Canyon Reports Second Quarter 2016 Results
TSX - FRC
CALGARY, Aug. 4, 2016 /CNW/ - Canyon Services Group Inc. ("Canyon" or the "Company") today announces its second 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 and six months ended June 30, 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 June 30, 2016 are summarized as follows:
- Significant cost reduction measures resulted in the Company minimizing the financial loss to $14.3 million of negative adjusted consolidated EBITDA. Excluding the effect of $4.4 million of bad debt expenses and severance costs, consolidated adjusted EBITDA would have approximated the Q2 2015 amount of negative $9.8 million even though Industry Conditions resulted in pricing driven revenue declines of 40% to $25.7 million (Q2 2015: $43.2 million). The bad debt expense primarily relates to a private equity backed customer entering into insolvency proceedings during the quarter.
- On January 1, 2016 Canyon transitioned additional field support staff to a variable pay structure, placing approximately 75% of the Company's consolidated workforce on either hourly or daily pay rates. This strategy helped Canyon mitigate Q2 financial losses which the Company estimates would have been approximately $4.5 million greater in the absence of such measures.
- As at June 30, 2016, Canyon maintained a strong financial position with $5.0 million drawn under its amended credit facility and has $95.0 million available, which excludes amounts that may be available from the accordion feature of $50.0 million.
OVERVIEW OF RESULTS
| 000's except per share, job amounts and hydraulic pumping capacity |
Three Months Ended |
Six Months Ended |
|||
| (Unaudited) |
June 30, |
June 30, |
|||
| 2016 |
2015 |
2016 |
2015 |
||
| Consolidated revenues |
$25,733 |
$43,159 |
$97,002 |
$198,744 |
|
| Loss and comprehensive loss |
($22,617) |
($21,857) |
($43,211) |
($22,939) |
|
| Per share-basic |
($0.26) |
($0.32) |
($0.55) |
($0.33) |
|
| Per share-diluted |
($0.26) |
($0.32) |
($0.55) |
($0.33) |
|
| Adjusted EBITDA(1) |
($14,261) |
($9,754) |
($17,934) |
$8,581 |
|
| Funds from (used in) operations(1) |
($7,943) |
($4,504) |
($7,534) |
$11,082 |
|
| Adjusted loss and comprehensive loss(1) |
($19,907) |
($18,881) |
($33,007) |
($17,087) |
|
| Adjusted per share-basic(1) |
($0.23) |
($0.27) |
($0.42) |
($0.25) |
|
| Adjusted per share-diluted(1) |
($0.23) |
($0.27) |
($0.42) |
($0.25) |
|
| Total pressure pumping jobs completed (2) |
530 |
283 |
1,194 |
903 |
|
| Consolidated pressure pumping revenue per job (2) |
$43,920 |
$131,585 |
$72,554 |
$195,149 |
|
| Average fracturing revenue per job |
$62,665 |
$232,569 |
$105,458 |
$255,162 |
|
| Hydraulic Pumping Capacity: |
|||||
| Average HHP |
255,500 |
255,500 |
255,500 |
255,500 |
|
| Exit HHP |
255,500 |
255,500 |
255,500 |
255,500 |
|
| Capital expenditures |
$582 |
$6,053 |
$1,860 |
$23,671 |
|
| 000's except per share amounts |
||
| (Unaudited) |
As at June 30, 2016 |
As at December 31, 2015 |
| Cash and cash equivalents |
$1,127 |
$3,059 |
| Working capital |
$23,127 |
$27,578 |
| Total long-term financial liabilities |
$8,665 |
$64,779 |
| Total assets |
$446,522 |
$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 fracturing; coiled tubing; nitrogen fracturing; acidizing and cementing. |
FINANCIAL AND OPERATING HIGHLIGHTS
Second Quarter Industry Conditions
Oil prices improved dramatically in the second quarter of 2016 with WTI price increasing by 36% relative to the low levels experienced in the first quarter of 2016 (source: Nickles Energy Group). However, the price for this commodity remains weak compared to historical levels and has continued to demonstrate high volatility. Natural gas prices weakened sequentially with AECO spot prices declining by 23% in Q2 2016 over Q1 2016. Industry activity and the demand for oilfield services has now been declining for approximately eighteen months in response to the weak commodity prices. Global concerns around oil supply and economic growth together with record global inventory levels have resulted in WTI oil prices for Q2 2016 declining by 21% over Q2 2015 (source: US Energy Information Administration). Similarly, in the case of natural gas, AECO spot prices for Q2 2016 declined by 48% relative to Q2 2015 (source: Nickles Energy Group) in response to strong U.S. production levels, high inventory levels, and mild winter conditions.
