CALGARY, ALBERTA — (Marketwire) — 03/06/13 — Essential Energy Services Ltd. (TSX: ESN) (“Essential” or the “Company”) announces fourth quarter EBITDA(1) of $22.4 million compared to $31.7 million in the fourth quarter of 2011. For 2012, EBITDA(1) was $74.3 million compared to $73.7 million for 2011. After a slower third quarter, activity and earnings improved in the fourth quarter primarily due to the performance of the Canadian well servicing operations. Long-term debt at December 31, 2012 was $35.6 million.
The acquisition of Technicoil Corporation (“Technicoil” or the “Technicoil Acquisition”) on May 31, 2011 impacts the 2012 fiscal year comparison to the year ended December 31, 2011. The results for Technicoil are not included for January to May of 2011.
2012 HIGHLIGHTS – ESSENTIAL
Operating Highlights for Fourth Quarter 2012
Operating Highlights for 2012 Year
Business Strategy Highlights
Management further refined the operating, geographical and financial focus of the Company by the following activities:
Capital Spending Highlights
2012 capital spending was focused on expanding the service capabilities and depth capacity of Essential–s coil well service and service rig fleets. Total 2012 capital spending was $51.8 million (consisting of $38.2 million in growth capital and $13.6 million in maintenance capital). Essential experienced delivery delays with equipment manufacturers resulting in $11.2 million of planned 2012 capital spending being deferred to 2013. Essential continues to focus on investing in high demand assets in addition to maintaining and enhancing its existing fleet. During the fourth quarter, Essential commissioned one conventional deep coil tubing rig, two fluid pumpers and three nitrogen pumpers.
SALE PROCESS FOR COLOMBIAN OPERATIONS
Essential is seeking buyers for its Colombian operations. The decision comes after almost two years of operations in Colombia as inconsistent utilization has hindered financial performance. The two rod rigs and the rod rig accelerator are currently under contracts that expire in May 2013 and June 2013. Essential will continue to operate these assets until the contracts expire. Essential does not intend to operate any of the other equipment while it seeks a buyer.
For 2012, Essential reported a net loss related to Colombian operations of $8.9 million, including the revaluation of assets. This is detailed under “Discontinued Operations”.
In late 2010, Essential sent to Colombia a small fleet of primarily shallow-focused well servicing equipment that was underutilized in Canada. In the second quarter of 2011, Essential commenced operations in the mid-Magdalena basin. The Company currently has two coil tubing rigs, two nitrogen pumpers, two service rigs, two rod rigs, one rod rig accelerator and support equipment in Colombia.
The operations in Colombia are immaterial to Essential–s primary focus on well servicing in the Western Canadian Sedimentary Basin with coil tubing, service rigs and downhole tools and rentals.
The plan to sell the Colombia operations resulted in various changes to the presentation of financial information for the current year and comparative periods. The operating results and cash flows from continuing operations do not include the results of the Colombian operations. Operating results for the Colombian operations have been reclassified as discontinued operations and cash flows have been reclassified as net cash flows incurred by discontinued operations.
INDUSTRY OVERVIEW
During the year, the Canadian oil and gas industry faced uncertainty surrounding macroeconomic factors in the United States and Europe, volatile crude oil prices and increasing crude oil price differentials. During 2012, the price differential for Western Canadian Select (“WCS”) crude oil compared to the West Texas Intermediate (“WTI”) benchmark fluctuated between US$14/bbl at the beginning of the year to US$42/bbl in December, primarily due to distribution and pipeline constraints. These factors contributed to exploration and production (“E&P”) companies deferring or curtailing 2012 capital spending programs which reduced activity in the WCSB.
Well service activity in the WCSB continues to be driven by horizontal drilling, completion and stimulation of oil and liquids-rich natural gas plays. The industry continues to focus on horizontal wells which typically require more investment capital and increased rig time per well due to their depth and complexity compared to conventional vertical wells.
Drilling rig utilization during 2012, as reported by the Canadian Association of Oilwell Drilling Contractors (“CAODC”), was below the 3 year average utilization and well below 2011 utilization in the latter part of the year due to the industry slowdown. Average drilling rig utilization was down 28% quarter-over-quarter and 16% year-over-year compared to 2011. The CAODC also reported that 2012 well completion activity was down 20% quarter-over-quarter and 17% year-over-year compared to 2011. Drilling rig utilization and completion activity levels are indicators of overall oilfield activity levels in the WCSB.
