Mr. Alex MacAusland reports

WESTERN ENERGY SERVICES CORP. RELEASES THIRD QUARTER 2023 FINANCIAL AND OPERATING RESULTS AND ANNOUNCES FURTHER DEBT REPAYMENTS

Western Energy Services Corp. has released its third 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 Sept. 30, 2023, and for the three and nine months ended Sept. 30, 2023, and 2022, will be available on SEDAR+.

Third quarter 2023 operating results:

• On Sept. 29, 2023, the company made a lump sum repayment of $4.1-million related to its HSBC Bank Canada six-year committed term non-revolving facility with the participation of Business Development Canada. The voluntary repayment included all committed monthly principal payments from Sept. 30, 2023, up to Dec. 31, 2026, resulting in no current obligation owing on the HSBC facility as at Sept. 30, 2023. The remaining balance under the HSBC facility is due upon maturity of the HSBC facility on Dec. 31, 2026.
• Third quarter revenue decreased by $3.5-million or 6 per cent, to $55-million in 2023, as compared with $58.5-million in the third quarter of 2022. Contract drilling revenue totalled $38.3-million in the third quarter of 2023, which was consistent with $38.1-million in the third quarter of 2022. Production services revenue was $16.8-million for the three months ended Sept. 30, 2023, a decrease of $3.6-million or 18 per cent, as compared with $20.4-million in the same period of the prior year. In the third quarter of 2023, revenue was negatively impacted by lower activity in production services and contract drilling in Canada and the United States due to lower commodity prices, compared with the third quarter of 2022 as described below:
  • In Canada, operating days of 883 days in the third quarter of 2023 were 26 days (or 3 per cent) lower compared with 909 days in the third quarter of 2022. This compares with a 7-per-cent decrease in the Canadian Association of Energy Contractors (CAOEC) industry operating days in the third quarter of 2023, compared with the third quarter of 2022. Drilling rig utilization in Canada was 28 per cent in the third quarter of 2023, compared with 27 per cent in the same period of the prior year, as lower operating days were offset by three rigs that were deregistered since Sept. 30, 2022. The CAOEC industry average utilization of 38 per cent for the third quarter of 2023 represented a decrease of 200 basis points compared with the CAOEC industry average utilization of 40 per cent in the third quarter of 2022. Revenue per operating day averaged $31,698 in the third quarter of 2023, an increase of 8 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, drilling rig utilization averaged 34 per cent in the third quarter of 2023, compared with 45 per cent in the third quarter of 2022, with operating days decreasing from 333 days in the third quarter of 2022 to 249 days in the third quarter of 2023 due to lower industry activity. Average active industry rigs of 649 2 in the third quarter of 2023 were 15 per cent lower compared with the third quarter of 2022. Revenue per operating day for the third quarter of 2023 averaged $30,898 (U.S.), a 17-per-cent increase compared with $26,372 (U.S.) in the same period of the prior year, mainly due to improved spot market rates;
  • In Canada, service rig utilization of 33 per cent in the third quarter of 2023 was lower than 45 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, several customers waiting on the restoration of power in areas impacted by wildfires and lower commodity prices experienced during the first eight months of 2023, compared with 2022. Revenue per service hour averaged $1,012 in the third quarter of 2023 and was 4 per cent higher than the third 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 $700,000 or 21 per cent, to $4-million in the third quarter of 2023, as compared with $3.3-million in the third quarter of 2022, due to inflationary pressures on all employee-related costs.
• The company incurred a net loss of $1.3-million in the third quarter of 2023 (four-cent net loss per basic common share) as compared with a net income of $800,000 in the same period in 2022 (two-cent net income per basic common share). The change can mainly be attributed to a $3.8-million decrease in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) and a $500,000 increase in depreciation expense due to property and equipment additions, which were partially offset by a $1.3-million decrease in income tax expense, a $600,000 increase in other items, a $200,000 decrease in stock-based compensation expense and a $100,000 decrease in finance costs due to a lower total debt balance.
• Adjusted EBITDA of $11-million in the third quarter of 2023 was $3.8-million, or 25 per cent, lower compared with $14.8-million in the third quarter of 2022. Adjusted EBITDA in 2023 was lower due to lower production services activity in Canada and lower contract drilling activity in the U.S. and Canada, as well as inflationary cost increases, offset partially by higher pricing across all divisions.
• Third quarter additions to property and equipment of $7.3-million in 2023 compared with $8.5-million in the third quarter of 2022, consisting of $1.7-million of expansion capital related to the substantial completion of the company's rig upgrade program and $5.6-million of maintenance capital.

