Strad Energy Services Ltd.
TSX : SDY

Strad Energy Services Ltd.

February 23, 2016 22:47 ET

Strad Energy Services Announces Fourth Quarter Results

CALGARY, ALBERTA--(Marketwired - Feb. 23, 2016) -

NOT FOR DISTRIBUTION TO U.S. NEWS WIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES ("U.S.")

The news release contains "forward-looking information and statements" within the meaning of applicable securities laws. For full disclosure of the forward-looking information and statements and the risks to which they are subject, see the "Cautionary Statement Regarding Forward-Looking Information and Statements" later in this news release.

Strad Energy Services Ltd., ("Strad" or the "Company") (TSX:SDY), a North American-focused, energy services company, today announced its financial results for the year-ended December 31, 2015. All amounts are stated in Canadian dollars unless otherwise noted.

SELECTED FINANCIAL AND OPERATIONAL HIGHLIGHTS:

  • Fourth quarter and annual adjusted EBITDA(1) of $2.5 million and $17.4 million decreased 86% and 70% compared to $17.6 million and $58.7 million for the same period in 2014. Adjusted EBITDA normalized for one time and non-recurring costs (2)for the three months and year-ended December 31, 2015, would otherwise be $3.4 million and $19.6 million.

  • Fourth quarter earnings per share decreased to $(0.23) from $0.17 for the same period in 2014. For the year-ended December 31, 2015 (loss) earnings per share decreased to $(0.82) from $0.63. Earnings per share for the year-ended December 31, 2015, before goodwill and other impairments, would otherwise be $(0.22);

  • Revenue of $22.0 million and $111.5 million for the three months and year-ended December 31, 2015, decreased 61% and 49% compared to $56.1 million and $219.8 million for the same periods in 2014;

  • Reduced total funded debt(3) by $5.8 million and $19.3 million during the three months and year-ended December 31, 2015;

  • Total funded debt(3) to EBITDA(4) ratio was 1.0 to 1.0 at December 31, 2015;

  • Recorded a non-cash property, plant and equipment impairment of $7.8 million during the fourth quarter of 2015; and

  • Capital additions totaled $1.3 million during the fourth quarter of 2015 and $9.6 million for the year-ended December 31, 2015.

Notes:
(1) Earnings before interest, taxes, depreciation and amortization and other adjustments ("adjusted EBITDA") is not a recognized measure under IFRS; see "Non-IFRS Measures Reconciliation".
(2) One time and non-recurring items include severance costs related to staff reductions and advisory fees associated with the potential takeover bid announced and subsequently withdrawn in September.
(3) Funded debt includes bank indebtedness plus long-term debt plus current and long-term obligations under finance lease less cash.
(4) EBITDA is based on trailing twelve months adjusted EBITDA plus share based payments, plus additional one time charges.

"Challenging market conditions persisted throughout the fourth quarter and have intensified further into 2016 with rig declines, reduced activity levels and early signs of break-up in Canada," said Andy Pernal, President and Chief Executive Officer of Strad. "Our strategy of pursuing energy infrastructure opportunities and other non-traditional markets as well as tightly managing our cost structure and balance sheet will enable us to weather what we anticipate to be historically low activity levels in 2016."

"During the fourth quarter, we continued to rationalize our cost base and made further headcount reductions across our entire business," said Greg Duerr, Chief Financial Officer of Strad. "Our proactive and disciplined approach to managing our cost structure in 2015 resulted in a further repayment of $5.8 million of debt during the fourth quarter. As we head into 2016, we will continue to remained focused on managing costs and repaying debt in order to maintain our strong financial position."

YEAR-END FINANCIAL HIGHLIGHTS
($000's, except per share amounts) Three months ended December 31, Year-ended December 31,
2015 2014 % Chg. 2015 2014 % Chg. 2013
Revenue 21,972 56,089 (61 ) 111,548 219,784 (49 ) 189,574
Adjusted EBITDA(1) 2,500 17,571 (86 ) 17,432 58,694 (70 )
Adjusted EBITDA as a % of revenue 11 % 31 % 16 % 27 % 21 %
Per share ($), basic 0.07 0.48 (85 ) 0.47 1.60 (71 ) 1.11
Per share ($), diluted 0.07 0.47 (85 ) 0.47 1.56 (70 ) 1.08
Net (loss) income (8,316 ) 6,125 (236 ) (30,361 ) 22,997 (232 ) 5,372
Per share ($), basic (0.23 ) 0.17 (0.82 ) 0.63 0.15
Per share ($), diluted (0.23 ) 0.16 (0.82 ) 0.61 0.14
Funds from operations(2) 3,005 16,785 (82 ) 18,543 56,742 (67 ) 3,992,200
Per share ($), basic 0.08 0.45 (82 ) 0.50 1.54 (68 ) 1.09
Per share ($), diluted 0.08 0.45 (82 ) 0.50 1.51 (67 ) 1.07
Capital expenditures(3) 1,328 11,900 (89 ) 9,606 42,715 (78 ) 25,516
Dividends declared - 2,609 (100 ) 7,827 9,875 (21 ) 8,194
Dividends declared per share - 0.07 0.21 0.26 0.22
Total assets 169,206 237,459 (29 ) 169,206 237,459 (29 ) 207,920
Long-term debt 15,500 36,000 (57 ) 15,500 36,000 (57 ) 38,500
Total long-term liabilities 22,264 51,107 (56 ) 22,264 51,107 (56 ) 47,067
Common shares - end of period ('000's) 37,280 37,279 37,280 37,279 37,251
Weighted avg common shares ('000's)
Basic 36,919 36,910 36,916 36,789 36,612
Diluted 36,919 37,587 36,916 37,592 37,361
Notes:
(1) Earnings before interest, taxes, depreciation and amortization and other adjustments ("adjusted EBITDA") is not a recognized measure under IFRS; see "Non-IFRS Measures Reconciliation".
(2) Funds from operations is cash flow from operating activities before changes in non-cash working capital. Funds from operations is not a recognized measure under IFRS; see "Non-IFRS Measures Reconciliation".
(3) Includes assets acquired under finance lease and purchases of intangible assets.
FINANCIAL POSITION AND RATIOS
As at December 31,
($000's except ratios) 2015 2014
Working capital(1) 12,403 26,321
Funded debt(2) 19,592 38,677
Total assets 169,206 237,459
Funded debt to EBITDA(3) 1.0 : 1.0 0.7 : 1.0
Notes:
(1) Working capital is calculated as current assets less current liabilities, excluding assets held for sale.
(2) Funded debt includes bank indebtedness plus long-term debt plus current and long-term obligations under finance lease less cash.
(3) EBITDA is based on trailing twelve months adjusted EBITDA plus share based payments, plus additional one time charges. See "Non-IFRS Measures Reconciliation".

