Canyon Services Group Inc. Reports First Quarter 2015

CALGARY, May 5, 2015 /CNW/ - Canyon Services Group Inc. ("Canyon" or the "Company") is pleased to announce its first quarter 2015 results.  The following results should be read in conjunction with the Management's Discussion and Analysis, the audited consolidated financial statements and notes of Canyon Services Group Inc. for the year ended December 31, 2014 and the Annual Information Form for the year ended December 31, 2014, which are available on SEDAR at www.sedar.com.

The current quarter includes the results of Canyon's pressure pumping business as well as the results of Fraction Energy Services Ltd., ("Fraction") a leading provider of fracturing fluid management, including water sourcing, transfer, wellsite 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 Q1 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 ("WCSB") 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.  Our strong balance sheet allows us to actively pursue growth opportunities.

• In Q1 2015, consolidated revenues increased by 13% to $155.6 million from $138.2 million in Q1 2014 with the increase attributable to the contribution from Fraction.  Pressure pumping revenue totaled $138.2 million in Q1 2015, unchanged from the $138.2 million earned in Q1 2014 with the reduced pricing and lower job count offset by larger job sizes. In Q1 2015, Fraction contributed $17.4 million in revenue, a 35% increase over the $12.9 million of revenue recorded in Q4 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% to 15% 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%.  Canyon reduced its permanent employee count in the pressure pumping and fluid management divisions by 22% and 15% respectively in late March to match the anticipated reduced activity levels over the remainder of the year.  In addition, all remaining employees' salaries in both divisions have been rolled back between 5% and 10% with a 10% reduction of executive management salaries and directors' fees. 

• On March 19, 2015, Canyon declared a quarterly dividend of $0.15 per common share, or $10.3 million, which was paid to shareholders on April 24, 2015.

OVERVIEW OF FIRST QUARTER 2014

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

In Q1 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 Q1 2015 pricing approximately 20% lower than Q4 2014.  In fluid management, prices declined by 15% to 20% in Q1 2015 vs Q4 2014.

In Q1 2015, consolidated revenues increased by 13% to $155.6 million from $138.2 million in Q1 2014, with the increase mostly attributable to the contribution from Fraction.  Pressure pumping revenue in Q1 2015 was largely unchanged compared to Q1 2014 as declining prices and a lower job count was offset by larger job sizes.  The Company did experience a 17% sequential decline in consolidated revenues in Q1 2015 over Q4 2014 principally due to the pricing degradation persisting throughout the quarter as well as an early spring break-up.

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 EBITDA before share-based payments (see Non-GAAP Measures) decreasing by 33% to $18.3 million from $27.4 million in the comparable 2014 quarter.

Pressure Pumping Services

Pressure pumping revenues in Q1 2015 were $138.2 million, unchanged from the $138.2 million earned in Q1 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% in the current quarter compared to Q1 2014, and by about 22% from the activity levels recorded in Q4 2014.  The reduced industry-wide activity led to immediate pressure on pricing which began in January and continued through to an early spring break-up.  We estimate that Q1 2015 pricing was about 20% lower than levels reached in Q4 2014 and about 10% lower than Q1 2014 pricing levels.

Although the job count in Q1 2015 was lower at 620 compared to 890 in Q1 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 Q1 2015, until activity levels were cut short in the third week of March by an early spring break-up in contrast to Q1 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% in the total metres per well drilled in Q1 2015 over Q1 2014.  In addition, proppant usage per stage has increased dramatically throughout 2014 with Q1 2015 total proppant volumes pumped by Canyon increasing by 30% compared to Q1 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 Q1 2015, Ottawa White sand volumes pumped by Canyon's customers increased by 220% and represented about 70% of total sand pumped.  Therefore, Canyon's average fracturing revenue per job increased by 33% to $261,973 in Q1 2015 from $197,282 in Q1 2014 as the impact of larger job sizes more than offset pricing declines.  Sequentially, average fracturing revenue per job declined by 20% in the current quarter from Q4 2014 levels mostly due to the impact of sharply reduced customer pricing.

Pressure pumping cash flow and profitability remains highly levered to changes in revenue due to the fixed cost nature of the business.  Since Q4 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% decline in customer prices which were effective early in the quarter.  As a result, Q1 2015 EBITDA before share-based payments expense from pressure pumping was $13.8 million, or 10% of revenues, compared to $29.0 million or 21% 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 (see Non-GAAP Measures), a 35% and 66% increase respectively over the $12.9 million of revenue and $3.3 million of EBITDA recorded in Q4 2014.