Year-to-date 2023 operating results:

• During the nine months ended Sept. 30, 2023, the company reduced its total debt by $13.6-million (or 10 per cent), primarily through repayments of its credit facilities (as defined in this press release) as well as a $4.1-million voluntary repayment of all committed monthly principal amounts owing on its HSBC facility to its maturity on Dec. 31, 2026, as described previously.
• 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 nine months ended Sept. 30, 2023. Since the upgrades have been performed and the rigs recommissioned into service, all upgraded drilling rigs have worked for customers. Additionally, the upgraded rigs have generated higher day rates which contributed to increased revenue for the nine months ended Sept. 30, 2023.
• Revenue for the nine months ended Sept. 30, 2023, increased by $37.6-million or 27 per cent, to $177.2-million as compared with $139.6-million for the nine months ended Sept. 30, 2022. Contract drilling revenue totalled $126.9-million for the nine months ended Sept. 30, 2023, an increase of $40.6-million or 47 per cent, compared with $86.3-million in the same period of the prior year. Production services revenue was $50.6-million for the nine months ended Sept. 30, 2023, a decrease of $2.9-million or 6 per cent, as compared with $53.5-million in the same period of the prior year. In the nine months ended Sept. 30, 2023, revenue was positively impacted by improved pricing in all divisions, rig upgrades as well as higher activity in contract drilling, partially offset by lower activity in production services, compared with the same period of 2022 as described below:
  • In Canada, operating days of 2,742 days for the nine months ended Sept. 30, 2023, were 430 days (or 19 per cent) higher, compared with 2,312 days for the nine months ended Sept. 30, 2022, resulting in drilling rig utilization of 30 per cent for the nine months ended Sept. 30, 2023, compared with 23 per cent in the same period of the prior year. This compares with a 1-per-cent increase in CAOEC operating days for the nine months ended Sept. 30, 2023, compared with the same period in the prior year. The CAOEC industry average utilization of 36 per cent for the nine months ended Sept. 30, 2023, represented an increase of 200 bps compared with the CAOEC industry average utilization of 34 per cent for the nine months ended Sept. 30, 2022. Revenue per operating day averaged $32,755 for the nine months ended Sept. 30, 2023, an increase of 17 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 U.S., drilling rig utilization averaged 39 per cent for the nine months ended Sept. 30, 2023, compared with 31 per cent in the same period of 2022, with operating days improving by 160 days from 683 days in 2022 to 843 days in 2023. Average active industry rigs of 709 in the nine months ended Sept. 30, 2023, were 1 per cent higher than the average for the nine months ended Sept. 30, 2022. Revenue per operating day for the nine months ended Sept. 30, 2023, averaged $32,038 (U.S.), a 31-per-cent increase compared with $24,421 (U.S.) in the same period of the prior year, mainly due to improved spot market pricing in the Williston basin;
  • In Canada, service rig utilization of 33 per cent for the nine months ended Sept. 30, 2023, was lower than 42 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, several customers waiting on the restoration of power in areas impacted by wildfires and lower commodity prices. Revenue per service hour averaged $1,030 for the nine months ended Sept. 30, 2023, and was 11 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 $2.3-million or 23 per cent, to $12.4-million for the nine months ended Sept. 30, 2023, as compared with $10.1-million in the same period of 2022, due to higher employee related costs along with inflationary costs and higher professional fees.
• The company generated a net loss of $4.7-million for the nine months ended Sept. 30, 2023 (14-cent net loss per basic common share) as compared with net income of $32.4-million in the same period in 2022 ($1.89 net income per basic common share). The change can mainly be attributed to the $49.4-million gain on debt forgiveness in 2022 in connection with the company's restructuring transaction completed in May, 2022, a $6.7-million increase in adjusted EBITDA, a $4-million decrease in income tax expense and a $2.7-million decrease in finance costs due to the lower total debt balance, offset partially by a $1.1-million increase in stock-based compensation expense and a $1.1-million increase in depreciation expense due to property and equipment additions.
• Adjusted EBITDA of $34.4-million for the nine months ended Sept. 30, 2023 was $6.7-million, or 24 per cent, higher compared with $27.7-million in the same period of 2022. Adjusted EBITDA was higher due to improved contract drilling activity in Canada and the U.S. in the first half of 2023, higher pricing across all divisions and $600,000 (U.S.) of shortfall commitment revenue, which was offset partially by lower activity in the third quarter of 2023, one-time costs of $600,000 related to reactivating certain drilling rigs and inflationary cost increases, and $800,000 lower government subsidies received in 2023 compared with 2022.
• Year-to-date 2023 additions to property and equipment of $19.2-million compared with $26.5-million in the same period of 2022, consisting of $6.8-million of expansion capital related to the substantial completion of the company's rig upgrade program and $12.4-million of maintenance capital.

