Mr. Alex MacAusland reports

WESTERN ENERGY SERVICES CORP. RELEASES FIRST QUARTER 2024 FINANCIAL AND OPERATING RESULTS

Western Energy Services Corp. has released its first quarter 2024 financial and operating results. Additional information relating to the company, including the company's financial statements and management's discussion and analysis (MD&A) as at March 31, 2024, and for the three months ended March 31, 2024, and 2023 will be available on SEDAR+.

First quarter 2024 operating results:

• First quarter revenue decreased by $17.2-million (or 22 per cent), to $62.0-million in 2024, as compared with $79.2-million in the first quarter of 2023. Contract drilling revenue totalled $39.6-million in the first quarter of 2024, which was $18.5-million (or 32 per cent), lower than $58.1-million in the first quarter of 2023. Production services revenue was $22.4-million for the three months ended March 31, 2024, an increase of $1.1-million (or 5 per cent) as compared with $21.3-million in the same period of the prior year. In the first quarter of 2024, revenue was negatively impacted by lower activity in contract drilling in Canada and the United States due to lower commodity prices in the first part of 2024, specifically natural gas prices, compared with the first quarter of 2023 as described below:
  • In Canada, operating days of 952 days in the first quarter of 2024 were 331 days (or 26 per cent) lower compared with 1,283 days in the first quarter of 2023. Drilling rig utilization in Canada was 31 per cent in the first quarter of 2024, compared with 42 per cent in the same period of the prior year mainly due to customers cancelling or deferring their programs into the second half of 2024, as a result of lower natural gas prices in 2023 that continued into 2024. The Canadian Association of Energy Contractors (CAOEC) industry operating days decreased 1 per cent in the first quarter of 2024, compared with the first quarter of 2023, while the CAOEC industry average utilization increased five percentage points to 50 per cent (1) for the first quarter of 2024, compared with the CAOEC industry average utilization of 45 per cent in the first quarter of 2023. The increase in the CAOEC industry average utilization is attributable to a 13-per-cent decrease in the average number of drilling rigs registered with the CAOEC in the first quarter of 2024 compared with the first quarter of 2023. If the number of registered drilling rigs with the CAOEC had not decreased, the CAOEC industry average utilization in the first quarter of 2024 would have been 45 per cent, consistent with the first quarter of 2023. Revenue per operating day averaged $34,233 in the first quarter of 2024, an increase of 3 per cent compared with the same period of the prior year, mainly due to higher pricing.
  • In the United States (U.S.), drilling rig utilization averaged 26 per cent in the first quarter of 2024, compared with 45 per cent in the first quarter of 2023, with operating days decreasing from 327 days in the first quarter of 2023 to 164 days in the first quarter of 2024 due to lower industry activity. Average active industry rigs of 623 (2) in the first quarter of 2024 were 18 per cent lower compared with the first quarter of 2023. Revenue per operating day for the first quarter of 2024 averaged $31,858 (U.S.), a 4-per-cent decrease compared with $33,021 (U.S.) in the same period of the prior year, mainly due to higher standby revenue in 2023.
  • In Canada, service rig utilization of 44 per cent in the first quarter of 2024 was consistent with the same period of the prior year. Revenue per service hour averaged $1,058 in the first quarter of 2024 and was 3 per cent higher than the first quarter of 2023, due to improved pricing and inflationary pressures on operating costs, including higher wages that are passed through to the customer, which were partially offset by lower fuel surcharges as more customers provided their own fuel.
• The company generated net income of $1.5-million in the first quarter of 2024 (four-cent net income per basic common share) as compared with net income of $4.4-million in the same period in 2023 (13-cent net income per basic common share). The change can mainly be attributed to a $700,000 decrease in income tax expense, a $500,000 decrease in stock-based compensation expense and a $300,000 decrease in finance costs, which were partially offset by a $4.0-million decrease in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), $200,000 increase in depreciation expense due to property and equipment additions, and a $200,000 increase in other items. Administrative expenses in the first quarter of 2024 were $600,000 higher than the first quarter of 2023, due to higher employee-related costs including severance.
• Adjusted EBITDA of $15.2-million in the first quarter of 2024 was $4.0-million (or 21 per cent) lower compared with $19.2-million in the first quarter of 2023. Adjusted EBITDA in 2024 was lower due to lower drilling revenue in Canada and the U.S., as well as lower pricing in the U.S. and inflationary pressures on all costs.
• First quarter additions to property and equipment were $1.9-million in 2024 compared with $5.2-million in the first quarter of 2023, consisting of $600,000 of expansion capital related to rig upgrades and $1.3-million of maintenance capital.
• On March 22, 2024, the company extended the maturity of its $35.0-million syndicated revolving credit facility and its $10.0-million committed operating facility from May 18, 2025, to the earlier of: (i) six months prior to the maturity date of the second lien facility (as defined below), which is currently Nov. 18, 2025; or (ii) March 21, 2027, if the second lien facility is extended. The total commitments under the credit facilities are unchanged, and there were no changes to the company's financial covenants, which are described on page 8 of the company's first quarter 2024 MD&A under "liquidity and capital resources."

