CWC Energy Services Corp.
Annual Report 2019

Plain-text annual report

2019 Annual Report Contents 1 3 6 Corporate Profile President’s Message 33 Management’s Discussion & Analysis 41 Financial Statements Notes to the Financial Statements Corporate Pro�ile – April 2017 Corporate Profile – April 2020 TSX-V: CWC Market Pro�ile CWC Energy Services Corp. is a premier contract drilling and well servicing company operating in Canada and the United States 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 for well decommissioning. CWC’s services are provided through two divisions: Contract Drilling and Production Services. Horn River Montney/ Deep Basin Devonian Cardium Heavy Oil Viking Calgary AB Bakken Horn River Bakken Montney/ Deep Basin Denver DJ Basin Market Pro�ile Shares outstanding Price Market Financial Information Shares outstanding December 31, 2019 510.7 million December 31, 2016 $0.10 $51.1 million 391.9 million ($ millions) Price 2019 2018 2017 $0.195 $76.4 million $108.4 2016 $144.8 2015 $112.2 2014 $12.2 $18.5 $16.1 $243.4 $252.7 $264.4 $73.1 $40.6 $81.3 $44.9 $143.7 $49.8 $8.2 $22.0 $210.8 $12.0 $25.9 $222.4 $34.1 $30.3 $275.4 $33.1 $21.8 $52.2 $40.4 $65.7 $45.1 Market Financial Information Revenue ($ millions) Adjusted EBITDA Total Assets Revenue Long-Term Debt EBITDAS Net Debt Total Assets Long-Term Debt Net Debt Devonian Slave Lake Grande Prairie Pekisko & Beaverhill Lake Heavy Oil Drayton Valley Lloydminster Cardium Red Deer Provost Viking Permian Eagle Ford Calgary AB Bakken Brooks th 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. 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 has expanded its drilling rig services into select United States basins including the Eagle Ford, Denver-Julesburg (“DJ”) and Bakken. Market Pro�ile December 31, 2016 Price $0.195 ($ millions) 391.9 million Shares outstanding Market Financial Information The Production Services division operates under the trade name CWC Well Services and is the largest well servicing company in Canada as measured by active fleet and operating hours with 146 service rigs. Rig services include completions, maintenance, workovers and well decommissioning 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 3,200 metres. While the company continues to service steam- assisted gravity drainage (“SAGD”) wells that are shallower in depth and more appropriate for coil tubing operations, it has recently shifted its sales and operational focus on well decommissioning. Finally, CWC operates 13 swabbing rigs in the WCSB. The swabbing rigs are used to remove liquids from the wellbore and allow reservoir pressures to push the commodity up the tubing. 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 2019 $76.4 million Total Assets EBITDAS Net Debt Revenue $222.4 $275.4 $210.8 $143.7 2018 2017 $73.1 $81.3 $12.0 $40.4 $34.1 $52.2 $65.7 $45.1 $33.1 $21.8 2014 2016 2015 $8.2 2019 2019 2019 2018 2018 2018 2017 2017 2017 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 9 146 9 2019 13 2019 2019 2019 9 148 9 13 9 149 10 13 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 31% 31% 31% 31% 69% 69% 69% 69% * Divisional contribution, corporate costs excluded * Divisional contribution, corporate costs excluded * Divisional contribution, corporate costs excluded th th th th th (cid:44)(cid:75)(cid:116)(cid:3)(cid:17)(cid:4)(cid:24)(cid:3)(cid:47)(cid:94)(cid:3)(cid:100)(cid:44)(cid:28)(cid:3)(cid:69)(cid:856)(cid:4)(cid:856)(cid:3)(cid:75)(cid:104)(cid:100)(cid:62)(cid:75)(cid:75)(cid:60)(cid:3)(cid:47)(cid:69)(cid:3)(cid:100)(cid:44)(cid:28)(cid:3)(cid:18)(cid:75)(cid:69)(cid:100)(cid:28)(cid:121)(cid:100)(cid:3)(cid:75)(cid:38)(cid:3)(cid:44)(cid:47)(cid:94)(cid:100)(cid:75)(cid:90)(cid:122)(cid:845)(cid:3) • (cid:47)(cid:374)(cid:3)(cid:18)(cid:258)(cid:374)(cid:258)(cid:282)(cid:258)(cid:853)(cid:3)(cid:449)(cid:286)(cid:3)(cid:258)(cid:396)(cid:286)(cid:3)(cid:296)(cid:381)(cid:396)(cid:286)(cid:272)(cid:258)(cid:400)(cid:410)(cid:349)(cid:374)(cid:336)(cid:3)(cid:373)(cid:437)(cid:367)(cid:410)(cid:349)(cid:882)(cid:282)(cid:286)(cid:272)(cid:258)(cid:282)(cid:286)(cid:3)(cid:367)(cid:381)(cid:449)(cid:400)(cid:3)(cid:296)(cid:381)(cid:396)(cid:3)(cid:258)(cid:272)(cid:410)(cid:349)(cid:448)(cid:349)(cid:410)(cid:455)(cid:3)(cid:449)(cid:349)(cid:410)(cid:346)(cid:3)(cid:296)(cid:381)(cid:437)(cid:396)(cid:3)(cid:381)(cid:296)(cid:3)(cid:410)(cid:346)(cid:286)(cid:3)(cid:296)(cid:349)(cid:448)(cid:286)(cid:3)(cid:449)(cid:381)(cid:396)(cid:400)(cid:410)(cid:3)(cid:282)(cid:396)(cid:349)(cid:367)(cid:367)(cid:349)(cid:374)(cid:336)(cid:3)(cid:282)(cid:258)(cid:455)(cid:400)(cid:3)(cid:455)(cid:286)(cid:258)(cid:396)(cid:400)(cid:3)(cid:381)(cid:272)(cid:272)(cid:437)(cid:396)(cid:396)(cid:349)(cid:374)(cid:336)(cid:3) • (cid:104)(cid:856)(cid:94)(cid:856)(cid:3)(cid:396)(cid:349)(cid:336)(cid:3)(cid:272)(cid:381)(cid:437)(cid:374)(cid:410)(cid:400)(cid:3)(cid:258)(cid:396)(cid:286)(cid:3)(cid:258)(cid:367)(cid:400)(cid:381)(cid:3)(cid:410)(cid:396)(cid:286)(cid:374)(cid:282)(cid:349)(cid:374)(cid:336)(cid:3)(cid:367)(cid:381)(cid:449)(cid:286)(cid:396)(cid:853)(cid:3)(cid:271)(cid:437)(cid:410)(cid:3)(cid:400)(cid:286)(cid:396)(cid:448)(cid:349)(cid:272)(cid:286)(cid:3)(cid:286)(cid:296)(cid:296)(cid:349)(cid:272)(cid:349)(cid:286)(cid:374)(cid:272)(cid:455)(cid:3)(cid:349)(cid:400)(cid:3)(cid:258)(cid:367)(cid:367)(cid:381)(cid:449)(cid:349)(cid:374)(cid:336)(cid:3)(cid:410)(cid:346)(cid:286)(cid:3)(cid:104)(cid:856)(cid:94)(cid:856)(cid:3)(cid:410)(cid:381)(cid:3)(cid:396)(cid:286)(cid:258)(cid:272)(cid:346)(cid:3)(cid:396)(cid:286)(cid:272)(cid:381)(cid:396)(cid:282)(cid:3)(cid:346)(cid:349)(cid:336)(cid:346)(cid:3)(cid:272)(cid:396)(cid:437)(cid:282)(cid:286)(cid:3)(cid:381)(cid:349)(cid:367)(cid:3)(cid:258)(cid:374)(cid:282)(cid:3) Dear Fellow Shareholders, President’s Message (cid:100)(cid:346)(cid:286)(cid:3)(cid:104)(cid:856)(cid:94)(cid:856)(cid:3)(cid:396)(cid:349)(cid:336)(cid:3)(cid:272)(cid:381)(cid:437)(cid:374)(cid:410)(cid:3)(cid:349)(cid:400)(cid:3)(cid:282)(cid:381)(cid:449)(cid:374)(cid:3)(cid:1008)(cid:1004)(cid:1081)(cid:3)(cid:296)(cid:396)(cid:381)(cid:373)(cid:3)(cid:393)(cid:396)(cid:286)(cid:448)(cid:349)(cid:381)(cid:437)(cid:400)(cid:3)(cid:393)(cid:286)(cid:258)(cid:364)(cid:400)(cid:3)(cid:258)(cid:374)(cid:282)(cid:3)(cid:349)(cid:374)(cid:3)(cid:367)(cid:349)(cid:374)(cid:286)(cid:3)(cid:449)(cid:349)(cid:410)(cid:346)(cid:3)(cid:410)(cid:346)(cid:286)(cid:3)(cid:296)(cid:349)(cid:374)(cid:258)(cid:374)(cid:272)(cid:349)(cid:258)(cid:367)(cid:3)(cid:272)(cid:396)(cid:349)(cid:400)(cid:349)(cid:400)(cid:3)(cid:349)(cid:374)(cid:3)(cid:1006)(cid:1004)(cid:1004)(cid:1013)(cid:856)(cid:3) I wish to share with you CWC Energy Services Corp.’s (“CWC” or the “Company”) 2019 Annual Report. 2019 can best be described as one of the most challenging years for Canadian oilfield service companies in the last five decades as the CAODC’s 2019 Canadian drilling rig operating days of 45,426 days was the third lowest number of operating days on record dating back to 1964. Ranked Historical Canadian Drilling Days(64-21e) (cid:90)(cid:258)(cid:374)(cid:364)(cid:286)(cid:282)(cid:3)(cid:44)(cid:349)(cid:400)(cid:410)(cid:381)(cid:396)(cid:349)(cid:272)(cid:258)(cid:367)(cid:3)(cid:18)(cid:258)(cid:374)(cid:258)(cid:282)(cid:349)(cid:258)(cid:374)(cid:3)(cid:24)(cid:396)(cid:349)(cid:367)(cid:367)(cid:349)(cid:374)(cid:336)(cid:3)(cid:24)(cid:258)(cid:455)(cid:400)(cid:3)(cid:894)(cid:1010)(cid:1008)(cid:882)(cid:1006)(cid:1005)(cid:286)(cid:895) Revenue EBITDAS Total Assets $73.1 $8.2 (cid:3) (cid:1008) (cid:1008) (cid:3) (cid:1012) (cid:1009) (cid:1009) (cid:853) (cid:1005) $81.3 (cid:3) (cid:1008) (cid:1011) (cid:1010) (cid:853) (cid:1005) $12.0 (cid:3) (cid:1006) (cid:1007) (cid:3) (cid:1005) (cid:1009) (cid:1011) (cid:853) (cid:1005) (cid:3) (cid:1005) $143.7 (cid:1012) (cid:1011) (cid:853) (cid:1005) (cid:3) (cid:1006) (cid:1005) $34.1 (cid:1010) (cid:853) (cid:1005) (cid:3) (cid:1011) (cid:1005) (cid:1011) (cid:853) (cid:1005) $210.8 (cid:1008) (cid:853) (cid:1005) $222.4 (cid:1008) (cid:853) (cid:1005) $275.4 (cid:3) (cid:1005) (cid:1008) (cid:1012) (cid:3) (cid:1005) (cid:1013) (cid:1011) (cid:3) (cid:1009) (cid:1009) (cid:1011) (cid:3) (cid:1013) (cid:1007) (cid:3) (cid:1012) (cid:1007) (cid:1005) (cid:1011) (cid:3) (cid:1007) (cid:1007) (cid:1011) Long-Term Debt Net Debt (cid:3) (cid:1009) (cid:1011) (cid:3) (cid:1011) (cid:3) (cid:1006) (cid:1010) (cid:1010) (cid:3) (cid:1007) (cid:1005) (cid:1010) (cid:3) (cid:1004) (cid:1006) (cid:1010) (cid:3) (cid:1006) (cid:1006) (cid:1010) (cid:1009) (cid:1007) (cid:1010) (cid:3) (cid:1012) (cid:1012) (cid:1009) (cid:3) (cid:1004) (cid:1008) (cid:1013) (cid:3) (cid:1012) (cid:1007) (cid:1011) (cid:3) (cid:1011) (cid:1010) (cid:1010) (cid:3) (cid:1010) (cid:1012) (cid:1008) (cid:3) (cid:1008) (cid:1012) (cid:1005) $33.1 (cid:853) (cid:1005) (cid:3) (cid:1010) (cid:1005) (cid:1004) (cid:853) (cid:3) (cid:1005) $21.8 (cid:1011) (cid:1010) (cid:1012) $52.2 (cid:3) (cid:1006) (cid:1012) $40.4 (cid:1013) $65.7 $45.1 (cid:3) (cid:1009) (cid:1008) (cid:1013) (cid:3) (cid:1008) (cid:1005) (cid:1004) (cid:3) (cid:1005) (cid:853) (cid:1010) (cid:1009) (cid:1012) (cid:3) (cid:1005) (cid:1006) (cid:1013) (cid:3) (cid:1012) (cid:1011) (cid:1012) (cid:3) (cid:1013) (cid:1013) (cid:1012) (cid:3) (cid:1010) (cid:1012) (cid:1008) (cid:3) (cid:400) (cid:455) (cid:258) (cid:24) (cid:336) (cid:374) (cid:349) (cid:410) (cid:258) (cid:396) (cid:286) (cid:393) (cid:75) (cid:3)(cid:1006)(cid:1004)(cid:1004)(cid:853)(cid:1004)(cid:1004)(cid:1004) (cid:3)(cid:1005)(cid:1012)(cid:1004)(cid:853)(cid:1004)(cid:1004)(cid:1004) (cid:3)(cid:1005)(cid:1010)(cid:1004)(cid:853)(cid:1004)(cid:1004)(cid:1004) (cid:3)(cid:1005)(cid:1008)(cid:1004)(cid:853)(cid:1004)(cid:1004)(cid:1004) (cid:3)(cid:1005)(cid:1006)(cid:1004)(cid:853)(cid:1004)(cid:1004)(cid:1004) (cid:3)(cid:1005)(cid:1004)(cid:1004)(cid:853)(cid:1004)(cid:1004)(cid:1004) (cid:3)(cid:1012)(cid:1004)(cid:853)(cid:1004)(cid:1004)(cid:1004) (cid:3)(cid:1010)(cid:1004)(cid:853)(cid:1004)(cid:1004)(cid:1004) (cid:3)(cid:1008)(cid:1004)(cid:853)(cid:1004)(cid:1004)(cid:1004) (cid:3)(cid:1006)(cid:1004)(cid:853)(cid:1004)(cid:1004)(cid:1004) (cid:3)(cid:882) (cid:44)(cid:349)(cid:400)(cid:410)(cid:381)(cid:396)(cid:349)(cid:272)(cid:258)(cid:367)(cid:3)(cid:4)(cid:448)(cid:286)(cid:396)(cid:258)(cid:336)(cid:286) (cid:400)(cid:349)(cid:374)(cid:272)(cid:286)(cid:3)(cid:1006)(cid:1004)(cid:1005)(cid:1010)(cid:856)(cid:3) Corporate Pro�ile – April 2017 (cid:374)(cid:258)(cid:410)(cid:437)(cid:396)(cid:258)(cid:367)(cid:3)(cid:336)(cid:258)(cid:400)(cid:3)(cid:393)(cid:396)(cid:381)(cid:282)(cid:437)(cid:272)(cid:410)(cid:349)(cid:381)(cid:374)(cid:856)(cid:3) • Market Pro�ile December 31, 2016 Shares outstanding (cid:44)(cid:349)(cid:400)(cid:410)(cid:381)(cid:396)(cid:349)(cid:272)(cid:258)(cid:367)(cid:3)(cid:104)(cid:856)(cid:94)(cid:856)(cid:3)(cid:90)(cid:349)(cid:336)(cid:3)(cid:18)(cid:381)(cid:437)(cid:374)(cid:410) 391.9 million Price Market Financial Information $0.195 $76.4 million ($ millions) 2016 2015 2014 (cid:1007)(cid:853)(cid:1004)(cid:1004)(cid:1004) (cid:3) (cid:1012) (cid:1006) (cid:1008) (cid:853) (cid:1006) (cid:1006)(cid:853)(cid:1009)(cid:1004)(cid:1004) (cid:3) (cid:1004) (cid:1012) (cid:1013) (cid:853) (cid:1005) (cid:1006)(cid:853)(cid:1004)(cid:1004)(cid:1004) (cid:1005)(cid:853)(cid:1009)(cid:1004)(cid:1004) (cid:1005)(cid:853)(cid:1004)(cid:1004)(cid:1004) (cid:1009)(cid:1004)(cid:1004) (cid:1004) 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 Source: GMP FirstEnergy, Baker Hughes, Nickle’s Data Central (cid:1005)(cid:1013) Source: GMP FirstEnergy – PSAC Fall 2019 Update: Oilfield Services Outlook Highlights of 2019 2019 started the year with the Government of Alberta helping our exploration and production (“E&P”) companies deal with the low price of crude oil as a result of the unprecedented widening differential of over US$50/bbl between West Texas Intermediate (“WTI”) and Western Canadian Select (“WCS”) in November 2018. Alberta mandated a production curtailment of 325,000 bbls/day and gradually reduced this production curtailment throughout 2019 to end the year at 125,000 bbls/day. Alberta has stated that this production th Page | 3 Share Price Returns - January 1, 2016 to April 1, 2019 (cid:286) (cid:1005) (cid:1006) (cid:1004) (cid:1006) (cid:286) (cid:1004) (cid:1006) (cid:1004) (cid:1006) (cid:286) (cid:1013) (cid:1005) (cid:1004) (cid:1006) (cid:1013) (cid:1012) (cid:1013) (cid:1005) (cid:1008) (cid:1013) (cid:1013) (cid:1005) (cid:1013) (cid:1004) (cid:1004) (cid:1006) (cid:1007) (cid:1011) (cid:1013) (cid:1005) (cid:1011) (cid:1005) (cid:1004) (cid:1006) (cid:1009) (cid:1005) (cid:1004) (cid:1006) (cid:1012) (cid:1005) (cid:1004) (cid:1006) (cid:1009) (cid:1010) (cid:1013) (cid:1005) (cid:1006) (cid:1011) (cid:1013) (cid:1005) (cid:1010) (cid:1010) (cid:1013) (cid:1005) (cid:1008) (cid:1011) (cid:1013) (cid:1005) (cid:1012) (cid:1010) (cid:1013) (cid:1005) (cid:1013) (cid:1010) (cid:1013) (cid:1005) (cid:1008) (cid:1010) (cid:1013) (cid:1005) (cid:1011) (cid:1010) (cid:1013) (cid:1005) (cid:1004) (cid:1013) (cid:1013) (cid:1005) (cid:1009) (cid:1011) (cid:1013) (cid:1005) (cid:1004) (cid:1011) (cid:1013) (cid:1005) (cid:1005) (cid:1011) (cid:1013) (cid:1005) (cid:1005) (cid:1013) (cid:1013) (cid:1005) (cid:1010) (cid:1011) (cid:1013) (cid:1005) (cid:1010) (cid:1004) (cid:1004) (cid:1006) (cid:1009) (cid:1004) (cid:1004) (cid:1006) (cid:1005) (cid:1005) (cid:1004) (cid:1006) (cid:1004) (cid:1012) (cid:1013) (cid:1005) (cid:1012) (cid:1004) (cid:1004) (cid:1006) (cid:1008) (cid:1005) (cid:1004) (cid:1006) (cid:1011) (cid:1013) (cid:1013) (cid:1005) (cid:1007) (cid:1004) (cid:1004) (cid:1006) (cid:1008) (cid:1004) (cid:1004) (cid:1006) (cid:1006) (cid:1005) (cid:1004) (cid:1006) (cid:1007) (cid:1005) (cid:1004) (cid:1006) (cid:1004) (cid:1005) (cid:1004) (cid:1006) (cid:1004) (cid:1004) (cid:1004) (cid:1006) (cid:1011) (cid:1004) (cid:1004) (cid:1006) (cid:1005) (cid:1004) (cid:1004) (cid:1006) (cid:1013) (cid:1011) (cid:1013) (cid:1005) (cid:1009) (cid:1012) (cid:1013) (cid:1005) (cid:1010) (cid:1013) (cid:1013) (cid:1005) (cid:1006) (cid:1004) (cid:1004) (cid:1006) (cid:1005) (cid:1012) (cid:1013) (cid:1005) (cid:1012) (cid:1013) (cid:1013) (cid:1005) (cid:1008) (cid:1012) (cid:1013) (cid:1005) (cid:1013) (cid:1013) (cid:1013) (cid:1005) (cid:1009) (cid:1013) (cid:1013) (cid:1005) (cid:1011) (cid:1011) (cid:1013) (cid:1005) (cid:1007) (cid:1012) (cid:1013) (cid:1005) (cid:1006) (cid:1012) (cid:1013) (cid:1005) (cid:1012) (cid:1012) (cid:1013) (cid:1005) (cid:1007) (cid:1013) (cid:1013) (cid:1005) (cid:1011) (cid:1012) (cid:1013) (cid:1005) (cid:1010) (cid:1012) (cid:1013) (cid:1005) (cid:1012) (cid:1011) (cid:1013) (cid:1005) (cid:1010) (cid:1005) (cid:1004) (cid:1006) (cid:1006) (cid:1013) (cid:1013) (cid:1005) curtailment is expected to last until the end of 2020 when it is expected that additional takeaway capacity is expected to come online with the completion of the Enbridge Line 3 Replacement Project. While the Alberta production curtailments helped our E&P customers obtain a reasonable crude oil price by reducing the WTI- WCS differential back to