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© Queen’s University 2017

QUIC RESEARCH REPORT

QUIC Research Reports focus on

emerging investment themes that

affect current portfolio companies

and companies under coverage.

Energy & Utilities

The QUIC Energy portfolio first pitched Canadian Energy Services &

Technology Corp (CES) in November of 2015. Since then, CES has

surpassed our target price of $7.75 as it appears we are past the

trough of the oil field services industry, and the outlook for services has

become much more bright.

CES is currently our second largest holding in terms of active

weighting. In this report the QUIC Energy team will revisit our outlook

for both CES and the service industry as a whole and ultimately re-

evaluate how comfortable we are with CES’s current valuation.

TSX:CEU Re-Evaluation

We loved it then. We love it now.

February 6, 2017

Jack Ferris

David Patterson-Cole

Irena Petkovic

Michael Benzinger

QUIC Research Report

February 6, 2017

TSX:CEU Re-Evaluation

February 6, 2017

Table of Contents

2

Industry Overview 3

Company Overview 4

Investment Thesis I: Specialty Chemicals Market 6

Investment Thesis II: Platform for Future Acquisitions 7

Investment Thesis III: Shift Towards Complex Drilling 8

Catalysts & Risks 9

Valuation 10

References 11

QUIC Research Report

February 6, 2017

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Energy Services:

The Energy Services industry comprises of

businesses who specialize in different operations

that are a part of the process of developing and

maintaining oil wells. These service companies will

then bid to work for different E&P’s for various

roles along the well lifecycle. The services sector as

a whole can be categorized into two general

categories: drillers and services (visualized in Exhibit

1). As the name entails, the “drillers” segment

comprises of roles related to the physical drilling of

the well. Services comprises of tasks relating to

upkeep and efficiencies. Given that CES only

operates on the services side of the breakdown, this

industry overview will concentrate on that half of

the industry.

Seismic: Seismic services involve the use of sonar

and other advance technologies to locate new oil

fields and identify the most efficient locations to

drill.

Transport: The transportation segment consists of

the physical transportation of the rigs, both

onshore and offshore.

Well Services: This category is more broad. One of

the key areas within this sub segment is the

specialty chemicals market which has been the

fastest growing segment in recent years. This is also

the area that CES has the most exposure to.

Specialty chemicals are used in various parts of the

well life-cycle. Chemicals are used to maximize

production, and maintain optimal fluid flow as well

as asset quality. This segment has boomed recently

as more complex drilling techniques are developed

which are specialty increasingly chemical-intensive.

The specialty chemicals area is most sensitive to

economic downturns as the business is purely

dependent on new wells being drilled. Given out

current stable outlook for oil markets, we believe

this to be an attractive segment as it appears we

are past the trough for drilling activity in the United

States.

Industry Overview

Energy

Services

Drillers

Onshore OffshoreCapital

Equipment

Services

Seismic TransportWell

Services

Other

Services

EXHIBIT 1

Energy Services Industry Breakdown

Source: Company Filings

QUIC Research Report

February 6, 2017

TSX:CEU Re-Evaluation

February 6, 2017 4

The Energy portfolio has held CES for just over one

year now. We were originally attracted by the

combination of CES’s exposure to both the specialty

chemicals market as well as their international (U.S.)

exposure.

The company operates in four major segments:

Drilling Fluids, Completion & Stimulation,

Production, and Pipelines & Midstream. CES

operates in these segments under a number of

different trade names. In Canada, the business is

run under the names Canadian Energy Services,

PureChem Services, Clear Environmental Solutions,

and Equal Transport. In the U.S. the company

operates under AES Drilling Fluids, AES Drilling

Fluids Permian and JACAM Chemicals. Canadian

Energy Services, AES and AES Permian form the

core of the drilling fluids business, JACAM and

PureChem are the specialty chemicals companies,

and Equal and Clear are complimentary services.

The product portfolio can be visualized in Exhibit 2

below while the company’s geographic breakdown

and diversification can be seen in Exhibit 7. One of

the most attractive aspects of CES is its U.S.

exposure. Exhibit 4 shows their peer leading

exposure to the U.S. where service inflation costs

are expected to far outpace those in Canada in the

upcoming twelve months.

