CALGARY, Oct. 30, 2018 /CNW/ - Secure Energy Services Inc.
("Secure" or the "Corporation") (TSX – SES) announced today its
operational and financial results for the three and nine months
ended September 30, 2018. These results should be read in
conjunction with the management's discussion and analysis
("MD&A") and the interim consolidated financial statements and
notes thereto for the three and nine months ended
September 30, 2018 of Secure which are available on SEDAR
at www.sedar.com.
2018 THIRD QUARTER OPERATIONAL AND FINANCIAL
HIGHLIGHTS
In the third quarter, the Corporation continued to execute a
disciplined growth strategy, focused on the PRD division which
achieved a 36% increase in Adjusted EBITDA1 over the
2017 comparative period resulting from new and expanded facilities,
recurring cash flows generated from oil production processing and
disposal, and higher terminalling and crude oil marketing
revenue. Additionally, higher crude oil and liquids prices resulted
in increased industry activity in the Corporation's core operating
regions and increased recovered oil pricing. This, combined with
strong contributions from the Corporation's OS and DPS divisions,
resulted in an overall Adjusted EBITDA of $53.7 million for the three months ended
September 30, 2018. The Corporation achieved net income
during the quarter of $6.8 million, resulting in income of
$0.04 per weighted average common
share.
Secure continues to identify and develop midstream
infrastructure to expand capacity and optimize capabilities at
existing facilities. These efforts help Secure's customers by
increasing their operating netbacks and improving their capital
efficiency. The Corporation's Gold Creek and Tony Creek water
disposal facilities commenced operations in July 2018 and expand Secure's footprint in the
liquids-rich Montney region in
Alberta. In total, over half of
the Corporation's 51 facilities are now located in the
Montney and Duvernay regions where production growth and
water disposal requirements are higher than the rest of the Western
Canadian Sedimentary Basin ("WCSB"). With a significant presence in
areas where customers have been most active in the WCSB, Secure has
been able to grow volumes despite overall WCSB activity being
relatively flat in the quarter and year to date. Additionally,
Secure's footprint of facilities in North
Dakota generated a 58% increase in revenue from the U.S.
during the three months ended September 30, 2018 over the
same period last year as higher oil prices and improved market
access continue to attract investment in the Bakken.
During the third quarter, the Corporation completed construction
and commissioning of the light oil feeder pipeline system and
receipt terminal in the Kindersley-Kerrobert region of Saskatchewan ("Kerrobert Light Pipeline
System") at the estimated in-service date of
October 1, 2018. The Kerrobert Light Pipeline System
provides a capital efficient transportation solution for Secure's
customers operating in the region and has operational flexibility
to accommodate production growth. The $75 million project is
supported by long-term commitments, providing Secure with recurring
fee-for-service cash flows. The project is expected to contribute
to Adjusted EBITDA during the fourth quarter. The Corporation has
also commenced construction of two additional storage tanks at the
receipt terminal in Kerrobert,
which are expected to be commissioned in the second quarter of 2019
and offer a solution during periods of apportionment resulting from
egress challenges.
Secure continues to take a disciplined approach to maintaining a
strong balance sheet. This provides the Corporation with
considerable flexibility to continue to grow the business
organically and execute on strategic acquisition opportunities that
align with the profitable growth strategy of Secure. Additionally,
during the third quarter, the Corporation returned $11.0 million of cash flow to shareholders
through the monthly dividend, and purchased and cancelled 1,613,400
common shares of the Corporation ("shares") at a weighted average
price per share of $7.52 for a total
of $12.1 million under the
normal course issuer bid ("NCIB") approved at the end of
May 2018.
