Essential Energy Services Trust
TSX : ESN.UN

Essential Energy Services Trust

March 17, 2008 18:00 ET

Essential Energy Services Trust Releases Fourth Quarter and Year End Results

CALGARY, ALBERTA--(Marketwire - March 17, 2008) - Essential Energy Services Trust (TSX:ESN.UN) ("Essential", or the "Trust") releases the operational and financial results for the three months and year ended December 31, 2007 and announces it has filed the complete Management Discussion and Analysis and audited consolidated financial statements for the year ended December 31, 2007 on SEDAR. An electronic copy of these documents may be obtained on the Trust's SEDAR profile at www.sedar.com.

These operational and financial results contain the results of the energy services division of Avenir Diversified Income Trust ("Avenir", TSX: AVF.UN) for the periods prior to May 31, 2006.



Fourth Quarter and Year End 2007 Financial Highlights

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Three Months Ended Year Ended
December 31 December 31
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$ thousands,
except per
unit amounts % %
and margins 2007 2006 change 2007 2006 change
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Financial
Results
Revenue 26,741 32,791 (18)% 112,415 96,308 17%

EBITDAC(1) 4,826 10,642 (55)% 24,952 30,174 (17)%
EBITDAC
margin (%)(1) 18% 32% 22% 31%

Funds from
operations(2) 3,791 9,434 (60)% 20,001 27,221 (27)%

Net income
(loss) (38,479)(6) 5,650 (781)% (36,204)(6) 12,785 (383)%
Net income
(loss)
margin (%) (144)% 17% (32)% 13%

Distributions
to Avenir - - - - 7,190 n/a
Distributions
to
unitholders 6,453 6,901 (6)% 30,079 15,960 88%
Payout ratio(3) 170% 73% 150% 85%

Unit
Information
(Diluted)
Weighted
average
number
of units
outstanding 35,269 30,244 17% 32,233 29,949 8%

EBITDAC per
unit Funds 0.14 0.35 (60)% 0.77 1.01 (24)%
from
operations
per unit 0.11 0.31 (65)% 0.62 0.91 (32)%
Net income
(loss) per
unit (1.09) 0.19 (674)% (1.12) 0.43 (360)%
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Dec. 31, Dec. 31,
2007 2006
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Financial
Position and
Liquidity
Working
capital
(excluding
debt)(4) 1,533 7,596
Working
capital
ratio(4) 1.1:1 1.4:1
Net debt(5) 56,665 49,068
Unitholders'
equity 115,180 147,007
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Notes 1 to 6 - Please refer to the Notes to the Financial Highlights at the
end of this release.


Overview

2007 can best be characterized as a difficult financial year for the entire Canadian energy services industry. Despite such an environment, Essential overcame significant challenges and completed four asset acquisitions that were absorbed by existing operations with minimal addition to administrative overhead, thereby significantly strengthening our core business units. In June 2007, Essential completed an equity financing resulting in net proceeds of $32.6 million and increased the Trust's available lines of credit with our bankers from $85 million to $110 million.

Equipment utilization decreased through the latter part of the year relative to the corresponding periods in 2006 while fixed operating and general and administrative expenses increased slightly due to growth of the equipment fleet. As a result revenue increased in 2007 by 17%, but EBITDAC decreased by 17% compared to 2006 despite significant efforts to contain costs at all levels in the organization. A dramatic slowdown in oilfield activity in Alberta in the fourth quarter following the announcement of proposed increases to the Alberta oil and gas royalty rates and generally reduced activity levels due to low natural gas prices in North America and a rapidly rising Canadian dollar to U.S. dollar exchange rate caused a significant drop in utilization rates for Essential. Throughout this period of decreased activity, Essential did not experience significant pressure on the hourly and daily rates charged to our customers. However, the general slowdown did result in some modest discounting for our larger customers which had a slightly negative impact on the EBITDAC margin throughout the year.

Although management continues to believe in the long-term fundamentals of crude oil and natural gas activities throughout the Western Canadian Sedimentary Basin ("WCSB"), a combination of recent events transpired to indicate that goodwill may be impaired. These recent events include the September 2007 Alberta Royalty Review Report, a strengthening Canadian dollar relative to the U.S. dollar and further delays in the expected recovery of natural gas prices. Management is required to test for goodwill impairment on at least an annualized basis. The result of this analysis indicates an impairment of goodwill of $35.1 million in Essential's rigs division which was recognized for the year ended December 31, 2007.

