Pure Energy Services Ltd. announces Q2 2012 results and declaration of Q4 2012 dividend

CALGARY, Aug. 9, 2012 /CNW/ - Pure Energy Services Ltd. ("Pure" or "the Corporation") (TSX: PSV) is pleased to announce its financial and operating results for the three and six-month periods ended June 30, 2012.  The financial results presented and all comparative information have been prepared in accordance with International Financial Reporting Standards ("IFRS").  Unless otherwise indicated, references in this news release to "$" or "Dollars" are to Canadian dollars.

SELECTED CONSOLIDATED FINANCIAL INFORMATION

BUSINESS OVERVIEW

Pure is a publicly traded oilfield services company that operates in western Canada and the United States ("US").  The Corporation's shares trade on the Toronto Stock Exchange under the symbol PSV.

Pure's operations are divided into three separate operating segments: Canadian Completion Services ("CCS"), US Completion Services ("USCS") and Corporate Administration ("Corporate") as follows:

• The CCS segment provides Frac Flowback and Wireline services on new, producing and abandoned oil and natural gas wells for exploration and production companies operating in the Western Canadian Sedimentary Basin ("WCSB").  CCS currently operates the largest Frac Flowback fleet and one of the largest Wireline fleets in the WCSB.  At June 30, 2012, the CCS fleet consisted of 73 Frac Flowback units and 61 Wireline units.  CCS' operations are impacted by seasonality, experiencing higher levels of activity during the winter months (November through March) and lower levels of activity during the spring (April through June).
• The USCS segment provides Frac Flowback and Wireline services on new, producing and abandoned oil and natural gas wells for exploration and production companies throughout the US. At June 30, 2012, the USCS fleet consisted of 55 Frac Flowback units and 22 Wireline units.  USCS' operations are also impacted by seasonality, although not to the same extent as CCS' operations, with higher levels of activity typically experienced during the non-winter months (April through October) in the northern US operation areas.
• The Corporate segment is a cost centre which includes corporate administration and other costs not specifically attributable to the CCS and USCS segments.

The demand for Pure's services in Canada and the US is, in large part, correlated with the level of drilling and completion activity.  Prices for oil, natural gas and natural gas liquids ("NGL's") can have a considerable impact on drilling and completion activity.

Q2 2012 HIGHLIGHTS

In Q2 2012, Pure:

• Generated revenue of $55.0 million, representing a 35% increase over the comparable quarter in 2011.
• Recorded EBITDAS of $1.9 million, representing a 111% increase over the comparable quarter in 2011.
• Reported a quarterly net loss of $2.4 million ($0.10 per share), which was a 22% improvement from the $3.0 million net loss ($0.12 per share) recorded in Q2 2011.
• Invested $12.2 million in capital expenditures to increase operating capacities for Frac Flowback and Wireline services in both the CCS and USCS segments.
• Exited the quarter in a strong financial position with long-term debt, net of working capital of $2.5 million and undrawn credit of approximately $48 million available under its aggregate credit facilities of $67 million.

DIVIDENDS

On August 8, 2012, Pure's Board of Directors declared a quarterly dividend of $0.09 per share to be paid on November 15, 2012 to shareholders of record at the close of business on October 31, 2012.  Pure's dividends are eligible dividends for Canadian tax purposes.  The annualized dividend amount of approximately $8.8 million (based on the 24.5 million shares outstanding at August 8, 2012) represents approximately 15% of funds flow from operations generated by Pure during the trailing twelve-month period from July 1, 2011 to June 30, 2012.

OUTLOOK

Given the current volatility in prices for oil, natural gas and NGL's, Pure's management continues to carefully monitor industry activity levels in western Canada and the Corporation's US operating areas to ensure equipment and manpower are positioned to provide sustainable equipment utilization rates with the objective of maximizing operating margins.

Management is encouraged by the robust utilization rates experienced so far in Q3 2012 in both the Corporation's Canadian Frac Flowback and Wireline operations.  The Canadian Frac Flowback operations are benefitting from the significant multi-well pad project work in the Horn River and Montney basins combined with the ongoing work for a senior customer related to liquefied petroleum gas ("LPG") fracturing operations. Canadian Wireline operations' utilization rates continue to benefit from the regulatory requirements for logging services and the increasing demand for well abandonment services.

