Mr. Alex MacAusland reports

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

Western Energy Services Corp. has released its second 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 June 30, 2023, and for the three and six months ended June 30, 2023 and 2022 (MD&A), will be available on SEDAR Plus. All amounts are denominated in Canadian dollars unless otherwise identified.

Second quarter 2023 operating results:

• Second quarter revenue increased by $12.4-million or 40 per cent, to $43.0-million in 2023, as compared with $30.6-million in the second quarter of 2022. Contract drilling revenue totalled $30.6-million in the second quarter of 2023, an increase of $13.4-million or 78 per cent, compared with $17.2-million in the second quarter of 2022. Production services revenue was $12.4-million for the three months ended June 30, 2023, a decrease of $1.1-million or 8 per cent, as compared with $13.5-million in the same period of the prior year. In the second quarter of 2023, revenue was positively impacted by improved pricing in all divisions, rig upgrades, as well as higher activity in contract drilling; however, activity was lower in production services due to lower commodity prices, compared with the second quarter of 2022, as described below:
  • In Canada, operating days of 576 days in the second quarter of 2023 were 254 days (or 79 per cent) higher compared with 322 days in the second quarter of 2022, resulting in drilling rig utilization of 19 per cent in the second quarter of 2023 compared with 10 per cent in the same period of the prior year. This compares with a 1-per-cent increase in the Canadian Association of Energy Contractors (CAOEC) industry operating days in the second quarter of 2023, compared with the second quarter of 2022. The CAOEC industry average utilization of 25 per cent (1) for the second quarter of 2023 represented an increase of 200 basis points compared with the CAOEC industry average utilization of 23 per cent in the second quarter of 2022. Revenue per operating day averaged $33,218 in the second quarter of 2023, an increase of 11 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 wages and fuel charges that are passed through to the customer;
  • In the United States (U.S.), drilling rig utilization averaged 37 per cent in the second quarter of 2023, compared with 34 per cent in the second quarter of 2022, with operating days improving from 250 days in the second quarter of 2022 to 267 days in the second quarter of 2023. Average active industry rigs of 719 (2) in the second quarter of 2023 were 1 per cent higher compared with the second quarter of 2022. Revenue per operating day for the second quarter of 2023 averaged $31,896 (U.S.), a 33-per-cent increase compared with $23,945 (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; and
  • In Canada, service rig utilization of 23 per cent in the second quarter of 2023 was lower than 32 per cent in the same period of the prior year as industry activity decreased, mainly due to the completion of the federal site rehabilitation program and customers reducing their capital spending due to inflationary factors and lower commodity prices. Revenue per service hour averaged $1,052 in the second quarter of 2023 and was 12 per cent higher than the second quarter of 2022, due to improved pricing and inflationary pressures on operating costs, including higher 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 second quarter of 2023, as compared with $3.4-million in the second quarter of 2022, due to higher employee-related costs along with inflationary costs and higher legal fees;
• The company incurred a net loss of $7.8-million in the second quarter of 2023 (23-cent net loss per basic common share) as compared with a net income of $35.4-million in the same period in 2022 ($1.81 net income per basic common share). The change can mainly be attributed to the $49.4-million gain on debt forgiveness in connection with the company's restructuring transaction in May, 2022, a $500,000 increase in stock-based compensation expense, and a $300,000 increase in depreciation expense due to property and equipment additions, which were partially offset by a $4.3-million decrease in income tax expense, a $1.6-million increase in adjusted earnings before interest, taxes, depreciation and amortization, and a $1.0-million decrease in finance costs due to a lower total debt balance;
• Adjusted EBITDA of $4.1-million in the second quarter of 2023 was $1.6-million, or 66 per cent, higher compared with $2.5-million in the second quarter of 2022. Adjusted EBITDA was higher due to improved contract drilling activity in Canada and the U.S., as well as higher pricing across all divisions, which was offset partially by inflationary cost increases and $900,000 lower receipts of COVID-19-related government subsidies in 2023 compared with 2022;
• Second-quarter additions to property and equipment of $6.7-million in 2023 compared with $14.0-million in the second quarter of 2022, consisting of $2.4-million of expansion capital related to the substantial completion of the company's rig upgrade program and $4.3-million of maintenance capital.

