Norex Exploration Services Inc.
TSX VENTURE : NRX

Norex Exploration Services Inc.

December 19, 2006 19:50 ET

Norex Reports Revenue and Net Income Growth for the Quarter and Six Months Ended October 31, 2006

CALGARY, ALBERTA--(CCNMatthews - Dec. 19, 2006) - Norex Exploration Services Inc. (TSX VENTURE:NRX)("Norex" or the "Company") announced results for the second quarter and six months ended October 31, 2006.



Financial Overview


Three months ended Six months ended
(000's $ October 31, October 31,
except per % %
share amounts) 2006 2005 Increase 2006 2005 Increase
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Revenue $ 26,547 $ 3,013 781% $ 42,791 $ 5,157 730%
Gross Margin $ 4,169 $ 147 2,736% $ 6,731 $ 579 1,063%
EBITDA $ 2,927 ($167) $ 4,466 ($31)
Per share $ 0.08 ($0.02) $ 0.13 $ 0.00
Net Earnings $ 975 ($537) $ 1,468 ($681)
Per share basic
and diluted $ 0.03 ($0.06) $ 0.04 ($0.08)
Capital
Expenditures $ 4,493 $ 6 $ 8,417 $ 52


Non-GAAP financial measures

Management's discussion and analysis includes references to financial
measures commonly used in the oil and gas service industry. Adjusted 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, gains and losses from the sale of property and equipment 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.


The Company is pleased to report the following financial and operational achievements for the quarter:

-Revenue for the quarter increased 781% to $26.5 million. Approximately 50% of this growth came from our operations in eastern Canada and the United States.

- EBITDA for the current quarter increased to $2.9 million ($0.08 per share) compared to negative EBITDA of $0.1 million ($0.02 per share) for the quarter ended October 31, 2005.

- Net income increased to $1.0 million ($0.03 per share) in the second quarter despite seasonally lower activity levels throughout the seismic acquisition industry in western Canada.

- Norex's subsidiary Conquest Seismic Services, Inc. secured and completed several large 3 Dimensional ("3D") seismic recording contracts in the northeastern United States to solidify our presence in this area.

- Norex continued its strategy of expanding its vibroseis capability. In the second quarter, the Company took delivery of four new I/O® ("Input/Output") vibroseis machines. These state-of-the-art vibrators provide field-proven reliability and the ability to deliver more than 62,000 lb of source energy bringing the Company's fleet of vibroseis machines to twelve. Vibroseis machines provide an alternative to dynamite based seismic acquisition. Utilizing vibroseis equipment results in less land owner issues and concerns, provides the Company with more scheduling control over the recording phase of the program, and generally results in better field margins. These new vibroseis machines are currently working in the US.

Six Month Highlights

- Revenue for the six months ended October 31, 2006 increased 730% to $42.8 million compared to $5.2 million for the prior year. The Company experienced high utilization rates during the first and second quarters, including improved utilization of its crews stationed in eastern Canada and the northeastern United States.

- EBITDA for the current six month period increased to $4.5 million ($0.13 per share) compared to negative EBITDA of $31,000 ($0.00 per share) for the same period of the prior year. Net earnings increased to $1.5 million ($0.04 per share) for the six month period ended October 31, 2006 compared to a loss of $0.7 million ($0.08 per share) in the prior year.

- To facilitate a comparison with industry peers and for administrative reasons the Company has changed its year end from April 30, to December 31, effective December 31, 2006.

"Through the hard work and commitment of our people across our entire North American operations, we were successful in generating earnings during one of the more challenging quarters of the year. While volatile natural gas prices have produced instability in the oilfield service industry in western Canada, the Company's activity levels remain strong and we are anticipating a busy winter seismic acquisition season. In the U.S., our expansion strategy continues to deliver results, with record profitability in the second quarter." commented Mr. Paul Crilly, President and CEO.

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.

Second Quarter Review

Results of Operations

During the quarter ended October 31, 2006, the Company began to see the results of its strategy to grow its operations in eastern Canada and the northeastern United States. Approximately 50% of the Company's revenue during the second quarter was generated from these regions. This was an important milestone for the Company as it clearly demonstrated its growth potential and the ability of the Company to partially offset the seasonality inherent in Norex's traditional core, the winter months in the Western Canadian Sedimentary Basin.

Revenue for the second quarter ended October 31, 2006 increased to $26.5 million compared to $3.0 million for the second quarter ended October 31, 2005. Increased revenue in the quarter was attributable to several factors, including, the acquisition of Conquest Seismic Services Ltd. ("Conquest") which was purchased February 1, 2006 and higher activity levels in eastern Canada and the northeastern United States.

