09:23:10 EDT Fri 29 Mar 2024
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Canyon Services Group Inc
Symbol FRC
Shares Issued 68,497,661
Close 2014-07-30 C$ 16.00
Market Cap C$ 1,095,962,576
Recent Sedar Documents

Canyon Services loses $15.26-million in Q2

2014-07-31 21:05 ET - News Release

Mr. Brad Fedora reports

CANYON SERVICES GROUP INC. REPORTS SECOND QUARTER 2014 RESULTS

Canyon Services Group Inc. is releasing its second quarter 2014 results. The following results should be read in conjunction with the management's discussion and analysis, the interim consolidated financial statements, and notes of Canyon Services Group, for the six months ended June 30, 2014, and should also be read in conjunction with the audited consolidated financial statements and annual information form for the year ended Dec. 31, 2013, which are available on SEDAR.

Highlights summary

The operating and financial highlights for the three and six months ended June 30, 2014, are summarized as follows:

  • The second quarter of 2014 experienced increased activity levels from the prior-year comparable quarter as a long cold winter delayed the seasonal spring breakup into early April and June experienced drier than normal field conditions, especially in the northern portions of the WCSB, compared with the same month last year, when operations were impacted by extremely wet weather.
  • Jobs completed in the current quarter increased by 130 per cent to 347, from 151 in the second quarter of 2013, while consolidated revenues increased by 120 per cent to $60.3-million in the second quarter of 2014, from $27.4-million in the second quarter of 2013. For the six months ended June 30, 2014, jobs completed increased by 99 per cent to 1,237, from 621 in the prior-year comparable period, while consolidated revenues increased by 74 per cent to $198.5-million, from $114.3-million over the same periods.
  • Canyon's increased activity and revenues in the second quarter of 2014 were offset by an increase in fixed costs due to staff additions in the quarter and significant seasonal price discounts, which are traditionally offered to customers during spring breakup. As a result, Canyon recorded negative EBITDA (earnings before interest, taxes, depreciation and amortization) before share-based payments of $9.2-million, a 30-per-cent improvement over the negative $13.1-million recorded in the second quarter of 2013. Canyon exited the second quarter of 2014 with just under 1,100 people, compared with about 800 at the same time last year.
  • For the six months ended June 30, 2014, EBITDA before share-based payments more than doubled to $18.2-million, from $7.2-million recorded in the prior-year comparable period. In the six months ended June 30, 2014, loss and comprehensive loss were $3.4-million, down from the loss and comprehensive loss of $8.7-million in the six months ended June 30, 2013.
  • Effective July 1, 2014, Canyon closed the previously announced acquisition of Fraction Energy Services Ltd., a leading water and fracturing fluid logistics, containment, transfer and storage management business, for total consideration of approximately $106.1-million, which consisted of 5.4 million common shares of Canyon issued at $18.81 per share and cash consideration of $4.5-million to settle outstanding options to acquire Fraction common shares.
  • Effective July 14, 2014, Canyon acquired four deep coiled tubing packages which included twin fluid pumpers, BOPs, injectors and three cranes, from a Canadian oil field services company for approximately $19.7-million. This acquisition will increase Canyon's deep coiled tubing fleet to 11 packages. Canyon expects to deploy the assets in northwestern Alberta and northeastern British Columbia. Including the purchase of the assets, Canyon's 2014 capital budget has increased to $94.5-million. This amount also includes the previously announced $62.9-million, $3.2-million recently allocated to expand Canyon's Grande Prairie operating base and approximately $8.7-million that will be spent over the remainder of 2014, in the fraction business.
  • On July 2, 2014, Canyon amended its bank credit facilities to extend the term by one year. The facilities consist of a $20-million operating facility and an $80-million revolving facility which includes a $30-million accordion feature. Canyon remains in a very strong financial position.
  • As at June 30, 2014, Canyon had available credit facilities combined with positive working capital totalling $112-million.
  • On June 26, 2014, Canyon declared a quarterly dividend of 15 cents per common share, or $10.3-million, which was paid to shareholders on July 25, 2014.

