Akita Drilling Ltd. — Management Reports 2023

May 4, 2023

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Management’s Discussion and Analysis

Management’s discussion and analysis (“MD&A”) for AKITA Drilling Ltd. and its subsidiaries (collectively referred to as “AKITA” or the “Company”) should be read in conjunction with the unaudited interim condensed consolidated financial statements (“interim financial statements”) for the three months ended March 31, 2023, and the audited consolidated financial statements and MD&A for the year ended December 31, 2022.

References made to 2022 in this MD&A relate to the period from January 1 to March 31 unless otherwise stated. The information in this MD&A was approved on May 2, 2023 by AKITA’s Audit Committee on behalf of the Board of Directors, and incorporates all relevant considerations to that date.

Management has prepared this MD&A as well as the accompanying interim financial statements and notes thereof. All financial information is presented in Canadian Dollars (“CAD”).

Introduction

AKITA is a premier Canadian oil and gas drilling contractor with a fleet of 35 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 whollyowned rigs and rigs that are partially owned by AKITA and First Nations, Metis or Inuit joint venture partners including Akita Mistiyapew Aski Drilling Ltd., a joint venture between AKITA and Saulteau First Nations, Akita Equtak Drilling Ltd. a joint venture between AKITA and the Inuvialuit Development Corporation, and Akita Wood Buffalo Drilling Ltd., a joint venture between AKITA and Chipewyan Prairie First Nation, Fort McMurray 468 First Nation, Fort McKay Metis Nation, Fort Chipewyan Metis Local 125, and Conklin Metis Local 193. Each joint venture has defined geographical boundaries and an equity interest in select AKITA rigs; together AKITA’s First Nation, Metis and Inuit joint venture partners hold equity interest in six of AKITA’s Canadian drilling rigs. AKITA’s US division conducts operations with a fleet of 15 rigs, currently operating in Texas and New Mexico.

With a focus on the efficient provision of drilling services, rigorous crew training, rig maintenance, safety processes and its First Nation, Metis and Inuvialuit joint venture relationships, AKITA strives to ensure it

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is well positioned to meet the demanding requirements of global operators while remaining flexible enough to tailor its services to custom operator requests. AKITA has consolidated its US Division operations to the Permian Basin while its Canadian Division primarily operates in the oil sands and heavy oil with a view to expanding its presence in the Montney deep gas basin while continuing to play a central role in drilling energy transition targets, including carbon capture wells, hydrogen storage wells and geothermal wells.

Financial Highlights

Financial Highlights
	For the	Three Months	Ended March 31,
($ thousands exceptper share amounts)	2023	2022	Change % Change
Revenue	65,000	44,986	20,014	44%
Operatingand maintenance expenses	45,426	36,254	9,172	25%
Operating margin	19,574	8,732	10,842	124%
Margin %	30%	19%	11%	58%
Net cash from (used in) operating activities	(414)	247	(661)	(268%)
Adjusted funds flow from operations(1)	15,159	4,996	10,163	203%
Per share	0.38	0.13	0.25	192%
Net income (loss)	9,523	(2,933)	12,456	425%
Per share	0.24	(0.07)	0.31	443%
Capital expenditures	2,504	6,412	(3,908)	(61%)
Weighted average shares outstanding	39,650	39,608	42	0%
Total assets	270,169	261,348	8,821	3%
Total debt	91,212	94,521	(3,309)	(4%)

(1) See “ Non- GAAP and Supplementary Financial Measures" near the end of this MD&A for further detail.

General Overview

The Company’s net income improved to $9,523,000 in the first quarter of 2023 from a loss of $2,933,000 in the first quarter of 2022. Improvements in day rates in Canada and the US were the driver behind the significant improvement in net income. Adjusted funds flow from operations increased 203% to $15,159,000 in the first quarter of 2023 from $4,996,000 in the first quarter of 2022, also driven by improved activity and rates. Net cash from operations decreased to a loss of $414,000 for the three months ended March 31, 2023, compared to a gain of $247,000 in the same period of 2022, due to the continued build of the Company’s working capital balances which typically peak at the end of the first quarter. Debt decreased to $91,212,000 at the end of the first quarter of 2023 from $94,521,000 of debt at the same time in 2022.

