Total Energy Services Inc. — Management Reports 2021

Mar 11, 2021

T O T A L E N E R G Y S E R V I C E S I N C .

MANAGEMENT’S DISCUSSION AND ANALYSIS (“MD&A”)

The following MD&A for Total Energy Services Inc. (“Total Energy” or the “Company”) was prepared as at March 11, 2021 and focuses on information and key statistics from the audited consolidated financial statements of the Company for the year ended December 31, 2020 (the “2020 Financial Statements”) and pertains to known risks and uncertainties relating to the energy services sector. This discussion should not be considered all-inclusive as it does not include all changes regarding general economic, political, governmental and environmental conditions.

This MD&A should be read in conjunction with the 2020 Financial Statements, the Company’s 2020 Annual Report, the Annual Information Form (“AIF”) for the year ended December 31, 2020 and the cautionary statement regarding forward-looking information and statements below. Additional information relating to Total Energy, including the Company’s AIF, may be found on SEDAR at www.sedar.com.

Unless otherwise indicated, all dollar amounts presented herein are in thousands of Canadian dollars except per share amounts which are presented in Canadian dollars.

FINANCIAL HIGHLIGHTS

FINANCIAL HIGHLIGHTS
	Three months ended December 31	Year ended December 31
	2020 2019 Change	2020 2019 Change
Revenue Operating (loss) income EBITDA(1) Cashflow Net (loss) income Attributable to shareholders Per Share Data (Diluted) EBITDA(1) Cashflow Attributable to shareholders: Net(loss)income	$ 83,472 $ 151,500 (45%) (4,013) 14,468 nm 19,546 35,805 (45%) 18,431 36,896 (50%) (1,732) 8,593 nm (1,739) 8,523 nm $ 0.43 $ 0.79 (46%) $ 0.41 $ 0.82 (50%) $ (0.04) $0.19 nm	$ 365,750 $ 757,398 (52%) (36,539) 16,802 nm 81,204 107,679 (25%) 73,437 111,727 (34%) (30,455) 10,091 nm (30,450) 10,527 nm $ 1.80 $ 2.36 (24%) $ 1.63 $ 2.45 (33%) $ (0.68) $0.23 nm
Financial Position at		December 31
		2020 2019 Change
Total Assets Long-Term Debt and Lease Liabilities (excluding current portion) Working Capital(2) Net Debt(1) Shareholders’ Equity Common shares(000’s)(3) Basic and diluted	45,081 45,262 –	$ 849,579 $ 997,161 (15%) 238,937 248,448 (4%) 138,940 103,234 35% 99,997 145,214 (31%) 510,987 543,142 (6%) 45,083 45,553 (1%)

(1) Please see “Non-IFRS Measures” below for the definition of EBITDA and Net Debt.

(2) Working capital means current assets minus current liabilities.

(3) Basic and diluted shares outstanding reflect the weighted average number of common shares outstanding for the period. See note 16 to the 2020 Financial Statements.

“nm” – calculation not meaningful

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T O T A L E N E R G Y S E R V I C E S I N C . MANAGEMENT’S DISCUSSION AND ANALYSIS

BUSINESS OF THE COMPANY

Total Energy is a public energy services company based in Calgary, Alberta that provides a variety of products and services to the oil and natural gas industry through its subsidiaries and aboriginal partnerships. Total Energy is involved in four businesses: contract drilling services (“CDS”), the rental and transportation of equipment used in the drilling, completion and production of oil and natural gas wells (“RTS”), the fabrication, sale, rental and servicing of new and used natural gas compression and oil and natural gas process equipment (“CPS”) and well servicing, including completion, workover, maintenance and abandonment services (“WS”). The Company’s operations are conducted within Canada, the United States of America (“United States” or “U.S.”) and Australia. Corporate and public issuer affairs are conducted in the Company’s Corporate segment.

Contract Drilling Services: At December 31, 2020, the Company operated a total fleet of 98 drilling rigs. During the second quarter of 2020 the Company decommissioned nine drilling rigs, including seven mechanical double rigs located in the United States and two conventional single rigs located in Canada. The rig fleet is supported by an extensive fleet of owned top drives, walking systems, pumps and other ancillary equipment. Composition of the Company’s drilling rig fleet is as follows:

By Type AC triples 3 AC doubles 13 Mechanical doubles 38 Australian shallow 5 TDS and singles 39 98	By Geography
	Canada 80 United States 13 Australia 5
	98

Rentals and Transportation Services: Total Energy’s RTS business is presently conducted from 12 locations in western Canada and three locations in the United States. At December 31, 2020, this segment had approximately 10,650 pieces of major rental equipment (excluding access matting), a fleet of 87 heavy trucks and a significant inventory of small rental equipment and access matting.

Compression and Process Services: The Company fabricates a full range of natural gas compression equipment as well as select oil and natural gas process equipment. At December 31, 2020 the CPS segment occupied approximately 246,000 square feet of production facilities located in Calgary, Alberta and a 100,000 square foot production facility in Weirton, West Virginia. As at December 31, 2020 the CPS segment also had a network of 13 branch locations throughout western Canada and the United States from which its natural gas compression parts and service business is conducted. This segment had 54,800 horsepower of compression in its rental fleet at December 31, 2020.

Well Servicing: At December 31, 2020, the Company operated a total fleet of 83 well servicing rigs across western Canada, northwest United States and Australia. Composition of the Company’s service rig fleet is as follows:

By Type Singles 38 Doubles 32 Australian specification 9 Flush-by 4 83	By Geography
	Canada 57 United States 14 Australia 12
	83

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T O T A L E N E R G Y S E R V I C E S I N C . MANAGEMENT’S DISCUSSION AND ANALYSIS

OVERALL PERFORMANCE

Selected annual financial information derived from the audited consolidated financial statements of the Company for the three most recently completed financial years is set forth below and is prepared in accordance with IFRS.

(in thousands of dollars exceptper share amounts)	Year ended December 31
	2020 2019 2018
Revenue Cash provided by operations Cashflow Net (loss) income Attributable to shareholders Per share (basic and diluted) Dividends declared per share Total assets Long term liabilities (excluding current lease liabilities, current portion of long-term debt and deferred tax liability)	$ 365,750 $ 757,398 $ 851,809 86,122 73,055 115,705 73,437 111,727 101,490 (30,455) 10,091 24,215 (30,450) 10,527 24,458 (0.68) 0.23 0.53 – 0.24 0.24 849,579 997,161 1,078,124 238,937 248,448 287,893

Total Energy’s results for the three months and year ended December 31, 2020 reflect the substantial deterioration of industry conditions in North America beginning March of 2020 as a result of the COVID-19 pandemic and resultant decreases in economic activity and demand for oil and natural gas. Over the course of the second half of 2020 social mobility restrictions began to ease globally, which modestly improved industry conditions in North America compared to the second quarter of 2020. Activity levels in Australia began to moderate in the third quarter of 2020 as customers began to reduce capital expenditure programs in response to the decline in global crude oil and natural gas prices. During the fourth quarter and year ended December 31, 2020, the Company recognized $9.1 million and $21.1 million, respectively, under various COVID19 relief programs in Canada, the United States and Australia. Also included in the financial results for the three months and year ended December 31, 2020 was $0.8 million of losses and $6.0 million of gains, respectively, relating to unrealized foreign exchange gains and losses from translation of intercompany working capital balances of foreign subsidiaries. This compares to unrealized foreign exchange losses of $2.1 million and $3.9 million for the same periods in 2019. Negatively impacting financial results for the fourth quarter of 2020 was $3.2 million of incremental depreciation expense resulting from a change to depreciation estimates in the CDS segment effective April 1, 2020. For the year ended December 31, 2020 financial results were negatively impacted by $26.3 million of non-recurring and $11.6 million of incremental depreciation expense resulting from the change in depreciation estimates in the CDS segment and a $0.7 million increase to the Company’s allowance for doubtful accounts receivable.

The Company’s financial condition remains strong, with a positive working capital balance of $138.9 million as at December 31, 2020. The $35.7 million increase in working capital since December 31, 2019 was due primarily to a reduction in the current portion of long-term debt following the refinancing of the Company’s mortgage loan that matured in April 2020. Shareholders’ equity decreased by $32.2 million from December 31, 2019 mostly due to the increase in depreciation expense as a result of the change in estimates in the CDS segment and by a $2.0 million decrease relating to accumulated other comprehensive loss for the year ended 2020 as a result of the strengthening of the Canadian dollar relative to the U.S. dollar and the weakening of the Canadian dollar relative to the Australian dollar and the corresponding impact on the translation of U.S. and Australian foreign subsidiary balances.

