Mr.
Alex MacAusland reports
WESTERN ENERGY SERVICES CORP. RELEASES THIRD QUARTER 2016 FINANCIAL AND OPERATING RESULTS
Western Energy Services Corp. has released its third-quarter 2016 financial and operating results. Additional information relating to the Company, including the Company's financial statements and management's discussion and analysis as at and for the three and nine months ended September 30, 2016 and 2015 will be available on SEDAR at www.sedar.com. Non-International Financial Reporting Standards ("Non-IFRS") measures and abbreviations for standard industry terms are included in this press release. All amounts are denominated in Canadian dollars (CDN$) unless otherwise identified.
Third Quarter 2016 Operating Results:
-
-- Third quarter Operating Revenue decreased by $13.7 million (or 31%) to
$30.7 million in 2016 as compared to $44.4 million in 2015. In the
contract drilling segment, Operating Revenue totaled $20.2 million in
the third quarter of 2016 as compared to $30.9 million in the third
quarter of 2015; while in the production services segment, Operating
Revenue totaled $10.5 million for the three months ended September 30,
2016 as compared to $13.4 million in the same period of the prior year.
While West Texas Intermediate ("WTI") prices recovered somewhat near the
end of the third quarter of 2016, Operating Revenue continued to be
impacted by low commodity prices, as both crude oil and natural gas
prices were lower year over year. Operating Revenue in the contract
drilling and production services segments were impacted by lower
utilization and pricing as described below:
- -- Drilling rig utilization - Operating Days (or "Drilling Rig
Utilization") in Canada was 20% in the third quarter of 2016
compared to 26% in the third quarter of 2015, reflecting a 600 basis
points ("bps") decrease. Third quarter 2016 Drilling Rig Utilization
represented a premium of 300 bps to the Canadian Association of
Oilwell Drilling Contractors ("CAODC") industry average of 17%,
consistent with the 200 bps premium to the industry average realized
in the third quarter of 2015. Despite the premium relative to the
CAODC average in the third quarter of 2016, weather negatively
impacted Drilling Rig Utilization. While 940 Operating Days were
worked in the period, 227 Operating Days were lost relating to
weather delays. Higher than average precipitation levels impact the
Company's ability to move drilling rigs and work in certain
locations. Additionally, increased competition in the third quarter
of 2016 resulted in downward pricing pressure on all drilling rig
classes, which reduced Operating Revenue per Revenue Day in the
contract drilling segment in Canada by 28%, as compared to the third
quarter of 2015;
-
-- In the United States, the Company had two drilling rigs operating
during the quarter, one of which was working on a long term
contract, resulting in Drilling Rig Utilization of 32% in the third
quarter of 2016, as compared to 19% in the same period of the prior
year. Operating Revenue per Revenue Day in the United States
decreased by 37% in the third quarter of 2016 due to downward
pricing pressure, as well as the renegotiation of the day rate and
extending the term on the long term contract; and
- -- Well servicing utilization of 24% in the third quarter of 2016
compared to 26% in the same period of the prior year. Reduced
activity, due to the low commodity price environment and
unseasonably wet weather in the quarter, coupled with a 15% decrease
in well servicing hourly rates, due to pricing pressure in all
areas, resulted in a $2.4 million (or 22%) decrease in well
servicing Operating Revenue in the period.
-
-- Third quarter Adjusted EBITDA decreased by $7.2 million to $0.9 million
in 2016 as compared to $8.1 million in the third quarter of 2015. The
year over year change in Adjusted EBITDA is due to lower utilization and
pricing in both the contract drilling and production services segments,
offset partially by cost reduction measures, including a reduced
headcount year over year, wage reductions to all employees and other
cost control measures.
-
-- Administrative expenses, excluding depreciation and stock based
compensation, in the third quarter of 2016 decreased by $1.4 million (or
23%) to $4.8 million as compared to $6.2 million in the third quarter of
2015. The decrease in administrative expenses is due to a reduced
employee headcount, a 10% rollback to all salaried employee wages and
directors' fees implemented in the first quarter of 2016, as well as
additional cost control measures.
-
-- The Company incurred a net loss of $17.0 million in the third quarter of
2016 (a loss of $0.23 per basic common share) as compared to a net loss
of $76.8 million in the same period in 2015 (a loss of $1.04 per basic
common share). The change in the third quarter net loss in 2016,
relative to the third quarter of 2015, can be attributed to the
following:
-
-- A prior year goodwill impairment loss of $71.3 million recorded in
the third quarter of 2015;
- and
-- A $3.8 million decrease in income tax expense due to lower taxable
income in the third quarter of 2016.