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Industry Overview

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WTI Prices ($USD/bbl) [(1)] Alberta Natural Gas Price($CAD/GJ) [(2)]
130.00 8.0
7.0
110.00
6.0
90.00 5.0
70.00 4.0
3.0
50.00
2.0
30.00 1.0
10.00 -
2021 2022 2023 2021 2022 2023
Industry Utilization Canada [(3)] US Active Rig Count [(4)]
60% 800
50% 700
40%
600
30%
500
20%
10% 400
0% 300
2021 2022 2023 2021 2022 2023
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• (1) Source: U.S. Energy Information Administration

• (2) Source: Natural Gas Exchange

• (3) Source: Canadian Association of Energy Contractors (“CAOEC”)

• (4) Source: Baker Hughes North American Rotary Rig Count

Oil and gas contract drilling activity is cyclical and is affected by numerous factors, most importantly world crude oil prices, North American natural gas prices and increasingly, international LNG (liquified natural gas) pricing. Crude oil prices, which increased throughout 2021, peaked in June of 2022 and have slowly declined as recessionary concerns put downward pressure on oil prices with US storage slightly above the five year average. Natural gas prices have followed a very similar curve, peaking in June of 2022 and decreasing as demand issues have reduced the price for natural gas, resulting in US natural gas storage being close to 20% above the five year average.

In Canada, industry utilization has now recovered to pre-pandemic levels and continues to strengthen. Activity levels in the Canadian drilling industry have reached a point where drilling contractors are able to increase day rates for the first time in several years, a signal that a recovery is underway. This encouraging development is tempered by the fact that rates are increasing from extremely low unsustainable benchmark rates that were established in the downturn, and then further depressed during the height of the pandemic. Consequently, despite the recent day rate improvements, there remains a large delta

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between current rates and peak rates last seen in 2014. The recovery in the Canadian market has been more gradual than in the US and current pricing for both oil and natural gas is affecting demand for drilling services.

In the US, industry activity which increased through 2021 and 2022 has decreased modestly in 2023. This decrease in drilling activity is being driven by the commodity prices. While day rates improved significantly in 2022 as the active rig count continued to increase, continued improvements will depend on the number of rigs working and there could be downward pressure on rates if the active rig count falls much below 750 active rigs in the US.

Results by Geographic Segment

Canada

Canada
	For the Three Months		Ended March 31,
$Thousands exceptper dayamounts	2023	2022	Change	% Change
Revenue Canada	19,427	16,242	3,185	20%
Revenue from joint venture drilling rigs	7,782	5,903	1,879	32%
Flowthroughcharges(1)	(829)	(1,082)	253	23%
Adjusted revenue Canada(1)	26,380	21,063	5,317	25%
Operating and maintenance expenses Canada	14,072	12,423	1,649	13%
Operating and maintenance expenses from joint venture drilling rigs	5,494	4,516	978	22%
Flowthroughcharges(1)	(829)	(1,082)	253	23%
Adjusted operating and maintenance expenses Canada(1)	18,737	15,857	2,880	18%
Adjusted operating margin Canada(1)	7,643	5,206	2,437	47%
Margin %(1)	29%	25%	4%	16%
Operating days	720	722	(2)	(0%)
Adjusted revenue per operating day(1)	36,639	29,173	7,466	26%
Adjusted operating and maintenance per operating day(1)	26,024	21,963	4,061	18%
Adjusted operating margin per operating day(1)	10,615	7,210	3,405	47%
Utilization(1)	40%	40%	0%	0%
Rig count	20	20	-	0%

(1) See “Non-GAAP and Supplementary Financial Measures" near the end of this MD&A for further detail.

During the first quarter of 2023, AKITA achieved 720 operating days in Canada, which corresponds to a utilization rate of 40% compared to an industry utilization of 45%. For the first quarter of 2022, the Company’s utilization rate was 40% with an industry average of 39%.

Adjusted revenue in Canada increased to $26,380,000 in the first quarter of 2023 from $21,063,000 in the first quarter of 2022. Adjusted revenue per operating day increased to $36,639 in the first quarter of 2023 from $29,173 in the same period of 2022 due to higher day rates which in turn increased adjusted revenue. Rates improved in the latter half of 2022 which impacted 2023’s first quarter results.

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Higher revenue in the quarter was offset by higher adjusted operating and maintenance expenses which increased 18% to $18,737,000 in the first quarter of 2023 from $15,857,000 in the same period of 2022. As activity remained flat for the Company in Canada, this increase is due to higher labour costs as well as increased costs for consumable rig supplies and repairs.

The Company’s rig count in Canada remained constant at 20 rigs.

