Norex Exploration Services Inc.
TSX : NRX

Norex Exploration Services Inc.

August 13, 2008 20:15 ET

Norex Reports Improved Second Quarter Results

CALGARY, ALBERTA--(Marketwire - Aug. 13, 2008) - Norex Exploration Services Inc. ("Norex" or the "Company") (TSX:NRX) today announced a 46% increase in consolidated revenue to $12.7 million for the three months ended June 30, 2008 compared to $8.7 million of consolidated revenue for the three months ended June 30, 2007. Consistent with seasonally slower activity levels in western Canada due to spring thawing conditions, the Company reported a net loss of $1.5 million ($0.04 per share) for the second quarter of 2008 compared to a net loss of $1.9 million ($0.05 per share) for the second quarter of 2007. The Company reported negative EBITDA(1) of $0.1 million ($0.00 per share) in the second quarter compared to negative EBITDA of $1.0 million ($0.03 per share) in the second quarter of 2007.

The Company's United States and Eastern Canada ("USEC") division accounted for Norex's growth in the second quarter of 2008, and offset a sharper than anticipated seasonal decline in western Canada. The Company was successful in deploying personnel and equipment in the northerly regions of Alberta and British Columbia which avoided the earlier spring thawing conditions in the southerly areas of western Canada. However, wetter than normal weather patterns in western Canada for most of the second quarter of 2008 negatively impacted the Company's activity levels. Furthermore, a number of seismic programs in western Canada were delayed due to our customers' difficulty in gaining access to farmland over which to complete their seismic surveys. With the increasing value of their crops, farmers have been reluctant to permit seismic programs in their fields, despite the industry practice of compensating them for damage to crops created by the seismic vehicles. The delay in these programs is expected to result in strong activity levels late in the third quarter and throughout the fourth quarter in western Canada.

While significantly improved results were reported in the Company's USEC division, exceptionally wet weather in parts of Kansas and New York State also hindered operations. These geographic regions particularly the Marcellous Shale gas play in the Appalachian Basin of New York, were the catalyst for our growth in the second quarter of 2008.

On July 7, 2008, the Company purchased assets from a private seismic acquisition company in the United States. This acquisition provided Norex with a strong contingent of personnel and a solid customer list which has subsequently lead to a backlog of work for an additional crew in the US. Norex was also able to bolster its presence in the Rocky Mountain region of the U.S. with the most of the personnel from this acquisition joining the Company's Denver, Colorado office.

"Our second quarter was reflective of spring break-up conditions in western Canada, however, we continued to make progress in expanding our presence in the United States. Subsequent to the end of the quarter, we completed further steps in laying the foundation for our continued growth. The Company's transaction with a former competitor in the U.S. demonstrates our ability to find innovative ways to enhance shareholder value" commented Mr. Paul Crilly, President and CEO.

Second quarter highlights:

- Consolidated revenue increased 46% to $12.7 million in the second quarter of 2008 compared to $8.7 million in the same period last year. Gross profit(2) increased to $1.4 million, or 10.7% of revenue, compared to $0.3 million, or 2.9% of revenue in the second quarter of 2007. Gross profit as a percentage of seismic acquisition revenue(4) increased to 16.2% for the three months ended June 30, 2008 compared to 4.0% in the similar period of 2007.

- The USEC division reported revenue of $9.1 million in the second quarter compared to $5.2 million for the same period in 2007. Gross profit was $1.7 million, or 30.9% of seismic acquisition revenue, compared to $1.1 million, or 32.3% of seismic acquisition revenue, for the three months ended June 30, 2007.

- Western Canadian operations generated $2.9 million of revenue for the three months ended June 30, 2008 compared to $2.9 million for the three months ended June 30, 2007. The Company experienced lower than anticipated activity levels in western Canada due to the delay in a number of seismic programs until the third quarter of 2008.

- EBITDA was negative $0.1 million, ($0.00 per share), in the second quarter of 2008, compared to negative $1.0 million, ($0.03 per share), in the same period of 2007.

- The Company recorded a net loss of $1.5 million ($0.04 per diluted share) compared to a net loss of $1.9 million ($0.05 per diluted share) in the three months ended June 30, 2007.

- In the second quarter, Norex completed the purchase of an additional 5,000 channels of recording equipment, bringing its total channel count of ARAM-ARIES equipment to 17,300 channels. The Company continues to see an increase in the channel counts for 3D programs, as customers increase both their surface coverage and sub-surface image resolution of their seismic data acquisition programs.

- On July 7, 2008 the Company purchased certain intangible assets from a private seismic acquisition company in the United States. This acquisition provided Norex with a strong contingent of personnel and a solid customer list on which to expand the Company's United States operations further.

Year to date highlights:

- Consolidated revenue totaled $56.3 million for the six months ended June 30, 2008 compared to $58.4 million in the same period last year. Seismic acquisition revenue increased 16% to $39.4 million for the first six months of 2008 compared to $34.0 million in the first six months of 2007. Gross profit as a percentage of seismic acquisition revenue(4) decreased to 29.5% for the six months ended June 30, 2008 compared to 30.1% in similar period of 2007.

