Essential Energy Services Announces Third Quarter Financial Results
CALGARY, Alberta, Nov. 06, 2019 (GLOBE NEWSWIRE) — Essential Energy Services Ltd. (TSX: ESN) (“Essential” or the “Company”) announces third quarter results.INDUSTRY OVERVIEWThird quarter 2019 industry drilling and well completion activity remained below 2018 in Western Canada as concerns about political, regulatory and market access issues continued throughout the quarter. Faced with this uncertainty, Canadian exploration and production (“E&P”) companies maintained their cautious approach to spending during the quarter, which led to lower drilling and completion activity in the Western Canadian Sedimentary Basin (“WCSB”). Third quarter 2019 well completions represented the lowest third quarter activity since 2016. Well completions declined 21% compared to the three months ended September 30, 2018 and 23% compared to the nine months ended September 30, 2018.HIGHLIGHTSRevenue for the three months ended September 30, 2019 was $39.3 million, a 22% decrease from the third quarter 2018, due to lower activity. Given the challenging industry backdrop, Essential’s persistent focus on cost management resulted in EBITDAS(1) of $6.3 million, only $0.8 million lower than the same prior year period, despite the $11.4 million decrease in revenue.Key operating highlights included:Essential Coil Well Service (“ECWS”) revenue was $22.6 million, 19% lower than the third quarter 2018. Gross margin improved to 26%, compared to 19% in the same prior year period despite lower revenue, primarily a result of cost management. Essential continues to be pleased with the demand for its equipment specifically designed to work on long-reach, deep horizontal wells, which experienced stronger activity than the third quarter 2018, despite the decline in industry.
Tryton revenue was $16.7 million, 27% lower than the third quarter 2018 as industry activity deteriorated. Gross margin was 22%, consistent with the same prior year period. Tryton’s conventional tools and rentals activity, while steady, was lower than the prior year period, as customers continued to spend on production and decommissioning work. Tryton’s MSFS® operations experienced sequential growth compared to the second quarter 2019, however activity remained below the third quarter 2018.For the nine months ended September 30, 2019, Essential reported revenue of $113.8 million, 23% lower than the prior year period. EBITDAS(1) was $15.2 million, a 15% decrease from the nine months ended September 30, 2018.Over the past twelve months, Essential reduced its long-term debt by $12.9 million, which was a significant accomplishment given the challenging industry environment. This was achieved through the Company’s focus on ensuring its service offerings meet customer demand, cost management and modest capital spending. At September 30, 2019, long-term debt was $10.8 million and funded debt(1) to bank EBITDA(1) was 0.7x. Working capital(1) was $54.4 million on September 30, 2019, exceeding long-term debt by $43.6 million. On November 6, 2019, Essential had $8.2 million of long-term debt outstanding.ECWS revenue for the three months ended September 30, 2019 was $22.6 million, a 19% decrease compared to the same prior year period, consistent with the 21% decrease in industry well completions. Lower revenue was due to decreased coil tubing and pumping activity. Although total ECWS operating hours were down, operating hours for the equipment designed to work on long-reach, deep horizontal wells were higher than the three months ended September 30, 2018. This equipment continued to be in demand, with activity weighted towards the Duvernay and Montney regions. Revenue per hour for coil tubing rigs and pumpers was relatively flat compared to the same prior year period.ECWS gross margin was 26%, higher than the three months ended September 30, 2018. Effective cost management, including wage reductions and a stronger focus on variable operating costs resulted in improvement from the same prior year period.On a year-to-date basis, ECWS revenue was $64.7 million, 20% lower than the nine months ended September 30, 2018, consistent with the 23% decrease in industry well completions. Gross margin, however, improved year-over-year to 23% of revenue, compared to 17% in the prior year period, a result of proactive and effective cost management practices.Third quarter 2019 Tryton revenue was $16.7 million, a 27% decrease compared to the third quarter 2018, due primarily to lower industry activity in Canada. Tryton’s Canadian MSFS® and conventional tool operations generated less revenue compared to the same prior year period, as customer activity slowed. Conventional tools and rentals activity, while steady, was slower than the third quarter 2018, as customers continued to spend on production and decommissioning work. Tryton’s MSFS® operations experienced sequential growth compared to the second quarter 2019, however, activity was below the third quarter 2018. Rentals revenue was lower than the third quarter 2018, due to decreased drilling activity. Tryton’s U.S. conventional downhole tool operations continued to generate higher quarter-over-quarter activity, particularly in Texas, from a broader customer base.Gross margin was 22% of revenue for the three months ended September 30, 2019, consistent with the third quarter 2018.On a year-to-date basis, Tryton revenue was $49.1 million, a 27% decrease compared to the nine months ended September 30, 2018. Gross margin was 19%, lower than the same prior year period. The year-over-year decline was due to decreased activity, particularly during the second quarter 2019, and fixed costs represented a greater portion of revenue. Pricing continued to be very competitive during the first nine months of 2019 for Tryton’s Canadian and U.S. operations.