In response to the lower commodity pricing environment, exploration and production companies (E&P) have reduced capital programs leading to dramatic declines in drilling rig utilization, well licensing and well completions, which are key drivers of oilfield services activity across the Western Canadian Sedimentary Basin ("WCSB"). The average drilling rig count across the WCSB has declined by 50% from the second quarter of 2015 (source: Nickles Energy Group), while WCSB well licenses decreased by 34% in the second quarter of 2016 compared to the second quarter of 2015 (source: Nickles Energy Group).
As a result of lower industry activity levels and intense competition, pricing levels for pressure pumping and fluid management services have decreased to unprecedented levels which is evident from the overall negative financial results experienced by the pressure pumping industry. The Company's second quarter 2016 Pressure Pumping Services and Fluid Management Services pricing declined by roughly 5% from the already low levels experienced in Q1 2016.
The above Industry Conditions are referred to throughout this Press Release.
Overall Performance and Results of Operations
The aforementioned Industry Conditions was a contributing factor resulting in lower second quarter financial results when compared to Q2 2015. The primary factor resulting in lower Second Quarter 2016 consolidated adjusted EBITDA is the impact of bad debt expenses and severance costs of $4.4 million. In Q2 2016, consolidated revenues totaled $25.7 million, down 40% from $43.2 million in Q2 2015 when industry activity and pricing were considerably higher. Although backed by a large private equity shareholder, an E&P customer filed for creditor protection under the Companies Creditors Arrangement Act, resulting in the recognition of a significant bad debt expense in the second quarter.
Q2 2016 consolidated adjusted EBITDA was negative $14.3 million compared to negative $9.8 million in Q2 2015. Excluding the effect of $4.4 million in bad debt expenses and severance costs, Q2 2016 negative adjusted EBITDA would have been consistent with Q2 2015 results, even though revenue was down 40% from the same period in 2015. Canyon's ability to maintain a relatively stable level of financial loss while Industry Conditions continued to worsen is the result of Canyon shifting the majority of the Company's workforce to variable pay in 2015 and early 2016, combined with significant additional cost reduction measures (see Cost Reduction Measures for further details).
For the six months ended June 30, 2016 consolidated revenue of $97.0 million (2015: $198.7 million) and consolidated adjusted EBITDA of negative $17.9 million (2015: $8.6 million) decreased significantly from the comparable 2015 period primarily due to Industry Conditions.
The consolidated loss and comprehensive loss for the three and six months ended June 30, 2016 of $22.6 million and $43.2 million, respectively (three and six months ended June 30, 2015: $21.9 million loss and $22.9 million loss, respectively) 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% - 45% lower than those prevailing at the beginning of 2015.
In the three and six months ended June 30, 2016, drilling activity was down approximately 50% and 42%, respectively, over the comparable 2015 periods as certain E&P companies deferred completion expenditures due to weak commodity prices. Pressure Pumping Services experienced high job counts during the first half of 2016 with Canyon's Pressure Pumping Services job count for the three and six months ended June 30, 2016 increasing by 87% and 32%, respectively, from the comparable 2015 periods. Cementing jobs completed for the three and six months ended June 30, 2016 increased by 432% and 242%, respectively, over the comparable 2015 periods primarily due to Canyon's focus on expanding its market share in Saskatchewan which has led to long-term contract-based work. Hydraulic fracturing jobs reported completed for the three and six months ended June 30, 2016 increased by 94% and 12% over the comparable 2015 periods mostly due to administrative changes requested by certain customers to invoice by stage rather than by day. For the three and six months ended June 30, 2016, average hydraulic fracturing revenue per job decreased 73% and 59%, respectively, from the comparable 2015 periods due primarily to the aforementioned pricing declines, job mix and the customer requested administrative changes.
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 in the first half of 2016 has increased by approximately 9% from the first half of 2015 (source: Nickles Energy Group), however, total meters drilled in the WCSB has decreased by approximately 40% due to the sharp decrease in overall activity. The service intensity per well combined with the increased proppant volumes and the usage of more expensive types of proppant, has not been enough to offset the activity and pricing declines seen in the first half of 2016.
Pressure Pumping Services cash flow and profitability remain highly levered to changes in customer pricing due to the cost intensive nature of the business. Throughout 2015 and into 2016, Canyon has been working with suppliers, as well as continuing to review its 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, while substantial, cannot overcome the dramatic reduction in Pressure Pumping Services' pricing. As a result, Pressure Pumping Services adjusted EBITDA for the three and six months ended June 30, 2016 was negative $12.4 million and $16.2 million, respectively, which was down from the comparable 2015 periods of adjusted EBITDA of negative $10.7 million and positive $3.1 million, respectively. Second quarter 2016 results include the impact of bad debt expenses and severance costs of $3.8 million.
