Mr. Michael Buker reports

PHX ENERGY ANNOUNCES ALL-TIME RECORD QUARTERLY RESULTS, 33% INCREASE TO DIVIDEND AND 2023 & 2024 CAPITAL EXPENDITURES

PHX Energy Services Corp. has released its third quarter 2023 results.

Third quarter highlights:

• For the three-month period ended Sept. 30, 2023, PHX Energy generated consolidated revenue of $169.4-million, the highest level of quarterly revenue in the corporation's history. With the first quarter of 2023 being the second-highest level on record, the 2023 year is tracking to be a record year for PHX Energy. Consolidated revenue in the 2023 quarter included $11.9-million of motor rental revenue and $6.2-million of motor equipment and parts sold.
• Earnings from continuing operations, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) (1) from continuing operations and adjusted EBITDA as a percentage of consolidated revenue are the best level of quarterly results on record. Earnings from continuing operations increased to $24.9-million (50 cents per share), an increase of 85 per cent over the third quarter of 2022, and adjusted EBITDA from continuing operations increased to $43.5-million (88 cents per share), which represented 26 per cent of consolidated revenue (1). Included in the 2023 quarter adjusted EBITDA is $5-million in cash-settled share-based compensation expense. Excluding cash-settled share-based compensation expense, adjusted EBITDA from continuing operations (1) in the third quarter of 2023 was $48.5-million, 29 per cent of consolidated revenue (1).
• PHX Energy's U.S. division revenue in the third quarter of 2023 was $123.8-million, 12 per cent higher than the third quarter of 2022, and represented 73 per cent of consolidated revenue. This level of revenue is only 1 per cent less than the record achieved by the U.S. segment in the fourth quarter of 2022.
• PHX Energy's Canadian division reported $44.4-million of quarterly revenue, which is the highest level since the fourth quarter of 2014.
• In light of the continued strong demand for the corporation's premium technologies, the board approved to increase the 2023 capital expenditure budget to $80-million from the previous $61.5-million. The board also approved a preliminary 2024 capital expenditure budget of $70-million.
• As at Sept. 30, 2023, the corporation had working capital (2) of $101.3-million and net debt (2) of $3.5-million.
• In November, 2023, the corporation increased the borrowing amounts in the syndicated facility from $50-million (Canadian) to $80-million (Canadian) and in the U.S. operating facility from $15-million (U.S.) to $20-million (U.S.). The corporation also extended the maturity date of the syndicated loan agreement to Dec. 12, 2026. With the increased borrowing amounts, the corporation has approximately $76.5-million (Canadian) and $20-million (U.S.) available to be drawn from its credit facilities. Currently, debt levels are low and this increase is intended to provide PHX Energy flexibility to take advantage of lucrative opportunities when presented in the future.
• In the 2023 three-month period, the corporation generated excess cash flow (2) of $25.7-million, after deducting capital expenditures of $18.8-million offset by proceeds on disposition of drilling and other equipment of $11.7-million.
• During the 2023 quarter, PHX Energy continued to deliver additional returns to shareholders through its previous and current NCIB (normal course issuer bid), purchasing and cancelling 2,442,700 common shares for $17.5-million. In the 2023 nine-month period, the corporation purchased and cancelled 2,710,500 common shares for $19.1-million.
• For the three-month period ended Sept. 30, 2023, PHX Energy paid $7.6-million in dividends, which is double the dividend amount paid in the same 2022 period. On Sept. 15, 2023, the corporation declared a dividend of 15 cents per share (3) or $7.3-million, paid on Oct. 16, 2023, to shareholders of record on Sept. 30, 2023.
• With three consecutive quarters of strong financial performance, the board has approved an increase to the quarterly dividend to 20 cents per share, effective for the dividend payable to shareholders of record at the close of business on Dec. 31, 2023. This is 33 per cent higher than the dividend declared on Sept. 15, 2023, and the fifth dividend increase since the dividend program was reinstated in December, 2020.

Outlook

In the third quarter, PHX Energy continued to build off the strong momentum it has achieved thus far in 2023, setting all-time records for quarterly revenue, earnings, adjusted EBITDA and adjusted EBITDA as a percentage of consolidated revenue:

