Essential Energy Services Ltd.
TSX : ESN

Essential Energy Services Ltd.

November 09, 2010 19:11 ET

Essential Energy Services Announces 2010 Third Quarter Results

CALGARY, ALBERTA--(Marketwire - Nov. 9, 2010) - Essential Energy Services Ltd. (TSX:ESN) ("Essential" or the "Company") announces 2010 third quarter results with EBITDAS(1) of $7.2 million. EBITDAS for the first nine months of 2010 was $17.8 million. This was a significant improvement over the same periods in 2009, despite unseasonably wet weather in September.

Third quarter activity for Essential was strong as exploration and production companies focused on oil and liquids-rich natural gas resource plays. With 80% of Essential's service rigs, coil tubing operations and the Tryton Multi-Stage Fracturing System ("Tryton MSFS") focused on servicing these resource plays, the Company experienced increased demand for its services.

HIGHLIGHTS

Operational

- EBITDAS was $7.2 million for the third quarter of 2010 compared to $0.8 million for the third quarter of 2009. EBITDAS for the first nine months of 2010 was $17.8 million compared to $5.4 million for the first nine months of 2009.

- Horizontal well activity continued to generate strong demand for Essential's deep and intermediate coil tubing rigs and the Tryton MSFS.

- Essential had 40% service rig utilization in the quarter, well ahead of 19% in the third quarter of 2009. This was driven by an increase in oil-based activity and a backlog of maintenance, abandonment and completion programs.

Colombia

- As announced on November 8, 2010, Essential is progressing on its plan to expand operations into Colombia. The Company entered into a joint venture agreement with a private Colombian group and will be shipping equipment to Colombia in November. Essential expects the equipment will begin operating in Colombia in the first quarter of 2011.

Essential had no long-term debt outstanding on September 30, 2010 and a cash balance of $2.9 million. On November 9, 2010, the cash balance was $0.8 million.



SELECTED FINANCIAL INFORMATION
Three months ended Nine months ended
September 30, September 30,
($ Thousands, except per share amounts) 2010 2009 2010 2009
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Revenue 41,244 23,442 112,658 81,614

Gross margin(1) 10,126 2,841 26,413 12,715
Gross margin %(1) 25% 12% 23% 16%

EBITDAS(1) 7,186 808 17,811 5,435
EBITDAS %(1) 17% 3% 16% 7%

Funds flow from operations (1) 7,115 615 17,215 4,417
Per share - basic and diluted $ 0.10 $ 0.01 $ 0.25 $ 0.07

Net earnings (loss) 1,311 (2,661) 17 (8,071)
Per share - basic and diluted $ 0.02 $ (0.04) $ 0.00 $ (0.13)

Total assets 174,737 167,574 174,737 167,574
Total long term debt - 14,302 - 14,302
Shareholders' equity 158,406 144,506 158,406 144,506

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(1) Refer to Non-GAAP measures at the end of this news release.


INDUSTRY OVERVIEW

During the third quarter, oil and liquids-rich natural gas plays continued to drive activity in the Western Canadian Sedimentary Basin ("WCSB"). Given the stability and strength of oil prices, exploration and production companies continued to focus on oil-related resource plays. Additionally, liquids-rich natural gas plays have become increasingly important in the WCSB given the use of natural gas liquids to dilute heavy oil for transportation. Traditional natural gas activity in the WCSB continued to be impacted by persistent low prices and high storage levels. The unseasonably wet weather in September negatively impacted activity; nevertheless, service rig utilization continued to improve over the prior year. Utilization improved in spite of fewer well completions due to the increase in horizontal wells. Typically, more money is spent and increased rig time per well is required on horizontal wells due to their depth and complexity compared to traditional vertical wells.

RESULTS OF OPERATIONS

Segment Results - Well Servicing

Essential provides well completion and production/workover services across western Canada primarily through its fleet of service rigs and coil tubing rigs. In addition, Essential provides services through a fleet of rod rigs, nitrogen pumpers, a cement & acid unit and other specialty equipment. Well Servicing generated revenue of $24.1 million and $70.5 million, respectively, for the three and nine months ended September 30, 2010, compared to $13.2 million and $52.2 million, respectively, for the same periods in 2009.



