Mr. Garnet Amundson reports
ESSENTIAL ENERGY SERVICES ANNOUNCES SECOND QUARTER RESULTS AND DECLARES QUARTERLY DIVIDEND
Essential Energy Services Ltd. is releasing second quarter results.
SELECTED INFORMATION
(in thousands of dollars, except per-share amounts,
percentages and fleet data)
Three months ended Six months ended
June 30, June 30,
2014 2013 2014 2013
Revenue $ 52,752 $ 38,417 $156,482 $158,936
Gross margin 5,222 (1,310) 32,549 36,521
Gross margin percentage 10% (3)% 21% 23%
EBITDA from continuing
operations 440 (5,171) 22,947 28,254
EBITDA percentage 1% (13)% 15% 18%
Net income (loss) attributable
to shareholders of Essential (5,425) (11,501) 4,724 7,126
Per share, basic and diluted $ (0.04) $ (0.09) $ 0.04 $ 0.06
Total assets 408,964 380,728 408,964 380,728
Total long-term debt 38,433 14,592 38,433 14,592
Utilization
Deep coil tubing rigs 27% 18% 52% 64%
Service rigs 34% 28% 50% 48%
Equipment fleet
Masted deep coil tubing rigs 17 14 17 14
Conventional deep coil tubing
rigs 12 11 12 11
Service rigs 55 56 55 56
Overview for the second quarter of 2014
Revenue for the second quarter of 2014 was $52.8-million, 37 per cent higher than the second quarter of 2013. The strong second quarter was due to increased customer demand, supported by a less severe spring breakup compared with the prior quarter:
-
Coil well service revenue increased 84 per cent from the
prior quarter with a significant improvement in masted deep coil tubing
utilization quarter over quarter at 42 per cent, compared with 19 per cent in 2013. The
company's masted deep coil tubing fleet experienced increased customer
demand; in particular, there was strong demand for the two generation
III masted deep coil tubing rigs.
- Service rigs performed well in the quarter with
utilization at 34 per cent, compared with 28 per cent in the prior quarter.
- Essential's downhole tools and rentals revenue
increased in the quarter due to strong demand for conventional downhole
tools, continued growth of Essential's U.S. operation
and increased rental revenue.
EBITDA (earnings before interest, taxes, depreciation and amortization) for the second quarter of 2014 was $400,000, a significant improvement of $5.6-million from 2013. The increase was driven by improved activity across both segments and lower operating expenses as a percentage of revenue. Operating expenses associated with training and retaining key personnel and maintaining equipment are typically higher in the second quarter when equipment is restricted from travelling to customer locations during spring breakup. Revenue increases in the second quarter of 2014 offset these expenditures and improved margins.
In the second quarter of 2014, Essential took delivery of its first state-of-the-art generation IV masted deep coil tubing rig.
Overview for year to date 2014
Revenue for the six months ended June 30, 2014, was $156.5-million, slightly lower than the same period in 2013. EBITDA for six months ended June 30, 2014, was $22.9-million, a decrease of $5.3-million compared with the same period in 2013. The EBITDA impact of lower revenue during the first quarter 2014 was somewhat offset by improved revenue and activity in both well servicing, and downhole tools and rentals, during the second quarter. Tryton multistage fracturing system (MSFS) revenue for the first half of 2014 was lower than the prior year. The margin impact of this revenue shortfall has been partially offset within the segment by growth in conventional downhole tools and higher-margin rentals operations. EBITDA during the first half of 2014 was also impacted by increased fuel costs in well servicing and increased labour costs in coil well service. Incremental labour costs in coil well service relates to additional costs incurred in the first quarter to retain crews on location during specific short-term periods of inactivity that was brought on by extremely cold weather, and costs incurred to hire and train additional crews in anticipation of the delivery of the new generation III and generational IV masted deep coil tubing rigs.
Industry overview
Industry activity in the second quarter is typically the slowest quarter of the year due to the onset of spring breakup. Compared with 2013, the second quarter of 2014 benefited from a less severe spring breakup in Western Canada, and improved demand from exploration and production (E&P) companies as a result of stronger commodity prices and access to capital. Drilling rig utilization increased 35 per cent, well completion count increased 4 per cent and the number of wells drilled increased by 29 per cent for the second quarter of 2014, compared with the prior quarter. These are indicators of overall oil field activity in the Western Canadian sedimentary basin (WCSB).
