PHX PHX Energy Services Corp

Second Quarter Highlights

• For the three-month period ended June 30, 2023, PHX Energy generated consolidated revenue of $155.6 million, the highest level of second quarter revenue on record and the third highest level of quarterly revenue in the Corporation’s history despite the second quarter being typically slow in Canada due to spring break-up. Revenue in the first quarter of 2023 and fourth quarter of 2022 are the first and second highest quarterly revenue on record, respectively.
• Earnings from continuing operations increased to $18.1 million, an increase of 41 percent over the second quarter of 2022, and adjusted EBITDA(1) from continuing operations increased to $34.8 million, which represented 22 percent of consolidated revenue(1). Earnings and adjusted EBITDA from continuing operations are the best second quarter results on record. Additionally, adjusted EBITDA is the Corporation’s second highest quarterly level in its history. Included in the 2023-quarter’s adjusted EBITDA is $2.6 million in cash-settled share-based compensation expense. Excluding cash-settled share-based compensation expense, adjusted EBITDA from continuing operations(1) in the second quarter of 2023 was $37.4 million, 24 percent of consolidated revenue(1).
• PHX Energy’s US division revenue in the second quarter of 2023 was $125 million, 19 percent higher than the second quarter of 2022 and just slightly below the records achieved in the previous two quarters. US division revenue in the 2023-quarter represented 80 percent of consolidated revenue.
• PHX Energy’s Canadian division reported $29.4 million of quarterly revenue, its highest level of second quarter revenue on record.
• The US dollar continued to have a favorable impact on the 2023-quarter’s financial results. In the 2023 three-month period, the average US dollar to Canadian dollar foreign exchange rate was 1.34 compared to 1.28 in the 2022-period. Albeit, the US dollar has weakened compared to the first quarter of 2023.
• The Corporation generated excess cash flow(2) of $25.5 million in the 2023 three-month period, after deducting for maintenance capital expenditures from asset retirements, maintenance capital expenditures from downhole equipment losses, and growth capital expenditures of $3.9 million, $3.3 million, and $4.9 million, respectively.

• In the 2023-quarter, PHX Energy paid $7.7 million in dividends which is double the dividend amount paid in the same 2022-quarter. On June 15, 2023, the Corporation declared a dividend of $0.15 per share(3) or $7.6 million, paid on July 17, 2023 to shareholders of record on June 30, 2023.
• PHX Energy delivered additional returns to shareholders through the use of its current NCIB, purchasing and cancelling 267,800 common shares for $1.6 million in the second quarter of 2023. Subsequent to June 30, 2023, the Corporation purchased and cancelled 1,242,000 common shares for $8.1 million.
• As at June 30, 2023, the Corporation had working capital(2) of $111 million and net debt(2) of $7.6 million with credit facility capacity in excess of $52 million.

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

	Three-month periods ended June 30,						Six-month periods ended June 30,
	2023		2022		% Change		2023		2022		% Change
Operating Results – Continuing Operations	(unaudited)		(unaudited)				(unaudited)		(unaudited)
Revenue	155,618		126,238		23		321,641		235,568		37
Earnings	18,108		12,818		41		40,526		10,504		286
Earnings per share – diluted	0.35		0.25		40		0.77		0.21		267
Adjusted EBITDA (1)	34,802		25,084		39		71,804		31,528		128
Adjusted EBITDA per share – diluted (1)	0.66		0.49		35		1.35		0.63		114
Adjusted EBITDA as a percentage of revenue (1)	22	%	20	%			22	%	13	%
Cash Flow – Continuing Operations
Cash flows from (used in) operating activities	22,633		11,449		98		26,341		7,740		240
Funds from operations (2)	30,248		21,821		39		56,985		24,703		131
Funds from operations per share – diluted (3)	0.57		0.43		33		1.07		0.49		118
Dividends paid per share (3)	0.15		0.075		100		0.30		0.125		140
Dividends paid	7,656		3,791		102		15,292		6,273		144
Capital expenditures	12,072		15,214		(21	)	30,654		33,420		(8	)
Excess cash flow (2)	25,508		9,116		180		44,743		(2,277	)	n.m.
Financial Position							Jun 30 ‘23		Dec 31 ‘22
Working capital (2)							110,963		94,339		18
Net debt (2)							7,605		4,484		70
Shareholders’ equity							196,750		176,878		11
Common shares outstanding							50,801,138		50,896,175		n.m.

n.m. – not meaningful

Outlook

In the second quarter we continued to produce strong financial and operating results despite a softening market. These results are testament to our talented team and leading-edge technology that allow us to deliver the superior operational performance that Operators demand.

• We remain cautiously optimistic for the second half of 2023. We expect the softening US rig count to stabilize with the recent strengthening of oil commodity prices and tightening supply. Additionally, we anticipate the Canadian industry activity will continue to trend above the levels seen in the prior year.
• In the US we may continue to see lighter activity than 2022 and expect levels to remain relatively consistent with those seen in the second quarter. We anticipate that the premiums generated from our technology offering, particularly RSS, will continue to offset the subtle decline in activity. Additionally, we believe our motor rental and sales division will continue to see growth in the remainder of the year and these streams will also contribute to improved revenue and margins year-over-year.
• In Canada we expect our activity to continue to show an improvement over 2022 and revenues to track accordingly. The second quarter was a record spring break up period for our Canadian division and currently this division is very active.
• We believe the delivery of the additional equipment on order will be adequate to meet the volume of forecasted activity for the remainder of 2023. We will assess future capital requirements in the upcoming months for anticipated growth in 2024 and will likely place early orders for certain materials and items that still have long lead times for delivery.
• In line with our strategy to expand our Atlas sales business, we recently entered into an Atlas sales agreement with an existing international client. We have already seen an upside in the second quarter from this new business line and will continue to pursue opportunities for expansion.
• We continue to leverage our business strengths to reward our shareholders through the various mechanism of ROCS, including our base dividend program, share buy backs and the ability to trigger special dividends with excess cash. We have bought back 19% of our shares since 2017, including the purchase and cancellation of 1.5 million shares through the current NCIB thus far in 2023. Through our dividend program we have paid $36.7 million to shareholders since reinstating the program in December 2020.

Through the remainder of the year, we will continue to provide attractive shareholder returns while maintaining our balance sheet strength and funding operational growth by investing in new technology development and capital expenditures.

Michael Buker, PresidentAugust 8, 2023

Financial ResultsIn the second quarter of 2023, market uncertainties continued. North American drilling activity was flat compared to the same quarter in 2022 and has declined from the first quarter of 2023. Despite these market trends, PHX Energy’s consolidated revenue grew by 23 percent to $155.6 million (2022 - $126.2 million), the highest second quarter revenue on record.

For the three-month period ended June 30, 2023, in line with North American industry activity, PHX Energy’s consolidated activity levels were relatively flat at 6,526 operating days compared to 6,486 operating days in the 2022-period. The Corporation continued to leverage its premium technologies and strength in marketing and operations, and as a result, improved its average consolidated revenue per day(3) for directional drilling services by 15 percent quarter-over-quarter.

In the 2023 three-month period, PHX Energy’s US division revenue grew by 19 percent to $125 million as compared to $105.4 million in the same 2022-period. Compared to the record in the first quarter of 2023, the US division’s revenue was relatively flat despite the decline in the rig count in the 2023-quarter. US operating days decreased by 7 percent from 4,707 in the second quarter of 2022 to 4,364 in the second quarter of 2023 while US average revenue per day(3) for directional drilling services improved by 18 percent quarter-over-quarter. Revenue from the Corporation’s US segment represented 80 percent of consolidated revenue in the 2023 three-month period (2022 – 83 percent).

Similar to the US division, the momentum of the strong first quarter results in Canada continued in the second quarter of 2023, and the Corporation’s Canadian division generated revenue of $29.4 million, a 49 percent increase from $19.7 million in the same 2022-quarter. Following the record revenue in the first quarter, this is the highest level of second quarter Canadian division revenue on record. In the 2023 three-month period, Canadian industry activity held steady compared to the same 2022-period while the Corporation’s Canadian operating days grew by 23 percent to 2,076 days from the 1,688 operating days in the comparable 2022-period. Average revenue per day realized by the Canadian segment also improved by 19 percent quarter-over-quarter.

