CanElson Drilling Inc.
TSX : CDI

CanElson Drilling Inc.

May 14, 2015 07:30 ET

CanElson Announces First Quarter Results, Updates Its 2015 Capital Program and Declares Quarterly Dividend

CALGARY, ALBERTA--(Marketwired - May 14, 2015) - CanElson Drilling Inc. (TSX:CDI) announces its financial results for the first quarter, updates its 2015 capital program, and declares a quarterly dividend of $0.03 per share. All tabular amounts are denominated in Canadian dollars unless otherwise identified and are stated in thousands, except for: per share amounts, number of drilling rigs, drilling days, utilization rate and depths in metres.

OVERVIEW OF OPERATING AND FINANCIAL RESULTS

For the three months ended March 31,
Operating Summary 2015 2014 % change
Canadian Operations
Revenue per drilling day (i) $ 28.25 $ 29.51 (4)%
Drilling Days (i) 1,318 2,050 (36)%
Services Revenue $ 37,228 $ 60,500 (38)%
Utilization (i) 50% 79% (37)%
Industry Average Utilization (ii) 35% 61% (43)%
CanElson's Multiple of Industry Average Utilization 1.43 1.30 10 %
US Operations
Revenue per drilling day (i) $ 28.37 $ 28.58 (1)%
Drilling Days (i) 1,023 1,282 (20)%
Services Revenue $ 29,024 $ 36,639 (21)%
Utilization (i) 54% 84% (36)%
Industry Average Rig Count (iii) 1,403 1,779 (21)%
Total Drilling Services
Revenue per drilling day (i) $ 28.30 $ 29.15 (3)%
Other direct expenses per day (i) $ 17.90 $ 17.61 2 %
Drilling Days (i) $ 2,341 $ 3,332 (30)%
Utilization (i) 52% 81% (36)%
Financial Summary
Services revenue $ 66,252 $ 97,139 (32)%
Gross Margin (i) $ 24,354 $ 38,483 (37)%
Gross Margin % 37% 40% (8)%
Adjusted EBITDA (i) $ 18,380 $ 31,761 (42)%
Adjusted EBITDA Margin % 28% 33% (15)%
G&A as a percentage of services revenue (i) 9% 7% 29 %
Depreciation expense per operating day $ 3.40 $ 2.70 26 %
Funds flow (i) $ 19,008 $ 26,036 (27)%
Joint Venture Adjusted EBITDA $ (449) $ 2,954 nm
Share of joint venture profits $ (578) $ 1,653 nm
Income attributable to shareholders of the Corporation $ 5,407 $ 15,102 (64)%
Income per share (diluted) $ 0.06 $ 0.16 (63)%
Weighted average number of diluted shares outstanding $ 92,975 $ 93,195 - %
Common shares outstanding $ 92,984 $ 92,257 1 %
Dividends declared per common share $ 0.03 $ 0.06 (50)%
i. See Non-GAAP Measures and Industry Definitions
ii. Source: Canadian industry average utilization is provided by the CAODC (http://www.caodc.ca/rig-counts)
iii. Source: US industry average rig count is provided by Baker Hughes (http://www.bakerhughes.com/rig-count)
nm - calculation is not meaningful

FIRST QUARTER 2015 SUMMARY (compared with a year earlier)

  • Services revenue of $66.3 million, down 32% from $97.1 million
  • Adjusted EBITDA of $18.4 million, down 42% from $31.8 million, excluding an Adjusted EBITDA loss from our joint venture equity investment in Diavaz CanElson de Mexico ("DCM") of $0.4 million (2014: Adjusted EBITDA of $3.0 million).
  • Income attributable to shareholders of the Corporation $5.4 million, down 64% from $15.1 million
  • Income per share (diluted) of $0.06, down 63% from $0.16
  • Weighted average diluted common shares outstanding 93.0 million, unchanged
  • Declared first quarter dividend of $0.03 per share, down 50% from $0.06 per share
  • Canadian utilization of 50% (1.43 times above industry average), down 37% from 79% (1.30 times above industry average)
  • US utilization of 54%, down 36% from 84%

First quarter Canadian utilization of 50% was 1.43 times the industry average utilization level of 35%. We credit our modern drilling fleet and our continued focus on working with our partners to find operating efficiencies as significant contributors to our outperformance in this operating region. In the US, total drilling days were down 20%, consistent with the 21% decline in the Baker Hughes rig count. One service rig was active in Mexico for the majority of the first quarter resulting in an EBITDA loss of $0.4 million.

