PHX Energy Announces All-Time Record Financial and Operating Results for the 2013-Year

CALGARY, ALBERTA--(Marketwired - Feb 26, 2014) - For the third consecutive year, in 2013 PHX Energy ( TSX:PHX ) generated an all-time record level of revenue, operating days, EBITDA, net earnings, and funds from operations.

For the year ended December 31, 2013, the Corporation generated consolidated revenue of $380.7 million as compared to $301.7 million in the 2012-year; an increase of 26 percent. EBITDA increased by 49 percent to $72.6 million in 2013 as compared to $48.8 million in 2012. Net earnings increased to $36.6 million in 2013 from $17.7 million in 2012; a 107 percent increase. The Corporation's funds from operations were $53.2 million in 2013, which is 5 percent greater than the $50.6 million achieved in 2012. Included in the 2013-year's EBITDA and net earnings were gains of $14.8 million from the re-measurement to fair value of the Corporation's pre-existing ownership interest in RMS Systems Inc. ("RMS") and RigManager International Inc. ("RMII"), a gain of $2.2 million from the sale of land and an operations centre, and a loss of $1.2 million that related to the write-off of certain tools as the technology is no longer being utilized. Excluding these items, adjusted EBITDA increased by 17 percent to a record $56.9 million and net earnings increased by 18 percent to a record $20.9 million in the year ended December 31, 2013.

During 2013, the Corporation benefitted from positive trends in the Canadian and US industry, such as overall improved commodity prices and continued strong utilization of horizontal and directional drilling techniques. Industry horizontal and directional drilling activity represented approximately 93 percent (as measured by drilling days) and 75 percent (as measured by rigs running per day) of the 2013 total drilling activity in Canada and the US, respectively. This compared to 92 percent in Canada and 71 percent in the US for the 2012-year. (Sources:Daily Oil Bulletin and Baker Hughes) This, coupled with the Corporation's continued superior operational performance, led PHX Energy to realize record activity growth in all of its operating segments in 2013.

PHX Energy's US and international operations achieved record levels of revenue and represented 48 and 13 percent of consolidated revenue in the 2013-year compared to 46 and 12 percent in 2012. In the US, the Corporation continues to build and strengthen its marketing and operations teams and has been successful in diversifying its client base. Russia has been at the forefront of the international operations' growth and Albania demonstrated solid results throughout the year. PHX Energy expects this growth momentum to continue in future years.

In line with the Corporation's strategic objective of providing leading edge technologies to its clients, PHX Energy is in the process of exploring new technologies and as a result has entered into third party license and technology development agreements. The activities are a collaboration between PHX Energy's research and development ("R&D") department and the third parties. During 2013, the Corporation made payments totaling $4.3 million under these agreements.

For the year ended December 31, 2013, $41.8 million in capital expenditures were incurred. During 2013, PHX Energy's down hole performance drilling motor fleet grew and job capacity increased to 214 concurrent jobs from 210 in 2012. Greater job capacity resulted from the addition of resistivity while drilling ("RWD") systems. As at December 31, 2013, the Corporation's measurement while drilling ("MWD") fleet consisted of 132 P-360 positive pulse MWD systems, 65 E-360 electromagnetic ("EM") MWD systems, and 17 RWD systems. Of these, 96 MWD systems were deployed in Canada, 88 in the US, 15 in Russia, 6 in Albania, 5 in Colombia, and 4 in Peru.

The Corporation's capital expenditures were financed from a combination of cash flow from operations, borrowings under the Corporation's credit facilities, and from an equity financing. On August 7, 2013, the terms of the Corporation's syndicated loan agreement with its bank were amended to extend the maturity date of the syndicated facility and US operating facility from September 6, 2015 to September 5, 2016. The aggregate carrying amount of the syndicated facility and US operating facility of $70.2 million as at December 31, 2013 was classified as a non-current liability.

The 2014 capital expenditure budget has been approved by the Board of Directors and is projected to be $34.7 million. Included in the budget are MWD guidance systems and components, performance drilling motors and tubulars required for anticipated growth.

In light of the record financial results and positive company outlook, on October 30, 2013, the Board of Directors approved raising the monthly dividend by $0.01 to $0.07 per share. The dividend increase became effective for the Corporation's November 2013 dividend. For the year ended December 31, 2013, the Corporation paid dividends of $0.73 per share to its shareholders (2012 - $0.66 per share), or $21.4 million (2012 - $18.6 million). PHX Energy ended 2013 with a cash dividend payout ratio of 40 percent (cash dividends paid divided by funds from operations).

