Essential Energy Services Trust
TSX : ESN.UN

Essential Energy Services Trust

November 12, 2007 17:00 ET

Essential Energy Services Trust Releases Third Quarter Results and Announces Reduced November Distribution

CALGARY, ALBERTA--(Marketwire - Nov. 12, 2007) - Essential Energy Services Trust ("Essential", or the "Trust") (TSX:ESN.UN) releases the operational and financial results for the three and nine months ended September 30, 2007 and announces it has filed the complete Management Discussion and Analysis and unaudited interim consolidated financial statements for the three and nine months ended September 30, 2007 on SEDAR. An electronic copy of these documents may be obtained on the Trust's SEDAR profile at www.sedar.com.

These operational and financial results contain the results of the energy services division of Avenir Diversified Income Trust ("Avenir") (TSX:AVF.UN) for the periods prior to May 31, 2006.



Third Quarter 2007 Financial Highlights

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Three Months Ended Nine Months Ended
(Unaudited) September 30 September 30
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$ thousands, except
per unit % %
amounts and margins 2007 2006 Change 2007 2006 Change
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Financial Results
Revenue 27,675 25,267 10% 85,674 63,517 35%

EBITDAC(1) 6,984 7,266 (4)% 20,126 19,532 3%
EBITDAC margin (%)(1) 25% 29% (14)% 23% 31% (26)%

Funds from
operations(2) 5,760 6,293 (8)% 16,210 17,787 (9)%

Net income 1,767 2,421 (27)% 2,275 7,135 (68)%
Net income margin (%) 6% 10% (40)% 3% 11% (73)%

Distributions to n/a
Avenir - - - - 7,190
Distributions to
unitholders 8,782 6,806 29% 23,626 9,059 160%
Payout ratio(3) 152% 108% 41% 146% 91% 60%

Unit Information
(Diluted)
Weighted average
number of units
outstanding 35,268 27,217 30% 32,182 27,198 18%

EBITDAC per unit 0.20 0.27 (26)% 0.63 0.72 (13)%
Funds from operations
per unit 0.16 0.23 (30)% 0.50 0.65 (23)%
Net income per unit 0.05 0.09 (44)% 0.07 0.26 (73)%
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Sep. 30, Dec. 31,
2007 2006
-------------------
Financial Position and
Liquidity
Working capital
(excluding debt)(4) 4,908 7,596
Working capital
ratio(4) 1.3:1 1.4:1
Net debt(5) 51,503 49,068
Unitholders equity 159,506 147,007
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Notes 1 to 5 - Please refer to the Notes to the Financial Highlights at the
end of this release.


Overview

The third quarter of 2007 started off with a return to normal seasonal utilization in July following an unusually long spring break-up in the second quarter of 2007. However beginning in August and continuing through September, utilization rates fell and have remained unusually low due to a combination of wet weather, low natural gas prices due to high natural gas storage levels in North America and a rising Canadian dollar to U.S. dollar exchange rate, as well as uncertainty introduced by the Alberta government's proposed new royalty framework for the oil and gas industry. Despite the challenging environment, Essential managed to increase revenue in the third quarter by 10% compared to the third quarter of 2006 as a result of growth through acquisitions. In its Rig division, Essential continues to see a significant slow down in demand for its coil tubing and swabbing services in southern Alberta due to depressed natural gas prices as revenue fell 31% and 51%, respectively. However, activity levels remained robust for Essential's rod rig (flush-by) services as these rigs focus entirely on conventional oil producing wells where high oil prices support the increase in demand for these services. Essential saw a 66% increase in revenue for rod rigs (flush-by's) even though the fleet has only increased 50% compared to the third quarter of 2006. The Transport division also increased revenue in the third quarter by 35% as a result of the significant increase in fleet size due to acquisitions compared to the third quarter of 2006.

During this period, Essential moved aggressively to contain costs as evidenced by our ability to maintain EBITDAC margins of 25% in this significantly slower environment. On June 1, 2007, the Trust combined its Jacar operations in Alberta with its Richmound operations in Saskatchewan as well as combining the swab rig operations of HK Well Service into the Cardinal Well Services rod rig operations. Further consolidation of the coil tubing division will also provide savings and greater efficiency in the fourth quarter and beyond. "Management has positioned the Trust to not only survive this downturn, but prosper and eventually emerge as an even stronger operation in the future," said James Burns, President and Chief Executive Officer.

Throughout the third quarter, the Trust maintained its monthly distribution to unitholders at $0.083 per unit or $8.8 million for the quarter.

