Mr. Ken Zinger reports

CES ENERGY SOLUTIONS CORP. ANNOUNCES STRONG Q1 2023 RESULTS AND AN INCREASED DIVIDEND

CES Energy Solutions Corp. has released its results for the three months ended March 31, 2023, along with a 25-per-cent increase to its quarterly dividend from two cents per share to 2.5 cents per share, which will take effect and be paid on the company's next scheduled dividend payment of July 14, 2023, to the shareholders of record at the close of business on June 30, 2023.

First quarter highlights

• Quarterly revenue of $557.7-million;
• Adjusted EBITDAC of $77.1-million, representing a 13.8-per-cent margin;
• Cash flow from operations of $73.2-million;
• Leverage reduced to 1.78 times total debt/adjusted EBITDAC from 2.17 times at Dec. 31, 2022;
• Working capital surplus exceeded total debt at March 31, 2023, by $160.3-million.

CES is pleased to announce strong Q1 2023 financial results, as quarterly revenue, adjusted EBITDAC and cash flow from operations remained stable near all-time high levels. These solid financial results reflect CES's ability to leverage its established infrastructure, strong industry positioning and dedicated people to capitalize on the constructive environment in the broader industry.

CES remains confident in its ability to continue generating strong surplus free cash flow, supported by its financial results, outlook and recent refinancing efforts aimed at addressing the 6.375 per cent senior unsecured notes that are scheduled to mature in October of 2024. Furthermore, on May 11, 2023, the company's board of directors approved a 25-per-cent increase to the quarterly dividend from two cents per share to 2.5 cents per share, resulting in an annualized dividend of 10 cents per share representing an implied yield of 4 per cent and an implied payout ratio of 12 per cent. The increased dividend returns additional value to shareholders while preserving the strength of the company's balance sheet and maintaining ample liquidity to finance capital allocation alternatives. The new dividend payment amount will be paid on the company's next scheduled dividend payment date of July 14, 2023, to the shareholders of record at the close of business on June 30, 2023.

Revenue for the quarter remained stable near all-time high levels at $557.7-million, representing a sequential decrease of $5.0-million or 1 per cent relative to CES's previous record of $562.7-million in Q4 2022 and an increase of $156.4-million or 39 per cent relative to Q1 2022. Adjusted EBITDAC for the quarter came in at $77.1-million, compared with $80.2-million in Q4 2022 and $42.5-million in Q1 2022, as CES continues to realize high levels of revenue underpinned by industry stabilization, and continued strong market share throughout the business. Industry conditions continue to provide a supportive backdrop for the company with positive macro trends in supply demand balance, activity levels, rig counts and production levels. While cost inflation persists in certain facets of the value chain, margin compression has been mitigated by the maintenance of prudent G&A (general and administrative) levels and targeted pricing increases.

CES exited the quarter with a net draw on its syndicated senior facility of $166.7-million compared with $208.5-million at Dec. 31, 2022. Total debt of $518.8-million at March 31, 2023, compared with $557.5-million at Dec. 31, 2022, of which $288.0-million relates to senior notes which mature on Oct. 21, 2024. The decreases realized during the quarter were primarily driven by strong cash flow generation enhanced by the reduction in required working capital investments, partly offset by $4.2-million in share repurchases and $5.1-million in dividend payments. Working capital surplus exceeded total debt at March 31, 2023, by $160.3-million (Dec. 31, 2022 -- $133.6-million).

As at the date of this MD&A (management's discussion and analysis), the company had a net draw on its amended senior facility of approximately $130.0-million representing a reduction of approximately $78.5-million since Dec. 31, 2022. These reduced draw levels reflect the onset of strong free cash flow generation from strong revenue levels supported by CES's capex-light business model and stabilizing end market activity levels.

First quarter results

In the first quarter CES generated revenue of $557.7-million, representing a sequential decrease of $5.0-million or 1 per cent compared with Q4 2022, as revenue and activity levels stabilized throughout the business. Q1 2023 revenue also represented an increase of 39 per cent compared with Q1 2022 as activity levels have seen a significant increase year over year. As producers' capital spending increased and production levels have improved year over year, activity and industry rig counts have seen a significant uptick since the comparative period, which was still impacted by a lower commodity price environment.

