Akita Drilling Ltd.
Annual Report 2023

Plain-text annual report

A K I T A D R I L L I N G 2 0 2 3 A n n u a l R e p o r t 2023 ANNUAL REPORT 2 AKITA DRILLING | 2023 Annual ReportCORPORATE PROFILE AKITA Drilling Ltd. is a premier oil and gas drilling contractor with drilling operations throughout North America. The Company strives to be the industry leader in safety, equipment quality, drilling performance, employee and customer relations, and First Nations, Métis and Inuit partnerships. In addition to conventional drilling, the Company specializes in pad and other purpose-built drilling rigs and is active in directional, horizontal and underbalanced drilling providing specialized drilling services to a broad range of independent and multinational oil and gas companies. AKITA currently employs, at full operations, approximately 1,000 people. The Company has ownership in 35 drilling rigs in all depth ranges. Annual Meeting The annual meeting (the “Meeting”) of the shareholders of AKITA DRILLING LTD. (the “Company”) will be held in a virtual only format via live webcast on Tuesday, May 14, 2024 at 10:00 a.m. Mountain Daylight Time. Details on how to access the Meeting can be found in the Company’s Management Proxy Circular. 11 AKITA DRILLING | 2023 Annual ReportFORWARD-LOOKING STATEMENTS FORWARD-LOOKING STATEMENTS From time to time AKITA makes forward-looking statements. These statements include but are not limited to comments with respect to AKITA’s objectives and strategies, financial condition, results of operations, the outlook for industry and risk management discussions. In particular, forward-looking information in this MD&A includes, but is not limited to, references to the outlook for the North American economy and the drilling industry (including the demand for drilling services, customer exploration and development budgets and drilling programs, day rates, active rig count, supply issues and labour shortages), the demand for oil and natural gas, crude oil and natural gas prices, the Company's SAGD drilling activity, the Company's existing credit facility, the Company's operating performance and cash flows, future investment, debt repayment, tax rates, the Company's capital program, advantages associated with the percentage of pad drilling rigs in the Company's Canadian fleet, and the expansion of the Company's presence in the Montney deep gas basin and its role in drilling potash and in achieving energy transition targets, and the upgrading of one of the Company’s oil sands rigs for deep gas drilling. Although the Company believes that the expectations reflected in the forward-looking information are reasonable based on the information available on the date such statements are made and processes used to prepare the information, such statements are not guarantees of future performance and no assurance can be given that these expectations will prove to be correct. By their nature, these forward-looking statements involve numerous assumptions, inherent risks and uncertainties, both general and specific, and therefore carry the risk that the predictions and other forward-looking statements will not be realized. Readers of this MD&A are cautioned not to place undue reliance on these statements as a number of important factors could cause actual future results to differ materially from the plans, objectives, estimates and intentions expressed in such forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of, among other things: • Prevailing economic conditions including world crude oil prices, North American natural gas prices and global liquified natural gas (LNG) demand; • Increased competition, including as a result of the movement of drilling rigs among regions or reduced levels of activity in the oil and gas industry; • Fluctuations and uncertainty surrounding the future price of • Energy transition targets and industry’s ability to achieve commodities; them; • The impact of global supply chain disruptions; • The loss of one or more major customers; • The impact of the level of industry activity for Canadian and US crude oil and natural gas exploration and development on the demand, pricing and terms for contract drilling services; • The impact of changes in demand for crude oil, natural gas or other liquid hydrocarbons on the demand and pricing for drilling services; • Changes to existing laws, regulations and government policies, and the introduction of new laws and regulations, including those governing the management, transportation and disposal of hazardous substances and other waste materials and otherwise relating to the protection of the environment; • The impact of climate change activism; • The level of exploration and development activity carried on • Access to capital markets including AKITA’s ability to obtain by AKITA’s customers; additional debt or equity financing; 2 AKITA DRILLING | 2023 Annual ReportFORWARD-LOOKING STATEMENTS CONTENTS CONTENTS 1 4 Corporate Profile Operational Performance 6 Share Performance 10 8 Letter to the Shareowners 34 Management's Discussion and Analysis Management's Responsibility for Financial Reporting 36 42 Independent Auditor's Report Consolidated Financial Statements 74 10 Year Financial Review 46 Notes to the Consolidated Financial Statements 77 Corporate Information 3 • Variations in interest rates and principal repayments under the terms of the Company's credit facility; • The Company's ability to make scheduled payments of principal and interest on, or to refinance, its indebtedness; • The sufficiency of AKITA's assets to repay indebtedness under its credit facility in the event repayment were to be accelerated following an event of default; • The impact of dilutive financings or other transactions; • Fluctuations in foreign exchange, interest and tax rates; • The adequacy of AKITA's insurance coverage or contractual indemnity rights to cover losses, and the applicability of anti-indemnification legislation; • The Company's ability to attract, develop and maintain a skilled and safe workforce and maintain a cost structure that varies with activity levels; • The availability of qualified management personnel; • A general reduction in rates in the drilling industry caused by a capital overbuild. We caution that the foregoing list of factors is not exhaustive and that while relying on forward-looking statements to make decisions with respect to AKITA, investors and others should carefully consider the foregoing factors, as well as other uncertainties and events, prior to making a decision to invest in AKITA. Except where required by law, the Company does not undertake to update any forward- looking statement, whether written or oral, that may be made from time to time by it or on its behalf. Additional information about these and other factors can be found under the “Business Risks and Risk Management” section of the Management’s Discussion and Analysis of this 2023 Annual Report for AKITA. AKITA DRILLING | 2023 Annual ReportOPERATIONAL PERFORMANCE Revenue ($000's) Net Earnings (Loss) ($000's) 250,000 200,000 150,000 100,000 50,000 0 40,000 20,000 0 (20,000) (40,000) (60,000) (80,000) (100,000) 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 Funds Flow from Continuing Operations ($000's) Capital Expenditures ($000's) 30,000 25,000 20,000 15,000 10,000 5,000 0 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 4 AKITA DRILLING | 2023 Annual ReportOPERATIONAL PERFORMANCERESPECT COMMITMENT FOUNDATIONAL VALUES INTEGRITY At AKITA - integrity, respect and commitment are the foundational values and guiding principles engrained into every aspect of our operations. 5 AKITA DRILLING | 2023 Annual ReportSHARE PERFORMANCE The graph below compares the cumulative return over the last five years on the Class A Non-Voting shares and Class B Common shares of the Company from December 31, 2023 with the cumulative total return of the S&P/TSX Composite Stock Index and the TSX Energy Services Sub-Index over the same period, assuming reinvestment of dividends. Five Year Total Return on $100 Investment 200 150 100 50 0 2018 2019 2020 2021 2022 2023 Dec 31, 2018 Dec 31, 2019 Dec 31, 2020 Dec 31, 2021 Dec 31, 2022 Dec 31, 2023 AKITA Class A Non-Voting Shares AKITA Class B Common Shares S&P/TSX Composite Index TSX Equal Weight Oil & Gas 100 100 100 100 31 36 119 111 13 46 122 76 25 56 148 121 45 59 135 154 36 43 146 152 6 AKITA DRILLING | 2023 Annual ReportSHARE PERFORMANCESHARE PERFORMANCE Share Performance Weighted average number of Class A and Class B shares 39,609,191 30,608,191 39,608,191 39,622,805 39,658,520 Total number of Class A and Class B shares 39,608,191 39,608,191 39,608,191 39,650,191 39,710,191 Market prices for Class A Non-Voting shares High $ 4.42 $ 1.22 $ 1.54 $ 2.96 $ 1.74 2019 2020 2021 2022 2023 Low $ 0.75 $ 0.25 $ 0.50 $ 0.89 $ 1.08 Close $ 1.19 $ 0.48 $ 0.94 $ 1.73 $ 2.05 Volume 8,875,748 21,339,080 7,239,647 20,529,992 12,340,380 Market prices for Class B Common shares High $ 4.48 $ 2.89 $ 3.00 $ 4.98 $ 2.45 Low $ 1.25 $ 0.67 $ 0.98 $ 1.50 $ 1.35 Close $ 1.57 $ 0.77 $ 2.46 $ 2.60 $ 1.87 Volume 53,746 45,986 14,172 19,530 4,854 Dividend History AKITA began paying dividends to shareholders in 1996. In July of 2019, AKITA suspended its dividend program in light of the current economic environment. Dividends per share ($) 2019 0.17 2020 0.00 2021 0.00 2022 0.00 2023 0.00 7 AKITA DRILLING | 2023 Annual ReportLinda Southern-Heathcott Colin Dease While 2023 marked the 30th year of AKITA operating as a falling from 1,486 DUCS at the end of 2021, to 982 at the public entity after being spun off from ATCO Enterprises Ltd. on end of 2022 and to 830 at the end of 2023. A decreasing January 1, 1993, AKITA can trace its roots back even further DUC count may be a positive leading indicator for increased to 1964 when it formed part of Thomson Industries Ltd. AKITA demand for drilling. The second positive in the Permian is the has navigated through many changes in the industry over the investment in takeaway capacity for natural gas out of the last 60 years but one thing has held true at AKITA, it has always Permian to the gulf coast to feed the expanding demand of the committed to live up to the core principles of its founder, Mr. LNG export terminals, including the Permian Highway Pipeline, R.D. Southern, in setting and maintaining high standards, the expansion of the Whistler Pipeline and the Matterhorn striving for excellence and always conducting business with Express Pipeline, which will all help to export gas out of the integrity. Permian, thereby increasing potential drilling. Recent operator consolidation and the current pause on new LNG export We had a strong start to 2023 in our US division, with 14 rigs facilities, however, are two factors potentailly weighing on the running steadily at materially higher day rates then we have US market. seen in several years in the US. Strong US rates and utilization helped the Company generate significant earnings and free In Canada, the Company saw an 11% reduction in operating cash flow in the first half of the year. By the third quarter, days in 2023, however, due to stronger day rates that however, the active rig count in the US began to steadily decline as natural gas prices significantly decreased and crude oil prices remained volatile. The active rig count dropped from 779 rigs at the start of 2023 to 622 rigs at the end of the year. This weakening in the US market caught up with the Company in the second half of the year, where AKITA’s activity decreased to end the year with nine active rigs. The decrease in activity put pressure on day rates which also decreased over the second half of the year. There are some signs that the second half of 2024 will improve increased over the course of the year, saw a 16% increase in operating margin. The Company is excited about optimism in the Canadian market stemming from the near completion of the TransMountain Expansion and the Coastal GasLink pipeline project. The Canadian Association of Energy Contractors released its 2024 Drilling and Service Rig Forecast on November 24, 2023, estimating 6,229 wells to be drilled in 2024, up 481 from 2023, and drilling operating days to increase by 5,046 days in 2024 to 65,399. This should have a positive impact in the US, especially in the Permian Basin where AKITA’s rigs on AKITA’s Canadian division and we are anticipating stronger are located. The drilled but uncompleted well count (“DUCS”) results in 2024 in our Canadian operations. has steadily declined in the Permian over the last two years, 8 AKITA DRILLING | 2023 Annual ReportLETTER TO THE SHAREOWNERSLETTER TO THE SHAREOWNERS Colin Dease AKITA had three primary focuses in 2023: Safety - AKITA maintains a commitment to safety that permeates all levels of the organization. Our focus on safety We would like to express a special thanks to AKITA’s employees for their adaptability, hard work and commitment to excellence. We wish to acknowledge the contribution of our in the year resulted in AKITA’s total recordable incident rate directors, whose thoughtful counsel and guidance have helped (“TRIR”) for 2023 decreasing 116% in Canada and 35% in the to create and maintain a strong and successful Company, our United States. A refresh of AKITA’s safety program complete First Nation, Métis and Inuvialuit partners, and the AKITA with new management and a back to basics approach to Shareowners for their continued support and confidence in safety were the contributing factors for this improvement. We the Company. will continue to make safety our first priority at AKITA, working to continue to improve our results year over year. On behalf of the Board of Directors, Debt Repayment – our 2023 debt repayment target was $20,000,000 and we are very pleased to have exceeded this target by 20%, repaying $24,000,000 exceeded over the year and ending the year with a total debt balance of $70,000,000, 1.2 x debt to EBITDA at the end of 2023, compared to a total Linda Southern-Heathcott debt balance of $94,000,000 at the start of 2023. Executive Chairman of the Board Capital Replenishment – after several lean years at the Company, we reinvested in our fleet in 2023, building up critical spares, rebuilding engines and implemented a host of other initiatives that will improve operational performance, reduce downtime and reduce ongoing maintenance costs. In addition to this capital replenishment, we upgraded one of our Canadian oil sands configured rigs, making it well suited for oil sands as well as deep gas drilling. We see the Montney gas basin as a growth opportunity for the Company and we are excited about the possibility of duplicating the success we achieved on our first oil sands rig with additional upgrades. Colin Dease President and Chief Executive Officer March 21, 2024 9 AKITA DRILLING | 2023 Annual ReportLETTER TO THE SHAREOWNERS MANAGEMENT’S DISCUSSION & ANALYSIS The following management’s discussion and analysis (“MD&A”) of the financial condition and results of operations is intended to help the reader understand the current and prospective financial position and operating results of AKITA Drilling Ltd. (“AKITA” or the “Company”). The MD&A discusses the operating and financial results for the year ended December 31, 2023, is dated March 21, 2024, and takes into consideration information available up to that date. The MD&A is based on the audited annual consolidated financial statements of AKITA for the year ended December 31, 2023. The MD&A should be read in conjunction with the audited annual consolidated financial statements and related notes for the year ended December 31, 2023, prepared in accordance with International Financial Reporting Standards ("IFRS Accounting Standards") as issued by the International Accounting Standards Board ("IASB"). Additional information is available on AKITA’s website (www.AKITA-Drilling.com) and all previous public filings, including the most recently filed Annual Report and Annual Information Form, are available through SEDAR+ (www.sedarplus.ca). All amounts are denominated in Canadian dollars (“CAD”) and stated in thousands unless otherwise identified. Introduction AKITA is a premier Canadian oil and gas drilling contractor with a fleet of 35 drilling rigs. AKITA provides contract drilling services through two geographical segments: Canada and the United States (“US”). AKITA’s US operating segment, which began as four rigs, expanded to 16 rigs through the acquisition of Xtreme Drilling Ltd. (“Xtreme”) in 2018. At the time of the acquisition, Xtreme’s fleet was widely dispersed, with rigs spread across eight different States and multiple basins. A post-acquisition focus was to consolidate the US fleet to improve operational efficiencies. In support of this objective, AKITA strategically exited operations in Wyoming, North Dakota, Oklahoma, Utah and Ohio. In 2023, AKITA completed its objective to consolidate its US division to the Permian, by closing its operational office in Evans, Colorado. AKITA’s US marketed fleet is supported out of its operations base in Midland, Texas and is comprised of 13 high specification AC triple rigs and one high specification AC double rig, all serving the Permian Basin, which is the most active basin in the US and is currently supporting 50% of all US land drilling. While the US fleet primarily targets oil wells in the Permian, saltwater disposal wells are a secondary market that our fleet has proven to be well equipped for. With a fleet of 20 rigs, AKITA’s Canadian division operates in Alberta, British Columbia, Saskatchewan, and as market conditions dictate, in the Yukon and the Northwest Territories. The Canadian division operates both wholly-owned rigs and rigs that are partially owned by AKITA and First Nations, Métis or Inuvialuit joint venture partners including Akita Mistiyapew Aski Drilling Ltd., a joint venture between AKITA and Saulteau First Nations, Akita Equtak Drilling Ltd., a joint venture between AKITA and the Inuvialuit Development Corporation, and Akita Wood Buffalo Drilling Ltd., a joint venture between AKITA and Chipewyan Prairie First Nation, Fort McMurray 468 First Nation, Fort McKay Métis Nation, Fort Chipewyan Métis Local 125, and Conklin Métis Local 193. Each joint venture has defined geographical boundaries and an equity interest in select AKITA rigs. Together AKITA’s First Nation, Métis and Inuit joint venture 10 AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSISpartners hold equity interests in six of AKITA’s Canadian drilling rigs. AKITA’s Canadian division primarily operates in the oil sands and heavy oil regions with a view to expanding its presence in the Montney deep gas basin. In addition, the Canadian division continues to play a central role in drilling potash and other energy transition targets, including carbon capture wells, hydrogen storage wells and geothermal wells. In both Canada and the US, AKITA strives to ensure it is well positioned to meet the demanding requirements of global operators while remaining flexible enough to tailor its services to custom operator requests. Fostered over three decades of operation, AKITA has established a leading safety culture and is committed to coaching and mentoring its crew personnel in both divisions to ensure they develop as future leaders and ambassadors for the Company. AKITA is extremely proud of the First Nation, Métis and Inuvialuit joint venture relationships it has forged in Canada, which help to ensure such communities benefit from resource development AKITA is involved in proximate to their traditional lands. Financial Highlights $Thousands except per share amounts 2023 2022 Change % Change 2023 2022 Change % Change For the three months ended December 31, For the year ended December 31, Revenue 47,317 59,525 (12,208) (21%) 225,479 200,996 24,483 Operating and maintenance expenses 38,228 40,666 (2,438) (6%) 167,029 151,884 15,145 Operating margin Margin % 9,089 18,859 (9,770) (52%) 58,450 49,112 9,338 19% 32% (13%) (41%) 26% 24% 2% Net cash from operating activities 17,523 8,035 9,488 118% 35,567 18,198 17,369 Adjusted funds flow from operations (1) 7,177 16,144 (8,967) (56%) 45,522 34,813 10,709 Per share Net income (loss) Per share Capital expenditures 0.18 0.41 (0.23) (56%) 1.15 0.88 0.27 (1,166) 8,813 (9,979) (113%) 18,415 4,288 14,127 (0.03) 0.22 (0.25) (114%) 0.46 0.11 12,822 4,917 7,905 161% 24,592 17,982 0.35 6,610 Weighted average shares outstanding 39,684 39,650 34 0% 39,659 39,623 36 Total assets Total debt 263,640 268,281 (4,641) 69,542 93,514 (23,972) 12% 10% 19% 8% 95% 31% 31% 329% 318% 37% 0% (2%) (26%) (1) See “Non-GAAP and Supplementary Financial Measures" near the end of this MD&A for further detail. General Overview AKITA ended the year with net earnings of $18,415,000 in 2023, compared to $4,288,000 in 2022, an increase of 329% year over year and a return to a positive retained earnings balance. Significantly improved earnings translated into a 31% increase in adjusted funds flow from operations, which increased to $45,522,000 for 2023, from $34,813,000 in 2022. Both net income and adjusted funds flow from operations were the highest achieved since 2014. Despite improved financial results, activity was down year over year with the Canadian division achieving 2,239 operating days in 2023, compared to 2,518 operating days in 2022 and the US division achieving 3,853 operating days in 2023, compared to 4,088 operating days in 2022. In the US, 2023 started at full capacity but began to decline over the second half of the year while Canada fell behind 2022 in the second quarter and remained behind for the balance of the year. Improved operating margins per day, driven by improved day rates, were the key driver in the Company’s improved results between the two years. Operating margin per operating day increased 30% in Canada and 31% in the US. Capital spending for the year was 37% higher in 2023 than in 2022, and included the cost of upgrading one Canadian oil sands configured rig to position it for deep gas drilling. The Company’s debt balance decreased by $23,972,000 in 2023, exceeding the Company’s debt repayment target of $20,000,000 for 2023, and is now at $69,542,000 total debt 11 AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSISIndustry Overview WTI Prices ($USD/bbl) (1) Alberta Natural Gas Price ($CAD/GJ) (2) 2023 2022 2021 130.00 110.00 90.00 70.00 50.00 30.00 10.00 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Industry Utilization Canada (3) US Active Rig Count (4) 60% 50% 40% 30% 20% 10% 0% 900 800 700 600 500 400 300 200 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 1) Source: U.S. Energy Information Administration 2) Source: Natural Gas Exchange ("NGX") 3) Source: Canadian Association of Energy Contractors ("CAOEC") 4) Source: Baker Hughes North American Rotary Rig Count Oil and gas drilling activity is cyclical and is affected by numerous factors, most importantly world crude oil prices, North American natural gas prices and increasingly international LNG (liquified natural gas) pricing. West Texas Intermediate (“WTI”) crude oil prices, which have seen significant volatility in 2023, reached a low of $70.25 USD in June and a high of $89.43 USD in September, ending the year at $71.90 USD. This volatility had an impact on the demand for drilling services especially in the US. Natural gas prices did not have as much volatility in 2023 compared to crude oil prices but did decline significantly throughout the year, falling from $4.90 at the start of the year to $2.30 at the end of the year, which also had a significant impact on the demand for drilling services in the US. In the US, the total active rig count began to decline at the end of 2022, and this decline accelerated in April of 2023, dropping from 779 active rigs at the end of 2022, to 622 active rigs at the end of 2023. The decline in 157 active rigs in 2023 was spread equally between rigs drilling for oil and rigs drilling for gas and the roughly 80% of rigs drilling for oil and 20% of rigs drilling for gas. This ratio was maintained from the start of the year to the end of the year. In the Permian Basin, AKITA’s US operating basin, the total decrease in the year was 44 active rigs, a 12% decrease, compared to a 20% decrease in the US active rig count as a whole. The number of available drilling rigs in the US market has put downward pressure on pricing for drilling rigs that may continue until the rig count begins to recover. In Canada, the recovery in the industry that appeared to begin in 2021, failed to materialize in any significant manner. Both pricing and demand in the Canadian market, despite strong potential, remain challenged. Industry utilization, which started the year trending above 2022, ended the year slightly below 2022. Similar to the United States, operators began to pause drilling programs as crude oil and natural gas prices fell and activity levels have not yet fully recovered. The split between rigs drilling for oil and those drilling for gas has remained constant through the year at 62% drilling for oil and 37% drilling for gas in Canada. 