Akita Drilling Ltd. - Management Reports 2021

Management’s Discussion & Analysis

The following management’s discussion and analysis (“MD&A”) of the financial condition and results of operations is intended to help the reader understand the current and prospective financial position and operating results of AKITA Drilling Ltd. (“AKITA” or the “Company”). The MD&A discusses the operating and financial results for the year ended December 31, 2020, is dated March 11, 2021, and takes into consideration information available up to that date. The MD&A is based on the audited annual consolidated financial statements of AKITA for the year ended December 31, 2020. The MD&A should be read in conjunction with the audited annual consolidated financial statements and related notes for the year ended December 31, 2020, prepared in accordance with International Financial Reporting Standards (IFRS).

Additional information is available on AKITA’s website (www.AKITA-Drilling.com) and all previous public filings, including the most recently filed Annual Report and Annual Information Form, are available through SEDAR (www.sedar.com). All amounts are denominated in Canadian dollars (CAD) and stated in thousands unless otherwise identified.

Introduction

AKITA is a premier Canadian oil and gas drilling contractor with a fleet of 37 drilling rigs. AKITA provides contract drilling services through two geographical segments: Canada and the United States (“US”). With a fleet of 20 rigs, AKITA’s Canadian division operates in Alberta, British Columbia, Saskatchewan, and from time to time, in the Yukon and the Northwest Territories. The Canadian division operates both wholly-owned rigs and rigs that are partially owned by AKITA and First Nations, Metis or Inuit joint venture partners including Akita Mistiyapew Aski Drilling Ltd., Akita Equtak Drilling Ltd., and Akita Wood Buffalo Drilling Ltd., each of which has defined geographical boundaries and an equity interest in select AKITA rigs. With a fleet of 17 rigs, AKITA’s US division conducts operations in North Dakota, Colorado, Wyoming, Texas, Utah, New Mexico, and Oklahoma.

With a focus on the efficient provision of drilling services, rigorous crew training, rig maintenance and safety processes and adherence to a leading quality assurance-quality control program, AKITA strives to ensure it is well positioned to meet the most demanding requirements of global operators who offer long-lasting resource-based drilling programs. The Company has utilized this strategy to enhance its development of pad drilling rigs designed for both heavy oil and unconventional natural gas formations.

Financial Highlights

Financial Highlights
$Thousands exceptper share amounts	2020	2019	Change	% Change
Revenue	119,664	175,890	(56,226)	(32%)
Operating expenses	91,855	137,486	(45,631)	(33%)
Operating margin(1)	27,809	38,404	(10,595)	(28%)
Margin %(1)	23%	22%	1%	5%
Adjusted EBIDTA(1)	15,617	19,130	(3,513)	(18%)
Per share	0.39	0.48	(0.09)	(19%)
Adjusted funds flow from operations(1)	10,321	12,925	(2,604)	(20%)
Per share	0.26	0.33	(0.07)	(21%)
Net loss	93,274	19,875	73,399	369%
Per share	2.35	0.50	1.85	370%
Capital expenditures	7,593	15,238	(7,645)	(50%)
Dividend declared	-	6,734	(6,734)	(100%)
Weighted average shares outstanding	39,608	39,608	-	0%
Total assets	251,521	369,116	(117,595)	(32%)
Total debt	74,303	84,019	(9,716)	(12%)
(1)See “Basis of Analysis in this MD&A and Non-GAAP Items”.

Operational Highlights

Operational Highlights
	2020	2019	Change % Change
Operating days
Canada	945	1,606	(661)	(41%)
United States	2,555	3,747	(1,192)	(32%)
Revenue per operating day(1)
Canada(2)	35,513	33,415	2,098	6%
United States	35,694	34,031	1,663	5%
Operating and maintenance per operating day(1)
Canada(2)	26,779	25,166	1,613	6%
United States	27,750	27,000	750	3%
Utilization
Canada	13%	19%	(6%)	(32%)
United States	41%	60%	(19%)	(32%)

(1)See “Basis of Analysis in this MD&A and Non-GAAP Items”.

(2) Includes AKITA's share of joint venture revenue and expenses. See “Basis of Analysis in this MD&A and Non-GAAP Items”.

General Overview

The impact of the North American economic slowdown as a result of initiatives implemented to mitigate the spread of the COVID-19 global pandemic can be seen in the Company’s 2020 results. The Company recorded a net loss of $93,274,000 in 2020, compared to a loss of $19,875,000 in 2019. Included in the Company’s net loss for 2020 is an $80,000,000 asset impairment expense. Adjusting for impairment, the Company’s net loss for 2020 was $20,674,000. Adjusted funds flow from operations decreased to $10,321,000 in 2020 from $12,925,000 in 2019 and adjusted EBITDA decreased to $15,617,000 from $19,130,000 over the same period.

The Company began 2020 with 10 rigs operating in Canada and 15 rigs operating in the US. As global oil demand decreased due to the impact of COVID-19 related shut downs, however, the Company’s customers put drilling programs on hold and the Company’s operating rigs dropped to one in Canada and four in the US, in September of 2020. This decrease in active rig count resulted in a material decrease in operating days. In Canada, operating days fell by 41% to 945 operating days in 2020 from 1,606 operating days in 2019. In the US, activity fell 32% to 2,555 operating days in 2020 from 3,747 operating days in 2019.

In the first quarter of 2020, as a result of both reduced activity and a significant oil price decline, the Company underwent a significant cost cutting initiative, reducing costs in all areas of the Company. As a result of the cost cutting initiative, the Company’s selling and administrative expenses decreased to $12,686,000 in 2020 from $20,339,000 in 2019. Notwithstanding the reduction in the Company’s adjusted funds flow from operations, however, AKITA reduced total debt to $74 million at December 31, 2020 from $84 million at December 31, 2019. The debt reduction included the high interest debt assumed with the acquisition of Xtreme Drilling Corp (“Xtreme”) in September of 2018.

Industry Overview

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WTI Prices ($USD) [(1)] Alberta Natural Gas Price($CAD/GJ) [(2)]
80.00 3.0
70.00
2.5
60.00
2.0
50.00
1.5
40.00
1.0
30.00
20.00 0.5
10.00 ‐
2018 2019 2020 2018 2019 2020
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Industry Utilization Canada [(3)]
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50%
40%
30%
20%
10%
0%
2018 2019 2020
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(1) Source: U.S. Energy Information Administration
(2) Source: NGX (Natural Gas Exchange)

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US Active Rig Count [(4)]
1,200
1,000
800
600
400
200
2018 2019 2020
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(4) Source: Baker Hughes North American Rotary Rig Count
(3) Source: Canadian Association of Oilwell Drilling Contractors (CAODC)

Oil and gas contract drilling activity is cyclical and is affected by numerous factors, most importantly world crude oil prices and North American natural gas prices. In March 2020, the World Health Organization declared a global pandemic related to COVID-19. To date, the COVID19 related economic slowdown has resulted in significant declines and volatility in the stock markets, as well as steep reductions in both global oil demand and prices. Additionally, an increase in the global oil supply, brought about by the Saudi Arabia and Russia oil price war in the first quarter of 2020, placed further negative pressure on oil prices, which reached cycle lows in April of 2020. There is significant ongoing uncertainty surrounding the future impact of COVID19 on both demand and prices for the Company’s drilling services.

In Canada, industry utilization was higher at the beginning of the first quarter of 2020 than at the same point in 2019, but declined rapidly in March as the above mentioned factors reduced demand for drilling services. This decline in demand reached a low point in June of 2020 before it began to slowly improve, however, demand over the year ended well below 2019 levels. By the end of December 2020, the Company’s Canadian division had three active rigs.

In the US, the activity decline that began in the latter part of 2019, due to the volatility in oil and gas prices and the pressure on operators to operate within free cash flow, continues to impact results. These pressures were exacerbated in late Q1 2020, by the combined effects of the Saudi Arabia and Russia oil price war and the effects of the COVID-19 global pandemic. Several of the Company’s drilling rigs operating in the first quarter shut down drilling operations as prices dropped further, leaving five active rigs at the end of September 2020, down from 11 active rigs at the end of March 2020. The Company ended the year with eight active rigs in December of 2020. The total active rig count in the US dropped 67% from 790 rigs at the start of 2020 to 261 rigs at the end of September 2020 before increasing to 341 rigs by year-end.

