NorAm Drilling AS

Earnings Release • Aug 22, 2023

INTERIM FINANCIAL INFORMATION

NORAM DRILLING AS

SECOND QUARTER 2023

22 AUGUST 2023

NORAM DRILLING AS REPORTS RESULTS FOR THE SECOND QUARTER ENDED JUNE 30, 2023

Oslo, Norway, August 22, 2023. NorAm Drilling AS (the "Company" or "NorAm"), today reported unaudited results for the three and six months ended June 30, 2023:

HIGHLIGHTS

• Revenue increased to MUSD 35.0, up 7% from the previous quarter
• Adjusted EBITDA(1) increased to MUSD 14.4(2), up 6% from the previous quarter
• Fleet utilization was 98.9% compared to 99.3% (3) in the previous quarter
• Average base dayrate(4) increased to \$31,500, up 2% from the previous quarter
• Current revenue backlog of MUSD 18.0 as of August 22, 2023
• (1) Adjusted EBITDA is defined as earnings before interest, tax, depreciation and amortization plus non-cash stock option expense.
• (2) Excludes MUSD 1.4 ERTC Refund received in the previous quarter.
• (3) Excludes 10.9 days of downtime related to rig upgrades.
• (4) Base dayrate includes contracted revenue while on operating time divided by the total operating days and excludes (a) move operating rates which currently range from 85-100% of base operating day rates and (b) add-ons for equipment rentals, additional crew and overtime.

Marty L. Jimmerson, Chief Executive Officer & Chief Financial Officer of NorAm Drilling AS commented:

We are pleased with our second quarter results, as both revenue and Adjusted EBITDA, increased 7% and 6%, respectively compared to the first quarter of 2023. We paid MUSD 14.2 or NOK 3.50 per share in monthly dividends to our shareholders in the second quarter of 2023. As a result of WTI and natural gas volatility, US rig counts have declined approximately 19% so far this year. Permian rig counts have held up better and only declined 7% year to date primarily due to less volatility in WTI. We remain encouraged that market fundamentals are intact and expected to improve later this year and into 2024.

SUMMARY

NorAm Drilling AS owns 100% of NorAm Drilling Company, a Texas corporation, collectively referred to as NorAm or the Company herein. NorAm owns and operates a quality rig portfolio of "super spec" advanced high-end AC driven rigs tailored for the drilling of horizontal wells in the US land drilling market. Currently, eight of our eleven rigs are under contract in the Permian Basin and the remaining three rigs are stacked and actively being marketed. These rigs are designed to combine the cost efficiency of a compact rig with the versatility of different rig classes, enabling the rigs to cover a broad range of wells for both liquids and gas.

MARKET & ACTIVITIES

Demand for drilling rigs outside of the Permian started to decline in the first quarter of 2023 as natural gas prices declined. Demand for drilling rigs in the Permian started to decline during the second quarter of 2023 as WTI declined from \$80 to \$67 by mid-June. WTI finished the second quarter trading around \$70 and is currently trading at \$80. During the second quarter, US and Permian land rigs decreased 83 and 11, respectively. During the quarter, oil inventories decreased 4.2%, daily production in the Lower 48 was flat at 11.8 million barrels per day and the number of drilled but uncompleted wells in the Permian Basin continued to decline.

Dayrates for high end "super spec" drilling rigs started to soften during the second quarter as some rigs were mobilized from the Haynesville as a result of low natural gas prices and operators started to release rigs in the Permian as a result of lower WTI prices.

As of August 18, 2023, the US land drilling active rig count and Permian rig count was 621 and 327, respectively. As of June 30, 2022, the US land drilling active rig count and Permian rig count was 653 and 341, respectively. As of December 31, 2022, the US land drilling active rig count and Permian rig count was 762 and 353, respectively.

OPERATIONS

During 2Q 2023, NorAm achieved a 98.9% utilization compared to 99.3% utilization in 1Q 2023.