1 Source: CAOEC, monthly Contractor Summary.

2 Source: Baker Hughes Company, North America Rotary Rig Count.

Year to Date 2023 Operating Results:

• During the six months ended June 30, 2023, the Company reduced its total debt by $8.3-million (or 7 per cent), primarily through repayments of its Credit Facilities.
• Western'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 half 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 for the six months ended June 30, 2023.
• Revenue for the six months ended June 30, 2023, increased by $41.1-million or 51 per cent, to $122.2-million as compared with $81.1-million for the six months ended June 30, 2022. Contract drilling revenue totalled $88.7-million for the six months ended June 30, 2023, an increase of $40.5-million or 84 per cent, compared with $48.2-million in the same period of the prior year. Production services revenue was $33.8-million for the six months ended June 30, 2023, an increase of $0.7-million or 2 per cent, as compared with $33.1-million in the same period of the prior year. In the first half of 2023, revenue was positively impacted by improved pricing in all divisions, rig upgrades, as well as higher activity in contract drilling, compared with the first half of 2022 as described below:
  • In Canada, Operating Days of 1,859 days for the six months ended June 30, 2023 were 456 days (or 33 per cent) higher, compared with 1,403 days for the six months ended June 30, 2022, resulting in drilling rig utilization of 30 per cent for the first half of 2023 compared with 21 per cent in the same period of the prior year. This compares with a 6 per cent increase in CAOEC Operating Days for the six months ended June 30, 2023, compared with the same period in the prior year. The CAOEC industry average utilization of 35 per cent 3 for the six months ended June 30, 2023 represented an increase of 400 bps compared with the CAOEC industry average utilization of 31 per cent for the six months ended June 30, 2022. Revenue per Operating Day averaged $33,258 for the six months ended June 30, 2023, an increase of 22 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 wages and fuel charges that are passed through to the customer;
  • In the US, drilling rig utilization averaged 41 per cent for the six months ended June 30, 2023, compared with 24 per cent in the same period of 2022, with Operating Days improving from 350 days in the first half of 2022 to 594 days in the first half of 2023. Average active industry rigs of 740 4 in the first six months of 2023 were 10 per cent higher compared with the first six months of 2022. Revenue per Operating Day for the six months ended June 30, 2023 averaged US$32,515, a 44 per cent increase compared with US$22,565 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; and
  • In Canada, service rig utilization of 33 per cent for the six months ended June 30, 2023 was lower than 40 per cent in the same period of the prior year as industry activity decreased, mainly due to the completion of the Federal site rehabilitation program and customers reducing their capital spending due to inflationary factors and lower commodity prices. Revenue per Service Hour averaged $1,039 for the six months ended June 30, 2023 and was 15 per cent higher than the same period of the prior year, due to improved pricing and inflationary pressures on operating costs, including higher wages and fuel charges that are passed through to the customer.
• Administrative expenses increased by $1.6-million or 24 per cent, to $8.4-million for the six months ended June 30, 2023, as compared with $6.8-million in the same period of 2022, due to higher employee related costs along with inflationary costs and higher legal fees.
• The Company generated a net loss of $3.4-million for the six months ended June 30, 2023 ($0.10 net loss per basic common share) as compared with net income of $31.6-million in the same period in 2022 ($2.40 net income per basic common share). The change can mainly be attributed to the $49.4-million gain on debt forgiveness in connection with the Company's restructuring transaction completed in May 2022, a $10.4-million increase in Adjusted EBITDA, a $2.7-million decrease in income tax expense and a $2.6-million decrease in finance costs due to the lower total debt balance, offset partially by a $1.3-million increase in stock based compensation expense and a $0.6-million increase in depreciation expense due to property and equipment additions.
• Adjusted EBITDA of $23.3-million for the six months ended June 30, 2023 was $10.4-million, or 81 per cent, higher compared with $12.9-million in the same period of 2022. Adjusted EBITDA was higher due to improved contract drilling activity in Canada and the US, higher pricing across all divisions, and US$0.6-million of shortfall commitment revenue, which was offset partially by one-time costs of $0.6-million related to reactivating certain drilling rigs and inflationary cost increases and $0.7-million lower COVID-19 related government subsidies received in 2023 compared with 2022.
• Year to date 2023 additions to property and equipment of $11.9-million compared with $18.1-million in the same period of 2022, consisting of $5.1-million of expansion capital related to the substantial completion of the Company's rig upgrade program and $6.8-million of maintenance capital.

3 Source: CAOEC, monthly Contractor Summary.

4 Source: Baker Hughes Company, North America Rotary Rig Count.

Business Overview

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

Contract Drilling

Western markets a fleet of 42 drilling rigs specifically suited for drilling complex horizontal wells across Canada and the US. Western is currently the fourth largest drilling contractor in Canada, based on the CAOEC registered drilling rigs 5 .