The operating and financial highlights for the three and nine
month periods ending September 30,
2018 and 2017 can be summarized as follows:
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
($000's except
share and per share data)
|
2018
|
2017
|
%
change
|
2018
|
2017
|
%
change
|
Revenue (excludes oil
purchase and resale)
|
182,469
|
162,596
|
12
|
505,416
|
418,681
|
21
|
Oil purchase and
resale
|
646,565
|
451,143
|
43
|
1,748,986
|
1,229,971
|
42
|
Total
revenue
|
829,034
|
613,739
|
35
|
2,254,402
|
1,648,652
|
37
|
Adjusted EBITDA
(1)
|
53,746
|
43,820
|
23
|
132,711
|
106,034
|
25
|
Per share ($),
basic
|
0.33
|
0.27
|
22
|
0.81
|
0.65
|
25
|
Per share ($),
diluted
|
0.33
|
0.27
|
22
|
0.80
|
0.64
|
25
|
Net income
(loss)
|
6,809
|
(179)
|
3,904
|
5,985
|
(10,268)
|
158
|
Per share ($), basic
and diluted
|
0.04
|
-
|
100
|
0.04
|
(0.06)
|
167
|
Cash flows from
operating activities
|
19,879
|
2,864
|
594
|
127,205
|
85,947
|
48
|
Per share ($),
basic
|
0.12
|
0.02
|
500
|
0.78
|
0.53
|
47
|
Per share ($),
diluted
|
0.12
|
0.02
|
500
|
0.77
|
0.52
|
48
|
Funds flow from
operations (1)
|
48,407
|
54,326
|
(11)
|
117,597
|
111,235
|
6
|
Per share ($),
basic
|
0.30
|
0.33
|
(9)
|
0.72
|
0.68
|
6
|
Per share ($),
diluted
|
0.29
|
0.33
|
(12)
|
0.71
|
0.67
|
6
|
Dividends per common
share
|
0.06750
|
0.06375
|
6
|
0.2025
|
0.1850
|
9
|
Capital expenditures
(1)
|
43,478
|
78,238
|
(44)
|
136,322
|
140,022
|
(3)
|
Total
assets
|
1,591,913
|
1,488,328
|
7
|
1,591,913
|
1,488,328
|
7
|
Long-term
liabilities
|
522,304
|
379,443
|
38
|
522,304
|
379,443
|
38
|
Net debt
(1)
|
250,061
|
151,697
|
65
|
250,061
|
151,697
|
65
|
Common shares - end
of period
|
161,945,330
|
163,285,511
|
(1)
|
161,945,330
|
163,285,511
|
(1)
|
Weighted average
common shares
|
|
|
|
|
|
|
basic
|
162,286,387
|
163,128,460
|
(1)
|
163,600,546
|
162,659,701
|
1
|
diluted
|
164,911,044
|
164,661,749
|
-
|
165,779,889
|
164,980,327
|
-
|
(1)Refer to "Non-GAAP Measures,
Additional GAAP Measures and Operational Definitions" for
further information.
|
|
- REVENUE OF $829.0 MILLION AND $2.3 BILLION FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2018
-
- The PRD division's revenue from services increased to
$89.6 million and $250.9 million during the three and nine months
ended September 30, 2018, up 36% and
30%, respectively, from the comparative periods in 2017. The
increase was driven by growth initiatives over the past several
years to increase capacity and expand service offerings; higher
activity levels in the U.S. in response to higher average crude oil
prices, which also generated higher recovered oil revenues;
increased produced water and condensate production in the
Corporation's key service areas which resulted in incremental
processing and disposal volumes at Secure's facilities; and wide
crude oil differentials which resulted in higher crude oil
marketing revenue as a result of Secure's ability to work with
customers at the Corporation's pipeline connected FSTs to improve
their operating netbacks through higher realized pricing and lower
transportation costs;
- Oil purchase and resale revenue in the PRD division for the
three and nine months ended September 30,
2018 increased by 43% and 42% from the 2017 comparative
periods to $646.6 million and
$1.7 billion due to higher volumes
resulting from increased industry activity as discussed above and
higher takeaway capacity at certain of the Corporation's pipeline
connected full service terminals, and a 32% and 23% increase in
Canadian Light Sweet crude oil prices in the three and nine months
ended September 30, 2018 over the
2017 comparative periods;
- OS division revenue of $29.6
million in the third quarter decreased 19% from the three
months ended September 30, 2017 as a
result of unseasonably wet weather in September which delayed
certain Project work. Projects revenue is dependent on the type and
size of jobs as well as weather conditions, which can vary quarter
to quarter. Good weather conducive to project execution in the
third quarter of 2017 resulted in more jobs, including a large pond
remediation project. Additionally, water pumping revenue decreased
in the three months ended September 30,
2018 following the completion of a customer's large fracing
program in the IFS service area. In the nine months ended
September 30, 2018, the OS division's
revenue increased 9% to $87.8 million
primarily due to higher activity levels in the oil and gas sector
in the first half of the year as a result of rising oil prices. As
a result, there was increased demand for onsite services and
increased Projects work which contributed to higher revenue
compared to the prior year comparative period;
- DPS division revenue increased 5% and 15% to $63.3 million and $166.7
million in the three and nine months ended September 30, 2018 over the 2017 comparative
periods. In April 2017, the
Corporation acquired a production chemicals business that
significantly increased revenue generated from production services
beginning in the second quarter of 2017. Revenue from production
services has been increasing at a steady rate as the Corporation
wins bids for new jobs and expands its customer base. A significant
portion of the DPS division's revenue comes from drilling services,
which strongly correlates with oil and gas drilling activity in the
WCSB. During the three and nine months ended September 30, 2018 there was a slight decline in
active rigs over the 2017 comparative periods; however, the impact
to revenue from drilling services was mitigated as revenue per
operating day increased as a result of the trend towards deeper and
more complex wells.
