Norex Exploration Services Inc.
TSX VENTURE : NRX

Norex Exploration Services Inc.

March 29, 2006 19:07 ET

Norex Reports Record Quarterly Results

CALGARY, ALBERTA--(CCNMatthews - March 29, 2006) - Norex Exploration Services Inc. (TSX VENTURE:NRX) ("Norex" or the "Company") announced results for the third quarter and nine months ended January 31, 2006. The Company is pleased to report the following financial and operational achievements for the quarter:

- Revenue increased 234% to $13.2 million compared to $3.9 million of revenue for the third quarter of fiscal 2005. The Company experienced high utilization rates during the current quarter, including improved utilization of its crews stationed in eastern Canada.

- EBITDA increased nearly tenfold to $3.4 million ($0.17 per share) for the current quarter over $0.4 million ($0.06 per share) for the quarter ended January 31, 2005. Net earnings increased to $2.0 million ($0.10 per share) for the quarter ended January 31, 2006 compared to $0.1 million ($0.02 per share) for the similar quarter of the prior year.

- On November 23, 2005, Norex announced the purchase of certain assets of Norcana Resource Services Ltd., a competitor to Norex in the seismic acquisition business in western Canada.

- On December 6, 2005, the Company announced a $10 million private placement of 14,925,373 units. Each unit, priced at $0.67, consists of one common share and 0.4 of a share purchase warrant, entitling the holders thereof to purchase one common share for each whole warrant at an exercise price of $0.84 per share. On January 31, 2005, 2,976,190 of these warrants were exercised for gross proceeds of $2.5 million. The remaining warrants expire December 5, 2006.

- On December 9, 2005 the Company purchased 1,536 channels of ARAM/ARIES field recording equipment bringing its channel count to over 4,500 at that time.

- On February 1, 2006 the Company merged with Conquest Seismic Services Ltd. ("Conquest") to create one of the largest seismic acquisition companies operating in Canada. On a combined basis, Norex and Conquest now operate up to 11 crews in Canada and the northeastern United States and own over 12,000 channels of recording equipment. We are the largest operator of state-of-the-art ARAM/ARIES equipment in Canada.


"These quarterly results are particularly gratifying as they reflect a recovery in the seismic industry and a validation of our strategy to grow in conjunction with this recovery. It is important to note that these record quarterly results do not include the incremental contribution from our merger with Conquest, which became effective February 1, 2006." commented Mr. Paul Crilly, President and CEO.



Financial Overview

Three months ended Nine months ended
January 31, January 31,
(000's $ except per share amounts) 2006 2005 2006 2005
------------------------------------------------------------------------
------------------------------------------------------------------------

Revenue $13,161 $ 3,944 $18,318 $ 7,263
Direct Expenses 9,325 3,362 13,903 6,382
--------------------------------------
Gross Margin 3,836 582 4,415 881

EBITDA $ 3,375 $ 372 $ 3,353 $ 287
Per share 0.17 0.06 0.28 0.05

Net Income (loss) $ 2,044 $ 147 $ 1,363 $ (172)
Per share basic and diluted 0.10 0.02 0.11 (0.03)

Capital Expenditures $ 3,323 $ 833 $ 3,376 $ 834

Basic weighted average number
of shares outstanding (000's) 19,585 6,079 12,049 6,079


- Non-GAAP financial measures

Management's discussion and analysis includes references to financial measures commonly used in the oil and gas service industry. EBITDA is provided to assist investors in determining the ability of Norex to generate cash from operations and is calculated from the statement of operations as net income for the period plus interest on debt and capital leases, income taxes, unrealized foreign exchange gains and losses, amortization and stock-based compensation expense. Gross margin 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 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.

Third Quarter Review

Results of Operations

Revenue for the third quarter ended January 31, 2006 increased to $13.2 million compared to $4.0 million for the third quarter ended January 31, 2005. Geophysical Applications Processing Services Ltd. ("GAPS") which was purchased May 31, 2005 and comprises the Company's eastern Canada and United States operations, contributed $1.6 million of revenue to the current quarter results. The increased revenue in the quarter was attributable to a general increase in seismic industry activity levels as exploration spending continued to improve. Secondly, a substantial portion of work completed in the quarter utilized our vibro-seis equipment to generate seismic acoustic shockwaves, as opposed to dynamite. Vibro-seis jobs typically produce better margins as our equipment generates increased revenue compared to the subcontracting of shot hole drilling and explosives services required for dynamite-based acquisition. Finally, with improved activity levels in the industry, we are beginning to see improvements in the pricing of our services, especially in situations where we can accommodate our clients' timelines for the completion of their jobs.

