CALGARY, ALBERTA — (Marketwired) — 11/06/13 — Essential Energy Services Ltd. (TSX: ESN) (“Essential” or the “Company”) announces third quarter EBITDA(1) of $17.1 million, down from $19.3 million in the third quarter of 2012. Given the relatively flat industry activity, Essential–s EBITDA decrease is largely attributed to start-up costs for expansion of the downhole tools business into the United States and the absence of EBITDA from the drilling rig assets that was included in third quarter 2012 results. The drilling assets were sold in November 2012. On a year-to-date basis, EBITDA was $45.4 million.
HIGHLIGHTS
Third quarter 2013 industry activity was in line with 2012. In addition to wet weather at the beginning of the quarter, exploration and production (“E&P”) companies were cautious with their capital spending as the oil price differential continued to be volatile and equity capital market activity was limited, making it difficult for producers to raise capital.
Essential–s revenue for the third quarter of 2013 was generally flat compared to 2012, consistent with industry activity. Reported revenue of $84.5 million, increased $1.0 million compared to the third quarter of 2012.
EBITDA for the third quarter of 2013 was $17.1 million, a decrease of $2.1 million from 2012. The decrease was mainly attributable to start-up costs related to the expansion of the downhole tools operations into the United States, the EBITDA contribution in the prior quarter from the drilling rig operation which was sold in November 2012, and higher general and administrative costs.
Capital – In the third quarter, Essential took delivery of its first state-of-the-art Generation III masted deep coil tubing rig. This Generation III rig can reach up to 4,900 meters, with a coil diameter of 2 5/8″.
This rig is capable of working on long-reach horizontal wells and is well-suited to meet the growing demand in servicing deeper, more complex wells.
® MSFS is a registered trademark of Essential Energy Services Ltd.
INDUSTRY OVERVIEW
During the third quarter of 2013, the Western Canadian Sedimentary Basin (“WCSB”) experienced a slow recovery from the unseasonably wet June. Overall industry activity in the third quarter was comparable to prior quarter levels. The lack of momentum in the third quarter was due in part to wet weather experienced in the WCSB and a lack of urgency exhibited by E&P companies.
Drilling rig utilization, wells drilled and completion activity are all indicators of overall oilfield activity levels in the WCSB. During the third quarter of 2013, drilling rig utilization and the number of wells drilled were slightly ahead of prior quarter, while well completions were slightly down. Compared to the third quarter 2012, drilling rig utilization increased 1%, the number of wells drilled increased by 5% and well completion count decreased 3%.
FINANCIAL RESULTS
SEGMENT RESULTS – WELL SERVICING
Coil well service revenue was unchanged during the third quarter of 2013 compared to the same period in the prior year despite a decrease in utilization from 79% to 73% quarter-over-quarter. Essential–s masted deep coil tubing fleet performed well with 112% utilization compared to 100% in third quarter of 2012 and revenue increased from Essential–s larger fleet of nitrogen and fluid pumpers. These gains were offset by a decrease in revenue from the conventional deep coil tubing fleet. Management anticipates utilization for the conventional deep coil tubing fleet may continue to lag below prior year levels through the rest of the year. Addition of the first Generation III masted deep coil tubing rig in the third quarter and three more masted deep coil tubing rigs in the fourth quarter will position Essential to meet the growing demand for long-reach coil tubing rigs. Revenue per hour for coil tubing rigs was consistent with prior year.
Service rig revenue improved during the third quarter of 2013 compared to the same period in the prior year as Essential saw improved utilization in Grande Prairie and Fort St. John. During the third quarter, Essential continued to see demand for its service rigs operating on SAGD wells. Revenue per hour increased from prior year due to the mix of services provided.
Well servicing revenue decreased on a quarter-to-date and year-to-date basis in 2013 compared to 2012 as the prior period included $2.8 million and $11.0 million, respectively, in revenue from the drilling rig operation which was disposed of in November 2012.
SEGMENT RESULTS – DOWNHOLE TOOLS & RENTALS
During the third quarter of 2013, Downhole Tools & Rentals revenue increased compared to the same quarter in the prior year due to an increase in demand for the Tryton MSFS® product line. Revenue for conventional tools and rentals was comparable to the same period in the prior year.
Downhole tools & rentals revenue increased on a year-to-date basis in 2013 compared to 2012 as a result of continued growth in Tryton MSFS® activity. Demand for Tryton MSFS® has remained strong due to innovative product design and the high quality of service offered by the business. Tryton continues to provide tools that are a cost-effective technical solution for customers looking to minimize horizontal well completion costs.
Essential has started expanding downhole tool operations into the southern United States, strategically operating near active basins. Gross margin percentage declined on a quarter-over-quarter basis due to United States start-up costs with limited revenue as the business is in the very early stages of operations.
A Statement of Claim was filed on October 23, 2013 by Packers Plus Energy Services Inc. against Essential in Federal Court. The Statement of Claim alleges products and methods associated with the Tryton MSFS® infringe a patent issued to Packers Plus Energy Services Inc. Essential believes the suit is without merit and will actively defend against the allegations.
GENERAL AND ADMINISTRATIVE
General and administrative expenses are comprised of wages, professional fees, office space and other administrative costs incurred at corporate and operational levels. General and administrative expenses in the three and nine-months ended September 30, 2013 were higher than 2012, both in dollars and as a percentage of revenue. The increase is due to additional corporate staff, facility lease costs and professional fees.
