CALGARY, July 30, 2019 /CNW/ - Secure Energy Services Inc.
("Secure" or the "Corporation") (TSX – SES) announced today its
operational and financial results for the three and six months
ended June 30, 2019.
The following operational and financial highlights should be
read in conjunction with the Corporation's management's discussion
and analysis ("MD&A") and the interim consolidated financial
statements and notes thereto for the three and six months ended
June 30, 2019 of Secure which are
available on SEDAR at www.sedar.com.
2019 SECOND QUARTER OPERATIONAL AND FINANCIAL
HIGHLIGHTS
Increasing Cash Flow Stability
Secure achieved
Adjusted EBITDAi of $35.0 million during the second quarter of
2019, a 12% increase from the three months ended
June 30, 2018 despite lower oil and gas activity levels.
Along with the impact of the adoption IFRS 16, Leasesii
on January 1, 2019, growth initiatives over the last several
years to increase capacity in response to customer demand and
expand production-related service offerings more than offset the
impact of lower revenues associated with reduced drilling and
completion related volumes and related services. Secure's
focus in recent years to capture new production-based revenue and
long-term contracts has provided the Corporation with greater
revenue stability. This shift into higher production-based exposure
and contracted volumes significantly improves the predictability of
Secure's cash flows, including during the second quarter where the
Corporation's results are impacted by weather conditions resulting
in road bans that hamper drilling and completion activity in
Canada.
Executing Growth Strategy
During the second
quarter, Secure added key storage infrastructure, continuing to add
to the Corporation's midstream growth strategy. At the
Kerrobert terminal, Secure
expanded total crude oil storage to 420,000 barrels with the
completion of the construction of two 130,000 barrel tanks. Secure
also acquired a 27% interest in a crude oil storage facility
located in Cushing, Oklahoma, and
a 51% interest in an adjacent 80-acre parcel of undeveloped land.
The Cushing 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, ultimately providing
connectivity to all major inbound and outbound pipelines in
Cushing. Secure's majority
investment in the 80-acre parcel of land provides the Corporation
with significant optionality to develop additional midstream
infrastructure in one of North
America's key storage and trading hubs. Having access to
multiple Canadian crude streams and well-connected infrastructure
at hubs across North America will
benefit our customers getting their product to market at the
optimum price and significantly expands Secure's commercial revenue
generating opportunities.
During the quarter, Secure also continued to identify and
develop infrastructure near customer production to provide
transportation and disposal solutions to customers that increase
their operating netbacks and capital efficiency. In June 2019,
Secure commenced construction of a new water disposal facility and
produced water pipeline in the Montney region of Alberta. The facility, which is expected to be
completed during the fourth quarter of 2019, has multi-year
contracted volumes through facility and well dedications with an
anchor tenant, providing reliable cash flows over the contract
term.
Other growth and expansion capital incurred in the three months
ended June 30, 2019 included progressing construction of
a produced water transfer and injection pipeline in the
Montney region, the addition of
two new disposal wells in North
Dakota at the Keene and 13
Mile facilities, completion of a second well at Tony Creek, and
construction of an additional landfill cell at Willesden
Green. Additionally, the Corporation increased capacity and
efficiencies through various other expansion projects at the
Corporation's existing facilities. Secure continues to evaluate
additional opportunities relating to new infrastructure across the
WCSB and North Dakota based on
customer demand. In total, the Corporation invested growth and
expansion capital (including acquisitions) of $46.6 million during the three months ended
June 30, 2019.
Improving Financial Flexibility
During the
second quarter, Secure closed an amendment to its First Lien Credit
Facility, increasing the facility by $130 million and
extending the maturity date by two years to
June 30, 2023. The amended First Lien Credit Facility
also includes an accordion feature, which, if exercised and
approved by the Corporation's lenders, would increase the revolving
credit facility by an additional $100 million. Secure has also
entered into a new $75 million bilateral Letter of Credit
Facility with two major financial institutions. As a result of the
amended First Lien Credit Facility and new Letter of Credit
Facility, Secure has a total credit capacity of
$805 million.
At June 30, 2019, Secure's Total Debt to EBITDA ratio, as
defined in the Corporation's lending agreements, was 2.3 to 1.
The strength of the Corporation's balance sheet and increased
credit capacity achieved in the quarter provides sufficient
financial flexibility and the incremental borrowing capacity
required for Secure to continue to operate efficiently, grow the
business organically and execute on strategic acquisition
opportunities that align with the profitable growth strategy of
Secure.