During the quarter ended October 31, 2006, the Company operated two to three crews in western Canada, expanding to five crews near the end of the quarter. In addition, the Company operated two to three crews in eastern Canada and the northeastern United States. The Company experienced high utilization rates for all of its crews that were deployed in the quarter.

Gross profit for the current quarter was $4.2 million or 15.7% of revenue compared to $0.15 million or 4.9% of revenue for the second quarter ended October 31, 2005. This significant growth in gross profit can be attributed to the growth factors outlined above along with higher utilization of the Company's personnel and equipment and economies of scale relating to the Conquest acquisition. However, in light of the relative industry uncertainty as to exploration spending due to the volatility of gas prices, the Company made the strategic pricing decision to ensure its crews were busy. While this trended to reduce gross margins in the quarter, it provided an opportunity to keep our crews intact and facilitated deploying additional crews in anticipation of an active winter season in western Canada.

General and administrative expenses in the current quarter were $1.2 million compared to $0.3 million in the second quarter of the prior year. The acquisition of Conquest and its general and administrative expenses, various marketing initiatives, and increased variable compensation accounted for the increase in expenses in the quarter.

Amortization and depreciation expense for the second quarter increased to $1.2 million from $0.3 million for the comparative prior period, reflecting amortization on $23.4 million of property and equipment and $3.2 million of amortizable intangible assets acquired in the prior year. In addition, during the three and six months ended October 31, 2006 the Company incurred $4.5 million and $8.4 million respectively of capital expenditures primarily related to field recording equipment.

As a result of additional term debt and capital leases related to the Conquest acquisition and the Company's subsequent capital asset purchases, interest on long term debt increased to $0.2 million in the quarter compared to $47,000 in the second quarter of the prior year.

During the quarter, stock based compensation expense related to the granting of stock options to directors, officers and employees increased to $0.2 million compared to $25,000 for the comparative period.

As a result of the increased profitability, the Company recorded a provision for income taxes of $0.4 million in the quarter of which $0.5 million is related to current taxes and $0.1 million is related to a future income tax reduction. The Company did not incur a current tax expense in the comparative period of the prior year due to the utilization of tax losses carried forward from previous periods.

The increased revenue and higher field margins resulted in an increase in net earnings to $1.0 million ($0.03 per share) in the second quarter compared to a net loss of $0.5 million ($0.06 per share) in the second quarter of the prior fiscal year.

Year-to-Date Review

Results of Operations

Revenue for the six months ended October 31, 2006 increased to $42.8 million compared to $5.2 million for the six months ended October 31, 2005. The increase in revenue was attributable to the substantial growth in our eastern Canada and northeastern United States operations and the acquisition of Conquest which was purchased February 1, 2006.

Gross profit for the six months ended October 31, 2006 was $6.7 million or 15.7% of revenue compared to $0.6 million or 11.2% of revenue for the six month period ended October 31, 2005. This significant growth in gross profit can be attributed to the growth factors outlined above along with higher utilization of the company's personnel and equipment and economies of scale relating to the Conquest acquisition.

General and administrative expenses in the six months ended October 31, 2006 were $2.3 million compared to $0.6 million in the same period of the prior year. The acquisition of Conquest and its general and administrative expenses and increased variable compensation accounted for the increase in expenses in the quarter.

Amortization and depreciation expense for the six month period ended October 31, 2006 increased to $2.4 million from $0.5 million for the comparative prior period, reflecting amortization on $23.4 million of property and equipment and $3.2 million of amortizable intangible assets acquired in the prior year. In addition, during the six months ended October 31, 2006 the Company incurred $8.4 million of capital expenditures primarily related to field recording equipment.

As a result of additional term debt and capital leases related to the Conquest acquisition and the Company's subsequent capital asset purchases, interest on long term debt increased to $0.4 million in the current six month period compared to $83,000 in the same period of the prior year.

During the six month period ended October 31, 2006, stock based compensation expense related to the granting of stock options to directors, officers and employees increased to $0.3 million compared to $27,000 for the comparative period.

A gain on the sale of fixed assets of $0.8 million was reported in the six months ended October 31, 2006 related to the sale of older model recording equipment. The Company strives to operate with a consistent equipment platform across all its operations, and accordingly, replaced this older equipment with state-of-the-art ARAM ARIES® recording equipment.

As a result of the increased profitability, the Company recorded a provision for income taxes of $0.7 million in the six months ended October 31, 2006 of which $0.5 million is related to current taxes and $0.2 million is related to future income taxes. The Company did not incur a current tax expense in the comparative period of the prior year due to tax losses carried forward from previous periods.

The increased revenue, higher field margins and gain on the sale of fixed assets resulted in an increase in net earnings to $1.5 million ($0.04 per share) in the six months ended October 31, 2006 compared to a net loss of $0.7 million ($0.08 per share) in the six months ended October 31, 2005.