- The USEC division generated revenue of $17.9 million for the first six months of 2008 compared to $7.9 million for the same period in 2007. Gross profit was $3.0 million, or 25% of seismic acquisition revenue, compared to $1.3 million, or 24% of seismic acquisition revenue, for the six months ended June 30, 2007.

- Western Canadian operations generated $38.5 million of revenue compared to $50.3 million for the six months ended June 30, 2007. Seismic acquisition revenue was $27.2 million compared to $28.3 million for the six months ended June 30, 2007. Gross profit was $8.6 million, or 32% of seismic acquisition revenue, compared to $8.9 million, or 31% of seismic acquisition revenue, in 2007.

- EBITDA for the six months ended June 30, 2008 was $8.6 million ($0.22 per share) in the first six months of 2008, compared to $7.5 million ($0.20 per share) in the same period of 2007.

- The Company generated net earnings of $3.1 million ($0.08 per diluted share) compared to net earnings of $2.4 million ($0.06 per diluted share) in the six months ended June 30, 2007.

- 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 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 data in addition to the conventional pressure wave currently captured and processed for seismic imaging.



Financial Highlights

Three Months Ended Six Months Ended
June 30 June 30
(Unaudited) (Unaudited)
($000's, except % %
per share data) 2008 2007 Change 2008 2007 Change
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Revenue 12,985 8,693 49 56,309 58,377 (4)
Seismic acquisition
revenue 8,364 6.283 33 39,420 33,977 16
Gross Profit (2) 1,356 253 436 11,635 10,218 14
EBITDA (1) (122) (985) 88 8,605 7,544 14
- Per share (0.00) (0.03) - $ 0.22 $ 0.20 10
Trailing 12 month
EBITDA (1) 14,766 13,253 11
Net Earnings (Loss) (1,458) (1,896) 23 3,094 2,421 28
- Per share, basic
and diluted (0.04) ($0.05) 20 $ 0.08 $ 0.06 33

Working capital 2,358 2,985 (21) 2,358 2,985 (21)
Total long term
borrowings (3) 9,804 11,723 (16) 9,804 11,723 (16)
Capital expenditures 5,507 1,892 191 8,157 5,010 63
Weighted avg. shares
outstanding (000's) 38,601 38,601 38,601 38,592

Shares outstanding,
end of period (000's) 38,601 38,601 38,601 38,601
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Outlook

The Company continues to focus on geographic diversification with the expansion of its United States and eastern Canada operations.

The Company's transaction with a U.S. competitor is expected to facilitate the Company's additional growth in the Rocky Mountain region of the United States. The Company secured significant customer relationships and a talented management team based in Denver, Colorado and Calgary, Alberta. These customer relationships have resulted in Norex mobilizing an additional crew in the U.S. in the third quarter of 2008.

Management's outlook for the second half of 2008 based on work currently being tendered by customers is very positive. Of particular note in western Canada is the seismic requirements of the growing potash industry in Saskatchewan. This industry provides further diversification for the Company and is expected to complement what the Company believes will be a general improvement in the oil and gas industry in western Canada in the latter half of 2008.

The Company's USEC division continues to expand. Its presence in the "resource plays" of the Appalachian basin, Piceance basin, and Bakken fields in the U.S. is driving this expansion. Further, the Company is seeing additional demand for its services in the Utica shale play in Quebec and expects to have two crews operating in Quebec late in the third quarter of 2008 and into the fourth quarter of 2008.

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 (Loss) and Comprehensive Loss, Retained Earnings and Accumulated Other Comprehensive Loss 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) 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 Six Months
Ended June 30 Ended June 30
($000's) 2008 2007 2008 2007
----------------------------------------------------------------------------
Seismic acquisition revenue (A) 8,364 6,283 39,420 33,977
Subcontractor revenue 4,321 2,410 16,889 24,400
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Total revenue (B) 12,685 8,693 56,309 58,377

Less:
Direct costs 7,008 6,030 27,787 23,759
Subcontractor costs 4,321 2,410 16,889 24,400
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Gross Profit (C) 1,356 253 11,633 10,218
Gross Profit as % of seismic
acquisition rev (C / A) 16.2% 4.0% 29.5% 30.1%
Gross Profit as % of total
revenue (C / B) 10.7% 2.9% 20.7% 17.5%
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NOREX EXPLORATION SERVICES INC.
CONSOLIDATED BALANCE SHEETS

As at June 30, 2008 and December 31, 2007

(in thousands of dollars)
(unaudited)

----------------------------------------------------------------------------
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June 30 December 31
2008 2007
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Assets
Current assets:
Cash $ 782 $ -
Accounts receivable 16,259 29,238
Prepaid expenses and deposits 306 455
Future income taxes 1,280 586
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18,627 30,279