Creating Shareholder Value
During the quarter,
Secure renewed the normal course issuer bid ("NCIB") first
initiated in May 2018. During the
three months ended June 30, 2019, Secure purchased and
cancelled 3,070,100 common shares of the Corporation
("shares") at a weighted average price per share of $7.30 for a total of $22.4 million. Subsequent to quarter end,
the Corporation has purchased 450,900 additional shares. In
total, Secure has repurchased and cancelled 9,199,173 shares since
May 2018, representing approximately
6% of the number of common shares outstanding at the time of
commencement. The Corporation believes that, at times, the
prevailing market price for Secure's shares does not reflect their
underlying value.
The Corporation's operating and financial highlights for the
three and six month periods ending June 30,
2019 and 2018 can be summarized as follows:
|
Three months ended
June 30,
|
Six months ended
June 30,
|
($000's except
share and per share data)
|
2019
|
2018
|
%
change
|
2019
|
2018
|
%
change
|
Revenue (excludes oil
purchase and resale)
|
138,869
|
141,249
|
(2)
|
316,248
|
322,947
|
(2)
|
Oil purchase and
resale
|
654,618
|
578,674
|
13
|
1,266,121
|
1,102,421
|
15
|
Total
revenue
|
793,487
|
719,923
|
10
|
1,582,369
|
1,425,368
|
11
|
Adjusted EBITDA
(1)
|
34,966
|
31,158
|
12
|
90,105
|
78,965
|
14
|
|
Per share ($), basic
and diluted
|
0.22
|
0.19
|
16
|
0.56
|
0.48
|
17
|
Net loss attributable
to shareholders of Secure
|
(1,678)
|
(6,901)
|
(76)
|
(419)
|
(824)
|
49
|
|
Per share ($), basic
and diluted
|
(0.01)
|
(0.04)
|
(75)
|
-
|
(0.01)
|
100
|
Cash flows from
operating activities
|
53,926
|
74,572
|
(28)
|
111,228
|
107,326
|
4
|
|
Per share ($), basic
and diluted
|
0.34
|
0.45
|
(24)
|
0.69
|
0.65
|
6
|
Dividends per common
share
|
0.0675
|
0.0675
|
-
|
0.1350
|
0.1350
|
-
|
Capital expenditures
(1)
|
48,612
|
36,263
|
34
|
72,231
|
92,844
|
(22)
|
Total
assets
|
1,605,988
|
1,538,001
|
4
|
1,605,988
|
1,538,001
|
4
|
Long-term
liabilities
|
604,610
|
457,994
|
32
|
604,610
|
457,994
|
32
|
Common shares - end
of period
|
158,452,248
|
163,431,134
|
(3)
|
158,452,248
|
163,431,134
|
(3)
|
Weighted average
common shares - basic and diluted
|
160,371,354
|
164,524,360
|
(3)
|
160,405,924
|
164,268,516
|
(2)
|
(1)
Refer to "Non-GAAP Measures and Operational Definitions" for
further information
|
- REVENUE OF $793.5 MILLION AND $1.6 BILLION FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2019
-
- The Midstream Infrastructure division's revenue (excluding oil
purchase and resale) increased to $85.5 million and $179.7 million during the three and six
months ended June 30, 2019, up 6% and 11%, respectively, from
the comparative periods in 2018. The increase in revenues was
driven by infrastructure added in 2018, which resulted in new
revenue streams and increased disposal capacity, and the
Corporation's continued commitment to optimize realized pricing by
utilizing multiple crude oil and condensate streams at Secure's
pipeline connected FSTs, benefiting both the Corporation and our
customers. The increase in revenue was partially offset by lower
drilling and completions related processing and disposal volumes
resulting from a slowdown in Canadian drilling and completion
activity. During the three and six months ended June 30, 2019, industry rig counts decreased 28%
and 35% from the comparative periods of 2018, and completions
decreased 26% and 25%;
- Oil purchase and resale revenue in the Midstream Infrastructure
division for the three and six months ended June 30, 2019
increased by 13% and 15% from the 2018 comparative periods to
$654.6 million and $1.3 billion due to Secure's expanded commercial
operations, particularly related to the Kerrobert crude oil pipeline system;
- Environmental Solutions division revenue of $16.0 million and $45.7 million for the three and six months ended
June 30, 2019 decreased 38% and 21%
from the respective comparative periods of 2018. 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 and from the deferral of ongoing
remediation and demolition jobs until the second half of the year
as wet weather conditions in June limited field access to continue
with these jobs. 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 increased 7% to
$37.3 million in the three
months ended June 30, 2019 over the 2018 comparative period
due to increased production services revenue from an expanded
customer base. Drilling services revenue was relatively flat
quarter over quarter as increased market share offset the impact of
lower drilling activity in the WCSB. In the six months ended
June 30, 2019, Technical Solutions revenue decreased 12%
to $90.9 million as the impact
of higher production services revenue was more than offset by the
slowdown in drilling activity in Canada, as evidenced by a 35% decrease in rigs
drilling in the WCSB from the same period in 2018.