-
-- Offsetting the above mentioned items are the following:
-
-- An increase of $7.8 million in depreciation expense due to the
Company changing from unit of production to straight line
depreciation for drilling and well servicing rigs; and
-
-- A $7.2 million decrease in Adjusted EBITDA due to lower utilization
and pricing in both the contract drilling and production services
segments.
-
-- Third quarter 2016 capital expenditures of $0.7 million included $0.3
million of expansion capital and $0.4 million of maintenance capital. In
total, capital spending in the third quarter of 2016 decreased by 86%
from the $4.8 million incurred in the third quarter of 2015, as the
Company is only incurring necessary maintenance capital to preserve cash
during the current slowdown in oilfield service activity.
Year to Date Operating Results
-
-- Operating Revenue for the nine month period ended September 30, 2016
decreased by $100.7 million (or 57%) to $75.3 million in 2016, as
compared to $176.0 million in the same period of the prior year. In the
contract drilling segment, Operating Revenue totaled $49.9 million for
the nine month period ended September 30, 2016 compared to $123.3
million in the same period of the prior year; while in the production
services segment, year to date Operating Revenue totaled $25.4 million
compared to $53.0 million in the same period of the prior year.
Operating Revenue continued to be impacted by low commodity prices, as
both crude oil and natural gas prices were lower year over year.
Operating Revenue in the contract drilling and production services
segments for the nine month period ended September 30, 2016 were
impacted by lower utilization and pricing as described below:
- -- Drilling Rig Utilization in Canada of 14% for the nine month period
ended September 30, 2016, compared to 28% for the nine month period
ended September 30, 2015, reflects a 50% decrease. Drilling Rig
Utilization on a year to date basis in 2016 represented a discount
of 100 bps to the CAODC industry average of 15%, as compared to the
400 bps premium to the CAODC industry average realized in the nine
month period ended September 30, 2015. The change in the Company's
utilization relative to the CAODC industry average is partially due
to a number of Western's customers who typically have substantial
drilling programs, significantly cutting their capital spending in
2016. Additionally, changes in the industry rig mix, as competitors
continue to decommission older and less competitive rigs in the
Western Canadian Sedimentary Basin ("WCSB"), and add rigs that
directly compete with Western's drilling rig fleet, impacts
Western's relative utilization as compared to the CAODC industry
average. Lower activity and increased competition in the nine month
period ended September 30, 2016 resulted in downward pricing
pressure on all drilling rig classes, which reduced Operating
Revenue per Revenue Day in the contract drilling segment in Canada
by 28%, as compared to the same period of 2015;
-
-- In the United States, Drilling Rig Utilization of 22% for the nine
months ended September 30, 2016, compared to 32% in the same period
of the prior year. Operating Revenue per Revenue Day in the United
States decreased by 23% in the nine months ended September 30, 2016
due to renegotiating the day rate and extending the term on a long
term contract, coupled with pricing pressure on spot market rates;
and
-
-- Well servicing utilization of 17% for the nine months ended
September 30, 2016 compared to 31% in the same period of the prior
year. Reduced activity as well as a 19% reduction in well servicing
hourly rates, due to pricing pressure in all areas, resulted in a
$24.6 million (or 55%) decrease in well servicing Operating Revenue
in the period.
-
-- Adjusted EBITDA for the nine months ended September 30, 2016 decreased
by $50.7 million to $2.3 million, as compared to $53.0 million for the
nine months ended September 30, 2015. The year over year decrease in
Adjusted EBITDA is due to lower utilization and pricing in both the
contract drilling and production services segments, offset by cost
reduction measures, including a reduced headcount, wage reductions to
all employees and other cost control measures.
-
-- Year to date administrative expenses, excluding depreciation and stock
based compensation, for the nine month period ended September 30, 2016
decreased by $4.6 million (or 24%) to $15.0 million as compared to $19.6
million in the same period of the prior year. The decrease in
administrative expenses is due to a reduced employee headcount, a 10%
rollback to all salaried employee wages and directors' fees implemented
in the first quarter of 2016, coupled with additional cost control
measures.
