Canadian Energy Services L.P.
TSX : CEU.UN

Canadian Energy Services L.P.

May 07, 2009 09:00 ET

Canadian Energy Services L.P. Announces Results for the First Quarter

CALGARY, ALBERTA--(Marketwire - May 7, 2009) -

NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE U.S.

Canadian Energy Services L.P. ("Canadian Energy Services", "CES" or the "Partnership") (TSX:CEU.UN) is pleased to announce the financial highlights of the first quarter ended March 31, 2009.

The Partnership generated gross revenue of $30.3 million for the first quarter of 2009, compared to $28.3 million for the three months ended March 31, 2008, an increase of 7.2% over the same period last year. On a per unit basis, gross revenue was $2.71 per unit for the three months ended March 31, 2009 compared to $3.01 per unit for the three months ended March 31, 2008, a decrease of 10.0% over the same period last year. Revenue from drilling fluids related sales of products and services in the Western Canadian Sedimentary Basin ("WCSB") was $23.7 million for the three months ended March 31, 2009, compared to $26.5 million for the three months ended March 31, 2008, representing a decrease of $2.8 million or 10.6%. CES's estimated market share in the WCSB increased to 20% for the three months ended March 31, 2009 from 18% for the three months ended March 31, 2008. CES operating days in the WCSB were estimated to be 6,141 for the three month period ended March 31, 2009, a decrease of 30% from the same period last year. Overall industry activity dropped approximately 36% from an average rig count in the first quarter of 2008 of 497 to 320 in 2009 based on Canadian Association of Oilwell Drilling Contractors ("CAODC") published monthly data for Western Canada. Revenue generated in the United States ("US") from drilling fluids related sales of products and services was $1.0 million with 149 operating days for the three months ended March 31, 2009. This compares to revenue of $0.7 million with 91 operating days for the three month period ended March 31, 2008. Revenue from Canadian trucking related operations increased to $1.8 million from $1.1 million for the three months ended March 31, 2009 and 2008 respectively. Clear Environmental Solutions ("Clear"), which was acquired by CES on June 12, 2008, generated $3.8 million of revenue for the three month period ended March 31, 2009 with no corresponding revenue from the prior year's quarter as it was prior to the acquisition date.

"The first quarter reflected strong operational results despite significantly lower industry activity. These industry conditions have created the need to focus on costs to ensure continued profitability. CES has reduced headcount to match anticipated go forward activity levels in 2009 and has undertaken specific initiatives to lower product costs and working capital requirements," said Tom Simons, the President and Chief Executive Officer of Canadian Energy Services Inc., the general partner of CES. "While managing our cost structure we continue to position ourselves as the leading service provider of technologically advanced drilling fluids by making prudent investments in key people, technologies and infrastructure which will allow us to capitalize on future opportunities."

The core business of CES is to design and implement drilling fluid systems for oil and natural gas producers. CES operates in the WCSB and the US, with an emphasis on servicing the ongoing major resource plays. The drilling of those major resources plays includes wells drilled vertically, directionally, and with increasing frequency, horizontally. Horizontal drilling is a technique utilized in tight formations like shale gas, shale oil, heavy oil, and in the oil sands ("SAGD"). The designed fluid encompasses the functions of cleaning the hole, stabilizing the rock drilled, controlling subsurface pressures, enhancing drilling rates and protecting potential production zones while conserving the environment in the surrounding surface and subsurface area. The Partnership's drilling fluid systems are designed to be adaptable to a broad range of complex and varied drilling scenarios, to help clients eliminate inefficiencies in the drilling process and to assist them in meeting operational objectives and environmental compliance obligations. The Partnership markets its technical expertise and services to oil and natural gas exploration and production entities by emphasizing the historical success of its patented and proprietary drilling fluid systems and the technical expertise and experience of its personnel.

Clear, the Partnership's environmental division, provides environmental and drilling fluids waste disposal services primarily to oil and gas producers active in the WCSB. The business of Clear involves determining the appropriate processes for disposing of or recycling fluids produced by drilling operations and to carry out various related services necessary to dispose of drilling fluids.