- ADJUSTED EBITDA OF $35.0 MILLION AND $90.1 MILLION FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2019
-
- Adjusted EBITDA of $35.0 million and $90.1 million increased 12% and 14% from the
three and six months ended June 30, 2018, primarily from
higher Midstream Infrastructure revenue (excluding oil purchase and
resale), continued cost efficiencies, and the impact of the
adoption of IFRS 16. These factors more than offset the decrease in
drilling and completions related volumes and demand for related
services. 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;
- In the Midstream Infrastructure division, Adjusted EBITDA
increased 8% in the second quarter of 2019 compared to the second
quarter of 2018, and 19% during the six months ended June 30, 2019 over the same period in 2018.
Higher water disposal volumes, new revenue streams, and Secure's
utilization of multiple crude oil and condensate streams to
optimize pricing at the Corporation's pipeline connected FSTs,
benefiting both the Corporation and our customers, more than
mitigated a decrease in facility volumes relating to less drilling
and completions waste processing and disposal during the 2019
periods;
- Adjusted EBITDA generated from the Environmental Solutions
division decreased $1.6 million
and $3.1 million for the three
and six months ended June 30, 2019 from the respective
comparative periods in 2018, primarily from revenue variances
described above. The majority of the Environmental Solutions
division's cost of sales are variable with fluctuations
corresponding to changes in revenue;
- The Technical Solutions division's Adjusted EBITDA improved
$2.0 million during the three
months ended June 30, 2019 over the 2018 comparative
period primarily due to higher revenue from production services and
lower general and administrative expenses following cost reductions
initiated in late 2018 in response to lower oil and gas drilling
activity. During the year to date, Adjusted EBITDA for the division
decreased $1.0 million compared
to the same period of 2018 primarily as a result of lower revenue
driven by reduced drilling activity.
- NET LOSS ATTRIBUTABLE TO SHAREHOLDERS OF SECURE OF
$1.7 MILLION AND $0.4 MILLION FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2019
-
- For the three months ended June 30,
2019, net loss attributable to shareholders of Secure of
$1.7 million decreased from a net
loss of $6.9 million in the
three months ended June 30, 2018. The variance is primarily
due to a $3.8 million increase
to Adjusted EBITDA resulting from the factors described above, and
lower tax expense driven by a reduction in corporate tax rates.
These positive variances were partially offset by higher
depreciation expense resulting from the adoption of IFRS 16 and new
assets put into use since the second quarter of 2018 and higher
interest expense resulting from higher debt levels to fund organic
development and acquisitions in the past year. During the six
months ended June 30, 2019, the net loss attributable to
shareholders of Secure was $0.4 million, down slightly from
$0.8 million in the six months
ended June 30, 2018. The decrease in the net loss is due
to the $11.1 million increase to
Adjusted EBITDA and lower tax expense as described above, partially
offset by higher depreciation expense resulting from the adoption
of IFRS 16 and new assets put into use since the first quarter of
2018, and higher interest expense from increased debt levels to
fund growth initiatives in the past year.
- CAPITAL EXPENDITURES OF $48.6
MILLION AND $72.2 MILLION FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2019
-
- Total capital expenditures for the three months ended
June 30, 2019 included $32.7 million of organic growth and expansion
capital, $13.9 million of acquisition
capital related to the two tuck-in acquisitions at Cushing, and $2.1 million of sustaining capital. Growth
and expansion capital (excluding business acquisitions) of
$53.3 million incurred in the
six months ended June 30, 2019 related primarily to
progressing construction of a produced water transfer and injection
pipeline from a customer plant in the Montney region; the additional crude oil
storage at the receipt terminal in Kerrobert; commencement of construction of the
new Montney water disposal
facility; 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, including purchasing
equipment to support existing services; and long lead items and
upfront costs for future projects. Sustaining capital incurred in
the year to date of $5.0 million
relates primarily to well and facility maintenance.
