U.S. Markets closed

SECURE Energy Announces Fourth Quarter and Year End Results, Director Appointment and Officer Retirement

CALGARY , Feb. 26, 2019 /CNW/ - Secure Energy Services Inc. ("Secure" or the "Corporation") (TSX – SES) announced today its operational and financial results for the three and twelve months ended December 31, 2018 , highlighted by Adjusted EBITDA1 of $57 .8 million and $190 .5 million, an increase of 16% and 21% per basic share over the respective comparative periods of 2017. Secure is also pleased to announce the appointment of Richard (Rick) Wise to the Corporation's Board of Directors ("the Board"). Secure is also announcing the recent retirement of Daniel Steinke from his role as Executive Vice President of New Ventures and Government Affairs.

Director Appointment 
Mr. Wise brings to the Board a wealth of midstream experience from his career of over 30 years in leadership, technical and commercial roles. Over the past ten years, Mr. Wise held various senior and executive leadership positions with Gibson Energy Inc., including Chief Operating Officer and Chief Commercial Officer (interim), where he provided leadership to the company's terminal, pipeline, wholesale and refinery operations. Mr. Wise obtained a Bachelor of Science degree in Chemical & Petroleum Engineering from the University of Calgary. He currently serves as a director for the Canadian Mental Health Association, Calgary .

"As we look ahead, Rick is an outstanding addition to our Board. His midstream experience will help guide Secure as it continues to execute the Corporation's growth strategy through expanded midstream offerings," said Rene Amirault , Chairman of the Board, President and CEO.

Officer Retirement
Dan Steinke was one of the founding members of Secure in 2007 and has been instrumental in growing and defining Secure into the company it is today. In his most recent role of Executive Vice President of New Ventures and Government Affairs, Dan's responsibilities included directing the Corporation's safety, regulatory, and Government relations teams, and evaluating industry trends and customer requirements to continue to grow Secure's core business and find new and better ways to help our customers. Dan's previous roles with Secure included executive positions in sales, business development and operations.

"Dan has been an invaluable asset to Secure over the past twelve years, providing vision and insight across all aspects of our business," said Rene Amirault . "Dan's mission to help the customer not only shaped our company, but the treatment and disposal industry as we know it. The honesty and integrity that Dan instilled in Secure's culture built the trust with our customers and partners that we enjoy today. We congratulate Dan on his retirement and welcome his continued counsel and knowledge as a director on Secure's Board."

Dan's retirement was effective December 31, 2018. His responsibilities have been transitioned to Corey Higham , Executive Vice President Processing, Recovery and Disposal, and Dave Engel , Executive Vice President, Technical Services.

Fourth Quarter and Year End 2018 Operational and Financial Highlights
The following operational and financial highlights should be read in conjunction with the Corporation's management's discussion and analysis ("MD&A") and the audited consolidated financial statements and notes thereto which are available on SEDAR at www.sedar.com.

2018 was another volatile year for the oil and gas industry in Canada . Four years following the global oil price collapse, the industry appeared to be in a cautious state of recovery, with stable commodity prices, increased drilling activity and rising production levels. However, Canadian oil and gas producers continue to face the challenge of exporting their products due to a lack of pipeline infrastructure. As a result of a significant oversupply of Canadian crude caused by these export constraints, crude price differentials in Canada relative to U.S. and global benchmarks reached unprecedented highs during the fourth quarter. The steep deterioration in realized crude pricing across the Western Canadian Sedimentary Basin ("WCSB") from these wide differentials impacted industry cash flows, resulting in decreased producer confidence and a slowdown of drilling and completion activity.

Amidst these extraordinary industry conditions, Secure remained focused on executing the Corporation's strategy for enhanced fluid management, providing customers with solutions to increase operating netbacks and improve capital efficiency. In the Corporation's core Midstream Infrastructure division, Secure achieved record revenue and Adjusted EBITDA resulting from infrastructure additions and expansions during the year, and stable production-driven activity at existing facilities. Additionally, the Corporation's pipeline connected FSTs and rail terminals located near customer operations enabled Secure to help our customers move product with lower transportation costs and realize higher pricing during the quarter, which favourably impacted revenue. Overall, Secure achieved Adjusted EBITDA of $57 .8 million and $190 .5 million in the three and twelve months ended December 31, 2018, an increase of 13% and 21%, respectively, from the comparative periods of 2017. Secure's net income of $13 .9 million and $19 .9 million in the three and twelve months ended December 31, 2018 resulted in net income per weighted average common share of $0.09 and $0.12 in the respective periods.

