Trican Reports Fourth Quarter Results for 2013

Marketwired

CALGARY, ALBERTA--(Marketwired - Feb. 25, 2014) - Trican Well Service Ltd. (TCW.TO) -

Financial Review

    Three months ended   Twelve months ended
    Dec. 31,   Dec. 31,   Sept. 30,   Dec. 31,   Dec. 31,
($ millions, except per share amounts; unaudited) 2013   2012   2013   2013   2012
Revenue   $ 552.1   $ 485.9   $ 548.3   $ 2,115.5   $ 2,213.0
Operating income *     35.5     35.1     72.7     179.6     240.1
Profit / (loss)     (20.8 )   (7.7 )   5.7     (45.9 )   53.3
Earnings / (loss) per share (basic) $ (0.14 ) $ (0.05 ) $ 0.04   $ (0.31 ) $ 0.37
  (diluted) $ (0.14 ) $ (0.05 ) $ 0.04   $ (0.31 ) $ 0.37
Adjusted profit / (loss) *     (9.9 )   (5.4 )   9.7     (31.5 )   63.0
Adjusted profit / (loss) per share* (basic) $ (0.07 ) $ (0.04 ) $ 0.07   $ (0.21 ) $ 0.43
  (diluted) $ (0.07 ) $ (0.04 ) $ 0.07   $ (0.21 ) $ 0.43
Funds provided by / (used in) operations*     30.4     (14.5 )   71.1     130.8     126.8

Notes:

* Trican makes reference to operating income, adjusted net income (loss) and funds provided by (used in) operations. These are measures that are not recognized under International Financial Reporting Standards (IFRS). Management believes that, in addition to net income (loss), operating income, adjusted net income (loss) and funds provided by (used in) operations are useful supplemental measures. Operating income provides investors with an indication of earnings before depreciation, foreign exchange, taxes and interest. Adjusted net income (loss) provides investors with information on net income (loss) excluding one-time non-cash charges and the non-cash effect of stock-based compensation expense. Funds provided by (used in) operations provide investors with an indication of cash available for capital commitments, debt repayments and other expenditures. Investors should be cautioned that operating income, adjusted net income (loss), and funds provided by (used in) operations should not be construed as an alternative to net income (loss) and cash flow from operations determined in accordance with IFRS as an indicator of Trican's performance. Trican's method of calculating operating income, adjusted net income (loss) and funds provided by (used in) operations may differ from that of other companies and accordingly may not be comparable to measures used by other companies.

FOURTH QUARTER HIGHLIGHTS

Consolidated revenue for the fourth quarter of 2013 was $552.1 million, an increase of 14% compared to the fourth quarter of 2012. The adjusted consolidated loss was $9.9 million compared to $5.4 million, and adjusted loss per share was $0.07 compared to $0.04 for the same period in 2012.

Due to a rise in fracturing intensity per well in Canada, including increased sand usage per well, we have seen increased wear on fluid ends over the past year. As a result, the useful life of a fluid end has decreased and led to a $14.3 million charge to depreciation expense in the fourth quarter of 2013 ($10.7 million net of tax) to write-off fluid ends no longer in use. Effective January 1, 2014, we will change our accounting estimate on the useful life of a fluid end to more accurately reflect current operating conditions. We assessed the useful life of fluid ends in our other operating regions and concluded that no further changes in estimates were required in those regions.

Our Canadian operations earned quarterly revenue of $286.9 million in the fourth quarter of 2013, an increase of 17% compared to the fourth quarter of 2012. Fourth-quarter operating income was $53.1 million, which was up 4% on a year-over-year basis. Canadian revenue increased sequentially by 3% due to the strong demand in October and November; however, operating margins decreased sequentially by 660 basis points. Fourth-quarter margins were negatively impacted by cost increases and pricing declines. Cost increases were driven primarily by higher third-party hauling, fuel, and repairs and maintenance expenses. Canadian fracturing prices decreased by approximately 3% and cementing prices decreased by approximately 1%, on a sequential basis, which also had a negative impact on fourth-quarter operating margins.

Revenue in the fourth quarter of 2013 for our U.S. operations was relatively consistent with the fourth quarter of 2012, but decreased by 4% on a sequential basis. Revenue for our U.S. pressure pumping business was down sequentially, largely due to reduced activity in the Marcellus play. As expected, our key customers in the Marcellus play decreased spending levels as 2013 capital budgets were completed. In addition, winter weather led to reduced industry activity in the Permian play during the fourth quarter of 2013. Lower revenue from our pressure pumping business was partially offset by a 50% increase in revenue for our U.S. completion tools business. Our U.S. operations incurred an operating loss of $8.3 million during the fourth quarter as operating margins were negatively impacted by reduced pressure pumping activity.  

Revenue from International operations was $91.8 million compared to $68.0 million in the fourth quarter of 2012. The majority of international revenue is generated by our Russian operations and pressure pumping demand was strong in this region throughout the fourth quarter of 2013. Favorable weather conditions allowed our Russian customers to remain active throughout the quarter and catch-up on 2013 capital spending plans that were behind schedule for most of 2013. Although Russian operating margins improved on a year-over-year basis, continued cost inflation limited the margin increase. Weak results for our Algerian operations and start-up costs in both Saudi Arabia and Colombia also had a negative impact on International operating margins during the fourth quarter of 2013.

MANAGEMENT'S DISCUSSION AND ANALYSIS

COMPARATIVE QUARTERLY INCOME STATEMENTS ($ thousands, unaudited)  
                  Quarter-      
                  Over-      
      % of       % of   Quarter   %  
Three months ended December 31, 2013   Revenue   2012   Revenue   Change   Change  
                         
Revenue 552,144   100 % 485,865   100.0 % 66,279   13.6 %
Expenses                        
  Materials and operating 490,713   88.9 % 422,999   87.1 % 67,714   16.0 %
  General and administrative 25,931   4.7 % 27,743   5.7 % (1,812 ) (6.5 %)
Operating income* 35,500   6.4 % 35,123   7.2 % 377   1.1 %
  Finance costs 8,592   1.6 % 8,373   1.7 % 219   2.6 %
  Depreciation and amortization 70,085   12.7 % 41,564   8.6 % 28,521   68.6 %
  Foreign exchange gain (5,968 ) (1.1 %) (3,467 ) (0.7 %) (2,501 ) 72.1 %
  Other loss / (income) 432   0.1 % (560 ) (0.1 %) 992   (177.1 %)
Loss before income taxes and non-controlling interest (37,641 ) (6.8 %) (10,787 ) (2.2 %) (26,854 ) 249.0 %
Income tax recovery (16,431 ) (3.0 %) (2,957 ) (0.6 %) (13,474 ) 455.7 %
Non-controlling interest (380 ) (0.1 %) (88 ) (0.0 %) (292 ) (331.8 %)
Net loss (20,830 ) (3.8 %) (7,742 ) (1.6 %) (13,088 ) 169.1 %

* see first page of this report

CANADIAN OPERATIONS

($ thousands, except revenue per job, unaudited) Dec. 31, % of   Dec. 31, % of   Sept. 30, % of  
Three months ended, 2013 Revenue   2012 Revenue   2013** Revenue  
Revenue 286,869     244,237     279,783    
Expenses                  
  Materials and operating 228,533 79.7 % 187,313 76.7 % 203,005 72.6 %
  General and administrative 5,244 1.8 % 5,897 2.4 % 6,610 2.4 %
  Total expenses 233,777 81.5 % 193,212 79.1 % 209,615 74.9 %
Operating income* 53,092 18.5 % 51,025 20.9 % 70,168 25.1 %
Number of jobs 5,154     5,572     6,082    
Revenue per job 55,435     43,545     45,393    

* see first page of this report

** Certain prior period comparative numbers have been restated to be consistent with the presentation used in Q4 2013

Sales Mix

Three months ended, Dec. 31,   Dec. 31,   Sept. 30,  
(unaudited) 2013   2012   2013  
% of Total Revenue            
Fracturing 67 % 61 % 70 %
Cementing 18 % 21 % 18 %
Nitrogen 6 % 6 % 4 %
Industrial Services 4 % 0 % 2 %
Coiled Tubing 3 % 5 % 3 %
Acidizing 1 % 3 % 2 %
Other 1 % 4 % 1 %
Total 100 % 100 % 100 %

Operations Review

Canadian fracturing and cementing demand was strong in October and November and the early part of December, but decreased substantially in the second half of December. The lower activity in late December was due to reduced customer spending as 2013 drilling and completions budgets came to a close, combined with reduced activity over the holiday season. This decrease was expected and consistent with the previous year.

Canadian revenue increased sequentially by 3% due to the strong demand in October and November; however, operating margins decreased sequentially by 660 basis points. Fourth quarter margins were negatively impacted by cost increases and pricing declines.

A substantial increase in third-party hauling expenses had a meaningful impact on fourth quarter Canadian operating margins. The fracturing job size and the amount of sand pumped per fracturing stage increased sequentially and led to increased hauling requirements for our fracturing service line. As a result, third-party hauling costs increased sequentially by over 70%. In addition, the cost of diesel increased by 12% and repairs and maintenance expenses increased by 12% compared to the third quarter of 2013. Due to the competitive nature of Canadian pressure pumping market, we were unable to recover these cost increases through higher pricing.

There was downward pressure on pricing despite the strong demand that Trican experienced throughout most of the fourth quarter, as the Canadian market remained highly competitive. On a sequential basis, fracturing prices decreased by approximately 3% and cementing prices decreased by approximately 1% negatively impacting fourth-quarter operating margins.