- FINANCIAL FLEXIBILITY
-
- The total amount drawn on Secure's credit facilities as at June
30, 2019 increased by 6% to $437.0 million compared to $413.5 million at December 31, 2018. The amount drawn increased
slightly in order to fund the Corporation's capital program;
- As at June 30, 2018, the
Corporation had $330.3 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 capacity by $130 million and issued a new $75 million
bilateral Letter of Credit Facility, resulting in total credit
capacity of $805 million. The Corporation is well positioned
to pursue further accretive acquisition opportunities and execute
on the expected 2019 capital program;
- Secure is in compliance with all covenants related to its
credit facilities at June 30, 2019. The following table
outlines Secure's senior and total debt to trailing twelve month
EBITDA ratios at June 30, 2019 and
December 31, 2018:
|
|
|
|
|
Jun 30,
2019
|
Threshold
|
%
Variance
|
|
|
|
|
Senior Debt to
EBITDA
|
1.6
|
3.5
|
(54)
|
|
|
|
|
Total Debt to
EBITDA
|
2.3
|
5.0
|
(54)
|
MIDSTREAM INFRASTRUCTURE DIVISION HIGHLIGHTS
|
Three months ended
June 30, 2019
|
Six months ended
June 30, 2019
|
($000's)
|
2019
|
2018
|
%
Change
|
2019
|
2018
|
%
Change
|
Revenue
|
|
|
|
|
|
|
Midstream
Infrastructure (a)
|
85,544
|
80,496
|
6
|
179,682
|
161,351
|
11
|
Oil purchase and
resale
|
654,618
|
578,674
|
13
|
1,266,121
|
1,102,421
|
15
|
Total Midstream
Infrastructure division revenue
|
740,162
|
659,170
|
12
|
1,445,803
|
1,263,772
|
14
|
|
|
|
|
|
|
|
Cost of
Sales
|
|
|
|
|
|
|
Midstream
Infrastructure excluding items noted below
|
39,419
|
37,796
|
4
|
78,656
|
71,247
|
10
|
Depreciation,
depletion and amortization
|
21,945
|
18,668
|
18
|
42,308
|
37,146
|
14
|
Oil purchase and
resale
|
654,618
|
578,674
|
13
|
1,266,121
|
1,102,421
|
15
|
Total Midstream
Infrastructure division cost of sales
|
715,982
|
635,138
|
13
|
1,387,085
|
1,210,814
|
15
|
|
|
|
|
|
|
|
Segment Profit
Margin(1)
|
46,125
|
42,700
|
8
|
101,026
|
90,104
|
12
|
|
|
|
|
|
|
|
Segment Profit
Margin (1) as a % of revenue (a)
|
54%
|
53%
|
|
56%
|
56%
|
|
(1)
Calculated as revenue less cost of sales excluding depreciation and
amortization. Refer to "Non-GAAP Measures and Operational
Definitions" for further information
|
- Revenue generated from Midstream Infrastructure services
of $85.5 million and $179.7 million for the three and six months
ended June 30, 2019 increased by 6% and 11% from the 2018
comparative periods. The increase in revenue was primarily driven
by higher volumes associated with new infrastructure, including the
Kerrobert crude oil pipeline
system and expansions at certain of the Corporation's existing
facilities during 2018 and the first half of 2019. Further
increases in revenue during the three and six months ended
June 30, 2019 were due to Secure's continued utilization
of multiple crude oil and condensate streams at the Corporation's
pipeline connected FSTs to optimize realized pricing, which
benefited both the Corporation and our customers. These increases
to revenue were partially offset by a decrease in processing and
disposal volumes tied to drilling and completion activity, wet
weather in June resulting in extensive road bans, and lower
realized pricing on recovered oil;
- Disposal volumes increased slightly in the three months ended
June 30, 2019 over the 2018 comparative period as a
31% increase in produced water disposal volumes at the
Corporation's facilities in Canada
more than offset the impact on landfill volumes and waste water
volumes resulting from slower drilling and completion activity. The
majority of the Corporation's facilities are located in high impact
resource plays, such as the Montney and Duvernay regions, where producers were most
active in the WCSB during the quarter. Average fluids pumped per
well in these regions are also significantly higher than other
regions of the WCSB, driving incremental volumes at Secure's
facilities. In the past year, Secure has strategically added new
facilities, including the Gold Creek and Tony Creek water disposal
facilities, and increased capacity for water disposal at various
other facilities in these regions in response to customer demand.
