Oilfield Services EQUITY RESEARCH DAILY EDGE. Trans Mountain and Line 3 Helps But Not Game Changers. Wednesday, November 30, 2016, Pre-market

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1 Oilfield Services Trans Mountain and Line 3 Helps But Not Game Changers OUR TAKE: Broadly speaking, government sanction of major projects is good for the camps space, whether it is through direct wins or indirect benefit from a tightening market. That said, we believe the direct impact to BDI (SP) and HNL (SO) could be marginalized given oversupplied market and intense competition. We expect stocks to be up roughly 10% on the news and could see more upside once projects are awarded. That said, BDI could be in a relatively better position to win work east of Alberta (Line 3), but there is no certainty of this. Also, given BDI's higher leverage, the impact to its stock could be slightly better than HNL's. However, we continue to prefer HNL as we believe it is further along its transformation process, which could become increasingly evident in mid HNL also has a stronger B/S and a stable dividend. KEY POINTS Sensitivity analysis gives the edge to BDI. In Exhibit 1, we did a generic sensitivity on seasonally adjusted EBITDA per 1,000 beds. If both providers were to win 1,000 beds each (cumulatively from one or both projects), HNL's price target could have 20% upside (rounded to $3.00 from $2.50) while BDI could have 25% upside (rounded to $6.25 from $5.00). BDI s higher torque is primarily the result of higher financial leverage. A key question is whether 1,000 beds is the right number? In Exhibit 2 and 3 we provide price target sensitivity for bed awards in the 500 to 2,000 beds range for BDI and HNL, respectively. We will adjust our price targets upon formal award. ANALYST TEAM Vladislav C. Vlad, MBA, P.Eng. Analyst Scotia Capital Inc. - Canada Barry Liang Associate Scotia Capital Inc. - Canada Klazina van den Berg Associate Scotia Capital Inc. - Canada COVERAGE SUMMARY Link to ScotiaView Rating 1-Yr. Target Return BDI-T SP C$ % CEU-T SO C$ % EFX-T SO C$ % ESI-T SP C$ % FRC-T SO C$ % HNL-T SO C$ % NAL-T SO C$ % PD-T SP C$ % PHX-T SO C$ % SES-T SP C$ % TCW-T SO C$ % TDG-T SP C$ % TOT-T SP C$ % WRG-T SU C$ % Key assumptions includes 50% to 80% utilization (given seasonality), each bed costs $50k, returns are on a 4-year payback, camps are from existing fleet (no incremental capex), and excludes non-rental revenue. High degree of uncertainty on how it could play out. Total peak demand could be 9,000 beds in aggregate for the two pipeline projects. That said, we are highly skeptical few camp providers will win the lions share of the work. Not only could the project be spread among several camp providers and interest groups (some wins may go direct to First Nations who could then choose to outsource), but some of the work would be supported by labour in neighboring towns (such as Hinton and Kamloops, for example). Other unknowns include pricing. Also, would the camps be on spot price or on contract? While we give the slight edge to BDI, there are many uncertainties. Overall, we are not bullish on camps purely on the basis of these two projects alone, but it does help. A brief overview of the two approved pipeline projects are on pages 3 and 4. Time of dissemination: November 30, 2016, 05:34 ET. For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-u.s. affiliates are not registered/qualified as research analysts with FINRA in the U.S. 1

