Canyon Reports First Quarter 2016 Results
CALGARY, May 5, 2016 /CNW/ - Canyon Services Group Inc. ("Canyon" or the "Company") today announces its first quarter 2016 results. The following results should be read in conjunction with the Management's Discussion and Analysis, the consolidated interim financial statements and notes of Canyon Services Group Inc. for the three months ended March 31, 2016 and the Annual Information Form for the year ended December 31, 2015, which are available on SEDAR at www.sedar.com.
The current quarter includes the results of Canyon's pressure pumping business as well as the results of its wholly owned subsidiary Fraction Energy Services Ltd. ("Fraction"), a fracturing fluid management business.
HIGHLIGHTS
The operating and financial highlights for the three months ended March 31, 2016 are summarized as follows:
- Canyon remained active in Q1 2016 with total jobs completed increasing by 7% to 664 from 620 jobs completed in Q1 2015. Cementing jobs completed increased by 142% over Q1 2015 as Canyon secured contract-based work, while hydraulic fracturing jobs completed declined by 13% over the same period. For Q1 2016, the hydraulic fracturing job count of 420 remained steady when compared to the previous quarter of 418 jobs completed in Q4 2015.
- Canyon's active quarter combined with significant cost reduction measures implemented over the past year was insufficient to offset the dramatically lower pricing which has declined 10-15% from Q4 2015 levels and 40% from peak 2014 levels.
- Industry Conditions resulted in Q1 2016 consolidated revenues of $71.3 million compared to $155.6 million in Q1 2015 and negative consolidated adjusted EBITDA of $3.7 million in the current quarter compared to $18.3 million in Q1 2015.
- On March 29, 2016, Canyon closed a bought deal offering of common shares (the "Offering"). Pursuant to the Offering, Canyon issued 15,812,500 common shares (including 2,062,500 commons shares issued pursuant to the exercise in full of the over-allotment option granted to the underwriters) at a price of $4.00 per common share, for total gross proceeds of $63.25 million (proceeds net of transaction costs: $59.7 million). The net proceeds were initially allocated to repay bank indebtedness to maintain our financial flexibility in order to fund growth opportunities when they arise.
- On January 1, 2016 Canyon transitioned additional staff to a variable pay structure, placing approximately 75% of the Company's consolidated workforce on either hourly or daily pay rates.
- On March 3, 2016, Canyon announced the suspension of the remaining $0.03 per common share per quarter dividend preserving annual cash outflows of $10.3 million. The Board will continue to regularly review the ability of the Company to reinstate a dividend payment policy in the context of the market for Canyon's services.
- As at March 31, 2016, Canyon has nil amounts drawn under the amended facility and has $100.0 million available, which excludes amounts that may be available from the accordion feature of $50.0 million.
OVERVIEW OF FIRST QUARTER RESULTS
| 000's except per share, job amounts and hydraulic pumping capacity |
Three Months Ended |
||
| (Unaudited) |
March 31, |
||
| 2016 |
2015 |
||
| Consolidated revenues |
$71,269 |
$155,585 |
|
| Loss and comprehensive loss |
($20,594) |
($1,038) |
|
| Per share-basic |
($0.29) |
($0.02) |
|
| Per share-diluted |
($0.29) |
($0.02) |
|
| Adjusted EBITDA(1) |
($3,673) |
$18,335 |
|
| Funds from operations(1) |
$409 |
$15,584 |
|
| Adjusted income (loss) and comprehensive income (loss)(1) |
($13,100) |
$1,838 |
|
| Adjusted per share-basic(1) |
($0.19) |
$0.03 |
|
| Adjusted per share-diluted(1) |
($0.19) |
$0.03 |
|
| Total pressure pumping jobs completed (2) |
664 |
620 |
|
| Consolidated pressure pumping revenue per job (2) |
$94,967 |
$224,162 |
|
| Average fracturing revenue per job |
$134,015 |
$261,973 |
|
| Hydraulic Pumping Capacity: |
|||
| Average HHP |
255,500 |
255,500 |
|
| Exit HHP |
255,500 |
255,500 |
|
| Capital expenditures |
$1,278 |
$17,618 |
|
| 000's except per share amounts |
As at |
As at |
| (Unaudited) |
March 31, |
December 31, |
| 2016 |
2015 |
|
| Cash and cash equivalents |
$2,341 |
$3,059 |
| Working capital |
$26,047 |
$27,578 |
| Total long-term financial liabilities |
$5,069 |
$64,779 |
| Total assets |
$473,119 |
$510,088 |
| Cash dividends declared per share |
$0.00 |
$0.29 |
| Note (1): |
See Non-GAAP Measures. |
| Note (2): |
Includes all jobs from each service line within Pressure Pumping Services, specifically hydraulic |
FINANCIAL AND OPERATING HIGHLIGHTS
First Quarter Industry Conditions
