Palko Environmental Ltd.
TSX : PLK

Palko Environmental Ltd.

November 14, 2011 09:00 ET

Palko Environmental Ltd. Announces Third Quarter 2011 Results

CALGARY, ALBERTA--(Marketwire - Nov. 14, 2011) -

NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR DISSEMINATION IN THE UNITED STATES.

Palko Environmental Ltd. ("Palko" or the "Company") (TSX:PLK) is pleased to announce our financial and operating results for the three and nine months ended September 30, 2011.

The financial results presented for September 30, 2011 and all 2010 comparative information have been prepared in accordance with International Financial Reporting Standards ("IFRS") with effect from January 1, 2010. The following should be read in conjunction with management's discussion and analysis and the unaudited condensed interim financial statements and notes of Palko as at and for the three and nine months ended September 30, 2011. Additional information relating to the Company is available on the System for Electronic Document Analysis and Retrieval ("SEDAR") at www.sedar.com.

Q3-2011 SELECTED FINANCIAL HIGHLIGHTS
Three months ended
September 30 (Unaudited
) Nine months ended
September 30 (Unaudited
)
$(000'S) 2011 2010 % Change 2011 2010 % Change
Revenue 9,919 6,667 49 24,303 15,503 57
Operating expenses 5,518 4,000 38 14,399 9,913 45
Operating margin 4,401 2,667 65 9,904 5,590 77
Operating margin % 44% 40 % 4 41% 36 % 5
Selling, general & administrative 1,035 1,114 (7 ) 3,657 2,915 25
Restructuring and reorganizing - 136 (100 ) - 459 (100 )
EBITDA(1) 3,366 1,417 138 6,247 2,216 182
Per share, basic 0.15 0.06 150 0.27 0.12 119
Per share, diluted 0.14 0.06 133 0.26 0.12 112
Net and comprehensive income (loss) 1,573 321 390 1,538 (2,295 ) 167
Per share, basic 0.07 0.01 600 0.07 (0.13 ) 154
Per share, diluted 0.07 0.01 600 0.06 (0.13 ) 146
Normalized income(1) 1,573 457 244 1,538 46 3,243
Funds flow from operations (1) 3,037 1,173 159 5,259 1,286 309
Per share, basic 0.13 0.05 160 0.23 0.07 229
Per share, diluted 0.13 0.05 160 0.22 0.07 214
Capital expenditures 4,401 2,052 114 6,991 2,553 174
Weighted average shares outstanding
Basic 23,032,306 22,854,287 1 23,021,984 17,870,951 29
Diluted 23,699,771 23,116,019 3 23,718,983 17,870,951 33
(1) These financial measures are Non-GAAP measurements and do not have any standardized meaning prescribed by International Financial Reporting Standards ("IFRS") and are therefore unlikely to be comparable to measures presented by other reporting issuers. See management's discussion and analysis available at http://www.sedar.com/ for a description of the Non-GAAP measurements.
Q3-2011 Corporate Highlights
  • Revenues totaled $9.9 and $24.3 million for the three and nine months ended September 30, 2011 as compared to $6.7 and $15.5 million in comparable periods of 2010 reflecting a quarter-over-quarter increase of 49% and a year-over-year increase of 57%.
  • Operating margin in Q3-2011 increased to $4.4 million from $2.7 million in Q3-2010 and year-to-date to $9.9 million from $5.6 million in the comparable period of 2010. Operating margin as a percentage of revenue increased to 44% from 40% quarter-over-quarter and to 41% from 36% year-over-year.
  • EBITDA increased to $3.4 million ($0.15 per basic and $0.14 per diluted share) for the three months ended September 30, 2011 and to $6.2 million ($0.27 per basic and $0.26 per diluted share) for the nine months ended September 30, 2011 from EBITDA of $1.4 million ($0.06 per basic and diluted share) and $2.2 million ($0.12 per basic and diluted share) in the comparable periods of 2010.
  • Palko expended $4.4 million and $7.0 million on property, plant and equipment in the three and nine months ended September 30, 2011 as compared to $2.1 million and $2.6 million in the same three and nine months of 2010. A significant amount of the 2011 capital expenditures included the continued construction of two new waste disposal facilities in the Bakken area of southeast Saskatchewan near Stoughton and Oungre and an exclusive waste handling tank farm for a major Saskatchewan producer. Palko expects to be accepting volumes at Oungre in late November and at Stoughton in December. Operations at the tank farm commenced on October 13, 2011.
  • Palko continued to progress regulatory and stakeholder approvals for a Cardium focused facility. Palko expects to complete the approval process and begin construction of the facility in 2012.
  • Subsequent to quarter end, on October 17, 2011, Gibson Energy Inc. ("Gibson") and Palko announced that they have entered into an agreement providing for the acquisition by Gibson of all of the issued and outstanding common shares of Palko ("Palko Shares") not already owned, directly or indirectly, by Gibson. Under the terms of the transaction, shareholders of Palko may elect to receive either: (i) 0.1717 of a common share of Gibson for each Palko Share; or (ii) $3.05 cash for each Palko Share. Shareholders may elect to receive any combination of cash and share consideration in respect of the shares they hold. An Information Circular outlining an Arrangement will be mailed in November with an anticipated closing in mid-December.
  • On November 9, 2011, Palko agreed to purchase assets permitting the development of an industrial/oilfield landfill and treatment pad near Heward, Saskatchewan. The assets include a parcel of land approved for landfill development, associated regulatory approvals and landfill operations infrastructure. The purchase price for the assets is $1.875 million.
RESULTS OF OPERATIONS
Revenue, operating costs, and operating margin for the three and nine months ended September 30, 2011 and 2010 are outlined below:
Three months ended Nine months ended
September 30 September 30
$(000'S) 2011 2010 2011 2010
Revenue 9,919 6,667 24,303 15,503
Operating costs 5,518 4,000 14,399 9,913
Operating margin 4,401 2,667 9,904 5,590
Operating margin % 44% 40% 41% 36%