Our Canadian completion tools division continued to grow and achieve increased market penetration during the fourth quarter of 2013. Revenue increased by over 20% on a sequential basis as we continued to see good customer acceptance of our tool portfolio in Canada.

Q4 2013 versus Q4 2012

Canadian revenue in the fourth quarter of 2013 increased by 17% compared to the fourth quarter of 2012. Revenue per job increased by 27% as a 17% year-over-year decrease in price was more than offset by larger job sizes for our fracturing and nitrogen service lines. We are continuing to see an increase in fracturing stages per well and more product usage per job, including sand and nitrogen, which has led to the larger job sizes. An increase in fracturing revenue relative to total revenue also contributed to the increase in revenue per job, as fracturing jobs generally have significantly higher revenue per job than other service lines.

The job count decreased by 8% despite the increase in overall Canadian activity. Cementing and fracturing jobs remained relatively stable on a year-over-year basis; however, coiled tubing jobs decreased significantly and contributed to most of the decline in the overall job count. Lower coiled tubing demand also had a negative impact on our nitrogen and acidizing job count as these service lines are closely correlated with coiled tubing. We are continuing to see increased competition for our coiled tubing services in Canada, which is contributing to the decline in job count.

As a percentage of revenue, materials and operating expenses increased to 79.7% from 76.7% in the fourth quarter of 2012. The year-over-year decrease in price and higher third-party hauling and fuel expenses led to lower margins and was partially offset by lower employee costs, as a percentage of revenue, as well as lower guar and repairs and maintenance expenses. General and administrative costs were down $0.7 million largely due to lower share based expenses.

Q4 2013 versus Q3 2013

Canadian revenue increased by 3% on a sequential basis. Fourth-quarter industry activity levels in Canada were relatively consistent with the third quarter despite the large movements in the job count and revenue per job. The job count decreased by 15% due to a change in job type and customer mix. Fracturing job size was much larger sequentially, which led to fewer jobs performed in the fourth quarter of 2013 as the larger jobs are generally more time consuming. In addition, a decrease in coiled tubing jobs and associated nitrogen and acidizing work, contributed to the decline in job count. The shift to larger fracturing jobs in the fourth quarter led to the 22% increase in revenue per job.

Materials and operating expenses increased to 79.7% of revenue compared to 72.6% of revenue in the third quarter of 2013. The reduction in operating margins was due largely to a decrease in price combined with cost increases for third-party hauling, fuel, and repairs and maintenance expenses. General and administrative costs were down $1.4 million due largely to lower profit-sharing and share-based expenses.

UNITED STATES OPERATIONS

($ thousands, except revenue per job, unaudited) Dec. 31,   % of   Dec. 31,   % of   Sept. 30, % of  
Three months ended, 2013   Revenue   2012   Revenue   2013** Revenue  
Revenue 173,470       173,589       180,401    
Expenses                      
  Materials and operating 174,989   100.9 % 171,140   98.6 % 169,049 93.7 %
  General and administrative 6,776   3.9 % 4,553   2.6 % 6,541 3.6 %
  Total expenses 181,765   104.8 % 175,693   101.2 % 175,590 97.3 %
Operating (loss) / income** (8,295 ) (4.8 %) (2,104 ) (1.2 %) 4,811 2.7 %
Number of jobs 2,262       1,654       2,284    
Revenue per job 68,533       105,077       76,238    

* see first page of this report

** Certain prior period comparative numbers have been restated to be consistent with the presentation used in Q4 2013

Sales Mix

Three months ended, Dec. 31,   Dec. 31,   Sept. 30,  
(unaudited) 2013   2012   2013  
% of Total Revenue            
Fracturing 88 % 90 % 88 %
Cementing 7 % 7 % 8 %
Coiled Tubing 5 % 3 % 4 %
Total 100 % 100 % 100 %

Operations Review

Activity levels declined on a sequential basis for our U.S. pressure pumping operations during the fourth quarter of 2013. As expected, revenue earned in the Marcellus play declined substantially as our key customers in the region reduced activity levels during the fourth quarter. Declines in the Marcellus play were partially offset by increased revenue earned in the Bakken in the fourth quarter relative to the third quarter of 2013. Revenue earned in the Eagle Ford and Permian plays were relatively flat on a sequential basis; however, fourth quarter activity levels in the Permian region were negatively impacted by winter weather.

Fourth-quarter pricing declined in the Eagle Ford region on a sequential basis as this area remains competitive and over-supplied with pressure pumping equipment. Pricing remained relatively stable in all other U.S. operating regions.

Our U.S. completion tools business continued to show excellent growth with revenue increasing by over 50% on a sequential basis. We continue to see customer acceptance of our completion tools in the U.S. and will look to grow this business and increase profitability throughout 2014.

Q4 2013 versus Q4 2012

Revenue for our U.S. operations decreased slightly as lower pricing for our U.S. pressure pumping business was offset by an increase in our U.S. completion tools revenue. The job count increased by 37% due to year-over-year increases in all service lines including substantial increases in acidizing, nitrogen and cementing as a result of Trican's strategic focus to expand our service offering in the US. Revenue per job decreased by 35% due to a decrease in price combined with a change in job mix. A substantial amount of fracturing work was performed in the Haynesville region in the fourth quarter of 2012, and fracturing jobs in this region are generally larger due to the high pumping pressure and rate required to fracture the wells. No work was performed in the Haynesville region during the fourth quarter of 2013.

As a percentage of revenue, materials and operating expenses increased to 100.9% of revenue compared to 98.6% in the same period of the prior year. Year-over-year operating margins were negatively impacted by lower pricing, which was partially offset by lower costs due to cost cutting measures implemented throughout 2013 and higher margins associated with the U.S. completions tools business. An increase in the cost of diesel also had a negative impact on fourth quarter operating margins. General and administrative expenses increased by $2.2 million due largely to increased overhead costs associated with the growth of the U.S. completion tools business and one-time administrative expenses.

Q4 2013 versus Q3 2013

Revenue decreased by 4% on a sequential basis for our U.S. operations. The job count decreased by 1%, sequentially, due to declines in fracturing and cementing activity, offset partially by increases in acidizing and nitrogen jobs. Revenue per job fell by 10% due largely to changes in customer mix and price decreases in the Eagle Ford region.

As a percentage of revenue, materials and operating expenses increased to 100.9% compared to 93.7% in the third quarter of 2013. Operating margins were negatively impacted by the reduced activity in the Marcellus play. The Marcellus play was our most profitable region in the third quarter of 2013; therefore, lower activity in this region had a meaningful impact on fourth quarter operating margins. Improved profitability for our U.S. completion tools business partially offset the impact of lower Marcellus activity. General and administrative expenses increased slightly by $0.2 million as increased overhead costs associated with the growth of the U.S. completion tools business were partially offset by lower share-based expenses.

INTERNATIONAL OPERATIONS

($ thousands, except revenue per job, unaudited) Dec. 31, % of   Dec. 31, % of   Sept. 30, % of  
Three months ended, 2013 Revenue   2012 Revenue   2013 Revenue  
Revenue 91,805     68,039     88,161    
Expenses                  
  Materials and operating 80,556 87.7 % 57,941 85.2 % 71,523 81.1 %
  General and administrative 4,434 4.8 % 4,216 6.2 % 4,176 4.8 %
  Total expenses 84,990 92.6 % 62,157 91.4 % 75,699 85.9 %
Operating income* 6,815 7.4 % 5,882 8.6 % 12,462 14.1 %
Number of jobs 1,074     951     1,232    
Revenue per job 82,872     68,586     69,180    

* see first page of this report

Sales Mix

Three months ended, Dec. 31,   Dec. 31,   Sept. 30,  
(unaudited) 2013   2012   2013  
% of Total Revenue            
Fracturing 84 % 82 % 81 %
Coiled Tubing 6 % 9 % 10 %
Cementing 5 % 6 % 5 %
Nitrogen 2 % 1 % 2 %
Other 3 % 2 % 2 %
Total 100 % 100 % 100 %

Operations Review

The majority of international revenue is generated by our Russian operations and pressure pumping demand was strong in this region throughout the fourth quarter of 2013. Favorable weather conditions allowed our Russian customers to remain active throughout the quarter and catch up on 2013 capital spending plans that were behind schedule for most of 2013. Although Russian operating margins improved on a year-over-year basis, continued cost inflation limited the margin increase.

Weak results for our Algerian operations had a significant impact on international operating margins during the fourth quarter of 2013. Asset impairment write-downs on inventory and equipment were recorded during the fourth quarter relating to our Algerian cementing operations that were shut down earlier in the year. The asset write-downs, combined with weak results for our coiled tubing operations in Algeria, negatively impacted fourth-quarter international operating margins by 250 basis points.

We expect to begin coiled tubing operations in Saudi Arabia and cementing operations in Colombia during the first half of 2014. As a result, we incurred start-up costs in both regions during the fourth quarter compared to the third quarter of 2013 and the fourth quarter of 2012, which had a negative impact on fourth-quarter operating margins.

There was minimal revenue growth for our Australian operations in the fourth quarter of 2013 on both a sequential and year-over-year basis. We remain optimistic about the long-term growth opportunities in the region and are committed to growing our Australian cementing business during 2014.

We continue to see good demand for our completion tools in the North Sea and will look to grow this business in 2014.