First quarter of 2016 saw continued weakness in energy services. Activity across the Western Canadian Sedimentary Basin ("WCSB") declined by 42% from first quarter 2015 (source: Nickles Energy Group) in response to persistently low commodity prices. Global concerns around oil supply and economic growth together with record global inventory levels have resulted in West Texas Intermediate (WTI) oil prices for Q1 2016 declining by 31% over Q1 2015 (source: US Energy Information Administration). Similarly, in the case of natural gas, AECO spot prices for Q1 2016 declined by 34% relative to Q1 2015 (source: Nickles Energy Group) in response to strong U.S. production levels, sluggish demand due to mild winter conditions and high inventory levels. In response to the lower commodity pricing environment, exploration and production (E&P) companies have reduced capital programs leading to dramatic declines in drilling rig utilization, well licensing and well completions, all of which are key drivers of industry activity across the WCSB. In Q1 2016, WCSB drilling rig utilization averaged 23%, a reduction of 40% from Q1 2015 levels (source: Nickles Energy Group). Similarly, well licenses and completions decreased by 46% and 63%, respectively, in the first quarter 2016 compared to the first quarter 2015 (source: Nickles Energy Group).
First quarter 2016 Pressure Pumping Services and Fluid Management Services pricing declined by roughly 10% to 15% from the already low levels experienced in Q4 2015, primarily driven by lower industry activity levels.
The above described Industry Conditions are referred to throughout this press release.
Overall Performance and Results of Operations
The aforementioned Industry Conditions were the primary factor in declines of the Company's first quarter financial results when compared to Q1 2015. First Quarter 2016 consolidated adjusted EBITDA includes one-time charges for commodity tax assessments, doubtful accounts provision, and severances of $1.7 million. In Q1 2016, consolidated revenues totaled $71.3 million, down 54% from $155.6 million in Q1 2015 when industry activity and pricing were considerably higher.
The Industry Conditions were the primary driver leading to Q1 2016 consolidated adjusted EBITDA of negative $3.7 million compared to a positive $18.3 million in Q1 2015. The decrease in consolidated adjusted EBITDA from Q1 2015 is due to the volatile operating leverage that is characteristic of the pressure pumping industry. The Company was able to minimize negative adjusted EBITDA, in part, due to the shift of a majority of its workforce to variable pay combined with significant cost reduction measures (see Cost Reduction Measures for further details).
The first quarter consolidated loss and comprehensive loss of $20.6 million (Q1 2015: loss $1 million) was a result of Industry Conditions.
Overview of Pressure Pumping Services
In Pressure Pumping Services, Industry Conditions led to lower activity and rapidly deteriorating customer pricing levels. This has resulted in current pricing levels approximately 40% lower than those prevailing at the beginning of 2015.
In the first quarter of 2016, drilling activity was down approximately 40% over Q1 2015 while completions activity was down approximately 63% over Q1 2015 as certain E&P companies deferred completion expenditures due to weak commodity prices. Although activity was significantly down in the WCSB from last year, Pressure Pumping Services were able to remain relatively active throughout the quarter. Canyon's Pressure Pumping Services job count in Q1 2016 increased by 7% to 664 jobs from 620 in Q1 2015. Cementing jobs completed increased by 142% over Q1 2015 due to the addition of contract-based work, while hydraulic fracturing jobs completed declined by 13% over the same period. In the current quarter, average hydraulic fracturing revenue per job decreased 49% to $134,015 in Q1 2016 from $261,973 in Q1 2015 due primarily to the aforementioned pricing declines. This pricing degradation was the main driver in overall Pressure Pumping Services revenues declining by 54% when compared to Q1 2015.
The general trend in well completions design has resulted in increased fracturing intensity on a per well basis in the form of more fractures per wellbore and/or larger individual fracture designs. One of the main predictors of fracture intensity for pressure pumping is the average total length in meters per well. Meters drilled per well has increased by about 36% from Q1 2015 (source: Nickles Energy Group), while total meters drilled has decreased by about 52% due to the sharp decrease in WCSB activity. The service intensity per well, indicated by the increases in meters drilled per well, combined with the increased proppant volumes and the usage of more expensive types of proppant, has only partially offset the activity and pricing declines seen in the first quarter of 2016.
