Annual Information Form. For the year ended December 31, 2016

Transcription

1 Annual Information Form For the year ended December 31, 2016 March 30, 2017

2 Corporate Structure 1 ANNUAL INFORMATION FORM CONTENTS Corporate Structure... 2 Trinidad Drilling Ltd Trinidad Drilling Limited Partnership... 2 Joint Ventures... 3 Organizational Chart... 3 General Development... 4 Three Year History Trends... 8 About Our Business... 9 Land Drilling Services Segmented Information Canadian Operations US and International Operations Joint Venture Operations Manufacturing Operations Corporate Other Operational Information Risk Factors Dividend Policy General Description of Capital Structure Common Shares Preferred Shares Credit Facility Notes Other Debt Credit Ratings Market for Securities Directors and Officers In this Document We, us, our, the Company and Trinidad mean Trinidad Drilling Ltd. A full list of definitions and abbreviations can be found on page 47. For More Information You can find our 2016 financial statements and management s discussion and analysis (MD&A) as well as our quarterly reports on our website or SEDAR Directors of Trinidad Officers of Trinidad Security Holdings of Directors and Officers Audit Committee Composition of the Audit Committee Relevant Education and Experience Compliance with Audit Committee Rules External Auditor Service Fees Cease Trade Orders, Bankruptcies, Penalties or Sanctions Conflicts of Interest Legal Proceedings and Regulatory Actions Interest in Material Transactions Transfer Agents and Registrars Material Contracts Interests of Experts Additional Information Forward-Looking Information Definitions, Abbreviations & Conversions Definitions Abbreviations & Conversions Schedule A - Audit Committee Charter Establishment of Committee Committee Procedure Mandate of Committee Information contained in this document is dated as at December 31, 2016 unless where otherwise noted. Information contained or otherwise accessible through Trinidad s website or other websites, though referenced herein, does not form part of and is not incorporated by reference into this Annual Information Form. Copies of these documents are also available for free by contacting our Investor Relations department: Investor Relations Trinidad Drilling Ltd. 1000, 585 8th Avenue SW Calgary, Alberta T2P 1G1 Trinidad Drilling Ltd Annual Information Form

3 2 Corporate Structure CORPORATE STRUCTURE Trinidad Drilling Ltd. Trinidad Drilling Ltd. was incorporated under the Business Corporations Act (Saskatchewan) on February 23, 1996 as Saskatchewan Ltd. On May 9, 1996, we changed our name to Trinidad Drilling Ltd. On June 29, 1999, we continued into Alberta under the Business Corporations Act (Alberta) (ABCA). As of June 30, 1999, we amalgamated with Alberta Ltd. and continued operating as Trinidad Drilling Ltd. In connection with this amalgamation, Trinidad amended its articles to remove its private company restrictions in preparation of going public. Trinidad began trading under the symbol TDG on the Toronto Stock Exchange (TSX) on October 11, On September 17, 2002, Trinidad was amalgamated with AcquisitionCo and became a wholly-owned subsidiary of the Trust (Trinidad Energy Services Income Trust) pursuant to the 2002 Arrangement. Following the 2002 Arrangement, the Trinidad shares were delisted from the TSX and the Trust Units commenced trading on the TSX under the symbol TDG.UN. On March 11, 2004, the articles of Trinidad were amended to add the Exchangeable Shares as a class of shares and to create the first set of Exchangeable Shares (the Exchangeable Shares, Series A). On July 26, 2004 and May 2, 2005, the articles of Trinidad were amended to create the second series of Exchangeable Shares (the Exchangeable Shares, Series B) and the third series of Exchangeable Shares (the Exchangeable Shares, Series C), respectively. Effective January 1, 2008, Trinidad amalgamated with Titan Surface Casing Ltd. (Titan) and Alberta Ltd. The amalgamated corporation continued as Trinidad Drilling Ltd. On March 10, 2008, Trinidad completed the 2008 Arrangement, pursuant to which, the Trust units were delisted from the TSX and the Trinidad shares commenced trading on the TSX, again under the symbol TDG. On May 10, 2013, Trinidad filed articles of amendment under the ABCA to increase the maximum number of directors of Trinidad to 11 after receiving shareholder approval for such amendment. The head and principal office of Trinidad is located at 1000, 585-8th Avenue SW, Calgary, Alberta, T2P 1G1. Trinidad's registered office is located at 3500, 855 2nd Street SW, Calgary, Alberta, T2P 4J8. Trinidad is extra-provincially registered to carry on business in Manitoba, Saskatchewan, Nova Scotia, British Columbia and the Northwest Territories. Trinidad Drilling Limited Partnership On October 12, 2005, Trinidad Drilling Limited Partnership (TDLP) was formed pursuant to the laws of the state of Delaware to be the operating entity for Trinidad's US operations. TDLP is an indirect, wholly-owned subsidiary of Trinidad. TDLP provides contract drilling services to the United States oil and gas industry. The head and principal office of TDLP is located at Vickery Drive, Houston, Texas, USA, 77032,

