Ensign Energy Services
Annual Report 2017

Plain-text annual report

ENSIGN ENERGY SERVICES INC. 2017 ANNUAL REPORT drilling | directional drilling | testing | well servicing TABLE OF CONTENTS MANAGEMENT’S DISCUSSION AND ANALYSIS ............................................................................... 1 MANAGEMENT’S REPORT ............................................................................................................ 20 INDEPENDENT AUDITOR’S REPORT .............................................................................................. 21 CONSOLIDATED FINANCIAL STATEMENTS .................................................................................... 23 SHARE TRADING SUMMARY ......................................................................................................... 47 10 YEAR FINANCIAL INFORMATION .............................................................................................. 48 CORPORATE INFORMATION ......................................................................................................... 50 MANAGEMENT'S DISCUSSION AND ANALYSIS This Management’s Discussion and Analysis (“MD&A”) for Ensign Energy Services Inc. and all of its subsidiaries and partnerships (“Ensign” or the “Company”) should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2017, which are available on SEDAR at www.sedar.com. This MD&A and the audited consolidated financial statements and comparative information have been prepared in accordance with International Financial Reporting Standards (“IFRS”). All financial measures presented in this MD&A are expressed in Canadian dollars unless otherwise indicated and are stated in thousands, except for: per share amounts, number of drilling rigs and operating days. This MD&A is dated March 1, 2018. Additional information, including the Company's Annual Information Form for the year ended December 31, 2016, is available on SEDAR at www.sedar.com. The Company's Annual Information Form for the year ended December 31, 2017 is expected to be filed on SEDAR prior to March 31, 2018. ADVISORY REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this document constitute forward-looking statements or information (collectively referred to herein as “forward-looking statements”) within the meaning of applicable securities legislation. Forward-looking statements can be identified by the words “believe”, “anticipate”, “expect”, “plan”, “estimate”, “target”, “continue”, “could”, “intend”, “may”, “potential”, “predict”, “should”, “will”, “objective”, “project”, “forecast”, “goal”, “guidance”, “outlook”, “effort”, “seeks”, “schedule” or other expressions of a similar nature suggesting future outcome or statements regarding an outlook. Disclosure related to expected future energy commodity pricing or trends, revenue rates, equipment utilization or operating activity levels, operating costs, capital expenditures and other future guidance provided throughout this MD&A, including, but not limited to, information provided in the “Funds Flow From Operations and Working Capital” section regarding the Company’s expectation that funds generated by operations combined with current and future credit facilities will support current operating and capital requirements, information provided in the “New Builds and Major Retrofits” section regarding the new build program, information provided in the "Financial Instruments" section regarding Venezuela and information provided in the “Outlook” section regarding the general outlook for 2017, constitute forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks. The reader should not place undue reliance on these forward-looking statements as there can be no assurance that the plans, initiatives or expectations upon which they are based will occur. The forward-looking statements are based on current expectations, estimates and projections about the Company and the industry in which the Company operates, which speak only as of the date such statements were made or as of the date of the report or document in which they are contained, and are subject to known and unknown risks, uncertainties and other factors that could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others: general economic and business conditions which will, among other things, impact demand for and market prices of the Company’s services and the ability of the Company’s customers to pay accounts receivable balances; volatility of and assumptions regarding oil and natural gas prices; fluctuations in currency and interest rates; economic conditions in the countries and regions in which the Company conducts business; political uncertainty and civil unrest; ability of the Company to implement its business strategy; impact of competition; the Company’s defense of lawsuits; availability and cost of labor and other equipment, supplies and services; ability of the Company and its subsidiaries to complete their capital programs; operating hazards and other difficulties inherent in the operation of the Company’s oilfield services equipment; availability and cost of financing; timing and success of integrating the business and operations of acquired companies; actions by governmental authorities; government regulations and the expenditures required to comply with them (including safety and environmental laws and regulations and the impact of climate change initiatives on capital and operating costs); the adequacy of the Company’s provision for taxes; and other circumstances that may affect revenues and expenses. The Company’s operations and levels of demand for its services have been, and at times in the future may be, affected by political developments and by national, regional and local laws and regulations such as changes in taxes, royalties and other amounts payable to governments or governmental agencies and environmental protection regulations. Should one or more of these risks or uncertainties materialize, or should any of the Company’s assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. The impact of any one factor on a particular forward-looking statement is not determinable with certainty as such factors are interdependent upon other factors, and the Company’s course of action may depend upon its assessment of the future considering all information then available. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 1 For additional information refer to the “Risks and Uncertainties” section of this MD&A. Readers are cautioned that the foregoing list of important factors is not exhaustive. Unpredictable or unknown factors not discussed in this report could also have material adverse effects on forward-looking statements or results of operations. Although the Company believes that the expectations conveyed by the forward-looking statements are reasonable based on information available to it on the date such forward-looking statements are made, no assurances can be given as to future results, levels of activity and achievements. Except as required by law, the Company assumes no obligation to update forward-looking statements should circumstances or the Company’s estimates or opinions change. NON-GAAP MEASURES This MD&A contains references to Adjusted EBITDA, Adjusted EBITDA per share, Funds flow from operations, Funds flow from operations per share and Revenue net of third party. These measures do not have any standardized meaning prescribed by IFRS and accordingly, may not be comparable to similar measures used by other companies. The non- GAAP measures included in this MD&A should not be considered as an alternative to, or more meaningful than, the IFRS measure from which they are derived or to which they are compared. The definition and method of calculation of the non-GAAP measures included in this MD&A are included in the "Overview and Selected Annual Information" section. OVERVIEW AND SELECTED ANNUAL INFORMATION (in thousands of Canadian dollars, except per share data and operating information) 2017 2016 Change % change 2015 Change % change Revenue Revenue, net of third party 1 Adjusted EBITDA 2 Adjusted EBITDA per share 2 1,000,650 873,864 201,784 859,702 755,857 185,173 Basic Diluted Net loss Net loss per share Basic Diluted Cash provided by operating activities Funds flow from operations 3 Funds flow from operations per share 3 Basic Diluted Total assets $ $ $ $ $ $ 1.29 1.29 $ $ 1.21 1.21 (37,644) (150,522) (0.24) (0.24) $ $ (0.99) (0.98) 135,147 141,438 165,336 170,651 0.90 0.90 $ $ 1.12 1.11 140,948 118,007 16,611 0.08 0.08 112,878 0.75 0.74 (30,189) (29,213) (0.22) (0.21) $ $ $ $ $ $ Long-term financial liabilities 739,933 717,459 22,474 2,958,465 3,214,395 (255,930) 16 16 9 7 7 75 76 76 (18) (17) (20) (19) (8) 3 1,390,978 (531,276) 1,234,775 (478,918) 329,010 (143,837) $ $ $ $ $ $ 2.16 2.16 (104,049) (0.68) (0.68) 412,224 296,273 1.94 1.94 $ $ $ $ $ $ (0.95) (0.95) (46,473) (0.31) (0.30) (246,888) (125,622) (0.82) (0.83) 3,598,140 (383,745) 794,109 (76,650) (38) (39) (44) (44) (44) nm 46 44 (60) (42) (42) (43) (11) (10) — Dividends per share $ 0.48 $ 0.48 — — $ 0.48 $ — nm - calculation not meaningful 1 Revenue, net of third party is defined as "gross revenue less third party reimbursable items". Management believes that, in addition to revenue, Revenue, net of third party is a useful supplemental measure to indicate the Company's operating activity levels. 2 Adjusted EBITDA is defined as “(loss) income before interest, income taxes, depreciation, asset decommissioning and write-downs, share-based compensation and foreign exchange and other”. Management believes that, in addition to net (loss) income, Adjusted EBITDA is a useful supplemental measure as it provides an indication of the results generated by the Company’s principal business activities prior to consideration of how these activities are financed, how the results are taxed in various jurisdictions, how the results are impacted by foreign exchange or how the results are impacted by the accounting standards associated with the Company’s share-based compensation plans. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 2 ($ thousands) Loss before income taxes Interest expense Interest income Depreciation Asset decommissioning and write-downs Share-based compensation Foreign exchange and other Adjusted EBITDA 2017 (187,796) 41,491 (281) 325,811 — 656 21,903 201,784 2016 (204,545) 30,838 (367) 349,947 — 10,287 (987) 185,173 2015 (129,754) 25,333 (420) 335,513 28,281 7,952 62,105 329,010 3 Funds flow from operations are defined as “cash provided by operating activities before the change in non-cash working capital”. Management believes that, in addition to net loss, Funds flow from operations constitute a measure that provides additional information regarding the Company’s liquidity and its ability to generate funds to finance its operations. Management utilizes this measure to assess the Company’s ability to finance operating activities and capital expenditures. ($ thousands) Net loss Items not affecting cash Depreciation Asset decommissioning and write-downs Share-based compensation, net of cash paid Unrealized foreign exchange and other Accretion on long-term debt Deferred income tax Funds flow from operations NATURE OF OPERATIONS: 2017 (37,644) 325,811 — 145 (918) 1,843 (147,799) 141,438 2016 (150,522) 349,947 — 10,287 (6,864) 316 (32,513) 170,651 2015 (104,049) 335,513 28,281 7,237 54,742 407 (25,858) 296,273 The Company is in the business of providing oilfield services to the oil and natural gas industry in Canada, the United States and internationally. Oilfield services provided by the Company include drilling and well servicing, oil sands coring, directional drilling, underbalanced and managed pressure drilling, equipment rentals, transportation, wireline services and production testing services. The Company’s Canadian operations span the four western provinces of British Columbia, Alberta, Saskatchewan and Manitoba and include the Northwest Territories and the Yukon. In the United States, the Company operates predominantly in the Rocky Mountain and southern regions as well as the states of California, New Mexico, North Dakota, Pennsylvania and South Dakota. Internationally, the Company currently operates in Australia, Argentina, Kurdistan, Oman and Venezuela. In addition to these international locations, the Company has operated in several other countries in the past and may relocate equipment to other regions in the future depending on bidding opportunities and anticipated levels of future demand. 2017 COMPARED WITH 2016 Revenue for the year ended December 31, 2017 was $1,000.7 million, an increase of 16 percent from 2016 revenue of $859.7 million. Revenue, net of third party, for the year ended December 31, 2017 was $873.9 million, an increase of 16 percent from Revenue, net of third party, for the year ended December 31, 2016 of $755.9 million. Adjusted EBITDA for 2017, totaled $201.8 million ($1.29 per common share), 9 percent higher than Adjusted EBITDA of $185.2 million ($1.21 per common share) for 2016. Net loss for the year ended December 31, 2017 was $37.6 million ($0.24 per common share), compared to net loss of $150.5 million ($0.99 per common share) for the year ended December 31, 2016. Funds flow from operations decreased 17 percent to $141.4 million ($0.90 per common share) in 2017 compared to $170.7 million ($1.12 per common share) in the prior year. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 3 The Company's increased operating and financial results for 2017 resulted from increased demand for oilfield services caused by modest price recovery of crude oil and natural gas commodity prices. Volatile energy commodity prices significantly impact the current and future cash flows of the Company’s customers and, as a result, the expected levels of future demand for oilfield services, particularly in North America. Financial results from the Company’s United States and international operations were adversely impacted by translation to Canadian dollars due to the weakening of the United States dollar relative to the Canadian dollar. During 2017, a two percent decrease in the Canadian/United States dollar exchange rate negatively impacted revenues and margins generated outside Canada. In 2017 the Company added three new-build ADR® drilling rigs to its drilling rig fleet in the Canada and United States markets, which have been committed to long-term contracts. The Company also added one new-build well servicing rig in the United States. The Company declared total dividends of $0.48 per common share in 2017. The Company exited 2017 with a working capital deficit of $342.2 million, compared to a working capital deficit of $11.2 million as at December 31, 2016. The decrease in working capital year-over-year was largely due to the Company's Global Bank Facility ($488.8 million due October 3, 2018) maturing within the next 12 months. The Company’s bank credit facilities provide unused and available borrowings of $11.2 million at December 31, 2017, compared to $184.4 million at December 31, 2016, down by $173.2 million because of a reduction in the available credit under the current global facility arrangement and the repayment of Tranche A of the senior unsecured notes in February of 2017. 2016 COMPARED WITH 2015 The Company's decreased operating and financial results for the 2016 fiscal year resulted from the slow recovery of oil and natural gas prices. Continued low energy commodity prices adversely impacted cash flows of the Company’s customers and, as a result, the expected levels of future demand for oilfield services, particularly in North America. Financial results from the Company’s United States and international operations improved on translation to Canadian dollars due to the strengthening of the United States dollar relative to the Canadian dollar. For the year ended December 31, 2016, a four percent increase in the Canadian/United States dollar exchange rate positively impacted revenues and margins generated outside Canada. REVENUE AND OILFIELD SERVICES EXPENSE ($ thousands) Revenue Canada United States International Total revenue Revenue, net of third party Oilfield services expense Gross margin 2017 2016 Change % change 262,793 459,496 278,361 1,000,650 222,804 337,950 298,948 859,702 39,989 121,546 (20,587) 140,948 873,864 755,857 118,007 759,700 240,950 622,026 237,676 137,674 3,274 18 36 (7) 16 16 22 1 Gross margin as a percentage of Revenue, net of third party 27.6 31.4 (3.8) (12.1) Revenue for the year ended December 31, 2017 totaled $1,000.7 million, a 16 percent increase from the year ended December 31, 2016 of $859.7 million. The increase in revenue was a direct result of the increased demand for oilfield services resulting in higher equipment utilization rates which was offset by lower revenue rates. Revenue, net of third party, for the year ended December 31, 2017 totaled $873.9 million, an increase of 16 percent from the previous year of $755.9 million. As a percentage of Revenue, net of third party, gross margin for the year ended December 31, 2017 was 27.6 percent (2016 - 31.4 percent). As a result of slow recovery of energy prices, the Company has reduced its revenue rate and operating cost structure and made changes to reduce the cost of its administrative and supervisory structure. The cautious optimism regarding oil and natural gas commodity prices increased demand for oilfield services during 2017, which resulted in higher equipment utilization rates; however, revenue rates declined during prior years and have ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 4 yet to increase with demand. Financial results from the Company's United States and international operations were negatively impacted on translation, as the weaker United States dollar relative to the Canadian dollar in 2017 compared to the prior year further increased the impact of certain of the revenue rate declines experienced during the year. CANADIAN OILFIELD SERVICES Revenue ($ thousands) Drilling rigs1 Opening balance Additions Transfers, net Decommissions/Disposals Ending balance Drilling operating days1, Drilling rig utilization (%)1 Well servicing rigs Opening balance Decommissions/Disposals Ending balance Well servicing operating hours Well servicing utilization (%) 1Excludes coring rig fleet. 