Financial Highlights
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Three Months Ended March 31,
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Financial Results 2009 2008
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($000 s except per unit amounts)
Revenue 30,298 28,274
Gross margin (3) 8,045 8,969
Net earnings before income taxes 2,252 5,333
per unit - basic and diluted (1) 0.20 0.57
Net earnings 2,154 5,282
per unit - basic and diluted (1) 0.19 0.56
EBITDAC (3) 3,689 5,852
Funds flow from operations (3) 3,481 5,703
per unit - basic and diluted (1) 0.31 0.61
Distributable funds (3) 3,476 5,588
Distributions declared 2,642 2,229
per Class A Unit 0.2376 0.2376
per Subordinated Class B Unit 0.2376 0.2376


Financial Position March 31, 2009 March 31, 2008
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($000 s)
Net working capital 15,612 15,825
Total assets 107,631 125,261
Long-term financial liabilities (2) 3,185 3,474
Unitholders' equity 76,536 76,978


Three Months Ended March 31,
------------------------------
Partnership Units Outstanding (1) 2009 2008
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End of period 11,119,801 9,380,946
Weighted average
- basic 11,124,245 9,380,946
- diluted 11,200,356 9,382,281

Notes:
(1) Includes Class A Units and Subordinated Class B Units.
(2) Vehicle financing loans and term loan excluding current portions.
(3) The Partnership uses certain performance measures that are not
recognizable under Canadian generally accepted accounting principles
("GAAP"). These performance measures include, earnings before interest,
taxes, amortization, goodwill impairment, unit-based compensation
("EBITDAC"), gross margin, funds flow from operations and distributable
funds. Management believes that these measures provide supplemental
financial information that is useful in the evaluation of the
Partnership's operations. Readers should be cautioned, however, that
these measures should not be construed as alternatives to measures
determined in accordance with GAAP as an indicator of CES' performance.
CES' method of calculating these measures may differ from that of other
organizations and, accordingly, these may not be comparable. Please
refer to the Non-GAAP measures section of the Partnership's MD&A for the
three months ended March 31, 2009.


Additional highlights for the three months ended March 31, 2009 in comparison to the three month period ended March 31, 2008 for CES were:

- Gross margin of $8.0 million or 26.6% of revenue was generated for the period, compared to gross margin of $9.0 million or 31.7% of revenue generated in the same period last year. Margins have decreased from Q1 2008 primarily due to increased sales of invert as a percentage of revenue, which generates a lower margin than other products; lower margins achieved on revenue generated in the US in order to gain an entry into the marketplace; and an increase in revenue attributable to lower margin activities including environmental services and trucking. Margins will vary with the mix of well types and the areas of operations.

- Selling, general, and administrative costs were $4.4 million for the first quarter in 2009, in comparison to $3.1 million for the same period in 2008. Selling, general, and administrative costs were higher in comparison to Q1 2008 due to increased headcount resulting from: transfers of field personnel into lab and technical support positions in Calgary, the addition of the Clear business unit, the addition of personnel in the US, and general compensation increases. Selling, general, and administrative costs were 19% lower in Q1 2009, than the immediately preceding Q4 2008 of $5.4 million. CES continues undertake actions to adjust costs in an effort to meet the current market conditions.

- EBITDAC for the three months ended March 31, 2009 was $3.7 million as compared to $5.9 million for the three months ended March 31, 2008 representing a decrease of $2.2 million or 37.0%.

- Net earnings were $2.2 million for the three months ended March 31, 2009, a decrease of 59.2% over the $5.3 million generated for the same period last year. Net earnings were primarily lower for the year as a result of a combination of lower gross margin, higher selling, general, and administrative expenses, and higher non-cash expenses relating to amortization and unit-based compensation. Earnings per unit were $0.19 for the three months ended March 31, 2009, as compared with $0.56 per unit for the same period in 2008, representing a decrease of 65.7% on a per unit basis. The decline in earnings per unit is due to a combination of lower net earnings for the period and additional Units outstanding for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008.