FOURTH QUARTER RESULTS

Strad reported a decrease in revenue and adjusted EBITDA of 61% and 86% respectively, during the three months ended December 31, 2015, compared to the same period in 2014. Decreased revenue during the fourth quarter was a result of reduced equipment utilization and pricing in both Canada and the United States ("U.S.") and lower Product Sales due to a significant decline in rig activity levels year-over-year. Adjusted EBITDA margin percentage decreased to 11% compared to 31% in the prior year during the fourth quarter of 2015 due to the decrease in overall revenue.

Strad's Canadian Operations reported a decrease in revenue of 49% and adjusted EBITDA of 56% during the three months ended December 31, 2015, compared to the same period in 2014. Decreased revenue was a result of lower pricing and utilization of the surface equipment fleet as a result of a 56% decline in the average drilling rig count to 173 rigs during the fourth quarter of 2015 compared to 394 for the same period in 2014.

Rig counts in Strad's targeted U.S. resource plays were also significantly lower year-over-year during the fourth quarter of 2015 compared to the same period in 2014. Rig counts in the Bakken, Rockies and Marcellus regions decreased by 67%, 64%, and 52%, respectively, year-over-year. The rig count declines resulted in a 64% decrease in revenue during the fourth quarter of 2015 compared to 2014. As a result of lower revenue, adjusted EBITDA decreased 89% and adjusted EBITDA as a percentage of revenue decreased to 15% during the fourth quarter of 2015 compared to 47% in the fourth quarter of 2014.

During the fourth quarter of 2015, capital expenditures were $0.2 million in Canada and $1.1 million in the U.S. For the year-ended December 31, 2015, Strad spent $9.6 million on capital expenditures.

RESULTS OF OPERATIONS
Canadian Operations
Three months ended December 31, Year-ended December 31,
($000's) 2015 2014 % chg. 2015 2014 % chg.
Revenue 11,971 23,664 (49 ) 58,308 97,853 (40 )
Operating expenses 7,656 14,951 (49 ) 38,304 61,975 (38 )
Selling, general and administrative 1,637 2,522 (35 ) 7,280 9,729 (25 )
Net (loss) income (1,484 ) 3,315 (145 ) (8,616 ) 15,740 (155 )
Adjusted EBITDA(1) 2,677 6,148 (56 ) 12,728 26,025 (51 )
Adjusted EBITDA as a % of revenue 22 26 % 22 % 27 %
Capital expenditures(2) 229 4,702 (95 ) 5,904 22,707 (74 )
Gross capital assets 116,010 118,136 (2 ) 116,010 118,136 (2 )
Total assets 78,405 114,646 (32 ) 78,405 114,646 (32 )
Notes:
(1) Earnings before interest, taxes, depreciation and amortization and other adjustments ("adjusted EBITDA") is not a recognized measure under IFRS; see "Non-IFRS Measures Reconciliation".
(2) Includes assets acquired under finance lease and purchases of intangible assets.

Revenue for the three months ended December 31, 2015, of $12.0 million decreased 49% compared to $23.7 million for the same period in 2014. Decreased revenue during the quarter was primarily a result of lower rental revenue from the surface equipment and matting fleets. In addition to price declines, utilization levels for surface equipment declined by 53% during the fourth quarter of 2015, compared to the same period in 2014, due to a 56% decline in average rig count in the WCSB over the same time period. A significant decline in commodity prices throughout 2015 caused the continuation of the decline in rig count during the fourth quarter of 2015 as Strad's customers reduced capital spending.

During the fourth quarter, revenue from Strad's matting rental fleet decreased due to pricing, offset by an increase in utilization level and an increase in the overall size of the matting fleet. Strad's Canadian matting fleet increased to approximately 51,300 pieces as at December 31, 2015, compared to approximately 45,500 pieces as at December 31, 2014. Utilization increased by 5% during the fourth quarter of 2015, compared to the fourth quarter of 2014.

Adjusted EBITDA for the three months ended December 31, 2015, of $2.7 million, decreased 56% compared to $6.1 million for the same period in 2014. Adjusted EBITDA as a percentage of revenue, for the three months ended December 31, 2015, decreased to 22% compared to 26% for the same period in 2014. The decline in adjusted EBITDA is a result of the decline in total revenue during the fourth quarter. Adjusted EBITDA, normalized for one-time and non-recurring costs, for the three months ended December 31, 2015, would otherwise be $3.2 million.

