Pure Energy Services Ltd. announces record Q1 2012 results and declaration of Q3 2012 dividend

CALGARY, May 10, 2012 /CNW/ - Pure Energy Services Ltd. ("Pure" or "the Corporation") (TSX: PSV) is pleased to announce its financial and operating results for the three-month period ended March 31, 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.

BUSINESS OVERVIEW

Pure is a publicly traded oilfield services company that operates in western Canada and certain regions of 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 March 31, 2012, the CCS fleet consisted of 74 Frac Flowback units and 63 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 operating primarily in the Rocky Mountain, North Dakota and Appalachian Basin regions of the US.  The majority of USCS' operations are conducted through field bases located in Colorado, Wyoming, North Dakota and Pennsylvania.  At March 31, 2012, the USCS fleet consisted of 53 Frac Flowback units and 21 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).
• 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 correlated with the level of drilling and completion activity in the respective regions.  Prices for oil, natural gas and natural gas liquids ("NGL's") can have a considerable impact on drilling and completion activity.

Q1 2012 HIGHLIGHTS

In Q1 2012, Pure:

• Achieved record quarterly revenue of $83.1 million, surpassing the previous record of $78.9 million recognized in Q4 2011, by capitalizing on the increase in horizontal drilling activity in the WCSB and increased drilling activity for oil in North Dakota.  This represents a 36% increase over the comparable period of Q1 2011.
• Earned record quarterly EBITDAS of $20.7 million representing a 45% increase over the comparable period of Q1 2011 and surpassing the previous record of $20.5 million in Q4 2011.
• Reported record quarterly Net Earnings of $10.2 million ($0.42 per share), representing a 47% increase over the $7.0 million ($0.29 per share) reported in Q1 2011 and surpassing the previous record of $9.4 million in Q4 2011. 
• Invested $8.9 million in capital expenditures to increase operating capacities for Frac Flowback and Wireline services in both the CCS and USCS segments.
• Exited Q1 2012 in a strong financial position with working capital net of long-term debt of $10.3 million at March 31, 2012; a significant improvement over the $2.0 million at December 31, 2011.
• Maintained undrawn credit of approximately $48 million available under its aggregate credit facilities of $67 million.

DIVIDENDS

On May 9, 2012, Pure's Board of Directors declared a quarterly dividend of $0.09 per share to be paid on August 15, 2012 to shareholders of record at the close of business on July 31, 2012.  Pure's dividends are eligible dividends for Canadian tax purposes.  The annualized dividend amount of approximately $8.8 million (based on the 24.4 million shares outstanding at May 9, 2012) represents approximately 16% of funds flow from operations generated by Pure during the trailing twelve-month period from April 1, 2011 to March 31, 2012.

OUTLOOK

Pure is cautiously optimistic about industry activity levels in its Canadian operating areas and certain US operating areas for the remainder of 2012.  Drilling activity related to oil and liquids rich natural gas continues to be robust in Canada and the US due to the strong prices for oil and NGL's.  This has offset the reduced activity related to "dry" natural gas caused by the decline in natural gas prices.  Overall, Pure continues to benefit from the shift to horizontal drilling, where the well completions are more complex and service intensive. 

Capital expenditure estimates for aggregate Canadian and US drilling and completion activity for 2012 have recently been reduced as a result of the significant drop in natural gas prices over the past 6 months.  Recent drilling forecasts for the WCSB for 2012 have been downgraded with an average of approximately 13,000 wells predicted for 2012; however this still represents a slight increase over the 12,829 wells drilled (rig released) (Source: Nickles Energy Group) in calendar 2011.  Pure has been able to successfully redeploy equipment and manpower from those  basins where work has been reduced to higher activity oil and liquids rich natural gas basins.

Pure's primary areas of focus for the remainder of 2012 are to:

• Continue to monitor regional activity in both Canada and the US and deploy manpower and equipment in a manner that maximizes utilization and profitability. 
• Carry on the successful recruiting and retention of staff to support the Corporation's growth strategy.  Pure continues to invest in its "Superior Value" program which includes increased training and education programs for field and support staff.
• Improve the profitability of its USCS Wireline division by diversifying the division's existing customer base and capitalizing on recent expansion efforts.
• Identify and evaluate acquisition opportunities in both Canada and the US that provide business synergies with the Corporation's core service lines and/or the expansion into new core operating areas.

RESULTS OF CONTINUING OPERATIONS

Financial Summary by Segment

The break-down of consolidated financial results by segment for the three months ended March 31, 2012 and 2011 is as follows:

DISCUSSION OF SEGMENT RESULTS

CCS earned record revenues during Q1 2012 of $54.1 million, representing a 24% increase over the $43.5 million in Q1 2011.  Both the Wireline and Frac Flowback divisions contributed to the revenue increase.  The record revenues translated into a record gross margin in Q1 2012 of $20.6 million and a record EBITDAS in Q1 2012 of $17.1 million.

