CALGARY, Oct. 30, 2019 /CNW/ - Energy Services Inc.
("Secure" or the "Corporation") (TSX – SES) provided today an
update on its corporate vision and strategy and announced a sales
process relating to service lines that do not have recurring or
production-related revenue streams, the development of a new feeder
pipeline system and the operational and financial results of the
Corporation for the three and nine months ended
September 30, 2019.
The following press release should be read in conjunction with
the Corporation's management's discussion and analysis ("MD&A")
and the interim consolidated financial statements and notes thereto
for the three and nine months ended September 30, 2019 which
are available on SEDAR at www.sedar.com.
CORPORATE VISION AND STRATEGY UPDATE
In 2007, Secure
was founded with one vision in mind: to help our customers. Twelve
years later, delivering solutions that put our customers' needs
first continues to be our guiding principle. Our unique culture,
which is driven by entrepreneurial spirit, motivation, and hard
work, allows us to carefully consider our customers' needs and
deliver innovative solutions. It is this culture and our commitment
to exceptional customer service that has made Secure a trusted
industry partner today.
The past several years have been volatile for the oil and gas
sector. From the dramatic drop in oil prices in late 2014, to the
ongoing environmental and political debates surrounding
transportation of crude oil in Canada, macro economic factors and political
issues continue to have a significant impact on our industry. Our
customers have responded with increased financial and capital
discipline as they strive for resiliency and free cash flow
generation through low commodity price cycles.
Secure's strategy remains focused on what is in the
Corporation's control: helping our customers by challenging what's
possible. Secure is building on our dedication to creating value
for customers with our updated vision to Do Midstream
Differently. By doing midstream differently, Secure works
transparently with customers to identify opportunities where we can
provide innovative solutions that help our customers reduce costs
and emissions, and invest their capital where it generates the
highest returns. As a result, customers are willing to share in the
risk and commit dedicated volumes to our midstream infrastructure
that provides predictable, recurring cash flows for the
Corporation.
Increasing the stability of our cash flows is a key priority for
Secure as we aim to reduce the risk of our investments, maximize
the return and value from our existing assets and ensure profitable
growth for our shareholders. This focus has led Secure to make
strategic investments in midstream infrastructure in high impact
resource plays located near customer production, including the
following:
- Oil feeder pipelines
-
- Kerrobert crude oil pipeline
system and East Kaybob feeder pipeline (currently under
development);
- New produced water disposal facilities with committed
volumes
-
- Gold Creek, Tony Creek and Pipestone (commissioned October 2019);
- Four produced water pipelines connecting producer
facilities/gas plants to Secure's midstream infrastructure
-
- Gold Creek, Tony Creek, Pipestone and 13 Mile;
- Crude oil storage at Cushing,
Oklahoma and Kerrobert,
Saskatchewan with lease commitments.
This midstream growth has helped transform the nature and
reliability of Secure's cash flows by significantly increasing the
Corporation's exposure to recurring production-based revenues and
limiting exposure to cyclical drilling and completion activities.
Additional opportunities to execute on this strategy are expected
to continue to evolve based on current trends such as:
- Producers outsourcing midstream work;
- Produced water volumes increasing at a disproportionate rate
relative to aggregate production;
- Higher well densities improving economics to pipeline connect
production volumes to midstream facilities; and
- Volatile differentials and limited pipeline capacity.
Secure's strategy is to follow a sensible approach to capital
spending by allocating funds to projects that will generate stable
cash flows. This approach includes constructing and operating
midstream infrastructure as follows:
- Building and connecting produced water pipelines and disposal
facilities to reduce customers' transportation costs and reduce
their environmental footprint;
- Building and connecting feeder oil pipelines to producer
batteries to reduce customers' transportation costs and optimize
producer netbacks;
- Utilizing crude oil storage to optimize pricing and manage
pipeline transportation constraints; and
- Providing crude oil transport via rail for access to higher
priced markets.
STRATEGIC DIVESTITURES
As part of Secure's focus on
increasing cash flow stability, Secure has initiated a formal sales
process for the divestiture of specific service lines that do not
have recurring or production-related revenue streams. In the last
quarter, multiple financial institutions approached Secure about
divesting select service lines, and this process is expected to be
ongoing throughout the remainder of the year and into 2020. Secure
expects any divestitures will be completed by the end of 2020.
Aggregate proceeds for these divestures could range from
$100 million to $200 million depending on which service lines are
divested.
For many years, service offerings that supported drilling and
completion activities were a key part of Secure's strategy of
delivering value to customers through a broad suite of integrated,
'cradle to grave' energy solutions. During years where producer
spending was robust, these service lines made important
contributions to Secure by generating significant free cash flow
that was reinvested in midstream growth opportunities.
Monetizing assets that primarily support drilling and completion
activity will help management focus on its longer-term strategy,
strengthen our balance sheet, provide incremental capital for
continued midstream infrastructure growth, and support continued
opportunistic share repurchases. Secure believes this best
positions the Corporation for sustainable future growth and
shareholder value creation in the midstream space.
Regardless of whether or not divestitures are completed, Secure
and our employees will continue providing exceptional service and
delivering value-adding solutions that exceed our customers
expectations.
