Management’s Discussion & Analysis
Management’s Discussion and Analysis
Fourth Quarter and Year-End Report for the three and twelve-month
periods ended December 31, 2022 and 2021
The following Management’s Discussion and Analysis (“MD&A”) of the financial condition, results of operations, and cash flow of PHX Energy Services Corp. (“PHX Energy” or the
“Corporation”) should be read in conjunction with the Corporation’s annual audited consolidated financial statements for the years ended December 31, 2022 and 2021 and the
accompanying notes contained therein as well as other sections contained within the Corporation’s 2022 annual report. Readers can also obtain additional information on the
Corporation including its most recently filed Annual Information Circular and Annual Information Form (“AIF”) on SEDAR at www.sedar.com. This MD&A has been prepared taking
into consideration information available up to and including February 28, 2023.
PHX Energy’s audited annual financial statements for the years ended December 31, 2022 and 2021 have been prepared in accordance with International Financial Reporting
Standards (“IFRS”), as issued by the International Accounting Standards Board. The MD&A and audited annual financial statements were reviewed by PHX Energy’s Audit Committee
and approved by PHX Energy’s Board of Directors (the “Board”) on February 28, 2023.
This MD&A contains Forward-Looking Information and Non-GAAP and Other Financial Measures, including Non-GAAP Financial Measures and Ratios, Capital Management
Measures and Supplementary Financial Measures. Please refer to the “Non-GAAP and Other Financial Measures” section of this MD&A for applicable definitions and reconciliations.
Please refer to the “Cautionary Statement Regarding Forward-Looking Information and Statements” section of this MD&A.
Fourth Quarter Highlights
•
For the three-month period ended December 31, 2022, PHX Energy generated consolidated revenue of $157.8
million, the highest level of quarterly revenue in the Corporation’s history and an increase of 54 percent from the
fourth quarter of 2021.
• Adjusted EBITDA(1) from continuing operations increased to $33.9 million, 21 percent of consolidated revenue(1).
This is also PHX Energy’s highest level of quarterly adjusted EBITDA and all-time record as a percentage of
consolidated revenue. Included in the 2022-quarter’s adjusted EBITDA is $6.9 million in cash-settled share-based
compensation expense. Excluding cash-settled share-based compensation expense, adjusted EBITDA from
continuing operations(1) in the fourth quarter of 2022 was $40.8 million, 26 percent of consolidated revenue.
• Earnings from continuing operations doubled to $20.3 million in the 2022-quarter from $9.3 million in the 2021 three-
month period.
• PHX Energy’s strong momentum in the US continued, with the Corporation’s US division generating its highest
quarterly revenue for the fourth consecutive quarter. US revenue was $125.7 million in the fourth quarter of 2022,
representing 80 percent of consolidated revenue.
(1) Non-GAAP financial measure or ratio that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures
presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this MD&A.
-1-
PHX Energy Services Corp. | 2022 Annual Report
•
•
•
The US dollar remained strong and continued to have a favorable impact to the 2022-quarter’s financial results. In
the 2022 three-month period, the average US dollar to Canadian dollar foreign exchange rate was 1.36 compared
to 1.26 in the 2021-period.
The Corporation generated excess cash flow(2) of $14.3 million, a 119 percent increase over the fourth quarter of
2021.
In the 2022-quarter, PHX Energy paid $5.1 million in dividends which is double the dividends paid in the same 2021-
quarter. On December 15, 2022, the Corporation declared a dividend of $0.15 per share or $7.6 million, paid on
January 16, 2023 to shareholders of record on December 30, 2022.
Year End Highlights
•
For the year ended December 31, 2022, PHX Energy generated consolidated revenue of $535.7 million, the highest
level of annual revenue in the Corporation’s history and an increase of 58 percent from 2021.
• Adjusted EBITDA(1) from continuing operations increased to $92.7 million, 17 percent of consolidated revenue(1).
This is also PHX Energy’s highest level of annual adjusted EBITDA. Included in the 2022-year’s adjusted EBITDA is
$24.6 million
in cash-settled share-based compensation expense. Excluding cash-settled share-based
compensation expense, adjusted EBITDA from continuing operations(1) in the 2022-year was $117.3 million, 22
percent of consolidated revenue.
• Earnings from continuing operations increased to $44.3 million in the 2022 twelve-month period from $23.3 million
in the comparative 2021-period, a 90 percent increase. This is an all-time record level of annual earnings for the
Corporation.
•
The Corporation maintained a strong financial position with working capital(2) of $94.3 million and net debt(2) of $4.5
million with credit facility capacity in excess of $57 million as at December 31, 2022.
PHX Energy achieved these financial results despite continued constraints in activity and equipment utilization that
resulted from ongoing supply chain challenges and inflation. The resulting increased costs and component shortages with
certain suppliers are expected to have less of an impact in 2023 and the Corporation will continue to leverage its strong
market position and implement strategies to mitigate the impacts to its operations.
(1) Non-GAAP financial measure or ratio that does not have any standardized meaning under IFRS and therefore may not be comparable to similar
measures presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this MD&A.
(2) Capital management measure that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures
presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this MD&A.
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Management’s Discussion & Analysis
Financial Highlights
(Stated in thousands of dollars except per share amounts, percentages and shares outstanding)
Operating Results – Continuing Operations
(unaudited)
(unaudited)
Three-month periods ended December 31,
Years ended December 31,
2022
2021 % Change
2022
2021 % Change
Revenue
Earnings
Earnings per share – diluted
Adjusted EBITDA (1)
Adjusted EBITDA per share – diluted (1)
Adjusted EBITDA as a percentage of
revenue (1)
Cash Flow – Continuing Operations
Cash flows from operating activities
Funds from operations (2)
Funds from operations per share – diluted (3)
Dividends paid per share (3)
Dividends paid
Capital expenditures
Excess cash flow (2)
Financial Position, December 31,
Working capital (2)
Net debt (Net cash) (2)
Shareholders’ equity
Common shares outstanding
n.m. – not meaningful
157,758
102,296
20,333
0.39
33,874
0.66
9,330
0.18
17,410
0.34
54
118
117
95
94
535,745
339,946
44,311
0.87
92,719
1.83
23,318
0.45
60,164
1.16
21%
17%
17%
18%
8,970
25,068
0.49
0.10
5,078
21,474
14,268
12,968
13,772
0.27
0.05
2,505
11,122
6,513
(31)
82
81
100
103
93
119
38,338
72,482
1.43
0.300
15,148
73,525
21,113
45,548
51,211
0.99
0.125
6,291
35,281
22,850
94,339
4,484
57,872
(24,829)
176,878
134,432
50,896,175 47,978,662
58
90
93
54
58
(16)
42
44
140
141
108
(8)
63
n.m.
32
6
(1) Non-GAAP financial measure or ratio that does not have any standardized meaning under IFRS and therefore may not be comparable to similar
measures presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this MD&A.
(2) Capital management measure that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures
presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this MD&A.
(3) Supplementary financial measure that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures
presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this MD&A.
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PHX Energy Services Corp. | 2022 Annual Report
Non-GAAP and Other Financial Measures
Throughout this MD&A, PHX Energy uses certain measures to analyze financial performance, financial position, and cash flow.
These Non-GAAP and other specified financial measures do not have standardized meanings prescribed under Canadian
generally accepted accounting principles (“GAAP”) and include Non-GAAP Financial Measures and Ratios, Capital
Management Measures and Supplementary Financial Measures (collectively referred to as “Non-GAAP and Other Financial
Measures”). These non-GAAP and other specified financial measures include, but are not limited to, adjusted EBITDA, adjusted
EBITDA per share, adjusted EBITDA as a percentage of revenue, gross profit as a percentage of revenue excluding
depreciation and amortization and government grants, selling, general and administrative (“SG&A”) costs excluding share-
based compensation as a percentage of revenue, funds from operations, funds from operations per share, excess cash flow,
net capital expenditures, net debt, and working capital. Management believes that these measures provide supplemental
financial information that is useful in the evaluation of the Corporation’s operations and are commonly used by other oil and
natural gas service companies. Investors should be cautioned, however, that these measures should not be construed as
alternatives to measures determined in accordance with GAAP as an indicator of PHX Energy’s performance. The
Corporation’s method of calculating these measures may differ from that of other organizations, and accordingly, such
measures may not be comparable. Please refer to the “Non-GAAP and Other Financial Measures” section of this MD&A for
applicable definitions, rationale for use, method of calculation and reconciliations where applicable.
Outlook
2022 was undoubtedly the strongest year in our history, as we set many all-time financial records, and built upon our position
as a market leader while maintaining our balance sheet strength. With the high level of performance achieved, we are
positioned to continue to leverage our operational strength to create further growth while upholding our commitment to reward
shareholders.
•
In 2023, we anticipate that the accelerated growth in industry activity will stabilize, plateauing at an average of 1,000
active rigs per day in North America. We believe that this will be the result of a weakening in commodity prices, but
even with these lower rates the industry will remain in a healthy position that will support further growth, particularly
in our US division.
• Through 2022 our premium technology remained in high demand and our fleet operated at capacity, even as new
assets were brought online, as this demand outpaced our supply with climbing rig counts. Supply chain product and
component shortages delayed the delivery of some of the 2022 capital expenditures, and we anticipate receiving
these deliveries in the first half of 2023.
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Management’s Discussion & Analysis
• We believe the 2023 capital expenditure program will allow us to meet the ongoing demand for our premium
technology as operators continue to seek technologies, like ours, that increase the speed at which they drill. In 2023,
we anticipate growing our market share as the industry activity flattens and we will see the full benefit from the record
level of net capital expenditures in 2022 and expenditures planned for 2023.
• We will continue to diligently act to protect our operating margins as inflation continues to be a prominent factor in
all aspects of our business. Our supply chain department will work proactively to control costs and inventory levels,
and as in the previous year, we will strive to implement purchasing and marketing strategies to offset further cost
increases.
• The strength of our US operations led to all-time record divisional revenue being achieved in 2022, and even with
this growth we only touched 10 percent of rigs in the US land market with our technology, including full service work
and motor rentals. There is another 90 percent of this market that we believe we can gain a portion of, leveraging
our strong brand and premium technologies to generate opportunities for greater revenue streams with attractive
margins. Additionally, similar opportunities continue to exist in select international markets.
• We are committed to maintaining one of the strongest balance sheets in the sector with minimal or no net debt,
remaining disciplined in our approach to capital spending, and focused on profitability while providing shareholders
attractive total return. We intend to continue to do so through our Return of Capital Strategy (“ROCS”) which will
potentially allow us to return up to 70 percent of excess cash flow to shareholders through both base dividend, and
the possibility of special dividends (more information on the ROCS can be found in the Return of Capital Strategy
section of this MD&A).
We believe we are strategically positioned to continue our successes and remain the leader in our sector in 2023. We employ
an exceptional team of people who embody a culture of superior customer service and operational excellence. We believe
their unwavering focus on utilizing our industry-leading technology and expertise to deliver faster, more efficient drilling
operations will continue to generate strong revenue and profitability in the upcoming year. We will remain diligent in leveraging
these operational strengths to maintain our healthy financial position and to allow us to execute on strategies that will fulfill our
commitment to shareholder returns, as described in the ROCS.
Michael Buker, President
February 28, 2023
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PHX Energy Services Corp. | 2022 Annual Report
Overall Performance
In the three-month period and year ended December 31, 2022, PHX Energy achieved the highest level of quarterly and annual
revenue and adjusted EBITDA(1) in its history.
In the fourth quarter of 2022, the Corporation generated consolidated revenue of $157.8 million, an increase of 54 percent as
compared to $102.3 million in the 2021-quarter. Consolidated operating days grew by 24 percent to 7,509 days from 6,070
days in the corresponding 2021-quarter. For the year ended December 31, 2022, the Corporation’s consolidated revenue
increased by 58 percent to $535.7 million from $340 million in 2021. PHX Energy’s activity levels grew by 33 percent with
consolidated operating days increasing to 28,368 days in 2022 from 21,310 days in 2021. Revenue growth in both the 2022-
quarter and year were primarily driven by: stronger industry activity; increased capacity in the Corporation’s high performance
technologies, in particular, the Atlas High Performance motors (“Atlas”), Velocity Real-Time systems (“Velocity”), and
PowerDrive Orbit Rotary Steerable Systems (“RSS”); and pricing increases that were achieved as a result of the strong demand
for PHX Energy’s premium technologies and targeted marketing efforts to help mitigate inflationary costs.
For the fourth consecutive quarter, PHX Energy’s US operations generated its highest quarterly revenue in the Corporation’s
history. In the 2022 three-month period, US revenue grew by 57 percent to $125.7 million (2021 - $79.9 million) while US
operating days increased by 28 percent to 4,843 (2021 – 3,783). In the 2022-quarter, revenue from the Corporation’s US
division represented 80 percent of consolidated revenue (2021 – 76 percent).
The Corporation’s Canadian division also experienced growth in the quarter generating revenue of $30.7 million, a 37 percent
increase from $22.5 million in the same 2021-quarter. PHX Energy’s Canadian segment recorded 2,571 operating days in the
2022-quarter, a 12 percent increase from the 2,287 operating days realized in the comparable 2021-period.
Throughout 2022, the Corporation implemented strategies to mitigate the negative impacts of supply chain challenges and
inflationary pressures. These strategies, together with growth in revenue and activity, helped yield record results in profitability.
In the fourth quarter of 2022, adjusted EBITDA from continuing operations increased by 95 percent to $33.9 million (21 percent
of revenue) from $17.4 million (17 percent of revenue) in the same 2021-quarter, while earnings from continuing operations
doubled to $20.3 million from $9.3 million in the comparable 2021-period. For the year ended December 31, 2022, PHX Energy
realized adjusted EBITDA from continuing operations of $92.7 million (17 percent of revenue), a 54 percent improvement
compared to the $60.2 million (18 percent of revenue) reported in the 2021-year. Earnings from continuing operations for the
2022-year increased to $44.3 million from $23.3 million in the 2021-year. Included in the 2021-year adjusted EBITDA and
earnings from continuing operations is $8.8 million of government grants compared to $0.3 million included in the 2022-year.
(1) Non-GAAP financial measure or ratio that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures
presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this MD&A.
-6-
Management’s Discussion & Analysis
Also included in the 2022 three and twelve-month period adjusted EBITDA from continuing operations is cash-settled share-
based compensation expense of $6.9 million (2021 - $3 million) and $24.6 million (2021 - $12.9 million), respectively. Excluding
cash-settled share-based compensation expense, adjusted EBITDA from continuing operations for the three and twelve-month
period ended December 31, 2022 is $40.8 million (2021 - $20.4 million) and $117.3 million (2021 - $73.1 million), respectively.
The Corporation continued to maintain a strong financial position with working capital of $94.3 million and net debt of $4.5
million with available credit facilities in excess of $57 million.
Dividends
In November 2022, the Board approved another increase to the Corporation’s quarterly dividend to $0.15 per common share
from $0.10 per common share, which commenced with the dividend payable January 16, 2023 to shareholders of record at
the close of business on December 30, 2022. An aggregate of $7.6 million was paid on January 16, 2023. This is the fourth
dividend increase since its re-instatement in December 2020 and is a 500 percent increase from the dividend payable on
December 31, 2020.
Return of Capital Strategy
In the fourth quarter of 2022, PHX Energy’s Board approved a Return of Capital Strategy (“ROCS”) that establishes the
Corporation’s intention for creating unprecedented shareholder returns. Highlights of the ROCS include:
• Maintaining a strong balance sheet with little to no bank debt.
• Growth capital expenditures will be available for expanding the fleet in the most attractive basins.
• Base dividends will remain a focus.
• Special dividends may be considered with available excess cash.
• Share buy backs may be considered if deemed accretive.
The Return of Capital Strategy approved by the Board will potentially allow up to 70 percent of 2023 excess cash flow(1) to be
used for shareholder returns.
(1) Capital management measure that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures
presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this MD&A.
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PHX Energy Services Corp. | 2022 Annual Report
Capital Spending
For the year ended December 31, 2022, the Corporation spent $73.5 million in capital expenditures, of which $48.5 million was
spent on growing the Corporation’s fleet of drilling equipment (2021 - $23.1 million) and the remaining $25 million was spent
on maintaining capacity in the Corporation’s fleet of drilling and other equipment and replacing equipment lost downhole during
drilling operations (2021 - $12.2 million). With proceeds on disposition of drilling and other equipment of $27.5 million, the
Corporation’s net capital expenditures(1) for the 2022-year were $46.1 million (2021 - $22.9 million). Capital expenditures in
the 2022-year were primarily directed towards Atlas motors, Velocity systems, and RSS. PHX Energy funded capital spending
primarily using cash flows from operating activities, proceeds on disposition of drilling equipment, and its credit facilities when
required.
The approved capital expenditure budget for the 2022-year was $85 million. Due to global supply chain disruptions, the
Corporation received only $73.5 million of drilling and other equipment in 2022. The remaining $11.5 million from the 2022
budget has been carried forward into the 2023 capital expenditure budget. As a result of this carry over, PHX Energy now
anticipates spending $61.5 million, previously announced $50 million, in capital expenditures during 2023. Of the total
expenditures, $41.8 million is expected to be allocated to growth capital and the remaining $19.7 million is expected to be
allocated towards maintenance of the existing fleet of drilling and other equipment and replacement of equipment lost downhole
during drilling operations. The maintenance capital amount could increase throughout the year should there be more downhole
equipment losses than forecasted. These increases would likely be funded by proceeds on disposition of drilling equipment.
As at December 31, 2022, the Corporation has capital commitments to purchase drilling and other equipment for $43.3 million,
$19.6 million of which is growth capital and includes $14.4 million for performance drilling motors and $5.2 million for other
equipment. Equipment on order as at December 31, 2022 is expected to be delivered within the first half of 2023.
The Corporation currently possesses approximately 647 Atlas motors, comprised of various configurations including its 5.13",
5.25", 5.76", 6.63", 7.12", 7.25", 8" and 9" Atlas motors, 112 Velocity systems, and 51 PowerDrive Orbit RSS, the largest
independent fleet in North America.
(1) Capital management measure that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures
presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this MD&A.
-8-
Management’s Discussion & Analysis
Supply Chain Disruptions and Inflation
Throughout 2022 industry and economic conditions continued to improve as most of the COVID-19 restrictions have been
lifted by governments. However, supply chain challenges escalated and continued to create shortages and inflation related to
the products and services required within the energy sector, including those within the Corporation’s supply chain. These
shortages resulted in increased turn-around times for servicing the Corporation’s premium technologies and in turn limited
equipment utilization and constrained activity growth. Inflationary pressures led to overall cost increases and have negatively
impacted the Corporation’s margins.
PHX Energy has been proactive with efforts to lessen the supply chain disruptions’ impact on its operations. Specifically, the
Corporation has maintained higher minimum safety stock levels and taken advantage of pre-ordering materials to manufacture
technology and obtain bulk discounts, and as a result, inventory levels have increased by 72 percent from $36.7 million at the
end of 2021 to $63.1 million at December 31, 2022. In addition, to mitigate the impact of inflationary costs and to protect its
margins, the Corporation also continues to pursue pricing increases where possible.
Additional information regarding certain material risks and uncertainties, and their impact on the Corporation’s business can
be found throughout this MD&A, including under the headings “Capital Spending”, “Operating Costs and Expenses”, “Business
Risks Factors” and “Outlook”.
Divesture of Russian Subsidiary
On June 30, 2022, PHX Energy divested Phoenix TSR LLC (“Phoenix TSR”) and exited Russia. The divestiture resulted in a
loss on disposition of $3.5 million and the recognition of $10.6 million in foreign exchange losses resulting from accumulated
currency translation adjustments. Pursuant to the disposition of Phoenix TSR, the Corporation has terminated all presence in
Russia. The results of Phoenix TSR have been presented as a discontinued operation, separate from continuing operating
results at December 31, 2022 and 2021.
Shares Held in Trust
During the 2022-year, the Corporation equity settled a portion of its outstanding Retention Awards (“RA”) granted under its
Retention Award Plan (the “RAP”). Pursuant to RA settlements, 2,277,875 common shares were released from the independent
trustee in 2022 to settle $14.6 million in RAP liabilities. The independent trustee acquires common shares on the open market
from time-to-time for the potential settlement of future share-based compensation obligations of the Corporation. For the twelve-
month period ended December 31, 2022, the trustee purchased 626,400 common shares for a total cost of $4.1 million. As at
December 31, 2022, 11,064 common shares were held in trust for purposes of the RAP.
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PHX Energy Services Corp. | 2022 Annual Report
Normal Course Issuer Bid
During the third quarter of 2022, the TSX approved the renewal of PHX Energy’s Normal Course Issuer Bid (“NCIB”) to purchase
for cancellation, from time-to-time, up to a maximum of 3,622,967 common shares, representing 10 percent of the Corporation’s
public float of Common Shares as at August 3, 2022. The NCIB commenced on August 16, 2022 and will terminate on August
15, 2023 or such earlier time as the NCIB is completed or terminated by PHX Energy. Purchases of common shares are to be
made on the open market through the facilities of the TSX and through alternative trading systems. The price which PHX Energy
is to pay for any common shares purchased is to be at the prevailing market price on the TSX or alternate trading systems at
the time of such purchase.
For the year ended December 31, 2022, the Corporation did not repurchase shares through its previous or current NCIB.
Pursuant to the previous NCIB, 1,499,900 common shares were purchased during the 2021-year by the Corporation and
cancelled.
About PHX Energy Services Corp.
PHX Energy is a growth oriented, public oil and natural gas services company. The Corporation, through its directional drilling
subsidiary entities provides horizontal and directional drilling services to oil and natural gas exploration and development
companies principally in Canada and the US. In connection with the services it provides, PHX Energy engineers, develops and
manufactures leading-edge technologies. In recent years, PHX Energy has developed various new technologies that have
positioned the Corporation as a technology leader in the horizontal and directional drilling services sector.
PHX Energy’s Canadian directional drilling operations are conducted through Phoenix Technology Services LP. The Corporation
maintains its corporate head office, research and development, Canadian sales, service and operational centers in Calgary,
Alberta. In addition, PHX Energy has a facility in Estevan, Saskatchewan. PHX Energy’s US operations, conducted through the
Corporation’s wholly-owned subsidiary, Phoenix Technology Services USA Inc. (“Phoenix USA”), is headquartered in Houston,
Texas. Phoenix USA has sales and service facilities in Houston, Texas; Casper, Wyoming; Midland, Texas; and Oklahoma City,
Oklahoma. Internationally, PHX Energy has sales offices and service facilities in Albania, and administrative offices in Nicosia,
Cyprus and Luxembourg City, Luxembourg. The Corporation also operates in the Middle East regions through an arrangement
with National Energy Services Reunited Corp.
As at December 31, 2022, PHX Energy had 843 full-time employees (2021 – 707) and the Corporation utilized over 160
additional field consultants in 2022 (2021 – over 120).
The common shares of PHX Energy trade on the Toronto Stock Exchange under the symbol PHX.
-10-
Management’s Discussion & Analysis
Key Drivers of the Corporation’s Business
PHX Energy considers the following to be the key drivers of its business:
• World demand for natural gas and oil commodities directly affect oil and natural gas prices and drilling activity levels.
These in turn have a direct impact on the Corporation’s customers’ level of cash flows and their ability to fund capital
drilling programs with the use of cash flow, debt or equity financing, ultimately impacting PHX Energy’s activity levels.
• New drilling technologies must be continually developed for the Corporation to further expand and meet the ongoing
demands from its customers, oil and natural gas producing companies, for greater operating efficiencies.
• Superior customer service and satisfaction must be delivered and achieved consistently in order to retain business.
•
The Corporation must attract, train and retain key personnel in order to ensure future growth.
Key Performance Measures
There are several performance measures that are used by the Corporation to assess its performance relative to its strategies
and goals, the most significant of which are:
• Adjusted EBITDA(1) and adjusted EBITDA as a percentage of revenue(1);
•
•
•
•
gross profit;
net debt (2);
excess cash flow (2);
the reliability of the Corporation’s equipment and ability to provide high quality services in the field;
• market share retention and growth; and,
•
health and safety performance targets.
Industry Activity and Statistics
In 2022, the North American industry continued to rebound from the lows reached in 2020, which was one of the worst
downturns in its history. As economies recover from the COVID-19 pandemic, energy demand has grown and rig counts and
commodity prices improved. Additionally other geo-political and economic factors contributed to the industry strengthening,
including the supply concerns caused by the Russian-Ukraine war.
(1) Non-GAAP financial measure or ratio that does not have any standardized meaning under IFRS and therefore may not be comparable to similar
measures presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this MD&A.
(2) Capital management measure that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures
presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this MD&A.
-11-
PHX Energy Services Corp. | 2022 Annual Report
Commodity Price Trends
The recovery of commodity prices seen in 2021 continued in 2022 as energy demand returned after being suppressed by the
COVID-19 pandemic’s impact on the global economy in 2020 and with the impact of the Russian-Ukraine War on energy
supply. The average Western Texas Intermediate (“WTI”) price was 39 percent higher in 2022 at approximately USD $95 per
barrel for the year (2021 – USD $68). The average price of Western Canadian Select (“WCS”) increased by 41 percent and
was USD $76 per barrel in 2022 (2021 – USD $54). The average differential between WTI and WCS grew as compared to the
prior year and was USD $18.78 in 2022 (2021 - $13.10). (Source: Alberta Government Economic Dashboard –
https://economicdashboard.alberta.ca/OilPrice).
WTI and WCS Crude Oil and WCS Differential ($US/bbl)
Source: Alberta Government Economic Dashboard – https://economicdashboard.alberta.ca/OilPrice
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2
-
r
a
M
2
2
-
r
p
A
2
2
-
y
a
M
2
2
-
n
u
J
2
2
-
l
u
J
2
2
-
g
u
A
2
2
-
p
e
S
2
2
-
t
c
O
2
2
-
v
o
N
2
2
-
c
e
D
WCS Price Differential
WTI
WCS
Natural gas commodity prices continued to strengthen in 2022. The Henry Hub spot price averaged USD $6.52 per gigajoule
in 2022 (2021 – USD $3.72) while AECO-C spot averaged CAD $5.41 per gigajoule in 2021 (2021 – CAD $3.63) (Source:
Peters & Co. Limited, Energy Update, 01-23-23).