2 Beds Won Beds Won Beds Won EQUITY RESEARCH DAILY EDGE Implications for Camp Providers While there are many moving parts, the news is undoubtedly positive for camp providers Black Diamond (BDI-TSX, SP, $5 price target) and Horizon North (HNL-TSX, SO, $2.50 price target), as it would help soak up excess industry fleet capacity. In Exhibit 1, we provide a generic annual EBITDA impact sensitivity to the number of potential beds to be won and EBITDA per bed. Our bed count range assumes that accommodation work will be distributed among numerous camp providers. On EBITDA per bed, we had previously estimated $16M all-in annual EBITDA per 1k beds in our LNG Watch Update (page 15) last year. However, industry commentary suggests pricing has deteriorated 15% to 20% and remains very competitive. We also took into consideration seasonality impacts and payback of 4 years (on 50k/bed capex). We caveat that a lack of recent LT contracts in the space offers poor visibility for pricing implications in upcoming negotiations. Thus, pricing could potentially be lower. Exhibit 1: Annual EBITDA Impact Sensitivity Annual EBITDA Per 1K Beds ($M) US$160 $6 $7 $8 $9 $ $3 $4 $4 $5 $5 750 $5 $5 $6 $7 $8 1,000 $6 $7 $8 $9 $10 1,500 $9 $11 $12 $14 $15 2,000 $12 $14 $16 $18 $20 Source: Scotiabank GBM estimates. Price target sensitivities. If both providers were to win 1,000 beds (cumulatively), HNL s price target has a 20% upside (rounded to $3.00 from $2.50) while BDI s has 25% upside (rounded to $6.25 from $5.00). BDI s higher torque is primarily the result of higher financial leverage. Also, we suspect, BDI could be in a better position to win relatively more work, particularly with Line 3, but there is no certainty of this. Exhibit 2: Black Diamond Price Target Sensitivity Annual EBITDA Per 1K Beds ($M) US$8 $6 $7 $8 $9 $ $5.43 $5.51 $5.59 $5.67 $5.75 Exhibit 3: Horizon North Price Target Sensitivity Annual EBITDA Per 1K Beds ($M) US$6 $6 $7 $8 $9 $ $2.64 $2.66 $2.69 $2.72 $ $5.67 $5.79 $5.91 $6.03 $ $2.72 $2.75 $2.79 $2.83 $2.87 1,000 $5.91 $6.07 $6.23 $6.39 $6.55 1,000 $2.79 $2.84 $2.90 $2.95 $3.00 1,500 $6.39 $6.63 $6.87 $7.10 $7.34 1,500 $2.95 $3.03 $3.10 $3.18 $3.26 2,000 $6.87 $7.18 $7.50 $7.82 $8.14 2,000 $3.10 $3.21 $3.31 $3.42 $3.52 Source: Scotiabank GBM estimates. Source: Scotiabank GBM estimates. 2

3 Line 3 Replacement Program (Enbridge) Project description: the Line 3 Replacement Program will fully replace Line 3 (shown in Exhibit 4) with new pipeline and associated facilities on both sides of the Canada-U.S. border. Length: 1,660 km Expected in-service date: early 2019 Construction timeframe: approx. 3 years Capex cost: $7.5B ($4.9B in Canada, $2.6B in U.S.) Labour demand: Enbridge stated that the peak construction workforce for the project is estimated to be approximately 650 workers per spread (along nine spreads). This works out to 5,850 workers during peak construction demand. Exhibit 4: Line 3 Replacement Project Map Note: Map shows Canadian portion of project (U.S. portion extends to Superior,WI) Source: National Energy Board. 3

4 Trans Mountain Expansion Project (Kinder Morgan) Project description: The expansion project will twin the existing Trans Mountain pipeline system between Edmonton, Alberta, and Burnaby, British Columbia. The project will also reactivate 193 km of existing pipeline. Length: 987 km Expected in-service date: late 2019 Construction timeframe: approx. 3 years Capex cost: $6.8B Labour demand: Kinder Morgan stated that construction workforce for the project is estimated to be approximately 450 workers per spread (along seven spreads). This works out to 3,150 workers. Exhibit 5: Trans Mountain Expansion Project Map Source: National Energy Board. 4

5 Pertinent Data Price Rating 1-Yr. Target 1-Yr. Return BDI-T * C$3.09 SP C$ % CEU-T * C$6.34 SO C$ % EFX-T * C$16.34 SO C$ % ESI-T * C$8.02 SP C$ % FRC-T * C$5.16 SO C$ % HNL-T * C$1.69 SO C$ % NAL-T * C$1.69 SO C$ % PD-T * C$6.08 SP C$ % PHX-T * C$3.35 SO C$ % SES-T * C$8.51 SP C$ % TCW-T * C$3.26 SO C$ % TDG-T * C$2.40 SP C$ % TOT-T * C$13.16 SP C$ % WRG-T * C$2.09 SU C$ % * Speculative risk ranking Black Diamond Group Ltd. (BDI-T; C$3.09) Valuation: 6.6x our 2018 EV/EBITDA estimate. Key Risks: Commodity prices, labour supply, access to supplies, weather, contract risk, FX, community opposition, and political environment. Horizon North Logistics Inc. (HNL-T; C$1.69) Valuation: 7.5x our 2018 EV/EBITDA estimate. Key Risks: Commodity prices, labour supply, access to supplies, weather, contract risk, FX, community opposition, and political environment. 5

