CALGARY, Feb. 24, 2020 /CNW/ - Secure Energy Services Inc.
("SECURE" or the "Corporation") (TSX – SES) announced today its
operational and financial results for the three and twelve months
ended December 31, 2019, highlighted
by 2019 Adjusted EBITDAi of $180.2 million, or $1.13 per basic share.
The following press release should be read in conjunction with
the Corporation's management's discussion and analysis ("MD&A")
and the audited consolidated financial statements and notes thereto
which are available on SEDAR at www.sedar.com.
Over the past several years, increasing the stability of the
Corporation's cash flows has been a key priority for SECURE to
reduce the risk of our capital investments and maximize the return
and value from our existing assets, ensuring profitable growth for
our shareholders, and positioning the Corporation for sustained
success. The strategies the Corporation has developed to achieve
this priority include:
-
Building and connecting produced water pipelines and disposal facilities to reduce customers' transportation costs
and environmental footprint;
-
Building and connecting gathering oil pipelines from producer batteries to reduce customers' transportation costs
and environmental footprint;
- Utilizing crude oil storage and blending capabilities to
optimize pricing and manage pipeline transportation
constraints; and
- Providing crude oil transport via rail for access to higher
priced markets and to minimize egress constraints.
During 2019, the Corporation executed on its corporate strategy
by increasing the Corporation's exposure to production‑based
revenues through the growth of our core midstream infrastructure
business, and limiting exposure to cyclical drilling and completion
activities.
2019 ACHIEVEMENTS
Pipestone
facility
In October 2019, the Corporation
commissioned the Pipestone
facility in the liquids rich Montney region of Alberta. The facility includes a produced
water pipeline connecting directly from our anchor customer's
battery. The facility has multi‑year contracted volumes through
facility and area dedications, providing reliable cash flows over
the contract term.
New produced water pipelines
In addition to the produced water pipeline at Pipestone, SECURE added three other produced
water pipelines in the year, connecting producer batteries/gas
plants to SECURE's midstream infrastructure at Gold Creek (two) and
Tony Creek (one). These pipelines
include long-term committed volumes from anchor tenants, resulting
in a reliable rate of return on the investment, and driving volumes
to our facilities. SECURE also has a fifth produced water pipeline,
tying in produced water volumes to our 13 Mile facility in
North Dakota.
Operational success at Kerrobert
In October 2018, SECURE commenced
commercial operations at the Corporation's first owned and operated
oil feeder pipeline system and receipt terminal, located in the
Kindersley Kerrobert region of Saskatchewan. The system gathers crude oil
from multiple oil producers and transports the product to SECURE's
new Kerrobert terminal. From the
terminal, the product is delivered onto the Enbridge mainline at
Kerrobert. The oil feeder pipeline
system includes area dedication and contracted volumes on both an
annual and cumulative term basis over a 10‑year term resulting in a
stable revenue source for the Corporation through pipeline tariffs.
In 2019, SECURE completed the construction of two 130,000 barrel
tanks, increasing the total crude oil storage at the Kerrobert terminal to 420,000 barrels
resulting in increased operational flexibility and expanded
commercial opportunities.
The performance of the Kerrobert crude oil pipeline system surpassed
expectations during the year. Operational highlights include:
- Nearly 1.9 million cubic metres shipped during 2019 with
growing volumes each quarter;
- 20 approved shippers;
- Zero environmental or safety incidents; and
- No unscheduled downtime.
The execution of this pipeline system on time and on budget, and
the operational success demonstrated to date positions SECURE to
take advantage of similar opportunities to create value for
customers seeking cost effective and sustainable solutions for
water, oil and condensate volumes.
Development of our second oil pipeline system
During the third quarter of 2019, the Corporation entered into
long-term contracts in the Bigstone and East Kaybob regions of
Alberta to gather light oil and
condensate from multiple producers and transport the product to the
Corporation's Fox Creek facility.
Several producer facilities will be tied into the pipeline system
by way of four-inch diameter lateral pipelines, joining together
into a six-inch line stretching approximately 25 kilometres to the
Fox Creek facility. In total, the
system will span approximately 120 kilometres. Construction
commenced during the fourth quarter of 2019 and the pipeline system
is expected to be operational by mid-2020, subject to timing of
receipt of regulatory approvals or unanticipated delays.
The development of the East Kaybob oil pipeline system is
underpinned by 15-year commitments with multiple customers, which
should provide SECURE with stable, long-term fee-for-service
revenues from pipeline tariffs, and reliable volumes at the
Fox Creek facility. For our
customers, the elimination of hauling product by truck is expected
to positively impact their respective operating costs, safety and
emissions.
Cushing storage
acquisition
In April 2019, the Corporation
completed two tuck-in acquisitions to secure crude oil storage at
Cushing, Oklahoma. The
acquisitions included a 27% interest in a crude oil storage
facility and a 51% interest in an adjacent 80-acre parcel of
undeveloped land. The storage facility was constructed in 2015 and
is strategically located on 10 acres of land in South Cushing with long-term connection
agreements in place, and provides connectivity to all major inbound
and outbound pipelines in Cushing.
Having access to multiple Canadian crude streams and well-connected
infrastructure at hubs across North
America is expected to benefit our customers' ability to
access markets at the optimum price and significantly expands
SECURE's commercial revenue generating opportunities.
SECURE's majority investment in the 80-acre parcel of land
provides the Corporation with significant optionality to develop
additional midstream infrastructure at Cushing.
Expansion projects
During 2019, the Corporation also undertook several projects to
optimize capabilities and increase processing and disposal capacity
at various existing facilities with the intention of maximizing the
return and value from our existing assets. These projects
included:
-
Additional disposal wells added at the Tony Creek, 13 Mile, and Keene facilities;
-
Blend optimization projects at several pipeline connected full service terminals;
and
- Upgrades at our Big Mountain facility for the handling of
sour fluids.
