Mr. Alex MacAusland reports

WESTERN ENERGY SERVICES CORP. RELEASES FIRST QUARTER 2023 FINANCIAL AND OPERATING RESULTS

Western Energy Services Corp. has released its first quarter 2023 financial and operating results. Additional information relating to the company, including the company's financial statements and management's discussion and analysis as at March 31, 2023, and for the three months ended March 31, 2023, and 2022, will be available on SEDAR.

First quarter 2023 operating results:

• Western Energy's drilling rig upgrade program, which was initiated in 2022, has been a success and has generated a substantial portion of revenue in the first quarter of 2023. Since the upgrades have been performed and the rigs recommissioned into service, each upgraded drilling rig has been working for a customer. Additionally, the upgraded rigs have generated day rates which contributed to higher revenue in the first quarter of 2023.
• First quarter revenue increased by $28.7-million or 57 per cent to $79.2-million in 2023 as compared with $50.5-million in the first quarter of 2022. Contract drilling revenue totalled $58.1-million in the first quarter of 2023, an increase of $27.1-million or 88 per cent, compared with $31.0-million in the first quarter of 2022. Production service revenue was $21.3-million for the three months ended March 31, 2023, an increase of $1.7-million or 9 per cent, as compared with $19.6-million in the same period of the prior year. In the first quarter of 2023, revenue was positively impacted by improved pricing in all divisions, as well as higher activity in contract drilling, compared with the first quarter of 2022 as described below:
  • In Canada, operating days of 1,283 days in the first quarter of 2023 were 202 days (or 19 per cent) higher compared with 1,081 days in the first quarter of 2022, resulting in drilling rig utilization of 42 per cent in the first quarter of 2023 compared with 32 per cent in the same period of the prior year. The Canadian Association of Energy Contractors (CAOEC) industry average utilization of 45 per cent (1) for the first quarter of 2023 represented an increase of 600 basis points (bps) compared with the CAOEC industry average utilization of 39 per cent in the first quarter of 2022. Revenue per operating day averaged $33,275 in the first quarter of 2023, an increase of 26 per cent compared with the same period of the prior year, mainly due to rig upgrades, market-driven increased pricing and inflationary pressures on operating costs, including higher CAOEC industry wages and fuel charges that are passed through to the customer.
  • In the United States, drilling rig utilization averaged 45 per cent in the first quarter of 2023, compared with 14 per cent in the first quarter of 2022, with operating days improving from 100 days in the first quarter of 2022 to 327 days in the first quarter of 2023. Average active industry rigs of 744 (2) in the first quarter of 2023 were 20 per cent higher compared with the first quarter of 2022. Revenue per operating day for the first quarter of 2023 averaged $33,021 (U.S.), a 73-per-cent increase compared with $19,134 (U.S.) in the same period of the prior year, mainly due to improved pricing and changes in rig mix, as there was more activity with the company's higher spec rigs, which command higher day rates.
  • In Canada, service rig utilization of 44 per cent in the first quarter of 2023 was lower than 49 per cent in the same period of the prior year, mainly due to the industry-wide issue of crew availability. Revenue per service hour averaged $1,032 in the first quarter of 2023 and was 18 per cent higher than the first quarter of 2022, due to improved pricing and inflationary pressures on operating costs, including higher CAOEC industry wages and fuel charges that are passed through to the customer.
• Administrative expenses increased by $800,000 or 24 per cent to $4.2-million in the first quarter of 2023, as compared with $3.4-million in the first quarter of 2022, due to higher employee-related costs along with inflationary cost increases associated with improved industry activity.
• The company generated net income of $4.4-million in the first quarter of 2023 (13-cent net income per basic common share) as compared with a net loss of $3.8-million in the same period in 2022 (57-cent net loss per basic common share). The change can mainly be attributed to an $8.8-million increase in adjusted EBITDA, a $1.6-million decrease in finance costs due to the lower total debt balance and a $600,000 gain on asset disposals, offset partially by a $1.6-million increase in income tax expense, a $900,000 increase in stock-based compensation expense, and a $400,000 increase in depreciation expense due to property and equipment additions.
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $19.2-million in the first quarter of 2023 was $8.8-million, or 85 per cent, higher compared with $10.4-million in the first quarter of 2022. Adjusted EBITDA was higher due to improved contract drilling activity in Canada and the United States, higher pricing across all divisions, and $600,000 (U.S.) of shortfall commitment revenue, which was offset partially by one-time costs of $600,000 related to reactivating certain drilling rigs and inflationary cost increases.
• First quarter additions to property and equipment were $5.2-million in 2023 compared with $4.1-million in the first quarter of 2022, consisting of $2.7-million of expansion capital related to the substantial completion of the company's rig upgrade program and $2.5-million of maintenance capital.

