Norex Exploration Services Inc.
TSX : NRX

Norex Exploration Services Inc.

March 11, 2009 20:25 ET

Norex Reports 2008 Fourth Quarter and Year End Results

CALGARY, ALBERTA--(Marketwire - March 11, 2009) - Norex Exploration Services Inc. ("Norex" or the "Company") (TSX:NRX) today announced its 2008 fourth quarter and full year operating and financial results.

Fourth quarter highlights:

- Despite very challenging industry conditions, seismic acquisition revenue in the fourth quarter of 2008 improved to $26.5 million, compared to $24.9 million in the fourth quarter of 2007. Total consolidated revenue, including subcontractor services, was $36.8 million compared to $34.4 million for the three months ended December 31, 2007.

- The Company generated EBITDA of $3.9 million and earnings before other items of $1.1 million in the fourth quarter compared to $5.3 million and $3.2 million respectively in the fourth quarter of the prior year.

- After reporting non-cash expenses related to goodwill impairment of $7.1 million, intangible asset impairment of $1.6 million, and stock-based compensation expense resulting from the cancellation of stock options of $0.9 million, the Company incurred a net loss of $8.2 million ($0.21 per share) in the fourth quarter of 2008 compared to net earnings of $2.3 million or ($0.06 per share) in the fourth quarter of 2007.

- The Company deployed up to five crews in the United States in the fourth quarter of 2008 and up to two crews in central and eastern Canada in the fourth quarter. This expanded geographic presence partially offset a further weakening of industry conditions in western Canada that limited our crew count to three crews.

- On October 7, 2008 the Company announced the signing of an agreement to provide seismic data acquisition services in the United States to WesternGeco, a Schlumberger business unit. Activity stemming from this agreement kept one crew busy throughout most of the fourth quarter.

- The Company's United States and eastern Canada ("USEC") division reported seismic acquisition revenue of $19.8 million in the fourth quarter compared to $13.0 million for the same period in 2007. Gross profit was $5.1 million, or 26% of seismic acquisition revenue, compared to $4.6 million, or 36% of seismic acquisition revenue, for the three months ended December 31, 2007. The requirement to rent additional equipment, particularly vibroseis equipment, an increase in weather-related standby days, and the completion of more lower margin 2D work negatively impacted our field margins.

- Western Canadian operations generated $6.7 million of seismic acquisition revenue for the three months ended December 31, 2008 compared to $11.8 million for the three months ended December 31, 2007. The Company experienced lower than anticipated activity levels in western Canada combined with an increase in weather-related standby days and pricing pressures for the Company's services.

"The precipitous fall in oil and natural gas prices combined with constrained equity and debt markets had a marked effect on the capital spending of our customers, oil and gas exploration and production companies, over the latter half of 2008. While we were generally pleased with our performance in the first two quarters of 2008, our performance in the third and fourth quarters was below our expectations. The Company is preparing for a very challenging year, evidenced by a slower first quarter of 2009. We have implemented significant cost cutting measures and will focus on efficiencies as we continue to look for expansion opportunities in the U.S." stated Mr. Paul Crilly, President and CEO.

2008 highlights:

- Consolidated total revenue for the year ended December 31, 2008 increased $3.1 million to $112.9 million compared to $109.8 million for the same period in 2007. Consolidated seismic acquisition revenue was $79.6 million for the year ended December 31, 2008 compared to $69.9 million for the year ended December 31, 2007. The increase in seismic acquisition revenue was attributable to relatively strong first quarter results in western Canada and continued growth throughout 2008 in the Company's USEC division. The Company was particularly active in the Utica shale gas play in Quebec, providing a further opportunity for geographic expansion.

- The Company was successful in expanding its service offering to include the provision of three component ("3C") seismic data recording services. This next generation of seismic data acquisition technology allows customers to acquire and utilize shear wave data in addition to the conventional pressure wave data. Shear wave data is particularly valuable to understanding the unique geophysical aspects of the unconventional resource plays in North America.

- The USEC division generated seismic acquisition revenue of $43.2 million for the twelve months ended December 31, 2008 compared to $25.9 million for the same period in 2007. Gross profit was $10.1 million, or 23% of seismic acquisition revenue in 2008, compared to $8.3 million, or 32% of seismic acquisition revenue, for the year ended December 31, 2007.