SECURE will continue to pursue high-return expansion projects at
our existing facilities where it is supported by highly reliable
volumes.
Announcement of strategic divestitures
During the fourth quarter of 2019, SECURE initiated a process
for the divestiture of specific service lines that do not have
recurring or production-related revenue streams. SECURE has engaged
Peters & Co. Limited as financial advisors for the sales
process. The sales process continues to advance, and the
Corporation presently expects to conclude any divestitures by the
end of 2020. Based on current market conditions and the views of
our advisors, aggregate proceeds for these divestures are
anticipated to range from $100
million to $200 million
depending on which service lines are divested.
Monetizing assets that primarily support drilling and completion
activity is expected to allow management to focus on longer-term
strategy, strengthen SECURE's balance sheet, provide incremental
capital for continued midstream infrastructure growth, and support
continued opportunistic share repurchases. SECURE believes these
divestitures will best position the Corporation for sustainable
future growth and shareholder value creation in the midstream
space.
LOOKING AHEAD
SECURE will continue to follow a sensible approach to capital
spending by focusing our capital spending on projects
underpinned by long-term committed volumes that will generate
stable cash flows and capture a secure rate of return. Additional
opportunities to execute on this objective are expected to continue
based on current industry trends such as:
- Producers increasingly outsourcing midstream work;
- Produced water volumes increasing at a disproportionate rate
relative to aggregate production;
- Increased use of concentrated pad drilling with multiple wells
creating large centralized volumes that improve the economics of
building pipelines to connect production volumes to midstream
facilities; and
- Volatile commodity price differentials and limited
pipeline capacity.
Pipeline connecting volumes creates value for our customers by
providing a capital efficient transportation solution that lowers
operating costs and enhances operating netbacks. Additionally, the
use of pipelines significantly reduces or eliminates trucking
logistics and constraints, reduces greenhouse gas emissions and
increases safety for all road users by reducing the number of
trucks required to transport producer's product.
ESG focused
SECURE recognizes that the long-term success of the Corporation
goes beyond the financial results generated by the Corporation.
SECURE is focused on continually improving our strategies and
processes to further enhance the sustainability of our business by
incorporating environmental, social, and governance ("ESG") factors
in our overall business strategy, risk management and business
development. Our commitments to sustainability, including putting
safety first, minimizing the environmental impacts of our
operations, and creating positive relationships with stakeholders
in the communities where we live and work, guide these
strategies.
Over the past year, the Corporation has taken the following
actions to advance our ESG framework and address key issues:
- Integrated sustainability into the mandate of the Board's
standing Health, Safety and Environment committee;
- Published our first climate policy for increasing energy
efficiency and reducing emissions;
- Adopted an 'Every Drop Matters' initiative for
spill prevention;
- Formalized stakeholder relations and Aboriginal
vendor policies;
- Linked executive compensation targets to key corporate
sustainability goals; and
- Increased the diversity of our Board of Directors with the
addition of a second female director.
The Corporation has established environmental targets to
reduce our carbon intensity in half by 2030 and achieve net zero
emissions by 2050. The Corporation is committed to developing and
implementing new practices and technologies to achieve these
targets.
SECURE also acknowledges the larger role we are able to play in
reducing the overall environmental impact associated with
delivering energy to the world. The Corporation is dedicated to
working with customers to provide innovative midstream and
environmental solutions that not only reduce costs, but also lower
emissions, improve safety, manage water, recycle by-products, and
protect the land.
2020 capital guidance
The current growth capital plan for 2020 is approximately
$50 million and relates primarily to
completing construction of the East Kaybob oil pipeline system and
other small expansion projects. Sustaining capital is expected to
be approximately $20 million for 2020. In addition, the
Corporation expects to incur approximately $10 million in 2020 for office construction costs
due to a new sub-lease arrangement which will significantly lower
our future rent and operating costs over the next 12 years.
The capital budget will be reviewed quarterly in 2020 and may be
revised in accordance with growth and expansion opportunities
available to further expand SECURE's midstream infrastructure
business in a manner consistent with SECURE's business strategy and
such other factors as management considers appropriate including,
among other things, the risks set out in the in the Corporation's
Annual Information Form for the year ended
December 31, 2019 ("AIF") under the heading 'Risk
Factors'.
2019 RESULTS
Adjusted EBITDA of $1.13 per share
Successful project execution and strategic acquisitions over the
past several years contributing recurring cash flows generated from
production-related activities helped offset the impact of continued
reduced oil and gas drilling and completion activity in 2019. For
the year ended December 31, 2019,
SECURE achieved Adjusted EBITDA of $180.2
million, equal to $1.13 per
share, down 3% compared to 2018.
In the Midstream Infrastructure division, growth initiatives
over the last several years to increase capacity in response to
customer demand and expand production-related service offerings
resulted in Adjusted EBITDA of $183.6
million, up 1% from 2018. This increase was offset by
reduced contributions from the Corporation's Technical Solutions
and Environmental Solutions divisions as a result of lower drilling
and completion activity in the Western Canadian Sedimentary Basin
("WCSB") as over half of the service lines provide drilling and
completion-related services. Activity levels were hampered by
weather-related issues during several months of the year,
compounded by the overall impact of reduced capital budgets as
producers employ increased financial and capital discipline.
Overall, the active rig count and wells completed were down 31% and
20% respectively during 2019 from 2018.
Solid balance sheet
SECURE continues to follow a disciplined approach to maintaining
a strong balance sheet.
-
In April 2019, SECURE closed an amendment to its first lien credit facility
(the "First Lien Credit
Facility"), increasing the borrowing
capacity by $130 million to $600 million and entered into a new
$75 million bilateral Letter of Credit Facility. SECURE's
total credit capacity is $805
million, comprised of the First Lien Credit Facility, the
Corporation's $130 million second lien credit facility entered
into in 2017, and the new Letter of Credit Facility. At
December 31, 2019, the Corporation
had $312.1 million available under
these credit facilities, subject to covenant restrictions, up from
$148.4 million at December
31, 2018.