DEVELOPMENT OF NEW FEEDER PIPELINE SYSTEM
Secure is
pleased to announce that the Corporation has entered into long-term
contracts in the Bigstone and East Kaybob regions of Alberta to gather light oil and condensate
from multiple producers and transport the product to the
Corporation's Fox Creek
full-service terminal ("FST"). Several producer facilities will be
tied into the system by way of four-inch diameter lateral
pipelines, joining together into a six-inch line stretching
approximately 25 kilometres to the Fox Creek FST. In total,
the system will span approximately 120 kilometres and is estimated
to cost approximately $40 million. Construction is scheduled
to begin in the fourth quarter of 2019 and the pipeline is expected
to be operational by mid-2020, subject to regulatory or other
unanticipated delays.
The project is underpinned by 15-year commitments with multiple
customers, providing Secure with stable, long-term fee-for-service
revenues from pipeline tariffs, and reliable volumes at the Fox
Creek FST. The pipeline system creates value for our customers
operating in the region by providing a capital efficient
transportation solution that enhances operating netbacks.
Additionally, the pipeline system significantly reduces or
eliminates trucking logistics and constraints, reduces
CO2 emissions and increases safety by reducing the
number of trucks required to transport producer's product.
THIRD QUARTER OPERATIONAL AND FINANCIAL
HIGHLIGHTS
During the third quarter of 2019, Secure achieved
Adjusted EBITDAi of $43.2 million, equal to $0.27 per share, an 18% decrease from the three
months ended September 30, 2018. Drilling and completion
activity in the Western Canadian Sedimentary Basin ("WCSB") did not
see the usual significant increase following the second quarter
spring break up due to unseasonably wet weather conditions
extending throughout the summer months. During the third quarter,
oil and gas producers were unwilling to incur additional costs due
to weather related issues if the oil and gas activity could be
delayed until weather conditions improved. This reduction in
activity was compounded by the overall impact of reduced capital
budgets as producers continue to make cautious spending decisions.
Overall, the active rig count and wells completed were down 33% and
21% during the third quarter of 2019 from the same period of
2018.
In the Midstream Infrastructure division, growth initiatives
over the last several years to increase capacity in response to
customer demand and expand production-related service offerings
partially offset the impact of lower drilling and completion
volumes at the Corporation's facilities. Reduced activity levels
had the most significant impact on the Corporation's Technical
Solutions and Environmental Solutions divisions, where over half of
the service lines provide drilling and completion-related services.
The poor weather also impacted the execution of planned remediation
and demolition programs in the Environmental Solutions
division.
Secure continues to execute on the Corporation's midstream
growth strategy by helping our customers challenge what's possible.
During the third quarter, Secure progressed construction of the
Pipestone water disposal facility
in the Montney region of
Alberta. The facility is pipeline
connected and has multi-year contracted volumes through facility
and area dedications with an anchor tenant, providing reliable cash
flows over the contract term. The facility was commissioned in
October and is expected to be running at full capacity by the end
of the year. During the year, Secure also drilled additional wells
at the Tony Creek water disposal facility and the 13 Mile and
Keene full-service terminals which
are expected to contribute incremental revenue in the first quarter
of 2020 after pipeline connections are completed.
Secure continues to follow a disciplined approach to maintaining
a strong balance sheet. This provides the Corporation with
considerable flexibility to continue to grow the business
organically and execute on acquisition opportunities that align
with the profitable growth strategy of Secure. Additionally, during
the third quarter of 2019, Secure returned $10.7 million of cash flow to shareholders
through the Corporation's monthly dividend, and purchased and
cancelled 579,900 common shares of the Corporation ("shares") at a
weighted average price per share of $6.85 for a total of $4.0
million under the Corporation's normal course issuer bid
approved at the end of May 2019.
Subsequent to the end of the quarter, Secure purchased and
cancelled an additional 1,002,100 shares at an average price of
$4.57 per share.
The Corporation's operating and financial highlights for the
three- and nine-month periods ending September 30, 2019 and 2018 can be summarized as
follows:
|
|
|
|
|
|
|
|
Three months ended
Sept 30,
|
Nine months ended
Sept 30,
|
($000's except
share and per share data)
|
2019
|
2018
|
%
change
|
2019
|
2018
|
%
change
|
Revenue (excludes oil
purchase and resale)
|
154,147
|
182,469
|
(16)
|
470,395
|
505,416
|
(7)
|
Oil purchase and
resale
|
577,877
|
646,565
|
(11)
|
1,843,998
|
1,748,986
|
5
|
Total
revenue
|
732,024
|
829,034
|
(12)
|
2,314,393
|
2,254,402
|
3
|
Adjusted EBITDA
(1)
|
43,173
|
53,746
|
(20)
|
133,278
|
132,711
|
-
|
Per share ($),
basic
|
0.27
|
0.33
|
(18)
|
0.83
|
0.81
|
2
|
Per share ($),
diluted
|
0.27
|
0.33
|
(18)
|
0.82
|
0.80
|
2
|
Net (loss) income
attributable to shareholders of Secure
|
(639)
|
6,809
|
(109)
|
(1,058)
|
5,985
|
118
|
Per share ($), basic
and diluted
|
-
|
0.04
|
(100)
|
(0.01)
|
0.04
|
125
|
Cash flows from
operating activities
|
35,976
|
19,879
|
81
|
147,204
|
127,205
|
16
|
Per share ($),
basic
|
0.23
|
0.13
|
77
|
0.92
|
0.78
|
18
|
Per share ($),
diluted
|
0.22
|
0.20
|
10
|
0.91
|
0.77
|
18
|
Dividends per common
share
|
0.0675
|
0.0675
|
-
|
0.2025
|
0.2025
|
-
|
Capital expenditures
(1)
|
30,725
|
43,478
|
(29)
|
102,956
|
136,322
|
(24)
|
Total
assets
|
1,635,106
|
1,591,913
|
3
|
1,635,106
|
1,591,913
|
3
|
Long-term
liabilities
|
633,037
|
522,304
|
21
|
633,037
|
522,304
|
21
|
Common shares - end
of period
|
157,979,909
|
162,286,387
|
(3)
|
157,979,909
|
161,945,330
|
(2)
|
Weighted average
common shares
|
|
|
|
|
|
|
basic
|
158,075,674
|
162,286,387
|
(3)
|
159,620,638
|
163,600,546
|
(2)
|
diluted
|
160,725,966
|
164,911,044
|
(3)
|
162,621,883
|
165,779,889
|
(2)
|
(1)Refer
to "Non-GAAP Measures" and "Operational Definitions" for
further information.