Q4 2013 versus Q4 2012

International revenue increased by 35% due largely to an increase in Russian revenue. The job count rose by 13% due to increases in Russian cementing and fracturing activity that benefited from more favorable weather conditions compared to the fourth quarter of 2012. Revenue per job increased by 21% due to larger fracturing and cementing jobs for our Russian service line and increased fracturing revenue relative to total revenue. Completion tools activity also contributed to the year-over-year increase in international revenue as this service line was not offered internationally in 2012.

As a percentage of revenue, materials and operating expenses increased to 87.7% from 85.2%. Increased operating leverage from higher revenue was more than offset by increased product costs in Russia, operating losses in Algeria, and increased start-up costs in Colombia and Saudi Arabia. General and administrative expenses increased by $0.2 million due largely to increased overhead costs in Colombia and Saudi Arabia as we prepared to begin active operations in the first half of 2014.

Q4 2013 versus Q3 2013

International revenue in the fourth quarter of 2013 increased sequentially by 4%. Revenue per job increased by 20% due to an increase in fracturing revenue relative to total revenue and an increase in fracturing and cementing job size in Russia. The job count decreased by 13% due largely to a sequential decrease in Russian activity as the third quarter is typically the most active quarter in Russia.

Materials and operating expenses increased to 87.7% from 81.1% due partially to a change in customer and job mix in Russia that resulted in lower operating margins. Operating losses in Algeria and increased start-up costs in Colombia and Saudi Arabia also contributed to the decline in operating margins. General and administrative expenses increased by $0.3 million due largely to increased overhead costs in Colombia and Saudi Arabia as we prepared to begin active operations in the first half of 2014.

CORPORATE

($ thousands, except revenue per job, unaudited) Dec. 31,   % of   Dec. 31,   % of   Sept. 30,   % of  
Three months ended, 2013   Revenue   2012   Revenue   2013   Revenue  
Expenses                        
  Materials and operating 6,635   1.2 % 6,603   1.4 % 5,835   1.1 %
  General and administrative 9,477   1.7 % 13,077   2.7 % 8,904   1.6 %
  Total expenses 16,112   2.9 % 19,680   4.1 % 14,739   2.7 %
Operating loss* (16,112 )     (19,680 )     (14,739 )    

* see first page of this report

Q4 2013 versus Q4 2012

Corporate expenses in the fourth quarter of 2013 were down $3.6 million compared to the fourth quarter of 2012. Reductions in profit sharing, share-based compensation expense and professional fees contributed to the majority of the decrease. The lower professional fees were due to i-TEC acquisition costs that were incurred during the fourth quarter of 2012.

Q4 2013 versus Q3 2013

Corporate expenses increased sequentially by $1.4 million due largely to an increase in donation expenses in the fourth quarter of 2013.

OTHER EXPENSES AND INCOME

Finance costs in the fourth quarter of 2013 increased by $0.2 million on a year-over-year basis due to slightly higher average interest rates on the notes payable and revolving credit facility. Other loss was $0.4 million in the quarter versus income of $0.6 million for the same period in the prior year. Other loss/income is largely comprised of gains and losses on disposal of property and equipment and interest income earned on cash balances.

Depreciation and amortization expense for the fourth quarter of 2013 includes a $14.3 million charge for accelerated depreciation on fluid ends in Canada. $9.5 million of this adjustment ($7.2 million net of tax) relates to the first three quarters of 2013, and has been excluded from adjusted net income for the fourth quarter of 2013.

Depreciation and amortization expense for the fourth quarter of 2013 also includes $3.1 million in amortization on the intangible assets relating to the purchase of i-TEC. The purchase date of this transaction was January 11, 2013 and the amortization period began on this date. The purchase price accounting was not finalized until the fourth quarter of 2013; therefore, a catch-up entry was required to ensure that adequate amortization had been recorded as of December 31, 2013. $2.1 million of this adjustment ($1.6 million net of tax) relates to periods prior to October 1, 2013 and has been excluded from adjusted net income for the fourth quarter of 2013.

Excluding these one-time charges, depreciation and amortization increased by $11.1 million, on a year-over-year basis, due to an increase in the average balance of capital assets subject to depreciation, primarily in North America.

The foreign exchange gain of $6.0 million in the quarter versus a gain of $3.5 million in the same quarter last year was due to the net impact of fluctuations in the U.S. dollar and Russian ruble relative to the Canadian dollar. In particular, the value of the U.S. dollar increased by 3.2% relative to the Canadian dollar, which led to foreign exchange gains on net U.S. dollar assets.

COMPARATIVE ANNUAL INCOME STATEMENTS  
($ thousands; unaudited)                 Year-      
                  Over-      
      % of       % of   Year   %  
Year ended December 31, 2013   Revenue   2012   Revenue   Change   Change  
                         
Revenue 2,115,472   100.0 % 2,213,400   100.0 % (97,928 ) (4 %)
Expenses                        
  Materials and operating 1,826,221   86.3 % 1,870,889   84.5 % (44,668 ) (2 %)
  General and administrative 109,701   5.2 % 102,443   4.6 % 7,258   7 %
Operating income* 179,550   8.5 % 240,068   10.8 % (60,518 ) (25 %)
  Finance costs 34,497   1.6 % 30,497   1.4 % 4,000   13 %
  Depreciation and amortization 222,403   10.5 % 152,837   6.9 % 69,566   46 %
  Foreign exchange (gain)/loss (4,859 ) (0.2 %) 408   0.0 % (5,267 ) (1,291 %)
  Goodwill impairment, net 4,123   0.2 % -   -   4,123   -  
  Other income (1,612 ) (0.1 %) (1,837 ) (0.1 %) 225   (12 %)
Income before income taxes and non-controlling interest (75,002 ) (3.5 %) 58,163   2.6 % (133,165 ) (229 %)
Income tax (recovery) / expense (28,303 ) (1.3 %) 4,824   0.2 % (33,127 ) (687 %)
Non-controlling interest (845 ) (0.0 %) (335 ) (0.0 %) (510 ) (152 %)
Net (loss) / income (45,854 ) (2.2 %) 53,674   2.4 % (99,528 ) (185 %)

* See first page of this report

CANADIAN OPERATIONS

Year ended December 31,   % of     % of   Year-Over-Year  
($ thousands, except revenue per job, unaudited) 2013 Revenue   2012 Revenue   Change  
Revenue 1,021,426     1,139,474     (10 %)
Expenses                
  Materials and operating 794,459 77.8 % 804,429 70.6 % (1 %)
  General and administrative 26,167 2.6 % 26,352 2.3 % (1 %)
  Total expenses 820,626 80.3 % 830,781 72.9 % (1 %)
Operating income* 200,800 19.7 % 308,693 27.1 % (35 %)
Number of jobs 21,287     22,427     (5 %)
Revenue per job 47,553     50,486     (6 %)

* See first page of this report

Canadian revenue for 2013 decreased by 10% compared to 2012. Revenue per job decreased by 6% due to a 22% decline in average annual pricing, which was partially offset by larger fracturing job sizes and an increase in fracturing revenue relative to total revenue. Job count decreased by 5% due largely to a drop in coiled tubing activity, which also negatively impacted associated service lines, including nitrogen and acidizing.

As a percentage of revenue, materials and operating expenses increased to 77.8% from 70.6% in the prior year. The pricing decline had a significant negative impact on operating margins and was partially offset by cost decreases including reductions in operating salaries, profit sharing expenses, product costs, and travel expenses. General and administrative expenses were relatively consistent on a year-over-year basis as reductions in profit sharing expense were offset by increased share based expenses.

UNITED STATES OPERATIONS

Year ended December 31,   % of       % of   Year-Over-Year  
($ thousands, except revenue per job, unaudited) 2013 Revenue   2012   Revenue   Change  
Revenue 764,962     797,783       (4 %)
Expenses                  
  Materials and operating 716,029 93.6 % 803,677   100.7 % (11 %)
  General and administrative 26,046 3.4 % 19,808   2.5 % 32 %
  Total expenses 742,075 97.0 % 823,485   103.2 % (10 %)
Operating income / (loss)* 22,887 3.0 % (25,702 ) (3.2 %) 189 %
Number of jobs 8,789     7,110       24 %
Revenue per job 83,220     112,471       (26 %)

* See first page of this report

U.S. revenue for 2013 decreased by 4% as a rise in cementing and completion tools revenue were more than offset by pricing declines for the fracturing service line. The job count for 2013 increased substantially for cementing as we continued to grow this service line in the US. The job count also increased for the fracturing service line, although revenue per fracturing job decreased as we performed smaller jobs in 2013 compared to 2012. Revenue per job was also negatively impacted by lower pricing realized in 2013 compared to 2012.

Materials and operating expenses decreased to 93.6% of revenue in 2013 compared to 100.7% in 2012. Cost-cutting initiatives and a substantial reduction in the price of guar led to higher operating margins on a year-over-year basis. These improvements were partially offset by lower pricing in 2013 compared to 2012. General and administrative expenses increased by $6.2 million in 2013 versus 2012. Overhead costs associated with the new completions tools business combined with an increase in share based employee costs led to a significant portion of the increase.

