TSX Symbol: SES
All amounts are expressed in U.S. dollars unless otherwise noted
CALGARY, May 1 /CNW/ - Saxon Energy Services Inc. ("Saxon" or the "Corporation") is pleased to announce its first quarter results.
For the first quarter of 2008 the Corporation generated $72.2 million in revenue and net earnings of $5.1 million ($0.06 per diluted share) compared to revenue of $54.9 million and net earnings of $8.0 million ($0.10 per diluted share) in the first quarter of 2007. In the first quarter of 2008 the Corporation recorded a provision of $1.5 million related to an assessment of penalties for prior years' value added tax in Venezuela which the Corporation believes is recoverable from a third party (see discussion below). Excluding this exceptional provision, net earnings would have been $6.6 million ($0.08 per diluted share).
Highlights:
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Three Months Ended March 31
($000's, except per share and
operating data) 2008 2007 %
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Revenue 72,160 54,925 31
EBITDAS(1) 18,661 19,029 (2)
Operating earnings(2) 11,288 13,819 (18)
Net earnings 5,118 8,017 (36)
Cash flow from operations 15,914 14,389 11
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EBITDAS per share ($)(1)
Basic 0.22 0.23 (4)
Diluted 0.22 0.23 (4)
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Earnings per share ($)
Basic 0.06 0.10 (40)
Diluted 0.06 0.10 (40)
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Weighted average shares (000's)
Basic 84,588 83,937 1
Diluted 85,107 84,176 1
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Revenue per operating day(3) 21.2 17.9 18
Operating days(4)(5) 3,407 3,074 11
Available days(5) 4,744 4,114 15
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Utilization 72% 75%
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Overview
Revenue for the first quarter of 2008 was $17.2 million (31%) higher than the first quarter of 2007. Operating days increased by 11%, driven by rig fleet expansion in the U.S. and Mexico and rig redeployments in South America, offset in part by the reduction in Canadian activity due to soft market conditions. Revenue per operating day was 18% higher than the first quarter of 2007.
Operating earnings did not reflect the $17.2 million increase in revenue. Increases in activity and revenue per operating day added $11.4 million in revenue and $4.4 million in operating earnings but the effect of these was more than offset by the following:
- A provision of $1.5 million for the assessment of penalties relating
to prior years' value added tax in Venezuela (see discussion below);
- An increase in major repairs of $1.9 million in the quarter mainly
relating to planned maintenance in Mexico and Venezuela ($600,000);
unplanned repairs on topdrives in the U.S. and Colombia
($1.0 million); and unexpected problems in Canada ($300,000);
- Reimbursable revenue increased by $4.6 million but this had little or
no margin associated with it;
- A foreign exchange loss of $1.2 million mainly relating to the loss
on translation of net monetary assets in Canada ($400,000) and net
monetary liabilities in Colombia ($700,000);
- General and administrative costs grew by $900,000 year on year due to
the larger geographic footprint and the increased support at the
corporate office;
- Revenue increased by $1.6 million associated with the stronger
Canadian dollar and Colombian peso, but these exchange rate
variations also increased direct operating and general and
administrative costs by $2.0 million, resulting in a net loss of
$400,000; and
- The Corporation recorded $400,000 of expenses associated with a
potential sale of the Corporation to Schlumberger Limited and First
Reserve Corporation which was announced on April 21, 2008.
South America
Three Months Ended March 31
Selected operating data 2008 2007 %
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Revenue 32,555 22,565 44
EBITDAS 8,633 7,308 18
Operating earnings 5,834 5,396 8
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Revenue per operating day 22.7 16.4 38
Operating days
Colombia 592 450 32
Peru 182 180 1
Ecuador 408 566 (28)
Venezuela 253 180 41
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South America 1,435 1,376 4
Utilization
Colombia 100% 100%
Peru 100% 100%
Ecuador 50% 70%
Venezuela 93% 60%
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South America 77% 79%
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Revenue for the first quarter of 2008 was $10.0 million (44%) higher than the first quarter of 2007 with all countries at or near full utilization with the exception of Ecuador. Operating days were 59 above the first quarter of 2007 with additional activity from two (1.5 net) rigs deployed to Colombia that were idle or moving during the first quarter of 2007 and nearly full utilization on a rig in Venezuela that was idle in the prior year quarter. Revenue per operating day in the first quarter of 2008 was 38% higher than the first quarter of 2007.
