CWC Energy Services Corp.
Annual Report 2018

Plain-text annual report

2018 Annual Report CWC-AR-2018-2.indd 1 2019-05-03 8:47 AM Contents 1 3 6 Corporate Profile President’s Message 34 Management’s Discussion & Analysis 41 Financial Statements Notes to the Financial Statements CWC-AR-2018-2.indd 2 2019-05-03 8:47 AM th 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 $45.1 Horn River Montney/ Deep Basin Devonian Slave Lake Grande Prairie Pekisko & Beaverhill Lake Heavy Oil Drayton Valley Lloydminster Cardium Red Deer Provost Viking Calgary AB Bakken Brooks Corporate Pro�ile – April 2017 TSX-V: CWC CWC Energy Services Corp. is a premier contract drilling and well servicing company operating in the WCSB with a complementary suite of oilfield services including drilling rigs, service rigs, swabbing rigs and coil tubing units. These oilfield service activities are necessary to drill wells, to complete newly drilled wells, to maintain ongoing servicing of producing wells and to abandon wells. CWC’s services are provided through two divisions: Contract Drilling and Production Services. Corporate Profile – June 2019 Market Pro�ile Market Pro�ile December 31, 2016 December 31, 2018 Shares outstanding Shares outstanding Price Price Market Financial Information Market Financial Information ($ millions) 391.9 million 512.5 million $0.195 $0.115 $76.4 million $58.9 million 2015 2014 2016 ($ millions) 2018 2017 2016 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 $144.8 $8.2 $112.2 $12.0 $73.1 $34.1 $18.5 $210.8 $16.1 $222.4 $8.2 $275.4 $252.7 $33.1 $264.4 $52.2 $210.8 $65.7 $44.9 $21.8 $49.8 $40.4 $33.1 $45.1 $25.9 $30.3 $24.0 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 CWC-AR-2018-2.indd 3 th 2019-05-03 8:47 AM Board of Directors Jim Reid, Chairman Duncan Au Daryl Austin Gary Bentham Wade McGowan Management Dean Schultz President & CEO Duncan Au, FCPA, FCA, 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) 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, three have pad rig walking systems. The drilling rig fleet has an average age of nine 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. The Company is expanding its drilling rig services into select United States basins including the Permian, Eagle Ford and Bakken. Market Pro�ile December 31, 2016 Price $0.195 391.9 million Shares outstanding Market Financial Information 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 148 service rigs as at December 31, 2018. 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 9 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. Long-Term Debt 2018 $76.4 million ($ millions) Total Assets EBITDAS Revenue $222.4 $275.4 $210.8 $143.7 2016 2017 $73.1 $81.3 $33.1 $34.1 $12.0 $65.7 $52.2 2016 2014 2015 $8.2 Net Debt 2018 2018 2018 2017 2017 2017 $21.8 2016 2016 2016 $40.4 $45.1 Contract Drilling Service Rigs Horn River Coil Tubing Swabbing Rigs REVENUE BY DIVISION Devonian Montney/ Deep Basin REVENUE BY DIVISION REVENUE BY DIVISION Grande Prairie REVENUE BY DIVISION Slave Lake 9 148 9 2018 13 2018 2018 2018 9 149 10 13 9 74 9 – ADJUSTED EBITDA BY DIVISION * ADJUSTED EBITDA BY DIVISION * ADJUSTED EBITDA BY DIVISION * ADJUSTED EBITDA BY DIVISION * 26% Pekisko & Beaverhill Lake Heavy Oil 26% 26% Drayton Valley 26% Cardium 74% Red Deer 74% 74% 74% Calgary Production Lloydminster Services Provost Production Production Viking Services Contract Services Production Drilling Services Contract Contract Drilling Drilling Contract Drilling Brooks * Divisional contribution, corporate costs excluded AB Bakken 37% 37% 37% 37% 63% 63% 63% 63% CWC-AR-2018-2.indd 4 th th th th th * Divisional contribution, corporate costs excluded * Divisional contribution, corporate costs excluded * Divisional contribution, corporate costs excluded 2019-05-03 8:47 AM Corporate Pro�ile – April 2017 Market Pro�ile December 31, 2016 Highlights of 2018 President’s Message Dear Fellow Shareholders, I am very pleased to share with you CWC Energy Services Corp.’s (“CWC” or the “Company”) 2018 Annual Report. 2018 was a year of significant growth for CWC as we achieved a record-setting 156,358 operating hours in the service rig division, an increase of 28% compared to 2017 which was itself the previous Company record, and firmly positioned CWC as the largest service rig company in Canada as measured by operating hours. Shares outstanding Price Market Financial Information 391.9 million $0.195 $76.4 million ($ millions) 2016 2015 2014 Revenue EBITDAS Total Assets Long-Term Debt 2018 Net Debt 2018 2018 2018 2017 2017 2017 2017 $73.1 $81.3 $143.7 $8.2 $12.0 $34.1 $210.8 $222.4 $275.4 $33.1 2016 $52.2 $21.8 2016 2016 $40.4 2016 $65.7 $45.1 Horn River REVENUE BY DIVISION Devonian Montney/ Deep Basin REVENUE BY DIVISION REVENUE BY DIVISION Grande Prairie REVENUE BY DIVISION Slave Lake ADJUSTED EBITDA BY DIVISION * ADJUSTED EBITDA BY DIVISION * ADJUSTED EBITDA BY DIVISION * ADJUSTED EBITDA BY DIVISION * 2018 2018 2018 2018 Lloydminster Production Services Provost Production Production Viking Services Contract Services Production Drilling Services Contract Contract Drilling Drilling Contract Drilling Pekisko & 26% Beaverhill Lake Heavy Oil Drayton Valley 26% 26% 26% Cardium Red Deer 74% 74% 74% 74% 37% 37% 37% 37% 63% 63% 63% 63% Calgary Brooks * Divisional contribution, corporate costs excluded AB Bakken * Divisional contribution, corporate costs excluded * Divisional contribution, corporate costs excluded * Divisional contribution, corporate costs excluded 2018 started the year with West Texas Intermediate (“WTI”) oil prices in the mid US$60/bbl increasing to the mid US$70/bbl range by the end of September 2018 before dropping precipitously to end the year at approximately US$48/bbl. However, the real story in Canada was the widening price differential between Canadian heavy oil, as represented by Western Canadian Select (“WCS”), and WTI which exploded to unprecedented levels of over US$50/bbl compared to the historical normalized range of US$10 to US$15/bbl in Q4 2018. This significant WTI-WCS differential resulted in the Government of Alberta announcement on December 2, 2018 mandating a 325,000 bbls/day crude oil production curtailment on Alberta oil companies producing more than 10,000 bbls/day. This Alberta production curtailment had a negative effect at the end of the year on our Production Services segment as activity levels dropped significantly in mid-November 2018 as our exploration and production (“E&P”) customers were faced with both lower pricing and reduced ability to sell their oil resulting in lower cash flow to spend on CWC’s production services. Despite the poor finish at the end of 2018, CWC increased revenue to $144.8 million (a $32.5 million increase or 29% from 2017) and increased Adjusted EBITDA to $18.5 million (a $2.4 million increase or 15% from 2017) resulting in a net loss of $1.7 million (compared to a net income of $4.9 million in 2017, driven mostly from a gain on acquisition from C&J Canada of $9.1 million). These operational and financial results are 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 June 29, 2018, CWC obtained a new five-year credit facility (the “Mortgage Loan”) in the principal amount of $12.8 million to refinance our properties in Sylvan Lake, Slave Lake and Brooks, Alberta. As a result of this financing, the Company reduced its credit facility with its banking syndicate from $100 million to $75 million to reduce borrowing costs and standby charges. In addition, on July 27, 2018 the Company entered into an interest rate swap to effectively fix the interest rate on the Mortgage Loan at 4% until June 28, 2023. Such support from our debtholders allows CWC to focus on its business operations and strategic growth initiatives to create long-term shareholder value. On April 10, 2018, the Company renewed its Normal Course Issuer Bid (“NCIB”) with an Automatic Securities Purchase Plan (“ASPP”) with Raymond James Ltd. During 2018, CWC purchased 11,421,000 common shares under the NCIB which were cancelled and returned to treasury. These common shares represented 47% of the 24,366,081 shares traded on the TSX Venture Exchange in 2018, as the Company continued to add value for its remaining shareholders by reducing the number of common shares outstanding and providing liquidity for those shareholders looking to sell their shares. th th th th th Page | 3 CWC-AR-2018-2.indd 5 2019-05-03 8:47 AM Outlook For 2019 Activity levels for the beginning of 2019 has been slower than 2018 due to the Alberta production curtailment. On May 1, 2019, the Petroleum Services Association of Canada (“PSAC”) revised its forecast for number of wells drilled in 2019 to 5,300 wells, a decrease of 1,300 wells or 20% from its original November 1, 2018 forecast. Despite the slow start to 2019, CWC is starting to see activity levels in both the Contract Drilling and Production Services segment increasing as the Government of Alberta reduced their production curtailment by 75,000 bbls/day in February 2019, another 25,000 bbls/day in each of April, May and June 2019. In addition, the Company has been actively pursuing opportunities with new E&P customers in the United States for our drilling rigs where both utilization and pricing are expected to be higher than in Canada. We have recently signed our first two U.S. contracts and will be moving one drilling rig into the Eagle Ford basin in Texas and a second drilling rig into Wyoming with operations expected to start in Q2 2019, subject to obtaining work visas for our field employees. We intend on sending two more drilling rigs into the U.S. in the second half of 2019. As such, CWC is optimistic that the second half of 2019 will show higher activity levels and better Shareholder Returns operational and financial results compared to the first half of 2019. From a shareholder return perspective, while 2018 was not a great year for share price appreciation for public Canadian contract drilling and well servicing companies, CWC’s share price has bounced back in 2019 and is the only company to produce a significant positive share price return of 67% for its shareholders since December 31, 2015 as the following graph indicates: Share Price Returns - January 1, 2016 to April 1, 2019 Page | 4 CWC-AR-2018-2.indd 6 2019-05-03 8:47 AM The poor share price performance for the Canadian contract drilling and well servicing sector, despite better fundamental operating and financial performance in 2018 compared to 2017 and 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. In fact, 2018 was the lowest amount of equity capital raised (approximately $500 million) for Canadian E&P companies in the last 25 years. To date for 2019, the amount of equity capital raised for Canadian E&P companies has been $0. While there does not appear to be any catalysts that will reverse this competitiveness and investment trend in the near future, save and except for a change in provincial and federal government policies, CWC believes these are opportunistic times for consolidation with our peers at very attractive valuations and as such will create superior returns for Conclusion shareholders over the long-term. 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 and will be there to advocate for you in creating a healthier Canadian energy industry. 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, it’s not what we know but what we USE of what you know that matters! Sincerely and submitted on behalf of the Board of Directors, Duncan T. Au President & Chief Executive Officer May 1, 2019 Page | 5 CWC-AR-2018-2.indd 7 2019-05-03 8:47 AM  MANAGEMENT’S DISCUSSION AND ANALYSIS (“MD&A”) 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, 2019 and should be read in conjunction with audited consolidated financial statements for the year ended December 31, 2018. Additional information regarding CWC can be found in the Company’s latest Annual Information Form (“AIF”). The audited consolidated 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, including the AIF, is available on SEDAR at www.sedar.com. 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 (%) 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 per share – basic and (2) $ thousands, except ratios FINANCIAL POSITION AND LIQUIDITY (1) Three months ended December 31, Year ended December 31, 2018 2017 % Change 2018 2017 2016 13,081 22,397 35,478 4,978 14% 4,978 (157) (0%) 10,914 26,506 37,420 6,630 18% 20% (16%) (5%) (25%) 38,223 106,539 144,762 18,489 13% 35,222 76,993 112,215 16,063 14% 5,081 (2%) 18,489 14,514 15,903 57,219 73,122 8,220 11% 8,220 (2) 8,544 n/m (1,702) 4,861 (6,746) 23% n/m (1%) 4% (9%) (2) 518,513,776 418,913,266 520,576,582 399,008,915 349,836,144 518,513,776 423,221,202 520,576,582 403,359,537 349,836,144 $0.01 ($0.00) $0.02 $0.02 December 31, 2018 $0.04 December 31, ($0.00) 2017 $0.04 $0.01 $0.02 December 31, ($0.02) 2016 Working capital (excluding debt) Working capital (excluding debt) ratio Total assets Total long-term debt (including current portion) Shareholders' equity (1) (1) (2) Please refer to the “Reconciliation of Non-IFRS Measures” section for further information. Not meaningful. 19,028 3.4:1 252,665 44,896 184,231 19,543 2.6:1 264,354 49,810 186,519 9,142 2.2:1 210,750 33,142 155,482 (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (10%) from December 31, 2017 as positive funds from operations were used to fund capital expenditures, purchase shares under the Normal Course Issuer Bid (“NCIB”) and to repay debt. Highlights for the Three Months Ended December 31, 2018 Average Q4 2018 crude oil pricing, as measured by WTI, of US$59.34/bbl was 15% lower than Q3 2018 average price of US$69.51/bbl (Q4 2017: US$55.28/bbl) and finished the year on December 31, 2018 at US$45.41/bbl. However, the price differential between Canadian heavy crude oil, as represented by WCS, and WTI widened at times during Q4 2018 to unprecedented levels of over US$50/bbl compared to the historical normalized range of US$10/bbl to US$15/bbl. These significant WTI-WCS differential resulted in the Government of Alberta announcement on December 2, 2018 mandating a 325,000 bbls/day crude oil production curtailment on Alberta oil companies producing more than 10,000 bbls/day. Natural gas prices, as measured by AECO, increased 29% from an average of $1.19/GJ in Q3 2018 to $1.53/GJ in Q4 2018 (Q4 2017: $1.67/GJ), but continues to remain very low in historically terms. CWC’s drilling rig utilization in Q4 2018 of 59% (Q4 2017: 56%) exceeded Canadian Association of Oilwell Drilling Contractors (“CAODC”) industry average of 28%. Activity levels increased 6% to 491 drilling rig operating days in Q4 2018 compared to 463 drilling rig operating days in Q4 2017, further demonstrating the desirability and demand by exploration and production (“E&P”) customers for CWC’s telescopic double drilling rigs. CWC's service rig utilization in Q4 2018 of 37% (Q4 2017: 46%) was driven by 31,232 operating hours being 24% lower than the 40,879 operating hours in Q4 2017. The significant drop in Q4 2018 activity level for our production-oriented service rigs was a direct result of the significant WTI- WCS differentials reaching over US$50/bbl and the uncertainties our E&P customers faced regarding the Government of Alberta production curtailments thereby causing them to shorten or delay their workover and maintenance work on (cid:120) producing wells. Revenue of $35.5 million, a decrease of $1.9 million (5%) compared to $37.4 million in Q4 2017. The decrease in Q4 2018 is a direct result of the significant WTI-WCS differential and the uncertainties our E&P customers faced regarding Alberta’s production curtailments resulting in reduced activity levels in November and December 2018 for our Production Services segment partially offset by an increase in activity level in our Contract Drilling segment. (1) Adjusted EBITDA of $5.0 million, a decrease of $1.7 million (25%) compared to $6.6 million in Q4 2017. The decrease in Q4 2018 is a direct result of the significant WTI-WCS differential and the uncertainties our E&P customers faced regarding Alberta’s production curtailments resulting in reduced activity levels in November and December 2018 for our Production Services segment partially offset by an increase in activity level in our Contract Drilling segment. Net loss of $0.2 million, a decrease of $8.7 million compared to a net income of $8.5 million in Q4 2017. The decrease in net income in Q4 2018 is primarily due to a gain on acquisition of $9.1 million, related to the C&J Energy Production Services- Canada Ltd. (“C&J Canada”) acquisition in Q4 2017. During Q4 2018, 7,828,000 (Q4 2017: 405,000) common shares were purchased, cancelled and returned to treasury under CWC’s Normal Course Issuer Bid (“NCIB”). Highlights for the Year Ended December 31, 2018 CWC’s drilling rig utilization in 2018 of 49% (2017: 51%) exceeded the CAODC industry average of 29%. Activity levels in 2018 have decreased 3% compared to 2017 due to significant wet weather conditions in key operating areas in Q3 2018 which resulted in lost activity days. For the year ended December 31, 2018 operating days of 1,622 (2017: 1,672 operating days) is the second most active since the acquisition of Ironhand Drilling Inc. in May 2014. CWC's service rig utilization in 2018 of 42% (2017: 45%). Activity levels in 2018 set new Company records by increasing 28% to 156,358 operating hours (2017: 122,243). The increase resulted from the additional service rigs acquired from C&J Canada in November 2017. Revenue of $144.8 million, an increase of $32.5 million (29%) compared to $112.2 million in 2017. The increase is primarily a result of the addition of the service rig assets of C&J Canada. (1) Adjusted EBITDA of $18.5 million, an increase of $2.4 million (15%) compared to $16.1 million in 2017. The increase in Adjusted EBITDA is consistent with the increased activity ($4.5 million) from Production services due to the C&J Canada acquisition, offset by a decrease in Adjusted EBITDA in Contract drilling ($0.4 million) and corporate expense of ($1.7 Working capital (excluding debt) is similar to December 31, 2017 due to similar operating days and hours between CWC’s Contract Drilling and Production Services segments. Long-term debt (including current portion) has decreased $4.9 million Page | 6 CWC-AR-2018-2.indd 8 2019-05-03 8:47 AM million). Page | 7  MANAGEMENT’S DISCUSSION AND ANALYSIS (“MD&A”) 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, 2019 and should be read in conjunction with audited consolidated financial statements for the year ended December 31, 2018. Additional information regarding CWC can be found in the Company’s latest Annual Information Form (“AIF”). The audited consolidated 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, including the AIF, is available on SEDAR at www.sedar.com. Financial and Operational Highlights Funds from operations 5,081 (2%) 18,489 14,514 Three months ended December 31, Year ended December 31, 2018 2017 % Change 2018 2017 2016 13,081 22,397 35,478 4,978 14% 4,978 (157) (0%) 10,914 26,506 37,420 6,630 18% 20% (16%) (5%) (25%) 38,223 106,539 144,762 18,489 13% 35,222 76,993 112,215 16,063 14% 15,903 57,219 73,122 8,220 11% 8,220 8,544 n/m (1,702) 4,861 (6,746) 23% n/m (1%) 4% (9%) (2) (2) 518,513,776 418,913,266 520,576,582 399,008,915 349,836,144 518,513,776 423,221,202 520,576,582 403,359,537 349,836,144 $0.01 ($0.00) $0.02 $0.02 $0.04 $0.04 December 31, December 31, ($0.00) $0.01 December 31, ($0.02) 2018 2017 $0.02 2016 $ thousands, except shares, per share amounts, margins and ratios FINANCIAL RESULTS Revenue Contract Drilling Production Services Adjusted EBITDA (1) Adjusted EBITDA margin (%) (1) Net income (loss) and comprehensive income Net income (loss) and comprehensive income (loss) (loss) margin (%) Per share information Weighted average number of shares outstanding – basic Weighted average number of shares outstanding – diluted (2) Adjusted EBITDA per share – basic and diluted Net income (loss) per share - basic and diluted $ thousands, except ratios FINANCIAL POSITION AND LIQUIDITY Working capital (excluding debt) Working capital (excluding debt) ratio (1) (1) Total assets Total long-term debt (including current portion) Shareholders' equity (1) (2) Not meaningful. Page | 6 Please refer to the “Reconciliation of Non-IFRS Measures” section for further information. Working capital (excluding debt) is similar to December 31, 2017 due to similar operating days and hours between CWC’s Contract Drilling and Production Services segments. Long-term debt (including current portion) has decreased $4.9 million 19,028 3.4:1 252,665 44,896 184,231 19,543 2.6:1 264,354 49,810 186,519 9,142 2.2:1 210,750 33,142 155,482 (10%) from December 31, 2017 as positive funds from operations were used to fund capital expenditures, purchase shares Highlights for the Three Months Ended December 31, 2018 under the Normal Course Issuer Bid (“NCIB”) and to repay debt. (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) Average Q4 2018 crude oil pricing, as measured by WTI, of US$59.34/bbl was 15% lower than Q3 2018 average price of US$69.51/bbl (Q4 2017: US$55.28/bbl) and finished the year on December 31, 2018 at US$45.41/bbl. However, the price differential between Canadian heavy crude oil, as represented by WCS, and WTI widened at times during Q4 2018 to unprecedented levels of over US$50/bbl compared to the historical normalized range of US$10/bbl to US$15/bbl. These significant WTI-WCS differential resulted in the Government of Alberta announcement on December 2, 2018 mandating a 325,000 bbls/day crude oil production curtailment on Alberta oil companies producing more than 10,000 bbls/day. Natural gas prices, as measured by AECO, increased 29% from an average of $1.19/GJ in Q3 2018 to $1.53/GJ in Q4 2018 (Q4 2017: $1.67/GJ), but continues to remain very low in historically terms. CWC’s drilling rig utilization in Q4 2018 of 59% (Q4 2017: 56%) exceeded Canadian Association of Oilwell Drilling Contractors (“CAODC”) industry average of 28%. Activity levels increased 6% to 491 drilling rig operating days in Q4 2018 compared to 463 drilling rig operating days in Q4 2017, further demonstrating the desirability and demand by exploration and production (“E&P”) customers for CWC’s telescopic double drilling rigs. CWC's service rig utilization in Q4 2018 of 37% (Q4 2017: 46%) was driven by 31,232 operating hours being 24% lower than the 40,879 operating hours in Q4 2017. The significant drop in Q4 2018 activity level for our production-oriented service rigs was a direct result of the significant WTI- WCS differentials reaching over US$50/bbl and the uncertainties our E&P customers faced regarding the Government of Alberta production curtailments thereby causing them to shorten or delay their workover and maintenance work on producing wells. Revenue of $35.5 million, a decrease of $1.9 million (5%) compared to $37.4 million in Q4 2017. The decrease in Q4 2018 is a direct result of the significant WTI-WCS differential and the uncertainties our E&P customers faced regarding Alberta’s production curtailments resulting in reduced activity levels in November and December 2018 for our Production Services segment partially offset by an increase in activity level in our Contract Drilling segment. (1) of $5.0 million, a decrease of $1.7 million (25%) compared to $6.6 million in Q4 2017. The decrease in Adjusted EBITDA Q4 2018 is a direct result of the significant WTI-WCS differential and the uncertainties our E&P customers faced regarding Alberta’s production curtailments resulting in reduced activity levels in November and December 2018 for our Production Services segment partially offset by an increase in activity level in our Contract Drilling segment. Net loss of $0.2 million, a decrease of $8.7 million compared to a net income of $8.5 million in Q4 2017. The decrease in net income in Q4 2018 is primarily due to a gain on acquisition of $9.1 million, related to the C&J Energy Production Services- Canada Ltd. (“C&J Canada”) acquisition in Q4 2017. During Q4 2018, 7,828,000 (Q4 2017: 405,000) common shares were purchased, cancelled and returned to treasury under CWC’s Normal Course Issuer Bid (“NCIB”). Highlights for the Year Ended December 31, 2018 (cid:120) (cid:120) (cid:120) CWC’s drilling rig utilization in 2018 of 49% (2017: 51%) exceeded the CAODC industry average of 29%. Activity levels in 2018 have decreased 3% compared to 2017 due to significant wet weather conditions in key operating areas in Q3 2018 which resulted in lost activity days. For the year ended December 31, 2018 operating days of 1,622 (2017: 1,672 operating days) is the second most active since the acquisition of Ironhand Drilling Inc. in May 2014. CWC's service rig utilization in 2018 of 42% (2017: 45%). Activity levels in 2018 set new Company records by increasing 28% to 156,358 operating hours (2017: 122,243). The increase resulted from the additional service rigs acquired from C&J Canada in November 2017. Revenue of $144.8 million, an increase of $32.5 million (29%) compared to $112.2 million in 2017. The increase is primarily a result of the addition of the service rig assets of C&J Canada. (1) of $18.5 million, an increase of $2.4 million (15%) compared to $16.1 million in 2017. The increase in Adjusted EBITDA Adjusted EBITDA is consistent with the increased activity ($4.5 million) from Production services due to the C&J Canada acquisition, offset by a decrease in Adjusted EBITDA in Contract drilling ($0.4 million) and corporate expense of ($1.7 million). Page | 7 CWC-AR-2018-2.indd 9 2019-05-03 8:47 AM (cid:120) (cid:120) (cid:120) (cid:120) Net loss of $1.7 million, a decrease of $6.5 million compared to a net income of $4.9 million in 2017. The decrease in net income in 2018 is primarily due to a gain on acquisition of $9.1 million, related to the C&J Canada acquisition in 2017. OPERATING HIGHLIGHTS Drilling Rigs Dec. 31, Sep. 30, Jun. 30, Mar. 31, Dec. 31, Sep. 30, Jun. 30, Mar. 31, 2018 2018 2018 2018 2017 2017 2017 2017 Three months ended At the request of the Company, the Bank Loan was reduced from $100 million to $75 million to reduce borrowing costs and standby charges. On June 29, 2018 the Company obtained a new five year credit facility (the “Mortgage Loan”) in the principal amount of $12.8 million. The Mortgage Loan is secured by, among other things, a collateral mortgage from the Company in favour of the bank over properties located in Sylvan Lake, Brooks and Slave Lake Alberta. These new borrowing arrangements significantly reduce the Company’s overall borrowing costs by reducing standby charges on the syndicated credit facilities (the “Bank Loan”) and realizing a lower interest rate on the term Bank Loan. The Mortgage Loan has been amortized over 22 years with blended monthly principal and interest payments. On July 27, 2018 the Company entered into an interest rate swap to effectively fix the interest rate at 4.00% until June 28, 2023. As of December 31, 2018, the mark-to-market value of the interest rate swap resulted in a net loss of $0.2 million. On April 10, 2018, the Company renewed its NCIB with an Automatic Securities Purchase Plan (“ASPP”) with Raymond James Ltd., which expires on April 9, 2019. During 2018, the Company purchased 11,421,000 (2017: 3,493,500) common shares under its NCIB which were cancelled and returned to treasury. The 11,421,000 common shares purchased under the NCIB represented 47% of the 24,366,081 shares traded on the TSX Venture Exchange (“TSXV”) in 2018. (1) Corporate Overview Please refer to the “Reconciliation of Non-IFRS Measures” section for further information. 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”. 