PHX Energy Services Corp. ("PHX Energy") (TSX:PHX) generated a
record level of activity and revenue for a second quarter.
Consolidated revenue of $58.4 million for the three-month period
ended June 30, 2012 was achieved as compared to $45.3 million in
the 2011-period; a 29 percent increase. Due to an extended spring
break-up period in Canada and a general rise in operating costs,
the level of profitability has decreased. Net earnings decreased to
a loss of $2.6 million for the second quarter of 2012 from earnings
of $0.4 million in the 2011-quarter while EBITDA decreased by 51
percent to $2.5 million for the three-month period ended June 30,
2012 from $5.2 million in the 2011-period.
International operations continued to demonstrate strong growth,
particularly in Albania and Russia. In the 2012-quarter, this
operating segment represented 17 percent of consolidated revenue as
compared to 11 percent in the 2011-quarter. This momentum should
continue in all international operating areas through the remainder
of 2012 and beyond.
As part of its previously announced revised $55.1 million 2012
capital expenditure program, $18.9 million was incurred in the
second quarter of 2012, with a further $6.6 million of equipment
presently on order for delivery in the next few months.
On May 18, 2012, the Corporation entered into a joint venture
agreement with RMS Systems Inc. ("RMS"), pursuant to which, the
parties have incorporated RigManager International Inc. ("RMII")
which is equally owned by the two parties. Pursuant to the joint
venture, RMS transferred all of its interest in its wholly-owned US
subsidiary, RigManager Inc., to RMII and granted RMII an exclusive
perpetual license to market and distribute RMS' electronic drilling
recorder ("EDR") technology worldwide outside Canada. The
Corporation believes that the joint venture will strategically
assist PHX Energy in achieving its long-term goals as it represents
an opportunity to expand its international and US operating
segments.
The Corporation continued its policy of rewarding its
shareholders, and in the 2012-quarter, the Corporation paid
dividends of $5.1 million or $0.18 per share.
PHX Energy ended the second quarter with long-term debt of $62.0
million and working capital of $21.3 million.
Financial Highlights
(Stated in thousands of dollars except per share amounts, percentages and
shares outstanding)
Three-month periods ended Six-month periods ended
June 30, June, 30
% %
2012 2011 Change 2012 2011 Change
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Operating
Results (unaudited) (unaudited) (unaudited)(unaudited)
Revenue 58,423 45,336 29 138,192 108,484 27
Net earnings
(loss) (2,584) 424 n.m. 5,335 4,307 24
Earnings (Loss)
per share -
diluted (0.09) 0.01 n.m. 0.19 0.15 27
EBITDA (1) 2,521 5,182 (51) 17,560 14,452 22
EBITDA per share
- diluted (1) 0.09 0.18 (50) 0.62 0.51 22
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Cash Flow
Cash flows from
operating
activities 15,667 7,437 111 19,743 7,653 158
Funds from
operations (1) 2,512 4,277 (41) 15,546 13,797 13
Funds from
operations per
share - diluted
(1) 0.09 0.15 (40) 0.55 0.49 12
Dividends paid 5,069 3,099 64 8,442 6,211 36
Dividends per
share (2) 0.18 0.12 50 0.30 0.24 25
Capital
expenditures 18,897 11,242 68 36,457 21,408 70
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Financial
Position June 30, Dec 31,
(unaudited) '12 '11
Working capital 21,322 44,868 (52)
Long-term debt 62,000 56,000 11
Shareholders'
equity 112,443 113,868 (1)
Common shares
outstanding 28,179,292 28,091,062 -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Refer to non-GAAP measures section.
(2) Dividends paid by the Corporation on a per share basis in the period.
n.m. - not meaningful
Non-GAAP Measures
PHX Energy uses certain performance measures throughout this
document that are not recognizable under Canadian generally
accepted accounting principles ("GAAP"). These performance measures
include earnings before interest, taxes, depreciation and
amortization ("EBITDA"), EBITDA per share, funds from operations
and funds from operations per share. Management believes that these
measures provide supplemental financial information that is useful
in the evaluation of the Corporation's operations and are commonly
used by other oil and gas service companies. Investors should be
cautioned, however, that these measures should not be construed as
alternatives to measures determined in accordance with GAAP as an
indicator of PHX Energy's performance. The Corporation's method of
calculating these measures may differ from that of other
organizations, and accordingly, these may not be comparable. Please
refer to the non-GAAP measures section.
Cautionary Statement Regarding Forward-Looking Information and
Statements
This document contains certain forward-looking information and
statements within the meaning of applicable securities laws. The
use of "expect", "anticipate", "continue", "estimate", "objective",
"ongoing", "may", "will", "project", "could", "should", "can",
"believe", "plans", "intends", "strategy" and similar expressions
are intended to identify forward-looking information or
statements.
The forward-looking information and statements included in this
document are not guarantees of future performance and should not be
unduly relied upon. These statements and information involve known
and unknown risks, uncertainties and other factors that may cause
actual results or events to differ materially from those
anticipated in such forward-looking statements and information. The
Corporation believes the expectations reflected in such
forward-looking statements and information are reasonable, but no
assurance can be given that these expectations will prove to be
correct. Such forward-looking statements and information included
in this document should not be unduly relied upon. These
forward-looking statements and information speak only as of the
date of this document.
In particular, forward-looking information and statements
contained in this document include references to, without
limitation, growth and greater profitability in each of the
Corporation's international segments; projected capital expenditure
budget and how this budget will be funded; expected fleet expansion
in 2012; the opportunity to expand internationally and in the US
with the joint venture with RMS Systems Inc.; ability to improve
profitability, specifically related to employee utilization, labor
rates and performance drilling motor costs; the implementation of
strategies to mitigate the foreign exchange exposure related to the
Russian rouble; PHX Energy achieving greater diversification and
steady performance in the Canadian market; the installation of
three additional RigManager EDR units in Albania; the ability to
maintain current dividend rate; and the expected increase to the
Corporation's credit facilities.
