Trican Well Service : Q1 2016 Interim Report (PDF)

Q1 2016 - Interim Report (FINAL).indd

Q1 INTERIM REPORT

Three Months Ended March 31, 2016

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following Management's Discussion and Analysis ("MD&A") of the financial condition and results of operations of Trican Well Service Ltd. ("Trican" or "the Company") has been prepared, as at and for the quarter ended March 31, 2016, taking into consideration information available to

May 4, 2016, and should be read in conjunction with the unaudited interim consolidated financial statements for the three month period ended March 31, 2016, as well as the audited annual consolidated financial statements and accompanying notes, and the management's discussion and analysis for the year ended December 31, 2015.

OVERVIEW

Headquartered in Calgary, Alberta, Trican has continuing operations in Canada, which provides a comprehensive

array of specialized products, equipment and services that are used during the exploration and development of oil and gas reserves provided by a highly trained workforce dedicated to safety and operational excellence. The Company also continues to provide completion services in Canada, United States, Russia and Norway.

The following MD&A focuses on the financial and operating results for Trican's continuing operations. For further details related to Trican's discontinued operations in Russia (related to pressure pumping operations), United States (related to pressure pumping operations), Australia,

Algeria, Colombia, Kazakhstan and Saudi Arabia, please refer to the discontinued operations section of the MD&A and the unaudited interim consolidated financial statements and accompanying notes, as at and for the quarter ended March 31, 2016.

CONTINUING OPERATIONS - FINANCIAL REVIEW

($ millions, except per share amounts, unaudited)			Mar. 31, 2016	Three months ended Mar. 31, 2015	Dec. 31, 2015**
Revenue			$111.8	$236.5	$169.1
Adjusted operating income / (loss) *	(16.8)	2.2	1.5
Operating loss *	(26.9)	(6.8)	(5.2)
Gross loss	(32.0)	(11.7)	(12.9)
Net loss	(45.1)	(23.1)	(82.0)
Per share - basic and diluted	(basic)	($0.30)	($0.15)	($0.55)
Adjusted loss *	(31.8)	(25.2)	(63.4)
Per share - basic and diluted	(basic)	($0.21)	($0.17)	($0.43)
Funds used in operations *	(37.1)	(31.0)	(62.7)

Notes:

* Trican makes reference to operating income / (loss), adjusted operating income / (loss), adjusted profit / (loss) and funds provided by / (used in) operations. These measures are not recognized under International Financial Reporting Standards (IFRS) and are considered non-GAAP measures. Management believes that, in addition to gross profit / (loss) and profit / (loss), operating income

/ (loss), adjusted operating income / (loss), adjusted profit / (loss) and funds provided by / (used in) operations are useful supplemental measures. Operating income / (loss) provides investors with an indication of profit / (loss) before depreciation and amortization, foreign exchange gains and losses, asset impairment, other (income) / loss, finance costs and income tax expense / (recovery). Adjusted operating income / (loss) provides investors with an indication of comparable operating income / (loss), which exclude items that are significant but not reflective of our underlying operations for the period. Adjusted profit / (loss) provides investors with information on profit / (loss) excluding asset impairment, severance expense, base closure expenses, non-recurring profes- sional expenses, amortization of debt issuance costs, the impact of foreign currency gains / losses and the non-cash effect of stock-based compensation expense. Funds provided by / (used in) operations provide investors with an indication of cash available for capital commitments, debt repayments and other expenditures. Investors should be cautioned that operating income / (loss), adjusted operating income / (loss), adjusted profit / (loss), and funds provided by / (used in) operations should not be construed as an alternative to gross profit / (loss) or profit / (loss) determined in accordance with IFRS as an indicator of Trican's performance. Trican's method of calculating operating income / (loss), adjusted operating income / (loss), adjusted profit / (loss) and funds pro- vided by / (used in) operations may differ from that of other companies and accordingly may not be comparable to measures used by other companies. See also "Non-GAAP Disclosure" section

of this report. **Trican's financial statements for the year ended December 31, 2015 have been amended to correct certain immaterial errors involving reclassifications from other comprehensive income to loss from continuing and discontinued operations. Please see Immaterial Corrections section of the MD&A as well as Note 11 of the unaudited interim consolidated financial statements and accompanying notes, as at and for the quarter ended March 31, 2016.

Trican Well Service Ltd.

FIRST QUARTER HIGHLIGHTS

Trican closed the sale of its United States pressure pumping business on March 16, 2016 to Keane Group, a privately-held U.S.-based well completion services company ("Keane").

The transaction involves the sale of all of the pressure pumping and select related assets, and the assumption of certain liabilities, of Trican Well Service, L.P., Trican's wholly- owned subsidiary, for a purchase price of US $200 million, or approximately CAD $265 million, with customary working capital adjustments to be determined. In addition to this cash consideration, Trican has received 10% of the shares

of Keane Group Holdings, LLC, as well as certain economic interests in Keane that represent up to an additional 20% economic participation above certain thresholds upon

a Keane liquidity event. The fair value of this non-cash consideration was $78.5 million at March 31, 2016.

