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PHX Energy Announces Further Increase to its Quarterly Dividend and Strong Second Quarter Results

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CALGARY, Alberta, Aug. 09, 2022 (GLOBE NEWSWIRE) —

Second Quarter Highlights

  • The Corporation’s adjusted EBITDA(1) from continuing operations increased to $25.1 million, 20 percent of consolidated revenue(1). This is the highest second quarter adjusted EBITDA in the Corporation’s history.
  • Earnings from continuing operations of $12.8 million is also the best second quarter result in the Corporation’s history.
  • Consolidated revenue of $126.2 million is the highest second quarter revenue on record, an increase of 67 percent over the comparative 2021-quarter.
  • For the second consecutive quarter, PHX Energy’s US division generated its highest quarterly revenue in the Corporation’s history. US revenue was $105.4 million in the second quarter of 2022, representing 83 percent of consolidated revenue.
  • The Corporation divested its Russian subsidiary, Phoenix TSR LLC (“Phoenix TSR”), resulting in full withdrawal from Russia.
  • A quarterly dividend of $0.075 per common share was paid on July 15, 2022, which is triple the dividend per share declared in the second quarter of 2021. In light of continued strong financial performance, PHX Energy’s Board has approved a further increase to the quarterly dividend to $0.10 per share effective for the dividend payable to shareholders of record at the close of business on September 30, 2022.
  • The Corporation maintained a strong financial position, with working capital(1) of $75.7 million and credit facility capacity in excess of $60 million.
  • PHX Energy intends to protect and preserve its balance sheet strength, capitalize on unique growth strategies and continue to reward its shareholders.

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(Stated in thousands of dollars except per share amounts, percentages and shares outstanding)

  Three-month periods ended June 30,   Six-month periods ended June 30,
  2022   2021   % Change   2022   2021   % Change  
Operating Results – Continuing Operations (unaudited)   (unaudited)       (unaudited)   (unaudited)    
Revenue 126,238   75,765   67   235,568   144,312   63  
Earnings 12,818   4,447   188   10,504   9,781   7  
Earnings per share – diluted 0.25   0.08   213   0.21   0.19   11  
Adjusted EBITDA(1)1 25,084   14,154   77   31,528   28,645   10  
Adjusted EBITDA per share – diluted(1) 0.49   0.27   81   0.63   0.56   13  
Adjusted EBITDA as a percentage of
revenue(1)
20 % 19 %     13 % 20 %  
Cash Flow – Continuing Operations              
Cash flows from operating activities 11,449   8,845   29   7,740   10,374   (25 )
Funds from operations(1) 21,822   12,299   77   24,703   24,102   2  
Funds from operations per share – diluted(1) 0.43   0.24   79   0.49   0.47   4  
Dividends paid per share 0.075   0.025   200   0.125   0.050   150  
Dividends paid 3,791   1,260   201   6,273   2,525   148  
Capital expenditures 15,214   10,519   45   33,420   17,408   92  
Free cash flow(1) 19,163   11,007   74   20,737   22,996   (10 )
               
Financial Position (unaudited)         Jun 30, ‘22   Dec 31, ‘21    
Working capital(1)         75,678   57,872   31  
Net debt(1)         2,137   (24,829 ) n.m.  
Shareholders’ equity         146,467   134,432   9  
Common shares outstanding         50,378,074   47,978,662   5  

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n.m. – not meaningful

Outlook

We are proud of the records achieved in the second quarter of 2022 and believe these results can be attributed to the execution of our strategies to focus on the best markets in the world, providing premium technologies, employing the industry’s top professionals, and using our financial strength to mitigate supply chain challenges and create a competitive advantage.

  • Although there is some caution related to a possible recession, we believe the rig count will continue to grow and commodity prices will remain favourable as inventories are depleted due to the capital restraints of producers since 2014. As such premium equipment will remain in high demand as Operators will not settle for mediocre drilling performance.
  • This will bode well for our operations which will be equipped with additional job capacity from the large 2022 capital expenditures program. In the second quarter our fleet operated near or at maximum capacity, and this constrained activity growth, however, this was partially offset by the ability to improve day rates.
  • We will continue to receive equipment deliveries through the second half of the year and into 2023, and have built up our inventory to service this equipment in a market where this premium technology will be scarce.
  • We have created a competitive advantage where we can continue to grow, potentially see further pricing increases, and further strengthen our financial position for additional shareholder rewards.
  • In the current economic environment, there are challenges that us and the entire sector are facing including supply chain constraints such as long lead times for materials for repair, inflationary cost and labour shortages. We remain diligent in trying to proactively mitigate these through our resources in supply chain and training.
  • The solutions to mitigate these challenges, particularly related to labour, will likely take time and may impact our costs, however this will not be unique to our operations and the technology supply demand imbalance should create the opportunity to protect operating margins.
  • We anticipate that in 2023 capital expenditures will largely be directed towards maintenance capital, creating additional financial strength, strong profitability and substantial free cash flow, which we expect to continue to return to shareholders, hopefully at an even greater percentage in the upcoming quarters.
  • We are committed to shareholder returns as shown by our quarterly dividend increasing from $0.025 per share to the newly announced $0.10 per share since its re-commencement in December 2020. Our ability to increase dividends while growing our operations demonstrates the strength of our sector-leading balance sheet, which we are diligent in protecting.
  • If we are correct in our forecast for a robust industry environment, we will remain steadfast in our commitment to creating shareholder value and continue to explore additional opportunities to benefit shareholders which could include, future quarterly dividend increases, special dividends, and continued NCIB purchases.

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We are in an enviable position with one of the largest fleets of industry leading technology that has proven its ability to deliver the drilling performance that Operators expect. We believe there will be further increases to the North American rig count creating opportunities for greater activity and we will be equipped to meet this demand. With the robust commodity prices forecasted to continue, we anticipate our financial and operating results will strengthen in future quarters sustaining our balance sheet strength. This position coupled with our unfairly low valuation in the stock market will drive our continued desire to reward shareholders leveraging the strong free cash flow forecasted.

