Enseco Energy Services Corp.
TSX VENTURE : ENS

Enseco Energy Services Corp.

June 16, 2008 19:29 ET

Enseco Energy Services Corp. Announces Its Results for the Three Months and Year Ended March 31, 2008

CALGARY, ALBERTA--(Marketwire - June 16, 2008) - Enseco Energy Services Corp. ("Enseco" or "the Corp.") (TSX VENTURE:ENS) announces its consolidated financial results for the three months and year ended March 31, 2008.

HIGHLIGHTS

- Established a U.S. operations centre in Minot, North Dakota in early April 2008 and moved four production testing vessels and one swabbing unit into the region for a large independent customer.

- Raised $5 million through a private placement completed in late April 2008 which provides Enseco with the necessary financial flexibility to execute its operating plan for the current fiscal year.

- Continued the commercialization of the Company's open hole logging technology during the three months ended March 31, 2008 and it is expected that Enseco's open hole division will be performing work on commercial terms for its customers during the three months ended September 30, 2008.

- Eliminated significant fixed and structural cost from the Company's operations during fiscal 2008 which positions Enseco very favourably for the recovery in activity levels expected in fiscal 2009.

Established Bakken Operations Centre in North Dakota

Subsequent to March 31, 2008, Enseco expanded its geographic presence into the United States by establishing an operations centre in North Dakota. The Company initially moved three production testing units into the area for a large established customer in April of 2008. Since that time Enseco has moved an additional testing unit into this market as well as a swabbing rig. Enseco has begun providing services to a number of different customers in the region. Enseco is also in discussions with customers to possibly expand its service offering in this area to include Wireline and Directional Drilling services. In early April 2008, the United States Geological Service ("USGS") announced that it was revising its estimate of technically recoverable oil from the North Dakota and Montana Bakken formation to a range of 3.0 to 4.3 billion barrels, which is 25 times more than its previous 1995 estimate. With this revised estimate and recent record prices for crude oil, Enseco believes that activity levels in this region will continue to be robust and the Company will focus its efforts on expanding its presence in North Dakota.

Completion of $5 million Private Placement

On April 24, 2008, Enseco announced the closing of a private placement equity financing of 11,120,000 Common Shares at a price of $0.45 per Common Share, for gross proceeds of $5 million. The financing significantly strengthened the Company's balance sheet and will allow Enseco to proceed with its fiscal 2009 operating plan and associated capital expenditures.

Commercialization of Open Hole Logging Technology

During the first calendar quarter of 2008, Enseco announced that it had commercialized its Open Hole Wireline Logging tools. The "Quad Stack" of tools has been tested in various environments in the Western Canadian Sedimentary Basin and these tests along with the original tests that were conducted at Callisto Test Pits in the UK and the Catoosa Test Wells in Oklahoma have been extremely encouraging. The log responses from the tool have been very positive and Enseco expects to deploy the tools at customer locations during the three months ended September 30, 2008.

Elimination of Significant Structural and Fixed Cost from Operations

Management recognized in 2007 that the 2008 winter drilling season would be a challenging period and one that would require focus and discipline in order to mitigate the significant negative financial impact from the slowdown in activity. With this in mind, Management proactively implemented Company wide wage reductions and other cost reduction measures in order to better align Enseco's cost structure with expected activity levels. Through these initiatives the Company is poised to profit favorably for the anticipated recovery in activity levels expected in 2009.



