Enseco Energy Services Corp.
TSX VENTURE : ENS

Enseco Energy Services Corp.

March 02, 2009 19:49 ET

Enseco Energy Services Corp. Announces Results for the Three and Nine Months Ended December 31, 2008

CALGARY, ALBERTA--(Marketwire - March 2, 2009) - Enseco Energy Services Corp. (TSX VENTURE:ENS) ("Enseco" or "the Company") announces its consolidated financial results for the three and nine months ended December 31, 2008.

HIGHLIGHTS

- On February 27, 2009 Enseco finalized a contract to exchange its cased hole wireline assets for the Canadian production testing assets of a large multinational oilfield services company. This asset exchange will allow Enseco to achieve significant economies of scale and operating mass in its production testing business going forward. The cased hole wireline business has become a very competitive business in Alberta. This reality has been reflected in the operating results of this division. For the three and nine months ended December 31, 2008 the cased hole wireline business experienced net losses of $854 thousand and $2.5 million respectively. For the three and nine months ended December 31, 2008 the cased hole wireline business had negative cash flow from operations of $520 thousand and $1.4 million respectively.

- Revenue from continuing operations increased by 66% to $8.5 million and 77% to $19.7 million for the three and nine months ended December 31, 2008 as compared to $5.1 million and $11.2 million for the three and nine months ended December 31, 2007.

- The Company's U.S. operations situated in North Dakota contributed $2.5 million and $5.5 million of revenue during the three and nine months ended December 31, 2008. Enseco is currently evaluating near term opportunities to expand beyond North Dakota as it looks to broaden its geographic coverage in the United States.

- The Company's directional drilling division has shown a 121% increase in revenue for three months and 307% for the nine months ended December 31, 2008 and produced operating income of $423 thousand for the nine months ended December 31, 2008 as compared to an operating loss of $473 thousand for the same period in the prior year.

- Operating losses from continuing operations decreased by 29% to $1.4 million and 50% to $4.9 million for the three and nine months ended December 31, 2008 when compared to $2.0 million and $9.8 million for the three and nine months ended December 31, 2007, as the divestiture of the Company's cased hole wireline division and the increased contribution from the Company's US operations begin to have a significant impact on results.

Key Strategic Divestiture of Enseco's Cased Hole Wireline Division and Acquisition of Canadian Testing Assets

As discussed above, effective March 1, 2009, Enseco has divested its cased hole wireline division and substantially enhanced its Canadian testing offering. Enseco expects this transaction to benefit the overall company as the cased hole wireline division did not have the necessary operating mass and economies of scale to compete as a standalone entity. For the three and nine months ended December 31, 2008 the cased hole wireline division incurred losses of $854 thousand and $2.5 million, respectively. In addition, this division had negative cash flow from operations of $520 thousand and $1.4 million, respectively. The net losses and negative cash flows associated with this division were unacceptable and management acted decisively in a difficult marketplace in order to secure a transaction that significantly strengthened the overall entity.

Revenues from continuing operations grew by 66% to $8.5 million and 77% to $19.7 million for the quarter and year to date - December 31, 2008

Enseco has shown a significant year over year improvement in revenue from continuing operations by posting a 66% increase during the current quarter over the same period in the prior year and a year to date increase of 77%. The key drivers of this growth were the Company's U.S. operations which contributed $2.5 million of revenue in the quarter and $5.5 million year to date, and the Company's directional drilling division which increased revenue to $1.3 million in the quarter and $3.5 million year to date.

U.S. Operations contributed $2.5 million of Revenue in the quarter and $5.5 million Year to Date

During the December quarter, the Company's U.S. operations contributed $2.5 million and $5.5 million of revenue to Enseco's consolidated results for the three and nine months ended December 31, 2008, and accounted for 29% and 28% of total revenue from continuing operations in each respective period. In early April of 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 and now has a total of six production testing units in the area, as well as two swabbing rigs. To date Enseco has seen increased demand for its services and believes that the activity levels in this region will continue to be more robust than in its core operating areas of Northwestern Alberta and Northeastern British Columbia. Enseco expects to move additional equipment into the US throughout 2009.

Directional Drilling revenue increased 121% and 307% for the quarter and year to date - December 31, 2008

The Company's directional drilling division has shown a 121% increase in revenues to $1.3 million and a 307% increase to $3.5 million for three and nine months ended December 31, 2008, as compared to revenues of $609 thousand and $863 thousand for the three and nine months ended December 31, 2007. This division also produced operating income of $423 thousand for the nine months ended December 31, 2008 as compared to an operating loss of $473 thousand for the same period in the prior year. The directional drilling division has gained significant traction in the current year due to its emphasis on exceptional customer service and its high level of operating performance, which has led to significant repeat business from our existing client base.