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T O T A L E N E R G Y S E R V I C E S I N C . MANAGEMENT’S DISCUSSION AND ANALYSIS

Revenue

Revenue
	Three months ended December 31 Year ended December 31
	2020 2019 Change 2020 2019 Change
Revenue	$ 83,472 $151,500 (45%) $ 365,750 $757,398 (52%)

The decrease in revenue for the three and twelve months ended December 31, 2020 relative to the same periods in 2019 was the result of lower activity in all segments because of the COVID-19 pandemic and its negative impact on economic activity and, consequently, crude oil and natural gas prices. Included in revenue for the three and twelve months ended December 31, 2019 is a non-recurring $17.6 million payment relating to the early termination of contracts for three drilling rigs in the United States (the “Rig Termination Payment”).

Cost of Services and Gross Margin

	Three months ended December 31 Year ended December 31
	2020 2019 Change 2020 2019 Change
Cost of services Gross margin Gross margin, as a percentage of revenue	$ 59,107 $ 102,212 (42%) $ 266,720 $ 597,336 (55%) $ 24,365 $ 49,288 (51%) $ 99,030 $ 160,062 (38%) 29% 33% (12%) 27% 21% 29%

The decrease in costs of services during the three and twelve months ended December 31, 2020 relative to the same periods in 2019 is primarily due to decreased activity in all business segments. Also reducing operating costs for the three and twelve months ended December 31, 2020 was the recognition of $8.0 million and $18.0 million of funds, respectively, from various COVID-19 relief programs. The year over year decrease in the gross margin percentage for the three months ended December 31, 2020 is a result of the receipt of the $17.6 million Rig Termination Payment in 2019 with no associated cost of services. The year over year increase in the annual gross margin percentage is a result of a change in the segment revenue mix, realized cost efficiencies in all segments as a result of measures taken by the Company following the start of the pandemic and the receipt of funds from various COVID-19 relief programs.

Cost of services includes salaries and benefits for operations personnel, equipment repairs and maintenance, fuel, inventory used to manufacture compression and process equipment, utilities, property taxes and other occupancy costs related to manufacturing facilities and operations branches.

Selling, General and Administration Expenses

	Three months ended December 31 Year ended December 31
	2020 2019 Change 2020 2019 Change
Selling, general and administration expenses	$ 5,277 $11,778 (55%) $ 27,309 $49,393 (45%)

Selling, general and administration expenses decreased in the three and twelve months ended December 31, 2020 relative to the same periods in 2019 as a result of cost savings activities implemented following the start of the pandemic, lower sales and profit incentive compensation in certain segments and the receipt of $1.1 million and $3.1 million from various COVID-19 relief programs for the three and twelve months ended December 31, 2020, respectively.

Included in selling, general and administration expenses are salaries and benefits for sales, office and administrative staff, utilities, property taxes and other occupancy costs related to the Company’s various divisional offices and its corporate head office as well as professional fees and other costs incurred to maintain the Company’s public listing and conduct investor relations activities. Also included is compensation for directors and officers pursuant to the Company’s cash based compensation plans.

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T O T A L E N E R G Y S E R V I C E S I N C . MANAGEMENT’S DISCUSSION AND ANALYSIS

Other Expense (Income)

Other Expense (Income)
	Three months ended December 31 Year ended December 31
	2020 2019 Change 2020 2019 Change
Other expense(income)	$ 844 $2,070 (59%) $ (5,969) $3,928 nm

“nm” - calculation not meaningful

Other expense (income) arises from unrealized foreign exchange differences on translation of intercompany working capital balances of foreign subsidiaries. The weakening of the Canadian dollar relative to the Australian dollar and the strengthening of the Canadian dollar relative to the U.S. dollar combined with the geographical composition of intercompany balances during the period gave rise to an unrealized foreign exchange gain for the year ended December 31, 2020.

Share-based Compensation Expense

	Three months ended December 31 Year ended December 31
	2020 2019 Change 2020 2019 Change
Share-based compensation expense	$ 176 $199 (12%) $ 866 $1,499 (42%)

Share-based compensation expense arises from share options granted pursuant to the share option plan implemented in 2015. Share-based compensation expense for the three and twelve months ended December 31, 2020 relative to the same periods in 2019 is lower due to certain options fully vesting and the forfeiture of certain options during 2020.

Depreciation Expense

	Three months ended December 31 Year ended December 31
	2020 2019 Change 2020 2019 Change
Depreciation expense	$ 22,081 $20,773 6% $ 113,363 $88,440 28%

The increase in depreciation expense for both the fourth quarter of 2020 and year ended December 31, 2020 compared to the same periods in 2019 is mostly due to a change in depreciation estimates in the CDS segment effective April 1, 2020 (see “Critical Accounting Estimates” for further details). For the three months ended December 31, 2020 incremental recurring depreciation expense from the change in the CDS segment was $3.2 million. For the twelve months ended December 31, 2020 depreciation expense included $26.3 million of non-recurring and $11.6 million of incremental depreciation expense resulting from the change in depreciation estimates in the CDS segment, as compared to the same period in 2019 which included $7.9 million of non-recurring depreciation expense relating to the change in depreciation estimates in the RTS segment.

Operating (Loss) Income

Operating (Loss) Income
	Three months ended December 31 Year ended December 31
	2020 2019 Change 2020 2019 Change
Operating (loss)income	$ (4,013) $14,468 nm $ (36,539) $16,802 nm

“nm” - calculation not meaningful

Included in the operating loss for the three months and year ended December 31, 2020 was a $0.8 million unrealized loss and a $6.0 million unrealized gain, respectively, on foreign exchange translation of intercompany working capital balances compared to unrealized losses of $2.1 million and $3.9 million, respectively, for the same periods in 2019. Negatively impacting the fourth quarter and year ended December 31, 2020 was a $0.1 million and a $0.7 million increase to the Company’s allowance for doubtful accounts receivable and $3.2 million and $11.6 million of incremental depreciation expense as a result of a change in depreciation estimates in the CDS segment. Included in the year ended December 31,

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T O T A L E N E R G Y S E R V I C E S I N C . MANAGEMENT’S DISCUSSION AND ANALYSIS

2020 is $26.3 million of non-recurring depreciation expense as result of the change in depreciation estimates in the CDS segment compared to $7.9 million of non-recurring depreciation expense in 2019 arising from a change in depreciation estimates in the RTS segment. Offsetting these expenses was $9.1 million and $21.1 million of cost recoveries from various COVID-19 relief programs for the three months and year ended December 31, 2020, respectively. Adjusted for the above, operating losses for the three and twelve months ended December 31, 2020 was $9.0 million and $24.9 million, respectively. Comparative operating (loss) income for the three and twelve months ended December 31, 2019 was a $1.1 million loss and income of $11.0 million, respectively.

Gain on Sale of Property, Plant and Equipment

	Three months ended December 31 Year ended December 31
	2020 2019 Change 2020 2019 Change
Gain on sale of property, plant and equipment Proceeds on the sale of property, plant and equipment	$ 1,478 $ 564 162% $ 4,380 $ 2,437 80% $ 468 $1,573 (70%) $ 5,936 $8,422 (30%)

Disposals of property, plant and equipment result from the rationalization, replacement and upgrade of older equipment in the Company’s equipment fleet and the sale of compression rental equipment in the ordinary course of business. The gain on sale of property, plant and equipment for the three months ended December 31, 2020 includes a non-cash recovery of $1.2 million related to real estate lease obligations previously expensed as onerous following the subletting of such real estate.

Equipment disposed of in the three months and year ended December 31, 2020 included decommissioned drilling rigs, underutilized rental equipment, light duty vehicles, compression rental equipment purchased by customers in the ordinary course of business and ancillary drilling equipment. Equipment disposed of during the three months and year ended December 31, 2019 consisted primarily of seven decommissioned drilling rigs, older heavy trucks, underutilized rental equipment and compression rental equipment purchased by customers in the ordinary course of business.

Finance Costs

Finance Costs
	Three months ended December 31 Year ended December 31
	2020 2019 Change 2020 2019 Change
Finance costs	$ 2,283 $3,233 (29%) $ 10,346 $12,938 (20%)

Finance costs for the three months and year ended December 31, 2020 were lower than the prior year comparable periods due to lower effective interest rates combined with a lower year over year average outstanding balance on the Company’s credit facility.