12 AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSISResults by Segment Canada For the three months ended December 31, For the year ended December 31, $Thousands except per day amounts 2023 2022 Change % Change 2023 2022 Change % Change Revenue Canada 11,768 14,686 (2,918) (20%) 56,005 55,279 726 Revenue from joint venture drilling rigs 7,672 6,546 1,126 17% 35,662 25,958 9,704 Flow through charges (1) (860) (712) (148) (21%) (5,986) (3,800) (2,186) Adjusted revenue Canada (1) 18,580 20,520 (1,940) (9%) 85,681 77,437 8,244 1% 37% (58%) 11% Operating and maintenance expenses Canada Operating and maintenance expenses from joint venture drilling rigs Flow through charges (1) Adjusted operating and maintenance expenses Canada (1) 8,935 10,806 (1,871) (17%) 41,556 41,799 (243) (1%) 6,129 4,470 1,659 37% 27,144 19,635 7,509 38% (860) (712) (148) (21%) (5,986) (3,800) (2,186) (58%) 14,204 14,564 (360) (2%) 62,714 57,634 5,080 9% Adjusted operating margin (1) 4,376 5,956 (1,580) 22,967 19,803 3,164 24% 465 29% 583 (5%) (118) 27% 2,239 26% 2,518 (27%) (17%) (20%) 16% 4% 1% (279) (11%) Margin % (1) Operating days Adjusted revenue per operating day (1) Adjusted operating and maintenance expenses per operating day (1) Adjusted operating margin per operating day (1) Utilization (1) Rig count 39,957 35,197 4,760 14% 38,268 30,753 7,515 24% 30,546 24,981 5,565 22% 28,010 22,889 5,121 22% 9,411 10,216 (805) (8%) 10,258 7,864 2,394 30% 25% 20 32% 20 (7%) (22%) - 0% 31% 20 34% 20 (3%) - (9%) 0% (1) See “Non-GAAP and Supplementary Financial Measures" near the end of this MD&A for further detail. Results in Canada improved in 2023, with adjusted operating margin increasing 16% to $22,967,000 in the year from $19,803,000 in 2022. This increase was driven by improved day rates throughout the fleet which increased 24% in 2023 when compared to 2022. Improved day rates were offset somewhat by reduced activity in 2023 compared to 2022. Operating days fell by 11% in the year due to prolonged forest fires and conservation activities, which reduced second quarter activity and led to fewer operating days for AKITA’s double rigs. During 2023, AKITA achieved 2,239 operating days in Canada, which corresponds to an annual utilization rate of 31%, compared to a 2023 industry average of 36% and a 2022 utilization rate for the Company of 34% (2,518 days). Adjusted operating and maintenance expenses increased 9% to $62,714,000 in 2023 from $57,634,000 in 2022. The increase was not in-line with the 11% decrease in operating days but was reflective of increased per day costs. On a per day basis, adjusted operating and maintenance costs increased to $28,010 in 2023 from $22,889 in 2022. Higher labour costs, which make up 68% of the total operating and maintenance expense in 2023, were the main cause of the increase. Also contributing to higher operating and maintenance costs in 2023 were higher maintenance costs in the year overall due to startup costs on two rigs. In the fourth quarter of 2023, the Company completed the upgrade of one of its oil sands designed rigs, making it competitive in both the oil sands as well as drilling for deep gas. 13 AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSISAKITA’s Canadian segment provided drilling services to 15 different customers in 2023 (2022 - 27 different customers), including four customers that each provided more than 10% of AKITA’s Canadian revenue for the year (2022 – five customers). United States $Thousands except per day amounts 2023 2022 Change % Change 2023 2022 Change % Change For the three months ended December 31, For the year ended December 31, Revenue US Flow through charges (1) Adjusted revenue US (1) Operating and maintenance expenses US Flow through charges (1) Adjusted operating and maintenance expenses US (1) 35,549 44,839 (9,290) (21%) 169,474 145,717 23,757 (4,183) (5,383) 1,200 22% (17,610) (14,919) (2,691) 31,366 39,456 (8,090) (21%) 151,864 130,798 21,066 16% (18%) 16% 29,293 29,861 (568) (2%) 125,473 110,086 15,387 14% (4,183) (5,383) 1,200 22% (17,610) (14,919) (2,691) (18%) 25,110 24,478 632 3% 107,863 95,167 12,696 13% Adjusted operating margin US (1) 6,256 14,978 (8,722) 20% 812 38% (18%) 1,046 (234) (58%) (47%) (22%) 44,001 35,631 8,370 29% 3,853 27% 4,088 2% (235) 38,628 37,721 907 2% 39,414 31,996 7,418 23% 7% (6%) 23% Margin % (1) Operating days Adjusted revenue per operating day (1) Adjusted operating and maintenance expenses per operating day (1) Adjusted operating margin per operating day (1) Utilization (1) Rig count 30,924 23,402 7,522 32% 27,995 23,280 4,715 20% 7,704 14,319 (6,615) (46%) 11,419 8,716 2,703 31% 59% 15 71% 16 (12%) (1) (17%) (6%) 70% 15 70% 16 0% (1) 0% (6%) (1) See “Non-GAAP and Supplementary Financial Measures" near the end of this MD&A for further detail. The Company’s US division began the year operating at full utilization with all 14 marketed rigs active, until August when the declining rig count in the industry began to affect the Company, dropping AKITA’s US rig count to 10 active rigs in September before hitting a low of eight active rigs in October, and ending the year with nine active rigs. Adjusted operating margin increased 23% to $44,001,000 in 2023, from $35,631,000 in 2022 despite a 6% decrease in year over year operating days. Higher revenue per operating day was the cause of the increased adjusted operating margin. Revenue per day increased 23% to $39,414 in 2023, from $31,996 in 2022, peaking at $40,499 in the second quarter of 2023 and ending the year at $38,628, 2% above the same period of 2022. Pressure on day rates as the active industry rig count fell was the cause of the decrease in rates. Revenue in the US accounted for 64% of the Company’s total 2023 adjusted revenue, consistent with 63% in 2022. Adjusted operating margin in the US was 65% of the total for the Company in 2023, up from 64% in 2022. Adjusted operating and maintenance costs increased to $107,863,000 in 2023 from $95,167,000 in 2022, due to higher per day costs, which increased to $27,995 in 2023 from $23,280 in 2022 and peaked in the fourth quarter of 2023 at $30,924. The cause of the increased adjusted operating and maintenance costs is an overall increase in all costs associated with operating a drilling rig. This includes the provision of more ancillary items, such as rental drill pipe at the Company’s expense, as competition increased in response to the reduced active industry rig count. Adjusted operating and maintenance costs were positively impacted by the receipt of a $4.0 million Employee Retention Credit (“ERC”) from the IRS (2020–$20 million). The ERC is a COVID-19 related credit, granted to employers that retained a certain number of employees while experiencing significant decreases in revenue during the pandemic. This amount reduced the total operating costs in the year. In the US, AKITA provided drilling services to 25 different customers in 2023 (2022 – 27 customers), including two customers that provided more than 10% of AKITA’s US revenue for the year (2022 – two customers). 14 AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSISSeasonality The Canadian drilling industry is seasonal with activity typically building in the fall as the ground freezes and peaking during the winter months. Northern transportation routes become available once areas with muskeg conditions freeze to allow the movement of drilling rigs and other heavy equipment. The peak Canadian drilling season ends with “spring break-up” at which time drilling operations are curtailed due to seasonal road bans (temporary prohibitions on road use) and restricted access to agricultural land as frozen ground thaws. The summer drilling season begins when road bans are lifted, typically later in June or early July. Some areas are subject to environmental orders for specific well leases which can prevent drilling activity during certain periods when authorities prioritize wildlife or habitat protections. Such restrictions may affect activity levels and operating results. While seasonality can affect all rig classes, pad drilling rigs are generally less susceptible to seasonality than conventional drilling rigs since pad rigs can be situated on a pad just before the start of spring break up with the ability to drill several wells before a rig move on restricted roads would be necessary. The Permian Basin, where AKITA primarily conducts its US drilling operations, is infrequently subject to weather constraints, but may experience operational restrictions for other reasons. Depreciation and Amortization Expense $Millions Depreciation and amortization expense 2023 28.5 2022 30.3 Change % Change (1.8) (6%) The decrease in depreciation and amortization expense to $28,510,000 in 2023 from $30,263,000 in 2022 is due to a larger portion of the Company’s assets being fully depreciated. AKITA depreciates its drilling rig assets on a straight-line basis where the estimated useful lives and residual values of various rig components have been chosen to match the expected life of that component. In 2023, drilling rig depreciation accounted for 98% of total depreciation expense, from 97% in 2022. While AKITA conducts some of its drilling operations via joint ventures, the drilling rigs used to conduct those activities are owned jointly by AKITA and its joint venture partners, and not by the joint ventures themselves. As the joint ventures do not hold any property, plant, or equipment assets directly, the Company’s depreciation expense includes depreciation on assets involved in both wholly-owned and joint venture activities. Selling and Administrative Expenses $Millions Selling and administrative expenses 2023 16.1 2022 14.5 Change % Change 1.6 11% Selling and administrative expenses increased to $16,120,000 in 2023 from $14,541,000 in 2022 due to higher accrued short term incentives and increased salaries across the Company. Selling and administrative expenses stayed constant at 7% of revenue year over year. The single largest component of selling and administrative expenses is salaries and benefits which accounted for 33% of these expenses in 2023 (2022 – 42%). Asset Impairment The Company did not identify any changes in the indicators of asset impairment or any new indicators of asset impairment during 2023. Therefore, no further assessment on asset impairment was performed as there have been no changes in circumstances that indicate that the carrying amount of property, plant and equipment does not exceed its recoverable amount as at December 31, 2023. 15 AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSISEquity Income from Joint Ventures Equity income from joint ventures is comprised of the following: $Millions Proportionate share of revenue from joint ventures Proportionate share of operating & maintenance expenses from joint ventures Proportionate share of selling and administrative expenses from joint ventures Equity income from joint ventures 2023 35.7 27.1 0.4 8.2 2022 26.0 19.6 0.4 6.0 Change % Change 9.7 7.5 - 2.2 37% 38% 0% 37% The Company provides the same drilling services and utilizes the same management, financial and reporting controls for its joint venture activities as it does for its wholly-owned operations. The analyses of these activities are incorporated throughout the relevant sections of this MD&A relating to activity, revenue per day, as well as operating expenses. The increase in revenue for the Company’s proportionate share of joint ventures year-over-year relates to the increased activity in SAGD (steam assisted gravity drainage) drilling which is the key market for the Company’s joint venture rigs. Other Income (Loss) $Millions Interest income Interest and financing expense Gain on sale of assets Unrealized gain (loss) on risk management contracts Net other gains Total other loss 2023 0.3 (6.5) 2.2 0.1 0.4 (3.5) 2022 - (6.8) 0.1 (0.3) 0.2 (6.8) Change % Change 0.3 0.3 2.1 0.4 0.2 3.3 n/a 4% 2100% 133% 100% 49% The Company recorded interest and financing expense of $6,502,000 for 2023, down from $6,777,000 in 2022. This decrease is due to a lower average debt balance in 2023 of $80,500,000 compared to $94,759,000 in 2022. This decrease in average debt balances was offset by an increased interest rate which averaged 7.99% in 2023 up from 7.06% in 2022. The Company is exposed to changes in interest rates on borrowings under its operating loan facility, which is subject to floating interest rates. To mitigate this risk the Company entered into an interest rate swap with its principal banker in June of 2022. The term of the interest rate swap is June 15, 2022 to June 15, 2026 and the notional amount of the swap is $50,000,000. The fixed rate is 4.24% while the floating rate is indexed to the Canadian Dollar Offered Rate (“CDOR”). At period end the interest rate swap is valued at fair value with any unrealized gain (loss) recorded as other income (loss) on the consolidated income statement. For the year ended December 31, 2023 the Company recorded an unrealized gain of $95,000 compared to a loss of $290,000 in 2022. During 2023, the Company realized a gain of $2,199,000 primarily on the sale of certain components, including the centre section of an idle rig in the US, as well as spare equipment in Canada (2022–$93,000). Net other gains in 2023 was primarily on the sale of fully depreciated assets, compared to foreign exchange gains in 2022. 16 AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Income Tax Recovery $Millions, except income tax rate (%) 2023 2022 Change % Change Current tax expense Deferred tax expense (recovery) Total income tax expense (recovery) Effective income tax rate - 0.1 0.1 23.7% - (0.7) (0.7) 23.5% - 0.8 0.8 n/a 114% 114% AKITA had an income tax expense of $130,000 in 2023 compared to an income tax recovery of $749,000 in 2022. A net deferred tax asset has not been recognized for $67 million (2022 – $76 million). This amount is primarily related to non-capital losses carried forward. Total gross tax losses available to the Company are $415,652,000 with $379,378,000 in the US and $36,274,000 in Canada. The first of these losses will begin to expire in 2031. Net Income (Loss), Net Cash and Adjusted Funds Flow $Millions Net income Net cash from operating activities Adjusted funds flow from operations (1) 2023 18.4 35.6 45.5 2022 4.3 18.2 34.8 Change % Change 14.1 17.4 10.7 328% 96% 31% (1) See "Non-GAAP and Supplementary Financial Measures" near the end of this MD&A for further detail. During 2023, the Company recorded net income of $18,415,000 (net income of $0.46 per Class A Non-Voting and Class B Common share (basic and diluted)) compared to net earnings of $4,288,000 (net earnings of $0.11 per Class A Non-Voting and Class B Common share (basic and diluted)) in 2022. Higher day rates were the cause of the significant improvement in net income. Net cash from operating activities increased to $35,567,000 in 2023, up from $18,198,000 in 2022. In the fourth quarter of 2023, AKITA’s non-cash working capital balances reduced by $11.9 million as activity slowed. This reduction in working capital coupled with improved earnings in the year increased the net cash from operations in 2023 compared to 2022. Adjusted funds flow from operations, which is not impacted by changes in non-cash working capital, increased in 2023 to $45,522,000 from $34,813,000 in 2022 due to higher net income and the factors discussed previously. 17 AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Summary of Quarterly Results The following table shows key selected quarterly financial information for the Company: $Thousands, except per share (unaudited) Mar. 31 Jun. 30 Sep. 30 Dec. 31 Annual Totals Three Months Ended Adjusted funds flow from operations (1) 15,159 12,620 10,566 2023 Revenue Net income (loss) Income (loss) per share (basic and diluted) ($) Cash flow from operations Capital expenditures 2022 Revenue 65,000 58,349 54,813 47,317 225,479 9,523 0.24 6,177 0.16 3,880 0.10 (414) 16,150 2,504 4,700 2,308 4,566 (1,165) 18,415 (0.04) 7,177 17,523 12,822 0.46 45,522 35,567 24,592 44,986 42,960 53,526 59,524 200,996 Net income (loss) (2,933) (4,252) Income (loss) per share (basic and diluted) ($) (0.07) (0.11) Adjusted funds flow from operations (1) Cash flow from operations Capital expenditures 4,996 247 6,412 4,716 6,189 3,633 2,660 0.07 8,957 3,727 3,020 8,813 0.22 16,144 8,035 4,917 4,288 0.11 34,813 18,198 17,982 2021 Revenue Net loss 27,171 18,651 29,906 34,360 110,088 (3,651) (6,108) (6,433) (4,798) (20,990) Loss per share (basic and diluted) ($) Adjusted funds flow from operations (1) (0.09) 3,719 (0.15) 1,056 (0.16) 252 (0.13) 2,427 (0.53) 7,454 Cash flow from (used in) operations (5,692) 10,118 (1,560) (6,327) (3,461) Capital expenditures 1,604 3,138 4,130 7,554 16,426 (1) See "Non-GAAP and Supplementary Financial Measures" near the end of this MD&A for further detail. Key trends over the past 12 quarters, after giving consideration to the seasonal nature of AKITA’s operations, are as follows: • The impact of COVID-19 on demand can be seen until the third quarter of 2021, when the US and Canadian drilling markets began to recover after the pandemic and revenue began to increase; • Increased activity in Canada in 2022 can be seen when comparing the second quarter of 2021 to recent quarters; • The impact of the significant improvement in the profitability of the US operating segment can be seen in the third and fourth quarters of 2022 and the first quarter of 2023, comparing those quarters to any other; 18 AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS• Revenue in the first quarter of 2022 was split relatively equally between Canada and the United States. The majority of revenue shifted back to the US in the fourth quarter of 2022; • Decreased demand in the US market for drilling services significantly impacted the Company’s results in the fourth quarter of 2023; and • The seasonal nature of the Canadian operations can been seen in the cash from operations balances peaking in the second quarter of each year. Three Year Annual Financial Summary The following table highlights AKITA’s annual financial results for the last three years: $Thousands, except per share Revenue Net income (loss) Income (loss) per share (basic and diluted) Adjusted funds flow from operations (1) Net cash from (used in) operating activities Year-end working capital Year-end shareholders' equity Year-end total assets 2023 225,479 18,415 0.46 45,522 35,567 27,130 155,962 263,640 2022 200,996 4,288 0.11 34,813 18,198 31,121 137,851 268,281 2021 110,088 (20,990) (0.53) 7,454 (3,461) 6,502 131,485 247,574 (1) See "Non-GAAP and Supplementary Financial Measures" near the end of this MD&A for further detail. Liquidity and Capital Resources At December 31, 2023, AKITA had $27,130,000 in working capital (working capital ratio of 1.85:1) with $11,187,000 of cash, compared to a working capital of $31,121,000 (working capital ratio of 2.01:1) and $13,311,000 cash for the previous year. In 2023, AKITA generated $35,567,000 in cash from operating activities. Positive cash was also generated from joint venture distributions ($5,950,000) and from proceeds on sales of assets ($2,788,000). During the same period, cash was used for capital expenditures of $24,592,000 and debt repayment of $24,000,000. Accounts payable at year-end included $12,276,000 in accrued expenses, the majority of which relates to routine operations. The Company has a syndicated credit agreement with the Company’s principal banker as the agent on the syndication and three other Canadian banks. The operating loan facility totals $110,000,000. The Credit facility expires in September 2025. The interest rate on the Company’s credit facility ranges from 175 to 300 basis points over prime interest rates depending on the Funded Debt(1) to EBITDA(1) Ratio. Security for this facility includes all present and after-acquired personal property and a first floating charge over all other present and after-acquired property including real property. The financial covenants are: 1. The Funded Debt(1) to EBITDA(1) Ratio: the Company shall ensure that the Funded Debt(1) to EBITDA(1) Ratio shall not be more than 3.00:1.00. The Funded Debt(1) to EBITDA(1) Ratio shall be calculated quarterly on the last day of each Fiscal Quarter on a rolling four quarter basis; 2. The EBITDA(1) to Interest Expense(1) Ratio: the Company shall ensure that the EBITDA(1) to Interest Expense(1) Ratio shall not be less than 3.00:1.00. The EBITDA(1) to Interest Expense(1) Ratio shall be calculated quarterly on the last day of each Fiscal Quarter on a rolling four quarter basis. (1) See "Non-GAAP and Supplementary Financial Measures" near the end of the MD&A for further detail. 19 AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS At December 31, 2023, the Company was in compliance with its covenants with a Funded Debt(1) to EBITDA(1) Ratio of 1.20:1.00, and an EBITDA(1) to Interest Expense(1) Ratio of 7.73:1.00. The facility also includes a borrowing base calculation which is the sum of: (i) (ii) 75% of Eligible Accounts Receivable(1); plus 50% of net book value of all Eligible Rig Assets(1); less (iii) Priority Payables(1) of the Loan Parties. At December 31, 2023, the Company’s borrowing base totalled $94,088,000. The credit facility includes a $10,000,000 operating line of credit that is classified as current, given the Company expects to settle the balance within a normal operating cycle. The maturity date aligns with the total credit facility. At December 31, 2023, the current portion of debt was nil (December 31, 2022 – nil). The balance outstanding under the credit loan facility, net of unamortized loan fees, is classified as long-term debt as the credit agreement has no required repayment obligations prior to the end of the loan facility term. The Company borrowed $70,000,000 in total from this facility as at December 31, 2023 (December 31, 2022 - $94,000,000). The Company's objectives when managing capital are: • to safeguard the Company's ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders; and • to augment existing resources to meet further growth opportunities. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, repurchase shares, issue new shares, sell assets or take on long-term debt. Property, Plant and Equipment Capital expenditures totaled $24,592,000 in 2023 ($17,982,000 in 2022). Capital spending in 2023 was as follows: $13,360,000 (2022 - $10,322,000) for certifications and overhauls, $1,380,000 (2022 - $3,206,000) for drill pipe and drill collars, $8,910,000 (2022 - $4,393,000) for drilling rig equipment and upgrades, and $942,000 in other capital assets. During 2023, the Company sold ancillary assets for $2,788,000 (2022 - $133,000) that resulted in a gain of $2,199,000 (2022 – gain of $93,000). Future Outlook and Strategy The drilling industry is cyclical and certain key factors that impact AKITA’s results are beyond management’s control. Like other drilling contractors, AKITA is exposed to the effects of fluctuating oil and gas prices and changes in the exploration and development budgets of its customers. The outlook for the drilling industry in 2024 is somewhat opaque with both oil and natural gas prices being at relative lows compared to the last three years. Activity levels in Canada for 2023 were largely in line with 2022 and on par with pre-pandemic activity levels in the first quarter of 2020. This trend in demand for drilling services is expected to continue into 2024, however, there is some optimism in the industry that 2024 may improve over 2023. The CAOEC released its 2024 Drilling and Service Rig Forecast on November 24, 2023, estimating 6,229 wells to be drilled in 2024, up 481 from 2023 and for drilling operating days to increase by 5,046 days in 2024 to 65,399. The Trans Mountain Pipe Line is expected to begin operation in mid-2024, which will increase the egress of Canadian crude oil and thereby demand in the industry. A further positive development in Canada is the anticipated completion of the LNG Canada’s export facility in (1) See "Non-GAAP and Supplementary Financial Measures" near the end of the MD&A for further detail. 20 AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS2025, which in conjunction with the Coastal GasLink is expected to secure additional markets for Canadian natural gas and therefore improve demand for drilling services. In order to service this growing market in Canada, in 2023 the Company successfully upgraded one of its oil sands designed rigs to reposition it for deep gas drilling. The Company has additional oil sands designed rigs that can be upgraded for deep gas should market conditions warrant. In the US, the active rig count ended 2023 at 622 rigs, down 20% from the 779 rigs at the start of 2023. Market sentiment suggests current activity levels are likely to persist through the first half of 2024. The current growth trend for large operators in the US is through mergers and acquisitions as opposed to drilling new wells, which is having a negative effect on the demand for drilling services in the near term. There are some signs that the second half of 2024 will improve, especially in the Permian Basin where AKITA’s US rigs are located. The drilled but uncompleted well count (“DUCS”) has steadily declined in the Permian over the last two years, falling from 1,486 DUCS at the end of 2021, to 982 at the end of 2022 and to 830 at the end of 2023. A decreasing DUC count may be a positive leading indicator for increased demand for drilling. The second positive in the Permian is the investment in takeaway capacity for natural gas out of the Permian to the gulf coast to feed the expanding demand of the LNG export terminals, the Permian Highway Pipeline, the expansion of the Whistler Pipeline and the Matterhorn Express Pipeline, which will all help get gas out of the Permian, thereby increasing potential drilling. Although there is the potential for activity in 2024 to increase from the current levels in both Canada and the US, AKITA is taking a cautious approach to the year and continuing to focus on debt repayment. The intention is to reach a level of debt that is easily maintainable through the market cycles the industry is experiencing. The Company’s capital plans for 2024 are in line with 2023, however, there is the potential for additional upgrade capital if the right opportunity warranted it. Financial Instruments The Company’s financial assets and liabilities include cash, accounts receivable, accounts payable, accrued liabilities and financial instruments. Fair values approximate carrying values unless otherwise stated. The Company is exposed to risks caused by fluctuations in currency exchange rates. US contracts are denominated in US dollars and, accordingly, a material decrease in the value of the US dollar could negatively impact revenues. The Company does not currently use hedges to offset this risk. Management continues to consider the credit risk associated with accounts receivable to be generally low. AKITA has conservative credit-granting procedures and in certain situations requires customers to make advance payment prior to provision of services or takes other measures to mitigate credit risk. Provisions have been estimated by management and are included in the accounts to recognize potential credit losses. Off Balance Sheet Transactions AKITA has not entered into any arrangements that involve off balance sheet transactions. Related Party Transactions AKITA is affiliated with the ATCO Group of companies and with Spruce Meadows, an equestrian show jumping facility, through its majority shareholder. All related party transactions in 2023 and 2022 were made in the normal course of business with regular payment terms and have been recorded at the paid amounts. In 2023, operating purchases totaled $981,000, and included sponsorship and advertising of $350,000, operational costs of $518,000 and other miscellaneous purchases of $113,000. At December 31, 2023, the outstanding commitment of the Company’s multi-year sponsorship and advertising contract with Spruce Meadows was $350,000. Costs incurred related to this contract during 2023 were $350,000 (2022 - $175,000). Costs and related services are consistent with parties dealing at arm’s length. The Company is related to its joint ventures. The following table summarizes transactions and annual balances with its joint ventures. These transactions were made in the normal course of business with regular payment terms and have been recorded at the paid amounts. 21 AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS$Thousands Operating and maintenance expenses Selling and administrative expenses Year-end due to AKITA from joint venture partners Year-end due to AKITA from joint ventures Commitments and Contingencies 2023 5,727 581 2,248 3,470 2022 4,613 493 1,801 858 From time to time, the Company enters into drilling contracts with its customers that are for extended periods. At December 31, 2023, the Company had no drilling rigs with multi-year contracts. The Company has entered into a two year contract with a related party to provide sponsorship and advertising at an annual cost of $350,000. At December 31, 2023, the Company had capital expenditure commitments of $5,109,000 (2022 – $740,000). Class A Non-Voting and Class B Common Shares Authorized An unlimited number of Class A Non-Voting shares An unlimited number of Class B Common shares Issued Class A Non-Voting Class B Common Total $Thousands, except share amounts Number of Shares Consideration Number of Shares Consideration Number of Shares Consideration December 31, 2022 37,996,407 144,940 1,653,784 1,366 39,650,191 146,306 Stock options exercised 60,000 42 - - 60,000 42 December 31, 2023 38,056,407 144,982 1,653,784 1,366 39,710,191 146,348 At March 21, 2024, the Company had 38,080,407 Class A Non-Voting shares and 1,653,784 Class B Common shares outstanding. At that date, there were also 1,853,500 stock options outstanding, of which 947,000 were exercisable. Accounting Estimates The preparation of AKITA’s consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as at the date of the consolidated financial statements as well as reported amounts for revenue and expenses for the year. Estimates and judgments are continually evaluated and are based upon historical experience and other factors including expectations of future events that are believed to be reasonable in the circumstances. Actual outcomes, however, can differ materially from such estimates. The Company makes assumptions relating to transactions that were incomplete at the Statement of Financial Position date. Depending on the actual transaction, total assets and liabilities of the Company as well as results of operations, including net income, could be either understated or overstated as a result of differences between amounts accrued for incomplete transactions and the subsequent actual balances. 22 AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSISThe preparation of AKITA’s consolidated financial statements requires management to make significant estimates relating to the useful lives of drilling rigs. Depreciation methods and rates have been selected so as to amortize the net cost of each asset over its expected useful life to its estimated residual value. The estimated useful lives, residual values and depreciation methods are reviewed at the end of each annual reporting period. AKITA’s depreciation estimates do not have any effect on the changes to the financial condition for the Company, as depreciation is a non-cash item. However, total assets and results of operations, including net income, could be either understated or overstated as a result of excessively high or low depreciation estimates. At each reporting date, the Company assesses whether there are indicators of asset impairment. If such indicators exist, the Company performs an asset impairment test and, if required, the Company recognizes an asset impairment loss calculated as the lesser of the difference between the amortized cost of the asset and the present value of the estimated future cash flows or the recoverable amount. The carrying amount of the asset is reduced by the impairment loss. Impairment losses recognized in prior periods are assessed at each reporting date for any indicators that the impairment losses may no longer exist or may have decreased. In the event that an impairment loss reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but only to the extent that the carrying amount does not exceed the amount that would have been determined had no impairment loss been recognized on the asset in prior periods. AKITA’s asset impairment estimates do not have any effect on the changes to financial condition for the Company, as any asset write down would be a non-cash item. However, total assets and results of operations, including net income, could be overstated as a result of projections of discounted future cash flows that are too high. A significant estimate used in the preparation of AKITA’s consolidated financial statements relates to the long-term defined benefit pension liability for certain retired employees that was recorded as $4,091,000 at December 31, 2023 (2022 - $3,964,000). Changes in AKITA’s pension liability estimates do not have any effect on the changes to the financial condition of the Company, since the defined benefit pension is a non-cash item. However, total liabilities and results of operations, including net income, could be either understated or overstated as a result of pension estimates that are either too high or too low. AKITA utilizes the services of a third party to assist in the actuarial estimate of the Company’s pension expense and liability. For 2023, a key assumption is the 4.6% discount rate at year end (2022 – 5.1%). The Company makes assumptions relating to deferred income taxes, including future tax rates, timing of reversals of timing differences and the anticipated tax rules that will be in place when timing differences reverse. Consequently, total liabilities of the Company as well as results of operations, including net income, could be either understated or overstated. Business Risks and Risk Management The following information is a summary only of certain risk factors relating to the business of AKITA and is qualified in its entirety by reference to and must be read in conjunction with, the detailed information appearing elsewhere in this document. Shareholders and potential shareholders should consider carefully the information contained herein and, in particular, the following risk factors: Crude Oil and Natural Gas Prices Fluctuations and uncertainty surrounding the future price of commodities could lead to changes in demand for oil and natural gas, and may impact the economics of planned drilling projects and ongoing production projects, resulting in the curtailment, reduction, delay or postponement of such projects for an indefinite period of time. The price AKITA’s customers receive for their production has a direct impact on the cash flow available to them and the subsequent demand for drilling services provided by AKITA. An extended period of lower oil and natural gas prices could result in a decline in demand and day rates. High volatility in crude oil and natural gas prices may also impact AKITA’s customers’ capital programs, causing delays in spending and lower overall demand for drilling services. Competition The contract drilling industry is highly competitive and includes a large number of drilling contractors with varied rig fleets. Drilling contracts are usually awarded through a competitive bid process with pricing, rig suitability and availability being primary drivers in the bid process. Other factors that influence the bid process include: mobility and efficiency of the rig, location of the rig in relation to the drilling location, experience and quality of service provided by rig crews, safety record of the rig as well as the contractor as a whole, and the adaptability of equipment to utilize new technologies. Rigs can be moved from one region to another depending on the competitive environment within that region and therefore a contractor’s competitive advantage in a region can be quickly eroded by other contractors moving in equipment from other regions. Reduced levels of activity in the oil and gas industry can also increase competition and therefore lower day rates. 2323 AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSISAdvancements in technology Advancements in technology could impact AKITA’s ability to remain competitive. New technology is required to meet demands for complex drilling programs and improve efficiency and there is a risk that competitors may have access to technologies that put them at a competitive advantage and render some of AKITA’s services or equipment obsolete. Access to or development of new technology can be costly. Dependence on Major Customers AKITA earned 34% of its total revenue in 2023 from two major customers. These were the only two customers who individually provided over 10% of the Company’s revenue for the year. The loss of one or more major customers or a significant reduction in the business done with any customer without offsetting new revenue could have a material adverse effect on AKITA’s business, results of operations and prospects. Volatility of Industry Conditions The demand, pricing and terms for contract drilling services are dependent upon the level of industry activity for Canadian and US crude oil and natural gas exploration and development. Industry conditions are influenced by numerous factors which AKITA does not control including (without limitation): current crude oil and natural gas prices, expectations about future crude oil and natural gas prices, the cost of exploring for, producing and delivering crude oil and natural gas, the expected rates of decline in current production for AKITA’s customers, discovery rates of new oil and gas reserves by AKITA’s customers, sufficient crew labour, available pipeline and other oil and gas transportation capacity, weather conditions, political, regulatory and economic conditions, influences from special interest groups, the use of energy generated from sources that are not crude oil or natural gas based, the ability of oil and gas companies to raise equity capital or debt financing and technological advances in the exploration and production of crude oil and natural gas. The level of activity in both the Canadian and US oil and gas exploration and production industry is volatile. No assurance can be given that the expected trends in oil and gas exploration and production activities will continue or that demand for contract drilling services will reflect the level of activity in the industry. Recent global economic events and uncertainty have significantly affected commodity pricing. While commodity pricing recovered over the course of 2022 to pre-pandemic levels, a return to a prolonged substantial reduction in crude oil and natural gas prices would likely lead to a reduction in oil and gas production levels and therefore adversely affect the demand for drilling services to oil and gas customers. Any elimination or curtailment of government incentives or adverse changes in government regulation could have a significant impact on the contract drilling industry in Canada or in the US. These factors could lead to a decline in demand for AKITA’s services which could result in a material adverse effect on AKITA’s business, financial condition, results of operations and cash flows. AKITA’s customers rely on access to pipelines and liquified natural gas facilities to increase transportation and refinery capacity. There has been downward pressure on oil and natural gas prices in Western Canada due to delays to critical infrastructure construction projects as a result of political pressure, both within Canada and the US, and societal pressures leading to permit cancellations. These delays may depress AKITA’s customers’ overall exploration and production activities which could impact the demand for drilling services. Labour The contract drilling industry is dependent upon attracting, developing and maintaining a skilled and safe workforce. During periods of peak activity levels, AKITA is susceptible to increased labour costs as a result of a competitive labour market or may be faced with a lack of experienced personnel to operate AKITA’s equipment. There is a risk of unionization efforts to parts of the Company’s workforce that could lead to increased costs due to strikes, work stoppages, other labour disruptions and collective bargaining agreements. AKITA is also faced with the challenge of retaining employees during periods of low utilization. The Company’s financial results depend, at least in part, upon its ability to attract, develop and maintain a skilled work force, while maintaining a cost structure that varies with activity levels. A number of AKITA’s key customers evaluate the ability of contract drilling companies to provide and maintain a high standard of safe operations prior to their selecting a drilling contractor for the provision of drilling services. AKITA’s financial success is related to its ability to continue to meet those expectations. Capital Overbuild in Contract Drilling Industry Drilling rigs have a long life span. Further, there is a significant lag between when the decision to build a rig is made and when the construction is complete. High demand typically spurs greater capital expenditures by drilling contractors which may, in turn, lead to excessive supply in future periods. A potential capital overbuild could lead to a general reduction in rates in the industry as a whole, which could have a material adverse effect on AKITA’s business, financial condition, results of operations and cash flows. The cyclical nature of AKITA’s business makes the impact of this risk significant. Debt Service AKITA has a syndicated credit facility. Variations in interest rates and principal repayments, under the terms of the facility, could result in significant changes in the amount required to be applied to debt service before payment of any amounts by AKITA. Although management’s view is that AKITA’s current 24 AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSISfacility is sufficient, there is no assurance that it will be adequate for the future financial obligations of AKITA or that additional funds can be obtained if required. AKITA’s credit facility is a revolving facility which matures on September 11, 2025 and is subject to annual extensions of an additional year on each anniversary date of the closing date, contingent upon the consent of the lenders holding two- thirds of the aggregate commitments under the facility. To the extent the facility is not extended, the drawn down principal would be due on the maturity date. Interest payments are required quarterly and are based on the Canadian prime rate for Canadian prime rate loans and the US prime rate for US rate loans. Leverage and Restrictive Covenants AKITA has third party debt service obligations under its credit facility. The degree to which AKITA is leveraged could have important consequences to shareholders, including: 1. 2. a portion of the consolidated cash flow from operations could be dedicated to the payment of the principal and interest on indebtedness, thereby reducing cash available for other initiatives; and certain borrowings are at variable rates of interest, which exposes AKITA to the risk of increased interest rates. AKITA's ability to make scheduled payments of principal and interest on, or to refinance, its indebtedness will depend on its future operating performance and cash flow, which are subject to prevailing economic conditions, prevailing interest rate levels and financial, competitive, business and other factors, many of which are beyond its control. AKITA’s credit facilities contain certain customary operating covenants that limit the discretion of management to incur additional indebtedness, to create liens or other encumbrances, to pay dividends or make certain other payments, investments, loans and guarantees and to sell or otherwise dispose of assets and merge or consolidate with another entity. In addition, AKITA is required to satisfy and maintain two financial ratio tests, Debt to EBITDA and EBITDA to Interest Expense. A failure to comply with the obligations in the agreements in respect of the credit facilities could result in an event of default which, if not cured or waived, could permit acceleration of the repayment of the relevant indebtedness. If the repayment of the indebtedness under the credit facilities were to be accelerated, there can be no assurance that AKITA's assets would be sufficient to repay the debt. Access to Additional Financing AKITA may find it necessary in the future to obtain additional debt or equity financing to support ongoing operations, undertake capital expenditures or undertake acquisitions or other business combination activities. There can be no guarantee that AKITA will have access to the required capital as its ability to do so is dependent on, among other factors, the overall state of capital markets, interest rates, the oil and gas industry as well as the appetite for investment in the oilfield drilling industry. As an oilfield service company, AKITA’s ability to obtain additional debt or equity financing could be constrained by pressure from investors and environmental groups to divest from fossil fuel related investments. An inability to obtain necessary financing, on terms that are acceptable to AKITA, could limit AKITA’s growth and could have a material adverse effect on AKITA’s business, financial condition and cash flows in the future. Access to financing also impacts AKITA’s customers, potentially limiting capital budgets and therefore the demand for AKITA’s services. AKITA’s customers also rely on favourable access to credit and debt capital markets to fund capital budgets. They may face the same risks relating to the state of markets, interest rates and appetite for investment in hydrocarbons. Customers may choose to reduce their capital budget if the cost of accessing additional funding is unfavourable which would lower the demand for drilling services. in the United States Foreign Exchange and Foreign Operations Risk increase the AKITA’s operations Company’s exposure to risks inherent in foreign operations. The Company is exposed to risks caused by fluctuations in currency exchange rates. US contracts are denominated in US dollars and, accordingly, a material decrease in the value of the US dollar could negatively impact revenues. In addition to foreign exchange, risks include, but are not limited to: different taxation regimes, potential litigation and potential political protectionist measures. While AKITA has increased its insurance coverage to offset the increased chance of litigation and has engaged third party experts to assist in taxation matters, there can be no assurance that the Company will be fully effective in mitigating foreign operation risks. Such risks could have material adverse effects on AKITA’s business, financial condition, results of operations and cash flows. Regulation of Industry AKITA’s operations are subject to a variety of federal, provincial, state and local laws, regulations and guidelines relating to health and safety, the conduct of operations, the operation of equipment used in drilling operations and the transportation of materials and equipment provided to customers. Compliance with, or breaches of, such laws, or costs or implications of changes to such laws, regulations and guidelines could have a material effect on AKITA’s business, financial condition, results of operations and cash flows. 