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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., (TSX:SDY) ("Strad" or the "Company"), a North American-focused, energy services company, today announced its financial results for the three and six months ended June 30, 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 15 of the unaudited condensed interim consolidated financial statements of Strad for the three and six months ended June 30, 2012. All amounts are stated in Canadian dollars unless otherwise noted.
SELECTED FINANCIAL AND OPERATIONAL HIGHLIGHTS:
- Second quarter revenue from continuing operations of $54.3 million, a 48% increase compared with $36.7 million for the same period in 2011;
- Second quarter EBITDA(1) from continuing operations of $10.9 million, a 4% increase, compared with $10.5 million for the same period in 2011;
- Capital expenditures of $23.3 million in the second quarter and $46.7 million in the first half of 2012;
- Strad officially launched its EcoPond™ frac-water storage tanks during the second quarter. The Company has started to submit customer proposals and has placed its first units in July;
- Total funded debt to trailing EBITDA ratio of 1.0 at the end of Q2 2012; and,
- Second quarter earnings per share from continuing operations of $0.08.
(1) Earnings before interest, taxes, depreciation and amortization ("EBITDA") is not a recognized measure under IFRS or previous Generally Accepted Accounting Principles in Canada ("GAAP"); see "Non-IFRS Measures Reconciliation" in this press release.
"The second quarter saw more challenging conditions prevail in a few North American markets that impacted industry results for a number of oilfield service participants," said Andy Pernal, President and CEO of Strad. "Strad's previous investment in both geographic and product line diversity allowed us to adapt to changing conditions in several regions by re-deploying assets to areas of higher activity. We also continue to invest in new initiatives that target emerging trends, including the need for innovative frac-water storage solutions that offer robust opportunities for growth over the longer term."
"Changing industry dynamics, particularly in the Marcellus shale resource play, impacted our financial results this quarter, which included some one-time costs related to the redeployment of assets," said Greg Duerr, Chief Financial Officer of Strad. "We continue to closely monitor changing industry conditions, the broader global economic picture, and customer capital programs and believe the flexibility and diversity of our operations will allow us to adapt quickly to both positive and negative trends in the near term."
FINANCIAL REVIEW FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012
With the divestiture of the Production Services business, Strad is 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 have different margin and asset base profiles.
RESULTS OF OPERATIONS
Strad reported an increase in revenue of 48% during the three months ended June 30, 2012, compared to the same period in 2011. Strad's expansion of its equipment fleet in both Canada and the U.S. through strong capital spending programs, continued to be the main driver of year-over-year revenue increases during 2012.
Strad's Canadian Operations reported lower EBITDA margins during the three months ended June 30, 2012, compared to the same period in 2011, due to weather related factors as well as increased infrastructure costs required to support the expanded asset base. Strad's Canadian Operations experienced an earlier and extended spring break-up period in 2012, which resulted in lower demand for Strad's surface equipment fleet. However, these wet conditions resulted in continued strong demand for Strad's matting fleet, including mat sales and supporting service. Strad's Canadian matting fleet, continued to act as a hedge against decreased surface equipment utilization rates in the Western Canadian Sedimentary Basin ("WCSB") during the second quarter.
Second quarter EBITDA results from Strad's U.S. Operations continued to be impacted by lower utilization levels in the Marcellus resource play in Pennsylvania as a result of low natural gas prices. Strad's customers in the Marcellus continued to reallocate assets to different areas within the Marcellus as well as other resource plays in the U.S. during the second quarter to focus on oil and liquids rich natural gas drilling. Strad redeployed a portion of its Marcellus equipment fleet, both within the Marcellus and other resource plays, in response to its customers' reallocation of assets. During the second quarter, Strad incurred $0.6 million of one-time trucking charges associated with redeploying its equipment fleet to meet changing customer areas of focus. EBITDA was also impacted by an increased infrastructure required to support multiple regions and a larger asset base. Warm and dry conditions in North Dakota resulted in lower utilization rates for Strad's U.S. matting fleet in the second quarter compared to 2011 when North Dakota experienced unusually wet conditions.
During the second quarter, Strad added $7.5 million of capital additions in Canada and $15.3 million in the U.S. For the six months ended June 30, 2012, Strad has spent $46.7 million of its $72.0 million budgeted capital program. Strad continued to invest in new product initiatives including EcoPond™, its frac-water storage solution, satellite communications equipment, and solids control and waste management.
