ZDC Zedcor Inc

CALGARY, Nov. 14, 2017 /CNW/ - Zedcor Energy Inc. (the "Company") (TSX VENTURE: ZDC) today announced its financial and operating results for the three and nine months ended September 30, 2017.

Highlights

Amounts in the following tables are presented in thousands of dollars, except for per share amounts and percentages.

SELECT FINANCIAL RESULTS

• Revenues for the quarter ended September 30, 2017 increased by $1.2 million or 33% from $2.4 million to $3.5 million compared to the same quarter in 2016.  Commodity prices were stronger in the third quarter of 2017 compared to the same quarter 2016, which in part resulted in increased demand for drilling services and ancillary support equipment.  Rental rates in the third quarter have improved when compared to the third quarter of 2016, which is due to increased drilling activity in Western Canada.   
• Adjusted EBITDA for the quarter ended September 30, 2017 was $1.5 million, an increase of $1.0 million from the quarter ended September 30, 2016.  This increase is a direct result of both the increased sales and decreased general administrative costs in the quarter.
• Net loss for the quarter ended September 30, 2017 was $1.3 million, an improvement of $7.4 million or 86% from a loss of $8.7 million for the quarter end September 30, 2016.  The improvement is a result of increased sales and a decrease in general and administrative expenses of $0.8 million resulting from the cost saving initiatives put in place over the past year.  There was also a quarter over quarter decrease in deprecation of $6.8 million as the Company divested of under-utilized assets in 2016, there were no significant divestitures in 2017. 
• On April 27, 2017, the Company entered into a Loan and Security Agreement with a new lender for a term of 12 months.  See Liquidity and Capital Resources section.
• Over the past year, the Company restructured its operations and divested of both its General Rentals operating segment and Waste Management operating segment.  Net proceeds from both transactions were used to pay down debt.

SELECT OPERATING RESULTS   

• The Energy Services segment includes the operations of Zedcor Energy Services Corp. and represents 100% of the Company's continuing operations. 
• The third quarter of 2017 saw an improvement in commodity prices and an increase in drilling activity in the oil and gas sector in Western Canada compared to the third quarter of 2016.  As a result there was an increase in utilization of rental equipment and an increase in rental rates for the equipment compared to the prior year quarter.  Despite the increase in drilling activity, there is still strong competition from other service providers with idle assets which is preventing a full recovery in rental pricing.
• For the quarter ended September 30, 2017 revenue was $3.5 million, an increase of $1.2 million compared to the same period in 2016.  Gross margin increased by $1.4 million compared to the three months ended September 30, 2016 as a result of the increased revenue and the more streamlined cost structure established through the recent restructuring. 

SELECTED QUARTERLY FINANCIAL INFORMATION

LIQUIDITY AND CAPITAL RESOURCES

Revolving operating facility:
On April 28, 2016, the Company's Syndicated Bank Credit Facility was amended under the Third Amending Agreement to amend the financial covenant in respect of the Debt to EBITDA and Interest Coverage ratios.

On November 24, 2016 the Company's Syndicated Bank Credit facility was amended under the Fourth Amending agreement.  The fourth amending agreement included a reduction in the revolving facility amount from $55 million to $46 million.

On December 15, 2016 the Company's Syndicated Bank Credit facility was amended under the Fifth Amending agreement.  The fifth amending agreement included a reduction in the revolving facility amount from $46 million to $32.5 million and cancellation of the term facility commitment and swingline loans.

On February 16, 2017, the Company's Syndicated Credit Facility was amended under the Sixth Amending Agreement in which the lenders agreed to forbear from demanding repayment or enforcing its security under the agreement until April 28, 2017.  The sixth amending agreement included a reduction in the revolving facility amount from $32.5 million to $20.97 million. 

On April 21, 2017, the Syndicated Credit Facility was repaid in full and forthwith cancelled.

Loan and security facility:
On April 21, 2017, the Company entered into a Loan and Security Agreement with a new lender.  The Loan and Security Agreement in the amount of $20.4 million was used to repay the Syndicated Credit Facility, bears interest at a rate of 12.75% and has a term of 12 months with an option to extend for an additional 12 months at the satisfaction of the lender.  The Loan and Security Agreement is serviced by six months of interest only payments, followed by six months of blended principal and interest payments.  The Loan and Security Agreement does not require quantitative financial covenants, but imposes restrictions on the Loan's collateral, being the property and equipment of the Company.  

The Company issued the lender 3,651,501 share purchase warrants.  Each warrant entitles the lender to acquire one common shares in the Company at an exercise price of $0.25 per warrant.  The warrants expire 90 days after the term of the loan, July 21, 2019.  The warrants fair value of $300 was recorded as a transaction cost of the loan and will be expensed over the term of the loan.

The Company is beginning to explore options for extension with the current lender, along with lower cost alternative financing with new lenders.   Management is confident that either an extension or alternative financing will be secured by April 2018.        

Operating loan facility:
On May 10, 2017, the Company signed a $1 million operating loan agreement bearing interest at a rate of prime plus 3.3% and secured by the Company's accounts receivables and restricted cash.  The operating loan facility requires that the Company's current ratio does not fall below 1.50:1.00 and effective September 30, 2017, the debt service coverage ratio not be less than 1.50:1.00, calculated in accordance with the formula set forth in the agreement.  As at September 30, 2017 the Company's current ratio, as defined to exclude the loan facility, was 5.2:1.00 and the debt service coverage ratio was 1.92:1.00. 