Earnings from continuing operations and adjusted EBITDA(1) generated in the 2023-quarter are the best second quarter results in the Corporation’s history. For the three-month period ended June 30, 2023, earnings from continuing operations increased to $18.1 million from $12.8 million in the comparable 2022-period, an increase of 41 percent. Adjusted EBITDA from continuing operations increased to $34.8 million (22 percent of revenue) which is 39 percent higher than the adjusted EBITDA reported in the same 2022-period of $25.1 million (20 percent of revenue). Included in the 2023 three-month period adjusted EBITDA from continuing operations is cash-settled share-based compensation expense of $2.6 million (2022 - $0.7 million). For the three-month period ended June 30, 2023, excluding cash-settled share-based compensation expense, adjusted EBITDA from continuing operations(1) is $37.4 million, 24 percent of consolidated revenue (2022 - $25.8 million).

PHX Energy maintained its strong financial position and had working capital(2) of $111 million and net debt(2) of $7.6 million with available credit facilities in excess of $52 million as at June 30, 2023.

Dividends and ROCSOn June 15, 2023, the Corporation declared a dividend of $0.15 per share payable to shareholders of record at the close of business on June 30, 2023. An aggregate of $7.6 million was paid on July 17, 2023. This is double the dividend declared in the 2022-quarter.

The Corporation remains committed to enhancing shareholder returns through its Return of Capital Strategy (“ROCS”) that includes multiple options including the dividend program and the Normal Course Issuer Bid (“NCIB”).

Normal Course Issuer Bid Pursuant to PHX Energy’s current NCIB it is entitled to purchase for cancellation, from time-to-time, up to a maximum of 3,622,967 common shares, representing 10 percent of the Corporation’s public float of common shares at the time of its approval by the TSX. The NCIB commenced on August 16, 2022, and will terminate on August 15, 2023. Pursuant to the current NCIB, 267,800 common shares were purchased by the Corporation for $1.6 million and cancelled in the second quarter of 2023. Subsequent to June 30, 2023, the Corporation purchased and cancelled 1,242,000 common shares for $8.1 million. Pursuant to the Corporation's current NCIB, the Corporation purchased in the open market through the facilities of the TSX and through other alternative Canadian trading platforms and cancelled an aggregate of 1,509,800 common shares of the Corporation at an average price paid of $6.39 per common share. For the three-month period ended June 30, 2022, the Corporation did not repurchase shares through its previous NCIB.

The Corporation has made an application to the TSX for renewal of its NCIB for a further one-year term. The anticipated renewal of the NCIB is subject to the review and approval of the TSX.

Capital SpendingIn the second quarter of 2023, the Corporation spent $12.1 million in capital expenditures, of which $4.9 million was spent on growing the Corporation’s fleet of drilling equipment, $3.9 million was spent to replace retired assets, and $3.3 million was spent to replace equipment lost downhole during drilling operations. With proceeds on disposition of drilling and other equipment of $8.6 million, the Corporation’s net capital expenditures(2) for the 2023-quarter were $3.5 million. Capital expenditures in the 2023-quarter were primarily directed towards Atlas High Performance motors (“Atlas”), Velocity Real-Time systems (“Velocity”), and PowerDrive Orbit Rotary Steerable Systems (“RSS”). PHX Energy funded capital spending primarily using proceeds on disposition of drilling equipment, cash flows from operating activities, and its credit facilities when required.

(Stated in thousands of dollars)

Three-month period ended June 30,			Six-month period ended June 30,
	2023		2023
Growth capital expenditures	4,931		14,885
Maintenance capital expenditures from asset retirements	3,860		8,718
Maintenance capital expenditures from downhole equipment losses	3,281		7,051
	12,072		30,654
Deduct:
Proceeds on disposition of drilling equipment	(8,589	)	(21,007	)
Net capital expenditures(2)	3,483		9,647

The approved capital expenditure budget for the 2023-year, excluding proceeds on disposition of drilling equipment, is $61.5 million, which includes $11.5 million of carryover from the 2022 budget. Of the total expenditures, $38.5 million is expected to be allocated to growth capital and the remaining $23 million is expected to be allocated towards maintenance of the existing fleet of drilling and other equipment and replacement of equipment lost downhole during drilling operations. The maintenance capital amount could increase throughout the year should there be more downhole equipment losses than forecasted. These increases would likely be funded by proceeds on disposition of drilling equipment.

As at June 30, 2023, the Corporation has capital commitments to purchase drilling and other equipment for $28.4 million, $21.5 million of which is growth capital and includes $20.7 million for performance drilling motors and $0.8 million for other equipment. Equipment on order as at June 30, 2023 is expected to be delivered within 2023.

The Corporation currently possesses approximately 680 Atlas motors, comprised of various configurations including its 5.13", 5.25", 5.76", 6.63", 7.12", 7.25", 8" and 9" Atlas motors, 113 Velocity systems, and 51 PowerDrive Orbit RSS, the largest independent fleet in North America.

Sale and Licensed Use of Atlas Motors On May 3, 2023, PHX Energy entered into a sales agreement for the sale and licensed use of its Atlas High Performance Drilling Motors. PHX Energy will be providing a fleet of Atlas motors to a purchaser in the US market (referred to as the “Purchaser”). Under the agreement, the Purchaser must exclusively use components manufactured by the Corporation for the maintenance of their fleet of Atlas motors. PHX Energy anticipates delivering a fleet of Atlas motors amounting to $3.8 million to the Purchaser by the third quarter of 2023 and anticipates ongoing orders for parts to maintain their fleet throughout the remainder of the year. In addition, the Purchaser could potentially place subsequent orders for additional Atlas motors in the latter part of the year. In the 2023 three-month period, $3.2 million of motors and parts were sold as part of this agreement.

On July 27, 2023, PHX Energy agreed upon the sale and licensed use of its Atlas High Performance Drilling Motors to an existing international client. PHX Energy will be providing a fleet of Atlas motors and parts amounting to approximately $5 million with delivery anticipated to be completed by the end of 2023.

Supply Chain and InventoryInflation and shortages related to the products and services required within the energy sector, including those within the Corporation’s supply chain, continued in the second quarter 2023 although it had less of an impact. Due to these shortages, lead times remain extended and turn-around times for servicing the Corporation’s premium technologies remain longer than usual. Inflationary pressures also carried through 2023 and the resulting overall cost increases continued to negatively impact the Corporation’s margins.

PHX Energy has remained diligent and proactive with efforts to lessen the supply chain disruptions’ impact on its operations. Specifically, the Corporation continues to maintain higher minimum safety stock levels and take advantage of pre-ordering materials to manufacture technology and obtain bulk discounts. These supply chain strategies continue to result in higher inventory levels, which have increased by 8 percent from $63.1 million at the end of 2022 to $68.4 million at June 30, 2023. Higher inventory levels were also partly due to lower than forecasted activity in the 2023-quarter. The Corporation continues to pursue pricing increases where it deems necessary to mitigate the impact of inflationary costs and to protect its margins.

Additional information regarding certain material risks and uncertainties, and their impact on the Corporation’s business can be found throughout this Press Release, including under the headings “Capital Spending”, “Operating Costs and Expenses”, “Segmented Information” and “Outlook”.

Shares Held in TrustFor the three-month period ended June 30, 2023, the Corporation equity settled a portion of its outstanding Retention Awards (“RA”) granted under its Retention Award Plan (the “RAP”). Pursuant to RA settlements, 53,594 common shares were released from the independent trustee in the 2023-quarter to settle $0.4 million in RAP liabilities. The independent trustee acquires common shares on the open market from time-to-time for the potential settlement of future share-based compensation obligations of the Corporation. For the three-month period ended June 30, 2023, the trustee did not repurchase common shares. As at June 30, 2023, 3,301 common shares were held in trust for purposes of the RAP.

Non-GAAP and Other Financial Measures

Throughout this Press Release, PHX Energy uses certain measures to analyze financial performance, financial position, and cash flow. These Non-GAAP and other specified financial measures do not have standardized meanings prescribed under Canadian generally accepted accounting principles (“GAAP”) and include Non-GAAP Financial Measures and Ratios, Capital Management Measures and Supplementary Financial Measures (collectively referred to as “Non-GAAP and Other Financial Measures”). These non-GAAP and other specified financial measures include, but are not limited to, adjusted EBITDA, adjusted EBITDA per share, adjusted EBITDA as a percentage of revenue, gross profit as a percentage of revenue excluding depreciation and amortization, selling, general and administrative (“SG&A”) costs excluding share-based compensation as a percentage of revenue, funds from operations, funds from operations per share, excess cash flow, net capital expenditures, net debt, and working capital. Management believes that these measures provide supplemental financial information that is useful in the evaluation of the Corporation’s operations and are commonly used by other oil and natural gas service companies. Investors should be cautioned, however, that these measures should not be construed as alternatives to measures determined in accordance with GAAP as an indicator of PHX Energy’s performance. The Corporation’s method of calculating these measures may differ from that of other organizations, and accordingly, such measures may not be comparable. Please refer to the “Non-GAAP and Other Financial Measures” section of this Press Release for applicable definitions, rationale for use, method of calculation and reconciliations where applicable.

