Mr. Garnet Amundson reports
ESSENTIAL ENERGY SERVICES ANNOUNCES THIRD QUARTER RESULTS AND DECLARES QUARTERLY DIVIDEND
Essential Energy Services Ltd. has released its third quarter results.
SELECTED INFORMATION
(In thousands, except per share, percentages and fleet data)
Three months ended Nine months ended
Sept. 30, Sept. 30,
2014 2013 2014 2013
Revenue $ 96,136 $ 84,510 $ 252,618 $ 243,445
Gross margin 27,515 21,414 60,064 57,935
Gross margin % 29% 25% 24% 24%
EBITDAS 22,657 17,132 45,604 45,386
EBITDAS % 24% 20% 18% 19%
Net income attributable to
shareholders of Essential 10,777 3,843 15,501 10,969
Per share -- basic 0.09 0.03 0.12 0.09
Per share -- diluted 0.08 0.03 0.12 0.09
Utilization
Masted coil tubing rigs 105% 112% 85% 93%
Service rigs 48% 50% 49% 49%
Equipment fleet
Masted coil tubing rigs 17 15 17 15
Service rigs 54 54 54 54
Revenue for the third quarter of 2014 was $96.1-million, 14 per cent higher than the third quarter of 2013.
-
Coil well service -- Coil well service revenue increased $6.2-million, or
19 per cent, from the same quarter in 2013 due to incremental revenue from the
two new Generation III masted coil tubing rigs and higher utilization of
the fluid and nitrogen pumper fleet;
- Service rigs -- Service rig utilization was 48 per cent for the quarter compared with the Canadian Association of Oil Drilling Contractors (CAODC)
service rig industry utilization of 47 per cent. On Oct. 8, 2014, Essential
sold its rod rig assets for $6.1-million. These assets were part of the
service rig business and Essential used the proceeds to reduce bank
debt.
- Downhole tools and rentals -- Essential's downhole tools and rentals revenue
increased $7.1-million, or 25 per cent, from the same quarter in 2013 due to
increased rental revenue, demand for Tryton multistage fracturing
system (MSFS) products and revenue from Essential's U.S. downhole
tool operations.
Earnings before interest, taxes, depreciation, amortization and stock-based compensation for the third quarter of 2014 were $22.7-million, an improvement of 32 per cent from the same quarter in 2013. The increase was driven by higher revenue for coil well service, and downhole tools and rentals.
At Sept. 30, 2014, Essential had $65.0-million of debt outstanding, an increase of $26.6-million from June 30, 2014. The increase is due to financing working capital, primarily accounts receivable, as activity increased in the third quarter.
Year-to-date 2014 overview
Revenue for the nine months ended Sept. 30, 2014, was $252.6-million, or 4 per cent, higher than the same period in 2013. EBITDAS for the nine months ended Sept. 30, 2014, was $45.6-million, consistent with the prior year. Well servicing revenue increased over prior year as Essential generated incremental revenue from the deployment of two new Generation III masted coil tubing rigs in the third quarter 2013 and first quarter 2014, respectively, and increased fluid and nitrogen pumper utilization. This was offset by higher costs in well servicing, primarily in the first quarter. Downhole tools and rentals revenue and margin exceeded prior year results due to growth in conventional downhole tools, greater contributions from Essential's rental operation and higher revenue from Essential's U.S. downhole tool operation.
Industry overview
Well service activity in the Western Canadian sedimentary basin (WCSB) continues to be driven by horizontal drilling, and the 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.
Compared with 2013, the third quarter of 2014 benefited from improved industry demand for oil field services as exploration and production (E&P) companies had better access to capital markets. Canadian E&P companies also benefited from a decrease in the value of the Canadian dollar, relative to the U.S. dollar, which helped to offset the decrease in the price of U.S.-dollar-denominated West Texas Intermediate crude oil.
With continued customer demand to drill long-reach horizontal wells, drilling rig utilization was 47 per cent for the third quarter 2014 compared with 41 per cent for the same period in 2013. Well completion counts and the total number of wells drilled remained consistent for the third quarter of 2014 compared with the same quarter last year. The higher drilling rig utilization and consistent well count activity reflects a trend in recent years where overall metreage continues to increase as E&P companies drill deeper, longer-reach horizontal wells. These are indicators of overall oil field activity in the WCSB.