-
The Corporation remained compliant with all covenants related to its credit facilities in 2019, ending the year with
a senior debt to trailing twelve-month EBITDA
ratioii of 2.0x, well within the
covenant threshold.
SECURE will continue to focus on managing the Corporation's
financial position throughout 2020. Funds flow from operations
after sustaining capital and dividend payments, along with any
proceeds from divestitures, will provide increased flexibility for
debt repayment, midstream infrastructure growth underpinned by
long-term committed volume contracts, and opportunistic share
repurchases.
Shareholder value creation
During 2019, SECURE continued to pay a $0.0225 per share monthly dividend and executed
on strategic share repurchases under the Corporation's normal
course issuer bid ("NCIB"). In aggregate, SECURE returned
$43.0 million of cash flow to
shareholders through the dividend payments, and purchased and
cancelled 5,393,392 common shares of the Corporation ("shares") at
a weighted average price per share of $6.44 for a total of $34.7
million under the NCIB. At December
31, 2019, the Corporation had 156,460,158 shares
outstanding.
ANNUAL HIGHLIGHTS
The operating and financial highlights for the years ended
December 31, 2019, 2018 and 2017 can
be summarized as follows:
|
Twelve months
ended Dec 31,
|
($000's except
share and per share data)
|
2019
|
2018
|
2017
|
Revenue (excludes oil
purchase and resale)
|
632,409
|
698,172
|
603,421
|
Oil purchase and
resale
|
2,440,071
|
2,239,281
|
1,724,787
|
Total
revenue
|
3,072,480
|
2,937,453
|
2,328,208
|
Adjusted EBITDA
(1)
|
180,172
|
190,521
|
157,211
|
Per share ($),
basic
|
1.13
|
1.17
|
0.97
|
Per share ($),
diluted
|
1.11
|
1.15
|
0.97
|
Net income (loss)
attributable to shareholders of Secure
|
1,600
|
19,929
|
(34,202)
|
Per share ($), basic
and diluted
|
0.01
|
0.12
|
(0.21)
|
Cash flows from
operating activities
|
196,604
|
186,515
|
108,872
|
Per share ($),
basic
|
1.24
|
1.14
|
0.67
|
Per share ($),
diluted
|
1.21
|
1.13
|
0.67
|
Dividends per common
share
|
0.27
|
0.27
|
0.25
|
Capital expenditures
(1)
|
134,725
|
178,646
|
195,867
|
Total
assets
|
1,647,651
|
1,583,501
|
1,562,746
|
Long-term
liabilities
|
624,739
|
560,863
|
422,251
|
Common shares - end
of period
|
156,460,158
|
159,274,147
|
163,352,572
|
Weighted average
common shares
|
|
|
|
basic
|
158,984,770
|
163,008,356
|
162,827,541
|
diluted
|
161,817,532
|
165,425,609
|
162,827,541
|
(1)Refer to "Non-GAAP Measures and
Operational Definitions" for further
information.
|
- REVENUE OF $3.1 BILLION FOR
THE YEAR ENDED DECEMBER 31, 2019
-
- Midstream Infrastructure division revenue (excluding oil
purchase and resale) in 2019 increased by 2% over 2018 to
$362.1 million. Higher revenues were
driven primarily by infrastructure added during 2018 and 2019 which
resulted in new production-related revenue streams and increased
disposal capacity with committed volumes. Lower revenue from
existing facilities due to lower drilling and completions related
processing and disposal volumes resulting from poor weather
throughout the second and third quarter, compounded by reduced
spending by producers in Canada
across the Corporation's operating areas, partially offset the
contributions from new infrastructure;
- Oil purchase and resale revenue in 2019 increased 9% over 2018
to $2.4 billion primarily due to
higher volumes attributable to SECURE's expanded commercial
operations, particularly related to the Kerrobert crude oil pipeline system which was
placed in service October 1,
2018;
- Environmental Solutions division revenue in 2019 decreased 26%
over 2018 to $86.8 million. The
integrated fluids solutions service line was impacted by lower well
completion activity in the WCSB and from reduced spending from
major exploration and production companies in Canada. Project revenue also decreased due to
fewer reclamation and demolition jobs underway year over year and
from the deferral of ongoing remediation and demolition jobs as wet
weather conditions during most of the second and third quarters
limited field access required to complete these jobs. Increases in
recurring revenue from scrap metal recycling agreements combined
with new project work in the Fort
McMurray region partially offset the reduced revenue from
the lower job volumes and program deferrals;
- Technical Solutions division revenue in 2019 decreased 18% over
2018 to $183.4 million due to lower
drilling and completion activity in the WCSB, negatively impacting
revenue generated from drilling and completion fluid services,
solids control equipment rentals and drilling waste management.
Increased production services revenue from an expanded customer
base partially offset this impact;
- ADJUSTED EBITDA OF $180.2
MILLION FOR THE YEAR ENDED DECEMBER
31, 2019
-
- Adjusted EBITDA in 2019 decreased 5% over 2018 to $180.2 million due to a 34% decrease in Adjusted
EBITDA generated by the Environmental Solutions and Technical
Solutions divisions. Approximately half of these divisions'
business lines provide services for drilling and completions, which
were down year over year by 31% and 20%, respectively.
Additionally, reduced spending from major exploration and
production companies in Canada and
weather-related delays impacted certain project work in the
Environmental Solutions division. Midstream Infrastructure Adjusted
EBITDA increased slightly year over year as a result of
infrastructure additions with stable, production-related revenue
streams.