-
-- As a result of the Company's review of estimated useful lives and
methodology for depreciating its drilling and well service rig fleet and
related equipment, effective April 1, 2016, Western changed the method
for depreciating its drilling and well service rigs and related
equipment from unit of production to straight line and changed certain
estimates related to useful lives and salvage values. The change in
depreciation methodology reflects the technological developments within
the industry. The Company expects that straight line depreciation will
better reflect the future economic benefit related to these assets,
which are expected to depreciate over time instead of on a unit of
production basis. Additionally, the change will result in idle or
underutilized assets being depreciated more quickly in periods of low
activity, better reflecting the cyclical nature of the oilfield service
industry. These adjustments were applied prospectively and resulted in
an increase of approximately $8.6 million and $22.1 million
respectively, of additional depreciation expense for the three and nine
months ended September 30, 2016 over what would have been expensed had
the previous assumptions using the unit of production methodology
continued to be used in the periods. The estimated additional
depreciation expense for the year ending December 31, 2016 from this
change is expected to be approximately $29.1 million.
-
-- During the second quarter of 2016, the Company decommissioned one of its
Cardium class drilling rigs, resulting in a loss on asset
decommissioning of $5.2 million, and as a result at September 30, 2016
Horizon had a fleet of 51 drilling rigs.
-
-- The Company incurred a net loss of $47.5 million for the nine months
ended September 30, 2016 (a loss of $0.64 per basic common share) as
compared to a net loss of $74.1 million for the same period in 2015 (a
loss of $1.00 per basic common share). The change in net loss in 2016
can be attributed to the following:
-
-- A prior year goodwill impairment loss of $71.3 million recorded in
the third quarter of 2015; and
- -- A $25.5 million decrease in income tax expense due to lower taxable
income for the nine months ended September 30, 2016, along with the
impact of the Alberta corporate tax rate increase in 2015, which
increased income tax expense in the prior period by approximately
$6.0 million.
-
-- Offsetting the above mentioned items are the following:
-- A $50.7 million decrease in Adjusted EBITDA due to lower utilization
and pricing in both the contract drilling and production services
segments;
-- An increase of $12.2 million in depreciation expense due to the
Company changing from unit of production to straight line
depreciation for drilling and well servicing rigs in the second
quarter of 2016;
-- Losses on asset decommissioning of $5.2 million in the contract
drilling segment recorded in the second quarter of 2016; and
-- A $2.0 million increase in finance costs, due to lower capitalized
interest as a result of the completion of the 2014 rig build program
in the prior period.
-
-- Year to date capital expenditures of $2.0 million included $0.9 million
of expansion capital and $1.1 million of maintenance capital. In total,
capital spending for the nine months ended September 30, 2016 decreased
by 93% from the $30.3 million incurred in the same period of 2015, as
the Company is only incurring necessary maintenance capital to preserve
cash during the current slowdown in oilfield service activity.
-
-- On April 27, 2016, the Company amended the covenants and elected to
reduce its syndicated revolving credit facility (the "Revolving
Facility") from $175.0 million to $40.0 million and reduced its
previously uncommitted operating demand revolving loan of $20.0 million
to a committed operating line (the "Operating Facility") totaling $10.0
million. Western's decision to reduce its Revolving and Operating
Facilities (the "Credit Facilities") is estimated to save the Company
$1.5 million in standby fees annually. On July 25, 2016, the Company
added a lender to its syndicated Revolving Facility and increased the
amount available by $10.0 million to $50.0 million, from $40.0 million
previously.
Selected Financial Information
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(stated in thousands, except share and per share amounts)
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Three months ended Sept 30 Nine months ended Sept 30
Financial
Highlights 2016 2015Change 2016 2015 Change
----------------------------------------------------------------------------
Revenue 32,485 46,959 (31%) 79,312 184,846 (57%)
Operating
Revenue(1) 30,665 44,350 (31%) 75,258 176,027 (57%)
Gross Margin(1) 5,685 14,285 (60%) 17,255 72,579 (76%)
Gross Margin as a
percentage of
Operating Revenue 19% 32% (41%) 23% 41% (44%)
Adjusted EBITDA(1) 896 8,080 (89%) 2,269 52,972 (96%)
Adjusted EBITDA as
a percentage of
Operating Revenue 3% 18% (83%) 3% 30% (90%)
Cash flow from
operating
activities 909 (530)(272%) 17,958 79,816 (78%)
Capital
expenditures 651 4,752 (86%) 1,995 30,303 (93%)
Net loss (16,973) (76,816) (78%) (47,464) (74,129) (36%)
-basic net loss
per share (0.23) (1.04) (78%) (0.64) (1.00) (36%)
-diluted net loss
per share (0.23) (1.04) (78%) (0.64) (1.00) (36%)
Dividends declared - 5,526(100%) - 16,710 (100%)
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(1) See "Non-IFRS measures" included in this press release.
