Mr. Alex MacAusland reports

WESTERN ENERGY SERVICES CORP. RELEASES FOURTH QUARTER AND YEAR END 2023 FINANCIAL AND OPERATING RESULTS, REDUCING DEBT BY $17 MILLION IN 2023

Western Energy Services Corp. has released its fourth quarter and year-end 2023 financial and operating results, reducing debt by $17-million in 2023. Additional information relating to the Company, including the Company's financial statements and management's discussion and analysis as at and for the year ended December 31, 2023 and 2022 will be available on SEDAR+. Non-International Financial Reporting Standards ("Non-IFRS") measures and ratios, such as Adjusted EBITDA, Adjusted EBITDA as a percentage of revenue, revenue per Operating Day, revenue per Service Hour and Working Capital, as well as abbreviations and definitions for standard industry terms are defined later in this press release. All amounts are denominated in Canadian dollars (CDN$) unless otherwise identified.

Fourth Quarter 2023 Operating Results:

• Fourth quarter revenue decreased by $4.5 million or 7%, to $56.3 million in 2023, as compared to $60.8 million in the fourth quarter of 2022. Contract drilling revenue totalled $37.7 million in the fourth quarter of 2023, which was $5.5 million or 13%, lower than $43.2 million in the fourth quarter of 2022. Production services revenue was $18.6 million for the three months ended December 31, 2023, an increase of $0.8 million or 5%, as compared to $17.8 million in the same period of the prior year. In the fourth quarter of 2023, revenue was negatively impacted by lower activity in contract drilling in Canada and the US due to lower commodity prices, compared to the fourth quarter of 2022 as described below:
  • In Canada, Operating Days of 833 days in the fourth quarter of 2023 were 95 days (or 10%) lower compared to 928 days in the fourth quarter of 2022. This compares to a 9% decrease in CAOEC industry Operating Days in the fourth quarter of 2023, compared to the fourth quarter of 2022. Drilling rig utilization in Canada was 27% in the fourth quarter of 2023, compared to 28% in the same period of the prior year mainly due to customers reducing their capital budgets or deferring their programs into 2024, as a result of lower commodity prices in the fourth quarter. The Canadian Association of Energy Contractors ("CAOEC") industry average utilization of 36% 1 for the fourth quarter of 2023 represented a decrease of four percentage points compared to the CAOEC industry average utilization of 40% in the fourth quarter of 2022. Revenue per Operating Day averaged $35,211 in the fourth quarter of 2023, an increase of 4% compared to the same period of the prior year, mainly due to higher pricing, which was offset partially by lower third party charges, such as fuel, as more customers are paying for fuel directly instead of passing fuel charges through Western;
  • In the United States ("US"), drilling rig utilization averaged 36% in the fourth quarter of 2023, compared to 40% in the fourth quarter of 2022, with Operating Days decreasing from 293 days in the fourth quarter of 2022 to 229 days in the fourth quarter of 2023 due to lower industry activity. Average active industry rigs of 622 2 in the fourth quarter of 2023 were 20% lower compared to the fourth quarter of 2022. Revenue per Operating Day for the fourth quarter of 2023 averaged US$26,530, a 10% decrease compared to US$29,439 in the same period of the prior year, mainly due to changes in rig mix as activity was lower for the Company's higher specification rigs which have higher day rates; and
  • In Canada, service rig utilization of 37% in the fourth quarter of 2023 was lower than 38% in the same period of the prior year as industry activity decreased. Revenue per Service Hour averaged $1,017 in the fourth quarter of 2023 and was 3% higher than the fourth quarter of 2022, due to improved pricing and inflationary pressures on operating costs, including higher wages that are passed through to the customer.
• The Company incurred a net loss of $2.2 million in the fourth quarter of 2023 ($0.06 net loss per basic common share) as compared to a net loss of $3.1 million in the same period in 2022 ($0.09 net loss per basic common share). The change can mainly be attributed to a $1.2 million increase in Adjusted EBITDA, a $0.3 million decrease in income tax expense, a $0.3 million decrease in stock based compensation expense, and a $0.3 million decrease in finance costs due to a lower total debt balance, which were partially offset by a $0.9 million increase in depreciation expense due to property and equipment additions and a $0.2 million increase in other items. Administrative expenses in the fourth quarter of 2023 were consistent with the fourth quarter of 2022.
• Adjusted EBITDA of $13.4 million in the fourth quarter of 2023 was $1.2 million, or 9%, higher compared to $12.2 million in the fourth quarter of 2022. Adjusted EBITDA in 2023 was higher due to higher industry activity and pricing in production services, higher pricing in the contract drilling segment in the fourth quarter of 2023, as well as lower repairs and maintenance costs, which were offset partially by lower contract drilling activity in the US and Canada, as well as inflationary cost increases.
• Fourth quarter additions to property and equipment of $3.4 million in 2023 compared to $7.7 million in the fourth quarter of 2022, consisting of $0.6 million of expansion capital related to rig upgrades and $2.8 million of maintenance capital. The decrease can mainly be attributable to the Company substantially completing its rig upgrade program in 2022.
• On December 22, 2023, the Company made a $7.0 million voluntary prepayment on its second lien term loan facility with Alberta Investment Management Corporation (the "Second Lien Facility").