United States

United States
	For the Three Months		Ended March 31,
$ Thousands exceptper dayamounts(CAD)	2023	2022	Change	% Change
Revenue US	45,573	28,744	16,829	59%
Flow through charges(1)	(4,573)	(2,211)	(2,362)	(107%)
Adjusted revenue US (1)	41,000	26,533	14,467	55%
Operating and maintenance expenses US	31,355	23,831	7,524	32%
Flow through charges(1)	(4,573)	(2,211)	(2,362)	(107%)
Adjusted operating and maintenance expenses US (1)	26,782	21,620	5,162	24%
Adjusted operating margin US (1)	14,218	4,913	9,305	189%
Margin %(1)	35%	19%	16%	84%
Operating days	1,044	1,017	27	3%
Adjusted revenue per operating day(1)	39,272	26,089	13,183	51%
Adjusted operatingand maintenanceper operatingday(1)	25,653	21,259	4,394	21%
Adjusted operating margin per operating day (1)	13,619	4,830	8,789	182%
Utilization(1)	77%	71%	6%	8%
Rig count	15	16	(1)	(6%)

(1)See “Non-GAAP and Supplementary Financial Measures" near the end of this MD&A for further detail.

The impact of the US day rate increases which took effect in the second half of 2022 are clear to see when comparing adjusted revenue of $41,000,000 in the first quarter of 2023 with adjusted revenue of $26,533,000 over the same period of 2022; a 55% increase, despite activity levels increasing just 3% over the same period. Quarter-over-quarter revenue per day has increased 51% from the first quarter of 2022 to the first quarter of 2023 with the largest increases in the second and third quarters of 2022.

Activity increased 27 days in the first quarter of 2023 (1,044) from the first quarter of 2022 (1,017) as all rigs that the Company is currently marketing in the US were working during both quarters.

Adjusted operating and maintenance costs increased 24% between the first quarter of 2023 and 2022, driven by increased costs per day which increased to $25,653 in the first quarter of 2023 from $21,259 in the first quarter of 2022. The primary driver of the cost per day increase is increased labour costs. Operating and maintenance costs were offset in the first quarter of 2023 by $2,000,000 in Employee Retention Credits (“ERC”) received from the IRS in the quarter.

During the first quarter of 2023 the Company disposed of certain components, including the centre section of one of its idle US rigs, decreasing the Company’s total US rig count to 15 rigs.

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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.

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
For the three months ended March 31, 2023	2022 Change % Change
Depreciation and amortization expense 7.1	7.7 (0.6) (8%)

Depreciation and amortization expense decreased to $7,062,000 during the first quarter of 2023 from $7,690,000 during the corresponding period in 2022, due to assets reaching full depreciation over the year.

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 the first quarter of 2023, drilling rig depreciation accounted for 98% of total depreciation expense (Q1 2022 - 97%).

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 of assets involved in both wholly-owned and joint venture activities.

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Selling and Administrative Expenses

Selling and Administrative Expenses
$Millions
For the three months ended March 31, 2023	2022 Change % Change
Sellingand administrative expenses 4.7	4.4 0.3 7%

Selling and administrative expenses increased to $4,670,000 in the first quarter of 2023 (7.2% of revenue) from $4,360,000 (9.7% of revenue) in the first quarter of 2022. The increase in selling and administrative expenses is due to general cost increases in multiple categories.

Salaries and benefits accounted for 42% of the total selling and administrative expenses during the first quarter of 2023 (Q1 2022 - 38%).

Asset Impairment

Asset Impairment
$Millions
For the three months ended March 31, 2023	2022 Change % Change
Asset impairment loss -	- - 0%

The Company did not identify any changes in the indicators of asset impairment or any new indicators of asset impairment during the first quarter of 2023. Therefore, no further assessment on asset impairment was performed as there have been no changes in circumstances that indicate that the carrying amount of PP&E does not exceed its recoverable amount as at March 31, 2023.

Equity Income from Joint Ventures

$Millions

$Millions
For the three months ended March 31, 2023	2022 Change % Change
Proportionate share of revenue from joint ventures 7.8 Proportionate share of operating & maintenance expenses from joint ventures 5.5 Proportionate share of selling and administrative expenses fromjoint ventures 0.1	5.9 1.9 32% 4.5 1.0 22% 0.1 - 0%
Equityincome fromjoint ventures 2.2	1.3 0.9 69%

The Company provides the same drilling services and utilizes the same management and financial and reporting controls for its joint venture activities as are in place for its wholly-owned operations. The increase in equity income for the Company’s proportionate share of joint ventures is related to the increased activity for the Company’s joint venture rigs in the first quarter of 2023 compared to the first quarter of 2022, as well as improved day rates between the two periods.

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Other Income (Loss)

Other Income (Loss)
$Millions
For the three months ended March 31,	2023	2022	Change	% Change
Interest income	0.0	0.0	-	n/a
Interest expense	(2.2)	(1.0)	(1.2)	(120%)
Unrealized loss on risk management contracts	(0.2)	0.0	(0.2)	n/a
Gain on sale of assets	1.6	0.0	1.6	n/a
Net othergains	0.2	0.0	0.2	n/a
Total other loss	(0.6)	(1.0)	0.4	40%

Total other income (loss) is the aggregate of interest income, interest expense, gain (loss) on sale of assets, and net other gains (losses).

