Newalta Reports Second Quarter 2017 Results

TSX Trading Symbol: NAL

CALGARY, Aug. 3, 2017 /CNW/ - Newalta Corporation ("Newalta") (TSX:NAL) today reported results for the three and six months ended June 30, 2017.

FINANCIAL HIGHLIGHTS⁽¹⁾

			Three months ended June 30,			Six months ended June 30,
($000s except per share data) (unaudited)		2017	2016	% change	2017	2016	% change
Revenue		57,948	41,766	39	118,758	90,431	31
General & Administrative		6,872	7,135	(4)	14,403	16,579	(13)
Net loss		(16,031)	(21,560)	(26)	(30,506)	(62,802)	(51)
	- per share ($) basic and diluted	(0.18)	(0.26)	(31)	(0.35)	(0.91)	(62)
Adjusted EBITDA^(2)		9,583	2,268	n/m	20,062	2,301	n/m
	- per share ($) basic and diluted	0.11	0.03	267	0.23	0.03	n/m
Maintenance capital expenditures^(2)		2,242	1,020	120	3,341	1,990	68
Growth capital expenditures^(2)		913	319	186	1,982	2,017	(2)
Dividends declared		-	-	-	-	-	-
Dividends paid		-	-	-	-	3,515	(100)
Weighted average shares outstanding		88,148	81,485	8	88,148	68,861	28
Shares outstanding, June 30,^(3)		88,148	88,148	-	88,148	88,148	-

(1)	Refer to Newalta's Management's Discussion and Analysis and unaudited Condensed Consolidated Financial Statements for further information. References to GAAP are synonymous with IFRS and references to Consolidated Financial Statements and notes are synonymous with Financial Statements. Unless otherwise noted, commentary and the financial results will refer to Continuing Operations.
(2)	These financial measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers. Non-GAAP financial measures are identified and defined in our Management's Discussion and Analysis ("MD&A").
(3)	Newalta had 88,148,148 shares outstanding as at August 3, 2017.

MANAGEMENT COMMENTARY

"Our second quarter results were at the high end of our guidance range as improved market conditions increased activity in the segments and basins we serve translated into improved performance at Newalta," said John Barkhouse, President and Chief Executive Officer.

"In the first half of 2017 we saw continued year-over-year improvements in our Adjusted EBITDA, driven primarily by increased drilling and production-related waste activities returning to the market, combined with our disciplined cost control during the activity ramp up. Recovery is playing out in our markets as we expected, with our U.S. and Canadian drilling services businesses and Canadian Oilfield Facilities being the first to realize the benefits of the improved activity. The relative stability in oil prices is now beginning to increase customer demand for project work, particularly in Heavy Oil.  We expect these positive year-over-year recovery trends to continue in the quarters ahead.

"Having passed the half-year mark, and with improved visibility for the remainder of the year, we have refined our Adjusted EBITDA outlook guidance range to $43 million to $50 million based on a WTI forecast of $45 to $50 per barrel. We continue to work towards a target of being within a range of cash flow neutrality for the year and driving towards the positive cash flow model we envision in future years.  With the actions taken to establish a lower cost structure, we remain well positioned to realize significant operating leverage and deliver strong increases in performance as our markets recover.

"We continue to actively explore a number of potential financing alternatives, including those that may permit the refinancing of our November 2019 Senior Unsecured Debentures prior to their maturity. Based on the alternatives under consideration, we expect that Newalta will have options available to it to refinance the 2019 debentures in advance of their maturity that are consistent with our focus on optimizing our capital structure."