Secure's dedication to helping the customer has proven to be a competitive advantage to the Corporation, and continued to drive Secure's growth and success in the three and twelve months ended 2018, highlighted by the following achievements:

Strategic Growth Secure continues to identify and develop midstream infrastructure to expand capacity and optimize capabilities at existing facilities. During 2018, Secure completed construction and commissioning of the light oil feeder pipeline system and receipt terminal in the Kindersley - Kerrobert region of Saskatchewan ("Kerrobert Light Pipeline System"), the Corporation's first owned and operated crude oil pipeline system. Secure also commenced operations at two new water disposal facilities during year, expanding the Corporation's footprint in the liquids-rich Montney region in Alberta where activity levels, production growth and water disposal requirements are higher than the rest of the WCSB. These capital investments are supported by long-term commitments, providing Secure with recurring volumes and fee-for-service cash flows.

In total, the Corporation incurred $32 .3 million and $156.7 million of growth and expansion capital during the three and twelve months ended December 31, 2018, comprised primarily of the growth projects noted above and expansions at several facilities to increase throughput, emulsion treating and storage and disposal capacity. These investments are expected to position the Corporation to capture new demand and drive more volumes to Secure's facilities.

Resilient Cash Flows Secure's focus in recent years on growing the Midstream Infrastructure division has lessened the Corporation's dependence on drilling-related revenue streams and provides the Corporation with greater certainty on recurring cash flows. 84% of the Corporation's Adjusted EBITDA (before Corporate costs) during 2018 was generated from the Midstream Infrastructure division, where facility volumes are driven primarily from production-related activities. Stable cash flows generated from these production volumes, along with the growth of the production chemicals business in the Technical Solutions division, and recurring work in the Environmental Solutions division, including new long-term contracts in the oil sands for large scale waste management and recycling programs, mitigated the impact of periods of decreased drilling activity during the year. Additionally, Secure has made investments in the U.S. market that continued to show significant signs of growth specifically noted in the performance of the Corporation's facilities located in North Dakota . Production in North Dakota was at record levels during 2018 and producers in the region do not face the egress challenges producers are experiencing in Canada . With Secure's core business, the Corporation is well positioned to succeed in periods of industry uncertainty, with significant upside potential resulting from increased activity levels.

Solid Financial Performance Successful project execution and strategic acquisitions over the past several years, along with recurring cash flows generated from production-related activities resulted in revenue (excluding oil purchase and resale) of $192 .8 million and $698 .2 million in the three and twelve months ended December 31, 2018, a 4% and 16% increase over the comparative periods of 2017 despite lower oil and gas drilling and completion activity in the WCSB. The Midstream Infrastructure division's segment profit margin1 as a percentage of revenue (excluding oil purchase and resale) was 62% and 59% in the three and twelve months ended December 31, 2018 as a result of higher revenue and an ongoing commitment to cost control and efficiency. Overall, Secure's Adjusted EBITDA increased by greater than 10% each quarter of 2018 over 2017. As a result of higher Adjusted EBITDA, net income also saw substantial quarter over quarter increases in 2018 over 2017.

Financial Strength Secure continues to take a disciplined approach to maintaining a strong balance sheet. At December 31, 2018, the Corporation's total debt to EBITDA, as defined in the lending agreements, was 2.2 to 1. This provides the Corporation with considerable flexibility to continue to grow the business organically and execute on strategic acquisition opportunities that align with the profitable growth strategy of Secure.

Shareholder Value Creation During the three and twelve months ended December 31, 2018, the Corporation returned $10 .9 million and $44.0 million , respectively, of cash flow to shareholders through the monthly dividend of $0.0225 per share.  Secure was also active during the year on the normal course issuer bid ("NCIB") approved by the TSX in May 2018 . The Corporation repurchased and cancelled 5,546,681  common shares for $41 .1 million during the year at an average price of $7 .42 per common share, representing over 3% of the Corporation's outstanding shares. During the three months ended December 31, 2018, Secure repurchased and cancelled 2,740,108 common shares for $20 .3 million at an average price of $7 .40 per common share.

