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Enter Symbol
or Name
USA
CA



Essential Energy Services Ltd
Symbol ESN
Shares Issued 125,836,930
Close 2015-08-05 C$ 0.89
Market Cap C$ 111,994,868
Recent Sedar Documents

Essential Energy cuts quarterly dividend to 1.5 cents

2015-08-05 17:39 ET - News Release

Mr. Garnet Amundson reports

ESSENTIAL ENERGY SERVICES ANNOUNCES SECOND QUARTER RESULTS AND DIVIDEND REDUCTION

Essential Energy Services Ltd. has released its second quarter results and declared its quarterly dividend.

                          SELECTED INFORMATION
                (in thousands of dollars, except per-share 
                   amounts, percentages and fleet data)  

                                    Three months ended     Six months ended
                                   June 30,    June 30,   June 30,  June 30,
                                      2015        2014       2015      2014

Revenue                          $  23,990   $  52,752  $  94,409 $ 156,482
Gross margin                           580       5,222     15,882    32,549
Gross margin %                          2%         10%        17%       21%
EBITDAS                             (2,832)        440      8,027    22,947
EBITDAS %                             (12)%         1%         9%       15%
Net (loss) income                  (10,495)     (5,425)    (7,399)    4,724
Per share -- basic and diluted       (0.08)      (0.04)     (0.06)     0.04
Total assets                       337,299     408,964    337,299   408,964
Total long-term debt                27,027      38,433     27,027    38,433
Utilization
Masted coil tubing rigs                25%         42%        57%       75%
Service rigs                           19%         34%        28%       50%
Equipment fleet
Masted coil tubing rigs                 19          17         19        17
Service rigs                            54          55         54        55

Highlights

Industry activity for the first half of 2015 was significantly below the same period in the prior year as weak oil and natural gas prices resulted in exploration and production companies drastically reducing spending, decreasing the demand for oil field service activity. This also resulted in customers demanding lower prices for oil field services. In response to this, Essential took pro-active steps in the first quarter 2015 to manage costs. Compensation and discretionary spending reductions were implemented, including a 20-per-cent reduction in the board's fees and executive salaries, as well as suspension of various benefit and incentive programs. Non-executive employee salaries were decreased by an average of 10 per cent and the employee head count was reduced by approximately 40 per cent. Essential expects to realize annualized fixed cost savings from these initiatives of approximately $10-million.

Second quarter of 2015

Second quarter results reflect the cumulative impact of the seasonally slow period and poor industry fundamentals. EBITDAS (earnings before finance costs, income taxes, depreciation, amortization, transaction costs, losses or gains on disposal of equipment, writedown of assets, impairment loss, foreign exchange gains or losses, and share-based compensation, which includes both equity-settled and cash-settled transactions) for the three months ended June 30, 2015, was negative $2.8-million, compared with $400,000 in the comparative 2014 period. The reduction reflects slower activity and pricing pressures. Cost management initiatives and an overall decrease in discretionary spending limited the 2015 second quarter operating loss, despite a significant revenue decline.

With industry well completions, a key driver of Essential's services, down 63 per cent from the comparative period, Essential's masted coil tubing and pumping fleet performed relatively well with operating hours declining 29 per cent and 35 per cent, respectively. Competitive pricing pressures resulted in revenue-per-hour declines of approximately 10 per cent to 15 per cent in well servicing and price reductions of approximately 15 per cent to 20 per cent in downhole tools and rentals relative to the second quarter of 2014.

2015 year to date

EBITDAS for the first half of 2015 was $8-million, compared with $22.9-million in the same period in 2014. Essential's employee head count, wage and discretionary spending reductions implemented in the first quarter of 2015 resulted in cost reductions year to date, partially offsetting the revenue decline.

With the challenging industry conditions, Essential has been focused on cost management, disciplined capital spending and balance sheet preservation. At June 30, 2015, the company had $27-million of long-term debt outstanding.

Dividend reduction

Industry fundamentals show no signs of improvement in the near term as there remains uncertainty with respect to the extent and duration of the industry downturn. In an effort to preserve its strong financial position, Essential has reduced its dividend by 50 per cent. Starting with the Aug. 5, 2015, dividend announcement, the quarterly dividend will be 1.5 cents per share. This will decrease the annualized dividend from $15.1-million to $7.6-million. The board will continue to review the dividend on a quarterly basis.

Dividend declaration

The cash dividend for the period July 1, 2015, to Sept. 30, 2015, has been set at 1.5 cents per share. The dividend will be paid on Oct. 15, 2015, to shareholders of record on Sept. 30, 2015. The ex dividend date is Sept. 28, 2015. This dividend is an eligible dividend for Canadian income tax purposes.

