Strad Announces Third Quarter Results

November 8, 2018

NOT FOR DISTRIBUTION TO U.S. NEWS WIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES (“U.S.”)

The news release contains “forward-looking information and statements” within the meaning of applicable securities laws. For full disclosure of the forward-looking information and statements and the risks to which they are subject, see the “Cautionary Statement Regarding Forward-Looking Information and Statements” later in this news release.

CALGARY, Alberta, Nov. 08, 2018 (GLOBE NEWSWIRE) — Strad Energy Services Ltd., (“Strad” or the “Company”), an industrial matting and equipment rentals company, today announced its financial results for the three and nine months ended September 30, 2018. All amounts are stated in Canadian dollars unless otherwise noted.

THIRD QUARTER SELECTED FINANCIAL AND OPERATIONAL HIGHLIGHTS:

Strad reported total revenue of $31.2 million as compared to $33.9 million in Q3 2017;
Third quarter net income improved to $0.9 million compared to net income of $0.6 million in Q3 2017;
Strad reported EBITDA^(1,4)of $6.5 million as compared to $9.4 million in Q3 2017;
Earnings per share improved to $0.02 as compared to earnings per share of $0.01 during the same period in 2017;
Reduced funded debt⁽²⁾ by 21% to $7.7 million at September 30, 2018, compared to $9.8 million at December 31, 2017. Funded debt⁽²⁾ to covenant EBITDA⁽³⁾ ratio was 0.4 : 1.0 at September 30, 2018;;
More than doubled the 2018 capital budget from $13.0 million to $28.5 million. The increase in the capital budget is to meet the expected demand for industrial matting projects in Canada and the U.S. for the remainder of 2018 and 2019;
Capital additions in the third quarter totaled $10.5 million focused on increasing the Company’s matting fleet; and
On October 2, 2018 the Company announced a change in the reportable segments from a geographical focus to two new segments focusing on Industrial Matting and Equipment Rentals.

Notes:

Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is not a recognized measure under IFRS, and, accordingly, Strad’s use of such a term may not be comparable to similarly defined measures presented by other entities; see “Non-IFRS and Additional IFRS Measures and Reconciliations”.
Funded debt includes bank indebtedness plus long-term debt plus current and long-term obligations under finance lease less cash.
Covenant EBITDA, as defined in the Company’s credit facility agreement, is based on trailing twelve months adjusted EBITDA plus share based payments, plus additional one-time charges.
During the second quarter of 2018, the Company changed the method of calculation for EBITDA by no longer adjusting for gains or losses resulting from foreign exchange or the disposal of property, plant and equipment during the normal course of business. These changes have been updated for prior period balances.

“The current operating environment represents a unique dynamic for Strad, as the traditional drivers of our business, namely a robust energy sector with growing rig counts, is not reflected in the current state of affairs. Yet, I am excited about Strad’s outlook, in large measure due to our recently created Industrial Matting division,” said Andy Pernal, President and CEO of Strad. “The drivers of this business line are positive; for instance, the building of large scale infrastructural projects such as LNG Canada and the Coastal GasLink pipeline will require extensive matting support. Moreover, there exists a long list of additional pending, large-scale projects, as well. Finally, matting’s utility extends well beyond the energy sector, and geographically beyond our historical markets. That is why this past quarter we more than doubled the growth capital committed to matting – to adapt to our evolving operating climate and to capitalize on its potential.”

“Fiscally, the quarter highlighted our ability to maintain strong margins and EBITDA levels with disciplined cost containment, even in the face of modest revenue headwinds,” said Michael Donovan, CFO of Strad. “With our available free cash flow, we reduced our long-term debt and in part funded our matting division’s growth capex investments. Also this quarter, consistent with our strategic emphasis on matting, we modified how we report performance by segmenting our results into our two principal divisions, Industrial Matting and Equipment Rentals to provide greater clarity into our operations.”

THIRD QUARTER FINANCIAL HIGHLIGHTS

	Three months ended September 30, 2018
	Industrial Matting		Equipment Rentals		Corporate		Total
($000’s)
Revenue	16,368		14,852		—		31,220
Operating expenses	9,599		11,538		—		21,137
Selling, general and administration	1,337		1,764		532		3,633
Share based payments	23		31		16		70
Gain on the disposal of property, plant and equipment	(46	)	(47	)	—		(93	)
(Gain) loss on foreign exchange	(19	)	(14	)	4		(29	)
EBITDA ⁽¹⁾	5,474		1,580		(552	)	6,502
Depreciation and amortization	1,368		3,992		84		5,444
EBIT⁽²⁾	4,106		(2,412	)	(636	)	1,058
Interest expense					230		230
Income tax recovery					(62	)	(62	)
Net (loss) income					(804	)	890

Equipment Fleet:
Matting fleet at period end	101,210		—		—		101,210
Average matting fleet	84,920		—		—		84,920
Equipment fleet at period end	—		6,120		—		6,120
Average Equipment fleet	—		6,140		—		6,140

	Three months ended September 30, 2017
	Industrial Matting		Equipment Rentals		Corporate		Total
($000’s)
Revenue	17,884		16,039		—		33,923
Operating expenses	8,761		11,582		—		20,343
Selling, general and administration	1,321		1,805		954		4,080
Share based payments	29		45		8		82
(Gain) loss on the disposal of property, plant and equipment	8		11		(25	)	(6	)
(Gain) loss on foreign exchange	(25	)	(34	)	44		(15	)
EBITDA ⁽¹⁾	7,790		2,630		(981	)	9,439
Depreciation and amortization	2,840		4,446		73		7,359
EBIT⁽²⁾	4,950		(1,816	)	(1,054	)	2,080
Interest expense					359		359
Income tax expense					1,123		1,123
Net (loss) income					(2,536	)	598