The above references are stated under the headings: "Operating
Costs and Expenses", "Segmented Information", "Investing
Activities", "Capital Resources", and "Cash Requirements for
Capital Expenditures". Furthermore, all information contained
within the Outlook section of this document contains
forward-looking statements.
In addition to other material factors, expectations and
assumptions which may be identified in this document and other
continuous disclosure documents of the Corporation referenced
herein, assumptions have been made in respect of such
forward-looking statements and information regarding, among other
things: the Corporation will continue to conduct its operations in
a manner consistent with past operations; the general continuance
of current industry conditions; anticipated financial performance;
business prospects; impact of competition; strategies; the general
stability of the economic and political environment in which the
Corporation operates; exchange and interest rates; tax laws; the
sufficiency of budgeted capital expenditures in carrying out
planned activities; the availability and cost of labour and
services; and the adequacy of cash flow, debt and ability to obtain
financing on acceptable terms to fund its planned expenditures,
which are subject to change based on commodity prices, market
conditions, and future oil and natural gas prices; and potential
timing delays. Although Management considers these material
factors, expectations and assumptions to be reasonable based on
information currently available to it, no assurance can be given
that they will prove to be correct.
Readers are cautioned that the foregoing lists of factors are
not exhaustive. Additional information on these and other factors
that could affect the Corporation's operations and financial
results are included in reports on file with the Canadian
Securities Regulatory Authorities and may be accessed through the
SEDAR website (www.sedar.com) or at the Corporation's website. The
forward-looking statements and information contained in this
document are expressly qualified by this cautionary statement. The
Corporation does not undertake any obligation to publicly update or
revise any forward-looking statements or information, whether as a
result of new information, future events or otherwise, except as
may be required by applicable securities laws.
Revenue
(Stated in thousands of dollars)
Three-month periods ended Six-month periods ended
June 30, June 30,
2012 2011 % Change 2012 2011% Change
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue 58,423 45,336 29 138,192 108,484 27
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Despite a prolonged spring break-up period in Canada, the
Corporation reported record second quarter consolidated revenue and
activity due to strong growth realized in the US and
internationally. For the three-month period ended June 30, 2012,
PHX Energy generated revenue of $58.4 million as compared to $45.3
million in the corresponding 2011-period; an increase of 29
percent. US and international revenue as a percentage of total
consolidated revenue were 55 and 17 percent, respectively, for the
2012-quarter as compared to 51 and 11 percent in 2011. Consolidated
operating days grew by 13 percent to a second quarter record of
4,622 days in 2012 as compared to 4,105 in the 2011-quarter.
Average consolidated day rates for the three-month period ended
June 30, 2012 increased to $12,640, which is approximately 14
percent higher than the day rates of $11,044 in the second quarter
of 2011.
The industry trend toward horizontal and directional drilling is
becoming the norm in both Canada and the US, and this continues to
create positive industry fundamentals for PHX Energy's operations.
In the 2012-quarter, horizontal and directional drilling dominated
the Canadian market, representing approximately 95 percent of total
industry drilling days (2011 - 89 percent). In the US, horizontal
and directional activity levels in the second quarter of 2012 rose
slightly to 71 percent of the rigs running per day (2011 - 69
percent). (Sources: Daily Oil Bulletin and Baker Hughes)
For the six-month period ended June 30, 2012, consolidated
revenue increased by 27 percent to $138.2 million from $108.5
million for the comparable 2011-period. Consolidated operating days
for the six-month period ended June 30, 2012 grew by 11 percent to
11,305 days as compared to 10,170 days in 2011.
Operating Costs and Expenses
(Stated in thousands of dollars except percentages)
Three-month periods ended Six-month periods ended
June 30, June 30,
2012 2011 % Change 2012 2011 % Change
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Direct costs 51,365 37,805 36 113,029 87,811 29
Depreciation &
amortization (included
in direct costs) 5,206 3,873 34 10,040 7,575 33
Gross profit as
percentage of revenue
excluding depreciation
& amortization 21 25 25 26
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Direct costs are comprised of field and shop expenses, and
include depreciation and amortization on the Corporation's
equipment. Excluding depreciation and amortization, gross profit as
a percentage of revenue was 21 percent for the three-month period
ended June 30, 2012 as compared to 25 percent in the comparable
2011-period. For the six-month period ended June 30, 2012, gross
profit as a percentage of revenue, excluding depreciation and
amortization, was 25 percent as compared to 26 percent in 2011.
The decline in margins in the three and six-month periods ended
June 30, 2012 is due to the factors below.
-- Slower Canadian activity caused by extended wet weather.
-- Higher labor costs in Canada; as a result of record activity levels
achieved in 2011 and in the prior quarter, field and shop personnel
levels grew substantially.
-- Increased performance drilling motor and measurements while drilling
("MWD") system repair costs in Canada and US.
-- Greater third party equipment rentals in Russia and US. The
Corporation's third party equipment rentals for the second quarter of
2012 were $2.3 million, or 4 percent of consolidated revenue, 50 percent
higher compared to the corresponding 2011-quarter when third party
rentals were $1.5 million, or 3 percent of revenue.
Management is monitoring and responding to these issues and is
committed to evaluating different cost reduction initiatives to
improve profitability, especially with its employee utilization,
labor rates and performance drilling motor costs. In addition, the
Corporation also expects Colombia to generate improved
profitability in future months.
The overall negative impact of the areas above on margins was
partially offset by higher average day rates realized in all of PHX
Energy's operating segments.
Depreciation and amortization for the three-month period ended
June 30, 2012 increased by 34 percent to $5.2 million as compared
to $3.9 million in the 2011-quarter. The increase is the result of
the Corporation's record levels of capital expenditure programs in
2011 and 2012.