On June 30, 2010, the Company acquired the remaining 50% interest in Palko Energy. The three and nine months ended September 30, 2011 operating results presented contain 100% of Palko Energy operations. Operating results for the same period in 2010 contain 50% until June 30, 2010 and 100% for July 1 to September 30, 2010.

REVENUE

Revenue for the three and nine months ended September 30, 2011 was $9.9 million and $24.3 million, reflecting increases of 49% and 57% respectively, as compared to the same periods in 2010.

Palko continues to experience increased revenues mainly because of enhanced oil and gas activity in the areas in which we operate and higher oil prices. West Texas Intermediate ("WTI") crude oil averaged US$89.75 per barrel in Q3-2011 as compared to US$76.17 per barrel in Q3-2010, an increase of 18%. Although one of our Alberta plants continued to suffer from prolonged adverse weather conditions through mid-quarter followed by equipment issues, the remaining plants enjoyed increased activity which is reflected in our revenues. Increased demand for our services has allowed Palko to continue to implement selective price increases at certain facilities. Our 2010 capital expenditure program expanded the capacities at certain of our facilities, allowing us to meet the increased demands that our facilities are experiencing in 2011, which has also produced positive revenue generation. In addition, employing our mobile oil treatment units at certain of our facilities allowed us to obtain enhanced efficiencies and recoveries for both Palko and our customers. The increased ownership of the Palko Energy facility from 50% in Q1 and Q2-2010 to 100% thereafter also provided additional revenue.

OPERATING COSTS AND OPERATING MARGIN

Operating costs in the three and nine months ended September 30, 2011 increased 38% and 45% to $5.5 million and $14.4 million, respectively, as compared to $4.0 million and $9.9 million in the three and nine months of 2010.

