Mr. Ken Zinger reports

CES ENERGY SOLUTIONS CORP. ANNOUNCES STRONG Q2 2023 RESULTS

CES Energy Solutions Corp. had record second quarter financial results for Q2 2023, as quarterly revenue, adjusted EBITDAC (defined as net income before interest, taxes, depreciation and amortization, finance costs, other income (loss), stock-based compensation, and impairment of goodwill, which are not reflective of underlying operations) and cash flow generation continued to grow year over year. Second quarter highlights include:

• Revenue of $515.8-million, increased 19 per cent year over year;
• Adjusted EBITDAC of $73.9-million, increased 21 per cent year over year;
• Adjusted EBITDAC margin of 14.3 per cent, increased 20 basis points year over year;
• Cash flow from operations of $89.3-million and free cash flow of $66.7-million;
• Leverage declined to 1.57 times total debt/adjusted EBITDAC from 1.78 times at March 31, 2023, and 2.17 times at Dec. 31, 2022;
• Working capital surplus exceeded total debt at June 30, 2023, by $163.4-million;
• Renewed NCIB (normal course issuer bid), permitting the repurchase for cancellation up to 10 per cent of the public float of common shares, effective July 21, 2023;
• Repurchased $7.6-million of common shares during the quarter and $12.2-million of common shares subsequent to June 30, 2023.

The continuation of strong cash flow generation at near-record levels has extended CES's deleveraging trend, providing ample comfort to increase share buybacks, while preserving current dividend levels and supporting operational needs. Amid the current environment, CES intends to repurchase up to the maximum of 18.7 million common shares under its renewed NCIB over the coming year.

Second quarter results

In the second quarter, CES generated revenue of $515.8-million, representing a sequential decrease of $41.9-million or 8 per cent compared with Q1 2023, on seasonally lower activity levels in Canada, and an increase of 19 per cent compared with Q2 2022, as activity levels have seen a modest increase year over year. For the six months ended June 30, 2023, CES generated revenue of $1.1-billion, an increase of $238.6-million or 29 per cent relative to the six months ended June 30, 2022. As producers' capital spending and production levels have stabilized, improvements in U.S. drilling market share and production chemical volumes resulted in significant uptick in revenue compared with prior year. CES continues to realize high levels of revenue underpinned by industry stabilization and strong market share throughout the business. Industry conditions provided a supportive backdrop for the company with balancing macro trends in supply demand, activity levels, rig counts and production levels.

Revenue generated in the United States during Q2 2023 was $375.5-million, representing a sequential increase of $6.5-million or 2 per cent compared with Q1 2023 and an increase of 25 per cent compared with Q2 2022. For the six months ended June 30, 2023, revenue generated in the U.S. was up 36 per cent to $744.4-million relative to the six months ended June 30, 2022. U.S. revenues for both the three- and six-month periods were positively impacted by increased industry activity, higher production levels and improved market share year over year. CES maintained its strong industry positioning, with a U.S. drilling fluids market share of 20 per cent for Q2 2023 and Q1 2023, and year-over-year improvement from 17 per cent in Q2 2022.

Revenue generated in Canada during Q2 2023 was $140.4-million, representing a sequential decrease of $48.3-million or 26 per cent compared with Q1 2023, as is expected on a seasonal basis, and an increase of 5 per cent from Q2 2022. Canadian revenues were negatively impacted by a 42-per-cent sequential decrease in rig counts relative to Q1 2023 for spring breakup, with production levels up marginally year over year in the three-month period, despite customer shut-ins due to the Canadian wildfires. Canadian drilling fluids market share for Q2 2023 of 32 per cent was in line with Q2 2022 of 33 per cent but down from 38 per cent on a sequential quarterly basis. For the six months ended June 30, 2023, revenue generated in Canada of $329.1-million was up 15 per cent relative to the six months ended June 30, 2022, driven by higher industry activity and production levels year over year.

CES achieved adjusted EBITDAC of $73.9-million in Q2 2023, representing a sequential decrease of 4 per cent compared with Q1 2023 and an increase of 21 per cent compared with Q2 2022. Adjusted EBITDAC as a percentage of revenue of 14.3 per cent achieved in Q2 2023 compared with 13.8 per cent recorded in Q1 2023 and 14.1 per cent recorded in Q2 2022. For the three-month period, adjusted EBITDAC improved year over year on higher revenue levels and a comparable period that was negatively impacted by rapid inflation of product and labour costs. For the six months ended June 30, 2023, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was up 46 per cent to $151.0-million. The company has continued to be effective in pricing and procurement activities while maintaining prudent G&A (general and administrative) levels, combined with increased scale.

Net income for the three and six months ended June 30, 2023, increased 69 per cent to $33.9-million from $20.1-million and 120 per cent to $66.9-million from $30.4-million, respectively, compared with the prior-year periods, driven by significantly higher industry activity levels.

