05:43:43 EDT Thu 28 Mar 2024
Enter Symbol
or Name
USA
CA



Essential Energy Services Ltd
Symbol ESN
Shares Issued 125,836,930
Close 2016-08-10 C$ 0.70
Market Cap C$ 88,085,851
Recent Sedar Documents

Essential Energy loses $7.48-million in fiscal Q2 2016

2016-08-10 06:28 ET - News Release

Mr. Garnet Amundson reports

ESSENTIAL ENERGY SERVICES ANNOUNCES SECOND QUARTER RESULTS

Essential Energy Services Ltd. has released its second quarter results.

                             SELECTED INFORMATION
          (In thousands, except per share, percentages and fleet)

                                  Three months ended       Six months ended
                                             June 30,               June 30,
                                    2016        2015       2016        2015

Revenue                          $15,008     $23,990    $45,923     $94,409
Gross margin                      (1,595)        580       (349)     15,882
Gross margin %                     (11)%          2%       (1)%         17%
EBITDAS before severance
costs                             (4,452)     (2,720)    (5,202)      9,824
EBITDAS                           (4,469)     (2,832)    (6,952)      8,027
Net (loss) before impairment
(loss)                            (7,486)    (10,495)   (21,142)     (7,399)
Per share -- basic and
diluted                            (0.06)      (0.08)     (0.17)      (0.06)
Net (loss)                        (7,486)    (10,495)   (61,404)     (7,399)
Per share -- basic and
diluted                            (0.06)      (0.08)     (0.49)      (0.06)
Utilization
Masted coil tubing rigs              19%         25%        29%         57%
Service rigs                         14%         19%        16%         28%

                                                              As at June 30,
                                                          2016         2015

Total assets                                          $238,450     $337,299
Total long-term debt                                    26,894       27,027
Equipment fleet
Masted coil tubing rigs                                     21           19
Service rigs                                                38           54

Highlights

Oil and natural gas activity for the first half of 2016 was below historical levels as exploration and production (E&P) companies reduced spending to preserve cash flow and manage debt. Oil and natural gas prices improved in the second quarter 2016 from the lows reached in the first quarter but remained volatile and below thresholds necessary to support significant E&P investment. Limited activity created an environment of excess industry oil field service equipment and aggressive pricing. The second quarter, which is typically slow due to the seasonality of oil and gas operations in the Western Canadian sedimentary basin (WCSB), was particularly slow in 2016. Wells drilled in the WCSB in the second quarter 2016 declined 58 per cent compared with the same period in 2015 and drilling rig utilization, at 7 per cent, hit its lowest level in decades.

Essential's second quarter revenue was $15.0-million, 37 per cent lower than the same period of 2015, driven by low activity and aggressive pricing by competitors across all service lines. Utilization was below the same period in 2015 as a result of fewer well completions and less production work. Pricing continued to decline compared with the second quarter 2015.

EBITDAS (earnings before interest, taxes, depreciation, amortization and stock-based compensation) was negative $4.5-million and negative $7.0-million, respectively, for the three and six months ended June 30, 2016, due to extremely low activity and lower pricing. Negative EBITDAS for the first half of the year is unprecedented for Essential and, in a continued effort to manage costs, margins and debt, a number of strategies were implemented including:

  • A second round of significant cost reductions including compensation and head count reductions across the organization. These were incremental to the compensation and head count reductions in early 2015;
  • Disposition of retired and redundant equipment;
  • Suspension of the company's dividend in May, 2016;
  • Renewal of Essential's credit facility with an extension to May, 2019, and revisions to certain terms and conditions.

Long-term debt outstanding at June 30, 2016, was $26.9-million, essentially flat to March 31, 2016. With working capital of $43.8-million, working capital exceeded debt by $16.9-million. On Aug. 9, 2016, there was $28.9-million of debt outstanding.