As previously reported, water access restrictions were lifted in December 2014 allowing Fraction to gain larger fluid transfer and logistics projects late in Q4 2014 and this resulted in a strong start to Q1 2015.  As a result, a number of large fluid transfer projects were successfully 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 Q1 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 Q1 2015, rental rates for fluid transfer equipment and tanks declined by approximately 15% compared to Q4 2014.

This division has built strong relationships with our customers through demonstrated expertise and efficiency in the area of fluid management.  It is expected that our customers will continue to invest in their drilling programs and require our 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 Q4 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%, and third party hauling rates have decreased by approximately 15% with higher reductions applicable to standby rates.  The cost of both Canadian and US sourced proppants has been reduced by approximately 10%.  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%.  In the fluid management division, cost of material and hourly rates for subcontractors and temporary employees have been reduced by 10% to 15%.  Canyon has reduced its permanent employee count in the pressure pumping and fluid management divisions by 22% and 15% respectively in late March to match the anticipated reduced activity levels over the remainder of the year.  In addition, all remaining employees' salaries in both divisions have been rolled back between 5% and 10% with a 10% 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 (the "Board") 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% reduction to Canyon's dividend is prudent.  Effective for the July 2015 payment, Canyon's quarterly dividend will be $0.075 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. 

Non-GAAP Measures

The Company's Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). Certain measures in this document do not have any standardized meaning as prescribed by IFRS and are considered Non-GAAP Measures.

EBITDA before share-based payments, funds from operations, adjusted profit (loss) and comprehensive income (loss) and adjusted per share amounts are not recognized measures under IFRS.  Management believes that in addition to profit (loss) and comprehensive income (loss), EBITDA before share-based payments, funds from operations and adjusted profit (loss) and comprehensive income (loss) are useful supplemental measures as they provide an indication of the results generated by the Company's business activities prior to consideration of how those activities are financed, amortized or taxed, as well as the cash generated by the Company's business activities without consideration of the timing of the monetization of non-cash working capital items.  Readers should be cautioned, however, that EBITDA before share-based payments, funds from operations and adjusted profit (loss) and comprehensive income (loss) and per share amounts should not be construed as an alternative to profit and comprehensive income determined in accordance with IFRS as an indicator of the Company's performance.  Canyon's method of calculating EBITDA before share-based payments, funds from operations and adjusted profit (loss) and comprehensive income (loss) may differ from other companies and accordingly, EBITDA before share-based payments, funds from operations and adjusted profit (loss) and comprehensive income (loss) may not be comparable to measures used by other companies.  Canyon calculates EBITDA before share-based payments as profit and comprehensive income for the year adjusted for depreciation and amortization, equity settled share-based payment transactions, gain or loss on sale of property and equipment, finance costs, foreign exchange gains and losses and income tax expense.  Adjusted profit (loss) and comprehensive income (loss) per share is calculated using the weighted average shares outstanding consistent with the calculation of earnings per share.  Reconciliations of these Non-GAAP Measures to the most directly comparable IFRS measures are outlined below.

The Company describes revenue less cost of services as gross profit (loss). 

EBITDA before share-based payments

Funds from Operations

Adjusted Profit (Loss) and Comprehensive Income (Loss)

QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS

Pressure Pumping Services

Revenues

Pressure pumping revenues in Q1 2015 were $138.2 million, unchanged from the $138.2 million earned in Q1 2014 despite the dramatic curtailment in WCSB activity levels resulting from the significant decline in commodity prices since mid-2014.  Jobs completed totaled 620 in Q1 2015, down by 30% from the 890 jobs completed in Q1 2014, while average fracturing revenue per job increased by 33% to $261,973 in Q1 2015 from $197,282 in Q1 2014 as the impact of larger job sizes offset pricing declines.  The reduced industry-wide activity led to immediate pressure on pricing commencing in January which continued through to an early spring break-up.  We estimate that Q1 2015 pricing was about 20% lower than levels reached in Q4 2014 and about 10% lower than Q1 2014 pricing levels.  The lower pricing and lower job count in the current quarter was 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 Q1 2015, Ottawa White sand volumes pumped by Canyon's customers increased by 220% and represented about 70% of total sand pumped compared to about 30% in Q1 2014.

