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KPMG LLP205 5th Avenue SWSuite 3100Calgary AB T2P 4B9Tel (403) 691-8000Fax (403) 691-8008www.kpmg.caINDEPENDENT AUDITORS’ REPORTTo the Shareholders of Secure Energy Services Inc.OpinionWe have audited the consolidated financial statements of Secure Energy Services Inc. (theEntity), which comprise: the consolidated statements of financial position as at December 31, 2020 andDecember 31, 2019 the consolidated statements of comprehensive loss for the years then ended the consolidated statements of changes in shareholders’ equity for the years then ended the consolidated statements of cash flows for the years then ended and notes to the consolidated financial statements, including a summary of significantaccounting policies(Hereinafter referred to as the “financial statements”).In our opinion, the accompanying financial statements present fairly, in all material respects,the consolidated financial position of the Entity as at December 31, 2020 and December 31,2019, and its consolidated financial performance and its consolidated cash flows for theyears then ended in accordance with International Financial Reporting Standards (IFRS).Basis for OpinionWe conducted our audit in accordance with Canadian generally accepted auditingstandards. Our responsibilities under those standards are further described in the “Auditors’Responsibilities for the Audit of the Financial Statements” section of our auditors’ report.We are independent of the Entity in accordance with the ethical requirements that arerelevant to our audit of the financial statements in Canada and we have fulfilled our otherethical responsibilities in accordance with these requirements.We believe that the audit evidence we have obtained is sufficient and appropriate to providea basis for our opinion. 2020 KPMG LLP, an Ontario limited liability partnership and a member firm of the KPMG global organization of independent member firmsaffiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
Key Audit MatterKey audit matters are those matters that, in our professional judgment, were of mostsignificance in our audit of the financial statements for the year ended December 31, 2020.These matters were addressed in the context of our audit of the financial statements as awhole, and in forming our opinion thereon, and we do not provide a separate opinion onthese matters.We have determined the matter described below to be the key audit matters to becommunicated in our auditors’ report.Assessment of the recoverable amount of the drilling and productionservices, Canadian processing and disposal facilities and watermanagement cash generating unitsDescription of the matterWe draw attention to note 2, note 3, and note 9 to the financial statements. When thecarrying amount of a cash generating unit exceeds its recoverable amount, the non-financialassets within the cash generating unit (“CGU”) are considered impaired and its carryingamount is reduced to its recoverable amount. The Entity determined that impairment testswere required on various cash generating units including the drilling and production services,the Canadian processing and disposal facilities and the water management cash generatingunits. The Entity recorded an impairment charge of 15.7 million related to the drilling andproduction services CGU.The estimated recoverable amount of the drilling and production services, Canadianprocessing and disposal facilities and water management CGUs involves certain significantassumptions including the: Forecasted income before finance costs, taxes, depreciation, depletion andamortization, non-cash impairments on non-current assets, unrealized gains or losseson mark to market commodity transactions, share based compensation and certainother income and expenses (“adjusted EBITDA”) Discount rates.Why the matter is a key audit matterWe identified the assessment of the recoverable amount of the drilling and productionservices, Canadian processing and disposal facilities and water management cashgenerating units as a key audit matter. Significant auditor judgment was required to evaluatethe results of our audit procedures regarding the significant assumptions.2