Pressure Pumping Services cash flow and profitability remains highly levered to changes in customer pricing due to the service intensive nature of the business. Throughout 2015 and into 2016, Canyon has been working with suppliers, as well as continuing to review our internal operations and systems to reduce both variable and fixed input costs. These include: 1) proppants and chemicals; 2) third-party hauling and fuel; and 3) labour, benefits and accommodations. The goal of these reductions is to permanently reduce our input costs of delivering services to our customers (see Cost Reduction Measures below for further details). These cost reduction efforts have not been significant enough to offset the dramatic reduction in Pressure Pumping Services' pricing. As a result, Pressure Pumping Services adjusted EBITDA in Q1 2016 turned to a negative of $3.8 million, which was down significantly from the comparable Q1 2015 adjusted EBITDA of positive $13.8 million. First quarter 2016 results include one-time charges for prior period commodity taxes, doubtful accounts provision, and severance of $1.6 million.
Overview of Fluid Management Services
Fraction is a provider of fracturing fluid logistics, containment, transfer and storage for the oil and gas industry in Northwest Alberta and Northeast British Columbia and operates as an independent operating segment. Fraction's service offering complements Canyon's offering of services to our customers.
As a result of the Industry Conditions, prices have declined by approximately 35% for water transfer services, and up to 70% for containment services, when compared to peak 2014 pricing levels. For the three months ended March 31, 2016 Fraction contributed $8.3 million in revenue and $0.9 million in adjusted EBITDA compared to $17.4 million in revenue and $5.5 million in adjusted EBITDA in Q1 2015. First quarter 2016 results include one-time charges for severance of $0.1 million.
Industry Conditions contributed to reduced Q1 2016 revenues and profitability when compared to Q1 2015. While tank rentals, fluid containment and fluid transfer services are still required for completions, the volume of work has decreased and there is continued pressure on pricing due to strong competition. The decline in volume of work is evidenced by a decline in tank rental utilization rates to 36% in Q1 2016 from 58% in Q1 2015.
Cost Reduction Measures
To mitigate the significant decreases in services' pricing, the Company has been working diligently to reduce all operating and input costs, primarily focused on: chemicals; proppants; fuel; third party hauling; accommodations; and labour. Canyon does not view the reduction of input costs as a one-time exercise and is continuing to work with suppliers and customers to gain concessions and economies of scale. More importantly, we have made and will continue to make changes to permanently reorganize and transform certain business processes with the goal of permanently reducing the cost of delivering our services.
Canyon's Variable Pay Structure
Canyon's Pressure Pumping Services division has moved away from a fixed cost model to a variable pay model so that expenses are more closely linked to revenue. The pressure pumping industry has historically experienced significant volatility of cash flows due to the fact that many field employees received fixed base salaries. This previous lack of flexibility within the Pressure Pumping Services division's cost structure magnified cash flow losses during low activity periods. Canyon's move to a variable cost structure should aid in reducing cash flow volatility during periods of low activity levels. Effective August 1, 2015, Canyon introduced an hourly rate for the transportation group to more closely match the compensation structure of the trucking industry. Effective November 1, 2015, Canyon introduced a day rate for the majority of the field staff in its pressure pumping business and made further changes to a day rate model effective January 1, 2016. These changes now place approximately 75% of the Company's consolidated workforce on a variable pay structure compared to about 10% at the beginning of the first quarter of 2015.
Other Input Costs
First quarter 2016 chemical costs have been reduced by approximately 24%, and third party hauling rates have decreased by approximately 10%, relative to first quarter 2015. Although trucking rates have declined from 2015 levels, Canyon has taken positive strides in decreasing third party hauling costs by migrating the majority of trucking to an internal cost rather than a third party cost. The cost of both Canadian and U.S. sourced proppants has been reduced by approximately 25% net of exchange rate fluctuations. Minor concessions have been received from fuel suppliers in addition to the benefits of lower oil prices and accommodation costs have been reduced by about 15%. During Q1 2016, Canyon reduced its permanent employee count in the Pressure Pumping Services and Fluid Management Services divisions by 10% and 21%, respectively, to better match reduced activity levels. The reduced work force resulted in one time severance costs of $1.5 million for the 2015 year and $0.3 million in Q1 2016. During the first quarter of 2015, employees' salaries were rolled back between 5% and 10%, with a 10% reduction of executive management salaries and directors' fees. Various employee benefits were also reduced or suspended.
