Pason Reports First Quarter 2012 Results

CALGARY, May 1, 2012 /CNW/ - Pason Systems Inc. (TSX: PSI) announced today its 2012 first quarter results.

Performance Data

President's Message

Pason had a very good first quarter in 2012. Solid operational performance and favourable market conditions generated earnings for the quarter of $29.5 million and earnings per share of $0.36.

Despite very low natural gas prices, drilling activity in the United States and Canada increased 13% to 224,848 industry days with an average rig count of 2,471, up 12% from the first quarter in 2011. This increase was driven by activity in shale bearing oil deposits and renewed interested in conventional oil formations drilled horizontally. Pason's total revenue for the quarter was $111.7 million, a 32% increase over 2011. All product categories generated growth rates above drilling industry activity with Software and Total Gas System/Gas Analyzer showing the highest growth rates with 90% and 44% respectively.

The software category includes revenue generated through DataHub updates with LiveData (enhanced Live Rig View), specialized software (e.g., Directional System, WellView) and data delivery (WITSML Service) products. 84% of US customers using the Pason DataHub and 98% of Canadian customers are currently subscribing to LiveData. Growth in the Total Gas System/Gas Analyzer category is driven by the deployment of the new Pason Gas Analyzer that started in North America toward the end of last year and continued throughout the first quarter of 2012. The Pason Gas Analyzer is a step-change in gas detector reliability and gas analysis capability. It provides on-demand real-time compositional analysis of hydrocarbons and CO₂. Market reception for the new system continues to be very positive.

EBITDA increased 43% to $64.1 million, and earnings rose 66% to $29.5 million. EBITDA, as a percentage of revenue, was 57% in 2012 compared to 53% in 2011. We were able to grow revenue, EBITDA and earnings at a higher percentage than North American drilling activity by a combination of increased product penetration, price increases and because we were able to effectively control costs.

United States

United States drilling industry days increased 17% while our largest business unit was able to grow revenue 39% to $56.4 million. On average, 1,107 US land rigs were operating Pason equipment during the first quarter of 2012 compared to 990 in 2011.  Revenue growth above industry day growth was achieved with higher product penetration and a price increase at the beginning of 2012 resulting in a 14% increase of average daily revenue generated on each rig with a Pason product installed to US$523 in 2012 from US$459 in 2011. Software, the Gas Analyzer and Mobilization achieved above-average revenue growth.

Our calculated US market share for the first quarter of 2012 was 57%, up 1.5% from the previous quarter and down 2% from 2011. However, we believe our actual market share is understated by almost 3% because we are tracking EDR rental days under the new partial day billing method while industry days are still calculated on a 24 hour basis.

Operating costs increased 35% and depreciation and amortization increased by 44% compared to the 39% increase in revenue. United States revenue and costs include 3PS Inc., the US-based company that was acquired in August of 2011. In addition to the inclusion of 3PS, higher operating costs are driven by an increase in field technician related costs as we keep pace with rapid rig movements away from dry gas plays to oil plays and continued strengthening of our US sales and marketing capabilities. Higher depreciation charges are driven by the accelerated depreciation of our TGAS and EDR systems as the new Gas Analyzer is being rolled out and as we continue to pursue a major upgrade of our EDR system.

As a result, our US business unit was able to generate an operating profit of $27.7 million, an increase of 41%. EBITDA, as a percentage of revenue of the business unit, was 63% in 2012 compared to 62% in 2011.

With a strengthened sales and marketing organization, ongoing emphasis on outstanding field service capabilities, continuous improvements to existing products and new product introductions we expect to maintain our trajectory of growing revenue per rig going while being more aggressive in growing market share in the United States going forward.

Canada

The Canadian business unit had a good quarter despite the fact that unseasonably warm temperatures in March led to an early spring break-up. Revenue for the quarter was $46.5 million, up 25% from the previous year, compared to an increase of 2% in Canadian drilling industry days. On average, 509 Canadian land rigs were operating Pason equipment compared to 512 rigs the year before. Market share remained in the mid-90s. Revenue growth above industry day growth was achieved with a price increase in October 2011 and better product penetration. The average daily revenue generated on each rig with a Pason product installed grew to $994 in the first quarter of 2012 from $793 in 2011.

