Enseco Energy Services Corp.
TSX VENTURE : ENS

Enseco Energy Services Corp.

August 25, 2008 08:00 ET

Enseco Energy Services Corp. Announces Improved Results for the Three Months Ended June 30, 2008

CALGARY, ALBERTA--(Marketwire - Aug. 25, 2008) - Enseco Energy Services Corp. ("Enseco" or "the Company")(TSX VENTURE:ENS) announces its consolidated financial results for the three months ended June 30, 2008.

HIGHLIGHTS

- Increased revenue by 49% to $4.3 million for the three months ended June 30, 2008 from $2.9 million for the three months ended June 30, 2007.

- The Company's U.S. Bakken Operations situated in North Dakota contributed $1.2 million of revenue during its first quarter of activity.

- Continued strong emphasis on cost control resulted in a 9% decrease in operating costs and a 28% decrease in general and administrative ("G&A") costs, despite a 49% increase in revenues.

- Reduced operating loss by 49% from $6.6 million for the three months ended June 30, 2007 to $3.4 million for the three months ended June 30, 2008, as cost cutting measures and the ability to operate in the US through breakup began to impact results.

Increased Revenues by 49% to $4.3 million for the three months ended June 30, 2008

Enseco has shown a significant year over year improvement in revenue by posting a 49% increase during the current quarter over the same period in the prior year. The key drivers of this growth were the Company's U.S. Bakken Operations which contributed $1.2 million of revenue and the Company's Directional Drilling division which increased revenue from $75 thousand in the three months ended June 30, 2007 to $638 thousand for the same period in the current year.

U.S. Bakken Operations contributed $1.2 million of Revenue

During its first full quarter of activity, the Company's U.S. Bakken Operations contributed $1.2 million of revenue to Enseco's consolidated results accounting for 27% of total revenue. In early April of 2008, Enseco expanded its geographic presence into the United States by establishing an operations centre in North Dakota. The Company initially moved three production testing units into the area for a large established customer and now has a total of five production testing units in the area, as well as one swab rig. To date Enseco has seen strong demand for its services and believes that the activity in this region will continue to accelerate as repeatability and attractive well economics cause producers to increase their capital budgets in this area. Enseco expects to move additional equipment into the US throughout 2008.

Emphasis on Cost Control Resulted in a 9% Decrease in Operating Costs and a 28% Decrease in G&A Expense

Enseco's employees and management have worked diligently over the past year to ensure that the Company's cost structure was properly aligned with its revenue prospects going forward. These efforts have manifested themselves in the current quarterly results, which show a significant improvement in operating costs and G&A expenses. These improvements are even more substantial when considered within the context of a 49% increase in revenues. Management will continue to closely monitor both operating costs and G&A expenses with a view towards containing these costs in the face of rising activity levels.

Reduced Operating Loss by 49%

The above noted increase in revenue combined with stringent cost control produced a favorable bottom line result for the Company despite the additional costs involved in setting up US operations. Operating loss was decreased to $3.4 million in the current quarter, as compared to $6.6 million for the three months ended June 30, 2007. Management anticipates capitalizing on the numerous accomplishments to date to appropriately position Enseco for sustainable growth in its key markets.

Progress on Implementation of Strategic Plan

Over the past twelve months Enseco has made tangible and measurable progress towards improving its operational and financial performance. One of the key objectives in the Company's plan was to diversify its revenue stream so as not to be solely reliant on activity levels in Alberta. The Company has achieved this by establishing a presence in North Dakota in the United States, as well as recently performing a greater percentage of its work in British Columbia and Saskatchewan. Enseco anticipates a further expansion of its market presence in the United States and greater emphasis in its Testing and Directional Drilling divisions on opportunities in northeast British Columbia and southeast Saskatchewan. A second objective was to ensure that Enseco's cost structure was properly aligned with industry activity levels and reasonable in the context of the overall size of the Company. Enseco has demonstrated progress in this area given that direct costs have fallen by 9% and, general and administrative costs have decreased by 28% despite a 49% increase in revenue.



Financial Highlights
($000's except per share data)

Three Months Ended Three Months Ended
June 30, June 30,
2008 2007
% change
------------------- ------------------ --------

Revenue $ 4,302 $ 2,888 49%
Operating loss (1) (3,390) (6,595) 49%
EBITDA (1) (2,184) (4,781) 54%
Cashflow (1) (2,266) (4,612) 49%
Net loss (3,477) (26,288) 87%

Per Share Data
EBITDA (1) $ (0.05) $ (0.20) 75%
Cashflow (1) $ (0.05) $ (0.19) 74%
Net loss $ (0.08) $ (1.08) 93%

June 30 March 31
2008 2008
(audited) % change
------------------- ------------------ --------
Financial Position
Total assets $ 51,246 $ 56,514 (9)%
Long-term debt (excluding
current portion) 10,828 11,371 (5)%
Working capital (2) (441) (964) 54%
Shareholders' equity 26,367 25,090 5%

