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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 and twelve months ended December 31, 2012. In early 2012, Strad announced the sale of its Production Services business. Comparative results have been restated to reflect the impact of operations that have been classified as discontinued during 2011. Refer to note 21 of the audited consolidated financial statements of Strad for the three and twelve months ended December 31, 2012. All amounts are stated in Canadian dollars unless otherwise noted.
SELECTED FINANCIAL AND OPERATIONAL HIGHLIGHTS:
- Revenue from continuing operations of $41.5 million and $203.2 million for the three months and year-ended December 31, 2012, a 33% decrease and 8% increase, respectively, compared with $62.1 million and $188.3 million for the same periods in 2011;
- EBITDA(1) from continuing operations of $7.7 million and $46.6 million for the three months and year-ended December 31, 2012. Adjusted EBITDA, adjusted for the Communications product line non-recurring operating losses, totals $8.4 million and $48.6 million for the three months and year-ended December 31, 2012;
- Management has implemented a restructuring of Strad U.S. Operations that re-aligns the U.S. segment cost structure to reflect current market conditions and increases focus on core areas. The restructuring included staff reductions as well as exiting non-core areas of operation and the Communications product line. The revised cost structure and focus on core areas, enhances margins in the near term and provides sufficient infrastructure to support growth in the U.S. business;
- Capital expenditures were $11.4 million in the fourth quarter and $67.2 million for the year. The 2012 capital program positions the Company very well to meet the evolving needs of our customers and the increased equipment intensity of well-sites;
- Total funded debt(2) to trailing EBITDA ratio of 1.3 to 1 at the end of the fourth quarter of 2012; and,
- Earnings (loss) per share from continuing operations of $(0.10) and $0.20 for the three months and year-ended December 31, 2012, respectively. Adjusted for one time and non-recurring items(3), earnings per share would otherwise be $0.03 and $0.35 for the three months and year-ended December 31, 2012.
"We continued to face challenging industry conditions compared with the prior year, as reduced drilling activity across our operating regions created an increasingly competitive landscape in many of our areas of operation," said Andy Pernal, President and CEO of Strad. "It is against this backdrop that Strad has made significant efforts, particularly in the U.S., to reduce its cost base and refocus its efforts on those markets and service offerings where we feel we can generate superior returns. With activity levels remaining modest during the fourth quarter, we exited those resource plays and areas of business where we were not seeing returns in line with our expectations and have, as a result, refocused our efforts on those operations and geographical areas where we are able to better leverage our strong presence, considerable brand equity and extensive industry relationships."
"During the fourth quarter we acted to alleviate some of the margin compression that was occurring in the U.S. business," said Greg Duerr, Chief Financial Officer of Strad. "This involved realigning our cost structure to better match our revenue levels by reducing U.S. staff levels, winding down the Communications product line, and exiting those resource plays that were yielding only modest profit margins. We anticipate these changes will result in a leaner, more focused operational base that retains our ability to grow in key target markets with our core product offerings. It is our expectation that these actions will result in an improvement in our U.S. EBITDA margins by the second quarter of 2013 at current activity levels."
FOURTH QUARTER RESULTS
Strad reported a decrease in revenue of 33% during the three months ended December 31, 2012, compared with the same period in 2011. Substantially decreased revenue from Product Sales, lower activity levels and pricing in the Marcellus region, and delayed deployment of surface equipment and reduced matting utilization in the Western Canadian Sedimentary Basin ("WCSB"), were the main drivers for lower revenue year-over-year.
Strad's Canadian Operations reported lower revenue and EBITDA during the three months ended December 31, 2012, compared with the same period in 2011. Decreased revenue was a result of reduced drilling activity in the WCSB coupled with colder weather which resulted in lower matting utilization during the fourth quarter of 2012. A delay in the ramp up of winter drilling programs in the WCSB prior to the end of December, coupled with the impact of a longer Christmas break, resulted in a 26% year-over-year decline in active rigs.
Strad's U.S. Operations continued to be impacted by higher year-over-year operating costs combined with lower year-over-year drilling rig utilization levels and lower year-over-year pricing in the Marcellus resource play in Pennsylvania. As has been the case during the second half of 2012, Strad's customer base in the Marcellus continues to focus on oil and higher margin liquids rich natural gas drilling in other resource plays. Overall active rig counts in the Marcellus continue to be below 2011 levels. Rig counts in the Bakken have been more stable year-over-year, however Strad's operations have been impacted by lower matting utilization and some pricing pressure.