FINANCIAL RESULTS

• Q2 2017 revenue of $57.9 million increased by 39% compared to prior year, driven primarily by an increase in U.S. Drill Site utilization and drilling and production related waste volumes at our Canadian Oilfield Facilities.
• Year-to-date revenue increased 31% to $118.8 million from $90.4 million in prior year, driven by the same factors as the quarter.
• Net loss for the quarter was $16.0 million compared to $21.6 million in prior year. The year-over-year improvement was driven by increased contributions from Oilfield operations and a reduction in restructuring and other expense, partially offset by a decrease in income tax recovery and an increase in depreciation and amortization.
• Year-to-date net loss improved by 51% over prior year to $30.5 million, driven by the same factors as the quarter as well as a reduction in impairment.
• Adjusted EBITDA for the quarter was $9.6 million compared to $2.3 million in prior year. The year-over-year increase was driven primarily by Divisional EBITDA improvements of $7.1 million.
• Year-to-date Adjusted EBITDA was $20.1 million, an increase of $17.8 million over prior year. The increase was driven by Divisional EBITDA improvements of $15.6 million and G&A savings of $2.2 million.
• Effective March 31, 2017, we amended and extended the terms of our Credit Facility to extend the waiver of our Total Debt to Covenant EBITDA covenant to Q2 2019 and to revise the Senior Debt to Covenant EBITDA and Interest Coverage covenant thresholds.
• Our contract model continued to provide predictable cash flow. These contracts generally are not tied directly to commodity price changes or drilling activity and provide a solid foundation for our business, particularly in depressed markets. On a trailing-twelve month ("TTM") basis, contracts represented 20% of our revenue.

Heavy Oil

• In the second quarter, Heavy Oil revenue increased by 8% to $21.0 million driven by increased contributions from Onsite contracts, partially offset by a decrease in production waste volumes received at our facilities. Net earnings before taxes decreased by 59% to $0.9 million compared to prior year primarily due to an increase in depreciation and amortization. Divisional EBITDA remained flat to prior year at $6.8 million as the recovery of Onsite contributions lost in the 2016 Fort McMurray wildfires of $3.0 million was offset by lower event-based SAGD volumes at our Heavy Oil Facilities.
• Year-to-date, Heavy Oil revenue remained flat to prior year and net earnings decreased by 43% primarily due to an increase in depreciation and amortization. Divisional EBITDA increased 8% over prior year primarily due to improvements in commodity prices and savings from cost efficiencies, partially offset by decreased contributions from production related waste activities.

Oilfield

• In the second quarter, Oilfield revenue increased 66% to $36.9 million and net earnings before taxes increased 149% to $2.0 million compared to prior year driven by improved performance in both the Drilling Services and Facilities business units. Divisional EBITDA increased by $7.0 million to $9.6 million over prior year primarily as a result of improved drilling activity and production volumes.
• Year-to-date, Oilfield revenue increased by 59% over prior year due to the same factors as the quarter. Net earnings improved by 160% due to increased contributions from the business units and decreased restructuring and other expenses compared to prior year. Divisional EBITDA increased by $14.4 million due to the same factors as the quarter.

Corporate and Other

• Capital expenditures for the three and six months ended June 30, 2017 were $3.2 million and $5.3 million, respectively, an increase of 136% and 33% over prior year. Expenditures for the quarter and year-to-date have been primarily focused on maintenance projects.
• G&A decreased 4% and 13% to $6.9 million and $14.4 million, respectively, for the three and six months ended June 30, 2017. The year-over-year improvement was driven by our disciplined approach to maintaining the benefit of the cost rationalization initiatives taken throughout the downturn, even with the improved activity levels.
• Restructuring and other expense for the three and six months ended June 30, 2017, were $3.1 million and $3.8 million compared to $7.4 million and $29.5 million in prior year. The current year expense is primarily comprised of an increase to the non-cash decommissioning liabilities related to inactive sites, driven by changes in discount rates.

The following section contains forward-looking information as it outlines our Outlook for 2017. Our Outlook is based on several key assumptions including growth capital contributions, commodity prices and activity levels in the oil and gas industry. Changes to these assumptions could cause our actual results to differ materially. Please refer to our Forward-Looking Information later in this document. We are subject to a number of risks and uncertainties in carrying out our activities including market conditions, ability to expand the business, competition, regulation, and the ability to attract and retain personnel. A complete list of our risk factors is disclosed in our most recently filed Annual Information Form. 