Dividend
The Board of Directors (the "Board") continuously reviews the long-term capital structure of the Company and its corresponding dividend policy each fiscal quarter. On March 3, 2016, the Company announced the suspension of its quarterly dividend. At the date of this press release, there is currently no plan to reinstate a dividend until Industry Conditions improve.
INDUSTRY COMMENTARY & 2016 OUTLOOK
Industry Commentary
The deterioration of oil and natural gas prices since mid-2014 has significantly altered industry expectations of activity levels and job pricing for the remainder of 2016. E&P Companies are continually adjusting to the volatile and lower commodity prices by reducing or deferring drilling and completions' activities. In addition, the reduced levels of activity have pushed pricing in 2016 to levels that are unsustainable, resulting in negative EBITDA margins in the current quarter.
Another layer of uncertainty involves the delayed Liquefied Natural Gas ("LNG") development on the west coast of British Columbia. The decrease in commodity prices has affected LNG-driven activity levels and ultimately the timing of final investment decisions. While numerous projects have been proposed, representing approximately 15–20 billion cubic feet per day in combined export capacity (source: Canadian Association of Petroleum Producers), the timing of development has yet to be determined. Project approvals were granted in 2013 and front-end engineering was initiated for some projects, but the decline in commodity prices combined with reduced global economic growth rates and subsequent additional regulatory hurdles are having a negative impact on Canadian LNG development. Currently, it is difficult to anticipate the timing of a positive final investment decision on any of the proposed projects.
Canyon Commentary
While Canyon has reduced costs over the past several quarters to respond to decreased WCSB activity and customer pricing levels, the impact of lower customer pricing in Q1 2016 has more than offset benefits gained from our Cost Reduction Measures. This pricing degradation has directly impacted the bottom line as margins have been eroded in comparison to 2015, resulting in a negative adjusted EBITDA of $3.7 million for the Q1 2016. Even with further cost reduction measures, it will be difficult for Canyon to return to positive adjusted EBITDA in the next few quarters at existing prices and activity levels. The impact of negative adjusted EBITDA would have been much worse had we not been proactive in reducing our cost structure and taking an industry leading position in adjusting to a more variable operating cost structure.
Although we have virtually no debt and have made significant progress in implementing a more flexible and lower cost structure, we are not immune to the most dramatic decline in drilling and completions activity this industry has experienced in decades. As a result, we expect overall 2016 activity and financial results to trail 2015's already depressed levels. However, we believe financial losses of the magnitude experienced in Q1 2016 are ultimately not viable for the long-term sustainability of the pressure pumping industry as a whole. Additionally, we believe Canyon is better positioned than our competitors, both financially and operationally, to navigate the expected near term financial losses and improve the long term sustainability of our business due to our strong financial position and variable cost structure.
We are working closely with our customers to increase efficiencies in all of our service offerings, with specific focus on our pad-based 24 hour projects which offer the most cost savings to our customers. Canyon continues to look at ways of providing more efficient operations for our customers, including utilizing our Fluid Management Services division to bundle fracturing and fluid services for the customer, thereby avoiding well completion delays and providing more efficient operations for the customer.
Primary Objectives
As a result of our relatively strong financial position, and our reduced and adjusted cost structure, Canyon's short-term and long-term objectives remain essentially unchanged for 2016. In the short-term, our primary objective is to maintain and selectively grow our market share, which has and will continue to negatively impact short-term return on invested capital. Our primary long-term objectives are as follows:
- To build a leading Canadian service provider that can succeed and grow over the long-term and provide superior long-term returns on invested capital to our investors by reducing finding and development costs for our customers.
- To grow Canyon's operating assets over the next five years, with a focus on servicing the WCSB.
To achieve our objectives, Canyon will continue to undertake the following key activities:
- Seek out attractive investment opportunities, including actively evaluating oilfield acquisition opportunities that will add both long-term value on a per share basis and enhance our relative competitive position with customers; and
- Strengthen relationships with top-tier customers and build our reputation in the region's premier unconventional plays with a particular focus on high-rate treatments.