Revenue The Corporation generates revenue primarily through the provision of directional drilling services which includes providing equipment, personnel, and operational support for drilling a well. Additionally, the Corporation generates revenue through the rental and sale of drilling motors and associated parts, particularly Atlas. Recently, the revenue generated from the rental and sale of motors has grown and this is expected to continue in future periods.

(Stated in thousands of dollars)

	Three-month periods ended June 30,			Six-month periods ended June 30,
	2023	2022	% Change	2023	2022	% Change
Directional drilling services	140,970	120,101	17	297,062	223,518	33
Motor rental	11,427	6,137	86	20,669	12,050	72
Sale of motor equipment and parts	3,221	-	n.m.	3,910	-	n.m.
Total revenue	155,618	126,238	23	321,641	235,568	37

n.m. – not meaningful

In the second quarter of 2023, PHX Energy’s consolidated revenue was $155.6 million, a 23 percent increase compared to the $126.2 million in the second quarter of 2022 and a 6 percent decrease compared to the $166 million in the first quarter of 2023. A decrease from the first quarter to the second quarter is typical due to Canadian spring break up and additionally wildfires in Alberta also affected the Corporation’s Canadian drilling activity in the 2023-quarter. For the six-month period ended June 30, 2023, the Corporation generated consolidated revenue of $321.6 million, an increase of 37 percent as compared to the same 2022-period which generated consolidated revenue of $235.6 million. Higher revenue in both the 2023 three and six-month periods was mainly driven by stronger average consolidated revenue per day(3) realized through increased capacity in the Corporation’s fleet of high performance technologies, the cumulative impact of previous and recent pricing increases carried out to mitigate the effects of inflationary costs, and the strengthening of the US dollar relative to the 2022-quarter.

For the three and six-month period ended June 30, 2023, average consolidated revenue per day(3) for directional drilling services increased by 15 percent and 20 percent, respectively. Average consolidated revenue per day increased to $21,603 in the 2023 three-month period from $18,782 in the same 2022-period and increased to $20,515 in the 2023 six-month period from $17,086 in the same 2022-period.

During the second quarter of 2023, the US industry rig count averaged 700 rigs operating per day, which is only 2 percent greater than the average of 687 rigs in the second quarter of 2022. US rig count has been decreasing since the fourth quarter of 2022 and is 6 percent lower in the second quarter of 2023 compared to the average of 742 rigs in the first quarter of 2023. In Canada, the average rig count for the 2023 three-month period increased 4 percent to 117 rigs from 113 rigs in the second quarter of 2022 (Source: Baker Hughes, North American Rotary Rig Count, Jan 2000 – Current, https://rigcount.bakerhughes.com/na-rig-count). In comparison, the Corporation’s consolidated operating days were relatively flat at 6,526 days in the second quarter of 2023 compared to 6,486 days in the second quarter of 2022. For the six-month period ended June 30, 2023, consolidated operating days increased by 9 percent to 14,480 from 13,281 days in the corresponding 2022-period.

PHX Energy’s revenue from motor rentals grew by 86 percent to $11.4 million in the 2023-quarter from $6.1 million in the same 2022-quarter and increased by 72 percent to $20.7 million in the 2023 six-month period from $12.1 million in the same 2022-period. Higher motor rental revenue in both 2023-periods primarily resulted from the continued focus on marketing Atlas technology as a stand-alone product line and expanded capacity in the Corporation’s Atlas motor fleet.

In the 2023-quarter, PHX Energy sold $3.2 million in Atlas motors and parts. With the two sales agreements in place, the Corporation expects to grow this business line in future periods.

Operating Costs and Expenses

(Stated in thousands of dollars except percentages)

		Three-month periods ended June 30,						Six-month periods ended June 30,
		2023		2022		% Change		2023		2022		% Change
Direct costs		119,870		100,520		19		251,858		192,466		31
Depreciation & amortization drilling and other equipment (included in direct costs)		9,621		7,823		23		18,938		15,099		25
Depreciation & amortization right-of-use asset (included in direct costs)		827		849		(3	)	1,235		1,685		(27	)
Gross profit as a percentage of revenue excluding depreciation & amortization(1)		30	%	27	%			28	%	25	%

Direct costs are comprised of field and shop expenses, costs of motors and parts sold, and include depreciation and amortization of the Corporation’s equipment and right-of-use assets. For the three-month period ended June 30, 2023, direct costs increased by 19 percent to $119.9 million from $100.5 million in the 2022-period. For the 2023 six-month period, direct costs increased by 31 percent to $251.9 million from $192.5 million in the same 2022-period. Higher direct costs in both 2023 periods were mainly driven by greater depreciation and amortization expenses on drilling and other equipment, higher motor repairs associated with growth in motor rental activity, greater costs of motors and parts sold, and increased overall costs related to personnel, repair parts, and equipment rentals as a result of inflation and activity growth in the first half of 2023. The Corporation’s depreciation and amortization on drilling and other equipment increased by 23 percent and 25 percent, respectively, in the 2023 three and six-month periods due to the volume of fixed assets acquired as part of PHX Energy’s capital expenditure program in the first half of 2023.

In the three and six-month periods of 2023, gross profit as a percentage of revenue excluding depreciation and amortization improved to 30 percent and 28 percent, respectively, compared to 27 percent and 25 percent in the corresponding 2022-periods. Greater profitability in both periods was largely driven by the higher average consolidated revenue per day(3) achieved and various strategies implemented by PHX Energy over the past year to gain cost efficiencies and soften the impact of rising costs caused by inflation. Margins from the rental and sale of Atlas motors also contributed to the increase in gross profits in the 2023 periods.

(Stated in thousands of dollars except percentages)

	Three-month periods ended June 30,						Six-month periods ended June 30,
		2023		2022		% Change	2023		2022		% Change
Selling, general and administrative (“SG&A”) costs		15,522		11,836		31	31,078		33,947		(8	)
Cash-settled share-based compensation (included in SG&A costs)		2,556		715		n.m.	3,930		12,452		(68	)
Equity-settled share-based compensation (included in SG&A costs)		186		(75	)	n.m.	287		260		10
SG&A costs excluding share-based compensation as a percentage of revenue(1)		8	%	9	%		8	%	9	%

n.m. – not meaningful

For the three-month period ended June 30, 2023, SG&A costs were $15.5 million, an increase of 31 percent as compared to $11.8 million in the corresponding 2022-period. Higher SG&A costs in the 2023-quarter were largely due to rising personnel-related costs mainly attributable to inflation and the increase in the compensation expenses related to cash-settled share-based awards. In the 2023 six-month period, SG&A costs decreased by 8 percent to $31.1 million from $33.9 million in the corresponding 2022-period. Lower SG&A costs in the first half of 2023 were primarily driven by the decline in the compensation expenses related to cash-settled share-based awards.

Cash-settled share-based compensation relates to the Corporation’s retention awards and are measured at fair value. For the three and six-month periods ended June 30, 2023, the related compensation expense recognized by PHX Energy was $2.6 million (2022 - $0.7 million) and $3.9 million (2022 - $12.5 million), respectively. Changes in cash-settled share-based compensation expense in the 2023-periods were mainly driven by fluctuations in the Corporation’s share price, the number of awards granted in the period, and changes in the estimated payout multiplier for performance awards. There were 2,100,746 retention awards outstanding as at June 30, 2023 (2022 – 3,425,196). Excluding share-based compensation, SG&A costs as a percentage of revenue for both the 2023 three and six-month periods improved to 8 percent as compared to 9 percent in the corresponding 2022 periods.

(Stated in thousands of dollars)

	Three-month periods ended June 30,				Six-month periods ended June 30,
		2023	2022	% Change	2023	2022	% Change
Research and development expense		1,314	873	51	2,571	1,630	58

PHX Energy’s research and development (“R&D”) expenditures for the three and six-month periods ended June 30, 2023, were $1.3 million (2022 - $0.9 million) and $2.6 million (2022 - $1.6 million), respectively. Higher R&D expenditures in both 2023 periods were mainly due to increased prototype expenses and more personnel necessary to support the greater number of ongoing initiatives to continuously improve the reliability of equipment, reduce costs to operations, and develop new technologies.

