Canadian Energy Services & Technology Corp. ("CES" or the "Company")(TSX:CEU) is
pleased to report on its financial and operating results for the three and nine
months ended September 30, 2010. CES also announced today that it will pay a
cash dividend of $0.10 per common share on December 15, 2010 to the shareholders
of record at the close of business on November 30, 2010, representing an
increased dividend of $0.02 per common share to the monthly dividend.
In Q3 2010, CES generated gross revenue of $78.4 million, compared to $19.2
million for the three months ended September 30, 2009, an increase of $59.2
million or 308% on a year-over-year basis. Gross margin was $22.7 million or 29%
of revenue, compared to gross margin of $6.1 million or 32% of revenue generated
in the same period last year. Net earnings before interest, taxes, amortization,
loss on disposal of assets, goodwill impairment, unrealized foreign exchange
gains and losses, unrealized derivative gains and losses, and stock-based
compensation ("EBITDAC") was $13.5 million as compared to $2.0 million for the
three months ended September 30, 2009 representing an increase of $11.5 million
or 571%. Net income was $8.1 million as compared to net income of $0.8 million
in the prior year, and net income per share was $0.52 ($0.46 diluted) versus net
income per share of $0.06 (basic and diluted) in Q3 2009.
The performance in Q3 2010 was reflective of the increase in activity levels
realised by CES in both Canada and in particular the United States ("US") where
for the first time CES' quarterly revenue generated in the US exceeded Canadian
revenue. Revenue from drilling fluids related sales of products and services in
the Western Canadian Sedimentary Basin ("WCSB") was $27.6 million compared to
$15.5 million for the three months ended September 30, 2009, representing an
increase of $12.1 million or 78.1%. CES' estimated Canadian Market Share
remained consistent with last year at approximately 28% for the three months
ended September 30, 2010, up slightly from 27% for the three months ended
September 30, 2009. Year to date, the estimated market share in Western Canada
has averaged 27% as compared to 23% for the first nine months of 2009. CES'
operating days in the WCSB were estimated to be 8,208 for the three month period
ended September 30, 2010, an increase of 67% from the 4,924 operating days
during the same period last year. CES' year-over-year increase in operating days
would have been greater but operating days were severely curtailed in September
2010 due to wet weather that forced many operators to postpone work. Overall
industry activity increased approximately 84% from an average monthly rig count
of 176 in Q3 2009 to 323 during the Q3 2010 based on CAODC published monthly
data for Western Canada. In the US, revenue generated from drilling fluid sales
of products and services was $44.3 million as compared to the previous year's
revenue of $0.7 million representing an increase of $43.6 million. Estimated US
operating days in Q3 2010 were 7,634 as compared to 191 operating days during
the same period last year. The respective year-over-year increases in both
activity levels and revenue in the US in 2010 compared to 2009 are attributable
to the two accretive acquisitions completed by CES (Champion Drilling Fluids in
Q4 of 2009, the Fluids Management Acquisition completed at the end of Q2 2010,
the "US Acquisitions"), and the organic growth that the Company has been able to
generate off of these platforms. CES' estimated US Market Share for the three
months ended September 30, 2010 was estimated to be 5.2% as compared to less
than 1% for Q3 2009.
EQUAL Transport's ("EQUAL") trucking revenue for the three month period ended
September 30, 2010, gross of intercompany eliminations, totalled $4.0 million,
an increase of $2.1 million or 111% from the $1.9 million for the three months
ended September 30, 2009. The respective year-over-year increase is due to
increased activity levels in 2010 and the expansion of trucking operations in
Saskatchewan undertaken during 2009.
Clear Environmental Solutions division ("Clear") generated $2.8 million of
revenue for the three month period ended September 30, 2010 compared to $1.3
million during the prior year representing an increase of $1.5 million or 115%.
Year-over-year, Clear has seen higher overall activity levels and continues to
benefit from increased integration with the drilling fluids division, and from
diversification strategies pursued during 2009 to reduce its exposure to shallow
natural gas focused drilling, and general improvement in industry activity
levels.
CES declared monthly dividends of $0.08 per for a total of $0.24 per share for
the quarter. CES also announced today that it has declared a cash dividend of
$0.10 per common share to shareholders of record on November 30, 2010,
representing a 25% increase over the previous monthly dividend. CES expects to
pay this dividend on or about December 15, 2010. CES' business model has
historically shown it can support a large proportion of cash flow from operating
activity being paid out as a dividend or distribution as the long-term capital
investments required and maintenance capital expenditures required for CES to
execute its business plan are not significant.