Fleet deployment (by rigs)

Saskatchewan / Mexico Mexico
Alberta /BC Manitoba Texas North Dakota Drilling Service Total
At March 31, 2015 16 (net 16) 13 (net 11.5) 15 (net 13.5) 6 (net 6) 2 (net 1) 2 (net 1) 54 (net 49)
At December 31, 2014 15 (net 15) 13 (net 11.5) 14 (net 12.5) 6 (net 6) 2 (net 1) 2 (net 1) 52 (net 47)
Change % 7% Unchanged 7% Unchanged Unchanged Unchanged 4%
(i) Excludes 1 (net:0.5) sub-contracted drilling rig in Mexico.

Gross fleet deployment (by %)

Saskatchewan / Mexico Mexico
Alberta /BC Manitoba Texas North Dakota Drilling Service Total
At March 31, 2015 29% 24% 28% 11% 4% 4% 100%
At December 31, 2014 29% 25% 27% 11% 4% 4% 100%

OUTLOOK

Drilling Services

Despite a meaningful improvement in North American crude oil pricing in recent weeks, the abundance of idle drilling rigs has resulted in an average reduction to CanElson's current base rig rate pricing of approximately 15% relative to fourth quarter 2014 levels, excluding the impact of winter rentals in Canada and North Dakota, and the migration of performance based contracts to a dayrate basis. This decrease is not fully reflected in the first quarter, as negotiations with customers progressed over several months. Additionally, we expect that the uncertainty surrounding the extent of the downturn and the timing of a full recovery will continue to prolong our customers' decision to increase capital spending from original or reduced 2015 capital programs. That said, we believe that a sustained period of stability in the commodity price environment may result in our customers re-evaluating their well economics in the context of the current oilfield services pricing environment. Year-to-date, activity levels were significantly below historical averages. However, CanElson has been focused on positioning itself with key customers, and we credit current performance to our alignment with a portfolio of customers that understand CanElson's value proposition. Specifically, our customers understand that drilling efficiency, not just the dayrate of a drilling rig, drives well costs down. This operating philosophy results in improved economics for our customers and the ability to sustain activity even in a reduced commodity price environment.

CanElson remains focused on reducing variable direct operating and administrative expenses without sacrificing the quality of our service offering. During the first quarter, CanElson approached all of its major vendors in order to negotiate cost reductions on all capital and consumable items. All corporate and administrative staff have taken salary reductions, and all US field employees have taken wage reductions. These cost saving measures will begin to impact CanElson's results in the second quarter. All of the aforementioned initiatives are in addition to previously announced steps, including: an initial 80% reduction of our original 2015 capital program by $51.0 million (subsequently increased by $7.1 million to execute on new projects), reducing our annual dividend commitment by $11.2 million (50%), and reducing executive salaries and Board of Directors compensation by 20%.

Canada - Alberta & British Columbia

Currently, the Deep Basin is CanElson's most active operating area, and we are fortunate to be aligned with a number of key customers that have elected to maintain relatively strong activity levels through spring break-up during this challenging economic environment. We continue to work on developing new strategic relationships that we were previously unable to initiate due to a lack of available rigs. At the date of this MD&A, CanElson had an active rig count of 6 drilling rigs in Alberta and British Columbia (May 14, 2014: 7 drilling rigs).

Canada - Saskatchewan & Manitoba

Our outlook has modestly improved in our Saskatchewan and Manitoba operations since our MD&A dated February 26, 2015, due to conversations with customers and an improvement in crude oil pricing. Our near term outlook has also been assisted by favorable road conditions to-date during spring break-up. While our full year activity level expectations remain below prior year, discussions with our customers suggest that the commencement of activity in the region may commence earlier than expected. At the date of this MD&A, CanElson had 1 active drilling rig in Saskatchewan and Manitoba (May 14, 2014: 1 drilling rig).

United States - Texas

CanElson's operations in the Permian Basin continue to be an area of relative strength, with an active rig count of 6 drilling rigs at the date of this MD&A (May 14, 2014: 13 drilling rigs), excluding 1 rig collecting revenue on standby. There are no major changes to our outlook in this region since our MD&A dated February 26, 2015.

United States - North Dakota

CanElson's outlook has modestly improved since our MD&A dated February 26, 2015 based on current and anticipated activity and due to ongoing conversations with customers. At the date of this MD&A, CanElson had an active rig count of 1 drilling rig in North Dakota (May 14, 2014: 3 drilling rigs), and we expect activity levels to modestly increase post spring break-up.