Company Overview (part i of ii)

EXHIBIT 2

Portfolio Breakdown

-

$4.0

$8.0

$12.0

$16.0

2009 2010 2011 2012 2013 2014 2015

Schlumberger Haliburton Baker Hughes

Newpark Tetra Tech. CESTC

Lubrizol Others

EXHIBIT 3

Drilling & Completion Fluids Market Size

Source: Investor Presentation

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February 6, 2017

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February 6, 2017

CES is led by an experienced management team

who have been with the company for several years.

Exhibit 6 breaks down CES’s top management, each

of whom has at least fifteen years of relevant work

experience.

5

Company Overview (part ii of ii)

EXHIBIT 7

Geographic Breakdown

Source: Investor Presentations

EXHIBIT 5

QUIC TSX:CEU Holding History

Source: S&P Capital IQ

EXHIBIT 4

Peer Leading US Exposure

Source: Company Reports

-

25.0%

50.0%

75.0%

FY2010E FY2012E FY2014E

TSX:TCW TSX:CFW TSX:CEU

Name Position Held Role Since Experience

Thomas Simons Pres. & CEO 2006 > 15 Years

Craig Nieboer CFO 2010 > 20 Years

Kenneth Zinger COO 2005 > 21 Years

Kenneth Zandee VP Marketing 2005 > 18 Years

EXHIBIT 6

Experienced Management Team

Source: Company Reports

-

900

1,800

2,700

3,600

4,500

5,400

-

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

23-Nov-15 23-Jan-16 23-Mar-16 23-May-16 23-Jul-16 23-Sep-16 23-Nov-16 23-Jan-17

Share Count [RHS] TSX:CEU [LHS] Target Price [LHS]

QUIC Research Report

February 6, 2017

TSX:CEU Re-Evaluation

February 6, 2017 6

Our first thesis focused on the attractive exposure

would give our portfolio to the flourishing specialty

chemicals market, something particularly attractive

as WTI hovered around $43 when we initially

pitched CES, with extreme volatility both preceding

and following our investment.

Industry Growth Cooling Overall

We discussed the rapid growth of the specialty

chemicals segment, attributable to the rise in

unconventional hydrocarbon recovery methods and

the shale revolution, resulting in a 12% CAGR for

the global market since 2009, a trend that was

forecast to continue. However, revised estimates

see the market growing at a 3.79% CAGR until

2021, and while this estimate is well below historical

growth rates, we see this as a reasonable growth

rate that reflects the recovery of oil prices, and in

hindsight, feel that it was perhaps unreasonable to

expect similar growth going forward.

Exposure to the Permian

We spoke briefly about the attractiveness of CES’s

exposure to the Permian Basin, which we continue

to see as a key area of growth for the specialty

chemicals segment. Since the US rig count recovery

began in May 2016, the Permian rig count has

grown by 63%, while everything outside the

Permian has grown at only 37%. Throughout the oil

price collapse, the Permian proved to be the most

resilient of the “big three” US shale regions,:

consider that from peak production, crude output

dropped by 40% in the Eagle ford, 25% in the

Bakken, and only 2% in the Permian. This is

because the Permian has the most accessible oil of

the three, making it the most economical play.

However, this isn’t to say that it’s becoming a

depleted resource base, with estimated reserved of

3 billion barrels of oil , and 75 trillion cf of gas, as

its thought to be a “layer cake” of multiple different

oil bearing formations that will require different

extraction techniques. We see the nature of this

play as attractive in and of itself, as extraction will

require the use of new, unconventional techniques

that could prompt demand for speciality chemicals,

much like the shale revolution.

CES’s acquisition of Catalyst Oilfield Services in

August 2016 renews our confidence that CES is

poised to capitalize on the growth in this area. As

demonstrated in Exhibit X, the acquisition

dramatically increases their presence in West Texas,

bringing their rig count in the area to 38,

representing a 17% drilling fluids market share in

the area, compared to 11% in the US overall.

Furthermore, we feel that this exposure upholds our

initial point about cash flow stability, especially as

E&Ps begin to resume operations. Exxon, for

instance, announced that their Permian wells could

be economically viable with WTI at $40, giving us

confidence in CES’s ability to capitalize on this

activity.

Investment Thesis I: Specialty Chemicals Market

EXHIBIT 8

Increased Exposure to Permian through

Integration of JACAM and Catalyst

Source: Company Filings

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February 6, 2017 7

We also discussed how management has a history

of accretive acquisitions, that has allowed the

company to aggressively expand their exposure to

multiple product and service lines. As a result, CES

has become a vertically integrated producer or both

drilling fluids and chemicals.