Results of operations

Coil well service revenue decreased 43 per cent in the second quarter of 2015 compared with the same period in 2014. Masted coil tubing and pumping hours decreased 29 per cent and 35 per cent, respectively, less than the 63-per-cent decline in industry well completions. Essential's performance relative to the industry comparative is attributed to demand from certain customers in the Bakken, Montney and Duvernay regions during the quarter. Masted coil tubing and pumping revenue per hour was 10 per cent to 15 per cent lower than the second quarter of 2014.

Service rig revenue decreased 58 per cent compared with the second quarter of 2014 due to the industrywide decrease in activity and pricing pressure. Revenue also decreased with the sale of Essential's rod rig assets in October, 2014. In comparison with 2014, service rig revenue per hour was approximately 15 per cent lower.

Well servicing gross margin as a percentage of revenue improved in the second quarter of 2015, compared with 2014, as Essential benefited from cost management initiatives implemented in the first quarter of 2015 in response to the industry downturn. These initiatives included integration of Essential's conventional coil with its masted coil tubing operations, employee head count and wage reductions, and an overall decrease in discretionary spending.

On a year-to-date basis, well servicing revenue decreased 41 per cent compared with the prior period due to lower demand and price declines as a result of the industry downturn. Demand for Essential's masted coil tubing and pumper fleets remained relatively strong compared with industry conditions. Operating hours were down 8 per cent for the masted coil tubing rigs and 20 per cent for pumpers from the same period in 2014. Service rigs, however, experienced a 46-per-cent decrease in operating hours on a period-over-period basis. Despite the significant decrease in revenue, gross margin as a percentage of revenue for the six months ended June 30, 2015, remained unchanged from 2014 as Essential pro-actively reduced its cost structure and discretionary spending.

Following the second quarter of 2015, Essential reduced its service rig fleet to 48 rigs by retiring six rigs.

Segment results -- downhole tools and rentals

Downhole tools and rentals 2015 second quarter revenue decreased 62 per cent from the same quarter of 2014. Tryton MSFS, conventional tools and rental revenue were all negatively impacted by decreased drilling, well completions and production work. Competition for limited customer activity resulted in pricing pressures with price reductions of approximately 15 per cent to 20 per cent compared with the second quarter of 2014.

Downhole tools and rentals gross margin as a percentage of revenue was negative 7 per cent in the second quarter of 2015, compared with 34 per cent for the same period in 2014. Further cost reduction measures, including employee head count reductions and a decrease in discretionary spending, were implemented in the second quarter of 2015 as industry conditions continued to deteriorate.

On a year-to-date basis, downhole tools and rentals revenue decreased 38 per cent due to industry declines in drilling, well completions, production work, as well as continuing pricing pressures. Gross margin as a percentage of revenue for the six months ended June 30, 2015, decreased compared with the prior year as fixed costs comprised a greater percentage of revenue.

General and administrative expenses comprise wages, professional fees, office space and other administrative costs incurred at corporate and operational levels. General and administrative expenses expenses for the three and six months ended June 30, 2015, were lower than the same period in 2014 due primarily to employee head count reductions, salary reductions and the suspension of various benefit and incentive plans in 2015. General and administrative expenses as a percentage of revenue increased from the same periods in 2014 due to the significant revenue declines.

Loss (gain) on assets includes disposal and writedown of equipment that is no longer used in operations. The weakening Canadian dollar in relation to the U.S. dollar resulted in higher foreign exchange gains in the first six months of 2015 compared with the same period in 2014.

For the three and six months ended June 30, 2015, current income tax recovery increased compared with 2014, as 2015 losses will be applied to recover taxes paid in previous years.

For the three and six months ended June 30, 2015, deferred income tax expense increased compared with 2014 due to legislation that was enacted during the second quarter of 2015 to increase the Alberta provincial corporate income tax rate from 10 per cent to 12 per cent, effective July 1, 2015. This rate increase resulted in the revaluation of the deferred income tax liability as at April 1, 2015.

The accounts receivable portion of working capital typically grows through the first, third and fourth quarters of the year when activity is greater. The inventory component comprises downhole tools and coil tubing inventory, which does not fluctuate as much with activity. Essential uses its revolving credit facility to meet the variable nature of its working capital needs as collection periods for accounts receivable are longer than payment cycles to vendors and employees. In periods of higher activity, debt initially tends to increase, and in periods of lower activity debt initially declines.

During the first half of 2015, Essential took advantage of the slowdown in industry activity to complete further modifications and enhancements on the two Generation IV masted coil tubing rigs that were in service. Both rigs are expected to be back in service in the third quarter of 2015, and the design modifications will be incorporated into the remaining four Generation IV masted coil tubing rigs.