Income Taxes and Net (Loss) Income

	Three months ended December 31 Year ended December 31
	2020 2019 Change 2020 2019 Change
Current income tax expense (recovery) $ 768 $ (235) nm $ 3,075 $ (161) nm Deferred income tax(recovery)expense (3,854) 3,441 nm (15,125) (3,629) 317%
Total income tax(recovery)expense $ (3,086) $ 3,206 nm $ (12,050) $ (3,790) 218%
Net(loss)income $ (1,732) $ 8,593 nm $ (30,455) $10,091 nm

“nm” - calculation not meaningful

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T O T A L E N E R G Y S E R V I C E S I N C . MANAGEMENT’S DISCUSSION AND ANALYSIS

The year over year increase in current income tax expense is primarily due to reduced income tax recoveries during the three months and year ended December 31, 2020 as compared to the same periods in 2019.

The year over year change in deferred income tax recovery was primarily a result of changes on temporary differences on the Company’s property and equipment following the change in depreciation estimates in the CDS segment. The deferred income tax recovery also includes the effect of the two percentage point decrease to the Alberta provincial corporate income tax rate substantially enacted effective July 1, 2020.

SEASONALITY

A significant portion of the Company’s field operations are conducted in Canada where the ability to move heavy equipment is dependent on ground conditions. As warm weather returns in the spring, the winter’s frost comes out of the ground rendering many secondary roads incapable of supporting the weight of heavy equipment until such roads have thoroughly dried out. The duration of this “spring breakup” has a direct impact on the Company’s activity levels and operating results in Canada. In addition, many exploration and production areas in northern Canada are accessible only in winter months when the ground is frozen hard enough to support heavy equipment. The timing of freeze up and spring breakup affects the ability to move equipment in and out of these areas. As a result, late March through May is traditionally the Company’s slowest period in Canada. Additionally, wet weather in Australia, normally in the first quarter, can restrict the Company’s Australian operations. Consequently, quarterly operating results may not be indicative of full year operating results.

SUMMARY OF QUARTERLY RESULTS

SUMMARY OF QUARTERLY RESULTS
	FinancialQuarter Ended
	Dec 31, 2020 Sept 30,2020 June 30,2020 March 31,2020
Revenue Operating income (loss) EBITDA(1) Cashflow Cash provided by operating activities Net (loss) income Attributable to shareholders Per share data EBITDA(1) Cashflow Net (loss) income attributable to shareholders Financial Position Total Assets Long-Term Debt and Lease Liabilities (excluding current portion) Working Capital(2) Net Debt(1) Shareholders’ Equity Common Shares(000’s)(3) Basic and diluted	$ 83,472 $ 77,240 $ 70,770 $ 134,268 (4,013) (5,894) (37,161) 10,529 19,546 17,869 12,886 30,903 18,431 19,810 13,793 21,911 19,226 14,391 36,162 16,343 (1,732) (4,602) (28,845) 4,724 (1,739) (4,618) (28,765) 4,672 $ 0.43 $ 0.40 $ 0.29 $ 0.69 0.41 0.44 0.31 0.49 (0.04) (0.10) (0.64) 0.10 $ 849,579 $ 873,891 $ 898,940 $ 999,229 238,937 250,643 255,538 252,035 138,940 138,973 130,968 124,010 99,997 111,670 124,570 128,025 510,987 517,067 523,979 552,995 45,081 45,081 45,081 45,087

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T O T A L E N E R G Y S E R V I C E S I N C .

MANAGEMENT’S DISCUSSION AND ANALYSIS

	FinancialQuarter Ended
	Dec 31,2019 Sept 30,2019 June 30,2019 March 31,2019
Revenue Operating income (loss) EBITDA(1) Cashflow Cash provided (used) by operating activities Net income (loss) Attributable to shareholders Per share data(diluted) EBITDA(1) Cashflow Net income (loss) attributable to shareholders Financial Position Total Assets Long-Term Debt and Lease Liabilities (excluding current portion) Working Capital(2) Net Debt(1) Shareholders’ Equity Common Shares(000’s)(3) Basic and diluted	$ 151,500 $ 171,213 $ 212,695 $ 221,990 14,468 (5,012) (1,091) 8,437 35,805 24,913 17,546 29,415 36,896 23,959 22,419 28,453 40,545 (21,800) 4,123 50,187 8,593 (6,114) 2,853 4,759 8,523 (6,159) 3,403 4,760 $ 0.79 $ 0.55 $ 0.38 $ 0.64 0.82 0.53 0.49 0.62 0.19 (0.14) 0.07 0.10 $ 997,161 $ 991,176 $ 1,026,564 $ 1,101,027 248,448 251,724 239,287 286,829 103,234 85,778 74,283 117,914 145,214 165,946 165,004 168,915 543,142 538,790 549,851 558,054 45,262 45,457 45,746 45,829

(1) Please see “Non-IFRS Measures” below for the definition of EBITDA and Net Debt.

(2) Working capital means current assets minus current liabilities.

(3) Basic and diluted shares outstanding reflect the weighted average number of common shares outstanding for the period. See note 16 to the 2020 Financial Statements.

Aboriginal Partnerships

The Company conducts certain of its operations through limited partnerships in which each of the Company and an Aboriginal partner hold one half of the partnership interest. The Company fully consolidates all of these partnerships, with the Aboriginal partners’ share in the equity and net earnings of the partnerships reported as non-controlling interests.

SEGMENTED RESULTS

Contract Drilling Services

December 31	Three Months Ended Year Ended
	2020 2019 Change 2020 2019 Change
Revenue Operating (loss) income Operating days(1) Utilization Revenueper spud to release day,dollars	$ 23,288 $ 59,688 (61%) $ 96,661 $ 186,868 (48%) $ (3,608) $ 17,814 nm $ (45,924) $ 9,792 nm 1,210 1,862 (35%) 4,533 7,396 (39%) 13% 19% (32%) 12% 18% (33%) $ 19,246 $32,056 (40%) $ 21,324 $25,266 (16%)

(1) Operating days include drilling and paid stand-by days.

“nm” – calculation not meaningful

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T O T A L E N E R G Y S E R V I C E S I N C . MANAGEMENT’S DISCUSSION AND ANALYSIS

North American and Australian drilling activity during the fourth quarter and year ended December 31, 2020 was lower compared to the same periods in 2019 as a result of reduced industry activity due to the COVID-19 pandemic and the corresponding impact on global commodity prices. Also increasing the operating loss for the fourth quarter and year ended December 31, 2020 was higher depreciation expense resulting from changes to the accounting estimates on the useful lives of CDS equipment and a change in the depreciation method from utilization (with a minimum annual depreciation expense equal to 96 days) to straight-line effective April 1, 2020. For the three months and year ended December 31, 2020 a total of $3.2 million and $11.6 million of incremental depreciation expense was recognized. For the year ended December 31, 2020 $26.3 million of non-recurring depreciation expense on now fully depreciated assets was recorded. Included in CDS results for the year ended December 31, 2019 was $0.9 million of net expenses incurred to relocate drilling equipment in the United States and the $17.6 million Rig Termination Payment received in the United States during the fourth quarter of 2019. Adjusted for these items, operating losses in CDS for the three months and year ended December 31, 2020 was, respectively, $0.4 million and $8.0 million as compared to $0.2 million income and $6.9 million loss for the same periods of 2019.

The following summarizes the operating results for the CDS segment by geographic area for the three months and year ended December 31, 2020.

ended December 31, 2020.
		Drilling		Drilling		Drilling
Q4 2020		Canada		U.S.		Australia		Total
Revenue	$	11,587	$	5,092	$	6,609	$	23,288
Operating (loss) income	$	(2,762)	$	(2,304)	$	1,458	$	(3,608)
Operating days(1)		747		286		177		1,210
Revenue per spud to release day, dollars	$	15,511	$	17,804	$	37,339	$	19,246
Utilization %(spud to release)		10%		24%		38%		13%
		Drilling		Drilling		Drilling
Q4 2019		Canada		U.S.	Australia			Total
Revenue	$	16,075	$	31,055	$	12,558	$	59,688
Operating (loss) income	$	(1,926)	$	17,470	$	2,270	$	17,814
Operating days(1)		902		564		396		1,862
Revenue per spud to release day, dollars	$	17,822	$	55,062	$	31,712	$	32,056
Utilization %(spud to release)		12%		31%		86%		19%
		Drilling		Drilling		Drilling
YTD 2020		Canada		U.S.	Australia			Total
Revenue	$	42,618	$	15,233	$	38,810	$	96,661
Operating (loss) income	$	(35,861)	$	(17,050)	$	6,987	$	(45,924)
Operating days(1)		2,648		781		1,104		4,533
Revenue per spud to release day, dollars	$	16,094	$	19,504	$	35,154	$	21,324
Utilization %(spud to release)		9%		13%		60%		12%
		Drilling		Drilling		Drilling
YTD 2019		Canada		U.S.	Australia			Total
Revenue	$	62,398	$	72,710	$	51,760	$	186,868
Operating income (loss)	$	(8,994)	$	10,148	$	8,638	$	9,792
Operating days(1)		3,602		2,253		1,541		7,396
Revenue per spud to release day, dollars	$	17,324	$	32,273	$	33,589	$	25,266
Utilization %(spud to release)		12%		28%		84%		18%

(1) Operating days include drilling and paid stand-by days.