- CES continued to maintain a strong balance sheet at March 31, 2009 with net working capital of $15.6 million and an operating line of credit of $20.0 million, of which a total $5.6 million had been drawn. At March 31, 2008, net working capital was $12.1 million and the operating line of credit was $12.0 million, of which a total of $6.3 million had been drawn. At December 31, 2008, there was a net working capital balance of $15.8 million and an operating line of credit of $20.0 million, of which a total $12.7 million had been drawn.

- On March 1, 2009, the subordination period relating to the Subordinated Class B Units expired pursuant to the terms of the Amended and Restated Limited Partnership Agreement dated March 2, 2006. The Subordinated Class B Units were held by the former owners of the drilling fluid systems businesses which were acquired by the Partnership in connection with the Partnership's initial public offering on March 2, 2006. The Subordinated Class B Units can be exchanged, on a one for one basis, for Class A Units at any time after March 1, 2009. On March 11, 2009 1,075,743 Subordinated Class B Units were exchanged for an equivalent number of Class A Units. Subsequent to the end of the quarter, on April 14, 2009, the remaining 1,075,743 Subordinated Class B Units were exchanged for an equivalent number of Class A Units, following which there are nil Subordinated Class B Units outstanding.

- The Partnership maintained its monthly distributions throughout the first quarter of 2009 at its target level of $0.0792 per unit to Class A Unitholders for a total of $0.2376 per unit for the quarter. As noted above, following the expiration of the subordination provisions applicable to the Subordinated Class B Units on March 1, 2009, monthly distributions were made to Subordinated Class B Unitholders on a basis equivalent to the Class A Units. Two distributions were made to Subordinated Class B Unitholders for a total quarterly distribution of $0.2376 per Subordinated Class B Unit during the quarter consisting of $0.1584 per Subordinated Class B Unit for the months of January and February and $0.0792 per Subordinated Class B Unit for the month of March. The payout ratio was 76.0% for the first quarter of 2009, in comparison to 39.9% for the same period last year. The determination of the payout ratio does not take into account changes in non-cash operating working capital items. Management and the Board of Directors review the appropriateness of distributions on a monthly and quarterly basis taking into account industry conditions, growth opportunities requiring expansion capital, and management's forecast of distributable funds. Although at this time the Partnership intends to continue to make cash distributions to unitholders, these distributions are not guaranteed.

Outlook

The sharp decrease in crude oil and natural gas prices since the summer of 2008, and the resulting decrease in both Q1 actual and 2009 forecasted industry drilling activity throughout North America, will likely result in a decrease in the Partnership's overall activity levels through the remainder of 2009 and the resulting cash flows over that term. The commodity price down-turn, combined with the on-going uncertainty and reduced access to the debt and equity markets, increases the importance of maintaining strong financial flexibility. As a result, the Partnership intends to closely manage its distribution levels and capital expenditures in order to minimize increases in debt levels and preserve its balance sheet strength and liquidity position.

Despite the uncertain times facing the North American drilling market, CES' exposure to the growth in the number of horizontal wells being drilled bodes well for the Partnership. These wells require complex drilling fluids to best manage drilling times and costs and our unique products like Seal-AX™ and Liquidrill™, combined with our concerted focus on providing superior service, positions CES well in this current environment.

Drilling in the oil sands and heavy oil, which will continue to benefit CES from our Liquidrill™/Tarbreak products, is forecast to continue, albeit at lower levels in the current commodity price environment.

Our expansion into the Oklahoma market complements our US Rockies group based in Denver. These markets present us with potential incremental growth. Our strategy remains to utilize our patented and proprietary technologies and local personnel to create market share in the US market.

The Clear and EQUAL Transport divisions are making substantial contributions to our business. They continue to complement CES' core drilling fluids business and we expect both to perform well but, based on current industry activity forecasts, at reduced levels from 2008.

In addition, CES will continue to invest in research and development and technology advancements in the drilling fluids market. CES will also provide integrated business solutions to drive margins and remain competitive for our customers.

