Ensign Energy Services
Annual Report 2018

Plain-text annual report

ENSIGN ENERGY SERVICES INC. 2018 ANNUAL REPORT TABLE OF CONTENTS MANAGEMENT’S DISCUSSION AND ANALYSIS ............................................................................... 1 MANAGEMENT’S REPORT ............................................................................................................ 23 INDEPENDENT AUDITOR’S REPORT .............................................................................................. 24 CONSOLIDATED FINANCIAL STATEMENTS .................................................................................... 27 SHARE TRADING SUMMARY ......................................................................................................... 63 10 YEAR FINANCIAL INFORMATION .............................................................................................. 64 CORPORATE INFORMATION ......................................................................................................... 66 ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 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, 2018, 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 7, 2019. Additional information, including the Company's Annual Information Form for the year ended December 31, 2017, is available on SEDAR at www.sedar.com. The Company's Annual Information Form for the year ended December 31, 2018 is expected to be filed on SEDAR prior to March 31, 2019. 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, international operations, operating costs, annualized operating synergies as a result of the Trinidad Acquisition (as defined below), completion of the repayment of the Trinidad Notes (as defined below), 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 2019, 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 ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 1 upon other factors, and the Company’s course of action may depend upon its assessment of the future considering all information then available. 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) 2018 2017 Change % change 2016 Change % change 1,156,357 1,000,650 1,021,913 255,677 873,864 201,784 155,707 148,049 53,893 Revenue Revenue, net of third party 1 Adjusted EBITDA 2 Adjusted EBITDA per share 2 Basic Diluted Net income (loss) attributable to shareholders Net income (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 $ $ $ $ $ $ 1.63 1.63 58,302 0.37 0.37 152,133 225,939 1.44 1.44 $ $ $ $ $ $ 1.29 1.29 (37,644) (0.24) (0.24) 135,147 141,438 0.90 0.90 $ $ $ $ $ $ 3,894,108 2,958,465 Long term financial liabilities 1,726,653 739,933 Dividends per share $ 0.48 $ 0.48 16 17 27 26 26 859,702 755,857 185,173 140,948 118,007 16,611 $ $ 1.21 1.21 $ $ 0.08 0.08 0.34 0.34 95,946 nm (150,522) 112,878 0.61 0.61 16,986 84,501 0.54 0.54 935,643 986,720 — nm nm 13 60 60 60 32 nm $ $ $ $ (0.99) (0.98) $ $ 0.75 0.74 165,336 170,651 (30,189) (29,213) 1.12 1.11 $ $ (0.22) (0.21) 3,214,395 (255,930) 717,459 22,474 — $ 0.48 — 16 16 9 7 7 75 76 76 (18) (17) (20) (19) (8) 3 — 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, gain on bargain purchase, restructuring costs 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. Adjusted EBITDA also takes into account the Company’s portion of the ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 2 principal activities of the joint venture arrangements by removing the loss (gain) from investments in joint ventures and including adjusted EBITDA from investments in joint ventures. ($ thousands) Income (loss) before income taxes Interest expense Depreciation Gain on bargain purchase Share-based compensation Foreign exchange and other Gain from investments in joint ventures Restructuring cost Adjusted EBITDA from investments in joint ventures 2018 6,484 52,416 415,036 (200,672) 707 (19,001) (874) 1,492 89 2017 (187,796) 41,210 325,811 — 656 21,903 — — — 2016 (204,545) 30,471 349,947 — 10,287 (987) — — — Adjusted EBITDA 255,677 201,784 185,173 Adjusted EBITDA from investment in joint ventures is calculated below: ($ thousands) Gain from investment in joint ventures TDI fair value adjustment Depreciation and amortization Foreign exchange Finance cost Loss on sale of assets Income taxes Preferred shares valuation Adjusted EBITDA 2018 874 — 1,125 (39) 54 395 14 (2,334) 89 2017 2016 — — — — — — — — — — — — — — — — — — 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 income (loss) Items not affecting cash Depreciation Share-based compensation, net of cash paid Gain from joint ventures Unrealized foreign exchange and other Accretion on long-term debt Deferred income tax Gain on bargain purchase Funds flow from operations 2018 58,664 2017 (37,644) 415,036 325,811 707 (874) 5,571 731 (53,224) (200,672) 225,939 145 — (918) 1,843 (147,799) — 141,438 2016 (150,522) 349,947 10,287 — (6,864) 316 (32,513) — 170,651 ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 3 NATURE OF OPERATIONS 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, Bahrain, Kurdistan, Kuwait, Mexico, Oman, United Arab Emirates, 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. 2018 COMPARED WITH 2017 Revenue for the year ended December 31, 2018 was $1,156.4 million, an increase of 16 percent from 2017 revenue of $1,000.7 million. Revenue, net of third party, for the year ended December 31, 2018 was $1,021.9 million, an increase of 17 percent from Revenue, net of third party, for the year ended December 31, 2017 of $873.9 million. Adjusted EBITDA for 2018, totaled $255.7 million which includes $15.1 million from Trinidad Drilling Ltd. for the month of December 2018 ($1.63 per common share), 27 percent higher than Adjusted EBITDA of $201.8 million ($1.29 per common share) for 2017. Net income attributed to shareholders for the year ended December 31, 2018 was $58.3 million ($0.37 per common share), compared to net loss attributed to shareholders of $37.6 million ($0.24 per common share) for the year ended December 31, 2017. Funds flow from operations increased 60 percent to $225.9 million ($1.44 per common share) in 2018 compared to $141.4 million ($0.90 per common share) in the prior year. During the fourth quarter of 2018, the Company acquired 89.3 percent of Trinidad Drilling Ltd. ("Trinidad"), the largest acquisition in the Company's history (the "Trinidad Acquisition"), adding 68 drilling rigs in Canada, 66 in the United States and one internationally. The Trinidad Acquisition also expands the Company’s geographic footprint with the addition of three new countries of operation (Bahrain, Kuwait and Mexico) with the joint venture described below, expands the Company’s existing customer base, and provides the Company additional exposure to the United States market in particular. Results for the fourth quarter and year ended December 31, 2018 were materially impacted by the Trinidad Acquisition. The acquisition includes a 60 percent interest in Trinidad Drilling International ("TDI"), which is a joint venture with a wholly-owned subsidiary of Halliburton Company. For further information on the Trinidad Acquisition, please refer to the "Trinidad Drilling Acquisition" section of this MD&A. The Company's improved operating and financial results for 2018 resulted from increased demand for oilfield services caused by price recovery of crude oil and natural gas commodity prices during the year as well as the Trinidad Acquisition in the fourth quarter of 2018. Operating and financial results were lower in Canada in 2018 compared to 2017, mainly due to geopolitical factors and the lack of transportation infrastructure to transport oil and natural gas to other markets. The Company decommissioned three well servicing rigs in Canada and transferred one ADR® drilling rig from Canada to the United States in 2018. The Company also decommissioned one drilling rig and two well servicing rigs in the United States and added three new-build well servicing rigs in the United States in 2018. The Company declared total dividends of $0.48 per common share in 2018. The Company exited 2018 with a working capital deficit of $156.2 million, compared to a working capital deficit of $342.2 million as at December 31, 2017. The change in working capital year-over-year was largely due to the financing obtained from a new Credit Facility (as defined below) in the fourth quarter of 2018, which was partially offset by the Ensign Notes (as defined below) that were optionally repaid on January 10, 2019. The Company’s bank credit facilities provided unused and available borrowings of $401.5 million at December 31, 2018, compared to $11.2 million at December 31, 2017, up by $390.3 million, primarily due to a higher current principal amount under the Credit Facility and additional available borrowing as a consequence of the Trinidad Acquisition. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 4 2017 COMPARED WITH 2016 The Company's increased operating and financial results for the 2017 fiscal year resulted from increased demand for oilfield services caused by modest price recovery of crude oil and natural gas commodity prices. Volatile energy commodity prices significantly impacted cash flows of the Company’s customers and, as a result, the expected levels of future demand for oilfield services, particularly in North America. Financial results from the Company’s United States and international operations were adversely impacted by translation to Canadian dollars due to the weakening of the United States dollar relative to the Canadian dollar. For the year ended December 31, 2017, a two percent decrease in the Canadian/United States dollar exchange rate negatively impacted revenues and margins generated outside Canada. REVENUE AND OILFIELD SERVICES EXPENSE ($ thousands) Revenue Canada United States International Total revenue Revenue, net of third party Oilfield services expense Gross margin 2018 2017 Change % change 241,034 641,558 273,765 262,793 459,496 278,361 1,156,357 1,000,650 1,021,913 855,824 300,533 873,864 759,700 240,950 (21,759) 182,062 (4,596) 155,707 148,049 96,124 59,583 1.8 (8) 40 (2) 16 17 13 25 6.5 Gross margin as a percentage of Revenue, net of third party 29.4 27.6 Revenue for the year ended December 31, 2018 totaled $1,156.4 million, a 16 percent increase from the year ended December 31, 2017 of $1,000.7 million. The increase in revenue largely result from the increased demand for oilfield services in the United States, resulting in higher equipment utilization rates and additions to revenue from the Trinidad Acquisition. Revenue, net of third party, for the year ended December 31, 2018 totaled $1,021.9 million, an increase of 17 percent from the previous year of $873.9 million. As a percentage of Revenue, net of third party, gross margin for the year ended December 31, 2018 was 29.4 percent (2017 - 27.6 percent) as a result of a recovery in energy prices. Moreover, the Company has increased revenue rates along with maintaining effective cost controls. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 5 CANADIAN OILFIELD SERVICES Revenue ($ thousands) Marketed drilling rigs1,2 Opening balance Additions Acquisition of Trinidad Drilling Ltd. Transfers, net Placed into reserve Placed into marketed fleet 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. 2Total rigs: 137, (2017 - 70) 2018 2017 Change % change $ 241,034 $ 262,793 $ (21,759) (8) 58 — 68 (1) (1) 1 — 125 6,002 21.9 65 (3) 62 57,068 25.2 57 2 — — — (1) 58 6,860 26.8 65 — 65 70,556 29.7 67 (858) (4.9) (3) (13,488) (4.5) 116 (13) (18) — (19) (15) The Company recorded revenue of $241.0 million in Canada for the year ended December 31, 2018, a decrease of eight percent from $262.8 million recorded for the year ended December 31, 2017. During the year ended December 31, 2018, Canadian total revenues were 21 percent, of the total Company's revenue compared with 26 percent in the prior year. For the year ended December 31, 2018, the Company recorded 6,002 drilling days in Canada, compared to 6,860 drilling days for the year ended December 31, 2017, a decrease of 13 percent. Well servicing hours decreased by 19 percent to 57,068 operating hours compared with 70,556 operating hours for the year ended December 31, 2017. Despite, the moderate increase in oil and natural gas commodity prices, demand for the Company's oilfield services was lower compared to prior year mainly due to commodity pricing differentials caused by limited access to other markets for Canadian oil and natural gas, due to a lack of transportation infrastructure in Western Canada. During 2018, the Company transferred one ADR® drilling rig from Canada to the United States and decommissioned three well servicing rigs. During fourth quarter, 2018 the Company through the Trinidad Acquisition, added 68 drilling rigs to its Canadian fleet. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 6 UNITED STATES OILFIELD SERVICES Revenue ($ thousands) Marketed drilling rigs1 Opening balance Additions Acquisition of Trinidad Drilling Ltd. Transfers, net Placed into reserve Decommissions/Disposals Ending balance Drilling operating days Drilling rig utilization (%) Well servicing rigs Opening balance Additions Decommissions/Disposals Ending balance Well servicing operating hours Well servicing utilization (%) 1Total rigs: 151, (2017 - 85) 2018 2017 Change % change $ 641,558 $ 459,496 $ 182,062 40 70 — 66 1 (3) (1) 133 14,173 43.4 45 3 (2) 46 112,224 70.1 69 1 — — — — 70 10,944 35.6 44 1 — 45 90,281 55.6 63 3,229 7.8 1 21,943 14.5 90 30 22 2 24 26 For the year ended December 31, 2018, revenue of $641.6 million was recorded in the United States, an increase of 40 percent from the $459.5 million recorded in the prior year. The Company's United States operations accounted for 55 percent of the Company's revenue in 2018 fiscal year (2017 - 46 percent) and were the largest contributor to the Company's consolidated revenues in 2018, consistent with the prior year. In the United States, drilling operating days increased by 30 percent from 10,944 operating days in 2017 to 14,173 operating days in 2018. For the year ended December 31, 2018, well servicing activity increased 24 percent to 112,224 operating hours from 90,281 operating hours in 2017. Overall operating and financial results for the Company’s United States operations were positively impacted by a significant increase in demand for oilfield services, due primarily to renewed optimism regarding oil and natural gas commodity prices, as well as the Trinidad Acquisition during the fourth quarter of 2018. Revenue rates in the United States have modestly rebounded with operating activity. During 2018, the Company transferred one ADR® drilling rig from Canada to the United States and deployed three new well servicing rigs to the United States fleet. The Company also decommissioned one drilling rig and two well servicing rigs. During fourth quarter, 2018 the Company, through the Trinidad Acquisition, added 66 drilling rigs to the United States fleet and placed three drilling rigs into reserve. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 7 INTERNATIONAL OILFIELD SERVICES Revenue ($ thousands) Marketed drilling and workover rigs 1 Opening balance Acquisition of Trinidad Drilling Ltd. Transfers Placed into reserve Ending balance Drilling operating days Drilling rig utilization (%) 1Total rigs: 47, (2017 - 46) 2018 273,765 2017 278,361 Change (4,596) % change (2) 44 1 — (1) 44 6,061 36.1 46 — — (2) 44 6,106 36.4 — (45) (0.3) — (1) (1) The Company's international revenues for the year ended December 31, 2018, decreased two percent to $273.8 million from $278.4 million recorded in the year ended December 31, 2017. The Company's international operations contributed 24 percent of the Company's revenue in 2018 (2017 - 28 percent). International operating days totaled 6,061 compared to 6,106 drilling days for the year ended December 31, 2017, a decrease of 1 percent compared to the year prior. The Company's international operations expanded in 2018 through the 60 percent TDI joint venture, acquired pursuant to the Trinidad Acquisition and discussed below. One additional international drilling rig was acquired through the Trinidad Acquisition and one of the Company's international drilling rigs was placed into reserve. The possible impact to the Company of the challenges in Venezuela are discussed further in the “Financial Instruments” section of this MD&A under Credit Risk, and also in the “Risks and Uncertainties – Foreign Operations” section of this MD&A. DEPRECIATION ($ thousands) Depreciation 2018 415,036 2017 325,811 Change 89,225 % change 27 Depreciation expense for the year increased by 27 percent to $415.0 million compared with $325.8 million for the year ended 2017. In the first quarter of 2018, the Company reviewed the useful life estimates for all rigs and related equipment and determined that using a straight-line method (versus unit of production) would more accurately reflect the future economic benefits related to these assets. These adjustments were applied prospectively and, as such, have increased depreciation expenses for the year ended December 31, 2018 when compared to the year ended December 31, 2017. Furthermore, the increase is also partially attributed to the acquisition of Trinidad's fixed asset base. As a result of certain external impairment indicators existing in the market, the Company completed impairment tests in all of its cash generating units (each a "CGU"). The Company did not note any impairments for any CGUs based on the following key assumptions: weighted average pre-tax discount rate of 10 percent to 14 percent based on cost of capital and debt, asset and country risk, together with past experience; annual inflationary growth after five years and limited to the assets' lives; and cash flow projections consistent with market conditions and estimated rig salvage values of 10 percent. A six percent change in the discount rate, a 19 percent change in cash flow projections, or a changing in the terminal growth rate to zero, independent of each other, would not have resulted in any impairments. GENERAL AND ADMINISTRATIVE EXPENSE ($ thousands) General and administrative % of revenue 2018 46,437 4.0 2017 39,166 3.9 Change 7,271 % change 19 For the year ended December 31, 2018, general and administrative expense totaled $46.4 million (4.0 percent of revenue) compared to $39.2 million (3.9 percent of revenue) for the year ended December 31, 2017, an increase of 19 percent. The increase was due primarily to the Trinidad Acquisition and includes $1.5 million of non-recurring acquisition and ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 8 integration costs relating to such acquisition. Management continues to focus on managing costs, but expects further restructuring costs to be incurred into 2019. JOINT VENTURE OILFIELD SERVICES Revenue ($ thousands) Marketed drilling and workover rigs Opening balance Acquisition of Trinidad Drilling Ltd. Decommissions Ending balance Drilling operating days Drilling rig utilization (%) nm - calculation not meaningful 2018 3,643 — 5 — 5 47 30.3% 2017 — — — — — — — Change 3,643 % change — 5 47 30.3% nm nm nm Pursuant to the Trinidad Acquisition, Ensign acquired a 60% ownership in TDI, a joint venture with a wholly-owned subsidiary of Halliburton Company, which operates rigs in Bahrain, Mexico and Kuwait. TDI has five drilling rigs. For the period November 30, 2018 to December 31, 2018, Ensign portion of TDI's income was $1,094. INTEREST EXPENSE ($ thousands) Interest Expense 2018 52,416 2017 41,210 Change 11,206 % change 27 Interest is incurred on the Company's $1.25 billion revolving credit facility (the “Credit Facility”), a $200 million existing Trinidad credit facility (the "Trinidad Facility") and USD $350 million of Trinidad's senior notes due February 2025 (the "Trinidad Notes") assumed through the Trinidad Acquisition, and the USD $200 million in senior guaranteed notes (the “Ensign Notes”) due February 2019 and 2022. The amortization of deferred financing costs associated with the issuance of the Ensign Notes is included in interest expense. Interest expense increased by 26 percent for the year ended December 31, 2018 compared to the same period in 2017 as a result of increased borrowings and interest rates. In January and February 2019, the Company: (i) utilized a portion of the Credit Facility to redeem the Ensign Notes, including the principal, make whole and accrued interest; (ii) entered into USD $700 million senior loan facility (the “Senior Loan”); utilized a portion of the proceeds of the Senior Loan to repurchase 99.93% of the Trinidad Notes and pay related consent fees (the remaining 0.07% of which will be repurchased in March 2019) and to repay the Trinidad Facility; and (iii) reduced the outstanding balance of the Credit Facility to below $900 million utilizing a portion of the Senior Loan. FOREIGN EXCHANGE AND OTHER ($ thousands) Foreign exchange and other nm - calculation not meaningful 2018 (19,001) 2017 21,903 Change (40,904) % 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. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 9 INCOME TAXES ($ thousands) Current income tax Deferred income tax Total income tax Effective income tax rate (%) nm - calculation not meaningful 2018 1,044 (53,224) (52,180) 26.9 2017 (2,353) (147,799) (150,152) 80.0 Change % change 3,397 94,575 97,972 nm (64) (65) The effective income tax rate for the year ended December 31, 2018 was 26.9 percent compared with 80.0 percent for the year ended December 31, 2017. The effective tax rate was significantly lower than the effective tax rate of 2017 due mainly to the impact of US Tax Reform and its effect on the US deferred income tax liability in 2017. TRINIDAD DRILLING ACQUISITION During the fourth quarter of 2018, Ensign Holdings Inc. ("Holdings"), a wholly -owned subsidiary of Ensign, completed the acquisition of 89.3 percent of the issued and outstanding common shares of Trinidad, a publicly traded oilfield service company, through series of transactions for a total consideration $410.2 million. The strategic business combination was completed to increase its presence in the North American and international markets. On February 15, 2019 Holdings acquired the remaining 10.7 percent of the common shares of Trinidad and amalgamated with Trinidad, following which Trinidad was delisted from the Toronto Stock Exchange and ceased to be a reporting issuer (or equivalent) in all jurisdictions in which Trinidad was a reporting issuer. The acquisition was accounted for as a business combination using the acquisition method whereby the net assets and liabilities assumed are recorded at fair value. The preliminary purchase price allocation is based on management's best estimates of the fair value of Trinidad's assets and liabilities as at the Effective Acquisition Date of November 30, 2018, although future adjustments to estimates may be required. If new information obtained within one year from the acquisition date about facts and circumstances that existed as at the Effective Acquisition Date and which reasonably requires adjustments to above amounts, or any additions to provisions that existed at the Effective Acquisition Date, then the accounting at acquisition will be revised. FUNDS FLOW FROM OPERATIONS AND WORKING CAPITAL ($ thousands, except per share data) Funds flow from operations Funds flow from operations per share 2018 225,939 $1.44 2017 141,438 $0.90 Working capital (156,223) (342,199) Change 84,501 0.54 185,976 % change 60 60 (54) For the year ended December 31, 2018, the Company generated Funds flow from operations of $225.9 million ($1.44 per common share) an increase of 60 percent from $141.4 million ($0.90 per common share) for the year ended December 31, 2017. The increase in Funds flow from operations in 2018 compared to 2017 is primarily due to higher operating results and the Trinidad Acquisition. 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, 2018, the Company’s working capital was a deficit of $156.2 million, compared to a working capital deficit of $342.2 million at December 31, 2017. The change in working capital in 2018 was mainly related to refinancing the Credit Facility, which is due November 2021. The increase was partially offset by the financial statement reclassification of the Ensign Notes ($200 million USD were redeemed in January 2019) 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 $1.5 billion and, of which $401.5 million was undrawn and available at December 31, 2018. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 10 INVESTING ACTIVITIES ($ thousands) Purchase of property and equipment Proceeds from disposals of property and equipment Acquisition of Trinidad Drilling Ltd. (net) Contributions to joint venture Net change in non-cash working capital Cash used in investing activities nm - calculation not meaningful 2018 (80,044) 6,748 (294,264) (26,144) 17,734 (375,970) 2017 (123,763) 6,051 — — (2,667) (120,379) Change 43,719 697 (294,264) (26,144) 20,401 (255,591) % change (35) 12 nm nm nm nm In the fourth quarter, the Company acquired an 89.3 percent interest in Trinidad for net cash consideration of $320.3 million and made a $26.1 million contribution to TDI. Net purchases of property and equipment during the fiscal year ending 2018 totaled $73.3 million (2017 - $117.7 million). The purchase of property and equipment relates predominantly to expenditures made pursuant to the Company’s new build and major retrofit program, and for maintenance capital costs incurred during the year. The Company completed construction of a total of three well servicing rigs for the United States during 2018. FINANCING ACTIVITIES ($ thousands) Proceeds from long-term debt Repayments of long-term debt Purchase of shares held in trust Subordinate convertible debenture Dividends Net change in non-cash working capital Cash used in financing activities nm - calculation not meaningful 2018 490,886 (182,391) (1,047) 37,000 (75,396) 11,609 280,661 2017 171,976 (129,787) (1,103) — (52,577) (482) (11,973) Change 318,910 (52,604) 56 37,000 (22,819) 12,091 292,634 % change nm 41 (5) nm 43 nm nm The Company made a net withdrawal on the Credit Facility of $308.5 million during the year ended December 31, 2018, increasing the outstanding long-term debt balance. As of December 31, 2018, the Credit Facility is primarily being used to fund capital expenditures and the Trinidad Acquisition. During the first quarter of 2018, the Company issued a non-brokered private placement of unsecured, subordinated convertible debentures (the "Debentures") for gross proceeds of $37.0 million. The Debentures bear interest from the date of closing at 7.0% per annum, payable semi-annually in arrears, on April 1 and October 1 each year. The Debentures will mature on January 31, 2022. If, on and after April 1, 2021, the closing price of the Company's common shares ("Common Shares") on the Toronto Stock Exchange exceeds 125% of the Conversion Price for at least 30 consecutive trading days, the Debentures may be redeemed by the Company for cash, in whole or in part from time to time, on not more than 90 days and not less than 60 days prior notice, at a redemption price equal to the outstanding principal amount of the Debentures plus accrued and unpaid interest thereon (if any), up to, but excluding, the date of redemption. The liability component of the Debentures was recognized initially at the fair value and revalued quarterly using a similar liability that does not have an equity conversion option, which was calculated based on an estimated market interest rate of 8.25%. The difference between the principal amount of the Debentures and the fair value of the liability component was recognized in shareholders’ equity. CONTRACTUAL OBLIGATIONS In the normal course of business, the Company enters into various commitments that will have an impact on future operations. These commitments relate primarily to credit facilities, senior unsecured notes and facility leases. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 11 A summary of the Company’s total contractual obligations as of December 31, 2018, is as follows: ($ thousands) Less than 1 Year 1-3 Years 4-5 Years After 5 Years Total Ensign Notes - senior unsecured notes due 2019 and 2022 Trinidad Notes - senior notes due 2025 Drawings on credit facilities Debentures Capital Leases Facility leases FINANCIAL INSTRUMENTS 278,614 31,638 39,991 2,590 2,647 9,052 — 94,914 1,019,504 40,445 6,676 13,326 364,532 1,174,865 — 63,275 — — — 466 63,741 — 514,570 — — — — 278,614 704,397 1,059,495 43,035 9,323 22,844 514,570 2,117,708 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, 2018 totaled $351.6 million, an increase of $119.4 million from $232.2 million as at December 31, 2017. Varying 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. As at December 31, 2018, the Company had trade receivables of $20.2 million (2017 - $25.8 million) with multiple customers that were greater than 90 days old for which an allowance for doubtful accounts of $16.9 million (2017 - $4.2 million) has been recorded to provide for balances which, in management’s best estimate, are deemed uncollectible as at December 31, 2018. 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, 2018, the Company had net accounts receivable of approximately $12.9 million net of allowance for doubtful accounts for work performed in Venezuela, and in recent months a number of payments have been received by the Company (2017 - $28.6 million). Though the Company has a history of collecting accounts receivable in Venezuela, due to the recent decline in the price of oil, continuing political unrest in the country and expansion of sanctions by the US government, there can be no assurance that the Company will be successful in collecting all of such accounts receivable outstanding. As a result the Company has provided a further $11.2 million provision onto its already discounted accounts receivable balance. Liquidity Risk The Company is subject to liquidity risk on its financial liabilities, which at December 31, 2018 totaled $2,020.7 million, an increase of $760.7 million from $1,259.9 million as at December 31, 2017. 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, 2018, the remaining contractual maturities of accounts payable and accruals and dividends payable are less than one year. Maturity ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 12 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, 2018, the Company had undrawn and available bank credit facilities of $401.5 million (2017 – $11.2 million). NEW BUILDS AND MAJOR RETROFITS During the year ended December 31, 2018, the Company added three new-build well servicing rigs in the United States. The Company decommissioned three well servicing rigs in Canada, one drilling rig and two well servicing rigs in the United States during 2018. One new-build well servicing rig will be added early 2019 in the United States. The Company continues to selectively add new ADR® drilling rigs to meet the increasing technical demands of its customers. SUMMARY QUARTERLY RESULTS ($ thousands, except per share data) Q4-2018 Q3-2018 Q2-2018 Q1-2018 Q4-2017 Q3-2017 Q2-2017 Q1-2017 Revenue Revenue, net of third party 1 Adjusted EBITDA 1 Adjusted EBITDA per share 1 Basic Diluted Net (loss) income attributable to shareholders 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 Total debt, net of cash 346,136 288,700 263,061 258,460 270,013 247,121 232,232 251,284 308,651 254,424 231,871 226,967 241,987 211,299 211,687 208,891 81,678 68,641 53,064 52,294 54,820 52,600 44,276 50,088 $0.52 $0.52 $0.44 $0.44 $0.34 $0.34 $0.33 $0.33 $0.34 $0.35 $0.34 $0.33 $0.29 $0.29 $0.32 $0.32 154,472 (32,791) (36,697) (26,682) 46,488 (36,526) (33,814) (13,792) $0.98 $0.98 61,037 63,834 $(0.21) $(0.23) $(0.17) $(0.21) $(0.23) $(0.17) 51,792 60,390 19,306 47,808 19,998 53,907 $0.30 $0.30 38,124 12,244 $(0.23) $(0.22) $(0.09) $(0.23) $(0.22) $(0.09) 32,791 39,616 44,687 44,769 19,545 44,809 $0.41 $0.41 $0.38 $0.38 $0.31 $0.31 $0.34 $0.34 $0.07 $0.07 $0.25 $0.25 $0.29 $0.29 $0.29 $0.29 730,520 748,609 726,636 707,559 700,011 714,357 709,062 1,641,83 0 1 See definition of "Non-GAAP Measures" in the "Overview and Selected Annual Information" section of this MD&A. 