RE:Out of cash, out of love, this 4 penny dog needs love! MANAGEMENT REVIEW AND OUTLOOK
In the quarter ended March 31, 2018 showed significantly increased financial performance in terms of revenue, gross profit and EBITDA compared to the same period in the three prior fiscal years. Revenue of $12.2 million was more than double the $6.0 in sales for the same period in 2017. Gross profit of $2.4 million based on an operating margin of 19.4% was the highest for this three-month period since the first quarter of 2014. While EBITDA was slightly negative at ($29,000), for the same period in 2017 it was negative ($0.6 million) and negative ($1.4 million) in 2016.
Although the company is still not where management would like to be in terms of generating positive EBITDA and free cash flow from operations after debt servicing expenses and capital investments, the progress is steady and the year-over-year improvement meaningful. Based on these financial metrics, this is the best operating financial performance for Hyduke in the first quarter since world oil prices collapsed in late 2014.
April 2018 was the final winding down of Western Manufacturing Ltd operations, a business in northwest Alberta the Company acquired in March of 2017. Western had a prior history of rapid growth and profitability. It saw its direction reverse post 2014 and by the end of 2016 appeared to be attractively priced. Based in the heart of the active Montneynatural gas, liquids and crude oil development, Hyduke was of the view a recovery was underway and that under new management Western could resume a growth path towards profitability.
Post-closing, financial and operating issues emerged not identified during the purchase negotiations. The result was Hyduke being forced to commit considerably more working capital to Western than contemplated to complete preexisting orders and settle with trade creditors. In spite of eliminating over $1.5 of annualized overhead shortly after purchase, Western was unable to profitably complete any of the acquired backlog. Further, the historic goodwill associated with Western in this unique, regional market was difficult to reestablish given Hyduke’s unwillingness to continue to price new work at or below cost.
These were some of the factors contributing to the operating losses in the second half of 2017.
Early in 2018 negotiations began with the former owners and current landlord of Western to vacate the leased premises at Hythe, Alberta and settle certain financial arrangements. An agreement was signed April 3, 2018 and is referred to in the Q1 financial statements as a subsequent event. Western was released from the lease effective April 1, 2018 to its legal termination December 31, 2018. Including property taxes and utilities Hyduke estimates annual savings of approximately $700,000.
Hyduke is completing its remaining orders in its main facility in Nisku and its subsidiary, Avalanche Metal Industries, in Kelowna, B.C.
Another subsequent event took place on May 8, 2018 when Hyduke finished up at the AltaGas Ridley Island Propane Export Terminal (RIPET). The Company began this project in May of last year. It completed the fabrication and air raise of a 1.5 million pound roof on January 27, 2018.
The completion on the RIPET site will allow the accelerated release of a 10% construction holdback.
Business in other company segments is steady. The company has projects underway in areas of oil sands tailing pond reclamation, utilities, agrifoods and transportation. Particularly encouraging is renewed interest in Hyduke’s legacy business of building, repairing and refitting drilling and well servicing rigs. One rig was refit and modified in April to go back into service in northeast Alberta. Other drilling and well servicing contractors are making inquiries about new equipment, modifications and repairs. Some companies are looking at reworking their rigs in anticipation of putting them to work in the significantly more active market in the United States.
The conventional upstream oil and gas industry has not been strong for Hyduke in the past three years. The company’s survival has been in diversification into new products, new markets and new industries. Hyduke is here today because it began looking beyond its legacy businesses three years ago.
Higher oil prices are having a positive impact on Canada’s upstream oil and gas industry despite all the well-publicized challenges regarding pipelines, market access and competitiveness.
In its May 7 weekly upstream industry analysis, ARC Energy Research Institute once again increased its estimate for revenue and after-tax cash flow for 2018. Based on average production of 7.5 million boe/day – the highest in history – and despite low natural prices, ARC is now forecasting revenue from production this year will be $122.5 billion and after-tax cash flow $57.6 billion. Revenue is up 49% from only $82.3 billion in 2016 while after-tax cash flow will rise by 117% from $26.6 billion two years ago.
The continually improving outlook from rising oil prices helped ARC increase its most recent revenue and after-tax cash flow forecast from earlier estimates January 2, 2018 when it was only estimated at $105.8 billion and $44.2 billionrespectively
ARC has not increased is capital spending or drilling estimates for 2018, nor have other organizations that regularly do this such as the Petroleum Services Association of Canada or the Canadian Association of Oilwell Drilling Contractors.
However, in the absence of public data anticipating increased spending because of increase funds available, Hyduke is noticing a rise in inquiries from new and former customers as general economic conditions for this significant industry continue to improve.
Challenges remain. Because of the issues described above working capital and liquidity is tight. To this end, Hyduke is continuously reviewing the fixed cost side of its business. Shutting down Western’s Hythe facility and exiting the RIPET project has permanently reduced fixed property and labor costs. The objective is to continually improve operating efficiency by increasing revenue, increasing margins and reducing fixed costs.