- ADJUSTED EBITDA OF $53.7
MILLION AND $132.7 MILLION FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2018
-
- Adjusted EBITDA of $53.7 million
and $132.7 million increased 23% and
25% from the three and nine months ended September 30, 2017, primarily from higher
revenues achieved by the PRD division and a continued focus on cost
controls. Increased revenues were driven by higher facility volumes
from the addition of new facilities through organic growth, several
facility expansions to increase waste handling capacity, the
acquisition of Ceiba Energy Services Inc. ("Ceiba") in August 2017, higher produced water and condensate
production volumes in the Corporation's key service areas, and
improved oil and gas sector activity in the U.S. Additionally,
increased recovered oil revenues generated from higher average
crude oil prices and higher crude oil marketing revenues from the
Corporation's pipeline connected FSTs during the three and nine
months ended September 30, 2018
helped drive revenue and segment profit margins1 in the
PRD division, which were up 39% and 31% over the three and nine
months ended September 30, 2017;
- Adjusted EBITDA generated from the OS division decreased 28%
and increased 3% in the three and nine months ended September 30, 2018 over the comparative periods
in 2017, primarily as a result of the variance in revenue, as
described above. The majority of the OS division's operating
expenses are variable, and fluctuations will correspond to change
in revenue and project mix;
- The DPS division's Adjusted EBITDA was relatively consistent in
the three and nine months ended September
30, 2018 over the 2017 comparative periods as the impact of
higher revenue from production services was offset by increased
general and administrative expenses in the year to date to support
the expanded production chemicals business. Additionally, upward
cost pressures resulting from higher commodity prices and the
strength of the U.S. dollar have compressed margins, limiting the
upside generated from economies of scale achieved from higher
revenues.
- NET INCOME OF $6.8 MILLION AND
$6.0 MILLION FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30,
2018
-
- For the three and nine months ended September 30, 2018, Secure's net income of
$6.8 million and $6.0 million improved from a net loss of
$0.2 million and $10.3 million in the three and nine months ended
September 30, 2017. The variances are
primarily due to a $9.9 million and
$26.7 million increase to Adjusted
EBITDA resulting from the factors described above, partially offset
by higher interest expense resulting from higher debt levels to
fund organic development and acquisitions in the past year, as well
as increased tax expense resulting from higher net earnings before
non-deductible expenses.
- FINANCIAL FLEXIBILITY
-
- The total amount drawn on Secure's credit facilities as at
September 30, 2018 increased by 30%
to $389.1 million compared to
$300.0 million at December 31, 2017. The amount drawn increased in
order to fund the Corporation's organic capital program, partially
offset by cash flows from operating activities.
- As at September 30, 2018, the
Corporation had $149.9 million
available under its credit facilities, subject to covenant
restrictions. The Corporation is well positioned, based on this
availability and expected cash flows from operating activities, to
pursue further accretive acquisition opportunities and execute on
the remaining 2018 and expected 2019 capital programs.
- Secure is in compliance with all covenants related to its
credit facilities at September 30,
2018. The following table outlines Secure's senior and total
debt to trailing twelve month EBITDA ratios at September 30, 2018 and December 31, 2017.
|
Sept 30,
2018
|
Dec. 31,
2017
|
Threshold
|
Senior debt to
EBITDA
|
1.5
|
1.1
|
3.5
|
Total debt to
EBITDA
|
2.2
|
1.9
|
5.0
|
-
- Senior debt is equal to amounts drawn on the Corporation's
first lien facility plus financial leases less any cash balances
exceeding $5 million. Total debt
includes senior debt plus the $130
million borrowed under the Corporation's second lien
facility. 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.
- CAPITAL EXPENDITURES OF $43.5
MILLION AND $136.3 MILLION FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2018
-
- Total capital expenditures for the three and nine months ended
September 30, 2018 of $43.5 million and $136.3
million were comprised of $37.7
million and $124.4 million
related to growth and expansion projects, and $5.8 million and $11.9
million of sustaining capital. There were no acquisitions
completed during the quarter or year to date. Growth and expansion
capital in the nine months ended September
30, 2018 relates primarily to completing construction of the
Kerrobert Light Pipeline System; the addition of four water
disposal wells, including two at Gold Creek, and one each at Tony
Creek and Big Mountain; expansion projects at various existing
facilities to increase throughput, emulsion treating and disposal
capacity; construction of three new landfill cells (Saddle Hills,
Tulliby Lake and Williston); and
long lead items and upfront costs for future projects, including
the additional storage at the receipt terminal in Kerrobert. Sustaining capital incurred in 2018
to date relates primarily to well and facility maintenance.
