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Canyon Services Group Inc
Symbol FRC
Shares Issued 68,851,761
Close 2015-05-05 C$ 8.30
Market Cap C$ 571,469,616
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Canyon Services loses $1.03-million in Q1

2015-05-06 01:01 ET - News Release

Mr. Brad Fedora reports

CANYON SERVICES GROUP INC. REPORTS FIRST QUARTER 2015

Canyon Services Group Inc. has released its first quarter 2015 results. The following results should be read in conjunction with management's discussion and analysis, the audited consolidated financial statements, notes of Canyon Services Group for the year ended Dec. 31, 2014, and the annual information form for the year ended Dec. 31, 2014, which are available on SEDAR.

The current quarter includes the results of Canyon's pressure-pumping business, as well as the results of Fraction Energy Services Ltd., a leading provider of fracturing fluid management, including water sourcing, transfer, well site storage, fluid heating, flowback transfer and produced water storage services, which was acquired by Canyon, effective July 1, 2014.

Highlights

The operating and financial highlights for the three months ended March 31, 2015, are summarized as follows:

In first quarter 2015, Canyon's pressure-pumping equipment fleet was almost fully utilized, serving its core group of customers, even though industry activity across the Western Canadian sedimentary basin was considerably lower in the quarter in response to the dramatic decline in commodity prices. Activity was also very strong in the fluid management division as previously imposed water restrictions were lifted in December, allowing Fraction to service larger fluid transfer and logistics projects.

As at March 31, 2015, Canyon had available bank credit facilities of $57-million, as well as non-cash working capital of $23-million. Its strong balance sheet allows the company to actively pursue growth opportunities.

In first quarter 2015, consolidated revenues increased by 13 per cent to $155.6-million from $138.2-million in first quarter 2014 with the increase attributable to the contribution from Fraction. Pressure-pumping revenue totalled $138.2-million in first quarter 2015, unchanged from the $138.2-million earned in first quarter 2014 with the reduced pricing and lower job count offset by larger job sizes. In first quarter 2015, Fraction contributed $17.4-million in revenue, a 35-per-cent increase over the $12.9-million of revenue recorded in fourth quarter 2014.

Canyon continues to work with suppliers to reduce operating and input costs in both the pressure-pumping and fluid management divisions, and, to date, reductions of about 10 per cent to 15 per cent have been realized in chemical costs, third party hauling costs, domestic proppants, fuel, accommodation and fluid management input costs. Hourly rates for subcontractors and temporary employees have also been reduced by approximately 10 per cent. Canyon reduced its permanent employee count in the pressure-pumping and fluid management divisions by 22 per cent and 15 per cent, respectively, in late March to match the anticipated reduced activity levels over the rest of the year. In addition, all remaining employees' salaries in both divisions have been rolled back between 5 per cent and 10 per cent with a 10-per-cent reduction of executive management salaries and directors fees.

On March 19, 2015, Canyon declared a quarterly dividend of 15 cents per common share, or $10.3-million, which was paid to shareholders on April 24, 2015.

                          OVERVIEW OF FIRST QUARTER 
      ($000s except per share, job amounts and hydraulic pumping capacity)          
        
                                                          Three months ended March 31,
                                                         2015        2014        2013

Consolidated revenues                                $155,585    $138,195     $86,887
(Loss) profit and comprehensive (loss) income         $(1,038)    $11,850      $8,527
Per share, basic                                       $(0.02)      $0.19       $0.14
Per share, diluted                                     $(0.02)      $0.19       $0.14
EBITDA before share-based payments                    $18,335     $27,432     $20,364
Funds from operations                                 $15,584     $23,866     $18,648
Adjusted profit and comprehensive income               $1,838     $12,743      $9,415
Adjusted per share, basic                               $0.03       $0.20       $0.15
Adjusted per share, diluted                             $0.03       $0.19       $0.15
Total jobs completed                                      620         890         470
Consolidated average revenue per job                 $224,162    $155,963    $185,065
Average fracturing revenue per job                   $261,973    $197,282    $246,932
Hydraulic pumping capacity
Average HHP                                           255,500     225,500     225,500
Exit HHP                                              255,500     245,500     225,500
Capital expenditures                                  $17,618     $13,282      $3,501

The current quarter ended March 31, 2015, includes the results of Canyon's pressure-pumping business, as well as the results of Fraction.

In first quarter 2015, Canyon was able to remain relatively active with its core group of customers in both its pressure-pumping and fluid management divisions, even though industry activity across the WCSB was considerably lower in the quarter in response to the dramatic decline in commodity prices. In pressure pumping, the lower industry activity led to rapidly deteriorating pricing levels throughout the quarter, resulting in average first quarter 2015 pricing approximately 20 per cent lower than fourth quarter 2014. In fluid management, prices declined by 15 per cent to 20 per cent in first quarter 2015 versus fourth quarter 2014.