Results by Segment

Canada

Canada
$Thousands exceptper dayamounts	2020	2019	Change	% Change
Revenue(1)	33,560	53,665	(20,105)	(37%)
Operating and maintenance(1)	25,306	40,417	(15,111)	(37%)
Operating margin	8,254	13,248	(4,994)	(38%)
Margin %	25%	25%	0%	0%
Operating days	945	1,606	(661)	(41%)
Revenue per operating day(1)(2)	35,513	33,415	2,098	6%
Operating and maintenance per operating
day(1)(2)	26,779	25,166	1,613	6%
Operating margin per operating day(1)(2)	8,734	8,249	485	6%
Utilization	13%	19%	(6%)	(32%)
Rig count	20	23	(3)	(13%)

(1) Includes AKITA's share of joint venture revenue and expenses. See “Basis of Analysis in this MD&A and Non-GAAP Items”.

(2)See“Basis of Analysis in this MD&A and Non-GAAP Items”.

Utilization rates are a key statistic for the drilling industry since they directly affect total revenue and influence pricing. During 2020, AKITA achieved 945 operating days in Canada, which corresponds to an annual utilization rate of 13%, compared to a 2020 industry average of 16% and a 2019 utilization rate for the Company of 19% (1,606 days). Historically, AKITA’s utilization in Canada has been above industry standard due to the higher than average number of pad drilling rigs in AKITA’s fleet. Pad drilling rigs typically have higher utilization than conventional drilling rigs as pad drilling is a more efficient way to drill multiple wells without requiring trucks to move. The decreased demand in oil sands drilling in 2020 had the largest impact on the Company’s Canadian utilization as oil sands drilling has been a key market for the Company’s Canadian rigs.

Canadian revenue of $33,560,000 in 2020 was 37% lower than 2019 revenue of $53,665,000, due to decreased activity in 2020. Revenue per day increased in 2020 to $35,513 per day from $33,415 per day in 2019, a 6% increase, as a result of a greater percentage of higher specification rigs working. Included in the Canadian operating results is AKITA’s share of revenue and costs from its joint ventures, as AKITA provides the same drilling services through its joint venture drilling rigs as it does its wholly-owned rigs.

Operating and maintenance costs are tied to activity levels and decreased to $25,306,000 in 2020 from $40,417,000 in 2019 including AKITA’s share of costs from its joint venture rigs. On a per day basis, 2020 costs increased by 6%, consistent with the increase in revenue per day. Also affecting operating and maintenance expense for 2020 was $1,526,000 in Canadian Emergency Wage Subsidy (“CEWS”) payments from the federal government that reduced total expense.

AKITA moved one rig from its Canadian fleet to the US in 2020 and delisted two rigs, taking the Company’s Canadian rig count to 20 rigs at December 31, 2020 from 23 at December 31, 2019.

AKITA’s Canadian segment provided drilling services to eight different customers in 2020 (2019 - 19 different customers), including four customers that each provided more than 10% of AKITA’s Canadian revenue for the year (2019 – five customers).

United States

$Thousands exceptper dayamounts(CAD)	2020	2019	Change	% Change
Revenue	91,198	127,514	(36,316)	(28%)
Operating and maintenance	70,901	101,168	(30,267)	(30%)
Operating margin	20,297	26,346	(6,049)	(23%)
Margin %	22%	21%	1%	5%
Operating days	2,555	3,747	(1,192)	(32%)
Revenue per operating day(1)	35,694	34,031	1,663	5%
Operating and maintenance per operating
day(1)	27,750	27,000	750	3%
Operating margin per operating day(1)
	7,944	7,031	913	13%
Utilization	41%	60%	(19%)	(32%)
Rig count	17	17	-	-

(1)See “Basis of Analysis in this MD&A and Non-GAAP Items”.

Activity levels in the US were impacted by the collapse in oil prices as drilling rigs began to shut down near the end of the first quarter and continued to shut down into the third quarter of 2020, before ending the year slightly improved from the lows seen in the third quarter.

Revenue in the US was $91,198,000 for 2020, down from $127,514,000 in 2019. This 28% drop in revenue is attributable to the decrease in operating days, which fell 32% to 2,555 operating days in 2020 from 3,747 operating days over the same period in 2019. The impact of COVID-19 on demand for oil, which influences the price of WTI, is the dominant factor contributing to the decrease in activity. Revenue in the US accounted for 76% of the Company’s total 2020 revenue, up from 72% in 2019.

Operating margin per operating day increased to $7,944 in 2020 from $7,031 in 2019 due to standby revenue received on two of the Company’s rigs.

In the US, AKITA provided drilling services to 13 different customers in 2020 (2019 – 19), including two customers that each provided more than 10% of AKITA’s US revenue for the year (2019 – three).

Seasonality

The Canadian drilling industry is seasonal with activity typically building in the fall as the ground freezes and peaking during the winter months. Northern transportation routes become available once areas with muskeg conditions freeze to allow the movement of drilling rigs and other heavy equipment. The peak Canadian drilling season ends with "spring break-up" at which time drilling operations are curtailed due to seasonal road bans (temporary prohibitions on road use) and restricted access to agricultural land as frozen ground thaws. The summer drilling season begins when road bans are lifted. Some areas are subject to environmental orders for specific well leases which can prevent drilling activity during certain periods when authorities prioritize wildlife or habitat protections. Such restrictions may affect activity levels and operating results.

While activity in the northern part of the US is subject to a degree of seasonality, it is less affected by spring break-up than AKITA’s operations in northern Canada. Other areas in the US where AKITA conducts drilling operations are infrequently subject to weather constraints, especially in the southern states, but may experience operational restrictions for other reasons.

While seasonality can affect all rig classes, pad drilling rigs are generally less susceptible to seasonality than conventional drilling rigs.

Depreciation and Amortization Expense

$Millions	2020	2019	Change	% Change
Depreciation and amortization expense	32.7	36.8	(4.1)	(11%)

The decrease in depreciation and amortization expense to $32,681,000 during 2020 from $36,763,000 during 2019, is due to the impact of the $80,000,000 asset impairment loss the Company recorded in 2020.

AKITA depreciates its drilling rig assets on a straight-line basis where the estimated useful lives and residual values of various rig components have been chosen to match the expected life of that component. In 2020, drilling rig depreciation accounted for 97% of total depreciation expense, compared to 97% in 2019.

While AKITA conducts some of its drilling operations via joint ventures, the drilling rigs used to conduct those activities are owned jointly by AKITA and its joint venture partners, and not by the joint ventures themselves. As the joint ventures do not hold any property, plant, or equipment assets directly, the Company’s depreciation expense includes depreciation on assets involved in both wholly-owned and joint venture activities.

Selling and Administrative Expenses

				%
$Millions	2020	2019	Change	Change
Sellingand administrative expenses	12.7	20.3	(7.6)	(37%)

Selling and administrative expenses decreased to $12,686,000 in 2020 from $20,339,000 in 2019. The decrease in 2020 is related to the cost cutting measures implemented by the company in the first quarter of 2020 in light of the low demand for the Company’s services. Also contributing to the decrease in selling and administrative costs is the receipt of COVID-19 related government grants totaling $723,000. Reductions in selling and administrative expenses were partially offset by the payment of a one-time long service retiring allowance of $3,177,000 in the year.

Selling and administrative expenses equated to 11% of revenue in 2020 compared to 12% in 2019. The single largest component of selling and administrative expenses is salaries and benefits which accounted for 75% of these expenses in 2020 (2019 – 45%).

Asset Impairment

$Millions		2020	2019	Change	% Change
Asset	impairment loss	80.0	0.3	79.7	n/a

During the year ended December 31, 2020, the Company determined that two external indicators of impairment existed: the uncertainty and volatility of oil prices, which impacts the future earnings potential of the Company’s CGUs (cash generating units), and the Company’s book value of its net assets exceeding its market capitalization and therefore, the Company tested its CGUs for asset impairment.

