Essential Energy Services : Announces Second Quarter Financial Results and Revised Capital Spending Forecast

CALGARY, ALBERTA--(Marketwired - Aug 9, 2017) - Essential Energy Services Ltd. (TSX:ESN) ("Essential" or the "Company") announces second quarter results.

SELECTED INFORMATION

1. Total assets as at June 30, 2016 include the service rig business which was sold in December 2016.
2. Fleet data represents the number of units at the end of the period.

⁽¹⁾ Refer to "Non-IFRS Measures" section for further information.

HIGHLIGHTS

Essential's revenue for the second quarter 2017 was $27.6 million, a significant increase from 2016 as stronger customer demand contributed to increases for both Essential Coil Well Service ("ECWS") and Tryton. EBITDAS⁽¹⁾ was negative $1.3 million, a $2.9 million improvement from the second quarter 2016. The higher revenue was partially offset by incremental repairs and maintenance costs incurred by ECWS to ready equipment for the second half of 2017. While the financial results were better than the prior year period, they are still reflective of the second quarter being seasonally slow due to spring break-up.

Key operating highlights include:

• Operating hours in ECWS were the highest for a second quarter since 2014. The Generation III coil tubing rigs continued to be in high demand with operating hours increasing 344% compared to the prior year period.
• Tryton reported increased revenue in all service lines compared to the prior year period and demand was particularly strong for the Canadian Multi-Stage Fracturing System® ("MSFS®").

For the six months ended June 30, 2017 Essential reported revenue of $83.9 million, a 118% improvement from the first six months of 2016. EBITDAS⁽¹⁾ was $8.9 million, $15.3 million higher than the prior year period.

Essential continues to have a strong balance sheet with debt outstanding at June 30, 2017 of $13.3 million and $12.3 million outstanding at August 9, 2017. The Company's funded debt⁽¹⁾ to bank EBITDA⁽¹⁾ was 0.57x at June 30, 2017.

Essential increased its capital forecast from $16 million to $23 million. The additional capital is for the purchase of two quintuplex fluid pumpers and additional rental drill pipe. Customer well programs are focused on complex long-reach horizontal wells requiring higher capacity fluid pumpers to support the deeper coil tubing rigs.

COMPARATIVE FIGURES

The sale of Essential's service rig business in December 2016 was reported as a discontinued operation, with the three and six months ended June 30, 2016 comparative figures restated to this same basis of accounting and disclosure.

RESULTS OF OPERATIONS

Segment Results - Essential Coil Well Service

1. Fleet data represents the number of units at the end of the period.
2. During the fourth quarter 2016, Essential acquired four Generation III coil tubing rigs, three quintuplex fluid pumpers and one nitrogen pumper.
3. During the second quarter 2017, Essential retired one single fluid pumper.

ECWS revenue was $14.6 million, a 127% increase compared to the three months ended June 30, 2016, due to improved activity by key customers. Prior to the second quarter, which is typically slow due to spring breakup conditions, ECWS strategically positioned equipment on customer locations allowing some work to continue into April. Activity slowed in May due to wet weather, but picked up in mid-June.

Essential's coil tubing and pumping operating hours for the three months ended June 30, 2017 increased 83% and 120% respectively, compared to the same period in 2016. Essential's Generation III coil tubing rigs, twin triplex and quintuplex fluid pumpers continued to experience strong demand, particularly in the Montney region of the Western Canadian Sedimentary Basin, meeting customer requirements for long-reach horizontal wells.

Pricing during the second quarter 2017 was consistent with the first quarter 2017 and improved compared to the second quarter 2016. For the three months ended June 30, 2017, Essential did not offer discounts that are typical during spring breakup. Revenue per hour can fluctuate from period to period due to the mix of work. While revenue per hour remains below 2014, first quarter increases helped offset rising operating costs, including labour and repairs and maintenance expenses, which had been reduced in prior years as part of cost reduction initiatives.

Second quarter 2017 gross margin as a percentage of revenue improved from the second quarter 2016 as fixed costs comprised a smaller proportion of revenue. While gross margin benefited from increased completion activity, ECWS incurred incremental costs for repairs and maintenance to ready equipment for the second half of 2017. In comparison, in the second quarter 2016, slow industry activity and cost control measures resulted in only nominal repairs and maintenance spending.

On a year-to-date basis, ECWS revenue was $43.3 million, $21.1 million higher than the prior period due to higher oilfield service activity. Gross margin as a percentage of revenue for the six months ended June 30, 2017 was 16%, a significant improvement over the prior period. Gross margin improvement was due to increased revenue, reduced variable costs due to operating efficiencies associated with close proximity of well locations and pad work, and fixed costs comprising a smaller percentage of a larger revenue base.

