CALGARY, Nov. 3, 2016 /CNW/ - Secure Energy Services
Inc. ("Secure" or the "Corporation") (TSX – SES) announced today
operational and financial results for the three and nine months
ended September 30, 2016. The
following should be read in conjunction with the management's
discussion and analysis ("MD&A") and the interim consolidated
financial statements and notes thereto of Secure which are
available on SEDAR at www.sedar.com.
Q3 2016 OPERATIONAL AND FINANCIAL HIGHLIGHTS
For the three months ended September 30,
2016, Secure realized Adjusted EBITDA of $27.4 million, demonstrating continued
resilience during a period of reduced oil and gas activity levels.
Unseasonably wet weather conditions and continuing weak commodity
prices hampered industry activity across Western Canada during the third quarter.
Compared to the prior year, during the three months ended
September 30, 2016, industry rig
counts were down 35% and metres drilled declined 31%, impacting
both the DPS and PRD divisions. Additionally, wet weather caused
project work delays within the OS division as site access was
restricted. However, the impact of these factors was partially
mitigated by ongoing production related volumes in the PRD
division, the addition of new facilities, a continued focus on cost
controls, and diversification of services offered across the
Corporation.
During the quarter, Secure continued to expand its market
presence with the opening of the new Kakwa FST located south of
Grande Prairie. Secure also closed
an acquisition resulting in an increase in Secure's ownership of
the La Glace and Judy Creek
FSTs to 100% (the "JV Acquisition"). Secure is continuing to
seek out and evaluate opportunities to organically build or acquire
assets that will provide meaningful growth for 2017 and
beyond.
Throughout 2016, Secure has achieved numerous operational
successes; as a result, the Corporation has continued to generate
positive funds from operations during the extended downturn in oil
and gas activity and relatively poor price environment,
demonstrating that positive cash flows from operating activities
are sustainable at the current oil and gas price and activity
levels with its current midstream infrastructure. Some of these
operational highlights to date in 2016 include:
- Completing construction of the Kakwa FST, a facility that was
designed and constructed to meet specific customer requirements in
a capacity constrained region;
- Expanding Secure's midstream facility network in Saskatchewan through the acquisition of all of
the operating assets of PetroLama Energy Inc. and the expansion of
the Corporation's Kindersley FST to increase storage and services,
expected to be completed in late 2016;
- Increasing capacity to meet demand at various existing
facilities by adding additional tanks and disposal wells, and
expanding landfill cells;
- Performing various drilling, completion, production and
remediation services for ten of the most active drillers in
Western Canada;
- Gaining customer traction with the DPS division's new
production chemicals and enhanced oil recovery service line;
- Working with customers in the Alberta Deep Basin and Duvernay
Formation on water recycling, storage and logistics.
The Corporation's strong balance sheet has allowed Secure to
maintain a monthly dividend, pursue accretive acquisition
opportunities, and continue investing in organic capital projects
in capacity constrained regions. At September 30, 2016, Secure's net debt was
$86.8 million, and the
Corporation is operating well within its credit facility covenant
restrictions.
The Corporation continues its disciplined approach to
maintaining a strong balance sheet to effectively manage the
business through a period of lower commodity pricing and industry
activity. As a result of this approach, Secure has maintained a
debt to EBITDA ratio, as defined by the Corporation's credit
facility, of 2.1 at September 30,
2016, well below other oilfield service providers during the
extended downturn in oil and gas activity.
The financial highlights for the three and nine months ended
September 30, 2016 and 2015 can be summarized as follows:
|
|
Three months ended
Sept 30,
|
Nine months ended
Sept 30,
|
($000's except
share and per share data)
|
|
2016
|
2015
|
%
change
|
2016
|
2015
|
%
change
|
Revenue (excludes oil
purchase and resale)
|
|
100,160
|
148,943
|
(33)
|
268,575
|
431,128
|
(38)
|
Oil purchase and
resale
|
|
301,640
|
184,393
|
64
|
610,965
|
625,324
|
(2)
|
Total
revenue
|
|
401,800
|
333,336
|
21
|
879,540
|
1,056,452
|
(17)
|
Adjusted EBITDA
(1)
|
|
27,431
|
35,362
|
(22)
|
61,054
|
94,844
|
(36)
|
|
Per share ($),
basic
|
|
0.17
|
0.26
|
(35)
|
0.40
|
0.72
|
(44)
|
Net loss
|
|
(8,121)
|
(53,042)
|
(85)
|
(38,868)
|
(73,045)
|
(47)
|
|
Per share ($), basic
and diluted
|
|
(0.05)
|
(0.39)
|
(87)
|
(0.25)
|
(0.55)
|
(55)
|
Adjusted net
loss(1)
|
|
(7,617)
|
(1,563)
|
387
|
(36,681)
|
(15,516)
|
136
|
|
Per share ($),
basic
|
|
(0.05)
|
(0.01)
|
400
|
(0.24)
|
(0.12)
|
100
|
Funds from operations
(1)
|
|
26,499
|
29,808
|
(11)
|
56,602
|
83,055
|
(32)
|
|
Per share ($),
basic
|
|
0.17
|
0.22
|
(23)
|
0.37
|
0.63
|
(41)
|
Dividends per common
share
|
|
0.06
|
0.06
|
-
|
0.18
|
0.18
|
-
|
Capital expenditures
(1)
|
|
39,624
|
27,421
|
45
|
135,469
|
88,159
|
54
|
Total
assets
|
|
1,406,641
|
1,400,438
|
-
|
1,406,641
|
1,400,438
|
-
|
Net debt
(1)
|
|
86,811
|
143,547
|
(40)
|
86,811
|
143,547
|
(40)
|
Common Shares - end
of period
|
|
159,930,448
|
137,297,777
|
16
|
159,930,448
|
137,297,777
|
16
|
Weighted average
common shares - basic and diluted
|
|
159,618,869
|
136,944,300
|
17
|
152,715,722
|
131,992,359
|
16
|
(1)
Refer to "Non-GAAP measures, operational definitions and additional
subtotals" for further information.
