Western Energy Services Corp. Releases Second Quarter 2022 Financial and Operating Results

Press Release

July 25, 2022

CALGARY, ALBERTA – Western Energy Services Corp. (“Western” or the “Company”) (TSX: WRG) announces the release of its second quarter 2022 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, 2022 and for the three and six months ended June 30, 2022 and 2021 will be available on SEDAR at www.sedar.com. Non‐International Financial Reporting Standards (“Non‐IFRS”) measures and ratios, such as Adjusted EBITDA and Adjusted EBITDA as a percentage of revenue, 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.

Second Quarter 2022 Operating Results:

• Second quarter revenue increased by $10.2 million or 50%, to $30.6 million in 2022 as compared to $20.4 million in the second quarter of 2021. Contract drilling revenue totalled $17.2 million in the second quarter of 2022, an increase of $5.3 million or 44%, compared to $11.9 million in the second quarter of 2021. Production services revenue was $13.5 million for the three months ended June 30, 2022, as compared to $8.6 million in the same period of the prior year, an increase of $4.9 million or 57%. In the second quarter of 2022, revenue was positively impacted by improved demand compared to 2021 as described below:

o In Canada, drilling rig utilization averaged 10% in the second quarter of 2022, compared to 9% in the second quarter of 2021. The increase in activity in the second quarter of 2022 was mainly attributable to the higher commodity prices resulting from the war in Ukraine, the COVID‐19 vaccination rollouts and the lifting of government restrictions which re‐opened the economy, compared to the second quarter of 2021 when the COVID‐19 pandemic reduced demand across the industry. The Canadian Association of Energy Contractors (“CAOEC”) industry average utilization of 23%¹ for the second quarter of 2022 represented an increase of 800 basis points (“bps”) compared to the CAOEC industry average of 15% in the second quarter of 2021. Western’s market share, represented by the Company’s Operating Days as a percentage of the CAOEC’s total Operating Days in the Western Canadian Sedimentary Basin (“WCSB”), decreased to 3.3% for the second quarter of 2022, as compared to 6.2% in the same period of 2021, as a result of limited capital spent on rig upgrades during the economic downturn and wet weather in the areas the Company operates. Revenue per Operating Day averaged $29,800 in the second quarter of 2022, an increase of 34% compared to the same period of the prior year, mainly due to improved market rates, as well as the 2021 CAOEC wage increase that is passed through to the customer;

o In the United States (“US”), drilling rig utilization averaged 34% in the second quarter of 2022, compared to 21% in the second quarter of 2021, with Operating Days improving from 151 days in 2021 to 250 days in 2022. Revenue per Operating Day for the second quarter of 2022 averaged US$23,945, a 67% increase compared to US$14,312 in the same period of the prior year, mainly due to improved market conditions and changes in rig mix, as there was more activity with the Company’s higher spec rigs which command higher day rates; and

o In Canada, service rig utilization of 32% in the second quarter of 2022 was higher than 27% in the same period of the prior year, mainly due to improved activity resulting from higher commodity prices. Revenue per Service Hour averaged $943 in the second quarter of 2022 and was 38% higher than the second quarter of 2021, as a result of improved market conditions which led to higher hourly rates, as well as increased labour and fuel charges passed through to the customer. Higher pricing led to production services revenue totaling $13.5 million in the second quarter of 2022, an increase of $4.9 million or 57%, as compared to the same period in the prior year.

• Administrative expenses increased by $1.1 million or 48%, to $3.4 million in the second quarter of 2022, as compared to $2.3 million in the second quarter of 2021, due to reduced COVID‐19 government subsidies.
• The Company incurred net income of $35.4 million in the second quarter of 2022 ($0.02 net income per basic common share) as compared to a net loss of $12.9 million in the same period in 2021 ($0.14 net loss per basic common share). The change can mainly be attributed to a $49.4 million gain on debt forgiveness related to the Restructuring Transaction as described below, a $0.7 million decrease in finance costs due to the lower total debt balance, a $0.5 million decrease in depreciation expense due to certain assets being fully depreciated in the period, and a $0.3 million increase in Adjusted EBITDA, offset partially by a $2.4 million increase in income tax expense.
• Second quarter Adjusted EBITDA of $2.5 million in the second quarter of 2022 was $0.3 million, or 14%, higher compared to $2.2 million in the second quarter of 2021. Adjusted EBITDA was higher due to improved activity in Canada and the US, offset partially by $2.6 million lower COVID‐19 related government subsidies received in 2022, as well as approximately $1.1 million of one‐time startup costs associated with reactivating certain rigs in the Company’s rig fleet.
• Second quarter additions to property and equipment of $14.0 million in 2022 compared to $2.6 million incurred in the second quarter of 2021 and consisted of $12.4 million of expansion capital and $1.6 million of maintenance capital, as the Company initiated its rig upgrade program in 2022.
• On May 18, 2022, Western completed a recapitalization and debt restructuring transaction to restructure a portion of its outstanding debt and raise new capital (the “Restructuring Transaction”).