The gross margin for the current quarter was $3,835,922 or 29.1% of revenue compared to $581,684 or 14.7% of revenue for the third quarter ended January 31, 2005. The improved gross margins are attributable to the factors identified above, and the economies of scale of higher revenue covering our fixed field infrastructure costs.

General and administrative expenses in the current quarter were $478,716 compared to $209,010 in the third quarter of the prior year. The acquisition of GAPS and the addition of its general and administrative expenses, termination costs related to managerial changes within GAPS in December, and an increase in public company costs accounted for the increase in expenses in the quarter.

Amortization expense for the third quarter increased to $449,659 from $192,668 for the comparative prior period, reflecting amortization on $2.8 million of property and equipment acquired through the GAPS acquisition and $1.1 million of capital expenditures made over the course of the previous fiscal year. Amortization expense in the current quarter also included the amortization of $3.3 million of capital expenditures, including the purchase of 1,536 channels of ARAM/ARIES equipment and ancillary equipment. The Company also started the amortization of $0.9 million of intangible assets purchased from Norcana Resource Services Ltd. on November 23, 2005 over an average four year period.

As a result of additional term debt related to the GAPS acquisition and a capital lease entered into in November 2004, interest on long term debt increased to $52,614 in the quarter compared to $33,183 in the third quarter of the prior year.

The Company reported $40,124 of stock-based compensation expense related to the granting of stock options to directors, officers and employees in the nine months ended January 31, 2006.

As a result of the increased profitability, the Company recorded a provision for income taxes of $783,815 in the quarter of which $513,610 is related to current taxes and $270,205 is related to future taxes. The Company did not incur a tax expense in the comparative period of the prior year due to tax losses carried forward from previous periods.

The increased revenue and higher field margins resulted in an increase in net earnings to $2,043,902 ($0.10 per share) in the third quarter compared to net earnings of $146,823 ($0.02 per share) in the third quarter of fiscal 2005.

Year-to-date Review

Results of Operations

Revenue for the nine months ended January 31, 2006 increased to $18.3 million compared to $7.3 million for the nine months ended January 31, 2005. Strong third quarter activity levels compared to the prior year and incremental revenue from GAPS of $3.2 million accounted for the majority of the increase in revenues over the comparable period of the prior year.

The gross margin for the nine months ended January 31, 2006 was $4.4 million or 24.1% of revenue compared to $880,828 or 12.1% of revenue for the same prior year period. Relatively lower sub-contractor expenses, higher utilization of the company's personnel and equipment, and pricing improvements in the third quarter contributed to the gross margin improvement. The Company also realized a reduction in equipment rental costs as a result of purchasing seismic acquisition equipment in the prior year and in the third quarter of the current fiscal year.

General and administrative expenses for the nine months ended January 31, 2006 were $1,083,356 compared to $593,910 in the prior year. The acquisition of GAPS and the addition of its general and administrative expenses accounted for the majority of the increase. Restructuring expenses related to a change in GAPS senior management also contributed to higher expenses in the current period.

Amortization expense for the nine months ended January 31, 2006 increased to $980,782 from $395,120 for the comparative period of the prior year. The increase in the Company's capital assets as a result of prior year capital expenditures, the GAPS acquisition and capital expenditures of $3.4 million in the current nine month period accounted for this increase. The Company also began amortizing the intangible assets purchased from Norcana Resource Services Ltd. over an average four year period.

Interest on long-term debt and capital leases increased from $64,757 for the nine months ended January 31, 2005 to $135,501 for the nine months ended January 31, 2006 due to additional term debt related to the GAPS acquisition and a capital lease entered into in November 2004.

Stock-based compensation of $67,226 was recorded for the nine months ended January 31, 2006 as a result of 2,255,000 options issued to directors, officers and employees in the current period.

Net earnings of $1,362,590 ($0.11 per share) were generated in the current nine month period compared to a net loss of $172,959 ($0.03 per share) in the nine month period ended January 31, 2005. The Company recorded an income tax provision of $783,815 in the current period, as its taxes losses of previous years have been fully utilized. The provision comprised of $513,610 related to current taxes and $270,205 related to future taxes. Improved profitability experienced in the third quarter of fiscal 2006 accounted for the improvement in earnings compared to the same period of the prior year.

