2017 Annual Report
Contents
1
3
6
Corporate Profile
President’s Message
34
Management’s Discussion & Analysis
41
Financial Statements
Notes to the Financial Statements
Corporate Pro�ile – April 2017
TSX-V: CWC
CWC Energy Services Corp.
is a premier
contract drilling and well servicing company
operating in the WCSB with a complementary
suite of oilfield services including drilling rigs,
service rigs, swabbing rigs and coil tubing units.
These oilfield service activities are necessary
to drill wells, to complete newly drilled wells,
to maintain ongoing servicing of producing
wells and to abandon wells. CWC’s services
are provided through two divisions: Contract
Drilling and Production Services.
Corporate Profile – April 2018
Market Pro�ile
Market Pro�ile
December 31, 2016
December 31, 2017
Shares outstanding
Shares outstanding
Price
Price
Market
Financial Information
Market
Financial Information
($ millions)
391.9 million
521.4 million
$0.195
$0.20
$76.4 million
$104.3 million
2015
2014
2016
($ millions)
2017
2016
2015
Revenue
Revenue
EBITDAS
Adjusted EBITDA
Total Assets
Total Assets
Long-Term Debt
Long-Term Debt
Net Debt
Net Debt
$73.1
$81.3
$143.7
$112.2
$8.2
$73.1
$12.0
$81.3
$34.1
$16.1
$210.8
$8.2
$222.4
$12.0
$275.4
$264.4
$33.1
$210.8
$52.2
$222.4
$65.7
$49.8
$21.8
$33.1
$40.4
$52.2
$45.1
$30.3
$24.0
$40.4
Horn
Horn
River
River
Montney/
Montney/
Deep Basin
Deep Basin
Devonian
Devonian
Slave Lake
Slave Lake
Grande Prairie
Grande Prairie
Pekisko &
Beaverhill Lake
Heavy
Heavy
Oil
Oil
Drayton Valley
Drayton Valley
Cardium
Cardium
Lloydminster
Lloydminster
Red Deer
Sylvan Lake
Provost
Provost
Viking
Viking
Calgary
Calgary
Brooks
Brooks
AB
AB
Bakken
Bakken
th
Board of Directors
Jim Reid, Chairman
Duncan Au
Daryl Austin
Gary Bentham
Wade McGowan
Management
Dean Schultz
President & CEO
Duncan Au, CPA, CA, CFA
Chief Financial Officer
Stuart King, CPA, CA
VP Operations (Drilling)
Paul Donohue
VP Operations (Well
Darwin McIntyre
Services)
VP Sales and Marketing
Bob Apps
(Drilling)
VP Sales and Marketing
Mike Dubois
(Well Services)
th
th
th
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Corporate Pro�ile – April 2017
The Contract Drilling division operates under the trade name CWC
Ironhand Drilling which has a fleet of nine telescopic drilling rigs with
depth ratings from 3,200 to 5,000 metres, eight of nine rigs have top
drives, two have pad rig walking systems. The drilling rig fleet has an
average age of eight years. All of the drilling rigs are well suited for the
most active depths for horizontal drilling in the WCSB, including the
Montney, Cardium, Duvernay and other deep basin horizons.
Market Pro�ile
Price
391.9 million
Shares outstanding
December 31, 2016
The Production Services division operates under the trade name CWC Well
Services and is the largest service rig provider by operating hours in the
WCSB, based on our fleet of 149 service rigs as at December 31, 2017. Rig
services include completions, maintenance, workovers and abandonments
with depth ratings from 1,500 to 5,000 metres and are well positioned
throughout the WCSB with operating locations in Slave Lake, Grande
Prairie, Drayton Valley, Sylvan Lake, Lloydminster, Provost and Brooks,
Alberta. CWC also operates 10 coil tubing units with depth rating from
1,500 to 4,000 metres. CWC’s coil tubing units are ideally suited for the
steam adjusted gravity drainage (SAGD) wells in the oilsands as well as
other parts of the WCSB. Finally, CWC operates 13 Swabbing rigs in the
WCSB. CWC’s Swabbing services are performed by a derrick unit (similar
to a small service rig) to remove liquids from within the wellbore and allow
reservoir pressure to push all fluids up the tubing or casing. CWC’s Well
Services division is well positioned for the changing demands of our oil and
gas customers for horizontal drilling and deeper depth capabilities.
Market
Financial Information
$76.4 million
($ millions)
EBITDAS
Revenue
$222.4
$275.4
$210.8
$143.7
$0.195
$73.1
$81.3
$12.0
$34.1
2014
2015
2016
$8.2
Total Assets
2017
Long-Term Debt
2017
2017
Net Debt
2016
2016
2016
$33.1
2015
2015
2015
$21.8
$52.2
$40.4
$65.7
$45.1
Contract Drilling
Service Rigs
Coil Tubing
Horn
River
Swabbing Rigs
REVENUE BY DIVISION
REVENUE BY DIVISION
REVENUE BY DIVISION
Montney/
Deep Basin
Devonian
Slave Lake
Grande Prairie
69%
69%
69%
Pekisko &
Beaverhill Lake
31%
31%
31%
Drayton Valley
Cardium
Red Deer
Calgary
9
149
10
13
2017
2017
2017
9
74
10
–
9
74
9
–
ADJUSTED EBITDA BY DIVISION *
ADJUSTED EBITDA BY DIVISION *
ADJUSTED EBITDA BY DIVISION *
Heavy
Oil
Production
Production
Lloydminster
Services
Production
Services
Provost
Services
Viking
Contract
Contract
Drilling
Contract
Drilling
Drilling
54%
54%
54%
46%
46%
46%
* Divisional contribution, corporate costs excluded
* Divisional contribution, corporate costs excluded
* Divisional contribution, corporate costs excluded
AB
Bakken
Brooks
Corporate Pro�ile – April 2017
Market Pro�ile
Shares outstanding
Price
Market
Financial Information
December 31, 2016
391.9 million
$0.195
$76.4 million
($ millions)
2016
2015
2014
Revenue
EBITDAS
Total Assets
Long-Term Debt
Net Debt
$73.1
$81.3
$143.7
$8.2
$12.0
$34.1
$210.8
$222.4
$275.4
$33.1
$21.8
$52.2
$40.4
$65.7
$45.1
Horn
River
Montney/
Deep Basin
Devonian
Slave Lake
Grande Prairie
Pekisko &
Beaverhill Lake
Heavy
Oil
Drayton Valley
Lloydminster
Cardium
Red Deer
Provost
Viking
Calgary
AB
Bakken
Brooks
President’s Message
Dear Fellow Shareholders,
I am very pleased to share with you CWC Energy Services Corp.’s (“CWC”
or the “Company”) 2017 Annual Report. 2017 can best be described
as a year of significant recovery in Canadian oilfield services from the
depths of the four decade lows experienced in 2016. CWC’s operational
and financial results improved significantly in 2017 and the Company
strategically positioned itself to become the largest service rig company
in Canada as measured by operating hours.
Highlights of 2017
2017 started the year with West Texas Intermediate (“WTI”) oil prices around $50 to $55 per bbl and dropping
to $45 per bbl by mid-June 2017 before its steady rise to $60 per bbl by the end of the year. Currently, WTI
continues to move positively upward to $65 per bbl as OPEC and Russia’s discipline in managing oil supplies
by adhering to the production quotas set for OPEC members at their November 30, 2017 meeting, is proving
that it can be successful in increasing oil prices. This increase in oil prices resulted in increased capital
expenditure programs and drilling activity by Canadian exploration and production (“E&P”) companies,
which ultimately translated into increased business and financial results for CWC. In 2017, CWC increased
revenue to $112.2 million (a $39.1 million increase or 53% from 2016) and increased Adjusted EBITDA to $16.1
million (a $7.8 million increase or 95% from 2016) resulting in a net income of $4.9 million (a $12.3 million
increase from the net loss of $7.5 million in 2016). Under the backdrop of an improving Canadian oil patch,
CWC’s Board of Directors announced a Strategic Alternatives Review process on May 4, 2017. 207 strategic
and financial market participants were approached with the assistance of GMP FirstEnergy and CIBC World
Markets. 25 parties showed an interest in CWC and signed Confidentiality Agreements of which 9 parties
submitted a proposal for CWC’s consideration. CWC pursued several of these proposals which ultimately
ended with the acquisition of the 75 service rigs and 13 swabbing rigs of C&J Energy Production Services-
Canada Ltd. (“C&J”) on November 5, 2017 for $37.5 million in cash. CWC acquired C&J at such an attractive
price that it recorded a gain on acquisition of $9.1 million. The combination of CWC’s 74 service rigs and C&J’s
75 service rigs created the largest service rig company in Canada by operating hours. In the last 7 years,
CWC has grown its service rig fleet by 108 rigs or 263%; more than any other company in Canada during
this time. Improving from being the sixth largest service rig company to the largest service rig company in
Canada by operating hours in 7 short years and doing so under the worst industry conditions in four decades
is a testament to CWC’s productive, efficient and safety conscious employees, exceptional management team,
Board of Directors guidance and, above all, the support of our debtholders and shareholders in providing the
necessary financing to achieve these goals.
On October 30, 2017, our banking syndicate agreed to CWC’s exercise of its accordion feature to expand our
credit facilities from $65 million to $100 million to accommodate the acquisition of the C&J assets. In addition
on August 4, 2017, the banking syndicate extended the credit facilities and certain other amendments,
including revised financial covenants and continuation of an equity cure provision, to provide financial
security and flexibility to July 31, 2020. Such support from our debtholders allows CWC to focus on its
business operations and strategic growth initiatives to create long-term shareholder value.
On December 13, 2017, CWC announced the closing of its fully subscribed $26.0 million equity rights offering
by issuing an additional 130.1 million shares to its existing shareholders. $15.9 million of these proceeds
th
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were used to reduce the long-term debt incurred on the acquisition of C&J with the remainder of the $10.0
million, held in a segregated bank account, to be used at a later date to reduce long-term debt and apply
the equity cure provisions to the Company’s financial covenants. The credit facility renewal by the banking
syndicate and the equity injection from CWC’s existing shareholders to fund the C&J acquisition will ensure
CWC is well positioned to pursue future growth opportunities.
Outlook For 2018
The activity outlook for 2018 appears to be a repeat of 2017. On January 31, 2018, the Petroleum Services
Association of Canada (“PSAC”) revised its forecast for number of wells drilled in 2018 to 7,600 wells, a
decrease of 300 wells or 4% from its original October 31, 2017 forecast, but consistent with the 7,550 wells
drilled in 2017. CWC continues to perform extremely well relative to its industry peer group. Q1 2018 activity
levels have been very strong with 9 of 9 drilling rigs (100%), 93 of 107 service rigs (87%), 6 of 8 swabbing rigs
(75%) and 8 of 9 coil tubing units (89%) experiencing operating days and hours. In addition to the high activity
levels, CWC has been successful in modestly increasing service rig hourly rates with our E&P customers in Q1
2018, although such increases have yet to return to 2014 pre-downturn levels. As for the drilling rigs, average
revenue per operating day remains stable in Q1 2018, after a 21% increase in Q4 2017 over Q3 2017, as the
excess supply of drilling rigs in the WCSB keeps a lid on further pricing increases at this time.
Shareholder Returns
From a shareholder return perspective, while 2017 was not a great year for share price appreciation for
public Canadian contract drilling and well servicing companies, CWC was the only company to produce a
small positive share price return for its shareholders as the following graph indicates:
Share Price Returns - January 1, 2017 to December 31, 2017
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The poor share price performance for the entire Canadian contract drilling and well servicing sector
despite better fundamental operating and financial performance in 2017 compared to 2016, can largely be
attributable to the negative macro environment surrounding our E&P customers’ ability to get their oil and
natural gas to markets. The delays in building pipelines and the constantly increasing costs and regulations
put on our customers by federal and provincial government authorities versus the more accommodating
investment environment in the U.S. towards oil and natural gas has led to investment dollars flowing to
U.S. companies compared to Canadian companies. While there does not appear to be any catalysts that will
reverse this competitiveness and investment trend in the near future, CWC believes these are opportunistic
times for consolidation with our peers at very attractive valuations and as such will create superior returns
for shareholders over the long-term.
Conclusion
In closing, I would like to express my sincere thanks to CWC’s employees for their truly hard work and
dedication to making CWC the best performing contract drilling and well servicing company in Canada. To
our customers, we cherish your ongoing business and relationship, but must find a sustainable pricing level
that allows our industry to remain healthy given the rising costs so that together we may accomplish each
other’s objectives. To my Board of Directors, thank you for your support, wisdom, guidance and belief in this
management team. And to all of my fellow shareholders who continue to believe and support us, patience is
not the ability to wait, but how you act while waiting. Patience is not a virtue, it is a necessity!
Sincerely and submitted on behalf of the Board of Directors,
Duncan T. Au
President & Chief Executive Officer
March 24, 2018
Page | 5
MANAGEMENT’S DISCUSSION AND ANALYSIS (“MD&A”)
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Management’s Discussion and Analysis (“MD&A”) is a review of the results of operations and liquidity and capital resources of
CWC Energy Services Corp. (unless the context indicates otherwise, a reference in this MD&A to “CWC”, the “Company”, “we”,
“us”, or “our” means CWC Energy Services Corp.). The following discussion and analysis provided by CWC is dated February 28,
2018 and should be read in conjunction with audited annual financial statements for the year ended December 31, 2017.
Additional information regarding CWC can be found in the Company’s latest Annual Information Form (“AIF”). The audited
annual financial statements are prepared in accordance with IFRS as issued by the International Accounting Standards Board
(“IASB”). All amounts are expressed in Canadian dollars unless otherwise noted. Additional information relating to CWC,
Highlights for the Three Months Ended December 31, 2017
including the AIF, is available on SEDAR at www.sedar.com.
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On November 5, 2017 CWC acquired the service and swabbing rig assets and ongoing operations of C&J Energy Production
Services-Canada Ltd. (“C&J Canada”) from C&J Energy Services, Inc. (“C&J Parent”) for total consideration of $37.5 million
in cash (the “Transaction”). The combination of CWC’s premier well servicing fleet of 74 service rigs (67 active) and C&J
Canada’s 75 service rigs (44 Active) creates the largest active service rig fleet in Canada of 149 service rigs (111 active)
based on the combined 2017 operating hours reported by the Canadian Association of Oilwell Drilling Contractors
(“CAODC”) with a Canadian service rig market share of approximately 16%.
In Q4 2017 the Company experienced increased demand for drilling and well servicing largely attributable to higher crude
oil prices. The Q4 2017 average crude price, as measured by WTI, of US$55.28/bbl was a 15% increase over Q3 2017 average
price of US$48.18/bbl and 13% higher than US$49.04/bbl in Q4 2016. Natural gas prices, as measured by AECO, continued
to be depressed, but increased 23% from an average of $1.36/GJ in Q3 2017 to $1.67/GJ in Q4 2017 (Q4 2016: $2.22/GJ).
CWC’s drilling rig utilization of 56% in Q4 2017 (Q4 2016: 31%) continued to significantly outperform the CAODC industry
average of 28%, further demonstrating the desirability and demand by exploration and production (“E&P”) customers for
CWC’s telescopic double drilling rigs. CWC achieved 463 drilling rig operating days in Q4 2017 (Q4 2016: 257 days) as the
increased activity level in Q4 2017, compared to Q4 2016, reflects the increased optimism of our E&P customers as a result
of the aforementioned increase in commodity pricing.
CWC's service rig utilization of 46% in Q4 2017 was slightly higher than the 45% utilization in Q4 2016. However, a record
setting 40,879 operating hours was 51% higher than the 27,091 operating hours in Q4 2016 as a result of the additional 44
active service rigs purchased from C&J Canada on November 5, 2017 increasing CWC’s active service rig fleet from 67 to
111 rigs.
CWC’s coil tubing utilization of 24% in Q4 2017 (Q4 2016: 32%) from 1,978 operating hours was 16% lower than the 2,349
operating hours in Q4 2016. Operating hours were negatively impacted by the continuation of low natural gas prices which
started in Q3 2017 causing delays in allocation and commitment of capital by our E&P customers. These capital allocation
delays were further caused by a change of ownership in land and well positions among some of CWC’s key customers.
Revenue of $37.4 million, an increase of $16.4 million (78%) compared to $21.0 million in Q4 2016. The increase from Q4
2016 is a result of increased year-over-year activity levels and the addition of the C&J Canada assets. Between November
was recognized
5, 2017 and December 31, 2017, approximately $4.4 million of revenue and $2.0 million of gross margin
relating to the C&J Canada assets.
(1)
(1)
Adjusted EBITDA
of $6.6 million, an increase of $3.7 million (128%) compared to $2.9 million in Q4 2016. The increased
Adjusted EBITDA is a direct result of the 51% increase in service rig activity primarily as a result of the C&J Canada
acquisition combined with a 13% increase in the average revenue per hour for service rigs compared to the prior period.
In addition, an 80% increase in drilling rig operating days in Q4 2017 combined with a 14% increase in average revenue
per operating day compared to the prior period also contributed to the increased Adjusted EBITDA. CWC has achieved 18
continuous quarters of positive Adjusted EBITDA since Q2 2013 initially demonstrating management’s superior ability to
Page | 6
reduce costs to offset lower revenue from reduced pricing and activity since the beginning of this industry downturn three
years ago and now beginning to demonstrate management’s ability to increase pricing and activity as the industry recovers.
Net income of $8.5 million, an increase of $10.2 million compared to a net loss of $1.7 million in Q4 2016. The increase in
Net income in Q4 2017 is primarily due to a gain on acquisition of $9.1 million, related to the C&J Canada acquisition.
On October 30, 2017, CWC and its syndicated lenders agreed to the Company’s exercise of the accordion feature to expand
its credit facilities from $65 million to $100 million. The expanded credit facilities provide financial security and flexibility
to July 31, 2020. The expanded credit facilities were initially used to complete the $37.5 million C&J Canada acquisition
which has since been partially repaid from the equity proceeds on the successful completion of the $26.0 million Rights
Offering on December 13, 2017. The expanded credit facilities are now available to assist the Company in completing further
acquisitions, financing capital expenditures and for general working capital purposes.
On December 13, 2017, CWC completed an offering of rights (the "Rights Offering”) to holders of its common shares (the
"Common Shares") of record at the close of business on November 15, 2017 (the "Record Date"). The Rights issued under
the Rights Offering expired on December 11, 2017. Each registered shareholder of Common Shares on the Record Date
received one (1) Right for each Common Share held by such shareholder. Three (3) Rights plus the sum of $0.20 entitled the
Rights holder to subscribe for one Common Share. Eligible shareholders were entitled to subscribe for additional Common
Shares, subject to certain limitations set out in the Company's rights offering circular (the "Rights Offering Circular"). On
December 13, 2017, CWC closed the rights offering for aggregate gross proceeds of $26.0 million ($25.9 million after
deductions of share issue costs). Under the fully subscribed offering, 130,148,781 common shares were issued to
shareholders who exercised their rights.
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During Q4 2017, 405,000 (Q4 2016: nil) common shares were purchased, cancelled and returned to treasury under CWC’s
Normal Course Issuer Bid (“NCIB”).
Highlights for the Year Ended December 31, 2017
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CWC’s drilling rig utilization of 51% in 2017 (2016: 26%) exceeded the CAODC industry average of 29%. Activity levels in
2017 have increased 94% compared to 2016 reflecting increased year-over-year industry activity, focused marketing
efforts on E&P companies with ongoing drilling programs and the high quality and efficiency of our drilling rigs and field
employees. 2017 drilling rig operating days of 1,672 operating days (2016: 814 operating days) is the highest CWC has
achieved since acquiring Ironhand Drilling Inc. in May 2014.
CWC's service rig utilization was 45% in 2017 (2016: 40%). This utilization was achieve with a record setting 122,243
operating hours in 2017 (2016: 95,208 operating hours); the most in the Company’s twelve year history and shows CWC’s
commitment to being the market leader in the Canadian service rig industry. The Company's continuing increase in market
share since Q4 2015 can be attributed to its modern active fleet of 111 service rigs, exceptional sales and operational
management, and experienced rig crews performing work safely and efficiently.
CWC’s coil tubing utilization was consistent with the previous year at 29% in 2017 (2016: 30%). 2017 operating hours of
9,561 hours was a 10% increase over the 8,690 operating hours in 2016 as a result of one additional active coil tubing unit
being added to the fleet in 2017 compared to 2016. Coil tubing utilization in 2017 was impacted by low natural gas prices,
which started in Q3 2017, causing delays in allocation and commitment of capital by our E&P customers. These capital
allocation delays were further caused by a change of ownership in land and well positions among some of CWC’s key
customers.
Revenue of $112.2 million, an increase of $39.1 million (53%) compared to $73.1 million in 2016. The increase from the
previous year is primarily due to a 105% increase in drilling rig operating days and 28% increase in service rig operating
hours driven by the addition of the C&J Canada assets on November 5, 2017, as well as an increase in pricing of 8% for
drilling rig and 6% for service rig in 2017 compared to 2016.
(1)
of $16.1 million, an increase of $7.9 million (96%) compared to $8.2 million in 2016. The increased
Adjusted EBITDA
Adjusted EBITDA is consistent with the increased activity level for drilling rigs and service rigs driven by the addition of the
C&J Canada assets and the increase in pricing in 2017 compared to 2016.
Net income of $4.9 million, an increase of $12.4 million compared to a net loss of $7.5 million in 2016. Net income in 2017
includes a gain on acquisition of $9.1 million, related to the C&J Canada acquisition.
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(1)
On April 7, 2017, the Company renewed its NCIB with an Automatic Securities Purchase Plan (“ASPP”) with Raymond James
Ltd., which expires on April 6, 2018. During 2017, the Company purchased 3,493,500 (2016: nil) common shares under its
NCIB which were cancelled and returned to treasury.