Operating earnings did not reflect the $10.0 million increase in revenue. The increase in activity and revenue per operating day added $6.7 million in revenue and $3.2 million in operating earnings but was offset by the following:
- A provision of $1.5 million for the assessment of penalties relating
to prior years' value added tax in Venezuela (see discussion below);
- Major repair and maintenance expenditures of $800,000 including
topdrive issues in Colombia ($600,000) and scheduled rig repairs in
Venezuela ($200,000);
- The loss on translation of Colombian peso net monetary liabilities
($700,000);
- Revenue increased by $800,000 associated with the stronger Colombian
peso, but the exchange rate variation also increased direct operating
expenses by $900,000. The impact of entering into forward foreign
exchange contracts on the Colombian peso prevented a further $300,000
loss; and
- Reimbursable revenue increased by $2.4 million but this had little or
no margin associated with it.
On April 17, 2008 the Corporation's Venezuelan subsidiary received an assessment from the Venezuelan tax authority of $2.8 million (6.1 million bolivar fuerte) for penalties related to the late payment of value added tax during the period from 2003 to 2006. The Corporation believes there are reasonable legal grounds to challenge the calculation of the penalty amounts and that the assessed amount is overstated. In the first quarter of 2008 the Corporation recorded a provision of $1.5 million, based on consultation with tax and legal advisors, and on management's initial estimate of the potential liability. The Corporation's initial estimate is that the liability could range between $1.1 million and $2.8 million. Substantially all of the assessed amount relates to periods prior to the Corporation's acquisition of the Venezuelan entity. The Corporation has consulted with legal counsel who has indicated that the representations and tax indemnities contained in the purchase and sale agreement related to the acquisition of the Venezuelan entity are still in force and that the Corporation has a valid claim against the vendor. The Corporation has notified the vendor of its claim under the indemnity provisions and intends to pursue the recovery of any amount paid to the Venezuelan tax authority related to pre-acquisition periods.
North America
Three Months Ended March 31
Selected operating data 2008 2007 %
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Revenue 39,571 32,360 22
EBITDAS 13,349 13,330 NM(6)
Operating earnings 9,192 10,129 (9)
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Revenue per operating day 20.1 19.1 5
Operating days
United States 1,260 836 51
Mexico 461 368 25
Canada 251 494 (49)
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North America 1,972 1,698 16
Utilization
United States 75% 70%
Mexico 99% 100%
Canada 34% 61%
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North America 69% 72%
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Revenue for the first quarter of 2008 was up $7.2 million (22%) from the first quarter of 2007, driven by the impact of 274 more operating days ($4.7 million) and higher reimbursable revenues ($2.2 million). Operating days rose 16% due to the deployment of seven new rigs in the U.S. (including five ATS(R) rigs) since the first quarter of 2007 and three (1.5 net) new ATD(R) rigs into Mexico. However, the positive effect of these new rigs was dampened by the significant decline in Canadian activity as soft market conditions reduced operating days and dayrates from the prior year period. Excluding the effect of low margin reimbursable revenue, revenue per operating day was flat with the first quarter of 2007. The effect of the higher dayrates on newly deployed rigs in the U.S. was entirely offset by the lower Canadian dayrates and the fact that certain rigs in Mexico earned reduced dayrates on standby mode while awaiting redeployment to new projects.
Operating earnings for the first quarter of 2008 were $900,000 (9%) lower than the first quarter of 2007 and decreased as a percentage of revenue (2008: 23%; 2007: 31%). The increase in activity added $4.7 million in revenue and $1.2 million in operating earnings despite the reduction in activity and pricing in Canada. Other factors that impacted the change in quarter over quarter operating earnings included the following:
- One time gains in the prior year quarter ($700,000);
- An increase in major repairs of $1.1 million in the first quarter of
2008 related to scheduled maintenance between contracts in Mexico
($400,000), topdrive issues in the U.S. ($400,000); and unexpected
repairs in Canada ($300,000);
- Reimbursable revenue increased by $2.2 million but this had little or
no margin associated with it; and
- Higher property taxes and office expenses due to the larger footprint
in the U.S. added $500,000 to expenses compared to the prior year
quarter.