INTERNATIONAL OPERATIONS

Year ended December 31,   % of     % of   Year-Over-Year  
($ thousands, except revenue per job, unaudited) 2013 Revenue   2012 Revenue   Change  
Revenue 329,084     276,143     19 %
Expenses                
  Materials and operating 291,186 88.5 % 238,967 86.5 % 22 %
  General and administrative 17,095 5.2 % 14,486 5.2 % 18 %
  Total expenses 308,281 93.7 % 253,453 91.8 % 22 %
Operating income / (loss)* 20,803 6.3 % 22,690 8.2 % (8 %)
Number of jobs 4,182     4,007     4 %
Revenue per job 75,861     65,027     17 %

* See first page of this report

International revenue increased by 19% due to increases in both job count and revenue per job. The job count increased by 4% due to an increase in fracturing activity in Russia, and to a lesser extent, increased cementing activity in Australia. Revenue per job increased by 17% due to larger fracturing job sizes in Russia combined with an increase in fracturing revenue relative to total revenue.

As a percentage of revenue, materials and operating expenses increased by 200 basis points due primarily to increased product costs in Russia. General and administrative costs increased by $2.6 million due largely to costs associated with the international completion tools business, which did not exist in 2012, and increased overhead costs in Saudi Arabia and Colombia.

CORPORATE

Year ended December 31,     % of       % of   Year-Over-Year  
($ thousands, except revenue per job, unaudited) 2013   Revenue   2012   Revenue   Change  
Expenses                    
  Materials and operating 24,547   1.2 % 23,814   1.1 % 3 %
  General and administrative 40,393   1.9 % 41,799   1.9 % (3 %)
  Total expenses 64,940   3.1 % 65,613   3.0 % (1 %)
Operating income / (loss)* (64,940 )     (65,613 )     (1 %)

* See first page of this report

Our 2013 Corporate expenses decreased slightly by $0.7 million compared to 2012. Lower professional fees and profit sharing expenses were partially offset by increased share-based expenses. Professional fees were lower due largely to acquisition fees relating to the purchase of i-TEC in 2012.

OTHER EXPENSES AND INCOME

Our 2013 finance costs increased by $4.0 million relative to 2012 due to increased average debt levels and an increase in average interest rates. Foreign exchange gains of $4.9 million have been recognized in 2013 compared to losses of $0.4 million in 2012. The 2013 gain is due to the net impact of fluctuations in the U.S. dollar and Russian ruble relative to the Canadian dollar. Other income was $1.6 million compared to $1.8 million in the same period in 2012. Other income is largely comprised of net gains on disposal of property and equipment and interest income earned on cash balances.

Excluding the one-time adjustments relating to fluid-ends in Canada and the amortization of intangible assets acquired in the i-TEC acquisition, depreciation and amortization expense for 2013 increased by $52.2 million compared to 2012. A large portion of the equipment built as part of our 2011 and 2012 capital budgets became active, and subject to deprecation, beginning in the middle of 2012. Therefore, our average depreciable asset base is significantly larger in 2013 compared to 2012.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Funds provided by operations was $30.4 million in the fourth quarter of 2013 compared to funds used in operations of $14.5 million in the fourth quarter of 2012 largely as a result of less taxes paid. Funds provided by operations for the year ended December 31, 2013 was $130.8 million compared to $126.8 million in 2012. A decrease in operating income and an increase in interest paid was offset by lower taxes paid, which resulted in only a small increase in funds provided by operations.

Investing Activities

Capital expenditures for the year ended December 31, 2013 were $107.8 million compared to $444.5 million in 2012. North American expansion initiatives in 2011 and 2012 led to large capital budgets for those years, which resulted in large capital expenditures in 2012. The North American pressure pumping market became over-supplied with equipment in 2012 and therefore, the capital budget for 2013 was substantially smaller than in previous years. The 2013 capital budget was directed primarily towards maintenance capital requirements.

There were no significant changes made to our 2013 capital budget during the fourth quarter of 2013. Capital expenditures for the fourth quarter were $21 million and approximately $80 million to $90 million of remaining capital expenditures are expected to be carried forward into 2014.

The initial 2014 capital budget is $32.7 million. Management is confident that this budget, combined with carryover capital expenditures from 2013, properly maintains Trican's global equipment fleet and infrastructure at a very high standard. Trican regularly reviews its capital equipment requirements and will continue to follow its policy of adjusting the capital budget on a quarterly basis to reflect changing operating conditions and capital equipment needs.

During the first quarter of 2013, Trican closed the previously announced acquisition of i-TEC in exchange for cash consideration of $29.7 million and 2.4 million Trican common shares valued at $30.3 million at January 11, 2013.

Financing Activities

Trican currently pays a semi-annual dividend of $0.15 per share. During 2013, $44.3 million in dividend payments were made and we expect approximately $44.0 million in dividend payments to be made in 2014.

During the year ended December 31, 2013, Trican repaid $42.3 million on its $500 million revolving credit facility. As at December 31, 2013, the Company had available unused committed bank credit facilities in the amount of $307.5 million plus cash and trade and other receivables of $63.9 million and $452.0 million respectively, for a total of $823.4 million available to fund the cash outflows relating to its financial obligations. The Company believes it has sufficient funding through the use of these sources to meet foreseeable financing requirements. On October 17, 2013, Trican extended its revolving credit facility by an additional year to 2017.

The Company received approval from the Toronto Stock Exchange to purchase its own common shares, for cancellation, in accordance with a Normal Course Issuer Bid ("NCIB") that expires on March 7, 2014. During the year ended December 31, 2013, there were no common shares purchased through the NCIB.

OUTLOOK

Canadian Operations

We currently expect the number of wells drilled in Canada in 2014 to be relatively consistent with wells drilled in 2013. We also believe that fracturing intensity per well will continue to increase in 2014 and lead to an increase in year-over-year fracturing demand in 2014. Fracturing intensity per well is expected to increase due to a rise in fracturing stages per well as we continue to see an increase in multi-stage horizontal wells drilled in Canada relative to vertical wells. In addition, we expect to see an increase in fracturing job size. Commodity prices are currently higher than originally forecast for the Canadian market. This, combined with a lower Canadian dollar relative to the US dollar, is expected to result in increased cash flow for our customers, which normally results in increased activity in the basin. We will continue to monitor changes to our customers' spending and budgets as the year progresses.

Drilling and completions activity is expected to increase in the Duvernay play during 2014 based on discussions with our customers. We also expect that there will be a marginal increase in LNG-related drilling next year, although we expect the majority of LNG-related drilling will occur beyond 2014. Duvernay and LNG-related activity both present significant growth prospects for the pressure pumping industry over the next several years; however, we expect a significant amount of pressure pumping demand to continue to be generated from activity in the Montney and Cardium plays during 2014.

Canadian pressure pumping activity levels began slowly in the first half of January 2014; however, demand has been strong since then and we expect our fracturing and cementing equipment to be fully utilized until spring break-up conditions occur. Assuming that we do not experience an early spring break-up, we expect first quarter operating margins to increase slightly relative to the fourth quarter of 2013 due to increased utilization; however, we expect first quarter margins to be down relative to the first quarter of 2013 due to lower pricing, increased costs and the low activity levels in early January.

First quarter pricing has been relatively consistent on a sequential basis and we expect it to remain stable throughout the quarter; however, the first quarter in Canada generally represents peak activity levels. Canadian pricing levels for the second half of 2014 will be dependant on the demand for pressure pumping equipment in the region as we head into the summer drilling season. We will continue to look for opportunities to increase pricing if activity levels remain high during the second half of the year.

U.S. Operations

The U.S. pressure pumping market remains very competitive and over-supplied with equipment in most operating regions; however, we are starting to see signs of improving fundamentals in the Permian and Marcellus plays. The horizontal rig count continues to increase in the Permian, which is leading to an increase in fracturing demand. In addition, improving natural gas prices have led to increased optimism for 2014 demand increases in the Marcellus play.

We expect our three fracturing crews in the Marcellus play to be well utilized in the first quarter of 2014, which is expected to contribute to sequential improvements in revenue and operating income for our U.S. operations. While cold weather in the region has affected Marcellus activity levels this winter, which will have a negative effect on first quarter results, we are encouraged by our customers' outlook on a full year basis. Given the improving fundamentals in this region, we currently expect the utilization of our existing Marcellus crews to remain strong throughout 2014. We will continue to monitor activity levels in this region and will consider deploying additional horsepower in the Marcellus region if market conditions continue to improve.

We are seeing an increase in activity in the Permian play and improved long-term demand as our customers move towards more horizontal drilling in this region. That being said, the level of competition in the Permian play remains high as there are many fracturing companies operating in the region. We will continue to focus on service quality and improved utilization for our three fracturing crews in this area, and we will look to increase pricing when utilization remains high for a period of time. We believe that increasing utilization in the Permian region will be a key factor in improving the financial results of our U.S. operations and will continue to be a strategic focus for Trican.

We expect fracturing demand to remain stable in the Eagle Ford, Bakken, and Oklahoma regions and we will continue to focus on improving utilization and decreasing costs, where possible, for our operations in these areas. Activity levels remain low in the dry gas plays, including the Haynesville and Barnett shale plays, and we do not to expect pressure pumping demand to increase in these regions during 2014. However, given the recent increase in natural gas prices, we will continue to monitor activity levels in these regions and react accordingly if industry conditions improve.

Increased sequential activity in the Marcellus and the Permian plays are expected to lead to increased revenue and operating income in the first quarter of 2014 compared to the fourth quarter of 2013. In addition, we expect our U.S. completion tools business to maintain a strong level of profitability and contribute to improvements in sequential U.S. operating results. However, we do not expect improvements in 2014 first quarter financial results compared to the first quarter of 2013 due largely to lower year-over-year pricing.