4 Corporate Structure 3 and the registered address of TDLP is located at 2711 Centerville Road, Suite 400, Wilmington, Delaware, USA, Joint Ventures TRINIDAD DRILLING INTERNATIONAL (TDI-JV) Effective September 3, 2013, Trinidad, through a wholly-owned subsidiary, entered into a joint venture arrangement with a wholly-owned subsidiary of Halliburton to operate drilling rigs for international projects outside of Canada and the US. TDI-JV currently has operations in Saudi Arabia and Mexico. Additionally, TDI-JV continues to look into future growth opportunities in other international markets. Trinidad owns 60% of the shares of TDI-JV and each of the joint parties have equal voting rights. Trinidad considers the investment to be a financial asset at fair value through profit or loss and recognizes changes in fair value of the investment in the statement of operations and comprehensive income (loss) as a gain (loss) from joint ventures. The shareholders agreement for TDI-JV was signed by each of the participating parties effective September 3, TDI-JV's registered office is located at 9 Allée Scheffer, L-2520 Luxembourg. DIAVAZ CANELSON DE MEXICO, S.A. DE C.V. (DCM-JV) As part of the CanElson Acquisition, Trinidad acquired a 50% ownership in DCM-JV, a joint venture which operates drilling and service rigs in Mexico. DCM-JV currently has two drilling rigs and two service rigs in Mexico. Organizational Chart The simplified organizational structure of Trinidad, including the material subsidiaries of Trinidad is set forth below: Trinidad Drilling Ltd. (Alberta) US Consolidated Group (Delaware) 100% The US Consolidated Group includes TDLP. Trinidad Drilling International Joint Venture (Luxembourg) 60% The TDI-JV includes operations in Saudi Arabia and Mexico, and is owned 60% by Trinidad through a wholly-owned subsidiary and 40% by Halliburton. The DCM-JV includes operations in Mexico, and Trinidad and D&S Petroleum, S.A. de C.V., a wholly-owned subsidiary of Grupo Diavaz, S.A. de C.V. both have a 50% interest in DCM. Trinidad s 50% ownership of DCM-JV is held directly by Trinidad Drilling Ltd. Trinidad Drilling Ltd Annual Information Form

5 4 General Development GENERAL DEVELOPMENT Trinidad, the US Consolidated Group and the Joint Venture operations provide contract drilling services to the Canadian, US and international oil and gas industries. At December 31, 2016, we had a total of 100% owned 139 drilling rigs, 72 in Canada, 66 in the US and one in the United Arab Emirates (UAE). Through our Joint Venture operations, Trinidad has interests in 10 drilling rigs (four in Saudi Arabia and six in Mexico). Trinidad's Rig Fleet 7% 48% 45% Three Year History The following describes the significant events of the last three years and to date in 2017 with respect to our business: 2017 Canada US & International Joint Ventures 2017 Capital Expenditure Budget. On March 15, 2017, we announced an increased capital budget of $95 million for This capital budget is comprised of $75 million directed towards upgrades and $20 million directed towards maintenance capital. Improving industry conditions and growing customer demand for high specification equipment provided the support to increase our 2017 capital budget from its initial level of $40 million. Management Changes. On March 12, 2017, Lyle Whitmarsh, a member of our Board of Directors and our Chief Executive Officer left Trinidad to pursue other interests. Also on March 12, 2017, Brent Conway, previously our President, was appointed to the role of President and Chief Executive Officer. Senior Notes and Credit Facility Amendment. On January 25, 2017, we announced the commencement of a cash tender offer to purchase any and all of the Company's outstanding 7.875% senior unsecured notes due in 2019 (2019 Notes), of which US$450 million aggregate principal amount was outstanding at December 31, 2016, for cash consideration of US$1,005 per US$1,000 principal amount. Pursuant to the terms of the tender offer, approximately US$203 million of these notes were validly tendered for gross proceeds of approximately US$205 million including accrued and unpaid interest. All remaining 2019 Notes that were not validly tendered were redeemed on March 10, 2017, at their principal amount plus accrued and unpaid interest. On February 8, 2017, we also announced our completion of a private placement offering of US$350 million of senior unsecured notes (2025 Notes). Interest on the 2025 Notes accrues at a rate of 6.625% per annum, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, The 2025 Notes mature on February 15, In connection with the foregoing, on January 27, 2017, we entered into a consent and amending agreement with our bank lenders under our credit facility to allow us to use up