In the first quarter of 2020, the Company recorded an asset impairment loss of $30,000,000 in each of its Canadian and US CGUs respectively. In the fourth quarter of 2020, both CGUs were tested again for impairment and the Company's US CGU's carrying amount exceeded the recoverable amount resulting in an additional impairment of $20,000,000. The total asset impairment loss for the year ended December 31, 2020 was $80,000,000.

The recoverable amounts of these CGUs were determined using a discounted cash flow model. Assumptions used in the discounted cash flow models include the Company’s Board of Directors approved budgets and an average revenue growth rate ranging from 5% to 15% over a 10 year period depending on the CGU being analyzed. In forecasting its projected cash flows the

Company assumed a slow recovery commencing in 2021 for both Canada and the US with improvements in activity and revenue per day over the forecast period. Discounted future cash flows are determined by applying a discount rate of 14.5%. This valuation has an IFRS fair value hierarchy of Level 3. Additionally, in the fourth quarter, management also obtained external equipment appraisals from independent third party experts which supported the fair value less cost to sell.

Asset impairment testing is subject to numerous assumptions, inherent risks and uncertainties, both general and specific, and the risk that the predictions will not be realized. As a result, the following sensitivity analysis has been performed to recognize that additional outcomes are possible:

Changed future revenue assumptions by 5% resulting in increases to the Company’s CGUs from $15 million to $35 million per CGU and reductions ranging from $15 million to $35 million per CGU; and
Changed the Company’s pre-tax discount rate by 1% resulting in reductions between $4 million and $11 million per CGU and increases from $4 million to $10 million per CGU.

As drilling rigs are long lived assets, no sensitivity adjustment was made for the projected forecast period.

As the base case test represented management’s best estimates, these sensitivity reductions were not included in the asset impairment loss reported.

Equity Income from Joint Ventures

Equity income from joint ventures is comprised of the following:

				%
$Millions	2020	2019	Change	Change
Proportionate share of revenue from joint ventures	5.1	5.3	(0.2)	(4%)
Proportionate share of operating & maintenance
expenses from joint ventures	4.4	4.1	0.3	7%
Proportionate share of selling and administrative
expenses fromjoint ventures	0.1	0.1	-	0%
Equityincome fromjoint ventures	0.6	1.1	(0.5)	(45%)

The Company provides the same drilling services and utilizes the same management, financial and reporting controls for its joint venture activities as it does for its wholly-owned operations. The analyses of these activities are incorporated throughout the relevant sections of this MD&A relating to activity, revenue per day as well as operating expenses. The decrease in revenue for the Company’s proportionate share of joint ventures is related to the decreased activity for the Company’s joint venture rigs in 2020 compared to the same period in 2019.

Other Income (Loss)

Other Income (Loss)
$Millions	2020	2019 Change	% Change
Interest income	-	- -	n/a
Interest expense	(5.6)	(6.8) 1.2	18%
Loss on sale of assets	(0.2)	(0.4) 0.2	50%
Net othergains	-	0.4(0.4)	(100%)
Total other loss	(5.8)	(6.8) 1.0	15%

During 2020, the Company recorded interest expense of $5,637,000 (2019 – $6,771,000). The reduction of the Company’s interest expense relates to the repayment of the Company’s high interest US dollar denominated debt that was assumed with the acquisition of Xtreme Drilling Corp. in 2018 and repaid during 2020.

During 2020, the Company disposed of non-core assets resulting in a loss of $156,000 with total proceeds of $2,142,000 compared to a loss of $476,000 and proceeds of $1,823,000 in 2019.

Income Tax Expense (Recovery)

$Millions, except income tax rate (%)	2020	2019	Change	% Change
Current tax expense (recovery)	(0.1)	0.1	(0.2)	(200%)
Deferred tax recovery	(9.3)	(4.9)	(4.4)	(90%)
Total income tax recovery	(9.4)	(4.8)	(4.6)	(96%)
Effective income tax rate	24.6%	26.6%

AKITA had an income tax recovery of $9,427,000 in 2020 compared to an income tax recovery of $4,804,000 in 2019. Deferred tax recovery increased to $9,311,000 in 2020 compared to $4,872,000 in 2019. The increase in the Company’s deferred tax recovery relates to the impact of the asset impairment loss recorded in 2020. To a lesser extent, the reduction in the Alberta corporate tax rate from 11.5% in 2019 to 8% in 2020 affected the deferred tax expense.

Net Loss, Adjusted Funds Flow and Net Cash From Operating Activities

Activities
$Millions	2020	2019	Change	% Change
Net loss	(93.3)	(19.9)	(73.4)	(369%)
Net cash from operating activities	22.9	21.6	1.3	6%
Adjusted funds flow from operations(1)	10.3	12.9	(2.6)	(20%)

During 2020, the Company recorded a net loss of $93,274,000 (net loss of $2.35 per Class A NonVoting and Class B Common share (basic and diluted)) compared to a net loss of $19,875,000 (net loss of $0.50 per Class A Non-Voting and Class B Common share (basic and diluted)) in 2019. The primary factor influencing net income in 2020 was the $80,000,000 asset impairment loss. After adjusting for the impairment, the Company’s net loss for the year was $20,674,000, a 4% increase in net loss, year-over-year. Also influencing the Company’s net loss was a decrease in revenue due to decreased activity offset by decreased selling and administrative expenses, decreased interest expense and an increased income tax recovery in the year. The influencing factors noted above are discussed throughout this MD&A.

Net cash from operating activities increased in 2020 to $22,860,000 in 2020 from $21,558,000 in 2019 due primarily to changes in non-cash working capital.

(1) See “Basis of Analysis in this MD&A and Non-GAAP Items.”

Adjusted funds flow from operations[(][1][)] decreased to $10,321,000 in 2020 from $12,925,000 in 2019 due to decreased revenue in the year.

Summary of Quarterly Results

The following table shows key selected quarterly financial information for the Company:

$Thousands, except per share (unaudited)	Three Months Ended
	Annual Totals Mar. 31 Jun. 30 Sep. 30 Dec. 31
2020
Revenue Net loss Loss per share (basic and diluted) ($) Adjusted funds flow from (used in) operations(1) Cash flow from operations	53,572 26,359 18,849 20,884 119,664 (52,257) (5,221) (8,203) (27,593) (93,274) (1.32) (0.13) (0.21) (0.69) (2.35) 10,154 2,099 (669) (1,263) 10,321 4,583 13,621 3,374 1,282 22,860
2019
Revenue Net loss Loss per share (basic and diluted) ($) Adjusted funds flow from operations(1) Cash flow from(used in)operations	52,342 39,119 42,610 41,819 175,890 (1,470) (5,067) (5,397) (7,941) (19,875) (0.04) (0.13) (0.14) (0.19) (0.50) 7,828 1,559 3,076 462 12,925 (4,287) 24,903 (735) 1,677 21,558
2018
Revenue Net loss Loss per share (basic and diluted) ($) Adjusted funds flow from (used in) operations(1) Cash flow from(used in)operations	27,089 17,293 22,465 51,514 118,361 (1,912) (2,959) (5,459) (5,609) (15,939) (0.11) (0.16) (0.24) (0.14) (0.65) 4,519 1,638 (637) 8,615 14,135 2,819 9,860 (7,428) (13,745) (8,494)

(1) See “Basis of Analysis in this MD&A and Non-GAAP Items”.

Key trends over the past 12 quarters, after giving consideration to the seasonal nature of AKITA’s operations, are as follows:

The impact on revenue of the Company’s acquisition of Xtreme at the end of the third quarter of 2018 is reflected in the fourth quarter of 2018;
Revenue in the first quarter of 2020 and 2019 is very similar but the impact of COVID-19 on demand over the balance of 2020 is striking when compared to the subsequent quarters of prior years;

1 See “Basis of Analysis in this MD&A and Non-GAAP Items.”

Day rates in Canada and the US continue to be below full cycle returns resulting in lower than anticipated funds flow from operations and net earnings for the Company; and
Net cash from operating activities is not directly correlated to market strength on a quarterly basis. Changes in the balance of this account are tied to the timing of changes in various non-cash working capital accounts.