FOURTH QUARTER HIGHLIGHTS

The operating and financial highlights for the three month periods ending December 31, 2018 and 2017 can be summarized as follows: 


Three months ended December 31,

($000's except share and per share data)

2018

2017

% change

Revenue (excludes oil purchase and resale) 

192,756

184,740

4

Oil purchase and resale

490,295

494,816

(1)

Total revenue

683,051

679,556

1

Adjusted EBITDA (1)

57,810

51,177

13


Per share ($), basic

0.36

0.31

16

Net income (loss)

13,944

(23,934)

158


Per share ($), basic and diluted

0.09

(0.15)

160

Cash flows from operating activities

59,310

22,925

159


Per share ($), basic 

0.37

0.14

164

Dividends per common share

0.06750

0.06375

6

Capital expenditures (1)

40,754

51,815

(21)

Total assets

1,583,501

1,562,746

1

Long-term liabilities

560,863

422,251

33

Net debt (1)

268,692

166,647

61

Common shares - end of period 

159,274,147

163,352,572

(2)

Weighted average common shares





basic

161,251,096

163,325,590

(1)


diluted

164,374,324

163,325,590

1

(1)Refer to "Non-GAAP Measures and Operational Definitions" for further information.

 

  • REVENUE OF $683.1 MILLION FOR THE THREE MONTHS ENDED DECEMBER 31, 2018
  • ADJUSTED EBITDA OF $57.8 MILLION FOR THE THREE MONTHS ENDED DECEMBER 31, 2018
  • NET INCOME OF $13.9 MILLION FOR THE THREE MONTHS ENDED DECEMBER 31, 2018
  • CAPITAL EXPENDITURES OF $40.8 MILLION FOR THE THREE MONTHS ENDED DECEMBER 31, 2018
  • FINANCIAL FLEXIBILITY



Dec 31, 2018

Dec. 31, 2017

Threshold

Senior debt to EBITDA

1.6

1.1

3.5

Total debt to EBITDA

2.2

1.9

5.0

 


ANNUAL HIGHLIGHTS

The operating and financial highlights for the years ended December 31, 2018, 2017 and 2016 can be summarized as follows: 


Twelve months ended Dec 31,

($000's except share and per share data)

2018

2017

2016

Revenue (excludes oil purchase and resale) 

698,172

603,421

393,159

Oil purchase and resale 

2,239,281

1,724,787

1,016,904

Total revenue

2,937,453

2,328,208

1,410,063

Adjusted EBITDA (1)

190,521

157,211

94,100


Per share ($), basic 

1.17

0.97

0.61

Net income (loss)

19,929

(34,202)

(48,943)


Per share ($), basic and diluted

0.12

(0.21)

(0.32)

Cash flows from operating activities

186,515

108,872

96,682


Per share ($), basic 

1.14

0.67

0.63

Dividends per common share

0.27000

0.25000

0.24000

Capital expenditures (1)

177,076

191,837

150,877

Total assets

1,583,501

1,562,746

1,425,250

Long-term liabilities

560,863

422,251

336,830

Net debt (1)

268,692

166,647

73,176

Common shares - end of period 

159,274,147

163,352,572

160,652,221

Weighted average common shares





basic 

163,008,356

162,827,541

154,625,869


diluted

165,425,609

162,827,541

154,625,869

(1)Refer to "Non-GAAP Measures and Operational Definitions" for further information.

 

  • REVENUE OF $2.9 BILLION FOR THE YEAR ENDED DECEMBER 31, 2018
  • ADJUSTED EBITDA OF $190.5 MILLION FOR THE YEAR ENDED DECEMBER 31, 2018
  • NET INCOME OF $19.9 MILLION FOR THE YEAR ENDED DECEMBER 31, 2018
  • CAPITAL EXPENDITURES OF $177.1 MILLION FOR THE YEAR ENDED DECEMBER 31, 2018


MIDSTREAM INFRASTRUCTURE DIVISION HIGHLIGHTS


Three months ended Dec 31,

Year ended Dec 31,

($000's)

2018

2017

% Change

2018

2017

% Change

Revenue 







Midstream Infrastructure (a)

105,420

80,611

31

356,350

274,372

30

Oil purchase and resale

490,295

494,816

(1)

2,239,281

1,724,787

30

Total Midstream Infrastructure division revenue

595,715

575,427

4

2,595,631

1,999,159

30








Cost of Sales







Midstream Infrastructure excluding items noted below

39,607

33,877

17

146,767

117,655

25

Depreciation, depletion and amortization

20,175

22,564

(11)

81,094

81,674

(1)

Oil purchase and resale

490,295

494,816

(1)

2,239,281

1,724,787

30

Total Midstream Infrastructure division cost of sales

550,077

551,257

-

2,467,142

1,924,116

28








Segment Profit Margin(1) 

65,813

46,734

41

209,583

156,717

34








Segment Profit Margin (1)  as a % of revenue (a)

62%

58%


59%

57%


(1) Calculated as revenue less cost of sales excluding depreciation and amortization. Refer to "Non-GAAP Measures and Operational Definitions" for further information.

