BlackWatch Energy Services Trust
TSX : BWT.UN

BlackWatch Energy Services Trust

August 14, 2007 21:32 ET

BlackWatch Energy Services Trust Reports Interim Results for Three and Six Month Periods Ended June 30, 2007

CALGARY, ALBERTA--(Marketwire - Aug. 14, 2007) - BlackWatch Energy Services Trust ("BlackWatch" or the "Trust") (TSX:BWT.UN) announces interim results for the three and six month periods ended June 30, 2007. 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 six month periods ended June 30, 2007. Our interim consolidated financial statements with notes and related MD&A for these periods have been filed separately on SEDAR (www.sedar.com). Please review that material in conjunction with this press release.



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Summary

($ thousands, except per Trust unit amounts)

Three months Six months
ended ended
June 30 June 30
2007 2007
-----------------------

Revenue $ 5,506 $ 29,637

Gross margin $ (4,341) $ (471)

EBITDAC (1) $ (5,619) $ (3,213)
Per Trust unit - basic $ (0.23) $ (0.13)
Per Trust unit - diluted $ (0.23) $ (0.13)

Loss for the period (1) $(16,862) $ (20,780)
Per Trust unit - basic $ (0.68) $ (0.84)
Per Trust unit - diluted $ (0.68) $ (0.84)

Funds from operations (1) $ (6,679) $ (5,406)
Per Trust unit - basic $ (0.27) $ (0.22)
Per Trust unit - diluted $ (0.27) $ (0.22)

Net debt $ 44,989 $ 44,989

Unitholders' equity $ 46,986 $ 46,986

Distributions declared $ - $ 1,611
Per Trust unit $ - $ 0.07

Weighted average Trust units - basic 24,781 24,781
Weighted average Trust units - diluted 24,805 24,805
Trust units, end of period 24,781 24,781

(1) Six months ended June 30, 2007 includes approximately $400,000 of non-
recurring items including severance costs and professional fees related
to the Officer Certification requirements. Three months ended June 30,
2007 includes approximately $100,000 of non-recurring costs related to
severance.
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The Trust generated EBITDAC of negative $5.6 million and Funds from Operations of negative $6.7 million for the second quarter of 2007.

The decision was made to close redundant facilities within our Coil Tubing operation at the end of April, 2007 and consolidate operations out of a new, larger facility in Lloydminster. Operations and facilities have also been consolidated within our Drumheller Production Services and Transport groups.

BlackWatch is re-deploying equipment and manpower to geographic regions, including Grande Prairie and Saskatchewan, which provides opportunities for higher margins and utilization as part of our strategic plan to diversify our customer base and become less dependent on shallow gas and CBM markets. These initiatives are expected to be in place by the end of the third quarter.

Beginning early in the second quarter, Management undertook a comprehensive program to review operating and general and administrative expenses to improve the efficiency of our organization. A number of management changes and compensation structure alterations occurred in the second quarter, the benefit of which will be fully realized in the second half of 2007.

2007 OUTLOOK

The reduction in demand for energy services in western Canada that began in the second half of 2006 continued into the first half of 2007 as a result of high natural gas storage levels and the resulting softening of natural gas commodity prices. The Petroleum Services Association of Canada ("PSAC") is forecasting a decline of at least 25% in the number of wells drilled within Canada in 2007 compared to 2006. A shift in the type of wells being drilled is also being experienced with a shift to more drilling for oil where prices have remained strong by historical standards despite the decline from the record highs of mid 2006. While the reduction in drilling for natural gas combined with continued declines in production rates on existing wells is expected to resolve the excess of natural gas storage and ultimately improve natural gas prices and gas well drilling activity, it is unlikely any improvement will occur until 2008.

