Hyduke announces first quarter 2016 financial results

NISKU, AB, May 13, 2016 /CNW/ - Hyduke Energy Services Inc. (HYD - TSX), announced operating results for three months ending March 31, 2016 and 2015.  Hyduke's Financial Statements and Management's Discussion and Analysis have been filed with regulators and are available at www.hyduke.com and at www.SEDAR.com. Following is a summary of the 2016 quarterly financial statements.  All amounts disclosed are in thousands of dollars. 

SELECTED FINANCIAL INFORMATION

Total revenue for the three months ended March 31, 2016 decreased 54.4% from $6,391 for the three months ended March 31, 2015 to $2,914.  Revenue attributable to the manufacture of oilfield equipment declined 83% from the levels achieved in the first quarter of 2015.  The Company mitigated the effect of the oil and gas sector downturn by diversifying product and service offerings to include storage tank repairs and custom steel fabrication.  These new product lines produced 31% of the total revenue for the quarter.  Revenue in the Company's Supply & Service segment experienced a 53% decline over 2015 levels.  The decline in utilization resulting from the deterioration in oil prices in addition to the early commencement of spring break up were factors in the revenue decline.   

Negative gross margin of $1.1 million or 36.5% declined from 2015 negative gross margin of $0.1 million or 1.4%.  Commencing in 2016, the Company reviewed and reclassified certain amounts related to selling and distributive expenses, general and administrative expenses, other operating income and expenses, interest expense and loss on foreign exchange to cost of sales.  The purpose for this reclassification allows for easier comparability to the Company's peers.  Prior year comparative figures have also been restated to reflect this change in presentation.  These reclassifications have resulted in a first quarter increase to cost of sales of $926 in 2016, and $989 in 2015.

Corporate Services selling, general and administrative expenses decreased $0.3 million or 32.5% to $0.6 million.  In addition to a $45 or a 36.7% reduction in consulting and professional fees due to a decline in legal services during the quarter, administration and employment expenses decreased 40.8% or $233 to $338 in 2016.  Approximately $66 in severances were incurred for terminations during the quarter compared to $179 in 2015. Comparing year over year, the Company reduced its administration services employee count by 20%, the remaining staff are working a reduced work week and the executive have reduced compensation by an additional 5-10% for a total of 15-20% reduction. 

Negative EBITDAS for continuing operations was $1,380 for the first quarter of 2016, a decline of $1,057 from negative EBITDAS of $323 in the first quarter of 2015.     

At December 31, 2015, Hyduke maintained a cash balance of $1.8 million and had a current ratio of 1.4 to 1.00 and debt to equity ratio of 0.57 to 1.00.

Total assets of $24.1 million as at March 31, 2016 represents a decrease of $3.5 million (12.7%) from December 31, 2015 and is due primarily to the collection of accounts receivable and a reduction in inventory. 

Total liabilities of $10.4 million as at March 31, 2016 represents a decrease of $1.5 million (12.3%) from December 31, 2015.  The reduction is due to the payment of accounts payables and accrued liabilities.

MANAGEMENT REVIEW AND OUTLOOK
Hyduke (or "the Company") operated in a very challenging business environment in the first three months and first reporting quarter of the current fiscal year ended March 31, 2016. Hyduke's historical core businesses have supported the Canadian and international drilling and well servicing (service rigs) sector. In the first quarter of 2016 the oil and gas price collapse created a business environment in which every metric regarding capital spending, drilling and oilfield activity was at multiyear lows. Every company operating in the oilfield services industry domestically and globally reported materially reduced financial performance in the first quarter of this year compared to the first quarter of 2015. Hyduke is no exception.

In Q1 Hyduke's primary objectives were to reduce costs, conserve cash and working capital, expand the customer base in non-traditional areas, and maintain the core staff to be able to exploit the recovery when it comes. When comparing the significant year-over-year drop in revenue and the cash and working capital on hand on December 31 and March 31, the Company is of the view its determined efforts were reasonably successful.

The downturn in oil prices and upstream oil and gas investment in drilling and well servicing activity has extended beyond 1 ½ years and there is no indication there will be a quick recovery. Fortunately, Hyduke began its customer diversification initiatives in late 2014 as part of the major restructuring of the entire business. The objective was to diversify its client base beyond its traditional rig-support products and services and offer a superior and competitive product to oil and gas industry clients requiring other equipment and components made of steel, particularly in production operations. An aggressive sales and market development initiative began combined with implementing structural changes required to attract new clients.

The most significant changes in Hyduke's client base evident in the first quarter of the current fiscal year is direct sales to exploration and production (E&P) companies and engineering, procurement and construction (EPC) contractors. These are entirely new clients to Hyduke where we are building new products a key component of the long-term plan to diversify and reposition the Company as a general fabricator to multiple facets of the upstream oil and gas industry and other industries. This allows Hyduke to capitalize on its core strengths in capacity and fabrication while broadening its revenue stream and current and future opportunities.

