04:09:46 EDT Fri 29 Mar 2024
Enter Symbol
or Name
USA
CA



CES Energy Solutions Corp
Symbol CEU
Shares Issued 267,070,872
Close 2018-11-08 C$ 3.41
Market Cap C$ 910,711,674
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CES Energy earns $5.85-million in Q3 2018

2018-11-08 18:47 ET - News Release

Mr. Tom Simons reports

CES ENERGY SOLUTIONS CORP. REPORTS RECORD THIRD QUARTER RESULTS AND DECLARES CASH DIVIDEND

CES Energy Solutions Corp. has released its financial and operating results for the three and nine months ended September 30, 2018. Further, CES announced today that it will pay a cash dividend of $0.005 per common share on December 14, 2018 to the shareholders of record at the close of business on November 30, 2018.

In Q3 2018, CES generated revenue of $338.5 million and Adjusted EBITDAC of $45.6 million, both representing record quarterly results achieved by the Company.

Record revenue of $338.5 million during Q3 2018 represented an increase of $77.6 million or 30% compared to $260.9 million in revenue for Q3 2017. Revenue for the nine months ended September 30, 2018 was $923.1 million as compared to $750.8 million for the nine months ended September 30, 2017.

Revenue generated in the US increased 34% and 28% to $227.1 million and $608.1 million for the three and nine months ended September 30, 2018, respectively, over the 2017 comparative periods. Q3 2018 revenue generated in the US of $227.1 million is the highest US revenue quarter in the Company's history exceeding the previous record quarter for the US which was Q2 2018 with $201.5 million. Contributing to the year-over-year increase of 34% was CES' completed investments in US infrastructure and capabilities to date, significant activity improvement in the drilling fluids business and increased US Treatment Points, particularly in the Permian Basin. For Q3 2018, the Company's US source revenues were positively impacted on translation by weakness in the Canadian Dollar ("CAD") versus US Dollar ("USD"), compared to Q3 2017.

Revenue generated in Canada increased 21% and 14% to $111.4 million and $315.1 million for the three and nine months ended September 30, 2018, respectively, over the 2017 comparative periods. Q3 began on solid footing in Canada, with strong performance in July and August leading into mid-September when weather and ground conditions slowed drilling activity and prevented access for certain production chemical deliveries. PureChem contributed the majority of the Canadian revenue gain for the three and nine months ended September 30, 2018 compared to the comparative periods in prior year, as completed investments in PureChem infrastructure continue to enable increased market share in Canada in the production chemicals business. Revenues in CES' drilling fluids business in Canada also increased in 2018 compared to 2017, due to increased activity in the respective three and nine month periods.

Gross Margin in Q3 2018 was $75.9 million or 22.4% of revenue, compared to Gross Margin of $63.9 million or 24.5% of revenue generated in Q3 2017. Year-to-date Gross Margin totaled $214.6 million, compared to $182.2 million for the nine months ended September 30, 2017, representing an increase of $32.4 million or 18%. In Q3 2018, CES recorded Gross Margin (excluding depreciation) of $86.2 million or 25.5% of revenue, compared to Gross Margin (excluding depreciation) of $73.0 million or 28.0% of revenue generated in Q3 2017. Year-to-date Gross Margin (excluding depreciation) totaled $244.3 million, compared to $209.7 million for the nine months ended September 30, 2017, representing an increase of $34.6 million or 16%. CES continues to benefit from operating leverage in our consumable chemicals business model, except in the Permian where continued strong growth has caused CES' infrastructure to temporarily reach its efficiency capacity as expansionary investments continue to de-bottleneck operations. CES has previously announced expansion plans to its Permian infrastructure to address the needs of its growing Permian businesses. These gains were offset by cost inflation incurred throughout 2018, which has outpaced the Company's ability to pass through its input costs to its customers for its products and services. Further, weather related challenges in Canada during September also temporarily negatively affected Gross Margin as activity levels declined and corresponding lower revenue was over the same fixed cost base. As a result, Gross Margin (excluding depreciation) as a percentage of revenue in Q3 2018 has decreased from Q3 2017. CES believes that as it increases sales in areas such as the Permian and the Deep Basin, CES' operating leverage from its expanded infrastructure, innovative technologies, and superior service culture will improve margins going forward. Net income for the three and nine months ended September 30, 2018 was $5.9 million and $32.3 million, respectively, compared to $19.4 million and $33.6 million for the 2017 respective periods.

