Norex Exploration Services Inc.
TSX : NRX

Norex Exploration Services Inc.

May 14, 2008 19:31 ET

Norex Reports $4.6 Million in First Quarter Earnings

CALGARY, ALBERTA--(Marketwire - May 14, 2008) - Norex Exploration Services Inc. (TSX:NRX) ("Norex" or the "Company") today announced a 5% increase in net earnings to $4.6 million for the first quarter of 2008 (or $0.12 per share) compared to $4.3 million (or $0.11 per share) for the first quarter of 2007. Consolidated revenue, which includes revenue from procuring third party sub-contractor services, declined to $43.6 million in the first quarter of 2008 from $49.7 million in the first quarter of 2007. The decrease in revenue was primarily due to Norex's customers requiring fewer low margin sub-contractor services from Norex, either as a result of incurring these costs directly themselves, or due to the fact that Norex provided more vibroseis-based data acquisition services. Vibroseis seismic data acquisition involves the utilization of Norex's own equipment to generate the acoustic shock wave on surface and a result, Norex earns a more attractive margin for the provision of these services. Alternatively, dynamite-based seismic acquisition requires third party services to drill shallow holes for the explosive charges, upon which Norex earns a small margin. Revenue on the services performed directly by Norex and excluding low margin sub-contractor services, increased by 12% in the first quarter of 2008 compared to the same period of the prior year, due to growth in the Company's United States operations. Total revenue in the United States and eastern Canada ("USEC") division was $8.7 million compared to $2.8 million in the first quarter of 2007. Consolidated EBITDA(1) increased to $8.7 million in the first quarter of 2008 compared to $8.5 million in the same period of 2007.

"Our momentum continued from the fourth quarter of 2007 into the first quarter of this year. These solid financial results are attributable to successful expansion in the U.S. and the maintenance of our margins in western Canada in the midst of challenging industry conditions. The strength of our market position in western Canada enabled us to field seven crews in this region throughout the first quarter. Our operational management has been diligent in controlling costs and our field personnel did an excellent job in achieving productivity and safety targets this winter," commented Mr. Paul Crilly, President and CEO.

First quarter highlights:

- Consolidated gross profit(2) increased to $10.3 million, or 24% of revenue, compared to $10.0 million, or 20% of revenue in the first quarter of 2007. Gross profit as a percentage of seismic acquisition revenue(4) decreased to 33% compared to 36% in the first quarter of 2007 (see note 4 below for a description of this calculation). As a percentage of seismic acquisition revenue, gross profit decreased in part as a result of reduced pricing in western Canada.

- The USEC division achieved total revenue of $8.7 million compared to $2.8 million for the same period in 2007. Gross profit was $1.3 million, or 19% of seismic acquisition revenue, compared to $0.2 million, or 10% of seismic acquisition revenue, for the three months ended March 31, 2007. The first quarter is typically the slowest quarter for the USEC division.

- Revenue in western Canada during the first quarter of 2008 included completion of a $6.3 million contract with a major oilsands customer in northern Alberta. Gross profit in western Canada was $9.0 million, or 37% of seismic acquisition revenue in the first quarter of 2008, compared to $9.7 million, or 38% of seismic acquisition revenue, in the first quarter of 2007.

- Consolidated EBITDA was $8.7 million, or $0.23 per share, in the first quarter of 2008, compared to $8.5 million, or $0.22 per share, in the same period of 2007.

- The Company recorded consolidated net earnings of $4.6 million ($0.12 per share) compared to net earnings of $4.3 million ($0.11 per share) in the three months ended March 31, 2007.

- Amidst depressed industry conditions in Western Canada, Norex has maintained a solid balance sheet with $5.1 million of working capital and conservative debt levels with total long term debt at March 31, 2008 representing approximately 62% of twelve month trailing EBITDA. The Company is well positioned to capitalize on expansion opportunities as they arise.

- The Company completed its first large scale three component ("3C") seismic acquisition program with one of its U.S. based customers. 3C technology allows clients to acquire shear wave seismic data in addition to the conventional pressure wave data currently captured and processed for seismic imaging.

- On March 25, 2008, Norex announced its intention to purchase an additional 5,000 channels of ARAM-ARIES recording equipment. Including this purchase, which was made in April of 2008, Norex now has 17,300 channels of recording equipment.

- Also on March 25, 2008, Norex appointed Mr. Randy Luckiw as Vice President of the Company's United States and Eastern Canada division. Mr. Luckiw has 23 years of experience in the seismic acquisition industry, and has been instrumental in Norex's successful expansion in the United States.

The information contained in this news release is in summary form and should be read in conjunction with the Company's consolidated financial statements and Management's Discussion and Analysis for the periods ended March 31, 2008 and 2007. Those documents are available through the Internet on the Canadian System for Electronic Document Analysis and Retrieval (SEDAR) which can be accessed at www.sedar.com.



Financial Highlights

Three Months Ended
March 31 %
(Unaudited) Increase
($000's, except per share data) 2008 2007 (decrease)
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Revenue 43,624 49,684 (12%)
Seismic acquisition revenue(4) 31,056 27,693 12%
Gross Profit (2) 10,279 9,962 3%
EBITDA (1) 8,725 8,524 2%
- Per share $ 0.23 $ 0.22 5%
Net Earnings 4,552 4,316 5%
- Per share, basic $ 0.12 $ 0.11 9%
- Per share, diluted $ 0.12 $ 0.11 9%
Working capital 5,104 5,453 (6%)
Total long term borrowings (3) 8,423 12,841 (34%)
Capital expenditures 2,649 3,116 (15%)

Weighted avg. shares outstanding (000's) 38,601 38,583 -
Shares outstanding, end of period (000's) 38,601 38,601 -
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Outlook

Currently, Norex has greater geographical and customer diversity than any time in the past. Management's goal is to achieve an equal revenue split between western Canada and the USEC divisions.