Pressure Pumping Services - Q1 Financial Review
| 000's |
Three Months Ended March 31, |
||||
| (Unaudited) |
2016 |
2015 |
|||
| Total |
Percentage of revenue |
Percentage change |
Total |
Percentage of revenue |
|
| Revenue |
$62,978 |
(54%) |
$138,182 |
||
| Depreciation - cost of services |
(10,717) |
(17%) |
(11%) |
(12,083) |
(9%) |
| Other - cost of services |
(63,399) |
(101%) |
(47%) |
(119,967) |
(87%) |
| Cost of services |
(74,116) |
(118%) |
(44%) |
(132,050) |
(96%) |
| Gross (loss) profit |
(11,138) |
(18%) |
(282%) |
6,132 |
4% |
| Depreciation - administrative expenses |
(539) |
(1%) |
2% |
(529) |
-% |
| Other - administrative expenses |
(3,371) |
(5%) |
(23%) |
(4,403) |
(3%) |
| Administrative expenses |
(3,910) |
(6%) |
(21%) |
(4,932) |
(3%) |
| Amortization expense |
(5) |
-% |
-% |
(5) |
-% |
| Results from operating activities |
(15,053) |
(24%) |
(1,360%) |
1,195 |
1% |
| Add non-cash items: |
|||||
| Depreciation and amortization |
11,261 |
18% |
(11%) |
12,617 |
9% |
| Adjusted EBITDA(1) |
($3,792) |
(6%) |
(127%) |
$13,812 |
10% |
| Note (1): See Non-GAAP Measures. |
Revenues
In Q1 2016, Canyon completed 664 pressure pumping jobs, a 7% increase over the 620 jobs completed in Q1 2015 despite industry activity levels that were approximately one-half of prior year's levels. In the current quarter, lower-revenue cementing jobs completed increased by 142% over Q1 2015 due to the addition of contract work, while higher-revenue hydraulic fracturing jobs completed declined by 13% over the same periods due to Industry Conditions. Commodity prices remained low throughout the quarter which, coupled with reduced industry activity, has led to sharply lower customer pricing. As a result, Pressure Pumping Services revenue decreased by 54% to $63.0 million from $138.2 million in Q1 2015.
Cost of services
Cost of services includes materials, products, transportation and repair costs, employee benefits expense and depreciation of property and equipment. The following table provides a summary of cost of services:
| 000's |
Three Months Ended March 31, |
||
| (Unaudited) |
2016 |
Percentage change |
2015 |
| Employee benefits expense |
$18,231 |
(39%) |
$30,027 |
| Depreciation of property and equipment |
10,717 |
(11%) |
12,083 |
| Materials and inventory |
33,619 |
(50%) |
67,679 |
| Operating expense |
11,549 |
(48%) |
22,261 |
| Total cost of services |
$74,116 |
(44%) |
$132,050 |
- Total costs of services did not decline in proportion to revenue declines as supplier discounts were not in proportion to services revenue pricing decreases. Additionally, certain of the input costs purchased in United States dollars (USD) were negatively affected by the appreciation in USD relative to the Canadian dollar.
- Employee benefits expense decreased by 39% in Q1 2016 when compared to Q1 2015 due to reduced activity levels, as well as a reduction in the permanent employee count. Severance costs were $208 during Q1 2016. While the Company implemented wage rate reductions in response to Industry Conditions, pricing for services deteriorated more than the wage rate reductions.
- Depreciation of property and equipment decreased 11% when compared to Q1 2015, due primarily to the change in expected useful life calculation of coiled tubing, nitrogen and cementing equipment that occurred in Q2 2015.
- Materials, products, transportation and other operating expenses decreased dramatically in Q1 2016 when compared to Q1 2015 due to lower activity and previously noted Cost Reduction Measures. Included in Q1 2016 operating expense is a commodity tax provision of $0.8 million resulting from ongoing assessments.
Administrative expenses (G&A)
The following table provides a summary of G&A:
| 000's |
Three Months Ended March 31, |
||
| (Unaudited) |
2016 |
Percentage change |
2015 |
| Employee benefits expense |
$2,094 |
(35%) |
$3,242 |
| Depreciation of property and equipment |
539 |
2% |
529 |
| Other administration expenses |
1,277 |
10% |
1,161 |
| Total administrative expenses |
$3,910 |
(21%) |
$4,932 |
Overall, G&A decreased by 21% mainly due to lower employee benefits expense attributable to the wage rate, benefits and staffing reductions implemented at the end of Q1 2015 and in Q1 2016 as previously discussed in Cost Reduction Measures.
