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The news release contains "forward-looking information and statements" within the meaning of applicable securities laws. For full disclosure of the forward-looking information and statements and the risks to which they are subject, see the "Cautionary Statement Regarding Forward-Looking Information and Statements" later in this news release.
Strad Energy Services Ltd., ("Strad" or the "Company") (TSX:SDY), a North American-focused, energy services company, today announced its financial results for the three months ended March 31, 2012. In early 2012, Strad announced the sale of its Production Services business. For 2011, the Company is reporting the results from the Production Services business as discontinued operations. On that basis, comparative results have been restated to reflect the impact of operations that have been classified as discontinued during 2011. Refer to note 13 of the unaudited condensed interim consolidated financial statements of Strad for the three months ended March 31, 2012. All amounts are stated in Canadian dollars unless otherwise noted.
- First quarter EBITDA(1) from continuing operations of $16.0 million, a 122% increase compared with $7.2 million, for the same period in 2011;
- First quarter revenue from continuing operations of $56.3 million, a 110% increase compared with $26.8 million for the same period in 2011;
- Capital expenditures of $23.4 million in the first quarter;
- United States (U.S.) first quarter revenue of $20.9 million increased 141% compared with the same period in 2011;
- Ongoing success in the development of new products, including solids control and waste management, composite matting and satellite communications equipment with $4.1 million spent on new products in the first quarter; and
- Total funded debt to trailing EBITDA ratio of 0.9 for the first quarter of 2012.
"Strad continues to generate strong growth on a year-over-year basis. We attribute our record first quarter results to the 2011 capital expenditure program that effectively set the table for increased market penetration and higher reliance on the Strad brand name. This was ultimately reflected in first quarter EBITDA surpassing the same period last year by 122 percent, despite this year's shorter Canadian drilling season," said Henry van der Sloot, Chief Executive Officer of Strad. "Moving forward, we continue to focus on maintaining a flexible operation that can appropriately scale to industry conditions and take advantage of growing activity levels in crude oil and natural gas liquids rich plays."
"With several strong quarters behind us building momentum, we continue to look at a number of initiatives designed to further drive sustainable, long term growth," said Andy Pernal, President of Strad. "It was with this mindset that we launched our in-house R&D division, Strad Innovations, which is currently preparing to release our Company's first frac-water storage product, EcoPond™, in mid-2012. We believe there is significant potential in this emerging market segment and feel that Strad, with our North American-wide base of operations and in-house manufacturing capabilities, is particularly well positioned to take advantage of it."
FINANCIAL REVIEW FOR THE THREE MONTHS ENDED MARCH 31, 2012
With the divestiture of the Production Services business, Strad will be reporting operational and financial results for its core well-site infrastructure and activation solutions business along geographic lines with a separate segment for product sales. Product sales are comprised of Strad manufactured products sold to external customers, third party equipment sales to existing customers, and sales of equipment from Strad's existing fleet to customers. Results are segmented between Canadian Operations, U.S. Operations and Product Sales to better distinguish between the Company's core operating business and product sales, which can vary significantly on a quarter to quarter basis.
RESULTS OF OPERATIONS
The Company attributes the positive results from continuing operations for the quarter ended March 31, 2012, to the successful execution of Strad's 2011 capital program, which yielded increased market penetration in both the U.S. and Canadian markets. Seeking to continue this trend, Strad's capital spending during the first quarter totalled $23.4 million, with $12.8 million being spent in the U.S. Total gross capital assets based in the United States now comprise 48% of total Company gross capital assets compared with 46% for the same period in 2011. First quarter EBITDA from continuing operations was $16.0 million, a 122% increase, compared with $7.2 million for the same period in 2011.
With the divestiture of the Production Services business, Strad now reports its results between Canadian Operations, U.S. Operations and Product Sales. As is indicated below, results were favourable in all three areas when compared to the first quarter of 2011. The growing trend towards horizontal drilling and multi-stage fracking, in both the U.S. and Canada, has continued to drive demand in all three business segments. The industry's shift toward these more technologically complex initiatives has translated into a growing requirement for turn-key service providers that offer integrated, technologically-advanced, and complete solutions. Strad continues to benefit from this by focusing its resources on client integration and product innovation. Strad offers its customers a wide range of turn-key well-site infrastructure and activation solutions including, environmental and access matting, surface equipment, satellite communications, solids control and waste management, and drill pipe, and manufactures both matting and surface equipment. Strad's capital resources are distributed evenly between its U.S. Operations and Canadian Operations, as the Company views this as an important diversifier of overall risk.
