CanElson Drilling Inc.
TSX : CDI

CanElson Drilling Inc.

November 07, 2013 07:30 ET

CanElson Announces Third Quarter Financial Results, Initial 2014 Capital Program and Declares Third Quarter Dividend

CALGARY, ALBERTA--(Marketwired - Nov. 7, 2013) - CanElson Drilling Inc. (TSX:CDI) today announced the financial results for the third quarter ending September 30, 2013 compared to a year earlier. CanElson also announced its initial 2014 capital program and declared a third quarter dividend of $0.06 per share.

THIRD QUARTER 2013 SUMMARY (compared with a year earlier)

  • Services revenue $66.2 million, up 17% from $56.7 million
  • EBITDA $23.1 million, up 5% from $22.1 million
  • Income attributable to shareholders of the Corporation $9.8 million, down 4% from $10.2 million
  • EPS (diluted) $0.12, down 8% from $0.13
  • Weighted average diluted shares outstanding 84.2 million, up 10% from 76.3 million
  • Declared third quarter dividend of $0.06 per share, up 20% from $0.05

NINE MONTHS ENDED 2013 SUMMARY (compared with a year earlier)

  • Services revenue $175.9 million, up 15% from $153.1 million
  • EBITDA $59.6 million, up 1% from $58.8 million
  • Income attributable to shareholders of the Corporation $24.9 million, down 16% from $29.7 million
  • EPS (diluted) $0.31, down 21% from $0.39
  • Weighted average diluted shares outstanding 79.9 million, up 6% from 75.2 million

Notably, CanElson's US utilization for the third quarter increased to 81% from 79% during the same period of 2012 even though the overall US rig count was down approximately 7% at September 30, 2013 relative to September 30, 2012 (source: Baker Hughes). CanElson's Canadian utilization rate in the third quarter of 2013 was 55% (2012: 62%), which exceeded the industry average of 41%. Overall, CanElson's utilization was 65% during the third quarter of 2013, which was down slightly compared to third quarter 2012 levels of 68%.

For the first nine months ended September 30, 2013, CanElson's US year-to-date utilization was 82% (2012: 79%), even though the overall US rig count was down approximately 10% for the nine months ended September 30, 2013 relative to September 30, 2012 (source: Baker Hughes). CanElson's Canadian utilization rate was 48% (2012: 52%), or 1.17 times the industry average (2012: 1.22 times the industry average). Overall, CanElson's utilization for the first nine months of 2013 was similar to 2012 levels at 62%.

"Despite the relatively flat drilling rig counts in North America, we continue to increase our market share in both Canada and the United States which is a reflection of our efficiencies in the drilling process and our modern drilling fleet," stated Randy Hawkings, President and CEO of CanElson.

Fleet deployment (by rigs and jurisdiction)

Canada

Texas
North
Dakota
Mexico
Drilling
Mexico
Service

Total
At September 30, 2013 26 (net 24.5 ) 12 (net 10.5 ) 5 2 (net 1.0 ) 2 (net 1 ) 47 (net 42 )
At December 31, 2012 23 (net 22.5 ) 10 (net 8.5 ) 4 1 (net 0.5 ) 2 (net 1 ) 40 (net 36.5 )
Change % 13 % 20 % 25 % 100 % Unchanged 18 %
Gross fleet deployment (by % and jurisdiction)

Canada

Texas
North
Dakota
Mexico
Drilling
Mexico
Service

Total
At September 30, 2013 55 % 26 % 11 % 4 % 4 % 100 %
At December 31, 2012 57 % 25 % 10 % 3 % 5 % 100 %

CanGas Solutions Inc. ("CanGas")

We acquired CanGas on May 14, 2012 to build an innovative solutions-focused business to assist clients in displacing high cost diesel and other fuels with more economical and environmentally friendly compressed natural gas ("CNG"). While we have continued to build our ability to displace high cost diesel on our own drilling rig fleet, interest in CanGas' services has grown. At this point CanElson related revenues amount to only a quarter of CanGas' overall revenues. To fund further growth for CanGas, CanElson is seeking external capital for CanGas' 2014 growth plans. This process will likely result in CanGas becoming a strategic investment, as compared to a wholly-owned subsidiary of CanElson.

We believe continuing to hold a strategic investment for CanGas will provide our shareholders with the continued opportunity to participate in the development of a new, high potential oilfield service opportunity which complements our core business.

