Secure Increases First Quarter 2013 EBITDA 22% Over the Prior Year

Marketwired

CALGARY, ALBERTA--(Marketwired - May 9, 2013) - Secure Energy Services Inc. ("Secure" or the "Corporation") (SES.TO) today announced financial and operational results for the three months ended March 31, 2013. The following should be read in conjunction with the management's discussion and analysis ("MD&A"), the condensed consolidated financial statements and notes of Secure which are available on SEDAR at www.sedar.com.

FIRST QUARTER 2013 FINANCIAL AND OPERATIONAL HIGHLIGHTS  
 
  Three Months Ended
 March 31,
 
($000's except share and per share data) 2013 2012 % change
Revenue (excludes oil purchase and resale) 147,122 115,426 27
Oil purchase and resale 175,856 162,286 8
Total revenue 322,978 277,712 16
EBITDA (1) 39,705 32,559 22
  Per share ($), basic 0.38 0.36 6
  Per share ($), diluted 0.37 0.35 6
Net earnings 17,758 14,977 19
  Per share ($), basic 0.17 0.17 -
  Per share ($), diluted 0.17 0.16 6
Capital Expenditures 42,268 35,833 18
Total assets 828,058 622,099 33
Long term borrowings 168,353 119,002 41
Common Shares - end of period 104,894,191 91,196,885 15
Weighted average common shares      
  basic 104,734,964 90,658,046 16
  diluted 107,363,836 94,179,644 14
(1) Refer to "Non GAAP measures and operational definitions"  

Secure's financial results for the three months ended March 31, 2013 were at all-time highs. Revenue (excluding oil purchase/resale) and earnings before interest, taxes, depreciation and amortization ("EBITDA") increased 27% and 22% respectively over the previous high established in the first quarter of 2012. Revenue and EBITDA increased on a sequential basis over the fourth quarter of 2012 by 36% and 40% respectively.

The positive results were achieved notwithstanding mixed industry activity in the first quarter of 2013 compared to the first quarter of 2012. The average rig count dropped 8% in Canada and 12% in the United States countered by a 3% increase in total number of meters drilled in the WCSB.

The Corporation continues to develop organic opportunities with 2013 first quarter capital expenditures of $42.3 million in the Processing, Recovery and Disposal ("PRD") and Drilling Services ("DS") division for projects in Canada and the United States. Total assets of $828.1 million have grown 33% since March 2012.

Subsequent to the end of the first quarter, Secure announced the acquisition of Frontline Integrated Services Ltd. ("Frontline") for an aggregate purchase price of $23.1 million. This strategic acquisition brings new business lines that add to the value chain of services by supporting and expanding the DS division's existing environmental and project management offerings.