                              OVERVIEW OF THE SECOND QUARTER 2014
(in thousands of dollars, except per-share amounts, job amounts and hydraulic pumping capacity)

                                     Three months ended June 30,                    Six months ended June 30,
                                     2014      2013        2012            2014       2013              2012

Consolidated revenues             $60,279   $27,431     $37,974        $198,464   $114,318          $173,909
Profit (loss) and comprehensive
income (loss)                    $(15,263) $(17,186)    $(6,940)        $(3,413)   $(8,659)          $30,227
Per share, basic                   $(0.24)   $(0.28)     $(0.11)         $(0.05)    $(0.14)            $0.49
Per share, diluted                 $(0.24)   $(0.28)     $(0.11)         $(0.05)    $(0.14)            $0.48
EBITDA before share-based
payments                          $(9,186) $(13,134)    $(1,552)        $18,246     $7,230           $56,462
Funds from (used in)
operations                        $(4,071) $(11,822)     $2,723         $19,795     $6,826           $49,306
Total jobs completed                  347       151         251           1,237        621             1,185
Consolidated average revenue
per job                          $178,028  $181,979    $155,545        $161,333   $184,389          $147,343
Average fracturing revenue per
job                              $275,423  $320,769    $203,759        $214,580   $261,204          $222,404
Hydraulic pumping capacity                                                                                   
Average HHP                       245,500   225,500     194,000         238,000    225,500           185,000 
Exit HHP                          245,500   225,500     218,000         245,500    225,500           218,000
Capital expenditures              $18,589    $2,310     $20,653         $31,871     $5,811           $54,779

In the second quarter of 2014, jobs completed and consolidated revenues increased by 130 per cent and 120 per cent, respectively, compared with the second quarter of 2013. The quarter got off to a strong start as a long cold winter delayed the seasonal spring breakup into early April, while June experienced drier field conditions especially in the northern portions of the Western Canadian sedimentary basin, compared with the same month last year, when operations were impacted by extremely wet weather. In addition, Canyon's continuing sales initiatives resulted in further market share growth with companies operating in the deep basin, as well as market share expansion in southeast Saskatchewan and southwest Manitoba. As a result, jobs completed in the current quarter increased by 130 per cent to 347, from 151 in the second quarter of 2013, while consolidated revenues increased by 120 per cent to $60.3-million in the second quarter of 2014, from $27.4-million in the second quarter of 2013. For the six months ended June 30, 2014, jobs completed increased by 99 per cent to 1,237, from 621 in the prior-year comparable period, while consolidated revenues increased by 74 per cent to $198.5-million, from $114.3-million over the same periods.

The company estimates that overall industry activity in the WCSB as measured by total metres drilled increased by over 30 per cent in the second quarter of 2014, year over year. This increasing trend in industry activity has been evident since late 2013, and is driven by several factors, including strong natural gas prices in the first half of 2014, stable oil prices and oil price differentials, more favourable Canadian/U.S. exchange rates and E&P companies' improved access to capital markets to finance capital programs. The AECO spot natural gas price averaged $4.70 per thousand cubic feet in the second quarter of 2014, up 32 per cent from $3.55 per thousand cubic feet in the second quarter of 2013. Crude oil prices for Edmonton light increased by 12 per cent to $104.54 per barrel in the second quarter of 2014, from $93.08 per barrel in the second quarter of 2013. Also evident of the increased industry-wide activity are the key industry indicators such as well licensing, drilling rig utilization and well completions, which all point to a positive outlook for the remainder of 2014 and into 2015. Well licensing for service-intensive deep wells in the WCSB increased by about 40 per cent in the second quarter of 2014, compared with the second quarter of 2013, and by 43 per cent for the six months ended June 30, 2014. Drilling rig utilization increased by about 33 per cent in the second quarter of 2014, compared with the second quarter of 2013, and by about 12 per cent on a year-to-date basis. Although well completions were relatively flat in the second quarter of 2014 for the year to date compared with the prior-year comparable period, total metres completed increased by 15 per cent, compared with the second quarter of 2013. Natural gas well completions have increased by about 51 per cent for the year to date, mainly due to LNG-related delineation drilling in the deeper, more service-intensive parts of the WCSB requiring increasing fracturing stages per well and greater proppant tonnages.