Three months ended Nine months ended
September 30, September 30,
(Thousands) 2010 2009 2010 2009
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Revenue
Service rigs $ 12,876 $ 6,453 $ 39,169 $ 30,761
Coil tubing rigs 7,035 3,994 16,824 12,295
Other 4,198 2,712 14,500 9,164
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Total revenue 24,109 13,159 70,493 52,220
Operating expenses 17,781 12,209 52,984 44,584
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Gross margin $ 6,328 $ 950 $ 17,509 $ 7,636
Gross margin % 26% 7% 25% 15%
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Service Rigs
Number of rigs(1) 51 51 51 51
Number of operating hours 18,787 8,970 56,189 36,186
Utilization 40% 19% 40% 26%

Coil Tubing Rigs
Number of rigs(1) 32 29 32 29
Number of operating hours 12,387 8,037 31,097 24,510
Utilization 42% 31% 37% 29%
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(1) Fleet data represents the number of rigs at the end of the period. The
service rig count will increase to 52 in the fourth quarter with the
refurbishment of an additional rig.


The increase in oil-based activity in the WCSB, combined with work on the backlog of maintenance, abandonment and completion programs, continued to stimulate activity for service rig equipment during the quarter and, as a result, utilization improved substantially from the prior year. The improvement in Essential's service rig utilization was primarily in southern Alberta, where companies focused on smaller oil pools rather than shallow natural gas plays. Essential has experienced only modest improvement in northern Alberta; however, the Company expects the recent rebranding as "Essential Well Service" should benefit its northern Alberta operations in future periods.

Essential's coil tubing operations are becoming an increasingly important part of the well servicing operations as the Company expands the service offerings and the fleet. The quarterly and year to date results for the coil tubing fleet continued to benefit from the intermediate and deep coil tubing rigs working on horizontal wells in the resource plays of the Bakken, Viking, Cardium and Montney regions. During the quarter, Essential also continued to perform work using a coil tubing rig for nitrogen stimulation of coalbed methane reservoirs in southern Alberta which improved utilization of the coil tubing and nitrogen fleets.

The Company significantly improved activity and revenue for its Well Servicing segment during the quarter compared to the prior year despite the unseasonably wet weather in September. Essential was able to achieve these improvements while being subject to labour constraints throughout the quarter. Due to these labour challenges, the Company initiated some wage increases in an effort to retain personnel. Essential will be striving to maintain margins in the fourth quarter through improved activity levels and modest pricing increases to offset the impact of wage increases.

Essential completed the re-branding of its coil tubing and nitrogen operations as "Essential Coil and Stimulation Services" effective November 1, 2010. The Company expects the re-branding will provide its customers with additional clarity about Essential's service offerings and will enable the Company to further benefit from its position as the largest coil tubing well service fleet in Canada.

Segment Results - Downhole Services & Rentals

Essential offers downhole tools and equipment rentals in addition to electric wireline ("e-line") and slickline services through the Downhole Services & Rentals business segment. Downhole Services & Rentals generated revenue of $17.1 million and $42.2 million, respectively, for the three and nine months ended September 30, 2010, compared to $10.3 million and $29.4 million for the same periods in 2009.



Three months ended Nine months ended
September 30, September 30,
(Thousands) 2010 2009 2010 2009
----------------------------------------------------------------------------
Revenue
Downhole tools & rentals $ 14,542 $ 7,798 $ 34,093 $ 20,724
Wireline services 2,593 2,485 8,072 8,670
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Total revenue 17,135 10,283 42,165 29,394
Operating expenses 12,062 8,080 30,386 23,187
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Gross margin $ 5,073 $ 2,203 $ 11,779 $ 6,207
Gross margin % 30% 21% 28% 21%
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The downhole tools and rentals operations continued to be a strong contributor to this segment in the third quarter of 2010. Essential continued to benefit from increasing industry demand for multi-stage fracturing applications to stimulate wells. The Tryton MSFS, which was first introduced in the second quarter of 2009 as Essential's solution for multi-stage fracturing applications, has rapidly become a core service line of the Company. Revenue from both the traditional downhole tools and rentals operations and the Tryton MSFS continued to increase, particularly throughout northern and central Alberta, on both a quarterly and year to date basis. During the quarter, Essential expanded its labour force to meet the rapidly growing demand for its downhole tools and rentals operations.

