Management s Discussion and Analysis For the three months ended July 31, 2014

Transcription

1 Management s Discussion and Analysis The Management Discussion and Analysis ( MD&A ) is an overview of the activities of New West Energy Services Inc. (the Company ) for the three months ended July 31, The following should be read in conjunction with the Company s condensed interim consolidated financial statements for the three months ended July 31, 2014 and 2013 and the related notes contained therein which have been prepared under International Financial Reporting Standards ( IFRS ). Additional information related to the Company is available for review from the SEDAR website at All financial information in the MD&A related to July 31, 2014 and 2013 has been prepared in accordance with IFRS and all dollar amounts are quoted in Canadian dollars, the reporting and functional currency of the Company, except where noted. The effective date of the Management Discussion and Analysis is September 29, Operational and Financial Results for the three months ended July 31, 2014 and 2013: Revenue of $5.24 million ($3.57 million for 2013). Gross margin of $1.02 million ($1.00 million for 2013). Net loss of $532,631 from operations before income tax (Net income of $4,451 for 2013). Earnings per share (basic & diluted) from operations of ($0.005) ($0.000 for 2013). EBITDA was ($176,382) for 2014 ($173,448 for 2013). This calculation is a non-ifrs measure. The Company continued to expand its new diversified service, based in Beaverlodge, Alberta, with the addition of 2 tri drive combo vacuum trucks and 2 quad wagon trailers and is now well positioned to enter the completions and production sector of the oil and gas industry. The Company initiated its diversification strategy following the winter drilling season which involved moving some of the vacuum and water trucks from the drilling project related service to the callout type service operating from Beaverlodge. This decrease in the drilling project equipment fleet is expected to increase overall margins by reducing the high swing in utilization between summer and winter months and the costs involved in hiring and retaining labour. The new operation in Beaverlodge has an equipment fleet of approximately 18 units comprised of combo vacs, hydrovacs, tank trucks and steamer units mostly operating in the completions and production sectors. Company Developments: The Company increased productive capacity and updated the equipment fleet during the quarter with the addition of 7 units along with the disposal of some of the older units in the fleet. The overall heavy equipment fleet currently stands at 44 units. Total capital expenditures during the quarter amounted to $2.3 million for additional trucks and equipment. OVERVIEW The Company is a publicly-traded company that is listed on the TSX Venture Exchange under the trading symbol NWE.V. The Company s business activities are carried out through two wholly owned subsidiaries - BearStone Environmental Solutions Inc. ( BearStone ) and Porterco Oilfield Services Inc. ( Porterco ). BearStone provides environmental services to the upstream oil and gas industry and also operates a fleet of specialized vacuum trucks, tank trucks and water trucks in the drilling, completions and production sectors of the oil and gas industry throughout Western Canada. Porterco operates a fleet of trucks and trailers for hauling oil contaminated drill cuttings as well as providing equipment rental and custom fabrication services.