a more normalized range of US$10 to US$20/bbl for 2019, its negative effect was felt with lower Canadian drilling and well servicing activity throughout the year. To combat the decreased Canadian activity levels, CWC was successful in attracting several U.S. customers and in May 2019, moved two of its nine drilling rigs to serve the Texas, Wyoming and North Dakota drilling markets despite a significant decline in U.S. drilling activity as well. The move to the U.S. allowed CWC to attract higher margin business which helped CWC achieve better financial results in 2019 than it might otherwise have had. CWC’s revenue of $108.5 million (a decrease of $36.3 million or 25% compared to 2018) and Adjusted EBITDA of $12.2 million (a decrease of $6.3 million or 34% compared to 2018) resulted in a net loss of $1.7 million (which was the same as 2018). On September 27, 2019, CWC and its syndicated lenders completed an extension of its credit facilities and certain other amendments to provide financial security and flexibility to July 31, 2022. At the request of the Company, the credit facilities were reduced from $75 million to $60 million to reduce borrowing costs and standby charges. The amendments further provide the Company with access to another equity cure under the same terms and conditions and a reduction in the minimum liquidity from $10 to $5 million. Additionally, the amendments exclude the Mortgage Loan from the consolidated debt definition used in calculating the quarterly financial covenants. On April 10, 2019, the Company renewed its Normal Course Issuer Bid (“NCIB”) with an Automatic Securities Purchase Plan (“ASPP”) with Raymond James Ltd. During 2019, CWC purchased 4,532,000 common shares under the NCIB of which 4,402,500 common shares were cancelled and returned to treasury. These common shares represented 38% of the 11,930,386 shares traded on the TSX Venture Exchange in 2019, as the Company continued to add value for its remaining shareholders by reducing the number of common shares Outlook For 2020 outstanding and providing liquidity for those shareholders looking to sell their shares. Activity levels for the start of 2020 has been significantly stronger than 2019. However, the spread of the global pandemic of COVID-19 (the “coronavirus”) in February and March 2020 has resulted in a disruption to normal economic activity around the world, which may turn out to be the start of a global recession. On March 6, 2020, OPEC+ failed to agree on a continuation of the production quotas with Russia unwilling to participate in a cut to crude oil production of an additional 1.5 million bbls/day. As such, Saudi Arabia responded by removing all OPEC production quotas and increased their own supply of crude oil to the global market. This anticipated glut of crude oil supply resulted in an immediate price crash in crude oil to the current US$20 to US$30/bbl range. At these crude oil price levels, CWC believes both Canadian and U.S. drilling and well servicing activity will significantly decline for the remainder of 2020. Management is monitoring the COVID-19 situation closely and will take the necessary steps on a timely basis to protect its balance sheet. On March 17, 2020, CWC discontinued operations of its Coil Tubing division, thereby stopping the recent negative Adjusted EBITDA and losses of this division. CWC will consider options to monetize these assets once there is some stability in the oilfield services market so as to maximize its value. CWC will reduce it 2020 capital expenditure budget from $6.7 million to approximately $3.0 million. Management will also consider other cost cutting measures with the view of ensuring any cost reductions do not result in long-term damages to our business. Page | 4 Conclusion Indeed these are very challenging times for the Canadian energy sector, but CWC will persevere with the support of its debtholders and shareholders. In closing, I would like to express my sincere thanks to CWC’s employees for their truly hard work and dedication to continue making CWC one of the best performing contract drilling and well servicing companies in Canada and the U.S. To our customers, we cherish your ongoing business and relationship and will be there to advocate for you in creating a healthier 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, these are dark days, but as Confucius says, “Our greatest glory is not in never falling, but in rising every time we fall.” Sincerely and submitted on behalf of the Board of Directors, Duncan T. Au President & Chief Executive Officer March 20, 2020 Page | 5 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, 2020 and should be read in conjunction with audited consolidated financial statements for the year ended December 31, 2019. Additional information regarding CWC can be found in the Company’s latest Annual Information Form (“AIF”). The consolidated financial statements are prepared in accordance with IFRS as issued by the International Accounting Standards Board (“IASB”) applicable to the preparation of financial statements. All amounts are expressed in Canadian dollars unless otherwise noted. Additional information relating to CWC, is available on SEDAR at www.sedar.com. Financial Highlights $ thousands, except shares, per share amounts and margins 2019 2018 Change % 2019 2018 2017 Three months ended December 31, Year ended December 31, FINANCIAL RESULTS Revenue Contract Drilling Production Services Adjusted EBITDA (1) Adjusted EBITDA margin (%) (1) Net (loss) income Net (loss) income margin (%) (1) Capital expenditures Per share information: Weighted average number of shares outstanding – basic Weighted average number of shares outstanding - diluted Adjusted EBITDA (1) per share - basic and diluted Net (loss) income per share - basic and diluted $ $ 7,705 22,962 30,667 3,491 11% (854) (3%) 1,185 13,081 22,397 35,478 4,978 14% (157) (0%) (41%) 3% (14%) (30%) 444% (2%) 28,497 79,949 108,446 12,166 11% (1,700) (2%) 1,983 (40%) 5,349 38,223 106,539 144,762 18,489 13% (1,702) (1%) 11,753 35,222 76,993 112,215 16,063 14% 4,861 4% 44,532 510,443,613 518,513,776 511,106,531 520,576,582 399,008,915 510,443,613 518,513,776 511,106,531 520,576,582 403,359,537 0.01 $ 0.01 $ 0.02 $ 0.04 $ 0.04 (0.00) $ (0.00) $ (0.00) $ (0.00) $ 0.01 $ thousands, except ratios FINANCIAL POSITION AND LIQUIDITY Working capital (excluding debt) (1) Working capital (excluding debt) ratio (1) Total assets Total long-term debt (including current portion) Shareholders' equity (1) Please refer to the “Reconciliation of Non-IFRS Measures” section for further information. As at December 31, 2018 2017 2019 18,534 3.3:1 243,398 40,552 182,032 19,028 3.4:1 252,665 44,896 184,231 19,543 2.6:1 264,354 49,810 186,519 Page | 6 Working capital (excluding debt) for December 31, 2019 has decreased $0.5 million (2%) since December 31, 2018 driven by decreases in cash ($0.4 million (76%)), accounts receivable ($0.9 million (4%)), and prepaid expenses and deposits ($0.1 million (3%)) partially offset by a decrease in accounts payable of $0.9 million (11%). Long-term debt (including current portion) has decreased $4.3 million (10%) from December 31, 2018 driven by cash generated from operations which was used to pay down long-term debt. Shareholders’ equity has decreased since December 31, 2018 primarily due to the net loss for the year ended December 31, 2019 and the purchase and cancellation of common shares under the NCIB program. Highlights for the Three Months Ended December 31, 2019 • Average Q4 2019 crude oil pricing, as measured by WTI, of US$56.85/bbl was 1% higher than the Q3 2019 average price of US$56.40/bbl (Q4 2018: US$59.32/bbl). The price differential in Q4 2019 between Canadian heavy crude oil, as represented by WCS, and WTI widened to over US$20.00/bbl. The Government of Alberta announcements in Q3 2019 reducing the production curtailment to 125,000 bbls/day and extending the curtailment end date to December 31, 2020 while increasing the exemption limit from 10,000 to 20,000 bbls/day starting October 1, 2019, effectively reduced the number of Alberta exploration and production (“E&P”) companies affected by the production curtailment. The widening price differential between WTI and WCS is partially a result of this increased crude oil supply which saw an increase in Alberta crude oil storage levels in November 2019 nearing all-time highs last achieved in 2018. Natural gas prices, as measured by AECO, increased 141% from an average of $0.97/GJ in Q3 2019 to $2.34/GJ in Q4 2019 (Q4 2018 $1.53/GJ); a result of the Canadian Energy Regulator’s approval of TC Energy’s Temporary Service Protocol (“TSP”) application which caused the differential between Alberta gas prices and other North American natural gas prices, such as NYMEX, to narrow. • CWC’s Canadian drilling rig utilization in Q4 2019 of 36% (Q4 2018: 59%) exceeded the Canadian Association of Oilwell Drilling Contractors (“CAODC”) industry average of 23%. Canadian activity levels in Q4 2019 decreased 53% to 232 drilling rig operating days from seven Canadian drilling rigs (Q4 2018: 491 drilling rig operating days from nine Canadian drilling rigs) as E&P customers deferred their drilling programs into Q1 2020. U.S. drilling rig activity levels in Q4 2019 were 56 drilling rig operating days from two U.S. drilling rigs for a utilization of 31% (Q4 2018: nil) as the Company moved one drilling rig from Texas to Wyoming in November 2019 to start operations in late December 2019. U.S. Contract Drilling revenue of $2.6 million represented 34% of CWC’s total Contract Drilling revenue in Q4 2019 with the average revenue per operating day of US$45,461 from U.S. operations (which includes a one-time recovery of mobilization costs). CWC's service rig utilization in Q4 2019 of 61% (Q4 2018: 51%) was driven by 33,656 operating hours being 8% higher than the 31,232 operating hours in Q4 2018; a result of E&P customers choosing to do workovers to optimize production on their wells prior to the end of the year. • Revenue of $30.7 million, a decrease of $4.8 million (14%) compared to $35.5 million in Q4 2018. The decrease in Q4 2019 revenue is a direct result of lower utilizations in the Canadian drilling rig division partially offset by increased activity and higher day rates in the U.S. drilling rig division and increased activity in the Canadian service rig divisions. • Adjusted EBITDA(1) of $3.5 million, a decrease of $1.5 million (30%) compared to $5.0 million in Q4 2018, is a result of the decrease in revenue offset by lower costs associated with the reduced activity levels in the Canadian drilling rig division. CWC has achieved 26 consecutive quarters of positive Adjusted EBITDA(1) since Q2 2013. • Net loss of $0.9 million, an increase of $0.7 million compared to a net loss of $0.2 million in Q4 2018. The increase in net loss in Q4 2019 is partially due to a loss on disposal of equipment of $0.4 million in Q4 2019. • During Q4 2019, 1,453,500 common shares (Q4 2018: 7,828,000) were purchased under the Normal Course Issuer Bid (“NCIB”) and 1,342,000 common shares (Q4 2018: 7,828,000) were cancelled and returned to treasury. (1) Please refer to the “Reconciliation of Non-IFRS Measures” section for further information. Page | 7 Highlights for the Year Ended December 31, 2019 • CWC’s Canadian drilling rig utilization in 2019 of 30% (2018: 49%) exceeded the CAODC industry average of 22% (2018: 28%). CWC’s U.S. drilling rig utilization in 2019 was 60% (2018: n/a) after CWC started its U.S. drilling operations in mid- June 2019. CWC's service rig utilization in 2019 was 51% compared to 59% in 2018. Activity levels in both the Canadian drilling rig and service rig divisions dropped in 2019 as a result of CWC’s E&P customers reducing or delaying their drilling and well maintenance programs due to lower crude oil prices and the Government of Alberta mandated production curtailment program temporarily slowing down the need for newly drilled wells and workover and maintenance work on producing wells. • Revenue of $108.5 million, a decrease of $36.3 million (25%) compared to $144.8 million in 2018. The decrease is primarily a result of reduced activity levels in the Contract Drilling and Production Services segments due to the aforementioned Alberta production curtailments and lower crude oil prices. • Adjusted EBITDA(1) of $12.2 million, a decrease of $6.3 million (34%) compared to $18.5 million in 2018. The decrease in Adjusted EBITDA(1) is consistent with the reduced revenue from lower activity levels in both segments as a result of the aforementioned Alberta production curtailments and lower crude oil prices partially offset by significantly lower selling and administrative expenses as a result of lower bad debt expenses in 2019 compared to 2018. • Net loss of $1.7 million, unchanged from a net loss of $1.7 million in 2018. Net loss in 2019 is a result of the decreased Adjusted EBITDA(1) partially offset by a reduction in selling and administrative expenses and depreciation and amortization expenses, and deferred income tax recoveries as a result of a reduction in the Alberta provincial corporate tax rates from 12% to 8% by 2022. • On September 27, 2019, CWC and its syndicated lenders completed an extension of its credit facilities and certain other amendments to provide financial security and flexibility to July 31, 2022. At the request of the Company, the credit facilities were reduced from $75.0 million to $60.0 million to reduce borrowing costs and standby charges. The amendments further provide the Company access to another equity cure under the same terms and conditions and a reduction in the minimum liquidity from $10.0 million to $5.0 million. Additionally, the amendments exclude the Mortgage Loan from the consolidated debt definition used in calculating the quarterly financial covenants. The covenant for Consolidated Debt to Consolidated EBITDA ratio is as follows: For the Quarter Ended December 31, 2019 March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020 March 31, 2021 June 30, 2021 September 30, 2021 and thereafter Previously 4.00 : 1.00 4.00 : 1.00 4.00 : 1.00 n/a n/a n/a n/a n/a Currently 3.75 : 1.00 3.75 : 1.00 3.75 : 1.00 3.50 : 1.00 3.50 : 1.00 3.25 : 1.00 3.25 : 1.00 3.00 : 1.00 • On April 10, 2019, the Company renewed its NCIB with an Automatic Securities Purchase Plan (“ASPP”) with Raymond James Ltd., which expires on April 14, 2020. During 2019, the Company purchased 4,532,000 (2018: 11,421,000) common shares under its NCIB. 4,402,500 shares which were cancelled and returned to treasury (2018:11,421,000). The 4,532,000 common shares purchased under the NCIB represented 38% of the 11,930,386 shares traded on the TSX Venture Exchange (“TSXV”) in 2019 (2018: 47%). (1) 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 Canada and the United States 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 a U.S. office in Denver, Colorado and operational locations in Nisku, Grande Prairie, Slave Lake, Sylvan Lake, Drayton Valley, Lloydminster, Provost and Brooks, Alberta. The Company’s shares trade on the TSX Venture Exchange under the symbol “CWC”. Page | 8 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 Western Canadian Sedimentary Basin (“WCSB”), including the