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T O T A L E N E R G Y S E R V I C E S I N C . MANAGEMENT’S DISCUSSION AND ANALYSIS

Year over year lower effective day rates in North America were a result of continued price competition in the North American market. In the U.S. a combination of the mix of rigs working, the translation of foreign financial results into Canadian dollars given the depreciation of the U.S. dollar relative to the Canadian dollar during the fourth quarter of 2020 and the receipt of the $17.6 million Rig Termination Payment in the fourth quarter of 2019 also contributed to a year over year decline in revenue per spud to release day. Operating losses in the fourth quarter of 2020 increased relative to the same period in 2019 in North America as a result of reduced activity combined with $3.2 million of incremental depreciation expense. Overall revenue for the year ended December 31, 2020 decreased relative to the same period in 2019 as a result of challenging market conditions beginning in the second quarter of 2020 in North America. Operating losses for the year ended 2020 increased relative to the same period in 2019 in North America as a result of reduced activity combined with $12.2 million of incremental depreciation expense and $25.7 million of non-recurring depreciation expense. The recognition of COVID-19 relief funds contributed to lower labour costs in Canada and Australia.

Impacting fourth quarter results for Australia was a decline in activity levels that began in the third quarter of 2020 as customers reduced drilling programs in response to low oil and natural gas prices. In addition, two drilling rigs were removed from service in the third quarter of 2020 in order to complete necessary recertifications and upgrades and remained out of service during the fourth quarter of 2020. One rig is currently expected to be completed during the second quarter of 2021 and the other during the third quarter of 2021. Revenue per spud to release day for Australia was higher for the three and twelve months ended December 31, 2020 as compared to 2019 due to higher ancillary revenue combined with the effect of the translation of foreign financial results into Canadian dollars given the appreciation of the Australia dollar relative to the Canadian dollar during the fourth quarter of 2020. Australian operating income for the fourth quarter of 2020 decreased relative to the same period in 2019 as a result of reduced activity. Operating income for the year ended December 31, 2020 decreased relative to 2019 mostly due to decreased activity and $0.6 million of non-recurring depreciation expense.

Rentals and Transportation Services

Rentals and Transportation Services
December 31	Three Months Ended Year Ended
	2020 2019 Change 2020 2019 Change
Revenue Operating loss Pieces of rental equipment Heavy trucks Rental equipment utilization	$ 6,975 $ 15,907 (56%) $ 34,529 $ 65,446 (47%) $ (3,606) $ (4,496) (20%) $ (15,085) $ (21,411) (30%) 10,650 10,590 1% 10,650 10,590 1% 87 87 – 87 87 – 7% 13% (46%) 8% 16% (50%)

The revenue from the RTS segment for the fourth quarter and year ended December 31, 2020 decreased as compared with the same periods in 2019 due to extremely challenging industry conditions in North America resulting from the COVID-19 pandemic.

Operating losses in the fourth quarter of 2020 decreased as compared to the same period in 2019 primarily due to continued cost control efforts and the recognition of funds from COVID-19 relief programs. For the year ended December 31, 2020, operating losses decreased as compared to the same period in 2019 mostly due to $7.9 million of non-recurring depreciation expense in 2019 resulting from the change in accounting estimates on the useful life and residual values of RTS equipment effective July 1, 2019.

This segment’s relatively high fixed cost structure as compared to the Company’s other business segments combined with the inability to increase prices to the extent necessary to offset cost inflation contributed to the operating losses for the fourth quarter and year ended December 31, 2020. Such fixed cost structure includes costs associated with its significant operating branch infrastructure, including maintenance and repairs, utilities, insurance, property taxes and other infrastructure costs. In addition, depreciation expense on this segment’s equipment fleet is recorded on a straight-line basis and is not correlated to levels of activity.

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The following summarizes the operating results for the RTS segment by geographic area for the three months and year ended December 31, 2020.

ended December 31, 2020.
		RTS		RTS
Q4 2020		Canada		U.S.		Total
Revenue	$	4,826	$	2,149	$	6,975
Operating loss	$	(2,988)	$	(618)	$	(3,606)
Pieces of rental equipment		9,710		940		10,650
Rental equipment utilization		6%		13%		7%
		RTS		RTS
Q4 2019		Canada		U.S.		Total
Revenue	$	8,147	$	7,760	$	15,907
Operating (loss) income	$	(5,367)	$	871	$	(4,496)
Pieces of rental equipment		9,710		880		10,590
Rental equipment utilization		10%		42%		13%
		RTS		RTS
YTD 2020		Canada		U.S.		Total
Revenue	$	22,023	$	12,506	$	34,529
Operating loss	$	(13,297)	$	(1,788)	$	(15,085)
Pieces of rental equipment		9,710		940		10,650
Rental equipment utilization		7%		19%		8%
		RTS		RTS
YTD 2019		Canada		U.S.		Total
Revenue	$	38,657	$	26,789	$	65,446
Operating (loss) income	$	(24,189)	$	2,778	$	(21,411)
Pieces of rental equipment		9,710		880		10,590
Rental equipment utilization		14%		38%		16%

RTS Canada revenue decreased in the three months and year ended December 31, 2020 as compared to the same periods in 2019 due to extremely difficult industry conditions. Operating losses were lower in Q4 2020 as compared to the same period in 2019 despite lower revenue due to efforts to reduce the fixed cost structure of this business segment and continued operating cost control measures. The recognition of funds from COVID-19 relief programs also contributed to lower labour costs. For the year ended December 31, 2020 operating losses were lower than the prior year due primarily to $7.5 million of non-recurring depreciation expense incurred in 2019 arising from the change in depreciation estimates effective July 1, 2019.

RTS U.S. revenue for the three months and year ended December 31, 2020 decreased compared to the same periods in 2019 due to extremely difficult industry conditions. Operating losses were realized in the U.S. in the fourth quarter and year ended December 31, 2020 as compared to operating income for the same periods in 2019, due to a significant decline in activity. Included in the year ended December 31, 2019 was $0.4 million of non-recurring depreciation expense as a result of a change in depreciation estimates. Also impacting the decrease in revenues and operating losses for the year ended December 31, 2020 was the negative impact of the translation of foreign financial results into Canadian dollars given the appreciation of the Canadian dollar relative to the U.S. dollar during 2020.

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Compression and Process Services

Compression and Process Services
December 31	Three Months Ended Year Ended
	2020 2019 Change 2020 2019 Change
Revenue Operating income Operating income, % of revenue Sales backlog at period end, $ million Horsepower of equipment on rent at period end Rental equipment utilization during the period(HP)	$ 32,767 $ 40,666 (19%) $ 136,005 $ 366,738 (63%) $ 2,507 $ 1,939 29% $ 11,731 $ 27,869 (58%) 8% 5% 60% 9% 8% 13% $ 43.9 $ 48.6 $ (10%) $ 43.9 $ 48.6 (10%) 23,700 34,800 (32%) 23,700 34,800 (32%) 45% 72% (38%) 61% 69% (12%)

The revenue reported from the CPS segment decreased for the three months and year ended December 31, 2020 as compared to the same periods in 2019, due primarily to a decrease in fabrication sales and lower utilization of the compression rental fleet. Fabrication sales bookings began a steady and significant decline in 2019. This decline was reversed during the fourth quarter of 2020 with the fabrication sales backlog increasing by $6.9 million, or 19%, from $37.0 million at September 30, 2020 to $43.9 million at December 31, 2020. The timeline for conversion of the sales backlog into revenue varies from order to order and often changes due to factors outside of the Company’s control. During the fourth quarter of 2020, 6,500 horsepower of compression rental units were returned following the bankruptcy of a U.S. customer. Operating income for the fourth quarter of 2020 was higher compared to the same period in 2019 despite lower revenues due to the mix of revenue and the corresponding incremental margin contribution as well as the recognition of COVID-19 relief funds. For the year ended December 31, 2020 operating income was lower than the same period in 2019 mostly due to the decline in fabrication sales.