(1) Operating loss is loss before impairment loss on intangible assets,
impairment loss on goodwill, gain (loss) on sale of equipment and income
taxes. EBITDA means earnings before interest, taxes, depreciation and
amortization and is equal to earnings before income taxes plus interest
on long-term debt plus other interest expense plus depreciation plus
amortization plus impairment loss on intangible assets, plus impairment
loss on goodwill. Cashflow means cash flows provided by operations
before changes in non-cash working capital items. Operating loss, EBITDA
and cashflow are not recognized measures under Canadian generally
accepted accounting principles ("GAAP"). Management believes that in
addition to net earnings, operating loss, EBITDA and cashflow are useful
supplemental measures as they provide an indication of the results
generated by Enseco's primary business activities prior to consideration
of how those activities are financed, amortized or how the results are
taxed in various jurisdictions as well as the cash generated by Enseco's
primary business activities. Readers should be cautioned, however, that
operating loss, EBITDA and cashflow should not be construed as an
alternative to net earnings determined in accordance with GAAP as an
indicator of Enseco's performance. Enseco's method of calculating
operating loss, EBITDA and cashflow may differ from other organizations
and, accordingly, these figures may not be comparable to those disclosed
by other organizations.

(2) Working capital equals current assets minus current liabilities.


In the early summer of 2008, the oilfield service industry in Canada was preparing itself for the long awaited recovery in activity levels to materialize. The strong belief at the time was that excess natural gas inventory had been consumed during a fairly cold winter and that pricing had rebounded to appropriately reflect this underlying shift in supply/demand fundamentals. As it turned out, this outlook may have been prematurely optimistic given that natural gas pricing has declined substantially over the past few weeks due to large production gains from unconventional gas drilling in the United States. Although pricing has remained above prior year levels, the swift and sudden drop in the near month natural gas spot price has led a number of Industry observers to delay their expected recovery in activity levels until late 2008 or early 2009. Enseco is actively managing its business through this period of uncertainty by trying to diversify as much of its revenue stream as possible away from the cyclicality of the Western Canadian Sedimentary Basin and looking increasing its presence areas where drilling activity is expected to be robust, such as the Montney in Northeastern British Columbia.

The results for the three months ended June 30, 2008 reflect a seasonally normal "spring breakup" quarter where activity levels are hampered by wet weather and lease access issues. The losses incurred during the three months ended June 30, 2008 are reflected in the Company's financial condition. The working capital deficit decreased to $0.5 million at June 30, 2008 as compared to a deficit of $1.0 million at March 31, 2008. As well, Shareholders' Equity increased to $26.4 million at June 30, 2008 as compared to $25.1 million at March 31, 2008. Both working capital and Shareholders' Equity were negatively impacted by the losses incurred during the quarter given that the June 30, 2008 amounts also reflect the proceeds of the Company's $5.0 million private placement which closed on April 24, 2008.

Summary

The increase in revenues for the three months ended June 30, 2008 was due to a new revenue stream provided by Enseco's U.S. operations and a significant increase in revenue from the Directional Drilling division. This was offset by a decrease in revenue from the Wireline division which was attributable to nonrecurring project work performed for a non oil and gas customer during the three months ended June 30, 2007.

Directional Drilling

Enseco's Directional division reported revenue of $0.7 million for the three months ended June 30, 2008, as compared to $0.1 million for the three months ended June 30, 2007. The large increase in the Directional division's revenue base is a result of a significant ramp up in repeat business from existing customers who had tried this division's services over the past year and are now adding Enseco Directional as a key supplier based on their satisfaction with the service provided. Average utilization of the directional drilling kits was 14% for the three months ended June 30, 2008, as compared to 3% for the same period in 2007. This division operated an average of 4 directional kits during the three months ended June 30, 2008 and 2007.

Testing

The revenue reported from Enseco's Testing division increased by 170% to $2.1 million for the three months ended June 30, 2008 as compared to $0.8 million for the three months ended June 30, 2007. Revenue increased due to the expansion of the Company's operations into North Dakota. This expanded geographic presence provided $1.2 million of additional revenue for the three months ended June 30, 2008 as compared to the same period in the prior year. For the three months ended June 30, 2008 the Canadian Testing division achieved average utilization rates of 8%, as compared to 10% for the three months ended June 30, 2007. During its first three months of operations, the U.S. testing division achieved a utilization rate of 72% with a weighted average of three operated units. During the three months ended June 30, 2008 the Canadian Testing division operated a weighted average of 34 testing units. This compared to a weighted average of 37 units operated during the three months ended June 30, 2007. The average day rate achieved by the testing division in Canada decreased by 58% for the three months ended June 30, 2008 as compared to the same periods in the prior year. There is no prior period comparable for the U.S. testing division as the three months ended June 30, 2008 was this division's first full quarter of operations.

Swabbing

The revenue reported from Enseco's Swabbing division remained constant at $1.0 million for the three months ended June 30, 2008 as compared to $1.0 million for the three months ended June 30, 2007. For the three months ended June 30, 2008 average utilization of the swabbing units was 14%, as compared to 17% for the three months ended June 30, 2007. This division operated an average of 21 units during the three months ended June 30, 2008 as compared to an average of 20 units during the three months ended June 30, 2007. The average day rate achieved by the Swabbing division increased by 8% for the three months ended June 30, 2008 as compared to June 30, 2007.

