Enseco Energy Services Corp.
TSX VENTURE : ENS

Enseco Energy Services Corp.

November 23, 2007 18:34 ET

Enseco Energy Services Corp. Announces Its Results for the Three and Six Months Ended September 30, 2007

CALGARY, ALBERTA--(Marketwire - Nov. 23, 2007) - Enseco Energy Services Corp. ("Enseco") (TSX VENTURE:ENS) announces its consolidated financial results for the three and six months ended September 30, 2007.

The six months ended September 30, 2007 continued to be a challenging period for Enseco and the oilfield services industry as a whole. Activity levels did not rebound robustly as previously hoped for during the September 30, 2007 quarter. Enseco's customers continued to be hesitant on making significant capital commitments to drilling programs due to a combination of factors including low natural gas prices, a weakening US dollar and the high cost of oilfield services relative to new well productivity. The uncertainty was further heightened by the release of the "Our Fair Share" report 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. The Alberta government then announced its intent to adopt the majority of the recommendations contained in the report, thereby reinforcing the general mood of pessimism that had pervaded the Industry since the Report's release.

One key measure of the Industry's overall health is determined by the active rig count in Western Canada which averaged 370 rigs during the third quarter of 2007 as compared to 550 rigs for the same period in 2006 and 510 rigs for the third 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 The persistent decline in the one-year forward price for North American natural gas continued as it traded within a range of about $6.50 to $8.00 on Canadian and U.S. exchanges in the third quarter of 2007, compared to the 2006 range of about $7.00 to $10.00.

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 the Corp.'s customers. For the 12 month period ended September 30, 2007, the Canadian dollar has appreciated approximately 12% against the U.S. dollar.

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.



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


Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2007 2006 2007 2007
(unaudited) (unaudited) (unaudited) (unaudited)
----------------------------------------------------------------------------
Revenue $ 6,066 $ 7,672 $ 8,954 $ 11,374
Operating loss (1) (2,371) (984) (9,017) (2,349)
EBITDA (1) (960) 274 (5,680) (53)
Cashflow (1) (1,167) 436 (5,778) 125
Net loss (2,205) (842) (28,493) (2,016)

Per Share Data
EBITDA (1) $ (0.04) $ 0.03 $ (0.23) $ (0.01)
Cashflow (1) $ (0.04) $ 0.05 $ (0.23) $ 0.01
Net loss $ (0.08) $ (0.09) $ (1.12) $ (0.21)



September 30 March 31
2007 2007
(unaudited) (audited) % change
----------------------------------------------------------------------------
Financial Position
Total assets $ 54,070 $ 83,332 (35)%
Long-term debt (excluding
current portion) 8,764 6,272 40 %
Working capital (2) (5,566) (665) (737)%
Shareholders' equity 23,318 50,917 (54)%


(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.


As explained above the decrease in the revenues for the three and six months ended September 30, 2007 as compared to September 30, 2006 were 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 Production Testing division decreased by 62% to $1.8 million for the three months ended September 30, 2007 as compared to $4.7 million for the three months ended September 30, 2006, and decreased 64% to $2.6 million for the six months ended September 30, 2007 as compared to $7.1 million for the corresponding period in 2006. Revenue decreased for the three and six months ended September 30, 2007 as compared to the three and six months ended September 30, 2006 due to decreased customer demand which resulted in decreased utilization and pricing. For the three and six months ended September 30, 2007 the Testing division achieved an average utilization rates of 19% and 15% respectively, as compared to 57% and 45% for the three and six months ended September 30, 2006. During the three and six months ended September 30, 2007 the Testing division operated a weighted average of 37 testing units. This compared to a weighted average of 35 units and 33 units operated during the three and six months ended September 30, 2006. The average day rate achieved by the testing division decreased by 14% and 22% and for the three and six months ended September 30, 2007 as compared to September 30, 2006.