Segment Results - Tryton

Tryton second quarter 2017 revenue was $13.1 million, a 134% increase from the same period in 2016 with each service line experiencing higher activity. Canadian MSFS® was particularly strong due to demand, primarily in the Montney region, for completion of long-reach horizontal wells. Conventional tools activity was also significantly higher than the prior year period due to increased maintenance work on producing wells and abandonment work. Pricing remained consistent with the first quarter 2017 as market competitiveness limited the ability to implement price increases.

On a year-to-date basis, Tryton revenue increased $24.1 million compared to the prior year period due to increased activity. A significant portion of the year-over-year increase is attributed to MSFS® revenue due to strong demand by key customers for their horizontal drilling and completion programs.

Gross margin improved for the three and six months ended June 30, 2017 compared to the same prior year periods, as fixed costs represented a smaller portion of a greater revenue base.

FINANCIAL RESOURCES AND LIQUIDITY

Credit Facility

Essential's credit facility is comprised of a $40 million revolving term loan facility with a $20 million accordion feature available at the lender's consent (the "Credit Facility"). The Credit Facility was renewed on June 15, 2016 and matures on May 31, 2019. It is renewable at the lender's consent and is secured by a general security agreement over the Company's assets. To the extent the Credit Facility is not renewed, the balance becomes immediately due and payable on the maturity date. At June 30, 2017, the maximum of $40 million under the Credit Facility was available to Essential.

The Credit Facility includes an equity cure provision where proceeds from equity offerings may be applied to the calculation of Bank EBITDA⁽¹⁾ in the funded debt⁽¹⁾ to Bank EBITDA⁽¹⁾ covenant and the fixed charge coverage⁽¹⁾ covenant. In October 2016, Essential received gross proceeds of $10.4 million for 16,019,883 shares issued at $0.65 per share from an equity offering that the Company applied as an equity cure to its fourth quarter 2016 Bank EBITDA⁽¹⁾ calculation under the Credit Facility. Due to the trailing 12 month nature of the covenants, the proceeds from the equity offering increase Bank EBITDA⁽¹⁾ for the first, second and third quarter 2017 covenants as well.

As at June 30, 2017 all financial debt covenants and banking requirements under the Credit Facility were satisfied.

Essential does not anticipate financial resource or liquidity issues to restrict its future operating, investing or financing activities. On August 9, 2017, Essential had $12.3 million of debt outstanding.

Equipment Expenditures

Capital Spending Forecast

Essential's 2017 capital forecast increased from $16 million to $23 million and is comprised of $12 million of growth capital and $11 million of maintenance capital. The $6 million increase in growth capital consists of two new quintuplex fluid pumpers and additional rental drill pipe. The fluid pumpers will support Essential's deep coil tubing fleet working on long-reach horizontal wells where greater pumping capacity is required due to the depths and pressures of these wells. The new pumpers are expected to be available for service in early 2018.

PATENT LITIGATION

On October 23, 2013, Packers Plus Energy Services Inc. ("Packers Plus") filed a Statement of Claim in Canada's Federal Court (the "Court") against Essential alleging that certain products and methods associated with the Tryton MSFS® infringe on a patent issued to Packers Plus (the "Packers Plus Claim"). Packers Plus subsequently limited its infringement allegations to just certain method claims in the patent.

Essential believes the Packers Plus Claim is without merit and filed a Statement of Defence and Counterclaim on November 22, 2013. The Statement of Defence denies infringement and the Counterclaim pleads further that the patent is invalid because the methodology and equipment claimed in the patent were in use in the oil and natural gas industry prior to the patent's effective filing date of November 19, 2001 or represent nothing more than obvious variations over what was already known in the industry at the time. This position is supported by the existence of similar products, articles and other patents prior to the effective filing date of the patent.

The trial was completed in March 2017. There were two parts to the trial:

• Validity - The validity portion of the trial focused on whether or not the patent is valid. Given the fact that Packers Plus has asserted infringement of the same patent against Essential and three other defendants, Baker Hughes Canada Company, Weatherford Canada Ltd. and Resource Well Completion Technologies Inc., and all of the defendants filed counterclaims seeking a declaration that the patent is invalid, the Court directed that the counterclaims be consolidated into a single trial (the "Joint Validity Trial"). During the Joint Validity Trial the four defendants asserted their common position that the patent is invalid.
• Infringement - The infringement portion of the trial focused on whether or not Essential has infringed the Packers Plus patent. The infringement portions of the Baker Hughes Canada Company, Weatherford Canada Ltd. and Resource Well Completion Technologies Inc. trials were not consolidated with the infringement portion of the Essential case since each infringement action, by its nature, deals with tools, designs and business activities specific to each company.

The Court is expected to render its decision on both validity and infringement prior to October 2017. In order for Essential to be found liable for damages, the Court must find that the Packers Plus patent is both valid and infringed. If the patent is found to be valid and it is determined that Essential has infringed, a separate trial will be required to quantify damages (the "Quantification of Damages Trial").