• Despite the lower U.S. rig count impacting the company's directional drilling activity levels, PHX Energy has continued to produce strong results, maintain market share and work for 12 of the top 15 U.S. operators. The primary drivers of these successes were PHX Energy's technology offering, particularly its rotary steerable (RSS) capabilities, and expansion of its Atlas rental and sales divisions. PHX Energy foresees further growth in both areas for the remainder of 2023 and into 2024, and is directing the new capital expenditures announced toward these objectives.
• PHX Energy recently added a second brand of RSS technology to its U.S. fleet. The iCruise technology developed by Halliburton will complement the company's fleet of Schlumberger PowerDrive Orbit RSS technology and PHX Energy is uniquely positioned as the only provider in North America that can offer two superior RSS options for owned systems. Additionally, PHX Energy's engineering group has commercialized supplementary technologies that work in conjunction with the company's RSS and Velocity fleets that are already in high demand. Both of these technology developments will continue to differentiate PHX Energy and further solidify the company's reputation as a technology leader.
• In Canada, PHX Energy's marketing team has successfully expanded the company's client base and its results show improved activity and revenue in a slightly slower to flat industry. PHX Energy expects current activity levels to continue for the remainder of the year and into the first quarter of 2024. PHX Energy may see some incremental increases in revenue per day as a result of the commercialization of new value-added technologies that supplement the premium fleet and the planned fleet expansion.
• PHX Energy will continue to execute on the strategic objective aimed at expanding its Atlas sales and rental businesses, which allows the company to penetrate the portion of the U.S. market that is not accessible through its full-service offering. The rental division has shown promising growth thus far in 2023 and PHX Energy anticipates that it will continue to generate a similar level of activity and revenue in the near term. Additionally, the revenue from the sale of Atlas motors aided the U.S. division in achieving strong revenue and profitability in the quarter. Over the next few quarters, PHX Energy will look to expand its infrastructure to drive further growth and the company plans to dedicate a portion of the Atlas motors acquired through the 2024 capital expenditures program to the rental business.
• During the quarter, the corporation continued to deliver on its commitment to its return of capital strategy (ROCS) and leveraged its renewed NCIB to further reduce the shares outstanding. PHX Energy has bought back 21 per cent of its shares since 2017, including the purchase and cancellation of 2.7 million shares through the NCIBs thus far in 2023. Through its dividend, PHX Energy has paid $44-million to shareholders since reinstating the program in December, 2020, and due to the company's strong performance and outlook, the board has approved the fifth increase to the dividend since its reinstatement. Effective for the dividend payable to shareholders of record at the close of business on Dec. 31, 2023, a quarterly dividend to 20 cents per share will be payable, a 33-per-cent increase over the current dividend.

Global concerns around the possibility of a recession in North America, issues surrounding the economy in China, plus regional conflicts in Europe and the Middle East provide a backdrop of uncertainty for the near term to midterm. Despite this, PHX Energy is optimistic that its operating and financial performance will remain strong through the deployment of its premium fleet of technology, particularly RSS. PHX Energy will remain diligent with protecting its balance sheet and deliver on its commitment to continue to reward its shareholders.

Financial results

In the third quarter of 2023, PHX Energy generated an all-time record level of revenue, earnings from continuing operations, adjusted EBITDA from continuing operations and adjusted EBITDA as a percentage of consolidated revenue.

For the three-month period ended Sept. 30, 2023, PHX Energy's consolidated revenue was $169.4-million, as compared with $142.4-million in the same 2022 period, an increase of 19 per cent. Despite the declining North American rig count, the corporation achieved higher revenue by leveraging the increased capacity in its premium technology fleets, and its strong reputation and operations expertise. In addition, the corporation's strong activity in Canada and growth in its U.S. motor rental and sales divisions contributed to the record revenue achieved in the quarter.

In the 2023 quarter, the U.S. rig count continued to soften. PHX Energy's U.S. operating days decreased by 13 per cent from 4,653 in the third quarter of 2022 to 4,050 in the third quarter of 2023. Despite the decline in activity, the corporation's U.S. division's revenue grew by 12 per cent to $123.8-million as compared with $110.2-million in the same 2022 period. In the 2023 three-month period, RSS services accounted for a larger percentage of the division's activity and this growth was a primary driver of the 17-per-cent improvement in the average revenue per day (3) for directional drilling services quarter over quarter. Additionally, the corporation's U.S. motor rental and sales divisions generated $11.6-million and $6.2-million of revenue, respectively, in the third quarter of 2023 (2022 quarter -- $7.4-million and nil, respectively). Revenue from PHX Energy's U.S. segment represented 73 per cent of consolidated revenue in the 2023 three-month period (2022 quarter -- 77 per cent).

In the 2023 three-month period, the corporation's Canadian division generated revenue of $44.4-million, which is the highest level since the fourth quarter of 2014 and is 43 per cent greater than the $31-million generated in the same 2022 period. During the 2023 quarter, despite a quarter-over-quarter decline in Canadian industry activity, PHX Energy's Canadian operating days grew by 16 per cent to 3,301 days from the 2,835 operating days in the comparable 2022 quarter. Average revenue per day realized by the Canadian segment also improved by 22 per cent over the third quarter of 2022.

For the three-month period ended Sept. 30, 2023, earnings from continuing operations was $24.9-million (2022 -- $13.5-million) and adjusted EBITDA from continuing operations (1) was $43.5-million (2022 -- $27.3-million), 26 per cent of consolidated revenue. These levels of earnings from continuing operations, adjusted EBITDA from continuing operations and adjusted EBITDA as a percentage of consolidated revenue are the best quarterly results in the corporation's history. Higher margins generated from PHX Energy's premium technologies, Atlas motor rentals, and the sale of Atlas motors and parts primarily drove these record results. Included in the 2023 three-month period adjusted EBITDA from continuing operations is cash-settled share-based compensation expense of $5-million (2022 -- $5.2-million). For the three-month period ended Sept. 30, 2023, excluding cash-settled share-based compensation expense, adjusted EBITDA from continuing operations (1) was $48.5-million, 29 per cent of consolidated revenue (2022 -- $32.5-million).

