NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE U.S.
Canadian Energy Services L.P. ("Canadian Energy Services", "CES" or the
"Partnership") (TSX:CEU.UN) is pleased to report on its financial and operating
results for the three months ended September 30, 2009.
The Partnership generated gross revenue of $19.2 million during the third
quarter of 2009, compared to $40.9 million for the three months ended September
30, 2008, a decrease of $21.6 million or 53.0% on a year-over-year basis.
Year-to-date, gross revenue totalled $62.2 million compared to $83.7 million
last year representing a decline of $21.5 million or 25.7% on a year-over-year
basis. During Q3 2009, gross revenue on a per unit basis was $1.70 per unit
compared to $3.64 per unit for Q3 2008, a decrease of 53.2%.
CES' estimated market share in the Western Canadian Sedimentary Basin ("WCSB")
increased to 27% for the three months ended September 30, 2009, up from 23% for
the three months ended September 30, 2008. Year-to-date, the Partnership's
estimated market share in the WCSB averaged 23% as compared to 21% during 2008.
The year-over-year market share increases are reflective of CES' solutions which
are focused on the major resource plays along with the Partnership's service and
execution. CES' operating days in the WCSB were estimated to be 4,924 for the
three month period ended September 30, 2009, a decrease of 50% from the 9,844
operating days during the third quarter of 2008. Year-to-date, operating days in
the WCSB were estimated to total 13,617 compared to 22,584 during same period
last year, representing a decline of 40%. Overall industry activity dropped
approximately 56.3% from an average monthly rig count in the third quarter of
2008 of 403 to 176 during the second quarter of 2009 based on Canadian
Association of Oilwell Drilling Contractors ("CAODC") published monthly data for
Western Canada. Year-to-date, the CAODC average monthly rig count for Western
Canada has averaged 196 as compared to 357 in 2008 representing a year-over-year
decline of 45.0%.
Revenue from drilling fluids related sales of products and services in the WCSB
was $15.5 million for the three months ended September 30, 2009, compared to
$33.5 million for the three months ended September 30, 2008, representing a
decrease of $18.0 million or 53.7%. For the nine month period ended September
30, 2009, revenue from drilling fluids related sales of products and services in
the WCSB was $48.4 million as compared to $72.3 million for the nine months
ended September 30, 2008, representing a decrease of $23.9 million or 33.1%.
For the three months ended September 30, 2009, revenue generated in the United
States ("US") from drilling fluid sales of products and services was $0.7
million with an estimated 191 operating days as compared to last year's revenue
of $1.7 million with an estimated 212 operating days during the same period.
Year-to-date, revenue generated in the US totalled $2.9 million as compared to
$3.5 million in the previous year.
During the third quarter of 2009, revenue from trucking operations totalled $1.7
million, an increase of $0.2 million from $1.5 million for the three months
ended September 30, 2008. For the year-to-date period, revenue from trucking
operations totalled $4.7 million as compared to $3.1 million during 2008
representing an increase of $1.6 million.
Clear Environmental Solutions ("Clear"), which was acquired by CES on June 12,
2008, generated $1.3 million of revenue for the three month period ended
September 30, 2009 as compared to $4.2 million during the prior year. Revenue
from Clear for the nine month period ended September 30, 2009 totalled $6.2
million. In 2008, Clear revenue from the date of acquisition (June 12, 2008)
through to September 30, 2009 totalled $4.8 million.
The core business of CES is to design and implement drilling fluid systems for
oil and natural gas producers. CES operates in the WCSB and the US, with an
emphasis on servicing the ongoing major resource plays. The drilling of those
major resources plays includes wells drilled vertically, directionally, and with
increasing frequency, horizontally. Horizontal drilling is a technique utilized
in tight formations like shale gas, shale 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. The Partnership's
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. The Partnership 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 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.
The Partnership's head office and the sales and services headquarters are
located in Calgary, Alberta and its stock point facilities and other operations
are located throughout Alberta, British Columbia, and Saskatchewan. The
Partnership's indirect wholly-owned subsidiary, AES Drilling Fluids, LLC
("AES"), conducts operations in the US from its head office in Denver with stock
point facilities currently located in both Oklahoma and Utah.