On November 28, 2013, PHX Energy successfully completed the acquisition of RMS through a plan of arrangement. Upon completion of the arrangement, RMS became a wholly-owned subsidiary of PHX Energy and ceased trading on the TSX Venture Exchange. RMS was subsequently amalgamated with PHX Energy on January 1, 2014. RMS owns web-based remote electronic drilling recorder ("EDR") technology which allows oil and natural gas companies to retrieve scientific measurement data in the field and communicate this data in real-time back to a central web-based data warehouse. PHX Energy markets these services in Canada through RMS as well as through its wholly-owned subsidiary RMII worldwide outside Canada; mainly Albania, and Mexico.

Financial Highlights

(Stated in thousands of dollars except per share amounts, percentages and shares outstanding)

Three-month periods ended
December 31,
Years ended
December 31,
2013 2012 % Change 2013 2012 % Change
Operating Results (unaudited) (unaudited)
Revenue 115,543 79,473 45 380,663 301,720 26
Net earnings 22,259 4,537 391 36,567 17,707 107
Earnings per share - diluted 0.68 0.16 325 1.23 0.63 95
EBITDA (1) 32,369 13,575 138 72,639 48,837 49
EBITDA per share - diluted (1) 0.99 0.48 106 2.45 1.73 42
Adjusted EBITDA (1) 17,611 13,575 30 56,930 48,837 17
Adjusted EBITDA per share - diluted (1) 0.54 0.48 13 1.92 1.73 11
Cash Flow
Cash flows from operating activities 17,367 13,748 26 35,378 33,070 7
Funds from operations (1) 15,161 13,890 9 53,160 50,621 5
Funds from operations per share - diluted (1) 0.46 0.49 (6 ) 1.79 1.79 -
Dividends paid 6,058 5,080 19 21,433 18,595 15
Dividends per share (2) 0.19 0.18 6 0.73 0.66 11
Capital expenditures 13,272 5,334 149 41,818 51,452 (19 )
Financial Position, December 31,
Working capital 66,580 45,480 46
Long-term debt 70,208 80,000 (12 )
Shareholders' equity 198,477 115,095 72
Common shares outstanding 34,218,974 28,241,371 21
(1) Refer to non-GAAP measures section.
(2) Dividends paid by the Corporation on a per share basis in the period.

Non-GAAP Measures

PHX Energy uses certain performance measures throughout this document that are not recognizable under Canadian generally accepted accounting principles ("GAAP"). These performance measures include earnings before interest, taxes, depreciation and amortization ("EBITDA"), EBITDA per share, adjusted EBITDA, adjusted EBITDA per share, funds from operations, funds from operations per share and senior debt to EBITDA ratio. Management believes that these measures provide supplemental financial information that is useful in the evaluation of the Corporation's operations and are commonly used by other oil and natural gas service companies. Investors should be cautioned, however, that these measures should not be construed as alternatives to measures determined in accordance with GAAP as an indicator of PHX Energy's performance. The Corporation's method of calculating these measures may differ from that of other organizations, and accordingly, these may not be comparable. Please refer to the non-GAAP measures section.

Cautionary Statement Regarding Forward-Looking Information and Statements

This document contains certain forward-looking information and statements within the meaning of applicable securities laws. The use of "expect", "anticipate", "continue", "estimate", "objective", "ongoing", "may", "will", "project", "could", "should", "can", "believe", "plans", "intends", "strategy" and similar expressions are intended to identify forward-looking information or statements.

The forward-looking information and statements included in this document are not guarantees of future performance and should not be unduly relied upon. These statements and information 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 statements and information. The Corporation believes the expectations reflected in such forward-looking statements and information are reasonable, but no assurance can be given that these expectations will prove to be correct. Such forward-looking statements and information included in this document should not be unduly relied upon. These forward-looking statements and information speak only as of the date of this document.

In particular, forward-looking information and statements contained in this document include, without limitation the expected growth momentum in PHX Energy's US and international operations; projected capital expenditure budget and how this budget will be funded; the expected combined Canadian federal and provincial tax rate; the impact that remote drilling and Prism Optimization initiatives will have on Canadian margins in 2014; the ability to diversify the Corporation's client base in Russia; and expectations to market RMS' EDR technology.