How the matter was addressed in the auditThe primary procedures we performed to address this key audit matter included thefollowing:We compared the Entity’s 2020 actual adjusted EBITDA to the amount budgeted for 2020 toassess the Entity’s ability to accurately forecast.We evaluated the appropriateness of the forecasted adjusted EBITDA used in the estimateof the recoverable amounts by: Comparing the forecasted 2021 adjusted EBITDA for the Canadian processing anddisposal facilities and the water management CGUs to the 2021 budget to assessconsistency with other significant assumptions used by the Entity in other estimatesused in the financial statements Comparing the forecasted 2020 adjusted EBITDA for the drilling and production servicesCGU to the 2020 budget to assess consistency with other significant assumptions usedby the Entity in other estimates used in the financial statements Comparing the forecasted adjusted EBITDA for each CGU to historical results. We tookinto account changes in conditions and events affecting each CGU to assess theadjustments or lack of adjustments made by the Entity in arriving at forecasted adjustedEBITDA for each CGU Comparing certain underlying assumptions in the forecasted adjusted EBITDA to marketdata.We involved valuation professionals with specialized skills and knowledge, who assisted in: Evaluating the appropriateness of the Entity’s discount rates by comparing the discountrates to market and other external data Assessing the reasonableness of the Entity’s estimates of the recoverable amounts ofeach CGU by comparing the Entity’s estimates to market metrics and other externaldata.Other InformationManagement is responsible for the other information. Other information comprises theinformation included in Management’s Discussion and Analysis filed with the relevantCanadian Securities Commissions.Our opinion on the financial statements does not cover the other information and we do notand will not express any form of assurance conclusion thereon.In connection with our audit of the financial statements, our responsibility is to read the otherinformation identified above and, in doing so, consider whether the other information is3
materially inconsistent with the financial statements or our knowledge obtained in the auditand remain alert for indications that the other information appears to be materially misstated.We obtained the information included in Management’s Discussion and Analysis filed withthe relevant Canadian Securities Commissions as at the date of this auditors’ report. If,based on the work we have performed on this other information, we conclude that there is amaterial misstatement of this other information, we are required to report that fact in theauditors’ report.We have nothing to report in this regard.Responsibilities of Management and Those Charged withGovernance for the Financial StatementsManagement is responsible for the preparation and fair presentation of the financialstatements in accordance with International Financial Reporting Standards (IFRS), and forsuch internal control as management determines is necessary to enable the preparation offinancial statements that are free from material misstatement, whether due to fraud or error.In preparing the financial statements, management is responsible for assessing the Entity’sability to continue as a going concern, disclosing as applicable, matters related to goingconcern and using the going concern basis of accounting unless management either intendsto liquidate the Entity or to cease operations, or has no realistic alternative but to do so.Those charged with governance are responsible for overseeing the Entity’s financialreporting process.Auditors’ Responsibilities for the Audit of the FinancialStatementsOur objectives are to obtain reasonable assurance about whether the financial statementsas a whole are free from material misstatement, whether due to fraud or error, and to issuean auditors’ report that includes our opinion.Reasonable assurance is a high level of assurance, but is not a guarantee that an auditconducted in accordance with Canadian generally accepted auditing standards will alwaysdetect a material misstatement when it exists.Misstatements can arise from fraud or error and are considered material if, individually or inthe aggregate, they could reasonably be expected to influence the economic decisions ofusers taken on the basis of the financial statements.As part of an audit in accordance with Canadian generally accepted auditing standards, weexercise professional judgment and maintain professional skepticism throughout the audit.4
