Mr. Alex MacAusland reports

WESTERN ENERGY SERVICES CORP. RELEASES FOURTH QUARTER AND YEAR END 2018 FINANCIAL AND OPERATING RESULTS

Western Energy Services Corp. has released its fourth quarter and year-end 2018 financial and operating results. Additional information relating to the company, including the company's financial statements and management discussion and analysis as at and for the years ended Dec. 31, 2018, and Dec. 31, 2017, will be available on SEDAR.

Fourth quarter 2018 operating results

Fourth quarter operating revenue decreased by $1.5-million to $57.8-million in 2018 as compared with $59.3-million in 2017. In the contract drilling segment, operating revenue totalled $44.5-million in the fourth quarter of 2018, a decrease of $1.4-million (or 3 per cent) as compared with $45.9-million in the fourth quarter of 2017. In the production services segment, operating revenue totalled $13.3-million for the three months ended Dec. 31, 2018, as compared with $13.4-million in the three months ended Dec. 31, 2017, a decrease of $100,000 (or 1 per cent). While pricing improved in the contract drilling segment and activity was higher for contract drilling in the United States and well servicing in Canada, lower contract drilling activity in Canada, decreased oil field rental equipment activity as well as lower pricing in the production services segment impacted operating revenue as described as follows.

Drilling rig utilization

Operating days in Canada decreased to 32 per cent in the fourth quarter of 2018, compared with an average of 38 per cent in the same period of the prior year, reflecting a 600-basis-point reduction. The decrease in activity was mainly attributable to record high differentials on Canadian crude oil realized in the fourth quarter of 2018 and heightened market uncertainty. As a result, customers were quick to delay or cancel their drilling programs in the fourth quarter of 2018. Fourth quarter 2018 drilling rig utilization of 32 per cent represented a premium of 400 basis points to the Canadian Association of Oilwell Drilling Contractors (CAODC) industry average of 28 per cent, a decrease as compared with the fourth quarter of 2017 when Drilling rig utilization of 38 per cent represented a premium of 1,000 basis points to the industry average. The decrease in the company's utilization premium to the industry average in 2018 was a function of a smaller industry rig fleet as rigs continue to be decommissioned or moved out of the Western Canadian sedimentary basin (WCSB). Western's market share, represented by the company's operating days as a percentage of the CAODC's total operating days in the WCSB, remained consistent at 10 per cent in both the fourth quarter of 2018 and 2017. Pricing continued to increase and resulted in a 4-per-cent improvement in operating revenue per billable day in the fourth quarter of 2018 as compared with the same period in the prior year. The increase in pricing was a result of the company being successful in steadily raising rates in 2018 prior to demand decreasing in the fourth quarter of 2018.

In the United States, improved West Texas Intermediate (WTI) prices led to six of the company's seven drilling rigs operating during the quarter, three of which were working on long-term contracts. During the fourth quarter of 2018, the company purchased one Cardium-class drilling rig for its fleet in the United States, which commenced operations in the Permian basin at the end of the fourth quarter. As a result of improved WTI pricing and a larger rig fleet, operating days increased by 29 per cent in the fourth quarter of 2018, as compared with the same period in the prior year. As a result, drilling rig utilization improved to 71 per cent in the fourth quarter of 2018, compared with 63 per cent in the same period of the prior year. Operating revenue per billable day for the fourth quarter of 2018 improved by 10 per cent as compared with the fourth quarter of 2017 as the improved commodity price environment led to increased demand and resulted in day rate increases on contracted rigs.

Service rig utilization was 28 per cent in the fourth quarter of 2018 compared with 26 per cent in the same period of the prior year. The increase is due to continued marketing efforts to broaden the company's customer base despite customer programs being impacted significantly by record high crude oil differentials in the fourth quarter of 2018. While utilization improved, service rig operating revenue per service hour decreased during the fourth quarter of 2018 by 6 per cent as compared with the same period in the prior year due to changes in the average rig mix. Higher utilization, offset partially by lower pricing, led to well servicing operating revenue in the period increasing to $11.5-million, an improvement of $400,000 (or 4 per cent) as compared with the same period in the prior year.

Fourth quarter adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) decreased by $2.2-million (or 21 per cent) to $7.9-million in 2018 as compared with $10.1-million in the fourth quarter of 2017. The year-over-year change in adjusted EBITDA is due to lower activity in the contract drilling segment in Canada, decreased oil field rental equipment activity and decreased well servicing hourly rates, which were offset partially by improved pricing in the contract drilling segment and higher utilization in the United States and well servicing in Canada.