Management prioritizes geographic expansion over

product expansion, demonstrated by their most

recent acquisition of Catalyst Oilfield Services for

$9.2 million in August 2016, the geographic

advantages of which were explained in Thesis I. In

terms of the efficacy of this strategy overall, their

vertically integrated model affords them resiliency

through downturns (the company was able to hold

their North American market share constant at 34%

from 2014-2015) and the flexibility to continue to

make acquisitions, demonstrated by their

acquisition of Catalyst (see Exhibit X for a full

breakdown of their acquisitions).

Even in light of their past successes, we feel

confident that CES will continue to not only make

accretive acquisitions, but also integrate these

businesses with their previous acquisitions to realize

even greater synergies than initially forecasted. This

is something that we did not consider in our initial

pitch, but have seen this with Jacam and Catalyst.

JACAM & Catalyst

While they both afford CES attractive exposure to

the Permian Basin, the Catalyst acquisition allows

CES to improve market access for its Jacam

products, and should, over time, begin to absorb

some of the excess manufacturing capacity at its

Sterling Kansas, two benefits not priced into

management’s estimate of $6MM - $7MM in

synergies, which focused mainly on the integration

of laboratory facilities. This acquisition in particular

demonstrates management’s long term view as

they invest through the downturn in one of the

most economical plays in North America, again,

positioning them well to capitalize on the upswing.

The two businesses have no geographical overlap,

and with the exception of one large-cap client, no

customer overlap either.

Financing

CES has traditionally financed their acquisitions with

a 70/30 split between cash and stock, respectively,

and with a cash balance of $20MM and $150 MM

of senior secured credit facility that remains

undrawn as of 3Q16, we feel that CES has sufficient

capital to draw upon to fund future acquisitions. It

is also worth noting that in terms of an energy

company, CES has a capital light business, and has

undertaken cost reduction programs that have

increased their gross margin by 2% in 6 months,

again, positioning them well for future acquisitions.

Investment Thesis II: Platform for Future Acquisitions

EXHIBIT 9

Increased Exposure to Permian through

Integration of JACAM and Catalyst

Source: Company Filings

Acquisitions Summary Date Closed

Drilling Fluids Companies

Rheotech Drilling Fluid Services 1-Jul-14

Venture Mud 15-Jul-13

Mega Fluids 31-Dec-12

ProDrill Fluid Technologies 21-Nov-12

Fluids Management II 30-Jun-10

Champion Drilling Fluids 30-Nov-09

Impact Fluid Systems 2-Mar-06

Canadian Fluid Systems 2-Mar-06

Specialty Chemicals Companies

Catalyst Oilfield Services* 16-Aug-16

Southwest Treating Products 5-Sep-14

Canwell Enviro-Industries 1-Jul-14

Jacam Chemicals 1-Mar-13

Petrotreat 16-Feb-12

Waste Management Companies

Clear Environmental Solutions 12-Jun-08

* indicates announcement date

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February 6, 2017 8

Fracking Leading to Industry Shift

As we noted in our original pitch, fracking and

other unconventional recovery techniques, have

contributed to a shift towards more complex

drilling across the industry. The drilling of deeper,

more complex, often horizontal, wells has been on

the rise over the past decade and we expect this

trend to continue as the prevalence of easily

accessible reserves continues to decline.

Horizontal Drilling

Horizontal drilling, as the name suggests, is a form

of drilling where the well is turned horizontal once

it reaches a certain depth. Exhibit 10 depicts the

differences between traditional vertical drilling and

the more modern form of horizontal drilling that

has become increasingly widespread.

Visually, it is clear that by using a horizontally

drilled well, energy producers are able to gain

access to a larger store of oil and natural gas per

well.

As horizontal wells are far more complex, premium

product is required. Because of this, fluids for

horizontal drilling represent a larger fraction of the

overall well cost (5-10% of total cost vs. 2-5% for

conventional recovery techniques.

CEU Poised for Growth

As we noted in our original pitch, CES services

clients in the high end segment of the market.