Streamlining of operations to realize on potential operating synergies to both enhance revenue and contain costs resulted in a reduction in the number of business units from ten at the beginning of 2007 to six at year end while also absorbing the assets of four acquisitions during the year. The majority of Essential's field employees are paid on an hourly wage with no minimum guarantees resulting in a flexible variable cost structure. While these wage structures are aggressive and effective, such flexible cost structures were not sufficient to offset the impact of reduced oilfield activity. As a result, Essential's Board of Directors, on the recommendation of management, decided to reduce the monthly distribution payable to unitholders from $0.083 per unit to $0.05 per unit beginning with the November 2007 distribution to preserve the financial position of the Trust.

In October 2007 management, with the approval of Essential's Board of Directors, initiated discussions about a strategic combination with Builders Energy Services Trust ("Builders"). These discussions culminated in the announcement on January 31, 2008 of the merger of Essential and Builders. The merger will result in a much larger, more efficient and stronger entity that will enjoy the advantages of critical mass in key business lines, annual cost reductions of approximately $6.0 million per year, improved market relevance and the operational strength to pursue new markets and opportunities. The merger will be effected through a plan of arrangement whereby Essential will offer Builders' unitholders 1.25 Essential trust units for 1 trust unit of Builders. This deal is expected to close in April 2008 subject to approval by Builders' unitholders

Outlook

Oilfield activity has seen improvement in January and February 2008 due to higher oil and natural gas prices and new activity related to the Bakken play in southeast Saskatchewan as well as the Montney tight gas play and the Horn River shale gas play, both in northeast British Columbia. Essential has operations in all these areas and has moved aggressively to relocate equipment and manpower from Alberta into these areas to take advantage of the significantly increased demand for production services.

The merger of Essential and Builders is scheduled to close in April 2008 at which time the advantages of the merger will be enjoyed by all Essential unitholders. Essential is optimistic about the propects for the remainder of 2008, but will continue to prudently manage its business should such conditions not materialize.

Selected Financial Information

Selected financial information for the year ended December 31, 2007 are attached below with the detailed audited consolidated financial statements and the Management Discussion and Analysis available on the company's profile on SEDAR at www.sedar.com or the Trust's website at www.essentialenergy.ca.



Essential Energy Services Trust

CONSOLIDATED BALANCE SHEETS

As at,
($ in thousands)
December 31, December 31,
2007 2006
$ $
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ASSETS
Current

Cash - 1,110
Accounts receivable and prepaid expenses 22,889 24,214
Materials and supplies 1,970 1,782
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24,859 27,106

Property and equipment 97,806 96,741
Intangibles 13,959 10,759
Goodwill 60,080 88,575
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196,704 223,181
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LIABILITIES AND UNITHOLDERS' EQUITY
Current
Bank indebtedness 14,408 10,940
Accounts payable and accrued liabilities 7,155 6,269
Distributions payable 1,763 2,301
Current portion of capital lease obligations 20 235
Current portion of long-term debt 11,559 11,347
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34,905 31,092
Capital lease obligations - 17
Long-term debt 46,088 45,065
Future income tax liability 531 -
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81,524 76,174
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Unitholders' equity
Unitholders' capital 192,041 159,423
Contributed surplus 2,480 642
Accumulated deficit (79,341) (13,058)
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115,180 147,007
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196,704 223,181
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CONSOLIDATED STATEMENTS OF
OPERATIONS, COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED DEFICIT