Administrative expenses, excluding depreciation and stock-based compensation, decreased by $1-million (or 17 per cent) to $4.8-million, as compared with $5.8-million in the fourth quarter of 2017, mainly due to lower employee-related costs.

The company incurred a net loss of $9.5-million in the fourth quarter of 2018 (10 cents per basic common share), as compared with a net loss of $5-million in the same period in 2017 (six cents per basic common share). The change can be attributed to the following:

• A $3.2-million decrease in income tax recovery due to the decrease in the federal corporate tax rates in the United States in 2017 from 35 per cent to 21 per cent, which resulted in a significant recovery in the prior period;
• A $2.2-million decrease in adjusted EBITDA, mainly due to lower oil field rental equipment activity and lower utilization in the contract drilling segment in Canada, offset partially by higher utilization in the United States and in well servicing in Canada;
• A $600,000 increase in other items, which include gains and losses on foreign exchange and asset sales.

Offsetting the aforementioned items was a $1-million decrease in finance costs due to lower total debt levels and a lower average interest rate.

Fourth quarter 2018 capital expenditures of $6.1-million included $4.1-million of expansion capital and $2-million of maintenance capital. In total, capital spending in the fourth quarter of 2018 increased by $200,000 from the $5.9-million incurred in the fourth quarter of 2017. The company incurred expansion capital mainly related to drilling rig upgrades, including the acquisition and upgrade of one Cardium-class rig in the Permian basin as well as required maintenance capital in the fourth quarter of 2018.

On Dec. 12, 2018, the company completed a number of amendments to its syndicated first-lien credit facility (the revolving facility) and its committed operating facility, including the following:

• Extended the maturity of its credit facilities to Dec. 17, 2021;
• Elected to reduce the commitment under the revolving facility from $70-million to $50-million; the commitment under the operating facility remains unchanged at $10-million;
• The minimum debt service coverage ratio financial covenant was removed;
• A current ratio financial covenant was added, whereby Western's current ratio, excluding the current portion of long-term debt and accrued interest, must meet or exceed 1.15.

2018 operating results

Operating revenue in 2018 decreased by $3.2-million (or 1 per cent) to $215.8-million as compared with $219-million in 2017. However, after normalizing for $6.4-million of shortfall commitment revenue recognized in the first quarter of 2017, operating revenue in 2018 improved by $3.2-million (or 2 per cent). In the contract drilling segment, operating revenue totalled $165.7-million in 2018, which, after normalizing for $6.4-million of shortfall commitment revenue recognized in 2017, resulted in operating revenue improving by $5.4-million (or 3 per cent). In the production services segment, operating revenue totalled $50.3-million in 2018, as compared with $52.5-million in 2017, a decrease of $2.2-million (or 4 per cent). While on a year-to-date basis activity was lower in Canada, activity in the United States increased and pricing in all divisions improved, which impacted operating revenue as described as follows.

Drilling rig utilization in Canada for the year ended Dec. 31, 2018, averaged 35 per cent, compared with an average of 37 per cent for the prior year, reflecting a 200-basis-point decrease. The decrease in activity was due to some of Western's customers deferring or cancelling their drilling plans, particularly in the fourth quarter of 2018, amid high differentials on Canadian crude oil and low natural gas prices. Drilling rig utilization of 35 per cent in 2018 represented a premium of 600 basis points to the CAODC industry average of 29 per cent, whereas, in 2017, drilling rig utilization of 37 per cent represented an 800-basis-point premium to the industry average. The decrease in the company's utilization premium to the industry average in 2018 was a function of a smaller industry rig fleet as rigs continue to be decommissioned or moved out of the WCSB. Western's market share, represented by the company's operating days as a percentage of the CAODC's total operating days in the WCSB, remained consistent at 10 per cent in both 2018 and 2017. While utilization decreased during 2018, pricing continued to increase and resulted in an 8-per-cent improvement in operating revenue per billable day in 2018 as compared with 2017. The increase in pricing is a result of the company being successful in steadily raising rates in 2018 prior to demand decreasing in the fourth quarter of 2018.