6 General Development 5 to US$50 million of the credit facility to repurchase or redeem the 2019 Notes and to make other certain amendments to reflect and allow for the issuance of the 2025 Notes. Bought Deal Financing. On January 19, 2017, we announced that we had entered into an agreement with a syndicate of underwriters to complete a $100 million bought deal offering of common shares. On January 20, 2017, we announced an upsize of the offering to $130 million, being comprised of 41,269,841 common shares, at a price of $3.15 per share. We also granted the Underwriters an over-allotment option to purchase an additional 6,190,476 common shares on the same terms. Effective February 8, 2017, a total of 47,460,317 common shares were issued for gross proceeds to Trinidad of approximately $149.5 million Early Termination and Standby Revenue. As a result of continued weak commodity prices and reduced customer capital spending, several customers terminated their contracts early or chose to not operate rigs under contract. As a result, we recorded $65 million in early termination and standby revenue in 2016, compared to $53 million in Our contracts must have an initial term of one year before they are considered long-term, and typically range from one to five years in duration. At December 31, 2016, approximately 18% of our fleet was under long-term contracts with an average remaining term of approximately 1.3 years at year end. TDM. In 2016, Trinidad chose to further scale back its manufacturing operations as a result of industry conditions and limited demand for new equipment. During this process, we closed facilities and brought much of the manufacturing functionality inside our drilling operations. We retained the ability to repair and recertify our equipment and, when industry conditions improve, to also engineer and design new equipment. Axxis. In the third quarter of 2016, Trinidad sold its barge rigs. Due to the weak industry conditions in 2015, we chose to stop marketing these rigs to focus our attention on our core drilling business. In 2015, the value of the rigs was impaired to nil and in 2016 a gain on sale was recorded when the assets were sold. Credit Facility. In June 2016, Trinidad announced that it had amended its credit facility, reducing the size of the facility, as well as adjusting the required covenants in order to allow the Company more financial flexibility. As part of this amendment, Trinidad reduced the revolving facilities to $100 million on the Canadian revolver (previously $150 million) and US$100 million (previously US$150 million). The credit facility matures on December 12, Acquisition. In 2015, Trinidad acquired CanElson by way of Plan of Arrangement, adding 51 land drilling rigs to our operations across North America, growing our geographic relevance in key operating areas, expanding our product offering and customer base, and reducing overall corporate leverage. The rigs added through the CanElson Acquisition included 28 rigs in Canada, 21 rigs in the US and two rigs in Mexico. The rigs were highlymarketable, modern, deep-focused assets with an average age of approximately 5.6 years at the time of acquisition. The acquisition was financed through a combination of the issuance of approximately 88.7 million Trinidad shares and the payment of $50 Trinidad Drilling Ltd Annual Information Form

7 6 General Development million of cash, for a total consideration of $345 million. Integration of the CanElson operations began in the third quarter and was largely complete by the end of TDI-JV. During 2015, four rigs were operating under TDI-JV in Saudi Arabia. In Mexico, two rigs were operating at the beginning of 2015 and construction was completed on two additional rigs, with all four rigs operating in Mexico by the end of DCM-JV. As part of the CanElson acquisition, effective August 11, 2015, we acquired 50% ownership of a joint venture operating under the name Diavaz CanElson de Mexico, S.A. de C.V. DCM-JV operates two land drilling rigs and two service rigs in Mexico. Non-Controlling Interests. As part of the CanElson acquisition, we also acquired four noncontrolling interests - Midland C Ranch Holdings, LLC (Midland), CanElson Drilling Limited Partnership #1 (LP#1), CanElson Drilling Limited Partnership #2 (LP#2), and CanElson Drilling Limited Partnership #3 (LP#3). Trinidad holds 50% of the outstanding membership units of Midland, 50% of the outstanding limited partnership units in LP#1, 54.4% of LP#2 and 50% of LP#3. Subsidiary companies of Midland operate three rigs in the US, while each of LP#1, LP#2 and LP#3 operate one rig in Canada. Drilling Rig Construction. In early 2015, TDM completed construction on a new rig for our Canadian operations. This rig is a 3,000 horsepower, AC triple rig. During 2015, TDM completed construction on two new rigs for operation in Mexico through the TDI-JV. The rigs are 3,600 horsepower, AC triple rigs. TDM completed construction and delivered three new builds to our US and International operations. The rigs are 1,500 horsepower, AC triple rigs. We also completed construction on a training rig we were building for our TDI-JV partner, Halliburton. Toward the end of 2015, activity in Trinidad s manufacturing operations declined significantly as rig construction was largely complete. Due to the reduced activity levels, we restructured TDM, moving repair and maintenance work to each of the operating divisions and outsourcing less technical rig design and construction work. Rig Decommissioning and Impairment. Due to weak market conditions and the future outlook for continued low drilling activity levels, we determined that indicators of impairment existed. Under IFRS, we assessed the carrying value of assets in our cash generating units by comparing the total estimated future cash flows to the net book value at December 31, We evaluated our rig fleet to identify rigs that would be considered lower specification equipment with high costs to maintain. As such, we decommissioned 15 rigs at the end of Of these rigs, 10 were included in the Canadian operations and five were included in the US and International operations. Trinidad believes that, in spite of this decommissioning, we continue to hold sufficient equipment to allow us to remain competitive in future periods. Credit Facility. In December 2015, we amended our credit facility and its covenants. We reduced the size of the facility to lower standby fees on funds we did not expect to access and have not historically utilized. The credit facility included a Canadian revolving facility of C$150 million (C$200 million previously) and a US revolving facility of US$150 million (US$200 million previously). We also relaxed our debt covenants over the following two years, providing additional financial flexibility through a potentially challenging time. Early Termination and Standby Revenue. As a result of weak commodity prices and reduced customer capital spending, several customers terminated their contracts early