- NET INCOME ATTRIBUTABLE TO SHAREHOLDERS OF SECURE FOR THE
YEAR ENDED DECEMBER 31, 2019
-
- For the year ended December 31,
2019, net income attributable to shareholders of SECURE was
$1.6 million, compared to income
of $19.9 million in the year ended
December 31, 2018. The variance is
primarily due to a $10.3 million
decrease to Adjusted EBITDA resulting from the factors described
above, higher depreciation expense resulting from the adoption of
International Financial Reporting Standard 16 ("IFRS
16")iii and new infrastructure put into use in 2018
and 2019. These increases were partially offset by lower tax
expense resulting from lower pre-tax earnings and a deferred tax
recovery booked in the second quarter of 2019 due to a reduction in
corporate tax rates in Alberta.
- CAPITAL EXPENDITURES OF $134.7
MILLION FOR THE YEAR ENDED DECEMBER
31, 2019
-
- SECURE's organic growth and expansion capital during 2019 of
$103.4 million was heavily weighted
toward infrastructure projects that aligned with our underlying
strategy to increase the stability of our cash flows,
including:
-
- Construction of 260,000 barrels of additional crude oil storage
at Kerrobert;
- Construction of the new Pipestone water disposal facility and
water pipeline;
- The addition of produced water transfer and
injection pipelines;
- Long lead items and commencing construction of the East Kaybob
oil pipeline system;
-
The addition of three water disposal wells at existing facilities (Tony Creek, Keene and 13 Mile);
- Increasing processing and disposal capacity and creating
efficiencies at various other facilities; and
- Upgrades at our Big Mountain facility for the handling of
sour fluids.
- Two tuck-in acquisitions at Cushing to secure crude oil storage for
$13.9 million.
- Sustaining capital of $17.4
million relating primarily to well and facility
maintenance.
- FINANCIAL FLEXIBILITY
-
-
The total amount drawn on SECURE's credit facilities as at December 31, 2019 increased 10% to $454.3 million
compared to $413.5 million at
December 31, 2018 primarily as a
result of the Corporation's capital program;
- As at December 31, 2019, the
Corporation had $312.1 million
available under its credit facilities, subject to covenant
restrictions, up from $148.4 million
at December 31, 2018. In April 2019, SECURE closed an amendment to its
First Lien Credit Facility, increasing the borrowing capacity by
$130 million to $600 million and entered into a new $75 million bilateral Letter of Credit Facility.
SECURE's total credit capacity at December
31, 2019 is $805 million;
- The following table outlines SECURE's senior and total debt to
trailing twelve-month EBITDA ratios at December 31, 2019 and December 31, 2018. SECURE remains well within
compliance of all covenants related to its credit facilities at
December 31, 2019.
|
Dec 31,
2019
|
Dec 31,
2018
|
Covenant
|
Senior Debt to
EBITDA
|
2.0
|
1.6
|
3.5
|
Total Debt to
EBITDA
|
2.8
|
2.2
|
5.0
|
FOURTH QUARTER HIGHLIGHTS
The Corporation's operating and financial highlights for the
three-month periods ending December 31,
2019 and 2018 can be summarized as follows:
|
Three months ended
Dec 31,
|
($000's except
share and per share data)
|
2019
|
2018
|
%
change
|
Revenue (excludes oil
purchase and resale)
|
162,014
|
192,756
|
(16)
|
Oil purchase and
resale
|
596,073
|
490,295
|
22
|
Total
revenue
|
758,087
|
683,051
|
11
|
Adjusted EBITDA
(1)
|
46,894
|
57,810
|
(19)
|
Per share ($),
basic
|
0.30
|
0.36
|
(17)
|
Per share ($),
diluted
|
0.29
|
0.35
|
(17)
|
Net income
attributable to shareholders of Secure
|
2,658
|
13,944
|
(81)
|
Per share ($),
basic
|
0.02
|
0.09
|
(78)
|
Per share ($),
diluted
|
0.02
|
0.08
|
(75)
|
Cash flows from
operating activities
|
49,401
|
59,310
|
(17)
|
Per share ($),
basic
|
0.31
|
0.37
|
(16)
|
Per share ($),
diluted
|
0.31
|
0.36
|
(14)
|
Dividends per common
share
|
0.0675
|
0.0675
|
-
|
Capital expenditures
(1)
|
31,769
|
40,754
|
(22)
|
Total
assets
|
1,647,651
|
1,583,501
|
4
|
Long-term
liabilities
|
624,739
|
560,863
|
11
|
Common shares - end
of period
|
156,460,158
|
159,274,147
|
(2)
|
Weighted average
common shares
|
|
|
|
basic
|
157,097,902
|
161,251,096
|
(3)
|
diluted
|
159,430,711
|
164,374,324
|
(3)
|
(1)Refer to "Non-GAAP Measures and
Operational Definitions"for further information.
|
- REVENUE OF $758.1 MILLION FOR
THE THREE MONTHS ENDED DECEMBER 31,
2019
-
- Midstream Infrastructure division revenue (excluding oil
purchase and resale) decreased 11% to $94.2 million during the three months ended
December 31, 2019 from the 2018
comparative period. Lower revenue associated with drilling and
completions related processing and disposal volumes at the
Corporation's facilities negatively impacted drilling waste and
flowback water disposal volumes, and processing volumes from
drilling and completion activities. Additionally, commodity price
differentials were less volatile in the three months ended
December 31, 2019 compared to the
same period of 2018, resulting in fewer marketing opportunities and
reduced rail activity compared to the prior year period.
