CALGARY, AB, July 28, 2020 /CNW/ - Secure Energy Services Inc.
("SECURE" or the "Corporation") (TSX: SES) reported today its
operational and financial results for the three and six months
ended June 30, 2020. The following
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, 2020, which are
available on SEDAR at www.sedar.com.
SECOND QUARTER SUMMARY
The Corporation recorded Adjusted EBITDAi of
$20.5 million for the three
months ended June 30, 2020, compared to $35.0 million in the prior year second
quarter. Reduced global oil demand driven by public health measures
taken to limit the spread of the novel coronavirus ("COVID-19") and
the associated economic downturn pressured crude oil and liquid
prices to historic lows during the three months ended June 30, 2020, resulting in production shut-ins
and minimal drilling and completion activity in the Corporation's
operating regions.
SECURE's revenue (excluding oil purchase and resale) of
$65.5 million for the second
quarter of 2020 decreased 51% from the prior year comparative
period as a result of lower production-related volumes at the
Corporation's midstream facilities due to short-term shut-ins, and
limited drilling and completion volumes at the Corporation's
midstream facilities and landfills, as evidenced by active rig
counts decreasing by approximately 75% from the prior year.
Due to the highly unusual dynamics in the crude oil market
stemming from the COVID-19 pandemic, the Corporation also had fewer
product optimization opportunities resulting in lower crude oil
marketing revenue in the three months ended
June 30, 2020, compared to the same period of 2019.
SECURE was able to partially mitigate the reduced market
optimization opportunities by capitalizing on the Corporation's
significant crude oil storage positions at the Kerrobert and Cushing facilities. SECURE also benefited in
the quarter from stable revenue provided by contracted volumes
associated with SECURE's oil feeder pipelines and
pipeline-connected produced water disposal facilities.
In early April of 2020, the Corporation undertook aggressive
cost reductions which began to take effect in the three months
ended June 30, 2020, including a 25%
decrease in personnel costs achieved through organizational
restructuring, salary reductions, modified work schedules and job
sharing. As a result of these measures, the Corporation anticipates
a $40 million reduction in cost of sales and general and
administrative expenses on an annualized basis. In addition, SECURE
qualified for the Canadian Federal Government's wage subsidy
program during the quarter which was used to reduce the impact of
the downturn on the Corporation's staffing levels. The benefit of
$11.2 million resulting from the
program has been offset against wages included in cost of sales and
general and administrative expenses. The Corporation has also taken
a number of measures to significantly reduce all discretionary
spending. As a result of these reductions to the Corporation's cost
structure, SECURE's Adjusted EBITDA margini was 31%
for the three months ended June 30, 2020, an increase of
5% from the prior year comparative period despite the decrease to
revenue.
The Corporation is actively anticipating and managing risks to
ensure the long-term resiliency of the organization. Maintaining a
strong balance sheet has always been a priority of SECURE to
effectively manage the business through periods of lower commodity
pricing and industry activity. In addition to the restructuring
efforts and associated cost reductions noted above, the Corporation
has taken further measures to protect the Corporation's balance
sheet, including:
- Managing a strict capital program. The Corporation's 2020
capital program is $60 million,
comprised of $50 million of growth
capital and $10 million of sustaining
capital, less than half the 2019 spend of $135 million. The majority of the capital program
for this year was completed during the six months ended
June 30, 2020, and related primarily
to substantially completing the East Kaybob Oil Pipeline, which is
expected to contribute positive cash flows for the remainder of
2020. The Corporation expects to incur approximately $15 million for 2021, primarily related to
sustaining capital.
- Reducing the monthly dividend from $0.0225 per share to $0.0025 (0.25
cents) per share beginning May
2020. This reduction results in annualized cash savings of
approximately $38 million. Following
the payment of the monthly dividend in June
2020, the Corporation has moved to paying the dividend
quarterly, with the first payment of $0.0075 (0.75
cents) per common share expected in October 2020.
- Optimizing working capital. At June 30,
2020, the Corporation's non-cash working capital was
$94.9 million, down from $125.3 million at December
31, 2019. The Corporation has a robust credit review process
and has been working with customers to ensure timely collection of
receivables. As a result of these diligent procedures, no loss
allowance for expected credit losses was recorded during the three
months ended June 30, 2020. The
Corporation has also been actively managing inventory levels,
primarily related to drilling fluids and production chemicals, to
align with expected near-term activity levels.
The factors noted above have lessened the negative impact of
reduced activity levels and lower Adjusted EBITDA on the
Corporation's financial position. The following table outlines
SECURE's Senior and Total Debt to trailing twelve-month EBITDA
ratiosii at June 30, 2020, compared to the
covenant thresholds outlined in our credit facility agreements.