8 General Development 7 or chose to not operate rigs under contract. As a result, we recorded $53 million in early termination and standby revenue in 2015, compared to $19 million in At December 31, 2015, approximately 29% of our fleet was under long-term contracts with an average remaining term of approximately 1.4 years TDI-JV. In 2014, TDI-JV commenced operations in Saudi Arabia. During 2014, Trinidad sold three existing US-based rigs to TDI-JV and constructed one new rig for TDI-JV. All four rigs operated under TDI-JV in Saudi Arabia in The newly constructed rig was built by TDM. TDM also began construction on four new rigs for operation in Mexico through TDI-JV. The first two rigs were delivered to Mexico in late Drilling Rig Construction. In 2014, TDM worked on the construction of one rig destined for northern Canada which was announced in As noted above, TDM built a new rig for TDI-JV, for operation in Saudi Arabia and began construction on four new rigs for operation in Mexico. In addition, TDM began construction on three new builds for Trinidad s US and International operations. The rigs were completed and delivered in We also selected several rigs for upgrade in The upgrades on these rigs included improvements to increase the efficiency and performance of the rigs such as adding moving systems and top drives, changing to AC drawworks and upgrading pumping capacity. These changes increased the marketability of the equipment and resulted in some improved dayrates and extended contract terms. Redeployment of Mexican rigs. Our three rigs that had been operating in Mexico completed their contracts in 2013 and were redeployed to Canada in Rig Decommissioning. As a result of changing industry conditions and a growing acceptance of the benefits of high performance, modern equipment, we reviewed our fleet and decommissioned 22 rigs in Of these rigs, 13 had previously operated in Canada and nine had previously operated in the US. The rigs were older, mechanical style rigs that were no longer in demand by customers. Normal Course Issuer Bid. In November of 2014, we announced our intention to acquire for cancellation, by way of a normal course issuer bid, up to 12,299,009 common shares of the Trinidad, which represented approximately 10 percent of our public float. The normal course issuer bid expired on November 26, During the term of the bid, we purchased and cancelled 1,732,380 common shares for total consideration of $8.4 million in 2015 and in 2014, we purchased and cancelled 3,038,060 common shares for total consideration of $16.5 million. Credit Facility. In 2014, Trinidad terminated its 2010 credit facility and entered into a new agreement, including additional commitments under the US dollar denominated revolving facility. The new credit facility included a Canadian revolving facility of C$200 million and a US revolving facility of US$200 million (US$100 million previously). Early Termination and Standby Revenue. During 2014, we received $19 million in early termination and standby revenue on long-term, take-or-pay contracts. At December 31, 2014, approximately 50% of our fleet was under long-term contracts with an average remaining term of approximately 1.5 years. Trinidad Drilling Ltd Annual Information Form

9 8 General Development Trends The added efficiency of high performance rigs has become more widely recognized in the drilling industry over the past few years. These trends benefit Trinidad as our deeper capacity, modern asset base has been built to service these markets. Oil and gas exploration and production companies are putting increased emphasis on rig performance and efficiency. Improved drilling efficiencies improve the economics of their development programs. This has created a greater demand for higher specification equipment, at the expense of the older, conventional style rigs. These competitive conditions make the market a more challenging one to operate in; however, we have been able to establish a reputation as a high performance driller and are well positioned to operate in these conditions. The ability to add more production per well through advanced drilling and completion techniques has increased the supply of oil, particularly in North America. This combined with a continuing strong supply of oil from OPEC countries resulted in lower oil prices in 2015 and throughout most of The weaker commodity prices led to a strong pull back in drilling activity across North America. The impact of lower customer demand was initially felt in the conventional, mechanical style rigs; however, spot market rates and activity levels for high performance equipment were also impacted as commodity prices weakened further. In reaction to these market conditions, we have lowered costs, reduced our headcount, cut back on capital expenditures program and suspended our dividend. In late November 2016, OPEC and certain non-opec countries agreed to lower crude oil production levels. This agreement had a positive impact on global crude oil prices and since that time there has been an improvement in benchmark oil prices. Customer demand has improved in conjunction with increasing oil and natural gas prices, and the industry is seeing an increase in drilling activity both in Canada and in the US Certain high specification rigs, particularly in the US, are beginning to see opportunities to increase dayrates.

10 About Our Business 9 ABOUT OUR BUSINESS Trinidad's operations are carried out in four reportable segments: Canadian operations; US and International operations; Manufacturing operations; and Joint Venture operations. Trinidad's revenue by operating segment is outlined below: ($ thousands) Canadian operations 152, ,064 US and International operations 205, ,513 Manufacturing operations 57, ,131 Joint Venture operations Inter-segment Eliminations 2 (54,734) (83,082) Corporate 1,051 1,273 Total Revenue 362, ,899 Joint Venture Operations (Gain) loss from investment in joint venture (12,929) 1, The DCM-JV is recognized using the equity method of accounting. For the TDI-JV, Trinidad considers the investment to be a financial asset at fair value through profit or loss and recognizes changes in fair value of the investment in the statement of operations and comprehensive income (loss) as a gain (loss) from joint ventures. 2. Inter-segment Eliminations consist of revenue earned by the manufacturing division for work performed for other internal segments of Trinidad. This revenue is eliminated on consolidation. In 2016, Trinidad s segmented land drilling rig fleet operated in Canada, the US and the UAE, as well as Saudi Arabia and Mexico through joint venture partnerships. At December 31, 2016, we operated 149 land drilling rigs, including our joint venture partnerships Trinidad Rig Count Canada US & International Joint Ventures* * JV rigs included at 100%. Trinidad Drilling Ltd Annual Information Form