US Frac Flowback operations have also experienced strong utilization rates in early Q3 2012 due to the repositioning of equipment from certain "dry" natural gas basins, where activity has been reduced, to other basins with higher drilling and completion activity.

In response to the uncertainty surrounding drilling and completion activity for the remainder of 2012, Pure plans to postpone approximately $9 million of its previously announced $53 million capital expenditure program for 2012 until 2013.  The postponed capital expenditures relate primarily to the US Frac Flowback and Wireline divisions.  The US Frac Flowback division plans to postpone the acquisition of 4 new Frac Flowback units and supporting auxiliary equipment (with an aggregate cost of approximately $3 million) and continue to focus on repositioning existing equipment and manpower. The US Wireline division plans to postpone the acquisition of 4 new Wireline units and supporting equipment (with an aggregate cost of approximately $5 million) and focus on improving margins in its existing operating bases, including those that have been recently established.

RESULTS OF CONTINUING OPERATIONS

Financial Summary by Segment

The break-down of consolidated financial results by segment for the three and six-month periods ended June 30, 2012 and 2011 is as follows:

DISCUSSION OF SEGMENT RESULTS

Canadian Completion Services ("CCS") Segment

CCS generated better than expected revenue and gross margins during Q2 2012 given the extremely wet weather experienced throughout western Canada.  Increased equipment utilization combined with higher revenue per day/job rates in both the Frac Flowback and Wireline divisions led to a quarter over quarter revenue increase of 39% (to $25.6 million in Q2 2012 from $18.4 million in Q2 2011).  The increase in revenues translated into a positive gross margin in Q2 2012 of $2.1 million compared to a negative margin of $1.4 million in Q2 2011.  The CCS segment posted near break-even EBITDAS in Q2 2012 of negative $0.9 million representing a considerable improvement over the negative EBITDAS of $3.9 million in Q2 2011.

The CCS segment continues to benefit from the shift to horizontal drilling in the WCSB.  During Q2 2012, 70% of the total wells drilled (rig released) were horizontal, an increase from the 63% in Q1 2012 and 60% in Q2 2011.  The shift towards horizontal drilling has also led to a slight increase in metres drilled on a quarter over quarter basis (2.9 million in Q2 2012 versus 2.8 million in Q2 2011) offsetting the drop in the total number of wells drilled (1,441 in Q2 2012 versus 1,457 in Q2 2011).

PDF - Horizontal Wells as a % of Total Wells Drilled

PDF - Metres Drilled/Well Rig Released

Frac Flowback

CCS Frac Flowback revenue increased by $3.1 million (or 36%) to $11.6 million in Q2 2012 versus the $8.5 million earned in Q2 2011.  The Frac Flowback division continues to benefit from the shift to more service intensive horizontal wells (1,015 horizontal wells drilled in Q2 2012 compared to 867 in Q2 2011 - Source: Nickles Energy Group) and increased work related to LPG fracturing operations. These factors led to a 24% increase in Frac Flowback days worked to 1,827 in Q2 2012 compared to 1,471 in Q2 2011.  Revenue per day increased on a quarter over quarter basis, reflecting the significant increase in auxiliary equipment (storage tanks, line heaters, high pressure pipe) required for LPG fracturing work and high pressure work.  The demand for auxiliary Frac Flowback equipment continues to increase with the high flowback volumes associated with horizontal wells and the increased pressure encountered in deeper wells. The higher equipment utilization combined with the increased revenue per day contributed to an increase in the gross margins achieved by this division in Q2 2012 to 21% compared to the 17% in Q2 2011.

Wireline  

CCS Wireline revenue in Q2 2012 of $14.0 million was 42% higher than the $9.9 million recorded in Q2 2011.  The higher revenue for Q2 2012 reflected a shift in the job mix towards higher rate services such as pump down perforating and logging for horizontal wells, tubing conveyed perforating and abandonment services, combined with an increase in equipment utilization rates. Equipment utilization rates were higher as 1,247 jobs were completed in Q2 2012 compared to 1,089 jobs in Q2 2011, despite a smaller operating fleet of wireline trucks and the extremely wet weather experienced throughout the WCSB. The higher revenue level resulted in a significant improvement in the division's gross margin percentage to negative 2% in Q2 2012 from negative 29% in Q2 2011 as the costs of the Wireline business are predominantly fixed in nature.

