Canyon reports results for third quarter 2013 and provides 2014 capital expenditure guidance

PR Newswire

CALGARY, Nov. 5, 2013 /CNW/ - Canyon Services Group Inc. TSX: FRC ("Canyon") is pleased to announce its third quarter 2013 results.  The following should be read in conjunction with the Management's Discussion and Analysis, the condensed consolidated interim financial statements and notes of Canyon Services Group Inc. for the nine months ended September 30, 2013 and should also be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2012, and which are available on SEDAR at www.sedar.com

HIGHLIGHTS SUMMARY

The main operating and financial highlights for the third quarter 2013 are as follows:

  • In 2013, Canyon has taken advantage of the slower industry conditions to continue investing in staff and physical infrastructure including significantly increasing our training and staff development.

  • Staffing increased by 80 people in Q3 2013 to prepare Canyon for an anticipated increase in industry activity in 2014, primarily to support LNG related projects.

  • Canyon exited the quarter with 225,500 HHP, the major portion of which is relatively new, at three years old or less, and has heavy-duty capability.

  • Canyon remains in a very strong financial position with undrawn credit facilities of $100 million including a $40 million accordion feature, plus working capital of $41 million, including cash of $15 million, as at September 30, 2013.

  • On September 26, 2013, Canyon declared a quarterly dividend of $0.15 per common share, or $9.4 million, which was paid to shareholders on October 25, 2013.

OVERVIEW OF THIRD QUARTER 2013

               
000's except per share, job amounts and
hydraulic pumping capacity
(Unaudited)
Three Months Ended
September 30
  Nine Months Ended
September 30
  2013 2012 2011   2013 2012 2011
Consolidated revenues $81,224 $94,401 $105,207   $195,591 $268,310 $227,131
Profit (loss) and comprehensive income (loss) $3,908 $17,036 $30,861   $(4,752) $47,263 $54,338
Per share-basic $0.06 $0.28 $0.51   $(0.08) $0.77 $0.90
Per share-diluted $0.06 $0.27 $0.49   $(0.08) $0.76 $0.87
EBITDA before share-based payments(1) $14,384 $32,496 $46,512   $21,663 $88,960 $91,377
Funds from (used in) operations(1) $14,316 $27,727 $37,395   $21,141 $77,035 $76,368
Total jobs completed (2) 553 524 733   1,174 1,709 1,628
Consolidated average revenue per job (2) (3) $147,794 $180,540 $143,970   $167,144 $157,521 $139,640
Average fracturing revenue per job(3) $208,524 $247,746 $191,328   $236,358 $230,516 $196,399
Hydraulic Pumping Capacity              
Average HHP 225,500 220,000 140,000   225,500 200,500 127,000
Exit HHP 225,500 225,500 150,500   225,500 225,500 150,500
Capital expenditures $1,586 $9,740 $28,941   $7,398 $64,521 $81,273
       
000's except per share amounts
(Unaudited)
As at
September 30,
2013
As at
December 31,
2012
As at
December 31,
2011
Cash and cash equivalents $15,206 $22,584 $42,481
Working capital $41,250 $56,245 $67,009
Total long-term financial liabilities $2,493 $3,475 $3,530
Total assets $372,326 $406,113 $407,330
Cash dividends declared per share $0.45 $0.60 $0.1125

Note (1): See Non-GAAP Measures
Note (2): Includes all jobs from each service line, specifically hydraulic fracturing; coiled tubing; nitrogen fracturing; acidizing and remedial cementing
Note (3):  2012 revenue per job numbers are restated to include invoice adjustments.

Canyon's operating results were impacted by weak pricing, E&P well completion interruptions due to pipeline delays in areas where natural gas flaring from newly completed wells is prohibited and wet weather.  The third quarter, normally a period that sees a return to more robust activity following spring break-up, experienced persistent wet weather in the active areas of the Western Canadian Sedimentary Basin ("WCSB") such as Northern Alberta and Northeast B.C.  Overall, spot pricing declined further by 5% to 8% from the previous quarter as large Canadian and US competitors continue to drive down prices.  Pricing has now declined by over 30% since the peak levels of late 2011 and early 2012.  In this environment, where price levels continue to be under pressure, Canyon remains focused on only deploying its equipment to projects that contribute positive returns on invested capital.