Liquidity and Capital Resources

As at January 31, 2006, the Company had working capital of $2.6 million (excluding cash held for purposes of closing the Conquest acquisition on February 1, 2006) compared to a deficit of $48,853 at April 30, 2005. The improved working capital position was attributable to improved third quarter earnings and $12.4 million of net proceeds from the Company's December 6, 2005 equity financing and the subsequent exercise of related share purchase warrants.

On February 1, 2006 in conjunction with purchase of Conquest Seismic Services Ltd., the Company increased its operating line of credit with the Royal Bank of Canada to a maximum of $10 million bearing interest at prime plus $0.5% (previously prime plus 1.5%), repayable on demand. The Company also assumed approximately $8.6 million of Conquest's long term debt of which approximately $3.5 million is current.

In May 2005, the Company signed a new banking agreement for the provision of a $1,500,000 term loan bearing interest at prime plus 2% repayable based on a three-year amortization of monthly payments of $41,667. The Company has no off-balance sheet arrangements.

The Company intends to finance additional capital expenditures in the future through a combination of internally generated cashflow, additional term indebtedness and capital leases. The exercise of 2,993,959 common share warrants currently outstanding, if and when exercised, may provide for $2.5 million of gross proceeds to fund the Company's working capital and capital expenditure requirements.

Capital Spending

During the quarter ended January 31, 2006, the Company spent $3.3 million on capital expenditures comprised primarily of 1,536 channels of ARAM/ARIES seismic recording equipment and other ancillary field equipment.

Share Capital

As at January 31, 2006, the Company's issued share capital consisted of 28,652,027 common shares (April 30, 2005 - 6,078,675). In May 2005, the Company issued 1,748,712 common shares in conjunction with the acquisition of GAPS and a related shareholder loan conversion. An additional 1,923,077 common shares were issued in August 2005 in connection with a private placement. On November 23, 2005, the Company issued 1,000,000 shares as consideration for the purchase of certain assets from Norcana Resource Services Ltd. On December 6, 2005, the Company completed a private placement of 14,925,373 common shares at $0.67 per share and 5,970,149 warrants entitling the holders thereof to purchase one common share for each warrant for $0.84 per share. On January 31, 2006, 2,976,190 of the warrants were exercised for gross proceeds of $2.5 million. The remaining warrants expire on December 5, 2006.

On February 1, 2006, as described in "Subsequent Events" below, the Company issued 6,666,666 common shares as partial consideration for the purchase of Conquest. In March 2006, the Company issued 75,000 shares on the exercise of options.

As at the date of this MD&A, the Company's issued share capital consists of 35,393,693 common shares and 2,993,959 share purchase warrants.

As at January 31, 2006, the Company had 2,480,000 stock options outstanding (April 30, 2005 - 325,000) with a weighted average exercise price of $1.13 each. In March 2006, 75,000 options were exercised resulting in 2,405,000 stock options outstanding as at the date of this MD&A.

Related party transactions

During the three and nine months ended January 31, 2006, the Company was charged $8,000 and $104,000 respectively (three and nine months ended January 31, 2005 - $51,250 and $133,250 respectively) by officers and directors for administrative and consulting services. These amounts are recorded at the exchange amount agreed to by the related parties.

In conjunction with the acquisition of GAPS, the Company converted $210,002 of shareholder loans into 494,123 common shares of the Company and repaid $1,625 of loans in cash.

The Company also accrued the minimum earn-out of $100,000 due to a shareholder pursuant to the terms of the GAPS acquisition. This amount was paid in December, 2005 as part of management restructuring in the current quarter.

Subsequent Events

On February 1, 2006 the Company completed the acquisition of Conquest Seismic Services Ltd., a privately held seismic acquisition company operating primarily in western Canada. The purchase price totaled $13.5 million comprised of $7.5 million in cash and 6,666,666 common shares of Norex at a deemed price of $0.90 per share.

On February 1, 2006 in conjunction with purchase of Conquest Seismic Services Ltd., the Company increased its operating line of credit with the Royal Bank of Canada to a maximum of $10 million bearing interest at prime plus $0.5%, repayable on demand. The Company also assumed approximately $8.6 million of Conquest's long term debt of which approximately $3.5 million is current.

Outlook

The Company continues to experience high utilization rates of its crews in the fourth quarter of the current fiscal period. With the acquisition of Conquest on February 1, 2006, the Company currently operates nine crews in western Canada and up to two crews in eastern Canada and the northeastern United States. As with most oilfield services in western Canada, spring breakup conditions will result in reduced activity levels post-March. The Company is pursuing sales opportunities in Eastern Canada and certain areas of the United States to offset the seasonal cyclicality of operations in western Canada.