SG&A expenses incurred by the CCS segment in Q2 2012 of $3.1 million were 12.0% of revenue, which was an improvement over the 13.7% of revenue recognized in Q2 2011.  For the six months ended June 30, 2012, SG&A improved to 8.3% of revenue from the 9.1% recorded in the comparative six-month period in 2011.  The improvement in the quarter over quarter and six-month periods reflects the significant increase in revenues.

Outlook

CCS management continues to deploy equipment and structure its service offerings to exploit the trend towards horizontal drilling.  The Frac Flowback division commenced work on 3 multi-well pad projects in the Horn River area at the end of Q2 2012 and an additional multi-well pad project in the Montney area in early Q3 2012.  These projects, which are expected to run through Q4 2012 and early 2013, require an aggregate of 11 Frac Flowback units (or 15% of the existing fleet) and a large complement of auxiliary equipment.  The strong overall demand for Frac Flowback services, combined with the continuing contractual LPG flowback work and the aforementioned multi-well pad projects, is expected to keep Frac Flowback equipment utilization levels robust for the remainder of 2012.  The CCS Wireline division is also experiencing strong utilization rates for equipment due to the strong demand for abandonment, high pressure and well logging services (for regulatory purposes) and is expected to continue for the remainder of 2012.

US Completion Services ("USCS") Segment

USCS' revenues increased by 31% to $29.4 million in Q2 2012 compared to $22.5 million in Q2 2011 with increased contributions from both the Wireline and Frac Flowback divisions.  Drilling activity levels in USCS' primary operating areas varied on a quarter over quarter basis.  North Dakota continued to experience a modest increase in drilling activity (average rig counts), despite the volatility in oil prices in Q2 2012.  Colorado, Pennsylvania and Wyoming, however, all experienced decreases in drilling activity in Q2 2012 primarily due to lagging natural gas prices.  USCS' overall gross margin of $6.8 million in Q2 2012 was 10% less than the $7.6 million achieved in Q2 2011 reflecting quarter over quarter margin reductions (on a dollar and percentage basis) in both operating divisions.  The lower gross margins, together with higher SG&A expenses, contributed to a 29% reduction in EBITDAS for USCS from $5.9 million in Q2 2011 to $4.2 million in Q2 2012.

The following chart shows the trend of drilling activity in USCS' core operating areas:

PDF - Average Rotary Rig Counts

Frac Flowback      

USCS Frac Flowback revenues increased by $4.7 million (or 29%) to $20.8 million in Q2 2012 compared to $16.1 million in Q2 2011 reflecting a slight increase in the number of days worked, combined with an increase in revenue per day, in the current quarter.  The increased revenue per day reflects improved pricing on a quarter over quarter basis combined with an increased use of auxiliary equipment, which adds to the daily rates charged.   Gross margins decreased by 4% to $6.2 million in Q2 2012 from $6.5 million in Q2 2011, while the gross margin percentage declined to 30% in Q2 2012 compared to the 40% achieved in Q2 2011, despite the increases in days worked and revenue per day.  The erosion in the gross margin reflects the significant mobilization costs associated with relocating crews and equipment from regions focused on "dry" natural gas to regions with an oil and liquids rich natural gas focus.

Equipment utilization rates in early Q3 2012 have shown improvement over rates in Q2 2012 as equipment repositioned to the DJ basin (in northern Colorado) and to Wyoming is now working for customers.  The USCS Frac Flowback division continues to focus on margin improvement through higher equipment utilization rates, reduced mobilization costs and reductions in other operating costs.