- On July 7, 2008 the Company purchased certain assets from a competitor in the U.S., Polaris Explorer USA Inc. This acquisition provided further depth to our customer base, and added Denver-based management personnel and field operating crews. The Company was particularly active in the Uinta Basin shale gas play in Utah in the latter half of 2008 as a result of this transaction.

- Western Canadian operations generated $36.3 million in seismic acquisition revenue compared to $44.0 million for the year ended December 31, 2007. Gross profit was $7.4 million, or 20% of seismic acquisition revenue, compared to $10.5 million, or 24% of seismic acquisition revenue, in 2007.

- EBITDA for the year ended December 31, 2008 was $10.9 million ($0.28 per share), compared to $13.3 million ($0.34 per share) for the year ended December 31, 2007.

- The consolidated net loss for the year ended December 31, 2008 was $8.2 million ($0.21 per share) compared to consolidated net earnings of $3.1 million ($0.08 per share) for the year ended December 31, 2007. Included in the current year loss are non-cash charges for goodwill impairment of $7.1 million, $1.6 million for intangible asset impairment, $0.9 million for stock-based compensation expense, an increase in depreciation and amortization resulting from the prior year capital program, an increase in general and administrative costs in the USEC division, the total of which was partially offset by foreign exchange gains in the year.

- During the year ended December 31, 2008, the Company incurred $15.3 million of capital expenditures compared to $9.1 million for the year ended December 31, 2007. The increase over the prior year relates to the purchase of 10 new vibroseis machines increasing the fleet of vibroseis machines to 35 units, and the purchase of an additional 5,000 ARAM-ARIES® recording channels increasing the number of channels owned by the Company to 17,300.

- We further strengthened our management team with the addition of Mr. Graham Reid, CA, Vice President of Finance and CFO. Mr. Reid brings extensive oilfield service experience to Norex, and has the requisite technical skills to meet the ever changing regulatory demands of a public company.

Consistent with our focus on expanding our U.S. operations, Randy Luckiw, VP U.S. Operations, relocated to our Denver, Colorado office. In addition, Mr. Steve Solokis also joined our organization as our Vice President, Operations in the United States. Mr. Solokis is a well respected industry veteran in the Rocky Mountain region of the United States, and has been instrumental in growing our business in this area.



Financial Highlights

Three Months % Year Ended %
Ended Dec. 31 Increase Dec. 31 Increase
($000's, except (Unaudited) (decrease) (Unaudited) (decrease)
per share data) 2008 2007 2008 2007
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Revenue 36,773 34,395 7 112,945 109,803 3
Seismic acquisition
revenue(5) 26,503 24,880 7 79,568 69,894 14
Gross Profit(2) 5,714 6,714 (15) 17,544 18,821 (7)
Earnings before
other items(4) 1,136 3,232 (65) 1,271 5,570 (77)
EBITDA(1) 3,865 5,252 (26) 10,935 13,257 (18)
- Per share $0.10 $0.14 (29) $0.28 $0.34 (18)
Net (loss)
Earnings (8,185) 2,347 (8,182) 3,108
- Per share,
basic and
diluted ($0.21) $0.06 ($0.21) $0.08
Working capital 1,612 1,732 1,612 1,732
Total long term
borrowings(3) 14,695 10,099 14,695 10,099
Capital
expenditures 664 2,041 15,275 9,062
Weighted avg.
shares
outstanding(000's) 38,606 38,601 38,603 38,597
Shares outstanding,
end of
period(000's) 38,606 38,601 38,606 38,601
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Outlook

The current weakness in North American natural gas prices is due, in part, to the increased production from highly prolific unconventional gas plays in North America. These highly fractured and faulted reservoirs require high resolution seismic data to overcome the technical challenges of drilling and producing from these basins. While overall gas-directed drilling activity is currently slow in response to increased supplies from these shale gas plays and general demand destruction in North America, the lower costs associated with these plays should result in their resurgence of activity first. When this occurs, seismic industry activity should be one of the first service lines to benefit from this recovery.

While we remain one of the largest seismic acquisition companies in western Canada, and we look for additional opportunities to consolidate the industry further, our current market share in the United States continues to provide us with organic growth opportunities. As exploration and production companies in the United States focus their efforts in more challenging regions such as Utah, Colorado and Pennsylvania, our experience gained from working in the rugged terrains of northeast British Columbia and northwest Alberta becomes increasingly important. We consider this to be a key competitive advantage as we continue to grow our market share in these regions.