"The Q3 results demonstrate an inflection point for the company as CES is now
truly a North American drilling fluids company" said Tom Simons, the President
and Chief Executive Officer of Canadian Energy Services & Technology Corp. "US
operations for the first time in CES' history outpaced Canadian operations
despite very positive results across all of our Canadian business segments. CES
will continue to focus on our customer needs and deliver the solutions, service
and technologies which have allowed us to be successful."
The core business of CES is to design and implement drilling fluid systems for
the North American oil and natural gas industry. CES operates in the WCSB and in
various basins in the US, with an emphasis on servicing the ongoing major
resource plays. The drilling of those major resource plays includes wells
drilled vertically, directionally, and with increasing frequency, horizontally.
Horizontal drilling is a technique utilized in tight formations like tight gas,
tight oil, heavy oil, and in the oil sands. The designed drilling fluid
encompasses the functions of cleaning the hole, stabilizing the rock drilled,
controlling subsurface pressures, enhancing drilling rates and protecting
potential production zones while conserving the environment in the surrounding
surface and subsurface area. CES' drilling fluid systems are designed to be
adaptable to a broad range of complex and varied drilling scenarios, to help
clients eliminate inefficiencies in the drilling process and to assist them in
meeting operational objectives and environmental compliance obligations. CES
markets its technical expertise and services to oil and natural gas exploration
and production entities by emphasizing the historical success of both its
patented and proprietary drilling fluid systems and the technical expertise and
experience of its personnel.
Clear, CES' environmental division, provides environmental and drilling fluids
waste disposal services primarily to oil and gas producers active in the WCSB.
The business of Clear involves determining the appropriate processes for
disposing of or recycling fluids produced by drilling operations and to carry
out various related services necessary to dispose of drilling fluids.
EQUAL, CES' transport division, provides its customers with the necessary trucks
and trailers specifically designed to meet the demanding requirements of
off-highway oilfield work, and trained personnel to transport and handle
oilfield produced fluids and to haul, handle, manage and warehouse drilling
fluids. EQUAL operates from two terminals and yards located in Edson, Alberta
and Carlyle, Saskatchewan.
CES' corporate head office and the sales and services headquarters for its
Canadian operations are located in Calgary, Alberta and its stock point
facilities and other operations are located throughout Alberta, British
Columbia, and Saskatchewan. CES' indirect wholly-owned subsidiary, AES Drilling
Fluids, LLC ("AES"), conducts operations in the United States from its head
office in Denver, Colorado; in the mid-continent region through its Champion
Drilling Fluids division which is headquartered in Norman, Oklahoma; and in
Texas, Louisiana, off-shore Gulf of Mexico and Northeast US through its Fluids
Management division headquartered in Houston, Texas. AES has stock point
facilities located in Oklahoma, Texas, Pennsylvania, Michigan, Colorado, North
Dakota, Louisiana, and Utah.
Financial Highlights
Three Months Ended Nine Months Ended
Summary Financial Results September 30, September 30,
----------------------------------------
($000's, except per share amounts) 2010 2009 2010 2009
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Revenue 78,398 19,219 154,648 62,151
Gross margin (3) 22,741 6,085 44,708 17,552
Income before taxes 10,529 788 18,094 1,883
per share- basic (1) 0.68 0.07 1.28 0.17
per share - diluted (1) 0.60 0.07 1.22 0.17
Net income 8,090 718 14,595 1,658
per share- basic (1) 0.52 0.06 1.03 0.15
per share - diluted (1) 0.46 0.06 0.98 0.15
EBITDAC (3) 13,453 2,004 24,355 5,567
Funds flow from operations (3) 12,763 1,922 23,150 5,293
per share- basic (1) 0.82 0.17 1.64 0.47
per share - diluted (1) 0.73 0.17 1.55 0.47
Dividends declared 3,786 2,683 8,998 7,972
per share (1) 0.24 0.2376 0.62 0.4752
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Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------
Shares Outstanding 2010 2009 (1) 2010 2009 (1)
----------------------------------------------------------------------------
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End of period 17,734,179 11,378,055 17,734,179 11,378,055
Weighted average
- basic 15,552,005 11,224,912 14,143,284 11,163,521
- diluted 17,550,662 11,297,312 14,890,752 11,183,493
Financial Position ($000's) September 30, December 31,
2010 2009
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Net working capital 27,228 11,347
Total assets 271,871 130,699
Long-term financial liabilities (2) 4,928 2,557
Shareholders' equity 163,226 92,534
Notes:
(1) Includes Class A Units and Subordinated Class B Units for 2009
comparatives.