(Stated in thousands of dollars except percentages)
Three-month periods ended Six-month periods ended
June 30, June 30,
2012 2011 % Change 2012 2011 % Change
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Selling, general and
administrative ("SG&A")
costs 8,241 7,028 17 16,746 14,503 15
Share-based payments
(included in SG&A
costs) 614 689 (11) 1,411 1,484 (5)
SG&A costs excluding
share-based payments as
a percentage of revenue 13 14 11 12
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SG&A costs for the three-month period ended June 30, 2012
increased by 17 percent to $8.2 million as compared to $7.0 million
in 2011. Included in SG&A costs are share-based payments of
$0.6 million for the 2012-quarter and $0.7 million for the
2011-quarter. Excluding these costs, SG&A costs as a percentage
of consolidated revenue for the three-month period ended June 30,
2012 and 2011 were 13 percent and 14 percent, respectively.
For the six-month period ended June 30, 2012, SG&A costs
increased by 15 percent to $16.7 million as compared to $14.5
million in 2011. Excluding share-based payments of $1.4 million in
the 2012 six-month period and $1.5 million in the corresponding
2011-period, SG&A costs as a percentage of consolidated revenue
were 11 percent and 12 percent, respectively.
The increase in SG&A costs in both 2012-periods is due to
greater payroll-related costs associated with record activity and
additional expenses with respect to the growth and expansion of PHX
Energy's international operations.
Share-based payments relate to the amortization of the fair
values of issued options of the Corporation using the Black-Scholes
model. Share-based payments decreased in the three and six-month
periods ended June 30, 2012 as the Corporation has not made
significant option issuances since December 2011.
(Stated in thousands of dollars)
Three-month periods ended Six-month periods ended
June 30, June 30,
2012 2011 % Change 2012 2011 % Change
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Research and development
expense 548 527 4 1,101 1,090 1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Research and development ("R&D") expenditures charged to net
earnings during each of the three-month periods ended June 30, 2012
and 2011 were both $0.5 million. During the same 2012-period, there
were no capitalized development costs (2011 - $0.4 million).
For the six-month period ended June 30, 2012, R&D
expenditures of $1.2 million were incurred of which $0.1 million
were capitalized as deferred development costs. R&D
expenditures for the six-month period ended June 30, 2011 were $1.9
million, of which $0.8 million were capitalized.
PHX Energy continues to focus on its mandate to provide leading
edge technologies to its clients.
(Stated in thousands of dollars)
Three-month periods ended Six-month periods ended
June 30, June 30,
2012 2011 % Change 2012 2011 % Change
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Finance expense 711 510 39 1,267 941 35
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Finance expenses relate to interest charges on the Corporation's
long-term and short-term bank facilities. In the second quarter of
2012, finance charges increased to $0.7 million from $0.5 million
in the 2011-quarter, and increased to $1.3 million in the six-month
period ended June 30, 2012 from $0.9 million in 2011. In order to
fund PHX Energy's extensive capital expenditure programs in 2011
and 2012, additional bank borrowings were incurred.
(Stated in thousands of dollars)
Three-month periods ended Six-month periods ended
June 30, June 30,
2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Foreign exchange losses
(gains) 988 (33) 636 (267)
Losses from the change
in fair value of
investment in equity
securities 180 - 370 -
Provision for (Recovery
of) bad debts (208) (2) (208) 15
Gains on disposition of
drilling equipment (111) (1,298) (1,105) (1,546)
----------------------------------------------------------------------------
Other expense (income) 849 (1,333) (307) (1,798)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In the second quarter of 2012, other expense is generally
represented by foreign exchange losses of $1.0 million (2011 -
gains on disposition of drilling equipment of $1.3 million). Other
income for the six-month period ended June 30, 2012 is mostly
represented by gains on disposition of drilling equipment of $1.1
million, partially offset by foreign exchange losses of $0.6
million, whereas in the 2011 six-month period it is represented by
gains on disposition of drilling equipment of $1.5 million and a
foreign exchange gain of $0.3 million.
Foreign exchange losses resulted mainly from fluctuations in the
RUR-CDN exchange rates. Russian roubles devalued in both
2012-periods. Management has implemented some strategies to
mitigate this foreign exchange exposure in upcoming periods.
The dispositions of drilling equipment relate primarily to
equipment lost in well bores that are uncontrollable in nature.
These gains are reported net of any asset retirements that are made
before the end of the equipment's useful life and self-insured down
hole equipment losses, if any. Gains typically result from
insurance programs undertaken whereby proceeds for the lost
equipment are at current replacement values, which are higher than
the respective equipment's book value. There were fewer occurrences
of losses in the 2012-periods as compared to the corresponding
2011-periods. In addition there was a larger occurrence of scrapped
assets in the second quarter of 2012.
(Stated in thousands of dollars)
Three-month periods ended Six-month periods ended
June 30, June 30,
2012 2011 % Change 2012 2011 % Change
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Share of loss of equity-
accounted investee 104 - n.m. 104 - n.m.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
n.m. - not meaningful
The Corporation's share in the loss of the equity-accounted
investee, RigManager International ("RMII") for the three and
six-month period ended June 30, 2012 amounted to $0.1 million. The
loss mainly pertains to RMII's wholly-owned US subsidiary,
RigManager Inc.
(Stated in thousands of dollars)
Three-month periods Six-month periods
ended June 30, ended June 30,
2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Provision for (Recovery of) income
taxes (812) 374 918 1,629
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The recovery of income taxes for the second quarter of 2012 was
$0.8 million as compared to a provision for $0.4 million in the
2011-quarter. For the six-month period ended June 30, 2012, the
provision for income taxes was $0.9 million as compared to $1.6
million in 2011. The expected combined Canadian federal and
provincial tax rate for 2012 is 25 percent. The effective tax rates
in the 2012 three and six-month periods of 24 and 15 percent,
respectively, are lower than the expected rate due mainly to the
effect of tax rates in foreign jurisdictions.