-12-
Management’s Discussion & Analysis
Canadian Industry
WCSB Active Drilling Rig Count
Source: Baker Hughes, North American Rotary Rig Count, Jan 2000 - Current, https://rigcount.bakerhughes.com/na-rig-count
800
700
600
500
400
300
200
100
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
30 Yr. Max-Min Range
2015
2020
Dec
Nov
2021
2022
The Canadian market’s activity continued to improve in 2022, with an average of 175 active rigs per day. This level of activity
is 34 percent more than the 131 rigs operating on average in 2021 and is 22 percent greater than the 5-year average of 144
active rigs. Horizontal and directional drilling continues to be the norm in the industry, and combined, horizontal and directional
wells represented 97 percent of the total 2022 industry drilling days (2021 – 95 percent). Oil well drilling represented 63 percent
of the Canadian industry’s average active rig count in 2022 which is slightly higher than the 57 percent in 2021. (Source: Daily
Oil Bulletin, hz-dir days 221231 and Baker Hughes, North American Rotary Rig Count, Jan 2000 - Current,
https://rigcount.bakerhughes.com/na-rig-count).
-13-
PHX Energy Services Corp. | 2022 Annual Report
US Industry
US Active Drilling Rig Count
Baker Hughes, North American Rotary Rig Count, Jan 2000 - Current, https://rigcount.bakerhughes.com/na-rig-count
2,250
2,000
1,750
1,500
1,250
1,000
750
500
250
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
35 Yr Range
2015
2020
2021
2022
The US rig count grew consistently in 2022, with the Permian basin remaining the most active area with half the active rigs
nationally. The average rig count increased 51 percent annually to 723 rigs operating per day in the 2022-year, as compared
to an average of 478 rigs in 2021. Annually there was an average of 335 active rigs (2021 – 240 active rigs) in the Permian
basin. Horizontal and directional drilling continued to represent 96 percent of active rigs (2021 – 95 percent). (Source: Baker
Hughes, North American Rotary Rig Count, Jan 2000 - Current, https://rigcount.bakerhughes.com/na-rig-count ).
-14-
Management’s Discussion & Analysis
Results of Operations
Three-Month Period and Year Ended December 31, 2022
Revenue
(Stated in thousands of dollars)
Revenue
Three-month periods ended December 31,
Years ended December 31,
2022
2021 % Change
2022
2021 % Change
157,758
102,296
54
535,745
339,946
58
In the three-month period and year ended December 31, 2022, PHX Energy achieved its highest-ever quarterly and annual
revenue, surpassing the previous records set in the fourth quarter and year ended 2014. For the three-month period ended
December 31, 2022, consolidated revenue increased by 54 percent to $157.8 million compared to $102.3 million in the
corresponding 2021-quarter. For the year ended December 31, 2022, consolidated revenue was $535.7 million, an increase
of 58 percent, compared to $340 million in 2021. In the 2022-quarter and year, PHX Energy continued to expand its fleet
capacity to address the strong growing demand for its premium technologies as the North American industry’s rig count
continued to improve with the support of robust commodity prices.
During the fourth quarter of 2022, the Western Texas Intermediate (“WTI”) crude oil price was 7 percent higher than in the
2021-quarter averaging USD $83/bbl (2021-quarter – USD $77/bbl) and the Western Canadian Select (“WCS”) oil prices
declined by 7 percent, averaging CAD$74/bbl (2021-quarter – CAD $79/bbl) (Source: Peters & Co. Limited, Energy Update,
01-23-23). Industry activity levels in both Canada and the US improved quarter-over-quarter. In the US, the 2022 fourth
quarter average number of rigs operating per day was 776 (2021-quarter – 559 rigs) while in Canada, the average for the same
period was 199 (2021-quarter – 159 rigs) (Source: Baker Hughes, North American Rotary Rig Count, Jan 2000 - Current,
https://rigcount.bakerhughes.com/na-rig-count). In comparison, the Corporation’s consolidated operating days grew by 24
percent to 7,509 days in the 2022 three-month period from 6,070 days in the corresponding 2021-period. For the year-ended
December 31, 2022, there were 28,368 consolidated operating days recorded which is 33 percent more than the 21,310 days
in the 2021-year.
The record quarterly and annual revenue achieved in 2022 were also supported by pricing increases realized during these
periods and the favorable impact of the US dollar strengthening in the 2022-periods relative to 2021. Average consolidated
-15-
PHX Energy Services Corp. | 2022 Annual Report
revenue per day(1), excluding the motor rental division in the US, for the three-month period ended December 31, 2022, was
$19,974 an increase of 24 percent as compared to $16,122 in the 2021-quarter. The 2022 annual average consolidated
revenue per day, excluding the motor rental division in the US, was $18,097 compared to $15,298 in 2021, an 18 percent
increase.
Operating Costs and Expenses
(Stated in thousands of dollars except percentages)
Three-month periods ended December 31,
Years ended December 31,
2022
2021 % Change
2022
2021 % Change
Direct costs
121,906
82,138
Depreciation & amortization drilling and other
equipment (included in direct costs)
Depreciation & amortization right-of-use asset
(included in direct costs)
8,876
6,898
805
837
48
29
(4)
426,107
270,637
32,119
25,860
3,235
3,336
57
24
(3)
Gross profit as a percentage of revenue excluding
depreciation & amortization and government grants(2)
29%
27%
27%
27%
Direct costs are comprised of field and shop expenses and include depreciation and amortization on the Corporation’s
equipment and right-of-use assets. For the three-month period and year ended December 31, 2022, direct costs increased by
48 and 57 percent, respectively. Higher direct costs in both periods were largely driven by activity growth, greater depreciation
and amortization expenses on drilling and other equipment, and rising costs related to personnel, repair parts, and equipment
rentals as a result of inflation. In the 2022-year, PHX Energy’s equipment rental costs increased to 7 percent of consolidated
revenue from 6 percent in 2021.
The Corporation’s depreciation and amortization on drilling and other equipment for the three-month period and year ended
December 31, 2022, increased by 29 percent and 24 percent, respectively with a significant number of fixed assets received
throughout 2022 as the capital expenditure program was increased to help mitigate supply chain challenges and increase
capacity to meet growing demand.
(1) Supplementary financial measure that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures
presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this MD&A.
(2) Non-GAAP financial measure or ratio that does not have any standardized meaning under IFRS and therefore may not be comparable to similar
measures presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this MD&A.
-16-
Management’s Discussion & Analysis
In the three and twelve-month periods of 2022, gross profit as a percentage of revenue excluding depreciation and amortization
and government grants was 29 percent and 27 percent, respectively, compared to 27 percent in both corresponding 2021
periods. Included in the 2021-year’s direct costs are $6.5 million in government grants. Despite the negative impacts of
inflation, PHX Energy was able to sustain and improve profitability levels through effective implementation of various strategies
to soften the impact of rising costs, including but not limited to, volume discounts and continuous efforts to achieve cost
efficiencies across all major aspects in the Corporation’s operations.
(Stated in thousands of dollars except percentages)
Three-month periods ended December 31,
Years ended December 31,
2022
2021 % Change
2022
2021 % Change
Selling, general and administrative (“SG&A”) costs
19,365
13,044
48
68,901
44,982
Cash-settled share-based compensation
(included in SG&A costs)
Equity-settled share-based compensation
(included in SG&A costs)
6,938
2,972
133
24,568
12,889
58
49
18
451
384
53
91
17
SG&A costs excluding share-based compensation as
a percentage of revenue( 1)
8%
10%
8%
9%
For the three-month period and year ended December 31, 2022, SG&A costs were $19.4 million and $68.9 million, respectively,
as compared to $13 million and $45 million in the corresponding 2021-periods. In both 2022-periods, higher SG&A costs were
primarily a result of greater personnel costs necessary to support activity growth and increased compensation expenses related
to cash-settled share-based awards. SG&A costs in the 2021-year also included $1.9 million of government grants.
Cash-settled share-based compensation relates to the Corporation’s retention awards and are measured at fair value. For the
three-month period and year ended December 31, 2022, the related compensation expense recognized by PHX Energy was
$6.9 million (2021 - $3 million) and $24.6 million (2021 - $12.9 million), respectively. Changes in cash-settled share-based
compensation expense in the 2022-periods were mainly driven by increases in the Corporation’s share price period-over-
period. There were 2,845,191 retention awards outstanding as at December 31, 2022 (2021 – 3,267,579). Excluding share-
based compensation, SG&A costs as a percentage of revenue for the 2022 three and twelve-month periods improved to 8
percent in both periods as compared to 10 percent and 9 percent, respectively, in the corresponding 2021-periods.
(Stated in thousands of dollars)
Research and development expense
Three-month periods ended December 31,
Years ended December 31,
2022
1,184
2021 % Change
1,049
13
2022
3,723
2021 % Change
2,774
34
(1) Non-GAAP financial measure or ratio that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures
presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this MD&A.
-17-
PHX Energy Services Corp. | 2022 Annual Report
Throughout the 2022-year with the increase in activity levels and the capacity of the premium technology fleet, PHX Energy’s
research and development (“R&D”) department worked on a greater number of initiatives to improve the reliability of equipment,
reduce costs to operations, and develop new technologies. To support these initiatives, greater personnel related costs and
prototype expenses were necessary. For the three-month period and year ended December 31, 2022, PHX Energy’s R&D
expenditures increased to $1.2 million and $3.7 million, respectively, from $1 million and $2.8 million in the corresponding
2021-periods. R&D expenses in the 2022 twelve-month period included $0.2 million of government grants (2021 – $0.4 million).
(Stated in thousands of dollars)
Finance expense
Finance expense lease liabilities
n.m. – not meaningful
Three-month periods ended December 31,
Years ended December 31,
2022
2021 % Change
487
525
115
516
n.m.
2
2022
1,360
2,032
2021 % Change
494
2,125
175
(4)
Finance expense mainly relates to interest charges on the Corporation’s credit facilities. For the three-month period and year
ended December 31, 2022, finance expense increased to $0.5 million (2021 - $0.1 million) and $1.4 million (2021 - $0.5 million),
respectively, primarily due to higher drawings on the credit facilities that were used to fund PHX Energy’s capital spending.
Rising variable interest rates on the Corporation’s operating and syndicated facilities also contributed to the increase in finance
expense in both 2022-periods.
Finance expense lease liabilities relate to interest expenses incurred on lease liabilities. For both the three and twelve-month
periods ended December 31, 2022, finance expense lease liabilities were relatively flat at $0.5 million and $2 million,
respectively (2021 - $0.5 million and $2.1 million, respectively).
(Stated in thousands of dollars)
Net gain on disposition of drilling equipment
Foreign exchange loss
Recovery of bad debts
Other
Other income
Three-month periods ended December 31,
Years ended December 31,
2022
(8,693)
5
(11)
-
2021
(3,483)
100
(2)
-
2022
(19,492)
287
(13)
(512)
2021
(7,746)
85
(281)
-
(8,699)
(3,385)
(19,730)
(7,942)
For the three-month period and year ended December 31, 2022, the Corporation recognized other income of $8.7 million and
$19.7 million, respectively (2021 - $3.4 million and $7.9 million, respectively). The increases from the 2021-periods were mainly
due to higher net gain on disposition of drilling equipment realized in both 2022-periods.
-18-
Management’s Discussion & Analysis
Net gain on disposition of drilling equipment is comprised of gains on disposition of drilling equipment and proceeds from
insurance programs. The recognized gain is net of losses, which typically result from asset retirements that were made before
the end of the equipment’s useful life. In both 2022-periods, as drilling activity grew, more instances of downhole equipment
losses occurred as compared to the corresponding 2021-periods, resulting in a higher net gain on disposition of drilling
equipment. The Corporation will use capital expenditure funds, including the proceeds from disposition of drilling equipment,
to replace this equipment and these amounts will be added to the expected capital expenditures in 2023.
(Stated in thousands of dollars except percentages)
Provision for (Recovery of) income taxes
Effective tax rates(2)
Three-month periods ended December 31,
Years ended December 31,
2022
2,657
12%
2021
(511)
(6%)
2022
9,042
17%
2021
3,559
13%
For the three-month period and year ended December 31, 2022, the Corporation reported income tax provisions of $2.7 million
(2021 - $0.5 million recovery) and $9 million (2021 - $3.6 million), respectively. Higher provisions in the 2022-periods were mainly
a result of improved taxable profits in the US.
(Stated in thousands of dollars except per share amounts and percentages)
Three-month periods ended December 31,
Years ended December 31,
2022
2021
% Change
2022
2021 % Change
Operating Results – Continuing Operations
Earnings
Earnings per share – diluted
Adjusted EBITDA ( 1)
Adjusted EBITDA per share – diluted (1)
Adjusted EBITDA as a percentage of revenue (1)
20,333
0.39
9,330
0.18
33,874
17,410
0.66
21%
0.34
17%
118
117
95
94
44,311
23,318
0.87
0.45
92,719
60,164
1.83
17%
1.16
18%
90
93
54
58
For the three-month period ended December 31, 2022, the Corporation’s adjusted EBITDA from continuing operations as a
percentage of revenue increased to 21 percent from 17 percent in the 2021-period while earnings from continuing operations
increased to $20.3 million as compared to $9.3 million in the 2021-quarter. These substantial improvements in the
Corporation’s profitability were achieved primarily as a result of activity growth and effective cost control measures and
strategies implemented to shelter margins from the adverse effects of inflationary pressures and supply chain challenges.
(1)
(2)
Non-GAAP financial measure or ratio that does not have any standardized meaning under IFRS and therefore may not be comparable to similar
measures presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this MD&A.
Supplementary financial measure that does not have any standardized meaning under IFRS and therefore may not be comparable to similar
measures presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this MD&A.
-19-
PHX Energy Services Corp. | 2022 Annual Report
For the year ended December 31, 2022, adjusted EBITDA from continuing operations as a percentage of revenue decreased
slightly to 17 percent from 18 percent in the corresponding 2021-period while earnings from continuing operations increased
by 90 percent to $44.3 million from $23.3 million in 2021. Adjusted EBITDA and earnings from continuing operations in the
comparative 2021-period included $8.8 million of government grants. Excluding the impact of government grants, 2022
adjusted EBITDA from continuing operations shows an improvement to 17 percent of revenue from 15 percent in the 2021-
year.
Segmented Information
The Corporation reports three operating segments on a geographical basis throughout the Canadian provinces of Alberta,
Saskatchewan, British Columbia, and Manitoba; throughout the Gulf Coast, Northeast and Rocky Mountain regions of the US;
and internationally, in Albania.
Canada
(Stated in thousands of dollars)
Revenue
Reportable segment profit (loss) before tax (i)
n.m. – not meaningful
(i) Includes adjustments to intercompany transactions.
Three-month periods ended December 31,
Years ended December 31,
2022
2021 % Change
2022
2021 % Change
30,705
22,335
771
(1,319)
37
n.m.
108,544
67,354
8,700
3,489
61
149
In the three and twelve-month periods of 2022, PHX Energy’s Canadian operations realized significant improvements in its
activity levels and average revenue per day as the Canadian industry continued to recover with higher volume of active rigs in
2022.
For the three-month period ended December 31, 2022, PHX Energy’s Canadian division generated $30.7 million in revenue,
an increase of 37 percent compared to $22.3 million in the 2021-quarter. Canadian operating days in the 2022 three-month
period rose by 12 percent to 2,571 days compared to 2,287 days in the same 2021-quarter. In comparison, industry horizontal
and directional drilling activity, as measured by drilling days, increased by 21 percent to 16,813 in the fourth quarter of 2022
from 13,947 in the 2021-quarter (Source: Daily Oil Bulletin, hz-dir days 221231). The difference between the industry’s rate
of growth and the Corporation’s mainly relates to customer mix, the Corporation’s strategies to protect profit margins and the
competitive nature of the directional drilling sector.
-20-
Management’s Discussion & Analysis
For the year ended December 31, 2022, PHX Energy’s Canadian division’s revenue increased by 61 percent to $108.5 million
from $67.4 million in the 2021-year. Drilling activity in the Canadian segment improved by 35 percent from 7,269 operating
days in 2021 to 9,823 days in 2022. In comparison, for the year ended December 31, 2022, there were 60,276 horizontal and
directional drilling days realized in the Canadian industry, compared to the 45,624 days realized in 2021, a 32 percent
improvement (Source: Daily Oil Bulletin, hz-dir days 221231). PHX Energy’s Canadian operating segment remains a leader
in this market being among the top three service providers. During the 2022-year, the Corporation was active in the Duvernay,
Montney, Glauconite, Frobisher, Cardium, Viking, Bakken, Torquay, Colony, Clearwater, Deadwood, and Scallion basins.
In the 2022 three and twelve-month periods, PHX Energy’s Canadian division achieved higher levels of profitability despite the
Canadian market remaining highly competitive and the challenges faced in relation to inflation, labour shortages, and supply
chain difficulties. For the three-month period and year ended December 31, 2022, the Corporation’s Canadian division
recognized reportable segment profit before tax of $0.8 million (2021 - $1.3 million of reportable segment loss before tax) and
$8.7 million (2021 - $3.5 million), respectively. The improvements in segment profits in both periods were achieved mainly
through greater volumes of activity and pricing increases negotiated with customers to help curtail rising costs.
United States
(Stated in thousands of dollars)
Revenue
Reportable segment profit before tax (i)
(i) Includes adjustments to intercompany transactions.
Three-month periods ended December 31,
Years ended December 31,
2022
2021 % Change
2022
2021 % Change
125,693
79,861
23,643
14,511
57
63
423,083
272,492
64,030
43,636
55
47
In the fourth quarter of 2022, PHX Energy’s US operations once again achieved its highest quarterly revenue in its history.
This marks the first year where consecutive all-time record revenue was generated in each quarter and as a result of this
cumulative success, the 2022 annual US revenue is the highest on record. For the three-month period ended December 31,
2022, US revenue increased by 57 percent to $125.7 million as compared to $79.9 million in the 2021-quarter. For the year
ended December 31, 2022, US revenue grew 55 percent to $423.1 million from $272.5 million in 2021.
In the fourth quarter of 2022, the Corporation’s US drilling activity increased by 28 percent to 4,843 days from 3,783 days in
the same 2021-quarter while US industry horizontal and directional rig count in the fourth quarter of 2022 increased by 41
percent quarter-over-quarter with an average of 752 active horizontal and directional rigs per day compared to an average of
533 active horizontal and directional rigs per day in the 2021-quarter (Source: Baker Hughes, North American Rotary Rig
Count, Jan 2000 - Current, https://rigcount.bakerhughes.com/na-rig-count). For the year-ended December 31, 2022, the US
segment’s operating days were 18,248 days, compared to 14,041 days in the 2021-year; an increase of 30 percent. In
-21-
PHX Energy Services Corp. | 2022 Annual Report
comparison, the US industry activity, as measured by the average number of horizontal and directional rigs running on a daily
basis, grew by 53 percent to 698 rigs in 2022 from 456 rigs in 2021 (Source: Baker Hughes, North American Rotary Rig Count,
Jan 2000 - Current, https://rigcount.bakerhughes.com/na-rig-count). Horizontal and directional drilling continues to represent
the majority of rigs running on a daily basis during the fourth quarter and year ended 2022. During the 2022-year, Phoenix
USA was active in the Permian, Scoop/Stack, Marcellus, Utica, Bakken, and Niobrara basins.
Despite significant additions to the fleet that aided stronger activity levels, the Corporation’s US growth was constrained by
fleet capacity that could not keep up with demand given the supply chain environment. The Corporation's fleet of premium
technology operated at maximum capacity during the year, and with this strong demand and targeted marketing efforts, PHX
Energy’s US division realized price increases in both 2022-periods. For the three-month period ended December 31, 2022,
average revenue per day (1), excluding the Corporation’s US motor rental division, rose by 22 percent to $24,348 from $19,895
in the 2021-quarter. For the year ended December 31, 2022, average revenue per day, excluding the Corporation’s US motor
rental division, grew by 19 percent to $21,958 from $18,413 in 2021. The strengthening of the US dollar in both 2022-periods
also supported the increases in average revenue per day. Omitting the impact of foreign exchange, the average revenue per
day, excluding the Corporation’s motor rental division, increased by 14 percent quarter-over-quarter and 15 percent year-over-
year.
For the three-month period and year ended December 31, 2022, the US segment realized reportable segment income before
tax of $23.6 million and $64 million, respectively, compared to the corresponding 2021-periods when the US segment had
reportable segment profit before tax of $14.5 million and $43.6 million, respectively. The improved profitability in both 2022-
periods was mainly due to growth in activity levels and revenue per day, and effective strategies implemented to mitigate the
impacts of inflation.
International – Continuing Operations
(Stated in thousands of dollars)
Revenue
Reportable segment profit (loss) before tax
n.m. – not meaningful
Three-month periods ended December 31,
Years ended December 31,
2022
1,360
631
2021 % Change
100
(61)
n.m.
n.m.
2022
4,118
1,412
2021 % Change
100
(1,161)
n.m.
n.m.
(1) Supplementary financial measure that does not have any standardized meaning under IFRS and therefore may not be comparable to similar
measures presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this MD&A.
-22-
Management’s Discussion & Analysis
The Corporation’s international segment revenue is mainly comprised of revenue from Albania. For the three-month period
and year ended December 31, 2022, the international segment’s revenue was $1.4 million (2021-quarter - $0.1 million) and
$4.1 million (2021 - $0.1 million), respectively. Albania operations were suspended in 2021 and resumed late in the first quarter
of 2022 with one rig.
With the resumption of activity in 2022, the international segment generated reportable segment profit before tax of $0.6 million
in the 2022 three-month period compared to reportable segment loss before tax of $0.1 million in the 2021-period. For the
year-ended December 31, 2022, the international segment realized reportable segment profit before tax of $1.4 million from a
loss of $1.2 million in the corresponding 2021-year.
Discontinued Operations – Russia
On June 30, 2022, the Corporation disposed of the Russian division operating under the entity, Phoenix TSR. Accordingly, for
the three and twelve-month periods ended December 31, 2022, the Russian operations and loss on disposition have been
presented as discontinued operations.
The results of the disposed Phoenix TSR operations are as follows:
Three-month periods ended December 31,
Years ended December 31,
(Stated in thousands of dollars)
Revenue
Expenses
Reclassification of foreign currency translation loss
on disposition of Phoenix TSR
Loss on disposition of Phoenix TSR
Impairment and other write-offs
Loss on remeasurement
Loss from discontinued operations
Income tax (recovery) from discontinued operations
Loss from discontinued operations, net of taxes
2021
3,133
(2,633)
500
-
-
-
(1,178)
(678)
(1)
(677)
2022
7,443
(5,781)
1,662
(10,561)
(3,496)
(1,967)
-
(14,362)
196
(14,558)
2021
9,974
(9,390)
584
-
-
-
(1,178)
(594)
(1)
(593)
2022
-
-
-
-
-
-
-
-
-
-
-23-
PHX Energy Services Corp. | 2022 Annual Report
Liquidity
(Stated in thousands of dollars)
Cash flows from operating activities
Funds from operations(1)
Working capital(1)
Three-month periods ended December 31,
Years ended December 31,
2022
8,970
25,068
2021
12,968
13,772
2022
38,338
72,482
2021
45,548
51,211
Dec. 31, ‘22
Dec. 31, ‘21
94,339
57,872
In both the 2022 three and twelve-month periods, cash flow from operating activities decreased to $9 million and $38.3 million
respectively, from $13 million and $45.5 million in the corresponding 2021-periods. The decrease in both periods was mainly
due to cash tied up from higher levels of trade and other receivables and increased inventory balances.
For the three-month period and year ended December 31, 2022, funds from operations were $25.1 million and $72.5 million,
respectively, as compared to $13.8 million and $51.2 million in the comparable 2021-periods. The improvement in funds from
operations in both 2022-periods was mainly driven by greater activity and improved profitability in all of the Corporation’s
operating segments.
As at December 31, 2022, the Corporation had working capital of $94.3 million, an increase of $36.4 million from the $57.9
million reported at December 31, 2021. The increase in working capital at December 31, 2022 was primarily due to higher
trade and other receivables resulting from higher revenue and greater inventory levels that are being maintained to address
supply chain challenges partially offset by increase in trade and other payables.
Cash Flow and Dividends
In December 2020, PHX Energy reinstated its quarterly dividend program. The Board will continually review the dividend
program and its ROCS and take into consideration, without limitation, the Corporation’s financial performance, forecasted
activity levels and the industry outlook. The actual amount of future quarterly dividends, if any, remains subject to the approval
of and declaration by the Board. The Board reviews the Corporation’s dividend policy in conjunction with their review of
quarterly financial and operating results. The Corporation’s ability to maintain the current level of dividends to its shareholders
is dependent upon the realization of cash flow from operating activities, among other considerations, and if the Corporation
(1) Capital management measure that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures
presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this MD&A.
-24-
Management’s Discussion & Analysis
does not meet its budgeted cash flow from operating activities, dividends to shareholders may be reduced or suspended
entirely.
The Board previously approved a 50 percent increase to the Corporation’s quarterly dividend from $0.10 per common share
to $0.15 per common share, effective for the dividend payable January 16, 2023 to shareholders of record at the close of
business on December 30, 2022. This is the fourth dividend increase since its re-instatement in December 2020, and is a 500
percent increase from the dividend payable on December 31, 2020.
For the three-month period and year ended December 31, 2022, dividends of $5.1 million and $15.1 million, respectively, were
financed from the Corporation’s funds from operations (2021 - $2.5 million and $6.3 million, respectively).
Investing Activities
Net cash used in investing activities for the year ended December 31, 2022 was $47.3 million as compared to $23.6 million in
2021. During 2022, the Corporation spent $73.5 million (2021 - $35.3 million) on capital expenditures directed towards drilling
and other equipment and received proceeds of $27.5 million (2021 - $12.3 million) primarily from involuntary disposal of drilling
equipment in well bores.
(Stated in thousands of dollars)
Three-month periods ended December 31,
Years ended December 31,
Growth capital expenditures
Maintenance capital expenditures from downhole
equipment losses and asset retirements
Total capital expenditures
Deduct:
Proceeds on disposition of drilling equipment
Net capital expenditures(1)
2022
15,252
6,222
21,474
(12,005)
9,469
2021
7,182
3,940
11,122
(5,236)
5,886
2022
48,457
25,068
73,525
2021
23,078
12,203
35,281
(27,459)
46,066
(12,340)
22,941
The 2022-year capital expenditures comprised of:
•
•
•
$31.7 million in downhole performance drilling motors;
$38.2 million in MWD systems and spare components and RSS; and
$3.6 million in machinery and equipment and other assets.
(1) Capital management measure that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures
presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this MD&A.