Well Servicing

Well Servicing
December 31	Three Months Ended Year Ended
	2020 2019 Change 2020 2019 Change
Revenue Operating income Operating income, % of revenue Service hours(1) Revenue per service hour, dollars Utilization(2)	$ 20,442 $ 35,239 (42%) $ 98,555 $ 138,346 (29%) $ 3,087 $ 4,166 (26%) $ 12,858 $ 14,744 (13%) 15% 12% 25% 13% 11% 18% 24,333 42,175 (42%) 113,428 158,142 (28%) $ 840 $ 836 – $ 869 $ 875 (1%) 25% 41% (39%) 26% 38% (32%)

(1) Service hours is defined as well servicing hours of service provided to customers and includes paid rig move and standby.

(2) The Company reports its service rig utilization for its operational service rigs in North America based on service hours of 3,650 per rig per year to reflect standard 10 hour operations per day. Utilization for the Company’s service rigs in Australia is calculated based on service hours of 8,760 per rig per year to reflect standard 24 hour operations.

Overall revenue decreased in the fourth quarter and year ended December 31, 2020 as compared to the same periods in 2019 as a result of decreased activity in all geographic regions. North American results were impacted by challenging market conditions following the outbreak of COVID-19 in March of 2020 while activity in Australia began to moderate in the third quarter of 2020.

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The following summarizes the operating results for the WS segment by geographic area for the three months and year ended December 31, 2020.

ended December 31, 2020.
		WS		WS		WS
Q4 2020		Canada		U.S.		Australia		Total
Revenue	$	8,130	$	1,277	$	11,035	$	20,442
Operating income (loss)	$	1,134	$	(114)	$	2,067	$	3,087
Operating income (loss), % of revenue		14%		nm		19%		15%
Service hours(1)		13,042		1,837		9,454		24,333
Revenue per service hour, dollars	$	623	$	695	$	1,167	$	840
Utilization %(2)		25%		14%		36%		25%
“nm” - calculation not meaningful
		WS		WS		WS
Q4 2019		Canada		U.S.		Australia		Total
Revenue	$	11,893	$	3,417	$	19,929	$	35,239
Operating income (loss)	$	643	$	(763)	$	4,286	$	4,166
Operating income (loss), % of revenue		5%		nm		22%		12%
Service hours(1)		18,387		4,716		19,072		42,175
Revenue per service hour, dollars	$	647	$	725	$	1,045	$	836
Utilization %(2)		35%		37%		72%		41%
“nm” - calculation not meaningful
		WS		WS		WS
YTD 2020		Canada		U.S.		Australia		Total
Revenue	$	26,747	$	7,799	$	64,009	$	98,555
Operating (loss) income	$	(193)	$	(472)	$	13,523	$	12,858
Operating (loss) income, % of revenue		nm		nm		21%		13%
Service hours(1)		42,011		10,734		60,683		113,428
Revenue per service hour, dollars	$	637	$	727	$	1,055	$	869
Utilization %(2)		20%		21%		58%		26%
“nm” - calculation not meaningful
		WS		WS		WS
YTD 2019		Canada		U.S.		Australia		Total
Revenue	$	44,242	$	14,150	$	79,954	$	138,346
Operating income (loss)	$	419	$	(232)	$	14,557	$	14,744
Operating income (loss), % of revenue		1%		nm		18%		11%
Service hours(1)		66,995		17,961		73,186		158,142
Revenue per service hour, dollars	$	660	$	788	$	1,092	$	875
Utilization %(2)		32%		35%		70%		38%

“nm” - calculation not meaningful

(1) Service hours is defined as well servicing hours of service provided to customers and includes paid rig move and standby.

(2) The Company reports its service rig utilization for its operational service rigs in North America based on service hours of 3,650 per rig per year to reflect standard 10 hour operations per day. Utilization for the Company’s service rigs in Australia is calculated based on service hours of 8,760 per rig per year to reflect standard 24 hour operations.

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T O T A L E N E R G Y S E R V I C E S I N C . MANAGEMENT’S DISCUSSION AND ANALYSIS

Canadian revenue in the fourth quarter and year ended December 31, 2020 decreased compared to the same periods in 2019 primarily due to lower utilization and decreased pricing as a result of a combination of the mix of equipment operating and reduced activity levels. Despite lower revenue in the fourth quarter, higher operating income was realized in the period as a result of cost control measures implemented following the start of the pandemic combined with the recognition of funds from COVID-19 relief programs. For the year ended December 31, 2020 operating losses were realized compared to income in the same period in 2019 due to a combination of the mix of equipment operating and the corresponding contribution to operating income margin and an overall decrease in activity levels.

In the United States revenue decreased in the fourth quarter and year ended December 31, 2020 compared to the same periods in 2019 primarily due to decreased activity beginning in the second quarter of 2020 following the impact of COVID-19 on the U.S. market. Operating losses in the fourth quarter of 2020 decreased compared to the same period in 2019 as 2019 included $0.4 million of expenses incurred to reactivate three well servicing rigs. Operating losses for the year ended December 31, 2020 were higher compared to the same period in 2019 as a result of reduced activity levels.

In Australia lower revenue and operating income for the fourth quarter of 2020 compared to the same period in 2019 was due primarily to a combination of lower ancillary revenues and the moderation of industry activity levels beginning in the third quarter of 2020 which resulted in fewer rigs operating in the period compared to 2019. Revenue and operating income for the year ended December 31, 2020 compared to the same period in 2019 was lower due to a combination of lower ancillary revenues and reduced activity beginning in the third quarter of 2020. Positively impacting operating income in the second half of 2020 was the recognition of funds from COVID-19 relief programs.

Corporate

Corporate
December 31	Three months ended Year ended
	2020 2019 Change 2020 2019 Change
Operatingloss	$ (2,393) $ (4,955) (52%) $ (119) $ (14,192) (99%)

“nm” - calculation not meaningful

Total Energy’s Corporate segment includes activities related to the Company’s corporate and public issuer affairs. This segment does not generate any revenue but provides sales, operating, financial, treasury, analytical and other management and support services to Total Energy’s business segments and manages the corporate affairs of the Company, including matters related to its public listing. Included in the Corporate segment for the three months and year ended December 31, 2020 is a $0.8 million unrealized loss and a $6.0 million unrealized gain, respectively, on the translation of working capital balances of foreign subsidiaries as compared to $2.1 million and $3.9 million of unrealized losses for the same periods in 2019.

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LIQUIDITY AND CAPITAL RESOURCES

Cash Provided by Operating Activities and Cashflow

Cash Provided by Operating Activities	and Cashfow
December 31	Three months ended Year ended
	2020 2019 Change 2020 2019 Change
Cash provided by operating activities Per Share Data (Diluted), dollars Cashflow Per Share Data(Diluted),dollars	$ 19,226 $ 40,545 (53%) $ 86,122 $ 73,055 18% $ 0.43 $ 0.90 (52%) $ 1.91 $ 1.60 19% $ 18,431 $ 36,896 (50%) $ 73,437 $ 111,727 (34%) $ 0.41 $ 0.82 (50%) $ 1.63 $ 2.45 (33%)

The changes in cash provided by operating activities were due primarily to changes in the working capital requirements of the various business segments. Cash flow decreased in the fourth quarter and year ended December 31, 2020 compared to the same periods in 2019 as a result of lower EBITDA compared to 2019. Given continued challenging industry conditions and the suspension of dividends in Q1 2020, the Company’s current priority is to maintain sufficient financial liquidity and direct remaining cash provided by operating activities after required long-term debt and lease liability payments to the repayment of long-term debt.