($ in thousands)
For the year ended
----------------------------------------------------------------------------
December 31, December 31,
2007 2006
$ $
----------------------------------------------------------------------------
REVENUE
Energy services revenue 112,415 96,308
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EXPENSES
Operating expenses 68,548 53,807
General and administrative 18,915 12,327
Stock-based compensation 1,838 642
Interest on short-term debt and bank fees 1,296 685
Interest on long-term debt 3,966 2,365
Depreciation and amortization 18,440 13,286
Impairment of goodwill 35,085 -
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148,088 83,112
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Income (loss) before income taxes and
non-controlling interest (35,673) 13,196
Income taxes
Future income taxes 531 -
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Income before non-controlling interest (36,204) 13,196
Non-controlling interest - 411
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Net income (loss) and comprehensive income
(loss) for the year (36,204) 12,785
Accumulated deficit, beginning of year (13,058) (2,693)
Distributions to Avenir Diversified Income Trust - (7,190)
Distributions to unitholders (30,079) (15,960)
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Accumulated deficit, end of year (79,341) (13,058)
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Net income (loss) per unit
Basic (1.12) 0.47
Diluted (1.12) 0.43
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CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)
---------------------------
Year ended
December 31, December 31,
2007 2006
$ $
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OPERATING ACTIVITIES
Net income (loss) for the year (36,204) 12,785
Add non-cash items:
Depreciation and amortization 18,440 13,286
Non-controlling interest - 411
Future income taxes 531 -
Stock-based compensation 1,838 642
Impairment of goodwill 35,085
Loss (gain) on sale of property and equipment 311 97
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20,001 27,221
Change in non-cash working capital 2,466 (7,552)
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Cash provided by operating activities 22,467 19,669
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FINANCING ACTIVITIES
Issuance of trust units, net of costs 32,618 -
Investment by Avenir Diversified Income Trust - 14,279
Distributions to Avenir Diversified Income Trust - (7,890)
Distributions to unitholders (30,617) (13,659)
Cost of formation of Essential Energy Services
Trust - (5,104)
Increase in bank indebtedness 3,468 59
Repayments of capital lease obligations (102) (139)
Increase in long-term debt 2,141 55,236
Repayments of long-term debt (906) (4,568)
Change in non-cash working capital (538) -
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Cash provided by financing activities 6,064 38,214
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INVESTING ACTIVITIES
Purchase of energy service businesses (22,622) (30,099)
Purchase of property and equipment (8,327) (31,072)
Sale of property and equipment 1,081 1,835
Change in non-controlling interest - (524)
Change in non-cash working capital 227 317
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Cash used in investing activities (29,641) (59,543)
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Decrease in cash during the year (1,110) (1,660)
Cash, beginning of year 1,110 2,770
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Cash, end of year - 1,110
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Cash interest paid 4,643 2,821
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About Essential

Essential is an energy service trust that provides post drilling production maintenance and enhancement services to oil and gas producers across western Canada from northeast British Columbia to southeast Saskatchewan including service rigs, coil tubing, rod rigs, swab rigs, vacuum trucks, pressure trucks, tank trucks, hydro-vacs, steaming and hot oiling along with other related services.

Notes to Financial Highlights

(1) EBITDAC is defined as earnings before non-controlling interests, interest, taxes, depreciation, amortization, goodwill impairment and stock-based compensation expense. We believe in addition to net income (loss), EBITDAC is a useful supplemental earnings measure as it provides an indication of the financial results generated by our principal business activities prior to consideration of how these activities are financed or how the results are taxed in various jurisdictions and before non-cash amortization expenses, goodwill impairment and stock-based compensation expense. EBITDAC margin is calculated as EBITDAC divided by revenue.

(2) Funds from operations is calculated by taking net income (loss) and adding back non-cash balances such as depreciation and amortization, gain (loss) on sale of property and equipment, goodwill impairment, stock-based compensation expense and non-controlling interest.

(3) Payout ratio is calculated by dividing distributions to unitholders plus distributions to Avenir Diversified Income Trust by funds from operations.

(4) Working capital (excluding debt) is calculated by taking current assets less current liabilities excluding current portions of capital lease obligations, and long-term debt. Working capital ratio is calculated by taking current assets divided by current liabilities excluding current portions of capital lease obligations, and long-term debt.

(5) Net debt is calculated by taking current assets less total liabilities.

(6) Net loss for the three months and year ended December 31, 2007 is primarily due to a goodwill impairment charge of $35.1 million.

Forward Looking Statements: Certain information set forth in this document, including a discussion of future plans and operations, contains forward looking statements that involve substantial known and unknown risks and uncertainties. These forward looking statements are subject to numerous risks and uncertainties, some of which are beyond the Trust's and management's control, including but not limited to, the impact of general economic conditions, industry conditions, fluctuation of commodity prices, fluctuation of foreign exchange rates, environmental risks, industry competition, availability of qualified personnel and management, stock market volatility, timely and cost effective access to sufficient capital from internal and external sources. Actual results, performance or achievement could differ materially from those expressed in or implied by, these forward looking statements.

The TSX Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this release.

Contact Information

  • Essential Energy Services Trust
    James Burns
    President & CEO
    (403) 263-6778
    (403) 263-6737 (FAX)
    or
    Essential Energy Services Trust
    Duncan Au
    Vice President - Business Development & CFO
    (403) 263-6778
    (403) 263-6737 (FAX)
    or
    Essential Energy Services Trust
    Suite 950, 330 - 5th Ave SW
    Calgary, Alberta T2P 0L4