BlackWatch Energy Services Trust
TSX : BWT.UN

BlackWatch Energy Services Trust

March 29, 2007 17:08 ET

BlackWatch Energy Services Trust Reports Results for Initial Period Ended December 31, 2006

CALGARY, ALBERTA--(CCNMatthews - March 29, 2007) - BlackWatch Energy Services Trust (TSX:BWT.UN) ("BlackWatch" or the "Trust") announces the release of its financial and operating results for the initial period ended December 31, 2006. This period includes the results of 150 days of business operations from August 4, 2006 to December 31, 2006. BlackWatch's audited consolidated financial statements, notes and MD&A are filed on SEDAR and can also be accessed on BlackWatch's website. Readers are encouraged to review these filings in conjunction with this press release. All figures are reported in Canadian dollars unless otherwise stated.

Summary of activity

- On August 4, 2006, BlackWatch completed the acquisitions of the following private service companies operating in western Canada: Austin's Transport (1990) Ltd., Strata Completions Limited, Ammonite Assets Inc., Caliber Energy Services Corp., Brantford's Consolidated Inc. and Brantford's Consolidated Ltd. These companies formed the Trust's initial five operating Divisions - Transport, Completion Services, Drilling, Coil Tubing and Production Services.

- On August 11, 2006, the Trust completed its initial public offering ("IPO") and began trading on the Toronto Stock Exchange under the symbol BWT.UN.

- A sixth Division, Rentals and Leasing, commenced operations on October 6, 2006 through the acquisition of Elite Oilfield Rentals ("Elite"), based in Valleyview, Alberta. This acquisition allowed us to expand our presence in the northwest sector of the province.

- $19.5 million was invested in new equipment and facilities throughout the operating Divisions during this initial period.

- Excluding non-recurring costs related to the creation of the Trust and the consolidation of the acquired companies, the Trust generated Normalized EBITDAC of $2.7 million and Normalized Funds from Operations of $1.6 million in the initial period ending December 31, 2006.

- Per the Trust's February 19, 2007 announcement, in anticipation of these fourth quarter results and an expectation of further uncertainty in the industry throughout 2007, management decided to suspend distributions effective February 2007. This step was taken to preserve cash flow for debt repayment and to ensure the long term financial strength of the Trust.

- In addition, a further reorganization of the Trust's Divisions was implemented to improve customer service and streamline operations. The number of operating Divisions has been reduced from six into four focused service groups.

- The quality and effectiveness of our Sales and Marketing group continues to be a priority. This is evidenced by ongoing recruiting efforts, the promotion of Ron Dahl to the position of Vice President, Sales & Marketing and the recruiting of sales personnel who have brought significant technical and sales skills to the Trust. Ron brings 30 years of service sector operating and sales experience to this position.

- BlackWatch is re-deploying equipment and manpower to geographic regions that provide opportunities for higher margins and utilization as part of our strategic plan to diversify our customer base and reduce our dependence on shallow gas and coal bed methane (CBM) markets. We are establishing a presence in the busy northwest region of Alberta, including the Grande Prairie area, by re-deploying our new coil tubing rigs and electric wireline units. We will also increase our presence in central and southeast Saskatchewan, where drilling activity is expected to remain relatively stable compared to 2006.

- A search is underway to fill the President and CEO position left vacant in early March.

FINANCIAL & OPERATING SUMMARY

The table below provides a summary of BlackWatch's financial and operating results for the Initial period ended December 31, 2006.


`
($ thousands, except per Trust unit amounts)
Initial period ended
December 31
2006(1)
-----------

Revenue $ 29,197

Gross Margin $ 4,291

Normalized EBITDAC $ 2,724
Per Trust unit - basic $ 0.15
Per Trust unit - diluted $ 0.15

Net Loss (2) $ (162,872)
Per Trust unit - basic $ (8.92)
Per Trust unit - diluted $ (8.92)

Funds From Operations (2) $ (18)
Per Trust unit - basic $ (0.001)
Per Trust unit - diluted $ (0.001)

Net Debt $ 33,323

Unitholders' equity $ 69,511

Distributions declared $ 11,246
Per Trust unit $ 0.458

Weighted average Trust units - basic 18,253
Weighted average Trust units - diluted 18,283
Trust units, end of period 24,781

(1) The Trust was created on June 23, 2006, but did not commence operations
until August 4, 2006.
(2) Includes approximately $1.6 million of non-recurring costs related to
the initiation of the Trust and consolidation of the acquired companies,
including commitment fees for the Trust's bridge debt facility, early
payout fees on pre-existing debt facilities and recruitment costs for
key management personnel. Excluding these non-recurring costs as well as
the goodwill and intangibles impairment amounts of $156 million, the Net
Loss would be $5 million. Excluding the non-recurring costs, the Funds
From Operations would be $1.6 million.