The revenue reported from Enseco's Swabbing division decreased by 26% to $2.2 million for the three months ended September 30, 2007 as compared to $2.9 million for the three months ended September 30, 2006, and decreased 24% to $3.2 million for the six months ended September 30, 2007 as compared to $4.2 million for the same period in 2006. Revenue decreased for the three and six months ended September 30, 2007 as compared to the three and six months ended September 30, 2006 due to decreased customer demand which resulted in decreased utilization and pricing. For the three and six months ended September 30, 2007 average utilization of the swabbing units was 35%, and 26% respectively, as compared to 63% and 59% for the three and six months ended September 30, 2006. This division operated an average of 20 units during the three and six months ended September 30, 2007 as compared to an average of 15 units and 14 units during the three and six months ended September 30, 2006. The average day rate achieved by the Swabbing division decreased by 1% for the three and six months ended September 30, 2007 as compared to September 30, 2006.

The revenue reported from Enseco's Wireline division was $1.9 million and $2.9 million for the three and six months ended September 30, 2007 as compared to $nil for the three and six months ended September 30, 2006. Enseco's Wireline division commenced operations in February 2007 with the acquisition of Expro and the delivery of an additional cased hole wireline truck. For the three and six months ended September 30, 2007 average utilization of the wireline units was 23% and 18%, respectively. This division operated an average of 12 units during the three and six months ended September 30, 2007.

Enseco's Directional division reported revenue of $0.2 million and $0.3 million for the three and six months ended September 30, 2007, as compared to $nil for the three and six months ended September 30, 2006. This division commenced operations in January of 2007. Average utilization of the directional drilling kits was 6% and 5% for the three and six months ended September 30, 2006. This division operated an average of 4 directional kits during the three and six months ended September 30, 2007.

Operating loss increased 141% and 284% for the three and six months ended September 30, 2007 to $2.4 million and $9.0 million as compared to $1.0 million and $2.3 million for the three and six months ended September 30, 2006. The increased operating loss for the three and six months ended September 30, 2007 as compared to the three and six months ended September 30, 2006 is due to decreased revenue and the increased size of the operations of Enseco.

Enseco recorded net losses of $2.2 million ($0.08 per share on a diluted basis) and $28.5 million ($1.12 per share on a diluted basis) for the three and six months ended September 30, 2007 as compared to $0.8 million ($0.09 per share on a diluted basis) and $2.0 million ($0.21 per share on a diluted basis) for the three and six months ended September 30, 2006. Included in the net loss for the six months ended September 30, 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 six months ended September 30, 2007 which offset any potential future income tax recovery.

At September 30, 2007 the Company was not in material compliance with all debt covenants, and Enseco's bank has provided the Company with forbearance relating to the Company's covenant violations at September 30, 2007. The Company has signed an amended debt facility letter dated September 28, 2007 with its bank. The changes to the Company's banking facility include an increase of $4.0 million to its evergreen facility and a decrease of $2.0 million to its operating line bringing the Company's total credit facility to $20.0 million. In conjunction with the increase to its credit facility Enseco issued 8.0 million common shares for gross proceeds of $4 million through a common share private placement which closed on October 19, 2007. Subsequent to closing the above mentioned private placement and renegotiating the Company's debt facility, Enseco is now in material compliance with all debt covenants other than the debt to EBITDA ratio, for which the lender has waived its calculation until March 31, 2008.

OUTLOOK

The expected optimism that would previously greet the onset of the winter drilling season appears to have been replaced with uncertainty and hesitation. By this time of the year Enseco would have expected to see a commitment to large scale drilling projects from its larger customers. This has not materialized. Commitments for work are sporadic and it appears that customers' capital budgets have not been solidified for the winter drilling season. Enseco is monitoring this situation closely and has appropriate contingency plans in place if the expected increase in winter activity levels does not materialize as expected.

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 this is expected to have a negative impact on winter activity levels as companies re-examine their budgets to determine the full impact of the changes. Natural gas storage levels continue to remain at historical highs resulting in a decline in natural gas prices and providing a disincentive to accelerate natural gas targeted exploration programs.

The outlook for activity in the Western Canadian Sedimentary Basin ("WCSB") for 2008 is for activity levels to be lower then those experienced in 2007. These expectations are evidenced by the Petroleum Services Association of Canada's 2008 Canadian Drilling Forecast which shows a decline in forecasted Canadian drilling activity from 17,550 wells in 2007 to 14,500 wells in 2008, representing a 17% decrease. It is anticipated that any significant upturn in Industry sentiment will not likely materialize until early in 2009.

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, lower services company pricing 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.

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