Mexico

Energy reform is ushering in a new era in Mexico, however, the current commodity price environment has resulted in an interim period of lower land drilling activity. We are anticipating minimal activity levels for the remainder of 2015 and for collections of accounts receivable to continue to be slow. However, we believe that our historical performance and alignment with an experienced and strong local partner (Grupo Diavaz, with 42 plus years of experience serving PEMEX) positions DCM to participate in increased drilling activity if Mexico's current energy sector reform results in increased demand for drilling and service rigs. At the date of the MD&A, DCM had no active drilling rigs and one active service rig operating.

CanGas Solutions Inc.

Demand for our services has weakened as activity associated with drilling rig activity has declined. However, we are diversified in our operational scope and are pursuing a number of projects that are not directly correlated to the drilling cycle.

Capital Availability and Capital Program

CanElson has approximately $84 million of cash and available capacity on existing credit facilities to fund its capital programs and take advantage of strategic opportunities. Funds flow continues to support our quarterly dividend rate of $0.03 per share as well as the 2015 capital investment program.

A review of CanElson's current anticipated 2015 capital investment program is as follows (in millions):

Drilling Services
Capital Expenditures Spare
equipment
facility &
overhead
Maintenance
(i)
Upgrades &
Expansion (i)
CanGas Total
Capital expenditures for the three months ended March 31, 2015 $ 0.4 $ 2.8 $ 7.3 $ 0.4 $ 10.9
Anticipated cost to complete 2015 capital expenditures 4.4 1.4 2.0 1.3 9.1
Total expected 2015 capital expenditures $ 4.8 $ 4.2 $ 9.3 $ 1.7 $ 20.0
Previously anticipated 2015 capital expenditures (ii) $ 4.3 $ 3.4 $ 8.7 $ 1.5 $ 17.9
Variance from previously anticipated 2015 capital expenditures $ 0.5 $ 0.8 $ 0.6 $ 0.2 $ 2.1
i. Capital spending related to upgrades was previously included with Maintenance capital, but is now included with Expansion capital.
ii. See our MD&A dated February 26, 2015.

2015 Capital Program

We now anticipate a 2015 capital program of $20.0 million, a $2.1 million increase compared with the capital program as previously reported. The increase in capital spending is the result of conversations with our customers, and primarily relates to maintenance to re-activate rigs, upgrades to existing rigs, as well as spare equipment in anticipation of further customer demand. We estimate that approximately $12 million of capital that is related to re-certifications and other maintenance has been deferred until activity levels improve. These costs will be incurred at a future date when activity levels return to more normalized levels.

Primary Corporate Objective

CanElson's primary objective is to maintain and strengthen its above industry average utilization by consistently providing operational excellence and drilling efficiencies to its customers. We intend to carry out the following activities to further enhance our competitive positioning:

  • Continue to expand our modern drilling rig fleet through organic builds (subject to securing suitable customer commitments) and/or evaluate mergers and acquisitions.
  • Optimize the rig fleet composition to meet our customers' needs.
  • Continue to form innovative long-term business relationships.
  • Provide customers with lower overall well costs.

DIVIDEND

Subsequent to March 31, 2015, the Board of Directors approved a quarterly dividend of $0.03 per share to be paid on June 12, 2015 to shareholders of record at the close of business on June 5, 2015. The ex-dividend date is June 3, 2015.

FINANCIAL SUMMARY

(Tabular amounts are stated in thousands of Canadian dollars, except per share amounts and rig operating days)

For the three months ended March 31,
2015 2014 % change
Services revenue $ 66,252 $ 97,139 (32 )%
Adjusted EBITDA $ 18,380 $ 31,761 (42 )%
Share of joint venture profits $ (578 ) $ 1,653 nm
Income attributable to shareholders of the Corporation $ 5,407 $ 15,102 (64 )%
Income per share
Basic $ 0.06 $ 0.16 (63 )%
Diluted $ 0.06 $ 0.16 (63 )%
Cash dividends per share $ 0.03 $ 0.06 (50 )%
Funds flow $ 19,008 $ 26,036 (27 )%
Gross margin $ 24,354 $ 38,483 (37 )%
Weighted average diluted shares outstanding $ 92,975 $ 93,195 - %

Revenue and Operating Expenses

For the three months ended March 31,
2015 2014 % Change
Services revenue
Canada $ 37,228 60,500 (38 )%
US 29,024 36,639 (21 )%
66,252 97,139 (32 )%
Other direct operating expenses 41,898 58,656 (29 )%
Gross margin $ 24,354 38,483 (37 )%
Gross margin % 37 % 40 %
Administration expenses 5,974 6,722 (11 )%
Adjusted EBITDA 18,380 31,761 (42 )%
Adjusted EBITDA % 28 % 33 % (15 )%
Drilling days (spud to rig release) 2,341 3,332 (30 )%
Revenue per drilling day (Canada) 28.25 29.54 (4 )%
Revenue per drilling day (US) 28.37 28.58 (1 )%
Direct operating expenses per day 17.90 17.61 2 %

CANELSON DRILLING INC.