During the fourth quarter, Strad added $7.9 million of capital assets in Canada and $2.5 million in the U.S. For the year-ended December 31, 2012, Strad spent $67.2 million of its budgeted $72.0 million capital program. Strad continued to invest in new product initiatives including its frac-water storage solution, EcoPond™, as well as Solids Control and Waste Management.
The Company's equipment fleet expansion in 2012 was balanced in Canada between the matting and surface equipment product lines. In the U.S. segment, capital investment was weighted more to the matting and solids control product lines. The 2012 capital program positions the Company very well to meet the evolving needs of our customers and the increased equipment intensity of well-sites.
In response to year-over-year declines in U.S. margins, management implemented a restructuring of Strad's U.S. Operations. Strad's restructuring plan consists of the three strategic moves: exiting non-core resource plays where Strad does not have a significant market share, re-aligning the U.S. cost structure to reflect current market conditions and ceasing to offer Communications as a product line. Management has recorded a restructuring provision of $4.1 million to reflect the one-time costs associated with the restructuring.
Management made the strategic decision to exit certain markets and regions to focus on core resource plays where Strad already has a significant presence and larger market share. Exiting non-core markets, such as the Eagle Ford in Texas, will sharpen Strad's operational focus on growth in the Bakken resource play in North Dakota and the Marcellus play in Pennsylvania. Management believes there are excellent opportunities for growth in these key areas and will continue to leverage its strong customer relationships to gain market share. In addition, management expects that exiting marginal operating regions will have a positive impact on margins in 2013.
The second part of management's restructuring plan consists of re-aligning Strad's U.S. Operations infrastructure with current market conditions and revenue. This alignment has been initiated through staff reductions, facility closures as well as termination of select service provider contracts. This re-alignment will retain sufficient infrastructure to support both current activity levels as well as near term growth.
Management has also determined that further investment in the Communications product line was unlikely to generate returns consistent with original expectations and the Company has ceased to offer Communications as a product line. The operating loss experienced in this product line totaled $0.7 million in the fourth quarter of 2012 and $2.0 million for the year-ended December 31, 2012. Although management does not expect to incur continued operating losses in 2013 after the product line has been wound down, some costs will be incurred during the first quarter of 2013 as the equipment is returned from client sites and prepared for a potential sale. Management does not expect these costs to be significant and has included related employee severance costs in the 2012 restructuring provision. Any proceeds generated from the sale of assets or winding down of the product line will be used to reduce debt or fund Strad's 2013 capital program.
On February 15, 2013, the Company sold a portion of the Communications equipment classified as assets held for sale for cash proceeds of $1.8 million.
Revenue generated for the three months ended December 31, 2012, decreased 14% to $16.4 million versus $19.2 million for the same period in 2011. Fourth quarter 2012 revenue declined primarily due to decreased matting deployment as a result of colder weather, which resulted in greater seasonal decline in matting demand in 2012 than in 2011. Surface equipment revenues also decreased year-over-year due to a slower start to winter drilling programs with many companies electing to defer the start of their programs until after the Christmas break.
Revenue generated for the year-ended December 31, 2012, increased 26% to $73.1 million compared with $58.0 million for the same period in 2011. Deployment of assets added as part of the 2011 and 2012 capital programs continue to be the main driver of the revenue increase year-over-year.
EBITDA for the three months ended December 31, 2012, of $4.9 million, decreased 26% compared with $6.7 million for the same period in 2011. EBITDA as a percentage of revenue for the three months ended December 31, 2012, was 30% compared with 35% for the same period in 2011 due to lower revenue combined with increased infrastructure costs to support a larger asset base. Also contributing to lower margins was a modest shift in product mix in the fourth quarter of 2012 compared to 2011.
EBITDA for the year-ended December 31, 2012, increased 10% to $24.1 million compared with $21.8 million for the same period in 2011. Increased EBITDA is due to increased revenue as discussed previously. EBITDA as a percentage of revenue for the year-ended December 31, 2012, was 33% compared with 38% for the same period in 2011. The decrease in margin is due to increased infrastructure needed to support the growth in asset base, as well as a modest change in product mix.