The Partnership's existing credit line of $20.0 million is expected to provide the Partnership with sufficient flexibility to meet working capital investments.

CES believes that its value proposition in horizontal, oil sands, and deeper natural gas drilling, will position it as the premium drilling fluids provider in the market. CES' technologies have global application and the Partnership will continue to pursue opportunities that align our service offerings with the needs of our customers. We are confident that our technologies will be embraced as we build out our operations. We believe the US operations offer significant growth opportunities. Procuring materials and providing engineering support for these new activities can be achieved without adversely affecting our traditional markets.



CANADIAN ENERGY SERVICES L.P.

CONSOLIDATED BALANCE SHEETS
(stated in thousands of dollars)

As at
---------------------------------
March 31, 2009 December 31, 2008
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ASSETS
Current assets
Accounts receivable 32,305 47,286
Inventory 8,705 10,903
Prepaid expenses 410 441
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41,420 58,630

Property and equipment 12,597 12,519
Intangible assets 3,701 4,199
Goodwill 49,913 49,913
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107,631 125,261
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LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities
Bank indebtedness 5,585 12,702
Accounts payable and accrued liabilities 15,787 25,578
Contingency payable 2,000 2,000
Distributions payable 1,221 1,225
Current portion of long-term debt 1,215 1,300
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25,808 42,805

Long-term debt 3,185 3,474
Future income tax liability 2,102 2,004
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31,095 48,283
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Unitholders' equity
Class A Units 94,642 84,352
Subordinated Class B Units 10,757 21,514
Contributed surplus 2,044 1,531
Deficit (30,907) (30,419)
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76,536 76,978
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107,631 125,261
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CANADIAN ENERGY SERVICES L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS, COMPREHENSIVE EARNINGS AND DEFICIT
(stated in thousands of dollars except per unit amounts)

Three Months Ended March 31,
-----------------------------
2009 2008
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Revenue 30,298 28,274
Cost of sales 22,253 19,305
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Gross margin 8,045 8,969
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Expenses
Selling, general and administrative expenses 4,425 3,117
Amortization 877 323
Unit-based compensation 396 43
Interest expense 143 149
Foreign exchange gain (69) -
Loss on disposal of assets 21 4
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5,793 3,636
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Net earnings before taxes 2,252 5,333
Future income tax expense 98 51
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Net earnings and comprehensive earnings 2,154 5,282

Deficit, beginning of period (30,419) (35,699)
Unitholders' distributions declared (2,642) (2,229)
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Deficit, end of period (30,907) (32,646)
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Net earnings per unit
Basic and diluted 0.19 0.56
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CANADIAN ENERGY SERVICES L.P.

CONSOLIDATED STATEMENTS OF CASH FLOW
(stated in thousands of dollars)

Three Months Ended March 31,
-----------------------------
2009 2008
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CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES:
Net earnings for the period 2,154 5,282
Items not involving cash:
Amortization 877 323
Unit-based compensation 396 43
Future income tax expense 98 51
Loss on disposal of assets 21 4
Unrealized foreign exchange gain (65) -
Change in non-cash operating working capital 7,444 (6,214)
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10,925 (511)
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FINANCING ACTIVITIES:
Repayment of long-term debt (477) (1,094)
Issuance of long-term debt - 2,550
Increase (decrease) in bank indebtedness (7,117) 1,728
Distributions to unitholders (2,646) (2,229)
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(10,240) 955
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INVESTING ACTIVITIES:
Investment in property and equipment (867) (394)
Investment in intangible assets (32) (8)
Proceeds on disposal of fixed assets 185 24
Change in non-cash investing working capital 29 (66)
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(685) (444)
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CHANGE IN CASH - -
Cash, beginning of period - -
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Cash, end of period - -
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The Partnership has filed its 2009 Q1 consolidated financial statements and notes thereto as at and for the period ended March 31, 2009 and accompanying management's discussion and analysis in accordance with National Instrument 51-102 - Continuous Disclosure Obligations adopted by the Canadian securities regulatory authorities.