  • RECORD REVENUE AND EBITDA
    • Revenue for the three months ended March 31, 2013 (excluding oil purchase and resale) increased 27% to $147.1 million from $115.4 million for the three months ended March 31, 2012. PRD division revenue (excluding oil purchase/resale) increased 33% from the first quarter of 2012 to $45.4 million. Major contributing factors increasing first quarter revenue in the PRD division included the new facilities and expansions added in 2012, namely the Wild River stand alone water disposal facility "SWD", the full service terminal ("FST") expansions at Dawson Creek and Fox Creek, the Fox Creek landfill, additional facilities in the United States through the DRD
      Saltwater Disposal LLC ("DRD") purchase and organic addition of the Crosby water disposal facilities in North Dakota. Disposal volumes for the first quarter increased 48% mostly due to the addition of the US facilities and processing volumes increased 14% due to increased demand from drilling and production activities and expansion at existing facilities. Crude oil marketing revenue in the first quarter of 2013 increased 145% over the prior year as a result of an added pipeline connection, increased oil throughput and due to the Corporation's ability to capitalize on market spread differential opportunities. DS division revenue increased 25% from the first quarter of 2012 to $101.7 million despite mixed oil field service conditions experienced in the first quarter of 2013. Revenue increased quarter over quarter due to increased DS division serviced meters drilled and due to a three percentage point increase in DS's market share to 31% ;
    • Oil purchase and resale revenue in the PRD division for the three months ended March 31, 2013 of $175.9 million increased 8% from the same period in 2012. The increase resulted from the
      Drayton Valley, Silverdale and Dawson FST's being fully operational the first quarter of 2013 whereas they were in start-up in the first quarter of 2012. Overall demand also increased quarter over quarter; EBITDA for the three months ended March 31, 2013 increased 22% to $39.7 million from $32.6 million for the three months ended March 31, 2012. EBITDA per diluted share for the three months ended March 31, 2013 was $0.37, a 6% increase from the three months ended March 31, 2012. Increases in revenue as discussed above and higher operating margins translated into improved EBITDA for Secure for the first quarter of 2013 as compared to the prior year period; and
    • Net earnings per share (basic) of $0.17 for the first quarter of 2013 was consistent to the first quarter of 2012. Net earnings per share was not reflective of the increase in net earnings as the number of shares outstanding increased quarter over quarter; the number of shares increased during 2012 as the Corporation completed a bought deal financing and issued shares as consideration in certain acquisitions completed.
  • DIVERSIFICATION INTO NEW MARKETS AND NEW AREAS
    • Organic expansion and growth capital totaled $41.5 million for the three months ended March 31, 2013 and included $15.0 million of 2012 carryover capital related to the Judy Creek and
      Rocky FST's. Total assets as of March 31, 2013 were $828.1 million compared to $622.1 million as of March 31, 2012. Major expenditures in the quarter included:
      • Judy Creek FST expected to be operational in the second quarter of 2013;
      • Rocky FST which began accepting produced water in the second quarter. The facility will become fully operational following the commissioning of the crude oil treater and the waste processing equipment in the second quarter of 2013;
      • Edson SWD, temporary facility opened in the quarter with construction of the permanent facility expected to commence at the start of the third quarter;
      • Kabob SWD, construction commencing in the second quarter;
      • Keene and Stanley water disposal facility preliminary construction in North Dakota;
      • Expansion at Drayton Valley and Fox Creek FST's with second treaters added; and
      • Various long lead purchases for 2013 PRD capital projects and rental equipment for DS Canada and the United States.
  • SOLID BALANCE SHEET
    • Secure's debt to EBITDA ratio was 1.84 as of March 31, 2013; well under the Corporation's credit facility covenant of 3.00;
    • Maintained a strong balance sheet exiting the first quarter of 2013 with positive working capital of $106.9 million and available borrowings of $111.4 million; and
    • During the quarter the Corporation announced it would begin paying a monthly dividend of $0.0125 per common share commencing May 1, 2013. Monthly distributions amount to approximately $1.3 million. In conjunction with the dividend, the Corporation also announced the adoption of a Dividend Reinvestment Plan ("DRIP"). The DRIP provides eligible shareholders with the opportunity to reinvest their cash dividends, on each dividend payment date, in additional Common Shares, which will be issued from treasury. Eligible shareholders may elect to participate in the DRIP commencing with the May 2013 dividend.
  • SUBSEQUENT EVENT
    • Subsequent to the three months ended March 31, 2013, the Corporation acquired all of the issued and outstanding shares of Frontline Integrated Services Ltd. ("Frontline") for an aggregate purchase price of $23.1 million including the issuance of $16.3 million in common shares of Secure. Frontline's core services include pipeline integrity; remediation and reclamation; and demolition and decommissioning performed throughout Western Canada. The Frontline acquisition is a continuation of Secure's strategy to add complementary services along the energy services value chain. The acquisition will support and expand the existing environmental and project management services of the Corporation's DS division. Going forward, all of Frontline's customers will now have the ability to receive an integrated service solution.
PRD DIVISION OPERATING HIGHLIGHTS
 
