CanElson Drilling Inc.

TSX : CDI


CanElson Drilling Inc.

November 09, 2012 07:00 ET

CanElson Announces Strong Third Quarter Financial Results, Expands Its Credit Facility Through Syndication and Declares Third Quarter Dividend

CALGARY, ALBERTA--(Marketwire - Nov. 9, 2012) - CanElson Drilling Inc. (TSX:CDI) today announced strong financial results for the third quarter and first nine months of 2012 compared with a year earlier. CanElson also has expanded its credit facility to $120 million from $60 million previously available and declared a third quarter dividend of $0.05 per share.

THIRD QUARTER 2012 SUMMARY (Compared with a year earlier)

  • Services revenue $58.5 million, up 7% from $54.7 million
  • CanElson's Canadian utilization of 62% was 1.5 times higher than the industry average, up from 1.4
  • Foreign segment (United States and Mexico) revenue grew by 27% to $27.1 million representing 46% of total revenue for the quarter
  • EBITDA $22.2 million, up 9% from $20.3 million
  • Income attributable to shareholders $10.2 million, declined 5% from $10.7 million
  • EPS (diluted) $0.13, declined 13% from $0.15
  • Weighted average diluted shares outstanding 76.3 million, up 4% from 73.6 million
  • Declared third quarter dividend of $0.05 per share, up from nil

NINE MONTHS ENDED 2012 SUMMARY (Compared with a year earlier)

  • Services revenue $161.6 million, up 34% from $120.7 million
  • CanElson's Canadian utilization of 52% was 1.2 times higher than the industry average, which is the same as the prior year
  • Foreign segment (United States and Mexico) revenue grew by 60% to $78.6 million representing 49% of total revenue
  • EBITDA $60.3 million, up 46% from $41.2 million
  • Income attributable to shareholders $29.7 million, up 48% from $20.0 million
  • EPS (diluted) $0.39, up 34% from $0.29
  • Weighted average diluted shares outstanding 75.2 million, up 10% from 68.2 million
  • Declared dividends totaling $0.15 per share, up from nil

"Our highly versatile tele-double and modern drilling rig fleet, and operations in key oil-weighted basins across North America enabled us to generate strong financial results during the third quarter even though the rig activity levels declined in both the United States and Canada relative to the same period last year," stated Randy Hawkings, President and CEO of CanElson. "Our prudent growth and risk management strategy continues to prove itself as we remain focused on delivering superior full-cycle value and growth to our customers and shareholders."

OUTLOOK

Drilling Services

We believe that our strategy has uniquely positioned us to sustain relatively strong profitability during the full drilling industry cycle. The current drilling cycle, as we described in the second quarter 2012 MD&A, continues to be subdued in Canada and the US. The cornerstones to our relative industry strength, profitability, and top quartile financial results are:

  1. operations in four core balanced geographical regions;
  2. a standardized deep modern rig fleet (average age of less than 4.5 years and average vertical rating of greater than 4000 metres);
  3. new cost saving initiatives such as our natural gas fuel and flare gas initiative with CanGas and our new proprietary triple design;
  4. an established foot print and a growing reputation for efficiency in optimization of drilling practices in Mexico where the market appears to be poised for growth; and
  5. a strong balance sheet with excess capacity to take advantage of opportunities.

Mexico

The drilling industry in Mexico appears to be counter cyclical relative to Canada and the United States. PEMEX is dedicated to stemming oil production decline and increasing domestic gas production; and we have demonstrated our ability to effectively and successfully do business in Mexico. We believe our performance in the region and our alignment with an experienced and strong local partner (Grupo Diavaz with 40 years working for PEMEX) will provide an excellent opportunity for our Mexican joint venture, Diavaz CanElson de Mexico, S.A. de C.V. ("DCM"), to expand its complement of services. As previously disclosed we expect DCM's customer will move to a production sharing contract with PEMEX during the next three months. Therefore, DCM has experienced the current temporary lull in activity this year during this transition period.