Liquidity and Capital Resources

As at October 31, 2006, the Company had working capital of $0.25 million compared to $3.0 million at April 30, 2006. Norex's working capital decreased primarily as a result of the Company's capital expenditures. The Company incurred $8.4 million of capital expenditures during the six months ended October 31, 2006. The Company's working capital and cash flow were used to fund $4.3 million of this expenditure and the remaining $4.1 million was financed through capital leases.

As at October 31, 2006, the Company has a revolving line of credit to a maximum of $10,000,000 due on demand and bearing interest at the bank prime rate plus 0.5% per annum. In addition, as at October 31, 2006, the Company has a revolving line of credit to a maximum of $5,000,000 due on demand and bearing interest at the bank prime rate plus 0.5% per annum, which is available from December 1 to June 30 each year. These facilities are secured by a general security agreement and are subject to an annual review which is scheduled for August, 2007. As at October 31, 2006, $nil (April 30, 2006 - $nil) had been drawn on these facilities.

The Company has lease commitments for its premises and equipment. These commitments are outlined in note 15 of the audited April 30, 2006 consolidated financial statements. In addition, the Company has entered into a commitment to purchase $1.9 million of recording equipment in January, 2007. Other than operating lease commitments relating to its premises and equipment and the commitment to purchase $1.9 million of recording equipment in January, the Company has no off-balance sheet arrangements.

The Company has budgeted (net of sale of older equipment), up to $17.0 million for capital expenditures primarily related to field equipment and vehicles for the upcoming fiscal year ending December 31, 2007. 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 Company may also raise additional equity to fund its capital expenditures. The exercise of 2,814,855 share purchase warrants currently outstanding, if and when exercised, may provide for $2.4 million of gross proceeds to fund the Company's working capital and capital expenditure requirements. The Warrants have a current expiry date of December 5, 2006; however, the Company has obtained approval from the TSX Venture Exchange for extension of the expiry date to December 31, 2006.

Capital Spending

During the six months ended October 31, 2006, the Company incurred $8.4 million on capital expenditures comprised primarily of seismic recording equipment, vehicles and other ancillary field equipment.

Share Capital

As at October 31, 2006, the Company's issued share capital consisted of 35,402,026 common shares (April 30, 2006 - 35,393,693).

As at the date of this MD&A, the Company has 35,681,131 common shares outstanding and 2,814,855 share purchase warrants outstanding.

As at October 31, 2006, the Company had 2,410,667 stock options outstanding (April 30, 2006 - 2,265,000) with a weighted average exercise price of $2.55 each. Subsequent to the quarter ended October 31, 2006, 100,000 options were exercised resulting in 2,310,667 stock options outstanding as at the date of this MD&A.

Subsequent to the six months ended October 31, 2006, 179,105 share purchase warrants were exercised by officers and directors of the Company for total proceeds of $150,000.

Outlook

Based on anticipated activity levels this winter, the Company is planning to operate eight to nine crews in western Canada utilizing up to 23,000 channels of owned and rented recording equipment. While the Company operated up to nine crews in western Canada last winter, it achieved its peak crew count later in the winter season. In addition, it is expected that the average crew size and channels deployed will increase from the prior winter season. The Company is also planning on operating one to two crews in eastern Canada and the United States bringing Norex's total crew count in the range of nine to eleven crews this winter.

The Company is currently experiencing activity levels that are generally higher than those experienced in the prior year. The uncertainty surrounding natural gas prices has resulted in a more competitive environment for our acquisition services and consequently, while activity levels have increased for the Company the pricing for our services and resultant gross margins will reflect this more competitive environment. Additionally, severe winter weather conditions in western Canada including high winds have hampered our field production for two weeks in December.

Looking beyond the current winter season, Norex is focused on growth in the United States. Norex anticipates increasing the number of crews in the northeastern United States to meet expanded demand for services in the 2007 spring and summer months. The northeastern United States and eastern Canada regions with their concentration of seismic activities in the warmer months are a perfect fit to offset the activity in Norex's traditional core, the winter months in the western Canadian Sedimentary Basin. In addition, they Company is also expanding its operational presence in the U.S. to the Rocky Mountain and mid continent region of the U.S. where industry activity levels remain robust. The Company anticipates opening a regional office in Denver, Colorado in the new year.

The Company also continues to see a growing demand for vibroseis based acquisition services. As such, the Company has purchased four large buggy vibrators which were received in September, 2006. This increased vibroseis capacity, bringing Norex's fleet of vibroseis machines to twelve, will allow the Company to bid on additional vibroseis jobs in both Canada and the United States.