(2) Includes vehicle financing loans, term loans, and capital leases
facilities excluding current portions.
(3) CES uses certain performance measures that are not recognizable under
Canadian generally accepted accounting principles ("GAAP"). These
performance measures include, earnings before interest, taxes,
amortization, goodwill impairment, stock- based compensation
("EBITDAC"), gross margin, funds flow from operations and distributable
funds. Management believes that these measures provide supplemental
financial information that is useful in the evaluation of CES'
operations. Readers should be cautioned, however, that these measures
should not be construed as alternatives to measures determined in
accordance with GAAP as an indicator of CES' performance. CES' method
of calculating these measures may differ from that of other
organizations and, accordingly, these may not be comparable. Please
refer to the Non-GAAP measures section of CES' MD&A for the three
months ended September 30, 2010.
Canadian Energy Services & Technology Corp.
Consolidated Balance Sheets (unaudited)
(stated in thousands of dollars)
As at
------------------------------
September 30, December 31,
2010 2009
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ASSETS
Current assets
Accounts receivable 91,944 35,336
Financial derivative asset 10 -
Inventory 25,787 10,001
Prepaid expenses 1,047 389
----------------------------------------------------------------------------
118,788 45,726
Property and equipment 25,593 14,564
Intangible assets 17,658 7,169
Future income tax asset 13,063 1,949
Goodwill 96,769 61,291
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271,871 130,699
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----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness 40,889 8,762
Accounts payable and accrued liabilities 41,536 21,212
Financial derivative liability - 11
Earn-out payable - 207
Deferred acquisition consideration 5,145 2,098
Dividends payable 1,419 983
Current portion of capital lease obligation 918 -
Current portion of long-term debt 1,653 1,106
----------------------------------------------------------------------------
91,560 34,379
Capital lease obligation 1,293 -
Long-term debt 3,635 2,557
Future income tax liability 1,940 1,229
Deferred tax credit 10,217 -
----------------------------------------------------------------------------
108,645 38,165
----------------------------------------------------------------------------
Commitments
Shareholders' equity
Common shares 190,808 117,448
Subordinate convertible debenture - 6,627
Contributed surplus 2,354 2,122
Deficit (28,066) (33,663)
Accumulated other comprehensive loss (1,870) -
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163,226 92,534
----------------------------------------------------------------------------
271,871 130,699
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Canadian Energy Services & Technology Corp.
Consolidated Statements of Operations and Deficit and Comprehensive Income
(Loss) and Accumulated Other Comprehensive Loss (unaudited)
(stated in thousands of dollars except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------
2010 2009 2010 2009
----------------------------------------------------------------------------
Revenue 78,398 19,219 154,648 62,151
Cost of sales 55,657 13,134 109,940 44,599
----------------------------------------------------------------------------
Gross margin 22,741 6,085 44,708 17,552
----------------------------------------------------------------------------
Expenses
Selling, general, and
administrative expenses 9,886 4,079 20,959 11,981
Amortization 2,126 840 4,462 2,600
Stock-based compensation 323 147 793 703
Interest expense 537 82 1,009 274
Foreign exchange loss (gain) (623) 94 (617) 27
Financial derivative loss (gain) (12) 53 9 15
Loss (gain) on disposal of assets (25) 2 (1) 69
----------------------------------------------------------------------------
12,212 5,297 26,614 15,669
----------------------------------------------------------------------------
Income before taxes 10,529 788 18,094 1,883
Current income tax expense 153 - 196 -
Future income tax expense 2,286 70 3,303 225
----------------------------------------------------------------------------
Net income 8,090 718 14,595 1,658
Deficit, beginning of period (32,370) (34,768) (33,663) (30,419)
Dividends declared (3,786) (2,683) (8,998) (7,972)
----------------------------------------------------------------------------
Deficit, end of period (28,066) (36,733) (28,066) (36,733)
----------------------------------------------------------------------------
Net income per share
Basic 0.52 0.06 1.03 0.15
Diluted 0.46 0.06 0.98 0.15
----------------------------------------------------------------------------
Canadian Energy Services & Technology Corp.
