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Strad Energy Services Announces Second Quarter Results – Part 2


Adjusted EBITDA for the six months ended June 30, 2017, of $9.8 million, increased 715% compared to $1.2 million for the same period in 2016. Adjusted EBITDA as a percentage of revenue, for the six months ended June 30, 2017, increased to 24% compared to 9% for the same period in 2016.

Operating expenses for the three and six months ended June 30, 2017, of $12.8 million and $27.5 million increased 217% and 179% compared to $4.0 million and $9.8 million for the same period in 2016. The increase in operating expenses during the first six months of 2017 is a result of increased activity levels, utilization rates, and fleet size, as well as an increase in third party expenses, as compared to the same period in 2016. The increase in overall expenses is consistent with the increase in drilling activity and energy infrastructure projects throughout the first half of 2017.

Selling, general and administrative costs ("SG&A") for the three and six months ended June 30, 2017, of $1.3 million and $2.7 million, respectively, increased 5% and 17% compared to $1.3 million and $2.3 million for the same period in 2016. SG&A costs increased over the three and six months as a result of the third quarter 2016 Redneck acquisition and first quarter 2017 acquisition of Got Mats?.

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U.S. Operations

Three months ended June 30, Six months ended June 30, ---------------------------- --------------------------- ---------------------------- --------------------------- ($000's) 2017 2016 % chg. 2017 2016 % chg. --------- -------- -------- -------- -------- --------
Revenue 6,252 2,515 149 11,318 7,301 55 Operating expenses 4,766 2,314 106 8,718 6,444 35 Selling, general and administration 861 1,420 (39) 1,757 2,508 (30) Share based payments 15 13 32 17 Net income (4,411) (7,169) 38 (6,618) (9,079) 27 Adjusted EBITDA(1) 610 (1,232) 150 811 (1,668) 149 Adjusted EBITDA as a % of revenue 10% (49)% 7% (23)%
Capital expenditures(2) 488 143 2,673 439 Gross capital assets 134,972 141,966 (5) 134,972 141,966 (5) Total assets 67,188 72,825 (8) 67,188 72,825 (8)
Equipment Fleet: Surface equipment 2,040 2,010 2,040 2,010 Utilization %(3) 25% 13% 25% 17% Matting 17,650 13,220 34 17,650 13,220 34 Utilization %(3) 29% 12% 24% 16%

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Notes:

(1) Earnings before interest, taxes, depreciation and amortization and other adjustments ("Adjusted EBITDA") is not a recognized measure under IFRS; see "Non-IFRS Measures Reconciliation".

(2) Includes assets acquired under finance lease and purchases of intangible assets.

(3) Equipment utilization includes surface and matting equipment on rent only and is calculated using gross asset value.

Revenue for the three months ended June 30, 2017, increased 149% to $6.3 million from $2.5 million for the same period in 2016. The increase in revenue is due to a combination of higher surface equipment and matting utilization rates and modestly higher customer pricing resulting from increased drilling activity when compared to the same period in 2016. Average rig counts in the Bakken, Rockies and Marcellus regions increased by 80%, 130%, and 89%, respectively, during the second quarter of 2017 compared to the same period in 2016.

During the second quarter, revenue from energy infrastructure projects was $1.0 million or 16% of total revenue for U.S. Operations compared to $nil in the same period of 2016.

The U.S. matting fleet increased to 17,650 mats as at June 30, 2017, compared to 13,220 mats as at June 30, 2016. The addition of mats during the first half of 2017 was to support the increase in U.S. energy infrastructure customers. The U.S. surface equipment fleet increased slightly by 30 pieces of equipment to 2,040 pieces as at June 30, 2017, compared to 2,010 pieces as at June 30, 2016.

Adjusted EBITDA for the three months ended June 30, 2017, increased to $0.6 million compared to $(1.2) million for the same period in 2016. Adjusted EBITDA as a percentage of revenue, for the three months ended June 30, 2017, was 10% compared to (49)% for the same period in 2016. The increase in both adjusted EBITDA and adjusted EBITDA as a percentage of revenue is primarily due to increased drilling activity levels which resulted in higher utilization and modestly improved customer pricing in the second quarter of 2017 compared to the same period of 2016.

