News Releases

Stad Announces Third Quarter Results and Suspension of Quarterly Dividend

Nov 03, 2015
Strad today announced its financial results for the three and nine months ended September 30, 2015.

CALGARY, ALBERTA--(Marketwired - Nov. 3, 2015) -

NOT FOR DISTRIBUTION TO U.S. NEWS WIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES ("U.S.")

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 nine months ended September 30, 2015. All amounts are stated in Canadian dollars unless otherwise noted.

The Company also announced that given the challenging market conditions and uncertainty with respect to the duration of the current downturn and the increasing availability of potential asset acquisitions, the Board of Directors has suspended the Company's quarterly dividend until further notice. Strad remains focused on managing a strong balance sheet and maintaining financial flexibility given that industry fundamentals show little sign of improving in the near term.

SELECTED FINANCIAL AND OPERATIONAL HIGHLIGHTS:

  • Third quarter adjusted EBITDA(1) of $4.0 million decreased 77% compared to $17.8 million for the same period in 2014. Adjusted EBITDA excluding one time and non-recurring items(2) would otherwise be $4.3 million;
  • Third quarter (loss) earnings per share decreased to $(0.55) from $0.22 for the same period in 2014. Third quarter loss per share excluding one time and non-recurring items,(2) goodwill impairment and property, plant and equipment impairment would otherwise be $(0.04);
  • Third quarter revenue of $25.3 million decreased 56% compared to $58.1 million for the same period in 2014;
  • Reduced total funded debt(3) by $14.2 million since March 31, 2015;
  • Total funded debt(3) to EBITDA(4) ratio was 0.8 to 1.0 at the end of the third quarter of 2015;
  • Recorded a non-cash goodwill impairment of $17.3 million during the third quarter of 2015;
  • Recorded a non-cash property, plant and equipment impairment of $1.9 million during the third quarter of 2015; and
  • Capital additions totaled $0.8 million during the third quarter of 2015.
    Notes:
    (1) Earnings before interest, taxes, depreciation and amortization and other adjustments ("adjusted EBITDA") is not a recognized measure under IFRS; see "Non-IFRS Measures Reconciliation".
    (2)
    One time and non-recurring items include advisory fees associated with the potential takeover bid announced and subsequently withdrawn in September.
    (3) Funded debt includes bank indebtedness plus long-term debt plus current and long-term obligations under finance lease less cash.
    (4) EBITDA is based on trailing twelve months adjusted EBITDA plus share based payments.

"During the third quarter, the trend of sharp year-over-year rig count declines continued in all of the regions in which Strad operates," said Andy Pernal, President and CEO of Strad. "Our strategy of pursuing energy infrastructure opportunities outside of our traditional drilling market resulted in reasonably strong demand in our matting product line during the third quarter. We anticipate challenging market conditions to continue into the winter drilling season due to depressed commodity prices and reduced producer capital spending. However, we continue to believe that our diversification and cost management strategies will position us well to weather this downturn."

"During the third quarter, we continued to exercise discipline on the cost side of our business by reducing discretionary spending and further reducing our headcount," said Greg Duerr, Chief Financial Officer of Strad. "Our cost reduction initiatives and minimal capital spending during the quarter accommodated additional debt repayment. We will continue to focus on cost reduction initiatives to maintain flexibility in the face of low activity levels."

THIRD QUARTER FINANCIAL HIGHLIGHTS

(in thousands of Canadian Dollars, except per share amounts)

Three months ended September 30, Nine months ended September 30,
2015 2014 % Chg. 2015 2014 % Chg.
Revenue 25,299 58,115 (56 ) 89,576 163,695 (45 )
Adjusted EBITDA(1) 4,021 17,835 (77 ) 14,932 41,123 (64 )
Adjusted EBITDA as a % of revenue 16 % 31 % 17 % 25 %
Per share ($), basic 0.11 0.48 (77 ) 0.40 1.12 (64 )
Per share ($), diluted 0.11 0.47 (77 ) 0.40 1.09 (63 )
Net (loss) income (20,362 ) 7,968 (356 ) (22,045 ) 16,872 (231 )
Per share ($), basic (0.55 ) 0.22 (0.60 ) 0.46
Per share ($), diluted (0.55 ) 0.21 (0.60 ) 0.45
Funds from operations(2) 4,120 17,158 (76 ) 15,539 39,957 (61 )
Per share ($), basic 0.11 0.47 (77 ) 0.42 1.09 (61 )
Per share ($), diluted 0.11 0.45 (76 ) 0.42 1.06 (60 )
Capital expenditures(3) 769 6,302 (88 ) 8,278 27,508 (70 )
Total assets 188,894 234,522 (19 ) 188,894 234,522 (19 )
Long-term debt 18,500 37,400 (51 ) 18,500 37,400 (51 )
Total long-term liabilities 29,248 50,334 (42 ) 29,248 50,334 (42 )
Common shares - end of period ('000's) 37,280 37,275 37,280 37,275
Weighted avg common shares ('000's)
Basic 36,916 36,781 36,914 36,748
Diluted 36,916 37,795 36,914 37,615
Notes:
(1) Earnings before interest, taxes, depreciation and amortization and other adjustments ("adjusted EBITDA") is not a recognized measure under IFRS; see "Non-IFRS Measures Reconciliation".
(2) Funds from operations is cash flow from operating activities before changes in non-cash working capital. Funds from operations is not a recognized measure under IFRS; see "Non-IFRS Measures Reconciliation".
(3) Includes assets acquired under finance lease and purchases of intangible assets.