Consolidated revenue generated from continuing operations for the quarter ended March 31, 2012, increased 110% to $56.3 million compared with $26.8 million for the same period in 2011. Continued strong equipment and service utilization, additional capital expenditures and increased product sales contributed to the significant increase in revenue compared to 2011.
Revenues generated by the Company's Canadian Operations segment for the three months ended March 31, 2012, increased 110% to $21.8 million versus $10.4 million for the same period in 2011. The increase is primarily due to capital additions to the surface equipment fleet during 2011. During 2011, the Canadian Operations segment added $30.9 million of capital additions, and another $10.4 million was added in the first quarter of 2012.
Revenue generated by the U.S. Operations for the three months ended March 31, 2012, increased 140% to $20.9 million from $8.7 million for the same period in 2011. The increase is due to $46.8 million in capital additions to the surface equipment fleet during 2011, and an additional $12.8 million of capital additions in the first quarter of 2012. The increase is also due to continuing strong demand for surface equipment in the Bakken and Eagle Ford resource plays, continued focus on expanding the customer base and market penetration in the U.S., and increased traction from new product deployment including satellite communications, solids control and waste management, and composite mats.
Compared to the fourth quarter in 2011, revenue has decreased by $1.0 million from $21.9 million. The decrease in revenue is due to overall decreased drilling activity in the Marcellus resource play in Pennsylvania as a result of depressed natural gas prices.
Strad also expanded its presence in high activity U.S. markets by opening local offices in Houston, Texas and Pittsburgh, Pennsylvania. By increasing its visibility with customers in these areas, Strad aims to further improve penetration and market share by locating in key-decision making and operational centres. This remains part of the Company's ongoing efforts to position itself as a North American-focused services provider.
Revenue generated by the Company's Product Sales segment for the three months ended March 31, 2012, increased 77% to $13.6 million from $7.7 million for the same period in 2011. Product sales are comprised of in-house manufactured products sold to external customers, third party equipment sales to existing customers, and sales of equipment from Strad's existing fleet to customers. Product sales revenues tend to fluctuate quarter to quarter depending on customer demand for third party equipment sales, which are dependent upon individual customer capital programs and manufacturing capacity dedicated to external sales as capacity is first allocated to Strad capital requirements. Compared to the fourth quarter of 2011, product sales decreased by $7.4 million due to fewer sales of third party matting and drill pipe, offset by increased external manufacturing sales.
LIQUIDITY AND CAPITAL RESOURCES
As at March 31, 2012, Strad's principal sources of liquidity include working capital of $23.2 million, an increase of $5.6 million compared with March 31, 2011; a syndicated banking facility of $100.0 million consisting of a $15.0 million operating facility, of which $9.7 million was drawn; and a revolving facility of $85.0 million, of which $37.5 million was drawn as of March 31, 2012.
Strad's quarterly performance has historically been affected by seasonal variations in the Western Canadian Sedimentary Basin (WCSB). The Company has geographically diversified its operations to the point where approximately half of Strad's gross capital assets are located in the U.S. The United States does not normally experience the same reduction in drilling activity as the WCSB does in the second quarter. Strad's product diversity helps further mitigate seasonal variations. In Canada, the demand for matting products is minimal during the first quarter, much stronger in the second quarter and third quarter and then decreases through the end of the year. Demand for surface equipment is typically strong in the first quarter, decreases in the second quarter and then increases over the next two quarters. Strad invests strategically in its asset base so the deployment of new equipment can coincide with higher levels of sustained activity in the second half of the year.
Industry conditions remained solid in the first quarter, despite an earlier spring breakup in Canada and continued weakness in North American natural gas pricing. In the WCSB, drilling utilization of 64% for the first quarter of 2012 was down slightly from 67% in the first quarter of last year; the number of wells rig released during the first quarter of 2012 was down to 3,422 from 3,670 - likely a result of a shorter drilling season than the previous year. Directional and horizontal drilling comprised 82% of all wells drilled during the first quarter of 2012, representing an increase of 12% over the same period of last year. Well licensing for the first quarter of 2012 decreased by 16% over the first quarter of 2011, while well completions also dropped year-over-year by 20%, with oil-targeted completions increasing 14% and natural gas completions falling 59%. Much of the softness in numbers can be attributed to declining natural gas prices and an earlier spring breakup. In the United States, approximately 70% of rigs were focused on crude oil and natural gas liquids versus 55% for the first quarter of last year. U.S. land rig counts were down only slightly over the end of 2011 with activity levels remaining generally robust.