Michael Buker, President        
August 9, 2022

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Financial Results

In the quarter PHX Energy achieved the highest second quarter revenue in the Corporation’s history and the US division again achieved all-time record quarterly revenue, having also done so in the first quarter of the year. PHX Energy’s consolidated revenue from continuing operations grew by 67 percent to $126.2 million from $75.8 million in the comparative 2021-quarter. PHX Energy’s proactive supply chain strategy allowed the Corporation to capitalize on the robust commodity prices as parts and equipment ordered in late 2021 were delivered and deployed in the second quarter. The greater capacity in the Corporation’s fleet of high-performance technologies along with strong demand from oil and gas producers drove increases to both consolidated operating activity and average revenue per day across all segments.

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The Corporation’s consolidated activity levels increased by 40 percent to 6,486 operating days in the 2022-quarter relative to 4,639 operating days in the 2021-quarter. Average revenue per day excluding US motor rentals improved by 21 percent from $15,526 in the 2021-quarter to $18,782 in the 2022-quarter. The increase in activity coupled with the improvement in average revenue per day were the main drivers of the 77 percent improvement in adjusted EBITDA which was the highest for a second quarter in PHX Energy’s history. In the quarter adjusted EBITDA was $25.1 million, 20 percent of revenue, compared to $14.2 million, 19 percent of revenue, reported in the second of quarter of 2021. For the three-month period ended June 30, 2022, the Corporation achieved earnings from continuing operations of $12.8 million compared to $4.4 million in the 2021-period. This level of earnings is also the best second quarter earnings in the Corporation’s history. Included in the 2021-quarter’s adjusted EBITDA and earnings from continuing operations is $4.5 million of government grants. Excluding the impact of government grants, adjusted EBITDA improved by 159 percent in the 2022-quarter.

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For the three-month period ended June 30, 2022, PHX Energy’s strong momentum in the US continued and, for the second quarter in a row, the US division attained its highest quarterly revenue in the history of the Corporation. US revenue increased by 61 percent to $105.4 million from $65.5 million in the corresponding 2021-quarter. Stronger drilling activity partially contributed to this record level of revenue with the US segment’s operating days growing by 33 percent in the 2022-quarter to 4,707 operating days from 3,549 days in the 2021-quarter. The Corporation increased activity in the US by expanding the capacity of its high performance technology fleets, specifically Velocity Real Time-Time Systems (“Velocity”), PowerDrive Orbit Rotary Steerable Systems (“RSS”), and Atlas High Performance (“Atlas”) Motors. The US division’s revenue represented 83 percent of the Corporation’s consolidated revenue from continuing operations for the period (2021 – 86 percent).

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The Canadian industry’s activity levels in the second quarter of 2022 improved substantially over the same quarter of 2021 and PHX Energy’s Canadian division recorded 1,688 operating days in the 2022-quarter, a 55 percent increase from the 1,090 operating days realized in the comparable 2021-period. The increase in the Canadian segment’s drilling activity quarter-over-quarter was consistent with the Canadian market’s activity where the average quarterly rig count increased 57 percent from 72 in the 2021-period to 113 in the 2022-period (Source: Baker Hughes). The recovery in activity greatly contributed to the improvement in the Canadian segment’s revenue which almost doubled to $19.7 million in the three-month period ended June 30, 2022 from $10.3 million in the 2021-period.

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As at June 30, 2022, the Corporation continued to maintain a strong balance sheet with a net debt (1) of only $2.1 million and available credit facilities in excess of $60 million. As at June 30, 2022, the Corporation’s working capital was $75.7 million.

Dividends
In light of the continued strong performance and financial results, the Board has approved an increase to the Corporation’s quarterly dividend to $0.10 per common share from $0.075 per common share, commencing with the dividend payable October 15, 2022 to shareholders of record at the close of business on September 30, 2022. This is the third dividend increase since its re-instatement in December 2020.

On June 15, 2022, PHX Energy declared a cash dividend of $0.075 per common share payable to shareholders of record at the close of business on June 30, 2022. An aggregate of $3.8 million was paid on July 15, 2022.

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Capital Spending
In the second quarter of 2022, the Corporation spent $15.2 million on capital expenditures, which is $4.7 million greater than the expenditures of $10.5 million in the 2021-quarter. Capital expenditures for the 2022-quarter were primarily directed towards Atlas motors, Velocity systems, and RSS. Of the total capital expenditures in the 2022-quarter, $10 million was spent on growing the Corporation’s fleet of drilling equipment and the remaining $5.2 million was spent on maintenance of the current fleet of drilling and other equipment. The Corporation funded capital spending primarily using its cash and cash equivalents held at March 31, 2022 and drawings on its Canadian credit facilities.

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As at June 30, 2022, the Corporation has commitments to purchase drilling and other equipment for $47.2 million. Majority of the purchases are expected to be delivered throughout the second half of the 2022-year, with the remaining anticipated in the first quarter of 2023. Commitments include $13.6 million for Velocity systems, $26.7 million for performance drilling motors primarily relating to Atlas, and $6.9 million for RSS and other machinery and equipment. As previously announced, the Board approved to increase the 2022 capital expenditure program to $85 million to allow the Corporation to proactively order materials and equipment to expand its fleet for activity in late 2022 and into 2023. Given the current supply chain environment, lead times and costs are increasing and the Corporation’s ability to place advanced orders is continuing to create a competitive advantage.

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The Corporation currently possesses approximately 554 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, 105 Velocity systems, and 42 PowerDrive Orbit RSS, the largest independent fleet in North America.

Divesture of Russian Subsidiary
On June 30, 2022, PHX Energy divested Phoenix TSR LLC 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.

Shares Held in Trust
For the three-month period ended June 30, 2022, the Corporation equity settled a portion of its outstanding Retention Awards (“RA”) under its Retention Award Plan (the “RAP”). Pursuant to the RA settlement, 168,390 common shares were issued in the second quarter of the 2022-year to settle $1.1 million in RAP liabilities. The Corporation, through an independent trustee, continues to acquire common shares on the open market from time-to-time for the potential settlement of future share-based compensation obligations. For the three-month period ended June 30, 2022, the trustee purchased 240,700 common shares for a total cost of $1.5 million. As at June 30, 2022, 245,830 common shares are held in trust for purposes of the RAP.