Fourth Quarter Analysis Operational Highlights

For the three months ended December 31,	2020	2019	Change	% Change
Operating Days
Canada	100	390	(290)	(74%)
United States	507	756	(249)	(33%)
Revenue per operating day(1)
Canada(2)	46,850	34,910	11,940	34%
United States	32,083	40,483	(8,400)	(21%)
Operating and maintenance per operating day(1)
Canada(2)	39,473	26,553	12,920	49%
United States	24,525	35,631	(11,106)	(31%)
Operating margin per operating day(1)
Canada(2)	7,377	9,434	(2,057)	(22%)
United States	7,558	9,670	(2,112)	(22%)
Utilization
Canada	5%	18%	(13%)	(71%)
United States	32%	48%	(16%)	(33%)

(1)See “Basis of Analysis in this MD&A and Non-GAAP Items”.

(2) Includes AKITA's share of joint venture revenue and expenses. See “Basis of Analysis in this MD&A and Non-GAAP Items”.

During the fourth quarter of 2020, the Company had 100 operating days in Canada compared to 390 operating days during the corresponding period in 2019. In the US, operating days decreased by 33% to 507 in the fourth quarter of 2020 from 756 in the fourth quarter of 2019. The negative impact of COVID-19 on oil prices was the key driver for the 2020 fourth quarter activity decline.

AKITA incurred a net loss of $27,593,000 (net loss of $0.69 per Class A Non-Voting and Class B Common share (basic and diluted) for the fourth quarter of 2020 compared to a net loss of $7,941,000 (net loss of $0.19 (basic and diluted)) in the fourth quarter of 2019. The increased loss

in 2020 is a result of the asset impairment loss recorded in the Company’s US CGU. Decreased activity also contributed to the increased loss. Adjusted funds flow from operations decreased to a loss of $1,262,000 in the fourth quarter of 2020 from $462,000 in the corresponding quarter in 2019 due to lower activity and one-time selling and administrative expenses.

Three Year Annual Financial Summary

The following table highlights AKITA’s annual financial results for the last three years:

Three Year Summary
($ Thousands, except per share) (unaudited)	2020	2019	2018
Revenue	119,664	175,890	118,361
Net loss	(93,274)	(19,875)	(15,939)
Loss per share (basic and diluted)	(2.35)	(0.50)	(0.65)
Dividends per Class A Non-Voting and Class B
Common share(1)	-	0.17	0.34
Adjusted funds flow from operations(2)	10,321	12,925	14,135
Net cash from operating activities	22,860	21,558	(8,494)
Year-end working capital	8,683	4,155	11,166
Year-end shareholders' equity	152,266	245,134	271,728
Year-end total assets	251,521	369,116	403,641

(1)The Company's dividend program was suspended in July of 2019.

(2)See “Basis of Analysis in this MD&A and Non-GAAP Items”.

Liquidity and Capital Resources

At December 31, 2020, AKITA had $8,683,000 in working capital (working capital ratio of 1.56:1) with $7,108,000 of cash, compared to a working capital of $4,155,000 (working capital ratio of 1.14:1) and nil cash for the previous year. In 2020, AKITA generated $22,860,000 in cash from operating activities. Positive cash was generated from joint venture distributions ($1,411,000) and from proceeds on sales of assets ($2,142,000). During the same period, cash was used for capital expenditures ($7,593,000) and repayment of debt ($9,953,000). Accounts payable at year-end included $5,907,000 in accrued expenses, two thirds of which related to routine operations and one third of which related to one-time items.

The Company has a syndicated credit agreement with the Company’s principal banker as the agent on the syndication and three other Canadian banks in the syndication. The operating loan facility totals $110,000,000 with the term ending in 2023. The credit agreement was amended on July 17, 2020, to include a covenant relief period that extended to June 30, 2021. The facility was

further amended two more times to add additional quarters of covenant relief for September 30, 2021 and December 31, 2021. The interest rate during the covenant relief period ranges from 225 to 350 basis points over prime interest rates depending on the Funded Debt[(1)] to Tangible Net Worth[(1)] Ratio. Security for this facility includes all present and after-acquired personal property and a first floating charge over all other present and after-acquired property including real property. The financial covenants are:

The Funded Debt[(1)] to Tangible Net Worth[(1)] Ratio: the Company shall ensure that for the fiscal quarters ended December 31, 2020 to December 31, 2021, the Funded Debt[(1)] to Tangible Net Worth[(1)] Ratio shall not be more than 0.75:1.00.

The Funded Debt[(1)] to Tangible Net Worth[(1)] Ratio shall be calculated quarterly on the last day of each Fiscal Quarter on a rolling four quarter basis; and

The EBITDA[(1)] to Interest Expense[(1)] Ratio: the Company shall ensure that:
(i) For the fiscal quarter ended December 31, 2020, the EBITDA[(1)] to Interest Expense[(1)] Ratio shall not be less than 1.25:1.00;
(ii) For the fiscal quarters ended March 31, 2021, and June 30, 2021, the EBITDA[(1)] to Interest Expense[(1)] Ratio is waived, and
(iii) For the fiscal quarter ended September 30, 2021, the EBITDA[(1)] to Interest Expense[(1)] Ratio shall not be less than 0.75:1.00;
(iv) For the fiscal quarter ended December 31, 2021, the EBITDA[(1)] to Interest Expense[(1)] Ratio shall not be less than 1.25:1.00

The EBITDA[(1)] to Interest Expense[(1)] Ratio shall be calculated quarterly on the last day of each Fiscal Quarter on a rolling four quarter basis; and

A minimum trailing twelve month EBITDA[(1)] test will be required quarterly during the Covenant Relief Period, with EBITDA[(1)] varying each period in line with agreed upon forecasts.

Upon the end of the Covenant Relief Period the Company’s covenants revert back to:

(i) Funded Debt[(1)] to EBITDA[(1)] Ratio of not more than 3.00:1.00

(1) Readers should be aware that EBITDA, Funded Debt, Interest Expense, Tangible Net Worth, Eligible Accounts Receivable, Priority Payables and Eligible Rig Assets have specifically set out definitions in the loan facility agreement and are not necessarily defined by or consistent with either GAAP or determinations by other users for other purposes.

(ii) EBITDA[(1)] to Interest Expense[(1)] Ratio of not less than 3.00:1.00

At December 31, 2020, the Company was in compliance with its covenants with a Funded Debt[(1)] to Tangible Net Worth[(1)] Ratio of 0.38:1.00, an EBITDA[(1)] to Interest Expense[(1)] Ratio of 3.94:1.00 and a trailing twelve month EBITDA[(1)] in excess of the $17,612,000 minimum threshold.

The facility also includes a borrowing base calculation which is the sum of:

(i) 75% of Eligible Accounts Receivable[(1)] ; plus
(ii) 50% of the orderly liquidation value of all Eligible Rig Assets[(1)] ; less
(iii) Priority Payables[(1)] of the Loan Parties.

At December 31, 2020, the Company’s borrowing base totalled $116,796,000.

The Company borrowed $75,000,000 from this facility as at December 31, 2020 (December 31, 2019 - $77,535,000).

The Company's objectives when managing capital are:

to safeguard the Company's ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders; and
to augment existing resources in order to meet further growth opportunities.

The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, repurchase shares, issue new shares, sell assets or take on long-term debt.

Property, Plant and Equipment

Capital expenditures totaled $7,593,000 in 2020 ($15,238,000 in 2019). Capital spending in 2020 was as follows: $2,920,000 (2019 - $7,545,000) for certifications and overhauls, $1,592,000 (2019 - $2,837,000) in drill pipe and drill collars and $3,081,000 (2019 - $4,856,000) for drilling rig equipment and upgrades.

(1) Readers should be aware that EBITDA, Funded Debt, Interest Expense, Tangible Net Worth, Eligible Accounts Receivable, Priority Payables and Eligible Rig Assets have specifically set out definitions in the loan facility agreement and are not necessarily defined by or consistent with either GAAP or determinations by other users for other purposes.

During 2020, the Company sold ancillary assets for $2,142,000 (2019 - $1,823,000) that resulted in a loss of $156,000 (2019 – $476,000).