|
|
|
|
|
|
|
- REVENUE OF $732.0 MILLION AND $2.3 BILLION FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2019
-
- The Midstream Infrastructure division's revenue (excluding oil
purchase and resale) decreased 1% to $88.3 million during the three months ended
September 30, 2019 from the comparative period in 2018. Higher
revenues driven by infrastructure added since the third quarter of
2018, which resulted in new recurring revenue streams and increased
disposal capacity with committed volumes, were offset by lower
revenue from existing facilities due to lower drilling and
completions related processing and disposal volumes resulting from
poor weather conditions across the Corporation's operating areas
and cautious spending by producers in Canada. As a result, drilling waste and
flowback water disposal volumes, and processing volumes from
drilling and completion activities, were negatively impacted and,
consequently, recovered oil volumes decreased. Additionally,
commodity price differentials were flat in the three months ended
September 30, 2019 compared to the same period of 2018,
resulting in fewer marketing opportunities and reduced rail
activity compared to the prior year period.
- During the nine months ended September 30, 2019, the
Midstream Infrastructure division's revenue (excluding oil purchase
and resale) increased to $268.0 million, up 7% from the 2018
comparative period due to infrastructure added during 2018 and in
the 2019 year to date, which more than offset the impact of lower
year over year activity levels.
- Oil purchase and resale revenue in the Midstream Infrastructure
division for the three and nine months ended September 30,
2019 decreased by 11% and increased by 5% from the 2018 comparative
periods to $577.9 million and
$1.8 billion. In the year to date,
the increase is attributable to Secure's expanded commercial
operations, particularly related to the Kerrobert crude oil pipeline system. In the
three months ended September 30,
2019, this impact was more than offset by reduced rail and
marketing activity resulting from flat price differentials.
- The Environmental Solutions division revenue of $20.4 million and $66.1 million for the three and nine months ended
September 30, 2019 decreased 31% and
25% from the respective comparative periods of 2018. The integrated
fluids solutions service line was impacted by lower well completion
activity in the WCSB and from reduced spending from major
exploration and production companies in Canada. Project
revenue decreased due to fewer reclamation and demolition jobs
underway quarter over quarter and from the deferral of ongoing
remediation and demolition jobs as wet weather conditions in the
quarter limited field access required to complete these jobs.
Increases in recurring revenue from the scrap metal recycling
agreements combined with new project work in the Fort McMurray region partially offset the
reduced revenue from the lower job volumes and program
deferrals.
- The Technical Solutions division revenue decreased 28% and 18%
to $45.4 million and
$136.3 million in the three and
nine months ended September 30, 2019 over the 2018 comparative
periods due to lower drilling and completion activity in the WCSB,
negatively impacting revenue generated from drilling and completion
fluid services, solids control equipment rentals and drilling waste
management. Increased production services revenue from an expanded
customer base partially offset this impact.
- NET LOSS ATTRIBUTABLE TO SHAREHOLDERS OF SECURE OF
$0.6 MILLION AND $1.1 MILLION FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2019
-
- For the three months ended September 30,
2019, net loss attributable to shareholders of Secure of
$0.6 million decreased from net
income of $6.8 million in the
three months ended September 30, 2018. The variance is due
primarily to a $10.6 million
decrease to Adjusted EBITDA, partially offset by lower tax expense
driven by lower pre-tax income. During the nine months ended
September 30, 2019, the net loss attributable to shareholders
of Secure was $1.1 million, down
from net income of $6.0 million in
the nine months ended September 30,
2018. The decrease relates primarily to higher depreciation
expense resulting from the adoption of International Financial
Reporting Standard 16 ("IFRS 16")ii and new assets put
into use since the second quarter of 2018, partially offset by
lower tax expense driven by lower pre-tax income and a deferred tax
recovery booked in the second quarter of 2019 due to a reduction in
corporate tax rates.
- CAPITAL EXPENDITURES OF $30.7
MILLION AND $103.0 MILLION FOR
THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2019
-
- Total capital expenditures for the three months ended
September 30, 2019 included
$24.4 million of organic growth and
expansion capital related primarily to:
-
- Construction of the new Pipestone water disposal facility;
- Completing construction of a produced water transfer and
injection pipeline from a customer plant to our Gold Creek water
disposal facility;
- Increasing processing and disposal capacity and creating
efficiencies at various other facilities;
- Tying in of new disposal wells drilled during the first half of
the year;
- Ongoing optimization of disposal well water injection pumps to
increase throughput; and
- Long lead items related to the East Kaybob oil feeder
pipeline.
- In addition to these projects, growth and expansion capital
incurred during the nine months ended September 30, 2019
of $91.7 million included two
tuck-in acquisitions at Cushing to
secure crude oil storage for $13.9 million; construction of 260,000
barrels of additional crude oil storage at Kerrobert; and the addition of three water
disposal wells at existing facilities (Tony Creek, Keene and 13 Mile).