  Three Months Ended
 March 31,
   
($000's) 2013   2012   % Change
Revenue          
  Processing, recovery and disposal services (a) 45,444   34,066   33
  Oil purchase and resale service 175,856   162,286   8
  Total PRD division revenue 221,300   196,352   13
 
Operating Expenses          
  Processing, recovery and disposal services (b) 15,418   11,862   30
  Oil purchase and resale service 175,856   162,286   8
  Depreciation, depletion, and amortization 9,189   6,551   40
  Total PRD division operating expenses 200,463   180,699   11
General and administrative 4,959   2,648   87
Total PRD division expenses 205,422   183,347   12
 
Operating Margin (1) (a-b) 30,026   22,204   35
Operating Margin as a % of revenue (a) 66 % 65 % -
(1) Refer to "Non GAAP measures and operational definitions"   

Highlights for the PRD division included:

  • Revenue from processing, recovery and disposal for the three months ended March 31, 2013 increased 33% to $45.4 million from $34.1 million for the three months ended March 31, 2012. The 33% increase quarter over quarter relates to the following:
    • New facility additions and expansions subsequent to the first quarter of 2012 which include: the completion of the Wild River SWD permanent facility in the second quarter of 2012; expansion of the Dawson Creek facility in June 2012 to include a pipeline connection; the acquisition of DRD in July 2012; the completion of the Crosby SWD in North Dakota in December 2012; the completion of Fox Creek Landfill in December 2012; and the completion of the new Edson temporary water injection facility in January 2013; and
    • Increased demand for the Corporation's products and services. Quarter over quarter processing volumes from existing facilities have increased (excludes processing volumes from new facilities added after the first quarter of 2012).
  • Revenue from processing activity was higher as quarter over quarter processing volumes increased by 14%. First quarter 2013 disposal volumes increased by 48% over the prior year quarter. A significant portion of the increase relates to the addition of the new US SWD facilities (DRD acquisition and the completion of Crosby SWD) in North Dakota in the second half of 2012. Disposal volumes at existing facilities also increased on a quarter over quarter basis.
  • Recovery revenue from the sale of oil recovered through waste processing, crude oil handling, marketing and terminalling increased by 41% for the three months ended March 31, 2013 compared to the same period in 2012. The amount of recovery revenue increased as processing volumes related to the addition of the new facilities and expansions subsequent to the first quarter of 2012 as mentioned under the first bullet point above. A large portion of the increase in recovery revenue quarter over quarter is a result of the Corporation's ability to capitalize on crude oil marketing opportunities at its FST's. Crude oil marketing revenue increased by 145% for the quarter ended March 31, 2013 compared to the same period of 2012 as a result of the Dawson FST crude oil pipeline connection in July 2012, increased oil throughput at Drayton Valley and Silverdale FST's and the Corporation's ability to capitalize on market spread differential opportunities throughout the quarter. This includes crude oil marketing opportunities available by shipping crude oil out by rail.
  • Operating expenses from PRD services for the three months ended March 31, 2013 increased 30% to $15.4 million from $11.9 million for the comparative period of 2012. The increase in operating expenses relates to the new facilities and expansions added organically, the DRD acquisition and due to an increase in processing volumes from existing facilities. Revenue for the three months ended March 31, 2013 increased 33% which is consistent with the 30% increase in operating expenses over the comparable period of 2012.
  • Operating margin as a percentage of revenue from PRD services was 66% for the three months ended March 31, 2013 compared to 65% for the same period of 2012. The increase in the operating margin quarter over quarter was a result of improvements in operating efficiencies at the facilities and through increased crude oil marketing activity from the Dawson FST crude oil pipeline connection and from volumes managed at the Silverdale FST.
  • General and administrative ("G&A") expenses for the three months ended March 31, 2013 increased 87% to $5.0 million from $2.6 million in the comparative period in 2012. Wages and salaries increased 68% as new employees were hired to support growth in the PRD division in Canada and the United States. The establishment of the PRD divisional office in Denver, Colorado plus a 25% increase in building rent expenses contributed to the quarter over quarter increase.
DIVISION OPERATING HIGHLIGHTS      
   