11 10 About Our Business Land Drilling Services Land drilling services are provided to oil and gas exploration and production companies. These services are completed using drilling rigs and auxiliary equipment, and are performed at the request of oil and gas exploration and production companies we have entered into contracts with. The customer provides us with instructions for the drilling of the oil or gas well at a specified location and desired depth. We provide a drilling rig with required personnel, and the customer supervises the drilling of the well. Typically, the customer agrees to pay a fixed rate per day regardless of the number of days needed to drill the well. Contracts usually provide for a reduced dayrate (or lump sum amount) to mobilize the rig to the well location, to rig-up and rig-down on location, and to demobilize the rig. Generally, we do not bear the costs arising from down-hole risks. If the customer determines that the well is economical, the drilling rig will set the production casing for the well. The drilling rig may then complete the well or cap it to provide for completion at a later date by using a service rig. If the well is not economical, the drilling rig plugs and abandons the well. Land drilling contracts can be for single or multiple wells and can vary in length from a day to multiple years. Long-term contracts typically have set dayrates, an agreed minimum number of operating days or years, typically ranging from one to five years and include early termination penalties, cost escalation provisions, and options for renewing the contract. Short-term contracts that provide drilling rigs on a well-to-well basis are typically subject to termination by the customer on short notice or with little or no penalty. Contracts can also include pricing tied to benchmark commodity prices, performance bonuses for specific targets met or exceeded, and pricing that increases as contract terms are extended. In weak market conditions, we typically sign less long-term contracts, preferring to wait until conditions improve before committing to long-term dayrates. In addition, weak commodity prices can cause an increased number of customers to cancel contracts early.

12 About Our Business 11 Segmented Information Canadian Operations PRINCIPAL PRODUCTS, SERVICES AND OPERATIONS The Canadian operations provide one principal component: land drilling services to the Canadian oil and gas industry. Land Drilling Services Canadian operations land drilling revenue was approximately 42% of Trinidad s total consolidated revenue for 2016 and 37% of Trinidad's total consolidated revenue for At December 31, 2016, our Canadian fleet consisted of 72 land drilling rigs. Canadian Rig Fleet Canadian Rig Fleet Age 18% 8% 74% Single Double Triple 39% 21% 40% < 5 years 5-10 years > 10 years PRINCIPAL MARKETS The Canadian operations are presently conducted in the Western Canadian Sedimentary Basin (WCSB) and the Williston Sedimentary Basin (WSB), which includes portions of the provinces of British Columbia, Alberta, Saskatchewan and Manitoba, and portions of the Northwest Territories. The WCSB and the WSB are two of the largest oil and gas exploration and producing regions in North America. A substantial portion of the active production from these basins occurs at shallow and intermediate depths from both conventional and non-conventional reservoirs. Non-conventional oil deposits in Canada include the Alberta oilsands, the heavy oil deposits of Saskatchewan, the Canadian East Coast, the Arctic Islands and the Beaufort Sea. There is continued focus on the development of unconventional natural gas reservoirs of shale gas in Canada, where drilling is primarily focused on deep gas plays which are contained in tight gas formations. This follows the advancement of drilling and completion techniques that have made the development of these types of reserves more economically viable. The main shale plays in Canada are the Montney and the Duvernay, which are primarily located in north-eastern British Columbia but also cross into parts of Alberta and Northwest Territories. Activity in these conventional oil and natural-gas-liquids-rich plays across WCSB and the WSB has great potential with advances in drilling and completion techniques. The majority of oil and natural gas production in Canada originates from the WCSB and WSB. In addition to upstream oil and gas activities, other related industry activity occurs in this region, such as refining, processing and transportation of oil and gas. Trinidad Drilling Ltd Annual Information Form

13 12 About Our Business COMPETITIVE CONDITIONS The drilling industry in Canada is a competitive sector which is dominated by five large contractors accounting for approximately 60% of the industry's drilling fleet 1. Due to the age of the fleet and Trinidad's investment in drilling assets and personnel, Trinidad's drilling operations are efficient and competitive. Our Canadian utilization level typically exceeds industry average. In 2016, we averaged 22% utilization compared to 17% 1 for the industry ( % and 23% 1, respectively). A drilling company is evaluated by potential customers based primarily on the performance of its equipment, drilling depth capacity, safety record and the expertise of its operational personnel. If a drilling contractor is evaluated highly in each area, it will typically achieve high utilization and strong dayrates. Trinidad strives to obtain high evaluations in each of these areas. Our Canadian operations include some of the industry's newest and most technically advanced rigs that are suited for shale gas and deeper, more complex resource plays. In addition, our Canadian fleet includes versatile, heavy double rigs that are well suited a large number of the higher demand plays in Canada. These rigs are quick to rig up and move, and their versatility makes them some of the most utilized equipment in our fleet. Our Canadian operations land drilling rigs have an average age of nine years and a large proportion of the fleet is equipped with technically advanced, high performance equipment that allows the rigs to drill efficiently in today's complex and challenging drilling environments. See Risk Factors on page 19. US and International Operations PRINCIPAL PRODUCTS, SERVICES AND OPERATIONS The US Consolidated Group provides contract drilling services to the United States and international oil and gas industries. US and International operations land drilling revenue was approximately 57% of Trinidad s total consolidated revenue for 2016 and 56% of Trinidad's total consolidated revenue for Land Drilling Rigs At December 31, 2016, our US and International operations fleet consisted of a total of 66 land drilling rigs in the US and one land drilling rig in UAE. US and International Rig Fleet US and International Rig Fleet Age 24% Double 6% 18% < 5 years 5-10 years 76% Triple 76% > 10 years PRINCIPAL MARKETS Our US and International operations are currently active in the Permian Basin and the Eagle Ford and Haynesville Shales. Our US and International operations have also been 1 Canadian Association of Oilwell Drilling Contractors