EBITDAC for Q3 2018 was $43.1 million as compared to $40.7 million for Q3 2017, representing an increase of $2.4 million or 6%. Excluding CFO-related one-time management transition costs of $2.5 million incurred in the quarter, Adjusted EBITDAC was $45.6 million. Year-to-date EBITDAC was $123.1 million as compared to $112.2 million for the nine months ended September 30, 2017, representing an increase of $10.9 million or 10%. Excluding one-time CFO-related management transition costs of $2.5 million incurred in the quarter, Adjusted EBITDAC was $125.5 million. Net income for the three and nine months ended September 30, 2018 was $5.9 million and $32.3 million, respectively, compared to $19.4 million and $33.6 million for the 2017 respective periods. Year-over-year, the Company's operating results continued to benefit from increased activity levels due to the improved commodity price environment, and CES' business' in both US and Canada have made positive contributions to revenue, net income and EBITDAC.

CES continues to maintain a prudent balance sheet to support its business needs and capitalize on improving oilfield activity in both the US and Canada throughout the cycle. In October 2017, CES successfully re-financed and reduced its coupon on its $300.0 million Senior Notes by issuing new 6.375% Senior Notes which have an extended maturity into October 2024.

At September 30, 2018, CES had a net draw of $149.4 million on its Senior Facility (December 31, 2017 - $109.3 million), representing an increase of $56.4 million from June 30, 2018, The increase was primarily driven by working capital build attributable to record revenue levels, typical Q2 to Q3 build in preparation for upcoming seasonally driven higher activity levels, and for opportunistic inventory purchases in the quarter. Capital allocation in Q3 also included expansionary capex for the Kermit mud plant in the Permian Basin, PureChem's production chemical Grande Prairie facility and opportunistic share repurchases through CES' normal course issuer bid ("NCIB") program.

The maximum available draw on the Senior Facility at September 30, 2018 was $125.0 million on the Canadian facility and US$40.0 million on the US facility (December 31, 2017 - $125.0 million and US $40.0 million, respectively). On November 8, 2018, the Company amended its Senior Facility to exercise $55.0 million of available accordion capacity, increasing the maximum amount available on the Canadian facility from $125.0 million to $180.0 million, in addition to the US$40.0 million on the US facility. All other terms and conditions of the Senior Facility remain unchanged. In early 2016, CES took a voluntary reduction in the amount of $50.0 million on the maximum borrowing amount on its Canadian facility, which provided adequate liquidity during the downturn as working capital returned to the balance sheet in the form of cash. As activity levels have rebounded and market conditions have improved, this $55.0 million increase in availability on the Senior Facility addresses the needs of the Company's growing business in the recovery. As at the date hereof, the Company has a net draw of approximately $160.0 million on its Senior Facility.

CES continues to see improvement in its financial position and the Company's Board of Directors and management view share repurchases as a prudent component of its capital allocation at this time as they believe that the current market price of CES's common shares does not reflect their underlying value. On July 17, 2018, the Company began an NCIB program to repurchase for cancellation up to 24,587,978 common shares. The NCIB will terminate on July 16, 2019 or such earlier date as the maximum number of common shares are purchased pursuant to the NCIB or the NCIB is completed or is terminated at the Company's election. In Q3 2018, the Company repurchased 2,700,000 common shares at an average price of $4.574 per share for a total amount $12.4 million. Subsequent to September 30, 2018, the Company purchased 1,300,000 additional shares at a weighted average price per share of $3.601 for a total of $4.7 million.

Outlook

CES is very optimistic about its prospects for the remainder of 2018 and beyond. CES' record consolidated revenue result and record US revenue result in Q3 2018 reflect its effective execution in a dynamic environment and CES' strategy has positioned the Company to take advantage of the opportunities ahead. CES believes that over time it can continue to grow its share of the oilfield consumable chemical markets in which it competes. CES also sees the consumable chemical market increasing its share of the oilfield spend as operators continue to: drill longer reach laterals and drill them faster; expand and optimize the utilization of pad drilling and cube development techniques; increase the intensity and size of their fracs; and require increasingly technical and specialized chemical treatments to effectively maintain existing cash flow generating wells and treat growing production from new wells.

In the US, CES' infrastructure is largely built out to meet anticipated growing production chemical and drilling fluid needs in the key basins. In the Permian Basin, the Kermit, Texas mud plant expansion has been designed to double capacity, positioning the Company to take on new work and continue to grow market share. In addition, Catalyst's current platform is setup to capitalize on growing production and higher levels of activity in the Permian Basin, and CES continues to recruit top talent in this highly competitive region. CES also plans to build a strategically located barite facility in the northeast US in 2019, expanding its existing barite grinding capabilities and further adding to the Company's competitive positioning and operating leverage.

In Canada, CES' production chemical infrastructure is also largely complete, and CES is well positioned to increase financial contribution from its PureChem division as the Company grows into this infrastructure and continues to add scale. In Canada, current industry takeaway capacity issues and a lack of consistent market access has caused differentials to widen significantly, thereby tempering current activity levels by operators. Weather related challenges temporarily limited access in the WCSB and affected CES' Canadian business in Q3 2018, with poor weather conditions continuing into early October. Despite these challenges, CES expects activity levels in Q1 2019 to achieve the higher levels typically seen in the first quarter in Canada, with further clarity on this as operators' capital budgets are finalized during Q4 2018.