In 2013, Canyon has taken advantage of the slower industry conditions to continue investing in staff and physical infrastructure in anticipation of a more active industry in 2014.  To-date in 2013, Canyon has added approximately 100 people, an increase of almost 13% from the beginning of the year.  In addition to hiring new staff, we have significantly increased our training and staff development and upgraded business systems throughout the organization resulting in higher fixed operating and general and administrative costs.  Compared to 2012, our fixed operating and general and administrative costs are up almost 10% year-to-date.

As a result, Q3 2013 consolidated revenues decreased by 14% to $81.2 million from $94.4 million in Q3 2012.  Average consolidated revenue per job decreased by 18% to $147,794 from $180,540 in Q3 2012 mainly due to lower industry-wide pricing and job mix, while jobs completed increased by 6% to 553 in Q3 2013 from 524 in Q3 2012 due to job mix.  The combination of lower revenues and higher fixed costs to prepare for an expected busier 2014 (staffing increase of 80 people in Q3 2013) has resulted in a Q3 2013 profit and comprehensive income of $3.9 million compared to $17.0 million in Q3 2012.

For the nine months ended September 30, 2013, consolidated revenues decreased by 27% to $195.6 million from $268.3 million mostly due to price compression. The jobs completed decreased by 31% to 1,174 for the nine months ended September 30, 2013 compared to 1,709 in 2012.  Even though customer pricing across the industry has declined by approximately 30% from 2012 levels, average consolidated revenue per job actually increased by 6% to $167,144 from $157,521 in 2012.  This difference is primarily due to a change in customer invoicing methodology related to the increase in 24-hour operations.  In the past, customers requested to be invoiced on the basis of work completed in a single shift (one invoice per 12-hour shift) or on a per stage basis.  The evolution of 24-hour operations, which now represents approximately 50% of revenue, has meant that many customers have requested to be billed for services provided per 24-hour shift which led to fewer invoices (jobs) in 2013 but for larger amounts.  This change has resulted in reporting higher consolidated average revenue per job even though industry prices have significantly declined.  Although the job count shows a decline, overall, Canyon has completed almost the same amount of work for our customers year-to-date compared to 2012, albeit at lower prices.  The aforementioned industry conditions combined with the ramp-up in fixed costs in advance of more robust industry activity have resulted in a loss and comprehensive loss of $4.8 million for the nine months ended September 30, 2013 compared to a profit and comprehensive income of $47.3 million in the comparable 2012 period.

NON-GAAP MEASURES

The Company's Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). Certain measures in this document do not have any standardized meaning as prescribed by International Financial Reporting Standards ("IFRS") and are considered non-GAAP measures.

EBITDA before share-based payments and funds from operations are not recognized measures under IFRS.  Management believes that in addition to profit and comprehensive income, EBITDA before share-based payments and funds from operations are useful supplemental measures as they provide an indication of the results generated by the Company's business activities prior to consideration of how those activities are financed, amortized or taxed, as well as the cash generated by the Company's business activities without consideration of the timing of the monetization of non-cash working capital items.  Readers should be cautioned, however, that EBITDA before share-based payments and funds from operations should not be construed as an alternative to profit and comprehensive income determined in accordance with IFRS as an indicator of the Company's performance.  Canyon's method of calculating EBITDA before share-based payments and funds from operations may differ from other companies and accordingly, EBITDA before share-based payments and funds from operations may not be comparable to measures used by other companies.  Canyon calculates EBITDA before share-based payments as profit and comprehensive income for the year adjusted for depreciation and amortization, equity settled share-based payment transactions, gain or loss on sale of property and equipment, finance costs and income tax expense.  Reconciliations of these non-GAAP measures to the most directly comparable IFRS measures are outlined below.

The Company describes revenue less cost of services as gross profit (loss).

EBITDA before share-based payments

     
000's
(Unaudited)
Three Months Ended
September 30
Nine Months Ended
September 30
  2013 2012 2013 2012
Profit (loss) and comprehensive income (loss) $3,908 $17,036 $(4,752) $47,263
Add (Deduct):        
Depreciation and amortization 7,971 7,602 23,467 21,782
Finance costs 149 175 467 572
Share-based payment transactions 799 1,620 2,950 419
Cash settlement of deferred share units - - - 2,298
(Gain) Loss on sale of property and equipment 32 116 (12) 193
Income tax expense (recovery) 1,525 5,947 (457) 16,433
EBITDA before share-based payments $14,384 $32,496 $21,663 $88,960

Funds from Operations

     
000's
(Unaudited)
Three Months Ended
September 30
Nine Months Ended
September 30
  2013 2012 2013 2012
Net cash from operating activities $(801) $526 $28,673 $46,214
Income Tax paid 1,468 8,405 5,135 31,471
Change in working capital 13,568 23,390 (12,612) 8,405
Cash settlement of deferred share units - - - 2,298
Less: current tax expense (recovery) (81) 4,594 55 11,353
Funds from operations $14,316 $27,727 $21,141 $77,035