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 three 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. Part of the Company’s strategic initiatives is to continue 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 while providing a sufficient internal rate of return for CWC’s shareholders. Active drilling rigs, end of period Inactive drilling rigs, end of period Total drilling rigs, end of period (1) Revenue per operating day Drilling rig operating days (2) Drilling rig utilization % CAODC industry average utilization % Wells drilled Average days per well Meters drilled (thousands) Meters drilled per day (1) Average meters per well (2) of field service. $26,642 $21,263 $21,227 $23,485 $23,572 $19,424 $19,575 $20,942 9 - 9 491 59% 28% 34 14.4 127.8 261 3,708 9 - 9 500 60% 30% 41 12.2 155.2 310 3,786 9 - 9 133 16% 17% 11 12.1 41.0 309 3,724 9 - 9 498 61% 52% 45 11.1 161.7 325 3,593 9 - 9 463 56% 28% 30 15.0 128.1 277 4,270 9 - 9 522 63% 29% 29 18.0 112.2 215 3,869 9 - 9 155 19% 17% 17 9.1 45.6 294 2,684 9 - 9 532 66% 40% 41 13.0 151.8 285 3,702 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 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 $13.1 million for Q4 2018 (Q4 2017: $10.9 million) was achieved with a utilization rate of 59% (Q4 2017: 56%), compared to the CAODC industry average of 28%. CWC achieved 491 drilling rig operating days in Q4 2018, a 6% increase from 463 drilling rig operating days in Q4 2017. The Q4 2018 average revenue per operating day of $26,642 was an increase from $23,572 in Q4 2017 and included a one-time contract payout amount of $0.7 million. For the year ended December 31, 2018, Contract Drilling revenue of $38.2 million was 9% higher than the $35.2 million achieved in 2017. CWC’s utilization rate in 2018 of 49% continues to significantly exceed the CAODC industry average of 29% and is slightly lower than the 51% for the year ended December 31, 2017. CWC had 1,622 drilling rig operating days in 2018, a 3% decrease from the 1,672 drilling operating days in 2017. The reduction in operating days were due to significant wet weather conditions in key operating areas in Q3 2018 (57 days of lost activity compared to 31 days in Q3 2017 out of a possible 828 total days). Production Services With a fleet of 148 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, 57 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 56 of its service rigs and focus its sales and operational efforts on the remaining 92 active service rigs due to the tight labour market for field employees and the inability to crew these service rigs. CWC’s fleet of nine coil tubing units consist of six Class I and three Class II coil tubing units having depth ratings from 1,500 to 3,200 metres. The Company continues to focus its sales and operational efforts on servicing Steam-assisted gravity drainage (“SAGD”) wells that are shallower in depth and more appropriate for coil tubing operations. CWC’s fleet of 13 swabbing rigs were acquired as part of the C&J Canada acquisition and operate under the trade name CWC Swabtech. The swabbing rigs are used to remove liquids from the wellbore and allow reservoir pressures to push the commodity up the tubing casing. The Company has chosen to park five of its swabbing rigs and focus its sales and operational efforts on the remaining eight active swabbing rigs. Page | 8 CWC-AR-2018-2.indd 10 Page | 9 2019-05-03 8:47 AM (1) 34 14.4 127.8 261 3,708 41 12.2 155.2 310 3,786 17 9.1 45.6 294 2,684 29 18.0 112.2 215 3,869 30 15.0 128.1 277 4,270 11 12.1 41.0 309 3,724 45 11.1 161.7 325 3,593 41 13.0 151.8 285 3,702 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 Wells drilled Average days per well Meters drilled (thousands) Meters drilled per day Average meters per well Net loss of $1.7 million, a decrease of $6.5 million compared to a net income of $4.9 million in 2017. The decrease in net income in 2018 is primarily due to a gain on acquisition of $9.1 million, related to the C&J Canada acquisition in 2017. OPERATING HIGHLIGHTS Drilling Rigs Dec. 31, 2018 Sep. 30, 2018 Jun. 30, 2018 Mar. 31, 2018 Dec. 31, 2017 Sep. 30, 2017 Jun. 30, 2017 Mar. 31, 2017 Three months ended 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 9 - 9 9 - 9 (1) Revenue per operating day Drilling rig operating days (2) Drilling rig utilization % CAODC industry average utilization % $26,642 491 59% 28% $21,263 500 60% 30% $21,227 133 16% 17% $23,485 498 61% 52% $23,572 463 56% 28% $19,424 522 63% 29% $19,575 155 19% 17% $20,942 532 66% 40% (cid:120) (cid:120) (cid:120) (cid:120) (1) At the request of the Company, the Bank Loan was reduced from $100 million to $75 million to reduce borrowing costs and standby charges. On June 29, 2018 the Company obtained a new five year credit facility (the “Mortgage Loan”) in the principal amount of $12.8 million. The Mortgage Loan is secured by, among other things, a collateral mortgage from the Company in favour of the bank over properties located in Sylvan Lake, Brooks and Slave Lake Alberta. These new borrowing arrangements significantly reduce the Company’s overall borrowing costs by reducing standby charges on the syndicated credit facilities (the “Bank Loan”) and realizing a lower interest rate on the term Bank Loan. The Mortgage Loan has been amortized over 22 years with blended monthly principal and interest payments. On July 27, 2018 the Company entered into an interest rate swap to effectively fix the interest rate at 4.00% until June 28, 2023. As of December 31, 2018, the mark-to-market value of the interest rate swap resulted in a net loss of $0.2 million. On April 10, 2018, the Company renewed its NCIB with an Automatic Securities Purchase Plan (“ASPP”) with Raymond James Ltd., which expires on April 9, 2019. During 2018, the Company purchased 11,421,000 (2017: 3,493,500) common 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”. 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 three 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. Part of the Company’s strategic initiatives is to continue 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 while providing a sufficient internal rate of return for CWC’s shareholders. shares under its NCIB which were cancelled and returned to treasury. The 11,421,000 common shares purchased under the (2) of field service. NCIB represented 47% of the 24,366,081 shares traded on the TSX Venture Exchange (“TSXV”) in 2018. 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 $13.1 million for Q4 2018 (Q4 2017: $10.9 million) was achieved with a utilization rate of 59% (Q4 2017: 56%), compared to the CAODC industry average of 28%. CWC achieved 491 drilling rig operating days in Q4 2018, a 6% increase from 463 drilling rig operating days in Q4 2017. The Q4 2018 average revenue per operating day of $26,642 was an increase from $23,572 in Q4 2017 and included a one-time contract payout amount of $0.7 million. For the year ended December 31, 2018, Contract Drilling revenue of $38.2 million was 9% higher than the $35.2 million achieved in 2017. CWC’s utilization rate in 2018 of 49% continues to significantly exceed the CAODC industry average of 29% and is slightly lower than the 51% for the year ended December 31, 2017. CWC had 1,622 drilling rig operating days in 2018, a 3% decrease from the 1,672 drilling operating days in 2017. The reduction in operating days were due to significant wet weather conditions in key operating areas in Q3 2018 (57 days of lost activity compared to 31 days in Q3 2017 out of a possible 828 total days). Production Services With a fleet of 148 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, 57 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 56 of its service rigs and focus its sales and operational efforts on the remaining 92 active service rigs due to the tight labour market for field employees and the inability to crew these service rigs. CWC’s fleet of nine coil tubing units consist of six Class I and three Class II coil tubing units having depth ratings from 1,500 to 3,200 metres. The Company continues to focus its sales and operational efforts on servicing Steam-assisted gravity drainage (“SAGD”) wells that are shallower in depth and more appropriate for coil tubing operations. CWC’s fleet of 13 swabbing rigs were acquired as part of the C&J Canada acquisition and operate under the trade name CWC Swabtech. The swabbing rigs are used to remove liquids from the wellbore and allow reservoir pressures to push the commodity up the tubing casing. The Company has chosen to park five of its swabbing rigs and focus its sales and operational efforts on the remaining eight active swabbing rigs. Page | 8 Page | 9 CWC-AR-2018-2.indd 11 2019-05-03 8:47 AM increase in average service rig revenue per hour of 10% in 2018 compared to 2017. Service rig utilization decreased to 42% in 2018 compared to 45% in 2017. The increase in Production Services revenue was partially offset by coil tubing operating hours decreasing 29% in 2018 to 6,764 operating hours (2017: 9,561 operating hours) resulting in coil tubing utilization in 2018 of 23% (2017: 29%). The decrease in coil tubing activity level in 2018 is a result of low natural gas prices and unprecedented widening of WTI-WCS differentials in SAGD operating areas causing delays in allocation and commitment of capital by our E&P customers. These lower activity levels were partially offset by an increase in average coil tubing revenue per hour of 17% in 2018. Outlook The steady rise in crude oil prices throughout 2017 and the first nine months of 2018 ended in Q4 2018. Crude oil, as represented by WTI, averaged US$59.34/bbl in Q4 2018, a decrease of 15% compared to Q3 2018 average price of US$69.51/bbl (Q4 2017: US$55.28/bbl) and finished the year on December 31, 2018 at US$45.41/bbl. However, the price differential between Canadian heavy crude oil, as represented by WCS, and WTI widened at times during Q4 2018 to unprecedented levels of over US$50/bbl compared to the historical normalized range of US$10/bbl to US$15/bbl. These significant WTI-WCS differential resulted in the Government of Alberta announcement on December 2, 2018 mandating a 325,000 bbls/day crude oil production curtailment on Alberta oil companies producing more than 10,000 bbls/day. Natural gas prices, as measured by AECO, increased 29% from an average of $1.19/GJ in Q3 2018 to $1.53/GJ in Q4 2018 (Q4 2017: $1.67/GJ), but continues to remain very low in historically terms. With the backdrop of a decreasing crude oil price and a depressed natural gas price, the Petroleum Services Association of Canada (“PSAC”) on January 29, 2019 updated its 2019 forecast of number of wells drilled to 5,600 wells; a decrease of 1,000 wells or 15% from their original 2019 forecast. Recognizing the oversupply of crude oil on the market, on December 7, 2018 OPEC agreed to a cut global oil production by 1.2 million barrels, which has helped the price of WTI recover and stabilize to approximately US$55/bbl in February 2019. CWC has sustainably positioned itself by providing its E&P customers with the highest quality service from the highest quality people at reasonable prices. However, uncertainties around the proposed Government of Canada’s Bill C-69 legislation on the creation of the Canadian Energy Regulator and the Impact Assessment Act, which may impact the ability to develop new pipelines, as well as Bill C-48 banning tanker traffic for crude oil on British Columbia’s north coast, will continue to negatively affect investment capital and growth in Canada’s oil and gas industry in the near term. However, investment capital and growth are showing signs of returning as evident by the positive final investment decisions made in October 2018 by proponents of a liquefied natural gas process facility (LNG Canada) in northeast British Columbia and final investment decisions to be made in 2019 on the Goldboro LNG in Nova Scotia. In addition, the Government of Alberta announced a decrease in their production curtailment by 75,000 bbls/day in February 2019, which has resulted in CWC’s E&P customers being allowed to increase their production and in turn gradually increasing CWC’s activity levels for its Production Services segment back to more normalized levels. While CWC remains focused on its operational and financial performance, it also recognizes the need to pursue opportunities that create long-term shareholder value. With the support of the Board of Directors, management continues to actively pursue opportunities to achieve higher utilization and EBITDA margins on its existing fleet, including working for new customers in the United States, while also evaluating opportunities to consolidate the North American drilling and well servicing industry. CWC cautions that there are no guarantees that strategic opportunities will result in a transaction, or if a transaction is undertaken, as to its terms or timing. OPERATING HIGHLIGHTS Service Rigs Dec. 31, 2018 Sep. 30, 2018 Jun. 30, 2018 Three months ended Dec. 31, 2017 Mar. 31, 2018 Sep. 30, 2017 Jun. 30, 2017 Mar. 31, 2017 Active service rigs, end of period Inactive service rigs, end of period Total service rigs, end of period 92 56 148 102 46 148 107 41 148 108 41 149 111 38 149 66 8 74 66 8 74 66 8 74 Operating hours Revenue per hour Revenue per hour excluding top volume customers Service rig utilization % (1) Coil Tubing Units 31,232 $663 42,316 $628 28,831 $642 53,979 $637 40,879 $606 28,320 $559 20,047 $551 32,997 $584 $696 37% $664 45% $677 60% $681 56% $645 46% $610 47% $608 33% $641 56% Active coil tubing units, end of period Inactive coil tubing units, end of period Total coil tubing units, end of period Operating hours Revenue per hour Coil tubing unit utilization % Swabbing Rigs (2) 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) 8 1 9 1,647 $625 22% 8 5 13 2,313 $283 30% 8 1 9 898 $731 12% 9 4 13 881 $273 11% 8 1 9 8 1 9 9 1 10 9 1 10 9 1 10 9 1 10 1,212 $762 17% 3,007 $724 39% 1,978 $725 24% 1,783 $688 22% 1,557 $657 19% 4,243 $491 52% 8 5 13 958 $265 13% 8 5 13 9 4 13 2,258 $310 31% 1,063 $286 19% - - - - - - - - - - - - - - - - - - (1) (2) Service and swabbing rig utilization is calculated based on 10 hours a day, 365 days a year. New service and swabbing rigs are added based on the first day of field service. Service 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. 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. Coil tubing units that have been removed from service for greater than 90 days are excluded from the utilization calculation until their first day back in field service. Production Services revenue was $22.4 million in Q4 2018, down $4.1 million (16%) compared to $26.5 million in Q4 2017. The decrease in Q4 2018 is a direct result of the significant WTI-WCS differential reaching over US$50/bbl and the uncertainties our E&P customers faced regarding the Government of Alberta’s production curtailments resulting in reduced activity levels in November and December 2018. CWC's service rig utilization in Q4 2018 of 37% (Q4 2017: 46%) was driven by 31,232 operating hours being 24% lower than the 40,879 operating hours in Q4 2017. The Q4 2018 average revenue per hour of $663 increased $57 per hour (9%) over the $606 in Q4 2017. Furthermore, Q4 2018 average revenue per hour excluding the top volume customers of $696 was $51 per hour (8%) higher than Q4 2017 average revenue per hour of $645 demonstrating CWC’s ability to pass on higher labour and fuel costs to all of its E&P customers. CWC’s coil tubing utilization in Q4 2018 of 22% (Q4 2017: 24%) with 1,647 operating hours was 17% lower than the 1,978 operating hours in Q4 2017. Average revenue per hour for coil tubing services of $625 in Q4 2018 is 14% lower than $725 in Q4 2017. Both lower utilization and pricing reflects the continuing challenge of low natural gas prices and unprecedented widening of the WTI-WCS differential in SAGD operating areas causing delays in allocation and commitment of capital by our E&P customers in Q4 2018. CWC swabbing rig utilization in Q4 2018 of 30% (Q4 2017: 19%) with 2,313 operating hours was 118% higher than the 1,063 operating hours in Q4 2017. Average revenue per hour for swabbing rigs of $283 in Q4 2018 is 1% lower than $286 in Q4 2017. The higher activity level is a result of having a full three months with the swabbing assets in Q4 2018 compared to only two months in Q4 2017 as a result of the C&J Canada acquisition in November 2017. For the year ended December 31, 2018, Production Services revenue of $106.5 million was 38% higher than the $77.0 million achieved in 2017 primarily as a result of a 28% increase in service rig operating hours from 122,243 in 2017 to a new Company record of 156,358 operating hours in 2018 driven by the additional service rigs from the C&J Canada acquisition, as well as an Page | 10 CWC-AR-2018-2.indd 12 Page | 11 2019-05-03 8:47 AM OPERATING HIGHLIGHTS Dec. 31, Sep. 30, Jun. 30, Mar. 31, Dec. 31, Sep. 30, Jun. 30, Mar. 31, 2018 2018 2018 2018 2017 2017 2017 2017 Three months ended Service Rigs Active service rigs, end of period Inactive service rigs, end of period Total service rigs, end of period 92 56 148 102 46 148 107 41 148 108 41 149 111 38 149 66 8 74 66 8 74 66 8 74 Operating hours Revenue per hour Revenue per hour excluding top volume customers (1) Service rig utilization % Coil Tubing Units Active coil tubing units, end of period Inactive coil tubing units, end of period Total coil tubing units, end of period Operating hours Revenue per hour Coil tubing unit utilization % Swabbing Rigs (2) 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) (1) 31,232 $663 42,316 $628 28,831 $642 53,979 $637 40,879 $606 28,320 $559 20,047 $551 32,997 $584 $696 37% $664 45% $677 60% $681 56% $645 46% $610 47% $608 33% $641 56% 1,212 $762 17% 3,007 $724 39% 1,978 $725 24% 1,783 $688 22% 1,557 $657 19% 4,243 $491 52% 8 1 9 1,647 $625 22% 8 5 13 2,313 $283 30% 8 1 9 898 $731 12% 9 4 13 881 $273 11% 8 1 9 8 5 13 958 $265 13% 8 1 9 8 5 13 9 1 10 9 4 13 2,258 $310 31% 1,063 $286 19% 9 1 10 9 1 10 9 1 10 - - - - - - - - - - - - - - - - - - Service and swabbing rig utilization is calculated based on 10 hours a day, 365 days a year. New service and swabbing rigs are added based on the first day of field service. Service and swabbing rigs requiring their 24,000 hour recertification, refurbishment or have been otherwise removed from service for greater (2) than 90 days are excluded from the utilization calculation until their first day back in field service. 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. Coil tubing units that have been removed from service for greater than 90 days are excluded from the utilization calculation until their first day back in field service. Production Services revenue was $22.4 million in Q4 2018, down $4.1 million (16%) compared to $26.5 million in Q4 2017. The decrease in Q4 2018 is a direct result of the significant WTI-WCS differential reaching over US$50/bbl and the uncertainties our E&P customers faced regarding the Government of Alberta’s production curtailments resulting in reduced activity levels in November and December 2018. CWC's service rig utilization in Q4 2018 of 37% (Q4 2017: 46%) was driven by 31,232 operating hours being 24% lower than the 40,879 operating hours in Q4 2017. The Q4 2018 average revenue per hour of $663 increased $57 per hour (9%) over the $606 in Q4 2017. Furthermore, Q4 2018 average revenue per hour excluding the top volume customers of $696 was $51 per hour (8%) higher than Q4 2017 average revenue per hour of $645 demonstrating CWC’s ability to pass on higher labour and fuel costs to all of its E&P customers. CWC’s coil tubing utilization in Q4 2018 of 22% (Q4 2017: 24%) with 1,647 operating hours was 17% lower than the 1,978 operating hours in Q4 2017. Average revenue per hour for coil tubing services of $625 in Q4 2018 is 14% lower than $725 in Q4 2017. Both lower utilization and pricing reflects the continuing challenge of low natural gas prices and unprecedented widening of the WTI-WCS differential in SAGD operating areas causing delays in allocation and commitment of capital by our E&P customers in Q4 2018. CWC swabbing rig utilization in Q4 2018 of 30% (Q4 2017: 19%) with 2,313 operating hours was 118% higher than the 1,063 operating hours in Q4 2017. Average revenue per hour for swabbing rigs of $283 in Q4 2018 is 1% lower than $286 in Q4 2017. The higher activity level is a result of having a full three months with the swabbing assets in Q4 2018 compared to only two months in Q4 2017 as a result of the C&J Canada acquisition in November 2017. For the year ended December 31, 2018, Production Services revenue of $106.5 million was 38% higher than the $77.0 million achieved in 2017 primarily as a result of a 28% increase in service rig operating hours from 122,243 in 2017 to a new Company record of 156,358 operating hours in 2018 driven by the additional service rigs from the C&J Canada acquisition, as well as an Page | 10 increase in average service rig revenue per hour of 10% in 2018 compared to 2017. Service rig utilization decreased to 42% in 2018 compared to 45% in 2017. The increase in Production Services revenue was partially offset by coil tubing operating hours decreasing 29% in 2018 to 6,764 operating hours (2017: 9,561 operating hours) resulting in coil tubing utilization in 2018 of 23% (2017: 29%). The decrease in coil tubing activity level in 2018 is a result of low natural gas prices and unprecedented widening of WTI-WCS differentials in SAGD operating areas causing delays in allocation and commitment of capital by our E&P customers. These lower activity levels were partially offset by an increase in average coil tubing revenue per hour of 17% in 2018. Outlook The steady rise in crude oil prices throughout 2017 and the first nine months of 2018 ended in Q4 2018. Crude oil, as represented by WTI, averaged US$59.34/bbl in Q4 2018, a decrease of 15% compared to Q3 2018 average price of US$69.51/bbl (Q4 2017: US$55.28/bbl) and finished the year on December 31, 2018 at US$45.41/bbl. However, the price differential between Canadian heavy crude oil, as represented by WCS, and WTI widened at times during Q4 2018 to unprecedented levels of over US$50/bbl compared to the historical normalized range of US$10/bbl to US$15/bbl. These significant WTI-WCS differential resulted in the Government of Alberta announcement on December 2, 2018 mandating a 325,000 bbls/day crude oil production curtailment on Alberta oil companies producing more than 10,000 bbls/day. Natural gas prices, as measured by AECO, increased 29% from an average of $1.19/GJ in Q3 2018 to $1.53/GJ in Q4 2018 (Q4 2017: $1.67/GJ), but continues to remain very low in historically terms. With the backdrop of a decreasing crude oil price and a depressed natural gas price, the Petroleum Services Association of Canada (“PSAC”) on January 29, 2019 updated its 2019 forecast of number of wells drilled to 5,600 wells; a decrease of 1,000 wells or 15% from their original 2019 forecast. Recognizing the oversupply of crude oil on the market, on December 7, 2018 OPEC agreed to a cut global oil production by 1.2 million barrels, which has helped the price of WTI recover and stabilize to approximately US$55/bbl in February 2019. CWC has sustainably positioned itself by providing its E&P customers with the highest quality service from the highest quality people at reasonable prices. However, uncertainties around the proposed Government of Canada’s Bill C-69 legislation on the creation of the Canadian Energy Regulator and the Impact Assessment Act, which may impact the ability to develop new pipelines, as well as Bill C-48 banning tanker traffic for crude oil on British Columbia’s north coast, will continue to negatively affect investment capital and growth in Canada’s oil and gas industry in the near term. However, investment capital and growth are showing signs of returning as evident by the positive final investment decisions made in October 2018 by proponents of a liquefied natural gas process facility (LNG Canada) in northeast British Columbia and final investment decisions to be made in 2019 on the Goldboro LNG in Nova Scotia. In addition, the Government of Alberta announced a decrease in their production curtailment by 75,000 bbls/day in February 2019, which has resulted in CWC’s E&P customers being allowed to increase their production and in turn gradually increasing CWC’s activity levels for its Production Services segment back to more normalized levels. While CWC remains focused on its operational and financial performance, it also recognizes the need to pursue opportunities that create long-term shareholder value. With the support of the Board of Directors, management continues to actively pursue opportunities to achieve higher utilization and EBITDA margins on its existing fleet, including working for new customers in the United States, while also evaluating opportunities to consolidate the North American drilling and well servicing industry. CWC cautions that there are no guarantees that strategic opportunities will result in a transaction, or if a transaction is undertaken, as to its terms or timing. Page | 11 CWC-AR-2018-2.indd 13 2019-05-03 8:47 AM  Discussion of Financial Results Revenue, Direct Operating Expenses and Gross Margin $ thousands 2018 2017 Change $ Change % 2018 2017 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) 13,081 22,397 35,478 8,600 17,188 25,788 4,481 5,209 9,690 10,914 26,506 37,420 7,026 19,594 26,620 3,888 6,912 10,800 2,167 (4,109) (1,942) 1,574 (2,406) (832) 593 (1,703) (1,110) 20% (16%) (5%) 22% (12%) (3%) 15% (25%) (10%) Contract Drilling Production Services 34% 23% 27% Please refer to the “Reconciliation of Non-IFRS Measures” section for further information. 