Adjusted EBITDA
In Q1 2016, adjusted EBITDA for Pressure Pumping Services decreased to a negative $3.8 million from a positive $13.8 million in Q1 2015. The primary cause of the decline was Industry Conditions that resulted in reduced activity and customer pricing.
Fluid Management Services – Q1 Financial Review
| 000's |
Three Months Ended March 31, |
||||
| (Unaudited) |
2016 |
2015 |
|||
| Total |
Percentage of revenue |
Percentage change |
Total |
Percentage of revenue |
|
| Revenue |
$8,291 |
(52%) |
$17,403 |
||
| Depreciation - cost of services |
(2,411) |
(29%) |
40% |
(1,719) |
(10%) |
| Other - cost of services |
(5,987) |
(72%) |
(42%) |
(10,266) |
(59%) |
| Cost of services |
(8,398) |
(101%) |
(30%) |
(11,985) |
(69%) |
| Gross (loss) profit |
(107) |
(1%) |
(102%) |
5,418 |
31% |
| Other - administrative expenses |
(1,446) |
(17%) |
(11%) |
(1,624) |
(9%) |
| Administrative expenses |
(1,446) |
(17%) |
(11%) |
(1,624) |
(9%) |
| Amortization expense |
(1,442) |
(17%) |
(4%) |
(1,500) |
(9%) |
| Results from operating activities |
(2,995) |
(36%) |
(231%) |
2,294 |
13% |
| Add non-cash items: |
|||||
| Depreciation and amortization |
3,853 |
46% |
20% |
3,219 |
19% |
| Adjusted EBITDA(1) |
$858 |
10% |
(84%) |
$5,513 |
32% |
| Note (1): See Non-GAAP Measures. |
Revenues
The Fluid Management Services division, contributed $8.3 million of revenue to Canyon in Q1 2016, a 52% decrease from the $17.4 million generated in Q1 2015. Industry Conditions caused increased competitive pressures from smaller service providers which led to pricing declines of 15% to 30% for water transfer services and significantly higher pricing declines for containment services relative to Q1 2015.
Cost of services
The following table provides a summary of cost of services:
| 000's |
Three Months Ended March 31, |
||
| (Unaudited) |
2016 |
Percentage change |
2015 |
| Employee benefits expense |
$2,650 |
(41%) |
$4,501 |
| Depreciation of property and equipment |
2,411 |
40% |
1,719 |
| Materials and inventory |
841 |
(19%) |
1,044 |
| Operating expense |
2,496 |
(47%) |
4,721 |
| Total cost of services |
$8,398 |
(30%) |
$11,985 |
- Employee benefits expense decreased by 41% in Q1 2016 due to a reduction in wage rates as well as a decrease in staffing to match reduced industry activity levels.
- Materials, products, transportation and repair costs decreased dramatically in Q1 2016 when compared to Q1 2015, mainly due to lower activity. Although discounts for costs were negotiated, the costs did not decrease in proportion to revenue as competitive pressures resulted in price decreases which were greater than input cost decreases.
- Depreciation of property and equipment expense increased by 40% in Q1 2016 primarily due to the acquisition of a fluid hauling business in Q3 2015.
Administrative expenses (G&A)
The following table provides a summary of G&A:
| 000's |
Three Months Ended March 31, |
||
| (Unaudited) |
2016 |
Percentage change |
2015 |
| Employee benefits expense |
$811 |
4% |
$779 |
| Other administration expenses |
635 |
(25%) |
845 |
| Total administrative expenses |
$1,446 |
(11%) |
$1,624 |
Employee benefits expense did not decrease primarily as a result of one-time severance costs. Overall, G&A decreased as a result of continued cost reduction measures.
Adjusted EBITDA
Q1 2016 adjusted EBITDA totaled $0.9 million, or 10% of revenues, a decrease of 84% from $5.5 million in Q1 2015, primarily due to the aforementioned lower activity and reduced customer pricing.