Well service activity in the WCSB continues to be driven by horizontal drilling, completion and stimulation of oil- and liquids-rich natural gas wells. Horizontal wells typically require more investment capital and increased rig time per well due to their depth and complexity compared with vertical wells.
Segment results
Well servicing
Coil well service second quarter revenue increased 84 per cent from the prior quarter due to improved customer demand for Essential's masted deep coil tubing fleet, and, in particular, the two generation III masted deep coil tubing rigs that went into service in the fourth quarter 2013 and first quarter 2014, respectively. With increased customer demand, supported by a less severe spring breakup, Essential's masted deep coil tubing utilization was 42 per cent, compared with 19 per cent in prior quarter. The two generation III masted deep coil tubing rigs performed well, achieving 72 per cent utilization during the quarter. Essential's fluid and nitrogen pumper revenue also increased significantly as this equipment supports the masted deep coil tubing fleet.
Conventional deep coil tubing utilization was down quarter over quarter due to competition in the less technical smaller diameter conventional coil tubing market.
Service rig utilization was 34 per cent, compared with 28 per cent in the prior quarter, due to milder spring breakup conditions in 2014. Essential's utilization was particularly strong in the Grande Prairie, Fort St. John and Southern Alberta areas, and for the rigs working in steam-assisted gravity drainage (SAGD).
Gross margin for well servicing in the second quarter of 2014 improved from the prior quarter due to higher revenue and activity. However, costs related to training and retaining key staff, seasonal maintenance work, and fixed costs associated with maintaining service locations and infrastructure, resulted in negative gross margin for the segment during the quarter.
On a year-to-date basis, well servicing revenue is similar to the prior year, as strong nitrogen and fluid pumper utilization offset lower conventional deep coil tubing utilization. Masted deep coil tubing utilization was 75 per cent on a year-to-date basis, compared with 83 per cent in the prior year. Gross margin for the six months ended June 30, 2014, was adversely impacted by increased fuel and labour costs in coil well servicing. Incremental labour costs were incurred to retain crews on location during specific short-term periods of inactivity during the first quarter that was brought on by extremely cold weather, and costs incurred to hire and train additional crews in anticipation of the delivery of the new generation III and generational IV masted deep coil tubing rigs. Revenue per hour for coil well service and service rigs was consistent with the prior quarter.
Downhole tools and
rentals
Downhole tools and rentals second quarter revenue increased 37 per cent from the same period in 2013, primarily due to strong performance of the conventional tools and rentals operations. Tryton MSFS revenue was lower than the prior quarter as Essential continues to adjust its MSFS product offerings to meet changing customer demands. Gross margin increased significantly as a result of improved conventional tool activity and greater contributions from the higher-margin rentals business.
Revenue from conventional tools and rentals increased by 71 per cent from the prior quarter. Growth in conventional tools was generated by both Canadian operations and U.S. conventional tools. Tryton's role as a dominant conventional tools service provider offers growth opportunities, and insights into customer well completion preferences and requirements. Higher rentals revenue was primarily due to increased rental of specialty drill pipe and pressure control equipment as second quarter sales continued to demonstrate the benefits of an evolving sales and product strategy. Management anticipates continued growth in the conventional tools and rentals businesses in the second half of 2014.
Tryton MSFS revenue in the second quarter included revenue from Essential's Canadian and U.S. operations. In Canada, the second quarter is typically a slower period for MSFS products as fracturing activity is reduced during spring breakup. Demand for Tryton's Canadian MSFS products historically has been exclusively ball-and-seat technology, using standard or dissolvable balls. In response to customer demand for alternative completion techniques when conducting a multistage fracture, Essential continued its efforts to develop and test new MSFS products. These products include the development of coil-actuated Viking sliding-sleeve technology which offers unlimited stages without balls or seats. In the second quarter, Essential also experienced early success in the U.S. with its Tryton MaxFrac tool, a new packer design that provides a consistently large-inner-diametet sleeve that eliminates the mill-out phase of plug-and-perf completions. In the second half of 2014, management expects that ball-and-seat products will continue to form the core of its Tryton MSFS product line. The introduction of new tools and additional growth in U.S. Tryton MSFS revenue are also expected to contribute to MSFS revenue.