In conjunction with the above closure of the sale, Trican's previously announced amendment to its agreement with its bank lenders under its Revolving Credit Facility and its Senior Note holders credit came into effect on March 16, 2016 ("2016 Amended Credit Agreements"). On March

31, 2016, Trican has used the net proceeds from the sale of the U.S. operations to pay down the Revolving Credit Facility and the notes payable on a pro-rata basis. The 2016 Amended Credit Agreements includes a waiver of covenants during Q1 2016 and Q2 2016 and a 5.0 times leverage ratio and 2.0 times interest coverage ratio commencing in Q3 2016 and are applicable through Q3

2017. An equity cure of up to $20 million is also included in the additional amendments. Please refer to the Liquidity, Capital Resources and Future Operations - Financing Activities Section for further details regarding the additional amendments.

Consolidated revenue from continuing operations for the first quarter of 2016 was $111.8 million, a decrease of 34% compared to the fourth quarter of 2015. The adjusted loss for the period was $31.8 million and adjusted loss per share was $0.21 compared to an adjusted loss of $63.4 million and adjusted loss per share of $0.43 in the fourth quarter of 2015. The Company also incurred significant costs in the

first quarter of 2016 for severance associated with workforce reductions as a measure to reduce our fixed cost structure. Funds used in operations were $37.1 million compared to

funds used in operations of $31.0 million in the first quarter of 2015.

Canadian operations generated $101.2 million of revenue and an adjusted operating loss of $8.6 million during the first quarter of 2016 compared to revenue of $222.7 million and adjusted operating income of $13.8 million during

the first quarter of 2015. Canadian results continue to be negatively impacted by reduced drilling and completion activity caused by low commodity prices. Activity levels were low compared to first quarter of 2015 and the pressure of low commodity prices and early spring break-up conditions led to a significant reduction in activity levels

in March 2016. Q1 2016 proppant pumped was 11% lower than that pumped in Q1 2015 and stages pumped were 46% lower year over year. Pricing has been negatively affected by market conditions, and as a result, Q1 2016 pricing is down approximately 6% sequentially and 27% when compared to Q1 2015. Trican's Canadian operations' fixed cost structure in Q1 2016 has been reduced by

36% when compared to Q1 2015 as a result of workforce reductions, discretionary spending reductions and lower compensation programs. Canadian margins were negatively impacted by lower pricing and by costs in the first quarter of 2016 for severance related to workforce reductions.

Approximately 35% of the Canadian operations' equipment remained parked in the first quarter and we have parked an additional 15% of the equipment at the beginning of the second quarter. As a result, we are currently operating 50% of our equipment fleet. We continue to monitor activity and pricing levels and will adjust our active equipment fleet and cost structure accordingly.

The U.S. completion business generated $3.4 million of revenue and an adjusted operating loss of $0.1 million during the first quarter of 2016, compared to Q1 2015 revenue of $11.0 million and adjusted operating income of

$0.8 million. Management has reduced the U.S. Completion business' cost structure to match current and expected activity and operating conditions. Our U.S. completion business reduced its employee expenses by 68% when compared to Q1 2015 and consolidated its operations

into one facility in Houston. Results from the U.S. pressure pumping operations and gains from the sale transaction are classified in discontinued operations.

2 | Q1 2016 Interim Report

Trican Well Service Ltd.

International continuing operations generated $7.1 million in revenue and adjusted operating income of $0.9 million during Q1 2016, compared to Q1 2015 revenue of $2.7 million and an adjusted operating loss of $0.7 million.

Continuing operations of the International segment comprises the Norwegian and Russian completion businesses. As of the first quarter of 2016, Trican has discontinued its operations in all other international markets.

CONTINUING OPERATIONS - COMPARATIVE QUARTERLY INCOME STATEMENTS

($thousands, unaudited) Three months ended March 31,	2016	% of Revenue	2015**	% of Revenue	Quarter- Over- Quarter Change	% Change
Revenue Expenses Materials and operating	111,773 124,889	100% 111.7%	236,458 230,335	100.0% 97.4%	(124,686) (105,446)	(53%) (46%)
General and administrative	13,833	12.4%	12,888	5.5%	945	7%
Operating loss *	(26,949)	(24.1%)	(6,765)	(2.9%)	(20,184)	298%
Finance costs	9,010	8.1%	10,090	4.3%	(1,080)	(11%)
Depreciation and amortization	21,756	19.5%	19,676	8.3%	2,080	11%
Foreign exchange (gain) / loss	3,175	2.8%	(11,054)	(4.7%)	14,229	(129%)
Other income	(512)	(0.5%)	(203)	(0.1%)	(310)	153%
Loss before income taxes and non- controlling interest	(60,378)	(54.0%)	(25,274)	(10.7%)	(35,104)	139%
Income tax recovery	(15,263)	(13.6%)	(2,180)	(0.9%)	(13,083)	600%
Net loss	(45,115)	(40.4%)	(23,094)	(9.8%)	(22,021)	95%
Adjusted operating income / (loss) *	(16,822)	(15.1%)	2,174	0.9%	(18,995)	(874%)
Gross (loss) *	(32,001)	(28.6%)	(11,689)	(4.9%)	(20,312)	174%

(*)(**) See the first page of this report for a description of operating income / (loss) and adjusted operating income / (loss). Gross profit / (loss) has been presented in this table as it is the most directly comparable measure calculated in accordance with IFRS to operating income / (loss).