OUTLOOK & OPERATING LEVERAGE

Our performance throughout 2015 and 2016 was significantly impacted by the decline in oil prices and activity levels in the oil and gas industry. Inherent in our business model is the capacity to leverage significant upside with recovery in oil pricing and activity levels with minimal capital investment.

Our view is that recovery, in the form of increased activity (whether drilling, completions or production), will continue to be driven by stability in oil and gas prices, which enables our customers to make capital decisions to invest in the drilling and completion of new wells and reactivation of shut-in wells. As activity levels recover, this translates into increased generation of production waste volumes. Timing of recovery will vary among plays based on their cost profile.

Our operating leverage is driven by the following factors:

Crude Oil Prices

• Crude oil prices directly impact the value of the products we recover from waste.
• Commodity price stabilization generates confidence amongst producers, impacting their capital budgets, which in turn drives increased activity.

Drilling Activity

• Recovery of drilling activity is determined by the speed at which producers deploy their capital budgets.
• Drill Site performance is driven by active rigs and is the first business line to respond to changes in activity.
• Wells drilled and completed in the areas we serve drive waste volumes into our facilities.
• As drilling activity recovers, we expect to realize improving returns on our capital investments made in 2014 and 2015.
• We anticipate the drilling activity in the areas where we operate to recover at different rates depending on the cost profile of the play, with shale play activity increasing first and CHOPS being the last to recover.
• As utilization of assets improve, we expect price elasticity will follow.

Step Change 

• Primarily comprised of the net impact of production waste volumes and shifts in waste mix, net impact of contributions from Onsite contracts and, to a lesser extent, customer pricing and operational efficiencies.
• We expect to see a lag in recovery of production waste volumes depending on the speed at which producers deploy their budgets, including turnarounds and workovers.
• The composition of waste volumes impacts the degree of processing complexity and the amount of recoverable oil.
• CHOPS waste volumes are also dependent on the drilling of new wells to replace production volumes lost through their naturally steep decline curves.
• SAGD waste volumes are dependent on the number, timing and length of event-based upsets occurring in the normal course of SAGD facility operations.
• Mining contributions are expected to be slower to return as producers focus on developing mitigation plans required to meet the Tailings Management Framework. We continue to work with producers to develop solutions to meet these requirements.
• As production activity recovers, we expect to realize improving returns on our capital investments made in 2014 and 2015.
• We continue to manage our operational cost structure and collaborate with customers to provide enhanced value solutions.

Savings from Cost Rationalization

• Our various initiatives to right-size the organization, streamline cost structures and business processes, and rationalize office space have established a lower cost model capable of supporting meaningful improvement in profitability in a recovering environment.
• Cost rationalization actions taken by Management throughout the downturn removed in excess of $60 million in costs on an annualized basis from 2014 levels.

Outlook

Our outlook for the remainder of 2017 is based on our expectation of the continuation of the year-over-year trends we saw in the first half, including:

• Improved commodity prices
• Strengthened drilling and completions activity
• Production related activity remaining relatively flat, driven by:
• Increased volumes at our Oilfield Facilities
• Incremental improvements in CHOPS waste volumes
• Lower event-based SAGD volumes
• Disciplined focus on maintaining the benefits of our cost rationalization initiatives

Based on the average WTI of $50 US/bbl realized in the first half of 2017 and our expectations for commodity prices for the remainder of the year, we have refined and narrowed our guidance ranges for the full year. Our Q3 and full-year 2017 guidance ranges are:

• Revenue of $60 million to $70 million for the third quarter and $235 million to $265 million for the full year; and
• Adjusted EBITDA of $12 million to $14 million for the third quarter and $43 million to $50 million for the full year.