Financial Highlights
($000's except per share data)

Three Months Three Months Year Year
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
2008 2007 2008 2007

-------------- -------------- ----------- ------------
Revenue $ 10,101 $ 11,304 $ 26,026 $ 29,250
Operating loss (1) (168) (173) (11,573) (4,188)
EBITDA (1) 1,081 1,506 (5,814) 431
Cashflow (1) 965 1,478 (5,984) 1,473
Net loss (156) (93) (30,937) (3,626)

Per Share Data
EBITDA (1) $ 0.03 $ 0.11 $ (0.20) $ 0.02
Cashflow (1) $ 0.03 $ 0.06 $ (0.20) $ 0.06
Net loss $ 0.00 $ 0.00 $ (1.05) $ (0.26)

March 31 March 31
2008 2007
(audited) (audited) % change
-------------- ----------- ------------
Financial Position

Total assets $ 56,514 $ 83,332 (33)%
Long-term debt (excluding
current portion) 11,371 6,272 81%
Working capital (2) (1,144) (665) (175)%
Shareholders' equity 25,090 50,917 (51)%


(1) Operating loss is loss before impairment loss on intangible assets, impairment loss on goodwill, gain (loss) on sale of equipment, accretion of convertible debentures and income taxes. EBITDA means earnings before interest, taxes, depreciation and amortization and is equal to earnings before income taxes plus interest on long-term debt plus other interest expense plus depreciation plus amortization plus accretion of convertible debentures plus impairment loss on intangible assets, plus impairment loss on goodwill. Cashflow means cash flows provided by operations before changes in non-cash working capital items. Operating loss, EBITDA and cashflow are not recognized measures under Canadian generally accepted accounting principles ("GAAP"). Management believes that in addition to net earnings, operating loss, EBITDA and cashflow are useful supplemental measures as they provide an indication of the results generated by Enseco's primary business activities prior to consideration of how those activities are financed, amortized or how the results are taxed in various jurisdictions as well as the cash generated by Enseco's primary business activities. Readers should be cautioned, however, that operating loss, EBITDA and cashflow should not be construed as an alternative to net earnings determined in accordance with GAAP as an indicator of Enseco's performance. Enseco's method of calculating operating loss, EBITDA and cashflow may differ from other organizations and, accordingly, these figures may not be comparable to those disclosed by other organizations.

(2) Working capital equals current assets minus current liabilities.

In January of 2008, the oilfield service sector in Canada was fairly pessimistic with respect to winter natural gas drilling activity. Industry sentiment in Western Canada commenced the year with the lingering impact of issues that had originally surfaced in 2007 such as, the impact of low natural gas commodity prices, a weak U.S. dollar and the negative economic impact from Alberta's royalty review slated for implementation in 2009. A number of these factors began to impact the Canadian market in 2006 and led to declining equipment activity and customer pricing for the past six quarters. Enseco also noted a marked increase in competition as a larger fleet of service equipment competed for less available work than in the same period in 2007. These circumstances resulted in increased pricing pressure with the expected corresponding decrease in operating margins. Towards the end of March however, the underlying fundamentals improved. The Canadian dollar stabilized at close to parity with the U.S. dollar, natural gas prices have strengthened significantly and Alberta has announced plans to deal with some of the unintended consequences from the royalty review undertaken in the fall of 2007.

The results for the year ended March 31, 2008 reflect the impact of the issues described above and although there has been a noticeable positive shift in sentiment it did not arrive in time to positively impact the results for the three months ended March 31, 2008. The losses incurred during the year ended March 31, 2008 are reflected in the Corp.'s financial condition. The working capital deficit increased to $1.1 million at March 31, 2008 as compared to $0.7 million at March 31, 2007. As well, Shareholders' Equity decreased to $25.1 million at March 31, 2008 as compared to $50.9 million at March 31, 2007. The primary driver for the significant decrease in Shareholders' Equity was the $7.1 million charge taken for impairment on intangible assets and the $12.4 million charge taken for impairment on goodwill. As mentioned above, the Company's working capital position was improved by the completion of a private placement of 11,120,000 common shares at a price of $0.45 per common share generating gross proceeds of $5.0 million, which closed on April 24, 2008. The Company incurred total costs of approximately $350 thousand in conjunction with the closing of this transaction, primarily related to agent's fees, legal expenses and listing fees.

