BlackWatch Energy Services Trust
TSX : BWT.UN

BlackWatch Energy Services Trust

November 10, 2008 17:53 ET

BlackWatch Energy Services Trust Announces Financial Results for the Three and Nine Months Ended September 30, 2008 and Its Intention to Convert to a Corporation

CALGARY, ALBERTA--(Marketwire - Nov. 10, 2008) - BlackWatch Energy Services Trust ("BlackWatch" or the "Trust") (TSX:BWT.UN) announces its results for the three and nine months ended September 30, 2008 and plan to convert to a corporation. All figures are reported in Canadian dollars unless otherwise stated.

FINANCIAL & OPERATING SUMMARY

The table below provides a summary of BlackWatch's financial and operating results for the three and nine months ended September 30, 2008. Our unaudited consolidated financial statements with notes and related MD&A for this period will be filed separately on SEDAR on November 10, 2008 (www.sedar.com). Please review that material in conjunction with this press release.



SUMMARY FINANCIAL INFORMATION
($ thousands, except per Quarter ended Nine Months ended
Trust unit amounts) September 30 September 30
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2008 2007 2008 2007
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Revenue from continuing operations $ 10,454 $ 9,798 $ 35,554 $ 36,077

Gross margin from continuing
operations(1) $ 198 $ 767 $ 3,614 $ 1,182

Normalized EBITDAC (1) $ (888) $ 106 $ 630 $ (2,466)

Loss from continuing operations $ (4,397) $ (3,827) $(10,291) $(23,506)
Per Trust unit - basic and diluted $ (0.13) $ (0.13) $ (0.30) $ (0.90)

Funds from operations(1) $ (1,294) $ (1,057) $ (696) $ (5,583)
Per Trust unit - basic and diluted $ (0.04) $ (0.04) $ (0.02) $ (0.21)

Cash distributions declared per
Trust unit $ - $ - $ - $ 0.065

(1) See definition within the Non-GAAP Measures section.

As at As at
($ thousands) September 30, 2008 December 31, 2007
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Total assets $ 77,788 $ 81,894

Debt and future capital obligations:
Current $ 43,511 $ 43,726
Long-term $ 242 $ 475

Unitholders' equity $ 26,773 $ 33,650


In the quarter ended September 30, 2008 the Trust showed a larger loss from continuing operations and reduced cash flow compared to the same period in 2007, on increased revenues. The increase in revenues occurred mainly in the drilling, rentals and transportation divisions, offset by a significant decrease in downhole services revenue. The reduction in gross margin from 8% to 2%, combined with higher administrative costs led to a significant decrease in EBITDAC for the quarter. The decrease in gross margin related primarily to the drilling, downhole services and transport divisions. All divisions continued to experience weak demand for energy services in 2007 and 2008, greater competition among energy service providers and downward pricing pressures.

In the nine months ended September 30, 2008 the Trust showed a lower loss and a reduced negative cash flow compared to the same period in 2007, on slightly lower revenues. The reduction in revenues reflects lower pricing for services and flat industry activity levels in the period, with average industry drilling rig utilization of approximately 40% in 2008, compared to 39% in 2007. The improvement in gross margin from 3% to 10%, combined with lower administrative costs led to a significant improvement in EBITDAC for the nine month period. The improved gross margin, which related primarily to the drilling division, was achieved through increased utilization in the first quarter of 2008 and improved cost control. Other divisions continued to experience lower demand for energy services and low prices.

Natural gas prices weakened during the quarter and these weaker prices combined with weaker crude oil prices could have a significant negative effect on oil and gas industry activity in western Canada for the remainder of 2008 and into 2009.

In September 2008 BlackWatch completed the construction of a telescopic double pad rig ("Rig #11") and the rig began working under a take-or-pay contract with an intermediate oil and gas producer. The agreement provides for a commitment of 200 days per year for two years. In October 2008, BlackWatch received the second of two $1.375 million payments required from the client under the take-or-pay contract, which amounts were used to partially fund the completion of Rig #11. The rig commenced operations on September 28, 2008.

In October 2008 the Trust made the decision to shut down its remaining coiled tubing operations and has expanded the program to dispose of the assets related to this business unit. In the nine months ended September 30, 2008 BlackWatch has sold three electric-line units, one swabbing unit and five coil tubing units for net proceeds of $4 million and various other assets for proceeds of $900,000. BlackWatch hopes to dispose of additional underutilized assets in the coming months. The Trust intends to use the proceeds from these asset sales to pay down the senior debt.

OUTLOOK

The outlook for the western Canadian energy services sector for the remainder of 2008 and beyond is largely dependant on capital spending by oil and natural gas explorers and producers which are in turn heavily influenced by North American natural gas prices. The quarter ended September 30, 2008 saw a significant decline in crude oil and natural gas prices and industry sources have become less optimistic about oilfield activity improving for the remainder of the year and into 2009. Some of our customers are reducing their capital budgets and reducing their planned activities, which will reduce our utilization rates and revenues. Although some oilfield service sectors have experienced strong activity levels associated with emerging shale gas development primarily onshore in the United States, this activity has not positively impacted demand for BlackWatch's services in our operating areas.