SECURE remains well within compliance of all covenants related to
its credit facilities.
|
June 30,
2020
|
Threshold
|
Senior Debt to
EBITDA
|
2.3
|
3.5
|
Total Debt to
EBITDA
|
3.2
|
5.0
|
At June 30, 2020, SECURE had cash of $17.4 million and $267.1 million of available capacity on our
First Lien Credit Facility, subject to covenant restrictions. In
addition, SECURE has a $75 million
letter of credit facility with $30.8 million available for use under this
facility as of June 30, 2020.
Outlook
Crude oil prices stabilized near the end of the second quarter
of 2020 following indicators of a gradual economic recovery as
lockdowns associated with COVID-19 eased across the globe, leading
to increased energy demand. As demand continues to increase and oil
prices rise, producers in SECURE's core operating regions have
started bringing shut-in production back on-stream.
The Corporation expects that there will be a modest increase in
drilling and completion activity in late third quarter and fourth
quarter of 2020 as producers seek to add production to offset
natural declines in order to maintain flat production levels to
hold cash flow levels, satisfy reserve-based lending commitments
and maximize hedge contracts. The Corporation anticipates that
drilling and completion activity will, however, remain well below
prior year levels in the second half of 2020 as producers continue
to prudently manage capital and protect their balance sheet.
While the Corporation continues to face significant external
headwinds, by controlling what we can control, SECURE remains well
positioned to navigate this challenging time through the remainder
of 2020 and beyond.
- During the second quarter of 2020, the Canadian Federal
Government announced a $1.7 billion
federal stimulus package to help fund the closure and reclamation
of orphan and inactive wells in the Western Canadian Sedimentary
Basin ("WCSB") as part of an effort to reduce the economic fallout
on oil-producing provinces from COVID-19. The majority of the
package ($1.0 billion) has been used
to create the Alberta Site Rehabilitation Program, a phased grant
funding program for well, pipeline and oil and gas site closure and
reclamation work through to the end of 2022. Site closure and
remediation programs have also been introduced in British Columbia ($100
million) and Saskatchewan
($400 million), where SECURE is an
approved government contractor. SECURE is also a prime contractor
for the Orphan Well Association, who has been allotted the
remaining $200 million. SECURE
expects increased abandonment and remediation activity to
positively impact all Canadian business units over the term of the
program, particularly within the Environmental Management group as
a result of higher demand for environmental site assessments,
onsite abandonment, remediation and reclamation management and
decommissioning work. Solid and waste volumes resulting from these
operations will also require disposal; SECURE owns and operates six
industrial landfills in Alberta
capable of handling waste of this nature.
- SECURE's business remains highly concentrated on production
volumes and related services that historically represent
approximately 75% of the Corporation's Adjusted EBITDA. The
majority of the Corporation's midstream processing facilities are
located in low cost light oil and gas related plays in western
Canada, which should support
ongoing production at current benchmark pricing.
- SECURE's oil and water pipelines have committed volumes, which
will provide a recurring revenue stream and provide a certain
degree of cash flow stability. In June
2020, the Corporation successfully commissioned the East
Kaybob Oil Pipeline, which will begin contributing to the
Corporation's results in the third quarter of 2020. There is one
remaining segment of the pipeline that will be constructed in late
2020
- SECURE benefited in the second quarter from its crude oil
storage infrastructure at both Kerrobert and Cushing. The Corporation expects these assets
will continue to provide incremental year over year cash flows for
the remainder of 2020 as pipeline disruptions and egress challenges
create fluctuating differentials opportunities. Additionally, as
crude oil market dynamics return to normal, the Corporation expects
opportunities for price optimization at the Corporation's pipeline
connected midstream facilities will return.
- Through organizational and structural changes, the Corporation
expects the reductions made to our fixed cost structure will result
in annualized savings to Adjusted EBITDA in excess of
$40 million, the majority of which is expected to remain
regardless of increases in activity levels.
- The majority of the Corporation's 2020 capital program was
completed in the first half of the year with the addition of the
East Kaybob Oil Pipeline, a milestone project for SECURE that
aligns with our underlying strategy to increase the stability of
our cash flows.
- The Corporation is proceeding with the planned divestitures
announced last year related to specific service lines that do not
have recurring or production-related revenue streams. However,
SECURE continues to remain patient in executing any divestitures as
the Corporation is committed to obtaining a sales price
commensurate with the value of the service lines. Due to recent
market volatility and continued uncertainty, the Corporation
expects that timing for the completion of any divestitures will be
delayed to 2021.
For the remainder of 2020, SECURE will continue to focus on
maintaining financial resiliency by maximizing cash flows and
paying down debt with free cash flow. By doing so, the Corporation
will remain well positioned to respond to the market's needs when
activity levels increase. Helping our customers by challenging what
is possible, working transparently to identify opportunities where
we can provide innovative solutions that help our customers reduce
costs and emissions and invest their capital where it generates the
highest rates of return will ultimately contribute to our combined
success in the long-term, regardless of the challenges faced along
the way.