International

We expect to see a year-over-year increase in Russian and Kazakhstan oil and gas industry activity and a continued increase in horizontal multi-stage well completions during 2014. Management is currently estimating 2014 revenue to increase by 5% relative to 2013. The estimated revenue increase is based on consistent pressure pumping activity levels combined with a 7% increase in pressure pumping revenue per job, partially offset by a small decrease in completion tool revenue. The Russian and Kazakhstan markets remain competitive and we expect 2014 pricing improvements to only cover inflationary cost increases. As a result, we expect 2014 Russian and Kazakhstan operating margins to improve slightly in 2014 relative to 2013, due to the expected increase in activity. First quarter activity in Russia and Kazakhstan is expected to be down sequentially due to extreme cold weather that is typically experienced through the early part of the year.

We expect revenue growth and improved profitability in 2014 for the international completions tools business relative to 2013. We continue to see good customer acceptance of our tools in the North Sea market and will look to expand our international customer base during 2014.

We expect to see improved utilization and profitability for our Australian cement crews in 2014 relative to 2013; however, the improvements are expected to be modest as the Australian market continues to develop slowly. We will continue to focus on expanding market share through sales and marketing initiatives and by offering high service quality and technical solutions to the Australian customer base.

Algeria continues to be a challenging market and if we do not see improvements in utilization for our two coiled tubing crews operating in the region during 2014, we will consider redeploying those assets into a more profitable region.

We expect to begin active operations in both Colombia and Saudi Arabia in the first half of 2014. We are optimistic about the growth prospects in both these regions and will continue to focus on establishing our market presence in these regions throughout 2014.

NON-IFRS DISCLOSURE

Adjusted net income, operating income and funds provided by operations do not have any standardized meaning as prescribed by IFRS and, therefore, are considered non-IFRS measures.

Adjusted net income and funds provided by operations have been reconciled to net income and operating income has been reconciled to gross profit, being the most directly comparable measures calculated in accordance with IFRS. The reconciling items have been presented net of tax.

  Three months ended   Twelve months ended
  Dec. 31,   Dec. 31,   Sept. 30,   Dec. 31,   Dec. 31,
  2013   2012   2013   2013   2012
Adjusted net (loss) / income ($9,873 ) ($5,375 ) $9,693   ($31,490 ) $63,028
Deduct:                  
  Fluid end depreciation adjustment (net of $2.4 million tax recovery)* 7,153   -   -   -   -
  Intangible amortization adjustment (net of $0.5 million tax recovery)** 1,595   -   -   -   -
  Goodwill impairment -   -   -   4,123   -
  Non-cash share-based compensation expense 2,209   2,455   1,840   8,096   9,689
  Loss on deposit with vendor (net of $0.7 million tax recovery) -   -   2,145   2,145   -
                   
(Loss) / profit for the period (IFRS financial measure) ($20,830 ) ($7,830 ) $5,708   ($45,854 ) $53,339

* Depreciation and amortization expense for the fourth quarter of 2013 includes a $14.3 million charge for accelerated depreciation on fluid ends in Canada. $9.5 million of this adjustment ($7.2 million net of tax) relates to periods prior to October 1, 2013 and has been excluded from adjusted net income for the fourth quarter.

**Depreciation and amortization expense for the fourth quarter includes $3.1 million in amortization on the intangible assets relating to the purchase of i-TEC. The purchase price accounting was not finalized until the fourth quarter of 2013; therefore, a catch-up entry was required to ensure that adequate amortization had been recorded as of December 31, 2013. $2.1 million of this adjustment ($1.6 million net of tax) relates to periods prior to October 1, 2013 and has been excluded from adjusted net income for the fourth quarter.

  Three months ended   Twelve months ended  
  Dec. 31,   Dec. 31,   Sept. 30,   Dec. 31,   Dec. 31,  
  2013   2012   2013   2013   2012  
Funds provided by / (used in) operations $ 30,380   $ (14,525 ) $ 71,087   $ 130,815   $ 126,757  
Adjustments                              
  Depreciation and amortization   (70,085 )   (41,564 )   (54,646 )   (222,403 )   (152,837 )
  Amortization of debt issuance costs   (216 )   (208 )   (216 )   (864 )   (813 )
  Stock-based compensation   (2,209 )   (2,455 )   (1,840 )   (8,096 )   (9,689 )
  Loss / (gain) on disposal of property and equipment   15     (352 )   (585 )   (293 )   (2,423 )
  Net finance costs   (8,122 )   (7,824 )   (9,111 )   (32,749 )   (28,285 )
  Unrealized foreign exchange (gain) / loss   (1 )   4,863     (2,984 )   5,593     50  
  Asset impairments, net         -     (2,870 )   (6,993 )   -  
  Income tax recovery / (expense)   16,431     2,957     2,847     28,303     (4,824 )
  Interest paid   12,956     8,373     6,182     34,794     24,278  
  Income tax paid / (recovered)   21     42,697     (2,156 )   26,039     100,312  
                               
Profit / (loss) (IFRS financial measure) $ (20,830 ) $ (8,038 ) $ 5,708   $ (45,854 ) $ 53,339  
                               

 

  Three months ended   Twelve months ended  
  Dec. 31,   Dec. 31,   Sept. 30,   Dec. 31,   Dec. 31,  
  2013   2012   2013   2013   2012  
Operating income $ 35,500   $ 35,123   $ 72,702   $ 179,550   $ 240,068  
Add:                              
  Administrative expenses   26,064     23,083     28,730     114,836     108,289  
Deduct:                              
  Depreciation expense   (70,085 )   (41,564 )   (54,646 )   (222,403 )   (152,837 )
                               
                               
Gross profit / (loss) (IFRS financial measure) $ (8,521 ) $ 16,642   $ 46,786   $ 71,983   $ 195,520  

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION        
         
         
(Stated in thousands)
As at December 31,
2013   2012  
ASSETS            
Current assets            
  Cash and cash equivalents $ 63,869   $ 113,506  
  Trade and other receivables   459,210     437,038  
  Current tax assets   5,186     647  
  Inventory   232,898     211,794  
  Prepaid expenses   34,407     33,002  
    795,570     795,987  
Property and equipment   1,374,212     1,458,562  
Intangible assets   44,285     10,081  
Deferred tax assets   122,745     76,302  
Other assets   17,360     11,898  
Goodwill   59,475     43,689  
    2,413,647   $ 2,396,519  
             
LIABILITIES AND SHAREHOLDERS' EQUITY            
Current liabilities            
  Bank loans $ -   $ 9,119  
  Trade and other payables   301,920     228,788  
  Contingent consideration   -     2,860  
  Deferred consideration   650     -  
  Current tax liabilities   14     7,853  
  Current portion of loans and borrowings   79,770     -  
    382,354     248,620  
             
Loans and borrowings   593,786     694,972  
Deferred tax liabilities   87,005     77,012  
             
Shareholders' equity            
  Share capital   559,723     527,860  
  Contributed surplus   63,074     55,352  
  Accumulated other comprehensive loss   (1,020 )   (24,100 )
  Retained earnings   725,172     815,700  
Total equity attributable to equity holders of the Company   1,346,949     1,374,812  
Non-controlling interest   3,553     1,103  
  $ 2,413,647   $ 2,396,519  

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME              
(Stated in thousands, except per share amounts) Three Months   Three Months   Twelve Months   Twelve Months  
  Ended Dec 31,   Ended Dec 31,   Ended Dec 31,   Ended Dec 31,  
For the year ended December 31, 2013   2012   2013   2012  
                 
Revenue 552,144   485,865   2,115,472   2,213,400  
Cost of sales 560,665   463,378   2,043,489   2,017,880  
Gross profit (8,521 ) 22,487   71,983   195,520  
Administrative expenses 26,066   28,928   114,836   108,289  
Other expense 900   (10 ) 136   375  
Results from operating activities (35,487 ) (6,431 ) (42,989 ) 86,856  
Finance income (470 ) (550 ) (1,748 ) (2,212 )
Finance costs 8,592   8,374   34,497   30,497  
Foreign exchange (gain) / loss (5,968 ) (3,468 ) (4,859 ) 408  
Goodwill impairment, net -   -   4,123   -  
(Loss) / profit before income tax (37,641 ) (10,787 ) (75,002 ) 58,163  
Income tax (recovery) /expense (16,431 ) (2,957 ) (28,303 ) 4,824  
(Loss) / profit for the year (21,210 ) (7,830 ) (46,699 ) 53,339  
                 
Other comprehensive income                
  Unrealized loss / (gain) on hedging instruments 616   207   717   (898 )
  Foreign currency translation gain / (loss) 14,411   10,311   23,797   (2,193 )
Total comprehensive (loss) / income for the year (7,415 ) 2,274   (23,619 ) 52,044  
                 
(Loss) / profit attributable to:                
Owners of the Company (20,830 ) (7,741 ) (45,854 ) 53,674  
Non-controlling interest (380 ) (89 ) (845 ) (335 )
(Loss) / Profit for the year (21,210 ) (7,830 ) (46,699 ) 53,339  
                 
Total comprehensive (loss) / income attributable to:                
Owners of the Company (6,570 ) 2,363   (22,774 ) 52,379  
Non-controlling interest (845 ) (89 ) (845 ) (335 )
Total comprehensive (loss) / income for the year (7,415 ) 2,274   (23,619 ) 52,044  
                 