Financial Highlights
Three Months Ended Nine Months Ended
September 30, September 30,
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Financial Results 2009 2008 2009 2008
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($000's except per unit amounts)
Revenue 19,219 40,850 62,151 83,684
Gross margin (3) 6,085 12,188 17,552 24,716
Net earnings before income taxes 788 6,273 1,883 10,566
per unit basic and diluted (1) 0.07 0.56 0.17 1.04
Net earnings 718 6,244 1,658 10,471
per unit basic and diluted (1) 0.06 0.56 0.15 1.03
EBITDAC (3) (4) 2,004 7,630 5,572 14,067
Funds flow from operations (3) (4) 1,922 7,518 5,298 13,709
per unit basic and diluted (1) 0.17 0.67 0.47 1.35
Distributable funds (3) (4) 1,885 7,224 5,253 13,237
Distributions declared 2,683 2,653 7,972 7,253
per Class A Unit 0.2376 0.2376 0.7128 0.7128
per Subordinated Class B Unit - 0.2376 0.2376 0.7128
Financial Position September 30, 2009 December 31, 2008
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($000's)
Net working capital 11,470 15,825
Total assets 94,685 125,261
Long-term financial liabilities (2) 2,589 3,474
Unitholders' equity 72,907 76,978
Three Months Ended Nine Months Ended
September 30, September 30,
Partnership Units --------------------------------------------------
Outstanding (1) 2009 2008 2009 2008
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End of period 11,378,055 11,166,870 11,378,055 11,166,870
Weighted average
- basic 11,224,912 11,166,513 11,163,521 10,129,716
- diluted 11,297,312 11,230,889 11,183,493 10,129,716
Notes:
(1) Includes Class A Units and Subordinated Class B Units.
(2) Vehicle financing loans and term loan excluding current portions.
(3) The Partnership 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, unit-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 the
Partnership's 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 the Partnership's MD&A for the
three and nine months ended September 30, 2009.
(4) Prior year balances recomputed to conform to current year financial
statement presentation.
Additional highlights for the three and nine month periods ended September 30,
2009 in comparison to the three and nine month periods ended September 30, 2008
for CES are as follows:
- For the three month period ended September 30, 2009, gross margin of $6.1
million or 31.7% of revenue was generated, compared to gross margin of $12.2
million or 29.8% of revenue generated in the same period last year.
Year-over-year, Q3 margins were higher primarily due to lower overall invert
sales as a percentage of revenue. Invert has a lower gross margin as compared to
other product margins of the Partnership. Year-to-date, the Partnership achieved
a gross margin of $17.6 million or 28.2% of revenue compared to $24.7 million or
29.5% of revenue last year. Year-over-year, margins have declined on a year to
date basis primarily due to decreased margins on some products, lower operating
margins on US generated revenue, and an increase in revenue attributable to
lower margin activities including trucking.
- For the three month period ended September 30, 2009, selling, general, and
administrative costs were $4.1 million as compared to $4.5 million for the same
period in 2008. Year-over-year, third quarter selling, general, and
administrative costs have declined as a result of cost reductions made by the
Partnership. For the nine month period ended September 30, 2009, selling,
general, and administrative costs were $12.0 million as compared to $10.6
million for the same period in 2008. Selling, general, and administrative costs
for the year-to-date period are higher on a year-over-year comparison as a
result of the Clear business unit's inclusion for the full nine month period in
the current year balances. Selling, general, and administrative costs increased
by $0.6 million or 17% in Q3 2009 to $4.1 million from $3.5 million in Q2 2009
primarily as a result of higher overall sales volumes during the quarter. CES
continues to monitor selling, general, and administrative costs in light of
prevailing market conditions.
- EBITDAC for the three months ended September 30, 2009 was $2.0 million as
compared to $7.6 million for the three months ended September 30, 2008
representing a decrease of $5.6 million or 73.7%. For the nine month period
ended September 30, 2009, EBTIDAC totalled $5.6 million as compared to $14.1
million in 2008 representing a decrease of $8.5 million or 60.4%.