OPERATING AND FINANCIAL HIGHLIGHTS
The following table summarizes the operating and financial
highlights for the three and six month periods ending
June 30, 2020 and 2019:
|
|
Three months ended
June 30,
|
Six months ended
June 30,
|
($000's except
share and per share data)
|
2020
|
2019
|
%
change
|
2020
|
2019
|
%
change
|
Revenue (excludes oil
purchase and resale)
|
65,546
|
134,230
|
(51)
|
237,569
|
307,110
|
(23)
|
Oil purchase and
resale
|
225,644
|
654,618
|
(66)
|
659,199
|
1,266,121
|
(48)
|
Total
revenue
|
|
291,190
|
788,848
|
(63)
|
896,768
|
1,573,231
|
(43)
|
Adjusted EBITDA
(1)
|
|
20,453
|
34,966
|
(42)
|
62,547
|
90,105
|
(31)
|
|
Per share ($),
basic
|
0.13
|
0.22
|
(41)
|
0.39
|
0.56
|
(30)
|
Net loss attributable
to shareholders of SECURE
|
(20,889)
|
(1,678)
|
(1,145)
|
(42,827)
|
(419)
|
(10,121)
|
|
Per share ($), basic
and diluted
|
(0.13)
|
(0.01)
|
(1,200)
|
(0.27)
|
-
|
(100)
|
Cash flows from
operating activities
|
22,098
|
53,926
|
(59)
|
67,948
|
111,228
|
(39)
|
|
Per share ($),
basic
|
0.14
|
0.34
|
(59)
|
0.43
|
0.69
|
(38)
|
Capital expenditures
(1)
|
|
10,560
|
48,612
|
(78)
|
51,920
|
72,231
|
(28)
|
Dividends per common
share
|
0.0275
|
0.0675
|
(59)
|
0.0950
|
0.1350
|
(30)
|
Total
assets
|
|
1,493,949
|
1,605,988
|
(7)
|
1,493,949
|
1,605,988
|
(7)
|
Long-term
liabilities
|
|
624,495
|
604,610
|
3
|
624,495
|
604,610
|
3
|
Common shares - end
of period
|
158,543,252
|
158,452,248
|
-
|
158,543,252
|
158,452,248
|
-
|
Weighted average
common shares - basic and diluted
|
158,488,825
|
160,371,354
|
(1)
|
158,501,312
|
160,405,924
|
(1)
|
(1) Refer
to "Non-GAAP Measures" for further information
|
|
|
|
|
|
|
- REVENUE OF $291.2 MILLION AND
$896.8 MILLION FOR THE THREE AND SIX
MONTHS ENDED JUNE 30, 2020
-
- Midstream Infrastructure segment revenue (excluding oil
purchase and resale) for the three and six months ended
June 30, 2020, decreased by 53% and
29% from the comparative periods of 2019 to $34.2 million and $108.8
million, respectively. For the three months ended
June 30, 2020, the decrease in
revenues is attributable to production shut-ins and minimal
drilling and completion activity across the WCSB and North Dakota due to macro-economic factors
driving low crude and liquids pricing, resulting in lower
processing, disposal and recovery volumes at the Corporation's
midstream processing facilities and reduced marketing
opportunities. Recovered oil pricing was also negatively impacted
by the significant decline in Canadian benchmark oil prices
compared to the same period of 2019. Partially offsetting these
negative factors on the Midstream Infrastructure segment's second
quarter revenue was increased demand for crude oil storage at the
Kerrobert and Cushing facilities, and stability provided by
contracted volumes associated with SECURE's oil feeder pipelines
and pipeline-connected produced water disposal facilities;
- The impact of production shut-ins and reduced drilling and
completion activity during the six months ended June 30, 2020, was partially offset by higher
year over year activity levels in the first two months of the year
prior to the crash in crude and liquids pricing in March 2020;
- Oil purchase and resale revenue for the three and six months
ended June 30, 2020, decreased 66%
and 48% from the 2019 comparative periods to $225.6 million and $659.2
million, respectively. The decrease in revenues is a result
of a 57% and 40% decrease in Canadian light oil benchmark pricing
during the three and six month periods ended June 30, 2020 over 2019, combined with reduced
marketing activity as a result of lower production volumes and
limited opportunities to work with our customers to optimize
pricing by utilizing multiple crude oil and condensate streams at
SECURE's midstream facilities due to extremely low crude and
condensate pricing;
- Environmental and Fluid Management segment revenue for the
three months ended June 30, 2020,
decreased 49% from the 2019 comparative period to $31.4 million due to a significant decline in
drilling and completion activity in the WCSB, negatively impacting
revenue generated from service lines supporting these activities.
Revenue from these service lines, which includes drilling and
completion fluid services, solids control equipment rentals,
drilling waste management, water management, and industrial
landfill disposal, was down approximately 75% from the prior year
comparative period, consistent with the decline in the active rig
count. Partially offsetting the extent of this decrease was stable
project work awarded in Fort
McMurray as the Corporation continues to gain a reputation
as a preferred service provider in the Oil Sands region, continuing
environmental project work for customers outside of oil and gas,
and a smaller decline in production chemicals revenue where the
impact of reduced demand due to production shut-ins was partially
offset by increased market share compared to the same period of
2019
- For the six months ended June 30,
2020, Environmental and Fluid Management segment revenue
decreased 16% from the 2019 comparative period to $128.8 million. The revenue decline in the second
quarter more than offset higher year over year revenue generated in
the first two months of the year as a result of higher drilling and
completion activity in the WCSB which positively impacted revenue
generated from service lines supporting these activities.
