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PHX Energy Announces its First Quarter Results, Reporting Increased Revenue and Activity Levels – Part 2


The Corporation incurred $7.2 million of SG&A costs for the three-month period ended March 31, 2017 as compared to $6.7 million in the 2016-period. Included in SG&A costs for the 2017-period were equity-settled and cash-settled share-based payments of $0.5 million (2016 - $0.3 million) and $0.1 million (2016 - $0.1 million recovery), respectively. Additionally, for the 2017 three-month period, SG&A costs were reduced by $0.1 million for actual lease payments made under the Corporation's onerous office lease contracts that were reclassified to reduce the provision for onerous contracts (2016 - nil). Excluding the share-based payment amounts and provision for onerous contracts, SG&A costs as a percentage of consolidated revenue were 11 percent in the 2017-quarter compared to 16 percent in the 2016-quarter.

For the three-month period ended March 31, 2017, SG&A costs were higher than the comparable period primarily due to the increase in activity and issuance of equity and cash-settled awards in March 2017. The Corporation remains focused on maintaining cost control initiatives to reduce SG&A costs across all regions and ensuring its cost structure is aligned with activity levels.

Equity-settled share-based payments relate to the amortization of the fair values of issued options of the Corporation using the Black-Scholes model. In the three-month period ended March 31, 2017, equity-settled share-based payments increased by 71 percent, as compared to the corresponding 2016-period, generally due to compensation expenses related to options granted in March 2017.

Cash-settled share-based retention awards, which are included in SG&A costs, are measured at fair value, and in the 2017-quarter, the related compensation expense recognized by PHX Energy was $0.1 million as compared to a recovery of $0.1 million in the 2016-quarter. The increased compensation expense is primarily due to the normal vesting of previously granted retention awards and issuance of new retention awards in March 2017 offset by the reduction in PHX Energy's share price from $4.22 as at December 31, 2016 to $3.66 as at March 31, 2017.

(Stated in thousands of dollars)

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Three-month periods ended March 31, 2017 2016 % Change ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Research & development expense 607 525 16 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

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Research and development ("R&D") expenditures charged to net earnings during the three-month period ended March 31, 2017 and 2016 were $0.6 million and $0.5 million, respectively. The increase in R&D expenditures in the 2017-quarter is mainly attributable to increased personnel in the R&D department who continue to focus on new technology development and cost-saving and reliability initiatives that will enhance and expand PHX Energy's services.

(Stated in thousands of dollars)

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Three-month periods ended March 31, 2017 2016 % Change ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Finance expense 585 571 2 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

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Finance expenses relate to interest charges on the Corporation's long-term and short-term bank facilities. Finance charges of $0.6 million in the first quarter of 2017 were consistent with those in the comparable 2016-period. Although there was a lower amount of borrowings outstanding during the 2017-quarter, the Corporation incurred additional financing charges from the amendment of the credit facility in the fourth quarter of 2016. In addition, as a result of the amendment, the applicable pricing on borrowings was fixed at higher rates compared to the 2016-period.

(Stated in thousands of dollars)

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Three-month periods ended March 31, 2017 2016 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Gain on disposition of drilling equipment (147) (1,205) Foreign exchange losses (gains) 172 (351) Provision for bad debts 228 30 ---------------------------------------------------------------------------- Other expense (income) 253 (1,526) ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

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For the three-month period ended March 31, 2017, other expense was comprised of a provision for bad debts of $0.2 million, foreign exchange losses of $0.2 million and a gain on disposition of drilling equipment of $0.1 million. During the period ended March 31, 2017, the Corporation recognized foreign exchange losses of $0.2 million (2016 - gain of $0.4 million), mainly from the settlement of Canadian-denominated intercompany payables in the Corporation's Russia operations. Provisions for the bad debt in the 2017-quarter relate mainly to US accounts receivable.

