Enseco Energy Services Corp. (TSX VENTURE:ENS) ("Enseco" or "the Company")
announces its consolidated financial results for the three and nine months ended
December 31, 2008.
HIGHLIGHTS
- On February 27, 2009 Enseco finalized a contract to exchange its cased hole
wireline assets for the Canadian production testing assets of a large
multinational oilfield services company. This asset exchange will allow Enseco
to achieve significant economies of scale and operating mass in its production
testing business going forward. The cased hole wireline business has become a
very competitive business in Alberta. This reality has been reflected in the
operating results of this division. For the three and nine months ended December
31, 2008 the cased hole wireline business experienced net losses of $854
thousand and $2.5 million respectively. For the three and nine months ended
December 31, 2008 the cased hole wireline business had negative cash flow from
operations of $520 thousand and $1.4 million respectively.
- Revenue from continuing operations increased by 66% to $8.5 million and 77% to
$19.7 million for the three and nine months ended December 31, 2008 as compared
to $5.1 million and $11.2 million for the three and nine months ended December
31, 2007.
- The Company's U.S. operations situated in North Dakota contributed $2.5
million and $5.5 million of revenue during the three and nine months ended
December 31, 2008. Enseco is currently evaluating near term opportunities to
expand beyond North Dakota as it looks to broaden its geographic coverage in the
United States.
- The Company's directional drilling division has shown a 121% increase in
revenue for three months and 307% for the nine months ended December 31, 2008
and produced operating income of $423 thousand for the nine months ended
December 31, 2008 as compared to an operating loss of $473 thousand for the same
period in the prior year.
- Operating losses from continuing operations decreased by 29% to $1.4 million
and 50% to $4.9 million for the three and nine months ended December 31, 2008
when compared to $2.0 million and $9.8 million for the three and nine months
ended December 31, 2007, as the divestiture of the Company's cased hole wireline
division and the increased contribution from the Company's US operations begin
to have a significant impact on results.
Key Strategic Divestiture of Enseco's Cased Hole Wireline Division and
Acquisition of Canadian Testing Assets
As discussed above, effective March 1, 2009, Enseco has divested its cased hole
wireline division and substantially enhanced its Canadian testing offering.
Enseco expects this transaction to benefit the overall company as the cased hole
wireline division did not have the necessary operating mass and economies of
scale to compete as a standalone entity. For the three and nine months ended
December 31, 2008 the cased hole wireline division incurred losses of $854
thousand and $2.5 million, respectively. In addition, this division had negative
cash flow from operations of $520 thousand and $1.4 million, respectively. The
net losses and negative cash flows associated with this division were
unacceptable and management acted decisively in a difficult marketplace in order
to secure a transaction that significantly strengthened the overall entity.
Revenues from continuing operations grew by 66% to $8.5 million and 77% to $19.7
million for the quarter and year to date - December 31, 2008
Enseco has shown a significant year over year improvement in revenue from
continuing operations by posting a 66% increase during the current quarter over
the same period in the prior year and a year to date increase of 77%. The key
drivers of this growth were the Company's U.S. operations which contributed $2.5
million of revenue in the quarter and $5.5 million year to date, and the
Company's directional drilling division which increased revenue to $1.3 million
in the quarter and $3.5 million year to date.
U.S. Operations contributed $2.5 million of Revenue in the quarter and $5.5
million Year to Date
During the December quarter, the Company's U.S. operations contributed $2.5
million and $5.5 million of revenue to Enseco's consolidated results for the
three and nine months ended December 31, 2008, and accounted for 29% and 28% of
total revenue from continuing operations in each respective period. In early
April of 2008, Enseco expanded its geographic presence into the United States by
establishing an operations centre in North Dakota. The Company initially moved
three production testing units into the area for a large established customer
and now has a total of six production testing units in the area, as well as two
swabbing rigs. To date Enseco has seen increased demand for its services and
believes that the activity levels in this region will continue to be more robust
than in its core operating areas of Northwestern Alberta and Northeastern
British Columbia. Enseco expects to move additional equipment into the US
throughout 2009.