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 and theTrinidad Acquisition. Such demand for oilfield services was positively influenced by more favorable oil and natural gas commodity prices for 2018 along with the Trinidad Acquisition. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 13 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 attributable to shareholders 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 2018 346,136 308,651 81,678 $0.52 $0.52 154,472 $0.98 $0.98 61,037 63,834 $0.41 $0.41 156,794 156,976 2018 1,691 4,711 1,588 19.7 47.9 37.5 2018 12,377 30,747 21.7 73.7 Three months ended December 31 Change 2017 % change 270,013 241,987 69,252 $0.34 $0.35 46,488 $0.30 $0.30 38,124 12,244 $0.07 $0.07 156,794 156,976 76,123 66,664 12,426 $0.18 $0.17 107,984 $0.68 $0.68 22,913 51,590 $0.34 $0.34 — — 28 28 18 53 49 nm nm nm 60 nm nm nm — — 2017 Change % change 1,649 3,066 1,547 25.3 39.4 36.4 2017 16,947 23,644 28.3 57.1 42 1,645 41 (5.6) 8.5 1.1 (4,570) 7,103 (6.6) 16.6 3 54 3 (22) 22 3 % change (27) 30 (23) 29 nm - calculation not meaningful Comparative amounts do not reflect Trinidad Drilling Ltd. 1 See definition of "Non-GAAP Measures" in the "Overview and Selected Annual Information" section of this MD&A. Certain prior period amounts have been restated to reflect current year presentation. 2 Excludes coring rigs. 3Includes workover rigs. 4As part of the Trinidad Acquisition, effective November 30, 2018, Ensign acquired 60% ownership of a joint venture operating under the name Trinidad Drilling International. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 14 REVENUE AND OILFIELD SERVICES EXPENSE ($ thousands) Revenue Canada United States International Total revenue Revenue, net of third party Oilfield services expense Gross margin 2018 2017 Change % change 65,565 209,890 70,681 346,136 308,651 251,907 94,229 64,260 129,188 76,565 270,013 241,987 206,750 63,263 1,305 80,702 (5,884) 76,123 66,664 45,157 30,966 2 62 (8) 28 28 22 49 Gross margin as a percentage of Revenue, net of third party 30.5 26.1 The Company recorded revenue of $346.1 million for the three months ended December 31, 2018, a 28 percent increase from the $270.0 million recorded in the three months ended December 31, 2017. Drilling operating days for the fourth quarter of 2018 totaled 7,990 days, a 28 percent increase from the prior year of 6,262 drilling operating days. The recovery of oil and natural gas commodity prices in 2018 and the Trinidad Acquisition during fourth quarter positively impacted the demand for the Company's oilfield services. As a percentage of revenue, net of third party, gross margin increased for the fourth quarter of 2018 to 30.5 percent from 26.1 percent for the fourth quarter of 2017. The increase in gross margin in the fourth quarter of 2018 compared to the prior year is due to revenue rate increases in reaction to increased levels of demand for oilfield services allowing for pricing increases and in addition the Trinidad Acquisition. Depreciation expense totaled $113.6 million for the fourth quarter of 2018 compared with $91.7 million for the fourth quarter of 2017. The increase was due to the increase in property, plant and equipment attributed to the Trinidad Acquisition as well as the change in accounting policy in 2018. General and administrative expense increased 67 percent to $14.1 million (4.1 percent of revenue) for the fourth quarter of 2018 compared with $8.4 million (3.1 percent of revenue) for the fourth quarter of 2017. The increase in general and administrative expense in the fourth quarter of 2018 compared to the prior year is primarily due the Trinidad Acquisition and includes $1.6 million of non-recurring acquisition and integration costs during the fourth quarter. Management continues to focus on costs and will be working to realize synergies from the Trinidad Acquisition. OUTSTANDING SHARE DATA The following Common Shares and stock options were outstanding as of March 7, 2019: Common shares Stock options OUTLOOK Industry Overview Number 157,000,293 $ Outstanding 5,911,350 Amount ($) 207,404 Exercisable 2,820,140 The oilfield services industry continues to experience volatility. The benchmark price of West Texas Intermediate experienced a significant decrease in Q4, 2018 with prices rebounding in the first two months of 2019. The price volatility has caused some oil and gas producers to reduce capital spending or to adopt a cautious tone. The Company has responded with a prudent net capital spending budget of $102 million consisting of maintenance capital only. The Company is continuing to focus on costs and is expecting annualized synergies of $40 million from the Trinidad Acquisition. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 15 Canadian Activity The Canadian market continues to be volatile, with the differential for light and heavy Canadian oil improving since Q4, 2018. The improvement of pricing has created more cash flow for Canadian producers which could result in increased activity in the summer and fall of 2019. Takeaway capacity is still the largest concern weighing on the Canadian market and, until this issue is resolved, pricing volatility is expected to continue. Of our 125 marketed Canadian rigs, approximately 53 percent are engaged in contracts, with 41 percent of the contracts having term that is six months or greater. United States Activity The drilling rig count in the United States has been relatively flat and is expected to remain steady for the remainder of the year. Day rates have increased modestly year over year, with the expectation that future increases will abate until the drilling rig count begins to increase. Of our 133 marketed United States drilling rigs, approximately 64 percent are contracted, with 55 percent of the contracts having term that is six months or greater. International Activity The Company expects modest growth in Australia with additional drilling rigs being contracted in Q4 2018 that will begin working in 2019. Our Latin American operations are expected to see a decrease in activity due to the January 2019 expansion of sanctions against Venezuela by the United States. Activity in the Middle East is expected to remain consistent with 2018 activity levels during 2019. Our 50 marketed international rigs, approximately 46 percent are contracted, with 78 percent of the contracts having term that is six months or greater. 2019 Capital Expenditures and Debt Reduction The Company has budgeted net capital expenditures for 2019 of approximately $102 million for the combined entity. The disciplined capital plan focuses on certifications and preventative maintenance for its combined global high/super spec drilling rig fleet, other service lines, and select upgrade projects. In addition to a disciplined capital plan, The Company will focus on debt reduction throughout 2019 and beyond, with an initial reduction target of $100 million in 2019 (before asset dispositions such as duplicate operating facility locations). Trinidad Acquisition Update The acquisition of Trinidad has allowed the Company to substantially increase the size of the Company’s global operations and geographic footprint, in particular within active U.S. shale basins such as the Permian, and new international jurisdictions such as Kuwait and Bahrain. The acquisition is expected to be accretive to the Company’s cash flow per share on a debt-adjusted basis and is expected to provide approximately $40 million in annual cost saving synergies relating to the elimination of duplicate public company costs, facility overlap and staff efficiencies. This number does not include potential revenue and purchasing efficiencies which could further add to the accretive nature of the acquisition, increase our liquidity and allow the Company to proactively reduce debt on a go-forward basis. The integration of Trinidad’s high/super-spec drilling rig fleet continues to progress as planned and management is very impressed with the equipment and people that they have seen in the field. We continue to focus on ensuring that during this integration that the Company's people are safe and operations and customers are not impacted. Customer feedback has been positive and this acquisition will allow the Company to take a market share leadership position in key markets and drive stronger financial results on a go-forward basis, which in combination with the Company's financial flexibility and agreed-to incremental customer funded upgrades, the Company has a platform for additional growth and financial strength." ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 16 Subsequent Events Subsequent to December 31, 2018, the Company: • On January 10, 2019 the Company utilized the Credit Facility to redeem in full the USD $200,000 senior guaranteed notes (Tranche B &C) due February 2019 and 2022. The total price for the redemption was USD $205.100, which included the principal, make whole and accrued interest. • • • • • • • • • On February 14, 2019 the Company entered into a five year USD $700,000 senior loan facility (the “Senior Loan”) at prevailing market rates for this type of loan. On February 14, 2019 a portion of the proceeds of the Senior Loan was utilized to repurchase 99.93% of the outstanding USD $350,000 of Trinidad Notes due February 2025 and to pay related consent fees. The total cost for the repurchase of the Trinidad Notes was USD $366,500. The Trinidad Notes were tendered, and the consent fees were paid, pursuant to Trinidad’s change of control offer to purchase and solicitation of consents announced on December 27, 2018. The Trinidad Notes were repurchased at 101% plus accrued and unpaid interest. Consenting noteholders also received 0.5% as a consent fee for their consent to certain amendments to the indenture governing the Trinidad Notes, among other things eliminating or modifying substantially all of the restrictive covenants. The remaining 0.07% of the Trinidad Notes which were not tendered in the offer will be repurchased prior to the end of March 2019. On February 14, 2019 the Company reduced the Credit Facility available amount from $1,250,000 to $900,000 million and a portion of the proceeds of the Senior Loan was utilized to reduce the outstanding balance of the Credit Facility to less than $900,000. On February 14, 2019 the Company repaid the existing Trinidad Facility utilizing a portion of the proceeds from the Senior Loan. On February 15, 2019 Trinidad and Holdings completed an amalgamation (the “Amalgamation”) to form an amalgamated corporation named “Trinidad Drilling Ltd.” (“Amalco”). The amalgamation was approved at a special meeting of Trinidad Shareholders held on January 31, 2019. Pursuant to the terms of an amalgamation agreement (the “Amalgamation Agreement”) dated January 4, 2019 between Trinidad and Holdings, Trinidad Shareholders (other than Holdings) received one redeemable preferred share of Amalco (each, a “Redeemable Preferred Share”) for each Trinidad common share upon completion of the Amalgamation. The Redeemable Preferred Shares were immediately redeemed for $1.68 in cash per Redeemable Preferred Share (the “Redemption Consideration”). The Redemption Consideration was the same as the consideration that was available to Trinidad Shareholders under Holding’s Offer for all the issued and outstanding Trinidad Shares, which expired on December 21, 2018. Effective as of February 15, 2019, Amalco became an indirect wholly-owned subsidiary of Ensign. The Trinidad Shares were delisted from trading on the Toronto Stock Exchange effective as of the close of trading on February 19, 2019. On February 25, 2019, Trinidad ceased to be a reporting issuer with the applicable securities regulatory authorities in each of the jurisdictions in which Trinidad was a reporting issuer (or equivalent). Declared a dividend for the first quarter of 2019 of $0.12 per common share or approximately $18,877, payable on or about April 4, 2019 to the shareholders of record at the close of business on March 25, 2019. 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. The Company has re-implemented its dividend reinvestment plan ("the DRIP"). The DRIP has been updated from the prior version operated by Ensign (the "Original DRIP") that was suspended in August 2017. The substantive features of the Original DRIP have not been changed except to reflect certain tax changes and to limit a participant’s ability to terminate their participation in the plan to once per year. 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. | 2018 ANNUAL REPORT 17 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. Joint arrangements The Company assesses the values of these instruments by using a discounted cash flow model. This calculation requires the use of estimates, including: future drilling activity and utilization of the drilling rigs, future equipment deployment milestones, prices, operating costs, discount rates, timing of new property and equipment and other assumptions. Purchase price allocation The measurement of each business combination requires management estimation in determining the fair values of assets and liabilities acquired as well as the fair value of any intangible assets identified. Management is required to estimate future cash flows, discount rates and market conditions at the Effective Acquisition Date of the Trinidad Acquisition, in order to determine the fair value of certain assets. 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. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 18 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 risk characteristics and the days past due. 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. 