In the first quarter of 2023, the Company recorded interest expense of $2,231,000, up from $1,069,000 in the same period of 2022 due to higher interest rates which have increased 4.25% from the start of 2022 to the first quarter of 2023. The companies average interest rate in the quarter was 9.75% compared to 5.13% in the same period of 2022.

The Company is exposed to changes in interest rates on borrowings under its operating loan facility, which is subject to floating interest rates. To mitigate this risk the Company entered into an interest rate swap with its principal banker as the agent on the syndication along with two other Canadian banks in June of 2022. The term of the interest rate swap is June 15, 2022 to June 15, 2026 and the notional amount of the swap is $50,000,000. The fixed rate is 4.24% while the floating rate is indexed to the Canadian Dollar Offered Rate (“CDOR”). At period end, the interest rate swap is valued at fair value with any unrealized gain (loss) recorded as other income (loss) on the consolidated income statement. For the three months ended March 31, 2023, the Company recorded an unrealized loss of $211,000 (2022 – nil).

During the first quarter of 2023, the Company sold certain components, including the centre section of an idle rig in the US, for proceeds of $2,027,000 and a gain on disposal of $1,550,000 (Q1 2022 – nil).

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Income Tax Expense (Recovery)

Income Tax Expense (Recovery)
$Millions, except income tax rate (%)
For the three months ended March 31, 2023	2022 Change
Current tax expense 0.0 Deferred tax recovery (0.1)	0.0 0.0 (0.1) 0.0
Total income tax recovery (0.1) Effective income tax rate 23.4%	(0.1) 0.0 23.4%

The Company recorded a deferred tax recovery of $82,000 in the first quarter of 2023, compared to a deferred tax recovery of $126,000 in the corresponding period in 2022. The decrease in the deferred tax recovery relates to a decrease in the Company’s depreciation expense in the first quarter of 2023 compared to the first quarter of 2022. The Company’s effective tax rate increased to 23.43% in the first quarter of 2023 from 23.39% in the same period of 2022 due to a higher percentage of the Company’s Canadian revenue being earned in provinces with higher tax rates. Refer to the Company’s 2022 Annual Report for additional tax disclosures.

Net Income (Loss), Net Cash and Adjusted Funds Flow

$Millions
For the three months ended March 31, 2023	2022 Change % Change
Net income (loss) 9.5 Net cash from (used in) operating activities (0.4) Adjusted funds flow from operations(1) 15.0	(2.9) 12.4 428% 0.2 (0.6) (300%) 5.0 10.0 200%

(1) See “Non-GAAP and Supplementary Financial Measures" near the end of this MD&A for further detail.

The Company had net income of $9,523,000 ($0.24 earnings per share, basic and diluted) for the first quarter of 2023, compared to a net loss of $2,933,000 ($0.07 loss per share, basic and diluted) in the first quarter of 2022. Adjusted funds flow from operations increased to $15,159,000 in the first quarter of 2023, from $4,996,000 during the corresponding quarter in 2022. The increase in the Company’s net income and adjusted funds flow from operations is primarily due to increases in revenue per day in both Canada and the United states as discussed earlier in this MD&A. Net cash from operations decreased to a loss of $414,000 compared to a gain of $247,000 in the first quarter of 2022 due to the increase in non-cash working capital in the quarter which was $13,356,000 in the first quarter of 2023 compared to $3,423,000 in the same period of 2022.

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Summary of Quarterly Results

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

$Thousands, except per share (Unaudited)	Three Months Ended
	Mar. 31 Jun. 30 Sep. 30 Dec. 31
2023
Revenue Net incom e Incom e per share (basic and diluted) ($) Adjusted funds flow from operations( 1) Cash flow from operations	65,000 9,523 0.24 15,159 (414)
2022
Revenue Net income (loss) Income (loss) per share (basic and diluted) ($) Adjusted funds flow from operations(1) Cash flow from operations	44,986 42,960 53,526 59,524 (2,933) (4,252) 2,660 8,813 (0.07) (0.11) 0.07 0.22 4,996 4,716 8,957 16,144 247 6,189 3,727 8,035
2021
Revenue Net loss Loss per share (basic and diluted) ($) Adjusted funds flow from operations(1) Cash flow from (used in) operations	27,171 18,651 29,906 34,360 (3,651) (6,108) (6,433) (4,798) (0.09) (0.15) (0.16) (0.13) 3,719 1,056 252 2,427 (5,692) 10,118 (1,560) (6,327)

(1) See “Non-GAAP and Supplementary Financial Measures" near the end of this MD&A for further detail.

