IROC Energy Services Corp.
TSX : ISC

IROC Energy Services Corp.

August 07, 2008 06:00 ET

IROC Energy Services Corp. Announces Second Quarter 2008 Results

CALGARY, ALBERTA--(Marketwire - Aug. 7, 2008) -

THIS PRESS RELEASE IS NOT FOR DISSEMINATION IN UNITED STATES OR TO ANY UNITED STATES NEWS SERVICES.

IROC Energy Services Corp. ("IROC" or the "Company") (TSX:ISC) announces the Company's financial results for the three and six months ended June 30, 2008.



FINANCIAL HIGHLIGHTS

For the 3 months For the 6 months
ended June 30, ended June 30,
------------------- ------------------
(Unaudited) (Unaudited)

2008 2007 Change% 2008 2007 Change%
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Revenue -
continuing
operations $ 13,359 $ 11,815 13% $ 38,970 $ 37,777 3%
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Operating
costs 10,205 8,402 21% 25,975 23,074 13%
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Gross margin 3,154 3,413 -8% 12,995 14,703 -12%
Gross margin % 24% 29% -17% 33% 39% -15%
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General and
administrative
expenses 2,395 2,304 4% 4,770 5,238 -9%
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EBITDAS -
continuing
operations (1) 759 1,109 -32% 8,225 9,465 -13%
Per share
diluted 0.02 0.03 -33% 0.19 0.22 -14%
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Net earnings
(loss) -
continuing
operations (2,170) (1,682) -29% 540 1,496 -64%
Per share
diluted (0.05) (0.04) -25% 0.01 0.04 -38%
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Net earnings
(loss) (2,170) (1,681) -29% 540 1,575 -66%
Per share
diluted (0.05) (0.04) -25% 0.01 0.04 0%
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Number of
shares
outstanding
Basic 44,301,080 44,226,794 0% 44,276,080 42,612,019 4%
Diluted 44,321,531 44,343,450 0% 44,304,325 42,731,012 4%
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(1) EBITDAS and EBITDAS per share are NON-GAAP MEASURES . EBITDAS is defined
as earnings before interest, taxes, depreciation and amortization,
stock-based compensation expense, foreign exchange gains and losses and
gains or losses on disposal of property and equipment. EBITDAS and
EBITDAS per share are not recognized measures under GAAP.


As expected, the seasonal weakness of spring break-up during the second quarter led to varied results in the industry and IROC was not immune to this in certain of its divisions. Strengthening fundamentals driven by higher commodity pricing, particularly natural gas beginning early in the quarter, created strong demand through April, however, the demand was muted as wet weather played a significant factor through much of the remainder of the quarter. Natural gas prices and the development of unconventional resource properties by operators needing to address reserve replacement have generated renewed optimism among oilfield service providers in Western Canada in demand for its equipment and the corresponding pricing trends. Natural gas activities have historically represented the bulk of activities in Western Canada and this trend will continue and in order for producers to increase activity, in any meaningful way, they will be looking for sustained pricing of the commodity. With the improved fundaments, many oil and gas producers appear to be accelerating their plans for drilling which will positively impact the industry.

Three and Six Months Results

Revenue for the six months ended June 30, 2008 was $39 million compared to $37.8 million, representing an increase of 3%. IROC's revenue from continuing operations for the three months ended June 30, 2008 increased 13%, from $11.8 million to $13.4 million compared to the same period in 2007. Revenue increased year over year for both the three and six months as a result of additional equipment capacity from internal growth initiatives. Although IROC had additional equipment capacity year over year from the organic build program completed in fiscal 2007, additional revenue growth was hampered as a result of lower utilization in most of its service lines consistent with the seasonal slowdown during the second quarter break-up period. Demand for our service rigs continues to be strong with utilization remaining consistent with the prior year while pricing decreased slightly over the prior year as a result of increased competition. The revenue mix year over year changed with an unexpected strong quarter being posted from our drilling division.

EBITDAS from continuing operations for the three months ended June 30, 2008 was $0.8 million or $0.02 per share compared to $1.1 million, or $0.03 per share, in the same three month period of 2007. For the six months ended June 30, 2008 EBITDAS was $8.2 million or $0.19 per share compared to $9.5 million or $0.22 per share in the same period of 2007, a decrease of 13%. The decrease in EBITDAS is a result of competitive pricing for our services and products and lower activity levels in some divisions. Additionally, operating costs were higher as recruitment of skilled personnel remains a challenge, fuel costs are at record highs and general overall costs associated with field activities have not moved directionally with lower demand. EBITDAS as a percentage of revenue was 21.1% for six months ended June 30, 2008 as compared to 25.1% for the same period of 2007.