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. CHANGE IN ACCOUNTING POLICY The Company adopted the following mandatory new standards effective January 1, 2018. The following is a brief summary of the new standards that are relevant to the Company: IFRS 9 - Financial Instruments: The IASB issued the final version of IFRS 9 Financial Instruments, which is effective for annual periods beginning on or after January 1, 2018. IFRS 9, as amended, addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces a substantially reformed approach to hedge accounting and a new impairment model for financial assets. The Company has adopted the standard retrospectively from January 1, 2018, with the transition provisions permitted under the standard. Differences in the carrying amount of financial assets and financial liabilities resulting from the adoption of IFRS 9 are recognized in the opening balance as of January 1, 2018. Comparative prior year periods are not restated. IFRS 15 - Revenue from Contracts with Customers: Effective January 1, 2018, upon adoption of IFRS 15 Revenue from Contracts with Customers, the Company recognizes revenue for services rendered when the performance obligations have been completed, as control of the services transfer to the customer, when the services performed have been accepted by the customer, and collectability is reasonably assured. The consideration for services rendered is measured at the fair value of the consideration received and allocated based on their standalone selling prices. The standalone selling prices are determined based on the agreed upon list prices at which the Company sells its services in separate transactions. Payment terms with customers vary by country and contract. Standard payment terms are 30 days from invoice date. The Company does not expect to have any revenue contracts where the period between the transfer of the promised goods or services to the customer and payment by the customer exceeds one year. As a consequence, the Company does not adjust any of the transaction prices for the time value of money. The Company does not incur material costs to obtain contracts with customers and consequently, does not recognize any contract assets. The Company does not have any contract liabilities associated with its customer contracts. The adoption of IFRS 15 did not result in any changes in the timing of revenue recognition for the Company’s goods and services. RECENT ACCOUNTING PRONOUNCEMENTS On January 13, 2016 the IASB issued IFRS 16 - Leases ("IFRS 16") which has been adopted by the Company on January 1, 2019 using the modified retrospective method. Under the modified retrospective method, comparative financial information is not restated and continues to be reported under the accounting standards in effect for those periods. Under the principles of the new standard, the Company will recognize lease liabilities related to its lease commitments. These lease liabilities will be measured at the present value of the remaining lease payments, discounted using the Company's incremental borrowing rate as at January 1, 2019. The associated right of use ("ROU) assets will be measured at the lease liability amount on January 1, 2019 resulting in no adjustment to the opening balance of retained earnings. The Company intends to use the following practical expedients permitted under the new standard: (i) Lease with a remaining lease term of less than twelve months as at January 1, 2019 as a sort term leases; (ii) Leases of low dollar value will continue to be expensed as incurred; ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 19 (iii) The Company will not apply any grandfathering practical expedients. The Company is in process of completing its assessment and expects to book a right to use assets and corresponding liability when the standard comes in effect. DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING As of December 31, 2018, the Company'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 Company’s Disclosure Controls and Procedures are effective as of December 31, 2018. The President and Chief Operating Officer and Chief Financial Officer do not expect that the Company’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, 2018, the management of the Company evaluated the Company'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 Company's internal control over financial reporting was effective as of December 31, 2018. 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. Management has limited the scope on the design of disclosure controls and procedures and internal control over financial reporting of the Company to exclude the controls, policies and procedures of Trinidad. Trinidad’s balance sheet is included in the December 31, 2018, consolidated financial statements of the Company. The scope limitation is in accordance with Section 3.3 of National Instrument 52-109, which allows an issuer to limit its design of internal control over financial reporting and disclosure controls and procedures to exclude the controls, policies and procedures of a company acquired not more than 365 days before the end of the financial period to which the certificate relates. The Company intends to complete the design of disclosure controls and procedures and internal control over financial reporting of Trinidad by September 30, 2019. 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. 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 results 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 ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 20 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, changes to taxation regimes and changes to international trade agreements, 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, 2018 was approximately 1.36 compared with 1.26 at December 31, 2017 and 1.34 at December 31, 2016. 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 ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 21 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 or attract 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. | 2018 ANNUAL REPORT 22 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 7, 2019 President and Chief Operating Officer "Signed" Michael Gray Chief Financial Officer March 1, 2018 ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 23 (cid:47)(cid:84)(cid:74)(cid:75)(cid:86)(cid:75)(cid:84)(cid:74)(cid:75)(cid:84)(cid:90)(cid:5)(cid:71)(cid:91)(cid:74)(cid:79)(cid:90)(cid:85)(cid:88)(cid:120)(cid:89)(cid:5)(cid:88)(cid:75)(cid:86)(cid:85)(cid:88)(cid:90)(cid:5) (cid:58)(cid:85)(cid:5)(cid:90)(cid:78)(cid:75)(cid:5)(cid:57)(cid:78)(cid:71)(cid:88)(cid:75)(cid:78)(cid:85)(cid:82)(cid:74)(cid:75)(cid:88)(cid:89)(cid:5)(cid:85)(cid:76)(cid:5)(cid:43)(cid:84)(cid:89)(cid:79)(cid:77)(cid:84)(cid:5)(cid:43)(cid:84)(cid:75)(cid:88)(cid:77)(cid:95)(cid:5)(cid:57)(cid:75)(cid:88)(cid:92)(cid:79)(cid:73)(cid:75)(cid:89)(cid:5)(cid:47)(cid:84)(cid:73)(cid:19)(cid:5) (cid:53)(cid:91)(cid:88)(cid:5)(cid:85)(cid:86)(cid:79)(cid:84)(cid:79)(cid:85)(cid:84)(cid:5) 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(cid:22)(cid:22)(cid:22)(cid:18)(cid:26)(cid:90)(cid:78)(cid:5)(cid:39)(cid:92)(cid:75)(cid:84)(cid:91)(cid:75)(cid:5)(cid:57)(cid:61)(cid:17)(cid:5)(cid:57)(cid:91)(cid:79)(cid:90)(cid:75)(cid:5)(cid:24)(cid:22)(cid:21)(cid:21)(cid:17)(cid:5)(cid:41)(cid:71)(cid:82)(cid:77)(cid:71)(cid:88)(cid:95)(cid:17)(cid:5)(cid:39)(cid:82)(cid:72)(cid:75)(cid:88)(cid:90)(cid:71)(cid:17)(cid:5)(cid:41)(cid:71)(cid:84)(cid:71)(cid:74)(cid:71)(cid:5)(cid:58)(cid:23)(cid:54)(cid:5)(cid:26)(cid:50)(cid:24)(cid:5) (cid:58)(cid:32)(cid:5)(cid:16)(cid:22)(cid:5)(cid:25)(cid:21)(cid:24)(cid:5)(cid:26)(cid:21)(cid:31)(cid:5)(cid:28)(cid:26)(cid:21)(cid:21)(cid:17)(cid:5)(cid:44)(cid:32)(cid:5)(cid:16)(cid:22)(cid:5)(cid:25)(cid:21)(cid:24)(cid:5)(cid:28)(cid:29)(cid:22)(cid:5)(cid:22)(cid:29)(cid:23)(cid:26)(cid:5) “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 24 (cid:53)(cid:91)(cid:88)(cid:5)(cid:85)(cid:86)(cid:79)(cid:84)(cid:79)(cid:85)(cid:84)(cid:5)(cid:85)(cid:84)(cid:5)(cid:90)(cid:78)(cid:75)(cid:5)(cid:73)(cid:85)(cid:84)(cid:89)(cid:85)(cid:82)(cid:79)(cid:74)(cid:71)(cid:90)(cid:75)(cid:74)(cid:5)(cid:76)(cid:79)(cid:84)(cid:71)(cid:84)(cid:73)(cid:79)(cid:71)(cid:82)(cid:5)(cid:89)(cid:90)(cid:71)(cid:90)(cid:75)(cid:83)(cid:75)(cid:84)(cid:90)(cid:89)(cid:5)(cid:74)(cid:85)(cid:75)(cid:89)(cid:5)(cid:84)(cid:85)(cid:90)(cid:5)(cid:73)(cid:85)(cid:92)(cid:75)(cid:88)(cid:5)(cid:90)(cid:78)(cid:75)(cid:5)(cid:85)(cid:90)(cid:78)(cid:75)(cid:88)(cid:5)(cid:79)(cid:84)(cid:76)(cid:85)(cid:88)(cid:83)(cid:71)(cid:90)(cid:79)(cid:85)(cid:84)(cid:5)(cid:71)(cid:84)(cid:74)(cid:5)(cid:93)(cid:75)(cid:5)(cid:74)(cid:85)(cid:5)(cid:84)(cid:85)(cid:90)(cid:5) 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(cid:58)(cid:78)(cid:75)(cid:5)(cid:75)(cid:84)(cid:77)(cid:71)(cid:77)(cid:75)(cid:83)(cid:75)(cid:84)(cid:90)(cid:5)(cid:86)(cid:71)(cid:88)(cid:90)(cid:84)(cid:75)(cid:88)(cid:5)(cid:85)(cid:84)(cid:5)(cid:90)(cid:78)(cid:75)(cid:5)(cid:71)(cid:91)(cid:74)(cid:79)(cid:90)(cid:5)(cid:88)(cid:75)(cid:89)(cid:91)(cid:82)(cid:90)(cid:79)(cid:84)(cid:77)(cid:5)(cid:79)(cid:84)(cid:5)(cid:90)(cid:78)(cid:79)(cid:89)(cid:5)(cid:79)(cid:84)(cid:74)(cid:75)(cid:86)(cid:75)(cid:84)(cid:74)(cid:75)(cid:84)(cid:90)(cid:5)(cid:71)(cid:91)(cid:74)(cid:79)(cid:90)(cid:85)(cid:88)(cid:120)(cid:89)(cid:5)(cid:88)(cid:75)(cid:86)(cid:85)(cid:88)(cid:90)(cid:5)(cid:79)(cid:89)(cid:5)(cid:56)(cid:75)(cid:95)(cid:84)(cid:85)(cid:82)(cid:74)(cid:5)(cid:58)(cid:75)(cid:90)(cid:96)(cid:82)(cid:71)(cid:76)(cid:76)(cid:19)(cid:5) (cid:41)(cid:78)(cid:71)(cid:88)(cid:90)(cid:75)(cid:88)(cid:75)(cid:74)(cid:5)(cid:54)(cid:88)(cid:85)(cid:76)(cid:75)(cid:89)(cid:89)(cid:79)(cid:85)(cid:84)(cid:71)(cid:82)(cid:5)(cid:39)(cid:73)(cid:73)(cid:85)(cid:91)(cid:84)(cid:90)(cid:71)(cid:84)(cid:90)(cid:89)(cid:5) (cid:41)(cid:71)(cid:82)(cid:77)(cid:71)(cid:88)(cid:95)(cid:17)(cid:5)(cid:39)(cid:82)(cid:72)(cid:75)(cid:88)(cid:90)(cid:71)(cid:5) (cid:51)(cid:71)(cid:88)(cid:73)(cid:78)(cid:5)(cid:28)(cid:17)(cid:5)(cid:23)(cid:21)(cid:22)(cid:31)(cid:5) ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 26 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As at (in thousands of Canadian dollars) Assets Current Assets Cash and cash equivalents (Note 6) Accounts receivable Inventories, investments, prepaid and other Asset held for sale (Note 5) Income taxes receivable Total current assets Property and equipment (Note 7) Investment in joint ventures (Note 8) Total assets Liabilities Current Liabilities Accounts payable and accruals (Note 9) Dividends payable Share-based compensation (Note 10) Income taxes payable Current portion of long-term debt (Note 11) Total current liabilities Long-term debt (Note 11) Share-based compensation (Note 10) Deferred income taxes (Note 12) Non-controlling interest (Note 13) Total liabilities Shareholders' Equity Share capital (Note 14) Contributed surplus Equity component of convertible debenture (Note 11) Foreign currency translation reserve Minority interest Retained earnings Total shareholders' equity December 31 2018 December 31 2017 $ 84,823 $ 351,596 58,175 18,806 1,994 515,394 3,201,704 177,010 32,374 232,155 92,424 — 3,546 360,499 2,597,966 — $ 3,894,108 $ 2,958,465 $ 271,374 $ 190,152 18,849 975 3,807 376,612 671,617 1,350,041 3,033 72,727 6,007 18,849 3,021 3,419 487,257 702,698 252,676 2,708 311,007 — 2,103,425 1,269,089 206,328 206,042 1,013 3,193 315,095 72,078 1,192,976 1,790,683 1,126 — 237,885 — 1,244,323 1,689,376 Total liabilities and shareholders' equity $ 3,894,108 $ 2,958,465 Contingencies and commitments (Note 23) See accompanying notes to the consolidated financial statements. Approved by the Board of Directors: 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. | 2018 ANNUAL REPORT 27 CONSOLIDATED STATEMENTS OF INCOME (LOSS) For the years ended December 31 (in thousands of Canadian dollars, except per share data) Revenue (Note 17) Expenses Oilfield services Depreciation (Note 7) General and administrative Share-based compensation (Note 10) Foreign exchange and other Total expenses 2018 2017 $ 1,156,357 $ 1,000,650 855,824 415,036 46,437 707 (19,001) 759,700 325,811 39,166 656 21,903 1,299,003 1,147,236 Loss before interest and income taxes and gain on bargain purchase (142,646) (146,586) Gain from investment in joint ventures (Note 8) Gain on bargain purchase (Note 5) Interest expense Income (loss) before income taxes Income taxes (Note 12) Current tax Deferred tax Total income taxes Net income (loss) Net income (loss) attributable to: Shareholders of Ensign Minority interests Net income (loss) per share (Note 16) Basic Diluted See accompanying notes to the consolidated financial statements. (874) (200,672) 52,416 6,484 1,044 (53,224) (52,180) — — 41,210 (187,796) (2,353) (147,799) (150,152) $ 58,664 $ (37,644) 58,302 362 58,664 (37,644) — (37,644) $ $ 0.37 0.37 $ $ (0.24) (0.24) ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 28 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) For the years ended December 31 (in thousands of Canadian dollars) Net income (loss) Other comprehensive income (loss) Item that may be subsequently reclassified to profit or loss Foreign currency translation adjustment Comprehensive income (loss) Total comprehensive income (loss) attributable to: Shareholders of Ensign Minority interests See accompanying notes to the consolidated financial statements. 2018 2017 $ 58,664 $ (37,644) 78,240 (54,662) $ 136,904 $ (92,306) 135,512 1,392 (54,662) — $ 136,904 $ (54,662) ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 29 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (in thousands of Canadian dollars) Balance at December 31, 2017 as originally presented Change in accounting policy (Note 3) Balance, January, 2018 Net income Other comprehensive income Total comprehensive income Minority interest assumed on acquisition (Note 5) Recognition of net assets attributable to minority interest Dividends Convertible Debenture (Note 11) Share-based compensation Shares vested previously held in trust Purchase of shares held in trust Balance December 31, 2018 Balance January 1, 2017 Net loss Other comprehensive loss Total comprehensive loss Dividends Share Capital Contributed Surplus Equity Component of Convertible Debenture Foreign Currency Translation Reserve Minority Interest Retained Earnings Total Equity $ 206,042 $ 1,126 $ — $ 237,885 $ — $ 1,244,323 $ 1,689,376 — 206,042 — 1,126 — — — — — — — — 1,333 (1,047) — — — — — — — 1,220 (1,333) — — — — — — — — — 3,193 — — — — — (12,781) $ (12,781) 237,885 — 1,231,542 1,676,595 — 77,210 77,210 362 1,030 1,392 58,302 — 58,664 78,240 58,302 136,904 — — — — — — — 49,214 — 49,214 21,472 (21,472) — — — — — — (75,396) (75,396) — — — — 3,193 1,220 — (1,047) $ $ 206,328 $ 1,013 $ 3,193 $ 315,095 $ 72,078 $ 1,192,976 $ 1,790,683 180,666 $ 1,524 $ — $ 292,547 $ — $ 1,357,752 $ 1,832,489 — — — 23,208 — — — — — — — — — — — — (54,662) (54,662) — — — — — — — — — — — (37,644) (37,644) — (54,662) (37,644) (92,306) (75,785) (52,577) — — — 2,873 — (1,103) Share-based compensation — 2,873 Shares vested previously held in trust Purchase of shares held in trust 3,271 (1,103) (3,271) — Balance December 31, 2017 $ 206,042 $ 1,126 $ — $ 237,885 $ — $ 1,244,323 $ 1,689,376 See accompanying notes to the consolidated financial statements. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 30 CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31 (in thousands of Canadian dollars) Cash provided by (used in) Operating activities Net income (loss) Items not affecting cash Depreciation Share-based compensation, net of cash paid Gain from joint ventures Unrealized foreign exchange and other Accretion on long-term debt Deferred income tax Gain on bargain purchase (Note 5) Funds flow from operations Net change in non-cash working capital (Note 6) Cash provided by operating activities Investing activities Purchase of property and equipment Proceeds from disposals of property and equipment Acquisition of Trinidad Drilling Ltd. (net of cash) Contributions to joint venture (Note 8) Net change in non-cash working capital (Note 6) Cash used in investing activities Financing activities Proceeds from long-term debt Repayments of long-term debt Purchase of shares held in trust (Note 14) Subordinate convertible debenture Dividends (Note 14) Net change in non-cash working capital (Note 6) Cash provided by (used in) financing activities Net increase 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 paid (recovered) See accompanying notes to the consolidated financial statements. 2018 2017 $ 58,664 $ (37,644) 415,036 325,811 707 (874) 5,571 731 (53,224) (200,672) 225,939 (73,806) 152,133 (80,044) 6,748 (294,264) (26,144) 17,734 145 — (918) 1,843 (147,799) — 141,438 (6,291) 135,147 (123,763) 6,051 — — (2,667) (375,970) (120,379) 490,886 (182,391) (1,047) 37,000 (75,396) 11,609 280,661 56,824 (4,375) 32,374 84,823 39,784 896 $ $ $ $ $ $ 171,976 (129,787) (1,103) — (52,577) (482) (11,973) 2,795 (258) 29,837 32,374 37,161 (19,688) ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 31 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2018 and 2017 (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 400 – 5th Avenue S.W., Suite 1000, 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 7, 2019, 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) New and amended standards The Company has applied the following standards and amendments for the first time for their annual reporting period commencing January 1, 2018: (i) IFRS 9 Financial Instruments (ii) IFRS 15 Revenue from Contracts with Customers The Company had to change its accounting policies and make certain retrospective adjustments following the adoption of IFRS 9. As discussed in this note below. (c) 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 and controlled. 