Since inception, BlackWatch has been significantly impacted by this cyclical industry decline and by more specific factors such as reduced drilling and capital programs of some key customers and an overall reduction in the level of shallow gas drilling in the WCSB. Earnings levels and cash flow from all operating Divisions were significantly reduced in the latter half of 2006 and the first half of 2007 and were below the levels achieved by the individual predecessor companies in 2005 and the first quarter of 2006. Since commencement of operations, a combination of reduced activity levels, a significant capital program, non-recurring expenditures related to the consolidation of the acquired companies and low operating margins has resulted in distributable cash flow levels well below expectations for the initial reporting period in 2006 and the first half of 2007 as well as higher debt levels. As a consequence, several significant and immediate decisions were made by Management and the Board of Directors of the Trust to address these issues.

A comprehensive review and analysis of our labour cost structure commenced in the first quarter. Labour costs were too high in relation to revenues as a result of compensation programs that were carried over from 2006, when generous retention programs had become necessary. As of the date of this report, steps have been taken to reduce the cost of those programs throughout the Trust and to more closely align compensation to activity levels. Overall headcount has also been assessed compared to activity levels throughout the organization and reductions have been initiated where necessary.

Consolidation of the Coil Tubing Service facilities in the Lloydminster area was completed in late April and further consolidation occurred within the Production Services Division in the second quarter. Comprehensive preventative maintenance programs have also been enhanced in the Drilling and Transport Divisions, where unexpected major equipment repairs have had a significant impact on operating margins. Tighter bid preparation and analysis is being performed in our Pipeline Construction business which experienced losses in the first quarter of 2007. In addition, organizational changes have been made in the Production Services Division which we believe will result in cost savings and better management of our cost structure going forward.

BlackWatch is also redeploying equipment and manpower to geographic regions that will provide opportunities for higher margins and utilization as part of our strategic plan to further diversify our customer base and reduce our dependence on shallow gas and CBM markets.

The Trust's 2007 capital expenditure program has been reduced to reflect the current oversupply of equipment in the energy services industry. Capital spending has been restricted to amounts previously committed, as well as maintenance capital and growth capital where we perceive limited risk and strong margin potential. The capital program will be monitored throughout 2007 to determine if additional opportunities arise for value added expenditures.

All strategic and financial efforts noted above are intended to improve cash flow and reduce overall debt to more conservative levels in anticipation of improved market conditions in 2008. Through substantial capital investment since inception, the Trust has built a significant fleet of equipment in a number of key service areas. We believe the remainder of 2007 will be challenging without a significant increase in drilling activity levels. Activity levels in most of our businesses are dependent on industry drilling activity. However, management has taken steps to reduce costs and to more closely align them with activity levels which will start to be reflected in the third quarter of 2007. We anticipate revenue in the third and fourth quarters to show an improvement from the second quarter due to the seasonal nature of the business, and that our cash flows will further improve due to the cost cutting measures and field compensation adjustments noted above.

As discussed in our MD&A and in the notes to the unaudited interim consolidated financial statements, Management is presently in discussions with its lenders to revise the existing terms of BlackWatch's credit facility. Significant progress has been made and we are confident we will be able to negotiate a revised credit facility with our senior lenders that will allow BlackWatch to carry on its business and its restructuring initiatives. Management and the Board of Directors are pursuing a number of options to recapitalize the Trust's balance sheet including issuance of equity and or subordinated debt, and potentially the sale of some of the Trust's assets, as well as other opportunities to improve utilization of our equipment. The commitment of subordinated debt and the closing of our fully subscribed rights offering as previously announced represent significant examples of these recapitalization efforts. We remain committed to improving results and ultimately creating an organization that can compete in these difficult market conditions as well as capitalize on opportunities that will be available in both strong and weak environments in the future.

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, pipeline and facility construction, and oilfield equipment rentals and leasing. 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.

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.

- Net debt - This term is defined as total debt less working capital (see below).

- 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

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
    or
    BlackWatch Energy Services Trust
    Paul Partlo
    Vice President and Chief Financial Officer
    (403) 225-3879
    or
    BlackWatch Energy Services Trust
    300, 855 - 8 Avenue SW
    Calgary, Alberta T2P 3P1
    (403) 225-3879
    (403) 366-2066 (FAX)
    Website: www.blackwatchenergy.ca