Revenue for the year-ended December 31, 2015, of $58.3 million, decreased 40% compared to $97.9 million for the same period in 2014. Decreased drilling activity was the primary driver of lower revenue year-over-year.

Adjusted EBITDA for the year-ended December 31, 2015, of $12.7 million, decreased 51% compared to $26.0 million for the same period in 2014. Adjusted EBITDA as a percentage of revenue, for the year-ended December 31, 2015, was 22% compared to 27% for the same period in 2014. Adjusted EBITDA, normalized for one-time and non-recurring costs, for the year-ended December 31, 2015, would otherwise be $13.5 million.

Operating expenses for the three months and year-ended December 31, 2015, of $7.7 million and $38.3 million decreased 49% and 38% respectively compared to $15.0 million and $62.0 million for the same period in 2014. The decline in operating expenses during the fourth quarter of 2015 is a result of lower activity levels.

Selling, general and administration costs ("SG&A") for the three months and year-ended December 31, 2015, of $1.6 million and $7.3 million respectively decreased 35% and 25% compared to $2.5 million and $9.7 million for the same period in 2014. SG&A costs decreased due to cost reductions implemented by management including staff reductions, wage roll backs and reductions in discretionary spending.

U.S. Operations
Three months ended December 31, Year-ended December 31,
($000's) 2015 2014 % chg. 2015 2014 % chg.
Revenue 7,875 21,852 (64 ) 40,083 73,840 (46 )
Operating expenses 5,523 9,225 (40 ) 26,705 35,875 (26 )
Selling, general and administrative 1,188 2,434 (51 ) 5,929 8,966 (34 )
Net (loss) income (5,195 ) 2,907 (279 ) (17,388 ) 3,414 (609 )
Adjusted EBITDA(1) 1,148 10,191 (89 ) 7,450 28,982 (74 )
Adjusted EBITDA as a % of revenue 15 % 47 % 19 % 39 %
Capital expenditures(2) 1,098 5,155 (79 ) 3,551 14,330 (75 )
Gross capital assets 154,570 126,825 22 154,570 126,825 22
Total assets 89,236 120,917 (26 ) 89,236 120,917 (26 )
Notes:
(1) Earnings before interest, taxes, depreciation and amortization and other adjustments ("adjusted EBITDA") is not a recognized measure under IFRS; see "Non-IFRS Measures Reconciliation".
(2) Includes assets acquired under finance lease and purchases of intangible assets.

Revenue for the three months ended December 31, 2015, decreased 64% to $7.9 million from $21.9 million for the same period in 2014. The decline in revenue is due to a combination of lower rental fleet utilization rates and average pricing offset with an increase in the size of the rental fleets and a strengthening U.S. dollar. During the fourth quarter of 2015, utilization rates for Strad's U.S. matting, surface equipment and solids control fleets declined by 65%, 50%, and 64%, respectively, compared to the same period in 2014. Pricing pressure in the fourth quarter of 2015 contributed further to revenue declines. Both utilization and price declines year-over-year are the result of a decline in rig counts across all Strad's targeted resource plays in the U.S. Average rig counts declined in the Bakken, Rockies and Marcellus regions by 67%, 64%, and 52%, respectively, during the fourth quarter of 2015 compared to the same quarter in 2014.

An increase in the surface equipment and solids control rental fleets year-over-year offset declines in the matting fleet, utilization rates and average pricing. The U.S. matting fleet decreased by 48 pieces to 12,655 as at December 31, 2015, compared to 12,703 pieces as at December 31, 2014. The U.S. surface equipment fleet increased by 71 pieces of equipment to 2,019 pieces as at December 31, 2015, compared to 1,948 pieces as at December 31, 2014. Strad's U.S. solids control fleet increased by 3 centrifuges to a total of 53 as at December 31, 2015, compared to 50 centrifuges as at December 31, 2014. Finally, a strengthening U.S. dollar from the fourth quarter of 2014 to the fourth quarter of 2015 helped offset a portion of the revenue decline.

Adjusted EBITDA for the three months ended December 31, 2015, decreased 89% to $1.1 million compared to $10.2 million for the same period in 2014. Adjusted EBITDA as a percentage of revenue, for the three months ended December 31, 2015, was 15% compared to 47% for the same period in 2014. The decrease in both adjusted EBITDA and adjusted EBITDA as a percentage of revenue is primarily due to the decline in revenue compared to the same period in 2014. Adjusted EBITDA, normalized for one-time and non-recurring costs, for the three months ended December 31, 2015, would otherwise be $1.4 million.

Revenue for the year-ended December 31, 2015, decreased 46% to $40.1 million compared to $73.8 million for the same period in 2014. The year-over-year decrease in revenue was primarily driven by decreased utilization of Strad's matting, solids control and surface equipment fleets.

Adjusted EBITDA for the year-ended December 31, 2015, decreased 74% to $7.5 million compared to $29.0 million for the same period in 2014. Decreased adjusted EBITDA was due to lower revenue compared to the same period in 2014. Adjusted EBITDA as a percentage of revenue for the year-ended December 31, 2015, was 19% compared to 39% for the same period in 2014. Adjusted EBITDA, normalized for one-time and non-recurring costs, for the year-ended December 31, 2015, would otherwise be $8.5 million.

Operating expenses for the three months and year-ended December 31, 2015, of $5.5 million and $26.7 million, respectively, decreased 40% and 26% compared to $9.2 million and $35.9 million for the same period in 2014. The decline in operating expenses during the fourth quarter of 2015 is a result of lower activity levels. A portion of the Company's operating expenses are fixed, thus the percentage decline is lower for operating expenses compared to revenue.