36% 26% 29% n/a n/a n/a (2%) (3%) (2%) (1) 38,223 106,539 144,762 27,691 80,293 107,984 10,532 26,246 36,778 28% 25% 25% 35,222 76,993 112,215 24,690 57,671 82,361 10,532 19,322 29,854 30% 25% 27% 3,001 29,546 32,547 3,001 22,622 25,623 - 6,924 6,924 n/a n/a n/a 9% 38% 29% 12% 39% 31% 0% 36% 23% (2%) 0% (2%) Q4 2018 revenue of $35.5 million, a decrease of $1.9 million (5%) compared to $37.4 million in Q4 2017. Revenue increased $2.2 million (20%) in the Contract Drilling segment and decreased $4.1 million (16%) in the Production Services segment in Q4 2018 compared to Q4 2017. The decrease in Q4 2018 is a direct result of the significant WTI-WCS differential and the uncertainties our E&P customers faced regarding Alberta’s production curtailments resulting in reduced activity levels in November and December 2018 for our Production Services segment partially offset by an increase in activity level in our Contract Drilling segment. For the year ended December 31, 2018, revenue of $144.8 million, an increase of $32.5 million (29%) compared to $112.2 million in 2017. Revenue increased $3.0 million (9%) in the Contract Drilling segment and $29.5 million (38%) in the Production Services segment for 2018 compared to 2017. In 2018, CWC continued to increase its revenue and diversify its customer base, reducing reliance on its top ten customers. Revenue contribution from the Company's top ten customers dropped from 62% in 2017 to 57% in 2018 with CWC’s top customer’s revenue contribution dropping from 21% in 2017 to 18% in 2018. In 2018, approximately 78% or revenue (2017: 66%) was from work on crude oil wells while 22% (2017: 34%) was from natural gas wells. Further, approximately 35% of revenue (2017: 38%) was related to drilling and completions work, 53% (2017: 37%) from maintenance and workovers on producing wells and 12% (2017: 25%) 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 34% in Q4 2018 is lower than the 36% in Q4 2017 and the year ended December 31, 2018 gross margin percentage of 28% for 2018 is lower than 30% in 2017 due to increased repair and maintenance costs. Production Services’ gross margin of 23% in Q4 2018 is lower than the 26% in Q4 2017, due to reduced activity levels not being able to cover a certain component of fixed costs. For the year ended December 31, 2018, Production Services’ gross margin of 25% is consistent with that obtained in 2017. Selling and Administrative Expenses $ thousands 2018 2017 Change $ Change % 2018 2017 Change $ Change % Three months ended December 31, Year ended December 31, Selling and administrative expenses Page | 12 4,713 4,170 543 13% 18,289 13,791 4,498 33% expensed over their vesting periods. Page | 13 CWC-AR-2018-2.indd 14 2019-05-03 8:47 AM Selling and administrative expenses of $4.7 million in Q4 2018, an increase of $0.5 million (13%) compared to $4.2 million in Q4 2017. Selling and administrative expenses of $18.3 million for the year ended December 31, 2018, an increase of $4.5 million (33%) compared to $13.8 million in 2017. For both the quarter and year ended December 31, 2018, the increased selling and administrative expenses are due to the additional salaried employees that joined the Company primarily from the C&J Canada acquisition, additional costs to recruit field employees combined with other costs incurred due to higher year-over-year activity levels across all segments. Severance costs totaling $0.3 million were paid in 2018 (2017: $0.3 million) and a bonus accrual of $1.0 million is included in 2018 (2017: $0.4 million). In addition, CWC experienced a higher bad debt expense in 2018 of $0.7 million (2017: $0.01 million) Adjusted EBITDA $ thousands 2018 2017 Change $ Change % 2018 2017 Change $ Change % Three months ended December 31, Year ended December 31, Adjusted EBITDA (1) Contract Drilling Production Services Corporate Adjusted EBITDA margin (%) (1) (1) 4,136 2,621 (1,779) 4,978 14% 3,624 4,765 (1,759) 6,630 18% 512 (2,144) (20) (1,652) n/a 14% (45%) (1%) (25%) (4%) 9,232 15,550 (6,293) 18,489 13% 9,591 11,073 (4,601) 16,063 14% (359) 4,477 (1,692) 2,426 n/a (4%) 40% (37%) 15% (1%) 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 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 $5.0 million in Q4 2018, a decrease of $1.7 million (25%) compared to $6.6 million in Q4 2017. The decrease in Q4 2018 is a direct result of the significant WTI-WCS differential and the uncertainties our E&P customers faced regarding Alberta’s production curtailments resulting in reduced activity levels in November and December 2018 for our Production Services segment partially offset by an increase in activity level in our Contract Drilling segment. For the year ended December 31, 2018, Adjusted EBITDA of $18.5 million, an increase of $2.4 million (15%) compared to $16.1 million in 2017. The increase in Adjusted EBITDA is primarily due to the additional service rigs acquired from C&J Canada offset by slightly higher selling, general and administrative expenses in the Contract Drilling segment and higher Corporate expenses due to a larger bonus accrual and higher bad debt expense in 2018 compared to 2017. Transaction Costs $ thousands 2018 2017 Change $ Change % 2018 2017 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 in 2017 on the acquisition of C&J Canada’s service and swabbing rig assets. No similar expense was incurred in 2018. Stock Based Compensation $ thousands 2018 2017 Change $ Change % 2018 2017 Change $ Change % Three months ended December 31, Year ended December 31, Stock based compensation 339 278 61 22% 1,102 869 233 27% Stock based compensation is primarily a function of outstanding stock options and restricted share units (“RSUs”) being $ thousands Adjusted EBITDA (1) Contract Drilling Production Services Corporate (1) Three months ended December 31, 2017 2018 Change $ Change % Year ended December 31, 2017 2018 Change $ Change % 4,136 2,621 (1,779) 4,978 14% 3,624 4,765 (1,759) 6,630 18% 512 (2,144) (20) (1,652) n/a 14% (45%) (1%) (25%) (4%) 9,232 15,550 (6,293) 18,489 13% 9,591 11,073 (4,601) 16,063 14% (359) 4,477 (1,692) 2,426 n/a (4%) 40% (37%) 15% (1%) Selling and administrative expenses of $4.7 million in Q4 2018, an increase of $0.5 million (13%) compared to $4.2 million in Q4 2017. Selling and administrative expenses of $18.3 million for the year ended December 31, 2018, an increase of $4.5 million (33%) compared to $13.8 million in 2017. For both the quarter and year ended December 31, 2018, the increased selling and administrative expenses are due to the additional salaried employees that joined the Company primarily from the C&J Canada acquisition, additional costs to recruit field employees combined with other costs incurred due to higher year-over-year activity levels across all segments. Severance costs totaling $0.3 million were paid in 2018 (2017: $0.3 million) and a bonus accrual of $1.0 million is included in 2018 (2017: $0.4 million). In addition, CWC experienced a higher bad debt expense in 2018 of $0.7 million (2017: $0.01 million) Adjusted EBITDA Discussion of Financial Results Revenue, Direct Operating Expenses and Gross Margin $ thousands 2018 2017 Change $ Change % 2018 2017 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 (1) Gross margin percentage Contract Drilling Production Services (1) 13,081 22,397 35,478 8,600 17,188 25,788 4,481 5,209 9,690 34% 23% 27% 10,914 26,506 37,420 7,026 19,594 26,620 3,888 6,912 10,800 36% 26% 29% 2,167 (4,109) (1,942) 1,574 (2,406) (832) 593 (1,703) (1,110) n/a n/a n/a 20% (16%) (5%) 22% (12%) (3%) 15% (25%) (10%) (2%) (3%) (2%) 38,223 106,539 144,762 27,691 80,293 107,984 10,532 26,246 36,778 28% 25% 25% 35,222 76,993 112,215 24,690 57,671 82,361 10,532 19,322 29,854 30% 25% 27% 3,001 29,546 32,547 3,001 22,622 25,623 - 6,924 6,924 n/a n/a n/a 9% 38% 29% 12% 39% 31% 0% 36% 23% (2%) 0% (2%) Please refer to the “Reconciliation of Non-IFRS Measures” section for further information. Q4 2018 revenue of $35.5 million, a decrease of $1.9 million (5%) compared to $37.4 million in Q4 2017. Revenue increased $2.2 million (20%) in the Contract Drilling segment and decreased $4.1 million (16%) in the Production Services segment in Q4 2018 compared to Q4 2017. The decrease in Q4 2018 is a direct result of the significant WTI-WCS differential and the uncertainties our E&P customers faced regarding Alberta’s production curtailments resulting in reduced activity levels in November and December 2018 for our Production Services segment partially offset by an increase in activity level in our Contract Drilling segment. For the year ended December 31, 2018, revenue of $144.8 million, an increase of $32.5 million (29%) compared to $112.2 million in 2017. Revenue increased $3.0 million (9%) in the Contract Drilling segment and $29.5 million (38%) in the Production Services segment for 2018 compared to 2017. In 2018, CWC continued to increase its revenue and diversify its customer base, reducing reliance on its top ten customers. Revenue contribution from the Company's top ten customers dropped from 62% in 2017 to 57% in 2018 with CWC’s top customer’s revenue contribution dropping from 21% in 2017 to 18% in 2018. In 2018, approximately 78% or revenue (2017: 66%) was from work on crude oil wells while 22% (2017: 34%) was from natural gas wells. Further, approximately 35% of revenue (2017: 38%) was related to drilling and completions work, 53% (2017: 37%) from maintenance and workovers on producing wells and 12% (2017: 25%) 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 34% in Q4 2018 is lower than the 36% in Q4 2017 and the year ended December 31, 2018 gross margin percentage of 28% for 2018 is lower than 30% in 2017 due to increased repair and maintenance costs. Production Services’ gross margin of 23% in Q4 2018 is lower than the 26% in Q4 2017, due to reduced activity levels not being able to cover a certain component of fixed costs. For the year ended December 31, 2018, Production Services’ gross margin of 25% is consistent with that obtained in 2017. Selling and Administrative Expenses $ thousands 2018 2017 Change $ Change % 2018 2017 Change $ Change % Three months ended December 31, Year ended December 31, 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 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 $5.0 million in Q4 2018, a decrease of $1.7 million (25%) compared to $6.6 million in Q4 2017. The decrease in Q4 2018 is a direct result of the significant WTI-WCS differential and the uncertainties our E&P customers faced regarding Alberta’s production curtailments resulting in reduced activity levels in November and December 2018 for our Production Services segment partially offset by an increase in activity level in our Contract Drilling segment. For the year ended December 31, 2018, Adjusted EBITDA of $18.5 million, an increase of $2.4 million (15%) compared to $16.1 million in 2017. The increase in Adjusted EBITDA is primarily due to the additional service rigs acquired from C&J Canada offset by slightly higher selling, general and administrative expenses in the Contract Drilling segment and higher Corporate expenses due to a larger bonus accrual and higher bad debt expense in 2018 compared to 2017. Transaction Costs $ thousands 2018 2017 Change $ Change % 2018 2017 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 in 2017 on the acquisition of C&J Canada’s service and swabbing rig assets. No similar expense was incurred in 2018. Stock Based Compensation $ thousands 2018 2017 Change $ Change % 2018 2017 Change $ Change % Three months ended December 31, Year ended December 31, Stock based compensation 339 278 61 22% 1,102 869 233 27% Selling and administrative expenses Page | 12 4,713 4,170 543 13% 18,289 13,791 4,498 33% Stock based compensation is primarily a function of outstanding stock options and restricted share units (“RSUs”) being expensed over their vesting periods. Page | 13 CWC-AR-2018-2.indd 15 2019-05-03 8:47 AM (1) Adjusted EBITDA margin (%) Please refer to the “Reconciliation of Non-IFRS Measures” section for further information. Stock based compensation of $0.3 million in Q4 2018 is consistent with $0.3 million in Q4 2017. Stock based compensation of $1.1 million for the year ended December 31, 2018, an increase of $0.2 million (27%) compared to $0.9 million in 2017. For both the quarter and year ended December 31, 2018, the increase in stock based compensation is primarily due to greater number of stock options and RSUs granted to directors, management and employees for managing a larger pool of assets as a result of the C&J Canada acquisition. Finance Costs $ thousands 2018 2017 Change $ Change % 2018 2017 Change $ Change % Three months ended December 31, Year ended December 31, Finance costs 857 606 251 41% 2,756 2,054 702 34% $ thousands Finance costs of $0.9 million in Q4 2018, an increase of $0.3 million (41%) compared to $0.6 million in Q4 2017. Finance costs were $2.8 million for the year ended December 31, 2018, an increase of $0.7 million (34%) compared to $2.1 million in 2017. For both the quarter and year ended December 31, 2018, the increase in finance costs was due to increases in interest rates and higher average debt levels due to the acquisition of the C&J Canada assets. Depreciation and Amortization 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 (1) Not meaningful. (17) 140 (1) n/m 27% 8,402 (142) (2%) 27% (1,852) (150) (8%) 27% 3,576 (1,285) (1) n/m 27% $ thousands Depreciation and amortization Contract Drilling Production Services Corporate Three months ended December 31, Year ended December 31, 2018 2017 Change $ Change % 2018 2017 Change $ Change % 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. 1,840 1,794 219 3,853 1,973 2,801 37 4,811 (133) (1,007) 182 (958) (7%) (36%) 492% (20%) 6,034 9,523 884 16,441 6,215 10,730 158 17,103 (181) (1,207) 726 (662) (3%) (11%) 459% (4%) differences. Depreciation and amortization for drilling rigs, service rigs and swabbing rigs are based on operating days and hours. Coil tubing units, capitalized recertification’s 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 2018 and the year ended December 31, 2018 predominately reflect changes in utilizations compared to the same periods in 2017. (Gain) Loss on Disposal of Equipment $ thousands 2018 2017 Change $ Change % 2018 2017 Change $ Change % Three months ended December 31, Year ended December 31, Gain on Acquisition $ thousands 2018 2017 Change $ Change % 2018 2017 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 in 2017 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. No similar gain on acquisition was incurred for both Q4 2018 nor the year ended December 31, 2018. Deferred Income Taxes Expense (Recovery) Three months ended December 31, Year ended December 31, 2018 2017 2018 2017 The deferred income tax expense in Q4 2018 of $0.1 million (deferred income tax recovery Q4 2017: $0.1 million) and for the year ended December 31, 2018 deferred income tax recovery of $0.2 million (2017: $1.3 million) is a result of the net income (loss) before income taxes being adjusted into a net loss for tax purposes by adjusting for the temporary and permanent 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 (Loss) Income and Comprehensive (Loss) Income $ thousands 2018 2017 Change $ Change % 2018 2017 Change $ Change % Three months ended December 31, Year ended December 31, Net (loss) income and comprehensive (loss) income (1) Not meaningful. (157) 8,544 (8,701) n/m (1,702) 4,861 (6,563) (1) (1) n/m Net (loss) income and comprehensive (loss) income of $(0.2) million in Q4 2018, a decrease of $8.7 million compared to $8.5 million in Q4 2017. Net (loss) income and comprehensive (loss) income for 2018 was $(1.7) million, a decrease of $6.6 million compared to $4.9 million in 2017. The decrease is primarily due to 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 2017 with no similar gain on acquisition in Q4 2018 nor the year ended December 31, 2018. 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, acquire shares under the NCIB and fund capital Management continually monitors the asset mix and equipment needs and invests and divests assets as needed to optimize operations. For both the quarter and year ended December 31, 2018, the (gain) loss on disposal of equipment was the result of the sale of equipment with proceeds on sale of $0.1 million (Q4 2017: $0.3 million) and $2.1 million (2017: $0.5 million), respectively. The equipment sold consisted of one inactive coil tubing unit, one picker unit, one inactive service rig and various other vehicles. Page | 14 CWC-AR-2018-2.indd 16 requirements. Page | 15 2019-05-03 8:47 AM (54) 112 (166) n/m 42 40 2 5% (1) (Gain) loss on disposal of equipment Not meaningful. (1) Gain on Acquisition $ thousands 2018 2017 Change $ Change % 2018 2017 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 in 2017 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. No similar gain on acquisition was incurred for both Q4 2018 nor the year ended December 31, 2018. Deferred Income Taxes Expense (Recovery) Finance costs 857 606 251 41% 2,756 2,054 702 34% $ thousands 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 (1) Not meaningful. Three months ended December 31, Year ended December 31, 2018 2017 2018 2017 (17) 140 (1) n/m 27% 8,402 (142) (2%) 27% (1,852) (150) (8%) 27% 3,576 (1,285) (1) n/m 27% Three months ended December 31, Year ended December 31, 2018 2017 Change $ Change % 2018 2017 Change $ Change % 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 expense in Q4 2018 of $0.1 million (deferred income tax recovery Q4 2017: $0.1 million) and for the year ended December 31, 2018 deferred income tax recovery of $0.2 million (2017: $1.3 million) is a result of the net income (loss) before income taxes being adjusted into a net loss for tax purposes by adjusting for the temporary and permanent differences. 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 (Loss) Income and Comprehensive (Loss) Income $ thousands 2018 2017 Change $ Change % 2018 2017 Change $ Change % Three months ended December 31, Year ended December 31, Stock based compensation of $0.3 million in Q4 2018 is consistent with $0.3 million in Q4 2017. Stock based compensation of $1.1 million for the year ended December 31, 2018, an increase of $0.2 million (27%) compared to $0.9 million in 2017. For both the quarter and year ended December 31, 2018, the increase in stock based compensation is primarily due to greater number of stock options and RSUs granted to directors, management and employees for managing a larger pool of assets as a result of the C&J Canada acquisition. Finance Costs $ thousands 2018 2017 Change $ Change % 2018 2017 Change $ Change % Three months ended December 31, Year ended December 31, Finance costs of $0.9 million in Q4 2018, an increase of $0.3 million (41%) compared to $0.6 million in Q4 2017. Finance costs were $2.8 million for the year ended December 31, 2018, an increase of $0.7 million (34%) compared to $2.1 million in 2017. For both the quarter and year ended December 31, 2018, the increase in finance costs was due to increases in interest rates and higher average debt levels due to the acquisition of the C&J Canada assets. Depreciation and Amortization $ thousands Depreciation and amortization Contract Drilling Production Services Corporate 1,840 1,794 219 3,853 1,973 2,801 37 4,811 (133) (1,007) 182 (958) (7%) (36%) 492% (20%) 6,034 9,523 884 16,441 6,215 10,730 158 17,103 (181) (1,207) 726 (662) (3%) (11%) 459% (4%) Depreciation and amortization for drilling rigs, service rigs and swabbing rigs are based on operating days and hours. Coil tubing units, capitalized recertification’s 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 2018 and the year ended December 31, 2018 predominately reflect changes in utilizations compared to the same periods in 2017. (Gain) Loss on Disposal of Equipment $ thousands 2018 2017 Change $ Change % 2018 2017 Change $ Change % Three months ended December 31, Year ended December 31, (54) 112 (166) n/m 42 40 2 5% (1) Management continually monitors the asset mix and equipment needs and invests and divests assets as needed to optimize For both the quarter and year ended December 31, 2018, the (gain) loss on disposal of equipment was the result of the sale of equipment with proceeds on sale of $0.1 million (Q4 2017: $0.3 million) and $2.1 million (2017: $0.5 million), respectively. The equipment sold consisted of one inactive coil tubing unit, one picker unit, one inactive service rig and various other vehicles. (Gain) loss on disposal of equipment (1) Not meaningful. operations. Page | 14 Net (loss) income and comprehensive (loss) income of $(0.2) million in Q4 2018, a decrease of $8.7 million compared to $8.5 million in Q4 2017. Net (loss) income and comprehensive (loss) income for 2018 was $(1.7) million, a decrease of $6.6 million compared to $4.9 million in 2017. The decrease is primarily due to 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 2017 with no similar gain on acquisition in Q4 2018 nor the year ended December 31, 2018. 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, acquire shares under the NCIB and fund capital requirements. Page | 15 CWC-AR-2018-2.indd 17 2019-05-03 8:47 AM (157) 8,544 (8,701) n/m (1,702) 4,861 (6,563) (1) (1) n/m Net (loss) income and comprehensive (loss) income Not meaningful. (1) During the year ended December 31, 2018, the Company’s Funds from Operations of $18.5 million combined with $0.1 million from common share issuances and $2.1 million proceeds on disposal of equipment was used to fund a $5.4 million reduction in long term debt, $11.1 million of capital expenditures, $3.0 million of interest on long-term debt and finance lease payments and $1.8 million in acquisitions of shares under the NCIB. At December 31, 2018 the Company had working capital (excluding debt) of $19.0 million compared to $19.5 million at December 31, 2017. (Please refer to the "Reconciliation of Non-IFRS Measures" section for further information). Typically, as activity levels increase or decrease working capital will also increase or decrease. During Q2 2018 at the request of the Company the syndicated credit facility (“Bank Loan”) was reduced from $100 million to $75 million to reduce borrowing costs and standby charges. The $75 million Bank Loan provides financial security and flexibility to July 31, 2020 and a quarterly financial covenant for Consolidated Debt to Consolidated EBITDA ratio of 4.00 to 1. The Bank Loan is 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 Bank Loan, the Company is required to comply with certain financial covenants. The Company is in compliance with each of the financial covenants at December 31, 2018. The Company expects to be able to renew the Bank Loan prior to maturity. Effective December 31, 2018, 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 June 29, 2018 the Company obtained a new five year credit facility (the “Mortgage Loan”) in the principal amount of $12.8 million. The Mortgage Loan is secured by, among other things, a collateral mortgage from the Company in favour of the bank over properties located in Sylvan Lake, Brooks and Slave Lake Alberta. These new borrowing arrangements significantly reduce the Company’s overall borrowing costs by reducing standby charges on the syndicated Bank Loan and realizing a lower interest rate on the term Bank Loan. The Mortgage Loan has been amortized over 22 years with blended monthly principal and interest payments. On July 27, 2018 the Company entered into an interest rate swap to exchange the floating rate interest payments for fixed rate interest payments, which fix the Bankers Acceptance-Canadian Dollar Offered Rate components of its interest payment on the outstanding term debt. Under the interest rate swap agreement, the Company pays a fixed rate of 2.65% per annum plus the applicable credit spread of 1.35%, for an effective fixed rate of 4.0%. The fair value of the interest rate swap arrangement is the difference between the forward interest rates and the discounted contract rate. As of December 31, 2018 the mark-to- market value of the interest rate swap resulted in a net loss of $0.2 million. Capital Requirements On January 16, 2019 the Company announced its capital expenditure budget for 2019 of $5.4 million all of which 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 decrease of $6.4 million to the 2019 capital budget compared to the 2018 capital expenditure of $11.8 million is a result of the Company taking a more cautious view of the 2019 economic and operating environment than in the prior year. CWC intends to finance its 2019 capital expenditure budget from operating cash flows. As utilization of the Company’s equipment increases, CWC plans to recertify several of its service rigs. As at December 31, 2018, 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, 2019 December 31, 2018 December 31, 2017 Common shares Stock options Restricted share units 512,786,291 24,173,333 5,651,001 512,509,291 24,351,333 5,910,001 521,378,958 27,546,667 5,135,332 During the year ended December 31, 2018, 1,033,335 stock options were exercised, 2,161,999 were forfeited and none were granted. In addition, 1,517,998 RSU's were exercised, 422,333 were forfeited and 2,715,000 were granted. On April 10, 2018, the Company replaced its expired NCIB with a new NCIB which now expires on April 9, 2019. Under the new NCIB the Company may purchase, from time to time as it considers advisable, up to 26,057,889 of issued and outstanding common shares through the facilities of the TSXV or other recognized marketplaces. 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. For the year ended December 31, 2018, 11,421,000 common shares (2017: 3,493,500 common shares) were purchased, cancelled and returned to treasury under the NCIB. The 11,421,000 common shares purchased under the NCIB represented 47% of the 24,366,081 shares traded on the TSXV in 2018. Capital Expenditures $ thousands 2018 2017 Change $ Change % 2018 2017 Change $ Change % Three months ended December 31, Year ended December 31, Total capital expenditures 1,983 38,906 (36,923) Contract drilling Production services Corporate Growth capital Maintenance and infrastructure capital Total capital expenditures 414 1,569 - - 1,176 37,730 - (762) (36,161) - (65%) (96%) -% (95%) 7,116 4,609 28 3,964 40,559 9 3,152 (35,950) 19 11,753 44,532 (32,779) 80% (89%) 211% (74%) 37,605 (37,605) (100%) 5,859 39,340 (33,481) (85%) 1,983 1,983 1,301 38,906 682 (36,923) 52% (95%) 5,894 11,753 5,192 44,532 702 (32,779) 14% (74%) Capital expenditures of $2.0 million in Q4 2018, a decrease of $36.9 million (95%) compared to $38.9 million in Q4 2017. Capital expenditures were $11.8 million for the year ended December 31, 2018, a decrease of $32.8 million (74%) compared to $44.5 million in 2017. For both the quarter and year ended December 31, 2018, the decrease in capital expenditures was due to the purchase of the C&J Canada service and swabbing rig assets in 2017 with no similar purchases in 2018. For the year ended December 31, 2018, growth capital of $5.9 million consists primarily of customer driven upgrades to Drilling Rig #4 ($4.3 million) that included a pad rig walking system, increase drilling capacity, torque, pump pressure and dual fuel engine capabilities while operating on a smaller footprint. Drilling Rig #2 ($1.0 million) upgrades included a new mast, rising cylinders, catwalk and top drive integration. These upgrades are expected to increase these two drilling rigs’ capacity resulting in higher expected utilization in future quarters. Drilling Rig #2 and #4’s upgrades align with our strategic initiatives and meet our E&P customers’ demands for deeper depths at cost effective prices while providing a sufficient internal rate of return for CWC’s shareholders. Maintenance and infrastructure capital of $5.9 million consists primarily of recertification costs, building upgrades and leased vehicles. The 2019 capital expenditure budget of $5.4 million was approved by the Board of Directors on January 16, 2019 comprised entirely of maintenance and infrastructure capital related to recertification’s, additions and upgrades to field equipment for the drilling rigs, service rigs, swabbing rigs and coil tubing divisions as well as information technology infrastructure. Page | 16 CWC-AR-2018-2.indd 18 Page | 17 2019-05-03 8:47 AM Common Shares and Dividends February 28, 2019 December 31, 2017 December 31, 2018 The following table summarizes outstanding share data and potentially dilutive securities: During the year ended December 31, 2018, the Company’s Funds from Operations of $18.5 million combined with $0.1 million from common share issuances and $2.1 million proceeds on disposal of equipment was used to fund a $5.4 million reduction in long term debt, $11.1 million of capital expenditures, $3.0 million of interest on long-term debt and finance lease payments and $1.8 million in acquisitions of shares under the NCIB. At December 31, 2018 the Company had working capital (excluding debt) of $19.0 million compared to $19.5 million at December 31, 2017. (Please refer to the "Reconciliation of Non-IFRS Measures" section for further information). Typically, as activity levels increase or decrease working capital will also increase or decrease. During Q2 2018 at the request of the Company the syndicated credit facility (“Bank Loan”) was reduced from $100 million to $75 million to reduce borrowing costs and standby charges. The $75 million Bank Loan provides financial security and flexibility to July 31, 2020 and a quarterly financial covenant for Consolidated Debt to Consolidated EBITDA ratio of 4.00 to 1. The Bank Loan is 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 Bank Loan, the Company is required to comply with certain financial covenants. The Company is in compliance with each of the financial covenants at December 31, 2018. The Company expects to be able to renew the Bank Loan prior to maturity. Effective December 31, 2018, 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 June 29, 2018 the Company obtained a new five year credit facility (the “Mortgage Loan”) in the principal amount of $12.8 million. The Mortgage Loan is secured by, among other things, a collateral mortgage from the Company in favour of the bank over properties located in Sylvan Lake, Brooks and Slave Lake Alberta. These new borrowing arrangements significantly reduce the Company’s overall borrowing costs by reducing standby charges on the syndicated Bank Loan and realizing a lower interest rate on the term Bank Loan. The Mortgage Loan has been amortized over 22 years with blended monthly principal and interest payments. On July 27, 2018 the Company entered into an interest rate swap to exchange the floating rate interest payments for fixed rate interest payments, which fix the Bankers Acceptance-Canadian Dollar Offered Rate components of its interest payment on the outstanding term debt. Under the interest rate swap agreement, the Company pays a fixed rate of 2.65% per annum plus the applicable credit spread of 1.35%, for an effective fixed rate of 4.0%. The fair value of the interest rate swap arrangement is the difference between the forward interest rates and the discounted contract rate. As of December 31, 2018 the mark-to- market value of the interest rate swap resulted in a net loss of $0.2 million. Capital Requirements On January 16, 2019 the Company announced its capital expenditure budget for 2019 of $5.4 million all of which 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 decrease of $6.4 million to the 2019 capital budget compared to the 2018 capital expenditure of $11.8 million is a result of the Company taking a more cautious view of the 2019 economic and operating environment than in the prior year. CWC intends to finance its 2019 capital expenditure budget from operating cash flows. As utilization of the Company’s equipment increases, CWC plans to recertify several of its service rigs. As at December 31, 2018, 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 Stock options Restricted share units 512,786,291 24,173,333 5,651,001 512,509,291 24,351,333 5,910,001 521,378,958 27,546,667 5,135,332 During the year ended December 31, 2018, 1,033,335 stock options were exercised, 2,161,999 were forfeited and none were granted. In addition, 1,517,998 RSU's were exercised, 422,333 were forfeited and 2,715,000 were granted. On April 10, 2018, the Company replaced its expired NCIB with a new NCIB which now expires on April 9, 2019. Under the new NCIB the Company may purchase, from time to time as it considers advisable, up to 26,057,889 of issued and outstanding common shares through the facilities of the TSXV or other recognized marketplaces. 