Corporate – Q1 Financial Review
This segment consists of costs incurred to operate a public company, including corporate management, head office costs, share-based payment expenses and professional fees.
| 000's |
Three Months Ended March 31, |
|||
| (Unaudited) |
2016 |
2015 |
||
| Total |
Percentage change |
Total |
||
| Revenue |
$- |
$- |
||
| Share-based payment transactions - administrative expenses |
(4,860) |
254% |
(1,371) |
|
| Other - administrative expenses |
(739) |
(25%) |
(990) |
|
| Results from operating activities |
(5,599) |
137% |
(2,361) |
|
| Add non-cash items: |
||||
| Share-based payments expense |
4,860 |
254% |
1,371 |
|
| Adjusted EBITDA(1) |
($739) |
(25%) |
($990) |
|
| Note (1): See Non-GAAP Measures. |
Administrative expenses for the three months ended March 31, 2016 totaled $5.6 million (2015: $2.4 million) and includes employee benefits expense, share-based payments, and other head office administrative expenses. The change is due to an increase in non-cash share-based payments expense as a result of annual bonus awards being settled with non-cash share-based payments rather than cash bonuses.
Other Items – Quarterly Consolidated Statement of Operations
| 000's |
Three Months Ended March 31, |
|
| (Unaudited) |
2016 |
2015 |
| Finance costs |
$589 |
$533 |
| Foreign exchange loss |
$565 |
$1,564 |
| Income tax expense (recovery) |
($5,227) |
$20 |
Finance costs
Finance costs include interest on bank indebtedness and finance lease obligations and totaled $0.6 million in Q1 2016, which approximated the 2015 figure of $0.5 million. Finance costs include interest on loans, finance lease obligations and automobile loans.
Foreign exchange loss
In Q1 2016, the Company recorded a foreign exchange loss of $0.6 million (2015: loss of $1.6 million). The Company purchases U.S. sourced proppants which require payment in USD. Payments are 30 to 45 days after purchase which cause foreign exchange gains and losses on outstanding USD accounts payable. In addition, included within foreign exchange gain (loss) are amounts related to the Company's hedging activities. The decrease in foreign exchange loss in Q1 2016 over Q1 2015 is due to the fact the USD depreciated against the Canadian dollar from Q4 2015 to the end of Q1 2016.
Income tax expense
For Q1 2016, the actual calculated tax rate did not equal the expected combined income tax rate of 27% primarily due to income before income tax including expenses that are not deductible for tax purposes, including non-deductible share-based payment expenses.
NON-GAAP MEASURES
The Company's Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). Certain measures in this document do not have any standardized meaning as prescribed by IFRS and are considered Non-GAAP Measures.
Adjusted EBITDA, funds from operations, adjusted income (loss) and comprehensive income (loss) and adjusted per share amounts are not recognized measures under IFRS. Management believes that in addition to income (loss) and comprehensive income (loss), the following measures are useful to help assess the results of the Company.
Descriptions and reconciliations of these Non-GAAP Measures to the most directly comparable IFRS measures are outlined below. Readers should be cautioned that the below metrics should not be construed as an alternative to or a more meaningful measure than those determined in accordance with IFRS. Canyon's method of calculating these metrics may differ from other companies and accordingly, they may not be comparable to measures used by other companies.
Adjusted EBITDA
Canyon calculates adjusted EBITDA as loss and comprehensive loss for the period adjusted for depreciation and amortization, equity settled share-based payment transactions, gain or loss on sale of property and equipment, finance costs, foreign exchange loss, income tax (recovery) expense, and impairment.
Adjusted EBITDA is a useful supplemental measure as it provides an indication of the cash results generated by the Company's principal business activities prior to consideration of how those activities are financed and how the results are taxed.
| 000's |
Three Months Ended |
|
| (Unaudited) |
March 31, |
|
| 2016 |
2015 |
|
| Loss and comprehensive loss |
($20,594) |
($1,038) |
| Add (deduct): |
||
| Depreciation and amortization |
15,114 |
15,836 |
| Finance costs |
589 |
533 |
| Foreign exchange loss |
565 |
1,564 |
| Share-based payment transactions |
4,860 |
1,371 |
| (Gain) loss on sale of property and equipment |
(167) |
49 |
| Write-off of equipment and onerous contract |
1,187 |
- |
| Income tax expense (recovery) |
(5,227) |
20 |
| Adjusted EBITDA |
($3,673) |
$18,335 |
Funds from Operations
Funds from operations refers to cash flow from operations before changes in non-cash working capital, income taxes recovered (paid), but includes finance costs and current tax recovery (expense).