Wireline continued to be negatively impacted by reduced conventional natural gas drilling throughout the WCSB and reduced activity in the shallow gas resource plays of southern Alberta. Wireline had improved activity levels during the quarter compared to the prior year, however, a high fixed cost structure and the competitive market for these services continued to hamper profitability.



General and Administrative

Three months ended Nine months ended
September 30, September 30,
(Thousands) 2010 2009 2010 2009
----------------------------------------------------------------------------
General and administrative expenses $ 2,940 $ 2,033 $ 8,602 $ 7,280
As a % of revenue 7% 9% 8% 9%
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General and administrative expenses were $2.9 million and $8.6 million, respectively, for the three and nine months ended September 30, 2010, compared to $2.0 million and $7.3 million, respectively for the same periods in 2009. These costs are comprised of wages, professional fees, office space and other administrative costs incurred at the corporate and business unit level.

The increase in general and administrative costs in 2010 is due to costs related to converting to a corporation, incurred in the first half of 2010, and implementing International Financial Reporting Standards. In addition, certain compensation programs were reinstated in 2010 after being eliminated as part of the cost reduction measures taken in 2009.



Equipment Expenditures

Three months ended Nine months ended
September 30, September 30,
(Thousands) 2010 2009 2010 2009
----------------------------------------------------------------------------
Equipment expenditures
Well Servicing $ 2,208 $ 1,761 $ 8,804 $ 5,394
Downhole Services & Rentals 668 582 1,354 1,166
Corporate 119 227 747 650
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2,995 2,570 10,905 7,210
Less proceeds on disposal of property
and equipment (107) (52) (877) (407)
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Net equipment expenditures(1) $ 2,888 $ 2,518 $ 10,028 $ 6,803
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Net equipment expenditures(1) for the three and nine months ended September 30, 2010 were $2.9 million and $10.0 million, respectively, compared to $2.5 million and $6.8 million, respectively, for the same periods in 2009. During the quarter the Company's capital expenditures were primarily for upgrades and retrofits to the coil tubing and nitrogen fleets.

Essential classifies its equipment expenditures as growth capital(1) and maintenance capital(1); the latter category includes information systems, operational facilities and leasehold improvements. Comparative equipment expenditures are as follows:



Three months ended Nine months ended
September 30, September 30,
(Thousands) 2010 2009 2010 2009
----------------------------------------------------------------------------
Equipment expenditures
Growth capital(1) $ 793 $ 2,119 $ 6,214 $ 4,718
Maintenance capital(1) 2,202 451 4,691 2,492
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$ 2,995 $ 2,570 $ 10,905 $ 7,210
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Essential increased its 2010 capital spending budget by $3 million to $19 million. The $3 million increase includes $2 million for Colombian operations and $1 million for Canadian operations. Previously budgeted fourth quarter spending of $6 million includes a second deep coil tubing rig for Canada and maintenance capital. This deep coil tubing rig is expected to be in service in December 2010.

In conjunction with its expansion into Colombia, Essential has made a further commitment to spend $3 million in 2011 for a deep coil tubing rig and picker and two rod rig accelerator units. These items are expected to be completed and shipped to Colombia early in the second quarter of 2011. This commitment forms part of Essential's 2011 capital expenditure program which will be finalized and announced in the first quarter of 2011.

OUTLOOK

Activity in the WCSB has been tracking above 2009 levels and this is expected to continue for the remainder of the year. The price of oil remains strong and exploration and production companies are expected to continue to focus on oil and liquids-rich natural gas resource plays. While low natural gas prices continue to be a concern, some of the reduction in natural gas-related activity is being offset by the increased activity for oil and liquids-rich natural gas.