Current economic conditions suggest that weakness in commodity prices and reductions in our customers' spending plans will persist until late 2009 as a minimum. The Canadian Association of Oilwell Drilling Contractors forecast 2009 drilling activity to fall 34% to 11,200 wells drilled in western Canada while the current US rig count for 2009 has fallen 38% from its peak in 2008. The Company has implemented significant cost cutting measures and has asked our employees to do more with less. Our dedicated team has risen to many challenges in the past, and their hard work and commitment will be evident during this current industry slow down.

Notes

(1) "EBITDA" is a financial measure that does not have any standardized meaning prescribed by Canadian generally accepted accounting principles ("GAAP") and may not be comparable to similar measures presented by other companies. EBITDA is a measure of the Company's operating profitability. EBITDA provides an indication of the results generated by the Company's principal business activities prior to how these activities are financed, assets are amortized or how the results are taxed in various jurisdictions. EBITDA is calculated from the Consolidated Statements of (Loss) Earnings and is calculated as net earnings (loss) plus or minus interest expense, income taxes, depreciation and amortization, stock based compensation, gains or losses on disposal of equipment and foreign exchange gains or losses.

(2) "Gross profit" is a financial measure that does not have any standardized meaning prescribed by Canadian generally accepted accounting principles ("GAAP") and may not be comparable to similar measures presented by other companies. Gross profit is provided to assist investors in determining Norex's ability to generate earnings from its field operations and is calculated by subtracting direct field expenses and subcontractor expenses from revenue. These measures do not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies.

(3) Includes long term debt and capital lease obligations, including current portions thereof.

(4) "Earnings before other items" is a supplemental measure of profitability on the Consolidated Statements of (Loss) Earnings which provides comparability of operating results to the prior year. Earnings before other items is calculated from the Consolidated Statements of (Loss) Earnings as revenue less operating expenses (direct costs and subcontractor expenses), general and administrative expenses, depreciation and amortization, and interest expense.

(5) "Seismic acquisition revenue" is revenue generated on services performed directly by Norex. A significant portion of the Company's revenue includes the provision of subcontracted services from which the Company generates a nominal profit. Prior to seismic data acquisition, many customers look to Norex to procure and manage third-party services related to the use of shot hole drilling, ground surveying and line-clearing. The Company is reimbursed for these expenses by its clients, plus an administration fee. In accordance with generally accepted accounting principles, these subcontract revenue and costs are included at their gross amounts in revenue and expenses. Because subcontracted services as a percentage of total revenue will vary from job to job, they may distort the movement of the actual gross margins for the seismic acquisition recording services performed directly by Norex. In order to assist readers to more clearly understand the changes in gross profits for the services directly provided by Norex, and understand the profitability of the seismic data acquisition services provided by Norex, the following table details gross profit as a percentage of seismic acquisition revenue. (note: the nominal administration fee earned on the "flow-through" of subcontracted services has been included in seismic acquisition revenue):



----------------------------------------------------------------------------
Three Months Year Ended
Ended December 31 December 31
($000's) 2008 2007 2008 2007
----------------------------------------------------------------------------
Seismic acquisition revenue(A) 26,503 24,880 79,568 69,894
Subcontractor revenue 10,270 9,515 33,377 39,909
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Total revenue(B) 36,773 34,395 112,945 109,803
Less:
Direct costs 20,789 18,166 62,024 51,073
Subcontractor costs 10,270 9,515 33,377 39,909
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Gross Profit(C) 5,714 6,714 17,544 18,821
Gross Profit as % of seismic
acquisition rev(C ÷ A) 21.6% 27.0% 22.0% 26.9%
Gross Profit as % of total
revenue(C ÷ B) 15.5% 19.5% 15.5% 17.1%
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NOREX EXPLORATION SERVICES INC.
Consolidated Balance Sheets
As at December 31, 2008 and December 31, 2007

(in thousands of dollars)
(unaudited)

----------------------------------------------------------------------------
----------------------------------------------------------------------------
December 31 December 31
2008 2007
----------------------------------------------------------------------------

Assets

Current assets:
Cash $ 3,176 $ -
Accounts receivable 24,812 29,238
Prepaid expenses and deposits 1,152 455
Income taxes receivable 3,092 -
Future income taxes - 586
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32,232 30,279