Infrastructure additions and expansions generating stable,
production-related revenues during the year helped partially offset
the negative factors described above;
- Oil purchase and resale revenue in the Midstream Infrastructure
division increased 22% to $596.1 million during the three months ended
December 31, 2019 from the 2018
comparative period. The increase is primarily attributable to a 38%
increase in average Canadian Light Sweet crude oil prices in the
three months ended December 31, 2019
of 2019 over the 2018 comparative period;
- Environmental Solutions division revenue decreased 29% to
$20.7 million during the three months
ended December 31, 2019 from the 2018
comparative period. The integrated fluids solutions service line
was impacted by lower well completion activity in the WCSB and from
reduced spending from major exploration and production companies in
Canada. Project revenue decreased
due to fewer reclamation and demolition jobs underway quarter over
quarter. Increases in recurring revenue from the scrap metal
recycling agreements combined with new project work in the
Fort McMurray region partially
offset the reduced revenue from the lower job volumes and program
deferrals;
- Technical Solutions division revenue decreased 19% to
$47.1 million during the three months
ended December 31, 2019 from the 2018 comparative period
due to lower drilling and completion activity in the WCSB,
negatively impacting revenue generated from drilling and completion
fluid services, solids control equipment rentals and drilling waste
management. Increased production services revenue from an expanded
customer base partially offset this impact.
- ADJUSTED EBITDA OF $46.9
MILLION FOR THE THREE MONTHS ENDED DECEMBER 31, 2019
-
- Adjusted EBITDA decreased 19% to $46.9
million during the three months ended December 31, 2019 from the 2018 comparative
period primarily as a result of lower revenues across all three
divisions as described above. Segment profit
marginiv as a percentage of revenue also decreased
5% in the Midstream Infrastructure division from 62% in the three
months ended December 31, 2018
primarily as a result of lower revenue with ongoing fixed costs at
facilities and service mix.
- NET INCOME ATTRIBUTABLE TO SHAREHOLDERS OF SECURE OF
$2.6 MILLION FOR THE THREE MONTHS
ENDED DECEMBER 31, 2019
-
- Net income attributable to shareholders of SECURE decreased 81%
to $2.6 million during the three
months ended December 31, 2019 from
the 2018 comparative period. The variance is due primarily to a
$10.9 million decrease to
Adjusted EBITDA, partially offset by lower tax expense driven by
lower pre-tax income.
- CAPITAL EXPENDITURES OF $31.8
MILLION FOR THE THREE MONTHS ENDED DECEMBER 31, 2019
-
- Total capital expenditures for the three months ended
December 31, 2019 included
$25.6 million of organic growth and
expansion capital related primarily to:
-
- Construction of the new East Kaybob oil pipeline system;
- Acquisition of a second produced water transfer and injection
pipeline from a customer plant to SECURE's Gold Creek water
disposal facility;
- Tying in of new disposal wells drilled during the first half of
the year; and
- Ongoing optimization projects at existing facilities, including
upgrades to disposal well water injection pumps to increase
throughput.
- Sustaining capital incurred in the three months ended
December 31, 2019 of $6.1 million relates primarily to well and
facility maintenance.
MIDSTREAM INFRASTRUCTURE DIVISION HIGHLIGHTS
|
Three months ended
Dec 31,
|
Twelve months
ended Dec 31,
|
($000's)
|
2019
|
2018
|
%
Change
|
2019
|
2018
|
%
Change
|
Revenue
|
|
|
|
|
|
|
Midstream
Infrastructure (a)
|
94,150
|
105,420
|
(11)
|
362,148
|
356,350
|
2
|
Oil purchase and
resale
|
596,073
|
490,295
|
22
|
2,440,071
|
2,239,281
|
9
|
Total Midstream
Infrastructure division revenue
|
690,223
|
595,715
|
16
|
2,802,219
|
2,595,631
|
8
|
|
|
|
|
|
|
|
Cost of
Sales
|
|
|
|
|
|
|
Midstream
Infrastructure excluding items noted below
|
40,351
|
39,607
|
2
|
158,836
|
146,767
|
8
|
Depreciation,
depletion and amortization
|
23,265
|
20,175
|
15
|
86,545
|
81,094
|
7
|
Oil purchase and
resale
|
596,073
|
490,295
|
22
|
2,440,071
|
2,239,281
|
9
|
Total Midstream
Infrastructure division cost of sales
|
659,689
|
550,077
|
20
|
2,685,452
|
2,467,142
|
9
|
|
|
|
|
|
|
|
Segment Profit
Margin (1)
|
53,799
|
65,813
|
(18)
|
203,312
|
209,583
|
(3)
|
|
|
|
|
|
|
|
Segment Profit
Margin (1) as a % of revenue (a)
|
57%
|
62%
|
|
56%
|
59%
|
|
(1)Calculated as revenue less cost of
sales excluding depreciation, depletion and amortization. Refer to
"Non-GAAP Measures and Operational Definitions" for further
information.
|
- Revenue generated from Midstream Infrastructure services
decreased 11% and increased 2% to $94.2
million and $362.1 million for
the three and twelve months ended December
31, 2019 from the respective 2018 comparative periods. In
the three month period, the decrease in Midstream Infrastructure
services revenue from the 2018 comparative period was due to lower
processing and disposal volumes tied to lower drilling and
completion activity in the WCSB. Additionally, exceptionally
volatile commodity price differentials in the fourth quarter of
2018 created increased opportunities for transporting crude by rail
and for price optimization at the Corporation's pipeline connected
FSTs, resulting in higher revenues generated from the Corporation's
rail terminal and crude oil marketing during such period;
- Infrastructure additions during the year, including produced
water pipelines added at Gold Creek and Tony Creek, crude oil storage at Kerrobert and Cushing, and the Pipestone facility, along with various
expansions at existing facilities, partially offset lower revenues
during the three months ended December 31,
2019. Additionally, the Corporation realized higher pricing
on recovered oil volumes due to a 38% increase in benchmark oil
prices in Canada during such
period;
- During the twelve months ended December
31, 2019, the 2% increase in Midstream Infrastructure
service revenue from the 2018 comparative period was primarily due
to higher volumes associated with new infrastructure. In addition
to the above, the Corporation strategically added the Gold Creek
and Tony Creek water disposal
facilities at the end of the second quarter of 2018 which are
underpinned by committed volumes, and commenced commercial
operations at the Kerrobert crude
oil pipeline system on October 1,
2018, providing a new stable revenue source for the
Corporation and expanded commercial marketing opportunities;
- Disposal volumes were relatively flat as an 11% and 14%
increase in produced water disposal volumes during the three and
twelve months ended December 31, 2019
from the respective 2018 comparative periods was offset by the
impact of lower completion-related water volumes and reduced
drilling waste disposed at the Corporation's landfills. Increased
produced water disposal volumes were driven by the addition of the
Pipestone facility in the fourth
quarter of 2019 and the Gold Creek and Tony
Creek water disposal facilities at the end of the second
quarter of 2018, along with expansions to increase water disposal
capacity at various other facilities since the start of 2018
through additional disposal wells and improved injection rates.