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. For the year ended December 31, 2018, 11,421,000 common shares (2017: 3,493,500 common shares) were purchased, cancelled and returned to treasury under the NCIB. The 11,421,000 common shares purchased under the NCIB represented 47% of the 24,366,081 shares traded on the TSXV in 2018. Capital Expenditures $ thousands 2018 2017 Change $ Change % Three months ended December 31, Year ended December 31, 2017 2018 Change $ Change % Contract drilling Production services Corporate Total capital expenditures Growth capital Maintenance and infrastructure capital Total capital expenditures 414 1,569 - 1,983 1,176 37,730 - 38,906 (762) (36,161) - (36,923) (65%) (96%) -% (95%) 7,116 4,609 28 11,753 3,964 40,559 9 44,532 3,152 (35,950) 19 (32,779) 80% (89%) 211% (74%) - 37,605 (37,605) (100%) 5,859 39,340 (33,481) (85%) 1,983 1,983 1,301 38,906 682 (36,923) 52% (95%) 5,894 11,753 5,192 44,532 702 (32,779) 14% (74%) Capital expenditures of $2.0 million in Q4 2018, a decrease of $36.9 million (95%) compared to $38.9 million in Q4 2017. Capital expenditures were $11.8 million for the year ended December 31, 2018, a decrease of $32.8 million (74%) compared to $44.5 million in 2017. For both the quarter and year ended December 31, 2018, the decrease in capital expenditures was due to the purchase of the C&J Canada service and swabbing rig assets in 2017 with no similar purchases in 2018. For the year ended December 31, 2018, growth capital of $5.9 million consists primarily of customer driven upgrades to Drilling Rig #4 ($4.3 million) that included a pad rig walking system, increase drilling capacity, torque, pump pressure and dual fuel engine capabilities while operating on a smaller footprint. Drilling Rig #2 ($1.0 million) upgrades included a new mast, rising cylinders, catwalk and top drive integration. These upgrades are expected to increase these two drilling rigs’ capacity resulting in higher expected utilization in future quarters. Drilling Rig #2 and #4’s upgrades align with our strategic initiatives and meet our E&P customers’ demands for deeper depths at cost effective prices while providing a sufficient internal rate of return for CWC’s shareholders. Maintenance and infrastructure capital of $5.9 million consists primarily of recertification costs, building upgrades and leased vehicles. The 2019 capital expenditure budget of $5.4 million was approved by the Board of Directors on January 16, 2019 comprised entirely of maintenance and infrastructure capital related to recertification’s, additions and upgrades to field equipment for the drilling rigs, service rigs, swabbing rigs and coil tubing divisions as well as information technology infrastructure. Page | 16 Page | 17 CWC-AR-2018-2.indd 19 2019-05-03 8:47 AM Commitments and Contractual Obligations Under the terms of the Company’s amended Bank Loan, the borrowing under the Bank Loan are due in full on July 31, 2020. The Company is committed to monthly payments of interest and bank charges until July 31, 2020. The Company’s Mortgage Loan is being amortized over 22 years with blended monthly principal and interest payments and matures on June 28, 2023. There have been no significant changes in other commitments or contractual obligations since December 31, 2017. Management believes that there will be sufficient cash flows generated from operations to service the interest on the debt and finance the required maintenance and growth capital of the Company in 2019. Summary and Analysis of Quarterly Data $ thousands, except per share amounts Three months ended 2018 2017 Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31 Revenue Adjusted EBITDA Net income (loss) 35,478 38,113 22,245 48,925 37,420 27,173 15,114 32,580 4,978 6,002 31 7,478 6,630 4,055 228 5,150 (157) 326 (3,067) 1,196 8,544 (638) (2,677) (368) Net income (loss) per share: basic and diluted (0.00) 0.01 (0.01) 0.00 0.02 0.00 (0.01) 0.00 Total assets Total long-term debt Shareholders' equity 252,665 44,896 184,231 257,675 46,394 185,195 250,039 36,803 184,834 268,479 51,377 187,829 264,354 49,810 186,519 208,355 34,404 151,833 203,265 28,887 152,596 218,171 38,828 155,358 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 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. (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) Q1 2018 service rig fleet set a new Company record of 53,979 operating hours as a result of the increase in the number of service rigs from the acquisition of the C&J Canada assets. During Q1 2018, 1,394,000 common shares were purchased under the NCIB and a total of 1,318,500 common shares were cancelled and returned to treasury; 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 saw the initiation of a process to review strategic alternatives. 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; and Q1 2017 saw significantly higher operating activity in the Company’s Contract Drilling and Production Services Critical Accounting Estimates and Judgments segments than what had been experienced in the last eight to twelve quarters. This MD&A of the Company’s financial condition and results of operations is based on the consolidated financial statements which are prepared in accordance with IFRS. The preparation of the consolidated 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 consolidated 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. There have been no significant or material changes in the nature of critical accounting estimates and judgements since December 31, 2017. The Company adopted IFRS 15 “Revenue from Contracts with Customers” and IFRS 9 “Financial Instruments” on January 1, 2018. The transitions had no material effect on the Company’s Financial Statements. Please refer to the consolidated financial statements and related notes for further details on the adoption of these standards. 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 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”. The consideration transferred on acquisitions of businesses is allocated to the identifiable assets acquired and liabilities assumed at their estimated fair values on the acquisition date. All available information is used to estimate fair values, and external consultants may be engaged to assist in the fair value determination of property, plant and equipment. The preliminary allocation of consideration transferred may be adjusted, as necessary, up to one year after the acquisition closing date due to Other significant impacts have been a result of: (cid:120) (cid:120) (cid:120) Q4 2018 saw the price differential between Canadian heavy crude oil, as represented by WCS, and WTI widened at times to unprecedented levels of over US$50/bbl compared to the historical normalized range of US$10/bbl to US$15/bbl. These significant WTI-WCS differential resulted in the Government of Alberta announcement on December 2, 2018 mandating a 325,000 bbls/day crude oil production curtailment on Alberta oil companies producing more than 10,000 bbls/day causing E&P customers to shorten or delay their workover and maintenance work on producing wells. During Q4 2018, 7,858,000 common shares were purchased, cancelled and returned to treasury under the NCIB; Q3 2018 saw the completion of significant customer driven capital expenditure upgrades on Drilling Rig #4 to meet customer demands for deeper depths at cost effective prices. Wet weather conditions during the quarter significantly impacted activity levels in both the Contract Drilling and Production Services segments resulting in 7% and 4% of lost operating days and hours respectively. During Q3 2018, 1,175,500 common shares were purchased under the NCIB and a total of 1,309,000 common shares were cancelled and returned to treasury; Q2 2018 saw significant customer driven capital expenditure upgrades to two drilling rigs to meet customer demands for deeper depths at cost effective prices. During Q2 2018, 1,023,000 common shares were purchased under the NCIB and a total of 935,500 common shares were cancelled and returned to treasury; additional information affecting asset valuation and liabilities assumed. The allocation process for the consideration transferred involves uncertainty as management is required to make assumptions and apply judgment to estimates of the fair value of the acquired assets and liabilities, including highest and best use of assets. Quoted market prices and widely accepted valuation techniques, including discounted cash flows and market multiple analyses are used to estimate the fair market value of the assets and liabilities and depreciated replacement costs are used for the valuation of tangible assets. These estimates include assumptions on inputs within the discounted cash flow calculations related to forecasted revenues, cash flows, contract renewals, asset lives, industry economic factors and business strategies. 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 Page | 18 CWC-AR-2018-2.indd 20 Page | 19 2019-05-03 8:47 AM Commitments and Contractual Obligations Under the terms of the Company’s amended Bank Loan, the borrowing under the Bank Loan are due in full on July 31, 2020. The Company is committed to monthly payments of interest and bank charges until July 31, 2020. The Company’s Mortgage Loan is being amortized over 22 years with blended monthly principal and interest payments and matures on June 28, 2023. There have been no significant changes in other commitments or contractual obligations since December 31, 2017. Management believes that there will be sufficient cash flows generated from operations to service the interest on the debt and finance the required maintenance and growth capital of the Company in 2019. Summary and Analysis of Quarterly Data $ thousands, except per share amounts Three months ended 2018 2017 Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31 Revenue Adjusted EBITDA Net income (loss) 35,478 38,113 22,245 48,925 37,420 27,173 15,114 32,580 4,978 6,002 31 7,478 6,630 4,055 228 5,150 (157) 326 (3,067) 1,196 8,544 (638) (2,677) (368) Net income (loss) per share: basic and diluted (0.00) 0.01 (0.01) 0.00 0.02 0.00 (0.01) 0.00 Total assets Total long-term debt Shareholders' equity 252,665 44,896 184,231 257,675 46,394 185,195 250,039 36,803 184,834 268,479 51,377 187,829 264,354 49,810 186,519 208,355 34,404 151,833 203,265 28,887 152,596 218,171 38,828 155,358 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 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) Q4 2018 saw the price differential between Canadian heavy crude oil, as represented by WCS, and WTI widened at times to unprecedented levels of over US$50/bbl compared to the historical normalized range of US$10/bbl to US$15/bbl. These significant WTI-WCS differential resulted in the Government of Alberta announcement on December 2, 2018 mandating a 325,000 bbls/day crude oil production curtailment on Alberta oil companies producing more than 10,000 bbls/day causing E&P customers to shorten or delay their workover and maintenance work on producing wells. During Q4 2018, 7,858,000 common shares were purchased, cancelled and returned to treasury under the NCIB; Q3 2018 saw the completion of significant customer driven capital expenditure upgrades on Drilling Rig #4 to meet customer demands for deeper depths at cost effective prices. Wet weather conditions during the quarter significantly impacted activity levels in both the Contract Drilling and Production Services segments resulting in 7% and 4% of lost operating days and hours respectively. During Q3 2018, 1,175,500 common shares were purchased under the NCIB and a total of 1,309,000 common shares were cancelled and returned to treasury; Q2 2018 saw significant customer driven capital expenditure upgrades to two drilling rigs to meet customer demands for deeper depths at cost effective prices. During Q2 2018, 1,023,000 common shares were purchased under the NCIB and a total of 935,500 common shares were cancelled and returned to treasury; Page | 18 (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) Q1 2018 service rig fleet set a new Company record of 53,979 operating hours as a result of the increase in the number of service rigs from the acquisition of the C&J Canada assets. During Q1 2018, 1,394,000 common shares were purchased under the NCIB and a total of 1,318,500 common shares were cancelled and returned to treasury; 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 saw the initiation of a process to review strategic alternatives. 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; and 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. Critical Accounting Estimates and Judgments This MD&A of the Company’s financial condition and results of operations is based on the consolidated financial statements which are prepared in accordance with IFRS. The preparation of the consolidated 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 consolidated 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. There have been no significant or material changes in the nature of critical accounting estimates and judgements since December 31, 2017. The Company adopted IFRS 15 “Revenue from Contracts with Customers” and IFRS 9 “Financial Instruments” on January 1, 2018. The transitions had no material effect on the Company’s Financial Statements. Please refer to the consolidated financial statements and related notes for further details on the adoption of these standards. 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 consideration transferred on acquisitions of businesses is allocated to the identifiable assets acquired and liabilities assumed at their estimated fair values on the acquisition date. All available information is used to estimate fair values, and external consultants may be engaged to assist in the fair value determination of property, plant and equipment. The preliminary allocation of consideration transferred may be adjusted, as necessary, up to one year after the acquisition closing date due to additional information affecting asset valuation and liabilities assumed. The allocation process for the consideration transferred involves uncertainty as management is required to make assumptions and apply judgment to estimates of the fair value of the acquired assets and liabilities, including highest and best use of assets. Quoted market prices and widely accepted valuation techniques, including discounted cash flows and market multiple analyses are used to estimate the fair market value of the assets and liabilities and depreciated replacement costs are used for the valuation of tangible assets. These estimates include assumptions on inputs within the discounted cash flow calculations related to forecasted revenues, cash flows, contract renewals, asset lives, industry economic factors and business strategies. 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 Page | 19 CWC-AR-2018-2.indd 21 2019-05-03 8:47 AM costs to dispose 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, 2018. The new standards, amendments to standards and interpretations are not expected to have a significant effect on the annual financial statements, except for: repayments will be reported as financing activities on the Consolidated Statement of Cash Flows. There will be no net Related Party Transactions impact on cash flows. As at December 31, 2018, of the total outstanding shares of the Company, 79.3% 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 2018, the Company had revenue totaling $1.6 million (2017: $1.1 million) and accounts receivable as at December 31, 2018 of $0.2 million (December 31, 2017: $0.01 million) 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. 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, 2018 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: They have reviewed the annual financial report and MD&A; 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 Risks and Uncertainties of the Company as of the date and for the periods presented in the annual filings. (cid:120) (cid:120) (cid:120) 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. 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 at the present time 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. 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 has selected to use the modified approach which does not require restatement of prior period financial information as the cumulative effect of applying the standard to prior periods is recorded as an adjustment to opening retained earnings. The company has elected practical expedients permitted under the standard for the initial adoption. On adoption of IFRS 16, The Company will recognize lease liabilities in relation to leases under the principles of the new standard measured at the present value of the remaining lease payments, discounted using the interest rate implicit in the lease or our incremental borrowing rate as at January 1, 2019. The association right-of-use (“ROU”) asset will be measured at the amount equal to the lease liability on January 1, 2019. Adoption of the new standard will result in the recognition of additional lease liabilities and ROU assets. We have identified ROU assets and leases liabilities primarily related to office and facility space. The impact will result in higher adjusted EBITDA throughout the term of the lease. In addition, cash flow from operating activities and adjusted cash flow from operating activities will increase and cash flow from financing activities will decrease as lease obligations Page | 20 CWC-AR-2018-2.indd 22 2019-05-03 8:47 AM CWC’s business is generally tied in large part to the oil and gas exploration and production industry in Western Canada. CWC’s business is 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 Price Competition and Cyclical Nature of the Oilfield Services Business relevant to CWC’s business. All of these risk factors could negatively impact CWC’s revenue, margins and 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; (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) Page | 21 costs to dispose 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, 2018. The new standards, amendments to standards and interpretations are not expected to have a significant effect on the annual financial statements, except for: repayments will be reported as financing activities on the Consolidated Statement of Cash Flows. There will be no net impact on cash flows. Related Party Transactions As at December 31, 2018, of the total outstanding shares of the Company, 79.3% 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 2018, the Company had revenue totaling $1.6 million (2017: $1.1 million) and accounts receivable as at December 31, 2018 of $0.2 million (December 31, 2017: $0.01 million) 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. 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, 2018 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) (cid:120) (cid:120) They have reviewed the annual financial report and MD&A; 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 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. 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 at the present time 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. CWC’s business is generally tied in large part to the oil and gas exploration and production industry in Western Canada. CWC’s business is 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 Price Competition and Cyclical Nature of the Oilfield Services Business relevant to CWC’s business. All of these risk factors could negatively impact CWC’s revenue, margins and 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; (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) Page | 21 CWC-AR-2018-2.indd 23 2019-05-03 8:47 AM 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 has selected to use the modified approach which does not require restatement of prior period financial information as the cumulative effect of applying the standard to prior periods is recorded as an adjustment to opening retained earnings. The company has elected practical expedients permitted under the standard for the initial adoption. On adoption of IFRS 16, The Company will recognize lease liabilities in relation to leases under the principles of the new standard measured at the present value of the remaining lease payments, discounted using the interest rate implicit in the lease or our incremental borrowing rate as at January 1, 2019. The association right-of-use (“ROU”) asset will be measured at the amount equal to the lease liability on January 1, 2019. Adoption of the new standard will result in the recognition of additional lease liabilities and ROU assets. We have identified ROU assets and leases liabilities primarily related to office and facility space. The impact will result in higher adjusted EBITDA throughout the term of the lease. In addition, cash flow from operating activities and adjusted cash flow from operating activities will increase and cash flow from financing activities will decrease as lease obligations Page | 20 (cid:120) (cid:120) the mobility and efficiency of the drilling rigs, service rigs, swabbing rigs or coil tubing units; and marketing relationships. 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. Oversupply of Oilfield Services Equipment 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 capital expenditures on rigs or units, and those capital expenditures may exceed actual demand. An oversupply of oilfield services equipment 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 Page | 22 CWC-AR-2018-2.indd 24 2019-05-03 8:47 AM 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. Reputational Risk Associated with the Corporation's Operations The Corporation's business, operations or financial condition may be negatively impacted as a result of any negative public opinion towards the Corporation or as a result of any negative sentiment toward, or in respect of, the Corporation's reputation with stakeholders, special interest groups, political leadership, the media or other entities. Public opinion may be influenced by certain media and special interest groups' negative portrayal of the industry in which the Corporation operates as well as their opposition to certain oil and natural gas projects. Potential impacts of negative public opinion or reputational issues may include delays or interruptions in operations, legal or regulatory actions or challenges, blockades, increased regulatory oversight, reduced support for, delays in, challenges to, or the revocation of regulatory approvals, permits and/or licenses and increased costs and/or cost overruns. The Corporation's reputation and public opinion could also be impacted by the actions and activities of other companies operating in the oil and natural gas industry, particularly other oilfield service providers, over which the Corporation has no control. Similarly, the Corporation's reputation could be impacted by negative publicity related to loss of life, injury or damage to property and environmental damage caused by the Corporation's operations. In addition, if the Corporation develops a reputation of having an unsafe work site, it may impact the ability of the Corporation to attract and retain the necessary skilled employees and consultants to operate its business. Opposition from special interest groups opposed to oil and natural gas development and the possibility of climate related litigation against governments and fossil fuel companies may impact the Corporation's reputation. Reputational risk cannot be managed in isolation from other forms of risk. Credit, market, operational, insurance, regulatory and legal risks, among others, must all be managed effectively to safeguard the Corporation's reputation. Damage to the Corporation's reputation could result in negative investor sentiment towards the Corporation, which may result in limiting the Corporation's access to capital, increasing the cost of capital, and decreasing the price and liquidity of the Corporation's securities. Changing Investor Sentiment A number of factors, including the concerns of the effects of the use of fossil fuels on climate change, the impact of oil and natural gas operations on the environment, environmental damage relating to spills of petroleum products during transportation and indigenous rights, have affected certain investors' sentiments towards investing in the oil and natural gas industry. As a result of these concerns, some institutional, retail and public investors have announced that they no longer are willing to fund or invest in oil and natural gas properties or companies, or are reducing the amount thereof over time. In addition, certain institutional investors are requesting that issuers develop and implement more robust social, environmental and governance policies and practices. Developing and implementing such policies and practices can involve significant costs and require a significant time commitment from the Board, management and employees of the Corporation. Failing to implement the policies and practices, as requested by institutional investors, may result in such investors reducing their investment in the Corporation, or not investing in the Corporation at all. Any reduction in the investor base interested or willing to invest in the oil and natural gas industry and more specifically, the Corporation, may result in limiting the Corporation's access to capital, increasing the cost of capital, and decreasing the price and liquidity of the Corporation's securities even if the Corporation's operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause a decrease in the value of the Corporation's assets which may result in an impairment change. 