Equipment Fleet:
Matting fleet at period end	85,100		—		—		85,100
Average matting fleet	82,960		—		—		82,960
Equipment fleet at period end	—		6,140		—		6,140
Average Equipment fleet	—		6,090		—		6,090

Notes:

Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is not a recognized measure under IFRS, and, accordingly, Strad’s use of such a term may not be comparable to similarly defined measures presented by other entities; see “Non-IFRS and Additional IFRS Measures and Reconciliations”. During the second quarter of 2018, the Company changed the method of calculation for EBITDA by no longer adjusting for gains or losses resulting from foreign exchange or the disposal of property, plant and equipment during the normal course of business.
Earnings before interest and tax (“EBIT”) is an additional measure under IFRS, see “Non-IFRS and Additional IFRS Measures and Reconciliations”.

	Nine months ended September 30, 2018
	Industrial Matting		Equipment Rentals		Corporate		Total
($000’s)
Revenue	41,970		45,649		—		87,619
Operating expenses	25,151		34,997		—		60,148
Selling, general and administration	3,775		5,025		2,382		11,182
Share based payments	84		118		46		248
Gain on the disposal of property, plant and equipment	(239	)	(323	)	(8	)	(570	)
(Gain) loss on foreign exchange	3		19		(6	)	16
EBITDA ⁽¹⁾	13,196		5,813		(2,414	)	16,595
Depreciation and amortization	3,993		11,927		196		16,116
EBIT⁽²⁾	9,203		(6,114	)	(2,610	)	479
Interest expense					577		577
Income tax recovery					(4,452	)	(4,452	)
Net income					1,265		4,354

Equipment Fleet:
Matting fleet at period end	101,210		—		—		101,210
Average matting fleet	86,400		—		—		86,400
Equipment fleet at period end	—		6,120		—		6,120
Average Equipment fleet	—		6,110		—		6,110

	Nine months ended September 30, 2017
	Industrial Matting		Equipment Rentals		Corporate		Total
($000’s)
Revenue	44,988		45,089		—		90,077
Operating expenses	24,952		34,645		—		59,597
Selling, general and administration	3,276		4,434		2,895		10,605
Share based payments	106		152		112		370
Gain on the disposal of property, plant and equipment	(87	)	(122	)	(25	)	(234	)
(Gain) loss on foreign exchange	(140	)	(198	)	178		(160	)
EBITDA ⁽¹⁾	16,881		6,178		(3,160	)	19,899
Depreciation and amortization	7,328		13,773		213		21,314
EBIT⁽²⁾	9,553		(7,595	)	(3,373	)	(1,415	)
Interest expense					1,360		1,360
Income tax expense					1,136		1,136
Net loss					(5,869	)	(3,911	)

Equipment Fleet:
Matting fleet at period end	85,100		—		—		85,100
Average matting fleet	78,950		—		—		78,950
Equipment fleet at period end	—		6,140		—		6,140
Average Equipment fleet	—		6,080		—		6,080

Notes:

Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is not a recognized measure under IFRS, and, accordingly, Strad’s use of such a term may not be comparable to similarly defined measures presented by other entities; see “Non-IFRS Measures and Additional IFRS Measures and Reconciliations”. During the second quarter of 2018, the Company changed the method of calculation for EBITDA by no longer adjusting for gains or losses resulting from foreign exchange or the disposal of property, plant and equipment during the normal course of business.
Earnings before interest and tax (“EBIT”) is an additional measure under IFRS, see “Non-IFRS and Additional IFRS Measures and Reconciliations”.

FINANCIAL POSITION AND RATIOS


($000’s except ratios)	As at September 30, 2018	As at December 31, 2017

Working capital⁽¹⁾	13,148	19,617
Funded debt⁽²⁾	7,701	9,768
Total assets	172,707	174,821

Funded debt to EBITDA⁽³⁾	0.4 : 1.0	0.4 : 1.0

Notes:
(1) Working capital is calculated as current assets less current liabilities.
(2) Funded debt includes bank indebtedness plus long-term debt plus current and long-term obligations under finance lease.
(3) EBITDA is based on trailing twelve months adjusted EBITDA plus share based payments, plus severance and transaction costs.

THIRD QUARTER RESULTS

Strad reported a decrease in revenue and EBITDA of 8% and 31%, respectively during the three months ended September 30, 2018, compared to the same period in 2017. During the three months ended September 30, 2018, Strad reported net income of $0.9 million compared to net income of $0.6 million in 2017.

For the three months ended September 30, 2018, Strad’s Industrial Matting segment reported a decrease in revenue and EBITDA of 8% and 30% as compared to the same period in 2017. Earnings before interest and taxes (“EBIT”) from Industrial Matting decreased from $5.0 million in the third quarter of 2017 to $4.1 million in the third quarter of 2018. The decrease in revenue, EBITDA and EBIT is a result of lower utilization due to project delays in comparison to the third quarter of 2017. The decrease in revenue for the third quarter of 2018 was offset by improved customer pricing as compared to the same period in 2017.

Strad’s Equipment Rentals segment reported a decrease in revenue and EBITDA of 7% and 40%, respectively, during the three months ended September 30, 2018, compared to the same period in 2017. The decrease in revenue was a result of decreased surface equipment utilization in Canada which was slightly offset by an increase in pricing and utilization in the U.S.