- ADJUSTED EBITDA OF $20.5
MILLION AND $62.5 MILLION FOR
THE THREE AND SIX MONTHS ENDED JUNE 30,
2020
-
- Adjusted EBITDA of $20.5 million
and $62.5 million decreased 42% and
31% from the three and six months ended June
30, 2019, primarily as a result of reduced period over
period revenue as described above. For the three months ended
June 30, 2020, the impact of the 51%
reduction in revenue (excluding oil purchase and resale) was
partially offset by cost reduction measures taken in early
April 2020 to align the Corporation's
fixed cost structure with current activity levels, which included
organizational restructuring and associated personnel lay-offs,
salary reductions, and restricted discretionary spending across all
operating segments. As a result, SECURE reduced personnel costs by
25% and discretionary fixed costs by 75% for the three months ended
June 30, 2020 compared to the same
period of 2019. The Corporation also benefited from the
Canada Emergency Wage Subsidy
("CEWS") implemented by the Canadian federal government to
qualifying entities impacted by the consequences of the COVID-19
pandemic to maintain staffing levels.
- NET LOSS ATTRIBUTABLE TO SHAREHOLDERS OF SECURE OF
$20.9 MILLION AND $42.8 MILLION FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2020
-
- For the three months ended June 30,
2020, there was a net loss attributable to shareholders of
SECURE of $20.9 million, an increased
loss of $19.2 million from the
comparative period of 2019. The increase is primarily due to lower
Adjusted EBITDA as described above. For the six months ended
June 30, 2020, the Corporation's net
loss of $42.8 million increased
$42.4 million from the comparative
period of 2019. In addition to lower Adjusted EBITDA, the net loss
in the current year period also included $26.0 million of impairment and restructuring
charges.
-
- Impairment of non-current assets: In accordance with the
accounting standards, the Corporation assesses at each reporting
date whether there is an indication that an asset or cash
generating unit ("CGUs") may be impaired. With the rapid and
significant decline in oil prices in March
2020 and resulting decrease to producer capital spending,
indicators of impairment were present at March 31, 2020 for SECURE's CGUs with cash flows
tied primarily to drilling and completion activities. The value in
use of the Technical Solutions CGU, determined using a five-year
cash flow estimate discounted to March 31,
2020, exceeded the carrying amount of the CGU. Consequently,
a $15.7 million impairment charge was
recorded in the first quarter of 2020 against intangible assets in
order to write the CGU down to its recoverable amount. There were
no indicators of impairment or impairment reversal at June 30, 2020;
- Restructuring costs: SECURE recorded an expense of
$10.3 million during the six months
ended June 30, 2020, related
primarily to employee termination benefits resulting from
restructuring plans undertaken by the Corporation beginning at the
end of March 2020 to right-size the
Corporation's workforce to anticipated activity levels and
streamline business processes which resulted in the suspension or
termination of certain functions.
- These negative variances were partially offset by a higher
income tax recovery in the 2020 year to date resulting primarily
from a higher pre-tax loss.
- CASH FLOWS FROM OPERATING ACTIVITIES OF $22.1 MILLION AND $67.9
MILLION FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020
-
- The Corporation generated cash flows from operating activities
of $22.1 million and $67.9 million during the three and six months
ended June 30, 2020, a decrease of
59% and 39% from the respective prior year comparative periods. The
impact of lower Adjusted EBITDA was partially offset by changes in
non-cash working capital during the period corresponding to lower
activity levels. SECURE carried total net working capital at
June 30, 2020, of $94.9 million, down from $125.3 million at December
31, 2019.