  Three Months Ended
 March 31,
     
($000's) 2013   2012   % Change  
Revenue            
  Drilling services (a) 101,678   81,360   25  
   
Operating expenses            
  Driling services (b) 77,746   60,663   28  
  Depreciation and amortization 3,704   2,785   33  
  Total DS division operating expenses 81,450   63,448   28  
General and administrative 7,255   6,728   8  
Total DS division expenses 88,705   70,176   26  
   
Operating Margin (1) (a-b) 23,932   20,697   16  
Operating Margin % (1) 24 % 25 % (4 )
(1) Refer to "Non GAAP measures and operational definitions" 

Highlights for the DS division included:

  • First quarter 2013 DS divisional revenue was $101.7 million or 25% higher than the $81.4 million of revenue generated in the first quarter of 2012. Overall, the quarter over quarter increase in revenue is the result of an 18% increase in Canadian revenue per operating day, an increase in market share to 31% versus 28% in Canada and due to an increase in the number of meters drilled by DS. These improvements were despite an 8% drop in the CAODC's average rig count to 496 rigs in the first quarter of 2013 from the 540 average rigs working during the comparative period of 2012. The drop in rig count was offset by a late spring breakup in 2013 compared to 2012 which led to higher sustained demand for drilling fluids late into the quarter. The late spring breakup helped to keep Canadian DS division operating rig days relatively unchanged; DS operating days totaled 13,918 for the first quarter of 2013 compared to 13,875 for the first quarter of 2012.
  • The drilling fluids service line contributed $87.4 million or 86% of total DS division revenue during the first quarter of 2013, compared to $71.3 million or 88% of total revenue in the comparative quarter of 2012, a 23% dollar improvement. Major drivers for the revenue improvement in addition to those mentioned above include a higher proportion of activity related to SAGD wells and higher revenue in the U.S. as a result of the IDF acquisition. First quarter revenue per operating day for the drilling fluids service line in Canada increased to $5,815 compared to $4,919 in 2012 or an 18% increase. Increases in the proportion of SAGD wells helped drive the revenue per operating day improvement in the first quarter of 2013. SAGD wells tend to be more complex and require more costly drilling fluids. The first quarter of 2013 saw an increase in the proportion of SAGD wells relative to the first quarter of 2012. The volumes of oil based fluids used in the first quarter of 2013 were consistent with the first quarter of 2012.
  • Despite an 8% quarter over quarter decrease in Canadian rig count, the drilling fluid service line in Canada was able to increase its market share to approximately 31%, compared to 28% for the same period of 2012.
    The CAODC's average monthly rig count for Western Canada provides the basis for market share calculations.
  • Operating margins for the first quarter of 2013 were $23.9 million or 24% of revenue compared to $20.7 million or 25% in 2012. Of the 1% margin decrease; $0.7 million relates to lower environmental and solids control service lines. Environment margins decreased as a result of a higher proportion of flow through revenue and expenses. Solids control margins were impacted by lower utilization rates. Drilling fluids service line operating margins improved on a quarter over quarter basis and helped to offset environmental and solid control quarter over quarter decreased margins.
  • G&A expenses for the first quarter ending March 31, 2013 were $7.3 million compared to $6.7 million for the three months ended March 31, 2012. The 8% increase is attributable to increases in headcount quarter over quarter in addition to associated costs to improve infrastructure and manage the growing business. G&A expenses as a percentage of revenue were 7% for the three months ended March 31, 2013, versus 8% for the same period of 2012. The most significant accounts within G&A expense include: salaries and benefits for office staff, professional fees, office leases, insurance, utilities, and communications. The increase in G&A is in line with management expectations.