Directional Drilling revenue increased 121% and 307% for the quarter and year to
date - December 31, 2008
The Company's directional drilling division has shown a 121% increase in
revenues to $1.3 million and a 307% increase to $3.5 million for three and nine
months ended December 31, 2008, as compared to revenues of $609 thousand and
$863 thousand for the three and nine months ended December 31, 2007. This
division also produced operating income of $423 thousand for the nine months
ended December 31, 2008 as compared to an operating loss of $473 thousand for
the same period in the prior year. The directional drilling division has gained
significant traction in the current year due to its emphasis on exceptional
customer service and its high level of operating performance, which has led to
significant repeat business from our existing client base.
Reduced Operating Loss from continuing operations by 29% to $1.4 million for the
quarter and 50% to $4.9 million year to date
Increased revenues from both U.S. operations and directional drilling were key
factors in producing significant improvements over the prior year's performance.
Operating loss from continuing operations was decreased to $1.4 million and $4.9
million for the three and nine months ended December 31, 2008, as compared to
$2.0 million and $9.8 million for the same periods in 2007. Management
anticipates that, going forward, Enseco will continue to show improvement
relative to the comparative prior year period.
Progress on Implementation of Strategic Plan
Enseco achieved significant progress on its strategic plan through its
divestiture of its cased hole wireline division. This transaction is expected to
be transformational for the Company. The significant fixed cost infrastructure
and inconsistent revenue stream associated with the cased hole wireline division
continued to handicap Enseco's efforts improve the financial performance of the
Company. Going forward, it is expected that the significant scale and
operational flexibility of the production testing assets gained from this
transaction will enhance the operational capability of Enseco's testing division
and further demonstrate to the Company's customer base that Enseco is committed
to improving and increasing its service offering wherever and whenever possible.
Enseco continues to actively pursue the diversification of its revenue stream
away from the Alberta market, however, this has proved to be more difficult in
light of the difficult commodity price and financial market volatility. Enseco
anticipates a further expansion of its market presence in the United States by
expanding geographically, as well as moving additional equipment into this
region.
Another of Enseco's objectives was to ensure that the Company continues to
maintain discipline with respect to its cost structure. As such, Enseco has
begun to realign current staffing levels with the anticipated industry activity
going forward. The Company has also recently rolled out a revised compensation
structure for its field level employees which takes into account the new
realities of the marketplace and addresses the inconsistencies between current
pricing received for Enseco's services and the total compensation paid to
employees.
Financial Highlights
($000's except per share data)
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
Dec 31, Dec 31, Dec 31, Dec 31,
2008 2007 % 2008 2007 %
(unaudited) (unaudited) change (unaudited) (unaudited) change
----------- ----------- -------
Revenue (1) $ 8,516 $ 5,128 66% $ 19,742 $11,151 77%
Operating
loss (1) (1,437) (2,032) 29% (4,899) (9,807) 50%
EBITDA (1) (299) (900) 67% (1,782) (5,817) 69%
Cashflow (1) (455) (1,100) 59% (2,227) (6,329) 65%
Net loss (1) (1,348) (1,931) 30% (5,169) (23,353) 78%
Per Share
Data
EBITDA (1) $ (0.01) $ (0.03) 67% $ (0.04) $ (0.22) 82%
Cashflow (1) $ (0.01) $ (0.04) 75% $ (0.05) $ (0.24) 79%
Net loss $ (0.03) $ (0.06) 50% $ (0.12) $ (0.87) 86%
Dec 31 March 31
2008 2008 %
(audited) change
--------- ---------- -------
Financial Position
Total assets $ 46,822 $ 56,514 (17)%
Long-term debt (excluding
current portion) - 11,371 (100)%
Working capital (2) (14,723) (1,144) N/A%
Shareholders' equity 22,506 25,090 (10)%
(1) Operating loss is loss before impairment loss on intangible assets,
impairment loss on goodwill, gain (loss) on sale of equipment and income
taxes. EBITDA means earnings before interest, taxes, depreciation and
amortization and is equal to earnings before income taxes plus interest
on long-term debt plus other interest expense plus depreciation plus
amortization plus (gain)/loss on disposal of assets minus foreign
exchange gain plus impairment loss on intangible assets, plus impairment
loss on goodwill. Cashflow means cash flows provided by operations
before changes in noncash working capital items. Operating loss, EBITDA
and cashflow are not recognized measures under Canadian generally
accepted accounting principles ("GAAP"). Management believes that in
addition to net earnings, operating loss, EBITDA and cashflow are useful
supplemental measures as they provide an indication of the results
generated by Enseco's primary business activities prior to consideration
of how those activities are financed, amortized or how the results are
taxed in various jurisdictions as well as the cash generated by Enseco's
primary business activities. Readers should be cautioned, however, that
operating loss, EBITDA and cashflow should not be construed as an
alternative to net earnings determined in accordance with GAAP as an
indicator of Enseco's performance. Enseco's method of calculating
operating loss, EBITDA and cashflow may differ from other organizations
and, accordingly, these figures may not be comparable to those
disclosed by other organizations.