Consolidated Statements Of Cash Flow (unaudited)
(stated in thousands of dollars)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------
2010 2009 2010 2009
----------------------------------------------------------------------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES:
Net income for the period 8,090 718 14,595 1,658
Items not involving cash:
Amortization 2,126 840 4,462 2,600
Stock-based compensation 323 147 793 703
Future income tax expense 2,286 70 3,303 225
Gain (loss) on disposal of assets (25) 2 (1) 69
Unrealized foreign exchange (gain)
loss (27) 98 8 29
Unrealized financial derivative
(gain) loss (10) 47 (10) 9
Change in non-cash operating
working capital (33,576) (2,739) (42,740) 16,185
----------------------------------------------------------------------------
(20,813) (817) (19,590) 21,478
----------------------------------------------------------------------------
FINANCING ACTIVITIES:
Repayment of long-term debt and
capital leases (662) (276) (1,709) (1,238)
Issuance of long-term debt and lease
proceeds - - 4,147 -
Issuance of shares, net of issuance
costs 42,819 96 44,000 96
Bridge Loan financing (41,920) - - -
Increase (decrease) in bank
indebtedness 26,001 2,991 32,127 (9,711)
Shareholder dividends (3,549) (2,665) (8,563) (8,297)
----------------------------------------------------------------------------
22,689 146 70,002 (19,150)
----------------------------------------------------------------------------
INVESTING ACTIVITIES:
Investment in property and equipment (2,534) (1,462) (5,402) (2,818)
Investment in intangible assets (9) (3) (53) (45)
Deferred acquisition consideration - - (2,245) -
Conversion transaction - - (2,800) -
Acquisition of Fluids Management - - (40,563) -
Proceeds on disposal of fixed assets 46 18 395 416
Change in non-cash investing working
capital 534 32 137 144
----------------------------------------------------------------------------
(1,963) (1,415) (50,531) (2,303)
----------------------------------------------------------------------------
Effect of exchange rate on cash
balances 87 (7) 119 (25)
CHANGE IN CASH - (2,093) - -
Cash, beginning of period - 2,093 - -
----------------------------------------------------------------------------
Cash, end of period - - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outlook
Although crude oil prices have rebounded off their lows in early 2009 and appear
to have stabilized, natural gas prices continue to remain relatively weak in
context to oil prices and recent history. Beginning in the fourth quarter of
2009, drilling activity levels began to rebound in both the WCSB and the US. In
the WCSB, CES has experienced robust levels of activity in the first nine months
of 2010 and, over the same period, CES' activity in the US also increased as a
result of the US Acquisitions, organic growth, and a general increase in
drilling activity. Despite the volatile nature of commodity prices coupled with
the tepid global economic recovery, current expectations are for industry
activity levels to remain robust throughout Q4 2010 and into Q1 2011.
The Champion and Fluids Management acquisitions provide CES with significant
growth opportunities. CES has a wide footprint in the majority of the key basins
of activity in the US. The Marcellus shale play in the Northeast US has
particular promise for near-term market gains and is a focus of expansion
efforts. CES has been able to successfully leverage off of the acquired
platforms and expand market share further in the US. CES' strategy still remains
to utilize our patented and proprietary technologies and local personnel to
increase market share in the US.
Despite some uncertainty facing the North American drilling market, CES'
exposure to the key resource plays and the growth in the number of horizontal
wells being drilled bodes well for future growth. A larger percentage of the
wells being drilled require more complex drilling fluids to best manage down
hole conditions, drilling times and costs and our unique products like
Seal-AX(TM)/PolarBond, ABS40(TM)and Liquidrill(TM)/Tarbreak, combined with our
concerted focus on providing superior service, positions CES well in this
increasingly technically competitive environment. CES believes that its unique
value propositions in the increasingly complex drilling environment will
position it as the premium independent drilling fluids provider in the market.
Management believes that CES' technologies have global application and CES will
continue to pursue opportunities that align our service offerings with the needs
of our customers. We are confident that our technologies will be embraced as we
build out our drilling fluids operations.
The EQUAL Transport division experienced significant growth in 2009,
particularly in south-eastern Saskatchewan where the business was expanded to
not only haul drilling fluids and products to drilling locations but also to
provide other oilfield hauling services to our customers including the hauling
of produced fluids. It is expected this business will continue to be
economically attractive and may expand further as viable opportunities emerge.
In Q2 2010, CES announced the establishment of the PureChem Services division
("PureChem") which will manufacture and sell both drilling fluid products and
production chemicals. The PureChem manufacturing facility is being constructed
in Carlyle, Saskatchewan on existing CES land and is expected to commence
operations in late Q4 2010. PureChem will be a complimentary business to both
CES' drilling fluids business and EQUAL's production hauling businesses in
Canada. The Fluids Management division also produces and blends its own set of
proprietary drilling fluid products which will provide synergies and experience
to PureChem going forward.