CANADIAN OPERATIONS
($ thousands, except revenue per job, unaudited)	Mar. 31,	% of	Mar. 31,	% of	Dec. 31,	% of
Three months ended,	2016	Revenue	2015	Revenue	2015	Revenue
Revenue	101,203		222,717		158,547
Expenses
Materials and operating	112,808	111.5%	210,900	94.7%	148,388	93.6%
General and administrative	3,531	3.5%	4,033	1.8%	2,382	1.5%
Total expenses	116,339	115.0%	214,933	96.5%	150,770	95.1%
Operating income / (loss) *	(15,136)	(15.0%)	7,784	3.5%	7,777	4.9%
Adjusted operating income / (loss) *	(8,676)	(8.6%)	13,838	6.2%	11,521	7.3%
Number of jobs	2,466	3,611	2,887
Revenue per job	40,348	60,826	54,390
Gross loss *	(30,016)	(29.7%)	(5,845)	(2.6%)	(8,229)	(5.2%)

* See the first page of this report for a description of operating income / (loss) and adjusted operating income / (loss). Gross profit / (loss) has been presented in this table as it is the most directly comparable measure calculated in accordance with IFRS to operating income / (loss).

Q1 2016 Interim Report | 3

Trican Well Service Ltd.

Sales Mix
(unaudited) Three months ended,	Mar. 31, 2016	Mar. 31, 2015	Dec. 31, 2015
% of Total Revenue
Fracturing and Completions	63%	67%	65%
Cementing	25%	17%	18%
Nitrogen	3%	5%	9%
Coiled Tubing	3%	3%	2%
Acidizing	3%	2%	2%
Industrial Services	2%	3%	3%
Other	1%	3%	1%
Total	100%	100%	100%

Operations Review

Low commodity prices continued to have a significant impact on the demand for Trican's Canadian pressure pumping services in the first quarter of 2016, as revenue decreased by 55% on a year-over-year basis. The rig count in Canada decreased by 45% compared to the same quarter of 2015, as customers continued to reduce capital spending. Weak first quarter demand also had a significant impact on Canadian pricing levels. First quarter of 2016 average pricing decreased on average by 27% compared to the same period in 2015.

The Canadian operations' revenue decreased year-over- year by $121.5 million and operating loss increased $22.9 million due to pricing reductions and a lower level of activity largely due to reduced demand for services as

a result of low oil and gas prices. Canadian operations generated an adjusted operating loss of $8.7 million, or 8.6% of net revenue due to challenging market conditions during the quarter.

Q1 2016 versus Q1 2015

Canadian operations revenue for the first quarter of 2016 decreased by 55% compared to the first quarter of 2015. Low commodity prices and early spring break up led to a significant decrease in demand for our services, which was reflected in the 32% year-over-year decline in the job count. Revenue per job decreased by 34% due to a 27% year-

over-year drop in overall Canadian pricing and a decrease in fracturing job size. Sales mix also caused a decrease

in revenue per job as the number of cementing jobs increased year over year.

Materials and operating expenses increased to 111.5% of revenue compared to 94.7% for the same period in 2015. Operating loss for the first quarter of 2016 was 15.0% of revenue compared to operating income of 3.5% for the same period in 2015. These results include expenses related to workforce reductions of $6.2 million during Q1 2016 and

$5.5 million for the same period last year. The year-over-year decline in activity levels reduced operating leverage on

our fixed cost structure and when combined with reduced pricing caused a decrease in operating and gross margins.

General and administrative costs were down 12.4% or by

$0.5 million. This reduction includes a meaningful reduction in employee and other G&A expenses offset by an increase of $1.0 million in share based unit expense due to Trican's share price increasing 86% during the quarter.

Q1 2016 versus Q4 2015

Canadian operations revenue in the first quarter decreased 36% compared to the fourth quarter of 2015 largely due to a decrease in pricing and a significant drop in activity over the month of March. Q1 activity levels were affected by early spring break up conditions in combination with continued reductions of capital spending that led our customers to request further price concessions. As a result, job count decreased by 15%. Revenue per job also decreased by 26% due to a higher proportion of smaller cement jobs and an average decline in pricing of 6% from Q4 2015 levels.

As a percentage of revenue, first quarter materials and operating expenses increased to 111.5% compared to 93.6% during the fourth quarter of 2015. Operating loss was 15.0%

4 | Q1 2016 Interim Report