Essential's 2015 capital budget of $21-million comprises $13-million in growth capital and $8-million of maintenance capital. Growth capital is focused primarily on the Generation III masted coil tubing rig and progress payments on the four Generation IV masted coil tubing rigs currently under construction. Two of these five masted coil tubing rigs are expected to be in service in 2015 and three in 2016.

Essential's long-term capital build program will increase the size and depth capacity of the masted coil tubing fleet. To date, the company has added three Generation III and two Generation IV masted coil tubing rigs. Essential expects to spend approximately $52-million on this program and, upon completion in 2016, expects to have four Generation III and six Generation IV masted coil tubing rigs. At June 30, 2015, Essential has spent approximately $42-million on this capital program. The Generation III and Generation IV masted coil tubing rigs have the capability to work on long-reach horizontal wells and are well suited to work in deep, high-pressure regions, including Montney, Bakken, Duvernay and Horn River. With a coil diameter of 2 3/8ths inches, the Generation III masted coil tubing rigs can reach 6,300 metres and the Generation IV masted coil tubing rigs can reach 7,900 metres.

Outlook

Uncertainty with respect to the duration and extent of the industry downturn continues as activity in the Western Canadian sedimentary basin remains significantly below the prior year. Continued weakness in oil and natural gas prices has resulted in customers remaining cautious and limiting capital spending following the traditionally slow second quarter in Canada. In Alberta, this has been compounded by uncertainty with regard to fiscal policy decisions, including the pending Alberta royalty review. For the remainder of 2015, activity is expected to increase from the seasonal lows experienced in the second quarter but is expected to remain below prior-year levels. Pricing pressure is expected to continue as oil field service providers compete for limited work. Through this time, management remains focused on the items the company can control: costs, capital spending and debt.

Essential's cost management initiatives implemented earlier in the year are designed to allow the company to continue to operate profitably during the downturn while retaining key employees. Essential remains on track to realize annualized fixed cost savings of $10-million.

The company's capital expenditure plans for 2015 are focused on Essential's Generation III and IV masted coil tubing rigs. These rigs are well suited to work in deep, high-pressure regions and will better position the company to take advantage of the industry trend of drilling and completing long-reach horizontal wells.

Cost management and conservative capital spending will help to preserve the strength of the balance sheet through the downturn. At Aug. 5, 2015, Essential had $30.6-million outstanding and reported debt to EBITDAS of 0.5 times at the end of the second quarter.

The management discussion and analysis and financial statements are available on Essential's website and on SEDAR.

Summary of quarterly data

Essential operates primarily in Western Canada, where activity is directly impacted by seasonality. Activity is traditionally higher in the first, third and fourth quarters of the year and lower in the second quarter. With the onset of spring, melting snow renders many roadways incapable of supporting heavy equipment. In addition, certain areas in Canada are typically only accessible during the winter months. The attached table provides the company's quarterly information for the past eight quarters.

                                 SUMMARY OF QUARTERLY DATA
                          (in thousands of dollars, except per-share 
                             amounts, percentages and fleet data) 
                       
                                           June 30,     March 31,      Dec. 31,     Sept. 30,
                                              2015          2015          2014          2014
Well servicing
Coil well service                         $  9,887      $ 31,976      $ 41,426      $ 39,233
Service rigs                                 6,825        15,026        22,034        22,105
Total well servicing                        16,712        47,002        63,460        61,338
Downhole tools and rentals                   7,460        23,611        35,921        35,261
Intersegment eliminations                     (182)         (194)         (527)         (463)
Total revenue                               23,990        70,419        98,854        96,136
Gross margin                                   580        15,302        27,330        27,515
Gross margin (%)                                2%           22%           28%           29%
EBITDAS                                     (2,832)       10,859        21,992        22,657
EBITDAS (%)                                  (12)%           15%           22%           24%
Net (loss) income (i)                      (10,495)        3,096       (38,323)       10,777
Per share -- basic                           (0.08)         0.02         (0.30)         0.09
Per share -- diluted                         (0.08)         0.02         (0.30)         0.08
Utilization (ii)
Masted coil tubing rigs                        25%           90%          104%          105%
Pumping (iii)                                  23%           61%           72%           66%
Service rigs                                   19%           37%           49%           48%
Operating hours
Masted coil tubing rigs                      4,341        15,335        17,469        15,524
Pumping (iii)                                6,381        17,586        20,885        19,397
Conventional coil tubing rigs                1,088         3,665         3,951         4,426
Service rigs                                 9,239        17,745        24,394        23,997
Downhole tools and rentals 
-- percentage of revenue
Tryton MSFS                                    16%           38%           45%           46%
Conventional tools and rentals                 84%           62%           55%           54%
Equipment fleet (iv)
Masted coil tubing rigs                         19            19            19            17
Fluid pumpers                                   18            18            18            18
Nitrogen pumpers                                12            14            14            14
Conventional coil tubing rigs                   11            17            17            29
Service rigs (v)                                54            54            54            54