- Sustaining capital incurred in the three and nine months ended
September 30, 2019 of $6.3 million and $11.3 million relates primarily to well and
facility maintenance.
- FINANCIAL FLEXIBILITY
-
- The total amount drawn on Secure's credit facilities as at
September 30, 2019 increased by 8% to $448.5 million compared to $413.5 million at December 31, 2018. The amount drawn increased
primarily as a result of the Corporation's capital program.
- As at September 30, 2019, the
Corporation had $318.9 million
available under its credit facilities, subject to covenant
restrictions, up from $148.4 million at December 31, 2018. In April 2019, Secure closed an amendment to its
First Lien Credit Facility, increasing the capacity by $130 million and issued a new $75 million bilateral Letter of Credit Facility,
resulting in total credit capacity of $805 million.
- Secure is in compliance with all covenants related to its
credit facilities at September 30, 2019. The following
table outlines Secure's senior and total debt to trailing
twelve-month EBITDA ratiosiii at
September 30, 2019 and December 31, 2018.
|
Sept 30 ,
2019
|
Dec. 31,
2018
|
Threshold
|
Senior Debt to
EBITDA
|
1.8
|
1.6
|
3.5
|
Total Debt to
EBITDA
|
2.5
|
2.2
|
5.0
|
|
|
|
|
MIDSTREAM INFRASTRUCTURE DIVISION HIGHLIGHTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
Sept 30, 2019
|
Nine months ended
Sept 30, 2019
|
($000's)
|
2019
|
2018
|
%
Change
|
2019
|
2018
|
%
Change
|
Revenue
|
|
|
|
|
|
|
Midstream
Infrastructure (a)
|
88,316
|
89,579
|
(1)
|
267,998
|
250,930
|
7
|
Oil purchase and
resale
|
577,877
|
646,565
|
(11)
|
1,843,998
|
1,748,986
|
5
|
Total Midstream
Infrastructure division revenue
|
666,193
|
736,144
|
(10)
|
2,111,996
|
1,999,916
|
6
|
|
|
|
|
|
|
|
Cost of
Sales
|
|
|
|
|
|
|
Midstream
Infrastructure excluding items noted below
|
39,829
|
35,913
|
11
|
118,485
|
107,160
|
11
|
Depreciation,
depletion and amortization
|
20,972
|
23,771
|
(12)
|
63,280
|
60,917
|
4
|
Oil purchase and
resale
|
577,877
|
646,565
|
(11)
|
1,843,998
|
1,748,986
|
5
|
Total Midstream
Infrastructure division cost of sales
|
638,678
|
706,249
|
(10)
|
2,025,763
|
1,917,063
|
6
|
|
|
|
|
|
|
|
Segment Profit
Margin (1)
|
48,487
|
53,666
|
(10)
|
149,513
|
143,770
|
4
|
|
|
|
|
|
|
|
Segment Profit
Margin (1) as a % of revenue (a)
|
55%
|
60%
|
|
56%
|
57%
|
|
|
|
|
|
|
|
|
(1)Calculated as revenue less cost of
sales excluding depreciation, depletion and amortization. Refer to
"Non-GAAP Measures and Operational Definitions" for further
information.
|
|
|
|
|
|
|
|
- Revenue generated from Midstream Infrastructure services of
$88.3 million and $268.0 million for the three and nine months
ended September 30, 2019 decreased by 1% and increased by 7%
from the 2018 comparative periods. In the three month period, the
decrease in Midstream Infrastructure services revenue from the 2018
comparative period was due to lower processing and disposal volumes
tied to drilling and completion activity, and corresponding
recovered oil volumes, lower realized pricing on recovered oil, and
flat differentials limiting the upside for price optimization at
the Corporation's pipeline connected FSTs and rail terminals.
- The impact of lower activity levels on existing facilities
offset incremental revenue in the three months ended
September 30, 2019 driven from new infrastructure and
expansions at certain of the Corporation's existing facilities
since the third quarter of 2018. Secure commenced commercial
operations at the Kerrobert crude
oil pipeline system on October 1, 2018, resulting in a
new, stable revenue source for the Corporation in the three months
ended September 30, 2019 compared to the same period of 2018
through pipeline tariffs. The feeder pipeline project includes area
dedication and contracted volume on both an annual and cumulative
term basis over a 10-year term. The Corporation also completed the
acquisition of a crude oil storage business located in Cushing, Oklahoma in April 2019, which commenced contributing revenue
during the second quarter of 2019.
- During the nine months ended September
30, 2019, the 7% increase in Midstream Infrastructure
service revenue from the 2018 comparative period was primarily due
to higher volumes associated with new infrastructure. In addition
to the above, the Corporation strategically added the Gold Creek
and Tony Creek water disposal facilities at the end of the second
quarter of 2018 which are underpinned by committed volumes.
- Disposal volumes were relatively flat in the three and nine
months ended September 30, 2019 over the 2018 comparative
period as a 14% and 16% increase in produced water disposal
volumes was offset by the impact of lower completion-related water
volumes and reduced drilling waste disposed at the Corporation's
landfills. Increased produced water disposal volumes were driven by
the addition of the Gold Creek and Tony Creek water disposal
facilities at the end of the second quarter of 2018 and expansions
to increase water disposal capacity at various other facilities
since the start of 2018. Additionally, Secure's facilities are
strategically located in regions where production levels have not
decreased, and where average fluids pumped per well are higher than
other regions of the WCSB, driving incremental volumes at Secure's
facilities.