2 Certain assets of Porterco were reallocated to BearStone during the year ended April 30, This reallocation and reclassification of these assets reduced the operating segments for the Company from four down to three Corporate, Environmental and Vacuum. OPERATIONAL REVIEW In October, 2013, the Company completed the acquisition of Alberta Ltd. (formerly operating as Tippin D Oilfield Services Ltd. and 40 Creek Oilfield Services Ltd.). The Company was amalgamated into BearStone Environmental Solutions Inc. and operates as part of the BearStone vacuum truck services division operating from Beaverlodge, Alberta. The additional services offered as part of this acquisition include: - combo vacuum trucks - hydrovacs - steamer trucks - mobile boiler units - tank trucks and quad wagon trailers for bulk transport - straight vacuum trucks - water trucks Vacuum Truck Services The vacuum truck services division of BearStone includes the new diversified service operating from Beaverlodge, Alberta as well as the Porterco Oilfield Services Inc. operation in Slave Lake, Alberta and the drilling project service which operates from Medicine Hat, Alberta. Overall equipment operating days for the drilling project related vacuum and water trucks increased during the quarter ended July 31, 2014 compared to July 31, This is primarily due to an increase in oilsands SagD drilling activity thru spring break up. Overall labour costs and repairs and maintenance remain relatively high compared to previous years. Management remains optimistic that costs will be reduced in the long term with new hiring initiatives being undertaken to find and retain qualified operators. The new diversified service in Beaverlodge, Alberta operated at approximately 50% capacity and generated $1.18 million in revenue. The new service operates combo vacuum, straight vacuum and hydrovac trucks mostly on completion rigs and production facilities. During the quarter, the division completed its first plant turnaround which involves cleaning of vessels at an operating facility. Plant turnarounds are typically completed from April to July and utilize a variety of equipment from combo vac trucks to steamers and tank trucks. Due to its first year of operation and starting during the busy fall/winter season in 2013, Management wasn t able to bid on many of the plant turnarounds for the spring 2014 season but are targeting specific oil and gas operators for the 2015 season and see this as a significant growth area in the future. Additional tank trucks and trailers were added during the quarter to bring the fleet of tank trucks and trailers to 4. Management believes this is the minimum number of units required to enter the bulk transport market and expects the utilization of these units to increase through the fall and winter. The division operating from Slake Lake, Alberta experienced a decrease in revenue of approximately 56% compared to the same period last year. This was due to an overall slowdown in the area which started in late One of the largest clients has decreased its drilling operations for the remainder of 2014 and expects to increase again in the summer of This slowdown resulted in less demand for the end dump trucks and trailers used in the hauling of oil contaminated cuttings. Management is currently bidding on projects in other areas of Alberta and is confident that the fleet of end dumps can gain utilization elsewhere until drilling activity picks up again in the area. The operation in Slake Lake now operates a hydrovac and straight vac truck in order to diversify the services offered into the production sector. Environmental Services The Environmental division of BearStone generated $2.18 million in revenue for the quarter which was relatively flat compared to the same quarter in The gross margin decreased by 2% mostly due to an increase in flow through 3rd party charges. 2

3 Overall gross margins for the Corporation dropped to 19.5% from 28% compared to the same quarter in 2013 and this is mostly due to the slowdown in the Slave Lake area and the new operation in Beaverlodge which added equipment and personnel to offer a full service to the completions and production sectors in the area. The outlook for drilling in Western Canada remains optimistic for the remainder of 2014 with a forecasted overall rig utilization of 45%, an increase of 4% from The outlook for LNG related projects in northeastern British Columbia is positive and the Company is pursuing opportunities in the region for its existing services for future growth. There is still some concern in regards to pipeline capacity required for future stability and growth which has affected mostly oil projects to date and some SagD operations in the oilsands. Management plans on using its strong client base of approximately 140 clients to continue to expand the new service operating from Beverlodge, Alberta into other areas of Alberta and Northeastern British Columbia. REVIEW OF RESULTS Comparison for the three months ended July 31, 2014 and 2013 For the three months ended July $ $ Cash and cash equivalents 371,913 3,284,025 Bank Indebtedness (43,853) - Cash (used) in investing activities (2,375,392) (357,166) Property and equipment (net book value) 9,242,320 4,231,023 The changes above are mainly due to the acquisition of trucks and equipment. For the three months ended July $ $ Net (loss) income before income taxes (532,631) 4,451 Revenue 5,237,645 3,577,590 Direct costs 4,213,780 2,577,453 The net (loss) income before income taxes for the quarter in the amount of $532,631 is composed of a loss from Environmental of $48,904, a loss from Vacuum services of $467,042, and a loss from the corporate segment costs of $16,685. The Environmental and Vacuum segments combined for a net loss before income tax of $515,946 compared to a profit of $19,936 for the three month period ended July 31, The decrease was due to an increase in labour and repairs and maintenance costs for the vacuum segment as well as start up operational costs in Beaverlodge and a decline in Porterco revenues. Amortization and interest also increased due to additional equipment. Total revenue of $5,237,645 was comprised of $2,186,172 from Environmental Services, $3,081,724 from Vacuum services and less inter-company revenue of $30,251. The same quarter in revenue of $3,577,590 was composed of $2,132,421 from Environmental, $1,443,328 from Vacuum and $1,884 from Corporate segment. The total direct costs of $4,213,780 ( $2,577,453) were all comprised of Environmental and Vacuum Services. The increase primarily relates to additional labour, training and repairs and maintenance costs as well as the addition of the new operation in Beaverlodge, Alberta. For the three months ended July $ $ General and administrative expenses 1,200, ,689 Interest56,695 23,731 Amortization 299, ,266 The total General and Administrative expenses of $1,200,247 for the three month period includes $1,136,170 ( $771,862) from Environmental and Vacuum services and $64,077 ( $54,827) from Corporate. These amounts 3