14 About Our Business 13 active in most of the key plays in the US, including the Mid-Continent, Bakken Shale, Barnett Shale, Haynesville Shale, Eagle Ford Shale, Niobrara Shale, Mississippian Lime, Tuscaloosa Marine Shale, and East Texas and West Texas regions and in parts of New Mexico, Kansas, Oklahoma, Wyoming, North Dakota, Texas, Mississippi and Louisiana. The Mid-Continent region contains conventional reservoirs at shallow to intermediate depths, while the West Texas region has conventional reservoirs in the intermediate to deep depths. Conventional reservoirs have witnessed a renewed interest due to lower completion costs. Drilling activity in West Texas also experienced an increase in new unconventional resource plays such as the Avalon and Spraberry/Wolfcamp Shales. New unconventional techniques have also been increasingly used on existing plays in west Texas, such as the Permian Basin, driving stronger activity levels in the Permian than most resource plays in North America. The east Texas region has conventional and unconventional natural gas tight sands reservoirs, while the Barnett Shale and Haynesville Shale regions have unconventional shale natural gas reservoirs where drilling is primarily horizontal and focused on deep gas plays which are contained in tight gas formations. The Niobrara Shale in Wyoming and Colorado has conventional and unconventional oil reservoirs at intermediate to deep depths. The Bakken Shale contains conventional and unconventional oil reservoirs at intermediate depths and the Eagle Ford Shale region contains unconventional shale reservoirs with deposits rich in natural gas liquids and oil found at intermediate to deep depths. Drilling activity is focused on horizontal wells with long reach laterals in both of these regions. The Mississippian Lime is a conventional oil and natural gas liquids play focused on shallow horizontal drilling, while the Tuscaloosa Marine Shale is an unconventional oil shale where drilling is primarily horizontal and focused on deep targets. The Cleveland Sands is an unconventional tight sand formation with oil targets being exploited currently, while the Granite Wash is an unconventional formation made up of granite with oil being the primary focus currently. The Woodford Shale is an unconventional shale focused on oil drilling. COMPETITIVE CONDITIONS The US land drilling market is a competitive sector, divided between different regions, with five of the large contractors accounting for approximately 77% 1 of the industry's active drilling fleet as of December 31, Trinidad was the 6 th largest active driller 1 for the same time period. Trinidad has established strong working relationships with several key oil and gas exploration and production companies in the US. These relationships, the Company's history of consistent top performance and our modern, technically advanced fleet make Trinidad's US drilling operations very competitive. Our US and International operations land drilling rig fleet includes some of the industry's newest and most technically advanced rigs that are suited for deeper, more complex resource plays. Our US and International operations land drilling rigs have an average age of eight years and a large proportion of the fleet is equipped with technically advanced, high performance equipment that allows the rigs to drill efficiently in today's complex and challenging drilling environments. See Risk Factors on page Tudor Pickering Holt Trinidad Drilling Ltd Annual Information Form

15 14 About Our Business Joint Venture Operations The Joint Venture operations consist of our two international joint ventures. Trinidad Drilling International is a drilling rig contractor that provides contract drilling services to Halliburton. Trinidad has a 60% interest in TDI-JV and Halliburton has a 40% interest. At December 31, 2016, TDI-JV operated a total of eight land drilling rigs, with four drilling rigs in Saudi Arabia and four drilling rigs in Mexico. DCM is a drilling rig contractor that operates in Mexico. At December 31, 2016, the DCM- JV operated a total of two land drilling rigs and two service rigs in Mexico. Trinidad and Grupo Diavaz, S.A. each have a 50% interest in DCM-JV. PRINCIPAL MARKETS In 2016, our joint ventures operate in the Ghwar fields in Saudi Arabia and the Villahermosa and Miquetla region in Mexico. The Ghwar field is a large established oil field that produces Arab light crude oil. The Villahermosa region is in south eastern Mexico and is a mature producing area characterized by generally predictable and stable production levels. The DCM-JV operates in the Miquetla block, which is located in Mexico s onshore Chicontepec basin. PRINCIPAL PRODUCTS, SERVICES AND OPERATIONS The Joint Venture operations are comprised of one principal component which provides land drilling services. Land Drilling Services Land drilling services are provided by TDI-JV to TDI-JV s partner, Halliburton, for their international integrated projects, and by DCM-JV for the operation of drilling and service rigs. Halliburton s projects are typically for national oil companies or large global exploration and development companies. Land drilling services are completed using drilling rigs and auxiliary equipment and are performed at the request of Halliburton who has entered into contracts with TDI-JV. Halliburton and their customer issue instructions to TDI-JV for the drilling of the oil or gas well at a specified location and desired depth. If the customer determines that the well is economical, the drilling rig will set the production casing for the well. The drilling rig may then complete the well or cap it to provide for completion at a later date by using a service rig. If the well is not economical, the drilling rig plugs and abandons the well. Trinidad owns 60% of the shares of TDI-JV and each of the joint parties have equal voting rights. Trinidad considers the investment to be a financial asset at fair value through profit or loss and recognizes changes in fair value of the investment in the statement of operations and comprehensive income (loss) as a gain (loss) from joint ventures. DCM-JV was acquired as part of the CanElson acquisition. Trinidad has a 50% ownership in DCM-JV and each of the parties have equal voting rights. The joint venture partners have joint control over the relevant activities of this joint venture and as such DCM-JV is accounted for in Trinidad s consolidated financial statements using the equity method of accounting. In 2016, the revenue from the TDI-JV was $132 million, compared to $137 million in Joint Venture operations are reflected as the gain (loss) from investment in joint