6 Appendix A: Important Disclosures Company Canadian Energy Services & Technology Corp. Enerflex Ltd. Ensign Energy Services Inc. Horizon North Logistics Inc. Newalta Corporation PHX Energy Services Corp. Precision Drilling Corp. Secure Energy Services Inc. Total Energy Services Inc. Trican Well Service Ltd. Western Energy Services Corp. Disclosures (see legend below)* G, I, U, VS196 G, I, U J I G, I, U, VS033 G, I, J, U, VS123 G, U, VS102 G, I, U J I, J, VS103 VS032 I, Vladislav C. Vlad, certify that (1) the views expressed in this report in connection with securities or issuers that I analyze accurately reflect my personal views and (2) no part of my compensation was, is, or will be directly or indirectly, related to the specific recommendations or views expressed by me in this report. This research report was prepared by employees of Scotia Capital Inc. and/or its affiliates who have the title of Analyst. All pricing of securities in reports is based on the closing price of the securities principal marketplace on the night before the publication date, unless otherwise explicitly stated. All Equity Research Analysts report to the Head of Equity Research. The Head of Equity Research reports to the Managing Director and Co-Head, Global Capital Markets, who is not and does not report to the Head of the Investment Banking Department. Scotiabank, Global Banking and Markets has policies that are reasonably designed to prevent or control the sharing of material non-public information across internal information barriers, such as between Investment Banking and Research. The compensation of the research analyst who prepared this report is based on several factors, including but not limited to, the overall profitability of Scotiabank, Global Banking and Markets, and the revenues generated from its various departments, including investment banking, trading fees and other types of transactions. Furthermore, the research analyst s compensation is charged as an expense to various Scotiabank, Global Banking and Markets departments, including investment banking. Research Analysts may not receive compensation from the companies they cover. Non-U.S. analysts may not be associated persons of Scotia Capital (USA) Inc. and therefore may not be subject to FINRA Rule 2241 restrictions on communications with subject company, public appearances and trading securities held by the analysts. For Scotiabank, Global Banking and Markets Research analyst standards and disclosure policies, please visit gbm.scotiabank.com/ disclosures. Scotiabank, Global Banking and Markets Research, 40 King Street West, 33rd Floor, Toronto, Ontario, M5H 1H1. Time of dissemination: November 30, 2016, 05:34 ET. *Legend G I J U VS032 Scotia Capital (USA) Inc. or its affiliates has managed or co-managed a public offering in the past 12 months. Scotia Capital (USA) Inc. or its affiliates has received compensation for investment banking services in the past 12 months. Scotia Capital (USA) Inc. or its affiliates expects to receive or intends to seek compensation for investment banking services in the next 3 months. Within the last 12 months, Scotia Capital Inc. and/or its affiliates have undertaken an underwriting liability with respect to equity or debt securities of, or have provided advice for a fee with respect to, this issuer. Our Research Analyst visited Rig 51 at Nisku, Alberta, a drilling rig, on September 6, Full payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS033 Our Research Analyst visited Drayton Valley Facility and Niton Junction Facility, oilfield waste processing facilities, on June 11, Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS102 Our Research Analyst visited PD's Marcellus operation, a drilling operation, on October 1, Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. 6

7 VS103 VS123 VS196 Our Research Analyst visited TCW's Marcellus operation, a drilling operation, on September 30, Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. Our Research Analyst visited Rocky View facility, Canadian operations and R&D facility, on January 17, No payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. Our Research Analyst visited the JACAM facility and offices, a chemicals manufacturing plant, on October 22, 2014 and April 21, Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. 7