During the third quarter of 2018, capital expenditures were $10.1 million in Industrial Matting, $0.1 million in Equipment Rentals and $0.3 million in Corporate. The majority of the capital additions were related to wood matting additions, which were acquired to prepare for and to support industrial matting projects expected to begin during the fourth quarter of 2018.

OUTLOOK

Macro economic conditions during the third quarter and into the fourth quarter of 2018 continue to be mixed. West Texas Intermediate (“WTI”) pricing has ranged between $60 and $75 U.S. per barrel, natural gas prices have been steady at Henry Hub and positive U.S. tax changes have spurred a pro-investment environment in the United States. In Canada, widening commodity price differentials have significantly hampered producer cash flow and investment. Lack of pipeline access to tidewater continues to plague the Canadian energy industry and the Canadian economy.

On a positive note, however, a substantial infrastructure project has been approved in Canada. LNG Canada, the largest energy investment in Canadian history, was formally green-lighted on October 1, 2018, subsequent to the quarter-end. This project and associated infrastructure and pipelines are expected to take five years to complete and will provide significant opportunity for our Industrial Matting and Equipment Rentals segments. The Coastal GasLink pipeline is expected to cost over $4.8 billion and take approximately four years to construct. We expect continued opportunities related to these and other projects to contribute meaningfully to our activity levels in the Industrial Matting segment in future quarters.

During the third quarter of 2018, Strad reorganized the Company’s geographical segments, Canada and the United States, into two new distinct reportable segments, Industrial Matting and Equipment Rentals. This reporting structure provides additional detail and insight into our business for both shareholders and potential investors, and is consistent with how management assesses performance and allocates resources. The Company’s focus will be to maximize the opportunity within its growing Industrial Matting segment in both Canada and the United States.

Year-to-date, 2018 Industrial Matting revenue and EBITDA trail 2017 results, due to the timing of major projects in 2018 in Canada offset by increased activity in the U.S. However, late in the third quarter, Industrial Matting momentum has been building with the launch of TransCanada’s North Montney MainLine project as well as several other projects in both countries. To date, most U.S. matting opportunities have been driven by drilling activity however we continue to pursue matting opportunities outside of the Oil & Gas sector in the U.S.

The Equipment Rentals segment in 2018 remains fairly consistent with prior year, however, increased Equipment Rentals activity in the United States has offset lower year-over-year results in Canada. We continue to see growth and opportunity in our Equipment Rentals business in the United States and expect seasonal activity levels to improve in Canada as we head into the fall and winter drilling season.

As previously announced, Strad’s capital program has been increased by an additional $15.5 million to $28.5 million in 2018. The additional capital will be allocated to increasing the matting fleet by approximately 22,000 mats to meet the demand of current and pending projects. The increased growth capital will allow Strad the opportunity to participate in the construction of extensive Canadian infrastructure projects that have recently been approved.

In 2018, our free cash flow has allowed us to increase our capital program and repurchase shares under our Normal Course Issuer Bid (“NCIB”) while carrying a minimal amount of debt. Our free cash flow and strong balance sheet provide the flexibility to evaluate many alternatives to create shareholder value, including both organic growth opportunities or strategic acquisitions.

RESULTS OF OPERATIONS

Industrial Matting

	Three months ended September 30,						Nine months ended September 30,
($000’s)	2018		2017		%		2018		2017		%

Canadian revenue	11,865		16,090		(26	)%	29,760		39,818		(25	)%
U.S. revenue	4,503		1,794		151	%	12,210		5,170		136	%
Total Revenue	16,368		17,884		(8	)%	41,970		44,988		(7	)%

EBITDA⁽¹⁾	5,474		7,790		(30	)%	13,196		16,881		(22	)%
EBITDA as a percentage of revenue	33	%	44	%			31	%	38	%

EBIT⁽²⁾	4,106		4,950		(17	)%	9,203		9,553		(4	)%
EBIT as a percentage of revenue	25	%	28	%			22	%	21	%

Capital expenditures⁽³⁾	10,059		6,896		46	%	19,366		14,680		32	%
Property, plant and equipment	56,245		45,478		24	%	56,245		45,478		24	%

Equipment Fleet:
Matting fleet at period end⁽⁴⁾	101,210		85,100		19	%	101,210		85,100		19	%
Average matting fleet⁽⁵⁾	84,920		82,960		2	%	86,400		78,950		9	%
Average utilization %⁽⁶⁾	38	%	43	%			31	%	37	%

Notes:

Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is not a recognized measure under IFRS, and, accordingly, Strad’s use of such term may not be comparable to similarly defined measures presented by other entities; see “Non-IFRS and Additional IFRS Measures and Reconciliations”. During the second quarter of 2018, the Company changed the method of calculation for EBITDA by no longer adjusting for gains or losses resulting from foreign exchange or the disposal of property, plant and equipment during the normal course of business. These changes have been updated for prior period balances.
Earnings before interest and tax (“EBIT”) is an additional measure under IFRS, see “Non-IFRS and Additional IFRS Measures and Reconciliations”.
Includes assets acquired under finance lease and purchases of intangible assets.
Matting fleet balances are as at September 30, 2018 and 2017.
Matting fleet balances are averages for the three months ended September 30, 2018 and 2017.
Equipment utilization includes surface and matting equipment on rent only and is calculated using gross asset value.