Gains from the disposition of drilling equipment typically result from insurance programs undertaken whereby proceeds for the lost equipment are at current replacement values, which are higher than the respective equipment's book value. Losses typically result from any asset retirements that were made before the end of the equipment's useful life and self-insured downhole equipment losses. In the 2017-period, the decrease in the gain on disposition of drilling equipment resulted mainly from fewer occurrences of insured downhole equipment losses and increased asset retirements.

(Stated in thousands of dollars, except percentages)

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Three-month periods ended March 31, 2017 2016 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Provision for (Recovery of) income taxes (1,195) (4,407) Effective tax rates 14% 37% ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

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The recovery of income taxes for the three-month period ended March 31, 2017 was $1.2 million as compared to $4.4 million in the 2016-quarter. The expected combined Canadian federal and provincial tax rate for 2017 is 27 percent (2016 - 27 percent). The effective tax rate in the 2017-period was lower than the expected rate mainly as a result of the effect of tax rates in foreign 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, in Russia and Albania.

Canada

(Stated in thousands of dollars)

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Three-month periods ended March 31, 2017 2016 % Change ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Revenue 29,442 15,620 88 Reportable segment loss before tax (2,395) (3,262) (27) ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

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PHX Energy's Canadian revenue for the three-month period ended March 31, 2017 increased by 88 percent to $29.4 million from $15.6 million in the corresponding 2016-period. The improvement was primarily the result of a significantly higher volume of activity during the 2017-quarter versus the comparable 2016-period. The Canadian segment reported 4,004 operating days in the first quarter of 2017, a large increase from the 1,951 days in the 2016-period. Similarly, total industry horizontal and directional drilling activity, as measured by drilling days, increased by 98 percent in the 2017-quarter to 22,186 days from 11,192 days in the 2016-quarter (Source: Daily Oil Bulletin). The Canadian market remained highly competitive even with the increased rig counts, and as such, market pricing did not adjust with the rebound in activity. PHX Energy's average day rates declined by 11 percent to $7,009 in the 2017-quarter from $7,870 in the comparable 2016-period (excluding Stream revenue of $1.4 million).

With a higher volume of active rigs operating in 2017, the Canadian division continued to be a prominent player in this market, maintaining its 25 percent market share and a well-diversified client base. During the 2017-quarter, 63 percent of the Canadian division's activity was oil well drilling and 37 percent was natural gas well drilling. PHX Energy was active in the Montney, Wilrich, Bakken, Shaunavon, Duvernay, Cardium and Viking areas.

The Canadian operations' reportable segment loss before tax for the first quarter of 2017 was $2.4 million as compared to losses of $3.3 million in the 2016-quarter. The improved profitability of the Canadian segment in the 2017-quarter was primarily the result of higher activity levels as compared to prior year's quarter offset by lower intercompany revenue generated from the lease of drilling and other equipment between the Canadian and US segments.

Stream Services

Included in the Canadian segment's revenue for the first quarter of 2017 is $1.4 million of revenue generated by the Stream division (2016 - $0.3 million). With the commercialization of a new product line and significant expansion of Stream's capacity in late-2016, this division achieved its highest quarterly activity in the 2017-quarter since the fourth quarter of 2014. During the three-month period ended March 31, 2017, Stream achieved 1,739 operating days, strong growth over the 385 days in the respective 2016-period. Along with increased volume, average day rates for the division also rose by 16 percent to $794 in the first quarter of 2017 from $687 in the 2016 three-month period.

For the three-month period ended March 31, 2017, the Stream division incurred reportable losses before tax of $0.5 million (2016 - $1.7 million). The Stream division's losses in the 2017-period pertain mostly to depreciation expenses of $0.6 million as well as to costs associated with the expansion of the division.