25 AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSISincreasingly is becoming Cybersecurity AKITA’s business reliant on information technology for delivery of services to its customers both in the field and in the office. An increasing reliance on information technology exposes the Company to cybersecurity issues through either malicious attacks, unauthorized access or human error. These issues could lead to disruption of services, potential loss of information or improper use of assets, any of which could have a material effect on the Company’s reputation and financial position. Safety Issues The Company is governed by industry safety standards in both Canada and the United States. These regulatory standards outline safety frameworks that serve as the minimum baseline for AKITA’s safety policies and procedures. Failure to comply with these guidelines could result in a reduction in demand for the Company’s services as safety performance is an important criteria for contractor selection by AKITA’s customers and could have a material financial impact to the Company. Litigation and Unknown Liabilities From time to time, AKITA is subject to legal proceedings relating to its business. Legal actions against the Company may have a material impact on the Company’s financial position despite having insurance to cover such claims. The Company’s assessment of the financial impact of these matters is based on historical claims and management’s assessment of the likelihood of such a claim resulting in a material financial impact to the Company. Carbon Emissions, Climate Change Activism and Environmental Regulations While AKITA’s operations, and those of its customers, are subject to numerous laws, regulations and guidelines governing the management, transportation and disposal of hazardous substances and other waste materials and otherwise relating to the protection of the environment, the trend in environmental regulation has been to impose more restrictions and limitations on activities that may impact the environment, particularly regarding the generation of carbon emissions. AKITA operates in jurisdictions that have regulated, or proposed to regulate, industrial carbon emissions. Laws and regulations implemented to reduce carbon emissions have potential to impose significant compliance costs on the oil and gas, potash and mining companies that the Company provides drilling services for. Consequently, future oil and gas, potash and mining development could face increased operating costs relating to increased carbon regulation which could result in a reduced demand for the drilling services that AKITA provides. In recent years, public support for climate change action and pressure by climate activists to shift from fossil fuels to alternative and renewable energy technology has grown. 26 Climate change activism impact could reduce demand for hydrocarbons in favour of lower carbon intense fuels. Further, within Canada, increased climate change activism has translated to opposition to new pipeline approvals, to ongoing oil sands development and to the practice of hydraulic fracturing. In the US, the Biden administration has implemented restrictions of drilling permits on federal lands, has stopped the construction of the Keystone pipeline and most recently has implemented a moratorium on new LNG terminal expansion. Laws, regulations and guidelines relating to carbon emissions, spills, releases, and discharges of hazardous substances or other waste materials into the environment, requiring removal or remediation of pollutants or contaminants are increasingly becoming more stringent and can impose civil and criminal penalties for violations. Some of the laws, regulations and guidelines that apply to AKITA’s operations also authorize the recovery of natural resource damages by governmental authorities, injunctive relief and the imposition of stop, control, remediation and abandonment orders. The costs arising from compliance with such laws, regulations and guidelines may be material to AKITA. While AKITA maintains liability insurance, including insurance for environmental claims, there can be no assurance that such insurance will continue to be available to AKITA on commercially reasonable terms, that the possible types of liabilities that may be incurred by AKITA will be covered by AKITA’s insurance, or that the dollar amount of such liabilities will not exceed AKITA’s policy limits. Even a partially uninsured claim, if successful and of sufficient magnitude, could have a material adverse effect on AKITA’s business, results of operations and prospects. Key Management The success and growth of AKITA are dependent upon its key management personnel. The loss of services of any of such persons without suitable replacements could have a material adverse effect on the business and operations of AKITA. While this risk is mitigated by ongoing succession planning, no assurance can be provided that AKITA will be able to retain key management members. fuel Energy Alternatives AKITA’s management cannot predict the impact of changing demand for crude oil and natural gas products. Fuel requirements, conservation measures, alternative opposition to fossil fuel energy, increasing consumer demand for alternatives to crude oil and gas and technological advances in fuel economy and energy generation devices could reduce the demand for crude oil, natural gas and other liquid hydrocarbons. Any major change in demand for crude oil, natural gas or other liquid hydrocarbons could result in a reduction in the demand for drilling services and could have a material adverse effect on AKITA’s business, financial condition, results of operations and cash flow. AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSISPandemic Risk On March 11, 2020, the World Health Organization declared a global pandemic in relation to the spread of COVID-19. As the virus spread across the world, many businesses closed and isolation and social distancing practices were implemented to reduce the spread. The virus and its impact on transacting business resulted in a decline in the world economy. Among other effects, demand for oil decreased materially over the balance of 2020, which resulted in a significant reduction in demand for the Company’s drilling services. In addition to the reduced demand for drilling services, the pandemic presented operational challenges for the Company’s staff and rig crews as an outbreak of COVID-19 at a rig site could lead to suspended or cancelled operations. The possibility of future pandemics and their impact cannot be estimated at this time but could have a significant impact on the Company and demand for the drilling services. Seasonal Nature of Industry In Canada, the level of activity in the contract drilling industry, particularly for conventional rigs, is influenced by seasonal weather patterns. Spring breakup, which typically occurs between mid-March and mid-June, makes the ground unstable leaving many secondary roads temporarily incapable of supporting the weight of heavy equipment, thereby reducing drilling activity levels. In addition, during excessively rainy periods, equipment moves may be delayed, thereby adversely affecting revenue. Typically, there is greater demand for contract drilling services in the winter as freezing permits the movement and operation of heavy equipment. Drilling activities tend to increase in the fall as the ground begins to freeze and peak in the winter months of November through February as areas having muskeg conditions also become accessible to drilling operations. Variability in the weather can therefore create unpredictability in activity and utilization rates. Unusually warm weather may limit access to drilling sites and could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows. The Permian Basin, where AKITA primarily conducts its US drilling operations, is infrequently subject to weather constraints, but may experience operational restrictions for other reasons. These restrictions could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows. Operating Hazards AKITA’s operations are subject to numerous hazards inherent to the drilling industry, including but not limited to: fires or explosions, hydrocarbon influx or kicks, loss of well control, well blow-outs, cratering, collapse of the well, damage to, or loss of, drilling equipment and equipment lost down the hole. AKITA’s insurance policies and contractual indemnity rights may not adequately cover all losses, and therefore, the Company may not have adequate insurance coverage or rights to indemnity for all risks. Pollution and environmental risks may not be fully insurable. AKITA generally attempts to obtain contractual protection against uninsured operating risks from its customers. However, customers who provide contractual indemnification protection may not in all cases maintain adequate insurance or otherwise have the financial resources indemnification obligations. necessary AKITA’s indemnification arrangements may not adequately protect it against liability or loss from all operating hazards. Further, certain states in the US where AKITA operates have anti-indemnity legislation that could preclude operator indemnification in certain circumstances. The occurrence of a significant event that has not been fully insured or indemnified against, the failure of a customer to meet its indemnification obligations to the Company, or the applicability of anti-indemnification legislation could materially and adversely affect the results of operations and financial condition of the Company. insurance or to support their Dilution AKITA’s articles permit the issuance of an unlimited number of Class A Non-Voting and Class B Common shares, and the Company may make future acquisitions or enter into financings or other transactions involving the issuance of securities of AKITA which may be dilutive. Supply Chain Risk AKITA purchases equipment, raw materials, components and parts from suppliers located in Canada and the US, and from time to time, international suppliers. The recent supply chain disruptions manifested in reduced inventory for many of the Company’s suppliers. Recognizing the risks presented by the disruptions to the supply chain, AKITA’s operations team aims to anticipate the equipment, raw materials, components and parts it may need with sufficient lead time to procure same. Notwithstanding this effort, however, ongoing supply chain disruptions could result in our vendors delaying delivery of, or being unable to deliver, such equipment, raw materials, components or parts when ordered. As drilling activity increases, so too does the risk of an undersupplied inventory of equipment, raw materials, components and parts. In the event the Company is not able to secure equipment, raw materials, components or parts that are critical to AKITA’s operations, it could force the Company to suspend operations and have a material adverse effect on AKITA’s business and financial condition. 27 AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS Risk Management AKITA manages its risks by: • maintaining a conservative balance sheet that includes a low cost structure for the Company; • improving the skills of its employees through training programs; • having its risk management committee deliberate periodically to assess, evaluate and develop a plan to deal with the risk conditions for the Company; • maintaining effective systems of internal control to safeguard assets and ensure timely and accurate reporting of financial results; • developing an annual strategic business plan and budget to help determine the levels of capital and operating expenditures; • continuously developing long-term relationships with a core base of customers who maintain ongoing drilling programs during all phases of the economic cycle; • obtaining multi-year drilling contracts whenever possible, but especially when tailoring rig construction or reconfiguration to customer demand; • maintaining an efficient fleet of drilling rigs through a rigorous ongoing maintenance program; • employing well-trained, experienced and responsible employees; • ensuring that all employees comply with clearly defined safety standards; • reducing health, safety and operational risk by maintaining its rigorous safety policies and procedures; • maintaining comprehensive insurance policies with respect to its operations; • reducing environmental risk through the implementation of industry-leading standards, policies and procedures; • exploring opportunities to decarbonize its operations; • developing and maintaining a succession plan to provide for a smooth transition in the event of key personnel turnover; • diversifying into the US market where demand for drilling services is correlated to West Texas Intermediate pricing rather than Western Canadian Select pricing as in Canada, which allows AKITA to generate revenue denominated in US currency; and • expanding beyond oil and natural gas to drill geothermal wells, carbon capture wells and hydrogen storage wells in an aim to ensure it plays a meaningful role in energy transition. Disclosure Controls and Internal Controls Over Financial Reporting As of December 31, 2023, the Company’s management evaluated the effectiveness of the Company’s disclosure controls and procedures as required by the Canadian Securities Administrators (“CSA”). This evaluation was performed under the supervision of, and with the participation of the Chief Executive Officer (“CEO”) and the Vice President, Finance and Chief Financial Officer (“CFO”). Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in documents filed with the securities regulatory authorities is recorded, processed, summarized and reported on a timely basis. The controls also seek to assure that this information is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions on required disclosure. Based on this evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective at December 31, 2023. As of December 31, 2023, management evaluated the effectiveness of the Company’s internal control over financial reporting as required by the CSA. This evaluation was performed utilizing the framework developed by the Committee of Sponsoring Organizations of the Treadway Commission, as revised effective May 14, 2013 under the supervision of, and with the participation of the CEO and CFO. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS. Based on this evaluation, the CEO and CFO have concluded that the Company’s internal control over financial reporting was effective at December 31, 2023. 28 AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSISThere was no change in the Company’s internal control over financial reporting that occurred during the period that began on October 1, 2023 and ended December 31, 2023 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. There was also no change in the Company’s internal control over financial reporting that has occurred since December 31, 2023. Non-GAAP and Supplementary Financial Measures Non-GAAP Financial Measures Adjusted Revenue and Adjusted Operating and Maintenance Expenses Revenue and operating and maintenance expenses in AKITA’s Canadian operating segment include revenue and expenses from AKITA’s wholly-owned drilling rigs as well as its share of joint venture revenue and expenses. Excluded from the revenue and expenses in AKITA’s Canadian and US operating segment are flow through charges that are billed to operators and repaid to the Company. The volume and timing of the flow through charges can artificially impact the operational per day analysis and as a result management and certain investors may find the comparability between periods is improved when these flow through charges are excluded from revenue per day and operating and maintenance expense per day. The flow through charges do not have any impact on the Company’s net earnings as the amounts offset each other. Adjusted Funds Flow from Operations Adjusted funds flow from operations is not a recognized GAAP measure under IFRS and users of this MD&A should note that AKITA’s method of determining adjusted funds flow from operations may differ from methods used by other companies, and includes cash flow from operating activities before working capital changes, equity income from joint ventures, and income tax amounts paid or recovered during the period. Nonetheless, management and certain investors may find adjusted funds flow from operations to be a useful measurement to evaluate the Company’s operating results at year-end and within each year, since the seasonal nature of the business affects the comparability of non-cash working capital changes both between and within periods. $Thousands Net cash from operating activities Interest paid Interest expense Post-employment benefits paid Equity income from joint ventures Change in non-cash working capital Adjusted funds flow from operations For the three months ended For the year ended December 31, 2023 December 31, 2022 December 31, 2023 December 31, 2022 17,523 1,243 (1,294) 79 1,488 (11,862) 7,177 8,035 2,142 (2,181) 378 2,001 5,769 35,567 6,292 (6,502) 322 8,184 1,659 16,144 45,522 18,198 6,622 (6,777) 584 5,954 10,232 34,813 Terms Defined in the Company’s Credit Facility The following terms are defined in the Company’s credit facility and are used in the calculation of the Company’s financial covenants: “EBITDA" means, for any fiscal period, the Net Income of the Canadian Borrower on a consolidated basis in accordance with GAAP but without duplication, plus (in each case, for the Canadian Borrower on a consolidated basis but without duplication): 29 AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSISa) b) c) d) e) f) g) h) all amounts deducted in the calculation of Net Income in respect of Interest Expense; all amounts deducted in the calculation of Net Income in respect of the provision for income taxes (in accordance with Generally Accepted Accounting Principles); all amounts deducted in the calculation of Net Income in respect of non-cash items including, without limitation, depletion, accretion (to the extent not included in clause (a) above), depreciation, amortization and future income tax liabilities; all amounts deducted in the calculation of Net Income in respect of equity loss, minority interests, extraordinary losses, non- recurring losses (including losses on the sale of property, plant and equipment) and any non-cash impairment charges and any other non-cash charges; all cash distributions received in such period from persons which are not Guarantors; all amounts deducted in the calculation of Net Income in respect of discretionary management bonuses, fees and other compensation declared and payable to the directors or shareholders of the Canadian Borrower on commercially reasonable terms. For the avoidance of doubt, bonuses, fees or other compensation that the Canadian Borrower, on a consolidated basis, is contractually required to pay may not be added back; all amounts deducted in the calculation of Net Income in respect of share based compensation; unrealized foreign exchange losses incurred in the ordinary course of business; "Funded Debt" means, as of any date of determination, with respect to the Canadian Borrower on a consolidated basis, all Indebtedness, but excluding obligations owing between any Loan Parties and less all cash and Cash Equivalents denominated in Canadian Dollars and U.S. Dollars held by the Loan Parties up to a maximum of $10,000,000 and which are: (i) in accounts with the Agent which are subject to Perfected Security Interests and rights of set-off in favour of the Agent; or (ii) in accounts with a financial institution acceptable to the Agent (acting reasonably) which are subject to Perfected Security Interests and a blocked account control agreement in favour of and satisfactory to the Agent. "Interest Expense" means for any fiscal period, in respect of the Canadian Borrower on a consolidated basis as determined in accordance with GAAP, the aggregate cost of credit outstanding during that period including, without limitation, interest charges (including for postponed Indebtedness), capitalized interest, the interest component of Financial Leases, fees payable in respect of letters of credit and letters of guarantee, discounts incurred and fees payable in respect of bankers' acceptance advances. "Eligible Accounts Receivable" means at any time, any Account Receivable of the Loan Parties (net of any credit balance, returns, trade discounts, or unbilled amounts or retention) that meets and at all times continues to meet all of the standards of eligibility (and the Canadian Borrower by including such account in any computation of the Borrowing Base shall be deemed to represent and warrant to the Agent and the Lenders that to the knowledge of the Canadian Borrower all of the following statements are accurate and complete with respect to such account): a) b) c) d) e) f) it is a valid and legally enforceable obligation of the applicable Account Debtor; such account is genuine as appearing on its face or as represented in the books and records of the Canadian Borrower on a consolidated basis; such account is free from valid claims regarding rescission, cancellation or avoidance, whether by operation of Applicable Law or otherwise, and except to the extent of any reduction made pursuant to paragraph (e) of this definition is net of all then applicable holdbacks and prepayment credits; such account does not relate to services not as of yet completed; without limiting the generality of paragraph (c) of this definition, is not subject to any offset, counterclaim or other defence on the part of the Account Debtor or any claim by the Account Debtor that denies liability in whole or in part; and, if the Account Debtor denies liability only in part, the undisputed portion of the Account Receivable shall be allowed so long as the Account Debtor has agreed that it will pay such portion not in dispute in accordance with its terms; such Account Receivable is not outstanding more than 90 days after billing date, provided that the under 90 day portion may be included; (i) where the over 90 day portion is less than 10% of all Accounts Receivable of such Account Debtor and its Related Parties; (ii) the Agent and the Lenders have nevertheless designated the Account Receivable as good; or (iii) where the Account Debtor has long term debt obligations rated no worse than BBB by S&P or DBRS Limited; 30 AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSISg) it is owed by an Account Debtor whose principal place of business is located in Canada or the United States, unless otherwise supported by a letter of credit acceptable to the Agent, in its discretion; h) it is denominated in either Canadian Dollars or United States Dollars; i) j) k) l) it is subject to a Perfected Security Interest in favour of the Agent; such account is, and at all times will be, free and clear of all Security Interests other than Priority Payables (to the extent deducted in calculating the Borrowing Base) and any Permitted Encumbrances; such account is not in respect of a builders lien or similar holdbacks; the Account Receivable does not arise from a sale or lease to or rendering of services to a Related Party of any Loan Party, or, in each case, to their respective Affiliates; Any Eligible Accounts Receivable which are at any time Eligible Accounts Receivable but which subsequently fail to meet any of the foregoing requirements shall immediately cease to be an Account Receivable. "Tangible Net Worth" means, as of any date of determination, with respect to the Canadian Borrower on a consolidated basis, the sum of Shareholders' Equity and Subordinated Debt, less: a) any amount that would be included on the consolidated balance sheet of the Canadian Borrower prepared in accordance with GAAP as an investment in or as amounts owed by any Related Party which does not constitute Subordinated Debt; and b) any amount included in the assets column on the consolidated balance sheet of the Canadian Borrower in respect of Intangibles. Non-GAAP Ratios “Adjusted funds flow from operations per share” is calculated on the same basis as net loss per class A and class B share basic and diluted, utilizing the basic and diluted weighted average number of class A and class B shares outstanding during the periods presented. “Adjusted revenue per operating day” may be useful to analysts, investors, other interested parties and management as a measure of pricing strength and is calculated by dividing adjusted revenue by the number of operating days for the period. “Adjusted operating and maintenance expenses per operating day” may be useful to analysts, investors, other interested parties and management as it demonstrates a degree of cost control and provides a proxy for specific inflation rates incurred by the Company. Supplementary Financial Measures A supplementary financial measure: a) b) c) d) is, or is intended to be, disclosed on a periodic basis to depict the historical or expected future financial performance, financial position or cash flow of the Company; is not presented in the financial statements of the Company; is not a non-GAAP financial measure; and is not a non-GAAP ratio. Supplementary financial measures presented and discussed in this MD&A are as follows: • “Operating Margin %” – represents operating margin as a percentage of revenue. • “Adjusted Operating Margin %” – represents adjusted operating margin as a percentage of adjusted revenue. • “Utilization” – represents the operating days achieved divided by the maximum operating days based on the number of days in the year and the rigs available. 31 AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSISForward-Looking Statements From time to time AKITA makes forward-looking statements. These statements include but are not limited to comments with respect to AKITA’s objectives and strategies, financial condition, results of operations, the outlook for industry and risk management discussions. In particular, forward-looking information in this MD&A includes, but is not limited to, references to the outlook for the North American economy and the drilling industry (including the demand for drilling services, customer exploration and development budgets and drilling programs, day rates, active rig count, supply issues and labour shortage), pipeline capacity in Canada, the demand for oil and natural gas, crude oil and natural gas prices, future investment, the Company's SAGD drilling activity, the Company's existing credit facility, the Company's operating performance and cash flows, future investment, debt repayment, tax rates, the Company's capital program, advantages associated with the percentage of pad drilling rigs in the Company's Canadian fleet, and the expansion of the Company's presence in the Montney deep gas basin and its role in drilling potash and in achieving energy transition targets, and the upgrading of one of the Company’s oil sands rigs for deep gas drilling. Although the Company believes that the expectations reflected in the forward-looking information are reasonable based on the information available on the date such statements are made and processes used to prepare the information, such statements are not guarantees of future performance and no assurance can be given that these expectations will prove to be correct. By their nature, these forward-looking statements involve numerous assumptions, inherent risks and uncertainties, both general and specific, and therefore carry the risk that the predictions and other forward-looking statements will not be realized. Readers of this MD&A are cautioned not to place undue reliance on these statements as a number of important factors could cause actual future results to differ materially from the plans, objectives, estimates and intentions expressed in such forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of, among other things: - Prevailing economic conditions including world crude oil prices, North American natural gas prices and global liquified natural gas (LNG) demand; - Fluctuations and uncertainty surrounding the future price of commodities; - The impact of global supply chain disruptions; - The impact of the level of industry activity for Canadian and US crude oil and natural gas exploration and development on the demand, pricing and terms for contract drilling services; - The impact of changes in demand for crude oil, natural gas or other liquid hydrocarbons on the demand and pricing for drilling services; - The level of exploration and development activity carried on by AKITA’s customers; - Increased competition, including as a result of the movement of drilling rigs among regions or reduced levels of activity in the oil and gas industry; - Energy transition targets and industry’s ability to achieve them; - The loss of one or more major customers; - Changes to existing laws, regulations and government policies, and the introduction of new laws and regulations, including those governing the management, transportation and disposal of hazardous substances and other waste materials and otherwise relating to the protection of the environment; - The impact of climate change activism; - Access to capital markets including AKITA’s ability to obtain additional debt or equity financing; - Variations in interest rates and principal repayments under the terms of the Company's credit facility; - The Company's ability to make scheduled payments of principal and interest on, or to refinance, its indebtedness; - The sufficiency of AKITA's assets to repay indebtedness under its credit facility in the event repayment were to be accelerated following an event of default; - The impact of dilutive financings or other transactions; 32 AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSIS- Fluctuations in foreign exchange, interest and tax rates; - The adequacy of AKITA's insurance coverage or contractual indemnity rights to cover losses, and the applicability of anti- indemnification legislation; - The Company's ability to attract, develop and maintain a skilled and safe workforce and maintain a cost structure that varies with activity levels; - The availability of qualified management personnel; - A general reduction in rates in the drilling industry caused by a capital overbuild We caution that the foregoing list of factors is not exhaustive and that while relying on forward-looking statements to make decisions with respect to AKITA, investors and others should carefully consider the foregoing factors, as well as other uncertainties and events, prior to making a decision to invest in AKITA. Except where required by law, the Company does not undertake to update any forward- looking statement, whether written or oral, that may be made from time to time by it or on its behalf. Upcoming Accounting Standard Changes Certain new or amended standards or interpretations have been issued by the International Accounting Standards Board (“IASB”) or the International Financial Reporting Interpretations Committee. One amendment became applicable for the current reporting period and the Company had to change its accounting policies as a result. The amendment below was applied and did not have a material impact on the consolidated financial statements: • IAS 12, “Income Taxes”, has been amended to recognize deferred tax on particular transactions that, on initial recognition, give rise to equal amounts of taxable and deductible temporary differences. The following amendments have not yet been early adopted and are not expected to have a material impact on the consolidated financial statements. They are effective for reporting periods beginning on or after January 1, 2024: • • IAS 1, “Presentation of Financial Statements”, has been amended to clarify how to classify debt and other liabilities as either current or non-current. IAS 1, “Presentation of Financial Statements”, has been amended to clarify how to determine that an entity has the right to defer settlement for a liability arising from a loan arrangement for at least twelve months after the reporting period. There are no other standards and interpretations that have been issued, but are not yet effective, that the Company anticipates will have a material effect on the financial statements once adopted. Other Information Additional information is provided by the Company in its Annual Information Form, Notice of Annual Meeting and Information Circular all dated March 21, 2024. Copies of these documents including additional copies of the Annual Report for the year ended December 31, 2023 may be obtained upon request from the Vice President, Finance and Chief Financial Officer of the Company at 1000, 333 – 7th Avenue S.W., Calgary, Alberta, T2P 2Z1 or at www.sedarplus.ca. 33 AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S DISCUSSION & ANALYSISMANAGEMENT’S RESPONSIBILIT Y FOR FINANCIAL REPORTING MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying consolidated financial statements of AKITA Drilling Ltd., Management's Discussion and Analysis and other information relating to AKITA contained in this Annual Report are the responsibility of management and have been approved by the Board of Directors. The consolidated financial statements have been prepared in accordance with accounting policies detailed in the notes to the consolidated financial statements and are in conformity with International Financial Reporting Standards (also referred to as “IFRS”) using methods appropriate for the industry in which the Company operates. Where necessary, management made estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements including estimates related to transactions and operations that were incomplete at year-end, the useful lives of drilling rigs and other assets, the measurement of the defined benefit pension liability, assumptions around future income tax calculations and the measurement of asset impairments. Financial is consistent with the consolidated financial statements except as noted. this Annual Report information throughout 34 34 AKITA DRILLING | 2023 Annual Report AKITA DRILLING | 2023 Annual ReportMANAGEMENT’S RESPONSIBILIT Y FOR FINANCIAL REPORTING Management ensures the integrity of the consolidated financial statements by maintaining a system of internal control. This system of internal control is based on the control criteria framework of the Committee of Sponsoring Organizations of the Treadway Commission published in their report titled, Internal Control – Integrated Framework, as revised effective May 14, 2013. The system is designed to provide reasonable assurance that transactions are executed as authorized and accurately recorded; that assets are safeguarded; and that accounting records are sufficiently reliable to permit the preparation of financial statements that conform in all material respects with accounting principles generally accepted in Canada. The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports is disclosed, processed and summarized and reported within specified time periods. Internal controls are monitored through self-assessments and are reinforced through a Code of Business Conduct, which sets forth the Company’s commitment to conduct business with integrity, and within both the letter and the spirit of the law. PricewaterhouseCoopers LLP, the Company's independent auditors, have conducted an examination of the consolidated financial statements and have had full access to the Audit Committee. The Board of Directors, through its Audit Committee comprised of four independent directors as defined in National Instrument 52-110 – Audit Committees (“NI 52-110”), oversees management's responsibilities for financial reporting. The Audit Committee meets regularly with management and the independent auditors to discuss auditing and financial matters and to gain assurance that management is carrying out its responsibilities Colin Dease President and Chief Executive Officer Darcy Reynolds Vice President, Finance and Chief Financial Officer March 21, 2024 AKITA DRILLING | 2023 Annual Report 35 35 AKITA DRILLING | 2023 Annual Report Independent auditor’s report To the Shareholders of AKITA Drilling Ltd. Our opinion In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of AKITA Drilling Ltd. and its subsidiaries (together, the Company) as at December 31, 2023 and 2022, and its financial performance and its cash flows for the years then ended in accordance with IFRS Accounting Standards as issued by the International Accounting Standards Board (IFRS Accounting Standards). What we have audited The Company’s consolidated financial statements comprise:      the consolidated statements of financial position as at December 31, 2023 and 2022; the consolidated statements of net income (loss) and comprehensive income (loss) for the years then ended; the consolidated statements of changes in shareholders’ equity for the years then ended; the consolidated statements of cash flows for the years then ended; and the notes to the consolidated financial statements, comprising material accounting policy information and other explanatory information. Basis for opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements. PricewaterhouseCoopers LLP Suncor Energy Centre, 111 5th Avenue South West, Suite 3100, Calgary, Alberta, Canada T2P 5L3 T.: +1 403 509 7500, F.: +1 403 781 1825, Fax to mail: ca_calgary_main_fax@pwc.com “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. 36 AKITA DRILLING | 2023 Annual ReportINDEPENDENT AUDITOR'S REPORTKey audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the year ended December 31, 2023. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter How our audit addressed the key audit matter Our approach to addressing the matter included the following procedures, among others: • Evaluated management’s assessment of indicators of impairment and impairment reversal, which included the following:  Assessed the completeness of external or internal factors that could be considered as indicators of impairment or impairment reversal of the Company’s PP&E.  Assessed significant changes in the market capitalization of the Company, which may indicate a change in value of the Company’s net assets.  Assessed significant changes in the condition of the drilling rig assets of the Company, which may indicate a change in value of the drilling rig assets.  Assessed changes in oil and gas prices, forecasted activity or earnings and changes in interest rates by considering the current and past performance of the CGUs, external market data and evidence obtained in other areas of the audit, as applicable. Assessment of indicators of impairment or impairment reversal for property, plant and equipment (PP&E) Refer to note 10 – Property, plant and equipment and note 8 – Segmented information to the consolidated financial statements. As at December 31, 2023, the total net book value of PP&E, which mainly consists of drilling rig assets, amounted to $197 million, of which $57 million and $140 million related to the Canadian and US Cash Generating Units (CGUs), respectively. At each reporting period, management considers both internal and external factors (indicators) when assessing whether there are indicators of impairment. When impairment indicators of PP&E exist, an impairment assessment is conducted at the level of the CGUs (a group of assets that generate independent cash inflows). An impairment loss is recognized when the carrying amount of a CGU exceeds its recoverable amount. Impairment losses recognized in prior periods are assessed at each reporting date by management for any indicators that the impairment losses may no longer exist or may have decreased. In the event that an impairment loss reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but only to the extent that the carrying amount does not exceed the amount that would have been determined had no impairment loss been recognized on the asset in prior periods. As at December 31, 2023, management concluded that 37 AKITA DRILLING | 2023 Annual ReportINDEPENDENT AUDITOR'S REPORTHow our audit addressed the key audit matter Key audit matter no indicators of impairment or impairment reversal existed. Management applies significant judgment in assessing whether indicators of impairment or impairment reversal exist that would necessitate either impairment testing or impairment reversal calculations. Internal and external factors such as (i) a significant change in the market capitalization of the Company’s share price; (ii) changes in conditions of drilling rig assets; (iii) changes in oil and gas prices in the market; (iv) changes in forecasted activity or earnings; and (v) changes in interest rates, are evaluated by management in determining whether there are any indicators of impairment or impairment reversal. We considered this a key audit matter due to (i) the significance of the PP&E balance and (ii) the significant audit effort and subjectivity in applying audit procedures to assess the internal and external factors evaluated by management in its assessment of indicators of impairment or impairment reversal, which required significant management judgment. Other information Management is responsible for the other information. The other information comprises the Management’s Discussion and Analysis, which we obtained prior to the date of this auditor’s report and the information, other than the consolidated financial statements and our auditor’s report thereon, included in the annual report, which is expected to be made available to us after that date. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. 38 AKITA DRILLING | 2023 Annual ReportINDEPENDENT AUDITOR'S REPORTResponsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS Accounting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. 39 AKITA DRILLING | 2023 Annual ReportINDEPENDENT AUDITOR'S REPORT Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.  Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.  Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resulting in this independent auditor’s report is Reynold Tetzlaff. Chartered Professional Accountants Calgary, Alberta March 21, 2024 40 AKITA DRILLING | 2023 Annual ReportINDEPENDENT AUDITOR'S REPORTLeading the Drilling Industry SAFETY ENVIRONMENTAL STEWARDSHIP FOUNDATIONAL VALUES PERFORMANCE 41 AKITA DRILLING | 2023 Annual ReportINDEPENDENT AUDITOR'S REPORTConsolidated Statements of Financial Position $Thousands ASSETS Current Assets Cash Accounts receivable Prepaid expenses and other Non-current Assets Other long-term assets Investments in joint ventures Right-of-use assets Property, plant and equipment TOTAL ASSETS LIABILITIES Current Liabilities December 31, 2023 December 31, 2022 $ 11,187 $ 13,311 47,098 812 59,097 1,420 5,121 718 46,868 1,599 61,778 1,551 2,887 1,515 197,284 200,550 $ 263,640 $ 268,281 Note 12 Note 11 Note 9 Note 10 Accounts payable and accrued liabilities Note 12 $ 30,695 $ 29,461 Deferred revenue Current portion of lease obligations Non-current Liabilities Risk management contracts Deferred income taxes Share-based compensation plans Employee future benefits Lease obligations Long-term debt Total Liabilities SHAREHOLDERS' EQUITY Class A and Class B shares Contributed surplus Accumulated other comprehensive income Retained earnings (deficit) Total Equity TOTAL LIABILITIES AND EQUITY Note 15 Note 12 Note 7 Note 18 Note 19 Note 15 Note 14 Note 17 627 645 31,967 196 719 935 4,091 228 69,542 107,678 146,348 6,064 1,043 2,507 155,962 206 990 30,657 290 644 558 3,964 803 93,514 130,430 146,306 5,693 1,760 (15,908) 137,851 $ 263,640 $ 268,281 The accompanying notes are an integral part of these financial statements. Approved by the Board, Director Director 42 AKITA DRILLING | 2023 Annual ReportCONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Net Income (Loss) & Comprehensive Income (Loss) $Thousands, except per share amounts REVENUE COSTS AND EXPENSES Operating and maintenance Depreciation and amortization Selling and administrative Total Costs and Expenses For the Year Ended December 31, 2023 2022 Note 4 $ 225,479 $ 200,996 Note 6 Note 10 Note 6 167,029 28,510 16,120 211,659 151,884 30,263 14,541 196,688 Revenue Less Costs and Expenses 13,820 4,308 EQUITY INCOME FROM JOINT VENTURES Note 11 8,184 5,954 OTHER INCOME (LOSS) Interest income Interest and financing expense Unrealized gain (loss) on risk management contracts Gain on sale of assets Net other gains Total Other Loss Note 5 Note 12 373 (6,502) 95 2,199 376 (3,459) 41 (6,777) (290) 93 210 (6,723) Income Before Income Taxes 18,545 3,539 Income tax expense (recovery) Note 7 130 (749) NET INCOME FOR THE PERIOD ATTRIBUTABLE TO SHAREHOLDERS 18,415 4,288 OTHER COMPREHENSIVE INCOME INCOME (LOSS) Items that will not subsequently be reclassified to profit or loss: Remeasurement of pension liability and deferred tax Items that may subsequently be reclassified to profit or loss: Foreign currency translation adjustment Total Other Comprehensive Income (Loss) (176) 827 (541) (717) 968 1,795 COMPREHENSIVE INCOME FOR THE PERIOD ATTRIBUTABLE TO SHAREHOLDERS $ 17,698 $ 6,083 NET INCOME PER CLASS A AND CLASS B SHARE Note 3 Basic Diluted $ 0.46 $ 0.11 $ 0.46 $ 0.11 The accompanying notes are an integral part of these financial statements. 