(2) Working capital equals current assets minus current liabilities.
The last few months of 2008 and the beginning of 2009 have shown a marked
deceleration in economic activity and a number of negative economic indicators
that point to a deep and prolonged global recession. Demand for oil and natural
gas continues to be weak despite positive macro level developments such as a
cold winter throughout most parts of the United States. Weak demand has led to
depressed pricing levels for both commodities which has translated into lower
cash flows for producers. Producers have had to make significant cuts to their
exploration and development budgets in order to properly manage short and long
term liquidity. In addition, access to debt and equity remains exceptionally
difficult even for the industry's largest players due to the negative global
economic situation and weak pricing. This winter has seen a rapid response to
deteriorating pricing from producers, the rig count in Western Canada showed 402
active rigs during the week of February 10, 2009 as compared to 668 active rigs
during the same week in 2008. This statistic foreshadows a grim near term
outlook for activity and possibly a much longer "spring breakup" period than has
been historically the norm. Enseco has taken a number of measures to strengthen
its underlying businesses and to ensure that it is properly positioned for lower
activity levels.
The results for the three and nine months ended December 31, 2008 are reflective
of the negative commodity price environment and the macro level uncertainties
described above. In particular, Enseco experienced unseasonably weak results in
December as producers who shut down operations for the holiday period did not
resume normal levels of activity until the second week of January. The losses
and capital expenditures incurred during the three and nine months ended
December 31, 2008 are reflected in the Company's financial condition. The
working capital deficit increased to $14.7 million at December 31, 2008 as
compared to a deficit of $1.1 million at March 31, 2008. As well, Shareholders'
Equity decreased to $22.5 million at December 31, 2008 as compared to $25.1
million at March 31, 2008. The Company has experienced losses and negative cash
flow over the last two years and as at December 31, 2008 it was not in
compliance with its working capital covenant under its existing credit facility.
Subsequent to December 31, 2008, the lender provided the Company with
forbearance relating to the Company's covenant violation at December 31, 2008
and a relaxation of the covenant as at January 31, 2009 and February 28, 2009.
The Company continues to work with its lender to address the periods subsequent
to these dates.
Summary
The increase in revenues from continuing operations for the three and nine
months ended December 31, 2008 was due to a new revenue stream provided by
Enseco's U.S. operations and a significant increase in revenue from the
directional drilling division. This was offset by a decrease in revenue from the
swabbing division which was attributable to increasing competition from
traditional well servicing rigs and an overall decrease in activity levels
during the past year.
Directional Drilling
Enseco's directional drilling division reported revenue of $1.3 million and $3.5
million for the three and nine months ended December 31, 2008, as compared to
$609 thousand and $863 thousand for the three and nine months ended December 31,
2007. The large increase in the directional drilling division's revenue base is
a result of a significant ramp up in repeat business from existing customers who
had tried this division's services over the past year and are now adding us as a
key supplier based on their satisfaction with the service provided. Average
utilization of the directional drilling kits was 30% and 27% for the three and
nine months ended December 31, 2008, as compared to 20% and 10% for the same
period in 2007. This division operated an average of 5 directional kits during
the three and nine months ended December 31, 2008, as compared to 4 directional
kits during the same period in 2007.