(Stated in thousands of dollars except per share and percentages)
Three-month periods ended Six-month periods ended
June 30, June 30,
2012 2011 % Change 2012 2011 % Change
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings (loss) (2,584) 424 n.m. 5,335 4,307 24
Earnings (Loss) per
share - diluted (0.09) 0.01 n.m. 0.19 0.15 27
EBITDA 2,521 5,182 (51) 17,560 14,452 22
EBITDA per share -
diluted 0.09 0.18 (50) 0.62 0.51 22
EBITDA as a percentage
of revenue 4 11 13 13
----------------------------------------------------------------------------
----------------------------------------------------------------------------
n.m. - not meaningful
The Corporation's level of net earnings and EBITDA in the second
quarter of 2012 have both decreased mainly due to higher operating
costs and lower Canadian activity incurred in the quarter. However,
for the six-month period ended June 30, 2012, net earnings and
EBITDA have both increased due to higher activity and improved day
rates realized from customers. EBITDA as a percentage of revenue
for the three and six-month periods ended June 30, 2012 were 4 and
13 percent, respectively (2011 - 11 percent and 13 percent).
Segmented Information:
The Corporation reports three operating segments on a
geographical basis throughout the Canadian provinces of Alberta,
Saskatchewan, British Columbia, and Manitoba; throughout the Gulf
Coast, Northeast and Rocky Mountain regions of the US; and
internationally in Albania, Peru, Russia and Colombia.
Canada
(Stated in thousands of dollars)
Three-month periods ended Six-month periods ended
June 30, June 30,
2012 2011 % Change 2012 2011 % Change
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue 16,121 17,069 (6) 60,611 55,014 10
Reportable segment profit
(loss) before tax (4,512) 21 n.m. 6,499 6,721 (3)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
n.m. - not meaningful
Due to a relatively early and prolonged spring break-up,
Canadian revenue for the three-month period ended June 30, 2012
decreased by 6 percent to $16.1 million (2011 - $17.1 million) and
operating days decreased by 14 percent to 1,219 days (2011 - 1,410
days). The demand for horizontal gamma jobs continued to
strengthen, and as a result, average day rates increased by 9
percent to $13,225 in the 2012-quarter from $12,106 in the
2011-quarter.
In Canada, PHX Energy's horizontal oil well drilling activity
(as measured by operating days) for the three-month period ended
June 30, 2012 represented approximately 77 percent of its overall
Canadian activity; a decrease from 82 percent in the 2011-quarter.
The Corporation's activity was hampered in May and June by the
impact of wet weather and lower activity, and drilling levels in
the Bakken and Cardium areas were both below those in the
2011-quarter. The active areas for the Corporation in the
2012-quarter were in the Montney, Viking, Spearfish, and Shaunavon.
PHX Energy is expecting greater diversification in the Canadian
market in upcoming periods as a direct result of marketing
personnel expansion.
Overall in the Canadian industry, horizontal and directional
drilling activity, as measured by drilling days, in the
2012-quarter was 16,587 days, just 30 days higher compared to the
16,557 days in the 2011-quarter. (Source: Daily Oil Bulletin)
For the six-month period ended June 30, 2012, PHX Energy's
Canadian revenue increased by 10 percent to $60.6 million from
$55.0 million in the comparable 2011-period. The number of
horizontal and directional drilling days realized in the Canadian
industry during the six-month period ended June 30, 2012 decreased
by 3 percent to 56,693 days as compared to 58,229 days in 2011.
(Source: Daily Oil Bulletin) In comparison, the Corporation's
Canadian operating days decreased by 1 percent to 4,897 days in the
six-month period ended June 30, 2012 from 4,939 days in 2011. Oil
well drilling activity represented 78 percent of PHX Energy's
Canadian activity for the 2012 six-month period as compared to 76
percent in 2011.
Reportable segment profit before tax for the second quarter of
2012 decreased to a loss of $4.5 million from a profit of $21,000
in the 2011-quarter. Lower profitability during the 2012-quarter
was due to increased labor and performance drilling motor and MWD
system repair costs. Due to the seasonal nature of the
Corporation's operations, these loss results are usually expected.
For the six-month period ended June 30, 2012, reportable segment
profit before tax decreased by 3 percent to $6.5 million from $6.7
million in 2011.
United States
(Stated in thousands of dollars)
Three-month periods ended Six-month periods ended
June 30, June 30,
2012 2011 % Change 2012 2011 % Change
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue 32,381 23,205 40 59,546 43,003 38
Reportable segment
profit before tax 2,466 1,530 61 2,497 1,242 101
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Phoenix USA reported a record level of activity and revenue
during the quarter. For the three-month period ended June 30, 2012,
revenue of $32.4 million was generated compared to $23.2 million in
the 2011-period; a 40 percent increase. The Corporation's US
operating days grew by 16 percent to a record 2,666 days from 2,291
days in the 2011-quarter. Overall day rates realized also increased
by 20 percent in the 2012-quarter to $12,146 compared to $10,129 in
the 2011-quarter. The addition of a performance drilling motor
rental division in the Gulf Coast in late 2011 continued to
contribute to the stronger day rates.
The factors that contributed to Phoenix USA's growth in the
first quarter of 2012 continued to have an impact in the second
quarter, namely: increased activity in the Permian Basin in
Midland, Texas and the mid-continent region in Oklahoma that
occurred late in 2011, the recruitment of additional marketing
personnel, and the deployment of a new proprietary power section
that was utilized successfully in the Corporation's US performance
drilling motor fleet. In the 2012-quarter, Phoenix USA was active
in the Barnett, Eagle Ford, Marcellus, Utica, Niobrara and Bakken
plays.