The Company recorded net earnings from continuing operations of $0.5 million, or $0.01 per share, for the six months ended June 30, 2008 compared to net earnings of $1.5 million, or $0.04 per share for the comparable period in 2007. For the three months ended June 30, 2008 IROC incurred a net loss from continuing operations of $2.2 million or ($0.05) loss per share compared to $1.7 million or ($0.04) loss per share in the comparable period of 2007. The decrease in the net earnings for 2008 compared to 2007 is due to higher depreciation and amortization expense in the current year as a result of significant additions to equipment in the past year, higher interest costs for debt servicing due to higher debt incurred to support the growth over the past two years and lower margins in most of our services and products as a result of lower utilization, higher operating costs and lower prices in some cases.

We are confident that our financial performance will continue to improve as the efficiencies associated with more equipment reaching the field are realized. Our capital expenditure program from 2007, which focused primarily on the expansion of Eagle Well Servicing and Aero Rentals based upon the continued demand for the products and services offered by these divisions, should lead to further benefits in the coming months. In response to the improved fundamentals for the industry, our Board of Directors have approved an additional expansion of our service rig fleet with the construction of 6 new freestanding double service rigs at a total cost of approximately $12.6 million. It is anticipated that delivery of these rigs will commence early in the fourth quarter of 2008 with the last rig to likely be deployed in early January of 2009. Further, IROC is in the process of converting its fourth drilling rig from a single to a double with depth capacity to 3400 meters in order to address the growing demand in this particular segment of the market.

At June 30, 2008, the Company was not compliant with one of the financial covenants under the credit facility. The Company is required to maintain compliance with certain financial covenants on its debt which are measured quarterly. Subsequent to June 30, 2008 the lenders have provided the Company with a waiver of the covenant until September 30, 2008 and thus have not demanded repayment of the facility. Expansion of our capital asset base through the past two years has been accomplished mostly through the use of conventional bank debt. IROC has built new service rigs, added new drilling rigs and continued to expand our other businesses with the introduction of new equipment and technologies. Despite the fact that we have reduced debt substantially over the first half of the year, with the prolonged downturn in activity we came to a point where our EBITDA to Debt ratio did not meet the target at the end of Q2. Essentially this was simply a technical breach and while only marginally off the target, a waiver of the ratio was required which was obtained from our bank. Management is working diligently on a number of options to rectify the situation, with a combination of increasing cash flow from a larger fleet of equipment and debt reduction through a number of means being central to the strategy. Given the renewal of our capital expansion plans it is evident that there is a great deal of confidence in our operations and ability to work our way through the current situation. As cash flow remains very strong on a comparative basis, our business continues to grow and the options to remedy our situation are numerous.

Also, management and the Board of Directors of IROC remain concerned about the lagging share price of the Company. While some of the factors contributing to this situation can be attributed to factors outside our control, we believe that the market continues to price the stock well below actual value. Accordingly, a Special Committee of the Board has been struck to investigate any and all options that may be available to the Company to provide the best return possible for our shareholders. An appropriate valuation of our business is important as we capitalize on our growth opportunities; especially given the optimism that is beginning to become evident as we enter the second half of 2008. The process will be carried out over a period of time and has no predetermined or preconceived outcome.

Tom Alford, President and CEO of IROC commented that, "the Q2 2008 revenues beat the previous years Q2 revenue by a significant margin, indicating a change in momentum which we believe will be maintained throughout the remainder of the year. The increase in activity continues as we enter Q3 but the entire industry is waiting for confirmation of increasing expenditures with the underlying commodity pricing being the key factor. The additional service rig and drilling equipment being deployed, along with expected increases in utilization will show the capability of IROC Energy Services to deliver stronger returns in the coming quarters." Additionally Mr. Alford indicated that, "while our balance sheet continues to be a focus and steps will be taken during the coming months to ensure that we can continue to take advantage of the opportunities that are available to us, while also balancing our capital structure requirements, the impending changes in the operating environment in Western Canada will allow for management to focus our efforts on the areas providing the greatest returns, both in the short and long run, and set the Company up to continue to participate in the oil and gas services business in a meaningful way in the coming years."