During the nine months ended September 30, 2019, equipment expenditures included costs to retrofit a second Generation IV coil tubing rig and the purchase of Tryton rental pipe. This second retrofitted coil tubing rig is expected to be in-service in late 2019.Essential’s 2019 capital forecast remains unchanged at $8 million.OUTLOOKSimilar to 2018, fourth quarter Canadian oilfield service activity is expected to slow as the quarter progresses and customers complete their 2019 capital programs. During this time, Essential will continue to focus on balancing crew retention with cost management.Looking to 2020, some industry analysts are projecting E&P spending to be flat to slightly below 2019 levels as producers are generally focused on operating within cash flow. The Petroleum Services Association of Canada announced on October 31, 2019, its estimate that the number of wells drilled in 2020 will be 10% lower than its estimate for 2019. For Essential, visibility into 2020 will become clearer later in 2019 and early 2020 as customers announce their 2020 capital budgets and plan their work requirements.The Canadian oil and gas industry is nearing the start of a sixth year of industry downturn. The underlying issue was initially low global commodity prices, but soon evolved into Canadian political, regulatory and market access issues. Access to capital for E&P companies and oilfield service companies has become progressively more problematic as the duration of the downturn extends, and the “made in Canada” egress issues have not been resolved.Beyond 2020, there are some positives for the industry including the possibility of completion of the Trans Mountain Pipeline, incremental Enbridge takeaway capacity and progression of an LNG industry in Canada.Essential’s financial position continues to be strong with long-term debt outstanding, net of cash at November 6, 2019 of $6.6 million. At September 30, 2019, funded debt(1) to bank EBITDA(1) was 0.7x. Essential’s focus on ensuring services meet customer demand, cost management and modest capital spending has resulted in long-term debt decreasing from $23.7 million at September 30, 2018 to $10.8 million at September 30, 2019.CHANGE IN ACCOUNTING POLICY – IFRS 16 – LEASESOn January 1, 2019, Essential adopted the IFRS 16 – Leases standard (“IFRS 16”). Comparative information, including non-GAAP measures, has not been restated and therefore may not be comparable. Where the impact was material, the amounts have been quantified for comparative analysis purposes in the respective sections of this document. The implications for the nine months ended September 30, 2019 were:On January 1, 2019, Essential recognized a right-of-use asset of $14.1 million, and a lease liability of $18.4 million for its office and shop premises. Leases are capitalized at the commencement of each lease at the present value of the future lease payments;Lease payments, which were previously expensed as either an operating or general and administrative expense, are no longer expensed. There is now a depreciation charge for the right-of-use asset on a straight-line basis over the lease term; and
As lease payments are made, the lease liability is reduced by the discounted value of each lease payment, with the difference between the amount of the lease payment and the discounted value of the lease payment recognized as a finance cost over the term of the lease.This change in accounting policy increased gross margin, EBITDAS(1) and net income for the three months ended September 30, 2019 by $1.0 million, $1.4 million and $0.2 million, respectively, compared to the prior year period. Depreciation expense and finance costs related to the right-of-use asset and lease liability increased by $0.9 million and $0.3 million, respectively, compared to the prior year.For the nine months ended September 30, 2019, gross margin, EBITDAS(1) and net income increased by $2.8 million, $3.9 million and $0.4 million, respectively, compared to the prior year period. Depreciation expense and finance costs related to the right-of-use asset and lease liability increased by $2.5 million and $0.8 million, respectively, compared to the prior year.The Management’s Discussion and Analysis (“MD&A”) and Financial Statements for the quarter ended September 30, 2019 are available on Essential’s website at www.essentialenergy.ca and on SEDAR at www.sedar.com.(1)Non-IFRS MeasuresThroughout this press 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 income and net income 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 income and net income 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 onerous lease contract expense and severance costs (“Permitted Adjustments”) and excluding the impact of IFRS 16, for the most recent trailing twelve months.EBITDAS (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 related to IFRS 16.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 previously acquired 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.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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CONSOLIDATED INTERIM STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME
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CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(Unaudited)FORWARD-LOOKING STATEMENTS AND INFORMATION
This press release contains “forward-looking statements” and “forward-looking information” (collectively referred to herein as “forward-looking statements”) within the meaning of applicable securities legislation. Such forward-looking statements include, without limitation, forecasts, estimates, expectations and objectives for future operations that are subject to a number of material factors, assumptions, risks and uncertainties, many of which are beyond the control of the Company.Forward-looking statements are statements that are not historical facts and are generally, but not always, identified by the words “expects”, “plans”, “anticipates”, “believes”, “intends”, “estimates”, “continues”, “future”, “project”, “beyond”, “possible”, “forecasts”, “potential”, “budget” and similar expressions, or are events or conditions that “will”, “would”, “may”, “likely”, “could”, “should”, “can”, “typically”, “traditionally” or “tends to” occur or be achieved. This press release contains forward-looking statements, pertaining to, among other things, the following: Essential’s capital forecast and timing; oil and natural gas industry activity and outlook; and Essential’s outlook, activity levels and operational focus.Although the Company believes that the material factors, expectations and assumptions expressed in such forward-looking statements are reasonable based on information available to it on the date such statements are made, undue reliance should not be placed on the forward-looking statements because the Company can give no assurances that such statements and information will prove to be correct and such statements are not guarantees of future performance. Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties.Actual performance and results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to: known and unknown risks, including those set forth in the Company’s Annual Information Form (“AIF”) (a copy of which can be found under Essential’s profile on SEDAR at www.sedar.com); the risks associated with the oilfield services sector, including 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, market 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; potential industry developments; and other unforeseen conditions which could impact the use of services supplied by the Company. Accordingly, readers should not place undue importance or reliance on the forward-looking statements. Readers are cautioned that the foregoing list of factors is not exhaustive and should refer to “Risk Factors” set out in the AIF.Statements, including forward-looking statements, contained in this press release are made as of the date they are given and the Company disclaims any intention or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws. The forward-looking statements contained in this press release are expressly qualified by this cautionary statement.Additional information on these and other factors that could affect the Company’s operations and financial results are included in reports on file with applicable securities regulatory authorities and may be accessed under Essential’s profile on SEDAR at www.sedar.com.2019 THIRD QUARTER FINANCIAL RESULTS CONFERENCE CALL AND WEBCAST DETAILSEssential has scheduled a conference call and webcast at 10:00 am MT (12:00 pm ET) on November 7, 2019.The conference call dial in numbers are 416-340-2217 or 800-806-5484, passcode 8806189.An archived recording of the conference call will be available approximately one hour after completion of the call until November 21, 2019 by dialing 905-694-9451 or 800-408-3053, passcode 1529277.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 ESSENTIALEssential provides oilfield services to oil and natural gas producers, primarily in western Canada. Essential offers completion, production and decommissioning services to a diverse customer base. Services are offered with coil tubing, fluid and nitrogen pumping and the sale and rental of downhole tools and equipment. Essential offers one of the largest coil tubing fleets in Canada. Further information can be found at www.essentialenergy.ca.MSFS® is a registered trademark of Essential Energy Services Ltd.The TSX has neither approved nor disapproved the contents of this news release.PDF available: http://ml.globenewswire.com/Resource/Download/4753ab95-fb74-4382-b7e4-5bd0d8871ca8For further information, please contact:
Garnet K. Amundson
President and CEO
Phone: (403) 513-7272