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Normal Course Issuer Bid
During the third quarter of 2021, 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 3,679,797 common shares, representing 10 percent of the Corporation’s public float of common shares outstanding as at August 6, 2021. The NCIB commenced on August 16, 2021 and will terminate on August 15, 2022 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. Pursuant to the current NCIB, an aggregate of 1,499,900 common shares were purchased by the Corporation and cancelled as at December 31, 2021. For the three-month period ending June 30, 2022, the Corporation did not repurchase shares through its current NCIB.

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The Corporation intends to make an application to the TSX for renewal of its NCIB for a further one year term.  The anticipated renewal of the NCIB remains subject to the review and approval of the TSX.

PHX Energy continues to use NCIBs as an additional tool to enhance total long-term shareholder returns in conjunction with management’s disciplined capital allocation strategy.

Responding to COVID-19
In the 2022-quarter, government responses to COVID-19 continued to have a material impact on businesses worldwide. Despite easing of restrictions by most governments which led to improved industry and economic conditions in the period, the situation remains dynamic and the ultimate duration and magnitude of the impact on the economy and the financial effect on the Corporation is not known at this time. Supply chain challenges continue to create shortages and inflation related to the products and services required within the energy sector, including within the Corporation’s supply chain. PHX Energy has been proactive with efforts to lessen the supply chain disruptions’ impact on its operations. Specifically, as a result of these efforts, which included maintaining higher minimum safety stock levels and taking advantage of bulk discounts, inventory levels have increased by 29 percent from $36.7 million at the end of 2021 to $47.5 million at June 30, 2022.

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PHX Energy has and will continue to preserve a solid financial position and retain financial flexibility through substantial liquidity on its credit facilities. As at June 30, 2022, the Corporation has working capital of $75.7 million and approximately CAD $45 million and USD $15 million available from its credit facilities. Additional information regarding the risks, uncertainties and impact on the Corporation’s business can be found throughout this Press Release, including under the headings “Capital Spending”, “Operating Costs and Expenses”, “Segmented Information”, and “Outlook”.

Non-GAAP Measures
Throughout this Press Release, PHX Energy uses certain measures to analyze operational and financial performance that do not have standardized meanings prescribed under Canadian generally accepted accounting principles (“GAAP”). These non-GAAP measures include 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, free cash flow, 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 Measures” section following the Outstanding Corporation Share Data section of this Press Release for applicable definitions, rationale for use, method of calculation and reconciliations where applicable.

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Revenue
(Stated in thousands of dollars)

  Three-month periods ended June 30, Six-month periods ended June 30,
  2022 2021 % Change   2022 2021 % Change
Revenue 126,238 75,765 67   235,568 144,312 63

For the three-month period ended June 30, 2022, the Corporation generated consolidated revenue of $126.2 million as compared to $75.8 million in the 2021-quarter, an increase of 67 percent driven by higher revenue per day and operating days across all PHX Energy’s segments. The average consolidated revenue per day, excluding the motor rental division in the US, in the 2022-quarter rose by 21 percent to $18,782 relative to $15,526 in the corresponding 2021-quarter. The higher revenue per day was mainly driven by increased capacity in the Corporation’s fleet of high performance technologies, pricing increases rolled out to help curtail inflationary costs, and the strengthening of the US dollar relative to the 2021-quarter. Consolidated operating days increased by 40 percent from 4,639 days in the 2021-quarter to 6,486 days in the 2022-quarter. Strong activity in the US and Canadian operations plus resumption of operations in Albania helped bolster operating days relative to the comparative 2021-quarter. For the three-month period ended June 30, 2022, US revenue represented 83 percent of consolidated revenue (2021 – 86 percent).

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During the second quarter of 2022, the Western Texas Intermediate (“WTI”) crude oil price was 58 percent higher than in the 2021-quarter averaging USD $104/bbl (2021-quarter – USD $66/bbl) and the Western Canadian Select (“WCS”) oil prices also showed a 78 percent increase averaging USD $96/bbl (2021-quarter – USD $54/bbl). As a result of strong commodity prices both the US and Canadian industry’s activity improved quarter-over-quarter to an average of 713 rigs (2021-quarter – 450 rigs) operating per day in the US and an average of 113 rigs (2021-quarter – 72 rigs) in Canada. Throughout North America the vast majority of wells continued to be horizontal and directional representing 98 percent of all wells drilled in Canada and 96 percent of the average number of rigs operating per day in the US (Sources: Daily Oil Bulletin and Baker Hughes).

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For the six-month period ended June 30, 2022, the Corporation realized consolidated revenue of $235.6 million, a 63 percent increase, compared to the $144.3 million in the same 2021-period. The improvement in revenue for the 2022 six-month period was primarily a result of strong activity levels, high performance technology offerings, and the strengthening of the US dollar in the 2022-period relative to 2021. For the 2022-period, the average consolidated revenue per day, excluding the motor rental division in the US, was $17,086 as compared to $14,618 in the 2021-period, an increase of 17 percent. In the six-month period ended June 30, 2022, there were 13,281 operating days recorded which rose by 40 percent relative to 9,487 days in the corresponding 2021-period.

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Operating Costs and Expenses
(Stated in thousands of dollars except percentages)

  Three-month periods ended June 30, Six-month periods ended June 30,
  2022   2021   % Change   2022   2021   % Change
Direct costs 100,520   59,437   69   192,466   113,953   69
Depreciation & amortization drilling and other equipment (included in direct costs) 7,823   6,277   25   15,099   12,509   21
Depreciation & amortization right-of-use asset (included in direct costs) 849   825   3   1,685   1,661   1
Gross profit as a percentage of revenue excluding depreciation & amortization and government grants(1)2 27 % 26 %     25 % 26 %  

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 ended June 30, 2022, direct costs increased by 69 percent to $100.5 million from $59.4 million in the 2021-quarter. Higher direct costs are mainly attributable to increased activity across all divisions plus continued inflationary pressures increasing direct labour, equipment repair costs, and equipment rentals. In addition, no government grants were recognized in direct costs in the 2022-quarter whereas in the second quarter of 2021 the Corporation recognized $3.5 million in government grants.

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The Corporation’s depreciation and amortization on drilling and other equipment for the three-month period ended June 30, 2022, increased by 25 percent from $6.3 million to $7.8 million as capital expenditures progressively increased in the 2021-year and 2022-period.