OUTLOOK

Secure posted record first quarter 2013 financial and operating results which increased on a sequential basis over the fourth quarter of 2012 despite a continuation of subdued industry conditions. Producer spending was cautious in the quarter due to weak commodity prices and oil transporting bottlenecks resulting in regional oil price discounts. Lower producer spending is reflected in the 8% decrease in quarter over quarter rig activity in the WCSB. Oil and liquid price weaknesses have recently subsided and natural gas prices have seen improvement of late as a result of higher withdrawals from storage. This continued strength in commodity prices may lead to improved activity as the year unfolds. Alternatives to crude transport such as rail have also positively impacted Canadian crude pricing. Analyst expectations are now that activity will increase in the latter part of the year particularly in the fourth quarter. The longer term fundamentals of the North American oil and gas market are positive which bodes well for customer demand for the services the Corporation offers.

Quarter over quarter, WCSB meters drilled reported by the Canadian Association of Oilwell Drilling Contractors increased 3% to 7.4 million which is positive to the Corporation as meters drilled is more indicative as to volumes of drilling fluid required and produced waters requiring processing and disposal. Higher meters drilled is a result of more complex drilling, a move to horizontal wells and greater lengths and depths being pursued by operators. The Corporation anticipates the number of operating days and meters drilled in 2013 combined with high levels of produced drilling by products will increase demand for services at the Corporation's waste processing and disposal facilities and in the DS division's business.

Capital deployed for growth and expansion opportunities in the quarter totaled $41.5 million. Consolidated Capital expenditures for the year are expected to total $155.0 million plus $23.1 million for the acquisition of Frontline. Both the Judy Creek and Rocky FST's are nearing completion and it is anticipated both will become fully operational in the second quarter. The SWD projects at Edson and Kabob in Canada and Keene and Stanely in North Dakota are progressing and pending customer demand and regulatory approval, will be evaluated for conversion to FST's. The 2013 capital budget consists of three FST's two SWD's and two landfills in Canada and the United States for a total of $115.0 million. Although the capital expenditures will occur in 2013, meaningful cash flow from the new facilities is not expected until 2014. The DS division continues to build out its solids control fleet. The fleet now includes a greater proportion of high capacity centrifuges which are in high demand and generate greater revenue. The DS capital budget is forecast to total $15.0 million and is allocated equally between Canada and the United States.

One of the Corporation's primary objectives is to maintain and strengthen its market position by consistently providing operational excellence, innovative solutions and cost efficiencies to its customers. The addition of Frontline subsequent to the end of the quarter is an example how Secure continues to enhance its customer value chain. Frontline is an integrated provider servicing the energy, resource and civil construction industries. Their core services are environmental project management and remediation and reclamation which feed volume into Secure's fixed facilities. Their experienced team has extensive industry experience with values that are consistent to Secure's. Frontline generated $4.8 million of EBITDA in 2012.

Secure's strong balance sheet gives the Corporation flexibility to continue growing organically and to execute on strategic acquisition opportunities. The Corporation's diverse asset base lessens its dependence on drilling related revenue streams in favour of production related services. Secure has a focused strategy to continually add and expand facilities and services in key under-serviced and capacity constrained markets organically and via acquisition. The Corporation recently announced the implementation of a monthly $0.0125 per share dividend. The initiation of the dividend reflects management's confidence in its ability to generate returns to shareholders while continuing to invest in the Corporation's organic capital program facilitating future growth.

