CanElson Announces Second Quarter Financial Results and Declares Second Quarter Dividend

Marketwired

CALGARY, ALBERTA--(Marketwired - Aug 1, 2013) - CanElson Drilling Inc. (CDI.TO) today announced the financial results for the second quarter ending June 30, 2013. CanElson also declares a second quarter dividend of $0.06 per share.

SECOND QUARTER 2013 SUMMARY (compared with a year earlier)

  • Services revenue $37.5 million, up 11% from $33.8 million
  • EBITDA $9.0 million, consistent with $9.3 million
  • United States ("US") segment revenue $30.1 million, up 35% from $22.3 million, representing 80% of total service revenue for the quarter, up from 66%
  • US utilization of 79%, up from 71% (spud to rig release days)
  • Income attributable to shareholders of the Corporation $1.9 million, down 51% from $3.9 million
  • EPS (diluted) $0.02, down 52% from $0.05
  • Weighted average diluted shares outstanding 78.2 million, up 4% from 75.2 million
  • Declared second quarter dividend of $0.06 per share, up 20% from $0.05
  • Sold 50% interest in one drilling rig at a fair value of $4.3 million and a before tax net gain of $1.0 million (not recognized under IFRSs in the statement of comprehensive income nor within EBITDA)

FIRST HALF 2013 SUMMARY (compared with a year earlier)

  • Services revenue $109.8 million, up 14% from $96.4 million
  • EBITDA $36.5 million, consistent with $36.8 million
  • US segment revenue $59.1 million, up 32% from $44.7 million, representing 54% of total service revenue for the six months, up from 46%
  • US utilization of 82%, up from 72% (spud to rig release days)
  • Income attributable to shareholders of the Corporation $15.2 million, down 22% from $19.5 million
  • EPS (diluted) $0.20, down 23% from $0.26
  • Weighted average diluted shares outstanding 77.7 million, up 4% from 74.6 million

Notably, CanElson's US utilization for the second quarter increased to 79% from 71% during the same period of 2012 even though the US rig count was down approximately 10% at June 30, 2013 relative to June 30, 2012 (source: Baker Hughes). CanElson's Canadian utilization rate in the second quarter of 2013 was 13% (2012: 26%), which trailed the industry average of 18%. At the date of this press release, CanElson's Canadian utilization rate was 56%, which was 1.24 times the industry average of 45% (source: JuneWarren-Nickle's Group). Total consolidated utilization was 41% during the second quarter of 2013 which was comparable to second quarter 2012 levels of 42%.

For the first six months ended June 30, 2013, CanElson's US year-to-date utilization was 82% (2012: 72%), even though the US rig count was down approximately 10% for the six months ended June 30, 2013 relative to June 30, 2012 (source: Baker Hughes). CanElson's Canadian utilization rate was 44% (2012: 56%), or 1.10 times the industry average (2012:1.33 times the industry average). Total consolidated utilization for the first six months of 2013 was similar to 2012 levels at 60%.

"During the quarter the benefits of the geographic diversity of our operations became abundantly clear. Canada experienced a slow start up after breakup due to wet weather and subdued customer intentions. The US Division however, experienced 79% utilization and provided 80% of our total service revenue for the quarter." stated Randy Hawkings, President and CEO of CanElson. "We expect to broaden this geographical spread to provide future growth opportunities."

Fleet deployment (by rigs and jurisdiction)



Canada

Texas
North
Dakota
Mexico
Drilling
Mexico
Service

Total
At June 30, 2013 22 (net 20.5) 12 (net 10.5) 5 2 (net 1.0) 2 (net 1) 43 (net 38)
At December 31, 2012 23 (net 22.5) 10 (net 8.5) 4 1 (net 0.5) 2 (net 1) 40 (net 36.5)
Change % -4% 20% 25% 100% Unchanged 8%
Gross fleet deployment (by % and jurisdiction)


Canada

Texas
North
Dakota
Mexico
Drilling
Mexico
Service

Total
At June 30, 2013 51% 28% 11% 5% 5% 100%
At December 31, 2012 57% 25% 10% 3% 5% 100%