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

• The impact of COVID-19 on demand can be seen until the third quarter of 2021, when the US and Canadian drilling markets began to recover;

• The impact of increased activity in Canada in 2022 can be seen when comparing the second quarter of 2021 to recent quarters;

• The impact of the significant improvement in the profitability of the US operating segment can be seen in the third and fourth quarters of 2022 comparing those quarters to any other;

• Revenue in the first quarter of 2022 was split relatively equally between Canada and the United States. The majority of revenue has shifted back to the US in the fourth quarter of 2022; and

• The seasonal nature of the Canadian operations can been seen in the cash from operations balances peaking in the second quarter of each year.

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Liquidity and Capital Resources

Cash used for capital expenditures totalled $2,504,000 in the first quarter of 2023 (Q1 2022 - $6,412,000). Year-to-date capital spending in the first quarter of 2023 related to routine capital items, similar to the same period of 2022.

At March 31, 2023, AKITA’s Statements of Financial Position included working capital (current assets minus current liabilities) of $39,917,000 compared to working capital of $31,121,000 at December 31, 2022. The seasonal nature of AKITA’s Canadian business typically results in higher non-cash working capital balances at the end of the first quarter than at year-end due to the first quarter high seasonal activity levels in Canada. Working capital at March 31, 2023 increased compared to December 31, 2022, due to higher accounts receivable and prepaid expense balances and lower accounts payable balances, offset by an increase in the Company’s current portion of long-term debt.

The Company has a syndicated credit agreement with the Company’s principal banker as the agent on the syndication along with three other Canadian banks. The operating loan facility totals $110,000,000. The Credit facility was extended by one year to September 2024 on July 15, 2022. The credit agreement was amended on July 17, 2020, to include an original covenant relief period that extended to June 30, 2021. The facility was further amended to add additional quarters of covenant relief to June 30, 2023. In March of 2023, the Company ended the covenant relief period and has reverted to the original terms of the credit facility. The interest rate on the Company’s credit facility ranges from 175 to 300 basis points over prime interest rates depending on the Funded Debt[(1)] to EBITDA[(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:

1. The Funded Debt[(1)] to EBITDA[(1)] Ratio: the Company shall ensure that the Funded Debt[(1)] to EBITDA[(1)] Ratio shall not be more than 3.00:1.00.

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

1. The EBITDA[(1) ] to Interest Expense[(1) ] Ratio: the Company shall ensure that the EBITDA[(1)] to Interest Expense[(1)] Ratio shall not be less than 3.00:1.00.

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.

(1) See “Non-GAAP and Supplementary Financial Measures” near the end of this MD&A for further detail.

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At March 31, 2023, the Company was in compliance with its covenants with a Funded Debt[(1)] to EBITDA[(11)] Ratio of 1.39:1.00, and an EBITDA[(1)] to Interest Expense[(1)] Ratio of 7.72:1.00.

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

• (i) 75% of Eligible Accounts Receivable[(1)] ; plus

• (ii) 50% of net book value of all Eligible Rig Assets[(1)] ; less

• (iii) Priority Payables[(1)] of the Loan Parties.

At March 31, 2023, the Company’s borrowing base totalled $103,524,000.

The credit facility includes a $10,000,000 operating line of credit that is classified as current, given the Company expects to settle the balance within a normal operating cycle. The maturity date aligns with the total credit facility. At March 31, 2023, the current portion of debt was $1,620,000 (December 31, 2022 – nil).

The balance outstanding under the credit loan facility, net of unamortized loan fees, is classified as longterm debt as the credit agreement has no required repayment obligations prior to the end of the loan facility term. The Company borrowed $90,000,000 from this facility as at March 31, 2023 (December 31, 2022 - $94,000,000).

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 its capital structure and makes adjustments in light of changes in economic conditions and the risk characteristics of the underlying assets. Given the current state of the drilling industry and the energy industry as a whole, the Company’s liquidity is paramount. If future results do not meet the Company’s expectations there is a risk that the Company could be offside with the financial covenants in its banking facility and lose the ability to draw on the facility to meet its financial obligations or have to repay the amounts outstanding on the facility. This could also be the case if demand for drilling significantly decreases and the Company’s customers make cuts to their capital budgets.

(1) See “Non-GAAP and Supplementary Financial Measures” near the end of this MD&A for further detail.

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Future Outlook and Strategy

The drilling industry is cyclical and certain key factors that impact 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 has improved significantly over the past year, and with oil and gas operators continuing to generate strong profits, demand for drilling services is expected to continue to improve.