On May 4, 2017, CWC announced a process to review strategic alternatives with a view to maximizing shareholder value by
capitalizing on CWC's strong financial and operational performance, market share and attractive fleet of modern assets. The
Special Committee of the Board of Directors, their financial advisors and management of CWC evaluated several potential
alternatives and proposals received, which ultimately culminated in the announcement and closing of the C&J Canada
acquisition on November 5, 2017.
On August 4, 2017, CWC and its syndicated lenders completed an extension of its credit facilities and certain other
amendments to provide financial security and flexibility to July 31, 2020. The amendments further provide the Company
access to another equity cure under the same terms and conditions, a reduction in the minimum liquidity from $10.0 million
to $5.0 million, and quarterly financial covenant for Consolidated Debt to Consolidated EBITDA ratio as follows:
For the Quarter Ended
Previously
Currently
December 31, 2017
Thereafter
4.00 : 1
3.50 : 1
4.00:1
4.00:1
In addition, on October 30, 2017, CWC and its syndicated lenders agreed to the Company’s exercise of the accordion feature
to expand its credit facilities from $65 million to $100 million to accommodate the acquisition of the C&J Canada assets.
Please refer to the “Reconciliation of Non-IFRS Measures” section for further information.
Corporate Overview
CWC Energy Services Corp. is a premier Contract Drilling and Well Servicing company operating in the Western Canadian
Sedimentary Basin ("WCSB") with a complementary suite of oilfield services including drilling rigs, service rigs, swabbing rigs
and coil tubing units. The Company's corporate office is located in Calgary, Alberta, with operational locations in Nisku, Grande
Prairie, Slave Lake, Sylvan Lake, Drayton Valley, Lloydminster, Provost and Brooks, Alberta. The Company’s shares trade on the
TSX Venture Exchange under the symbol “CWC”.
Page | 8
Financial and Operational Highlights
$ thousands, except shares, per share
amounts, margins and ratios
FINANCIAL RESULTS
Revenue
Contract Drilling
Production Services
(1)
Adjusted EBITDA
Adjusted EBITDA margin (%)
(1)
Funds from operations
Net income (loss) and comprehensive income
(loss)
Net income (loss) and comprehensive income
(loss) margin (%)
Dividends declared
Per share information
Weighted average number of shares
outstanding – basic
Weighted average number of shares
outstanding – diluted
Adjusted EBITDA
diluted
Net income (loss) per share - basic and diluted
Dividends declared per share
per share – basic and
(2)
$ thousands, except ratios
FINANCIAL POSITION AND LIQUIDITY
(1)
Working capital (excluding debt)
Working capital (excluding debt) ratio
Total assets
Total long-term debt (including current portion)
Shareholders' equity
(1)
Three months ended
December 31,
Year ended
December 31,
2017
2016
% Change
2017
2016
2015
10,914
26,506
37,420
6,630
18%
5,081
5,299
15,693
20,992
2,923
14%
106%
69%
78%
128%
35,222
76,993
112,215
16,063
14%
15,903
57,219
73,122
8,220
11%
27,758
53,502
81,260
12,037
15%
2,923
74%
14,514
8,220
12,037
8,544
(1,717)
n/m
4,861
(7,468)
(29,106)
(2)
23%
(8%)
31%
-
-
-
4%
-
(10%)
(36%)
-
3,579
418,913,266 390,655,440
399,008,915 349,836,144 285,524,891
423,221,202 390,655,440
403,359,537 349,836,144 285,524,891
$0.02
$0.02
$0.00
$0.01
($0.00)
$0.00
December 31,
2017
$0.04
$0.01
December 31,
$0.00
2016
$0.02
($0.02)
$0.00
$0.04
($0.10)
December 31,
$0.0125
2015
19,543
2.6:1
264,354
49,810
186,519
9,142
2.2:1
210,750
33,142
155,482
11,822
3.1:1
222,428
52,241
147,462
(1)
(2)
Please refer to the “Reconciliation of Non-IFRS Measures” section for further information.
Not meaningful.
Working capital (excluding debt) has increased 114% since December 31, 2016 due to increased accounts receivable from
higher revenue in Q4 2017 offset by higher current liabilities. Long-term debt (including current portion) has increased by $16.7
million mainly due to the acquisition of C&J Canada’s assets for $37.5 million less proceeds from the Rights Offering of $26.0
million and an increase in working capital of $10.4 million. Additionally, funds from operations were used for capital
expenditures and to purchase shares under the NCIB. Shareholders’ equity has increased since December 31, 2016 due to the
net income of $4.5 million for the year ended December 31, 2017 and the closing of the $26.0 million Rights Offering offset by
the purchase and cancellation of common shares under the NCIB program.
Page | 9
Operational Overview
Contract Drilling
CWC Ironhand Drilling, the Company's Contract Drilling segment, has a fleet of nine telescopic double drilling rigs with depth
ratings from 3,200 to 5,000 metres, eight of nine rigs have top drives and two have pad rig walking systems. All of the drilling
rigs are well suited for the most active depths for horizontal drilling in the WCSB, including the Montney, Cardium, Duvernay
and other deep basin horizons. In 2017, the Company completed the upgrades to Drilling Rig #4 to a high specification rig
capable of racking over 6,500 metres of drill pipe. The upgrade is part of the Company’s strategic initiatives to increase the
capabilities of its existing fleet to meet the growing demands of E&P customers for deeper depths at a cost effective price.
Three months ended
OPERATING HIGHLIGHTS
Drilling Rigs
Dec. 31,
2017
Sep. 30,
2017
Jun. 30,
2017
Mar. 31,
2017
Dec. 31,
2016
Sep. 30,
2016
Jun. 30,
2016
Mar. 31,
2016
Active drilling rigs, end of period
Inactive drilling rigs, end of period
Total drilling rigs, end of period
9
-
9
9
-
9
9
-
9
9
-
9
9
-
9
9
-
9
8
1
9
8
1
9
(1)
Revenue per operating day
Drilling rig operating days
(2)
Drilling rig utilization %
CAODC industry average utilization %
$23,572
463
56%
28%
$19,424
522
63%
29%
$19,575
155
19%
17%
$20,942
532
66%
40%
$20,623
257
31%
24%
$16,835
301
37%
17%
$21,754
65
9%
7%
$21,565
191
26%
20%
Wells drilled
Average days per well
Meters drilled (thousands)
Meters drilled per day
Average meters per well
(1)
30
15.0
128.1
277
4,270
29
18.0
112.2
215
3,869
17
9.1
45.6
294
2,684
41
13.0
151.8
285
3,702
21
12.2
82.0
319
3,906
21
14.3
70.0
232
3,332
5
13.0
19.5
300
3,903
14
13.6
56.0
293
4,000
Revenue per operating day is calculated based on operating days (i.e. spud to rig release basis). New or inactive drilling rigs are added based on the first day
(2)
of field service.
Drilling rig utilization is calculated based on operating days (i.e. spud to rig release basis) in accordance with the methodology prescribed by the CAODC.
Contract Drilling revenue of $10.9 million for Q4 2017 (Q4 2016: $5.3 million) was achieved with a utilization rate of 56% (Q4
2016: 31%), compared to the CAODC industry average of 28%. CWC achieved 463 drilling rig operating days in Q4 2017, an
80% increase from Q4 2016, reflecting increased year-over-year industry activity, focused marketing efforts on E&P companies
with ongoing drilling programs and the high quality and efficiency of our drilling rigs and field employees, coupled with Q4 2016
having experienced unusually warm and wet weather conditions, which negatively affected ground conditions and the
movement of heavy equipment resulting in lower activity levels. Q4 2017 revenue was 106% higher compared to Q4 2016 as
increased activity was combined with a 14% increase in revenue per operating day
Contract Drilling revenue of $35.2 million for the year ended December 31, 2017 (2016: $15.9 million) was realized as a result
of a 105% increase in drilling rig operating days to 1,672 days (2016: 814 days). CWC’s utilization rate in 2017 of 51% continues
to significantly exceed the CAODC industry average of 29% and has increased from 26% for the year ended December 31, 2016
when CWC marketed only 8 of 9 drilling rigs for the first half of the year. Increased activity was complemented by average
revenue per operating day of $21,066 in 2017, 8% higher than in 2016. Improved financial performance for 2017 reflect higher
industry activity due to higher average crude oil prices, despite experiencing a modest pull back in Q2 and Q3 2017, and to CWC’s
modern, relevant, well maintained and cost effective drilling rigs, as well as a solid reputation for safe and efficient operations,
exceptional management and experienced drilling rig crews.
Production Services
With a fleet of 149 service rigs, CWC is the largest well servicing company in Canada as measured by operating hours. CWC’s
service rig fleet consists of 77 single, 58 double, and 14 slant rigs providing services which include completions, maintenance,
workovers and abandonments with depth ratings from 1,500 to 5,000 metres. CWC has chosen to park 38 of its service rigs and
focus its sales and operational efforts on the remaining 111 active service rigs.
CWC’s fleet of ten coil tubing units consists of six Class I, three Class II and one Class III coil tubing units having depth ratings
from 1,500 to 4,000 metres. In light of competitive challenges for CWC’s one inactive Class III coil tubing unit, subsequent to the
year ended December 31, 2017, the Company has sold this Class III coil tubing unit for cash proceeds of $0.5 million and has
chosen to focus its sales and operational efforts on its nine Class I and II coil tubing units which are better suited at servicing
SAGD wells, which are shallower in depth and more appropriate for these coil tubing operations.
Page | 10
CWC’s fleet of 13 swabbing rigs were acquired as part of the C&J Canada acquisition and operate under the trade name of CWC
Swabtech. The Company has chosen to park four of its swabbing rigs and focus its sales and operational efforts on the remaining
nine active swabbing rigs.
OPERATING HIGHLIGHTS
Dec. 31,
2017
Sep. 30,
2017
Jun. 30,
2017
Three months ended
Dec. 31,
2016
Mar. 31,
2017
Sep. 30,
2016
Jun. 30,
2016
Mar. 31,
2016
Service Rigs
Active service rigs, end of period
Inactive service rigs, end of period
Total service rigs, end of period
111
38
149
66
8
74
66
8
74
66
8
74
67
7
74
66
8
74
65
9
74
65
9
74
Operating hours
Revenue per hour
Service rig utilization %
Coil Tubing Units
(1)
40,879
$606
46%
28,320
$559
47%
20,047
$551
33%
32,997
$584
56%
27,091
$536
45%
22,927
$543
38%
21,724
$548
37%
23,466
$580
40%
Active coil tubing units, end of period
Inactive coil tubing units, end of period
Total coil tubing units, end of period
9
1
10
9
1
10
9
1
10
9
1
10
8
2
10
8
1
9
8
1
9
8
1
9
Operating hours
Revenue per hour
Coil tubing unit utilization %
Swabbing Rigs
(2)
1,978
$728
24%
1,783
$688
22%
1,557
$657
19%
4,243
$491
52%
2,349
$507
32%
2,160
$458
29%
1,147
$508
16%
3,034
$662
42%
Active swabbing rigs, end of period
Inactive swabbing rigs, end of period
Total swabbing rigs, end of period
Operating hours
Revenue per hour
Swabbing rig utilization %
(1)
9
4
13
1,063
$286
19%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1)
Service rig & swabbing rig utilizations are calculated based on 10 hours a day, 365 days a year. New service rigs & swabbing rigs are added based on the first
day of field service. Service rigs and swabbing rigs requiring their 24,000 hour recertification, refurbishment or have been otherwise removed from service for
greater than 90 days are excluded from the utilization calculation until their first day back in field service.
(2)
Coil tubing unit utilization is calculated based on 10 hours a day, 365 days a year. New coil tubing units are added based on the first day of field service.
Production Services revenue was $26.5 million in Q4 2017, up $10.8 million (69%) compared to $15.7 million in Q4 2016
primarily as a result of adding an additional 44 active service rigs and nine active swabbing rigs from the C&J Canada acquisition;
an increase of 66% in CWC’s active service rigs fleet from 67 to 111 rigs for the last 57 days of 2017.
CWC's service rig utilization of 46% in Q4 2017 was slightly higher than the 45% in Q4 2016, while the 40,879 operating hours
was 51% higher than the 27,091 operating hours in Q4 2016.
CWC’s coil tubing utilization of 24% in Q4 2017 (Q4 2016: 32%) from 1,978 operating hours was 16% lower than the 2,349
operating hours in Q4 2016. Operating hours were negatively impacted by the continuation of low natural gas prices which
started in Q3 2017 causing delays in allocation and commitment of capital by our E&P customers. These capital allocation delays
were further caused by a change of ownership in land and well positions among some of CWC’s key customers. The decreased
activity level in Q4 2017 was more than offset by an increase in coil tubing’s average revenue per hour of $728; a 44% increase
from $507 per hour in Q4 2016 as the Company was successful in increasing pricing for its Class I and II coil tubing units.
For the year ended December 31, 2017, Production Services revenue of $77.0 million was 35% higher than the $57.2 million
achieved in 2016 as a result of a 28% increase in service rig operating hours from 95,223 in 2016 to a Company record setting
122,242 operating hours in 2017 driven by the addition of 44 service rigs for the last 57 days of 2017 as a result of the C&J
Canada acquisition, as well as an increase in pricing of 6% in 2017 compared to 2016. Service rig utilization increased to 46%
in 2017 compared to 40% in 2016. In addition, coil tubing operating hours increased 10% to 9,561 operating hours in 2017
(2016: 8,690 operating hours) as a result of one additional active coil tubing unit being added to the fleet in 2017 compared to
2016. The 10% increase in coil tubing activity combined with the 10% increase to the average coil tubing revenue per hour in
2017 compared to 2016 also helped contribute to the increased Production Services revenue in 2017 compared to 2016.
However, the coil tubing utilization of 29% in 2017 (2016: 30%) was impacted by low natural gas prices, which started in Q3
Page | 11
2017, causing delays in allocation and commitment of capital by our E&P customers. These capital allocation delays were further
caused by a change of ownership in land and well positions among some of CWC’s key customers.
Outlook
The continued optimism that has been building up throughout 2017 over improving crude oil prices, as OPEC reaffirmed their
decision to curtail production at their November 30, 2017 meeting. As a result, crude oil as represented by WTI, closed above
US$60/bbl for the year ended December 31, 2017; the first time it has achieve this price since May 2015. WTI averaged
US$55.28/bbl in Q4 2017, an increase of 15% over the Q3 2017 average price of US$48.18/bbl and a 13% increase from the Q4
2016 average price of US$49.04/bbl. Natural gas prices improved in Q4 2017 with AECO averaging $1.67/GJ; an increase of
23% over the Q3 2017 average price of $1.36/GJ, but still significantly lower by 43% from the Q4 2016 average price of $2.95/GJ.
With the backdrop of an improving crude oil price and a depressed natural gas price, the Petroleum Services Association of
Canada (“PSAC”) on January 31, 2018 updated its 2018 forecast of number of wells drilled to 7,600 wells; a decrease of 300 wells
or 4% compared to their original 2018 forecast on October 31, 2017, but consistent with the 7,550 wells drilled in 2017.
CWC is experiencing strong utilization in its drilling rig and service rig business units well above the CAODC industry averages.
During Q1 2018, the Company has all nine drilling rigs working (100%) and expects this utilization to continue until Q2 2018
spring breakup. Similar to CWC’s drilling rigs, the Company’s service rigs continue to see strong industry demand leading all
other Canadian service rig companies with the highest operating hours as determined by the CAODC. CWC was successful in
increasing service rig pricing by 8% in Q4 2017 compared to Q3 2017 and intends to continue implementing pricing increases
with our E&P customers to cover the additional costs of the Government of Alberta’s Bill 17, which requires employers to pay
statutory holiday pay to its hourly field employees regardless of whether the employee works on a statutory holiday. CWC
believes the improving crude oil price will allow for the Company to increase the price for its services throughout 2018.
However, aggressive pricing from certain competitors will limit how much CWC will be able to garner from our E&P customers.
As such, CWC will continue to sustainably position itself as a low cost contractor for its E&P customers providing the highest
quality service from the highest quality people at reasonable prices. CWC has achieved 18 continuous quarters of positive
Adjusted EBITDA since Q2 2013 initially demonstrating management’s ability to reduce costs thereby offseting lower revenue
from reduced pricing and activity since the beginning of this industry downturn three years ago and now beginning to
demonstrate management’s ability to increase pricing and activity as the industry recovers.
While CWC continues to maintain focus on its operational and financial performance, it also recognizes the need to pursue
opportunities that create long-term shareholder value. On May 4, 2017, CWC announced a process to review strategic
alternatives with a view to maximizing shareholder value by capitalizing on CWC's strong financial and operational performance,
market share and attractive fleet of modern assets. This strategic alternatives review process resulted in CWC’s acquisition of
C&J Canada’s service and swabbing rig assets to become the largest service rig company in Canada by operating hours, according
to the CAODC, with 111 active service rigs and approximately 16% of the Canadian service rig market share. CWC will continue
to pursue opportunities to consolidate the North American drilling and well servicing industry. CWC cautions that there are no
guarantees that other strategic opportunities will result in a transaction, or if a transaction is undertaken, as to its terms or
timing.
Page | 12
Discussion of Financial Results
Revenue, Direct Operating Expenses and Gross Margin
$ thousands
2017
2016
Change $
Change %
2017
2016
Change $
Change %
Three months
ended
December 31,
Year ended
December 31,
Revenue
Contract Drilling
Production Services
Direct operating expenses
Contract Drilling
Production Services
Gross margin
(1)
Contract Drilling
Production Services
Gross margin percentage
(1)
10,914
26,506
37,420
7,026
19,594
26,620
3,888
6,912
10,800
5,299
15,693
20,992
3,938
11,310
15,248
1,361
4,383
5,744
5,615
10,813
16,428
3,088
8,284
11,372
2,527
2,529
5,056
106%
69%
78%
78%
73%
75%
186%
58%
88%
Contract Drilling
Production Services
36%
26%
29%
Please refer to the “Reconciliation of Non-IFRS Measures” section for further information.
26%
28%
27%
(1)
19,319
19,774
39,093
12,334
16,818
29,152
6,985
2,956
9,941
121%
35%
53%
100%
41%
55%
197%
18%
50%
35,222
76,993
112,215
24,690
57,671
82,361
10,532
19,322
29,854
30%
25%
27%
15,903
57,219
73,122
12,356
40,853
53,209
3,547
16,366
19,913
22%
29%
27%
Q4 2017 revenue of $37.4 million, an increase of $16.4 million (78%) compared to $21.0 million in Q4 2016. Revenue increased
$5.6 million (106%) in the Contract Drilling segment and $10.8 million (69%) in the Production Services segment in Q4 2017
compared to Q4 2016. The main drivers of the increase in Q4 2017 over Q4 2016 were increased drilling rig utilization of 56%
in Q4 2017 (Q4 2016: 31%) and a slight increase in service rig utilization of 46% in Q4 2017 (Q4 2016: 45%) while increasing
the active service rig fleet to 111 rigs in Q4 2017 (Q4 2016: 67 active service rigs).
For 2017, revenue of $112.2 million, an increase of $39.1 million (53%) compared to $73.1 million in 2016. The increase in
revenue is due to higher Contract Drilling revenue of $19.3 million (121%) combined with an increase of $19.8 million (35%)
in the Production Services segment for 2017 compared to 2016. Of the $19.3 million increase in Contract Drilling revenue,
approximately 87% is due to higher activity, while 13% is due to pricing as average revenue per operating day in 2017 of
$21,066 is 8% higher than the 2016 average revenue per operating day of $19,537. Production Services revenue for 2017 was
$19.8 million (35%) higher than 2016 as a 28% increase in service rig activity and a 10% increase in coil tubing activity
(operating hours) and a 6% increase in service rig pricing and a 10% increase in coil tubing pricing (revenue per hour) was
accomplished with the addition of the 44 active service rigs acquired from C&J Canada on November 5, 2017 and the addition
of one coil tubing unit for 2017 which was not active in 2016.
Higher industry activity in 2017 allowed CWC to diversify its customer base and reduce reliance on its top customer. Revenue
contribution from the Company's top ten customers dropped from 74% in 2016 to 62% in 2017 with CWC’s top customer’s
revenue contribution dropping from 32% in 2016 to 21% in 2017.
Approximately 66% (2016: 73%) of revenue in 2017 was from work on crude oil wells while 34% (2016: 25%) was from
natural gas wells (2016: Other: 2%). Further, approximately 38% (2016: 26%) of revenue was related to drilling and
completions work, 37% (2016: 63%) from maintenance and workovers on producing wells and 25% (2016: 11%) from
abandonments.
Many direct operating expenses, including labour costs related to field operating employees, are variable in nature and increase
or decrease with activity levels such that changes in operating costs generally correspond to changes in revenue or activity
levels. Contract Drilling’s gross margin percentage of 36% in Q4 2017 is higher than the 26% in Q4 2016 and the 30% for 2017
is higher than the 22% for 2016 as a result of higher activity levels and pricing. Production Services’ gross margin of 26% in Q4
2017 is lower than the 28% in Q4 2016, as service rig field labour wages increased during the quarter. Production Services’
gross margin of 25% for 2017 is lower than the 29% for 2016 as a result of increased service rig field labour wages in Q4 2017,
increases in repair and maintenance due to higher activity levels, and higher fuel costs in part driven by the impact of the Alberta
Carbon Tax Levy introduced on January 1, 2017 which could not be recovered from our E&P customers. In addition higher gross
margins in 2016 were attributable to Q2 to Q4 2016 experiencing a higher than normal percentage of service rigs operating 24
hours a day compared to a lesser number of 24 hour operations from Q2 to Q4 2017.
Page | 13
Selling and Administrative Expenses
$ thousands
2017
2016
Change $
Change %
2017
2016
Change $
Change %
Three months ended
December 31,
Year ended
December 31,
Selling and administrative
expenses
4,170
2,821
1,349
48%
13,791
11,693
2,098
18%
Most selling and administrative expenses, such as building and office rent and administrative salaries are fixed and are not
subject to significant fluctuation on a quarterly basis. Other costs such as travel, training, professional and legal fees can fluctuate
depending on specific activity or services required in the period.