Service rig utilization for the third quarter was 48 per cent, consistent with the CAODC utilization of 47 per cent, but slightly lower than 50 per cent for the same quarter in 2013. Essential had two service rigs working on steam-assisted gravity drainage wells. Due to the nature of this work, utilization for these rigs was higher than the rigs doing conventional work.
Gross margin increased over the prior quarter due to higher revenue in coil well service.
On a year-to-date basis, well servicing revenue increased over prior year as Essential generated incremental revenue from the deployment of two new Generation III masted coil tubing rigs in the third quarter of 2013 and first quarter of 2014, respectively, and increased pumper utilization. Gross margin for the nine months ended Sept. 30, 2014, was negatively impacted by higher costs, primarily in the first quarter. Revenue per hour for coil well service and service rigs was consistent with the prior year.
Downhole tools and rentals third quarter revenue increased $7.1-million or 25 per cent from the same period in 2013. Tryton MSFS revenue increased due to improved demand for both the ball and seat products, and new MSFS tools that were introduced earlier in the year. Customer preference for a particular completion technology is determined by wellbore conditions, economics and customer confidence in a technology. Conventional tools revenue increased due to higher contribution from the U.S. operations. Rental revenue increased largely from specialty drill pipe rentals targeted toward long-reach horizontal wells and pressure control equipment.
Gross margin in the third quarter increased to 37 per cent of revenue due to revenue growth in the Canadian operations, including greater contributions from the higher-margin rentals business and improved margins related to Essential's U.S. operations, which operated at a loss in 2013.
On a year-to-date basis, downhole tools and rentals revenue and gross margin exceeded prior year due to growth in conventional downhole tools, increased activity from Essential's higher margin rental business and improved performance from the U.S. operations. Compared with prior year, revenue and gross margin in the second and third quarter have more than offset the shortfall experienced in the first quarter 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 tool sales, rentals and services to a diversified customer base in Oklahoma, Kansas and Texas. The purchase price was $5.6-million (U.S.).
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 nine months ended Sept. 30, 2014, increased compared with the same period in 2013 due to employee costs, facility lease costs and legal fees.
Essential's capital forecast for 2014 has been reduced from $53-million to $47-million. The $47-million is expected to comprise $33-million of growth capital and $14-million of maintenance capital. The growth capital consists primarily of costs related to the Generation III and Generation IV masted coil tubing rig build program, the purchase of rental equipment, and a new quintiplex fluid pumper that is expected in service by the end of 2014.
The $6-million decrease from the most recent capital forecast primarily consists of $2-million of growth capital that will be carried into 2015, recognizing the delay in the masted coil tubing delivery and a $3-million reduction in maintenance capital.
Essential's long-term capital program is intended to increase the depth and coil diameter capability of its masted coil tubing fleet. Customers are requesting coil tubing rigs that can operate beyond 6,000 metres with large diameter coil. Essential expects to spend approximately $63-million through 2016 to build a total of four Generation III and eight Generation IV masted coil tubing rigs. At Sept. 30, 2014, Essential had spent $35-million on this capital program. Essential's first Generation IV and third Generation III masted coil tubing rigs went into service in October, 2014, and the company expects to commence operations with its second Generation IV masted coil tubing rig prior to the end of the year. While the Generation IV rigs are designed as masted rigs, due to a design issue with the mast, Essential removed the mast from the first rig and is operating it as a conventional rig with a crane for the winter drilling season. Essential has received a favourable third party engineering report and confirms that subsequent Generation IV rigs, including the second rig expected prior to the end of 2014, will be completed with the mast intact. The first rig will be retrofitted for the mast in the coming months.
Outlook
Recent changes in oil and gas supply and demand fundamentals and declining commodity prices have created longer term uncertainty in the Canadian oil and gas industry. To date, drilling rig utilization in the fourth quarter of 2014 is tracking ahead of the same period in 2013. As E&P companies set their 2015 budgets, there should be greater clarity for anticipated oil field service activity. Essential will monitor industry conditions and customer activity and will react accordingly.