In the United States, improved WTI prices led to six of the company's seven drilling rigs operating during the year. Late in the fourth quarter of 2018, the company added a Cardium-class drilling rig to its fleet in the United States, which began work in the Permian basin. As a result of improved WTI pricing and a larger rig fleet, operating days increased by 16 per cent in 2018 as compared with 2017. While activity increased, drilling rig utilization decreased marginally to 51 per cent for the year ended Dec. 31, 2018, as compared with 52 per cent in the prior year, due to an increased rig fleet as two Cardium-class drilling rigs were added to the fleet -- one in late 2017 and the other in late 2018. Operating revenue per billable day in the United States improved by 5 per cent in 2018, as compared with 2017, as the improved commodity price environment led to increased demand and resulted in day rate increases.

Service rig utilization of 25 per cent for the year ended Dec. 31, 2018, compared with 26 per cent in the prior year. Over the last nine months of 2018, well servicing activity improved over the same period of the prior year due to the continued marketing efforts to broaden the company's customer base. However, on a year-over-year basis, activity is down due to operating hours being lower in the first quarter of 2018. Hourly rates improved in 2018, increasing by 1 per cent as compared with the prior year, due to changes in the average rig mix and the company working to increase rates across all areas. Lower utilization, partially offset by improved pricing, led to a $1.2-million, or 3-per-cent, decrease in well servicing operating revenue in 2018.

Adjusted EBITDA for the year ended Dec. 31, 2018, decreased by $4.1-million (or 11 per cent) to $31.6-million, as compared with $35.7-million in 2017. However, after normalizing for the $6.4-million in shortfall commitment revenue recognized in the first quarter of 2017, adjusted EBITDA improved by $2.3-million (or 8 per cent) in 2018, as compared with the prior year. The year-over-year decrease in adjusted EBITDA is due to lower activity and shortfall commitment revenue in Canada, offset by improved pricing in all divisions and increased activity in the United States.

Administrative expenses in 2018, excluding depreciation and stock-based compensation, decreased by $3.7-million (or 16 per cent) to $18.9-million, as compared with $22.6-million in 2017, mainly due to lower employee-related costs.

The company incurred a net loss of $41.1-million in 2018 (45 cents per basic common share), as compared with a net loss of $37.4-million in 2017 (48 cents per basic common share). The change can be attributed to the following:

• A $4.1-million decrease in adjusted EBITDA, mainly due to lower shortfall commitment revenue;
• A $4.9-million decrease in income tax recovery mainly due to the decrease in the federal corporate tax rates in the United States in 2017 from 35 per cent to 21 per cent, which resulted in a significant recovery in the prior period.

Offsetting the aforementioned items was:

• A $1.5-million positive change in other items, of which $1.6-million related to transaction costs incurred in the prior period, coupled with gains and losses on foreign exchange and asset sales;
• A $2.9-million decrease in finance costs, due to lower total debt levels;
• An $800,000 decrease in stock-based compensation expense.

Year-to-date capital expenditures of $20-million included $11.5-million of expansion capital and $8.5-million of maintenance capital. In total, capital spending in 2018 increased by $1.9-million from the $18.1-million incurred in 2017. The company incurred expansion capital mainly related to drilling rig upgrades, including the purchase and upgrade of one Cardium-class rig in the Permian basin, as well as required maintenance capital in 2018.

On Jan. 31, 2018, the company completed the one-time draw of $215-million on its 7.25 per cent second-lien secured term loan facility. The proceeds from the second-lien facility draw, along with cash on hand and funds available under the credit facilities were used to redeem the $265-million 7-7/8ths per cent senior unsecured notes at their par value of $265-million on Feb. 1, 2018. Annual amortization payments equal to 1 per cent of the original principal amount are payable in quarterly instalments, which began on July 1, 2018, with the balance due on Jan. 31, 2023.

                                          SELECTED FINANCIAL INFORMATION         
                                 (stated in thousands, except per-share amounts)      

Financial highlights                                         Three months ended Dec. 31,             Year ended Dec. 31,
                                                                   2018            2017            2018            2017

Revenue                                                         $63,133         $66,515        $236,410        $238,175
Operating revenue                                                57,806          59,255         215,818         218,988
Gross margin                                                     12,677          15,886          50,535          58,310
Gross margin as a percentage of operating revenue                   22%             27%             23%             27%
Adjusted EBITDA                                                   7,916          10,067          31,616          35,695
Adjusted EBITDA as a percentage of operating revenue                14%             17%             15%             16%
Cash flow from operating activities                               5,022            (800)         33,231          24,641
Capital expenditures                                              6,102           5,912          19,960          18,132
Net (loss)                                                       (9,530)         (4,974)        (41,060)        (37,445)
Basic net (loss) per share                                        (0.10)          (0.06)          (0.45)          (0.48)
Diluted net (loss) per share                                      (0.10)          (0.06)          (0.45)          (0.48)
                                                            