2017 2016 $ 262,793 $ 222,804 $ Change 39,989 % change 18 69 2 — (1) 70 6,860 26.8 65 — 65 70,556 29.7 83 — (2) (12) 69 4,587 15.2 72 (7) 65 61,635 23.8 1 2,273 11.6 — 8,921 5.9 1 50 76 — 14 25 The Company recorded revenue of $262.8 million in Canada for the year ended December 31, 2017, an increase of 18 percent from $222.8 million recorded for the year ended December 31, 2016. During the year ended December 31, 2017, Canadian revenues were 26 percent of the Company's revenue, consistent with the prior year. During 2017 the Company received $1.3 million in shortfall and termination revenue in Canada compared to $17.1 million in 2016. For the year ended December 31, 2017, the Company recorded 6,860 drilling days in Canada, compared to 4,587 drilling days for the year ended December 31, 2016, an increase of 50 percent. Well servicing hours increased by 14 percent to 70,556 operating hours compared with 61,635 operating hours for the year ended December 31, 2016. Demand for the Company’s Canadian oilfield services was higher compared to 2016 due largely to a modest increase in oil and natural gas commodity prices. The increase in demand was offset by lower revenue rates and lower short fall revenue earned in 2017 compared to 2016. During 2017, the Company added two new-build ADR® drilling rigs to the Canadian fleet and decommissioned one drilling rig. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 5 UNITED STATES OILFIELD SERVICES Revenue ($ thousands) Drilling rigs Opening balance Additions Decommissions/Disposals Ending balance Drilling operating days Drilling rig utilization (%) Well servicing rigs Opening balance Additions Ending balance Well servicing operating hours Well servicing utilization (%) 2017 2016 Change % change $ 459,496 $ 337,950 $ 121,546 36 84 1 — 85 10,944 35.6 44 1 45 90,281 55.6 89 1 (6) 84 7,152 21.8 44 — 44 66,211 41.2 1 3,792 13.8 1 24,070 14.4 1 53 63 2 36 35 For the year ended December 31, 2017, revenue of $459.5 million was recorded in the United States, an increase of 36 percent from the $338.0 million recorded in the prior year. The Company's United States operations accounted for 46 percent of the Company's revenue in 2017 fiscal year (2016 - 39 percent) and were the largest contributor to the Company's consolidated revenues in 2017, consistent with the prior year. In the United States, drilling operating days increased by 53 percent from 7,152 operating days in 2016 to 10,944 operating days in 2017. For the year ended December 31, 2017 well servicing activity increased 36 percent to 90,281 operating hours from 66,211 operating hours in 2016. Overall operating and financial results for the Company’s United States operations were positively impacted by a significant increase in demand for oilfield services due primarily to renewed optimism regarding oil and natural gas commodity prices. The increased activity and associated operating financial results increase were partially offset by a weakening of the United States dollar, which decreased by two percent versus the Canadian dollar when compared to 2016. During 2017, the Company added one new-build ADR® drilling rig and one new-build well servicing rig to the United States fleet. INTERNATIONAL OILFIELD SERVICES Revenue ($ thousands) Drilling and workover rigs Opening balance Transfers Decommissions Ending balance Drilling operating days Drilling rig utilization (%) 2017 278,361 2016 298,948 Change (20,587) % change (7) 46 — — 46 6,106 36.4 50 2 (6) 46 6,545 36.0 — (439) 0.4 — (7) 1 The Company's international revenues for the year ended December 31, 2017, decreased seven percent to $278.4 million from $298.9 million recorded in the year ended December 31, 2016. The Company's international operations contributed 28 percent of the Company's revenue in 2017 (2016 - 35 percent). ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 6 International operating days totaled 6,106 compared to 6,545 drilling days for the year ended December 31, 2017, a decrease of seven percent compared to the year prior. Similar to the Company’s United States operations, international operations were negatively impacted by the weakening United States dollar year-over-year in 2017, versus the Canadian dollar, on translation into Canadian dollars for reporting purposes compared to 2016. International operations incurred a decrease in activity as certain drilling rigs on long-term contracts completed their term and were not renewed. Moreover, the decline in crude oil prices over the past several years has been particularly challenging for Venezuela due to the heavy economic reliance on energy revenues in that country. The possible impact to the Company of the challenges in Venezuela are discussed further in the “Financial Instruments” section of this MD&A under Credit Risk and also in the “Risks and Uncertainties – Foreign Operations” section of this MD&A. DEPRECIATION ($ thousands) Depreciation 2017 325,811 2016 349,947 Change (24,136) % change (7) Depreciation expense for the year decreased by seven percent to $325.8 million compared with $349.9 million for the year ended 2016. Depreciation expense was lower in the year ended December 31, 2017 when compared to the year ended December 31, 2016, due to certain operating assets having become fully depreciated in which case no further depreciation expense is required. Furthermore, the impacts of a weaker United States dollar compared to the Canadian dollar on non-Canadian domiciled fixed assets decreased the expense. As a result of certain external impairment indicators existing in the market, the Company completed impairment tests in all its cash generating units (each a "CGU"). The Company did not note any impairments for any CGUs based on the following key assumptions: weighted average pre-tax discount rate of 10 percent to 14 percent based on cost of capital and debt, asset and country risk, together with past experience; annual inflationary growth after five years and limited to the assets' lives; and cash flow projections consistent with market conditions and estimated rig salvage values of 10 percent. A 1.6 percent change in the discount rate, an eight percent change in cash flow projections, or a changing in the terminal growth rate to zero, independent of each other, would not have resulted in any impairments. GENERAL AND ADMINISTRATIVE EXPENSE ($ thousands) General and administrative % of revenue 2017 39,166 3.9 2016 52,503 6.1 Change (13,337) % change (25) For the year ended December 31, 2017, general and administrative expense totaled $39.2 million (3.9 percent of revenue) compared to $52.5 million (6.1 percent of revenue) for the year ended December 31, 2016, a decrease of 25 percent. The year over year decrease in general and administrative expense reflect the Company's initiatives to reduce costs in reaction to the oil service industry decline and lower oil and natural gas commodity prices, which began in 2015 and are ongoing. SHARE-BASED COMPENSATION ($ thousands) Share-based compensation nm - calculation not meaningful 2017 656 2016 10,287 Change (9,631) % change (94) Share-based compensation expense arises from the Black-Scholes valuation associated with the Company’s share- based compensation plans, whereby the liability associated with share-based compensation is adjusted for the effect of granting and vesting of employee stock options and changes in the underlying market price of the Company’s common shares. For the year ended December 31, 2017, share-based compensation was an expense of $0.7 million compared with an expense of $10.3 million for the year ended December 31, 2016. The share-based compensation expense for the year ended December 31, 2017 was a result of changes in the fair value of the share-based compensation liability and was impacted by the amortization of stock options which was offset by additional expenses in 2017 related to Performance Share Units (PSUs) issued under a long-term incentive plan implemented in 2017. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 7 The fair value of share-based compensation is impacted by both the input assumptions used to estimate the fair value and the price of the Company’s common shares during the period. The closing price of the Company's common shares was $6.47 at December 31, 2017, compared with $9.38 at December 31, 2016. During 2017 the Company granted PSUs to certain officers and employees of the Company to participate in the growth and development of the Company and to promote further alignment of interests between employees and the shareholders. PSUs are subject to the Company's pre-established performance metrics with a three year performance period. Each PSU granted permits the holder to receive a cash payment equal to the fair market value of a share as of the maturity date, adjusted for a performance multiplier. PSU holders are entitled to share in dividends which are credited as additional PSUs at the dividend record date. Included in net earnings for the year ended December 31, 2017 is an expense of $1.1 million (2016 - $nil). This was calculated using the trailing ten day volume weighted average share price of the Company's underlying common shares, as the PSUs have no exercise price, are adjusted for performance factors and are subject to a two percent cap relative to Adjusted EBITDA in the final year of their three year term based on certain financial performance metrics. INTEREST EXPENSE ($ thousands) Interest expense Interest income 2017 41,491 (281) 41,210 2016 30,838 (367) 30,471 Change 10,653 86 10,739 % change 35 (23) 35 Interest is incurred on the Company's $500.0 million global revolving credit facility (the “Global Bank Facility”) and the United States dollar $200.0 million senior unsecured notes (the “Notes”) issued in February 2012. The amortization of deferred financing costs associated with the issuance of the Notes is included in interest expense. Due to payment delays for work performed in Venezuela, the Company recognized a discount on its receivable in the amount of $4.6 million within interest expense. The receivable is discounted at 15 percent and assumes nominal collections in the first year with even collections thereafter over a five year period. Interest expense increased by 35 percent for the year ended December 31, 2017 compared to the same period in 2016 as a result of borrowings of an additional $42.2 million on the bank credit facilities in fiscal 2017, an increase in the interest rate and a discount applied on the Venezuela receivable. FOREIGN EXCHANGE AND OTHER ($ thousands) Foreign exchange and other nm - calculation not meaningful 2017 21,903 2016 (987) Change 22,890 % change nm Included in this amount is the impact of foreign currency fluctuations in the Company’s subsidiaries that have functional currencies other than the Canadian dollar. INCOME TAXES ($ thousands) Current income tax Deferred income tax Total income tax Effective income tax rate (%) nm - calculation not meaningful 2017 (2,353) (147,799) (150,152) 80.0 2016 (21,510) (32,513) (54,023) 26.4 Change 19,157 (115,286) (96,129) % change (89) nm nm The effective income tax rate for the year ended December 31, 2017 was 80.0 percent compared with 26.4 percent for the year ended December 31, 2016. The United States passed comprehensive tax reform under the Tax Cut and Jobs Act (“Tax Act”) on December 22, 2017. The Federal corporate income tax rate will drop from 35% to 21% beginning January 1, 2018. Due to these changes, the Company has revalued its deferred tax liability as at December 31, 2017 ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 8 and the result of this revaluation was a deferred tax recovery for the year ended December 31, 2017 of $109.3 million to reduce the deferred tax liability balance. FUNDS FLOW FROM OPERATIONS AND WORKING CAPITAL ($ thousands, except per share data) Funds flow from operations Funds flow from operations per share Working capital nm - calculation not meaningful 2017 141,438 $0.90 2016 170,651 $1.12 Change (29,213) (0.22) (342,199) (11,153) (331,046) % change (17) (20) nm For the year ended December 31, 2017, the Company generated Funds flow from operations of $141.4 million ($0.90 per common share) a decrease of 17 percent from $170.7 million ($1.12 per common share) for the year ended December 31, 2016. The decrease in Funds flow from operations in 2017 compared to 2016 is due to the impact of foreign exchange. The significant factors that may impact the Company's ability to generate Funds flow from operations in future periods are outlined in the "Risks and Uncertainties" section of this MD&A. As at December 31, 2017, the Company’s working capital was a deficit of $342.2 million, compared to a working capital deficit of $11.2 million at December 31, 2016. The decrease in working capital in 2017 was mainly related to the financial statement reclassification of the portion of long-term debt ($488.8 million of the Global Bank Facility, due October 3, 2018) maturing within the next 12 months to current liabilities. The Company expects funds generated by operations, combined with current and future credit facilities, to fully support current operating and capital requirements. Existing revolving credit facilities provide for total borrowings of $500.0 million, of which $11.2 million was undrawn and available at December 31, 2017. In addition, the Company has a $50 million accordion to be included in the existing revolving global facilities but not yet exercised. INVESTING ACTIVITIES ($ thousands) Purchase of property and equipment Proceeds from disposals of property and equipment Net change in non-cash working capital Cash used in investing activities nm - calculation not meaningful 2017 (123,763) 6,051 (2,667) (120,379) 2016 (43,394) 14,274 (23,627) (52,747) Change (80,369) (8,223) 20,960 (67,632) % change nm (58) (89) nm Net purchases of property and equipment during the fiscal year ending 2017 totaled $117.7 million (2016 - $29.1 million). The purchase of property and equipment relates predominantly to expenditures made pursuant to the Company’s new build and major retrofit program, and for maintenance capital costs incurred during the year. The Company completed a total of three new-build ADR® drilling rigs for the Canadian and United States fleets that commenced work under long term contracts and one new-build well servicing rig for the United States. FINANCING ACTIVITIES ($ thousands) Net increase (decrease) in bank credit facilities Purchase of shares held in trust Dividends Net change in non-cash working capital Cash used in financing activities nm - calculation not meaningful 2017 42,189 (1,103) (52,577) (482) (11,973) 2016 (48,995) (2,035) (66,440) (1,887) Change 91,184 932 13,863 1,405 (119,357) 107,384 % change nm (46) (21) (74) (90) The Global Bank Facility is available to the Company and certain of its wholly-owned subsidiaries, and may be drawn in Canadian, United States or Australian dollars, up to the equivalent value of $500.0 million Canadian dollars. The Global Facility matures in early October 2018. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 9 In addition, the Company has a $20.0 million uncommitted facility, solely for issuing letters of credit, primarily used for bidding on contracts in the normal course of business. The Company has a $50 million accordion included in the existing Global Facility, but this has not yet been exercised. The Company also finalized a waiver with its lenders that allows the Company to maintain Global Facility unsecured. The Company made a net withdrawal on the Global Facility of $42.2 million during the year ended December 31, 2017, increasing the outstanding long-term debt balance. As of December 31, 2017, the Global Facility is primarily being used to fund capital expenditures. During the year ended December 31, 2017, the Board of Directors of the Company cancelled a Dividend Reinvestment Plan (the “DRIP”). The DRIP provided eligible holders of common shares with an option to elect to reinvest their dividends in common shares of the Company at a discount of up to five percent of the average market price on each dividend payment date. Subsequent to December 31, 2017, the Company declared a dividend for the first quarter of 2017. A quarterly dividend of $0.12 per common share is payable April 5, 2018 to all Common Shareholders of record as of March 23, 2018. The dividend is pursuant to the quarterly dividend policy adopted by the Company. Pursuant to subsection 89(1) of the Canadian Income Tax Act (“ITA”), the dividend being paid is designated as an eligible dividend, as defined in subsection 89(1) of the ITA. CONTRACTUAL OBLIGATIONS In the normal course of business, the Company enters into various commitments that will have an impact on future operations. These commitments relate primarily to credit facilities, senior unsecured notes and facility leases. A summary of the Company’s total contractual obligations as of December 31, 2017, is as follows: ($ thousands) Senior unsecured notes Drawings on bank and credit facilities Capital Leases Facility leases Less than 1 Year 1-3 Years 4-5 Years After 5 Years 11,045 509,741 408 4,104 148,198 130,626 — 1,017 6,936 — 11 6 525,298 156,151 130,643 — — — 448 448 Total 289,869 509,741 1,436 11,494 812,540 FINANCIAL INSTRUMENTS The classification and measurement of financial instruments the Company has recognized is presented below: Cash and cash equivalents and accounts receivable are classified as financial assets at amortized cost. Accounts payable and accruals, operating lines of credit, dividends payable and long-term debt are classified as financial liabilities at amortized cost. Credit Risk The Company is subject to credit risk on accounts receivable balances, which at December 31, 2017 totaled $232.2 million, an increase of $26.8 million from $205.3 million as at December 31, 2016. Reduced levels of oil and natural gas commodity prices negatively impact the cash flow of the Company's customers and, consequently, increases the collection risk of accounts receivable balances. The Company assesses the credit worthiness of its customers on an ongoing basis and establishes credit limits for each customer based on external credit reports and other publicly available information, internal analysis and historical experience with the customer. Credit limits are approved by senior management and are reviewed on a regular basis or when changing economic circumstances dictate. The Company manages credit risk through dedicated credit resources, ongoing monitoring and follow up of balances owing, well liens, and tightening or restriction of credit terms as required. The Company also monitors the amount and age of accounts receivable balances on an ongoing basis. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 10 As at December 31, 2017, the Company had trade receivables of $25.8 million (2016 - $30 million) with multiple customers that were greater than 90 days old for which an allowance for doubtful accounts of $4.2 million (2016 - $5.8 million) has been recorded to provide for balances which, in management’s best estimate, are deemed uncollectible as at December 31, 2017. The allowance for doubtful accounts is an estimate requiring significant judgment and may differ materially from actual results. As part of the Company’s international operations, it provides oilfield services in Venezuela pursuant to contractual arrangements. As at December 31, 2017, the Company had accounts receivable of approximately $28.6 million for work performed in Venezuela, of which certain account receivables were discounted at 15 percent and assumed nominal collections in the first year with even collections thereafter over a five year period (2016 - $24.8 million). Though the Company has a history of collecting accounts receivable in Venezuela, due to the recent decline in the price of oil and continuing political unrest in the country there can be no assurance that the Company will be successful in collecting all of such accounts receivable outstanding. Liquidity Risk The Company is subject to liquidity risk on its financial liabilities, which at December 31, 2017 totaled $948.9 million, an increase of $59.2 million from $889.7 million as at December 31, 2016. The Company manages liquidity by forecasting cash flows on an annual basis and secures sufficient credit facilities to meet financing requirements that exceed anticipated internally generated funds. As at December 31, 2017, the remaining contractual maturities of accounts payable and accruals and dividends payable are less than one year. Maturity information regarding the Company’s bank credit facilities and long-term debt is described in the "Contractual Obligations" section of this MD&A. As at December 31, 2017, the Company had undrawn and available bank credit facilities of $11.2 million (2016 – $184.4 million). The Company was in compliance with all debt covenants as of December 31, 2017. NEW BUILDS AND MAJOR RETROFITS During the year ended December 31, 2017, the Company added two new-build ADR® drilling rigs in Canada and one new-build ADR® drilling rig in the United States. The additions to the drilling fleet have been contracted on long-term contracts. One new-build well servicing rig was added in the United States. The Company continues to selectively add new ADR® drilling rigs to meet the increasing technical demands of its customers. SUMMARY QUARTERLY RESULTS ($ thousands, except per share data) Q4-2017 Q3-2017 Q2-2017 Q1-2017 Q4-2016 Q3-2016 Q2-2016 Q1-2016 Revenue Revenue, net of third party 1 Adjusted EBITDA 1 Adjusted EBITDA per share 1 Basic Diluted 270,013 247,121 232,232 251,284 234,001 191,313 175,924 258,464 241,987 211,299 211,687 208,891 204,474 168,098 156,423 226,862 54,820 52,600 44,276 50,088 51,665 42,456 31,485 59,567 $0.34 $0.35 $0.34 $0.33 $0.29 $0.29 $0.32 $0.32 $0.33 $0.33 $0.28 $0.28 $0.21 $0.21 $0.39 $0.39 Net (loss) income 46,488 (36,526) (33,814) (13,792) (61,905) (33,727) (39,979) (14,911) Net (loss) income per share Basic Diluted Cash provided by operating activities Funds flow from operations 1 Funds flow from operations per share 1 $0.30 $0.30 38,124 12,244 $(0.23) $(0.22) $(0.09) $(0.41) $(0.22) $(0.26) $(0.10) $(0.23) $(0.22) $(0.09) $(0.40) $(0.22) $(0.26) $(0.10) 32,791 39,616 44,687 44,769 19,545 44,809 8,089 48,862 25,315 30,281 66,854 36,328 65,079 55,180 Basic Diluted $0.07 $0.07 $0.25 $0.25 $0.29 $0.29 $0.29 $0.29 $0.32 $0.31 $0.20 $0.20 $0.24 $0.24 $0.36 $0.36 Total debt, net of cash 707,559 700,011 714,357 709,062 687,662 669,618 664,560 688,405 1 See definition of "Non-GAAP Measures" in the "Overview and Selected Annual Information" section of this MD&A. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 11 Variability in the Company’s quarterly results is driven primarily by the seasonal operating environment in Canada and fluctuations in oil and natural gas commodity prices. Financial and operating results for the Company’s Canadian oilfield services division are generally strongest during the first and fourth quarters when the Company’s customers conduct the majority of their drilling programs. Utilization rates typically decline during the second quarter as spring break-up weather conditions hinder mobility of the Company’s equipment in Canada. Oil and natural gas commodity prices ultimately drive the level of exploration and development activities carried out by the Company’s customers and the resultant demand for the oilfield services provided by the Company. The quarterly results may also be impacted by the Black-Scholes valuation accounting associated with the Company’s share-based compensation and Performance Share Unit plans respectively, which can fluctuate significantly from quarter to quarter as a result of changes in the valuation inputs, as well as changes in foreign currencies against the functional currencies of the Company’s operating entities. In addition to the seasonality noted above, the variability noted in the Company’s quarterly results reflect continued varying levels of demand for oilfield services in the 2017 and 2016 fiscal years compared to prior years. Such demand for oilfield services was positively influenced by more favorable oil and natural gas commodity prices for 2017. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 12 FOURTH QUARTER ANALYSIS (in thousands of Canadian dollars, except per share data and operating information) Revenue Revenue, net of third party 1 Adjusted EBITDA 1 Adjusted EBITDA per share 1 Basic Diluted Net (loss) income Net (loss) income per share Basic Diluted Cash provided by operating activities Funds flow from operations 1 Funds flow from operations per share 1 Basic Diluted Weighted average shares - basic (000s) Weighted average shares - diluted (000s) Drilling Operating days Canada 2 United States International 3 Drilling rig utilization (%) Canada 2 United States International 3 Well Servicing Operating hours Canada United States Well servicing rig utilization rate (%) Canada United States 2017 270,013 241,987 54,820 $0.34 $0.35 46,488 $0.30 $0.30 38,124 12,244 $0.07 $0.07 156,794 156,976 2017 1,649 3,066 1,547 25.3 39.4 36.4 2017 16,947 23,644 28.3 57.1 Three months ended December 31 Change 2016 % change 234,001 204,474 51,665 $0.33 $0.33 36,012 37,513 3,155 $0.01 $0.02 (61,905) 108,393 $(0.41) $(0.41) 8,088 48,862 $0.32 $0.32 153,579 154,093 $0.71 $0.71 30,036 (36,618) $(0.25) $(0.25) 3,215 2,883 15 18 6 3 6 nm nm nm nm (75) (78) (78) 2 2 2016 Change % change 1,271 2,067 1,690 17.1 25.0 37.5 2016 18,967 18,976 29.0 46.9 378 999 (143) 8.2 14.4 (1.1) (2,020) 4,668 (0.7) 10.2 30 48 (8) 48 58 (3) % change (11) 25 (2) 22 nm - calculation not meaningful 1 See definition of "Non-GAAP Measures" in the "Overview and Selected Annual Information" section of this MD&A. Certain prior period amounts have been restated to reflect current year presentation. 2 Excludes coring rigs. 3Includes workover rigs. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 13 REVENUE AND OILFIELD SERVICES EXPENSE ($ thousands) Revenue Canada United States International Total revenue Revenue, net of third party Oilfield services expense Gross margin 2017 2016 Change % change 64,260 129,188 76,565 270,013 241,987 206,750 63,263 61,137 91,881 80,983 234,001 204,474 170,267 63,734 3,123 37,307 (4,418) 36,012 37,513 36,483 (471) 5 41 (5) 15 18 21 (1) Gross margin as a percentage of Revenue, net of third party 26.1 31.2 The Company recorded revenue of $270.0 million for the three months ended December 31, 2017, a 15 percent increase from the $234.0 million recorded in the three months ended December 31, 2016. Drilling operating days for the fourth quarter of 2017 totaled 6,262 days, a 25 percent increase from the prior year of 5,028 drilling operating days. The modest recovery of oil and natural gas commodity prices in 2017 positively impacted the demand for oilfield services. Increased North American demand was offset by the negative translational impact of the strengthening of the United States dollar versus the Canadian dollar compared to the prior year. As a percentage of revenue, net of third party, gross margin decreased for the fourth quarter of 2017 to 26.1 percent from 31.2 percent for the fourth quarter of 2016. The reduction in gross margin in the fourth quarter of 2017 compared to the prior year is due to revenue rate pressures in reaction to reduced levels of demand for oilfield services in a lower commodity price environment and shortfall payments earned in the prior year not earned in 2017. Depreciation expense totaled $91.7 million for the fourth quarter of 2017 compared with $90.1 million for the fourth quarter of 2016. The decrease was due to the negative impact of a two percent year-over-year increase in the United States dollar exchange rate against the Canadian dollar. General and administrative expense decreased 30 percent to $8.4 million (3.1 percent of revenue) for the fourth quarter of 2017 compared with $12.1 million (5.2 percent of revenue) for the fourth quarter of 2016. The decrease in general and administrative expense in the fourth quarter of 2017 compared to the prior year is primarily due to the Company's initiatives to reduce fixed costs in reaction to lower oil and natural gas commodity prices. OUTSTANDING SHARE DATA The following common shares and stock options were outstanding as of March 1, 2018: Common shares Stock options OUTLOOK Industry Overview Number 156,792,521 $ Outstanding 6,477,500 Amount ($) 206,055 Exercisable 2,862,300 Signs of a modest recovery for the industry started to show in 2017. In the first half of 2017 activity picked up substantially compared to 2016 before leveling off in the latter half 2017. Oil prices continued to be volatile, with the price of WTI fluctuating between the low $40’s and mid $60’s throughout the year and early 2018. The rebalancing of the oil markets continues to date in 2018 with the expectation that world GDP and oil demand will increase in the current year and beyond, and that OPEC and non-OPEC members, led by Russia, remain supportive ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 14 of the oil production cuts. This optimism is overshadowed by the expected increase in oil production from the United States. Until the market overall can gain a proper understanding of the United States production capability and sustainability, there appears to be a ceiling on oil prices as additional production could impact oil supply and pricing. In 2018 it is generally expected that oil and natural gas producers will focus more on financial returns. This will impact where and when capital investments are deployed. Areas like the United States expected to continue to see capital deployment in contrast to Canada where ongoing uncertainty of provincial and federal government policies and market pricing are expected to continue impacting the oil and natural gas industry. In addition, companies will continue to seek at contractors that capable of providing drilling and operational efficiencies that will help reduce total well costs. The challenge for oil and natural gas drilling contractors will be how to share in the financial gains that they are creating from these efficiencies. Canadian Activity The AECO natural gas price, oil price differentials and takeaway capacity will likely continue to dominate the headlines in 2018 and will likely continue to cast a shadow over industry activity. Absent any major announcements or volatility in commodity pricing, 2018 drilling activity, is expected to be similar to late 2017. With the corporate tax law changes in the USA that became effective in 2018, there is a possibility for customers with assets in the North America will focus on United States activity before deploying capital in Canada. United States Activity In comparison to the Canada, the United States market is much more optimistic for 2018. Analysts are expecting the rig count to continue to grow in 2018, with some expecting between 50 to 100 additional drilling rigs being activated in 2018 with additional rig deployments into 2019. The tightness and continued expected tightness in the AC 1500 horse power drilling rig category is expected to place upward pressure on rates for that class of assets that could trickle down to lower specification drilling rigs. At the current pricing levels there is minimal expectation that new builds will be introduced into the market during 2018, which may allow for pricing to begin to normalize and lower spec assets to be activated. In 2017, the market experienced upgrades and modifications to drilling rigs. The magnitude of such upgrades is expected to decline in 2018 as the assets that readily could be upgraded have been completed already and the remaining rigs that can be upgraded will involve a substantial capital expenditure, which will require increased pricing and/or longer contract terms to be economical. The reduced corporate tax rate and changes to tax regulations in the United States have and are likely to continue creating incentives for capital to be allocated to the United States. It is expected that 2018 operating activity and pricing in the United States in this market is expected to be higher than 2017. International Activity The Company’s expectation for its International segment is contemplates some growth and continued reduction in costs. The Australian operations appear to have bottomed in 2017 with activity