Corporate and Other
Three Months Ended March 31
Selected operating data 2008 2007 %
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Revenue 34 - NM
EBITDAS (3,321) (1,609) 106
Operating earnings (3,738) (1,706) 119
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Compared to the prior year quarter Corporate and Other expenses have increased as the corporate office has added resources to support its growing international operations ($700,000). These expenses were also negatively impacted by the increased strength of the Canadian dollar against the U.S. dollar ($300,000) and $400,000 of transaction costs related to its April 21, 2008 announcement. As a result of the Canadian dollar's depreciation against the U.S. dollar since December 31, 2007 this segment also recorded a foreign exchange loss of of $400,000 related to net monetary assets.
Income Taxes
The Corporation's effective tax rate increased to 39% in the first quarter of 2008 compared to 28% in the prior year. In the first quarter of 2008 the Corporation's operations were weighted more towards jurisdictions with higher statutory tax rates, particularly in the U.S. The effective tax rate was further affected in the first quarter of 2008 by the non-deductible provision for prior years' value added taxes in Venezuela and the fact that the value of the Canadian tax losses generated in the first quarter of 2008 were lower due to the utilization of a lower future tax recovery rate.
Other Financial Information:
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Working Capital
At March 31, 2008 the Corporation had working capital of $5.7 million compared to $18.2 million at December 31, 2007. The decrease is due mainly to the sale of a drilling rig in the first quarter of 2008 that was classified as a current asset at December 31, 2007, the result of an additional quarterly principal payment on the Corporation's term debt facility being classified to current liabilities (in June 2007 the Corporation received a principal repayment holiday on its term debt facility until May 2008 at which time principal repayments will restart in 11 quarterly installments) and due to the provision for prior years' value added tax in Venezuela.
Financing Activities
During the first quarter of 2008 the Corporation drew $3.0 million under its revolving credit facility and made $12.0 million in repayments. The Corporation also made $299,000 in scheduled repayments against its credit facility. The net repayments were funded through cash flow from operations and proceeds received on the sale of an idle drilling rig.
Investing Activities
During the three months ended March 31, 2008 the Corporation invested $10.4 million in property and equipment as follows:
- $7.5 million for expansion of the drilling rig fleet; and
- $2.9 million on various capital upgrades to the Corporation's
existing asset base.
Outlook
The Corporation has completed its previously announced rig deployment programs, having delivered its last ATS(R) rig to the U.S. in the first quarter of 2008. The Corporation now has an active rig fleet of 58 (52.5 net); 37 (32 net) in North America and 21 (20.5 net) in South America.
On April 21, 2008 the Corporation announced that it is in exclusive discussions with Schlumberger Limited and First Reserve Corporation with respect to a transaction whereby a corporation controlled by them with Saxon management participation, would acquire all of Saxon's outstanding shares for Cdn$7.00 per share. A Special Committee of the Board of Directors has been established and the Committee has agreed to negotiate exclusively with these parties until May 5, 2008. No acquisition agreement has been entered into and accordingly no assurance can be given that these discussions will lead to any firm offer being made to acquire the Corporation.
In view of the Corporation's discussions with Schlumberger Limited and First Reserve Corporation, there will be no conference call to discuss these results.
Notes:
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(1) Neither Earnings before interest, taxes, depreciation, amortization
and stock-based compensation ("EBITDAS") nor EBITDAS per share is a
recognized measure under Canadian Generally Accepted Accounting
Principles ("GAAP"). Management believes that in addition to cash
flow from operations and net earnings, EBITDAS is a useful
supplemental measure as it provides an indication of the operating
cash flow generated by the Corporation's principal business
activities. Readers should be cautioned that EBITDAS should not be
construed as an alternative to cash flow from operations or net
earnings determined in accordance with GAAP as an indicator of the
Corporation's performance. The Corporation's method of calculating
EBITDAS may differ from other companies and accordingly may not be
comparable to measures used by other companies. EBITDAS is calculated
as earnings before income taxes plus or minus loss or gain on
disposal of property and equipment, plus or minus financial expense
or income, plus or minus foreign exchange loss or gain, plus
depreciation and amortization plus stock-based compensation expense.
