Mr. Garnet Amundson reports

ESSENTIAL ENERGY SERVICES ANNOUNCES FIRST QUARTER RESULTS AND DECLARES QUARTERLY DIVIDEND

Essential Energy Services Ltd. has released first quarter results and has declared a quarterly dividend.

Quarterly dividend

The cash dividend for the period from April 1, 2015, to June 30, 2015, has been set at three cents per share. The dividend will be paid on July 15, 2015, to shareholders of record on June 30, 2015. The ex dividend date is June 26, 2015. This dividend is an eligible dividend for Canadian income tax purposes.

Highlights

Industry activity in the first quarter of 2015 was significantly below the same quarter in the prior year, as weak oil and natural gas prices resulted in exploration and production companies drastically reducing spending. The reduction in E&P spending directly impacted oil field service activity and led customers to demand lower prices for oil field services. During the first quarter of 2015, drilling rig utilization, the number of wells drilled and well completions, all indicators of oil field activity, were significantly below the first quarter 2014 comparatives. Well completions, a key driver of Essential's services, was down 34 per cent compared with 2014.

First quarter 2015 revenue was $70.4-million, 32 per cent lower than the first quarter of 2014. Price declines were experienced across all of Essential's service lines as oil field service companies competed for limited work. Essential's primary service lines performed well compared with industry declines in completions and drilling activity. Masted coil-tubing utilization was strong at 90 per cent.

Essential's well-servicing revenue decreased 36 per cent in the first quarter of 2015 compared with the same period in 2014 due to lower utilization, particularly in service rigs and conventional coil tubing, and pricing reductions. Compared with the significant decline in industry well completions, masted coil tubing performed well as operating hours were consistent with the first quarter of 2014. This was driven by demand for Essential's equipment in the Montney, Bakken and Duvernay regions. Service rig utilization was 37 per cent for the quarter compared with Canadian Association of Oil Drilling Contractors service rig industry utilization of 34 per cent. Revenue per hour reductions in Essential's well-servicing segment ranged from 10 per cent to 15 per cent compared with the first quarter of 2014.

Essential's downhole tools and rentals revenue decreased 22 per cent from the first quarter of 2014 due to decreased activity and pricing in Canadian operations, partially offset by growth in U.S. downhole tools revenue.

Given industry conditions, Essential took pro-active steps during the first quarter of 2015 to manage costs. Compensation and discretionary spending reductions were implemented in March, 2015, including a 20-per-cent reduction in board of directors' fees and executive salaries, and suspension of various benefit and incentive programs. Essential decreased non-executive employee salaries by an average of 10 per cent and reduced its labour force prior to the end of March by 25 per cent of salaried employees and 35 per cent of field staff. Severance costs totalling $1.7-million were recorded in the first quarter of 2015 in the corporate and eliminations segment. Essential expects to realize annualized fixed cost savings from these initiatives of approximately $10-million.

Earnings before interest, taxes, depreciation and amortization, and stock-based compensation for the first quarter of 2015 were $10.9-million, a decline of 52 per cent from the first quarter of 2014. EBITDAS before severance costs was $12.5-million or 18 per cent as a percentage of revenue compared with 22 per cent in the first quarter 2014.

At March 31, 2015, Essential had $39.8-million of debt outstanding, a decrease of $15.4-million from Dec. 31, 2014. At May 5, 2015, Essential had $39.1-million of debt outstanding.

Segment results -- well servicing

Coil well service revenue decreased 23 per cent in the first quarter of 2015 compared with the same period in 2014. Masted coil tubing and pumping performed well compared with the decline in industry well completions. Masted coil-tubing operating hours were consistent with 2014, and pumping utilization was down slightly. This relatively strong demand was initiated by certain customers for masted coil-tubing equipment in the Montney, Bakken and Duvernay regions. Conventional coil-tubing operating hours were down 47 per cent year over year as this equipment, which is not as specialized as Essential's masted coil-tubing fleet, was exposed to greater competitive pressures. Masted coil-tubing and pumping revenue per hour declined between 10 per cent and 15 per cent compared with the first quarter of 2014.