                                           June 30,     March 31,      Dec. 31,     Sept. 30,
                                              2014          2014          2013          2013
Well servicing
Coil well service                         $ 17,398      $ 41,499      $ 36,150      $ 33,037
Service rigs                                16,437        32,499        25,593        23,870
Total well servicing                        33,835        73,998        61,743        56,907
Downhole tools and rentals                  19,521        30,286        31,560        28,185
Intersegment eliminations                     (604)         (554)         (480)         (582)
Total revenue                               52,752       103,730        92,823        84,510
Gross margin                                 5,222        27,327        25,332        21,414
Gross margin (%)                               10%           26%           27%           25%
EBITDAS                                        440        22,507        20,705        17,132
EBITDAS (%)                                     1%           22%           22%           20%
Net (loss) income (i)                       (5,425)       10,149        11,126         3,843
Per share -- basic                           (0.04)         0.08          0.09          0.03
Per share -- diluted                         (0.04)         0.08          0.09          0.03
Utilization (ii)
Masted coil tubing rigs                        42%          109%          107%          112%
Pumping (iii)                                  34%           69%           55%           47%
Service rigs                                   34%           66%           53%           50%
Operating hours
Masted coil tubing rigs                      6,094        15,312        14,699        14,738
Pumping (iii)                                9,861        19,995        16,612        14,418
Conventional coil tubing rigs                2,942         6,959         6,612         5,002
Service rigs                                16,907        32,616        26,557        25,084
Downhole tools and rentals 
-- percentage of revenue
Tryton MSFS                                    25%           39%           55%           55%
Conventional tools and rentals                 75%           61%           45%           45%
Equipment fleet (iv)
Masted coil tubing rigs                         17            16            15            15
Fluid pumpers                                   18            18            18            18
Nitrogen pumpers                                14            14            14            15
Conventional coil tubing rigs                   30            30            30            30
Service rigs (v)                                55            55            55            54

(i)   The quarter ended Dec. 31, 2014, includes an impairment loss on
      goodwill and intangible assets of $47.2-million.
(ii)  Utilization is calculated using a 10-hour day.
(iii) Pumping includes both fluid and nitrogen pumpers.
(iv)  Fleet data represent the number of units at the end of the period.
(v)   Effective July 1, 2015, six service rigs were retired, and the 
      service rig fleet was reduced to 48 rigs.

                 CONSOLIDATED INTERIM STATEMENTS OF NET (LOSS) 
                    INCOME AND COMPREHENSIVE (LOSS) INCOME
              (in thousands of dollars, except per-share amounts)

                                   Three months ended      Six months ended
                                   June 30,   June 30,   June 30,   June 30,
                                      2015       2014       2015       2014

Revenue                          $  23,990  $  52,752  $  94,409  $ 156,482
Operating expenses                  23,410     47,530     78,527    123,933
Gross margin                           580      5,222     15,882     32,549
General and administrative
expenses                             3,412      4,782      7,855      9,602
                                    (2,832)       440      8,027     22,947
Depreciation and amortization        6,464      6,576     13,154     13,361
Share-based compensation               460        678        614      1,329
Other expenses                       1,017         98        301        853
Operating (loss) profit            (10,773)    (6,912)    (6,042)     7,404
Finance costs                          332        481        804        914
(Loss) income before income
taxes                              (11,105)    (7,393)    (6,846)     6,490
Current income tax (recovery)
expense                             (4,004)    (1,466)    (3,562)     1,316
Deferred income tax expense
(recovery)                           3,394       (502)     4,115        450
Income tax (recovery) expense         (610)    (1,968)       553      1,766
Net (loss) income                $ (10,495) $  (5,425) $  (7,399) $   4,724
Unrealized foreign exchange
(loss) gain                            (61)       (80)       187       (166)
Comprehensive (loss) income      $ (10,556) $  (5,505) $  (7,212) $   4,558
Net (loss) income and
comprehensive (loss) income
per share
Basic and diluted                $   (0.08) $   (0.04) $   (0.06) $    0.04

2015 second quarter financial results conference call and webcast

Essential has scheduled a conference call and webcast at 10 a.m. MT (12 p.m. ET) on Aug. 6, 2015.

The conference call dial-in numbers are 416-340-2217 or 866-696-5910, passcode 8191139.

An archived recording of the conference call will be available approximately one hour after completion of the call until Aug. 20, 2015, by dialling 905-694-9451 or 800-408-3053, passcode 2882853.

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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