Mr. Garnet Amundson reports
ESSENTIAL ENERGY SERVICES ANNOUNCES THIRD QUARTER FINANCIAL RESULTS
Essential Energy Services Ltd. has released third quarter results.
SELECTED INFORMATION
(in thousands of dollars except per-share, percentages, hours and fleet data)
Three months ended Nine months ended
Sept. 30, Sept. 30,
2017 2016 2017 2016
Revenue $48,751 $26,013 $132,646 $64,484
Gross margin 11,524 3,899 27,402 3,639
Gross margin % 24% 15% 21% 6%
EBITDAS (1) from continuing operations 8,541 1,418 17,456 (5,008)
Net income (loss) from continuing operations 2,344 (3,253) 819 (52,790)
Per share -- basic and diluted 0.02 (0.03) 0.01 (0.42)
Net income (loss) 2,344 (3,814) 489 (65,218)
Per share -- basic and diluted 0.02 (0.03) 0.00 (0.52)
Operating hours
Coil tubing rigs 13,751 7,662 37,210 21,187
Pumpers 18,094 10,127 46,276 24,681
(1) A non-international financial reporting standard measure.
Highlights
Essential wins patent litigation
For the past four years, Essential has defended itself in court proceedings against a patent infringement claim pursued by Packers Plus Energy Services Inc., alleging that methods associated with the Tryton multistage fracturing system infringe certain claims of a patent issued to Packers Plus. On Nov. 3, 2017, the Federal Court of Canada ruled that the asserted claims of the patent were not valid and that Essential did not infringe the patent.
Management is very pleased with the court's decision on validity and infringement, which absolves Essential of any wrongdoing in connection with this litigation.
Highlights for the third quarter 2017
A broader customer base and strong industry activity resulted in Essential's third quarter 2017 revenue and 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) (1) exceeding management's expectations. Revenue for the three months ended Sept. 30, 2017, was $48.8-million, a $22.7-million or 87-per-cent increase from 2016, as both Essential coil well service (ECWS) and Tryton continued to experience strong customer demand with improved industry activity compared with the third quarter 2016. EBITDAS (1) was $8.5-million, $7.1-million higher than the third quarter 2016.
Key operating highlights include:
- ECWS third quarter 2017 revenue increased 106 per cent compared with the third quarter 2016 with demand remaining strong for coil tubing rigs and pumpers particularly in the Montney region of the Western Canadian sedimentary basin (WCSB).
-
Tryton revenue increased 64 per cent compared with the third quarter 2016. All service lines improved, with especially strong demand for its MSFS tools.
For the nine months ended Sept. 30, 2017, Essential reported revenue of $132.6-million, a 106-per-cent improvement from the first nine months of 2016. EBITDAS (1) was $17.5-million, or $22.5-million higher than the prior-year period.
At Sept. 30, 2017, Essential's debt outstanding was $20.6-million, and financed debt (1) to bank EBITDA (1) was 0.8 time. Working capital of $57.3-million exceeded debt by $36.7-million. Debt increased $7.3-million from June 30, 2017, primarily due to working capital as third quarter revenue was higher than the seasonally slower second quarter, resulting in higher trade accounts receivable. On Nov. 8, 2017, there was $24.5-million of debt outstanding.
Industry overview
The Canadian oil field service industry has seen a resurgence of activity in 2017, particularly in completions activity, compared with the lows reached in 2016. Well completions, a key indicator of industry activity in the WCSB, increased 76 per cent compared with the nine months ended Sept. 30, 2016. Oil prices averaged approximately $50 (U.S.) per barrel (WTI) for the first nine months of 2017 providing exploration and production (E&P) companies prices sufficient to support industry activity. Well completions for the three months ended Sept. 30, 2017, increased 134 per cent compared with the same prior-year period.
Comparative figures
The sale of Essential's service rig business in December, 2016, was reported as a discontinued operation, with the three and nine months ended Sept. 30, 2016, comparative figures restated to this same basis of accounting and disclosure.
Outlook
Higher commodity prices in 2017 compared with 2016 have supported E&P spending, which resulted in improved year-over-year results for the Canadian oil field services sector. Industry well completions continue to be weighted toward oil and liquids-rich natural gas in the Montney region of the WCSB. Management expects fourth quarter activity to remain steady with a possible slowdown later in the quarter as customers complete their 2017 capital programs and strive to maintain spending within cash flow.