- The Partnership recorded a net profit of $0.7 million for the three month
period ended September 30, 2009 as compared to a net profit of $6.2 million in
the prior year. The Partnership recorded net earnings per unit was $0.06 for the
three months ended September 30, 2009 versus net earnings per unit of $0.56 in
2008. For the nine month period ended September 30, 2009, the Partnership
recorded net earnings of $1.7 million, a decrease of 84.2% from the $10.5
million generated for the same period last year. For the nine month period, net
earnings per unit were $0.15 for 2009, as compared with $1.03 per unit for the
same period in 2008, representing a decrease of $0.88 or 85.4% on a per unit
basis. For the quarter, net earnings were lower primarily as a result of lower
overall revenues and higher non-cash expenses relating to amortization. For the
year-to-date period, the decline in earnings per unit is due to a combination of
lower net earnings for the period and additional units outstanding during the
period as compared to 2008.
- Despite the weak market conditions, CES continued to maintain a strong balance
sheet at September 30, 2009 with net working capital of $11.5 million (December
31, 2008 - $15.8 million). At September 30, 2009, CES had drawn $3.0 million on
its operating facility (December 31, 2008 - $12.7 million). The maximum
available draw on the $30.0 million facility at September 30, 2009, based on
accounts receivable and inventory balances, was $12.5 million.
- In August, 223,054 Class A Units of the Partnership were issued as partial
settlement of the earn-out liability pursuant to the Partnership's acquisition
of the business assets of Clear on June 26, 2008. This represents a settlement
of $1.8 million of the $2.0 million earn-out payable. The remaining $0.2 million
is payable in cash contingent upon the collection of selected accounts
receivable balances prior to December 31, 2009. To date, $0.038 million of the
selected outstanding accounts receivable balances have been collected resulting
in a confirmed minimum earn-out payable of $0.15 million of December 31, 2009.
- The Partnership has continued to maintain its monthly distributions throughout
the first nine months of 2009 at its target level of $0.0792 per Class A Unit
per month. A total aggregate distribution of $0.2376 per Class A Unit was paid
during the third quarter. During the third quarter, the payout ratio averaged
142.3% as compared to 36.7% last year. Year-to-date, the payout ratio has
averaged 151.8% as compared to 54.8% during 2008. Since the Partnership's
inception in 2006, the Partnership has maintained its distribution at $0.0792
per Class A Unit per month resulting in an inception to date payout ratio of
83%. The determination of the payout ratio does not take into account changes in
non-cash operating working capital items. Management and the Board of Directors
review the appropriateness of distributions on a monthly basis taking into
account industry conditions, growth opportunities requiring expansion capital,
and management's forecast of distributable funds. Although at this time the
Partnership intends to continue to make cash distributions to unitholders, these
distributions are not guaranteed.
Outlook
Although crude oil prices have rebounded off their lows in early 2009 and have
stabilized during the last two quarters, natural gas prices continue to remain
relatively weak compared to recent years. Overall drilling activity in both the
WCSB and the US has dropped considerably on a year-over-year basis and despite
improved market share statistics in the WCSB, the Partnership has also
experienced a significant decline in overall activity levels compared to last
year. Industry forecasts for drilling activity for the upcoming winter drilling
season continue to remain relatively weak compared to recent history and
expected to remain weak during the first half of 2010 in both the WCSB and the
United States. The lower drilling activity has and will continue to result in a
decrease in the Partnership's overall activity levels through the remainder of
2009 and into the first half of 2010 which will negatively impact the
Partnership's earnings and resulting cash flows over that term. Low industry
activity levels, weakness in natural gas prices, uncertainty with global
economic growth, and continuity uncertainty and reduced access to the debt and
equity markets, increases the importance of maintaining strong financial
flexibility. As a result, the Partnership intends to closely manage its
distribution levels and capital expenditures in order to minimize increases in
debt levels and preserve its balance sheet strength and liquidity position.
