will be available on the company's website. A replay of the teleconference will be available one hour after the conclusion of the call until midnight, Aug. 12, 2016. Please call 1-800-558-5253 or 1-416-626-4100, and enter passcode 21815364.

We seek Safe Harbor.