BlackWatch has undertaken several initiatives designed to provide service differentiation, to help it compete for work and diversify to a broader range of industry activity. For example, in the first quarter of 2008 BlackWatch added significant drilling activity through oilsands related drilling and coring work, allowing us to participate in the growing market for oilsands development. In September 2008 BlackWatch completed Rig #11 which has begun working under a take-or-pay contract with an intermediate oil and gas producer. That contract provides for a commitment of 200 days per year for two years. In March 2008 BlackWatch acquired 148 flow-back tanks and related equipment which, when combined with its existing production services, completes its offering of fluid support services used for the completion, stimulation and production of oil and gas wells.

BlackWatch has tested and employed the capability to drill wells with casing which, in certain applications, eliminates the need for drill pipe and reduces drilling time. Casing drilling can increase drilling efficiency significantly and has the potential to reduce formation damage associated with fluid exposure and pressure surges. A number of BlackWatch's rigs are also well-suited to safely drill with air, as an alternative to conventional drilling using fluids. The design of our rigs allows this to be done without the addition of major equipment or service interfaces, resulting in very cost effective service versus typical air drilling operations. Drilling with air substantially increases drilling efficiency and imparts minimal formation damage, a critical issue in coal bed methane and shallow gas developments. We have tested the combination of drilling with casing, using air rather than fluids, resulting in further improvements to drilling efficiency. This combines the drilling efficiencies and other benefits of each technique, and creates a unique way to differentiate our drilling services. We have begun to utilize those techniques as a means of marketing our services to our customers. In the remainder of 2008 and into 2009, BlackWatch should continue to benefit from two new completion services that were added in late 2007: 1) proprietary propellant technology to enhance perforation performance for little incremental cost, using licensed technologies; 2) pipe recovery equipment and expertise for both open-hole and cased-hole applications. By late 2008 we expect to add a down-hole camera technology that can investigate well equipment problems and assist in directly evaluating production performance.

We believe that progressive actions such as these will improve the Trust's performance.

BlackWatch recognizes that significant challenges remain, and we are taking a systematic approach to addressing them. We continue to take steps to stabilize the business financially and are addressing the opportunities available to us to position BlackWatch for success. Our goal is to create an entity that is viable during periods of low economic activity but which is able to take full advantage of a future recovery in industry activity levels. Management believe that the long term viability of the western Canadian sedimentary basin is supported by both declining oil and gas well production rates and overall increases in the global demand for energy.

CONVERSION TO A CORPORATION

The Trust is pleased to announce its plans to convert to a corporation (the "Reorganization") pursuant to a plan of arrangement transaction under the Business Corporations Act (Alberta). Pursuant to the Reorganization holders of trust units ("Unitholders") of the Trust will receive common shares ("Common Shares") of a newly-formed corporation ("BlackWatchCo") on a one-for-one basis (the "Exchange Ratio"). The Reorganization will result in BlackWatchCo holding the assets and business operations previously held and operated by the Trust and its subsidiaries. All of the members of the Board of Directors and the senior officers of BlackWatch Energy Services Operating Corp. ("OpCo") will continue as the directors and officers of BlackWatchCo. Also in the Reorganization, holders of exchangeable limited partnership units ("Exchangeable Units") of BlackWatch Energy Services Limited Partnership (the "Partnership") will exchange their Exchangeable Units for Common Shares based on the Exchange Ratio. The Reorganization will result in BlackWatchCo having approximately 36.7 million Common Shares issued and outstanding after closing.

The Reorganization is subject to receipt of all required regulatory, stock exchange and Court of Queen's Bench approvals as well as approval by at least 66 2/3% of the votes cast by Unitholders and the holders of Exchangeable Units present in person or by proxy at a duly convened special meeting (the "Unitholder Meeting") of securityholders of the Trust. It is anticipated that an information circular and proxy statement in connection with the Unitholder Meeting will be mailed to Unitholders and the holders of Exchangeable Units on or about November 26, 2008 and the Unitholder Meeting and will be held on December 23, 2008. Subject to receiving all necessary approvals, closing of the Reorganization is expected to be on December 31, 2008.

The Reorganization has been structured to allow Unitholders resident in Canada to receive Common Shares on a tax-deferred basis, with Unitholders being entitled to elect that such exchange be carried out on a taxable basis. Further, holders of Exchangeable Units will be entitled to elect that the exchange of their Exchangeable Units for Common Shares be carried out on a tax-deferred basis.

The Board of Directors of OpCo has unanimously concluded that the Reorganization is in the best interests of the Trust and securityholders of the Trust, and has unanimously resolved to recommend that securityholders of the Trust vote their trust units and Exchangeable Units in favour of the Reorganization. Officers and directors of OpCo beneficially owning approximately 29% of the issued and outstanding trust units and Exchangeable Units of the Trust intend to vote their trust units and Exchangeable Units in favour of the Reorganization.

Travis Robertson, President & CEO said "we are undertaking this transaction to simplify the business structure, resulting in modest reductions in G&A, and to allow unitholders the opportunity to effect personal tax planning in calendar 2008 in respect of their investment in BlackWatch units. The trust structure is a less desirable business organization for BlackWatch in the current market because the Trust is not paying distributions and the business will likely remain non-taxable until 2011."

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. 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.

NON GAAP MEASURES

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.

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.

For more information regarding these financial and operating results or the reorganization, please contact the number below.

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)
    or
    BlackWatch Energy Services Trust
    Wiley Auch
    Vice President, Finance & CFO
    (403) 225-3879
    (403) 366-2066 (FAX)
    or
    BlackWatch Energy Services Trust
    300, 855 - 8 Avenue SW
    Calgary, Alberta T2P 3P1
    Website: www.blackwatchenergy.ca