- CAPITAL EXPENDITURES OF $10.6
MILLION AND $51.9 MILLION FOR
THE THREE AND SIX MONTHS ENDED JUNE 30,
2020
-
- During the three months ended June 30,
2020, SECURE incurred $9.0
million of growth capital related primarily to the
substantial completion of the East Kaybob Oil Pipeline, a
120-kilometre pipeline system gathering light oil and condensate
from multiple producers and terminating at the Corporation's
Fox Creek midstream processing
facility. The project provides SECURE with long-term
fees-for-service from pipeline tariffs, and reliable volumes at the
Fox Creek facility. The pipeline
will commence contributing to the Corporation's results in the
third quarter of 2020. During the six months ended June 30, 2020, SECURE incurred $47.0 million of organic growth and expansion
capital largely related to the East Kaybob Oil Pipeline System, as
well as certain carryover costs related to expansion and
optimization projects at existing facilities in the prior
year;
- The Corporation also incurred sustaining capital of
$1.5 million and $4.9 million during the three and six months
ended June 30, 2020 relating
primarily to well and facility maintenance. SECURE is committed to
maintaining capital discipline as we navigate this downturn, while
continuing to ensure the integrity and safety of our assets for
long-term sustainability
- DIVIDEND PAYMENTS OF $4.4
MILLION AND $15.0 MILLION FOR
THE THREE AND SIX MONTHS ENDED JUNE 30,
2020
-
- During the three and six months ended June 30, 2020, the Corporation paid monthly
dividend payments totaling $4.4
million and $15.0 million to
holders of common shares. On March 24,
2020, the Corporation announced that the monthly dividend
would be reduced from $0.0225 per
common share to $0.0025 (0.25 cents) per common share, effective for the
May 2020 dividend. This reduction of
the dividend results in annualized cash savings of approximately
$38 million;
- SECURE believes the sharing of excess cash flows with
shareholders is a core business principle; as a result, management
and the Board of Directors of the Corporation will continue to
monitor the Corporation's dividend policy with respect to
forecasted Adjusted EBITDA, debt, capital expenditures and other
investment opportunities, as well as expected interest, lease and
tax payments, and will look for opportunities to increase the
dividend as business conditions warrant;
- Following the June 2020 monthly
dividend paid on June 15, 2020, the
Corporation has moved to a quarterly dividend, with the first
planned payment of $0.0075
(0.75 cents) per common share to
occur on or about October 15, 2020,
to shareholders of record on October 1,
2020.
- RENEWAL OF THE NORMAL COURSE ISSUER BID
-
- During the second quarter of 2020, SECURE renewed the normal
course issuer bid ("NCIB") first initiated in May 2018. Pursuant to the renewed NCIB, the
Corporation may repurchase from time to time up to a maximum of
10,796,069 common shares of the Corporation. Any common shares
purchased under the NCIB will be cancelled. The renewed NCIB period
commenced on May 28, 2020, and will
end on May 27, 2021, or such earlier
date as the NCIB is completed or is terminated at the Corporation's
election.
- The renewed NCIB provides the Corporation with an additional
capital allocation alternative to acquire common shares under the
appropriate circumstances. The Board of Directors and senior
management believe that, from time to time, the prevailing market
price of the common shares may not fully reflect the underlying
value of SECURE's business and future business prospects. In such
circumstances, the repurchase of common shares under the NCIB
represents an attractive investment for the Corporation and an
opportunity to enhance shareholder value. No shares were
repurchased during the second quarter of 2020.
MIDSTREAM INFRASTRUCTURE SEGMENT HIGHLIGHTS
|
Three months ended
June 30,
|
Six months ended
June 30,
|
($000's)
|
2020
|
2019
|
%
Change
|
2020
|
2019
|
%
Change
|
|
|
|
|
|
|
|
Midstream
Infrastructure services revenue (a)
|
34,191
|
72,916
|
(53)
|
108,764
|
153,235
|
(29)
|
Oil purchase and
resale
|
225,644
|
654,618
|
(66)
|
659,199
|
1,266,121
|
(48)
|
Midstream
Infrastructure Revenue
|
259,835
|
727,534
|
(64)
|
767,963
|
1,419,356
|
(46)
|
|
|
|
|
|
|
|
Cost of
Sales
|
|
|
|
|
|
|
Cost of sales
excluding items noted below
|
13,244
|
29,750
|
(55)
|
44,110
|
60,003
|
(26)
|
Depreciation and
amortization
|
23,568
|
18,914
|
25
|
47,070
|
36,195
|
30
|
Oil purchase and
resale
|
225,644
|
654,618
|
(66)
|
659,199
|
1,266,121
|
(48)
|
Midstream
Infrastructure Cost of Sales
|
262,456
|
703,282
|
(63)
|
750,379
|
1,362,319
|
(45)
|
|
|
|
|
|
|
|
Segment Profit
Margin (1)
|
20,947
|
43,166
|
(51)
|
64,654
|
93,232
|
(31)
|
|
|
|
|
|
|
|
Segment Profit
Margin (1) as a % of revenue (a)
|
61%
|
59%
|
|
59%
|
61%
|
|
|
|
|
|
|
|
|
(1)
Calculated as revenue less cost of sales excluding depreciation and
amortization. Refer to "Non-GAAP Measures" for further
information
|
- Revenue generated from Midstream Infrastructure services
decreased 53% for the three months ended June 30, 2020, from the 2019 comparative period.