 

  • Revenue generated from Midstream Infrastructure services of $105.4 million for the three months ended December 31, 2018 and $356.4 million for the 2018 year increased 31% and 30%, respectively, from the 2017 comparative periods. The increase in revenue during the fourth quarter was primarily driven by higher volumes associated with new infrastructure and expansions at certain of the Corporation's existing facilities during 2017 and 2018, Secure's utilization of multiple crude oil and condensate streams at the Corporation's pipeline connected FSTs to optimize realized pricing, which benefited both the Corporation and our customers, and increased rail activity. In the last four months of 2018, a shortage of pipeline takeaway capacity and refinery outages resulted in an over supply of crude oil and unprecedented crude oil price differentials in the WCSB. These large differentials and the volatility in pricing provided Secure with an opportunity to work with customers at the Corporation's pipeline connected FSTs, crude oil terminals and rail terminals to improve their operating netbacks through higher realized pricing and lower transportation costs which also lead to higher revenue for the Corporation;
  • In addition to the factors described above, the increase in Midstream Infrastructure services revenue in 2018 over 2017 was due to higher activity levels in North Dakota which accounted for 7% of the year over year increase. Furthermore, higher realized crude oil prices in Canada during the first half of 2018 resulted in increased activity levels driving incremental volumes to the Corporation's facilities and generated higher recovered oil revenues;
  • The majority of the Corporation's facilities are located in high impact resource plays, such as the Montney and Duvernay regions, where producers were most active in the WCSB in 2018. Fluids pumped from wells in these regions are also significantly higher than other regions of the WCSB, driving incremental volumes at Secure's facilities. In the past year, Secure has strategically added new facilities, including the Gold Creek and Tony Creek water disposal facilities in July 2018 , and increased capacity for water disposal at various other facilities in these regions, including at the Dawson Creek and Fox Creek FSTs, Rycroft FSR and Big Mountain water disposal facility, in response to customer demand. Additionally, Secure completed the acquisition of Ceiba Energy Services Inc. ("Ceiba") on August 1, 2017 which added ten facilities to Secure's footprint in the WCSB. These additions and expansions were the driving force behind a 24% and 32% increase in water disposal volumes in Canada during the three and twelve months ended December 31, 2018 over the comparative periods of 2017;
  • The Kerrobert Light Pipeline System commenced commercial operations on October 1, 2018 , resulting in a new revenue source for the Corporation in the fourth quarter through pipeline tariffs. The feeder pipeline project includes area dedication and contracted volume on both an annual and cumulative term basis over 10 years. In total, revenue from new infrastructure, including the pipeline system and two new water disposal facilities, added $7.5 million in the fourth quarter, accounting for 9% of the increase in revenue over the same period in 2017. In 2018, revenue from new infrastructure contributed $16.5 million of revenue, accounting for 6% of the increase in revenue over 2017;
  • Waste processing and solids disposal volumes at the Corporation's facilities in North Dakota increased significantly in the year ended December 31, 2018 contributing to a 37% increase in revenue generated from the U.S. compared to 2017. Higher volumes at Secure's North Dakota facilities were a result of improved activity levels, including new drilling and frac completions as customers remain active in the Bakken, evidenced by a 16% increase in the North Dakota average rig count year over year, and rising production levels. Higher activity levels were driven by an increase in the WTI oil price over 2017 and the commissioning of the Dakota Access Pipeline in June 2017 which has improved economics for delivering producers' product to market. Secure's revenue from the U.S. increased marginally in the three months ended December 31, 2018 over 2017;