Management's outlook for the second half of 2008 is very positive. Higher natural gas and crude oil prices are anticipated to drive increased exploration and development spending, which is expected to translate into increased activity levels for Norex in the second half of the year. An increase in oil and gas activity levels in western Canada is also supported the Petroleum Services Association of Canada ("PSAC") which recently increased its forecast for the number of wells to be drilled in 2008 by approximately 14% from previous estimates.

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 Earnings and Retained Earnings and is calculated as net earnings 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.

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

(4) 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 a small administration fee. In accordance with generally accepted accounting principles, these subcontract revenue and costs 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):



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Three Months
Ended
($000's) March 31, 2008 March 31, 2007
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Seismic acquisition revenue (A) 31,056 27,693
Subcontractor revenue 12,568 21,991
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Total revenue (B) 43,624 49,684

Less:
Direct costs 20,777 17,731
Subcontractor costs 12,568 21,991
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Gross Profit (C) 10,279 9,962
Gross Profit as % of seismic
acquisition revenue (C / A) 33.1% 36.0%
Gross Profit as % of total revenue
(C / B) 23.6% 20.1%
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NOREX EXPLORATION SERVICES INC.
Consolidated Balance Sheets
As at March 31, 2008 and December 31, 2007

(in thousands of dollars)
(unaudited)
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March 31 December 31
2008 2007
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Assets

Current assets:
Cash $ 3,185 $ -
Accounts receivable 33,335 29,238
Prepaid expenses and deposits 265 455
Future Income taxes 1,016 586
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37,801 30,279

Property and equipment 34,976 34,075
Goodwill 7,097 7,097
Intangible assets 2,141 2,257
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$ 82,015 $ 73,708
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Liabilities and Shareholders' Equity
Current liabilities:
Operating lines of credit $ 5,911 $ 4,745
Accounts payable and accrued liabilities 18,743 15,916
Income taxes payable 2,435 1,264
Current portion of long-term debt 965 1,523
Current portion of capital lease obligations 4,643 5,099
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32,697 28,547

Capital lease obligations 2,815 3,477
Future income taxes 3,498 3,338
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39,010 35,362

Shareholders' equity:
Share capital 23,352 23,352
Contributed surplus 1,524 1,289
Accumulated other comprehensive income (128) -
Retained earnings 18,257 13,705
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43,005 38,346

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$ 82,015 $ 73,708
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NOREX EXPLORATION SERVICES INC.
Consolidated Statements of Earnings, Comprehensive Income, and Retained
Earnings

(in thousands of dollars, except per share amounts)
(unaudited)
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Three months Three months
ended ended
March 31, March 31,
2008 2007
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Revenue $ 43,624 $49,684

Expenses:
Direct costs 20,777 17,731
Subcontractors 12,568 21,991
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Earnings before the undernoted 10,279 9,962

General and administrative expenses 1,554 1,438
Depreciation and amortization 1,854 1,578
Interest and finance costs 225 317
Stock-based compensation (note 11) 235 196
Foreign exchange (gain) loss (384) -

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3,484 3,529
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Earnings before income taxes 6,795 6,433

Income taxes (note 9):
Current 2,530 2,023
Future expense (reduction) (287) 94
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2,243 2,117

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Net earnings for the period 4,552 4,316

Other comprehensive income:
Cumulative foreign currency translation
adjustment (128) -
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Comprehensive income 4,424 4,316
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Retained earnings, beginning of period 13,705 10,597
Net earnings for the period 4,552 4,316
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Retained earnings, end of period $ 18,257 $14,913
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Net earnings per share (note 10):
Basic and diluted $ 0.12 $ 0.11
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NOREX EXPLORATION SERVICES INC.
Consolidated Statements of Cash Flows

(in thousands of dollars)
(unaudited)
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Three months Three months
ended ended
March 31, March 31,
2008 2007
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Cash provided by (used in):

Operations:
Net earnings for the period $ 4,552 $ 4,316
Items not involving cash:
Depreciation and amortization 1,854 1,578
Stock-based compensation 235 196
Unrealized foreign exchange gain (346) -
Future income taxes reduction (287) 94
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6,008 6,184
Change in non-cash operating working capital 301 (8,653)
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6,309 (2,469)

Investing:
Acquisition of property and equipment (2,649) (2,448)
Proceeds on disposal of equipment 35 87
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(2,614) (2,361)

Financing:
Issuance of common shares - net of share issue
costs - 104
Increase operating lines of credit (net) 1,166 6,388
Repayment of long-term debt (558) (295)
Repayment of capital lease obligations (1,118) (1,207)
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(510) 4,990

Increase in cash 3,185 160
Cash, beginning of period - 1,251
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Cash, end of period $ 3,185 $ 1,411
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Supplemental cash flow information:
Interest and financing costs paid $ 284 $ 322
Taxes paid $ 1,359 $ -
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The Company also reports that Rob Morin, Vice President of Finance and CFO has tendered his resignation to pursue other interests. Mr. Morin will be assisting the Company while a replacement is determined.

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 "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; 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 volatility of 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