Wireline

The revenue reported from Enseco's Wireline division decreased 40% to $0.6 million for the three months ended June 30, 2008 as compared to $1.0 million for the three months ended June 30, 2007. The decrease in revenue for the Wireline division was primarily due to nonrecurring project revenue in the three months ended June 30, 2007 of $555 thousand from a client who is not associated with the oil and gas industry. For the three months ended June 30, 2008 average utilization of the wireline units was 7%, as compared to 12% during same period in 2007. The average day rate achieved by the Wireline division increased by 5% for the three months ended June 30, 2008 as compared to June 30, 2007. This division operated an average of 12 units during the three months ended June 30, 2008 and 2007.

Consolidated

Operating loss decreased 49% to $3.4 million for the three months ended June 30, 2008, as compared to $6.6 million for the three months ended June 30, 2007. The decreased operating loss is due to increased revenue combined with the realization of costs savings from the elimination of numerous field and administrative positions within the Company's structure, as well as the realized savings from company wide wage reductions implemented in late 2007. Another factor in decreasing the operating loss for the three months ended June 30, 2008 as compared to the same period in 2007 relates to the fact that amortization expense was $nil for the three months ended June 30, 2008 as compared to $908 thousand for the same period in the prior year. Amortization was not recorded from June 30, 2007 forward as the Company incurred a fiscal first quarter impairment charge in 2007 on all of its intangible assets resulting in no future amortization charges. The Company recorded net losses of $3.5 million for the three months ended June 30, 2008 as compared to $26.3 million for the three months ended June 30, 2007. During the three months ended June 30, 2008, the Company recognized $36 thousand of income tax expense relating to the income generated from Enseco's U.S. operating division. Whereas, income tax expense/was $nil for the three months ended June 30, 2007 due to a valuation allowance being recognized during the quarter which offset any potential future income tax recovery. Enseco continued to recognize a valuation allowance against any potential future income tax recovery until such time as it can demonstrate a consistent track record of profitability.

OUTLOOK

From the industry's perspective, North American natural gas inventory levels and related natural gas pricing have improved from 2007. However, there continue to be concerns regarding the near-term supply / demand fundamentals for natural gas and these concerns are reflected in the recent retreat in natural gas pricing. Natural gas storage injections are occurring at a more rapid pace than expected and have largely been driven by the aggressive unconventional natural gas drilling activities that have occurred in the United States over the past couple of years. This has more that offset the decline in Canadian natural gas directed activities over the past 18 to 24 months.

Despite the near-term weakness in natural gas pricing, the industry has seen marginal increases in previously announced 2008 capital programs and industry analysts that had recently increased their well count forecasts for fiscal 2008 and 2009 have not significantly changed their forecasts in light of the recent events. Management believes the outlook for the oil and gas industry in North America remains very positive for the mid and longer term, however for at least the third quarter of 2008 the Industry will continue to experience lower levels of activity as compared to the five year average, until the underlying natural gas fundamentals firm up over a more sustainable period.

Enseco remains positive about the long-term underlying fundamentals for North American natural gas and oil service opportunities in the WCSB and North Dakota. Enseco expects that factors such as lower initial well

production, increasing decline rates of natural gas wells in the WCSB and increasing natural gas consumption in North America will support increased natural gas prices in the future and with the increased natural gas prices increased oil and gas service work in the WCSB and North Dakota.

Enseco is an emerging supplier of energy related services operating throughout the Western Canadian Sedimentary Basin and select markets in the United States, with operational centres in Red Deer, Whitecourt, Edmonton, Beaverlodge, Grande Prairie, Fort St. John and Minot, North Dakota, as well as corporate and sales offices located in Calgary. Enseco is led by an experienced management team currently offering well swabbing, production testing, cased hole logging, perforating and propellant stimulation services and directional drilling services with a focus on continued value creation through accretive acquisitions and organic growth.

FORWARD-LOOKING STATEMENTS

Certain information and statements contained in this press release constitute forward-looking information, including expectations concerning the nature and timing of growth within Enseco's various business divisions, expectations respecting the competitive position of such business divisions, and statements as to future economic and operating conditions, which are provided to enable investors to better understand our business. These forward-looking statements are based upon the opinions, expectations and estimates of management as at the date the statements are made including the Company's current budget (which is subject to change), expectations relating to future economic and operating conditions, the competitive environment and opinions of third-party analysts respecting anticipated economic and operating conditions. These forward-looking statements are subject to a variety of risks and uncertainties and other factors that could cause actual events or outcomes to differ materially from those anticipated or implied by such 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 services provided by Enseco, industry competition and Enseco's ability to attract and retain both customers and key personnel. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. Enseco's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements, or if any of them do so, what benefits that Enseco will derive therefrom. Enseco disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

The TSX Venture Exchange has neither approved nor disapproved the contents of this press release.

Contact Information

  • Enseco Energy Services Corp.
    David A. Hawkins
    President and CEO
    (403) 806-0088
    or
    Enseco Energy Services Corp.
    Aly Khan Musani
    Senior Vice President and CFO
    (403) 806-0088