Revenue generated in the United States during Q1 2023 was $369.0-million, representing a sequential decrease of $9.5-million or 3 per cent compared with Q4 2022 and an increase of 48 per cent compared with Q1 2022. U.S. revenues for the three-month period were positively impacted by increased industry activity, higher production levels and improved pricing year over year. U.S. land drilling activity in Q1 2023 decreased by 2 per cent on a sequential quarterly basis and increased by 21 per cent from Q1 2022. CES also saw a sequential and year over year improvement in its strong industry positioning, with a U.S. drilling fluids market share of 20 per cent for Q1 2023 versus 19 per cent for Q4 2022, and 18 per cent for Q1 2022.

Revenue generated in Canada during Q1 2023 was $188.7-million, representing a sequential increase of $4.5-million or 2 per cent compared with Q4 2022 and an increase of 24 per cent from Q1 2022. Canadian revenues benefited from an 11-per-cent increase in rig counts relative to Q4 2022 and Q1 2022, with drilling and production levels up year over year in the three-month period. Canadian drilling fluids market share for Q1 2023 of 38 per cent was in line with Q4 2022 of 38 per cent, and up from 35 per cent on a year-over-year basis.

CES achieved adjusted EBITDAC of $77.1-million in Q1 2023, representing a sequential decrease of 4 per cent compared with Q4 2022 and an increase of 82 per cent compared with Q1 2022. Adjusted EBITDAC as a percentage of revenue of 13.8 per cent achieved in Q1 2023 compared with 14.3 per cent recorded in Q4 2022 and 10.6 per cent recorded in Q1 2022. The company has been effective in passing through pricing increases where warranted and maintaining prudent G&A levels, which combined with increased scale to deliver continued strong margins for Q1 2023. For the three-month period, adjusted EBITDAC improved on significantly higher industry activity levels and improved pricing year over year.

Net income for the three months ended March 31, 2023, was $33.0-million compared with $10.3-million in Q1 2022. Net income increased by 222 per cent over prior year, primarily as a result of significantly higher industry activity levels year over year.

CES generated $62.6-million in funds flow from operations in Q1 2023, down 6 per cent from $66.9-million generated in Q4 2022 and up 89 per cent from $33.1-million generated in Q1 2022. Funds flow from operations excludes the impact of working capital investment and is reflective of strong surplus free cash flow generation amid significant improvements in market conditions in the quarter relative to the comparative period.

For Q1 2023, net cash provided by operating activities totalled $73.2-million, compared with net cash used by operating activities of $12.4-million during the three months ended March 31, 2022. The change was primarily driven by a lower required investment in working capital as activity levels stabilized during the quarter, coupled with higher net income on associated activity levels relative to the comparative period.

As at March 31, 2023, CES had a working capital surplus of $679.1-million, which has decreased from $691.1-million at Dec. 31, 2022, as revenue and activity levels stabilized in the current quarter. The reduction during the quarter was driven by a 3-per-cent reduction in accounts receivable, partially offset by a 2-per-cent increase in inventory. The company continues to focus on working capital optimization and to benefit from the high quality of its customers and diligent internal credit monitoring processes.

CES exited the quarter with a net draw on its syndicated senior facility of $166.7-million compared with $208.5-million at Dec. 31, 2022. Total debt of $518.8-million at March 31, 2023, compared with $557.5-million at Dec. 31, 2022, of which $288.0-million relates to senior notes which mature on Oct. 21, 2024. The decreases realized during the quarter were primarily driven by strong cash flow generation enhanced by the reduction in required working capital investments as described herein, partly offset by $4.2-million in share repurchases and $5.1-million in dividend payments. Working capital surplus exceeded total debt at March 31, 2023, by $160.3-million (Dec. 31, 2022 -- $133.6-million). As at the date of this MD&A, the company had a net draw on its senior facility of approximately $130.0-million.

On April 25, 2023, CES entered into an amended and restated credit agreement with respect to its syndicated and operating credit facilities. The total size of the increased amended senior facility is approximately $700.0-million consisting of an aggregated revolving facility of approximately $450.0-million and a Canadian term loan facility of $250.0-million. The Canadian term loan facility is undrawn and can only be used to repay and redeem the 6.375 per cent senior unsecured notes scheduled to mature in October of 2024. The amended senior facility matures on April 25, 2026, and is secured by substantially all of the company's assets and includes customary terms, conditions and covenants. The amended senior facility effectively addresses CES's near-term and foreseeable longer-term requirements. The Canadian term loan facility provides CES with the ability to repay the senior notes in full on its own schedule over the next seven months. Thereafter, CES has the opportunity to refinance and right-size the term portion of its capital structure on suitable terms at any time up until April of 2026.