SG&A costs for the three months and year-ended December 31, 2015, of $1.2 million and $5.9 million, respectively, decreased 51% and 34% compared to $2.4 million and $9.0 million for the same period in 2014. SG&A costs decreased due to cost reductions implemented by management including staff reductions, wage roll backs and reductions in discretionary spending.

Product Sales
Three months ended December 31, Year-ended December 31,
($000's) 2015 2014 % chg. 2015 2014 % chg.
Revenue 2,126 10,574 (80 ) 13,157 48,091 (73 )
Operating expenses 2,700 8,252 (67 ) 13,226 40,243 (67 )
Selling, general and administrative 44 54 (19 ) 170 201 (15 )
Net (loss) income (370 ) 1,545 (124 ) (370 ) 4,255 (109 )
Adjusted EBITDA(1) (622 ) 2,269 (127 ) (245 ) 7,639 (103 )
Adjusted EBITDA as a % of revenue (29 )% 21 % (2 )% 16 %
Capital expenditures(2) - 2 (100 ) - 26 (100 )
Total assets 532 505 5 532 505 5
Notes:
(1) Earnings before interest, taxes, depreciation and amortization and other adjustments ("adjusted EBITDA") is not a recognized measure under IFRS; see "Non-IFRS Measures Reconciliation".
(2) Includes assets acquired under finance lease and purchases of intangible assets.

Product Sales are comprised of in-house manufactured products sold to external customers, third party equipment sales to existing customers and sales of equipment from Strad's existing fleet to customers.

Revenue for the three months ended December 31, 2015, decreased 80% to $2.1 million from $10.6 million for the same period in 2014, resulting primarily from lower sales of in-house manufactured products sold to external customers and third party equipment sales. During the fourth quarter, Product Sales consisted of $0.9 million of in-house manufactured products, $0.2 million of third party equipment sales and $1.0 million of rental fleet sales compared to $6.7 million, $1.7 million and $2.2 million, respectively, during the same period in 2014. Sales in the quarter were impacted by a significant decrease in demand, typical in the business when drilling activity levels decline.

Adjusted EBITDA for the three months ended December 31, 2015, decreased 127% to $(0.6) million compared to $2.3 million for the same period in 2014. Adjusted EBITDA as a percentage of revenue, for the three months ended December 31, 2015, decreased to (29%) compared to 21% for the same period in 2014. The decrease in adjusted EBITDA was due to lower sales revenue insufficient to cover the fixed overhead in the manufacturing facility during the fourth quarter of 2015 compared to the same period in the prior year.

Revenue for the year-ended December 31, 2015, decreased 73% to $13.2 million compared to $48.1 million for the same period in 2014. Revenue was lower during 2015 due to decreased rig activity. Sales of Strad's rental fleet equipment fluctuate quarter-over-quarter and are primarily dependent on strategic opportunities to monetize underutilized rental assets.

Adjusted EBITDA for the year-ended December 31, 2015, decreased 103% to $(0.2) million compared to $7.6 million for the same period in 2014. The decrease in adjusted EBITDA was due to lower sales revenue in 2015 compared to the same period in 2014. Adjusted EBITDA as a percentage of revenue, for the year-ended December 31, 2015, was (2)% compared to 16% for the same period in 2014.

Operating expenses for the three months and year-ended December 31, 2015, of $2.7 million and $13.2 million respectively decreased 67% compared to $8.3 million and $40.2 million for the same period in 2014. Operating expenses were removed from the business as activity levels declined.

IMPAIRMENT OF GOODWILL AND PROPERTY, PLANT AND EQUIPMENT

The Company reviews the carrying value of its cash-generating units ("CGU's") at each balance sheet date to determine whether there is any indication of impairment. During 2015, significant decreases in industry activity resulting from the decline in oil and natural gas prices and its impact on current and future business were indicators of impairment and resulted in the Company conducting its test for goodwill impairment as of September 30, 2015. The recoverable amount of each CGU was determined using fair value less costs of disposal calculations, which included discounted after-tax cash flow calculations, using forecast prices and cost estimates (Level 3) based on expected future results and discount rates of 15.0% (Canadian Operations) and 15.5% (U.S. Operations). Cash flow projections for 2016 to 2019 have assumed a gradual trend toward recovery to near historical activity levels experienced in 2014. Cash flow projections thereafter have been extrapolated based on a 2.0% per annum growth rate. To assess reasonableness, an evaluation of EBITDA multiples was also completed. As a result of these tests, it was determined that the carrying amount exceeded the recoverable amount indicating impairment of the carrying values. Accordingly, the Company recorded a goodwill impairment loss in the Canadian Operations CGU and U.S. Operations CGU of $7.7 million and $9.6 million, respectively, as at September 30, 2015.

Due to additional indicators of impairment, the recoverable amount of each CGU was also determined at December 31, 2015, using the higher of value in use and fair value less costs of disposal calculations, which included discounted after-tax cash flow calculations and multiples of EBITDA, using forecast prices and cost estimates (Level 3) based on expected future results and discount rates of 15.5% (Canadian Operations) and 16.0% (U.S. Operations). Cash flow projections for 2016 to 2020 assumed a gradual trend towards recovery to near historical activity levels. Cash flow projections thereafter reflect a 2% per annum growth rate. As at December 31, 2015, the recoverable amount of the U.S. Operations CGU, using a value in use approach, was estimated to be $85.3 million. The carrying amount of the CGU exceeded the recoverable amount, accordingly, the Company recorded an impairment to its property, plant and equipment in its U.S. Operations CGU of $5.2 million. As at December 31, 2015, the recoverable amount of the Canadian Operations CGU, using a value in use approach, was estimated to be $69.8 million. The carrying amount of the CGU exceeded the recoverable amount, accordingly, the Company recorded an impairment to its property, plant and equipment of $2.6 million.

