BlackWatch Energy Services Trust
TSX : BWT.UN

BlackWatch Energy Services Trust

November 07, 2007 08:00 ET

BlackWatch Energy Services Trust Announces Third Quarter Results and Provides Corporate Update

CALGARY, ALBERTA--(Marketwire - Nov. 7, 2007) - BlackWatch Energy Services Trust ("BlackWatch" or the "Trust") (TSX:BWT.UN) announces its third quarter results and provides its unitholders with a corporate update. All figures are reported in Canadian dollars unless otherwise stated.

Third quarter results reflect positive EBITDAC and achievement of a number of targets on cost management. We have been and continue to operate in a challenging environment with low natural gas prices, a high Canadian dollar and a changing Alberta royalty regime which have all led to uncertainty in the sector and reductions in capital budgets of the oil and gas producers operating in western Canada. However, our plan is to manage costs and pursue creative alternatives so that we may start to show positive results. We are making progress in that regard.

BlackWatch has undertaken the following positive financial steps:

- We have increased our financial flexibility by extending the term of our existing credit facility and creating undrawn capacity of approximately $16 million;

- We have reduced overall debt by completing an equity rights offering for $8 million and closing the disposition of a non-strategic service line (pipeline construction) for $3.8 million;

- We have reduced general and administrative costs to $0.7 million in the third quarter compared to $1.6 million in the two months ended September 30, 2006 and $1.2 million in the second quarter; and

- We have altered our field compensation programs to make labour costs more variable to activity levels and to reduce employee benefits costs.

BlackWatch has also undertaken several successful operating initiatives as follows:

- We have lessened our exposure to the service areas where we have seen the weakest activity, by pursuing oil sands drilling business and redeploying equipment geographically;

- We have achieved some efficiencies in terms of costs and cross-selling of services by re-aligning service lines internally;

- We have successfully demonstrated new ways of utilizing and marketing our existing equipment including performing drilling with casing and drilling with air; and

- We are offering enhancements to existing service lines by licensing proprietary technologies.

FINANCIAL & OPERATING SUMMARY

The table below provides a summary of BlackWatch's financial and operating results for the three and nine month periods ended September 30, 2007. Our interim consolidated financial statements with notes and related MD&A for these periods will be filed separately on SEDAR on November 7, 2007 (www.sedar.com). Please review that material in conjunction with this press release.



BlackWatch Energy Services Trust
Financial Performance Summary

($ thousands, except per Trust unit amounts)

Three months ended Nine months ended
September 30 September 30
2007 2007
-------------------------------------------
-------------------------------------------
Revenue from continuing
operations $ 9,798 $ 36,077

Gross margin from
continuing operations $ 767 $ 1,182

EBITDAC from continuing
operations $ 105 $ (2,229)
Per Trust unit - basic $ 0.00 $ (0.09)
Per Trust unit - diluted $ 0.00 $ (0.09)

Loss from continuing
operations for the period $ (3,827) $ (23,506)
Per Trust unit - basic $ (0.13) $ (0.90)
Per Trust unit - diluted $ (0.13) $ (0.90)

Funds from operations $ (1,057) $ (5,583)
Per Trust unit - basic $ (0.04) $ (0.21)
Per Trust unit - diluted $ (0.04) $ (0.21)

Net debt $ 35,711 $ 35,711

Unitholders' equity $ 51,706 $ 51,706

Distributions declared $ - $ 1,611
Per Trust unit $ - $ 0.07

Weighted average Trust
units - basic 28,991 26,118
Weighted average Trust
units - diluted 29,005 26,132
Trust units, end of period 29,499 29,499


The Trust generated positive EBITDAC from continuing operations of $105,000 and Funds from operations of negative $1 million for the third quarter of 2007.

On July 3, 2007 the Trust completed its previously announced rights offering. A total of 4,765,656 units of the Trust were subscribed for under the rights offering for gross proceeds of $8.0 million. The rights offering was fully subscribed. Net proceeds of $7.9 million were used to repay outstanding debt under the credit facility.

On October 4, 2007 the Trust successfully completed an amended and restated $35 million syndicated senior credit agreement and a $22.5 million subordinated credit facility. The amended and restated syndicated facility will continue to be led by the Bank of Nova Scotia and includes the same group of major Canadian banks that have been BlackWatch's lenders since the original facility was put in place in December, 2006. The new senior facility matures on June 30, 2008 and bears interest at prime plus 2.625%. In conjunction with the closing of the amended and restated credit facility, the Trust also entered into a $22.5 million loan with an entity controlled by a Director of BlackWatch. The subordinated loan is strictly subordinate to the amended and restated senior credit agreement and bears interest of 9.5%. Interest costs are to be paid quarterly through the issuance of trust units or cash and the subordinated loan matures on December 31, 2007. Proceeds from this loan were used to pay down the outstanding balance under the senior credit facility. Following completion of the subordinated loan financing, the rights offering and the sale of the Pipeline Construction division assets, the Trust has drawn approximately $19 million on its senior credit facility, leaving $16 million of undrawn capacity.