Revenue for the three months ended September 30, 2018, of $16.4 million decreased 8% compared to $17.9 million during the same period of 2017. Decreased revenue was primarily due to the timing of industrial matting projects in comparison to the same quarter of 2017. In Canada, there were fewer ongoing matting projects as compared to the same quarter of 2017, which led to a decrease in utilization to 36% from 56%. Further impacting revenue was a 10% decrease in average matting pricing in Canada as compared to the third quarter of 2017. This was offset by an increase in U.S. matting revenue, due to a 58% increase in average matting pricing and an increase in utilization to 43% from 38% as compared to the third quarter of 2017.

During the third quarter of 2018, Strad’s matting fleet increased to 101,210 mats at September 30, 2018, compared to 85,100 mats at September 30, 2017, to meet the expected increase in customer demand. Late in the third quarter of 2018, Strad began deploying mats on a major project in Northeastern British Columbia.

EBITDA for the three months ended September 30, 2018, decreased 30% to $5.5 million as compared to $7.8 million during the three months ended September 30, 2017. EBITDA as a percentage of revenue was 33% at September 30, 2018, compared to 44% at September 30, 2017. The decrease in EBITDA is driven primarily by the decrease in revenue as well as an increase in operating expenses by 10% during the third quarter of 2018 as compared to the same period in 2017.

During the third quarter of 2018, EBIT decreased to $4.1 million compared to $5.0 million during the same period of 2017. The primary driver for the decrease in EBIT was the decrease in EBITDA for the third quarter of 2018 compared to the third quarter of 2017. The decrease in EBITDA was offset by depreciation expense, which was higher in the third quarter of 2017 compared to 2018.

Revenue for the nine months ended September 30, 2018, decreased 7% to $42.0 million from $45.0 million during the same period of 2017. The primary decrease in Canadian revenue year-over-year is due to the timing of matting projects, which resulted in a decrease in utilization to 30% from 53%. This was offset by the 136% revenue increase in the U.S. to $12.2 million, compared to $5.2 million during the same period in 2017, due to drilling related matting projects within the U.S., which led to an increase in utilization to 40% from 26%. Further impacting U.S. revenue was a 71% increase in pricing year-over-year.

During the nine months ended September 30, 2018, EBITDA decreased 22% to $13.2 million compared to $16.9 million for the same period of 2017. The decrease in EBITDA is primarily due to the decrease in revenue year-over-year in addition to a nominal increase in operating expenses, due to increased lease payments and personnel costs. EBITDA as a percentage of revenue decreased to 31% for the nine months ended September 31, 2018, as compared to 38% for the nine months ended September 31, 2017.

EBIT for the nine months ended September 30, 2018, decreased to $9.2 million as compared to $9.6 million for the same period in 2017. The decrease in EBIT is primarily driven by the decrease in EBITDA for the third quarter of 2018 as compared to the third quarter of 2017. The decrease in EBITDA was offset by the decrease in depreciation expense to $4.0 million for the nine months ended September 30, 2018, as compared to $7.3 million for the nine months ended September 31, 2017. The decrease in depreciation expense is due to the accelerated depreciation of mats with no remaining useful life during 2017 that did not re-occur in 2018.

Operating expenses for the three and nine months ended September 30, 2018, increased 10% and 1%, respectively, to $9.6 million and $25.2 million as compared to $8.8 million and $25.0 million during the same period of 2017. The increase in operating expenses for the three months ended September 30, 2018, is primarily due to higher transportation and other third party costs for the three and nine months ended September 30, 2018, as compared to the same periods in 2017.

Equipment Rentals

	Three months ended September 30,						Nine months ended September 30,
($000’s)	2018		2017		%		2018		2017		%

Canadian revenue	7,638		10,076		(24	)%	26,658		30,963		(14	)%
U.S. revenue	7,214		5,963		21	%	18,991		14,126		34	%
Total Revenue	14,852		16,039		(7	)%	45,649		45,089		1	%

EBITDA⁽¹⁾	1,580		2,630		(40	)%	5,813		6,178		(6	)%
EBITDA as a percentage of revenue	11	%	16	%			13	%	14	%

EBIT ⁽²⁾	(2,412	)	(1,816	)	nm		(6,114	)	(7,595	)	nm
EBIT as a percentage of revenue	(16	)%	(11	)%			(13	)%	(17	)%

Capital expenditures⁽³⁾	142		260		(45	)%	1,074		2,211		(51	)%
Property, plant and equipment	84,777		100,887		(16	)%	84,777		100,887		(16	)%

Equipment Fleet:
Equipment fleet at period end⁽⁴⁾	6,120		6,140		nm		6,120		6,140		nm
Average equipment fleet⁽⁵⁾	6,140		6,090		1	%	6,110		6,080		nm
Average utilization %⁽⁶⁾	36	%	35	%			35	%	35	%

Rig Counts⁽⁷⁾
Western Canada	206		207		nm		193		206		(6	)%
Bakken	55		52		6	%	53		45		18	%
Marcellus	76		75		1	%	78		69		13	%
Rockies	66		71		(7	)%	67		61		10	%

Notes:

Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is not a recognized measure under IFRS, and, accordingly, Strad’s use of such term may not be comparable to similarly defined measures presented by other entities; see “Non-IFRS and Additional IFRS Measures and Reconciliations”. During the second quarter of 2018, the Company changed the method of calculation for EBITDA by no longer adjusting for gains or losses resulting from foreign exchange or the disposal of property, plant and equipment during the normal course of business. These changes have been updated for prior period balances.
Earnings before interest and tax (“EBIT”) is an additional measure under IFRS, see “Non-IFRS and Additional IFRS Measures and Reconciliations”.
Includes assets acquired under finance lease and purchases of intangible assets.
Surface equipment fleet balances are as at September 30, 2018 and 2017.
Surface equipment fleet balances are averages for the three months ended September 30, 2018 and 2017.
Equipment utilization includes surface and matting equipment on rent only and is calculated using gross asset value.
Source: Baker Hughes “North America Rotary Rig Count”. Rig Counts are average rig counts for the period.