Property and equipment 44,582 34,075
Goodwill - 7,097
Intangible assets 1,368 2,257
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$ 78,182 $ 73,708
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Liabilities and Shareholders' Equity

Current liabilities:
Operating line of credit $ 5,591 $ 4,745
Accounts payable and accrued liabilities 17,519 15,916
Income taxes payable 954 1,264
Current portion of long-term debt 2,875 1,523
Current portion of capital lease obligations 3,681 5,099
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30,620 28,547

Long-term debt 7,719 -
Capital lease obligations 420 3,477
Future income taxes 4,623 3,338
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43,382 35,362

Shareholders' equity:
Share capital 23,358 23,352
Contributed surplus 3,047 1,289
Accumulated other comprehensive income 2,872 -
Retained earnings 5,523 13,705
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34,800 38,346

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$ 78,182 $ 73,708
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NOREX EXPLORATION SERVICES INC.

Consolidated Statements of (Loss) Earnings and Comprehensive (Loss) Income

(in thousands of dollars, except per share amounts)
(unaudited)

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Year ended
December 31 December 31
2008 2007 2008 2007
----------------------------------------------------------------------------

Revenue $ 36,773 $ 34,395 $ 112,945 $109,803

Operating expenses:
Direct costs 20,789 18,166 62,024 51,073
Subcontractors 10,270 9,515 33,377 39,909
General and administrative
expenses 1,849 1,462 6,609 5,564
Depreciation and amortization 2,439 1,788 8,700 6,670
Interest expense 290 232 964 1,017
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Earnings before other items 1,136 3,232 1,271 5,570
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Other items:
Loss on disposal of property and
equipment 132 35 73 137
Foreign exchange (gain) loss (1,329) (102) (2,463) 451
Stock-based compensation 1,060 264 1,760 725
Goodwill and intangible asset
impairment 8,697 - 8,697 -
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8,560 197 8,067 1,313

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(Loss) earnings before income taxes (7,424) 3,035 (6,796) 4,257

Income taxes:
Current (recovery) (263) 1,250 (485) 1,415
Future (reduction) 1,024 (562) 1,871 (266)
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761 688 1,386 1,149
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Net (loss) earnings (8,185) 2,347 (8,182) 3,108

Cumulative translation adjustment 2,239 - 2,872 -
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Comprehensive (loss) income (5,946) 2,347 (5,310) 3,108
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Net (loss) earnings per share:
Basic and Diluted $ (0.21) $ 0.06 $ (0.21) $ 0.08
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NOREX EXPLORATION SERVICES INC.
Consolidated Statements of Retained Earnings

(in thousands of dollars)
(unaudited)
----------------------------------------------------------------------------
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Three months ended Year ended
December 31 December 31
2008 2007 2008 2007
----------------------------------------------------------------------------

Retained earnings, beginning of
period $ 13,708 $ 11,358 $ 13,705 $ 10,597

Net (loss) earnings for the period (8,185) 2,347 (8,182) 3,108
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Retained earnings, end of period $ 5,523 $ 13,705 $ 5,523 $ 13,705
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NOREX EXPLORATION SERVICES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of dollars)
(unaudited)
----------------------------------------------------------------------------
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Three months ended Year ended
December 31 December 31
2008 2007 2008 2007
----------------------------------------------------------------------------

Cash provided by (used in):

Operations:
Net (loss) earnings for the
period $ (8,185) $ 2,347 $ (8,182) $ 3,108
Items not involving cash:
Depreciation and amortization 2,439 1,788 8,700 6,670
Stock-based compensation 1,060 264 1,760 725
Loss on disposal of property and
equipment 132 35 73 137
Goodwill and intangible asset
impairment 8,697 - 8,697 -
Future income taxes (reduction) 1,024 (562) 1,871 (266)
Unrealized foreign exchange
(gain) loss (1,572) (158) (2,644) 138
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3,595 3,714 10,275 10,512

Change in non-cash operating
working capital (3,168) (6,103) 1,588 (3,034)
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427 (2,389) 11,863 7,478

Investing:
Acquisition of property and
equipment (664) (1,437) (15,275) (5,886)
Proceeds on disposal of
equipment 173 119 604 259
Acquisition of intangible
asset - - (1,025) -
Change in non-cash working
capital (3,251) - 1,241 -
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(3,742) (1,318) (14,455) (5,627)