Coil well service revenue decreased during the fourth quarter as compared to the same period in the prior year, however the decrease was significantly less than the quarter-over-quarter reduction in industry drilling and completion activity. Masted coil tubing revenue was approximately the same quarter-over-quarter but conventional coil tubing revenue was down particularly in southern Alberta. Coil well service revenue also included a quarter-over-quarter increase in pumper revenue as Essential operated an expanded pumper fleet during the quarter. Masted coil tubing is primarily focused on completion work, while conventional coil tubing is more evenly balanced between completion and production work. Revenue per hour for coil well service equipment was similar to the comparative quarter of the prior year.
During the fourth quarter of 2012 there was strong utilization for service rigs operating 24 hours on SAGD wells and service rigs working in northern Alberta. Overall service rig revenue was lower in the fourth quarter of 2012 compared to the same period in 2011, primarily due to reduced customer spending and lower activity in specific operating areas including Drayton Valley, Brooks and Fort St John. Revenue per hour in the fourth quarter increased due to the mix of services provided, in particular the increase in SAGD work and associated rentals.
Other revenue was down quarter-over-quarter due to the drilling rig operation sold in November 2012.
Compared to the same period in the prior quarter and year, gross margin percentage was negatively impacted by lower utilization and higher operating costs. Delays in anticipated delivery of new deep coil tubing rigs and support equipment contributed to increased labour costs.
Well Servicing revenue increased in 2012 compared to the prior year due to the Technicoil Acquisition. Gross margin remained relatively unchanged year-over-year, but higher 2012 revenue was offset by increased labour costs in the second half of the year which led to a reduction in gross margin as a percentage of revenue. Delays in equipment deliveries meant that Essential absorbed the additional cost of hiring and training coil well service staff required to operate new equipment in 2012 without a corresponding increase in revenue. Labour costs were further impacted during the year by periods of volatile utilization as Essential chose to retain staff during these periods in preparation for the winter drilling season. In 2012, Essential also incurred the cost of completing the annual maintenance program for equipment acquired in the Technicoil Acquisition, whereas in 2011 this work was completed prior to closing the Technicoil Acquisition.
Essential–s downhole tools & rentals business focuses on oil and liquids-rich natural gas plays by providing production and completion tools and rentals for horizontal and vertical wells. Operations for this segment are well placed geographically across many of the active oil plays in the WCSB.
During the fourth quarter, the Company successfully broadened its Tryton MSFS product line by offering innovative, lower cost technical solutions to customers looking to minimize horizontal well completion costs. The new Tryton MSFS tools are well suited to work in shallow, low pressure well conditions. Demand for the Tryton MSFS product line and sustained demand for conventional downhole tools & rentals, allowed Essential to increase revenue on a quarter-over-quarter basis despite a decrease in industry drilling and completion activity.
Through continued efforts to develop innovative technical solutions to meet customer needs, Essential was able to increase revenue in 2012 compared to 2011 despite a slowdown in industry activity.
Revenue growth was proportional across both the Tryton MSFS and conventional tool & rental operations. The reduction in other revenue compared to the prior quarter and year was due to the disposal of the wireline business in February 2012.
Gross margin as a percentage of revenue increased on both a quarterly and annual basis due to tool procurement efficiencies and the disposal of the wireline business which historically generated lower margins compared to the ongoing operations of the segment.
General and administrative expenses are comprised of wages, professional fees, office space and other administrative costs incurred at the corporate and operations level. General and administrative expenses were higher in the fourth quarter due to the increased number of staff, wage costs and increased infrastructure costs. Year-over-year general and administrative expenses were higher due to the increased size of the Company–s operations and timing of the Technicoil Acquisition.
DISCONTINUED OPERATIONS
Essential has committed to a plan to seek buyers for its Colombian operations. This resulted in a reclassification of revenue and expenses, as well as the assets and liabilities, of the Colombian operations to “Discontinued Operations” and “Assets and Liabilities Held for Sale”, respectively. Essential expects that the Colombian operations will be acquired by a buyer who intends to operate in Colombia. The Company estimates it will incur approximately $1.0 million to dispose of its Colombian operations, of which $0.3 million has been accrued at December 31, 2012.