Overview of Fluid Management Services
Fraction is a provider of fracturing fluid logistics, containment, transfer and storage for the oil and natural 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 and six months ended June 30, 2016, Fraction contributed $2.6 million and $10.9 million in revenue, respectively, resulting in $1.0 million and $0.1 million of negative adjusted EBITDA, respectively. During the three and six months ended June 30, 2015, revenue was $6.6 million and $24.0 million, respectively, and adjusted EBITDA was $1.5 million and $7.0 million, respectively. Second quarter 2016 financial results were negatively affected by charges for severance costs and bad debt expenses of $0.6 million.
Industry Conditions contributed to reduced first half of 2016 revenues and profitability when compared to the first half of 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 intense competition. The decline in volume of work is evidenced by a decline in tank rental utilization rates to 30% in first half of 2016 from 48% in the first half of 2015.
Cost Reduction Measures
To mitigate the significant decreases in the pricing of services, Canyon 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. The positive financial impact of the switch to variable pay is evidenced in the Q2 2016 financial results. Although consolidated revenues were down approximately 40%, negative consolidated adjusted EBITDA was consistent with Q2 2015 levels, net of the $4.4 million of bad debt expenses and severance costs. The timeline for the move to variable pay has been as follows: (1) effective August 1, 2015, Canyon introduced an hourly rate for the transportation group to more closely match the compensation structure of the trucking industry; (2) effective November 1, 2015, Canyon introduced a day rate for the majority of the field staff in its pressure pumping business; and (3) effective January 1, 2016 additional field support staff were transitioned to the day rate model. 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
The second quarter of 2016 chemical costs have been reduced by approximately 17%, and third party hauling rates have decreased by approximately 10%, relative to the second quarter of 2015. Although trucking rates have declined from 2015 levels, Canyon has achieved additional savings in decreasing third party hauling costs by migrating the majority of its 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 21% net of exchange rate fluctuations in the second quarter of 2016 compared to the second quarter of 2015. Minor concessions have been received from fuel suppliers and accommodation costs have been reduced by about 15%. During the first half of 2016, Canyon reduced its permanent employee count in the Pressure Pumping Services and Fluid Management Services divisions by 17% and 23%, respectively, to better match reduced activity levels. The reduced work force resulted in severance costs of $1.5 million for the 2015 year and $0.7 million for the six months ended June 30, 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. The reduced salaries remain in effect and various employee benefits were also reduced or suspended.
Dividend
The Board of Directors 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
The deterioration of oil and natural gas prices since mid-2014 has significantly altered industry expectations of activity levels and job pricing for at least the remainder of 2016. Through the second quarter, improvement in commodity prices has introduced some early discussion of increasing activity. However, E&P's remain extremely sensitive to the volatile swings in the commodity price process. Therefore, any significant expansion of E&P capital programs is likely dependent upon further commodity price improvements and a moderation of commodity price volatility. Should an expansion in E&P capital programs occur, the corresponding increase in industry activity should allow oilfield services activity and pricing to improve above currently unsustainable levels that have resulted in negative EBITDA margins through the first half of 2016.
The current commodity price environment has forced E&P's to focus on only the most economic resource plays within the WCSB. The key trend is for continued investment in the Montney, Bakken and Viking formations with increasing interest in the Duvernay and Shaunavon. These are all areas in which Canyon is active. Given the growing service intensity required by E&P Companies to complete wells in the Montney and Duvernay formations, a modest increase in commodity prices could result in a return to a sustainable level of well completion services pricing. Any potential pricing increase could be positively or negatively magnified depending upon how quickly the well completion services industry can reactivate idle equipment. Our view is that the ability for the pressure pumping industry to activate idle equipment quickly will depend on: (1) the availability of qualified workers, many of whom have now left the industry; and (2) the need for significant investment to overhaul equipment which has been idle for approximately one year, on an expedited basis. While a positive final investment decision ("FID") on Liquefied Natural Gas would have a positive impact on advancing increases in well completion services pricing, we believe that the economics of the key WCSB resource plays (noted above) are competitive with other significant North American resource plays such that a FID is not required for continued (and potentially increasing) E&P investment in these areas.
Canyon Commentary
While Canyon has reduced its costs over the past several quarters to respond to decreased WCSB activity and customer pricing levels, the impact of lower customer pricing for the six months ended June 30, 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 consolidated adjusted EBITDA of $17.9 million for the six months ended June 30, 2016. Even with further cost reduction measures, it will be difficult for Canyon to return to positive adjusted EBITDA unless pricing and overall oilfield services activity levels improve. For the six months ended June 30, 2016, negative adjusted EBITDA would have been 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 the Company has significantly reduced its debt levels with the recently completed equity offering and succeeded 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 during the first half of 2016 are ultimately not viable for the long-term sustainability of the pressure pumping industry as a whole and therefore oilfield services pricing will improve. If customer prices do not improve, we believe more pressure pumping companies will exit the business as was experienced in the first half of 2016. We believe Canyon is better positioned than our competitors to navigate these expected near term financial losses while making improvements for the long-term sustainability of our business.