43 AKITA DRILLING | 2023 Annual ReportCONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Changes in Shareholders’ Equity Attributable to the Shareholders of the Company Class A Non-Voting Shares Class B Common Shares Total Class A and Class B Shares Contributed Surplus Accumulated Other Comprehensive Income (Loss) Retained Earnings (Deficit) Total Equity $ 144,898 $ 1,366 $ 146,264 $ 5,452 $ (35) $ (20,196) $ 131,485 - - - 42 - - - - - - - - - 4,288 4,288 - - 968 - - - 827 - 42 - (9) 250 - - - - 968 827 33 250 $ 144,940 $ 1,366 $ 146,306 $ 5,693 $ 1,760 $ (15,908) $ 137,851 - - - 42 - - - - - 18,415 18,415 - - - - - - (541) - (541) - - (176) - (176) 42 - (16) 387 - - - - 26 387 $ 144,982 $ 1,366 $ 146,348 $ 6,064 $ 1,043 $ 2,507 $ 155,962 $Thousands BALANCE AT DECEMBER 31, 2021 Net loss for the year Foreign currency translation adjustment Remeasurement of pension liability Stock options exercised Stock options expense BALANCE AT DECEMBER 31, 2022 Net income for the year Foreign currency translation adjustment Remeasurement of pension liability Stock options exercised Stock options expense BALANCE AT DECEMBER 31, 2023 The accompanying notes are an integral part of these financial statements. 44 AKITA DRILLING | 2023 Annual ReportCONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Cash Flows $Thousands OPERATING ACTIVITIES Net income Non-cash items included in net income: Depreciation and amortization Deferred income tax recovery Defined benefit pension plan expense Stock options expense Share-based compensation expense Gain on sale of assets Gain on termination of lease Unrealized (gain) loss on risk management contracts Change in non-cash working capital Equity income from joint ventures Post-employment benefits paid Interest expense Interest paid Net Cash From Operating Activities INVESTING ACTIVITIES Capital expenditures Change in non-cash working capital related to capital Distributions from investments in joint ventures Change in long-term assets Proceeds from sale of assets Net Cash Used In Investing Activities FINANCING ACTIVITIES Change in debt Change in lease obligations Proceeds from exercise of stock options Loan commitment fee Net Cash From (Used In) Financing Activities Effect of Foreign Exchange on Cash Increase (Decrease) In Cash Cash, beginning of year CASH, END OF YEAR The accompanying notes are an integral part of these financial statements. For The Year Ended December 31, 2023 2022 18,415 $4,288 Note 10 Note 7 Note 19 Note 18 Note 18 Note 12 Note 13 Note 11 Note 10 Note 13 Note 11 28,510 130 - 387 377 (2,199) (3) (95) (1,659) (8,184) (322) 6,502 (6,292) 35,567 (24,592) 3,872 5,950 (6) 2,788 (11,988) Note 14 (24,000) (913) 26 (275) (25,162) (541) (2,124) 13,311 30,263 (749) 18 250 546 (93) - 290 (10,232) (5,954) (584) 6,777 (6,622) 18,198 (17,982) (1,130) 5,443 (62) 133 (13,598) 7,283 (1,071) 33 (275) 5,970 968 11,538 1,773 $ 11,187 $ 13,311 45 AKITA DRILLING | 2023 Annual ReportCONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES CONTENTS 47 49 53 BUSINESS AND ENVIRONMENT RESULTS FOR THE YEAR LONG-TERM ASSETS 1. General Information 2. Basis of Preparation 47 47 3. Net Income (Loss) per Share 4. Revenue 5. Interest and Financing Expense 6. Expenses by Nature 7. Income Taxes 8. Segmented Information 58 62 WORKING CAPITAL DEBT AND EQUITY 12. Financial Instruments 58 14. Debt 13. Change in Non-Cash Working Capital 62 15. Lease Obligations 16. Capital Management 17. Share Capital 9. Right-of-Use Assets 10. Property, Plant and Equipment 11. Investments in Joint Ventures 53 54 57 66 PERSONNEL 18. Share-Based Compensation Plans 19. Employee Future Benefits 66 70 49 49 50 51 51 53 62 63 65 65 71 OTHER NOTES 20. Commitments and Contingencies 21. Related Party Transactions 22. New and Upcoming Accounting Standards 71 72 73 46 46 AKITA DRILLING | 2023 Annual Report AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2023 and December 31, 2022 BUSINESS AND ENVIRONMENT 1. General Information AKITA Drilling Ltd. and its subsidiaries (the “Company” or “AKITA”) provide contract drilling services, primarily to the oil and gas industry, in Canada and the United States (“US”). The Company owns and operates 35 drilling rigs (33.65 net of joint venture ownership). The Company conducts certain rig operations via joint ventures with First Nations, Métis or Inuit partners whereby rig assets are jointly owned. While joint venture interests are at least 50% owned by the Company, in each case the joint venture is governed on a joint basis. The Company is a limited liability company incorporated and domiciled in Alberta, Canada. The address of its registered office is 1000, 333 – 7th Avenue SW, Calgary, Alberta. The Company is listed on the Toronto Stock Exchange. The Company is controlled by Sentgraf Enterprises Ltd. and its controlling share owner, the Southern family. 2. Basis of Preparation The consolidated financial statements for the year ended December 31, 2023, have been prepared in accordance with International Financial Reporting Standards (“IFRS Accounting Standards”) as issued by the International Accounting Standards Board (“IASB”). These consolidated financial statements have been prepared under the historical cost convention, except as specifically stated within these notes. Material accounting policy information is located throughout the consolidated financial statements along with the required disclosures. These consolidated financial statements were approved by the Company’s Board of Directors on March 21, 2024. Consolidation The consolidated financial statements of the Company consolidate the accounts of AKITA and its subsidiaries which are entities over which the Company has control. Control exists when the Company has the power, directly or indirectly, to direct the relevant activities of an entity so as to obtain benefit from its activities. Subsidiaries are fully consolidated from the date on which control is transferred to the Company and are deconsolidated from the date that control ceases. Inter-company transactions, balances and unrealized gains and losses from inter-company transactions are eliminated on consolidation. 47 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFunctional and Presentation Currency Items included in the financial statements of each of the Company's entities are measured using the currency of the primary economic environment in which the entity operates ("the functional currency"). The functional currency of the Company and its Canadian subsidiaries is the Canadian dollar ("CAD") while the functional currency of its US subsidiaries is the US dollar ("USD"). The consolidated financial statements are presented in CAD, which is the Company's presentation currency. Foreign Currency Translation (i) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year-end exchange rates are recognized in the statement of net income and comprehensive income. (ii) Group companies The results and financial position of foreign operations that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that balance sheet; • income and expenses for each statement of net income and comprehensive income are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and • all resulting exchange differences are recognized in Other Comprehensive Income (“OCI”). Estimates and Judgments The preparation of these consolidated financial statements required management to make estimates and judgments. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable in the circumstances. Actual results could differ materially from these estimates. Estimates and judgments which are material to the consolidated financial statements are found in the following notes: • Note 4 - Revenue • Note 7 - Income Taxes • Note 9 - Right-of-Use Assets • Note 10 - Property, Plant and Equipment • Note 12 – Financial Instruments • Note 19 – Employee Future Benefits 48 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS RESULTS FOR THE YEAR 3. Net Income per Share Basic earnings per share is calculated by dividing the net income for the period attributable to shareholders of the Company by the weighted average number of Class A Non-Voting and Class B Common shares outstanding during the period. Diluted earnings per share is calculated by adjusting the weighted average number of Class A Non-Voting and Class B Common shares outstanding to assume conversion of all dilutive potential Class A Non-Voting shares, typically stock options granted to directors and employees. The calculation is performed for the stock options to determine the number of shares that could have been acquired at fair value (determined as the average quarterly or annual, as appropriate, market share price of the Company’s outstanding Class A Non- Voting shares) based on the monetary value of the subscription rights attached to outstanding stock options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of stock options. Net income ($Thousands) Weighted average outstanding shares Incremental shares for diluted income calculation Weighted average outstanding shares for income per share - diluted Income per share - basic Income per share - diluted 4. Revenue For the Year Ended December 31, 2023 December 31, 2023 $ 18,415 $ 4,288 39,658,520 39,622,805 447,710 467,647 40,106,230 40,090,452 $ 0.46 $ 0.11 $ 0.46 $ 0.11 IFRS 15, "Revenue from Contracts with Customers" – Accounting Policies Revenue is recognized when the Company satisfies a performance obligation by transferring promised goods or services to a customer and the amount recorded is measured at the fair value of the consideration received. A typical contract with a customer includes performance obligations to provide drilling services and rig equipment, which are satisfied over time. Once determined, the transaction price will be allocated to each performance obligation based on stand-alone selling prices. Where stand-alone selling prices are not directly observable, the Company will make an estimate based on expected cost-plus margin. Where possible, the Company will apply the practical expedient not to disclose the transaction price for unsatisfied performance if the performance obligation is part of a contract that has an original expected duration of one year or less. The Company does not expect to have any contracts where the period between the transfer of the promised goods or services to the customer and payment by the customer exceeds one year. Consequently, the Company does not adjust any of the transaction prices for the time value of money. The receipt of unearned contract revenue is recorded as deferred revenue until the contracted passage of time has occurred. Contract cancellation revenue is recognized when both parties to the contract have agreed upon an amount, collection is probable, and the Company does not have any further services to render in order to earn the revenue. 49 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Significant Estimates and Judgments – Relative Stand-Alone Selling Price The majority of the Company’s contracts contain both a lease and a service element. IFRS 15, “Revenue from Contracts with Customers” requires that contract revenue be presented separately from lease revenue. In this case, the transaction price will be allocated to each of the lease and service elements based on the stand-alone selling prices. Where these are not directly observable, they are estimated based on expected cost-plus margin. The Company’s revenue streams are comprised of the following: $Thousands Contract drilling services Rig lease rental Total revenue Significant Customers For the Year Ended December 31, 2023 December 31, 2022 $ 124,119 $ 110,436 101,360 90,560 $ 225,479 $ 200,996 During 2023 two customers (2022 – one customer) provided more than 10% of the Company’s revenue. While the loss of one or more of these customers may have a material adverse effect on the financial results of the Company, in management’s assessment, the future viability of the Company is not dependent upon these major customers. 5. Interest and Financing Expense The following table summarizes the components of interest and financing expense: $Thousands Interest expense Interest expense, lease obligations Interest expense, pension Financing expense, risk management contracts Total interest and financing expense For the Year Ended December 31, 2023 December 31, 2022 $ 6,664 $ 6,267 58 210 (430) 118 155 237 $ 6,502 $ 6,777 50 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS6. Expenses by Nature The Company presents certain expenses in the consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss) by function. The following table presents those expenses by their nature: $Thousands Expenses Salaries, wages and benefits Materials and supplies Repairs and maintenance External services and facilities Total expenses Allocated to: Operating and maintenance Selling and administrative Total expenses 7. Income Taxes For the Year Ended December 31, 2023 December 31, 2022 $ 102,370 $ 96,329 36,971 30,780 13,028 26,113 32,949 11,034 $ 183,149 $ 166,425 $ 167,029 $ 151,884 16,120 14,541 $ 183,149 $ 166,425 Income taxes are comprised of current and deferred income taxes. Current taxes are calculated using tax rates and tax laws that have been enacted or substantively enacted at the end of the reporting year. Deferred tax is recognized, using the liability method, on temporary differences arising between the tax basis of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred taxes are measured using tax rates that are enacted or substantively enacted at the end of the reporting period and are expected to apply when the deferred tax asset is realized or the liability is settled. Deferred tax assets are recognized to the extent that it is probable that the assets can be recovered. Income taxes are comprised of the following: $Thousands Current tax recovery Deferred tax expense (recovery) Total income tax expense (recovery) For the Year Ended December 31, 2023 December 31, 2022 $ - $ - 130 (749) $ 130 $ (749) 51 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSThe following table reconciles the income tax expense (recovery) using a weighted average Canadian federal and provincial rate of 23.70% (2022– 23.57%) to the reported tax recovery. The rate increase is due to changes in the jurisdictions the Company operates in. The reconciling items represent, aside from the impact of tax rate differentials and changes, non-taxable benefits or non-deductible expenses arising from permanent differences between the local tax base and the financial statements. $Thousands Income before income taxes Expected income tax at the statutory rate Add (deduct): Change in income tax rates Permanent differences Jurisdictional rate difference For the Year Ended December 31, 2023 December 31, 2022 $ 18,545 $ 3,539 4,396 1 103 (216) 834 (8) 102 (75) Change in unrecognized deferred tax asset (4,060) (1,571) Return to provision adjustment Other Total income tax expense (recovery) The deferred tax balance consists of the following: (25) (69) (48) 17 $ 130 $ (749) $Thousands Property, Plant and Equipment Defined Benefit Pension Plan Benefits Non-Capital Losses Other Total Balance as at December 31, 2021 $ 34,947 $ (1,338) $ (23,291) $ (9,180) $ 1,138 Charged (credited) to net loss Charged to OCI 3,588 - 74 255 (4,093) - Balance as at December 31, 2022 38,535 (1,009) (27,384) Charged (credited) to net income Charged to OCI 1,569 - 19 (55) (972) - (318) - (9,498) (486) - (749) 255 644 130 (55) Balance as at December 31, 2023 $ 40,104 $ (1,045) $ (28,356) $ (9,984) $ 719 A net deferred tax asset has not been recognized for $67 million (2022 – $76 million). This amount is primarily related to non-capital losses carried forward. Total gross tax losses available to the Company are $415,652,000 with $379,378,000 in the US and $36,274,000 in Canada. The first of these losses will begin to expire in 2031. Significant Estimates and Judgments - Deferred Income Taxes The Company makes estimates and judgments relating to the measurement of deferred income taxes, including future tax rates, timing of reversals of temporary timing differences and the anticipated tax rules that will be in place when timing differences reverse. 52 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. Segmented Information The Company has one operating segment providing contract drilling services primarily to the oil and gas industry. From time to time, the Company is involved in other forms of drilling related to potash mining and the development of storage caverns. The Company determines its operating segments based on internal information, regularly reviewed by management, to allocate resources and assess performance. Geographical information is presented in the following tables: $Thousands Revenue Revenue less costs and expenses For the Year Ended December 31, 2023 For the Year Ended December 31, 2022 Canada US Total Canada US Total $ 56,005 $ 169,474 $ 225,479 $ 55,279 $ 145,717 $ 200,996 $ (6,554) $ 20,374 $ 13,820 $ (6,860) $ 11,168 $ 4,308 $Thousands Canada US Total Canada US Total Property, plant and equipment $ 57,284 $ 140,000 $ 197,284 $ 56,920 $ 143,630 $ 200,550 As at December 31, 2023 As at December 31, 2022 LONG-TERM ASSETS 9. Right-of-Use Assets IFRS 16 "Leases" - Accounting Policies The Company leases various offices, yards, rig equipment, vehicles and office equipment. Lease contracts are typically made for fixed periods of two to five years, but may have extension or termination options. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes. Lease right-of-use (“ROU”) assets arising from a lease are initially measured on a present value basis. The initial measurement of the ROU assets is comprised of the following: • the amount of the initial measurement of the lease liability; • any lease payments made at or before the commencement date less any lease incentives received; • any initial direct costs; and • restoration costs. ROU assets are depreciated over the lease term on a straight-line basis. Payments associated with short-term leases and leases of low-value assets are recognized as an expense in the statement of net income and comprehensive income. Short-term leases are leases with a lease term of 12 months or less. Low-value assets are comprised of office and IT software. 53 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ROU assets are reviewed for internal and external indicators of impairment at each reporting date or when facts and circumstances suggest that the carrying amount may exceed its recoverable amount. If indicators of impairment exist, the recoverable amount of the ROU asset is estimated as the greater of value-in-use (“VIU”) and fair value less costs of disposal (“FVLCOD”). VIU is estimated as the present value of the future cash flows expected to arise from the continuing use of the ROU asset. FVLCOD is determined by estimating the discounted after-tax future net cash flows. If the recoverable amount of the ROU asset is less than the carrying amount, an impairment loss is recognized. Continuity of ROU Assets $Thousands Land and Property Office Equipment and Software Vehicles Total Balance as at December 31, 2021 $ 1,007 $ 822 $ - $ 1,829 Additions Amortization expense Balance as at December 31, 2022 Additions Disposals Amortization expense - (448) 559 - - (291) 245 (394) 673 388 (78) (533) 304 (21) 283 - (304) 21 549 (863) 1,515 388 (382) (803) Balance as at December 31, 2023 $ 268 $ 450 $ - $ 718 Significant Estimates and Judgments In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). The assessment is reviewed if a significant event or a significant change in circumstances occurs which affects this assessment and that is within the control of the lessee. 10. Property, Plant and Equipment IAS 16, “Property, Plant and Equipment” – Accounting Policies Property, plant and equipment (PP&E) is recognized at cost less accumulated depreciation and impairment. Cost includes expenditures directly attributable to the acquisition of the asset. The cost of assets constructed by the Company includes the cost of all materials and services used in the construction and direct labour on the project. Costs cease to be capitalized as soon as the asset is ready for productive use. Subsequent costs associated with equipment upgrades that result in increased capabilities or performance enhancements of PP&E are capitalized. Costs incurred to repair or maintain PP&E are charged to expense as incurred. The carrying amount of a replaced asset is derecognized when replaced. 54 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The PP&E cash generating units (“CGUs”) are reviewed for internal and external indicators of impairment at each reporting date or when facts and circumstances suggest that the carrying amount may exceed its recoverable amount. Internal and external factors such as (i) a significant change in the market capitalization of the Company’s share price; (ii) changes in conditions of drilling rig assets, (iii) changes in oil and gas prices in the market (iv) changes in forecasted activity or earnings and (v) changes in interest rates or other market rates of return, are evaluated by management in determining whether there are any indicators of impairment or impairment reversal. If indicators of impairment exist, the recoverable amount of the CGU is estimated as the greater of VIU and FVLCOD. VIU is estimated as the present value of the future cash flows expected to arise from the continuing use of a CGU. FVLCOD is determined by estimating the discounted after-tax future net cash flows or through the use of external equipment appraisals obtained from independent third party valuation experts, less an estimated cost to sell. If the recoverable amount of the CGU is less than the carrying amount, an impairment loss is recognized. An impairment loss is allocated to the CGU and then to reduce the carrying amounts of the assets in the CGU. Impairment losses recognized in prior periods are assessed at each reporting date for any indicators that the impairment losses may no longer exist or may have decreased. In the event that an impairment loss reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but only to the extent that the carrying amount does not exceed the amount that would have been determined had no impairment loss been recognized on the asset in prior periods. The amount of the reversal is recognized in net earnings. Impairment of Assets The Company did not identify any changes in the indicators of asset impairment or impairment reversals or any new indicators of asset impairment as at December 31, 2023. Therefore, no further assessment on asset impairment was performed as there have been no changes in circumstances that indicate that the carrying amount of PP&E does not exceed its recoverable amount as at December 31, 2023. Significant Estimates and Judgments Useful Lives of Drilling Rigs Depreciation is recognized on PP&E excluding land. Depreciation methods and rates have been selected so as to amortize the net cost of each asset over its expected useful life to its estimated residual value. The estimated useful lives, residual values and depreciation methods are reviewed at the end of each annual reporting period. Major renovations are depreciated over the remaining useful life of the related asset or to the date of the next major renovation, whichever is sooner. Asset Impairment The determination of indicators of asset impairment and impairment reversals involves the use of estimates and judgments including changes in the conditions of drilling rig assets, changes in forecasted activity or earnings and changes in interest rates or other market rates of return. Asset impairment testing involves the use of estimates and judgments in the calculation of future cash flows which include future revenue projections, discount rates, probabilities of cash flow variability, future capital and operating costs, salvage values and income taxes and may consider the report of an external appraiser. 