-25-
PHX Energy Services Corp. | 2022 Annual Report
The capital expenditure program undertaken in the year was primarily financed from cash flows from operating activities,
proceeds on disposition of drilling equipment, and the Corporation’s credit facilities when required. Of the total capital
expenditures in the 2022-year, $48.5 million was used to grow the Corporation’s fleet of drilling equipment and the remaining
$25 million was used to maintain capacity in the Corporation’s fleet of drilling and other equipment and replace equipment lost
downhole during drilling operations. With proceeds on disposition of drilling and other equipment of $27.5 million, the
Corporation’s net capital expenditures for the 2022-year were $46.1 million.
Capital Expenditures
$80.0
$80.0
$70.0
$70.0
$60.0
$60.0
$50.0
$50.0
Net Capital Expenditures
$46.1 million
$48.5
$40.0
$40.0
Net Capital Expenditures
$19.2 million
$30.0
$30.0
$22.7
$20.0
$20.0
$10.0
$10.0
$-
$-
$15.3
$11.8
2019
Net Capital Expenditures
$22.9 million
Net Capital Expenditures
$18.5 million
$23.1
$17.8
$8.1
$7.4
$12.2
$12.4
$27.5
$25.0
2020
Maintenance Capital
2021
Growth Capital
Proceeds from Dispostion of Drilling Equipment
2022
In 2022, the Corporation’s capital spending was the highest in its history, while its net debt remained minimal. The Corporation
leveraged its strong financial position to proactively order materials and equipment to mitigate the impacts of supply chain
challenges and inflation. The 2022 capital expenditures were primarily directed towards expanding the Corporation’s fleet of
high-performance technologies, including its Atlas motors, Velocity systems, and PowerDrive Orbit RSS tools, to address the
growing demand as robust commodity prices and growing industry activity continued.
-26-
Management’s Discussion & Analysis
Investments
No new investments were made in 2022. In 2021, the Corporation made a strategic investment by acquiring a minor equity
position in DEEP Earth Energy Production Corp. (“DEEP”), a geothermal power developer. The investment in DEEP provides
a potential opportunity for the Corporation to diversify its business to include renewable energy projects, provide drilling
expertise to the project and increase the focus on long term sustainable growth.
Financing Activities
For the year ended December 31, 2022, net cash generated from financing activities was $2.7 million as compared to $22.7
million used in financing activities in 2021. In the 2022-year:
•
•
•
•
•
dividends of $15.1 million were paid to shareholders;
626,400 common shares were purchased by an independent trustee in the open market for $4.1 million and
held in trust for the use of potential future settlements of restricted awards granted under the Corporation’s RAP;
payments of $3.3 million were made towards lease liabilities;
1,266,038 common shares were issued from treasury for proceeds of $2.5 million upon the exercise of share
options; and
$22.7 million net in drawings were taken against the Corporation’s syndicated credit facility.
Capital Resources
As of December 31, 2022, the Corporation had CAD $22.7 million drawn on its Canadian credit facilities, nothing drawn on its
US operating facility, and a cash balance of $18.2 million. As at December 31, 2022, the Corporation had CAD $42.3 million
and USD $15 million available from its credit facilities. The credit facilities are secured by substantially all of the Corporation’s
assets and mature in December 2025.
As at December 31, 2022, the Corporation was in compliance with all its financial covenants as follows:
Ratio
Debt to covenant EBITDA(i)
Interest coverage ratio(i)
(i) Definitions for these terms are included in the credit agreement filed on SEDAR
Covenant
As at December 31, 2022
<3.0x
>3.0x
0.27
62.40
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PHX Energy Services Corp. | 2022 Annual Report
Under the syndicated credit agreement, in any given year, the Corporation’s distributions (as defined therein) cannot exceed
its distributable cash flows as defined in the Corporation’s syndicated credit agreement. Distributions include, without limitation,
dividends declared and paid, as well as cash used for common shares purchased by the independent trustee in the open
market and held in trust for potential settlement of outstanding RAs. For the year ended December 31, 2022, the Corporation’s
distributions were 29 percent of its distributable cash flows.
Cash Requirements for Capital Expenditures
Historically, the Corporation has financed its capital expenditures and acquisitions through cash flows from operating activities,
proceeds on disposition of drilling equipment, debt and equity. In order to continue the advantageous strategy of placing
advanced orders in a robust industry environment and continue to mitigate the supply chain issues expected to continue into
2023, the Board has approved a 2023 capital expenditure program of $61.5 million. Of the 2023 capital expenditures, $19.7
million is expected to be allocated to maintain capacity in the existing fleet of drilling and other equipment and replace
equipment lost downhole during drilling operations, and $41.8 million is expected to be allocated to growth capital. The amount
expected to be allocated towards replacing equipment lost downhole could increase should more downhole equipment losses
occur throughout the year.
These planned expenditures are expected to be financed from cash flow from operating activities, proceeds on disposition of
drilling equipment, cash and cash equivalents, and the Corporation’s credit facilities, if necessary. However, if a sustained
period of market uncertainty and financial market volatility persists in 2023, the Corporation's activity levels, cash flows and
access to credit may be negatively impacted, and the expenditure level would be reduced accordingly where possible.
Conversely, if future growth opportunities present themselves, the Corporation would look at expanding this planned capital
expenditure amount.
As at December 31, 2022, the Corporation has commitments to purchase drilling and other equipment for $43.3 million. Delivery
is expected to occur within the first half of 2023.
Off-Balance Sheet Arrangements
The Corporation had no material off-balance sheet arrangements as at December 31, 2022 and 2021.
-28-
Management’s Discussion & Analysis
Proposed Transactions
The Corporation regularly reviews and evaluates possible strategic material business or asset acquisitions or capital asset
divestitures in the normal course of its operations.
Critical Accounting Estimates and Judgments
The preparation of the consolidated financial statements in conformity with IFRS requires management to make estimates and
assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and
expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized
in the period in which the estimates are revised and in any future periods affected.
Assumptions and estimation uncertainties that have a significant risk of material adjustment in the context of these financial
statements include the following:
•
•
•
•
•
•
•
•
key assumptions used in the valuation of drilling and other equipment not yet in use;
estimated useful lives of drilling and other equipment and intangible assets;
recognition of deferred tax assets based on estimates of the availability of future taxable profit against which carry-
forward tax losses can be used;
assumptions used in the valuation of investments;
estimates and assumptions used in the valuation of inventory;
estimate used in the valuation of accounts receivable;
valuation of equity-settled and cash-settled share-based payments; and,
key assumptions used in the estimate of leases including valuation of right of use assets and lease liabilities.
Climate change policy, environmental regulations and ESG culture policies are evolving at regional, national and international
levels. Political and economic events may significantly affect the scope and timing of ESG policies and climate change
measures. The International Sustainability Standards Board has issued an IFRS Sustainability Disclosure Standard with the
aim to develop sustainability disclosure standards that are globally consistent, comparable and reliable. In addition, the
Canadian Securities Administrators have issued a proposed National Instrument 51-107 Disclosure of Climate-related Matters.
The direct or indirect costs of compliance with greenhouse gas-related regulations and ESG directives may have an adverse
effect on the Corporation's and its customer’s business, financial condition, results of operations and prospects; however, at
-29-
PHX Energy Services Corp. | 2022 Annual Report
this time these costs have not yet been quantified. Significant estimates and judgment currently made by management which
could be significantly impacted by climate and climate-related matters include:
•
•
•
recoverability of asset carrying values;
useful life of assets; and,
cash flow projections for purpose of impairment tests.
Significant judgement is required to assess when impairment indicators exist, and impairment testing is required. The
assessment of impairment indicators is based on management’s judgment of whether there are internal and external factors
that would indicate that a cash generating unit ("CGU") and specifically the non-financial assets within the CGU, are impaired.
These factors include revenue and earnings before interest, taxes, depreciation and amortization forecasts, expected industry
activity levels, commodity price developments and market capitalization. The determination of a CGU is also based on
management’s judgment and is an assessment of the smallest group of assets that generate cash inflows independently of
other assets.
Changes in Accounting Policies
The consolidated annual financial statements for the year ended December 31, 2022 have been prepared utilizing the same
accounting policies and methods as the consolidated financial statements of the Corporation for the year ended December 31,
2021,
Financial Instruments
Credit Risk
The Corporation is exposed to normal credit risks of its customers that exist within the oil and natural gas exploration and
development industry. The Corporation’s credit risk associated with these customers can be directly impacted by a decline in
economic conditions, which would impair the customers’ ability to satisfy their obligations to the Corporation. During the year
ended December 31, 2022, one customer comprised 19 percent of the total revenue (2021 - 27 percent of revenue). The
customer’s revenue is reported within the US operating segment.
-30-
As at December 31, 2022, the aging of trade and other receivables that were not impaired was as follows:
Management’s Discussion & Analysis
(Stated in thousands of dollars)
Neither past due nor impaired
Past due 1-30 days
Past due 31-60 days
Past due 61-90 days
Past due over 90 days
$
2022
81,086
30,344
10,397
1,699
2,310
$
125,836
The Corporation’s standard customer payment terms are 30 days after job completion or invoice issuance date, after which,
the balance becomes past due. The Corporation will assess for impairment once the receivable becomes past due. All accounts
receivable balances that are past due for more than 90 days and were not impaired represented 2 percent or approximately
$2.3 million of total receivables on the statement of financial position at December 31, 2022. Management believes that the
unimpaired amounts that are past due are still collectible in full, based on historic payment behavior and extensive analysis of
customer credit risk. Management has provided an allowance of $0.3 million for all amounts it considers uncollectable at
December 31, 2022 (2021 - $0.3 million).
The Corporation has a credit management program to assist in managing this risk, which consists of conducting financial and
other assessments to establish and monitor a customer’s creditworthiness. The Corporation monitors and manages its credit
risk on an ongoing basis.
Liquidity Risk
Liquidity risk is the risk that the Corporation will not be able to meet its financial obligations as they fall due. The Corporation
has financial liabilities, thus, is exposed to liquidity risk. The Corporation’s approach to managing liquidity risk is to ensure that
it always has sufficient cash and credit facilities to meet its obligations when due. Management typically forecasts cash flows
for a period of twelve months to identify financing requirements. These requirements are then addressed through a combination
of demand credit facilities and access to capital markets. The Corporation believes that future cash flows generated by the
operations and access to additional liquidity through capital and banking markets will be adequate to meet its financial
obligations.
-31-
PHX Energy Services Corp. | 2022 Annual Report
The following table reflects the Corporation’s anticipated payment of contractual obligations as at December 31, 2022:
(Stated in thousands of dollars)
Drilling and other equipment
purchase commitments
Trade and other payables
Other non-current liabilities
Dividends payable
Bank loan interest and principal (i)
Lease payments (ii)
2023
2024
2025
2026
2027 and
after
43,256
104,689
-
7,636
1,082
6,480
163,143
-
-
3,740
-
1,031
5,920
10,691
-
-
722
-
23,713
5,504
29,939
-
-
-
-
-
-
-
-
-
-
5,397
5,397
13,986
13,986
(i) Bank loan interest has been estimated using interest rates in effect at December 31, 2022.
(ii) Lease payment amounts are gross and undiscounted contractual cash flows and include low value and short-term leases.
Fair Values of Financial Instruments
The Corporation has designated its trade and other payables, dividends payable, and loans and borrowings as non-derivative
financial liabilities carried at amortized cost. Cash and cash equivalents and trade and other receivables are designated as
non-derivative financial assets measured at amortized cost. The Corporation’s carrying values of these items, excluding loans
and borrowings, approximate their fair value due to the relatively short periods to maturity of the instruments. Loans and
borrowings bears interest at a floating market rate indicative of current spreads and accordingly the fair value approximate the
carrying value.
Equity investments in a company are designated as non-derivative financial assets measured at Fair Value Through Other
Comprehensive Income as the investment is not held-for-trading and fair value changes are not reflective of the Corporation’s
operations. The investment asset is carried at fair value on the Consolidated Statement of Financial Position. Fair value is
considered level 3 under the fair value hierarchy and requires management to assess information available, which may include
private placements, available financial statement information and other available market data.
Interest Rate Risk
Interest rate risk is created by fluctuations in the fair values of financial instruments due to changes in the market interest rates.
The Corporation has access to variable interest long-term debt which exposes it to fluctuations in cash interest payment
amounts.
A one percent change in interest rates would have increased or decreased the Corporation’s profit by $142 thousand for the
year ended December 31, 2022.
-32-
Management’s Discussion & Analysis
Foreign Exchange Risk
Foreign exchange risk is created by fluctuations in the fair values of financial instruments due to changes in foreign exchange
rates. Due to operations of the Corporation’s subsidiaries in the US, the Corporation has an exposure to foreign currency
exchange rates. The carrying values of Canadian dollar and US dollar denominated monetary assets and liabilities and
earnings are subject to foreign exchange risk. For the year ended December 31, 2022, foreign currency translation gains of
$8.8 million (2021 – $0.1 million loss) that resulted from fluctuations in the CAD-USD exchange rates was recognized in other
comprehensive income and $10.6 million of foreign currency translation losses was reclassified from other income to net
earnings upon sale of the Russia operations. For the year ended December 31, 2022, foreign exchange losses of $0.3 million
(2021 - $0.1 million loss) were recognized as part of earnings from continuing operations. The Corporation reviews options
with respect to managing its foreign exchange risk periodically.
The following chart represents the Corporation’s exposure to foreign currency risk:
As at December 31, 2022
Cash and cash equivalents
Trade and other receivables
Trade and other payables
Intercompany receivables
Statement of financial position exposure
As at December 31, 2021 (re-stated)
Cash and cash equivalents
Trade and other receivables
Trade and other payables
Intercompany payables
Statement of financial position exposure
CAD
-
-
-
1,235
1,235
CAD
-
-
-
(2,889)
(2,889)
USD
1,444
-
(2,141)
-
(697)
USD
4,385
-
(2,360)
-
2,025
The
following significant exchange rates compared
to
the Canadian dollar applied during
the year ended
December 31:
USD
Average Rate
December 31, Close Rate
2022
1.3017
2021
1.2537
2022
1.3544
2021
1.2678
-33-
PHX Energy Services Corp. | 2022 Annual Report
A strengthening of the Canadian dollar and US dollar against all other currencies as at December 31 would have affected the
measurement of financial instruments denominated in a foreign currency and affected profit or loss by the amounts shown
below. The analysis assumes that all other variables remain constant.
Gain (Loss)
CAD (10% strengthening)
USD (10% strengthening)
$
2022
91
(95)
$
2021
(246)
248
Business Risk Factors
The Corporation’s operations are subject to certain factors that are beyond its control. A significant portion of the Corporation’s
operating costs are variable in nature and, as a result, the impact of a significant decline in demand for the Corporation’s goods
and services on its financial results is somewhat lessened. Management has identified herein certain key risks and
uncertainties associated with PHX Energy’s business that could impact financial results. More detailed disclosure of these risk
factors and additional risk factors that could affect the Corporation are included in the Corporation’s most recently filed AIF
under the heading “Risk Factors”, which is available under the Corporation’s profile at www.sedar.com. Such risks include, but
are not limited to:
Capital Requirements
If the Corporation’s revenues decline because of continued and sustained weakness and volatility in industry activity levels, it
may be required to reduce its planned capital expenditures. In addition, continued sector, global and political volatility and
resulting uncertain levels of industry activity, exposes the Corporation to additional capital risk. There can be no assurance
that debt or equity financing, or cash generated by operations will be available, or sufficient, to meet these capital expenditure
requirements or for other corporate purposes, or if debt or equity financing is available, that it will be on terms acceptable to
the Corporation. Additionally, the failure to obtain adequate financing on a timely basis could cause the Corporation to miss
certain strategic opportunities and reduce or terminate certain of its operations. The volatile conditions in the oil and natural
gas industry have negatively impacted the ability of, and the cost to, companies involved in the oil and natural gas industry to
access additional financing. The inability of the Corporation to access sufficient and acceptable capital for its operations in a
timely manner could have a material adverse effect on the Corporation's business, financial condition, results of operations
and prospects.
Inflation and Cost Management
The Corporation's operating costs could escalate and become uncompetitive due to supply chain disruptions, inflationary cost
pressures, equipment limitations, escalating supply costs, commodity prices, and additional government intervention through
stimulus spending or additional regulations. The Corporation's inability to manage costs could impact future capital expenditure
plans and have a material adverse effect on its financial performance and cash flows.
-34-
Management’s Discussion & Analysis
Adverse Economic Conditions
The demand for energy, including crude oil and natural gas, is generally linked to broad-based economic activities. If there
was a slowdown in economic growth, an economic downturn or recession, or other adverse economic or political development
in the US, Europe, or Asia, there could be a significant adverse effect on global financial markets and commodity prices. In
addition, hostilities in the Middle East, Ukraine, and South China Sea and the occurrence or threat of terrorist attacks in the
US or other countries could adversely affect the global economy. Global or national health concerns, including the outbreak of
pandemic or contagious diseases may adversely affect the Corporation by (i) reducing global economic activity thereby
resulting in lower demand for crude oil and liquids and natural gas, and therefore demand for the Corporation’s services, (ii)
impairing its supply chain, for example, by limiting the manufacturing of materials or the supply of goods and services used in
the Corporation’s operations, and (iii) affecting the health of its workforce, rendering employees unable to work or travel. These
and other factors disclosed elsewhere in this MD&A that affect the supply and demand for crude oil and natural gas, and the
Corporation’s business and industry, could ultimately have an adverse impact on the Corporation’s financial condition, financial
performance, and cash flows.
Volatility of Commodity Prices and Industry Activity
Activity levels in the oil and natural gas industry are highly dependent on commodity prices. Commodity prices may fluctuate
widely in response to relatively minor changes in the supply of and demand for crude oil and liquids and natural gas, market
uncertainty, and a variety of additional factors that are beyond the Corporation and its customers control. Commodity prices
have historically been, and continue to be, volatile. The Corporation expects this volatility to continue. The Corporation makes
activity assumptions based on commodity price assumptions that are used for planning purposes. Accordingly, if commodity
prices and consequently industry activity levels are below the expectations, the Corporations capital plans and financial results
are likely to be adversely affected. Significant or extended price declines could have a material adverse effect upon its financial
condition, results of operations and cash flows of the Corporation.
Third Party Credit Risk
The Corporation is exposed to the credit risks of its customers that exist within the oil and natural gas exploration and
development industry. As a result of challenging and often volatile oil and natural gas market conditions and other market
factors the Corporation may face heightened counterparty credit risk as a substantial portion of the Corporation's dealings are
with entities involved in the oil and natural gas industry. The Corporation’s credit risk associated with its customers can be
directly impacted by a sustained decline in commodity prices and associated economic conditions, which would impair a
customer’s ability to satisfy their obligations to the Corporation and therefore could materially adversely effect the Corporation's
business, financial condition, results of operations, receivable and prospects.
-35-
PHX Energy Services Corp. | 2022 Annual Report
Environmental Risks
All phases of the oil and natural gas business present environmental risks and hazards and are subject to environmental
regulation pursuant to a variety of federal, provincial, state and local laws and regulations. Compliance with such legislation
can require significant expenditures and a breach may result in the imposition of fines and penalties, some of which may be
material. Environmental legislation is evolving in a manner expected to result in stricter standards and enforcement, larger
fines and liability, and potentially increased capital expenditures and operating costs. Implementation of strategies for reducing
greenhouse gases ("GHG") could have a material impact on the nature of oil and natural gas operations, including those of the
Corporation and the Corporation’s customers. Given the evolving nature of regulations related to climate change and the
control of GHG and the possible resulting requirements, it is not possible to predict either the nature of those requirements or
the impact on the Corporation and its operations and financial condition.
Climate Change
Global climate issues continue to attract public and scientific attention. Numerous reports, including reports from the
Intergovernmental Panel on Climate Change, have engendered concern about the impacts of human activity, especially
hydrocarbon combustion, on global climate issues. In turn, increasing public, government, and investor attention is being paid
to global climate issues and to emissions of GHG. The majority of countries across the globe, including Canada and the US,
have agreed to reduce their carbon emissions in accordance with the Paris Agreement. In addition, during the course of the
2021 United Nations Climate Change Conference in Glasgow, Scotland, Canada's Prime Minister Justin Trudeau and US
President Joe Biden made several pledges aimed at reducing their nation's GHG emissions and environmental impact. As
discussed below, the Corporation faces both transition risks and physical risks associated with climate change and climate
change policy and regulations.
Transition Risks
Foreign and domestic governments continue to evaluate and implement policy, legislation, and regulations focused on
restricting emissions commonly referred to as GHG emissions and promoting adaptation to climate change and the transition
to a low-carbon economy. It is not possible to predict what measures foreign and domestic governments may implement in this
regard, nor is it possible to predict the requirements that such measures may impose or when such measures may be
implemented. However, international multilateral agreements, the obligations adopted thereunder and legal challenges
concerning the adequacy of climate-related policy brought against foreign and domestic governments may accelerate the
implementation of these measures. Given the evolving nature of climate change policy and the control of GHG emissions and
resulting requirements, including emission caps, carbon taxes and carbon pricing schemes implemented by varying levels of
government, it is expected that current and future climate change regulations will have the effect of increasing the Corporation's
operating expenses, and, in the long-term, potentially reducing the demand for oil, liquids, natural gas and related products,
which may result in a decrease in the demand for the Corporation's services.
-36-
Management’s Discussion & Analysis
Given the perceived elevated long-term risks associated with policy development, regulatory changes, public and private legal
challenges, or other market developments related to climate change, there have also been efforts in recent years affecting the
investment community, including investment advisors, sovereign wealth funds, banks, public pension funds, universities and
other institutional investors, promoting direct engagement and dialogue with companies in their portfolios on climate change
action (including exercising their voting rights on matters relating to climate change) and increased capital allocation to
investments in low-carbon assets and businesses while decreasing the carbon intensity of their portfolios through, among other
measures, divestments of companies with high exposure to GHG-intensive operations and products. Certain stakeholders
have also pressured insurance providers and commercial and investment banks to reduce or stop financing, and providing
insurance coverage to oil and natural gas and related infrastructure businesses and projects. The impact of such efforts may
adversely affect the Corporation's operations, the demand for and price of the Corporation's securities and may negatively
impact the Corporation's cost of capital and access to the capital markets.
Emissions, carbon and other regulations impacting climate and climate-related matters are constantly evolving. With respect
to environmental, social, governance and climate reporting, the International Sustainability Standards Board has issued an
IFRS Sustainability Disclosure Standard with the aim to develop sustainability disclosure standards that are globally consistent,
comparable and reliable. In addition, the Canadian Securities Administrators published for comment Proposed National
Instrument 51-107 – Disclosure of Climate Related Matters, intended to introduce climate-related disclosure requirements for
reporting issuers in Canada with limited exceptions. The Corporation is committed to transparent reporting of its environmental
performance, among other topics discussed in its ESG and Sustainability Report, and considers standards such as the
Sustainability Accounting Standards Board’s documentation, and recommendations issued by the Task Force for Climate
Related Financial Disclosures. If the Corporation is not able to meet future sustainability reporting requirements of regulators
or current and future expectations of investors, insurance providers, or other stakeholders, its business and ability to attract
and retain skilled employees, and raise capital may be adversely affected.
Physical Risks
Based on the Corporation's current understanding, the potential physical risks resulting from climate change are long-term in
nature and associated with a high degree of uncertainty regarding timing, scope, and severity of potential impacts. Many
experts believe global climate change could increase extreme variability in weather patterns such as increased frequency of
severe weather, rising mean temperature and sea levels, and long-term changes in precipitation patterns. Extreme hot and
cold weather, heavy snowfall, heavy rainfall, and wildfires may negatively impact Corporation's operations. Extreme weather
also increases the risk of personnel injury as a result of dangerous working conditions.
-37-
PHX Energy Services Corp. | 2022 Annual Report
Alternatives to and Changing Demand for Petroleum & Petroleum Based
Products
Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas
and technological advances in fuel economy and renewable energy generation systems could reduce the demand for oil,
natural gas and liquid hydrocarbons. Recently, certain jurisdictions have implemented policies or incentives to decrease the
use of hydrocarbons and encourage the use of renewable fuel alternatives, which may lessen the demand for petroleum and
petroleum based products and put downward pressure on commodity prices. Advancements in energy efficient products have
a similar effect on the demand for oil and natural gas products. The Corporation cannot predict the impact of changing demand
for oil and natural gas products, and any major changes may have a material adverse effect the Corporation's customers and
therefore in turn have a material adverse effect on the Corporation's business, financial condition, results of operations and
cash flow.
Reliance on a Skilled Workforce and Key Personnel
The success of the Corporation will be dependent upon the recruitment and retention of a skilled workforce and key personnel.
Losing the services of key personnel, or a substantial portion of its workforce as a whole, could result in failure to successfully
implement business plans and have a material adverse effect on the business and operations of the Corporation. The
Corporation does not have any key personnel insurance in effect. The contributions of the existing management team and
other key personnel to the immediate and near-term operations of the Corporation are likely to be of central importance. In
addition, certain of PHX Energy's current employees have significant institutional knowledge that must be transferred to other
employees prior to their departure from the Corporation. If PHX Energy is unable to: (i) retain current employees; (ii)
successfully complete effective knowledge transfers; and/or (iii) recruit new employees with the requisite knowledge and
experience, the Corporation could be negatively impacted. In addition, the Corporation could experience increased costs to
retain and recruit these professionals. Competition for qualified personnel in certain sectors of the oil and natural gas services
industry is intense and there can be no assurance that the Corporation will be able to continue to attract and retain all personnel
necessary for the development and operation of its business.
Availability and Cost of Equipment and Development of New Technology
The industry in which the Corporation operates is categorized by rapid and significant technological advancements and
introductions of new products and services utilizing new technologies. The ability of the Corporation to compete and expand
its business is dependent upon it having access to certain industry-leading equipment and specialized components at a
reasonable cost, as well as upon its ability to develop or acquire new competitive technology. There can be no assurance that
the Corporation will be able to respond to the competitive pressures of those companies with greater financial and technical
resources and implement new technologies on a timely basis, at an acceptable cost, or at all. The Corporation purchases
equipment and materials from various suppliers in the oil and natural gas drilling service industry. There can be no assurance
that these sources for equipment and materials will be maintained or available at acceptable cost. If such equipment is not
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Management’s Discussion & Analysis
available, and is not available from any other source, the Corporation’s ability to compete may be impaired. If the Corporation
is unable to continue to offer advanced and industry leading technologies to its customers, or is unsuccessful in implementing
certain technologies, its business and results of operations could also be adversely affected.
Competition
The Corporation’s major competitors are principally large multinational companies with significantly greater resources available
for marketing and R&D programs. The Corporation also competes with a number of other small and medium sized companies.