PHX Energy maintained its strong financial position and had working capital (2) of $101.3-million and net debt (2) of $3.5-million, with available credit facilities in excess of $61.5-million, as at Sept. 30, 2023.

In November, 2023, the corporation increased the borrowing amounts in the syndicated facility from $50-million (Canadian) to $80-million (Canadian) and in the U.S. operating facility from $15-million (U.S.) to $20-million (U.S.). The corporation also extended the maturity date of the syndicated loan agreement to Dec. 12, 2026. With the increased borrowing amounts, the corporation has approximately $76.5-million (Canadian) and $20-million (U.S.) available to be drawn from its credit facilities.

Dividends and ROCS

On Sept. 15, 2023, the corporation declared a dividend of 15 cents per share, payable to shareholders of record at the close of business on Sept. 30, 2023. An aggregate of $7.3-million was paid on Oct. 16, 2023. This is 50 per cent higher than the dividend of 10 cents per share declared in the 2022 quarter.

In November, 2023, the board approved an increase to the quarterly dividend to 20 cents per share, effective for the dividend payable to shareholders of record at the close of business on Dec. 31, 2023. This is 33 per cent higher than the dividend declared on Sept. 15, 2023, and the fifth dividend increase since the dividend program was reinstated in December, 2020.

The corporation remains committed to enhancing shareholder returns through its return of capital strategy, which includes multiple options, including the dividend program and the normal course issuer bid.

Normal course issuer bid

During the third quarter of 2023, the Toronto Stock Exchange approved the renewal of PHX Energy's NCIB to purchase for cancellation, from time to time, up to a maximum of 3,552,810 common shares, representing 10 per cent of the corporation's public float of common shares as at Aug. 2, 2023. The NCIB commenced on Aug. 16, 2023, and will terminate on Aug. 15, 2024. Purchases of common shares are to be made on the open market through the facilities of the TSX and through alternative trading systems. The price which PHX Energy is to pay for any common shares purchased is to be at the prevailing market price on the TSX or alternate trading systems at the time of such purchase.

Pursuant to the previous and current NCIB, 2,442,700 common shares were purchased by the corporation for $17.5-million and cancelled in the third quarter of 2023. In the 2023 nine-month period, PHX Energy purchased and cancelled 2,710,500 common shares for $19.1-million.

Capital spending

In the third quarter of 2023, the corporation spent $18.8-million in capital expenditures, of which $12.5-million was spent on growing the corporation's fleet of drilling equipment, $2.8-million was spent to replace retired assets and $3.5-million was spent to replace equipment lost downhole during drilling operations. With proceeds on disposition of drilling and other equipment of $11.7-million, the corporation's net capital expenditures (2) for the 2023 quarter were $7.1-million. Capital expenditures in the 2023 quarter were primarily directed toward Atlas high performance motors, Velocity real-time systems and RSS. PHX Energy financed capital spending primarily using proceeds on disposition of drilling equipment, cash flows from operating activities and its credit facilities when required.

In light of the continued strong demand for the corporation's premium technologies, the approved capital expenditure budget for the 2023 year, excluding proceeds on disposition of drilling equipment, was increased to $80-million from the previous $61.5-million. The increase of $18.5-million in the 2023 capital expenditure budget will be directed mainly toward growing and maintaining PHX Energy's RSS and Atlas motor fleets. Of the total expenditures, $45-million is expected to be allocated to growth capital and the remaining $35-million is expected to be allocated toward maintenance of the existing fleet of drilling and other equipment and replacement of equipment lost downhole during drilling operations. The maintenance capital amount could increase throughout the year should there be more downhole equipment losses than forecasted. These increases would likely be financed by proceeds on disposition of drilling equipment.

As at Sept. 30, 2023, the corporation has capital commitments to purchase drilling and other equipment for $33.8-million, $20.3-million of which is growth capital, and includes $19.4-million for performance drilling motors and $900,000 for other equipment. Equipment on order as at Sept. 30, 2023, is expected to be delivered within 2023 and the first quarter of 2024.

With the outlook that the corporation's 2023 momentum will continue into the upcoming year and that the declining rig counts in North America will level off, the board has approved a preliminary 2024 capital expenditure program of $70-million, of which $42-million is anticipated to be spent on growth. The growth capital expenditures are expected to be allocated toward: building larger fleets of recently commercialized supplementary technologies that create value-added capabilities within the premium fleet and are already in high demand; additional motor capacity to grow the Atlas rental division; and add required Velocity systems, RSS and Atlas motors to continue to meet demand for full-service operations. The remaining $28-million is anticipated to be spent on maintenance of the fleet of drilling and other equipment and replacement of equipment lost downhole during drilling operations.