Property and equipment 38,190 34,075
Goodwill 7,097 7,097
Intangible assets 2,046 2,257
----------------------------------------------------------------------------
$ 65,960 $ 73,708
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Liabilities and Shareholders' Equity
Current liabilities:
Operating lines of credit $ 3,863 $ 4,745
Accounts payable and accrued liabilities 6,066 15,916
Income taxes payable 1,021 1,264
Current portion of long-term debt 1,333 1,523
Current portion of capital lease obligations 3,986 5,099
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16,269 28,547

Long-term debt 2,125
Capital lease obligations 2,360 3,477
Future income taxes 3,406 3,338
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24,160 35,362

Shareholders' equity:
Share capital 23,352 23,352
Contributed surplus 1,774 1,289
Accumulated other comprehensive loss (125) -
Retained earnings 16,799 13,705
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41,800 38,346

$ 65,960 $ 73,708
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NOREX EXPLORATION SERVICES INC.
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) AND COMPREHENSIVE
INCOME (LOSS)

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

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30 June 30 June 30
2008 2007 2008 2007
----------------------------------------------------------------------------

Revenue $ 12,685 $ 8,693 $ 56,309 $ 58,377

Expenses:
Direct costs 7,008 6,030 27,787 23,759
Subcontractors 4,321 2,410 16,889 24,400
----------------------------------------------------------------------------
Earnings before the undernoted 1,356 253 11,633 10,218

General and administrative
expenses 1,478 1,238 3,030 2,674
Depreciation and amortization 2,167 1,623 4,021 3,201
Interest and finance expense 233 245 458 563
Loss (Gain) on disposal
of equipment (73) 101 (73) 102
Stock-based compensation 250 52 485 249
Foreign exchange (gain) loss (5) 128 (391) 128
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4,050 3,387 7,530 6,917
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Earnings (loss) before
income taxes (2,694) (3,134) 4,103 3,301

Income taxes:
Current (895) (1,055) 1,635 969
Future (reduction) (341) (183) (626) (89)
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(1,236) (1,238) 1,009 880
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Net earnings (loss) (1,458) (1,896) 3,094 2,421

Cumulative foreign currency
translation adjustment 3 - (125) -
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Comprehensive income (loss) $ (1,455) $ (1,896) $ 2,969 $ 2,421
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Net earnings (loss) per share:
Basic and Diluted $ (0.04) $ (0.05) $ 0.08 $ 0.06
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NOREX EXPLORATION SERVICES INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS AND ACCUMULATED
OTHER COMPREHENSIVE LOSS

(in thousands of dollars)
(unaudited)

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30 June 30 June 30
2008 2007 2008 2007
----------------------------------------------------------------------------
Retained earnings, beginning
of period $ 18,257 $ 14,914 $ 13,705 $ 10,597
Net earnings (loss) for the
period (1,458) (1,896) 3,094 2,421
----------------------------------------------------------------------------
Retained earnings, end of
period $ 16,799 $ 13,018 $ 16,799 $ 13,018
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Accumulated other
comprehensive loss,
beginning of period $ (128) $ - $ - $ -

Cumulative foreign currency
translation adjustment 3 - (125) -
----------------------------------------------------------------------------
Accumulated other
comprehensive loss,
end of period $ (125) $ - $ (125) $ -
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NOREX EXPLORATION SERVICES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of dollars)
(unaudited)

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30 June 30 June 30
2008 2007 2008 2007
----------------------------------------------------------------------------

Cash provided by (used in):

Operations:
Net earnings (loss) for
the period $ (1,458) $ (1,896) $ 3,094 $ 2,421
Items not involving cash:
Depreciation and
amortization 2,167 1,623 4,021 3,201
Loss (Gain) on disposal of
equipment (73) 101 (73) 102
Stock-based compensation 250 52 485 249
Unrealized foreign
exchange gain - 105 (348) 105
Future income taxes (reduction) (341) (183) (626) (89)
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545 (198) 6,553 5,989

Change in non-cash operating
working capital 3,030 15,924 3,332 7,270
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3,575 15,726 9,885 13,259

Investing:
Acquisition of property
and equipment (5,507) (1,868) (8,157) (4,317)
Proceeds on disposal of
equipment 296 339 331 426
Acquisition of intangible asset (20) - (20) -
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(5,231) (1,529) (7,846) (3,891)

Financing:
Increase (decrease) operating
lines of credit (net) (2,048) (7,778) (882) (1,390)
Repayment of long-term debt (507) (299) (1,065) (593)
Proceeds from long-term debt 3,000 - 3,000 -
Repayment of capital lease
obligations (1,192) (819) (2,310) (2,027)
Issuance of common shares - net - - - 104
----------------------------------------------------------------------------
(747) (8,896) (1,257) (3,906)

Increase (decrease) in cash (2,403) 5,301 782 5,462
Cash, beginning of period 3,185 1,412 - 1,251
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Cash, end of period $ 782 $ 6,713 $ 782 $ 6,713
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Supplemental cash flow
information:
Interest and financing
costs paid $ 197 $ 239 $ 481 $ 561

Taxes paid 797 - 2,155 -
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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 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