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. (d) Non-controlling interest (i) Minority interest Minority interests arises from business combinations in which the acquisition of less than a 100 percent interests are initially measured at fair value or at the minority interest's proportionate share of the acquiree's identifiable assets. With respect to Trinidad Drilling Ltd. ("Trinidad") and the acquisition of Trinidad by the Company ("Trinidad Acquisition"), all minority interests were valued using the fair value method. Subsequent to the Trinidad Acquisition, the carrying amount of minority interests is increased or decreased by the minority interest's share of subsequent changes in net (loss) income and comprehensive (loss) income, as well as dividends or cash disbursements made to the minority interest. Total comprehensive income is distributed to minority interests even if the result is the minority interest becoming a debit balance. For non-wholly owned subsidiaries, interests held by external parties that the Company consolidates are shown as minority interest. Minority interests in the net (loss) income of the Company's non-wholly owned subsidiaries are included in total net (loss) income. Minority interests in other comprehensive (loss) income of the Company's ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 32 non-wholly owned subsidiaries are included in total other comprehensive (loss) income. An exception to this occurs where the non-wholly owned subsidiary's shares are required to be redeemed on conditions outside the control of the Company, in which case minority interest in the subsidiary is removed from net (loss) income and comprehensive (loss) income and is presented as a liability. The minority interest related to Trinidad's minority interests are presented as equity. (i) Non-controlling interest Midland C Ranch, LLC ("Midland"), CanElson 120601 Drilling Limited Partnership #1 ("LP1") and CanElson 120601 Drilling Limited Partnership #2 ("LP2") were acquired as part of the Trinidad Acquisition. The Company controls the relevant activities of these entities through services performed by virtue of contractual arrangements. Consequently, the Company consolidates its investments in these entities. Non-controlling interest represents the interest of non-controlling units held by third parties. The non-controlling interests in Midland, LP1 and LP2 are presented as a liability because their shares are required to be redeemed for cash on a fixed or determinable date. (e) Joint arrangements A joint arrangement is an arrangement in which two or more parties have joint control and must act together to direct the activities that significantly affect the returns of the arrangement. Under IFRS 11 - Joint arrangements, the Company classifies its interest in joint arrangements as either joint operations or joint venture. When making this assessment, the Company considers structure and contractual terms of the arrangement, as well as the legal form of any separate vehicles, in addition to all other relevant facts and circumstances. Joint operations are recognized on proportionate consolidation basis by including the Company's share of assets, liabilities, revenues and expenses and other comprehensive income in each of the respective consolidated accounts. Joint venture are recognized using equity method of accounting. The Company's share of individual assets and liabilities are recognized as investments in the joint ventures account on the consolidated statements of financial position, and revenue and expenses are recognized with net earnings as a (gain) loss from investment in joint ventures account on the consolidated statements of operations and comprehensive income. Effective November 30, 2018 and pursuant to the Trinidad Acquisition, the Company acquired a joint venture arrangement with a wholly-owned subsidiary of Halliburton Company. The joint venture entity conducts business under the name Trinidad Drilling International ("TDI") through separately incorporated companies. Trinidad owns 60 percent of the shares of TDI and each of the joint parties have equal voting rights. The Company considers the investment in TDI to be a financial asset at fair value through profit or loss, and recognizes changes in fair value of the investment in the statements of operations and comprehensive income (loss) as gain (loss) from joint ventures. The Company participates in other joint ventures that are considered immaterial for reporting purposes. In all cases, the joint venture partners have joint control over the relevant activities of the joint venture, and such are accounted for in these consolidated financial statements using the equity method of accounting. (f) 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. (g) 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. (h) Asset held for sale Non-current assets, and disposal groups, are classified as assets held for sale when the carrying amount is to be recovered principally through a sales transaction rather than through continued use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale and it should be expected to be completed within one year from the date of classification. Non-current assets and disposal groups classified ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 33 as held for sale are measured at the lower of the carrying value amount and fair value less cost to sell. Assets held for sale are not depreciated. If an asset classified as an asset held for sale no longer meets the criteria required, whereby the completion of the sale within one year from the classification date is no longer relevant, or the Company has changed their plans of selling the asset, the asset is re-classified back to property and equipment. The value of the asset is then adjusted to the lower of either the carrying amount before the asset was classified as an asset held for sale, adjusted for depreciation and any other adjustments that would have taken place, or its recoverable amount at the date of the subsequent decision not to sell. (i) 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. Depreciation is based on the estimated useful lives of the assets as follows: Asset Class Oilfield services equipment Power Drill pipe Top drives Mud pumps Blow out preventer Dynamic Structure Service rig equipment Heavy oilfield service equipment Drilling rig spare equipment Buildings Automotive equipment Office furniture Expected Life Method Residual 5 years 6 years 10 years 10 years 10 years 10 years 20 years 20 years Straight-line Straight-line Straight-line Straight-line Straight-line Straight-line Straight-line Straight-line 3- 15 years Straight-line 1- 10 years Straight-line 20 years Straight-line 3 years Straight-line 5- 10 years Straight-line 10% 10% 10% 10% 10% 10% 10% 10% 10% —% —% 10% —% 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 first quarter of 2018, Ensign undertook a review of its depreciation methodology for all rigs and related equipment. As a result, as of January 1, 2018, the Company determined that using a straight- line method (versus unit of production) and a lower salvage value would more accurately reflect the future economic benefits related to these assets. These adjustments were applied prospectively and caused an increase in depreciation for year ended December 31, 2018 of $78,938. 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 ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 34 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. (j) 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. (k) Revenue recognition Effective January 1, 2018, the Company adopted IFRS 15 - Revenue from Contracts with Customers using the modified retrospective method with the cumulative effect of adopting this standard as an adjustment to the opening balances of retained earnings. The Company did not adjust the opening balances of retained earnings as at January 1, 2018, given that the adoption of IFRS 15 did not result in any changes in the timing of revenue recognition for the Company’s goods and services. 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 have been accepted by the customer, and collectability is reasonably assured. The consideration for services rendered is measured at the fair value of the consideration received and allocated based on their standalone selling prices. The standalone selling prices are determined based on the agreed upon list prices at which the Company sells its services in separate transactions. Payment terms with customers vary by country and contract. Standard payment terms are 30 days from invoice date. Customer contract terms do not include provisions for significant post-service delivery obligations. The Company does not expect to have any revenue contracts where the period between the transfer of the promised goods or services to the customer and payment by the customer exceeds one year. As a consequence, the Company does not adjust any of the transaction prices for the time value of money. The Company does not incur material costs to obtain contracts with customers and consequently, does not recognize any contract assets. The Company does not have any contract liabilities associated with its customer contracts. The adoption of IFRS 15 did not result in any changes in the timing of revenue recognition for the Company’s goods and services. Accounting policy applied until December 31 2017 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. (l) 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. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 35 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. (m) 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. (n) 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. (o) 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 ("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 a 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. (p) Financial instruments The IASB issued the final version of IFRS 9 Financial Instruments, which is effective for annual periods beginning on or after January 1, 2018. IFRS 9, as amended, addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces a substantially reformed approach to hedge accounting and a new impairment model for financial assets. The Company has adopted the standard retrospectively from January 1, 2018, with the transition provisions permitted under the standard. Differences in the carrying amount of financial assets and financial liabilities resulting from the adoption of IFRS 9 are recognized in the opening balance as of January 1, 2018. Comparative prior year periods are not restated. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 36 The allowances for doubtful accounts as at December 31, 2017 reconciles to the opening allowances for doubtful accounts on January 1, 2018 as follows: Allowance for doubtful accounts $ 4,165 11,234 1,547 12,781 16,946 Closing allowance for doubtful accounts as at December 31, 2017 Loss related to Venezuela Loss related to other receivables Total amounts restated through opening retained earnings Opening allowance for doubtful accounts as at January 1, 2018 - calculated under IFRS 9 $ To measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit risk characteristics and the days past due. The contract assets relate to unbilled work in progress and have substantially the same risk characteristics as the trade receivables for the same types of contracts. The Company has therefore concluded that the expected loss rates for trade receivables are a reasonable approximation of the loss rates for the contract assets. Trade receivables are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a customer to engage in a repayment plan with the Company, and a failure to make contractual payments for a period of greater than 120 days past due. As a result of the above noted adoption of accounting policies, the Company's residual undiscounted accounts receivable related to the Company's operations in Venezuela was provisioned for. (i) Classification Beginning January 1, 2018, the Company classifies its financial assets in the following measurement categories: i. Those to be measured subsequently at fair value (either through other comprehensive income, or through profit or loss), and ii. Those to be measured at amortized cost. The classification depends on the Company’s business model for managing the financial assets and the contractual terms of the cash flows. For assets measured at fair value, gains and losses will either be recorded in profit or loss or other comprehensive income. The Company reclassifies financial assets when and only when its business model for managing those assets changes. (ii) Measurement At initial recognition, the Company measures a financial asset at its fair value plus transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss. Subsequent measurement of financial assets depends on the Company’s business model for managing the asset and the cash flow characteristics of the asset. There are three measurement categories into which the Company classifies its financial assets: Amortized cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortized cost. Interest income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising on derecognition is recognized directly in profit or loss and presented together with foreign exchange gains and losses. Impairment losses are presented as separate line item in profit or loss. Fair value through other comprehensive income: Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at fair value through other comprehensive income. Movements in the carrying amount ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 37 are taken through other comprehensive income, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses which are recognized in profit or loss. When the financial asset is derecognized, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss and recognized in other gains and losses. Interest income from these financial assets is included in finance income using the effective interest rate method. Foreign exchange gains and losses are presented in other gains or losses and impairment expenses are presented as separate line item in profit or loss. Fair value through profit or loss: Assets that do not meet the criteria for amortized cost or fair value through other comprehensive income are measured at fair value through profit or less. A gain or loss on a financial asset that is subsequently measured at fair value through profit or loss is recognized in profit or loss and presented net within other gains or losses in the period in which it arises. Accounting policy applied until December 31 2017 The Company has applied IFRS 9 retrospectively, but has elected not to restate comparative information. As a result, the comparative information provided continues to be accounted for in accordance with the Company's previous accounting policy. 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 Ensign Notes (as defined ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 38 below) and the Trinidad Notes (as defined below), 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. (q) 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. 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 22. 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 7. 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 10. 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 12. 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 ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 39 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 22. 