Canyon's increased activity and revenues in the second quarter of 2014 were offset by an increase in fixed costs due to staff additions in the quarter and significant seasonal price discounts which are traditionally offered to customers during spring breakup. As a result, in the second quarter of 2014, Canyon recorded negative EBITDA before share-based payments of $9.2-million, a 30-per-cent improvement over the negative $13.1-million recorded in the second quarter of 2013. For the six months ended June 30, 2014, EBITDA before share-based payments more than doubled to $18.2-million, from $7.2-million recorded in the prior-year comparable period. In the second quarter of 2014, Canyon's fixed costs increased by approximately 30 per cent, compared with the second quarter of 2013, as Canyon continuously added field and support staff throughout 2013 and 2014, to prepare for a busier industry as discussed above. In the second quarter of 2014, Canyon added approximately 140 field staff and exited the second quarter of 2014, with just under 1,100 people, compared with about 800 at the same time last year. In the second quarter of 2014, Canyon recorded a loss and comprehensive loss of $15.3-million, compared with a loss and comprehensive loss of $17.2-million in the second quarter of 2013. In the six months ended June 30, 2014, loss and comprehensive loss were $3.4-million, down from the loss and comprehensive loss of $8.7-million in the six months ended June 30, 2013.

Subsequent events

Fraction acquisition

Effective July 1, 2014, Canyon closed the previously announced acquisition of Fraction Energy Services, a privately held company based in Calgary, Alta., for total consideration of approximately $106.1-million, which consisted of 5.4 million common shares of Canyon issued at a then market value of $18.81 per share and cash consideration of $4.5-million to settle outstanding options to acquire Fraction common shares.

Fraction was founded in 2012, and has grown into a leading provider of water and fracturing fluid logistics, containment, transfer and storage management services. It provides services to customers focused in northeast British Columbia and northwest Alberta, with field offices in Fort St. John, B.C., and Grande Prairie, Alta. Fraction currently employs approximately 150 people, and in the three and six months ending June 30, 2014, generated approximately $6-million and $14-million of EBITDA, respectively. This business has a variable cost structure where field salaries and wages fluctuate with activity. Thus, although Fraction's second quarter was impacted by the seasonal spring breakup, it was able to generate positive EBITDA in a period of lower activity. This will benefit Canyon's future consolidated results. Canyon's results will incorporate Fraction's results of operations commencing with the third quarter of 2014.

In connection with the acquisition, Fraction management and employee shareholders have agreed to enter into a three-year escrow agreement, whereby 25 per cent of the Canyon common shares received became freely tradable upon closing of the acquisition, with the remaining 75 per cent of the Canyon Shares being released equally on the first, second and third anniversaries of the closing date.

Coiled tubing assets acquisition

Effective July 14, 2014, Canyon acquired four deep coiled tubing packages, which include twin fluid pumpers, BOPs, injectors and three cranes, from a Canadian oil field services company for approximately $19.7-million. All of the assets are less than 12 months old and the coiled tubing units have depth capacities of approximately 6,000 metres with 2-3/8th-inch diameter coil. This acquisition will increase Canyon's deep coiled tubing fleet to 11 packages. Canyon expects to deploy the assets in northwest Alberta and northeast British Columbia.

Including the purchase of the assets, Canyon's 2014 capital budget has increased to approximately $94.5-million. This amount includes the previously announced budget of $62.9-million, $3.2-million recently allocated to expand Canyon's Grande Prairie operating base and approximately $8.7-million that will be spent over the remainder of 2014, in the Fraction business.

     QUARTERLY COMPARATIVE STATEMENTS OF OPERATIONS
  (in thousands of dollars, except per-share amounts)

                                     Three months ended June 30,
                                            2014           2013

Revenues                                $ 60,279       $ 27,431    
Cost of services                         (73,313)       (44,035)   
Gross loss                               (13,034)       (16,604)   
Administrative expenses                   (7,024)        (5,551)    
Results from operating activities        (20,058)       (22,155)   
Finance costs                                (70)          (162)      
Foreign exchange gain (loss)                 100            (12)       
(Loss) before income tax                 (20,028)       (22,329)   
Income tax recovery                        4,765          5,143      
(Loss) and comprehensive (loss)          (15,263)       (17,186)  
EBITDA before share-based payments        (9,186)       (13,134)  
Earnings (loss) per share
Basic                                   $  (0.24)      $  (0.28)    
Diluted                                 $  (0.24)      $  (0.28)    

Revenues

In the second quarter of 2014, jobs completed increased by 130 per cent to 347, from 151 in the second quarter of 2013, while consolidated revenues increased by 120 per cent to $60.3-million, from $27.4-million in the prior-year quarter. WCSB industry total metres drilled increased by over 30 per cent in the current quarter over the second quarter of 2013, in response to not only favourable field conditions, especially in the northern parts of the WCSB, but also due to several factors, including strong natural gas prices in the quarter, stable oil prices and E&P companies' improved access to capital markets to finance capital programs. Over 90 per cent of the second quarter 2014 consolidated revenues were provided by hydraulic fracturing services, with average fracturing revenue per job decreasing by 14 per cent to $275,423, from $320,769 in the second quarter of 2013. The decrease in average fracturing revenue per job is due to industry pricing pressure and job mix.