Revenue for the three months ended September 30, 2018, decreased 7% to $14.9 million from $16.0 million during the same period in 2017. Revenue decreased primarily due to lower Canadian revenue, which was the result of the discontinuance of the drill cuttings management service line that was still operating in the third quarter of 2017. The decrease was partially offset by increased revenue in the U.S., which was due to an improvement in utilization to 43% from 38% and a 10% improvement in average pricing when compared to the third quarter of 2017. U.S. utilization improved as a result of the increase in rig counts in the Bakken and Marcellus by 6% and 1%, respectively, which was offset by a decrease in rig counts in the Rockies by 7%.

During the third quarter, EBITDA decreased 40% to $1.6 million from $2.6 million during the third quarter of 2017. EBITDA as a percentage of revenue decreased to 11% at September 30, 2018, compared to 16% at September 30, 2017. The decrease in EBITDA was driven primarily by the decrease in revenue during the third quarter.

EBIT for the three months ended September 30, 2018, decreased 33% to $(2.4) million from $(1.8) million during the same period of 2017. The decrease in EBIT is driven primarily by the decrease in EBITDA, partially offset by lower depreciation expense during the third quarter of 2018 of $4.0 million compared to $4.4 million in 2017.

Revenue for the nine months ended September 30, 2018, increased 1% to $45.6 million from $45.1 million at September 30, 2017. The increase in revenue was driven by the increase in U.S. surface equipment utilization to 40% from 34% and the 16% increase in pricing year-over-year. Utilization improved due to the increase in rig counts in the Bakken, Marcellus and the Rockies of 18%, 13% and 10% respectively. This was offset by lower revenue in Canada which was the result of lower rig counts, by 6%, in addition to the discontinuance of the drill cuttings management service line and a decrease in utilization to 32% from 35%.

During the nine months ended September 30, 2018, EBITDA decreased 6% to $5.8 million from $6.2 million during the same period in 2017. The decrease in EBITDA was driven by increased operating expenses year-over-year. EBITDA as a percentage of revenue for the nine months ended September 30, 2018, remained consistent at 13% compared to 14% during the same period of 2017.

EBIT for the nine months ended September 30, 2018, increased 19% to $(6.1) million from $(7.6) million during the same period in 2017. EBIT improved during the nine months ended September 30, 2018, primarily due to lower depreciation expense for the nine months of $11.9 million as compared to $13.8 million for the same period in 2017.

Operating expenses for the three and nine months ended September 30, 2018, remained consistent and increased 1%, respectively, to $11.5 million and $35.0 million as compared to $11.6 million and $34.6 million during the same period of 2017. The increase in operating expenses for the nine months ended September 30, 2018, is primarily the result of an increase in lease payments and consumables compared to the same period in the prior year.

LIQUIDITY AND CAPITAL RESOURCES

($000’s)	September 30, 2018	December 31, 2017

Current assets	29,605	31,899
Current liabilities	16,457	12,282
Working capital⁽¹⁾	13,148	19,617

Banking facilities
Operating facility	956	—
Syndicated revolving facility	6,414	10,776
Total facility borrowings	7,370	10,776

Total credit facilities⁽²⁾	48,500	48,500
Unused credit capacity	41,130	37,724

Notes:

Working capital is calculated as current assets less current liabilities, as derived from the Company’s consolidated statement of financial position.
Facilities are subject to certain limitations on accounts receivable, inventory, and net book value of fixed assets and are secured by a general security agreement over all of the Company’s assets. As at September 30, 2018, Strad had access to $48.5 million of credit facilities.

As at September 30, 2018, working capital was $13.1 million compared to $19.6 million at December 31, 2017. The change in current assets is a result of a 3% increase in accounts receivable to $26.7 million for the third quarter of 2018 compared to $26.0 million for the fourth quarter of 2017. The increase in accounts receivable is due to the timing of collections of accounts receivable outstanding, in addition to revenue being higher in the third quarter of 2018 as compared to the fourth quarter of 2017. Inventory decreased by 33% to $1.2 million at September 30, 2018, from $1.8 million at December 31, 2017. Prepaid expenses increased 23% at September 30, 2018, as compared to December 31, 2017. The decrease in inventory and the increase in prepaids relates to the normal course of business. During the third quarter of 2018, the Company sold the property included in other assets for proceeds of $1.3 million, which further contributed to the decrease in current assets.

The change in current liabilities is a result of a 29% increase in accounts payable and accrued liabilities to $15.3 million at September 30, 2018, compared to $11.9 million at year end. The increase in accounts payable is primarily due to higher operating expenses in the third quarter of 2018 as compared to the fourth quarter of 2017 in addition to the timing of payments made for the third quarter of 2018.

Cash flow from operating activities for the nine months ended September 30, 2018, increased to $23.6 million compared to $10.8 million for the nine months ended September 30, 2017, due to a net income as opposed to a net loss, increased cash generated from used fleet sales and an unwind of non-cash working capital. Funds from operations for the three months ended September 30, 2018, decreased to $8.6 million compared to $11.4 million for the three months ended September 30, 2017. Capital expenditures totaled $10.5 million for the three months ended September 30, 2018. Management monitors funds from operations and the timing of capital additions to ensure adequate capital resources are available to fund Strad’s capital program.