We are continuing to work 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. This includes 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 oilfield 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 through operational and technical advancements in service delivery.
- To grow Canyon's operating assets over the next five years, with a continuing 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.
FINANCIAL REVIEW – SECOND QUARTER 2016 COMPARED TO 2015
Pressure Pumping Services – Q2 Financial Review
| 000's (Unaudited) |
Three Months Ended June 30, |
||||
| 2016 |
2015 |
||||
| Total |
Percentage |
Percentage |
Total |
Percentage |
|
| Revenue |
$23,141 |
(37%) |
$36,560 |
||
| Depreciation - cost of services |
(9,443) |
(41%) |
(9%) |
(10,392) |
(28%) |
| Other - cost of services |
(29,580) |
(128%) |
(32%) |
(43,786) |
(120%) |
| Cost of services |
(39,023) |
(169%) |
(28%) |
(54,178) |
(148%) |
| Gross profit (loss) |
(15,882) |
(69%) |
(10%) |
(17,618) |
(48%) |
| Depreciation - administrative expenses |
(346) |
(1%) |
(40%) |
(576) |
(2%) |
| Other - administrative expenses |
(2,580) |
(11%) |
(25%) |
(3,444) |
(9%) |
| Administrative expenses |
(2,926) |
(13%) |
(27%) |
(4,020) |
(11%) |
| Bad debt expenses |
(3,417) |
(15%) |
-% |
- |
-% |
| Amortization expense |
(5) |
-% |
-% |
(5) |
-% |
| Results from operating activities |
(22,230) |
(96%) |
3% |
(21,643) |
(59%) |
| Add non-cash items: |
|||||
| Depreciation and amortization |
9,794 |
42% |
(11%) |
10,973 |
30% |
| Adjusted EBITDA(1) |
($12,436) |
(54%) |
17% |
($10,670) |
(29%) |
| Note (1): See Non-GAAP Measures. |
Revenues
In Q2 2016, Canyon completed 530 jobs, an 87% increase over the 283 jobs completed in Q2 2015 despite industry activity levels that were approximately one-half of prior year's levels. However, both competitive pricing pressures as well as the mix of services provided adversely impacted revenue per job. In the current quarter, lower-revenue cementing jobs completed increased by 432% over Q2 2015 due to the addition of contract work, while higher-revenue hydraulic fracturing jobs completed increased by 94% over the same period primarily due to the job mix and administrative changes in how our customers have requested their billings resulting in more invoices per well. Although Canyon's activity levels increased overall, commodity prices remained volatile throughout the quarter which, coupled with reduced overall industry activity, led to sharply lower customer pricing. As a result, Pressure Pumping Services revenue decreased by 37% to $23.1 million from $36.6 million in Q2 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 June 30, |
||
| (Unaudited) |
|||
| 2016 |
Percentage change |
2015 |
|
| Employee benefits expense |
$8,836 |
(40%) |
$14,800 |
| Depreciation of property and equipment |
9,443 |
(9%) |
10,392 |
| Materials and inventory |
12,913 |
(4%) |
13,482 |
| Operating expense |
7,831 |
(49%) |
15,504 |
| Total cost of services |
$39,023 |
(28%) |
$54,178 |
- Total costs of services did not decline in proportion to revenue declines as supplier discounts and staff reductions were not in proportion to services revenue pricing decreases.
- Employee benefits expense decreased by 40% in Q2 2016 when compared to Q2 2015 due to reduced activity levels, as well as a reduction in the fixed salaried employee count. Severance costs were $0.4 million during Q2 2016. While the Company implemented staff reductions in response to Industry Conditions, pricing for services deteriorated more than the staffing reductions.
- Depreciation of property and equipment decreased 9% when compared to Q2 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 in Q2 2016 when compared to Q2 2015 due to the previously noted Cost Reduction Measures offset by increases in third party materials required to support increases in well intensity.
Administrative expenses (G&A)
The following table provides a summary of G&A:
| 000's |
Three Months Ended June 30, |
||
| (Unaudited) |
|||
| 2016 |
Percentage change |
2015 |
|
| Employee benefits expense |
$2,536 |
(19%) |
$3,123 |
| Depreciation of property and equipment |
346 |
(40%) |
576 |
| Other administration expenses |
44 |
(86%) |
321 |
| Total administrative expenses |
$2,926 |
(27%) |
$4,020 |
Overall, G&A expenses are lower by 27% primarily attributable to the wage rate, benefits and staffing reductions implemented throughout 2015 and into Q2 2016 as previously discussed in Cost Reduction Measures.