CES generated $63.0-million in funds flow from operations in Q2 2023, in line with the $62.6-million generated in Q1 2023 and up 37 per cent from $46.1-million generated in Q2 2022. For the six months ended June 30, 2023, CES generated $125.6-million of funds flow from operations, compared with $79.3-million in 2022. Funds flow from operations excludes the impact of working capital and is reflective of the continued strong surplus free cash flow generation in stable market conditions seen in the first half of 2023.

For Q2 2023, net cash provided by operating activities totalled $89.3-million, compared with net cash used by operating activities of $12.8-million during the three months ended June 30, 2022. For the six months ended June 30, 2023, net cash provided by operating activities of $162.6-million, compared with net cash used by operating activities of $25.3-million for the six months ended June 30, 2022. The change was primarily driven by a lower required investment in working capital as activity levels remained stable during the three- and six-month periods of 2023, coupled with higher net income on associated activity levels relative to the comparative periods.

CES generated $66.7-million in free cash flow in Q2 2023, up 23 per cent from $54.1-million generated in Q1 2023 and compared with a use of $27.0-million in Q2 2022. For the six months ended June 30, 2023, CES generated $120.8-million of free cash flow, compared with a use of $50.2-million in 2022. Free cash flow includes the impact of net capital expenditures and lease repayments, and is reflective of the company's surplus free cash flow generation in excess of required capital expenditures.

As at June 30, 2023, CES had a working capital surplus of $641.4-million, which decreased by $37.7-million from $679.1-million at March 31, 2023 (Dec. 31, 2022 -- $691.1-million), as revenue and activity levels have stabilized and working capital investments have moderated. The reduction during the quarter was driven by a 13-per-cent reduction in accounts receivable, supported by strong cash collections and a 6-per-cent reduction in inventory. The company continues to focus on working capital optimization benefiting 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 $120.2-million, compared with $166.7-million at March 31, 2023, and $208.5-million at Dec. 31, 2022. Total debt of $478.0-million at June 30, 2023, compared with $518.8-million at March 31, 2023, and $557.5-million at Dec. 31, 2022, of which $288.0-million relates to senior notes that mature on Oct. 21, 2024. The decreases realized during the period were primarily driven by strong cash flow generation enhanced by the reduction in required working capital investments as described above, partly offset by $11.8-million in share repurchases and $10.2-million in dividend payments paid out in the first half of 2023. Working capital surplus exceeded total debt at June 30, 2023, by $163.4-million (Dec. 31, 2022 -- $133.6-million). Currently, the company has a net draw on its senior facility of approximately $98.0-million, representing a reduction of approximately $110.5-million since Dec. 31, 2022. These reduced draw levels reflect the onset of strong free cash flow generation from sustained revenue levels supported by CES's capex-light business model and stabilizing end-market activity levels.

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 senior facility is approximately $700.0-million (Canadian), consisting of an aggregated revolving facility of approximately $450.0-million (Canadian) and a Canadian term loan facility of $250.0-million (Canadian). 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 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.

On July 18, 2023, CES announced the renewal of its previous NCIB, which expired on July 20, 2023. Under the company's renewed NCIB, which became effective on July 21, 2023, the company may repurchase for cancellation up to 18,719,430 common shares, being 10.0 per cent of the public float of common shares at the time of renewal. The renewed NCIB will terminate on July 20, 2024, or such earlier date as the maximum number of common shares are purchased pursuant to the NCIB or the NCIB is completed or is terminated at the company's election. During Q2 2023, the company repurchased 2,909,100 common shares at an average price of $2.61 per share for a total of $7.6-million. During the six months ended June 30, 2023, the company repurchased 4,500,100 common shares at an average price of $2.62 per share for a total of $11.8-million. Since inception of the company's NCIB programs on July 17, 2018, and up to June 30, 2023, the company has repurchased 36,758,457 common shares at an average price of $2.10 per share for a total amount of $77.1-million. Subsequent to June 30, 2023, the company repurchased 4,551,800 additional shares at a weighted average price of $2.68 for a total amount of $12.2-million.

Outlook

The recovery in global energy demand, combined with several years of lower investment in the upstream oil and gas sector, has 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. CES 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, increased service intensity levels 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 record revenue levels, CES expects 2023 capital expenditures to be approximately $60.0-million, split evenly between maintenance and expansion capital to support higher activity levels and business development opportunities. 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 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's underlying business model is capex light and asset light, enabling the generation of significant surplus free cash flow. As its 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 second quarter results, CES will host a conference call/webcast at 9 a.m. MT (11 a.m. ET) on Friday, Aug. 11, 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

Webcast:  A webcast will be available on the company's website.

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 mid-stream 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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