As has been the norm over the past 24 months, low dry natural gas pricing continues to shape exploration activity, with exploration budgets focusing more on those plays that offer exposure to oil and natural gas liquids. Strad remains aware of this reality and continues to deploy its capital and assets accordingly. First quarter demand for Strad's services represented an all-time high for the period, as reflected in a year-over-year EBITDA increase of 122%, although some softening was seen toward the end of the quarter in Canada in conjunction with breakup. A portion of Strad's customers in the Marcellus resource play in Pennsylvania are moving away from dry natural gas focused drilling to more liquids rich and oil drilling. This asset reallocation is expected to continue through Q2. Despite continued economic volatility, management expects drilling activity to remain relatively steady in key resource plays for the foreseeable future as the more profitable oil and natural gas liquids plays continue to drive demand for services. Strad will allocate assets to support changing customer priorities in the Marcellus while deploying both existing and new equipment to higher activity resource plays throughout the U.S., including the Bakken and Eagle Ford resource plays.
The trend towards horizontal drilling and multi-stage fracking continued on both sides of the border where the industry continued to access both unconventional resource plays and mature conventional plays. At the end of the first quarter, 60% of U.S. rigs were focused on horizontal drilling, compared with 57% at the end of the first quarter of 2011. In Canada, horizontal drilling accounted for 64% of the wells drilled in the first quarter of 2012 compared with 48% in the first quarter of 2011. This continued focus on horizontal drilling and multi-stage fracking continues to benefit Strad, as it has allowed the Company to capitalize on the increased demand for greater amounts of equipment and service at individual sites, and is supportive of new product development initiatives.
While Strad continues to monitor and leverage off the trend towards horizontal drilling and the increased focus on oil and liquids rich natural gas plays, the Company also takes a proactive approach to identifying new market opportunities. This was reflected in the creation of Strad Innovations, the Company's in-house R&D division that focuses exclusively on assessing future industry trends and new products and technologies to meet them. One such trend that the Company remains vigilant of is the growing demand for frac-water storage solutions. In keeping with this, Strad intends to introduce its own solution to frac-water storage in mid-2012. The Company is currently in the process of testing two of its EcoPond™ frac-water storage tank designs, with a focus on maximum flexibility and efficient use of well-site space. Strad has both internal manufacturing capacity and has sourced additional external manufacturing capacity for these products, which it projects will be adequate for meeting initial market demand once the product is launched. Management remains optimistic about the potential for this new line of products and expects successful deployment and customer acceptance to generate significant growth.
Capital expenditures for the quarter, totalled $10.4 million in Canada and $12.8 million in the U.S., which represented year-over-year increases of 33% in Canada and a 46% decrease in the U.S. Strad continues to deploy its capital on a roughly equal basis between its U.S. and Canadian Operations with regards to its planned $72.0 million 2012 capital program, and expects to have 65% of the 2012 capital program deployed by the end of the second quarter.
Management continues to monitor broader economic conditions and their potential to undermine continuing robust commodity pricing for North American crude and natural gas liquids. Management believes in the strength of its diversification strategy across geographic, commodity and product lines. This is a key differentiator that offers the Company flexibility and the ability to adjust quickly to fluctuating market conditions. The Company remains well capitalized through strong cash flows and management continues to maintain a strong balance sheet. At March 31, 2012, the funded debt to EBITDA ratio for continuing operations was 0.9.
NON-IFRS MEASURES RECONCILIATION
Certain supplementary measures in this Press Release do not have any standardized meaning as prescribed under IFRS and previous GAAP and, therefore, are considered non-IFRS measures. These measures are described and presented in order to provide shareholders and potential investors with additional information regarding the Company's financial results, liquidity and its ability to generate funds to finance its operations. These measures are identified and presented, where appropriate, together with reconciliations to the equivalent IFRS or previous GAAP measure. However, they should not be used as an alternative to IFRS or previous GAAP, because they may not be consistent with calculations of other companies. These measures are further explained below.