We also: Identify and assess the risks of material misstatement of the financial statements,whether due to fraud or error, design and perform audit procedures responsive to thoserisks, and obtain audit evidence that is sufficient and appropriate to provide a basis forour opinion.The risk of not detecting a material misstatement resulting from fraud is higher than forone resulting from error, as fraud may involve collusion, forgery, intentional omissions,misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design auditprocedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the Entity's internal control. Evaluate the appropriateness of accounting policies used and the reasonableness ofaccounting estimates and related disclosures made by management. Conclude on the appropriateness of management's use of the going concern basis ofaccounting and, based on the audit evidence obtained, whether a material uncertaintyexists related to events or conditions that may cast significant doubt on the Entity's abilityto continue as a going concern. If we conclude that a material uncertainty exists, we arerequired to draw attention in our auditors’ report to the related disclosures in the financialstatements or, if such disclosures are inadequate, to modify our opinion. Ourconclusions are based on the audit evidence obtained up to the date of our auditors’report. However, future events or conditions may cause the Entity to cease to continueas a going concern. Evaluate the overall presentation, structure and content of the financial statements,including the disclosures, and whether the financial statements represent the underlyingtransactions and events in a manner that achieves fair presentation. Communicate with those charged with governance regarding, among other matters, theplanned scope and timing of the audit and significant audit findings, including anysignificant deficiencies in internal control that we identify during our audit. Provide those charged with governance with a statement that we have complied withrelevant ethical requirements regarding independence, and communicate with them allrelationships and other matters that may reasonably be thought to bear on ourindependence, and where applicable, related safeguards. Obtain sufficient appropriate audit evidence regarding the financial information of theentities or business activities within the group Entity to express an opinion on thefinancial statements. We are responsible for the direction, supervision and performanceof the group audit. We remain solely responsible for our audit opinion.5
Determine, from the matters communicated with those charged with governance, thosematters that were of most significance in the audit of the financial statements of thecurrent period and are therefore the key audit matters. We describe these matters in ourauditors’ report unless law or regulation precludes public disclosure about the matter orwhen, in extremely rare circumstances, we determine that a matter should not becommunicated in our auditors’ report because the adverse consequences of doing sowould reasonably be expected to outweigh the public interest benefits of suchcommunication.The engagement partner on the audit resulting in this auditors’ report is Shane Doig.Chartered Professional AccountantsCalgary, CanadaFebruary 25, 20216
SECURE ENERGY SERVICES INC.Consolidated Statements of Financial PositionAs at December 31,Notes( 000's)AssetsCurrent assetsCashAccounts receivable and accrued receivablesInventoriesPrepaid expenses and other current assets5678Property, plant and equipmentRight-of-use assetsIntangible assetsGoodwillTotal bilitiesCurrent liabilitiesAccounts payable and accrued liabilitiesAsset retirement obligationsLease 6018,030210,268Long-term borrowingsAsset retirement obligationsLease and other liabilitiesDeferred tax 6,620)713,503812,6441,424,5791,647,651Total LiabilitiesShareholders' EquityIssued capitalShare-based compensation reserveForeign currency translation reserveNon-controlling interestDeficit13Total Shareholders' EquityTotal Liabilities and Shareholders' EquityApproved by the Board of Directors:“SIGNED”Rene Amirault“SIGNED”Kevin NugentThe accompanying notes are an integral part of these consolidated financial statements1
SECURE ENERGY SERVICES INC.Consolidated Statements of Comprehensive LossFor the years ended December 31,Notes( 000's except per share and share data)RevenueCost of 5,97116,426101,297-Gross marginGeneral and administrative expensesRestructuring costs and other2019Operating (loss) incomeInterest, accretion and finance costsLoss before 9,841)(723)1,151(23,805)(159)(755)Net (loss) income(87,187)191Net (loss) income attributable to:Shareholders of SECURENon-controlling interest(85,209)(1,978)1,600(1,409)1616Current tax expense (recovery)Deferred tax recoveryOther comprehensive loss(2,456)(7,386)Total comprehensive loss(89,643)(7,195)Total comprehensive loss attributable to:Shareholders of SECURENon-controlling interest(88,010)(1,633)(5,648)(1,547)Foreign currency translation adjustmentBasic and diluted loss per common share151515Weighted average shares outstanding - basicWeighted average shares outstanding - diluted(0.55)158,561,369158,561,369The accompanying notes are an integral part of these consolidated financial statements2158,984,770161,817,532