Revenue generated for the three months ended June 30, 2012, increased 42% to $15.6 million versus $11.0 million for the same period in 2011. Second quarter 2012 revenue increased due to capital expenditures during the third quarter and fourth quarter of 2011 and the first quarter of 2012. However, Canadian Operations revenue results were impacted by an extended breakup in the WCSB and prolonged wet weather into late June 2012. Strad's Canadian matting business benefited from wet conditions during the second quarter and a recent expansion to the fleet that allowed it to meet the corresponding increase in demand. Demand for Strad's matting fleet increases in the spring when the ground thaws and access to remote locations becomes more difficult without the use of matting. The extended breakup period impacted revenues generated by Strad's Canadian surface equipment fleet and drill pipe due to lower oilfield activity levels during the second quarter of 2012 compared to the second quarter of 2011.
EBITDA for the three months ended June 30, 2012, of $4.2 million, decreased 2% compared with $4.2 million for the same period in 2011. EBITDA as a percentage of revenue for the three months ended June 30, 2012, was 27% compared with 39% for the same period in 2011. The decrease in EBITDA as a percentage of revenue is due to increased infrastructure required to coordinate and manage the expanded equipment fleet in Canada and a shift in the mix of revenue.
Revenue for the three months ended June 30, 2012, increased 38% to $19.9 million from $14.5 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. Strad's U.S. Operations experienced lower utilization rates in the Marcellus (PA) resource play during the second quarter as customers continued to reallocate assets towards more oil and natural gas liquids rich drilling within the Marcellus and other resource plays throughout the continental United States. Strad redeployed a portion of its Marcellus equipment fleet, both within the Marcellus and other resource plays, in response to its customers' reallocation of assets. Matting utilization in North Dakota was also lower due to drier conditions during the second quarter of 2012 compared to the same period in 2011.
EBITDA for the three months ended June 30, 2012, decreased 6% to $5.2 million compared with $5.5 million for the same period in 2011. The decrease in EBITDA is due to the previously mentioned reduction in utilization rates in the Marcellus and in North Dakota as well as increased infrastructure required to coordinate and manage the expanded fleet. During the second quarter, Strad also incurred $0.6 million of one-time trucking charges associated with redeploying its surface equipment fleet to meet changing customer areas of focus.
Revenue for the three months ended June 30, 2012, increased 67% to $18.7 million from $11.2 million for the same period in 2011 driven primarily by matting sales to external customers. 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 and manufacturing capacity dedicated to external sales.
Industry conditions during the second quarter softened on a year-over-year basis, as a result of an early spring breakup followed by wet weather in Canada and continued weakness in North American dry natural gas pricing. In the Western Canadian Sedimentary Basin, active drilling rigs in the second quarter of 2012 averaged 177 compared to 184 for the same period in 2011. In the United States, drilling rig activity levels varied by region. The Bakken (ND), Marcellus (PA), and Eagle Ford plays drive the majority of the Company's operating activity in the U.S. In the Marcellus (PA) play, the active rig count averaged 90 rigs in Q2 of 2012, down from 109 in Q2 of 2011. The Bakken (ND) average rig count increased from 128 in Q2 of 2011 to 159 in Q2 of 2012, and the Eagle Ford rig count increased from 153 in Q2 2011 to 223 in Q2 2012.
During the second quarter, low natural gas pricing continued to curtail industry investment in related resource plays. Strad was most directly impacted by this in the Marcellus shale gas play where the Company experienced lower levels of activity compared to the second quarter of 2011. As a result, Strad redeployed a portion of its fleet within the Marcellus, where customers were reallocating assets towards drilling for oil and liquids-rich natural gas, and to other more active resource plays, specifically the Bakken, resulting in additional trucking costs of approximately $0.6 million during the second quarter. Strad remains optimistic about the long-term potential of the Marcellus, however, a near-term shift out of the play to areas of higher activity was necessary for the Company to achieve higher utilization rates for its fleet in the near term. While a focus on oil and liquids-rich natural gas drilling helped offset regional challenges in the Marcellus play, a wet spring in Canada delayed deployment of the Company's surface fleet north of the border.
Pricing on Strad's core group of product offerings remained in line with previous quarters in most of the markets that Strad supplies and the Company anticipates this trend continuing into the year's final two quarters. The Company has experienced price pressure in its Marcellus operations due to the decline in activity.
Strad also officially launched its EcoPond™ frac-water storage tanks during the second quarter, further diversifying its suite of product offerings. Strad sales teams have indicated significant interest for both EcoPond™ designs and the Company has started to submit customer proposals and placed its first units in the third quarter. Sufficient internal and external manufacturing infrastructure remains in place to meet 2012 sales forecasts and Management expects demand to increase in the months ahead.