Selling and administrative expenses of $4.2 million in Q4 2017, an increase of $1.4 million (48%) compared to $2.8 million in
Q4 2016. Selling and administrative expenses of $13.8 million for the year ended December 31, 2017, an increase of $2.1 million
(18%) compared to $11.7 million in 2016. The increased selling and administrative expenses are due primarily to the 24 salaried
employees that joined CWC from the C&J Canada acquisition, additional costs to recruit field employees combined with other
costs incurred due to significantly higher year-over-year activity levels across all segments. Severance costs totaling $0.3 million
were paid in 2017 (2016: $0.2 million) and a bonus accrual of $0.4 million is included in 2017 (2016: nil).
Adjusted EBITDA
Three months ended
December 31,
2016
2017
Change $ Change %
Year ended
December 31,
2016
2017
Change $ Change %
$ thousands
Adjusted EBITDA
(1)
Contract Drilling
Production Services
Corporate
(1)
3,624
4,765
(1,759)
6,630
18%
996
2,577
(650)
2,923
14%
2,628
2,188
(1,109)
3,707
264%
85%
(171%)
128%
9,591
11,073
(4,601)
16,063
14%
2,422
9,491
(3,693)
8,220
11%
7,169
1,582
(908)
7,843
296%
17%
(25%)
96%
(1)
Adjusted EBITDA margin (%)
Please refer to the “Reconciliation of Non-IFRS Measures” section for further information.
Management uses Adjusted EBITDA as a measure of the cash flow generated by the Company. Positive Adjusted EBITDA
provides the cash flow needed to grow the business through purchase of new equipment or business acquisitions, fund working
capital, service and reduce outstanding long-term debt, pay a dividend or repurchase outstanding common shares under the
NCIB.
Adjusted EBITDA of $6.6 million in Q4 2017, an increase of $3.7 million (128%) compared to $2.9 million in Q4 2016. The
increase in Adjusted EBITDA is due to a $2.6 million increase in the Contract Drilling, a $2.2 million increase in the Production
Services segment offset by a $1.1 million increase in Corporate expenses.
For the year ended December 31, 2017, Adjusted EBITDA of $16.1 million, an increase of $7.9 million (96%) compared to $8.2
million in 2016. The increase in Adjusted EBITDA is consistent with increased activity and pricing from Contract Drilling ($7.2
million) and Production Services ($1.6 million) offset by higher Corporate expenses ($0.9 million).
Transaction Costs
$ thousands
2017
2016
Change $
Change %
2017
2016
Change $
Change %
Three months ended
December 31,
Year ended
December 31,
(1)
Transaction costs
Not meaningful.
1,549
-
1,549
n/m
1,549
-
1,549
(1)
(1)
n/m
Transaction costs of $1.5 million were incurred on the acquisition of C&J Canada’s service and swabbing rig assets.
Page | 14
Stock Based Compensation
$ thousands
2017
2016
Change $
Change %
2017
2016
Change $
Change %
Three months ended
December 31,
Year ended
December 31,
Stock based compensation
278
594
(316)
(53%)
869
945
(76)
(8%)
Stock based compensation of $0.3 million in Q4 2017, a decrease of $0.3 million (-53%) compared to $0.6 million in Q4 2016.
Stock based compensation of $0.9 million for the year ended December 31, 2017, a decrease of $0.1 million (-8%) compared to
$1.0 million for the year ended December 31, 2016. Stock based compensation is primarily a function of outstanding stock
options and restricted share units (“RSU's”) being expensed over their vesting term.
Finance Costs
$ thousands
2017
2016
Change $ Change %
2017
2016
Change $ Change %
Three months ended
December 31,
Year ended
December 31,
Finance costs
606
502
104
21%
2,054
2,515
(461)
(18%)
Finance costs of $0.6 million in Q4 2017, an increase of $0.1 million (21%) compared to $0.5 million in Q4 2016. The increase
in finance costs was due to increased debt levels at the end of the year due to the acquisition of the C&J Canada assets.
Finance costs were $2.1 million for the year ended December 31, 2017, a decrease of $0.4 million (-18%) compared to $2.5
million in 2016. The decrease in finance costs was due to lower average interest rates, and a reduction in the average outstanding
borrowing in 2017 when compared to 2016 following the July 2017 repayment of $7.6 million from the proceeds of the $14.6
million rights offering in June 2016.
Depreciation and Amortization
$ thousands
Depreciation and
Amortization
Contract Drilling
Production Services
Corporate
Three months ended
December 31,
Year ended
December 31,
2017
2016
Change $ Change %
2017
2016
Change $ Change %
1,973
2,801
37
4,811
984
2,708
41
3,733
989
93
(4)
1,078
101%
3%
(10%)
29%
6,215
10,730
158
17,103
3,284
10,799
165
14,248
2,931
(69)
(7)
2,855
89%
(1%)
(4%)
20%
Depreciation and amortization for drilling rigs, service rigs and swabbing rigs are predominately based on operating days and
hours. Coil tubing units, capitalized re-certifications and other production equipment are depreciated on a straight line basis
resulting in consistent depreciation and amortization expense regardless of activity. Amortization of Intangibles is based on
estimated remaining life. As such, the change in depreciation for Q4 2017 and the year ended December 31, 2017 predominately
reflect changes in utilizations and the increase in usage of the Contract Drilling and Production Services equipment in 2017
compared to 2016.
Loss on Disposal of Equipment
$ thousands
2017
2016
Change $ Change %
2017
2016
Change $ Change %
Three months ended
December 31,
Year ended
December 31,,
Loss on disposal of equipment
112
231
(119)
(52%)
40
394
(354)
(90%)
Management continually monitors the asset mix and equipment needs and invests and divests assets as needed to optimize
operations. During Q4 2017 and the year ended December 31, 2017, the loss on disposal of equipment was the result of the sale
of equipment with proceeds on sale of $0.3 million (Q4 2016: $0.9 million) and $0.5 million (2016: $1.1 million) respectively.
Page | 15
Gain on Acquisition
$ thousands
2017
2016
Change $ Change %
2017
2016
Change $ Change %
Three months ended
December 31,
Year ended
December 31,,
Gain on acquisition
(1)
Not meaningful.
9,128
-
9,128
n/m
9,128
-
9,128
(1)
(1)
n/m
The gain relates to the acquisition of C&J Canada’s service and swabbing rig assets. The gain was calculated as the difference
between the total acquisition fair value of the identifiable net assets acquired being $49.0 million and the fair value of the
consideration transferred being $37.5 million with $2.4 million being deducted for deferred tax liability.
Deferred Income Taxes Expense (Recovery)
$ thousands
Three months ended
December 31,
Year ended
December 31,
2017
2016
2017
2016
Net income (loss) before income taxes
Deferred income tax expense (recovery)
Deferred income tax expense (recovery) as a % of net income (loss)
before income taxes
Expected statutory income tax rate
8,402
(142)
(2%)
27%
(2,137)
(420)
3,576
(1,285)
(9,882)
(2,414)
20%
27%
(36%)
27%
24%
27%
Income taxes are a function of taxable income and are calculated differently than accounting net income. Differences between
accounting net income and taxable income include such things as gains or losses on disposal of fixed assets, stock based
compensation, differences between income tax estimates and actual tax filings, goodwill impairment, and other differences.
The deferred income tax recovery for 2017 of $1.3 million (2016: $2.4 million) is a result of the net income before income taxes
being adjusted into a net loss for tax purposes by adjusting for the temporary and permanent differences. The largest item being
added back to net income (loss) for accounting purposes to get to net income (loss) for tax purposes in 2017 is the $9.1 million
gain on acquisition recorded as part of the purchase price allocation on the acquisition of C&J Canada’s service and swabbing rig
assets.
The Company has substantial tax pools and non-capital losses available to reduce future taxable income such that the Company
does not expect to pay any cash taxes for the next several years.
Net Income (Loss) and Comprehensive Income (Loss)
$ thousands
2017
2016
Change $ Change %
2017
2016
Change $ Change %
Three months ended
December 31,
Year ended
December 31,
Net income (loss) and
comprehensive income
(loss)
(1)
Not meaningful.
8,544
(1,717)
10,261
(1)
n/m
4,861
(7,468)
12,329
(1)
n/m
Net income (loss) and comprehensive income (loss) of $8.5 million in Q4 2017, an increase of $10.2 million compared to $(1.7)
million in Q4 2016. Net income (loss) and comprehensive income (loss) for 2017 was $4.9 million, an increase of $12.4 million
compared to $(7.5) million in 2016. The largest cause of the increases is the $9.1 million gain on acquisition recorded as part of
the purchase price allocation on the acquisition of C&J Canada’s service and swabbing rig assets. In addition, the increase in
Adjusted EBITDA from the Contract Drilling and Production Services segments more than offset the higher Corporate costs and
Company depreciation and amortization for both Q4 2017 and for the year ended December 31, 2017.
Page | 16
Liquidity and Capital Resources
Source of Funds:
The Company’s liquidity needs in the short-term and long-term can be sourced in several ways including: funds from operations,
borrowing against existing credit facilities, new debt instruments, equity issuances and proceeds from the sale of assets. Cash
inflows are used to repay outstanding amounts on the Company's credit facilities, and fund capital requirements.
During 2017, the Company’s Funds from Operations of $14.5 million combined with a $16.7 million increase in long-term debt
and $26.0 million from common share issuances was used to fund a $10.3 million increase in non-cash working capital, $43.8
million in capital expenditures, net of proceeds on disposition, $2.3 million to pay interest on long-term debt, finance lease
payments and pay financing costs and $0.8 million to acquire shares under the NCIB.
At December 31, 2017 the Company had working capital (excluding debt) of $19.5 million compared to $9.1 million at December
31, 2016. (Please refer to the "Reconciliation of Non-IFRS Measures" section for further information). The increase in working
capital (excluding debt) from December 31, 2016 is due to increased accounts receivable from higher revenue in Q4 2017 versus
Q4 2016 offset by higher current liabilities. Typically, as activity levels and/or pricing increase or decrease working capital will
also increase or decrease.
On August 4, 2017, CWC and its syndicated lenders completed an extension of its credit facilities and certain other amendments
to provide financial security and flexibility to July 31, 2020. The amendments further provide the Company access to another
equity cure under the same terms and conditions, a reduction in the minimum liquidity from $10.0 million to $5.0 million, and
quarterly financial covenant for Consolidated Debt to Consolidated EBITDA ratio as follows:
Previously Currently
For the Quarter Ended
December 31, 2017
Thereafter
4.00 : 1
3.50 : 1
4.00:1
4.00:1
The credit facilities are secured by a general security agreement and a first charge security interest covering all of the assets of
the Company. Under the terms of the credit facilities, the Company is required to comply with certain financial covenants. As of
December 31, 2017, the Company is in compliance with each of the financial covenants. The Company expects to be able to
renew the credit facilities prior to maturity.
On October 30, 2017, CWC and its syndicated lenders agreed to the Company’s exercise of the accordion feature to expand its
credit facilities from $65 million to $100 million. The expanded credit facilities provide financial security and flexibility to July
31, 2020. The syndicate lenders also provided consent to permit the acquisition of the C&J Canada assets with the expanded
credit facilities. The expanded credit facilities were initially used to complete the transaction with C&J Canada and upon the
successful completion of the Rights Offering, are subsequently available to assist the Company in completing further
acquisitions, financing capital expenditures and for general working capital purposes.
Effective December 31, 2017, the applicable rates under the Bank Loan are: bank prime rate plus 1.00%, banker’s acceptances
rate plus a stamping fee of 2.00%, and standby fee rate of 0.45%.
On December 13, 2017, CWC announced the closing of a Rights Offering of its common shares. The Rights Offering was fully
subscribed and generated $26.0 million in gross proceeds for 130,148,781 common shares issued. In December 2017, the
Company elected to repay $16.0 million of the Company’s outstanding indebtedness from the proceeds from the Rights Offering.
At December 31, 2017, the remaining $10.0 million of proceeds from the Rights Offering were held in a segregated bank account
so that it may be utilized as an equity cure in future quarters.
Capital Requirements
On December 13, 2017 the Company announced its capital expenditure budget for 2018 of $12.7 million, $7.2 million of which
is growth capital to improve certain drilling and coil tubing equipment while the remaining $5.5 million is maintenance and
infrastructure capital related to recertifications, additions and upgrades to field equipment for the drilling rigs, service rigs,
swabbing rigs and coil tubing divisions as well as information technology infrastructure. The increase to the 2018 capital
expenditure budget compared to the 2017 capital expenditure of $6.8 million is consistent with CWC’s commitment to safety
and operational efficiency with high quality and well maintained equipment. CWC intends to finance its 2018 capital expenditure
budget from operating cash flows.
Page | 17
As utilization of the Company’s equipment increases, CWC plans to recertify several of its service rigs. As at December 31, 2017,
the Company has capital spending plans as noted in the section titled “Capital Expenditures”. Additional discretionary capital
expenditures will be required in order to continue to grow the Company’s assets and revenue in the future. It is anticipated
future cash requirements for capital expenditures will be met through a combination of funds from operations and borrowing
against existing credit facilities as required. However, additional funds may be raised by new debt instruments, equity issuances
and proceeds from the sale of assets.
CWC may require additional financing in the future to implement its strategies and business objectives. It is possible that such
financing will not be available, or if available, will not be available on favorable terms. If CWC issues any shares in the future to
finance its operations or implement its strategies, the current shareholders of CWC may incur a dilution of their interest.
Common Shares and Dividends
The following table summarizes outstanding share data and potentially dilutive securities:
February 28, 2018
December 31, 2017
December 31, 2016
Common shares
Stock options
Restricted share units
522,109,625
25,563,335
4,822,332
521,378,958
27,546,667
5,135,332
391,920,676
21,791,000
4,473,000
During the year ended December 31, 2017, 983,333 stock options were exercised, 1,568,000 were forfeited and 8,307,000 were
granted. In addition, 1,819,668 RSU's were exercised, 200,000 were forfeited and 2,682,000 were granted.
On April 7, 2017, the Company renewed its NCIB which now expires on April 6, 2018. Under the NCIB the Company may
purchase, from time to time as it considers advisable, up to 19,653,292 of issued and outstanding common shares through the
facilities of the TSXV. In addition, CWC entered into an automatic securities purchase plan (the “ASPP”) (as defined under
applicable securities laws) with Raymond James Ltd. ("Raymond James") for the purpose of making purchases under the ASPP.
Such purchases will be determined by Raymond James in its sole discretion, without consultation with CWC having regard to
the price limitation and aggregate purchase limitation and other terms of the ASPP and the rules of the TSXV. Conducting the
NCIB as an ASPP allows common shares to be purchased at times when CWC would otherwise be prohibited from doing so
pursuant to securities laws and its internal trading policies During Q4 2017, 405,000 common shares (Q4 2016: nil) were
purchased, cancelled and returned to treasury, bringing the total to 3,493,500 common shares purchased, cancelled and
returned to treasury for the year ended December 31, 2017.
CWC completed an offering of rights to holders of its common shares of record at the close of business on November 15, 2017.
The Rights issued under the Rights Offering expired on December 11, 2017. Each registered shareholder of Common Shares on
the Record Date received one Right for each Common Share held by such shareholder. Three Rights plus the sum of $0.20
entitled the Rights holder to subscribe for one Common Share. Eligible shareholders were entitled to subscribe for additional
Common Shares, subject to certain limitations set out in the Company's rights offering circular. On December 13, 2017, CWC
closed the rights offering for aggregate gross proceeds of $26.0 million ($25.9 million after deductions of share issue costs).
Under the fully subscribed offering, 130,148,781 common shares were issued to shareholders who exercised their rights.
Page | 18
Capital Expenditures
$ thousands
Contract Drilling
Production Services
Corporate
Total capital expenditures
Growth capital
Maintenance and infrastructure capital
Total capital expenditure
Three months ended
December 31,
Year ended
December 31,
2017
2016
2017
2016
1,176
37,730
-
38,906
37,605
1,301
38,906
1,303
451
-
1,754
207
1,547
1,754
3,964
40,559
9
44,532
39,340
5,192
44,532
1,662
996
-
2,658
207
2,451
2,658
Capital expenditures in 2017 of $44.5 million are $41.9 million higher than the $2.7 million in 2016 and primarily consist of the
acquisition of C&J Canada’s service and swabbing rig assets, recertification costs, leasehold improvements, new drill pipe, coil
tubing equipment and vehicles.
A 2018 capital expenditure budget of $12.7 million was approved by the Board of Directors on December 13, 2017, $7.2 million
of which is growth capital to improve certain drilling and coil tubing equipment while the remaining $5.5 million is maintenance
and infrastructure capital related to recertifications, additions and upgrades to field equipment for the drilling rigs, service rigs,
swabbing rigs and coil tubing divisions as well as information technology infrastructure.
Commitments and Contractual Obligations
Under the terms of the Company’s amended credit facilities, the borrowing under the credit facilities are due in full on July 31,
2020. The Company is committed to monthly payments of interest and bank charges until July 31, 2020. There have been no
significant changes in other commitments or contractual obligations since December 31, 2016. Management believes that there
will be sufficient cash flows generated from operations to service the interest on the debt and finance the required growth and
maintenance capital of the Company in 2018.
Summary and Analysis of Quarterly Data
$ thousands, except per share
amounts
Three months ended
2017
2016
Dec.
31
Sept.
30
June
30
March
31
Dec.
31
Sept.
30
June
30
March
31
Revenue
Adjusted EBITDA
Net income (loss)
37,420
27,173
15,114
32,580
20,922
18,506
13,884
19,740
6,630
4,055
228
5,150
2,923
1,741
999
2,557
8,544
(638)
(2,677)
(368)
(1,717)
(2,042)
(2,279)
(1,430)
Net income (loss) per share: basic and
diluted
0.02
0.00
(0.01)
0.00
0.00
(0.01)
(0.01)
0.00
Total assets
Total long-term debt
Shareholders' equity
264,354
49,810
186,519
208,355
34,404
151,833
203,265
28,887
152,596
218,171
38,828
155,358
210,750
33,142
155,482
212,634
34,013
156,605
212,440
32,235
158,515
218,906
50,538
146,116
The table above summarizes CWC’s quarterly results for the previous eight financial quarters. CWC’s operations are carried out
in western Canada. The second quarter is typically expected to be the weakest financial and operating quarter for the Company
due to ground conditions being impacted by spring breakup. The ability to move heavy equipment in the Canadian crude oil and
natural gas fields is dependent on weather conditions. As warm weather returns in the spring, the winter’s frost comes out of
the ground rendering many secondary roads incapable of supporting the weight of heavy equipment until they have thoroughly
dried out. The duration of this spring breakup has a direct impact on the Company’s activity levels. In addition, many exploration
and production areas in northern Canada are accessible only in winter months when the ground is frozen enough to support
Page | 19
equipment. As a result, late March through May is traditionally the Company’s slowest time, and as such the revenue, operating
costs, and financial results of the Company will vary on a quarterly basis.
Through the eight quarters presented, the amount of revenue and net income (loss), adjusted for the effects of seasonality, have
fluctuated primarily due to changes in the utilization of equipment, changes in the day and hours billing rate, and the increase
in the number of drilling rigs, service rigs, swabbing rigs and coil tubing units over the period as detailed in the section titled
“Operational Overview”.
Other significant impacts have been a result of:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Q4 2017 saw the acquisition of C&J Canada’s service and swabbing rig assets for $37.5 million. Higher operating activity
and pricing in the Contract Drilling and Production Services’ segments also contributed to the improved financial results
compared to the previous seven quarters. CWC closed a rights offering for aggregate gross proceeds of $26.0 million
($25.9 million after deductions of share issue costs) to partially finance the acquisition of the C&J Canada assets. Under
the fully subscribed offering, 130,148,781 common shares were issued to shareholders who exercised their rights.
During Q4 2017, 405,000 common shares were purchased, cancelled and returned to treasury under the NCIB;
During Q3 2017, 1,402,000 common shares were purchased under the NCIB and a total of 1,441,500 common shares
were cancelled and returned to treasury;
During Q2 2017, 1,404,000 common shares were purchased under the NCIB and a total of 1,478,000 common shares
were cancelled and returned to treasury;
Q1 2017 saw significantly higher operating activity in the Company’s Contract Drilling and Production Services
segments than what had been experienced in the last eight to twelve quarters;
Q4 2016 saw improved utilizations in both drilling and service rig activity as a result of increased global crude oil and
natural gas prices after OPEC’s agreement on crude oil production cuts;
Q3 2016 activity and pricing continued to be negatively impacted by low global crude oil and natural gas prices.
However, the Company continued to see leading market share and utilization of its service rigs;
Q2 2016 service rig fleet worked a record 21,730 operating hours, the highest second quarter in the company's previous
eleven years despite a very challenging industry operating environment, which continued to reduce hourly rates. The
prolonged downturn and pricing pressure had a significant impact on the utilization of the Company’s Contract Drilling
division as the need to drill new wells by E&P customers were at extremely low levels; and
Q1 2016 activity and pricing continued to be negatively impacted by low global crude oil and natural gas prices.
However, the Company saw a significant increase in its market share and utilization of its service rigs during a period
of declining industry activity.
Critical Accounting Estimates and Judgments
This MD&A of the Company’s financial condition and results of operations is based on the financial statements which are
prepared in accordance with IFRS. The preparation of the financial statements in conformity with IFRS requires that certain
estimates and judgments be made with respect to the reported amounts of revenue and expenses and the carrying amounts of
assets and liabilities. These estimates are based on historical experience and management’s judgment. Anticipating future events
involves uncertainty and consequently the estimates used by management in the preparation of the financial statements may
change as future events unfold, additional experience is acquired or the Company’s operating environment changes. In many
cases the use of judgment is required to make estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in
the period in which the estimates are revised and in any future periods affected. Further details of the nature of these estimates
and assumptions may be found in the relevant notes to the financial statements.