These additions and expansions were the driving force behind higher
produced water volumes in the quarter. Disposal volumes were
relatively flat in the six months ended June 30, 2019
compared to the same period in 2018 as the impact of higher
produced water disposal volumes described above was offset by lower
completion-related water volumes and reduced drilling waste
disposed at the Corporation's landfills;
- Processing volumes decreased by 30% and 26% in the three and
six months ended June 30, 2019 from
the 2018 comparative periods driven primarily by lower emulsion
treating and waste processing over the comparative periods
resulting from the slowdown of oil and gas activity due to
challenging industry fundamentals stemming from volatile crude oil
pricing, low natural gas prices and uncertainty with respect to the
addition of pipeline capacity out of the WCSB. Additionally, cold
weather in the first quarter of 2019 and a prolonged spring
break-up due to rain in June impacted overall activity levels. In
the WCSB, rig activity declined 28% and 35% in the three and six
months ended June 30, 2019 from the
2018 comparative periods, and completions decreased 26% and 25% in
these same periods;
- The Kerrobert crude oil
pipeline system commenced commercial operations on
October 1, 2018, resulting in a new revenue source for
the Corporation in the three and six months ended June
30, 2019 compared to the same periods of 2018 through pipeline
tariffs. The feeder pipeline project includes area dedication and
contracted volume on both an annual and cumulative term basis over
a 10 year term;
- Oil purchase and resale revenue in the Midstream Infrastructure
division for the three and six months ended June 30, 2019
increased to $654.6 million and $1.3 billion driven by the addition of the
Kerrobert crude oil pipeline
system;
- The Midstream Infrastructure's segment profit margin for the
three and six months ended June 30,
2019 of $46.1 million and
$101.0 million increased by 8% and
12% from the prior year comparative periods, driven by the impact
of increased revenues, as discussed above. As a percentage of
Midstream Infrastructure services revenue, segment profit margin
increased slightly to 54% during the three months ended
June 30, 2019 from 53% in the second quarter of 2018, and
remained flat at 56% in the year to date compared to the first half
of 2018;
- General and administrative ("G&A") expenses of $7.6 million and $14.9 million for the three and six months ended
June 30, 2019 increased from the respective 2018
comparative period balances of $6.6 million and $12.7 million. Excluding depreciation and
amortization, G&A expenses decreased 6% and 5% during the three
and six months ended June 30, 2019 from the respective
2018 comparative periods primarily due to the impact of IFRS 16 on
office leases. The Corporation continues to minimize G&A costs
by streamlining operations where possible;
- Earnings before tax of $16.1 million for the three months ended
June 30, 2019 decreased 5% from the three months ended June
30, 2018. The decrease is primarily a result of higher
depreciation and amortization expense partially offset by a
$3.4 million increase in segment
profit margin in the 2019 period. Earnings before tax increased 9%
for the six months ended June 30,
2019 over the 2018 comparative period. The increase is
driven primarily by a $10.9 million increase in segment profit
margin as a result of facilities added in the second half of 2018
and the Corporation's continued focus on efficient and proactive
cost management. This increase was partially offset by higher
overall G&A expenses.
ENVIRONMENTAL SOLUTIONS DIVISION HIGHLIGHTS
|
Three months ended
June 30, 2019
|
Six months ended
June 30, 2019
|
($000's)
|
2019
|
2018
|
%
Change
|
2019
|
2018
|
%
Change
|
Revenue
|
|
|
|
|
|
|
Environmental
Solutions
|
16,027
|
26,043
|
(38)
|
45,699
|
58,207
|
(21)
|
|
|
|
|
|
|
|
Cost of
Sales
|
|
|
|
|
|
|
Environmental
Solutions excluding depreciation and amortization
|
13,371
|
21,100
|
(37)
|
38,035
|
46,629
|
(18)
|
Depreciation and
amortization
|
2,453
|
2,236
|
10
|
4,990
|
4,633
|
8
|
Total
Environmental Solutions division cost of sales
|
15,824
|
23,336
|
(32)
|
43,025
|
51,262
|
(16)
|
|
|
|
|
|
|
|
Segment Profit
Margin (1)
|
2,656
|
4,943
|
(46)
|
7,664
|
11,578
|
(34)
|
|
|
|
|
|
|
|
Segment Profit
Margin (1) as a % of revenue
|
17%
|
19%
|
|
17%
|
20%
|
|
(1)
Calculated as revenue less cost of sales excluding depreciation and
amortization. Refer to "Non-GAAP Measures and Operational
Definitions" for further information
|
- Environmental Solutions division revenue of $16.0 million and $45.7 million for the three and six months
ended June 30, 2019 decreased by 38% and 21% from the
comparative periods of 2018. Onsite water management and pumping
service revenue was negatively impacted by lower well completion
activity in the WCSB and from significantly reduced spending from
major exploration and development companies in Canada.
Project services revenue decreased as there were fewer large scale
job opportunities quarter over quarter. Revenue in the second
quarter of 2018 included two large remediation jobs, a significant
demolition job and revenue from an oil spill clean-up. The second
quarter of 2019 did not have similar type of jobs occurring.