Prior to commencement of the validity and infringement trials, the Court scheduled dates for the Quantification of Damages Trial for Essential and similar trials for each of the other three defendants, in case such trials are required. The fact that the Quantification of Damages Trial has been scheduled does not foreshadow an unfavourable Court decision on patent validity or infringement. Essential's potential Quantification of Damages Trial, if required, is scheduled to commence in January 2018. The Quantification of Damages Trial will only be required if Essential receives an unfavorable decision in both its validity and infringement trials.

If the Quantification of Damages Trial is required, the trial will focus on the damages that Packers Plus alleges that it suffered as a result of sales of the Tryton MSFS® system or, alternatively, the profits that Essential earned from such system. In determining Packers Plus' damages or Essential's profits, the Court will also hear evidence relating to the ability of Packers Plus to complete the work performed by Essential, the duty of Packers Plus to mitigate its losses and Essential's ability to sell alternative, non-infringing, products.

Essential continues to believe that the case is without merit. If Essential were to receive an unfavorable decision in both the validity and infringement trials, it will appeal such a decision. Factoring in the appeal process and the time to complete the Quantification of Damages Trial, the implications for Essential may not be known for up to two more years.

The Packers Plus Claim targets only the Tryton MSFS® ball & seat system, which Essential commenced using in 2009. It does not target past or future operations of Essential's conventional tools, other Tryton MSFS® tools or the rentals service line.

OUTLOOK

To date, Essential has seen improved year-over-year results in 2017 compared to 2016. July activity for ECWS and Tryton was much better than July 2016 as customers continued to invest in completions work. While recent commodity price volatility has put into question the timing and extent of an industry recovery, at this point, Essential expects steady activity for the third quarter of 2017. Due to commodity price uncertainty, Essential does not have a clear outlook on fourth quarter 2017 activity. It will be contingent on commodity prices and customer capital programs.

Service pricing is relatively unchanged from the first quarter 2017. Essential expects pricing discussions with customers to continue but with recent commodity price volatility, the window for increases may be closing. Essential believes in the long-term, higher pricing is required to achieve reasonable margins given increases in labour and repairs and maintenance costs.

ECWS continued with its recruiting program in the second quarter but has slowed the program in the third quarter. Activity in the third and fourth quarters will determine the number of incremental employees required.

Essential increased its capital forecast to $23 million, consisting of $12 million for growth capital and $11 million maintenance capital. The growth capital consists of two quintuplex pumpers, pumping support equipment, the cost to recertify and upgrade the coil tubing rigs and pumping equipment acquired in 2016 and rental drill pipe assets. $10 million of the forecasted capital was spent in the first half of 2017.

Essential continues to have a strong balance sheet and believes it is well-positioned as the western Canadian oil and gas industry continues to recover. Debt was $13.3 million at June 30, 2017 and funded debt⁽¹⁾ to bank EBITDA⁽¹⁾ was 0.57x at June 30, 2017.

The Management's Discussion and Analysis and Financial Statements are available on Essential's website at www.essentialenergy.ca and on SEDAR at www.sedar.com.

⁽¹⁾Non-IFRS Measures

Throughout this news release, certain terms that are not specifically defined in International Financial Reporting Standards ("IFRS") are used to analyze Essential's operations. In addition to the primary measures of net income (loss) and net income (loss) per share in accordance with IFRS, Essential believes that certain measures not recognized under IFRS assist both Essential and the reader in assessing performance and understanding Essential's results. Each of these measures provides the reader with additional insight into Essential's ability to fund principal debt repayments and capital programs. As a result, the method of calculation may not be comparable with other companies. These measures should not be considered alternatives to net income (loss) and net income (loss) per share as calculated in accordance with IFRS.

Bank EBITDA - Bank EBITDA is generally defined in Essential's Credit Facility as EBITDAS from continuing operations, including the equity cure, excluding onerous lease contract expense and severance costs.

EBITDAS (Earnings before finance costs, income taxes, depreciation, amortization, transaction costs, losses or gains on disposal of equipment, write-down of assets, impairment loss, foreign exchange gains or losses, and share-based compensation, which includes both equity-settled and cash-settled transactions) - These adjustments are relevant as they provide another measure which is considered an indicator of Essential's results from its principal business activities.

The following table reconciles Bank EBITDA, EBITDAS from continuing operations, and EBITDA from continuing operations, to the IFRS measure, net loss from continuing operations:

Fixed charge coverage ratio - This measure is generally defined in Essential's Credit Facility as the ratio of EBITDAS less cash tax expense to the sum of distributions, scheduled principal repayments and interest expense.

Funded debt - Funded debt is generally defined in Essential's Credit Facility as long-term debt, including current portion of long-term debt plus deferred financing costs and bank indebtedness, net of cash.