OUTLOOK

The improved demand for drilling services and ancillary equipment in the third quarter of 2017 compared to the same quarter in 2016 resulted in Zedcor's revenue increasing 33% year over year.  Improvements in commodity prices and industry activity levels in the quarter allowed the Company to increase pricing while experiencing stronger demand for rental assets compared to the prior year.

However, during the last few weeks of the third quarter Zedcor's rental equipment utilization levels dropped as several customers paused their drilling and completions activities while they evaluated their winter drilling plans.  By early November, drilling activity for these customers had resumed with a positive outlook for the winter drilling season.

Although there continues to be volatility in oil prices and continued downward pressure on gas prices, current industry conditions indicate that activity levels through the winter drilling season should continue to remain strong and experience year over year pricing improvements.

As such, fourth quarter 2017 revenues will likely be similar to those experienced in 2016, however with the lower cost structure now in place compared to the prior year, cash flows will be improved.

The restructuring efforts over the past year, including the significant reductions in headcount at the executive level and reductions in associated discretionary spending, means the Company now has an operating structure that can support the full utilization of the existing rental asset base and deliver positive cash flows. This structure, coupled with superior service quality and a best-in-class equipment rental fleet are instrumental in maintaining and growing market share. 

The Company continues to expand its market reach and customer base from beyond its traditional upstream energy services customers to new industry segments including industrial facilities and pipeline construction. This should lead to more diversity in its revenue streams and increase the utilization of existing rental equipment by penetrating new market segments that are less affected by seasonal fluctuations.

NON-IFRS MEASURES RECONCILIATION

The Company uses certain measures in this press release which do not have any standardized meaning as prescribed by International Financial Reporting Standards ("IFRS").  These measures which are derived from information reported in the consolidated statements of operations and comprehensive income may not be comparable to similar measures presented by other reporting issuers.  These measures have been described and presented in this press release in order to provide shareholders and potential investors with additional information regarding the Company.

Investors are cautioned that EBITDA, adjusted EBITDA and adjusted EBITDA per share, adjusted free cash flow and payout ratio are not acceptable alternatives to net income or net income per share, a measurement of liquidity, or comparable measures as determined in accordance with IFRS.

EBITDA and Adjusted EBITDA

EBITDA refers to net income before finance costs, income taxes, depreciation and amortization. Adjusted EBITDA is calculated as EBITDA before costs associated with business acquisition costs, refinancing, severance, gains or losses on disposal of property and equipment, and share based compensation. These measures do not have a standardized definition prescribed by IFRS and therefore may not be comparable to similar captioned terms presented by other issuers.

Management believes that EBITDA and Adjusted EBITDA are useful measures of performance as they eliminate non-recurring items and the impact of finance and tax structure variables that exist between entities. "Adjusted EBITDA per share – basic" refers to Adjusted EBITDA divided by the weighted average basic number of shares outstanding during the relevant periods.

A reconciliation of net income to Adjusted EBITDA is provided below:

Adjusted EBIT

Adjusted EBIT refers to earnings before interest and finance charges, taxes, amortization, impairment of property and equipment, purchase gain, refinancing costs, severance costs and business acquisition costs.

A reconciliation of net income to Adjusted EBIT is provided below:

No Conference Call

No conference call will be held in conjunction with this release. Full details of the Company's financial results, in the form of the condensed consolidated interim financial statements and notes for the three and nine months ended September 30, 2017 and Management's Discussion and Analysis of the results are available on SEDAR at www.sedar.com and on the Company's website at www.zedcor.ca.

About Zedcor Energy Inc.

Zedcor Energy Inc. is a Canadian public corporation and parent company to Zedcor Energy Services Corp. ("Zedcor"). Zedcor is engaged in the rental of surface equipment and accommodations to the Western Canadian Oil and Gas Industry. The Company trades on the TSX Venture Exchange under the symbol "ZDC".

FORWARD-LOOKING STATEMENTS

Certain statements included or incorporated by reference in this press release constitute forward-looking statements or forward-looking information, including management's belief that improvement in demand should begin to drive improvements in equipment rental rates and that the expanded market reach and customer base will lead to more diversity in the Company's revenue stream and increase utilization.  Forward-looking statements or information may contain statements with the words "anticipate", "believe", "expect", "plan", "intend", "estimate", "propose", "budget", "should", "project", "would have realized', "may have been" or similar words suggesting future outcomes or expectations. Although the Company believes that the expectations implied in such forward-looking statements or information are reasonable, undue reliance should not be placed on these forward-looking statements because the Company can give no assurance that such statements will prove to be correct. Forward-looking statements or information are based on current expectations, estimates and projections that involve a number of assumptions about the future and uncertainties. These assumptions include that the Company's cost cutting measures that have been implemented will protect future margins and that the Company's lean operations will protect against profound down swings in the economic environment. Although management believes these assumptions are reasonable, there can be no assurance that they will be proved to be correct, and actual results will differ materially from those anticipated.  For this purpose, any statements herein that are not statements of historical fact may be deemed to be forward-looking statements.  The forward-looking statements or information contained in this press release are made as of the date hereof and the Company assumes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new contrary information, future events or any other reason, unless it is required by any applicable securities laws. The forward-looking statements or information contained in this press release are expressly qualified by this cautionary statement.

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

SOURCE Zedcor Energy Inc.