Financial Instruments

The Company’s financial assets and liabilities include cash, accounts receivable, accounts payable, accrued liabilities and financial instruments. Fair values approximate carrying values unless otherwise stated.

The Company is exposed to risks caused by fluctuations in currency exchange rates. US contracts are denominated in United States dollars and, accordingly, a material decrease in the value of the US dollar could negatively impact revenues. The Company does not currently use hedges to offset this risk.

Despite the effect of weak commodity prices for crude oil and natural gas on AKITA’s customers, management continues to consider the credit risk associated with accounts receivable to be generally low. AKITA has conservative credit-granting procedures and in certain situations requires customers to make advance payment prior to provision of services or takes other measures to mitigate credit risk. Provisions have been estimated by management and are included in the accounts to recognize potential credit losses.

Off Balance Sheet Transactions

AKITA has not entered into any arrangements that involve off balance sheet transactions.

Related Party Transactions

AKITA is affiliated with the ATCO Group of companies and with Spruce Meadows, an equestrian show jumping facility, through its majority shareholder. All related party transactions in 2020 and 2019 were made in the normal course of business with regular payment terms and have been recorded at the paid amounts. Operating purchases totaled $851,000, and included sponsorship and advertising of $175,000, wellsite trailers of $57,000, operational costs of $570,000 and other miscellaneous purchases of $49,000. At December 31, 2020, the outstanding commitment of the Company’s multi-year sponsorship and advertising contract with Spruce Meadows was $350,000. Costs incurred related to this contract during 2020 were $175,000 (2019 - $325,000). Costs and related services are consistent with parties dealing at arm’s length.

The Company is related to its joint ventures. The following table summarizes transactions and annual balances with its joint ventures. These transactions were made in the normal course of business with regular payment terms and have been recorded at the paid amounts.

$Thousands	2020	2019
Operating and maintenance expenses	837	773
Selling and administrative expenses	115	103
Year-end due to AKITA from partners	991	1,031
Year-end due to AKITA fromjoint ventures	123	885

Commitments and Contingencies

From time to time, the Company enters into drilling contracts with its customers that are for extended periods. At December 31, 2020, the Company had four drilling rigs with multi-year contracts. These multi-year contracts are due to expire in 2021.

The Company has entered into a two year contract with a related party to provide sponsorship and advertising at an annual cost of $175,000.

At December 31, 2020, the Company had capital expenditure commitments of $422,000 (2019 – $1,406,000).

Class A and Class B Share Dividends

Per share	2020 2019 Change % Change
Dividends per share ($)	- 0.17 (0.17) (100%)

During 2019, AKITA declared dividends totaling $6,374,000 ($0.17 per share) on its Class A NonVoting shares and Class B Common shares. The Company’s dividend program was suspended in July of 2019 to improve the Company’s financial flexibility in response to the weakened industry environment.

Class A Non-Voting and Class B Common Shares

Authorized

An unlimited number of Class A Non-Voting shares An unlimited number of Class B Common shares

Issued

Issued
	Class A Non-Voting		Class B	Common	Total
$Thousands,	Number of		Number of		Number of
except share amounts	Shares	Consideration	Shares	Consideration	Shares	Consideration
December 31, 2019	37,954,407	144,898	1,653,784	1,366	39,608,191	146,264
Shares issued in 2020	-	-	-	-	-	-
Decem ber 31, 2020	37,954,407	144,898	1,653,784	1,366	39,608,191	146,264

At March 11, 2021, the Company had 37,954,407 Class A Non-Voting shares and 1,653,784 Class B Common shares outstanding. At that date, there were also 842,500 stock options outstanding, of which 249,000 were exercisable.

Accounting Estimates

The preparation of AKITA’s consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as at the date of the consolidated financial statements as well as reported amounts for revenue and expenses for the year. Estimates and judgments are continually evaluated and are based upon historical experience and other factors including expectations of future events that are believed to be reasonable in the circumstances. Actual outcomes could differ materially from these estimates.

The Company makes assumptions relating to transactions that were incomplete at the Statement of Financial Position date. Depending on the actual transaction, total assets and liabilities of the Company as well as results of operations, including net income, could be either understated or overstated as a result of differences between amounts accrued for incomplete transactions and the subsequent actual balances.

The preparation of AKITA’s consolidated financial statements requires management to make significant estimates relating to the useful lives of drilling rigs. Depreciation methods and rates

have been selected so as to amortize the net cost of each asset over its expected useful life to its estimated residual value. The estimated useful lives, residual values and depreciation methods are reviewed at the end of each annual reporting period.

AKITA’s depreciation estimates do not have any effect on the changes to the financial condition for the Company, as depreciation is a non-cash item. However, total assets and results of operations, including net income, could be either understated or overstated as a result of excessively high or low depreciation estimates.

At each reporting date, the Company assesses whether there are indicators of asset impairment. If such indicators exist, the Company performs an asset impairment test and, if required, the Company recognizes an asset impairment loss calculated as the lesser of the difference between the amortized cost of the asset and the present value of the estimated future cash flows or the recoverable amount. The carrying amount of the asset is reduced by the impairment loss.

AKITA’s asset impairment estimates do not have any effect on the changes to financial condition for the Company, as any asset write down would be a non-cash item. However, total assets and results of operations, including net income, could be overstated as a result of projections of discounted future cash flows that are too high.

A significant estimate used in the preparation of AKITA’s consolidated financial statements relates to the long-term defined benefit pension liability for certain employees and retired employees that was recorded as $5,710,000 at December 31, 2020 (2019 - $5,208,000). Changes in AKITA’s pension liability estimates do not have any effect on the changes to the financial condition of the Company, since the defined benefit pension is a non-cash item. However, total liabilities and results of operations, including net income, could be either understated or overstated as a result of pension estimates that are either too high or too low. AKITA utilizes the services of a third party to assist in the actuarial estimate of the Company’s pension expense and liability. For 2020, a key assumption is the 2.3% discount rate (2019 – 3.0%).

The Company makes assumptions relating to deferred income taxes, including future tax rates, timing of reversals of timing differences and the anticipated tax rules that will be in place when timing differences reverse. Consequently, total liabilities of the Company as well as results of operations, including net income, could be either understated or overstated.

Business Risks and Risk Management

The following information is a summary only of certain risk factors relating to the business of AKITA and is qualified in its entirety by reference to and must be read in conjunction with, the detailed information appearing elsewhere in this document. Shareholders and potential shareholders should consider carefully the information contained herein and, in particular, the following risk factors:

Crude Oil and Natural Gas Prices

Fluctuations and uncertainty surrounding the future price of commodities could lead to changes in demand for oil and natural gas, and may impact the economics of planned drilling projects and ongoing production projects, resulting in the curtailment, reduction, delay or postponement of such projects for an indefinite period of time. The price AKITA’s customers receive for their production has a direct impact on the cash flow available to them and the subsequent demand for drilling services provided by AKITA. An extended period of lower oil and natural gas prices could result in a decline in demand and dayrates. High volatility in crude oil and natural gas prices may also impact AKITA’s customers’ capital programs, causing delays in spending and lower overall demand for drilling services.

Pandemic Risk

On March 11, 2020, the World Health Organization declared a global pandemic in relation to the spread of COVID-19. As the virus spread across the world, many businesses closed and isolation and social distancing practices were implemented to reduce the spread. The virus and its impact on transacting business resulted in a decline in the world economy. Among other effects, demand for oil decreased materially over the balance of 2020, which resulted in an acute reduction in demand for the Company’s drilling services. In addition to the reduced demand for drilling services, the pandemic presented operational challenges for the Company’s staff and rig crews. An outbreak of COVID-19 at a rig site could lead to suspended or cancelled operations. 2020’s financial results were negatively impacted by ongoing COVID-19 related disruptions. The Company expects further COVID-19 related disruptions to persist, however, the Company cannot currently estimate the severity of such impact, which may be material.