OUTLOOK

Low commodity prices during the fourth quarter of 2015 continued to negatively impact activity levels in North America resulting average rig counts significantly below 2014 levels. Year-over-year rig count declines in the fourth quarter of 2015 exceeded declines experienced in each of the first three quarters of 2015. Oil producing regions in Western Canada and the Bakken continue to be impacted to the greatest degree. The decline in activity continues to result in pricing pressures across all regions in 2015 as producers seek to reduce drilling costs.

In the WCSB, active drilling rigs in the fourth quarter of 2015 were down approximately 56% over the prior year, averaging 173 compared to 394 for the same period in 2014. In the U.S., drilling rig activity continued to vary by region, with the total active U.S. rig count decreasing by 61% on a year-over-year basis and 8% sequentially. The majority of Strad's U.S. fleet continues to operate in the Bakken and Marcellus resource plays. The Bakken region experienced a decline similar to the WCSB while the Marcellus play, given its gas weighting, experienced a more modest decline. The active rig count in the Bakken averaged 62 rigs in the fourth quarter of 2015, down 67% from 189 in the prior year. In the gas-weighted Marcellus and Utica plays, the active rig count averaged 63 during the fourth quarter of 2015, 52% lower than 129 during the prior year period.

Bakken operations are in close proximity to the Rockies region, consisting of Colorado, Wyoming, and Utah, where an average of 56 rigs were drilling during the fourth quarter, representing a decline of 64% from 155 rigs in the previous period.

Management continued to focus on expanding the Company's service offerings to the energy infrastructure market, including pipeline construction, power transmission construction and energy facilities construction, during the fourth quarter to further diversify the business into markets that are expected to be less commodity price sensitive in the near term. Matting demand has been reasonably strong in Canada as several infrastructure related projects continue to progress despite the weak commodity price environment.

Overall, Strad's diversification across geographies in Canada and the U.S., exposure to both crude oil and natural gas activity, product line diversification, blue chip and well capitalized customer base, and exposure to energy infrastructure projects collectively, is expected to serve to insulate the business to some degree from the decline in drilling activity levels.

Management continued to actively manage costs during the fourth quarter in response to lower activity levels. In addition to staff layoffs, reduction of labour hours, company wide wage rollbacks, and reductions in discretionary expenditures discussed previously, further reductions of direct labour and selling, general and administration ("SG&A") staff have been completed to align the cost structure to the level of activity present in the business. Since the end of 2014, Strad has reduced its employee headcount by nearly 200 staff or more than 60%. The Company expects to realize the full benefit of the most recent cost reductions in the first quarter of 2016.

Management expects activity levels to remain low until such time that commodity prices stabilize resulting in increased producer capital spending. There continues to be little visibility regarding producer capital spending and as a result, management expects winter drilling activity to be significantly lower year-over-year in the first quarter of 2016 and spring break-up in the WCSB has already begun due to warm weather conditions and low commodity prices. Management's strategy continues to reflect a prudent and measured approach with a focus on cash preservation, debt paydown and maintaining flexibility to be able to respond to opportunities that are presented when the market does recover. Management expects the maintenance capex requirement in 2016 to be modest and is anticipated to be managed at or below $5 million in this environment. The Company has approved a 2016 capital budget of $7.0 million which will be allocated to maintenance capital spending and select growth opportunities.

The business continued to produce positive cash flow even at significantly reduced revenue and adjusted EBITDA levels this quarter. Outstanding debt was reduced by an additional $5.8 million during the fourth quarter, bringing total debt reduction to $20.0 million since March 31, 2015. Total funded debt was $19.4 million at December 31, 2015, and the total funded debt to adjusted EBITDA ratio was 1.0 to 1.0.

LIQUIDITY AND CAPITAL RESOURCES
($000's) December 31, 2015 December 31, 2014
Current assets 25,035 57,683
Current liabilities 12,632 31,362
Working capital(1) 12,403 26,321
Banking facilities
Operating facility 2,874 826
Syndicated revolving facility 15,500 36,000
Total facility borrowings 18,374 36,826
Total credit facilities(2) 70,000 110,000
Unused credit capacity 51,626 73,174
Notes:
(1) Working capital is calculated as current assets less current liabilities, excluding assets held for sale.
(2) Facilities are subject to certain limitations on accounts receivable, inventory, and net book value of fixed assets and are secured by a general security agreement over all of the Company's assets. As at December 31, 2015, Strad had access to $70 million of credit facilities.

As at December 31, 2015, working capital was $12.4 million compared to $26.3 million at December 31, 2014. The change in current assets is a result of a 65% decrease in accounts receivable to $16.8 million for the fourth quarter of 2015 compared to $48.5 million for the fourth quarter of 2014. Accounts receivable decreased due to the 61% decline in revenue during the fourth quarter of 2015 compared to the same period in 2014. Prepaid expenses decreased $0.2 million to $1.5 million for the fourth quarter of 2015 compared to $1.7 million for the fourth quarter of 2014. Additionally, inventory decreased by 30% to $5.2 million for the fourth quarter of 2015 from $7.4 million for the fourth quarter of 2014. Inventory decreased due to the decline in Product Sales during the fourth quarter of 2015 compared to the same period in 2014.