Like the Corporation, these companies have certain competitive advantages, such as low overhead costs and specialized
regional strengths. The Corporation’s ability to generate revenue depends on its ability to successfully compete, continue to
obtain contracts and to perform services within projected times and costs. Other factors that could affect competition include
additional transition to alternative sources of energy, political and economic factors and other factors outside of PHX Energy’s
control.
Oil and Natural Gas Industry Risk & Insurance
PHX Energy's operations are subject to the risks normally incident to the exploration, development and operation of oil and
natural gas properties and the drilling of oil and natural gas wells, including, without limitation, encountering unexpected
formations or pressures, equipment defects, malfunction, failures, blow-outs, loss of well control, leaks of sour natural gas, the
release of contaminants into the environment, cratering, fires, explosions, or other acts of nature, any of which could result in
work stoppages, personal injuries, loss of life or damage to or destruction of equipment, facilities and property of PHX Energy
and others, and the imposition of fines and penalties pursuant to environmental legislation. These risks and hazards could
expose PHX Energy to substantial liability. PHX Energy maintains insurance coverage that it believes to be adequate and
customary in the industry, such as all risk property insurance covering property, contractors equipment, motor truck cargo, fire,
limited first party pollution clean-up and limited first party blow-out and cratering; marine cargo insurance; commercial general
liability insurance covering third party bodily injury and property damage including sudden and accidental pollution coverage
and underground resources and equipment; and automobile insurance. While PHX Energy maintains such insurance, it may
not be adequate to cover all the costs and risk of loss arising from PHX Energy’s operations, all potential liabilities, potential
quantum of liabilities due to cover limits, exclusions or uninsurable events. In addition, such insurance may not be available
in the future at reasonable or commercially justifiable rates, as a result, PHX Energy may elect not to obtain insurance to
address specific risks. Further, there can be no assurance that insurance will continue to be available to PHX Energy at all.
In the event of any of the foregoing occurring, the Corporation’s overall risk exposure could increase and PHX Energy could
incur significant costs that could have a material adverse effect upon its financial condition, results of operations and cash
flows.
The Corporation's insurance policies are generally renewed on an annual basis and, depending on factors such as market
conditions, the premiums, policy limits and/or deductibles for certain insurance policies can vary substantially. In some
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PHX Energy Services Corp. | 2022 Annual Report
instances, certain insurance may become unavailable or available only for reduced amounts of coverage. Significantly
increased costs could lead the Corporation to decide to reduce or possibly eliminate, coverage.
Seasonality
In general, the level of activity of the Canadian and certain parts of the US and international oilfield service industry is influenced
by seasonable weather patterns. Wet weather and the spring thaw may make the ground unstable, which prevents, delays or
makes operations more difficult. Consequently, municipalities and provincial or state transportation departments may enforce
road bans that restrict the movement of rigs and other heavy equipment, thereby reducing activity levels. Additionally, certain
oil and natural gas producing areas, located where the ground consists of swampy terrain known as muskeg, are inaccessible
except during winter months.
Political Uncertainty and Geopolitical Risks
The Corporation's results can be adversely impacted by political, legal, or regulatory developments in Canada, the US and
elsewhere that affect local operations and local and international markets. Changes in government, government policy or
regulations, sanctions, changes in law or interpretation of settled law, third-party opposition to industrial activity generally or
projects specifically, and duration of regulatory reviews could impact the Corporation's existing or future operations and plans.
Additionally, changes in environmental regulations, assessment processes or other laws, and increasing and expanding
stakeholder consultation (including Indigenous stakeholders), may increase the cost of compliance or reduce or delay available
business opportunities of both the corporation and its customers and adversely impact the Corporation's results.
Other government and political factors that could adversely affect the Corporation's financial results include increases in taxes
or government royalty rates (including retroactive claims) and changes in trade policies and agreements. Further, the adoption
of regulations mandating efficiency standards, and the use of alternative fuels or uncompetitive fuel components could affect
the Corporation's operations. Many governments are providing tax advantages and other subsidies to support alternative
energy sources or are mandating the use of specific fuels or technologies. Governments and others are also promoting
research into new technologies to reduce the cost and increase the scalability of alternative energy sources, and the success
of these initiatives may decrease demand for the Corporation's services and technologies.
A change in federal, provincial, state or municipal governments in Canada and the US may have an impact on the directions
taken by such governments on matters that may impact the oil and natural gas industry including the balance between
economic development and environmental policy. In Canada particularly, the oil and natural gas industry has become an
increasingly politically polarizing topic, which has resulted in a rise in civil disobedience surrounding oil and natural gas
development—particularly with respect to infrastructure projects. Protests, blockades and demonstrations have the potential
to delay and disrupt the Corporation's activities and those of its customers.
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Management’s Discussion & Analysis
Impact of Pandemics - COVID-19
In March 2020, the World Health Organization declared COVID-19 a global pandemic, prompting many countries around the
world to close international borders and order the closure of institutions and businesses deemed non-essential. This resulted
in a swift and significant reduction in economic activity in Canada, the US and internationally along with a sudden drop in
demand for oil, liquids and natural gas. Since 2020, oil prices have largely recovered from their historic lows, but price support
from future demand, particularly in China, remains uncertain as countries experience varying degrees of virus outbreak and
newly emerging virus variants following efforts to re-open local economies and international borders. Volatile commodity prices
resulting from reduced demand associated with the impact of pandemics, including COVID-19, has had, and may continue to
have, a negative impact on the Corporation's operational results and financial condition. Low prices for oil, liquids and natural
gas will reduce the Corporation's funds from operations, and impact the Corporation's level of capital investment and may
result in the reduction in the demand for its services.
Foreign Operations
The Corporation will conduct a certain portion of its business in the US, and Albania. Any change in government policies could
have a significant impact on business, especially in the US as it represents a large portion of the Corporation’s market an
operations. Risks of foreign operations include, but are not necessarily limited to foreign currency exchange rate fluctuations,
changes of laws affecting foreign ownership, government participation, taxation, royalties, duties, inflation, repatriation of
earnings, social unrest or civil war, corruption, acts of terrorism, extortion or armed conflict and uncertain political and economic
conditions resulting in unfavourable government actions such as sanctions and unfavourable legislation or regulation. There
are no assurances that the economic and political conditions in the countries in which the Corporation operates will continue
as they are at the present time. While the impact of these factors cannot be accurately predicted, if any of the risks materialize,
they could have a material adverse effect on the Corporation's business, financial condition, results of operations and cash
flows.
US Operations
The Corporation has expanded its presence in the US by: (a) increasing sales and marketing initiatives; (b) retaining additional
personnel; (c) developing and deploying new technologies that provide competitive advantages in the US market; and (d)
increasing the amount of equipment located in the US. As a result, the Corporation is increasingly subject to the prevailing
market conditions of the oil and natural gas services industries in the US. The Corporation's reliance on the market for these
industries means that it is particularly subject to downturns in the US economy, adverse weather patterns in the US (such as
hurricanes and tropical storms), US regulatory changes, protectionist actions by US legislators and other political
developments, all of which could have an adverse impact on the Corporation's operations and financial results.
While growth of US Operations enhances the Corporation's ability to access opportunities in the US, it also increases its
exposure to risks such as those listed above, civil liability exposure, and evolving political dynamics in the US, including
increasing protectionist sentiment, the renegotiation of trade agreements, and efforts to amend regulation in many US
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PHX Energy Services Corp. | 2022 Annual Report
industries. As a result, the competitive position of the Corporation may become increasingly uncertain and challenging in
relation to the US.
Changing Investor Sentiment
A number of factors, including the effects of the use of hydrocarbons on climate change, the impact of oil and natural gas
operations on the environment, environmental damage relating to spills of petroleum products during production and
transportation, Indigenous rights and gender balance, have affected certain investors' sentiments towards investing in the oil
and natural gas industry and certain corporations generally. As a result of these concerns, some institutional, retail, and
governmental investors have announced that they are no longer funding or investing in oil and natural gas industry assets or
companies, or are reducing the amount thereof over time. In addition, certain institutional investors are requesting that issuers
develop and implement more robust ESG policies and practices. Developing and implementing such policies and practices
can involve significant costs and require a significant time commitment from the Board, Management and employees of the
Corporation. Failing to implement the policies and practices, as requested by institutional investors, may result in such investors
reducing their investment in the Corporation, or not investing in Corporation at all. Any reduction in the investor base interested
or willing to invest in the oil and natural gas industry and more specifically, the Corporation, may result in limiting the
Corporation’s access to capital, increasing the cost of capital, and decreasing the price and liquidity of the Corporation’s
securities even if the Corporation’s operating results, underlying asset values or prospects have not changed. Additionally,
these factors, as well as other related factors, may cause a decrease in the value of the Corporation’s assets which may result
in an impairment charge.
Dividends
The amount of future cash dividends paid by the Corporation or other forms of shareholder returns, if any, will be subject to
the discretion of the Board and may vary depending on a variety of factors and conditions existing from time-to-time, including,
among other things, fluctuations in commodity prices, capital expenditure requirements, debt service requirements, operating
costs, foreign exchange rates, limits on distributions under the corporation’s credit facility, and the satisfaction of the liquidity
and solvency tests imposed by applicable corporate law for the declaration and payment of dividends. Depending on these
and various other factors, many of which will be beyond the control of the Corporation, the dividend policy and return of capital
strategy of the Corporation may change from time-to-time and, as a result, future cash dividends could be reduced or
suspended entirely.
The market value of the Corporation’s common shares may deteriorate if cash dividends are reduced or suspended.
Furthermore, the future treatment of dividends for tax purposes will be subject to the nature and composition of dividends paid
by the Corporation and potential legislative and regulatory changes. Dividends may be reduced during periods of lower funds
from operations, which result from lower commodity prices and reduced customer services demands and any decision by the
Corporation to finance capital expenditures using funds from operations.
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Management’s Discussion & Analysis
To the extent that external sources of capital become limited or unavailable, the ability of the Corporation to make its necessary
capital investments in its business will be impaired. To the extent that the Corporation is required to use funds from operations
to finance capital expenditures or invest in or further expand its asset base, the cash available for dividends may be reduced.
Market Price
The trading price of the securities of issuers in the oil and natural gas industry is subject to substantial volatility often based on
factors related and unrelated to the financial performance or prospects of the issuers involved. Factors unrelated to the
Corporation's performance could include macroeconomic developments nationally, within North America or globally, domestic
and global commodity prices, and/or current perceptions of the oil and natural gas market. Similarly, the market price of the
common shares of the Corporation could be subject to significant fluctuations in response to variations in the Corporation's
operating results, financial condition, liquidity and other internal factors. Accordingly, the price at which the common shares of
the Corporation will trade cannot be accurately predicted.
Reputational Risk
The Corporation's business, financial condition, operations or prospects may be negatively impacted as a result of any negative
public opinion toward the Corporation or as a result of any negative sentiment toward or in respect of Corporation's reputation
with stakeholders, special interest groups, political leadership, the media or other entities. Public opinion may be influenced by
certain media and special interest groups' negative portrayal of the industry in which the Corporation operates as well as their
opposition to certain oil and natural gas projects. Potential impacts of negative public opinion or reputational issues may
include, with respect to both the Corporation and its customers which would indirectly affect the Corporation, the following:
delays or interruptions in operations, legal or regulatory actions or challenges, blockades, increased regulatory oversight,
reduced support for, delays in, challenges to, or the revocation of regulatory approvals, permits and/or licences and increased
costs and/or cost overruns. Any environmental damage, loss of life, injury or damage to property caused by the Corporation's
operations could damage the reputation of the Corporation. The Corporation's reputation could be affected by actions and
activities of other corporations operating in the oil and natural gas industry, over which the Corporation has no control.
Opposition from special interest groups opposed to oil and natural gas development and the possibility of climate related
litigation against hydrocarbons companies may indirectly harm the Corporation's reputation. See “Risk Factors – Climate
Change”.
Reputational risk cannot be managed in isolation from other forms of risk. Credit, market, operational, insurance, regulatory
and legal risks, among others, must all be managed effectively to safeguard the Corporation's reputation. Damage to the
Corporation's reputation could result in in negative investor sentiment towards the Corporation, which may result in limiting the
Corporation's access to capital, increasing the cost of capital, and decreasing the price and liquidity of the Corporation's
securities.
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PHX Energy Services Corp. | 2022 Annual Report
Management of Growth
The Corporation may be subject to growth related risks at certain periods of time including capacity constraints and pressure
on its internal systems and controls. The ability of the Corporation to manage growth effectively when it occurs will require it to
continue to implement and improve its operational and financial systems and to expand, train and manage its employee base.
If the Corporation is unable to deal with this growth, it may have a material adverse effect on the Corporation's business,
financial condition, results of operations and prospects.
Information Technology Systems, Cyber-Security and Social Media
The Corporation is increasingly dependent upon the availability, capacity, reliability and security of its information technology
infrastructure and its ability to expand and continually update this infrastructure to conduct daily operations. The Corporation
depends on various information technology systems to process and record financial data, manage financial resources,
administer contracts with customers and communicate with employees and third-party partners.
Further, the Corporation is subject to a variety of information technology and system risks as a part of its operations including
potential breakdown, invasion, virus, cyber-attack, cyber-fraud, security breach, and destruction or interruption of the
Corporation’s information technology systems by third parties or insiders. Unauthorized access to these systems by employees
or third parties could lead to corruption or exposure of confidential, fiduciary or proprietary information, interruption to
communications or operations or disruption to business activities or the Corporation's competitive position. In addition, cyber
phishing attempts, in which a malicious party attempts to obtain sensitive information such as usernames, passwords, and
credit card details (and money) by disguising as a trustworthy entity in an electronic communication, have become more
widespread and sophisticated in recent years. If the Corporation becomes a victim to a cyber phishing attack it could result in
a loss or theft of the Corporation's financial resources or critical data and information, or could result in a loss of control of the
Corporation's technological infrastructure or financial resources. The Corporation's employees are often the targets of such
cyber phishing attacks, as they are and will continue to be targeted by parties using fraudulent "spoof" emails to misappropriate
information or to introduce viruses and or other malware. These emails appear to be legitimate emails, but direct recipients to
fake websites operated by the sender of the email or request recipients to send a password or other confidential information
through email, or to download malware.
The Corporation maintains policies and procedures that address and implement employee protocols with respect to electronic
communications and electronic devices and conducts regular cyber-security risk assessments (both internal and third-party)
and training and education programs for its employees. The Corporation also employs encryption protection of its confidential
information on all computers and other electronic devices. Despite PHX Energy’s efforts to mitigate such cyber-phishing attacks
through education and training, cyber-phishing activities remain a serious problem that may damage its information technology
infrastructure. The Corporation applies technical and process controls in line with industry-accepted standards to protect its
information, assets and systems including a written incident response plan for responding to a cybersecurity incident. However,
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Management’s Discussion & Analysis
these controls may not adequately prevent cyber-security breaches. Disruption of critical information technology services, or
breaches of information security, could have a negative effect on the Corporation's performance and earnings, as well as its
reputation, and any damages sustained may not be adequately covered by the Corporation's current insurance coverage, or
at all. The significance of any such event is difficult to quantify, but may in certain circumstances be material and could have a
material adverse effect on the Corporation’s business, financial condition and results of operations.
Additionally, social media is increasingly used as a vehicle to carry out cyber phishing attacks. Information posted on social
media sites, for business or personal purposes, may be used by attackers to gain entry into the Corporation's systems and
obtain confidential information. While the Corporation takes steps to alleviate such risks, despite its efforts, as social media
continues to grow in influence and access to social media platforms becomes increasingly prevalent, there are significant risks
that the Corporation may not be able to properly regulate social media use and preserve adequate records of business activities
and client communications conducted through the use of social media platforms.
Breach of Confidentiality
While discussing potential business relationships or other transactions with third parties, the Corporation may disclose
confidential information relating to its business, operations or affairs. Although confidentiality agreements are generally signed
by third parties prior to the disclosure of any confidential information, a breach could put the Corporation at competitive risk
and may cause significant damage to its business. The harm to the Corporation's business from a breach of confidentiality
cannot presently be quantified, but may be material and may not be compensable in damages. There is no assurance that, in
the event of a breach of confidentiality, the Corporation will be able to obtain equitable remedies, such as injunctive relief, from
a court of competent jurisdiction in a timely manner, if at all, in order to prevent or mitigate any damage to its business that
such a breach of confidentiality may cause.
Corporate Governance
This MD&A has been prepared by the management of PHX Energy and it has been reviewed and approved by the Audit
Committee and the Board of the Corporation. Additional information relating to the Corporation’s Corporate Governance can
be found in the Corporation’s AIF and in its Information Circular in respect of its annual meeting of Shareholders, each of which
are annually filed on SEDAR at www.sedar.com.
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PHX Energy Services Corp. | 2022 Annual Report
Disclosure Controls and Procedures
The Corporation's Chief Executive Officer and Chief Financial Officer (the "Certifying Officers") have designed, or caused to
be designed under their supervision, disclosure controls and procedures ("DC&P"), as defined in National Instrument 52-109
Certification of Disclosure in Issuers’ Annual and Interim Filings ("NI 52-109"), to provide reasonable assurance that information
required to be disclosed by the Corporation in its annual filings, interim filings or other reports filed or submitted by it under
securities legislation is recorded, processed, summarized and reported within the time periods specified in the securities
legislation and include controls and procedures designed to ensure that information required to be so disclosed is accumulated
and communicated to the Corporation's management, including the Certifying Officers, as appropriate to allow timely decisions
regarding required disclosure.
The Certifying Officers have evaluated, or caused to be evaluated under their supervision, the effectiveness of the
Corporation’s DC&P. Based on that evaluation, the Certifying Officers have concluded that the Corporation's DC&P were
effective as at December 31, 2022.
Internal Controls Over Financial Reporting
The Corporation's Certifying Officers have designed, or caused to be designed under their supervision, internal controls over
financial reporting ("ICFR"), as defined in NI 52-109, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles applicable to the Corporation. ICFR includes those policies and procedures that (i) pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Corporation;
(ii) are designed to provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that receipts and expenditures of the Corporation are being made only in accordance
with authorizations of management and directors of the Corporation; and (iii) are designed to provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation's assets that could
have a material effect on the annual financial statements or interim financial reports.
The control framework used to design and evaluate the Corporation's ICFR is "Internal Control - Integrated Framework (2013)"
published by The Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Certifying Officers have evaluated, or caused to be evaluated under their supervision, the effectiveness of the
Corporation's ICFR and have concluded that the Corporation's ICFR were effective as at December 31, 2022.
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Management’s Discussion & Analysis
There were no changes in the Corporation's ICFR that occurred during the period that have materially affected, or are
reasonably likely to materially affect, the Corporation's ICFR.
While the Certifying Officers believe that the Corporation's ICFR provide a reasonable level of assurance and are effective,
they do not expect that the ICFR will prevent all errors and fraud. A control system, no matter how well conceived or operated,
can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Outstanding Corporation Share Data
(In thousands of shares)
Common shares outstanding, excluding shares held in trust
Common shares held in trust (i)
Total common shares outstanding
Dilutive securities:
Options
Corporation shares – diluted
As at February 28, 2023
50,982,999
5,738
50,988,737
1,051,834
52,040,571
(i) Common Shares held in trust by an independent trustee for the potential future settlement of retention awards granted to eligible participant’s under the
Corporation’s RAP
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PHX Energy Services Corp. | 2022 Annual Report
Selected Annual Financial Information
The following selected annual financial information was obtained from the audited consolidated financial statements prepared
in accordance with IFRS, with the exception of net debt.
(Stated in thousands of dollars except per share amounts)
Years ended December 31,
Revenue
Net earnings (loss)
Earnings (loss) per share - basic
Earnings (loss) per share - diluted
Earnings (loss) from continuing operations
Earnings (loss) from continuing operations per share – basic
Earnings (loss) from continuing operations per share – diluted
Dividends declared per share(1)
Loans and borrowings
Net Debt (Net Cash)(2)
Total assets
2022
535,745
29,753
0.59
0.58
44,311
0.88
0.87
0.40
22,731
4,484
375,224
2021
339,946
22,725
0.46
0.44
23,318
0.47
0.45
0.15
-
(24,829)
262,494
2020
233,734
(7,771)
(0.15)
(0.15)
(6,878)
(0.13)
(0.13)
0.025
-
(25,746)
216,541
In 2022, the global economy continued to recover from COVID-19 and global energy demand and supply imbalance, partially
caused by the Russian Ukraine war, strengthened commodity prices which aided the improvement in the North American rig
counts. In this more favourable industry environment, the Corporation generated strong operational and financial results in
2022. The COVID-19 pandemic, which began in 2020 and lingered into 2021 negatively impacted global economies and
caused disruption to energy demand, commodity pricing and global supply chains. In 2020, the North American industry
experienced the worst downturn in its history with rig counts dropping to all-time lows. As vaccines became widely available in
2021, many governments started easing restrictions which led to the global economy beginning its path to recovery, however
the supply chain disruption persisted through to 2022 and are anticipated to continue into 2023. The Corporation maintained
its healthy financial position through the challenges of 2020, and as a result in 2021 and 2022 was able to take a proactive
stance in an environment where businesses were facing historic inflationary pressures and supply chain issues. The
Corporation focused its strategy on early acquisition of drilling equipment in order to take advantage of the rising demand for
energy products while making an effort to avoid resource shortages. In 2021, the Corporation’s net earnings and earnings
from continuing operations increased to $22.7 million and $23.3 million, respectively, primarily driven by revenue growth of 45
percent from 2020 to 2021. In 2022, net earnings and earnings from continuing operations increased to $29.8 million and
$44.3 million, respectively, driven by a 58 percent increase in revenue. As a result of the Corporation’s ability to leverage its
(1) Supplementary financial measure that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures
presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this MD&A.
(2) Capital management measure that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures
presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this MD&A.
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Management’s Discussion & Analysis
financial strength in the past 2 years to execute large capital expenditure programs, the Corporation’s total assets progressively
increased from $216.5 million at the end of 2020 to $375.2 million as at December 31, 2022. The increases in total assets were
mainly driven by higher trade receivables that resulted from increased revenues, and greater inventories and drilling equipment
to support operating activities and address the increased global demand for energy products. The Corporation ended the 2022-
year with loans or borrowings outstanding of $22.7 million and a cash and cash equivalents balance of $18.2 million, resulting
to a net debt of $4.5 million.
Summary of Quarterly Results – Continuing Operations
(Stated in thousands of dollars except per share amounts)
Revenue
Earnings (loss)
Dec-22
Sep-22
Jun-22
Mar-22
Dec-21
Sept-21
157,758
142,418
126,238
109,331
102,296
93,338
20,333
13,475
12,818
(2,315)
9,330
4,206
Earnings (loss) per share – basic
Earnings (loss) per share – diluted
Dividends paid
Cash and cash equivalents
Loans and borrowings
0.40
0.39
5,078
18,247
22,731
0.27
0.27
3,797
27,024
24,000
0.25
0.25
3,791
17,971
20,108
(0.04)
(0.04)
0.19
0.18
0.09
0.08
2,482
2,505
1,260
1,260
1,266
11,284
24,829
24,917
21,026
23,468
3,749
-
-
-
-
Jun-21
75,765
4,447
0.08
0.08
Mar-21
68,547
5,334
0.11
0.11
Non-GAAP and Other Financial Measures
Non-GAAP Financial Measures and Ratios
a) Adjusted EBITDA from Continuing Operations
Adjusted EBITDA from continuing operations, defined as earnings before finance expense, finance expense lease liability,
income taxes, depreciation and amortization, impairment losses on drilling and other equipment and goodwill and other write-
offs, equity-settled share-based payments, severance payouts relating to the Corporation’s restructuring cost, and unrealized
foreign exchange gains or losses, does not have a standardized meaning and is not a financial measure that is recognized
under GAAP. However, Management believes that adjusted EBITDA from continuing operations provides supplemental
information to earnings from continuing operations that is useful in evaluating the results of the Corporation’s principal business
activities before considering certain charges, how it was financed and how it was taxed in various countries. Investors should
be cautioned, however, that adjusted EBITDA from continuing operations should not be construed as an alternative measure
to earnings from continuing operations determined in accordance with GAAP. PHX Energy’s method of calculating adjusted
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PHX Energy Services Corp. | 2022 Annual Report
EBITDA from continuing operations may differ from that of other organizations and, accordingly, its adjusted EBITDA from
continuing operations may not be comparable to that of other companies.
The following is a reconciliation of earnings from continuing operations to adjusted EBITDA:
(Stated in thousands of dollars)
Three-month periods ended December 31,
Years ended December 31,
Earnings from continuing operations:
Add:
Depreciation and amortization drilling and
other equipment
Depreciation and amortization right-of-use
asset
Provision for (recovery of) income taxes
Finance expense
Finance expense lease liability
Equity-settled share-based payments
Unrealized foreign exchange loss
Severance
2022
20,333
8,876
805
2,657
487
525
58
133
-
2021
9,330
6,898
837
(511)
115
516
49
176
-
2022
44,311
2021
23,318
32,119
25,860
3,235
9,042
1,360
2,032
451
169
-
3,336
3,559
494
2,125
384
253
835
Adjusted EBITDA from continuing operations
33,874
17,410
92,719
60,164
b) Adjusted EBITDA from Continuing Operations Per Share - Diluted
Adjusted EBITDA from continuing operations per share - diluted is calculated using the treasury stock method whereby deemed
proceeds on the exercise of the share options are used to reacquire common shares at an average share price. The calculation
of adjusted EBITDA from continuing operations per share - dilutive is based on the adjusted EBITDA from continuing operations
as reported in the table above divided by the diluted number of shares outstanding as quantified in Note 11(b) in the Notes to
the Consolidated Financial Statements.
c) Adjusted EBITDA from Continuing Operations as a Percentage of Revenue
Adjusted EBITDA as a percentage of revenue is calculated by dividing the adjusted EBITDA from continuing operations as
reported in the table above by revenue as stated on the Consolidated Statements of Comprehensive Earnings.
d) Adjusted EBITDA from Continuing Operations Excluding Cash-settled Share-based Compensation Expense
Adjusted EBITDA from continuing operations excluding cash-settled share-based compensation expense is calculated by
adding cash-settled share-based compensation expense to adjusted EBITDA from continuing operations as described above.