Cost of services

Cost of services for the three months ended June 30, 2014, totalled $73,313 (2013, $44,035), and includes materials, products, transportation and repair costs of $45,413 (2013, $23,558), employee benefits expense of $18,473 (2013, $13,053), and depreciation of property and equipment of $9,427 (2013, $7,424).

Materials, products, transportation and repair costs increased by 93 per cent to $45,413 in the current quarter from $23,558 in the second quarter of 2013, due to the increased job count in the quarter. The increase in employee benefits expense is mainly due to field staff additions to support higher activity levels in 2014, and inflation in labour rates experienced in 2013. The increase in depreciation of property and equipment is due to additional depreciation pertaining to equipment introduced into service in the second half of 2013, and accelerated depreciation relating to the replacement of a number of pump components.

Administrative expenses

Administrative expenses for the three months ended June 30, 2014, totalled $7,024, compared with $5,551 in the second quarter of 2013, and include employee benefits expense of $3,300 (2013, $2,182) and share-based payments expense of $1,006 (2013, $1,241). Administrative expenses also include depreciation of buildings and office equipment, and amortization of intangibles, of $464 (2013, $367). In addition, other administrative expenses totalled $2,254 in the second quarter of 2014, compared with $1,760 in the second quarter of 2013. The increase in employee benefits expense was mainly attributable to staff additions and the implementation of a cost of living increase effective in the fourth quarter of 2013. Other administrative expenses include $612 of transaction costs pertaining to the acquisition of Fraction as discussed above.

Share-based payments expense represents the value assigned to the granting of options and incentive-based units under the company's share purchase option plan and stock-based compensation plan, respectively, using the Black-Scholes model. For the second quarter of 2014, $1,006 (second quarter of 2013, $922) was charged to expenses and included in contributed surplus in respect of these two plans. In addition, obligations for payments under the company's deferred share unit plan are accrued as share-based payments expense over the vesting period. The accrued liability increases or decreases with fluctuations in the price of the company's common shares, with a corresponding increase or decrease in the share-based payments expense. In the second quarter of 2014, share-based payments expense was nil (2013, $319) for the company's deferred share unit plan to reflect changes in the price of the common shares of the company.

EBITDA before share-based payments

In the second quarter of 2014, Canyon's increased activity, which was offset by an increase in fixed costs due to staff additions and significant seasonal price discounts, which are traditionally offered to customers during spring breakup, resulted in EBITDA before share-based payments of negative $9,186, a 30-per-cent improvement over the negative $13,134 recorded in the comparable 2013 quarter.

Finance costs

Finance costs include interest on finance lease obligations and automobile loans, and totalled $70 in the second quarter of 2014 (2013, $162).

Income tax expense

At the expected combined income tax rate of 25 per cent, the loss before income tax for the second quarter of 2014, of $20,028, would have resulted in an expected recovery of $5,007, compared with the actual income tax recovery of $4,765. The actual income tax recovery was reduced by non-deductible expenses.

Loss and comprehensive loss, and loss per share

Loss and comprehensive loss totalled $15,263 in the second quarter of 2014, compared with $17,186 in the second quarter of 2013.

Basic and diluted loss per share was 24 cents for the three months ended June 30, 2014, compared with basic and diluted loss per share of 28 cents for the comparable 2013 quarter.

         COMPARATIVE STATEMENTS OF OPERATIONS FOR SIX MONTHS
  (in thousands of dollars, except per-share amounts)

                                       Six months ended June 30,
                                            2014           2013       

Revenues                               $ 198,464      $ 114,318   
Cost of services                        (187,892)      (113,617)  
Gross profit                              10,572            701        
Administrative expenses                  (13,902)       (11,074)   
Results from operating activities         (3,330)       (10,373)   
Finance costs                               (251)          (318)      
Foreign exchange (loss) gain                (268)            50         
(Loss) before income tax                  (3,849)       (10,641)   
Income tax recovery                          436          1,982      
(Loss) and comprehensive (loss)           (3,413)        (8,659)   
EBITDA before share-based payments        18,246          7,230     
Earnings (loss) per share
Basic                                  $   (0.05)     $   (0.14)    
Diluted                                $   (0.05)     $   (0.14)    