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

March 31,
(Stated in thousands of Canadian dollars) 2015 2014
ASSETS
Current assets:
Cash $ 8,961 $ 6,402
Trade and other receivables 41,881 65,055
Prepaid expenses and deposits 2,041 1,693
Current income tax asset 4,330 6,020
Total current assets 57,213 79,170
Property and equipment 515,488 422,257
Deferred tax assets 1,085 749
Other intangible assets 1,724 1,872
Investment in joint venture 9,230 7,062
Goodwill 35,696 35,696
Total assets $ 620,436 $ 546,806
LIABILITIES AND EQUITY
Current liabilities:
Trade payables and accrued liabilities $ 14,738 $ 26,720
Deferred revenue 160 1,532
Loans and borrowings 3,235 17,163
Total current liabilities 18,133 45,415
Deferred revenue 769 1,450
Loans and borrowings 44,908 24,608
Deferred tax liabilities 82,169 56,423
Total liabilities 145,979 127,896
Equity:
Share capital 307,210 301,439
Employee benefit reserve 5,655 4,406
Foreign currency translation reserve 36,804 20,803
Retained earnings 104,100 81,110
Equity attributable to shareholders of the Corporation 453,769 407,758
Equity attributable to non-controlling interest 20,688 23,164
Total equity 474,457 430,922
Total liabilities and equity $ 620,436 $ 558,818

CANELSON DRILLING INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

March 31,
(Stated in thousands of Canadian dollars - except per share data) 2015 2014
Services revenue $ 66,252 $ 97,139
Cost of sales:
Other direct operating expenses 41,898 58,656
Depreciation and amortization 7,966 8,990
Stock based compensation 188 198
Total cost of sales 50,052 67,844
Total gross profit 16,200 29,295
Expenses:
Administration expenses 5,974 6,722
Business acquisition transaction costs - -
Stock based compensation 139 367
Loss on disposal and decommissioning of assets - -
Foreign exchange loss (gain) (47) 928
Total expenses 6,066 8,017
Share of joint venture profits (loss) (578) 1,653
Income before interest and taxes 9,556 61,544
Interest expense 531 196
Income before income tax 9,025 61,348
Current tax expense (recovery) (660) 4,313
Deferred tax expense 3,432 1,796
Total income tax 2,772 6,109
Net income $ 6,253 $ 55,239
Other comprehensive income
Foreign currency translation differences for foreign operations 15,322 4,550
Share of joint venture translation differences 499 305
Total comprehensive income $ 22,074 $ 60,094
Income attributable to:
Shareholders of the Corporation $ 5,407 $ 15,102
Non-controlling interest 846 1,524
Net income $ 6,253 $ 55,239
Total comprehensive income attributable to:
Shareholders of the Corporation $ 21,408 $ 19,151
Non-controlling interest 666 2,330
Total comprehensive income $ 22,074 $ 60,094
Income per share:
Basic $ 0.06 $ 0.16
Diluted $ 0.06 $ 0.16

NON-GAAP MEASURES

This press release contains references to Adjusted EBITDA, funds flow, gross margin, and effective tax rate to shareholders of the Corporation. These financial measures are not measures that have any standardized meaning prescribed by IFRSs and are therefore referred to as non-GAAP measures. The non-GAAP measures used by CanElson may not be comparable to similar measures used by other companies.

Adjusted EBITDA is defined as income (loss) before interest, taxes, business acquisition transaction costs, depreciation and amortization, stock based compensation expense, gains on disposal of property and equipment, foreign exchange and share of joint venture profits. Adjusted EBITDA includes 100% of revenue and expenses from controlled entities where the Corporation holds less than 100% of the outstanding shares. Management believes that, in addition to net and total comprehensive income (loss), Adjusted EBITDA is a useful supplemental measure as it provides an indication of the results generated by CanElson's principal business activities prior to consideration of how these activities are financed, how the results are taxed in various jurisdictions, or how the results are effected by the accounting standards associated with CanElson's stock based compensation plan. For the calculation of DCM Adjusted EBITDA, see Summary of Selected Quarterly Results for the Joint Venture (DCM).