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. Page | 23 (cid:120) (cid:120) time. the mobility and efficiency of the drilling rigs, service rigs, swabbing rigs or coil tubing units; and marketing relationships. 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 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. Reputational Risk Associated with the Corporation's Operations 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. Oversupply of Oilfield Services Equipment 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 capital expenditures on rigs or units, and those capital expenditures may exceed actual demand. An oversupply of oilfield services equipment 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 Page | 22 The Corporation's business, operations or financial condition may be negatively impacted as a result of any negative public opinion towards the Corporation or as a result of any negative sentiment toward, or in respect of, the Corporation's reputation with stakeholders, special interest groups, political leadership, the media or other entities. Public opinion may be influenced by certain media and special interest groups' negative portrayal of the industry in which the Corporation operates as well as their opposition to certain oil and natural gas projects. Potential impacts of negative public opinion or reputational issues may include delays or interruptions in operations, legal or regulatory actions or challenges, blockades, increased regulatory oversight, reduced support for, delays in, challenges to, or the revocation of regulatory approvals, permits and/or licenses and increased costs and/or cost overruns. The Corporation's reputation and public opinion could also be impacted by the actions and activities of other companies operating in the oil and natural gas industry, particularly other oilfield service providers, over which the Corporation has no control. Similarly, the Corporation's reputation could be impacted by negative publicity related to loss of life, injury or damage to property and environmental damage caused by the Corporation's operations. In addition, if the Corporation develops a reputation of having an unsafe work site, it may impact the ability of the Corporation to attract and retain the necessary skilled employees and consultants to operate its business. Opposition from special interest groups opposed to oil and natural gas development and the possibility of climate related litigation against governments and fossil fuel companies may impact the Corporation's reputation. Reputational risk cannot be managed in isolation from other forms of risk. Credit, market, operational, insurance, regulatory and legal risks, among others, must all be managed effectively to safeguard the Corporation's reputation. Damage to the Corporation's reputation could result in negative investor sentiment towards the Corporation, which may result in limiting the Corporation's access to capital, increasing the cost of capital, and decreasing the price and liquidity of the Corporation's securities. Changing Investor Sentiment A number of factors, including the concerns of the effects of the use of fossil fuels on climate change, the impact of oil and natural gas operations on the environment, environmental damage relating to spills of petroleum products during transportation and indigenous rights, have affected certain investors' sentiments towards investing in the oil and natural gas industry. As a result of these concerns, some institutional, retail and public investors have announced that they no longer are willing to fund or invest in oil and natural gas properties or companies, or are reducing the amount thereof over time. In addition, certain institutional investors are requesting that issuers develop and implement more robust social, environmental and governance policies and practices. Developing and implementing such policies and practices can involve significant costs and require a significant time commitment from the Board, management and employees of the Corporation. Failing to implement the policies and practices, as requested by institutional investors, may result in such investors reducing their investment in the Corporation, or not investing in the Corporation at all. Any reduction in the investor base interested or willing to invest in the oil and natural gas industry and more specifically, the Corporation, may result in limiting the Corporation's access to capital, increasing the cost of capital, and decreasing the price and liquidity of the Corporation's securities even if the Corporation's operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause a decrease in the value of the Corporation's assets which may result in an impairment change. 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. Page | 23 CWC-AR-2018-2.indd 25 2019-05-03 8:47 AM 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; 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 accurately estimated at this time. 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. 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. Dependence on Key Personnel 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. Climate Change United Climate change policy is evolving at regional, national and international levels, and political and economic events may Nations Framework Convention on Climate Change significantly affect the scope and timing of climate change measures that are ultimately put in place. As a signatory to the and a signatory to the Paris Agreement, which was ratified in Canada on October 3, 2016, the Government of Canada pledged to cut its greenhouse gases ("GHG") emissions by 30 per cent from 2005 levels by 2030. One of the pertinent policies announced to date by the Government of Canada to reduce GHG emission is the planned implementation of a nation-wide price on carbon emissions. The federal carbon levy goes into effect on April 1, 2019 and will affect provinces which have not implemented their own carbon taxes, cap-and-trade systems or other plans for carbon pricing, namely Ontario, Manitoba, Saskatchewan and New Brunswick. The federal carbon levy will be at an initial rate of $20 per tonne. Provincially, the Government of Alberta has already implemented a carbon levy on almost all sources of GHG emissions, now at a rate of $30 per tonne. The implementation of the federal carbon levy is currently subject to constitutional challenges submitted by the Provinces of Saskatchewan and Ontario, which are supported by the province of New Brunswick. The direct or indirect costs of compliance with GHG-related regulations may have a material adverse effect on CWC's business, financial condition, results of operations and prospects. 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 Concerns about climate change have resulted in a number of environmental activists and members of the public opposing the continued exploitation and development of fossil fuels. Historically, political and legal opposition to the fossil fuel industry focused on public opinion and the regulatory process. More recently, however, there has been a movement to more directly hold governments and oil and natural gas companies responsible for climate change through climate litigation. In November 2018, ENvironment JEUnesse, a Quebec advocacy group, applied to the Quebec Superior Court to certify a class action against the Government of Canada for climate related matters. In January 2019, the City of Victoria became the first municipality in Canada to endorse a class action lawsuit against oil and natural gas producers for climate-related harms. Given the evolving nature of the debate related to climate change and the control of GHG and resulting requirements, it is expected that current and future climate change regulations will have the affect of increasing the CWC's operating expenses and in the long-term reducing the demand for its services oil, resulting in a decrease in the Corporation's profitability and a reduction in the value of its assets or asset write-offs. In addition, there has been public discussion that climate change may be associated with extreme weather conditions and increased volatility in seasonal temperatures. Extreme weather could interfere with CWC's operations. At this time, CWC is unable to determine the extent to which climate change may lead to increased storm or weather hazards affecting its operations. Carbon Pricing Risk The majority of countries across the globe have agreed to reduce their carbon emissions. In Canada, the federal and certain provincial governments have implemented legislation aimed at incentivizing the use of alternative fuels and in turn reducing carbon emissions. The taxes placed on carbon emissions may have the effect of decreasing the demand for oil and natural gas products and at the same time, increasing CWC's operating expenses, each of which may have a material adverse effect on the CWC's profitability and financial condition. Further, the imposition of carbon taxes puts CWC at a disadvantage with its counterparts who operate in jurisdictions where there are less costly carbon regulations. Geopolitical Risks Political changes in North America and political instability in the Middle East and elsewhere may cause disruptions in the supply of oil that affects the oil and gas industry. Conflicts, or conversely peaceful developments, arising outside of Canada, including changes in political regimes or parties in power, may have a significant impact on the price of oil and natural gas. Any particular event could result in a material decline in prices and result in a reduction of the Corporation's profitability. Non-Governmental Organizations and Eco-Terrorism Risks 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 The business activities conducted by the Corporation may, at times, be subject to public opposition. Such public opposition could expose the Corporation to the risk of higher costs, delays or even project cancellations due to increased pressure on governments and regulators by special interest groups including Aboriginal groups, landowners, environmental interest groups Page | 24 CWC-AR-2018-2.indd 26 Page | 25 2019-05-03 8:47 AM 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; 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. 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. Dependence on Key Personnel 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. Climate Change United Climate change policy is evolving at regional, national and international levels, and political and economic events may Nations Framework Convention on Climate Change significantly affect the scope and timing of climate change measures that are ultimately put in place. As a signatory to the Paris Agreement, which was ratified in Canada on and a signatory to the October 3, 2016, the Government of Canada pledged to cut its greenhouse gases ("GHG") emissions by 30 per cent from 2005 levels by 2030. One of the pertinent policies announced to date by the Government of Canada to reduce GHG emission is the planned implementation of a nation-wide price on carbon emissions. The federal carbon levy goes into effect on April 1, 2019 and will affect provinces which have not implemented their own carbon taxes, cap-and-trade systems or other plans for carbon pricing, namely Ontario, Manitoba, Saskatchewan and New Brunswick. The federal carbon levy will be at an initial rate of $20 per tonne. Provincially, the Government of Alberta has already implemented a carbon levy on almost all sources of GHG emissions, now at a rate of $30 per tonne. The implementation of the federal carbon levy is currently subject to constitutional challenges submitted by the Provinces of Saskatchewan and Ontario, which are supported by the province of New Brunswick. The direct or indirect costs of compliance with GHG-related regulations may have a material adverse effect on CWC's business, financial condition, results of operations and prospects. 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. Concerns about climate change have resulted in a number of environmental activists and members of the public opposing the continued exploitation and development of fossil fuels. Historically, political and legal opposition to the fossil fuel industry focused on public opinion and the regulatory process. More recently, however, there has been a movement to more directly hold governments and oil and natural gas companies responsible for climate change through climate litigation. In November 2018, ENvironment JEUnesse, a Quebec advocacy group, applied to the Quebec Superior Court to certify a class action against the Government of Canada for climate related matters. In January 2019, the City of Victoria became the first municipality in Canada to endorse a class action lawsuit against oil and natural gas producers for climate-related harms. Given the evolving nature of the debate related to climate change and the control of GHG and resulting requirements, it is expected that current and future climate change regulations will have the affect of increasing the CWC's operating expenses and in the long-term reducing the demand for its services oil, resulting in a decrease in the Corporation's profitability and a reduction in the value of its assets or asset write-offs. In addition, there has been public discussion that climate change may be associated with extreme weather conditions and increased volatility in seasonal temperatures. Extreme weather could interfere with CWC's operations. At this time, CWC is unable to determine the extent to which climate change may lead to increased storm or weather hazards affecting its operations. Carbon Pricing Risk The majority of countries across the globe have agreed to reduce their carbon emissions. In Canada, the federal and certain provincial governments have implemented legislation aimed at incentivizing the use of alternative fuels and in turn reducing carbon emissions. The taxes placed on carbon emissions may have the effect of decreasing the demand for oil and natural gas products and at the same time, increasing CWC's operating expenses, each of which may have a material adverse effect on the CWC's profitability and financial condition. Further, the imposition of carbon taxes puts CWC at a disadvantage with its counterparts who operate in jurisdictions where there are less costly carbon regulations. Geopolitical Risks Political changes in North America and political instability in the Middle East and elsewhere may cause disruptions in the supply of oil that affects the oil and gas industry. Conflicts, or conversely peaceful developments, arising outside of Canada, including changes in political regimes or parties in power, may have a significant impact on the price of oil and natural gas. Any particular event could result in a material decline in prices and result in a reduction of the Corporation's profitability. Non-Governmental Organizations and Eco-Terrorism Risks 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 The business activities conducted by the Corporation may, at times, be subject to public opposition. Such public opposition could expose the Corporation to the risk of higher costs, delays or even project cancellations due to increased pressure on governments and regulators by special interest groups including Aboriginal groups, landowners, environmental interest groups Page | 24 Page | 25 CWC-AR-2018-2.indd 27 2019-05-03 8:47 AM (including those opposed to oil and natural gas production operations) and other non-governmental organizations, blockades, legal or regulatory actions or challenges, increased regulatory oversight, reduced support of the federal, provincial or municipal governments, delays in, challenges to, or the revocation of regulatory approvals, permits and/or licenses, and direct legal challenges, including the possibility of climate-related litigation. There is no guarantee that the Corporation will be able to satisfy the concerns of the special interest groups and non-governmental organizations and attempting to address such concerns may require the Corporation to incur significant and unanticipated capital and operating expenditures. In addition, the Corporation's oilfield services equipment could be the subject of a terrorist attack. If any of the Corporation's equipment are the subject of a terrorist attack it may have a material adverse effect on the Corporation's business, financial condition, results of operations and prospects. The Corporation does not have insurance to protect against the risk from terrorism. 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. 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 its affiliates (collectively, “Brookfield”), through its ownership of 79.3% 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. 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. 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. Page | 26 CWC-AR-2018-2.indd 28 Page | 27 2019-05-03 8:47 AM (including those opposed to oil and natural gas production operations) and other non-governmental organizations, blockades, legal or regulatory actions or challenges, increased regulatory oversight, reduced support of the federal, provincial or municipal governments, delays in, challenges to, or the revocation of regulatory approvals, permits and/or licenses, and direct legal challenges, including the possibility of climate-related litigation. There is no guarantee that the Corporation will be able to satisfy the concerns of the special interest groups and non-governmental organizations and attempting to address such concerns may require the Corporation to incur significant and unanticipated capital and operating expenditures. In addition, the Corporation's oilfield services equipment could be the subject of a terrorist attack. If any of the Corporation's equipment are the subject of a terrorist attack it may have a material adverse effect on the Corporation's business, financial condition, results of operations and prospects. The Corporation does not have insurance to protect against the risk from terrorism. 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. 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 its affiliates (collectively, “Brookfield”), through its ownership of 79.3% 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 Page | 26 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. 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. 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. Page | 27 CWC-AR-2018-2.indd 29 2019-05-03 8:47 AM 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. 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 expectations of future interest rates. Conflicts of Interest 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 Page | 28 CWC-AR-2018-2.indd 30 Page | 29 2019-05-03 8:47 AM 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 Tax Agencies 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). 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 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. Intellectual Property Litigation Due to the rapid development of oil and natural gas technology, in the normal course of the Corporation's operations, the Corporation may become involved in, named as a party to, or be the subject of, various legal proceedings in which it is alleged that the Corporation has infringed the intellectual property rights of others or which the Corporation initiates against others it believes are infringing upon its intellectual property rights. The Corporation's involvement in intellectual property litigation could result in significant expense, adversely affecting the development of its assets or intellectual property or diverting the efforts of its technical and management personnel, whether or not such litigation is resolved in the Corporation's favour. In the event of an adverse outcome as a defendant in any such litigation, the Corporation may, among other things, be required to: (a) pay substantial damages and/or cease the development, use, sale or importation of processes that infringe upon other patented intellectual property; (b) expend significant resources to develop or acquire non-infringing intellectual property; (c) discontinue processes incorporating infringing technology; or (d) obtain licences to the infringing intellectual property. However, the Corporation may not be successful in such development or acquisition, or such licences may not be available on reasonable terms. Any such development, acquisition or licence could require the expenditure of substantial time and other resources and could have a material adverse effect on the Corporation's business and financial results. 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. 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 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 earnings. Page | 28 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). Vulnerability to Market Changes Tax Agencies 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. Intellectual Property Litigation Due to the rapid development of oil and natural gas technology, in the normal course of the Corporation's operations, the Corporation may become involved in, named as a party to, or be the subject of, various legal proceedings in which it is alleged that the Corporation has infringed the intellectual property rights of others or which the Corporation initiates against others it believes are infringing upon its intellectual property rights. The Corporation's involvement in intellectual property litigation could result in significant expense, adversely affecting the development of its assets or intellectual property or diverting the efforts of its technical and management personnel, whether or not such litigation is resolved in the Corporation's favour. In the event of an adverse outcome as a defendant in any such litigation, the Corporation may, among other things, be required to: (a) pay substantial damages and/or cease the development, use, sale or importation of processes that infringe upon other patented intellectual property; (b) expend significant resources to develop or acquire non-infringing intellectual property; (c) discontinue processes incorporating infringing technology; or (d) obtain licences to the infringing intellectual property. However, the Corporation may not be successful in such development or acquisition, or such licences may not be available on reasonable terms. Any such development, acquisition or licence could require the expenditure of substantial time and other resources and could have a material adverse effect on the Corporation's business and financial results. Page | 29 CWC-AR-2018-2.indd 31 2019-05-03 8:47 AM 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” and similar expressions are intended to identify forward-looking information or statements. In particular, this MD&A contains forward-looking statements including 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. Breach of Confidentiality Forward-Looking Information While discussing potential business relationships or other transactions with third parties, the Corporation may disclose confidential information relating to its business, operations or affairs. Although confidentiality agreements are generally signed by third parties prior to the disclosure of any confidential information, a breach could put the Corporation at competitive risk and may cause significant damage to its business. The harm to the Corporation's business from a breach of confidentiality cannot presently be quantified, but may be material and may not be compensable in damages. There is no assurance that, in the event of a breach of confidentiality, the Corporation will be able to obtain equitable remedies, such as injunctive relief, from a court of competent jurisdiction in a timely manner, if at all, in order to prevent or mitigate any damage to its business that such a breach of confidentiality may cause. 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. Social Media Increasingly, social media is used as a vehicle to carry out cyber phishing attacks. Information posted on social media sites, for business or personal purposes, may be used by attackers to gain entry into the Corporation's systems and obtain confidential information. The Corporation restricts the social media access of its employees and periodically reviews, supervises, retains and maintains the ability to retrieve social media content. Despite these efforts, as social media continues to grow in influence and access to social media platforms becomes increasingly prevalent, there are significant risks that the Corporation may not be able to properly regulate social media use and preserve adequate records of business activities and client communications conducted through the use of social media platforms. 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. Page | 30 CWC-AR-2018-2.indd 32 Page | 31 2019-05-03 8:47 AM Breach of Confidentiality 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” and similar expressions are intended to identify forward-looking information or statements. In particular, this MD&A contains forward-looking statements including 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. While discussing potential business relationships or other transactions with third parties, the Corporation may disclose confidential information relating to its business, operations or affairs. Although confidentiality agreements are generally signed by third parties prior to the disclosure of any confidential information, a breach could put the Corporation at competitive risk and may cause significant damage to its business. The harm to the Corporation's business from a breach of confidentiality cannot presently be quantified, but may be material and may not be compensable in damages. There is no assurance that, in the event of a breach of confidentiality, the Corporation will be able to obtain equitable remedies, such as injunctive relief, from a court of competent jurisdiction in a timely manner, if at all, in order to prevent or mitigate any damage to its business that such a breach of confidentiality may cause. 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. Social Media Increasingly, social media is used as a vehicle to carry out cyber phishing attacks. Information posted on social media sites, for business or personal purposes, may be used by attackers to gain entry into the Corporation's systems and obtain confidential information. The Corporation restricts the social media access of its employees and periodically reviews, supervises, retains and maintains the ability to retrieve social media content. Despite these efforts, as social media continues to grow in influence and access to social media platforms becomes increasingly prevalent, there are significant risks that the Corporation may not be able to properly regulate social media use and preserve adequate records of business activities and client communications conducted through the use of social media platforms. 