Texas

CanElson has deployed 24% of its fleet focused on oil-directed drilling to the Permian Basin in Texas. The industry rig count in this area has recently declined due to the macro industry trends described above which may result in minor downward pressure on revenue rates in 2013 for CanElson's rigs operating there, compared with 2012. We do not expect that this pressure will significantly impact our overall utilization in west Texas and anticipate that we will still achieve capacity utilization in excess of 90% for the remainder of 2012 and into 2013, with downtime caused only by rig move intervals and planned re-certifications of some of our drilling equipment.

Canada and North Dakota

As a result of the volatility in both oil and natural gas commodity prices, reduced access to capital, commodity transportation challenges, and global macro concerns our customers are understandably cautious with respect to their capital spending programs. Consequently, we anticipate the current revenue rate conditions to prevail through the first quarter of 2013 combined with typical seasonal utilization increases through the winter. Beyond the first quarter we have less certainty as to the market direction but we expect that the strong relationships, cost reduction initiatives (e.g. CanGas) and long term contracts we have established with our customers will provide a competitive edge in the market place.

Rig Assembly

At our Nisku, Alberta facility we are assembling three additional tele-doubles at an estimated investment of approximately $8 million per rig. We will deploy these new rigs in Q4 of 2012 and Q1 of 2013, all with long term committed contracts. These new rigs will expand the gross size of the fleet to 41 rigs. As in the past, we continue to order long lead items for an additional tele-double, with full construction dependent upon obtaining customer commitments. In addition, progress is continuing on finalizing the detail designs of a proprietary triple drilling rig that will incorporate similar characteristics of our successful tele-doubles.

Fleet deployment (by rigs)
Mexico
North Drilling Mexico
Canada Texas Dakota (Leased) Service Total
September 30, 2012 22 9 (net 8) 4 1 (net 0.5) 2 (net 1) 38 (net 35.5)
September 30, 2011 20 6 (net 5) 4 2 (net 1) 2 (net 1) 34 (net 31)
Change % 10% 50% unchanged -50% unchanged 10%
(net 60%) (net 14%)
Gross fleet deployment (by %)
Canada Texas North Dakota Mexico
Drilling
(Leased)
Mexico
Service
Total
September 30, 2012 57% 24% 11% 3% 5% 100%
September 30, 2011 59% 17% 12% 6% 6% 100%

CanGas Solutions Inc. ("CanGas")

We believe CanGas is the only provider of compressed natural gas ("CNG") transportation services by truck-hauled CNG trailers in Western Canada, as such; it is strategically positioned for rapid growth and cost-savings to customers. Additionally, we look to bring this expertise to our operations outside the WCSB.

CanGas provides two unique high value services requiring road transportation of CNG. The first service provides high pressure processed natural gas to remote worksites where the natural gas can displace a significant proportion of diesel burned in conventional diesel engines converted to bi-fuel (a mixture of natural gas and diesel fuel) usage. CanGas also sources and supplies high pressure input compression to fill the road transport CNG trailers, and the diesel engine bi-fuel conversions. The second service collects low pressure raw natural gas which would otherwise be flared, and transports this previously wasted gas under high pressure to a gas processing facility. In areas with flaring restrictions the conservation of this raw gas allows the owner to produce more oil than would otherwise be allowed by regulations as well as the ability to use this gas for other purposes. Finally, CanGas is developing proprietary technology that could economically employ portable, small-scale field facilities to condition raw stranded natural gas so that it would be suitable for consumption in diesel engines. We hope to profit both from the commercialization of this technology and from the additional opportunities that it provides for our CNG engine conversion and CNG transportation business.

During the third quarter, CanGas signed a three year natural gas supply agreement with Bayhurst Energy Services Corporation, a subsidiary of SaskEnergy, Saskatchewan's Crown-owned natural gas utility. Under the agreement, SaskEnergy will develop a high-capacity CNG facility at Weyburn, Saskatchewan allowing CanGas to be the first commercial supplier in Western Canada of trucked CNG for diesel engines on drilling rigs. As a result CanGas will have a source of natural gas for CanGas' CNG delivery trailers to transport natural gas to the 14 CanElson rigs based in south east Saskatchewan.