PRD DIVISION OPERATING HIGHLIGHTS
|
Three months ended
Sept 30,
|
Nine months ended
Sept 30,
|
($000's)
|
2018
|
2017
|
%
Change
|
2018
|
2017
|
%
Change
|
Revenue
|
|
|
|
|
|
|
PRD services
(a)
|
89,579
|
66,013
|
36
|
250,930
|
193,761
|
30
|
Oil purchase and
resale service
|
646,565
|
451,143
|
43
|
1,748,986
|
1,229,971
|
42
|
Total PRD division
revenue
|
736,144
|
517,156
|
42
|
1,999,916
|
1,423,732
|
40
|
|
|
|
|
|
|
|
Direct
expenses
|
|
|
|
|
|
|
PRD services
(b)
|
35,913
|
27,416
|
31
|
107,160
|
83,778
|
28
|
Oil purchase and
resale service
|
646,565
|
451,143
|
43
|
1,748,986
|
1,229,971
|
42
|
Total PRD division
direct expenses
|
682,478
|
478,559
|
43
|
1,856,146
|
1,313,749
|
41
|
|
|
|
|
|
|
|
Segment Profit
Margin (1) (a-b)
|
53,666
|
38,597
|
39
|
143,770
|
109,983
|
31
|
|
|
|
|
|
|
|
Segment Profit
Margin (1) as a % of revenue (a)
|
60%
|
58%
|
|
57%
|
57%
|
|
|
|
|
|
|
|
|
(1)Refer to "Non-GAAP Measures,
Additional GAAP Measures and Operational Definitions" for
further information.
|
Highlights for the PRD division for the three and nine months
ended September 30, 2018 included:
- Record revenue generated from PRD services of $89.6 million for the three months ended
September 30, 2018, and $250.9 million in the year to date, increased by
36% and 30% from the 2017 comparative periods. The increase in
revenue was primarily driven by higher facility volumes resulting
from new facility additions and expansions at certain of the
Corporation's existing facilities in 2017 and 2018 to date, and
increased activity levels in response to higher average crude oil
prices at the Corporation's facilities in North Dakota, which also resulted in higher
recovered oil revenues;
- The majority of the Corporation's facilities are located in
high impact resource plays, such as the Montney and Duvernay regions, where producers have been
most active in the WCSB. Fluids pumped from wells in these regions
are also significantly higher than other regions of the WCSB,
driving incremental volumes at Secure's facilities. In the past
year, Secure has strategically added new facilities, including the
Gold Creek and Tony Creek water disposal facilities in July 2018, and increased capacity for water
disposal at various other facilities in these regions, including at
the Dawson Creek and Fox Creek
FSTs, Rycroft FSR and Big Mountain water disposal facility, in
response to customer demand. Additionally, Secure completed the
acquisition of Ceiba on August 1,
2017 which added ten facilities to Secure's footprint in the
WCSB. These additions and expansions were the driving force behind
a 42% and 35% increase in water disposal volumes in Canada during the three and nine months ended
September 30, 2018 over the
comparative periods of 2017;
- Waste processing and solids disposal volumes at the
Corporation's facilities in North
Dakota increased significantly in the three and nine months
ended September 30, 2018 contributing
to a 58% and 54% increase in revenue generated from the U.S. from
the 2017 comparative periods. Higher volumes at Secure's
North Dakota facilities were a
result of improved activity levels, including new drilling and frac
completions as customers remain active in the Bakken. Higher
drilling and completion activity has been driven by an increase in
average crude oil prices over the prior period, and the
commissioning of the Dakota Access Pipeline in June 2017 which has improved economics for
delivering producers' product to market;
- Recovered oil revenues increased 33% and 39% in the three and
nine months ended September 30, 2018
from the 2017 comparative periods, driven by higher volumes as
discussed above, and a marked increase in Canadian Light Sweet oil
prices of 32% and 23% over the 2017 comparative periods;
- Overall, disposal volumes increased by 25% and 22% in the three
and nine months ended September 30,
2018 from the comparative periods in 2017 due primarily to
increased produced and flowback water resulting from new facilities
and increased capacity at existing facilities, as well as
increasing water production as wells mature and improved industry
activity;
- Overall, processing volumes increased 1% and 9% in the three
and nine months ended September 30,
2018 from the comparative periods in 2017 due primarily to
higher waste processing volumes at the Corporation's North Dakota facilities. Drilling and
completion activity in Canada has
been relatively flat in the quarter and year to date as producers
are taking a cautious approach to capital spending in light of wide
crude oil pricing differentials, low gas prices and uncertainty
with respect to the addition of pipeline capacity out of the
WCSB;
- During the three months and nine months ended September 30, 2018, refinery outages and a
shortage of pipeline takeaway capacity resulted in large heavy oil
differentials, reaching over $30 per
barrel in the quarter and year to date, nearly double the 2017
levels. The volatility in the differential wide crude oil
differentials provided Secure with an opportunity to work with
customers at the Corporation's ten pipeline connected FSTs to
improve their operating netbacks through higher realized pricing
and lower transportation costs which also lead to higher revenue
generated from this service line;
- Oil purchase and resale revenue in the PRD division for the