SECURE ENERGY SERVICES INC.Consolidated Statements of Changes in Shareholders’ Equity( 000's)Balance at January 1, 2020Net lossDividends declaredForeign currency translation adjustmentExercise of share unitsShare-based compensationShares cancelled under normal course issuer bid ("NCIB")Balance at December 31, 2020Balance at January 1, 2019Net (loss) incomeDividends declaredAcquisition of non-controlling interestForeign currency translation adjustmentExercise of share unitsShare-based compensationShares cancelled under NCIBBalance at December 31, 2019Note131313Issued ,644The accompanying notes are an integral part of these consolidated financial statements3
SECURE ENERGY SERVICES INC.Consolidated Statements of Cash FlowsFor the years ended December 31,Notes( 000's)Cash flows (used in) from operating activitiesNet (loss) incomeAdjustments for non-cash items:Depreciation, depletion and 9)Effect of foreign exchange on cash(1,412)(1,134)(Decrease) increase in cashCash, beginning of periodCash, end of period(2,073)8,8546,7819267,9288,854Interest, accretion and finance costsCurrent and deferred tax recoveryOther non-cash expenseImpairment of non-current assetsShare-based compensationInterest paidIncome taxes recovered (paid)Asset retirement costs incurredFunds flow from operationsChange in non-cash working capitalNet cash flows from operating activities1691411Cash flows (used in) from investing activitiesPurchase of property, plant and equipmentProceeds from dispositionsPartnership distributions to non-controlling interestBusiness acquisitionChange in non-cash working capitalNet cash flows used in investing activities4Cash flows (used in) from financing activities13Repurchase and cancellation of shares under NCIB(Repayment) draw on credit facilitiesFinancing feesLease liability principal paymentsDividends declaredChange in non-cash working capitalNet cash flows used in financing activities1213The accompanying notes are an integral part of these consolidated financial statements4
SECURE ENERGY SERVICES INC.Notes to the Consolidated Financial StatementsFor the years ended December 31, 2020 and 20191.NATURE OF BUSINESS AND BASIS OF PRESENTATIONNature of BusinessSECURE Energy Services Inc. (“SECURE” or the “Corporation”) is incorporated under the Business Corporations Actof Alberta. SECURE operates through a number of wholly-owned subsidiaries (together referred to as the“Corporation”) which are managed through two reportable segments which provide innovative, efficient andenvironmentally responsible fluids and solids solutions to the oil and gas industry.The Midstream Infrastructure segment owns and operates a network of facilities throughout western Canada, NorthDakota and Oklahoma. These facilities provide processing, storing, shipping and marketing of crude oil; processingof waste; and water treatment and disposal. SECURE also transports oil and water through pipelines direct to SECUREfacilities.The Environmental and Fluid Management segment includes a network of landfill disposal facilities; onsiteabandonment, remediation and reclamation management; a suite of comprehensive environmental managementsolutions provided by the Corporation to a diversified customer base; and drilling, completion and production fluidoperations management for oil and gas producers in western Canada.The following entities have been consolidated within SECURE’s consolidated financial statements for the years endedDecember 31, 2020 and 2019.SubsidiariesSECURE Energy Services Inc. (parent company)True West Energy Ltd.Chaleur Terminals Inc.SECURE Energy (Drilling Services) Inc.Alliance Energy Services International Ltd.SECURE Energy (OnSite Services) Inc.SECURE Energy (Logistics Services) Inc.Reef International Ltd. (added Q1 2020)SES USA Holdings Inc.SECURE Energy Services USA LLCSECURE Drilling Services USA LLCSECURE Minerals USA LLCSECURE OnSite Services USA LLCBarcas Pipeline Ventures LLC (acquired April 11, 2019)BPV Gathering & Marketing LLC (acquired April 11, nadaCanadaUSAUSAUSAUSAUSAUSAUSA5Functional CurrencyCanadian DollarCanadian DollarCanadian DollarCanadian DollarCanadian DollarCanadian DollarCanadian DollarUS DollarUS DollarUS DollarUS DollarUS DollarUS DollarUS DollarUS Dollar% Interest Dec 31,2020
( 000's) Notes 2020 2019 Assets Current assets Cash 6,781 8,854 Accounts receivable and accrued receivables 143,887 228,468 Inventories 5 48,190 65,158 Prepaid expenses and other current assets 8,839 11,974 207,697 314,454 Property, plant and equipment 6 1,155,763 1,232,775 Right-of-use assets 7 31,999 49,624
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