In the three and six-month periods of 2022, gross profit as a percent of revenue excluding depreciation and amortization and government grants (were 27 percent and 25 percent, respectively, compared to 26 percent for both periods in 2021. The decrease in year-to-date gross profitability in 2022 relative to the corresponding 2021-period is mainly due to the effect of inflationary pressures; however, gross profit as a percent of revenue excluding depreciation and amortization and government grants improved in the second quarter of 2022 as management’s response to inflation began to take effect. In addressing inflation, management continues to take a proactive approach by leveraging volume purchases, quick pay discounts, and other strategies to soften the impact of rising material and service costs.

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(Stated in thousands of dollars except percentages)

  Three-month periods ended June 30, Six-month periods ended June 30,
  2022   2021   % Change   2022   2021   % Change
Selling, general and administrative (“SG&A”) costs 11,836   10,629   11     33,947   19,612   73
Cash-settled share-based compensation (included in SG&A costs) 715   3,924   (82 )   12,452   6,568   90
Equity-settled share-based compensation (included in SG&A costs) (75 ) 150   n.m.     260   218   19
SG&A costs excluding share-based compensation as a percentage of revenue(1)3 9 % 9 %     9 % 9 %  

n.m. – not meaningful

For the three-month period ended June 30, 2022, the Corporation’s SG&A costs increased by 11 percent to $11.8 million as compared to $10.6 million in the 2021-period, which was primarily due to higher personnel-related costs incurred to support the increase in drilling activity. No government grants were recognized in SG&A in the second quarter of 2022 (2021 – $1 million). Included in SG&A costs are share-based compensation expenses totaling $0.6 million in the 2022-quarter compared to $4.1 million in the 2021-quarter. Excluding share-based compensation, SG&A costs as a percentage of revenue for the three-month period ended June 30, 2022 remained steady with the 2021-period at 9 percent.

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Share-based compensation mainly relates to retention awards which are measured at fair value and the decrease in the 2022-quarter was primarily due to decreases in the Corporation’s share price.

(Stated in thousands of dollars)

  Three-month periods ended June 30, Six-month periods ended June 30,
  2022 2021 % Change   2022 2021 % Change
Research & development expense 873 624 40   1,630 1,185 38

Research and development (“R&D”) expenditures for the three and six-month periods ended June 30, 2022 were $0.9 million (2021 – $0.6 million) and $1.6 million (2021 – $1.2 million), respectively. The higher R&D expenditures in both 2022 periods is primarily due to the increase of personnel related costs and a greater number of initiatives in the R&D department. PHX Energy’s R&D focus continues to be on developing new technologies, improving the reliability of equipment, and reducing costs to operations.  

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(Stated in thousands of dollars)

  Three-month periods ended June 30, Six-month periods ended June 30,
  2022 2021 % Change     2022 2021 % Change  
Finance expense 262 94 179     374 265 41  
Finance expense lease liability 501 534 (6 )   1,008 1,083 (7 )

Finance expense mainly relates to interest charges on the Corporation’s long-term and short-term bank facilities. For the three and six-month periods ended June 30, 2022, finance charges increased to $0.3 million (2021 – $0.1 million) and $0.4 million (2021 – $0.3 million), respectively, due to higher drawings on the credit facilities as the Corporation secures equipment and material to facilitate growth.

Finance expense lease liability relates to interest expenses incurred on lease liabilities and decreased by 6 percent and 7 percent in the three and six-month periods as the Corporation’s long-term leases wind down and are renewed with more favorable terms.

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(Stated in thousands of dollars)

  Three-month periods ended June 30, Six-month periods ended June 30,
    2022   2021       2022   2021  
Net gain on disposition of drilling equipment   (3,060 ) (1,483 )     (6,642 ) (4,302 )
Foreign exchange losses   64   61       76   61  
Recovery of bad debts     (265 )       (265 )
Other   (512 )       (512 )  
Other income   (3,508 ) (1,687 )     (7,078 ) (4,506 )

For the three and six-month periods ended June 30, 2022, the Corporation recognized other income of $3.5 million and $7.1 million, respectively (2021 – $1.7 million and $4.5 million, respectively). In both periods, the improvement was mainly driven by increases in net gain on disposition of drilling equipment and recognition into income of a held deposit.

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 and self-insured downhole equipment losses. In the 2022-quarter, more instances of downhole equipment losses occurred as compared to the 2021-quarter, resulting in higher net gain on disposition of drilling equipment.

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(Stated in thousands of dollars except percentages)

  Three-month periods ended June 30, Six-month periods ended June 30,
  2022   2021     2022   2021  
Provision for income taxes 2,934   1,687     2,717   2,939  
Effective tax rates 19 % 28 %   21 % 23 %

For the three and six-month periods ended June 30, 2022, the Corporation reported income tax provisions of $2.9 million (2021 – $1.7 million) and $2.7 million (2021 – $2.9 million), respectively. Higher provision in the 2022-quarter was mainly a result of improved taxable profits in the US jurisdictions.

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 mainly in Albania.

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Canada

(Stated in thousands of dollars)

  Three-month periods ended June 30, Six-month periods ended June 30,
  2022   2021 % Change   2022 2021 % Change
Revenue 19,704   10,250 92   46,843 25,697 82
Reportable segment profit (loss) before tax(1) (16 ) 224 n.m.   3,450 2,549 35

(1) Includes adjustments to intercompany transactions.
n.m. – not meaningful

For the three and six-month periods ended June 30, 2022, PHX Energy’s Canadian revenue was $19.7 million and $46.8 million, respectively, in comparison to revenue of $10.3 million and $25.7 million in the same 2021-periods. Despite spring break-up when activity levels are typically lower as compared to the other quarters of the year, the Corporation exceeded 1,600 operating days in the 2022-quarter which was only achieved twice prior in the Corporation’s history.

For the three and six-month periods ended June 30, 2022, operating days improved 55 percent in both periods to 1,688 days and 4,418 days, respectively, compared to 1,090 days and 2,855 days, respectively, in the comparable 2021-periods. In comparison industry horizontal and directional drilling activity, as measured by drilling days, increased 62 percent to 10,407 days in the second quarter of 2022 and 44 percent to 26,840 in the first half of the 2022-year (Source: Daily Oil Bulletin).