Revenue for the three months ended December 31, 2012, decreased 36% to $14.1 million from $21.9 million for the same period in 2011. The decrease was a result of the reduction in drilling activity in Strad's operating regions, which was most pronounced in Pennsylvania's Marcellus resource play where Strad's U.S. Operations experienced lower utilization rates and lower pricing due to customer shifts towards other oil and natural gas liquids rich resource plays. Rig counts in the Marcellus peaked in the third quarter of 2011 and continued to trend downward through 2012. Year-over-year, rig counts have declined 17%. Strad continues to refocus its operations on core areas with the greatest growth potential as previously discussed. Although pricing declines were more pronounced in the Marcellus region, Strad's pricing in the Bakken also declined year-over-year.
Revenue for the year-ended December 31, 2012, increased 12% to $71.5 million compared with $63.9 million for the same period in 2011. Increased revenue has been mainly driven by capital additions in 2011 and the first half of 2012.
EBITDA for the three months ended December 31, 2012, decreased 76% to $2.2 million, excluding restructuring charges of $4.1 million, compared with $8.9 million for the same period in 2011. EBITDA as a percentage of revenue for the three months ended December 31, 2012, was 15% compared with 40% for the same period in 2011. The decrease in EBITDA is due to the previously mentioned reduction in overall asset utilization rates in the Marcellus, lower matting utilization rates in the Bakken, additional infrastructure added during 2011 and 2012, as well as a shift in product mix. In response to decreased margins, the Company has implemented its restructuring plan, which management expects will generate cost savings of approximately $1.5 million per quarter, with the savings beginning to be fully realized in the second quarter of 2013.
EBITDA for the year-ended December 31, 2012, decreased 29% to $17.6 million compared to $24.7 million for the same period in 2011. The decrease, despite the higher revenue, is due to the increased operating costs as well as a shift in product mix. EBITDA as a percentage of revenue for the year-ended December 31, 2012, was 25% compared with 39% for the same period in 2011.
Revenue for the three months ended December 31, 2012, decreased 48% to $10.9 million from $21.0 million for the same period in 2011 resulting primarily from lower drill pipe and matting Product Sales in Canada. In 2011, the Company made one large sale to a customer that did not recur in 2012. There were more matting sales prior to the winter drilling season in 2011 than there were in 2012.
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.
Revenue for the year-ended December 31, 2012, decreased 12% to $58.6 million compared with $66.4 million for the same period in 2011. The decrease in revenue was due to fewer mat and drill pipe sales in Canada during the fourth quarter of 2012 compared to 2011.
EBITDA for the three months ended December 31, 2012, of $1.6 million, declined by 41% compared with $2.6 million for the same period in 2011. The decrease in EBITDA is due to lower sales during the fourth quarter of 2012. EBITDA as a percentage of revenue for the three months ended December 31, 2012, was 14% compared with 12% for the same period in 2011. EBITDA as a percentage of revenue will vary from quarter to quarter depending on the mix of sales as third party equipment sales and sales of equipment from Strad's existing fleet are at lower margins than sales of in-house manufactured products.
EBITDA for the year-ended December 31, 2012, of $8.5 million, declined by 7% compared with $9.1 million for the same period in 2011. EBITDA as a percentage of revenue for the year-ended December 31, 2012 remained consistent at 14%.
Overall industry conditions during the fourth quarter slowed on a year-over-year basis as a result of the continued shift away from less profitable dry natural gas plays as well as generally lower capital spending levels on the part of exploration and production ("E&P") companies across North America. In the WCSB, active drilling rigs in the fourth quarter of 2012 averaged 362 compared with 489 for the same period in 2011, a 26% decline. Average active rigs were up 9% sequentially in the WCSB over the third quarter. In the United States, drilling rig activity levels varied by region. Following Strad's operational restructuring, the majority of Strad's U.S. fleet now operates in the Bakken and Marcellus resource plays. The active rig count in the Bakken averaged 197 rigs in the fourth quarter of 2012, level with 197 in the prior year period. A decline was also evident in the gas-weighted Marcellus play, where the active rig count averaged 91 in the fourth quarter of 2012, down from 137 in the prior year period, a 34% decline. On a sequential basis, rig counts in the Bakken and Marcellus dropped slightly from the third quarter of 2012, down 6% and 2%, respectively.