Loss from discontinued operations related to the Colombian business is as follows:
Despite operating for a full twelve months in 2012, compared to only the last half of 2011, revenue was only moderately higher in 2012 due to poor utilization, largely related to the service rig operations. Operating costs were higher in 2012 as Essential continued to maintain its work force and equipment while it pursued additional work which did not materialize. The Company also wrote off $0.4 million of accounts receivable as a bad debt expense in 2012. The $4.8 million loss from discontinued operations also includes $1.6 million in deferred income tax expense relating to the derecognition of deferred tax assets.
During the fourth quarter of 2012, the loss from Colombian operations was higher than the same period in the prior year. Fourth quarter revenue in 2012 was lower than the prior year due to a decrease in service rig revenue which represented approximately half of the revenue generated in the fourth quarter 2011. Operating costs remained relatively similar to the fourth quarter 2011 as Essential continued to incur the cost of maintaining its operations as it pursued new contracts.
Essential plans to continue to operate a down-sized operation of two rod rigs until the business is sold or until its contractual obligations with customers expire during the second quarter of 2013.
The following table represents the balances that have been reclassified on the consolidated balance sheet as assets and liabilities held for sale:
At December 31, 2012, the Colombian assets and liabilities have been classified as assets and liabilities held for sale, respectively, and treated as discontinued operations. Assets held for sale is comprised primarily of oilfield service equipment that Essential imported into Colombia in 2010. The equipment has been revalued to its estimated net realizable value which resulted in a $4.1 million loss on revaluation in 2012.
Credit Facility
Essential–s Credit Facility with its banking syndicate is comprised of a $100 million revolving term loan facility with a $35 million accordion feature available on lender–s consent. The revolving term loan facility matures on May 30, 2014, is renewable at the lender–s consent and is secured by a general security agreement over the Company–s assets. To the extent the revolving term loan facility is not renewed, debt payments would be required over a two year period based on a three year amortization schedule. At December 31, 2012, the maximum of $100 million was available to Essential.
As at December 31, 2012, all financial debt covenants were satisfied and all banking requirements were up to date. Essential does not anticipate any financial resource or liquidity issues to restrict its future operating, investing or financing activities. On March 6, 2013, Essential had long-term debt outstanding of $36.6 million.
In response to customer demand for larger, more technically advanced equipment, Essential is building deep masted coil tubing rigs capable of servicing long reach horizontal wells and double service rigs capable of SAGD operations with deep well, all-period ability.
During 2012, Essential added the following assets to its fleet:
The delivery time of certain equipment scheduled in 2012 suffered delays from equipment manufacturers. As a result $11.2 million of capital spending related to this equipment was deferred until 2013 when Essential expects it will take delivery of:
Essential classifies its equipment expenditures as growth capital(1), maintenance capital(1), and infrastructure capital(1). The latter category includes information systems, operational facilities and leasehold improvements. Comparative equipment expenditures are as follows:
OUTLOOK
After the industry slowdown experienced in the latter half of 2012, activity in early 2013 has increased for the winter drilling season. Drilling rig utilization, which can be viewed as a barometer of well completion activity, increased from an average of 44% in the fourth quarter of 2012 to 66% in the first two months of 2013. Demand for Essential–s services, those related to completion, as well as production, have increased, and to-date activity is stronger than the fourth quarter of 2012. That being said, as demonstrated by industry service rig and drilling rig utilization, activity is slower than it was a year ago. As always, the strength of the first quarter is also dependent on the timing of spring breakup as that will impact the duration of the busy winter drilling season.
Looking beyond spring break-up, it is difficult to assess oilfield service demand for the last half of 2013. The concerns that slowed E&P spending in the latter half of 2012 remain unresolved. Global economic concerns are still prevalent, impacting the stability of oil prices, and there is no short-term solution for the oil price differential. Infrastructure projects are underway that could narrow the differential towards the end of 2013 and into 2014. As this impacts the net cash flow of E&P producers, it impacts the demand for oilfield services. And, as has been the case for the past few years, natural gas storage remains high, pricing remains low and investment in natural gas production remains low.
Looking beyond 2013, there is growing optimism with the recent increase in foreign capital and joint venture activity in the WCSB to develop some of the more difficult and ultimately service intensive natural gas plays including the Duvernay, Horn River and Montney. In addition, if the recently announced liquefied natural gas (“LNG”) projects on the west coast of Canada come to fruition, this should in turn increase the demand for oilfield services to supply natural gas to those facilities.