Reduced Operating Loss from continuing operations by 29% to $1.4 million for the quarter and 50% to $4.9 million year to date

Increased revenues from both U.S. operations and directional drilling were key factors in producing significant improvements over the prior year's performance. Operating loss from continuing operations was decreased to $1.4 million and $4.9 million for the three and nine months ended December 31, 2008, as compared to $2.0 million and $9.8 million for the same periods in 2007. Management anticipates that, going forward, Enseco will continue to show improvement relative to the comparative prior year period.

Progress on Implementation of Strategic Plan

Enseco achieved significant progress on its strategic plan through its divestiture of its cased hole wireline division. This transaction is expected to be transformational for the Company. The significant fixed cost infrastructure and inconsistent revenue stream associated with the cased hole wireline division continued to handicap Enseco's efforts improve the financial performance of the Company. Going forward, it is expected that the significant scale and operational flexibility of the production testing assets gained from this transaction will enhance the operational capability of Enseco's testing division and further demonstrate to the Company's customer base that Enseco is committed to improving and increasing its service offering wherever and whenever possible.

Enseco continues to actively pursue the diversification of its revenue stream away from the Alberta market, however, this has proved to be more difficult in light of the difficult commodity price and financial market volatility. Enseco anticipates a further expansion of its market presence in the United States by expanding geographically, as well as moving additional equipment into this region.

Another of Enseco's objectives was to ensure that the Company continues to maintain discipline with respect to its cost structure. As such, Enseco has begun to realign current staffing levels with the anticipated industry activity going forward. The Company has also recently rolled out a revised compensation structure for its field level employees which takes into account the new realities of the marketplace and addresses the inconsistencies between current pricing received for Enseco's services and the total compensation paid to employees.



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

Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
Dec 31, Dec 31, Dec 31, Dec 31,
2008 2007 % 2008 2007 %
(unaudited) (unaudited) change (unaudited) (unaudited) change
----------- ----------- -------
Revenue (1) $ 8,516 $ 5,128 66% $ 19,742 $11,151 77%
Operating
loss (1) (1,437) (2,032) 29% (4,899) (9,807) 50%

EBITDA (1) (299) (900) 67% (1,782) (5,817) 69%
Cashflow (1) (455) (1,100) 59% (2,227) (6,329) 65%
Net loss (1) (1,348) (1,931) 30% (5,169) (23,353) 78%

Per Share
Data
EBITDA (1) $ (0.01) $ (0.03) 67% $ (0.04) $ (0.22) 82%
Cashflow (1) $ (0.01) $ (0.04) 75% $ (0.05) $ (0.24) 79%
Net loss $ (0.03) $ (0.06) 50% $ (0.12) $ (0.87) 86%

Dec 31 March 31
2008 2008 %
(audited) change
--------- ---------- -------
Financial Position
Total assets $ 46,822 $ 56,514 (17)%
Long-term debt (excluding
current portion) - 11,371 (100)%
Working capital (2) (14,723) (1,144) N/A%
Shareholders' equity 22,506 25,090 (10)%

(1) Operating loss is loss before impairment loss on intangible assets,
impairment loss on goodwill, gain (loss) on sale of equipment 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 (gain)/loss on disposal of assets minus foreign
exchange gain plus impairment loss on intangible assets, plus impairment
loss on goodwill. Cashflow means cash flows provided by operations
before changes in noncash 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 last few months of 2008 and the beginning of 2009 have shown a marked deceleration in economic activity and a number of negative economic indicators that point to a deep and prolonged global recession. Demand for oil and natural gas continues to be weak despite positive macro level developments such as a cold winter throughout most parts of the United States. Weak demand has led to depressed pricing levels for both commodities which has translated into lower cash flows for producers. Producers have had to make significant cuts to their exploration and development budgets in order to properly manage short and long term liquidity. In addition, access to debt and equity remains exceptionally difficult even for the industry's largest players due to the negative global economic situation and weak pricing. This winter has seen a rapid response to deteriorating pricing from producers, the rig count in Western Canada showed 402 active rigs during the week of February 10, 2009 as compared to 668 active rigs during the same week in 2008. This statistic foreshadows a grim near term outlook for activity and possibly a much longer "spring breakup" period than has been historically the norm. Enseco has taken a number of measures to strengthen its underlying businesses and to ensure that it is properly positioned for lower activity levels.

