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Secure Energy Services Inc
Symbol SES
Shares Issued 309,868,588
Close 2022-07-27 C$ 6.08
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Secure Energy earns $54-million in Q2 2022

2022-07-27 09:27 ET - News Release

Mr. Rene Amirault reports

SECURE ENERGY REPORTS SECOND QUARTER RESULTS INCLUDING $67 MILLION IN REALIZED SYNERGIES

Secure Energy Services Inc. has released the corporation's operational and financial results for the three and six months ended June 30, 2022.

"We are extremely pleased with our strong financial performance in the second quarter of 2022, demonstrating the strength of our expanded business, our ongoing focus on managing costs and an overall improvement in our underlying markets," said Rene Amirault, president and chief executive officer of Secure. "Results were positively impacted by realized cost synergies from the Tervita transaction, which have progressed ahead of our expectations. Our operations also benefited from robust industry activity levels led by higher oil and gas prices, driving significant demand for our customer solutions.

"There is strong momentum throughout our operations. With our increased discretionary free cash flow generation capabilities and a strengthened balance sheet, we remain well positioned to meet our debt reduction targets, deliver on ESG initiatives, and, at the same time, capitalize on growth at existing facilities and favourable industry fundamentals.

"We are excited by the future of Secure. Using our technologies, network and best-in-class team to form new partnerships, we remain focused on helping our customers develop the highest ESG standards and lowest-cost structure in the world, ensuring we create sustainable energy and environmental solutions for many decades."

Financial and operational results

The following should be read in conjunction with the corporation's management's discussion and analysis for the three and six months ended June 30, 2022, and the consolidated financial statements and notes thereto for the three and six months ended June 30, 2022, which are both available on SEDAR.

Second quarter highlights:

  • Integration cost savings of $67-million realized -- achieved an incremental $14-million of annualized cost savings impacting adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) in the second quarter of 2022, increasing realized cost savings from $53-million to $67-million on an annual run-rate basis. As a result, the corporation has now achieved 89 per cent of the $75-million cost savings target in the first 12 months following completion of the Tervita transaction. The $14-million achieved in the quarter is mainly a result of a reduction of headcount and corporate overhead costs, and operational optimizations. In the three months ended June 30, 2022, $9-million of costs related to the transaction and integration of the legacy businesses were incurred of which $6-million was associated with the competition review process.
  • Revenue (excluding oil purchase and resale) of $355 million -- represents an increase of 203 per cent compared with the second quarter of 2021 with mid-stream infrastructure revenue (excluding oil purchase and resale) increasing by $115-million to $164-million and environmental and fluid management revenue increasing by $123-million to $191-million for the quarter. These increases were primarily due to additional revenue associated with the transaction and an increase in energy-related industry activity levels as benchmark oil and natural gas prices were strong in the quarter. Both reportable segments benefited from improved industry activity levels, driving incremental volumes at mid-stream infrastructure facilities and industrial landfills, and demand for drilling and completion-related services, underpinned by an increase in average active rig count of approximately 47 per cent. Higher crude oil pricing in the second quarter of 2022 also positively impacted recovered oil revenue and contributed to the increase in oil purchase and resale revenue, which increased by 336 per cent to $1.7-billion compared with the comparative 2021 period.
  • Net income attributable to shareholders of $54-million and 17 cents per share -- an increase of $67-million or 26 cents per basic share compared with the second quarter of 2021, as general industry conditions continued to strengthen. The increase was primarily driven by the impact of the transaction and lower depreciation, depletion and amortization (DD&A), partially offset by higher general and administrative (G&A) expenses, higher finance costs associated with debt assumed upon closing the transaction and a higher non-cash deferred tax expense.
  • Adjusted EBITDA of $127-million and 41 cents per basic share -- an increase of 310 per cent and 116 per cent compared with the second quarter of 2021, respectively, primarily due to contributions from the transaction and related synergies, demonstrating the strength and scale of the combined business. In addition, higher oil and natural gas prices resulted in improved energy market conditions and increased activity levels in a number of the corporation's operating areas, which led to higher processing and disposal volumes at the company's mid-stream infrastructure facilities and landfills and increased demand for services related to drilling and completion activity within the environmental and fluid management segment.
  • Adjusted EBITDA margin of 36 per cent -- increased from 26 per cent in the second quarter of 2021, due to the positive impact from the cost savings mentioned above and higher revenue contributing to improved fixed cost absorption, particularly in the service lines impacted by the increased drilling and completion activity.
  • Funds flow from operations of $80-million -- an increase of $63-million from the prior year comparative period, or 136 per cent per basic share, driven by the increase in adjusted EBITDA, partially offset by higher interest payments of $37-million in the quarter, including semi-annual interest coupon payments on the corporation's fixed debt.
  • Discretionary free cash flow of $66-million -- which was used primarily, in addition Secure's revolving credit facility, to purchase and settle $77-million (U.S.) aggregate principal amount of its 2025 senior secured 11 per cent notes, as well as to finance the corporation's quarterly dividend, transaction-related costs and growth capital expenditures. At June 30, 2022, Secure carried working capital of $199-million, an increase of $12-million in the quarter.
  • G&A expense before DD&A and share-based compensation as a percentage of revenue (excluding oil purchase and resale) of 8 per cent -- an improvement of 3 per cent compared with 11 per cent in the second quarter of 2021, driven by synergies related to the transaction and supported by increased activity levels.
  • Improved its total debt to EBITDA covenant ratio to 2.5 times -- adjusted EBITDA and cash generation was supported by an improved commodity pricing environment, increased industry activity and a limited amount of investment in working capital. The corporation's ability to repay debt was further aided as modest capital spending was required to support its business. The debt reduction is consistent with the company's current capital allocation objective to target lower debt levels and moves it closer to achieving its near-term debt targets.
  • Settled $77-million (U.S.) of its 11 per cent 2025 senior secured notes -- the corporation remains focused on improving its capital structure and as such, the corporation opportunistically repurchased $77-million (U.S.) aggregate principal amount of its 11 per cent 2025 senior secured notes in the quarter.
  • Liquidity of $298-million -- decreased by $92-million from March 31, 2022, primarily due to financing the repurchase of $77-million (U.S.) aggregate principal amount of 2025 senior secured notes.
  • As at June 30, 2022, the corporation had drawn $435-million aggregate principal amount on the revolving credit facility and a total of $108-million of letters of credit have been issued against Secure's credit facilities resulting in $298-million of liquidity (available capacity under Secure's credit facilities and cash on hand, subject to covenant restrictions).
  • Growth capital expenditures of $2-million -- related to the expansion of a water disposal facility which is backstopped by a commercial agreement with an existing customer at the facility.
  • Sustaining capital expenditures of $17-million -- related primarily to well and facility maintenance, landfill cell expansions, and asset integrity and inspection programs.
  • Declared dividends of $2-million -- representing 0.75 cent per common share for the quarter.