Accompanying the increase in revenue at our facilities is an increase in certain types of variable costs such as repayment of recovered oil, trucking and landfill costs. However, since many of our costs such as salaries and regular maintenance are fixed, revenue increased by 49% and 57% and operating costs increased by only 38% and 45% in the three and nine months ended September 30, 2011 as compared to 2010. The continued positive results produced operating margins for the three and nine months ended September 30, 2011 of $4,401 and $9,904 compared to $2,667 and $5,590 for the corresponding three and nine months of 2010. The operating margin percentage increased in both the three and nine months ended September 30, 2011 to 44% and 41% as compared to 40% and 36% for the corresponding three and nine months of 2010.

Overall maintenance costs increased in the three and nine months ended September 30, 2011 as compared to 2010, which is to be expected; as throughput volumes increase, wear and tear on our facilities also increases. Landfill, waste and flush expenses also increased in the three and nine months ended September 30, 2011 as compared to 2010, again in correlation with the increase in revenues associated with these activities. In addition the increased ownership of the Palko Energy facility from 50% in Q1 and Q2-2010 and 100% in Q3-2010 as compared to 100% for all of 2011 resulted in increased costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SGA)

Three months ended Nine months ended
September 30 September 30
$(000'S) 2011 2010 2011 2010
SGA expenses 1,035 1,114 3,657 2,915
SGA as % of revenue 10 % 17 % 15 % 19 %

SGA as a percentage of revenue decreased to 10% and 15% for the three and nine months ended September 30, 2011 as compared to 17% and 19% in the same periods in 2010. Decreasing SGA as a percentage of revenue is a function of increased revenues and leverage on our fixed costs.

Gross dollar decreases for the quarterly results as compared to Q3 2010 are due in part to leverage on our fixed cost structure and a recovery of bad debt allowances as collections of accounts receivable continue to improve. Gross dollar increases year-to-date from the same period in 2010 are due mainly to the increased staffing costs; filling vacant positions in head office that were not filled in the economic downturn and expansion of the sales force and business development group during the latter half of 2010. Increased SGA was also the result of increased professional fees, incurred to facilitate our conversion to International Financial Reporting Standards ("IFRS") as well as for additional accounting and tax services. In addition, based on operating results to date a bonus was accrued for our employees in the first nine months of 2011 whereas in the same period of 2010 there was nil accrued. 2010 SGA includes an IFRS adjustment for transaction costs of $219 previously capitalized for the purchase of the remaining 50% of Palko Energy.

OUTLOOK

During the third quarter Palko made strides towards the completion of both of its new facilities in southeast Saskatchewan. At the time of producing this document, construction of both Stoughton and Oungre facilities is well on the way to being materially completed on time and on budget. Palko expects to be accepting its first loads at Oungre in late November and at Stoughton sometime in December. Palko remains confident of the design, timing and economics of these two new facilities based on our experience and customer knowledge in this robust market area.

Palko's growth initiatives have remained plentiful. The study of market demand and alternatives for solids handling services within the Bakken for our own facilities and to meet the growing demand of our customers has led to the purchase of the Heward landfill site in early November 2011. Strategically located amongst Palko's four Saskatchewan locations, the site includes an industrial landfill approval along with landfill lands and associated infrastructure. Palko expects to commence cell construction in the second quarter of 2012 and to be operating by the end of the year. In addition, Palko continues to make progress on the regulatory process for construction of a full service waste handling and terminalling facility focused on the Cardium formation in Alberta.

Palko's existing facilities in Alberta and Saskatchewan continue to perform very well. Activity levels within our markets, customer plans, consensus economic forecasts, expanded capabilities and additional facilities at Palko leave us with a confident view of the balance of 2011 and into 2012.

During the third quarter, a special committee was struck to run a process to evaluate Palko's strategic alternatives. While Palko's strategic position is strong, and its opportunity pipeline is extensive, its cost of capital is high. Significant additional equity would be required to seize Palko's development opportunities. In the final analysis, the special committee and the Board of Directors determined it was in shareholders' best interest to tender to a proposal from Gibson. The offer from Gibson represented a significant premium to Palko's closing price and Gibson provides an improved asset base for exploiting opportunities. As a minority shareholder in Palko, with board representation, Gibson is a known and quality relationship based on a common set of values. Palko's Board of Directors and management team take great comfort in the notion of passing control of Palko to Gibson. An Information Circular outlining an Arrangement will be mailed in November with an anticipated closing in mid-December.