The change in current liabilities is a result of a 65% decrease in accounts payable and accrued liabilities to $8.9 million for the fourth quarter of 2015 compared to $25.2 million at year end, offset by an increase of $2.0 million in bank indebtedness at the end of the fourth quarter. Accounts payable decreased due to a decline in activity and operating expenses during the fourth quarter of 2015 compared to the same period in 2014. The increase in bank indebtedness is primarily due to repayments of a portion of the Company's long term debt. The overall decrease in working capital is consistent with the decrease in revenue from the fourth quarter of 2014 to the fourth quarter of 2015.

Funds from operations for the three months ended December 31, 2015, decreased to $3.0 million compared to $16.8 million for the three months ended December 31, 2014. Capital expenditures totaled $1.3 million for the three months ended December 31, 2015. Strad's revolving facility borrowing decreased by $20.5 million for the year-ended December 31, 2015. Management monitors funds from operations and the timing of capital additions to ensure adequate capital resources are available to fund Strad's capital program.

The Company amended its credit facilities on December 31, 2015, extending the maturity date to September 29, 2018. These amendments include a relaxation of the Company's maximum ratio of funded debt to EBITDA for certain periods from its current level of 3.0:1 up to a maximum of 4.5:1. The Company's syndicated banking facility consists of an operating facility with a maximum principal amount of $10.0 million CAD and $7.0 million USD, and an $53.0 million syndicated revolving facility, which are subject to certain limitations on accounts receivable, inventory and net book value of fixed assets and are secured by a general security agreement over all of the Company's assets. As at December 31, 2015, the Company has access to $70.0 million of credit facilities. The syndicated banking facility bears interest at bank prime plus a variable rate, which is dependent on the Company's funded debt to EBITDA ratio.

Based on the Company's funded debt to EBITDA ratio of 1.0 to 1.0 at the end of the fourth quarter of 2015, the interest rate on the syndicated banking facility is bank prime plus 1.0% on prime rate advances and at the prevailing rate plus a stamping fee of 2.0% on bankers' acceptances. For the year-ended December 31, 2015, the overall effective rates on the operating facility and revolving facility were 4.75% and 3.78%, respectively. As of December 31, 2015, $2.9 million was drawn on the operating facility and $15.5 million was drawn on the revolving facility. Required payments on the revolving facility are interest only.

As at December 31, 2015, the Company was in compliance with all of the financial covenants under its credit facilities.

The relevant definitions of financial debt covenant ratio terms as set forth in the Company's syndicated banking facility are as follows:

  • Funded debt includes bank indebtedness plus long-term debt plus current and long-term obligations under finance lease less cash.
  • EBITDA is based on trailing twelve months adjusted EBITDA plus share based payments, plus additional one time charges.
  • Interest expense ratio is calculated as the ratio of trailing twelve months adjusted EBITDA plus share based payments and additional one time items to trailing twelve months interest expense on loans and borrowings.

The above noted definitions are not recognized under IFRS and are provided strictly for the purposes of the financial debt covenant calculation.

Financial Debt Covenants As at December 31, 2015 As at December 31, 2014
Funded debt to EBITDA ratio (not to exceed 3.0:1.0)
Funded debt 19,592 38,677
EBITDA 20,264 59,174
Ratio 1.0 0.7
EBITDA to interest coverage ratio (no less than 3.0:1.0)
EBITDA 20,264 59,174
Interest expense 1,625 2,176
Ratio 12.5 27.2

NON-IFRS MEASURES RECONCILIATION

Certain supplementary measures in this press release do not have any standardized meaning as prescribed under IFRS and, therefore, are considered non-IFRS measures. These measures are described and presented in order to provide shareholders and potential investors with additional information regarding the Company's financial results, liquidity and its ability to generate funds to finance its operations. These measures are identified and presented, where appropriate, together with reconciliations to the equivalent IFRS measure. However, they should not be used as an alternative to IFRS, because they may not be consistent with calculations of other companies. These measures are further explained below.

Earnings before interest, taxes, depreciation and amortization ("adjusted EBITDA") is not a recognized measure under IFRS. Management believes that in addition to net income, adjusted EBITDA is a useful supplemental measure as it provides an indication of the results generated by the Company's principal business activities prior to consideration of how those activities are financed or how the results are taxed. Adjusted EBITDA is calculated as net income plus interest, finance fees, taxes, depreciation and amortization, loss on disposal of property, plant and equipment, loss on foreign exchange, loss on assets held for sale, impairment of Goodwill, impairment loss, less gain on foreign exchange and gain on disposal of property, plant and equipment. Segmented adjusted EBITDA is based upon the same calculation for defined business segments, which are comprised of Canadian Operations, U.S. Operations and Product Sales.

Funds from operations are cash flow from operating activities excluding changes in working capital and share-based payments. It is a supplemental measure to gauge performance of the Company before non-cash items. Working capital is calculated as current assets minus current liabilities, excluding assets held for sale. Working capital, cash forecasting and banking facilities are used by Management to ensure funds are available to finance growth opportunities.

Funded debt is calculated as bank indebtedness plus long-term debt plus current and long-term portion of finance lease obligations less cash.