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 7. Deferred income tax assets The recognition of deferred tax assets is based on judgments about future taxable profits. Joint arrangements The Company assesses the values of these instruments by using a discounted cash flow model. This calculation requires the use of estimates, including: future drilling activity and utilization of the drilling rigs, future equipment deployment milestones, prices, operating costs, discount rates, timing of new property and equipment and other assumptions. Purchase price allocation The measurement of each business combination requires management estimation in determining the fair values of assets and liabilities acquired as well as the fair value of any intangible assets identified. Management is required to estimate future cash flows, discount rates and market conditions at the date of the acquisition in order to determine the fair value of certain assets. (r) Recent accounting pronouncements On January 13, 2016 the IASB issued IFRS 16 - Leases ("IFRS 16") which has been adopted by the Company on January 1, 2019 using the modified retrospective method. Under the modified retrospective method, comparative financial information is not restated and continues to be reported under the accounting standards in effect for those periods. Under the principles of the new standard, the Company will recognize lease liabilities related to its lease commitments. These lease liabilities will be measured at the present value of the remaining lease payments, discounted using the Company's incremental borrowing rate as at January 1, 2019. The associated right of use ("ROU) assets will be measured at the lease liability amount on January 1, 2019 resulting in no adjustment to the opening balance of retained earnings. The Company intends to use the following practical expedients permitted under the new standard: (i) Lease with a remaining lease term of less than twelve months as at January 1, 2019 as a sort term leases; (ii) Leases of low dollar value will continue to be expensed as incurred; (iii) The Company will not apply any grandfathering practical expedients. The Company is in process of completing its assessment and expects to book a right to use assets and corresponding liability when the standard comes in effect. 4. FOREIGN OPERATIONS The Company provides oilfield services throughout much of North America and internationally in a number of onshore drilling areas. The Company expanded its foreign operations to Bahrain, Mexico, the United Arab Emirates and Kuwait through the Trinidad Acquisition. 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. As such the Company is exposed to significant foreign exchange risks. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 40 5. BUSINESS COMBINATIONS Effective November 30, 2018 (the "Effective Date") the Company completed the acquisition of 56.4 percent of the issued and outstanding common shares of Trinidad Drilling Ltd. (Trinidad), a publicly traded oilfield service company. Following the acquisition of 56.4 percent of Trinidad, the Company extended the period for the tender of additional Trinidad shares and acquired 89.3 percent through a series of transactions for total consideration of $410,197. The strategic business combination was completed to increase the Company's presence in the North American drilling market and certain international markets. The Trinidad Acquisition was funded from the Company's cash resources and new Credit Facility as described in Note 12. The preliminary allocation of the purchase price for the Trinidad Acquisition is determined as follows: Net assets acquired Accounts receivable Prepaid expenses Assets held for sale Property and equipment Investment in joint ventures Future income tax Accounts payable Deferred revenue Long term debt Non-controlling interests liability Gain on bargain purchase Net assets acquired Minority interest Consideration net of cash received1 1 Cash of $89,856 was acquired as part of Trinidad Acquisition The purchase price consideration as at the Effective Acquisition Date is as follows: Cash consideration paid in 2017 Cash consideration paid in 2018 Fair value adjustment Total consideration 132,317 4,789 18,806 794,464 144,776 199,374 (124,911) (1,909) (591,818) (5,661) (200,672) 369,555 49,214 320,341 24,302 384,120 1,775 410,197 The Company has recognized the gain of $200,672 on bargain purchase in Consolidated Statements of Comprehensive Income (Loss) ,which is largely related to the recording of the deferred tax assets at an undiscounted amount versus fair value in the acquisition. The fair value of acquired trade receivables is $132,317. The gross contractual amount for trade receivables due is $135,043 of which $2,726 is expected to be uncollectible. During the fourth quarter of 2018, the Company acquired control of certain Trinidad assets including land, buildings and other under-utilized equipment which continue to be held for sale. The Company's management is committed to the sale and assesses that all criteria are met in order to continue to classify the assets as held for sale. The Company recognizes minority interests in an acquired entity either at fair value or at the minority interest's proportionate share of the acquired entity's net identifiable assets. This decision is made on an acquisition-by- acquisition basis. For minority interests in Trinidad, the Company elected to recognize the minority interest at its proportionate share of the acquired net identifiable assets. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 41 The acquired Trinidad business contributed revenues of $49,766 and net profit of $3,386 to the Company for the period December 1 to December 31, 2018. If acquisition had occurred on January 1, 2018, it is estimated that the consolidated pro-forma revenue and loss for the year ended December 31, 2018 would be $1,724,648 and $563,787 respectively. Included in the loss was an impairment of property and equipment and goodwill and intangibles of $564,874 recorded by Trinidad during Q3, 2018. The Trinidad Acquisition was accounted for as a business combination using the acquisition method whereby the net assets and liabilities assumed are recorded at fair value. The preliminary purchase price allocation is based on management's best estimates of fair values of Trinidad's assets and liabilities as at the Effective Acquisition Date, although future adjustments to estimates may be required. If new information obtained within one year from the Effective Acquisition Date regarding facts and circumstances that existed at the Effective Acquisition Date that identify adjustments to the above amounts, or any additions to provisions that existed at the Effective Acquisition Date, then the accounting at acquisition will be revised. 6. CASH AND CASH EQUIVALENTS (a) Cash and cash equivalents Cash Restricted cash Total cash and cash equivalents (b) 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 December 31 2018 December 31 2017 $ $ 75,709 9,114 84,823 $ $ 32,374 — 32,374 December 31 2018 December 31 2017 $ 19,535 $ (21,623) 39,373 (45,186) (58,185) — (44,463) $ (73,806) $ 17,734 11,609 (44,463) $ (43,900) 39,483 17,042 (442) (9,440) (6,291) (2,667) (482) (9,440) $ $ $ ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 42 7. PROPERTY AND EQUIPMENT Cost: Balance at December 31, 2016 $ 4,971,813 $ 122,703 $ 72,045 $ 5,166,561 Rig and related equipment Automotive and other equipment Land and buildings Total Additions Disposals Effects of foreign exchange 112,790 (50,268) (131,816) 10,031 443 (4,319) Balance at December 31, 2017 4,902,519 128,858 Acquisition Additions Disposals Asset decommissioning Effects of foreign exchange Balance at December 31, 2018 Accumulated depreciation and write-downs Balance at December 31, 2016 Depreciation Disposals Effects of foreign exchange Balance at December 31, 2017 Depreciation Disposals Asset decommissioning Effects of foreign exchange Balance at December 31, 2018 Net book value: At December 31, 2017 At December 31, 2018 942 (823) (2,697) 69,467 26,000 596 (1,571) — 3,029 123,763 (50,648) (138,832) 5,100,844 794,464 89,851 (17,796) (8,016) 255,191 768,464 77,318 (10,201) (8,016) 246,779 — 11,937 (6,024) — 5,383 $ $ $ $ $ 5,976,863 $ 140,154 $ 97,521 $ 6,214,538 (2,137,169) $ (94,078) $ (22,161) $ (2,253,408) (308,869) 39,286 34,720 (2,372,032) (399,086) 7,920 7,299 (108,655) (13,559) (1,934) 3,970 (105,601) (13,618) 4,910 — (4,312) (3,994) (326,422) 231 679 37,583 39,369 (25,245) (2,502,878) (2,505) (415,209) 606 — 13,436 7,299 (2,515) (115,482) (2,864,554) $ (118,621) $ (29,659) $ (3,012,834) 2,530,487 $ 3,112,309 $ 23,257 $ 21,533 $ 44,222 $ 2,597,966 67,862 $ 3,201,704 Property and equipment includes equipment under construction of $32,277 (2017 - $34,980) that has not yet been subject to depreciation. During the year, the Company added three well servicing rigs and decommissioned one drilling rig that had been fully depreciated. The Company also had $9,808 of capital leases additions during the year (2017 - $nil). 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, 2018. 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 a 5% growth rate, a terminal growth rate of 2%. The Company performed a sensitivity analysis and noted no material impact in any CGU under any of the following situations: • • • discount rates 1.8% higher or lower; cash flows 19% higher or lower; and a terminal growth rate 0%, ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 43 8. INVESTMENT IN JOINT VENTURES Joint venture loss (gain) reconciliation Trinidad Drilling International gain from investment Trinidad Drilling International fair value adjustment Other joint arrangements net loss from investments Gain from investment in joint ventures Joint venture investment reconciliation Trinidad Drilling International investment balance Other joint arrangements net loss from investments Investment in joint ventures December 31, 2018 $ (1,096) — 222 (874) December 31, 2018 $ $ 177,223 (213) 177,010 Effective November 30, 2018, through the Trinidad Acquisition, the Company acquired the TDI joint venture arrangement with a wholly-owned subsidiary of Halliburton Company, to operate rigs in Bahrain, Kuwait, Saudi Arabia, United Arab Emirates and Mexico. The joint venture conducts business under the name Trinidad Drilling International through separately incorporated companies. Trinidad owns 60% of the shares of TDI and each of the joint parties have equal voting rights. The investment is held through common shares and mandatory redeemable preferred shares ("MRPS") classified as liabilities. The investment is treated as a financial asset and is fair valued through profit or loss and recognizes changes in fair value of the investment in the consolidated statements of income (loss) and comprehensive income (loss) as gain from investment in joint venture. Continuity of investment in TDI Acquisition of Trinidad Drilling Ltd. Contributions to joint venture Gain from investment in joint venture Change in loan in joint venture Elimination of downstream transactions Effect of foreign exchange Ending balance December 31, 2018 $ 144,776 26,144 1,096 528 (48) 4,727 $ 177,223 ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 44 (a) Summarized financial information for TDI Summarized statements of operations for TDI: (in thousands of Canadian dollars) Revenue Oilfield service revenue Other revenue Expenses Operating expenses Third party costs General and administrative Depreciation and amortization Foreign Exchange Finance cost Loss on sale of assets Preferred share valuation Income before income tax Current income taxes Deferred income taxes Net income December 31, 2018 TDI Ensign 60% Share 3,281 244 3,525 2,002 244 762 1,875 (65) 90 658 (3,890) 1,849 23 — 1,969 146 2,115 1,201 146 457 1,125 (39) 54 395 (2,334) 1,110 14 $ 1,826 $ 1,096 ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 45 Summarized statement of financial position for TDI: Amounts are presented at 100% of the value included in the statements of financial position for TDI. As at (in thousands of Canadian dollars) Assets Current Assets Cash and cash equivalents Accounts receivable Inventories and other Total current assets Property and equipment Deferred income taxes Total assets Liabilities Current Liabilities Accounts payable and accruals Total current liabilities Preferred shares Notes payables to joint venture partners Total liabilities Shareholders' Equity Common Shares Contributed surplus Foreign currency translation reserve Retained earnings Total shareholders' equity December 31 2018 $ 54,380 16,146 6,309 76,835 268,010 5,915 $ 350,760 $ 14,052 14,052 274,534 27,053 315,639 23,508 102,500 6,437 (97,324) 35,121 Total liabilities and shareholders' equity $ 350,760 Related party transactions The related party transaction exchange amounts are determined depending on the nature of the transaction, and negotiations by both parties. They generally fall into two categories: shared services and sale of existing equipment. • Shared services - TDI, and the shareholders of TDI, signed a shared-services agreement that outlines the costs that will be reimbursed and the rates based on an employee time allocation assessment. • Sale of pre-existing equipment -This equipment is sold at a gain/loss on sale to the Company based on third- party valuations. The joint shareholders of TDI have loaned funds, via promissory notes, to fund the importation of drilling rigs into Saudi Arabia. The funds are recoverable through operations in TDI within five years from date of advance and earn interest at 4.25% and mature in December 2020. As at December 31, 2018, the loan payable to the joint venture shareholders is $27,053, of which $16,232 is payable to the Company. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 46 Fair value of investment in TDI joint venture The Company assesses the fair value of the investment using a discounted future cash flow model that compares the estimated future cash flows to the net book value of the asset at the period end date. The model incorporates the following assumptions: 1. A weighted average pre-tax discount rate of 14.0%, which considered industry average cost of capital, past experience, asset specific risk and anticipated debt to equity levels. 2. Five year forecasted cash flows, taking into consideration current industry conditions, actual 2018 operating results and past experience. 3. A terminal value was used for each of the 2018 fair value assessments assuming 1.5% annual growth rate and a 1.5% terminal growth rate for cash flows through the remainder of the segment’s life. 9. ACCOUNTS PAYABLE AND ACCRUALS Trade payables Accrued liabilities Accrued payroll Interest payable Deferred revenue Other liabilities 10. SHARE-BASED COMPENSATION Share option plan December 31 2018 December 31 2017 $ 117,783 $ 110,789 60,025 45,800 24,383 16,859 6,524 8,302 47,582 892 14,579 8,008 $ 271,374 $ 190,152 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 (2017 - 14,886,400) Common Shares. The options’ exercise price equals the market price of the 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, 2018 was $1,320 (2017 - $2,278). A summary of the Company’s share option plan as of December 31, 2018 and 2017 and the changes during the years then ended, is presented below: Outstanding – January 1 Granted Exercised Forfeited Expired Outstanding - December 31 Exercisable - December 31 Number of Share Options 6,724,900 $ 1,358,700 (4,200) (946,400) (1,094,800) 6,038,200 2,861,040 $ $ 2018 Weighted Average Exercise Price 9.67 5.60 5.80 9.81 16.13 7.56 8.33 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 The weighted average share price at the date of exercise of options in 2018 was $5.80 per Common Share (2017 - $7.30). ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 47 The following table lists the options outstanding at December 31, 2018: Exercise Price $5.60 to $6.66 $6.67 to $7.64 $7.65 to $10.37 Outstanding Options Average Vesting Remaining (in years) Weighted Average Exercise Price Options Exercisable Weighted Average Exercise Price 2,113,400 1,563,500 2,361,300 6,038,200 4.00 $ 2.00 1.85 2.64 $ 5.76 7.30 9.36 7.56 428,440 $ 940,300 1,492,300 2,861,040 $ 5.76 7.30 9.72 8.33 The assumptions used to estimate the fair value of employee share options as at December 31, 2018 were: Remaining expected life (years) Volatility (percent) Forfeiture rate (percent) Risk-free interest rate (percent) Expected dividend (percent) December 31 2018 December 31 2017 2.4 40.0 6.7 1.9 10.0 2.6 40.0 6.6 1.7 7.4 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. 