Additional information related to the Partnership can be found on the System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com. Information is also accessible on the Partnership's web site at www.CanadianEnergyServices.com.

CES is organized in accordance with the terms and conditions of a limited partnership agreement which provides that only persons who are resident in Canada, or, if partnerships, are Canadian partnerships, in each case for purposes of the Income Tax Act (Canada) (the "Tax Act"), may own units of the Partnership. Units may not be purchased as a "tax shelter investment" for the purposes of the Tax Act or by any entity an interest in which is a tax shelter investment.

Except for the historical and present factual information contained herein, the matters set forth in this news release, including words such as "expects", "projects", "plans" and similar expressions, are forward-looking information that represents management of Canadian Energy Services' internal projections, expectations or beliefs concerning, among other things, future operating results and various components thereof or the economic performance of Canadian Energy Services. The projections, estimates and beliefs contained in such forward-looking information necessarily involve known and unknown risks and uncertainties, which may cause Canadian Energy Services' actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed or implied by such forward-looking statements. These risks and uncertainties include, among other things, those described in Canadian Energy Services' filings with the Canadian securities authorities. Accordingly, holders of Canadian Energy Services Class A Common limited partnership units and potential investors are cautioned that events or circumstances could cause results to differ materially from those predicted.

In particular, this press release contains forward-looking information pertaining to the following: future estimates as to distribution levels; capital expenditure programs for oil and natural gas drilling, including with respect to heavy oil and SAGD projects; supply and demand for the Partnership's products and services; industry activity levels; commodity prices; treatment under governmental regulatory and taxation regimes; dependence on equipment suppliers; dependence on suppliers of inventory and product inputs; equipment improvements; dependence on personnel; collection of accounts receivable; operating risk liability; expectations regarding market prices and costs; expansion of services in Canada, the United States and internationally; development of new technology; expected performance of the environmental and transportation operations; investments in research and development and technology advancements; access to debt and capital markets; and competitive conditions.

The Partnership's actual results could differ materially from those anticipated in the forward-looking information as a result of the following factors: general economic conditions in Canada, the US and internationally; demand for oilfield services for drilling and completion of oil and natural gas wells; volatility in market prices for oil, natural gas and natural gas liquids and the effect of this volatility on the demand for oilfield services generally; competition; liabilities and risks, including environmental liabilities and risks, inherent in oil and natural gas operations; sourcing, pricing and availability of raw materials, consumables, component parts, equipment, suppliers, facilities, and skilled management, technical and field personnel; ability to integrate technological advances and match advances of competitors; availability of capital; uncertainties in weather and temperature affecting the duration of the oilfield service periods and the activities that can be completed; changes in legislation and the regulatory environment, including uncertainties with respect to programs to reduce greenhouse gas and other emissions, taxation of trusts, public partnerships and other flow-through entities, and changes to the royalty regimes applicable to entities operating in the WCSB and the US; access to capital and the liquidity of debt markets; fluctuations in foreign exchange and interest rates and the other factors considered under "Risk Factors" in the Partnership's Annual Information Form for the year ended December 31, 2008 and "Risks and Uncertainties" in the Partnership's MD&A for the year ended December 31, 2008.

Without limiting the foregoing, the forward-looking information contained in this press release is expressly qualified by this cautionary statement.

THE TORONTO STOCK EXCHANGE HAS NOT REVIEWED AND DOES NOT ACCEPT RESPONSIBILITY FOR THE ADEQUACY OR ACCURACY OF THIS RELEASE.

Contact Information

  • Canadian Energy Services Inc.,
    the general partner of Canadian Energy Services L.P.
    Tom Simons, President and Chief Executive Officer
    (403) 269-2800
    or
    Canadian Energy Services Inc.,
    the general partner of Canadian Energy Services L.P.
    Craig F. Nieboer, CA, Chief Financial Officer
    (403) 269-2800
    info@ceslp.ca
    www.CanadianEnergyServices.com