Operating costs decreased by 11% and depreciation and amortization increased by 27% compared to the 25% increase in revenue. Lower operating costs were driven by effective cost controls and the fact that in 2011 we incurred significant legal costs associated with the continuing automatic driller lawsuit. Higher depreciation charges were recorded, as in the United States business unit, by the accelerated depreciation of our TGAS and EDR systems.

As a result, our Canadian business unit was able to generate an operating profit of $29.9 million, an increase of 44%. EBITDA, as a percentage of revenue of the business unit, was 79% in 2012 compared to 71% in 2011.

Going forward, we expect to maintain market share in Canada while continuing to grow the average daily revenue generated on each rig with a Pason product installed.

International

Our International business unit includes our businesses in Latin America, Australia and Offshore. International revenue for the quarter increased 16% over the prior quarter and 23% over the first quarter 2011 to $8.7 million. This represents 8% of Pason's total revenue. The most significant gains were generated in Mexico, Brazil, Argentina and Australia. Operating costs were up 12% and depreciation and amortization were up 6%. As a result, the International business unit was able to generate an EBITDA of $2.5 million and an operating profit of $1.4 million.

With the integration issues behind us, the International business unit is poised to realize accelerated growth and improved profitability.

Outlook

Very low natural gas prices and volatile crude oil pricing in North America are affecting E&P operator cash flows going forward. With these cash flows heavily influencing E&P capital spending we expect to eventually see a reduction in overall North American drilling activity. However, for the remainder of 2012 we anticipate growth in oil directed drilling to offset further declines gas drilling and we expect to see moderate growth for Pason in 2012 compared to 2011.

Our capital expenditure budget for the next 12 months is $102 million with $70 million directed towards equipment that can generate incremental revenue, $20 million for maintenance capital and $12 million for capitalized R&D. The $70 million earmarked for growth includes capital for the new Pason Gas Analyzer, the Torque and Tension Sub and new components for the EDR system as we pursue a major upgrade of our EDR system. We expect the new Pason Gas Analyzer to completely replace the existing Total Gas System by the end of 2012, while gaining market share and generating higher revenue per unit. In addition, we expect the new Torque and Tension Sub rental fleet to start contributing to revenue towards the end of the year.

Our cash generating capacity and our cash position at $112.4 million are strong enough to comfortably cover new business development, planned equipment upgrades and our semi-annual dividend, which the Board of Directors increased to $0.22.

With the industry's leading field services organization, outstanding technical support, a competitive  product suite and a promising R&D project pipeline, Pason is well positioned to capitalize on growth opportunities in 2012 and beyond.

(singed)

Marcel Kessler
President and Chief Executive Officer
May 1, 2012

Management's Discussion and Analysis

The following discussion and analysis has been prepared by management as of May 1, 2012 and is a review of the financial condition and results of operations of Pason Systems Inc. (Pason or the Company) based on International Financial Reporting Standards (IFRS) and should be read in conjunction with the condensed consolidated interim financial statements and accompanying notes.

Certain information regarding the Company contained herein may constitute forward-looking statements under applicable securities laws. Such statements are subject to known or unknown risks and uncertainties that may cause actual results to differ materially from those anticipated or implied in the forward-looking statements.

All financial measures presented in this quarterly report are expressed in Canadian dollars unless otherwise indicated.

Overview of the 2012 First Quarter

Overall Performance

Electronic Drilling Recorder

Consistent with prior years, the Pason Electronic Drilling Recorder (EDR) remains the Company's prime product.  The EDR provides a complete system of drilling data acquisition, data networking and drilling management tools and reports at both the wellsite and customer offices.  The EDR is the base product from which all other rigsite instrumentation products are linked. By linking these products, a number of otherwise redundant elements such as data processing, display, storage, and networking are eliminated.  This ensures greater reliability and a more robust system of instrumentation for the customer. The EDR generated a 31% increase in revenue for the first quarter of 2012 compared to 2011. These increases are due to increased rig activity in the Company's major markets, price increases in both Canada and the United States (US), and expanding demand by customers for EDR peripheral devices.

During the first three months of 2012, the Pason EDR was installed on 94% of all active land rigs in Canada and 57% of the land rigs in the US.