Adjusted EBITDA
In Q2 2016, adjusted EBITDA for Pressure Pumping Services decreased to a negative $12.4 million from a negative $10.7 million in Q2 2015. The primary cause of the decline was due to bad debt expenses of approximately $3.4 million. Excluding the effect of the bad debt expenses, negative adjusted EBITDA from the Pressure Pumping Services division was reduced primarily due to the previously discussed Cost Reduction Measures.
Fluid Management Services – Q2 Financial Review
| 000's |
Three Months Ended June 30, |
||||
| (Unaudited) |
2016 |
2015 |
|||
| Total |
Percentage |
Percentage |
Total |
Percentage |
|
| Revenue |
$2,592 |
(61%) |
$6,599 |
||
| Depreciation - cost of services |
(2,489) |
(96%) |
33% |
(1,866) |
(28%) |
| Other - cost of services |
(1,913) |
(74%) |
(49%) |
(3,785) |
(57%) |
| Cost of services |
(4,402) |
(170%) |
(22%) |
(5,651) |
(86%) |
| Gross profit (loss) |
(1,810) |
(70%) |
(291%) |
948 |
14% |
| Other - administrative expenses |
(1,088) |
(42%) |
(19%) |
(1,346) |
(20%) |
| Administrative expenses |
(1,088) |
(42%) |
(19%) |
(1,346) |
(20%) |
| Bad debt expenses |
(587) |
(23%) |
-% |
- |
-% |
| Amortization expense |
(1,562) |
(60%) |
4% |
(1,500) |
(23%) |
| Results from operating activities |
(5,047) |
(195%) |
166% |
(1,898) |
(29%) |
| Add non-cash items: |
|||||
| Depreciation and amortization |
4,051 |
156% |
20% |
3,366 |
51% |
| Adjusted EBITDA(1) |
($996) |
(38%) |
(168%) |
$1,468 |
22% |
| Note (1): See Non-GAAP Measures. |
|
Revenues
The Fluid Management Services division, contributed $2.6 million of revenue to Canyon in Q2 2016, a 61% decrease from the $6.6 million generated in Q2 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 Q2 2015.
Cost of services
The following table provides a summary of cost of services:
| 000's |
Three Months Ended June 30, |
||
| (Unaudited) |
|||
| 2016 |
Percentage change |
2015 |
|
| Employee benefits expense |
$824 |
(53%) |
$1,741 |
| Depreciation of property and equipment |
2,489 |
33% |
1,866 |
| Materials and inventory |
325 |
(40%) |
538 |
| Operating expense |
764 |
(49%) |
1,506 |
| Total cost of services |
$4,402 |
(22%) |
$5,651 |
- Employee benefits expense decreased by 53% in Q2 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 Q2 2016 when compared to Q2 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 33% in Q2 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 June 30, |
||
| (Unaudited) |
|||
| 2016 |
Percentage change |
2015 |
|
| Employee benefits expense |
$569 |
1% |
$563 |
| Other administration expenses |
519 |
(34%) |
783 |
| Total administrative expenses |
$1,088 |
(19%) |
$1,346 |
Even though staffing levels were lower in the current quarter, employee benefits expense remained unchanged primarily as a result of severance costs. Overall, G&A expenses decreased by 19% as a result of continued cost reduction measures.
Adjusted EBITDA
Q2 2016 adjusted EBITDA totaled negative $1.0 million, compared to positive $1.5 million in Q2 2015, primarily due to the bad debt expenses of $0.6 million, lower activity, and reduced customer pricing.
Corporate – Q2 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 June 30, |
|||
| (Unaudited) |
2016 |
2015 |
||
| Total |
Percentage |
Total |
||
| Revenue |
$- |
$- |
||
| Share-based payment transactions - administrative expenses |
(1,143) |
(22%) |
(1,471) |
|
| Other - administrative expenses |
(829) |
50% |
(552) |
|
| Results from operating activities |
(1,972) |
(3%) |
(2,023) |
|
| Add non-cash items: |
||||
| Share-based payment transactions - administrative expenses |
1,143 |
(22%) |
1,471 |
|
| Adjusted EBITDA(1) |
($829) |
50% |
($552) |
|
| Note (1): See Non-GAAP Measures. |
|
Administrative expenses for the three months ended June 30, 2016 totaled $2.0 million and includes employee benefits expense, share-based payments, and other head office administrative expenses. These expenses did not change significantly from Q2 2015 levels.