OUTLOOK

Drilling Services

During the second quarter of 2013, CanElson was able to maintain consolidated activity levels, even as the Canadian and US drilling services markets experienced continued subdued markets. We believe that our strategy has uniquely positioned us to sustain relatively strong profitability during the full drilling industry cycle. The key drivers for our relative industry strength, profitability, and historically top quartile financial results are:

  1. Strategically diversified operations in oil-weighted regions within two balanced geographical segments, which provide diversity of earnings and less seasonality while maintaining focus and operational efficiency
  2. Standardized deep, modern rigs (average age of approximately 4.7 years and average vertical rating of greater than 4,000 metres) allowing us to outperform peers when considering the total costs of safely drilling wells
  3. A problem-solving culture as evidenced by our ability to service our customers with performance drilling and innovative cost saving initiatives such as our natural gas fuel and flare gas initiative with CanGas
  4. A history of developing mutually-beneficial partnerships and strong client relationships with First Nations organizations, oil and gas operators and our joint venture which leverages the established footprint of Diavaz CanElson de Mexico S.A. de C.V. ("DCM")
  5. Prudent financial management, which allows the company to be opportunistic at any point in the cycle
  6. Operational excellence based on a culture of safety, as reflected by superior drilling industry safety performance relative to benchmarks from third party sources, such as provincial and state workers' compensation boards and private insurance providers

Canada

Our customers in Canada are cautious with respect to their current capital spending programs, but appear to be increasingly optimistic towards increased spending levels for the latter part of 2013 and into 2014. Additionally, with potentially large field developments as a result of proposed west coast LNG terminals there could be significant incremental investment into the WCSB in 2014 and beyond. Through the third quarter, we expect to continue to see some seasonal revenue rate pressure as less efficient competitor drilling contractors try to obtain work with low revenue rates. We expect to maintain our competitive edge and to continue to exceed average industry utilization levels due to our strong relationships, modern drilling rig fleet, cost reduction initiatives and longer term contracts with customers.

Texas

CanElson has 28% of its fleet focused on oil directed drilling in the Permian Basin in Texas. During 2013 CanElson continued to expand its fully contracted fleet in this basin even though the industry-wide rig count in this area has recently declined due to commodity price volatility. We anticipate that the current revenue rates for CanElson's Texas rigs will continue for the balance of the year. We also expect to achieve capacity utilization in excess of 90% for 2013 with downtime caused only by rig move intervals and planned re- certifications of some drilling equipment.

North Dakota

Our customers in North Dakota continue to look for efficiencies. There is an expectation that the same number of wells will be drilled in 2013 compared to 2012 with fewer rigs required. Due to our customers demand for efficient equipment, we do not anticipate our utilization levels to be impacted and in fact we have recently re-deployed equipment to North Dakota to aid our customers in meeting their efficiency demands.

Mexico

We have demonstrated our ability to successfully do business in Mexico. We believe our performance in the region and our alignment with an experienced and strong local partner (Grupo Diavaz, with 40 years of experience serving PEMEX) provides an excellent opportunity for our joint venture DCM to expand its range of services, including potentially expanding its drilling rig fleet beyond the two recently refurbished rigs.

Rig Assembly

Based on customer contracts and those being finalized CanElson's 2013 investment and deployment of new build tele-double's is expected to be as follows:

Rig #37: Expected to be delivered Q3 2013
Rig #38: Expected to be delivered Q4 2013
Rig #44: Expected to be delivered Q4 2013
Rig #45: Long lead items will be procured in Q4 of 2013 and Q1 2014

CanGas Solutions Inc.

During 2013, we expect to continue investment in our fleet of truck-hauled CNG delivery trailers and to convert the primary diesel engines in our drilling rigs to bi-fuel capacity based on customer requests. For more information about our investment plan see Capital Availability and Capital Program below.