Cost of services

Cost of services for the three months ended March 31, 2015 totaled $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% to $89,940 in Q1 2015 from $77,724 in Q1 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% to $30,027 in Q1 2015 from $27,481 in Q1 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 Q1 2015 from $9,374 in Q1 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, 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 totaled $5,775 compared to $4,912 in Q1 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 totaled $1,163 in Q1 2015 compared to $1,657 in Q1 2014. 

EBITDA before share-based payments (See Non-GAAP Measures)

In Q1 2015, EBITDA before share-based payments (see Non-GAAP Measures) decreased by 52% to $13,811 from $28,956 in the comparable 2014 quarter.  As previously discussed, lower customer pricing due to decreased industry-wide activity levels more than offset input cost reductions in the period. 

Fluid Management Services

Revenues

The water management services business, acquired effective July 1, 2014, contributed $17,403 of revenues to Canyon in Q1 2015.  This compares to revenues of $12,876 recorded in the prior quarter.  As discussed above, 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 Q1 2015.

Cost of services

Cost of services for the three months ended March 31, 2015 totaled $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 totaled $3,140 and includes 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 (See Non-GAAP Measures)

Q1 2015 EBITDA before share-based payments totaled $5,514 in the fluid management services division, or 32% of revenues.  This is a 66% 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 totaled $1,507 compared to $1,966 in Q1 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 include interest on finance lease obligations and automobile loans and totaled $533 in Q1 2015 (2014: $181), with the increase attributable to the increase in loans and borrowings used to partially fund the Company's 2014 capital program.  In Q1 2015 the Company recorded a foreign exchange loss of $1,564 compared to $368 in Q1 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%, the loss before income tax for Q1 2015 of $1,018 would have resulted in an income tax recovery $255, compared to 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 (See Non-GAAP Measures)

In Q1 2015, Canyon recorded consolidated EBITDA before share-based payments (see Non-GAAP Measures) of $18,335, down 33% 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 industry-wide 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 totaling $1,038 in Q1 2015 compared to profit and comprehensive income of $11,850 in Q1 2014.

Basic and diluted loss per share was $0.02 for the three months ended March 31, 2015 compared to basic and diluted earnings per share of $0.19 for the comparable 2014 quarter.

FORWARD-LOOKING STATEMENTS

This document contains certain forward-looking information and statements within the meaning of applicable securities laws.  The use of any of the words "expect", "anticipate", "continue", "estimate", "objective", "ongoing", "may", "will", "should", "believe", "plans" and similar expressions are intended to identify forward-looking information or statements.  In particular, but without limiting the foregoing, this document contains forward-looking information and statements pertaining to the following: future oil and natural gas prices; future results from operations; future liquidity and financial capacity and financial resources; future costs, expenses and royalty rates; future interest costs; future capital expenditures; future capital structure and expansion; the making and timing of future regulatory filings; and the Company's ongoing relationship with major customers.

The forward-looking information and statements contained in this document reflect several material factors and expectations and assumptions of the Company including, without limitation: that the Company will continue to conduct its operations in a manner consistent with past operations; the general continuance of current or, where applicable, assumed industry conditions; the continuance of existing (and in certain circumstances, the implementation of proposed) tax, royalty and regulatory regimes; certain commodity price and other cost assumptions; the continued availability of adequate debt and/or equity financing and cash flow to funds its capital and operating requirements as needed; and the extent of its liabilities.  The Company believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable but no assurance can be given that these factors, expectations and assumptions will prove to be correct.

The forward-looking information and statements included in this document are not guarantees of future performance and should not be unduly relied upon.  Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information or statements including, without limitation: changes in commodity prices; changes in the demand for or supply of the Company's services; unanticipated operating results; changes in tax or environmental laws, royalty rates or other regulatory matters; changes in the development plans of third parties; increased debt levels or debt service requirements; limited, unfavourable or a lack of access to capital markets; increased costs; a lack of adequate insurance coverage; the impact of competitors; reliance on industry partners; attracting and retaining skilled personnel and certain other risks detailed from time to time in the Company's public disclosure documents (including, without limitation, those risks identified in this document and the Company's Annual Information Form).

The forward-looking information and statements contained in this document speak only as of the date of the document, and none of the Company or its subsidiaries assumes any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws.

SOURCE Canyon Services Group Inc.