Reconciliation of EBITDA and Funds from Operations
($000's)
Three months ended December 31, Year-ended December 31,
2015 2014 2015 2014
Net (loss) income $ (8,316 ) $ 6,125 $ (30,361 ) $ 22,997
Add:
Depreciation and amortization 7,126 7,543 30,807 24,568
Gain on disposal of PP&E (99 ) (16 ) (254 ) (350 )
(Gain) loss on disposal of assets held for sale - (11 ) - 188
Impairment 7,822 406 7,822 406
Goodwill impairment - - 17,277 -
Share-based payments 43 111 258 480
Deferred income tax (recovery) expense (4,033 ) 2,092 (8,799 ) 6,022
Financing fees 34 40 168 259
Interest expense 427 495 1,625 2,172
Funds from operations 3,004 16,785 18,543 56,742
Add:
Loss on foreign exchange 216 47 380 35
Current income tax (recovery) expense (677 ) 850 (1,233 ) 2,397
Subtotal 2,543 17,682 17,690 59,174
Deduct:
Share-based payments 43 111 258 480
Adjusted EBITDA 2,500 17,571 17,432 58,694
Reconciliation of quarterly non-IFRS measures
($000's)
Three months ended
Dec 31, 2015 Sep 30, 2015 Jun 30, 2015 Mar 31, 2015
Net (loss) income $ (8,316 ) $ (20,362 ) $ (1,887 ) $ 204
Add:
Depreciation and amortization 7,126 9,616 7,020 7,045
Gain on disposal of PP&E (99 ) (30 ) (80 ) (45 )
Loss (gain) on foreign exchange 216 380 (81 ) (135 )
Current income tax (recovery) (677 ) (432 ) (18 ) (106 )
Deferred income tax (recovery) (4,033 ) (2,776 ) (1,541 ) (449 )
Interest expense 427 311 391 496
Impairment loss 7,822 17,277 - -
Finance fees 34 37 50 47
Adjusted EBITDA 2,500 4,021 3,854 7,057
Three months ended
Dec 31, 2014 Sep 30, 2014 Jun 30, 2014 Mar 31, 2014
Net income $ 6,125 $ 7,968 $ 4,763 $ 4,141
Add:
Depreciation and amortization 7,543 5,799 5,739 5,487
(Gain) loss on disposal of PP&E (16 ) 665 (241 ) (758 )
(Gain) loss on disposal of assets held for sale (11 ) - 161 38
(Gain) loss on foreign exchange 47 (181 ) 236 (67 )
Current income tax expense (recovery) 850 968 (81 ) 660
Deferred income tax expense 2,092 2,041 1,025 864
Interest expense 495 543 599 535
Impairment loss 406 - - -
Finance fees 40 32 99 88
Adjusted EBITDA 17,571 17,835 12,300 10,988

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS

Certain statements and information contained in this press release constitute forward-looking information and statements within the meaning of applicable securities laws. The use of any of the words "expect", "plan", "continue", "estimate", "anticipate", "potential", "targeting", "intend", "could", "might", "should", "believe", "may", "predict", or "will" and similar expressions are intended to identify forward-looking information or statements. More particularly, this press release contains forward-looking statements concerning future capital expenditures of the Company and funding thereof, changes and expectations in margins to be experienced by Strad, anticipated cash flow, debt, demand for the Company's products and services, drilling activity in North America, pricing of the Company's products and services, introduction of new products and services and the potential for growth and expansion of certain components of the Company's business, anticipated benefits from cost reductions and timing thereof, manufacturing capacity to meet anticipated demand for the Company's products, and expected exploration and production industry activity including the effects of industry trends on demand for the Company's products. These statements relate to future events or to the Company's future financial performance and involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results, levels of activity, performance or achievements to be materially different from future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.

Various assumptions were used in drawing the conclusions or making the projections contained in the forward-looking statements throughout this press release. 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 involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated and described in the forward-looking statements. Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information or statements. In addition to other material factors, expectations and assumptions which may be identified in this press release and other continuous disclosure documents of the Company referenced herein, assumptions have been made in respect of such forward-looking statements and information regarding, among other things: the Company will continue to conduct its operations in a manner consistent with past operations; the general continuance of current industry conditions; anticipated financial performance, business prospects, impact of competition, strategies, the general stability of the economic and political environment in which the Company operates; exchange and interest rates; tax laws; the sufficiency of budgeted capital expenditures in carrying out planned activities; the availability and cost of labour and services and the adequacy of cash flow; debt and ability to obtain financing on acceptable terms to fund its planned expenditures, which are subject to change based on commodity prices; market conditions and future oil and natural gas prices; and potential timing delays. Although Management considers these material factors, expectations and assumptions to be reasonable based on information currently available to it, no assurance can be given that they will prove to be correct.

Readers are cautioned that the foregoing lists of factors are not exhaustive. Additional information on these and other factors that could affect the Company's operations and financial results are included in reports on file with the Canadian Securities Regulatory Authorities and may be accessed through the SEDAR website (www.sedar.com) or at the Company's website. The forward-looking statements and information contained in this press release are expressly qualified by this cautionary statement. The Company does not undertake any obligation to publicly update or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

This press release shall not constitute an offer to sell, nor the solicitation of an offer to buy, any securities in the United States, nor shall there be any sale of securities mentioned in this press release in any state in the United States in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.

FOURTH QUARTER EARNINGS CONFERENCE CALL

Strad Energy Services Ltd. has scheduled a conference call to begin promptly at 8:00 a.m. MT (10:00 a.m. ET) on Wednesday, February 24, 2016.

The conference call dial in number is 1-866-225-2055 / 1-416-340-2218

The conference call will also be accessible via webcast at www.stradenergy.com

A replay of the call will be available approximately one hour after the conference call ends until Wednesday, March 2nd, 2016, at 11:59pm ET. To access the replay, call 1-800-408-3053, followed by pass code 6473231.