Also during the third quarter, CanGas installed bi-fuel conversion kits on four of CanElson's rigs. CanGas has commissioned operations on one of these rigs which has been using natural gas as fuel. The remaining three are expected to be commissioned and commence operations imminently. As CanGas continues to convert more CanElson rigs to run on bi-fuel we expect to realize considerable cost savings from the substitution of inexpensive natural gas for diesel fuel. We also expect to be able to optimize bi-fuel operations as we become more involved within the operations and gain hands-on experience, which should positively impact the Corporation's financial results.

Our assessment of CanGas' significant growth prospects is based on anticipated environmental trends, especially tighter restrictions on flared gas to reduce greenhouse gas emissions and waste, as well as the significant cost saving available from the substitution of inexpensive natural gas for diesel fuel. CanGas is a natural supplier to our Drilling Services and further differentiate CanElson's drilling services benefiting both our clients and our shareholders.

CanGas currently derives revenue principally from the collection of low pressure raw natural gas from remote locations and the transportation of that gas to a processing facility. With further investment we also expect to receive revenue from the conditioning of wellhead natural gas, if and when our proprietary gas conditioning technology is proven commercial.

By 2013, as CanGas expands its fleet of CNG trailers and compression units and converts more drilling rigs to bi-fuel capacity, the delivery of CNG to drilling rigs may become the primary source of CanGas revenue.

CanGas operated a fleet of 8 CNG trailers as at the end of the third quarter of 2012, up 33% from 6 CNG trailers at the end of the second quarter of 2012. Subsequent to the end of the third quarter, CanGas further expanded the CNG fleet by 8, bringing the total size of the fleet to 16 trailers at the date of this press release.

CanGas operated 3 portable compression units as at the end of the third quarter of 2012, up 50% from 2 portable compression units at the end of the second quarter of 2012. Subsequent to the end of the third quarter, CanGas further expanded the number of portable compression units by 3, bringing the total number of units to 6 at the date of this press release.

CAPITAL AVAILABILITY AND CAPITAL PROGRAM

With net debt (debt less cash) at September 30, 2012 of only $17.7 million and $41.4 million available on our existing credit facilities, we are well capitalized to take advantage of specific strategic opportunities. Funds flow continues to be strong and will support our quarterly dividend rate of $0.05 per share and our announced 2012 capital program as well as further expansion into 2013.

A significant percentage of CanElson's 2012 and 2013 capital programs are being funded by operating cash flows with the remainder anticipated to be funded through amounts available on the undrawn portion of the Corporation's loans and borrowings. CanElson's total 2012 and 2013 capital programs are expected to be as follows:

Drilling Services
Spare equipment,
facilities & overhead
Upgrades &
maintenance

Expansion

CanGas

Total
Capital Expenditures
Total approved 2013 capital projects $ 3.0 $ 11.5 $ 5.6 $ 4.9 $ 25.0
Nine months ended September 30, 2012 $ 5.5 $ 6.6 $ 43.4 $ 4.0 $ 59.4
Anticipated costs to complete 2012 capital projects 4.1 1.9 17.1 10.4 33.5
Total approved costs for 2012 capital projects $ 9.6 $ 8.5 $ 60.5 $ 14.4 $ 92.9
Previously anticipated costs for 2012 capital projects (i) 7.0 12.7 58.2 20.3 98.2
Variance from previously anticipated 2012 capital projects $ 2.6 $ (4.2) $ 2.3 $ (5.9) $ (5.3)

(i) See our news release dated September 10, 2012

2013 Capital Program ($25 million):

Our modern standardized fleet allows us to minimize capital expenditures on maintenance and spare equipment. Expansion capital is primarily limited to additional top drives and completion of contracted rig builds. As in the past, the Corporation's initial capital program excludes any potential new rig builds. Construction of any additional drilling rigs is pending receipt of long-term committed contracts.

2012 Capital Program ($92.9 million):

The reasons for a significant decrease to the 2012 CanGas capital budget include a decrease of capital requirements as third parties have initially undertaken the purchasing and installation of high speed CNG compressors, and no requirements to utilize previously built in capital contingencies to roll-out drilling rig bi-fuel projects. We expect that the decrease will not compromise CanGas' growth plans.