Despite the uncertain times facing the North American drilling market, CES'
exposure the key resource plays and to the growth in the number of horizontal
wells being drilled bodes well for the Partnership. These wells require complex
drilling fluids to best manage down hole dynamics, drilling times and costs and
our unique products like Seal-AX(TM) and Liquidrill(TM)/Tarbreak, combined with
our concerted focus on providing superior service, positions CES well in this
environment. CES believes that its value proposition in the horizontal drilling,
oil sands drilling, and deeper natural gas drilling, will continue to position
it as the premium independent drilling fluids provider in the market.
Management believes that CES' technologies have global application and the
Partnership 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 operations. In particular
management believes CES's presence in the Rockies and Mid-Continent regions of
the US offer significant growth opportunities. These markets present us with
potential incremental growth and future access into other basins in the United
States, as we see increased potential in the Marcellus shale play in the
Northeast US. Our strategy remains to utilize our patented and proprietary
technologies and local personnel to create market share in the US market.
The Clear Environmental Solutions and EQUAL Transport divisions continue to
complement CES' core drilling fluids business. During 2009, the Environmental
Services has been 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 and is pursuing
opportunities in the oil sands and horizontal drilling.
In addition, CES will continue to invest in research and development and
technology advancements in the drilling fluids market. CES will also provide
integrated business solutions to drive margins and remain competitive for our
customers.
CANADIAN ENERGY SERVICES L.P.
CONSOLIDATED BALANCE SHEETS
(stated in thousands of dollars)
As at
------------------------------
September 30, December 31,
2009 2008
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ASSETS
Current assets
Accounts receivable 20,400 47,286
Inventory 7,663 10,903
Prepaid expenses 366 441
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28,429 58,630
Property and equipment (note 4) 12,969 12,519
Intangible assets 3,374 4,199
Goodwill 49,913 49,913
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94,685 125,261
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LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities
Bank indebtedness 2,991 12,702
Accounts payable and accrued liabilities 11,795 25,578
Financial derivative liability 15 -
Earn-out payable 207 2,000
Distributions payable 901 1,225
Current portion of long-term debt 1,050 1,300
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16,959 42,805
Long-term debt 2,589 3,474
Future income tax liability 2,230 2,004
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21,778 48,283
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Unitholders' equity
Class A Units 107,551 84,352
Subordinated Class B Units - 21,514
Contributed surplus 2,089 1,531
Deficit (36,733) (30,419)
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72,907 76,978
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94,685 125,261
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CANADIAN ENERGY SERVICES L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS, COMPREHENSIVE EARNINGS AND DEFICIT
(stated in thousands of dollars except per unit amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------
2009 2008 2009 2008
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Revenue 19,219 40,850 62,151 83,684
Cost of sales 13,134 28,662 44,599 58,968
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Gross margin 6,085 12,188 17,552 24,716
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Expenses
Selling, general, and
administrative expenses 4,079 4,525 11,981 10,587
Amortization 840 740 2,600 1,515
Unit-based compensation 147 509 703 1,605
Interest expense 82 112 274 358
Foreign exchange loss 94 12 27 60
Financial derivative loss 53 - 15 -
Loss on disposal of assets 2 17 69 25
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5,297 5,915 15,669 14,150
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Net earnings before taxes 788 6,273 1,883 10,566
Future income tax expense 70 29 225 95
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Net earnings and comprehensive
earnings 718 6,244 1,658 10,471
Deficit, beginning of period (34,768) (36,072) (30,419) (35,699)
Unitholders' distributions declared (2,683) (2,653) (7,972) (7,253)
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Deficit, end of period (36,733) (32,481) (36,733) (32,481)
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Net earnings per unit
Basic and diluted 0.06 0.56 0.15 1.03
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CANADIAN ENERGY SERVICES L.P.