Earnings per share                
  Basic (0.14 ) (0.05 ) (0.31 ) 0.37  
  Diluted (0.14 ) (0.05 ) (0.31 ) 0.37  
Weighted average shares outstanding - basic 148,916   146,450   148,815   146,620  
Weighted average shares outstanding - diluted 148,916   146,450   148,815   146,690  

 

CONSOLIDATED STATEMENT OF CASH FLOWS                
  Three Months   Three Months   Twelve Months   Twelve Months  
  Ended Dec 31,   Ended Dec 31,   Ended Dec 31,   Ended Dec 31,  
(Stated in thousands; unaudited) 2013   2012   2013   2012  
Cash Provided By/ (Used In):                        
Operations                        
  Profit/(loss) for the period $ (21,210 ) $ (7,830 ) $ (46,699 ) $ 53,339  
  Charges to income not involving cash:                        
    Depreciation and amortization   70,085     41,564     222,403     152,837  
    Amortization of debt issuance costs   216     208     864     813  
    Stock-based compensation   2,209     2,455     8,096     9,689  
    (Gain)Loss on disposal of property and equipment   (15 )   352     293     2,423  
    Net Finance Costs   8,122     7,824     32,749     28,285  
    Unrealized foreign exchange (gain)/loss   1     (4,863 )   (5,593 )   (50 )
    Asset impairments, net   -     -     6,993     -  
    Income tax expense/(recovery)   (16,431 )   (2,957 )   (28,303 )   4,824  
    42,977     36,753     190,803     252,160  
  Change in inventories   4,365     6,704     (15,874 )   (39,471 )
  Change in trade and other receivables   (37,137 )   96,141     (13,251 )   167,427  
  Change in prepayments   2,894     10,444     138     (1,463 )
  Change in trade and other payables   7,037     (70,701 )   70,950     (67,688 )
Cash generated from operating activities   20,136     79,341     232,766     310,965  
                         
  Interest paid   (12,956 )   (8,373 )   (34,794 )   (24,278 )
  Income tax paid   (21 )   (42,697 )   (26,039 )   (100,312 )
    7,159     28,271     171,933     186,375  
                         
Investing                        
  Interest received   387     250     1,155     1,163  
  Purchase of property and equipment   (20,871 )   (58,688 )   (107,761 )   (444,550 )
  Proceeds from the sale of property and equipment   1,790     1,848     6,520     3,325  
  Purchase of other assets   (2,400 )   -     (7,000 )   -  
  Payments received on loan to an unrelated third party   -     (250 )   -     (24 )
  Business acquisitions   -     -     (29,663 )   -  
    (21,094 )   (56,840 )   (136,749 )   (440,086 )
                         
Financing                        
  Net proceeds from issuance of share capital   44     -     1,174     1,289  
  Repurchase and cancellation of shares under NCIB   -     -     -     (10,011 )
  (Repayment)/Issuance of loans and borrowings   2,582     85,946     (42,317 )   279,331  
  Dividend paid   -     -     (44,304 )   (29,300 )
    2,626     86,946     (85,447 )   241,309  
                         
Effect of exchange rate changes on cash   819     795     626     51  
                         
Increase / (decrease) in cash and cash equivalents   (10,490 )   58,173     (49,637 )   (12,349 )
Cash and cash equivalents, beginning of period   74,359     55,333     113,506     125,855  
Cash and cash equivalents, end of period $ 63,869   $ 113,506   $ 63,869   $ 113,506  

SELECTED NOTES TO THE 2013 CONSOLIDATED FINANCIAL STATEMENTS

BUSINESS ACQUISITIONS

Effective January 11, 2013, Trican acquired all of the issued and outstanding shares and discharged the existing debt of Petro Tools Holding AS, the holding company for i-TEC and its subsidiaries (collectively "i-TEC"), for consideration of $60.6 million, which is made up of cash of $29.7 million, 2,381,381 Trican common shares, issued at $12.73 per share, and deferred consideration of $0.7 million. In conjunction with the acquisition, Trican has agreed to pay contingent consideration of up to U.S. $45 million subject to agreed upon financial targets for i-TEC for the year ended December 31, 2013. Trican has determined the acquisition date fair value of the contingent consideration to be nil. All of i-TEC's earnings have been included in Trican's condensed consolidated statement of comprehensive income since January 11, 2013.

The acquisition date fair values have been accounted as follows:

     
Fair value of acquired net assets:      
  Net working capital (including cash) $ 7,003  
  Property and equipment   908  
  Deferred tax liability   (11,735 )
  Intangible assets   41,894  
  Goodwill1   22,558  
  $ 60,628  
Financed as follows:      
  Cash $ 29,663  
  Shares issued out of treasury   30,315  
  Deferred consideration   650  
  $ 60,628  

TRADE AND OTHER RECEIVABLES

  December 31,   December 31,  
(Stated in thousands) 2013   2012  
Trade receivables $ 453,729   $ 434,568  
Allowance for doubtful accounts   (5,265 )   (4,085 )
Loans and other receivables   20,109     17,222  
Total $ 468,573   $ 447,705  
Non-current $ 9,363   $ 10,667  
Current $ 459,210   $ 437,038  
   

INVENTORY

  December 31, December 31,
(Stated in thousands) 2013 2012
Chemicals and consumables $ 106,071 $ 93,502
Coiled tubing   21,674   19,669
Parts   105,153   98,623
  $ 232,898 $ 211,794

PROPERTY AND EQUIPMENT


(stated in thousands)
Land and buildings   Equipment   Fixtures and fittings   Total  
Cost                        
Balance at January 1, 2012 $ 99,100   $ 1,518,796   $ 38,023   $ 1,655,919  
Additions   14,781     424,127     3,535     442,443  
Disposals   (27 )   (18,529 )   (92 )   (18,648 )
Effect of movements in exchange rates   (457 )   (7,710 )   (167 )   (8,334 )
Balance at December 31, 2012 $ 113,397   $ 1,916,684   $ 41,299   $ 2,071,380  
                         
Acquisitions through business combinations   -     908     -     908  
Additions   22,377     68,301     5,926     96,604  
Disposals   (2,492 )   (46,136 )   (1,959 )   (50,587 )
Effect of movements in exchange rates   3,441     50,086     1,169     54,696  
Balance at December 31, 2013 $ 136,723   $ 1,989,843   $ 46,435   $ 2,173,001  
                         
Accumulated Depreciation                        
Balance at January 1, 2012 $ 18,927   $ 433,199   $ 25,463   $ 477,509  
Depreciation   4,011     141,031     3,398     148,440  
Disposals   -     (12,587 )   -     (12,587 )
Effect of movements in exchange rates   (20 )   (498 )   (26 )   (544 )
Balance at December 31, 2012 $ 22,918   $ 561,065   $ 28,835   $ 612,818  
                         
Depreciation   8,142     199,823     6,252     214,217  
Disposals   (828 )   (41,162 )   (914 )   (42,904 )
Effect of movements in exchange rates   565     13,454     639     14,658  
Balance at December 31, 2013 $ 30,798   $ 733,180   $ 34,812   $ 798,789  
                         
Carrying amounts                        
At December 31, 2012 $ 90,479   $ 1,355,619   $ 12,464   $ 1,458,562  
At December 31, 2013 $ 105,926   $ 1,256,663   $ 11,623   $ 1,374,212  
                         

Included within equipment are assets held under finance lease with a gross value of $53.2 million (2012 - $53.7 million) and accumulated depreciation of $28.8 million (2012 - $18.4 million). The lease obligations are secured by the leased equipment. At December 31, 2013, Trican had $50.5 million in idle equipment and $150.4 million in assets under construction which have not been depreciated. At December 31, 2013, there were no impairment losses recognized (2012 - nil).

Included in other expense in the consolidated statement of comprehensive income is a $2.9 million loss relating to the write-down of unsecured deposits with an insolvent vendor. In addition, at December 31, 2013, Trican has $8.8 million in assets under construction with this vendor included in property and equipment in the statement of financial position. Trican believes that it currently has legal title to these assets and is confident in its ability to defend this position. At December 31, 2013 the Company is the physical custodian of these assets.

INTANGIBLE ASSETS AND GOODWILL


(stated in thousands)
Goodwill   Patents and know-how Non-compete agreements   CBM process   Total intangible assets  
Cost                            
Balance at January 1, 2012 $ 43,706   $ - $ 23,455   $ 8,503   $ 31,958  
Effect of movements in exchange rates   (17 )   -   (462 )   (3 )   (465 )
Balance at December 31, 2012 $
43,689
    - $
22,993
  $
8,500
  $
31,493
 
                             
Balance at January 1, 2013 $ 43,689     - $ 22,993   $ 8,500   $ 31,493  
Acquisition through business combinations   22,558     41,894   -     -     41,894  
Effect of movements in exchange rates   -     -   1,436     -     1,436  
Balance at December 31, 2013 $
66,247
  $ 41,894 $
24,429
  $
8,500
  $
74,823
 
                             
Amortization and impairment losses                            
Balance at January 1, 2012 $ -   $ - $ 13,927   $ 4,038   $ 17,965  
Amortization   -     -   2,992     849     3,841  
Effect of movements in exchange rates   -     -   (394 )   -     (394 )
Balance at December 31, 2012 $
-
    - $
16,525
  $
4,887
  $
21,412
 
                             
Balance at January 1, 2013 $ -   $ - $
16,525
  $ 4,887   $ 21,412  
Impairment   6,312     -   -     -     -  
Amortization   -     4,189   3,146     850     8,185  
Effect of movements in exchange rates   460     -   941     -     941  
Balance at December 31, 2013 $
6,772
  $ 4,189 $
20,612
  $
5,737
  $
30,538
 
                             
Carrying amounts                            
At December 31, 2012 $ 43,689     - $ 6,468   $ 3,613   $ 10,081  
At December 31, 2013 $ 59,475   $ 37,705 $ 3,817   $ 2,763   $ 44,285  
                             

TRADE AND OTHER PAYABLES

December 31,
(Stated in thousands)
December 31, December 31,
2013 2012
Trade payables   160,098   112,141
Accrued liabilities   53,888   40,803
Liabilities for cash-settled arrangements   19,443   14,800
Dividend payable   22,338   21,968
Finance lease obligations   11,938   13,275
Other payables   34,215   25,801
Total trade and other payables $ 301,920 $ 228,788

LOANS AND BORROWINGS

Bank loans

The Company's Russian subsidiary has a US $20 million (Canadian equivalent of $21.3 million) demand revolving facility with a large international bank. This facility is unsecured, bears interest at LIBOR plus a premium, as determined by the bank, plus 2.75% and has been guaranteed by the Company. As at December 31, 2013, there was nothing drawn on this facility (December 31, 2012 - $9.1 million).