Activity levels in Canada in the first quarter of 2023 were in line with 2022 and on par with pre-pandemic activity levels in the first quarter of 2020. This trend in demand for drilling services is expected to continue for the balance of 2023 but is somewhat opaque as the current instability in commodity prices is expected to affect capital allocations for the Company’s customers. However, the Company is optimistic that the second half of the year will potentially be stronger than the first half. It is expected that SAGD oil sands drilling, an area that the Company specializes in, will continue to generate the majority of the Canadian operations revenue. The capital budget planned for 2023 is in line with the 2022 capital budget with no major expenditures planned at this time

In the US, the active rig count is now under 750 rigs, down from 780 rigs at the end of 2022. The significant decrease in natural gas prices is causing a reduction in demand for drilling services in that sector. If this trend continues the Company is anticipating there could be downward pressure on pricing for drilling services across the US market in the second half of the year, although from an activity perspective, the Company is optimistic it will maintain its current levels. Like Canada, the US capital budget in 2023 is similar to 2022 with no significant capital expenditures planned at this time.

The Company’s focus in 2023 is on debt repayment and is anticipating material debt repayments this year. By maintaining current activity levels in both Canada and the US and marginal rate increases in Canada the Company is targeting debt repayments between $15 and $20 million this year.

Significant Accounting Estimates and Judgments

The preparation of the accompanying interim 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 financial statements, as well as the reported amounts for revenue and expenses during the period. 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.

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Impairment of Assets

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. Please refer to “Asset Impairment” for further information.

AKITA’s asset impairment estimates do not have any effect on the changes to financial condition for the Company, as any asset write-down is 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.

Useful Lives of Drilling Rigs

Management makes significant estimates related 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.

Defined Benefit Pension Liability

A significant estimate used in the preparation of AKITA’s interim financial statements relates to the measurement of the non-current defined benefit pension liability for certain retired employees that was recorded as $3,938,000 at March 31, 2023 (March 31, 2022 - $5,163,000). AKITA utilizes the services of a third party to assist in the actuarial estimate of the Company’s pension expense and liability. For 2023, a key assumption is the 5.1% discount rate (2022 – 2.9%).

Deferred Income Taxes

The Company makes assumptions related to the measurement of 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.

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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	Class A Non-Voting	Class A Non-Voting	Class B	Common	Total	Total
$Thousands,	Number of		Number of		Number of
except share amounts	Shares	Consideration	Shares	Consideration	Shares	Consideration
December 31, 2022	37,996,407	144,940	1,653,784	1,366	39,650,191	146,306
Shares issued in Q1 2023	-	-	-	-	-	-
March 31, 2023	37,996,407	144,940	1,653,784	1,366	39,650,191	146,306

At May 2, 2023, the Company had 37,996,407 Class A Non-Voting shares and 1,653,784 Class B Common shares outstanding. At that date, there were also 1,422,500 stock options outstanding, of which 691,500 were exercisable.

Non-GAAP and Supplementary Financial Measures

Non-GAAP Financial Measures

Adjusted Revenue and Adjusted Operating and Maintenance Expenses

Revenue and operating and maintenance expenses in AKITA’s Canadian operating segment include revenue and expenses from AKITA’s wholly-owned drilling rigs as well as its share of joint venture revenue and expenses.

Excluded from the revenue and expenses in AKITA’s Canadian and US operating segment are flow through charges that are billed to operators and repaid to the Company. The volume and timing of the flow through charges can artificially impact the operational per day analysis and as a result management and certain investors may find the comparability between periods is improved when these flow through charges are excluded from revenue per day and operating and maintenance expense per day. The flow through charges do not have any impact on the Company’s net earnings as the amounts offset each other.

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

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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.

both between and within periods.
$Thousands
For the three months ended March 31,	2023	2022
Net cash from (used in) operating activities Interest paid Interest expense	(414) 2,178 (2,231)	247 1,030 (1,069)
Post-employment benefits paid Equity income from joint ventures Change in non-cash workingcapital	86 2,184 13,356	69 1,296 3,423
Adjusted funds flow from operations	15,159	4,996

Terms Defined in the Company’s Credit Facility

The following terms are defined in the Company’s credit facility agreement and are used in the calculation of the Company’s financial covenants:

“ EBITDA" means, for any fiscal period, the Net Income of the Canadian Borrower on a consolidated basis in accordance with GAAP but without duplication, plus (in each case, for the Canadian Borrower on a consolidated basis but without duplication):

• a) all amounts deducted in the calculation of Net Income in respect of Interest Expense;

• b) all amounts deducted in the calculation of Net Income in respect of the provision for income taxes (in accordance with Generally Accepted Accounting Principles);