Management considers the following to be the most significant of the judgments, apart from those involved in making estimates,
made in preparation of the financial statements:
Business combinations
The acquisitions of businesses are accounted for using the acquisition method. The consideration for each acquisition is
measured at the aggregate of the fair values, at the date of exchange, of assets obtained, liabilities incurred or assumed, and
equity instruments issued by the Company in exchange for control of the acquired business. The acquired business’ identifiable
assets, liabilities and contingent liabilities are recognized at their fair values at the acquisition date.
To the extent the fair value of consideration paid exceeds the fair value of the net identifiable tangible and intangible assets,
goodwill is recognized. To the extent the fair value of consideration paid is less than the fair value of net identifiable tangible
assets and intangible assets, the excess is recognized in income.
Page | 20
Goodwill is not depreciated, but is measured at cost less any accumulated impairment losses.
Transaction costs incurred in connection with a business combination, such as legal fees, due diligence fees and other
professional and consulting fees are expensed as incurred.
Determination of cash generating units
For the purpose of assessing impairment of tangible and intangible assets, assets are grouped at the lowest level for which there
are separately identifiable cash flows (cash-generating units or “CGU’s”). The grouping of assets into CGU’s requires
management exercise significant judgment.
Impairment of tangible and intangible assets
Tangible and intangible assets are reviewed annually with respect to their useful lives, or more frequently, if events or changes
in circumstances indicate that the assets might be impaired. If any such indication exists, the recoverable amount of the asset is
estimated in order to determine the extent of the impairment loss, if any. Recoverable amount is the higher of fair value less
costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value
using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for
which the estimates of future cash flows have not been adjusted. As a result, any impairment losses are a result of management’s
best estimates of expected revenue, expenses and cash flows at a specific point in time. These estimates are subject to
measurement uncertainty as they are dependent on factors outside of management’s control. In addition, by their nature
impairment tests involve a significant degree of judgment as expectations concerning future cash flows and the selection of
appropriate market inputs are subject to considerable risks and uncertainties.
Depreciation and amortization
Depreciation of property and equipment and intangible assets is carried out on the basis of the estimated useful lives of the
related assets. Assessing the reasonableness of the estimated useful lives of property and equipment and intangibles requires
judgment and is based on currently available information, including historical experience by the Company. Additionally, the
Company may consult with external equipment builders or manufacturers to assess whether the methodologies and rates
utilized are consistent with their expectations. Changes in circumstances, such as technological advances, changes to the
Company’s business strategy, changes in the Company’s capital strategy or changes in regulations may result in the actual useful
lives differing from the Company’s estimates. A change in the remaining useful life of a group of assets, or their expected residual
value, will affect the depreciation rate used to amortize the group of assets and thus affect depreciation expense as reported in
the Company’s results of operations. These changes are reported prospectively when they occur.
Income taxes
The Company uses the liability method of accounting for income taxes. Under this method, deferred income tax assets and
liabilities are recorded based on temporary differences between the carrying amount of an asset or liability and its tax base.
Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally
recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against
which those deductible temporary differences can be utilized. The carrying amount of deferred tax assets is reviewed at the end
of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to
allow all or part of the asset to be recovered. The Company’s operations are complex and computation of the provision for
income taxes involves tax interpretations, regulations and legislation that are continually changing. Any changes in the estimated
amounts are recognized prospectively in the statement of income and comprehensive income.
New Accounting Pronouncements
A number of new standards, amendments to standards and interpretations have been issued by the IASB and are not yet effective
for the year ended December 31, 2017. The new standards, amendments to standards and interpretations are not expected to
have a significant effect on the annual financial statements, except for:
IFRS 9, Financial Instruments Classification and Measurement, which introduces new requirements for the
classification and measurement of financial assets. Under IFRS 9, financial assets are classified and measured based on
the business model in which they are held and the characteristics of their contractual cash flows. The standard
introduces additional changes relating to financial liabilities. It also amends the impairment model by introducing a
new ‘expected credit loss’ model for calculating impairment. IFRS 9 also includes a new general hedge accounting
standard which aligns hedge accounting more closely with risk management. The Company intends to adopt IFRS 9 in
its financial statements for the annual period beginning on January 1, 2018. Based on our assessment, we do not expect
adoption of the standard to have a material impact on the financial statements, however, we do expect to have additional
disclosures.
Page | 21
On May 28, 2015, the IASB issued IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”) replacing International
Accounting Standard 11, “Construction Contracts” (“IAS 11”), IAS 18, “Revenue” (“IAS 18”), and several revenue-related
interpretations. IFRS 15 establishes a single revenue recognition framework that applies to contracts with customers.
The standard requires an entity to recognize revenue to reflect the transfer of goods and services for the amount it
expects to receive, when control is transferred to the purchaser in accordance with a five step model. Disclosure
requirements have also been expanded.
The Company intends to adopt IFRS 15 in its financial statements for the annual period beginning on January 1, 2018.
Our assessment primarily involved reviewing our sales contracts to determine if any performance obligations exist that
will need to be separately identified that may affect the timing of when revenue will be recognized under IFRS 15. Based
on our assessment, CWC has not identified any material impacts on the timing and measurement of revenue from our
existing revenue recognition practices from the adoption of the new standard, however, we do expect to have additional
disclosures.
On January 13, 2016, the IASB issued IFRS 16, “Leases” (“IFRS 16”) replacing International Accounting Standard 17,
“Leases” (“IAS 17”). This standard introduces a single lessee accounting model and requires a lessee to recognize assets
and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is
required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability
representing its obligation to make lease payments.
The new standard is effective for annual periods beginning on or after January 1, 2019, with earlier adoption permitted
if IFRS 15, Revenue from Contracts with Customers, has been adopted. The standard may be applied retrospectively or
using a modified retrospective approach.
The Company will adopt the new standard on the effective date of January 1, 2019. The Company is developing an
implementation plan to identify all arrangements which will fall within the scope of IFRS 16. Management believes that
it has sufficient resources allocated to the project to ensure timely implementation and has commenced its assessment
of key arrangements.
The Company will address any system and process changes necessary to compile the information to meet the disclosure
requirements of the new standard. As the Company is currently evaluating the impact of this standard, it has not yet
determined the effect on its consolidated financial statements.
Related Party Transactions
As at December 31, 2017, of the total outstanding shares of the Company, 78.0% are directly or indirectly owned by Brookfield
Capital Partners Ltd. and Brookfield Business Partners L.P. (together “Brookfield”). The Company is related to Brookfield by
virtue of control, and is therefore also related to Brookfield’s affiliates.
During 2017, the Company had revenue totaling $1,101 (2016: $1,195) and accounts receivable as at December 31, 2017 of $14
(December 31, 2016: $271) in the normal course of business with companies under common control. The terms and conditions
of these transactions were no more favourable than those available, or which might reasonably be expected to be available, in
similar transactions with non-related companies on an arm's length basis.
In December 2017, as part of the Rights Offering, Brookfield acquired 122,577,317 common shares of CWC at $0.20 per common
share. The Company received total proceeds of $24,515 from Brookfield for the common shares issuance.
CEO and CFO Certifications
The CEO and CFO of TSX Venture Exchange listed companies, such as CWC, are not required to certify they have designed internal
control over financial reporting, or caused it to be designed under their supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.
Instead, an optional form of certification has been made available to TSX Venture Exchange listed companies and has been used
by CWC’s certifying officers for the December 31, 2017 annual filings. The certification reflects what the Company considers to
be a more appropriate level of CEO and CFO certification given the size and nature of the Company’s operations. This certification
requires that the certifying officer’s state:
(cid:120)
They have reviewed the annual financial report and MD&A;
Page | 22
(cid:120)
(cid:120)
That, based on their knowledge, they have determined there is no untrue statement of a material fact, or any
omission of material fact required to be stated which would make any statement not misleading in light of the
circumstances under which it was made within the annual filings; and
That based upon their knowledge, the annual filings, together with the other financial information included in the
annual filings, fairly present in all material respects the financial condition, financial performance and cash flows
of the Company as of the date and for the periods presented in the annual filings.
Risks and Uncertainties
Certain activities of the Company are affected by factors that are beyond its control or influence. Additional risks and
uncertainties that management may be unaware of, or that they determine to be immaterial may also become important factors
which affect the Company. Along with the risks discussed in this MD&A, other business risks faced by the Company may be found
under “Risk Factors” in the Company’s most recent Annual Information Form which is available under the Company’s profile at
www.sedar.com or by contacting the Company.
CWC’s various businesses are generally tied in large part to the oil and gas exploration and production industry in Western
Canada. CWC’s businesses are sensitive to and will be affected by changing industry conditions in the oil and gas industry
including changes in the level of demand, changes in pricing levels, changes in legislation or in regulation relating to exploration,
development, production, refining, transportation, or marketing in the oil and gas industry. The following is a summary of
certain risk factors relevant to CWC’s business. All of these risk factors could negatively impact CWC’s revenue, margins and
Price Competition and Cyclical Nature of the Oilfield Services Business
cash flow.
The drilling rig, service rig swabbing rig and coil tubing businesses are highly competitive with numerous industry participants.
Management believes pricing and rig availability are the primary factors considered by CWC's potential customers in
determining which drilling rig, service rig, swabbing rig or coil tubing contractor to select. Management believes other factors
are also important, including:
the capabilities and condition of drilling rigs, service rigs, swabbing rigs or coil tubing units;
the quality of service and experience of crews;
the safety record of the contractor and the particular drilling rig, service rig, swabbing rig or coil tubing unit;
the offering of ancillary services;
the ability to provide equipment adaptable to, and personnel familiar with, new technologies;
the mobility and efficiency of the drilling rigs, service rigs, swabbing rigs or coil tubing units; and
marketing relationships.
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
The drilling rig, service rig, swabbing rig and coil tubing industry historically has been cyclical and has experienced periods of
low demand, excess rig supply, and low day or hourly rates, followed by periods of high demand, short rig supply and increasing
day or hourly rates. Periods of excess rig supply intensify the competition in the industry and result in rigs being idle. There are
numerous drilling rig, service rig, swabbing rig and coil tubing unit suppliers in each of the markets in which CWC operates. In
all of those markets, an oversupply of equipment can cause greater price competition. Oilfield services companies compete
primarily on a regional basis, and the intensity of competition may vary significantly from region to region at any particular
time.
CWC provides services primarily to the field operation locations of oil and natural gas exploration and production companies
located in western Canada. The oil and natural gas services business in which CWC operates is highly competitive. To be
successful, CWC must provide services that meet the specific needs of its clients at competitive prices. CWC will compete with
several regional competitors that are both smaller and larger than it is. These competitors offer similar services in all geographic
regions in which CWC operates. As a result of competition, CWC may be unable to continue to provide its present services or to
acquire additional business opportunities, which could have a material adverse effect on CWC's business, financial condition,
results of operations and cash flows.
Capital Overbuild in the Drilling Rig and Service Rig Industry
Because of the long life nature of drilling rigs, service rigs, swabbing rigs and coil tubing units and the lag between the moment
a decision to build a rig or unit is made and the moment the rig or unit is placed into service, the number of rigs or units in the
industry does not always correlate to the level of demand for those rigs or units. Periods of high demand often spur increased
Page | 23
capital expenditures on rigs or units, and those capital expenditures may exceed actual demand. This capital overbuild could
cause CWC's competitors to lower their rates and could lead to a decrease in rates in the oilfield services industry generally,
which would have a material adverse effect on the revenue, cash flows and earnings of CWC.
Operational Risks
Demand and prices for CWC's products and services depend upon the level of activity in the Canadian oil and gas exploration
and production industry which in turn depends on the level of oil and gas prices, expectations about future oil and gas prices,
the cost of exploring for, producing and delivering oil and gas, the discovery rate of new oil and gas reserves, available pipeline
and other oil and gas transportation capacity, worldwide weather conditions, political, military, regulatory and economic
conditions and the ability of oil and gas companies to raise capital. The level of activity in the Canadian oil and gas exploration
and production industry is volatile. The marketability of any oil and natural gas acquired or discovered by CWC's customers will
be affected by numerous factors beyond the control of such customers. These factors include market fluctuations, the price of
crude oil, the price of natural gas, the supply and demand for oil and natural gas, the proximity and capacity of oil and natural
gas pipelines and processing equipment, and government regulations, including regulations relating to prices, taxes, royalties,
land tenure, allowable production, the import and export of oil and natural gas, and environmental protection. The effect of
these factors cannot be accurately predicted. No assurances can be given that current levels of oil and gas exploration and
production activities will improve, deteriorate further, or continue or that demand for the Company's services will continue to
reflect the level of activity in the industry generally. Industry conditions will continue to be influenced by numerous factors over
which the Company will have no control. Prices for oil and gas are expected to continue to be volatile and to affect the demand
for and pricing of the Company's products and services.
Merger and Acquisition Activity
Merger and acquisition activity in the oil and gas exploration and production sector may impact demand for CWC's services as
customers focus on reorganizing their business prior to committing funds to exploration and development projects. Further, in
any merger or acquisition transaction the resulting or acquired company may have preferred supplier relationships with oilfield
service providers other than CWC.
Oilfield Services Industry Risks
There are many risks inherent in the oilfield services industry, which even a combination of experience, knowledge and careful
evaluation may not be able to overcome. The Company's operations are subject to hazards inherent in the oilfield service
industry, such as explosions, fires and spills that can cause personal injury or loss of life, damage to or destruction of property,
equipment and the environment and suspension of operations. In addition, claims for loss of oil and gas production, damage to
formations, damage to facilities and business interruptions can occur. While the Company maintains insurance coverage that it
believes to be adequate and customary in the industry, there can be no assurances that insurance proceeds will be available or
sufficient or that CWC will be able to maintain adequate insurance in the future at rates considered reasonable. The single
occurrence of a significant uninsured claim or a claim in excess of the insurance coverage limits maintained by the Company
could have a material adverse effect on the Company's business, results of operation and prospects.
Hazards such as unusual or unexpected geological formations, pressures, blow-outs, fires or other conditions may be
encountered in drilling or servicing wells. CWC will have the benefit of insurance maintained by it, however, CWC may become
liable for damages arising from pollution, blowouts or other hazards against which it cannot insure or against which it may elect
not to insure because of high premium costs or other reasons.
Leverage and Restrictive Covenants
The ability of CWC to make payments or advances will be subject to applicable laws and contractual restrictions in the
instruments governing any indebtedness of those entities including the Credit Facilities. The degree to which CWC is leveraged
could have important consequences for investors including: (i) CWC's ability to obtain additional financing for working capital,
capital expenditures or future acquisitions; (ii) all or part of CWC's cash flow from operations may be dedicated to the payment
of the principal of and interest on CWC's indebtedness, thereby reducing funds available for future operations and to pay
dividends; (iii) certain of CWC's borrowings may be at variable rates of interest, which exposes CWC to the risk of increased
interest rates; and (iv) CWC may be more vulnerable to economic downturns and be limited in its ability to withstand competitor
pressures. These factors could have a material adverse effect on CWC's business, financial condition, results of operations and
cash flows.
The Credit Facilities contain numerous covenants that limit the discretion of management with respect to certain business
matters. These covenants will place restrictions on, among other things, the ability of CWC to create liens or other encumbrances;
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to pay dividends or make other distributions, or make certain other investments, loans and guarantees; to sell or otherwise
dispose of assets or repurchase stock, merge, amalgamate or consolidate with another entity. In addition, the credit facilities,
contain a number of financial covenants that require CWC to meet certain financial ratios and financial condition tests. CWC's
ability to meet such tests could be affected by events beyond its control, and it may not be able to meet such tests.
A failure to comply with the obligations in the credit facilities, including financial ratios and financial condition tests, could result
in a default which, if not cured or waived, would permit acceleration of the repayment of the relevant indebtedness as the lenders
could elect to declare all amounts outstanding under the credit facilities to be immediately due and payable and terminate all
commitments to extend further credit. If the lenders were to accelerate the repayment of borrowings, CWC may not have
sufficient assets to repay balances owing on the credit facilities as well as its unsecured indebtedness as the acceleration of
CWC's indebtedness under one agreement may permit acceleration of indebtedness under other agreements that contain cross-
default or cross-acceleration provisions. If CWC's indebtedness is accelerated and the Corporation was not able to repay its
indebtedness or borrow sufficient funds to refinance it, the lenders under the credit facilities could proceed to realize upon the
collateral granted to them to secure that indebtedness which could have a material adverse effect on CWC and its cash flows.
Even if CWC is able to obtain new financing, it may not be on commercially reasonable terms or on terms that are acceptable to
CWC and may impose financial restrictions and other covenants on it that may be more restrictive than the credit facilities.
Notwithstanding an event of default, there is also no assurance that CWC will be able to refinance any or all of the credit facilities
at their maturity dates on acceptable terms, or on any basis.
Liquidity Risk
Liquidity risk is the risk that the Corporation will not be able to meet its financial obligations as they become due or can do so
only at excessive cost. The Company's liquidity could be adversely affected by a material negative change in the oilfield services
industry, which in turn could lead to covenant breaches of the credit facilities, which, if not amended or waived, could limit the
Company's access to the credit facilities. If available liquidity is not sufficient to meet CWC's operating and debt obligations as
they come due, CWC will need to significantly reduce expenditure, pursue alternative financing arrangements, dispose of
significant assets, or pursue other corporate strategic alternatives, the ability of which to do so is uncertain.
Government Regulation
CWC operations are subject to a variety of federal, provincial and local laws, regulations and guidelines, including laws and
regulations related to health and safety, transportation, the conduct of operations, the manufacture, management,
transportation and disposal of certain materials used in the Company's operations. Changes in any such laws, regulations or
guidelines could have a material adverse effect on CWC’s operations.
In addition, the oil and gas industry in general is subject to extensive government policies and regulations, which result in
additional cost and risk for industry participants or parties, such as CWC, that service the industry. Royalty rates, carbon taxes,
transportation regulations, other laws or government incentive programs relating to the oil and gas industry generally may in
the future be changed or interpreted in a manner that adversely affects the Company and its shareholders.
Climate Change Legislation
In recent years, a number of initiatives relating to climate change have been proposed through domestic legislation and
international agreements (such as the Alberta Climate Leadership Plan, the Paris Protocol and the United Nations Framework
Convention on Climate Change). Many of these initiatives require nations to reduce their emissions of carbon dioxide and other
greenhouse gases ("GHG"). Reductions in GHG from oil and gas producers may be required which could result in, among other
things, increased operating and capital expenditures for those producers which may make certain production of crude oil or
natural gas by those producers uneconomic, resulting in reductions in such production and resulting decrease in the demand
for the Company's services. The Company is unable to predict the impact, if any, of any such climate change initiatives, both
current and future.
Alberta Climate Change Leadership Plan
The Alberta Climate Leadership Plan introduced a new GHG emissions pricing regime. The Climate Leadership Act (the "CLA")
received royal assent on June 13, 2016 and came into force on January 1, 2017. The Climate Leadership Regulation ("CL
Regulation"), which provides further detail in respect of the carbon levy regime set out in the CLA, was released on November
3, 2016, and also came into force on January 1, 2017. The CLA establishes an Alberta carbon pricing regime in the form of a
carbon levy on various types of fuel, based on rates of $20 per tonne of GHG emissions as of January 1, 2017 and $30 per tonne
for 2018. The carbon levy revenue will be used to fund initiatives to reduce GHG emissions, to support Alberta's ability to adapt
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to climate change and for rebates or adjustments related to the carbon levy to consumers, businesses, and communities in
addition to a household rebate program.
The CLA and the CL Regulation impose registration, payment, remittance, reporting and administrative obligations on applicable
persons throughout the fuel supply chain. The application of the carbon levy depends on the type and quantity of fuel purchased
or produced and how such fuel is used by the purchaser. Under the CLA and CL Regulations, activities integral to oil and gas
production processes are exempt until 2023. The Company's Contract Drilling and Production Services appear to meet the
definition of integral however the determination of what constitutes an activity that is "integral" to oil and gas production and
method to avoid or recover a carbon levy is still being clarified with the Alberta government. We expect the Company and its
customer’s operations to have minimal direct carbon levy exposure until 2023. It is not known what will occur in 2023 when
the current exemptions are expected to end.
Additional changes to provincial climate change legislation may adversely affect the Corporation's business, financial condition,
results of operations and cash flows which cannot be reliably or accurately estimated at this time.
Federal Carbon Tax Strategy
In October 2016, Canada ratified the Paris Agreement on climate change that was signed by Canada and over 160 other nations
at the United Nations Framework Convention on Climate Change in December 2015. Though the specific details of how Canada
will accomplish the goals set out in the Paris Agreement have not yet been announced, in October 2016 the federal government
announced a new national carbon pricing regime (the "Carbon Strategy") that will support the objectives of the Paris Agreement.
Under the Carbon Strategy, all provinces will be required to adopt a carbon pricing scheme that includes, at a minimum, a price
on carbon emissions of $10 per tonne in 2018, rising by $10 per tonne each year to $50 per tonne in 2022. If the provinces do
not adopt such a scheme, a federal regime will be imposed upon them and the funds will be transferred back to the provincial
government of the jurisdiction from where they were collected. Alternatively, provinces will be given the opportunity to
implement a cap-and-trade system, but will need to demonstrate that the province's emissions are consistent with both Canada's
national target and the results of the provinces who have implemented the carbon pricing scheme. Further legislation and
regulation is expected from the provinces in order to comply with the Carbon Strategy's requirements. For those provinces,
including Alberta, which have already established a carbon tax or a cap and trade regime, or both, the national price on carbon
will likely have little additional impact in the short term. None of the provinces have yet announced how they intend to comply
with the long-term carbon pricing requirements. It is unclear how the Carbon Strategy will be implemented in Saskatchewan
and Manitoba.
Adverse impacts to CWC's business as a result of comprehensive GHG legislation or regulation, including the CLA and the Carbon
Strategy applied to the Corporation's, may include, but are not limited to: increased compliance costs and reduced demand for
E&P Company's products thereby reducing the demand for our services.