Capital expenditures for the quarter totaled $7.5 million in Canada and $15.3 million in the U.S., in addition to $0.5 million in Product Sales, which represented a year-over-year increase of 9% in Canada and a 12% decrease in the United States. Strad continues to deploy its capital on a roughly equal basis between its U.S. and Canadian Operations. While the Company has 65% of its planned $72 million capital program already deployed, Management has left a portion of the total program uncommitted in order to remain flexible in response to high value opportunities.
Given that broader economic conditions continue to present a context of uncertainty, the Company is closely monitoring producer capital expenditure programs as shifts in demand can occur rapidly. Strad maintains flexibility given its geographic, product line, commodity and customer diversification. Strad's geographic diversity allows the Company to mitigate risk, as it continues to operate in numerous resource plays in both the U.S. and Canada. Strad's assets inherently have commodity diversity as the equipment fleet can be deployed to both oil and natural gas plays without modification. Strad's product line diversification also provides a natural hedge against spring breakup conditions in the WCSB as customer demand for matting products increases during the spring. Strad's customer base of large producers remains well positioned to weather short-term uncertainty with respect to changes to planned 2012 capital programs. Finally, Strad's conservative leverage levels also provide flexibility to add to the asset base when accretive opportunities are identified.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2012, working capital was $23.5 million compared to $23.2 million at March 31, 2012. The change in working capital is consistent with the modest change in revenue from the first quarter of 2012 to the second quarter of 2012. Funds from operations for the six months ended June 30, 2012, increased to $26.1 million compared to $17.7 million for the same period in 2011. During the same period in 2012, Strad spent $46.7 million on capital additions compared to $52.0 million for the same period in 2011. Management monitors funds from operations and the timing of capital additions to ensure adequate capital resources are available to fund Strad's capital program.
The Company's syndicated banking facility consists of an operating facility with a maximum principal amount of $15.0 million and an $85.0 million revolving facility, both of which are subject to certain limitations on accounts receivable, inventory and net book value of fixed assets and are secured by a general security agreement over the Company's assets. The syndicated banking facility bears interest at bank prime plus a variable rate, which is dependent on the Company's funded debt to EBITDA ratio. Based on the Company's current funded debt to EBITDA ratio of 1.0, the interest rate on the syndicated banking facility is bank prime plus 1.00% on prime rate advances and at the prevailing rate plus a stamping fee of 2.00% on bankers' acceptances. For the three months ended June 30, 2012, the overall effective rate on the syndicated banking facility was 4.12%. As of June 30, 2012, $5.5 million was drawn on the operating facility and $52.5 million was drawn on the revolving facility. Payments on the revolving facility are interest only.
As at June 30, 2012, the Company was in compliance with all of the syndicated banking facility covenants.
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.
Annualized return on average total assets for the six months ended June 30, 2012, is calculated as annualized year to date EBITDA divided by the average of total assets over the fourth quarter of 2011 and first quarter of 2012, 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.
Reconciliation of EBITDA and Funds from Operations
Reconciliation of quarterly non-IFRS measures
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.
This press release shall not constitute an offer to sell, nor the solicitation of an offer to buy, any securities in the United States, nor shall there be any sale of securities mentioned in this press release in any state in the United States in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.
SECOND QUARTER EARNINGS CONFERENCE CALL
Strad Energy Services Ltd. has scheduled a conference call to begin promptly at 8:00 a.m. MDT on Thursday, August 9, 2012.
The conference call dial in numbers are 1-866-226-1798 or 1-416-340-2220.
The conference call will also be accessible via webcast at:
A replay of the call will be available approximately one hour after the conference call ends until Thursday, August 16th, 2012, at 11:59pm. To access the replay, call 1-800-408-3053 or 1-905-694-9451, followed by pass code 9591362.
Strad Energy Services Ltd.
Interim Consolidated Statement of Financial Position
Strad Energy Services Ltd.
Interim Consolidated Statement of Income
For the three and six months ended June 30, 2012 and 2011
(in thousands of Canadian dollars)
Strad Energy Services Ltd.
Interim Consolidated Statement of Comprehensive Income
For the three and six months ended June 30, 2012 and 2011
Strad Energy Services Ltd.
Interim Consolidated Statement of Cash Flow
For the six months ended June 30, 2012 and 2011
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".