three and nine months ended September 30,
2018 increased to $646.6
million and $1.7 billion due
to higher volumes resulting from increased industry activity and
higher takeaway capacity at certain of the Corporation's pipeline
connected full service terminals, and higher benchmark crude oil
prices in the three and nine months ended September 30, 2018 over the comparative periods
of 2017;
- The PRD's segment profit margin as a percentage of revenue from
PRD services for the three and nine months ended September 30, 2018 increased to 60% in the three
months ended September 30, 2018 from
58% in the three months ended September 30,
2017. Segment profit margin as a percentage of PRD services
revenue was 57% in both the nine months ended September 30, 2018 and 2017. As a percentage of
PRD services revenue, segment profit margin increased over 2017 as
a result of overall increased revenues while minimizing fixed and
related costs, and higher recovered oil revenues and crude oil
marketing revenues which carry high margins. These positive impacts
were partially offset by increased variable costs related to
personnel and higher facility repair and maintenance expenditures
in the 2018 periods over 2017;
- General and administrative ("G&A") expenses of $6.7 million and $18.9
million for the three and nine months ended September 30, 2018 increased from the comparative
period balances of $4.3 million and
$12.7 million. Although the
Corporation continues to minimize G&A costs by streamlining
operations where possible, PRD G&A expenses have increased
primarily due to overhead requirements to support new service
lines, facilities and expansions. As a percentage of revenue from
PRD services, G&A expenses were consistent at 7% for the three
months ended September 30, 2018 and
2017, and up slightly to 8% in the nine months ended September 30, 2018 from 7% in the 2017
comparative period.
OS DIVISION OPERATING HIGHLIGHTS
|
Three months ended
Sept 30,
|
Nine months ended
Sept 30,
|
($000's)
|
2018
|
2017
|
%
Change
|
2018
|
2017
|
%
Change
|
Revenue
|
|
|
|
|
|
|
OnSite services
(a)
|
29,617
|
36,542
|
(19)
|
87,824
|
80,490
|
9
|
|
|
|
|
|
|
|
Direct
expenses
|
|
|
|
|
|
|
OnSite services
(b)
|
23,149
|
28,151
|
(18)
|
69,778
|
62,290
|
12
|
Segment Profit
Margin (1) (a-b)
|
6,468
|
8,391
|
(23)
|
18,046
|
18,200
|
(1)
|
|
|
|
|
|
|
|
Segment Profit
Margin (1) as a % of revenue (a)
|
22%
|
23%
|
|
21%
|
23%
|
|
|
|
|
|
|
|
|
(1)Refer to "Non-GAAP Measures,
Additional GAAP Measures and Operational Definitions" for
further information.
|
Highlights for the OS division for the three and nine months
ended September 30, 2018 included:
- OS division revenue decreased by 19% to $29.6 million for the three months ended
September 30, 2018 primarily as a
result of lower revenue generated from project work and onsite
water management and pumping services due to wet weather conditions
in September 2018 resulting in
project delays, and two large customer jobs in the third quarter of
2017 which were not repeated in the third quarter of 2018. The
resulting decrease to revenue was partially offset by project work
generated from new customers, including the completion of a large
infrastructure demolition job for a government agency, and the
introduction of new service offerings in the past year, including
the management of scrap metal recycling programs for two major oil
sands producers. Secure continues to seek opportunities of this
nature as they provide Secure with a more stable stream of revenue
over the life of the agreement;
- OS division revenue increased 9% to $87.8 million in the nine months ended
September 30, 2018 from the 2017
comparative period primarily due to higher activity levels in the
oil and gas sector in the first half of the year as a result of
improved commodity prices which led to increased customer activity,
resulting in more project work and higher pumping and fluid storage
rental activity;
- Segment profit margin for the three and nine months ended
September 30, 2018 of $6.5 million and $18.0
million decreased by 23% and 1% from the prior year
comparative periods. As a percentage of revenue, segment profit
margin was 22% and 21% for the three and nine months ended
September 30, 2018, down slightly
from 23% in both the comparative 2017 periods. The OS division's
segment profit margin as a percentage of revenue can fluctuate
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 segment profit margin in the three and nine months ended
September 30, 2018 decreased
primarily due to the nature of the project work, as well as
increased competition on project bids which resulted in lower rates
charged for labour and equipment;
- G&A expenses for the three and nine months ended
September 30, 2018 decreased
marginally by $0.2 million and
$0.5 million from the 2017
comparative periods to $1.8 million
and $5.8 million as certain personnel
and office costs included in the comparative figure were
transferred to the PRD division at the start of this year. The
impact of this change is partially offset by additional business
development expenses resulting from the OS division's growth
initiatives. As a percentage of OS revenue, G&A expenses are 6%
and 7% in the three and nine months ended September 30, 2018 compared to 5% and 8% in the
2017 comparative periods, primarily due to the change in
revenue.