The decrease was a result of lower volumes at midstream processing
facilities corresponding with production shut-ins and minimal
drilling and completion activity across the WCSB and North Dakota as a result of extremely low
crude and liquids pricing, which also limited crude oil
optimization opportunities and negatively impacted recovered oil
pricing. Midstream Infrastructure services revenue for the six
months ended June 30, 2020, of
$108.8 million decreased 29% from the
prior year comparative period. The impact of the drop in oil prices
and corresponding decrease in activity levels and crude oil
marketing opportunities during the second quarter was partially
offset by higher processing and disposal volumes during the first
two months of the year resulting primarily from infrastructure
additions during 2019, including produced water pipelines added at
Gold Creek and Tony Creek, crude oil
storage at Kerrobert and
Cushing, and the Pipestone facility, along with various
expansions at existing facilities;
- Disposal volumes decreased 46% and 20% during the three and six
months ended June 30, 2020, from the
respective 2019 comparative periods as a result of minimal waste
water volumes during the three months ended June 30, 2020 corresponding to limited producer
completion activity. Production shut-ins during the second quarter
of 2020, particularly in North
Dakota, also resulted in lower overall produced water
volumes, limited overflow volumes from producers with capacity to
handle their own product, and increased competition due to lower
demand. Higher stability from the Corporation's pipeline connected
water disposal facilities with contracted volumes helped to
partially reduce the overall decrease to disposal volumes. During
the six months ended June 30, 2020,
the impact of the reductions to drilling, completion and production
on disposal volumes beginning in March
2020 was partially offset by higher activity levels in
January and February of the current year;
- Processing volumes decreased 31% and 10% during the three and
six months ended June 30, 2020, from
the respective 2019 comparative periods due primarily to lower
waste processing volumes corresponding to the decrease in drilling
and completion activity beginning in March
2020. Emulsion treating volumes were also down, albeit to a
lesser extent, as a result of production shut-ins in the WCSB and
North Dakota;
- Oil volumes recovered through our processing operations
decreased 50% and 19% during the three and six months ended
June 30, 2020, from the respective
2019 comparative periods, consistent with lower overall volumes
received at the Corporation's midstream processing facilities. The
impact of lower volumes on recovered oil revenue was compounded by
lower benchmark oil pricing in the current year periods;
- Crude oil terminalling and pipeline volumes decreased 9% and
increased 4% during the three and six months ended June 30, 2020, from the respective 2019
comparative periods primarily as a result of the stability of
volumes associated with the contracted Kerrobert crude oil pipeline, partially offset
by reduced terminalling at certain facilities due to lower
production;
- Oil purchase and resale revenue in the Midstream Infrastructure
segment decreased 66% and 48% to $225.6
million and $659.2 million for
the three and six months ended June 30,
2020, from the respective 2019 comparative periods. The
decrease in the three and six months ended June 30, 2020, corresponds to the decrease in
benchmark oil prices, compounded by reduced marketing activities
compared to the prior year comparative periods;
- The Midstream Infrastructure segment's segment profit margin
decreased 51% and 31% to $20.9
million and $64.7 million for
the three and six months ended June 30,
2020, from the respective 2019 comparative periods. As a
percentage of Midstream Infrastructure services revenue, segment
profit margin was 61% for the three months ended June 30, 2020, up 2% from the three months ended
June 30, 2019. The impact of cost
reductions and CEWS reimbursements during the current year quarter
more than offset lower revenue. For the six months ended
June 30, 2020, segment profit margin
as a percentage of revenue (excluding oil purchase and resale) was
59%, down from 61% in the prior year comparative period. The
variance is primarily a result of service mix in the first quarter
of 2020, primarily due to reduced marketing and rail revenue and
associated blending margins due to fewer optimization opportunities
compared to the prior year;
- G&A expenses decreased by 45% and 25% to $3.9 million and $10.6
million for the three and six months ended June 30, 2020, from the respective 2019
comparative periods. The decrease is mainly due to lower personnel
costs and strict cost control measures restricting discretionary
spending;
- For the three months ended June 30,
2020, the Midstream Infrastructure segment had a loss before
tax of $7.0 million compared to
earnings of $16.8 million in the
prior year comparative period. Earnings before tax decreased
$39.4 million to $2.8 million for the six months ended
June 30, 2020, from the respective
2019 comparative period. The decrease for both the three and six
months ended is a result of lower segment profit margin and
increased depreciation and amortization expense in the 2020 period.
Additionally, the Corporation incurred $3.7
million in restructuring costs during the six months ended
June 30, 2020, related to right
sizing the Corporation's workforce to anticipated activity levels
and streamlining business processes resulting in the suspension or
termination of certain functions.