- Processing volumes decreased by 22% and 25% in the three and
nine months ended September 30, 2019
from the 2018 comparative periods due primarily to lower drilling
waste processing and completion fluids. Weather related issues
during the year, including cold weather in the first quarter, a
prolonged spring break-up and unseasonably wet weather throughout
the third quarter of 2019 resulted in year over year declines in
drilling and completions activity. These issues were compounded by
the overall slowdown of oil and gas activity during 2019 due to
challenging industry fundamentals stemming from volatile crude oil
pricing, low natural gas prices and uncertainty with respect to the
addition of pipeline capacity out of the WCSB. In the WCSB, rig
activity declined 33% and 31% in the three and nine months ended
September 30, 2019 from the 2018 comparative periods, and
well completions decreased 21% and 23% in these same periods.
- Oil purchase and resale revenue in the Midstream Infrastructure
division for the three and nine months ended
September 30, 2019 decreased by 11% and increased by 5%
from the 2018 comparative periods to $577.9 million and $1.8 billion. In the year to date, the
increase is attributable to Secure's expanded commercial
operations, particularly related to the Kerrobert crude oil pipeline system. In the
three months ended September 30,
2019, this impact was more than offset by lower volumes due
to decreased rail activity and marketing opportunities due to flat
differentials in the third quarter of 2019, and lower oil prices
compared to the third quarter of 2018.
- For the three months ended September 30, 2019, the
Midstream Infrastructure division's segment profit margin decreased
10% to $48.5 million. As a
percentage of Midstream Infrastructure services revenue, segment
profit margin was 55%, down from 60% in the third quarter of 2018.
The decrease was primarily a result of lower drilling and
completion revenue with ongoing fixed costs at existing facilities
during the quarter. Profit margin percentages were also lower than
the network average at Cushing,
partly due to start-up costs.
- The Midstream Infrastructure division's segment profit margin
for the nine months ended September 30,
2019 of $149.5 million
increased by 4% from the prior year comparative period due
primarily to higher revenues associated with new infrastructure. As
a percentage of revenue, segment profit margin was 56%, down
slightly from 57% for the nine months ended
September 30, 2018.
- General and administrative ("G&A") expenses of $7.4 million and $22.3 million for the three and nine months ended
September 30, 2019 increased from the respective 2018
comparative period balances of $7.0 million and $19.7 million. Excluding depreciation and
amortization, G&A expenses decreased 9% and 6% during the three
and nine months ended September 30, 2019 from the
respective 2018 comparative periods primarily due to the impact of
IFRS 16 on office leases. The Corporation continues to minimize
G&A costs by streamlining operations where possible.
- Earnings before tax of $19.7 million for the three months ended
September 30, 2019 decreased 13% from the three months ended
September 30, 2018. The decrease is primarily a result of a
$5.2 million decrease in segment
profit margin, partially offset by lower operating depreciation and
amortization expense in the 2019 period. Earnings before tax of
$62.5 million for the nine
months ended September 30, 2019 were relatively flat from
the 2018 comparative period. Higher segment profit margin was
offset by higher depreciation, depletion and amortization
expense.
ENVIRONMENTAL SOLUTIONS DIVISION HIGHLIGHTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
Sept 30, 2019
|
Nine months ended
Sept 30, 2019
|
|
($000's)
|
2019
|
2018
|
%
Change
|
2019
|
2018
|
%
Change
|
|
Revenue
|
|
|
|
|
|
|
|
Environmental
Solutions
|
20,387
|
29,617
|
(31)
|
66,086
|
87,824
|
(25)
|
|
|
|
|
|
|
|
|
|
Cost of
Sales
|
|
|
|
|
|
|
|
Environmental
Solutions excluding depreciation and amortization
|
15,308
|
23,149
|
(34)
|
53,343
|
69,778
|
(24)
|
|
Depreciation and
amortization
|
2,047
|
1,801
|
14
|
7,037
|
6,434
|
9
|
|
Total
Environmental Solutions division cost of sales
|
17,355
|
24,950
|
(30)
|
60,380
|
76,212
|
(21)
|
|
|
|
|
|
|
|
|
|
Segment Profit
Margin (1)
|
5,079
|
6,468
|
(21)
|
12,743
|
18,046
|
(29)
|
|
|
|
|
|
|
|
|
|
Segment Profit
Margin (1) as a % of revenue
|
25%
|
22%
|
|
19%
|
21%
|
|
|
|
|
|
|
|
|
|
|
(1)Calculated as revenue less cost of
sales excluding depreciation and amortization. Refer to
"Non-GAAP Measures and Operational Definitions" for further
information.
|
|
|
|
|
|
|
|
|
|
- The Environmental Solutions division revenue of $20.4 million and $66.1 million for the three and nine months
ended September 30, 2019 decreased by 31% and 25% from
the comparative periods of 2018. Project services revenue decreased
as there were fewer large-scale job opportunities quarter over
quarter. Revenue in the third quarter of 2018 included several
large remediation and demolition jobs and revenue from an oil spill
clean-up. The third quarter of 2019 did not have similar types of
jobs occurring. Additionally, ongoing remediation and demolition
programs during this quarter were delayed as wet conditions
throughout the summer months and into September limited field
access to continue these jobs. The programs are expected to resume
during the fourth quarter. In addition, third quarter and year to
date revenue from onsite water management and pumping services were
negatively impacted by lower well completion activity in the
WCSB. Increases in Oil Sands recurring revenue from scrap
metal recycling agreements combined with new project work in the
region partially offset the reduced revenue from the other service
lines.