The method by which the Company bills its customers continues to impact the US market share figures.  Previously, the Company billed for an entire day's worth of rentals regardless of whether the equipment was activated for the entire 24-hour period or not. To address customer concerns, the Company implemented a change to bill in increments, recognizing that during the initial start up or tear down of a rig the equipment is only utilized a portion of the day. The Company is tracking EDR rental days under this new partial billing method but the industry days that are reported are still calculated on a 24-hour basis. The Company's calculated US market share for 2012 was 57% but management believes this is understated by approximately three percentage points due to the inconsistency between Pason's method of tracking rental days and how the industry calculates drilling days.

In Canada, starting in 2011, the industry drilling day recognized these partial days and brought the method of activity reporting in line with how the Company bills.

Pit Volume Totalizer

The Pit Volume Totalizer (PVT) is Pason's proprietary solution for the detection and early warning of "kicks" that are caused by hydrocarbons entering the wellbore under high-pressure and expanding as they migrate to the surface.  Revenue increases for this product were in line with the rise in drilling days in North America.  During the first quarter of 2012, the PVT was installed on 99% of rigs with a Pason EDR in Canada and 70% in the US, compared to 98% and 69%, respectively, in 2011.

Communications

Pason's communications rental revenue is derived from the Company's automatic aiming satellite system.  This system provides high-speed wellsite communications for email and web application management tools.  Pason displays all data in standard forms on its Internet DataHub, although if customers require greater analysis or desire to have the information transferred to another supplier's database, data is available for export from the Pason DataHub using WITSML (a specification for transferring data amongst oilfield service companies, drilling contractors and operators).  The Company continues to complement its satellite equipment with High Speed Packet Access (HSPA), a high-speed wireless ground system that requires lower capital cost, less service, and lower cost per internet kilobyte, benefiting company margins. In Canada, HSPA has been installed on most rigs, and the majority of the rigs running will benefit from the investment in HSPA given the growth in cellular coverage. In the US, field coverage tests for HSPA are continuing.

Software

DataHub is the Company's data management system that collects, stores and displays drilling data, reports and real-time information from drilling operations. DataHub provides access to data through a number of innovative applications or services including:

• Enhanced Live Rig View, which provides advanced data viewing, directional drilling and 3D visualization of drilling data in real-time via a web browser.
• Mobile Viewer and Pason Mobile, which allows users to access their data on mobile devices including iPhone, iPad and Blackberry.
• WITSML, which provides seamless data sharing with third party applications enhancing the value of data hosted by Pason.
• Additional specialized software.

During the first quarter of 2012, 98% of the Company's Canadian customers were using all or a portion of the functionality of the DataHub and 84% of customers in the US. The revenue generated from customers using the applications included with the DataHub rose 90% over the first three months of 2011.

Total Gas System and Gas Analyzer

The Pason Total Gas System (TGAS), which is being replaced by the Company's new Gas Analyzer, measures the total hydrocarbon gases (C1 through C5) exiting the wellbore, and then calculates the lag time to show the formation depth where the gases were produced.  The new Gas Analyzer increases this functionality to include the actual composition of the gas, much like a gas chromatograph, and further calculate geologic rations from the gas composition to assist in indicating the type of gas, natural gas liquid, or oil in the formation. For the first three months of 2012, the Gas Analyzer generated $4.8 million of revenue compared to $2.8 million for TGAS. The Company is ahead of schedule on this switch-out and is realizing increased product penetration for the Gas Analyzer as compared to TGAS in both Canada and the US. For the first quarter of 2012 both of these systems combined were installed on 47% of Canadian and 18% of US land rigs operating with a Pason EDR system.  The combined market penetration of both products in Canada is an increase of approximately 9% points over 2011 levels while the US has seen an increase of 2% points.

Automatic Driller

Pason's Automatic Driller (ADR) is used to maintain constant weight on the drill bit while a well is being drilled. During the first three months of 2012, Pason's ADR was installed on 77% of Canadian and 50% of US land rigs operating with a Pason EDR system, compared to 74% and 44%, respectively, in 2011.