2007 OUTLOOK

The reduction in demand for energy services that began in the second half of 2006 has continued into the first quarter of 2007 as a result of high natural gas storage levels and the resulting softening of natural gas commodity prices compared to 2006. The Petroleum Services Association of Canada ("PSAC") is forecasting a decline of at least 10% in the number of wells drilled within Canada in 2007 compared to 2006. A shift in the type of wells being drilled is also expected with an emphasis towards oil where prices have remained strong by historical standards despite the decline from the record highs of mid 2006. While the reduction in drilling combined with continued declines in production rates on existing wells is expected to eventually resolve the natural gas storage overhang, that improvement may not occur until late 2007 or early 2008.

Since inception, BlackWatch has been significantly impacted by this industry decline and by more specific factors such as suspended drilling and capital programs of key customers. Earnings levels and cash flow from all operating Divisions were significantly reduced in 2006 and were below the levels achieved by the predecessor companies in 2005 and early 2006. Reduced activity levels, combined with the completion of a significant capital addition program and unexpected integration costs resulted in distributable cash flow levels well below expectations for the initial reporting period. As a result, several significant and immediate decisions were made by management and the Board of Directors .

BlackWatch has implemented several programs to streamline overall operations, improve customer service levels and ultimately improve the financial performance and cash flow generating capability of the Trust in the challenging environment that is expected in 2007. As a result of the termination of drilling programs by certain key customers in late 2006, we commenced efforts to replace that lost demand and diversify our customer base, in the Drilling and Transport Divisions specifically. Several key sales and marketing personnel have been recruited and we have named a Vice President of Sales & Marketing who is very experienced in the industry.

BlackWatch is redeploying equipment and manpower to geographic regions that will provide opportunities for higher margins and utilization as part of our plan to improve diversification within our customer base and become less dependent on shallow gas and CBM markets. We are establishing a presence in the busy northwest region of Alberta, including the Grande Prairie area, by re-deploying our new coil tubing rigs and electric wireline units. We will also increase our presence in central and southeast Saskatchewan, where drilling activity is expected to remain relatively strong compared to 2006.

The reduction in operating divisions to four allowed the Trust to reduce the size of the senior Management team, combine Divisions with significant synergies or similarities in operations and provide a clearer picture of the Trust's service offerings to the customer base.

The Trust's 2007 capital expenditure program has also been reduced to account for the oversupply of equipment in the energy services industry in conjunction with reduced demand. Capital spending has been restricted to amounts previously committed to, maintenance capital and growth capital that is anticipated to have significant and immediate positive impact on the Trust's performance. While the capital program will be monitored throughout 2007 to determine if additional opportunities arise for value added expenditures, the Trust has forecast total capital spending of $7.3 million, of which $4.5 million relates to the completion of committed capital projects initiated in 2006.

Effective February 2007, distributions to unitholders were suspended until further notice. The suspension of distributions is a critical part of our 2007 business strategy which will focus on preserving cash, reducing debt levels and maximizing utilization of the equipment fleet that has been substantially enhanced since inception.

All strategic and financial efforts noted above are intended to improve the Trust's performance during 2007, improve cash flow and reduce overall debt to more conservative levels in anticipation of improved market conditions in late 2007 and early 2008. Although 2007 is expected to be a challenging year throughout the industry, Management remains confident about the long term outlook for the oil and gas industry in North America.

ABOUT BLACKWATCH ENERGY SERVICES TRUST

BlackWatch Energy Services Trust is a growth-oriented 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 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 and selling, general and administration expenses, excluding depreciation and amortization.

- Normalized EBITDAC - This measure refers to EBITDAC as defined below, adjusted for non-recurring costs related to the initiation of the Trust and consolidation of the Acquired Companies.

- 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
    Paul Partlo
    Vice President and Chief Financial Officer
    (403) 225-3879
    (403) 366-2066 (FAX)
    or
    BlackWatch Energy Services Trust
    Robert Copeland
    Vice President and Chief Operating Officer
    (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