Beyond existing legal requirements, the extent and magnitude of any adverse impacts of any additional programs or additional
regulations cannot be reliably or accurately estimated at this time because specific legislative and regulatory requirements have
not been finalized and uncertainty exists with respect to any additional measures being considered.
Seasonal Nature of CWC's Business
The Company's operations are carried on generally in Western Canada. The ability to move heavy equipment in the Western
Canadian oil and natural gas fields is dependent on weather conditions. As warm weather returns in the spring, the winter's
frost comes out of the ground rendering many secondary roads incapable of supporting the weight of heavy equipment until
they have thoroughly dried out. The duration of this "spring breakup" has a direct impact on the Company's activity levels. In
addition, many exploration and production areas in northern Canada are accessible only in winter months when the ground is
frozen enough to support equipment. The timing of freeze-up and spring breakup affects the ability to move equipment in and
out of these areas. As a result, mid-March through June is traditionally the Company's slowest time, and as such, the operating
results of the Company will vary on a quarterly basis.
Equipment and Technology Risks
Complex drilling programs for the exploration and development of remaining conventional and unconventional oil and natural
gas reserves in North America places high demands on drilling rigs, service rigs, swabbing rigs, coil tubing units and related
equipment. CWC's ability to deliver equipment and services that are more efficient than equipment and services offered by its
competitors is critical to continued success. There is no assurance that competitors will not achieve technological improvements
that are more advantageous, timely or cost effective than improvements developed by CWC.
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The ability of CWC to meet customer demands in respect of performance and cost will depend upon continuous improvements
in operating equipment and there can be no assurance that CWC will be successful in its efforts in this regard or that it will have
the resources available to meet this continuing demand. Failure by CWC to do so could have a material adverse effect on CWC's
business, financial condition, results of operations and cash flows. No assurances can be given that competitors will not achieve
technological advantages over CWC.
In the future, the Company may seek patents or other similar protections in respect of particular tools, equipment and
technology; however, the Company may not be successful in such efforts. Competitors may also develop similar tools, equipment
and technology to those of the Company thereby adversely affecting the Company's competitive advantage in one or more of its
businesses. Additionally, there can be no assurance that certain tools, equipment or technology developed by the Company may
not be the subject of future patent infringement claims or other similar matters which could result in litigation, the requirement
to pay licensing fees or other results that could have a material adverse effect on the business, results of operations and financial
condition of the Company.
Significant Shareholder
Brookfield Capital Partners Ltd. and Brookfield Business Partners L.P. (together “Brookfield”), through its ownership of 78.0%
of CWC's outstanding voting shares is a significant shareholder. As such, Brookfield will have, subject to applicable law, the
ability to determine the outcome of certain matters submitted to shareholders for approval in the future, including the election
and removal of directors, amendments to the CWC's corporate governance documents and certain business combinations. CWC's
interests and those of its controlling shareholder may at times conflict, and this conflict might be resolved against CWC's
interests. The concentration of control in the hands of a significant shareholder may impact the potential for the initiation, or
the success, of an unsolicited bid for CWC's securities.
Drilling Rig, Service Rig, Swabbing Rig and Coil Tubing Unit Construction Risks
When CWC contracts for the construction of a drilling rig, service rig, swabbing rig or coil tubing unit, the cost of construction of
the rig or a coil tubing unit and the timeline for completing the construction, are estimated at that time. Actual costs of
construction may, however, vary significantly from those estimated as a result of numerous factors, including, without
limitation, changes in input costs such as the price of steel; variations in labour rates; and, to the extent that component parts
must be sourced from other countries, fluctuations in exchange rates. In addition, several factors could cause delays in the
construction of a drilling rig, service rig, swabbing rig or coil tubing unit, including, and without limitation, shortages in skilled
labour and delays or shortages in the supply of component parts. Construction delays may lead to postponements of the
anticipated date for deployment of the newly constructed rig or coil tubing unit into operation and any such postponement could
have a negative effect on cash flows generated from operations, of which the effect may be material.
Equipment and Parts Availability
The Company's ability to expand its operations and provide reliable service is dependent upon timely delivery of new equipment
and replacement parts from fabricators and suppliers. A lack of skilled labour to build equipment combined with new
competitors entering the oilfield service sector has resulted in increased order times on new equipment and increased
uncertainty surrounding final delivery dates. Significant delays in the arrival of new equipment from expected dates may impact
future growth and the financial performance of the Company. CWC attempts to mitigate this risk by maintaining strong relations
with key fabricators and suppliers.
Dependence on Suppliers
The ability of the Company to compete and grow will be dependent on the Company having access, at a reasonable cost and in a
timely manner, to equipment, parts, components and consumables. Failure of suppliers to deliver such equipment, parts,
components and consumables at a reasonable cost and in a timely manner would be detrimental to the Company's ability to
maintain existing customers and expand its customer list. No assurances can be given that the Company will be successful in
maintaining its required supply of equipment, parts, components and consumables.
The Company's ability to provide services to its customers is also dependent upon the availability at reasonable prices of raw
materials which the Company purchases from various suppliers, most of whom are located in Canada or the United States.
Alternate suppliers exist for all raw materials. In periods of high industry activity periodic industry shortages of certain materials
have been experienced and costs may be affected. In contrast, periods of low industry activity levels may cause financial distress
on a supplier, thus limiting their ability to continue to operate and provide the Company with necessary services and supplies.
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Management maintains relationships with a number of suppliers in an attempt to mitigate this risk. However, if the current
suppliers are unable to provide the necessary raw materials, or otherwise fail to deliver products in the quantities required, any
resulting delays in the provision of services to the Company's customers could have a material adverse effect on CWC's business,
financial condition, results of operations and cash flows.
Dependence on Key Personnel
CWC's future performance and development will depend, to a significant extent, on the efforts and abilities of its executive
officers and key management personnel, and on the ability to attract and retain qualified field staff. The loss of the services of
one or more of its management team could harm the Company. Also CWC's success largely depends on the Company's continuing
ability to attract, develop and retain skilled employees in all areas of its business. The ability of the Company to expand its
services is dependent upon its ability to attract additional qualified employees. The ability to secure the services of additional
personnel is constrained in times of strong industry activity.
Risks of Interruption and Casualty Losses
CWC's operations are, or will be, subject to many hazards inherent in the well drilling, workover and completion industry,
including blowouts, cratering, explosions, fires, loss of well control, loss of hole, damaged or lost drilling equipment and damage
or loss from inclement weather or natural disasters and reservoir damage. Any of these hazards could result in personal injury
or death, damage to or destruction of equipment and facilities, suspension of operations, environmental damage, damage to the
property of others and damage to producing or potentially productive oil and natural gas formations. Generally, drilling rig,
service rig, swabbing rig and coil tubing contracts provide for the division of responsibilities between a drilling rig, service rig,
swabbing rig or coil tubing unit provider and its customer, and CWC will seek to obtain indemnification from its customers by
contract for certain of these risks. CWC will also seek protection through insurance. However, CWC cannot ensure that such
insurance or indemnification agreements will adequately protect it against liability from all of the consequences of the hazards
described above. The occurrence of an event not fully insured or indemnified against, or the failure of a customer or insurer to
meet its indemnification or insurance obligations, could result in substantial losses. In addition, insurance may not be available
to cover any or all of these risks, or, even if available, may not be adequate. Insurance premiums or other costs may rise
significantly in the future, so as to make such insurance prohibitively expensive or uneconomic.
Future Capital Requirements and Future Sales of Common Shares by CWC
CWC may require additional financing in the future to implement its strategies and business objectives. It is possible that such
financing will not be available, or if available, will not be available on favorable terms. CWC may issue additional common shares
in the future, which may dilute a shareholder's holdings in CWC or negatively affect the market price of common shares. CWC's
articles permit the issuance of an unlimited number of common shares. The directors of CWC have the discretion to determine
the price and the terms of issue of further issuances of common shares, subject to applicable law. Also, additional common shares
will be issued by CWC on the exercise of stock options granted pursuant to CWC's stock option plan, or pursuant to its restricted
share unit plan.
Capital and Financial Markets
As future capital expenditures and potential acquisitions will need to be financed out of cash generated from operations, through
debt or, if available, equity offerings, the Company's ability to access new capital is dependent on, among other factors, the
overall state of capital markets generally, and the appetite for investments in the energy industry and the Company's securities
specifically. All of these factors could have a negative effect on CWC's ability to obtain new capital on acceptable terms, or at all,
and this could have a material adverse effect on operations and share price.
Environmental Protection
CWC, is subject to various environmental laws and regulations enacted in most jurisdictions in which the Company operates,
which primarily govern the manufacture, processing, importation, transportation, handling and disposal of certain materials
used in the Company's operations. CWC believes that all CWC's business lines are currently in compliance with such laws and
regulations. CWC's customers are subject to similar laws and regulations, as well as limits on emissions into the air and
discharges into surface and sub-surface waters. While regulatory developments that may follow in subsequent years could have
the effect of reducing industry activity, CWC cannot predict the nature of the restrictions that may be imposed. CWC may be
required to increase operating expenses or capital expenditures in order to comply with any new restrictions or regulations.
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Historically, environmental protection requirements have not had a significant financial operational effect on capital
expenditures, earnings or competitive position of the Company. Environmental protection requirements are not presently
anticipated to have a significant effect on such matters in the future.
The services provided by CWC, in some cases, involve flammable products being pumped under high pressure. To address these
risks, CWC has developed and implemented safety and training programs. In addition, a comprehensive insurance and risk
management program has been established to protect CWC's assets and operations. CWC also complies with current
environmental requirements and maintains an ongoing participation in various industry-related committees and programs.
The Company has established procedures to address compliance with current environmental laws and regulations and monitors
its practices concerning the handling of environmentally hazardous materials. However, there can be no assurance that the
Company's procedures will prevent environmental damage occurring from spills of materials handled by the Company or that
such damage has not already occurred. On occasion, substantial liabilities to third parties may be incurred. The Company may
have the benefit of insurance maintained by it or the operator; however the Company may become liable for damages against
which it cannot adequately insure or against which it may elect not to insure because of high costs or other reasons.
Third Party Credit Risk
CWC is exposed to third party credit risk through its contractual arrangements with other parties. In the event such entities fail
to meet their contractual obligations to the Company, such failures could have a material adverse effect on the Company.
Failure to Realize Anticipated Benefits of Acquisitions
The Company makes acquisitions of businesses and assets in the ordinary course of business. Achieving the benefits of
acquisitions depends in part on successfully consolidating functions, retaining key employees and customer relationships and
integrating operations and procedures in a timely and efficient manner. Such integration may require substantial management
effort, time and resources, may divert management's focus from other strategic opportunities and operational matters and
ultimately the Company may fail to realize anticipated benefits of acquisitions.
CWC May Make Dispositions of Businesses and Assets in the Ordinary Course of Business
Management continually assesses the value and contribution of services provided and assets required to provide such services.
In this regard, non-core assets are periodically disposed of, so that CWC can focus its efforts and resources more efficiently.
Depending on the state of the market for such non-core assets, certain non-core assets of CWC, if disposed of, could be expected
to realize less than their carrying value on the financial statements of CWC.
Tax Matters
The taxation of companies is complex. In the ordinary course of business, CWC is subject to ongoing audits by tax authorities.
While CWC believes that its tax filing positions are appropriate and supportable, it is possible that tax matters, including the
calculation and determination of revenue, expenditures, deductions, credits and other tax attributes, taxable income and taxes
payable, may be reviewed and challenged by the tax authorities. In addition, the tax filing positions of businesses acquired by
CWC may be reviewed and challenged by the tax authorities. If such challenge were to succeed, it could have a material adverse
effect on CWC's tax position. Further, the interpretation of, and changes in, tax laws, whether by legislative or judicial action or
decision, and the administrative policies and assessing practices of taxation authorities, could materially adversely affect CWC's
tax position. As a consequence, CWC is unable to predict with certainty the effect of the foregoing on CWC's effective tax rate and
earnings.
CWC regularly reviews the adequacy of its tax provisions and believes that it has adequately provided for those matters. Should
the ultimate outcomes materially differ from the provisions, CWC's effective tax rate and earnings may be affected positively or
negatively in the period in which the matters are resolved. CWC intends to mitigate this risk through ensuring staff is well trained
and supervised and that tax filing positions are carefully scrutinized by management and external consultants, as appropriate.
There can be no assurance that income tax laws or the interpretation thereof in any of the jurisdictions in which CWC operates
will not be changed or interpreted or administered in a manner which adversely affects CWC and its shareholders. In addition,
there is no assurance that the Canada Revenue Agency, or a provincial or foreign tax agency (collectively the "
")
will agree with the manner in which CWC or its subsidiaries calculate their income or taxable income for tax purposes or that
any of the Tax Agencies will not change their administrative practices to the detriment of CWC or its shareholders (or both).
Tax Agencies
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Vulnerability to Market Changes
Fixed costs, including costs associated with leases, labour and depreciation will account for a significant portion of the
Company's costs and expenses. As a result, reduced utilization of equipment and other fixed assets resulting from reduced
demand, equipment failure, weather or other factors could significantly affect financial results.
Alternatives to and Changing Demand for Petroleum Products
Regulation, fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and
natural gas, and technological advances in fuel economy and energy generation devices could reduce the demand for crude oil
and other liquid hydrocarbons. The Company cannot predict the impact of changing demand for oil and natural gas products,
and any major changes may have a material adverse effect on the Company's business, financial condition, results of operations
and cash flows.
Interest Rate Risk
The Company is exposed to interest rate price risk as its bank loan has floating interest rate terms. However, the floating interest
rate terms do give rise to interest rate cash flow risk as interest payments are recalculated as the market rates change.
Management currently does not see this risk as significant due to Canada's history of reasonably stable interest rates and their
expectations of future interest rates.
Conflicts of Interest
Certain of the directors and officers of the Company are also directors and officers of other oil and natural gas exploration and/or
production entities and oil and natural gas services companies, and conflicts of interest may arise between their duties as officers
and directors of the Company and as officers and directors of such other companies. Such conflicts must be disclosed in
accordance with, and are subject to such other procedures and remedies as apply, under the ABCA.
Legal Proceedings
The Company is involved in litigation from time to time in the ordinary course of business. No assurance can be given as to the
final outcome of any legal proceedings or that the ultimate resolution of any legal proceedings will not have a material adverse
effect on the Company.
Cyber-Security Threats and Reliance on Information Technology
CWC's operations are dependent on the functioning of several information technology systems. Exposure of CWC's information
technology systems to external threats poses a risk to the security of these systems. Such cyber-security threats include
unauthorized access to information technology systems due to hacking, viruses and other causes that can result in service
disruptions, system failures and the disclosure, deliberate or inadvertent, of confidential business information. Significant
interruption or failure of any or all of these systems could result in operational outages, delays, lost profits, lost data, increased
costs, and other adverse outcomes. These factors could include a loss of communication links or reliable information, security
breaches by computer hackers and cyber terrorists, and the inability to automatically process commercial transactions or
engage in similar automated or computerized business activities.
Further, the Company is subject to a variety of information technology and system risks as a part of its normal course operations,
including potential breakdown, invasion, virus, cyber-attack, cyber-fraud, security breach, and destruction or interruption of
the Company's information technology systems by third parties or insiders. Unauthorized access to these systems by employees
or third parties could lead to corruption or exposure of confidential, fiduciary or proprietary information, interruption to
communications or operations or disruption to our business activities or our competitive position. In addition, cyber phishing
attempts, in which a malicious party attempts to obtain sensitive information such as usernames, passwords, and credit card
details (and money) by disguising as a trustworthy entity in an electronic communication, have become more widespread and
sophisticated in recent years. If the Company becomes a victim to a cyber phishing attack it could result in a loss or theft of the
Company's financial resources or critical data and information or could result in a loss of control of the Company's technological
infrastructure or financial resources. The Company applies technical and process controls in line with industry-accepted
standards to protect our information assets and systems; however, these controls may not adequately prevent cyber-security
breaches. Disruption of critical information technology services, or breaches of information security, could have a negative effect
on our performance and earnings, as well as on our reputation. The significance of any such event is difficult to quantify, but
may in certain circumstances be material and could have a material adverse effect on the Company's business, financial
condition and results of operations.
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Forward-Looking Information may Prove Inaccurate
Shareholders and prospective investors are cautioned not to place undue reliance on the company’s forward-looking
information. By its nature, forward-looking information involves numerous assumptions, known and unknown risks and
uncertainties, of both a general and specific nature, that could cause actual results to differ materially from those suggested by
the forward-looking information or contribute to the possibility that predictions, forecasts or projections will prove to be
materially inaccurate.
Forward-Looking Information
This MD&A contains certain forward-looking information and statements within the meaning of applicable Canadian securities
legislation. Certain statements contained in this MD&A, including most of those contained in the section titled “Outlook” and
including statements which may contain such words as “anticipate”, “could”, “continue”, “should”, “seek”, “may”, “intend”, “likely”,
“plan”, “estimate”, “believe”, “expect”, “will”, “objective”, “ongoing”, “project”, “view” and similar expressions are intended to identify
forward-looking information or statements. In particular, this MD&A contains forward-looking statements involving the
anticipated benefits to be derived from the C&J Canada transaction including SG&A expense synergies with respect thereto and
statements with respect to the Transaction being accretive on various metrics, management’s assessment of future plans and
operations, planned levels of capital expenditures, expectations as to activity levels, expectations on the sustainability of future cash
flow and earnings and the ability to pay dividends, expectations with respect to crude oil and natural gas prices, activity levels in
various areas, expectations regarding the level and type of drilling and production and related drilling and well services activity in
the WCSB, expectations regarding entering into long-term drilling contracts and expanding its customer base, and expectations
regarding the business, operations, revenue and debt levels of the Company in addition to general economic conditions. Although
the Company believes that the expectations and assumptions on which such forward-looking information and statements are based
are reasonable, undue reliance should not be placed on the forward-looking information and statements because the Company can
give no assurances that they will prove to be correct. Since forward-looking information and statements address future events and
conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those
currently anticipated due to a number of factors and risks. These include, but are not limited to, the risks associated with the drilling
and oilfield services sector (ie. demand, pricing and terms for oilfield drilling and services; current and expected oil and gas prices;
exploration and development costs and delays; reserves discovery and decline rates; pipeline and transportation capacity; weather,
health, safety and environmental risks), integration of acquisitions, competition, and uncertainties resulting from potential delays
or changes in plans with respect to acquisitions, development projects or capital expenditures and changes in legislation, including
but not limited to tax laws, royalties and environmental regulations, stock market volatility and the inability to access sufficient
capital from external and internal sources and the inability to pay dividends. Accordingly, readers should not place undue reliance
on the forward-looking statements. Readers are cautioned that the foregoing list of factors is not exhaustive. Additional information
on these and other factors that could affect the Company’s financial results are included in reports on file with applicable securities
regulatory authorities and may be accessed through SEDAR at www.sedar.com. The forward-looking information and statements
contained in this MD&A are made as of the date hereof and the Company undertakes no obligation to update publicly or revise any
forward-looking information or statements, whether as a result of new information, future events or otherwise, unless so required
by applicable securities laws. Any forward-looking statements made previously may be inaccurate now.
Page | 31
Reconciliation of Non-IFRS Measures
$ thousands except share and per share amounts
NON-IFRS MEASURES
Three months ended
December 31,
2017
2016
Year ended
December 31,
2016
2015
2017
Adjusted EBITDA:
Net income (loss) and comprehensive income (loss)
8,544
(1,717)
4,861
(7,468)
(29,106)
Add:
Depreciation
Finance costs
Transaction costs
Deferred income tax expense (recovery)
Stock based compensation
Gain on acquisition
Impairment of goodwill and assets held for sale
Adjusted EBITDA
Loss on sale of equipment
Adjusted EBITDA per share – basic and diluted
(1)
Adjusted EBITDA margin (Adjusted
EBITDA/Revenue)
(1)
(1)
Weighted average number of shares
outstanding – basic
Weighted average number of shares
outstanding - diluted
Funds from operations:
Cash flows from operating activities
Funds from operations
Add (deduct): Change in non-cash working capital
4,811
606
1,549
(142)
278
(9,128)
-
112
6,630
$0.02
18%
3,733
502
-
(420)
594
-
-
231
2,923
$0.01
14%
17,103
2,054
1,549
(1,285)
869
(9,128)
-
40
16,063
$0.04
14,248
2,515
-
(2,414)
945
-
-
394
8,220
$0.02
15,469
2,203
-
(1,966)
1,008
-
24,214
215
12,037
$0.04
14%
11%
15%
418,913,266
390,655,440
399,008,915
349,836,144
285,524,891
423,221,202
390,655,440
403,359,537
349,836,144
285,524,891
(2,116)
7,197
5,081
2,300
623
2,923
4,260
10,254
14,514
8,788
(568)
8,220
25,427
(13,390)
12,037
Gross margin:
Revenue
Gross margin (2)
Gross margin percentage
Less: Direct operating expenses
(2)
$ thousands
Working capital (excluding debt):
Current assets
Less: Current liabilities
Working capital (excluding debt)
Add: Current portion of long-term debt
Working capital (excluding debt) ratio
(3)
(3)
Net debt:
Long-term debt
Net debt (4)
Less: Current assets
Add: Current liabilities
81,260
112,215
37,420
55,124
82,361
26,620
26,136
29,854
10,800
29%
32%
27%
December 31, 2017 December 31, 2016 December 31, 2015
73,122
53,209
19,913
27%
20,992
15,248
5,744
27%
31,745
(12,378)
176
19,543
2.6:1
49,634
(31,745)
12,378
30,267
16,501
(7,535)
176
9,142
2.2:1
32,966
(16,501)
7,535
24,000
17,333
(5,716)
205
11,822
3.1:1
52,036
(17,333)
5,716
40,419
(1)
(2)
Adjusted EBITDA (Earnings before interest and finance costs, income tax expense, depreciation, amortization, gain or loss on disposal of asset, goodwill
impairment, transaction costs and stock based compensation) is not a recognized measure under IFRS. Management believes that in addition to net
earnings, Adjusted EBITDA is a useful supplemental measure as it provides an indication of the Company’s ability to generate cash flow in order to fund
working capital, service debt, pay current income taxes, pay dividends, repurchase common shares under the Normal Course Issuer Bid, and fund capital
programs. Investors should be cautioned, however, that Adjusted EBITDA should not be construed as an alternative to net income (loss) and
comprehensive income (loss) determined in accordance with IFRS as an indicator of the Company’s performance. CWC’s method of calculating Adjusted
EBITDA may differ from other entities and accordingly, Adjusted EBITDA may not be comparable to measures used by other entities. Adjusted EBITDA
margin is calculated as Adjusted EBITDA divided by revenue and provides a measure of the percentage of Adjusted EBITDA per dollar of revenue. Adjusted
EBITDA per share is calculated by dividing Adjusted EBITDA by the weighted average number of shares outstanding as used for calculation of earnings per
share.