Rig operating costs were in line with expectations with strong focus on rig personnel staffing levels, management of other daily operating costs and controlling our maintenance capital expenditures.

FINANCIALS

NorAm had revenue of MUSD 35.0 during 2Q 2023 compared to MUSD 32.7 during 1Q 2023. We generated an operating profit of MUSD 9.6 in 2Q 2023 compared to an operating profit of MUSD 10.0 in 1Q 2023. The increase in revenue was the result of higher dayrates. Moreover, we generated Adjusted EBITDA of MUSD 14.4 in 2Q 2023 compared to 15.0 in 1Q 2023. 1Q 2023

operating profit and Adjusted EBITDA included the receipt of MUSD 1.4 in January 2023 related to the final remaining outstanding ERTC payroll credit mentioned below. Excluding the ERTC receipt, Adjusted EBITDA increased MUSD 0.8 as a result of higher dayrates.

Capital expenditures were MUSD 0.7 and MUSD 2.8 during the second quarter and year to date, respectively. We spent MUSD 0.5 on upgrades and MUSD 0.2 on maintenance capital expenditures in the second quarter of 2023. During the six months ended June 30, 2023, we spent MUSD 2.5 on upgrades and MUSD 0.3 on maintenance capital expenditures. Our equipment upgrades mainly relate to completion of the remaining requirements that all our rigs meet our ultra "super spec" specifications and construction of our first transformer to allow our rigs to connect to high line power. We currently estimate that 2023 capital expenditures will be approximately MUSD 4.0.

The Company is debt free, and we paid MUSD 14.2 or NOK 3.50 per share in monthly dividends to our shareholders in the second quarter of 2023. The dividend distributions were made from the Company's contributed surplus account which consists of previously paid in share premium transferred to the Company's share premium account. The Company intends to continue paying future dividends based upon earned free cash flow and maintaining a minimum liquidity of approximately MUSD 11.0.

The Company had available MUSD 4.5 under a Revolving Promissory Note ("Revolver") with a U.S. based bank for working capital and general corporate purposes. There were no borrowings outstanding under the Revolver as of June 30, 2022.

CARES ACT

NorAm Drilling applied for support relating to the Employee Retention Tax Credit (ERTC), part of the CARES Act, which is a payroll credit available from March 12, 2020, through September 30, 2021, for a total amount of approximately MUSD 4.0, which has been applied as a reduction in payroll expenses. The company received approximately MUSD 1.0 in 2Q 2022 and MUSD 1.6 in 3Q 2022. The Company received approximately MUSD 1.4 in January 2023 related to the final remaining outstanding ERTC payroll credit mentioned herein and the company does not expect to receive any further credit refunds.

OUTLOOK

Subject to key risks and uncertainties included in our 2022 Annual Report and recent declines in rig counts, we continue to expect strong demand for our high end "super spec" drilling rigs.

WTI was trading at \$80 at the beginning of the second quarter and hit a low of \$67 in mid-June. WTI finished trading at \$70 in June and is currently trading at \$80. Natural gas prices declined from \$7.0 per MMBtu as of November 2022 to \$4.5 per MMBtu as of December 31, 2022.

Natural gas prices have declined further in early 2023 and is currently trading at approximately \$2.60 per MMBtu.

Based upon current commodity prices and discussions with operators who have been focused on budgets and production discipline, we expect the recent decline in the Permian rig count should reach a bottom during the third quarter and start to increase in the fourth quarter. As E&P operators remain focused on maintaining current production levels and with drilling but uncompleted (DUCs) wells continuing to decline in the Permian basin, we believe "super spec" rigs will remain in high demand in the Permian basin.