As a result of moderating industry conditions and a slower ramp up to the winter drilling season, combined with the expected seasonal reduction in the matting business following the arrival of colder weather, Company-wide EBITDA from continuing operations dropped in the fourth quarter of 2012, down 55% from the same period last year. Much of the reduction was attributable to the U.S. business where the ongoing impact of low natural gas pricing continued to curtail rig activity. In response to the Company's resulting U.S. margin compression, management has taken steps to reduce U.S. infrastructure costs. The restructuring of the cost base has resulted in a staff level decrease in U.S. based personnel and an exit from Strad's non-core U.S. markets such as the Eagle Ford resource play in Texas. The Company is now focused only in those markets where it can best leverage its significant on the ground presence, relationships and brand equity to sustainably grow its business. Management believes that this leaner cost base will still support growth opportunities in its core U.S. markets and remains focused on expanding its presence in the Marcellus and Bakken plays, where nearly all of its total U.S. fleet is now positioned. The Company's lowered cost base and sharpened operational focus are expected to yield increased U.S. EBITDA margins beginning in the second quarter of 2013.
Capital expenditures for 2012 totaled $29.5 million in Canada and $34.9 million in the U.S. This represents year-over-year declines of 5% and 26%, respectively. The lower spending in 2012 is partly a byproduct of the significant investment made in the prior year as well as a response to moderating industry activity. With similar industry conditions expected to persist into 2013, Strad intends to maintain a prudent approach to capital spending by applying free cash flow to a combination of capital expenditures and debt reduction on a quarter by quarter basis. Management views this as an appropriate risk mitigation technique that will allow the Company to selectively target key areas for growth, maintain its current dividend, and facilitate its plan to pay down a portion of its debt in 2013.
With both broader economic and industry-specific conditions expected to remain uncertain into 2013, Strad has actively addressed costs for the near-term, while remaining well positioned to act on opportunities for future growth. As such, the Company has re-focused its efforts on those core markets and product offerings that present the highest potential for both current and future returns. Strad's new 45,000 barrel composite EcoPond™ offering is just one example of investment in a product portfolio designed to satisfy market demand for innovative products and services. Management is taking a balanced approach to managing risk and containing costs while also supporting growth that will help mitigate the impact of depressed and volatile market conditions.
At December 31, 2012, working capital was $13.0 million compared with $24.1 million at September 30, 2012. The reduction in working capital is consistent with the change in revenue from the third quarter of 2012 to the fourth quarter of 2012. Funds from operations for the year-ended December 31, 2012, decreased to $44.8 million compared with $49.9 million for the same period in 2011. During the same period in 2012, Strad spent $67.2 million on capital additions compared with $79.7 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.
On August 25, 2012, the Company amended its syndicated credit facility, increasing the operating facility by $10.0 million USD, decreasing standby rates charged on the undrawn portion of the committed facility, and extending the maturity date to July 25, 2015. The Company's syndicated banking facility consists of an operating facility with a maximum principal amount of $15.0 million CAD and $10.0 million USD 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 funded debt to EBITDA ratio of 1.3 to 1 at the end of the fourth quarter of 2012, the interest rate on the syndicated banking facility is bank prime plus 1.25% on prime rate advances and at the prevailing rate plus a stamping fee of 2.25% on bankers' acceptances. For the year-ended December 31, 2012, the overall effective rate on the operating facility and revolving facility were 4.21% and 3.77%, respectively. As of December 31, 2012, $2.5 million was drawn on the operating facility and $55.5 million was drawn on the revolving facility. Payments on the revolving facility are interest only.
As at December 31, 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, finance fees, taxes, depreciation and amortization, non-controlling interest, loss on disposal of property, plant and equipment, loss on foreign exchange, restructuring charges, impairment loss, 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. Adjusted EBITDA is calculated as EBITDA discussed above plus Communications operating loss.
Funds from operations are cash flow from operating activities excluding changes in working capital and discontinued operations plus restructuring expense. 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 year-ended December 31, 2012, is calculated as annualized year to date EBITDA divided by the average of total assets over the fourth quarter of 2011 and first, second and third quarters 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.
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.
FOURTH QUARTER EARNINGS CONFERENCE CALL
Strad Energy Services Ltd. has scheduled a conference call to begin promptly at 9:00 a.m. MST on Thursday, February 28, 2013.
The conference call dial in numbers are 1-888-340-9642 or 1-416-340-9432.
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, March 7th, 2013, at 11:59pm EST. To access the replay, call 1-800-408-3053 or 1-905-694-9451, followed by pass code 4001100.
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".