ENVIRONMENTAL AND FLUID MANAGEMENT SEGMENT
|
Three months ended
June 30,
|
Six months ended
June 30,
|
($000's)
|
2020
|
2019
|
%
Change
|
2020
|
2019
|
%
Change
|
|
|
|
|
|
|
|
Environmental and
Fluid Management Revenue
|
31,355
|
61,314
|
(49)
|
128,805
|
153,875
|
(16)
|
|
|
|
|
|
|
|
Cost of
Sales
|
|
|
|
|
|
|
Cost of sales
excluding depreciation, depletion and amortization
|
28,361
|
51,671
|
(45)
|
102,769
|
124,340
|
(17)
|
Depreciation,
depletion and amortization
|
7,084
|
11,678
|
(39)
|
19,173
|
22,972
|
(17)
|
Environmental and
Fluid Management Cost of Sales
|
35,445
|
63,349
|
(44)
|
121,942
|
147,312
|
(17)
|
|
|
|
|
|
|
|
Segment Profit
Margin (1)
|
2,994
|
9,643
|
(69)
|
26,036
|
29,535
|
(12)
|
|
|
|
|
|
|
|
Segment Profit
Margin (1) as a % of revenue
|
10%
|
16%
|
|
20%
|
19%
|
|
|
|
|
|
|
|
|
(1)
Calculated as revenue less cost of sales excluding depreciation,
depletion and amortization. Refer to "Non-GAAP Measures" for
further information
|
- The Environmental and Fluid Management segment revenue
decreased 49% to $31.4 million for
the three months ended June 30, 2020,
from the 2019 comparative period. Limited producer spending in the
second quarter of 2020 decreased drilling and completion activity
which in turn reduced drilling waste volumes at the Corporation's
landfills and demand for fluid management associated with drilling
and completions. In total, revenue from these service lines
decreased approximately 75%, consistent with the reduction in
drilling activity as evidenced by the second quarter active rig
counts. The extent of the decrease to the segment was partially
mitigated by the relative stability of demand for production
chemicals, from contracted operations in the Oil Sands region, and
from ongoing environmental project work for customers outside of
the oil and gas industry;
- For the six months ended June 30,
2020, Environmental and Fluid Management segment revenue of
$128.8 million decreased 16% compared
to the six months ended June 30,
2019. The impact of reduced drilling and completion activity
on the segment during the second quarter of 2020 as described above
was partially offset by higher year over year contributions from
Fluid Management during the first two months of the year from
increased drilling activity and production chemicals work awarded
at the end of 2019. The second quarter is also generally when
spring break-up road bans typically occur, reducing customer demand
for Environmental and Fluid Management services. Wet field
conditions which have become normal in the quarter limit site
access for certain types of project work. As a result, the seasonal
impact of the second quarter decline has a smaller proportional
impact on the year to date results;
- Segment profit margin decreased 69% and 12% to $3.0 million and $26.0
million for the three and six months ended June 30, 2020 from the respective 2019
comparative periods. For the three months ended June 30, 2020, segment profit margin as a
percentage of revenue was 10%, compared to 16% in the prior year
comparative period. The profit margin decreased as reduced revenue
resulted in weaker fixed cost absorption, primarily associated with
the Corporation's landfills as leachate management costs remained
flat year over year despite the 75% decrease in revenue;
- For the six months ended June 30,
2020, segment profit margin as a percentage of revenue
increased slightly to 20%, compared to 19% in the prior year
comparative period due to a higher proportion of better margin
business during the first quarter of 2020 which include increased
volumes of project work in the Fort
McMurray region, the impact of CEWS reimbursements and fixed
cost reductions that began to take effect in April 2020;
- G&A expense decreased 52% and 23% to $3.2 million and $11.2
million for the three and six months ended June 30, 2020, from the respective 2019
comparative periods. The decrease is primarily due to lower
personnel related costs and reduced discretionary spending as the
Corporation manages costs to correspond to current industry
activity levels. For the six months ended June 30, 2020, the impact of cost reductions
taking effect in April 2020 were
partially offset by higher loss allowances for expected credit
losses resulting from negative macro-economic factors as at
March 31, 2020;
- The Environmental and Fluid Management segment had a loss
before tax of $8.0 million for the
three months ended June 30, 2020, an
improvement of $0.9 million from the
three months ended June 30, 2020.
Lower G&A expense and operational DD&A expense more than
offset the reduced segment profit margin. For the six months ended
June 30, 2020, the segment's loss
before tax of $25.7 million increased
$17.4 million primarily as a result
of a non-cash impairment charge recorded in the first quarter of
2020.
FINANCIAL STATEMENTS AND MD&A
The Corporation's condensed consolidated financial statements
and notes thereto for the three and six months ended
June 30, 2020 and 2019 and MD&A for the three and six
months ended June 30, 2020 and 2019
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,
global economic events arising from COVID-19 and the OPEC decisions
and operating performance and speak only as of the date of this
document.