The factors above also contributed to horizontal oil well
drilling increasing to approximately 33 percent of Phoenix USA's
overall activity, as measured by drilling days, in the three-month
period ended June 30, 2012 as compared to 27 percent in the
2011-period. US industry activity, as measured by the average
number of horizontal and directional rigs running on a daily basis,
were 11 percent higher in the second quarter of 2012 with 1,401
rigs running as compared to 1,266 rigs in the 2011-quarter. This
level of activity represented 71 percent of total US Industry
activity in the 2012-quarter and 69 percent in 2011. (Source: Baker
Hughes)
US revenue for the six-month period ended June 30, 2012
increased by 38 percent to $59.5 million from $43.0 million in the
comparable 2011-period. US industry activity, as measured by the
average number of horizontal and directional rigs running on a
daily basis, grew by 13 percent for the six-month period ended June
30, 2012 to 1,395 rigs as compared to 1,236 rigs in the comparable
2011-period. For the six-month period ended June 30, 2012,
horizontal and directional drilling activity in the US represented
approximately 70 percent of total industry activity, the same level
as in 2011. (Source: Baker Hughes) The Corporation's US operating
days increased by approximately 15 percent to 5,068 days in the
six-month period ended June 30, 2012 from 4,402 days in 2011.
Reportable segment income before tax for the second quarter of
2012 increased by 61 percent to $2.5 million from $1.5 million in
the 2011-quarter. For the six-month period ended June 30, 2012,
reportable segment profit before tax increased by 101 percent to
$2.5 million from $1.2 million in 2011. The increase in
profitability in the 2012-quarter is a result of activity growth
and higher day rates. However, this was adversely impacted by
higher performance drilling motor repair costs and third party
equipment rentals incurred in the 2012-quarter.
International
(Stated in thousands of dollars)
Three-month periods ended Six-month periods ended
June 30, June 30,
2012 2011 % Change 2012 2011 % Change
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue 9,921 5,062 96 18,035 10,467 72
Reportable segment
profit before tax 2,863 883 224 4,888 2,235 119
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue generated from PHX Energy's international operations in
the second quarter of 2012 increased by 96 percent to a record $9.9
million from $5.1 million in the 2011-quarter, due to activity
growth realized in Albania and Russia. International operating days
also grew by 83 percent from 404 days in the 2011-quarter to a
record 738 days in the 2012-quarter. The Corporation generated 17
percent of its consolidated revenue from international operations
in the 2012-quarter compared to 11 percent in the 2011-quarter.
For the six-month period ended June 30, 2012, revenue increased
by 72 percent to $18.0 million as compared to $10.5 million in
2011. Operating days for the same period grew from 829 days in 2011
to 1,340 days in 2012; a 62 percent increase.
Phoenix Albania continued to be the most active international
area in the second quarter of 2012 and reported record revenue.
This growth is due to the Corporation operating steadily on 5 rigs
in 2012, and since commencing operations in 2008, PHX Energy has
successfully drilled in excess of 226 wells in Albania. In the
early part of the second quarter, RMS' electronic drilling recorder
systems were installed and are now currently running on two of the
rigs in Albania. Three additional units are expected to be
installed on the three remaining rigs over the next few months. The
Corporation is also continuing to hire, train, and develop local
Albanian staff, which is expected to create greater efficiencies
and profitability.
With Phoenix Russia again achieving record level of revenue and
activity in the second quarter of 2012, the Corporation has
increased the region's concurrent job capacity to 19 jobs from the
previously announced 16 jobs in anticipation of the higher activity
forecasted in the remainder of 2012. Phoenix Russia continues to
build a strong team of regional field operators.
In the second quarter of 2012, Phoenix Colombia successfully
commenced full service drilling activity with two full service
jobs. Growth is anticipated to continue in future quarters, and
therefore, the Corporation is also mobilizing to deploy its RWD
tool in the Colombian market. PHX Energy's operations in Colombia
currently have a 4 job capacity.
Phoenix Peru's activity in the 2012-quarter was slightly higher
than the level obtained in the second quarter of 2011. The
Corporation is continuing to work with a number of operators and
currently has a job capacity of 4 full service jobs in Peru.
For the three-month period ended June 30, 2012, reportable
segment profit before tax was $2.9 million, an increase of 224
percent compared to $0.9 million in the corresponding 2011-period.
Reportable segment profit for the six-month period ended June 30,
2012 was $4.9 million as compared to $2.2 million in 2011; a 119
percent increase. The increase is due to the higher levels of
activity led by Albania and Russia.
Investing Activities
Net cash used in investing activities for the three-month period
ended June 30, 2012 was $13.8 million as compared to $8.1 million
in 2011. The Corporation made a $2.9 million investment in the
joint venture company RMII and added $18.9 million in capital
equipment in the second quarter of 2012 as compared to $11.2
million in the 2011-quarter. These quarterly 2012 expenditures
included:
-- $13.3 million in down hole performance drilling motors;
-- $4.1 million in MWD systems and spare components;
-- $1.2 million in non-magnetic drill collars and jars;
-- $0.2 million in machinery and equipment for global service centers, and;
-- $0.1 million in other assets.
The capital expenditure program undertaken in the year was
financed from a combination of cash flow from operations, long-term
debt and working capital.
The Corporation realized proceeds from the involuntary disposal
of drilling equipment in well bores of $1.3 million in the second
quarter of 2012, as compared to $1.9 million in the 2011-quarter.
The change in non-cash working capital balances of $6.7 million
(source of cash) for the three-month period ended June 30, 2012
relates to the net change in the Corporation's trade payables that
are associated with the acquisition of capital assets. This
compares to $1.2 million (source of cash) for the three-month
period ended June 30, 2011.