With 80% of its service rigs, coil tubing operations and downhole tool and rentals business, including the Tryton MSFS, focused on servicing oil-related and liquids-rich natural gas activity, the Company expects strong demand for its services as it enters the winter drilling season. These services are also expected to continue to benefit from the high demand generated by the increase in horizontal wells. Essential's deep and intermediate coil tubing rigs have been busy in 2010 and Essential expects to have its second deep coil tubing rig ready for operations in December 2010. In addition, Essential expects to have a second intermediate coil tubing rig focused on nitrogen stimulation of coalbed methane reservoirs in southern Alberta in the fourth quarter.

As activity levels have increased, the labour market has tightened the demand for experienced oilfield service workers. This is not unusual due to the cyclicality of the oil and gas industry in the WCSB. Many workers left the industry and Alberta in 2009 during the industry downturn. Labour rates are increasing with demand and Essential is focused on recruiting and training new employees. The Company expects to recover some of the increased labour costs through higher service pricing and increased activity.

Essential is progressing on its plan to expand operations into Colombia. The first phase of equipment, including two double service rigs, three double rod rigs, an intermediate depth coil tubing rig, a nitrogen pumper, two electric wireline trucks and various spare parts and support equipment, is expected to leave Canada in November, 2010 and be ready for operations in Colombia in the first quarter of 2011. This equipment is from Essential's current fleet. The second phase of equipment, including a deep coil tubing rig and picker, two rod rig accelerator units and a nitrogen pumper, is expected to be shipped to Colombia early in the second quarter of 2011. Essential will operate in Colombia through a joint venture arrangement with a private Colombian group (the "Partner") under the name of Essential Energy Services S.A. (Sucursal) Colombia ("Essential Colombia"). Under the terms of the joint venture agreement, Essential owns 85% and the Partner owns 15% of Essential Colombia.

Essential Colombia will offer well servicing and wireline services from a field office and operating base in Villavicencio, Colombia. Villavicencio is located in the heart of the Llanos region, one of the fastest growing oil and gas exploration regions in Colombia. Essential believes that customer workover and completion needs, well pressures and depths in this region are relatively similar to those in western Canada. Essential Colombia believes there is a strong demand for its services in Colombia as both the Canadian equipment design and proven Canadian services practices will offer operators in Colombia a competitive advantage in terms of efficiencies and cost savings.

With no debt outstanding, Essential has a very strong balance sheet allowing it to realize on its growth plans into Colombia and be well-positioned to respond quickly to possible growth opportunities in the WCSB.

Essential's Management's Discussion & Analysis and Financial Statements will be available on Sedar at www.sedar.com and on Essential's website at www.essentialenergy.ca.



ESSENTIAL ENERGY SERVICES LTD.
CONSOLIDATED BALANCE SHEETS
(unaudited)
As at As at
September December
(Thousands) 30, 2010 31, 2009
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Assets
Current assets
Cash $ 2,937 $ 1,080
Accounts receivable 31,680 22,855
Inventory 9,620 9,194
Prepaid expenses and deposits 2,161 1,897
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46,398 35,026

Property and equipment 123,868 125,704
Assets held for sale - 1,215
Intangible assets 3,291 3,853
Future income tax asset 1,180 3,582
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$ 174,737 $ 169,380
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Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 16,331 $ 9,413
Current portion of long-term debt - 3,228
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16,331 12,641

Long-term debt - 13,372
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16,331 26,013
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Shareholders' Equity
Share capital 279,697 -
Unitholders' capital - 265,573
Contributed surplus 7,620 6,722
Accumulated deficit (128,911) (128,928)
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158,406 143,367
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$ 174,737 $ 169,380
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ESSENTIAL ENERGY SERVICES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS, COMPREHENSIVE EARNINGS (LOSS) AND
ACCUMULATED DEFICIT
(unaudited)
For the three For the nine
months ended months ended
(Thousands, except per share September 30, September 30,
amounts) 2010 2009 2010 2009
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Revenue $ 41,244 $ 23,442 $ 112,658 $ 81,614

Operating expenses 31,118 20,601 86,245 68,899
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10,126 2,841 26,413 12,715
Expenses
General and administrative 2,940 2,033 8,602 7,280
Share-based compensation 301 265 924 944
Depreciation and amortization 4,737 4,986 13,694 14,890
Interest on long-term debt 71 193 596 1,018
(Gain) loss on disposal of assets 22 11 (53) 4,057
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Earnings (loss) before
income taxes 2,055 (4,647) 2,650 (15,474)