• c) all amounts deducted in the calculation of Net Income in respect of non-cash items including, without limitation, depletion, accretion (to the extent not included in clause (a) above), depreciation, amortization and future income tax liabilities;

• d) all amounts deducted in the calculation of Net Income in respect of equity loss, minority interests, extraordinary losses, non-recurring losses (including losses on the sale of property, plant and equipment) and any non-cash impairment charges and any other non-cash charges;

• e) all cash distributions received in such period from persons which are not Guarantors;

• f) all amounts deducted in the calculation of Net Income in respect of discretionary management bonuses, fees and other compensation declared and payable to the directors or shareholders of the Canadian Borrower on commercially reasonable terms. For the avoidance of doubt, bonuses, fees or other compensation that the Canadian Borrower, on a consolidated basis, is contractually required to pay may not be added back;

• g) all amounts deducted in the calculation of Net Income in respect of share based compensation;

• h) unrealized foreign exchange losses incurred in the ordinary course of business;

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"Funded Debt" means, as of any date of determination, with respect to the Canadian Borrower on a consolidated basis, all Indebtedness, but excluding obligations owing between any Loan Parties and less all cash and Cash Equivalents denominated in Canadian Dollars and U.S. Dollars held by the Loan Parties up to a maximum of $10,000,000 and which are: (i) in accounts with the Agent which are subject to Perfected Security Interests and rights of set-off in favour of the Agent; or (ii) in accounts with a financial institution acceptable to the Agent (acting reasonably) which are subject to Perfected Security Interests and a blocked account control agreement in favour of and satisfactory to the Agent.

"Interest Expense" means for any fiscal period, in respect of the Canadian Borrower on a consolidated basis as determined in accordance with GAAP, the aggregate cost of credit outstanding during that period including, without limitation, interest charges (including for postponed Indebtedness), capitalized interest, the interest component of Financial Leases, fees payable in respect of letters of credit and letters of guarantee, discounts incurred and fees payable in respect of bankers' acceptance advances.

"Eligible Accounts Receivable" means at any time, any Account Receivable of the Loan Parties (net of any credit balance, returns, trade discounts, or unbilled amounts or retention) that meets and at all times continues to meet all of the standards of eligibility (and the Canadian Borrower by including such account in any computation of the Borrowing Base shall be deemed to represent and warrant to the Agent and the Lenders that to the knowledge of the Canadian Borrower all of the following statements are accurate and complete with respect to such account):

• a) it is a valid and legally enforceable obligation of the applicable Account Debtor;

• b) such account is genuine as appearing on its face or as represented in the books and records of the Canadian Borrower on a consolidated basis;

• c) such account is free from valid claims regarding rescission, cancellation or avoidance, whether by operation of Applicable Law or otherwise, and except to the extent of any reduction made pursuant to paragraph (e) of this definition is net of all then applicable holdbacks and prepayment credits;

• d) such account does not relate to services not as of yet completed;

• e) without limiting the generality of paragraph (c) of this definition, is not subject to any offset, counterclaim or other defence on the part of the Account Debtor or any claim by the Account Debtor that denies liability in whole or in part; and, if the Account Debtor denies liability only in part, the undisputed portion of the Account Receivable shall be allowed so long as the Account Debtor has agreed that it will pay such portion not in dispute in accordance with its terms;

• f) such Account Receivable is not outstanding more than 90 days after billing date, provided that the under 90 day portion may be included; (i) where the over 90 day portion is less than 10% of all Accounts Receivable of such Account Debtor and its Related Parties; (ii) the Agent and the Lenders

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have nevertheless designated the Account Receivable as good; or (iii) where the Account Debtor has long term debt obligations rated no worse than BBB by S&P or DBRS Limited;

• g) it is owed by an Account Debtor whose principal place of business is located in Canada or the United States, unless otherwise supported by a letter of credit acceptable to the Agent, in its discretion;

• h) it is denominated in either Canadian Dollars or United States Dollars;

• i) it is subject to a Perfected Security Interest in favour of the Agent;

• j) such account is, and at all times will be, free and clear of all Security Interests other than Priority Payables (to the extent deducted in calculating the Borrowing Base) and any Permitted Encumbrances;

• k) such account is not in respect of a builders lien or similar holdbacks;

• l) the Account Receivable does not arise from a sale or lease to or rendering of services to a Related Party of any Loan Party, or, in each case, to their respective Affiliates;

Any Eligible Accounts Receivable which are at any time Eligible Accounts Receivable but which subsequently fail to meet any of the foregoing requirements shall immediately cease to be an Account Receivable.