QUARTERLY COMPARATIVE STATEMENTS OF OPERATIONS

   
000's except per share amounts
(Unaudited)
Three Months Ended
September 30
  2013   2012
Revenues $81,224   $94,401
Cost of services 69,422   64,228
Gross profit 11,802   30,173
Administrative expenses 6,220   7,015
Results from operating activities 5,582   23,158
Finance costs 149   175
Profit before income tax 5,433   22,983
Income tax expense (recovery) 1,525   5,947
Profit  and comprehensive income $3,908   $17,036
EBITDA before share-based payments(1) $14,384   $32,496
Earnings per share:      
  Basic $0.06   $0.28
  Diluted $0.06   $0.27

Note (1): See Non-GAAP Measures.

Revenues

Persistent pricing pressure, E&P well completion interruptions and wet weather resulted in consolidated revenues decreasing by 14% to $81,224 in Q3 2013 from $94,401 in Q3 2012.  Jobs completed increased by 6% to 553 in Q3 2013 from 524 in Q3 2012 due to job mix.  Over 90% of Q3 2013 consolidated revenues were provided by hydraulic fracturing services with average fracturing revenue per job decreasing by 16% to $208,524 from $247,746 in Q3 2012.

Cost of services

Cost of services for the three months ended September 30, 2013 totaled $69,422 (2012: $64,228) and includes materials, products, transportation and repair costs of $43,538 (2012: $38,352), employee benefits expense of $18,384 (2012: $18,604), and depreciation of property and equipment of $7,500 (2012: $7,272).

The Q3 2013 job count increased to 553 jobs from 524 in Q3 2012, resulting in higher materials, products, transportation and repair costs mostly due to the completion of larger jobs such as Duvernay shale gas wells.  Employee benefits expense has remained largely flat as the increased cost attributable to additional field staff was offset by a decrease in variable field pay in the quarter due to lower revenues as well as a decrease in the expected payout of the annual discretionary incentive program due to lower than anticipated results.  The slight increase in depreciation of property and equipment is due to additional depreciation pertaining to equipment additions.

Administrative expenses

Administrative expenses for the three months ended September 30, 2013 totaled $6,220 compared to $7,015 in Q3 2012 and include employee benefits expense of $3,070 (2012: $3,686) and share-based payments expense of $799 (2012: $1,620). Administrative expenses also include depreciation of buildings and office equipment and amortization of intangibles of $471 (2012: $329).  In addition, other administrative expenses totaled $1,880 in Q3 2013 compared to $1,380 in Q3 2012.  The decrease in employee benefits expense is attributable to lower sales commissions due to lower revenues as well as a decrease in the expected payout of the annual discretionary incentive program due to lower than anticipated results.  The increase in other administrative expenses is mainly due to costs associated with systems' upgrades.

Share-based payments expense represents the value assigned to the granting of options and incentive-based units under the Company's Share Purchase Option Plan and Stock Based Compensation Plan respectively, using the Black-Scholes model.  For Q3 2013, $861 (Q3 2012 - $855) was charged to expenses and included in contributed surplus in respect of these two plans.  In addition, obligations for payments under the Company's Deferred Share Unit Plan are accrued as share-based payments expense over the vesting period.  The accrued liability increases or decreases with fluctuations in the price of the Company's common shares, with a corresponding increase or decrease in the share-based payments expense.  In Q3 2013, share-based payments were reduced by $62 (Q3 2012 - $766) for the Company's Deferred Share Unit Plan to reflect changes in the price of the common shares of the Company.

EBITDA before share-based payments (See Non-GAAP Measures)

In Q3 2013, EBITDA before share-based payments (see NON-GAAP MEASURES) was $14,384 compared to $32,496 in the comparable 2012 quarter.  As previously discussed, continuing pricing pressure, E&P well completion interruptions and weather related delays resulted in the decreased EBITDA.

Finance costs

Finance costs include interest on finance lease obligations and automobile loans and totaled $149 in Q3 2013 (Q3 2012: $175).

Income Tax Expense

At the expected combined income tax rate of 25%, the income before income tax for Q3 2013 of $5,433 would have resulted in an expense of $1,358, compared to the actual income tax expense of $1,525.  The actual income tax expense was increased by non-deductible expenses.