FINANCIAL POSITION AND RATIOS

As at September 30,
($000's except ratios) 2015 2014
Working capital(1) 12,391 15,490
Funded debt(2) 25,196 47,541
Total assets 188,894 234,522
Funded debt to EBITDA(3) 0.8 : 1.0 0.9 : 1.0
Notes:
(1) Working capital is calculated as current assets less current liabilities, excluding assets held for sale.
(2) Funded debt includes bank indebtedness plus long-term debt plus current and long-term obligations under finance lease less cash.
(3) EBITDA is based on trailing twelve months adjusted EBITDA plus share based payments, plus additional one time charges. See "Non-IFRS Measures Reconciliation".

THIRD QUARTER RESULTS

Strad reported a decrease in revenue and adjusted EBITDA of 56% and 77% respectively, during the three months ended September 30, 2015, compared to the same period in 2014. Decreased revenue during the third quarter was a result of reduced equipment utilization and pricing in both Canada and the United States ("U.S.") and lower Product Sales due to a significant decline in rig activity levels year-over-year. Adjusted EBITDA margin percentage decreased to 16% compared to 31% in the prior year during the third quarter of 2015 due to the decrease in overall revenue during the quarter.

Strad's Canadian Operations reported a decrease in revenue of 60% and adjusted EBITDA of 69% during the three months ended September 30, 2015, compared to the same period in 2014. Decreased revenue was a result of lower pricing and utilization of the surface equipment fleet as a result of a 52% decline in the average drilling rig count to 187 rigs during Q3 2015 compared to 387 for the same period in 2014.

Rig counts in Strad's targeted U.S. resource plays were also significantly lower year-over-year during the third quarter of 2015 compared to the same period in 2014. Rig counts in the Bakken, Rockies and Marcellus regions decreased by 63%, 58%, and 39%, respectively, year-over-year. The rig count declines resulted in a 56% decrease in revenue during the third quarter of 2015 compared to 2014. As a result of lower revenue, adjusted EBITDA decreased 85% and adjusted EBITDA as a percentage of revenue decreased to 15% during the third quarter of 2015 compared to 44% in the third quarter of 2014.

During the third quarter of 2015, capital expenditures were $0.3 million in Canada and $0.5 million in the U.S. Strad has approved a total of $10.0 million in budgeted capital for 2015, including $5.0 million of maintenance capital expenditures.

RESULTS OF OPERATIONS

Canadian Operations

Three months ended September 30, Nine months ended September 30,
($000's) 2015 2014 % chg. 2015 2014 % chg.
Revenue 13,359 33,162 (60 ) 46,337 74,191 (38 )
Operating expenses 8,492 21,070 (60 ) 30,646 46,970 (35 )
Selling, general and administrative 1,877 2,347 (20 ) 5,564 7,162 (22 )
Net (loss) income (8,423 ) 5,363 (257 ) (7,132 ) 12,425 (157 )
Adjusted EBITDA(1) 2,967 9,663 (69 ) 10,051 19,877 (49 )
Adjusted EBITDA as a % of revenue 22 % 29 % 22 % 27 %
Capital expenditures(2) 292 4,663 (94 ) 5,675 18,005 (68 )
Gross capital assets 118,527 116,248 2 118,527 116,248 2
Total assets 89,359 117,832 (24 ) 89,359 117,832 (24 )
Notes:
(1) Earnings before interest, taxes, depreciation and amortization and other adjustments ("adjusted EBITDA") is not a recognized measure under IFRS; see "Non-IFRS Measures Reconciliation".
(2) Includes assets acquired under finance lease and purchases of intangible assets.

Revenue for the three months ended September 30, 2015, of $13.4 million decreased 60% compared to $33.2 million for the same period in 2014. Decreased revenue during the quarter was primarily a result of lower rental revenue from the surface equipment and matting fleets. In addition to price declines, utilization levels for surface equipment declined by 56% during the third quarter of 2015, compared to the same period in 2014, due to a 52% decline in average rig count in the WCSB over the same time period. A significant decline in commodity prices in late 2014 caused the decline in rig count during the third quarter of 2015 as Strad's customers reduced capital spending.

During the third quarter, revenue from Strad's matting rental fleet decreased due to lower utilization and pricing, partially offset by an increase in the overall size of the matting fleet. Strad's Canadian matting fleet increased to approximately 51,800 pieces as at September 30, 2015, compared to approximately 46,800 pieces as at September 30, 2014. However, utilization decreased by 35% during the third quarter of 2015, compared to the third quarter of 2014, due to the rig count decline in the WCSB.