Investing Activities

Investing Activities
December 31	Three months ended Year ended
	2020 2019 Change 2020 2019 Change
Net cash used in investing activities Proceeds from sale of PP&E Purchase of PP&E	$ (3,900) $ (7,348) (47%) $ (13,538) $ (39,209) (65%) $ 468 $ 1,573 (70%) $ 5,936 $ 8,422 (30%) $ (4,606) $ (9,013) (49%) $ (16,904) $ (49,313) (66%)

Proceeds from the sale of property, plant and equipment (“PP&E”) are derived primarily from the disposal of equipment in the ordinary course of business and the replacement and upgrade of older equipment in the Company’s fleet. During the fourth quarter of 2020, equipment disposed of consisted primarily of light-duty vehicles and underutilized ancillary drilling equipment. For the year ended December 31, 2020 equipment disposed consisted primarily of decommissioned drilling rigs, underutilized rental equipment, light-duty vehicles, compression rental equipment and underutilized ancillary drilling equipment.

The following summarizes PP&E purchases by segment for the three months and year ended December 31, 2020.

December 31	Three months ended Year ended
	2020 2019 Change 2020 2019 Change
CDS RTS CPS WS Corporate	$ 2,163 $ 3,405 (36%) $ 4,703 $ 10,168 (54%) 167 2,209 (92%) 1,024 19,420 (95%) 988 2,720 (64%) 7,922 14,312 (45%) 1,288 679 90% 3,243 4,929 (34%) – – – 12 484 (98%)
	$ 4,606 $ 9,013 (49%) $ 16,904 $49,313 (66%)

During the fourth quarter and year ended December 31, 2020, PP&E purchases were as follows: ancillary rig equipment and rig recertification and upgrades in the CDS segment, information technology upgrades and heavy truck recertifications in the RTS segment, additions to the compression rental fleet in the CPS segment and service rig recertifications and upgrades in the WS segment.

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During the fourth quarter and year ended December 31, 2019, PP&E purchases included the following: rig equipment and rig recertification and upgrades in the CDS segment, information technology upgrades and rental equipment in the RTS segment, additions to the compression rental fleet in the CPS segment, service rig recertifications and upgrades in the WS segment and real estate development and information technology infrastructure upgrades in the Corporate segment.

Financing Activities

Financing Activities
December 31	Three months ended Year ended
	2020 2019 Change 2020 2019 Change
Net cash used in financingactivities	$ (17,183) $ (13,324) 29% $ (69,461) $ (44,613) 56%

During the fourth quarter of 2020 the Company paid $4.6 million of interest, repaid $10.6 million of long-term debt and made $1.9 million of lease liabilities payments. During the year ended December 31, 2020 the Company paid $13.1 million of interest, $2.7 million of dividends, repaid $44.8 million of long-term debt and made $8.3 million of lease liabilities payments.

Liquidity and Capital Resources

The Company had a working capital surplus of $138.9 million as at December 31, 2020 compared to $103.2 million as at December 31, 2019. This increase was due primarily to a lower current portion of long-term debt following the refinancing of $40.2 million of mortgage debt that matured on April 29, 2020. As at December 31, 2020 and the date of this MD&A, the Company was in compliance with all debt covenants.

On June 19, 2017 the Company entered into a three-year $225.0 million revolving syndicated credit facility (the “Credit Facility”). On April 25, 2018 the Credit Facility was increased by $65.0 million to $290.0 million. On November 10, 2020, at the request of the Company the Credit Facility was reduced to $250.0 million and the maturity date extended to November 10, 2023. The Company has the option to increase such facility by $75.0 million subject to certain terms and conditions, including the agreement of the lenders to increase their commitments. The Credit Facility includes a Canadian $18.0 million operating line, an Australian $2.0 million operating line and a Canadian $230.0 million revolving facility. The Credit Facility bears interest at the banks’ Canadian prime rate plus 0.25% to 2.75%, bankers’ acceptance, letter of credit, LIBOR or BBSY advances plus a 1.5% to 4.0% stamping fee. The applicable interest rate within such ranges is dependent on certain financial ratios of the Company. A standby fee ranging from 0.25% to 0.8% per annum is paid quarterly on the unused portion of the facility depending on certain financial ratios of the Company. At December 31, 2020, the applicable interest rate on amounts drawn on the Credit Facility was 2.59% and the standby rate was 0.44%. Letters of credit (“LOC”) of $0.3 million were outstanding at December 31, 2020 which reduces the amount of credit available under the Credit Facility by an equivalent amount.

In August of 2018 a U.S. $20.0 million letter of credit facility was established (the “LOC Facility”). Letters of credit (“LOC”) issued pursuant to the LOC Facility do not reduce availability under the Credit Facility. In April 2020 this facility was reduced at the request of the Company to U.S. $10.0 million. At December 31, 2020 $3.7 million Canadian dollars of LOCs were outstanding under the LOC Facility (2019: $4.4 million).

In addition to the Credit Facility, a subsidiary of the Company has a $5.0 million revolving operating credit facility with a member of the Credit Facility lenders’ syndicate. At December 31, 2020 this facility was undrawn and fully available.

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At December 31, 2020 the Company’s long-term debt consisted of the following:

	December 31, 2020
	Interest rate Principal amount
Credit Facility Mortgage loan (2025 maturity) Mortgage loan(2041 maturity)	2.59% $ 170,000
	3.10% 48,791
	3.05% 14,278
Less currentportion	233,069
	2,552
	$ 230,517

At December 31, 2020 amounts owing under the Credit Facility and the two mortgage loans were denominated in Canadian dollars.

The weighted average interest rate on the Company’s debt at December 31, 2020 was 2.72%.

The Company’s ability to access the Credit Facility is dependent, among other conditions, on compliance with the following financial ratios, the definitions and thresholds for which are further described below:

	December 31, 2020	Threshold
Twelve-month trailing Bank EBITDA to interest expense	8.67	minimum 3.00
Total Senior Debt to twelve-month trailingBank EBITDA	2.35	maximum 3.00

The Company was in compliance with all of its Credit Facility and other debt covenants at December 31, 2020. For further information regarding Credit Facility compliance requirements and details on the Company’s borrowings, please refer to note 13 to the 2020 Financial Statements.

The Company expects that cash and cash equivalents, cash flow from operating activities, together with existing and available credit facilities, will be sufficient to fund its presently anticipated requirements for investments in working capital and capital assets as well as required debt and lease liability payments.

Dividends

On March 12, 2020 the Company suspended payment of a dividend given the sudden and material deterioration in industry conditions.

For the three months and year ended December 31, 2019 the Company declared dividends of $2.7 million ($0.06 per share) and $10.9 million ($0.24 per share).

Management and the Board of Directors of the Company continue to monitor the Company’s dividend policy in the context of industry conditions and forecasted net income, cashflow, cash provided by operating activities, debt levels, capital expenditures and other investment opportunities and will aim to finance any future dividends through cash provided by operating activities.

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Capital Spending

Capital spending for the three months and year ending December 31, 2020 consisted of $4.6 million and $16.9 million of PP&E purchases. This included approximately $3.7 million of 2019 capital expenditure commitments that were carried into 2020. Capital spending was funded by cash flow, including $5.9 million of proceeds from the sale of PP&E during 2020.

CONTRACTUAL OBLIGATIONS

At December 31, 2020 the Company had the following contractual obligations:

Total	Payments due by year
	2021 2022 2023 2024 2025 and after
Long-term debt and bank indebtedness $ 233,069 Commitments(1) 288 Lease liabilities, net of lease assets 13,552 Purchase obligations(2) 6,969	$ 2,552 $ 2,611 $ 172,671 $ 2,730 $ 52,505 169 101 16 2 – 5,851 3,100 1,781 1,232 1,588 6,969 – – – –
Total contractual obligations $253,878	$15,541 $ 5,812 $174,468 $ 3,964 $54,093

(1) Commitments are described in Note 24 to the 2020 Financial Statements.

(2) Purchase obligations are described in Note 24 to the 2020 Financial Statements. As at December 31, 2020 purchase obligations primarily relate to commitments to purchase inventory in the CPS segment.

OFF-BALANCE SHEET ARRANGEMENTS

During 2020 and 2019, the Company had no off-balance sheet arrangements other than short-term leases.

TRANSACTIONS WITH RELATED PARTIES

During 2020 and 2019 the Company had no material transactions with related parties.

FINANCIAL INSTRUMENTS

Fair values

The discounted future cash repayments of the Company’s mortgage loan due in 2025 are calculated using prevailing market rates of a similar debt instrument as at the reporting date. The net present value of future cash repayments of such mortgage and related interest at the prevailing market rate of 3.08% for a similar debt instrument at December 31, 2020 was $48.8 million (December 31, 2019: market rate of 3.85%, $40.8 million). The carrying value and Company’s liability with respect to this mortgage is $48.8 million.