The corporation currently possesses approximately 734 Atlas motors, comprising various configurations, including its 5.13-inch, 5.25-inch, 5.76-inch, 6.63-inch, 7.12-inch, 7.25-inch, eight-inch and nine-inch Atlas motors, and 118 Velocity systems. The corporation also possesses the largest independent RSS fleet in North America, with 54 RSS tools and the only fleet currently comprising both the PowerDrive Orbit and iCruise systems.

Sale and licensed use of Atlas motors

On May 3, 2023, PHX Energy entered into a sales agreement for the sale and licensed use of its Atlas high performance drilling motors. PHX Energy will be providing a fleet of Atlas motors to a purchaser in the U.S. market. Subsequently on July 27, 2023, PHX Energy agreed upon the sale and licensed use of its Atlas motors to an existing international client. Under these agreements, the purchasers must exclusively use components manufactured by the corporation for the maintenance of their fleets of Atlas motors. As of Sept. 30, 2023, $10.1-million of motors and parts were sold. PHX Energy anticipates continuing orders for parts and the purchasers could potentially place subsequent orders for additional Atlas motors late in 2023 and through the upcoming year.

Non-GAAP (generally accepted accounting principles) and other financial measures

Throughout this document, PHX Energy uses certain measures to analyze financial performance, financial position and cash flow. These non-GAAP and other specified financial measures do not have standardized meanings prescribed under Canadian generally accepted accounting principles and include non-GAAP financial measures and ratios, capital management measures and supplementary financial measures. These non-GAAP and other specified financial measures include, but are not limited to, adjusted EBITDA, adjusted EBITDA per share, adjusted EBITDA excluding cash-settled share-based compensation expense, adjusted EBITDA as a percentage of revenue, gross profit as a percentage of revenue, excluding depreciation and amortization, selling, general and administrative (SG&A) costs, excluding share-based compensation as a percentage of revenue, funds from operations, funds from operations per share, excess cash flow, net capital expenditures, net debt, working capital, and remaining distributable balance under ROCS. Management believes that these measures provide supplemental financial information that is useful in the evaluation of the corporation's operations and are commonly used by other oil and natural gas service companies. Investors should be cautioned, however, that these measures should not be construed as alternatives to measures determined in accordance with GAAP as an indicator of PHX Energy's performance. The corporation's method of calculating these measures may differ from that of other organizations and, accordingly, such measures may not be comparable. Please refer to the non-GAAP and other financial measures section of this MD&A for applicable definitions, rationale for use, method of calculation and reconciliations where applicable.

(1) Non-GAAP financial measure or ratio that does not have any standardized meaning under IFRS (international financial reporting standards) and therefore may not be comparable with similar measures presented by other entities.

(2) Capital management measure that does not have any standardized meaning under IFRS and therefore may not be comparable with similar measures presented by other entities.

(3) Supplementary financial measure that does not have any standardized meaning under IFRS and therefore may not be comparable with similar measures presented by other entities.

Revenue

The corporation generates revenue primarily through the provision of directional drilling services, which includes providing equipment, personnel and operational support for drilling a well. Additionally, the corporation generates revenue through the rental and sale of drilling motors and associated parts, particularly Atlas.

In the third quarter of 2023, PHX Energy generated its highest level of quarterly revenue on record, surpassing the previous records set in the first quarter of 2023. For the three-month period ended Sept. 30, 2023, the corporation's consolidated revenue was $169.4-million, a 19-per-cent increase compared with the $142.4-million in the third quarter of 2022. For the nine-month period ended Sept. 30, 2023, the corporation generated consolidated revenue of $491-million, an increase of 30 per cent as compared with the $378-million generated in the same 2022 period.

Average consolidated revenue per day (3) increased 13 per cent to $20,343 in the 2023 three-month period from $18,008 in the same 2022 period and in the 2023 nine-month period increased 17 per cent to $20,457 from $17,421 in the same 2022 period. In both 2023-periods, PHX Energy increased capacity and utilization in its fleet of premium technologies, particularly additional RSS systems that were acquired in the fourth quarter of 2022, and this, along with the cumulative impact of previous pricing increases to mitigate the effects of inflationary costs, greatly contributed to the stronger average consolidated revenue per day (3) realized in both periods. The favourable impact of the strong U.S. dollar also supported the increases in average consolidated revenue per day.

The U.S. industry rig count continued to soften in the third quarter of 2023, averaging 632 horizontal and directional rigs operating per day, which is a 14-per-cent decrease from the average of 733 rigs in the third quarter of 2022 and 10 per cent lower compared with the average of 700 rigs in the second quarter of 2023. In Canada, the average rig count for the 2023 three-month period decreased 6 per cent to 188 rigs from 199 rigs in the third quarter of 2022. In comparison, the corporation's consolidated operating days slightly decreased by 2 per cent to 7,435 days in the third quarter of 2023, compared with 7,578 days in the same 2022 quarter. For the nine-month period ended Sept. 30, 2023, consolidated operating days increased by 5 per cent to 21,915 from 20,859 days in the corresponding 2022 period.