Outlook

Increasing natural gas production in the lower 48 states of the U.S. and high levels of liquefied natural gas ("LNG") imports this summer has resulted in record natural gas storage levels in North America, which has put downward pressure on natural gas prices. Meanwhile, as crude oil prices set new records, it is important to remember that western Canada is a natural gas and oilsands dominated basin with a relatively smaller proportion of conventional oil production. As an indication of activity levels for 2008, Canadian conventional oil and natural gas drilling is forecasted by the Canadian Association of Oilwell Drilling Contractors ("CAODC") and the Petroleum Services Association of Canada ("PSAC") to decrease by 17% compared to 2007 and 38% when compared to 2006. While similar statistics and forecasts for production service activity levels are not readily available, Essential believes that such activity will also slow down as our customers focus on only those activities providing the greatest economic return. In the midst of this already challenging business environment, the Alberta government has proposed significant increases to the royalties paid by certain of our customers, the oil and gas producers in Alberta. Some of Essential's customers have already announced dramatic cuts to their 2008 budgets; in some cases by 30% to 50% for natural gas drilling. Essential saw its utilization levels drop immediately after the September 18, 2007 release of the so called "Our Fair Share" report by the Alberta Royalty Review Panel and recovery since the October 25, 2007 announcement by the Alberta government has been negligible. The new royalty framework proposal is still a recent development and the potential impact has yet to be fully determined on Essential's operations.

Given this difficult operating environment, Essential will continue to focus on costs while pursuing every opportunity to improve revenue. In October, Essential expanded its field operations in Slave Lake, Alberta to focus more of its rod rigs in the conventional oil fields surrounding this area. On November 1, 2007, Essential combined its two coil tubing business units of Endless Tubing Services and Kodiak Coil Tubing into one business unit called Essential Coil Tubing Services. In the last 4 months, Essential has consolidated the number of business units it operates from 10 to 7 business units. As well, Essential has been assessing opportunities to move equipment and personnel to British Columbia and Saskatchewan in 2008 where activity levels, according to PSAC, are expected to increase 10% and 3% respectively as Essential's customers redeploy capital and operating expenditures out of Alberta. In November 2007, Essential relocated certain coil tubing equipment to Estevan, Saskatchewan to capitalize on the conventional light oil projects in this area.

Distribution for November 2007

Management believes these are times when it is particularly important to retain sufficient cash to improve operations and liquidity in what will likely be a competitively priced environment. Such cash retention will allow Essential to take advantage of opportunities that may arise in the near future resulting in a stronger Trust. Given the uncertainty, low current activity levels and reduced activity forecasts for 2008, Essential feels it is prudent to manage its cash distributions to unitholders conservatively and therefore announces that its cash distribution for the month of November 2007 will be $0.05 per trust unit, a reduction of $0.033 per unit or 40% from previous monthly distributions. The distribution will be paid on December 17, 2007 to unitholders of record on November 30, 2007. The ex-distribution date is November 28, 2007. Essential expects this distribution level will result in a 2008 payout ratio on funds from operations of approximately 65% to 70%.

Selected Financial Information

Selected financial information for the three and nine months ended September 30, 2007 are attached below with the detailed unaudited interim consolidated financial statements and the Management Discussion and Analysis available on the company's profile on SEDAR at www.sedar.com or the Trust's website at www.essentialenergy.ca.




CONSOLIDATED BALANCE SHEETS
(Unaudited)
As at,
($ in thousands)
September 30, 2007 December 31, 2006
$ $
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ASSETS
Current
Cash 920 1,110
Accounts receivable and prepaid
expenses 21,020 24,214
Materials and supplies 1,924 1,782
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23,864 27,106

Property and equipment 100,809 96,741
Goodwill and intangibles 110,200 99,334
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234,873 223,181
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LIABILITIES AND UNITHOLDERS EQUITY
Current
Bank indebtedness 11,100 10,940
Accounts payable and accrued
liabilities 4,928 6,269
Distributions payable 2,928 2,301
Current portion of capital lease
obligations 55 235
Current portion of long-term debt 6,661 11,347
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25,672 31,092
Capital lease obligations - 17
Long-term debt 49,676 45,065
Future income tax liability 19 -
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75,367 76,174
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Unitholders equity
Unitholders capital 192,041 159,423
Contributed surplus 1,874 642
Accumulated deficit (34,409) (13,058)
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159,506 147,007
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234,873 223,181
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CONSOLIDATED STATEMENTS OF OPERATIONS, COMPREHENSIVE INCOME AND
ACCUMULATED DEFICIT
(Unaudited)

($ in thousands)
For the
----------------------------------------
Three months ended Nine months ended

September September September September
30, 30, 30, 30,
2007 2006 2007 2006
$ $ $ $
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REVENUE
Energy services revenue 27,638 25,234 85,679 63,490
Gain (loss) on sale of property and
equipment 37 33 (5) 27
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27,675 25,267 85,674 63,517
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EXPENSES
Operating expenses 16,192 15,038 50,919 35,634
General and administrative 4,499 2,963 14,629 8,351
Stock-based compensation 436 294 1,232 392
Interest on short-term debt and
bank fees 203 303 1,021 1,012
Interest on long-term debt 984 637 2,900 706
Depreciation and amortization 4,208 3,611 12,679 9,876
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26,522 22,846 83,380 55,971
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Income before income taxes and
non-controlling interest 1,153 2,421 2,294 7,546
Income taxes
Future income taxes (recovery) (614) - 19 -
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Income before non-controlling
interest 1,767 2,421 2,275 7,546
Non-controlling interest - - - (411)
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Net income and comprehensive income
for the period 1,767 2,421 2,275 7,135
Accumulated deficit, beginning of
period (27,394) (7,422) (13,058) (2,693)
Distributions to Avenir Diversified
Income Trust - - - (7,190)
Distributions to unitholders (8,782) (6,806) (23,626) (9,059)
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Accumulated deficit, end of period (34,409) (11,807) (34,409) (11,807)
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Net income per unit
Basic 0.05 0.09 0.07 0.26
Diluted 0.05 0.09 0.07 0.26
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

