ClearStream Energy Services Inc.
TSX : CSM
TSX : CSM.DB.A

ClearStream Energy Services Inc.

March 07, 2017 13:59 ET

Amended: ClearStream Announces Fourth Quarter and Annual 2016 Financial Results

CALGARY, ALBERTA--(Marketwired - March 7, 2017) - Note: This news release supersedes an earlier news release dated March 7, 2017 and has been corrected for an administrative error in the Q4 2015 Adjusted EBITDA amount.

NOT FOR DISTRIBUTION TO THE U.S. NEWS WIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES

ClearStream Energy Services Inc. ("ClearStream") (TSX:CSM)(TSX:CSM.DB.A) today announced its results for the three and twelve months ended December 31, 2016.

On October 13, 2016, Tuckamore Capital Management Inc. announced that it had filed articles of amendment changing its name to "ClearStream Energy Services Inc." The shareholder approval required to authorize the change in the Company's name was obtained at the Company's annual and special meeting held on June 17, 2016. The Company's listed securities, consisting of the Company's common shares and its outstanding 10.0% second lien secured convertible debentures due 2026, began trading under the new name on October 18, 2016 under the trading symbols of "CSM" and "CSM.DB.A" respectively.

"EBITDA" and "Adjusted EBITDA" are not standard measures under IFRS. Please refer to the "Non-IFRS measures" section of this release for a description of these items and limitations of their use.

Fourth Quarter 2016 Highlights

  • Adjusted EBITDA in the fourth quarter of 2016 remained relatively consistent with the fourth quarter of 2015 despite the 18% decrease in revenue, as cost cutting measures that were realized throughout 2016 has a positive impact on fourth quarter financial results; fourth quarter selling, general and administrative costs declined by 22% compared to the same period in 2015;
  • ClearStream's revenue continued to be impacted by low commodity prices, which have led to maintenance and project delays and deferrals;
  • Significant progress was made on business development initiatives during the fourth quarter of 2016, including:
    • Expansion into the southern Saskatchewan market through a contract award with Yara Bell Plaine Inc., a Saskatchewan based Nitrogen Fertilizer Company, that is expected to generate $105 million of revenue over three years;
    • A maintenance contract renewal with a major oilsands producer in late 2016 that is expected to generate $390 million over the five-year term of the contract;
    • Through a joint venture with SNC-Lavalin, the award of a five-year contract with a large integrated oil company to provide engineering and procurement services for maintenance and sustainment projects in the Fort McMurray region;
  • Commodity price improvements in the fourth quarter, combined with an increase in demand in the Fort McMurray region subsequent to the wildfires, led to improved demand for our services late in the fourth quarter of 2016;
  • The increase in demand late in the quarter supports our view that maintenance and turnaround spending will increase in 2017, relative to 2016, given the significant amount of deferrals that occurred in 2016.

Overview of Results

($ millions, except per share amounts) Q4 2016 Q4 2015 2016 2015
Restated1 Restated1
Revenue 72.9 89.0 270.7 416.1
Gross profit 7.3 8.6 24.9 53.7
Selling, general & administrative expenses (5.1) (6.5) (17.4) (22.4)
(Loss) income from continuing operations (6.8) (68.9) (32.9) (64.4)
EBITDA 1.1 (55.8) (1.7) (30.0)
Adjusted EBITDA 2.3 2.4 7.3 32.2
(Loss) income per share from continuing operations, basic (0.06) (0.62) (0.30) (0.59)

1 Adjusted for discontinued operations and reclassification of certain selling, general and administrative expenses to cost of revenues (see Note 27 of the audited financial statements).

FOURTH QUARTER RESULTS COMMENTARY

Revenues for the three months ended December 31, 2016 were $72.9 million compared to $89.0 million for the same period in 2015, a decrease of 18.0%. The decline in revenues over the same period in the prior year is due to the impact of reduced commodity prices on ClearStream's business. Lower commodity prices have caused our customers to delay and/or cancel the maintenance and project spending that drives demand for our business.

Gross profit for the three months ended December 31, 2016 was $7.3 million compared to $8.6 million for the same period in 2015, a decrease of 15.3%. Gross margins were 10.0% for the three months ended December 31, 2016 compared to 9.7% in the fourth quarter of 2015. The improvement in the gross profit margin is primarily related to the positive impact of the cost-cutting initiatives that management commenced in mid-2015 and continued to pursue throughout 2016. The $1.4 million decrease in selling, general and administrative expenses is also due to the implementation of cost-cutting measures throughout 2016.