o  As part of the Restructuring Transaction, on May 18, 2022, Western completed a rights offering to holders of its common shares on April 19, 2022 to subscribe for additional common shares (the “Rights Offering”), resulting in the issuance of an aggregate of 1,968,867,475 common shares in the capital of the Company at a price of $0.016 per share for aggregate gross proceeds of approximately $31.5 million.  As the Rights Offering was fully subscribed, Western did not utilize a standby commitment whereby G2S2 Capital Inc. (“G2S2”), Armco Alberta Inc. (“Armco”) and MATCO Investments Ltd. (“Matco”), each a significant shareholder of the Company, agreed to acquire any common shares not subscribed for under the Rights Offering.

o $100.0 million of the principal amount owing to Alberta Investment Management Corporation (“AIMCo”), the lender under Western’s second lien term loan facility (the “Second Lien Facility”), was converted into 2 billion common shares at a conversion price of $0.05 per common share (the “Debt Exchange”), resulting in AIMCo holding approximately 49.7% of the common shares following closing of the Restructuring Transaction. In addition, $10.0 million of the proceeds from the Rights Offering was paid by Western to AIMCo to further reduce the principal amount outstanding under the Second Lien Facility, with the remaining $21.5 million of the proceeds, net of expenses of the Restructuring Transaction, being used primarily for upgrades to the Company’s rig fleet, as well as for general corporate purposes.

o Concurrent with the Debt Exchange and the repayment of $10.0 million of the principal amount of the Second Lien Facility, the Second Lien Facility was amended to provide for an extension of the maturity of the remaining principal amount of the Second Lien Facility from January 31, 2023 to May 18, 2026; and an increase in the interest rate from 7.25% to 8.5%.

o In addition, as part of the Restructuring Transaction, the senior secured credit facilities (the “Credit Facilities”) of the Company were amended with effect as of May 18, 2022, including amendments to (a) extend the maturity of the Credit Facilities from July 1, 2022 to May 18, 2025, (b) reduce the amount available under the Credit Facilities from $60.0 million to $45.0 million, and (c) revise certain financial covenants.

• Concurrent with closing of the Restructuring Transaction, the Company, AIMCo, G2S2, Armco, Matco and Ronald P. Mathison entered into an investor rights agreement pursuant to which AIMCo was granted the right to nominate two directors for election to Western’s board for so long as AIMCo’s shareholding percentage of the Company is 30% or greater. As a result, Western’s directors approved the appointment of two nominees designated by AIMCo to the board of directors of the Company. AIMCo’s nominees, Trent Boehm and Colleen Cebuliak, joined the board of directors of the Company effective May 24, 2022. The Company and AIMCo also entered into a registration rights agreement pursuant to which AIMCo was granted the right to cause the Company to file a prospectus to facilitate the sale of its common shares in a public offering, or to allow it to participate in a public offering of common shares by the Company, in each case subject to certain customary restrictions and limitations.

Details on the Restructuring Transaction are contained in Western’s short form prospectus dated April 11, 2022 and related documents filed under Western’s SEDAR profile on www.sedar.com.

• At the Company’s annual and special meeting on June 29, 2022, Western’s shareholders approved the consolidation of the Company’s issued and outstanding common shares (the “Consolidation”) at a ratio, to be determined by Western’s directors, between 75 and 120 pre‐consolidation common shares to one post‐consolidation common share. On July 25, 2022, Western’s board of directors resolved to proceed with the Consolidation of the Company’s common shares at a ratio of one post‐ consolidation common share for every 120 pre‐consolidation common shares. The Consolidation is expected to be effective as of August 1, 2022. Subject to the receipt of all required and final approvals, the Company’s common shares are expected to begin trading on the TSX, on a consolidated basis, within two to three trading days following the receipt by the TSX of all required documents upon completion of the Consolidation. The Company will provide further information regarding the share consolidation, including with respect to the process for exchanging share certificates for post‐consolidation share certificates, in a separate news release closer to the effective date. The Consolidation will reduce the number of issued and outstanding common shares of the Company from 4,060,663,214 common shares to approximately 33,838,860 common shares, and proportionate adjustments will be made to the Company’s outstanding restricted share units and options. The common shares will continue to trade on the TSX under the trading symbol “WRG” following the Consolidation.