Additionally, ongoing remediation and demolition programs during
this quarter were delayed due to spring break up and wet conditions
in June which limited field access to continue these jobs. The
programs are scheduled to re-start in the second half of the
year. Increases in Oil Sands recurring revenue from scrap
metal recycling agreements combined with new project work in the
region partially offset the reduced revenue from the lower volume
of jobs and program deferrals;
- Segment profit margin for the three and six months ended
June 30, 2019 decreased by 46% and
34% to $2.7 million and
$7.7 million from the prior year
comparative periods due primarily to lower revenue. As a percentage
of revenue, segment profit margin was 17% for both the three and
six months ended June 30, 2019, down slightly from 19% and 20%
in the three and six months ended June 30,
2018. 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, and other services in
any given period. As a percentage of revenue, the segment profit
margin in the first half of 2019 decreased primarily due to lower
proportion of revenue from water pumping and fracing services,
which typically generates higher margins than project type work.
Additionally, competitive pricing due to lower market demand and
limited water pumping opportunities decreased margin as a
percentage of revenue for the integrated fluid solutions services
in 2019 compared to 2018. The integrated services solutions margin
decrease was partially offset by improving project type margins and
higher margins associated with recurring revenue generated from the
Oil Sands region;
- G&A expense for the three and six months ended June
30, 2019 decreased 31% and 23% from the 2018 comparative
periods to $1.6 million and
$3.4 million as a result of ongoing
initiatives to minimize costs to correspond to with activity
levels;
- During the three and six months ended June 30, 2019,
the Environmental Solutions division had losses of $1.4 million and $0.8 million, respectively, compared to
earnings of $0.4 million and
$2.5 million during the three
and six months ended June 30, 2018. 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
June 30, 2019
|
Six months ended
June 30, 2019
|
($000's)
|
2019
|
2018
|
%
Change
|
2019
|
2018
|
%
Change
|
Revenue
|
|
|
|
|
|
|
Technical
Solutions
|
37,298
|
34,710
|
7
|
90,867
|
103,389
|
(12)
|
|
|
|
|
|
|
|
Cost of
Sales
|
|
|
|
|
|
|
Technical Solutions
excluding depreciation and amortization
|
33,270
|
31,988
|
4
|
76,790
|
87,304
|
(12)
|
Depreciation and
amortization
|
6,194
|
5,313
|
17
|
11,869
|
10,486
|
13
|
Total Technical
Solutions division cost of sales
|
39,464
|
37,301
|
6
|
88,659
|
97,790
|
(9)
|
|
|
|
|
|
|
|
Segment Profit
Margin (1)
|
4,028
|
2,722
|
48
|
14,077
|
16,085
|
(12)
|
|
|
|
|
|
|
|
Segment Profit
Margin (1) as a % of revenue
|
11%
|
8%
|
|
15%
|
16%
|
|
(1)
Calculated as revenue less cost of sales excluding depreciation and
amortization. Refer to "Non-GAAP Measures and Operational
Definitions" for further information
|
- Technical Solutions division's revenue of $37.3 million in the three months ended
June 30, 2019 increased 7% compared to the three months
ended June 30, 2018. The increase in revenue was a result
of higher contributions from production chemicals as the
Corporation expands its customer base and product offerings. The
division's drilling fluids and equipment revenue correlates with
oil and gas drilling activity in the WCSB. During the three months
ended June 30, 2019, rig activity and
metres drilled in the WCSB decreased 28% and 13%, respectively,
compared to the three months ended June 30, 2018. Despite
the decrease in industry activity levels, revenue from drilling
services was relatively flat in the three months ended June 30, 2019 from the comparative period of 2018
due to a steady number of operating days resulting from higher
market share. During periods of low activity, such as the
second quarter spring break-up where the average rig count is
typically half of that in the first quarter of the year, the
timing, type and location of one customer's drilling activities can
create fluctuations in market share;
- During the six month period, rig activity and metres drilled in
the WCSB decreased 35% and 25%, respectively, compared to the first
half of 2018. 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 with
the increased contribution from Secure's production chemicals
related services. Overall revenue from the Technical Solutions
division for six months ended June 30, 2019 decreased 12%
to $90.9 million from the
comparative period of 2018;
- The Technical Solutions division's segment profit margin of
$4.0 million for the three months
ended June 30, 2019 increased 48%
from the comparative period of 2018. Segment profit margin as a
percentage of revenue was 11%, up from 8% in the prior year second
quarter. The increase is attributable to improved production
services margins resulting from higher revenues with relatively
flat overhead costs, favorable product mix, and the adoption of
IFRS 16 which has positively impacted the segment profit margin as
certain production chemical blending plants are operated under
lease agreements. Lower product margins related to drilling fluids
partially offset these factors due to competitive pricing and
higher costs related to products sourced in U.S. dollars;
- The Technical Solutions division's segment profit margin for
the six months ended June 30, 2019
decreased 12% from the comparative period to $14.1 million as a result of lower revenue
and proportionately lower expenses, as discussed above. Segment
profit margin as a percentage of revenue was 15%, down from 16% in
the six months ended June 30, 2018;
- G&A expenses decreased 12% and 8% to $4.6 million and $10.4 million as a result of the
Corporation's continued efforts to manage costs efficiently and
proactively while still responding to customer demands and activity
levels. This is partially offset by costs associated with research
and development projects as Secure continues its focus on expanding
the value chain of services offered to customers, including
innovative and cost-effective solutions to reduce waste in the
drilling and production processes;
- During the three and six months ended June 30, 2019, the
Technical Solutions division had losses before tax of $6.8 million and $8.1
million compared to $7.8 million and $5.7
million in the three and six months ended
June 30, 2018. The variance was a result of a changes to
segment profit margin as described above and the decrease in
G&A expense.