|
- REVENUE OF $401.8 MILLION AND $879.5 MILLION FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 2016
- Total processing, recovery and disposal volumes at PRD
facilities for the three and nine months ended September 30, 2016 decreased over the 2015
comparative periods as poor weather conditions and continued low
oil prices negatively impacted volumes at PRD facilities from
drilling and completion related activities. The impact of the above
to the PRD division's revenue was partially mitigated by ongoing
production related volumes and the addition of facilities in 2015
and 2016 to date, which included the construction and commissioning
of Tulliby Lake FST, Kakwa FST, Big Mountain SWD, and Wonowon SWD,
the conversion of the Rycroft FSR to include water disposal
services, the conversion of 13 Mile from an SWD to an FST, the
acquisition of the Alida crude oil
terminalling facility from PetroLama Energy Canada Inc. in
June 2016, and the JV Acquisition in
July 2016. Overall, this resulted in
the PRD division achieving revenue (excluding oil purchase and
resale) of $50.7 million and
$136.8 million, down 17% and 27% from
the 2015 comparative periods;
- Oil purchase and resale revenue in the PRD division for the
three and nine months ended September 30,
2016 increased by 64% and decreased by 2% from the 2015
comparative periods to $301.6 million
and $611.0 million, respectively. The
increase in the three months ended September
30, 2016 is primarily due to additional oil purchase and
resale volumes related to the newly acquired Alida facility and the increased ownership in
the Judy Creek and La Glace FSTs;
- Activity in the DPS division is strongly correlated with oil
and gas drilling activity in the Western Canadian Sedimentary Basin
("WCSB"), where the rig count in the three and nine months ended
September 30, 2016 decreased by 35%
and 44% from the respective 2015 comparative periods. As a result
of these decreased activity levels and pricing pressures, DPS
division revenue less non-recurring items decreased by 45% and 46%
to $26.8 million and $73.3 million in the three and nine months ended
September 30, 2016;
- OS division revenue decreased 37% and 38% in the three and nine
months ended September 30, 2016 from
the 2015 comparative periods to $22.7
million and $58.5 million,
respectively. The decrease is primarily due to reduced Projects
revenue resulting from two significant jobs in the nine months
ended September 30, 2015 for which
there was no equivalents to date in 2016,
wet weather conditions in the third quarter restricting site
access and delaying job starts, and lower completion activities
given the poor weather conditions and low oil price. The impact to
revenue was partially mitigated by new service offerings and
geographic expansion.
- ADJUSTED EBITDA OF $27.4
MILLION AND $61.1 MILLION FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2016
- Adjusted EBITDA of $27.4 million
for the three and nine months ended September 30, 2016 was driven by certain service
lines that are not as heavily impacted by drilling and completion
activity. Additionally, Secure has streamlined operations which has
resulted in strong operating margins and decreased fixed costs
across the Corporation's cost structure. As a result, Adjusted
EBITDA decreased 22% and 36% from the same periods in 2015;
- Adjusted EBITDA for the three and nine months ended
September 30, 2016 was impacted by
unseasonable weather conditions causing a reduction in drilling and
completion activity throughout the WCSB which most heavily impacted
the DPS division as the majority of operations are currently tied
to drilling operations. The decrease in the PRD division was
partially offset by ongoing production related volumes, the
construction of new facilities in 2015 and 2016 and expansions at
certain of the Corporation's existing facilities in the past year,
the PetroLama and JV Acquisitions, and cost saving initiatives
implemented in 2015 and 2016 which has resulted in a strong
operating margin and reduced general and administrative costs. The
decrease in the OS division due to project work delays resulting
from wet weather, and reduced services correlated to completions
activity was somewhat mitigated by geographic expansion, new and
diversified service lines and integrated service offerings.
- NET LOSS OF $8.1 MILLION AND
$38.9 MILLION FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2016
- For the three and nine months ended September 30, 2016, Secure's net loss of
$8.1 million and $38.9 million improved 85% and 47% compared to
net losses of $53.0 million and
$73.0 million in the three and nine
months ended September 30, 2015. The
decrease in net loss is primarily a result of a $62.8 million non-cash impairment charge recorded
in the third quarter of 2015 in response to the decrease in
commodity prices and industry activity levels in the prior year. No
impairment has been recorded in 2016 to date.