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 the 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 14 of the audited April 30, 2006 financial statements.



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 external auditors have not reviewed the unaudited interim consolidated financial statements for the three and six months ended October 31, 2005.



NOREX EXPLORATION SERVICES INC.
Consolidated Balance Sheets
(in thousands of dollars)
(unaudited)

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October 31 April 30
2006 2006
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Assets

Current assets:
Cash $ 1,451 $ 2,136
Accounts receivable 19,820 29,838
Prepaid expenses and deposits 419 843
Prepaid income taxes 462 -
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22,152 32,817

Property and equipment 28,820 23,731
Goodwill 7,097 7,097
Intangible assets 2,799 3,031
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$ 60,868 $ 66,676
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Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable and accrued liabilities $ 15,671 $ 20,301
Income taxes payable - 3,612
Current portion of long-term debt 1,490 1,163
Current portion of capital lease obligations 4,743 4,739
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21,904 29,815

Long-term debt 819 1,720
Capital lease obligations 4,561 3,496
Future income taxes 2,809 2,654
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30,093 37,685

Shareholders' equity:
Share capital 19,548 19,535
Warrants 1,083 1,083
Contributed surplus 442 139
Retained earnings 9,702 8,234
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30,775 28,991
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$ 60,868 $ 66,676
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NOREX EXPLORATION SERVICES INC.
Consolidated Statements of Earnings (Loss) and Retained Earnings
(in thousands of dollars, except per share amounts)
(unaudited)

---------------------------------------------------------------------------
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Three months ended Six months ended
October 31 October 31
2006 2005 2006 2005
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Revenue $ 26,547 $ 3,013 $ 42,791 $ 5,157

Expenses:
Direct costs 10,309 1,795 17,417 2,812
Subcontractors 12,069 1,071 18,643 1,766
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Earnings before the undernoted 4,169 147 6,731 579
General and administrative
expenses 1,242 324 2,265 621
Amortization and depreciation 1,225 290 2,391 531
Interest on long-term debt
and capital leases 216 47 418 83
Gain on disposal of equipment (32) (2) (822) (2)
Stock-based compensation 163 25 308 27
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2,814 684 4,560 1,260
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Earnings (loss) before
income taxes 1,355 (537) 2,171 (681)

Income taxes:
Current 477 - 548 -
Future (reduction) (97) - 155 -
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380 - 703 -

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Net earnings (loss) 975 (537) 1,468 (681)

Retained earnings, beginning
of period 8,727 1,152 8,234 1,296
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Retained earnings, end of
period $ 9,702 $ 615 $ 9,702 $ 615
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Net earnings (loss) per share:
Basic and diluted $ 0.03 $ (0.06) $ 0.04 $ (0.08)
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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 Six months ended
October 31 October 31
2006 2005 2006 2005
---------------------------------------------------------------------------
Cash provided by (used in):

Operations:
Net earnings (loss) $ 975 $ (537) $ 1,468 $ (681)
Items not involving cash:
Amortization and depreciation 1,225 290 2,391 531
Gain on disposal of equipment (32) (2) (822) (2)
Stock-based compensation 163 25 308 27
Future income taxes (reduction) (97) - 155 -
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2,234 (224) 3,500 (125)
Change in non-cash operating
working capital 1,274 (605) 1,738 279
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3,508 (829) 5,238 154

Investing:
Acquisition of property and
equipment (415) (7) (4,277) (53)
Proceeds on disposal of property
and equipment 185 2 1,495 2
Business acquisitions - - - (1,111)
Bank indebtedness on acquisitions - - - (117)
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(230) (5) (2,782) (1,279)

Financing:
Proceeds (repayment) of operating
lines of credit (689) 466 - 161
Repayment of demand loans - - - (768)
Proceeds of long-term debt - - - 1,500
Repayment of long-term debt (289) (125) (574) (208)
Repayment of capital lease
obligations (857) (107) (2,575) (160)
Proceeds on issue of common shares 8 600 8 600
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(1,827) 834 (3,141) 1,125

Increase (decrease) in cash 1,451 - (685) -
Cash, beginning of period - - 2,136 -
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Cash, end of period $ 1,451 $ - $ 1,451 $ -
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Supplemental cash flow
information:
Interest paid $ 216 $ 47 $ 418 $ 83
Income taxes paid 1,472 - 4,622 -
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Norex, and its divisions Conquest Seismic Services and US subsidiary, Conquest Seismic Services, Inc., provide premium 2D, 3D and 4D 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 Venture Exchange under the symbol "NRX"

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, CA
    President and CEO
    (403) 216-5929
    or
    Norex Exploration Services Inc.
    Mr. Bharat Mahajan, CA
    Vice-President Finance and CFO
    (403) 216-5904