On a year-to-date basis, downhole tools and rentals revenue and margin were similar to the prior year due to growth in conventional downhole tools and higher margin rentals operations, which was offset by lower Tryton MSFS revenue for the first half of 2014.
On April 30, 2014, Essential acquired all of the issued and outstanding shares of Sam's Packer & Supply LLC, a private downhole tool company that provides conventional tool sales, rentals and services to a diversified customer base in Oklahoma, Kansas and Texas. The purchase price was $5.1-million (U.S.) plus working capital adjustments.
General and administrative
General and administrative expenses comprise wages, professional fees, office space and other administrative costs incurred at corporate and operational levels. General and administrative expense for the three and six months ended June 30, 2014, increased compared with the same period in 2013, due to employee costs, facility lease costs and legal fees.
Financial resources and liquidity
During the second quarter, Essential took delivery of its first state-of-the-art generation IV masted deep coil tubing rig.
Essential's 2014 capital budget of $53-million comprises $36-million in growth capital and $17-million of maintenance capital. Growth capital consists primarily of expenditures to expand Essential's masted deep coil tubing fleet and to purchase additional rental equipment.
Essential has established a long-term build program intended to increase the depth and coil diameter capability of its masted deep coil tubing fleet. Customers are demanding coil tubing rigs that can operate beyond 6,000 metres with large-diameter coil. Given the limited number of builders that are qualified to build this type of equipment, and the long lead time required to secure build spots and fabricate the equipment, Essential selected two companies to manufacture its generation III and generation IV equipment. Essential expects to spend approximately $63-million through to 2016, to build a total of four generation III and eight generation IV masted deep coil tubing rigs. To date, Essential has spent approximately $27-million on this capital program, and has taken delivery of two generation III and one generation IV masted deep coil tubing rigs.
The company believes that it has access to sufficient funds through internally generated cash flows and from the credit facility to meet current spending needs.
Outlook
Heading into the last half of 2014, there is a sense of renewed optimism within the energy services sector as E&P companies, bolstered by strong oil prices, improved access to capital markets, and, in some instances, merger and acquisition activity, continue to execute their 2014 capital programs. Increases in key industry metrics, including second quarter drilling activity, a backlog of well completion work heading into the last half of the year, and an increase in the number and total depth of horizontal wells drilled in Western Canada, support a strong industry environment for oil field service companies in the last half of 2014.
Essential believes that it is well positioned to benefit from the anticipated increase in demand for well completion services in the last half of the year, particularly as the industry continues to shift toward deeper, longer-reach horizontal wells.
Essential's masted deep coil tubing fleet, which achieved utilization of 109 per cent in the first quarter of 2014, is expected to continue to experience strong demand as customers execute their drilling, fracturing and completion programs. Essential also expects to benefit from the expanded service capacity of its masted deep coil tubing fleet with the recent delivery of two generation III and one generation IV rigs.
Essential also expects further growth in its downhole tools and rentals segment as year-to-date growth in the conventional downhole tools and rentals operations is expected to continue throughout the back half of the year. Management expects that ball-and-seat products will continue to form the core of its Tryton MSFS product line. The introduction of new tools and additional growth in U.S. Tryton MSFS revenue are also expected to contribute to MSFS revenue.
Essential continues to execute its $53-million capital equipment program. As mentioned above, during the first half of 2014, Essential took delivery of its second generation III masted deep coil tubing rig. The generation III rigs that are in service have seen strong utilization in the first half of 2014, even during breakup. In the second quarter, Essential took delivery of its first generation IV masted deep coil tubing rig. One additional generation III rig and one additional generation IV rig are expected to be in service later in the year.
Essential has a strong balance sheet with $49.4-million of debt outstanding on Aug. 6, 2014, and a debt-to-EBITDA ratio of 0.8 times.