Summary

The decrease in revenues for the three months ended March 31, 2008 was due to additional revenue from the wireline and directional drilling divisions being offset by decreases in revenue in both the testing and swabbing divisions, the wireline and directional drilling divisions were recent additions for the three months ended March 31, 2007 and therefore did not contribute significantly to the results achieved in the prior year period. The decrease in revenues for the year ended March 31, 2008 as compared to March 31, 2007 was due to decreased customer demand and pricing for Enseco's services primarily due to the variety of regulatory and economic challenges described above.

Testing

The revenue reported from Enseco's Testing division decreased by 40% to $3.2 million for the three months ended March 31, 2008 as compared to $5.3 million for the three months ended March 31, 2007, and decreased 48% to $8.0 million for the year ended March 31, 2008 as compared to $15.3 million for the corresponding period in 2007. Revenue decreased for the three months and year ended March 31, 2008 as compared to the three months and year ended March 31, 2007 due to decreased customer demand which resulted in decreased utilization and pricing. For the three months and year ended March 31, 2008 the Testing division achieved average utilization rates of 30% and 20% respectively, as compared to 56% and 43% for the three months and year ended March 31, 2007. During the three months and year ended March 31, 2008 the Testing division operated a weighted average of 37 testing units. This compared to a weighted average of 33 units and 30 units operated during the three months and year ended March 31, 2007. The average day rate achieved by the testing division decreased by 1% and 15% and for the three months and year ended March 31, 2008 as compared to the same periods in the prior year.

Swabbing

The revenue reported from Enseco's Swabbing division decreased by 30% to $3.2 million for the three months ended March 31, 2008 as compared to $4.6 million for the three months ended March 31, 2007, and decreased 31% to $8.7 million for the year ended March 31, 2008 as compared to $12.6 million for the same period in 2007. Revenue decreased for the three months and year ended March 31, 2008 as compared to the three months and year ended March 31, 2007 due to decreased customer demand which resulted in decreased utilization and pricing. For the three months and year ended March 31, 2008 average utilization of the swabbing units was 52%, and 35% respectively, as compared to 77% and 70% for the three months and year ended March 31, 2007. This division operated an average of 21 units and 20 units during the three months and year ended March 31, 2008 as compared to an average of 20 units and 18 units during the three months and year ended March 31, 2007. The average day rate achieved by the Swabbing division decreased by 4% and 11% for the three months and year ended March 31, 2008 as compared to March 31, 2007.

Wireline

The revenue reported from Enseco's Wireline division was $3.0 million and $7.7 million for the three months and year ended March 31, 2008 as compared to $1.2 million for the three months and year ended March 31, 2007. Enseco's Wireline division commenced operations in March 2007 with the acquisition of Expro and the delivery of two additional cased hole wireline trucks in 2007. For the three months and year ended March 31, 2008 average utilization of the wireline units was 30% and 22%, respectively. This division operated an average of 12 units during the three months and year ended March 31, 2008.

Directional Drilling

Enseco's Directional division reported revenue of $0.7 million and $1.6 million for the three months and year ended March 31, 2008, as compared to $0.2 million for the three months and year ended March 31, 2007. This division commenced operations in January of 2007. Average utilization of the directional drilling kits was 25% and 14% for the three months and year ended March 31, 2008. This division operated an average of 4 directional kits during the three months and year ended March 31, 2008.

Consolidated

Operating loss decreased 3% to $168 thousand and increased 176% to $11.6 million for the three months and year ended March 31, 2008 respectively, as compared to $173 thousand and $4.2 million for the three months and year ended March 31, 2007. The increased operating loss for the year ended March 31, 2008 as compared to year ended March 31, 2007 is due to decreased revenue and the increased size of the operations of Enseco as described above. The decreased operating loss for the three months ended March 31, 2008 as compared to the same period in 2007 relates primarily to the fact that amortization expense was $nil in the three months ended March 31, 2008, as compared to $773 thousand for the same period in the prior year. Amortization was not recorded from June 30, 2007 forward as the Company incurred a first quarter impairment charge on all of its intangible assets resulting in no amortization charges in the future.