Wireline

USCS Wireline revenues increased by $2.2 million (34%) to $8.6 million in Q2 2012 compared to $6.4 million in Q2 2011.  The higher revenues primarily reflected the larger equipment fleet as the number of jobs completed increased to 952 in Q2 2012 compared to 788 in Q2 2011.  The increase in revenue, however, did not translate to improved gross margins.  The Wireline division continued to be hampered by expansion costs relating to new bases in Colorado, Oklahoma and New Mexico, combined with the costs of repositioning equipment and crews into areas with higher drilling activity.  Some of the new bases are gaining traction (particularly the Fort Lupton, Colorado base servicing the DJ Basin) as the customer base grows.  A sales office was established in Dallas, Texas in Q2 2012 to focus on customers operating primarily in the new markets of Oklahoma and New Mexico.

SG&A expenses incurred by the USCS segment in Q2 2012 of $2.6 million (9.0% of revenue) were higher than the $1.7 million (7.4% of revenue) in Q2 2011 reflecting the increased operating infrastructure needed for the expanded operations.  SG&A for the six-month period ended June 30, 2012 was 8.7% of revenue, which was relatively consistent with the 8.3% of revenue recognized in the comparable six-month period of 2011.

Outlook

With the completion of the recent expansion of Wireline operations into new operating areas in Colorado, New Mexico and Oklahoma, Pure's USCS segment is focusing on improving operating margins for all of its Wireline bases. The USCS Frac Flowback division is also focusing on margin improvement through operating cost reductions in the wake of the repositioning of equipment and crews to areas of higher activity in Q2 2012.

OTHER EXPENSES

Depreciation and Amortization Expense

Depreciation and amortization expense increased to $4.9 million in Q2 2012 from $3.6 million in Q2 2011.  This reflects an increase in the average net book values of property and equipment from $96.3 million in Q2 2011 to $133.0 million in Q2 2012 primarily due to $48.9 million in property and equipment additions over the past twelve months.

Finance Costs

Finance costs of $0.2 million in Q2 2012 were consistent with the $0.2 million recognized in Q2 2011.  The increase in the average long-term debt balance of $26.3 million in Q2 2012 compared to the $17.8 million in Q2 2011 was offset by a reduction in interest rates related to Pure's finance lease liabilities and its US debt facilities.

Other Expenses (Income)

Other income in Q2 2012 was comprised of a $0.5 million foreign exchange gain, offset by a $0.1 million loss on sale of property and equipment.  The foreign exchange gain in Q2 2012 was recognized by Pure's wholly-owned US subsidiary, Pure Energy Services (USA), Inc. ("Pure USA"), on Canadian dollar denominated term debt owing to the parent and was the result of the strengthening in the US dollar relative to the Canadian dollar from March 31, 2012 (where 1 USD = $0.9975 CDN) to June 30, 2012 (where 1 USD = $1.0181 CDN).

INCOME TAX EXPENSE

Pure's total income tax recovery in Q2 2012 of $0.8 million on the net loss before income tax of $3.2 million results in a blended Canadian/US effective income tax rate of approximately 26%.  The US and Canadian jurisdictions have effective income tax rates of approximately 38% and 30% respectively when the impact of expenses not deductible for tax purposes are incorporated.  The low blended effective income tax rate in Q2 2012 is a result of the net losses incurred in the lower rate Canadian jurisdiction (due to the seasonally slower Q2 period) that were offset by the net earnings in the higher rate US jurisdiction. 

SUMMARY OF QUARTERLY RESULTS ⁽¹⁾

Pure's business is seasonal in nature with Canadian operations experiencing a slow-down in activity in Q2 of each year due to spring break-up in western Canada, and US operations typically experiencing slower activity in the colder winter months.  In addition, the business is cyclical as a result of industry activity levels that are highly correlated to oil, NGL and natural gas prices that affect the cash flow of the Corporation's customers and their ability to obtain debt and equity financing.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2012, Pure's long-term debt exceeded working capital by $2.5 million which is an increase of $4.4 million from the amount at December 31, 2011.  The increase primarily reflects funds flow from operations of $22.1 million, offset by net capital expenditures of $22.2 million and dividend payments of $4.4 million.