Montney, Cardium, Duvernay and other deep basin horizons. The Company has expanded its drilling rig services into select United States basins including the Eagle Ford, Denver-Julesburg (“DJ”) and Bakken. One 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. OPERATING HIGHLIGHTS Drilling Rigs – Canada Total drilling rigs, end of period Dec. 31, 2019 Sep. 30, 2019 Three months ended Jun. 30, 2019 Mar. 31, 2019 Dec. 31, 2018 Sep. 30, 2018 Jun. 30, 2018 Mar. 31, 2018 7 7 7 9 9 9 9 9 Revenue per operating day (1) Drilling rig operating days Drilling rig utilization % (2) CAODC industry average utilization % $22,161 232 36% 23% $20,685 130 19% 23% $22,750 72 11% 18% $23,895 382 47% 29% $26,642 491 59% 28% $21,263 500 60% 30% $21,227 133 16% 17% $23,485 498 61% 52% Wells drilled Average days per well Meters drilled (thousands) Meters drilled per day Average meters per well 18 12.9 75.6 326 4,199 12 10.9 39.6 304 3,300 10 8.0 26.7 373 2,966 39 9.8 119.8 314 3,070 34 14.4 127.8 261 3,708 41 12.2 155.2 310 3,786 11 12.1 41.0 309 3,724 45 11.1 161.7 325 3,593 Drilling Rigs - United States Total drilling rigs, end of period 2 2 2 Revenue per operating day (US$)(1) Drilling rig operating days Drilling rig utilization % (2) $45,461(3) 56 31% $36,097 155 84% $54,188 (3) 25 69% Wells drilled Average days per well Meters drilled (thousands) Meters drilled per day Average meters per well 5 11.3 14.5 258 2,942 16 9.7 50.7 327 978 1 16.6 2.9 177 2,939 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (1) 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 of field service. (2) Drilling rig utilization is calculated based on operating days (i.e. spud to rig release basis). (3) Revenue is enhanced by one-time recovery of mobilization costs. Canadian Contract Drilling revenue of $5.1 million for Q4 2019 (Q4 2018: $13.1 million) was achieved with a utilization rate of 36% (Q4 2018: 59%), compared to the CAODC industry average of 23%, as CWC’s E&P customers deferred their drilling programs into Q1 2020. CWC completed 232 Canadian drilling rig operating days with seven drilling rigs in Q4 2019, a 53% decrease from the 491 Canadian drilling rig operating days with nine drilling rigs in Q4 2018 as activity levels in Q4 2019 were reduced as a result of the Government of Alberta mandated production curtailment, which continued to temporarily slow down the need for newly drilled wells. The Q4 2019 average revenue per operating day of $22,161 was a decrease of 17% from $26,642 in Q4 2018 which included a one-time contract payout amount of $0.7 million. U.S. Contract Drilling revenue of $2.6 million for Q4 2019 (Q4 2018: nil) was achieved with a utilization rate of 31% (Q4 2018: nil) with 56 U.S. drilling rig operating days completed. Q4 2019 average revenue per operating day in the U.S. was US$45,461 and included $0.8 million in one-time recovery of mobilization costs. CWC plans to move two more drilling rigs into the United States by the end of 2020, subject to obtaining contracts with U.S. customers. Page | 9 Production Services With a fleet of 146 service rigs, CWC is the largest well servicing company in Canada as measured by active fleet and operating hours. CWC’s service rig fleet consists of 75 single, 57 double, and 14 slant rigs providing services which include completions, maintenance, workovers and well decommissioning with depth ratings from 1,500 to 5,000 metres. CWC has chosen to park 62 of its service rigs and focus its sales and operational efforts on the remaining 84 active service rigs due to the reduction in the number of service rigs currently required to service the WCSB, in part as a result of the Government of Alberta’s mandated crude oil production curtailments. 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. While the Company continues to service steam-assisted gravity drainage (“SAGD”) wells that are shallower in depth and more appropriate for coil tubing operations, it has recently shifted its sales and operational focus on decommissioning of abandoned wells. CWC’s fleet of 13 swabbing rigs 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. The Company has chosen to park eight of its swabbing rigs and focus its sales and operational efforts on the remaining five active swabbing rigs. In January 2020, CWC sold one of its inactive swabbing rigs for a current fleet of 12 swabbing rigs. OPERATING HIGHLIGHTS Service Rigs Active service rigs, end of period Inactive service rigs, end of period Total service rigs, end of period Operating hours Revenue per hour Revenue per hour excluding top volume customers Service rig utilization % (1) 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 % (1) Swabbing Rigs 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) Dec. 31, 2019 Sep. 30, 2019 Jun. 30, 2019 Three months ended Dec. 31, 2018 Mar. 31, 2019 Sep. 30, 2018 Jun. 30, 2018 Mar. 31, 2018 84 62 146 84 64 148 92 56 148 93 55 148 92 56 148 102 46 148 107 41 148 108 41 149 33,656 $664 29,528 $644 23,129 $646 30,875 $671 31,232 $663 42,316 $628 28,831 $642 53,979 $637 $682 62% $660 52% $687 39% $690 53% $696 51% $664 63% $677 41% $681 78% 7 2 9 448 $646 10% 5 8 13 1,141 $282 35% 8 1 9 318 $730 6% 5 8 13 865 $284 19% 8 1 9 301 $830 6% 8 5 13 661 $262 13% 8 1 9 1,730 $555 34% 8 5 13 1,655 $288 32% 8 1 9 1,647 $625 31% 8 5 13 2,313 $283 41% 8 1 9 898 $731 17% 9 4 13 881 $273 15% 8 1 9 1,212 $762 23% 8 5 13 958 $265 18% 8 1 9 3,007 $724 54% 8 5 13 2,258 $310 44% (1) Effective September 1, 2019, the CAODC changed its methodology on how it calculates service rig utilization. Service rig, coil tubing unit and swabbing rig utilization is now calculated based on 10 operating hours a day x number of days per quarter x 5 days a week divided by 7 days in a week to reflect maximum utilization available due to hours of service restrictions on rig crews. Utilization percentages have been retroactively updated to reflect this new CAODC methodology. 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 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 $23.0 million in Q4 2019, up $0.6 million (3%) compared to $22.4 million in Q4 2018. The increase in Q4 2019 activity levels for our production-oriented service rigs was a result of our E&P customers choosing to do workovers to optimize production on their wells prior to the end of the year. CWC’s Production Services segment was affected by a tight labour market for field employees during Q4 2019. Had rig crews been available, CWC believes it could activate 19 of the 62 inactive service rigs with minimal capital expenditure resulting in a 103 active service rig fleet. Page | 10 CWC's service rig utilization in Q4 2019 of 61% (Q4 2018: 51%) was driven by 33,656 operating hours being 8% higher than the 31,232 operating hours in Q4 2018. In addition, the Q4 2019 average revenue per hour of $664 remained relatively unchanged compared to the $663 per hour in Q4 2018. Q4 2019 average revenue per hour excluding the Company’s top volume customers of $682 was $14 per hour (2%) lower than Q4 2018 average revenue per hour of $696 as CWC was able to increase its hourly rate with its largest volume customers while being more competitive at slightly lower rates offered by our competitors for its smaller volume customers. CWC’s coil tubing utilization in Q4 2019 of 10% (Q4 2018: 31%) with 448 operating hours was 73% lower than the 1,647 operating hours in Q4 2018. Average revenue per hour for coil tubing services of $646 in Q4 2019 is $21 per hour higher (3%) than $625 in Q4 2018. The lower utilization reflects the continuing challenge of lower crude oil prices during the quarter, compared to a year ago, as well as the Government of Alberta mandated production curtailments temporarily slowing down the need for work on SAGD wells. CWC swabbing rig utilization in Q4 2019 of 35% (Q4 2018: 41%) with 1,141 operating hours was 51% lower than the 2,313 operating hours in Q4 2018 as CWC had three less swabbing rigs active during the quarter compared to the prior year, due to lower customer demand from continued low natural gas prices. Average revenue per hour for swabbing rigs of $282 in Q4 2019 is relatively unchanged from $283 in Q4 2018. Outlook Crude oil, as represented by WTI, averaged US$56.85/bbl in Q4 2019, an increase of 1% compared to Q3 2019 average price of US$56.40/bbl (Q4 2018: US$59.32/bbl). The price differential in Q4 2019 between Canadian heavy crude oil, as represented by WCS, and WTI widened to over US$20.00/bbl. The Government of Alberta announcements in Q3 2019 reducing the production curtailment to 125,000 bbls/day and extending the curtailment end date to December 31, 2020 while increasing the exemption limit from 10,000 to 20,000 bbls/day starting October 1, 2019, effectively reduced the number of Alberta E&P companies affected by the production curtailment. The widening price differential between WTI and WCS is partially a result of this increased crude oil supply which saw an increase in Alberta crude oil storage levels in November 2019 nearing all-time highs last achieved in 2018. As more pipeline space gets freed up on existing pipelines, crude-by-rail continues to grow and once construction of the Enbridge Line 3 Replacement Project is completed, the WTI – WCS differential should begin to narrow, thereby allowing increased activity level for oilfield services in the WCSB. Natural gas prices, as measured by AECO, increased 141% from an average of $0.97/GJ in Q3 2019 to $2.34/GJ in Q4 2019 (Q4 2018 $1.53/GJ); a result of the Canadian Energy Regulator’s approval of the TSP application which caused the differential between Alberta gas prices and other North American natural gas prices, such as NYMEX, to narrow. The TSP was enacted with the goal of providing TC Energy more flexibility in how they deal with curtailments on the Nova Gas Transmission System during times of maintenance. In Q1 2020, CWC is currently experiencing higher utilization than at any point in 2019 for both drilling rigs and service rigs which we believe will continue through to spring breakup. The Canadian Association of Petroleum Producers (“CAPP”) has recently stated that it expects $37 billion, about $2 billion (6%) more than 2019, will be invested in the Canadian upstream energy sector in 2020; the first increase since 2014 when investment levels were $81 billion. In addition, on January 30, 2020, the Petroleum Services Association of Canada (“PSAC”) increased its forecast for the number of wells to be drilled in Canada for 2020 by 300 wells (7%) to 4,800 wells. These industry forecasts suggest that CWC’s Canadian activity levels should be stronger throughout 2020 with its only significant constraint being able to find sufficient field labour. However, CWC cautions that the current global uncertainty with respect to the spread of the COVID-19 virus (the “coronavirus”) and its effect on the disruption of supply and demand for products and services to the broader global economy, including its effect on oil and natural gas produced by our E&P customers, may have a significant negative effect to oilfield service activity levels in Canada and the U.S. 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 business combinations in North America and globally. 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 Discussion of Financial Results Revenue, Direct Operating Expenses and Gross Margin $ thousands Revenue Contract Drilling Production Services Direct operating expenses Contract Drilling Production Services Gross margin (1) Contract Drilling Production Services Gross margin percentage (1) Contract Drilling Production Services Three months ended December 31, 2019 2018 Change $ Change % Year ended December 31, 2018 2019 Change $ Change % 7,705 22,962 30,667 6,213 16,590 22,803 1,492 6,372 7,864 19% 28% 26% 13,081 22,397 35,478 8,600 17,188 25,788 4,481 5,209 9,690 34% 23% 27% (5,376) 565 (4,811) (2,387) (598) (2,985) (2,989) 1,163 (1,826) n/a n/a n/a (41%) 3% (14%) (28%) (3%) (12%) (67%) 22% (19%) (15%) 5% (2%) 28,497 79,949 108,446 21,484 58,125 79,609 7,013 21,824 28,837 25% 27% 27% 38,223 106,539 144,762 27,691 80,293 107,984 10,532 26,246 36,778 28% 25% 25% (9,726) (26,590) (36,316) (6,207) (22,168) (28,375) (3,519) (4,422) (7,941) n/a n/a n/a (25%) (25%) (25%) (22%) (28%) (26%) (33%) (17%) (22%) (3%) 2% 1% (1) Please refer to the “Reconciliation of Non-IFRS Measures” section for further information. Q4 2019 revenue of $30.7 million, a decrease of $4.8 million (14%) compared to $35.5 million in Q4 2018. Revenue decreased $5.4 million (41%) in the Contract Drilling segment and increased $0.6 million (3%) in the Production Services segment in Q4 2019 compared to Q4 2018. For the year ended December 31, 2019, revenue of $108.4 million, a decrease of $36.3 million (25%) compared to $144.8 million in 2018. Revenue decreased $9.7 million (25%) in the Contract Drilling segment and $26.6 million (25%) in the Production Services segment for 2019 compared to 2018. The decrease in revenue for both Contract Drilling and Production Services is a result of lower crude oil prices during 2019, as compared to 2018, wet weather conditions, and the Government of Alberta mandated production curtailment temporarily slowing down the need for newly drilled wells and workover and maintenance work on producing wells. Revenue contribution from the Company’s top ten customers remained relatively constant at 56% for 2019 compared to 57% in 2018 with CWC’s top customer’s revenue contribution decreasing to 12% in 2019 from 18% in 2018, suggesting the loss in CWC’s service rig revenue in 2019 was primarily from CWC’s top volume customer who were the most affected by the Government of Alberta’s mandated production curtailment. For the year ended December 31, 2019, approximately 86% of revenue (2018: 78%) was from work on crude oil wells while 13% (2018: 22%) was from natural gas wells. Further, approximately 36% of revenue (2018: 35%) was related to drilling and completions work, 51% of revenue (2018: 53%) from maintenance and workovers on producing wells and 13% of revenue (2018: 12%) from well decommissioning. 