Additionally, SECURE's facilities are strategically located in
regions where production levels have not decreased, and where
average fluids pumped per well are higher than other regions of the
WCSB, driving incremental volumes at SECURE's facilities;
- Processing volumes decreased 9% and 21% during the three and
twelve months ended December 31, 2019
from the 2018 comparative periods due primarily to lower processing
volumes of drilling waste and completion fluids. Weather related
issues during the year, including cold weather in the first
quarter, a prolonged spring break-up and unseasonably wet weather
throughout the third quarter of 2019, resulted in year over year
declines in drilling and completions activity in the WCSB. These
issues were compounded by the overall slowdown of oil and gas
activity during 2019 due to challenging industry fundamentals
stemming from volatile crude oil pricing and uncertainty with
respect to the addition of pipeline capacity out of the WCSB.
Overall, rig activity in the WCSB declined 29% and 31% during the
three and twelve months ended December 31,
2019 from the respective 2018 comparative periods, and well
completions decreased 12% and 20% in these same periods;
- Oil purchase and resale revenue in the Midstream Infrastructure
division increased 22% and 9% to $596.1
million and $2.4 billion for
the three and twelve months ended December
31, 2019 from the respective 2018 comparative periods. The
increase in the three months ended December
31, 2019 relates to higher commodity prices in such period.
In the twelve months ended December 31,
2019, the increase is primarily attributable to SECURE's
expanded commercial operations, particularly related to the
Kerrobert crude oil pipeline
system;
- The Midstream Infrastructure division's segment profit margin
decreased 18% to $53.8 million for
the three months ended December 31,
2019 from the 2018 comparative period. As a percentage of
Midstream Infrastructure services revenue, segment profit margin
was 57% for the three months ended December
31, 2019, down from 62% in the 2018 comparative period. The
decrease was primarily a result of lower drilling and completion
revenue available to absorb ongoing fixed costs at existing
facilities during such period, and reduced crude by rail activity
as a result of narrower commodity price differentials. Profit
margin percentage at Cushing was
also lower than the Midstream Infrastructure division's historical
average, partly due to start-up costs. Additionally, in the fourth
quarter of 2018, segment profit margin as a percentage of revenue
was higher than the Midstream Infrastructure division's historic
average as a result of a favorable service mix, including certain
higher margin services that did not re-occur in 2019;
- The Midstream Infrastructure division's segment profit margin
decreased 3% to $203.3 million for
the twelve months ended December 31,
2019 from the 2018 comparative period due primarily to the
fourth quarter impacts described above. As a percentage of revenue,
segment profit margin was 56% for the twelve months ended
December 31, 2019, down from 59% in
the 2018 comparative period as a result of service mix, including
the addition of new lower margin revenue streams;
- General and administrative ("G&A") expenses increased to
$7.2 million and $29.5 million for the three and twelve months
ended December 31, 2019 from the
respective 2018 comparative periods balances of $5.4 million and $25.1
million. Excluding depreciation and amortization, G&A
expenses increased 26% and 1% during the three and twelve months
ended December 31, 2019 from the
respective 2018 comparative periods primarily due to severance
costs associated with a reduction in the division's workforce
during the fourth quarter to align with activity levels. This
impact was partially offset by the impact of IFRS 16 on office
leases. The Corporation continues to minimize G&A costs by
streamlining operations where possible;
- Earnings before tax decreased 42% and 16% to $23.0 million and $85.5
million for the three and twelve months ended December 31, 2019 from the respective 2018
comparative periods. The decrease is a result of lower segment
profit margin, and increased depreciation and amortization expense
in the 2019 period resulting from new infrastructure put into
service as well as the Cushing
acquisition.
ENVIRONMENTAL SOLUTIONS DIVISION HIGHLIGHTS
|
Three months ended
Dec 31,
|
Twelve months
ended Dec 31,
|
($000's)
|
2019
|
2018
|
%
Change
|
2019
|
2018
|
%
Change
|
Revenue
|
|
|
|
|
|
|
Environmental
Solutions
|
20,745
|
29,236
|
(29)
|
86,831
|
117,060
|
(26)
|
|
|
|
|
|
|
|
Cost of
Sales
|
|
|
|
|
|
|
Environmental
Solutions excluding depreciation and amortization
|
15,909
|
22,464
|
(29)
|
69,252
|
92,242
|
(25)
|
Depreciation and
amortization
|
2,037
|
2,093
|
(3)
|
9,074
|
8,525
|
6
|
Total
Environmental Solutions division cost of sales
|
17,946
|
24,557
|
(27)
|
78,326
|
100,767
|
(22)
|
|
|
|
|
|
|
|
Segment Profit
Margin (1)
|
4,836
|
6,772
|
(29)
|
17,579
|
24,818
|
(29)
|
|
|
|
|
|
|
|
Segment Profit
Margin (1) as a % of revenue
|
23%
|
23%
|
|
20%
|
21%
|
|
(1)Calculated as revenue less cost of
sales excluding depreciation and amortization. Refer to
"Non-GAAP Measures and Operational Definitions" for further
information.