Debt Service

AKITA has a syndicated credit facility. Variations in interest rates and principal repayments, under the terms of the facility, could result in significant changes in the amount required to be applied to debt service before payment of any amounts by AKITA. Although management’s view is that AKITA’s current facility is sufficient, there is no assurance that it will be adequate for the future financial obligations of AKITA or that additional funds can be obtained if required.

AKITA’s credit facility is a revolving facility which matures on September 11, 2023 and is subject to annual extensions of an additional year on each anniversary date of the closing date, contingent upon the consent of the lenders holding two-thirds of the aggregate commitments under the facility. To the extent the facility is not extended, the drawn down principal would be due on the maturity date. Interest payments are required quarterly and are based on the Canadian prime rate for Canadian prime rate loans and the US prime rate for US rate loans.

Leverage and Restrictive Covenants

AKITA has third party debt service obligations under its credit facility. The degree to which AKITA is leveraged could have important consequences to shareholders, including:

a portion of the consolidated cash flow from operations could be dedicated to the payment of the principal and interest on indebtedness, thereby reducing cash available for other initiatives; and
certain borrowings are at variable rates of interest, which exposes AKITA to the risk of increased interest rates.

AKITA's ability to make scheduled payments of principal and interest on, or to refinance, its indebtedness will depend on its future operating performance and cash flow, which are subject to prevailing economic conditions, prevailing interest rate levels and financial, competitive, business and other factors, many of which are beyond its control.

AKITA’s credit facilities contain certain customary operating covenants that limit the discretion of management to incur additional indebtedness, to create liens or other encumbrances, to pay dividends or make certain other payments, investments, loans and guarantees and to sell or otherwise dispose of assets and merge or consolidate with another entity. In addition, AKITA is required to satisfy and maintain two financial ratio tests, Debt to EBITDA and EBITDA to Interest Expense. A failure to comply with the obligations in the agreements in respect of the credit facilities could result in an event of default which, if not cured or waived, could permit acceleration of the

repayment of the relevant indebtedness. If the repayment of the indebtedness under the credit facilities were to be accelerated, there can be no assurance that AKITA's assets would be sufficient to repay the debt. Currently AKITA is in a covenant relief period whereby the financial covenants are relaxed or waived until December 31, 2021.

Competition

The contract drilling industry is highly competitive and includes a large number of drilling contractors with varied rig fleets. Drilling contracts are usually awarded through a competitive bid process with pricing and rig suitability and availability being primary drivers in the bid process. Other factors that influence the bid process include: mobility and efficiency of the rig; experience and quality of service provided by rig crews; safety record of the rig as well as the contractor as a whole; and the adaptability of equipment to utilize new technologies. Rigs can be moved from one region to another depending on the competitive environment within that region and therefore a contractor’s competitive advantage in a region can be quickly eroded by other contractors moving in equipment from other regions. Reduced levels of activity in the oil and gas industry can also increase competition and therefore lower day rates.

Operating Hazards

AKITA’s operations are subject to numerous hazards inherent to the drilling industry, including but not limited to: fires or explosions, hydrocarbon influx or kicks, loss of well control, well blow-outs, cratering, collapse of the well, damage to, or loss of, drilling equipment and equipment lost down the hole. AKITA’s insurance policies and contractual indemnity rights may not adequately cover all losses, and therefore, the Company may not have adequate insurance coverage or rights to indemnity for all risks. Pollution and environmental risks may not be fully insurable. AKITA generally attempts to obtain contractual protection against uninsured operating risks from its customers. However, customers who provide contractual indemnification protection may not in all cases maintain adequate insurance or otherwise have the financial resources necessary to support their indemnification obligations. AKITA’s insurance or indemnification arrangements may not adequately protect it against liability or loss from all operating hazards. Further, certain states in the US where AKITA operates have anti-indemnity legislation that could preclude operator indemnification in certain circumstances. The occurrence of a significant event that has not been fully insured or indemnified against, the failure of a customer to meet its indemnification obligations to the Company, or the applicability of anti-indemnification legislation could materially and adversely affect the results of operations and financial condition.

Dependence on Major Customers

AKITA earned 61% of its total revenue in 2020 from two major customers. These were the only customers who individually provided over 10% of the Company’s revenue for the year. The loss of one or more major customers or a significant reduction in the business done with any customer without offsetting new revenue could have a material adverse effect on AKITA’s business, results of operations and prospects.

Seasonal Nature of Industry

In Canada, the level of activity in the contract drilling industry, particularly for conventional rigs, is influenced by seasonal weather patterns. Spring breakup, which typically occurs between midMarch and mid-June, makes the ground unstable leaving many secondary roads temporarily incapable of supporting the weight of heavy equipment, thereby reducing drilling activity levels. In addition, during excessively rainy periods, equipment moves may be delayed, thereby adversely affecting revenue.

Typically, there is greater demand for contract drilling services in the winter as freezing permits the movement and operation of heavy equipment. Drilling activities tend to increase in the fall as the ground begins to freeze and peak in the winter months of November through February as areas having muskeg conditions also become accessible to drilling operations. Variability in the weather can therefore create unpredictability in activity and utilization rates. Unusually warm weather may limit access to drilling sites and could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.

Generally speaking, AKITA’s US operations are less affected by seasonality than AKITA’s Canadian operations. Areas in the US where AKITA operates are infrequently subject to weather constraints like hurricanes in the southern states, but the Company may experience operational constraints such as floods, blizzards and other extreme winter conditions in the Rocky Mountain region in addition to operational restrictions for a variety of other reasons. These restrictions could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.

Volatility of Industry Conditions

The demand, pricing and terms for contract drilling services are dependent upon the level of industry activity for Canadian and US crude oil and natural gas exploration and development. Industry conditions are influenced by numerous factors which AKITA does not control including (without limitation): current crude oil and natural gas prices, expectations about future crude oil

and natural gas prices, the cost of exploring for, producing and delivering crude oil and natural gas, the expected rates of decline in current production for AKITA’s customers, discovery rates of new oil and gas reserves by AKITA’s customers, available pipeline and other oil and gas transportation capacity, weather conditions, political, regulatory and economic conditions, influences from special interest groups, the use of energy generated from sources that are not crude oil or natural gas based, the ability of oil and gas companies to raise equity capital or debt financing and technological advances in the exploration and production of crude oil and natural gas.

The level of activity in both the Canadian and US oil and gas exploration and production industry is volatile. No assurance can be given that the expected trends in oil and gas exploration and production activities will continue or that demand for contract drilling services will reflect the level of activity in the industry. Current global economic events and uncertainty have significantly affected, and may continue to significantly affect, commodity pricing. Any prolonged substantial reduction in crude oil and natural gas prices would likely continue to affect oil and gas production levels and therefore adversely affect the demand for drilling services to oil and gas customers. Any elimination or curtailment of government incentives or adverse changes in government regulation could have a significant impact on the contract drilling industry in Canada or in the US. These factors could lead to a further decline in demand for AKITA’s services which could result in a material adverse effect on AKITA’s business, financial condition, results of operations and cash flows.

Labour

The contract drilling industry is dependent upon attracting, developing and maintaining a skilled and safe workforce. During periods of peak activity levels, AKITA is susceptible to increased labour costs as a result of a competitive labour market or may be faced with a lack of experienced personnel to operate AKITA’s equipment. AKITA is also faced with the challenge of retaining employees during periods of low utilization. The Company’s financial results depend, at least in part, upon its ability to attract, develop and maintain a skilled work force, while maintaining a cost structure that varies with activity levels.

A number of AKITA’s key customers evaluate the ability of contract drilling companies to provide and maintain a high standard of safe operations prior to their selecting a drilling contractor for the provision of drilling services. AKITA’s financial success is related to its ability to continue to meet those expectations.

Capital Overbuild in Contract Drilling Industry

Drilling rigs have a long life span. Further, there is a significant lag between when the decision to build a rig is made and when the construction is complete. These two factors contribute to the supply of rigs in the industry not always aligning with the demand for drilling rigs. High demand typically spurs greater capital expenditures by drilling contractors which may, in turn, lead to excessive supply in future periods. A potential capital overbuild could lead to a general reduction in rates in the industry as a whole, which could have a material adverse effect on AKITA’s business, financial condition, results of operations and cash flows. The cyclical nature of AKITA’s business makes the impact of this risk significant.