Throughout 2023, the corporation continued to increase capacity in its Atlas motor fleet and as a result, in the 2023 three- and nine-month periods, revenue generated from PHX Energy's motor rental division grew by 55 per cent and 65 per cent, respectively. Motor rental revenue increased to $11.9-million in the 2023 three-month period from $7.7-million in the same 2022 period and increased to $32.6-million in the 2023 nine-month period from $19.7-million in the same 2022 period. PHX Energy remains focused on marketing Atlas technology as a stand-alone product line. With additional Atlas motors on order, the corporation expects this business line to continue to grow in future periods.

For the three- and nine-month periods ended Sept. 30, 2023, revenue of $6.2-million and $10.1-million, respectively, were generated from the sale of Atlas motors and parts under PHX Energy's two existing sales agreements. As the corporation continues to support its customers' owned fleet of Atlas motors, a steady stream of revenue is expected to continue for this business line.

Operating costs and expenses

Direct costs comprise field and shop expenses, and costs of motors and parts sold, and include depreciation and amortization of the corporation's equipment and right-of-use assets. For the three-month period ended Sept. 30, 2023, direct costs increased by 12 per cent to $125.1-million from $111.7-million in the 2022 period. For the 2023 nine-month period, direct costs increased by 24 per cent to $377-million from $304.2-million in the same 2022 period.

In both 2023 periods, higher direct costs are partly attributable to greater servicing costs and equipment rental expenses associated with increased RSS activity. Growth in Atlas motor rental activity also resulted in higher motor repairs. In addition, there were greater depreciation and amortization expenses on drilling and other equipment in both 2023 periods due to the volume of fixed assets acquired as part of PHX Energy's 2023 capital expenditure program. The corporation's depreciation and amortization on drilling and other equipment increased by 21 per cent and 24 per cent, respectively, in the 2023 three- and nine-month periods. Additionally, overall costs related to personnel, repair parts and equipment rentals increased partly as a result of inflation.

In the 2023 three- and nine-month periods, gross profit as a percentage of revenue excluding depreciation and amortization improved to 32 per cent and 30 per cent, respectively, compared with 28 per cent and 26 per cent in the corresponding 2022 periods. Greater profitability in both periods was largely driven by the higher margins from the corporation's premium technologies as well as increased profits from PHX Energy's growing Atlas motor rental and sales divisions. In addition, the corporation remained diligent in executing various strategies to gain cost-efficiencies and mitigate the impact of higher costs caused by inflation and this continued to have a positive impact on the corporation's margins.

For the three-month period ended Sept. 30, 2023, SG&A costs were $19.8-million, an increase of 27 per cent as compared with $15.6-million in the corresponding 2022 period. In the 2023 nine-month period, SG&A costs were $50.9-million, an increase of 3 per cent as compared with $49.5-million in the corresponding 2022 period. Higher SG&A costs in both 2023 periods were primarily due to greater costs associated with increasing revenue and activity and rising personnel-related costs.

Cash-settled share-based compensation relates to the corporation's retention awards and are measured at fair value. For the three- and nine-month periods ended Sept. 30, 2023, the related compensation expense recognized by PHX Energy was $5-million (2022 -- $5.2-million) and $8.9-million (2022 -- $17.6-million), respectively. Changes in cash-settled share-based compensation expense in the 2023-periods were mainly driven by fluctuations in the corporation's share price, the number of awards granted in the period and changes in the estimated payout multiplier for performance awards. There were 2,135,283 retention awards outstanding as at Sept. 30, 2023 (2022 -- 3,293,538). Excluding share-based compensation, SG&A costs as a percentage of revenue in the 2023 three- and nine-month periods were 9 per cent and 8 per cent, respectively, as compared with 7 per cent and 8 per cent in the corresponding 2022 periods.

PHX Energy's research and development (R&D) expenditures for the three- and nine-month periods ended Sept. 30, 2023, were $1.2-million (2022 -- $900,000) and $3.8-million (2022 -- $2.5-million), respectively. Higher R&D expenditures in both 2023 periods were mainly due to increased prototype expenses and greater personnel-related costs. The corporation remained focused on supporting new and continuing initiatives to continuously improve the reliability of equipment and reduce costs of operations. In addition, new technologies are continually being developed, particularly projects that are critical in sustaining operational growth and create value-added capabilities within the premium fleet to further profitability.

Finance expenses mainly relate to interest charges on the corporation's credit facilities. For the three- and nine-month periods ended Sept. 30, 2023, finance expenses increased to $600,000 (2022 -- $500,000) and $2-million (2022 -- $900,000), respectively, mainly due to increased drawings on the credit facilities to finance PHX Energy's capital spending. In both 2023 periods, higher finance expenses also resulted from rising variable interest rates on the corporation's operating and syndicated facilities.