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, 2018 and 2017 and the changes during the years ended, is presented below: Outstanding – January 1 Granted Exercised Forfeited Expired Outstanding - December 31, 2018 Exercisable - December 31, 2018 2018 Weighted Average Exercise Price 9.39 5.60 5.60 10.18 16.13 7.28 8.07 Number of SARs 612,700 $ 150,000 (800) (40,600) (104,500) 616,800 263,600 $ $ 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 $ $ The weighted average share price at the date of exercise of SARs in 2018 was $5.60 per common share. No SARs were exercised in 2017. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 48 The following table lists the SARs outstanding at December 31, 2018: Exercise Price $5.60 to $7.00 $7.01 to $9.00 $9.01 to $10.37 SARs Outstanding Average Vesting Remaining (in years) Weighted Average Exercise Price SARs Exercisable Weighted Average Exercise Price 265,200 248,100 103,500 616,800 4.00 $ 2.40 1.00 2.85 $ 5.79 7.58 10.37 7.28 52,400 $ 128,400 82,800 263,600 $ 5.80 7.51 10.37 8.07 Performance Share Units (PSUs) The Company grants 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, 2018 Granted Granted through dividend payment Forfeited Outstanding - December 31, 2018 11. BANK CREDIT FACILITIES AND LONG-TERM DEBT Drawings on the Bank Facilities Ensign Notes - Senior unsecured notes Tranche B, due February 22, 2019, 3.97% Tranche C, due February 22, 2022, 4.54% Trinidad Notes - Senior unsecured notes, February 2025, 6.63% Subordinate Convertible Debenture, January 22, 2022, 7.00% Capital Lease Commitments Unamortized deferred financing costs Total Less: current portion Total long-term debt Bank credit facilities: Outstanding 694,983 771,917 98,703 (292,488) 1,273,115 December 31 2018 December 31 2017 $ 946,531 $ 488,677 136,444 136,444 477,554 34,538 9,689 (14,547) $ $ 1,726,653 (376,612) 1,350,041 $ $ 125,730 125,730 — — 1,436 (1,640) 739,933 (487,257) 252,676 As at December 31, 2018, the Company’s available bank credit facilities consists of a $1,250,000 (2017 - $500,000) global revolving credit facility (the “Credit Facility”) and the Trinidad's existing credit facility (the "Trinidad Facility"). The Credit Facility is available to the Company and certain of its wholly-owned subsidiaries, and may be drawn in Canadian or United States dollars, up to the equivalent value of $1,250,000 Canadian dollars. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 49 Interest is incurred on the utilized balance of the Credit Facility based on the election of one of the following options when funds are drawn: a. The bank's Canadian prime lending rate plus 0.50% to 3.00% b. The US base or US prime rate c. The commitment rate of 0.375% to 1.00% d. The BA rate plus 1.50% to 4.00% e. The LIBOR and letters of credit The Credit Facility matures November 26, 2021, unless extended and is unsecured. No principal payments are due until then. The Credit Facility has the following covenant requirements: • The Consolidated Debt to Consolidated EBITDA Ratio shall not exceed 5.50:1.00 as at the end of the Fiscal Quarters ending on December 31, 2018 and March 31, 2019, 5:25:1.00 at the end of the Fiscal Quarters ending June 30, 2019 and September 30, 2019, and 5.00:1.00 at any time thereafter; • The Consolidated EBITDA to Consolidated Interest Expense as at the end of any Fiscal Quarter shall not be less than 2.50:1.00; and • The Consolidated Senior Debt (being the Company's bank debt and outstanding Ensign Notes which were redeemed and paid in full on January 10, 2019) to Consolidated EBITDA Ratio shall not exceed 3.00:1.00 as at the end of the Fiscal Quarters ending December 31, 2018 and March 31, 2019, 2.75:1.00 at the end of the Fiscal Quarters ending June 30, 2019 and September 30, 2019, and 2.50:1.00 at any time thereafter. As at December 31, 2018 the Company was in compliance with all covenants related to the Credit Facility. Consolidated EBITDA is defined under the Credit Facility 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. As at December 31, 2018, the Company had $55,977 (2017 - $10,530) outstanding collateralized letters of credit, used in the normal course of business. Senior unsecured notes: On February 22, 2012, the Company completed the private placement of USD $200,000 of senior unsecured notes (the "Ensign Notes") with the terms noted above. Interest on the Ensign Notes is payable semi-annually on May 31st and November 30th of each year, with final interest payments due on expiry. The Ensign Notes are unsecured, ranked equally with the Credit Facility and guaranteed by Ensign Energy Services Inc. and certain of the Company’s subsidiaries located in Canada, the United States and Australia. Interest accrued on the Ensign Notes at December 31, 2018 was $1,000 (2017 - $892) and has been included in accounts payable and accruals on the consolidated statement of financial position. The Company incurred financing costs associated with the Ensign Notes that are being deferred and amortized using the effective interest method. On December 6, 2018, Ensign provided a notice of redemption to all holders of its Ensign Notes, with a redemption effective date of January 10, 2019. Due to this redemption, Ensign did not calculate the financial covenants and classified the senior unsecured notes to current liabilities. Subordinate convertible debenture: During the first quarter of 2018, the Company issued a non-brokered private placement of unsecured, subordinated convertible debentures (the "Debentures") for gross proceeds of $37,000. The Debentures bear interest from the date of closing at 7.0% per annum, payable semi-annually in arrears, on April 1 and October 1 each year. The Debentures will mature on January 31, 2022. If, on and after April 1, 2021, the closing price of the Company's Common Shares on the Toronto Stock Exchange exceeds 125% of the Conversion Price for at least 30 consecutive trading days, the Debentures may be redeemed ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 50 by the Company for cash, in whole or in part from time to time, on not more than 90 days and not less than 60 days prior notice, at a redemption price equal to the outstanding principal amount of the Debentures plus accrued and unpaid interest thereon (if any), up to, but excluding, the date of redemption. The liability component of the Debentures was recognized initially at the fair value and revalued quarterly using a similar liability that does not have an equity conversion option, which was calculated based on an estimated market interest rate of 8.25%. The difference between the principal amount of the Debentures and the fair value of the liability component was recognized in shareholders’ equity. Acquisition In the fourth quarter of 2018, the Company acquired control of Trinidad pursuant to the Trinidad Acquisition. As part of the acquisition, the Company assumed $591,818 of long term debt, the particulars of which are as follows: (i) The Trinidad Facility $127,109 drawn on the Trinidad's existing credit facility (the "Trinidad Facility"). On November 27, 2018, Trinidad notified the lenders that the acquisition of Trinidad by Ensign constitutes the occurrence of a change of control under the credit agreement and therefore the Trinidad Facility was classified as a current liability and additional borrowings was not permitted. Subsequent to year end on January 8, 2019, Ensign received consent from the lenders to keep the Trinidad Facility outstanding and the size of the facility was reduced to an aggregate of $125,000 from the original $100,000 Canadian revolving facility and $100,000 US revolving facility, including $10,000 Canadian dollar overdraft and a $10,000 US dollar bank overdraft. The Trinidad Facility requires quarterly interest payments based on Bankers Acceptance and LIBOR rates and a maturity of December 12, 2020. Subsequent year end the Trinidad Facility was repaid in full on February 14, 2019. Due to this repayment, Ensign did not calculate the financial covenants and classified the senior unsecured notes to current liabilities. (ii) The Trinidad Notes USD $350,000 (CAD $464,709) million of senior unsecured notes ("Trinidad Notes"). The Trinidad Notes mature in February 2025, bear interest at 6.625% per annum, which is payable semi-annually in February and August. The Company has the option to redeem all or part of the Trinidad Notes at a redemption price equal to the principal plus accrued interest. On December 6, 2018, Ensign provided a notice of redemption to all holders of its outstanding Trinidad Notes, with a redemption effective date of January 10, 2019. Due to this redemption, Ensign did not calculate the financial covenants and classified the senior unsecured notes to current liabilities. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 51 12. 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 2018 December 31 2017 $ 501,508 $ 427,893 $ $ (963) (370,439) (57,379) (803) (109,808) (6,275) 72,727 $ 311,007 (19,618) $ (11,291) (411,632) (109,808) 2,470 501,507 4,213 427,893 Net deferred tax liability $ 72,727 $ 311,007 Movement of deferred tax liability: Opening deferred tax liability Deferred tax recovery Acquisition of Trinidad Drilling Ltd. Foreign exchange impact Net deferred tax liability December 31, 2018 December 31, 2017 $ 311,007 $ 483,703 (53,224) (147,799) (200,672) 15,616 — (24,897) $ 72,727 $ 311,007 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 Gain on bargain purchase Income tax rate Expected income tax expense Increase (decrease) from: Higher effective tax rate on foreign operations Non-deductible expenses Adjustments from prior years Functional currency translation adjustment and true up Rate change impact on deferred taxes Income tax expense December 31 2018 December 31 2017 $ 6,484 $ (187,796) (200,672) (194,188) — — 27.0% 26.9% (52,431) (50,517) (1,818) (1,083) — 2,139 1,013 (9,848) 3,624 7,442 7,107 (107,960) $ (52,180) $ (150,152) The statutory rate for 2018 increased slightly over that of 2017 due to the increase in the British Columbia and Saskatchewan tax rates, effective January 1, 2018 for both provinces. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 52 13. NON-CONTROLLING INTERESTS The non-controlling interests relate to Midland C Ranch Holdings, LLC (Midland), CanElson 120601 Drilling Limited Partnership #1 (LP1), and CanElson 120601 Drilling Limited Partnership #2 (LP2) which were acquired as part of Trinidad Acquisition. The following table summarizes the information relating to the non-controlling interest: As at December 31, 2018 Acquired interest at November 30, 2018 Total comprehensive income attributable to non-controlling interest Change in fair value of liability Foreign currency translation adjustment Balance as at December 31, 2018 $ $ Total NCI 5,661 180 — 166 6,007 Summarized statements of financial position for non-controlling interests As at December 31, 2018 Non-controlling interests ownership percentage Current assets Non-current assets LP1 50% 2,078 2,787 LP2 45.6% 1,099 1,925 Midland Total 50% 5,995 5,523 9,172 10,235 Current liabilities 1,250 3,100 2,601 6,951 Summarized statement of operations and comprehensive income (loss) for non-controlling interests For the year ended December 31, 2018 Non-controlling interests ownership percentage Revenue Net (loss) LP1 50% — LP2 45.6% — (111) (161) Net (loss) attributable to non-controlling interests Total comprehensive income (loss) attributable to non- controlling interests (55) (55) (75) (75) Midland Total 50% 1,249 (18) (9) 310 1,249 (290) (139) 180 Fair value of non-controlling interest The Company completed a valuation assessment of the non-controlling interest liability as part of business combination. See Note 5 for more details. 14. SHARE CAPITAL (a) Authorized Unlimited common shares, no par value Unlimited preferred shares, no par value, issuable in series ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 53 (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 156,753,209 $ — 107,847 2018 Amount 206,042 — 286 Number of Common Shares 153,594,857 $ 2,933,708 224,644 2017 Amount 180,666 23,208 2,168 Closing balance - December 31 156,861,056 $ 206,328 156,753,209 $ 206,042 The total number of unvested shares held in trust for share-based compensation plans as at December 31, 2018 was 213,425 (December 31, 2017 – 321,272). (c) Dividends During the year ended December 31, 2018, the Company declared dividends of $75,396 (2017 - $75,785), being $0.48 per common share (2017 - $0.48 per common share). 15. MINORITY INTERESTS Set out below is summarized financial information for the Company's minority interest. As at December 31, 2018 Minority interests ownership percentage Current assets Non-current assets Current liabilities Summarized statement of operations and comprehensive (loss) for minority interests: For the year ended December 31, 2018 Minority interests ownership percentage Revenue Net income Net income attributable to minority interest Total comprehensive income attributable to minority interest 16. NET INCOME (LOSS) PER SHARE Trinidad Drilling Ltd. 10.7% 176,587 986,030 101,610 Trinidad Drilling Ltd. 10.7% 49,766 3,386 362 1,392 $ $ $ $ Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of Common Shares outstanding during the period adjusted for conversion of all potentially dilutive Common Shares. Diluted net income (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 Common Shares at the average market price during the period. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 54 Net income (loss) attributable to common shareholders: Basic and diluted $ 58,302 $ (37,644) Weighted average number of Common Shares outstanding: Basic Potentially dilutive share-based compensation plans Diluted 156,862,920 156,545,624 178,800 182,153 157,041,720 156,727,777 December 31 2018 December 31 2017 Share options of 3,923,750 (2017 – 4,890,600) were excluded from the calculation of diluted weighted average number of Common Shares outstanding as they were anti-dilutive. 17. 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, 2018 Canada United States International Revenue Depreciation and amortization Income (loss) before interest and income taxes Total assets Total liabilities Purchase of property & equipment, net As at and for the year ended December 31, 2017 Revenue Depreciation and amortization Loss before interest and income taxes Total assets Total liabilities Purchase of property & equipment, net For the years ended December 31 Rig rental revenue Service revenue Total revenue 241,034 118,521 123,781 907,011 1,404,756 14,355 Canada 262,793 110,808 (78,377) 980,476 561,809 21,459 641,558 204,412 (47,323) 2,161,721 582,818 49,082 273,765 92,103 (17,558) 825,376 115,851 9,859 United States International 459,496 158,157 (61,818) 1,326,988 486,653 83,158 278,361 56,846 (6,391) 651,001 220,627 13,095 Total 1,156,357 415,036 58,900 3,894,108 2,103,425 73,296 Total 1,000,650 325,811 (146,586) 2,958,465 1,269,089 117,712 2018 2017 682,716 $ 560,364 473,641 440,286 1,156,357 $ 1,000,650 $ $ There are no material differences in the basis of accounting or the measurement of (loss) income, assets and liabilities between the Company 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, 2018 the Company had no customers that represented 10 percent or more of the Company's revenue. During the year ended December 31, 2017, the Company had one customer that represented more than 10 percent of the Company's revenue. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 55 18. 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 2018 December 31 2017 $ 588,563 $ 524,291 707 589,270 415,036 313,698 (19,001) 656 524,947 325,811 274,575 21,903 Total expenses before interest and income taxes $ 1,299,003 $ 1,147,236 19. 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 2018 December 31 2017 $ $ 2,744 717 3,461 $ $ 2,349 1,407 3,756 ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 56 20. 