CES' strategy is to utilize its decentralized management model; its vertically integrated manufacturing model; its problem solving through science approach; its patented and proprietary technologies; and its superior people and execution to increase market share. The downturn made many middlemen, or competitors who are simply resellers of other company's products, redundant. By being basic in the manufacture of the consumable chemicals it sells, CES continues to be price competitive and a technology leader. Recent competitor consolidations and business failures will provide further opportunities for CES in this recovery period as operators require increasingly technical solutions and deeper customer-centric coverage models to meet their needs. CES believes that its unique value proposition makes it the premier independent provider of technically advanced consumable chemical solutions to the North American oilfield.

CES' balance sheet is well positioned to capitalize on the improving oilfield activity. In October 2017, CES successfully re-financed and reduced its coupon on its $300.0 million Senior Notes by issuing new 6.375% Senior Notes which have an extended maturity into October 2024. In 2018, it is expected that EBITDAC will materially exceed the sum of cash expenditures on interest, taxes, and capital expenditures, allowing for free cash flow to be returned to shareholders through CES' monthly dividend and recently implemented NCIB.

As CES' infrastructure buildout in both Canada and the US is largely completed in 2018, absent acceptable return expansionary capital projects, such as the buildout of the northeast US barite facility, CES expects capital expenditures in 2019 to return to levels below 2017-2018 levels. CES' business model, capital structure and free cash flow generation attributes continue to permit prudent capital allocation to one or a combination of: investment in current operations, debt reduction, opportunistic share repurchases, dividends and acquisitions.

CES will continue to assess organic and M&A opportunities that will improve CES' competitive position and enhance profitability. Any acquisitions must meet CES' stringent financial and operational metrics. In its core businesses, CES will focus on profitably growing market share, controlling costs, developing or acquiring new technologies, and making strategic investments as required to position the business to capitalize on the industry rebound and increasing intensity.

Conference Call Details

With respect to the third quarter results, CES will host a conference call / webcast at 9:00 am MT (11:00 am ET) on Friday, November 9, 2018. North American toll-free: 1-(855)-327-6838

International / Toronto callers: (416)-915-3239

                                   Financial Highlights
 
                             Three Months Ended September 30,  Nine Months Ended September 30,
($000's, except per share amounts)   2018             2017             2018            2017           
Revenue                                                                                               
United States                        227,100          168,912          608,087         473,571        
Canada                               111,411          91,969           315,059         277,238        
                                     338,511          260,881          923,146         750,809        
Gross margin                         75,949           63,876           214,561         182,195        
as a percentage of revenue           22.4%            24.5%            23.2%           24.3%          
Gross Margin (excluding depreciation)86,238           73,017           244,270         209,694        
as a percentage of revenue           25.5%            28.0%            26.5%           27.9%          
Net income                             5,859            19,437           32,268          33,560       
per share - basic                      0.02             0.07             0.12            0.13         
per share - diluted                    0.02             0.07             0.12            0.12         
Adjusted EBITDAC (1)                   45,550           40,718           125,515         112,211      
per share - basic                    0.17               0.15             0.47            0.42         
per share - diluted                  0.17               0.15             0.46            0.41         
Dividends declared                   4,012            2,000            8,713           5,973          
per share                              0.0150           0.0075           0.0325          0.0225       

1 CES uses certain performance measures that are not recognizable under International Financial Reporting Standards ("IFRS"). These performance measures include net income (loss) before interest, taxes, depreciation and amortization, finance costs, other gains and losses, and stock-based compensation ("EBITDAC"), Adjusted EBITDAC, Gross Margin (excluding depreciation), and Net Debt. Management believes that these measures provide supplemental financial information that is useful in the evaluation of CES' operations. Readers should be cautioned, however, that these measures should not be construed as alternatives to measures determined in accordance with IFRS as an indicator of CES' performance. CES' method of calculating these measures may differ from that of other organizations and, accordingly, these may not be comparable. Please refer to the Non-GAAP measures section of CES' MD&A for the three and nine months ended September 30, 2018 for additional details regarding the calculation of these Non-GAAP measures.

2 Includes long-term portion of the deferred acquisition consideration, the Senior Facility, the Senior Notes, and finance lease obligations.

Business of CES

CES is a leading provider of technically advanced consumable chemical solutions throughout the life-cycle of the oilfield. This includes total solutions at the drill-bit, at the point of completion and stimulation, at the wellhead and pump-jack, and finally through to the pipeline and midstream market.

We seek Safe Harbor.

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