Finance expense lease liabilities relate to interest expense incurred on lease liabilities. For the three- and nine-month periods ended Sept. 30, 2023, finance expense lease liabilities increased by 11 per cent and 12 per cent, respectively, primarily due to new premise leases entered in the fourth quarter of 2022 and first quarter of 2023 for a new facility in Midland, Tex., and additional head office space in Calgary, Alta.

For the three- and nine-month periods ended Sept. 30, 2023, the corporation recognized other income of $9.1-million and $24.4-million, respectively (2022 -- $4-million and $11-million, respectively). In both periods, other income was mainly comprised of net gain on disposition of drilling equipment.

Net gain on disposition of drilling equipment comprises gains on disposition of drilling equipment and proceeds from insurance programs. The recognized gain is net of losses, which typically result from asset retirements that were made before the end of the useful life of the equipment. In both 2023 periods, a larger percentage of PHX Energy's activity involved utilizing premium technologies, particularly RSS. As a result, more instances of high-dollar-valued downhole equipment losses occurred as compared with the corresponding 2022 periods, which resulted in higher proceeds and gains. The corporation will use capital expenditure funds, including the proceeds from disposition of drilling equipment, to replace this equipment and these amounts will be added to the capital expenditures for the remainder of 2023 and for 2024.

For the three-month period ended Sept. 30, 2023, the corporation recognized foreign exchange losses of $300,000 (2022 -- $200,000), which primarily resulted from the revaluation of Canadian-dollar-denominated intercompany receivables in the United States. In the 2023 nine-month period, foreign exchange gains of $600,000 (2022 -- $300,000 foreign exchange losses) was primarily due to the settlement of a U.S.-dollar-denominated receivable as a result of a reorganization in Luxembourg.

In the third quarter of 2023, PHX Energy reversed the amounts previously provisioned for bad debt in the amount of $1.1-million (2022 -- $2,000 recovery), which relates mainly to one client.

For the three-month period ended Sept. 30, 2023, the corporation reported income tax provision of $6.2-million (2022 -- $3.7-million), of which $5.6-million was current and $600,000 was deferred. For the nine-month period ended Sept. 30, 2023, PHX Energy recognized provision for income taxes of $14.5-million (2022 -- $6.4-million), of which $13.6-million was current and $900,000 was deferred. Increased current taxes in both 2023 periods mainly resulted from higher taxable income in the U.S. PHX Energy's effective tax rate was 20 per cent in the 2023 quarter and 18 per cent in the 2023 nine-month period, which is lower than the combined U.S. federal and state corporate income tax rate of 21 per cent and the combined Canadian federal and provincial corporate income tax rate of 23 per cent, due to the recognition of previously unrecognized deferred tax assets that were applied to income for tax purposes in Canada.

Segmented information

The corporation reports three operating segments on a geographical basis throughout the Gulf Coast, Northeast and Rocky Mountain regions of the U.S. throughout the Western Canadian sedimentary basin and internationally in Albania.

United States

For the three-month period ended Sept. 30, 2023, total U.S. revenue increased by 12 per cent to $123.8-million as compared with $110.2-million in the 2022 quarter. The increase in revenue was primarily driven by increased RSS activity, motor rental growth, and Atlas motor and parts sales, and was achieved despite the slowdown in U.S. industry activity. With three consecutive strong quarters in 2023, U.S. revenue for the nine-month period ended Sept. 30, 2023, increased 26 per cent to $374.4-million from $297.4-million in the 2022 period.

Throughout the year, the demand for PHX Energy's premium technologies was robust and with the additional RSS systems added in the fourth quarter of 2022 and third quarter of 2023, RSS services accounted for a larger percentage of the U.S. segment's activity. This greater volume of RSS activity, along with increased capacity and utilization in the corporation's premium technologies, primarily drove improvements in the U.S. division's average revenue per day (3). For the three-month period ended Sept. 30, 2023, average revenue per day for directional drilling services rose to $26,168 from $22,425 in the third quarter of 2022, a 17-per-cent increase. In the 2023 nine-month period, average revenue per day for directional drilling services increased 18 per cent to $25,173 from $21,324 in the same 2022-period. The strong U.S. dollar in both 2023 periods also supported the increase in the average revenue per day. Omitting the impact of foreign exchange, the average revenue per day for directional drilling services increased by 9 per cent and 13 per cent, respectively, in the 2023 three- and nine-month periods.