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, 2018: Name of Subsidiary Ensign Drilling Inc. Ensign Argentina S.A. Ensign de Venezuela C.A. Ensign Energy Services Pty Limited Ensign Australia Pty Limited Ensign International Energy Services LLC 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. Ensign Well Servicing Inc. Ensign Testing Services Inc. Trinidad Drilling Ltd. Trinidad Drilling USA Ltd. Trinidad Drilling LP Jurisdiction of Formation Incorporation or Continuance Functional Currency Percentage Ownership of Shares Beneficially Owned or Controlled Directly or Indirectly by the Company 2018 2017 CAD USD USD USD AUD USD USD USD USD USD USD USD CAD USD CAD CAD CAD USD USD Canada Argentina Venezuela Australia Australia Oman Barbados United States United States United States United States United States Canada Canada Canada Canada Canada United States United States 100 100 100 100 100 100 100 100 100 100 100 100 100 100 — — 89 89 89 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 — — — ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 57 21. CAPITAL MANAGEMENT STRATEGY 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, convertible debentures 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, 2018, the bank credit facilities' drawings totaled $946,531 (2017 - $488,677), senior unsecured notes totaled $750,442 (2017 - $249,820) and shareholders’ equity totaled $1,790,683 (2017 - $1,689,376). 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. 22. 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. The estimated fair value of the investment in joint ventures is a Level 3 in the value of hierarchy. Inputs to the change in the fail value of the investment in joint venture are disclosed in Note 8. The fair value of non-controlling interest is based on Level 3 inputs and is not based on observable market. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 58 The following table summarizes the carrying value of the certain Company's financial assets and liabilities as compared to their respective fair values: As at December 31, 2018 December 31, 2017 (in thousands of Canadian dollars) Fair value Carrying value Fair Value Carrying value Financial assets at fair value for profit or loss: Investment in TDI joint venture 177,010 177,010 — — Financial liabilities at fair value through profit or loss: Ensign Notes - senior unsecured notes due 2019 and 2022 Trinidad Notes - senior notes dues 2025 Debenture Non-controlling interests liability Credit risk 278,614 482,682 34,538 6,007 278,614 482,682 34,538 6,007 251,460 251,460 — — — — — — 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, 2018. The Company applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowances for all trade receivables and contract assets. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due. The expected loss rates are based on the payment profiles of sales over a period of 36 months before December 31, 2018 or January 1, 2018 respectively and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward- looking information on macroeconomic factors affecting the ability of the customer to settle the receivables. On that basis, the loss allowance as at December 31, 2018 and January 1, 2018 (on adoption of IFRS 9) was determined as follows for trade receivables: As at December 31, 2018 Expected loss rate Current 0.5% More than 30 days past due More than 60 days past due More than 90 days past due 2.0% 8.2% 43.2% Gross carrying amount 167,105 104,662 Loss allowances 836 2,093 26,207 2,149 25,682 11,105 January 1, 2018 Expected loss rate Gross carrying amount Loss allowances Current 2.0% 107,308 2,146 More that 30 days past due More that 60 days past due More that 90 days past due 5.0% 12.5% 55.3% 67,904 3,395 8,641 1,080 18,671 10,325 Total 323,656 16,183 Total 202,524 16,946 As part of the Company’s international operations, it provides oilfield services in Venezuela pursuant to contractual arrangements. As at December 31, 2018, the Company had accounts receivable of approximately $21,478 million for work performed in Venezuela, and in recent months a number of payments have been received by the Company. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 59 Though the Company has a history of collecting accounts receivable in Venezuela, due to the 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. As a result the Company has provided a further $11,234 million provision onto its already discounted accounts receivable balance. The opening loss allowance for trade receivables as at December 31, 2018 reconciled in Note 3 (p). Trade receivables are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of debtor to engage in a repayment plan with the Company, and failure to make contractual payments for a period of greater than 120 days past due. Impairment losses on trade receivables are presented as net losses within operating profit. Subsequent recoveries of amounts previously written off are credited against the same line item. Previous accounting policy for impairment for trade receivables 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. 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, 2018, 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 Less than 1 Year 1-3 Years 4-5 Years Total Ensign Notes - senior unsecured notes due 2019 and 2022 Trinidad Notes - senior unsecured notes due 2025 Bank facilities1 Debenture Total $ 278,614 $ — $ — $ 278,614 31,638 39,991 2,590 94,914 1,019,504 40,445 63,275 $ 189,827 — $ — $ 1,059,495 43,035 $ 352,833 $ 1,154,863 $ 63,275 $ 1,570,971 1 Interest on the bank credit facilities is calculated based on the amount drawn at December 31, 2018 and the applicable bankers’ acceptance/ LIBOR interest rates outstanding as at December 31, 2018. USD denominated balances are converted using the foreign exchange rate as of December 31, 2018. 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, 2018, 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 $3,966 lower or higher. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 60 Foreign currency exchange rate risk Foreign currency risk can only arise on financial instruments that are denominated in a currency other than the functional currency in which they are measured. The Company is not exposed to foreign exchange risk as the Company does not have financial instruments that are not denominated in its functional currency. Translation related risks are therefore not included in the assessment of the entity’s exposure to currency risks. Translation exposures arise from financial and non-financial items held by an entity (for example, a subsidiary) with a functional currency different from the Company’s presentation currency. However, foreign currency denominated inter-company receivables and payables which do not form part of a net investment in a foreign operation would be included in the sensitivity analysis for foreign currency risks, because even though the balances eliminate in the consolidated balance sheet, the effect on profit or loss of their revaluation under IAS 21 is not fully eliminated. 23. 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 $ 9,052 13,792 — 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, 2018, lease payments of $3,783 (2017 - $4,888) 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. 24. SUBSEQUENT EVENTS Subsequent to December 31, 2018, the Company: • On January 10, 2019 the Company utilized the Credit Facility to redeem in full the USD $200,000 senior guaranteed notes (Tranche B &C) due February 2019 and 2022. The total price for the redemption was USD $205,100, which included the principal, make whole and accrued interest. • • • On February 14, 2019 the Company entered into a five year USD $700,000 senior loan facility (the “Senior Loan”) at prevailing market rates for this type loan. On February 14, 2019 a portion of the proceeds of the Senior Loan was utilized to repurchase 99.93% of the outstanding USD $350,000 of Trinidad Notes due February 2025 and to pay related consent fees. The total cost for the repurchase of the Trinidad Notes was USD $366,500. The Trinidad Notes were tendered, and the consent fees were paid, pursuant to Trinidad’s change of control offer to purchase and solicitation of consents announced on December 27, 2018. The Trinidad Notes were repurchased at 101% plus accrued and unpaid interest. Consenting noteholders also received 0.5% as a consent fee for their consent to certain amendments to the indenture governing the Trinidad Notes, among other things eliminating or modifying substantially all of the restrictive covenants. The remaining 0.07% of the Trinidad Notes which were not tendered in the offer will be repurchased prior to the end of March 2019. On February 14, 2019 the Company reduced the Credit Facility available amount from $1,250,000 to $900,000 million and a portion of the proceeds of the Senior Loan was utilized to reduce the outstanding balance of the Credit Facility to less than $900,000. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 61 • • • • • • On February 14, 2019 the Company repaid the existing Trinidad Facility utilizing a portion of the proceeds from the Senior Loan. On February 15, 2019 Trinidad and Holdings completed an amalgamation (the “Amalgamation”) to form an amalgamated corporation named “Trinidad Drilling Ltd.” (“Amalco”). The amalgamation was approved at a special meeting of Trinidad Shareholders held on January 31, 2019. Pursuant to the terms of an amalgamation agreement (the “Amalgamation Agreement”) dated January 4, 2019 between Trinidad and Holdings, Trinidad Shareholders (other than Holdings) received one redeemable preferred share of Amalco (each, a “Redeemable Preferred Share”) for each Trinidad common share upon completion of the Amalgamation. The Redeemable Preferred Shares were immediately redeemed for $1.68 in cash per Redeemable Preferred Share (the “Redemption Consideration”). The Redemption Consideration was the same as the consideration that was available to Trinidad Shareholders under Holding’s Offer for all the issued and outstanding Trinidad Shares, which expired on December 21, 2018. Effective as of February 15, 2019, Amalco became an indirect wholly- owned subsidiary of Ensign. The Trinidad Shares were delisted from trading on the Toronto Stock Exchange effective as of the close of trading on February 19, 2019. On February 25, 2019, Trinidad ceased to be a reporting issuer with the applicable securities regulatory authorities in each of the jurisdictions in which Trinidad was a reporting issuer (or equivalent). Declared a dividend for the first quarter of 2019 of $0.12 per common share or approximately $18,877, payable on or about April 4, 2019 to the shareholders of record at the close of business on March 25, 2019. The dividend has not been provided for and is pursuant to the quarterly dividend policy adopted by the Company. Pursuant to subsection 89(1) of the Canadian Income Tax Act (“ITA”), the dividend being paid is designated as an eligible dividend, as defined in subsection 89(1) of the ITA. The Company has re-implemented its dividend reinvestment plan ("the DRIP"). The DRIP has been updated from the prior version operated by Ensign (the "Original DRIP") that was suspended in August 2017. The substantive features of the Original DRIP have not been changed except to reflect certain tax changes and to limit a participant’s ability to terminate their participation in the plan to once per year. ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 62 Share Trading Summary For the three months ended (Unaudited) High ($) Low ($) Close ($) Volume Value ($) 2018 March 31 June 30 September 30 December 31 Total 7.83 6.55 7.20 6.51 5.61 5.56 5.29 4.14 6.04 5.87 6.23 4.79 23,422,300 157,503,889 15,172,200 91,109,848 8,356,300 51,778,506 14,162,900 72,049,229 61,113,700 372,441,472 For the three months ended (Unaudited) High ($) 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 ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 63 10 Year Financial information (Unaudited - $ thousands, except per share data) 2018 2017 2016 2015 2014 Revenue Gross margin 1,156,357 1,000,650 859,702 1,390,978 2,321,765 300,533 240,950 237,676 395,953 635,370 Gross margin % of revenue 26.0% 24.1 % 27.6 % 28.5 % 27.4% Adjusted EBITDA Depreciation Net income (loss) Net income (loss) per share Basic Diluted 255,677 415,036 201,784 325,811 185,173 349,947 329,010 335,513 58,664 (37,644) (150,522) (104,049) (cid:7)0.37 (cid:7)0.37 $(0.24) $(0.24) $(0.99) $(0.98) $(0.68) $(0.68) 542,262 298,854 71,120 $0.47 $0.46 Funds from operations 225,939 141,438 170,651 296,273 491,886 Funds from operations per share Basic Diluted Net capital expenditures, excluding acquisitions Acquisitions1 $1.44 $1.44 73,296 320.341 Working capital (deficit) (156,223) (342,199) Long-term debt, net of current portion 1,350,041 252,676 $0.90 $0.90 $1.12 $1.11 $1.94 $1.94 $3.22 $3.21 117,712 29,120 159,033 582,999 — — (11,153) 583,269 — 144,239 794,109 — 189,698 786,327 Shareholders' equity 1,790,683 1,689,376 1,832,489 2,086,596 2,045,237 Return on average shareholders' equity Long-term debt to equity Weighted avg. common shares outstanding - basic 3.3% 0.75:1 (2.2)% 0.15:1 (8.2)% 0.32:1 (5.0)% 0.38:1 3.5% 0.38:1 156,862,920 156,545,624 152,759,973 152,476,615 152,710,636 Closing share price - December 31 $4.79 $6.47 $9.38 $7.38 $10.20 1 Consideration paid net of cash was $294,264 in 2018 and(cid:3)$24,302 in 2017. Fair value adjustment of $1,775 was recorded in 2018. *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(cid:3) 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. | 2018 ANNUAL REPORT 64 10 Year Financial information (Unaudited - $ thousands, except per share data) 2013 2012 2011 2010* 2009** Revenue Gross margin 2,098,011 2,197,321 1,890,372 1,355,683 1,137,575 573,838 641,812 567,446 370,860 356,554 Gross margin % of revenue 27.4% 29.2% 30.0% 27.4% 31.3% Adjusted EBITDA Depreciation Net income (loss) Net income (loss) per share Basic Diluted 485,712 248,026 128,865 $0.84 $0.84 560,975 220,227 217,522 $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 Funds from operations 435,611 506,355 473,099 288,513 259,239 Funds from operations per share Basic Diluted Net capital expenditures, excluding acquisitions Acquisitions Working capital (deficit) Long-term debt, net of current portion $2.85 $2.84 342,225 76,408 (71,146) 317,407 $3.32 $3.31 $3.09 $3.09 $1.89 $1.88 $1.69 $1.69 306,689 386,833 255,463 132,573 — 497,352 — 52,573 13,861 296,589 (10,233) 405,953 84,516 107,894 — — Shareholders' equity 1,962,569 1,857,958 1,723,422 1,548,155 1,530,797 Return on average shareholders' equity Long-term debt to equity Weighted avg. common shares outstanding - basic 6.7% 0.16:1 12.1% 0.16:1 13.0% 0.24:1 7.7% NA 8.1% NA 152,693,280 152,664,447 152,865,133 152,834,798 153,154,557 Closing share price - December 31 $16.73 $15.37 $16.25 $15.03 $15.00 *Restated under IFRS **Not restated for IFRS ENSIGN ENERGY SERVICES INC. | 2018 ANNUAL REPORT 65 CORPORATE INFORMATION BOARD OF DIRECTORS CORPORATE MANAGEMENT HEAD OFFICE N. MURRAY EDWARDS N. MURRAY EDWARDS 400 - 5th Avenue S.W., Suite 1000 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 JAMES B. HOWE (1,3) President, Bragg Creek Financial Consultants Ltd. LEN KANGAS (2,4) Independent Businessman CARY A. MOOMJIAN, JR (2,3) President, CAM OilServ Advisors LLC JOHN SCHROEDER (1,3) Independent Businessman GAIL SURKAN (2,3) Independent Businesswoman BARTH WHITHAM (1,4) President and CEO, Enduring Resources LLC 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 MICHAEL GRAY Chief Financial Officer TOM CONNORS Executive Vice President - Canada/ MICHAEL NUSS Executive Vice President, U.S. Symbol: ESI AUDITORS BRENT CONWAY PricewaterhouseCoopers LLP TRANSFER AGENT Computershare Trust Company of Canada Executive Vice President, International TREVOR RUSSELL Vice President, Finance AHMED IQBAL Corporate Controller ROBERT RAIMONDO Vice President, Health, Safety and Environment 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. | 2018 ANNUAL REPORT 66    www.ensignenergy.com 

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