Essential Energy Services Announces First Quarter Financial Results

CALGARY, Alberta, May 13, 2020 (GLOBE NEWSWIRE) — Essential Energy Services Ltd. (TSX: ESN) (“Essential” or the “Company”) announces first quarter results.

INDUSTRY OVERVIEW
First quarter 2020 industry drilling and well completion activity remained below 2019 levels in Western Canada. Well completions, a key indicator of industry activity in the Western Canadian Sedimentary Basin (“WCSB”) declined 9% compared to the first three months of 2019.Near-term economic, political and social consequences of the COVID-19 pandemic and the extraordinary measures to contain its spread, started to evolve rapidly in March 2020. Demand destruction for oil intensified as the quarter progressed, as a result of the disruptive impact of the COVID-19 pandemic, concurrent with the effects of the price war between Russia and Saudi Arabia. West Texas Intermediate (“WTI”) oil price dropped to U.S. $14 per barrel at the end of March, as excess oil in the market began raising fears about storage capacity limits being reached. The compounded effect created substantial uncertainty for North American exploration and production (“E&P”) and oilfield service companies by the end of the first quarter 2020.HIGHLIGHTSRevenue for the three months ended March 31, 2020 was $41.4 million, a 13% decrease from the first quarter 2019. Both Essential Coil Well Service (“ECWS”) and Tryton experienced a decrease in activity as customers opted to defer or reduce spending in response to worsening commodity prices and the onset of the COVID-19 pandemic. EBITDAS⁽¹⁾ was $5.9 million, $1.7 million lower compared to the same prior year period due primarily to lower revenue.Key highlights included:ECWS revenue was $24.5 million, 6% lower than the first quarter 2019, in comparison to a 9% decline in industry well completions. Management was pleased with gross margin of $5.8 million or 24%, consistent with the first quarter 2019, despite the decrease in revenue.
 Tryton revenue was $16.9 million, 21% lower compared to the first quarter 2019. Tryton Multi-Stage Fracturing System^® (“MSFS^®”) sales experienced growth from both the third and fourth quarters 2019, as customers resumed spending on completion activities; however, activity remained below the first quarter 2019.
 In the face of the COVID-19 pandemic and the uncertainties surrounding it, Essential quickly adapted its operations and processes to remain focused on delivery of high-quality service to customers, in a safe work environment for employees. As the Company is deemed an essential service, staff continued to work while respecting the COVID-19 physical distancing parameters and Essential’s occupational health and safety policies, as well as recommendations of health authorities and its customers.Essential was in a strong financial position with long-term debt net of cash of $7.6 million and funded debt⁽¹⁾ to bank EBITDA⁽¹⁾ of 0.8x at March 31, 2020. Working capital⁽¹⁾ was $53.5 million on March 31, 2020, exceeding long-term debt by $45.0 million. On May 13, 2020 Essential had $1.0 million of long-term debt net of cash.RESULTS OF OPERATIONSECWS first quarter 2020 revenue was $24.5 million, a 6% decrease compared to the same prior year period, which was better than the 9% decrease in industry well completions in the same period. Activity was steady during the first three months of 2020, despite being disrupted by a prolonged cold stretch in January. Operating hours decreased only 2%, with customer demand for Essential’s deeper Generation III and IV coil tubing rigs and high rate fluid pumpers consistent with the first quarter 2019. Revenue per hour declined slightly, primarily due to the mix of work.Management was pleased with the ECWS gross margin of $5.8 million, or 24%, for the first quarter 2020. Due to continued strong cost management practices, gross margin percentage remained consistent with the same prior year period, despite the decline in revenue.Tryton first quarter 2020 revenue decreased 21% compared to the same quarter 2019. Tryton MSFS^® sales experienced growth from both the third and fourth quarters 2019, as customers resumed spending on completion activities, however activity remained below the first quarter 2019. MSFS® revenue also decreased as customers opted to use lower-cost completion techniques, including Tryton’s composite bridge plugs, that generate lower revenue per job compared to Tryton’s ball & seat systems. Tryton U.S. revenue increased slightly compared to the same prior year period, as customers increased spending on well maintenance and decommissioning work, particularly in the Permian Basin.Gross margin in the first quarter 2020 decreased to 17% of revenue compared to 21% in the same prior year period, as fixed costs represented a greater portion of revenue.International Financial Reporting Standards (“IFRS”) requires the Company to assess the carrying value of assets in the cash generating units when there are impairment indicators. At March 31, 2020, the industry outlook had deteriorated since December 31, 2019 with the compounded impact of worldwide events, including the onset of the COVID-19 pandemic, a sharp decrease in demand for oil and a significant reduction in North American E&P companies’ 2020 drilling and completion budgets, requiring Essential to complete an impairment assessment. The impairment assessment determined that the fair value of Essential’s ECWS and Tryton segments were less than their carrying values. The Company recognized an impairment loss in the first quarter of 2020 of $10.3 million: $5.2 million on ECWS equipment, $1.4 million on Tryton rental assets and $3.7 million on goodwill (2019 – nil).Essential classifies its equipment expenditures as growth capital⁽¹⁾ and maintenance capital⁽¹⁾:
Essential reduced its 2020 capital budget from $5 million to $2 million, in response to the combined effects of the reduction in demand for oil, the COVID-19 global health pandemic and the increase in global oil supply that resulted in a sharp decline in the price of oil. Essential’s capital spending will focus on critical maintenance activities and is expected to be funded with cash from operations and its Credit Facility.OUTLOOKBy now, the economic destruction, globally and locally, from the COVID-19 global health pandemic is well known. From an oil perspective, the combined effects of the reduction in the demand for oil due to COVID-19 and the increase in oil supply has resulted in a sharp price decline, to the point of negative WTI prices on some days in April 2020. Western Canadian Select fared even worse, trading below U.S. $10.00 per barrel and into negative territory in mid-April. This is having a negative effect on current and forecasted drilling and completion activity in Canada and the United States and has decreased the demand for oilfield services by E&P companies.At Essential, activity in April softened but results have come in reasonably close to management’s expectations. While it is typically a slow month due to spring breakup, the macroeconomic issues have slowed activity even further. For the remainder of the year, Essential is anticipating demand for its services will decrease relative to 2019. The extent of the decrease, however, is difficult to predict.It became apparent in mid-March that significant cost cutting initiatives would be required to preserve positive operational cash flow generation in 2020. Despite Essential’s exceptionally low debt and financial position, early and significant cost reductions were necessary to preserve these advantages. During April and May, the following initiatives were implemented:A 50% reduction in Board of Director compensation;A 50% reduction in the salary of the President and Chief Executive Officer;Salary and wage reductions through most levels of the organization, with senior level staff taking more significant reductions than junior roles;Bonus programs and most incentive and activity-based compensation programs were suspended;Reduction of certain employee benefit plans;Staff headcount reductions including permanent and temporary layoffs; andOther cost saving initiatives throughout the organization, including inventory reduction initiatives.In addition to the significant cost reductions implemented, Essential’s headcount has been reduced from 380 employees at January 1, 2020 to 245 employees at May 13, 2020.In mid-April, ECWS announced its intention to reduce its active fleet from 16 coil tubing and pumping packages to 8 packages. The inactive equipment will be parked but can be available to re-enter service as market demand dictates. The smaller active fleet allows ECWS to maintain a smaller group of assets and, as a result, the Company’s 2020 capital spending forecast is only $2 million. One bright spot for ECWS occurred during April, as a depth record was set by it for coil tubing in the WCSB. Rig 2050, a Generation IV retrofit rig, reached 7,760 meters on a horizontal well completion while conducting mill-out work.In anticipation of similar activity reductions in Tryton, wage reductions and part-time work arrangements were implemented to reduce costs and preserve the employee base. On April 17, 2020, the federal government announced $1.7 billion of funding for orphan and inactive wells. On May 1, 2020, the Alberta government provided a framework for its $1 billion allotment of those funds with the Alberta Site Rehabilitation Plan. With Tryton being a primarily Alberta-based supplier of downhole tools and abandonment expertise, it is actively pursuing these opportunities and hopes to be successful with a number of projects.Essential expects to benefit from the Canada Emergency Wage Subsidy program. Funds are expected to be available to the Company in the second and third quarter of 2020.While the price of oil and oil-related activity has been especially hard hit, there may be a reason for optimism with natural gas-related work. The price of AECO has been trading higher, and with less volatility to-date in 2020, compared to most of 2019. As Essential’s services are suitable for oil and natural gas-related work, an improvement in natural gas activity would be a welcome change, albeit, gas-related activity has had a small role in the WCSB in recent years.The value and importance of Essential’s low-debt strategy over the past few years has never been more apparent than it is now. At the end of March, Essential’s funded debt to bank EBITDA covenant was only 0.8x. Essential anticipates being covenant compliant through the remainder of 2020. This is an enviable position at this point in the cycle. On May 13, 2020, long-term debt, net of cash, was $1.0 million.The Management’s Discussion and Analysis and Financial Statements for the quarter ended March 31, 2020 are available on Essential’s website at www.essentialenergy.ca and on SEDAR at www.sedar.com.⁽¹⁾Non-IFRS MeasuresThroughout 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 loss and net loss 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 loss and net loss per share as calculated in accordance with IFRS.Bank EBITDA – Bank EBITDA is generally defined in Essential’s Credit Facility as EBITDAS, including the equity cure, excluding severance costs and excluding the impact of IFRS 16, for the most recent trailing twelve months.EBITDAS – EBITDAS is earnings before finance costs, income taxes, depreciation, amortization, transaction costs, losses or gains on disposal, write-down of assets, impairment loss, foreign exchange gains or losses, 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 results from its principal business activities.Funded debt – Funded debt is generally defined in Essential’s Credit Facility as long-term debt, including current portion of long-term debt plus deferred financing costs and bank indebtedness, net of cash. It does not include the lease liability.Growth capital – Growth capital is capital spending which is intended to result in incremental revenue. Growth capital is considered to be a key measure as it represents the total expenditures on equipment expected to add incremental revenue to Essential.Maintenance capital – Equipment additions that are incurred in order to refurbish, replace or extend the life of existing equipment.Net equipment expenditures – This measure is equipment expenditures less proceeds on the disposal of equipment. Essential uses net equipment expenditures to describe net cash outflows related to managing Essential’s property and equipment.Net income before impairment loss – This measure is net (loss) income before impairment loss, net of taxes. Management believes it is a relevant measure as it provides an indication of Essential’s results from its principal business activities.Working capital – Working capital is calculated as current assets less current liabilities.ESSENTIAL ENERGY SERVICES LTD.
CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION
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