Other Items – Quarterly Consolidated Statement of Operations
| 000's |
Three Months Ended June 30, |
|
| (Unaudited) |
2016 |
2015 |
| Finance costs |
$216 |
$854 |
| Foreign exchange loss (gain) |
$42 |
($274) |
| Income tax expense recovery |
$6,426 |
$4,088 |
Finance costs
Finance costs include interest on bank indebtedness and finance lease obligations and totaled $0.2 million in Q2 2016, which decreased significantly from the 2015 figure of $0.9 million. The decrease is primarily due to using proceeds from the Q1 2016 equity financing to repay outstanding bank debt.
Foreign exchange loss
In Q2 2016, the Company recorded a nominal foreign exchange loss of $42 (2015: gain of $274). The Company purchases U.S. sourced proppants which require payment in USD. Payments are due 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 foreign exchange hedging activities.
Income tax expense
For Q2 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.
FINANCIAL REVIEW – Year to date 2016 COMPARED TO 2015
Pressure Pumping Services – Year to Date Financial Review
| 000's |
Six Months Ended June 30, |
||||
| 2016 |
2015 |
||||
| Total |
Percentage |
Percentage |
Total |
Percentage |
|
| Revenue |
$86,119 |
(51%) |
$174,742 |
||
| Depreciation - cost of services |
(20,160) |
(23%) |
(10%) |
(22,475) |
(13%) |
| Other - cost of services |
(92,979) |
(108%) |
(43%) |
(163,753) |
(94%) |
| Cost of services |
(113,139) |
(131%) |
(39%) |
(186,228) |
(107%) |
| Gross profit (loss) |
(27,020) |
(31%) |
135% |
(11,486) |
(7%) |
| Depreciation - administrative expenses |
(885) |
(1%) |
(20%) |
(1,105) |
(1%) |
| Other - administrative expenses |
(5,951) |
(7%) |
(24%) |
(7,847) |
(4%) |
| Administrative expenses |
(6,836) |
(8%) |
(24%) |
(8,952) |
(5%) |
| Bad debt expenses |
(3,417) |
(4%) |
-% |
- |
-% |
| Amortization expense |
(10) |
-% |
-% |
(10) |
-% |
| Results from operating activities |
(37,283) |
(43%) |
82% |
(20,448) |
(12%) |
| Add non-cash items: |
|||||
| Depreciation and amortization |
21,055 |
24% |
(11%) |
23,590 |
13% |
| Adjusted EBITDA(1) |
($16,228) |
(19%) |
(616%) |
$3,142 |
2% |
| Note (1): See Non-GAAP Measures. |
Revenues
For the six months ended June 30, 2016, Canyon completed 1,194 jobs, a 32% increase over the 903 jobs completed for the six months ended June 30, 2015, despite industry activity levels that were approximately one-half of prior year's levels. However, both competitive pricing pressures as well as the mix of services provided adversely impacted revenue per job. Lower-revenue cementing jobs completed increased by 242% over 2015 due to the addition of contract work, and higher-revenue hydraulic fracturing jobs completed increased 12% over the same period. Commodity prices remained low throughout the period which, coupled with reduced industry activity, has led to sharply lower customer pricing. As a result, Pressure Pumping Services revenue decreased by 51% to $86.1 million from $174.7 million in 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 |
Six Months Ended June 30, |
||
| (Unaudited) |
2016 |
Percentage |
2015 |
| Employee benefits expense |
$27,067 |
(40%) |
$44,827 |
| Depreciation of property and equipment |
20,160 |
(10%) |
22,475 |
| Materials and inventory |
46,532 |
(43%) |
81,161 |
| Operating expense |
19,380 |
(49%) |
37,765 |
| Total cost of services |
$113,139 |
(39%) |
$186,228 |
- Total cost of services did not decline in proportion to the 51% decline in revenue 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 40% for the six months ended June 30, 2016 when compared to the same period in 2015 due to activity being weighted to lower intensity cementing work, as well as a reduction in the fixed salaried employee count. Severance costs were $0.6 million during the first half of 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 10% when compared to 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 for the six months ended June 30, 2016 when compared to 2015 due to the previously noted Cost Reduction Measures offset by increases in third party materials required to support increases in well intensity. Included in 2016 operating expense is a commodity tax provision of $0.8 million resulting from ongoing tax authority assessments.