Adjusted EBITDA for the three months ended September 30, 2015, of $3.0 million, decreased 69% compared to $9.7 million for the same period in 2014. Adjusted EBITDA as a percentage of revenue, for the three months ended September 30, 2015, decreased to 22% compared to 29% for the same period in 2014. The decline in adjusted EBITDA is a result of the decline in total revenue during the third quarter.

Revenue for the nine months ended September 30, 2015, of $46.3 million, decreased 38% compared to $74.2 million for the same period in 2014. Decreased drilling activity was the primary driver of lower revenue year-over-year.

Adjusted EBITDA for the nine months ended September 30, 2015, of $10.1 million, decreased 49% compared to $19.9 million for the same period in 2014. Adjusted EBITDA as a percentage of revenue, for the nine months ended September 30, 2015, was 22% compared to 27% for the same period in 2014.

Operating expenses for the three and nine months ended September 30, 2015, of $8.5 million and $30.6 million decreased 60% and 35% respectively compared to $21.1 million and $47.0 million for the same period in 2014. The decline in operating expenses during the third quarter of 2015 is a result of lower activity levels.

Selling, general and administration costs ("SG&A") for the three and nine months ended September 30, 2015, of $1.9 million and $5.6 million respectively decreased 20% and 22% compared to $2.3 million and $7.2 million for the same period in 2014. SG&A costs decreased due to cost reductions implemented by management including staff reductions, wage roll backs and reductions in discretionary spending.

U.S. Operations

Three months ended September 30, Nine months ended September 30,
($000's) 2015 2014 % chg. 2015 2014 % chg.
Revenue 8,715 19,741 (56 ) 32,208 51,987 (38 )
Operating expenses 6,117 9,018 (32 ) 21,182 26,651 (21 )
Selling, general and administrative 1,323 2,030 (35 ) 4,723 6,509 (27 )
Net (loss) income (11,137 ) 2,730 (508 ) (12,193 ) 3,414 (457 )
Adjusted EBITDA(1) 1,286 8,684 (85 ) 6,301 18,802 (66 )
Adjusted EBITDA as a % of revenue 15 % 44 % 20 % 36 %
Capital expenditures(2) 473 1,593 (70 ) 2,453 9,175 (73 )
Gross capital assets 149,491 119,902 25 149,491 119,902 25
Total assets 98,418 113,418 (13 ) 98,418 113,418 (13 )
Notes:
(1) Earnings before interest, taxes, depreciation and amortization and other adjustments ("adjusted EBITDA") is not a recognized measure under IFRS; see "Non-IFRS Measures Reconciliation".
(2) Includes assets acquired under finance lease and purchases of intangible assets.

Revenue for the three months ended September 30, 2015, decreased 56% to $8.7 million from $19.7 million for the same period in 2014. The decline in revenue is due to a combination of lower rental fleet utilization rates and average pricing offset with an increase in the size of the rental fleets and a strengthening U.S. dollar. During the third quarter of 2015, utilization rates for Strad's U.S. matting, surface equipment and solids control fleets declined by 71%, 44%, and 59%, respectively, compared to the same period in 2014. Pricing pressure in Q3 2015 contributed further to revenue declines. Both utilization and price declines year-over-year are the result of a decline in rig counts across all Strad's targeted resource plays in the U.S. Average rig counts declined in the Bakken, Rockies and Marcellus regions by 63%, 58%, and 39%, respectively, during the third quarter of 2015 compared to the same quarter in 2014.

An increase in the matting, surface equipment and solids control rental fleets year-over-year offset declines in utilization rates and average pricing. The U.S. matting fleet increased by 1,670 pieces to 13,002 as at September 30, 2015, compared to 11,332 pieces as at September 30, 2014. The U.S. surface equipment fleet increased by 338 pieces of equipment to 2,022 pieces as at September 30, 2015, compared to 1,684 pieces as at September 30, 2014. Strad's U.S. solids control fleet increased by 5 centrifuges to a total of 53 as at September 30, 2015, compared to 48 centrifuges as at September 30, 2014. Finally, a strengthening U.S. dollar from Q3 2014 to Q3 2015 helped offset a portion of the revenue decline.

Adjusted EBITDA for the three months ended September 30, 2015, decreased 85% to $1.3 million compared to $8.7 million for the same period in 2014. Adjusted EBITDA as a percentage of revenue, for the three months ended September 30, 2015, was 15% compared to 44% for the same period in 2014. The decrease in both adjusted EBITDA and adjusted EBITDA as a percentage of revenue is primarily due to the decline in revenue compared to the same period in 2014.

Revenue for the nine months ended September 30, 2015, decreased 38% to $32.2 million compared to $52.0 million for the same period in 2014. The year-over-year decrease in revenue was primarily driven by decreased utilization of Strad's matting, solids control and surface equipment fleets.

Adjusted EBITDA for the nine months ended September 30, 2015, decreased 66% to $6.3 million compared to $18.8 million for the same period in 2014. Decreased adjusted EBITDA was due to lower revenue compared to the same period in 2014. Adjusted EBITDA as a percentage of revenue for the nine months ended September 30, 2015, was 20% compared to 36% for the same period in 2014.