(2) Operating earnings is not a recognized measure under GAAP. Management
believes that in addition to net earnings, operating earnings is a
useful supplemental measure as it provides an indication of the
results generated by the Corporation's principal business activities
prior to consideration of how those activities are financed, how the
results are taxed in various jurisdictions, or how the results are
impacted by the accounting standards associated with the
Corporation's stock-based compensation plans. Investors should be
cautioned that operating earnings should not be construed as an
alternative to net earnings determined in accordance with GAAP as an
indicator of the Corporation's performance. The Corporation's method
of calculating operating earnings may differ from other companies and
accordingly may not be comparable to measures used by other
companies. Operating earnings is calculated as earnings before income
taxes plus or minus financial expense or income, plus stock-based
compensation expense.
(3) Excludes revenue generated in Corporate and Other.
(4) Operating days is not a recognized measure under GAAP. Management
believes that in addition to net earnings, operating days is a useful
supplemental measure as it provides an indication of the utilization
of the Corporation's asset base. The Corporation's method of
calculating operating days may differ from other companies and may
not be comparable to measures used by other companies. Operating days
is the total of all drilling, completion, workover, mobilization,
standby and other revenue days in the period.
(5) Net to the Corporation.
(6) Not measurable or meaningful "NM".
CONSOLIDATED BALANCE SHEETS
(Unaudited - $000's) March 31, December 31,
2008 2007
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Assets
Current assets:
Cash and cash equivalents 11,613 11,249
Accounts receivable 62,066 59,919
Prepaid expenses and deposits 2,071 3,703
Long-lived asset held for sale - 4,245
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75,750 79,116
Property and equipment 346,604 344,575
Other accounts receivable 2,596 2,570
Intangible assets 1,082 1,277
Goodwill 3,196 3,528
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429,228 431,066
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Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities 29,137 27,031
Income and other taxes payable 14,883 14,065
Current portion of long-term debt 26,020 19,805
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70,040 60,901
Long-term debt 62,288 77,644
Future income tax liability 1,010 361
Shareholders' equity:
Share capital 217,704 217,704
Contributed surplus 24,218 23,070
Retained earnings 47,787 42,669
Accumulated other comprehensive income 6,181 8,717
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53,968 51,386
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Total shareholders' equity 295,890 292,160
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429,228 431,066
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CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Three months ended March 31 (Unaudited - $000's,
except per share amounts)
2008 2007
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Revenue 72,160 54,925
Expenses:
Direct operating 46,126 30,734
General and administrative 7,373 5,162
Depreciation and amortization 6,185 5,151
Foreign exchange loss 1,180 162
Financial expense 1,741 1,620
Stock-based compensation 1,148 1,010
Loss (gain) on disposal of property and equipment 8 (103)
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63,761 43,736
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Earnings before income taxes 8,399 11,189
Income taxes
Current 2,857 2,209
Future 424 963
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3,281 3,172
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Net earnings 5,118 8,017
Retained earnings, beginning of period 42,669 15,884
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Retained earnings, end of period 47,787 23,901
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Net earnings per share
Basic 0.06 0.10
Diluted 0.06 0.10
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended March 31 (Unaudited - $000's)
2008 2007
----------------------
Net earnings 5,118 8,017
Unrealized gains (losses) recorded on translation
of assets and liabilities of self-sustaining
operations denominated in foreign currency (2,698) 686
Gains on derivatives designated as cash flow
hedges, net of tax 162 -
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Comprehensive income 2,582 8,703
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31 (Unaudited - $000's) 2008 2007
----------------------
Cash provided by (used in):
Operating activities:
Net earnings 5,118 8,017
Items not involving cash:
Depreciation and amortization 6,185 5,151
Stock-based compensation 1,148 1,010
Unrealized foreign exchange loss 413 -
Other 302 215
Future income tax 424 963
Loss (gain) on disposal of property and
equipment 8 (103)
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13,598 15,253
Change in non-cash working capital 2,316 (864)
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15,914 14,389
Financing activities:
Long-term debt (9,299) 6,297
Issue of share capital - 339
Debt financing costs - (232)
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(9,299) 6,404
Investing activities:
Additions to property and equipment (10,392) (16,592)
Proceeds on disposal of property and equipment 4,179 149
Change in non-cash working capital (38) 1,282
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(6,251) (15,161)
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Change in cash position 364 5,632
Cash and cash equivalents, beginning of period 11,249 10,455
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Cash and cash equivalents, end of period 11,613 16,087
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Interest paid 1,726 1,930
Interest received 92 26
Income taxes paid 961 1,544
----------------------
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The Corporation is an emerging international oilfield services company that operates an established oil and gas drilling and workover business focusing on providing these services to major and intermediate oil and gas companies in North and South America. The common shares of the Corporation trade on the TSX under the symbol "SES".