Key elements of the remaining 2012 capital program are:

Drilling Services ($23 million):

(1) $17.1 million for the construction and completion of construction for three contracted and committed tele-doubles (relating to rigs #33, #34 and #35), long lead items for one tele-double (rig #36) and other growth capital investment; and
(2) Approximately $5.9 million for spares, shop upgrades and maintenance capital.

CanGas:

$10.4 million to convert the primary diesel engines on 15 of our drilling rigs to bi-fuel capability by January 2013 so that the engines can operate on a mixture of natural gas and diesel fuel; to expand our fleet of truck-hauled CNG delivery trailers to more than 44 from 22 currently; to expand the portable compression units by 4 to 6 units; and for further research and development associated with our proprietary small-scale portable, raw gas conditioning technology to condition raw stranded natural gas so that it would be suitable for consumption in engines.

2013 PRIMARY OBJECTIVES

Looking to 2013, CanElson's primary objectives will be to maintain and strengthen its industry leading position by consistently providing operational excellence and drilling efficiencies to its customers. With this focus, we will be well positioned to obtain strong customer commitments and to capitalize on new opportunities. Assuming we continue to obtain satisfactory customer commitments, we intend to carry out the following activities that will enhance our competitive positioning: expand our service offering in Mexico; continue with the rapid conversion of the diesel engines in our fleet to bi-fuel capacity; tactically develop, contract and deploy a proprietary triple drilling rig to complement our core tele-double fleet; and continue to expand our standard tele-double fleet. Achieving these objectives will present new opportunities for CanElson, its customers and shareholders.

SYNDICATION OF CREDIT FACILITIES

CanElson is also pleased to announce the syndication of its credit facilities led by HSBC Bank Canada, as Agent, with HSBC Bank Canada, Royal Bank of Canada, The Bank of Nova Scotia and Alberta Treasury Branches, as lenders, which increases CanElson's aggregate credit limit from $60 million to $120 million (consisting of a $110 million extendible revolving term loan facility and a $10 million extendible revolving operating loan facility). The Lenders are committed to the credit facilities for at least 3 years (having a current maturity date of November 8, 2015), which are to be used by CanElson for general corporate and working capital requirements as well as to assist with capital expenditures and acquisitions. At CanElson's option, and upon the consent of the Lenders, the maturity date of the credit facilities can be extended upon terms acceptable to the parties. The credit facilities require interest to be paid monthly with no scheduled principal repayments until the stated maturity date.

DIVIDEND

The Board of Directors has declared the third quarter dividend of $0.05 per share for the three month period ended September 30, 2012, payable on December 4, 2012 to shareholders of record at the close of business on November 23, 2012. Management believes the Corporation can pursue disciplined but aggressive growth opportunities while returning value to our shareholders through a dividend.

FINANCIAL SUMMARY

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

Three months ended
September 30,
Nine months ended
September 30,
2012 2011 change 2012 2011 change
Services revenue $ 58,501 $ 54,569 7% $ 161,590 $ 120,660 34%
Rig construction revenue $ - $ - nm $ - $ 4,377 -100%
EBITDA $ 22,172 $ 20,337 9% $ 60,337 $ 41,288 46%
Income attributable to shareholders of the corporation

$

10,172

$

10,724

-5%

$

29,656

$

20,005

48%
Income per share
Basic $ 0.13 $ 0.15 -11% $ 0.39 $ 0.30 30%
Diluted $ 0.13 $ 0.15 -11% $ 0.39 $ 0.29 34%
Funds flow $ 21,854 $ 20,838 5% $ 56,365 $ 39,693 42%
Gross Margin (services) $ 26,370 $ 23,701 11% $ 72,304 $ 47,823 51%
Gross Profit (rig construction) $ - $ - nm $ - $ 788 -100%
Weighted average diluted shares outstanding 76,335 73,564 4% 75,161 68,158 10%

FINANCIAL STATEMENTS AND MD&A

CanElson's complete unaudited interim financial results and Management's Discussion and Analysis (MD&A) for the third quarter and nine month period ended September 30 of 2012 have been filed on SEDAR and posted to the company's website at this link: http://www.canelsondrilling.com/investor-relations/financial-reports