looking to increase in 2018, especially the latter half of 2018. Activity in the Middle East is expected to remain relatively steady with the potential for some rig activations toward the latter half of 2018 as well. There is increased potential that Argentina may add additional drilling rigs and the Company is expected to participate in certain tenders for work in 2018 and beyond. Venezuela as a country continues to have significant social, economical and political challenges and those challenges are expected to continue for some time. The Company is closely monitoring business activities in Venezuela and will react as deemed appropriate. The Company continues to operate in Venezuela and is expected to do so into 2018 and beyond. General Activity The Company expects the overall market to be lower for longer. The modest recovery to date has been slow and steady as expected. The Company continues to review capital projects with returns on the forefront and only plans to proceed with projects that are expected to provide the appropriate returns for shareholders. The cost control and organizational changes that the Company has implemented during the past three years have resulted in reduced general and administrative costs that will be scalable into the future. The Company will continue to look at ways to reduce costs or increase revenue and will be focused on returns for its shareholders. CRITICAL ACCOUNTING ESTIMATES Management is required to make judgments, assumptions and estimates in applying its accounting policies and practices, which have a significant impact on the financial results of the Company. These significant accounting policies involve critical accounting estimates due to complex judgments and assumptions. These estimates, judgments and assumptions ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 15 are based on the circumstances that exist at the reporting date and may affect the reported amounts of income and expenses during the reporting periods and the carrying amounts of assets, liabilities, accruals, provisions, contingent liabilities, other financial obligations, as well as the determination of fair values. Property and Equipment The estimated useful life, residual value and depreciation methods selected are the Company’s best estimate of such and are based on industry practice, historical experience and other applicable factors. These assumptions and estimates are subject to change as more experience is obtained or as general market conditions change, both of which could impact the operations of the Company’s property and equipment. Impairment For impairment testing, the assessment of facts and circumstances is a subjective process that often involves a number of estimates and is subject to interpretation. An impairment is recognized if the carrying value exceeds the recoverable amount for a CGU. Property and equipment are aggregated into CGUs based on their ability to generate separately identifiable and largely independent cash flows. The testing of assets or CGUs for impairment, as well as the assessment of potential impairment reversals, requires that the Company estimate an asset’s or CGU’s recoverable amount. The estimate of a recoverable amount requires a number of assumptions and estimates, including expected market prices, market supply and demand, margins and discount rates. These assumptions and estimates are subject to change as new information becomes available and changes in any of the assumptions could result in an impairment of an asset’s or CGU’s carrying value. Share-based Compensation Measurement inputs include share price on measurement date, exercise price, expected volatility, expected life, expected dividends and the risk-free interest rate. Significant estimates and assumptions are used in determining the expected volatility based on weighted average historic volatility adjusted for changes expected due to publicly available information, weighted average expected life and expected forfeitures, based on historical experience and general option holder behavior. Changes to the input assumptions could have a significant impact on the share-based compensation liability and expense. Income Taxes The Company follows the liability method of accounting for income taxes. Under this method, deferred income taxes are recorded for the effect of any temporary difference between the accounting and income tax basis of an asset or liability, using the substantively enacted income tax rates. Current income taxes for the current and prior periods are measured at the amount expected to be recoverable from or payable to the taxation authorities based on the income tax rates enacted or substantively enacted at the end of the reporting period. The deferred income tax assets and liabilities are adjusted to reflect changes in enacted or substantively enacted income tax rates that are expected to apply, with the corresponding adjustment recognized in net income or in shareholders’ equity depending on the item to which the adjustment relates. Tax interpretations, regulations and legislation in the various jurisdictions in which the Company and its subsidiaries operate are subject to change. As such, income taxes are subject to measurement uncertainty and the interpretations can impact net income through the income tax expense arising from the changes in deferred income tax assets or liabilities. Allowance for Doubtful Accounts The Company is subject to credit risk on accounts receivable balances and assesses the recoverability of accounts receivable balances on an ongoing basis. The Company establishes an allowance for estimated losses for uncollectible accounts as circumstances warrant. The allowance is determined based on customer credit-worthiness, current economic trends and past experience. Assessing accounts receivable balances for recoverability involves significant judgment and uncertainty, including estimates of future events. Changes in circumstances underlying these estimates may result in adjustments to the allowance for doubtful accounts in future periods. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 16 Functional Currency The Company determines functional currency based on the primary economic environment in which the entity operates. This includes a number of factors that must be considered by the Company in using its judgment to determine the appropriate functional currency for each entity. RECENT ACCOUNTING PRONOUNCEMENTS As of January 1, 2018, IFRS 15 Revenue from Contracts with Customers came into effect, replacing IAS 18 Revenue, IAS 11 Construction Contracts and any associated interpretations. The standard is required to be adopted either retrospectively or using a modified transition method, with early adoption permitted. The Company has completed its initial assessment of IFRS 15 Revenue from Contracts with Customers has adopted as of January 1, 2018. This will not have a material impact on the recognition of revenue, however, it will have an impact on the associated disclosures. As of January 1, 2018, IFRS 9 Financial Instruments, came into effect, superseding earlier versions of IFRS 9 and replacing IAS 39 Financial Instruments: Recognition and Measurement. The Company is currently in the process of completing its assessment of the standard and its expected impact on the consolidated financial statements ahead of year end. On January 13, 2016 the IASB issued IFRS 16 - Leases ("IFRS 16") which has not yet been adopted by the Company. IFRS 16 replaces the accounting requirements under IAS 17 - Leases and is effective for annual periods beginning on or after January 1, 2019 with early adoption permitted. IFRS 16 requires all leases to be reported on the Company's balance sheet as assets and liabilities. The Company is in the process of assessing the impact that the amendments will have on its financial statements or whether to early adopt. DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING As of December 31, 2017, the Corporation’s management evaluated the effectiveness of its disclosure controls and procedures as defined in the rules of the Canadian Securities Administrators. This evaluation is performed under the supervision of, and with the participation of, the President and Chief Operating Officer and the Chief Financial Officer. The President and Chief Operating Officer and the Chief Financial Officer have concluded that the Corporation’s Disclosure Controls and Procedures are effective as of December 31, 2017. The President and Chief Operating Officer and Chief Financial Officer do not expect that the Corporation’s disclosure controls and procedures will prevent or detect all errors, misstatements and fraud but they are designed to provide reasonable assurance of achieving these objectives. A control system, no matter how well designed or operated, can only provide reasonable, not absolute, assurance that the corresponding objectives are met. As of December 31, 2017, the management of the Corporation evaluated the Corporation's effectiveness of internal controls over financial reporting, as defined in the rules of the Canadian Securities Administrators. This evaluation is performed under the supervision of, and with the participation of, the President and Chief Operating Officer and Chief Financial Officer. The President and Chief Operating Officer and Chief Financial Officer concluded that the Corporation's internal control over financial reporting was effective as of December 31, 2017. Internal control over financial reporting, no matter how well designed, has inherent limitations and can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. RISKS AND UNCERTAINTIES Oil and Natural Gas Prices The most significant factors affecting the business of the Company are oil and natural gas commodity prices. Commodity price levels affect the capital programs of energy exploration and production companies, as the price they receive for the oil and natural gas they produce has a direct impact on the cash flow available to them and the subsequent demand for oilfield services provided by the Company. Oil and natural gas prices have been volatile in recent years and may continue to be so as supply/demand fundamentals, weather conditions, government regulations, political and economic environments, pipeline capacity, storage levels and other factors outside of the Company’s control continue to influence commodity prices. Demand for the Company’s services in the future will continue to be influenced by oil and natural gas commodity prices and the resultant impact on the cash flow of its customers, and may not be reflective of historical activity levels. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 17 Competition and Industry Conditions The oilfield services industry is, and will continue to be, highly competitive. Contract drilling companies compete primarily on a regional basis and competition may vary significantly from region to region at any particular time. Most drilling and workover contracts are awarded on the basis of competitive bids, which result in price competition. Many drilling, workover and well servicing rigs can be moved from one region to another in response to changes in levels of activity, which can result in an oversupply of rigs in an area. In many markets in which the Company operates, the supply of rigs exceeds the demand for rigs, resulting in further price competition. Certain competitors are present in more than one of the regions in which the Company operates, although no one competitor operates in all of these areas. In Canada, the Company competes with several firms of varying size. In the United States there are many competitors with national, regional or local rig operations. Internationally, there are several competitors in each country where the Company operates and some of those international competitors may be better positioned in certain markets, allowing them to compete more effectively. There is no assurance that the Company will be able to continue to compete successfully or that the level of competition and pressure on pricing will not affect the Company’s margins. Access to Credit Facilities and Debt Capital Markets The Company and its customers require reasonable access to credit facilities and debt capital markets as an important source of liquidity. Global economic events, outside the control of the Company or its customers, may restrict or reduce the access to credit facilities and debt capital markets. Tightening credit markets may reduce the funds available to the Company’s customers for paying accounts receivable balances and may also result in reduced levels of demand for the Company’s services. Additionally, the Company relies on access to credit facilities, along with its reserves of cash and cash flow from operating activities, to meet its obligations and finance operating activities. The Company believes it has adequate bank credit facilities to provide liquidity. Changes in Laws and Regulations The Company and its customers are subject to numerous laws and regulations governing its operations and the exploration and development of oil and natural gas, including environmental regulations. Existing and expected environmental legislation and regulations may increase the costs associated with providing oilfield services, as the Company may be required to incur additional operating costs or capital expenditures in order to comply with any new regulations. The costs of complying with increased environmental and other regulatory changes in the future, such as royalty regime changes, may also have an adverse effect on the cash flows of the Company’s customers and may dampen demand for oilfield services provided by the Company. Foreign Operations The Company provides oilfield services throughout much of North America and internationally in a number of onshore drilling areas. The Canadian, United States, and Australian regulatory regimes are generally stable and, typically, supportive of energy industry activity. Internationally, the Company's operations are subject to regulations in various jurisdictions and support for the oil and natural gas industry can vary in these jurisdictions. There are risks inherent in foreign operations such as unstable government regimes, civil and/or labor unrest, strikes, terrorist threats, regulatory uncertainty and complex commercial arrangements. Risks to the Company's operations include, but are not limited to, loss of revenue, expropriation and nationalization, restrictions on repatriation of income or capital, currency exchange restrictions, contract deprivation, force majeure events and the potential for trade and economic sanctions or other restrictions to be imposed by the Canadian government or other governments or organizations. To mitigate these risks, the Company seeks to negotiate long-term service contracts for drilling services that ideally include early termination provisions and other clauses for the Company's protection. However, there is, and there can be, no assurance that the Company will be fully effective in mitigating foreign operation risks. Such risks could have material adverse impacts on the Company's financial condition and operating results. Foreign Exchange Exposure The Company’s consolidated financial statements are presented in Canadian dollars. Operations in countries outside of Canada result in foreign exchange risk to the Company. The principal foreign exchange risk relates to the conversion of United States dollar-denominated activity to Canadian dollars. The United States/Canadian dollar exchange rate at December 31, 2017 was approximately 1.26 compared with 1.34 at December 31, 2016 and 1.38 at December 31, 2015. In addition, the Company has foreign exchange risk in relation to the conversion of United States dollar-denominated debt to Australian dollars. The United States/Australian dollar exchange rate at December 31, 2017 was approximately ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 18 1.28, compared with 1.38 at December 31, 2016 and 1.37 at December 31, 2015. Fluctuations in the future period's exchange rates will impact the Canadian dollar equivalent of the results reported by foreign subsidiaries. Litigation and Legal Proceedings From time to time, the Company is subject to litigation and legal proceedings that may include employment, tort, commercial and class action suits. Amounts claimed in such suits or actions may be material and accordingly decisions against the Company could have an adverse effect on the Company’s financial condition or results of operations. Operating Risks and Insurance The Company’s operations are subject to risks inherent in the oilfield services industry. Where available and cost- effective, the Company carries insurance to cover the risk to its equipment and people, and each year the Company reviews the level of insurance for adequacy. Although the Company