1 Source: CAOEC, monthly Contractor Summary.

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

2023 Operating Results:

• During the year ended December 31, 2023, the Company reduced its total debt by $17.0 million (or 13%), primarily through a $7.0 million voluntary repayment on its Second Lien Facility, a $4.1 million voluntary repayment on its HSBC Bank Canada six-year committed term non-revolving facility with the participation of Business Development Canada (the "HSBC Facility") and repayments of its Credit Facilities (as defined in this press release).
• Western's drilling rig upgrade program, which was initiated in 2022, has been a success and has generated a substantial portion of revenue for the year ended December 31, 2023. The upgraded rigs have generated higher day rates which contributed to increased revenue for the year ended December 31, 2023.
• Revenue for the year ended December 31, 2023, increased by $33.2 million or 17%, to $233.5 million as compared to $200.3 million for the year ended December 31, 2022. Contract drilling revenue totalled $164.6 million for the year ended December 31, 2023, an increase of $35.1 million or 27%, compared to $129.5 million in the same period of the prior year. Production services revenue was $69.2 million for the year ended December 31, 2023, a decrease of $2.1 million or 3%, as compared to $71.3 million in the same period of the prior year. In 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 to 2022 as described below:
  • In Canada, Operating Days of 3,575 for the year ended December 31, 2023, were 334 days (or 10%) higher, compared to 3,241 days for the year ended December 31, 2022, resulting in drilling rig utilization of 29% for the year ended December 31, 2023, compared to 24% for the year ended December 31, 2022. This compares to a 2% decrease in CAOEC Operating Days for the year ended December 31, 2023, compared to the year ended December 31, 2022. The CAOEC industry average utilization of 36% 3 for the year ended December 31, 2023, represented an increase of one percentage point compared to the CAOEC industry average utilization of 35% for the year ended December 31, 2022. Revenue per Operating Day averaged $33,328 for the year ended December 31, 2023, an increase of 12% compared to the prior year, mainly due to rig upgrades, market driven increased pricing, and inflationary pressures on operating costs, including higher wages that are passed through to the customer;
  • In the US, drilling rig utilization averaged 38% for the year ended December 31, 2023, compared to 33% in the prior year, with Operating Days improving by 96 days from 976 days in 2022 to 1,072 days in 2023. Average active industry rigs of 687 4 in 2023 were 5% lower than the average for the year ended December 31, 2022 as US industry activity weakened in 2023. Revenue per Operating Day for the year ended December 31, 2023 averaged US$30,861, a 19% increase compared to US$25,927 for the year ended December 31, 2022, mainly due to improved spot market pricing in the Williston Basin; and
  • In Canada, service rig utilization of 34% for the year ended December 31, 2023 was lower than 41% in prior year as industry activity decreased, mainly due to the completion of the funding for 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 $1,027 for the year ended December 31, 2023 and was 9% higher than the prior year, due to improved pricing and inflationary pressures on operating costs, including higher wages that are passed through to the customer.
• Administrative expenses increased by $2.4 million or 17%, to $16.3 million for the year ended December 31, 2023, as compared to $13.9 million in the prior year, due to higher employee related costs along with inflationary costs and higher professional fees.
• The Company generated a net loss of $6.9 million for the year ended December 31, 2023 ($0.20 net loss per basic common share) as compared to net income of $29.3 million in the prior year ($1.24 net income per basic common share). The change can mainly be attributed to the $49.4 million gain on debt forgiveness in 2022, a $7.8 million increase in Adjusted EBITDA, a $4.3 million decrease in income tax expense, a $3.0 million decrease in finance costs due to the lower total debt balance and a $0.9 million decrease in other items, offset partially by a $0.8 million increase in stock based compensation expense and a $2.1 million increase in depreciation expense due to property and equipment additions.
• Adjusted EBITDA of $47.7 million for the year ended December 31, 2023 was $7.8 million, or 20%, higher compared to $39.9 million in the prior year. Adjusted EBITDA was higher due to improved contract drilling activity in Canada and the US in the first half of 2023, higher pricing across all divisions, and US$0.6 million of shortfall commitment revenue, which was offset partially by lower activity in the third and fourth quarters of 2023, one-time costs of $0.5 million related to reactivating certain drilling rigs, inflationary cost increases and $1.8 million lower government subsidies received in 2023 compared to 2022.
• Year to date 2023 additions to property and equipment of $22.6 million compared to $34.2 million in the prior year, consisting of $7.4 million of expansion capital and $15.2 million of maintenance capital. The decrease year over year can mainly be attributable to the Company substantially completing its rig upgrade program in 2022.