For the three months ended March 31,
2015 2014 % change
Net income $ 6,253 $ 16,626 (62 )%
Interest expense 531 196 171 %
Current and deferred taxes 2,772 6,109 (55 )%
Depreciation expense 7,966 8,990 (11 )%
EBITDA 17,522 31,921 (45 )%
Stock based compensation expense 327 565 (42 )%
Share of profit joint venture 578 (1,653 ) nm
Foreign exchange (recovery) losses (47 ) 928 nm
Adjusted EBITDA $ 18,380 $ 31,761 (42 )%
nm - calculation is not meaningful

Funds flow from operations is defined as cash provided by operating activities before changes in non-cash working capital and current tax expense. Funds flow from operations is a measure that provides shareholders and potential investors with additional information regarding CanElson's liquidity and its ability to generate funds to finance its operations, fund investing activities and support financing payments. Management utilizes this measurement to assess CanElson's ability to finance operating activities and capital expenditures. Comparative period presentation of funds flow has been adjusted to conform with the current year presentation of funds flow, that is net of current income tax expense, whereas it was previously net of income taxes paid.

For the three months ended March 31,
2015 2014 % change
Operating cash flow $ 27,815 $ 16,744 66 %
Current tax (expense)/recovery 660 (4,313 ) nm
Changes in working capital (9,467 ) 13,605 nm
Funds flow $ 19,008 $ 26,036 (27 )%
nm - calculation is not meaningful

Gross margin is defined as "gross profit from services revenue before stock based compensation and depreciation". Gross margin is a measure that provides shareholders and potential investors with additional information regarding CanElson's cash generating operating performance. Management utilizes this measurement to assess CanElson's operating performance.

For the three months ended March 31,
2015 2014 % change
Gross profit $ 16,200 $ 29,295 (45 )%
Depreciation expense 7,966 8,990 (11 )%
Stock based compensation expense 188 198 (5 )%
Gross margin $ 24,354 $ 38,483 (37 )%

INDUSTRY DEFINITIONS

In addition to the non-GAAP measures listed above, we use a number of industry and other terms in this press release which are described below. These industry definitions may not be comparable to similar measures used by other companies.

Drilling rigs are categorized as singles, doubles, or triples based on the number of connected segments or "joints" of drill pipe that can be handled as a "stand" in the mast. Taller masts (e.g. triples) generally correspond to greater drilling depth capacities. We often refer to many of our rigs as tele-doubles - "tele" is short for telescoping, which refers to a design featuring an upper section of the mast that nests inside the lower section for transport and telescopes to full operating height to handle two-joint stands while drilling. Drilling rigs are also categorized as mechanical or AC electric, which refers to the method by which the hoisting and pumping equipment are powered.

Spring break-up is a period when local governments typically restrict movements of heavy equipment on roads susceptible to damage during seasonally wet conditions.

References to commodity prices within the press release refer to the prices of crude oil, natural gas, as well as natural gas liquids such as condensate, butane, propane, and ethane.

Drilling days refers to the time it takes for a drilling rig to drill a well from spud to rig release. The time taken to mobilize, move in, rig-up, and tear-down the drilling rig is excluded from this metric regardless if revenue is earned or costs are incurred during this time.

CanElson presents its utilization levels on a drilling day basis, and sources Canadian industry utilization statistics from the Canadian Association of Oilwell Drilling Contractors ("CAODC"), which measures drilling rig utilization based on spud to rig release dates. CanElson also references the Baker Hughes rig count in the US as a measure of US industry activity.

Revenue, operating expenses, and depreciation per drilling day is calculated as total of the respective item divided by the number of drilling days and is not indicative of our drilling rig rates.

G&A as a percentage of revenue is calculated as total administration expense divided by total revenue.

FORWARD LOOKING INFORMATION

This Press Release contains forward-looking information pertaining to: our activity level expectations across each of our geographic operating regions; our expectation that the uncertainty surrounding the extent of the downturn and the timing of a full recovery will continue to prolong our customers' decision to increase capital spending from original or reduced 2015 capital programs; our belief that a sustained period of stability in the commodity price environment may result in our customers re-evaluating their well economics; our 2015 capital program; our estimate of deferred capital related to re-certifications and that these expenditures will be incurred in the future; and our primary corporate objectives. This forward-looking information involves material assumptions and known and unknown risks and uncertainties, including the risks set out under "Risks and Uncertainties", certain of which are beyond CanElson's control. CanElson's Annual Information Form and other documents filed with securities regulatory authorities (accessible through the SEDAR website www.sedar.com) describe the other risks, the material assumptions and other factors that could influence actual results and which are incorporated herein by reference. Actual results, performance or achievements could differ materially from those expressed in, or implied by, this forward-looking information and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking information will transpire or occur, or if any of them do so, what benefits CanElson will derive therefrom. The forward-looking information is made as at the date of this Press Release and CanElson does not undertake any obligation to update publicly or to revise any of the included forward-looking information, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

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