Enseco Energy Services Corp.
TSX VENTURE : ENS

Enseco Energy Services Corp.

February 22, 2008 16:15 ET

Enseco Energy Services Corp. Announces Its Results for the Three and Nine Months Ended December 31, 2007

CALGARY, ALBERTA--(Marketwire - Feb. 22, 2008) - Enseco Energy Services Corp. (TSX VENTURE:ENS) ("Enseco") announces its consolidated financial results for the three and nine months ended December 31, 2007.

The nine months ended December 31, 2007 continued to be a challenging period for Enseco and the oilfield services industry as a whole. Activity levels did not increase as is usually expected during the December 31, 2007 quarter as winter approaches and freeze-up occurs. The oilfield services industry in western Canada continues to be plagued by weak activity levels exiting 2007. In the fourth quarter of 2007 5,237 wells were drilled in western Canada, the lowest fourth quarter since 2002. This meagre well count had to be divided amongst the largest drilling rig fleet ever recorded in western Canada, with an average of 870 rigs operating in the quarter. This translated into an average rig utilization rate of 44% as compared to the five year average of 66%. Enseco's customers continued to be reluctant to make significant capital commitments to drilling programs due to a combination of factors including low natural gas prices, a weakening US dollar and Alberta Royalty Changes reinforcing the general mood of pessimism that had pervaded the Industry since the Report's release.

During the fourth quarter of 2007 the Alberta Government solidified its position on oil and gas royalties by choosing to adopt the majority of the recommendations contained in the "Our Fair Share" report produced by the Alberta Royalty Review Panel in September. This report proposed increases to royalties on oil and gas production in the Province and led numerous companies to revisit their budgets to determine the impact of the recommendations which further delayed new activity.

One key measure of the Industry's overall health is determined by the active rig count in Western Canada which averaged 308 rigs during the fourth quarter of 2007 as compared to 471 rigs for the same period in 2006 and 626 rigs for the fourth quarter of 2005. The decline in oilfield activity levels from recent years has been exacerbated by the increased equipment in almost every service line of the industry. When combined with lower year-over-year drilling levels in Western Canada, the increased availability of equipment has led to the lowest equipment utilization rates in nearly a decade and increased pricing pressure.

Stagnant natural gas prices have contributed to the negative industry environment due to high natural gas storage levels in North America which kept natural gas prices at levels reasonably close to the prior year period with Canadian natural gas prices trading in the $6.00 per MMBtu range.

The weakening of the U.S. dollar to parity with the Canadian dollar has compounded the decline in industry cash flow from natural gas production for many of Enseco's customers. For the 12 month period ended December 31, 2007, the Canadian dollar has appreciated approximately 18% against the U.S. dollar.

In light of this negative operating environment, Enseco is aggressively undertaking to further integrate and rationalize its operations. This includes reducing its fixed costs through staffing and cost reductions, consolidating operations and aligning its operations to lower activity levels until such time as industry activity levels increase. Enseco has reduced its staffing levels by approximately 20% from this time last year. During the month of December 2007 Enseco implemented wage reductions for all employees throughout the organization. These reductions will result in savings of approximately 8% to 9% of wage and related costs.



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

Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
Revenue $ 6,971 $ 6,572 $ 15,925 $ 17,946
Operating loss (1) (2,388) (1,666) (11,405) (4,015)
EBITDA (1) (992) (801) (6,672) (1,075)
Cashflow (1) (1,171) (130) (6,949) (5)
Net loss (2,287) (1,517) (30,780) (3,533)

Per Share Data
EBITDA (1) $ (0.03) $ (0.04) $ (0.25) $ (0.09)
Cashflow (1) $ (0.04) $ (0.01) $ (0.24) $ 0.00
Net loss $ (0.07) $ (0.09) $ (1.15) $ (0.30)

September 30 March 31
2007 2007
(unaudited) (audited) % change
----------- --------- ----------
Financial Position
Total assets $ 55,070 $ 83,332 (34)%
Long-term debt
(excluding current portion) 11,215 6,272 79 %
Working capital (2) (1,923) (665) (189)%
Shareholders' equity 25,117 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.

The increase in revenues for the three months ended December 31, 2007 was due to additional revenue from the wireline and directional drilling divisions, these divisions were added subsequent to December 31, 2006 and therefore did not contribute to the results achieved in the prior year period. The decrease in revenues for the nine months ended December 31, 2007 as compared to December 31, 2006 was due to decreased customer demand for Enseco's services primarily due to the variety of regulatory and economic challenges described above.

The revenue reported from Enseco's Testing division decreased by 22% to $2.2 million for the three months ended December 31, 2007 as compared to $2.9 million for the three months ended December 31, 2006, and decreased 52% to $4.8 million for the nine months ended December 31, 2007 as compared to $10.0 million for the corresponding period in 2006. Revenue decreased for the three and nine months ended December 31, 2007 as compared to the three and nine months ended December 31, 2006 due to decreased customer demand which resulted in decreased utilization and pricing. For the three and nine months ended December 31, 2007 the Testing division achieved average utilization rates of 22% and 17% respectively, as compared to 33% and 39% for the three and nine months ended December 31, 2006. During the three and nine months ended December 31, 2007 the Testing division operated a weighted average of 37 testing units. This compared to a weighted average of 30 units and 29 units operated during the three and nine months ended December 31, 2006. The average day rate achieved by the testing division decreased by 3% and 18% and for the three and nine months ended December 31, 2007 as compared to December 31, 2006.