4 are comprised of salary and benefits, professional fees, office and general, rent, automotive, marketing and travel. The increase primarily related to overhead costs, office personnel, leasing, professional fees, and the addition of Alberta Ltd. The increase in interest and amortization is primarily due to the increase in equipment loans and the addition of assets. As at July 31, 2014, the Company has approximately $2.70 million in non-capital losses. Management has determined that there is a high probability of future taxable profits sufficient to utilize the losses. Accordingly, the Company has recognized a net deferred income tax recovery on the balance sheet in the amount of $687,913. SEGMENTED RESULTS The Company operates in three segments that are Corporate, Environmental Services and Vacuum Services. Management defines these segments based on the type of revenue earned. All of the Company s revenue is earned in Canada and all of its assets are located in Canada. Segmented information is presented on year-to-date basis for the three months ended July 31, 2014 and 2013: Environmental Vacuum Inter-company Corporate Services Services elimination Total $ $ $ Revenue - 2,186,172 3,081,724 (30,251) 5,237,645 Direct costs - 1,563,789 2,680,242 (30,251) 4,213,780 Gross margin - 622, ,482 1,023,865 Interest expense 54 2,386 54,255-56,695 Amortization , ,554 Earnings before income tax (16,685) (48,904) (467,042) - (532,631) Deferred income tax recovered ,398 Total assets 1,734,270 2,007,447 13,148,766-16,890,483 Note the above figures are prior to any inter-company management fees For the three months ended July 31, 2013 Environmental Vacuum Inter-company Corporate Services Services elimination Total $ $ $ Revenue 1,841 2,132,421 1,443,328-3,577,590 Direct costs - 1,479,741 1,097,712-2,577,453 Gross margin 1, , ,616-1,000,137 Interest expense - 1,421 22,310-23,731 Amortization , ,266 Earnings before income tax (15,485) 62,445 (42,509) - 4,451 Deferred income tax recovered (788) Total assets 2,477,066 2,540,739 7,674,108-12,691,913 Note the above figures are prior to any inter-company management fees Corporate Segment, the Corporate segment incurred a loss of $16,685 before any intercompany management fees compared to a loss of $15,485 for the same period last year. The increase was related to office and professional fees incurred. 4

5 Environmental Segment, revenue from the Environmental segment was $2,186,172 before any management fees as compared to $2,132,421 during the same period last year. The gross margin decreased by $30,297 and the earnings before management fees and income tax decreased by $111,349 respectively compared to the same period last year due to an increase in operating costs. Vacuum Segment, revenue from the Vacuum segment was $3,081,724 before any management fees as compared to $1,443,328 during the same period last year. The gross margin increased by $55,866 from the same period last year due to the addition of Alberta Ltd. The earnings before management fees and income tax decreased by $424,533 compared to the same period last year due to an increase in equipment operating costs, labour, training and repairs and maintenance costs for drilling project related services and an increase in amortization and interest. CURRENT OPERATIONS AND OUTLOOK The two current segments of BearStone, Environmental and Vacuum Services, have a solid client base and the company is looking to leverage this client base to offer its new diversified services. BearStone has successfully maintained several key contracts within the industry and is providing the following services: Environmental - Drilling waste sampling, testing and disposal - Treatment of drilling waste - Development of waste management plans - Pre-disturbance site assessments - Pre and post drilling water well testing - In house client consulting - Oilfield waste and manifest tracking Vacuum Truck Services - Combo vacuum trucks - Hydrovacs - Steamer units - Mobile boiler units - Tank trucks and trailers - Water trucks - End dump trucks and trailers - Oilfield equipment rental and fabrication Management plans on continuing the diversification growth into the production sector and increasing the plant turnaround and the bulk transport service in the future. Equipment utilization for vacuum and water trucks is expected to increase further in the fall months and into the winter season. Management is confident that the end dump trucks and trailers operating from Slave Lake will see an increase in utilization in the fall and winter months. The environmental services division has experienced slightly lower operating days thru the summer months but is expected to gain operating days in the fall months and into the winter drilling season of During the previous quarter ended April 30, 2014, the Company completed trials with two major oil & gas operators utilizing a new technology to recover oil, water and solids from contaminated drill cuttings. The technology uses thermal desorption to separate oil, water and solids with all phases being recovered for re-use or disposal. The Company is in discussions with a major gas producer in regards to building a customized unit to operate in Canada. Upon conclusion of a successful contract, the Company plans on establishing a new business with the United Kingdom based developer of the technology. 5