Hazardous Gas Alarm System

Pason's Hazardous Gas Alarm System (HGAS) monitors both lower explosive limit gases (LEL) and H₂S where both readings and an alarm system are integrated with the EDR. The Hazardous Gas Alarm System was installed on 20% of Canadian rigs in the first quarter of 2012, up from 16% for the same period in 2011, and 8% of US land rigs operating with a Pason EDR system, an increase from 6% in 2011.

Discussion of Operations

United States Operations

US segment revenue increased by 39% in the first quarter of 2012 over the 2011 comparable period (37% increase when measured in US dollars). Included in the first quarter 2012 figures is $3.2 million of revenue generated from the sale of tensors and other products by 3PS, Inc., the US-based company acquired in August of 2011.

Revenue from the rental of instrumentation equipment increased 31% (29% in USD) for the first quarter of 2012 from 2011 levels, which compared favourably with US drilling industry days that were up 17% over the first three months of 2011.

Revenue was impacted by the following factors:

• An increase in EDR rental days of 13% over the first quarter of 2011.
• Better pricing. Prices increased at the beginning of 2012. The net impact of average weighted pricing, when comparing the first three months of 2012 to 2011, was to increase revenue by approximately 7% in USD.
• More products on each rig.  Revenue was increased by more products on each rig, primarily with gains in ADR rentals and customer acceptance of the Company's live rig view and rig data software. Increased product penetration contributed to approximately a 9% revenue gain for 2012.

The factors explained above resulted in the US segment being able to realize an increase in revenue per EDR day during the first quarter from 2011 levels of $64 (USD$64) to $523 (USD$523).

In the first quarter of 2012, revenue per industry day was $300 (USD$300) compared to $268 (USD$272) in 2011 and $206 (USD$198) in 2010.

The majority of the increase in "Other" revenue relates to sales realized by 3PS, Inc.

Segment profit, as a percentage of revenue, was 49% for the first quarter of 2012, compared to 49% realized in 2011 and 18% in the first quarter of 2010.

The benefit of the increase in revenue for the first quarter of 2012 was reduced by increases in operating and depreciation costs from 2011 levels:

• An increase in field technician related costs, to support the increase in rig activity, of $2.2 million mostly attributable to increased staff levels and the costs associated to support such an increase, including vehicle expense and consumable supplies.
• An increase in support costs of $0.5 million as the US business unit continues to strengthen its sales and marketing presence.
• An increase in the depreciation and amortization charges relating to the accelerated depreciation on the Company's TGAS and EDR systems. The TGAS system is being replaced with the Gas Analyzer, while a portion of the Company's base EDR system will become obsolete as a result of the EDR evolution project. This contributed to an increase in depreciation costs over 2011 levels of approximately $1.9 million.

Canadian Operations

Canadian segment revenue rose 25% for the three months ended March 31, 2012, compared to the first three months of 2011. This
increase is significantly higher than the 2% increase in the number of Canadian drilling industry days for the same period.

The improvement in revenue for quarter was due to:

• A slight increase in EDR rental days for the quarter compared to the corresponding first quarter of 2011.
• Improved pricing. A price increase was implemented in the fourth quarter of 2011. The net impact of average weighted pricing, when comparing the first quarter of 2012 to 2011, was an increase to revenue of approximately 14%.
• More products on each rig. Revenue was increased by more products on each rig, primarily with gains attributable to greater customer usage of software applications included in the DataHub and increased adoption of the Company's Gas Analyzer system compared to the TGAS system. Increased product penetration contributed to approximately a 10% revenue gain for 2012.

The factors explained above resulted in:

• First quarter revenue per industry day of $935 in 2012 compared to $770 in 2011 and $680 in 2010.
• An increase in revenue per EDR day during the first three months of 2012 compared to 2011 of 25% ($201) to $994.

The segment profit for the first quarter of 2012 of $29.9 million is significantly higher than the $20.8 million profit in 2011 and a significant improvement over the $14.8 million profit in 2010. During the first quarter of 2012, the Canadian business unit was able to leverage its fixed cost structure as recurring operating costs (excluding depreciation and amortization) increased by only $0.5 million while revenue increased $9.4 million.