CONSOLIDATED STATEMENTS OF CASH FLOW
(stated in thousands of dollars)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------
2009 2008 2009 2008
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CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES:
Net earnings for the period 718 6,244 1,658 10,471
Items not involving cash:
Amortization 840 740 2,600 1,515
Unit-based compensation 147 509 703 1,605
Future income tax expense 70 29 225 95
Loss on disposal of assets 2 17 69 25
Unrealized foreign exchange (gain)
loss 98 (21) 34 (2)
Unrealized financial derivative
loss 47 - 9 -
Change in non-cash operating
working capital (2,719) (13,972) 16,182 (15,258)
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(797) (6,454) 21,480 (1,549)
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FINANCING ACTIVITIES:
Repayment of long-term debt (276) (314) (1,238) (1,659)
Issuance of long-term debt - - - 2,550
Issuance of Class A Units, net of
issuance costs 96 4 96 11,908
Increase (decrease) in bank
indebtedness 2,991 12,461 (9,711) 7,913
Distributions to unitholders (2,683) (2,512) (8,315) (6,971)
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128 9,639 (19,168) 13,741
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INVESTING ACTIVITIES:
Investment in property and equipment (1,462) (3,425) (2,818) (4,511)
Investment in intangible assets (3) (35) (45) (62)
Acquisition of Clear Environmental
Solutions - - - (7,529)
Proceeds on disposal of fixed assets 9 38 407 72
Change in non-cash investing working
capital 32 (6) 144 (162)
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(1,424) (3,428) (2,312) (12,192)
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CHANGE IN CASH (2,093) (243) - -
Cash, beginning of period 2,093 243 - -
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Cash, end of period - - - -
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The Partnership has filed its 2009 Q3 consolidated financial statements and
notes thereto as at and for the period ended September 30, 2009 and accompanying
management's discussion and analysis in accordance with National Instrument
51-102 - Continuous Disclosure Obligations adopted by the Canadian securities
regulatory authorities.
Additional information related to the Partnership can be found on the System for
Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com. Information
is also accessible on the Partnership's web site at
www.CanadianEnergyServices.com.
CES is organized in accordance with the terms and conditions of a limited
partnership agreement which provides that only persons who are resident in
Canada, or, if partnerships, are Canadian partnerships, in each case for
purposes of the Income Tax Act (Canada) (the "Tax Act"), may own units of the
Partnership. Units may not be purchased as a "tax shelter investment" for the
purposes of the Tax Act or by any entity an interest in which is a tax shelter
investment.
Except for the historical and present factual information contained herein, the
matters set forth in this news release, including words such as "expects",
"projects", "plans" and similar expressions, are forward-looking information
that represents management of Canadian Energy Services' internal projections,
expectations or beliefs concerning, among other things, future operating results
and various components thereof or the economic performance of Canadian Energy
Services. The projections, estimates and beliefs contained in such
forward-looking information necessarily involve known and unknown risks and
uncertainties, which may cause Canadian Energy Services' actual performance and
financial results in future periods to differ materially from any projections of
future performance or results expressed or implied by such forward-looking
statements. These risks and uncertainties include, among other things, those
described in Canadian Energy Services' filings with the Canadian securities
authorities. Accordingly, holders of Canadian Energy Services Class A Common
limited partnership units and potential investors are cautioned that events or
circumstances could cause results to differ materially from those predicted.
In particular, this press release contains forward-looking information
pertaining to the following: future estimates as to distribution levels; capital
expenditure programs for oil and natural gas drilling, including with respect to
heavy oil and SAGD projects; supply and demand for the Partnership's 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 technology;
expected performance of the environmental and transportation operations;
investments in research and development and technology advancements; access to
debt and capital markets; and competitive conditions.
The Partnership's 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 US 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, taxation of trusts,
public partnerships and other flow-through entities, and changes to the royalty
regimes applicable to entities operating in the WCSB and the US; access to
capital and the liquidity of debt markets; fluctuations in foreign exchange and
interest rates and the other factors considered under "Risk Factors" in the
Partnership's Annual Information Form for the year ended December 31, 2008 and
"Risks and Uncertainties" in the Partnership's MD&A for the year ended December
31, 2008.
Without limiting the foregoing, the forward-looking information contained in
this press release is expressly qualified by this cautionary statement.
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