These are the highest value customers in the

market and offer CES an opportunity to strongly

increase their market share in the coming years. We

also argued that CES had an opportunity to expand

its market share in the US, where it has a much less

developed position in a far larger market. Currently,

the company represents a small fraction (~4%) of

the United States market, compared to ~35% in

Canada.

We were encouraged by steps taken by

management in the past years to help the company

break into the American market. The acquisition of

Catalyst provides the company with an expanded

product line and better positions the company to

service the liquids rich, low cost assets bases seen in

the Permian Basin. By re-affirming their

commitment to grow in the US, CES has the

potential to take advantage of favorable secular

trends in the coming years.

-

$100

$200

$300

$400

Canada

Drilling

Fluids

US Drilling

Fluids

JACAM &

PureChem

Clear,

EQUAL&

Other2013 2014 2015

Investment Thesis III: Shift Towards Complex Drilling

EXHIBIT 11

Shift Towards Complex Wells

EXHIBIT 10

Drilling Techniques Depicted

Source: Investor Presentations

Source: Company Filings

QUIC Research Report

February 6, 2017

TSX:CEU Re-Evaluation

February 6, 2017 9

Catalysts

1. Uptick in North American Drilling Activity

As an oilfield service provider, CES’s revenue

stream is dependent on ongoing drilling activity

in the markets that the company serves. An

increase in overall drilling volumes in either the

Canadian market or the Permian basin would

bolster CES’s earnings in the upcoming year.

2. Positive Operating Results from Newly

Acquired Operations

As metrics surrounding the company’s most

recent acquisition were not made available,

investors will likely be looking to next quarters

earnings for guidance as to how to

quantitatively evaluate the deal.

3. Accretive acquisitions relating from GE-

Baker Hughes Merger

Should this deal proceed as planned, the

combined entity may have to divest assets. This

could create a buying opportunity for small

players like CES

Risks

1. Exchange Rate Risk

CES is exposed to exchange rate risk as it has

operations in both Canada and the United

States. Differences in the denomination of the

company’s revenue and expenses results in a

degree of exchange rate risk moving forward.

2. Financial Risk

While the company has taken steps to bolster

its financial position (Raised ~$80mm in equity

earlier this year) the company has historically

been leveraged aggressively relative to peers.

As such, there is a degree of leverage risk

associated with this investment position.

3. Ability to Attract and Retain Human Capital

During times of high activity, the drilling

services industry has historically experienced a

lack of experienced professionals and well

trained workers.

Catalysts & Risks

(60%)

(45%)

(30%)

(15%)

-

15%

30%

-

200

400

600

800

1,000

1,200

Europe Middle East Africa Latin America Asia Pacific North America

Jan-17 Jan-16 Yearly Change

EXHIBIT 12

YoY Rig Count Changes by Region

Source: EIA

QUIC Research Report

February 6, 2017

TSX:CEU Re-Evaluation

February 6, 2017 10

Comparables Commentary:

From Exhibit 14 we can see that CES has been able

to maintain positive cash flow unlike peers and

currently boasts a stronger dividend yield as well as

EBITDA margin. Additionally CES trades at a

discount on forward EV/EBITDA multiples.

DCF Commentary:

After updating our original DCF to current

projected industry growth rates, we came to a

target price of $10.30. Which is slightly more bullish

than street estimates mainly due to the fact that we

have stronger conviction in CES’s US market share

growth in the specialty chemicals area.

Valuation

EXHIBIT 14

Comparable Company Analysis

Source: S&P Capital IQ

Well Services

Company Name Market Cap Enterprise EV/EBITDA Dividend Price/Cash Flow Net Debt/ EBITDA FCF Price/ Inside

(Millions) Value (Millions) LTM 2017E 2018E Yield 2017E 2018E EBITDA 2017E Margin Yield Book Ownership

Trican Well Service Ltd. $985.3 $1,148.8 (7.3x) 27.5x 9.6x - (153.9x) 23.6x 8.3x 4.3% 34.6% 2.0x 0.4%

Calfrac Well Services Ltd. $621.7 $1,475.7 (33.2x) 22.3x 7.5x - (11.0x) 9.9x 31.3x 3.0% 3.4% 1.0x 5.2%

Canyon Services Group Inc. $552.4 $571.3 (24.3x) 15.3x 5.9x - 23.4x 12.0x 1.0x 5.0% 1.9% 1.6x 1.0%