The loss from continuing operations for the fourth quarter of 2015 included $47.3 million in asset impairment losses and $6.4 million in losses on the disposal of assets held for sale. The fourth quarter of 2016 did not include such losses.

2016 ANNUAL RESULTS COMMENTARY

Revenues for the year ended December 31, 2016 were $270.7 million compared to $416.1 million in 2015, a decrease of 35.0%. Reduced revenues in 2016, in comparison to 2015, are directly related to the impact of lower oil and gas prices that negatively impacted market conditions in 2016 for the oil and gas industry. Furthermore, the Fort McMurray forest fires in May 2016 resulted in significantly reduced oil sands activity during the second and third quarter of 2016 and negatively impacted revenue in 2016 on a comparative basis.

Gross profit for the year ended December 31, 2016 was $24.9 million compared to $53.7 million in 2015. Gross profit margins were 9.2% compared to 12.9% in 2015. The decline in gross profit margin in 2016, in comparison to 2015, was largely due to reduced pricing that was necessary for customer retention in light of the decrease in customer demand during 2016. In addition, the temporary impact of the 2016 Fort McMurray forest fires resulted in lower operating leverage on ClearStream's fixed cost structure. Absent the temporary impact of the Fort McMurray forest fires, management believes that fixed costs, which include indirect and selling, general and administrative expenses, would have decreased at the same rate as revenue.

Selling, general and administrative expenses for the year ended December 31, 2016 were $17.4 million compared to $22.4 million in 2015. ClearStream continued to execute its cost reduction strategy in 2016, with the closure of three additional operating locations and further staffing reductions. In addition, the transition of the Company's head office function from Toronto to Calgary was largely completed by December 31, 2016 and, as such, the Company expects additional cost savings going forward. The official change in the registered and head office will occur at the end of March 2017 upon expiration of the Toronto lease.

Despite the difficult operating environment throughout 2016 that led to a $32.9 million loss from continuing operations, ClearStream was able effectively manage cash flow and liquidity during the year through the following initiatives:

  • Business dispositions and debt refinancing that were completed in the first quarter of 2016;
  • Cost cutting initiatives implemented in mid-2015 and throughout 2016;
  • Effective working capital management;
  • Disposition of non-essential assets;
  • Amendments to existing debt agreements that provided ClearStream with the flexibility to manage liquidity during 2016.

Segment Review

Given the significant change in ClearStream's organizational structure in the first quarter of 2016, the Company considered and concluded that there was a change in reportable segments. The reportable segments discussed below, represent the reportable segments that the chief operating decision makers consider when reviewing the performance of ClearStream and deciding where to allocate resources.

($ millions, except per share amounts) Q4 2016 Q4 2015 2016 2015
Adjusted EBITDA Restated1 Restated1
Maintenance and Construction Services 4.5 0.6 16.4 26.7
Wear, Fabrication & Transportation Services 1.9 6.3 6.7 22.8
Adjusted EBITDA from Operating Segments 6.4 6.9 23.1 49.5
Corporate (4.1) (4.6) (15.8) (17.3)
Consolidated adjusted EBITDA 2.3 2.4 7.3 32.2

1 Adjusted for discontinued operations and reclassification of certain selling, general and administrative expenses to cost of revenues (see Note 27 of the audited financial statements).

MAINTENANCE AND CONSTRUCTION SERVICES

Adjusted EBITDA for the Maintenance and Construction Services segment improved in the fourth quarter of 2016 compared to the same period in 2015. The year-over-year increase was partially due to cost reduction initiatives that had a positive year-over-year impact on adjusted EBITDA during the fourth quarter of 2016. In addition, a fire at one of our major customer's facilities caused a disruption in activity for most of the fourth quarter of 2015, which has a negative impact on prior period results.

For the year ended 2016, adjusted EBITDA decreased significantly for the Maintenance and Construction Services segment as weak oil and gas prices led to reduced customer spending on maintenance and construction initiatives. Furthermore, the Fort McMurray fires in 2016 had a significant negative impact on the Maintenance and Construction Services segment throughout the second and third quarters of 2016. The impact of lower demand was offset partially by the positive impact of cost cutting measures that were implemented in 2015 and throughout 2016.