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 41 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 second 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 months ended December 31, 2023 and 2022 and for the year ended December 31, 2023 and 2022.

West Texas Intermediate on average decreased by 5% and 18% respectively, for the three months and year ended December 31, 2023, compared to the same periods in the prior year. Pricing on Western Canadian Select crude oil decreased by 1% and 19% respectively, for the three months and year ended December 31, 2023. 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 56% and 51% respectively, for the three months and year ended December 31, 2023, compared to the same periods of the prior year. Additionally, the US dollar to the Canadian dollar foreign exchange rate for the three months ended December 31, 2023 was consistent with the same period in the prior year, while for the year ended December 31, 2023, the US dollar strengthened by 4% compared to the prior year.

In both the US and Canada, lower commodity prices reduced industry activity in 2023. As reported by Baker Hughes Company 7 , the number of active drilling rigs in the US decreased by approximately 20% to 622 rigs as at December 31, 2023, as compared to 779 rigs at December 31, 2022. In Canada, there were 104 active rigs in the Western Canadian Sedimentary Basin ("WCSB") at December 31, 2023, compared to 121 active rigs as at December 31, 2022, representing a decrease of approximately 14%. The CAOEC 8 reported that for drilling in Canada, the total number of Operating Days in the WCSB for the three months ended December 31, 2023, were 9% lower than the same period in the prior year. Similarly, for the year ended December 31, 2023, the total number of Operating Days in the WCSB in Canada were 2% lower than the prior year.

Outlook

In 2023, crude oil prices were 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 ongoing war in Ukraine and 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, remains uncertain at this time. Additionally, the threatened shutdown and relocation of a portion of the Enbridge Line 5 pipeline, the delays and construction challenges on the Trans Mountain pipeline expansion, and the recent challenge of the Blueberry River First Nations agreement in British Columbia by the Treaty 8 nations have contributed to continued uncertainty regarding takeaway capacity and resource development. However, despite the recent technical issues with the Trans Mountain pipeline expansion, as of the date hereof, the pipeline is estimated to be 95% complete with an anticipated in-service date in the second quarter of 2024. The Trans Mountain pipeline, in addition to the Coastal Gaslink pipeline project which was mechanically complete in November 2023, and the LNG Canada liquefied natural gas project in British Columbia now more than 85% complete and expected to be online 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 previously announced, Western's board of directors has approved a capital budget for 2024 of $23 million, comprised of $8 million of expansion capital and $15 million of maintenance capital. The 2024 capital budget includes approximately $3 million of committed expenditures from 2023 that will carry forward into 2024. Western will continue to manage its costs in a disciplined manner and make required adjustments to its capital program as customer demand changes. Currently, 14 of Western's drilling rigs and 25 of Western's well servicing rigs are operating.

As at December 31, 2023, Western had $5 million drawn on its $45 million senior secured credit facilities (the "Credit Facilities") and $6 million outstanding on its HSBC Facility, which matures on December 31, 2026. As at December 31, 2023, Western had $99 million outstanding on its Second Lien Facility, which matures on May 18, 2026. In 2023, Western reduced its total debt by $17 million and will continue to focus its efforts on debt reduction in 2024.

Energy service activity in Canada will be affected by volatile commodity prices, the continued development of resource plays in Alberta and northeast British Columbia, continued pipeline construction to increase takeaway capacity, environmental regulations, and the level of investment in Canada. 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 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 weak commodity prices, 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, we expect that drilling activity will increase. In the medium term, Western's rig fleet is well positioned to benefit from the increased drilling and production services activity generated by the LNG Canada liquefied natural gas project and the Trans Mountain pipeline expansion. The total rig fleet in the WCSB has decreased from 441 drilling rigs at December 31, 2022 to 383 drilling rigs as of February 28, 2024, representing a decrease of 58 drilling rigs, or 13% which reduces the supply of drilling rigs for such projects. Western is an experienced deep horizontal driller in Canada, with an average well length of 6,757 meters drilled per well and an average of 12.3 operating days to drill per well for the year ended December 31, 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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