- ADJUSTED NET LOSS OF $7.6
MILLION AND $36.7 MILLION FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2016
- For the three and nine months ended September 30, 2016, Secure's adjusted net loss of
$7.6 million and $36.7 million increased from $1.6 million and $15.5
million in the three and nine months ended September 30, 2015 primarily as a result of the
factors discussed above impacting Adjusted EBITDA, partially offset
by lower general and administrative expenses and business
development expenses as the Corporation is realizing the cost
saving initiatives implemented in 2015 and 2016. Secure has reduced
personnel levels to match current industry activity levels, as well
as reduced discretionary spending and streamlined and consolidated
support functions where possible.
- CAPITAL EXPENDITURES OF $39.6
MILLION AND $135.5 MILLION FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2016
- Excluding business acquisitions, capital expenditures for the
three and nine months ended September 30,
2016 of $12.9 million and
$47.2 million relates primarily
to:
- Construction of the Kakwa FST, which opened in August 2016;
- Disposal well additions at the Kaybob and Big Mountain SWD
facilities;
- Landfill cell expansion at the Grande
Prairie landfill;
- Sustaining capital expenditures at existing facilities required
to maintain ongoing business operations.
- PETROLAMA ACQUISITION
- On June 1, 2016, Secure closed
the acquisition of all the operating assets (excluding working
capital) of PetroLama Energy Canada Inc. ("PetroLama Acquisition").
The main asset acquired by the Corporation from PetroLama is a
crude oil terminal in Alida,
Saskatchewan which is connected to the Enbridge Pipelines
(Saskatchewan) Inc. pipeline
system and includes truck unload risers and storage tanks. Secure
also acquired various marketing contracts relating to the purchase,
sale and transportation of propane, butane and condensate,
including access to crude oil storage at Cushing, Oklahoma;
- The PetroLama Acquisition provides Secure with an attractive
entry point into the southeast Saskatchewan midstream market. Secure has
expanded its market presence and enhanced its service offering for
continued midstream growth. The Alida terminal, a facility constructed in
2013, is uniquely positioned for sustainable cash flow generation
in a new market area. Secure expects to leverage PetroLama's
existing business into further growth opportunities and build upon
PetroLama's relationships with oil producers, marketers and
refiners with its breadth of oil and gas services. Secure expects
its size and strong history of operational expertise in the PRD
division will allow the Corporation to achieve certain operating
efficiencies;
- The purchase price was paid with $61.7 million in cash and the balance of
$5.9 million through the
issuance of 664,972 common shares of the Corporation ("Common
Shares"), and included $13.8 million of crude oil inventory stored
at Cushing, Oklahoma. The value of
the oil inventory fluctuates with oil prices and the U.S. dollar.
At September 30, 2016, the oil
inventory was valued at $14.1 million and is hedged with futures
contracts.
- JV ACQUISITION
- On July 12, 2016, Secure
completed the acquisition of the outstanding 50% interest in all of
the joint venture assets of the La
Glace and Judy Creek facilities, increasing Secure's
interest in these facilities to 100%;
- The purchase price of $26.6
million included working capital and was funded through
existing capacity under the Corporation's credit facility. The JV
Acquisition relieves Secure of the administrative requirements of
operating the facilities under a joint venture structure, while
adding additional cash flow from an increase in ownership in the
facilities.
- FINANCIAL FLEXIBILITY
- On March 22, 2016, the
Corporation completed a bought deal common share financing (the
"Offering"), issuing a total of 19,550,000 Common Shares at a price
of $7.65 per Common Share for gross
proceeds of $149.6 million. Proceeds
of the Offering have been used to repay outstanding debt and fund
the cash portion of the PetroLama Acquisition and JV Acquisition,
with the remaining balance expected to be used to fund capital
expenditures, for other strategic acquisition opportunities, and/or
general working capital purposes;
- The total amount drawn on Secure's credit facility as at
September 30, 2016 decreased 23% to
$202.0 million compared to
$262.0 million at December 31, 2015. The Corporation strengthened
its balance sheet and increased its financial flexibility to take
advantage of opportunities during the current low commodity price
environment;
- Secure is in compliance with all covenants related to its
credit facility at September 30,
2016. Secure's debt to trailing twelve month EBITDA ratio,
where EBITDA is defined in the lending agreement as earnings before
interest, taxes, depreciation, depletion and amortization, and is
adjusted for non-recurring losses, any non-cash impairment charges
and any other non-cash charges, and acquisitions on a pro-forma
basis, was 2.1 as at September 30,
2016 compared to 2.2 as at December
31, 2015. The Corporation is required under its credit
facility to maintain a debt to EBITDA ratio of less than 3.5 to
1.0;
- As at September 30, 2016, the
Corporation had $462.4 million
available under its credit facility, subject to maintaining the
debt to EBITDA ratio described above.