16 About Our Business 15 ventures on the consolidated statements of operations, and therefore, are not included in the consolidated revenues. The gain from investment in joint ventures was approximately 24% of Trinidad s total consolidated net loss for The loss from investment in Joint Ventures was approximately 0.7% of Trinidad's total consolidated net loss for At December 31, 2016, the Joint Venture operations operated a fleet of 10 land drilling rigs in Saudi Arabia and Mexico. COMPETITIVE CONDITIONS TDI-JV has the first look at any contract drilling work associated with Halliburton s integrated projects outside of Canada and the US. TDI-JV may bid on those projects that meet its return, risk and logistical requirements, without needing to bid on any projects that do not meet its internal benchmarks. TDI-JV s bid must be competitive and its equipment must meet the specifications for Halliburton to accept the bid. While TDI-JV s customer is Trinidad s partner, Halliburton, TDI-JV is evaluated based primarily on the performance of its equipment, drilling depth capacity, safety record and the expertise of its operational personnel. TDI-JV must remain competitive in all these aspects to continue to win bids with Halliburton. TDI-JV strives to obtain high evaluations in each of these areas. Trinidad s Joint Venture operations rig fleet includes some of the industry's newest and most technically advanced rigs that are suited for deeper, more complex resource plays. The Joint Venture operations land drilling rigs have an average age of five years and a large proportion of the fleet is equipped with technically advanced, high performance equipment that allows the rigs to drill efficiently in today's complex and challenging drilling environments. See Risk Factors on page 19. Manufacturing Operations TDM is a drilling rig and equipment construction and fabrication business which builds and maintains Trinidad's drilling rigs and related equipment. MANUFACTURING In 2016, TDM was restructured, with TDM s operations being scaled down and the majority of its functions being performed from within the Canadian and US and International operations. As of June 30, 2016, the restructuring of the manufacturing division was complete. As part of this restructuring, we retained specialized design and engineering personal within the company to manage maintenance and upgrades to our fleet. Future new builds, if industry conditions allowed, would be largely out-sourced and project managed by these skilled and experienced employees. Trinidad Drilling Ltd Annual Information Form

17 16 About Our Business For the year ended December 31, 2016, Trinidad recognized revenue and expenses related an upgrade project and various repairs and maintenance type work for the TDI-JV rigs. Manufacturing revenue related to third parties (TDI-JV and Halliburton) was approximately 1% of Trinidad s consolidated revenue for 2016 and 8% of Trinidad s consolidated revenue for Revenue for internal construction projects is eliminated on consolidation. Corporate Trinidad has a non-operating corporate segment, which acts as a support function to the other segments. In addition, the segment receives revenue due to the recovery of thirdparty costs from TDI-JV. Revenue for the corporate segment was approximately 0.3% of Trinidad s total consolidated revenue for 2016 and 0.2% for Other Operational Information MARKET FOR SERVICE AND ECONOMIC DEPENDENCE The amount of capital allocated by oil and gas exploration and production companies for reserve development has a direct impact on the demand for drilling rigs and this demand will impact the rig utilizations and dayrates that can be charged. The total capital available is influenced by commodity prices and the ability to finance capital programs with either cash flow, debt or new equity issues. These market forces, in combination with consumer demand for oil and gas, are key factors in determining the number of wells that will be drilled by oil and gas exploration and production companies. Drilling services are provided based on standard drilling contracts. The contracts outline the rights, responsibilities and obligations of each party to the contract. The contracts can be for a specific well, a series of wells, or for a specific time frame. Our long-term, take-or-pay contracts specify a minimum number of days that the customer agrees the rigs will operate (typically ranging from one to five years), whereas the spot contracts generally do not provide for a guaranteed level of utilization. Both long-term, take-or-pay contracts and spot contracts provide for daily rates to the customer and outline responsibilities with respect to third-party charges. In order to provide additional stability to our revenue stream, part of Trinidad's strategy has been to back up the construction of new rigs and ongoing utilization of existing rigs with long-term, take-or-pay contracts that guarantee a specific level of utilization and dayrates during the term of the contract. These contracts have cancellation clauses that require the operator to pay clearly defined fees if a contract is cancelled prior to its expiry. At December 31, 2016, we had approximately 17% of our fleet covered with this style of contract, as compared to December 31, 2015 when we had 30% of our fleet under long-term, take-or-pay contracts. The market for the drilling services we provide is comprised of numerous oil and gas exploration companies, and as such we do not have any customers upon which its business is substantially dependent. For the year ended 2016, we had one customer that accounted for approximately 13% of our total revenue. CYCLES We operate a substantial number of rigs in western Canada, and therefore, operations are heavily dependent upon the seasons. The winter season is typically a busy period as