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. Page | 30 Page | 31 CWC-AR-2018-2.indd 33 2019-05-03 8:47 AM Reconciliation of Non-IFRS Measures $ thousands except share and per share amounts NON-IFRS MEASURES Adjusted EBITDA: Net income (loss) and comprehensive income (loss) Add: Depreciation Finance costs Transaction costs Deferred income tax expense (recovery) Stock based compensation Gain on acquisition Adjusted EBITDA (Gain) 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 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 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. (3) (4) 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. Three months ended December 31, 2018 2017 Year ended December 31, 2017 2018 2016 (157) 3,853 857 - 140 339 - (54) 4,978 $0.01 14% 8,544 (1,702) 4,861 (7,468) 4,811 606 1,549 (142) 278 (9,128) 112 6,630 $0.02 16,441 2,756 - (150) 1,102 - 42 18,489 $0.04 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 18% 13% 14% 11% 518,513,776 418,913,266 520,576,582 399,008,915 349,836,144 518,513,776 423,221,202 520,576,582 403,359,537 349,836,144 5,773 (795) 4,978 (2,116) 7,197 5,081 19,417 (928) 18,849 4,260 10,254 14,514 8,788 (568) 8,220 73,122 144,762 35,478 53,209 107,984 25,788 19,913 36,778 9,690 27% 27% 25% December 31, 2018 December 31, 2017 December 31, 2016 112,215 82,361 29,854 27% 37,420 26,620 10,800 29% 26,893 (8,793) 928 19,028 3.4:1 43,968 (26,893) 8,793 25,868 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 (1) (2) Adjusted EBITDA (Earnings before interest and finance costs, income tax expense, depreciation, amortization, gain or loss on disposal of asset, goodwill impairment, stock based compensation and other one-time gains and losses) is not a recognized measure under IFRS. Management believes that in addition to net income, 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) 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 loss 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 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 Page | 32 CWC-AR-2018-2.indd 34 Page | 33 2019-05-03 8:47 AM Reconciliation of Non-IFRS Measures $ thousands except share and per share amounts 2018 2017 2018 2017 2016 Three months ended December 31, Year ended December 31, Net income (loss) and comprehensive income (loss) 8,544 (1,702) 4,861 (7,468) 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. (3) (4) 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. Page | 33 CWC-AR-2018-2.indd 35 2019-05-03 8:47 AM NON-IFRS MEASURES Adjusted EBITDA: Add: Depreciation Finance costs Transaction costs Deferred income tax expense (recovery) Stock based compensation Gain on acquisition Adjusted EBITDA (Gain) Loss on sale of equipment Adjusted EBITDA per share – basic and diluted (1) Adjusted EBITDA margin (Adjusted (1) EBITDA/Revenue) (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 Gross margin: Revenue Gross margin (2) Less: Direct operating expenses Gross margin percentage (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 Less: Current assets Net debt (4) Add: Current liabilities (157) 3,853 857 140 339 - - (54) 4,978 $0.01 14% 5,773 (795) 4,978 35,478 25,788 9,690 27% 4,811 606 1,549 (142) 278 (9,128) 112 6,630 $0.02 16,441 2,756 - (150) 1,102 - 42 18,489 $0.04 17,103 2,054 1,549 (1,285) 869 (9,128) 40 16,063 $0.04 18% 13% 14% 518,513,776 418,913,266 520,576,582 399,008,915 349,836,144 518,513,776 423,221,202 520,576,582 403,359,537 349,836,144 (2,116) 7,197 5,081 37,420 26,620 10,800 29% 19,417 (928) 18,849 144,762 107,984 36,778 25% 4,260 10,254 14,514 112,215 82,361 29,854 27% December 31, 2018 December 31, 2017 December 31, 2016 26,893 (8,793) 928 19,028 3.4:1 43,968 (26,893) 8,793 25,868 31,745 (12,378) 176 19,543 2.6:1 49,634 (31,745) 12,378 30,267 14,248 2,515 (2,414) 945 - - 394 8,220 $0.02 11% 8,788 (568) 8,220 73,122 53,209 19,913 27% 16,501 (7,535) 176 9,142 2.2:1 32,966 (16,501) 7,535 24,000 (1) (2) Adjusted EBITDA (Earnings before interest and finance costs, income tax expense, depreciation, amortization, gain or loss on disposal of asset, goodwill impairment, stock based compensation and other one-time gains and losses) is not a recognized measure under IFRS. Management believes that in addition to net income, 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) 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 loss 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 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 Page | 32 INDEPENDENT AUDITOR’S REPORT To the Shareholders of CWC Energy Services Corp. Opinion Other Matter Basis for Opinion thereon. this regard. We have audited the consolidated financial statements of CWC Energy Services Corp. and its subsidiaries (the “Company”), which comprise the consolidated statement of financial position as at December 31, 2018, and the consolidated statement of comprehensive loss, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as at December 31, 2018, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (“IFRS”). The financial statements of the Company for the year ended December 31, 2017, were audited by another auditor who expressed an unmodified opinion on those financial statements on February 28, 2018. We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other Information Management is responsible for the other information. The other information comprises: (cid:120) Management’s Discussion and Analysis (cid:120) The information, other than the consolidated financial statements and our auditor’s report thereon, in the Annual Report Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion In connection with our audit of the consolidated financial statements, our responsibility is to read the other information, and in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. We obtained Management’s Discussion & Analysis prior to the date of this auditor’s report. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s report. We have nothing to report in The Annual Report is expected to be made available to us after the date of the auditor’s report. If based on the work we will perform on this other information, we conclude there is a material misstatement of other information, we are required to report that fact to those charged with governance. Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. CWC ENERGY SERVICES CORP. Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Page | 34 CWC-AR-2018-2.indd 36 Page | 35 2019-05-03 8:47 AM CWC ENERGY SERVICES CORP. Consolidated Financial Statements For the years ended December 31, 2018 and 2017 INDEPENDENT AUDITOR’S REPORT To the Shareholders of CWC Energy Services Corp. Opinion We have audited the consolidated financial statements of CWC Energy Services Corp. and its subsidiaries (the “Company”), which comprise the consolidated statement of financial position as at December 31, 2018, and the consolidated statement of comprehensive loss, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as at December 31, 2018, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (“IFRS”). Other Matter The financial statements of the Company for the year ended December 31, 2017, were audited by another auditor who expressed an unmodified opinion on those financial statements on February 28, 2018. Basis for Opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other Information Management is responsible for the other information. The other information comprises: (cid:120) Management’s Discussion and Analysis (cid:120) The information, other than the consolidated financial statements and our auditor’s report thereon, in the Annual Report Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information, and in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. We obtained Management’s Discussion & Analysis prior to the date of this auditor’s report. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s report. We have nothing to report in this regard. The Annual Report is expected to be made available to us after the date of the auditor’s report. If based on the work we will perform on this other information, we conclude there is a material misstatement of other information, we are required to report that fact to those charged with governance. Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Page | 34 Page | 35 CWC-AR-2018-2.indd 37 2019-05-03 8:47 AM Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: (cid:120) Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. CWC ENERGY SERVICES CORP. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As at December 31, 2018 and December 31, 2017 December 31, Stated in thousands of Canadian dollars 2018 (cid:120) Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accounts receivable Prepaid expenses and deposits (cid:120) (cid:120) (cid:120) Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Property, plant and equipment Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. (cid:120) Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Company audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. The engagement partner on the audit resulting in this independent auditor’s report is Robert Jubenvill. Calgary, Canada February 28, 2019 Note 2017 $ 508 23,579 2,806 26,893 $ 14,15 5 6 7 8 7 9 225,658 114 $ 252,665 $ 7,865 928 8,793 15,673 43,968 68,434 261,353 13,390 (90,512) 184,231 $ 252,665 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 ASSETS Current Cash 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 Comments and contingencies (note 13) See accompanying notes to the consolidated financial statements. Approved on behalf of the board: (signed) “Gary Bentham” (signed) “Jim Reid” Gary Bentham, Director Jim Reid, Director Page | 36 CWC-AR-2018-2.indd 38 Page | 37 2019-05-03 8:47 AM Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. (cid:120) Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Company audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. The engagement partner on the audit resulting in this independent auditor’s report is Robert Jubenvill. CWC ENERGY SERVICES CORP. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As at December 31, 2018 and December 31, 2017 December 31, Stated in thousands of Canadian dollars 2018 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 Note 2017 $ 508 23,579 2,806 26,893 $ 14,15 5 6 7 8 7 9 225,658 114 $ 252,665 $ 7,865 928 8,793 $ $ 15,673 43,968 68,434 261,353 13,390 (90,512) 184,231 $ 252,665 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 Comments and contingencies (note 13) See accompanying notes to the consolidated financial statements. $ 264,354 Approved on behalf of the board: (signed) “Gary Bentham” (signed) “Jim Reid” Gary Bentham, Director Jim Reid, Director Page | 37 CWC-AR-2018-2.indd 39 2019-05-03 8:47 AM Calgary, Canada February 28, 2019 Page | 36 CWC ENERGY SERVICES CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) CWC ENERGY SERVICES CORP. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY For the years ended December 31, 2018 and 2017 For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except per share amounts 2018 Stated in thousands of Canadian dollars except share amounts Number of Shares Share Capital Contributed Surplus Deficit Total Equity 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 (Loss) income before income taxes Deferred income tax recovery Net (loss) income and comprehensive (loss) income Net (loss) income per share Note $ 144,762 2017 Balance - January 1, 2017 Note 17 12 9(d)(e) 5 8 $ 112,215 82,361 13,791 1,549 869 2,054 17,103 40 (9,128) 108,639 3,576 (1,285) $ 4,861 107,984 18,289 - 1,102 2,756 16,441 42 - 146,614 (1,852) (150) $ (1,702) $ (0.00) Basic and diluted See accompanying notes to the consolidated financial statements. 9(f) $ 0.01 391,920,676 $ 242,306 $ 6,847 $ (93,671) $ 155,482 4,861 4,861 Net income and comprehensive income Stock based compensation expense 9(d)(e) Exercise of stock options Settlement of restricted share units Cancellation of common shares purchased under normal course issuer 9(d) 9(e) 983,333 1,819,668 - - 194 441 - 869 (67) (441) bid Balance – December 31, 2017 Rights offering, net of share issue costs 9(c) 9(b) (3,493,500) 130,148,781 (2,157) 25,936 1,401 - Balance – January 1, 2018 521,378,958 $ 266,720 $ 8,609 $ (88,810) $ 186,519 Net loss and comprehensive loss Stock based compensation expense 9(d)(e) Exercise of stock options Settlement of restricted share units Cancellation of common shares purchased under normal course issuer Balance – December 31, 2018 bid 9(d) 9(e) 1,033,335 1,517,998 See accompanying notes to the consolidated financial statements. 521,378,958 $ 266,720 $ 8,609 $ (88,810) $ 186,519 - (1,702) (1,702) - - 230 266 1,102 (82) (266) 9(c) (11,421,000) (5,863) 4,027 (1,836) 512,509,291 $ 261,353 $ 13,390 $ (90,512) $ 184,231 869 127 - (756) 25,936 1,102 148 - - - - - - - - - - - - - - Page | 38 CWC-AR-2018-2.indd 40 Page | 39 2019-05-03 8:47 AM CWC ENERGY SERVICES CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) CWC ENERGY SERVICES CORP. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY For the years ended December 31, 2018 and 2017 For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share amounts Number of Shares Share Capital Contributed Surplus Deficit Total Equity Balance - January 1, 2017 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 Balance – January 1, 2018 Note 9(d)(e) 9(d) 9(e) 391,920,676 $ 242,306 - - 194 441 - - 983,333 1,819,668 $ 6,847 - 869 (67) (441) $ (93,671) 4,861 - - - $ 155,482 4,861 869 127 - 9(c) 9(b) (3,493,500) 130,148,781 (2,157) 25,936 521,378,958 $ 266,720 $ 1,401 - 8,609 - - (756) 25,936 $ (88,810) $ 186,519 Stated in thousands of Canadian dollars except per share amounts 2018 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 (Loss) income before income taxes Deferred income tax recovery Net (loss) income per share Note $ 144,762 2017 $ 112,215 9(d)(e) 17 12 5 8 107,984 18,289 - 1,102 2,756 16,441 42 - 146,614 (1,852) (150) 82,361 13,791 1,549 869 2,054 17,103 40 (9,128) 108,639 3,576 (1,285) $ 4,861 $ (0.00) Net (loss) income and comprehensive (loss) income $ (1,702) Basic and diluted See accompanying notes to the consolidated financial statements. 9(f) $ 0.01 Net loss and comprehensive loss Stock based compensation expense Exercise of stock options Settlement of restricted share units Cancellation of common shares purchased under normal course issuer Balance – December 31, 2018 bid 9(d)(e) 9(d) 9(e) 9(c) 521,378,958 - - 1,033,335 1,517,998 $ 266,720 - - 230 266 $ 8,609 - 1,102 (82) (266) $ (88,810) (1,702) - - - $ 186,519 (1,702) 1,102 148 - (11,421,000) 512,509,291 (5,863) $ 261,353 4,027 $ 13,390 - $ (90,512) (1,836) $ 184,231 See accompanying notes to the consolidated financial statements. Page | 38 Page | 39 CWC-AR-2018-2.indd 41 2019-05-03 8:47 AM CWC ENERGY SERVICES CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2018 and 2017 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts Stated in thousands of Canadian dollars Operating activities: Net (loss) income 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 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 consolidated financial statements . 2018 Note $ (1,702) 2017 1. Reporting entity 9(d)(e) 5 8 10 (5) 9(d) 9(c) 1,102 2,756 16,441 - 42 (150) 18,489 928 19,417 (11,060) - 2,105 (8,955) (5,404) (2,594) (58) (305) 148 (1,836) (10,049) 413 95 $ 508 $ 4,861 869 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 $ 2. at the address noted above. Basis of presentation (a) Statement of compliance Standards (“IFRS”). CWC Energy Services Corp. (“CWC” or the “Company”) is incorporated under the Business Corporations Act (Alberta). The address of the Company’s head office is Suite 610, 205 – 5th 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”). These consolidated financial statements reflect only the Company’s proportionate interests in such activities and are comprised of the Company and its subsidiaries. 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 These consolidated financial statements have been prepared in accordance with International Financial Reporting These consolidated financial statements were approved by the Board of Directors on February 28, 2019. (b) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis. (c) Functional and presentation currency These annual consolidated 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. (d) Use of estimates and judgments The preparation of the consolidated 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 consolidated 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 consolidated 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 consolidated financial statements: Business combinations The consideration transferred on acquisitions of businesses is allocated to the identifiable assets acquired and liabilities assumed at their estimated fair values on the acquisition date. All available information is used to estimate fair values, and external consultants may be engaged to assist in the fair value determination of property, plant and equipment. The preliminary allocation of consideration transferred may be adjusted, as necessary, up to one year after the acquisition closing date due to additional information affecting asset valuation and liabilities assumed. The allocation process for the consideration transferred involves uncertainty as management is required to make assumptions and apply judgment to estimates of the fair value of the acquired assets and liabilities, including highest and best use of assets. Quoted market prices and widely accepted valuation techniques, including discounted cash flows Page | 40 CWC-AR-2018-2.indd 42 Page | 41 2019-05-03 8:47 AM CWC ENERGY SERVICES CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2018 and 2017 Stock based compensation expense 9(d)(e) Stated in thousands of Canadian dollars Operating activities: Net (loss) income Adjustments for: Finance costs Depreciation and amortization Gain on acquisition Loss on disposal of equipment Deferred income tax recovery Changes in non-cash working capital balances Funds from operations Operating cash flow Investing activities: Purchase of equipment Business acquisition Proceeds on disposal of equipment Investing cash flow Financing activities: Increase (repayment) of 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 Note $ (1,702) 2017 $ 4,861 2018 1,102 2,756 16,441 - 42 (150) 18,489 928 19,417 (11,060) - 2,105 (8,955) (5,404) (2,594) (58) (305) 148 (1,836) (10,049) 5 8 10 (5) 9(d) 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 Increase in cash during the year Cash, beginning of year Cash, end of year See accompanying notes to the consolidated financial statements . 413 95 $ 508 93 2 95 $ CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts 1. Reporting entity CWC Energy Services Corp. (“CWC” or the “Company”) is incorporated under the Business Corporations Act (Alberta). The address of the Company’s head office is Suite 610, 205 – 5th 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”). These consolidated financial statements reflect only the Company’s proportionate interests in such activities and are comprised of the Company and its subsidiaries. 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 2. Statement of compliance (a) These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). These consolidated financial statements were approved by the Board of Directors on February 28, 2019. Basis of measurement (b) The consolidated financial statements have been prepared on the historical cost basis. Functional and presentation currency (c) These annual consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated financial statements: Business combinations The consideration transferred on acquisitions of businesses is allocated to the identifiable assets acquired and liabilities assumed at their estimated fair values on the acquisition date. All available information is used to estimate fair values, and external consultants may be engaged to assist in the fair value determination of property, plant and equipment. The preliminary allocation of consideration transferred may be adjusted, as necessary, up to one year after the acquisition closing date due to additional information affecting asset valuation and liabilities assumed. The allocation process for the consideration transferred involves uncertainty as management is required to make assumptions and apply judgment to estimates of the fair value of the acquired assets and liabilities, including highest and best use of assets. Quoted market prices and widely accepted valuation techniques, including discounted cash flows Page | 40 Page | 41 CWC-AR-2018-2.indd 43 2019-05-03 8:47 AM CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts 3. Significant accounting policies and market multiple analyses are used to estimate the fair market value of the assets and liabilities and depreciated replacement costs are used for the valuation of tangible assets. These estimates include assumptions on inputs within the discounted cash flow calculations related to forecasted revenues, cash flows, contract renewals, asset lives, industry economic factors and business strategies. 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 consolidated 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 dispose (“FVLCD”) 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 (loss) and comprehensive income (loss). The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements. (a) Business combinations 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. (b) Property and equipment and depreciation 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) use. the cost of materials and direct labour; and any other costs directly attributable to bringing the assets to a working condition for their intended 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 Buildings Drilling rigs and related equipment Unit of production with residual values 1,500 to 5,000 operating Straight-line with residual values of up Production equipment – service and recertifications Production equipment – coil swabbing rigs and Level IV Unit of production with residual values Straight-line with residual values of up 24,000 operating hours Support equipment Straight-line with residual values of up Miscellaneous equipment Straight-line with no residual value Rate days 25 years 10 years 2 to 10 years 3 to 5 years Method up to-20% to-20% up to-20% to-20% to-15% Page | 42 CWC-AR-2018-2.indd 44 Page | 43 2019-05-03 8:47 AM CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 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 consolidated 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 | 42 Page | 43 CWC-AR-2018-2.indd 45 2019-05-03 8:47 AM and market multiple analyses are used to estimate the fair market value of the assets and liabilities and depreciated replacement costs are used for the valuation of tangible assets. These estimates include assumptions on inputs within the discounted cash flow calculations related to forecasted revenues, cash flows, contract renewals, asset lives, industry economic factors and business strategies. 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 consolidated 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 dispose (“FVLCD”) 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 (loss) and comprehensive income (loss). CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 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 FVLCD. 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. 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. 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. 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. The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire. Page | 44 CWC-AR-2018-2.indd 46 sheets and field tickets. Page | 45 2019-05-03 8:47 AM Financial assets and liabilities are offset and the net amount presented in the consolidated 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 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. impairment losses. (e) Cash (f) Common shares 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. (g) Provisions A provision is recognized in the consolidated 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, 2018 and December 31, 2017 there were no provisions recognized in the consolidated financial statements. (h) Revenue recognition Contract Drilling provides drilling rigs and related ancillary equipment to oil and gas exploration and production companies. Customer contracts may be for a single well, multiple wells or a fixed term and are based upon daily, hourly or contracted rates. The Company recognizes revenue in when it has a right to invoice for all contracts in which the value of the performance completed to date directly corresponds with the right to consideration. Operating time is measured through industry standard tour sheets that document the daily activity of the rig. Production Services provides well services to oil and gas exploration and production companies through the use of service rigs, swabbing rigs or coil tubing units. In general, Production Services are not performed under long-term contracts and do not include penalties for termination. Contracts are based upon daily, hourly or contracted rates and the Company recognizes revenue when it has a right to invoice for all contracts in which the value of the performance completed to date directly corresponds with the right to consideration. Operating time is measured through daily tour CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 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. (c) Impairment of non-financial assets excluding inventories and deferred tax assets 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 FVLCD. 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. 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. (d) Financial instruments 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. 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 consolidated 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 consolidated 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, 2018 and December 31, 2017 there were no provisions recognized in the consolidated financial statements. Revenue recognition (h) Contract Drilling provides drilling rigs and related ancillary equipment to oil and gas exploration and production companies. Customer contracts may be for a single well, multiple wells or a fixed term and are based upon daily, hourly or contracted rates. The Company recognizes revenue in when it has a right to invoice for all contracts in which the value of the performance completed to date directly corresponds with the right to consideration. Operating time is measured through industry standard tour sheets that document the daily activity of the rig. Production Services provides well services to oil and gas exploration and production companies through the use of service rigs, swabbing rigs or coil tubing units. In general, Production Services are not performed under long-term contracts and do not include penalties for termination. Contracts are based upon daily, hourly or contracted rates and the Company recognizes revenue when it has a right to invoice for all contracts in which the value of the performance completed to date directly corresponds with the right to consideration. Operating time is measured through daily tour sheets and field tickets. Page | 44 Page | 45 CWC-AR-2018-2.indd 47 2019-05-03 8:47 AM CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts For both its Contract Drilling Services and its Production Services, the Company does not expect to have any revenue contracts where the period between the transfer of the promised goods or services to the customer and payments by the customer exceeds one year. As a consequence, the Company does not adjust any of the transaction prices for the time value of money. The Company does not incur material costs to obtain contracts with customers and consequently, does not recognize any contract assets. The Company does not have any contract liabilities associated with its contract drilling or production services customer contracts. As revenue from Contract Drilling Services and Production Services contracts is recognized as-invoiced, the transaction price allocated to remaining performance obligations and an explanation of when the Company expects to recognize such amounts as revenue are not disclosed. (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). 