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OUTSTANDING COMPANY SHARE DATA

As at the date of this MD&A, the Company had 45,081,300 common shares outstanding.

Summary information with respect to share options outstanding is provided below:

Outstanding at		Exercise	Remaining life	Exercisable at
December 31,2020		price	(years)	December 31,2020
1,175,000	$	12.69	1.50	1,175,000
60,000		12.00	1.60	60,000
300,000		13.54	2.20	200,000
840,000		9.51	3.40	280,004
650,000		2.31	4.60	–
3,025,000	$	9.65	2.77	1,715,004

OUTLOOK

Industry Conditions

The COVID-19 pandemic and the resultant historic decline in global economic activity and oil prices contributed to unprecedented challenges and uncertainty for the global energy industry during 2020. Exacerbating the pressure on global prices was a short-lived price war between Saudi Arabia and Russia that occurred around the time the COVID-19 pandemic began. While oil and natural gas prices have recently recovered, industry activity remains low by historical measures. As such, the Company remains cautious and continues to manage it business and affairs in a manner to protect its balance sheet and financial liquidity.

The severity of the current downturn has resulted in a substantial increase in bankruptcies and insolvencies among the Company’s competitors and customers. While this led to short term challenges, it is expected to result in more balanced market conditions over the long-term in the various markets in which the Company competes as global energy supply and demand rebalances with normalized global economic activity.

Recent improvements in global oil and natural gas prices have stabilized industry conditions although current activity levels remain low relative to historical levels, particularly in North America.

RISK FACTORS AND RISK MANAGEMENT

In the normal course of business, Total Energy is exposed to financial and operating risks that may potentially and materially impact its operating results. A discussion of the Company’s business risks is set out in its AIF under the heading “Risk Factors” and is incorporated herein. The Company employs risk management strategies with a view to mitigating these risks on a cost-effective basis. There have been no significant changes in risk and risk management in 2020 other than as described below.

Industry Conditions

The dual shocks of the COVID-19 pandemic and collapse in oil prices contributed to extremely negative industry conditions for the global energy industry that only recently have begun to moderate. The Company’s North American customers have significantly reduced near term capital spending resulting in current activity levels that are substantially below historical levels. Activity levels in Australia have also moderated but less than North America. While the Company has been proactive in managing its operating cost structure, capital expenditures and dividend policy to adapt to the current environment, continued challenging industry activity levels may require additional substantive measures be taken to preserve the Company’s financial strength and flexibility.

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T O T A L E N E R G Y S E R V I C E S I N C . MANAGEMENT’S DISCUSSION AND ANALYSIS

Credit Risk

As a result of the challenging oil and natural gas market conditions, particularly in North America, the Company continues to face heightened counterparty credit risk as a substantial portion of the Company’s dealings are with entities involved in the oil and gas industry. Regarding accounts receivable, the Company remains focused on actively managing credit risk. Specifically, management has remained diligent in assessing credit levels granted to customers, monitoring the aging of receivables and taking proactive steps to secure and collect outstanding balances.

The Company did not have significant exposure to any individual customer or counter party in the fourth quarter of 2020, other than one major oil and gas producing company that accounted for over 10% of the consolidated revenue. For the year ended December 31, 2020, the Company did not have significant exposure other than two major oil and gas producing companies that each accounted for over 10% of consolidated revenue. In the fourth quarter of 2019 the Company did not have significant exposure other than two major oil and gas companies. For the year ended December 31, 2019 the Company did not have significant exposure to any individual customer, with no single customer accounting for more than 10% of consolidated revenue.

The Company increased its allowance for doubtful accounts receivable by $0.7 million and wrote-off $1.3 million against the allowance for doubtful accounts during 2020, bringing such allowance to an aggregate of $2.0 million as at December 31, 2020.

CRITICAL ACCOUNTING ESTIMATES

Management is responsible for applying judgment in preparing accounting estimates. Certain estimates and related disclosures included within the financial statements are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from management’s current judgments. An accounting estimate is considered critical only if it requires the Company to make assumptions about matters that are highly uncertain at the time the accounting estimate is made, and different estimates the Company could have used would have a material impact on Total Energy’s financial condition, changes in financial condition or results of operations.

There have been no material changes to the Company’s Critical Accounting Estimates during 2020 other than the changes listed below.

Change in accounting estimates

During the second quarter of 2020, the Company conducted a review of its drilling equipment within its CDS segment. Such review was based on the current economic and operating environment and considered the operating history of these assets in order to assess their useful lives, pace of economic consumption and residual values. As a result of this review, effective April 1, 2020 certain changes were made to the Company’s estimates of the useful life and residual values of various CDS assets, which are summarized as follows:

	Previous	New	Previous	New
	estimated	estimated	basis of	basis of
	useful lives	useful lives	depreciation	depreciation
			utilization
			(minimum annual
	600 to 8,000		deemed utilization
Drillingrigs and related equipment	operatingdays	3 – 25years	of 96 days)	straight-line

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T O T A L E N E R G Y S E R V I C E S I N C . MANAGEMENT’S DISCUSSION AND ANALYSIS

As a result of these changes in estimates which related primarily to the estimated useful life and method of depreciation, a non-recurring depreciation expense relating to now fully depreciated assets of $26.3 million was incurred during the year ended December 31, 2020. In addition, recurring depreciation expense increased by $3.2 million and $11.6 million for the three months and year ended December 31, 2020.

During the third quarter of 2019, the Company conducted a review of its rentals and transportation equipment within its RTS segment. Such review was based on the current economic and operating environment and considered the operating history of these assets in order to assess their useful lives, pace of economic consumption and residual values. As a result of this review, effective July 1, 2019 certain changes were made to the Company’s estimates of the useful life and residual values of various RTS assets and are summarized as follows:

	Previous	New
	estimated useful	estimated useful	Previous	New
	lives, years	lives, years	residual value	residual value
Rental and transportation equipment
Rental equipment	5 - 15	3 - 20	25% - 33%	0% - 25%
Transportation equipment	7	7 - 10	25%	25%

As a result of these changes in estimates, a non-recurring depreciation expense of $7.9 million was incurred during the second half of 2019 on residual values of previously fully depreciated assets. In addition, recurring depreciation expense increased by $2.0 million in 2019 as a result of this change in estimates.

Critical Judgments in Applying Accounting Policies

The following are critical judgments that management has made in the process of applying accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial statements.

The Company’s assets are aggregated into cash-generating units for the purpose of calculating impairment. Cash generating units (“CGU” or “CGUs”) are based on management’s judgments and assessment of the CGU’s ability to generate independent cash inflows. Judgments are also required to assess when impairment indicators exist and impairment testing is required.

The Company is required to exercise judgment in assessing whether the criteria for recognition of a provision or a contingency have been met. The Company considers whether a present obligation exists, probability of loss and if a reliable estimate can be formulated.

The Company’s functional currency is based on the primary economic environment in which it operates and is based on an analysis of several factors including which currency principally affects sales prices of products sold by the Company, which currency influences the main expenses of providing services, in which currency the Company keeps it receipts from operating activities and in which currency the Company has received financing.

The Company makes judgments regarding the determination of its reportable segments, including aggregation criteria (as appropriate), for segmented reporting.

Judgments are made by management to determine the likelihood of whether deferred income tax assets at the end of the reporting period will be realized from future taxable earnings.

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T O T A L E N E R G Y S E R V I C E S I N C .

MANAGEMENT’S DISCUSSION AND ANALYSIS

Key Sources of Estimation Uncertainty

The following are key estimates and their assumptions made by management affecting the measurement of balances and transactions in the consolidated financial statements.

Where impairment indicators exist or annually for goodwill, the recoverable amount of the asset or CGU is determined using the greater of fair value less costs to sell or value-in-use. Value-in-use calculations require assumptions for discount rates and estimations of the timing for events or circumstances that will affect future cash flows. Fair value less costs to sell requires management to make estimates of fair value using market conditions for similar assets as well as estimations for costs to sell taking into account dismantle and transportation costs.

The Company is required to estimate the amount of provisions and contingencies based on the estimated future outcome of the event.

The Company recognizes revenue over time in accounting for its equipment manufacturing contract revenue. Recognizing revenue over time requires estimates of the stage of completion of the contract to date as a proportion of the total work to be performed.

As pertains to property, plant and equipment the Company is required to estimate the residual value and useful lives of assets for purposes of depreciation.

As pertains to accounts receivable the Company is required to estimate allowances for doubtful accounts based on expected future credit losses and experiences with customers.