Results of operations

                       SEGMENT RESULTS -- WELL SERVICING
             (In thousands, except percentages, hours and fleet)

                                    Three months ended      Six months ended
                                               June 30,              June 30,
                                      2016        2015       2016       2015
Revenue
Coil well service(i)                $6,422      $9,887    $22,178    $41,863
Service rigs                         3,093       6,825      7,452     21,851
                                   -------     -------    -------    -------
Total revenue                        9,515      16,712     29,630     63,714
Operating expenses                  10,573      15,677     29,179     51,965
                                   -------     -------    -------    -------
Gross margin                        (1,058)      1,035        451     11,749
Gross margin %                       (11)%          6%         2%        18%
                                   =======     =======    =======    =======
Utilization(ii)
Masted coil tubing rigs
Utilization                            19%         25%        29%        57%
Operating hours                      3,570       4,341     10,855     19,676
Pumping
Utilization                            16%         23%        27%        43%
Operating hours                      4,336       6,381     14,554     23,967
Service rigs
Utilization                            14%         19%        16%        28%
Operating hours                      5,010       9,239     11,172     26,984
Equipment fleet(iii)
Masted coil tubing rigs                 21          19         21         19
Pumping                                 30          30         30         30
Service rigs                            38          54         38         54
                                   =======     =======    =======    =======

(i) Includes revenue from coil tubing rigs, nitrogen and fluid pumping, and 
other ancillary equipment.
(ii) Utilization is calculated using a 10-hour day.
(iii) Fleet data represent the number of units in service at the end of the 
period.

Segment results -- well servicing

Coil well service revenue decreased 35 per cent in the second quarter 2016 compared with the same period in 2015 due to lower activity and pricing. Masted coil tubing operating hours declined 18 per cent and pumping operating hours declined 32 per cent compared with the second quarter 2015 due to reduced exploration and production (E&P) spending and a decrease in stand-alone pumper work. Revenue per hour declined approximately 10 per cent compared with the second quarter 2015 and was consistent with the first quarter 2016.

Essential's Generation IV masted coil tubing rigs experienced relatively strong customer demand in the second quarter of 2016. Management and customers were pleased with the performance of these rigs, which completed complex, long-reach wells in the Duvernay, Montney and Bakken.

Second quarter 2016 service rig revenue decreased 55 per cent and operating hours were down 46 per cent compared with the same period in 2015. Limited industry activity continued to result in aggressive pricing by competitors to gain market share. Service rig revenue per hour was down approximately 15 per cent compared with the second quarter 2015.

Well-servicing gross margin as a percentage of revenue was negative 11 per cent in the second quarter of 2016. Lower repairs and maintenance costs compared with the same period in 2015 and Essential's second round of cost reductions implemented in March, 2016, including staff layoffs and wage rollbacks, limited margin erosion in the second quarter 2016. Revenue in the second quarter 2016 was not sufficient to cover fixed costs.

On a year-to-date basis, well-servicing revenue decreased 53 per cent compared with the prior period driven by lower activity and price declines for all services as a result of the continued industry downturn. Essential's second round of cost-reduction measures implemented earlier in the year partially offset the impact of the period-over-period revenue decline and maintained positive year-to-date margins.

               SEGMENT RESULTS -- DOWNHOLE TOOLS AND RENTALS
                     (In thousands, except percentages)

                                  Three months ended       Six months ended
                                             June 30,               June 30,
                                     2016       2015        2016       2015

Revenue                            $5,583     $7,460     $16,472    $31,071
Operating expenses                  5,472      8,004      15,185     24,835
                                  -------    -------     -------    -------
Gross margin                          111       (544)      1,287      6,236
Gross margin %                         2%       (7)%          8%        20%
Downhole tools and rentals
revenue -- % of revenue
Tryton MSFS                           15%        16%         32%        33%
Conventional tools and rentals        85%        84%         68%        67%
                                  =======    =======     =======    =======

Segment results -- downhole tools and rentals

Second quarter 2016 downhole tools and rentals (DT&R) revenue decreased from the same period in 2015, primarily from lower Canadian and U.S. conventional tools revenue. Conventional tools revenue was negatively impacted by lower production activity and pricing declines. Tryton MSFS revenue also declined over the same period. Rentals revenue was consistent with the second quarter 2015.

Positive gross margin in the quarter was primarily a result of cost reductions implemented in the Canadian operations in the first quarter of 2016 and in the U.S. operations during the second quarter of 2016. These reductions included staff layoffs and wage rollbacks. Savings from these cost reductions and higher-margin rental activity in the current quarter offset the impact of lower DT&R revenue in the period.

