CALGARY, ALBERTA--(Marketwired - Aug. 6, 2014) - Essential Energy Services Ltd. (TSX:ESN) ("Essential" or the "Company") announces second quarter results.
SECOND QUARTER 2014 OVERVIEW
Revenue for the second quarter of 2014 was $52.8 million, 37% higher than the second quarter of 2013. The strong second quarter was due to increased customer demand, supported by a less severe spring break-up compared to the prior quarter.
- Coil Well Service - Coil well service revenue increased 84% from the prior quarter with a significant improvement in masted deep coil tubing utilization quarter-over-quarter at 42% compared to 19% in 2013. The Company's masted deep coil tubing fleet experienced increased customer demand, in particular, there was strong demand for the two Generation III masted deep coil tubing rigs.
- Service Rigs - Service rigs performed well in the quarter with utilization at 34% compared to 28% in the prior quarter.
- Downhole Tools & Rentals - Essential's downhole tools & rentals revenue increased in the quarter due to strong demand for conventional downhole tools, continued growth of Essential's United States ("U.S.") operation and increased rental revenue.
EBITDAS for the second quarter of 2014 was $0.4 million, a significant improvement of $5.6 million from 2013. The increase was driven by improved activity across both segments and lower operating expenses as a percentage of revenue. Operating expenses associated with training and retaining key personnel and maintaining equipment are typically higher in the second quarter when equipment is restricted from travelling to customer locations during spring break-up. Revenue increases in the second quarter of 2014 offset these expenditures and improved margins.
In the second quarter of 2014, Essential took delivery of its first state-of-the-art Generation IV masted deep coil tubing rig.
YEAR-TO-DATE 2014 OVERVIEW
Revenue for the six months ended June 30, 2014 was $156.5 million, slightly lower than the same period in 2013. EBITDAS for six months ended June 30, 2014 was $22.9 million, a decrease of $5.3 million compared to the same period in 2013. The EBITDAS impact of lower revenue during the first quarter 2014 was somewhat offset by improved revenue and activity in both well servicing and downhole tools & rentals during the second quarter. Tryton Multi-Stage Fracturing System ("MSFS®") revenue for the first half of 2014 was lower than the prior year. The margin impact of this revenue shortfall has been partially offset within the segment by growth in conventional downhole tools and higher margin rentals operations. EBITDAS during the first half of 2014 was also impacted by increased fuel costs in well servicing and increased labour costs in coil well service. Incremental labour costs in coil well service relates to additional costs incurred in the first quarter to retain crews on location during specific short- term periods of inactivity, that was brought on by extremely cold weather, and costs incurred to hire and train additional crews in anticipation of the delivery of the new Generation III and Generational IV masted deep coil tubing rigs.
INDUSTRY OVERVIEW
Industry activity in the second quarter is typically the slowest quarter of the year due to the onset of spring break-up. Compared to 2013, the second quarter of 2014 benefitted from a less severe spring break-up in western Canada, and improved demand from exploration and production ("E&P") companies as a result of stronger commodity prices and access to capital. Drilling rig utilization increased 35%, well completion count increased 4% and the number of wells drilled increased by 29% for the second quarter 2014 compared to the prior quarter. These are indicators of overall oilfield activity in the Western Canadian Sedimentary Basin ("WCSB").
Well service activity in the WCSB continues to be driven by horizontal drilling, completion and stimulation of oil and liquids-rich natural gas wells. Horizontal wells typically require more investment capital and increased rig time per well due to their depth and complexity compared to vertical wells.
(i) Includes revenue from coil tubing rigs, nitrogen and fluid pumpers and other ancillary equipment.
(ii) Utilization is calculated using a 10 hour day.
(iii) Fleet data represents the number of units at the end of the period.
Coil well service second quarter revenue increased 84% from the prior quarter due to improved customer demand for Essential's masted deep coil tubing fleet and, in particular, the two Generation III masted deep coil tubing rigs that went into service in the fourth quarter 2013 and first quarter 2014, respectively. With increased customer demand, supported by a less severe spring break-up, Essential's masted deep coil tubing utilization was 42% compared to 19% in prior quarter. The two Generation III masted deep coil tubing rigs performed well achieving 72% utilization during the quarter. Essential's fluid and nitrogen pumper revenue also increased significantly as this equipment supports the masted deep coil tubing fleet.
Conventional deep coil tubing utilization was down quarter-over-quarter due to competition in the less technical smaller diameter conventional coil tubing market.