Revenue for the six months ended June 30, 2017, increased 55% to $11.3 million from $7.3 million for the same period in 2016. The increase in revenue for the six months ended June 30, 2017 can be attributed to higher surface equipment and matting utilization rates due to increased drilling activity levels across all of our U.S. operating regions and modestly higher customer pricing as compared to the same period in 2016. In addition, energy infrastructure revenue as a percentage of total revenue increased to $1.5 million or 13% during the six months ended June 30, 2017 compared to $nil in the same period of 2016.

Adjusted EBITDA for the six months ended June 30, 2017, increased to $0.8 million compared to $(1.7) million for the same period in 2016. Adjusted EBITDA as a percentage of revenue, for the six months ended June 30, 2017, was 7% compared to (23)% for the same period in 2016. The increase in both adjusted EBITDA and adjusted EBITDA as a percentage of revenue is primarily due to the increase in revenue during the first six months of 2017 in addition to lower fixed costs.

Operating expenses for the three and six months ended June 30, 2017, of $4.8 million and $8.7 million, respectively, increased 106% and 35% compared to $2.3 million and $6.4 million for the same period in 2016. The increase in operating expenses during the first six months of 2017 is a result of increased activity levels.

SG&A costs for the three and six months ended June 30, 2017, of $0.9 million and $1.8 million decreased 39% and 30% compared to $1.4 million and $2.5 million for the same period in 2016. The decrease in SG&A expenses is due to cost reductions implemented by management including staff reductions and reductions in discretionary spending.

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Product Sales

Three months ended June 30, Six months ended June 30, --------------------------- ------------------------- --------------------------- ------------------------- ($000's) 2017 2016 % chg. 2017 2016 % chg. -----------------------------------------------------
Revenue 3,034 2,232 36 4,682 4,129 13 Operating expenses 1,991 1,616 23 3,074 3,461 (11) Selling, general and administration 49 21 133 99 22 350 Net income (loss) (4) (252) 98 (274) (546) 50 Adjusted EBITDA(1) 994 595 67 1,509 646 134 Adjusted EBITDA as a % of revenue 33% 27% 32% 16%
Capital expenditures(2) - - - 25 - - Total assets 34 52 (35) 34 52 (35)

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Notes:

(1) Earnings before interest, taxes, depreciation and amortization and other adjustments ("Adjusted EBITDA") is not a recognized measure under IFRS; see "Non- IFRS Measures Reconciliation".

(2) Includes assets acquired under finance lease and purchases of intangible assets.

Product Sales are comprised of in-house manufactured products sold to external customers, third party equipment sales to existing customers and sales of equipment from Strad's existing fleet to customers.

Revenue for the three months ended June 30, 2017, increased 36% to $3.0 million from $2.2 million for the same period in 2016, resulting primarily from higher in-house manufactured equipment sales. During the three months ended June 30, 2017, Product Sales consisted of $2.1 million of in-house manufactured products and $0.9 million of rental fleet sales compared to $0.1 million and $0.2 million, respectively, as well as $1.9 million of third party equipment sales during the same period in 2016.

During the second quarter, revenue from energy infrastructure projects was $1.8 million or 57% of total revenue compared to $1.6 million or 71% of total revenue in the same period of 2016.

Adjusted EBITDA for the three months ended June 30, 2017, increased to $1.0 million from $0.6 million for the same period in 2016. Adjusted EBITDA as a percentage of revenue, for the three months ended June 30, 2017, was 33% compared to 27% for the same period in 2016. Adjusted EBITDA has increased more than revenue on a percentage basis, primarily as a result of lower fixed costs related to the manufacturing facility for the three months ended June 30, 2017, as compared to the same period in 2016.

Revenue for the six months ended June 30, 2017, increased 13% to $4.7 million from $4.1 million for the same period in 2016, resulting primarily from higher in-house manufactured equipment sales. Sales of Strad's rental fleet equipment fluctuate quarter-over-quarter and are primarily dependent on strategic opportunities to monetize underutilized rental assets.

During the six months ended June 30, 2017, revenue from energy infrastructure projects was $3.1 million or 67% of total revenue compared to $2.9 million or 70% of total revenue in the same period of 2016.