About Palko Environmental Ltd.

Palko provides processing and disposal of oilfield and industrial wastes through our network of waste handling and hydrocarbon recovery facilities located across Alberta and Saskatchewan. Our focus on client service extends to custom oil treating, waste oil reclamation and crude oil market access for customers.

Our services support all aspects and stages of oil and gas exploration and production, including drilling, fracturing, completion, production and subsequent abandonment and reclamation. In addition, Palko provides hydrocarbon recovery and waste management solutions for a variety of non-oilfield and industrial wastes of similar composition.

Additional information relating to the Company is available on SEDAR at www.sedar.com.

Certain statements in this press release constitute "forward-looking" statements that involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of Palko, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. When used in this document, such statements use such words as "may", "will", "intend", "should", "expect", "believe", "plan", "anticipate", "estimate", "predict", "potential", "continue", or the negative of these terms or other similar terminology.

Such statements include:

  • the Company's ability to capitalize on the ongoing recovery in oil and gas exploration in Western Canada;
  • the expectation that two new facilities in Saskatchewan will be operational and accepting volumes in late November and December and will be on budget;
  • the ability of the Company to fund its 2011 capital expenditure program from cash flow from operations and its credit facilities;
  • the expectation that Palko will complete the approval process and begin construction of a Cardium focused facility in 2012;
  • the expectation that Palko's performance will continue to be robust for the remainder of 2011 and into 2012;
  • the anticipated closing of the Arrangement in mid-December; and
  • Palko's expectation that it will commence construction on the Heward landfill site in the second quarter of 2012 and be operating it by the end of the year.

These statements reflect current expectations regarding future events and operating performance and speak only as of the date of this document. These statements are based on certain assumptions, including assumptions with respect to, prices for oil and natural gas, level of activity of oil and gas exploration, forecasts of capital expenditures and the sources of financing thereof, the amount, nature, timing and effects of capital expenditures, operating and other costs, business strategies and plans of management, tax treatment of the Company and competitive position of the Company in the oilfield waste management industry.

In particular, the Company has made the following assumptions:

  • that the recovery of the oil and gas exploration sector will continue;
  • that the Company will be able to capitalize on such recovery;
  • that the new facilities will generate revenues;
  • that existing facilities will be able to absorb increasing volumes;
  • that activity levels in the Alberta Bakken will increase; and
  • that all regulatory and security holder approvals will be obtained for the Arrangement all conditions for completion of the Arrangement will be met.

Although Palko believes that the expectations represented in such forward-looking statements are reasonable, there can be no assurance that these expectations will prove to be correct. There are risks which could affect Palko's future results and could cause the results to differ materially from those expressed in these forward looking statements including:

  • volatility in market prices for oil and natural gas;
  • liabilities and risks inherent in Palko's operations;
  • competition for, among other things, capital and skilled personnel;
  • increased competition for customers and the possibility that the Company's customer base will decrease;
  • technical and drilling problems;
  • equipment failure;
  • construction delays;
  • delivery delays;
  • the possibility that the economic recovery will not continue;
  • fluctuations in foreign exchange or interest rates and stock market volatility;
  • uncertainties associated with changes in legislation, including but not limited to changes in income tax laws; and
  • the Arrangement may not be approved by the security holders of Palko or other conditions for the completion of the Arrangement may not be met.

Statements of past performance should not be construed as an indication of future performance. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such results will be achieved. A number of factors, including those discussed above, could cause actual results to differ materially from the results discussed in the forward-looking statements. Any such forward-looking statements are expressly qualified in their entirety by this cautionary statement. Moreover, Palko does not assume responsibility for the accuracy or completeness of such forward-looking statements.

The forward-looking statements included in this Press Release are made as of the date of this Press Release and Palko undertakes no obligation to publicly update or revise forward-looking statements other than as required by applicable laws. You should not place undue reliance on forward-looking statements.

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