Operating highlights                                         Three months ended Dec. 31,             Year ended Dec. 31,
                                                                   2018            2017            2018            2017
Contract drilling
Canadian operations
Contract drilling rig fleet
Average active rig count                                           18.1            21.6            19.2            20.6
End of period                                                        50              50              50              50
Operating revenue per billable day                              $19,622         $18,807         $18,922         $17,558
Operating revenue per operating day                             $21,973         $21,100         $20,984         $19,446
Operating days                                                    1,487           1,774           6,328           6,801
Drilling rig utilization -- billable days                           36%             43%             38%             41%
Drilling rig utilization -- operating days                          32%             38%             35%             37%
CAODC industry average utilization -- operating days                28%             28%             29%             29%
U.S. operations
Contract drilling rig fleet
Average active rig count                                            4.9             4.0             3.4             3.1
End of period                                                         7               6               7               6
Operating revenue per billable day (US$)                        $19,756         $18,038         $20,227         $19,198
Operating revenue per operating day (US$)                       $22,183         $21,265         $22,586         $22,338
Operating days                                                      403             313           1,121             969
Drilling rig utilization -- billable days                           79%             75%             57%             61%
Drilling rig utilization -- operating days                          71%             63%             51%             52%
Production services
Well servicing rig fleet
Average active rig count                                           18.8            17.0            16.5            17.2
End of period                                                        66              66              66              66
Service rig operating revenue per service hour                     $667            $708            $683            $673
Service hours                                                    17,247          15,650          60,337          62,946
Service rig utilization                                             28%             26%             25%             26%

Western is an oil field service company focused on three core business lines: contract drilling, well servicing and oil field rental equipment services. Western provides contract drilling services through its division, Horizon Drilling, in Canada, and its wholly owned subsidiary, Stoneham Drilling Corp., in the United States. Western provides well servicing and oil field rental equipment services in Canada through its wholly owned subsidiary Western Production Services Corp. Western Production Services' division, Eagle Well Servicing provides well servicing operations while its division, Aero Rental Services provides oil field rental equipment services. Financial and operating results for Horizon and Stoneham are included in Western's contract drilling segment, while financial and operating results for Eagle and Aero are included in Western's production services segment.

Western has a drilling rig fleet of 57 rigs specifically suited for drilling complex horizontal wells. Western is currently the fourth-largest drilling contractor in Canada, based on the CAODC-registered rigs, with a fleet of 49 rigs operating through Horizon. Of the Canadian fleet, 23 are classified as Cardium-class rigs, 19 as Montney-class rigs and seven as Duvernay-class rigs. As compared with the Cardium-class rigs, the Montney-class rigs have a larger hookload, while the Duvernay-class rigs have the largest hookload, allowing the rig to support more drill pipe down hole. Additionally, Western has eight drilling rigs operating through Stoneham in the United States, including six Duvernay-class rigs. Western is also the fifth-largest well servicing company in Canada with a fleet of 66 rigs operating through Eagle. Western's oil field rental equipment division, which operates through Aero, provides oil field rental equipment for hydraulic fracturing services, well completions and production work, coil tubing, and drilling services.

Crude oil and natural gas prices impact the cash flow of Western's customers, which in turn impacts the demand for Western's services. The attached table summarizes average crude oil and natural gas prices as well as average foreign exchange rates for the three months ended Dec. 31, 2018, and 2017 and for the years ended Dec. 31, 2018, and 2017.