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Management’s Discussion & Analysis
The following is a reconciliation of earnings from continuing operations to adjusted EBITDA from continuing operations
excluding cash-settled share-based compensation expense:
(Stated in thousands of dollars)
Three-month periods ended December 31,
Years ended December 31,
Earnings from continuing operations:
Add:
Depreciation and amortization drilling and
other equipment
Depreciation and amortization right-of-use
asset
Provision for (recovery of) income taxes
Finance expense
Finance expense lease liability
Equity-settled share-based payments
Unrealized foreign exchange loss
Severance
Cash-settled share-based compensation
expense
Adjusted EBITDA from continuing operations
excluding cash-settled share-based
compensation expense
2022
20,333
8,876
805
2,657
487
525
58
133
-
2021
9,330
6,898
837
(511)
115
516
49
176
-
2022
44,311
2021
23,318
32,119
25,860
3,235
9,042
1,360
2,032
451
169
-
3,336
3,559
494
2,125
384
253
835
6,938
2,972
24,568
12,889
40,812
20,382
117,287
73,053
e) Adjusted EBITDA from Continuing Operations Excluding Cash-settled Share-based Compensation Expense as a
Percentage of Revenue
Adjusted EBITDA from continuing operations excluding cash-settled share-based compensation expense as a percentage of
revenue is calculated by dividing adjusted EBITDA from continuing operations excluding cash-settled share-based
compensation expense as reported above by revenue as stated on the Consolidated Statements of Comprehensive Earnings.
f) Gross Profit as a Percentage of Revenue Excluding Depreciation & Amortization and Government Grants
Gross profit as a percentage of revenue excluding depreciation & amortization and government grants is defined as the
Corporation’s gross profit excluding depreciation and amortization and government grants divided by revenue and is used to
assess operational profitability. This Non-GAAP ratio does not have a standardized meaning and is not a financial measure
recognized under GAAP. PHX Energy’s method of calculating gross profit as a percentage of revenue may differ from that of
other organizations and, accordingly, it may not be comparable to that of other companies.
-51-
PHX Energy Services Corp. | 2022 Annual Report
The following is a reconciliation of revenue, direct costs, depreciation and amortization, government grants and gross profit to
gross profit as a percentage of revenue excluding depreciation and amortization and government grants:
(Stated in thousands of dollars)
Three-month periods ended December 31,
Years ended December 31,
Revenue
Direct costs
Gross profit
Depreciation & amortization drilling and other
equipment (included in direct costs)
Depreciation & amortization right-of-use asset
(included in direct costs)
Government grants (included in direct costs)
Gross profit as a percentage of revenue excluding
depreciation & amortization and government
grants
2022
157,758
121,906
35,852
8,876
805
(8)
2021
102,296
82,138
20,158
6,898
837
-
45,525
27,893
2022
535,745
426,107
109,638
2021
339,946
270,637
69,309
32,119
25,860
3,235
(83)
144,909
3,336
(6,488)
92,017
29%
27%
27%
27%
g) SG&A Costs Excluding Share-Based Compensation as a Percentage of Revenue
SG&A costs excluding share-based compensation as a percentage of revenue is defined as the Corporation’s SG&A costs
excluding share-based compensation divided by revenue and is used to assess the impact of administrative costs excluding
the effect of share price volatility. This Non-GAAP ratio does not have a standardized meaning and is not a financial measure
recognized under GAAP. PHX Energy’s method of calculating SG&A costs excluding share-based compensation as a
percentage of revenue may differ from that of other organizations and, accordingly, it may not be comparable to that of other
companies.
The following is a reconciliation of SG&A costs, share-based compensation, and revenue to SG&A costs excluding share-
based compensation as a percentage of revenue:
(Stated in thousands of dollars)
SG&A Costs
Deduct:
Share-based compensation (included in SG&A)
Three-month periods ended December 31,
Years ended December 31,
2022
19,365
6,996
12,369
2021
13,044
3,021
10,023
2022
68,901
25,019
43,882
2021
44,982
13,273
31,709
Revenue
SG&A costs excluding share-based compensation
as a percentage of revenue
157,758
102,296
535,745
339,946
8%
10%
8%
9%
-52-
Management’s Discussion & Analysis
Capital Management Measures
a) Funds from Operations
Funds from operations is defined as cash flows generated from operating activities before changes in non-cash working capital,
interest paid, and income taxes paid. This financial measure does not have a standardized meaning and is not a financial
measure recognized under GAAP. Management uses funds from operations as an indication of the Corporation’s ability to
generate funds from its operations before considering changes in working capital balances and interest and taxes paid.
Investors should be cautioned, however, that this financial measure should not be construed as an alternative measure to cash
flows from operating activities determined in accordance with GAAP. PHX Energy’s method of calculating funds from
operations may differ from that of other organizations and, accordingly, it may not be comparable to that of other companies.
The following is a reconciliation of cash flows from operating activities to funds from operations:
(Stated in thousands of dollars)
Cash flows from operating activities
Add (deduct):
Changes in non-cash working capital
Interest paid
Income taxes paid (received)
Funds from operations
b) Excess Cash Flow
Three-month periods ended December 31,
Years ended December 31,
2022
8,970
15,326
775
(3)
2021
12,969
150
556
97
25,068
13,772
2022
38,338
31,503
2,873
(232)
72,482
2021
45,548
3,451
2,321
(109)
51,211
Excess cash flow is defined as funds from operations (as defined above) less cash payment on leases, growth capital
expenditures, and maintenance capital expenditures from downhole equipment losses and asset retirements, and increased
by proceeds on disposition of drilling equipment. This financial measure does not have a standardized meaning and is not a
financial measure recognized under GAAP. Management uses excess cash flow as an indication of the Corporation’s ability
to generate funds from its operations to support operations and grow and maintain the Corporation’s drilling and other
equipment. This performance measure is useful to investors for assessing the Corporation’s operating and financial
performance, leverage and liquidity. Investors should be cautioned, however, that this financial measure should not be
construed as an alternative measure to cash flows from operating activities determined in accordance with GAAP. PHX
Energy’s method of calculating excess cash flow may differ from that of other organizations and, accordingly, it may not be
comparable to that of other companies.
-53-
PHX Energy Services Corp. | 2022 Annual Report
The following is a reconciliation of cash flows from operating activities to excess cash flow:
(Stated in thousands of dollars)
Cash flows from operating activities
Add (deduct):
Changes in non-cash working capital
Interest paid
Income taxes paid (received)
Cash payment on leases
Three-month periods ended December 31,
Years ended December 31,
2022
8,970
15,326
774
(3)
(1,330)
23,737
2021
12,969
150
556
97
(1,372)
12,399
2022
38,338
31,503
2,873
(232)
(5,303)
67,179
2021
45,548
3,451
2,321
(109)
(5,420)
45,791
Proceeds on disposition of drilling equipment
Maintenance capital expenditures from
downhole equipment losses and asset
retirements
Net proceeds
12,005
5,236
27,459
12,340
(6,222)
(3,940)
(25,068)
(12,203)
5,783
1,296
2,391
137
Growth capital expenditures
(15,252)
(7,182)
(48,457)
(23,078)
Excess cash flow
14,268
6,513
21,113
22,850
c) Working Capital
Working capital is defined as the Corporation’s current assets less its current liabilities and is used to assess the Corporation’s
short-term liquidity. This financial measure does not have a standardized meaning and is not a financial measure recognized
under GAAP. Management uses working capital to provide insight as to the Corporation’s ability to meet obligations as at the
reporting date. PHX Energy’s method of calculating working capital may differ from that of other organizations and, accordingly,
it may not be comparable to that of other companies.
The following is a reconciliation of current assets and current liabilities to working capital:
(Stated in thousands of dollars)
Current assets
Deduct:
Current liabilities
Working capital
Years ended December 31,
2022
2021
210,227
141,159
(115,888)
94,339
(83,286)
57,873
-54-
Management’s Discussion & Analysis
d) Net Debt (Net Cash)
Net debt is defined as the Corporation’s operating facility and loans and borrowings less cash and cash equivalents. This
financial measure does not have a standardized meaning and is not a financial measure recognized under GAAP. Management
uses net debt to provide insight as to the Corporation’s ability to meet obligations as at the reporting date. PHX Energy’s
method of calculating net debt may differ from that of other organizations and, accordingly, it may not be comparable to that of
other companies.
The following is a reconciliation of operating facility, loans and borrowings, and cash and cash equivalents to net debt:
(Stated in thousands of dollars)
Loans and borrowings
Deduct:
Cash and cash equivalents
Net debt (Net cash)
e) Net Capital Expenditures
Years ended December 31,
2022
22,731
2021
-
(18,247)
4,484
(24,829)
(24,829)
Net capital expenditures is comprised of total additions to drilling and other long-term assets, as determined in accordance with
IFRS, less total proceeds from disposition of drilling equipment, as determined in accordance with IFRS. This financial measure
does not have a standardized meaning and is not a financial measure recognized under GAAP. Management uses net capital
expenditures to provide insight as to the Corporation’s ability to meet obligations as at the reporting date. PHX Energy’s method
of calculating net debt may differ from that of other organizations and, accordingly, it may not be comparable to that of other
companies.
The following is a reconciliation of additions to drilling and other equipment and proceeds from disposition of drilling
equipment to net capital expenditures:
(Stated in thousands of dollars)
Additions to drilling and other equipment
(Capital expenditures)
Deduct:
Proceeds on disposition of drilling equipment
Net capital expenditures
Three-month periods ended December 31,
Years ended December 31,
2021
11,122
(5,236)
5,886
2022
73,525
(27,459)
46,066
2021
35,281
(12,340)
22,941
2022
21,474
(12,005)
9,469
-55-
PHX Energy Services Corp. | 2022 Annual Report
Supplementary Financial Measures
“Average consolidated revenue per day” is comprised of consolidated revenue, as determined in accordance with IFRS, divided
by the Corporation’s consolidated number of operating days. Operating days is defined under the “Definitions” section below.
“Average revenue per operating day” is comprised of revenue, as determined in accordance with IFRS, divided by the number
of operating days.
“Dividends paid per share” is comprised of dividends paid, as determined in accordance with IFRS, divided by the number of
shares outstanding at the dividend record date.
“Dividends declared per share” is comprised of dividends declared, as determined in accordance with IFRS, divided by the
number of shares outstanding at the dividend record date.
“Effective tax rate” is comprised of provision for or recovery of income tax, as determined in accordance with IFRS, divided by
earnings from continuing operations before income taxes, as determined in accordance with IFRS.
“Funds from operations per share – diluted” is calculated using the treasury stock method whereby deemed proceeds on
the exercise of the share options are used to reacquire common shares at an average share price. The calculation of funds
from operations per share - diluted is based on the funds from operations as reported in the table above divided by the diluted
number of shares outstanding as quantified in Note 11(b) in the Notes to the Consolidated Financial Statements.
Definitions
“Operating days” throughout this document, it is referring to the billable days on which PHX Energy is providing services to the
client at the rig site.
“Capital expenditures” equate to the Corporation’s total acquisition of drilling and other equipment as stated on the
Consolidated Statements of Cash Flows and Note 6(b) in the Notes to the Financial Statements.
“Growth capital expenditures” are capital expenditures that were used to expand capacity in the Corporation’s fleet of drilling
equipment.
“Maintenance capital expenditures” are capital expenditures that were used to maintain capacity in the Corporation’s fleet of
drilling equipment and replace equipment that were lost downhole during drilling operations.
-56-
Management’s Discussion & Analysis
Cautionary Statement Regarding Forward-Looking Information and
Statements
This MD&A contains certain forward-looking information and statements within the meaning of applicable securities laws. The use
of "expect", "anticipate", "continue", "estimate", "objective", "ongoing", "may", "will", "project", "could", "should", "can", "believe",
"plans", "intends", "strategy" and similar expressions are intended to identify forward-looking information or statements.
The forward-looking information and statements included in this MD&A are not guarantees of future performance and should
not be unduly relied upon. These statements and information involve known and unknown risks, uncertainties and other factors
that may cause actual results or events to differ materially from those anticipated in such forward-looking statements and
information. The Corporation believes the expectations reflected in such forward-looking statements and information are
reasonable, but no assurance can be given that these expectations will prove to be correct. Such forward-looking statements
and information included in this MD&A should not be unduly relied upon. These forward-looking statements and information
speak only as of the date of this MD&A.
In particular, forward-looking information and statements contained in this MD&A include, without limitation:
•
•
•
•
•
•
•
The anticipated increased demand for the Corporation’s services and high-performance technologies in North
America;
The resulting increased costs and component shortages with certain suppliers are expected to have less of an impact
in 2023 and the Corporation will continue to leverage its strong market position and implement strategies to mitigate
the impacts to its operations;
the Corporation’s intent to preserve balance sheet strength and continue to reward shareholders, including through
the ROCS Program;
PHX Energy now anticipates spending $61.5 million, previously announced $50 million, in capital expenditures during
2023. Of the total expenditures, $41.8 million is expected to be allocated to growth capital and the remaining $19.7
million is expected to be allocated towards maintenance of the existing fleet of drilling and other equipment and
replacement of equipment lost downhole during drilling operations. The maintenance capital amount could
increase throughout the year should there be more downhole equipment losses then forecasted. These increases
would likely be funded by proceeds on disposition of drilling equipment;
As at December 31, 2022, the Corporation has commitments to purchase drilling and other equipment for $43.3
million. Delivery is expected to occur within the first half of 2023;
Anticipated continuation of the Corporation’s quarterly dividend program and the amounts of dividends;
In 2021, the Corporation made a strategic investment by acquiring a minor equity position in DEEP, a geothermal
power developer. The investment in DEEP provides a potential opportunity for the Corporation to diversify its
-57-
PHX Energy Services Corp. | 2022 Annual Report
business to include renewable energy projects, provide drilling expertise to the project and increase the focus on
long term sustainable growth; and
•
Planned expenditures are expected to be financed primarily by funds from operations and proceeds on the
disposition of drilling equipment. However, if a sustained period of market and commodity price uncertainty and
financial market volatility persists in 2023, the Corporation’s activity levels, cash flows and access to credit may be
negatively impacted, in which event the proceeds from borrowing may be required to fund operations, and the
expenditure level would be reduced accordingly.
The above are stated under the headings: “Year End Highlights”, “Overall Performance”, “Return of Capital Strategy”, “Capital
Spending”, “Supply Chain Disruption and Inflation”, “Liquidity”, and “Cash Requirements for Capital Expenditures”. In addition,
all information contained under the headings “Return of Capital Strategy”, “Cash Flow and Dividends”, “Investments”, “Critical
Accounting Estimates and Judgements”, “Business Risk Factors” and “Outlook” sections of this MD&A may contain forward-
looking statements.
In addition to other material factors, expectations and assumptions which may be identified in this MD&A and other continuous
disclosure documents of the Corporation referenced herein, assumptions have been made in respect of such forward-looking
statements and information regarding, without limitation, that: the Corporation will continue to conduct its operations in a
manner consistent with past operations; the general continuance of current industry conditions and the accuracy of the
Corporation’s market outlook expectations for 2023 and in the future; that future business, regulatory and industry conditions
will be within the parameters expected by the Corporation, anticipated financial performance, business prospects, impact of
competition, strategies, the general stability of the economic and political environment in which the Corporation operates; the
impact of pandemics and the Russian-Ukrainian war on the global economy, specifically trade, manufacturing, supply chain,
inflation and energy consumption, among other things and the resulting impact on the Corporation’s operations and future
results which remain uncertain, exchange and interest rates including the potential for further interest rate hikes by global
central banks and the impact on financing charges and foreign exchange and the anticipated global economic response to
concerted interest rate hikes; the continuance of existing (and in certain circumstances, the implementation of proposed) tax,
royalty and regulatory regimes; the sufficiency of budgeted capital expenditures in carrying out planned activities; the
availability and cost of labour and services and the adequacy of cash flow; debt and ability to obtain financing on acceptable
terms to fund its planned expenditures, which are subject to change based on commodity prices; market conditions and future
oil and natural gas prices; and potential timing delays. Although management considers these material factors, expectations,
and assumptions to be reasonable based on information currently available to it, no assurance can be given that they will prove
to be correct.
Readers are cautioned that the foregoing lists of factors are not exhaustive. Additional information on these and other factors
that could affect the Corporation’s operations and financial results are included in reports on file with the Canadian Securities
Regulatory Authorities and may be accessed through the SEDAR website (www.sedar.com) or at the Corporation’s website.
-58-
Management’s Discussion & Analysis
The forward-looking statements and information contained in this MD&A are expressly qualified by this cautionary statement.
The Corporation does not undertake any obligation to publicly update or revise any forward-looking statements or information,
whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.
-59-
KPMG LLP
205 5th Avenue SW
Suite 3100
Calgary AB T2P 4B9
Tel 403-691-8000
Fax 403-691-8008
www.kpmg.ca
INDEPENDENT AUDITOR’S REPORT
To the Shareholders of PHX Energy Services Corp.
Opinion
We have audited the consolidated financial statements of PHX Energy Services Corp. (the Entity), which
comprise:
•
•
•
•
•
the consolidated statements of financial position as at December 31, 2022 and December 31, 2021
the consolidated statements of comprehensive earnings for the years then ended
the consolidated statements of changes in equity for the years then ended
the consolidated statements of cash flows for the years then ended
and notes to the consolidated financial statements, including a summary of significant accounting policies
(Hereinafter referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated
financial position of the Entity as at December 31, 2022 and December 31, 2021, and its consolidated financial
performance and its consolidated cash flows for the years then ended in accordance with International Financial
Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the “Auditor’s Responsibilities for the Audit
of the Financial Statements” section of our auditor’s report.
We are independent of the Entity in accordance with the ethical requirements that are relevant to our audit of
the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with
these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
KPMG LLP, an Ontario limited liability partnership and member firm of the KPMG global
organization of independent member firms affiliated with KPMG International Limited, a private
English company limited by guarantee. KPMG Canada provides services to KPMG LLP.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of
the financial statements for the year ended December 31, 2022. These matters were addressed in the context
of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a
separate opinion on these matters.
We have determined the matter described below to be the key audit matter to be communicated in our auditor’s
report.
Assessment of indicators of impairment for the Canadian and United States (“US”) cash
generating units (“CGU” or “CGUs”)
Description of the matter
We draw attention to Note 2(d), Note 3(h)(ii) and Note 6(a) to the financial statements. The carrying amounts of
the Entity’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting
date to determine whether there is any indication of impairment. The assessment of indicators of impairment is
based on management’s judgment of whether there are internal and external factors that would indicate that a
cash generating unit and specifically the non-financial assets within the CGU, are impaired. These factors
include revenue and earnings before interest, taxes, depreciation and amortization (”EBITDA”) forecasts,
expected industry activity levels, commodity price developments and market capitalization. As at December 31,
2022, management determined no indicators of impairment existed for the Canadian and US CGUs.
Why the matter is a key audit matter
We identified the assessment of indicators of impairment for the Canadian and US CGUs as a key audit matter.
Significant auditor judgement was required in evaluating the internal and external factors included in the Entity’s
indicators of impairment analysis.
How the matter was addressed in the audit
The primary procedures we performed to address this key audit matter included the following:
We compared the Entity’s 2022 actual revenues and EBITDA for the Canadian and US CGUs to the 2022
budgeted revenues and EBITDA to assess the Entity’s ability to accurately forecast.
We evaluated the Entity’s assessment of impairment indicators by:
•
•
•
comparing internal and external factors, including expected industry activity levels and commodity price
developments analyzed by the Entity to relevant external market data or internal source documents
comparing the Entity’s budgeted 2023 revenue and EBITDA for the Canadian and US CGUs to 2022 actual
revenue and EBITDA and considering the impact of changes in conditions and events affecting the Canadian
and US CGUs
evaluating changes in market capitalization over the year and its impact on the Entity’s impairment indicator
analysis.
-61-
Other Information
Management is responsible for the other information. Other information comprises:
•
•
the information included in Management’s Discussion and Analysis filed with the relevant Canadian
Securities Commissions
the information, other than the financial statements and the auditor’s report thereon, included in a document
likely to be entitled “2022 Annual Report”
Our opinion on the financial statements does not cover the other information and we do not and will not express
any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information
identified above and, in doing so, consider whether the other information is materially inconsistent with the
financial statements or our knowledge obtained in the audit and remain alert for indications that the other
information appears to be materially misstated.
We obtained the information included in Management’s Discussion and Analysis filed with the relevant Canadian
Securities Commissions as at the date of this auditor’s report. If, based on the work we have performed on this
other information, we conclude that there is a material misstatement of this other information, we are required
to report that fact in the auditor’s report.
We have nothing to report in this regard.
The information, other than the financial statements and the auditor’s report thereon, included in a document
likely to be entitled “2022 Annual Report” is expected to be made available to us after the date of this auditor’s
report. If, based on the work we will perform on this other information, we conclude that there is a material
misstatement of this other information, we are required to report that fact to those charged with governance.
Responsibilities of Management and Those Charged with Governance for the Financial
Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance
with IFRS as issued by the IASB, and for such internal control as management determines is necessary to
enable the preparation of financial statements that are free from material misstatement, whether due to fraud or
error.
In preparing the financial statements, management is responsible for assessing the Entity’s ability to continue
as a going concern, disclosing as applicable, matters related to going concern and using the going concern
basis of accounting unless management either intends to liquidate the Entity or to cease operations, or has no
realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Entity’s financial reporting process.
-62-
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our
opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance
with Canadian generally accepted auditing standards will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they
could reasonably be expected to influence the economic decisions of users taken on the basis of the financial
statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional
judgment and maintain professional skepticism throughout the audit.
We also:
•
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or
error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is
sufficient and appropriate to provide a basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from
error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of
internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Entity's internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates
and related disclosures made by management.
• Conclude on the appropriateness of management's use of the going concern basis of accounting and, based
on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that
may cast significant doubt on the Entity's ability to continue as a going concern. If we conclude that a material
uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the
financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based
on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions
may cause the Entity to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements, including the
disclosures, and whether the financial statements represent the underlying transactions and events in a
manner that achieves fair presentation.
• Communicate with those charged with governance regarding, among other matters, the planned scope and
timing of the audit and significant audit findings, including any significant deficiencies in internal control that
we identify during our audit.
-63-
• Provide those charged with governance with a statement that we have complied with relevant ethical
requirements regarding independence, and communicate with them all relationships and other matters that
may reasonably be thought to bear on our independence, and where applicable, related safeguards.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business
activities within the group Entity to express an opinion on the financial statements. We are responsible for
the direction, supervision and performance of the group audit. We remain solely responsible for our audit
opinion.
• Determine, from the matters communicated with those charged with governance, those matters that were
of most significance in the audit of the financial statements of the current period and are therefore the key
audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public
disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should
not be communicated in our auditor’s report because the adverse consequences of doing so would
reasonably be expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this auditor’s report is Richard John Mussenden.
Chartered Professional Accountants
Calgary, Canada
February 28, 2023
-64-
Consolidated Statements of Financial Position
Consolidated Financial Statements & Notes
ASSETS
Current assets:
Cash and cash equivalents
Trade and other receivables (Note 18a)
Inventories (Note 5)
Prepaid expenses
Current tax assets
Total current assets
Non-current assets:
Drilling and other long-term assets (Note 6)
Right-of-use asset (Note 20)
Intangible assets (Note 7)
Investments (Note 8)
Other long-term assets
Deferred tax assets (Note 10)
Total non-current assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade and other payables
Dividends payable (Note 11d)
Lease liability (Note 20)
Current tax liabilities
Total current liabilities
Non-current liabilities:
Lease liability (Note 20)
Loans and borrowings (Note 9)
Deferred tax liability (Note 10)
Other (Note 12c)
Total non-current liabilities
Equity:
Share capital (Note 11a)
Contributed surplus
Deficit
Accumulated other comprehensive income
Total equity
Total liabilities and equity
See accompanying notes to consolidated financial statements.
Commitments (Note 6c)
Approved by the Board of Directors
(Signed) John Hooks
John Hooks – Chairperson of the Board
December 31, 2022
December 31, 2021
(Adjusted – Note 12c)
$
18,247,376
125,836,273
63,119,489
3,024,166
-
$
24,828,830
76,478,093
36,691,141
2,814,272
346,554
210,227,304
141,158,890
115,945,060
29,336,163
15,668,180
3,000,500
993,112
53,869
164,996,884
76,363,001
25,708,177
16,137,024
3,000,500
-
126,133
121,334,835
$
375,224,188
$
262,493,725
$
104,688,901
$
77,571,887
7,636,085
2,906,708
656,499
115,888,193
36,768,003
22,731,389
18,496,619
4,461,531
82,457,542
251,344,809
7,044,317
(112,120,484)
30,609,811
176,878,453
2,482,060
3,232,503
-
83,286,450
32,638,819
-
9,346,426
2,789,786
44,775,031
235,463,414
9,462,091
(121,721,790)
11,228,529
134,432,244
$
375,224,188
$
262,493,725
(Signed) Terry Freeman
Terry Freeman – Chair of the Audit Committee
-65-
PHX Energy Services Corp. | 2022 Annual Report
Consolidated Statements of Comprehensive Earnings
Years ended December 31,
Revenue (Note 16)
Direct costs (Note 13)
Gross profit
Expenses:
Selling, general and administrative expenses (Note 13)
Research and development expenses (Note 13)
Finance expense
Finance expense lease liability (Note 20)
Other income (Note 14)
Earnings from continuing operations before income taxes
Provision for (recovery of) income taxes (Note 15)
Current
Deferred
Earnings from continuing operations
Discontinued operations (Note 4)
Net loss from discontinued operations, net of taxes
Net earnings
Other comprehensive income (loss)
Foreign currency translation
Reclassification of foreign currency translation loss on disposition (Note 4)
Total comprehensive earnings
Earnings per share – basic (Note 11c)
Continuing operations
Discontinued operations
Net earnings
Earnings per share – diluted (Note 11c)
Continuing operations
Discontinued operations
Net earnings
See accompanying notes to consolidated financial statements.