During Q1 2023, under its NCIB program the company purchased 1,591,000 common shares at an average price of $2.65 per share for a total of $4.2-million. Since inception of the company's NCIB programs on July 17, 2018, and up to March 31, 2023, the company has repurchased 33,849,357 common shares at an average price of $2.05 per share for a total amount of $69.6-million. Subsequent to March 31, 2023, the company repurchased 1,600,200 additional shares at a weighted average price of $2.73 for a total amount of $4.4-million.

Outlook

The recovery in global energy demand combined with several years of lower investment in the upstream oil and gas sector have resulted in a balanced market for oil and natural gas, higher commodity prices, and a supportive outlook for the sector in CES's North American target market. While oil and natural gas prices have declined since the second quarter of 2022, increased activity and demand have led to improved production levels and drilling activity. The company expects current activity levels to continue through 2023, moderated by potential challenges with availability of labour and supply chain constraints. Further, broad economic concerns exist with respect to recession risk, interest rates and geopolitical instability, which may impact customer spending plans. CES is optimistic in its outlook for 2023 as it expects to benefit from elevated upstream activity and continued strength in commodity pricing across North America by capitalizing on its established infrastructure, industry leading positioning, vertically integrated business model and strategic procurement practices.

Commensurate with current revenue levels, CES expects 2023 capital expenditures to be approximately $55.0-million split evenly between maintenance and expansion capital. CES plans to continue its disciplined and prudent approach to capital expenditures and will adjust its plans as required to support growth throughout divisions.

CES has pro-actively managed both the duration and the flexibility of its debt. In April, 2023, CES successfully amended and extended its senior facility to April, 2026. The amended senior facility effectively addresses CES's near-term and foreseeable longer-term requirements. The Canadian term loan facility provides CES with the ability to repay and redeem the senior notes in full on its own schedule over the coming months. Thereafter, CES has the opportunity to refinance and right-size the term portion of its capital structure on suitable terms at any time up until April of 2026. CES routinely considers its capital structure, including further increasing the capacity of its senior facility, refinancing of the company's senior notes and other potential financing options.

CES prioritizes cash flow and as significant surplus free cash flow is generated from continued heightened revenue levels, CES intends to continue to reduce leverage and assess increases to its dividend and share buyback activity.

CES's underlying business model is capex light and asset light, enabling generation of significant surplus free cash flow. As the company's customers endeavour to maintain or grow production in the current environment, CES will leverage its established infrastructure, business model and nimble customer-oriented culture to deliver superior products and services to the industry. CES sees the consumable chemical market increasing its share of the oil field spend as operators continue to: drill longer reach laterals and drill them faster; expand and optimize the utilization of pad drilling; increase the intensity and size of their fracs; and require increasingly technical and specialized chemical treatments to effectively maintain existing cash flow generating wells and treat growing production volumes and water cuts from new wells.

Conference call details

With respect to the first quarter results, CES will host a conference call/webcast at 9 a.m. MT (11 a.m. ET) on Friday, May 12, 2023. A recording of the live audio webcast of the conference call will also be available on the company's website. The webcast will be archived for approximately 90 days.

North American toll-free:   1-800-319-4610

International/Toronto callers:  416-915-3239

About CES Energy Solutions Corp.

CES is a leading provider of technically advanced consumable chemical solutions throughout the life cycle of the oil field. This includes total solutions at the drill bit, at the point of completion and stimulation, at the wellhead and pumpjack, and finally through to the pipeline and mid-stream market. Key solutions include corrosion inhibitors, demulsifiers, H2S scavengers, paraffin control products, surfactants, scale inhibitors, biocides and other specialty products. Further, specialty chemicals are used throughout the pipeline and midstream industry to aid in hydrocarbon movement and manage transportation and processing challenges including corrosion, wax buildup and H2S.

CES operates in all major basins throughout the United States, including the Permian, Eagleford, Bakken, Marcellus and Scoop/Stack, as well as in the Western Canadian sedimentary basin (WCSB) with an emphasis on servicing the continuing major resource plays: Montney, Duvernay, Deep basin and SAGD. In the U.S., CES operates under the trade names AES Drilling Fluids, Jacam Catalyst LLC, Proflow Solutions and Superior Weighting Products. In Canada, CES operates under the trade names Canadian Energy Services, PureChem Services, StimWrx Energy Services Ltd., Sialco Materials Ltd. and Clear Environmental Solutions.

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