Demand for CCS' completion services remained strong in Q1 2012 due to the continuing shift in drilling activity in the WCSB from vertical wells to horizontal wells combined with the robust oil and liquids rich natural gas activity.  The percentage of horizontal wells drilled continued to increase steadily as 63% of the total wells drilled in Q1 2012 were horizontal compared to 47% in Q1 2011 and 57% in Q4 2011.  The shift to horizontal drilling led to an increase in metres drilled on a quarter over quarter basis (7.4 million in Q1 2012 versus 6.8 million in Q1 2011) despite the drop in the total number of wells drilled (3,581 in Q1 2012 versus 3,879 in Q1 2011).

Horizontal Wells as a % of Total Wells Drilled (Source: Nickles Energy Group)

Metres Drilled/Well Rig Released (Source: Nickles Energy Group)

Frac Flowback

CCS Frac Flowback revenues increased by $5.7 million (or 32%) to $23.8 million in Q1 2012 versus the $18.1 million earned in Q1 2011.  The Frac Flowback division continues to benefit from the shift to more service intensive horizontal wells as frac flowback days increased by 14% to 4,578 in Q1 2012 compared to 4,012 in Q1 2011.  The increase in the number of horizontal wells drilled in the WCSB in Q1 2012 to 2,270 versus 1,822 in Q1 2011 (Source: Nickles Energy Group), combined with an increase in CCS' flowback work for fracturing operations utilizing liquefied petroleum gas ("LPG"), contributed to the increased equipment utilization.  Pricing increases, combined with an increase in jobs requiring auxiliary equipment (i.e. high pressure pipe, line heaters, etc.) resulted in an increase in revenue per job in Q1 2012 compared to Q1 2011.  The demand for auxiliary Frac Flowback equipment continues to increase with the complexity and length of the wells drilled.  Gross margin percentage for the Frac Flowback division remained consistent with Q1 2011 as the impact of the higher prices and higher equipment utilization were offset by increased wages and training costs for field crews.

Wireline  

CCS Wireline revenues increased by $4.8 million (or 19%) to $30.3 million in Q1 2012 versus the $25.5 million earned in Q1 2011.  This reflected general price increases combined with an increase in higher rate jobs involving high pressure environments, pump down perforating, tubing conveyed perforating and logging services on horizontal wells.  Despite an earlier onset of spring break-up, the number of Wireline jobs completed in Q1 2012 was consistent with Q1 2011 reflecting an increase in equipment utilization.  The increase in the CCS Wireline division's gross margin percentage to 37% in Q1 2012 (compared to 34% in Q1 2011) is a result of the higher pricing combined with an increase in equipment utilization rates.

SG&A expenses incurred by the CCS division in Q1 2012 of $3.5 million represented 6.5% of revenue which is an improvement over the 7.2% recognized in Q1 2011.  CCS management continues to monitor SG&A expense levels in relation to anticipated operating activity.

Outlook

The trend of increased horizontal drilling continues to buoy demand for completion services in Canada.  CCS' management continues to structure its service offerings to exploit this trend.  The CCS Frac Flowback division was recently awarded work on two multi-well pad projects in the Horn River basin requiring an aggregate of 10 dedicated Frac Flowback units commencing in June 2012 and running through the remainder of 2012.  In addition, 6 Frac Flowback units continue to be dedicated on a year-round basis to LPG fracturing flowback work for a senior customer.

USCS's revenues increased by 66% to $29.0 million in Q1 2012 compared to $17.4 million in Q1 2011 with both the Wireline and Frac Flowback divisions contributing to the increase.  The higher revenues triggered increases to both the gross margin ($7.2 million in Q1 2012 versus $4.5 million in Q1 2011 representing a 60% increase) and EBITDAS ($4.8 million in Q1 2012 versus $2.8 million in Q1 2011 representing a 69% increase).

Colorado, Wyoming and Pennsylvania all experienced modest increases in drilling activity, in terms of the average number of active rotary rigs, in Q1 2012 compared to Q1 2011 as strong oil and liquids rich natural gas drilling activity levels offset reduced "dry" natural gas drilling levels.  Drilling activity in oil-based North Dakota was significantly higher in Q1 2012 compared to Q1 2011.

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

Average Rotary Rig Counts (Source: Baker Hughes)

Frac Flowback      

USCS Frac Flowback revenues increased by $9.0 million (or 73%) to $21.2 million in Q1 2012 compared to $12.2 million in Q1 2011 reflecting a larger fleet combined with improved pricing.  Equipment utilization for USCS' Frac Flowback division was higher in the current quarter as the 26% increase in the average number of available units correlated to an increase of 31% in the number of days.  The increase in revenue translated into a 73% increase in gross margin to $7.2 million in Q1 2012 from $4.2 million in Q1 2011.  Gross margin percentage of 34% in Q1 2012 was consistent with the 34% in Q1 2011, but lower than the 42% recognized in Q4 2011.  The improved pricing for USCS Frac Flowback services in Q1 2012 was offset by an increase in labour and mobilization costs associated with relocating crews and equipment from regions focusing on "dry" natural gas to regions with an oil and liquids rich natural gas focus.  Cost increases also resulted from renting auxiliary equipment for certain horizontal applications from third parties.  Equipment required to eliminate these rentals was scheduled to be received at the end of 2011 but is now expected to be received later in 2012 due to vendor delays.