The Corp. recorded net losses of $156 thousand and $30.9 million for the three months and year ended March 31, 2008 as compared to $93 thousand and $3.6 million for the three months and year ended March 31, 2007. During the three months and year ended March 31, 2008, income tax recovery was $nil (2007 - $1,287) due to a valuation allowance being recognized during the quarter and year end which offset any potential future income tax recovery. Included in the net loss for the year ended March 31, 2008 are losses of $7.1 million for impairment on intangible assets and $12.4 million for impairment on goodwill. Impairment tests were performed on intangible assets and goodwill at June 30, 2007.

OUTLOOK

Enseco is currently looking at the second half of 2008 as an opportunity for higher seasonally adjusted service activity levels. In the late fall of 2007, natural gas inventories began the winter heating season at record highs, which led to early 2008 sentiment being negative, however, a cold winter in North America has reduced natural gas storage levels to exit the March quarter near the five-year average. These circumstances have provided a significant lift to natural gas prices in the spot and forward markets. Stronger than expected oil and natural gas prices in 2008 should positively impact customer cash flows and provide incentive to drill and service oil and natural gas wells. In addition, the Alberta government announced a plan to address some of the unintended consequences of the proposed January 1, 2009 royalty structure by offering certain deep drilling incentives. The well license trends in Canada are marginally lower year-over-year and Enseco continues to expect that the second calendar quarter of 2008 will be challenging due to the normal decrease in activity levels associated with spring breakup. In the newly established North Dakota operating region, Enseco has experienced very steady utilizations as well as strong customer demand for its services. Enseco expects to continue to add equipment to this area, as well as to expand its service offerings in line with customer demand.

Currently, United States natural gas storage levels are at or near the five-year average and uncertainty over liquefied natural gas imports have caused economic fundamentals for drilling in 2008 to have improved substantially from six months ago. Enseco expects this to translate into higher demand for natural gas related oilfield services in the late third and fourth quarter. Many of the forward indicators for 2008 have improved for the WCSB as the winter drilling season finished on a positive note. However, a sustained period of higher natural gas prices is required to instill producer confidence and to meaningfully increase drilling activity. We expect many customers to revisit their drilling programs in the coming months and adjust their 2008 budgets with an upward bias.

Enseco remains positive about the long-term underlying fundamentals for North American natural gas and oil service opportunities in the WCSB and North Dakota. Enseco expects that factors such as lower initial well production, increasing decline rates of natural gas wells in the WCSB and increasing natural gas consumption in North America will support increased natural gas prices in the future and with the increased natural gas prices increased oil and gas service work in the WCSB and North Dakota.

Enseco is an emerging supplier of energy related services operating throughout the Western Canadian Sedimentary Basin and select markets in the United States, with operational centres in Red Deer, Whitecourt, Edmonton, Beaverlodge, Grande Prairie, Fort St. John and Minot, North Dakota, as well as corporate and sales offices located in Calgary. Enseco is led by an experienced management team currently offering well swabbing, production testing, cased hole logging, perforating and propellant stimulation services and directional drilling services with a focus on continued value creation through accretive acquisitions and organic growth.

This press release contains forward-looking statements subject to various risk factors and uncertainties, which may cause the actual results, performances or achievements of Enseco to be materially different from any future results, performances or achievements expressed or implied by such forward-looking statements. Such factors include, but are not limited to, fluctuations in the market for oil and gas and related products and services, political and economic conditions, the demand for services provided by Enseco, industry competition and Enseco's ability to attract and retain both customers and key personnel.

The TSX Venture Exchange has neither approved nor disapproved the contents of this press release.

Contact Information

  • Enseco Energy Services Corp.
    David A. Hawkins
    President and CEO
    (403) 806-0088
    or
    Enseco Energy Services Corp.
    Aly Khan Musani
    Senior Vice President and CFO
    (403) 806-0088