In particular, this document contains or implies forward-looking
statements pertaining but not limited to: management's expectations
with respect to the impact of COVID-19, including government
responses thereto on demand for oil and our operations generally;
the outlook for oil prices; spending by producers and the impact of
this on SECURE's activity levels; the impact OPEC+ supply cuts may
have on crude oil pricing; the impact of over supply on the crude
oil market; the oil and natural gas industry in Canada and the U.S., including drilling,
completion and production activity levels for the remainder of 2020
and beyond, and the impact of this on SECURE's business, operations
and financial results; the benefits of midstream infrastructure and
production concentrated volumes on SECURE's cash flow and the
expected stability of such sources of cash flow; opportunities for
the Corporation's storage assets, including with respect to
pipeline disruptions and delays creating volatile differentials
opportunities; the timing and stability of contributions from new
projects, particularly the East Kaybob Oil Pipeline; the impact the
Canadian Federal Government's orphan and inactive well fund may
have to the business, operations and results of the Corporation;
timing associated with potential divestitures related to specific
service lines that do not have recurring or production-related
revenue streams and the outcome of such sales process; activity
levels in the Corporation's operating areas; the benefits of
contracted and/or fee for service contracts on SECURE's cash flow
and the expected stability of such sources of cash flow; the
Corporation's proposed 2020 and 2021 capital expenditure programs,
including growth and expansion and sustaining capital expenditures;
timing of the completion of the final segment of the East Kaybob
Oil Pipeline; the Corporation's ability to execute our
restructuring plans and align the Corporation's cost structure with
expected industry activity levels; the expected impacts and amounts
of the Corporation's cost and capital expenditure reductions;
future dividend payments and expected cash savings resulting from
the reduction of the Corporation's cash dividend payments; debt
service; and the Corporation's ability to meet obligations and
commitments and operate within any credit facility restrictions,
including the financial covenants related to our debt facilities;
expectations that our capital investment, share repurchases and
cash dividends will be funded from internally generated cash
flows; the Corporation's credit risk levels and it's ability
to collect on trade receivables; expected benefits customers will
receive from our midstream and environmental solutions; key factors
driving the Corporation's success; demand for the Corporation's
services and products; industry fundamentals driving the success of
SECURE's core operations; future capital needs and how the
Corporation intends to fund its operations, working capital
requirements, dividends and capital program; and access to
capital.
Forward-looking statements are based on certain assumptions that
SECURE has made in respect thereof as at the date of this document
regarding, among other things: the impact of COVID-19, including
related government responses related thereto and lower global
energy pricing on oil and gas industry exploration and development
activity levels and production volumes (including as a result of
demand and supply shifts caused by COVID-19 and the actions of OPEC
and non-OPEC countries); the success of SECURE's operations and
growth projects; the Corporation's competitive position remaining
substantially unchanged; future acquisition and sustaining costs
will not significantly increase from past acquisition and
sustaining costs; that counterparties comply with contracts in a
timely manner; that there are no unforeseen events preventing the
performance of contracts or the completion of the relevant
facilities; that there are no unforeseen material costs relation to
the Corporation's facilities; and that prevailing regulatory, tax
and environmental laws and regulations apply.
Forward-looking statements involve significant known and unknown
risks and uncertainties, should not be read as guarantees of future
performance or results, and will not necessarily be accurate
indications of whether such results will be achieved. Readers are
cautioned not to place undue reliance on these statements as a
number of factors could cause actual results to differ materially
from the results discussed in these forward-looking statements,
including but not limited to those factors referred to under the
heading "Risk Factors" in the AIF. In addition, the effects and
impacts of the COVID–19 outbreak, the rapid decline in global
energy prices and the length of time to significantly reduce the
global threat of COVID-19 on SECURE's business, the global economy
and markets are unknown at this time and could cause SECURE's
actual results to differ materially from the forward-looking
statements contained in this document.
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
The Corporation uses accounting principles that are generally
accepted in Canada (the issuer's
"GAAP"), which includes International Financial Reporting Standards
("IFRS"). Certain supplementary measures in this document do
not have any standardized meaning as prescribed by IFRS. These
measures are intended as a complement to results provided in
accordance with IFRS. The Corporation believes these measures
provide additional useful information to analysts, shareholders and
other users to understand the Corporation's financial results,
profitability, cost management, liquidity and ability to generate
funds to finance its operations. However, they should not be used
as an alternative to IFRS measures because they do not have a
standardized meaning under IFRS and therefore may not be comparable
to similar measures presented by other companies. See the MD&A
available at www.sedar.com for further details, including
reconciliations of the Non-GAAP measures and additional GAAP
measures to the most directly comparable measures calculated in
accordance with IFRS.
ABOUT SECURE
SECURE is a publicly traded energy business listed on the
Toronto Stock Exchange ("TSX") providing industry leading customer
solutions to upstream oil and natural gas companies operating in
western Canada and certain regions
in the United States ("U.S.")
through its network of midstream processing and
storage facilities, crude oil and water pipelines, and crude by
rail terminals
located throughout key resource plays in western
Canada, North Dakota and Oklahoma. SECURE's core midstream
infrastructure operations generate cash flows from oil production
processing and disposal, produced water disposal, and crude oil
storage, logistics, and marketing. SECURE also provides
comprehensive environmental and fluid management for landfill
disposal, onsite abandonment, remediation and reclamation,
drilling, completion and production operations for oil and gas
producers in western Canada.
_____________________________
|
i Refer to the "Non-GAAP
Measures" section herein
|
ii As
defined in the Corporation's lending agreements. Refer to the
MD&A for details on the Corporation's covenant
calculations
|
SOURCE SECURE Energy Services Inc.