Mr. Michael Buker reports

PHX ENERGY ANNOUNCES ALL-TIME RECORD ANNUAL FINANCIAL RESULTS

PHX Energy Services Corp. has released its results for the fourth quarter and full year 2023.

Fourth quarter highlights

• For the three-month period ended Dec. 31, 2023, PHX Energy generated consolidated revenue of $165.3-million, the highest level of fourth quarter revenue on record and the third highest level of quarterly revenue in the corporation's history. Revenue in the third and first quarter of 2023 are the first and second highest quarterly revenue on record, respectively. Consolidated revenue in the 2023 quarter included $10.3-million of motor rental revenue and $900,000 of motor equipment and parts sold.
• Earnings from continuing operations increased by 63 per cent to $33.1-million, 68 cents per share, in the 2023 quarter from $20.3-million, 39 cents per share, in the 2022 three-month period. The 2023 quarter's earnings are the highest level of quarterly earnings in the corporation's history. Earnings from continuing operations in the 2023 quarter included $9.5-million of recovery of income taxes that primarily resulted from the recognition and utilization of previously unrecognized deferred tax assets in the Canadian jurisdiction.
• In the 2023 three-month period, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) from continuing operations was $35.4-million, 21 per cent of consolidated revenue and is 4 per cent higher compared with $33.9-million, 21 per cent of consolidated revenue, in the same 2022-period. Included in the 2023 quarter's adjusted EBITDA is $4.6-million in cash-settled share-based compensation expense (2022 -- $6.9-million). Adjusted EBITDA excluding cash-settled share-based compensation expense in the fourth quarter of 2023 was $40-million, 24 per cent of consolidated revenue (2022 -- $40.8-million, 26 per cent of consolidated revenue).
• PHX Energy's United States division revenue in the fourth quarter of 2023 was $122.1-million, only 3 per cent lower compared with the record $125.7-million generated in the fourth quarter of 2022. U.S. division revenue in the 2023 quarter represented 74 per cent of consolidated revenue.
• PHX Energy's Canadian division reported $42.4-million of quarterly revenue, 38 per cent higher compared with $30.7-million in the 2022 quarter and is the highest level of fourth quarter revenue for the Canadian division since 2014.
• In the 2023 quarter, the corporation generated excess cash flow of $22.3-million, after deducting capital expenditures of $15.5-million offset by proceeds on disposition of drilling and other equipment of $11-million. This level of excess cash flow is a 57-per-cent increase over the fourth quarter of 2022.
• In the fourth quarter of 2023, PHX Energy continued to deliver additional returns to its shareholders and purchased and canceled 1,322,100 common shares for $11.3-million through its current normal course issuer bid (NCIB).
• For the three-month period ended Dec. 31, 2023, PHX Energy paid $7.3-million (15 cents per share) in dividends, which is 50 per cent, or five cents per share, more than the quarterly dividends paid in the same 2022 quarter. On Dec. 15, 2023, the corporation declared a dividend of 20 cents per share or $9.5-million, paid on Jan. 15, 2024, to shareholders of record on Dec. 29, 2023.