PRD DIVISION OPERATING HIGHLIGHTS
|
|
Three months ended
Sept 30,
|
Nine months ended
Sept 30,
|
($000's)
|
|
2016
|
2015
|
%
Change
|
2016
|
2015
|
%
Change
|
Revenue
|
|
|
|
|
|
|
|
|
PRD services
(a)
|
|
50,669
|
60,881
|
(17)
|
136,825
|
187,563
|
(27)
|
|
Oil purchase and
resale service
|
|
301,640
|
184,393
|
64
|
610,965
|
625,324
|
(2)
|
Total PRD division
revenue
|
|
352,309
|
245,274
|
44
|
747,790
|
812,887
|
(8)
|
|
|
|
|
|
|
|
|
Direct expenses
less non-recurring items(1)
|
|
|
|
|
|
|
|
|
PRD
services
|
|
23,322
|
28,928
|
(19)
|
65,815
|
92,660
|
(29)
|
|
Deduct: non-recurring
items
|
|
|
|
|
|
|
|
|
|
Severance and related
costs
|
|
(4)
|
(119)
|
(97)
|
(583)
|
(307)
|
90
|
|
PRD services less
non-recurring items (b)
|
|
23,318
|
28,809
|
(19)
|
65,232
|
92,353
|
(29)
|
|
Oil purchase and
resale service
|
|
301,640
|
184,393
|
64
|
610,965
|
625,324
|
(2)
|
Total PRD division
direct expenses less non-recurring items
(1)
|
|
324,958
|
213,202
|
52
|
676,197
|
717,677
|
(6)
|
|
|
|
|
|
|
|
|
Operating Margin
(1) (a-b)
|
|
27,351
|
32,072
|
(15)
|
71,593
|
95,210
|
(25)
|
|
|
|
|
|
|
|
|
Operating Margin
(1) as a % of revenue (a)
|
|
54%
|
53%
|
|
52%
|
51%
|
|
(1) Refer
to "Non-GAAP measures, operational definitions and additional
subtotals" for further information
|
Highlights for the PRD division for the three and nine months
ended September 30, 2016
included:
- Processing, recovery and disposal revenue of $50.7 million and $136.8
million for the three and nine months ended September 30, 2016 is down 17% and 27% from the
2015 comparative periods, primarily as a result of lower drilling
and completion activity impacting volumes. The continued low oil
price, combined with unseasonably wet weather conditions during the
third quarter, has resulted in a 44% and 67% drop during the nine
months ended September 30, 2016 in
industry rig counts in the WCSB and North
Dakota, respectively, from the 2015 comparative period,
which has resulted in a significant decline in volumes associated
with drilling and completion activities in the Corporation's
service areas. Production related services have been impacted by a
much lesser extent in the three and nine months ended September 30, 2016 compared to the same periods
in 2015 due to ongoing production related volumes, the construction
of new facilities in 2015 and 2016, expansions at certain of the
Corporation's existing facilities in the past year, and the
PetroLama and JV Acquisitions;
- The addition of new facilities, both organically and through
acquisitions, accounted for $6.0
million and $18.9 million of
revenue in the three and nine months ended September 30, 2016, offsetting the negative
revenue variance when comparing to the same periods in 2015 by
10%;
- Processing volumes in the three and nine months ended
September 30, 2016 declined 9% and
17% from the 2015 comparative periods and relate primarily to
emulsion and waste processing. Disposal volumes declined 7% and 17%
in the three and nine months ended September
30, 2016 from the 2015 comparative periods due to a decrease
in flow back water from completion activities and disposal of
drilling waste in Secure's landfills. Produced water volumes
remained relatively stable period over period;
- Recovery revenues decreased 20% and 30% in the three and nine
months ended September 30, 2016 from
the comparative 2015 periods due to lower recovered oil sales as a
result of the factors described above, compounded by a 4% and 15%
decrease in average crude oil prices from approximately
$61 to $59 in the quarter and from
$64 to $55 in the year to date. The
impact on recovery revenues from recovered oil sales was partially
mitigated by the Corporation's ability to capitalize on crude oil
marketing opportunities at its pipeline connected FSTs and the
Alida crude oil terminalling
facility, resulting in relatively stable crude oil marketing
revenues in the three and nine months ended September 30, 2016 and 2015;
- Oil purchase and resale revenue in the PRD division for the
three and nine months ended September 30,
2016 increased by 64% and decreased by 2% from the 2015
comparative periods to $301.6 million
and $611.0 million. The increase in
the three months ended September 30,
2016 is primarily due to additional oil and purchase resale
volumes related to the newly acquired Alida facility and the increased ownership in
the Judy Creek and La Glace FSTs, which in total accounted for
approximately half of oil purchase and resale revenue in the three
months ended September 30, 2016;
- Direct expenses less non-recurring items from PRD services for
the three and nine months ended September
30, 2016 decreased 19% and 29% to $23.3 million and $65.2
million from $28.8 million and
$92.4 million in the comparative
periods of 2015. The decrease in direct expenses less non-recurring
items relates primarily to fewer variable costs resulting from
lower volumes in the periods, fewer fixed costs associated with
Secure's rail operations as the Corporation has reduced the cost
structure associated with the rail transloading facilities to best
match current activity levels, upfront commissioning costs incurred
in 2015 associated with the 13 Mile and Tulliby Lake FSTs, the
Wonowon and Big Mountain SWDs, and
the Rycroft FSR (only the Kakwa FST has been commissioned to date
in 2016), and a decrease in employment and other costs resulting
from cost saving initiatives implemented by the Corporation in 2015
and 2016;
- Operating margin as a percentage of PRD services revenue for
the three and nine months ended September
30, 2016 was up slightly to 54% and 52% compared to 53% and
51% in the comparative periods of 2015. The increase in operating
margin as a percentage of revenue during the three and nine months
ended September 30, 2016 and 2015 is
due to cost saving initiatives implemented in 2015 and 2016,
including reducing employment costs, reduced costs associated with
the Corporation's rail transloading facilities, and the elimination
of start-up costs associated with new facilities commissioned,
offset by lower drilling and completion volumes, and reduced
recovered oil sales;
- General and administrative ("G&A") less non-recurring items
for the three and nine months ended September 30, 2016 decreased 22% and 45% from the
2015 comparative periods to $3.9
million and $9.5 million as
cost saving initiatives undertaken during 2015 and 2016 are being
realized. The Corporation continues to minimize future costs by
streamlining operations in the current oil and gas price
environment. As part of these initiatives, certain costs in the
current year have been moved to the Corporate division.