Reduced activity in the first quarter allowed Essential to meet customer demand for masted coil tubing with its Generation 2 and Generation 3 masted coil-tubing rigs. Essential used this time of slower industry activity to complete further modifications and enhancements on the two Generation 4 masted coil-tubing rigs. Both Generation 4 masted coil-tubing rigs are expected to be back in service by the end of the second quarter. The new modifications will be incorporated into the remaining four Generation 4 masted coil-tubing rigs.

First quarter service rig revenue decreased 54 per cent compared with the first quarter of 2014 due to lower demand and pricing pressures driven by the industry downturn. Year-over-year quarterly revenue also decreased with the sale of Essential's rod rig assets in October, 2014. Service rig utilization for the first quarter was 37 per cent, higher than the CAODC industry utilization of 34 per cent. Revenue per hour declined approximately 10 per cent compared with the first quarter of 2014. Price reductions became more pronounced as the quarter progressed, reaching approximately 15 per cent by quarter-end.

Well-servicing gross margin as a percentage of revenue decreased to 23 per cent compared with 27 per cent in the first quarter of 2014 due to the revenue decrease, partially offset by lower labour costs in coil well service from better crew management. As revenue declines, fixed costs comprise a larger percentage of revenue, reducing gross margin. Essential's fixed-cost savings were implemented in March, 2015, and the benefit will be realized in the rest of 2015.

Following the first quarter of 2015, Essential reduced its conventional coil-tubing fleet to 11 rigs by retiring six conventional coil-tubing rigs: two deep rigs and four shallow rigs. As a cost-reduction and -efficiency measure, the remaining conventional coil-tubing operation has been fully integrated with the masted coil-tubing operation.

Segment results -- downhole tools and rentals

Downhole tools and rentals first quarter revenue decreased 22 per cent from the same quarter of 2014. Downhole tools revenue decreased due to industry declines for well completions and production work, as well as pricing pressure. Pricing pressures became more pronounced as the quarter progressed, reaching approximately 15 per cent by the end of the quarter. During the first three months of 2015, Essential realized incremental growth from its U.S. downhole tools business, which remains a small portion of the segment. Rental revenue was consistent with 2014 due to demand for a specialty drill pipe that Essential added to its rental fleet in 2014.

Gross margin as a percentage of revenue in the first quarter of 2015 was 29 per cent compared with 30 per cent for the same period in 2014. Decreased operating margin in Canada was partially offset by improvement from U.S. operations, which had an operating loss in 2014 during its initial start-up phase, and relatively greater contribution of higher-margin rental revenue in 2015.

General and administrative

General and administrative expenses are composed of wages, professional fees, office space and other administrative costs, incurred at corporate and operational levels. G&A expenses for the quarter ended March 31, 2015, were lower than the same quarter in the prior year due primarily to the suspension of incentive plans in 2015. As cost cutting primarily occurred in later March, 2015, including implementation of salary rollbacks and layoffs, G&A is expected to be lower for the rest of 2015.

Other expense

The weakening of the Canadian dollar in relation to the U.S. dollar resulted in higher foreign exchange gains in the first quarter of 2015 compared with the same period in 2014.

Financial resources and liquidity

Funds flow from operations

Working capital

Working capital typically grows through the first, third and fourth quarters of the year when industry activity is stronger. Working capital declined in the first quarter of 2015, which is not typical for this time of year, due to the industry downturn. Essential uses its revolving credit facility to meet the variable nature of its working capital needs as collection periods for accounts receivable are longer than payment cycles to vendors and employees. In periods of higher activity, debt initially tends to increase, and in periods of lower activity, debt initially declines.

Equipment expenditures and fleet additions

Essential classifies its equipment expenditures as growth capital and maintenance capital

Essential's 2015 capital budget of $21-million is composed of $13-million in growth capital and $8-million in maintenance capital. Growth capital consists primarily of one Generation 3 and progress payments on four Generation 4 masted coil-tubing rigs. Two of these five masted coil-tubing rigs are expected to be in service in 2015 and three in 2016.

Essential added a Generation 3 masted coil-tubing rig to its 2015 capital budget. This masted coil-tubing rig was deferred earlier this year with Essential having the right of first refusal to purchase the rig prior to its completion. Negotiated deferrals in the Generation 4 masted coil-tubing rig program reduced capital in 2015 as costs have been deferred to 2016, resulting in Essential's capital budget remaining at $21-million.