Year to Date 2022 Operating Results:

• Revenue for the six months ended June 30, 2022 increased by $23.7 million or 41%, to $81.1 million as compared to $57.4 million for the six months ended June 30, 2021. In the contract drilling segment, revenue totalled $48.2 million for the six months ended June 30, 2022, an increase of $16.0 million or 50%, compared to $32.2 million in the same period in 2021. In the production services segment, revenue totalled $33.1 million for the six months ended June 30, 2022, as compared to $25.4 million in the same period of the prior year, an increase of $7.7 million or 30%. While the ongoing COVID‐19 pandemic continued to impact the contract drilling and production services segments in 2022, revenue was positively impacted by improved demand and pricing compared to 2021 as described below:

o In Canada, drilling rig utilization averaged 21% for the six months ended June 30, 2022, compared to 15% for the six months ended June 30, 2021. The increase in activity in 2022 was mainly attributable to the higher commodity prices resulting from the war in Ukraine, the COVID‐19 vaccination rollouts and the lifting of government restrictions which re‐opened the economy, compared to the first half of 2021 when the COVID‐19 pandemic reduced demand across the industry. The CAOEC industry average utilization of 31%² for the six months ended June 30, 2022 represented an increase of 1,000 bps compared to the CAOEC industry average of 21% for the six months ended June 30, 2021. Western’s market share, represented by the Company’s Operating Days as a percentage of the CAOEC’s total Operating Days in the WCSB, decreased to 5.4% for the first half of 2022, as compared to 7.5% in first half of 2021, as a result of limited capital spent on rig upgrades during the economic downturn and wet weather in the second quarter of 2022. Revenue per Operating Day averaged $27,172 for the six months ended June 30, 2022, an increase of 29% compared to the same period of the prior year, mainly due to improved market rates, as well as the 2021 CAOEC wage increase that is passed through to the customer;

o In the US, drilling rig utilization averaged 24% for the six months ended June 30, 2022, compared to 13% in the same period of 2021, with Operating Days improving from 189 days in 2021 to 350 days in 2022. Revenue per Operating Day for the six months ended June 30, 2022 averaged US$22,565, a 57% increase compared to US$14,366 for the six months ended June 30, 2021, mainly due to improved market conditions; and

o In Canada, service rig utilization of 40% for the six months ended June 30, 2022 was comparable to 39% for the six months ended June 30, 2021, mainly due to field crew shortages across the industry and very cold weather in the first quarter of 2022. Revenue per Service Hour averaged $902 for the six months ended June 30, 2022 and was 27% higher than the same period of 2021, as a result of improved market conditions which led to higher hourly rates, as well as increased labour and fuel charges passed through to the customer. Higher pricing led to production services revenue totalling $33.1 million for the six months ended June 30, 2022, an increase of $7.7 million or 30%, as compared to the same period in the prior year.

• Administrative expenses increased by $1.4 million or 26%, to $6.8 million for the six months ended June 30, 2022, as compared to $5.4 million in the same period of 2021, due to lower receipts related to government subsidy programs, as both the Canada Emergency Wage Subsidy and Canada Emergency Rent Subsidy programs ended in 2021 and were replaced with smaller government subsidy programs.
• The Company incurred net income of $31.6 million for the six months ended June 30, 2022 ($0.03 net income per basic common share) as compared to a net loss of $19.4 million in the same period in 2021 ($0.21 net loss per basic common share). The change can mainly be attributed to a $49.4 million gain on debt forgiveness related to the Restructuring Transaction described previously, a $3.8 million increase in Adjusted EBITDA, a $1.4 million decrease in depreciation expense due to certain assets being fully depreciated in the period, and a $0.6 million decrease in finance costs, offset partially by a $4.1 million increase in income tax expense.
• Adjusted EBITDA of $12.9 million for the six months ended June 30, 2022 was $3.8 million, or 42%, higher compared to $9.1 million in the same period of 2021. Adjusted EBITDA was higher due to improved activity and pricing in Canada and the US, offset partially by $5.9 million lower COVID‐19 related government subsidies and $1.5 million in one‐time startup costs associated with reactivating certain rigs in the Company’s rig fleet.
• Year to date 2022 additions to property and equipment of $18.1 million compared to $3.4 million incurred in the same period of 2021 and consisted of $14.9 million of expansion capital and $3.2 million of maintenance capital, as the Company initiated its rig upgrade program in 2022.

Read More: https://www.wesc.ca/upload/news_release/176/68a83068e477/q2-2022-news-release—western-energy-services-corp—sedar.pdf

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