Business overview

Western is an energy services company that provides contract drilling services in Canada and in the U.S. 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 U.S. Western is currently the fourth-largest drilling contractor in Canada, based on the CAOEC registered drilling rigs.

Production services

Production services provides well servicing and oil field equipment rentals in Canada. Western operates 65 well servicing rigs and is the second-largest well servicing company in Canada based on CAOEC registered well servicing rigs.

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.

West Texas Intermediate (WTI) on average decreased by 10 per cent and 21 per cent, respectively, for the three and nine months ended Sept. 30, 2023, compared with the same periods in the prior year. Pricing on Western Canadian Select (WCS) crude oil for the three months ended Sept. 30, 2023, was consistent with the same period of the prior year, whereas for the nine months ended Sept. 30, 2023, WCS decreased by 24 per cent, compared with the same period in the prior year. In the first eight months of 2023, both WTI and WCS were lower than the same period of 2022; however, pricing for both WTI and WCS improved at the end of the third quarter of 2023, compared with the third quarter of 2022. In 2023, crude oil prices decreased due to global economic concerns, including weakening demand for crude oil, 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 42 per cent and 50 per cent, respectively, for the three and nine months ended Sept. 30, 2023, compared with the same periods of the prior year. Additionally, the U.S. dollar to the Canadian dollar foreign exchange rate for the three and nine months ended Sept. 30, 2023, strengthened by 2 per cent and 5 per cent, respectively, compared with the same periods of the prior year.

In both the U.S. and Canada, lower commodity prices in the first eight months of the year reduced industry activity in the third quarter of 2023. As reported by Baker Hughes Company, the number of active drilling rigs in the U.S. decreased by approximately 19 per cent to 623 rigs as at Sept. 30, 2023, as compared with 765 rigs at Sept. 30, 2022, due to lower commodity prices. In Canada, there were 190 active rigs in the Western Canadian sedimentary basin (WCSB) at Sept. 30, 2023, compared with 215 active rigs as at Sept. 30, 2022, representing a decrease of approximately 12 per cent. The CAOEC reported that for drilling in Canada, the total number of operating days in the WCSB for the three months ended Sept. 30, 2023, were 7 per cent lower than the same period in the prior year. For the nine months ended Sept. 30, 2023, the total number of operating days in the WCSB in Canada were 1 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

In 2023, crude oil prices have been impacted in the short term by the fear of a North American recession, concerns surrounding demand from a weak global economy, continued uncertainty concerning the continuing war in Ukraine and, most recently, by the Israel-Palestine conflict in the Middle East. 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, remain uncertain at this time. Additionally, the threatened shutdown and relocation of a portion of the Enbridge Line 5 pipeline has contributed to continued uncertainty regarding takeaway capacity. However, recent positive events such as the Trans Mountain pipeline expansion, now expected to be mechanically complete in 2023 and start operating in early 2024, the Coastal Gaslink pipeline project which is 98 per cent complete and the LNG Canada liquefied natural gas project in British Columbia expected to be on-line in 2025, may contribute to increased industry activity. Controlling fixed costs, maintaining balance sheet strength and flexibility, repaying debt, and managing through a volatile market are priorities for the company, as prices and demand for Western's services continue to improve.

As a result of the reduced industry activity in the third quarter of 2023 caused by lower commodity prices in the first eight months of the year, Western has reduced its capital budget for 2023 to $25-million, which represents a decrease of $5-million from Western's previous capital budget of $30-million. The revised budget comprises $8-million of expansion capital and $17-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, 15 of Western's drilling rigs and 19 of Western's well servicing rigs are operating.

As at Sept. 30, 2023, Western had no amounts drawn on its $45-million senior secured credit facilities and $6.3-million outstanding on its HSBC facility, which matures on Dec. 31, 2026. As at Sept. 30, 2023, Western had $106.6-million outstanding on its second lien term loan facility with Alberta Investment Management Corp.

Energy service activity in Canada will be affected by the continued development of resource plays in Alberta and northeastern 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 their 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, Western expects that drilling activity will increase. In the medium term, Western's rig fleet is well positioned to benefit from the LNG Canada liquefied natural gas project and the Trans Mountain pipeline expansion. Western is an experienced deep horizontal driller in Canada, with an average well length of 6,908 metres drilled per well and an average of 12.7 operating days to drill per well for the nine months ended Sept. 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.

We seek Safe Harbor.