Income tax expense (recovery)
Future 744 (1,986) 2,633 (7,403)
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Net earnings (loss) and
comprehensive earnings (loss) 1,311 (2,661) 17 (8,071)

Accumulated deficit, beginning
of period (130,222) (124,260) (128,928) (116,257)
Distributions to unitholders - (598) - (3,191)
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Accumulated deficit, end of
period $(128,911) $(127,519) $(128,911) $ (127,519)
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Net earnings (loss) per share
Basic and diluted $ 0.02 $ (0.04) $ 0.00 $ (0.13)
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ESSENTIAL ENERGY SERVICES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the three For the nine
months ended months ended
September 30, September 30,
(Thousands) 2010 2009 2010 2009
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Operating activities:
Net earnings (loss) $ 1,311 $ (2,661) $ 17 $ (8,071)

Items not affecting cash:
Depreciation and amortization 4,737 4,986 13,694 14,890
Future income tax expense (recovery) 744 (1,986) 2,633 (7,403)
Share-based compensation 301 265 924 944
(Gain) loss on disposal of assets 22 11 (53) 4,057
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7,115 615 17,215 4,417
Changes in non-cash working capital (6,732) (1,647) (2,597) 10,422
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383 (1,032) 14,618 14,839
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Financing activities:
Issuance of shares, net of costs - - 13,813 -
Proceeds on exercise of share options 17 - 54 -
Increase (decrease) in long-term debt - 4,149 (16,600) (4,083)
Distributions paid - (599) - (3,491)
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17 3,550 (2,733) (7,574)
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Investing activities:
Property and equipment (2,995) (2,570) (10,905) (7,210)
Proceeds on disposal of equipment 107 52 877 407
Changes in non-cash working capital (11) - - (462)
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(2,899) (2,518) (10,028) (7,265)
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Change in cash (2,499) - 1,857 -
Cash, beginning of the period 5,436 - 1,080 -
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Cash, end of the period $ 2,937 $ - $ 2,937 $ -
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Supplementary cash flow information:
Interest paid $ 71 $ 213 $ 394 $ 654
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(1)Non-GAAP Measures


Throughout this news release, certain terms that are not specifically defined in Canadian Generally Accepted Accounting Principles ("GAAP") are used to analyze the operations. In addition to the primary measures of net earnings and net earnings per share in accordance with GAAP, Essential believes that certain measures not recognized under GAAP assist both Essential and the reader in assessing performance and understanding Essential's results. Each of these measures provides the reader with additional insight into Essential's ability to fund principal debt repayments and capital programs. These non-GAAP measures are not recognized measures under GAAP. As a result, the method of calculation may not be comparable with other companies or trusts. These measures should not be considered alternatives to net earnings and net earnings per share as calculated in accordance with GAAP.

Gross margin - This measure is considered a primary indicator of operating performance as calculated by revenue less operating expenses.

Gross margin % - This measure is considered a primary indicator of operating performance as calculated by gross margin divided by revenue.

EBITDAS (Earnings before interest, income taxes, depreciation, amortization, non-controlling interest earnings, losses or gains on disposal of equipment, results of discontinued operations, impairment of goodwill and share based compensation) - This measure is considered an indicator of Essential's ability to generate funds flow in order to fund required working capital, service debt, pay current income taxes and fund capital programs.

EBITDAS % - This measure is considered an indicator of Essential's ability to generate funds flow as calculated by EBITDAS divided by revenue.

Funds flow or funds flow from operations - This measure is an indicator of Essential's ability to generate funds flow in order to fund working capital, principal debt repayments and capital programs. Funds flow or funds flow from operations is defined as cash flow from operations before changes in non-cash operating working capital. This measure is useful in assessing Essential's operational cash flow as it provides cash generated in the period excluding the timing of non-cash operating working capital. This reflects the ability of the operations of Essential to meet the above noted funding requirements.