The above are stated under the headings: "Overall Performance", "Operating Costs and Expenses", "Segmented Information", "Cash Requirements for Capital Expenditures" and "Acquisition of Subsidiaries". Furthermore all statements in the Outlook section of this document contains forward-looking statements.

In addition to other material factors, expectations and assumptions which may be identified in this document and other continuous disclosure documents of the Corporation referenced herein, assumptions have been made in respect of such forward-looking statements and information regarding, among other things: the Corporation 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 Corporation 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 Corporation'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 Corporation's website. The forward-looking statements and information contained in this MD&A are expressly qualified by this cautionary statement. The Corporation 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.

Revenue

(Stated in thousands of dollars)

Three-month periods ended
December 31,
Years ended
December 31,
2013 2012 % Change 2013 2012 % Change
Revenue 115,543 79,473 45 380,663 301,720 26

With the strength of ongoing marketing initiatives, superior operational performance, and the provision of leading edge technology solutions, PHX Energy generated all-time records in quarterly consolidated revenue and operating days for the three-month period ended December 31, 2013. Consolidated revenue for the fourth-quarter of 2013 was $115.5 million, compared to $79.5 million in the comparable 2012-quarter, an increase of 45 percent. Consolidated operating days increased by 37 percent to 9,188 days in 2013 from 6,690 days in the 2012-quarter. For the three-month period ended December 31, 2013, all three regions, Canada, US and international, achieved record levels of activity and revenue for any quarter.

Average consolidated day rates for the three-month period ended December 31, 2013, excluding the motor rental division in Midland, Texas and the recently acquired EDR business, were $12,285 which is 5 percent higher compared to the day rates of $11,671 realized in the fourth quarter of 2012.

Horizontal and directional drilling continues to represent a large majority of total wells in Canada and the US. In the 2013-quarter, horizontal and directional drilling activity represented 93 percent of total Canadian industry drilling days (2012 - 93 percent). In the US, horizontal and directional activity represented approximately 77 percent of the rigs running per day in the fourth quarter of 2013 compared to 72 percent in the 2012-quarter. (Sources:Daily Oil Bulletin and Baker Hughes)

For the year ended December 31, 2013, PHX Energy generated record consolidated revenue of $380.7 million, a 26 percent increase compared to 2012 revenue of $301.7 million. As a result of the Corporation's strategic focus to grow its operations outside of Canada, US and international revenue, as a percentage of total consolidated revenue, grew to 48 and 13 percent, respectively, for the 2013-year as compared to 46 and 12 percent in 2012. Consolidated operating days increased by 23 percent to a record 30,711 days compared to 24,930 in 2012. Average consolidated day rates for the year ended December 31, 2013, excluding the motor rental division in Midland, Texas and the EDR business, increased slightly by 2 percent to $12,124 from $11,903 in 2012.

Operating Costs and Expenses

(Stated in thousands of dollars except percentages)

Three-month periods ended
December 31,
Years ended
December 31,
2013 2012 % Change 2013 2012 % Change
Direct costs 93,293 62,990 48 307,680 238,168 29
Depreciation & amortization (included in direct costs) 6,362 5,800 10 24,403 21,336 14
Gross profit as percentage of revenue excluding depreciation & amortization 25 % 28 % 26 % 28 %

Direct costs are comprised of field and shop expenses, and include depreciation and amortization on the Corporation's equipment. Excluding depreciation and amortization, gross profit as a percentage of revenue was 25 percent for the three-month period ended December 31, 2013 as compared to 28 percent in the 2012-quarter. For the year ended December 31, 2013, gross profit as a percentage of revenue (excluding depreciation and amortization) was 26 percent as compared to 28 percent in 2012.

The decrease in PHX Energy's margins in the three-month period and year ended December 31, 2013 is primarily due to the following factors:

  • higher performance drilling motor and MWD system repair costs in Canada and US,
  • higher third party equipment rentals,
  • increased field personnel costs in Canada, and
  • weaker than expected industry activity levels in Peru and Colombia.

Management continues to implement several strategies and initiatives aimed at reducing costs and improving profitability. For the fourth quarter of 2013, the Corporation's third party equipment rentals were $3.7 million or 3 percent of consolidated revenue, as compared to $1.9 million, or 2 percent of revenue, in the corresponding 2012-quarter. For the year ended December 31, 2013, third party equipment rentals were $13.0 million, or 3 percent of consolidated revenue, versus $8.8 million, or 3 percent of revenue, in 2012.