At current commodity prices, the outlook for the first quarter 2018 is positive. Indicators suggest that first quarter industry well completions activity will continue to be strong, assuming commodity prices remain near current levels. Visibility into the first quarter will become clearer as customers announce their 2018 capital budgets.
With stronger-than-expected third quarter activity, ECWS has continued its crew recruiting to reactivate more coil tubing and pumper packages in the first quarter 2018. Approximately half of Essential's coil tubing rigs are considered active and ready for work. As activity increases and the employee base grows, Essential will activate more of its existing fleet.
Tryton has a full complement of employees to meet expected customer demand and will add additional employees if demand exceeds expectations.
Essential does not expect meaningful price increases for its products and services in the near term, with the exception of incremental pricing to partially recover rising labour costs in ECWS. Management believes that industry activity and steady commodity prices are required before customers support increased oil field service pricing.
On Nov. 3, 2017, the court ruled in favour of Essential with respect to the Packers Plus patent litigation stating that the asserted patent claims were not valid and that Essential did not infringe the patent. This affirmed Essential's position for the past four years that the lawsuit was without merit. This ruling is very positive and significant to Essential's business, shareholders and employees.
Essential's strong balance sheet positions it well as the oil and natural gas industry continues its recovery in the WCSB. Essential's 2017 growth capital investment is focused on increasing pumping capacity to support the coil tubing fleet working for customers on long-reach horizontal wells, where greater pumping capacity is required due to depths and pressures of these wells.
At Sept. 30, 2017, debt was $20.6-million, and financed debt (1) to bank EBITDA (Essential's credit facility as EBITDAS from continuing operations, including the equity cure, excluding onerous lease contract expense and severance costs) (1) was 0.8 time.
Management's discussion and analysis and financial statements are available on Essential's website and on SEDAR.
CONSOLIDATED INTERIM STATEMENTS OF NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(in thousands of dollars, except per-share amounts)
For the three months For the nine months
ended Sept. 30, ended Sept. 30,
2017 2016 2017 2016
Revenue $48,751 $26,013 $132,646 $64,484
Operating expenses 37,227 22,114 105,244 60,845
Gross margin 11,524 3,899 27,402 3,639
General and administrative expense 2,983 2,481 9,946 8,647
Depreciation and amortization 3,935 3,595 11,817 13,363
Share-based compensation 546 805 2,769 1,520
Impairment loss - - - 45,838
Other expenses 572 775 742 2,104
Operating income (loss) from
continuing operations 3,488 (3,757) 2,128 (67,833)
Finance costs 218 272 955 940
Income (loss) before income taxes from
continuing operations 3,270 (4,029) 1,173 (68,773)
Current income tax expense (recovery) 339 (515) (208) (5,979)
Deferred income tax expense (recovery) 587 (261) 562 (10,004)
Income tax expense (recovery) 926 (776) 354 (15,983)
Net income (loss) from continuing operations 2,344 (3,253) 819 (52,790)
(Loss) from discontinued operations, net of tax - (561) (330) (12,428)
Net income (loss) 2,344 (3,814) 489 (65,218)
Unrealized foreign exchange gain (loss)
from continuing operations 80 35 142 (17)
Unrealized foreign exchange (loss)
from discontinued operations - (55) - (55)
Other comprehensive income (loss) 80 (20) 142 (72)
Comprehensive income (loss) 2,424 (3,834) 631 (65,290)
Net income (loss) per share from
continuing operations,
basic and diluted 0.02 (0.03) 0.01 (0.42)
Net income (loss) per share,
basic and diluted 0.02 (0.03) 0.00 (0.52)
Comprehensive income (loss) per share,
basic and diluted 0.02 (0.03) 0.00 (0.52)
Third quarter 2017 financial results conference call and webcast
Essential has scheduled a conference call and webcast at 10 a.m. MT (12 p.m ET) on Nov. 9, 2017.
The conference call dial-in numbers are 416-340-2217 or 800-806-5484, passcode 8513141.
An archived recording of the conference call will be available approximately one hour after completion of the call until Nov. 23, 2017, by dialling 905-694-9451 or 800-408-3053, passcode 9590912.
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.
About Essential Energy Services Ltd.
Essential provides oil field services to oil and natural gas producers, primarily in Western Canada. Essential offers completion, production and abandonment services to a diverse customer base. Services are offered with coil tubing, fluid and nitrogen pumping and the sale and rental of downhole tools and equipment. Essential offers the largest coil tubing fleet in Canada.
We seek Safe Harbor.
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