(Stated in thousands of dollars)

	Three-month periods ended June 30,				Six-month periods ended June 30,
		2023	2022	% Change	2023	2022	% Change
Finance expense		709	262	171	1,376	374	268
Finance expense lease liabilities		564	501	13	1,140	1,008	13

Finance expenses mainly relate to interest charges on the Corporation’s credit facilities. For the three and six-month periods ended June 30, 2023, finance expenses increased to $0.7 million (2022 - $0.3 million) and $1.4 million (2022 - $0.4 million), respectively, mainly due to higher drawings on the credit facilities that were used to fund PHX Energy’s capital spending. Additionally, variable interest rates on the Corporation’s operating and syndicated facilities continued to trend upwards and contributed to higher finance expenses in the 2023 periods.

Finance expense lease liabilities relate to interest expense incurred on lease liabilities. For the three and six-month periods ended June, 2023, finance expense lease liabilities increased by 13 percent in both periods primarily due to new premise leases entered in the fourth quarter of 2022 and first quarter of 2023 for a new facility in Midland, Texas and additional head office space in Calgary, Alberta.

(Stated in thousands of dollars)

	Three-month periods ended June 30,				Six-month periods ended June 30,
	2023		2022		2023		2022
Net gain on disposition of drilling equipment	5,593		3,060		15,549		6,642
Foreign exchange gains (losses)	897		(64	)	920		(76	)
Bad debts	(1,223	)	-		(1,223	)	-
Other	-		512		-		512
Other income	5,267		3,508		15,246		7,078

For the three and six-month periods ended June 30, 2023, the Corporation recognized other income of $5.3 million $15.2 million, respectively (2022 - $3.5 million and $7.1 million, respectively). In both periods, other income was mainly comprised of net gain on disposition of drilling equipment.

Net gain on disposition of drilling equipment is comprised of gains on disposition of drilling equipment and proceeds from insurance programs. The recognized gain is net of losses, which typically result from asset retirements that were made before the end of the equipment’s useful life. In the 2023 periods, more instances of high dollar valued downhole equipment losses occurred as compared to the corresponding 2022 periods which resulted in higher proceeds and gains. The Corporation will use capital expenditure funds, including the proceeds from disposition of drilling equipment, to replace this equipment and these amounts will be added to the capital expenditures in 2023.

The Corporation recognized foreign exchange gains of $0.9 million in both the 2023 three and six-month periods (2022 - $0.1 million foreign exchange losses) primarily due to the settlement of a USD-denominated receivable as a result of a reorganization in Luxembourg.

In the 2023 periods, PHX Energy provisioned for bad debt for $1.2 million (2022 - nil) which relates mainly to one client.

(Stated in thousands of dollars except percentages)

		Three-month periods ended June 30,				Six-month periods ended June 30,
		2023		2022		2023		2022
Provision for income taxes		4,797		2,934		8,338		2,717
Effective tax rates(3)		21	%	19	%	17	%	21	%

For the three-month period ended June 30, 2023, the Corporation reported income tax provision of $4.8 million (2022 - $2.9 million), of which, $5.3 million was current and a recovery of $0.5 million was deferred. For the six-month period ended June 30, 2023, PHX Energy recognized provision for income taxes of $8.3 million (2022 - $2.7 million), of which, $8 million was current. Increased current taxes in both 2023 periods mainly resulted from improved taxable income in the US. PHX Energy’s effective tax rate was 21 percent in the 2023-quarter and 17 percent in the 2023 six-month period which is lower than the combined US federal and state corporate income tax rate of 21 percent and the combined Canadian federal and provincial corporate income tax rate of 23 percent, due to the recognition of previously unrecognized deferred tax assets that were applied to income for tax purposes in Canada.

Segmented Information

The Corporation reports three operating segments on a geographical basis throughout the Gulf Coast, Northeast and Rocky Mountain regions of the US; throughout the Western Canadian Sedimentary Basin, and internationally in Albania.United States

(Stated in thousands of dollars)

	Three-month periods ended June 30,				Six-month periods ended June 30,
		2023	2022	% Change	2023	2022	% Change
Directional drilling services		110,778	99,481	11	227,143	175,634	29
Motor rental		10,955	5,886	86	19,568	11,528	70
Sale of motor equipment and parts		3,221	-	n.m.	3,910	-	n.m.
Total US revenue		124,954	105,367	19	250,621	187,162	34
Reportable segment profit before tax (i)		24,037	16,885	42	39,959	23,331	71

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

For the three-month period ended June 30, 2023, total US revenue increased by 19 percent to $125 million as compared to $105.4 million in the 2022-quarter. The strong second quarter revenue generated followed the record revenue trend set in the previous two quarters, with a slight decrease as compared to the first quarter of 2023 due to a slowdown in industry activity. With two consecutive strong quarters in 2023, US revenue for the first half of 2023 increased 34 percent to $250.6 million from $187.2 million in the 2022-period.

In the second quarter of 2023, the Corporation’s US drilling activity decreased by 7 percent to 4,364 operating days compared to 4,707 days in the second quarter of 2022 and has decreased by 9 percent as compared to the 4,820 days in the first quarter of 2023. In comparison, the US industry horizontal and directional rig count in the second quarter of 2023 only increased 2 percent with 700 active rigs per day as compared to 687 rigs per day in the second quarter of 2022 and decreased by 6 percent when compared to an average of 742 active horizontal and directional rigs per day in the first quarter of 2023. (Source: Baker Hughes, North American Rotary Rig Count, Jan 2000 – Current, https://rigcount.bakerhughes.com/na-rig-count). For the six-month period ended June 30, 2023, PHX Energy’s US drilling activity increased 5 percent to 9,184 operating days as compared to 8,753 days in the same 2022-period. This increase was mainly a result of strong activity in the first quarter of 2023.

Horizontal and directional drilling continued to represent the majority of rigs running on a daily basis in both 2023 periods. Phoenix USA was active in the Permian, Scoop/Stack, Marcellus, Utica, Bakken, and Niobrara basins in the first half of 2023.

For the three-month period ended June 30, 2023, average revenue per day(3) for directional drilling services rose to $25,388 from $21,135 in the second quarter of 2022, a 20 percent increase. In the 2023 six-month period, average revenue per day for directional drilling services increased 23 percent to $24,734 from $20,067 in the same 2022-period. Higher average revenue per day in both 2023 periods was realized as a result of continued strong demand for the Corporation’s premium technologies, superior operational performance of personnel and equipment, and increased capacity and utilization in the Corporation’s premium technologies. The strong US dollar in both 2023 periods also supported the increase in average revenue per day. Omitting the impact of foreign exchange, the average revenue per day for directional drilling services increased by 14 percent and 16 percent, respectively, in the 2023 three and six-month periods.

In the second quarter of 2023, PHX Energy’s motor rental business continued to grow. US motor rental revenue in the 2023-quarter was $11 million as compared to $5.9 million in the same 2022-quarter, an increase of 86 percent. In the first half of 2023, US motor rental revenue was $19.6 million, a 70 percent increase compared to $11.5 million in the same 2022-period. During the 2023-quarter, PHX Energy also sold motor equipment and parts to a customer and generated $3.2 million of revenue from this new line of business.

For the three and six-month periods ended June 30, 2023, the US segment realized reportable segment income before tax of $24 and $40 million, respectively, which are 42 percent and 71 percent higher than the corresponding 2022-periods. Higher average revenue per day and growth in the rental and sale of Atlas motors greatly contributed to improved profitability in both 2023 periods.

Canada

(Stated in thousands of dollars)

		Three-month periods ended June 30,				Six-month periods ended June 30,
		2023	2022		% Change	2023	2022	% Change
Directional drilling services		28,970	19,453		49	67,572	46,321	46
Motor rental		472	251		88	1,101	522	111
Total Canadian revenue		29,442	19,704		49	68,673	46,843	47
Reportable segment profit (loss) before tax (i)		1,677	(16	)	n.m.	9,565	3,450	177

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

In the three-month period of 2023, PHX Energy’s Canadian operations continued to generate strong quarterly revenues, trending with the first quarter of 2023. For the three-month period ended June 30, 2023, PHX Energy’s Canadian division generated a second quarter record of $29.4 million in revenue, an increase of 49 percent compared to $19.7 million in the 2022-quarter. In the 2023 six-month period, Canadian division revenue was $68.7 million, an increase of 47 percent as compared to $46.8 million in the same 2022-period.