Average crude oil and                 Three months ended Dec. 31,    Year ended Dec. 31,
natural gas prices                                2018      2017         2018      2017

Crude oil
West Texas Intermediate (US$/bbl)               $59.32    $55.28       $64.95    $50.81
Western Canadian Select (CDN$/bbl)               33.91     49.10        49.97     49.49
Natural gas
30-day spot AECO (CDN$/mcf)                       1.61      1.67         1.53      2.23
Average foreign exchange rates
U.S. dollar to Canadian dollar                    1.32      1.27         1.30      1.30

WTI on average improved by 7 per cent and 28 per cent for the three months and year ended Dec. 31, 2018, respectively, compared with the same periods in the prior year. However, pricing on Canadian crude oil collapsed in the fourth quarter of 2018, resulting in record differentials. As a result, the price for Western Canadian Select (WCS) decreased by 31 per cent for the three months ended Dec. 31, 2018, as compared with the same period in the prior year, while, on a year-over-year basis, WCS improved by only 1 per cent. The U.S.-dollar-to-Canadian-dollar foreign exchange rate remained constant year over year, though the weakening of the Canadian dollar in the fourth quarter of 2018 had a slightly positive effect on the cash flows of Western's Canadian customers when selling U.S.-dollar-denominated commodities. Natural gas prices declined for both the three months and year ended Dec. 31, 2018, as the 30-day spot AECO price decreased by 4 per cent and 31 per cent, respectively, over the same periods of the prior year; however, fourth quarter 2018 average AECO prices improved by 28 per cent as compared with the third quarter of 2018.

In the United States, improved market conditions in 2018 have led to a corresponding increase in the demand for oil field services. As reported by Baker Hughes, a GE company, the average number of active drilling rigs in the United States increased approximately 18 per cent in 2018 as compared with 2017. However, market conditions in Canada did not improve. Higher WTI prices were largely offset by increased differentials on Canadian crude oil, which hit record highs in the fourth quarter of 2018, prior to narrowing upon the announcement of mandatory crude oil production curtailments by the government of Alberta. This intervention increased market uncertainty, so the higher pricing did not correspond to higher activity. Additionally, the continued industry concerns over market access, increased regulation, and the prevailing customer preference to return cash to shareholders or pay down debt, rather than grow production, have resulted in a decrease in industry activity in Canada. The CAODC reported that, for drilling in Canada, the total number of operating days in the WCSB decreased by approximately 3 per cent in 2018 as compared with 2017.

Outlook

Currently, 27 of Western's drilling rigs are operating. Six of Western's 57 drilling rigs (or 11 per cent) are under long-term take-or-pay contracts, with three expected to expire in 2019, two expected to expire in 2020 and one expected to expire in 2021. These contracts each typically generate between 250 and 350 billable days per year.

Western's capital budget for 2019 remains unchanged and is expected to total $15-million, with $2-million allocated for expansion capital and $13-million for maintenance capital. Western believes the 2019 capital budget provides a prudent use of cash resources and will allow it to maintain its premier drilling and well servicing rig fleets while remaining responsive to customer requirements. Western will continue to manage its operations in a disciplined manner and make required adjustments to its capital program as customer demand changes.

Mandated crude oil production cuts in Alberta and uncertainty surrounding take-away capacity related to the timing of construction on the Trans Mountain pipeline expansion and the Keystone XL pipeline have resulted in the announced capital budgets for Western's Canadian customers decreasing year over year in 2019 compared with 2018. As such, activity levels in Canada are expected to decrease in 2019. Controlling fixed costs and maintaining balance sheet flexibility are priorities for the company as prices for Western's services remain below historical levels. However, Western's variable cost structure and a prudent capital budget will aid in preserving balance sheet strength. Given the outlook for oil field services in Canada, Western is pro-actively looking to deploy existing assets in Canada into more active resource plays in the United States. Early in 2019, Western transferred a Duvernay-class drilling rig from Canada to the Permian Basin in the United States, increasing the U.S. drilling rig fleet to eight rigs. As at Dec. 31, 2018, Western had $11.9-million drawn on its $60-million credit facilities, which mature on Dec. 17, 2021, and currently has $213.4-million outstanding on its second-lien facility, which matures on Jan. 31, 2023.

Oil field service activity in Canada will be affected by the development of resource plays in Alberta and northeast British Columbia, which will be impacted by pipeline construction, environmental regulations and the level of investment in Canada. Currently, the largest challenges facing the oil field service industry are limited take-away capacity, continued customer spending constraints relative to historical levels (as a result of low natural gas prices and differentials on Canadian crude oil) and the increasing challenge of staffing field crews, particularly in the well servicing division. Western's rig fleet is well positioned to benefit from the recently approved liquefied natural gas project in British Columbia. It is also Western's view that its modern drilling and well servicing rig fleets, reputation and disciplined cash management provide a competitive advantage, which will enable the company to manage through the current oil field service environment.

We seek Safe Harbor.