DPS DIVISION OPERATING HIGHLIGHTS
|
Three months ended
Sept 30,
|
Nine months ended
Sept 30,
|
($000's)
|
2018
|
2017
|
%
Change
|
2018
|
2017
|
%
Change
|
Revenue
|
|
|
|
|
|
|
Drilling and
production services (a)
|
63,273
|
60,041
|
5
|
166,662
|
144,430
|
15
|
|
|
|
|
|
|
|
Direct
expenses
|
|
|
|
|
|
|
Drilling and
production services (b)
|
50,191
|
46,895
|
7
|
137,495
|
117,640
|
17
|
Segment Profit
Margin (1) (a-b)
|
13,082
|
13,146
|
-
|
29,167
|
26,790
|
9
|
|
|
|
|
|
|
|
Segment Profit
Margin (1) as a % of revenue (a)
|
21%
|
22%
|
|
18%
|
19%
|
|
|
|
|
|
|
|
|
(1) Refer to
"Non-GAAP Measures, Additional GAAP Measures and Operational
Definitions" for further information.
|
Highlights for the DPS division for the three and nine months
ended September 30, 2018 included:
- The DPS division's drilling services revenue correlates with
oil and gas drilling activity in the WCSB. The strength in oil
prices has resulted in steady or improved activity levels from oil
and liquids focused producers, but this was offset by declines in
dry gas drilling activity as a result of low AECO gas prices.
Additionally, rig activity was impacted by unseasonably wet weather
in September 2018. As a result,
overall activity in the WCSB is relatively flat compared to last
year, and the division's market share declined by 4% and 3% in the
three and nine months ended September 30,
2018 from the comparative periods of 2017. However, the
Corporation continued to focus on more complex wells which require
specialized fluids, equipment and expertise, and resulted in a
higher revenue per operating day. Overall, revenue from drilling
services was relatively flat in the three and nine months ended
September 30, 2018 from the 2017
comparative period;
- Secure continues diversification efforts in the DPS division to
become less dependent on drilling activity through expansion of
production services. Strategic relationships with key suppliers and
ongoing product development has resulted in a significant expansion
to Secure's product offering, leading to multiple commercial
projects in 2017 and the first half of 2018. The acquisition of a
production chemicals business completed in April 2017 has strengthened Secure's position in
the market by adding over 100 fully formulated proprietary
products, as well as key infrastructure related to the product
offering and an experienced and dedicated employee base. The
production chemicals service line now has over 350 commercialized
products and continues to win new bids and customers and gain
market share. As a result of increased contributions from
production related services, total revenue from the DPS division
for the three and nine months ended September 30, 2018 increased 5% and 15% from the
comparative periods of 2017 to $63.3
million and $166.7
million.
- The DPS division's segment profit margin for the three and nine
months ended September 30, 2018 was
flat and improved by 9%, respectively, from the comparative periods
to $13.1 million and $29.2 million. Segment profit margin as a
percentage of revenue was 21% and 18% in the three and nine months
ended September 30, 2018, down
slightly from 22% and 19% in the comparative periods. Segment
profit margin as a percentage of revenue were positively impacted
by the increased revenues while minimizing fixed costs resulting in
achieving economies of scale from increased activity. This impact
was partially offset by the continued cost inflation associated
with drilling and production chemicals which have outpaced the DPS
division's ability to realize meaningful price increases during the
period;
- G&A expense for the three and nine months ended
September 30, 2018 decreased by 5%
and increased by 27% from the comparative periods of 2017. The
Corporation continues to proactively manage costs while still
responding to customer demands and activity levels. In the year to
date, G&A expenses have increased as a result of expanding the
production chemicals service line, and includes additional costs
resulting from the production chemicals acquisition in April 2017. Additionally, all research and
development costs associated with the Corporation's research lab
have been included in DPS G&A expense since the third quarter
of 2017. Previous to that, they were reported with the
Corporation's business development expense. Secure continues to
focus on research and development projects to expand the value
chain of services offered to customers, and to provide innovative
and cost-effective solutions to reduce waste in the drilling and
production processes. As a percentage of DPS revenue, G&A
expenses are 8% and 10% in the three and nine months ended
September 30, 2018 compared to 9% in
both the prior year comparative periods.