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Three months ended Sept 30 Nine months ended Sept 30
Operating
Highlights 2016 2015Change 2016 2015 Change
----------------------------------------------------------------------------
Contract Drilling
Canadian
Operations:
Contract drilling
rig fleet:
-Average 51 50 2% 52 49 6%
-End of period 51 52 (2%) 51 52 (2%)
Operating Revenue
per Revenue Day(1) 15,256 21,135 (28%) 17,206(3) 23,815 (28%)
Operating Revenue
per Operating
Day(1) 17,017 23,220 (27%) 19,224(3) 26,221 (27%)
Operating Days(1) 940 1,176 (20%) 1,959 3,793 (48%)
Drilling rig
utilization -
Revenue Days(1) 22% 28% (21%) 15% 31% (52%)
Drilling rig
utilization -
Operating Days(1) 20% 26% (23%) 14% 28% (50%)
CAODC industry
average
utilization(1)(2) 17% 24% (29%) 15% 24% (38%)
United States
Operations:
Contract drilling
rig fleet:
-Average 5 5 - 5 5 -
-End of period 5 5 - 5 5 -
Operating Revenue
per Revenue Day
(US$)(1) 18,967 30,260 (37%) 22,515 29,140(4) (23%)
Operating Revenue
per Operating Day
(US$)(1) 22,246 32,341 (31%) 25,923 32,967(4) (21%)
Operating Days(1) 145 86 69% 306 442 (31%)
Drilling rig
utilization -
Revenue Days(1) 37% 20% 85% 26% 37% (30%)
Drilling rig
utilization -
Operating Days(1) 32% 19% 68% 22% 32% (31%)
Production Services
Well servicing rig
fleet:
-Average 66 66 - 66 66 -
-End of period 66 66 - 66 66 -
Service Rig
Operating Revenue
per Service
Hour(1) 603 712 (15%) 646 799 (19%)
Service Hours(1) 14,335 15,565 (8%) 31,123 55,873 (44%)
Service rig
utilization(1) 24% 26% (8%) 17% 31% (45%)
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(1) See "Non-IFRS measures" included in this press release.
(2) Source: The Canadian Association of Oilwell Drilling Contractors
("CAODC"). The CAODC industry average is based on Operating Days divided by
total available days.
(3) Excludes shortfall commitment revenue from take or pay contracts of $1.8
million for the nine months ended September 30, 2016.
(4) Excludes shortfall commitment and standby revenue from take or pay
contracts of US$4.5 million for the nine months ended September 30, 2015.
Western is an oilfield service company focused on three core business lines: contract drilling, well servicing and oilfield rental equipment services. Western provides contract drilling services through its division, Horizon Drilling ("Horizon") in Canada, and its wholly owned subsidiary, Stoneham Drilling Corporation ("Stoneham") in the United States ("US"). On December 28, 2015, Western wound up its partnership, Western Energy Services Partnership (the "Partnership"), and rolled all of the Partnership's assets into IROC Drilling and Production Services Corp., which then changed its name to Western Production Services Corp. ("Western Production Services"). As a result, Western now provides well servicing operations in Canada through Western Production Services' division, Eagle Well Servicing ("Eagle") and oilfield rental equipment services in Canada through Western Production Services' division, Aero Rental Services ("Aero"). Financial and operating results for Horizon and Stoneham are included in Western's contract drilling segment, while Eagle and Aero's financial and operating results are included in Western's production services segment.
Western currently has a drilling rig fleet of 56 rigs specifically suited for drilling horizontal wells of increased complexity. Western is the sixth largest drilling contractor in Canada with a fleet of 51 rigs operating through Horizon. Of the Canadian fleet, 24 are classified as Cardium class rigs, 19 as Montney class rigs and eight as Duvernay class rigs. As compared to the Cardium classified rigs, the Montney class rigs have a larger hookload, while the Duvernay class rigs have the largest hookload allowing the rig to support more drill pipe downhole. Additionally, Western has five Duvernay class triple drilling rigs deployed in the United States operating through Stoneham. Western is also the fourth largest well servicing company in Canada with a fleet of 66 rigs operating through Eagle. Western's oilfield rental equipment division, which operates through Aero, provides oilfield rental equipment for hydraulic fracturing services, well completions and production work, coil tubing and drilling services.