DPS DIVISION OPERATING HIGHLIGHTS
|
|
Three months ended
Sept 30,
|
Nine months ended
Sept 30,
|
($000's)
|
|
2016
|
2015
|
%
Change
|
2016
|
2015
|
%
Change
|
Revenue
|
|
|
|
|
|
|
|
|
Drilling and
production services
|
|
26,824
|
52,020
|
(48)
|
73,266
|
149,923
|
(51)
|
|
Deduct: non-recurring
items
|
|
|
|
|
|
|
|
|
|
Restucturing
(Drilling Services U.S.)
|
|
-
|
(3,332)
|
(100)
|
-
|
(14,955)
|
(100)
|
DPS division
revenue less non-recurring items(1)
(a)
|
|
26,824
|
48,688
|
(45)
|
73,266
|
134,968
|
(46)
|
|
|
|
|
|
|
|
|
Direct expenses
less non-recurring items(1)
|
|
|
|
|
|
|
|
|
Drilling and
production services
|
|
21,617
|
45,354
|
(52)
|
63,740
|
129,733
|
(51)
|
|
Deduct: non-recurring
items
|
|
|
|
|
|
|
|
|
|
Inventory
impairment
|
|
-
|
-
|
-
|
-
|
(1,970)
|
(100)
|
|
|
Restucturing
(Drilling Services U.S.)
|
|
-
|
(6,813)
|
(100)
|
-
|
(19,138)
|
(100)
|
|
|
Severance and related
costs
|
|
-
|
(262)
|
(100)
|
(803)
|
(909)
|
(12)
|
DPS division
direct expenses less non-recurring items
(1)(b)
|
|
21,617
|
38,279
|
(44)
|
62,937
|
107,716
|
(42)
|
|
|
|
|
|
|
|
|
Operating Margin
(1) (a-b)
|
|
5,207
|
10,409
|
(50)
|
10,329
|
27,252
|
(62)
|
|
|
|
|
|
|
|
|
Operating Margin
(1) as a % of revenue (a)
|
|
19%
|
21%
|
|
14%
|
20%
|
|
(1) Refer
to "Non-GAAP measures, operational definitions and additional
subtotals" for further information
|
Highlights for the DPS division for the three and nine months
ended September 30, 2016
included:
- Revenue in the DPS division correlates with oil and gas
drilling activity in the WCSB, most notably active rig counts and
metres drilled. The weakness in commodity pricing, wet weather
conditions during the second and third quarters and the resulting
drop off in activity levels from oil and gas producers had a
significant impact on the DPS division. For the three and nine
months ended September 30, 2016,
industry rig counts in the WCSB declined 35% and 44%, while metres
drilled decreased 31% and 38% from the 2015 comparative periods.
When combined with pricing pressures on services and rental rates,
revenue less non-recurring items from the DPS division for the
three and nine months ended September 30,
2016 decreased 45% and 46% to $26.8
million and $73.3 million from
$48.7 million and $135.0 million in the comparative periods of
2015;
- Revenue per operating day decreased slightly to $6,838 and $7,501
during the three and nine months ended September 30, 2016 compared to the same periods
in 2015 which generated revenue of $7,504 and $7,575
per operating day. The variance is a result of the proportion of
type of rigs serviced, which typically fluctuates quarter over
quarter;
- The DPS division's market share decreased slightly to 30% and
29% in the three and nine months ended September 30, 2016 from the comparative periods
in 2015 (32% and 30%, respectively). During periods when the total
rig count is low, the timing of one customer's drilling activities
can have a significant impact on market share;
- Secure continues diversification efforts in the DPS division
through expansion of the production chemicals service line and
ancillary offerings which should benefit the Corporation in the
medium to long-term. Strategic relationships with key suppliers has
resulted in a significant expansion to Secure's production
chemicals product offerings in 2016 to date;
- The DPS division's direct expenses less non-recurring items for
the three and nine months ended September
30, 2016 decreased by 44% and 42% to $21.6 million and $62.9
million, from $38.3 million
and $107.7 million in the 2015
comparative periods. Overall, the decrease in direct expenses less
non-recurring items over the 2015 comparative periods was primarily
due to decreased activity levels, the realization of cost saving
initiatives implemented in 2015 and 2016, and a reduction in cost
of goods sold for oil based drilling fluids;
- The DPS division's operating margin for the three and nine
months ended September 30, 2016
decreased 50% and 62% from the 2015 comparative periods to
$5.2 million and $10.3 million. The DPS division's operating
margin decreased as a result of the factors discussed above,
combined with price discounts given to customers to reflect the
depressed price of commodities, and a higher proportion of lower
margin products sold when compared to the same periods in 2015. As
a result, operating margin as a percentage of revenue less
non-recurring items declined from 21% and 20% in the three and nine
months ended September 30, 2015 to
19% and 14% in the three and nine months ended September 30, 2016;
G&A expenses less non-recurring items for the three and nine
months ended September 30, 2016
decreased 50% and 47% from the comparative periods of 2015 as a
result of cost saving initiatives undertaken during 2015 and 2016,
and reduced shared service allocations from the Corporate
division.