Access to Additional Financing

AKITA may find it necessary in the future to obtain additional debt or equity financing to support ongoing operations, undertake capital expenditures or undertake acquisitions or other business combination activities. There can be no guarantee that AKITA will have access to the required capital as its ability to do so is dependent on, among other factors, the overall state of capital markets, interest rates, the oil and gas industry as well as the appetite for investment in the oilfield drilling industry. As an oilfield service company, AKITA’s ability to obtain additional debt or equity financing could be constrained by pressure from investors and environmental groups to divest from fossil fuel related investments. An inability to obtain necessary financing, on terms that are acceptable to AKITA, could limit AKITA’s growth and could have a material adverse effect on AKITA’s business, financial condition and cash flows in the future. Access to financing also impacts AKITA’s customers, potentially limiting capital budgets and therefore the demand for AKITA’s services.

Foreign Exchange and Foreign Operations Risk

AKITA’s expansion into the United States increases the Company’s exposure to risks inherent in foreign operations. The Company is exposed to risks caused by fluctuations in currency exchange rates. US contracts are denominated in United States dollars and, accordingly, a material decrease in the value of the United States dollar could negatively impact revenues.

In addition to foreign exchange, risks include, but are not limited to: different taxation regimes, potential litigation and potential political protectionist measures. While AKITA has increased its insurance coverage to offset the increased chance of litigation and has engaged third party experts to assist in taxation matters, there can be no assurance that the Company will be fully effective in mitigating foreign operation risks. Such risks could have material adverse effects on AKITA’s business, financial condition, results of operations and cash flows.

Regulation of Industry

AKITA’s operations are subject to a variety of federal, provincial, state and local laws, regulations and guidelines relating to health and safety, the conduct of operations, the operation of equipment used in drilling operations and the transportation of materials and equipment provided to customers. Compliance with, or breaches of, such laws, or costs or implications of changes to such laws, regulations and guidelines could have a material effect on AKITA’s business, financial condition, results of operations and cash flows.

Carbon Emissions, Climate Change Activism and Environmental Regulations

While AKITA’s operations, and those of its customers, are subject to numerous laws, regulations and guidelines governing the management, transportation and disposal of hazardous substances and other waste materials and otherwise relating to the protection of the environment, the trend in environmental regulation has been to impose more restrictions and limitations on activities that may impact the environment, particularly regarding the generation of carbon emissions. AKITA operates in jurisdictions that have regulated, or proposed to regulate, industrial carbon emissions. Laws and regulations implemented to reduce carbon emissions have potential to impose significant compliance costs on the oil and gas, potash and mining companies that the Company provides drilling services for. Consequently, future oil and gas, potash and mining development could face increased operating costs relating to increased carbon regulation which could result in a reduced demand for the drilling services that AKITA provides.

In recent years, public support for climate change action and pressure by climate activists to shift from fossil fuels to alternative and renewable energy technology has grown. Climate change activism impact could reduce demand for hydrocarbons in favour of lower carbon intense fuels. Further, within Canada, increased climate change activism has translated to opposition to new pipeline approvals, to ongoing oil sands development and to the practice of hydraulic fracturing. In the US, the Biden Administration has recently implemented restrictions of drilling permits on federal lands and has stopped the construction of the Keystone pipeline.

Laws, regulations and guidelines relating to carbon emissions, spills, releases, and discharges of hazardous substances or other waste materials into the environment, requiring removal or remediation of pollutants or contaminants are increasingly becoming more stringent and can impose civil and criminal penalties for violations. Some of the laws, regulations and guidelines that apply to AKITA’s operations also authorize the recovery of natural resource damages by

governmental authorities, injunctive relief and the imposition of stop, control, remediation and abandonment orders. The costs arising from compliance with such laws, regulations and guidelines may be material to AKITA.

While AKITA maintains liability insurance, including insurance for environmental claims, there can be no assurance that insurance will continue to be available to AKITA on commercially reasonable terms, that the possible types of liabilities that may be incurred by AKITA will be covered by AKITA’s insurance, or that the dollar amount of such liabilities will not exceed AKITA’s policy limits. Even a partially uninsured claim, if successful and of sufficient magnitude, could have a material adverse effect on AKITA’s business, results of operations and prospects.

Key Management

The success and growth of AKITA are dependent upon its key management personnel. The loss of services of any of such persons without suitable replacements could have a material adverse effect on the business and operations of AKITA. While this risk is mitigated by ongoing succession planning, no assurance can be provided that AKITA will be able to retain key management members.

Dilution

AKITA’s articles permit the issuance of an unlimited number of Class A Non-Voting and Class B Common shares, and the Company may make future acquisitions or enter into financings or other transactions involving the issuance of securities of AKITA which may be dilutive.

Energy Alternatives

AKITA’s management cannot predict the impact of changing demand for crude oil and natural gas products. Fuel conservation measures, alternative fuel requirements, opposition to fossil fuel energy, increasing consumer demand for alternatives to crude oil and gas and technological advances in fuel economy and energy generation devices could reduce the demand for crude oil, natural gas and other liquid hydrocarbons. Any major change in demand for crude oil, natural gas or other liquid hydrocarbons could result in a reduction in the demand for drilling services and could have a material adverse effect on AKITA’s business, financial condition, results of operations and cash flow.

Risk Management

AKITA manages its risks by:

maintaining a conservative balance sheet that includes a low cost structure for the Company;
having its risk management committee deliberate periodically to assess, evaluate and develop a plan to deal with the risk conditions for the Company;
developing an annual strategic business plan and budget to help determine the levels of capital and operating expenditures;
continuously developing long-term relationships with a core base of customers who maintain ongoing drilling programs during all phases of the economic cycle;
obtaining multi-year drilling contracts whenever possible, but especially when tailoring rig construction or reconfiguration to customer demand;
maintaining an efficient fleet of drilling rigs through a rigorous ongoing maintenance program;
continually upgrading its rig fleet;
employing well-trained, experienced and responsible employees;
ensuring that all employees comply with clearly defined safety standards;
reducing health, safety and operational risk by maintaining its API Q2 certification in Canada;
improving the skills of its employees through training programs;
maintaining effective systems of internal control to safeguard assets and ensure timely and accurate reporting of financial results;
maintaining comprehensive insurance policies with respect to its operations;
reducing environmental risk through the implementation of industry-leading standards, policies and procedures;
developing and maintaining a succession plan to provide for a smooth transition in the event of key personnel turnover; and
diversifying into the US market where demand for drilling services is correlated to West Texas Intermediate pricing rather than Western Canadian Select pricing as in Canada and which allows AKITA to generate revenue denominated in US currency.

Furthermore, in response to the COVID-19 pandemic, the Company actively assessed and responded to the effects of the COVID-19 pandemic on employees, customers, suppliers and service providers, and evaluated governmental actions being taken to curtail its spread. The

Company successfully implemented a mandatory work-from-home program for a portion of the year for those employees who could perform their day-to-day activities working remotely. At our operation facilities and for active rig personnel, in accordance with applicable laws, the Company implemented measures to safeguard employees unable to work remotely through enhanced administrative controls, employee monitoring strategies, more rigorous cleaning practices, as well as physical distancing and through provision of personal protective equipment. The Company also implemented measures to reduce corporate overhead through wage and employee reductions together with qualification for COVID-19 related government assistance programs.

Future Outlook and Strategy

The drilling industry is cyclical and certain key factors that have an impact on AKITA’s results are beyond management’s control. Like other drilling contractors, AKITA is exposed to the effects of fluctuating oil and gas prices and changes in the exploration and development budgets of its customers. The outlook for the drilling industry continues to be uncertain. The impact of COVID19 on demand for oil should begin to decrease as COVID-19 vaccinations ramp up globally and mobility restrictions are eased. This should have a corresponding effect on the demand for drilling services and the first signs of this can already be seen in Canada and the US as demand has begun to improve from the lows seen in September of 2020.