Administrative expenses (G&A)
The following table provides a summary of G&A:
| 000's |
Six Months Ended June 30, |
||
| (Unaudited) |
|||
| 2016 |
Percentage change |
2015 |
|
| Employee benefits expense |
$4,630 |
(27%) |
$6,365 |
| Depreciation of property and equipment |
885 |
(20%) |
1,105 |
| Other administration expenses |
1,321 |
(11%) |
1,482 |
| Total administrative expenses |
$6,836 |
(24%) |
$8,952 |
Overall, G&A expenses are lower by 24% primarily attributable to the wage rate, benefits, and staffing reductions implemented throughout 2015 and into Q2 2016 as previously discussed in Cost Reduction Measures. Included in employee benefits expense is approximately $0.6 million of severance costs.
Adjusted EBITDA
For the six months ended June 30, 2016, adjusted EBITDA for Pressure Pumping Services decreased to a negative $16.2 million from a positive $3.1 million in 2015. The primary cause of the decline was the aforementioned impact of items related to bad debt expenses and severance costs of $4.0 million and Industry Conditions that resulted in reduced customer pricing.
Fluid Management Services – YTD Financial Review
| 000's |
Six Months Ended June 30, |
||||
| (Unaudited) |
2016 |
2015 |
|||
| Total |
Percentage |
Percentage |
Total |
Percentage |
|
| Revenue |
$10,883 |
(55%) |
$24,002 |
||
| Depreciation - cost of services |
(4,900) |
(45%) |
37% |
(3,585) |
(15%) |
| Other - cost of services |
(7,900) |
(73%) |
(44%) |
(14,051) |
(59%) |
| Cost of services |
(12,800) |
(118%) |
(27%) |
(17,636) |
(73%) |
| Gross profit (loss) |
(1,917) |
(18%) |
(130%) |
6,366 |
27% |
| Other - administrative expenses |
(2,534) |
(23%) |
(15%) |
(2,970) |
(12%) |
| Administrative expenses |
(2,534) |
(23%) |
(15%) |
(2,970) |
(12%) |
| Bad debt expenses |
(587) |
(5%) |
-% |
- |
-% |
| Amortization expense |
(3,004) |
(28%) |
-% |
(3,000) |
(12%) |
| Results from operating activities |
(8,042) |
(74%) |
(2,131%) |
396 |
2% |
| Add non-cash items: |
|||||
| Depreciation and amortization |
7,904 |
73% |
20% |
6,585 |
27% |
| Adjusted EBITDA(1) |
($138) |
(1%) |
(102%) |
$6,981 |
29% |
| Note (1): See Non-GAAP Measures. |
|
Revenues
The Fluid Management Services division, contributed $10.9 million of revenue to Canyon for the six months ended June 30, 2016, a 55% decrease from the $24.0 million generated in the comparable 2015 period. 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 2015.
Cost of services
The following table provides a summary of cost of services:
| 000's |
Six Months Ended June 30, |
||
| (Unaudited) |
|||
| 2016 |
Percentage change |
2015 |
|
| Employee benefits expense |
$3,474 |
(44%) |
$6,242 |
| Depreciation of property and equipment |
4,900 |
37% |
3,585 |
| Materials and inventory |
1,166 |
(26%) |
1,582 |
| Operating expense |
3,260 |
(48%) |
6,227 |
| Total cost of services |
$12,800 |
(27%) |
$17,636 |
- Employee benefits expense decreased by 44% for the six months ended June 30, 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 for the six months ended June 30, 2016 when compared to 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 37% for the six months ended June 30, 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 |
Six Months Ended June 30, |
||
| (Unaudited) |
|||
| 2016 |
Percentage change |
2015 |
|
| Employee benefits expense |
$1,380 |
3% |
$1,342 |
| Other administration expenses |
1,154 |
(29%) |
1,628 |
| Total administrative expenses |
$2,534 |
(15%) |
$2,970 |
Even though staffing levels were lower in the current quarter, employee benefits expense remained unchanged primarily as a result of severance costs. Overall, G&A expenses decreased by 15% as a result of continued cost reduction measures.
Adjusted EBITDA
For the six months ended June 30, 2016 adjusted EBITDA totaled negative $0.1 million, a decrease from $7.0 million in 2015, primarily due to the aforementioned impact of bad debt expenses and severance costs of $0.7 million, lower activity, and reduced customer pricing.
Corporate – YTD 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 |
Six Months Ended June 30, |
|||
| (Unaudited) |
2016 |
2015 |
||
| Total |
Percentage |
Total |
||
| Revenue |
$- |
$- |
||
| Share-based payment transactions - administrative expenses |
(6,003) |
111% |
(2,842) |
|
| Other - administrative expenses |
(1,568) |
2% |
(1,542) |
|
| Results from operating activities |
(7,571) |
73% |
(4,384) |
|
| Add non-cash items: |
||||
| Share-based payment transactions - administrative expenses |
6,003 |
111% |
2,842 |
|
| Adjusted EBITDA(1) |
($1,568) |
2% |
($1,542) |
|
| Note (1): See Non-GAAP Measures. |
|
Administrative expenses for the six months ended June 30, 2016 totaled $7.6 million (2015: $4.4 million) and includes employee benefits expense, share-based payments, and other head office administrative expenses. The change is primarily due to an increase in non-cash share-based payments expense in Q1 2016 as a result of annual bonus awards being settled with non-cash share-based payments rather than cash bonuses.