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 percentages of 19% in Q4 2019 and 25% for the year ended December 31, 2019 are lower than the 34% in Q4 2018 and 28% for the year ended December 31, 2018 primarily as a result of U.S. operations where one of the drilling rigs did not generate revenue for 21 days during the fourth quarter of 2019 as it was being moved from Texas to Wyoming to start work for an E&P customer in late December 2019. Production Services’ gross margin of 28% in Q4 2019 is higher than the 23% in Q4 2018 as a result of a combination of increased activity levels and management’s focus and relentless controls over direct costs. For the year ended December 31, 2019, Production Services’ gross margin of 27% is higher than the 25% for the same period in 2018 primarily as a result of a drop in CWC’s top volume customer’s activity levels, which were most affected by the Government of Alberta’s mandated production curtailment, and corresponding decreases in volume discounts and revenue. Page | 12 Selling and Administrative Expenses $ thousands Selling and administrative expenses Three months ended December 31, 2019 2018 Change $ Change % Year ended December 31, 2018 2019 Change $ Change % 4,373 4,713 (340) (7%) 16,671 18,289 (1,618) (9%) Selling and administrative expenses were $4.4 million in Q4 2019, a decrease of $0.3 million (7%) compared to $4.7 million in Q4 2018. Selling and administrative expenses were $16.7 million for the year ended December 31, 2019, a decrease of $1.6 million (9%) compared to $18.3 million in 2018. The decrease in selling and administrative expenses for the year ended December 31, 2019 compared to 2018 is primarily due to a proactive focus on reducing personnel and facility expenses while ensuring staffing levels are optimized for the Company based on current economic conditions. Severance costs totaling $0.4 million were paid in 2019 (2018: $0.3 million) and a bonus accrual of $0.6 million is included in 2019 (2018: $1.0 million). Adjusted EBITDA(1) $ thousands Adjusted EBITDA(1) Contract Drilling Production Services Corporate Adjusted EBITDA margin (%) (1) Three months ended December 31, 2019 2018 Change $ Change % Year ended December 31, 2018 2019 Change $ Change % 1,074 3,892 (1,475) 3,491 11% 4,136 2,621 (1,779) 4,978 14% (3,062) 1,271 304 (1,487) n/a (74%) 48% (17%) (30%) (3%) 5,454 11,962 (5,250) 12,166 11% 9,232 15,550 (6,293) 18,489 13% (3,778) (3,588) 1,043 (6,323) n/a (41%) (23%) (17%) (34%) (2%) (1) Please refer to the “Reconciliation of Non-IFRS Measures” section for further information. Management uses Adjusted EBITDA(1) as a measure of the cash flow generated by the Company. Positive Adjusted EBITDA(1) 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(1) was $3.5 million for Q4 2019, a decrease of $1.5 million (30%) compared to $5.0 million in Q4 2018. For the year ended December 31, 2019, Adjusted EBITDA(1) was $12.2 million, a decrease of $6.3 million (34%) compared to $18.5 million for 2018. The decrease in Adjusted EBITDA(1) is a result of reduced activity levels for both Contract Drilling and Production Services due to lower crude oil prices in 2019, compared to 2018, a prolonged spring breakup and wet weather conditions and the Government of Alberta mandated production curtailment temporarily slowing down the need for newly drilled wells and workover and maintenance work on producing wells. Stock Based Compensation $ thousands Stock based compensation Three months ended December 31, 2019 2018 329 339 Change $ (10) Change % (3%) Year ended December 31, 2018 2019 921 1,102 Change $ (181) Change % (16%) Stock based compensation is primarily a function of outstanding stock options and restricted share units (“RSUs”) being expensed over their vesting periods. Stock based compensation was $0.3 million in Q4 2019, a decrease of $0.01 million (3%) compared to $0.3 million in Q4 2018. For the year ended December 31, 2019 stock based compensation was $0.9 million, a decrease of $0.2 million (16%) compared to $1.1 million for 2018. Page | 13 Finance Costs $ thousands Finance costs Three months ended December 31, 2019 2018 516 857 Change $ (341) Change % (40%) Year ended December 31, 2018 2019 2,431 2,756 Change $ (325) Change % (12%) Finance costs were $0.5 million in Q4 2019, a decrease of $0.3 million (40%) compared to $0.9 million in Q4 2018. For the year ended December 31, 2019, finance costs were $2.4 million, a decrease of $0.4 million (12%) compared to $2.8 million for 2018. Finance costs decreased in 2019 due to lower long-term debt levels compared to 2018. Depreciation and Amortization $ thousands Depreciation and amortization Contract Drilling Production Services Corporate Three months ended December 31, 2019 2018 Change $ Change % Year ended December 31, 2018 2019 Change $ Change % 1,104 1,806 273 3,183 1,840 1,794 219 3,853 (736) 12 54 (670) (40%) 1% 25% (17%) 4,566 7,545 1,057 13,168 6,034 9,523 884 16,441 (1,468) (1,978) 173 (3,273) (24%) (21%) 20% (20%) Effective April 1, 2019, the Company changed the method for depreciating its drilling and service rigs from a unit of production to a straight line method. In addition, the Company changed certain estimates relating to useful lives and salvage values. The change in depreciation methodology reflects the current and future economic environment within the industry and the Company believes that straight line depreciation better reflects the pattern in which the assets’ future economic benefits will be consumed by the Company, primarily as a result of idle or underutilized assets being depreciated more quickly in periods of low activity. These adjustments were applied prospectively. Coil tubing units, capitalized recertifications, and other production equipment have been and will continue to be depreciated on a straight line basis. The decrease in Contract Drilling and Production Services depreciation for Q4 2019 compared to Q4 2018 is a result of the switch to straight line depreciation compared to the previously used unit of production method which varied greatly with activity levels. Loss (Gain) on Disposal of Equipment $ thousands Loss (gain) on disposal of equipment (1) Not meaningful. Three months ended December 31, 2019 2018 Change $ Change % Year ended December 31, 2018 2019 Change $ Change % 368 (54) 422 n/m(1) 290 42 248 n/m Management continually monitors the asset mix and equipment needs of the Company and divests assets as needed to optimize operations. For the year ended December 31, 2019, the loss on disposal of equipment was primarily the result of the disposal of two inactive service rigs as well as disposals of ancillary equipment and vehicles with proceeds on sale of $0.3 million (2018: $2.1 million). Deferred Income Taxes (Recovery) Expense $ thousands Net loss before income taxes Deferred income tax (recovery) expense Deferred income tax (recovery) expense as a % of net loss before income taxes Expected statutory income tax rate (1) Not meaningful. Three months ended Year ended December 31, December 31, 2019 2018 (905) (51) 6% 26.5% (17) 140 n/m(1) 27% 2019 (4,644) (2,944) 63% 26.5% 2018 (1,852) (150) 8% 27% Income taxes are a function of taxable income and are calculated differently than accounting net income. Differences between accounting net income and taxable income include such things as gains or losses on disposal of fixed assets, stock based compensation, differences between income tax estimates and actual tax filings, and other differences. Page | 14 The deferred income tax recovery in 2019 of $2.9 million (2018: $0.2 million) is a result of the reduction in the Alberta provincial corporate tax rates from 12% to 8% by 2022. The Company has substantial tax pools and non-capital losses available to reduce future taxable income in Canada such that the Company does not expect to pay any Canadian cash taxes for the next several years. Net Loss and Comprehensive Loss $ thousands Net loss Unrealized loss on translation of foreign operations Comprehensive loss (1) Not meaningful. Three months ended December 31, 2019 2018 (854) (157) Change $ 697 Change % 444% Year ended December 31, 2018 (1,702) 2019 (1,700) (915) (1,769) - (157) 915 1,612 n/m(1) 1027% (730) (2,430) - (1,702) Change $ (2) 730 728 Change % (0%) n/m(1) 43% Net loss was $0.9 million in Q4 2019, an increase of $0.7 million compared to a net loss of $0.2 million in Q4 2018. Comprehensive loss was $1.8 million in Q4 2019, an increase of $1.6 million compared to a comprehensive loss of $0.2 million in Q4 2018. The increase in comprehensive loss was partially due to an unrealized loss on translation of foreign currency from the Company’s U.S. operations. For the year ended December 31, 2019, net loss of $1.7 million, unchanged from a net loss of $1.7 million in 2018. Comprehensive loss for the year ended December 31, 2019 was $2.4 million, an increase of $0.7 million (40%) compared to $1.7 million in 2018. Liquidity and Capital Resources Source of Funds The Company’s liquidity needs in the short 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. During the year ended December 31, 2019, the Company’s operating cash flow of $12.2 million and $0.3 million proceeds on disposal of equipment were used to fund a $4.4 million reduction in long-term debt, $4.3 million of capital expenditures, $3.4 million of interest on long-term debt and finance lease payments and $0.7 million in acquisitions of shares under the NCIB. At December 31, 2019 the Company had working capital (excluding debt) of $18.6 million consistent with the $19.0 million at December 31, 2018. (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. On September 27, 2019, CWC and its syndicated lenders completed an extension of its credit facilities (the “Bank Loan”) and certain other amendments to provide financial security and flexibility to July 31, 2022. At the request of the Company, the credit facilities were reduced from $75.0 million to $60.0 million to reduce borrowing costs and standby charges. Additionally, the amendments exclude the Mortgage Loan from the consolidated debt definition used in calculating the quarterly financial covenants. The covenant for Consolidated Debt to Consolidated EBITDA ratio is as follows: For the Quarter Ended December 31, 2019 March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020 March 31, 2021 June 30, 2021 September 30, 2021 and thereafter Previously 4.00 : 1.00 4.00 : 1.00 4.00 : 1.00 n/a n/a n/a n/a n/a Currently 3.75 : 1.00 3.75 : 1.00 3.75 : 1.00 3.50 : 1.00 3.50 : 1.00 3.25 : 1.00 3.25 : 1.00 3.00 : 1.00 The Bank Loan is secured by a general security agreement and a first charge security interest covering all of the assets of the Company (other than real estate assets related to the Mortgage Loan). 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, 2019. As of December 31, 2019, the applicable rates under the Bank Loan are: bank prime rate plus 1.50%, banker’s acceptances rate plus a stamping fee of 2.50%, and standby fee rate of 0.57%. Page | 1 5 On June 28, 2018, the Company entered into a five year credit facility (the “Mortgage Loan”) originally in the principal amount of $12.8 million. (December 31, 2019: $11.9 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 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. 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, 2019 the mark-to-market value of the interest rate swap of $0.2 million is included within accounts payable and accrued liabilities on the Consolidated Statements of Financial Position (December 31, 2018: $0.2 million). Capital Requirements On December 12, 2019, the Company announced its capital expenditure budget for 2020 of $6.7 million, $6.0 million of which is maintenance and infrastructure capital related to recertifications, additions and upgrades to field equipment for the drilling rig and service rig divisions as well as information technology infrastructure, with the remaining $0.7 million being growth capital to upgrade one of the drilling rigs. The increase of $1.4 million compared to the 2019 capital expenditure of $5.3 million is a result of the Company’s more optimistic view of the 2020 economy and operating environment than in the prior year. CWC intends to continue to finance its 2020 capital expenditure budget from operating cash flows. In 2019, the Company’s capital expenditure is detailed in the section below titled “Capital Expenditure”. 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: Common shares Stock options Restricted share units February 28, 2020 511,287,849 20,666,667 6,768,154 December 31, 2019 510,831,849 20,666,667 7,224,154 December 31, 2018 512,509,291 24,351,333 5,910,001 During the year ended December 31, 2019, no stock options were exercised, 2,900,000 expired, 1,051,666 were forfeited and 267,000 were granted. In addition, 2,725,058 RSUs were exercised, 100,000 expired, 254,334 were forfeited and 4,393,545 were granted. On April 15, 2019, the Company replaced its expired NCIB with a new NCIB which now expires on April 14, 2020. Under the new NCIB the Company may purchase, from time to time as it considers advisable, up to 25,535,115 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. During the year ended December 31, 2019, 4,532,000 common shares were purchased under the NCIB and 4,402,500 common shares were cancelled and returned to treasury. Page | 1 6 Capital Expenditures $ thousands Capital expenditures Contract drilling Production services Other equipment Growth capital Maintenance and infrastructure capital Total capital expenditures (1) Not meaningful. Three months ended December 31, 2019 2018 Change $ Change % Year ended December 31, 2018 2019 Change $ Change % 24 1,156 5 1,185 414 1,569 - 1,983 (390) (413) 5 (798) (94%) (26%) n/m(1) (40%) 1,477 3,616 256 5,349 7,116 4,609 28 11,753 (5,639) (993) 228 (6,404) (79%) (22%) 814% (54%) - - - n/m(1) 386 5,859 (5,473) (93%) 1,185 1,185 1,983 1,983 (798) (798) (40%) (40%) 4,963 5,349 5,894 11,753 (931) (6,404) (16%) (54%) Capital expenditures of $1.2 million in Q4 2019, a decrease of $0.8 million (40%) compared to $2.0 million in Q4 2018. Capital expenditures were $5.3 million for the year ended December 31, 2019, a decrease of $6.4 million (54%) compared to $11.8 million in 2018. The Company met its 2019 capital expenditure budget of $5.4 million which was announced on January 16, 2019. The 2020 capital expenditure budget of $6.7 million was approved by the Board of Directors on December 12, 2019 and is comprised of $6.0 million of maintenance and infrastructure capital related to recertifications, additions and upgrades to field equipment for the drilling rig and service rig divisions as well as information technology infrastructure, and $0.7 million related to growth capital to upgrade one of the drilling rigs. 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, 2022. The Company is committed to monthly payments of interest and bank charges until July 31, 2022. 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, 2018. Management believes that there will be sufficient cash flows generated from operations to service the interest on the debt and finance the required maintenance capital of the Company in 2020. Summary and Analysis of Quarterly Data $ thousands, except per share amounts Three months ended 2019 2018 Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31 Revenue 30,667 27,775 18,745 31,259 35,478 38,113 22,245 48,925 Adjusted EBITDA(1) 3,491 3,868 113 4,694 4,978 6,002 31 7,478 Net (loss) income (854) (234) (565) (47) (157) 326 (3,067) 1,196 Net (loss) income per share: basic and diluted (0.00) (0.00) (0.00) (0.00) (0.00) 0.01 (0.01) 0.00 Total assets Total long-term debt Shareholders' equity 243,398 40,552 182,032 243,647 41,549 183,621 240,603 36,618 183,526 250,358 43,296 184,041 252,665 44,896 184,231 257,675 46,394 185,195 250,038 36,803 184,834 268,479 51,377 187,829 (1) Please refer to the “Reconciliation of Non-IFRS Measures” section for further information. The table above summarizes CWC’s quarterly results for the previous eight financial quarters. CWC’s operations are carried out in western Canada and the United States. 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 in Canada. 