Growth capital - Growth capital is capital spending which is intended to result in incremental increases in revenue. Growth capital is considered to be a key measure as it represents the total expenditures on equipment expected to add incremental revenues and funds flow to Essential.

Maintenance capital - Equipment additions that are incurred in order to refurbish or replace previously acquired equipment less proceeds on the disposal of retired equipment. Such additions do not provide incremental increases in revenue. Maintenance capital is a key component in understanding the sustainability of Essential's business as cash resources retained within Essential must be sufficient to meet maintenance capital needs to replenish the assets for future cash generation.

Net equipment expenditures - This measure is equipment expenditures less proceeds on the disposal of equipment. Essential uses net equipment expenditures to assess net cash flows related to the financing of Essential's oilfield services equipment.

ABOUT ESSENTIAL

Essential Energy Services Ltd. is a growth-oriented corporation that provides oilfield services to oil and gas producers in western Canada and Colombia for servicing producing wells and new drilling activity. Essential provides services through its Well Servicing and Downhole Services & Rentals divisions. With 51 service rigs, Essential is the 6th largest service rig provider in Canada. With 32 coil tubing rigs, Essential has the largest coil tubing well service fleet in Canada. Essential sells and services a full-range of downhole tools including the Tryton Multi-Stage Fracturing System and other rental equipment. Essential also provides slickline, perforating and logging services with 20 wireline trucks. Further information about Essential can be found at www.essentialenergy.ca.

READER ADVISORY

This news release contains forward-looking statements and forward-looking information within the meaning of applicable securities laws. The use of any of the words "expect", "anticipate", "continue", "estimate", "objective", "ongoing", "may", "will", "project", "should", "believe", "plans", "intends" and similar expressions are intended to identify forward-looking information or statements. In particular, this news release contains forward-looking statements including expectations regarding the implementation of legislation, expectations regarding capital spending and cost saving measures, expectations regarding the impact of equipment purchases, expectations regarding staffing, expectations regarding payment of income taxes, expectations regarding the conversion to International Financial Reporting Standards, the sources of capital and uses of such capital, the services offered by the Company and the relocation of these services to different geographic areas including Colombia, expectations of future cash flow and earnings, expectations of cost recovery of increased labour expenses, delivery of equipment to Colombia pursuant to the Company's joint venture in that jurisdiction, expectations with respect to the demand for and price of oil and natural gas including natural gas storage levels, expectations regarding the level and type of drilling and production activity in the Western Canadian Sedimentary Basin and expectations regarding the business, operations and revenues of the Company in addition to general economic conditions. Although the Company believes that the expectations and assumptions on which such forward-looking statements and information are reasonable, undue reliance should not be placed on the forward-looking statements and information because the Company can give no assurance that they will prove to be correct. Since forward-looking statements and information address future events and conditions, by their very nature they involve inherent risks and uncertainties.

Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to, the risks associated with the oilfield services sector (e.g. demand, pricing and terms for oilfield services; current and expected oil and gas prices; exploration and development costs and delays; reserves discovery and decline rates; pipeline and transportation capacity; weather, health, safety and environmental risks), integration of acquisitions, competition, and uncertainties resulting from potential delays or changes in plans with respect to acquisitions, development projects or capital expenditures and changes in legislation, including but not limited to tax laws, royalties and environmental regulations, failure to realize the benefits of the conversion of the Company from a trust to a corporation, stock market volatility and the inability to access sufficient capital from external and internal sources, the ability of the Company's subsidiaries to enforce legal rights in foreign jurisdictions, general economic, market or business conditions, the availability of qualified personnel, management or other key inputs, currency exchange fluctuations, and other unforeseen conditions which could impact the use of services supplied by the Company. Accordingly, readers should not place undue reliance on the forward-looking statements. Readers are cautioned that the foregoing list of factors is not exhaustive. Additional information on these and other factors that could affect the Company's financial results are included in reports on file with applicable securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com) for each of Essential Energy Services Trust and the Company. The forward-looking statements and information contained in this news release are made as of the date hereof and the Company undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.

The TSX has not reviewed and does not accept responsibility for the adequacy or accuracy of this news release.

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