OTHER EXPENSE (INCOME)
Other expense in the three and nine months ended September 30, 2013 included a $3.6 million expense of deposits on two coil tubing rigs as the supplier was placed into receivership in September 2013. In the nine months ended September 30, 2012, other income of $1.1 million related to gains on fixed asset sales.
DISCONTINUED OPERATIONS
Results of the Colombian operations have been presented as discontinued operations. As of November 6, 2013, Essential has received approximately $2.2 million in cash proceeds from the sale of certain of its Colombian assets during 2013.
In October 2013, Essential announced its 2014 capital budget of $50 million comprised of $33 million in growth capital and $17 million of maintenance capital. Essential–s 2014 growth capital spending plan consists primarily of four masted deep coil tubing rigs, one quintiplex fluid pumper, one rod rig and rental equipment.
Essential increased its 2013 capital spending budget from $45 million to $50 million to include deposits and progress payments payable in 2013 for its 2014 capital program. The $50 million is comprised of $37 million of growth capital and $13 million of maintenance capital.
The following table shows the expected dates of the major equipment being built over the remainder of 2013 and 2014:
NORMAL COURSE ISSUER BID (“NCIB”)
On March 20, 2013 the Company received approval from the Toronto Stock Exchange (“TSX”) to implement an NCIB for Essential–s common shares (“Shares”). Any Share purchases by Essential pursuant to the NCIB will be for cancellation. The NCIB commenced on March 25, 2013 and will terminate on March 24, 2014 or at such earlier date as the NCIB is completed or terminated at the option of Essential.
Under the NCIB, Essential may purchase up to 12,182,508 of its issued and outstanding Shares on the open market through the facilities of the TSX. On November 6, 2013, Essential amended the Form 12 with the TSX to allow for purchases of shares to occur on other alternative trading systems, in addition to the TSX.
For the nine months ended September 30, 2013, a total of 520,052 Shares were acquired and cancelled under the NCIB at an average cost of $2.35 per Share. Shareholders may obtain a copy of the “Notice of Intention to make a Normal Course Issuer Bid” that was filed by the Company with the TSX, free of charge, by contacting the Company.
OUTLOOK
Heading into the fourth quarter, industry activity in the WCSB has been consistent with 2012 levels. Demand in well servicing continues to be driven by oil wells and horizontal completions, with an increasing shift to deeper, more complex wells. Looking beyond the near term, there is a positive overall tone in the potential for the proposed liquefied natural gas (“LNG”) projects in British Columbia which would include development of the Montney, Horn River and Duvernay basins. This is expected to increase the demand for oilfield services, including the demand for deep coil tubing and downhole tools.
Essential is well positioned to benefit from the rising demand to complete complex, long-reach horizontal wells. During the third quarter of 2013, Essential took delivery of one Generation III masted deep coil tubing rig. In the fourth quarter of 2013, Essential expects to take delivery of three more masted deep coil tubing rigs, one Generation III and two Generation IV. Essential–s recently announced 2014 capital program will further focus on these state-of-the-art assets including one additional Generation III masted deep coil tubing rig and three Generation IV masted deep coil tubing rigs. With a coil diameter of 2 5/8″, the Generation III rigs can reach 4,900 meters and the Generation IV rigs can reach 6,400 meters, making them well suited for deeper more complex wells.
Essential recently expanded its downhole tool operations into the southern United States, strategically establishing operations near active basins. The business is currently in the early stages of operations.
Essential has a very strong balance sheet with $44.7 million of debt outstanding on November 6, 2013 and a debt to EBITDA ratio of 0.7x. Essential is well positioned to take advantage of future growth opportunities including servicing deep horizontal wells and possible LNG related demand.
QUARTERLY DIVIDEND
The cash dividend for the period October 1, 2013 to December 31, 2013 has been set at $0.03 per share. The dividend will be paid on January 15, 2014 to shareholders of record on December 31, 2013. The ex-dividend date is December 27, 2013.
The third 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, capital programs and pay dividends. 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, depreciation, amortization, transaction costs, non- controlling interest earnings, losses or gains on disposal of equipment, results of discontinued operations and share-based compensation, which includes both equity-settled and cash-settled transactions) – This measure is considered an indicator of Essential–s ability to generate funds flow in order to fund required working capital, service debt, fund capital programs and pay dividends.
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, capital programs and pay dividends. 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.
Working capital – Working capital is calculated as current assets less current liabilities.
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.
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 45 coil tubing rigs and a fleet of 54 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 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 programs 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 including the demand for deep coil tubing and downhole tools, anticipated proceeds from asset sales in Colombia, anticipated shut-down and disposal costs of Colombian operations, expectations of the net realizable value of the Colombian assets, expectations of the opportunity for growth through expansion into the United States, expectations that the results of the conventional deep coil tubing fleet may continue to lag below prior year levels through the rest of the year, and expectations that the addition of the new masted deep coil tubing rigs will position Essential to meet the growing demand for long-reach coil tubing rigs.
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 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.
THIRD QUARTER 2013 EARNINGS CONFERENCE CALL AND WEBCAST
Essential has scheduled a conference call and webcast at 10:00 am MT (12:00 pm ET) on November 7, 2013.
The conference call dial in numbers are 416-340-2217 or 866-696-5910, passcode 7312337.
An archived recording of the conference call will be available approximately one hour after completion of the call until November 23, 2013 by dialing 905-694-9451 or 800-408-3053, passcode 9018160.
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.
Karen Perasalo
Investor Relations
(403) 513-7272