Other factors impacting the first quarter of 2012 results include:

• The month of March, 2012, saw unseasonably warm temperatures which brought on an early spring break-up, resulting in 2,500 less EDR days in March 2012 compared to March 2011, resulting in lower revenue for the first quarter than originally anticipated.
• An increase in the depreciation and amortization charges relating to the accelerated depreciation on the Company's TGAS and EDR systems of approximately $1.2 million.
• In the first three months of 2011 the Canadian business unit incurred $1.8 million in costs associated with the Automatic Driller lawsuit. These costs were insignificant in the first quarter of 2012.

International Operations

Revenue in the International operations improved 23% in the first quarter of 2012 from the same period in 2011, with increases in all of the Company's major markets. Operating profit increased by $1.0 million, with the most significant gains occurring in Mexico, Brazil, and Australia.

A number of factors influenced these results:

• Increased rig activity in two of the Company's largest South American operations, Argentina and Brazil, contributed to an increase in revenue of $0.8 million and resulted in operating profit gains of $0.5 million.
• The Company realized double digit growth in Mexico for both revenue and operating profit as a result of a 75% increase in the number of rigs deploying the Company's equipment.
• Results in Australia continue to improve with the operation posting an increase in revenue for the first quarter of 2012 of 114% over 2011 levels and an increase in EBITDA of almost $1.0 million, as the business continues to benefit from increased drilling activity in Australia.
• The Company's International segment includes our Offshore business unit which generated a 252% increase in its rental revenue for the first three months of 2012 over the same period in 2011 as drilling activity continues to increase in the Gulf of Mexico and internationally plus the deployment of Pason hardware onto offshore drilling rigs. The Offshore business unit continues to wind-down its sales of legacy systems, thus the reason for the drop in "Other" revenue.

Q1 2012 versus Q1 2011

The active rig count in both Canada and the US improved over the first quarter of 2011, resulting in gains in all of the Company's key metrics. Revenue increased 32%, while EBITDA increased by 43% and funds flow from operations was up 32%.

Net earnings increased to $29.5 million or $0.36 per share compared to $17.8 million or $0.22 per share in the first quarter of 2011. The first quarter consolidated results, when compared to 2011 figures, were impacted by the following significant items:

• Increase in depreciation expense of $4.0 million in the first three months of 2012 compared to 2011 amounts, attributable mostly to increased capital expenditures and the accelerated depreciation on the Company's TGAS and EDR systems.
• In the first quarter of 2011 the company incurred approximately $1.6 million in legal costs relating to the trial of the ADR lawsuit.
• Increase in research and developments costs in the first quarter of 2012 of $1.4 million compared to same time period in 2011 as the Company hires additional staff to support its EDR evolution project.
• Corporate services costs primarily relate to personnel located in the corporate headquarters who directly support the Company's field operations and perform other corporate functions.  The increase in corporate operating expenses from 2011 levels is mainly due to higher expenses as a result of more resources dedicated to the Company's growth strategy.
• Stock-based compensation increased by $1.0 million compared to the first quarter of 2011 due to an increase in the Company's stock price, which impacts the pricing under the Black-Scholes pricing model.

Q1 2012 versus Q4 2011

The Company's first quarter is usually its strongest due in part to the seasonality of the Canadian market while the fourth quarter is generally the second strongest quarter. Revenue rose 14% to $111.7 million, while funds flow from operations was up 23% to $51.7 million. Earnings decreased 7% compared to the fourth quarter of 2011 due in most part to the lower effective tax rate in the fourth quarter of 2011 as a result of a change in the relative amounts of taxable income earned in each respective tax jurisdiction combined with prior year adjustments flowing through the fourth quarter 2011 provision. Earnings before tax increased by 19% compared to the prior quarter, which is consistent with the increase in the key operating metrics of the Canadian and US business units.

This improvement in operations was primarily driven by the Canadian segment, which realized an operating profit of $29.9 million compared to a profit of $22.1 million in the last quarter of 2011. This is mostly attributable to an increase in drilling days of 16% and the benefit of a full quarter of the price increase that was put in place in the fourth quarter of 2011.

In addition to the increase in the Canadian business unit, the Company's International segment realized an operating profit of $1.4 million versus a loss of $3.9 million in the fourth quarter of 2011. This improvement is a direct result of an improvement in the operating results in the Company's Latin America and Australia markets as well in the fourth quarter of 2011 the Company incurred integration and logistic costs in Latin America of $1.5 million.