|
- The Environmental Solutions division revenue decreased 29% and
26% to $20.7 million and $86.8 million for the three and twelve months
ended December 31, 2019 from the
respective 2018 comparative periods. Project services revenue
decreased as there were fewer large-scale job opportunities in 2019
compared to 2018. In addition, revenue from onsite water management
and pumping services were negatively impacted by lower well
completion activity in the WCSB. Increases in recurring revenue
from scrap metal recycling agreements in Fort McMurray combined with new project work
in the Fort McMurray region
partially offset the reduced revenue from the other service
lines;
- Segment profit margin decreased 29% for both the three and
twelve months ended December 31, 2019
to $4.8 million and $17.6 million from the respective 2018
comparative periods due primarily to lower revenue. As a percentage
of revenue, segment profit margin was 23% for the three months
ended December 31, 2019, consistent
with the prior year comparative period. The Environmental Solutions
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, metal recycling and other services in any given
period;
- During the three months ended December
31, 2019, segment profit as a percentage of revenue
benefited from improved project type margins and higher margins
associated with revenue generated from the Fort McMurray region which offset the impact
of reduced completion related water pumping and fracing services.
Segment profit margin as a percentage of revenue decreased slightly
to 20% in the twelve months ended December
31, 2019, from 21% in the 2018 comparative period primarily
due to a lower proportion of revenue from water pumping and fracing
services, which typically generates higher margins than project
type work;
- G&A expense decreased 11% and 18% to $1.3 million and $6.5
million for the three and twelve months ended December 31, 2019 from the respective 2018
comparative periods. The overall decrease is primarily a result of
lower personnel costs due to headcount reductions to align staff
with activity levels. Additionally, amortization expense decreased
as certain intangible assets were fully amortized in the prior
year;
- The Environmental Solutions division had earnings before tax of
$1.5 million and $2.0 million during the three and twelve months
ended December 31, 2019, down from
$3.2 million and $8.3 million during the respective 2018
comparative periods. The variances correspond primarily to the
decrease in segment revenue and profit margin, offset by the
positive impact of reduced G&A expense in the period.
TECHNICAL SOLUTIONS DIVISION HIGHLIGHTS
|
Three months ended
Dec 31,
|
Twelve months
ended Dec 31,
|
($000's)
|
2019
|
2018
|
%
Change
|
2019
|
2018
|
%
Change
|
Revenue
|
|
|
|
|
|
|
Technical
Solutions
|
47,119
|
58,100
|
(19)
|
183,430
|
224,762
|
(18)
|
|
|
|
|
|
|
|
Cost of
Sales
|
|
|
|
|
|
|
Technical Solutions
excluding depreciation and amortization
|
38,821
|
48,737
|
(20)
|
153,118
|
186,232
|
(18)
|
Depreciation and
amortization
|
6,616
|
5,670
|
17
|
24,219
|
21,252
|
14
|
Total Technical
Solutions division cost of sales
|
45,437
|
54,407
|
(16)
|
177,337
|
207,484
|
(15)
|
|
|
|
|
|
|
|
Segment Profit
Margin (1)
|
8,298
|
9,363
|
(11)
|
30,312
|
38,530
|
(21)
|
|
|
|
|
|
|
|
Segment Profit
Margin (1) as a % of revenue
|
18%
|
16%
|
|
17%
|
17%
|
|
(1)Calculated as revenue less cost of
sales excluding depreciation and amortization. Refer to
"Non-GAAP Measures and Operational Definitions" for further
information.
|
- The Technical Solutions division's revenue decreased 19% and
18% to $47.1 million and $183.4 million in the three and twelve months
ended December 31, 2019 from the
respective 2018 comparative periods. The Technical Solutions
division's drilling fluids and equipment revenue correlates with
oil and gas drilling activity in the WCSB. Rig activity in the WCSB
decreased 29% and 31% during the three and twelve months ended
December 31, 2019 from the 2018
comparative periods. As a result, drilling services revenue was
negatively impacted by fewer operating days and rigs serviced.
SECURE was able to partially mitigate the impact of reduced
activity levels through higher contributions from production
chemicals as the Corporation continues to win new bids, and expand
its customer base and product offerings;
- The Technical Solutions division's segment profit margin
decreased 11% and 21% to $8.3 million
and $30.3 million for the three and
twelve months ended December 31, 2019
from the respective 2018 comparative periods. Segment profit margin
as a percentage of revenue was 18% and 17% for the three and twelve
months ended December 31, 2019,
compared to 16% and 17% for the respective 2018 comparative
periods. Improved production services margins resulting from margin
improvement initiatives to lower material costs, a favorable
product mix, and the adoption of IFRS 16 resulting in the
capitalization of certain production chemical blending plants
operated under lease agreements offset the impact of reduced
drilling fluids and equipment rental revenues and ongoing overhead
costs;
- Overall G&A expenses decreased 18% and 10% to $5.2 million and $20.7
million for the three and twelve months ended December 31, 2019 from the respective 2018
comparative periods as a result of the Corporation's continued
efforts to manage costs efficiently and proactively while still
responding to customer demands and activity levels. Additionally,
G&A expenses during the three months ended December 31, 2018 included severance payments
made related to a reduction of the division's workforce to align
with activity levels;
- The Technical Solutions division had losses before tax of
$3.5 million and $14.6 million during the three and twelve months
ended December 31, 2019, compared to
losses of $2.6 million and
$5.8 million in the respective 2018
comparative periods. These variances were primarily a result of
lower segment profit margin as described above.
REPORTING CHANGES
The Corporation adopted IFRS 16 as at the effective date of
January 1, 2019 which replaced IAS 17, Leases. The new
standard introduces a single lessee accounting model and requires a
lessee to recognize assets and liabilities for all leases with a
term of more than 12 months, unless the underlying asset is of low
value.
