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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