United States

(Stated in thousands of dollars)

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Three-month periods ended March 31, 2017 2016 % Change ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Revenue 26,815 21,739 23 Reportable segment loss before tax (3,007) (7,783) (61) ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

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In the first quarter of 2017, PHX Energy's US operations generated revenue of $26.8 million, an increase of 23 percent from $21.7 million in the 2016-quarter. This revenue growth was mainly the result of the higher industry rig count. In the first quarter of 2017, the number of horizontal and directional rigs running per day rose by 40 percent from an average of 487 horizontal and directional rigs running per day during the 2016-quarter to 681 in the 2017-quarter (Source: Baker Hughes). In comparison, the Corporation's US activity levels also rebounded as operating days increased by 27 percent to 1,990 days in the 2017-quarter from 1,564 days in the 2016-quarter. Average day rates, excluding the motor rental division in Midland, Texas and the Rocky Mountain region, slightly decreased from $13,361 in the 2016-quarter compared to $13,094 in the 2017-period.

Horizontal and directional drilling represented 91 percent of the industry's average number of rigs running on a daily basis during the first quarter of 2017, which was 3 percent greater than the percentage in the 2016-quarter. For the three-month period ended March 31, 2017, 93 percent of the US operating division's activity was oil well drilling, as measured by wells drilled and excluding the motor rental and gyro surveying divisions. During the first quarter of 2017, Phoenix USA remained active in the Permian, Eagle Ford, Bakken, Mississippian/Woodford, Marcellus, Niobrara and Utica basins.

Reportable segment loss before tax for the three-month period ended March 31, 2017 was $3.0 million compared to losses of $7.8 million in the 2016-quarter. The reduction to the segment losses in 2017 was largely the result of improved activity levels, stabilization of average day rates and lower rates charged on the intercompany lease of drilling and other equipment between the Canadian and US segments.

International

(Stated in thousands of dollars, except percentages)

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Three-month periods ended March 31, 2017 2016 % Change ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Revenue 4,865 3,090 57 Reportable segment loss before tax (605) (692) (13) ---------------------------------------------------------------------------- ----------------------------------------------------------------------------

/T/

For the three-month period ended March 31, 2017, the Corporation's international revenue increased by 57 percent to $4.9 million from the $3.1 million generated in the 2016-period. International operating days grew by 25 percent to 691 days in the 2017-quarter from 554 days in the 2016-quarter. The increase in international activity primarily resulted from the Albanian division recording 145 operating days in the 2017-quarter, whereas this division was idle for the first quarter of 2016. In both the 2016 and 2017-quarters, the Corporation generated 8 percent of its consolidated revenue from its international operations.

PHX Energy's Russian operations continued to benefit from its diversified client base during the first quarter of 2017. For the three-month period ended March 31, 2017, the Russian division achieved operating days of 546, slightly below the 554 days recorded in the 2016-period. During the quarter, the division continued to increase activity related to measurement while drilling ("MWD") system rentals in Eastern Siberia and this trend is expected to continue in the second quarter of 2017. The Corporation further continued efforts to expand its client base in Russia performing technical qualification trials for prospective clients.

Reportable segment loss from international operations for the three-month period March 31, 2017 was $0.6 million, which is $0.1 million less than the loss of $0.7 million reported in the comparable 2016-period. The improvement in the international operations' profitability in the 2017-quarter was mainly due to the recommencement of the Albanian operations.

Investing Activities

PHX Energy used net cash in investing activities of $2.4 million for the three-month period ended March 31, 2017 as compared to net cash generated of $1.4 million in the 2016-period. In the first quarter of 2017, the Corporation received proceeds of $1.4 million (2016 - $2.6 million) from the disposition of capital equipment, primarily related to the involuntary disposal of drilling equipment in well bores, and the recognition of a $0.1 million gain on disposition of drilling equipment (2016 - $1.2 million). Additionally, the Corporation spent $1.8 million on capital expenditures in the first quarter of 2017 (2016 - $0.9 million). These expenditures included:

/T/

-- $0.8 million in MWD systems and spare components
-- $0.5 million in computer hardware;
-- $0.4 million in EDR systems and spare components; and
-- $0.1 million in downhole performance drilling motors, machinery and

equipment and furniture and fixtures.

/T/

The capital expenditure program undertaken in the period was financed generally from loans and borrowings.

During the three-month period ended March 31, 2017, the Corporation acquired intangible assets with a total cost of $0.5 million (2016 - $0.2 million), most of which related to development costs.



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