55 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Depreciation Methods The depreciation methodologies for the Company’s major PP&E classes are as follows: Equipment Class Drilling rigs Major inspection and overhaul expenditures Drill pipe and other ancillary drilling equipment Furniture, fixtures and equipment Buildings Depreciation Method Depreciation Rates Straight-line Straight-line Straight-line Straight-line Straight-line 10 to 20 years 3 to 5 years 2 to 8 years 10 years 10 to 20 years The salvage values for the drilling rig equipment ranges from zero to 10% depending on the specific rig component. There are no salvage values for the remaining equipment classes. Property, Plant and Equipment Continuity Cost $Thousands Land and Buildings Drilling Rigs Other Total Balance as at December 31, 2021 $ 7,135 $ 572,608 $ 9,639 $ 589,382 Additions Disposals - - 17,921 61 (179) - Balance as at December 31, 2022 7,135 590,350 9,700 483 24,109 (20,376) - 17,982 (179) 607,185 24,592 (20.376) Additions Disposals - - Balance as at December 31, 2023 $ 7,135 $ 594,083 $ 10,183 $ 611,401 Accumulated Depreciation $Thousands Land and Buildings Drilling Rigs Other Total Balance as at December 31, 2021 $ 2,408 $ 366,999 $ 8,506 $ 377,913 Disposals Depreciation expense Balance as at December 31, 2022 Disposals Depreciation expense - (139) - 247 2,655 27,982 394,842 632 9,138 - (19,798) - 195 26,648 437 (139) 28,861 406,635 (19,798) 27,280 Balance as at December 31, 2023 $ 2,850 $ 401,692 $ 9,575 $ 414,117 Net Book Value $Thousands As at December 31, 2021 As at December 31, 2022 As at December 31, 2023 Land and Buildings Drilling Rigs Other Total $ 4,727 $ 205,609 $ 1,133 $ 211,469 $ 4,480 $195,508 $ 562 $ 200,550 $ 4,285 $192,391 $ 608 $ 197,284 At December 31, 2023, the Company had $2,948,000 in PP&E that was not being depreciated, as these assets were under construction (December 31, 2022 – $172,000). 56 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSIn addition to depreciation on its PP&E, the Company had amortization expense of $1,230,000 for the year ended December 31, 2023 (2022 - $1,402,000). 11. Investments in Joint Ventures The Company conducts certain rig operations via joint ventures with First Nations, Métis or Inuit partners whereby rig assets are jointly owned. Currently, there are eight different First Nations, Métis or Inuit groups with equity investments in six of AKITA’s drilling rigs. These equity investments are facilitated through joint venture agreements. Each joint venture operates the drilling rig with the joint venture partners’ owning a share of each drilling rig directly. The equity ownership of the drilling rigs for each First Nations, Métis or Inuit partner varies between rigs and groups and ranges from 5% to 50% per group per rig. All joint ventures operate in Canada. While joint venture interests are at least 50% owned by the Company, in each case the joint venture is governed on a joint basis. The accounting policies of the joint ventures are consistent with the policies described herein. The Company has assessed the nature of its joint arrangements and determined them to be joint ventures. Joint ventures are accounted for using the equity method of accounting whereby the Company’s share of individual assets and liabilities are recognized as investments in joint ventures on the consolidated Statements of Financial Position, and revenues and expenses are recognized as equity income from joint ventures on the consolidated Statements of Net Income and Comprehensive Income. The following table lists the Company’s active joint ventures. AKITA Ownership Interest 85% 85% 85% 70% 90% 50% Active Joint Ventures AKITA Wood Buffalo Joint Venture 25 AKITA Wood Buffalo Joint Venture 26 AKITA Wood Buffalo Joint Venture 27 AKITA Wood Buffalo Joint Venture 28 AKITA Mistiyapew Aski Joint Venture 56 AKITA Equtak Joint Venture 61 Continuity of Investments in Joint Ventures $Thousands Balance as at December 31, 2021 Net income for the year ended December 31, 2022 Distributions for the year ended December 31, 2022 Balance as at December 31, 2022 Net income for the year ended December 31, 2023 Distributions for the year ended December 31, 2023 Balance as at December 31, 2023 Investments in Joint Ventures $ 2,376 5,954 (5,443) 2,887 8,184 (5,950) $ 5,121 57 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSSummarized Joint Venture Financial Information The following summarized financial information is a reconciliation of the Company’s investments in joint ventures to the aggregate of the amounts included in the IFRS financial statements of the joint ventures which include both the Company’s and joint venture partners’ interests. $Thousands Cash Other current assets Non-current assets Total assets Current liabilities Net assets As at December 31, 2023 As at December 31, 2022 AKITA % JV Partner % Total AKITA % JV Partner % Total $ 3,775 $ 861 $ 4,636 $ 850 $ 210 $ 1,060 6,443 1,067 7,510 4,148 1,067 5,215 55 - 55 55 - 10,273 (5,152) 1,928 12,201 (825) (5,977) 5,053 (2,166) 1,277 (588) 55 6,330 (2,754) $ 5,121 $ 1,103 $ 6,224 $ 2,887 $ 689 $ 3,576 $Thousands Revenue Operating and maintenance expenses Selling and administrative expenses Net income and comprehensive income For the Year Ended December 31, 2023 For the Year Ended December 31, 2022 AKITA % JV Partner % Total AKITA % JV Partner % Total $ 35,662 $ 7,611 $ 43,273 $ 25,958 $ 6,403 $ 32,361 27,144 5,637 32,781 19,635 4,892 24,527 334 60 394 369 87 456 $ 8,184 $ 1,914 $ 10,098 $ 5,954 $ 1,424 $ 7,378 WORKING CAPITAL 12. Financial Instruments IFRS 9, “Financial Instruments” - Accounting Policies Due to the short-term nature of the Company’s financial instruments, fair values approximate carrying values unless otherwise stated. The Company recognizes cash received or paid via electronic transfer as at the bank settlement date. The Company discloses its financial instruments within a hierarchy prioritizing the inputs to fair value measurements at the following three levels: • Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities; • Level 2 – inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and • Level 3 – inputs that are not based on observable market data. 58 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Classification and measurement The Company classifies its financial instruments in the following measurement categories depending on the Company’s business model for managing financial assets and the contractual terms of the cash flows: (i) Financial assets at amortized cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortized cost. Interest income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising on derecognition is recognized directly in profit or loss and presented in other gains or losses, together with foreign exchange gains and losses. As at December 31, 2023, the Company’s financial assets in this category include cash and accounts receivable. (ii) Financial liabilities at amortized cost: Financial liabilities that are measured at amortized cost are initially recognized at the amount required to be paid less, when material, a discount to reduce the payables and accrued liabilities to fair value. Subsequently, financial liabilities are measured at amortized cost using the effective interest rate method. As at December 31, 2023, the Company's financial liabilities in this category include accounts payable and accrued liabilities and its operating loan facility. (iii) Fair value through other comprehensive income (“FVOCI”): Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at FVOCI. Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses which are recognized in profit or loss. When the financial asset is derecognized, the cumulative gain or loss previously recognized in OCI is reclassified from equity to profit or loss and recognized in other gains or losses and impairment expenses are presented as a separate line item on the statement of profit or loss. As at December 31, 2023, the Company held no financial instruments in this category. (iv) Fair value through profit or loss (“FVPL”): Assets that do not meet the criteria for amortized cost or FVOCI are measured at FVPL. A gain or loss on a debt investment that is subsequently measured at FVPL is recognized in profit or loss and presented net within other gains or losses in the period in which it arises. Financial assets at FVPL are financial assets held for trading. Derivatives are also categorized as held for trading and measured at FVPL unless they are designated as hedges. As at December 31, 2023, the Company’s financial instruments in this category include its interest rate swap. Impairment of financial assets The Company assesses, on a forward-looking basis, the expected credit losses associated with its debt instruments carried at amortized cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk. Financial Instrument Risk Exposure and Management The Company is exposed to the following risks associated with its financial instruments: Credit risk Credit risk is the risk of financial loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises primarily from the Company’s trade and other receivables. The credit risk is managed via the Company’s credit-granting procedures which include an evaluation of the customer’s financial condition and payment history. In certain circumstances the Company may require customers to make advance payment prior to the provision of services, issue a letter of credit or take other measures to reduce credit risk. For trade receivables, the Company applies the simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. To measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit-risk characteristics and analyzed. Accounts receivable are written-off when there is no reasonable 59 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan with the Company and a failure to make contractual payments for a period greater than 180 days past due. The terms of the Company’s contracts generally require payment within 30 days. The Company continuously monitors the recoverability of its accounts receivable balances and subject to agreed payment terms, generally considers the balance to be overdue when it ages over 90 days. In management’s judgment there is no significant credit risk exposure in the balances outstanding at: $Thousands Within 30 days 31 to 60 days 61 to 90 days Over 90 days Estimated credit losses Total accounts receivable As at December 31, 2023 As at December 31, 2022 $ 27,465 $ 34,308 15,125 3,738 1,420 (650) 12,196 732 407 (775) $ 47,098 $ 46,868 Significant Estimates and Judgments – Estimated Credit Losses The loss allowances for financial assets are based on assumptions about risk of default and expected loss rates. The Company uses judgment in making these assumptions and selecting the inputs to the impairment calculation, based on the Company’s past history, existing market conditions as well as forward-looking estimates at the end of each reporting period. Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. The Company mitigates liquidity risk through management of its working capital balance, monitoring actual and forecasted cash flows and using its operating loan facility when necessary. At December 31, 2023, this risk was limited by a positive working capital balance of $27.1 million and $40.0 million available in the Company’s undrawn banking facility. If future results do not meet the Company’s expectations there is a risk that the Company could be offside with its financial covenants in its banking facility and lose the ability to draw on the facility to meet its financial obligations or have to repay the amounts outstanding on the facility. The Company maintains a positive working relationship with the banks in its syndicated facility and on July 17, 2020, entered into an amending agreement with its lenders in the syndicate to provide a five quarter covenant relief period. The facility was further amended quarterly to add additional quarters of covenant relief to June 30, 2023 (Note 14). On March 30, 2023, the Company elected to end its covenant relief period. Maturity information regarding the Company’s long-term debt is as follows: $Thousands Less than 1 Year 1-3 Years Total Bank credit facility - principal $ - $ 69,542 $ 69,542 Bank credit facility - interest 4,957 3,407 8,364 Total $ 4,957 $ 72,949 $ 77,906 60 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Maturity information regarding the Company’s long-term lease obligations is as follows: $Thousands Lease obligations Less than 1 Year 2-3 Years 4-5 Years Total $ 645,044 $ 228,298 $ - $ 873,342 Lease obligations - interest 49,136 24,824 - 73,960 Total $ 694,180 $ 253,122 $ - $ 947,302 Foreign currency exchange - transaction risk Foreign currency exchange transaction risk is the risk that future cash flows will fluctuate as a result of changes in foreign currency exchange rates. The Company’s geographical divisional operations are primarily denominated in their local currency with limited exposure to foreign currency exchange transaction risk through capital expenditures or financial instruments. From time to time the Company may enter into forward currency contracts to manage this risk. Foreign currency exchange - translation risk The Company is exposed to foreign currency exchange translation risk as revenues, expenses and working capital from its US operations are denominated in USD. In addition, the Company’s foreign subsidiaries are subject to unrealized foreign currency exchange translation gains or losses on consolidation. Interest rate risk The Company is exposed to changes in interest rates on borrowings under its operating loan facility which is subject to floating interest rates. To mitigate this risk the company entered into an interest rate swap with its principal banker as the agent on the syndication along with two other Canadian banks. The term of the interest rate swap is June 15, 2022 to June 15, 2026 and the notional amount of the swap is $50,000,000. The fixed rate is 4.24% while the floating rate is indexed to the Canadian Dollar Offered Rate ("CDOR"). At period end the interest rate swap is valued at fair value with any unrealized gain (loss) recorded as other income (loss) on the consolidated statement of net income. At December 31, 2023, the Company recorded an unrealized gain of $95,000. The fair value measurement of the risk management contract has a fair value hierarchy of Level 3. Commodity risk The Company is exposed to the effects of fluctuating crude oil and natural gas prices through the resultant changes in the exploration and development budgets of its customers. Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities are comprised of the following: $Thousands Trade payables Statutory liabilities Accrued expenses Post-employment benefits As at December 31, 2023 As at December 31, 2022 $ 16,815 $ 12,238 970 12,595 315 1,264 15,636 323 Total accounts payable and accrued liabilities $ 30,695 $ 29,461 61 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 13. Change in Non-Cash Working Capital $Thousands Change in non-cash working capital: Accounts receivable Prepaid expenses and other Accounts payable and accrued liabilities Deferred revenue Change in non-cash working capital Pertaining to: Operating activities Investing activities Change in non-cash working capital DEBT AND EQUITY 14. Debt Operating Loan Facility For The Year Ended December 31, 2023 December 31, 2022 $ (230) $ (19,640) 787 1,235 421 (377) 8,731 (76) $ 2,213 $ (11,362) $ (1,659) $ (10,232) 3,872 (1,130) $ 2,213 $ (11,362) The Company has a syndicated credit agreement with the Company’s principal banker as the agent on the syndication and three other Canadian banks in the syndication. The operating loan facility totals $110,000,000. The Credit facility expires in September 2025. The interest rate on the Company’s credit facility ranges from 175 to 300 basis points over prime interest rates depending on the Funded Debt(1) to EBITDA(1) Ratio. Security for this facility includes all present and after-acquired personal property and a first floating charge over all other present and after-acquired property including real property. The financial covenants are: 1. The Funded Debt(1) to EBITDA(1) Ratio: the Company shall ensure that the Funded Debt(1) to EBITDA(1) Ratio shall not be more than 3.00:1.00. The Funded Debt(1) to EBITDA(1) Ratio shall be calculated quarterly on the last day of each Fiscal Quarter on a rolling four quarter basis; 2. The EBITDA(1) to Interest Expense(1) Ratio: the Company shall ensure that the EBITDA(1) to Interest Expense(1) Ratio shall not be less than 3.00:1.00. The EBITDA(1) to Interest Expense(1) Ratio shall be calculated quarterly on the last day of each Fiscal Quarter on a rolling four quarter basis. At December 31, 2023, the Company was in compliance with its covenants with a Funded Debt(1) to EBITDA(1) Ratio of 1.20:1.00, and an EBITDA(1) to Interest Expense(1) Ratio of 7.73:1.00. (1) Readers should be aware that EBITDA, Funded Debt, Interest Expense, Tangible Net Worth, Eligible Accounts Receivable, Priority Payables and Eligible Rig Assets have specifically set out definitions in the loan facility agreement and are not necessarily defined by or consistent with either GAAP or determinations by other users for other purposes. 62 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The facility also includes a borrowing base calculation which is the sum of: (i) (ii) 75% of Eligible Accounts Receivable(1); plus 50% of net book value of all Eligible Rig Assets(1); less (iii) Priority Payables(1) of the Loan Parties. At December 31, 2023, the Company’s borrowing base totalled $94,088,000. The credit facility includes a $10,000,000 operating line of credit that is classified as current, given the Company expects to settle the balance within a normal operating cycle. The maturity date aligns with the total credit facility. At December 31, 2023, the current portion of debt was nil (December 31, 2022 – nil). The balance outstanding under the credit loan facility, net of unamortized loan fees, is classified as long-term debt as the credit agreement has no required repayment obligations prior to the end of the loan facility term. The Company borrowed $70,000,000 in total from this facility as at December 31, 2023 (December 31, 2022 - $94,000,000). Continuity of Debt $Thousands Balance as at December 31 Drawn on credit facility Repayment of debt Net deferred loan fees Balance as at December 31 $Thousands Debt allocated to: Current portion Long-term portion Balance as at December 31 15. Lease Obligations IFRS 16 “Leases” – Accounting Policies For The Year Ended December 31, 2023 December 31, 2022 $ 93,514 $ 86,156 - (24,000) 28 10,000 (2,717) 75 $ 69,542 $ 93,514 As at December 31, 2023 As at December 31, 2022 $ - $ - 69,542 93,514 $ 69,542 $ 93,514 The Company leases various offices, yards, rig equipment, vehicles and office equipment. Lease contracts are typically made for fixed periods of two to five years, but may have extension or termination options. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes. (1) Readers should be aware that EBITDA, Funded Debt, Interest Expense, Tangible Net Worth, Eligible Accounts Receivable, Priority Payables and Eligible Rig Assets have specifically set out definitions in the loan facility agreement and are not necessarily defined by or consistent with either GAAP or determinations by other users for other purposes. 63 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Lease obligations arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments. • fixed payments less any lease incentives receivable; • amounts expected to be payable by the lessee under residual value guarantees; • the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and • payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee’s incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. The discount rates range from 5.01% to 9.95%. Continuity of Lease Obligations $Thousands Land and Property Office Equipment and Software Vehicles Total Balance as at December 31, 2021 $ 1,486 $ 829 $ - $ 2,315 Change in lease obligations Lease additions Balance as at December 31, 2022 Change in lease obligations Lease additions Lease terminations (696) - 790 (491) (356) 245 718 (451) 388 - (81) (19) 304 285 19 - (304) (1,071) 549 1,793 (923) 388 (385) Balance as at December 31, 2023 $ 299 $ 574 $ - $ 873 $Thousands Current portion Long-term portion Land and Property Office Equipment and Software Vehicles Total $ 299 $ 346 $ - $ 645 - 228 - 228 Balance as at December 31, 2023 $ 299 $ 574 $ - $ 873 Lease Expense The Company recorded $58,000 in interest expense related to its lease obligations for the year ended December 31, 2023 (2022 - $118,000). 64 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 16. Capital Management The Company has determined capital to include long-term debt and share capital. The Company's objectives when managing capital are: • to safeguard the Company's ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders; and • to augment existing resources in order to meet growth opportunities. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, repurchase shares, issue new shares, sell assets or take on long-term debt. 17. Share Capital Authorized: • An unlimited number of Series Preferred shares, issuable in series, designated as First Preferred shares, no par value • An unlimited number of Series Preferred shares, issuable in series, designated as Second Preferred shares, no par value • An unlimited number of Class A Non-Voting shares, no par value • An unlimited number of Class B Common shares, no par value Issued: • All issued shares are fully paid The shares outstanding are: Number of shares Class A Non-Voting Class B Common Total Shares outstanding at December 31, 2022 37,996,407 1,653,784 39,650,191 Stock options exercised 60,000 - 60,000 Shares outstanding at December 31, 2023 38,056,407 1,653,784 39,710,191 Each Class B Common share may be converted into one Class A Non-Voting share at the shareholder’s option. The holders of Class A Non-Voting shares have no right to participate if a takeover bid is made for Class B Common shares unless: • an offer to purchase Class B Common shares is made to all or substantially all holders of Class B Common shares; • at the same time, an offer to purchase Class A Non-Voting shares on the same terms and conditions is not made to the holders of Class A Non-Voting shares; and • holders of more than 50% of the Class B Common shares do not reject the offer in accordance with the terms of AKITA's articles of incorporation. If these three pre-conditions are met, then the holders of Class A Non-Voting shares will be entitled to exchange each Class A Non-Voting share for one Class B Common share for the purpose of depositing the resulting Class B Common shares pursuant to the terms of the takeover bid. 65 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSThe Class A Non-Voting shares and Class B Common shares rank equally in all other respects. Incremental costs attributable to the issue of new shares or options are recorded as a reduction in equity, net of income taxes. Shares repurchased by the Company are recorded as a reduction of shareholders’ equity based upon the consideration paid, including any directly incremental costs, net of income taxes. All shares repurchased by the Company are cancelled upon repurchase. PERSONNEL 18. Share-Based Compensation Plans The Company has four share-based compensation plans. Stock options qualify as an equity-settled share-based compensation plan, the deferred share units (“DSUs”) and share appreciation rights (“SARs”) qualify as cash-settled share-based compensation plans and the performance share units (“PSUs”) are cash-settled or equity-settled at the discretion of the Company. For all four of the share- based compensation plans, associated services received are measured at fair value and are calculated by multiplying the number of options, DSUs, SARs or PSUs expected to vest with the fair value of one option, DSU, SAR or PSU as of the grant date. Stock Options Subject to the approval of the Company’s Board of Directors, the Company’s Corporate Governance, Nomination, Compensation and Succession Committee may designate directors, officers, employees and other persons providing services to the Company to be granted options to purchase Class A Non-Voting shares. The vesting provisions and exercise period (which cannot exceed 10 years) are determined at the time of the grant. Each tranche is considered a separate award with its own vesting period and grant date fair value. The fair value of each tranche is measured at the date of grant using either the Binomial or the Black Scholes option pricing model. The number of awards expected to vest is reviewed at least annually, with any impact being recognized immediately. The following table summarizes stock options reserved, granted and available for future issuance: Number of options Reserved under the current stock option plan Balance at beginning of year Added to stock option plan (1) Expired Granted Available for future issuance December 31, 2023 December 31, 2022 6,500,000 3,633,500 - - (515,000) 3,118,500 6,500,000 365,500 3,400,000 298,000 (430,000) 3,633,500 (1) On May 10, 2022, the Company’s stock option plan was replenished, and 3,400,000 shares were added to the shares reserved for future issuance under the current stock option plan. 66 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSThe following table is a summary of the Company's stock options plan: 2023 2022 Number of Options Weighted Average Exercise Price Number of Options Weighted Average Exercise Price Options outstanding at January 1 1,422,500 $ 1.63 1,332,500 $ 2.14 Granted Exercised Expired 515,000 1.36 430,000 $ 1.69 (60,000) 0.44 (42,000) $ 0.77 - - (298,000) $ 4.12 Options outstanding at December 31 1,877,500 $ 1.59 1,422,500 $ 1.63 Options exercisable at December 31 971,000 $ 1.85 652,000 $ 1.94 The following table summarizes the outstanding stock options at December 31: Vesting Period (Years) Exercise Price Number Outstanding 5 5 5 5 5 5 $ 5.62 $ 3.93 $ 0.44 $ 1.01 $ 1.69 $ 1.36 42,500 197,500 262,500 430,000 430,000 515,000 Weighted Average Contractual Life Deferred Share Units 2023 Remaining Contractual Life (Years) 4.7 5.2 4.5 5.3 7.0 8.0 6.3 Number Exercisable Number Outstanding 42,500 197,500 198,000 258,000 172,000 103,000 42,500 197,500 322,500 430,000 430,000 2022 Remaining Contractual Life (Years) 5.7 6.2 5.5 6.3 8.0 6.6 Number Exercisable 42,500 158,000 193,500 172,000 86,000 The Company has a cash-settled share-based long-term incentive compensation plan for certain employees. Each DSU granted equates to one Class A Non-Voting share and entitles the holder to receive a cash payment equal to the Company’s share price on the payment date. DSU holders are entitled to share in dividends, which are credited as additional DSUs, at each dividend payment date. DSUs vest immediately but are not exercisable until resignation or retirement from management and/or the Board of Directors. Units issued under the Company’s DSU plan are measured at fair value using the intrinsic value method when granted and subsequently re-measured at each reporting date using the Company’s Class A Non-Voting share price at the reporting date with the associated expense (recovery) recognized in selling and administrative expense. The Company assumes a zero forfeiture rate. 67 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS A summary of the Company’s DSU plan is presented in the following table: 2023 2022 Number of Deferred Share Units Fair Value ($000's) Number of Deferred Share Units Fair Value ($000's) DSUs outstanding as at January 1 258,526 $ 447 349,882 $ 329 Granted Redeemed Change in fair value 88,235 (4,946) 120 (7) (92) 74,850 (166,206) 125 (309) 302 DSUs outstanding as at December 31 341,815 $ 468 258,526 $ 447 Deferred share units allocated to: 2023 2022 Number of Deferred Share Units Fair Value ($000's) Number of Deferred Share Units Fair Value ($000's) Accounts payable and accrued liabilities - $ - 4,947 $ 8 Non-current liabilities 341,815 468 253,579 439 DSUs outstanding as at December 31 341,815 $ 468 258,526 $ 447 Performance Share Units The Company has granted PSUs to certain employees under its Performance Share Unit Plan. PSUs are time-vested whole-share units that entitle employees to receive, upon vesting, either one Class A Non-Voting share of AKITA or a cash payment equal to the value of one Class A Non-Voting share of AKITA. The number of PSUs eligible to vest is determined by a multiplier that ranges from zero percent to 100 percent and is based on the Company achieving key pre-determined performance measures. PSUs vest after three years. Units issued under the Company’s PSU plan are measured at fair value using the intrinsic value method when granted and subsequently re-measured at each reporting date using the Company’s Class A Non-Voting share price at the reporting date with the associated expense (recovery) recognized in selling and administrative expense. The Company assumes a zero forfeiture rate and that all performance measurements will be met. A summary of the Company’s PSU plan is presented in the following table: 2023 2022 Number of Performance Share Units Fair Value ($000's) Number of Performance Share Units Fair Value ($000's) PSUs outstanding as at January 1 68,862 $ 119 - $ - Granted Change in fair value 272,059 370 (22) 68,862 115 4 PSUs outstanding as at December 31 340,921 $ 467 68,862 $ 119 The total long-term share-based compensation plan liability is $935,000 (December 31, 2022 - $558,000). 68 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Share Appreciation Rights SARs may be granted to directors, officers and key employees of the Company. The vesting provisions (which range from three to eight years) and exercise period (which cannot exceed 10 years) are determined at the time of the grant. The holder is entitled on exercise to receive a cash payment from the Company equal to any increase in the market price of the Class A Non-Voting shares over the base value of the SAR exercised. The base value is equal to the closing price of the Class A Non-Voting shares on the day before the grant. As at December 31, 2023, no SARs have been granted (December 31, 2022 – nil). Share-Based Compensation Expense The fair value of the services received is recognized as selling and administrative expense. In the case of equity-settled share-based payment plans, the selling and administrative expense results in a corresponding increase in contributed surplus over the vesting period of the respective plan. When stock options are exercised, shares are issued and the amount of the proceeds, together with the amount recorded in contributed surplus, is recognized in share capital. For cash-settled share-based payment plans, a corresponding liability is recognized. The fair value of the cash-settled share-based payment plans is remeasured at each Statement of Financial Position date through the Statement of Net Income and Comprehensive Income until settlement. Share-based compensation expense consists of the following: $Thousands Stock option expense DSU expense PSU expense For the Year Ended December 31, 2023 $ 387 29 348 December 31, 2022 $ 250 427 119 Total share-based compensation expense $ 764 $ 796 The stock option expense was determined using the Binomial Model based on the following assumptions. Expected volatility is calculated by examining a historical 60 month (5 year) trading history up to the grant date, where significant outliers are excluded to provide a better estimate. Risk-free interest rate Expected volatility Dividends yield rate Option life Weighted average share price Forfeiture rate Fair value of options 2023 3.36% 91% 0.00% 5.4 years $ 1.36 0.00% $ 1.00 2022 2.86% 92% 0.00% 5.4 years $ 1.69 0.00% $ 1.25 69 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 19. Employee Future Benefits The Company has a defined contribution pension plan, registered under the Alberta Employment Pension Plans Act, which covers substantially all of its Canadian employees. Under the provisions of the plan, the Company contributes 5% of regular earnings for eligible employees on a current basis. In addition, Canadian employees having eligible terms of service are subject to admission into the Company’s group RRSP. The Company makes contributions on behalf of these plans to a separate entity and has no legal or constructive obligations to pay further contributions if the plans do not hold sufficient assets to pay the employee benefits relating to employee service in current or prior periods. The Company has a 401(k) plan, registered under the Employment Retirement Income Security Act of 1974, which covers all of its United States employees. Under the provisions of the plan, the Company contributes 3% of regular earnings for eligible employees on a current basis. Contributions to the Company’s defined contribution pension plan, group RRSP and the 401(k) plan are recognized as employee benefit expense when they are due. The Company has established an unregistered defined benefit pension plan for certain retired employees. The defined benefit pension plan, which provides for pensions based upon the age of the retiree at the date of retirement, is non-contributory and unfunded. The Company obtains an actuarial valuation from an independent actuary subsequent to each year-end or if circumstances change. The most recent evaluation was dated January 11, 2024, and was utilized in measuring the December 31, 2023 balances. The defined benefit pension plan liability is the present value of the defined benefit obligation at the Statement of Financial Position date. The cost of the defined benefit pension plan is determined using the projected unit credit method. The defined benefit pension obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality Canadian denominated corporate bonds that have terms to maturity approximating the terms of the related pension liability. Past service costs are recognized in net income when incurred. Post-employment benefits expense is comprised of the interest on the net defined benefit liability, calculated using a discount rate based on market yields on high quality bonds, and the current service cost. Remeasurements consisting of actuarial gains and losses, the actual return on plan assets (excluding the net interest component) and any change in the asset ceiling are recognized in other comprehensive income. Continuity of Defined Benefit Pension Liability $Thousands Actuarial present value of defined benefit obligation as at January 1 Interest cost Current service cost Benefits paid Unrealized actuarial (gain) loss 2023 $ 4,279 210 - (315) 232 Actuarial present value of defined benefit obligation as at December 31 $ 4,406 2022 $ 5,463 155 18 (275) (1,082) $ 4,279 $Thousands Pension liability allocated to: Accounts payable and accrued liabilities Non-current liabilities Pension liability outstanding as at December 31 2023 2022 $ 315 4,091 $ 4,406 $ 315 3,964 $ 4,279 70 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Key Assumptions Discount rate at beginning of the year For the Year Ended December 31, 2023 5.1% December 31, 2022 2.9% The Company’s pension expense is recorded in selling and administrative expenses and interest expense and is comprised of the following: $Thousands Defined benefit pension plan Interest cost Service cost Expense for defined benefit pension plan Expense for defined contribution pension plans For the Year Ended December 31, 2023 December 31, 2022 $ 210 $ 155 - 210 3,631 18 173 3,054 Total expense $ 3,841 $ 3,227 Significant Estimates and Judgments – Defined Benefit Pension Liability Significant estimates used in the preparation of AKITA’s financial statements relate to the measurement of the non-current defined benefit pension liability for certain retired employees that was recorded as $4,091,000 at December 31, 2023 (December 31, 2022 - $3,964,000). AKITA utilizes the services of a third party to assist in the actuarial estimate of the Company’s defined benefit pension expense and liability. At December 31, 2023, a key assumption is the discount rate of 4.6% (2022 – 5.1%). From the perspective of a sensitivity analysis, a 1% decrease in the discount rate would result in a $448,000 increase in the defined benefit obligation while a 1% increase in the discount rate would result in a $381,000 decrease in the defined benefit obligation. Additionally, if members’ lives should be one year longer than actuarial expectations, the defined benefit obligation would increase by $70,000. Except for the impact on the discount rate used in the pension assumptions, recent changes in the global economy and related markets have not otherwise affected the measurement of the Company’s defined benefit pension liability. OTHER NOTES 20. Commitments and Contingencies From time to time, the Company enters into drilling contracts with its customers that are for extended periods. At December 31, 2023, the Company had no drilling rigs with multi-year contracts. The Company has entered into a two year contract with a related party to provide sponsorship and advertising at an annual cost of $350,000. At December 31, 2023, the Company had capital expenditure commitments of $5,109,000 (2022 – $740,000). 71 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 21. Related Party Transactions All related party transactions were made in the normal course of business with regular payment terms and have been recorded at the amounts agreed upon with the related parties. a) ATCO Group and Spruce Meadows The Company is related to the ATCO Group of companies and to Spruce Meadows through its controlling shareholder (see Note 1 – General Information). The transactions and year-end balances with those affiliates are as follows: $Thousands Revenue (computer services, rent) Purchases: Sponsorship and advertising (Note 20) Selling and administrative Operating Year-end accounts payable For the Year Ended December 31, 2023 December 31, 2022 $ $ $ $ $ 87 350 113 518 58 $ $ $ $ $ 87 175 81 744 74 b) Joint ventures and joint venture partners The Company is related to its joint ventures and joint venture partners. The joint ventures’ and joint venture partners’ transactions and year-end balances with AKITA are as follows: $Thousands Operating costs Selling and administrative costs $Thousands Due to AKITA from joint venture partners Due to AKITA from joint ventures For the Year Ended December 31, 2023 $ $ 5,727 581 December 31, 2022 $ $ 4,613 493 As at December 31, 2023 As at December 31, 2022 $ $ 2,248 3,470 $ $ 1,801 858 72 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS c) Key management compensation Key management includes the officers and directors of the Company. The following table presents the compensation paid or payable to key management for services in the capacity as either officers or directors: $Thousands Salaries, director's fees and other short-term benefits Post-employment benefits Share-based payments Long-service payable For the Year Ended December 31, 2023 December 31, 2022 $ $ $ $ 1,415 59 840 - $ $ $ $ 1,906 94 690 50 22. New and Upcoming Accounting Standards Certain new or amended standards or interpretations have been issued by the International Accounting Standards Board (“IASB”) or the International Financial Reporting Interpretations Committee. One amendment became applicable for the current reporting period and the Company had to change its accounting policies as a result. The amendment below was applied and did not have a material impact on the consolidated financial statements: • IAS 12, “Income Taxes”, has been amended to recognize deferred tax on particular transactions that, on initial recognition, give rise to equal amounts of taxable and deductible temporary differences. The following amendments have not yet been early adopted and are not expected to have a material impact on the consolidated financial statements. They are effective for reporting periods beginning on or after January 1, 2024: • • IAS 1, “Presentation of Financial Statements”, has been amended to clarify how to classify debt and other liabilities as either current or non-current. IAS 1, “Presentation of Financial Statements”, has been amended to clarify how to determine that an entity has the right to defer settlement for a liability arising from a loan arrangement for at least twelve months after the reporting period. There are no other standards and interpretations that have been issued, but are not yet effective, that the Company anticipates will have a material effect on the financial statements once adopted. 73 AKITA DRILLING | 2023 Annual ReportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS10 YEAR FINANCIAL REVIEW $Thousands (except per share) Summary of Operations Revenue Income (loss) before income taxes Income taxes expense (recovery) Net income (loss) As a percentage of average shareholders’ equity Earnings (loss) per Class A and Class B share (basic) Funds flow from operations As a percentage of average shareholders’ equity Financial Position at Year End Working capital (deficiency) Current ratio Total assets Shareholders’ equity per share Other Capital expenditures (net) Depreciation and amortization Dividends paid per share Annual Ranking 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 1 2 4 2 1 2 2 1 1 3 5 5 7 7 2 7 7 7 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 225,479 18,545 130 18,415 11.8% 0.46 45,522 29.2% 25.3% 27,130 1.85 263,640 155,962 3.93 24,592 28,510 - - $ $ $ $ $ $ $ $ $ $ $ $ 200,996 3,539 (749) 4,288 3.1% 0.11 34,813 25.3% 31,121 2.02 268,281 137,851 3.48 17,982 30,263 $ - $ - $ $ $ $ $ $ $ $ $ $ $ $ $ $ 110,088 (21,782) (792) (20,990) (16.0%) (0.53) 7,454 5.7% 6,496 1.27 247,574 131,485 3.32 16,416 28,838 - - $ $ $ $ $ $ $ $ $ $ $ $ $ $ 119,664 $ 175,890 $ 118,361 61,061 $ 112,488 165,274 (102,701) $ (24,679) (12,228) (9,427) $ (4,804) 3,651 (93,274) $ (19,875) (15,939) (61.3%) (8.1%) (2.03) $ (0.50) $ (5.9%) (0.65) $ $ $ 7,535 $ (44,544) 2,206 $ (10,579) 5,329 $ (33,965) 2.4% (14.2%) 0.30 $ (1.89) 28,121 7,042 21,079 8.3% 1.17 10,322 $ 12,925 $ 14,306 34,500 $ 38,510 56,195 6.8% 5.3% 5.3% 15.7% 16.0% 22.2% 8,683 $ 4,032 $ 11,166 34,907 $ 16,002 $ (5,028) 1.56 1.14 1.31 4.49 2.45 0.90 251,521 $ 369,116 $ 403,641 257,907 $ 254,516 340,926 152,266 $ 245,134 $ 271,728 219,646 $ 220,200 259,841 3.84 $ 6.19 $ 6.86 12.24 $ 12.27 14.48 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 71,198 (53,230) (14,053) (39,177) (22.5%) (2.18) 6,607 3.8% 15,528 2.02 207,497 174,455 9.72 20,348 27,126 6,100 0.34 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 7,593 $ 15,238 $ 17,546 13,193 $ 17,960 103,949 32,681 $ 36,763 $ 26,614 23,959 $ 36,748 30,200 - - $ $ 10,101 $ 7,942 0.17 $ 0.34 6,100 $ 0.34 $ 6,101 0.34 6,015 0.34 $ $ $ $ $ $ $ $ $ $ $ $ $ 74 AKITA DRILLING | 2023 Annual Report10 YEAR FINANCIAL REVIEW$Thousands (except per share) Summary of Operations Revenue Income (loss) before income taxes Income taxes expense (recovery) Net income (loss) As a percentage of average shareholders’ equity Earnings (loss) per Class A and Class B share (basic) Funds flow from operations As a percentage of average shareholders’ equity Financial Position at Year End Working capital (deficiency) Current ratio Total assets Shareholders’ equity per share Other Capital expenditures (net) Depreciation and amortization Dividends paid per share 1 2 4 2 1 2 2 1 1 3 5 5 7 7 2 7 7 7 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 225,479 18,545 130 18,415 11.8% 0.46 45,522 29.2% 25.3% 27,130 1.85 263,640 155,962 3.93 24,592 28,510 - - $ $ $ $ $ $ $ $ $ $ $ $ 200,996 110,088 3,539 (749) 4,288 3.1% 0.11 34,813 25.3% 31,121 2.02 268,281 137,851 3.48 17,982 30,263 $ $ $ $ $ $ $ $ $ $ $ $ $ $ (21,782) (792) (20,990) (16.0%) (0.53) 7,454 5.7% 6,496 1.27 247,574 131,485 3.32 16,416 28,838 - - $ - $ - Annual Ranking 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 119,664 $ 175,890 $ 118,361 (102,701) $ (24,679) (9,427) $ (4,804) (93,274) $ (19,875) (61.3%) (8.1%) $ $ $ (2.03) $ (0.50) $ (12,228) 3,651 (15,939) (5.9%) (0.65) 10,322 $ 12,925 $ 14,306 6.8% 5.3% 5.3% 8,683 $ 4,032 $ 11,166 1.56 1.14 1.31 251,521 $ 369,116 $ 403,641 152,266 $ 245,134 $ 271,728 3.84 $ 6.19 $ 6.86 7,593 $ 15,238 $ 17,546 32,681 $ 36,763 $ 26,614 - - $ $ 10,101 $ 7,942 0.17 $ 0.34 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 71,198 (53,230) (14,053) (39,177) (22.5%) (2.18) 6,607 3.8% 15,528 2.02 207,497 174,455 9.72 20,348 27,126 6,100 0.34 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 61,061 $ 112,488 7,535 $ (44,544) 2,206 $ (10,579) 5,329 $ (33,965) 2.4% (14.2%) 0.30 $ (1.89) 34,500 $ 38,510 15.7% 16.0% $ $ $ $ $ $ 165,274 28,121 7,042 21,079 8.3% 1.17 56,195 22.2% 34,907 $ 16,002 $ (5,028) 4.49 2.45 0.90 257,907 $ 254,516 219,646 $ 220,200 12.24 $ 12.27 13,193 $ 17,960 23,959 $ 36,748 6,100 $ 0.34 $ 6,101 0.34 $ $ $ $ $ $ $ 340,926 259,841 14.48 103,949 30,200 6,015 0.34 75 AKITA DRILLING | 2023 Annual Report10 YEAR FINANCIAL REVIEWCORPORATE INFORMATION Officers Linda A. Southern-Heathcott Executive Chair Colin A. Dease President and Chief Executive Officer Darcy Reynolds Vice President, Finance and Chief Financial Officer Head Office AKITA Drilling Ltd., 1000, 333 - 7th Avenue SW Calgary, Alberta T2P 2Z1 403.292.7979 Banker ATB Financial Calgary, Alberta Counsel Bennett Jones LLP Calgary, Alberta Auditors PricewaterhouseCoopers LLP Calgary, Alberta Registrar and Transfer Agent Odyssey Trust Company Calgary, Alberta 1.888.290.1175 Share Symbol/TSX Class A Non-Voting (AKT.A) Class B Common (AKT.B) Website www.akita-drilling.com Directors Loraine M. Charlton Corporate Director Calgary, Alberta Douglas A. Dafoe President and CEO Ember Resources Inc. Calgary, Alberta Harish K. Mohan Corporate Director Calgary, Alberta Robert J. Peabody Corporate Director Calgary, Alberta Nancy C. Southern Chairman, President and Chief Executive Officer, ATCO Ltd., Canadian Utilities Limited, and CU Inc. Calgary, Alberta Linda A. Southern-Heathcott Executive Chair, AKITA Drilling Ltd. President and Chief Executive Officer, Spruce Meadows Ltd., President, Team Spruce Meadows Inc., Calgary, Alberta Henry G. Wilmot Corporate Director Calgary, Alberta Charles W. Wilson Corporate Director Boulder, Colorado 77 AKITA DRILLING | 2023 Annual ReportA K I T A D R I L L I N G 2 0 2 3 A n n u a l R e p o r t HEAD OFFICE AKITA Drilling Ltd., 1000, 333 - 7th Ave SW Calgary, Alberta T2P 2Z1 Canada www.akita-drilling.com 

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