Year-end highlights

• With PHX Energy achieving record revenue for three of the quarters in 2023, the corporation's 2023 annual consolidated revenue of $656.3-million is the highest in the corporation's history and an increase of 23 per cent from 2022. Consolidated revenue in the 2023 year included $47-million of motor rental revenue (2022 -- $33.3-million) and $11-million of motor equipment and parts sold (2022 -- nil).
• Earnings from continuing operations, adjusted EBITDA from continuing operations and adjusted EBITDA as a percentage of consolidated revenue are all the best annual results on record. Earnings from continuing operations more than doubled to $98.6-million, $1.96 per share, in the 2023 12-month period from $44.3-million, 87 cents per share, in 2022. Adjusted EBITDA from continuing operations increased by 63 per cent year over year to $150.7-million, $2.86 per share, which represented 23 per cent of consolidated revenue, an increase compared with 17 per cent of consolidated revenue in 2022. Included in the 2023 year's adjusted EBITDA is $13.5-million in cash-settled share-based compensation expense (2022 -- $24.6-million). Adjusted EBITDA excluding cash-settled share-based compensation expense in the 2023 year was $164.2-million, 25 per cent of consolidated revenue (2022 -- $117.3-million, 22 per cent of consolidated revenue).
• The corporation's U.S. division achieved its highest annual revenue for the second consecutive year. U.S. revenue in 2023 increased by 17 per cent to $496.5-million and represented 76 per cent of consolidated revenue.
• PHX Energy's Canadian division generated annual revenue of $155.5-million (2022 -- $108.5-million), the highest level since 2014.
• For the year ended Dec. 31, 2023, PHX Energy generated excess cash flow of $92.8-million, after deducting capital expenditures of $64.9-million offset by proceeds on disposition of drilling and other equipment of $43.7-million. This level of excess cash flow is more than four times the amount generated in the 2022 year. As at Dec. 31, 2023, the corporation had $4.4-million of remaining distributable balance under the return of capital strategy (ROCS). This balance will be carried forward into 2024 and is targeted to be used for future NCIB purchases.
• In the 2023 12-month period, through its previous and current NCIB, the corporation purchased and canceled 4,032,600 common shares for $30.4-million.
• PHX Energy paid $30.2-million in dividends (60 cents per share) in the 2023 year which is double the dividend amount paid in 2022.
• The board has previously approved a preliminary 2024 capital expenditure budget of $70-million. With $5-million of the 2023 capital expenditure budget carried forward into 2024, the corporation now anticipates spending $75-million in capital expenditures during 2024.
• As at Dec. 31, 2023, the corporation had working capital of $93.9-million and net cash of $8.9-million with credit facility capacity in excess of $107-million.

Outlook

The company believes the record results set in the past two years are a testament to the strength of its technology, people and commitment to providing the company's customers with unmatched services and value. The company's positive momentum through the 2023 year and the cumulative results of the strong quarterly results led to an all-time record year on many fronts. This high level of performance allowed the company to leverage its ROCS and distribute $60.6-million of its excess cash flow to reward shareholders through NCIB purchases and dividends.

• Entering 2024, the company continues to be a provider of choice for 12 of the top 15 United States operators, however, a few of these customers have recently altered their well profiles which has impacted the company's RSS utilization and average revenue per day. The company does believe with the strength of its operations and marketing teams the company will be able to deploy more RSS assets to new and other existing clients in upcoming quarters, especially with the addition of the iCruise technology.
• Currently, the company's U.S. motor rental business' activity levels are in line with the fourth quarter of 2023. The company continues to believe there is a market opportunity to deploy more rental motors and foresee further growth in later quarters of 2024. This growth will be driven by both the creation of a dedicated rental fleet that is included in the company's 2024 capital spending program and the current marketing strategies under way.
• The revenue stream generated from the company's Atlas sales business will continue in 2024 as existing customers place continuing orders for parts to maintain their fleet. Additionally, there could be potential for further motor sales from the company's existing customers if they expand their fleets and possibly to new customers.
• Thus far in 2024, the strong activity levels in Canada from the fourth quarter have continued as the company works for nine of the 10 top operators. The company foresees the second quarter being more resilient than typical in spring breakup, as its customer mix is currently focused on areas that are less impacted. However the weakness in natural gas prices may have an impact on the third and fourth quarter. The company will continue to increase the deployment of its premium technology in Canada, and leverage recently commercialized technologies the company's R&D (research and development) efforts have produced to gain market share and improve revenue per day.
• In 2023, the company's R&D expenditures increased 40 per cent compared with 2022, with a significant focus on developing real-time communications technology that allows the company RSS to transmit data to its MWD systems. This is a technology that operators utilizing RSS are demanding and with its unique RSS fleet it further entrenches the company as an industry leader. The company believes this ancillary technology will create advantages and opportunities to seize more market share even with the static industry activity predicted.
• The strong operating and financial results in 2023, supported the company's ROCS program where it created $60.6-million of shareholder returns in the form of share buy backs and dividends payments. The company is committed to continuing the ROCS program in 2024, and will continue to focus on delivering value to its shareholders.