Other Items – YTD Consolidated Statement of Operations
| 000's |
Six Months Ended June 30, |
|
| (Unaudited) |
2016 |
2015 |
| Finance costs |
$805 |
$1,387 |
| Foreign exchange loss |
$607 |
$1,290 |
| Income tax recovery |
$11,653 |
$4,024 |
Finance costs
Finance costs include interest on bank indebtedness and finance lease obligations and totaled $0.8 million for the six months ended June 30, 2016, which decreased 42% from the 2015 figure of $1.4 million. The decrease is primarily due to using proceeds from the March 2016 equity financing to repay outstanding bank debt.
Foreign exchange loss
For the six months ended June 30, 2016, the Company recorded a foreign exchange loss of $0.6 million (2015: loss of $1.3 million). The Company purchases U.S. sourced proppants which require payment in USD. Payments are due 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 foreign exchange hedging activities.
Income tax expense
For the six months ended June 30, 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 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 (used in) 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 gain or 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 |
Six Months Ended |
||
| (Unaudited) |
June 30, |
June 30, |
||
| 2016 |
2015 |
2016 |
2015 |
|
| Loss and comprehensive loss |
($22,617) |
($21,857) |
($43,211) |
($22,939) |
| Add (deduct): |
||||
| Depreciation and amortization |
13,845 |
14,339 |
28,959 |
30,175 |
| Finance costs |
216 |
854 |
805 |
1,387 |
| Foreign exchange loss (gain) |
42 |
(274) |
607 |
1,290 |
| Share-based payment transactions |
1,143 |
1,471 |
6,003 |
2,842 |
| Gain on sale of property and equipment |
(464) |
(199) |
(631) |
(150) |
| Write-off of equipment and onerous contract |
- |
- |
1,187 |
- |
| Income tax recovery |
(6,426) |
(4,088) |
(11,653) |
(4,024) |
| Adjusted EBITDA |
($14,261) |
($9,754) |
($17,934) |
$8,581 |
Funds from (used in) Operations
Funds from (used in) operations refers to cash flow from (used in) operations before changes in non-cash working capital, income taxes recovered (paid), but includes finance costs and current tax recovery (expense).
Funds from (used in) 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 (used in) 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 |
Six Months Ended |
||
| (Unaudited) |
June 30, |
June 30, |
||
| 2016 |
2015 |
2016 |
2015 |
|
| Net cash (used in) from operating activities |
($5,138) |
$9,732 |
$204 |
$1,419 |
| Add (deduct): |
||||
| Income tax paid (recovered) |
(3,360) |
(17) |
(4,035) |
8,808 |
| Change in non-cash working capital related to operating activities |
(6,108) |
(19,160) |
(14,787) |
(2,976) |
| Current tax recovery |
6,879 |
5,795 |
11,889 |
5,218 |
| Finance costs |
(216) |
(854) |
(805) |
(1,387) |
| Funds from (used in) operations |
($7,943) |
($4,504) |
($7,534) |
$11,082 |
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, amortization of intangibles or impairment, which are not reflective of past operational activity.
| 000's |
Three Months Ended |
Six Months Ended |
||
| (Unaudited) |
June 30, |
June 30, |
||
| 2016 |
2015 |
2016 |
2015 |
|
| Loss and comprehensive loss |
($22,617) |
($21,857) |
($43,211) |
($22,939) |
| Amortization expense on intangibles |
1,567 |
1,505 |
3,014 |
3,010 |
| Write-off of equipment and onerous contracts |
- |
- |
1,187 |
- |
| Share-based payment transactions |
1,143 |
1,471 |
6,003 |
2,842 |
| Adjusted loss and comprehensive loss |
($19,907) |
($18,881) |
($33,007) |
($17,087) |
| Adjusted per share-basic |
($0.23) |
($0.27) |
($0.42) |
($0.25) |
| Adjusted per share-diluted |
($0.23) |
($0.27) |
($0.42) |
($0.25) |
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: impact of commodity prices on activity and pricing; the ability of the pressure pumping industry to activity idle equipment; an FID is not required for activity to improve; the expected timing the Company will experience negative adjusted EBITDA; current financial losses in the industry are not sustainable and pricing will have to improve; 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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