In a business combination, management makes estimates of the fair value of assets acquired and liabilities assumed which includes assessing the value of property, plant and equipment and intangible assets being acquired.

The Company’s estimate of share-based compensation is dependent upon estimates of historic volatility and forfeiture rates.

The Company’s estimate of the fair value of forward foreign exchange contracts is dependent on estimated forward prices / rates and volatility in those prices / rates.

The deferred tax liability is based on estimates as to the timing of the reversal of temporary differences, substantively enacted tax rates and the likelihood of assets being realized.

FUTURE ACCOUNTING POLICIES CHANGES

Certain pronouncements were issued recently by the International Accounting Standards Board (“IASB”) of the International Financial Reporting Standards (“IFRS”) Interpretations Committee that are mandatory for accounting periods beginning in future years. Accounting standards or amendments to existing accounting standards that have been issued but have future effective dates are either not applicable or are not expected to have a significant impact on the Company’s consolidated financial statements.

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F O C U S[• ] D I S C I P L I N E[• ] G R O W T H

T O T A L E N E R G Y S E R V I C E S I N C . MANAGEMENT’S DISCUSSION AND ANALYSIS

NON-IFRS MEASURES

Management believes that EBITDA (earnings before interest, taxes, depreciation and amortization) is a useful measure because it gives an indication of the results from the Company’s primary business activities prior to consideration of how such activities are financed and the impact of taxation and non-cash depreciation and amortization charges. Reconciliation of this non-IFRS measure to net income is set forth below.

EBITDA

EBITDA
December 31	Three months ended Year ended
	2020 2019 2020 2019
Net (loss) income Add back (deduct): Depreciation Finance costs Income tax(recovery)expense	$ (1,732) $ 8,593 $ (30,455) $ 10,091 22,081 20,773 113,363 88,440 2,283 3,233 10,346 12,938 (3,086) 3,206 (12,050) (3,790)
EBITDA	$ 19,546 $ 35,805 $ 81,204 $107,679
Net debt is equal to long-term debt plus lease liabilities plus current liabilities minus current assets. Net Debt As at December 31, 2020
Long-term debt $ 230,517 Lease liabilities 8,420 Add back (deduct): Current liabilities 61,744 Current assets (200,684)
Net Debt $ 99,997

RESPONSIBILITY OF MANAGEMENT AND THE BOARD OF DIRECTORS

Management is responsible for the information disclosed in this MD&A and the accompanying consolidated financial statements, and has in place appropriate information systems, procedures and controls to ensure that information used internally by management and disclosed externally is materially complete and reliable. In addition, the Company’s Audit Committee, on behalf of the Board of Directors, provides an oversight role with respect to all public financial disclosures made by the Company, and has reviewed and approved this MD&A and the 2020 Financial Statements.

DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING

The Chief Executive Officer and the Chief Financial Officer, together with other members of management (collectively, the “Officers”), have designed the Company’s disclosure controls and procedures in order to provide reasonable assurance that the information required to be disclosed by the Company and its consolidated divisions, subsidiaries and partnerships in its filings or other reports submitted by it under securities legislation is in compliance with the time periods specified in the securities legislation. These disclosure controls and procedures include controls and procedures which have been designed to ensure that the information required to be disclosed by the Company and its consolidated divisions and subsidiaries in its filings or other reports submitted by it under securities legislation is accumulated and communicated to the Officers and others within those entities to allow timely decisions regarding required disclosure.

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T O T A L E N E R G Y S E R V I C E S I N C . MANAGEMENT’S DISCUSSION AND ANALYSIS

Disclosure Controls and Procedures: The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by the Company is reported within the time periods specified under securities laws, and include controls and procedures that are designed to ensure that information is communicated to management of Total Energy, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure. An evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Multilateral Instrument 52-109, Certification of Disclosure in Issuers’ Annual Financial and Interim Filings) was conducted as at December 31, 2020. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer of Total Energy have concluded that the design and operation of the Company’s disclosure controls and procedures were effective as at December 31, 2020.

Internal Control Over Financial Reporting: The Chief Executive Officer and the Chief Financial Officer of Total Energy are responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards (“IFRS”). The Chief Executive Officer and the Chief Financial Officer of Total Energy directed the assessment of the design and operating effectiveness of the Company’s internal control over financial reporting as at December 31, 2020 and based on that assessment determined that the Company’s internal control over financial reporting was, in all material respects, appropriately designed and operating effectively. There were no changes to internal controls over financial reporting that would materially affect, or be reasonably likely to materially affect, the Company’s internal controls over financial reporting during the quarter ended December 31, 2020.

While the Officers have designed the Company’s disclosure controls and procedures and internal controls over financial reporting, they expect that these controls and procedures will not prevent all errors and fraud. A control system, no matter how well conceived or operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met.

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T O T A L E N E R G Y S E R V I C E S I N C . MANAGEMENT’S DISCUSSION AND ANALYSIS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS

Certain information and statements contained in this MD&A constitute forward-looking information, including the anticipated costs associated with the purchase of capital equipment, expectations concerning the nature and timing of growth within the various business divisions operated through affiliates of Total Energy, expectations respecting the competitive position of such business divisions, expectations concerning the financing of future business activities, statements as to future economic and operating conditions and expectations regarding the payment of dividends in the future. Readers should review the cautionary statement respecting forward-looking information that appears below.

The information and statements contained in this MD&A that are not historical facts are forward-looking statements. Forward-looking statements (often, but not always, identified by the use of words such as “seek”, “plan”, “continue”, “estimate”, “project”, “predict”, “potential”, “targeting”, “intend”, “could”, “might”, “should”, “believe”, “expect”, “may”, “anticipate” or “will” and similar expressions) may include plans, expectations, opinions, or guidance that are not statements of fact. Forward-looking statements are based upon the opinions, expectations and estimates of management as at the date the statements are made and are subject to a variety of risks and uncertainties and other factors that could cause actual events or outcomes to differ materially from those anticipated or implied by such forward-looking statements. These factors include, but are not limited to, such things as global economic conditions, changes in industry conditions (including the levels of capital expenditures made by oil and gas producers and explorers), pandemics, the credit risk to which the Company is exposed in the conduct of its business, fluctuations in prevailing commodity prices or currency and interest rates, the competitive environment to which the various business divisions are, or may be, exposed in all aspects of their business, the ability of the Company’s various business divisions to access equipment (including parts) and new technologies and to maintain relationships with key suppliers, the ability of the Company’s various business divisions to attract and maintain key personnel and other qualified employees, various environmental risks to which the Company’s business divisions are exposed in the conduct of their operations, inherent risks associated with the conduct of the businesses in which the Company’s business divisions operate, timing and costs associated with the acquisition of capital equipment, the impact of weather and other seasonal factors that affect business operations, availability of financial resources or third-party financing and the impact of new laws and regulations or changes in existing laws, regulations or administrative practices on the part of regulatory authorities, including without limitation taxation, labour and environmental laws and regulations and changes in how such laws and regulations are interpreted and enforced. Forward-looking information respecting the anticipated costs associated with the purchase of capital equipment are based upon historical prices for various classes of equipment, expectations relating to the impact of inflation on the future cost of such equipment and management’s views concerning the negotiating position of the Company and its affiliates. Forward-looking information concerning the nature and timing of growth within the various business divisions is based on the current budget of the Company (which is subject to change), factors that affected the historical growth of such business divisions, sources of historic growth opportunities and expectations relating to future economic and operating conditions. Forward-looking information concerning the future competitive position of the Company’s business divisions is based upon the current competitive environment in which those business divisions operate, expectations relating to future economic and operating conditions, current and announced build programs and other expansion plans of other organizations that operate in the energy service business. Forward-looking information concerning the financing of future business activities is based upon the financing sources on which the Company and its predecessors have historically relied and expectations relating to future economic and operating conditions. Forwardlooking information concerning future economic and operating conditions is based upon historical economic and operating conditions, and opinions of third-party analysts respecting anticipated economic and operating conditions. Although management of the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Accordingly, readers should not place undue reliance upon any of the forward-looking information set out in this MD&A. All of the forward-looking statements of the Company contained in this MD&A are expressly qualified, in their entirety, by this cautionary statement. The various risks to which the Company is exposed are described in additional detail in this MD&A under the heading “Risk Factors” and in the Company’s AIF. Except as required by law, the Company disclaims any intention or obligation to update or revise any forward-looking information or statements, whether as a result of new information, future events or otherwise.

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