On a year-to-date basis, DT&R revenue was below the prior period in all businesses as a result of lower activity and price declines. Gross margin for the six months ended June 30, 2016, compared with the same period in 2015, decreased due to fixed costs comprising a greater proportion of revenue. The full benefits of cost reductions implemented during the first half of 2016 are not fully reflected in the gross margin for the six months ended June 30, 2016. Those benefits are expected to result in improved margins in the second half of 2016. Higher U.S. losses and a weaker period-over-period contribution from the rentals business also reduced gross margin in the first half of 2016.

Financial resources and liquidity

                                WORKING CAPITAL
                        (In thousands, except ratios)

                                                        As at         As at
                                                      June 30,      Dec. 31,
                                                         2016          2015

Current assets                                        $55,937       $66,599
Current liabilities                                   (12,120)      (15,844)
                                                      -------       -------
Working capital                                        43,817        50,755
                                                      -------       -------
Working capital ratio                                   4.6:1         4.2:1
                                                      =======       =======

Working capital primarily comprises accounts receivable and inventory. The accounts receivable portion typically grows through the first, third and fourth quarters of the year when activity is greater. Inventory comprises downhole tools and coil tubing inventory, which does not fluctuate as much with activity and in the current industry environment may take longer to use or sell. 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.

Credit facility

Essential's credit facility comprises a $40-million revolving term loan facility with a $20-million accordion feature available on the lender's consent. The credit facility matures on May 31, 2019, is renewable at the lender's consent and is secured by a general security agreement over the company's assets. To the extent the credit facility is not renewed, the balance becomes immediately due and payable on the maturity date. At June 30, 2016, the maximum of $40-million under the credit facility was available to Essential.

On June 15, 2016, Essential renewed its credit facility with its banking syndicate with the following revised terms and conditions:

  • A voluntary reduction in the commitment from $100-million to $40-million;
  • A voluntary reduction in the accordion feature from $35-million to $20-million;
  • Revisions to certain financial covenants, including:
    • Minimum cumulative EBITDAS as follows: $1-million for the three months ending Sept. 30, 2016, $4-million for the six months ending Dec. 31, 2016, and $6-million for the nine months ending March 31, 2017;
    • Funded debt to trailing 12-month EBITDAS is not to exceed 5.25 times at June 30, 2016, has been waived for the quarters ending Sept. 30, 2016, Dec. 31, 2016, and March 31, 2017, and is not to exceed 5.25 times at June 30, 2017, stepping down to three times by the quarter ending Dec. 31, 2018, and thereafter;
    • Fixed charge coverage ratio is not to be less than 1.25 times at June 30, 2016, two times for the quarters ending Sept. 30, 2016, Dec. 31, 2016, and March 31, 2017, and 1.25 times for the quarters ending June 30, 2017, and thereafter;
  • Addition of an equity cure provision;
  • Addition of a monthly borrowing base;
  • Restrictions on dividends and acquisitions when funded debt to EBITDAS is greater than three times or when the covenant is waived.

As at June 30, 2016, all financial covenants were satisfied and all banking requirements under the credit facility were up to date. At the end of the second quarter of 2016, Essential had a consolidated funded debt balance of $26.7-million, which consisted of long-term debt of $26.9-million, plus deferred financing costs of $300,000, less cash of $500,000. At June 30, 2016, the company's funded debt to trailing 12-month EBITDAS was 3.2 times. Essential does not anticipate financial resource or liquidity issues to restrict its future operating, investing or financing activities. On Aug. 9, 2016, Essential had $28.9-million of debt outstanding.

                   EQUIPMENT EXPENDITURES AND FLEET ADDITIONS
                                  (In thousands)

                                   Three months ended      Six months ended
                                              June 30,              June 30,
                                      2016       2015       2016       2015

Well servicing                      $2,928     $2,131     $6,173     $7,674
Downhole tools and rentals           1,282         45      1,369        691
Corporate                                4        216         34        488
                                    ------     ------     ------     ------
Total equipment expenditures         4,214      2,392      7,576      8,853
                                    ------     ------     ------     ------
Less proceeds on disposal of
equipment                           (1,182)      (715)    (1,593)      (810)
                                    ------     ------     ------     ------
Net equipment expenditures           3,032      1,677      5,983      8,043
                                    ======     ======     ======     ======
Growth capital                       3,099      1,669      5,299      7,012
Maintenance capital                  1,115        723      2,277      1,841
                                    ------     ------     ------     ------
Total equipment expenditures         4,214      2,392      7,576      8,853
                                    ======     ======     ======     ======