Mean $719.8 $1,065.3 (21.6x) 21.7x 7.7x - (47.2x) 15.2x 13.6x 4.1% 13.3% 1.5x 2.2%

Median $621.7 $1,148.8 (24.3x) 22.3x 7.5x - (11.0x) 12.0x 8.3x 4.3% 3.4% 1.6x 1.0%

Canadian Energy Services $2,081.0 $2,369.5 129.3x 19.2x 12.9x 0.4% 38.9x 24.2x 2.9x 12.7% 2.6% 3.7x 2.3%

CEU vs Mean 189.1% 122.4% (698.8%) (11.2%) 68.0% nmf (182.4%) 59.4% (79.0%) 210.5% (80.7%) 142.3% 5.7%

CEU vs Median 234.7% 106.3% (632.4%) (13.6%) 72.7% nmf (452.9%) 101.5% (65.7%) 198.5% (25.3%) 140.2% 141.8%

EXHIBIT 13

Model Summary

Source: S&P Capital IQ

EXHIBIT 15

DCF Output

Source: Company Reports

Enterprise Build Gordon Growth Method Share Price

% Total

Present Value of Cash Flows $1,094 42.4%

Present Value of Terminal Value 1,485 57.6%

Enterprise Value $2,579 100.0%

(+) Tax Asset -

Effective Enterprise Value 2,578.6

(-) Total Debt (299.6)

(-) Minority Interest -

(+) Cash and Cash Equivalents -

Market Capitalization $2,279 Share Price

Total Shares Outstanding 221.3

Per Share Price $10.30

Implied Return (%) 30.7%

Financial Summary

2012A 2013A 2014A 2015A 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 15E-'20E

Revenue $471.3 $662.8 $974.0 $752.0 $602.1 $782.9 $1,005.1 $1,241.8 $1,493.9 $1,762.2 $2,047.4 $2,350.6 24.0%

YOY % Growth NM 40.6% 46.9% (22.8%) (19.9%) 30.0% 28.4% 23.6% 20.3% 18.0% 16.2% 14.8%

Gross Profit 110.2 174.8 291.5 199.4 144.5 208.3 309.6 429.9 570.7 733.9 921.3 1,134.9 38.4%

Margin (%) 23.4% 26.4% 29.9% 26.5% 24.0% 26.6% 30.8% 34.6% 38.2% 41.6% 45.0% 48.3%

YOY % Growth NM 58.7% 66.8% (31.6%) (27.5%) 44.1% 48.6% 38.8% 32.8% 28.6% 25.5% 23.2%

EBITDA 58.7 98.1 156.1 67.3 26.7 74.7 143.1 230.4 338.2 468.5 623.1 804.3 77.3%

Margin (%) 12.5% 14.8% 16.0% 9.0% 4.4% 9.5% 14.2% 18.6% 22.6% 26.6% 30.4% 34.2%

YOY % Growth NM 67.2% 59.1% (56.9%) (60.3%) 179.5% 91.6% 61.0% 46.8% 38.5% 33.0% 29.1%

EBIT 47.7 71.9 117.1 15.9 (23.5) 22.7 78.9 154.2 250.3 369.1 512.8 683.5 NM

Margin (%) 10.1% 10.9% 12.0% 2.1% (3.9%) 2.9% 7.9% 12.4% 16.8% 20.9% 25.0% 29.1%

YOY % Growth NM 50.7% 62.9% (86.4%) (247.7%) (196.7%) 247.4% 95.4% 62.3% 47.5% 38.9% 33.3%

CAPEX 20.1 47.2 74.9 52.1 21.7 28.2 36.2 44.7 53.8 63.4 73.7 84.6 24.0%

% of Revenue 4.3% 7.1% 7.7% 6.9% 3.6% 3.6% 3.6% 3.6% 3.6% 3.6% 3.6% 3.6%

YOY % Growth NM 135.3% 58.6% (30.5%) (58.4%) 30.0% 28.4% 23.6% 20.3% 18.0% 16.2% 14.8%

QUIC Research Report

February 6, 2017

TSX:CEU Re-Evaluation

February 6, 2017

References

11

1. Altacorp Capital

2. Bloomberg

3. BMO Capital Markets

4. Clarus Securities

5. Company Filings

6. Raymond James

7. RBC Capital Markets

8. S&P Capital IQ

9. Sentieo

10. TD Securities