With the United States industry appearing to have levelled off and the Canadian industry remaining flat the company is cautiously optimistic for 2024. The company knows it has many operational advantages and its drive to remain at the forefront of directional technology remains strong. Although the company has seen a slight weakening in 2024 thus far, the company foresees the first quarter 2024 on a historical basis continuing to be a top-performing quarter, albeit not at the all-time records seen in 2023.

Michael Buker, president

Feb. 27, 2024

Over all performance

In the fourth quarter of 2023, the corporation generated consolidated revenue of $165.3-million, an increase of 5 per cent as compared with $157.8-million in the 2022 quarter. This level of quarterly revenue is the third highest level in the corporation's history and is the record level of fourth quarter revenue. Despite the North American rig count softening further in the 2023 quarter, PHX Energy's consolidated revenue grew which was supported by strong activity in Canada and increased capacity in its fleet of premium technologies.

For the quarter ended Dec. 31, 2023, the corporation's U.S. division's revenue slightly decreased by 3 per cent to $122.1-million compared with the record $125.7-million in the same 2022 quarter. In the 2023 three-month period, U.S. industry drilling activity continued to decline and during the period PHX Energy's U.S. operating days decreased by 15 per cent to 4,114 days from 4,843 in the fourth quarter of 2022. The impact of the lower operating days was cushioned by the 15-per-cent improvement in the average revenue per day for directional drilling services. Rotary steerable (RSS) services accounted for a larger portion of the division's activity during the 2023 quarter, and this partly contributed to the increased average revenue per day for directional drilling services quarter over quarter. Included in the U.S. division revenue for the 2023 three-month period is $9.9-million of motor rental revenue and $900,000 of motor equipment and parts sold (2022 quarter -- $11.4-million and nil, respectively). In the 2023 quarter, revenue from the corporation's U.S. division represented 74 per cent of consolidated revenue (2022 -- 80 per cent).

The corporation's Canadian division generated its highest level of fourth quarter revenue since 2014 despite the Canadian industry drilling activity declining quarter over quarter. Canadian division revenue in the 2023 three-month period grew to $42.4-million, a 38-per-cent increase from $30.7-million in the same 2022 period. The Canadian segment recorded 3,099 operating days in the 2023 quarter, a 21-per-cent increase from the 2,571 operating days realized in the comparable 2022 quarter. Average revenue per day realized by the Canadian division also improved by 15 per cent quarter over quarter.

For the three-month period ended Dec. 31, 2023, earnings from operations were $33.1-million (2022 -- $20.3-million) and adjusted EBITDA from continuing operations was $35.4-million (2022 -- $33.9-million), 21 per cent of consolidated revenue. Earnings from operations in the fourth quarter of 2023 is the highest level of quarterly earnings in the corporation's history. Included in the 2023 quarter earnings is $9.5-million of recovery of income taxes that primarily resulted from the recognition and utilization of previously unrecognized deferred tax assets in the Canadian jurisdiction. Included in the 2023 three-month period adjusted EBITDA from continuing operations is cash-settled share-based compensation expense of $4.6-million (2022 -- $6.9-million). For the three-month period ended Dec. 31, 2023, adjusted EBITDA excluding cash-settled share-based compensation expense is $40-million (2022 -- $40.8-million).

In each quarter of 2023, PHX Energy set the records for that particular quarter in revenue, earnings from continuing operations and adjusted EBITDA from continuing operations, which accumulated to the highest annual results in the corporation's history. For the year ended Dec. 31, 2023, the corporation's consolidated revenue increased by 23 per cent to $656.3-million from $535.7-million in 2022. Earnings from continuing operations for the 2023 year more than doubled to $98.6-million from $44.3-million in the 2022 year. Adjusted EBITDA from continuing operations was $150.7-million (23 per cent of revenue), a 63-per-cent improvement compared with the $92.7-million (17 per cent of revenue) reported in the 2022 year. Included in the 2023 12-month period adjusted EBITDA from continuing operations is cash-settled share-based compensation expense of $13.5-million (2022 -- $24.6-million). For the year ended Dec. 31, 2023, adjusted EBITDA excluding cash-settled share-based compensation expense is $164.2-million (2022 -- $117.3-million).