Essential–s $45 million equipment expansion program for 2013 will add significant growth to Essential–s core service offerings in high demand deep coil tubing and mobile double service rigs. Essential expects to add four new deep masted coil tubing rigs, two nitrogen pumpers and five service rigs. Three of the service rigs will be focused on SAGD operations, an area of recent growth for Essential. Although the outlook for the second half of 2013 is uncertain, Essential is optimistic that the years beyond will require industry fleet expansion to meet E&P spending growth. Essential will use 2013 to increase its fleet, establish and train crews, and prepare for this significant growth opportunity.
While the industry drilling and completion well count was down in 2012 relative to 2011, the number of completed horizontal wells increased. We expect 2013 activity to be similar to 2012, with an increase in the years thereafter including ongoing growth in horizontal well development. This drives the demand for masted coil tubing rigs and the Tryton MSFS, as both services are instrumental for completing horizontal wells. Looking forward, deep coil tubing and/or service rigs and downhole tools will be required to work-over these wells to offset rapid production declines.
Essential has a very strong balance sheet with $36.6 million of debt outstanding on March 6, 2013 and debt to 2012 EBITDA of 0.5x. The recent asset sales and planned sale of Colombian operations allows management to focus entirely on the core services of well servicing with coil tubing, service rigs and downhole tools and rentals.
QUARTERLY DIVIDEND
The cash dividend for the period January 1, 2013 to March 31, 2013 has been set at $0.025 per share. The dividend will be paid on April 15, 2013 to shareholders of record on March 28, 2013. The ex- dividend date is March 26, 2013.
The fourth quarter Management–s Discussion and Analysis and Financial Statements are available on Essential–s website at and on SEDAR at .
(1)Non-IFRS Measures
Throughout this news release, certain terms that are not specifically defined in IFRS are used to analyze Essential–s operations. In addition to the primary measures of net earnings and net earnings per share in accordance with IFRS, Essential believes that certain measures not recognized under IFRS assist both Essential and the reader in assessing performance and understanding Essential–s results. Each of these measures provides the reader with additional insight into Essential–s ability to fund principal debt repayments and capital programs. As a result, the method of calculation may not be comparable with other companies. These measures should not be considered alternatives to net earnings and net earnings per share as calculated in accordance with IFRS.
EBITDA (Earnings before finance costs, income taxes, equity taxes, depreciation, amortization, transaction costs, non-controlling interest earnings, losses or gains on disposal of equipment, results of discontinued operations and share-based compensation) – This measure is considered an indicator of Essential–s ability to generate funds flow in order to fund required working capital, service debt and fund capital programs.
EBITDA % – This measure is considered an indicator of Essential–s ability to generate funds flow as calculated by EBITDA divided by revenue.
Funds flow or funds flow from operations – This measure is an indicator of Essential–s ability to generate funds flow in order to fund working capital, principal debt repayments and capital programs. Funds flow or funds flow from operations is defined as cash flow from operations before changes in non-cash operating working capital. This measure is useful in assessing Essential–s operational cash flow as it provides cash generated in the period excluding the timing of non-cash operating working capital. This reflects the ability of the operations of Essential to meet the above noted funding requirements.
Growth capital – Growth capital is capital spending which is intended to result in incremental increases in revenue. Growth capital is considered to be a key measure as it represents the total expenditures on equipment expected to add incremental revenues and funds flow to Essential.
Maintenance capital – Equipment additions that are incurred in order to refurbish or replace previously acquired equipment less proceeds on the disposal of retired equipment. Such additions do not provide incremental increases in revenue. Maintenance capital is a key component in understanding the sustainability of Essential–s business as cash resources retained within Essential must be sufficient to meet maintenance capital needs to replenish the assets for future cash generation.
Infrastructure capital – Additions that are incurred in order to maintain the Company–s business systems and operating facilities. Such additions do not provide incremental increases in revenue.
Net equipment expenditures – This measure is equipment expenditures less proceeds on the disposal of equipment. Essential uses net equipment expenditures to assess net cash flows related to the financing of Essential–s oilfield services equipment.
ABOUT ESSENTIAL
Essential is a growth-oriented, dividend paying corporation that provides oilfield services to producers in western Canada for producing wells and new drilling activity. Essential operates the largest coil tubing well service fleet in Canada with 46 coil tubing rigs and a fleet of 55 service rigs. Essential also sells, rents and services downhole tools and equipment including the Tryton Multi-Stage Fracturing System. Further information can be found at .