2022
$
535,744,879
$
426,106,571
109,638,308
68,901,204
3,722,513
1,360,429
2,031,549
(19,730,307)
56,285,388
53,352,920
759,822
8,281,708
9,041,530
44,311,390
(Re-presented – Note 4)
2021
339,946,067
270,636,934
69,309,133
44,982,155
2,773,559
494,287
2,125,017
(7,942,246)
42,432,772
26,876,361
(235,944)
3,794,631
3,558,687
23,317,674
(14,558,032)
29,753,358
(593,039)
22,724,635
8,820,328
10,560,954
(68,458)
-
49,134,640
$
22,656,177
0.88
(0.29)
0.59
$
$
$
0.87
$
(0.29) $
0.58
$
0.47
(0.01)
0.46
0.45
(0.01)
0.44
$
$
$
$
$
$
$
-66-
Consolidated Statements of Changes in Equity
Consolidated Financial Statements & Notes
Year Ended
Share Capital
December 31, 2022
Number
Amount ($)
Contributed Surplus
Accumulated Other
Comprehensive
Income
Deficit
Total Equity
Balance, December 31, 2021
47,978,662
$
235,463,414
$
9,462,091
$
11,228,529
$
(121,721,790)
$
134,432,244
Issuance of share capital on
exercise of options
(Note 11a)
Issuance of share capital from
trust on settlement of
retention awards (Note
11a)
Common shares purchased
and held in trust
(Note 11a)
Share-based payments
Fair value of options
exercised
Net earnings
Foreign currency translation,
net of tax
Reclassification of foreign
currency translation loss
on disposition (Note 4)
Dividends
1,266,038
2,503,685
2,277,875
14,618,748
(626,400)
(4,110,000)
-
-
-
-
-
-
-
-
-
-
451,188
2,868,962
(2,868,962)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
8,820,328
10,560,954
-
-
-
-
-
2,503,685
14,618,748
(4,110,000)
451,188
-
29,753,358
29,753,358
-
-
8,820,328
10,560,954
-
(20,152,052)
(20,152,052)
Balance, December 31, 2022
50,896,175
$
251,344,809
$
7,044,317
$
30,609,811
$
(112,120,484)
$
176,878,453
Year Ended
December 31, 2021
Share Capital
Number
Amount ($)
Contributed Surplus
Accumulated Other
Comprehensive
Income
Deficit
Total Equity
Balance, December 31, 2020
50,625,920
$
247,543,263
$
10,131,786
$
11,296,987
$
(136,939,398)
$
132,032,638
Issuance of share capital on
exercise of options
(Note 11a)
Common shares repurchased
and cancelled (Note 11a)
Common shares purchased
and held in trust (Note 11a)
Share-based payments
Fair value of options exercised
Net earnings
Foreign currency translation,
net of tax
Dividends
976,067
2,346,453
(1,960,788)
(7,979,601)
(1,662,537)
(7,500,000)
-
-
-
-
-
-
-
-
-
383,604
1,053,299
(1,053,299)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,346,453
(7,979,601)
(7,500,000)
383,604
-
22,724,635
22,724,635
(68,458)
-
(68,458)
-
(7,507,027)
(7,507,027)
Balance, December 31, 2021
47,978,662
$
235,463,414
$
9,462,091
$
11,228,529
$
(121,721,790)
$
134,432,244
See accompanying notes to consolidated financial statements.
-67-
PHX Energy Services Corp. | 2022 Annual Report
Consolidated Statements of Cash Flows
Years ended December 31,
Cash flows from operating activities:
Earnings from continuing operations
Adjustments for:
Depreciation and amortization (Note 13)
Depreciation and amortization right-of-use asset (Note 13)
Provision for income taxes (Note 15)
Unrealized foreign exchange loss
Net gain on disposition of drilling equipment (Note 14)
Equity-settled share-based payments (Note 12a)
Finance expense
Recovery of bad debts (Note 14)
Provision for inventory obsolescence (Note 5 and Note 13)
Interest paid
Interest paid on lease liabilities
Income taxes received
Change in non-cash working capital (Note 17)
Continuing operations
Discontinued operations (Note 4)
Net cash from operating activities
Cash flows from investing activities:
Proceeds on disposition of drilling equipment
Acquisition of drilling and other equipment (Note 6b)
Acquisition of intangible assets (Note 7)
Acquisition of equity investment (Note 8)
Change in non-cash working capital (Note 17)
Continuing operations
Discontinued operations (Note 4)
Net cash used in investing activities
Cash flows from financing activities:
Proceeds on loans and borrowings
Proceeds from exercise of options
Dividends paid to shareholders
Purchase of shares held in trust (Note 11a)
Payments of lease liability
Repurchase of shares under the NCIB (Note 11)
Continuing operations
Discontinued operations
Net cash from (used in) financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of year
Effect of movements in exchange rates on cash held
Cash and cash equivalents, end of year
See accompanying notes to consolidated financial statements.
$
-68-
2022
(Re-presented – Note 4)
2021
$
44,311,390
$
23,317,674
32,118,506
3,235,024
9,041,530
169,308
25,860,400
3,336,282
3,558,687
253,071
(19,491,747)
(7,745,851)
451,188
1,360,429
(13,213)
1,299,155
(841,288)
(2,031,549)
231,812
(31,502,843)
38,337,702
(1,254,859)
37,082,843
27,458,977
(73,525,079)
(1,261,372)
-
7,349
(47,320,125)
(68,068)
(47,388,193)
22,731,389
2,503,685
(15,147,530)
(4,110,000)
(3,271,452)
-
2,706,092
-
2,706,092
(7,599,258)
24,828,830
1,017,804
18,247,376
$
383,604
494,287
(280,612)
2,033,144
(195,672)
(2,125,017)
109,455
(3,451,337)
45,548,115
(95,412)
45,452,703
12,340,237
(35,281,303)
(1,852,731)
(3,000,500)
4,164,905
(23,629,392)
163
(23,629,229)
-
2,346,453
(6,290,612)
(7,500,000)
(3,294,608)
(7,979,601)
(22,718,368)
-
(22,718,368)
(894,894)
25,745,911
(22,187)
24,828,830
PHX Energy Services Corp. | 2022 Annual Report
Notes to the Consolidated Financial Statements
For the years ended December 31, 2022 and 2021
In Canadian dollars
1. Reporting Entity
PHX Energy Services Corp. (“PHX Energy” or the “Corporation”) is a publicly-traded Corporation listed on the Toronto Stock
Exchange (“TSX”) under the symbol “PHX”. The Corporation’s registered office is at Suite 1600, 215 – 9th Avenue SW
Calgary, Alberta, Canada
The Corporation, through its subsidiaries (see Note 22), provides horizontal and directional drilling services to oil and
natural gas exploration and development companies in Canada, United States, Albania and the Middle East regions. The
Middle East region operates through an arrangement with National Energy Services Reunited Corp. The Corporation also
develops and manufactures technologies that are made available for internal operational use.
The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries. The
Corporation has presented its operations in Russia as a discontinued operation (see Note 4).
2. Basis of Preparation
a) Statement of Compliance
The consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards (“IFRS”) as issued by the International Accounting Standards Board. Details of the Corporation’s
accounting policies, including changes during the year, are included in Note 3.
The consolidated financial statements were authorized for issue by the Board of Directors (the “Board”) on February
28, 2023.
b) Basis of Measurement
The consolidated financial statements have been prepared on a going concern basis using the historical cost basis
except for liabilities for cash-settled share-based payment arrangements and investments, which are measured at
fair value.
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PHX Energy Services Corp. | 2022 Annual Report
c) Functional and Presentation Currency
These consolidated financial statements are presented in Canadian dollars (“CAD”), which is the Corporation’s
functional currency.
d) Use of Estimates
The preparation of the consolidated financial statements in conformity with IFRS requires management to make
estimates and assumptions that affect the application of accounting policies and the reported amounts of assets,
liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are
recognized in the period in which the estimates are revised and in any future periods affected.
Assumptions and estimation uncertainties that have a significant risk of material adjustment in the context of these
financial statements include the following:
key assumptions used in the valuation of drilling and other equipment not yet in use;
estimated useful lives of drilling and other equipment and intangible assets;
recognition of deferred tax assets based on estimates of the availability of future taxable profit against
which carry-forward tax losses can be used;
assumptions used in the valuation of investments;
estimates and assumptions used in the valuation of inventory;
estimate used in the valuation of accounts receivable;
valuation of equity-settled and cash-settled share-based payments; and,
key assumptions used in the estimate of leases including valuation of right-of-use assets and lease
liabilities.
i. Climate Change and Environmental, Social, and Governance (“ESG”)
Climate change policy and ESG culture policies are evolving at regional, national and international levels. Political
and economic events may significantly affect the scope and timing of ESG policies and climate change measures.
The International Sustainability Standards Board has issued an IFRS Sustainability Disclosure Standard with the aim
to develop sustainability disclosure standards that are globally consistent, comparable and reliable. In addition, the
Canadian Securities Administrators have issued a proposed National Instrument 51-107 Disclosure of Climate-
related Matters.
The direct or indirect costs of compliance with greenhouse gas-related regulations and ESG directives may have an
adverse effect on the Corporation's and its customer’s business, financial condition, results of operations and
-70-
prospects; however, at this time these costs have not yet been quantified. Significant estimates and judgment
currently made by management which could be significantly impacted by climate and climate-related matters include:
Consolidated Financial Statements & Notes
Recoverability of asset carrying values;
Useful life of assets; and,
Cash flow projections for purpose of impairment tests.
e) Critical Judgments
Significant judgement is required to assess when impairment indicators exist, and impairment testing is required.
The assessment of impairment indicators is based on management’s judgment of whether there are internal and
external factors that would indicate that a cash generating unit ("CGU") and specifically the non-financial assets
within the CGU, are impaired. These factors include revenue and earnings before interest, taxes, depreciation and
amortization (”EBITDA”) forecasts, expected industry activity levels, commodity price developments and market
capitalization. The determination of a CGU is also based on management’s judgment and is an assessment of the
smallest group of assets that generate cash inflows independently of other assets.
3. Significant Accounting Policies
The accounting policies set out below have been applied consistently to all periods presented in these consolidated
financial statements.
a) Basis of Consolidation
i. Business Combinations
Business acquisitions are accounted for using the acquisition method when the acquired set of activities and assets
meets the definition of a business and control is transferred. In determining whether a particular set of activities and
assets is a business, the Corporation assesses whether the set of assets and activities acquired includes, at a
minimum, an input and substantive process and whether the acquired set has the ability to produce outputs.
The Corporation has an option to apply a “concentration test” that permits a simplified assessment of whether an
acquired set of activities and assets is not a business. The optional concentration test is met if substantially all of the
fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable
assets.
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PHX Energy Services Corp. | 2022 Annual Report
The consideration transferred in the acquisition is measured at fair value and excludes amounts related to the
settlement of pre-existing relationships. In a business combination achieved in stages, the acquirer remeasures its
previously held equity interest in the acquiree at its acquisition-date fair value and recognizes the resulting gain or
loss, if any, in profit or loss.
Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration
is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent
changes in the fair value of the contingent consideration are recognized in profit or loss.
ii. Subsidiaries
Subsidiaries are entities controlled by the Corporation. The Corporation 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. The financial statements of subsidiaries are included in the consolidated financial
statements from the date that control commences until the date that control ceases.
iii. Loss of Control
When the Corporation loses control over a subsidiary it derecognizes the assets and liabilities of the subsidiary, and
any other related components of equity. Any resulting gain or loss is recognized in profit or loss. Any interest retained
in the former subsidiary is measured at fair value when control is lost.
iv. Transactions Eliminated on Consolidation
Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group
transactions, are eliminated. Unrealized gains arising from transactions with equity-accounted investees are
eliminated against the investment to the extent of the Corporation’s interest in the investee. Unrealized losses are
eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.
v. Foreign Currency Transactions
Transactions in foreign currencies are translated to the respective functional currencies of the Corporation’s entities
at exchange rates at the dates of the transactions. The methods used to account for assets and liabilities relating to
foreign currency transactions entered into by the Corporation’s entities, and to measure the foreign exchange risk
arising on such transactions, depend upon whether the asset or liability in question is classified as a monetary or
non-monetary item.
Receivables, liabilities and other monetary assets denominated in foreign currencies at the reporting date are
translated at the functional currency spot exchange rate at the statement of financial position date. Exchange
differences that arise between the rate at the transaction date and the one in effect at the payment date or the rate
-72-
Consolidated Financial Statements & Notes
at the statement of financial position date are recognized in the statement of comprehensive earnings as other
income or expense.
Drilling and other equipment, inventories and other non-monetary items purchased in foreign currencies and that are
measured on the basis of historical cost are translated using the exchange rates as at the dates of the initial
transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange
rates at the date when the fair value is determined.
vi. Foreign Operations
When entities, which prepare their financial statements in a functional currency other than Canadian dollars, are
recognized in the consolidated financial statements, the income and expenses are translated at the monthly average
exchange rates. The assets and liabilities of foreign operations are translated to Canadian dollars at the rate of
exchange prevailing at the statement of financial position date.
Foreign currency differences are recognized in other comprehensive earnings in the accumulated other
comprehensive income account. The exchange differences arising on the translation to the Corporation’s
presentation currency are recognized directly in the cumulative translation reserve as a separate component of
equity. When a foreign operation is disposed of in its entirety or partially such that control, significant influence or
joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified
to profit or loss as part of the gain or loss on disposal.
When the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor
likely in the foreseeable future, foreign exchange gains and losses arising from such a monetary item are considered
to form part of a net investment in a foreign operation and are recognized in other comprehensive earnings, and are
presented within equity in accumulated other comprehensive income.
b) Financial Instruments
i. Financial Assets at Fair Value Through Profit and Loss (“FVTPL”)
These assets are subsequently measured at fair value. Net gains and losses, including any interest or dividend
income, are recognized in profit or loss.
ii. Financial Assets at Fair Value Through Other Comprehensive Income (“FVOCI”)
These assets are subsequently measured at fair value with the net gains or losses recognized in other
comprehensive income (“OCI”). Interest and dividend income resulting from financial assets measured at FVOCI
are recognized in the Corporation’s net earnings.
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PHX Energy Services Corp. | 2022 Annual Report
iii. Financial Assets at Amortized Cost
These assets are subsequently measured at amortized cost using the effective interest method. The amortized cost
is reduced by impairment losses. Interest income, foreign exchange gains and losses and impairment are recognized
in profit or loss. Any gain or loss on derecognition is recognized in profit or loss.
iv. Non-derivative Financial Assets
The carrying amount of the Corporation’s financial assets includes cash and cash equivalents, trade and other
receivables, and investments. A lifetime expected credit loss (“ECL”) is recognized on financial assets when there is
objective evidence of a significant increase in credit risk as a result of one or more events that occurred after the
initial recognition of the asset.
The Corporation’s short-term deposits with original maturities of three months or less are considered to be cash
equivalents and are recorded at cost, which approximates fair value.
The Corporation initially recognizes trade and other receivables on the date that they originate. All other financial
assets (including assets designated at fair value through profit or loss) are recognized initially on the trade date at
which the Corporation becomes a party to the contractual provisions of the instrument.
Financial assets at amortized cost consist of cash and cash equivalents and trade and other receivables. Trade and
other receivables are recorded at its original invoice value less any amounts estimated to be uncollectible plus any
directly attributable transaction costs.
Financial assets at FVOCI consist of equity investments in a company (see Note 8). On initial recognition of an equity
investment that is not held-for-trading, the Corporation may irrevocably elect to present subsequent changes in the
investment’s fair value in OCI. There is no subsequent reclassification of fair value changes to earnings following the
derecognition of the investment. Interest and dividends that reflect a return on investment continue to be recognized
in net earnings. This election is made on an investment-by-investment basis.
v. Non-derivative Financial Liabilities
Financial liabilities are recognized initially on the trade date at which the Corporation becomes a party to the
contractual provisions of the instrument. Such financial liabilities are recognized initially at fair value plus any directly
attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortized
cost using the effective interest rate method. Transaction costs related to the issuance of any long-term debt are
netted against the carrying value of the associated long-term debt and amortized as part of financing costs over the
life of the debt using the effective interest rate method. The Corporation derecognizes a financial liability when its
contractual obligations are discharged, cancelled or expire.
-74-
Consolidated Financial Statements & Notes
The Corporation has the following non-derivative financial liabilities: trade and other payables, dividends payable,
and loans and borrowings.
Financial assets and liabilities are offset and the net amount presented in the statement of financial position when,
and only when, the Corporation 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.
c) Share Capital
i. Common Shares
Common shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and
share options are recognized as a deduction from equity, net of any tax effects.
ii. Repurchase and Reissue of Common Shares (Treasury Shares)
When shares recognized as equity are repurchased, the amount of the consideration paid, which includes directly
attributable costs, net of any tax effects, is recognized as a deduction from equity. Repurchased shares are classified
as treasury shares and are presented in the treasury share reserve. When treasury shares are sold or reissued
subsequently, the amount received is recognized as an increase in equity and the resulting surplus or deficit on the
transaction is presented within contributed surplus.
d) Drilling and Other Equipment
i. Recognition and Measurement
Items of drilling and other equipment are measured at cost less accumulated depreciation and accumulated
impairment losses.
Cost is comprised of the acquisition price, costs directly attributable to the acquisition and preparation costs of the
asset until the time when it is ready to be put into operation. Where material, borrowing costs directly attributable to
the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to be
ready for use) are included in capitalized cost. Borrowing costs have not been material to the cost of assets for any
period presented. The cost of self-constructed assets includes the cost of materials and any other costs directly
attributable to bringing the assets to a working condition for their intended use. No borrowing costs were capitalized
in 2022 and 2021.
Drilling and other equipment also includes parts and raw materials awaiting assembly. These assets are recorded
at cost and no depreciation is taken until the asset is completed and available for intended use.
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PHX Energy Services Corp. | 2022 Annual Report
When parts of an item of drilling and other equipment have different useful lives, they are accounted for as separate
items (major components) of drilling and other equipment.
Gains and losses on disposal of an item of drilling and other equipment are determined by comparing the proceeds
from disposal with the carrying amount of drilling and other equipment, and are recognized net within other income
in the Corporation’s profit or loss.
ii. Subsequent Costs
The cost of replacing a part of an item of drilling and other equipment is recognized in the carrying amount of the
item if it is probable that the future economic benefits embodied within the part will flow to the Corporation, and its
cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-
day servicing of drilling and other equipment (repair and maintenance) are recognized in the Corporation’s profit or
loss as incurred.
iii. Depreciation
Depreciation expense is recognized in profit or loss on a straight-line basis over the estimated useful lives of drilling
and other equipment and is calculated using the depreciable amount, which is the cost of an asset, or other amount
substituted for cost, less its residual value.
Significant components of individual assets are assessed, and if a component has a useful life that is different from
the remainder of that asset, then that component is depreciated separately.
The estimated useful lives for the current period are as follows:
Directional drilling equipment
Office and computer equipment
Machinery and equipment
Vehicles
2 to 8 years straight-line
3 to 5 years straight-line
5 years straight-line
5 years straight-line
Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted if
appropriate.
e) Intangible Assets and Goodwill
i. Goodwill
Goodwill arising on the acquisition of subsidiaries is measured at cost less accumulated impairment losses.
-76-
Consolidated Financial Statements & Notes
ii. Research and Development Costs
Expenditure on research activities undertaken with the prospect of gaining new scientific or technical knowledge and
understanding is recognized in profit or loss as incurred.
Development activities involve a plan or design for the production of new or substantially improved product and
process. Development expenditure is capitalized only if development costs can be measured reliably, the product or
process is technically and commercially feasible, future economic benefits are probable, and the Corporation intends
to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalized
includes the cost of materials, direct labour, overhead costs that are directly attributable to preparing the asset for its
intended use, and borrowing costs. Other development expenditures are recognized in profit or loss as incurred.
Capitalized development expenditure is measured at cost less accumulated amortization and accumulated
impairment losses.
iii. Other Intangible Assets
Other intangible assets that are acquired by the Corporation and have finite useful lives are measured at cost less
accumulated amortization and any accumulated impairment losses.
Other intangible assets include licenses which give the Corporation rights to use in any manner certain equipment
acquired from a third party. These licenses are transferrable to other equipment should it be lost downhole, retired,
or sold. The useful life of these licenses is estimated to be the same as the estimated useful life of the associated
technologies.
iv. Subsequent Expenditures
Subsequent expenditures are capitalized only when they increase the future economic benefits embodied in the
specific asset to which they relate. All other expenditures, including expenditures on internally generated goodwill,
are recognized in profit or loss as incurred.
v. Amortization
Amortization is calculated to write-off the costs of intangible assets less their estimated residual values using the
straight-line method over their estimated useful lives, and is recognized in profit or loss.
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PHX Energy Services Corp. | 2022 Annual Report
The estimated useful life is as follows:
Licenses
10 to 15 years
Amortization methods, useful lives and residual values are reviewed at each reporting date and adjusted if
appropriate.
f) Assets Held for Sale
Non-current assets, or disposal groups comprising assets and liabilities, are classified as held for sale if it is highly
probable that they will be recovered primarily through sale rather than through continuing use.
Such assets, or disposal groups, are generally measured at the lower of their carrying amount and fair value less
costs to sell. Any impairment loss on a disposal group is allocated first to goodwill, and then to the remaining assets
and liabilities on a pro rata basis, except that no loss is allocated to inventories, financial assets, and deferred tax
assets, which continue to be measured in accordance with the Corporation’s other accounting policies. Impairment
losses on initial classification as held for sale and subsequent gains and losses on remeasurement are recognized
in profit or loss.
Once classified as held for sale, intangible assets and property, plant, and equipment are no longer depreciated.
On reclassification from held for sale to held for use, a non-current asset is remeasured at the lower of its recoverable
amount and the carrying amount that would have been recognized had the asset never been classified as held for
sale. As such, within 2021 upon reclassification of the long-lived assets of Phoenix TSR from held for sale to held for
use, the Corporation recognized a loss on remeasurement of $1.2 million (see Note 4).
g) Inventories
Inventories are measured at the lower of cost and net realizable value. The cost of inventories is based on the first-
in first-out method, and includes expenditures incurred in acquiring the inventories, production or conversion costs
and other costs incurred in bringing them to their existing location and condition.
Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of
completion and selling expenses.
-78-
Consolidated Financial Statements & Notes
h) Impairment
i. Financial Assets
A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine
whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates
that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect
on the estimated future cash flows of that asset that can be estimated reliably.
The Corporation considers evidence of impairment for receivables at a specific asset level. When determining
whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating
ECL, the Corporation considers reasonable and supportable information that is relevant and available without undue
cost or effort. This includes both quantitative and qualitative information and analysis based on the Corporation’s
historical experience, informed credit assessment, and forward-looking information. The Corporation has elected to
measure loss allowances for trade and other receivables at an amount equal to the ECL over the expected life of a
financial instrument.
An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between
its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original
effective interest rate. Losses are recognized in profit or loss and are reflected in an allowance account against
receivables. Interest on the impaired asset continues to be recognized through the unwinding of the discount. When
a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed
through profit or loss.
ii. Non-Financial Assets
The carrying amounts of the Corporation’s non-financial assets, other than inventories and deferred tax assets are
reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication
exists, then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite
useful lives or that are not yet available for use, the recoverable amount is estimated each year at the same time.
The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. In
assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate
that reflects current market assessments of the time value of money and the risks specific to the asset. For the
purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group
of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other
assets or groups of assets. For the purposes of goodwill impairment testing, goodwill acquired in a business
combination is allocated to the group of CGUs that is expected to benefit from the synergies of the combination. This
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PHX Energy Services Corp. | 2022 Annual Report
allocation is subject to an operating segment ceiling test and reflects the lowest level at which that goodwill is
monitored for internal reporting purposes.
The Corporation’s corporate assets do not generate separate cash inflows. If there is an indication that a corporate
asset may be impaired, then the recoverable amount is determined for the CGU to which the corporate asset belongs.
Where the carrying amount of an asset or CGU exceeds its recoverable amount, the non-financial assets within the
CGU are considered impaired and its carrying amount is reduced to its recoverable amount. Impairment losses
recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units,
and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized
in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer
exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable
amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the
carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had
been recognized.
iii. Employee Benefits
Short-term employee benefits
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related
service is provided.
A liability is recognized for the amount expected to be paid under short-term cash bonus plans if the Corporation has
a present legal or constructive obligation to pay this amount as a result of past service provided by the employee,
and the obligation can be estimated reliably.
Share-based payment transactions
The grant date fair value of share-based payment awards granted to employees is recognized as an employee
expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled
to the awards (vesting period). The amount recognized as an expense is adjusted to reflect the number of awards
for which the related service and non-market vesting conditions are expected to be met, such that the amount
ultimately recognized as an expense is based on the number of awards that do meet the related service and non-
market performance conditions at the vesting date.
The fair value of the amount payable to employees in respect of Retention Awards, which may be settled in cash or
equity, is recognized as an expense with a corresponding increase in liabilities, over the period that the employees
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unconditionally become entitled to payment. The liability is remeasured at each reporting date and at settlement
date. Any changes in the fair value of the liability are recognized as personnel expense in profit or loss.
Consolidated Financial Statements & Notes
i) Provisions
A provision is recognized if, as a result of a past event, the Corporation has a present legal or constructive obligation
that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the
obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects
current market assessments of the time value of money and the risks specific to the liability. The unwinding of the
discount is recognized as finance cost.
j) Revenue
Revenue is recognized when a client obtains control of the goods or services. Determining the timing of the transfer
of control – at a point in time or over time – requires judgement. Revenue is measured based on the consideration
specified in the contract with a client and excludes amounts collected on behalf of third parties. The Corporation
recognizes revenue when it transfers control over a product or service to a client. The Corporation’s services are
sold based upon bid acceptance or contracts with clients that includes fixed or determinable prices based upon daily,
hourly, or job rates.
The Corporation primarily generates drilling services revenue whereby the client is charged a flat day rate for each
day the rig requires directional drilling services. The day rate includes personnel assistance as well as use of
equipment. The Corporation recognizes revenue daily based on the daily drilling rate. The Corporation’s performance
obligation is the bundling of its services relating to directional drilling activities, which distinctly benefit the client each
day of active drilling. The Corporation recognizes this benefit to revenue daily, over a period of time, as services
have been provided. An invoice is sent to the client upon completion of the well, also revenues are accrued based
on daily services provided at period end. Clients are expected to pay the Corporation 30 days after the invoice has
been received.
Instances where there are equipment failures or delays, a sales credit will be issued upon review with the client. The
Corporation will accrue a sales credit when it is highly probable, and the magnitude of the reversal is significant.
k) Government Grants
Government grants received are recognized when there is reasonable assurance that the Corporation will comply
with the relevant conditions and the grant will be received. Grants are recognized in profit or loss on a systematic
basis as the entity recognizes as expenses the costs that the grants are intended to compensate. A grant that is
compensation for expenses or losses already incurred, or for which there are no future related costs, is recognized
in profit or loss in the period in which it becomes receivable.