Funds from operations is a measure of liquidity based on cash generated by the Company's activities without consideration of the timing of the monetization of non-cash working capital items or payment of taxes. Management believes that funds from operations provides investors with an indication of cash available for capital commitments, debt repayments, payment of taxes, and other expenditures.
| 000's |
Three Months Ended |
|
| (Unaudited) |
March 31, |
|
| 2016 |
2015 |
|
| Net cash (used in) from operating activities |
$5,342 |
($8,320) |
| Add (deduct): |
||
| Income tax paid (recovered) |
(675) |
8,827 |
| Change in non-cash working capital related to operating activities |
(8,679) |
16,188 |
| Current tax recovery (expense) |
5,010 |
(578) |
| Finance costs |
(589) |
(533) |
| Funds from operations |
$409 |
$15,584 |
Adjusted Income (Loss) and Comprehensive Income (Loss)
Adjusted income (loss) and comprehensive income (loss) is calculated as income (loss) and comprehensive income (loss) plus amortization expense on intangibles, impairment expense and share-based payment transactions.
Adjusted per share basic and diluted earnings (loss) per share are calculated as adjusted income (loss) and comprehensive income (loss) divided by weighted average basic and diluted shares outstanding.
These measures provide investors with results generated by the Company's business activities in the normal course of business, not taking into account share-based payments expense, one-time items or amortization of intangibles or impairment which are not reflective of past operational activity.
| 000's |
Three Months Ended |
|
| (Unaudited) |
March 31, |
|
| 2016 |
2015 |
|
| Loss and comprehensive loss |
($20,594) |
($1,038) |
| Amortization expense on intangibles |
1,447 |
1,505 |
| Write-off of equipment and onerous contract |
1,187 |
- |
| Share-based payment transactions |
4,860 |
1,371 |
| Adjusted income (loss) and comprehensive income (loss) |
($13,100) |
$1,838 |
| Adjusted per share-basic |
($0.19) |
$0.03 |
| Adjusted per share-diluted |
($0.19) |
$0.03 |
FORWARD-LOOKING STATEMENTS
This document contains certain forward-looking information and statements within the meaning of applicable securities laws. The use of any of the words "expect", "anticipate", "continue", "estimate", "objective", "ongoing", "may", "will", "should", "believe", "plans" and similar expressions are intended to identify forward-looking information or statements. In particular, but without limiting the foregoing, this document contains forward-looking information and statements pertaining to the following: future oil and natural gas prices; future results from operations; future liquidity and financial capacity and financial resources; future costs, expenses and royalty rates; future interest costs; future capital expenditures; future capital structure and expansion; the making and timing of future regulatory filings; and the Company's ongoing relationship with major customers.
The forward-looking information and statements contained in this document reflect several material factors and expectations and assumptions of the Company including, without limitation: the expected timing the Company will experience negative adjusted EBITDA; that we are better positioned than our competitors to manage financial losses; that bundled services will provide more efficient operations; our primary objectives, and methods of achieving those objectives; the general continuance of current or, where applicable, assumed industry conditions; the continuance of existing tax, royalty and regulatory regimes; certain commodity price and other cost assumptions; the continued availability of adequate debt and/or equity financing and cash flow to funds its capital and operating requirements as needed; and the extent of its liabilities. The Company believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable but no assurance can be given that these factors, expectations and assumptions will prove to be correct.
The forward-looking information and statements included in this document are not guarantees of future performance and should not be unduly relied upon. 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 including, without limitation: changes in commodity prices; changes in the demand for or supply of the Company's services; unanticipated operating results; changes in tax or environmental laws, royalty rates or other regulatory matters; changes in the development plans of third parties; increased debt levels or debt service requirements; limited, unfavorable or a lack of access to capital markets; increased costs; a lack of adequate insurance coverage; the impact of competitors; reliance on industry partners; attracting and retaining skilled personnel and certain other risks detailed from time to time in the Company's public disclosure documents (including, without limitation, those risks identified in this document and the Company's Annual Information Form).
The forward-looking information and statements contained in this document speak only as of the date of the document, and none of the Company or its subsidiaries assumes any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws.
SOURCE Canyon Services Group Inc.
Brad Fedora, President and CEO, Canyon Services Group Inc., 2900 Bow Valley Square III, 255 - 5 Avenue SW, Calgary, Alberta, T2P 3G6, Phone: 403-290-2491, Fax: 403-355-2211; Or Barry O'Brien, Vice President, Finance and CFO, Canyon Services Group Inc., 2900 Bow Valley Square III, 255 - 5 Avenue SW, Calgary, Alberta, T2P 3G6, Phone: 403-290-2478, Fax: 403-355-2211
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