6 The Company continues to seek acquisitions and other technologies which will complement its current services and add future growth potential. CAPABILITY TO DELIVER RESULTS A comprehensive review of the major factors that influence the Company s ability to deliver results are described in the Company s audited annual Financial Statements for the year ended April 30, These factors remain unchanged. An outline of these factors are listed as follows: - The employment of adequate qualified employees - Seasonality and cyclicality weather conditions - Trends and the outlook for oil and gas prices - Government, environmental regulation and risk management - Acceptance by our customers of our systems and products - Access to sufficient financial resources NON-IFRS MEASURE EBITDA is not a recognized measure under IFRS, however management believes that in addition to net earnings, EBITDA is a useful supplemental measure as it provides an indication of the results generated by the Company s continued operations. EBITDA is defined as earnings before interest, income taxes, amortization and share-based payments. For the three months ended July Net (loss) Income before Income taxes (532,631) 4,451 Amortization 299, ,266 Interest 56,695 23,731 EBITDA (176,382) 173,448 It should be noted that the Company s calculation of EBITDA may differ from other organizations and accordingly EBITDA may not be comparable to measurements used by others. LIQUIDITY AND CAPITAL RESOURCES Cash Flow from Operations:, cash of $3,340,035 was generated by operations compared to $1,069,063 for the same period last year. The positive cash flow was a result of an increase of $375,693 in accounts payable, a decrease of $3,204,871 in accounts receivable, an increase of $7,542 in inventory, $401,233 in loss of operations, plus changes not involving cash in the amount of $168,156. Financial Activities:, cash of $882,047 was used as compared to $206,065 being generated for the same period last year. The current period reflects an increase in obligations under capital lease and a repayment of bank indebtedness for BearStone. Investing Activities: the Company used cash of $2,375,392 as compared to $357,166 for the same period last year. The increase in use of cash in the current period was due to additions of assets. Liquidity: The Company has net working capital of $1,074,424 at July 31, 2014 as compared to $2,198,576 at April 30,

7 OFF-BALANCE SHEET ARRANGEMENTS The Company has no off-balance sheet arrangements at July 31, CONTRACTUAL OBLIGATIONS AND COMMITMENTS At July 31, 2014, the Company had the following contractual obligations: Leases and long-term obligations Other contractual obligations Next 12 months 1,150, , months Payments due by period 1,185, , months 771, , months 472,619 4,300 After 48 months 640,676 Total contractual obligations $ 1,915,459 $ 1,823,992 $ 1,053,930 $ 476,919 $640,676 BearStone has current office lease commitments in Calgary, Medicine Hat and Slave Lake for a combined amount of $43,000/month. The Calgary office is leased until December 2016, the Medicine Hat premises until May 2016 and the Slave Lake premises until September The long-term debt incurred from the purchase of equipment as at July 31, 2014 is $842,100. These loans range up to 60 months with interest from 4.98% to 8.32%. The combined monthly principal and interest payment is $26,326. The obligations under capital lease for purchase of equipment as at July31, 2014 is $3,379,576. These loans range up to 60 months with interest from 4.37% to 8.00%. The combined monthly principal and interest payment is $84,961 Included above is the employment contracts and conditional retention bonuses of two key members of management. SUMMARY OF QUARTERLY RESULTS Financial Quarter Ended Oct 31 /13 ** Jan 31 /14 * April 30 /14 * July 31, 2014 * Revenue $ 4,833,263 $ 6,376,551 $ 7,187,540 $ 5,237,645 Operating cash flow (442,710) (1,690,111) (1,303,786) 3,340,035 Net income (loss) (230,831) 110, ,026 (532,631) Per share (basic) (0.002) (0.005) Per share (diluted) (0.002) (0.005) Oct 31 /12** Jan 31 /13 ** April 30 /13 ** July 31 /13** Revenue $ 5,016,304 $ 5,670,194 $ 5,457,935 $ 3,577,590 Operating cash flow (1,059,007) 1,043,655 52,277 1,069,063 Net income (loss) 1,171, ,445 26,870 4,684 Per share (basic) Per share (diluted) Notes: * These quarters all reflect the operations of Environmental, Vacuum, Porterco and of Alberta Ltd. ** These quarters all reflect the operations of Environmental, Vacuum and Porterco For the quarter ended October 31, 2012 Environment revenue was $2,831,933 and Vacuum revenue was $2,184,371 with a combined increase of $631,446 or 14% over the same period last year. The Vacuum revenue included $941,497 from Porterco. For the quarter ended January 31, 2013 Environment revenue was $2,382,757 and Vacuum revenue was $3,287,437 with a combined increase of $1, or 30% over the same period last year. The Vacuum revenue included $1,146,394 from Porterco. 7