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PHX Energy Services Corp. | 2022 Annual Report
For the year ended December 31, 2022, the Corporation recognized government grants of $0.3 million relating to job
and innovation grant programs. For the year ended December 31, 2021, the Corporation recognized government
grants of $3.6 million relating to the Canadian Emergency Wage Subsidy and Canadian Emergency Rent Subsidy
programs, and USD $4.1 million relating to the Coronavirus Aid, Relief, and Economic Security program.
l) Leases
i. Definition of a Lease
The Corporation determines whether an arrangement or an agreement contains a lease in accordance to IFRS 16
Leases. Under IFRS 16, a contract is, or contains, a lease if the contract conveys a right to control the use of an
identified asset for a period of time in exchange for consideration.
At inception of a contract, the Corporation assesses whether a contract is, or contains, a lease. To assess whether
a contract conveys the right to control the use of an identified asset, the Corporation assesses whether:
The contract involves the use of an identified asset, which may be specifically or implicitly stated, and the
identified asset should be physically distinct or represents substantially all of the capacity of the asset. If
the supplier has the substantive right to substitute the asset throughout the term of the contract, then the
asset is not identified;
The Corporation has the right to obtain substantially all of the economic benefits from use of the asset
throughout the contract; and
The Corporation has the right to direct the use of the identified asset throughout the contract. The
Corporation has this right to direct how and for what purpose the asset is used. In addition, the Corporation
has the right to operate the asset without the lessor or supplier having the right to change those operation
instructions, or the Corporation designed the asset in a way that predetermines how and for what purpose
it will be used.
At inception or on reassessment of a contract that contains a lease component, the Corporation allocates the
consideration in the contract to each lease and non-lease component on the basis of their relative stand-alone prices.
However, for leases of properties in which it is a lessee, the Corporation has elected not to separate non-lease
components and will instead account for the lease and non-lease components as a single lease component.
ii. As a Lessee
The Corporation recognizes right-of-use assets and lease liabilities at the lease commencement date. The right-of-
use assets are initially measured at cost, which comprises the initial amount of the lease liabilities adjusted for any
lease payments made at or before the commencement date, plus any initial direct costs incurred less any lease
incentives received.
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Consolidated Financial Statements & Notes
The right-of-use assets are depreciated using the straight-line method from the commencement date to the end of
the lease term, unless the lease transfers ownership of the underlying asset to the Corporation by the end of the
lease term or the cost of the right-of-use asset reflects that the Corporation will exercise a purchase option. In that
case the right-of-use asset will be depreciated over the useful life of the underlying asset, which is determined on
the same basis as those of drilling and other equipment.
The lease liabilities are initially measured at the present value of the lease payments that are not paid at the
commencement date, discounted using the Corporation’s incremental borrowing rate. The Corporation determines
its incremental borrowing rate by obtaining interest rates from external financing sources and adjusting to reflect the
terms of the lease and type of the asset leased.
Lease payments included in the measurement of the lease liabilities comprise the following:
Fixed payments, including in-substance fixed payments;
Amounts expected to be payable under a residual value guarantee if applicable; and,
The exercise price under a purchase option that the Corporation is reasonably certain to exercise, lease
payments in an optional renewal period if the Corporation is reasonably certain to exercise and penalties
for early termination of a lease unless the Corporation is reasonably certain not to terminate early.
The lease liabilities are measured at amortized cost using the effective interest method. It is remeasured when there
is a change in future lease payments arising from a change in discount rate or change in estimate and assumptions
related to the leased asset. When a lease liability is remeasured a corresponding adjustment is made to the carrying
amount of the right-of-use asset or is recorded in profit or loss if the carrying amount of the right-of-use asset has
been reduced to zero.
The Corporation has elected to apply recognition exemptions to right-of-use assets and lease liabilities for some
leases of low-value assets (e.g. office equipment), as well as for short-term leases or leases with terms less than
twelve months or entered into on a month-to-month basis. The Corporation recognizes the lease payments
associated with these leases as an expense on a straight-line basis over the lease term.
iii. As a Lessor
The Corporation accounts for its interest in the head lease and the sub-lease separately. The Corporation assesses
the lease classification of a sub-lease with reference to the right-of-use assets arising from the head lease, not with
reference to the underlying asset. If a head lease is a short-term lease then it is classifies the sub-lease an operating
lease and lease payments received are recognized as operating income on a straight-line basis over the lease term.
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PHX Energy Services Corp. | 2022 Annual Report
m) Finance Income and Expense
Finance income is comprised of interest income on funds invested. Interest income is recognized as it accrues in the
Corporation’s profit or loss, using the effective interest method.
Finance expense comprises interest expense on borrowings. Borrowing costs that are not directly attributable to the
acquisition, construction or production of a qualifying asset are recognized in the Corporation’s profit or loss using
the effective interest method.
n) Income Tax
Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss
except to the extent that it relates to a business combination or items recognized directly in equity or in other
comprehensive income.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates
enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous
years.
Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the
following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business
combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in
subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable
future. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition
of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when
they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax
assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and
they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities,
but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized
simultaneously.
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the
extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax
assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related
tax benefit will be realized.
The criteria for recognizing deferred tax assets arising from unused tax losses is the same as the criteria arising from
temporary differences between the carrying amounts of asset and liabilities for tax purposes. However, the
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Corporation under the circumstances of having unused tax losses due to a history of recent losses recognizes
deferred tax assets to the extent there is convincing other evidence that sufficient taxable income will be available
Consolidated Financial Statements & Notes
against the unused losses.
Tax exposures
In determining the amount of current and deferred tax, the Corporation takes into account the impact of uncertain tax
positions and whether additional taxes and interest may be due. This assessment relies on estimates and
assumptions and may involve a series of judgements about future events. New information may become available
that causes the Corporation to change its judgement regarding the adequacy of existing tax liabilities; such changes
to tax liabilities will impact tax expense in the period that such a determination is made.
o) Earnings per Share
The Corporation presents basic and diluted earnings per share data for its ordinary shares. Basic per share amounts
are calculated by dividing the earnings or loss attributable to ordinary shareholders of the Corporation by the
weighted-average number of ordinary shares outstanding during the period, adjusted for own shares held. Diluted
per share amounts are calculated by adjusting the earnings or loss attributable to ordinary shareholders and the
weighted-average number of common shares outstanding, adjusted for own shares held, for the effects of all dilutive
potential ordinary shares, which comprise share options, retention awards, and performance awards granted to
employees and directors.
p) Segment Reporting
An operating segment is a component of the Corporation that engages in business activities from which it may earn
revenues and incur expenses, including revenues and expenses that relate to transactions with any of the
Corporation’s other components. All operating segments’ operating results are reviewed regularly by the
Corporation’s Chief Executive Officer (“CEO”) to make decisions about resources to be allocated to the segment and
assess its performance, and for which discrete financial information is available.
Segment results that are reported to the CEO include items directly attributable to a segment as well as those that
can be allocated on a reasonable basis. Unallocated items comprise mainly of corporate assets (primarily the
Corporation’s headquarters), head office expenses, and income tax assets and liabilities.
Segment capital expenditure is the total cost incurred during the period to acquire drilling and other equipment, and
intangible assets other than goodwill.
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PHX Energy Services Corp. | 2022 Annual Report
q) Discontinued Operations
A discontinued operation is a component of the Corporation’s business, the operations and cash flows of which can
be clearly distinguished from the rest of the Corporation and which:
represents a separate major line of business or geographic area of operations;
is part of a single coordinated plan to dispose of a separate major line of business or geographic area of
operations; or
is a subsidiary acquired exclusively with a view to resale.
Classification as a discontinued operation occurs at the earlier of the disposal or when the operation meets the
criteria to be classified as held-for-sale. When an operation is classified as a discontinued operation, the comparative
statement of profit or loss and OCI is re-presented as if the operation had been discontinued from the start of the
comparative year.
i.
Re-presentation of Comparatives
On June 30, 2022, the Corporation completed the sale of its Russian division. The transaction involved the sale of
all shares of Phoenix TSR LLC (“Phenix TSR”), a legally wholly-owned subsidiary of PHX Energy that held the entire
Russian drilling operations. Accordingly, certain comparative figures of the consolidated financial statements for the
year ended December 31, 2021 have been re-presented to present operations of Phoenix TSR as a discontinued
operation (Note 4).
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4. Discontinued Operations
Consolidated Financial Statements & Notes
a) Impairment and Other Write-Offs of Russian Assets
In the first quarter of 2022, the Corporation determined the Russian operations to be in its own cash-generating unit
(“CGU”) due to a divergence in its overall risk profile from the rest of the International CGU. Concurrently, PHX
Energy recognized:
Impairment loss of approximately $0.4 million on drilling and other equipment owned by the Russian
operations, Phoenix TSR;
Write-offs of $0.6 million related to inventories owned by the Russian operations; and,
Expected credit losses of $1 million related to certain trade receivables owned by Phoenix TSR.
b) Discontinued Operations and Loss on Disposition
On June 30, 2022, the Corporation completed the sale of its Russian division. The transaction involved the sale of
all shares of Phoenix TSR, a legally wholly-owned subsidiary of PHX Energy that held the entire Russian drilling
operations. The operations were previously classified under the Russia operating segment for reporting purposes.
Consideration on sale of Phoenix TSR, satisfied in cash
Less net assets of Phoenix TSR comprised of working capital:
Loss on disposition of Phoenix TSR
The results of the divested Phoenix TSR operations are as follows:
June 30, 2022
$
$
404
(3,496,576)
(3,496,172)
Revenue
Expenses
Reclassification of foreign currency translation loss on disposition of
Phoenix TSR
Loss on disposition of Phoenix TSR
Impairment and other write-offs
Loss on remeasurement
Loss from discontinued operations
Income tax (recovery) from discontinued operations
Loss from discontinued operations, net of taxes
Year ended December 31,
2022
$
7,443,368
$
(5,781,276)
1,662,092
(10,560,954)
(3,496,172)
(1,966,848)
2021
9,973,603
(9,390,175)
583,428
-
-
-
-
(1,177,546)
(14,361,882)
196,150
$
(14,558,032)
$
(594,118)
(1,079)
(593,039)
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PHX Energy Services Corp. | 2022 Annual Report
Included in the Corporation’s other comprehensive income for the year-ended December 31, 2021 is $0.3 million of
foreign currency translation gain relating to Russia’s operations.
Reconciliation of net loss from discontinued operations, net of taxes to cash used in discontinued operations is as
follows:
Net loss from discontinued operations, net of taxes
$
(14,558,032)
$
(593,039)
Year ended December 31,
2021
2022
Addback (deduct):
Depreciation and amortization
Provision for (recovery of) income taxes
Unrealized foreign exchange (gain) loss
Interest and taxes paid, net
Loss on disposition of drilling equipment
Finance expense
Reclassification of foreign currency translation loss on disposition of
Phoenix TSR
Impairment and other write-offs
Loss on remeasurement
Loss on disposition of Phoenix TSR
Change in non-cash working capital
Cash used in operating activities
136,024
196,150
(56,497)
(3,316)
68,068
3,316
10,560,954
1,966,848
-
(1,079)
15,914
(10,593)
27,666
1,671
-
-
-
1,177,546
3,496,172
(3,064,546)
$
(1,254,859)
$
-
(713,498)
(95,412)
Cash from (used in) investing activities of discontinued operations are due to proceeds from disposition and a
reversal of previously accrued proceeds.
5. Inventories
Inventories are mainly comprised of drilling and other equipment repair parts. In 2022, consumed repair parts, which are
included in direct costs, amounted to $49.7 million (2021 - $40.6 million). For the year ended December 31, 2022, the
Corporation recognized a provision for obsolete inventory of $1.3 million (2021 - $2 million).
-88-
6. Drilling and Other Long-Term Assets
Consolidated Financial Statements & Notes
a) Impairment Analysis
The Corporation is required to assess whether there are any external and internal indicators that exist at the end of
each reporting period. As at December 31, 2022, management determined no indicators of impairment existed.
b) Acquisitions and Disposals
Assets with a carrying amount of $8 million (2021 - $4.6 million) were disposed of as a result of tools lost down hole
and scrapped assets, resulting in a net gain on disposition of $19.5 million (2021 - $7.7 million), which is included in
other income in the consolidated statement of comprehensive earnings.
(Stated in thousands of dollars)
Cost
At January 1, 2022
Additions
Disposals
Discontinued Operations
Effect of movement
in exchange rate
Directional
Drilling
Equipment
Machinery and
Equipment
Office and
Computer
Equipment
Vehicles
Total
297,198
70,031
(19,264)
(18,546)
17,058
20,551
1,563
-
(2,790)
1,473
17,750
1,847
(520)
(174)
574
723
84
(69)
-
623
336,222
73,525
(19,853)
(21,510)
19,728
At December 31, 2022
346,477
20,797
19,477
1,361
388,112
Accumulated Depreciation
At January 1, 2022
Depreciation
Disposals
Discontinued Operations
Effect of movement
in exchange rate
At December 31, 2022
Carrying amount
at December 31, 2022
225,757
28,232
(11,310)
(16,809)
11,069
236,939
109,538
18,034
1,023
-
(2,366)
1,295
17,986
2,811
15,654
722
(520)
(138)
497
16,215
3,262
414
146
(56)
-
523
1,027
334
259,859
30,123
(11,886)
(19,313)
13,384
272,167
115,945
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PHX Energy Services Corp. | 2022 Annual Report
(Stated in thousands of dollars)
Directional Drilling
Equipment
Machinery and
Equipment
Office and
Computer
Equipment
Vehicles
Total
Cost
At January 1, 2021
Additions
Disposals
Impairment
Effect of movement
in exchange rate
282,542
33,912
(17,135)
(1,178)
(943)
19,830
17,147
729
(30)
-
22
649
(38)
-
(8)
At December 31, 2021
297,198
20,551
17,750
Accumulated Depreciation
At January 1, 2021
Depreciation
Disposals
Effect of movement
in exchange rate
216,858
22,342
(12,502)
(941)
17,120
15,075
917
(21)
18
638
(35)
(24)
At December 31, 2021
225,757
18,034
15,654
Carrying amount
at December 31, 2021
71,441
2,517
2,096
796
15
(84)
-
(4)
723
376
123
(84)
(1)
414
309
320,315
35,305
(17,287)
(1,178)
(933)
336,222
249,429
24,020
(12,642)
(948)
259,859
76,363
c) Capital Commitments
As at December 31, 2022, the Corporation has entered into commitments to purchase drilling and other equipment
for $43.3 million (2021 - $35.6 million); delivery is expected to occur within the first half of 2023.
7. Intangible Assets
Intangible assets are mainly licenses which give the Corporation rights to use in any manner certain equipment acquired
from a third party. These licenses are transferrable to other equipment should it be lost downhole, retired, or sold. The
useful life of these licenses is estimated to be the same as the estimated useful life of the associated technologies.
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Consolidated Financial Statements & Notes
(Stated in thousands of dollars)
Cost
At January 1, 2022
License
Development
Costs
Systems/
Software
Technology
Total
27,658
2,643
1,961
1,826
34,088
Additions
Effect of movement in exchange rate
1,261
363
-
-
-
9
-
-
1,261
372
At December 31, 2022
29,282
2,643
1,970
1,826
35,721
Accumulated Amortization
At January 1, 2022
Amortization
Effect of movement in exchange rate
At December 31, 2022
Carrying amount at December 31, 2022
(Stated in thousands of dollars)
Cost
At January 1, 2021
Additions
Effect of movement in exchange rate
At December 31, 2021
Accumulated Amortization
At January 1, 2021
Amortization
Effect of movement in exchange rate
At December 31, 2021
Carrying amount at December 31, 2021
8. Investments
11,521
1,995
98
13,614
15,668
2,643
1,961
1,826
-
-
-
9
2,643
1,970
-
-
-
-
1,826
-
17,951
1,995
107
20,053
15,668
License
Development
Costs
Systems/
Software
Technology
Total
25,817
1,853
(12)
27,658
9,612
1,840
69
11,521
16,137
2,643
1,962
1,826
32,248
-
-
-
(1)
-
-
1,853
(13)
2,643
1,961
1,826
34,088
2,643
1,962
1,826
-
-
-
(1)
2,643
1,961
-
-
-
-
1,826
-
16,043
1,840
68
17,951
16,137
Investments are comprised of 3.5 million common shares and 3.5 million warrants in a geothermal power developer,
DEEP Earth Energy Production Corp. The warrants include an option for an additional $3.5 million equity upon exercise.
Exercise of the warrants, which expire in three years from the initial grant date of July, 2021, is at the discretion of the
Corporation.
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PHX Energy Services Corp. | 2022 Annual Report
9. Loans and Borrowings
Amount of
Facility
Date of Maturity Currency
Carrying Amount at
December 31, 2022 Currency
Carrying Amount at
December 31, 2021
(Stated in thousands of dollars)
Currency
CAD
CAD
Operating Facility
Syndicated Facility
Total CAD Facility
15,000 December 12, 2025
50,000 December 12, 2025
CAD
CAD
65,000
US Operating Facility
USD
15,000 December 12, 2025
USD
Total USD Facility
15,000
731
22,000
22,731
-
-
CAD
CAD
CAD
USD
USD
-
-
-
-
-
Under the syndicated credit agreement, the Corporation is required to maintain certain financial covenants. As at
December 31, 2022 the Corporation was in compliance with all its financial covenants as follows:
Ratio
Debt to covenant EBITDA
Interest coverage ratio
(i) Definitions for these terms are included in the credit agreement filed on SEDAR
Covenant
As at December 31, 2022
<3.0x
>3.0x
0.27
62.40
Under the syndicated credit agreement, in any given year, the Corporation’s distributions (as defined therein) cannot
exceed its distributable cash flows as defined in the Corporation’s syndicated credit agreement. Distributions include,
without limitation, dividends declared and paid, as well as cash used for common shares purchased by the independent
trustee in the open market and held in trust for potential settlement of outstanding retention awards. For the year ended
December 31, 2022, the Corporation’s distributions were 29 percent of its distributable cash flows.
The facilities bear interest based primarily on the Corporation’s debt to earnings before interest, taxes, depreciation and
amortization (“EBITDA”) ratio, as defined in the credit agreement. Interest on the operating facility is at the bank’s prime
rate plus 0.5 percent. Interest on the syndicated facility is at the Secured Overnight Financing Rate (“SOFR”) plus 1.5
percent.
On August 24, 2022, the Corporation extended the maturity date of the syndicated loan agreement to December 12, 2025.
As at December 31, 2022 the Corporation has CAD $42 million and USD $15 million available to be drawn from its credit
facilities. The credit facilities are secured by substantially all of the Corporation's assets.
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Consolidated Financial Statements & Notes
10. Deferred Tax Assets and Liabilities
a) Unrecognized Deferred Tax Assets and Liabilities
(Stated in thousands of dollars)
Gross
Amount
2022
Tax Effect
Gross
Amount
2021
Tax Effect
Non-capital income tax losses
$
55,145
$
12,228
$
55,823
$
11,913
Investment tax credit / foreign tax credit
Drilling and other equipment
Intangibles
Partnership loss
IFRS 16 – lease liability
Other
-
1,979
1,961
-
-
4,631
455
451
-
-
6,955
1,600
-
8,188
2,033
1,230
1,289
11,764
$
66,040
$
19,365
$
80,327
$
4,364
1,883
467
283
296
2,707
21,913
The Corporation has unrecognized deferred tax assets relating to the Canadian and international jurisdiction.
Deferred tax assets have not been recognized in respect of the losses as they may not be used to offset taxable
profits elsewhere in the Corporation, and they have arisen in subsidiaries that have not established indicators
demonstrating that it is probable that future taxable profits will be available to utilize those loss carry-forwards. These
non-capital losses will expire between 2023 and 2042. The investment tax credits and foreign tax credits will expire
between 2026 and 2040.
As at December 31, 2022, the Corporation has unrecognized deferred tax assets in respect of deductible temporary
differences in the Canadian jurisdiction. Deferred tax assets have not been recognized in respect of deductible
temporary differences due to a recent history of taxable losses in Canada.
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PHX Energy Services Corp. | 2022 Annual Report
b) Recognized Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities are attributable to the following:
(Stated in thousands of dollars)
Years ended December 31,
Deferred income tax assets:
Non-capital income tax losses
Lease liability
Other (including foreign and other tax credits)
Deferred income tax liabilities:
Drilling and other equipment
Right-of-use asset
Intangibles
Undistributed profits
Partnership income
$
$
$
2022
255
$
9,348
1,594
2021
2,283
8,100
328
11,197
$
10,711
(20,756) $
(6,924)
(845)
-
(1,115)
(29,640)
(13,310)
(6,015)
(606)
-
-
(19,931)
(9,220)
Net deferred income tax liability
$
(18,443) $
Non-capital income tax losses expire between 2023 and 2042. Deferred tax assets are recognized only to the extent
it is considered probable that those assets will be recoverable. The determination involves an assessment of when
those deferred tax assets are likely to reverse and a judgment of whether there will be sufficient taxable profits
available to utilize the tax assets when they do reverse. Assumptions regarding future profitability have been made
and used as the basis for recognizing the deferred tax asset. Deferred tax movements are included in net loss.
-94-
Consolidated Financial Statements & Notes
(Stated in thousands of dollars)
Drilling and
Other
Equipment
Right-of-
Use Asset
Intangibles
Undistributed
Profits
Partnership
Income
Non-Capital
Income Tax
Losses
Lease
Liabilities
Other
Total
At January 1, 2022
Recognized in
profit
Recognized in OCI
Other
At December 31,
2022
(13,310)
(6,015)
(606)
(5,950)
(234)
(171)
(1,495)
(675)
(68)
-
-
-
(20,755)
(6,924)
(845)
(Stated in thousands of dollars)
-
-
-
-
-
-
2,283
8,100
328
(9,220)
(1,115)
(2,284)
338
1,134
(8,282)
-
-
256
-
910
37
(1,035)
-
94
94
(1,115)
255
9,348
1,593
(18,443)
Drilling and
Other
Equipment
Right-of-Use
Asset
(12,120)
(6,791)
(1,012)
(178)
-
876
(100)
-
(177)
(426)
(3)
-
(13,310)
(6,015)
(606)
At January 1, 2021
Recognized in
profit
Recognized in OCI
Other
At December 31,
2021
Intangibles
Undistributed
Profits
Partnership
Income
Non-Capital
Income Tax
Losses
Lease
Liabilities
Other
Total
(909)
922
(13)
-
-
-
-
-
-
-
3,681
9,167
1,798
(5,351)
(1,452)
(1,202)
(1,501)
(3,795)
54
-
135
-
26
5
(79)
5
2,283
8,100
328
(9,220)
11. Share Capital
a) Authorized and Issued Shares
The Corporation is authorized to issue an unlimited number of common shares.
Balance as at January 1, 2021
Common shares repurchased and cancelled
Common shares repurchased and held in trust
Issued shares pursuant to share option plan
Balance as at December 31, 2021
Common shares repurchased and held in trust (Note 12b)
Issued shares pursuant to retention awards plan
Issued shares pursuant to share option plan
Balance as at December 31, 2022
Number
Amount
50,625,920
$
247,543,263
(1,960,788)
(1,662,537)
976,067
47,978,662
(626,400)
2,277,875
1,266,038
$
(7,979,601)
(7,500,000)
3,399,752
235,463,414
(4,110,000)
14,618,748
5,372,647
50,896,175
$
251,344,809
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PHX Energy Services Corp. | 2022 Annual Report
b) Weighted-Average Number of Shares
Issued common shares at January 1,
Effect of shares issued from trust
Effect of share options exercised
Effect of shares pursuant to shares purchased and held in trust
Effect of shares pursuant to Normal Course Issuer Bid
Weighted-average number of common shares (basic) at December 31,
Dilutive effect of share options
Weighted-average number of common shares (diluted) at December 31,
2022
47,978,662
1,675,359
869,947
(379,634)
-
50,144,334
554,916
50,699,250
2021
50,625,920
-
331,880
(715,428)
(692,405)
49,549,967
2,116,239
51,666,206
c) Basic and Diluted Earnings (Loss) per Share
2022
Continuing operations:
Basic earnings per share:
Diluted earnings per share:
Discontinued operations:
Basic loss per share:
Diluted loss per share:
Net earnings:
Basic earnings per share:
Diluted earnings per share:
2021
Continuing operations:
Basic earnings per share:
Diluted earnings per share:
Discontinued operations:
Basic loss per share:
Diluted loss per share:
Net earnings:
Basic earnings per share:
Diluted earnings per share:
Earnings
(numerator)
Shares
(denominator)
Per Share
Amount
$
44,311,390
50,144,334
$
(14,558,032)
$
29,753,358
50,699,250
50,144,334
50,144,334
50,144,334
50,699,250
Earnings
(numerator)
Shares
(denominator)
$
23,317,674
49,549,967
$
(593,039)
$
22,724,635
51,666,206
49,549,967
49,549,967
49,549,967
51,666,206
$
$
$
$
$
$
0.88
0.87
(0.29)
(0.29)
0.59
0.58
Per Share
Amount
0.47
0.45
(0.01)
(0.01)
0.46
0.44
The Corporation realized profits in both the year ended December 31, 2022 and 2021. The number of options which
had a dilutive effect is 1,133,334 for the year ended December 31, 2022, all had exercise prices below the
-96-
Consolidated Financial Statements & Notes
Corporation’s ending share price for 2022. For the year ended December 31, 2021 the number of options outstanding
was 2,854,200, all dilutive.
As at December 31, 2022, retention awards of 2,845,191 (2021 – 3,267,579) were excluded from the diluted weighted
average number of ordinary shares calculation because the effect would have been anti-dilutive.
d) Dividends
On December 15, 2022, the Corporation declared a dividend of $0.15 per share or $7.6 million, payable on January
16, 2023 to shareholders of record on December 30, 2022.
e) Normal Course Issuer Bid (“NCIB”)
During the third quarter of 2022, the TSX approved the renewal of PHX Energy’s Normal Course Issuer Bid (“NCIB”)
to purchase for cancellation, from time-to-time, up to a maximum of 3,622,967 common shares, representing 10
percent of the Corporation’s public float of Common Shares as at August 3, 2022. The NCIB commenced on August
16, 2022 and will terminate on August 15, 2023. Purchases of common shares are to be made on the open market
through the facilities of the TSX and through alternative trading systems. The price which PHX Energy is to pay for
any common shares purchased is to be at the prevailing market price on the TSX or alternate trading systems at the
time of such purchase.
For the year ended December 31, 2022, the Corporation did not repurchase shares through its previous or current
NCIB.
The Corporation's previous NCIB commenced on August 16, 2021 and terminated on August 15, 2022. Pursuant to
the previous NCIB, 1,499,900 common shares were purchased by the Corporation and cancelled during the year
ended December 31, 2021.