The Clear Environmental Solutions division continues to complement CES' core
drilling fluids business. During 2009, the division was negatively impacted as a
result of the significant decline in shallow natural gas focused drilling in the
WCSB. The Environmental Services division has focused on expanding its
operational base in the WCSB and is pursuing opportunities in the oil sands and
horizontal drilling markets. The environmental division has experienced an
increase in activity beginning in the fourth quarter of 2009 which has carried
over into the first nine months of 2010. At this time, activity levels are
expected to remain healthy through to spring break-up in Q1 2011.
As drilling has become more complex, applied down-hole technologies are becoming
increasingly important in driving success for operators. CES will continue to
invest in research and development to be a leader in technology advancements in
the drilling fluids market. In addition, CES continues to assess integrated
business opportunities that will keep CES competitive and enhance profitability,
while at the same time closely manage its dividend levels and capital
expenditures in order to preserve its balance sheet strength and liquidity
position.
Except for the historical and present factual information contained herein, the
matters set forth in this news release, may constitute forward- looking
information or forward-looking statements (collectively referred to as
"forward-looking information") which involves known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of CES, or industry results, to be materially different from any
future results, performance or achievements expressed or implied by such forward
-looking information. When used in this press release, such information uses
such words as "may", "would", "could", "will", "intend", "expect", "believe",
"plan", "anticipate", "estimate", and other similar terminology. This
information reflects CES' current expectations regarding future events and
operating performance and speaks only as of the date of this press release.
Forward-looking information involves significant risks and uncertainties, should
not be read as a guarantee of future performance or results, and will not
necessarily be an accurate indication of whether or not such results will be
achieved. A number of factors could cause actual results to differ materially
from the results discussed in the forward- looking information, including, but
not limited to, the factors discussed below. The management of CES believes the
material factors, expectations and assumptions reflected in the forward-looking
information and statements are reasonable but no assurance can be given that
these factors, expectations and assumptions will prove to be correct. The
forward-looking information and statements contained in this press release speak
only as of the date of the press release, and CES assumes no obligation to
publicly update or revise them to reflect new events or circumstances, except as
may be required pursuant to applicable securities laws or regulations.
In particular, this press release contains forward-looking information
pertaining to the following: future estimates as to dividend levels, including
the payment of a dividend to shareholders of record on November 30, 2010;
capital expenditure programs for oil and natural gas; supply and demand for CES'
products and services; industry activity levels; commodity prices; treatment
under governmental regulatory and taxation regimes; dependence on equipment
suppliers; dependence on suppliers of inventory and product inputs; equipment
improvements; dependence on personnel; collection of accounts receivable;
operating risk liability; expectations regarding market prices and costs;
expansion of services in Canada, the United States and internationally;
development of new technologies; expectations regarding CES' growth
opportunities in the United States; expectations regarding the performance or
expansion of CES' environmental and transportation operations; expectations
regarding demand for CES' services and technology if drilling activity levels
increase; investments in research and development and technology advancements;
access to debt and capital markets; and competitive conditions.
CES' actual results could differ materially from those anticipated in the
forward-looking information as a result of the following factors: general
economic conditions in Canada, the United States, and internationally; demand
for oilfield services for drilling and completion of oil and natural gas wells;
volatility in market prices for oil, natural gas, and natural gas liquids and
the effect of this volatility on the demand for oilfield services generally;
competition; liabilities and risks, including environmental liabilities and
risks inherent in oil and natural gas operations; sourcing, pricing and
availability of raw materials, consumables, component parts, equipment,
suppliers, facilities, and skilled management, technical and field personnel;
ability to integrate technological advances and match advances of competitors;
availability of capital; uncertainties in weather and temperature affecting the
duration of the oilfield service periods and the activities that can be
completed; changes in legislation and the regulatory environment, including
uncertainties with respect to programs to reduce greenhouse gas and other
emissions and tax legislation; reassessment and audit risk associated with the
corporate conversion; changes to the royalty regimes applicable to entities
operating in the WCSB and the US; access to capital and the liquidity of debt
markets; changes as a result of IFRS adoption; fluctuations in foreign exchange
and interest rates and the other factors considered under "Risk Factors" in CES'
Annual Information Form for the period ended December 31, 2009 and "Risks and
Uncertainties" in CES' MD&A.
Without limiting the foregoing, the forward-looking information contained in
this press release is expressly qualified by this cautionary statement.
CES has filed its Q3 2010 consolidated financial statements and notes thereto as
at and for the period ended September 30, 2010 and accompanying management
discussion and analysis in accordance with National Instrument 51-102 -
Continuous Disclosure Obligations adopted by the Canadian securities regulatory
authorities. Additional information about CES will be available on CES' SEDAR
profile at www.sedar.com and CES' website at www.CanadianEnergyServices.com.
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