FORWARD-LOOKING INFORMATION

This press release contains certain statements or disclosures relating to CanElson that are based on the expectations of CanElson as well as assumptions made by and information currently available to CanElson which may constitute forward-looking information under applicable securities laws. In particular, this press release contains forward-looking information related to: we believe that our strategy has uniquely positioned us to sustain relatively strong profitability during the full drilling industry cycle; We believe our performance in the region and our alignment with an experienced and strong local partner (Grupo Diavaz with 40 years working for PEMEX) will provide an excellent opportunity for DCM to expand its complement of services. As previously disclosed we expect DCM's customer will move to a production sharing contract with PEMEX during the next three months; in Texas decline in rig count may result in some downward pressure on revenue rates in 2013 for the Corporation's rigs there, compared with 2012. We do not expect that this pressure will significantly impact our overall utilization in west Texas and anticipate that we will still achieve capacity utilization in excess of 90% for the remainder of 2012 and into 2013; in Canada and North akota we anticipate the current revenue rate conditions to prevail through the first quarter of 2013 combined with typical seasonal utilization increases through the winter. Beyond the first quarter we have less certainty as to the market direction but we expect that the strong relationships, cost reduction initiatives (e.g. CanGas) and long term contracts we have established with our customers will provide a competitive edge in the market place; we will deploy new rigs in Q4 of 2012 and Q1 of 2012; CanGas is strategically positioned for rapid growth and cost-savings to customers; we hope to profit both from the commercialization of this technology and from the additional opportunities that it provides for our CNG engine conversion and CNG transportation business; As CanGas continues to convert more CanElson rigs to run on bi-fuel we expect to make considerable cost savings from the substitution of inexpensive natural gas for diesel fuel.

We also expect to be able to optimize bi-fuel operations as we become more involved within the operations and gain hands-on experience which should positively impact the Company's financial results; Our assessment of CanGas' significant growth prospects is based on anticipated environmental trends; With further investment we also expect to receive revenue from the conditioning of wellhead natural gas if and when our proprietary gas conditioning technology is proven commercial; By 2013, as CanGas expands its fleet of CNG trailers and compression units and converts more drilling rigs to bi-fuel capacity, the delivery of CNG to drill rigs may become the primary source of CanGas revenue; funds flow continues to be strong and will support our dividend rate of $0.05 quarterly and our announced 2012 capital program as well as further expansion into 2013; all references relating to future capital expenditures for 2012 and 2013; Looking to 2013, CanElson's primary objectives will be to maintain and strengthen its industry leading position by consistently providing operational excellence and drilling efficiencies to its customers. With this focus, we will be well positioned to obtain strong customer commitments and to capitalize on new opportunities. Assuming we continue to obtain satisfactory customer commitments, we intend to carry out the following activities that will enhance our competitive positioning: expand our service offering in Mexico; continue with the rapid conversion of the diesel engines in our fleet to bi-fuel capacity; tactically develop, contract and deploy a proprietary triple drilling rig to complement our core tele-double fleet; and continue to expand our standard tele-double fleet. Achieving these objectives will present new opportunities for CanElson, its customers and its shareholders. Such forward looking information involves material assumptions and known and unknown risks and uncertainties, certain of which are beyond CanElson's control. Many factors could cause the performance or achievement by CanElson to be materially different from any future results, performance or achievements that may be expressed or implied by such forward looking information. CanElson's Annual Information Form and other documents filed with securities regulatory authorities (accessible through the SEDAR website at www.sedar.com) describe the risks, material assumptions and other factors that could influence actual results and which are incorporated herein by reference. CanElson disclaims any intention or obligation to publicly update or revise any forward looking information, whether as a result of new information, future events or otherwise, except as may be expressly required by applicable securities laws.

Contact Information

  • CanElson Drilling Inc.
    Randy Hawkings
    President and CEO
    (403) 266-3922

    CanElson Drilling Inc.
    Robert Skilnick
    Chief Financial Officer
    (403) 266-3922