"Tangible Net Worth" means, as of any date of determination, with respect to the Canadian Borrower on a consolidated basis, the sum of Shareholders' Equity and Subordinated Debt, less:

• a) any amount that would be included on the consolidated balance sheet of the Canadian Borrower prepared in accordance with GAAP as an investment in or as amounts owed by any Related Party which does not constitute Subordinated Debt; and

• b) any amount included in the assets column on the consolidated balance sheet of the Canadian Borrower in respect of Intangibles.

Non-GAAP Ratios

“Adjusted funds flow from operations per share” is calculated on the same basis as net loss per Class A and Class B share (basic and diluted), utilizing the basic and diluted weighted average number of Class A and Class B shares outstanding during the periods presented.

“Adjusted revenue per operating day” may be useful to analysts, investors, other interested parties and management as a measure of pricing strength and is calculated by dividing adjusted revenue by the number of operating days for the period.

“Adjusted operating and maintenance expenses per operating day” may be useful to analysts, investors, other interested parties and management as it demonstrates a degree of cost control and provides a proxy for specific inflation rates incurred by the Company.

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Supplementary Financial Measures A supplementary financial measure:

• a) is, or is intended to be, disclosed on a periodic basis to depict the historical or expected future financial performance, financial position or cash flow of the Company;

• b) is not presented in the financial statements of the Company;

• c) is not a non-GAAP financial measure; and

• d) is not a non-GAAP ratio.

Supplementary financial measures presented and discussed in this MD&A are as follows:

• “Operating Margin %” – represents operating margin as a percentage of revenue.

• “Adjusted Operating Margin %” – represents adjusted operating margin as a percentage of adjusted revenue.

• “Utilization” – represents the operating days achieved divided by the maximum operating days based on the number of days in the year and the rigs available.

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. In particular, forward-looking information in this MD&A includes, but is not limited to, references to the outlook for the North American economy and the drilling industry (including the demand for drilling services, day rates, supply issues and labour shortages), the demand for oil, future investment, the Company's SAGD drilling activity, the Company's existing credit facility, the Company's operating performance and cash flows, future investment, debt repayment, tax rates, and the Company's capital program.

Although the Company believes that the expectations reflected in the forward-looking information are reasonable based on the information available on the date such statements are made and processes used to prepare the information, such statements are not guarantees of future performance and no assurance can be given that these expectations will prove to be correct. 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.

The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of, among other things:

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• Prevailing economic conditions including world crude oil prices, North American natural gas prices and global liquified natural gas (LNG) demand;

• Fluctuations and uncertainty surrounding the future price of commodities;

• The impact of global supply chain disruptions;

• The impact of the level of industry activity for Canadian and US crude oil and natural gas exploration and development on the demand, pricing and terms for contract drilling services;

• The impact of ~~a~~ changes in demand for crude oil, natural gas or other liquid hydrocarbons on the demand and pricing for drilling services;

• The level of exploration and development activity carried on by AKITA’s customers;

• Increased competition, including as a result of the movement of drilling rigs among regions or reduced levels of activity in the oil and gas industry;

• The loss of one or more major customers;

• Changes to existing laws, regulations and government policies, and the introduction of new laws and regulations, including those governing the management, transportation and disposal of hazardous substances and other waste materials and otherwise relating to the protection of the environment;

• The impact of climate change activism;

• Access to capital markets including AKITA’s ability to obtain additional debt or equity financing;

• Variations in interest rates and principal repayments under the terms of the Company's credit facility;

• The Company's ability to make scheduled payments of principal and interest on, or to refinance, its indebtedness;

• The sufficiency of AKITA's assets to repay indebtedness under its credit facility in the event repayment were to be accelerated following an event of default;

• The impact of dilutive financings or other transactions;

• Fluctuations in foreign exchange, interest and tax rates;

• The adequacy of AKITA's insurance coverage or contractual indemnity rights to cover losses, and the applicability of anti-indemnification legislation;

• The Company's ability to attract, develop and maintain a skilled and safe workforce and maintain a cost structure that varies with activity levels;

• The availability of qualified management personnel;

• A general reduction in rates in the drilling industry caused by a capital overbuild.

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.

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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.

Management’s Responsibility for Financial Information

As at March 31, 2023, management evaluated, under the supervision of and the participation of the Executive Chair and Chief Executive Officer (the “CEO”) and the Vice President, Finance and Chief Financial Officer (the “CFO”), the effectiveness of the Company’s disclosure controls and procedures (“DC&P”) as defined under National Instrument 52-109. Based on that evaluation, the CEO and CFO concluded that the Company’s DC&P was effective as at March 31, 2023.

No changes were made to the Company’s internal control over financial reporting (“ICFR”) during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s ICFR.

As in prior quarters, AKITA’s Audit Committee reviewed this document, including the attached interim financial statements.

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