Long term debt
(Stated in thousands)
December 31,
2013
  December 31,
2012
 
Notes payable $ 456,935   $ 430,408  
Finance lease obligations   25,904     36,324  
Revolving credit facilities   212,625     255,693  
Hedge receivable   (9,970 )   (5,059 )
Total $ 685,494   $ 717,366  
Current portion of finance lease obligations (1)   11,938     13,275  
Russian demand revolving credit facility   -     9,119  
Current portion of long-term debt   79,770     -  
Non-current $ 593,786   $ 694,972  

(1) Current portion of finance lease obligations is included in trade and other payables.

Trican has a $500.0 million four-year extendible revolving credit facility ("Revolving Credit Facility") with a syndicate of banks. The Revolving Credit Facility is unsecured and bears interest at the applicable Canadian prime rate, U.S. prime rate, Banker's Acceptance rate, or at LIBOR, plus 50 to 325 basis points, dependent on certain financial ratios of the Company. On October 17, 2013, the Revolving Credit Facility was extended by an additional year to 2017.

The Revolving Credit Facility requires Trican to comply with certain financial and non-financial covenants that are typical for this type of arrangement. Trican was in compliance with these covenants at December 31, 2013.

SHARE CAPITAL AND ACCUMULATED OTHER COMPREHENSIVE LOSS

Share capital

Authorized:

The Company is authorized to issue an unlimited number of common shares, issuable in series. The shares have no par value. All issued shares are fully paid.

Issued and Outstanding - Common Shares:        
(stated in thousands, except share amounts) Number of Shares   Amount  
Balance, January 1, 2012 146,916,859   $ 529,062  
Exercise of stock options 288,718     1,289  
Reclassification from contributed surplus on exercise of options -     231  
Shares repurchased and cancelled under NCIB (755,400 )   (2,722 )
Balance, December 31, 2012 146,450,177   $ 527,860  
Exercise of stock options 86,488     1,174  
Reclassification from contributed surplus on exercise of options -     374  
Shares issued for acquisition 2,381,381     30,315  
Balance, December 31, 2013 148,918,046   $ 559,723  

EARNINGS PER SHARE 

(Stated in thousands, except share and per share amounts)            
  Three months   Three months   Twelve months   Twelve months
  Ended Dec.31   Ended Dec.31   Ended Dec.31   Ended Dec.31
Basic Income Per Share 2013   2012   2013   2012
Net (loss)/income available to common shareholders $
(20,830
)
(7,741
) $ (45,854 ) $ 53,674
Weighted average number of common shares   148,916,011   146,450,177     148,815,362     146,619,743
Basic (loss) / income per share $ (0.14 ) (0.05 ) $ (0.31 ) $ 0.37
                     
Diluted Income Per Share             2013     2012
Net (loss)/income available to common shareholders $
(20,830
)
(7,741
) $ (45,854 ) $ 53,674
Weighted average number of common shares   148,916,011   146,450,177     148,815,362     146,619,743
Diluted effect of stock options   -   -     -     70,515
Diluted weighted average number of common shares   148,916,011   146,450,177     148,815,362     146,690,258
Diluted (loss)/income per share $ (0.14 ) (0.05 ) $ (0.31 ) $ 0.37

At December 31, 2013, all of the outstanding options have been excluded from the diluted weighted average number of common shares as the Company ended the year at a net loss.

INCOME TAXES

  Three months   Three months   Twelve months   Twelve months  
(Stated in thousands) Ended Dec.31   Ended Dec.31   Ended Dec.31   Ended Dec.31  
  2013   2012   2013   2012  
Current tax expense/(recovery)                    
  Current year 7,779   21,366   $ 16,836   $ 104,997  
  Adjustment for prior years -   -     (1,401 )   546  
  Recognition of previously unrecognized tax losses -   -     (1,675 )   -  
  7,779   21,366   $ 13,760   $ 105,543  
Deferred tax expense/(recovery)                    
  Deferred tax recovery recognized in the current year (24,210 ) (24,323 ) $ (42,282 ) $ (100,474 )
  Adjustment for prior years -   -     219     (245 )
  (24,210 ) (24,323 ) $ (42,063 ) $ (100,719 )
Total tax (recovery)/expense (16,431 ) (2,957 ) $ (28,303 ) $ 4,824  

The income tax expense differs from that expected by applying the combined federal and provincial income tax rate of 25.26% (2012 - 25.17%) to income before income taxes for the following reasons:

(Stated in thousands)
For the year ended December 31,
2013   2012  
Expected combined federal and provincial income tax $ (18,946 ) $ 14,639  
Statutory and other rate differences   (15,862 )   (18,489 )
Non-deductible expenses   6,898     5,719  
Stock-based compensation   2,045     2,439  
Translation of foreign subsidiaries   (85 )   59  
Adjustments related to prior years   (1,182 )   301  
Recognition of previously unrecognized tax losses   (1,675 )   -  
Changes to deferred income tax rates   517     19  
Capital and other foreign tax   (18 )   175  
Other   5     (38 )
  $ (28,303 ) $ 4,824  

The change in the combined Federal and Provincial statutory tax rate in Canada from 2012 to 2013 is due to an increase in the British Columbia provincial tax rate from 10% to 11% effective April 1, 2013.

Deferred Tax Balances

The components of the deferred tax asset and liability are as follows:

(Stated in thousands)        
For the year ended December 31, 2013   2012  
Deferred tax assets:        
Goodwill $ 35,507   $ 36,297  
Non-capital loss carry forwards   156,470     91,504  
Property, equipment and other assets   (73,077 )   (53,942 )
Other   3,845     2,443  
  $ 122,745   $ 76,302  
Deferred tax liabilities:            
Non-capital loss carry forwards $ -   $ 1,707  
Property, equipment and other assets   (38,902 )   (38,088 )
Partnership deferral   (41,031 )   (42,362 )
Other   (7,072 )   1,731  
  $ (87,005 ) $ (77,012 )

Included in the above tax pools are $428.4 million (2012 - $262.6 million) of gross non-capital losses that can be carried forward to reduce taxable income in future years. These losses are predominantly in the U.S. and expire between 2029 and 2033. Deferred tax assets are recognized only to the extent it is considered probable that those assets will be recoverable. This involves an assessment of when those deferred tax assets are likely to reverse, and a judgment as to whether or not there will be sufficient taxable profits available to offset the tax assets when they do reverse. This requires assumptions regarding future profitability and is therefore inherently uncertain.

Deferred tax liabilities of $5.6 million (2012 - $5.0 million) have not been recognized on the unremitted earnings of the Company's foreign subsidiaries to the extent that the Company is able to control the timing of the reversal of the temporary differences, and it is probable that the temporary differences would not reverse in the foreseeable future.

OPERATING SEGMENTS

The Company operates in Canada and the U.S. along with a number of international regions, which include Russia, Kazakhstan, Algeria, Australia, Saudi Arabia, Colombia and Norway. Each geographic region has a General Manager that is responsible for the operation and strategy of their region's business. Personnel working within the particular geographic region report to the General Manager; the General Manager reports to the Corporate Executive.

The Company provides a comprehensive array of specialized products, equipment, services and technology to customers through three operating divisions:

  • Canadian operations provides cementing, fracturing, coiled tubing, nitrogen, geological, acidizing, reservoir management, industrial cleaning and pipeline, and completion systems and downhole tool services, which are performed on new and existing oil and gas wells.
  • U.S. operations provides cementing, fracturing, coiled tubing, nitrogen, acidizing and completion systems and downhole tool services, which are performed on new and existing oil and gas wells.
  • International operations provides cementing, fracturing, coiled tubing, acidizing, nitrogen, and completion systems and downhole tool services, which are performed on new and existing oil and gas wells.

Information regarding the results of each geographic region is included below. Performance is measured based on revenue and gross profit as included in the internal management reports, which are reviewed by the Company's executive management team. Each region's gross profit is used to measure performance as management believes that such information is most relevant in evaluating regional results relative to other entities that operate within the industry. Transactions between the segments are recorded at cost and have been eliminated upon consolidation.