The net capital expenditures of $22.2 million were comprised of $23.3 million in purchases of property, equipment and intangible assets (of which $2.2 million related to field vehicles financed through leases), offset by $1.1 million in proceeds received from equipment disposals.  The additions to property, equipment and intangible assets (excluding vehicles acquired through finance leases) for the six months ended June 30, 2012 related primarily to:

CCS

• 5 Frac Flowback units and auxiliary equipment.
• Wireline unit refurbishments and auxiliary Wireline equipment.
• Progress payments for 3 additional Frac Flowback units scheduled to be received in Q3 2012.
• Progress payments for additional auxiliary Frac Flowback equipment and Wireline equipment.

The original CCS capital expenditure budget for 2012 included 9 Frac Flowback units.  Funds for one Frac Flowback unit originally budgeted have been re-allocated to certain auxiliary equipment required for customer projects in 2012.

USCS

• 2 Wireline units and supporting equipment.
• Progress payments for 2 additional Wireline Units scheduled to be received in Q3 2012.
• 1 Frac Flowback unit and auxiliary equipment.
• Progress payments for 1 Frac Flowback unit expected to be received in Q3 2012.
• Progress payments for auxiliary Frac Flowback equipment to replace equipment currently rented from third party providers.

The original USCS capital expenditure budget for 2012 included the purchase of 8 Wireline units and 6 Frac Flowback units.  As noted in the Outlook section, Pure is postponing the purchase of 4 Wireline units and 4 Frac Flowback units until 2013.

The Corporation has the following operating lease commitments, purchase commitments and debt commitments over the next five years:

At June 30, 2012, Pure had aggregate debt facilities from its Canadian and US lenders of approximately $67 million (Canada - $45 million plus US - $22 million).  The Canadian debt facilities include a $20 million operating loan and a $25 million, three year extendible revolving loan which is scheduled to mature on September 30, 2014. The full $45 million was available under the Canadian debt facilities as at June 30, 2012.

The US debt facilities include a USD $5 million, three year revolving facility that matures on September 30, 2014 and a USD $17 million equipment financing facility.  The equipment financing facility revolves until September 30, 2012, at which time any outstanding amounts on the facility are converted to a term loan which is repayable over a five year period.  An aggregate USD $3.3 million was available under the US debt facilities as at June 30, 2012 (USD $2.6 million under the revolving facility and USD $0.7 million under the equipment financing facility).

The covenants for both the Canadian and US debt facilities are calculated on a consolidated basis in accordance with the terms of the respective credit agreements.  Pure was in compliance with all of its debt covenants at June 30, 2012.

The Corporation believes that its available debt facilities, combined with funds flow from operations, will provide sufficient capital resources to fund the 2012 capital expenditure program and ongoing operations.  In addition to the weak natural gas prices forecasted for the remainder of 2012, the current global economic concerns (including the sluggish US economy and the sovereign debt issues in several European countries) could have a negative impact on market confidence, which in turn could potentially lower the demand for energy products as well as the demand for Pure's services.  Management continues to monitor its capital and operational spending programs in response to these market conditions.

SHARE CAPITAL

As at August 8, 2012, the Corporation had 24.5 million shares outstanding and 1.9 million options outstanding, of which 0.9 million were vested.

RISKS AND UNCERTAINTIES

A complete discussion of risks faced by the Corporation may be found under "Risk Factors" in the Corporation's Annual Information Form dated March 13, 2012 which is available under the Corporation's profile at www.sedar.com.

NON-IFRS MEASURES

EBITDAS and funds flow from operations do not have standardized meanings prescribed by IFRS. Management believes that, in addition to net earnings, EBITDAS is a useful supplemental measure. EBITDAS is provided as a measure of operating performance without reference to financing decisions, depreciation, income tax or stock-based compensation impacts, which are not controlled at the operating management level. Investors should be cautioned that EBITDAS should not be construed as an alternative to net earnings determined in accordance with IFRS as an indicator of Pure's financial performance. Pure's method of calculating EBITDAS may differ from that of other entities and accordingly may not be comparable to measures used by other entities. See section titled "Reconciliation of EBITDAS to Net Earnings" below.

Funds flow from operations is defined as cash from operating activities before changes in non-cash working capital, as presented on Pure's statement of cash flows. Funds flow from operations is a measure that provides investors with additional information regarding Pure's liquidity and its ability to generate funds to finance its operations. Funds flow from operations does not have a standardized meaning prescribed by IFRS and may not be comparable to similar measures provided by other entities.