  • Recovered oil revenues decreased 39% in the three months ended December 31, 2018 from the comparative period of 2017 primarily due to a 27% decrease in Canadian Light Sweet oil prices in the same period. In 2018, recovered oil revenues increased 14% over 2017 primarily due to a 12% increase in Canadian Light Sweet oil prices in the year.
  • Overall, disposal volumes increased by 9% and 18% in the three and twelve months ended December 31, 2018 from the comparative periods in 2017 due primarily to increased produced and flowback water resulting from new facilities and increased capacity at existing facilities, as well as increasing water production as wells mature;
  • Overall, processing volumes decreased 5% in the three months ended December 31, 2018 from the 2017 comparative period due to the slowdown in drilling and completion activity in Canada resulting from volatile pricing and challenging industry fundamentals. During the year ended December 31, 2018 , processing volumes increased 6% from 2017 largely as a result of a 50% increase in waste processing volumes at the Corporation's North Dakota facilities year over year. Drilling and completion activity in Canada , and resulting processing volumes, was relatively flat in the year as producers took a cautious approach to capital spending in light of volatile crude oil pricing, low gas prices and uncertainty with respect to the addition of pipeline capacity out of the WCSB;
  • Oil purchase and resale revenue in the Midstream Infrastructure division for the three months ended December 31, 2018 decreased by 1% from the 2017 comparative period to $490.3 million due to a 27% decrease in Canadian Light Sweet crude oil prices in the three months ended December 31, 2018 over the 2017 comparative period, partially offset by higher volumes resulting from higher takeaway capacity at certain of the Corporation's pipeline connected full service terminals. In the year, oil purchase and resale revenue increased by 30% over 2017 to $2.2 billion due to higher volumes resulting from increased industry activity during the first half of the year and higher takeaway capacity at certain of the Corporation's pipeline connected full service terminals, and a 12% increase in Canadian Light Sweet crude oil prices in 2018 over 2017;
  • The Midstream Infrastructure's segment profit margin as a percentage of revenue from Midstream Infrastructure services increased 4% and 2% in the three and twelve months ended December 31, 2018 from the comparative periods of 2017 to 62% and 59%, respectively. As a percentage of Midstream Infrastructure services revenue, segment profit margin increased over 2017 as a result of overall increased revenues while minimizing fixed and related costs and a greater proportion of revenue generated from higher margin services;
  • General and administrative ("G&A") expenses of $5.4 million and $25.1 million for the three and twelve months ended December 31, 2018 increased from the comparative period balances of $5.0 million and $19.7 million . Although the Corporation continues to minimize G&A costs by streamlining operations where possible, Midstream Infrastructure G&A expenses have increased primarily due to overhead requirements to support new service lines, facilities and expansions. As a percentage of revenue from Midstream Infrastructure services, G&A expenses decreased slightly to 5% for the three months ended December 31, 2018 from 6% in the comparative period of 2017, and were flat at 7% for the years ended December 31, 2018 and 2017;
  • Earnings before tax of $39.7 million and $101.6 million during the three and twelve months ended December 31, 2018 increased from a loss before tax of $10.5 million in the fourth quarter of 2017, and earnings before tax of $24.6 million in the 2017 year. Excluding the impact of a $29.2 million non-cash impairment charge related to goodwill and intangible assets at the Corporation's Alida crude oil terminalling facility in 2017, the increase is primarily a result of a $19.1 million and $52.9 million increase in segment profit margin in the three and twelve months ended December 31, 2018 over the 2017 comparative periods, and lower depreciation, depletion and amortization due to losses on disposal of property, plant and equipment in 2017. This increase was partially offset by higher G&A expenses incurred to support higher activity levels.