8 Rating and Price Target History Black Diamond Group Ltd. (BDI-T) as of November 29, 2016 (in CAD) 07-Nov-2013 Price: Target: Apr-2015 Price: * Target: 18.00* 40 0 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan Jul-2015 Price: * Target: 20.00* 03-Feb-2014 Price: Target: 32.00* 20-Jul-2015 Price: * Target: Mar-2014 Price: * Target: 36.00* 13-Aug-2015 Price: Target: 18.00* 31-Mar-2014 Price: * Target: 40.00* 08-Oct-2015 Price: 9.92 Target: 11.00* 09-Jul-2014 Price: * Target: 41.00* 09-Nov-2015 Price: 7.77 * Target: 9.00* 30-Sep-2014 Price: Target: 38.00* 05-Feb-2016 Price: 5.26 Target: 7.50* 23-Oct-2014 Price: Target: 28.00* 03-Mar-2016 Price: 4.77 Target: 6.50* 04-Dec-2014 Price: * Target: 22.00* 25-Jul-2016 Price: 4.73 * Target: 8.50* 19-Dec-2014 Price: Target: 20.00* 11-Oct-2016 Price: 4.62 Target: 7.00* 28-Jan-2015 Price: 9.93 Target: 13.00* 09-Nov-2016 Price: 3.91 * Target: 5.00* Price (CAD) *Represents the value(s) that changed. Scotiabank GBM Ratings Legend: FS=Focus Stock; SO=Sector Outperform; SP=Sector Perform; SU=Sector Underperform; T=Tender; UR=Under Review Powered by: BlueMatrix Horizon North Logistics Inc. (HNL-T) as of November 29, 2016 (in CAD) 22-Oct-2013 Price: 7.90 Target: Oct-2013 Price: 8.50 Target: 10.00* 28-Jan-2014 Price: 7.44 Target: 9.25* 31-Mar-2014 Price: 8.36 Target: 10.00* 30-Jul-2014 Price: 6.24 Target: 9.00* 23-Oct-2014 Price: 4.71 Target: 6.50* 29-Oct-2014 Price: 3.31 * Target: Oct-2014 Price: 3.24 Target: 4.50* 02-Dec-2014 Price: 2.67 Target: 4.00* 23-Dec-2014 Price: 2.82 Target: 3.75* 28-Jan-2015 Price: 2.31 Target: 3.00* Price (CAD) 0 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan Apr-2015 Price: 3.19 * Target: 3.75* 01-May-2015 Price: 3.47 Target: 4.00* 20-Jul-2015 Price: 3.48 Target: 4.50* 08-Oct-2015 Price: 2.90 Target: 3.50* 05-Feb-2016 Price: 1.44 Target: 2.50* 25-Feb-2016 Price: 1.17 Target: 2.25* 25-Jul-2016 Price: 1.66 Target: 2.75* 02-Nov-2016 Price: 1.69 Target: 2.50* 2 *Represents the value(s) that changed. Scotiabank GBM Ratings Legend: FS=Focus Stock; SO=Sector Outperform; SP=Sector Perform; SU=Sector Underperform; T=Tender; UR=Under Review Powered by: BlueMatrix 8

9 Definition of Scotiabank, Global Banking and Markets Equity Research Ratings We have a four-tiered rating system, with ratings of Focus Stock, Sector Outperform, Sector Perform, and Sector Underperform. Each analyst assigns a rating that is relative to his or her coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst. The rating assigned to each security covered in this report is based on the Scotiabank, Global Banking and Markets research analyst s 12-month view on the security. Analysts may sometimes express to traders, salespeople and certain clients their shorter-term views on these securities that differ from their 12-month view due to several factors, including but not limited to the inherent volatility of the marketplace. Ratings Focus Stock (FS) The stock represents an analyst s best idea(s); stocks in this category are expected to significantly outperform the average 12-month total return of the analyst s coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst. Sector Outperform (SO) The stock is expected to outperform the average 12-month total return of the analyst s coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst. Sector Perform (SP) The stock is expected to perform approximately in line with the average 12-month total return of the analyst s coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst. Sector Underperform (SU) The stock is expected to underperform the average 12-month total return of the analyst s coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst. Other Ratings Scotiabank, Global Banking and Markets Equity Research Ratings Distribution* Distribution by Ratings and Equity and Equity-Related Financings* 60% 40% 20% 0% 44.6% 47.9% 7.5% 13.7% 12.2% 0.4% Sector Outperform Sector Perform Sector Underperform * As of October 31, Source: Scotiabank GBM. EQUITY RESEARCH DAILY EDGE Tender Investors are guided to tender to the terms of the takeover offer. Under Review The rating has been temporarily placed under review, until sufficient information has been received and assessed by the analyst. Risk Ranking As of June 22, 2015, Scotiabank, Global Banking and Markets discontinued its Low, Medium, and High risk rankings. The Speculative risk ranking reflects exceptionally high financial and/or operational risk, exceptionally low predictability of financial results, and exceptionally high stock volatility. The Director of Research and the Supervisory Analyst jointly make the final determination of the Speculative risk ranking. Percentage of companies covered by Scotiabank, Global Banking and Markets Equity Research within each rating category. Percentage of companies within each rating category for which Scotiabank, Global Banking and Markets has undertaken an underwriting liability or has provided advice for a fee within the last 12 months. For the purposes of the ratings distribution disclosure FINRA requires members who use a ratings system with terms different than buy, hold/neutral and sell, to equate their own ratings into these categories. Our Focus Stock, Sector Outperform, Sector Perform, and Sector Underperform ratings are based on the criteria above, but for this purpose could be equated to strong buy, buy, neutral and sell ratings, respectively. 9

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