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 Page | 1 7 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 hourly 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: • Q4 2019 saw the WTI-WCS differential widen to over US$20.00/bbl, compared to a historical normal range of US$10- $15/bbl. Despite this widening differential, CWC saw increased activity in its service rig division with 33,656 hours compared to the 29,528 hours in Q3 2019. Drilling rig operating days were impacted by the movement of one drilling rig from Texas to Wyoming which resulted in approximately 21 days of lost revenue. During Q4 2019, 1,453,500 common shares were purchased under the NCIB and 1,342,000 common shares were cancelled and returned to treasury; • Q3 2019 saw the first full quarter of drilling operations in the United States. In addition, the Company extended its credit facilities to July 31, 2022 and reduced the credit facilities from $75 million to $60 million, which now includes a separate U.S. operating facility. During Q3 2019, 405,000 common shares were purchased under the NCIB and 524,500 common shares were cancelled and returned to treasury; • Q2 2019 saw CWC move two drilling rigs from Canada into the United States which commenced operations in mid-June 2019. Wet weather conditions during the quarter significantly impacted activity levels in both the Canadian Contract Drilling and Production Services segments. During Q2 2019, 623,000 common shares were purchased under the NCIB and a total of 744,000 common shares were cancelled and returned to treasury; • Q1 2019 saw a continuation of reduced activity levels for both the drilling rigs and CWC’s production-oriented service rigs as a direct result of lower WTI prices during the quarter and the Government of Alberta mandated 325,000 bbls/day production curtailments taking effect in January 2019. During Q1 2019, 2,050,500 common shares were purchased under the NCIB and a total of 1,792,000 common shares were cancelled and returned to treasury; • Q4 2018 saw the price differential between Canadian heavy crude oil, as represented by WCS, and WTI widen 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; • 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. 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. Page | 1 8 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. Effective April 1, 2019 the Company changed the method for depreciating its drilling and service rigs from a unit of production method to a straight-line method. In addition, the Company changed certain estimates relating to useful lives and salvage values. The change in depreciation methodology reflects the current and future economic environment within the industry and the Company believes that straight line deprecation better reflects the pattern in which the assets’ future economic benefits will be consumed by the Company, primarily as a result of idle or underutilized assets being depreciated more quickly in periods of low activity. 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: Determination of cash generating units For the purpose of assessing impairment of tangible and intangible assets, assets are grouped at the lowest level for which there are separately identifiable cash flows (cash-generating units or “CGU’s”). The grouping of assets into CGU’s requires management exercise significant judgment. Impairment of tangible and intangible assets Tangible and intangible assets are reviewed annually with respect to their useful lives, or more frequently, if events or changes in circumstances indicate that the assets might be impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Recoverable amount is the higher of fair value less costs to 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. Page | 1 9 Accounting Policies Adopted in 2019 IFRS 16 The Company adopted IFRS 16 on January 1, 2019 using the modified retrospective approach. The modified retrospective approach does not require restatement of prior period financial information as it recognizes the cumulative effect as an adjustment to opening retained earnings and applies the standard prospectively. Accordingly, comparative information in the Company’s financial statements are not restated. On adoption, lease liabilities were measured at the present value of the remaining lease payments discounted using the Company’s incremental borrowing rate on January 1, 2019. ROU assets were measured at an amount equal to the lease liability. For leases previously classified as operating leases, the Company applied the exemption not to recognize ROU assets and liabilities for leases with a lease term of less than 12 months, excluded initial direct costs from measuring the ROU asset at the date of initial application, and applied a single discount rate to a portfolio of leases with similar characteristics. For leases that were previously classified as finance leases under IAS 17, the carrying amount of the ROU asset and lease liability remain unchanged upon transition and were determined at the carrying amount immediately before the adoption date. The recognition of the present value of minimum lease payments resulted in an additional $645,000 of ROU assets and associated lease liabilities. The Company has recognized lease liabilities in relation to lease arrangements previously disclosed as operating lease commitments under IAS 17 that meet the criteria of a lease under IFRS 16. Upon recognition, the Company’s weighted average incremental borrowing rate used in measuring lease liabilities was 6%. The nature of the Company’s leasing activities includes vehicles and office space. Related Party Transactions As at December 31, 2019, of the total outstanding shares of the Company, 79.6% 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 2019, the Company had revenue totaling $1.4 million (2018: $1.6 million) and accounts receivable as at December 31, 2019 of $0.1 million (December 31, 2018: $0.2 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, 2019 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 of the Company as of the date and for the periods presented in the annual filings. Page | 20 Risks and Uncertainties Certain activities of the Company are affected by factors that are beyond its control or influence. Additional risks and uncertainties that management may be unaware of 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 and the Unites States. 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 relevant to CWC’s business. All of these risk factors could negatively impact CWC’s revenue, margins and cash flow. Price Competition and Cyclical Nature of the Oilfield Services Business The drilling rig, service rig, swabbing rig and coil tubing businesses are highly competitive with numerous industry participants. Management believes pricing and rig availability are the primary factors considered by CWC's potential customers in determining which drilling rig, service rig, swabbing rig or coil tubing contractor to select. Management believes other factors are also important, including: the capabilities and condition of drilling rigs, service rigs, swabbing rigs or coil tubing units; the quality of service and experience of crews; the safety record of the contractor and the particular drilling rig, service rig, swabbing rig or coil tubing unit; the offering of ancillary services; the ability to provide equipment adaptable to, and personnel familiar with, new technologies; the mobility and efficiency of the drilling rigs, service rigs, swabbing rigs or coil tubing units; and • • • • • • • marketing relationships. 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 and the United States. 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 oil and gas exploration and production industry in Canada and the United States 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 oil and Page | 21 gas exploration and production industry in Canada and the United States is volatile. The marketability of any oil and natural gas acquired or discovered by CWC's customers will be affected by numerous factors beyond the control of such customers. These factors include market fluctuations, the price of crude oil, the price of natural gas, the supply and demand for oil and natural gas, the proximity and capacity of oil and natural gas pipelines and processing equipment, and government regulations, including regulations relating to prices, taxes, royalties, land tenure, allowable production, the import and export of oil and natural gas, and environmental protection. The effect of these factors cannot be accurately predicted. No assurances can be given that current levels of oil and gas exploration and production activities will improve, deteriorate further, or continue or that demand for the Company's services will continue to reflect the level of activity in the industry generally. Industry conditions will continue to be influenced by numerous factors over which the Company will have no control. Prices for oil and gas are expected to continue to be volatile and to affect the demand for and pricing of the Company's products and services. Merger and Acquisition Activity Merger and acquisition activity in the oil and gas exploration and production sector may impact demand for CWC's services as customers focus on reorganizing their business prior to committing funds to exploration and development projects. Further, in any merger or acquisition transaction the resulting or acquired company may have preferred supplier relationships with oilfield service providers other than CWC. Oilfield Services Industry Risks There are many risks inherent in the oilfield services industry, which even a combination of experience, knowledge and careful evaluation may not be able to overcome. The Company's operations are subject to hazards inherent in the oilfield service industry, such as explosions, fires and spills that can cause personal injury or loss of life, damage to or destruction of property, equipment and the environment and suspension of operations. In addition, claims for loss of oil and gas production, damage to formations, damage to facilities and business interruptions can occur. While the Company maintains insurance coverage that it believes to be adequate and customary in the industry, there can be no assurances that insurance proceeds will be available or sufficient or that CWC will be able to maintain adequate insurance in the future at rates considered reasonable. The single occurrence of a significant uninsured claim or a claim in excess of the insurance coverage limits maintained by the Company could have a material adverse effect on the Company's business, results of operation and prospects. Hazards such as unusual or unexpected geological formations, pressures, blow-outs, fires or other conditions may be encountered in drilling or servicing wells. CWC will have the benefit of insurance maintained by it; however, CWC may become liable for damages arising from pollution, blowouts or other hazards against which it cannot insure or against which it may elect not to insure because of high premium costs or other reasons. Reputational Risk Associated with the Company's Operations The Company's business, operations or financial condition may be negatively impacted as a result of any negative public opinion towards the Company or as a result of any negative sentiment toward, or in respect of, the Company'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 Company 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 Company'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 Company has no control. Similarly, the Company's reputation could be impacted by negative publicity related to loss of life, injury or damage to property and environmental damage caused by the Company's operations. In addition, if the Company develops a reputation of having an unsafe work site, it may impact the ability of the Company 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 Company'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 Company's reputation. Damage to the Company's reputation could result in negative investor sentiment towards the Company, which may result in limiting the Company's access to capital, increasing the cost of capital, and decreasing the price and liquidity of the Company'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 Page | 22 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 Company. Failing to implement the policies and practices, as requested by institutional investors, may result in such investors reducing their investment in the Company, or not investing in the Company at all. Any reduction in the investor base interested or willing to invest in the oil and natural gas industry and more specifically, the Company, may result in limiting the Company's access to capital, increasing the cost of capital, and decreasing the price and liquidity of the Company's securities even if the Company'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 Company'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. 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 Company 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 Company 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. Page | 23 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 and the United States. 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 CWC's future performance and development will depend, to a significant extent, on the efforts and abilities of its executive officers and key management personnel, and on the ability to attract and retain qualified field staff. The loss of the services of one or more of its management team could harm the Company. Also CWC's success largely depends on the Company's continuing ability to attract, develop and retain skilled employees in all areas of its business. The ability of the Company to expand its services is dependent upon its ability to attract additional qualified employees. The ability to secure the services of additional personnel is constrained in times of strong industry activity. Climate Change Climate change policy is evolving at regional, national and international levels, and political and economic events may significantly affect the scope and timing of climate change measures that are ultimately put in place. As a signatory to the United Nations Framework Convention on Climate Change 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 went into effect on April 1, 2019 and affects provinces which have not implemented their own carbon taxes, cap-and-trade systems or other plans for carbon pricing. The federal carbon levy is currently $20 per tonne and will rise $10 a year on April 1 of each year until it hits $50 a tonne in 2022. 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 Company'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, ENvironnement 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 July, 2019, the Superior Court of Quesbec refused to grant the authorization to institute the class action. 