ENVIRONMENTAL SOLUTIONS DIVISION HIGHLIGHTS


Three months ended Dec 31,

Year ended Dec 31,

($000's)

2018

2017

% Change

2018

2017

% Change

Revenue 







Environmental Solutions 

29,236

42,726

(32)

117,060

123,216

(5)








Cost of Sales







Environmental Solutions excluding depreciation and amortization

22,464

33,192

(32)

92,242

95,482

(3)

Depreciation and amortization

2,093

2,204

(5)

8,525

9,302

(8)

Total Environmental Solutions division cost of sales

24,557

35,396

(31)

100,767

104,784

(4)








Segment Profit Margin(1)  

6,772

9,534

(29)

24,818

27,734

(11)








Segment Profit Margin(1)  as a % of revenue 

23%

22%


21%

23%



(1) Calculated as revenue less cost of sales excluding depreciation and amortization. Refer to "Non-GAAP Measures and Operational Definitions" for further information.

 

  • Environmental Solutions division revenue of $29.2 million for the three months ended December 31, 2018 decreased by 32% from the comparative period of 2017 primarily due to lower revenue generated from onsite water management and pumping services as a result of poor industry conditions that reduced completion activity. During the year ended December 31, 2018 , Environmental Solutions division revenue of $117.1 million decreased 5% from 2017 due primarily to the transfer of the division's U.S. operations to the Midstream Infrastructure division at the start of 2018. Excluding this impact, revenue was relatively flat year over year. Higher revenue from projects generated from new customers and new services offerings in the past year, including the management of scrap metal recycling programs for two major oil sands producers, were offset by lower activity levels negatively impacting onsite water management and pumping services in the fourth quarter, and from lower environmental remediation revenue as major customers deferred this spending;
  • Segment profit margin for the three and twelve months ended December 31, 2018 of $6.8 million and $24.8 million decreased by 29% and 11% from the prior year comparative periods. As a percentage of revenue, segment profit margin was 23% and 21% for the three and twelve months ended December 31, 2018 compared to 22% and 23% in the three and twelve months ended December 31, 2017 . The Environmental Solutions division's segment profit margin as a percentage of revenue can fluctuate depending on the volume and type of projects undertaken and the blend of business between remediation and reclamation projects, demolition projects, pipeline integrity projects, site clean-up, and other services in any given period. As a percentage of revenue, the segment profit margin in the three months ended December 31, 2018 increased primarily due to the nature of project work in the quarter and the realization of initiatives undertaken throughout the year to minimize overhead expenses, which were partially offset by a smaller proportion of revenue generated from higher margin onsite integrated fluids solutions activity. In the year ended December 31, 2018 , the decrease in segment profit margin as a percentage of revenue was a result of project mix, as well as increased competition on project bids which resulted in lower rates charged for labour and equipment;
  • G&A expenses for the three and twelve months ended December 31, 2018 decreased 46% and 24% from the 2017 comparative periods to $1.4 million and $7.9 million as a result of ongoing initiatives to minimize costs, and from the transfer of certain personnel and office costs included in the comparative figure to the Midstream Infrastructure division at the start of 2018. Additionally, depreciation and amortization expense was lower in the 2018 periods as intangible assets recorded for two previous acquisitions were fully amortized in the second quarter of 2018. The impact of these changes was partially offset by additional business development expenses resulting from the Environmental Solutions division's growth initiatives;
  • Earnings before tax of $3.2 million and $8.3 million during the three and twelve months ended December 31, 2018 has decreased 30% and increased 5% over the 2017 comparative periods. The variances correspond primarily to changes in segment profit margin in the three and twelve months ended December 31, 2018 over the 2017 comparative periods, combined with the positive impact of a $1.2 million and $2.6 million decrease in G&A expense in the quarter and year to date.


TECHNICAL SOLUTIONS DIVISION HIGHLIGHTS


Three months ended Dec 31,

Year ended Dec 31,

($000's)

2018

2017

% Change

2018

2017

% Change

Revenue 







Technical Solutions 

58,100

61,403

(5)

224,762

205,833

9








Cost of Sales







Technical Solutions excluding depreciation and amortization

48,737

48,928

-

186,232

166,568

12

Depreciation and amortization

5,670

5,450

4

21,252

20,879

2

Total Technical Solutions division cost of sales

54,407

54,378

-

207,484

187,447

11








Segment Profit Margin(1)

9,363

12,475

(25)

38,530

39,265

(2)








Segment Profit Margin (1)  as a % of revenue

16%

20%


17%

19%



(1) Calculated as revenue less cost of sales excluding depreciation and amortization. Refer to "Non-GAAP Measures and Operational Definitions" for further information.

 