RECONCILIATION OF EBITDAS TO EARNINGS BEFORE INCOME TAXES

FORWARD-LOOKING STATEMENTS

This document contains certain forward-looking statements and other information that are based on the Corporation's current expectations, estimates, projections and assumptions made by management in light of its experience and perception of historical trends, current conditions, anticipated future developments and other factors believed by management to be relevant.

All statements and other information contained in this document that address expectations or projections about the future are forward-looking statements. Some of the forward-looking statements may be identified by words such as "may", "would", "could", "will", "intends", "targets", "expects", "believes", "plans", "anticipates", "estimates", "continues", "maintains", "projects", "indicates", "outlook", "proposed", "objective" and other similar expressions. These statements speak only as of the date of this document. 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 or not such results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to, the factors discussed in the "Risks and Uncertainties" section in the most recent Annual Information Form, Information Circular, quarterly reports, material change reports and news releases. The Corporation cannot assure investors that actual results will be consistent with the forward-looking statements and readers are cautioned not to place undue reliance on them. The forward-looking statements are provided as of the date of this document and, except as required pursuant to applicable securities laws and regulations, the Corporation assumes no obligation to update or revise such statements to reflect new events or circumstances.

The forward-looking statements and information contained in this document reflect several major factors, expectations and assumptions of the Corporation, including without limitation, that the Corporation will continue to conduct its continuing operations in a manner substantially consistent with past operations; the general continuance of current or, if applicable, assumed industry conditions; the continuance of existing (and in certain circumstances, the implementation of proposed) taxation, royalty and regulatory regimes; certain presumptions relating to the prices of the Corporation's services and its costs of services; certain commodity prices and other cost assumptions; certain conditions regarding oil and natural gas supply, demand and storage in North America; the continued availability of adequate debt and/or equity financing and cash flow from the Corporation's operations to fund its capital and operating requirements as needed; and the extent of its liabilities. Many of these factors, expectations and assumptions are based on management's knowledge and experience in the industry and on public disclosure of industry participants and analysts relating to anticipated exploration and development programs of oil and natural gas producers, the effect of changes to regulatory, taxation and royalty regimes, expected active rig counts and industry equipment utilization in the WCSB and the Corporation's US operating regions and other matters. The Corporation believes that the material factors, expectations and assumptions reflected in the forward-looking statements and information are reasonable; however, no assurances can be given that these factors, expectations and assumptions will prove to be correct.

In particular, this document contains forward-looking information pertaining to the following: ability to manage costs in response to industry activity levels; success of marketing programs and the increase and diversification of the Corporation's customer base; amount and timing of both the Corporation's and its customers' capital expenditure programs; ability to redeploy equipment and personnel within operating locations; availability of debt financing and ability to renew the Corporation's existing credit facilities at acceptable terms; supply and demand for oilfield services and industry activity levels and the impact on equipment utilization; oil, natural gas liquids and natural gas prices; oil, natural gas and liquids rich natural gas drilling activity; horizontal drilling activity; treatment under governmental royalty programs or regimes; collection of accounts receivable; operating risk liability; expectations regarding market prices and costs for the Corporation's services and the impact of these changes on gross margins; expansion of services and operations in Canada and the US through organic growth or by acquisition; financial results for new operating bases; working capital net of long-term debt levels; the amount and timing of recognition of income tax recoveries, income tax losses and deferred expense pools; future customer work; expected levels of the Corporation's sales, general and administrative expenses; ability to crew equipment; the recruitment and retention of local employees for the Corporation's field operations; and competitive conditions.

Consolidated Statements of Financial Position

Consolidated Statements of Net Earnings (Loss)
For the three and six-month periods ended June 30,

Consolidated Statements of Comprehensive Income (Loss)
For the three and six-month periods ended June 30,

Consolidated Statements of Cash Flows
For the three and six-month periods ended June 30,

Consolidated Statements of Changes in Equity
For the six months ended June 30, 2012 and 2011

* AOCI represents accumulated other comprehensive income (loss). AOCI comprises all foreign currency differences (net of tax) arising from the translation of the net investment in the Corporation's US subsidiary.

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SOURCE: Pure Energy Services Ltd.