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 Company'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 Page | 24 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 Company's profitability. Non-Governmental Organizations and Eco-Terrorism Risks The business activities conducted by the Company may, at times, be subject to public opposition. Such public opposition could expose the Company 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 (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 Company 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 Company to incur significant and unanticipated capital and operating expenditures. In addition, the Company's oilfield services equipment could be the subject of a terrorist attack. If any of the Company's equipment are the subject of a terrorist attack it may have a material adverse effect on the Company's business, financial condition, results of operations and prospects. The Company 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 79.6% 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 Page | 25 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. Page | 2 6 Capital and Financial Markets As future capital expenditures and potential acquisitions will need to be financed out of cash generated from operations, through debt or, if available, equity offerings, the Company's ability to access new capital is dependent on, among other factors, the overall state of capital markets generally, and the appetite for investments in the energy industry and the Company's securities specifically. All of these factors could have a negative effect on CWC's ability to obtain new capital on acceptable terms, or at all, and this could have a material adverse effect on operations and share price. Environmental Protection CWC, is subject to various environmental laws and regulations enacted in most jurisdictions in which the Company operates, which primarily govern the manufacture, processing, importation, transportation, handling and disposal of certain materials used in the Company's operations. CWC believes that all CWC's business lines are currently in compliance with such laws and regulations. CWC's customers are subject to similar laws and regulations, as well as limits on emissions into the air and discharges into surface and sub-surface waters. While regulatory developments that may follow in subsequent years could have the effect of reducing industry activity, CWC cannot predict the nature of the restrictions that may be imposed. CWC may be required to increase operating expenses or capital expenditures in order to comply with any new restrictions or regulations. 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 Page | 2 7 tax position. As a consequence, CWC is unable to predict with certainty the effect of the foregoing on CWC's effective tax rate and earnings. CWC regularly reviews the adequacy of its tax provisions and believes that it has adequately provided for those matters. Should the ultimate outcomes materially differ from the provisions, CWC's effective tax rate and earnings may be affected positively or negatively in the period in which the matters are resolved. CWC intends to mitigate this risk through ensuring staff is well trained and supervised and that tax filing positions are carefully scrutinized by management and external consultants, as appropriate. There can be no assurance that income tax laws or the interpretation thereof in any of the jurisdictions in which CWC operates will not be changed or interpreted or administered in a manner which adversely affects CWC and its shareholders. In addition, there is no assurance that the Canada Revenue Agency, or a provincial or foreign tax agency (collectively the "Tax Agencies") 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 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 and Regulatory Proceedings The Company is involved in legal and regulatory proceedings from time to time in the ordinary course of business. No assurance can be given as to the final outcome of any legal or regulatory 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 Company's operations, the Company may become involved in, named as a party to, or be the subject of, various legal proceedings in which it is alleged that the Company has infringed the intellectual property rights of others or which the Company initiates against others it believes are infringing upon its intellectual property rights. The Company'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 Company's favour. In the event of an adverse outcome as a defendant in any such litigation, the Company 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 Company 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 Company's business and financial results. Page | 2 8 Breach of Confidentiality While discussing potential business relationships or other transactions with third parties, the Company 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 Company at competitive risk and may cause significant damage to its business. The harm to the Company'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 Company 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 Company's systems and obtain confidential information. The Company 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 Company 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 | 2 9 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, 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 (i.e. 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. Accordingly, readers should not place undue reliance on the forward-looking statements. Readers are cautioned that the foregoing list of factors is not exhaustive. Additional information on these and other factors that could affect the Company’s financial results are included in reports on file with applicable securities regulatory authorities and may be accessed through SEDAR at www.sedar.com. The forward-looking information and statements contained in this MD&A are made as of the date hereof and the Company undertakes no obligation to update publicly or revise any forward-looking information or statements, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws. Any forward-looking statements made previously may be inaccurate now. Page | 30 Reconciliation of Non-IFRS Measures $ thousands, except shares, per share amounts and margins Three months ended December 31, 2019 2018 2019 Year ended December 31, 2018 2017 NON-IFRS MEASURES Adjusted EBITDA: Net (loss) income Add: Depreciation Finance costs Transaction costs Income tax expense Stock based compensation Gain on acquisition Loss (gain) on sale of equipment Adjusted EBITDA(1) Adjusted EBITDA per share – basic and diluted (1) Adjusted EBITDA margin (Adjusted EBITDA/Revenue)(1) Weighted average number of shares outstanding - basic Weighted average number of shares outstanding - diluted Gross margin: Revenue Less: Direct operating expenses Gross margin (2) Gross margin percentage (2) $ thousands Working capital (excluding debt): Current assets Less: Current liabilities Add: Current portion of long term debt Working capital (excluding debt) (3) Working capital (excluding debt) ratio(3) Net debt: Long term debt Less: Current assets Add: Current liabilities Net debt (4) (854) (157) (1,700) (1,702) 4,861 3,183 516 - (51) 329 - 368 3,491 $ 0.01 11% 3,853 857 - 140 339 - (54) 4,978 $ 0.01 14% 17,103 2,054 1,549 (1,285) 869 (9,128) 40 16,063 $ 0.04 14% 510,443,613 518,513,776 511,106,531 520,576,582 399,008,915 510,443,613 518,513,776 511,106,531 520,576,582 403,359,537 13,168 2,431 - (2,944) 921 - 290 12,166 $ 0.02 11% 16,441 2,756 - (150) 1,102 - 42 18,489 $ 0.04 13% 30,667 22,803 7,864 26% 35,478 25,788 9,690 27% 108,446 79,609 28,837 27% 144,762 107,984 36,778 25% 112,215 82,361 29,854 27% December 31, 2019 December 31, 2018 December 31, 2017 26,642 (9,249) 1,141 18,534 3.3:1 39,411 (26,642) 9,249 22,018 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 (1) 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, 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. (2) 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 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. Page | 31 (3) 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. (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 | 32 CWC ENERGY SERVICES CORP. Consolidated Financial Statements For the years ended December 31, 2019 and 2018 Page | 33 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 statements of financial position as at December 31, 2019 and 2018, and the consolidated statements of comprehensive loss, consolidated statements of changes in equity and consolidated statements of cash flows for the years 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, 2019 and 2018, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards (“IFRS”). 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: • Management’s Discussion and Analysis • 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. Page | 34 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. Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. • 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. • Page | 3 5 • 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 Kim Wiggins. Calgary, Canada February 28, 2020 Page | 3 6 CWC ENERGY SERVICES CORP. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As at December 31, 2019 and December 31, 2018 Stated in thousands of Canadian dollars Note 2019 2018 14,15 5 6 7 8 7 9 $ 117 $ 23,800 2,725 26,642 216,756 - $ 243,398 $ 8,108 1,141 9,249 12,706 39,411 61,366 259,515 15,459 (730) (92,212) 182,032 508 23,579 2,806 26,893 225,658 114 252,665 7,865 928 8,793 15,673 43,968 68,434 261,353 13,390 - (90,512) 184,231 $ 243,398 $ 252,665 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 Long term Deferred tax liability Long-term debt SHAREHOLDERS' EQUITY Share capital Contributed surplus Accumulated other comprehensive loss Deficit Comments and contingencies (note 13) See accompanying notes to the consolidated financial statements. Approved on behalf of the board: (signed) “Gary Bentham” Gary Bentham, Director (signed) “Jim Reid” Jim Reid, Director Page | 3 7 CWC ENERGY SERVICES CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except per share amounts Revenue Note 2019 2018 17 $ 108,446 $ 144,762 Expenses Direct operating expenses Selling and administrative expenses Stock based compensation Finance costs Depreciation and amortization Loss on disposal of equipment 12 9(c)(d) 7 79,609 16,671 921 2,431 13,168 290 113,090 107,984 18,289 1,102 2,756 16,441 42 146,614 Loss before income taxes (4,644) (1,852) Income taxes Current tax Deferred tax Total income taxes Net loss 8 23 (2,967) (2,944) - (150) (150) $ (1,700) $ (1,702) Other comprehensive loss Item that may be reclassified to profit or loss in subsequent periods: Unrealized loss on translation of foreign operations (730) - Comprehensive loss $ (2,430) $ (1,702) See accompanying notes to the consolidated financial statements. Page | 3 8 CWC ENERGY SERVICES CORP. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except share amounts Note Number of Shares Share Capital Contributed Surplus Balance – January 1, 2018 Net loss 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, 2018 Balance – January 1, 2019 Net loss Stock based compensation expense Settlement of restricted share units Cancellation of common shares purchased under normal course issuer bid Other comprehensive loss Balance – December 31, 2019 9(c)(d) 9(c) 9(d) 9(b) 9(c)(d) 9(d) 9(b) 521,378,958 $ 266,720 $ 8,609 $ - - 1,033,335 1,517,998 - - 230 266 - 1,102 (82) (266) (11,421,000) 512,509,291 $ (5,863) 261,353 $ 4,027 13,390 $ 512,509,291 $ 261,353 $ 13,390 $ - - 2,725,058 - - 472 (4,532,000) - (2,310) - - 921 (472) 1,620 - 510,702,349 $ 259,515 $ 15,459 $ Accumulated Other Comprehensive Loss - $ - - - - - - $ Deficit Total Equity (88,810) $ (1,702) - - - 186,519 (1,702) 1,102 148 - - (90,512) $ (1,836) 184,231 - $ (90,512) $ 184,231 (1,700) - 921 - - - (1,700) - - (690) - (730) (730) (730) $ (92,212) $ 182,032 - - See accompanying notes to the consolidated financial statements. Page | 3 9 Note 2019 2018 $ (1,700) $ (1,702) CWC ENERGY SERVICES CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except per share amounts Operating activities: Net loss Adjustments for: Stock based compensation Finance costs Depreciation and amortization 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 Proceeds on disposal of equipment Investing cash flow Financing activities: Repayment of long-term debt Interest paid Finance costs paid Lease repayments Proceeds from exercise of options Common shares purchased under NCIB Financing cash flow 9(c)(d) 8 10 9(c) 9(b) 921 2,431 13,168 290 (2,967) 12,143 104 12,247 (4,341) 295 (4,046) (4,365) (2,145) (373) (866) - (690) (8,439) Increase (decrease) in cash during the year Effect of exchange rate changes on cash and cash equivalents Cash, beginning of year Cash, end of year (238) (153) 508 117 $ $ See accompanying notes to the consolidated financial statements. Page | 40 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 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2019 and 2018 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”) and the Bakken, Denver-Julesburg (“DJ”), and Eagle Ford basins located in the United States. 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. 2. Basis of presentation (a) Statement of compliance 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, 2020. (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 Page | 41 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except share and per share amounts 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 revenue, 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 Page | 42 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except share and per share amounts 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 loss and comprehensive loss. 3. Significant accounting policies 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: 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. Effective April 1, 2019 the Company changed the method for depreciating its drilling and service rigs from a unit of production method to a straight-line method. In addition, the Company changed certain estimates relating to useful lives and salvage values. The change in depreciation methodology reflects the current and future economic environment within the industry and the Company believes that straight line deprecation better reflects the pattern in which the assets’ future economic benefits will be consumed by the Company, Page | 43 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except share and per share amounts primarily as a result of idle or underutilized assets being depreciated more quickly in periods of low activity. These adjustments were applied prospectively. The following is a summary of depreciation estimates for the Company’s property and equipment as of April 1, 2019: Assets Drilling rigs and related equipment Buildings Production equipment – service rigs Production equipment - swabbing rigs and Service Rig Level IV recertifications Production equipment – coil Support equipment Miscellaneous equipment Method Straight-line with residual values of up to-10% Straight-line with residual values of up to-20% Straight-line with residual values of up to-10% Rate 25 years 25 years 25 years Unit of production 24,000 operating hours Straight-line with residual values of up to-20% Straight-line with residual values of up to-15% Straight-line with no residual value 10 years 2 to 10 years 3 to 5 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 Non-financial 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 cash and accounts receivable. 