During the second quarter of 2012, PHX Energy's job capacity
increased by 4 concurrent jobs to 204 through the addition of 2
P-360 positive pulse MWD systems, 1 E-360 electromagnetic ("EM")
MWD system, and 1 Resistivity While Drilling ("RWD") system. As at
June 30, 2012, the Corporation's MWD fleet consisted of 133 P-360
positive pulse MWD systems, 60 E-360 EM MWD systems, and 11 RWD
systems. Of these, 90 MWD systems were deployed in Canada, 82 in
the US, 19 in Russia, 5 in Albania, and 4 in both Peru and
Colombia.
At June 30, 2012, the Corporation had on order an additional 5
E-360 EM MWD systems, all of which are expected to be deployed
during the end of the third quarter. As a result, by the end of
2012 the Corporation expects to have a fleet of 209 MWD systems,
which would be comprised of 133 P-360 positive pulse MWD systems,
65 E-360 EM MWD systems and 11 RWD systems. The Corporation
previously planned to add an additional 14 P-360 positive pulse MWD
systems by year end, but this expansion will be dependent upon
customer demand as the year progresses.
Financing Activities
The Corporation reported cash flows from financing activities of
$5.7 million in the three-month period ended June 30, 2012 as
compared to $2.4 million in the 2011 period. In the
2012-quarter:
-- the Corporation paid dividends of $5.1 million to shareholders, or $0.18
per share;
-- through its option and DRIP program the Corporation received cash
proceeds of $0.2 million from exercised options and reinvested dividends
to acquire 25,612 common shares of the Corporation; and
-- the Corporation received net proceeds from its bank overdraft revolving
facility and extendible revolving facility of an aggregate of $10.6
million to finance its capital expenditure program.
Capital Resources
As at June 30, 2012, the Corporation had access to a demand
overdraft revolving facility of up to $10.0 million and PHX Energy
also had access to an $80.0 million, 364-day extendible revolving
facility with its bank. On July 16, 2012, the Corporation's bank
provided a commitment letter to increase the credit facilities to
an aggregate amount of $105.0 million and US$25.0 million for a
term of three years. While the loan documents are being finalized,
on July 17, 2012, the existing extendible revolving facility was
temporarily increased to $90.0 million.
Cash Requirements for Capital Expenditures
Historically, the Corporation has financed its capital
expenditures and acquisitions through cash flows from operating
activities, debt and equity. The 2012 capital budget remains at
$55.1 million. These planned expenditures are expected to be
financed from a combination of one or more of the following, cash
flow from operations, the Corporation's unused credit facilities or
equity, if necessary. However, if a sustained period of market
uncertainty and financial market volatility persists in 2012, the
Corporation's activity levels, cash flows and access to credit may
be negatively impacted, and the expenditure level would be reduced
accordingly. Conversely, if future growth opportunities present
themselves, the Corporation would look at expanding this planned
capital expenditure amount.
Outlook
In the second quarter, the foreseen lower natural gas price and
oil differentials in Canada decreased industry activity levels,
however, this was intensified by wetter than normal weather during
the break-up period. In addition, what was not predicted was
depressed oil prices and the general volatility of the economy
which produced a strain on operator's cash flows and debt levels,
and resulted in reduced capital budgets and cutbacks to drilling
programs throughout the industry. Despite this, in 2012, record
revenue for any second quarter in PHX Energy's history was attained
and growth was achieved in a number of operating areas.
It is expected that a retraction will continue in the remainder
of 2012, however, PHX Energy will remain focused on growth
opportunities, albeit working towards a revised forecast to reflect
this operating environment.
In Canada, PHX Energy expects slower operating activity going
forward, however, believes the extent of this reduction will not be
as dramatic as some sectors in the industry. The majority of PHX
Energy's clients are focused on oil production over natural gas
drilling; thus, the percent of wells drilled with horizontal
technology will increase even though many analysts have reduced the
predicted total number of wells drilled due to the many issues
affecting the Canadian market. With the strong presence PHX Energy
has built in Canada and a large diverse client base, steady
performance and activity levels should be seen during future
quarters of lower industry activity.
The United States market presents many opportunities for PHX
Energy's growth, although there are still challenges present. By
remaining focused on the strategies set forth, even with reduced
drilling activity, PHX Energy believes its US division can capture
a greater market share and increase operating days. Both the Rocky
Mountain and Gulf Coast regions are focused on oil drilling and,
with the addition of our newest operating area in the Permian
Basin, ongoing growth is anticipated. As such, capital assets and
personnel continue to be added in the Gulf Coast and in West Texas
to service the Eagle Ford Shale, Permian Basin and Oklahoma region
with the expectation that future performance will counterbalance
past expansion costs.
Internationally, as another quarter has provided the time
required to deploy resources and implement the intended strategy,
all four geographical areas showed revenue growth and increased
market penetration. With second quarter projections realized, the
long-term goal remains focused on current diversification beyond
North America and providing a footprint for the future.
The successes in the second quarter, and those that are
anticipated in the future, are the result of growth initiatives
implemented and infrastructure expansion, including personnel
additions, however, this has led to a larger cost structure which
has curtailed current operating margins and profitability in times
of lower activity. PHX Energy continues to focus on improving
earning levels, not only through growth, but also through cost
reduction and value added initiatives.
PHX Energy remains aware that it is a business that operates in
a volatile and competitive segment of the energy sector. Operators
will continue to strive for leading edge technology that requires
considerable investment from service providers, and PHX Energy will
continue to put tremendous efforts in delivering on these
requests.
The outlook for the remainder of 2012 remains cautiously
optimistic, with opportunities for expansion being present in
certain regions and with other areas foreseen to experience only
modest reductions in a slower industry environment.
John Hooks, Chairman of the Board, President and Chief Executive
Officer
Non-GAAP Measures
1) EBITDA
EBITDA, defined as earnings before interest, taxes, depreciation
and amortization, is not a financial measure that is recognized
under GAAP. However, Management believes that EBITDA provides
supplemental information to net earnings that is useful in
evaluating the Corporation's operations before considering how it
was financed or taxed in various countries. Investors should be
cautioned, however, that EBITDA should not be construed as an
alternative measure to net earnings determined in accordance with
GAAP. PHX Energy's method of calculating EBITDA may differ from
that of other organizations and, accordingly, its EBITDA may not be
comparable to that of other companies.