($ in thousands)
For the
----------------------------------------
Three months ended Nine months ended

September September September September
30, 30, 30, 30,
2007 2006 2007 2006
$ $ $ $
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OPERATING ACTIVITIES
Net income for the period 1,767 2,421 2,275 7,135
Add non-cash items:
Depreciation and amortization 4,208 3,611 12,679 9,876
Non-controlling interest - - - 411
Future income taxes (recovery) (614) - 19 -
Stock-based compensation 436 294 1,232 392
Loss (gain) on sale of property
and equipment (37) (33) 5 (27)
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5,760 6,293 16,210 17,787
Change in non-cash working capital (4,464) (3,478) 1,046 (3,366)
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Cash provided by operating
activities 1,296 2,815 17,256 14,421
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FINANCING ACTIVITIES
Issuance of trust units, net of
costs - - 32,618 -
Investment by Avenir Diversified
Income Trust - - - 14,279
Distributions to Avenir Diversified
Income Trust - - (7,890)
Distributions to unitholders (8,781) (6,758) (22,999) (6,758)
Cost of formation of Essential
Energy Services Trust - (606) - (4,834)
Increase (decrease) in bank
indebtedness 10,600 (28,300) 160 (491)
Repayments of capital lease
obligations (28) (37) (94) (100)
Increase in long-term debt 141 52,065 641 52,130
Repayments of long-term debt (293) (281) (716) (4,303)
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Cash provided by financing
activities 1,639 16,083 9,610 42,033
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INVESTING ACTIVITIES
Purchase of energy service
businesses (11,932) (15,638) (22,222) (29,273)
Purchase of property and equipment (1,076) (5,121) (5,918) (27,228)
Sale of property and equipment 413 359 684 908
Change in non-controlling interest - - - (524)
Change in non-cash working capital 250 (686) 400 (2,000)
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Cash used in investing activities (12,345) (21,086) (27,056) (58,117)
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Decrease in cash during the period (9,410) (2,188) (190) (1,663)
Cash, beginning of period 10,330 3,295 1,110 2,770
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Cash, end of period 920 1,107 920 1,107
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Cash interest paid 1,142 817 3,454 1,304
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About Essential

Essential is an energy service trust that provides post drilling production maintenance and enhancement services to oil and gas producers across western Canada from northeast British Columbia to southeast Saskatchewan including service rigs, coil tubing, rod rigs, swab rigs, vacuum trucks, pressure trucks, tank trucks, hydro-vacs, steaming and hot oiling along with other related services.

Notes to Financial Highlights

1 EBITDAC is defined as earnings before non-controlling interests, interest, taxes, depreciation, amortization and stock-based compensation expense. We believe in addition to net (loss) income, EBITDAC is a useful supplemental earnings measure as it provides an indication of the financial results generated by our principal business activities prior to consideration of how these activities are financed or how the results are taxed in various jurisdictions and before non-cash amortization expenses and stock-based compensation expense. EBITDAC margin is calculated as EBITDAC divided by revenue.

2 Funds from operations is calculated by taking net (loss) income and adding back non-cash balances such as depreciation and amortization, (loss) gain on sale of property and equipment, stock-based compensation expense and non-controlling interest.

3 Payout ratio is calculated by dividing distributions to unitholders plus distributions to Avenir Diversified Income Trust by funds from operations.

4 Working capital (excluding debt) is calculated by taking current assets less current liabilities excluding current portions of capital lease obligations, and long-term debt. Working capital ratio is calculated by taking current assets divided by current liabilities excluding current portions of capital lease obligations, and long-term debt.

5 Net debt is calculated by taking current assets less total liabilities.

Forward Looking Statements: Certain information set forth in this document, including a discussion of future plans and operations, contains forward looking statements that involve substantial known and unknown risks and uncertainties. These forward looking statements are subject to numerous risks and uncertainties, some of which are beyond the Trust's and management's control, including but not limited to, the impact of general economic conditions, industry conditions, fluctuation of commodity prices, fluctuation of foreign exchange rates, environmental risks, industry competition, availability of qualified personnel and management, stock market volatility, timely and cost effective access to sufficient capital from internal and external sources. Actual results, performance or achievement could differ materially from those expressed in or implied by, these forward looking statements.

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

Contact Information

  • Essential Energy Services Trust
    James Burns
    President & CEO
    (403) 263-6778
    or
    Essential Energy Services Trust
    Duncan Au
    Vice President - Business Development & CFO
    (403) 263-6778
    or
    Essential Energy Services Trust
    Suite 950, 330 - 5th Ave SW
    Calgary, Alberta T2P 0L4
    (403) 263-6778
    (403) 263-6737 (FAX)
    Website: www.essentialenergy.ca