18 About Our Business 17 oil and natural gas companies take advantage of frozen conditions to move drilling rigs into regions which might otherwise be inaccessible to heavy equipment due to swampy conditions. Spring time normally encompasses a slow period referred to as spring breakup. During this period, melting conditions result in temporary municipal road bans that effectively prohibit the movement of drilling rigs. The remainder of the year is usually representative of average activity levels. Industry conditions have an effect on how seasonality affects Trinidad s activity. As well, Trinidad s expansion into the US and international markets has reduced its overall exposure to the seasonal factors that are present in its Canadian operations. These seasonal conditions typically limit Canadian drilling activity, whereas in the US and international areas, operators have increased flexibility to work throughout the year. This increased number of operating days throughout the year has allowed Trinidad to better manage its business with more sustainable cash flows throughout the year. HEALTH, SAFETY AND ENVIRONMENT (HSE) We are committed to providing industry leading operational performance, while protecting employees from harm, conserving the environment in which we operate, and protecting assets and the wellbeing of the community at large. Trinidad ensures all health, safety and environmental aspects and impacts are identified, mitigated and controlled to a level as low as reasonably practicable. In order to best manage and drive strong HSE performance, our management team includes an overall HSE Vice President and two geographic HSE managers with functional leadership and oversight of HSE matters. These two managers include our Director who is responsibility for Canadian operations and our General Manager who is responsible for both US and International operations. The HSE Vice President, Director and General Manager have ongoing communication and interaction with operations management and staff, while also maintaining direct access to the President and CEO of Trinidad. These interactions help to ensure the HSE mandate remains operationally driven and supported at the highest levels of the organization. Beyond the day-to-day line and functional HSE management, we have an HSE Leadership Committee comprised of senior leadership which regularly meets to focus on improving Trinidad s health, safety and environmental performance. In addition, at the Board of Directors (Board) level, Trinidad has an HSE Committee which meets at least four times annually to review HSE performance, management and initiatives. Continually improving the health and safety of rig crews is one of the most critical aspects of our operations. Throughout 2016, we continued to lower the number of safety incidents (our Total Recordable Incident Rate). Moving forward, we will continue to relentlessly and proactively track, analyze and trend incident and operational data to ensure programs remain current and effective for eliminating or reducing operational risks and proactively preventing incidents. Our high specification, modern and well-maintained fleet provides a critical safeguard in ensuring efficient and safe operations through the reduction of human interaction and reliability in the course of operations. The design of the rig fleet itself provides a further level of environmental protection through rigorous and well-planned preventative maintenance programs that allows rig engines and hydraulic equipment to run at their optimum levels, minimizing air pollution and fluid leakage. In addition, we outfit some of Trinidad Drilling Ltd Annual Information Form

19 18 About Our Business our equipment with high-grade mufflers to reduce noise pollution, particularly where a rig may be operating near a highly populated area. In order to reduce the sound and emissions from diesel engines and to lower costs for our customers, we utilize alternative power sources for rigs in some cases. Where available, we have the ability to provide power to our rigs through direct connection to high-line power; significantly lowering engine-related sound from the rig. We have had a number of rigs operating on bi-fuel engines which run a mixture of natural gas and diesel and have funds allocated in our 2017 capital budget to add bi-fuel to additional rigs in our fleet. We constructed a rig with the ability to operate on the natural gas produced from operations. Natural gas is a cleaner burning fuel and has other price drivers. MANAGEMENT AND EMPLOYEES The contract drilling business is organized into profit centres for each rig. Each rig manager is responsible for daily operational management of his individual rig and reports to the appropriate field superintendents, each managing a group of rigs. Marketing efforts are coordinated with the operational managers and are performed by our sales and marketing group located in Calgary, Alberta for the Canadian fleet and Houston, Texas for the US and international fleet. Given the weak industry conditions and limited demand for TDM s services, in 2016, TDM was restructured with TDM s operations being scaled down and the majority of its functions being performed from within the Canadian and US and International operations. In addition to reorganizing TDM, we lowered our overall number of employees throughout 2015 and again in early As rigs become idle, crew members are not paid until future work can be found for their rig. In addition, we lowered our headcount in our corporate, field administration and manufacturing divisions in order to further lower costs. In early 2017, with increased demand for drilling rigs, we have successfully re-crewed rigs as they go back to work. Trinidad Personnel 1-Mar Dec Dec-15 Canadian operations US and International operations Joint Venture operations Total 1,792 1,529 1,790