Outlook

During the second half of the year, the corporation expects the benchmark crude oil price will continue to fluctuate, supported by macroeconomic factors such as significant inflationary pressures, geopolitical risk premium due to the current war in Ukraine, as well as continued changes to the supply and demand outlook. Notwithstanding the fluctuation in the price of benchmark crude, the economics and producer cash flows remain robust, and therefore Secure expects strong energy industry activity in the second half of the year. The corporation will continue to benefit from its focus on cost control, realized synergies from the transaction and industry activity, including increased demand for drilling and completion services, incremental facility volumes, increased recovered oil revenue, and crude oil marketing opportunities.

During the second half of 2022, Secure expects to see the following:

  • Completion of the $75-million in synergies and cost savings. In the 12 months since the transaction, Secure has realized $67-million or 89 per cent of synergies impacting adjusted EBITDA on an annual run-rate basis. It expects to execute on the remaining $8-million of administrative and operational synergies by the end of this year. The operational synergies will contribute a partial benefit in 2022 with the full run-rate of $75-million cost savings in 2023. Additional savings through initiatives such as improving the company's capital structure as well as minimizing sustaining capital by managing underutilized assets are expected to provide incremental discretionary free cash flow beyond its $75-million cost savings target that impact adjusted EBITDA.
  • Increased utilization at its mid-stream processing facilities as higher drilling, completion and production volumes from increased activity levels require additional treating, processing, terminalling and disposal. The corporation has significant capacity to increase facility throughput and disposal with minimal incremental fixed costs or additional capital. Higher drilling and completion activity is expected to continue to have a positive impact on Secure's drilling and production services business within the environmental and fluid management segment. In addition, it has been able to pass through price increases to offset some of the cost pressures it is currently experiencing due to higher inflation.
  • Increased volumes at the corporation's industrial landfills and industrial waste facilities as both industry activity and abandonment, remediation, and reclamation activity continue to trend higher as a result of the Canadian federal government's $1.7-billion stimulus package to help fund the closure and reclamation of orphan and inactive wells within Alberta, Saskatchewan and British Columbia, which is scheduled to end in the first quarter of 2023. In addition, there is direction from the Alberta Energy Regulator requiring energy producers and other companies that have retirement obligations related to inactive (non-producing) wells and facilities to spend an amount each year toward addressing those obligations (which amount has recently been increased from $422-million to $700-million for 2023), and a similar program initiated by the Saskatchewan provincial government is expected to begin in 2023. Secure anticipates policy changes to increase abandonment, remediation and reclamation activity to positively impact all of Secure's Canadian operations, particularly within the environmental and fluid management segment as a result of higher demand for environmental site assessments, on-site abandonment, remediation and reclamation management and decommissioning work.