Our assessment of CanGas' future growth prospects is based on a recent increase in the demand for and interest in CanGas' services, environmental trends to reduce greenhouse gas emissions and waste, as well as the cost savings available from the substitution of diesel for less expensive natural gas.

OUTLOOK

Drilling Services

During the third quarter of 2013, CanElson was able to maintain consolidated activity levels, even though Canadian and US drilling services markets experienced continued subdued markets due to weather delays and overall market slowness. We believe that our strategy and key drivers have uniquely positioned us to sustain relatively strong profitability during the full drilling industry cycle. The strategy and key drivers for our relative industry strength, profitability, and historically top quartile financial results are:

  1. Strategically diversified operations in oil-weighted regions within two balanced geographical segments that provide diversity of earnings and less seasonality while maintaining focus and operational efficiency.
  2. Standardized deep, modern rigs (average age of approximately 5 years and average vertical rating of approximately 4,000 metres) allowing us to outperform peers when considering the total costs of safely drilling wells.
  3. A problem-solving culture as evidenced by our ability to service our customers with performance drilling and innovative cost saving initiatives such as our natural gas fuel and flare gas initiative with CanGas.
  4. A history of developing mutually-beneficial partnerships and strong client relationships with First Nations organizations, oil and gas operators and our Mexican joint venture, the latter of which leverages our joint venture partner's established Mexican footprint.
  5. Prudent financial management which allows the Company to be opportunistic at any point in the economic cycle.
  6. Operational excellence based on a culture of safety, as reflected by superior drilling industry safety performance relative to benchmarks from third party sources, such as provincial and state workers' compensation boards and private insurance providers.

Efficiency and Opportunity

The North American land drilling rig markets are currently characterized by relatively flat land drilling rig counts as customers continue to be prudent with their capital programs. The primary challenge facing our customers within the horizontal drilling movement is high well costs. In this relatively flat land drilling rig market, market divergence is being driven as much by efficiency in the drilling process as it is by modernization of the land drilling rig fleet. It is our belief that drilling contractors providing an efficiency solution rather than a rig rental will have the most profitable opportunities. Therefore, while we continue to offer our customers a high quality rig, we are seeing incremental demand being driven from those operators looking for assistance in reducing drilling and related well costs. This reduction in drilling costs does not necessarily correspond to a lower revenue rate for the drilling contractor, but instead focuses on the contractor's ability to minimize non-productive time and maximize performance while drilling.

Currently, a large majority of our new rig contract opportunities are being driven by our historical performance combined with our ability to identify cost saving opportunities in the drilling process. As a result, we continue to invest in personnel and customer relationships that allow us to assist in the drilling optimization process. This is expected to result in new opportunities that leverage some of our existing operations to participate in new geographical areas of activity.

Canada

Our customers in Canada are cautious with respect to their current capital spending programs, but appear to be increasingly optimistic towards increased spending levels for 2014. Additionally, with potentially large field developments as a result of proposed west coast LNG terminals there may be significant incremental investment into the WCSB in 2014 and beyond. Through the fourth quarter of 2013 and first quarter of 2014, we expect to see stabilizing revenue rates with small increases primarily resulting from customer requests for additional equipment upgrades and inflation pressure on wages. We have recently deployed a new drilling rig into north east British Columbia as this market continues to grow and offers new opportunities that we expect to benefit from.

United States - Texas

CanElson has 26% of its fleet focused on oil directed drilling in the Permian Basin in Texas. During 2013 CanElson continued to expand its fully contracted fleet in this basin even though the industry-wide rig count in this area has recently declined due to commodity price volatility. Growth in the area has largely been the result of our drilling and operating efficiencies. With a relatively flat drilling rig count, any further growth in the area will be dependent on our ability to reduce customers' well costs. We anticipate that the current revenue rates for CanElson's Texas rigs will continue for the balance of the year. We also expect to achieve capacity utilization in excess of 90% for 2013 and into the first half of 2014 with downtime caused only by rig move intervals and planned re-certifications of some drilling equipment.

United States - North Dakota

Our customers in North Dakota continue to look for drilling efficiencies. We expect that the same number of wells will be drilled in 2013 compared to 2012 with fewer rigs being required due to more efficient drilling practices. We do not anticipate our utilization levels to be significantly impacted, and our efficiencies have allowed us to transfer an additional drilling rig into the area.