Profit and comprehensive income and earnings per share

Profit and comprehensive income totaled $3,908 in Q3 2013 compared to $17,036 in Q3 2012. As previously discussed, the reduced profit is mostly due to the industry conditions and E&P infrastructure issues.

Basic and diluted earnings per share were $0.06 for the three months ended September 30, 2013 compared to basic and diluted loss per share of $0.28 and $0.27 respectively for the comparable 2012 quarter.

NINE MONTHS TO SEPTEMBER 30, 2013 COMPARATIVE STATEMENTS OF OPERATIONS

   
000's except per share amounts
(Unaudited)
Nine Months Ended
September 30
  2013   2012
Revenues $195,591   $268,310
Cost of services 183,039   187,216
Gross profit 12,552   81,094
Administrative expenses 17,294   16,826
Results from operating activities 4,742   64,268
Finance costs 467   572
Profit (loss) before income tax (5,209)   63,696
Income tax expense (recovery) (457)   16,433
Profit (loss) and comprehensive income (loss) $(4,752)   $47,263
EBITDA before share-based payments(1) $21,663   $88,960
Earnings (loss) per share:      
      Basic $(0.08)   $0.77
      Diluted $(0.08)   $0.76

Note (1): See Non-GAAP Measures.

Revenues

For the nine months ended September 30, 2013, consolidated revenues decreased by 27% to $195.6 million from $268.3 million mostly due to price compression. The jobs completed decreased by 31% to 1,174 for the nine months ended September 30, 2013 compared to 1,709 in 2012.  Even though customer pricing across the industry has declined by approximately 30% from 2012 levels, average consolidated revenue per job actually increased by 6% to $167,144 from $157,521 in 2012.  This difference is primarily due to a change in customer invoicing methodology related to the increase in 24-hour operations, as discussed above.  Over 90% of consolidated revenues in the nine months ended September 30, 2013 were provided by hydraulic fracturing services with average fracturing revenue per job increasing 3% to $236,358 from $230,516 in the 2012 comparable period even though customer pricing has declined by about 30% year over year.  This is due to the completion of larger jobs such as Duvernay shale gas wells in 2013 as well as to the impact of 24-hour operations as discussed above.

Cost of services

Cost of services for the nine months ended September 30, 2013 totaled $183,039 (2012: $187,216) and includes materials, products, transportation and repair costs of $109,972 (2012: $115,585), employee benefits expense of $50,796 (2012: $50,783), and depreciation of property and equipment of $22,271 (2012: $20,848).

The decrease in materials, products, transportation and repair costs is mostly due to the lower job count in 2013 compared to the prior year comparable period, partially offset by the completion of larger jobs in 2013, such as Duvernay shale gas wells.  Employee benefits expense has remained flat as the increased cost attributable to additional field staff was offset by a decrease in variable field pay in the period due to lower revenues as well as a decrease in the expected payout of the annual discretionary incentive program due to lower than anticipated results.  The increase in depreciation of property and equipment is due to additional depreciation pertaining to equipment additions.

Administrative expenses

Administrative expenses for the nine months ended September 30, 2013 totaled $17,294 compared to $16,826 in the 2012 comparable period and include employee benefits expense of $7,969 (2012: $8,756) and share-based payments expense of $2,950 (2012: $2,717). Administrative expenses also include depreciation of buildings and office equipment and amortization of intangibles of $1,196 (2012: $933).  In addition, other administrative expenses totaled $5,179 in the nine months ended September 30, 2103 compared to $4,420 in the 2012 comparable period.  The decrease in employee benefits expense is mostly attributable to lower sales commissions due to the lower revenues partially offset by staff additions to support the increased scale of Canyon's operations.  The increase in other administrative expenses is mainly due to costs associated with systems' upgrades.

Share-based payments expense represents the value assigned to the granting of options and incentive-based units under the Company's Share Purchase Option Plan and Stock Based Compensation Plan respectively, using the Black-Scholes model.  For the nine months ended September 30, 2013, $2,783 (Q3 2012 - $2,543) was charged to expenses and included in contributed surplus in respect of these two plans.  In addition, obligations for payments under the Company's Deferred Share Unit Plan are accrued as share-based payments expense over the vesting period.  The accrued liability increases or decreases with fluctuations in the price of the Company's common shares, with a corresponding increase or decrease in the share-based payments expense.  For the nine months ended September 30, 2013, share-based payments expense was $167 (2012 - $173) for the Company's Deferred Share Unit Plan to reflect changes in the price of the common shares of the Company.