Operating expenses for the three and nine months ended September 30, 2015, of $6.1 million and $21.2 million, respectively, decreased 32% and 21% compared to $9.0 million and $26.7 million for the same period in 2014. The decline in operating expenses during the third quarter of 2015 is a result of lower activity levels. A portion of the Company's operating expenses are fixed, thus the percentage decline is lower for operating expenses compared to revenue.

SG&A costs for the three and nine months ended September 30, 2015, of $1.3 million and $4.7 million, respectively, decreased 35% and 27% compared to $2.0 million and $6.5 million for the same period in 2014. SG&A costs decreased due to cost reductions implemented by management including staff reductions, wage roll backs and reductions in discretionary spending.

Product Sales

Three months ended September 30, Nine months ended September 30,
($000's) 2015 2014 % chg. 2015 2014 % chg.
Revenue 3,225 5,212 (38 ) 11,031 37,517 (71 )
Operating expenses 2,911 4,739 (39 ) 10,527 31,997 (67 )
Selling, general and administrative 42 46 (9 ) 126 145 (13 )
Net (loss) income (45 ) 321 (114 ) - 2,698 (100 )
Adjusted EBITDA(1) 274 420 (35 ) 378 5,370 (93 )
Adjusted EBITDA as a % of revenue 8 % 8 % 3 % 14 %
Capital expenditures(2) - 10 (100 ) - 24 (100 )
Total assets 149 1,665 (91 ) 149 1,665 (91 )
Notes:
(1) Earnings before interest, taxes, depreciation and amortization and other adjustments ("adjusted EBITDA") is not a recognized measure under IFRS; see "Non-IFRS Measures Reconciliation".
(2) Includes assets acquired under finance lease and purchases of intangible assets.

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.

Revenue for the three months ended September 30, 2015, decreased 38% to $3.2 million from $5.2 million for the same period in 2014, resulting primarily from lower sales of in-house manufactured products sold to external customers and third party equipment sales. During the third quarter, Product Sales consisted of $1.7 million of in-house manufactured products, $0.4 million of third party equipment sales and $1.1 million of rental fleet sales compared to $3.7 million, $0.7 million and $0.8 million, respectively, during the same period in 2014. Sales in the quarter were impacted by a significant decrease in demand, typical in the business when drilling activity levels decline.

Adjusted EBITDA for the three months ended September 30, 2015, decreased 35% to $0.3 million compared to $0.4 million for the same period in 2014. Adjusted EBITDA as a percentage of revenue, for the three months ended September 30, 2015, remained consistent at 8%. The decrease in adjusted EBITDA was due to lower sales revenue during the third quarter of 2015 compared to the same period in the prior year.

Revenue for the nine months ended September 30, 2015, decreased 71% to $11.0 million compared to $37.5 million for the same period in 2014. Revenue was lower during the first nine months of 2015 due to decreased rig activity. Sales of Strad's rental fleet equipment fluctuate quarter-over-quarter and are primarily dependent on strategic opportunities to monetize underutilized rental assets.

Adjusted EBITDA for the nine months ended September 30, 2015, decreased 93% to $0.4 million compared to $5.4 million for the same period in 2014. The decrease in adjusted EBITDA was due to lower sales revenue in 2015 compared to the same period in 2014. Adjusted EBITDA as a percentage of revenue, for the nine months ended September 30, 2015, was 3% compared to 14% for the same period in 2014.

Operating expenses for the three and nine months ended September 30, 2015, of $2.9 million and $10.5 million respectively decreased 39% and 67% compared to $4.7 million and $32.0 million for the same period in 2014. Operating expenses were removed from the business as activity levels declined.

IMPAIRMENT OF GOODWILL AND PROPERTY, PLANT AND EQUIPMENT

The Company reviews the carrying value of its long-lived assets and cash-generating units ("CGU's") at each balance sheet date to determine whether there is any indication of impairment. During the period, significant decreases in industry activity resulting from the decline in oil and natural gas prices and its impact on current and future business were indicators of impairment and resulted in the Company conducting its test for impairment as of September 30, 2015. The recoverable amount of each CGU was determined using fair value less costs of disposal calculations, which included discounted after-tax cash flow calculations, using forecast prices and cost estimates (Level 3) based on expected future results and discount rates of 15.0% (Canadian Operations) and 15.5% (U.S. Operations). Cash flow projections for 2015 to 2019 have assumed a gradual recovery to historical activity levels. Cash flow projections thereafter have been extrapolated based on a 2.0% per annum growth rate. To assess reasonableness, an evaluation of EBITDA multiples was also completed. As a result of these tests, it was determined that the carrying amount exceeded the recoverable amount indicating impairment of the carrying values. Accordingly, the Company recorded a goodwill impairment loss in the Canadian Operations CGU and U.S. Operations CGU of $7.7 million and $9.6 million, respectively, as at September 30, 2015. The Company also recognized a property, plant and equipment impairment charge related to its drill pipe assets in the amount of $1.9 million in the Canadian Operations segment.