WEAR, FABRICATION, AND TRANSPORATION SERVICES

Revenues for the Wear, Fabrication and Transportation Services segment are driven by project demand within the oil and gas sector. Given the weak oil and gas prices throughout most of 2016, new project development activity related to pipelines and infrastructure was minimal. As such, business volumes and pricing pressure had a more drastic impact on this segment in 2016 compared to ClearStream's Maintenance and Construction Services segment. These factors led to declines in year-over-year adjusted EBITDA for the quarterly and annual results ended December 31, 2016.

In addition, the Fort McMurray fires had a negative effect on this segment's revenues and adjusted EBITDA during the second and third quarters of 2016, which impacted the 2016 annual results. Cost cutting measures that were implemented starting mid-2015 and throughout 2016, helped to offset the impact of the fires and weak market conditions for both the quarterly and annual results.

CORPORATE

Corporate costs decreased on a year-over-year basis, both annually and quarterly, as ClearStream realized the benefits of cost cutting initiatives that commenced in mid-2015 and continued throughout 2016. The primary initiatives included location closures and staffing reductions.

Outlook

Oil and gas prices increased during the fourth quarter of 2016 and have stabilized in early 2017. This improved oil and gas price environment has led to increased customer demand for maintenance related services in early 2017 and we expect this trend to hold throughout 2017. We also expect to see a meaningful rise in facility turnaround demand during spring and fall turnaround seasons in 2017. Our customers deferred maintenance and turnaround spending in 2016 due to challenging market conditions and, with improved and stable market conditions in 2017, we expect to see a significant portion of these deferred programs executed in 2017.

The commodity price recovery has also led to moderate growth in facility and pipeline based project demand in early 2017. However, the bidding process for projects remains very competitive and we do not expect prices to increase in the first half of 2017.

For the first quarter of 2017, we expect revenue and EBITDA to be higher on both a year-over-year and sequential basis. We recently announced a major new contract win in Saskatchewan, the renewal of a large maintenance contract in Fort McMurray, and a new five-year contract award through a joint venture with SNC- Lavalin. These accomplishments, combined with an improving and stable market environment, have set the stage for improved financial results in 2017 compared to 2016. However, demand for our services continues to be driven by oil and gas prices that are volatile and unpredictable. Given this uncertainty, ClearStream management will continue to focus on cost management, customer retention, process and efficiency improvements, and diversification of our revenue stream into new geographies and markets outside of oil and gas.

About ClearStream Energy Services Inc.

ClearStream is a fully integrated provider of upstream, midstream and refinery production services, which includes facility maintenance and turnarounds, pipeline wear technology, facilities construction, welding and fabrication, and transportation to the energy and other industries in Western Canada. For more information about ClearStream, please visit www.ClearStreamEnergy.ca.

Forward-looking information

This report contains certain forward-looking information. Certain information included in this press release may constitute forward-looking information within the meaning of securities laws. In some cases, forward-looking information can be identified by terminology such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "estimate", "predict", "potential", "continue" or the negative of these terms or other similar expressions concerning matters that are not historical facts. Forward-looking information may relate to management's future outlook and anticipated events or results and may include statements or information regarding the future plans or prospects of ClearStream and reflects management's expectations and assumptions regarding the growth, results of operations, performance and business prospects and opportunities of ClearStream. Without limitation, forward-looking information in this press release includes: the future operating results and economic performance of ClearStream, including expected increases in revenue and EBITDA in 2017; expected revenues to be received from contracts; and the expected increase in demand for ClearStream's Services in 2017. Such forward-looking information reflects management's current beliefs and is based on information currently available to management of the Company. Forward-looking information involves significant risks and uncertainties. A number of factors could cause actual events or results to differ materially from the events and results discussed in the forward-looking information including risks related to investments, conditions of capital markets, economic conditions, commodity prices, dependence on key personnel, limited customer bases, interest rates, regulatory change, ability to meet working capital requirements and capital expenditures needs, factors relating to the weather and availability of labour. These factors should not be considered exhaustive. In addition, in evaluating this information, investors should specifically consider various factors, including the risks outlined under "Risk Factors" in the Company's MD&A and Annual Information Form, which may cause actual events or results to differ materially from any forward-looking statement. In formulating forward-looking information herein, management has assumed that business and economic conditions affecting ClearStream will continue substantially in the ordinary course, including without limitation with respect to general levels of economic activity, regulations, taxes and interest rates. Although the forward-looking information is based on what management of ClearStream consider to be reasonable assumptions based on information currently available to it, there can be no assurance that actual events or results will be consistent with this forward-looking information, and management's assumptions may prove to be incorrect. This forward-looking information is made as of the date of this press release, and ClearStream does not assume any obligation to update or revise it to reflect new events or circumstances except as required by law. Undue reliance should not be placed on forward-looking information. ClearStream is providing the forward-looking financial information set out in this press release for the purpose of providing investors with some context for the "Outlook" section presented. Readers are cautioned that this information may not be appropriate for any other purpose.