8 For the quarter ended April 30, 2013 Environment revenue was $2,362,808 and Vacuum revenue was $3,094,790 (net of inter-company revenues of $155,471) with a combined increase of $1,565,157 or 29% over the same period last year. The Vacuum revenue included $796,058 from Porterco. For the quarter ended July 31, 2013 Environment revenue was $2,132,421 and Vacuum revenue was $1,443,628 with a combined increase of $376,284 or 10% over the same period last year. The Vacuum revenue included $749,400 from Porterco. The Corporate segment had revenue of $1,541. For the quarter ended October 31, 2013 Environment revenue was $2,780,143 and Vacuum revenue was $2,047,195 with a combined decrease of $188,966 or 4% over the same period last year. The Vacuum revenue included $816,062 from Porterco. The Corporate segment had revenue of $5,926 For the quarter ended January 31, 2014 Environment revenue was $2,262,261 and Vacuum revenue was $4,114,290 with a combined increase of $706,357 or 11% over the same period last year. The Vacuum revenue included $655,947 from Porterco. For the quarter ended April 30, 2014 Environment revenue was $2,718,379 and Vacuum revenue was $4,469,161 (net of inter-company revenue of $94,306) with a combined increase of $1,729,942 or 24% over the same period last year. The Vacuum revenue included $734,994 from Porterco. For the quarter ended July 31, 2014 Environment revenue was $2,186,172 and Vacuum revenue was $3,051,473 (net of inter-company revenue of $30,251) with a combined increase of $1,661,896 or 46% over the same period last year. The Vacuum revenue included $324,412 from Porterco. Fluctuations in these revenues can change quarter over quarter depending on activity and the types of wells being drilled as well as the type of service being provided to the Oil and Gas operator. TRANSACTIONS WITH RELATED PARTIES The Company has engaged the services of Black Dot Consulting Ltd. since July 2010 to provide marketing and consulting services at a rate of $5,000 per month. a total of $15,000 ( $15,000) is included in consulting fee expenses. The Company has agreed to pay $10,000 per month to Cory Holdings Ltd, a company owned by the general manager of one of the Company s subsidiaries, since September 2012 for the rental of a warehouse, office and yard in Slave Lake, Alberta. A total of $30,000 is recorded for the three months ended July 31, 2014 ( $30,000). In addition, the Company has engaged Rand Edgar Investment Corp. ( REIC ), a company owned by a director of the Company. REIC is paid or has accrued $6,000 per month for providing administrative services to the Company. This engagement commenced in June a total of $18,000 ( $18,000) has been recorded in professional fees. This agreement may be terminated at the end of any calendar month. These transactions are made on terms equivalent to those that prevail in arm s length transactions and are made only if such terms can be substantiated. The Company has determined that its key management personnel consist of its executive management and its Board of Directors. Included in the Company s consolidated operating expenses for the three key individuals are the following compensation expenses for the three months ended July 31, 2014: - Short term benefits of $88,333 ( $60,500) Included in total commitments disclosed in Note 18 are contract payments of $342,916 and a conditional retention bonus of $275,000 payable to two of the executives. 8