The results for the three and nine months ended December 31, 2008 are reflective of the negative commodity price environment and the macro level uncertainties described above. In particular, Enseco experienced unseasonably weak results in December as producers who shut down operations for the holiday period did not resume normal levels of activity until the second week of January. The losses and capital expenditures incurred during the three and nine months ended December 31, 2008 are reflected in the Company's financial condition. The working capital deficit increased to $14.7 million at December 31, 2008 as compared to a deficit of $1.1 million at March 31, 2008. As well, Shareholders' Equity decreased to $22.5 million at December 31, 2008 as compared to $25.1 million at March 31, 2008. The Company has experienced losses and negative cash flow over the last two years and as at December 31, 2008 it was not in compliance with its working capital covenant under its existing credit facility. Subsequent to December 31, 2008, the lender provided the Company with forbearance relating to the Company's covenant violation at December 31, 2008 and a relaxation of the covenant as at January 31, 2009 and February 28, 2009. The Company continues to work with its lender to address the periods subsequent to these dates.

Summary

The increase in revenues from continuing operations for the three and nine months ended December 31, 2008 was due to a new revenue stream provided by Enseco's U.S. operations and a significant increase in revenue from the directional drilling division. This was offset by a decrease in revenue from the swabbing division which was attributable to increasing competition from traditional well servicing rigs and an overall decrease in activity levels during the past year.

Directional Drilling

Enseco's directional drilling division reported revenue of $1.3 million and $3.5 million for the three and nine months ended December 31, 2008, as compared to $609 thousand and $863 thousand for the three and nine months ended December 31, 2007. The large increase in the directional drilling division's revenue base is a result of a significant ramp up in repeat business from existing customers who had tried this division's services over the past year and are now adding us as a key supplier based on their satisfaction with the service provided. Average utilization of the directional drilling kits was 30% and 27% for the three and nine months ended December 31, 2008, as compared to 20% and 10% for the same period in 2007. This division operated an average of 5 directional kits during the three and nine months ended December 31, 2008, as compared to 4 directional kits during the same period in 2007.

U.S. Operations

Enseco's U.S. operations division consists of six production testing units and two swabbing rigs based in North Dakota. The U.S. division reported revenues of $2.5 million and $5.5 million for the three and nine months ended December 31, 2008, as compared to $nil for the three and nine months ended December 31, 2007. During the three and nine months ended December 31, 2008, the division had an average utilization rate of 62% and 69%, respectively. There are no comparable figures from 2007 as this is the first full year of operations.

Testing

The revenue reported from Enseco's testing division increased by 29% to $2.9 million and 28% to $6.1 million for the three and nine months ended December 31, 2008 as compared to $2.2 million and $4.8 million for the three and nine months ended December 31, 2007. Revenue in this division increased due to increased market penetration and acceptance of the Enseco brand during the current year. In the prior year period, Enseco was focused on integrating its various acquisitions and building a recognizable name and market presence. These efforts have shown results in the current year as this division has been able to grow its revenue base despite the negative momentum present in the overall market. For the three and nine months ended December 31, 2008 the testing division achieved average utilization rates of 29% and 22%, respectively, as compared to 22% and 17% for the three and nine months ended December 31, 2007. During the three and nine months ended December 31, 2008 the testing division operated a weighted average of 33 testing units. This compared to a weighted average of 37 units operated during the three and nine months ended December 31, 2007. The average day rate achieved by the testing division increased by 7% and 23% for the three and nine months ended December 31, 2008 as compared to the same period in the prior year. The increase in day rate achieved was a direct result of the Company's decision to market its services to larger, more established customers who are willing to pay a premium for the Company's services and comprehensive safety program.

Swabbing

The revenue reported from Enseco's swabbing division decreased to $1.7 million and $4.5 million for the three and nine months ended December 31, 2008, respectively, as compared to $2.3 million and $5.5 million for the three and nine months ended December 31, 2007. A significant portion of the decrease in revenue for this division is attributable to producers using service rigs to perform swabbing operations on their existing wells. The demand for service rigs has decreased in proportion to the slow down experienced in the oilfield services market overall, this has led service rig providers to lower their rates to the point where it is more economical for a service rig to remain on location than to replace it with a swabbing rig. For the three and nine months ended December 31, 2008 average utilization of the swabbing units was 29% and 24%, as compared to 38% and 30% for the three and nine months ended December 31, 2007. This division operated an average of 20 units for both the three and nine months ended December 31, 2008 and 2007. The average day rate achieved by the swabbing division decreased by 2% and increased 3% for the three and nine months ended December 31, 2008 as compared to the same periods in 2007.