For the three and six-month periods ended June 30, 2023, operating days improved by 23 percent and 16 percent to 2,076 and 5,127, respectively, compared to 1,688 days and 4,418 days in the corresponding 2022-periods. In comparison, industry horizontal and directional drilling activity (as measured by drilling days) was relatively the same as the previous year’s quarter with 10,243 days in the second quarter of 2023, and increased by 6 percent to 28,119 days in the first half of 2023 (Source: Daily Oil Bulletin, hz-dir days 230331). PHX Energy’s Canadian operating segment remains a leader in this market being among the top three service providers. During the 2023-quarter, the Corporation was active in the Duvernay, Montney, Glauconite, Frobisher, Cardium, Viking, Bakken, Torquay, Colony, Clearwater, Deadwood, and Scallion basins.

Throughout the first half of 2023, the Canadian market remained highly competitive but through successful marketing efforts, strong operational performance, and deployment of more premium technology, average revenue per day(3) for directional drilling services increased by 19 percent to $13,954 in the 2023-quarter from $11,692 in the corresponding 2022-quarter and increased by 24 percent to $13,181 in the 2023 six-month period compared to $10,604 in the same 2022-period.

For the three and six-month periods ended June 30, 2023, the Corporation’s Canadian division recognized reportable segment profit before tax of $1.7 million (2022 – loss of $16 thousand) and $9.6 million (2022 - $3.5 million), respectively. Improved levels of profitability in the 2023 periods were mainly driven by increased volume of activity and higher average revenue per day realized in both 2023 periods.

International – Continuing Operations

(Stated in thousands of dollars)

		Three-month periods ended June 30,				Six-month periods ended June 30,
		2023	2022	% Change		2023	2022	% Change
Revenue		1,222	1,167	5		2,347	1,563	50
Reportable segment profit (loss) before tax		490	523	(6	)	897	361	148

The Corporation’s international segment revenue is comprised of revenue from Albania. For the three and six-month periods ended June 30, 2023, the international segment’s revenue was $1.2 million (2022 - $1.2 million) and $2.3 million (2022 - $1.6 million), respectively. Albania operations remain consistent with one rig which resumed operations in the first quarter of 2022.

The international segment generated reportable segment profit before tax of $0.5 million in the 2023 three-month period, flat against the same 2022-period, and $0.9 million in the 2023 six-month period, more than double compared to the same 2022-period.

Investing Activities

Net cash used in investing activities for the period ended June 30, 2023 was $5.7 million as compared to $14.5 million in the 2022-period. During the second quarter of 2023, the Corporation spent $4.9 million (2022 - $10 million) to grow the Corporation’s fleet of drilling equipment and $7.1 million (2022 - $5.2 million) was used to maintain capacity in the Corporation’s fleet of drilling and other equipment and replace equipment lost downhole during drilling operations. With proceeds on disposition of drilling and other equipment of $8.6 million (2022 - $3.9 million), the Corporation’s net capital expenditures(2) for the 2023-quarter were $3.5 million (2022 - $11.3).

(Stated in thousands of dollars)

		Three-month periods ended June 30,				Six-month periods ended June 30,
		2023		2022		2023		2022
Growth capital expenditures		4,931		10,046		14,885		23,014
Maintenance capital expenditures		7,141		5,168		15,769		10,406
Total capital expenditures		12,072		15,214		30,654		33,420
Deduct:
Proceeds on disposition of drilling equipment		(8,589	)	(3,883	)	(21,007	)	(9,180	)
Net capital expenditures(2)		3,483		11,331		9,647		24,240

The 2023-period capital expenditures comprised of:

• $4.6 million in downhole performance drilling motors;
• $6.5 million in MWD systems and spare components and RSS; and
• $1 million in machinery and equipment and other assets.

The change in non-cash working capital balances of $2.2 million (use of cash) for the three-month period ended June 30, 2023, relates to the net change in the Corporation’s trade payables that are associated with the acquisition of capital assets. This compares to $2.9 million (use of cash) for the three-month period ended June 30, 2022.

Financing Activities

For the three-month period ended June 30, 2023, net cash used in financing activities was $12 million as compared to $10.4 million generated from financing activities in the 2022-period. In the 2023-period:

• dividends of $7.7 million were paid to shareholders;
• $2.2 million net repayments were made towards the Corporation’s syndicated credit facility;
• 267,800 common shares were purchased by the Corporation for $1.6 million and cancelled under the NCIB;
• payments of $0.7 million were made towards lease liabilities; and
• 33,500 common shares were issued from treasury for proceeds of $0.1 million upon the exercise of share options.

Capital Resources

As of June 30, 2023, the Corporation had CAD $27.7 million drawn on its Canadian credit facilities, nothing drawn on its US operating facility, and a cash balance of $20.1 million. As at June 30, 2023, the Corporation had CAD $37 million and USD $15 million available from its credit facilities. The credit facilities are secured by substantially all of the Corporation’s assets and mature in December 2025.

As at June 30, 2023, the Corporation was in compliance with all its financial covenants.

Cash Requirements for Capital Expenditures

Historically, the Corporation has financed its capital expenditures and acquisitions through cash flows from operating activities, proceeds on disposition of drilling equipment, debt and equity. In order to continue the advantageous strategy of placing advanced orders and continue to mitigate the supply chain issues expected to continue throughout 2023, the Board has approved a 2023 capital expenditure program of $61.5 million. Of the 2023 capital expenditures, $23 million is expected to be allocated to maintain capacity in the existing fleet of drilling and other equipment and replace equipment lost downhole during drilling operations, and $38.5 million is expected to be allocated to growth capital. The amount expected to be allocated towards replacing equipment lost downhole could increase should more downhole equipment losses occur throughout the year.

These planned expenditures are expected to be financed from cash flow from operating activities, proceeds on disposition of drilling equipment, cash and cash equivalents, and the Corporation’s credit facilities, if necessary. However, if a sustained period of market uncertainty and financial market volatility persists in 2023, the Corporation's activity levels, cash flows and access to credit may be negatively impacted, and the expenditure level would be reduced accordingly where possible. Conversely, if future growth opportunities present themselves, the Corporation would look at expanding this planned capital expenditure amount.

As at June 30, 2023, the Corporation has commitments to purchase drilling and other equipment for $28.4 million. Delivery is expected to occur within 2023.

About PHX Energy Services Corp.

PHX Energy is a growth-oriented, public oil and natural gas services company. The Corporation, through its directional drilling subsidiary entities provides horizontal and directional drilling services and technologies to oil and natural gas exploration and development companies principally in Canada and the US. In connection with the services it provides, PHX Energy engineers, develops and manufactures leading-edge technologies. In recent years, PHX Energy has developed various new technologies that have positioned the Corporation as a technology leader in the horizontal and directional drilling services sector.

PHX Energy’s Canadian directional drilling operations are conducted through Phoenix Technology Services LP. The Corporation maintains its corporate head office, research and development, Canadian sales, service and operational centers in Calgary, Alberta. In addition, PHX Energy has a facility in Estevan, Saskatchewan. PHX Energy’s US operations, conducted through the Corporation’s wholly-owned subsidiary, Phoenix Technology Services USA Inc. (“Phoenix USA”), is headquartered in Houston, Texas. Phoenix USA has sales and service facilities in Houston, Texas; Midland, Texas; Casper, Wyoming; and Oklahoma City, Oklahoma. Internationally, PHX Energy has sales offices and service facilities in Albania, and administrative offices in Nicosia, Cyprus and Luxembourg City, Luxembourg. The Corporation also supplies technology to the Middle East regions through an arrangement with National Energy Services Reunited Corp.

In July 2023, Phoenix USA appointed two new executive officers to provide further leadership dedicated to growth in the US market and executing strategic initiatives for the US operations. Garrett Wright was appointed Vice President of US Operations and David Raines was appointed Vice President US Sales and Marketing. Both individuals have long tenure with Phoenix USA and have played key roles in the growth thus far.