OUTLOOK

Commodity prices over most of Q3 2015 were lower than levels at the end of Q2 2015 and continue to be well below pricing levels from 2014. WTI crude oil prices declined from Q2 2015 highs of $60/bbl back to levels at or below $50/ bbl for much of the third quarter. Pricing at these levels continues to negatively impact activity. Henry Hub natural gas prices have remained below $US 3.00/mcf for much of the first nine months of the year.

Low commodity prices continued to produce a marked decline in industry drilling rig activity across most basins in North America. Year-over-year rig count declines in Q3 exceeded declines experienced in Q1 and Q2 2015. Oil producing regions in Western Canada and the Bakken continue to be impacted to the greatest degree. The decline in activity continues to result in pricing pressures across all regions in 2015 as producers seek to reduce drilling costs.

In the WCSB, active drilling rigs in the third quarter of 2015 were down approximately 52% over the prior year, averaging 187 compared to 387 for the same period in 2014. In the U.S., drilling rig activity continued to vary by region, with the total active U.S. rig count decreasing by 55% on a year-over-year basis and 39% sequentially. The majority of Strad's U.S. fleet continues to operate in the Bakken and Marcellus resource plays. The Bakken region experienced a decline similar to the WCSB while the Marcellus play, given its gas weighting, experienced a more modest decline. The active rig count in the Bakken averaged 71 rigs in the third quarter of 2015, down 63% from 190 in the prior year. In the gas-weighted Marcellus and Utica plays, the active rig count averaged 75 during the third quarter of 2015, 39% lower than 123 during the prior year period.

Bakken operations are in close proximity to the Rockies region, consisting of Colorado, Wyoming, and Utah, where an average of 64 rigs were drilling during the third quarter, representing a decline of 58% from rigs in the previous period.

Management continued to focus on expanding the Company's service offerings to the energy infrastructure market, including pipeline construction, power transmission construction and energy facilities construction, during the third quarter to further diversify the business into markets that are expected to be less commodity price sensitive in the near term. Matting demand has been reasonably strong in Canada as several infrastructure related projects continue to progress despite the weak commodity price environment.

Overall, Strad's diversification across geographies in Canada and the U.S., exposure to both crude oil and natural gas activity, product line diversification, blue chip and well capitalized customer base, and exposure to energy infrastructure projects collectively, is expected to serve to insulate the business to some degree from the decline in drilling activity levels.

Management continued to actively manage costs during the third quarter in response to lower activity levels. In addition to staff layoffs, reduction of labour hours, company wide wage rollbacks, and reductions in discretionary expenditures discussed previously, further reductions of direct labour and SG&A staff have been completed to align the cost structure to the level of activity present in the business. Since the end of 2014, Strad has reduced its employee headcount by nearly 140 staff or more than 40%. The Company expects to realize the full benefit of the most recent cost reductions in the fourth quarter of 2015.

Management expects activity levels to remain low until such time that commodity prices stabilize resulting in increased producer capital spending. There continues to be little visibility regarding producer capital spending and as a result, management expects winter drilling activity to be significantly lower year-over-year in Q4 2015 and Q1 2016. Management's strategy continues to reflect a prudent and measured approach with a focus on cash preservation, debt paydown and maintaining flexibility to be able to respond to opportunities that are presented when the market does recover. The maintenance capex requirement in 2015 and 2016 continues to be modest and is anticipated to be managed at or below $5 million per year in this environment. The Company has made select capital expenditures, mostly in the matting product line, to support reasonably strong demand in that business.

The business continued to produce positive cash flow even at significantly reduced revenue and adjusted EBITDA levels this quarter. Outstanding debt was reduced by an additional $3.0 million during the third quarter, bringing total debt reduction to $14.2 million since March 31, 2015. Total funded debt was $25.2 million at September 30, 2015 and the total funded debt to adjusted EBITDA ratio was 0.8 to 1.0.

LIQUIDITY AND CAPITAL RESOURCES

($000's) September 30, 2015 December 31, 2014
Current assets 32,568 57,683
Current liabilities 20,177 31,362
Working capital(1) 12,391 26,321
Banking facilities
Operating facility 5,345 826
Syndicated revolving facility 18,500 36,000
Total facility borrowings 23,845 36,826
Total credit facilities(2) 110,000 110,000
Unused credit capacity 86,155 73,174
Notes:
(1) Working capital is calculated as current assets less current liabilities, excluding assets held for sale.
(2) Facilities 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 all of the Company's assets. As at September 30, 2015, Strad had access to $108 million of credit facilities.

As at September 30, 2015, working capital was $12.4 million compared to $26.3 million at December 31, 2014. The change in current assets is a result of a 51% decrease in accounts receivable to $23.9 million for the third quarter of 2015 compared to $48.5 million for the fourth quarter of 2014. Accounts receivable decreased due to the 55% decline in revenue during the third quarter of 2015 compared to the fourth quarter of 2014. Additionally, inventory decreased by 22% to $5.8 million for the third quarter of 2015 from $7.4 million for the fourth quarter of 2014, offset by an increase in prepaid expenses of $0.1 million at the end of the third quarter compared to the fourth quarter of 2014. Inventory decreased due to the decline in Product Sales during Q3 2015 compared to Q4 2014.