- Segment profit margin for the three and nine months ended
September 30, 2019 decreased by 21%
and 29% to $5.1 million and
$12.7 million from the prior
year comparative periods due primarily to lower revenue. As a
percentage of revenue, segment profit margin was 25% for the three
months ended September 30, 2019, up from 22% in the prior year
comparative period. The Environmental Solutions division's segment
profit margin as a percentage of revenue can fluctuate depending on
the volume and type of projects undertaken and the blend of
business between remediation and reclamation projects, demolition
projects, pipeline integrity projects, site clean-up, metal
recycling and other services in any given period.
- During the three months ended September 30, 2019,
segment profit as a percentage of revenue increased as a result of
improving project type margins and higher margins associated with
recurring revenue generated from the Oil Sands region despite a
decline in completion related water pumping and fracing services.
In the year to date, segment profit margin as a percentage of
revenue decreased primarily due to lower proportion of revenue from
water pumping and fracing services, which typically generates
higher margins than project type work.
- G&A expense for the three and nine months ended September
30, 2019 decreased 11% and 20% from the 2018 comparative
periods to $1.8 million and
$5.2 million. The overall decrease is
primarily a result of lower personnel costs due to headcount
reductions to align staff with activity levels. Additionally,
amortization expense decreased as certain intangible assets were
fully amortized in the prior year.
- During the three and nine months ended
September 30, 2019, the Environmental Solutions division
had earnings before tax of $1.2 million and $0.5 million, respectively, down from
$2.6 million and $5.1 million during the three and nine
months ended September 30, 2018. The variances correspond
primarily to the decrease in segment revenue and profit margin,
offset by the positive impact of reduced G&A expense in the
period.
TECHNICAL SOLUTIONS DIVISION HIGHLIGHTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
Sept 30, 2019
|
Nine months ended
Sept 30, 2019
|
($000's)
|
2019
|
2018
|
%
Change
|
2019
|
2018
|
%
Change
|
Revenue
|
|
|
|
|
|
|
Technical
Solutions
|
45,444
|
63,273
|
(28)
|
136,311
|
166,662
|
(18)
|
|
|
|
|
|
|
|
Cost of
Sales
|
|
|
|
|
|
|
Technical Solutions
excluding depreciation and amortization
|
37,507
|
50,191
|
(25)
|
114,297
|
137,495
|
(17)
|
Depreciation and
amortization
|
5,734
|
5,096
|
13
|
17,603
|
15,582
|
13
|
Total Technical
Solutions division cost of sales
|
43,241
|
55,287
|
(22)
|
131,900
|
153,077
|
(14)
|
|
|
|
|
|
|
|
Segment Profit
Margin (1)
|
7,937
|
13,082
|
(39)
|
22,014
|
29,167
|
(25)
|
|
|
|
|
|
|
|
Segment Profit
Margin (1) as a % of revenue
|
17%
|
21%
|
|
16%
|
18%
|
|
|
|
|
|
|
|
|
(1)Calculated as revenue less cost of
sales excluding depreciation and amortization. Refer to
"Non-GAAP Measures and Operational Definitions" for further
information.
|
- The Technical Solutions division's revenue of $45.4 million and $136.3 million in the three and nine months
ended September 30, 2019 decreased 28% and 18% compared
to the three and nine months ended September 30, 2018.
The division's drilling fluids and equipment revenue correlates
with oil and gas drilling activity in the WCSB. During the three
and nine months ended September 30,
2019, rig activity in the WCSB decreased 33% and 31%,
respectively, compared to the three months ended
September 30, 2018. As a result, drilling services
revenue was negatively impacted by fewer operating days and rigs
serviced. Secure was able to partially mitigate the impact of
reduced activity levels higher contributions from production
chemicals as the Corporation expands its customer base and product
offerings.
- The Technical Solutions division's segment profit margin of
$7.9 million and $22.0 million for the three and nine months
ended September 30, 2019 decreased
39% and 25% from the comparative periods of 2018. Segment profit
margin as a percentage of revenue was 17% and 16% for the three and
nine months ended September 30, 2019, down from 21% and
18% in the prior year comparative periods. The decrease is
attributable to reduced revenue with relatively flat overhead
costs. Improved production services margins resulting from margin
improvement initiatives to lower materials costs, a favorable
product mix, and the adoption of IFRS 16 resulting in the
capitalization of certain production chemical blending plants
operated under lease agreements partially offset these
factors.
- Overall G&A expenses decreased 5% and 7% to $5.2 million and $15.5 million as a result of the
Corporation's continued efforts to manage costs efficiently and
proactively while still responding to customer demands and activity
levels. This is partially offset by costs associated with research
and development projects as Secure continues its focus on expanding
the value chain of services offered to customers, including
innovative and cost-effective solutions to reduce waste in the
drilling and production processes.
- During the three months ended September 30, 2019, the
Technical Solutions division had losses before tax of $3.0 million compared to earnings before
taxes of $2.5 million in the
prior year. During the nine months ended September 30, 2019,
the Technical Solutions division had losses before tax of
$11.1 million compared to
$3.2 million in the comparative
period of the prior year. These variances were primarily a result
of lower segment profit margin as described above.
OUTLOOK
Improved weather conditions and increased producer spending to
complete 2019 capital plans are expected to lead to higher drilling
and completion activity during the fourth quarter compared to the
three months ended September 30, 2019. However, in the
absence of significant commodity price increases, the Corporation
expects producer spending on drilling and completions to remain
cautious, with activity levels below the fourth quarter of
2018.