Earnings before interest, taxes, depreciation and amortization ("EBITDA") is not a recognized measure under IFRS and previous GAAP. Management believes that in addition to net income, EBITDA is a useful supplemental measure as it provides an indication of the results generated by the Company's principal business activities prior to consideration of how those activities are financed or how the results are taxed. EBITDA is calculated as net income from continuing operations plus interest, taxes, depreciation and amortization, non-controlling interest, loss on disposal of property, plant and equipment, loss on foreign exchange, less gain on foreign exchange and gain on disposal of property, plant and equipment. Segmented EBITDA is based upon the same calculation for defined business segments, which are comprised of Canadian Operations, U.S. Operations, Product Sales and Corporate.
Funds from operations are cash flow from operating activities excluding changes in working capital. It is a supplemental measure to gauge performance of the Company before non-cash items. Working capital is calculated as current assets minus current liabilities. Working capital is used by Management to gauge what banking facilities are available for reinvestment in the business.
Return on average total assets for the three months ended March 31, 2012, is calculated as annualized year to date EBITDA divided by the average total assets over the fourth quarter of 2011, including a three month lag. The three month lag represents the time between the purchase of capital assets and when they are deployed in the field and earning revenue. In 2011, the return on average total assets calculation was adjusted to include total Company assets, whereas prior calculations included total drilling services assets only.
Funded debt is calculated as bank indebtedness plus current and long-term portion of debt plus current and long-term portion of finance lease obligations less cash.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS
Certain statements and information contained in this Press Release constitute forward-looking statements. More particularly, this Press Release contains forward-looking statements concerning future capital expenditures of the Company, demand for the Company's products and services, drilling activity in North America, pricing of the Company's products and services, introduction of new products and services, manufacturing capacity to meet anticipated demand for the Company's products, and expected exploration and production industry activity. These statements relate to future events or to the Company's future financial performance and involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results, levels of activity, performance or achievements to be materially different from future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.
The use of any of the words "expect", "plan", "continue", "estimate", "anticipate", "potential", "targeting", "intend", "could", "might", "should", "believe", "may", "predict", or "will" and similar expressions are intended to identify forward-looking information or statements. Various assumptions were used in drawing the conclusions or making the projections contained in the forward-looking statements throughout this Press Release. The forward-looking information and statements included in this Press Release are not guarantees of future performance and should not be unduly relied upon. Forward-looking statements are based on current expectations, estimates and projections that involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated and described in the forward-looking statements. Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information or statements. These factors include, but are not limited to, such things as the impact of general industry conditions, fluctuation of commodity prices, industry competition, availability of qualified personnel and management, stock market volatility and timely and cost effective access to sufficient capital from internal and external sources. The risks outlined above should not be construed as exhaustive. Although management of the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Accordingly, readers should not place undue reliance upon any of the forward-looking information set out in this Press Release. All of the forward-looking statements of the Company contained in this Press Release are expressly qualified, in their entirety, by this cautionary statement. Except as required by law, the Company disclaims any intention or obligation to update or revise any forward-looking information or statements, whether the result of new information, future events or otherwise.
FIRST QUARTER EARNINGS CONFERENCE CALL
Strad Energy Services Ltd. has scheduled a conference call to begin promptly at 10:00 a.m. MDT on Thursday, May 10, 2012.
The conference call dial in numbers are 1-866-226-1798 or 1-416-340-2219.
The conference call will also be accessible via webcast at: www.stradenergy.com
A replay of the call will be available approximately one hour after the conference call ends until Thursday, May 17th, 2012, at 11:59pm. To access the replay, call 1-800-408-3053 or 1-905-694-9451, followed by pass code 9252374.
ABOUT STRAD ENERGY SERVICES LTD.
Strad is a North American energy services company that focuses on providing well-site infrastructure and activation solutions to the oil and natural gas industry. Strad focuses on providing complete customer solutions in well-site-related oilfield equipment for producers active in unconventional resource plays.
Strad is headquartered in Calgary, Alberta, Canada. Strad is listed on the Toronto Stock Exchange under the trading symbol "SDY".
The TSX has not reviewed and does not accept responsibility for the adequacy or accuracy of this Press Release.