OUTLOOK
Secure's outlook for oil and gas activity levels in the second
half of 2019 remains conservative in light of ongoing
macro-economic factors affecting the Canadian energy sector.
Producers are continuing to be cautious with spending, impacting
new drilling and completion related volumes and demand for related
services. Despite a difficult operating environment, Secure has
demonstrated consistent growth over the past several years. The
Corporation continues to find new and innovative ways to help our
customers and deliver energy to the world, so people and
communities thrive. Over the past two years, Secure has
strategically invested in midstream infrastructure in high impact
resource plays located near customer production, significantly
increased the Corporation's exposure to production-based revenues
and entered into long-term contracts for increased reliability of
future cash flows. Secure expects that these factors will mitigate
the impact reduced year over year activity levels will have on the
Corporation's financial results in 2019.
Secure's strategy remains focused on what is in the
Corporation's control: help our customers by challenging what's
possible. By doing midstream differently, Secure can work with
customers to identify opportunities and integrated solutions where
the Corporation can add value by increasing customer operating
netbacks and improving capital efficiency. The industry
fundamentals driving the success of Secure's core operations remain
unchanged:
- Trend towards increased outsourcing of midstream work by
producers;
- Produced water increasing at a disproportionate rate relative
to aggregate production as a result of larger fracs, aging wells
and maturing basins in both Canada
and the U.S.;
- Increasing opportunities relating to crude oil logistics as
volatile differentials allow for opportunities related to crude oil
storage, and transporting crude by rail and via pipeline;
- Well density improving economics to pipeline connect production
volumes to midstream facilities;
- Forecast global oil and gas demand driving production growth in
the WCSB; and
- Highly regulated and best in the world environmental
standards.
These factors are expected to result in the need for additional
facilities to meet incremental requirements for processing and
disposal capacity. Secure has made significant capital investments
to ensure the business is well positioned to capture new demand. By
offering exceptional customer service and owning and operating
midstream facilities near customer production, Secure expects these
trends will drive more volumes to the Corporation's midstream
facilities.
Additionally, customers continue to seek cost effective
transportation solutions for water, oil and condensate volumes.
Employing the Corporation's approach of doing midstream
differently, Secure has created strategic partnerships with
customers leading to the recent development of the Kerrobert crude oil pipeline system and the
ongoing construction of two produced water transfer pipelines.
These feeder pipelines create value for Secure through fixed
fee-for-service revenues and reliable volumes delivered to our
facilities, and for our customers through lower transportation
costs and higher operating netbacks.
The continued growth and development of the Corporation's
midstream business, highlighted in the second quarter with the
addition of storage infrastructure expanding Secure's strategic
footprint at key North American crude hubs, provides Secure with
the ability to offer customers market access flexibility to
optimize pricing.
Secure's Technical and Environmental Solutions divisions offer
significant torque to the Corporation's cash flows with increased
commodity prices, improved producer spending and higher activity
levels. Additionally, offering a suite of solutions across the
energy life cycle creates synergies with the core business.
With the strength of the Corporation's balance sheet,
experienced management team and proven track record, Secure is well
positioned to execute on its growth strategy and respond with
solutions to the market's requirements. The amendments to the
Corporation's First Lien Credit Facility and the new Letter of
Credit Facility during the second quarter increased the
Corporation's total credit capacity to $805 million, providing
financial flexibility and the borrowing capacity available for
Secure to continue to operate efficiently and execute on the
Corporation's growth and capital investment strategy. The
Corporation has visible continued growth and expects to incur
approximately $115 million of total growth and
expansion capital in 2019 (acquisition and organic) depending on
the outcome of various opportunities in development, such as
regulatory approvals, development permits and other operating
agreements. The current capital plan for the second half of the
year includes completing the produced water transfer and injection
pipelines in the Montney region;
completing the new Montney water
disposal facility and feeder pipeline; optimizing capabilities and
increasing processing and disposal capacity at various other
facilities, including additional disposal wells; and purchasing
equipment to support existing services.