The following table outlines the factors we expect to impact Adjusted EBITDA performance in the third quarter and full year of 2017:

Factor	Actual^(1)	Assumption^(1)	Expected impact on Adjusted EBITDA compared to prior year period^(1)
	Q2 2017	Q3 and Full Year 2017	Q3 2017	2017
West Texas Intermediate (US$/bbl)	Q2: $48.24	Q3 2017: $45 – $50 2017: $45 – $50
Canadian Light Sweet (CDN$/bbl)^(2)	Q2: $61.74	Q3 2017: $55 – $60 2017: $55 – $60	$0M – $0.3M ↑	$1M – $2M ↑
Western Canadian Select (CDN$/bbl)^(2)	Q2: $49.99	Q3 2017: $45 – $50 2017: $45 – $50	$0M – $0.7M ↑	$1.5M – $2M ↑
Drilling activity^(2) over prior year	Q2: 30%	Q3 2017: 35% – 40% 2017: 30% – 40%	$4.5M – $5M ↑	$15M – $20M ↑
Step Change^(3)	Q2: $2M		Flat	$0.5M – $1M ↑
Savings from cost rationalization	Q2: $1M		$0.5M↓ – $0M	$3M – $3.5M ↑
Adjusted EBITDA Guidance			$12M – $14M	$43M – $50M

(1)	M refers to millions.
(2)	Impact derived from annual sensitivities based on forecast performance and volumes outlined in the "Sensitivities" section of our 2016 Annual Report and may be adjusted for expected volumes. The actual impact from crude oil prices may vary with fluctuations in volumes.
(3)	This factor is expected to have an impact on our performance through the year and cannot be quantified on any linear sensitivity.

Total Debt, Capital & Cash Flow Management

Throughout the downturn, we proactively structured our business model for the environment. Our Q2 2016 equity financing, rationalization initiatives, amended Credit Facility, reduced capital spend and suspension of dividends provided us the liquidity and flexibility to operate in the sustained downturn.

We will continue to manage cash flows to ensure our financing obligations are met and spending is minimized wherever possible. Since the beginning of the downturn, management has focused on moving towards a positive cash flow model and we have made significant progress through proactive management of operating cash flows and cost rationalization initiatives. Through 2017, we continue to maintain our focus on being within a range of cash flow neutrality for the year, subject to opportunities that may arise. Further, we will exercise prudent judgment in managing our capital expenditures for the year, aligned with our longer-term cash flow target.

Effective March 31, 2017, we amended and extended the terms of our Credit Facility to extend the waiver of our Total Debt to Covenant EBITDA covenant to Q2 2019 and to revise the Senior Debt to Covenant EBITDA and Interest Coverage covenant thresholds.  These amendments provide us with the flexibility to continue to manage our balance sheet as we transition through recovery. Managing debt leverage and use of cash and capital are our highest priorities. We expect to remain within our debt covenants throughout the remainder of the year.

We continue to monitor markets and options for future financing alternatives, including those that may permit the refinancing of our $125 million Senior Unsecured Debentures ahead of their maturity in November 2019 in a manner that is consistent with our focus on optimizing our capital structure. 

Management's Discussion and Analysis and Financial Statements

The condensed consolidated financial statements and MD&A, which contain additional notes and disclosures, are available on SEDAR at www.sedar.com or our website at www.newalta.com under Investor Relations/Financial Reports.

Quarterly Conference Call
Management will hold a conference call on August 4, 2017 at 11:00 a.m. (ET) to discuss Newalta's performance for the quarter. To participate in the teleconference, please call 647-427-7450 or toll free 1-888-231-8191. To access the simultaneous webcast, please visit www.newalta.com. For those unable to listen to the live call, a taped broadcast will be available at www.newalta.com and, until midnight on Friday, August 11, 2017 by dialing 855-859-2056 and using the pass code 55427279.

About Newalta
Newalta is a leading provider of innovative engineered environmental solutions that enable customers to reduce disposal, enhance recycling and recover valuable resources from oil and gas exploration and production waste streams. We simplify the critical challenges of sustainable environmental practices through the use of advanced processing capabilities deployed through a differentiated business model. We serve customers onsite directly at their operations and through a network of locations throughout North America. Our proven processes and excellent record of safety make us the first-choice provider of sustainability-enhancing services for oil and gas customers. With a highly skilled team of people, a two-decade track record of innovation and a commitment to commercializing new solutions, Newalta is positioned for sustained future growth and improvement. We are Sustainability Simplified™. Newalta trades on the TSX as NAL. For more information, visit www.newalta.com.