OS DIVISION OPERATING HIGHLIGHTS
|
|
Three months ended
Sept 30,
|
Nine months ended
Sept 30,
|
($000's)
|
|
2016
|
2015
|
%
Change
|
2016
|
2015
|
%
Change
|
Revenue
|
|
|
|
|
|
|
|
|
OnSite services
(a)
|
|
22,667
|
36,042
|
(37)
|
58,484
|
93,642
|
(38)
|
|
|
|
|
|
|
|
|
Direct expenses
less non-recurring items(1)
|
|
|
|
|
|
|
|
|
OnSite
services
|
|
16,441
|
27,189
|
(40)
|
43,645
|
70,347
|
(38)
|
|
Deduct: non-recurring
items
|
|
|
|
|
|
|
|
|
|
Severance and related
costs
|
|
(51)
|
-
|
100
|
(228)
|
(116)
|
97
|
OS division direct
expenses less non-recurring items (1)(b)
|
|
16,390
|
27,189
|
(40)
|
43,417
|
70,231
|
(38)
|
|
|
|
|
|
|
|
|
Operating Margin
(1) (a-b)
|
|
6,277
|
8,853
|
(29)
|
15,067
|
23,411
|
(36)
|
|
|
|
|
|
|
|
|
Operating Margin
(1) as a % of revenue (a)
|
|
28%
|
25%
|
|
26%
|
25%
|
|
(1) Refer
to "Non-GAAP measures, operational definitions and additional
subtotals" for further information
|
Highlights for the OS division for the three and nine months
ended September 30, 2016
included:
- Diversified service lines, integrated service offerings and
organic growth partially mitigated reduced activity driven by wet
weather conditions and low commodity prices, resulting in a 37% and
38% decrease in revenue from $36.0
million and $93.6 million in
the three and nine months September 30,
2015 to $22.7 million and
$58.5 million in the three and nine
months ended September 30, 2016;
- Revenue from the Projects service line during the three and
nine months ended September 30, 2016
decreased approximately 40% from the 2015 comparative periods.
Projects revenue is dependent on the type and size of jobs which
can vary quarter to quarter. Projects completed significant
demolition and remediation jobs during 2015; similar jobs have not
been repeated to date in 2016. Excluding these two jobs, revenue
would have decreased 17% for the nine months ended September 30, 2016 from the comparative period in
2015 due primarily to poor weather conditions in the third quarter
which delayed work. In general, revenue has decreased as customers
react to the low commodity price environment by reducing spending
leading to lower activity levels. Partially offsetting the decrease
was revenue generated from new services and geographic
expansion;
- Environmental services revenue for the three and nine months
ended September 30, 2016 decreased
49% and 33% from the 2015 comparative periods primarily due to
reduced reclamation and remediation revenue resulting from deferred
customer spending created by low commodity prices. Drilling waste
revenue has also decreased due to lower drilling activity. This
lack of activity has produced a competitive pricing environment for
drill waste services. These decreases were partially offset by
revenue generated from an emergency response job managed by the
drill waste group, and by increased bin revenue in the nine months
ended September 30, 2016 compared to
the same period in 2015 resulting from geographic expansion and
growth in NORM related solution services;
- Integrated fluids solutions revenue for the three and nine
months ended September 30, 2016
decreased approximately 25% from the 2015 comparative periods.
Revenue decreased primarily due to lower customer field activity
from continued depressed commodity prices. Wet weather conditions
limiting field access in the third quarter and lower than
anticipated activity during spring break-up decreased rental
equipment utilization. As well, revenue has suffered from
competitive pricing pressure as a result of lower industry
activity;
- Direct expenses less non-recurring items for the three and nine
months ended September 30, 2016
decreased 40% and 38% to $16.4
million and $43.4 million from
$27.2 and $70.2 million in the 2015 comparative periods.
Overall, the variance in direct expenses was a direct result of the
change in activity levels from the 2015 comparative periods.
Additionally, operating overhead expenses have been reduced in
order to match activity levels. These reductions were partially
offset by operating expenses associated with new service lines
offered by the OS division this year;
- The three and nine months ended September 30, 2016 operating margin in the OS
division of $6.3 million and
$15.1 million was lower than the
prior year comparative periods due primarily to decreased revenues.
The operating margin as a percentage of revenue for the OS division
in the three and nine months ended September
30, 2016 was 28% and 26%, up from 25% in the comparative
2015 periods. The OS division's operating margin as a percentage of
revenue fluctuates depending on the volume and type of projects
undertaken and the blend of business between remediation and
reclamation projects, demolition projects, pipeline integrity
projects, site clean-up, and other services in any given period. As
a percentage of revenue, the increased operating margin in the
three months ended September 30, 2016
resulted from a higher proportion of pipeline related jobs which
typically generate higher margins, as well as lower overhead
expenses compared to 2015. During the nine months ended
September 30, 2016, increased bin
rental and NORM service revenue from the Environmental service line
and higher margin equipment rentals related to pumping in the IFS
service line more than offset the lower margins resulting from the
lack of large scale work in the Projects service line. The first
nine months of 2016 had a higher proportion of smaller projects
which typically have lower associated operating margins when
compared to the same period in 2015;
- G&A expenses less non-recurring items for the three months
and nine ended September 30, 2016
decreased 16% and 27% from the 2015 comparative periods to
$1.7 million and $4.6 million due to reduced shared service
allocations from the Corporate division's service departments, and
cost saving initiatives taken across the organization.