U.S. Operations
Enseco's U.S. operations division consists of six production testing units and
two swabbing rigs based in North Dakota. The U.S. division reported revenues of
$2.5 million and $5.5 million for the three and nine months ended December 31,
2008, as compared to $nil for the three and nine months ended December 31, 2007.
During the three and nine months ended December 31, 2008, the division had an
average utilization rate of 62% and 69%, respectively. There are no comparable
figures from 2007 as this is the first full year of operations.
Testing
The revenue reported from Enseco's testing division increased by 29% to $2.9
million and 28% to $6.1 million for the three and nine months ended December 31,
2008 as compared to $2.2 million and $4.8 million for the three and nine months
ended December 31, 2007. Revenue in this division increased due to increased
market penetration and acceptance of the Enseco brand during the current year.
In the prior year period, Enseco was focused on integrating its various
acquisitions and building a recognizable name and market presence. These efforts
have shown results in the current year as this division has been able to grow
its revenue base despite the negative momentum present in the overall market.
For the three and nine months ended December 31, 2008 the testing division
achieved average utilization rates of 29% and 22%, respectively, as compared to
22% and 17% for the three and nine months ended December 31, 2007. During the
three and nine months ended December 31, 2008 the testing division operated a
weighted average of 33 testing units. This compared to a weighted average of 37
units operated during the three and nine months ended December 31, 2007. The
average day rate achieved by the testing division increased by 7% and 23% for
the three and nine months ended December 31, 2008 as compared to the same period
in the prior year. The increase in day rate achieved was a direct result of the
Company's decision to market its services to larger, more established customers
who are willing to pay a premium for the Company's services and comprehensive
safety program.
Swabbing
The revenue reported from Enseco's swabbing division decreased to $1.7 million
and $4.5 million for the three and nine months ended December 31, 2008,
respectively, as compared to $2.3 million and $5.5 million for the three and
nine months ended December 31, 2007. A significant portion of the decrease in
revenue for this division is attributable to producers using service rigs to
perform swabbing operations on their existing wells. The demand for service rigs
has decreased in proportion to the slow down experienced in the oilfield
services market overall, this has led service rig providers to lower their rates
to the point where it is more economical for a service rig to remain on location
than to replace it with a swabbing rig. For the three and nine months ended
December 31, 2008 average utilization of the swabbing units was 29% and 24%, as
compared to 38% and 30% for the three and nine months ended December 31, 2007.
This division operated an average of 20 units for both the three and nine months
ended December 31, 2008 and 2007. The average day rate achieved by the swabbing
division decreased by 2% and increased 3% for the three and nine months ended
December 31, 2008 as compared to the same periods in 2007.
Discontinued Operations
Discontinued operations relates to the operating results from Enseco's cased
hole wireline division. Enseco entered into an asset exchange agreement date
February 27, 2009 with a large multinational oilfield service company to
exchange all of Enseco's cased hole wireline assets for all of this company's
Canadian production testing assets. The agreement is effective March 1, 2009.
Net loss from discontinued operations totaled $854 thousand and $2.5 million for
the three and nine months ended December 31, 2008 as compared to $356 thousand
and $7.4 million for the three and nine months ended December 31, 2007. The
results of this division have been classified as discontinued operations in
accordance with GAAP on a retroactive basis and the consolidated financial
statements as at and for the periods ended December 31, 2008 and 2007 have been
restated accordingly.
Consolidated
Operating loss from continuing operations decreased 39% to $1.4 million and
decreased 50% to $4.9 million for the three and nine months ended December 31,
2008, respectively, as compared to $2.0 million and $9.8 million for the three
and nine months ended December 31, 2007. The decreased operating loss is due to
increased revenue from U.S. operations combined with the realization of costs
savings from the elimination of numerous field and administrative positions
within the Company's structure, as well as the realized savings from company
wide wage reductions implemented in late 2007. Another factor in decreasing the
operating loss for the nine months ended December 31, 2008 as compared to the
same period in 2007 relates to the fact that amortization expense was $nil for
the nine months ended December 31, 2008 as compared to $730 thousand for the
same period in the prior year. Amortization was not recorded from June 30, 2007
forward as the Company incurred a fiscal first quarter impairment charge in 2007
on all of its intangible assets resulting in no future amortization charges.