Forward-Looking Information
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Certain information contained in this press release, including information and statements which may contain words such as "could", "plans", "should", "anticipates", "expects", "believes", "will", "forecasts", "budget" and similar expressions and statements relating to matters that are not historical facts, are forward-looking information including, but not limited to: information as to discussions regarding a possible transaction to acquire all of the shares of the Corporation by Schlumberger Limited and First Reserve Corporation, estimates as to liability of the Corporation's Venezuelan subsidiary for the assessment of penalties relating to prior years' value added tax in Venezuela and the ability of the Corporation to recover from the vendor those penalties relating to periods before the Corporation purchased the Venezuelan subsidiary from the vendor.
This forward-looking information is based on certain material factors, assumptions and analyses made by the Corporation in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances, in particular, our discussions with Schlumberger Limited and First Reserve Corporation regarding a possible transaction to acquire all of the shares of the Corporation and tax and legal advice provided to the Corporation regarding estimates as to liability for the tax assessment as described above and the ability to recover a portion of any paid tax assessment from the vendor as described above. However, whether actual results, performance or achievements will conform with the Corporation's conclusions, forecasts, projections, expectations and predictions expressed or implied by the forward looking information in this press release is subject to known and unknown risks and uncertainties which could cause actual results to differ materially from the Corporation's conclusions, forecasts, projections, expectations and predictions expressed or implied by the forward looking information in this press release, including: discussions with Schlumberger Limited and First Reserve Corporation may not result in an agreement to purchase all of the shares of the Corporation and if such agreement is entered into, the transaction to acquire all of the shares of the Corporation by Schlumberger Limited and First Reserve Corporation may not close for various reasons including, on account of conditions of closing not being fulfilled, a competing bid or the transaction may not be approved by the shareholders of the Corporation; tax authorities or courts not agreeing with the Corporation's position as to the amount of the tax assessment owed by its Venezuelan subsidiary; courts or arbitrators not ruling in favour of the Corporation regarding recovery of such tax assessment from the vendor of the Venezuelan subsidiary and the inability or difficulty to collect any such recovery; fluctuations in the price and demand of oil and gas; fluctuations in the level of oil and gas exploration and development activities; fluctuations in the demand for the Corporation's services; the ability of the Corporation to raise capital; the existence of credit risk inherent within the international oil and gas services business; competitors; technological changes and developments in the oil and gas industry; the effects of unpredictable weather conditions on operations and facilities; the existence of operating risks inherent in the Corporation's services; identifying and acquiring suitable acquisition targets on reasonable terms and successful integration of such targets when acquired; political and labour unrest and economic conditions in countries in which the Corporation does business; foreign currency exchange rate fluctuations; general economic, market or business conditions, including stock market volatility; changes in laws or regulations, including taxation and environmental regulations; the lack of availability of qualified personnel or management; other unforeseen conditions which could impact on the use of services supplied by the Corporation and those risks and uncertainties described in the Corporation's continuous disclosure filings, including those referred to in the Corporation's Management's Discussion and Analysis for the most recently completed financial year end and in the Corporation's most recent Annual Information Form, all of which may be found on SEDAR at www.sedar.com. If any of the above risks or uncertainties materialize, or if the material factors, assumptions and analyses applied by the Corporation are incorrect, actual results may vary materially from those expected in the forward looking information in this press release.
Consequently, all of the forward-looking information contained in this press release is qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Corporation expressed or implied by the forward looking information in this press release will be realized or, even if substantially realized, that they will have the expected consequences to or effects on the Corporation or its business operations. The Corporation assumes no obligation, except as required by law, to update publicly any such forward-looking information, whether as a result of new information, future events or otherwise. Readers should not place undue reliance on forward-looking information.
%SEDAR: 00009478E