(1) Source: CAOEC, monthly contractor summary.

(2) Source: Baker Hughes Company, North America rotary rig count.

About Western Energy Services Corp.

Western Energy is an energy service company that provides contract drilling services in Canada and the United States and production services in Canada through its various divisions, its subsidiary and its first nations relationships.

Outlook

In the first quarter of 2023, crude oil prices were impacted in the short term by the collapse of several international financial institutions, the fear of a North American recession and continued uncertainty concerning the continuing war in Ukraine. Additionally, the April 2, 2023, announcement by Saudi Arabia and other OPEC+ oil producers to cut oil production caused crude oil prices to rise. Events such as these contribute to the volatility of commodity prices, and the precise duration and extent of the adverse impacts of the current macroeconomic environment on Western Energy's customers, operations, business and global economic activity remain uncertain at this time. Additionally, the delayed timing of completion of construction on the Trans Mountain pipeline expansion, now expected to start filling with oil in late 2023 with full operation expected in 2024, and the threatened shutdown of Enbridge Line 5 have contributed to continued uncertainty regarding take-away capacity. Controlling fixed costs, maintaining balance sheet strength and flexibility, and managing through a volatile market are priorities for the company, as prices and demand for Western Energy's services continue to improve.

As previously announced, Western Energy's board of directors approved a capital budget for 2023 of $30-million, composed of $9-million of expansion capital and $21-million of maintenance capital. Western Energy will continue to manage its costs in a disciplined manner and make required adjustments to its capital program as customer demand changes. Currently, 12 of Western Energy's drilling rigs and six of Western Energy's well servicing rigs are operating.

As at March 31, 2023, Western Energy had $11.1-million drawn on its $45.0-million credit facilities (as defined in management's discussion and analysis) and $10.9-million outstanding on its HSBC Bank Canada six-year committed term non-revolving facility with the participation of Business Development Canada, which matures on Dec. 31, 2026. Western Energy currently has $106.9-million outstanding on its second-lien facility (as defined in the MD&A).

Energy service activity in Canada will be affected by the continued development of resource plays in Alberta and northeast British Columbia, which will be impacted by continued pipeline construction, environmental regulations and the level of investment in Canada. The January, 2023, announcement that the government of British Columbia and the Blueberry River First Nations reached an agreement, which provides a framework for how resource development may continue within the Blueberry River First Nations claim area, including the restoration and future development of land, water and natural resources, is expected to have a positive impact on the energy industry. Given the recent developments with the Blueberry agreement in northeastern British Columbia, there is higher demand for Montney and Duvernay class rigs, and with Western Energy's recent drilling rig upgrade program substantially complete, the company is well positioned to be the contractor of choice to supply drilling rigs in a tightening market. Western Energy expects its upgraded drilling rigs to be fully utilized in the future as such higher-spec rigs are in demand in the current market. Western Energy is also active with three fit-for-purpose drilling rigs in the Clearwater formation in Northern Alberta. In the short term, the largest challenges facing the energy service industry are a lack of qualified field personnel and the restrained growth in customer drilling activity due to the continuing preference to return cash to shareholders through share buybacks, increased dividends and repayment of debt, rather than increase production. If commodity prices stabilize for an extended period and as customers strengthen their balance sheets and satisfy shareholders, it expects that drilling activity will continue to increase. In the medium term, Western Energy's rig fleet is well positioned to benefit from the LNG Canada liquefied natural gas project now under construction in British Columbia. Western Energy is an experienced deep and long driller in Canada, with an average well length of 6,261 metres drilled per well and an average of 13.2 operating days to drill per well in 2023. It remains Western Energy's view that its upgraded drilling rigs and modern well servicing rigs, reputation for quality and capacity of the company's rig fleet, and disciplined cash management provide Western Energy with a competitive advantage.

We seek Safe Harbor.