REPORTING CHANGES
The Corporation adopted International Financial Reporting
Standard 16, Leases ("IFRS 16") as at the effective date of
January 1, 2019 which replaced IAS 17, Leases ("IAS 17").
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 $33.4 million and
$35.9 million, respectively,
related to office space, warehouses, surface land, rail cars and
certain heavy equipment. 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 condensed consolidated financial statements
and notes thereto for the three and six months ended
June 30, 2019 and 2018 and MD&A for the three and six
months ended June 30, 2019 and 2018
are available immediately on Secure's website at
www.secure-energy.com. The condensed consolidated financial
statements and MD&A will be available tomorrow on SEDAR at
www.sedar.com.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this document constitute
"forward-looking statements" and/or "forward-looking information"
within the meaning of applicable securities laws (collectively
referred to as forward-looking statements). When used in this
document, the words "may", "would", "could", "will", "intend",
"plan", "anticipate", "believe", "estimate", "expect", and similar
expressions, as they relate to Secure, or its management, are
intended to identify forward-looking statements. Such statements
reflect the current views of Secure with respect to future events
and operating performance and speak only as of the date of this
document. In particular, this document contains or implies
forward-looking statements pertaining to: key factors driving the
Corporation's success; the Corporation's expected 2019 Adjusted
EBITDA; the impact of new facilities, new service offerings,
potential acquisitions, and prior year acquisitions on the
Corporation's future financial results; demand for the
Corporation's services and products; 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; the oil and natural gas industry in
Canada and the U.S., including
2019 and 2020 activity levels, spending by producers and the impact
of this on Secure's activity levels; future pipeline development in
Canada; industry fundamentals
driving the success of Secure's core operations, including
increased outsourcing of midstream work by producers, drilling,
completion and production trends, opportunities relating to crude
oil logistics, well density and economics for pipeline connecting
production volumes to midstream facilities, and global oil and gas
demand; the Corporation's proposed 2019 capital expenditure program
including growth and expansion and sustaining capital expenditures,
and the timing of completion for projects, in particular the new
Montney water disposal facility;
debt service; 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 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, 2018 and also includes the risks associated
with the possible failure to realize the anticipated synergies in
integrating the assets acquired in prior year acquisitions with the
operations of Secure. Although forward-looking statements contained
in this document are based upon what the Corporation believes are
reasonable assumptions, the Corporation cannot assure investors
that actual results will be consistent with these forward-looking
statements. The forward-looking statements in this document are
expressly qualified by this cautionary statement. Unless otherwise
required by law, Secure does not intend, or assume any obligation,
to update these forward-looking statements.
NON-GAAP MEASURES AND OPERATIONAL DEFINITIONS
The Corporation uses accounting principles that are generally
accepted in Canada (the issuer's
"GAAP"), which includes International Financial Reporting Standards
("IFRS"). Certain supplementary measures in this document do
not have any standardized meaning as prescribed by IFRS. These
measures are intended as a complement to results provided in
accordance with IFRS. The Corporation believes these measures
provide additional useful information to analysts, shareholders and
other users to understand the Corporation's financial results,
profitability, cost management, liquidity and ability to generate
funds to finance its operations. However, they should not be used
as an alternative to IFRS measures because they do not have a
standardized meaning under IFRS and therefore may not be comparable
to similar measures presented by other companies. See the
management's discussion and analysis available at
www.sedar.com for further details, including reconciliations
of the Non-GAAP measures and additional GAAP measures to the most
directly comparable measures calculated in accordance with
IFRS.
ABOUT SECURE ENERGY SERVICES INC.
Secure is a TSX publicly traded integrated energy business with
midstream infrastructure, environmental and technical solutions
divisions providing industry leading customer solutions to upstream
oil and natural gas companies operating in western Canada and certain regions in the United States ("U.S.").
_____________________________________
|
i Refer to the "Non-GAAP Measures
and Operational Definitions" section herein
|
|
ii Refer
to the "Reporting Changes" section herein for more
information on Secure's adoption of IFRS 16. Secure anticipates the
impact of the new standard to result in an increase of
approximately $12 to $14 million to Adjusted EBITDA for the
2019 year
|
SOURCE SECURE Energy Services Inc.