Capital Availability and Capital Investment Program

CanElson is well capitalized to take advantage of strategic opportunities with net cash (cash less debt) at June 30, 2013 of $5 million combined with $120 million available on our existing credit facilities. Funds flow continues to be strong and will fully support our quarterly dividend rate of $0.06 per share as well as a majority of the expected 2013 capital investment program with the remaining amount funded through undrawn loans and borrowings facilities.

CanElson's total 2013 capital investment program is expected to be as follows:

Drilling Services

Capital Investment Program
Spare equipment,
facilities & overhead
Upgrades &
maintenance

Expansion

CanGas

Total
Six months ended June 30, 2013 $ 2.3 $ 9.2 $ 18.4 $ 5.8 $ 35.7
Anticipated costs to complete 2013 capital projects 4.1 5.3 51.0 6.7 67.1
Total approved costs for 2013 capital projects $ 6.4 $ 14.5 $ 69.4 $ 12.5 $ 102.8
Previously anticipated costs for 2013 capital projects (i) 6.4 13.2 50.0 12.5 82.1
Variance from previously anticipated 2013 capital projects $ - $ 1.3 $ 19.4 $ - $ 20.7
(i) Refer to the MD&A dated May 8, 2013 for previously reported capital investment program.

Our modern standardized fleet allows us to minimize capital investment on maintenance and spare equipment. The 2013 total expected capital investment program of $102.8 million has been increased by $20.7 million from the previously announced capital program of $82.1 million. The increase includes expansion capital investment of $4.0 million for long lead items related to rig assembly, $2.2 million for pump upgrades and a drilling pad moving system, and $15.0 million for the purchase of three additional contracted and crewed drilling rigs from Calmena Energy Services Inc., being one pad electric tele-double and two single rigs with top drives, as well as land improved with a field office, shop and storage yard. The remainder of the incremental capital investment primarily relates to additional recertification costs and spare equipment. Offsetting these capital investment program increases are favourable variances on expansion capital primarily related to rig assemblies. During the first half of 2013, our expansion capital investments were primarily related to expenditures required for the completion and deployment of Rig #35 and Rig #36, as well as long lead items for Rig #37 and Rig #38.

The remaining anticipated costs to complete 2013 capital projects are allocated as follows:

Drilling Services

$60.4 million capital investment allocated as follows:

  1. $31.3 million for the construction and completion of three tele-doubles with top drives (relating to rigs #37, #38, and #44), long lead items for one tele-double (rig #45) and $4.7 million of other growth capital;
  2. $15.0 million for the acquisition of one pad tele-double and two single drilling rigs with integrated top drives, as well as land, buildings and some spare equipment; and
  3. Approximately $9.4 million for spares, shop upgrades and maintenance capital.

CanGas

$6.7 million capital investment allocated as follows:

  1. Conversion of primary diesel engines on our drilling rigs to bi-fuel capability to enable operation on a mixture of natural gas and diesel fuel;
  2. Expansion of our fleet of truck-hauled natural gas delivery trailers, compression and conditioning equipment to meet both current and anticipated demand;
  3. Collection and leverage of operating data to facilitate greater diesel fuel displacement and better management of costs; and
  4. Further research and development associated with our proprietary raw gas conditioning technology to employ portable small-scale field facilities to condition raw natural gas for use as fuel.

2013 Primary Corporate Objectives

Looking to the end of 2013, CanElson's primary objective is to maintain and strengthen its industry leading position by consistently providing operational excellence and drilling efficiencies to its customers. With this focus we will be well positioned to obtain strong customer commitments and capitalize on new opportunities. Subject to obtaining customer commitments, we intend to carry out the following activities that will enhance our competitive positioning:

  • Continue to expand our standard tele-double fleet
  • Expand our service offering in Mexico
  • Continue to form innovative long-term business relationships

Achieving these objectives will present expanded opportunities for CanElson, its customers and shareholders.

DIVIDEND

On July 31, 2013, the Board of Directors declared a first quarter dividend of $0.06 per share for the three month period ended June 30, 2013, payable on August 30, 2013 to shareholders of record at the close of business on August 21, 2013. The dividend is an eligible dividend for Canadian tax purposes.