Western's marketed and owned contract drilling rig fleets are comprised of the following:

Production Services

Production services provides well servicing and oilfield equipment rentals in Canada. Western operates 65 well servicing rigs and is the third largest well servicing company in Canada based on CAOEC registered well servicing rigs6.

Western's well servicing rig fleet is comprised of the following:

Business Environment

Crude oil and natural gas prices impact the cash flow of Western's customers, which in turn impacts the demand for Western's services. The following table summarizes average crude oil and natural gas prices, as well as average foreign exchange rates, for the three and six months ended June 30, 2023 and 2022.

West Texas Intermediate on average decreased by 32 per cent and 26 per cent respectively, for the three and six months ended June 30, 2023, compared with the same periods in the prior year. Similarly, pricing on Western Canadian Select crude oil decreased by 35 per cent and 34 per cent respectively, for the three and six months ended June 30, 2023, compared with the same periods in the prior year. In 2023, crude oil prices decreased due to global economic concerns including weakening demand for crude oil, the collapse of several international financial institutions, the fear of a North American recession and continued high interest rates implemented to manage inflationary factors. Natural gas prices in Canada also declined in 2023 due to lower demand, as well as weather related factors including warmer winter seasons in both North America and Europe, as the 30-day spot AECO price decreased by 67 per cent and 53 per cent respectively, for the three and six months ended June 30, 2023, compared with the same periods of the prior year. Additionally, the US dollar to the Canadian dollar foreign exchange rate for the three and six months ended June 30, 2023, strengthened by 5 per cent and 6 per cent respectively, compared with the same periods of the prior year.

5 Source: CAOEC Drilling Contractor Summary as at July 25, 2023.

6 Source: CAOEC Well Servicing Fleet List as at July 25, 2023.

In the US, industry activity declined in the first half of 2023. As reported by Baker Hughes Company 7 , the number of active drilling rigs in the US decreased by approximately 10 per cent to 674 rigs as at June 30, 2023, as compared with 750 rigs at June 30, 2022 due to lower commodity prices. In Canada, there were 179 active rigs in the Western Canadian Sedimentary Basin ("WCSB") at June 30, 2023, compared with 177 active rigs as at June 30, 2022. The CAOEC 8 reported that for drilling in Canada, the total number of Operating Days in the WCSB for the three months ended June 30, 2023, were 1 per cent higher than the same period in the prior year. For the six months ended June 30, 2023, the total number of Operating Days in the WCSB in Canada were 6 per cent higher than the same period of the prior year. In addition to lower commodity prices, there remains continued service industry concerns over the prevailing customer preference to return cash to shareholders through share buyback programs and dividends, or pay down debt, rather than grow production through the drill bit thereby limiting industry drilling activity.

Outlook

During the first half 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, concerns surrounding demand for crude oil due to weak global economic data, and continued uncertainty concerning the ongoing 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's customers, operations, business and global economic activity, remains 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 and relocation of a portion of the Enbridge Line 5 pipeline, have contributed to continued uncertainty regarding takeaway 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's services continue to improve.

As previously announced, Western's board of directors approved a capital budget for 2023 of $30-million, comprised of $9-million of expansion capital and $21-million of maintenance capital. Western will continue to manage its costs in a disciplined manner and make required adjustments to its capital program as customer demand changes. Currently, 13 of Western's drilling rigs and 20 of Western's well servicing rigs are operating.

As at June 30, 2023, Western had no amounts drawn on its $45.0-million senior secured credit facilities (the "Credit Facilities") and $10.6-million outstanding on its HSBC Bank Canada six-year committed term non-revolving facility with the participation of Business Development Canada (the "HSBC Facility"), which matures on December 31, 2026. As at June 30, 2023, Western had $106.9-million outstanding on its second lien term loan facility with Alberta Investment Management Corporation (the "Second Lien Facility").

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, has facilitated an increase in 2023 drilling licence approvals, which should lead to higher demand for Montney and Duvernay class rigs. With Western'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's upgraded drilling rigs have all worked for customers since the upgrades were completed. Western 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 grow production. If commodity prices stabilize for an extended period and as customers strengthen their balance sheets by reducing debt levels, the company expects that drilling activity will continue to increase. In the medium term, Western's rig fleet is well positioned to benefit from the LNG Canada liquefied natural gas project now under construction in British Columbia, which is expected to be operational by 2025. Western is an experienced deep horizontal driller in Canada, with an average well length of 6,828 metres drilled per well and an average of 14.0 operating days to drill per well for the six months ended June 30, 2023. It remains Western'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 provides Western with a competitive advantage.

7 Source: Baker Hughes Company, 2023 Rig Count monthly press releases.

8 Source: CAOEC, monthly Contractor Summary.

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