Gross margin is calculated from the statement of comprehensive income as revenue less direct operating costs and is used to assist management and
investors in assessing the Company’s financial results from operations excluding fixed overhead costs. Gross margin percentage is calculated as gross
Page | 32
margin divided by revenue. The Company believes the relationship between revenue and costs expressed by the gross margin percentage is a useful
measure when compared over different financial periods as it demonstrates the trending relationship between revenue, costs and margins. Gross margin
and gross margin percentage are non-IFRS measures and do not have any standardized meaning prescribed by IFRS and may not be comparable to similar
measures provided by other companies.
Working capital (excluding debt) is calculated based on current assets less current liabilities excluding the current portion of long-term debt. Working
capital (excluding debt) is used to assist management and investors in assessing the Company’s liquidity. Working capital (excluding debt) does not have
any meaning prescribed under IFRS and may not be comparable to similar measures provided by other companies. Working capital (excluding debt) ratio
is calculated as current assets divided by the difference of current liabilities less the current portion of long-term debt.
Net debt is not a recognized measure under IFRS and does not have any standardized meaning prescribed by IFRS and may not be comparable to similar
measures provided by other companies. Management believes net debt is a useful indicator of a company’s debt position.
(3)
(4)
Page | 33
CWC ENERGY SERVICES CORP.
Financial Statements
For the years ended December 31, 2017 and 2016
Page | 34
KPMG LLP
205 5th Avenue SW
Suite 3100
Calgary AB
T2P 4B9
Telephone (403) 691-8000
Fax (403) 691-8008
www.kpmg.ca
INDEPENDENT AUDITORS’ REPORT
To the Shareholders and Directors of CWC Energy Services Corp.
We have audited the accompanying financial statements of CWC Energy Services Corp.,
which comprise the statements of financial position as at December 31, 2017 and
December 31, 2016, the statements of comprehensive income (loss), changes in equity and
cash flows for the years then ended, and notes, comprising a summary of significant
accounting policies and other explanatory information.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial
statements in accordance with International Financial Reporting Standards, and for such
internal control as management determines is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we comply with ethical requirements and plan and
perform the audit to obtain reasonable assurance about whether the financial statements
are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on our judgment,
including the assessment of the risks of material misstatement of the financial statements,
whether due to fraud or error. In making those risk assessments, we consider internal control
relevant to the entity’s preparation and fair presentation of the financial statements 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 entity’s internal control. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness
of accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and
appropriate to provide a basis for our audit opinion.
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated
with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG
LLP.
Page | 35
Opinion
In our opinion, the financial statements present fairly, in all material respects, the financial
position of CWC Energy Services Corp. as at December 31, 2017 and December 31, 2016,
and its financial performance and its cash flows for the years then ended in accordance with
International Financial Reporting Standards.
Chartered Professional Accountants
February 28, 2018
Calgary, Canada
Page | 36
CWC ENERGY SERVICES CORP.
STATEMENTS OF FINANCIAL POSITION
As at December 31, 2017 and December 31, 2016
December 31, Stated in thousands of Canadian dollars
2017
Note
2016
$ 95
30,119
1,531
31,745
$
232,190
419
$ 264,354
$
$
$ 12,202
176
12,378
15,823
49,634
77,835
266,720
8,609
(88,810)
186,519
$ 264,354
2
15,335
1,164
16,501
193,525
724
210,750
7,359
176
7,535
14,767
32,966
55,268
242,306
6,847
(93,671)
155,482
$
210,750
5
6
7
8
7
9
ASSETS
Current
Cash
Accounts receivable
Prepaid expenses and deposits
Property, plant and equipment
Intangibles
LIABILITIES
Current
Accounts payable and accrued liabilities
Current portion of long-term debt
Deferred tax liability
Long-term debt
SHAREHOLDERS' EQUITY
Share capital
Contributed surplus
Deficit
See accompanying notes to the financial statements.
Approved on behalf of the board:
Gary Bentham, Director
Jim Reid, Director
Page | 37
CWC ENERGY SERVICES CORP.
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except per share amounts
2017
Revenue
Expenses
Direct operating expenses
Selling and administrative expenses
Transaction costs
Stock based compensation
Finance costs
Depreciation and amortization
Loss on disposal of equipment
Gain on acquisition
Net income (loss) before income taxes
Deferred income tax recovery
Net income (loss) and comprehensive income (loss)
Net income (loss) per share
Basic and diluted
See accompanying notes to the financial statements.
Note
$ 112,215
2016
$
73,122
12
5
8
9
82,361
13,791
1,549
869
2,054
17,103
40
(9,128)
108,639
3,576
(1,285)
$ 4,861
53,209
11,693
-
945
2,515
14,248
394
-
83,004
(9,882)
(2,414)
$
(7,468)
0.01
$
(0.02)
Page | 38
CWC ENERGY SERVICES CORP.
STATEMENTS OF CHANGES IN EQUITY
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars
except share amounts
Number of
Shares
Share
Capital
Contributed
Surplus
Deficit
Total
Equity
Balance - January 1, 2016
Note
Net loss and comprehensive loss
Stock based compensation expense
Settlement of restricted share units
Balance – December 31, 2016
Rights offering, net of share issue costs
9(d)(e)
9(e)
9(b)
Balance – January 1, 2017
292,628,007 $ 227,149
-
-
614
14,543
-
-
1,746,667
97,546,002
$
6,516
-
945
(614)
-
$ (86,203)
(7,468)
-
-
-
$ 147,462
(7,468)
945
-
14,543
391,920,676 $ 242,306
$
6,847
$ (93,671) $ 155,482
Net income and comprehensive income
Stock based compensation expense
Exercise of stock options
Settlement of restricted share units
Cancellation of common shares
purchased under normal course issuer
bid
Balance – December 31, 2017
Rights offering, net of share issue costs
9(d)(e)
9(d)
9(e)
9(b)
See accompanying notes to the financial statements.
391,920,676
-
-
983,333
1,819,668
$ 242,306
-
-
194
441
$ 6,847
-
869
(67)
(441)
$ (93,671)
4,861
-
-
-
$ 155,482
4,861
869
127
-
(3,493,500)
130,148,781
521,378,958
(2,157)
25,936
$ 266,720
1,401
-
$ 8,609
-
-
$ (88,810)
(756)
25,936
$ 186,519
Page | 39
CWC ENERGY SERVICES CORP.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2017 and 2016
2017
Note
$ 4,861
2016
9(d)
5
8
10
(5)
9(c)
869
2,054
17,103
(9,128)
40
(1,285)
14,514
(10,254)
4,260
(6,800)
(37,500)
530
(43,770)
16,667
(1,812)
(309)
(217)
26,030
(756)
39,603
93
2
$ 95
$
(7,468)
945
2,515
14,248
-
394
(2,414)
8,220
568
8,788
(2,614)
1,053
(1,561)
(19,026)
(2,202)
(276)
(232)
14,509
-
(7,227)
-
2
2
$
Stated in thousands of Canadian dollars
Operating activities:
Net income (loss)
Adjustments for:
Stock based compensation expense
Finance costs
Depreciation and amortization
Gain on acquisition
Loss on disposal of equipment
Deferred income tax recovery
Funds from operations
Changes in non-cash working capital balances
Operating cash flow
Investing activities:
Purchase of equipment
Business acquisition
Proceeds on disposal of equipment
Investing cash flow
Financing activities:
Increase (repayment) of long-term debt
Interest paid
Finance costs paid
Finance lease repayments
Common shares issued, net of share issue costs
Common shares purchased under NCIB
Financing cash flow
Increase in cash during the year
Cash, beginning of year
Cash, end of year
See accompanying notes to the financial statements
.
Page | 40
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
1.
Reporting entity
Business Corporations Act
(Alberta).
CWC Energy Services Corp. (“CWC” or the “Company”) is incorporated under the
The address of the Company’s head office is Suite 610, 205 – 5
Avenue SW, Calgary, Alberta, Canada. The Company is
an oilfield services company providing drilling and production services to oil and gas exploration and development
companies throughout the Western Canadian Sedimentary Basin (“WCSB”). The Company's common stock is listed and
traded on the TSX Venture Exchange under the symbol CWC. Additional information regarding CWC’s business is
available in CWC’s most recent Annual Information Form available on SEDAR at www.sedar.com, on the Company’s
website www.cwcenergyservices.com, or by contacting the Company at the address noted above.
Basis of presentation
th
2.
Statement of compliance
(a)
These financial statements have been prepared in accordance with International Financial Reporting Standards
(“IFRS”).
These financial statements were approved by the Board of Directors on February 28, 2018.
Basis of measurement
(b)
The financial statements have been prepared on the historical cost basis.
Functional and presentation currency
(c)
These annual financial statements are presented in Canadian dollars, which is the Company’s functional currency. All
financial information presented in Canadian dollars has been rounded to the nearest thousand except where otherwise
noted.
Use of estimates and judgments
(d)
The preparation of the financial statements in conformity with IFRS requires that certain estimates and judgments be
made with respect to the reported amounts of revenue and expenses and the carrying amounts of assets and liabilities.
These estimates are based on historical experience and management’s judgment. Anticipating future events involves
uncertainty and consequently the estimates used by management in the preparation of the financial statements may
change as future events unfold, additional experience is acquired or the Company’s operating environment changes. In
many cases the use of judgment is required to make estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are
recognized in the period in which the estimates are revised and in any future periods affected. Further details of the
nature of these estimates and assumptions may be found in the relevant notes to the financial statements.
Management considers the following to be the most significant of the judgments, apart from those involved in making
estimates, made in preparation of the financial statements:
Business combinations
The acquisitions of businesses are accounted for using the acquisition method. The consideration for each acquisition
is measured at the aggregate of the fair values, at the date of exchange, of assets obtained, liabilities incurred or assumed,
and equity instruments issued by the Company in exchange for control of the acquired business. The acquired business’
identifiable assets, liabilities and contingent liabilities are recognized at their fair values at the acquisition date.
To the extent the fair value of consideration paid exceeds the fair value of the net identifiable tangible and intangible
assets, goodwill is recognized. To the extent the fair value of consideration paid is less than the fair value of net
identifiable tangible assets and intangible assets, the excess is recognized in income.
Goodwill is not depreciated, but is measured at cost less any accumulated impairment losses.
Page | 41
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
Transaction costs incurred in connection with a business combination, such as legal fees, due diligence fees and other
professional and consulting fees are expensed as incurred.
Determination of cash generating units
For the purpose of assessing impairment of tangible and intangible assets, assets are grouped at the lowest level for
which there are separately identifiable cash flows (cash-generating units or “CGU’s”). The grouping of assets into CGU’s
requires management exercise significant judgment.
Management considers the following to be the most significant of the estimates made in preparation of the financial
statements:
Impairment of tangible and intangible assets
Tangible and intangible assets are reviewed annually with respect to their useful lives, or more frequently, if events or
changes in circumstances indicate that the assets might be impaired. If any such indication exists, the recoverable
amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Recoverable amount is
the higher of fair value less costs to sell (“FVLCS”) and value in use (“VIU”). In assessing value in use, the estimated
future cash flows are discounted to their present value using a discount rate that reflects current market assessments
of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been
adjusted. As a result, any impairment losses are a result of management’s best estimates of expected revenue, expenses
and cash flows at a specific point in time. These estimates are subject to measurement uncertainty as they are dependent
on factors outside of management’s control. In addition, by their nature impairment tests involve a significant degree
of judgment as expectations concerning future cash flows and the selection of appropriate market inputs are subject to
considerable risks and uncertainties.
Depreciation and amortization
Depreciation and amortization of property and equipment and intangible assets is carried out on the basis of the
estimated useful lives of the related assets. Assessing the reasonableness of the estimated useful lives of property and
equipment and intangibles requires judgment and is based on currently available information, including historical
experience by the Company. Additionally, the Company may consult with external equipment builders or manufacturers
to assess whether the methodologies and rates utilized are consistent with their expectations. Changes in
circumstances, such as technological advances, changes to the Company’s business strategy, changes in the Company’s
capital strategy or changes in regulations may result in the actual useful lives differing from the Company’s estimates.
A change in the remaining useful life of a group of assets, or their expected residual value, will affect the depreciation
rate used to amortize the group of assets and thus affect depreciation expense as reported in the Company’s results of
operations. These changes are reported prospectively when they occur.
Income taxes
The Company uses the liability method of accounting for income taxes. Under this method, deferred income tax assets
and liabilities are recorded based on temporary differences between the carrying amount of an asset or liability and its
tax base. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are
generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will
be available against which those deductible temporary differences can be utilized. The carrying amount of deferred tax
assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that
sufficient taxable profits will be available to allow all or part of the asset to be recovered. The Company’s operations are
complex and computation of the provision for income taxes involves tax interpretations, regulations and legislation that
are continually changing. Any changes in the estimated amounts are recognized prospectively in the statement of
income and comprehensive income.
Comparative figures
(e)
Certain comparative amounts have been reclassified to conform to the current period's presentation.
Page | 42
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
3.
Significant accounting policies
The accounting policies set out below have been applied consistently to all periods presented in these financial
statements.
Business combinations
(a)
The Company uses the acquisition method to account for business acquisitions. The Company measures goodwill as the
fair value of the consideration transferred, less the net recognized amount (generally fair value) of the identifiable assets
acquired and liabilities assumed, all measured as of the acquisition date. When the excess is negative, a gain on
acquisition is recognized immediately in net income. Goodwill is allocated as of the date of the business combination to
the CGU and groups of CGU's that are expected to benefit from the business combination and represents the lowest level
within the entity at which the goodwill is monitored for internal management purposes, which can be no higher than
the operating segment level. Goodwill is not amortized and is tested for impairment annually. Additionally, goodwill is
reviewed at each reporting date to determine if events or changes in circumstances indicate that the asset might be
impaired, in which case an impairment test is performed. Goodwill is measured at cost less accumulated impairment
losses. Transaction costs, other than those associated with the issue of debt or equity securities, that the Company incurs
in connection with a business combination are expensed as incurred and recognized in other items within net income.
Property and equipment and depreciation
(b)
Property and equipment are recorded at cost less accumulated depreciation and accumulated impairment losses. Cost
includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets
includes the following:
(cid:120)
(cid:120)
the cost of materials and direct labour; and
any other costs directly attributable to bringing the assets to a working condition for their intended
use.
The costs of replacing a component of property and equipment are capitalized only when it is probable that the future
economic benefits associated with the component will flow to the Company. The carrying amount of the replaced
component is derecognized. Cost of routine repairs and maintenance is expensed as incurred.
When parts of an item of property and equipment have different useful lives, they are accounted for as separate items
(major components) of property and equipment.
Any gain or loss on disposal of an item of property and equipment (calculated as the difference between the net proceeds
from disposal and the carrying amount of the item) is recognized in profit or loss.
Items of property and equipment are depreciated from the date that they are inspected and determined to be ready for
field use, or in respect of internally constructed assets, from the date that the asset is completed or ready for use.
Depreciation is recorded annually over the estimated useful lives of the assets using the following deprecation methods
and rates:
Assets
Drilling rigs and related equipment
Buildings
Production equipment – service and
swabbing rigs and Level IV
recertifications
Production equipment – coil
Support equipment
Miscellaneous equipment
Method
Unit of production with residual values
up to-20%
Straight-line with residual values of up
to-20%
Rate
1,500 to 5,000 operating
days
25 years
Unit of production with residual values
up to-20%
Straight-line with residual values of up
to-20%
Straight-line with residual values of up
to-15%
Straight-line with no residual value
24,000 operating hours
10 years
2 to 10 years
3 to 5 years
Page | 43
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
Intangible assets acquired in business combinations consist of trade names which are amortized over five years and
customer contracts which are amortized over the remaining contractual term of up to two years.
Assets under construction are not depreciated until they are available for use. Leased assets are depreciated over the
shorter of the lease term and their useful lives unless it is reasonably certain that the Company will obtain ownership
by the end of the lease term. Land is not depreciated.
Depreciation method, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.
Impairment of non-financial assets excluding inventories and deferred tax assets
(c)
Non-financial assets excluding inventories and deferred tax assets are assessed at the end of each reporting period to
determine if any indication of impairment exists. If any such indication exists, the Company estimates the recoverable
amount of the asset. An impairment loss is recognized if the carrying amount of an asset or CGU exceeds its recoverable
amount.
The recoverable amount of an asset or CGU is the greater of its VIU and its FVLCS. In assessing VIU, the estimated future
cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments
of the time value of money and the risks specific to the asset or CGU. For the purpose of impairment testing, assets are
grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely
independent of the cash inflows of other assets or CGU’s.
Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs are allocated first
to reduce the carrying amount of goodwill, if any, allocated to the CGU (group of CGUs), and then to reduce the carrying
amounts of the other assets in the CGU (group of CGUs) on a pro rata basis.
An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the
extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of
depreciation or amortization, if no impairment loss had been recognized.
CWC’s corporate assets, which do not generate separate cash inflows, are allocated to the CGU’s on a reasonable basis
for impairment testing purposes.
Financial instruments
(d)
Financial assets include accounts receivable and marketable securities (if any). The Company determines the
classification of its financial assets at initial recognition and records the assets at their fair value. Subsequently, financial
assets are carried at fair value or amortized cost less impairment charges. Where non-derivative financial assets are
carried at fair value, gains and losses on remeasurement are recognized directly in equity unless the financial assets
have been designated as being held at fair value through profit or loss, in which case the gains and losses are recognized
directly in net earnings.
All financial liabilities are initially recognized at fair value net of transaction costs and subsequently carried at amortized
cost. The Company determines the classification of its financial liabilities at initial recognition.
The Company initially recognizes accounts receivable on the date that they originate. All other financial assets
(including assets designated at fair value through profit or loss) are recognized initially on the trade date at which it
becomes a party to the contractual provisions of the instrument.
The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it
transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all
the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets
that is created or retained is recognized as a separate asset or liability.
Page | 44
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire.
Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and
only when, there is a legal right to offset the amounts and the Company intends either to settle on a net basis or to
realize the asset and settle the liability simultaneously.
Financial assets at fair value through profit or loss
A financial asset is classified as at fair value through profit or loss if it is classified as held for trading or is designated as
such on initial recognition. Financial assets are designated as at fair value through profit or loss if the Company manages
such investments and makes purchase and sale decisions based on their fair value in accordance with the Company’s
documented risk management or investment strategy. Attributable transaction costs are recognized in profit or loss as
incurred. Financial assets at fair value through profit or loss are measured at fair value and changes therein, which takes
into account any dividend income, are recognized in profit or loss.
Financial assets designated as at fair value through profit or loss comprise equity securities that would otherwise would
have been classified as available for sale.
Loans and receivables
Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market.
Such assets are recognized initially at fair value plus any directly attributable transactions costs. Subsequent to initial
recognition, loans and receivables are measured at amortized cost using the effective interest method, less any
impairment losses.
Cash
(e)
Cash comprises cash balances that are subject to an insignificant risk of changes in their fair value, and are used by the
Company in the management of its short-term commitments.
Common shares
(f)
Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares are
recognized as a deduction from equity, net of any tax effects.
When share capital recognized as equity is repurchased, the amount of the consideration paid, which includes directly
attributable costs, net of any tax effects, is recognized as a deduction from equity. Repurchased shares are returned to
treasury and cancelled no more than six months from repurchase.
Provisions
(g)
A provision is recognized in the financial statements when the Company has an obligation, whether existing or potential
as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation.
If the obligation is determined to be material, then the estimated amount of the provision is determined by discounting
the expected future cash outflows. At December 31, 2017 and December 31, 2016 there were no provisions recognized
in the financial statements.
Revenue recognition
(h)
The Company’s services are provided based upon orders and contracts with customers that include fixed or
determinable prices and are based upon daily, hourly or contracted rates. Contract terms do not include the provision
for post-service obligations. Revenue is recognized when services are rendered and when collectability of the
consideration is probable and when the amount of revenue can be measured reliably.
(i)
At inception of an arrangement, the Company determines whether such an arrangement is or contains a lease. This will
be the case if the following two criteria are met:
Leases
(cid:120)
(cid:120)
the fulfillment of the arrangement is dependent on the use of a specific asset or assets; and
the arrangement contains a right to use the asset(s).
Page | 45
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
At the inception or on reassessment of the arrangement, the Company separates payments and other consideration
required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair
values. If the Company concludes for a finance lease that it is impracticable to separate the payments reliably, then an
asset and a liability are recognized at an amount equal to the fair value of the underlying asset. Subsequently, the liability
is reduced as payments are made and an imputed finance cost on the liability is recognized using the Company’s
incremental borrowing rate.
Leasing contracts are classified as either finance or operating leases.
The Company classifies a lease as a finance lease if it transfers substantially all of the risks and rewards of ownership
to the lessee. Upon the initial recognition of the lease asset it is measured at an amount equal to the lower of its fair
value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted
for in accordance with the accounting policy applicable to that asset. Minimum lease payments made under finance
leases are apportioned between the finance lease and the reduction of the outstanding liability. The finance expense is
allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining
balance of the liability.