While acknowledging the macroeconomic uncertainty, Essential continues to focus on long-reach horizontal wells within its masted coil tubing, pumping, and downhole tools and rentals operations. Demand for these services is expected to carry on to the extent customers execute their drilling, fracturing and completion programs.
Essential is progressing on its capital program focused on building Generation III and Generation IV masted coil tubing rigs that are capable of servicing these deep, longer-reach horizontal wells. Essential put its third Generation III masted coil tubing rig into service in October, 2014. The first Generation IV masted coil tubing rig went to work in October, 2014, and Essential expects to take delivery of its second Generation IV masted coil tubing rig prior to the end of the year.
Essential has a strong balance sheet with $59.6-million of debt at Nov. 5, 2014, and a debt-to-EBITDAS ratio of 0.9.
Quarterly dividend
The cash dividend for the period Oct. 1, 2014, to Dec. 31, 2014, has been set at three cents per share. The dividend will be paid on Jan. 15, 2015, to shareholders of record on Dec. 31, 2014. The ex dividend date is Dec. 29, 2014. This dividend is an eligible dividend for Canadian income tax purposes.
CONSOLIDATED INTERIM STATEMENT OF NET INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share)
For the three months For the nine months
ended ended
Sept. 30, Sept. 30,
2014 2013 2014 2013
Revenue $ 96,136 $ 84,510 $ 252,618 $ 243,445
Operating expense 68,621 63,096 192,554 185,510
Gross margin 27,515 21,414 60,064 57,935
General and administrative
expenses 4,858 4,282 14,460 12,549
22,657 17,132 45,604 45,386
Depreciation and amortization 6,827 6,515 20,188 19,565
Share-based compensation 484 585 1,813 1,197
Other expense 145 3,493 998 3,546
Operating profit from continuing
operations 15,201 6,539 22,605 21,078
Finance costs 453 375 1,367 1,153
Income before income tax from
continuing operations 14,748 6,164 21,238 19,925
Current income tax expense 3,268 1,396 4,584 4,852
Deferred income tax expense 703 476 1,153 534
Total income tax expense 3,971 1,872 5,737 5,386
Net income from continuing
operations $ 10,777 $ 4,292 $ 15,501 $ 14,539
(Loss) from discontinued
operations, net of tax - (473) - (3,758)
Net income $ 10,777 $ 3,819 $ 15,501 $ 10,781
Unrealized foreign exchange gain
from continuing operations 236 - 70 -
Unrealized foreign exchange (loss)
from discontinued operations - (56) - (243)
Other comprehensive income
(loss) 236 (56) 70 (243)
Comprehensive income $ 11,013 $ 3,763 $ 15,571 $ 10,538
Net income (loss) attributable
to
Shareholders of Essential $ 10,777 $ 3,843 $ 15,501 $ 10,969
Non-controlling interest - (24) - (188)
$ 10,777 $ 3,819 $ 15,501 $ 10,781
Comprehensive income (loss)
attributable to
Shareholders of Essential $ 11,013 $ 3,783 $ 15,571 $ 10,730
Non-controlling interest - (20) - (192)
$ 11,013 $ 3,763 $ 15,571 $ 10,538
Net income per share from
continuing operations
Basic, attributable to
shareholders of Essential $ 0.09 $ 0.03 $ 0.12 $ 0.12
Diluted, attributable to
shareholders of Essential $ 0.08 $ 0.03 $ 0.12 $ 0.12
Net income per share
Basic, attributable to
shareholders of Essential $ 0.09 $ 0.03 $ 0.12 $ 0.09
Diluted, attributable to
shareholders of Essential $ 0.08 $ 0.03 $ 0.12 $ 0.09
Comprehensive income per share
Basic, attributable to
shareholders of Essential $ 0.09 $ 0.03 $ 0.12 $ 0.09
Diluted, attributable to
shareholder of Essential $ 0.09 $ 0.03 $ 0.12 $ 0.09
We seek Safe Harbor.
© 2024 Canjex Publishing Ltd. All rights reserved.