FORWARD-LOOKING STATEMENTS AND INFORMATION
This news release contains forward-looking statements and forward-looking information within the meaning of applicable securities laws. The use of any of the words “expect”, “anticipate”, “continue”, “estimate”, “objective”, “ongoing”, “may”, “will”, “project”, “should”, “believe”, “plans”, “intends” and similar expressions are intended to identify forward-looking information or statements. In particular, this news release contains forward-looking statements including expectations regarding capital spending, in-service timing of new equipment, demand for new equipment, expectations of future cash flow and earnings, expectations with respect to the demand for and price of oil and liquids-rich natural gas, expectations regarding the future areas of development in the WCSB, the level and type of drilling activity, completion activity, work-over activity, production activity and required oilfield services in the WCSB, expectations regarding the business, operations and revenues of the Company in addition to general economic conditions, expectations regarding Essential–s ability to meet the changing needs of the WCSB market, expectations regarding the capital spending plans of E&P companies, expectations for Essential–s positioning for the future, expectations that development of possible LNG projects on the west coast will increase the demand for oilfield services, expectations to sell the Colombian assets to a buyer that will operate in Colombia, plans to operate Essential–s rod rigs in Colombia until their current contracts expire, expectations of the net realizable value of the Colombian assets, expectations of the disposal costs and expectations of the loss to be realized on the sale of the Colombian assets.
Although the Company believes that the expectations and assumptions on which such forward-looking statements and information are reasonable, undue reliance should not be placed on the forward-looking statements and information because the Company can give no assurance that such statements and information will prove to be correct. Since forward-looking statements and information address future events and conditions, by their very nature they involve inherent risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to: the risks associated with the oilfield services sector (e.g. demand, pricing and terms for oilfield services; current and expected oil and natural gas prices; exploration and development costs and delays; reserves discovery and decline rates; pipeline and transportation capacity; weather, health, safety and environmental risks); integration of acquisitions, competition, and uncertainties resulting from potential delays or changes in plans with respect to acquisitions, development projects or capital expenditures and changes in legislation, including but not limited to tax laws, royalties, incentive programs and environmental regulations; stock market volatility and the inability to access sufficient capital from external and internal sources; the ability of the Company–s subsidiaries to enforce legal rights in foreign jurisdictions; general economic, market or business conditions; global economic events; changes to Essential–s financial position and cash flow; the availability of qualified personnel, management or other key inputs; currency exchange fluctuations; changes in political and security stability; risks and other unforeseen conditions associated with the sale of the Colombian business; risks associated with government regulations and environmental health and safety matters and other unforeseen conditions which could impact the use of equipment and services supplied by Essential in Colombia; risks and uncertainty related to distribution and pipeline constraints; and other unforeseen conditions which could impact the use of services supplied by the Company. Accordingly, readers should not place undue reliance on the forward-looking statements. Readers are cautioned that the foregoing list of factors is not exhaustive.
Additional information on these and other factors that could affect the Company–s financial results are included in reports on file with applicable securities regulatory authorities and may be accessed through the SEDAR website () for the Company. The forward-looking statements and information contained in this news release are made as of the date hereof and the Company undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.
FOURTH QUARTER AND YEAR END 2012 EARNINGS CONFERENCE CALL AND WEBCAST
Essential has scheduled a conference call and webcast to begin at 10:00 am MST (12:00 pm EST) on Thursday, March 7, 2013.
The conference call dial in numbers are 416-340-2217 or 866-696-5910, passcode 9707065.
An archived recording of the conference call will be available approximately one hour after the completion of the call until April 6, 2013 by dialing 905-694-9451 or 800-408-3053, passcode 9218036.
A live webcast of the conference call will be accessible on Essential–s website at by selecting “Investors” and “Events and Presentations”. Shortly after the live webcast, an archived version will be available for approximately 30 days.
The TSX has neither approved nor disapproved the contents of this news release.
Contacts:
Essential Energy Services Ltd.
Garnet K. Amundson
President and CEO
(403) 513-7272
Essential Energy Services Ltd.
Jeff B. Newman
Chief Financial Officer
(403) 513-7272
Essential Energy Services Ltd.
Karen Perasalo
Investor Relations
(403) 513-7272