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. All financial liabilities are initially recognized at fair value net of transaction costs and subsequently carried at amortized cost. Derivative financial instruments are classified at fair value through profit of loss. The Company’s derivatives are interest rate swaps with changes in fair value recorded in the consolidated statements of income and comprehensive income. Page | 44 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except share and per share amounts 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. (e) Cash 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. (f) Common shares 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. (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, 2019 and 2018 there were no provisions recognized in the consolidated financial statements. (h) Leases A contract is, or contains, a lease if the contract conveys the right of control of the use of an identified asset for a period of time in exchange for considerations. A lease obligation is recognized at the commencement of the lease term at the present value of the lease payments that are not paid at that date. Interest expense is recognized on the lease obligations using the effective interest rate method and payments are applied against the lease obligation. At the commencement date, a corresponding ROU is recognized at the amount of the lease obligation, adjusted for lease incentives received and initial direct costs. Depreciation is recognized on the ROU asset over the lease term. The preparation of the condensed interim consolidated financial statements in accordance with IFRS requires management to make judgements, estimates, and key assumptions that affect the reported amount of asset, liabilities, income, and expense. Actual results could differ significantly from these estimates. Key areas where management has made judgements, estimates, and assumptions related to the adoption of IFRS 16 include: • Incremental borrowing rate: The incremental borrowing rates are based on judgements including economic environment, term, currency, and the underlying risk inherent to the asset. The carrying balance of the ROU asset, lease obligations, and the resulting interest and depletion and depreciation expense, may differ due to changes in the market conditions and lease term. • Lease term: Lease terms are based on assumptions regarding extension terms that allow for operational flexibility and future market conditions. Page | 4 5 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except share and per share amounts (i) 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 sheets and field tickets. For both its Contract Drilling 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 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. (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 translation Functional currency is the currency of the primary economic environment in which the Company and its subsidiaries operate and is normally the currency in which the entity primarily generates and expends cash. The financial statements of the Company’s subsidiaries are translated into Canadian dollars, which is the presentation currency of the Company. The assets and liabilities of subsidiaries whose functional currencies are other than Canadian dollars are translated into Canadian dollars at the foreign exchange rate at the balance sheet date, while revenues and expenses of such subsidiaries are translated using average monthly foreign exchange rates, which approximate the foreign exchange rates on the dates of the transactions. Foreign exchange differences arising on translation are included in Other Comprehensive Income (“OCI”). The Company’s transactions in foreign currencies are translated to the appropriate functional currency at the foreign exchange rate on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at the foreign exchange rate at the balance sheet date and differences arising on translation are recognized in net earnings. Non-monetary assets that are measured in terms of historical cost in foreign currency are translated using the exchange rate at the dates of the transactions. (l) Income Tax Tax is recognized in profit or loss, except to the extent that it relates to a business combination or items recognized in other comprehensive income or directly in equity. Current tax is the expected tax on taxable income less adjustments to prior periods using tax rates enacted, or substantively enacted as at the reporting date in jurisdictions where the Company operates. Page | 4 6 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except share and per share amounts 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 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(c), 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(d), 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 | 4 7 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2019 and 2018 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 16 In January 2016, the IASB issued IFRS 16 Leases (“IFRS 16”), which replaces the existing IFRS guidance on leases: IAS 17 Leases (“IAS 17”). Under IAS 17, lessees were required to determine if the lease is a finance or operating lease, based on specified criteria of whether the lease transferred significantly all the risks and rewards associated with ownership of the underlying asset. Finance leases are recognized on the balance sheet while operating leases are recognized in the Consolidated Statements of Comprehensive Income (Loss) when the expense is incurred. IFRS 16 introduced a single lease accounting model for lessees which require a Right- of-Use (“ROU”) asset and lease liability to be recognized on the balance sheet for contracts that are, or contain, a lease. The Company’s leases under IFRS 16 primarily consist of vehicle leases, which were previously classified as finance leases, and office leases, which were previously classified as operating leases. The Company has adopted IFRS 16 on January 1, 2019 using the modified retrospective approach. The modified retrospective approach does not require restatement of prior period financial information as it recognizes the cumulative effect as an adjustment to opening retained earnings and applies the standard prospectively. Accordingly, comparative information in the Company’s financial statements are not restated. For leases that were previously classified as finance leases under IAS 17, the carrying amount of the ROU asset and lease liability remain unchanged upon transition and were determined at the carrying amount immediately before the adoption date. For leases that were previously classified as operating leases under IAS 17, lease liabilities were measured at the present value of the remaining lease payments discounted using the Company’s incremental borrowing rate on January 1, 2019. ROU assets were measured at an amount equal to the lease liability. The recognition Page | 4 8 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except share and per share amounts of the present value of minimum lease payments resulted in additional $645 of ROU assets and associated lease liabilities. The adoption of IFRS 16 included the following elections: • Elected to not recognize ROU assets and liabilities for leases term of less than 12 months, or for leases of low value. • Elected to exclude initial direct costs from measuring the ROU asset at the date of initial application. • Elected to apply a single discount rate to portfolio of leases with similar characteristics. • Elected to use hindsight in determining lease term. 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. (a) 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 quoted prices that are observable for the asset or liability either directly or indirectly; and Level 3 – Inputs that are not based on observable market data. Page | 4 9 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except share and per share amounts 5. Property, plant and equipment Contract Drilling equipment Production Services property, plant, and equipment Right-of- use assets Other equipment Total $ 119,532 $ (167) 255,655 $ (771) 119,365 1,280 - (587) 120,058 26,282 (5) 26,277 4,316 - (10) 30,583 254,884 2,931 (1,937) - 255,878 123,376 (250) 123,126 7,810 (1,338) - 129,598 - 1,583 1,583 363 (40) (1) 1,905 - 255 255 849 (20) - 1,084 $ 1,942 $ 377,129 645 - 1,942 130 - 377,774 4,704 (1,977) - 2,072 (588) 379,913 1,813 - 1,813 79 - 151,471 - 151,471 13,054 (1,358) - 1,892 (10) 163,157 $ 89,475 $ 126,280 $ 821 $ 180 $ 216,756 Costs Balance, December 31, 2018 Right-of-use assets Balance, January 1, 2019 Additions Disposals Effect of foreign currency exchange differences Balance, December 31, 2019 Accumulated depreciation and impairment losses Balance, December 31, 2018 Right-of-use assets Balance, January 1, 2019 Depreciation Disposals Effect of foreign currency exchange differences Balance, December 31, 2019 Net book value Balance, December 31, 2019 Page | 50 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except share and per share amounts Costs Balance, January 1, 2018 Additions Disposals Transfers Balance, December 31, 2018 Accumulated depreciation and impairment losses Balance, January 1, 2018 Depreciation Disposals Balance, December 31, 2018 Net book value Balance, December 31, 2018 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 Given the degree of uncertainty regarding oil and natural gas activity and pricing for 2019 and into 2020, and the impact thereof, the Company concluded indicators of impairment existed and performed an impairment test for each CGU using value-in-use to determine the recoverable amounts. For each CGU, the recoverable amount exceeded its carrying amount and therefore no impairment was recognized. 6. Intangible assets Costs Balance, January 1, 2019 & December 31, 2019 Accumulated depreciation and impairment losses Balance, January 1, 2019 Depreciation of intangible assets Balance, December 31, 2019 Net book value Balance, December 31, 2019 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 Page | 51 Intangible assets 1,588 1,474 114 1,588 - Intangible assets 1,588 1,169 305 1,474 114 $ $ $ $ CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except share and per share amounts 7. Loans and borrowings 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 lease liabilities Current portion of Mortgage Loan Non-current liabilities Bank Loan Mortgage Loan Lease liabilities Financing fees Total loans and borrowings 2019 2018 559 $ 582 1,141 $ 28,304 $ 11,345 276 (514) 39,411 346 582 928 32,087 11,927 381 (427) 43,968 40,552 $ 44,896 $ $ $ $ $ The Company has credit facilities with a syndicate of four Canadian financial institutions (the “Credit Facility”). The Credit Facility provides the Company with a $60.0 million extendible revolving term facility (the “Bank Loan”) and other credit instruments. Of the Bank Loan, $42.5 million is a syndicated facility, $10.0 million is a Canadian operating facility with the remaining $7.5 million (US$5.75 million) being a U.S. operating facility. On September 27, 2019, the Bank Loan was extended for a committed term until July 31, 2022 (“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. The Bank Loan bears interest based on a sliding scale pricing grid tied to the Company’s trailing Consolidated Debt(2) to Consolidated EBITDA(1) 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, 2019, of the $60,000 Bank Loan facility, $31,696 was available for immediate borrowing and $28,304 was outstanding (December 31, 2018: $32,087). 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, 2019, the applicable rates under the Bank Loan are: bank prime rate plus 1.50%, banker’s acceptances rate plus a stamping fee of 2.50%, and standby fee rate of 0.57%. Page | 52 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except share and per share amounts Under the terms of the Credit Facility, the Company is required to comply with the following financial covenants: Consolidated Debt(2) to Consolidated EBITDA(1) Consolidated Debt(2) to Capitalization(3) Consolidated Adjusted Cash Flow(4) to Consolidated Adjusted Finance Obligations(5) Covenant limits 3.75:1.00 or less 0.50:1.00 or less December 31, 2019 2.51:1.00 0.14:1.00 1.15:1.00 or more 3.62:1.00 (1) Consolidated EBITDA is calculated as net income plus finance costs, plus current and deferred income taxes, plus depreciation, plus stock based compensation, plus any non-recurring losses or impairment losses, or permitted severance costs, minus any non-recurring gain, plus any expenses related to corporate or business acquisitions with all amounts being for the twelve month period ended the calculation date, minus all principal paid or payable in connection with the Mortgage Loan. Consolidated EBITDA is adjusted to reflect the inclusion of material acquisitions or material dispositions on a pro forma basis for the twelve month period ended the calculation date. Consolidated EBITDA is increased if debt repayments from the proceeds of equity issuance are used to repay the syndicated facility and designated by the Company as an Equity Cure amount. The Consolidated Debt to Consolidated EBITDA covenant limit reduces to 3.50:1.00 at September 30, 2020, to 3.25:1.00 at March 31, 2021 and to 3.00:1.00 at September 30, 2021 and thereafter. (2) Consolidated Debt is calculated as total loans and borrowings as shown in the schedule above adjusted to exclude: the Mortgage Loan, the funds held in any segregated accounts and to remove any financing fees included. (3) Capitalization is calculated as Consolidated Debt plus Shareholders’ Equity as at the calculation date. (4) Consolidated Adjusted Cash Flow is calculated as Consolidated EBITDA minus amounts paid for transaction costs, dividends or share repurchases in the twelve month period ended the calculation date. The Calculation of Adjusted Cash Flow excludes Consolidated EBITDA resulting from an Equity Cure. (5) Consolidated Adjusted 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 (excluding scheduled principal payments attributed to the Mortgage Loan). 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, 2019, the mark-to-market value of the interest rate swap of $246 is included within accounts payable and accrued liabilities on the Consolidated Statements of Financial Position (December 31, 2018: $206). Lease liabilities consist of vehicles and office space which mature in 1 to 3 years. The incremental borrowing rate applied to the individual leases liabilities varies from 4.0% to 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 December 31, 2019 financing fees of $286 were amortized and included in finance costs (year ended December 31, 2018: $162). Page | 53 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except share and per share amounts 8. Income taxes 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 Tax rate changes Stock based compensation Other The deferred income tax liability is comprised of: 2019 2018 (4,644) $ 27% (1,254) (1,852) 27% (500) 56 (1,933) 245 (58) (2,944) $ 79 - 297 (26) (150) $ $ Deferred tax assets Non capital losses(1) Share issue costs Finance lease liabilities Other Deferred tax liabilities: Property and equipment Net deferred income tax liability December 31, 2018 Recognized in Earnings December 31, 2019 $ $ 8,898 33 197 55 9,183 $ 3,466 $ (16) (8) 31 3,473 12,364 17 189 86 12,656 (24,856) (15,673) $ (506) 2,967 $ (25,362) (12,706) (1) The Company has $50,227 (2018: $32,949) 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 2039. All changes in deferred income tax temporary differences were recognized in income in the years ended December 31, 2019 and 2018. 