The press release contains certain statements that constitute forward-looking information.  Please refer to the section below, "Forward-Looking Information", for further discussion of assumptions and risks relating to this forward looking information.

This press release contains references to certain financial measures, including some that do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers. Non-GAAP financial measures are identified and defined in our MD&A.

FORWARD-LOOKING INFORMATION

Certain statements contained in this document constitute "forward-looking information" as defined under applicable securities laws.  When used in this document, the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "estimate", "expect", "potential", "strategy", "target" and similar expressions, as they relate to Newalta Corporation and the subsidiaries of Newalta Corporation, or their management, are intended to identify forward-looking information.  In particular, forward-looking information included or incorporated by reference in this document includes information with respect to:

• future operating and financial results;
• business prospects and strategy including related timelines;
• capital expenditure programs and other expenditures;
• realization of anticipated benefits of growth capital investments, acquisitions, divestitures and our innovation and process development initiatives;
• realization of anticipated benefits from the implementation of cost rationalization initiatives including the anticipated value and sustainability of the cash savings from such initiatives;
• the availability to us of financing alternatives, including those that may permit the refinancing of our November 2019 debentures prior to their maturity;
• our capital structure objectives;
• anticipated industry activity levels;
• anticipated commodity prices;
• expected demand for our services;
• expected expansion opportunities for our business;
• the amount of dividends declared or payable in the future;
• our projected cost structure; and
• expectations and implications of changes in legislation.

Expected future financial and operating performance and related assumptions are set out under "Outlook & Operating Leverage". 

Such information reflects our current views with respect to future events and are subject to certain risks, uncertainties and assumptions, including, without limitation:

• strength of the oil and gas industry, including drilling activity;
• general market conditions;
• fluctuations in commodity prices for oil and the price we receive for our recovered oil;
• fluctuations in interest rates and exchange rates;
• financial covenants in our debt agreements that may restrict our ability to engage in transactions or to obtain additional financing;
• success of our growth, acquisition and innovation and process development strategies including integration of businesses and processes into our operations and potential liabilities from acquisitions;
• our ability to secure future capital to support and develop our business, including the issuance of additional common shares;
• our ability to secure alternative financing, if needed and including financing that may permit the refinancing of our November 2019 debentures prior to their maturity, at all or on terms acceptable to us and consistent with our capital structure objectives; 
• the highly regulated nature of the environmental services and waste management business in which we operate;
• the competitive environment of our industry in Canada and the United States;
• possible volatility of the price of, and the market for, our common shares, and potential dilution for shareholders in the event of a sale of additional shares;
• dependence on our senior management team and other operations management personnel with waste industry experience;
• potential operational and safety risks and hazards, obtaining insurance for such risks and hazards on reasonable financial terms and potential failure of meeting customer safety standards;
• the seasonal nature of our operations;
• risk of pending and future legal proceedings;
• risk to our reputation;
• our ability to attract, retain and integrate skilled employees;
• open access for new industry entrants and the general unprotected nature of technology used in the waste industry;
• costs associated with operating our landfills; and
• such other risks or factors described from time to time in reports we file with securities regulatory authorities.

By its nature, forward-looking information involves numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking information will not occur.  Many other factors could also cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking information and readers are cautioned that the foregoing list of factors is not exhaustive.  Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking information prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected.  Furthermore, the forward-looking information contained in this document is made as of the date of this document and, in each case, is expressly qualified by this cautionary statement.  Unless otherwise required by law, we do not intend, or assume any obligation, to update any such forward-looking information.

SOURCE Newalta Corporation

Investor Relations, 1-855-506-9010, [email protected]

Related Links

http://www.newalta.com