The drilling industry in Canada, has begun to see some signs of improvement from the lows seen in 2020 which is positive, however, insufficient pipeline capacity, arguably the main challenge to the drilling industry in Canada, remains unresolved. This may limit the speed and size of any recovery that the Canadian industry may see. One area that is showing a significant improvement over 2020 is SAGD drilling in the oil sands. With multiple Aboriginal joint ventures in the area, and several of its newest rigs tailored for SAGD drilling, the oil sands market has always been a key focus of the Company. Low oil sands activity over the last two years, however, has resulted in reduced utilization for AKITA’s Canadian fleet. Improved activity in the oil sands market should improve results in the Canadian segment. Despite the strengthening in the oil sands market there is still an oversupply of drilling rigs for the Canadian drilling industry as a whole which affects both utilization and pricing for drilling services. Accordingly, the Company’s focus for its Canadian division in the near term will be financial discipline.

Similar to Canada, the US has begun to recover from the lows seen in September of 2020 but the active rig count still remains below 400 rigs, less than half the number of rigs that were active at

the start of 2020. Demand for high specification rigs remains steady and is anticipated to grow as activity levels rebound. Pricing for drilling services is still low, however, and it will take more rigs going back to work before contractors are able to influence prices. The impact that the new US administration will have on the oil and gas industry and the demand for drilling services is still unknown. The Company is optimistic that 2021 will build on from the gains made in the first quarter of 2020 (before the gains dropped off in the second quarter of the year), and remain strong throughout the balance of the year. Until there is more certainty in the size and stability of a recovery, cost control remains a priority in the US.

The focus in 2021 will be debt reduction to improve the Company’s financial strength. Only a modest capital program is planned for Canada and the US with the majority of free cash flow going to debt repayment. Management feels that debt repayment is the best use of cash in the current market and the strategy should allow AKITA the ability to pursue growth opportunities once the Company’s debt is reduced.

Disclosure Controls and Internal Controls Over Financial Reporting

As of December 31, 2020, the Company’s management evaluated the effectiveness of the Company’s disclosure controls and procedures as required by the Canadian Securities Administrators (“CSA”). This evaluation was performed under the supervision of, and with the participation of the President and Chief Executive Officer (“CEO”) and the Vice President, Finance and Chief Financial Officer (“CFO”).

Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in documents filed with the securities regulatory authorities is recorded, processed, summarized and reported on a timely basis. The controls also seek to assure that this information is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions on required disclosure. Based on this evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective at December 31, 2020.

As of December 31, 2020, management evaluated the effectiveness of the Company’s internal control over financial reporting as required by the CSA. This evaluation was performed utilizing the framework developed by the Committee of Sponsoring Organizations of the Treadway

Commission, as revised effective May 14, 2013 under the supervision of, and with the participation of the CEO and CFO.

The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS.

Based on this evaluation, the CEO and CFO have concluded that the Company’s internal control over financial reporting was effective at December 31, 2020.

There was no change in the Company’s internal control over financial reporting that occurred during the period that began on October 1, 2020 and ended December 31, 2020 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. There was also no change in the Company’s internal control over financial reporting that has occurred since December 31, 2020.

Basis of Analysis in this MD&A and Non-GAAP Items

Revenue and Operating and Maintenance Expenses and Adjusted Revenue and Adjusted Operating and Maintenance Expenses in Canada

Revenue and operating and maintenance expenses in AKITA’s Canadian operating segment includes revenue and expenses from AKITA’s wholly-owned drilling rigs as well as its share of joint venture revenue and expenses. Adjusted revenue and adjusted operating and maintenance expenses includes total revenue and expenses from Canada including AKITA’s share of joint ventures, as well as US revenue and expenses.

$Thousands	2020	2019
Revenue from wholly-owned drilling rigs in Canada Revenue from joint venture drilling rigs	28,466 5,094	48,376 5,289
Revenue in Canada	33,560	53,665

Operating and maintenance expenses from wholly- owned drilling rigs in Canada Operating and maintenance expenses from joint venture drilling rigs	20,954 4,352	36,248 4,169
Operating and maintenance expenses in Canada	25,306	40,417

Per Operating Day

AKITA’s revenue per operating day and AKITA’s operating and maintenance expenses per operating day are not recognized GAAP measures under IFRS. Management and certain investors, however, may find “per operating day” measures for AKITA’s revenue indicative of pricing strength, while AKITA’s operating and maintenance expenses per operating day demonstrates a degree of cost control and provides a proxy for specific inflation rates incurred by the Company. Readers should be cautioned that in addition to the foregoing, other factors, including the mix of drilling rigs that are utilized, can also influence these results.

Adjusted EBITDA

Adjusted earnings before interest, tax, depreciation and amortization (“Adjusted EBITDA”) is not a recognized GAAP measure under IFRS and users of this MD&A should note that Adjusted EBITDA calculations may differ between AKITA and other companies. Adjusted EBITDA is used by management and investors to analyze the Company’s profitability based on the Company’s principal business activities prior to how these activities are financed, how assets are depreciated and amortized and how the results are taxed in various jurisdictions. AKITA calculates Adjusted EBITDA as follows:

$Thousands	2020	2019
Net loss attributable to shareholders	(93,274)	(19,875)
Interest expense	5,637	6,771
Income tax recovery	(9,427)	(4,804)
Depreciation and amortization	32,681	36,763
Asset impairment loss	80,000	275
Adjusted EBITDA	15,617	19,130

Adjusted Funds Flow from Operations

Adjusted funds flow from operations is not a recognized GAAP measure under IFRS and users of this MD&A should note that AKITA’s method of determining adjusted funds flow from operations may differ from methods used by other companies, and includes cash flow from operating activities before working capital changes, equity income from joint ventures, and income tax amounts paid or recovered during the period. Nonetheless, management and certain investors may find adjusted funds flow from operations to be a useful measurement to evaluate the Company’s operating results at year-end and within each year, since the seasonal nature of the business affects the comparability of non-cash working capital changes both between and within periods.

$Thousands	2020	2019
Net cash from operating activities	22,859	21,558
Income tax recoverable	(276)	(305)
Current income tax expense (recovery)	117	(67)
Interest paid	5,479	6,598
Interest expense	(5,637)	(6,771)
Post-employment benefits paid	104	90
Equity income from joint ventures	650	1,129
Change in non-cash workingcapital	(12,975)	(9,307)
Adjusted funds flow from operations	10,321	12,925

Forward-Looking Statements

From time to time AKITA makes forward-looking statements. These statements include but are not limited to comments with respect to AKITA’s objectives and strategies, financial condition, results of operations, the outlook for industry and risk management discussions.

By their nature, these forward-looking statements involve numerous assumptions, inherent risks and uncertainties, both general and specific, and therefore carry the risk that the predictions and other forward-looking statements will not be realized. Readers of this MD&A are cautioned not to place undue reliance on these statements as a number of important factors could cause actual future results to differ materially from the plans, objectives, estimates and intentions expressed in such forward-looking statements.

Forward-looking statements may be influenced by factors such as prevailing economic conditions (including as may be affected by the COVID-19 pandemic); the level of exploration and development activity carried on by AKITA’s customers, world crude oil prices and North American

natural gas prices; global liquefied natural gas (LNG) demand, weather, access to capital markets; and government policies. We caution that the foregoing list of factors is not exhaustive and that while relying on forward-looking statements to make decisions with respect to AKITA, investors and others should carefully consider the foregoing factors, as well as other uncertainties and events, prior to making a decision to invest in AKITA. Except where required by law, the Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by it or on its behalf.

Upcoming Accounting Standard Changes

Certain new or amended standards or interpretations have been issued by the International Accounting Standards Board or the International Financial Reporting Interpretations Committee that are not required to be adopted in the current period. There are no standards and interpretations that have been issued, but are not yet effective, that the Company anticipates will have a material effect on the financial statements once adopted.

Other Information

Additional information is provided by the Company in its Annual Information Form, Notice of Annual Meeting and Information Circular all dated March 11, 2021. Copies of these documents including additional copies of the Annual Report for the year ended December 31, 2020 may be obtained upon request from the Vice President, Finance and Chief Financial Officer of the Company at 1000, 333 – 7th Avenue S.W., Calgary, Alberta, T2P 2Z1 or at www.sedar.com.