The revenue reported from Enseco's Swabbing division decreased by 38% to $2.3 million for the three months ended December 31, 2007 as compared to $3.7 million for the three months ended December 31, 2006, and decreased 31% to $5.5 million for the nine months ended December 31, 2007 as compared to $7.9 million for the same period in 2006. Revenue decreased for the three and nine months ended December 31, 2007 as compared to the three and nine months ended December 31, 2006 due to decreased customer demand which resulted in decreased utilization and pricing. For the three and nine months ended December 31, 2007 average utilization of the swabbing units was 38%, and 30% respectively, as compared to 69% and 68% for the three and nine months ended December 31, 2006. This division operated an average of 21 units and 20 units during the three and nine months ended December 31, 2007 as compared to an average of 18 units and 16 units during the three and nine months ended December 31, 2006. The average day rate achieved by the Swabbing division decreased by 2% and 14% for the three and nine months ended December 31, 2007 as compared to December 31, 2006.

The revenue reported from Enseco's Wireline division was $1.8 million and $4.8 million for the three and nine months ended December 31, 2007 as compared to nil for the three and nine months ended December 31, 2006. Enseco's Wireline division commenced operations in February 2007 with the acquisition of Expro and the delivery of two additional cased hole wireline trucks in 2007. For the three and nine months ended December 31, 2007 average utilization of the wireline units was 22% and 19%, respectively. This division operated an average of 12 units during the three and nine months ended December 31, 2007.

Enseco's Directional division reported revenue of $609 thousand and $863 thousand for the three and nine months ended December 31, 2007, as compared to $14 thousand for the three and nine months ended December 31, 2006. This division commenced operations in January of 2007. Average utilization of the directional drilling kits was 20% and 10% for the three and nine months ended December 31, 2007. This division operated an average of 4 directional kits during the three and nine months ended December 31, 2007.

Operating loss increased 43% and 184% for the three and nine months ended December 31, 2007 to $2.4 million and $11.4 million as compared to $1.7 million and $4.0 million for the three and nine months ended December 31, 2006. The increased operating loss for the three and nine months ended December 31, 2007 as compared to the three and nine months ended December 31, 2006 is due to decreased revenue and the increase size of the operations of Enseco as described in the sections above.

Enseco recorded net losses of $2.3 million ($0.07 per share on a diluted basis) and $30.8 million ($1.15 per share on a diluted basis) for the three and nine months ended December 31, 2007 as compared to $1.5 million ($0.09 per share on a diluted basis) and $3.5 million ($0.30 per share on a diluted basis) for the three and nine months ended December 31, 2006. Included in the net loss for the three and nine months ended December 31, 2007 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. In addition to the impairment on intangible assets and goodwill, Enseco did not record an income tax recovery due to a valuation allowance being recognized during the three and nine months ended December 31, 2007 which offset any potential future income tax recovery.

OUTLOOK

The winter drilling season has begun with a whimper rather than the bang that oilfield service companies have come to expect at this time of the year. As anticipated, Enseco's customers have shied away from committing to large scale drilling projects, and instead available work has been sporadic and subject to intense price competition. During this period Enseco has scrutinized every aspect of its cost structure and has implemented wage reductions for all employees at every level of the Company. This measure combined with an overall 20% reduction in staff in comparison to the prior year should allow Enseco to better align its costs with current activity levels.

It is still uncertain as to what the final impact will be from the Alberta government's announcement regarding the adoption of the Royalty Review Panel's recommendations. However, in the near term it has had a negative impact on winter activity levels as companies re-examine their budgets to determine the full impact of the changes.

The current Industry outlook for 2008 continues to be negative with analysts calling for 15,300 wells to be drilled in Western Canada in 2008, as compared to the 18,300 wells that were drilled in 2007. The majority of this decrease is directly attributable to two large exploration and production companies who will combine to drill 1,500 wells less in 2008 than they did collectively in 2007. Although there is a significant amount of pessimism related to Industry activity levels entering 2008, it should be noted that a number of analysts are calling for a rebound in activity levels for 2009 as the number of natural gas wells drilled is expected to increase from 8,446 in 2008 to 12,054 in 2009. A portion of this increase is a direct result of the new Alberta royalty framework discussed above. The implementation of this new royalty structure has had the unintended consequence of deferring lower productivity wells such as shallow gas and coalbed methane wells to 2009 when they will be subject to preferential royalty rates under the new regime.

While these conditions cast a negative outlook extending well into 2008, Enseco remains positive about the long-term underlying fundamentals for North American natural gas and oil and gas service opportunities in the WCSB basin. 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.

Currently Enseco is aggressively undertaking to further integrate and rationalize its operations. This includes reducing its fixed costs through staffing and cost reductions, consolidating operations and aligning its operations to lower activity levels until such time as industry activity levels increase. In addition, Enseco is currently examining a number of strategic alternatives in order to expand its geographic presence, thereby maximizing the use of idle equipment and cultivating new revenue streams.

Enseco is an emerging supplier of energy related services operating throughout the Western Canadian Sedimentary Basin with operational centres in Red Deer, Whitecourt, Edmonton, Beaverlodge, Grande Prairie, and Fort St. John, 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