Equipment expenditures and fleet additions

Essential's 2016 capital budget has been increased from $9-million to $11-million and comprises $8-million of growth capital and $3-million of maintenance capital. Growth capital will be primarily used to complete the Generation IV masted coil tubing rigs. The $2-million increase in growth capital consists primarily of the purchase of specialty drill pipe in the current quarter and incremental costs to enhance the Generation IV masted coil tubing rigs. At June 30, 2016, there was $2-million remaining to complete these rigs. Essential took delivery of the fourth Generation IV masted coil tubing rig in the second quarter 2016 and it is expected to go into service in the third quarter 2016.

The table shows the expected in-service dates for the Generation IV masted coil tubing rigs as at Aug. 9, 2016.

                             EXPECTED IN-SERVICE DATES

                                          # rigs     # rigs          Expected
                                      in program in service  in-service dates

Generation IV masted coil tubing rigs          6          3  Q3 2016, Q4 2016

Outlook

Oil and natural gas prices improved in the second quarter from lows reached earlier in the year creating some industry optimism. However, while higher than the first quarter, commodity prices remain volatile. Industry activity in the WCSB has improved over the seasonally slow second quarter but remains unsettled and industry drilling rig utilization to date in the third quarter is approximately 50 per cent below the same period in 2015. Longer-term industry perspectives seem more positive as forecasters anticipate excess oil and natural gas production and supply to be corrected through the inevitable production profile decline of existing wells. In Canada, industry activity is further complicated by market access issues and discounted Canadian prices.

Essential is seeing some improvement in activity following the second quarter but activity to date is lower than the prior year and is expected to continue to be below 2015 for the remainder of the third quarter. Muted activity and excess oil field service equipment in the WCSB are expected to continue to put downward pricing pressure on oil field services. Service pricing is being heavily discounted as companies compete for market share.

Essential has taken significant steps to manage costs and management continues to seek the right balance between cost reductions, in an effort to generate positive margins, and retention of key employees, to ensure there is a viable business that can respond and grow when the industry begins to pull out of the prolonged downturn. Essential's highly variable cost structure, with the majority of field employees working on a variable compensation model, helps support margins in periods of slow activity.

The 2016 capital budget has increased from $9-million to $11-million. The increase is primarily for the purchase of specialty drill pipe to meet a specific customer request. At June 30, 2016, $8-million had been spent, so capital commitments for the remainder of the year are low.

The renewed credit facility provides an appropriate level of flexibility to meet anticipated operating needs as well as capital spending requirements. On Aug. 9, 2016, debt was $28.9-million and on June 30, 2016, working capital of $43.8-million exceeded long-term debt by $16.9-million.

The management's discussion and analysis and financial statements are available on Essential's website and 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 industry downturn since early 2015 has disrupted typical historic oil field services seasonal patterns in Western Canada as E&P companies are driven by constrained cash flow in addition to weather and access issues.

The table provides the company's quarterly information for the past eight quarters.

                             QUARTERLY INFORMATION
           (In thousands, except per share, percentages and fleet)
 