  Canadian Operations United States
Operations
  International
Operations
  Corporate   Total  
Revenue $ 1,021,426 $ 764,962   $ 329,084   $ -   $ 2,115,472  
Gross profit/(loss)   137,768   (50,537 )   11,605     (26,853 )   71,983  
Finance income   -   -     -     (1,748 )   (1,748 )
Finance costs   -   -     -     34,497     34,497  
Impairment   2,870   -     4,123     -     6,993  
Tax expense/(recovery)   11,961   (39,054 )   (1,210 )   -     (28,303 )
Depreciation and amortization   89,716   103,096     27,284     2,307     222,403  
Assets   963,234   1,070,487     332,041     47,885     2,413,647  
Goodwill   45,248   -     14,227     -     59,475  
Property and equipment   523,594   728,609     104,943     17,066     1,374,212  
Capital expenditures   32,020   53,532     21,528     681     107,761  
Year ended December 31, 2012                
Revenue $ 1,139,474 $ 797,783   $ 276,143   $ -   $ 2,213,400  
Gross profit/(loss)   286,271   (77,379 )   11,363     (24,735 )   195,520  
Finance income   -   -     -     (2,212 )   (2,212 )
Finance costs   -   -     -     30,497     30,497  
Tax expense/(recovery)   46,884   (43,471 )   883     528     4,824  
Depreciation and amortization   53,810   71,683     26,422     922     152,837  
Assets   910,888   1,109,657     323,134     52,840     2,396,519  
Goodwill   22,690   -     20,999     -     43,689  
Property and equipment   534,235   797,841     111,632     14,854     1,458,562  
Capital expenditures   137,477   258,363     41,666     7,044     444,550  
                             

FORWARD-LOOKING STATEMENTS

This document contains certain forward-looking information and financial outlook based on Trican's current expectations, estimates, projections and assumptions that were made by the Company in light of information available at the time the statement was made. Forward-looking information and financial outlook that address expectations or projections about the future, and other statements and information about the Company's strategy for growth, expected and future expenditures, costs, operating and financial results, future financing and capital activities are forward-looking statements. Some forward-looking information and financial outlook are identified by the use of terms and phrases such as "anticipate," "achieve", "achievable," "believe," "estimate," "expect," "intention", "plan", "planned", and other similar terms and phrases. This forward-looking information and financial outlook speak only as of the date of this document and we do not undertake to publicly update this forward-looking information and financial outlook except in accordance with applicable securities laws. This forward-looking information and financial outlook includes, among others:

  • The expectation that coil tubing operations will commence in Saudi Arabia in the first half of 2014;
  • The expectation that cementing operations will commence in Colombia in the first half of 2014;
  • The intention to grow our Australian cementing business in 2014;
  • The intention to grow our completion tools business in 2014;
  • The expectation that Trican's 2014 capital budget will be approximately $80 - $90 million;
  • The belief that Trican has sufficient funding to meet foreseeable borrowing requirements;
  • The expectation that the number of wells drilled in Canada in 2014 will be relatively consistent with 2013 levels;
  • The belief that fracturing intensity per well will continue to increase in 2014 and will lead to an increase in year-over-year fracturing demand in 2014 in Canada;
  • The expectation that fracturing intensity per well will increase due to a rise in fracturing stages per well and the expectation that the number of multi-stage horizontal wells drilled in Canada will increase relative to vertical wells;
  • The expectation that fracturing jobs will increase in size in Canada;
  • The expectation that cash flow from our Canadian customers will increase due to an expected lower Canadian dollar and higher than forecasted commodity prices;
  • The expectation that drilling and completions activity in Duvernay will increase in 2014;
  • The expectation that there will be marginal increase in LNG related drilling in 2014 in Canada;
  • The expectation that a significant amount of pressure pumping demand will continue to be generated from activity in Montney and Cardium in 2014;
  • The expectation that our fracturing and cementing equipment in Canada will be fully utilized until spring break-up;
  • The expectation that first quarter operating margins in Canada will increase slightly relative to the fourth quarter in 2013 due to increased utilization;
  • The expectation that Canadian margins in the first quarter of 2014 will decrease to the levels in the first quarter of 2013 due to lower pricing and increased costs combined with a slow start in January of 2014;
  • The expectation that pricing in Canada will remain stable in the first quarter of 2014;
  • The intention to increase pricing levels in Canada if activity and demand remain strong during the second half of 2014;
  • The expectation that our three fracturing crews in the Marcellus will be well utilized in the first quarter of 2014 and contribute sequential improvements in U.S. revenue and operating income;
  • The expectation that the utilization of our existing crew in Marcellus will be strong in 2014;
  • The intention to monitor activity levels in the Marcellus play and deploy additional horsepower if market conditions continue to improve in that region;
  • The intention to continue focusing on service quality and improved utilization of our three fracturing crews in the Permian basin;
  • The belief that pricing in the Permian basin will increase when utilization remains high over a period of time;
  • The belief that increased utilization in the Permian will be a key factor in improving the financial results of our U.S. operations and will continue to be a strategic focus for Trican;
  • The expectation that fracturing demand will remain stable in the Eagle Ford, Bakken and Oklahoma regions;
  • The expectation that Trican will continue to improve utilization and decrease costs in the Eagle Ford, Bakken and Oklahoma regions;
  • The expectation that pressure pumping demand in the dry gas plays in U.S. will not increase in 2014;
  • The intention to continue monitoring the activity levels in the U.S. dry gas plays and react accordingly;
  • The expectation that increased sequential activity in the Marcellus play and the Permian play will lead to increased revenue and operating income in the first quarter in 2014 compared to the fourth quarter of 2013;
  • The expectation that our U.S. completion tools business will maintain strong levels of profitability and contribute to improvements in sequential U.S. operating results;
  • The expectation that there will be no improvements in the U.S. financial results during the first quarter of 2014 compared to the first quarter of 2013 due to lower year over year pricing;
  • The expectation that there will be a year over year increase in Russian and Kazakhstan oil and gas industry activity and a continued increase in horizontal multi-stage well completions during 2014;
  • The expectation that 2014 revenue for Russia and Kazakhstan will be 5% higher compared to 2013 and that the increase is based on consistent job count combined with a 7% increase in pressure pumping revenue per job, partially offset by a small decrease in pressure pumping revenue;
  • The expectation that 2014 pricing improvements will only cover inflationary cost increases in Russia and Kazakhstan;
  • The expectation that 2014 Russian and Kazakhstan operating margins will improve slightly in 2014;
  • The expectation that first-quarter activity in Russia and Kazakhstan will decrease compared with the fourth quarter in 2013 due to extreme cold weather;
  • The expectation of revenue growth and improved profitability in 2014 for the international completion tools business;
  • The intention to expand our international customer base in 2014;
  • The expectation to see improved utilization and profitability for our Australian cement crews in 2014;
  • The intention to expand market share in Australia through sales and marketing activities as well as offering high service quality and technical solutions;
  • The belief that, if there is no improvement in the utilization for our two coiled tubing crews in Algeria, Trican will consider redeploying those assets into more profitable regions;
  • The intention to continue establishing our market presence in Colombia and Saudi Arabia in 2014;
  • The intention to become a full service pressure pumping company in Colombia over time;
  • The expectation that the acquisition of i-TEC will provide growth opportunities and enhance our other pressure pumping service lines.

Forward-looking information and financial outlook is based on current expectations, estimates, projections and assumptions, which we believe are reasonable but which may prove to be incorrect. Trican's actual results may differ materially from those expressed or implied and therefore such forward-looking information and financial outlook should not be unduly relied upon. In addition to other factors and assumptions which may be identified in this document, assumptions have been made regarding, among other things: industry activity; the general stability of the economic and political environment; effect of market conditions on demand for the Company's products and services; the ability to obtain qualified staff, equipment and services in a timely and cost efficient manner; the ability to operate its business in a safe, efficient and effective manner; the performance and characteristics of various business segments; the effect of current plans; the timing and costs of capital expenditures; future oil and natural gas prices; currency, exchange and interest rates; the regulatory framework regarding royalties, taxes and environmental matters in the jurisdictions in which the Company operates; and the ability of the Company to successfully market its products and services.

Forward-looking information and financial outlook is subject to a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated. These risks and uncertainties include: fluctuating prices for crude oil and natural gas; changes in drilling activity; general global economic, political and business conditions; weather conditions; regulatory changes; the successful exploitation and integration of technology; customer acceptance of technology; success in obtaining issued patents; the potential development of competing technologies by market competitors; and availability of products, qualified personnel, manufacturing capacity and raw materials. The foregoing important factors are not exhaustive. In addition, actual results could differ materially from those anticipated in forward-looking information and financial outlook provided herein as a result of the risk factors set forth under the section entitled "Risks Factors" in our Annual Information Form dated March 21, 2013. Readers are also referred to the risk factors and assumptions described in other documents filed by the Company from time to time with securities regulatory authorities.

Additional information regarding Trican including Trican's most recent annual information form is available under Trican's profile on SEDAR (www.sedar.com).

Contact:
Trican Well Service Ltd.
Dale Dusterhoft
Chief Executive Officer
ddusterhoft@trican.ca

Trican Well Service Ltd.
Michael Baldwin
Senior Vice President, Finance & CFO
mbaldwin@trican.ca

Trican Well Service Ltd.
Gary Summach
Director of Reporting and Investor Relations
gsummach@trican.ca

Trican Well Service Ltd.
2900, 645 - 7th Avenue S.W.
Calgary, Alberta T2P 4G8
(403) 237-7716
(403) 266-0202
www.trican.ca

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