Wireline

USCS Wireline revenues increased by $2.6 million (50%) to $7.8 million in Q1 2012 compared to $5.2 million in Q1 2011.  The higher revenues primarily reflected the higher activity levels in North Dakota and increased equipment utilization as the number of jobs per unit increased to 43.7 in Q1 2012 compared to 31.8 in Q1 2011.  The increase in revenue in Q1 2012, however, did not translate to growth in the division's gross margins which were at break-even levels.  Start-up costs incurred during Q1 2012 related to new bases in Colorado, Oklahoma and New Mexico combined with costs to shut down a base located near Pennsylvania eroded the growth in gross margins expected from the increase in revenues.

SG&A expenses incurred by the USCS division in Q1 2012 of $2.4 million represented 8.4% of revenue which is an improvement over the 9.6% recognized in Q1 2011.  USCS management continues to monitor SG&A expense levels in relation to anticipated operating activity.

Outlook

Pure's USCS segment is responding to the reduced "dry" natural gas drilling and completion activity in some of its operating areas by relocating equipment and crews to areas where drilling for oil and liquids rich natural gas is on the rise.  Operating bases started up during Q4 2011 and Q1 2012 (in Colorado, Oklahoma and New Mexico) are gaining traction in their local markets with increased activity levels experienced in the initial part of Q2 2012.  USCS' short-term focus is on improving gross margins for its Wireline division through:

• Increasing customer diversification in existing regions where activity is dependent on a few major customers by strengthening its sales team with the hiring of local experienced personnel.
• Establishing a significant sales presence in regions where new operating bases have recently been started up.

Depreciation and Amortization Expense

Depreciation and amortization expense increased to $4.6 million in Q1 2012 from $3.4 million in Q1 2011.  This reflects an increase in the average net book values of property and equipment from $90.0 million in Q1 2011 to $127.1 million in Q1 2012.

Finance Costs

Finance costs of $0.3 million in Q1 2012 are slightly higher than the $0.2 million recognized in Q1 2011.  The increase reflects an increase in the average long-term debt balance of $26.8 million in Q1 2012 compared to the $19.0 million in Q1 2011, offset by a reduction in interest rates related to Pure's finance lease liabilities and its US debt facilities.

Other Expenses (Income)

Other expenses in Q1 2012 are comprised of a $0.4 million foreign exchange loss and a $0.1 million loss on sale of property and equipment.  The foreign exchange loss in Q1 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.  Repayment terms were formalized for this debt on August 1, 2011.  As a result of the formalized repayment plan, foreign exchange gains or losses related to this debt after August 1, 2011 are recognized in net earnings rather than accumulated other comprehensive income ("AOCI").  The Q1 2012 foreign exchange losses recorded by Pure USA were a result of the weakening in the US dollar relative to the Canadian dollar from December 31, 2011 (where 1 USD = $1.017 CDN) to March 31, 2012 (where 1 USD = $0.9975 CDN).

INCOME TAX EXPENSE

Pure's total income tax expense in Q1 2012 of $4.6 million on net earnings before income taxes of $14.8 million results in a blended Canadian/US effective income tax rate of approximately 31%.  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 reduction in the blended effective income tax rate in Q1 2012 from the rate for calendar year 2011 (37%) is a result of federal income tax rate reductions in Canada for 2012 combined with the impact of a higher percentage of total income earned in the lower rate Canadian jurisdiction in Q1 2012.

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 which affect the cash flow of the Corporation's customers and their ability to obtain debt and equity financing.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2012, Pure's working capital exceeded long-term debt by $10.3 million, which was an $8.4 million improvement from the December 31, 2011 amount.  The improvement during Q1 2012 primarily reflects funds flow from operations of $20.4 million, offset by net capital expenditures of $10.1 million (of which $1.6 million relates to net additions financed through leases) and a dividend payment of $2.2 million.

Pure incurred capital expenditures (excluding vehicles financed through leases) of $8.9 million which related primarily to:

CCS

• 4 Frac Flowback units and auxiliary equipment.
• 1 Wireline unit refurbishment and auxiliary Wireline equipment.
• Progress payments for auxiliary Frac Flowback and Wireline equipment.

USCS

• 2 Wireline units and progress payments for 2 additional Wireline units.
• Progress payments for 2 Frac Flowback units.
• Progress payments for auxiliary Frac Flowback equipment to replace equipment currently rented from third party providers.

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

At March 31, 2012, Pure had aggregate credit facilities from its Canadian and US lenders of approximately $67 million (Canada - $45 million plus US - $22 million).  The Canadian credit 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 US credit 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.

The debt covenants for both the Canadian and US credit 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 March 31, 2012.

The Corporation believes that its available credit 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 Pure's services.  Management continues to monitor its capital and operational spending programs in response to these market conditions.

SHARE CAPITAL

As at May 9, 2012, the Corporation had 24.4 million shares outstanding and 2.0 million options outstanding, of which 0.6 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.

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; the integration of assets and personnel from acquisitions; 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.

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