Mexico

We have demonstrated our ability to 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 of experience serving PEMEX) provides an excellent opportunity for our joint venture DCM to expand its range of services, including potentially expanding its drilling rig fleet beyond the two recently refurbished drilling rigs.

Rig Assembly

Based on existing customer contracts and those being finalized, CanElson's 2013 investment and deployment of new build tele-double's is expected to be as follows:

  • Rig #38: Expected to be delivered Q4 2013
  • Rig #44: Expected to be delivered Q1 2014
  • Rig #45: Long lead items are expected to be procured in Q4 of 2013 and Q1 2014

CanGas Solutions Inc.

CanElson is seeking external capital for CanGas' 2014 growth plans. For the remainder of 2013 we expect to continue investment in our fleet of truck-hauled CNG delivery trailers and to convert primary diesel engines in our drilling rigs to bi-fuel capacity based on customer demand. For more information about our investment plan see the Capital Availability and Capital Program below.

Capital Availability and Capital Investment Program

CanElson is well capitalized to take advantage of strategic opportunities with $95 million available on existing credit facilities. Funds flow continues to be strong and fully supports our quarterly dividend rate of $0.06 per share as well as a majority of the expected 2013 and 2014 capital investment programs, with the remaining amount being funded through existing credit facilities. Subsequent to the September 30, 2013 CanElson renewed its credit facility.

CanElson's total 2013 and 2014 capital investment programs are expected to be as follows:

2014 Capital Program ($34.1 million):
Drilling Services
Capital Investment Program Spare
equipment,
facilities &
overhead

Upgrades &
maintenance

Expansion

Total
Total approved 2014 capital projects $ 4.7 $ 21.5 $ 7.9 $ 34.1

Our modern standardized fleet allows us to minimize capital investment on maintenance and spare equipment. As in the past, the Corporation's initial capital program includes long lead items for incremental rigs and components, but excludes any fully constructed new rig builds, the latter of which require long-term committed contracts.

2013 Capital Program ($102.2 million):
Drilling Services


Capital Investment Program
Spare equipment,
facilities &
overhead

Upgrades &
maintenance


Expansion


CanGas


Total
Nine months ended September 30, 2013 $ 2.9 $ 11.7 $ 43.1 $ 7.8 $ 65.5
Anticipated costs to complete 2013 capital projects 3.5 5.3 23.7 4.2 36.7
Total approved costs for 2013 capital projects $ 6.4 $ 17.0 $ 66.8 $ 12.0 $ 102.2
Previously anticipated costs for 2013
capital projects (i) 6.4 14.5 69.4 12.5 102.8
Variance from previously anticipated
2013 capital projects $ - $ 2.5 $ (2.6) $ (0.5) $ (0.6)
(i) Refer to the MD&A dated July 31, 2013.

The 2013 total expected capital investment program of $102.2 million is relatively consistent with the capital program as previously reported. During the first nine months of 2013, our expansion capital investment primarily related to the purchase of three fully crewed drilling rigs from Calmena Energy Services Inc. for $15 million, expenditures required for the completion and deployment of Rig #35, Rig #36 and Rig #37 as well as long lead items for Rig #38 and Rig #44.

Key elements of the remaining 2013 capital program are:

Drilling Services

$32.5 million capital investment allocated as follows:

(1) $18.5 million remaining for the construction and completion of two contracted tele-doubles with top drives (relating to rigs #38 and #44), long lead items for one tele-double (rig #45) and $5.2 million of other growth capital; and
(2) Approximately $8.8 million for spares, shop upgrades and maintenance capital.

We anticipate $7.1 million of our 2013 capital program will carry over into 2014.

CanGas

$4.2 million capital investment allocated as follows:

(1) Conversion of primary diesel engines on our drilling rigs to bi-fuel capability to enable the operation on a mixture of natural gas and diesel fuel;
(2) Expansion of our fleet of truck-hauled natural gas delivery trailers, compression and conditioning equipment to meet both current and anticipated demand; and
(3) Collection and leverage of operating data to facilitate greater diesel fuel displacement and better management of costs.

Primary Corporate Objectives

Looking to the end of 2013 and into 2014, CanElson's primary objective is to maintain and strengthen its industry leading utilization 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 capitalize on new opportunities. Subject to obtaining customer commitments we intend to carry out the following activities that will enhance our competitive positioning:

  • Continue to expand our standard tele-double fleet
  • Expand our service offering in Mexico
  • Continue to form innovative long-term business relationships
  • Growth through acquisitions

Achieving these objectives will present expanded opportunities for CanElson, its customers and shareholders.