Revenues

The increased job count resulting from improved industry activity resulted in consolidated revenues increasing by 74 per cent to $198,464 in the six months ended June 30, 2014, from $114,318 in the 2013 comparable period. Jobs completed increased by 99 per cent to 1,237 in the six months ended June 30, 2014, from 621 in the 2013 comparable period. The improved industry-wide activity is supported by several factors, including strong natural gas prices in the first half of 2014, stable oil prices and oil price differentials, more favourable Canadian/U.S. exchange rates and E&P companies' improved access to capital markets to finance capital. Over 90 per cent of consolidated revenues in the six months ended June 30, 2014, were provided by hydraulic fracturing services, with average fracturing revenue per job decreasing by 18 per cent to $214,580, from $261,204 in the 2013 comparable period. The decrease in average fracturing revenue per job is due to industry pricing pressure compared with last year and job mix.

Cost of services

Cost of services for the six months ended June 30, 2014, totalled $187,892 (2013, $113,617), and includes materials, products, transportation and repair costs of $123,137 (2013, $66,433), employee benefits expense of $45,954 (2013, $32,412), and depreciation of property and equipment of $18,801 (2013, $14,772).

Materials, products, transportation and repair costs increased by 85 per cent to $123,137 in the current quarter, from $66,433 as the job count increased by 99 per cent in the current period, compared with the comparable six-month period in 2013. The increase in employee benefits expense is mainly due to field staff additions to support higher activity levels in 2014, and inflation in labour rates experienced in 2013. Canyon had approximately 1,100 employees as at June 30, 2014, compared with about 800 at the same time last year. The increase in depreciation of property and equipment is due to additional depreciation pertaining to equipment introduced into service in the second half of 2013, and accelerated depreciation relating to the replacement of a number of pump components.

Administrative expenses

Administrative expenses for the six months ended June 30, 2014, totalled $13,902, compared with $11,074 in the 2013 comparable period, and include employee benefits expense of $7,134 (2013, $4,899) and share-based payments expense of $1,886 (2013, $2,152). Administrative expenses also include depreciation of buildings and office equipment, and amortization of intangibles of $905 (2013, $724). In addition, other administrative expenses totalled $3,977 in the six months ended June 30, 2014, compared with $3,299 in the 2013 comparable period. The increase in employee benefits expense was mainly attributable to staff additions and the implementation of a cost of living increase effective in the fourth quarter of 2013. Other administrative expenses include $612 of transaction costs pertaining to the acquisition of Fraction as discussed above.

Share-based payments expense represents the value assigned to the granting of options and incentive-based units under the company's share purchase option plan and stock-based compensation plan, respectively, using the Black-Scholes model. For the six months ended June 30, 2014, $2,022 (second quarter of 2013, $1,921) was charged to expenses and included in contributed surplus in respect of these two plans. In addition, obligations for payments under the company's deferred share unit plan are accrued as share-based payments expense over the vesting period. The accrued liability increases or decreases with fluctuations in the price of the company's common shares, with a corresponding increase or decrease in the share-based payments expense. For the six months ended June 30, 2014, share-based payments expense decreased by $136 (2013, an increase of $230) for the company's deferred share unit plan to reflect changes in the price of the common shares of the company.

EBITDA before share-based payments

For the six months ended June 30, 2014, improved industry-wide conditions as previously discussed, resulted in EBITDA before share-based payments more than doubling to $18,246, from $7,230 recorded in the comparable 2013 period.

Finance costs

Finance costs include interest on finance lease obligations and automobile loans, and totalled $251 for the six months ended June 30, 2014.

Income tax expense

At the expected combined income tax rate of 25 per cent, the loss before income tax for the six months ended June 30, 2014, of $3,849 would have resulted in an expected recovery of $962, compared with the actual income tax recovery of $436. The actual income tax recovery was reduced by non-deductible expenses.

Profit (loss) and comprehensive income (loss), and earnings (loss) per share

Loss and comprehensive loss totalled $3,413 for the six months ended June 30, 2014, compared with loss and comprehensive loss of $8,659 in the 2013 comparable period.

Basic and diluted loss per share was five cents for the six months ended June 30, 2014, compared with basic and diluted earnings per share of 14 cents for the comparable 2013 period.

We seek Safe Harbor.

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