Crude oil and natural gas prices impact the cash flow of Western's customers, which in turn impacts the demand for Western's services. Overall performance of the Company for the three and nine months ended September 30, 2016 continued to be impacted by the low crude oil and natural gas price environment. WTI on average remained relatively constant in the third quarter of 2016 as compared to the second quarter of 2016, decreasing by 1%, and was 3% and 19% lower for the three and nine months ending September 30, 2016 respectively, as compared to the same periods in the prior year. Canadian natural gas prices, such as AECO, increased significantly quarter over quarter, increasing on average by 70% from the second quarter of 2016 to the third quarter of 2016. However AECO remained 18% and 33% lower for the three and nine months ended September 30, 2016 respectively, as compared to the same periods of the prior year. The following table summarizes average crude oil and natural gas prices, as well as average foreign exchange rates for the three and nine months ended September 30, 2016 and 2015.
The significant reduction in commodity prices has led to a corresponding decrease in the demand for oilfield services in both Canada and the United States. The CAODC reported that for drilling in Canada, the total number of Operating Days in the WCSB decreased approximately 38% and 43% respectively, for the three and nine months ended September 30, 2016, as compared to the three and nine months ended September 30, 2015. Similarly, as reported by Baker Hughes Incorporated, the number of active drilling rigs in the United States decreased approximately 45% and 54% for the three and nine months ended September 30, 2016 respectively, as compared to the same periods in the prior year.
Outlook
Currently, 15 of Western's drilling rigs are operating and three of Western's 56 drilling rigs (or 5%) are under long term take or pay contracts, with two of these contracts expected to expire in 2017, and one expected to expire in 2018. These contracts each typically generate between 250 and 350 Revenue Days per year.
Western's capital budget for 2016 of $7 million remains unchanged, with $3 million allocated for expansion capital and $4 million for maintenance capital. Western believes the 2016 capital budget provides a prudent use of cash resources and will allow it to maintain its premier drilling and well servicing rig fleets, while remaining responsive to customer requirements. Western will continue to manage its operations in a disciplined manner and make any required adjustments to its capital program as customer demand changes.
Since hitting 10 year lows in the first quarter of 2016, commodity prices, while remaining well below previous highs, have improved significantly, particularly since August 2016. As such, North American drilling rig counts appear to have bottomed out and the Company is expecting improved year over year activity levels in the fourth quarter of 2016. However, the Company expects pricing pressure will continue to be challenging as activity levels begin to recover. As at September 30, 2016, the Company had 16 drilling rigs operating in Canada and the United States, representing combined utilization of 29%; since that time, activity has remained steady and at October 25, 2016, the Company has 15 drilling rigs operating in Canada and the United States, with a full complement of experienced crews. Lower than normal activity levels and pricing pressure will continue to impact Western's Adjusted EBITDA and cash flow from operating activities if low commodity prices persist. As discussed, the Company has taken a proactive approach to reducing administrative and fixed overhead costs including reducing fixed headcount since the beginning of 2015 by a third and implementing a 10% companywide wage rollback to salaried employees and directors' fees in the first quarter of 2016, as well as reducing various other office related costs. In addition, Western's variable cost structure, the previously announced suspension of the Company's quarterly dividend and a prudent capital budget will aid in preserving balance sheet strength. In addition to $47.0 million in cash and cash equivalents at September 30, 2016, Western has $60.0 million undrawn on the Company's Credit Facilities, which do not mature until December 17, 2018 and no principal repayments due on the $265.0 million senior unsecured notes (the "Senior Notes") until they mature on January 30, 2019.
Oilfield service activity in Canada will be impacted by the development of resource plays in Alberta and northeast British Columbia including those related to liquefied natural gas projects, increased crude oil transportation capacity through rail and pipeline development and foreign investment into Canada. Currently, the largest challenges facing the oilfield service industry are customer spending constraints as a result of lower commodity prices and the increasing challenge of staffing field crews, particularly in the well servicing division. Western's view is that its modern drilling and well servicing rig fleets, reputation, and disciplined cash management provide a competitive advantage which will enable the Company to manage through the current slowdown in oilfield service activity.
2016 Third Quarter Results Conference Call and Webcast
Western has scheduled a conference call and webcast to begin at 10:00 a.m. MDT (12:00 p.m. EDT) on Wednesday, October 26, 2016.
The conference call dial-in number is 1-800-769-8320.
A live webcast of the conference call will be accessible on Western's website at www.wesc.ca by selecting "Investors", then "Webcasts". Shortly after the live webcast, an archived version will be available for approximately 14 days.
An archived recording of the conference call will also be available approximately one hour after the completion of the call until November 9, 2016 by dialing 1-800-408-3053 or 905-694-9451, passcode 7725844.
We seek Safe Harbor.
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