Outlook

The outlook for fiscal 2008 appears to have improved with substantially higher natural gas prices during Q2 and continued strong oil prices. These factors have positively impacted producers' cash flows and provide a step towards increased spending and greater activity at the field level in the industry. The increased spending by producers has already began in some cases and we expect this will develop further as the producers look for sustained periods of higher natural gas prices and adjust their budgets for 2008 and into 2009. Activities on a year over year basis in Saskatchewan and B.C. are increasing already providing opportunity in these areas. Alberta activity remains flat at this time, due in large part to the consequences of the proposed royalty structure. While changes have been introduced by government to mitigate the effect of the new royalty structure, it remains to be seen what effect this will have on Alberta based activity.

IROC's growth strategy is focused on organic growth through new service rig construction and increased capacity in its other services that generate a reasonable return on the capital employed. Customers have clearly indicated their desire for technically advanced, highly mobile, well designed rigs with availability to high-performing crews and personnel. In response to this demand the construction of 6 new service rigs in the second half of 2008 was approved. With the imminent increase in activity, access to field personnel will be a challenge for all oilfield service providers. We are able to offer our customers, and our personnel, the newest equipment in each of our services offered and have strength in terms of technology providing a competitive advantage for our customers. Additionally, IROC enjoys diversity both geographically and across a number of business lines. We believe these factors will provide for superior relative performance in the competitive oil and gas service business.

Publicly reported information for IROC Energy Services Corp. is available at www.sedar.com.

About IROC Energy Services Corp.

IROC Energy Services Corp. is an Alberta oilfield services company that, through the IROC Energy Services Partnership, provides a comprehensive and diverse range of products, services and equipment to the oil and gas industry. IROC combines cutting-edge technology with depth of experience to deliver a product and services offering in six core areas: Well Servicing & Equipment, Drilling Rig Equipment & Services, Down hole Temperature & Pressure Monitoring Tools, Rental Services, Lease Building, and Safety, Monitoring & Communications Services. For more information on IROC Energy Services Corp. visit our website at www.iroccorp.com.

Cautionary Statements

Certain statements contained in this press release may constitute forward looking statements concerning, among other things, expected revenues, expected expenses, profits, developments and strategies for IROC's operations all of which are subject to certain risks, uncertainties and assumptions. These forward looking statements are identified by their use of terms and phrases such as "anticipate", "continue", "estimate", "expect", "may", "will", "projected", "should", "believe" and other similar terms and phrases. By its nature, such forward looking information involves 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 statements. These risks include, but are not limited, to the risks associated with the oil and gas industry generally, fluctuating prices in crude oil and natural gas, changes in drilling activity, general global economic, political and business conditions, weather conditions, regulatory changes and availability of products, qualified personnel and manufacturing capacity and raw materials. If any of these uncertainties materialize, or if assumptions are incorrect actual results may vary materially from those expected. IROC relies on litigation protection for any forward looking statements.

The Common Shares of IROC have not and will not be registered on the United States Securities Act of 1933, as amended (the "United States Securities Act") or any state securities laws are not offered or sold in the United States or to any US person except in certain transactions exempt from the registration requirements of the United States Securities Act and applicable state securities laws.



Consolidated Balance Sheets

Expressed in thousands of dollars
(Unaudited)

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----------------------------------------------------------------------------
June 30, December 31,
2008 2007
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Assets
Current assets:
Cash $ 1 $ 1
Accounts receivable 12,822 18,383
Inventory 4,547 5,442
Prepaid expenses and deposits 497 359
----------------------------------------------------------------------------
17,867 24,185
Property and equipment (note 3) 97,459 99,471
Intangible assets (note 4) 5,101 5,376
Goodwill 8,621 8,621
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$ 129,048 $ 137,653
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Liabilities and Shareholders Equity
Current liabilities:
Operating line of credit $ 25 $ 3,421
Accounts payable and accrued liabilities 4,838 6,010
Income taxes payable 46 190
Current portion of long-term debt (note 5) 58,640 6,831
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63,549 16,452
Long-term debt (note 5) 37 56,457
Future income taxes 3,479 3,481

Shareholders' equity:
Share capital (note 6) 51,564 51,547
Warrants 828 828
Contributed surplus (note 6) 2,572 2,409
Retained earnings 7,019 6,479
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61,983 61,263