The Corp. recorded net losses of $1.3 million and $5.2 million from continuing
operations for the three and nine months ended December 31, 2008 as compared to
net losses of $2.0 million and $27.5 million for the three and nine months ended
December 31, 2007. During the three and nine months ended December 31, 2008, the
Corp. recognized $64 thousand and $125 thousand, respectively, of current income
tax expense relating to the income generated from Enseco's U.S. operations
division. Whereas, income tax expense was $nil for the three and nine months
ended December 31, 2007 due to the losses incurred during these periods. During
the three and nine months ended December 31, 2008 the Corp. recognized a future
income tax recovery of $189 thousand relating to the writeoff of its future
income tax asset and corresponding deferred credit. There were no amounts for
future income taxes recognized during the three and nine months ended December
31, 2007, as the Company recognized a valuation allowance which offset any
potential future income tax recovery. Enseco continued to recognize a valuation
allowance against any potential future income tax recovery until such time as it
can demonstrate a consistent track record of profitability.
OUTLOOK
The current level of negativity and pessimism prevailing in the global financial
and commodity markets is unprecedented in recent memory. The current market
conditions show no near term catalysts for improvement and it is apparent that
both service companies and producers are placing increasing importance on
liquidity and capital preservation rather than deploying capital in growth
oriented initiatives. The current winter drilling season has been exceptionally
slow by historical standards and the competition for existing work has been
fierce which has pushed pricing to low levels. Management is dealing with this
negative set of circumstances by revisiting its cost structure and eliminating
as much of the fixed component of costs as possible and proactively reducing
staffing levels to appropriately reflect current activity levels. Enseco
continues to focus its marketing and operational efforts on the United States
marketplace with a view to growing its presence geographically as well as by
diversifying its service line offering.
Enseco is an emerging supplier of energy related services operating throughout
the Western Canadian Sedimentary Basin and select markets in the United States,
with operational centres in Red Deer, Whitecourt, Edmonton, Beaverlodge, Grande
Prairie, Fort St. John, Midale, Saskatchewan and Minot, North Dakota, as well as
a corporate and sales office located in Calgary. Enseco is led by an experienced
management team currently offering well swabbing, production testing, open hole
logging, and directional drilling services with a focus on continued value
creation through accretive acquisitions and organic growth.
FORWARD-LOOKING STATEMENTS
Certain information and statements contained in this press release constitute
forward-looking information, including, without limitation, expectations
regarding the expansion of its US operations, the impact of the sale of its
cased hole wireline division, future financial results, the nature and timing of
growth within Enseco's various business divisions, expectations respecting the
competitive position of such business divisions, and statements as to future
economic and operating conditions, which are provided by management to enable
investors to better understand our business, and such information may not be
appropriate for other purposes. These forward-looking statements are based upon
the opinions, expectations and estimates of management as at the date the
statements are made including the Company's current budget (which is subject to
change), access to additional capital, expectations relating to future economic
and operating conditions, the competitive environment and opinions of
third-party analysts respecting anticipated economic and operating conditions.
These forward-looking statements are subject to a variety of risks and
uncertainties and other factors that could cause actual events or outcomes to
differ materially from those anticipated or implied by such forward-looking
statements. Such factors include, but are not limited to, fluctuations in the
market for oil and gas and related products and services, political and economic
conditions, the demand for services provided by Enseco, industry competition,
Enseco's ability to attract and retain both customers and key personnel and
Enseco's ability to access additional capital and maintain the support of its
lender. Enseco has made assumptions regarding, but not limited to, commodity
prices, foreign exchange rates, interest rates, the availability of skilled
labour, and the timing, amount and funding of capital expenditures. Readers are
cautioned that the assumptions used in the preparation of such information,
although considered reasonable at the time of preparation, may prove to be
imprecise and, as such, undue reliance should not be placed on forward-looking
statements. Enseco's actual results, performance or achievement could differ
materially from those expressed in, or implied by, these forward-looking
statements, or if any of them do so, what benefits that Enseco will derive
therefrom. Enseco disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by law.