Essential's long-term capital build program is aimed at increasing the size and depth capacity of the masted coil-tubing fleet. To date, the company has added three Generation 3 and two Generation 4 masted coil-tubing rigs. Essential expects to spend approximately $52-million on this program. Upon completion of the $52-million spending program in 2016, Essential will have four Generation 3 and six Generation 4 masted coil-tubing rigs. At March 31, 2015, Essential has spent approximately $41-million on this capital program. The Generation 3 and Generation 4 masted coil-tubing rigs have the capability to work on long-reach horizontal wells and are well suited to work in deep, high-pressure regions, including the Montney, Bakken, Duvernay and Horn River. With a coil diameter of 2-3/8ths of an inch, the Generation 3 masted coil-tubing rigs can reach 6,300 metres, and the Generation 4 rigs can reach 7,900 metres.

Outlook

The extent and duration of the industry downturn are highly uncertain. In Canada, industry drilling rig utilization in the first quarter was down significantly from the prior year, reaching levels similar to the first quarter of 2009. For the rest of 2015, sustained commodity price improvement will be required for improved industry activity. During this time, management will remain focused on the things the company can control: costs, capital spending and debt.

Essential implemented a number of cost management initiatives in the first quarter. The timing was critical to minimize fixed costs during the seasonally slow second quarter and thereafter. Reductions included employee compensation reductions at all levels of the organization and significant employee layoffs in the field and the Calgary corporate office. The objective is to continue to operate profitably during the downturn while retaining key employees so the company is ready to return as a stronger entity when the industry recovers. Annualized fixed-cost savings continue to be anticipated at $10-million.

The capital spending budget was rightsized for the downturn earlier in the year and remains unchanged at $21-million. This is less than 50 per cent of what the company spent on capital in each of the last few years. Investment capital is focused on the masted coil-tubing fleet. Management believes continuing with the build program is an appropriate use of capital given the industry trend of drilling and completing long-reach horizontal wells. The masted coil-tubing rigs have the capability to work on long-reach horizontal wells and are well suited to work in deep, high-pressure regions, including the Montney, Bakken, Duvernay and Horn River.

The cost-cutting efforts and conservative capital spending will help to preserve the strength of the balance sheet. At May 5, 2015, Essential had $39.1-million outstanding, and reported debt to EBITDAS of 0.7 times at the end of the first quarter.

The management's discussion and analysis and financial statements are available on Essential's website and on SEDAR.

                                       
   CONSOLIDATED INTERIM STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME      
         (in thousands of dollars, except per-share amounts)

                                                  For the three months ended
                                                             March 31,
                                                        2015            2014

Revenue                                       $       70,419  $      103,730
Operating expenses                                    55,117          76,403
Gross margin                                          15,302          27,327
General and administrative expenses                    4,443           4,820
Total                                                 10,859          22,507
Depreciation and amortization                          6,690           6,785
Share-based compensation                                 154             651
Other (income) expenses                                 (716)            755
Operating profit                                       4,731          14,316
Finance costs                                            472             433
Income before income taxes                             4,259          13,883
Current income tax expense                               442           2,782
Deferred income tax expense                              721             952
Total income tax expense                               1,163           3,734
Net income                                    $        3,096  $       10,149
Unrealized foreign exchange gain (loss)                  248             (86)
Comprehensive income                          $        3,344  $       10,063
Net income per share
Basic and diluted                             $         0.02  $         0.08
Comprehensive income per share
Basic and diluted                             $         0.03  $         0.08

First quarter 2015 financial results conference call and webcast

Essential has scheduled a conference call and webcast at 10 a.m. MT (12 p.m. ET) on May 6, 2015.

The conference call dial-in numbers are 416-340-2217 or 866-696-5910, passcode 5627608.

An archived recording of the conference call will be available approximately one hour after completion of the call until May 24, 2015, by dialling 905-694-9451 or 800-408-3053, passcode 4935655.

A live webcast of the conference call will be accessible on Essential's website by selecting investors, and events and presentations. Shortly after the live webcast, an archived version will be available for approximately 30 days.

We seek Safe Harbor.