FINANCIAL SUMMARY
For the three months ended June 30, For the six months ended June 30,
2013 2012 % change 2013 2012 % change
Services revenue $ 37,499 $ 33,848 11% $ 109,776 $ 96,358 14%
EBITDA (i) 9,036 9,288 -3% 36,491 36,761 -1%
Share of profit unconsolidated joint venture 476 459 4% 514 959 -46%
Net income attributable to shareholders of the Corporation 1,870 3,875 -52% 15,205 19,484 -22%
Net income per share
Basic 0.02 0.05 -52% 0.20 0.26 -23%
Diluted 0.02 0.05 -60% 0.20 0.26 -23%
Funds flow (i) 11,418 9,234 24% 35,382 33,347 6%
Gross Margin (services) (i) 13,579 13,259 2% 45,976 44,267 4%
Weighted average diluted shares outstanding 78,254 75,176 4% 77,670 74,570 4%

(Tabular amounts are stated in thousands of Canadian dollars, except per share amounts and rig operating days)

FINANCIAL STATEMENTS AND MD&A

This is the Corporation's first fiscal year adopting IFRS 11 accounting for Joint Arrangements. In accordance with IFRS 11 the transition date was January 1, 2013 with retroactive application to January 1, 2012 and, accordingly, the comparative information for 2012 has been restated to conform to the requirements of IFRS 11. The application of IFRS 11 has changed the classification and subsequent accounting of the Corporation's investment in Diavaz CanElson de Mexico S.A. de C.V. ("DCM"), which was classified as a jointly controlled entity and previously accounted for using the proportionate consolidation method. Applying IFRS 11 requires that the Corporation apply equity accounting for its 50% interest in DCM. Additional information about the adoption of this standard and the Corporation's IFRSs accounting policies is discussed in the Accounting Policies and Critical Estimates section of this MD&A as well as in the notes to the June 30, 2013 condensed consolidated financial statements and the audited December 31, 2012 consolidated financial statements.

CanElson's complete unaudited interim financial results and Management's Discussion and Analysis (MD&A) for the second quarter ended June 30, 2013 have been filed on SEDAR and posted to the company's website at this link: http://www.canelsondrilling.com/investor-relations/financial-reports

FORWARD-LOOKING INFORMATION

This press release contains certain statements or disclosures relating to CanElson that are based on the expectations of CanElson as well as assumptions made by and information currently available to CanElson which may constitute forward-looking information under applicable securities laws. In particular, this press release contains forward-looking information related to: our belief that our strategy positions us to sustain financial returns during the full drilling industry cycle; expected typical seasonal utilization and revenue rate effects through the remainder of the year in Canada; expectation to exceed average industry utilization levels in Canada and maintain existing utilization rates in North Dakota; anticipation current revenue rates will continue in Texas and achieve capacity utilization in excess of 90% for the remainder of 2013 in Texas; our performance and partner relationship in Mexico provides an opportunity for DCM to expand in the region; the construction and deployment of additional rigs in 2013; our expectation to continue investment in the fleet of truck-hauled CNG delivery trailers and to convert the primary diesel engines in our drilling rigs to bi-fuel capacity; expectation that funds flow will support our quarterly dividend and a majority of our capital program; expected 2013 capital programs and anticipated cost to complete 2013 capital projects; our 2013 primary corporate objectives. Such forward-looking information involves material assumptions and known and unknown risks and uncertainties, certain of which are beyond CanElson's control. Many factors could cause the performance or achievement by CanElson to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking information. CanElson's Annual Information Form and other documents filed with securities regulatory authorities (accessible through the SEDAR website at www.sedar.com) describe the risks, material assumptions and other factors that could influence actual results and which are incorporated herein by reference. CanElson disclaims any intention or obligation to publicly update or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as may be expressly required by applicable securities laws.

Contact:
CanElson Drilling Inc.
Randy Hawkings
President and CEO
(403) 266-3922
CanElson Drilling Inc.
Robert Skilnick
Chief Financial Officer
(403) 266-3922
www.canelsondrilling.com

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