The change in current liabilities is a result of a 55% decrease in accounts payable and accrued liabilities to $11.3 million for the third quarter of 2015 compared to $25.2 million at year end, offset by an increase of $4.5 million in bank indebtedness at the end of the third quarter. Accounts payable decreased due to a decline in activity and operating expenses during Q3 2015 compared to Q4 2014. The increase in bank indebtedness is primarily due to repayments of a portion of the Company's long term debt. The overall decrease in working capital is consistent with the decrease in revenue from the fourth quarter of 2014 to the third quarter of 2015.

Funds from operations for the three months ended September 30, 2015, decreased to $4.1 million compared to $17.2 million for the three months ended September 30, 2014. Capital expenditures totaled $0.8 million for the three months ended September 30, 2015. Strad's total facility borrowing decreased by $13.0 million for the nine months ended September 30, 2015. 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 CAD and $10.0 million USD, and an $85.0 million syndicated 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 all of the Company's assets. As at September 30, 2015, the Company has access to $108 million of credit facilities. 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. The Company's syndicated banking facility matures on September 30, 2017.

Based on the Company's funded debt to EBITDA ratio of 0.8 to 1.0 at the end of the third quarter of 2015, the interest rate on the syndicated banking facility is bank prime plus 0.75% on prime rate advances and at the prevailing rate plus a stamping fee of 1.75% on bankers' acceptances. For the nine months ended September 30, 2015, the overall effective rates on the operating facility and revolving facility were 4.50% and 3.30%, respectively. As of September 30, 2015, $5.3 million was drawn on the operating facility and $18.5 million was drawn on the revolving facility. Required payments on the revolving facility are interest only.

As at September 30, 2015, the Company was in compliance with all of the financial covenants under its credit facilities.

The relevant definitions of financial debt covenant ratio terms as set forth in the Company's syndicated banking facility are as follows:

  • Funded debt includes bank indebtedness plus long-term debt plus current and long-term obligations under finance lease less cash.
  • EBITDA is based on trailing twelve months adjusted EBITDA plus share based payments, plus additional one time charges.
  • Interest expense ratio is calculated as the ratio of trailing twelve months adjusted EBITDA plus share based payments to trailing twelve months interest expense on loans and borrowings.

The above noted definitions are not recognized under IFRS and are provided strictly for the purposes of the financial debt calculation.

Financial Debt Covenants As at September 30, 2015 As at December 31, 2014
Funded debt to EBITDA ratio (not to exceed 3.0:1.0)
Funded debt 25,196 38,677
EBITDA 33,517 59,174
Ratio 0.8 0.7
EBITDA to interest coverage ratio (no less than 3.0:1.0)
EBITDA 33,517 59,174
Interest expense 1,693 2,176
Ratio 19.8 27.2

NON-IFRS MEASURES RECONCILIATION

Certain supplementary measures in this press release do not have any standardized meaning as prescribed under IFRS 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 measure. However, they should not be used as an alternative to IFRS, because they may not be consistent with calculations of other companies. These measures are further explained below.

Earnings before interest, taxes, depreciation and amortization ("adjusted EBITDA") is not a recognized measure under IFRS. Management believes that in addition to net income, adjusted 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. Adjusted EBITDA is calculated as net income plus interest, finance fees, taxes, depreciation and amortization, loss on disposal of property, plant and equipment, loss on foreign exchange, loss on assets held for sale, impairment loss, less gain on foreign exchange and gain on disposal of property, plant and equipment. Segmented adjusted EBITDA is based upon the same calculation for defined business segments, which are comprised of Canadian Operations, U.S. Operations and Product Sales.

Funds from operations are cash flow from operating activities excluding changes in working capital and share-based payments. 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, excluding assets held for sale. Working capital, cash forecasting and banking facilities are used by Management to ensure funds are available to finance growth opportunities.

Funded debt is calculated as bank indebtedness plus long-term debt plus current and long-term portion of finance lease obligations less cash.

Reconciliation of EBITDA and Funds from Operations
($000's)

Three months ended September 30, Nine months ended September 30,
2015 2014 2015 2014
Net (loss) income $ (20,362 ) $ 7,968 $ (22,045 ) $ 16,872
Add:
Depreciation and amortization 7,716 5,799 21,781 17,025
(Gain) loss on disposal of PP&E (30 ) 665 (155 ) (334 )
Loss on disposal of assets held for sale 199
Impairment 1,900 - 1,900 -
Goodwill impairment 17,277 - 17,277 -
Share-based payments 47 109 215 369
Deferred income tax (recovery) expense (2,776 ) 2,042 (4,766 ) 3,930
Financing fees 37 32 134 219
Interest expense 311 543 1,198 1,677
Funds from operations 4,120 17,158 15,539 39,957
Add:
Loss (gain) on foreign exchange 380 (181 ) 164 (12 )
Current income tax (recovery) expense (432 ) 967 (556 ) 1,547
Subtotal 4,068 17,944 15,147 41,492
Deduct:
Share-based payments 47 109 215 369
Adjusted EBITDA 4,021 17,835 14,932 41,123