The Trust closed the sale of assets making up its Pipeline Construction division on August 31, 2007. The loss from these operations of $0.5 million and the gain from disposition of the assets of $1.2 million have been excluded from the operating results from continuing operations. Proceeds of disposition of $3.8 million have been applied against outstanding bank debt.

The Trust is pleased to announce that it has secured contracts for five of its ten drilling rigs to perform oilsands related drilling throughout the upcoming winter drilling season and continues to pursue winter contracts for the rest of the rigs. These contracts have resulted from efforts to diversify the Trust's service base and maximize utilization of our existing equipment. Also, through ongoing efforts to reduce drilling costs for our clients, BlackWatch, in conjunction with a drillbit manufacturer, has developed the capability to drill shallow gas wells with production casing. The application of this technique has proven to reduce the time required to drill certain types of shallow gas wells. The Trust's drilling rigs are ideally suited for both oilsands related drilling and drilling with casing and these services will remain a key part of our service offering in the future.

The Trust is also pleased to announce the signing of a number of technology licensing agreements with Marathon Oil Company of Houston, Texas which enhance the existing range of services offered by our Completions division. These agreements give our clients access to PowrPerf™ Completions Technology and StimGun™ Propellent Technology which, in many perforating applications, enhance near wellbore performance.

BlackWatch's Vice President and Chief Financial Officer, Paul Partlo has tendered his resignation to pursue another opportunity. The Trust and the board of directors wish to thank Mr. Partlo for his contributions to BlackWatch since its inception in 2006. BlackWatch has commenced the process to identify a successor and will provide an update once a new CFO has been appointed.

OUTLOOK

The reduction in demand for energy services that began in the second half of 2006 has continued throughout 2007 as a result of high natural gas storage levels and the resulting softening of natural gas commodity prices throughout much of the year. The Petroleum Services Association of Canada ("PSAC") forecasts a decline in the number of wells drilled within Canada in 2008 to approximately 14,500 wells. The government of Alberta's announced changes to its royalty rate structure could have a positive impact on shallow gas drilling which may result in higher utilization rates for our drilling rigs; however, most analysts are predicting a reduction in overall drilling activity in Alberta in the near-term as a result.

The Trust is countering these negative market forces with initiatives designed to help BlackWatch compete for work and diversify its exposure to a broad range of industry activity. These include the drilling and completions service initiatives discussed above and steps we have already completed in reducing overhead costs and aligning labour costs with activity levels. In addition, the restructuring of our senior debt facilities will allow BlackWatch to continue to carry on its business, its restructuring initiatives and pursue opportunistic acquisitions.

Management recognizes that significant challenges remain, and we are taking a systematic approach to addressing them. We have taken steps to stabilize the business from a financial point of view and are addressing the opportunities available to us in the current environment. We are realistic that a quick turnaround is not likely, but are prepared to see the current downturn through and achieve value creation for all stakeholders.

ABOUT BLACKWATCH ENERGY SERVICES TRUST

BlackWatch Energy Services Trust is a diversified income trust that provides a range of services to its customers operating in the Western Canadian Sedimentary Basin including drilling, wireline services, rig transportation and hauling, coil tubing well servicing, production services, and oilfield equipment rentals and leasing. The units of BlackWatch trade on the Toronto Stock Exchange under the symbol "BWT.UN".

This press release may contain forward-looking statements subject to various risk factors and uncertainties, which may cause the actual results, performance or achievements of BlackWatch to be materially different from results, performance or achievements expressed or implied by forward-looking statements. Such factors include, but are not limited to fluctuations in the market for oil and gas and related products and services, political and economic conditions, the demand for BlackWatch's services, competition and BlackWatch's ability to attract and retain customers and employees.

The following measures are used within this release, but not recognized under GAAP. As a result, the method of calculation may not be comparable with other companies or Trusts. These measures should not be considered alternatives to net earnings and net earnings per unit as calculated in accordance with GAAP:

Gross margin - This measure is considered a primary indicator of operating performance and is calculated as revenue less operating expenses.

EBITDAC (Earnings before interest, income taxes, depreciation and amortization, impairment of goodwill and intangibles and unit compensation) - This measure is considered an indicator of the Trust's ability to generate funds in order to meet ongoing operating commitments, servicing of debt, funding for capital programs and distributions.

Funds from operations - This measure is an indicator of the Trust's ability to generate funds in order to fund ongoing operating commitments, service debt, fund capital programs, pay interest and income tax charges and make distributions. Funds from operations is defined as cash flow from operations before changes in non-cash working capital.

Net debt - This term is defined as total debt less working capital (see below).

Working capital - This term is defined as current assets less current liabilities excluding the current portion of long-term debt and lease and finance contract obligations.

The TSX has not reviewed and does not accept responsibility for the adequacy or accuracy of this news release.

Contact Information

  • BlackWatch Energy Services Trust
    Travis Robertson
    President and Chief Executive Officer
    (403) 225-3879
    (403) 366-2066 (FAX)
    Website: www.blackwatchenergy.ca