9 OUTSTANDING SHARE DATA As at September 29, 2014, April 30, 2014 and July 31, 2013 the Company had the following outstanding share capital: September 29, 2014 April 30, 2014 July 31, 2013 Common shares 96,780,431 96,780,431 93,780,431 Share options - - 6,570,000 Total fully diluted share capital 96,780,431 96,780, ,350,431 During the year ended April 30, 2008, the shareholders approved a change in the Employee Stock Option Plan from a fixed number of 2,000,000 stock options authorized to be issued, to 10% of issued and outstanding shares of the Company. As a result the Company is now authorized to issue up to 9,678,043 options. The total number of options issued at July 31, 2014 was nil. CRITICAL ACCOUNTING ESTIMATES Management is responsible for applying judgment in preparing accounting estimates. Certain estimates and related disclosures included within the financial statements are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from management s current judgments. An accounting estimate is considered critical only if it requires the Company to make assumptions about matters that are highly uncertain at the time the accounting estimate is made, and different estimates the Company could have used would have a material impact on the Company s financial condition or results of operations. A comprehensive review of the major critical accounting estimates is described in the Company s Annual Statements for the year ended April 30, These critical accounting estimates remain unchanged. An outline of the critical accounting estimates are listed as follows: - Revenue recognition - Estimates of collectability of accounts receivable - Estimates of depreciation and amortization - Estimates of tax pools and their recoverability - Stock options FINANCIAL INSTRUMENTS Credit Risk Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. The Company s cash is held through large Canadian financial institutions which are guaranteed. Substantially all of the Company s accounts receivable are due from customers in the oil and natural gas industry and are subject to normal industry credit risks. The Company s subsidiaries have a balanced flow of customers. The carrying amount of cash and accounts receivable represents the maximum credit risk. Liquidity Risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company manages liquidity risk through the management of its capital structure and financial leverage as outlined in Note 15 Capital Management of the Financial Statements for the three months ended July 31, Market Risk Market risk is the risk that fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises of three types of risk: interest rate risk, currency risk and other price risk. 9

10 It is management s opinion that the Company is not exposed to significant interest rate risk, currency risk or other price risk because the Company does not transact business in other currencies and the demand loans and long term debt have fixed interest rate charge. Any bank indebtedness (if used) would be subject to any interest charges with the market prime rate fluctuation. Sensitivity analysis The Company has designated its cash and cash equivalents as held-for-trading which is measured at fair value. As of July 31, 2014, the carrying and fair value amounts of the Company s financial instruments are approximately equivalent. Receivables are classified for accounting purposes as loans and receivables, which are measured at amortized cost which equals fair market value. Accounts payable and accrued liabilities are classified for accounting purposes as other financial liabilities, which are measured at amortized cost which also equals fair market value. Based on management s knowledge and experience of the financial markets, the Company believes that movements in interest rates that are reasonably possible over the next twelve months will not have a significant impact on the Company. KEY PERFORMANCE DRIVERS The Company believes the following key performance drivers are critical to the success of its business: Oil and natural gas prices and the resulting cash flows, access to debt and equity financing and capital expenditures of its customers. Forecast expectations of its customers as to future oil and gas prices. Expectations of its customers as to oil and gas exploration and development prospects primarily in the Western Canada Sedimentary Basin. Interest rates, the state of the capital markets and the Company s ability to access debt and equity markets. Weather, which impacts both the ability to operate in the field as well as the overall demand for natural gas and heating oil. Effect of non-market forces such as government incentives for renewable energy and regulatory changes, all of which create market uncertainty and affects industry activity levels. Access to and retention of qualified personnel. CERTIFICATIONS The Company, being a venture exchange listed company, no longer is required to have the CEO and the CFO certify they have designed internal control over financial reporting, or caused it to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. An optional form has been made available by the TSX Venture Exchange for listed companies to be used by the Company s CEO and CFO to certify given the Company s size. The CEO and CFO have reviewed the financial report and MD&A as the following certification states: - That, based on their knowledge, they have determined there is no untrue statement of material fact, or any omission of material fact required to be stated which would make any statement not misleading in light of the circumstances under which it was made within the filling; and - That, based upon their knowledge, the filings, together with the other financial information included in the filings, fairly present in all material respects the financial condition, financial performance and cash flows of the Company as of the date and for the periods presented in the filings. 10