Also impacting the comparison to 2011 fourth quarter results are the following items:

• In the fourth quarter of 2011 an impairment loss was recorded against the Company's US water treatment assets of $2.8 million.
• An increase in stock-based compensation expense of $9.1 million due to an increase in the Company's stock price during the first three months of 2012.
• Foreign exchange loss recorded in the first quarter of 2012 of $1.7 million compared to a loss of $0.7 million in the fourth quarter of 2011.

First Quarter Conference Call and Annual General Meeting

Pason will be conducting a conference call for interested analysts, brokers, investors and media representatives to review its first quarter results at 9:00 a.m. (MDT) Thursday, May 3, 2012.  The conference call dial-in number is 1-888-231-8191 or 1-647-427-7450.  You can access the seven-day replay by dialing 1-855-859-2056 or 416-849-0833, password 72782560.

Pason Systems Inc. is a leading provider of instrumentation systems to land-based and offshore drilling rigs worldwide. The company's rental solutions, which include data acquisition, wellsite reporting, remote communications, and web-based information management, maximize rig uptime, improve work efficiency, and minimize operating costs. Pason's common shares trade on the Toronto Stock Exchange under the symbol PSI.

Additional information, including the Company's Annual Report for the year ended December 31, 2011, is available on SEDAR at www.sedar.com or on the Company's website at www.pason.com.

Shareholders are also invited to attend the Company's Annual General Meeting on Tuesday, May 8, 2012, at 3:30 pm (MST) at the offices of Pason Systems Inc., 6120 Third Street S.E., Calgary, Alberta.

Condensed Consolidated Interim Financial Statements

Condensed Consolidated Interim Balance Sheets

Condensed Consolidated Interim Statements of Operations

Condensed Consolidated Interim Statements of Comprehensive Income

Condensed Consolidated Interim Statements of Changes in Equity

Condensed Consolidated Interim Statements of Cash Flows

The Company operates in three geographic segments: Canada, the United States, and Internationally (Latin America, Offshore, and the Eastern Hemisphere). The amounts related to each segment are as follows:

Pason Systems Inc.

Pason Systems Inc. is a leading provider of instrumentation systems to land-based and offshore drilling rigs worldwide. The company's rental solutions, which include data acquisition, wellsite reporting, remote communications, and web-based information management, maximize rig uptime, improve work efficiency, and minimize operating costs. Pason's common shares trade on the Toronto Stock Exchange under the symbol PSI.

Certain information regarding the Company contained herein may constitute forward-looking information under applicable securities law.  The words "anticipate", "expect", "believe", "may", "should", "will", "estimate", "project", "outlook", "forecast" or other similar words are used to identify such forward-looking information and statements.  Forward-looking statements in this document may include statements, express or implied regarding the anticipated business prospects and financial performance of Pason; expectations or projections about future strategies and goals for growth and expansion; expected and future cash flows and revenues; and expected impact of future commitments.  These forward-looking statements are based upon various underlying factors and assumptions, including the state of the economy and the oil and gas exploration and production business, in particular; the Company's business prospects and opportunities; and estimates of the financial and operational performance of Pason.

Forward-looking information and statements are subject to known or unknown risks and uncertainties that may cause actual results to differ materially from those anticipated or implied in the forward-looking information and statements.  Risk factors that could cause actual results or events to differ materially from current expectations include, among others, the ability of Pason to successfully implement its strategic initiatives and whether such strategic initiatives will yield the expected benefits, the operating performance of Pason's assets and businesses, the price of energy commodities, competitive factors in the energy industry, changes in laws and regulations affecting Pason's businesses, technological developments, and general economic conditions.

Readers are cautioned not to place undue reliance on forward-looking statements as there can be no assurance that the plans, intentions or expectations upon which they are placed will occur.  Such forward looking statements, although considered reasonable by management as of the date hereof, may prove to be incorrect and actual results may differ materially from those anticipated.  Forward-looking statements contained in this press release are expressly qualified by this cautionary statement.

Additional information on risks and uncertainties and other factors that could affect Pason's operations or financial results are included in Pason's reports on file with the Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com or through Pason's website www.pason.com).  Furthermore, any forward looking statements contained in this news release are made as of the date of this news release, and Pason does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as expressly required by securities law.