Despite higher volume of active rigs operating in 2022, the Canadian market remained highly competitive. However, the Canadian division was successful in maintaining its market share and well-diversified client base. During the 2022-quarter, PHX Energy was active in the Duvernay, Montney, Glauconite, Frobisher, Cardium, Viking, Bakken, Torquay, Colony, Clearwater, and Scallion basins.

In the second quarter of 2022, the Canadian operations’ reportable segment profit before tax decreased to a loss of $16 thousand from a reportable segment profit before tax of $0.2 million in the 2021-quarter. For the 2022 six-month period, the division’s reportable segment profit before tax increased to $3.5 million from $2.5 million in the comparable 2021-period. No government grants were received in the 2022-year. Excluding the impact from government grants, PHX Energy’s Canadian segment profitability improved in both 2022-periods from reportable segment loss before tax of $1.6 million and $0.9 million, respectively, for the three and six-month periods ended June 30, 2021.

United States

(Stated in thousands of dollars)

  Three-month periods ended June 30, Six-month periods ended June 30,
  2022 2021 % Change   2022 2021 % Change
Revenue 105,367 65,515 61   187,162 118,615 58
Reportable segment income before tax(1) 16,885 11,272 50   23,331 18,494 26

(1) Includes adjustments to intercompany transactions.

For the three-month period ended June 30, 2022, the US division achieved the highest quarterly divisional revenue in the Corporation’s history. US revenue in the 2022-quarter improved by 61 percent to $105.4 million as compared to $65.5 million in the corresponding 2021-quarter. Drilling activity increased by 33 percent in the 2022-quarter to 4,707 days compared to 3,549 days in the same 2021-quarter. In comparison, the US industry horizontal and directional rig count increased by 59 percent quarter-over-quarter with an average of 687 active horizontal and directional rigs per day in 2022 compared to an average of 432 active horizontal and directional rigs per day in the 2021-quarter (Source: Baker Hughes). During the quarter PHX Energy’s fleet was operating at full capacity and was impacted by supply chain challenges. However, despite the limitations on drilling activity, the Corporation’s improvement in revenue demonstrates the continuing high demand for the Corporation’s high-performance technologies, superior operational performance of personnel and equipment, and targeted marketing efforts. For the three-month period ended June 30, 2022, revenue per day, excluding the Corporation’s US motor rental division, rose to $21,442 compared to $17,403 in the corresponding 2021-quarter. The 23 percent increase to revenue per day is attributable to demand for the Corporation’s high-performance technologies and strengthening of the US dollar. The US-denominated average revenue per day increased by 18 percent quarter-over-quarter from USD $14,173 to USD $16,795.

For the three-month period ended June 30, 2022, PHX Energy’s US operations realized reportable segment profit before tax of $16.9 million, a 50 percent increase from $11.3 million in the same 2021-period. Included in the 2021-quarter reportable segment profit before tax was $2.7 million in government grants. Excluding government grants, reportable segment income almost doubled in the 2022-quarter compared to the 2021-period. The significant improvement in divisional profit is primarily attributable to improved activity levels and effective inflation-mitigating strategies deployed by management.

Horizontal and directional drilling continues to represent the majority of rigs running on a daily basis during the second quarter of 2022. For the three-month period ended June 30, 2022, the Corporation’s US division was active in the Permian, Eagle Ford, SCOOP/STACK, Marcellus, Bakken, and Niobrara basins.

Consistent with the second quarter of 2022, for the six-month period ended June 30, 2022, the Corporation capitalized on high performance technologies and generated higher operational days and higher revenue per day. Drilling activity for the six-month period ended June 30, 2022, increased 32 percent to 8,753 days as compared to 6,633 days in the same 2021-period. In comparison, US industry activity, as measured by the average number of horizontal and directional rigs running on a daily basis, improved to 650 rigs in the first half of 2022 as compared to an average of 403 rigs in the comparable 2021-period (Source: Baker Hughes). For the six-month period ended June 30, 2022, average revenue per day, excluding the Corporation’s motor rental division, was $20,396, which is 20 percent higher than the $17,035 reported in the 2021-period. For the six-month period ended June 30, 2022, the US-denominated revenue per day increased to USD $16,034, 17 percent higher, compared to USD $13,685 achieved in the comparable 2021-period.

For the six-month period ended June 30, 2022, a reportable segment income before tax of $23.3 million was realized as compared to $18.5 million in the corresponding 2021-period. Excluding government grants, reportable segment income before tax in the first half of the 2022-year improved by 74 percent from the $13.4 million realized in the comparable 2021-period. Higher profitability in the period is mainly attributed to the rise in activity levels and revenue per day.

International – Continuing Operations

(Stated in thousands of dollars)

  Three-month periods ended June 30, Six-month periods ended June 30,
  2022 2021   % Change   2022 2021   % Change
Revenue 1,167   n.m.   1,563   n.m.
Reportable segment profit (loss) before tax 523 (471 ) n.m.   361 (798 ) n.m.

n.m. – not meaningful

The Corporation’s International segment revenue is mainly comprised of revenue from Albania. For the three and six-month periods ended June 30, 2022, International revenue increased to $1.2 million and $1.6 million, respectively, as compared to nil in the 2021-periods as Albania operations were paused at that time and resumed late in the first quarter of 2022 with one rig. With the resumption of activity in the first half of 2022, the International segment realized reportable segment profits of $0.5 million and $0.4 million for the three and six-month periods (2021 – loss of $0.5 million and loss of $0.8 million, respectively.)

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 six-month periods ended June 30, 2022, the Russian operations and loss on disposition have been presented as discontinued operations.