believes its level of insurance coverage to be adequate, there can be no assurance that the level of insurance carried by the Company will be sufficient to cover all potential liabilities. Technology As a result of growing technical demands of resource plays, the Company’s ability to meet customer demands is dependent on continuous improvement to the performance and efficiency of existing oilfield services equipment. There can be no assurance that competitors will not achieve technological advantages over the Company. Reliance on Key Management Personnel The success and growth of the Company is dependent upon its key management personnel. The loss of services of such persons could have a material adverse effect on the business and operations of the Company. No assurance can be provided that the Company will be able to retain key management members. Workforce The Company’s operations are dependent on attracting, developing and maintaining a skilled workforce. During periods of peak activity levels, the Company may be faced with a lack of personnel to operate its equipment. The Company is also faced with the challenge of retaining its most experienced employees during periods of low utilization, while maintaining a cost structure that varies with activity levels. To mitigate these risks, the Company has developed an employee recruitment and training program, and continues to focus on creating a work environment that is safe for its employees. Seasonality and Weather The Company’s Canadian oilfield services operations are impacted by weather conditions that hinder the Company’s ability to move heavy equipment. The timing and duration of “spring break-up”, during which time the Company is prohibited from moving heavy equipment on secondary roads, restricts movement of equipment in and out of certain areas, thereby negatively impacting equipment utilization levels. Further, the Company’s activities in certain areas in northern Canada are restricted to winter months when the ground is frozen solid enough to support the Company’s equipment. This seasonality is reflected in the Company’s operating results, as rig utilization is normally at its lowest during the second and third quarters of the year. The Company continues to mitigate the impact of Canadian weather conditions through expansion into markets not subject to the same seasonality and by working with customers in planning the timing of their drilling programs. In addition, volatility in the weather across all areas of the Company’s operations can create additional risk and unpredictability in equipment utilization rates and operating results. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 19 MANAGEMENT'S REPORT The consolidated financial statements and other information contained in the annual report are the responsibility of the management of the Company. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards consistently applied, using management’s best estimates and judgments, where appropriate. Preparation of financial statements is an integral part of management’s broader responsibilities for the ongoing operations of the Company. Management maintains a system of internal accounting controls to ensure that properly approved transactions are accurately recorded on a timely basis and result in reliable financial statements. The Company’s external auditors are appointed by the shareholders. They independently perform the necessary tests of the Company’s accounting records and procedures to enable them to express an opinion as to the fairness of the consolidated financial statements, in conformity with International Financial Reporting Standards. The Audit Committee, which is comprised of independent directors, meets with management and the Company’s external auditors to review the consolidated financial statements and reports on them to the Board of Directors. The consolidated financial statements have been approved by the Board of Directors. "Signed" Robert H. Geddes President and Chief Operating Officer "Signed" Michael Gray Chief Financial Officer March 1, 2018 President and Chief Operating Officer "Signed" Michael Gray Chief Financial Officer March 1, 2018 ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 20 March 1, 2018 Independent Auditor’s Report To the Shareholders of Ensign Energy Services Inc. We have audited the accompanying consolidated financial statements of Ensign Energy Services Inc. and its subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2017 and December 31, 2016 and the consolidated statements of loss and comprehensive loss, changes in shareholders’ equity and cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. PricewaterhouseCoopers LLP Suite 3100, 111 – 5th Avenue SW, Calgary, Alberta, Canada, T2P 5L3 T: +1 403 509 7500 F: +1 403 781 1825 “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 21 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Ensign Energy Services Inc. and its subsidiaries as at December 31, 2017 and December 31, 2016 and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 22 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As at (in thousands of Canadian dollars) Assets Current Assets Cash and cash equivalents (Note 16) Accounts receivable Inventories, investments and other Income taxes receivable Total current assets Property and equipment (Note 5) Total assets Liabilities Current Liabilities Accounts payable and accruals (Note 6) Dividends payable Share-based compensation (Note 11) Income taxes payable Current portion of long-term debt (Note 7) Total current liabilities Long-term debt (Note 7) Share-based compensation (Note 11) Deferred income taxes (Note 8) Total liabilities Shareholders' Equity Share capital (Note 9) Contributed surplus Foreign currency translation reserve Retained earnings Total shareholders' equity December 31 2017 December 31 2016 $ 32,374 $ 29,837 232,155 92,424 3,546 360,499 205,347 48,850 17,208 301,242 2,597,966 2,913,153 $ 2,958,465 $ 3,214,395 $ 190,152 $ 153,385 18,849 3,021 3,419 487,257 702,698 252,676 2,708 311,007 18,877 5,943 — 134,190 312,395 583,269 2,539 483,703 1,269,089 1,381,906 206,042 1,126 237,885 1,244,323 1,689,376 180,666 1,524 292,547 1,357,752 1,832,489 Total liabilities and shareholders' equity $ 2,958,465 $ 3,214,395 Contingencies and commitments (Note 19) See accompanying notes to the consolidated financial statements. Approved by the Board of Directors: "Signed" John Schroeder "Signed" James B. Howe Chairman of the Audit Committee and Director Director ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 23 CONSOLIDATED STATEMENTS OF LOSS For the years ended December 31 (in thousands of Canadian dollars, except per share data) Revenue Expenses Oilfield services Depreciation (Note 5) General and administrative Share-based compensation (Note 11) Foreign exchange and other Total expenses Loss before interest and income taxes Interest income Interest expense Loss before income taxes Income taxes (Note 8) Current tax Deferred tax Total income taxes Net loss Net loss per share (Note 10) Basic Diluted See accompanying notes to the consolidated financial statements. 2017 2016 $ 1,000,650 $ 859,702 759,700 325,811 39,166 656 21,903 622,026 349,947 52,503 10,287 (987) 1,147,236 1,033,776 (146,586) (174,074) (281) 41,491 (367) 30,838 (187,796) (204,545) (2,353) (147,799) (150,152) (21,510) (32,513) (54,023) (37,644) $ (150,522) (0.24) (0.24) $ $ (0.99) (0.98) $ $ $ ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 24 CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS For the years ended December 31 (in thousands of Canadian dollars) Net loss Other comprehensive (loss) income Item that may be subsequently reclassified to profit or loss Foreign currency translation adjustment Comprehensive loss See accompanying notes to the consolidated financial statements. 2017 2016 $ (37,644) $ (150,522) (54,662) (39,683) $ (92,306) $ (190,205) ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 25 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Share Capital Contributed Surplus Foreign Currency Translation Reserve Retained Earnings Total Equity (in thousands of Canadian dollars) Balance January 1, 2017 $ 180,666 $ 1,524 $ 292,547 $ 1,357,752 $ 1,832,489 Net loss Other comprehensive loss Total comprehensive loss Dividends Share-based compensation Shares vested previously held in trust Purchase of shares held in trust Balance December 31, 2017 Balance January 1, 2016 Net loss Other comprehensive loss Total comprehensive loss Dividends Share-based compensation Shares vested previously held in trust Purchase of shares held in trust — — — 23,208 — 3,271 (1,103) — — — — 2,873 (3,271) — — (37,644) (54,662) (54,662) — (37,644) (37,644) (54,662) (92,306) — — — — (75,785) (52,577) — — — 2,873 — (1,103) $ $ 206,042 $ 1,126 $ 237,885 $ 1,244,323 $ 1,689,376 169,171 $ 2,538 $ 332,230 $ 1,582,657 $ 2,086,596 — — — 7,943 — 5,587 (2,035) — — — — 4,573 (5,587) — — (150,522) (150,522) (39,683) (39,683) — (39,683) (150,522) (190,205) — — — — (74,383) (66,440) — — — 4,573 — (2,035) Balance December 31, 2016 $ 180,666 $ 1,524 $ 292,547 $ 1,357,752 $ 1,832,489 See accompanying notes to the consolidated financial statements. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 26 CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31 (in thousands of Canadian dollars) Cash provided by (used in) Operating activities Net loss Items not affecting cash Depreciation Share-based compensation, net of cash paid Unrealized foreign exchange and other Accretion on long-term debt Deferred income tax Funds flow from operations Net change in non-cash working capital (Note 16) Cash provided by operating activities Investing activities Purchase of property and equipment Proceeds from disposals of property and equipment Net change in non-cash working capital (Note 16) Cash used in investing activities Financing activities Net increase (decrease) in bank credit facilities Purchase of shares held in trust (Note 9) Dividends (Note 9) Net change in non-cash working capital (Note 16) Cash used in financing activities Net increase (decrease) in cash and cash equivalents Effects of foreign exchange on cash and cash equivalents Cash and cash equivalents Beginning of year End of year Supplemental information Interest paid Income taxes recovered See accompanying notes to the consolidated financial statements. 2017 2016 $ (37,644) $ (150,522) 325,811 349,947 145 (918) 1,843 (147,799) 141,438 (6,291) 135,147 (123,763) 6,051 (2,667) (120,379) 42,189 (1,103) (52,577) (482) 10,287 (6,864) 316 (32,513) 170,651 (5,315) 165,336 (43,394) 14,274 (23,627) (52,747) (48,995) (2,035) (66,440) (1,887) (11,973) (119,357) 2,795 (258) 29,837 32,374 37,161 (19,688) $ $ $ $ $ $ (6,768) (3,781) 40,386 29,837 30,851 (9,249) ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 27 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2017 and 2016 (in thousands of Canadian dollars, except share and per share data) 1. NATURE OF BUSINESS Ensign Energy Services Inc. is incorporated under the laws of the Province of Alberta, Canada. The address of its registered office is 1000, 400 – 5th Avenue S.W., Calgary, Alberta, Canada, T2P 0L6. Ensign Energy Services Inc. and its subsidiaries and partnerships (the “Company”) provide oilfield services to the oil and natural gas industry in Canada, the United States and internationally. 2. BASIS OF PRESENTATION The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). These consolidated financial statements were approved by the Company’s Board of Directors on March 1, 2018, after review by the Company’s Audit Committee. 3. SIGNIFICANT ACCOUNTING POLICIES (a) Measurement basis These consolidated financial statements have been prepared on an historical cost basis, except as discussed in the significant accounting policies below. (b) Basis of consolidation These consolidated financial statements include the accounts of Ensign Energy Services Inc. and its subsidiaries and partnerships, substantially all of which are wholly owned, which it controls. The Company controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Intercompany balances and transactions, including unrealized gains or losses between subsidiaries and partnerships are eliminated on consolidation. (c) Cash and cash equivalents Cash and cash equivalents consists of cash and cash equivalents with maturities of three months or less or convertible to cash on demand without penalty. (d) Inventories Inventories, comprised of spare equipment parts and consumables, are recorded at the lower of cost and net realizable value. Cost is determined on a specific item basis. (e) Property and equipment Property and equipment is initially recorded at cost. Costs associated with equipment upgrades that result in increased capabilities or performance enhancements of property and equipment are capitalized. Costs incurred to repair or maintain property and equipment are expensed as incurred. Property and equipment is subsequently carried at cost less accumulated depreciation and write-downs and is derecognized on disposal or when there is no future economic benefit expected from its use or disposal. Gains or losses on derecognition of property and equipment are recognized in net income. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 28 Depreciation is based on the estimated useful lives of the assets as follows: Asset Class Expected Life Method Residual Oilfield services equipment Drilling rigs and related 2,500 - 5,000 operating days Unit-of-production Well servicing rigs 24,000 operating hours Unit-of-production Oil sands coring rigs 680 - 1,370 operating days Unit-of-production Heavy oilfield service equipment 3 - 15 years Straight-line Drill pipe 1,500 operating days Unit-of-production Drilling rig spare equipment 1 - 10 years Buildings Automotive equipment 20 years 3 years Office furniture and shop equipment 5 - 15 years Straight-line Straight-line Straight-line Straight-line 10% 10% 10% 10% — — — 15% — The calculation of depreciation includes assumptions related to useful lives and residual values. The assumptions are based on experience with similar assets and are subject to change as new information becomes available. During the year the Company recorded additional depreciation for assets that have been inactive for a period of time. Property and equipment is reviewed for impairment when events or changes in circumstances indicate that its carrying value may not be recoverable. The Company’s operations and business environment are routinely monitored, and judgment and assessments are made to determine if an event has occurred that indicates possible impairment. If indicators of impairment exist, the recoverable amount of the asset or cash-generating unit (“CGU”) is estimated. If the carrying value of the asset or CGU exceeds the recoverable amount, the asset or CGU is written down to its recoverable amount. The recoverable amount of an asset or CGU is the greater of its fair value less costs to dispose and value-in-use. Value-in-use is determined as the amount of estimated risk- adjusted discounted future cash flows. (f) Business combinations The acquisition method of accounting is used to account for the acquisition of subsidiaries and businesses by the Company at the date control of the business is obtained. The cost of the business combination is measured as the aggregate of the fair value at the date of exchange of assets given, liabilities incurred or assumed, and equity instruments issued by the Company in exchange for control of the acquiree. Acquisition-related costs are expensed as incurred. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition are recognized at their fair values at the acquisition date. (g) Revenue recognition Revenue from oilfield services is generally earned based upon service orders or contracts with a customer that include fixed or determinable prices based upon daily, hourly or job rates. Revenue is recognized when services are performed and only when collectability is reasonably assured. Customer contract terms do not include provisions for significant post-service delivery obligations. The Company also provides services under turnkey contracts whereby oilfield services are performed for a fixed price, regardless of the time required or the problems encountered performing the service. Revenue from such contracts is recognized using the percentage-of-completion method based upon costs incurred to date and estimated total contract costs. Anticipated losses, if any, on uncompleted contracts are recorded at the time the estimated costs exceed the contract revenue. For contracts that are terminated prior to the specified term, early termination payments received by the Company are recognized as revenue when all contractual requirements are met. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 29 (h) Foreign currency translation The consolidated financial statements are presented in Canadian dollars which is the Company’s functional currency. Financial statements of the Company’s United States and international subsidiaries have a functional currency different from Canadian dollars and are translated to Canadian dollars using the exchange rate in effect at the year-end date for all assets and liabilities, and at average rates of exchange during the year for revenues and expenses. All changes resulting from these translation adjustments are recognized in other comprehensive (loss) income. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in currencies other than an operation’s functional currency are recognized in the consolidated statement of (loss) income. (i) Borrowing costs Interest and borrowing costs that are directly attributable to the acquisition, construction or production of qualifying assets are capitalized as part of the cost of those assets. Qualifying assets are those which take a substantial period of time to prepare for their intended use. Capitalization ceases when substantially all activities necessary to prepare the qualifying asset for its intended use are complete. All other interest is recognized in the consolidated statement of (loss) income in the period in which it is incurred. (j) Income taxes The Company follows the liability method of accounting for income taxes. Under this method, income tax liabilities and assets are recognized for the estimated tax consequences attributable to differences between the amounts reported in the consolidated financial statements and their respective tax bases, using enacted or substantively enacted income tax rates. The effect of a change in income tax rates on deferred income tax liabilities and assets is recognized in income in the period in which the change is substantively enacted. Deferred tax assets are recognized to the extent that future taxable income will be available against which temporary differences can be utilized. (k) Share-based compensation The Company has an employee share option plan or equivalent that provides all option holders the right to elect to receive either common shares or a direct cash payment in exchange for the options exercised. These options are accounted for as a compound financial instrument, which requires the fair value of the liability component to be determined first and the residual value, if any, allocated to the equity component. The fair value of the settlement option under cash and shares is the same; therefore these options are accounted for as cash-settled awards. The Company has other cash-settled share-based compensation plans. Cash-settled share-based compensation plans are recognized as compensation expense over the vesting period using fair values with a corresponding increase or decrease in liabilities. The liability is remeasured at each reporting date and at the settlement date. Any changes in the fair value of the liability are recognized as share-based compensation expense in the statement of income. The fair value is determined using the Black-Scholes option pricing model. The Company has established Performance Share Units (PSU) incentive plan measured at the fair value when granted using the volume weighted average of the Company's stock price for the ten day period preceding the reporting date, as well as certain performance factors assessed by management and subject to a two percent cap based on certain financial performance metrics. The fair value is re-measured at each reporting date. The Company has share savings and share bonus plans for employees, as well as a program whereby a portion of the retainer paid to Directors is in the form of common shares of the Company. In all cases, any common shares acquired for such plans are purchased in the open market and administered through trusts until the shares are vested. The share purchase price is considered the fair value. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 30 (l) Financial instruments All financial instruments are measured at fair value upon initial recognition of the transaction. Measurement in subsequent periods is dependent on whether the instrument is classified as a “financial asset or financial liability at fair value through profit or loss”, “available-for-sale financial assets”, “held-to-maturity investments”, “loans and receivables”, or “other financial liabilities”. The Company derecognizes a financial asset when the contractual right to the cash flows from the asset expires, or it transfers the right 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. The Company derecognizes a financial liability when its contractual obligations are discharged, cancelled or expired. Financial assets and liabilities are offset and the net amount presented in the balance sheet when the Company has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. The Company has the following non-derivative financial assets: (i) Financial assets at fair value through profit or loss: Cash and cash equivalents are held for trading within the fair value through profit or loss category. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in net income. (ii) Loans and receivables: Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value, adjusted for any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. The Company’s trade and other receivables are categorized as loans and receivables. (iii) Available for sale: From time to time, the Company may have certain equity investments in certain entities and the fair value is determined using Level 1 of the three-level hierarchy. Investments that have a quoted price in an active market are measured at fair value with changes in fair value recognized in other comprehensive income. When the investment is ultimately sold, any gains or losses are recognized in net income and any unrealized gains or losses previously recognized in other comprehensive income are reversed. The Company has the following non-derivative financial liabilities: (i) Other financial liabilities: Trade and other payables, finance lease obligations, senior unsecured notes and bank credit facilities are classified as “other financial liabilities”. Other financial liabilities are recognized initially at fair value, net of any directly attributable transaction costs. Other financial liabilities, including the Senior Notes, are subsequently measured at amortized cost using the effective interest method. Transaction costs incurred with respect to the credit facilities are deferred and amortized using the straight-line method over the term of the facility. The asset is recognized in other assets on the balance sheet while the amortization is included in finance costs within net income. (ii) Equity instruments: 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. (m) Critical judgments and accounting estimates Preparation of the Company’s consolidated financial statements in accordance with IFRS requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Actual results could differ from those estimates. Estimates, judgments and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 31 The following are the most critical estimates and assumptions used in determining the value of assets and liabilities: Allowance for doubtful accounts The Company establishes an allowance for estimated losses for uncollectible accounts. The allowance is determined based on customer credit-worthiness, current economic trends and past experience. Information regarding the allowance for doubtful accounts is included in Note 18. Property and equipment The calculation of depreciation includes assumptions related to useful lives and residual values. Assumptions are based on experience with similar assets and is subject to change as new information becomes available. In addition, assessing for impairment requires estimates and assumptions. Assets are grouped into CGUs based on separately identifiable and largely independent cash inflows and are used for impairment testing. Estimates of future cash flows used in the evaluation of impairment of assets are made using management’s forecasts of market prices, market supply and demand, margins, and discount rates. Information regarding property and equipment is included in Note 5. Share-based compensation Measurement inputs include share price on measurement date, exercise price, expected volatility, weighted average expected life, expected dividends, and risk-free interest rate. Significant estimates and assumptions are used in determining the expected volatility based on weighted average historic volatility adjusted for changes expected due to publicly available information, weighted average expected life and expected forfeitures, based on historical experience and general option-holder behavior. Changes to input assumptions will impact share- based compensation liability and expense. Information regarding share-based compensation is included in Note 11. Income taxes The Company is subject to income taxes in a number of tax jurisdictions. The amount expected to be settled and the actual outcome and tax rates can change over time, depending on the facts and circumstances. Changes to these assumptions will impact income tax and the deferred tax provision. Information regarding income taxes is included in Note 8. Critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements are as follows: Functional currency The Company determines functional currency based on the primary economic environment in which the entity operates. This includes a number of factors that must be considered by the Company in using its judgment to determine the appropriate functional currency for each entity. These factors include currency of revenue contracts and currency that mainly influences operating, financing and investing activities. Information regarding the specific functional currencies by Subsidiaries and Partnerships is included in Note 15. Impairments Assessing for indicators of possible impairment requires judgment in the assessment of facts and circumstances and is a subjective process that often involves a number of estimates and is subject to interpretation. Information regarding impairment is included in Note 5. Deferred income tax assets The recognition of deferred tax assets is based on judgments about future taxable profits. (n) Recent accounting pronouncements As of 1 January, 2018, IFRS 15 Revenue from Contracts with Customers will come in effect, replacing IAS 18 Revenue, IAS 11 Construction Contracts and any associated interpretations. The standard is required to be adopted either retrospectively or using a modified transition method, with early adoption permitted. The ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 32 Company has completed its initial assessment of IFRS 15 Revenue from Contracts with Customers and determined that it will be adopted as of 1 January, 2018 and that it will not have a material impact on the recognition of revenue, however, it will have an impact on the associated disclosures. As of 1 January, 2018, IFRS 9 Financial Instruments, will come into effect, superseding earlier versions of IFRS 9 and replacing IAS 39 Financial Instruments: Recognition and Measurement. The Company is currently in the process of completing its assessment of the standard and its expected impact on the consolidated financial statements ahead of year end. On January 13, 2016 the IASB issued IFRS 16 - Leases ("IFRS 16") which has not yet been adopted by the Company. IFRS 16 replaces the accounting requirements under IAS 17 - Leases and is effective for annual periods beginning on or after January 1, 2019 with early adoption permitted. IFRS 16 requires all leases to be reported on the Company's balance sheet as assets and liabilities. The Company is in the process of assessing the impact that the amendments will have on its financial statements or whether to early adopt. 4. FOREIGN OPERATIONS The Company provides oilfield services throughout much of North America and internationally in a number of onshore drilling areas. The Company’s foreign operations, with the general exception of operations in the United States and Australia, are subject to a number of risks and uncertainties such as unstable government regimes, civil and/or labor unrest, strikes, terrorist threats, regulatory uncertainty and complex commercial arrangements. The Company’s operations in Venezuela and Argentina are subject to certain restrictions with respect to the transfer of funds into or out of such countries; however, such restrictions are not considered significant to the Company at this time due to the relatively small size of the operations and certain contractual provisions that have been put in place designed to protect the Company. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 33 5. PROPERTY AND EQUIPMENT Cost: Balance at December 31, 2015 $ 5,148,188 $ 146,693 $ 73,831 $ 5,368,712 Rig and related equipment Automotive and other equipment Land and buildings Total Additions Disposals Asset decommissioning and write-downs Effects of foreign exchange Balance at December 31, 2016 Additions Disposals Asset decommissioning Effects of foreign exchange Balance at December 31, 2017 Accumulated depreciation and write-downs Balance at December 31, 2015 Depreciation Disposals Asset decommissioning and write-downs Effects of foreign exchange Balance at December 31, 2016 Depreciation Disposals Asset decommissioning Effects of foreign exchange Balance at December 31, 2017 Net book value: At December 31, 2016 At December 31, 2017 $ $ $ $ $ 39,096 (81,424) (61,191) (72,856) 4,971,813 112,790 (50,268) — 3,199 (23,147) — (4,042) 122,703 10,031 443 — 1,099 (1,860) — (1,025) 72,045 942 (823) — 43,394 (106,431) (61,191) (77,923) 5,166,561 123,763 (50,648) — (131,816) (4,319) (2,697) (138,832) 4,902,519 $ 128,858 $ 69,467 $ 5,100,844 (1,979,677) $ (103,407) $ (20,048) $ (2,103,132) (332,740) 80,865 61,191 33,192 (2,137,169) (308,869) 39,286 — 34,720 (13,093) 20,497 — 1,925 (94,078) (13,559) (1,934) — 3,970 (3,036) (348,869) 695 — 228 102,057 61,191 35,345 (22,161) (2,253,408) (3,994) (326,422) 231 — 679 37,583 — 39,369 (2,372,032) $ (105,601) $ (25,245) $ (2,502,878) 2,834,644 $ 2,530,487 $ 28,625 $ 23,257 $ 49,884 $ 2,913,153 44,222 $ 2,597,966 Property and equipment includes equipment under construction of $34,980 (2016 - $106,881) that has not yet been subject to depreciation. During the year, the Company decommissioned 1 drilling rig that had been fully depreciated. The adverse economic effects arising from the sustained low oil and natural gas prices are considered indicators of possible impairment of the Company's assets, and accordingly an asset impairment test was performed by Management. The Company completed impairment tests in each of its CGU's using five year cash flow projections with a terminal value and concluded that no impairment charges were required for any CGU's as at December 31, 2017. The impairment tests were based on the following key assumptions: • a weighted average pre-tax discount rate of 10% to 14% based on the cost of the Company's capital and debt, asset and country risk, together with past experience; • cash flow projections based on the assumption that activity levels will return to 85% of 2014 EBITDA in the year 2022; and • a terminal growth rate of 2%. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 34 The Company performed a sensitivity analysis and noted no material impact in any CGU under any of the following situations: • discount rates 2.3% higher or lower; • cash flows 24% higher or lower; and • a terminal growth rate 2% higher or lower. 6. ACCOUNTS PAYABLE AND ACCRUALS Trade payables Accrued liabilities Accrued payroll Interest payable Deferred revenue Other liabilities 7. BANK CREDIT FACILITIES AND LONG-TERM DEBT Drawings on the Global Bank Facility Senior unsecured notes Tranche A, due February 22, 2017, 3.43% Tranche B, due February 22, 2019, 3.97% Tranche C, due February 22, 2022, 4.54% Capital Lease Commitments Unamortized deferred financing costs Total Less: current portion Total long-term debt Bank credit facilities: December 31 2017 December 31 2016 $ 110,789 $ 8,302 47,582 892 14,579 8,008 58,705 30,329 37,321 1,362 23,808 1,860 $ 190,152 $ 153,385 December 31 2017 December 31 2016 $ 488,677 $ 316,701 - 125,730 125,730 1,436 (1,640) $ $ 739,933 (487,257) 252,676 $ $ 134,270 134,270 134,270 - (2,052) 717,459 (134,190) 583,269 As at December 31, 2017, the Company’s available bank credit facilities consists of a $500,000 (2016 - $500,000) global revolving credit facility (the “Global Bank Facility”). The Global Bank Facility is available to the Company and certain of its wholly-owned subsidiaries, and may be drawn in Canadian, United States or Australian dollars, up to the equivalent value of $500,000 Canadian dollars. The Company finalized a $50.0 million accordion in the second quarter of 2017, it is to be included in the existing revolving global facilities but not yet exercised. Interest is incurred on the utilized balance of the Global Bank Facility based on election of one of the following options when funds are drawn: a. The bank's Canadian prime lending rate plus 0.20% to 2.50% b. The US base rate plus 0.20% to 2.50% c. The BBSY rate plus 1.20% to 3.50% d. The BA rate plus 1.20% to 3.50% e. The LIBOR rate plus 1.20% to 3.50% The Global Bank Facility matures October 3, 2018, unless extended and is unsecured. No principal payments are due until then. At December 31, 2017 the Company had $23 thousands outstanding in letters of credit and bank guarantees (2016 - $9,250). Included in the drawings on the Global Bank Facility balance is an Australian denominated portion of $152,300 (2016 - USD $90,000, AUD $140,800). ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 35 The Global Bank Facility has the following covenant requirements: • The Consolidated Senior Debt (being the Company's bank debt and outstanding senior unsecured notes) to Consolidated EBITDA Ratio shall not exceed 3.75:1.00 as at the end of the Fiscal Quarter ending on December 31, 2017, and 3.50:1.00 at any time thereafter; • The Consolidated Debt to Consolidated EBITDA Ratio shall not exceed 4.75:1.00 as at the end of the Fiscal Quarter ending on December 31, 2017, and 4.25:1.00 at any time thereafter; • The Consolidated Debt to Consolidated Capitalization Ratio as at the end of any Fiscal Quarter shall not exceed 45%; and • The Consolidated EBITDA to Consolidated Interest Expense as at the end of any Fiscal Quarter shall not be less than 3.00:1.00. Consolidated EBITDA is defined under the Agreement as net income from continuing operations for the 12 month period then ended determined in accordance with IFRS before interest expense, depreciation, amortization and accretion expenses, all provisions for taxes, all non-cash expenses and non-cash income, the amount of any stock- based compensation; and extraordinary gains and losses. During the first quarter of 2014, the Company secured a $20,000 uncommitted facility, solely for issuing letters of credit, primarily used for bidding on contracts in the normal course of business. As at December 31, 2017, the Company had $10,530 (2016 - $3,406) outstanding in letters of credit under the facility. Senior unsecured notes: On February 22, 2012, the Company completed the private placement of USD $300.0 million of senior unsecured notes (the “Notes”) with the terms noted above. Interest on the Notes is payable semi-annually on May 31st and November 30th each year with final interest payments due on expiry of the Notes. These Notes are unsecured, rank equally with the Company’s Global Bank Facility and have been guaranteed by the Parent company and certain of the Company’s subsidiaries located in Canada, the United States and Australia. Interest accrued on the Notes at December 31, 2017 was $892 (2016 - $1,362) and has been included in accounts payable and accruals on the consolidated statement of financial position. The Company incurred financing costs associated with the Notes that are being deferred and amortized using the effective interest method. During the year ended December 31, 2017, the Company extinguished Tranche A of the senior unsecured notes using the Global Bank Facility. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 36 8. INCOME TAXES Analysis of deferred tax liability: Property and equipment Share-based compensation Non-capital losses Other Net deferred tax liability Deferred Tax: Deferred tax asset recovered within 12 months Deferred tax asset recovered after 12 months Deferred tax liability recovered within 12 months Deferred tax liability recovered after 12 months December 31 2017 December 31 2016 $ 427,893 $ 614,965 $ $ (803) (1,497) (109,808) (120,644) (6,275) (9,121) 311,007 $ 483,703 (11,291) $ (9,720) (109,808) (133,019) 4,213 427,893 4,375 622,067 Net deferred tax liability $ 311,007 $ 483,703 The provision for income taxes is different from the expected provision for income taxes using combined Canadian federal and provincial income tax rates for the following reasons: For the years ended Income (loss) before income taxes Income tax rate Expected income tax expense Increase (decrease) from: December 31 2017 December 31 2016 $ (187,796) $ (204,545) 26.9% 26.9% (50,517) (55,023) Higher effective tax rate on foreign operations (9,848) (10,462) Non-deductible expenses Adjustments from prior years Functional currency translation adjustment and other Rate change impact on deferred taxes Income tax expense 3,624 7,442 7,107 (107,960) 3,116 4,050 (704) 5,000 $ (150,152) $ (54,023) The statutory rate for 2017 increased slightly over that of 2016 due to the increase in the Alberta tax rate, effective July 1, 2015. The United States passed comprehensive tax reform under the Tax Cut and Jobs Act (“Tax Act”) on December 22, 2017. The Federal corporate income tax rate will drop from 35% to 21% beginning January 1, 2018. Due to these changes, the Company has revalued its deferred tax liability as at December 31, 2017 and the result of this revaluation was a deferred tax recovery for the year ended December 31, 2017 of $109.3 to reduce the deferred tax liability balance. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 37 9. SHARE CAPITAL (a) Authorized Unlimited common shares, no par value Unlimited preferred shares, no par value, issuable in series (b) Issued, fully paid and outstanding Opening balance – January 1 Shares issue as part of the dividend reinvestment plan Changes in unvested shares held in trust Number of Common Shares 153,594,857 $ 2,933,708 224,644 2017 Amount 180,666 23,208 2,168 Number of Common Shares 152,302,273 $ 1,080,777 211,807 2016 Amount 169,171 7,943 3,552 Closing balance - December 31 156,753,209 $ 206,042 153,594,857 $ 180,666 The total number of unvested shares held in trust for share-based compensation plans as at December 31, 2017 was 321,272 (December 31, 2016 – 545,916). (c) Dividends During the year ended December 31, 2017, the Company declared dividends of $75,785 (2016 - $74,383), being $0.48 per common share (2016 - $0.48 per common share). Subsequent to December 31 2017, the Company declared a dividend for the first quarter of 2018 of $0.12 per common share or approximately $18,877. The dividend has not been provided for and is pursuant to the quarterly dividend policy adopted by the Company. Pursuant to subsection 89(1) of the Canadian Income Tax Act (“ITA”), the dividend being paid is designated as an eligible dividend, as defined in subsection 89(1) of the ITA. 10. NET LOSS PER SHARE Basic net loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period adjusted for conversion of all potentially dilutive common shares. Diluted net loss is calculated using the treasury share method, which assumes that all outstanding share options are exercised, if dilutive, and the assumed proceeds are used to purchase the Company’s common shares at the average market price during the period. Net loss attributable to common shareholders: Basic and diluted Weighted average number of common shares outstanding: Basic Potentially dilutive share-based compensation plans Diluted December 31 2017 December 31 2016 $ (37,644) $ (150,522) 156,545,624 152,759,973 182,153 424,359 156,727,777 153,184,332 Share options of 4,890,600 (2016 – 5,037,000) were excluded from the calculation of diluted weighted average number of common shares outstanding as they were anti-dilutive. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 38 11. SHARE-BASED COMPENSATION Share option plan The Company has an employee share option plan that provides all option holders the right to elect to receive either common shares or a direct cash payment in exchange for the options exercised. The Company may grant options to its employees for up to 14,886,400 (2016 - 14,885,900) common shares. The options’ exercise price equals the market price of the Company’s common shares on the date of grant. Share options granted vest evenly over a period of five years. The total intrinsic value of the liability for vested benefits at December 31, 2017 was $2,278 (2016 - $2,817). A summary of the Company’s share option plan as of December 31, 2017 and 2016 and the changes during the years then ended, is presented below: Outstanding – January 1 Granted Exercised for cash Forfeited Expired Outstanding - December 31 Exercisable - December 31 Number of Share Options 5,037,700 $ 2,064,750 (2,100) (342,850) (32,600) 6,724,900 3,032,400 $ $ 2017 Weighted Average Exercise Price 10.74 7.18 7.30 9.88 15.51 9.67 11.35 Number of Share Options 7,404,000 $ — (32,200) (991,100) (1,343,000) 5,037,700 1,938,600 $ $ 2016 Weighted Average Exercise Price 12.04 — 7.30 12.08 17.00 10.74 12.24 The weighted average share price at the date of exercise of options in 2017 was $7.30 per common share (2016 - $9.10). The following table lists the options outstanding at December 31, 2017: Exercise Price $6.02 to $9.00 $9.01 to $12.00 $12.01 to $16.13 Outstanding Options Average Vesting Remaining (in years) Weighted Average Exercise Price Options Exercisable Weighted Average Exercise Price 3,825,200 1,625,700 1,274,000 6,724,900 3.75 $ 2.00 1.00 2.80 $ 7.22 10.37 16.13 9.67 1,001,400 $ 1,007,100 1,023,900 3,032,400 $ 7.46 10.37 16.13 11.35 The assumptions used to estimate the fair value of employee share options as at December 31, were: Remaining expected life (years) Volatility (percent) Forfeiture rate (percent) Risk-free interest rate (percent) Expected dividend (percent) December 31 2017 December 31 2016 2.6 40.0 6.6 1.7 7.4 3.0 40.0 6.6 0.9 5.1 The expected volatility is determined based on weighted average historic prices for the Company’s common shares. The forfeiture rate is estimated based on historical experience and general option holder behavior. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 39 Share Appreciation Rights (SARs) The Company has granted share appreciation rights (“SARs”) to certain employees that entitle the employees to a cash payment. The amount of the cash payment is determined based on the increase in the share price of the Company between grant date and exercise date. Grants under the plan vest evenly over a period of five years. A summary of the Company’s SARs plan as of December 31, 2017 and 2016 and the changes during the years ended, is presented below: Outstanding – January 1, 2016 Granted Exercised Forfeited Expired Outstanding - December 31, 2017 Exercisable - December 31, 2017 2017 Weighted Average Exercise Price 10.97 6.97 — 10.83 15.51 9.39 11.58 Number of SARs 477,100 $ 241,000 — (101,400) (4,000) 612,700 242,600 $ $ 2016 Weighted Average Exercise Price 12.70 — 7.30 13.83 17.20 10.97 12.52 Number of SARs 895,100 $ — (2,300) (307,200) (108,500) 477,100 189,900 $ $ No SARs were exercised in 2017. The weighted average share price at the date of exercise of SARs in 2016 was $8.51 per common share. The following table lists the SARs outstanding at December 31, 2017: Exercise Price $6.02 to $9.00 $9.01 to $12.00 $12.01 to $16.13 SARs Outstanding Average Vesting Remaining (in years) Weighted Average Exercise Price SARs Exercisable Weighted Average Exercise Price 382,700 115,000 115,000 612,700 3.92 $ 2.00 1.00 3.07 $ 7.08 10.37 16.13 9.39 81,600 $ 69,000 92,000 242,600 $ 7.47 10.37 16.13 11.58 Performance Share Units (PSUs) During the third quarter of 2017 the Company granted Performance Share Units (PSUs) to certain officers and employees of the Company to participate in the growth and development of the Company and to promote further alignment of interests between employees and the shareholders. PSUs are subject to the Company's performance metrics assessed by management with a three year performance period. Each PSU granted permits the holder to receive a cash payment equal to the fair market value of a share as of the maturity date, adjusted for a performance multiplier. A summary of the activity under this share based incentive plan is presented below: Outstanding – January 1, 2017 Granted Granted through dividend payment Forfeited Outstanding - December 31, 2017 Outstanding — 714,253 34,332 (53,602) 694,983 Included in net earnings for the year ended December 31, 2017 is an expense of $1.1 million (2016 - $nil). This was calculated using the trailing ten day volume weighted average share price of the Company's underlying common shares, as the PSUs have no exercise price, adjusted for performance factors and subject to a two percent cap based on certain financial performance metrics. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 40 12. SEGMENTED INFORMATION The Company determines its operating segments based on internal information regularly reviewed by management to allocate resources and assess performance. Oilfield services are provided in Canada, the United States and internationally. The amounts related to each geographic area are as follows: As at and for the year ended December 31, 2017 Canada United States International Total Revenue Depreciation and amortization (Loss) income before interest and income taxes Total assets Total liabilities Purchase of property & equipment, net As at and for the year ended December 31, 2016 Revenue Depreciation and amortization (Loss) income before interest and income taxes Total assets Total liabilities Purchase of property & equipment, net 262,793 110,808 (78,377) 980,476 561,809 21,459 Canada 222,804 121,141 (76,303) 1,036,806 725,434 5,864 278,361 1,000,650 459,496 158,157 (61,818) 1,326,988 486,653 83,158 56,846 (6,391) 651,001 220,627 13,095 United States International 337,950 164,306 (80,151) 1,456,516 444,713 (1,442) 298,948 64,500 (17,620) 721,073 211,759 24,698 325,811 (146,586) 2,958,465 1,269,089 117,712 Total 859,702 349,947 (174,074) 3,214,395 1,381,906 29,120 There are no material differences in the basis of accounting or the measurement of (loss) income, assets and liabilities between the Corporation and reported segment information, except that certain inter-company liabilities and equity are offset with the assets of the appropriate related segment. Revenues and expenses are attributed to geographical areas based on the location in which the services are rendered. The segment presentation of assets and liabilities is based on the geographical location of the assets. During the year ended December 31, 2017 the Company had one customers that represented 10.0 percent of the Company's revenue. During the year ended December 31, 2016, the Company had no customers that represented more than 10 percent of the Company's revenue. 13. EXPENSES BY NATURE Salaries, wages and benefits Share-based compensation Total employee costs Depreciation Purchased materials, supplies and services Foreign exchange and other December 31 2017 December 31 2016 524,291 $ 371,986 656 524,947 325,811 274,575 21,903 10,287 382,273 349,947 302,543 (987) Total expenses before interest and income taxes $ 1,147,236 $ 1,033,776 ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 41 14. KEY MANAGEMENT COMPENSATION AND RELATED PARTY TRANSACTIONS Key management personnel comprises of the Company’s directors and named executive officers. Compensation for key management personnel consists of the following: Short-term compensation Share-based compensation Total management compensation December 31 2017 December 31 2016 $ $ 2,349 1,407 3,756 $ $ 2,923 539 3,462 During the fourth quarter of 2017, a corporation controlled by the Chairman of the Board of the Company provided a short-term guarantee for amounts owing by the Company to a third party. The guarantee had an annual fee of 1% and was terminated in January of 2018. 15. SIGNIFICANT SUBSIDIARIES AND PARTNERSHIPS The following table lists the Company’s principal operating partnerships and subsidiaries, the functional currency, the jurisdiction of formation, incorporation or continuance of such partnerships and subsidiaries and the percentage of shares owned, directly or indirectly, by the Company as of December 31, 2017: Name of Subsidiary Ensign Drilling Inc. Ensign Well Servicing Inc. Ensign Argentina S.A. Ensign de Venezuela C.A. Ensign Energy Services PTY Limited Ensign Australia Pty Limited Ensign International Energy Services LLC Ensign Testing Services Inc. Tristate (Barbados) Holdings Inc. Ensign Testing Services (U.S.A) Inc. Ensign United States Drilling Inc. Ensign United States Drilling (California) Inc. Ensign US Financial (Delaware) LP Ensign US Southern Drilling LLC OFS Canada Inc. OFS Global Inc. Functional Currency Jurisdiction of Formation Incorporation or Continuance Percentage Ownership of Shares Beneficially Owned or Controlled Directly or Indirectly by the Company 2017 2016 CAD CAD USD USD USD AUD USD CAD USD USD USD USD USD USD CAD USD Alberta Alberta Argentina Venezuela Australia Australia Oman Alberta Barbados Montana Colorado California Delaware Delaware Alberta Nevada 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 42 16. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (a) Non-cash working capital Net change in non-cash working capital Accounts receivable Inventories, investments and other Accounts payable and accruals Income taxes receivable Dividends payable Relating to: Operating activities Investing activities Financing activities (b) Cash and cash equivalents Cash Cash equivalents and held in trust Total cash and cash equivalents 17. CAPITAL MANAGEMENT STRATEGY December 31 2017 December 31 2016 $ (21,623) $ (40,403) (43,900) 39,483 17,042 (442) 30,015 (10,154) (10,723) 436 (9,440) $ (30,829) (6,291) $ (5,315) (2,667) (482) (23,627) (1,886.925) (9,440) $ (30,829) $ $ $ December 31 2017 December 31 2016 $ $ 32,374 — 32,374 $ $ 24,500 5,337 29,837 The Company’s objectives when managing capital are to exercise financial discipline, and to deliver positive returns and stable dividend streams to its shareholders. The Company continues to be cognizant of the challenges associated with operating in a cyclical, commodity-based industry and may make future adjustments to its capital management strategy in light of changing economic conditions. The Company considers its capital structure to include shareholders’ equity, bank credit facilities and senior unsecured notes. In order to maintain or adjust its capital structure, the Company may from time to time adjust its capital spending or dividend policy to manage the level of its borrowings, or may revise the terms of its bank credit facilities to support future growth initiatives. The Company may consider additional long-term borrowings or equity financing if deemed necessary. As at December 31, 2017, the bank credit facilities' drawings totaled $488,677 (2016 - $316,701), senior unsecured notes totaled $249,820 (2016 - $400,758) and shareholders’ equity totaled $1,689,376 (2016 - $1,832,489). The Company is subject to externally imposed capital requirements associated with its bank credit facilities and senior unsecured notes, including financial covenants that incorporate shareholders’ equity, earnings, consolidated interest expense and level of indebtedness. The Company monitors its compliance with these requirements on an ongoing basis and projects future operating cash flows, capital expenditure levels and dividend payments to assess how these activities may impact compliance in future periods. As at December 31, 2017, the Company was in compliance with all debt covenants. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 43 18. FINANCIAL INSTRUMENTS Categories of financial instruments The classification and measurement of financial instruments is presented below: Cash and cash equivalents and accounts receivable are classified as financial assets at amortized cost. Accounts payable and accruals, dividends payable and long-term debt are classified as financial liabilities at amortized cost. Fair values The fair value of cash and cash equivalents, accounts receivable, accounts payable and accruals and dividends payable approximates their carrying value due to the short-term maturity of these financial instruments. The fair value of the drawings on the bank credit facilities approximates its carrying value. The estimated fair value of the senior unsecured notes has been determined based on available market information and appropriate valuation methods, including the use of discounted future cash flows using current rates for similar instruments with similar risks and maturities. The estimated fair value of the senior unsecured notes approximates its carrying value. Financial assets and liabilities recorded or disclosed at fair value in the consolidated statement of financial position are categorized using a three-level hierarchy that reflects the level of judgment associated with the inputs used to measure their fair value. The fair values of financial assets and liabilities included in Level 1 are determined by reference to unadjusted quoted prices in active markets for identical assets and liabilities. Fair values of financial assets and liabilities in Level 2 are based on inputs other than Level 1 quoted prices that are observable for the asset or liability either directly (as prices) or indirectly (derived from prices). The fair values in Level 3 financial assets and liabilities are not based on observable market data. The estimated fair value of senior unsecured notes was based on Level 2 inputs and was estimated using the risk free interest rates on government debt instruments of similar maturities, adjusted for estimated credit risk and market risk premiums. 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. Credit risk arises principally from the Company’s accounts receivable balances owing from customers operating primarily in the oil and natural gas industry in Canada, the United States and internationally. The carrying amount of accounts receivable represents the maximum credit exposure as at December 31, 2017. The Company assesses the credit worthiness of its customers on an ongoing basis and establishes credit limits for each customer based on external credit reports and other publicly available information, internal analysis and historical experience with the customer. Credit limits are approved by senior management and are reviewed on a regular basis or when changing economic circumstances dictate. The Company manages credit risk through dedicated credit resources, ongoing monitoring and follow up of balances owing, well liens, and tightening or restriction of credit terms as required. The Company also monitors the amount and age of accounts receivable balances on an ongoing basis. As at December 31, 2017, the Company had trade receivables of $25,775 (2016 - $30,011) with multiple customers that were greater than 90 days old for which an allowance for doubtful accounts of $4,165 (2016 - $5,802) has been recorded to provide for balances which, in management’s best estimate, are deemed uncollectible as at December 31, 2017. The allowance for doubtful accounts is an estimate requiring significant judgment and may differ materially from actual results. As part of the Company’s international operations, it provides oilfield services in Venezuela pursuant to contractual arrangements. As at December 31, 2017, the Company had accounts receivable of approximately $28.6 million for work performed in Venezuela, of which certain account receivables were discounted at 15 percent and assumed nominal collections in the first year with even collections of the balance thereafter over a five year period. (2016 - $24.8 million). However, due to the recent decline in the price of oil and continuing political unrest within Venezuela there can be no assurance that the Company will be successful in collecting all of such outstanding balance. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 44 Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they are due. The Company manages liquidity by forecasting cash flows on an annual basis and secures sufficient credit facilities to meet financing requirements that exceed anticipated internally generated funds. As at December 31, 2017, the remaining contractual maturities of accounts payable and accruals and dividends payable are less than one year. Maturity information regarding the principal and interest on the Company’s long-term debt are as follows: As at December 31 Senior unsecured notes Bank credit facilities1 Total Less than 1 Year 1-3 Years 4-5 Years $ $ 11,045 $ 148,198 $ 130,626 $ 509,741 — — 520,786 $ 148,198 $ 130,626 $ Total 289,869 509,741 799,610 1 Interest on the bank credit facilities is calculated based on the amount drawn at December 31, 2017 and the applicable bankers’ acceptance/ LIBOR interest rates outstanding as at December 31, 2017. USD denominated balances are converted using the foreign exchange rate as of December 31, 2017. Market risk Market risk is the risk that changes in market prices, such as interest rates and foreign exchange rates, will affect the Company’s net income or the value of its financial instruments. Interest rate risk The Company is exposed to interest rate risk with respect to its bank credit facilities which bear interest at floating market rates. For the year ended December 31, 2017, if interest rates applicable to its bank credit facilities had been 0.25 percent higher or lower, with all other variables held constant, income before income taxes would have been $1,222 lower or higher. Foreign currency exchange rate risk The Company operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the United States dollar. The principal foreign exchange risk relates to the translation of the Company’s foreign subsidiaries from their functional currencies to Canadian dollars. At December 31, 2017, had the Canadian dollar weakened or strengthened by $0.01 against the United States dollar, with all other variables held constant, the Company’s income before income taxes would have been $1,156 higher or lower. In addition, the Company has foreign exchange risk in relation to the conversion of Australian dollar denominated debt to Canadian dollars. At December 31, 2017, had the Australian dollar strengthened or weakened by $0.01 against the Canadian dollar, with all other variables held constant, the Company’s income before income taxes would have been $1,524 higher or lower. The above sensitivities are limited to the impact of changes in the specified variable applied to the items noted above and do not represent the impact of a change in the variable on the operating results of the Company taken as a whole. 19. CONTINGENCIES AND COMMITMENTS The Company has provided insurance bonds to certain government agencies in respect of the temporary importation of equipment into that country. It is not anticipated that any material liabilities will arise from these insurance bonds. The Company has commitments for facility leases, with future minimum payments as follows: Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years $ 4,104 6,942 448 ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 45 The Company leases a number of facilities under operating leases. The leases typically run for a period of two to ten years, with an option to renew the lease after that date. Lease payments are increased throughout the lease term to reflect market rates. For the year ended December 31, 2017, lease payments of $4,888 (2016 - $7,459) were recognized as an expense. The Company is a party to various disputes and lawsuits in the normal course of its business and believes the ultimate liability arising from these matters will have no material impact on its consolidated financial statements. 20. SUBSEQUENT EVENTS Subsequent to December 31, 2017, the Company secured a loan of $19,000 outside of the bank credit facilities. The term of the loan is indefinite and bears an interest rate of Canadian prime lending rate plus 1.5% per annum and is secured by certain assets of a subsidiary of the Company. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 46 Share Trading Summary For the three months ended (Unaudited) High ($) Low ($) Close ($) Volume Value ($) 2017 March 31 June 30 September 30 December 31 Total 9.81 8.26 7.56 6.98 7.43 6.27 6.09 5.95 7.97 6.93 7.05 6.47 24,600,100 216,304,588 22,972,300 165,293,284 11,395,900 75,766,121 11,341,600 71,825,426 70,309,900 529,189,419 For the three months ended (Unaudited) High ($) Low ($) Close ($) Volume Value ($) 2016 March 31 June 30 September 30 December 31 Total 7.87 8.37 8.02 10.41 4.72 5.83 6.81 7.36 5.98 7.25 7.50 9.38 26,405,400 156,908,091 14,017,900 101,023,677 8,995,800 67,376,904 15,125,200 137,422,931 64,544,300 462,731,603 ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 47 10 Year Financial information (Unaudited - $ thousands, except per share data) 2017 2016 2015 2014 2013 Revenue Gross margin 1,000,650 859,702 1,390,978 2,321,765 2,098,011 240,950 237,676 395,953 635,370 573,838 Gross margin % of revenue 24.1 % 27.6 % 28.5 % 27.4% 27.4% Adjusted EBITDA Depreciation Net income (loss) Net income (loss) per share Basic Diluted 201,784 325,811 185,173 349,947 329,010 335,513 (37,644) (150,522) (104,049) (0.24) (0.24) $(0.99) $(0.98) $(0.68) $(0.68) $ $ $ 542,262 298,854 71,120 $0.47 $0.46 485,712 248,026 128,865 $0.84 $0.84 Funds from operations 141,438 170,651 296,273 491,886 435,611 Funds from operations per share Basic Diluted Net capital expenditures, excluding acquisitions Acquisitions Working capital (deficit) Long-term debt, net of current portion $0.90 $0.90 $1.12 $1.11 $1.94 $1.94 $3.22 $3.21 117,712 29,120 159,033 582,999 — (342,199) 252,676 — (11,153) 583,269 — 144,239 794,109 — 189,698 786,327 $2.85 $2.84 342,225 76,408 (71,146) 317,407 Shareholders' equity 1,689,376 1,832,489 2,086,596 2,045,237 1,962,569 Return on average shareholders' equity Long-term debt to equity Weighted avg. common shares outstanding - basic (2.2)% 0.15:1 (8.2)% 0.32:1 (5.0)% 0.38:1 3.5% 0.38:1 6.7% 0.16:1 156,545,624 152,759,973 152,476,615 152,710,636 152,693,280 Closing share price - December 31 $6.47 $9.38 $7.38 $10.20 $16.73 *Restated under IFRS **Not restated for IFRS All per share data and the weighted average common shares outstanding have been restated to reflect the 3-for-1 stock split effective May 2001 and the 2-for-1 stock split effective May 2006. Certain prior year amounts have been restated to reflect current year presentation. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 48 10 Year Financial information (Unaudited - $ thousands, except per share data) 2012 2011 2010* 2009** 2008** Revenue Gross margin 2,197,321 1,890,372 1,355,683 1,137,575 1,705,579 641,812 567,446 370,860 356,554 559,695 Gross margin % of revenue 29.2% 30.0% 27.4% 31.3% 32.8% Adjusted EBITDA Depreciation Net income (loss) Net income (loss) per share Basic Diluted 560,975 220,227 217,522 $1.42 $1.42 497,188 177,927 212,393 $1.39 $1.39 310,011 132,980 119,308 $0.78 $0.78 305,670 111,015 125,436 $0.82 $0.82 498,139 125,809 259,959 $1.70 $1.68 Funds from operations 506,355 473,099 288,513 259,239 402,407 Funds from operations per share Basic Diluted Net capital expenditures, excluding acquisitions Acquisitions Working capital (deficit) Long-term debt, net of current portion $3.32 $3.31 $3.09 $3.09 $1.89 $1.88 $1.69 $1.69 $2.63 $2.61 306,689 386,833 255,463 132,573 274,323 — 497,352 — 52,573 13,861 296,589 (10,233) 405,953 84,516 107,894 — — — 107,024 20,000 Shareholders' equity 1,857,958 1,723,422 1,548,155 1,530,797 1,551,151 Return on average shareholders' equity Long-term debt to equity Weighted avg. common shares outstanding - basic 12.1% 0.16:1 13.0% 0.24:1 7.7% NA 8.1% NA 18.6% 0.01:1 152,664,447 152,865,133 152,834,798 153,154,557 153,094,863 Closing share price - December 31 $15.37 $16.25 $15.03 $15.00 $13.22 *Restated under IFRS **Not restated for IFRS All per share data and the weighted average common shares outstanding have been restated to reflect the 3-for-1 stock split effective May 2001 and the 2-for-1 stock split effective May 2006. Certain prior year amounts have been restated to reflect current year presentation. ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 49 CORPORATE INFORMATION BOARD OF DIRECTORS CORPORATE MANAGEMENT HEAD OFFICE N. MURRAY EDWARDS N. MURRAY EDWARDS 400 - 5th Avenue S.W., Suite 1000 Calgary, Alberta T2P 0L6 Telephone: (403)-262-1361 Facsimile: (403)-262-8215 Email: info@ensignenergy.com Website: www.ensignenergy.com BANKERS HSBC Bank Canada STOCK EXCHANGE LISTING Toronto Stock Exchange Symbol: ESI AUDITORS PricewaterhouseCoopers LLP TRANSFER AGENT Computershare Trust Company of Canada Corporate Director and Investor Chairman ROBERT H. GEDDES President and COO, ROBERT H. GEDDES President and Chief Operating Ensign Energy Services Inc. Officer GARY CASSWELL (2,4) Independent Businessman MICHAEL GRAY Chief Financial Officer JAMES B. HOWE (1,3) President, Bragg Creek Financial ED KAUTZ President United States Consultants Ltd. Operations LEN KANGAS (2,4) Independent Businessman CARY A. MOOMJIAN, JR (2,3) President, TOM CONNORS Executive Vice President - Canada/ International East Operations MICHAEL NUSS CAM OilServ Advisors LLC Executive Vice President, JOHN SCHROEDER (1,3) Independent Businessman KENNETH J. SKIRKA (2,4) Independent Businessman GAIL SURKAN (2,3) Independent Businesswoman BARTH WHITHAM (1,4) President and CEO, U.S. & Latin America Operations TREVOR RUSSELL Vice President, Finance AHMED IQBAL Corporate Controller ROBERT RAIMONDO Vice President, Health, Safety and Environment Enduring Resources LLC CATHY ROBINSON Vice President, Global Human Resources SUZANNE DAVIES Vice President Legal and Corporate Secretary COMMITTEE MEMBERS 1 Audit 2 Corporate Governance, Nominations and Risk 3 Compensation 4 Health, Safety and Environment ENSIGN ENERGY SERVICES INC. | 2017 ANNUAL REPORT 50 www.ensignenergy.com 

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