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 consolidated statement of financial position. Payments made under operating leases are recognized in the statement of comprehensive income (loss) on a straight- line basis over the term of the lease. Finance costs (j) 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 (k) These consolidated 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 (l) 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. Page | 46 CWC-AR-2018-2.indd 48 Page | 47 2019-05-03 8:47 AM 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 consolidated 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. 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. (m) Employee costs reasonably be estimated. 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 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. CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts For both its Contract Drilling Services and its Production Services, the Company does not expect to have any revenue contracts where the period between the transfer of the promised goods or services to the customer and payments by the customer exceeds one year. As a consequence, the Company does not adjust any of the transaction prices for the time value of money. The Company does not incur material costs to obtain contracts with customers and consequently, does not recognize any contract assets. The Company does not have any contract liabilities associated with its contract drilling or production services customer contracts. As revenue from Contract Drilling Services and Production Services contracts is recognized as-invoiced, the transaction price allocated to remaining performance obligations and an explanation of when the Company expects to recognize such amounts as revenue are not disclosed. At inception of an arrangement, the Company determines whether such an arrangement is or contains a lease. This will (i) Leases (cid:120) (cid:120) be the case if the following two criteria are met: 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). 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 consolidated statement of financial position. Payments made under operating leases are recognized in the statement of comprehensive income (loss) on a straight- line basis over the term of the lease. (j) Finance costs 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. (k) Foreign currency transactions These consolidated 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. 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. (l) Income Tax Page | 46 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 consolidated 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. 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 (m) 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. Page | 47 CWC-AR-2018-2.indd 49 2019-05-03 8:47 AM CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts 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. Per share amounts (n) 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 (o) 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. IFRS 15 (p) The Company adopted IFRS 15, “Revenue from Contracts with Customers” on January 1, 2018. The Company reviewed its revenue streams and major contracts with customers using the IFRS 15 five-step model and there were no material changes to net earnings. Under this method, there was no effect to opening deficit from the application of IFRS 15 to revenue contracts in progress at January 1, 2018. Revenue has been disaggregated into categories based on type of services provided consistent with its reportable operating segments outlined in Note 17. IFRS 9 (r) The Company adopted IFRS 9, “Financial Instruments” on January 1, 2018. The transition to IFRS 9 had no material effect on the Company’s consolidated financial statements. IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost, fair value through other comprehensive income (“FVOCI”); or fair value through profit or loss (“FVTPL”). The classification of financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. IFRS 9 eliminates the previous IAS 39 categories of held to maturity, loans and receivables and available for sale. Under IFRS 9, derivatives embedded in contracts where the host is a financial asset in the scope of the standard are never separated. Instead, the hybrid financial instrument as a whole is assessed for classification. The new standard also introduces an expected credit loss model for evaluating impairment of financial assets, which results in credit losses being recognized earlier than the previous standard. Cash and accounts receivable continue to be measured at amortized cost and are now classified as “amortized costs”. There was no change to the Company’s classification of accounts payable and accrued liabilities or long-term debt. The Company has identified the Mortgage Loan interest rate swap as a FVTPL. (s) Future Accounting Pronouncements 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 consolidated financial statements for the annual period beginning on January 1, 2019. The Company anticipates that the most significant impact of adopting IFRS 16 will be the recognition of right-of-use (“ROU”) assets and corresponding lease obligations on its operating leases for office space. As a result, the nature of the expenses related to these leases will change as IFRS 16 replaces the straight-line operating lease expense with depreciation expense on the ROU asset and a finance charge on the lease obligation. On adoption of IFRS 16. The Company will recognize lease liabilities in relation to leases under the principles of the new standard. These liabilities will be measured at the present value of the remaining lease payments, discounted using the Company’s incremental borrowing rate as of January 1, 2019. The associated ROU asset will initially be measured at the amount equal to the lease liability on January 1, 2019 with no impact on retained earnings. The Company has identified ROU assets and lease liabilities primarily related to office space. The impact will result in higher adjusted EBITDA throughout the term of the lease. In addition, cash flow from operating activities and adjusted cash flow from operating activities will increase and cash flow from financing activities will decrease as lease obligations repayments will be reported as financing activities on the Consolidated Statement of Cash Flows. There will be no net impact on cash flows. 4. Determination of fair values 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 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. 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. (a) Property and equipment 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. (b) Share based compensation transactions 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 The fair value of RSUs issued is determined on the grant date based on the market price of the common shares on the determining fair value. grant date. Page | 48 CWC-AR-2018-2.indd 50 Page | 49 2019-05-03 8:47 AM CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts 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. (n) Per share amounts 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. (o) Segmented information 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. (p) IFRS 15 (r) IFRS 9 The Company adopted IFRS 15, “Revenue from Contracts with Customers” on January 1, 2018. The Company reviewed its revenue streams and major contracts with customers using the IFRS 15 five-step model and there were no material changes to net earnings. Under this method, there was no effect to opening deficit from the application of IFRS 15 to revenue contracts in progress at January 1, 2018. Revenue has been disaggregated into categories based on type of services provided consistent with its reportable operating segments outlined in Note 17. The Company adopted IFRS 9, “Financial Instruments” on January 1, 2018. The transition to IFRS 9 had no material effect on the Company’s consolidated financial statements. IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost, fair value through other comprehensive income (“FVOCI”); or fair value through profit or loss (“FVTPL”). The classification of financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. IFRS 9 eliminates the previous IAS 39 categories of held to maturity, loans and receivables and available for sale. Under IFRS 9, derivatives embedded in contracts where the host is a financial asset in the scope of the standard are never separated. Instead, the hybrid financial instrument as a whole is assessed for classification. The new standard also introduces an expected credit loss model for evaluating impairment of financial assets, which results in credit losses being recognized earlier than the previous standard. Cash and accounts receivable continue to be measured at amortized cost and are now classified as “amortized costs”. There was no change to the Company’s classification of accounts payable and accrued liabilities or long-term debt. The Company has identified the Mortgage Loan interest rate swap as a FVTPL. (s) Future Accounting Pronouncements 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 consolidated financial statements for the annual period beginning on January 1, 2019. The Company anticipates that the most significant impact of adopting IFRS 16 will be the recognition of right-of-use (“ROU”) assets and corresponding lease obligations on its operating leases for office space. As a result, the nature of the expenses related to these leases will change as IFRS 16 replaces the straight-line operating lease expense with depreciation expense on the ROU asset and a finance charge on the lease obligation. On adoption of IFRS 16. The Company will recognize lease liabilities in relation to leases under the principles of the new standard. These liabilities will be measured at the present value of the remaining lease payments, discounted using the Company’s incremental borrowing rate as of January 1, 2019. The associated ROU asset will initially be measured at the amount equal to the lease liability on January 1, 2019 with no impact on retained earnings. The Company has identified ROU assets and lease liabilities primarily related to office space. The impact will result in higher adjusted EBITDA throughout the term of the lease. In addition, cash flow from operating activities and adjusted cash flow from operating activities will increase and cash flow from financing activities will decrease as lease obligations repayments will be reported as financing activities on the Consolidated Statement of Cash Flows. There will be no net impact on cash flows. 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 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. 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. Share based compensation transactions (b) 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. Page | 48 Page | 49 CWC-AR-2018-2.indd 51 2019-05-03 8:47 AM CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts 5. Property, plant and equipment Fair value hierarchy (c) 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. Balance, January 1, 2018 Costs Additions Disposals Transfers Accumulated depreciation and Balance, December 31, 2018 impairment losses Balance, January 1, 2018 Depreciation Disposals Net book value Balance, December 31, 2018 Balance, December 31, 2018 Costs Additions Disposals Transfers Accumulated depreciation and impairment losses Balance, January 1, 2017 Depreciation Disposals Balance, December 31, 2017 Net book value Balance, December 31, 2017 Production services property, plant and Contract drilling Other equipment equipment equipment Total $ 112,478 $ 256,984 $ 1,883 $ 371,345 7,116 (62) - 119,532 20,618 5,717 (53) 26,282 4,609 (5,907) (31) 255,655 116,831 10,312 (3,767) 123,376 28 - 31 11,753 (5,969) - 1,942 377,129 1,706 107 - 1,813 139,155 16,136 (3,820) 151,471 $ 93,250 $ 132,279 $ 129 $ 225,658 Production services property, plant and Contract drilling Other equipment equipment equipment Total 3,964 (433) - 206,269 52,062 (1,347) - 9 - - 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 Balance, January 1, 2017 $ 108,947 $ $ 1,874 $ 317,090 Balance, December 31, 2017 112,478 256,984 1,883 At December 31, 2018, property and equipment includes equipment under finance leases which are recorded at cost totaling $1,144 (December 31, 2017: $878), less accumulated depreciation of $435 (December 31, 2017: $547). Given the degree of uncertainty regarding oil and natural gas activity and pricing for 2018 and into 2019, and the impact thereof, the Company concluded indicators of impairment existed and performed an impairment test for each CGU using Page | 50 CWC-AR-2018-2.indd 52 Page | 51 2019-05-03 8:47 AM CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts 5. Property, plant and equipment (c) Fair value hierarchy 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. Page | 50 Costs Balance, January 1, 2018 Additions Disposals Transfers Accumulated depreciation and Balance, December 31, 2018 impairment losses Balance, January 1, 2018 Depreciation Disposals Net book value Balance, December 31, 2018 Balance, December 31, 2018 Costs Balance, January 1, 2017 Additions Disposals Transfers Balance, December 31, 2017 Accumulated depreciation and impairment losses Balance, January 1, 2017 Depreciation Disposals Balance, December 31, 2017 Net book value Balance, December 31, 2017 Contract drilling equipment Production services property, plant and equipment Other equipment Total $ 112,478 7,116 (62) - 119,532 $ 256,984 4,609 (5,907) (31) 255,655 $ 1,883 28 - 31 1,942 $ 371,345 11,753 (5,969) - 377,129 20,618 5,717 (53) 26,282 116,831 10,312 (3,767) 123,376 1,706 107 - 1,813 139,155 16,136 (3,820) 151,471 $ 93,250 $ 132,279 $ 129 $ 225,658 Contract drilling equipment Production services property, plant and equipment Other equipment $ $ $ 108,947 3,964 (433) - 112,478 206,269 52,062 (1,347) - 256,984 15,073 5,910 (365) 20,618 106,944 10,730 (843) 116,831 1,874 9 - - 1,883 1,548 158 - 1,706 $ Total 317,090 56,035 (1,780) - 371,345 123,565 16,798 (1,208) 139,155 $ 91,860 $ 140,153 $ 177 $ 232,190 At December 31, 2018, property and equipment includes equipment under finance leases which are recorded at cost totaling $1,144 (December 31, 2017: $878), less accumulated depreciation of $435 (December 31, 2017: $547). Given the degree of uncertainty regarding oil and natural gas activity and pricing for 2018 and into 2019, and the impact thereof, the Company concluded indicators of impairment existed and performed an impairment test for each CGU using Page | 51 CWC-AR-2018-2.indd 53 2019-05-03 8:47 AM CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts value-in-use to determine the recoverable amounts. For each CGU, the recoverable amount exceeded its carrying amount and therefore no impairment was recognized. Acquisition of C&J Canada Assets 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. Intangible assets 6. Costs Balance, January 1, 2018 & December 31, 2018 Accumulated depreciation and impairment losses Balance, January 1, 2018 Depreciation of intangible assets Balance, December 31, 2018 Net book value Balance, December 31, 2018 Intangible assets $ 1,588 1,169 305 1,474 $ 114 syndicate, the Maturity Date will remain unchanged The Company has credit facilities with a syndicate of four Canadian financial institutions (the “Credit Facility”). During the second quarter of 2018, at the request of the Company, the Credit Facility was reduced from $100 million to $75 million. The Credit Facility provides the Company with a $75 million extendible revolving term facility (the “Bank Loan”) and other credit instruments. Of the Bank Loan, $65 million is a syndicated facility with the remaining $10 million being an operating facility. On August 4, 2017, the Bank Loan was extended for a committed term until July 31, 2020 (“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 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 The Bank Loan bears interest based on a sliding scale pricing grid tied to the Company’s trailing Consolidated Debt (1) to Consolidated EBITDA ratio from a minimum of the bank’s prime rate plus 0.75% to a maximum of the bank’s prime 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, 2018, of the $75,000 Bank Loan facility, (2) Page | 52 CWC-AR-2018-2.indd 54 Page | 53 2019-05-03 8:47 AM Costs Balance, January 1, 2017 and 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 7. Loans and borrowings As at December 31, Current liabilities: Current portion of finance lease liabilities Current portion of Mortgage Loan Non-current liabilities: Bank Loan Mortgage Loan Finance lease liabilities Financing fees Total loans and borrowings Intangible assets $ 1,588 864 305 1,169 $ 419 2018 $ 346 2017 582 $ 928 $ 32,087 11,927 381 (427) $ 43,968 $ 44,896 $ $ $ $ $ 176 176 50,000 - 165 (531) 49,634 49,810 The following table provides information with respect to amounts included in the consolidated statement of financial position related to loans and borrowings: CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts value-in-use to determine the recoverable amounts. For each CGU, the recoverable amount exceeded its carrying amount and therefore no impairment was recognized. Acquisition of C&J Canada Assets 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 Costs Balance, January 1, 2017 and 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 7. Loans and borrowings Intangible assets $ 1,588 864 305 1,169 $ 419 The following table provides information with respect to amounts included in the consolidated statement of financial position related to loans and borrowings: As at December 31, Current liabilities: Current portion of finance lease liabilities Current portion of Mortgage Loan Non-current liabilities: Bank Loan Mortgage Loan Finance lease liabilities Financing fees Total loans and borrowings 2018 $ 346 582 $ 928 $ 32,087 11,927 381 (427) $ 43,968 $ 44,896 2017 176 176 50,000 - 165 (531) 49,634 49,810 $ $ $ $ $ The Company has credit facilities with a syndicate of four Canadian financial institutions (the “Credit Facility”). During the second quarter of 2018, at the request of the Company, the Credit Facility was reduced from $100 million to $75 million. The Credit Facility provides the Company with a $75 million extendible revolving term facility (the “Bank Loan”) and other credit instruments. Of the Bank Loan, $65 million is a syndicated facility with the remaining $10 million being an operating facility. On August 4, 2017, the Bank Loan was extended for a committed term until July 31, 2020 (“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 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) to The Bank Loan bears interest based on a sliding scale pricing grid tied to the Company’s trailing Consolidated Debt 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, 2018, of the $75,000 Bank Loan facility, (2) Identifiable assets (liabilities) acquired Cash Buildings Land Rigs Other Equipment Property taxes & other deposits Deferred tax liabilities Bargain purchase gain 6. Intangible assets Costs Balance, January 1, 2018 & December 31, 2018 Accumulated depreciation and impairment losses Balance, January 1, 2018 Depreciation of intangible assets Balance, December 31, 2018 Net book value Balance, December 31, 2018 Purchase Price Equation $ 37,500 $ 7,432 11,467 29,580 470 54 (2,375) (9,128) $ 37,500 Intangible assets $ 1,588 1,169 305 1,474 $ 114 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. Page | 52 Page | 53 CWC-AR-2018-2.indd 55 2019-05-03 8:47 AM CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts 8. Income taxes $42,913 was available for immediate borrowing and $32,087 was outstanding (December 31, 2017: $50,000). 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 (other than real estate assets related to the Mortgage Loan). Effective December 31, 2018, 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, 2018 1.35:1.00 0.20:1.00 8.10:1.00 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 Adjusted EBITDA (3) to Capitalization to Consolidated Finance Obligations (1) (5) (2) (2) (4) (1) Consolidated Adjusted 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. Consolidated Adjusted 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 Adjusted 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. (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 Adjusted 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 Adjusted 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 December 18, 2017, the Company received gross proceeds of $26,027 from a rights offering of common shares of which $10,000 was placed in a segregated bank account. On July 5, 2018, $5,000 was paid on the Bank Loan. Additionally on October 5, 2018 the remaining $5,098 held in the segregated account was paid on the Bank Loan. Consolidated Debt to Consolidated EBITDA at December 31, 2018 includes the impact of a $10,098 equity cure designated on July 5, 2018 and October 5, 2018. Mortgage Loan is a loan maturing on June 28, 2023 that is amortized over 22 years with blended monthly principal and interest payments of $86. At maturity, approximately $9,891 of principal will become payable assuming only regular monthly payments are made. On July 27, 2018 the Company entered into an interest rate swap to exchange the floating rate interest payments for fixed rate interest payments, which fix the Bankers Acceptance-Canadian Dollar Offered Rate components of its interest payment on the outstanding term debt. Under the interest rate swap agreement, the Company pays a fixed rate of 2.65% per annum plus the applicable credit spread of 1.35%, for an effective fixed rate of 4.0%. The fair value of the interest rate swap arrangement is the difference between the forward interest rates and the discounted contract rate. As of December 31, 2018 the mark-to-market value of the interest rate swap resulted in a net loss of $206 included within finance costs on the statement of net loss. 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 4.5% and 6.4% 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. For the year ended of December 31, 2018 financing fees of $162 were amortized and included in finance costs (December 31, 2017: $242). Page | 54 CWC-AR-2018-2.indd 56 Page | 55 2019-05-03 8:47 AM The provision for income taxes differs from that which would be expected by applying statutory rates. A reconciliation of the difference is as follows: 2018 $ (1,852) 27% (500) 79 - 297 (26) $ (150) 2017 $ 3,576 27% 965 36 (2,465) 235 (56) $ (1,285) Years ended December 31, 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, 2017 Recognized in Earnings $ 11,358 (1) 144 93 15 (27,433) (2,460) (111) 104 40 2,577 150 11,610 (2,427) December 31, 2018 $ 8,898 (1) 33 197 55 9,183 (24,856) $ (15,673) (1) Net deferred income tax liability $ (15,823) The Company has $32,949 (2017: $42,063) 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 2029 and 2032. All changes in deferred income tax temporary differences were recognized in income in the years ended December 31, 2018 and 2017. CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts 8. Income taxes $42,913 was available for immediate borrowing and $32,087 was outstanding (December 31, 2017: $50,000). 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 (other than real estate assets related to the Mortgage Loan). Effective December 31, 2018, 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, 2018 1.35:1.00 0.20:1.00 8.10:1.00 Consolidated Debt to Consolidated Adjusted EBITDA (3) (2) (2) (1) Consolidated Debt to Capitalization (4) Consolidated Adjusted Cash Flow to Consolidated Finance Obligations Covenant limits 4.00:1.00 or less 0.50:1.00 or less 1.15:1.00 or more (5) (1) (2) (3) (4) Consolidated Adjusted 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. Consolidated Adjusted 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 Adjusted 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. 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. Capitalization is calculated as Consolidated Debt plus Shareholders’ Equity as at the calculation date. Consolidated Adjusted Cash Flow is calculated as Consolidated Adjusted 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 Adjusted 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 December 18, 2017, the Company received gross proceeds of $26,027 from a rights offering of common shares of which $10,000 was placed in a segregated bank account. On July 5, 2018, $5,000 was paid on the Bank Loan. Additionally on October 5, 2018 the remaining $5,098 held in the segregated account was paid on the Bank Loan. Consolidated Debt to Consolidated EBITDA at December 31, 2018 includes the impact of a $10,098 equity cure designated on July 5, 2018 and October 5, 2018. Mortgage Loan is a loan maturing on June 28, 2023 that is amortized over 22 years with blended monthly principal and interest payments of $86. At maturity, approximately $9,891 of principal will become payable assuming only regular monthly payments are made. On July 27, 2018 the Company entered into an interest rate swap to exchange the floating rate interest payments for fixed rate interest payments, which fix the Bankers Acceptance-Canadian Dollar Offered Rate components of its interest payment on the outstanding term debt. Under the interest rate swap agreement, the Company pays a fixed rate of 2.65% per annum plus the applicable credit spread of 1.35%, for an effective fixed rate of 4.0%. The fair value of the interest rate swap arrangement is the difference between the forward interest rates and the discounted contract rate. As of December 31, 2018 the mark-to-market value of the interest rate swap resulted in a net loss of $206 included within finance costs on the statement of net loss. 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 4.5% and 6.4% 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. For the year ended of December 31, 2018 financing fees of $162 were amortized and included in finance costs (December 31, 2017: $242). The provision for income taxes differs from that which would be expected by applying statutory rates. A reconciliation of the difference is as follows: Years ended December 31, 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, 2017 Recognized in Earnings (1) $ 11,358 144 93 15 11,610 (2,460) (111) 104 40 (2,427) (27,433) $ (15,823) 2,577 150 2018 $ (1,852) 27% (500) 79 - 297 (26) $ (150) December 31, 2018 $ 8,898 (1) 33 197 55 9,183 (24,856) $ (15,673) 2017 $ 3,576 27% 965 36 (2,465) 235 (56) (1,285) $ (1) Net deferred income tax liability The Company has $32,949 (2017: $42,063) 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 2029 and 2032. All changes in deferred income tax temporary differences were recognized in income in the years ended December 31, 2018 and 2017. Page | 54 Page | 55 CWC-AR-2018-2.indd 57 2019-05-03 8:48 AM CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 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. (c) Normal course issuer bid On April 10, 2018, the Company replaced its expired Normal Course Issuer Bid (NCIB) with a new NCIB which now expires on April 9, 2019. Under the new NCIB the Company may purchase, from time to time as it considers advisable, up to 26,057,889 of issued and outstanding common shares through the facilities of the TSXV or other recognized marketplaces. 