Depreciation and amortization for the three-month period ended December 31, 2013 increased by 10 percent to $6.4 million as compared to $5.8 million in the 2012-quarter. For the year ended December 31, 2013, depreciation and amortization increased by 14 percent to $24.4 million from $21.3 million in 2012. The increase in both periods is the result of the Corporation's high level of capital expenditure program in 2013.

(Stated in thousands of dollars except percentages)

Three-month periods ended
December 31,
Years ended
December 31,
2013 2012 % Change 2013 2012 % Change
Selling, general and administrative ("SG&A") costs 13,491 8,456 60 43,632 34,467 27
Share-based payments (included in SG&A costs) 301 410 (27 ) 1,061 2,265 (53 )
SG&A costs excluding share-based payments as a percentage of revenue 11 % 10 % 11 % 11 %

SG&A costs for the three-month period ended December 31, 2013 increased by 60 percent to $13.5 million from the $8.5 million incurred in the 2012-period. Included in SG&A costs are share-based payments of $0.3 million in the 2013-quarter as compared to $0.4 million in the 2012-quarter. Excluding these costs, SG&A costs represented 11 percent of consolidated revenue in the 2013 three-month period compared to 10 percent in the 2012-period.

For the year ended December 31, 2013, SG&A costs increased by 27 percent to $43.6 million as compared to $34.5 million in 2012. Excluding share-based payments of $1.1 million in the 2013-year and $2.3 million in the 2012-year, SG&A costs as a percentage of consolidated revenue were 11 percent in both periods.

The increase in SG&A costs, in dollar terms, in both 2013-periods was mainly due to higher payroll and marketing related costs associated with overall increased activity in all of PHX Energy's operating segments. In addition, costs were incurred in relation to the acquisition of RMS and the closure of the Peruvian subsidiary.

Share-based payments relate to the amortization of the fair values of issued options of the Corporation using the Black-Scholes model. In the three-month period and year ended December 31, 2013, share-based payments decreased by 27 percent and 53 percent, respectively, as the Corporation shifted to rewarding employees with retention awards rather than options. Share-based cash settled retention awards are measured at fair value and in the 2013-quarter and year ended December 31, 2013, PHX Energy recognized $1.2 million and $2.9 million, respectively, in compensation expense relating to retention awards (2012 - $0.2 million and $0.9 million, respectively).

(Stated in thousands of dollars)

Three-month periods ended
December 31,
Years ended
December 31,
2013 2012 % Change 2013 2012 % Change
Research and development expense 565 321 76 2,004 1,985 1

R&D expenditures charged to net earnings during the three-month periods ended December 31, 2013 and 2012 were $0.6 million and $0.3 million, respectively. During the 2013-quarter, no R&D expenditures were capitalized as development costs (2012 - $39,000).

For the year ended December 31, 2013, R&D expenditures of $2.0 million were incurred, none of which were capitalized as development costs. R&D expenditures for the year ended December 31, 2012 were $2.1 million, of which $151,000 were capitalized.

(Stated in thousands of dollars)

Three-month periods ended
December 31,
Years ended
December 31,
2013 2012 % Change 2013 2012 % Change
Finance expense 1,131 1,091 4 4,789 3,233 48

Finance expenses relate to interest charges on the Corporation's long-term and short-term bank facilities. For the three-month period ended December 31, 2013, finance charges were $1.1 million, which is comparable to finance charges incurred in the 2012-period. In the 2013-year, finance charges increased by 48 percent to $4.8 million from $3.2 million in 2012. In order to fund PHX Energy's capital expenditure programs in 2012 and 2013 and the construction of the new operations centre in 2013 that was sold in September, additional bank borrowings were made in the 2013-year.

(Stated in thousands of dollars)

...
Three-month periods ended
December 31,
Years ended
December 31,
2013 2012 2013 2012
Gains from pre-existing ownership interest in RMS and RMII 14,758 - 14,758 -
Net gain on disposition of drilling equipment 3,488 575 7,419 2,727
Gain on sale of land and operations centre - - 2,196 -
Write-down of technological assets - - (1,245 ) -
Foreign exchange gains (losses) 297 (89 ) (232 ) (1,267 )
Provision for bad debt (88 ) (108 ) (60 ) (15 )
Losses from the change in fair value of investment in equity securities - -