Condensed consolidated Income Statement

	Quarter Ended		Six Months Ended
	June 2023	Mar 2023	June 2023	June 2022
(All amounts in USD 1000s)
Revenue/Expense
Sales	34,966	32,684	67,650	39,370
Other Income
Total Operating Income	34,966	32,684	67,650	39,370
Payroll Expenses	8,423	6,897	15,320	13,946
Depreciation of Tangible and Intangible Assets	4,671	4,759	9,430	9,340
Rig Mobilization, Service and Supplies	7,317	6,972	14,288	12,615
Insurance Rigs and Employees	1,441	1,644	3,085	2,465
Other Operating Expenses	3,550	2,391	5,941	4,483
Total Operating Expenses	25,402	22,663	48,065	42,848
Operating Profit (+)/ Loss (-)	9,564	10,022	19,586	-3,478
Financial Income and Expenses
Other Interest Income	106	110	216	3
Other Financial Income	116	12	128	11
Other Interest Expenses	6		6	3,600
Other Financial Expenses	67	171	238	72
Net Financial Items	148	-49	99	-3,658
Profit (+)/Loss(-) before Income Tax	9,712	9,972	19,685	-7,136
Income Tax Expense	200	393	593	724
Net Profit (+)/Loss (-)	9,512	9,579	19,091	-7,860

Condensed consolidated Balance Sheet
	Notes	June 2023	Dec 2022
(All amounts in USD 1000s)
Assets
Tangible Assets
Rigs and Accessories	1	79,304	86,312
Vehicles and Office Equipment	1	669	258
Total Tangible Assets		79,973	86,569
Current Assets
Receivable
Accounts Receivable		17,260	14,802
Prepaid Expenses and Other Current Assets		2,185	1,336
Total Receivable and Other		19,444	16,138
Cash and Cash Equivalents
Bank Deposits/Cash		11,894	13,098
Total Current Assets		31,338	29,236
Total Assets		111,311	115,806

Condensed consolidated Balance Sheet
	Notes	June 2023	Dec 2022
(All amounts in USD 1000s)
Equity
Owners Equity
Issued Capital	2	12,547	12,547
Share Premium	2	124,314	136,573
Other Shareholder Contribution	2	369	369
Total Owners Equity		137,230	149,489
Accumulated Profits
Other Equity	2	-48,365	-67,456
Total Accumulated Profits		-48,365	-67,456
Total Equity		88,866	82,033
Liabilities
Deferred Tax		2,139	1,746
Total deferred tax		2,139	1,746
Current Liabilities
Accounts Payable		3,927	4,607
Tax Payable		254	250
Public Duties Payable		268	267
Other Current Liabilities		15,857	26,904
Total Current Liabilities		20,307	32,027
Total Liabilities		22,446	33,773
Total Equity & Liabilities		111,311	115,806

Condensed Consolidated Statement of Cash Flow
		YTD
	June 2023	June 2022
(All amounts in USD 1000s)
Net Profit (+)/Loss (-)	19,485	-7,136
Tax paid for the period	4
Depreciation of fixed assets	9,430	9,340
Change in accounts receivable	-2,458	-3,252
Change in accounts payable	-679	-487
Change in other current balance sheet items	3,238	1,141
Net cash flow from operational activities	29,021	-394
Purchase of tangible fixed assets	-2,833	-1,939
Net cash flow from investing activities	-2,833	-1,939
Repayment of long term debt Issued capital
Dividends	-27,391
Net cash flow from financing activities	-27,391
Net change in cash and cash equivalent	-1,204	-2,333
Cash and cash equivalents opening balance	13,098	12,782
Cash and cash equivalents closing balance	11,894	10,449

NOTE DISCLOSURE

Note 1 - Accounting Principles

The condensed consolidated interim financial statement is prepared in accordance with the Norwegian accounting standard for interim financial statements, NRS 11.

Principles and policies are the same for the interim financial statements as in the last annual financial statements, that were prepared according to the Norwegian Accounting Act and generally accepted principles in Norway. For description of accounting principles we refer you the last issued Annual Financial Statement.