In the third quarter of 2023, the corporation's U.S. directional drilling activity decreased by 13 per cent to 4,050 operating days, compared with 4,653 days in the third quarter of 2022, and has decreased by 7 per cent, as compared with the 4,364 days in the second quarter of 2023. In comparison, the U.S. industry horizontal and directional rig count in the third quarter of 2023 decreased 14 per cent with 632 active rigs per day, as compared with 733 rigs per day in the third quarter of 2022, and decreased by 10 per cent when compared with an average of 700 active horizontal and directional rigs per day in the second quarter of 2023. For the nine-month period ended Sept. 30, 2023, PHX Energy's U.S. drilling activity was relatively flat at 13,234 operating days, as compared with 13,405 days in the same 2022 period, which is in line with the industry trend over the same period.

Horizontal and directional drilling continued to represent the majority of rigs running on a daily basis in both 2023 periods. Phoenix USA was active in the Permian, Scoop/Stack, Marcellus, Utica, Bakken and Niobrara basins in the nine-month period ended Sept. 30, 2023.

In the 2023 three-month period, PHX Energy increased the capacity of its motor rental fleet, which allowed the business to grow its revenue 57 per cent to $11.6-million from $7.4-million in the same 2022 period. In the nine-month period ended Sept. 30, 2023, U.S. motor rental revenue was $31.2-million, a 65-per-cent increase compared with $19-million in the same 2022 period. During the 2023 quarter, PHX Energy also sold Atlas motor equipment and parts to certain customers and generated $6.2-million of revenue from this line of business. In the 2023 nine-month period, $10.1-million of Atlas motors and parts have been sold.

For the three- and nine-month periods ended Sept. 30, 2023, the U.S. segment realized reportable segment income before tax of $25.5-million and $65.5-million, respectively, which are 49 per cent and 62 per cent higher than the corresponding 2022-periods. Greater margins from premium technologies and growth in the rental and sale of Atlas motors largely contributed to increased profitability in both 2023 periods.

Canada

In the third quarter of 2023, PHX Energy's Canadian operations generated revenue of $44.4-million, its highest level of quarterly revenue since the fourth quarter of 2014 and 43 per cent higher compared with $31-million generated in the 2022 quarter. In the 2023 nine-month period, Canadian division revenue was $113.1-million, an increase of 45 per cent as compared with $77.8-million in the same 2022 period. Strong quarterly revenue generated throughout 2023 was largely driven by higher average revenue per day (3) for directional drilling services, which increased by 22 per cent to $13,375 in the 2023 quarter from $10,926 in the corresponding 2022 quarter and increased by 24 per cent to $13,257 in the 2023 nine-month period compared with $10,733 in the same 2022 period. Targeted marketing efforts, strong operational expertise and increased deployment of premium technologies primarily contributed to the improved average revenue per day realized in both 2023 periods.

For the three- and nine-month periods ended Sept. 30, 2023, operating days improved by 16 per cent in both periods to 3,301 and 8,427, respectively, compared with 2,835 days and 7,252 days in the corresponding 2022 periods. In comparison, industry horizontal and directional drilling activity (as measured by drilling days) declined by 4 per cent to 16,261 days in the third quarter of 2023 and slightly increased by 1 per cent to 44,093 days in the first three quarters of 2023. PHX Energy's activity far exceeding that of the industry is a testament to the corporation's strong reputation and presence in the Canadian market. During the 2023 quarter, the corporation was active in the Duvernay, Montney, Glauconite, Frobisher, Cardium, Viking, Bakken, Torquay, Colony, Clearwater, Deadwood, Ellerslie and Scallion basins.

For the three- and nine-month periods ended Sept. 30, 2023, the corporation's Canadian division recognized reportable segment profit before tax of $8.3-million (2022 -- $4.5-million) and $17.8-million (2022 -- $7.9-million), respectively. The greater volume of activity and higher average revenue per day drove the improvements in profitability in both 2023 periods.

International -- continuing operations

The corporation's international segment revenue comprises revenue from Albania. For the three- and nine-month periods ended Sept. 30, 2023, the international segment's revenue was $1.1-million (2022 -- $1.2-million) and $3.5-million (2022 -- $2.8-million), respectively. Albania operations remain consistent with one rig which resumed operations in the first quarter of 2022.

The international segment generated reportable segment profit before tax of $400,000 in the 2023 three-month period, same level as the corresponding 2022 period, and $1.2-million in the 2023 nine-month period, almost double compared with the same 2022 period.

Investing activities

Net cash used in investing activities for the three-month period ended Sept. 30, 2023, was $3.9-million as compared with $12.8-million in the 2022 period. During the third quarter of 2023, the corporation spent $12.5-million (2022 -- $10.2-million) to grow the corporation's fleet of drilling equipment and $6.3-million (2022 -- $8.4-million) was used to maintain capacity in the corporation's fleet of drilling and other equipment and replace equipment lost downhole during drilling operations. With proceeds on disposition of drilling and other equipment of $11.7-million (2022 -- $6.3-million), the corporation's net capital expenditures (2) for the 2023 quarter were $7.1-million (2022 -- $12.4-million).

The 2023 period capital expenditures comprised:

• $6.8-million in downhole performance drilling motors;
• $11.5-million in MWD systems and spare components and RSS;
• $500,000 in machinery and equipment and other assets.