Management's focus is on increasing the utilization of the Company's current fleet of equipment, potential acquisitions and geographic expansion. Management expects favorable seismic industry conditions to continue as clients increase exploration activities to replace depleting reserves. New and more complex geological zones of interest together with better seismic acquisition technology is contributing to a general increase of activity levels in our industry. Seismic data is the primary tool to evaluate the potential existence of oil and gas reservoirs prior to drilling. As land prices increase, sometimes dramatically in certain western Canadian locations, seismic information is a critical risk mitigation tool for our customers prior to committing capital for land purchases and leases.

The Company continues to investigate other opportunities for potential acquisitions.

Business Risks and Uncertainties

The Company is exposed to several operational risks inherent in the acquisition of seismic data. These risks include: commodity prices received by customers which impacts their decision to acquire new seismic data in combination with the competitive bidding process for the Company's services; the seasonality of field operations and the impact of adverse weather conditions; land access constraints which influence the timing and nature of Company's services; cost of capital risk associated with securing the required capital to carry out the Company's operations; risk of environmental impact; competition from companies increasing their seismic equipment and crew capacities; and credit risk of non-payment for sales contracts.

The Company maintains a comprehensive insurance program to reduce risk to an acceptable level and to protect it against significant losses. The Company's risk in regards to financial instruments is detailed in Note 12 to the audited April 30, 2005 financial statements.

Forward-looking Statements

Certain information set forth in this MD&A, 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", "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 is a seismic acquisition and processing company 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 resource prices, general economic, market and business conditions; competition for capital and skilled personnel; the ability to comply with current and future health, safety, environmental and other laws; actions by governmental or regulatory authorities including increasing taxes and changes in other regulations; and the occurrence of unexpected events involved in resource exploration.

This MD&A 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.

This MD&A is dated March 29, 2006 and incorporates all relevant information and considerations to that date.

Notice of No Auditor Review of Interim Consolidated Financial Statements

In accordance with National Instrument 51-102 released by the Canadian Securities Administrators, the Company discloses that its auditors have not reviewed the unaudited consolidated financial statements for the period ended January 31, 2006.



NOREX EXPLORATION SERVICES INC.
Consolidated Balance Sheets
(unaudited)

------------------------------------------------------------------------
------------------------------------------------------------------------
January 31 April 30
2006 2005
Assets

Current assets
Accounts receivable $ 9,866,821 $ 6,165,529
Prepaids and deposits 99,457 46,209
-----------------------------------------------------------------------
9,966,278 6,211,738
Cash held in trust 7,500,000 -
Goodwill 652,030 150,000
Intangible assets 925,292 -
Capital assets 7,548,499 2,213,531
------------------------------------------------------------------------
$26,592,099 $ 8,575,269
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current liabilities
Bank overdraft $ 133,022 $ -
Operating line of credit - 543,359
Accounts payable and accrued liabilities 5,860,558 5,197,817
Demand loan - 43,119
Current portion of long-term debt 500,004 -
Current portion of capital lease obligations 410,367 476,296
Income taxes payable 448,725 -
-----------------------------------------------------------------------
7,352,676 6,260,591
Long-term debt 666,660 -
Capital lease obligations 143,745 449,933
Future income taxes 859,264 -
Due to shareholders - 211,627
------------------------------------------------------------------------
9,022,345 6,922,151
------------------------------------------------------------------------

Shareholders' equity
Equity instruments 14,844,431 357,611
Contributed surplus 67,226 -
Retained earnings 2,658,097 1,295,507
------------------------------------------------------------------------
17,569,754 1,653,118
------------------------------------------------------------------------
$26,592,099 $ 8,575,269
------------------------------------------------------------------------
------------------------------------------------------------------------


NOREX EXPLORATION SERVICES INC.
Consolidated Statements of Operations and Retained Earnings
(unaudited)

------------------------------------------------------------------------
------------------------------------------------------------------------
Three months ended Nine months ended
January 31 January 31
2006 2005 2006 2005
Revenue
Seismic acquisition
and processing $13,161,266 $ 3,943,645 $18,318,053 $ 7,263,460
------------------------------------------------------------------------