Financing:
Issuance of common shares - net - - 4 104
Increase operating line of
credit (net) 1,159 4,745 846 3,355
Proceeds on long-term debt 4,000 - 11,500 -
Repayment of long-term debt (726) 305 (2,429) (591)
Repayment of capital lease
obligations (1,063) (1,941) (4,475) (5,970)
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3,370 3,109 5,446 (3,102)

Effect of exchange rate
changes on
cash position 179 - 322 -
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Increase (decrease) in cash 234 (598) 3,176 (1,251)
Cash, beginning of period 2,942 598 - 1,251
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Cash, end of period $ 3,176 $ - $ 3,176 $ -
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Supplemental cash flow
information:
Interest and financing costs paid $ 298 $ 231 $ 954 $ 1,017
Taxes paid 670 - 3,303 69
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Forward-looking Statements

Certain information set forth in this news release, including management's assessment of the Company's future plans and operations, contains forward-looking statements, which are based on the Company's current internal expectations, estimates, projections, assumptions and beliefs, which may prove to be incorrect. Some of the forward-looking statements may be identified by words such as "outlook", "expects", "anticipates", "believes", "projects", "intends", "continues", "estimates", "objective", "ongoing", "may", "will", "should", "might", "plans" and similar expressions. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause the Company's actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed or implied by such forward-looking statements. The Company provides seismic data acquisition services and is exposed to a number of risks and uncertainties that are common to companies in the same business.

These risks and uncertainties include demand for the Company's services which is affected by, among other things, the speculative nature of resource exploration and development activities, changes in commodity prices, general economic, market and business conditions; changes in customer exploitation budgets; competition for capital and skilled personnel and shortages thereof; the competitive nature of the seismic industry; the ability to keep pace with constantly changing technology; uncertainty in various factors in the oil and gas industry, including the ability to comply with current and future health, safety, environmental and other laws; the general risk inherent to seismic data acquisition activities; risks relating to expansion including pressure on operational and technical resources; risks relating to the reliance on key officers, employees and consultants, including an unexpected loss or departure of any one of them; cancellation of work previously awarded to the Company; the possibility of a conflict of interest arising for the directors and officers of Norex who are participants in other sectors of the oil and gas industry; risks relating to having shareholders who are able to exert influence over the affairs of Norex; the possibility of the need for future financing, which may not be available on favourable terms; the risk of not renewing current credit facilities; the volatility of, and lack of liquidity in, the trading market for the shares of Norex; actions by governmental or regulatory authorities including increasing taxes and changes in other regulations; and the occurrence of unexpected events involved in resource exploration including, but not limited to, adverse weather conditions and wind. Adverse weather or field operating conditions can also negatively impact field productivity and, as a result, the Company's overall profitability. Certain jobs awarded to the Company are on a "turnkey" pricing basis where the Company bears the risk of lost productivity, increased input and/or subcontractor costs. As a result, factors reducing field productivity and any in increases in the Company's input costs could have a material affect on the Company's profitability.

The forward-looking information and statements included in this press release are not guarantees of future performance and should not be unduly relied upon. Forward-looking statements are based on current expectations, estimates and projections that involved a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated and described in the forward-looking statements.

The information contained in this press release should not be considered all-inclusive as it excludes changes that may occur in general economic, political and environmental conditions. The Company cautions that actual performance will be affected by a number of factors, many of which are beyond its control. Investors are cautioned against attributing undue certainty to forward-looking statements. The forward-looking information and statements contained in this press release speak only as of the date hereof and, subject to its obligations under applicable law, the Company does not intend, and does not assume any obligation, to update these forward looking statements if conditions or opinions should change.

Norex, and its divisions Conquest Seismic Services and US subsidiary, Conquest Seismic Services, Inc., provide premium 2D, 3D, 4D and 3C land-based seismic data acquisition services in Canada and the United States. Norex is the largest operator of ARAM-ARIES® recording equipment in Canada and provides state-of-the-art technology to the North American oil and gas industry. Norex trades on the TSX under the symbol "NRX".

Contact Information

  • Norex Exploration Services Inc.
    Mr. Paul Crilly
    President and CEO
    (403) 216-5929
    or
    Norex Exploration Services Inc.
    Mr. Graham Reid, CA
    VP Finance and CFO
    (403) 216-5929