DIVIDEND

On November 6, 2013, the Board of Directors declared a third quarter dividend of $0.06 per share for the three month period ended September 30, 2013, payable on December 6, 2013 to shareholders of record at the close of business on November 27, 2013. The ex-dividend date is November 25, 2013. The dividend is an eligible dividend for Canadian tax purposes.

FINANCIAL SUMMARY
For the three months ended September 30, For the nine months ended September 30,
2013 2012 %
change
2013 2012 %
change
Services revenue $ 66,155 $ 56,717 17 % $ 175,931 $ 153,075 15 %
EBITDA (i) $ 23,060 $ 22,054 5 % $ 59,551 $ 58,815 1 %
Share of profit unconsolidated joint venture
$

586

$

35

1574
%
$

1,100

$

994

11
%
Net income attributable to shareholders of the Corporation
$

9,767

$

10,172

-4
%
$

24,972

$

29,656

-16
%
Net income per share
Basic $ 0.12 $ 0.13 -8 % $ 0.32 $ 0.40 -20 %
Diluted $ 0.12 $ 0.13 -8 % $ 0.31 $ 0.39 -21 %
Funds flow (i) $ 23,081 $ 21,766 6 % $ 58,463 $ 55,113 6 %
Gross Margin (services) (i) $ 28,225 $ 26,025 8 % $ 74,201 $ 70,292 6 %
Weighted average diluted shares outstanding
84,197

76,335

10
%
79,857

75,161

6
%
(Tabular amounts are stated in thousands of Canadian dollars, except per share amounts and rig operating days)

FINANCIAL STATEMENTS AND MD&A

This is the Corporation's first fiscal year adopting IFRS 11 accounting for Joint Arrangements. In accordance with IFRS 11 the transition date was January 1, 2013 with retroactive application to January 1, 2012 and, accordingly, the comparative information for 2012 has been restated to conform to the requirements of IFRS 11. The application of IFRS 11 has changed the classification and subsequent accounting of the Corporation's investment in Diavaz CanElson de Mexico S.A. de C.V. ("DCM"), which was classified as a jointly controlled entity and previously accounted for using the proportionate consolidation method. Applying IFRS 11 requires that the Corporation apply equity accounting for its 50% interest in DCM. Due to the fact that the joint venture partners have joint control over the relevant activities. Additional information about the adoption of this standard and the Corporation's IFRSs accounting policies is discussed in the Accounting Policies and Critical Estimates section of this MD&A as well as in the notes to the September 30, 2013 condensed consolidated financial statements and the audited December 31, 2012 consolidated financial statements.

CanElson's complete unaudited interim financial results and Management's Discussion and Analysis (MD&A) for the third quarter ended September 30, 2013 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: our belief that our strategy and key drivers have uniquely positioned us to sustain relatively strong profitability during the full drilling industry cycle; our belief that drilling contractors providing a drilling efficiency solution rather than a rig rental will have the most profitable opportunities; our expectations that investment in personnel and customer relationships that us to assist in the drilling optimization process. This is expected to result in new opportunities that leverage some of our existing operations to participate in new geographic areas of activity; our expectation that in Canada revenue rates will stabilize through the fourth quarter of 2013 and first quarter of 2014 with small increases primarily as a result of customer requests for additional equipment upgrades and inflation pressure on wages; our expectation that we will benefit from new opportunities in northeast British Columbia as that market continues to grow; our expectation that the current revenue rates for CanElson's Texas rigs will continue for the balance of the year; our expectation that we will achieve capacity utilization in excess of 90% for 2013 and into the first half of 2014 for our Texas rigs; our expectation that in North Dakota the same number of wells will be drilled in 2013 compared to 2012 with fewer rigs and our anticipation that our utilization levels will not be significantly impacted; our performance and partner relationships in Mexico provides an opportunity for DCM to expand in the region; expected delivery dates of rigs; our expectation to continue investment in the fleet of truck hauled CNG delivery trailers and to convert primary diesel engines in our drilling rigs to bi-fuel capacity; expectation that funds flow will support our quarterly dividend and a majority of our capital program; expected 2013 capital programs and anticipated cost to complete 2013 capital projects; our anticipation that $7.1 million of our 2013 capital program will carry over to 2014; our primary corporate objectives.

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
    www.canelsondrilling.com