The Corporation has engaged financial advisors for the sales
process for the divestiture of specific service lines that do not
have recurring or production-related revenue streams. We expect a
robust sales process and are committed to obtaining a sales price
commensurate with the value of the service lines. We expect the
sales process will be ongoing throughout the fourth quarter and
into 2020, with the intent of completing any divestitures by the
end of next year.
There can be no assurance that any agreement or transaction will
occur, or if a transaction is undertaken, as to its terms or
timing. Secure has not set a definitive schedule to complete the
sales process and no decision on any particular transaction
structure has been reached at this time. Secure does not intend to
make further announcements or disclose developments with respect to
the sales process until the Corporation's board of directors has
approved a definitive transaction, unless otherwise required by
applicable laws or Secure otherwise determines that disclosure is
appropriate.
Secure's organic growth capital for 2019 has been heavily
weighted toward infrastructure projects that align with our
underlying strategy to increase the stability of our cash flows. In
addition to commissioning the Pipestone water disposal facility and feeder
pipeline, the capital plan the remainder of 2019 includes beginning
construction of the East Kaybob oil feeder pipeline; and finishing
projects to optimize capabilities and increase processing and
disposal capacity at various other facilities. The current growth
capital plan for 2020 is approximately $30 million, and is
dependent upon the timing of carryover and completion of projects
from the fourth quarter of 2019. Sustaining capital is expected to
be approximately $20 million for 2020.
Secure will continue to focus on strengthening the Corporation's
financial position throughout 2020. This will provide increased
flexibility for debt repayment, midstream infrastructure growth
underpinned by contracts, and opportunistic share repurchases.
REPORTING CHANGES
The Corporation adopted IFRS 16 as at the effective date of
January 1, 2019 which replaced IAS 17, Leases. The new
standard introduces a single lessee accounting model and requires a
lessee to recognize assets and liabilities for all leases with a
term of more than 12 months, unless the underlying asset is of low
value.
The Corporation elected the modified retrospective transition
approach, which provides lessees a method for recording existing
leases at adoption with no restatement of prior period financial
information. Under this approach, a lease liability was recognized
at January 1, 2019 in respect of leases previously
classified as operating leases, measured at the present value of
the remaining lease payments, discounted using the lessee's
incremental borrowing rate at transition. The associated
right-of-use assets were measured at amounts equal to the
respective lease liabilities, subject to certain adjustments
allowed under IFRS 16.
Adoption of the new standard at January 1, 2019 resulted in
the recording of additional right-of-use assets and lease
liabilities of $33.4 million and
$35.9 million, respectively,
related to office space, warehouses, surface land, rail cars and
certain heavy equipment. The new standard did not materially impact
consolidated net income as the depreciation of right-of-use assets
and interest and finance costs related to the lease liabilities
recognized under IFRS 16 were mostly offset by reductions in
operating lease expense, which were previously recognized in cost
of sales and general and administrative expenses. The adoption of
IFRS 16 had no impact on cash flows.
FINANCIAL STATEMENTS AND MD&A
The Corporation's condensed consolidated financial statements
and notes thereto for the three and nine months ended
September 30, 2019 and 2018 and MD&A for the three
and nine months ended September 30,
2019 and 2018 are available immediately on Secure's website
at www.secure-energy.com. The condensed consolidated financial
statements and MD&A will be available tomorrow on SEDAR at
www.sedar.com.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this document constitute
"forward-looking statements" and/or "forward-looking information"
within the meaning of applicable securities laws (collectively
referred to as "forward-looking statements"). When used in this
document, the words "may", "would", "could", "will", "intend",
"plan", "anticipate", "believe", "estimate", "expect", and similar
expressions, as they relate to Secure, or its management, are
intended to identify forward-looking statements. Such statements
reflect the current views of Secure with respect to future events
and operating performance and speak only as of the date of this
document. In particular, this document contains or implies
forward-looking statements pertaining to: management's expectations
with respect to the business, financial prospects and future
opportunities for the Corporation; the Corporation's growth
and expansion strategy; the Corporation's ability to continue to
grow the business organically and execute on strategic growth
opportunities based on current financial position; sales process
for the divestiture of specific service lines that do not have
recurring or production-related revenue streams, including outcome
of the sales process, proceeds and timing of proposed divestitures,
and the announcements, anticipated proceeds and use of proceeds
therefrom; the Corporation's proposed 2019 and 2020 capital
expenditure programs including growth and expansion and sustaining
capital expenditures, and the timing of completion for projects, in
particular the Pipestone water
disposal facility and East Kaybob pipeline; key factors
driving the Corporation's success; the oil and natural gas industry
in Canada and the U.S., including
2019 and 2020 activity levels, spending by producers and the impact
of this on Secure's activity levels; the impact of new facilities,
and new service offerings, potential acquisitions, and prior year
acquisitions on the Corporation's future financial results; demand
for the Corporation's services and products; industry fundamentals
driving the success of Secure's core operations, including
increased outsourcing of midstream work by producers, drilling,
completion and production trends, opportunities relating to crude
oil logistics, well density and economics for pipeline connecting
production volumes to midstream facilities, and global oil and gas
demand; debt service; future capital needs and how the Corporation
intends to fund its operations, working capital requirements,
dividends and capital program; access to capital; and the
Corporation's ability to meet obligations and commitments and
operate within any credit facility restrictions.