Non-IFRS measures

The terms "EBITDA" and "Adjusted EBITDA" (collectively the "Non-IFRS measures") are financial measures used in this report that are not standard measures under IFRS. ClearStream's method of calculating Non-IFRS measures may differ from the methods used by other issuers. Therefore, ClearStream's Non-IFRS measures, as presented, may not be comparable to similar measures presented by other issuers.

EBITDA refers to net earnings determined in accordance with IFRS, before depreciation and amortization, interest expense and income tax expense (recovery). EBITDA is used by management and the directors of ClearStream as well as many investors to determine the ability of an issuer to generate cash from operations. Management also uses

EBITDA to monitor the performance of ClearStream's reportable segments and believes that in addition to net income or loss and cash provided by operating activities, EBITDA is a useful supplemental measure from which to determine ClearStream's ability to generate cash available for debt service, working capital, capital expenditures and income taxes. ClearStream has provided a reconciliation of income (loss) from continuing operations to EBITDA in its MD&A.

Adjusted EBITDA refers to EBITDA excluding the interest, taxes, depreciation and amortization of long-term investments, write-down of goodwill, gain from disposal of assets held for sale, restructuring costs and gain on sale of long-term investment. ClearStream has used Adjusted EBITDA as the basis for the analysis of its past operating financial performance. Management believes Adjusted EBITDA is a useful supplemental measure from which to determine ClearStream's ability to generate cash available for debt service, working capital, capital expenditures, and income taxes. Adjusted EBITDA is a measure that management believes facilitates the comparability of the results of historical periods and the analysis of its operating financial performance which may be useful to investors. ClearStream has provided a reconciliation of income (loss) from continuing operations to Adjusted EBITDA in its MD&A.

Investors are cautioned that the Non-IFRS measures are not alternatives to measures under IFRS and should not, on their own, be construed as an indicator of performance or cash flows, a measure of liquidity or as a measure of actual return on the shares. These Non-IFRS measures should only be used in conjunction with ClearStream's annual audited consolidated financial statements, which along with the Company's MD&A, is available on SEDAR at www.sedar.com or www.clearstreamenergy.ca.