The results of the sold Phoenix TSR operations are as follows:

(Stated in thousands of dollars)

  Three-month periods ended June 30, Six-month period ended June 30,
  2022   2021   2022     2021  
Revenue 4,648   2,073     7,443     3,632  
Expenses (3,072 ) (2,141 )   (5,781 )   (4,170 )
  1,576   (68 )   1,662     (538 )
Reclassification of foreign currency translation loss on disposition of Phoenix TSR (10,561 )     (10,561 )    
Loss on disposition of Phoenix TSR (3,496 )     (3,496 )    
Impairment and other write-offs       (1,967 )    
Loss from discontinued operations (12,481 ) (68 )   (14,362 )   (538 )
Income tax from discontinued operations (169 )     (196 )   1  
Loss from discontinued operations, net of taxes (12,650 ) (68 )   (14,558 )   (537 )

Investing Activities

PHX Energy used net cash in investing activities of $14.5 million in the second quarter of 2022 compared to $5.4 million in the 2021-quarter. In the second quarter of 2022, the Corporation received proceeds of $3.9 million (2021 – $2.7 million) from the disposition of drilling equipment, primarily related to the involuntary disposal of drilling equipment in well bores. Additionally, the Corporation spent $15.2 million on capital expenditures in the second quarter of 2022 (2021 – $10.5 million). These expenditures included:

  • $7.5 million downhole performance drilling motors,
  • $7.4 million in MWD systems and spare components and RSS; and
  • $0.3 million in machinery and equipment and other assets.

The capital expenditure program undertaken in the period was primarily financed from cash and cash equivalents and the credit facilities. Of the total capital expenditures in the 2022-quarter, $10 million was used to grow the Corporation’s fleet of drilling equipment and the remaining $5.2 million was used to maintain the current fleet of drilling and other equipment.

During the three-month period ended June 30, 2022, the Corporation acquired intangible assets in the amount of $0.2 million (2021 – $nil).
  
The change in non-cash working capital balances of $2.9 million (use of cash) for the three-month period ended June 30, 2022, relates to the net change in the Corporation’s trade payables that are associated with the acquisition of capital assets. This compares to a $2.4 million (source of cash) for the three-month period ended June 30, 2021.

Financing Activities

For the three-month period ended June 30, 2022, net cash from financing activities was $10.4 million as compared to $5.4 million used in financing activities in the same 2021-period. In the 2022-period:

  • 240,700 common shares were purchased by an independent trustee in the open market for $1.5 million to be held in trust for the potential future settlement of restricted awards granted under the Corporation’s RAP;
  • dividends of $3.8 million were paid to shareholders;
  • payments of $0.9 million were made towards lease liability;
  • 83,333 common shares were issued from treasury for proceeds of $0.2 million upon the exercise of share options; and
  • $16.4 million net in drawings were taken against the operating and syndicated facilities.

Capital Resources

As of June 30, 2022, the Corporation had CAD $20.1 million drawn on its Canadian credit facilities, nothing drawn on its US operating facility, and a cash balance of $18 million. As at June 30, 2022, the Corporation had approximately CAD $45 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.
        
As at June 30, 2022, the Corporation was in compliance with all its financial covenants.

Cash Requirements for Capital Expenditures
Historically, the Corporation has financed its capital expenditures and acquisitions through cash flows from operating activities, debt and equity. On April 14, 2022, the Corporation announced an increase to its 2022 capital expenditure program from $47.7 million to $85 million. The increase is primarily dedicated to growing the Velocity, RSS and Atlas fleets to meet increased demand anticipated in late 2022 and 2023.

These planned expenditures are expected to be financed from cash flow from operations, cash and cash equivalents, and / or the Corporation’s unused credit facilities, if necessary. However, if a sustained period of market uncertainty and financial market volatility persists, 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 June 30, 2022, the Corporation has commitments to purchase drilling and other equipment for $47.2 million. Majority of the delivery is expected to occur within the second half of 2022 with the remainder expected to be delivered in the first quarter of 2023.

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.

The common shares of PHX Energy trade on the Toronto Stock Exchange under the symbol PH

For further information please contact:
John Hooks, CEO;
Michael Buker, President; or
Cameron Ritchie, Senior Vice President Finance and CFO

PHX Energy Services Corp.
Suite 1400, 250 2nd Street SW
Calgary, Alberta T2P 0C1
Tel: 403-543-4466 Fax: 403-543-4485 www.phxtech.com

Condensed Consolidated Statements of Financial Position

(unaudited)

    June 30, 2022 December 31, 2021
ASSETS            
Current assets:            
    Cash and cash equivalents   $ 17,971,334     $ 24,828,830  
  Trade and other receivables     96,152,034       76,478,093  
    Inventories     47,492,571       36,691,141  
  Prepaid expenses     4,587,966       2,814,272  
  Current tax assets     354,756       346,554  
  Total current assets     166,558,661       141,158,890  
Non-current assets:            
  Drilling and other long-term assets     93,597,375       76,363,001  
  Right-of-use asset     24,822,151       25,708,177  
  Intangible assets     15,833,846       16,137,024  
  Investments     3,000,500       3,000,500  
  Deferred tax assets     311,589       126,133  
  Total non-current assets     137,565,461       121,334,835  
Total assets   $ 304,124,122     $ 262,493,725  
LIABILITIES AND SHAREHOLDERS’ EQUITY            
Current liabilities:            
  Trade and other payables   $ 84,313,427     $ 77,571,887  
  Lease liability     2,770,862       3,232,503  
  Dividends payable     3,796,793       2,482,060  
  Total current liabilities     90,881,082       83,286,450  
Non-current liabilities:            
  Lease liability     32,214,382       32,638,819  
  Loans and borrowings     20,107,992        
  Deferred tax liability     12,669,815       9,346,426  
  Other     1,783,812       2,789,786  
  Total non-current liabilities     66,776,001       44,775,031  
Equity:            
  Share capital     248,949,605       235,463,414  
  Contributed surplus     7,117,440       9,462,091  
  Deficit     (133,214,072 )     (121,721,790 )
  Accumulated other comprehensive income     23,614,066       11,228,529  
  Total equity     146,467,039       134,432,244  
               
Total liabilities and equity   $ 304,124,122     $ 262,493,725  

                                