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

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

PHX Energy Services Corp.Suite 1600, 215 9th Avenue SW, Calgary Alberta T2P 1K3Tel: 403-543-4466   Fax: 403-543-4485   www.phxtech.comConsolidated Statements of Financial Position(unaudited)

		June 30, 2023				December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents		$	20,079,623			$	18,247,376
Trade and other receivables			120,308,340				125,836,273
Inventories			68,418,478				63,119,489
Prepaid expenses			3,226,639				3,024,166
Total current assets			212,033,080				210,227,304
Non-current assets:
Drilling and other long-term assets			121,124,658				115,945,060
Right-of-use assets			28,357,351				29,336,163
Intangible assets			14,539,520				15,668,180
Investments			3,000,500				3,000,500
Other long-term assets			1,172,348				993,112
Deferred tax assets			53,869				53,869
Total non-current assets			168,248,246				164,996,884
Total assets		$	380,281,326			$	375,224,188
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade and other payables		$	83,066,680			$	104,688,901
Dividends payable			7,620,665				7,636,085
Lease liability			2,955,057				2,906,708
Current tax liabilities			7,428,078				656,499
Total current liabilities			101,070,480				115,888,193
Non-current liabilities:
Lease liability			35,426,216				36,768,003
Loans and borrowings			27,684,591				22,731,389
Deferred tax liability			17,809,463				18,496,619
Other			1,540,812				4,461,531
Total non-current liabilities			82,461,082				82,457,542
Equity:
Share capital			250,600,043				251,344,809
Contributed surplus			7,189,773				7,044,317
Deficit			(87,020,775	)			(112,120,484	)
Accumulated other comprehensive income			25,980,723				30,609,811
Total equity			196,749,764				176,878,453
Total liabilities and equity		$	380,281,326			$	375,224,188

Condensed Consolidated Statements of Comprehensive Income(unaudited)

		Three-month periods ended June 30,							Six-month periods ended June 30,
			2023			2022			2023			2022
Revenue		$	155,618,401		$	126,237,557		$	321,640,520		$	235,568,256
Direct costs			119,869,868			100,520,480			251,858,067			192,466,162
Gross profit			35,748,533			25,717,077			69,782,453			43,102,094
Expenses:
Selling, general and administrative expenses			15,522,116			11,836,064			31,078,242			33,947,420
Research and development expenses			1,314,356			873,207			2,570,775			1,629,766
Finance expense			709,320			262,188			1,376,160			373,984
Finance expense lease liability			563,759			501,385			1,140,145			1,008,401
Other income			(5,266,643	)		(3,508,490	)		(15,246,492	)		(7,077,881	)
			12,842,908			9,964,354			20,918,830			29,881,690
Earnings from continuing operations before income taxes			22,905,625			15,752,723			48,863,623			13,220,404
Provision for (recovery of) income taxes
Current			5,251,592			(13,775	)		7,975,233			(229,272	)
Deferred			(454,209	)		2,948,037			362,700			2,946,091
			4,797,383			2,934,262			8,337,933			2,716,819
Earnings from continuing operations			18,108,242			12,818,461			40,525,690			10,503,585
Discontinued operations
Net loss from discontinued operations, net of taxes			-			(12,649,964	)		-			(14,558,032	)
Net earnings (loss)			18,108,242			168,497			40,525,690			(4,054,447	)
Other comprehensive income
Foreign currency translation			(4,522,004	)		4,144,053			(4,629,088	)		1,824,583
Total comprehensive earnings (loss) for the period		$	13,586,238		$	4,312,550			35,896,602			(2,229,864	)
Earnings (loss) per share – basic
Continuing operations		$	0.35		$	0.25			0.79			0.21
Discontinued operations		$	-		$	(0.25	)		-			(0.29	)
Net earnings (loss)		$	0.35		$	(0.00	)		0.79			(0.08	)
Earnings (loss) per share – diluted
Continuing operations		$	0.35		$	0.25			0.77			0.21
Discontinued operations		$	-		$	(0.25	)		-			(0.29	)
Net earnings (loss)		$	0.35		$	(0.00	)		0.77			(0.08	)

Condensed Consolidated Statements of Cash Flows(unaudited)

	Three-month periods ended June 30,								Six-month periods ended June 30,
		2023				2022			2023			2022
Cash flows from operating activities:
Earnings from continuing operations	$		18,108,242		$	12,818,461			40,525,690			10,503,585
Adjustments for:
Depreciation and amortization			9,620,667			7,822,953			18,938,023			15,099,473
Depreciation and amortization right-of-use asset			827,396			848,681			1,234,835			1,684,727
Provision for income taxes			4,797,383			2,934,262			8,337,933			2,716,819
Unrealized foreign exchange gain			(9,617	)		(27,999	)		(35,928	)		(118,526	)
Net gain on disposition of drilling equipment			(5,593,260	)		(3,059,873	)		(15,549,425	)		(6,641,623	)
Equity-settled share-based payments			186,114			(74,706	)		286,916			260,008
Finance expense			709,320			262,188			1,376,160			373,984
Finance expense lease liability			563,759			501,385			1,140,145			1,008,401
Provision for bad debts			1,222,764			-			1,222,764			-
Provision for inventory obsolescence			378,710			297,639			648,106			824,656
Interest paid on lease liability			(563,759	)		(501,385	)		(1,140,145	)		(1,008,401	)
Interest paid			(520,993	)		(127,248	)		(1,033,597	)		(178,171	)
Income taxes received (paid)			(1,323,848	)		14,880			(1,458,010	)		219,130
Change in non-cash working capital			(5,770,373	)		(10,259,827	)		(28,152,043	)		(17,003,987	)
Continuing operations			22,632,505			11,449,411			26,341,424			7,740,075
Discontinued operations			-			(520,334	)		-			(1,254,859	)
Net cash from operating activities			22,632,505			10,929,077			26,341,424			6,485,216
Cash flows from investing activities:
Proceeds on disposition of drilling equipment			8,589,174			3,883,133			21,006,626			9,179,549
Acquisition of drilling and other equipment			(12,071,525	)		(15,213,688	)		(30,654,445	)		(33,419,918	)
Acquisition of intangible assets			-			(206,930	)		-			(618,205	)
Change in non-cash working capital			(2,193,966	)		(2,924,122	)		(1,052,669	)		710,890
Continuing operations			(5,676,317	)		(14,461,607	)		(10,700,488	)		(24,147,684	)
Discontinued operations			-			(316,392	)		-			(68,068	)
Net cash used in investing activities			(5,676,317	)		(14,777,999	)		(10,700,488	)		(24,215,752	)
Cash flows from financing activities:
Proceeds from (Repayment of) loans and borrowings			(2,157,398	)		16,359,192			5,168,129			20,107,992
Proceeds from exercise of options			82,965			169,666			349,450			1,811,853
Dividends paid to shareholders			(7,655,810	)		(3,790,543	)		(15,291,896	)		(6,272,603	)
Repurchase of shares under the NCIB			(1,578,742	)		-			(1,578,742	)		-
Payments of Lease Liability			(693,049	)		(872,923	)		(1,455,275	)		(1,731,911	)
Purchase of shares held in trust			-			(1,500,000	)		(612,000	)		(3,500,000	)
Continuing operations			(12,002,034	)		10,365,392			(13,420,334	)		10,415,331
Discontinued operations			-			-			-			-
Net cash from (used in) financing activities			(12,002,034	)		10,365,392			(13,420,334	)		10,415,331
Net increase (decrease) in cash and cash equivalents			4,954,154			6,516,470			2,220,602			(7,315,205	)
Cash and cash equivalents, beginning of period			15,501,672			11,283,545			18,247,376			24,828,830
Effect of movements in exchange rates on cash held			(376,203	)		171,319			(388,355	)		457,709
Cash and cash equivalents, end of period	$		20,079,623		$	17,971,334			20,079,623			17,971,334

Cautionary Statement Regarding Forward-Looking Information and Statements

This document contains certain forward-looking information and statements within the meaning of applicable securities laws. The use of "expect", "anticipate", "continue", "estimate", "objective", "ongoing", "may", "will", "project", "could", "should", "can", "believe", "plans", "intends", "strategy" and similar expressions are intended to identify forward-looking information or statements.

The forward-looking information and statements included in this document are not guarantees of future performance and should not be unduly relied upon. These statements and information involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements and information. The Corporation believes the expectations reflected in such forward-looking statements and information are reasonable, but no assurance can be given that these expectations will prove to be correct. Such forward-looking statements and information included in this document should not be unduly relied upon. These forward-looking statements and information speak only as of the date of this document.