  • Falling benchmark crude prices and historically wide differentials in Canada during the three months ended December 31, 2018 resulted in a 10% decrease in WCSB rig activity compared to the three months ended December 31, 2017 . The Technical Solutions division's drilling fluids and equipment revenue correlates with oil and gas drilling activity in the WCSB. As a result, revenue generated from this line was negatively impacted by fewer operating days and rigs serviced quarter over quarter. In the year ended December 31, 2018 , Secure was able to partially mitigate the impact of reduced activity levels and market share declines by continuing to focus on more complex wells which require specialized fluids, equipment and expertise. As a result, revenue from drilling services was relatively flat during the year ended December 31, 2018 from 2017;
  • Secure continues diversification efforts in the Technical Solutions division to become less dependent on drilling activity through expansion of production services. Strategic relationships with key suppliers and ongoing product development has resulted in a significant expansion to Secure's product offering, leading to multiple commercial projects in 2018. The acquisition of a production chemicals business completed in April 2017 has strengthened Secure's position in the market by adding over 100 fully formulated proprietary products, as well as key infrastructure related to the product offering and an experienced and dedicated employee base. The production chemicals service line now has over 350 commercialized products and continues to win new bids and customers and gain market share. As a result of increased contributions from production related services, the decrease to total revenue from the Technical Solutions division resulting from the slowdown of drilling activity in the fourth quarter was partially mitigated. Overall, revenue from the Technical Solutions division of $58.1 million decreased 5% in the quarter from the three months ended December 31, 2017 . In the year, Technical Solutions division revenue increased 9% to $224.8 million as a result of contributions from the production chemicals business;
  • The Technical Solutions division's segment profit margin for the three months ended December 31, 2018 decreased 25% from the comparative period to $9.4 million as a result of lower revenue with flat expenses. The continued cost inflation associated with drilling and production chemicals have outpaced the Technical Solutions division's ability to realize meaningful price increases during the period. As a result, segment profit margin as a percentage of revenue was 16%, down from 20% in the three months ended December 31, 2017 ;
  • In year ended December 31, 2018 , the Technical Solutions division's segment profit margin decreased slightly to $38.5 million from $39.3 million . As a percentage of revenue, segment profit margin was 17% in 2018, down from 19% in 2017. Segment profit margin as a percentage of revenue were positively impacted by the increased revenues while minimizing fixed costs resulting in achieving economies of scale from increased activity. However, increasing product supply costs without realizing any meaningful price increases during the year resulted in a 2% margin compression;
  • The Corporation continues to proactively manage costs in response to customer demands and activity levels. During the fourth quarter, this included a reduction in the division's workforce. As a result, higher G&A expense during the three months ended December 31, 2018 over 2017 was largely due to severance payments made to terminated employees. During 2018, G&A expenses increased 24% to $23.1 million as a result of expanding the production chemicals service line. Additionally, all research and development costs associated with the Corporation's research lab have been included in Technical Solutions G&A expense since the third quarter of 2017. Previous to that, they were reported within the Corporation's business development expense included in Corporate G&A expense. Secure continues to focus on research and development projects to expand the value chain of services offered to customers, and to provide innovative and cost-effective solutions to reduce waste in the drilling and production processes;
  • During the three months ended December 31, 2018 , the Technical Solutions division had a loss before tax of $2.6 million compared to income of $1.7 million in the 2017 comparative period. The variance of $4.3 million was a result of a 25% decrease in segment profit margin and a 19% increase in G&A expense, with flat operating DD&A expense. During the twelve months ended December 31, 2018 , the Technical Solutions division had a net loss of $5.8 million compared to a net loss of $0.2 million in 2017. The impact of higher revenues was more than offset by increased product costs and higher G&A resulting primarily from costs associated with the expanded production chemicals business, and the reclassification of research and development expenses from Corporate business development to the Technical Solutions division effective July 2017 .


OUTLOOK

In response to the historic differentials during the fourth quarter, the Alberta Government implemented a temporary 8.7% production cut of raw crude oil and bitumen effective January 2019 to reduce excess oil storage in western Canada . In addition to the mandated production curtailment, uncertainty resulting from volatile commodity prices and ongoing egress constraints has resulted in producers continuing to delay drilling and completion activity. As a result, oil price differentials in the WCSB have tightened since the announcement. As the year progresses, Secure anticipates higher producer cash flows in Canada resulting from narrowing differentials. This, along with greater visibility toward pipeline development for improved market access, including the completion of the Enbridge Inc. Line 3 pipeline, will help restore confidence and may result in a rebound in activity levels in the second half of 2019 and into 2020.

Production-related volumes represent the majority of the volumes processed and disposed at Secure's midstream facilities, providing the Corporation with recurring cash flows that are more resilient during periods of reduced drilling and completion activity. This, combined with the addition of new infrastructure and expansions during 2018, is expected to mitigate the impact reduced activity levels, particularly in the drilling fluids and onsite integrated fluids management businesses, will have on the Corporation's financial results in 2019.

Secure's strategy remains focused on what is in the Corporation's control: working with customers to identify opportunities and integrated solutions where the Corporation can add value and lower customers' costs. By focusing on new and innovative ways to offer solutions, Secure's customers will be able to gain efficiencies for drilling, completing and producing their hydrocarbon reserves. Helping Secure's customers grow and being their trusted energy solutions partner will ensure that the Corporation continues to create long-term shareholder value.

The industry fundamentals driving the success of Secure's core operations remain unchanged:

  • Trend towards increased outsourcing of midstream work by producers;
  • Produced water increasing at a disproportionate rate relative to aggregate production as a result of larger fracs, aging wells and maturing basins in both Canada and the U.S.;
  • Increasing opportunities relating to crude oil logistics as volatile differentials allow for opportunities on both crude by rail and via pipeline;
  • Well density improving economics to pipeline connect production volumes to midstream facilities;
  • Forecast global oil and gas demand driving production growth in the WCSB;
  • Highly regulated and best in the world environmental standards.


These factors are expected to result in the need for additional facilities to meet incremental requirements for treating, processing and disposal capacity. Secure has made significant capital investments to ensure the business is well positioned to capture new demand. By offering exceptional customer service and owning and operating midstream facilities near customer production, Secure expects these trends will drive more volumes to the Corporation's midstream facilities. Additionally, customers continue seek cost effective transportation solutions for water, oil and condensate volumes; Secure's successful execution of the Kerrobert Light Pipeline System will help the Corporation to take advantage of similar opportunities creating value for both the customer and Secure.