Condensed Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

   Three-month periods ended June 30,  Six-month periods ended June 30,
      2022     2021       2022     2021  
Revenue   $ 126,237,557   $ 75,765,208     $ 235,568,256   $ 144,311,945  
Direct costs     100,520,480     59,436,713       192,466,162     113,952,764  
Gross profit     25,717,077     16,328,495       43,102,094     30,359,181  
Expenses:                    
Selling, general and administrative expenses     11,836,064     10,629,415       33,947,420     19,611,825  
Research and development expenses     873,207     624,447       1,629,766     1,184,548  
Finance expense     262,188     94,007       373,984     265,232  
Finance expense lease liability     501,385     534,208       1,008,401     1,082,682  
Other income     (3,508,490 )   (1,686,926 )     (7,077,881 )   (4,505,598 )
        9,964,354     10,195,151       29,881,690     17,638,689  
                                     
Earnings from continuing operations before income taxes     15,752,723     6,133,344       13,220,404     12,720,492  
                       
Provision for (recovery of) income taxes                    
Current     (13,775 )   11,619       (229,272 )   20,453  
Deferred     2,948,037     1,675,191       2,946,091     2,918,648  
        2,934,262     1,686,810       2,716,819     2,939,101  
Earnings from continuing operations     12,818,461     4,446,534       10,503,585     9,781,391  
                     
Discontinued operations                    
Net loss from discontinued operations, net of taxes     (12,649,964 )   (67,656 )     (14,558,032 )   (537,493 )
Net earnings (loss)     168,497     4,378,878       (4,054,447 )   9,243,898  
                     
Other comprehensive income (loss)                    
  Foreign currency translation     4,144,053     (987,617 )     1,824,583     (2,168,988 )
Total comprehensive income (loss) for the period   $ 4,312,550   $ 3,391,261     $ (2,229,864 ) $ 7,074,910  
Earnings (loss) per share – basic and diluted                    
Continuing operations   $ 0.25   $ 0.08     $ 0.21   $ 0.19  
Discontinued operations   $ (0.25 ) $     $ (0.29 ) $ (0.01 )
Net earnings (loss)   $   $ 0.08     $ (0.08 ) $ 0.18  

Condensed Consolidated Statements of Cash Flows

(unaudited)

  Three-month periods ended June 30,   Six-month periods ended June 30,
    2022     2021       2022     2021  
Cash flows from operating activities:                  
Earnings from continuing operations $ 12,818,461   $ 4,446,534     $ 10,503,585   $ 9,781,391  
Adjustments for:                  
Depreciation and amortization   7,822,953     6,277,011       15,099,473     12,509,160  
Depreciation and amortization right-of-use asset   848,681     825,454       1,684,727     1,661,353  
Provision for income taxes   2,934,262     1,686,810       2,716,819     2,939,101  
Unrealized foreign exchange loss (gain)   (27,999 )   140,177       (118,526 )   188,816  
Gain on disposition of drilling equipment   (3,059,873 )   (1,483,034 )     (6,641,623 )   (4,302,196 )
Equity-settled share-based payments   (74,706 )   149,817       260,008     218,318  
Finance expense   262,188     94,007       373,984     265,232  
Recovery of bad debts       (264,623 )         (264,623 )
Provision for inventory obsolescence   297,639     426,538       824,656     1,105,881  
Interest paid   (127,248 )   (47,463 )     (178,171 )   (106,836 )
Income taxes received (paid)   14,880     (8,097 )     219,130     (20,316 )
Change in non-cash working capital   (10,259,827 )   (3,398,566 )     (17,003,987 )   (13,601,474 )
Continuing operations   11,449,411     8,844,565       7,740,075     10,373,807  
Discontinued operations   (520,334 )   (472,558 )     (1,254,859 )   (590,149 )
Net cash from operating activities   10,929,077     8,372,007       6,485,216     9,783,658  
Cash flows from investing activities:                  
Proceeds on disposition of drilling equipment   3,883,133     2,740,941       9,179,549     6,525,814  
Acquisition of drilling and other equipment   (15,213,688 )   (10,518,640 )     (33,419,918 )   (17,408,157 )
Acquisition of intangible assets   (206,930 )         (618,205 )    
Change in non-cash working capital   (2,924,122 )   2,411,228       710,890     4,715,729  
Continuing operations   (14,461,607 )   (5,366,471 )     (24,147,684 )   (6,166,614 )
Discontinued operations   (316,392 )   13,406       (68,068 )   13,855  
Net cash used in investing activities   (14,777,999 )   (5,353,065 )     (24,215,752 )   (6,152,759 )
Cash flows from financing activities:                  
Proceeds from loans and borrowings   16,359,192           20,107,992      
Proceeds from issuance of share capital   169,666           1,811,853     395,271  
Dividends paid to shareholders   (3,790,543 )   (1,259,757 )     (6,272,603 )   (2,525,405 )
Purchase of shares held in trust   (1,500,000 )   (3,316,171 )     (3,500,000 )   (3,316,171 )
Payments of lease liability   (872,923 )   (814,514 )     (1,731,911 )   (1,605,880 )
Repurchase of shares under the NCIB                 (1,204,133 )
Continuing operations   10,365,392     (5,390,442 )     10,415,331     (8,256,318 )
Discontinued operations                  
Net cash from (used in) financing activities   10,365,392     (5,390,442 )     10,415,331     (8,256,318 )
Net increase (decrease) in cash and cash equivalents   6,516,470     (2,371,500 )     (7,315,205 )   (4,625,419 )
Cash and cash equivalents, beginning of period   11,283,545     23,468,419       24,828,830     25,745,911  
Effect of movements in exchange rates on cash held   171,319     (70,872 )     457,709     (94,445 )
Cash and cash equivalents, end of period $ 17,971,334   $ 21,026,047     $ 17,971,334   $ 21,026,047  

Cautionary Statement Regarding Forward-Looking Information and Statements

This document 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 document 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 document should not be unduly relied upon. These forward-looking statements and information speak only as of the date of this document.

In particular, forward-looking information and statements contained in this document include without limitation, the Corporation’s intent to preserve balance sheet strength and continue to reward shareholders, the anticipated continuation of PHX Energy’s quarterly dividend program and the amounts of dividends, the projected capital expenditures budget for 2022 and how the budget will be allocated and funded, the timeline for delivery of equipment on order, the competitive advantage that will be created by advanced orders in a challenging supply chain environment, the anticipated increase in demand for the Corporation’s services and technologies in North America, the intent to make an application to the TSX for renewal of its NCIB, the anticipated impact of COVID-19 on the Corporation’s operations, results and the Corporation’s planned responses thereto, the anticipated impact of global supply chain disruptions on the Corporation’s operations, results, and the Corporation’s planned responses thereto, the potential future settlement of retention and performance awards in common shares that were purchased and held in trust by an independent trustee in the open market.