Quarterly dividend
The cash dividend for the period July 1, 2014, to Sept. 30, 2014, has been set at three cents per share. The dividend will be paid on Oct. 15, 2014, to shareholders of record on Sept. 30, 2014. The ex dividend date is Sept. 26, 2014. This dividend is an eligible dividend for Canadian income tax purposes.
The management's discussion and analysis, and financial statements, are available on Essential's website and on SEDAR.
CONSOLIDATED STATEMENTS OF NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(in thousands of dollars, except per-share amounts)
For the three months For the six months
ended June 30, ended June 30,
2014 2013 2014 2013
Revenue $ 52,752 $ 38,417 $ 156,482 $ 158,936
Operating expense 47,530 39,727 123,933 122,415
---------- ---------- ---------- ----------
Gross margin 5,222 (1,310) 32,549 36,521
General and administrative
expenses 4,782 3,861 9,602 8,267
---------- ---------- ---------- ----------
440 (5,171) 22,947 28,254
Depreciation and amortization 6,576 6,006 13,361 13,050
Share-based compensation 678 269 1,329 612
Other expense 98 187 853 53
Operating profit (loss) from
continuing operations (6,912) (11,633) 7,404 14,539
Finance costs 481 402 914 778
---------- ---------- ---------- ----------
Income (loss) before income tax
from continuing operations (7,393) (12,035) 6,490 13,761
Current income tax expense
(recovery) (1,466) (969) 1,316 3,456
Deferred income tax expense
(recovery) (502) (2,108) 450 58
---------- ---------- ---------- ----------
Total income tax expense
(recovery) (1,968) (3,077) 1,766 3,514
---------- ---------- ---------- ----------
Net income (loss) from
continuing operations $ (5,425) $ (8,958) $ 4,724 $ 10,247
---------- ---------- ---------- ----------
(Loss) from discontinued
operations, net of tax - (2,678) - (3,285)
---------- ---------- ---------- ----------
Net income (loss) (5,425) (11,636) 4,724 6,962
---------- ---------- ---------- ----------
Unrealized foreign exchange
(loss) from continuing
operations (80) - (166) -
Unrealized foreign exchange
(loss) from discontinued
operations - (156) - (187)
---------- ---------- ---------- ----------
Other comprehensive (loss) (80) (156) (166) (187)
---------- ---------- ---------- ----------
Comprehensive income (loss) $ (5,505) $ (11,792) $ 4,558 $ 6,775
========== ========== ========== ==========
Net income (loss) attributable
to
Shareholders of Essential $ (5,425) $ (11,501) $ 4,724 $ 7,126
Non-controlling interest - (135) - (164)
---------- ---------- ---------- ----------
$ (5,425) $ (11,636) $ 4,724 $ 6,962
========== ========== ========== ==========
Comprehensive income (loss)
attributable to
Shareholders of Essential $ (5,505) $ (11,650) $ 4,558 $ 6,947
Non-controlling interest - (142) - (172)
---------- ---------- ---------- ----------
$ (5,505) $ (11,792) $ 4,558 $ 6,775
========== ========== ========== ==========
Net income (loss) per share from
continuing operations,
basic and diluted,
attributable to shareholders
of Essential $ (0.04) $ (0.07) $ 0.04 $ 0.08
Net income (loss) per share,
basic and diluted,
attributable to shareholders
of Essential $ (0.04) $ (0.09) $ 0.04 $ 0.06
Comprehensive income (loss) per
share, basic and diluted,
attributable to shareholders
of Essential $ (0.04) $ (0.09) $ 0.04 $ 0.06
2014 second quarter earnings conference call and webcast
Essential has scheduled a conference call and webcast at 10 a.m. MT (12 p.m. ET) on Aug. 7, 2014.
The conference call dial-in numbers are 416-340-2217 and 866-696-5910, passcode 8406362.
An archived recording of the conference call will be available approximately one hour after completion of the call until Aug. 23, 2014, by dialling 905-694-9451 or 800-408-3053, passcode 5383943.
A live webcast of the conference call will be accessible on Essential's website by selecting investors, and events and presentations. Shortly after the live webcast, an archived version will be available for approximately 30 days.
We seek Safe Harbor.
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