Other leases are operating leases and are not recognized in the Company’s statement of financial position. Payments
made under operating leases are recognized in the statement of comprehensive income on a straight-line basis over the
term of the lease.
Dividends
(j)
Dividends on shares are recognized in the Company’s financial statements in the period in which the dividends are
declared and approved by the Board of Directors of the Company.
Finance costs
(k)
Finance costs encompass interest expense on financial liabilities and accretion expense on debt issuance costs and are
recognized in profit or loss in the period in which they are incurred using the effective interest method.
Foreign currency transactions
(l)
These financial statements are presented in Canadian dollars, which is the functional and reporting currency of the
Company. Transactions in foreign currency are translated at exchange rates at the dates of the transactions. Monetary
assets and liabilities denominated in foreign currencies at the reporting date are translated into the functional currency
at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between
amortized cost in the functional currency at the beginning of the year and the amortized cost in foreign currency
translated at the exchange rate at the end of the year. Non-monetary assets are translated into Canadian dollars at the
exchange rate prevailing on the date of acquisition.
Income Tax
(m)
Tax is recognized in profit or loss, except to the extent that it relates to a business combination or items recognized in
other comprehensive income or directly in equity.
Current tax is the expected tax on taxable income less adjustments to prior periods using tax rates enacted, or
substantively enacted as at the reporting date in jurisdictions where the Company operates.
Deferred income taxes are recognized based on temporary differences arising between the tax value of assets and
liabilities and their carrying amounts in the financial statements. Deferred tax liabilities are not recognized if they arise
from the initial recognition of goodwill and are not accounted for if they arise from the initial recognition of an asset or
liability in a transaction other than a business combination that at the time of the transaction affects neither accounting
nor taxable income. Deferred income taxes are calculated on the basis of the tax laws enacted or substantively enacted
as at the reporting date and apply to when the related deferred income tax asset is realized or the deferred income tax
liability is settled.
Page | 46
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
Current and deferred income tax assets and liabilities are offset when there is a legally enforceable right to settle on a
net basis and when such assets and liabilities relate to income taxes imposed by the same taxation authority.
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences to the extent
that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are
reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit
will be realized.
Employee costs
(n)
Short term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service
is provided. A liability is recognized for the amount expected to be paid under the bonus plan when a present legal or
constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can
reasonably be estimated.
Termination benefits are recognized as an expense when the Company is demonstrably committed, without realistic
possibility of withdrawal to a formal detailed plan to either terminate employment before the normal retirement date,
or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits
for voluntary redundancies are recognized as an expense if the Company has made an offer of voluntary redundancy, it
is probable that the offer will be accepted and the number of acceptances can be measured reliably. If benefits are
payable more than twelve months after the reporting date, then they are discounted to their present value.
Under the Company’s stock option plan described in note 9(d), options to purchase common shares are granted to
directors, officers and employees. The fair value of common share purchase options is calculated at the date of grant
using the Black-Scholes option pricing model and that value is recorded as compensation expense over the vesting
period of the option with an offsetting credit to contributed surplus. Upon exercise of the share purchase options: i) if
shares are issued from treasury, consideration paid together with the amount previously recognized in contributed
surplus is recorded as an increase in common share capital, or ii) if a cash payment is made to the participant,
contributed surplus is reduced by the amount of the cash payment. It is the Company’s intent to settle future common
share purchase options by means of the issue of shares from treasury.
Under the Company’s restricted share unit plan described in note 9(e), RSUs are granted to directors, officers and
employees. The fair value of RSUs is calculated at the date of grant using the market price of the common shares and
that value is recorded as compensation expense over the vesting period of the RSU with an offsetting credit to
contributed surplus. Upon settlement of the RSUs: i) if shares are issued from treasury, share capital is increased and
contributed surplus is decreased by the amount previously expensed for stock based compensation for the RSUs, or ii)
if common shares are purchased in open market purchases or purchases pursuant to private transactions with third
parties, the amount paid for such purchases is recorded as a reduction in contributed surplus, or iii) if a cash payment
is made to the participant, contributed surplus is reduced by the amount of the cash payment. It is the Company’s intent
to settle future RSUs by means of the issue of shares from treasury.
The Company estimates future forfeitures for both stock options and RSUs and expenses stock options and RSUs based
on the Company’s estimate of stock options and RSUs expected to reach vesting. Any difference between the number of
stock options and RSUs expected to vest and the number of stock options and RSUs which actually vest is accounted for
as a change in estimate when those stock options or RSUs become vested or are forfeited before vesting.
The Company has a dividend bonus plan to compensate stock option holders for dividends paid on common shares.
Under the terms of the plan option holders of vested, in-the-money options are entitled to a bonus payment equal to
the dividend amount grossed up to negate the tax consequences of receiving employment income versus dividend
income. These amounts are accrued at each dividend declaration date and paid out annually, at the time of option
exercise or on termination of employment, whichever event occurs first.
Page | 47
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
Per share amounts
(o)
Basic per share amounts are calculated using the weighted average number of common shares outstanding during the
period. Diluted per share amounts are calculated considering the effects of all dilutive potential common shares. The
Company’s dilutive potential common shares assumes that all dilutive stock options and restricted share units are
exercised and the proceeds obtained on the exercise of dilutive stock options would be used to purchase common shares
at the average market price during the period. The weighted average number of common shares outstanding is then
adjusted accordingly
Segmented information
(p)
The operating divisions are grouped into two distinct reporting segments: Contract Drilling and Production Services
and are supported by the Corporate reporting segment. The reporting segments share common economic
characteristics and are differentiated by the type of service provided and customer needs. The reporting segments
financial results are reviewed regularly by the Company’s senior management. Senior management makes decisions
about resource allocation and assesses segment performance based on the internally prepared segment information.
New accounting standards not yet effective
(q)
A number of new standards, amendments to standards and interpretations have been issued by the IASB and are not
yet effective for the year ended December 31, 2017. The following new standards, amendments to standards and
interpretations have not been applied in preparing these financial statements.
IFRS 9, Financial Instruments Classification and Measurement, which introduces new requirements for the
classification and measurement of financial assets. Under IFRS 9, financial assets are classified and measured
based on the business model in which they are held and the characteristics of their contractual cash flows. The
standard introduces additional changes relating to financial liabilities. It also amends the impairment model by
introducing a new ‘expected credit loss’ model for calculating impairment. IFRS 9 also includes a new general
hedge accounting standard which aligns hedge accounting more closely with risk management. The Company
intends to adopt IFRS 9 in its financial statements for the annual period beginning on January 1, 2018. Based on
our assessment, we do not expect adoption of the standard to have a material impact on the financial statements,
however, we do expect to have additional disclosures.
IFRS 15, Revenue from Contracts with Customers, which provides guidance on revenue recognition and relevant
disclosures. The standard provides a single, principles based five-step model to be applied to all contracts with
customers. The Company intends to adopt IFRS 15 in its financial statements for the annual period beginning on
January 1, 2018. Our assessment primarily involved reviewing our sales contracts to determine if any
performance obligations exist that will need to be separately identified that may affect the timing of when
revenue will be recognized under IFRS 15. Based on our assessment, CWC has not identified any material impacts
on the timing and measurement of revenue from our existing revenue recognition practices from the adoption of
the new standard, however, we do expect to have additional disclosures.
IFRS 16, Leases. This standard introduces a single lessee accounting model and requires a lessee to recognize
assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value.
A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease
liability representing its obligation to make lease payments. The Company intends to adopt IFRS 16 in its financial
statements for the annual period beginning on January 1, 2019. The Company is currently evaluating the impact
of IFRS 16 on its financial statements.
Determination of fair values
4.
A number of the Company’s accounting policies and disclosures require the determination of fair value, for both
financial and non-financial assets and liabilities.
The carrying amounts for cash, accounts receivable, and accounts payable and accrued liabilities approximate fair value
due to their short-term nature. The fair value of long-term debt approximates its carrying value as the debt bears
interest at floating rates and the credit spreads approximate current market rates.
Page | 48
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When
applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific
to that asset or liability.
Property and equipment
(a)
The fair value of property and equipment recognized as a result of a business combination is the estimated amount for
which a property could be exchanged on the date of acquisition between a willing buyer and a willing seller in an arm’s
length transaction after proper marketing wherein the parties had each acted knowledgeably. The fair value of
equipment, fixtures and fittings is based on the market approach and cost approaches using quoted market prices for
similar items when available and depreciated replacement cost when appropriate. Depreciated replacement cost
estimates reflect adjustments for physical deterioration as well as functional and economic obsolescence.
Inventories
(b)
The net realizable value of inventories is determined based on the estimated selling price in the ordinary course of
business less cost and a reasonable profit margin.
Share based compensation transactions
(c)
The fair value of employee stock options is measured using the Black-Scholes option pricing model. Measurement inputs
include the share price on measurement date, the exercise price of the instrument, the expected volatility, the weighted
average expected life of the instruments, the expected dividends, the expected forfeiture rate, and the risk-free interest
rate (based on government bonds). Service and non-market performance conditions are not taken into account in
determining fair value.
The fair value of RSUs issued is determined on the grant date based on the market price of the common shares on the
grant date.
Fair value hierarchy
(d)
Financial instruments that are measured subsequent to initial recognition at fair value are grouped in Levels 1 to 3
based on the degree to which the fair value is observable:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2 – Inputs other than quote 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.
The Company did not have any financial instruments that were required to be classified in Level 1, 2 or 3 as at December
31, 2017.
Page | 49
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
5.
Property, plant and equipment
Costs
Balance, January 1, 2017
Additions
Disposals
Accumulated depreciation and
Balance, December 31, 2017
impairment losses
Balance, January 1, 2017
Depreciation
Disposals
Net book value
Balance, December 31, 2017
Balance, December 31, 2017
Costs
Balance, January 1, 2016
Additions
Disposals
Transfers
Balance, December 31, 2016
Accumulated depreciation and
impairment losses
Balance, January 1, 2016
Depreciation
Disposals
Balance, December 31, 2016
Net book value
Balance, December 31, 2016
Contract
drilling
equipment
Production
services
property,
plant and
equipment
Other
equipment
Total
$ 108,947
3,964
(433)
112,478
$ 206,269
52,062
(1,347)
256,984
$ 1,874
9
-
1,883
$ 317,090
56,035
(1,780)
371,345
15,073
5,910
(365)
20,618
106,944
10,730
(843)
116,831
1,548
158
-
1,706
123,565
16,798
(1,208)
139,155
$ 91,860
$ 140,153 $ 177
$ 232,190
Contract
drilling
equipment
Production
services
property,
plant and
equipment
Other
equipment
$
$
108,508
1,662
(1,223)
-
108,947
$
206,314
930
(907)
(68)
206,269
12,230
2,979
(136)
15,073
96,710
10,800
(566)
106,944
1,881
66
(141)
68
1,874
1,505
165
(122)
1,548
$
Total
316,703
2,658
(2,271)
-
317,090
110,445
13,944
(824)
123,565
$
93,874
$
99,325
$
326
$
193,525
At December 31, 2017, property and equipment includes equipment under finance leases which are recorded at cost
totaling $878 (December 31, 2016: $854), less accumulated depreciation of $547 (December 31, 2016: $586).
No asset impairment loss or impairment reversal was recorded for the year ended December 31, 2017 as triggers for
an impairment test were not identified in any of the CGUs.
Page | 50
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
Acquisition of Canadian Assets of C&J Canada
On November 5, 2017, the Company completed the acquisition of all of the service and swabbing rig assets and ongoing
operations of C&J Energy Production Services-Canada Ltd. (“C&J Canada”) from C&J Energy Services, Inc. for total
consideration of $37.5 million in cash. The acquisition of C&J Canada has been accounted for as a business combination
under IFRS 3. The purchase equation is as follows:
Consideration transferred
Purchase Price Equation
Cash
Identifiable assets (liabilities) acquired
Buildings
Land
Rigs
Other Equipment
Property taxes & other deposits
Deferred tax liabilities
Bargain purchase gain
$ 37,500
$ 7,432
11,467
29,580
470
54
(2,375)
(9,128)
$ 37,500
C&J Canada’s identifiable assets and liabilities have been measured at their fair values on the date of acquisition.
Determinations of fair value often require management to make assumptions and estimates about future events. CWC
has determined the fair value of assets acquired and liabilities assumed as of the date of acquisition. The fair value of
buildings, land and rigs were determined based on third party appraisal. Prepaid expenses and deposits and other
equipment book value was determined to be equal to the fair value. Deferred tax liabilities were determined by
applying statutory tax rate to assets acquired fair value less available tax pools.
Between the acquisition date and December 31, 2017 approximately $4.4 million of revenue and $2.0 million of gross
margin was recognized relating to the C&J Canada assets.
CWC incurred approximately $1.5 million of transaction costs related to the acquisition that are expensed in the
Statement of Comprehensive Income (Loss).
Page | 51
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
6.
Intangible assets
Costs
Balance, January 1, 2017 & December 31, 2017
Accumulated depreciation and impairment losses
Balance, January 1, 2017
Depreciation of intangible assets
Balance, December 31, 2017
Net book value
Balance, December 31, 2017
Costs
Balance, January 1, 2016 and December 31, 2016
Accumulated depreciation and impairment losses
Balance, January 1, 2016
Depreciation of intangible assets
Balance, December 31, 2016
Net book value
Balance, December 31, 2016
7.
Loans and borrowings
Intangible
assets
$ 1,588
864
305
1,169
$ 419
Intangible
assets
$
1,588
560
304
864
$
724
The following table provides information with respect to amounts included in the statement of financial position related
to loans and borrowings:
2017
As at December 31,
Current liabilities:
Current portion of finance lease liabilities
Non-current liabilities:
Bank Loan
Finance lease liabilities
Financing fees
Total loans and borrowings
$ 176
$ 176
$ 50,000
165
(531)
$ 49,634
$ 49,810
2016
176
176
33,333
97
(464)
32,966
33,142
$
$
$
$
$
The Company has credit facilities with a syndicate of four Canadian financial institutions (the “Credit Facility”). The
Credit Facility provides the Company with a $100 million extendible revolving term facility (the “Bank Loan”) and other
credit instruments. Of the Bank Loan, $90 million is a syndicated facility with the remaining $10 million being an
operating facility. During the third quarter, the Bank Loan was extended for a committed term until July 31, 2020 (the
“Maturity Date”). No principal payments are required under the Bank Loan until the Maturity Date, at which time any
amounts outstanding are due and payable. The Company may, on an annual basis, request the Maturity Date be
Page | 52
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
extended for a period not to exceed three years from the date of the request. If a request for an extension is not approved
by the banking syndicate, the Maturity Date will remain unchanged.
(1)
The Bank Loan bears interest based on a sliding scale pricing grid tied to the Company’s trailing Consolidated Debt to
ratio from a minimum of the bank’s prime rate plus 0.75% to a maximum of the bank’s prime
Consolidated EBITDA
rate plus 3.75% or from a minimum of the bankers acceptances rate plus a stamping fee of 1.75% to a maximum of the
bankers acceptances rate plus a stamping fee of 4.75%. Standby fees under the Bank Loan range between 0.39% and
1.07%. Interest and fees under the Bank Loan are payable monthly. The Company has the option to borrow funds
denominated in either Canadian or United States dollars under the Credit Facility. Borrowings under the Bank Loan are
limited to an aggregate of 75% of accounts receivable outstanding less than 90 days plus 60% of the net book value of
property and equipment less certain priority payables. As at December 31, 2017, of the $100,000 Bank Loan facility,
$40,000 was available for immediate borrowing and $60,000 was outstanding (December 31, 2016: $41,013). The Bank
Loan has an accordion feature which provides the Company with an ability to increase the maximum borrowings up to
$125,000, subject to the approval of the lenders. The Bank Loan is secured by a security agreement covering all of the
assets of the Company and a first charge Security Interest covering all assets of the Company. Effective December 31,
2017, the applicable rates under the Bank Loan are: bank prime rate plus 1.00%, banker’s acceptances rate plus a
stamping fee of 2.00%, and standby fee rate of 0.45%.
Under the terms of the Credit Facility, the Company is required to comply with the following financial covenants:
Actual
December 31,
2017
1.75:1.00
0.21:1.00
10.00:1.00
Consolidated Debt
Consolidated Debt
Consolidated Adjusted Cash Flow
Covenant limits
4.00:1.00 or less
0.50:1.00 or less
1.15:1.00 or more
to Consolidated EBITDA
to Capitalization
to Consolidated Finance Obligations
(3)
(5)
(1)
(4)
(2)
(2)
(1)
Consolidated EBITDA is calculated as net income plus finance costs, plus current and deferred income taxes, plus depreciation, plus stock based
compensation, plus any non-recurring losses or impairment losses, or permitted severance costs, minus any non-recurring gain, plus any expenses
related to corporate or business acquisitions with all amounts being for the twelve month period ended the calculation date. EBITDA is adjusted to
reflect the inclusion of material acquisitions or material dispositions on a pro forma basis for the twelve month period ended the calculation date.
Consolidated EBITDA is increased if debt repayments from the proceeds of equity issuance are used to repay the syndicated facility and designated
by the Company as an Equity Cure amount. The Consolidated Debt to Consolidated EBITDA covenant limit reduces to 4.00:1.00 for the periods
commencing December 31, 2017, to maturity.
(2)
Consolidated Debt is calculated as total loans and borrowings as shown in the schedule above adjusted to exclude the funds held in the segregated
account and to remove any financing fees included.
(3)
(4)
Capitalization is calculated as Consolidated Debt plus Shareholders’ Equity as at the calculation date.
Consolidated Adjusted Cash Flow is calculated as Consolidated EBITDA minus amounts paid for transaction costs, dividends or share repurchases
in the twelve month period ended the calculation date. The Calculation of Adjusted Cash Flow excludes Consolidated EBITDA resulting from an Equity
Cure.
(5)
Consolidated Finance Obligations is calculated as finance costs plus scheduled principal payments on debt including scheduled principal payments
under finance leases minus accretion of finance fees included in finance costs for the twelve month period ended the calculation date.
On October 30, 2017, CWC and its syndicated lenders agreed to the Company’s exercise of the accordion feature to
expand its credit facilities from $65 million to $100 million.
On December 11, 2017, the Company received gross proceeds of $26,027 from a rights offering of common shares (see
Note 9), $10,000 of the funds were placed into a segregated bank account.
At December 31, 2017 the $10,000 plus
earned interest has been offset against long-term debt as the Company has the current legal right to offset and intends
to settle on a net basis or settle the asset and liability simultaneously.
Page | 53
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
Gross amounts
Amount offset
Net amounts
Cash
$ 10,000
(10,000)
$ -
December 31, 2017
Long-Term Debt
$ (59,634)
10,000
$ (49,634)
Net
$ (49,634)
-
$ (49,634)
Obligations under finance leases are primarily for leased automobiles with an expected term of three years and a one
year minimum term. Interest rates on finance leases are specific to each leased asset, are fixed for the lease term and
vary between 4.4% and 5.2% per annum.
Financing fees consist of commitment fees and legal expenses relating to the Credit Facility and are being amortized
using the effective interest rate method over the term of the Credit Facility. Financing fees of $242 were amortized and
included in finance costs during the year ended December 31, 2017 (year ended December 31, 2016: $313).
Income taxes
8.
The provision for income taxes differs from that which would be expected by applying statutory rates. A reconciliation
of the difference is as follows:
2017
$ 3,576
27%
965
36
(2,465)
235
(56)
$ (1,285)
2016
$
(9,882)
27%
(2,668)
29
-
255
(30)
(2,414)
December
31, 2017
$
$ 11,358(1)
144
93
15
11,610
(27,433)
$ (15,823)
Years ended December 31,
Net income (loss) before income taxes
Combined federal and provincial income tax rate
Expected income taxes
Increase (decrease) resulting from:
Non-deductible items
Gain on acquisition
Stock based compensation
Other
The deferred income tax liability is comprised of:
Deferred tax assets
Non capital losses
Share issue costs
Finance lease liabilities
Other
Deferred tax liabilities:
Property and equipment
December
31, 2016
Recognized
in Earnings
Recognized
in Equity
Gain on
Acquisition
(1)
$ 13,370
196
74
119
13,759
(2,012)
(85)
19
(104)
(2,182)
-
33
-
-
33
-
-
-
-
-
(1)
Net deferred income tax liability
(28,526)
$ (14,767)
3,467
1,285
-
33
(2,374)
(2,374)
The Company has $42,063 (2016: $49,520) of non-capital loss carry forwards for income tax purposes which are available for application against
future taxable income. These non-capital loss carry forwards expire between 2027 and 2037.
All changes in deferred income tax temporary differences were recognized in income in the years ended December 31,
2017 and 2016.
Page | 54
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
9.
Share capital
(a)
Authorized
Unlimited number of Common voting shares without par value.
Unlimited number of Preferred shares without par value.
(b)
Rights offering
On December 13, 2017, CWC closed a rights offering for aggregate gross proceeds of $26,027 ($25,936 after
deductions of $125 in share issue costs plus deferred taxes of $34). Under the fully subscribed offering, 130,148,781
common shares were issued to shareholders who exercised their rights. Each eligible shareholder received one
right for every three common shares held and each right was exercisable for one common share at a price of $0.20
per share.
On June 2, 2016, CWC closed a rights offering for the aggregate gross proceeds of $14,632 ($14,543 after deductions
of $123 in share issues costs plus deferred taxes of $33). Under the fully subscribed offering, 97,546,002 common
shares were issued to shareholders who exercised their rights. Each eligible shareholder received one right for
every three common shares held and each right was exercisable for one common share at a price of $0.15 per share.
(c)
Normal course issuer bid
The Company has a program to purchase its common shares from time to time in accordance with the normal
course issuer bid procedures under Canadian securities laws. Pursuant to the issuer bid, CWC is allowed to purchase
for cancellation up to 19,653,292 of its issued and outstanding common shares at prevailing market prices on the
TSX Venture Exchange or other recognized marketplaces during the twelve month period ending April 6, 2018.