12. Share-Based Payments
a) Share Option Program (Equity-Settled)
PHX Energy has a share option program that entitles key management personnel and other employees to purchase
common shares in the Corporation. Grants under the plan vest as to one-third 6 months from the grant date, one-
third 18 months from grant date and one-third 30 months from grant date. In accordance with these programs, options
are exercisable using the five-day weighted-average trading price of the common shares ending immediately prior
to the date of grant, or in the case of a US option holder, the trading price of the common shares ending immediately
prior to the date of grant. The options have a term of five years.
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PHX Energy Services Corp. | 2022 Annual Report
Summary of option grants in 2022
Number
150,000
100,000
250,000
Exercise Price
Expiration Date
Fair Value
$
6.08
6.16
March 4, 2027
$
March 4, 2027
1.91
1.89
The Corporation values all of its share options using the Black-Scholes model. The Corporation’s determination of
fair value of options on the date of grant is affected by the Corporation’s share price as well as assumptions regarding
a number of variables. For the options granted during 2022 these variables include, but are not limited to, the
Corporation’s expected share price volatility over the term of the options of 54 percent, forfeiture rate of nil, dividend
yield of 4.89 percent and a risk-free interest rate of 1.4 percent. The amounts computed according to the Black-
Scholes model method may not be indicative of the actual values realized upon the exercise of these options by the
holders.
During 2022, the Corporation recognized a total compensation expense of $451,188 (2021 - $383,604) for share
options granted between 2020 and 2022. During the year-ended December 31, 2022, a total of 1,047,800 options
granted in 2017 were net equity-settled through the issuance of 342,972 common shares.
A summary of the status of the plan as at December 31, 2022, is presented below:
Outstanding, beginning of year
Granted
Exercised
Forfeited / cancelled
Outstanding, end of year
Options exercisable, end of year
2022
Weighted-Average
Exercise Price
$
$
$
3.15
6.11
3.44
-
3.31
2.86
Options
2,854,200
250,000
(1,970,866)
-
1,133,334
799,994
2021
Weighted-Average
Exercise Price
$
$
$
3.01
2.70
2.40
4.15
3.15
3.25
Options
3,345,267
500,000
(976,067)
(15,000)
2,854,200
2,437,530
The weighted-average share price at the date of exercise for share options exercised in 2022 was $5.98
(2021 - $4.05).
-98-
Consolidated Financial Statements & Notes
The range of exercise prices for options outstanding at December 31, 2022 are as follows:
Options Outstanding
Options Exercisable
Number
Weighted-Average
Remaining Contractual Life
Weighted-Average
Exercise Price
50,000
50,000
50,000
150,000
133,334
300,000
100,000
50,000
150,000
100,000
1,133,334
0.19 yrs
0.19 yrs
2.18 yrs
2.18 yrs
3.18 yrs
3.18 yrs
1.18 yrs
1.18 yrs
4.18 yrs
4.18 yrs
2.69 yrs
$
$
1.95
2.00
2.09
2.19
2.64
2.74
2.81
2.83
6.08
6.16
3.31
Number
50,000
50,000
50,000
150,000
66,666
199,998
100,000
50,000
49,998
33,332
799,994
Weighted-Average
Exercise Price
$
$
1.95
2.00
2.09
2.19
2.64
2.74
2.81
2.83
6.08
6.16
2.86
b) Retention Award Plan
The retention award plan has two types of awards: Restricted Awards (“RAs”) and Performance Awards (“PAs”) and
results in eligible participants, as approved by the Board, receiving cash or common shares in relation to the value
of a specified number of underlying notional retention awards. If common shares are used to settle awards, an
additional multiplier to the award value of 1.25 times is applied. Common shares acquired by an independent trustee
in the open market are held in trust for the potential settlement of RA and PA award values and are netted out of
share capital, including the cumulative purchase cost, until they are distributed for future settlements. For the year
ended December 31, 2022, the independent trustee purchased 626,400 common shares (2021 – 1,662,537) for a
total cost of $4.1 million (2021 - $7.5 million) and released 2,277,875 common shares (2021 – nil) to settle retention
award obligations of $14.6 million (2021 - $nil). As at December 31, 2022, the independent trustee held 11,064
common shares in trust (2021 – 1,662,537). The Corporation continues to account for its retention award plan as
cash-settled share-based compensation.
RAs vest evenly over a period of three-years. Upon vesting and subsequent exercise, the holder is entitled to receive
a cash payment or common shares based on the fair value of the underlying shares determined using the five-day
weighted-average trading price of the shares ending immediately prior to the exercise date plus accrued re-invested
dividends.
PAs vesting and subsequent exercise is similar to RAs, except a payout multiplier is applied to the final payout. The
payout multiplier is linked solely to total shareholder return on the Corporation’s common shares relative to returns
on securities of members of the Corporation’s peer comparison group over the applicable vesting period and can
range from a payout of zero percent to 200 percent. During the year ended December 31, 2022, 750,000 PAs were
granted (2021 – 750,000), 774,152 PAs settled at a weighted-average payout multiplier of 184 percent (2021 –
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PHX Energy Services Corp. | 2022 Annual Report
757,184), and 391,931 PAs were forfeited (2021 - nil). As at December 31, 2022, 1,198,469 PAs were outstanding
(2021 – 1,529,226).
The Corporation recorded a total of $24.6 million compensation expense relating to these plans for the year ended
December 31, 2022 (2021 – $12.9 million). The expense is included in selling, general and administrative expense
and has a corresponding liability of $14.2 million in trade and other payables for the current portion and $4.5 million
included in other liabilities for the long-term portion. There were 2,845,191 RAs and PAs outstanding as at December
31, 2022 (2021 - 3,267,579). The closing share price on December 31, 2022 of PHX stock was $7.77.
A summary of the status of the plan as at December 31, is presented below:
RAs and PAs outstanding, beginning of year
Granted
Settled
Forfeited / cancelled
RAs and PAs outstanding, end of year
c) Prior Period Adjustment
2022
3,267,579
1,613,555
(1,644,012)
(391,931)
2,845,191
2021
3,487,297
1,666,514
(1,808,415)
(77,817)
3,267,579
The Corporation identified that the classification of the cash-settled liability awards between current and long-term
liabilities was not correct as at December 31, 2021. As a result, the Corporation adjusted the December 31, 2021
statement of financial position to reclassify $2.8 million of liabilities from current (trade and other payables) to long-
term (other non-current liabilities).
-100-
13. Expenses by Nature
(Stated in thousands of dollars)
Years ended December 31,
Salaries and employee benefits
Share-based payments
Personnel expenses
Equipment expenses
Consumed repair parts
Contract labour
Depreciation and amortization drilling and other equipment
Field and freight expenses
Insurance and business and sales taxes
Facility and office expenses
Travel and entertainment
Depreciation and amortization right-of-use asset
Other
Provisions for inventory
Legal and audit fees
Government grants
Consolidated Financial Statements & Notes
2022
150,141
25,020
175,161
144,813
49,683
39,767
32,119
21,099
15,637
7,924
5,665
3,235
1,008
1,299
1,634
(314)
498,730
(adjusted - Note 4)
2021
93,671
13,313
106,984
85,683
40,597
27,654
25,860
11,995
11,792
5,867
3,446
3,336
640
2,033
1,269
(8,763)
318,393
The total amount of expenses represents the aggregate of direct costs, selling, general and administrative expenses, and
research and development expenses in the statements of comprehensive earnings.
14. Other Income
(Stated in thousands of dollars)
Years ended December 31,
Net gain on disposition of drilling equipment (Note 6b)
Foreign exchange loss
Recovery of bad debts
Other
2022
19,492
$
(287)
13
512
19,730
$
(adjusted - Note 4)
2021
7,746
(85)
281
-
7,942
$
$
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PHX Energy Services Corp. | 2022 Annual Report
15. Income Taxes
(Stated in thousands of dollars)
Years ended December 31,
Current tax expense (recovery):
Current period
Adjustment for prior periods
Deferred tax recovery:
Origination and reversal of temporary differences
Adjustment for prior periods
2022
(Re-presented – Note 4)
2021
$
914
$
(154)
760
8,236
46
8,282
17
(253)
(236)
4,014
(219)
3,795
3,559
Total income tax expense
$
9,042
$
Reconciliation of effective tax rate
Years ended December 31,
Net earnings
Total income tax provision
Income before income taxes
Income tax using the Corporation’s domestic tax rate
Non-taxable portion of gains on disposal of assets
Change in unrecognized deductible temporary differences
Effect of tax rates in foreign jurisdictions
Non-deductible loss / non-taxable gain on investments
Research and development tax credit
Non-deductible share-based payments and other expenses
Other
2022
(Re-presented – Note 4)
2021
$
44,311
9,042
53,353
12,271
(479)
(4,773)
(1,646)
4,536
(280)
(516)
(71)
23.0%
(0.9%)
(8.9%)
(3.1%)
8.5%
(0.5%)
(1.0%)
(0.1%)
$
23,317
3,559
26,876
6,045
22.5%
(226)
(0.8%)
3,540
13.2%
(3,075)
(11.4%)
-
-
(1,165)
(4.3%)
218
0.8%
(1,778)
(6.6%)
$
9,042
17.0%
$
3,559
13.2%
-102-
Consolidated Financial Statements & Notes
16. Operating Segments
The Corporation provides directional and horizontal oil and natural gas well drilling services. PHX Energy’s reportable
segments have been aligned as follows:
Information about reportable segments
(Stated in thousands of dollars)
Years ended December 31(ii),
2022
2021
2022
2021
2022
2021
2022
2021
Canada
United States
International
Total
Total revenue
108,544
67,354
423,083
272,492
4,118
100
535,745
339,946
Reportable segment profit (loss)
before income taxes (i)
8,700
3,489
64,030
43,636
1,412
(1,161)
74,142
45,964
(i) Includes adjustments to intercompany transactions.
(ii) 2021 has been re-presented to exclude discontinued operations (Note 4).
(Stated in thousands of dollars)
Canada
United States(i)
International
Total
As at December 31,
2022
2021
2022
2021
2022
2021
2022
2021
Drilling and other equipment
26,519
14,746
88,957
60,662
469
955
115,945
76,363
(i) December 31, 2022 includes USD $1.6 million of drilling and other equipment physically located in the Middle East region (2021 – USD $1.6
million).
Reconciliation of reportable segment loss and other material items
(Stated in thousands of dollars)
Years ended December 31,
(Re-presented – Note 4)
2021
2022
Reportable segment income before income taxes
$
74,142
$
45,964
Corporate:
Selling, general and administrative expenses
Research and development expenses
Finance expense
Finance expense lease liability
Other income
33,404
3,723
1,360
2,032
(19,730)
Earnings from continuing operations before income taxes
$
53,353
$
21,637
2,774
494
2,125
(7,942)
26,876
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PHX Energy Services Corp. | 2022 Annual Report
17. Changes in Non-Cash Working Capital
Changes in non-cash working capital relating to operating activities:
(Stated in thousands of dollars)
Years ended December 31,
Trade and other receivables
Inventories
Prepaid expenses
Trade and other payables
Retention award liabilities settled in shares
Impact of foreign exchange rate changes and other in working capital
Changes in non-cash working capital relating to investing activities:
(Stated in thousands of dollars)
Years ended December 31,
Impact of foreign exchange rate changes and other in working capital
2022
2021
$
(47,647)
$
(30,668)
(26,919)
(1,095)
27,478
14,619
2,061
$
(31,503)
$
(9,217)
(784)
41,561
-
(4,343)
(3,451)
2022
7
7
$
2021
4,165
4,165
$
18. Financial Instruments
a) Credit Risk
The Corporation is exposed to normal credit risks of its customers that exist within the oil and natural gas exploration
and development industry. The Corporation’s credit risk associated with these customers can be directly impacted
by a decline in economic conditions, which would impair the customers’ ability to satisfy their obligations to the
Corporation. During the year ended December 31, 2022, one customer comprised 19 percent of the total revenue
(2021 - 27 percent of revenue). The customer’s revenue is reported within the US operating segment.
-104-
As at December 31, 2022, the aging of trade and other receivables that were not impaired was as follows:
Consolidated Financial Statements & Notes
(Stated in thousands of dollars)
Neither past due nor impaired
Past due 1-30 days
Past due 31-60 days
Past due 61-90 days
Past due over 90 days
$
2022
81,086
30,344
10,397
1,699
2,310
$
125,836
The Corporation’s standard customer payment terms are 30 days after job completion or invoice issuance date, after
which, the balance becomes past due. The Corporation will assess for impairment once the receivable becomes
past due. All accounts receivable balances that are past due for more than 90 days and were not impaired
represented 2 percent or approximately $2.3 million of total receivables on the statement of financial position at
December 31, 2022. Management believes that the unimpaired amounts that are past due are still collectible in full,
based on historic payment behavior and extensive analysis of customer credit risk. Management has provided an
allowance of $0.3 million for all amounts it considers uncollectable at December 31, 2022 (2021 - $0.3 million).
The Corporation has a credit management program to assist in managing this risk, which consists of conducting
financial and other assessments to establish and monitor a customer’s creditworthiness. The Corporation monitors
and manages its credit risk on an ongoing basis.
b) Liquidity Risk
Liquidity risk is the risk that the Corporation will not be able to meet its financial obligations as they fall due. The
Corporation has financial liabilities, thus, is exposed to liquidity risk. The Corporation’s approach to managing liquidity
risk is to ensure that it always has sufficient cash and credit facilities to meet its obligations when due. Management
typically forecasts cash flows for a period of twelve months to identify financing requirements. These requirements
are then addressed through a combination of demand credit facilities and access to capital markets. The Corporation
believes that future cash flows generated by the operations and access to additional liquidity through capital and
banking markets will be adequate to meet its financial obligations.
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PHX Energy Services Corp. | 2022 Annual Report
The following table reflects the Corporation’s anticipated payment of contractual obligations related to continuing
operations as at December 31, 2022:
(Stated in thousands of dollars)
Drilling and other equipment
purchase commitments
Trade and other payables
Other non-current liabilities
Dividends payable
Bank loan interest and principal (i)
Lease payments (ii)
2023
2024
2025
2026
2027 and after
43,256
104,689
-
7,636
1,082
6,480
163,143
-
-
3,740
-
1,031
5,920
10,691
-
-
722
-
23,713
5,504
29,939
-
-
-
-
-
-
-
-
-
-
5,397
5,397
13,986
13,986
(i) Bank loan interest has been estimated using interest rates in effect at December 31, 2022.
(ii) Lease payment amounts are gross and undiscounted contractual cash flows and include low value and short-term leases.
c) Fair Values of Financial Instruments
The Corporation has designated its trade and other payables, dividends payable, and loans and borrowings as non-
derivative financial liabilities carried at amortized cost. Cash and cash equivalents and trade and other receivables
are designated as non-derivative financial assets measured at amortized cost. The Corporation’s carrying values of
these items, excluding loans and borrowings, approximate their fair value due to the relatively short periods to
maturity of the instruments. Loans and borrowings bears interest at a floating market rate indicative of current spreads
and accordingly the fair value approximate the carrying value.
Equity investments in a company are designated as non-derivative financial assets measured at FVOCI as the
investment is not held-for-trading and fair value changes are not reflective of the Corporation’s operations. The
investment asset is carried at fair value on the consolidated statement of financial position. Fair value is considered
level 3 under the fair value hierarchy and requires management to assess information available, which may include
private placements, available financial statement information and other available market data.
d) Interest Rate Risk
Interest rate risk is created by fluctuations in the fair values of financial instruments due to changes in the market
interest rates. The Corporation has access to variable interest long-term debt which exposes it to fluctuations in cash
interest payment amounts.
A one percent change in interest rates would have increased or decreased the Corporation’s profit by $142 thousand
for the year ended December 31, 2022.
-106-
Consolidated Financial Statements & Notes
e) Foreign Exchange Risk
Foreign exchange risk is created by fluctuations in the fair values of financial instruments due to changes in foreign
exchange rates. Due to operations of the Corporation’s subsidiaries in the US, the Corporation has an exposure to
foreign currency exchange rates. The carrying values of Canadian dollar and US dollar denominated monetary
assets and liabilities and earnings are subject to foreign exchange risk. For the year ended December 31, 2022,
foreign currency translation gains of $8.8 million (2021 – $0.1 million loss) that resulted from fluctuations in the CAD-
USD exchange rates was recognized in other comprehensive income and $10.6 million of foreign currency translation
losses was reclassified from other income to net earnings upon sale of the Russia operations (Note 4). For the year
ended December 31, 2022, foreign exchange losses of $0.3 million (2021 - $0.1 million loss) were recognized as
part of earnings from continuing operations. The Corporation reviews options with respect to managing its foreign
exchange risk periodically.
The following chart represents the Corporation’s exposure to foreign currency risk:
(Stated in thousands of dollars)
As at December 31, 2022
Cash and cash equivalents
Trade and other receivables
Trade and other payables
Intercompany receivables
Statement of financial position exposure
As at December 31, 2021 (re-stated)
Cash and cash equivalents
Trade and other receivables
Trade and other payables
Intercompany payables
Statement of financial position exposure
CAD
-
-
-
1,235
1,235
CAD
-
-
-
(2,889)
(2,889)
USD
1,444
-
(2,141)
-
(697)
USD
4,385
-
(2,360)
-
2,025
The following significant exchange rates compared to the Canadian dollar applied during the year ended
December 31:
USD
Average Rate
December 31, Close Rate
2022
1.3017
2021
1.2537
2022
1.3544
2021
1.2678
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PHX Energy Services Corp. | 2022 Annual Report
A strengthening of the Canadian dollar and US dollar against all other currencies as at December 31 would have
affected the measurement of financial instruments denominated in a foreign currency and affected profit or loss by
the amounts shown below. The analysis assumes that all other variables remain constant.
Gain (Loss)
CAD (10% strengthening)
USD (10% strengthening)
$
2022
91
(95)
$
2021
(246)
248
19. Capital Management
The Corporation’s primary objective of capital management is to maintain a strong capital base, in conjunction with
conservative long-term debt levels so as to maintain investor, creditor and market confidence, and to sustain future
development of the business. The Corporation seeks to maintain a balance between higher returns that might be possible
with higher levels of borrowings and the advantages and security created by a strong equity position.
The Corporation’s management considers the capital structure to consist of long-term debt and shareholders’ equity. As
at December 31, 2022, the Corporation had $22.7 million in loans and borrowings outstanding (2021 – $nil) and $176.9
million (2021 – $134.4 million) in shareholders’ equity. The Corporation’s resulting long-term debt to equity ratio was 0.13
as at December 31, 2022 (2021 – nil).
The Corporation prepares annual and quarterly operating and capital expenditure budgets, and forecasts to assist with the
management of its capital. The Corporation intends to maintain a flexible capital structure and it may alter its dividend levels,
raise new equity or issue new debt in response to a change in economic conditions.
The Corporation is subject to capital requirements relating to debt covenants on debt facilities held. As at December 31, 2022,
the Corporation was in compliance with all debt covenants.
There were no changes to the Corporation’s approach to capital management during the year ended December 31, 2022.
-108-
Consolidated Financial Statements & Notes
20. Leases
a) Leases as Lessee
The Corporation leases shop facilities, offices, and vehicles. The shop and office leases typically run for a period
between 5 to 15 years, with an option to renew the lease after that date. Vehicle leases typically run for a period between
3 to 6 years with an option to purchase the vehicle. Office leases that are sub-leased by the Corporation are applied
against the right-of-use asset. The office lease and sublease expires in the year 2023.
The Corporation elected not to recognize right-of-use assets and lease liabilities for leases that were short-term, expired
in 2022, or were low-value items like office equipment. Information about leases for which the Corporation is the lessee
is presented below.
i. Right-of-Use Assets
Right-of-use assets relate to leased properties that do not meet the definition of investment property.
(Stated in thousands of dollars)
2022
Balance at January 1,
Depreciation charge for the year
Additions to right-of-use assets
Derecognition of right-of-use assets (i)
Effect of movement in exchange rate
Shop and Office
Buildings
Vehicles
Total
$
24,972
$
736
$
(2,904)
6,171
(110)
411
(331)
333
(61)
119
796
25,708
(3,235)
6,504
(171)
530
Balance at December 31,
$
28,540
$
(i) Derecognition of right-of-use assets during 2022 is a result of recognition of sub-lease income
$
29,336
(Stated in thousands of dollars)
2021
Balance at January 1,
Depreciation charge for the year
Additions to right-of-use assets
Derecognition of right-of-use assets (i)
Effect of movement in exchange rate
Shop and Office
Buildings
Vehicles
Total
$
28,084
$
873
$
(2,971)
-
(104)
(37)
(365)
268
(26)
(14)
28,957
(3,336)
268
(130)
(51)
Balance at December 31,
$
24,972
$
736
$
25,708
(i) Derecognition of right-of-use assets during 2021 is a result of early termination of vehicle leases and recognition of sub-lease income.
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PHX Energy Services Corp. | 2022 Annual Report
ii. Lease Liability
Lease liability relate to leased properties and are amortised over the life of the lease.
(Stated in thousands of dollars)
2022
Balance at January 1,
Additions and modifications
Payments
Effect of movement in exchange rate
Balance at December 31,
(Stated in thousands of dollars)
2021
Balance at January 1,
Additions and modifications
Payments
Derecognition before lease end date
Effect of movement in exchange rate
Balance at December 31,
Shop and Office
Buildings
Vehicles
Total
35,059
6,171
(2,940)
550
38,840
812
333
(331)
21
835
35,871
6,504
(3,271)
571
39,675
Shop and Office
Buildings
Vehicles
Total
38,159
-
(2,928)
-
(172)
35,059
938
268
(368)
(27)
1
812
39,097
268
(3,296)
(27)
(171)
35,871
$
$
$
$
iii. Amounts Recognized in Consolidated Statements of Comprehensive Earnings
(Stated in thousands of dollars)
Years ended December 31,
Interest on lease liabilities
Income from sub-leasing right-of-use assets presented in “finance
expense lease liability”
Expenses relating to short-term leases
Expenses relating to leases of low-value assets, excluding short-term
leases of low value
2022
(Re-presented Note
4)
2021
$
2,032
$
2,125
(3)
448
90
(3)
363
90
$
2,567
$
2,575
-110-
iv. Amounts Recognized in Consolidated Statements of Cash Flows
Consolidated Financial Statements & Notes
(Stated in thousands of dollars)
Years ended December 31,
Total cash outflow for IFRS 16 Leases
v. Extension Options
2022
$
(5,303)
$
2021
(5,420)
Shop and office leases contain extension options exercisable by the Corporation during the term of the lease. Where
practicable, the Corporation seeks to include extension options in new leases to provide operational flexibility. The
extension options held are exercisable only by the Corporation and not by the lessors.
If the Corporation is reasonably expected to exercise the extension options, the effect of the potential future lease
payments are reflected in the long-term lease liabilities.
b) Leases as Lessor
During 2022 the Corporation sub-leased offices that are presented as part of a right-of-use asset. During the 2022
year the Corporation recognized interest income on lease receivables of $3 thousand (2021 – $3 thousand). Lease
payments to be received after the reporting date are immaterial as leases conclude in the first quarter of 2023.
21. Related Parties
a) Transactions with Key Management Personnel
Key management personnel compensation
Key management personnel are those persons having authority and responsibility for planning, directing and
controlling the activities of the Corporation as a whole. The Corporation determined that key management personnel
consists of members of the Board, the Chief Executive Officer, President, and Senior Vice Presidents reporting
directly to the Chief Executive Officer or President.
In addition to their salaries, the Corporation also provides its executive officers with annual incentives which consist
of bonuses and commissions that the Human Resources and Compensation Committee considers comparable to
benefits provided to executives of other publicly traded oil and natural gas service companies.
Executive officers also participate in the Corporation’s share option program and retention award plan.
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PHX Energy Services Corp. | 2022 Annual Report
The Corporation, either directly or indirectly through its subsidiaries, has entered into executive employment
agreements with certain executive officers that provide for termination payments. These agreements continue
indefinitely until terminated in accordance with the terms thereof and the base salary payable there under is subject
to annual review.
Key management personnel compensation comprised:
Years ended December 31,
Base salaries, benefits, and directors’ remuneration
Short-term bonuses and commissions
Share-based compensation
2022
$
2,568,335
$
7,393,980
3,393,550
2021
3,326,404
6,925,243
3,539,642
$
13,355,865
$
13,791,289
Key management personnel and director transactions
As at December 31, 2022, Directors and Executive Officers of the Corporation control 15 percent of the common
shares of the Corporation.
Independent Directors are entitled to receive an annual retainer as well as a fee for each meeting of the Board or
Committee of the Board attended. The Lead Director receives an additional annual retainer, as do the Chairs of the
Audit Committee, Human Resources and Compensation Committee, and Nomination and Corporate Governance
Committee. Directors are also entitled to participate in the retention award plan (see Note 12) and can elect to receive
certain percentages of these fees as RAs under the retention award plan. As at December 31, 2022, the Directors
held 1,086,395 of RAs outstanding (2021 – 803,460).
From time-to-time, Directors of the Corporation, or their related entities, may purchase goods or services from the
Corporation. These purchases are on the same terms and conditions as those entered into by other Corporation
employees or customers. For the year ended December 31, 2022, there were purchases of inventory in the amount
of $30 thousand from a related party (2021 – $nil).
-112-
22. Significant Subsidiaries
Consolidated Financial Statements & Notes
Phoenix Technology Services Inc.
Phoenix Technology Services LP
Phoenix Technology Services USA Inc.
Country of
Incorporation
Canada
Canada
USA
Phoenix Technology Services Luxembourg Sarl.
Luxembourg
Phoenix Technology Services International Ltd. (i)
Cyprus
(i) Entity holds a branch in Albania.
Functional
Currency
CAD
CAD
USD
USD
CAD
Ownership Interest
2022
100%
100%
100%
100%
100%
2021
100%
100%
100%
100%
100%
-113-
PHX Energy Services Corp. | 2022 Annual Report
Corporate Information
Board of Directors
John Hooks
Randolph (“Randy”) M. Charron
Myron Tétreault
Karen David-Green
Lawrence Hibbard
Roger Thomas
Terry Freeman
Officers
John Hooks
CEO
Michael Buker
President
Cameron Ritchie
Sr. Vice President Finance and CFO
Corporate Secretary
Craig Brown
Sr. Vice President Engineering and
Technology
Jeffery Shafer
Sr. Vice President Sales and Marketing
Legal Counsel
Burnet, Duckworth & Palmer LLP
Calgary, Alberta
Auditors
KPMG LLP
Calgary, Alberta
Bankers
HSBC Bank Canada
Calgary, Alberta
Transfer Agent
Odyssey Trust Company
Calgary, Alberta
-114-