In particular, forward-looking information and statements contained in this document include without limitation, the anticipated industry activity and demand for the Corporation’s services and technologies in North America, the Corporation’s intent to preserve balance sheet strength and continue to reward shareholders, including through dividend program, the ROCS Program and NCIB, PHX Energy's intentions with respect to the NCIB and purchases thereunder and the effects of repurchases under the NCIB; the projected capital expenditures budget 2023 and how the budget will be allocated and funded, the timeline for delivery of equipment on order, the anticipated delivery of assets under the Atlas sales agreement and the potential for ongoing parts orders and subsequent asset orders, the expectation that the Corporation will be able to expand its motor rentals and sales and that revenue will continue to grow in in future periods and that this will also enhance profitability, the anticipated impact of global supply chain disruptions and inflation on the Corporation’s operations, results, and the Corporation’s planned responses thereto, and the anticipated continuation of PHX Energy’s quarterly dividend program and the amounts of dividends.

The above are stated under the headings: Financial Results”, “Dividends and ROCS”, “Capital Spending”, Sales and Licensed Use of Atlas Motors” “Supply Chain Disruption and Inflation”, “Revenue”, and “Cash Requirements for Capital Expenditures”. In addition, all information contained under the heading “Outlook” of this document may contain forward-looking statements.

In addition to other material factors, expectations and assumptions which may be identified in this document and other continuous disclosure documents of the Corporation referenced herein, assumptions have been made in respect of such forward-looking statements and information regarding, without limitation, that: the Corporation will continue to conduct its operations in a manner consistent with past operations; the general continuance of current industry conditions and the accuracy of the Corporation’s market outlook expectations for 2023 and in the future; that future business, regulatory and industry conditions will be within the parameters expected by the Corporation, anticipated financial performance, business prospects, impact of competition, strategies, the general stability of the economic and political environment in which the Corporation operates; the impact of pandemics and the Russian-Ukrainian war on the global economy, specifically trade, manufacturing, supply chain, inflation and energy consumption, among other things and the resulting impact on the Corporation’s operations and future results which remain uncertain, exchange and interest rates including the potential for further interest rate hikes by global central banks and the impact on financing charges and foreign exchange and the anticipated global economic response to concerted interest rate hikes; the continuance of existing (and in certain circumstances, the implementation of proposed) tax, royalty and regulatory regimes; the sufficiency of budgeted capital expenditures in carrying out planned activities; the availability and cost of labour and services and the adequacy of cash flow; debt and ability to obtain financing on acceptable terms to fund its planned expenditures, which are subject to change based on commodity prices; market conditions and future oil and natural gas prices; and potential timing delays. Although management considers these material factors, expectations, and assumptions to be reasonable based on information currently available to it, no assurance can be given that they will prove to be correct.

Readers are cautioned that the foregoing lists of factors are not exhaustive. Additional information on these and other factors that could affect the Corporation’s operations and financial results are included in reports on file with the Canadian Securities Regulatory Authorities and may be accessed through the SEDAR website (www.sedar.com) or at the Corporation’s website. The forward-looking statements and information contained in this document are expressly qualified by this cautionary statement. The Corporation does not undertake any obligation to publicly update or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

Non-GAAP and Other Financial Measures

Non-GAAP Financial Measures and Ratios

a)   Adjusted EBITDA from Continuing Operations

Adjusted EBITDA from continuing operations, defined as earnings before finance expense, finance expense lease liability, income taxes, depreciation and amortization, impairment losses on drilling and other equipment and goodwill and other write-offs, equity-settled share-based payments, severance payouts relating to the Corporation’s restructuring cost, and unrealized foreign exchange gains or losses, does not have a standardized meaning and is not a financial measure that is recognized under GAAP. However, Management believes that adjusted EBITDA from continuing operations provides supplemental information to earnings from continuing operations that is useful in evaluating the results of the Corporation’s principal business activities before considering certain charges, how it was financed and how it was taxed in various countries. Investors should be cautioned, however, that adjusted EBITDA from continuing operations should not be construed as an alternative measure to earnings from continuing operations determined in accordance with GAAP. PHX Energy’s method of calculating adjusted EBITDA from continuing operations may differ from that of other organizations and, accordingly, its adjusted EBITDA from continuing operations may not be comparable to that of other companies.

The following is a reconciliation of earnings from continuing operations to adjusted EBITDA:

(Stated in thousands of dollars)

		Three-month periods ended June 30,				Six-month periods ended June 30,
		2023		2022		2023		2022
Earnings from continuing operations:		18,108		12,818		40,526		10,504
Add:
Depreciation and amortization drilling and other equipment		9,621		7,823		18,938		15,099
Depreciation and amortization right-of-use asset		827		849		1,235		1,685
Provision for income taxes		4,797		2,934		8,338		2,717
Finance expense		709		262		1,376		374
Finance expense lease liability		564		501		1,140		1,008
Equity-settled share-based payments		186		(75	)	287		260
Unrealized foreign exchange loss		(10	)	(28	)	(36	)	(119	)
Adjusted EBITDA from continuing operations		34,802		25,084		71,804		31,528

b)   Adjusted EBITDA from Continuing Operations Per Share - Diluted

Adjusted EBITDA from continuing operations per share - diluted is calculated using the treasury stock method whereby deemed proceeds on the exercise of the share options are used to reacquire common shares at an average share price. The calculation of adjusted EBITDA from continuing operations per share - dilutive is based on the adjusted EBITDA from continuing operations as reported in the table above divided by the diluted number of shares outstanding at the period end.

c)   Adjusted EBITDA from Continuing Operations as a Percentage of Revenue

Adjusted EBITDA as a percentage of revenue is calculated by dividing the adjusted EBITDA from continuing operations as reported in the table above by revenue as stated on the Condensed Consolidated Statements of Comprehensive Earnings.

d)   Adjusted EBITDA from Continuing Operations Excluding Cash-settled Share-based Compensation Expense

Adjusted EBITDA from continuing operations excluding cash-settled share-based compensation expense is calculated by adding cash-settled share-based compensation expense to adjusted EBITDA from continuing operations as described above.

The following is a reconciliation of earnings from continuing operations to adjusted EBITDA from continuing operations excluding cash-settled share-based compensation expense:(Stated in thousands of dollars)

		Three-month periods ended June 30,				Six-month periods ended June 30,
		2023		2022		2023		2022
Earnings (loss) from continuing operations:		18,108		12,818		40,526		10,504
Add:
Depreciation and amortization drilling and other equipment		9,621		7,823		18,938		15,099
Depreciation and amortization right-of-use asset		827		849		1,235		1,685
Provision for (Recovery of) income taxes		4,797		2,934		8,338		2,717
Finance expense		709		262		1,376		374
Finance expense lease liability		564		501		1,140		1,008
Equity-settled share-based payments		186		(75	)	287		260
Unrealized foreign exchange loss		(10	)	(28	)	(36	)	(119	)
Cash-settled share-based compensation expense		2,556		715		3,930		12,452
Adjusted EBITDA from continuing operations excluding cash-settled share-based compensation expense		37,358		25,799		75,734		43,980

e)   Adjusted EBITDA from Continuing Operations Excluding Cash-settled Share-based Compensation Expense as a Percentage of Revenue

Adjusted EBITDA from continuing operations excluding cash-settled share-based compensation expense as a percentage of revenue is calculated by dividing adjusted EBITDA from continuing operations excluding cash-settled share-based compensation expense as reported above by revenue as stated on the Condensed Consolidated Statements of Comprehensive Earnings.

f)   Gross Profit as a Percentage of Revenue Excluding Depreciation & Amortization

Gross profit as a percentage of revenue excluding depreciation & amortization is defined as the Corporation’s gross profit excluding depreciation and amortization divided by revenue and is used to assess operational profitability. This Non-GAAP ratio does not have a standardized meaning and is not a financial measure recognized under GAAP. PHX Energy’s method of calculating gross profit as a percentage of revenue may differ from that of other organizations and, accordingly, it may not be comparable to that of other companies.

The following is a reconciliation of revenue, direct costs, depreciation and amortization, and gross profit to gross profit as a percentage of revenue excluding depreciation and amortization:

(Stated in thousands of dollars)

		Three-month periods ended June 30,					Six-month periods ended June 30,
			2023		2022		2023		2022
Revenue			155,618		126,238		321,641		235,568
Direct costs			119,870		100,520		251,858		192,466
Gross profit			35,748		25,718		69,783		43,102
Depreciation & amortization drilling and other equipment (included in direct costs)			9,621		7,823		18,938		15,099
Depreciation & amortization right-of-use asset (included in direct costs)			827		849		1,235		1,685
			46,196		34,390		89,956		59,886
Gross profit as a percentage of revenue excluding depreciation & amortization			30	%	27	%	28	%	25	%

g)   SG&A Costs Excluding Share-Based Compensation as a Percentage of Revenue

SG&A costs excluding share-based compensation as a percentage of revenue is defined as the Corporation’s SG&A costs excluding share-based compensation divided by revenue and is used to assess the impact of administrative costs excluding the effect of share price volatility. This Non-GAAP ratio does not have a standardized meaning and is not a financial measure recognized under GAAP. PHX Energy’s method of calculating SG&A costs excluding share-based compensation as a percentage of revenue may differ from that of other organizations and, accordingly, it may not be comparable to that of other companies.