In first quarter 2015, consolidated revenues increased by 13 per cent to $155.6-million from $138.2-million in first quarter 2014, with the increase mostly attributable to the contribution from Fraction. Pressure-pumping revenue in first quarter 2015 was largely unchanged compared with first quarter 2014 as declining prices and a lower job count were offset by larger job sizes. The company did experience a 17-per-cent sequential decline in consolidated revenues in first quarter 2015 over fourth quarter 2014 principally due to the pricing degradation persisting throughout the quarter, as well as an early spring breakup.

The magnitude of the lower customer pricing more than offset any cost reductions gained by Canyon from suppliers, and as a result, profitability was impacted in the current quarter with consolidated earnings before interest, taxes, depreciation and amortization before share-based payments decreasing by 33 per cent to $18.3-million from $27.4-million in the comparable 2014 quarter.

Pressure-pumping services

Pressure-pumping revenues in first quarter 2015 were $138.2-million, unchanged from the $138.2-million earned in first quarter 2014 despite the dramatic curtailment in WCSB activity levels resulting from the significant decline in commodity prices since mid-2014. WCSB drilling rig utilization decreased by about 45 per cent in the current quarter compared with first quarter 2014, and by about 22 per cent from the activity levels recorded in fourth quarter 2014. The reduced industrywide activity led to immediate pressure on pricing, which began in January and continued through to an early spring breakup. The company estimates that first quarter 2015 pricing was about 20 per cent lower than levels reached in fourth quarter 2014 and about 10 per cent lower than first quarter 2014 pricing levels.

Although the job count in first quarter 2015 was lower at 620 compared with 890 in first quarter 2014, Canyon completed larger jobs as changing well designs have resulted in increased fracturing intensity on a per well basis in the form of more fractures per wellbore and/or larger fracture designs. This allowed Canyon's equipment fleet to remain quite active in first quarter 2015, until activity levels were cut short in the third week of March by an early spring breakup in contrast to first quarter 2014 when Canyon remained busy into early April. One of the main predictors of service intensity for pressure pumping is the average total length in metres per well. The industry experienced an increase of about 14 per cent in the total metres per well drilled in first quarter 2015 over first quarter 2014. In addition, proppant usage per stage has increased dramatically throughout 2014 with first quarter 2015 total proppant volumes pumped by Canyon increasing by 30 per cent compared with first quarter 2014. Also contributing to Canyon's increasing revenue per job was the increased use of Ottawa White sand, which is more expensive than domestic sand. In first quarter 2015, Ottawa White sand volumes pumped by Canyon's customers increased by 220 per cent and represented about 70 per cent of total sand pumped. Therefore, Canyon's average fracturing revenue per job increased by 33 per cent to $261,973 in first quarter 2015 from $197,282 in first quarter 2014 as the impact of larger job sizes more than offset pricing declines. Sequentially, average fracturing revenue per job declined by 20 per cent in the current quarter from fourth quarter 2014 levels mostly due to the impact of sharply reduced customer pricing. Pressure-pumping cash flow and profitability remain highly levered to changes in revenue due to the fixed-cost nature of the business. Since fourth quarter 2014, Canyon has been working with suppliers to reduce input costs, but these decreases have not been sufficient to offset the impact of the 20-per-cent decline in customer prices, which were effective early in the quarter. As a result, first quarter 2015 EBITDA before share-based payments expense from pressure pumping was $13.8-million, or 10 per cent of revenues, compared with $29.0-million or 21 per cent of revenues in the comparable 2014 quarter.

Fluid management services

For the three months ended March 31, 2015, Fraction contributed $17.4-million in revenue and $5.5-million in EBITDA before share-based payments expense, a 35-per-cent and a 66-per-cent increase, respectively, over the $12.9-million of revenue and $3.3-million of EBITDA recorded in fourth quarter 2014.

As previously reported, water access restrictions were lifted in December, 2014, allowing Fraction to gain larger fluid transfer and logistics projects late in fourth quarter 2014, and this resulted in a strong start to first quarter 2015. As a result, a number of large fluid transfer projects were completed in the current quarter. There were also a number of lease site fluid management projects that were started and are expected to continue through the second quarter. Activity declined in the latter portion of first quarter as large jobs were completed and operations slowed down for the annual seasonal breakup period.

Tank rental revenues were strong in the first half of the quarter, but were lower in the second half as pricing pressure took effect, given market conditions, and clients started to return tanks in preparation for breakup. In first quarter 2015, rental rates for fluid transfer equipment and tanks declined by approximately 15 per cent compared with fourth quarter 2014.