Service rig utilization was 34% compared to 28% in the prior quarter due to milder spring break-up conditions in 2014. Essential's utilization was particularly strong in the Grande Prairie, Fort St. John, southern Alberta areas and for the rigs working in steam-assisted gravity drainage ("SAGD").
Gross margin for well servicing in the second quarter of 2014 improved from the prior quarter due to higher revenue and activity. However, costs related to training and retaining key staff, seasonal maintenance work, and fixed costs associated with maintaining service locations and infrastructure resulted in negative gross margin for the segment during the quarter.
On a year-to-date basis, well servicing revenue is similar to the prior year as strong nitrogen and fluid pumper utilization offset lower conventional deep coil tubing utilization. Masted deep coil tubing utilization was 75% on a year-to-date basis, compared to 83% in the prior year. Gross margin for the six months ended June 30, 2014 was adversely impacted by increased fuel and labour costs in coil well servicing. Incremental labour costs were incurred to retain crews on location during specific short term periods of inactivity during the first quarter, that was brought on by extremely cold weather, and costs incurred to hire and train additional crews in anticipation of the delivery of the new Generation III and Generational IV masted deep coil tubing rigs. Revenue per hour for coil well service and service rigs was consistent with the prior quarter.
Downhole tools & rentals second quarter revenue increased 37% from the same period in 2013 primarily due to strong performance of the conventional tools and rentals operations. Tryton MSFS® revenue was lower than the prior quarter as Essential continues to adjust its MSFS® product offerings to meet changing customer demands. Gross margin increased significantly as a result of improved conventional tool activity and greater contributions from the higher margin rentals business.
Revenue from conventional tools and rentals increased by 71% from the prior quarter. Growth in conventional tools was generated by both Canadian operations and U.S. conventional tools. Tryton's role as a dominant conventional tools service provider offers growth opportunities and insights into customer well completion preferences and requirements. Higher rentals revenue was primarily due to increased rental of specialty drill pipe and pressure control equipment as second quarter sales continued to demonstrate the benefits of an evolving sales and product strategy. Management anticipates continued growth in the conventional tools and rentals businesses in the second half of 2014.
Tryton MSFS® revenue in the second quarter included revenue from Essential's Canadian and U.S. operations. In Canada, the second quarter is typically a slower period for MSFS® products as fracturing activity is reduced during spring break-up. Demand for Tryton's Canadian MSFS® products historically has been exclusively "ball & seat" technology, using standard or dissolvable balls. In response to customer demand for alternative completion techniques when conducting a multi-stage fracture, Essential continued its efforts to develop and test new MSFS® products. These products include the development of coil-actuated Viking sliding-sleeve technology which offers unlimited stages without balls or seats. In the second quarter, Essential also experienced early success in the U.S. with its Tryton MaxFrac® tool, a new packer design that provides a consistently large inner diameter sleeve that eliminates the mill-out phase of "plug-and-perf" completions. In the second half of 2014, management expects that "ball & seat" products will continue to form the core of its Tryton MSFS® product line. The introduction of new tools and additional growth in U.S. Tryton MSFS® revenue are also expected to contribute to MSFS® revenue.
On a year-to-date basis, downhole tools & rentals revenue and margin was similar to the prior year due to growth in conventional downhole tools and higher margin rentals operations, which was offset by lower Tryton MSFS® revenue for the first half of 2014.
On April 30, 2014, Essential acquired all of the issued and outstanding shares of Sam's Packer & Supply LLC, a private downhole tool company that provides conventional tool sales, rentals and services to a diversified customer base in Oklahoma, Kansas and Texas. The purchase price was US$5.1 million plus working capital adjustments.
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 expense for the three and six months ended June 30, 2014 increased compared to the same period in 2013 due to employee costs, facility lease costs and legal fees.
During the second quarter, Essential took delivery of its first state-of-the-art Generation IV masted deep coil tubing rig.
Essential classifies its equipment expenditures as growth capital(1) and maintenance capital(1):
Essential's 2014 capital budget of $53 million is comprised of $36 million in growth capital and $17 million of maintenance capital. Growth capital consists primarily of expenditures to expand Essential's masted deep coil tubing fleet and to purchase additional rental equipment.
Essential has established a long-term build program intended to increase the depth and coil diameter capability of its masted deep coil tubing fleet. Customers are demanding coil tubing rigs that can operate beyond 6,000 meters with large diameter coil. Given the limited number of builders that are qualified to build this type of equipment, and the long lead time required to secure build spots and fabricate the equipment, Essential selected two companies to manufacture its Generation III and Generation IV equipment. Essential expects to spend approximately $63 million through to 2016 to build a total of four Generation III and eight Generation IV masted deep coil tubing rigs. To date, Essential has spent approximately $27 million on this capital program and has taken delivery of two Generation III and one Generation IV masted deep coil tubing rigs.