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 41 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 (3).

Western's marketed and owned contract drilling rig fleets are shown in the attached table.

Production services

Production services provides well servicing and oil field equipment rentals in Canada. Western operates 63 well servicing rigs and is the second-largest well servicing company in Canada based on CAOEC registered well servicing rigs (4)

Western's well servicing rig fleet is shown in the attached table.

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 attached table summarizes average crude oil and natural gas prices, as well as average foreign exchange rates, for the three months ended March 31, 2024, and 2023.

West Texas Intermediate on average increased by 1 per cent for the three months ended March 31, 2024, compared with the same period in the prior year. Pricing on Western Canadian Select crude oil increased by 4 per cent for the three months ended March 31, 2024, compared with the same period in the prior year. In 2024, crude oil prices improved slightly due to tighter crude oil supplies resulting from OPEC (Organization of the Petroleum Exporting Countries) production cuts, and continuing geopolitical conflicts in Ukraine and the Middle East. However, natural gas prices in Canada declined in 2024 due to lower demand, as the 30-day spot AECO price decreased by 33 per cent for the three months ended March 31, 2024, compared with the same period of the prior year. Additionally, the U.S. dollar to the Canadian dollar foreign exchange rate for the three months ended March 31, 2024, was consistent with the same period in the prior year.

Despite similar commodity prices in the first quarter of 2024 in both the U.S. and Canada, industry drilling activity weakened in the U.S. As reported by Baker Hughes Company (5), the number of active drilling rigs in the U.S. decreased by approximately 18 per cent to 621 rigs as at March 31, 2024, as compared with 755 rigs at March 31, 2023, and averaged 623 rigs during the first quarter of 2024, compared with 760 rigs in the first quarter of 2023. In Canada there were 146 active rigs in the Western Canadian sedimentary basin (WSCB) at March 31, 2024, compared with 140 active rigs as at March 31, 2023, representing an increase of approximately 4 per cent; however the CAOEC (6) reported that for drilling in Canada, the total number of operating days in the WCSB for the three months ended March 31, 2024, were 1 per cent lower than the same period in the prior year.

Outlook

In 2024, commodity prices are being impacted in the short term by concerns surrounding demand from continued uncertainty concerning the continuing war in Ukraine and by the conflict in the Middle East. Events such as these contribute to the volatility of commodity prices. The precise duration and extent of the adverse impacts of the current macroeconomic environment and global economic activity on Western's customers and operations remain uncertain at this time. Additionally, the threatened shutdown and relocation of a portion of the Enbridge line 5 pipeline 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, the Trans Mountain pipeline expansion, as of the date of this press release, is complete with an anticipated in-service date of May, 2024. The Trans Mountain pipeline project, the Coastal GasLink pipeline project, which is mechanically complete and expected to be on-line in 2025, and the LNG Canada liquefied natural gas project in British Columbia, now more than 85 per cent complete and 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 are expected to continue to improve.

As previously announced, Western's board of directors has approved a capital budget for 2024 of $23-million, comprising $8-million of expansion capital and $15-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, 12 of Western's drilling rigs and nine of Western's well servicing rigs are operating.

As at March 31, 2024, Western had $3.6-million drawn on its credit facilities and $5.6-million outstanding on its committed term non-revolving facility, which matures on Dec. 31, 2026. As at March 31, 2024, Western had $99.1-million outstanding on its second lien secured term loan with Alberta Investment Management Corp., which matures on May 18, 2026. Western 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, continuing pipeline completions that will increase takeaway capacity, environmental regulations, and the level of investment in Canada. With Western's upgraded drilling rigs, 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 volatile commodity prices, 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, then as customers strengthen their balance sheets by reducing debt levels, the company expects 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 440 drilling rigs at March 31, 2023, to 384 drilling rigs as of April 23, 2024, representing a decrease of 56 drilling rigs, or 13 per cent, 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 7,897 metres drilled per well and an average of 13.5 operating days to drill per well for the three months ended March 31, 2024. 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 provide Western with a competitive advantage.

(5) Source: Baker Hughes Company, 2024 rig count monthly press releases.

(6) Source: CAOEC, monthly contractor summary.

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