This division has built strong relationships with its customers through demonstrated expertise and efficiency in the area of fluid management. It is expected that its customers will continue to invest in their drilling programs and require its services during the current period of sharply reduced commodity prices. The division continues to aggressively bid on available projects and further integrate fluid management services with pressure-pumping services to provide customers with a comprehensive, bundled service solution.

Cost reduction measures

Since fourth quarter 2014, Canyon has been working diligently to reduce all operating and input costs in both the pressure-pumping and fluid management divisions, including chemicals, proppants, fuel, third party hauling and labour. To date, chemical costs have been reduced by about 10 to 15 per cent, and third party hauling rates have decreased by approximately 15 per cent with higher reductions applicable to standby rates. The cost of both Canadian- and U.S.-sourced proppants has been reduced by approximately 10 per cent. Concessions have been received from fuel suppliers over and above the favourable impact of lower oil prices while accommodation costs have been reduced by about 10 per cent. In the fluid management division, cost of material and hourly rates for subcontractors and temporary employees have been reduced by 10 per cent to 15 per cent. Canyon has reduced its permanent employee count in the pressure-pumping and fluid management divisions by 22 per cent and 15 per cent, respectively, in late March to match the anticipated reduced activity levels over the rest of the year. In addition, all remaining employees' salaries in both divisions have been rolled back between 5 per cent and 10 per cent with a 10-per-cent reduction of executive management salaries and directors fees. Canyon does not view the reduction of input costs as a one-time exercise and will continue to work with suppliers and customers to gain concessions and economies in the months ahead.

Dividend

The board of directors continuously reviews the long-term capital structure of the company and its corresponding dividend policy each fiscal quarter. At this time, the board has decided to take a cautious stance in the context of the continuing industry uncertainty and has determined that a 50-per-cent reduction to Canyon's dividend is prudent. Effective for the July, 2015, payment, Canyon's quarterly dividend will be 7.5 cents per common share. The reduction in the quarterly dividend payout will enable Canyon to preserve its industry-leading balance sheet and provide the company with additional financial flexibility to pursue organic growth prospects and asset acquisitions, should such attractive opportunities arise. The board will continue to regularly review the dividend payout in the context of the market for Canyon's services.

Revenues

Pressure-pumping revenues in first quarter 2015 were $138.2-million, unchanged from the $138.2-million earned in first quarter 2014 despite the dramatic curtailment in WCSB activity levels resulting from the significant decline in commodity prices since mid-2014. Jobs completed totalled 620 in first quarter 2015, down by 30 per cent from the 890 jobs completed in first quarter 2014, while average fracturing revenue per job increased by 33 per cent to $261,973 in first quarter 2015 from $197,282 in first quarter 2014 as the impact of larger job sizes offset pricing declines. The reduced industrywide activity led to immediate pressure on pricing commencing in January, which continued through to an early spring breakup. The company estimates that first quarter 2015 pricing was about 20 per cent lower than levels reached in fourth quarter 2014 and about 10 per cent lower than first quarter 2014 pricing levels. The lower pricing and lower job count in the current quarter were offset by larger job sizes to result in the pressure-pumping revenue remaining flat. In the current quarter, Canyon completed larger jobs as changing well designs have resulted in increased fracturing intensity on a per well basis in the form of more fractures per wellbore and/or larger fracture designs. Also contributing to the larger average revenue per job is the growing trend by customers to use more expensive Ottawa White sand rather than domestic sand. In first quarter 2015, Ottawa White sand volumes pumped by Canyon's customers increased by 220 per cent and represented about 70 per cent of total sand pumped compared with about 30 per cent in first quarter 2014.

Cost of services

Cost of services for the three months ended March 31, 2015, totalled $132,050 (2014: $114,579) and included materials, products, transportation and repair costs of $89,940 (2014: $77,724), employee benefits expense of $30,027 (2014: $27,481), and depreciation of property and equipment of $12,083 (2014: $9,374).

Materials, products, transportation and repair costs increased by 16 per cent to $89,940 in first quarter 2015 from $77,724 in first quarter 2014 mainly due to the increased proppant usage and in particular due to the increase in the quantity of more expensive Ottawa White sands purchased by customers, as previously discussed. Employee benefits expense has increased by 9 per cent to $30,027 in first quarter 2015 from $27,481 in first quarter 2014 mainly due to field staff additions throughout 2014 related to the increase in 24-hour operations. The increase in depreciation of property and equipment to $12,083 in first quarter 2015 from $9,374 in first quarter 2014 was mainly due to the addition of equipment to Canyon's fleet throughout 2014 and accelerated depreciation relating to the replacement of a number of pump components. In 2014, Canyon added 30,000 hydraulic horsepower of pumping capacity, coiled tubing equipment, transportation and logistics equipment, and nitrogen and cement and acid equipment, as well as storage tanks and water transfer equipment related to the fluid management division.