EBITDA before share-based payments (See Non-GAAP Measures)

For the nine months ended September 30, 2013, EBITDA before share-based payments (see NON-GAAP MEASURES) was $21,663 compared to $88,960 in the comparable 2012 period.  As previously discussed, continuing pricing pressure, E&P well completion interruptions and weather related delays resulted in the decreased EBITDA.

Finance costs

Finance costs include interest on finance lease obligations and automobile loans and totaled $467 for the nine months ended September 30, 2013 (2012: $572).

Income Tax Expense

At the expected combined income tax rate of 25%, the loss before income tax for the nine months ended September 30, 2013 of $5,209 would have resulted in an expected recovery of $1,302, compared to the actual income tax recovery of $457.  The actual income tax recovery was reduced by non-deductible expenses.

Profit and comprehensive income (loss) and earnings (loss) per share

Loss and comprehensive loss totaled $4,752 for the nine months ended September 30, 2013 compared to profit and comprehensive income of $47,263 in the 2012 comparable period. As previously discussed, the loss is mostly due to the industry conditions and E&P infrastructure issues.

Basic and diluted loss per share were $0.08 for the nine months ended September 30, 2013 compared to basic and diluted earnings per share of $0.77 and $0.76 respectively for the comparable 2012 period.

2013 CAPITAL UPDATE AND 2014 CAPITAL EXPENDITURE GUIDANCE

Year to date September 30, 2013, Canyon has incurred capital expenditures of $7.4 million and expects to incur an additional $7.0 million in the fourth quarter 2013 for total capital expenditures of approximately $14.4 million in the current year.

The Board of Directors of the Company has approved a preliminary 2014 capital budget of $32.5 million.  This amount comprises $23.3 million for the construction of new equipment and $9.2 million to complete prior years' capital programs. The 2014 capital program of $23.3 million will consist of blending, sand management, transportation, nitrogen, cement and acid and other miscellaneous support equipment.

The $9.2 million carryover includes $6.0 million to complete equipment under construction which was delayed due to the insolvency of the manufacturer, Surefire Industries Ltd.  Canyon has taken possession of all partially constructed equipment which has been relocated to new manufacturers to complete fabrication.  The total capital program previously allocated to Surefire Industries Ltd. is expected to be completed by the other manufacturers in the first half of 2014 and is expected to result in a cost overrun of approximately $1.4 million, which is included in the $9.2 million carryover amount.

Canyon will monitor industry conditions and when appropriate, may adjust the 2014 capital program accordingly.

FORWARD-LOOKING STATEMENTS

This document contains certain forward-looking information and statements within the meaning of applicable securities laws.  The use of any of the words "expect", "anticipate", "continue", "estimate", "objective", "ongoing", "may", "will", "should", "believe", "plans" and similar expressions are intended to identify forward-looking information or statements.  In particular, but without limiting the foregoing, this document contains forward-looking information and statements pertaining to the following: future oil and natural gas prices; future results from operations; future liquidity and financial capacity and financial resources; future costs, expenses and royalty rates; future interest costs; future capital expenditures; future capital structure and expansion; the making and timing of future regulatory filings; and the Company's ongoing relationship with major customers.

The forward-looking information and statements contained in this document reflect several material factors and expectations and assumptions of the Company including, without limitation: that the Company will continue to conduct its operations in a manner consistent with past operations; the general continuance of current or, where applicable, assumed industry conditions; the continuance of existing (and in certain circumstances, the implementation of proposed) tax, royalty and regulatory regimes; certain commodity price and other cost assumptions; the continued availability of adequate debt and/or equity financing and cash flow to funds its capital and operating requirements as needed; and the extent of its liabilities.  The Company believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable but no assurance can be given that these factors, expectations and assumptions will prove to be correct.

The forward-looking information and statements included in this document are not guarantees of future performance and should not be unduly relied upon.  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 including, without limitation: changes in commodity prices; changes in the demand for or supply of the Company's services; unanticipated operating results; changes in tax or environmental laws, royalty rates or other regulatory matters; changes in the development plans of third parties; increased debt levels or debt service requirements; limited, unfavourable or a lack of access to capital markets; increased costs; a lack of adequate insurance coverage; the impact of competitors; reliance on industry partners; attracting and retaining skilled personnel and certain other risks detailed from time to time in the Company's public disclosure documents (including, without limitation, those risks identified in this document and the Company's Annual Information Form).

The forward-looking information and statements contained in this document speak only as of the date of the document, and none of the Company or its subsidiaries assumes any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws.

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