OUTLOOK
Activity levels during the third quarter of 2016 were impacted
by unseasonably wet weather conditions. This, combined with the
continued weak commodity price environment, resulted in decreased
drilling and completion activity compared to the prior year.
However, activity levels did continue to ramp up throughout the
third quarter, and Secure anticipates a further increase in
activity levels during the fourth quarter as customers work to
complete their 2016 capital spending targets. The fourth quarter
results will also be partially impacted positively or negatively
depending on the start of the typical December holiday drilling
slow-down. As it appears commodity prices have bottomed earlier
this year, Secure expects an increase in oil and gas producers'
capital budgets for 2017 over 2016, which will drive higher
activity levels and benefit all three of the Corporation's
divisions. Additionally, the industry trend towards drilling longer
and more challenging wells which require specialty drilling fluids
is expected to continue to benefit the DPS division.
During the remainder of the year and into 2017, the Corporation
will continue its prudent approach to both acquisitions and organic
capital spending. The Corporation will continue to increase
capacity to meet demand at current facilities by adding additional
tanks, disposal wells and expansion landfill cells. Secure
estimates total organic capital expenditures of approximately
$65 million in 2016, up from previous estimates of
$50 million. The increase relates primarily to an expansion at
the Kindersley FST to increase storage and throughput capacity, an
additional cell added to the Corporation's Fox Creek landfill, and various sustaining
projects at existing facilities. In 2017, the corporation
anticipates that capital opportunities at existing facilities will
be comparable to 2016 spending of $65
million. However, capital spend could increase above
$65 million as the corporation
responds to customer demand and continued evaluation of multiple
opportunities. Secure will also continue to evaluate and assess
further acquisition opportunities and/or partnership opportunities
that provide strategic advantages which may increase anticipated
spending.
Overall, Secure has a solid balance sheet and is well positioned
to respond with solutions and the right people to the market's
needs today. Secure continues to work with its customers to support
their requirements relating to new facilities, disposal wells,
landfill expansions and specialized equipment. Secure's key
priorities for success during the remainder of 2016 and throughout
2017 include:
- Working with partners to reduce the overall cost structure,
gain efficiencies and provide new services;
- Maintaining financial flexibility;
- Leveraging on all three operating divisions to gain
efficiencies for customers for drilling, completion, production and
remediation services;
- Gaining further traction on new services and products
associated with production chemicals and chemical enhanced oil
recovery ("EOR");
- Working with customers on water recycling, storage and
logistics. This market continues to expand as producers understand
the need to access water sources and reuse fluids during completion
activities; and
- Expanding Secure's midstream facility network.
FINANCIAL STATEMENTS AND MD&A
The Corporation's unaudited condensed consolidated financial
statements and notes thereto for the three and nine months ended
September 30, 2016 and 2015 and
MD&A for the three months and nine months ended
September 30, 2016 and 2015 are available immediately on
Secure's website at www.secure-energy.com. The unaudited condensed
consolidated financial statements and MD&A will be available
tomorrow on SEDAR at www.sedar.com.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this document constitute
"forward-looking statements" and/or "forward-looking information"
within the meaning of applicable securities laws (collectively
referred to as forward-looking statements). When used in this
document, the words "may", "would", "could", "will", "intend",
"plan", "anticipate", "believe", "estimate", "expect", and similar
expressions, as they relate to Secure, or its management, are
intended to identify forward-looking statements. Such statements
reflect the current views of Secure with respect to future events
and operating performance and speak only as of the date of this
document. In particular, this document contains or implies
forward-looking statements pertaining to: key priorities for the
Corporation's success; the oil and natural gas industry; activity
levels in the oil and gas sector, drilling levels, commodity prices
for oil, natural gas liquids and natural gas; industry fundamentals
for the fourth quarter of 2016 and 2017; capital forecasts and
spending by producers; demand for the Corporation's services and
products; expansion strategy; the impact of the reduction in oil
and gas activity on 2016 and 2017 activity levels; the
Corporation's proposed 2016 and 2017 capital expenditure programs;
debt service; acquisition strategy and timing of potential
acquisitions; the impact of new facilities, potential acquisitions,
the PetroLama Acquisition, and JV Acquisition on the Corporation's
financial and operational performance and growth opportunities;
future capital needs and how the Corporation intends to fund its
operations, working capital requirements, dividends and capital
program; access to capital; and the Corporation's ability to meet
obligations and commitments and operate within the credit facility
restrictions.