9. Share capital (a) Authorized Unlimited number of Common voting shares without par value. Unlimited number of Preferred shares without par value. (b) Normal course issuer bid On April 15, 2019, the Company replaced its expired NCIB with a new NCIB which now expires on April 14, 2020. Under the new NCIB the Company may purchase, from time to time as it considers advisable, up to 25,535,115 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 were determined by Raymond James in its sole discretion, without consultation with Page | 54 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except share and per share amounts 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, 2019, 4,532,000 shares (2018: 11,421,000) for consideration of $690, including commissions (2018: $1,836) were purchased under the NCIB. In the year ended December 31, 2019, a total of 4,402,500 shares were cancelled and returned to treasury (2018: 11,421,000). (c) 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. The following table summarizes changes in the number of stock options outstanding: Balance at January 1, 2018 Exercised for common shares Forfeited Balance at December 31, 2018 Issued Expired Forfeited Balance at December 31, 2019 Number of options 27,546,667 (1,033,335) (2,161,999) 24,351,333 267,000 (2,900,000) (1,051,666) 20,666,667 Weighted average exercise price 0.25 0.14 0.31 0.25 0.10 0.80 0.19 0.17 $ $ $ The following table summarizes information about stock options outstanding as at December 31, 2019: Number of options outstanding Weighted average remaining life (years) contractual Weighted average exercise price Number of options exercisable 267,000 7,245,000 4,438,000 4,400,000 4,316,667 20,666,667 4.93 2.96 1.94 1.21 0.94 1.98 0.10 $ 0.20 $ 0.19 $ $ 0.175 $ 0.11 0.17 $ - 4,830,000 4,438,000 4,400,000 4,316,667 17,984,667 Exercise price $ 0.10 $ 0.20 $ 0.19 $ 0.175 $ 0.11 $ 0.10 - $ 0.20 Page | 5 5 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except share and per share amounts 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: Risk free interest rate (%) Expected life (years) Expected volatility (%) Expected forfeiture rate (%) Expected dividend per share 2019 1.5% 4.9 83% 12% $ 0.00 2018 n/a n/a n/a n/a n/a 267,000 stock options were issued during the year ended December 31, 2019 (year ended December 31, 2018: nil). The weighted average fair value of the stock options issued during the year ended December 31, 2019 was $0.10. For the year ended December 31, 2019, stock based compensation expense relating to stock options totaled $480(year ended December 31, 2018: $732). (d) 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. The following table summarizes changes in the number of Restricted Share Units (“RSUs”) outstanding: Balance at January 1, 2018 Granted Redeemed for common shares Forfeited - unvested Balance at December 31, 2018 Granted Redeemed for common shares Expired - vested Forfeited - unvested Balance at December 31, 2019 Number of RSUs 5,135,332 2,715,000 (1,517,998) (422,333) 5,910,001 4,393,545 (2,725,058) (100,000) (254,334) 7,224,154 $ Weighted average fair value at issue date 0.19 0.14 0.18 0.17 0.17 0.09 0.17 0.17 0.17 0.12 $ $ The following table summarizes information about RSUs outstanding as at December 31, 2019: Issue date fair value Number of RSUs outstanding Weighted average remaining life (years) contractual Weighted average exercise price ($) Number of RSUs exercisable $ 0.09 - $ 0.19 7,224,154 2.93 n/a 959,999 For the year ended December 31, 2019, stock based compensation expense relating to RSUs totaled $441 (year ended December 31, 2018: $370). Page | 5 6 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except share and per share amounts (e) Weighted average common shares outstanding The following table reconciles the common shares used in computing per share amounts for the periods noted: Weighted average common shares outstanding – basic Effect of dilutive share-based compensation plans Weighted average common shares outstanding – diluted Year ended December 31, 2019 511,106,531 - 511,106,531 2018 520,576,582 - 520,576,582 Outstanding stock options and RSUs are currently the only instruments which could potentially dilute earnings per share. For the year ended December 31, 2019, 20,666,667 (year ended December 31, 2018: 24,351,333) stock options and 7,224,154 (year ended December 31, 2018: 5,910,001) RSUs were not included in the computation of net loss per common share because to do so would be anti-dilutive. (f) 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. 10. Supplemental cash flow information For the years ended December 31, Increase (decrease) in non-cash working capital items: Accounts receivable Prepaid expenses and deposits Accounts payable and accrued liabilities 11. Operating segments 2019 2018 $ $ (220) $ 81 243 104 $ 6,540 (1,275) (4,337) 928 The Company operates its Contract Drilling segment in both Canada and the United States while its Production Services segment operates in Canada. 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 to other entities that operate within the respective industries. The Corporate segment captures general and administrative expenses associated with supporting each of the reporting segments operations, plus costs associated with being a public company. Also included in the Corporate segment is interest expense for debt servicing, income tax expense and other amounts not directly related to the two primary segments. Page | 5 7 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except share and per share amounts The amounts related to each industry segment are as follows: For the year ended December 31, 2019 $ Revenue Direct operating expenses Selling and administrative expenses Stock based compensation Finance costs Loss on disposal of equipment Depreciation Income (loss) before tax Income tax recovery Net income (loss) Capital expenditures As at December 31, 2019 Property, plant and equipment Right-of-use assets $ $ $ $ Contract Drilling 28,497 $ 21,484 1,559 - - - 4,566 888 - 888 $ Production Services Corporate Total 79,949 $ - $ 108,446 58,125 9,862 - - 290 7,545 4,127 - 4,127 $ - 5,250 921 2,431 - 1,057 (9,659) (2,989) (6,670) $ 79,609 16,671 921 2,431 290 13,168 (4,644) (2,989) (1,655) 1,477 $ 3,616 $ 256 $ 5,349 89,475 $ 230 $ 126,280 $ 473 $ 180 $ 215,935 118 $ 821 For the year ended December 31, 2018 Revenue $ Contract Drilling 38,223 $ Production Services 106,539 $ 27,691 1,300 - - - 6,034 3,198 - 3,198 $ 80,293 10,696 - - 42 9,523 5,985 - 5,985 $ Corporate Total - $ 144,762 - 107,984 6,293 1,102 2,756 - 884 (11,035) (150) (10,885) $ 18,289 1,102 2,756 42 16,441 (1,852) (150) (1,702) 7,116 $ 4,609 $ 28 $ 11,753 93,250 $ 114 $ 132,279 $ $ - 129 $ - $ 225,658 114 Direct operating expenses Selling and administrative expenses Stock based compensation Finance costs Loss on disposal of equipment Depreciation Income (loss) before tax Deferred income tax recovery Net income (loss) Capital expenditures As at December 31, 2018 Property, plant and equipment Intangibles $ $ $ $ Page | 5 8 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except share and per share amounts 12. Expenses by nature For the year ended December 31, 2019 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, 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 Loss on disposal of equipment Selling and administrative expenses Direct operating expenses $ 52,536 $ 11,830 Stock based compensation Finance costs Depreciation expense 10,125 $ - - 5,018 194 1,334 - - - 921 $ - - - - - - - - - $ - - - $ - - - - - - 2,431 - - - 13,168 - - - 15,243 - - - - - - $ 79,609 $ 16,671 $ 921 $ 2,431 $ 13,168 $ Direct operating expenses $ 71,451 $ 16,410 Selling and administrative expenses Stock based compensation Finance costs Depreciation expense Loss on disposal of equipment Total 11,052 $ 1,102 $ 20,123 - - - - - - - 4,221 694 2,322 - - - - $ - - - $ - - - - - - 2,756 - - - - 16,441 - - - - - - - - - - Total - $ 63,582 11,830 - - - - - - - 15,243 5,018 194 1,334 13,168 2,431 290 290 290 $ 113,090 - $ - 83,605 16,410 - - - - - - 20,123 4,221 694 2,322 16,441 2,756 42 42 42 $ 146,614 $ 107,984 $ 18,289 $ 1,102 $ 2,756 $ 16,441 $ 13. Commitments and contingencies 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. 14. Related parties Of the total outstanding shares of the Company, 79.6% 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 2019, the Company had revenue totaling $1,369 (2018: $1,587) and $71 in accounts receivable as at December 31, 2019 (December 31, Page | 5 9 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except share and per share amounts 2018: $231) 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: December 31, 2019 December 31, 2018 Short term employee benefits (including directors' fees) Share based payments (stock options and RSUs) Total compensation to key management including directors and officers $ $ $ 1,717 704 2,421 $ 1,837 201 2,038 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. 15. Financial risk management The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework. The Company’s audit committee is also responsible for developing and monitoring the Company’s risk management policies. The committee reports regularly to the Board of Directors on its activities. The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s activities. The Company, through its policies and procedures and training, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Company has exposure to credit risk, liquidity risk and market risk as follows: (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, 2019 and 2018. 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. For the year ended December 31, 2019, ten customers comprised 53% of revenue (2018: 57%) and one customer comprised 12% of revenue (2018: 18%). At December 31, 2019, ten customers comprised 55% of trade accounts receivable (2018: 64%) and one customer comprised 15% of trade accounts receivable (2018: 14%). Page | 60 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except share and per share amounts 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, Trade accounts receivable: 1 to 30 days outstanding – not past due 31 to 90 days outstanding >90 days overdue Allowance for impairment of accounts 2019 2018 $ $ 13,250 $ 10,383 391 (225) 23,799 $ 20,739 2,216 1,396 (772) 23,579 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 2019 2018 $ $ 772 $ 282 (57) (772) 225 $ 126 671 (25) - 772 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, 2019, the Company has available committed amounts under its Credit Facility in the amount of $31,696 (2018: $42,913) plus trade and other receivables of $23,799 (2018: $23,579) for a total of $55,495 (2018: $65,772) 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 2020. 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. Page | 61 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except share and per share amounts The following table summarizes contractual maturities for non-derivative financial instruments: As at December 31, 2019 Accounts payable and accrued liabilities Long-term debt As at December 31, 2018 Accounts payable and accrued liabilities Long-term debt (c) Market risk 2020 2021 2022 2023 2024 and beyond 8,108 $ 1,141 9,249 $ - $ 801 801 $ - $ - $ 28,942 28,942 $ 10,181 10,181 $ - - - 2019 2020 2021 2022 2023 and beyond 7,865 $ 928 8,793 $ - $ 32,541 32,541 $ - $ 664 664 $ - $ 582 582 $ - 10,181 10,181 $ $ $ $ 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 is exposed to foreign currency fluctuations on its operations in the United States. At December 31, 2019, portions of the Company’s trade and other receivables and accounts payable and accrued liabilities were denominated in United States dollars and subject to foreign currency exchange fluctuations which are recorded in net income. In addition, the Company’s United States subsidiary is subject to foreign currency translation adjustments upon consolidation, which is recorded separately within other comprehensive income. 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, 2019, if the prime interest rate increased by 1.0%, with all other variables held constant, net loss would have been $406 higher (2018: $470). 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. Page | 62 CWC ENERGY SERVICES CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2019 and 2018 Stated in thousands of Canadian dollars except share and per share amounts 16. 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 issuer bids. The Company monitors capital using a financial metric of Consolidated Debt to Consolidated EBITDA ratio as defined in the Credit Facility (see Note 7). Consolidated Debt to Consolidated EBITDA is not a recognized measure under IFRS and, therefore, is unlikely to be comparable to similar measures of other companies. During the year ended December 31, 2019, the actual and forecasted Consolidated Debt to Consolidated EBITDA of the Company has increased, primarily due to amendments to the terms of the credit facility. The Consolidated Debt to Consolidated EBITDA ratio at December 31, 2019 was 2.51:1.00 (at December 31, 2018: 1.35:1.00). The Company was in compliance with all externally imposed capital requirements as at December 31, 2019 and 2018. 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 year ended December 31, 2019 Canada United States Revenue Contract Drilling Drilling Rigs Service Rigs Coil Tubing Production Services Swabbing Rigs Total $ $ 18,587 $ 9,910 28,497 $ 77,001 $ - 77,001 $ 1,218 $ - 1,218 $ 1,730 $ - 98,536 9,910 1,730 $ 108,446 Contract Drilling For the year ended December 31, 2018 Canada United States Revenue $ $ Drilling Rigs Service Rigs Coil Tubing 38,223 $ - 38,223 $ 99,904 $ - 99,904 $ 1,848 $ - 1,848 $ 4,787 $ - 4,787 $ Total 144,762 - 144,762 Production Services Swabbing Rigs Included in accounts receivable at December 31, 2019 was $2,669 (December 31, 2018: $1,789) 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, 2019, the Company did not have any sales contracts beyond one year in term. Page | 63 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 2019 2021 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 2018 2019 2020 2021 2022 and beyond $ $ 12,202 176 12,378 $ $ - - - $ $ - 49,634 49,634 $ $ - - - $ $ - - - Page | 64 Corporate Secretary 1 1, 2 1, 2, 3 1. 2. 3. Audit Committee 2, 3 Compensation and Corporate Governance Committee Quality, Health, Safety and Environment Committee Ernst & Young LLP Bankers President & Chief Executive Of�icer Duncan T. 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 

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