In November, 2023, the corporation increased the borrowing capacity in the syndicated facility from $50-million to $80-million 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 capacity, the corporation has approximately $87-million and $20-million (U.S.) available to be drawn from its credit facilities. As at Dec. 31, 2023, the corporation had working capital of $93.9-million and net cash of $8.9-million.

Dividends and ROCS

In November, 2023, the board approved an increase to the corporation's quarterly dividend to 20 cents per common share from 15 cents per common share, which commenced with the dividend payable Jan. 15, 2024, to shareholders of record at the close of business on Dec. 29, 2023. An aggregate of $9.5-million was paid on Jan. 15, 2024. This is the fifth dividend increase since the dividend program was reinstated in December, 2020, and is a 700-per-cent increase from the dividend payable on Dec. 31, 2020.

The corporation remains committed to enhancing shareholder returns through its return of capital strategy (ROCS) that includes multiple options including the dividend program and the NCIB. In 2023, 70 per cent of PHX Energy's excess cash flow was $65-million, $30.4-million of which was used to repurchase shares under the NCIB and $30.2-million was used to pay dividends to shareholders. The remaining distributable balance under ROCS of $4.4-million will be carried forward into 2024 and is targeted to be used for future NCIB purchases.

Normal course issuer bid

During the third quarter of 2023, the TSX 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, 4,032,600 common shares were purchased by the corporation for $30.4-million and cancelled in the year ended Dec. 31, 2023. Pursuant to the previous NCIB, no common shares were purchased during the 2022 year by the corporation and cancelled.

Capital spending

For the year ended Dec. 31, 2023, the corporation spent $64.9-million in capital expenditures, of which $34.4-million was spent on growing the corporation's fleet of drilling equipment, $14.6-million was spent to replace retired assets and $15.9-million was spent to replace equipment lost downhole during drilling operations. With proceeds on disposition of drilling and other equipment of $43.7-million, the corporation's net capital expenditures for the 2023 year were $21.2-million. Capital expenditures in the 2023 year 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.

As at Dec. 31, 2023, the corporation had capital commitments to purchase drilling and other equipment for $42.7-million, $35.2-million of which is growth capital and includes $20-million for performance drilling motors, $11-million for Velocity systems and $4.2-million for other equipment. Equipment on order as at Dec. 31, 2023, is expected to be delivered within the first half of 2024.

The board has approved a preliminary 2024 capital expenditure program of $70-million. Of the 2023 capital expenditure budget, $5-million was not spent in 2023 and will be carried forward into 2024. As a result of this carryover, the corporation now anticipates spending $75-million in capital expenditures during 2024. Of the total expenditures, $47-million is anticipated to be spent on growth and 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 to maintain capacity in the fleet of drilling and other equipment and replace equipment lost downhole during drilling operations.

The corporation currently possesses approximately 741 Atlas motors, comprised of various configurations including its 5.13-inch, 5.25-inch, 5.76-inch, 6.63-inch, 7.12-inch, 7.25-inch, 8.12-inch, 9.00-inch and 9.62-inch Atlas motors, and 115 Velocity systems. The corporation also possesses the largest independent RSS fleet in North America with 63 RSS tools and the only fleet currently comprised of both the PowerDrive Orbit and iCruise systems.

Sale and licensed use of Atlas Motors

In the second and third quarter of 2023, the corporation agreed upon the sale and licensed use of its Atlas motors to allow an existing U.S. and international client to establish their own fleet. Under these agreements, the purchasers must exclusively use components manufactured by the corporation for the maintenance of their fleets of Atlas motors. For the year ended Dec. 31, 2023, $11-million of motors and parts were sold. PHX Energy anticipates ongoing orders for parts and the purchasers could potentially place subsequent orders for additional Atlas motors in the upcoming year.

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 United States. 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, and service and operational centres in Calgary, Alberta. 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., 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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