On April 7, 2017, CWC entered into an automatic securities purchase plan (the “ASPP”) (as defined under applicable
securities laws) with Raymond James Ltd. ("Raymond James") for the purpose of making purchases under the ASPP.
Such purchases will be determined by Raymond James in its sole discretion, without consultation with CWC having
regard to the price limitation and aggregate purchase limitation and other terms of the ASPP and the rules of the
TSXV. Conducting the NCIB as an ASPP allows common shares to be purchased at times when CWC would otherwise
be prohibited from doing so pursuant to securities laws and its internal trading policies.
For the year ended December 31, 2017, 3,493,500 shares (2016: nil) for consideration of $756, including
In the year ended December 31, 2017, a total of
commissions (2016: nil) were purchased under the NCIB.
3,493,500 shares were cancelled and returned to treasury (2016: nil).
(d)
Stock options
The Company has a stock option plan which allows the Company to issue options to purchase common shares at
prevailing market prices on the date of the option grant. The aggregate number of stock options and RSUs
outstanding is limited to a maximum of ten percent of the outstanding common shares. The Company has granted
stock options to directors, officers and key employees. Stock options vest annually over three years from the date
of grant as employees or directors render continuous service to the Corporation and have a maximum term of five
years. The Company may choose to settle stock options for the intrinsic value of the stock option on the exercise
date, but the Company has no current intention or obligation to do so.
Page | 55
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
The following table summarizes changes in the number of stock options outstanding:
Number of
options
Weighted
average exercise
price
Balance at January 1, 2016
Granted
Forfeited
Granted
Balance at December 31, 2016
Exercised for common shares
Forfeited
Balance at December 31, 2017
14,400,000
11,291,000
(3,900,000)
8,307,000
21,791,000
(983,333)
(1,568,000)
27,546,667
0.43
0.18
0.57
0.20
0.28
0.13
0.43
0.25
The following table summarizes information about stock options outstanding as at December 31, 2017:
Exercise price
Number of
options
outstanding
8,307,000
5,273,000
5,083,333
4,983,334
2,200,000
1,700,000
27,546,667
Weighted average
remaining life (years)
contractual
4.95
3.94
3.19
2.94
1.98
1.37
3.61
Weighted
average
exercise price
$ 0.20
$ 0.19
$0.175
$ 0.11
$ 0.45
$1.04
0.25
Number of
options
exercisable
-
1,757,661
1,516,677
3,133,336
2,200,000
1,700,000
10,307,674
$ 0.20
$ 0.19
$ 0.175
$0.11
$0.45
$ 1.04
$ 0.11 - $ 1.04
The fair value of stock options is estimated as at the grant date using the Black-Scholes option pricing model, with the
following weighted average assumptions used for stock options issued during the years ended December 31:
2017
Risk free interest rate (%)
Expected life (years)
Expected volatility (%)
Expected forfeiture rate (%)
Expected dividend per share
1.6%
4.7
75%
12%
$ 0.00
2016
0.8%
4.5
77%
12%
0.00
$
The weighted average fair value of the stock options issued during the year ended December 31, 2017 was $0.20 (year
ended December 31, 2016 - $0.13). For the year ended December 31, 2017, stock-based compensation expense relating
to stock options totaled $592 (year ended December 31, 2016: $371).
Restricted share unit plan
(e)
The Company has a restricted share unit plan which allows CWC to issue RSUs which are redeemable for common shares
at future vesting dates. The aggregate number of RSUs and stock options outstanding is limited to a maximum of ten
percent of the outstanding common shares. The Corporation has granted RSUs to officers and key employees. RSUs vest
annually over three years from the date of grant as employees or directors render continuous service to the Company
and have a maximum term of the end of the third year following their grant date. The Company may choose to settle
RSUs for the intrinsic value of the RSUs on the settlement date, but the Company has no current intention or obligation
to do so.
Page | 56
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
The following table summarizes changes in the number of Restricted Share Units (“RSUs”) outstanding:
Balance at January 1, 2016
Granted
Redeemed for common shares
Forfeited – unvested
Balance at December 31, 2016
Granted
Redeemed for common shares
Forfeited - unvested
Balance at December 31, 2017
Number of RSUs
2,290,001
4,301,333
(1,746,667)
(371,667)
2,682,000
4,473,000
(1,819,668)
(200,000)
5,135,332
Weighted
average fair
value at issue
date
0.39
0.19
0.35
0.42
0.20
0.21
0.24
0.21
0.19
The following table summarizes information about RSUs outstanding as at December 31, 2017:
$0.09 -$0.39
Issue date fair value
Number of RSUs
5,135,332
outstanding
Weighted average
remaining life (years)
2.924
contractual
Weighted
average exercise
n/a
price ($)
Number of RSUs
811,322
exercisable
For the year ended December 31, 2017, stock based compensation expense relating to RSUs totaled $274 (year ended
December 31, 2016: $574).
Net income (loss) per share
(f)
Year ended December 31,
The following table reconciles the common shares used in computing per share amounts for the periods noted:
2017
Weighted average common shares outstanding – basic
Dilutive stock options & RSUs
Weighted average common shares outstanding – diluted
399,008,915
4,350,622
403,359,537
2016
349,836,144
-
349,836,144
Outstanding stock options and RSUs are currently the only instruments which could potentially dilute earnings per
share. For the year ended December 31, 2016, 21,791,000 stock options and 4,473,000 RSUs were not included in the
computation of net loss per common share because to do so would be anti-dilutive.
Contributed surplus
(g)
Contributed surplus comprises amounts paid in by equity holders. Contributed surplus in the form of surplus paid in by
equity holders includes premiums on shares issued, any portion of the proceeds of issue of shares without par value
not allocated to share capital, gain on forfeited shares, proceeds arising from shares donated by equity holders, credits
resulting from redemption or conversion of shares at less than the amount set up as share capital, and any other
contribution by equity holders in excess of amounts allocated to share capital. Contributed surplus also includes
increases and decreases in equity as a result of share based payments under the Company’s stock option and RSU plans.
Page | 57
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
10.
Supplemental cash flow information
For the years ended December 31,
Change in non-cash working capital items:
Accounts receivable
Prepaid expenses and deposits
Accounts payable and accrued liabilities
11.
Operating segments
2017
$ (14,784)
(313)
4,843
$ (10,254)
2016
$ (1,535)
255
1,848
$ 568
The Company operates in the western Canadian oilfield service industry through its Contract Drilling and Production
Services segments. The Contract Drilling segment provides drilling rigs and related ancillary equipment to oil and gas
exploration and production companies. The Production Services segment provides well services to oil and gas
exploration and production companies through the use of service rigs, swabbing rigs and coil tubing units.
Management uses net income before depreciation and income taxes (“segment profit”) in management reports
reviewed by key management personnel and the board of directors to measure performance at a segment basis.
Segment profit is used to measure performance as management believes this is the most relevant measure in evaluating
the results of our segments relative to each other and other entities that operate within the respective industries.
The Corporate segment captures general and administrative expenses associated with supporting each of the reporting
segments operations, plus costs associated with being a public company. Also included in the Corporate segment is
interest expense for debt servicing, income tax expense and other amounts not directly related to the two primary
segments.
Page | 58
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
The amounts related to each industry segment are as follows:
For the year ended December 31, 2017
Revenue
Direct operating expenses
Selling and administrative expenses
Transaction costs
Stock based compensation
Finance costs
Gain on acquisition
Loss (gain) on disposal of equipment
Net income before depreciation and taxes
Depreciation
Net income before tax
Deferred income tax recovery
Net income
Capital expenditures
As at December 31, 2017
Property and equipment
Intangibles
Contract
Drilling
$ 35,222
24,690
941
-
-
-
-
48
9,543
6,215
3,328
-
$ 3,328
Production
Services
$ 76,993
57,671
8,249
-
-
-
-
(8)
11,081
10,730
351
-
$ 351
Corporate
$ -
Total
$112,215
-
4,601
1,549
869
2,054
(9,128)
-
55
158
(103)
(1,285)
$ 1,182
82,361
13,791
1,549
869
2,054
(9,128)
40
20,679
17,103
3,576
(1,285)
$ 4,861
3,964
52,062
9
56,035
91,860
419
140,153
-
177
-
232,190
419
For the year ended December 31, 2016
Contract
Drilling
Production
Services
Corporate
Total
Revenue
$
15,903
$
57,219
$
- $
73,122
Direct operating expenses
Selling and administrative expenses
Stock based compensation
Finance costs
Loss on disposal of equipment
Net income (loss) before depreciation and taxes
Depreciation
Net loss before tax
Deferred income tax recovery
Net loss
12,356
1,125
-
-
238
2,184
3,284
(1,100)
-
$ (1,100)
40,853
6,875
-
-
156
9,335
10,799
(1,464)
-
$ (1,464)
-
3,693
945
2,515
-
(7,153)
165
(7,318)
(2,414)
$ (4,904)
53,209
11,693
945
2,515
394
4,366
14,248
(9,882)
(2,414)
$ (7,468)
Capital expenditures
As at December 31, 2016
1,662
930
66
2,658
Property and equipment
Intangibles
93,874
724
99,325
-
326
-
193,525
724
Page | 59
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
12.
Expenses by nature
For the year ended
December 31, 2017
Personnel expenses
Other operating
Direct
operating
expenses
$ 56,477
Selling and
administrative
expenses &
Transaction
costs
Loss on sale
of
equipment
$ 8,187 $ 869 $ - $ - $ -
Stock based
compensation Finance costs
Depreciation
expense
Total
$ 65,533
expenses(1)
25,884
-
Other selling and
administrative
expenses
Transaction costs
Bad debt expenses
Facility expenses
Depreciation expense
Finance costs
Loss on disposal of
equipment
Total
For the year ended
December 31, 2016
Personnel expenses
Other operating
(1)
expenses
Other selling and
administrative expenses
Bad debt recovery
Facility expenses
Depreciation expense
Finance costs
Loss on disposal of
equipment
Total
-
-
-
-
-
3,621
1,549
9
1,974
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,054
-
-
17,103
-
-
-
-
-
-
-
25,884
3,621
1,549
9
1,974
17,103
2,054
-
$ 82,361
40
$ 15,340 $ 869 $ 2,054 $ 17,103 $ 40
-
-
-
-
Direct
operating
expenses
Selling and
administrative
expenses
Stock based
compensation Finance costs
Depreciation
expense
Loss on sale
of
equipment
$ 36,330 $
6,994 $
945 $
- $
- $
16,879
-
-
-
-
-
-
-
2,564
(38)
2,173
-
-
-
$ 53,209 $
11,693 $
-
-
-
-
-
-
-
-
-
-
-
2,515
-
-
-
14,248
-
40
$117,767
Total
$ 44,269
16,879
2,564
(38)
2,173
14,248
2,515
-
-
-
-
-
-
-
-
945 $
-
-
2,515 $ 14,248 $
394
394
394
$ 83,004
2017
$ 11,218
8,098
1,609
1,346
1,244
1,573
470
326
$ 25,884
2016
$
$
7,082
4,876
1,193
1,130
983
846
562
207
16,879
(1)
Other operating expenses consists of the following:
December 31,
Repairs and maintenance
Fuel
Operating supplies and consumables
Certification and inspection
License, registration and permits
Travel and accommodation
Equipment rental
Other
Page | 60
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
13.
Commitments and contingencies:
As at December 31, 2017, the Company has lease commitments and other contractual obligations as follows:
Next 12
months
Between 1
and 3 years
Payments due by period
Between 4
and 5 years
Greater than
5 years
$ -
176
920
$ 50,000 $ - $ -
-
-
165
712
-
-
Total
$ 50,000
341
1,632
$ 1,096
$ 50,877 $ - $ -
$ 51,973
Contractual obligations:
Bank Loan
Finance lease liabilities
Operating lease payments
Total contractual
obligations
Operating leases relate primarily to buildings and lands leased for use in day-to-day operating activities. In the normal
course of business the Company makes short term commitments for the purchase and delivery of new items of property
and equipment.
The Company is a party to legal proceedings and claims that arise during the ordinary course of business. It is the
opinion of the Company that the ultimate outcome of these matters will not have a material effect upon the Company’s
financial position, results of operations, or cash flows.
Related parties
14.
Of the total outstanding shares of the Company, 78.0% are directly or indirectly owned by Brookfield Capital Partners
Ltd and Brookfield Business Partners LP (together “Brookfield”). The Company is related to Brookfield by virtue of
control, and is therefore also related to Brookfield’s affiliates. During 2017, the Company had revenue totaling $1,101
(2016: $1,195) ($14 in accounts receivable as at December 31, 2017 (December 31, 2016: $271)) in the normal course
of business with companies under common control. The terms and conditions of these transactions were no more
favourable than those available, or which might reasonably be expected to be available, in similar transactions with
non-related companies on an arm's length basis.
During the year, as part of the rights offering discussed in note 9, Brookfield acquired 122,577,317 shares.
Company received total proceeds of $24,515 from Brookfield for the shares.
The
Key management personnel include the Company’s directors and officers. The following table summarizes
compensation provided to key management personnel for the years ended:
Short term employee benefits (including directors’ fees)
Share based payments (stock options and RSUs)
Termination benefits
Total compensation to key management including directors and officers
December 31,
2017
$ 1,268
718
200
$ 2,186
December 31,
2016
$
1,335
564
-
1,899
$
Certain executive officers are subject to a mutual term of notice of three months. On resignation at the Company’s
request, they are entitled to termination benefits of 12 to 24 months gross salary.
The Board of Directors of the Company has a Compensation and Corporate Governance Committee which recommends
compensation for directors and key executives of the Company for review and approval by the Board of Directors.
Page | 61
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
15.
Financial risk management
The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk
management framework. The Company’s audit committee is also responsible for developing and monitoring the
Company’s risk management policies. The committee reports regularly to the Board of Directors on its activities.
The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set
appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and
systems are reviewed regularly to reflect changes in market conditions and the Company’s activities. The Company,
through its policies and procedures and training, aims to develop a disciplined and constructive control environment
in which all employees understand their roles and obligations.
The Company has exposure to credit risk, liquidity risk and market risk as follows:
Credit risk
a)
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to
meet its contractual obligations, and arises principally from the Company’s receivables from customers. The carrying
amount of accounts receivable and cash, prior to the amount offset against long-term debt, represents the maximum
exposure to credit risk as at December 31, 2017 and December 31, 2016.
Accounts receivable includes balances from a large number of customers primarily operating in the oil and gas industry.
The Company assesses the credit worthiness of its customers on an ongoing basis as well as monitoring the amount and
age of balances outstanding.
The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer, however,
management also considers the demographics of the Company’s customer base. Currently, all of the Company’s sales
are concentrated within the Western Canadian Sedimentary Basin (“WCSB”). For the year ended December 31, 2017,
ten customers comprised 62% of revenue (2016: 74%) and one customer comprised 21% of revenue (2016: 32%). At
December 31, 2017, ten customers comprised 62% of trade accounts receivables (2016: 66%) and one customer
comprised 23% of trade accounts receivables (2016: 21%).
The Company has a credit policy under which each new customer is analyzed individually for creditworthiness before
the Company begins to provide services to the customer and prior to offering standard payment terms and conditions.
The Company’s review includes external ratings, when available, as well as contacting credit references and evaluating
banking information provided by the customer. Customers that fail to meet the Company’s benchmark creditworthiness
may be required to provide a cash deposit for part or all of the anticipated job cost until they have sufficient payment
history with the Company. Under some circumstances the Company may lien a customer’s location where the services
were provided.
The following table details the age of the outstanding trade accounts receivable and the related allowance for
impairment of accounts:
As at December 31,
2017
Trade accounts receivable:
1 to 30 days outstanding – not past due
31 to 90 days outstanding
>90 days overdue
Allowance for impairment of accounts
Page | 62
$ 16,081
13.723
441
(126)
$ 30,119
2016
$
$
9,646
5,351
414
(76)
15,335
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
The change in the allowance for impairment in respect of trade accounts receivable for the years ended December 31
is as follows:
Balance as at January 1
Additional allowance
Amounts recovered
Amounts used
Balance as at December 31
2017
$ 76
89
(13)
(26)
$ 126
2016
$
$
147
328
(306)
(93)
76
Accounts receivable are considered for impairment on a case-by-case basis when they are past due or when objective
evidence is received that a customer will default. The Company records a specific allowance for impairment when
management considers that the expected recovery is less than the actual amount receivable. Recoveries are the result
of amounts which were previously determined to be uncollectable being collected in a period subsequent to an
allowance for impairment being recorded.
Liquidity risk
b)
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The
Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to
meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or
risking damage to the Company’s reputation.
At December 31, 2017, the Company has available committed amounts under its Credit Facility in the amount of $37,321
(2016: $13,987), segregated cash of $10,000 (2016: $7,680), plus trade and other receivables of $30,182 (2016:
$15,335) for a total of $77,503 (2016: $37,002) available to fund the cash outflows related to its financial liabilities.
The Company anticipates that its existing capital resources including its Credit Facility and cash flows from operations
will be adequate to satisfy its liquidity requirements through fiscal 2018. This expectation could be adversely affected
by a material negative change in the oilfield service industry, which in turn could lead to covenant breaches on the
Company's Credit Facility, which, if not amended or waived, could limit the Company's access to the credit facility. If
available liquidity is not sufficient to meet CWC's operating and debt servicing obligations as they come due,
management's plans include further expenditure reductions, pursuing alternative financing arrangements, asset
dispositions, or pursuing other corporate strategic alternatives.
The following table summarizes contractual maturities for non-derivative financial instruments:
Years ended December 31, 2017
2020
2018
2019
2021
2022 and
beyond
Accounts payable and accrued
liabilities
Long-term debt
$ 12,202
176
$ 12,378
$ -
-
$
$ - $
-
49,634
49,634
$
$
-
-
-
$
$
-
-
-
Years ended December 31, 2016
Accounts payable and accrued
liabilities
Long-term debt
2017
7,359
176
7,535
$
$
2018
2019
2020
2021 and
beyond
$
$
-
32,966
32,966
$
$
-
-
-
$
$
-
-
-
$
$
-
-
-
Page | 63
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2017 and 2016
Stated in thousands of Canadian dollars except share and per share amounts
Market risk
c)
Market risk is the risk of changes in market prices, such as commodity prices, foreign currency exchange rates, and
interest rates will affect the net earnings or the value of financial instruments. The objective of managing market risk is
to control market risk exposures within acceptable limits, while maximizing returns. Market risks to which the
Company is subject include:
Foreign currency risk
Foreign currency exchange rate risk is the risk that the fair value or future cash flows will fluctuate as a result of changes
in foreign exchange rates. The Company does not engage in significant foreign currency denominated transactions and
exposure to foreign currency risk is negligible.
Interest rate risk
Interest rate risk is the risk that future cash flow will fluctuate as a result of change in market interest rates. The
Company is exposed to interest rate fluctuations on its long-term debt which bears interest at floating market rates. For
the year ended December 31, 2017, if the prime interest rate increased/decreased by 1%, with all other variables held
constant, net income would have been $486 lower/higher (2016: $329). The Company has not entered into any interest
rate swaps or other financial arrangements that mitigate the Company’s exposure to interest rate fluctuations.
Commodity price risk
The Company is not directly exposed to commodity price risk as it does not have any contracts that are directly based
on commodity prices, however, many of the Company's customers are exposed to commodity price risk which poses an
indirect risk to the Company. A change in commodity prices, specifically crude oil and natural gas prices may have a
material impact on cash flows of the Company’s customers and therefore affect the demand for our products or services
from these customers. However, given that this is an indirect influence, the financial impact for the Company of changing
oil and natural gas prices is not reasonably determinable.
Capital management
16.
The Company’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence
and to sustain future development of the business. The Company strives to maintain a balance between debt and equity
to ensure the continued access to capital markets to fund growth and ensure long-term viability. The Company
continually assesses the cash flow from operations to make decisions regarding required capital maintenance, growth
capital and dividends to ordinary shareholders. When those cash flows are not anticipated to be sufficient, the Company
then assesses the impact on its capital structure of funding through additional debt.
The Company manages its capital structure and makes adjustments to it in accordance with the aforementioned
objectives, as well as in light of changes in economic conditions. In order to maintain or adjust its capital structure, the
Company may, but is not limited to, issue new shares, issue new debt, issue new debt replacing existing debt with
different characteristics, pay a dividend to ordinary shareholders, or purchase shares for cancellation pursuant to
normal course issuer bids.
The Company monitors capital using a key financial metric of Consolidated Debt to Consolidated EBITDA ratio as
defined in the Credit Facility (see Note 7). Consolidated Debt to Consolidated EBITDA is not a recognized measure under
IFRS and, therefore, is unlikely to be comparable to similar measures of other companies.
During the year ended December 31, 2017, the actual and forecasted Consolidated Debt to Consolidated EBITDA of the
Company has declined, primarily due to the rights offering, increased pricing and utilization and amendments to credit
The Consolidated Debt to Consolidated EBITDA ratio at December 31, 2017 was 1.75:1.00 (at
facility terms.
December 31, 2016: 2.70:1.00). The Company was in compliance with all externally imposed capital requirements as
at December 31, 2017 and 2016.
Comparative Figures
17.
Certain comparative amounts have been reclassified to conform to the current year’s presentation.
Page | 64
Corporate Secretary
1
1 2
Audit Committee
2
Compensation and Corporate Governance Committee
1.
2.
Bankers
President & Chief Executive Of�icer
Duncan Au, CPA, CA, CFA
Chief Financial Of�icer
Stuart King, CPA, CA
Vice President Operations (Drilling)
Paul Donohue
Vice President Operations (Well Services)
Darwin McIntyre
Vice President, Sales and Marketing (Drilling)
Bob Apps
Vice President, Sales and Marketing (Well Services)
Mike Dubois