Adjusted EBITDA for the six months ended June 30, 2017, increased to $1.5 million from $0.6 million for the same period in 2016. Adjusted EBITDA as a percentage of revenue, for the six months ended June 30, 2017, was 32% compared to 16% for the same period in 2016.

Operating expenses for the three and six months ended June 30, 2017, of $2.0 million and $3.1 million increased 23% and decreased 11% compared to $1.6 million and $3.5 million for the same period in 2016. Operating expenses vary with individual transactions and business activity levels.

OUTLOOK

We continued to see a year-over-year improvement in our financial performance as our results were impacted by a number of different variables including increased utilization, improved customer pricing and a significant revenue contribution from our energy infrastructure customer vertical.

Increased demand for our services in the WCSB during the quarter was attributable to increased average rig counts of 298 compared to 158 in the prior year, the addition of Redneck Oilfield Services Ltd. which expanded our equipment offering in western Canada and wet weather conditions which resulted in an early start to our matting season and an increase in utilization during the quarter, compared to the prior year.

In Canada, significantly higher demand for matting from both of our customer verticals, along with a period of under investment in new matting product by most matting providers, lead to favorable supply and demand market conditions during the second quarter which translated into a marked improvement in our average matting prices beyond the double digit increases we disclosed previously. Providing the recent volatility in commodity prices does not alter our customers' 2017 capital programs, we should continue to see similar utilization levels in the third quarter on an expanded matting fleet as a result of the addition of Got Mats? and capital spending during the second quarter. We anticipate deploying the additional $11.0 million of capital throughout the remainder of 2017 to support our matting business and our energy infrastructure customer vertical.

Second quarter results in our U.S. Operations improved significantly compared to the prior year, due to higher rig counts in the regions in which we operate. Stronger demand for our products and services in the U.S. during the quarter continued to support our strategy of increasing our prices in certain product lines and operating regions. We have realized modest pricing gains during the first half of 2017 notwithstanding those gains are being made on historically low pricing levels for our Company. For the remainder of 2017, we expect to see continued improvement in our U.S. operations results based on the current level of demand for our products and services.

During the second quarter, we continued to execute on our strategic priorities being continued growth of the energy infrastructure customer vertical, continued focus on increasing our size and scale and maintaining our lean cost structure. Revenue generated by energy infrastructure customers continued to increase accounting for 38% of total revenue, 43% of Canadian Operations revenue, 16% of U.S. Operations revenue and 57% of Product Sales revenue during the second quarter.

We continued to focus on growing our size and scale through organic growth with $4.6 million of the $6.3 million capital spending being allocated primarily to our Canadian matting fleet to meet strong demand. We plan to continue investing in our matting fleet throughout the remainder of 2017 to meet customer demand primarily in our energy infrastructure customer vertical.

Looking ahead to the remainder of 2017, we expect activity levels to continue to trend higher year-over-year despite the recent volatility in oil prices, providing our customers execute their remaining 2017 capital programs. We see demand for our Canadian matting fleet continuing to be strong during the third quarter as additional energy infrastructure projects begin in the summer months. We anticipate demand for our Canadian surface equipment to remain steady over the second half of 2017. In the U.S., we expect to see a slower and steady improvement in our results over the remainder of 2017 as pricing increases begin to take effect. We will continue our focus on increasing prices for our products and services where we can and managing our lean cost structure to ensure the efficiencies we gained over the past two years are maintained as activity levels increase and drive margin improvement.

LIQUIDITY AND CAPITAL RESOURCES

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($000's) June 30, 2017 December 31, 2016 -------------------------------------- --------------------------------------
Current assets $ 37,291 $ 31,852 Current liabilities 13,862 16,216 -------------------------------------- -------------------------------------- Working Capital(1) 23,429 15,636
Banking facilities Operating facility - 1,478 Syndicated revolving facility 20,951 26,501 -------------------------------------- -------------------------------------- Total facility borrowings 20,951 27,979
Total credit facilities(2) 48,500 48,500 -------------------------------------- -------------------------------------- Unused credit capacity 27,549 20,521

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