OUTLOOK
Secure's strategy remains focused on working with customers to
identify opportunities and integrated solutions where the
Corporation can add value and lower customers' costs. By focusing
on new and innovative ways to offer solutions, Secure's customers
will be able to gain efficiencies for drilling, completing and
producing their hydrocarbon reserves. Helping Secure's customers
grow and being their trusted energy solutions partner will ensure
that the Corporation continues to create long-term shareholder
value.
The fundamental drivers that are expected to provide meaningful
avenues of growth during 2019 and beyond include:
Increasing Volumes: Supporting Growth of Midstream
Infrastructure and Services
Production-related volumes
represent the majority of the volumes processed and disposed at
Secure's midstream facilities, providing the Corporation with
recurring cash flows. The majority of Secure's facilities are
located in high impact resource plays which have experienced higher
production growth than the remainder of the WCSB over the past
several years. Produced water, which accounts for over 85% of total
production fluids in the WCSB, continues to increase at a
disproportionate rate relative to aggregate production as a result
of aging wells and maturing basins.
Flowback waters and processing volumes are also increasing as
high intensity fracs continue to be applied in liquids rich natural
gas shale reservoirs like the Montney and Duvernay formations. The increased use of
proppants, the number of completion stages and length of the
horizontal wells are expected to continue as producers use
innovative means to develop unconventional resources. As a result,
there is a significant need from Secure's customers for sourcing
water, water logistics, storing water and overall water re-use
where it is cost effective. Secure's integrated business model
provides full-cycle service offerings to assist customers with
large completion programs where significant amounts of water are
required to be managed at various stages.
As oil sands projects have come on stream over the past few
years, bitumen production has increased along with demand for
condensate that is used as a diluent in order to transport the
final product to market. Condensate production levels have
increased in response; however, Canada currently remains a net importer of
condensate and, as a result, drilling activity in the Montney and Duvernay regions is expected to increase to
try to meet demand. As new production comes on, demand for
production chemicals is expected to increase. In addition to
continuing to provide customers with technical solutions for
drilling and completion, the Corporation's DPS division is
developing chemistry to optimize fluid production, provide flow
assurance and maintain the integrity of assets, both for producers
as well as Secure's own midstream assets.
These trends are all expected to result in increased demand for
incremental treating, processing and disposal capacity. It is also
expected that additional terminals and storage will be required to
meet this increased demand. Secure has made significant capital
investments over the past few years to ensure the business is well
positioned to capture new demand. By offering exceptional customer
service and owning and operating midstream facilities near customer
production, Secure expects these trends will drive more volumes to
Secure's midstream facilities.
Additionally, customers continue to seek cost effective
transportation solutions for water, oil and condensate volumes.
Secure's successful execution of the Kerrobert Light Pipeline
System from the planning phase to final completion positions the
Corporation to take advantage of similar opportunities creating
value for both the customer and Secure.
Pipeline Constraints and Wide Differentials: Driving
Higher Crude by Rail Activity
Rail offers an alternative
mode of transportation that is becoming increasingly relied upon by
the industry to transport crude oil as new pipeline projects in
Canada continue to face challenges
and delays. With a loading capacity of over 50,000 barrels per day
across the Corporation's four full service rail terminals, Secure
has meaningful exposure to the growing market for Canadian crude
shipped by rail. Given the recent widening of WCSB crude oil
pricing differentials, Secure expects more producers will agree to
long-term commitments to make transporting crude by rail a more
recurring cash flow stream. As rail operations normalize, Secure
should see increased activity during 2019 and beyond. Moreover,
wide WCS/WTI to Brent oil differentials influence certain U.S.
refiners to look for feedstock accessible by rail that is otherwise
delivered by oil tanker.
As crude oil price differentials have widened even further
during October, and are expected to remain so headed into 2019, the
Corporation remains attentive to opportunities at both
pipeline-connected FSTs and with respect to transporting crude by
rail. Secure continues to strive to position itself to offer
producers egress solutions with better pricing for their products
in western Canada.