The above are stated under the headings: “Second Quarter Highlights”, “Financial Results” and “Cash Requirements for Capital Expenditures”. In addition, all information contained under the headings “Outlook” sections of this Press Release may contains forward-looking statements.

In addition to other material factors, expectations and assumptions which may be identified in this Press Release and other continuous disclosure documents of the Corporation referenced herein, assumptions have been made in respect of such forward-looking statements and information regarding, among other things: the Corporation will continue to conduct its operations in a manner consistent with past operations; the general continuance of current industry conditions; anticipated financial performance, business prospects, impact of competition, strategies, the general stability of the economic and political environment in which the Corporation operates; the continuing impact of COVID-19 and the Russian-Ukrainian war on the global economy, specifically trade, manufacturing, supply chain 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 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. The forward-looking statements and information contained in this document 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.

Non-GAAP Measures

Adjusted EBITDA
Adjusted EBITDA, 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 provides supplemental information to net earnings 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 should not be construed as an alternative measure to net earnings determined in accordance with GAAP. PHX Energy’s method of calculating adjusted EBITDA may differ from that of other organizations and, accordingly, its adjusted EBITDA may not be comparable to that of other companies.

The following is a reconciliation of net earnings to adjusted EBITDA:

(Stated in thousands of dollars)        

  Three-month periods ended June 30, Six-month periods ended June 30,
    2022   2021     2022   2021
Net earnings from continuing operations:   12,818   4,447     10,504   9,781
Add:              
Depreciation and amortization drilling and other
equipment
  7,823   6,277     15,099   12,509
Depreciation and amortization right-of-use asset   849   825     1,685   1,661
Provision for income taxes   2,934   1,687     2,717   2,939
Finance expense   262   94     374   265
Finance expense lease liability   501   534     1,008   1,083
Equity-settled share-based payments   (75 ) 150     260   218
Unrealized foreign exchange (gain) loss   (28 ) 140     (119 ) 189
Adjusted EBITDA   25,084   14,154     31,528   28,645

Adjusted EBITDA 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 per share – dilutive is based on the adjusted EBITDA as reported in the table above divided by the diluted number of shares outstanding.

Adjusted EBITDA as a percentage of revenue is calculated by dividing the adjusted EBITDA as reported in the table above by revenue as stated on the Consolidated Statements of Comprehensive Income (Loss).

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 non-GAAP 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)

  Three-month periods ended June 30, Six-month periods ended June 30,
    2022   2021     2022   2021
Cash flows from operating activities   11,449   8,845     7,740   10,374
Add (deduct):              
Changes in non-cash working capital   10,261   3,399     17,004   13,601
Interest paid   127   47     178   107
Income taxes paid (received)   (15 ) 8     (219 ) 20
Funds from operations   21,822   12,299     24,703   24,102

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.

Free Cash Flow
Free cash flow is defined as funds from operations (as defined above) less maintenance capital expenditures and cash payment on leases and increased by proceeds on disposition. This non-GAAP measure does not have a standardized meaning and is not a financial measure recognized under GAAP. Management uses free cash flow as an indication of the Corporation’s ability to generate funds from its operations to support operations 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 free cash flow 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 free cash flow:

(Stated in thousands of dollars)

  Three-month periods ended June 30, Six-month periods ended June 30,
    2022   2021       2022   2021  
Cash flows from operating activities   11,449   8,845       7,740   10,374  
Add (deduct):              
Changes in non-cash working capital   10,261   3,399       17,004   13,601  
Interest paid   127   47       178   107  
Income taxes paid (received)   (15 ) 8       (219 ) 20  
Maintenance capital expenditures   (5,168 ) (2,684 )     (10,406 ) (4,943 )
Proceeds on disposition   3,883   2,741       9,180   6,526  
Cash payment on leases   (1,374 ) (1,349 )     (2,740 ) (2,689 )
Free cash flow   19,163   11,007       20,737   22,996  

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 non-GAAP 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)

          As at:  
        June 30, 2022   December 31, 2021  
Current assets       166,559   141,159  
Deduct:          
Current liabilities       (90,881 ) (83,287 )
Working capital       75,678   57,872  

Net Debt
Net debt is defined as the Corporation’s loans and borrowings less cash and cash equivalents. This non-GAAP 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 loans and borrowings and cash and cash equivalents to net debt:
(Stated in thousands of dollars)

            As at:  
        June 30, 2022   December 31, 2021  
Loans and borrowings       20,108    
Deduct:          
Cash and cash equivalents       (17,971 ) (24,829 )
Net debt       2,137   (24,829 )

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 measure 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.

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 June 30, Six-month periods ended June 30,
    2022   2021       2022   2021  
Revenue   126,237   75,765       235,568   144,312  
Direct costs   100,520   59,437       192,466   113,953  
Gross profit   25,717   16,328       43,102   30,359  
Depreciation & amortization drilling and other equipment (included in direct costs)   7,823   6,277       15,099   12,509  
Depreciation & amortization right-of-use asset (included in direct costs)   849   825       1,685   1,661  
Government grants (included in direct costs)     (3,543 )       (6,637 )
    34,389   19,887       59,886   37,892  
Gross profit as a percentage of revenue excluding depreciation & amortization and government grants   27 % 26 %     25 % 26 %

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 measure 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)

  Three-month periods ended June 30, Six-month periods ended June 30,
    2022   2021       2022   2021  
SG&A Costs   11,836   10,629       33,947   19,612  
Deduct:              
Share-based compensation (included in SG&A)   640   4,074       12,712   6,786  
    11,196   6,555       21,235   12,826  
Revenue   126,238   75,765       235,568   144,312  
SG&A costs excluding share-based compensation as a percentage of revenue   9 % 9 %     9 % 9 %

SG&A costs excluding share-based compensation and government grants as a percentage of revenue is defined as the Corporation’s SG&A costs excluding share-based compensation and government grants as quantified in the respective periods divided by revenue.

(1) Non-GAAP 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 Measures section of this Press Release.



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