11 RISK FACTORS Certain activities of the Company are affected by factors that are beyond its control or influence. The business and activities of the Company are directly affected by fluctuations in the levels of exploration, development and production activity carried on by its customers, which in turn is dictated by numerous factors including world energy prices and government policies. Any addition to or elimination or curtailment of government incentives or other material changes to government regulations of the energy industry in Canada could have a significant impact on the oilfield service industry in Canada of which the Company is a part. A comprehensive review of the major risk factors are described in the Company s Annual Statements for the year ended April 30, These major factors remain unchanged. - Industry Conditions - Credit Risk - Competition - Employees - Relationships with Key Suppliers and Development of New Technology - Environmental Liability Risks - Seasonality - Potential Operating Risk and Insurance FORWARD-LOOKING STATEMENTS Certain information in this MD&A, including all statements that are not historical facts, constitutes forward-looking statements. Such forward-looking statements are often, but not always, identified by the use of words such as seek, achieve, plan, continue, estimate, focus, will, potential, could, believe, and other similar expressions. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date the statements were made, and readers are advised to consider such forward-looking statements in light of the risks set forth above. The Company undertakes no obligation to reissue or update forward looking information as a result of new information or events after the date of this MD&A except as may be required by law. NEW ACCOUNTING POLICIES ADOPTED The following accounting standards were adopted as of May 1, 2013 and did not have a material impact on these condensed interim consolidated financial statements of the Company. IFRS 10, Consolidated Financial Statements replaces IAS27: Consolidated and Separate Financial Statements and establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 11, Joint Arrangements applies to accounting for interests in joint arrangements where there is joint control. IFRS 12, Disclosure of Involvement with Other Entities includes disclosure requirement about subsidiaries, joint ventures and associates, as well as unconsolidated structured entities and replaces existing disclosure requirements. IFRS 13, Fair Value Measurement requires entities to provide a single framework for measuring fair value while requiring enhanced disclosure when fair value is applied. IAS 27, Separate Financial Statements has been amended to conform to the changes made in IFRS 10 but retains the current guidance for separate financial statements. 11

12 IAS 28, Investments in Associates and Joint Ventures. As a consequence of the issue of IFRS 10, IFRS 11 and IFRS 12, IAS 28 has been amended and will further provide the accounting guidance for investments in associates and will set out requirements for the application of the equity method when accounting for investments in associates and joint ventures. FUTURE ACCOUNTING PRONOUNCEMENTS In November 2009, the IASB published IFRS 9, Financial Instruments, which covers the classification and measurement of financial assets as part of its project to replace IAS 39, Financial Instruments: Recognition and Measurement. In October 2010, the requirements for classifying and measuring financial liabilities were added to IFRS 9. Under this guidance, entities have the option to recognize financial liabilities at fair value through earnings. If this option is elected, entities would be required to reverse the portion of the fair value change due to own credit risk out of earnings and recognize the change in other comprehensive income. IFRS 9 is effective for the Company on May 1, Early adoption is permitted and the standard is required to be applied retrospectively. There is not expected to be a significant impact on the Company upon implementation of the issued standard. CORPORATE INFORMATION Board of Directors: Officers: Gerry E. Kerkhoff, William A. Rand, Robert F. Chase, Timothy A. Young and Ralph T. Strother Gerry E. Kerkhoff - President and Chief Executive Officer; William A. Rand - Chairman; Pardeep Sibia - Chief Financial Officer; Karin E. Lutz - Corporate Secretary Corporate Office: Suite 500, th Avenue, SW, Calgary, Alberta, T2P 3A8; Phone ; Fax Auditors: Legal Counsel: Transfer Agent: Bankers: Stock Exchange Listing: John J. Geib, Professional Corporation (Calgary) Torys LLP (Calgary) Computershare Investor Services Inc. TD Canada Trust and Canadian Western Bank The TSX Venture Exchange under symbol NWE Additional information relating to the Company is available on SEDAR at 12