The change in non-cash working capital balances of $3.2-million (source of cash) for the three-month period ended Sept. 30, 2023, relates to the net change in the corporation's trade payables that are associated with the acquisition of capital assets. This compares with $400,000 (use of cash) for the three-month period ended Sept. 30, 2022.

Financing activities

For the three-month period ended Sept. 30, 2023, net cash used in financing activities was $35.3-million as compared with $300,000 in the 2022 period. In the 2023 period:

• Dividends of $7.6-million were paid to shareholders;
• $9.4-million net repayments were made toward the corporation's syndicated credit facility;
• 2,442,700 common shares were purchased by the corporation for $17.5-million and cancelled under the NCIB;
• Payments of $800,000 were made toward lease liabilities;
• 150,000 common shares were issued from treasury for proceeds of $400,000 upon the exercise of share options.

Capital resources

As of Sept. 30, 2023, the corporation had $18.3-million (Canadian) drawn on its Canadian credit facilities, nothing drawn on its U.S. operating facility and a cash balance of $14.8-million. As at Sept. 30, 2023, the corporation had $46.5-million (Canadian) and $15-million (U.S.) available from its credit facilities. The credit facilities are secured by substantially all of the corporation's assets and mature in December, 2025.

As at Sept. 30, 2023, the corporation was in compliance with all its financial covenants.

In November, 2023, the corporation increased the borrowing amounts in the syndicated facility from $50-million (Canadian) to $80-million (Canadian) and in the U.S. operating facility from $15-million (U.S.) to $20-million (U.S.). The corporation also extended the maturity date of the syndicated loan agreement to Dec. 12, 2026. With the increased borrowing amounts, the corporation has approximately $76.5-million (Canadian) and $20-million (U.S.) available to be drawn from its credit facilities.

Cash requirements for capital expenditures

Historically, the corporation has financed its capital expenditures and acquisitions through cash flows from operating activities, proceeds on disposition of drilling equipment, debt and equity. The board approved an increase of the 2023 capital expenditure program to $80-million. Of the 2023 capital expenditures, $35-million is expected to be allocated to maintain capacity in the existing fleet of drilling and other equipment and replace equipment lost downhole during drilling operations, and $45-million is expected to be allocated to growth capital. The amount expected to be allocated toward replacing equipment lost downhole could increase should more downhole equipment losses occur throughout the year.

As demand for the corporation's premium technologies continues to grow and the outlook that the declining rig counts in North America will level off, the board has approved a preliminary 2024 capital expenditure program of $70-million, of which $42-million is anticipated to be spent on growth. The growth capital expenditures are expected to be allocated toward: building larger fleets of recently commercialized supplementary technologies that create value-added capabilities within the premium fleet and are already in high demand; additional motor capacity to grow the Atlas rental and sales division; and add required Velocity systems, RSS and Atlas motos to continue to meet demand for full-service operations. The remaining $28-million is anticipated to be spent on maintenance of the fleet of drilling and other equipment.

These planned expenditures are expected to be financed from cash flow from operating activities, proceeds on disposition of drilling equipment, cash and cash equivalents, and the corporation's credit facilities, if necessary. However, if a sustained period of market uncertainty and financial market volatility persists in 2023, the corporation's activity levels, cash flows and access to credit may be negatively impacted, and the expenditure level would be reduced accordingly where possible. Conversely, if future growth opportunities present themselves, the corporation would look at expanding this planned capital expenditure amount.

As at Sept. 30, 2023, the corporation has commitments to purchase drilling and other equipment for $33.8-million. Deliveries are expected to occur throughout the rest of the 2023 year and into the first quarter of 2024.

About PHX Energy Services Corp.

PHX Energy is a growth-oriented, public oil and natural gas services company. The corporation, through its directional drilling subsidiary entities, provides horizontal and directional drilling services and technologies to oil and natural gas exploration and development companies principally in Canada and the U.S. In connection with the services it provides, PHX Energy engineers, develops and manufactures leading-edge technologies. In recent years, PHX Energy has developed various new technologies that have positioned the corporation as a technology leader in the horizontal and directional drilling services sector.

PHX Energy's Canadian directional drilling operations are conducted through Phoenix Technology Services LP. The corporation maintains its corporate head office, research and development, Canadian sales, service and operational cetres in Calgary, Alta. In addition, PHX Energy has a facility in Estevan, Sask. PHX Energy's U.S. operations, conducted through the corporation's wholly owned subsidiary, Phoenix Technology Services USA Inc. (Phoenix USA), is headquartered in Houston, Tex. Phoenix USA has sales and service facilities in Houston, Tex., Midland, Tex., Casper, Wyo., and Oklahoma City, Okla. Internationally, PHX Energy has sales offices and service facilities in Albania, and an administrative office in Nicosia, Cyprus. The corporation also supplies technology to the Middle East regions.

The common shares of PHX Energy trade on the Toronto Stock Exchange under the symbol PHX.

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