Basis of presentation and going concern (note 1)
----------------------------------------------------------------------------
$ 129,048 $ 137,653
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Consolidated Statements of Earnings (Loss) and Retained Earnings

Expressed in thousands of dollars except share and per share amounts
(Unaudited)

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
-------------------- ------------------
2008 2007 2008 2007
----------------------------------------------------------------------------
Revenue $ 13,359 $ 11,815 $ 38,970 $ 37,777

Expenses:
Operating 10,205 8,402 25,975 23,074
General and
administrative 2,395 2,304 4,770 5,238
Stock-based
compensation 70 201 163 387
Depreciation and
amortization 2,503 2,324 5,154 4,737
Interest and
accretion on
debentures 236 236 472 472
Interest on
long-term debt 827 631 1,801 1,186
Other interest 24 245 159 449
Loss (gain) on
disposal of equipment 52 (160) (5) (151)
Foreign exchange
(gain) loss 6 84 (57) 92
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16,318 14,267 38,432 35,484

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Earnings (loss)
before income taxes
from continuing
operations (2,959) (2,452) 538 2,293
Income taxes
(recovery):
Current - (49) - 36
Future (789) (721) (2) 761
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Net earnings (loss)
from continuing
operations (2,170) (1,682) 540 1,496
Net earnings from
discontinued
operations (note 9) - 1 - 79
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Net earnings (loss) (2,170) (1,681) 540 1,575

Retained earnings,
beginning of period 9,189 7,596 6,479 4,340
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Retained earnings,
end of period $ 7,019 $ 5,915 $ 7,019 $ 5,915
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Earnings (loss) per
share from
continuing
operations:
Basic $ (0.05) $ (0.04) $ 0.01 $ 0.04
Diluted $ (0.05) $ (0.04) $ 0.01 $ 0.04
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Earnings per share
from discontinued
operations:
Basic $ 0.00 $ 0.00 $ 0.00 $ 0.00
Diluted $ 0.00 $ 0.00 $ 0.00 $ 0.00
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Earnings (loss) per
share:
Basic $ (0.05) $ (0.04) $ 0.01 $ 0.04
Diluted $ (0.05) $ (0.04) $ 0.01 $ 0.04
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Weighted average
number of shares
outstanding:
Basic 44,301,080 44,226,794 44,276,080 42,612,019
Diluted 44,321,531 44,343,450 44,304,325 42,731,012
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----------------------------------------------------------------------------


Consolidated Statements of Cash Flows

Expressed in thousands of dollars
(Unaudited)

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----------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
-------------------- ------------------
2008 2007 2008 2007
----------------------------------------------------------------------------
Cash provided by (used
in):

Operations:
Net earnings (loss)
from continuing
operations $ (2,170) $ (1,682) $ 540 $ 1,496
Items not affecting
cash:
Depreciation and
amortization 2,503 2,324 5,154 4,737
Future income taxes
(recovery) (789) (721) (2) 761
Stock-based
compensation 70 201 163 387
Non-cash accretion on
debentures 96 96 192 192
Gain on disposal of
property and
equipment 52 (160) (5) (151)
----------------------------------------------------------------------------
(238) 58 6,042 7,422
Changes in non-cash
working capital
balances (note 7) 7,551 4,987 5,002 (285)
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7,313 5,045 11,044 7,137
Discontinued operations
(note 9):
Funds provided by (used
in) discontinued
operations - 1 - 29
Changes in non-cash
working capital
balances of discontinued
operations - 317 - 582
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7,313 5,363 11,044 7,748
Investing:
Purchase of property
and equipment
of continuing
operations (2,403) (7,709) (3,086) (13,284)
Proceeds on disposal of
property and
equipment from continuing
operations 334 1,242 564 1,348
Proceeds on disposal of
equipment from
discontinued operations - - - 903
Business acquisitions - (1,000) - (1,000)
Change in non-cash
working capital
balances (note 7) - 624 - (1,367)
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(2,069) (6,843) (2,522) (13,400)
Financing:
Repayment of long-term
debt (4,777) (211) (4,803) (420)
Operating loan advances
(repayments) (467) (3,544) (3,396) 953
Issue of long-term debt - 5,223 - 5,307
Issue of common shares - 12 17 12
Loan commitment fees - - (340) (200)
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(5,244) 1,480 (8,522) 5,652
Increase (decrease) in
cash - - - -
Cash at beginning of
period 1 1 1 1
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Cash at end of period $ 1 $ 1 $ 1 $ 1
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