Forward-looking statements concerning expected operating and
economic conditions, including the PetroLama Acquisition and JV
Acquisition, are based upon prior year results as well as the
assumption that levels of market activity and growth will be
consistent with industry activity in Canada and the U.S. and similar phases of
previous economic cycles. Forward-looking statements concerning the
availability of funding for future operations are based upon the
assumption that the sources of funding which the Corporation has
relied upon in the past will continue to be available to the
Corporation on terms favorable to the Corporation and that future
economic and operating conditions will not limit the Corporation's
access to debt and equity markets. Forward-looking statements
concerning the relative future competitive position of the
Corporation are based upon the assumption that economic and
operating conditions, including commodity prices, crude oil and
natural gas storage levels, interest and foreign exchange rates,
the regulatory framework regarding oil and natural gas royalties,
environmental regulatory matters, the ability of the Corporation
and its subsidiaries to successfully market their services and
drilling and production activity in North
America will lead to sufficient demand for the Corporation's
services and its subsidiaries' services including demand for
oilfield services for drilling and completion of oil and natural
gas wells, that the current business environment will remain
substantially unchanged, and that present and anticipated programs
and expansion plans of other organizations operating in the energy
industry may change the demand for the Corporation's services and
its subsidiaries' services. Forward-looking statements concerning
the nature and timing of growth are based on past factors affecting
the growth of the Corporation, past sources of growth and
expectations relating to future economic and operating conditions.
Forward-looking statements in respect of the costs anticipated to
be associated with the acquisition and maintenance of equipment and
property are based upon assumptions that future acquisition and
maintenance costs will not significantly increase from past
acquisition and maintenance costs.
Forward-looking statements involve significant risks and
uncertainties, should not be read as guarantees of future
performance or results, and will not necessarily be accurate
indications of whether such results will be achieved. Readers
are cautioned not to place undue reliance on these statements as a
number of factors could cause actual results to differ materially
from the results discussed in these forward-looking statements,
including but not limited to those factors referred to and under
the heading "Business Risks" and under the heading "Risk
Factors" in the AIF for the year ended
December 31, 2015 and also includes the risks associated
with the possible failure to realize the anticipated synergies in
integrating the assets acquired in the Acquisition with the
operations of Secure. Although forward-looking statements contained
in this document are based upon what the Corporation believes are
reasonable assumptions, the Corporation cannot assure investors
that actual results will be consistent with these forward-looking
statements. The forward-looking statements in this document are
expressly qualified by this cautionary statement. Unless otherwise
required by law, Secure does not intend, or assume any obligation,
to update these forward-looking statements.
NON-GAAP MEASURES, OPERATIONAL DEFINITIONS AND ADDITIONAL
SUBTOTALS
The Corporation uses accounting principles that are generally
accepted in Canada (the issuer's
"GAAP"), which includes International Financial Reporting Standards
("IFRS"). Certain supplementary measures in this document do
not have any standardized meaning as prescribed by IFRS. These
non-GAAP measures, operational definitions and additional subtotals
used by the Corporation may not be comparable to similar measures
presented by other reporting issuers. These non-GAAP financial
measures, operational definitions and additional subtotals are
included because management uses the information to analyze
operating performance, leverage and liquidity. Therefore, these
non-GAAP financial measures, operational definitions and additional
subtotals should not be considered in isolation or as a substitute
for measures of performance prepared in accordance with GAAP. See
the management's discussion and analysis available at
www.sedar.com for a reconciliation of the Non-GAAP financial
measures, operational definitions and additional subtotals.
ABOUT SECURE ENERGY SERVICES INC.
Secure is a TSX publicly traded energy services company that
provides safe, innovative, efficient and environmentally
responsible fluids and solids solutions to the oil and gas
industry. The Corporation owns and operates midstream
infrastructure and provides environmental services and innovative
products to upstream oil and natural gas companies operating in
western Canada and certain regions
in the United States
("U.S.").
The Corporation operates three divisions:
Processing, Recovery and Disposal Division ("PRD"): The PRD
division owns and operates midstream infrastructure that provides
processing, storing, shipping and marketing of crude oil, oilfield
waste disposal and recycling. More specifically these services are
clean oil terminalling and rail transloading, custom treating of
crude oil, crude oil marketing, produced and waste water disposal,
oilfield waste processing, landfill disposal, and oil
purchase/resale service. Secure currently operates a network
of facilities throughout Western
Canada and in North Dakota,
providing these services at its full service terminals ("FST"),
landfills, stand-alone water disposal facilities ("SWD") and full
service rail facilities ("FSR").
Drilling and Production Services Division ("DPS"): The DPS
division provides equipment and product solutions for drilling,
completion and production operations for oil and gas producers in
Western Canada. The drilling
service line comprises the majority of the revenue for the division
which includes the design and implementation of drilling fluid
systems for producers drilling for oil, bitumen and natural gas.
The drilling service line focuses on providing products and systems
that are designed for more complex wells, such as medium to deep
wells, horizontal wells and horizontal wells drilled into the oil
sands. The production services line focuses on providing equipment
and chemical solutions that optimize production, provide flow
assurance and maintain the integrity of production
assets.
Onsite Services Division ("OS"): The operations of the OS
division include Projects which include pipeline integrity
(inspection, excavation, repair, replacement and rehabilitation),
demolition and decommissioning, and reclamation and remediation of
former wellsites, facilities, commercial and industrial properties,
and environmental construction projects (landfills, containment
ponds, subsurface containment walls, etc.); Environmental services
which provide pre-drilling assessment planning, drilling waste
management, remediation and reclamation assessment services,
Naturally Occurring Radioactive Material ("NORM") management, waste
container services, and emergency response services; and Integrated
Fluid Solutions ("IFS") which include water management, recycling,
pumping and storage solutions.
SOURCE SECURE Energy Services Inc.