Strad Energy Services Ltd.
Consolidated Statement of Financial Position
As at December 31, 2015 and 2014 and January 1, 2014
(in thousands of Canadian dollars)
As at December 31, 2015 As at December 31, 2014 As at January 1, 2014
$ $ $
(Revised) (Revised)
Assets
Current assets
Trade receivables 16,754 48,542 35,569
Inventories 5,193 7,400 5,788
Prepaids and deposits 1,484 1,741 1,772
Note receivable - - 350
Income taxes receivable 1,604 - 40
25,035 57,683 43,519
Assets held for sale - 260 3,167
Non-current assets
Property, plant and equipment 140,977 159,100 142,108
Intangible assets 800 1,210 1,685
Long term assets 2,184 1,914 -
Goodwill - 17,277 17,277
Deferred income tax assets 210 15 164
Total assets 169,206 237,459 207,920
Liabilities
Current liabilities
Bank indebtedness 2,874 826 1,879
Accounts payable and accrued liabilities 8,881 25,207 20,854
Income taxes payable - 1,579 -
Deferred revenue 94 259 785
Current portion of obligations under finance lease 783 882 1,887
Dividend payable - 2,609 2,050
12,632 31,362 27,455
Non-current liabilities
Long-term debt 15,500 36,000 38,500
Obligations under finance lease 228 969 770
Deferred income tax liabilities 6,536 14,138 7,797
Total liabilities 34,896 82,469 74,522
Equity
Share capital 118,401 118,351 117,824
Contributed surplus 12,012 11,757 11,612
Accumulated other comprehensive income 30,153 12,950 5,152
Retained earnings (deficit) (26,256 ) 11,932 (1,190 )
Total equity 134,310 154,990 133,398
Total liabilities and equity 169,206 237,459 207,920
Strad Energy Services Ltd.
Consolidated Statement of Income and Comprehensive Income
For the years-ended December 31, 2015 and 2014
(in thousands of Canadian dollars, except per share amounts)
2015 2014
$ $
Revenue 111,548 219,784
Expenses
Operating expenses 78,235 138,093
Depreciation 30,221 23,852
Amortization of intangible assets 494 716
Amortization of long term assets 92 -
Selling, general and administration 15,623 22,517
Share-based payments 258 480
Gain on disposal of property, plant and equipment (254 ) (350 )
Foreign exchange loss 380 35
Finance fees 168 259
Interest expense 1,625 2,172
Loss on assets held for sale - 188
Impairment 7,822 406
Goodwill impairment 17,277 -
(Loss) income before income tax (40,393 ) 31,416
Income tax (recovery) expense (10,032 ) 8,419
Net (loss) income for the period (30,361 ) 22,997
Other comprehensive (loss) income
Items that may be reclassified subsequently to net (loss) income
Cumulative translation adjustment (Revised) 17,203 7,798
Total comprehensive (loss) income for the period (13,158 ) 30,795
(Loss) earnings per share:
Basic ($0.82 ) $0.63
Diluted ($0.82 ) $0.61
Strad Energy Services Ltd.
Interim Consolidated Statement of Cash Flow
For the years ended December 31, 2015 and 2014
(in thousands of Canadian dollars)
2015 2014
Cash flow provided by (used in) $ $
(Revised)
Operating activities
Net (loss) income for the period (30,361 ) 22,997
Adjustments for items not affecting cash:
Depreciation and amortization 30,807 24,568
Deferred income tax (recovery) expense (8,799 ) 6,022
Share-based payments 258 145
Interest expense and finance fees 1,793 2,431
Foreign exchange loss 762 87
Gain on disposal of property, plant and equipment (254 ) (350 )
Loss on assets held for sale - 188
Impairment 7,822 406
Goodwill impairment 17,277 -
Changes in items of non-cash working capital 17,206 (10,816 )
Net cash generated from operating activities 36,511 45,678
Investing activities
Purchase of property, plant and equipment (note 9) (9,529 ) (42,127 )
Proceeds from sale of property, plant and equipment 4,986 8,710
Purchase of intangible assets (note 10) (77 ) (312 )
Proceeds from assets held for sale - 662
Changes in items of non-cash working capital (2,595 ) 1,741
Net cash used in investing activities (7,215 ) (31,326 )
Financing activities
Proceeds on issuance of long-term debt - 11,000
Repayment of long-term debt (20,500 ) (16,000 )
Repayment of finance lease obligations (net) (940 ) (806 )
Issuance of shareholder loan (net of repayments) 46 421
Interest expense and finance fees (1,793 ) (2,431 )
Payment of dividends (10,436 ) (9,318 )
Changes in items of non-cash working capital (33 ) 317
Net cash (used) generated in financing activities (33,656 ) (16,817 )
Effect of exchange rate changes on cash and cash equivalents 2,312 3,518
(Decrease) increase in cash and cash equivalents (2,048 ) 966
Cash and cash equivalents (including bank indebtedness) - beginning of year (826 ) (1,879 )
Cash and cash equivalents (including bank indebtedness) - end of period (2,874 ) (826 )
Cash paid for income tax 1,924 1,715
Cash paid for interest 1,630 2,155

ABOUT STRAD ENERGY SERVICES LTD.

Strad is a North American energy services company that focuses on providing well-site infrastructure solutions to the oil and natural gas industry. Strad focuses on providing complete customer solutions in well-site-related oilfield equipment for producers active in unconventional resource plays.

Strad is headquartered in Calgary, Alberta, Canada. Strad is listed on the Toronto Stock Exchange under the trading symbol "SDY".

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