As at September 30, 2018, the Company’s syndicated banking facility consists of an operating facility with a maximum principal amount of $7.0 million CAD and $5.0 million USD, and a $36.5 million CAD syndicated revolving facility, both of which are subject to certain limitations on accounts receivable, inventory, and net book value of fixed assets and are secured by a general security agreement over all of the Company’s assets. As at September 30, 2018, the Company had access to the maximum credit facilities. The syndicated banking facility will mature on September 29, 2021. The syndicated banking facility bears interest at bank prime plus a variable rate, which is dependent on the Company’s funded debt to covenant EBITDA ratio.

Based on the Company’s funded debt to covenant EBITDA ratio, the interest rate on the syndicated credit facility is bank prime plus 0.50% on prime rate advances and at the prevailing rate plus a stamping fee of 1.50% on bankers’ acceptances. For the three months ended September 30, 2018, the overall effective rates on the operating facility and revolving facility were 4.21% and 4.41%, respectively. As of September 30, 2018, $1.0 million was drawn on the operating facility and $6.4 million was drawn on the revolving facility. Required payments on the revolving facility are interest only.

As at September 30, 2018, the Company was in compliance with all of the financial covenants under its credit facilities.

The relevant definitions related to the financial debt covenant ratio terms as set forth in the Company’s syndicated banking facility are as follows:

Funded debt includes bank indebtedness plus long-term debt plus current and long-term obligations under finance lease, less cash.
Covenant EBITDA is based on trailing twelve months adjusted EBITDA plus share based payments, plus additional one-time charges.
Interest expense ratio is calculated as the ratio of trailing twelve months adjusted EBITDA plus share based payments to trailing twelve months interest expense on loans and borrowings.

The above noted definitions are not recognized under IFRS and are provided strictly for the purposes of the financial covenant calculation.

Financial Debt Covenants	As at September 30, 2018	As at December 31, 2017
Funded debt to EBITDA ratio (not to exceed 3.0:1)
Funded debt	7,701	9,768
Covenant EBITDA	21,533	25,339
Ratio	0.4	0.4

EBITDA to interest coverage ratio (no less than 3.0:1)
Covenant EBITDA	21,533	25,339
Covenant interest expense	468	1,225
Ratio	46.0	20.7

NON-IFRS AND ADDITIONAL IFRS MEASURES AND RECONCILIATIONS

Certain supplementary measures in this MD&A do not have any standardized meaning as prescribed under IFRS and, therefore, are considered non-IFRS measures. These measures are described and presented in order to provide shareholders and potential investors with additional information regarding the Company’s financial results, liquidity and its ability to generate funds to finance its operations. These measures are identified and presented, where appropriate, together with reconciliations to the equivalent IFRS measure. However, they should not be construed as alternative measures to IFRS measures, and as they do not have standardized meanings or standardized methods of calculation, the may not be consistent with or comparable to similar measures presented by other companies. These measures are further explained below.

Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is not a recognized measure under IFRS. Management believes that in addition to net income (loss), EBITDA is a useful supplemental measure as it provides an indication of the results generated by the Company’s principal business activities prior to consideration of how those activities are financed and taxed. As of June 30, 2018, the Company implemented changes to its method of calculating EBITDA, which no longer includes adjustments for gains and losses due to foreign exchange or disposal of property, plant and equipment that occur during the normal course of business. EBITDA is now calculated as net income (loss) before interest, taxes, and depreciation and amortization. Segmented EBITDA is based upon the same calculation for defined business segments, which are comprised of Industrial Matting and Equipment Rentals. The Company’s method of calculating EBITDA may differ from that of other organizations and, accordingly, its EBITDA may not be comparable to that of other companies.

Earnings before interest and taxes (“EBIT”) is an additional measure under IFRS. Management believes that in addition to net income (loss), EBIT is a useful supplemental measure as it provides an indication of the results generated by the Company’s principal business activities prior to consideration of how those activities are financed.

Funds from operations are cash flow from operating activities excluding changes in non-cash working capital. Funds from operations is a non-IFRS measure commonly used in the energy services industry to assist in measuring a company’s ability to finance its capital programs, debt repayments and other financial obligations. Funds from operations is not intended to represent net cash generated from operating activities or other measures of financial performance in accordance with IFRS. It is a supplemental measure to gauge performance of the Company before non-cash items. The Company’s method of calculating funds from operations may differ from that of other organizations and, accordingly, its funds from operations may not be comparable to that of other companies.

Working capital is calculated as current assets minus current liabilities, as derived from the Company’s consolidated statement of financial position. Working capital, cash forecasting, and banking facilities are used by Management to ensure funds are available to finance growth opportunities.

Funded debt is a measure used in calculating our bank financial covenants. Funded debt is calculated as bank indebtedness plus long-term debt plus current and long-term portion of finance lease obligations less cash from syndicate institutions.

Reconciliation of Funds from Operations

($000’s)
	Three months ended September 30,				Nine months ended September 30,
	2018		2017		2018	2017

Net cash generated from operating activities	7,448		4,223		23,571	10,795
Less:
Changes in non-cash working capital	(1,186	)	(7,174	)	1,357	(12,205	)
Funds from Operations	8,634		11,397		22,214	23,000

Reconciliation of EBITDA and EBIT

($’000’s)
	Three months ended September 30,				Nine months ended September 30,
	2018		2017		2018		2017

Net income (loss):	890		598		4,354		(3,911	)
Add (deduct):
Depreciation and amortization	5,444		7,359		16,116		21,314
Income tax (recovery) expense	(62	)	1,123		(4,452	)	1,136
Interest expense	230		359		577		1,360
EBITDA⁽¹⁾	6,502		9,439		16,595		19,899
(Deduct):
Depreciation and amortization	(5,444	)	(7,359	)	(16,116	)	(21,314	)
EBIT	1,058		2,080		479		(1,415	)
⁽¹⁾During the second quarter of 2018, the Company changed the method of calculation for EBITDA by no longer adjusting for gains or losses resulting from foreign exchange or the disposal of property, plant and equipment during the normal course of business. These changes have been updated for prior period balances.