The following is a reconciliation of net earnings to EBITDA:
(Stated in thousands of dollars)
Three-month periods Six-month periods
ended June 30, ended June 30,
2012 2011 2012 2011
------------------------------------------------------------------------
------------------------------------------------------------------------
Net earnings (loss) (2,584) 424 5,335 4,307
Add (deduct):
Depreciation and amortization 5,206 3,873 10,040 7,575
Provision for (Recovery of)
income taxes (812) 375 918 1,629
Finance expense 711 510 1,267 941
------------------------------------------------------------------------
EBITDA as reported 2,521 5,182 17,560 14,452
------------------------------------------------------------------------
------------------------------------------------------------------------
EBITDA per share - diluted is calculated using the treasury
stock method whereby deemed proceeds on the exercise of the share
options are used to reacquire common shares at an average share
price. The calculation of EBITDA per share on a dilutive basis does
not include anti-dilutive options.
2) Funds from Operations
Funds from operations is defined as cash flows generated from
operating activities before changes in non-cash working capital.
This is not a measure recognized under GAAP. Management uses funds
from operations as an indication of the Corporation's ability to
generate funds from its operations before considering changes in
working capital balances. Investors should be cautioned, however,
that this financial measure should not be construed as an
alternative measure to cash flows from operating activities
determined in accordance with GAAP. PHX Energy's method of
calculating funds from operations may differ from that of other
organizations and, accordingly, it may not be comparable to that of
other companies.
The following is a reconciliation of cash flows from operating activities to
funds from operations:
(Stated in thousands of dollars)
Three-month periods Six-month periods
ended June 30, ended June 30,
2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash flows from operating activities 15,667 7,437 19,743 7,653
Add (deduct):
Changes in non-cash working capital (14,238) (3,988) (6,490) 4,474
Interest paid 884 722 1,415 1,100
Income taxes paid 199 106 878 570
----------------------------------------------------------------------------
Funds from operations 2,512 4,277 15,546 13,797
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Funds from operations per share - diluted is calculated using
the treasury stock method whereby deemed proceeds on the exercise
of the share options are used to reacquire common shares at an
average share price. The calculation of funds from operations per
share on a dilutive basis does not include anti-dilutive
options.
About PHX Energy Services Corp.
The Corporation, through its subsidiary entities, provides
horizontal and directional technology and drilling services to oil
and natural gas producing companies in Canada, the US, Albania,
Peru, Russia, and Colombia. PHX Energy develops and manufactures
its E-360 electromagnetic ("EM") and P-360 positive pulse
measurement while drilling ("MWD") technologies that are made
available for internal operational use.
PHX Energy's Canadian operations are conducted through Phoenix
Technology Services LP. The Corporation maintains its corporate
head office, research and development, Canadian sales, service and
operational centres in Calgary, Alberta. In addition, PHX Energy
has a service facility in Estevan, Saskatchewan. PHX Energy's US
operations, conducted through the Corporation's wholly-owned
subsidiary, Phoenix Technology Services USA Inc. ("Phoenix USA"),
is headquartered in Houston, Texas. Phoenix USA has sales and
service facilities in Houston, Texas; Traverse City, Michigan;
Casper, Wyoming; Denver, Colorado; Fort Worth, Texas; Midland,
Texas; Buckhannon, West Virginia; Pittsburgh, Pennsylvania; and
Oklahoma City, Oklahoma. Internationally, PHX Energy has sales
offices and service facilities in Albania, Peru, Russia, and
Colombia.
Condensed Consolidated Statements of Financial Position
(unaudited)
June 30, 2012 December 31, 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,731,364 $ 8,376,344
Trade and other receivables 49,985,115 63,209,860
Inventories 21,029,445 15,445,543
Prepaid expenses 5,209,734 3,720,607
Investment in equity securities 540,270 -
Assets held for sale 3,132,482 -
----------------------------------------------------------------------------
Total current assets 91,628,410 90,752,354
Non-current assets:
Property, plant and equipment 143,626,869 120,452,022
Goodwill 8,876,351 8,876,351
Equity-accounted investee 2,747,687 -
Intangible assets 40,069 120,208
----------------------------------------------------------------------------
Total non-current assets 155,290,976 129,448,581
----------------------------------------------------------------------------
Total assets $ 246,919,386 $ 220,200,935
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 6,268,277 $ -
Trade and other payables 44,699,941 44,538,854
Dividends payable 1,613,909 1,064,592
Current tax liabilities 2,224,004 280,981
Loans and borrowings 15,500,000 -
----------------------------------------------------------------------------
Total current liabilities 70,306,131 45,884,427
Non-current liabilities:
Loans and borrowings 62,000,000 56,000,000
Deferred tax liabilities 2,170,538 4,448,999
----------------------------------------------------------------------------
Total non-current liabilities 64,170,538 60,448,999
Equity:
Share capital 98,579,676 97,583,055
Contributed surplus 7,028,037 5,827,955
Retained earnings 7,558,335 11,461,288
Accumulated other comprehensive income (723,331) (803,517)
----------------------------------------------------------------------------
Total equity attributable to equity
holders of the Corporation 112,442,717 114,068,781
Non-controlling interests - (201,272)
----------------------------------------------------------------------------
Total equity 112,442,717 113,867,509
----------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 246,919,386 $ 220,200,935
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
Three-month periods ended Six-month periods ended June