Reconciliation of quarterly non-IFRS measures
($000's)

Three months ended
Sep 30, 2015 Jun 30, 2015 Mar 31, 2015 Dec 31, 2014
Net (loss) income $ (20,362 ) $ (1,887 ) $ 204 $ 6,125
Add:
Depreciation and amortization 7,716 7,020 7,045 7,543
Gain on disposal of PP&E (30 ) (80 ) (45 ) (16 )
Gain on disposal of assets held for sale - - - (11 )
Loss (gain) on foreign exchange 380 (81 ) (135 ) 47
Current income tax (recovery) expense (432 ) (18 ) (106 ) 850
Deferred income tax (recovery) expense (2,776 ) (1,541 ) (449 ) 2,092
Interest expense 311 391 496 495
Impairment loss 19,177 406
Finance fees 37 50 47 40
Adjusted EBITDA 4,021 3,854 7,057 17,571
Three months ended
Sep 30, 2014 Jun 30, 2014 Mar 31, 2014 Dec 31, 2013
Net income $ 7,968 $ 4,763 $ 4,141 $ 1,923
Add:
Depreciation and amortization 5,799 5,739 5,487 5,265
Loss (gain) on disposal of PP&E 665 (241 ) (758 ) 477
Loss on disposal of assets held for sale - 161 38 637
(Gain) loss on foreign exchange (181 ) 236 (67 ) (5 )
Current income tax expense (recovery) 968 (81 ) 660 466
Deferred income tax expense (recovery) 2,041 1,025 864 (225 )
Interest expense 543 599 535 665
Restructuring recovery (514 )
Impairment loss - - - 1,901
Finance fees 32 99 88 88
Adjusted EBITDA 17,835 12,300 10,988 10,678

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS

Certain statements and information contained in this press release constitute forward-looking information and statements within the meaning of applicable securities laws. 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. More particularly, this press release contains forward-looking statements concerning future capital expenditures of the Company and funding thereof, changes and expectations in margins to be experienced by Strad, anticipated cash flow, debt, the ability to maintain payment of dividends and the level thereof, 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 and the potential for growth and expansion of certain components of the Company's business, anticipated benefits from cost reductions and timing thereof, manufacturing capacity to meet anticipated demand for the Company's products, and expected exploration and production industry activity including the effects of industry trends on demand for the Company's products. 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.

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. In addition to other material factors, expectations and assumptions which may be identified in this press release and other continuous disclosure documents of the Company referenced herein, assumptions have been made in respect of such forward-looking statements and information regarding, among other things: the Company will continue to conduct its operations in a manner consistent with past operations; the general continuance of current industry conditions; anticipated financial performance, business prospects, impact of competition, strategies, the general stability of the economic and political environment in which the Company operates; exchange and interest rates; tax laws; the sufficiency of budgeted capital expenditures in carrying out planned activities; the availability and cost of labour and services and the adequacy of cash flow; debt and ability to obtain financing on acceptable terms to fund its planned expenditures, which are subject to change based on commodity prices; market conditions and future oil and natural gas prices; and potential timing delays. Although Management considers these material factors, expectations and assumptions to be reasonable based on information currently available to it, no assurance can be given that they will prove to be correct.

Readers are cautioned that the foregoing lists of factors are not exhaustive. Additional information on these and other factors that could affect the Company's operations and financial results are included in reports on file with the Canadian Securities Regulatory Authorities and may be accessed through the SEDAR website (www.sedar.com) or at the Company's website. The forward-looking statements and information contained in this press release are expressly qualified by this cautionary statement. The Company does not undertake any obligation to publicly update or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

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.

THIRD QUARTER EARNINGS CONFERENCE CALL

Strad Energy Services Ltd. has scheduled a conference call to begin promptly at 8:00 a.m. MT (10:00 a.m. ET) on Wednesday, November 4, 2015.

The conference call dial in number is 1-866-223-7781 / 1-416-340-2218

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 Wednesday, November 11th, 2015, at 11:59pm ET. To access the replay, call 1-800-408-3053, followed by pass code 1909252.

Strad Energy Services Ltd.
Interim Consolidated Statement of Financial Position
(Unaudited)

(in thousands of Canadian dollars) As at September 30, As at December 31, As at January 1,
2015 2014 2014
$ $ $
(Revised) (Revised)
Assets
Current assets
Trade receivables 23,882 48,542 35,569
Inventories 5,780 7,400 5,788
Prepaids and deposits 1,840 1,741 1,772
Note receivable - - 350
Income taxes receivable 1,066 - 40
32,568 57,683 43,519
Assets held for sale - 260 3,167
Non-current assets
Property, plant and equipment 153,247 159,100 142,108
Intangible assets 909 1,210 1,685
Long term assets 2,138 1,914 -
Goodwill - 17,277 17,277
Deferred income tax assets 32 15 164
Total assets 188,894 237,459 207,920
Liabilities
Current liabilities
Bank indebtedness 5,345 826 1,879
Accounts payable and accrued liabilities 11,296 25,207 20,854
Income taxes payable - 1,579 -
Deferred revenue 16 259 785
Current portion of obligations under finance lease 911 882 1,887
Dividend payable 2,609 2,609 2,050
20,177 31,362 27,455
Non-current liabilities
Long-term debt 18,500 36,000 38,500
Obligations under finance lease 440 969 770
Deferred income tax liabilities 10,308 14,138 7,797
Total liabilities 49,425 82,469 74,522
Equity
Share capital 118,361 118,351 117,824
Contributed surplus 11,968 11,757 11,612
Accumulated other comprehensive income 27,080 12,950 5,152
Retained earnings (deficit) (17,940 ) 11,932 (1,190 )
Total equity 139,469 154,990 133,398
Total liabilities and equity 188,894 237,459 207,920