Direct expenses
Contractors 4,222,248 2,009,483 5,988,067 3,787,006
Wages, benefits and
subsistence 2,808,137 828,912 4,609,910 1,560,624
Field supplies and
consumables 1,092,314 249,565 1,610,045 563,907
Equipment rentals 1,000,738 212,195 1,324,555 359,886
Vehicle operating 201,907 61,806 370,709 111,209
------------------------------------------------------------------------
9,325,344 3,361,961 13,903,286 6,382,632
------------------------------------------------------------------------

Income before the
undernoted 3,835,922 581,684 4,414,767 880,828
General and
administrative
expenses 478,716 209,010 1,083,356 593,910
Amortization 449,659 192,668 980,782 395,120
Interest on long-term
debt and lease
obligations 52,614 33,183 135,501 64,757
Stock-based
compensation expense 40,124 - 67,226 -
Unrealized loss on
foreign exchange 5,048 - 22,971 -
Other income (17,956) - (21,474) -
------------------------------------------------------------------------
Income (loss) for the
period before income
taxes 2,827,717 146,823 2,146,405 (172,959)
------------------------------------------------------------------------

Income taxes
Current tax provision 513,610 - 513,610 -
Future tax provision 270,205 - 270,205 -
------------------------------------------------------------------------
783,815 - 783,815 -
------------------------------------------------------------------------
Net income (loss)
for the period 2,043,902 146,823 1,362,590 (172,959)
Retained earnings,
beginning of period 614,195 325,045 1,295,507 644,827
------------------------------------------------------------------------
Retained earnings,
end of period $ 2,658,097 $ 471,868 $ 2,658,097 $ 471,868
------------------------------------------------------------------------
------------------------------------------------------------------------

Net income (loss)
per share - Basic
and diluted $ 0.10 $ 0.02 $ 0.11 $ (0.03)
Weighted average
number of shares
- Basic 19,585,474 6,078,675 12,049,481 6,078,675
- Diluted 20,068,638 6,078,675 12,049,481 6,078,675


NOREX EXPLORATION SERVICES INC.
Consolidated Statements of Cash Flows
(unaudited)

------------------------------------------------------------------------
------------------------------------------------------------------------
Three months ended Nine months ended
January 31 January 31
2006 2005 2006 2005
Cash provided by
(used in)

Operations
Net income (loss)
for the period $ 2,043,902 $ 146,823 $ 1,362,590 $ (172,959)
Items not involving
cash
Amortization 449,659 192,668 980,782 395,120
Stock-based
compensation
expense 40,124 - 67,226 -
Gain on sale of capital
assets - - (2,000) -
Future income tax
provision 270,205 - 270,205 -
------------------------------------------------------------------------
2,803,890 339,491 2,678,803 222,161
Change in non-cash
working capital (3,290,537) 490,789 (3,010,061) 664,778
------------------------------------------------------------------------
(486,647) 830,280 (331,258) 886,939
------------------------------------------------------------------------
Investing
Cash held in trust (7,500,000) - (7,500,000) -
Business combination (114,995) - (1,226,312) -
Bank indebtedness
acquired - - (117,027) -
Proceeds on sale of
capital assets - - 2,000 -
Acquisition of capital
assets (3,323,242) (43,551) (3,375,566) (44,612)
------------------------------------------------------------------------
(10,938,237) (43,551) (12,216,905) (44,612)
------------------------------------------------------------------------
Financing
Proceeds on issue of
common shares,
net 12,411,500 - 13,011,500 -
Repayment of operating
line of credit (704,264) (466,840) (543,359) (393,654)
Repayment of
demand loans - (43,122) (768,119) (129,366)
Proceeds from
long-term debt - - 1,500,000 -
Repayment of
long-term debt (125,001) - (333,336) -
Repayment of obligations
under capital
lease (290,373) (276,767) (449,920) (319,307)
------------------------------------------------------------------------
Repayment of
shareholder loans - - (1,625) -
------------------------------------------------------------------------
11,291,862 (786,729) 12,415,141 (842,327)
------------------------------------------------------------------------

Decrease in cash (133,022) - (133,022) -
Bank overdraft,
beginning of period - - - -
------------------------------------------------------------------------
Bank overdraft,
end of period $ (133,022) $ - $ (133,022) $ -
------------------------------------------------------------------------
------------------------------------------------------------------------

Supplemental cash flow
information:
------------------------------------------------------------------------
------------------------------------------------------------------------

Interest paid $ 52,614 $ 33,183 $ 135,501 $ 64,757
Taxes paid - - - -



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

Contact Information

  • Norex Exploration Services Inc.
    Mr. Paul Crilly
    President and CEO
    (403) 291-0601