CLEARSTREAM ENERGY SERVICES INC.
(FORMERLY TUCKAMORE CAPITAL MANAGEMENT INC.)
Consolidated Balance Sheets
(In thousands of Canadian dollars)
As at December 31, 2016 2015
Cash $ 11,503 $ 24,409
Restricted cash 980 4,380
Accounts receivable 46,928 76,089
Inventories 3,000 3,114
Prepaid expenses and other 2,060 2,471
Earn-out assets 1,608 -
Assets held for sale - 54,310
Total current assets 66,079 164,773
Property, plant and equipment, net 24,745 30,873
Goodwill and intangible assets 38,088 49,892
Earn-out assets 4,056 -
Long-term investments 579 8,000
Deferred financing costs 1,295 -
Total assets $ 134,842 $ 253,538
Accounts payable and accrued liabilities $ 26,848 $ 32,132
Income tax payable - -
Deferred revenue 167 -
Current portion of obligations under finance leases 3,902 4,685
8.00% secured debentures - 174,311
Senior credit facility - 58,482
Current liabilities of assets held for sale - 42,637
Provision 4,985 -
Total current liabilities 35,902 312,247
ABL facility 3,500 -
Obligations under finance leases 2,915 6,347
Senior secured debentures 171,642 -
Convertible secured debentures 24,397 -
Total liabilities 238,356 318,594
Shareholders' deficit (103,514) (65,056)
Total liabilities and shareholders' deficit $ 134,842 $ 253,538
CLEARSTREAM ENERGY SERVICES INC.
(FORMERLY TUCKAMORE CAPITAL MANAGEMENT INC.)
Consolidated Statements of Loss and Comprehensive Loss
(In thousands of Canadian dollars, except per share amounts)
For year ended December 31, 2016 2015
Restated
Revenue $ 270,661 $ 416,122
Cost of revenue (245,750) (362,429)
direct (222,043) 623
indirect (23,707) (728)
Gross profit 24,911 53,693
Selling, general and administrative expenses (17,382) (22,362)
Amortization of intangible assets (3,376) (5,651)
Depreciation (6,625) (8,681)
Income from equity investment (169) (508)
Interest expense (21,259) (24,948)
Gain (loss) on sale of assets held for sale 1,260 (6,379)
Restructuring costs (1,471) (7,454)
Impairment of property, plant and equipment - (5,574)
Impairment of goodwill and intangible assets (8,700) (41,727)
Other income 623 -
(Loss) gain on sale of property, plant and equipment (728) 340
Loss before taxes (32,916) (69,252)
Income tax recovery (expense) - current (21) 2,050
Income tax recovery - deferred - 2,766
Loss from continuing operations (32,937) (64,436)
Loss from discontinued operations (net of income taxes) (12,793) (60,451)
Net loss and comprehensive loss $ (45,730) $ (124,887)
Loss per share
Basic & Diluted:
Continuing operations $ (0.30) $ (0.59)
Discontinued operations $ (0.12) $ (0.55)
Net loss $ (0.42) $ (1.14)
CLEARSTREAM ENERGY SERVICES INC.
(FORMERLY TUCKAMORE CAPITAL MANAGEMENT INC.)
Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)
For the year ended December 31, 2016 2015
Operating activities:
Net loss for the year $ (45,730) $ (124,887)
Loss from discontinued operations (net of income tax) 12,793 60,451
Items not affecting cash:
Amortization of intangible assets 3,376 5,651
Depreciation 6,625 8,681
Deferred income tax recovery - (2,766)
Income from equity investments 169 (3,434)
Non-cash accretion expense 2,526 7,465
Amortization of deferred financing costs 432 558
(Gain) loss on sale of assets held for sale (1,260) 6,379
Loss (gain) on sale of property, plant and equipment 728 (340)
Impairment of property, plant and equipment - 5,574
Impairment of goodwill and intangible assets 8,700 41,727
Impairment of long-term investments - -
Changes in non-cash working capital 24,569 29,701
Advances to discontinued operations (3,931) (20,677)
Cash (used in) provided by discontinued operations (4,432) 1,482
Total cash provided by operating activities 4,565 15,566
Investing activities:
Distributions from long-term investments - 1,740
Purchase of property, plant and equipment (1,417) (3,260)
Proceeds on disposition of property, plant and equipment, net 1,927 311
Proceeds on disposition of businesses 14,800 4,750
Purchase of intangibles (274) (108)
Cash used in discontinued operations - (732)
Total cash provided by investing activities 15,036 2,701
Financing activities:
Increase in long-term debt - -
Repayment of senior credit facility (58,735) (8,934)
Repayment of 8.00% secured debentures (176,228) -
Proceeds from the issuance of senior secured debentures 176,228 -
Proceeds from the issuance of convertible secured debentures 35,000 -
Refinancing fees (ABL facility, senior and convertible secured debentures) (10,256) -
Advance on ABL facility 3,500 -
Decrease (increase) in restricted cash 3,400 (1,430)
Repayment of obligations under finance leases (5,416) (5,591)
Cash used in discontinued operations - (617)
Total cash used in financing activities (32,507) (16,572)
(Decrease) increase in cash (12,906) 1,695
Cash beginning of year 24,409 22,714
Cash end of year $ 11,503 $ 24,409
Supplemental cash flow information:
Interest paid $ 9,404 $ 16,925
Supplemental disclosure of non-cash financing and investing activities:
Acquisition of property, plant and equipment through finance leases $ 1,201 $ 2,003

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