The potential impact of wider crude oil differentials on
producer capital budgets and drilling activity is expected to be
more than offset by increased crude by rail shipments and ongoing
and increasing production related volumes at Secure's midstream
facilities, as described above.
U.S. Macroeconomic Environment: Increasing Activity Levels
in North Dakota
Higher
average crude oil prices, improved market access, a favourable
regulatory environment and recent tax reform has driven capital
investment into North Dakota in
recent years. Record production levels were reached during the
third quarter and are expected to continue to increase along with
drilling and completion activity. The Corporation has meaningful
exposure through Secure's six midstream facilities located in key
resource plays in North Dakota to
capture incremental production, drilling and completion related
volumes. The continuing strength of oil prices in the region along
with additional takeaway capacity from the Dakota Access Pipeline
expansion under construction is expected to continue to facilitate
advantageous project economics for Secure's customers operating in
the region.
Environmental Regulations: Creating Demand for Secure's
Environmental Solutions
Increased environmental
regulations in all of Secure's market areas have created
opportunities to help customers operate in a sustainable way with a
focus on protecting the environment. Secure's OS division has seen
increased proactive efforts by customers to prevent spills and
reduce their future environmental liabilities. Recent changes to
remediation regulations in Alberta
through the Alberta Energy Regulator's Area-Based Closure program
could initiate increased abandonment, decommissioning, remediation
and reclamation activity levels which may result in additional
demand for OS division services.
These drivers are expected to provide Secure with significant
potential to grow and expand the business into the future. The
Corporation expects to incur approximately $150 million of
growth and expansion capital in 2018, and allocate
$100 million in 2019, depending on the outcome of various
opportunities in development, such as timing of obtaining
regulatory approvals, development permits and other operating
agreements. During the remainder of 2018, capital will be incurred
on advancing the construction of additional storage tanks at the
receipt terminal in Kerrobert,
completing the permanent water disposal facility at Tony Creek,
completing the expansion at the Williston landfill, increasing processing and
disposal capacity at various other facilities, and purchasing
equipment to support existing services. Providing value-adding
solutions to increase customer operating netbacks and improve
capital efficiency remains Secure's primary objective.
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, 2018 and 2017 and MD&A for the three
and nine months ended September 30, 2018 and 2017 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, including
drilling and production trends; activity levels in the oil and gas
sector, drilling levels, commodity prices for oil, natural gas
liquids and natural gas; industry fundamentals for 2018; capital
forecasts and spending by producers; demand for the Corporation's
services and products; expansion strategy; the impact of oil and
gas activity on Secure's activity levels; the Corporation's
proposed 2018 and 2019 capital expenditure program including
expansion, growth and sustaining capital expenditures, and the
timing of completion for projects, in particular the additional
storage at the Kerrobert terminal;
debt service; acquisition strategy and timing of potential
acquisitions; the impact of new facilities, new service offerings,
potential acquisitions, and prior year acquisitions on the
Corporation's financial and operational performance and growth
opportunities; growth opportunities; future capital needs and how
the Corporation intends to fund its operations, working capital
requirements, dividends and capital program; access to capital; the
impact of the NCIB on shareholder value; and the Corporation's
ability to meet obligations and commitments and operate within any
credit facility restrictions.
Forward-looking statements concerning expected operating and
economic conditions 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 under the
heading "Risk Factors" in the AIF for the year ended
December 31, 2017 and also includes the risks associated
with the possible failure to realize the anticipated synergies in
integrating the assets acquired in prior year acquisitions 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, ADDITIONAL GAAP MEASURES AND OPERATIONAL
DEFINITIONS
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
measures are intended as a complement to results provided in
accordance with IFRS. The Corporation believes these measures
provide additional useful information to analysts, shareholders and
other users to understand the Corporation's financial results,
profitability, cost management, liquidity and ability to generate
funds to finance its operations. However, they should not be used
as an alternative to IFRS measures because they do not have a
standardized meaning under IFRS and therefore may not be comparable
to similar measures presented by other companies. See the
management's discussion and analysis available at
www.sedar.com for further details, including reconciliations
of the Non-GAAP measures and additional GAAP measures to the most
directly comparable measures calculated in accordance with
IFRS.
ABOUT SECURE ENERGY SERVICES INC.
Secure is a TSX publicly traded integrated energy business with
midstream infrastructure, environmental and technical solutions
divisions providing industry leading customer solutions to upstream
oil and natural gas companies operating in western Canada and certain regions in the United States ("U.S.").
1 Refer to
the "Non-GAAP Measures, Additional GAAP Measures and Operational
Definitions" section herein.
|
SOURCE SECURE Energy Services Inc.