Administrative expenses

Administrative expenses for the three months ended March 31, 2015, totalled $5,775 compared with $4,912 in first quarter 2014 and included employee benefits expense of $3,242 (2014: $2,376) and share-based payments expense of $838 (2014: $438). The increase in employee benefits expense was mainly attributable to staff additions to the sales and technical services group in 2014. Administrative expenses also include depreciation of buildings and office equipment and amortization of intangibles of $532 (2014: $441). In addition, other administrative expenses totalled $1,163 in first quarter 2015 compared with $1,657 in first quarter 2014.

Earnings before interest, taxes, depreciation and amortization before share-based payments

In first quarter 2015, EBITDA before share-based payments decreased by 52 per cent to $13,811 from $28,956 in the comparable 2014 quarter. As previously discussed, lower customer pricing due to decreased industrywide activity levels more than offset input cost reductions in the period.

Revenues

The water management services business, acquired effective July 1, 2014, contributed $17,403 of revenues to Canyon in first quarter 2015. This compares with revenues of $12,876 recorded in the prior quarter. As discussed herein, water access restrictions in the northern regions of the WCSB were enacted in the latter half of the third quarter and continued to impact water transfer and fluid logistics revenues during the fourth quarter until December when the restrictions were lifted. As a result, Fraction experienced increased activity levels in first quarter 2015.

Cost of services

Cost of services for the three months ended March 31, 2015, totalled $11,985 and includes materials, products, transportation and repair costs of $5,765, employee benefits expense of $4,501, and depreciation of property and equipment of $1,719.

Administrative expenses

Administrative expenses for the three months ended March 31, 2015, totalled $3,140 and include employee benefits expense, depreciation of buildings and office equipment, and amortization of intangibles and other administrative expenses. Administrative expenses include $1,500 relating to the amortization of customer relationships and non-competition agreements pursuant to the acquisition of Fraction.

EBITDA before share-based payments

First quarter 2015 EBITDA before share-based payments totalled $5,514 in the fluid management services division, or 32 per cent of revenues. This is a 66-per-cent improvement over the $3,321 of EBITDA before share-based payments expense recorded in the prior quarter. As previously discussed, the lifting of water restrictions in December, 2014, led to increased activity in the current quarter.

Corporate

This segment consists of costs incurred to operate a public company, including corporate management, head office costs, corporate share-based payment expenses and professional fees.

Administrative expenses

Administrative expenses for the three months ended March 31, 2015, totalled $1,507 compared with $1,966 in first quarter 2014 and include employee benefits expense, share-based payments and other head office administrative expenses. The decrease in administrative expenses is mainly due to lower remuneration expenses.

Other items -- quarterly consolidated statement of operations

Finance costs and foreign exchange loss

Finance costs including interest on finance lease obligations and automobile loans totalled $533 in first quarter 2015 (2014: $181), with the increase attributable to the increase in loans and borrowings used to partially finance the company's 2014 capital program. In first quarter 2015, the company recorded a foreign exchange loss of $1,564 compared with $368 in first quarter 2014. The increase is due to the declining Canadian-dollar-versus-the-U.S.-dollar exchange rate during the current quarter mostly in relation to the purchase of U.S.-sourced proppants.

Income tax expense

At the expected combined income tax rate of 25 per cent, the loss before income tax for first quarter 2015 of $1,018 would have resulted in an income tax recovery of $255, compared with the actual income tax expense of $20. The increase in the actual income tax expense was due to the impact of non-deductible expenses.

EBITDA before share-based payments

In first quarter 2015, Canyon recorded consolidated EBITDA before share-based payments of $18,335, down 33 per cent from the comparable 2014 quarter. As previously discussed, the decreased EBITDA before share-based payments expense is due to significantly reduced customer pricing resulting from lower industrywide activity levels more than offsetting larger job sizes and input cost reductions realized in the current quarter.

(Loss) profit and comprehensive (loss) income and earnings (loss) per share

The aforementioned lower pricing resulted in a loss and comprehensive loss totalling $1,038 in first quarter 2015 compared with profit and comprehensive income of $11,850 in first quarter 2014.

Basic and diluted loss per share was two cents for the three months ended March 31, 2015, compared with basic and diluted earnings per share of 19 cents for the comparable 2014 quarter.

We seek Safe Harbor.

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