1-1 Income tax

The tax expense for management reporting and interim reporting purposes is a simplified tax calculation where the tax rate in the different jurisdictions are applied to the net result in the different jurisdiction booked against deferred tax/deferred tax asset. If a jurisdiction has a negative result, and no deferred tax asset is expected to be capitalized, no tax expense are calculated for that jurisdiction.

1-3 Property, Plant and Equipment

Property, plant and equipment are capitalized and depreciated over the estimated useful life. Costs for maintenance are expensed as incurred, whereas costs for improving and upgrading property, plant and equipment are added to the acquisition costs and depreciated with the related asset. If carrying value of a non-current asset exceeds the estimated recoverable amount, the asset is written down to the recoverable amount. The recoverable amount is the greater of the net realizable value in use. In assessing value in use, the discounted estimated cash flows from the asset are used.

Estimated useful life for accounting purposes is defined for different categories of fixed assets:

Estimated
Useful Life
10 - 15 years
2 - 15 years
3 - 5 years
3 - 5 years

1-4 Audit of management reporting/interim reporting

The interim financials are unaudited.

NOTE DISCLOSURE

Note 2 - Equity and Shareholders Information

		Share	Other paid in	Other	Total
	Share capital	premium	capital	equity
Equity December 2022	12,547	136,573	369	-67,456	82,033
Profit/loss in the period				19,092	19,092
Dividends		-12,513			-12,513
Stock option program		254			254
Equity June 2023	12,547	124,314	369	-48,365	88,866

The Company had MUSD 22.5 and MUSD 7.7 of dividends accrued as of December 31, 2022 and June 30, 2023, respectively. The Company declared and paid dividends of MUSD 27.4 for the 6 months ended March 31, 2023. The company declared and paid dividends of MUSD 7.7 subsequent to June 30, 2023. The dividend distributions were from the Company's contributed surplus account which consists of previously paid in share premium transferred to the Company's share premium account.

Note 3 - Long term liabilities and covenants

Bond loan

The Company paid off its outstanding bond loan of MUSD 80 and accrued interest of MUSD 3.2 on 30 November 2022.

On 21 November 2022, the Company's subsidiary ("Borrower") entered into a Loan agreement with a U.S. based bank that provides for a Revolving Promissory Note ("Revolver") of MUSD 4.5. Use of proceeds for any borrowings under this Revolver are available for working capital and general corporate purposes based upon a borrowing base calculation equal to 70% of eligible accounts. Financial covenants include (i) a debt service coverage ratio of not less than 1.2 to 1; (ii) Minimum liquidity requirement of MUSD 5.0 and (iii) a debt to EBITDA ratio of not more than 2.0 to 1.0. The Revolver is secured by accounts receivable and expected to be utilized to reduce the required level of liquidity on our balance sheet. AS of 30 June 2023, there were no borrowings outstanding on the Revolver.

NOTE DISCLOSURE

Note 4 - Cares Act

The Company received approximately MUSD 1.4 in January 2023 related to its final outstanding payroll credit refund application associated with the Employee Retention Tax Credit ("ERTC"), which has been applied as a reduction in payroll expenses.

Note 5 - Key figures and ratios
(USD mill)	Q2		YTD
	2023	2022	2023	2022
Revenue	35.0	22.3	67.7	39.4
Operating profit	9.6	-0.6	19.6	-3.5
Net profit before tax	9.7	-2.4	19.7	-7.1
EBITDA	14.2	4.1	29.0	5.9
ADJUSTED EBITDA	14.4	4.1	29.3	5.9
			June
			2023	2022
Equity to asset ratio			79.8%	70.8%
	Q2		YTD
	2023	2022	2023	2022
Total number of shares	43,140,993	23,392,317	43,140,993	23,392,317
EPS	0.22	-0.15	0.44	-0.34
Diluted EPS (Including options)	0.22	-0.15	0.44	-0.34

Definitions

EBITDA - Earnings Before Interest, Tax, Depreciation and Amortization.

ADJUSTED EBITDA - Earnings Before Interest, Tax, Depreciation and Amortization plus non cash stock option expenses.