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. For the year ended December 31, 2018, 11,421,000 shares (2017: 3,493,500) for consideration of $1,836, including commissions (2017: $756) were purchased under the NCIB. In the year ended December 31, 2018, a total of 11,421,000 shares were cancelled and returned to treasury (2017: 3,493,500). (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. CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts The following table summarizes changes in the number of stock options outstanding: Balance at January 1, 2017 Exercised for common shares Granted Forfeited Granted Forfeited Balance at December 31, 2017 Exercised for common shares Balance at December 31, 2018 Number of options Weighted average exercise price 21,791,000 8,307,000 (983,333) (1,568,000) - 27,546,667 (1,033,335) (2,161,999) 24,351,333 0.28 0.20 0.13 0.43 - 0.25 0.14 0.31 0.25 $ 0.20 $ 0.19 $0.175 $ 0.11 $ 0.45 $1.04 $0.25 n/a n/a n/a n/a n/a 2,643,000 3,092,656 2,933,350 4,350,000 1,200,000 1,700,000 15,919,006 2017 1.6% 4.7 75% 12% 0.00 $ The following table summarizes information about stock options outstanding as at December 31, 2018: remaining life (years) Exercise price average options options Number of Weighted average Weighted Number of outstanding contractual exercise price exercisable $ 0.20 $ 0.19 $ 0.175 $0.11 $0.45 $ 1.04 7,929,000 4,639,000 4,533,333 4,350,000 1,200,000 1,700,000 $ 0.11 - $ 1.04 24,351,333 3.96 2.94 2.20 1.94 0.98 0.37 2.74 The fair value of stock options is estimated as at the grant date using the Black-Scholes option pricing model, with the 2018 following weighted average assumptions used for stock options issued during the years ended December 31: Risk free interest rate (%) Expected life (years) Expected volatility (%) Expected forfeiture rate (%) Expected dividend per share No stock options were issued during the year ended December 31, 2018. The weighted average fair value of the stock options issued during the year ended December 31, 2017 was $0.20. For the year ended December 31, 2018, stock- based compensation expense relating to stock options totaled $732 (year ended December 31, 2017: $592). (e) Restricted share unit plan 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-AR-2018-2.indd 58 Page | 57 2019-05-03 8:48 AM CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 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. (c) Normal course issuer bid On April 10, 2018, the Company replaced its expired Normal Course Issuer Bid (NCIB) with a new NCIB which now expires on April 9, 2019. Under the new NCIB the Company may purchase, from time to time as it considers advisable, up to 26,057,889 of issued and outstanding common shares through the facilities of the TSXV or other recognized marketplaces. 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. For the year ended December 31, 2018, 11,421,000 shares (2017: 3,493,500) for consideration of $1,836, including commissions (2017: $756) were purchased under the NCIB. In the year ended December 31, 2018, a total of 11,421,000 shares were cancelled and returned to treasury (2017: 3,493,500). (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. CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 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, 2017 Granted Exercised for common shares Forfeited Granted Balance at December 31, 2017 Exercised for common shares Forfeited Balance at December 31, 2018 21,791,000 8,307,000 (983,333) (1,568,000) - 27,546,667 (1,033,335) (2,161,999) 24,351,333 0.28 0.20 0.13 0.43 - 0.25 0.14 0.31 0.25 The following table summarizes information about stock options outstanding as at December 31, 2018: Exercise price Number of options outstanding 7,929,000 4,639,000 4,533,333 4,350,000 1,200,000 1,700,000 24,351,333 Weighted average remaining life (years) contractual 3.96 2.94 2.20 1.94 0.98 0.37 2.74 Weighted average exercise price $ 0.20 $ 0.19 $0.175 $ 0.11 $ 0.45 $1.04 $0.25 Number of options exercisable 2,643,000 3,092,656 2,933,350 4,350,000 1,200,000 1,700,000 15,919,006 $ 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: 2018 Risk free interest rate (%) Expected life (years) Expected volatility (%) Expected forfeiture rate (%) Expected dividend per share n/a n/a n/a n/a n/a 2017 1.6% 4.7 75% 12% 0.00 $ No stock options were issued during the year ended December 31, 2018. The weighted average fair value of the stock options issued during the year ended December 31, 2017 was $0.20. For the year ended December 31, 2018, stock- based compensation expense relating to stock options totaled $732 (year ended December 31, 2017: $592). 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 Page | 57 CWC-AR-2018-2.indd 59 2019-05-03 8:48 AM CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 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 $ 6,540 2017 2018 (1,275) (4,337) $ 928 $ (14,784) (313) 4,843 $ (10,254) 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. CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 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, 2017 Granted Redeemed for common shares Forfeited – unvested Balance at December 31, 2017 Granted Redeemed for common shares Forfeited - unvested Balance at December 31, 2018 Number of RSUs 4,473,000 2,682,000 (1,819,668) (200,000) 2,715,000 5,135,332 (1,517,998) (422,333) 5,910,001 Weighted average fair value at issue date 0.19 0.20 0.24 0.21 0.14 0.19 0.18 0.17 0.17 The following table summarizes information about RSUs outstanding as at December 31, 2018: $0.14 -$0.23 Issue date fair value Number of RSUs 5,910,001 outstanding Weighted average remaining life (years) 2.95 contractual Weighted average exercise n/a price ($) Number of RSUs 959,999 exercisable For the year ended December 31, 2018, stock based compensation expense relating to RSUs totaled $370 (year ended December 31, 2017: $274). Weighted average common shares outstanding (f) Year ended December 31, The following table reconciles the common shares used in computing per share amounts for the periods noted: 2018 Weighted average common shares outstanding – basic Dilutive stock options & RSUs Weighted average common shares outstanding – diluted 520,576,582 - 520,576,582 2017 399,008,915 4,350,622 403,359,537 Outstanding stock options and RSUs are currently the only instruments which could potentially dilute earnings per share. For the year ended December 31, 2018, 24,351,333 (year ended December 31, 2017: 27,546,667) stock options and 5,910,001 (year ended December 31, 2017: 5,135,332) RSUs were not included in the computation of net (loss) income 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 | 58 CWC-AR-2018-2.indd 60 Page | 59 2019-05-03 8:48 AM CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 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 2018 $ 6,540 (1,275) (4,337) $ 928 2017 $ (14,784) (313) 4,843 $ (10,254) 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. CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 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, 2017 Granted Redeemed for common shares Forfeited – unvested Balance at December 31, 2017 Granted Redeemed for common shares Forfeited - unvested Balance at December 31, 2018 Weighted average fair value at issue Number of RSUs date 4,473,000 2,682,000 (1,819,668) (200,000) 2,715,000 (1,517,998) 5,135,332 (422,333) 5,910,001 0.19 0.20 0.24 0.21 0.14 0.19 0.18 0.17 0.17 The following table summarizes information about RSUs outstanding as at December 31, 2018: Weighted average Weighted $0.14 -$0.23 Issue date fair value Number of RSUs 5,910,001 outstanding remaining life (years) 2.95 average exercise n/a Number of RSUs 959,999 contractual price ($) exercisable For the year ended December 31, 2018, stock based compensation expense relating to RSUs totaled $370 (year ended December 31, 2017: $274). (f) Weighted average common shares outstanding Year ended December 31, The following table reconciles the common shares used in computing per share amounts for the periods noted: 2018 520,576,582 - 520,576,582 2017 399,008,915 4,350,622 403,359,537 Weighted average common shares outstanding – basic Dilutive stock options & RSUs Weighted average common shares outstanding – diluted Outstanding stock options and RSUs are currently the only instruments which could potentially dilute earnings per share. For the year ended December 31, 2018, 24,351,333 (year ended December 31, 2017: 27,546,667) stock options and 5,910,001 (year ended December 31, 2017: 5,135,332) RSUs were not included in the computation of net (loss) income per common share because to do so would be anti-dilutive. (g) Contributed surplus 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 | 58 Page | 59 CWC-AR-2018-2.indd 61 2019-05-03 8:48 AM CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts 12. Expenses by nature The amounts related to each industry segment are as follows: For the year ended December 31, 2018 Contract Drilling $ 38,223 Production Services $ 106,539 Corporate $ - Total $ 144,762 Selling and Loss on Direct operating administrative Stock based Depreciation disposal of expenses expenses compensation Finance costs expense equipment Total $ 71,451 $ 11,052 $ 1,102 $ - $ - $ - $ 83,605 Revenue Direct operating expenses Selling and administrative expenses Stock based compensation Finance costs Loss on disposal of equipment Net income before (loss) depreciation and taxes Depreciation Net income (loss) before tax Deferred income tax recovery Net income (loss) 27,691 1,300 - - - 80,293 10,696 - - 42 - 6,293 1,102 2,756 - 107,984 18,289 1,102 2,756 42 9,232 6,034 3,198 - $ 3,198 15,508 9,523 5,985 - $ 5,985 (10,151) 884 (11,035) (150) $ (10,885) 14,589 16,441 (1,852) (150) $ (1,702) Capital expenditures 7,116 4,609 28 11,753 As at December 31, 2018 Property and equipment Intangibles 93,250 114 132,279 - 129 - 225,658 114 For the year ended December 31, 2017 Contract Drilling Production Services Corporate Total Revenue $ 35,222 $ 76,993 $ - $ 112,215 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 (loss) before tax Deferred income tax recovery Net income 24,690 941 - - - - 48 9,543 6,215 3,328 - $ 3,328 57,671 8,249 - - - - (8) 11,081 10,730 351 - $ 351 - 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 Capital expenditures As at December 31, 2017 3,964 52,062 9 56,035 Property and equipment Intangibles 91,860 419 140,153 - 177 - 232,190 419 Page | 60 CWC-AR-2018-2.indd 62 Page | 61 2019-05-03 8:48 AM For the year ended December 31, 2018 Personnel expenses Third party charges Repairs and maintenance Other selling and administrative expenses Bad debt expense Facility expenses Depreciation expense Finance costs Loss on disposal of equipment Total For the year ended December 31, 2017 Personnel expenses Third party charges Repairs and maintenance Other selling and administrative expenses Transaction costs Bad debt expense Facility expenses Depreciation expense Finance costs Loss on disposal of equipment Total 16,410 20,123 - - - - - - - - - - - - - 14,196 11,688 - - - - - 4,221 694 2,322 - - 9 - - - 3,621 1,549 1,974 16,441 2,756 $ 107,984 $ 18,289 $ 1,102 $ 2,756 $ 16,441 $ 42 $146,614 42 42 Selling and administrative expenses & transaction Direct operating expenses Stock based Depreciation disposal of costs compensation Finance costs expense equipment Total Loss on $ 56,477 $ 8,187 $ 869 $ - $ - $ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 16,410 20,123 4,221 694 2,322 16,441 2,756 $ 65,533 14,196 11,688 3,621 1,549 9 1,974 17,103 2,054 17,103 2,054 $ 82,361 $ 15,340 $ 869 $ 2,054 $ 17,103 $ 40 40 40 $ 117,767 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts 12. Expenses by nature The amounts related to each industry segment are as follows: For the year ended December 31, 2018 Contract Drilling Production Services Corporate Total Revenue $ 38,223 $ 106,539 $ - $ 144,762 Direct operating expenses Selling and administrative expenses Stock based compensation Finance costs Loss on disposal of equipment Net income before (loss) depreciation and taxes Depreciation Net income (loss) before tax Deferred income tax recovery Net income (loss) 27,691 1,300 - - - - 9,232 6,034 3,198 80,293 10,696 - - 42 15,508 9,523 5,985 - 6,293 1,102 2,756 - - (10,151) 884 (11,035) (150) 107,984 18,289 1,102 2,756 42 14,589 16,441 (1,852) (150) $ 3,198 $ 5,985 $ (10,885) $ (1,702) Capital expenditures 7,116 4,609 28 11,753 As at December 31, 2018 Property and equipment Intangibles 93,250 114 132,279 - 129 - 225,658 114 For the year ended December 31, 2017 Contract Drilling Production Services Corporate Total Revenue $ 35,222 $ 76,993 $ $ 112,215 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 (loss) before tax Deferred income tax recovery Net income Capital expenditures As at December 31, 2017 24,690 941 - - - - 48 9,543 6,215 3,328 - 57,671 8,249 - - - - (8) 11,081 10,730 351 - - - 4,601 1,549 869 2,054 (9,128) - 55 158 (103) (1,285) 82,361 13,791 1,549 869 2,054 (9,128) 40 20,679 17,103 3,576 (1,285) $ 3,328 $ 351 $ 1,182 $ 4,861 3,964 52,062 9 56,035 Property and equipment Intangibles 91,860 419 140,153 - 177 - 232,190 419 For the year ended December 31, 2018 Personnel expenses Third party charges Repairs and maintenance Other selling and administrative expenses Bad debt expense Facility expenses Depreciation expense Finance costs Loss on disposal of equipment Total For the year ended December 31, 2017 Personnel expenses Third party charges Repairs and maintenance Other selling and administrative expenses Transaction costs Bad debt expense Facility expenses Depreciation expense Finance costs Loss on disposal of equipment Total Direct operating expenses Selling and administrative expenses Loss on disposal of Stock based equipment compensation Finance costs $ 71,451 $ 11,052 $ 1,102 $ - $ - $ - - - Depreciation expense 16,410 - - - Total $ 83,605 16,410 20,123 - - - - - - 4,221 694 2,322 - - - $ 107,984 - $ 18,289 Selling and administrative expenses & transaction costs Direct operating expenses 11,688 - 3,621 1,549 9 1,974 - - - - - - - - - $ 82,361 $ - - - - - - - - - - - - 2,756 - - - 16,441 - - - - - - - 20,123 4,221 694 2,322 16,441 2,756 42 - $ 1,102 $ 2,756 $ 16,441 $ 42 - - Stock based compensation Finance costs Depreciation expense Loss on disposal of equipment - $ - - - $ - - - - - - - 2,054 - - - - 17,103 - - - - - - - - - - - - - - - - - 42 $146,614 Total $ 65,533 14,196 11,688 3,621 1,549 9 1,974 17,103 2,054 - 15,340 $ - 869 $ - - 2,054 $ 17,103 $ 40 40 40 $ 117,767 $ 56,477 $ 14,196 8,187 - $ 869 $ - Page | 60 Page | 61 CWC-AR-2018-2.indd 63 2019-05-03 8:48 AM CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts 13. Commitments and contingencies: 15. Financial risk management As at December 31, 2018, the Company has lease commitments and other contractual obligations as follows: Next 12 months $ - 582 346 698 Between 1 and 3 years Payments due by period Between 4 and 5 years Greater than 5 years $ 32,087 $ - $ - - - - 10,181 - - 1,746 381 149 Total $ 32,087 12,509 727 847 $ 1,626 $ 34,363 $ 10,181 $ - $ 46,170 Contractual obligations: Bank Loan Mortgage 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, 79.3% 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 2018, the Company had revenue totaling $1,587 (2017: $1,101) $231 in accounts receivable as at December 31, 2018 (December 31, 2017: $14) in the normal course of business with companies under common control. The terms and conditions of these transactions were no more favorable 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. 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, 2018 $ 1,837 201 - $ 2,038 December 31, 2017 $ 1,268 718 200 2,186 $ 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 18 to 24 months gross salary, bonus and benefits. 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 | 62 CWC-AR-2018-2.indd 64 Page | 63 2019-05-03 8:48 AM 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: a) Credit risk 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, 2018 and 2017. Accounts receivable include 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, 2018, ten customers comprised 57% of revenue (2017: 62%) and one customer comprised 18% of revenue (2017: 21%). At December 31, 2018, ten customers comprised 64% of trade accounts receivable (2017: 62%) and one customer comprised 14% of trade accounts receivable (2017: 23%). 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 The following table details the age of the outstanding trade accounts receivable and the related allowance for were provided. impairment of accounts: As at December 31, Trade accounts receivable: 1 to 30 days outstanding – not past due 31 to 90 days outstanding >90 days overdue Allowance for impairment of accounts $ 20,739 2017 2018 2,216 1,396 (772) $ 23,579 $ 16,081 13,723 441 (126) $ 30,119 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts 13. Commitments and contingencies: 15. Financial risk management As at December 31, 2018, the Company has lease commitments and other contractual obligations as follows: Payments due by period Next 12 months Between 1 and 3 years Between 4 and 5 years Greater than 5 years Total 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. Contractual obligations: Bank Loan Mortgage Loan Finance lease liabilities Operating lease payments Total contractual obligations $ - $ 32,087 $ - $ - $ 32,087 582 346 698 1,746 381 149 10,181 - - - - - 12,509 727 847 $ 1,626 $ 34,363 $ 10,181 $ - $ 46,170 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 14. financial position, results of operations, or cash flows. Related parties Of the total outstanding shares of the Company, 79.3% 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 2018, the Company had revenue totaling $1,587 (2017: $1,101) $231 in accounts receivable as at December 31, 2018 (December 31, 2017: $14) in the normal course of business with companies under common control. The terms and conditions of these transactions were no more favorable 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. Key management personnel include the Company’s directors and officers. The following table summarizes December 31, 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 2018 $ 1,837 December 31, 201 - $ 2,038 2017 $ $ 1,268 718 200 2,186 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 18 to 24 months gross salary, bonus and benefits. 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. 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, 2018 and 2017. Accounts receivable include 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, 2018, ten customers comprised 57% of revenue (2017: 62%) and one customer comprised 18% of revenue (2017: 21%). At December 31, 2018, ten customers comprised 64% of trade accounts receivable (2017: 62%) and one customer comprised 14% of trade accounts receivable (2017: 23%). 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, 2018 Trade accounts receivable: 1 to 30 days outstanding – not past due 31 to 90 days outstanding >90 days overdue Allowance for impairment of accounts $ 20,739 2,216 1,396 (772) $ 23,579 2017 $ 16,081 13,723 441 (126) 30,119 $ Page | 62 Page | 63 CWC-AR-2018-2.indd 65 2019-05-03 8:48 AM CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 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 2018 $ 126 671 (25) - $ 772 2017 $ $ 76 89 (13) (26) 126 For accounts receivable, the Company applies a simplified approach and recognizes lifetime expected credit losses upon initial recognition of the receivables. Historical customer default rates, age of balances outstanding, and forward- looking information are used to determine the expected credit losses. When an expected credit loss is required to be recognized, the carrying amount of the asset is reduced by the amount with an offsetting entry to net income. 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, 2018, the Company has available committed amounts under its Credit Facility in the amount of $42,913 (2017: $37,321), segregated cash of nil (2017: $10,000), plus trade and other receivables of $23,579 (2017: $30,119) for a total of $65,772 (2017: $77,440) 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 2019. 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: Year ended December 31, 2018 2020 2021 2019 2022 2023 and beyond Accounts payable and accrued liabilities Long-term debt Year ended December 31, 2017 Accounts payable and accrued liabilities Long-term debt $ 7,865 928 $ 8,793 $ - 32,541 $ 32,541 $ $ - 664 664 $ $ - 582 582 $ - 10,181 $ 10,181 issuer bids. 2018 2019 2020 2021 2022 and beyond $ $ 12,202 176 12,378 $ $ - - - $ $ - 49,634 49,634 $ $ - - - $ $ - - - Page | 64 CWC-AR-2018-2.indd 66 Page | 65 2019-05-03 8:48 AM 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 c) Market risk 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, 2018, if the prime interest rate increased by 1.0%, with all other variables held constant, net loss would have been $470 higher (2017: $486). 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 16. oil and natural gas prices is not reasonably determinable. Capital management 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 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 shareholders, or purchase shares for cancellation pursuant to normal course The Company monitors capital using a financial metric of Consolidated Debt to Consolidated Adjusted EBITDA ratio as defined in the Credit Facility (see Note 7). Consolidated Debt to Consolidated Adjusted 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, 2018, the actual and forecasted Consolidated Debt to Consolidated Adjusted EBITDA of the Company has declined, primarily due to the Mortgage Loan, increased pricing and utilization and amendments to credit facility terms. The Consolidated Debt to Consolidated Adjusted EBITDA ratio at December 31, 2018 was 1.35:1.00 (at December 31, 2017: 1.75:1.00). The Company was in compliance with all externally imposed capital requirements as at December 31, 2018 and 2017. CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 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 2018 $ 126 671 (25) - $ 772 2017 $ $ 76 89 (13) (26) 126 For accounts receivable, the Company applies a simplified approach and recognizes lifetime expected credit losses upon initial recognition of the receivables. Historical customer default rates, age of balances outstanding, and forward- looking information are used to determine the expected credit losses. When an expected credit loss is required to be recognized, the carrying amount of the asset is reduced by the amount with an offsetting entry to net income. b) Liquidity risk 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, 2018, the Company has available committed amounts under its Credit Facility in the amount of $42,913 (2017: $37,321), segregated cash of nil (2017: $10,000), plus trade and other receivables of $23,579 (2017: $30,119) for a total of $65,772 (2017: $77,440) 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 2019. 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: Year ended December 31, 2018 2019 2020 2021 2022 2023 and beyond Accounts payable and accrued 928 32,541 $ 7,865 $ - $ $ - $ - - 664 664 582 582 10,181 $ 10,181 $ 8,793 $ 32,541 $ $ liabilities Long-term debt Year ended December 31, 2017 Accounts payable and accrued liabilities Long-term debt 2018 2019 2020 2021 2022 and beyond $ $ 12,202 176 12,378 $ $ - - - $ - 49,634 49,634 $ $ $ - - - $ $ - - - 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, 2018, if the prime interest rate increased by 1.0%, with all other variables held constant, net loss would have been $470 higher (2017: $486). 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 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 shareholders, or purchase shares for cancellation pursuant to normal course issuer bids. The Company monitors capital using a financial metric of Consolidated Debt to Consolidated Adjusted EBITDA ratio as defined in the Credit Facility (see Note 7). Consolidated Debt to Consolidated Adjusted 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, 2018, the actual and forecasted Consolidated Debt to Consolidated Adjusted EBITDA of the Company has declined, primarily due to the Mortgage Loan, increased pricing and utilization and amendments to credit facility terms. The Consolidated Debt to Consolidated Adjusted EBITDA ratio at December 31, 2018 was 1.35:1.00 (at December 31, 2017: 1.75:1.00). The Company was in compliance with all externally imposed capital requirements as at December 31, 2018 and 2017. Page | 64 Page | 65 CWC-AR-2018-2.indd 67 2019-05-03 8:48 AM CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts 17. Revenue Revenue consists of amounts earned from sale of Contract Drilling and Production Services. Production Services includes revenue from service rigs, swabbing rigs and coil tubing units. The following table presents the Company’s revenue disaggregated by type: For the years ended December 31, Contract Drilling Production Services Service Rigs Swabbing Rigs Coil Tubing Total 2018 $ 38,223 99,904 1,848 4,787 $ 144,762 2017 $ 35,222 70,919 303 5,771 112,215 $ Included in accounts receivable at December 31, 2018 was $1,789 (December 31, 2017: $2,322) of accrued revenue for services provided in the month then ended. There have been no significant adjustments for prior period accrued revenue in the current period. As of December 31, 2018, the Company did not have any sales contracts beyond one year in term. 1 Corporate Secretary 1 2 Audit Committee 2 1. 2. Compensation and Corporate Governance Committee Ernst & Young LLP Bankers President & Chief Executive Of�icer Duncan Au, FLPA, FLA, LFA 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 Mike Dubois Vice President, Sales and Marketing (Well Services) Page | 66 CWC-AR-2018-2.indd 68 2019-05-03 8:48 AM CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 Stated in thousands of Canadian dollars except share and per share amounts 17. Revenue Revenue consists of amounts earned from sale of Contract Drilling and Production Services. Production Services includes revenue from service rigs, swabbing rigs and coil tubing units. The following table presents the Company’s revenue disaggregated by type: For the years ended December 31, Contract Drilling Production Services Service Rigs Swabbing Rigs Coil Tubing Total 2018 $ 38,223 99,904 1,848 4,787 $ 144,762 2017 $ 35,222 70,919 303 5,771 $ 112,215 Included in accounts receivable at December 31, 2018 was $1,789 (December 31, 2017: $2,322) of accrued revenue for services provided in the month then ended. There have been no significant adjustments for prior period accrued revenue in the current period. As of December 31, 2018, the Company did not have any sales contracts beyond one year in term. Corporate Secretary Ernst & Young LLP Bankers 1 1 2 Audit Committee 2 Compensation and Corporate Governance Committee 1. 2. President & Chief Executive Of�icer Duncan Au, FCPA, FCA, 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 Page | 66 CWC-AR-2018-2.indd 69 2019-05-03 8:48 AM CWC-AR-2018-2.indd 70 2019-05-03 8:48 AM 

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