                                      June 30,  March 31,  Dec. 31, Sept. 30,
                                         2016       2016      2015      2015
Well servicing
Coil well service                      $6,422    $15,756   $23,833   $24,432
Service rigs                            3,093      4,359     7,516     7,682
                                      -------    -------   -------   -------
Total well servicing                    9,515     20,115    31,349    32,114
Downhole tools and rentals              5,583     10,889    11,278    15,919
Intersegment eliminations                 (90)       (89)     (147)     (209)
                                      -------    -------   -------   -------
Total revenue                          15,008     30,915    42,480    47,824
                                      -------    -------   -------   -------
Gross margin                           (1,595)     1,246     7,786    11,927
Gross margin %                          (11)%         4%       18%       25%
EBITDAS                                (4,469)    (2,483)    4,930     8,503
Net (loss) income(i)                   (7,486)   (53,918)  (18,082)    2,996
Per share -- basic                      (0.06)     (0.43)    (0.14)     0.02
Per share -- diluted                    (0.06)     (0.43)    (0.14)     0.02
Total assets                          238,450    246,713   317,244   346,564
Long-term debt                         26,894     27,053    25,543    34,738
                                      =======    =======   =======   =======
Utilization(ii)
Masted coil tubing rigs                   19%        39%       65%       70%
Pumping(iii)                              16%        37%       55%       57%
Service rigs                              14%        18%       30%       24%
Operating hours
Masted coil tubing rigs                 3,570      7,285    12,039    12,319
Pumping(iii)                            4,336     10,218    15,049    15,747
Conventional coil tubing rigs             278      2,392     1,778     1,174
Service rigs                            5,010      6,162    10,391    10,418
Downhole tools and rentals -- % of
revenue
Tryton MSFS                               15%        40%       24%       40%
Conventional tools and rentals            85%        60%       76%       60%
                                      =======    =======   =======   =======
Equipment fleet(iv)
Masted coil tubing rigs                    21         21        20        19
Fluid pumpers                              18         18        18        18
Nitrogen pumpers                           12         12        12        12
Conventional coil tubing rigs               5         11        11        11
Service rigs                               38         38        38        48
                                      =======    =======   =======   =======

                                      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
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
Total assets                          337,299    371,496   397,351   454,745
Long-term debt                         27,027     39,817    55,253    65,043
                                      =======    =======   =======   =======
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 -- % 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                               54         54        54        54
                                      =======    =======   =======   =======

(i) The quarters ended March 31, 2016, Dec. 31, 2015, and Dec. 31, 2014, 
include an impairment loss of $61.7-million, $13.2-million and 
$47.2-million, respectively.
(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 in service at the end of the 
period.

     CONSOLIDATED INTERIM STATEMENTS OF NET LOSS AND COMPREHENSIVE LOSS
                        (In thousands, except per share)

                                      For the three             For the six
                                       months ended            months ended
                                            June 30,                June 30,
                                    2016       2015       2016         2015

Revenue                          $15,008    $23,990    $45,923      $94,409
Operating expenses                16,603     23,410     46,272       78,527
                                 -------    -------    -------      -------
Gross margin                      (1,595)       580       (349)      15,882
General and administrative
expenses                           2,874      3,412      6,603        7,855
                                 -------    -------    -------      -------
                                  (4,469)    (2,832)    (6,952)       8,027
Depreciation and amortization      4,538      6,464     11,423       13,154
Share-based compensation             188        460        715          614
Impairment loss                        -          -     61,652            -
Other expenses                       517      1,017      1,384          301
                                 -------    -------    -------      -------
Operating (loss)                  (9,712)   (10,773)   (82,126)      (6,042)
Finance costs                        381        332        668          804
                                 -------    -------    -------      -------
(Loss) before income taxes       (10,093)   (11,105)   (82,794)      (6,846)
Current income tax recovery       (1,544)    (4,004)    (6,631)      (3,562)
Deferred income tax (recovery)
expense                           (1,063)     3,394    (14,759)       4,115
                                 -------    -------    -------      -------
Income tax (recovery) expense     (2,607)      (610)   (21,390)         553
                                 -------    -------    -------      -------
Net (loss)                        (7,486)   (10,495)   (61,404)      (7,399)
                                 =======    =======    =======      =======
Unrealized foreign exchange
(loss) gain                           (4)       (61)       (52)         187
                                 -------    -------    -------      -------
Comprehensive (loss)              (7,490)   (10,556)   (61,456)      (7,212)
                                 =======    =======    =======      =======
(Loss) per share,
basic and diluted                  (0.06)     (0.08)     (0.49)       (0.06)
Comprehensive loss per share,
basic and diluted                  (0.06)     (0.08)     (0.49)       (0.06)
                                 =======    =======    =======      =======

Second quarter 2016 results conference call and webcast

Essential has scheduled a conference call and webcast at 10 a.m. MT (12 p.m. ET) on Aug. 10, 2016.

The conference call dial-in numbers are 416-340-2217 or 866-696-5910, passcode 6905316.

An archived recording of the conference call will be available approximately one hour after completion of the call until Aug. 24, 2016, by dialling 905-694-9451 or 800-408-3053, passcode 6643565.

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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