Reconciliation of quarterly non-IFRS and additional IFRS measures
($’000’s)
	Three months ended
	Sep 30, 2018			Jun 30, 2018			Mar 31, 2018			Dec 31, 2017

Net income (loss):	$	890		$	3,861		$	(397	)	$	(3,364	)
Add (deduct):
Depreciation and amortization	5,444			5,240			5,432			8,918
Income tax (recovery) expense	(62		)	(4,428		)	38			(653		)
Interest expense	230			157			190			158
EBITDA⁽¹⁾	6,502			4,830			5,263			5,059
(Deduct):
Depreciation and amortization	(5,444		)	(5,240		)	(5,432		)	(8,918		)
EBIT	1,058			(410		)	(169		)	(3,859		)
⁽¹⁾During the second quarter of 2018, the Company changed the method of calculation for EBITDA by no longer adjusting for gains or losses resulting from foreign exchange or the disposal of property, plant and equipment during the normal course of business. These changes have been updated for prior period balances.

	Three months ended
	Sep 30, 2017			Jun 30, 2017			Mar 31, 2017			Dec 31, 2016

Net loss:	$	598		$	(2,163	)	$	(2,347	)	$	(3,105	)
Add (deduct):
Depreciation and amortization	7,359			7,572			6,383			7,610
Income tax (recovery) expense	1,123			(102		)	116			(199		)
Interest expense	359			492			509			458
EBITDA⁽¹⁾	9,439			5,799			4,661			4,764
(Deduct):
Depreciation and amortization	(7,359		)	(7,572		)	(6,383		)	(7,610		)
EBIT	2,080			(1,773		)	(1,722		)	(2,846		)
⁽¹⁾During the second quarter of 2018, the Company changed the method of calculation for EBITDA by no longer adjusting for gains or losses resulting from foreign exchange or the disposal of property, plant and equipment during the normal course of business. These changes have been updated for prior period balances.

Reconciliation of funded debt
($’000’s)
	Nine months ended September 30, 2018	Year-ended December 31, 2017
Bank indebtedness (cash) at syndicate banks	956	(1,626	)
Long term debt	6,414	10,776
Current and long term obligations under finance lease	331	618
Funded Debt	7,701	9,768

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS

Certain statements and information contained in this press release constitute forward-looking information and statements within the meaning of applicable securities laws. The use of any of the words “expect”, “plan”, “continue”, “estimate”, “anticipate”, “potential”, “targeting”, “intend”, “could”, “might”, “should”, “believe”, “may”, “predict”, or “will” and similar expressions are intended to identify forward-looking information or statements. More particularly, this MD&A contains forward-looking statements concerning future capital expenditures of the Company, including its 2018 capital budget, planned allocations of capital expenditures, and funding thereof, by way of cash flow, anticipated cash flow, debt, anticipated growing demand for the Company’s products and services in 2018 and beyond, and anticipated revenue allocations amongst our service offerings, drilling activity in North America, pricing of the Company’s products and services, and expectations for 2018 and potential for improved profitability, and the potential for growth and expansion of certain components of the Company’s business, including further capital being allocated to increase our matting fleet, expanding our matting offerings in the U.S., anticipated benefits from cost reductions and timing thereof, manufacturing capacity to meet anticipated demand for the Company’s products, and expected exploration and production industry activity including the effects of industry trends, including the potential of LNG infrastructure, on demand for the Company’s products. These statements relate to future events or to the Company’s future financial performance and involve known and unknown risks, uncertainties and other factors that may cause the Company’s actual results, levels of activity, performance or achievements to be materially different from future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.

Various assumptions were used in drawing the conclusions or making the projections contained in the forward-looking statements throughout this press release. The forward-looking information and statements included in this press release are not guarantees of future performance and should not be unduly relied upon. Forward-looking statements are based on current expectations, estimates, and projections that involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated and described in the forward-looking statements. Such information and statements 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 information or 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 Company referenced herein, assumptions have been made in respect of such forward-looking statements and information regarding, among other things: the Company 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 Company operates; exchange and interest rates; tax laws; 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 Company’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 Company’s website. The forward-looking statements and information contained in this press release are expressly qualified by this cautionary statement. The Company 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.

THIRD QUARTER EARNINGS CONFERENCE CALL

Strad has scheduled a conference call to begin promptly at 8:00 a.m. MT (10:00 a.m. ET) on Friday, November 9, 2018.

The conference call dial in number is 1-844-388-0561, followed by Conference ID code 5992769

The conference call will also be accessible via webcast at www.stradenergy.com

A replay of the call will be available approximately after the conference call ends until Friday, November 16th, 2018, at 1:00 p.m. ET. To access the replay, call 1-855-859-2056, followed by pass code 5992769.