June 30, 30,
2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue $58,423,429 $45,336,295 $138,192,258 $108,483,741
Direct costs 51,365,186 37,804,593 113,028,642 87,811,345
----------------------------------------------------------------------------
Gross profit 7,058,243 7,531,702 25,163,616 20,672,396
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Expenses:
Selling, general
and
administrative 8,241,383 7,028,155 16,745,774 14,502,900
Research and
development
expenses 547,825 527,493 1,100,928 1,089,931
Finance expense 711,434 510,281 1,267,065 941,489
Other expense
(income) 849,170 (1,332,743) (306,807) (1,797,510)
----------------------------------------------------------------------------
10,349,812 6,733,186 18,806,960 14,736,810
Share of loss of
equity-accounted
investee (net of
tax) 104,471 - 104,471 -
----------------------------------------------------------------------------
Earnings (Loss)
before income
taxes (3,396,040) 798,516 6,252,185 5,935,586
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Provision for
(Recovery of)
income taxes
Current 1,475,158 310,521 3,188,773 467,757
Deferred (2,287,542) 63,765 (2,271,197) 1,160,871
----------------------------------------------------------------------------
(812,384) 374,286 917,576 1,628,628
----------------------------------------------------------------------------
Net earnings
(loss) (2,583,656) 424,230 5,334,609 4,306,958
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other
comprehensive
income
Foreign currency
translation 970,772 (189,030) 34,873 (2,138,824)
----------------------------------------------------------------------------
Total
comprehensive
income (loss) for
the period $(1,612,884) $ 235,200 $ 5,369,482 $ 2,168,134
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings
attributable to:
Equity holders
of the
Corporation $(2,583,656) $ 517,562 $ 5,334,609 $ 4,427,279
Non-controlling
interests - (93,332) - (120,321)
----------------------------------------------------------------------------
Net earnings
(loss) $(2,583,656) $ 424,230 $ 5,334,609 $ 4,306,958
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Comprehensive
income
attributable to:
Equity holders
of the
Corporation $(1,612,884) $ 272,276 $ 5,369,482 $ 2,334,190
Non-controlling
interests - (37,076) - (166,056)
----------------------------------------------------------------------------
Total
comprehensive
income (loss) for
the period $(1,612,884) $ 235,200 $ 5,369,482 $ 2,168,134
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings (Loss)
per share - basic $ (0.09) $ 0.01 $ 0.19 $ 0.15
Earnings (Loss)
per share -
diluted $ (0.09) $ 0.01 $ 0.19 $ 0.15
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Condensed Consolidated Statements of Cash Flows
(unaudited)
Three-month periods ended Six-month periods ended
June 30, June 30,
2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash flows from
operating
activities:
Net earnings (loss) $ (2,583,656) $ 424,230 $ 5,334,609 $ 4,306,958
Adjustments for:
Depreciation and
amortization 5,206,082 3,872,753 10,040,306 7,575,293
Deferred income tax
expense (recovery) (2,287,542) 63,765 (2,271,197) 1,160,871
Unrealized foreign
exchange loss (gain) 885,966 17,251 603,216 (141,276)
Gain on disposition
of drilling
equipment (110,671) (1,298,316) (1,105,309) (1,545,804)
Share-based payments 613,711 689,009 1,410,803 1,484,495
Finance expense 711,434 510,281 1,267,065 941,489
Provision for
(Recovery of) bad
debts (207,714) (1,974) (207,714) 15,360
Change in fair value
of investment in
equity securities 180,090 - 370,185 -
Share of profit of
equity-accounted
investee 104,471 - 104,471 -
Change in non-cash
working capital 14,238,126 3,988,435 6,489,463 (4,474,348)
----------------------------------------------------------------------------
Cash generated from
operating activities 16,750,297 8,265,434 22,035,898 9,323,038
Interest paid (884,753) (722,158) (1,415,295) (1,100,035)
Income taxes paid (198,983) (106,293) (878,044) (570,081)
----------------------------------------------------------------------------
Net cash from
operating activities 15,666,561 7,436,983 19,742,559 7,652,922
----------------------------------------------------------------------------
Cash flows from
investing
activities:
Proceeds on
disposition of
drilling equipment 1,293,084 1,933,544 4,637,529 3,257,465
Acquisition of
drilling and other
equipment (18,897,365) (11,241,586) (36,457,150) (21,407,654)
Formation of equity-
accounted investee (2,852,158) - (2,852,158) -
Investment in equity
securities - - (910,455) -
Change in non-cash
working capital 6,685,034 1,169,336 (917,824) 40,051
----------------------------------------------------------------------------
Net cash used in
investing activities (13,771,405) (8,138,706) (36,500,058) (18,110,138)
----------------------------------------------------------------------------
Cash flows from
financing
activities:
Proceeds from
issuance of share
capital 228,356 518,605 785,900 2,939,255
Dividends paid to
shareholders (5,069,182) (3,099,068) (8,441,658) (6,210,754)
Proceeds on loans and
borrowings 12,500,000 2,500,000 21,500,000 2,500,000
Proceeds on
(Repayment of) bank
overdraft facility (1,917,328) 2,486,307 6,268,277 8,627,154
----------------------------------------------------------------------------
Net cash from
financing activities 5,741,846 2,405,844 20,112,519 7,855,655
----------------------------------------------------------------------------
Net increase
(decrease) in cash
and cash equivalents 7,637,002 1,704,121 3,355,020 (2,601,561)
Cash and cash
equivalents,
beginning of period 4,094,362 4,319,850 8,376,344 8,625,532
----------------------------------------------------------------------------
Cash and cash
equivalents, end of
period $ 11,731,364 $ 6,023,971 $ 11,731,364 $ 6,023,971
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contacts: PHX Energy Services Corp. John Hooks President and CEO
403-543-4466 403-543-4485 (FAX) PHX Energy Services Corp. Cameron
Ritchie Senior Vice President Finance and CFO 403-543-4466
403-543-4485 (FAX) PHX Energy Services Corp. Suite 1400, 250 2nd
Street SW Calgary, Alberta T2P 0C1 www.phxtech.com
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