FINANCIAL STATEMENTS AND MD&A

The condensed consolidated financial statements and MD&A of Secure for the three months ended March 31, 2013 are available immediately on Secure's website at www.secure-energy.ca. The condensed consolidated financial statements and MD&A will be available tomorrow on SEDAR at www.sedar.com.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this MD&A constitute "forward-looking statements" and/or "forward-looking information" within the meaning of applicable securities laws (collectively referred to as forward-looking statements). When used in this document, the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "estimate", "expect", and similar expressions, as they relate to Secure, or its management, are intended to identify forward-looking statements. Such statements reflect the current views of Secure with respect to future events and operating performance and speak only as of the date of this MD&A. In particular, this MD&A contains forward-looking statements pertaining to: general market conditions; the oil and natural gas industry; activity levels in the oil and gas sector, including drilling levels; commodity prices for oil, natural gas liquids ("NGLs") and natural gas; the increase in the first quarter of 2013 operating days; demand for the Corporation's services; expansion strategy; the amounts of the PRD and DS divisions' 2013 capital budgets and the intended use thereof; debt service; capital expenditures; completion of facilities; future capital needs; access to capital; acquisition strategy; the Corporation's capital spending on the new Rocky Mountain House and Judy Creek, Alberta full service terminals; capital spending on the Kabob and Edson, Alberta SWD; the construction of landfills at Saddle Hills and Fox Creek, Alberta; capital spending on the Keene and Stanley water disposal facilities in North Dakota; oil purchase and resale revenue; and the completion of the permanent facility.

Forward-looking statements concerning expected operating and economic conditions are based upon prior year results as well as the assumption that increases in market activity and growth will be consistent with industry activity in Canada, United States, and internationally and growth levels in similar phases of previous economic cycles. Forward-looking statements concerning the availability of funding for future operations are based upon the assumption that the sources of funding which the Corporation has relied upon in the past will continue to be available to the Corporation on terms favorable to the Corporation and that future economic and operating conditions will not limit the Corporation's access to debt and equity markets. Forward-looking statements concerning the relative future competitive position of the Corporation are based upon the assumption that economic and operating conditions, including commodity prices, crude oil and natural gas storage levels, interest rates, the regulatory framework regarding oil and natural gas royalties, environmental regulatory matters, the ability of the Corporation and its subsidiary to successfully market their services and drilling and production activity in North America will lead to sufficient demand for the Corporation's services and its subsidiary's services including demand for oilfield services for drilling and completion of oil and natural gas wells, that the current business environment will remain substantially unchanged, and that present and anticipated programs and expansion plans of other organizations operating in the energy service industry will result in increased demand for the Corporation's services and its subsidiary's services. Forward-looking statements concerning the nature and timing of growth are based on past factors affecting the growth of the Corporation, past sources of growth and expectations relating to future economic and operating conditions. Forward-looking statements in respect of the costs anticipated to be associated with the acquisition and maintenance of equipment and property are based upon assumptions that future acquisition and maintenance costs will not significantly increase from past acquisition and maintenance costs.

Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether such results will be achieved. Readers are cautioned not to place undue reliance on these statements as a number of factors could cause actual results to differ materially from the results discussed in these forward-looking statements, including but not limited to those factors referred to and under the heading "Business Risks" and under the heading "Risk Factors" in the Corporation's annual information form ("AIF") for the year ended December 31, 2012. Although forward-looking statements contained in this MD&A are based upon what the Corporation believes are reasonable assumptions, the Corporation cannot assure investors that actual results will be consistent with these forward-looking statements. The forward-looking statements in this MD&A are expressly qualified by this cautionary statement. Unless otherwise required by law, Secure does not intend, or assume any obligation, to update these forward-looking statements.

Non GAAP Measures and Operational Definitions

(1) The Corporation uses accounting principles that are generally accepted in Canada (the issuer's "GAAP"), which includes, International Financial Reporting Standards ("IFRS"). These financial measures are Non-GAAP financial measures and do not have any standardized meaning prescribed by IFRS. These non-GAAP measures used by the Corporation may not be comparable to a similar measures presented by other reporting issuers. See the management's discussion and analysis available at www.sedar.com for a reconciliation of the Non-GAAP financial measures and operational definitions. These non-GAAP financial measures and operational definitions are included because management uses the information to analyze operating performance, leverage and liquidity. Therefore, these non-GAAP financial measures and operational definitions should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.
Contact:
Secure Energy Services Inc.
Rene Amirault
Chairman, President and Chief Executive Officer
(403) 984-6101
(403) 984-6100

Secure Energy Services Inc.
Allen Gransch
Chief Financial Officer
(403) 984-6101
(403) 984-6100
www.secure-energy.ca

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