Discontinued Operations

Discontinued operations relates to the operating results from Enseco's cased hole wireline division. Enseco entered into an asset exchange agreement date February 27, 2009 with a large multinational oilfield service company to exchange all of Enseco's cased hole wireline assets for all of this company's Canadian production testing assets. The agreement is effective March 1, 2009. Net loss from discontinued operations totaled $854 thousand and $2.5 million for the three and nine months ended December 31, 2008 as compared to $356 thousand and $7.4 million for the three and nine months ended December 31, 2007. The results of this division have been classified as discontinued operations in accordance with GAAP on a retroactive basis and the consolidated financial statements as at and for the periods ended December 31, 2008 and 2007 have been restated accordingly.

Consolidated

Operating loss from continuing operations decreased 39% to $1.4 million and decreased 50% to $4.9 million for the three and nine months ended December 31, 2008, respectively, as compared to $2.0 million and $9.8 million for the three and nine months ended December 31, 2007. The decreased operating loss is due to increased revenue from U.S. operations combined with the realization of costs savings from the elimination of numerous field and administrative positions within the Company's structure, as well as the realized savings from company wide wage reductions implemented in late 2007. Another factor in decreasing the operating loss for the nine months ended December 31, 2008 as compared to the same period in 2007 relates to the fact that amortization expense was $nil for the nine months ended December 31, 2008 as compared to $730 thousand for the same period in the prior year. Amortization was not recorded from June 30, 2007 forward as the Company incurred a fiscal first quarter impairment charge in 2007 on all of its intangible assets resulting in no future amortization charges.

The Corp. recorded net losses of $1.3 million and $5.2 million from continuing operations for the three and nine months ended December 31, 2008 as compared to net losses of $2.0 million and $27.5 million for the three and nine months ended December 31, 2007. During the three and nine months ended December 31, 2008, the Corp. recognized $64 thousand and $125 thousand, respectively, of current income tax expense relating to the income generated from Enseco's U.S. operations division. Whereas, income tax expense was $nil for the three and nine months ended December 31, 2007 due to the losses incurred during these periods. During the three and nine months ended December 31, 2008 the Corp. recognized a future income tax recovery of $189 thousand relating to the writeoff of its future income tax asset and corresponding deferred credit. There were no amounts for future income taxes recognized during the three and nine months ended December 31, 2007, as the Company recognized a valuation allowance which offset any potential future income tax recovery. Enseco continued to recognize a valuation allowance against any potential future income tax recovery until such time as it can demonstrate a consistent track record of profitability.

OUTLOOK

The current level of negativity and pessimism prevailing in the global financial and commodity markets is unprecedented in recent memory. The current market conditions show no near term catalysts for improvement and it is apparent that both service companies and producers are placing increasing importance on liquidity and capital preservation rather than deploying capital in growth oriented initiatives. The current winter drilling season has been exceptionally slow by historical standards and the competition for existing work has been fierce which has pushed pricing to low levels. Management is dealing with this negative set of circumstances by revisiting its cost structure and eliminating as much of the fixed component of costs as possible and proactively reducing staffing levels to appropriately reflect current activity levels. Enseco continues to focus its marketing and operational efforts on the United States marketplace with a view to growing its presence geographically as well as by diversifying its service line offering.

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, Midale, Saskatchewan and Minot, North Dakota, as well as a corporate and sales office located in Calgary. Enseco is led by an experienced management team currently offering well swabbing, production testing, open hole logging, and directional drilling services with a focus on continued value creation through accretive acquisitions and organic growth.

FORWARD-LOOKING STATEMENTS

Certain information and statements contained in this press release constitute forward-looking information, including, without limitation, expectations regarding the expansion of its US operations, the impact of the sale of its cased hole wireline division, future financial results, the nature and timing of growth within Enseco's various business divisions, expectations respecting the competitive position of such business divisions, and statements as to future economic and operating conditions, which are provided by management to enable investors to better understand our business, and such information may not be appropriate for other purposes. These forward-looking statements are based upon the opinions, expectations and estimates of management as at the date the statements are made including the Company's current budget (which is subject to change), access to additional capital, expectations relating to future economic and operating conditions, the competitive environment and opinions of third-party analysts respecting anticipated economic and operating conditions. These forward-looking statements are subject to a variety of risks and uncertainties and other factors that could cause actual events or outcomes to differ materially from those anticipated 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, Enseco's ability to attract and retain both customers and key personnel and Enseco's ability to access additional capital and maintain the support of its lender. Enseco has made assumptions regarding, but not limited to, commodity prices, foreign exchange rates, interest rates, the availability of skilled labour, and the timing, amount and funding of capital expenditures. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. Enseco's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements, or if any of them do so, what benefits that Enseco will derive therefrom. Enseco disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Neither the TSX Venture Exchange nor its Regulation Service Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this 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