Secure has a solid balance sheet and is well positioned to respond with solutions and the right people to the market's needs. Secure continues to work with its customers to support their needs relating to new facilities and expansions. The Corporation expects to incur approximately $ 100  million of growth and expansion capital in 2019 depending on the outcome of various opportunities in development, such as regulatory approvals, development permits and other operating agreements. The initial capital plan includes completing construction of two crude oil storage tanks at the receipt terminal in Kerrobert , expected to be commissioned in May 2019; construction of two produced water transfer and injection pipelines from customer processing plants; optimizing capabilities and increasing processing and disposal capacity at various other facilities, including additional  disposal wells; and purchasing equipment to support existing services. Providing value-adding solutions to increase customer operating netbacks and improve capital efficiency remains Secure's primary objective.

FINANCIAL STATEMENTS AND MD&A
The Corporation's audited consolidated financial statements and notes thereto for the year ended December 31, 2018 and 2017 and MD&A for the three and twelve months ended December 31, 2018 and 2017 are available immediately on Secure's website at www.secure-energy.com. The audited consolidated financial statements and MD&A will be available tomorrow on SEDAR at www.sedar.com.

FORWARD-LOOKING STATEMENTS
Certain statements contained in this document 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 document. In particular, this document contains or implies forward-looking statements pertaining to: key factors driving the Corporation's success; the impact of new facilities, new service offerings, potential acquisitions, and prior year acquisitions on the Corporation's future financial results; demand for the Corporation's services and products; growth and expansion strategy; the Corporation's ability to continue to grow the business organically and execute on strategic growth opportunities based on current financial position; the oil and natural gas industry in Canada and the U.S., including 2019 and 2020 activity levels, spending by producers and the impact of this on Secure's activity levels; future pipeline development in Canada , specifically related to timing of the completion of Enbridge Inc.'s Line 3 replacement; industry fundamentals driving the success of Secure's core operations, including increased outsourcing of midstream work by producers, drilling, completion and production trends, opportunities relating to crude oil logistics, well density and economics for pipeline connecting production volumes to midstream facilities, and global oil and gas demand; the Corporation's proposed 2019 capital expenditure program including growth and expansion and sustaining capital expenditures, and the timing of completion for projects, in particular the additional storage at the Kerrobert terminal; debt service; future capital needs and how the Corporation intends to fund its operations, working capital requirements, dividends and capital program; access to capital; and the Corporation's ability to meet obligations and commitments and operate within any credit facility restrictions.

Forward-looking statements concerning expected operating and economic conditions are based upon prior year results as well as the assumption that levels of market activity and growth will be consistent with industry activity in Canada and the U.S. and 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 and foreign exchange rates, the regulatory framework regarding oil and natural gas royalties, environmental regulatory matters, the ability of the Corporation and its subsidiaries to successfully market their services and drilling and production activity in North America will lead to sufficient demand for the Corporation'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 industry may change the demand for the Corporation's services and its subsidiaries' 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 under the heading "Risk Factors" in the AIF for the year ended December 31, 2018 and also includes the risks associated with the possible failure to realize the anticipated synergies in integrating the assets acquired in prior year acquisitions with the operations of Secure. Although forward-looking statements contained in this document 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 document 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
The Corporation uses accounting principles that are generally accepted in Canada (the issuer's "GAAP"), which includes International Financial Reporting Standards ("IFRS"). Certain supplementary measures in this document do not have any standardized meaning as prescribed by IFRS. These measures are intended as a complement to results provided in accordance with IFRS. The Corporation believes these measures provide additional useful information to analysts, shareholders and other users to understand the Corporation's financial results, profitability, cost management, liquidity and ability to generate funds to finance its operations. However, they should not be used as an alternative to IFRS measures because they do not have a standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other companies. See the management's discussion and analysis available at www.sedar.com for further details, including reconciliations of the Non-GAAP measures and additional GAAP measures to the most directly comparable measures calculated in accordance with IFRS.

ABOUT SECURE ENERGY SERVICES INC.
Secure is a TSX publicly traded integrated energy business with midstream infrastructure, environmental and technical solutions divisions providing industry leading customer solutions to upstream oil and natural gas companies operating in western Canada and certain regions in the United States ("U.S.").

1 Refer to the "Non-GAAP Measures and Operational Definitions" section herein.

 

SOURCE SECURE Energy Services Inc.


View original content: http://www.newswire.ca/en/releases/archive/February2019/26/c1413.html