Strad Energy Services Ltd.
Interim Consolidated Statement of Income and Comprehensive Income
For the three and nine months ended September 30, 2015 and 2014
(Unaudited)

(in thousands of Canadian dollars, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2015 2014 2015 2014
$ $ $ $
Revenue 25,299 58,115 89,576 163,695
Expenses
Operating expenses 17,520 34,827 62,355 105,618
Depreciation 7,579 5,622 21,324 16,479
Amortization of intangible assets 113 177 389 546
Amortization of long term assets 24 - 68 -
Selling, general and administration 3,711 5,344 12,074 16,585
Share-based payments 47 109 215 369
(Gain) loss on disposal of property, plant and equipment (30 ) 665 (155 ) (334 )
Foreign exchange loss (gain) 380 (181 ) 164 (12 )
Finance fees 37 32 134 219
Interest expense 311 543 1,198 1,677
Loss on assets held for sale 199
Impairment 1,900 - 1,900 -
Goodwill impairment 17,277 - 17,277 -
(Loss) income before income tax (23,570 ) 10,977 (27,367 ) 22,349
Income tax (recovery) expense (3,208 ) 3,009 (5,322 ) 5,477
Net (loss) income for the period (20,362 ) 7,968 (22,045 ) 16,872
Other comprehensive (loss) income
Items that may be reclassified subsequently to net (loss) income
Cumulative translation adjustment (Revised) 7,000 4,113 14,130 4,431
Total comprehensive (loss) income for the period (13,362 ) 12,081 (7,915 ) 21,303
(Loss) earnings per share:
Basic ($0.55 ) $0.22 ($0.60 ) $0.46
Diluted ($0.55 ) $0.21 ($0.60 ) $0.45

Strad Energy Services Ltd.
Interim Consolidated Statement of Cash Flow
For the nine months ended September 30, 2015 and 2014
(Unaudited)

(in thousands of Canadian dollars)
2015 2014
Cash flow provided by (used in) $ $
(Revised)
Operating activities
Net (loss) income for the period (22,045 ) 16,872
Adjustments for items not affecting cash:
Depreciation and amortization 21,781 17,025
Deferred income tax (recovery) expense (4,766 ) 3,930
Share-based payments 215 157
Interest expense and finance fees 1,332 1,896
Gain on disposal of property, plant and equipment (155 ) (334 )
Loss on assets held for sale - 199
Impairment 1,900 -
Goodwill impairment 17,277 -
Changes in items of non-cash working capital 11,916 (11,735 )
Net cash generated from operating activities 27,455 28,010
Investing activities
Purchase of property, plant and equipment (8,201 ) (27,210 )
Proceeds from sale of property, plant and equipment 3,525 3,199
Purchase of intangible assets (77 ) (298 )
Proceeds from assets held for sale 557
Changes in items of non-cash working capital (2,554 ) (1,489 )
Net cash used in investing activities (7,307 ) (25,241 )
Financing activities
Proceeds on issuance of long-term debt - 7,900
Repayment of long-term debt (17,500 ) (9,000 )
Repayment of finance lease obligations (net) (794 ) (648 )
Issuance of shareholder loan (net of repayments) 6 421
Interest expense and finance fees (1,332 ) (1,896 )
Payment of dividends (7,827 ) (6,709 )
Changes in items of non-cash working capital 20 437
Net cash (used) generated in financing activities (27,427 ) (9,495 )
Effect of exchange rate changes on cash and cash equivalents 2,760 473
(Decrease) increase in cash and cash equivalents (4,519 ) (6,253 )
Cash and cash equivalents (including bank indebtedness) - beginning of year (826 ) (1,879 )
Cash and cash equivalents (including bank indebtedness) - end of period (5,345 ) (8,132 )
Cash paid for income tax 1,908 1,089
Cash paid for interest 1,209 1,643

ABOUT STRAD ENERGY SERVICES LTD.

Strad is a North American energy services company that focuses on providing well-site infrastructure 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".

Contact Information

 

Strad Energy Services Ltd.
Andy Pernal
President and Chief Executive Officer
(403) 775-9202
(403) 232-6901 (FAX)
apernal@stradenergy.com

Strad Energy Services Ltd.
Greg Duerr
Chief Financial Officer
(403) 705-4333
(403) 232-6901 (FAX)
gduerr@stradenergy.com
www.stradenergy.com