However, executing the foregoing required investments beyond hiring more sales personnel and asking for business. It involved fundamental changes which included the bidding and quoting process, shop-floor workflow and utilization schedules, ensuring quality assurance and delivery protocols, and a major improvement to the Company's health and safety program and safety record.

For the first four months of 2016 Hyduke did not record a single lost time incident and reported a total recordable incident frequency (TRIF) of zero. This is vast improvement over previous years and a "take notice" performance metric for clients, vendors and potential employees. While not a short term monetary measure, improving health and safety performance is a long-term investment that will ultimately yield significant returns. E&P and EPC contractors have much more rigid health and safety procurement standards than traditional clients. Expanding the Company's business into these other markets would not have been possible without major changes in how the Company conducts its business and manages it human capital resources.

The Hyduke marketing and business development team has done a noteworthy job of seeking new business and explaining the Company's considerable strengths. This has resulted in new quotes, new business and new potential business in numerous upstream oil and gas industry segments in which Hyduke has never operated before, along with other industries. Every bid and quote is carefully prepared to ensure if we get the order an appropriate contributive gross profit margin will be generated. Based on the potential order book, Hyduke does not require a high "win" percentage to materially improve the financial performance of the Company.

Further, the ever-rising oil prices gives Hyduke some reasons for optimism regarding its core business of support drilling and service rig operations through fabrication, repairs, inspections, certification and operating supplies. The Company is of the view that the worst is over for oil prices follow record low levels in February of this year. While West Texas Intermediate benchmark crude prices exceeding US$46 per barrel as was the case in the second week of March is only half of what it was in June of 2014, that price is over 75% higher than the price in February of this year. On March 12 the International Energy Agency (IEA), the Paris-based world leader in global energy forecasting supply/demand, wrote, "…we note that OECD stocks grew in 1Q16 at the slowest pace since 4Q14 and in February they declined for the first time in a year.

This lends support to our view that the global supply surplus of oil will shrink dramatically later this year." IEA data is the foundation of the growing view that in the latter half of 2016 global supply and demand will be the closest in nearly two years thus supporting rising prices. While has yet to translate into a firmer order book, the change in the industry's outlook in the past few months is palpable.

That said, management must caution that the Company faces significant financial challenges, particularly in the short term. Full disclosure appears elsewhere in this document.

These challenges are not unique to Hyduke. But we believe Hyduke has more potential for new revenue sources than most companies in the oilfield services sector. The Board of Directors, management and staff are committed to seeing the Company through this downturn and emerging as a different and vastly improved organization when the job is done and the industry recovery currently underway improves financial performance.

Forward Looking Statements
This report contains certain forward-looking statements under the heading "Outlook" and elsewhere concerning future events or the Company's operations, anticipated financial performance, business prospects and strategies of Hyduke.  Forward-looking information typically contains statements with words such as "anticipate", "believe", "estimate", "expect", "plan", "intend" or similar words suggesting future outcomes or outlooks on, without limitation, estimates of business activity, supply and demand for the Company's products, the estimated amounts and timing of capital expenditures, anticipated future debt levels, or other expectations, beliefs, plans, objectives, assumptions or statements about future events or performance.  Readers are cautioned not to place undue reliance on forward-looking information. By its nature, forward-looking information involves numerous assumptions, inherent risks and uncertainties both general and specific that may cause actual future results to differ materially from those contemplated and contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur.  These factors may affect anticipated earnings or assets and include, but are not limited to: industry activity levels, market liquidity, customer credit risk, competition, oil and gas prices, product liability, fixed price contracts, development of new products, uninsured and underinsured losses, access to additional financing, source of supply of raw material and third party components, availability of key personnel, agreements and contracts, government regulations, foreign exchange exposure, interest rate risk, international scope of operations, environmental health and safety regulations and Hyduke's anticipation of and success in managing the risks implied by the foregoing.  The Company cautions that the foregoing list of important factors is not exhaustive.  The Company believes that the expectations reflected in the forward-looking statements are reasonable, but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this report should not be unduly relied upon.  The forward-looking statements in this report speak only as of the date of this report.  Hyduke undertakes no obligation to update publicly or otherwise revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required pursuant to applicable securities legislation.

About Hyduke

Trading on the TSX under the symbol "HYD," Hyduke Energy Services Inc. is a supplier of equipment and services to the oil and gas drilling and well servicing industry. 

The TSX has not reviewed and does not accept responsibility for the adequacy or accuracy of this News Release.

SOURCE Hyduke Energy Services Inc.