The following is a reconciliation of SG&A costs, share-based compensation, and revenue to SG&A costs excluding share-based compensation as a percentage of revenue:

(Stated in thousands of dollars)

	Three-month periods ended June 30,						Six-month periods ended June 30,
			2023		2022		2023		2022
SG&A Costs			15,522		11,836		31,078		33,947
Deduct:
Share-based compensation (included in SG&A)			2,742		640		4,217		12,712
			12,780		11,196		26,861		21,235
Revenue			155,618		126,238		321,641		235,568
SG&A costs excluding share-based compensation as a percentage of revenue			8	%	9	%	8	%	9	%

Capital Management Measures

a)   Funds from Operations

Funds from operations is defined as cash flows generated from operating activities before changes in non-cash working capital, interest paid, and income taxes paid. This financial measure does not have a standardized meaning and is not a financial measure recognized under GAAP. Management uses funds from operations as an indication of the Corporation’s ability to generate funds from its operations before considering changes in working capital balances and interest and taxes paid. Investors should be cautioned, however, that this financial measure should not be construed as an alternative measure to cash flows from operating activities determined in accordance with GAAP. PHX Energy’s method of calculating funds from operations may differ from that of other organizations and, accordingly, it may not be comparable to that of other companies.

The following is a reconciliation of cash flows from operating activities to funds from operations:

(Stated in thousands of dollars)

		Three-month periods ended June 30,			Six-month periods ended June 30,
		2023	2022		2023	2022
Cash flows from operating activities		22,633	11,449		26,341	7,740
Add (deduct):
Changes in non-cash working capital		5,770	10,260		28,152	17,004
Interest paid		521	127		1,034	178
Income taxes paid (received)		1,324	(15	)	1,458	(219	)
Funds from operations		30,248	21,821		56,985	24,703

b)   Excess Cash Flow

Excess cash flow is defined as funds from operations (as defined above) less cash payment on leases, growth capital expenditures, and maintenance capital expenditures from downhole equipment losses and asset retirements and increased by proceeds on disposition of drilling equipment. This financial measure does not have a standardized meaning and is not a financial measure recognized under GAAP. Management uses excess cash flow as an indication of the Corporation’s ability to generate funds from its operations to support operations and grow and maintain the Corporation’s drilling and other equipment. This performance measure is useful to investors for assessing the Corporation’s operating and financial performance, leverage and liquidity. Investors should be cautioned, however, that this financial measure should not be construed as an alternative measure to cash flows from operating activities determined in accordance with GAAP. PHX Energy’s method of calculating excess cash flow may differ from that of other organizations and, accordingly, it may not be comparable to that of other companies.

The following is a reconciliation of cash flows from operating activities to excess cash flow:

(Stated in thousands of dollars)

		Three-month periods ended June 30,				Six-month periods ended June 30,
		2023		2022		2023		2022
Cash flows from operating activities		22,633		11,449		26,341		7,740
Add (deduct):
Changes in non-cash working capital		5,770		10,260		28,152		17,004
Interest paid		521		127		1,034		178
Income taxes paid (received)		1,324		(15	)	1,458		(219	)
Cash payment on leases		(1,257	)	(1,374	)	(2,595	)	(2,740	)
		28,991		20,447		54,390		21,963
Proceeds on disposition of drilling equipment		8,589		3,883		21,007		9,180
Maintenance capital expenditures		(7,141	)	(5,168	)	(15,769	)	(10,406	)
Net proceeds		1,448		(1,285	)	5,238		(1,226	)
Growth capital expenditures		(4,931	)	(10,046	)	(14,885	)	(23,014	)
Excess cash flow		25,508		9,116		44,743		(2,277	)

c)   Working Capital

Working capital is defined as the Corporation’s current assets less its current liabilities and is used to assess the Corporation’s short-term liquidity. This financial measure does not have a standardized meaning and is not a financial measure recognized under GAAP. Management uses working capital to provide insight as to the Corporation’s ability to meet obligations as at the reporting date. PHX Energy’s method of calculating working capital may differ from that of other organizations and, accordingly, it may not be comparable to that of other companies.

The following is a reconciliation of current assets and current liabilities to working capital:

(Stated in thousands of dollars)

				June 30, 2023		December 31, 2022
Current assets				212,033		210,227
Deduct:
Current liabilities				(101,070	)	(115,888	)
Working capital				110,963		94,339

d)   Net Debt

Net debt is defined as the Corporation’s operating facility and loans and borrowings less cash and cash equivalents. This financial measure does not have a standardized meaning and is not a financial measure recognized under GAAP. Management uses net debt to provide insight as to the Corporation’s ability to meet obligations as at the reporting date. PHX Energy’s method of calculating net debt may differ from that of other organizations and, accordingly, it may not be comparable to that of other companies.

The following is a reconciliation of operating facility, loans and borrowings, and cash and cash equivalents to net debt:

(Stated in thousands of dollars)

			June 30, 2023		December 31, 2022
Loans and borrowings			27,685		22,731
Deduct:
Cash and cash equivalents			(20,080	)	(18,247	)
Net debt			7,605		4,484

e)   Net Capital Expenditures

Net capital expenditures is comprised of total additions to drilling and other long-term assets, as determined in accordance with IFRS, less total proceeds from disposition of drilling equipment, as determined in accordance with IFRS. This financial measure does not have a standardized meaning and is not a financial measure recognized under GAAP. Management uses net capital expenditures to provide insight as to the Corporation’s ability to meet obligations as at the reporting date. PHX Energy’s method of calculating net debt may differ from that of other organizations and, accordingly, it may not be comparable to that of other companies.

The following is a reconciliation of additions to drilling and other equipment and proceeds from disposition of drilling equipment to net capital expenditures:

(Stated in thousands of dollars)

		Three-month periods ended June 30,				Six-month periods ended June 30,
		2023		2022		2023		2022
Growth capital expenditures		4,931		10,046		14,885		23,014
Maintenance capital expenditures		7,141		5,168		15,769		10,406
Total capital expenditures		12,072		15,214		30,654		33,420
Deduct:
Proceeds on disposition of drilling equipment		(8,589	)	(3,883	)	(21,007	)	(9,180	)
Net capital expenditures		3,483		11,331		9,647		24,240

Supplementary Financial Measures

“Average consolidated revenue per day” is comprised of consolidated revenue, as determined in accordance with IFRS, divided by the Corporation’s consolidated number of operating days. Operating days is defined under the “Definitions” section below.

Average revenue per operating day” is comprised of revenue, as determined in accordance with IFRS, divided by the number of operating days.

“Dividends paid per share” is comprised of dividends paid, as determined in accordance with IFRS, divided by the number of shares outstanding at the dividend record date.

“Effective tax rate” is comprised of provision for or recovery of income tax, as determined in accordance with IFRS, divided by earnings from continuing operations before income taxes, as determined in accordance with IFRS.

“Funds from operations per share – diluted” is calculated using the treasury stock method whereby deemed proceeds on the exercise of the share options are used to reacquire common shares at an average share price. The calculation of funds from operations per share - diluted is based on the funds from operations as reported in the table above divided by the diluted number of shares outstanding at period end.

Definitions

“Operating days” throughout this document, it is referring to the billable days on which PHX Energy is providing services to the client at the rig site.

“Capital expenditures” equate to the Corporation’s total acquisition of drilling and other equipment as stated on the Condensed Consolidated Statements of Cash Flows and Note 6(a) in the Notes to the Condensed Consolidated Financial Statements.

“Growth capital expenditures” are capital expenditures that were used to expand capacity in the Corporation’s fleet of drilling equipment.

“Maintenance capital expenditures” are capital expenditures that were used to maintain capacity in the Corporation’s fleet of drilling equipment and replace equipment that were lost downhole during drilling operations.

_________________

(1) Non-GAAP financial measure or ratio that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this Press Release.(2) Capital management measure that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this Press Release.(3) Supplementary financial measure that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other entities. Refer to Non-GAAP and Other Financial Measures section of this Press Release.