The Company believes that it has access to sufficient funds through internally generated cash flows and from the Credit Facility to meet current spending needs.
The following table shows the expected in-service dates of the major equipment:
OUTLOOK
Heading into the last half of 2014, there is a sense of renewed optimism within the energy services sector as E&P companies, bolstered by strong oil prices, improved access to capital markets and, in some instances, merger and acquisition activity, continue to execute their 2014 capital programs. Increases in key industry metrics including second quarter drilling activity, a backlog of well completion work heading into the last half of the year and an increase in the number and total depth of horizontal wells drilled in western Canada, support a strong industry environment for oilfield service companies in the last half of 2014.
Essential believes that it is well positioned to benefit from the anticipated increase in demand for well completion services in the last half of the year, particularly as the industry continues to shift towards deeper, longer reach horizontal wells.
Essential's masted deep coil tubing fleet, which achieved 109% utilization in the first quarter of 2014, is expected to continue to experience strong demand as customers execute their drilling, fracturing and completion programs. Essential also expects to benefit from the expanded service capacity of its masted deep coil tubing fleet with the recent delivery of two Generation III and one Generation IV rigs.
Essential also expects further growth in its downhole tools and rentals segment as year-to-date growth in the conventional downhole tools and rentals operations is expected to continue throughout the back half of the year. Management expects that "ball & seat" products will continue to form the core of its Tryton MSFS® product line. The introduction of new tools and additional growth in U.S. Tryton MSFS® revenue are also expected to contribute to MSFS® revenue.
Essential continues to execute its $53 million capital equipment program. As mentioned above, during the first half of 2014, Essential took delivery of its second Generation III masted deep coil tubing rig. The Generation III rigs that are in-service have seen strong utilization in the first half of 2014, even during break-up. In the second quarter, Essential took delivery of its first Generation IV masted deep coil tubing rig. One additional Generation III rig and one additional Generation IV rig is expected to be in-service later in the year.
Essential has a strong balance sheet with $49.4 million of debt outstanding on August 6, 2014 and a debt to EBITDAS ratio of 0.8x.
QUARTERLY DIVIDEND
The cash dividend for the period July 1, 2014 to September 30, 2014 has been set at $0.03 per share. The dividend will be paid on October 15, 2014 to shareholders of record on September 30, 2014. The ex-dividend date is September 26, 2014. This dividend is an eligible dividend for Canadian income tax purposes.
The Management's Discussion and Analysis and Financial Statements are available on Essential's website at www.essentialenergy.ca and on SEDAR at www.sedar.com.
(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.
EBITDAS(Earnings before finance costs, income taxes, depreciation, amortization, transaction costs, non- controlling interest earnings, losses or gains on disposal of equipment, foreign exchange gains or losses, results of discontinued operations and share-based compensation, which includes both equity-settled and cash-settled transactions) - These adjustments are relevant as they provide another measure which is considered an indicator of Essential's ability to generate funds flow in order to fund required working capital, service debt, capital programs and pay dividends.
EBITDAS % - This measure is considered an indicator of Essential's ability to generate funds flow as calculated by EBITDAS divided by revenue.
Funds flow or funds flow provided by (used in) 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, excluding the current portion of long-term debt.
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.
(i) Other revenue included revenue from Essential's drilling operation until its disposal in November 2012.
(ii) Utilization is calculated using a 10 hour day.
(iii) Fleet data represents the number of units at the end of the period.
2014 SECOND QUARTER EARNINGS CONFERENCE CALL AND WEBCAST
Essential has scheduled a conference call and webcast at 10:00 am MT (12:00 pm ET) on August 7, 2014.
The conference call dial in numbers are 416-340-2217 or 866-696-5910, passcode 8406362.
An archived recording of the conference call will be available approximately one hour after completion of the call until August 23, 2014 by dialing 905-694-9451 or 800-408-3053, passcode 5383943.
A live webcast of the conference call will be accessible on Essential's website at www.essentialenergy.ca by selecting "Investors" and "Events and Presentations". Shortly after the live webcast, an archived version will be available for approximately 30 days.
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 47 coil tubing rigs and a fleet of 55 service rigs. Essential also sells, rents and services downhole tools and equipment including the Tryton MSFS®. Further information can be found atwww.essentialenergy.ca.