One of Secure's key priorities remains debt repayment. As clearly demonstrated in the first half of the year, it expects to use discretionary free cash flow and any proceeds from non-core asset sales to reduce debt further. It will also continue to look for opportunities to improve its capital structure with the ultimate goals of reducing interest costs and increasing flexibility. As it achieves its leverage targets, in addition to strengthening its balance sheet, Secure is committed to allocating capital toward increased shareholder returns as an important element of its capital allocation framework, as well as incremental organic growth opportunities that provide stable cash flow. These shareholder returns may include further debt repayment, increased dividends, share buybacks or a combination thereof. Secure will continue to work diligently to manage inflationary costs that will likely continue through the year, including purchasing materials in bulk, working with customers, and negotiating with suppliers or finding alternative suppliers.

Secure expects sustaining capital in 2022 to be approximately $55-million, including capital expenditures related to landfill expansions of approximately $15-million. It expects to incur approximately $45-million of growth capital in 2022 which will be focused on projects that contain long-term agreements and tie in to existing infrastructure that strategically aligns with the company's customer needs as it both reduces costs and lowers emissions. In the first half of 2022, Secure spent $27-million in maintenance capital and $5-million in growth capital. Assisting customers to recycle and reduce wherever possible continues to be part of its long-term strategy and other opportunities such as carbon dioxide infrastructure will continue to be evaluated as part of the company's environmental, social and governance (ESG) goals and business strategy.

Summary

In closing, industry fundamentals remain favourable and provide support for Secure's business outlook in the second half of 2022. The company's priorities are to achieve the remaining $8-million of run-rate synergies impacting adjusted EBITDA, continue to optimize operations and realize cost savings between business units, and use its discretionary free cash flow to strengthen its balance sheet by further reducing debt. With its efforts to date and the continuing hard work of its employees, Secure believes it is well positioned to achieve all of these priorities in the second half of the year.

Financial statements and MD&A

The corporation's consolidated financial statements and notes thereto and MD&A for the three and six months ended June 30, 2022, are available on Secure's website and on SEDAR.

Second quarter 2022 conference call

Secure will host a conference call on Wednesday, July 27, 2022, at 9 a.m. MDT to discuss the second quarter results. To participate in the conference call, dial 416-764-8650 or toll-free 888-664-6383. To access the simultaneous webcast, please visit the Secure website. For those unable to listen to the live call, a taped broadcast will be available on the Secure website and, until midnight MDT on Wednesday, Aug. 3, 2022, by dialling 888-390-0541 and using the pass code 786436 followed by the pound key.

About Secure Energy Services Inc.

Secure is a publicly traded energy infrastructure and environmental business listed on the Toronto Stock Exchange. Secure provides industry-leading mid-stream infrastructure and environmental and fluid management to predominantly upstream oil and natural gas companies operating in Western Canada and certain regions in the United States. Secure's mid-stream infrastructure business segment includes a network of mid-stream processing and storage facilities, crude oil and water pipelines, and crude-by-rail terminals located throughout key resource plays in Western Canada, North Dakota and Oklahoma. Secure's mid-stream infrastructure operations generate cash flows from oil production processing and disposal, produced water disposal, and crude oil storage, logistics and marketing. Secure's environmental and fluid management business segment includes a network of industrial landfills, hazardous and non-hazardous waste management and disposal, on-site abandonment, environmental solutions for site remediation and reclamation, bio-remediation and technologies, waste treatment and recycling, emergency response, rail services, metal recycling services, as well as fluid management for drilling, completion and production activities.

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