Strad Energy Services Ltd.
Interim Consolidated Statement of Financial Position
(Unaudited)

(in thousands of Canadian dollars)	As at September 30, 2018		As at December 31, 2017
	$		$
Assets
Current assets
Cash	—		1,859
Trade receivables	26,738		26,038
Inventories	1,195		1,818
Prepaids and deposits	869		707
Other assets	—		1,289
Income taxes receivable	803		188
Total current assets	29,605		31,899

Non-current assets
Property, plant and equipment	141,225		141,917
Intangible assets	1,439		556
Income tax receivable	283		278
Deferred income tax assets	155		171
Total non-current assets	143,102		142,922
Total assets	172,707		174,821

Liabilities
Current liabilities
Bank indebtedness	956		—
Accounts payable and accrued liabilities	15,346		11,937
Current portion of obligations under finance lease	155		345
Total current liabilities	16,457		12,282

Non-current liabilities
Long-term debt	6,414		10,776
Obligations under finance lease	176		273
Deferred income tax liabilities	11,874		11,567
Total liabilities	34,921		34,898

Equity
Share capital	147,877		154,763
Contributed surplus	12,984		12,736
Accumulated other comprehensive income	19,886		22,635
Deficit	(42,961	)	(50,211	)
Total equity	137,786		139,923
Total liabilities and equity	172,707		174,821

Strad Energy Services Ltd.
Interim Consolidated Statement of Income (Loss) and Comprehensive Income (Loss)
For the three and nine months ended September 30, 2018 and 2017
(Unaudited)

(in thousands of Canadian dollars, except per share amounts)
	Three months ended September 30,						Nine months ended September 30,
		2018			2017			2018			2017
	$			$			$			$
Revenue		31,220			33,923			87,619			90,077
Expenses
Operating expenses		21,137			20,343			60,148			59,597
Depreciation		5,373			7,295			15,956			21,118
Amortization of intangible assets		71			42			160			126
Amortization of other assets		—			22			—			70
Selling, general and administration		3,633			4,080			11,182			10,605
Share-based payments		70			82			248			370
Gain on disposal of property, plant and equipment		(93	)		(6	)		(570	)		(234	)
Foreign exchange (gain) loss		(29	)		(15	)		16			(160	)
Interest expense		230			359			577			1,360
Income (loss) before income tax		828			1,721			(98	)		(2,775	)
Income tax (recovery) expense		(62	)		1,123			(4,452	)		1,136
Income (loss) for the period		890			598			4,354			(3,911	)

Other comprehensive (loss) income
Items that may be reclassified subsequently to net income
Cumulative translation adjustment		(1,085	)		(2,510	)		1,595			(4,849	)
Deferred tax expense on foreign exchange gain		—			—			(4,344	)		—
Total comprehensive (loss) income		(195	)		(1,912	)		1,605			(8,760	)


Income (loss) per share:
Basic	$	0.02		$	0.01		$	0.07		$	(0.07		)
Diluted	$	0.02		$	0.01		$	0.07		$	(0.07		)

Strad Energy Services Ltd.
Interim Consolidated Statement of Cash Flow
For the three and nine months ended September 30, 2018 and 2017
(Unaudited)

(in thousands of Canadian dollars)
	Nine months ended September 30,
	2018		2017
	$		$
Cash flow provided by (used in)
Operating activities
Net income (loss) for the period	4,354		(3,911	)
Adjustments for items not affecting cash:
Depreciation and amortization	16,116		21,314
Deferred income tax (recovery) expense	(4,021	)	1,136
Share-based payments	248		370
Interest expense	577		1,360
Unrealized foreign exchange loss (gain)	56		(495	)
Gain on disposal of property, plant and equipment	(570	)	(234	)
Book value of used fleet sales in operating activities	5,454		3,460
Changes in items of non-cash working capital	1,357		(12,205	)
Net cash generated from operating activities	23,571		10,795

Investing activities
Purchase of property, plant and equipment	(20,516	)	(16,967	)
Proceeds from sale of property, plant and equipment	1,595		790
Purchase of intangible assets	(1,039	)	(34	)
Proceeds from sale of other assets	1,272		—
Cash paid on business acquisition	—		(2,750	)
Cash assumed on business acquisition	—		322
Changes in items of non-cash working capital	1,184		117
Net cash used in investing activities	(17,504	)	(18,522	)

Financing activities
Proceeds on issuance of long-term debt	—		5,307
Repayment of long-term debt	(4,362	)	(12,919	)
Repayment of finance lease obligations (net)	(252	)	(790	)
Repayment of shareholder loan	—		304
Issuance of common shares	—		15,000
Share issue costs	—		(1,025	)
Normal course issuer bid	(3,990	)	—
Interest expense	(577	)	(1,360	)
Changes in items of non-cash working capital	10		(76	)
Net cash (used in) generated from financing activities	(9,171	)	4,441
Effect of exchange rate changes on cash and cash equivalents	289		769
Decrease in cash and cash equivalents	(2,815	)	(2,517	)

Cash and cash equivalents (including bank indebtedness) – beginning of year	1,859		(1,109	)
Cash and cash equivalents (including bank indebtedness) – end of period	(956	)	(3,626	)

Cash paid for income tax	377		—
Cash paid for interest	393		203

ABOUT STRAD

Strad specializes in industrial matting and equipment rentals for projects of any size, from a network of branches across Canada and the United States. Strad aims to exceed customer expectations in many industrial sectors, including Oil and Gas, Pipeline, Power Transmission, and Mining.

Strad is headquartered in Calgary, Alberta, Canada. Strad is listed on the Toronto Stock Exchange under the trading symbol “SDY”.

CONTACT: For more information, please contact:

Andy Pernal  
President and Chief Executive Officer  
(403) 775-9202  
email: [email protected]

Michael Donovan
Chief Financial Officer
(403) 775-9221
email: [email protected]

www.stradenergy.com

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