Growth capital - Growth capital is capital spending which is intended to result in incremental revenue. Growth capital is considered to be a key measure as it represents the total expenditures on equipment expected to add incremental revenue to Essential.

Maintenance capital - Equipment additions that are incurred in order to refurbish, replace or extend the life of previously acquired equipment. Such additions do not provide incremental revenue.

Net equipment expenditures - This measure is equipment expenditures less proceeds on the disposal of equipment. Essential uses net equipment expenditures to describe net cash outflows related to the financing of Essential's capital program.

FORWARD-LOOKING STATEMENTS AND INFORMATION

This news release contains "forward-looking statements" and "forward-looking information" (collectively referred to herein as "forward-looking statements") within the meaning of applicable securities legislation. Such forward-looking statements include, without limitation, forecasts, estimates, expectations and objectives for future operations that are subject to a number of material factors, assumptions, risks and uncertainties, many of which are beyond the control of the Company.

Forward-looking statements are statements that are not historical facts and are generally, but not always, identified by the words "expects", "plans", "anticipates", "believes", "intends", "estimates", "continues", "projects", "forecasts", "potential", "budget" and similar expressions, or are events or conditions that "will", "would", "may", "could" or "should" occur or be achieved. This news release contains forward-looking statements, pertaining to, among other things, the following: the impact of Essential's financial resources or liquidity on its future operating, investing and financing activities; Essential's capital forecast and in-service timing; new equipment; industry recovery and activity; Essential's activity; pricing discussions; pricing impact on Essential; Essential's competitive position and outlook; the implications of Essential's strong balance sheet; the Packers Plus Claim; the Company's belief that the Packers Plus Claim is without merit and the length of time it will take to resolve the claim; and the timing and process with regard to the Quantification of Damages Trial.

Although the Company believes that the material factors, expectations and assumptions expressed in such forward-looking statements are reasonable based on information available to it on the date such statements are made, undue reliance should not be placed on the forward-looking statements because the Company can give no assurances that such statements and information will prove to be correct and such statements are not guarantees of future performance. Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties.

Actual performance and results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to: known and unknown risks, including those set forth in the Company's Annual Information Form (a copy of which can be found under Essential's profile on SEDAR at www.sedar.com); the risks associated with the oilfield services sector (e.g. demand, pricing and terms for oilfield services; current and expected oil and natural gas prices; exploration and development costs and delays; reserves discovery and decline rates; pipeline and transportation capacity; weather, health, safety and environmental risks); integration of acquisitions, competition, and uncertainties resulting from potential delays or changes in plans with respect to acquisitions, development projects or capital expenditures and changes in legislation, including but not limited to tax laws, royalties, incentive programs and environmental regulations; stock market volatility and the inability to access sufficient capital from external and internal sources; the ability of the Company's subsidiaries to enforce legal rights in foreign jurisdictions; general economic, market or business conditions; global economic events; changes to Essential's financial position and cash flow; the availability of qualified personnel, management or other key inputs; currency exchange fluctuations; changes in political and security stability; risks and uncertainty related to distribution and pipeline constraints; and other unforeseen conditions which could impact the use of services supplied by the Company. Accordingly, readers should not place undue importance or reliance on the forward-looking statements. Readers are cautioned that the foregoing list of factors is not exhaustive.

Statements, including forward-looking statements, contained in this news release are made as of the date they are given and the Company disclaims any intention or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws. The forward-looking statements contained in this news release are expressly qualified by this cautionary statement.

Additional information on these and other factors that could affect the Company's operations and financial results are included in reports on file with applicable securities regulatory authorities and may be accessed under Essential's profile on SEDAR at www.sedar.com.

2017 SECOND QUARTER FINANCIAL RESULTS CONFERENCE CALL AND WEBCAST

Essential has scheduled a conference call and webcast at 10:00 am MT (12:00 pm ET) on August 10, 2017.

The conference call dial in numbers are 416-406-0743 or 800-806-5484, passcode 1593381.

An archived recording of the conference call will be available approximately one hour after completion of the call until August 23, 2017 by dialing 905-694-9451 or 800-408-3053, passcode 8808485.

A live webcast of the conference call will be accessible on Essential's website at www.essentialenergy.ca by selecting "Investors" and "Events and Presentations". Shortly after the live webcast, an archived version will be available for approximately 30 days.

ABOUT ESSENTIAL

Essential provides oilfield services to oil and natural gas producers, primarily in western Canada. Essential offers completion, production and abandonment services to a diverse customer base. Services are offered with coil tubing, fluid and nitrogen pumping and the sale and rental of downhole tools and equipment. Essential offers the largest coil tubing fleet in Canada. Further information can be found at www.essentialenergy.ca.

® MSFS is a registered trademark of Essential Energy Services Ltd.

The TSX has neither approved nor disapproved the contents of this news release.