Forward-looking statements concerning expected operating and
economic conditions are based upon prior year results as well as
the assumption that levels of market activity and growth will be
consistent with industry activity in Canada and the U.S. and similar phases of
previous economic cycles. Forward-looking statements concerning the
availability of funding for future operations are based upon the
assumption that the sources of funding which the Corporation has
relied upon in the past will continue to be available to the
Corporation on terms favorable to the Corporation and that future
economic and operating conditions will not limit the Corporation's
access to debt and equity markets.
Forward-looking statements concerning the relative future
competitive position of the Corporation are based upon the
assumption that economic and operating conditions, including
commodity prices, crude oil and natural gas storage levels,
interest and foreign exchange rates, the regulatory framework
regarding oil and natural gas royalties, environmental regulatory
matters, the ability of the Corporation and its subsidiaries to
successfully market their services and drilling and production
activity in North America will
lead to sufficient demand for the Corporation's services including
demand for oilfield services for drilling and completion of oil and
natural gas wells, that the current business environment will
remain substantially unchanged, and that present and anticipated
programs and expansion plans of other organizations operating in
the energy industry may change the demand for the Corporation's
services and its subsidiaries' services. Forward-looking statements
concerning the nature and timing of growth are based on past
factors affecting the growth of the Corporation, past sources of
growth and expectations relating to future economic and operating
conditions. Forward-looking statements in respect of the costs
anticipated to be associated with the acquisition and maintenance
of equipment and property are based upon assumptions that future
acquisition and maintenance costs will not significantly increase
from past acquisition and maintenance costs.
Forward-looking statements involve significant known and unknown
risks and uncertainties, should not be read as guarantees of future
performance or results, and will not necessarily be accurate
indications of whether such results will be achieved. Readers are
cautioned not to place undue reliance on these statements as a
number of factors could cause actual results to differ materially
from the results discussed in these forward-looking statements,
including but not limited to those factors referred to under the
heading "Risk Factors" in the annual information form for
the year ended December 31, 2018 and
in the MD&A for the year ended December
31, 2018 and also includes risks associated with general
economic conditions in Canada and
the U.S.; changes in the level of capital expenditures made by oil
and natural gas producers and the resultant effect on demand for
oilfield services during drilling and completion of oil and natural
gas wells; volatility in market prices for oil and natural gas and
the effect of this volatility on the demand for oilfield services
generally; risks inherent in the Corporation's ability to generate
sufficient cash flow from operations to meet its current and future
obligations; increases in debt service charges; the Corporation's
ability to access external sources of debt and equity capital;
changes in legislation and the regulatory environment, including
uncertainties with respect to implementing binding targets for
reductions of emissions and the regulation of hydraulic fracturing
services; uncertainties in weather and temperature affecting the
duration of the oilfield service periods and the activities that
can be completed; competition; sourcing, pricing and availability
of raw materials, consumables, component parts, equipment,
suppliers, facilities, and skilled management, technical and field
personnel; liabilities and risks, including environmental
liabilities and risks, inherent in oil and natural gas operations;
ability to integrate technological advances and match advances of
completion; credit risk to which the Corporation is exposed in the
conduct of its business; Secure's ability to complete anticipated
divestiture transactions on acceptable terms or at all; updates or
changes to Secure's strategy; risks associated with the possible
failure to realize the anticipated synergies in integrating the
assets acquired in prior year acquisitions with the operations of
Secure; and other factors, many of which are beyond the control of
the Corporation.
Although forward-looking statements contained in this document
are based upon what the Corporation believes are reasonable
assumptions, the Corporation cannot assure investors that actual
results will be consistent with these forward-looking statements.
The forward-looking statements in this document are expressly
qualified by this cautionary statement. Unless otherwise required
by law, Secure does not intend, or assume any obligation, to update
these forward-looking statements.
NON-GAAP MEASURES AND OPERATIONAL DEFINITIONS
The Corporation uses accounting principles that are generally
accepted in Canada (the issuer's
"GAAP"), which includes International Financial Reporting Standards
("IFRS"). Certain supplementary measures in this document do
not have any standardized meaning as prescribed by IFRS. These
measures are intended as a complement to results provided in
accordance with IFRS. The Corporation believes these measures
provide additional useful information to analysts, shareholders and
other users to understand the Corporation's financial results,
profitability, cost management, liquidity and ability to generate
funds to finance its operations. However, they should not be used
as an alternative to IFRS measures because they do not have a
standardized meaning under IFRS and therefore may not be comparable
to similar measures presented by other companies. See the MD&A
available at www.sedar.com for further details, including
reconciliations of the Non-GAAP measures and additional GAAP
measures to the most directly comparable measures calculated in
accordance with IFRS.
ABOUT SECURE ENERGY SERVICES INC.
Secure is a TSX publicly traded integrated energy business with
midstream infrastructure, environmental and technical solutions
divisions providing industry leading customer solutions to upstream
oil and natural gas companies operating in western Canada and certain regions in the United States ("U.S.").
--------------------------------------
|
i Refer to
the "Non-GAAP Measures and Operational Definitions" section
herein.
|
|
ii IFRS 16 was adopted by the
Corporation on January 1, 2019 and resulted in the reclassification
of certain lease payments previously included in the determination
of EBITDA to depreciation and amortization expense and interest
costs. Refer to the 'Reporting Changes' section
herein.
|
|
iii Refer to the "Liquidity and
Capital Resources" section herein for details on the
Corporation's covenant calculations.
|
SOURCE SECURE Energy Services Inc.