The Corporation elected the modified retrospective transition
approach, which provides lessees a method for recording existing
leases at adoption with no restatement of prior period financial
information. Under this approach, a lease liability was recognized
at January 1, 2019 in respect of leases previously
classified as operating leases, measured at the present value of
the remaining lease payments, discounted using the lessee's
incremental borrowing rate at transition. The associated
right-of-use assets were measured at amounts equal to the
respective lease liabilities, subject to certain adjustments
allowed under IFRS 16.
Adoption of the new standard at January 1, 2019 resulted in
the recording of additional right-of-use assets and lease
liabilities of $33.5 million and
$35.9 million, respectively,
related to office space, warehouses, surface land, rail cars and
certain heavy equipment. The new standard resulted in an increase
to Adjusted EBITDA from 2018 of approximately $14.6 million from lease payments previously
expensed in cost of sales and general and administrative
expenses. The new standard did not materially impact
consolidated net income as the depreciation of right-of-use assets
and interest and finance costs related to the lease liabilities
recognized under IFRS 16 were mostly offset by reductions in
operating lease expense, which were previously recognized in cost
of sales and general and administrative expenses. The adoption of
IFRS 16 had no impact on cash flows.
FINANCIAL STATEMENTS AND MD&A
The Corporation's
audited consolidated financial statements and notes thereto for the
year ended December 31, 2019 and 2018
and MD&A for the three and twelve months ended December 31, 2018 and 2017 are available
immediately on SECURE's website at www.secure-energy.com. The
audited 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 but not limited to:
management's expectations with respect to the business, financial
prospects and future opportunities for the Corporation; the
Corporation's growth and expansion strategy; the Corporation's
ability to continue to grow the business organically and execute on
strategic growth opportunities based on current financial position;
sales process for the divestiture of specific service lines that do
not have recurring or production-related revenue streams, including
outcome of the sales process, proceeds and timing of proposed
divestitures, and the announcements, anticipated proceeds and use
of proceeds therefrom; the Corporation's proposed 2020 capital
expenditure programs including growth and expansion and sustaining
capital expenditures, and the timing of completion for projects, in
particular the East Kaybob oil pipeline system; the benefits of
long-term contracts and commitments entered into by SECURE for its
projects and facilities, in particular at the Pipestone and Fox
Creek facilities and East Kaybob oil pipeline system;
expected benefits customers will receive from our pipeline systems
and crude oil storage facilities; key factors driving the
Corporation's success; the oil and natural gas industry in
Canada and the U.S., including
2020 activity levels, spending by producers and the impact of this
on SECURE's activity levels; the impact of new facilities, and new
service offerings, potential acquisitions, and prior year
acquisitions on the Corporation's future financial results; demand
for the Corporation's services and products; industry fundamentals
driving the success of SECURE's core operations, including
increased outsourcing of midstream work by producers, drilling,
completion and production trends, volatile commodity price
differentials and limited pipeline capacity, opportunities relating
to crude oil logistics, well density and economics for pipeline
connecting production volumes to midstream facilities, and global
oil and gas demand; debt service; adjustments in our dividend;
future share repurchases; expectations that our capital investment,
share repurchases and cash dividends will be funded from internally
generated cash flows; 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 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 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 known and unknown
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, 2019 and also includes risks
associated with general economic conditions in Canada and the U.S.; changes in the level of
capital expenditures made by oil and natural gas producers and the
resultant effect on demand for oilfield services during drilling
and completion of oil and natural gas wells; volatility in market
prices for oil and natural gas and the effect of this volatility on
the demand for oilfield services generally; risks inherent in the
Corporation's ability to generate sufficient cash flow from
operations to meet its current and future obligations; increases in
debt service charges; the Corporation's ability to access external
sources of debt and equity capital; changes in legislation and the
regulatory environment, including uncertainties with respect to
implementing binding targets for reductions of emissions and the
regulation of hydraulic fracturing services; uncertainties in
weather and temperature affecting the duration of the oilfield
service periods and the activities that can be completed;
competition; sourcing, pricing and availability of raw materials,
consumables, component parts, equipment, suppliers, facilities, and
skilled management, technical and field personnel; liabilities and
risks, including environmental liabilities and risks, inherent in
oil and natural gas operations; ability to integrate technological
advances and match advances of completion; credit risk to which the
Corporation is exposed in the conduct of its business; SECURE's
ability to complete anticipated divestiture transactions on
acceptable terms or at all; updates or changes to SECURE's
strategy; risks associated with the possible failure to realize the
anticipated synergies in integrating the assets acquired in prior
year acquisitions with SECURE's operations; and other factors, many
of which are beyond the control of the Corporation.
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 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 MD&A
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
SECURE is a publicly traded energy
business listed on the Toronto Stock Exchange ("TSX") 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.") through its three
operating segments: Midstream Infrastructure, Environmental
Solutions and Technical Solutions.
The Corporation owns and operates a network of over fifty midstream facilities throughout key resource plays in western
Canada, North Dakota and Oklahoma. SECURE's core midstream
infrastructure operations generate cash flows from oil production
processing and disposal, produced water disposal, and crude oil
logistics, marketing and storage.
TSX Symbol: SES
i Refer to the "Non-GAAP Measures and
Operational Definitions" section herein.
ii As defined in the Corporation's lending
agreements. Refer to the MD&A for details on the Corporation's
covenant calculations.
iii IFRS 16 was adopted by the Corporation on
January 1, 2019 and resulted in the
reclassification of certain lease payments previously included in
the determination of EBITDA to depreciation and amortization
expense and interest costs. Refer to the "Reporting
Changes" section herein.
iv Refer to the "Non-GAAP Measures and
Operational Definitions" section herein.
SOURCE SECURE Energy Services Inc.