Mr. Garnet Amundson reports

ESSENTIAL ENERGY SERVICES ANNOUNCES FIRST QUARTER FINANCIAL RESULTS

Essential Energy Services Ltd. has released its first quarter financial results.

Industry overview

Commodity prices were significantly lower in the first quarter of 2023 compared with the same prior-year quarter. The price of oil (Western Texas Intermediate (WTI)) averaged $76 (U.S.) per barrel in the first quarter of 2023, compared with an average of $95 (U.S.) per barrel in the first quarter of 2022. Canadian natural gas prices (AECO) averaged $3.09 per gigajoule during the first quarter of 2023, compared with an average of $4.54 per gigajoule during the comparative prior-year quarter.

First quarter 2023 industry well completions in the Western Canadian sedimentary Basin were 2 per cent ahead of the same prior-year quarter. High inflation rates continued to have a negative impact on cost structures in the oil field services sector. The sector continued to be challenged by labour shortages during the first quarter of 2023.

Highlights

Essential's revenue for the three months ended March 31, 2023, was $45.9-million, 22-per-cent higher than the same prior-year quarter. First quarter EBITDAS (earnings before interest, taxes, depreciation and amortization, and stock-based compensation) was $5.8-million, $2.2-million higher than the same prior-year quarter.

Key operating highlights included:

• Essential coil well service (ECWS) first quarter 2023 revenue was $26.4-million, 34-per-cent higher than the same prior-year quarter due to improved customer pricing, offset partially by slightly lower activity. ECWS recorded gross margin of $5.5-million, $2.7-million higher than the same prior-year quarter.
• Tryton first quarter 2023 revenue was $19.5-million, 8-per-cent higher than the same prior-year quarter due to higher United States and Canadian conventional tool activity. Tryton recorded gross margin of $3.7-million, $300,000 higher than the same prior-year quarter.

During the first quarter of 2023, Essential acquired and cancelled 1,106,500 common shares under its normal course issuer bid at a weighted average price of 38 cents per share for a total cost of $400,000.

Cash and working capital

At March 31, 2023, Essential continued to be in a strong financial position with long-term debt, net of cash of $1.3-million and working capital of $49.0-million. On May 4, 2023, Essential had $3.8-million of long-term debt, net of cash.

Results of operations

First quarter 2023 ECWS revenue was $26.4-million, the highest since the third quarter of 2018 and 34-per-cent higher than the same prior-year quarter. Customer price increases, combined with the nature of work performed, resulted in significantly higher revenue per operating hour when compared with the same prior-year quarter. ECWS activity was slightly lower than the same prior-year quarter due to a slow start in January. Industry well completions were only 2 per cent higher than the same prior-year quarter.

Gross margin for the first quarter of 2023 was $5.5-million, $2.7-million higher than the same prior-year quarter due to improved customer pricing, partially offset by higher operating costs. Cost inflation related to wages, repairs and maintenance, and inventory resulted in higher operating costs. Gross margin percentage was 21 per cent, a significant improvement compared with 14 per cent in the same prior-year quarter.

First quarter 2023 Tryton revenue was $19.5-million, an 8-per-cent increase compared with the same prior-year quarter due to increased conventional tool activity in the U.S. and Canada. Conventional tool revenue was stronger than the same prior-year quarter due to improved customer spending on production-related and well-site restoration activities. Multistage fracturing system (MSFS) activity was in line with the same prior-year quarter.

First quarter gross margin was $3.7-million, $300,000 higher than the same prior-year quarter due to increased U.S. and Canadian conventional tool activity, partially offset by higher operating costs as a result of inflation. Gross margin percentage for the quarter was 19 per cent, in line with the same prior-year quarter.

For the three months ended March 31, 2023, Essential's capital spending was entirely related to maintenance capital related to the ECWS active fleet and replacement pickups in both ECWS and Tryton.

Essential's 2023 capital budget for the purchase of property and equipment remains unchanged at $8-million and relates entirely to maintenance capital. Essential will continue to monitor fleet activity and industry opportunities and adjust its spending as appropriate. The 2023 capital budget is expected to be financed with cash, operational cashflow and, if needed, its credit facility.

Outlook

During the first quarter of 2023, the price of WTI was relatively stable but has recently shown some volatility. The decrease in natural gas prices so far in 2023 continue to be a concern. However, despite recent commodity prices, the company still generally expects that the oil field service sector will see a modest increase in activity in 2023 compared with 2022, but there could be risk to E&P (exploration and production) capital spending for the remainder of the year. For the longer-term outlook, there is positive optimism coming from the Blueberry River First Nations implementation agreement and continued progress on the LNG Canada project.

For 2023, the Canadian oil field service sector is expected to continue to be affected by labour shortages, cost inflation and supply chain issues. As well, the economic implications of recession risk remain uncertain. Oil field service company activity may be somewhat resilient to recessionary concerns given continuing reservoir declines and Canadian E&P strategic objectives. A low ratio of E&P cash flow allocated to capital spending is expected for 2023, which reflects the capital discipline already built into E&P capital budgets and may limit the influence that commodity price volatility and recessionary concerns could have on E&P capital spending plans.

ECWS has one of the industry's largest active deep coiled tubing fleets. Early in the second quarter of 2023, in order to optimize operational efficiency given difficulty in expanding crews, two Generation III coiled tubing rigs and two fluid pumpers were removed from the active fleet. As of May 1, 2023, ECWS's active fleet includes nine coiled tubing rigs and nine quintuplex 1,000 horsepower fluid pumpers. The fluid pumpers support ECWS's deep-capacity Generation III and Generation IV coiled tubing rigs. ECWS historically had not been crewing its entire active fleet. As E&P customers continue to require greater pumping fluid capacity and pressure capability, the company believes that ECWS's current active fleet remains suitable to meet customer demand. Certain inactive equipment can be reactivated relatively quickly to meet future demand when required.

Tryton conventional tool activity in both Canada and the U.S. improved in the first quarter of 2023 mainly due to increased customer spending on production-related activities and well-site restoration spending. Modest growth of production-related E&P capital spending and continuation of well-site restoration activity is expected for the remainder of 2023.

Essential is well positioned to participate in improving oil field service activity as the industry is anticipated to experience modest growth. Essential's strengths include its well-trained work force, industry-leading coiled tubing fleet, value-adding down hole tool technologies and sound financial footing. Essential will continue to focus on obtaining appropriate pricing for its services including the pursuit of cost inflation pass through. Essential is committed to meeting the demands of its key customers, efficient and safe operations, a continued focus on ESG, and maintaining its strong financial position. On May 4, 2023, Essential had long-term debt, net of cash, of $3.8-million. Essential believes its continuing financial stability is a strategic advantage.

The first quarter 2023 management's discussion and analysis (MD&A) and financial statements are available on Essential's website and on SEDAR.

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