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2008-08-11 07:30:00
Canadian Sub-Surface Energy Services Announces Q2 2008 Financial Results
CALGARY, ALBERTA–(EMWNews – Aug. 11, 2008) – Canadian Sub-Surface Energy Services Corp. (TSX:CSE) (“CanSub” or “the Company”) announced today its financial and operating results for the three and six-month periods ended June 30, 2008.
(in thousands of dollars, except per share amounts or as otherwise noted)
----------------------------------------------------------------------------
(Unaudited) Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, % June 30, June 30, %
2008 2007 Change 2008 2007 Change
----------------------------------------------------------------------------
Revenue 12,543 7,282 +72.2% 35,934 32,324 +11.2%
----------------------------------------------------------------------------
Gross Margin 607 (1,176) +151.6% 8,517 6,751 +26.2%
----------------------------------------------------------------------------
Gross Margin % 4.8% (16.1%) +130.0% 23.7% 20.9% +13.5%
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Cash Flow (1) (1,940) (3,370) +42.4% 3,367 1,497 +124.9%
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EBITDAS (1) (2) (1,542) (3,010) +48.8% 4,258 2,179 +95.4%
----------------------------------------------------------------------------
EBITDAS as a
% of revenue (12.3%) (41.3%) +70.3% 11.8% 6.7% +75.8%
----------------------------------------------------------------------------
Net Earnings (loss) (2,933) (4,597) +36.2% 135 (2,883) +104.7%
----------------------------------------------------------------------------
Net Earnings (loss)
per share - basic
and diluted ($0.14) ($0.24) +41.7% $0.01 ($0.15) +106.7%
----------------------------------------------------------------------------
Weighted average number
of Class A common
shares outstanding
(in thousands) 21,104 19,324 +9.2% 20,219 19,324 +4.6%
----------------------------------------------------------------------------
Number of field
locations at end
period 14 10 +40% 14 10 +40%
----------------------------------------------------------------------------
(1) Refer to the "Non-GAAP measures" section below for details.
(2) EBITDAS refers to earnings before interest, taxes, depreciation,
amortization and stock-based compensation expense. See section below
titled "Reconciliation of Cash Flow and EBITDAS to Net Earnings".
Operational Highlights
Revenue during Q2 2008 of $12.5 million was significantly higher than the $7.3 million of revenue recognized during Q2 2007. The increased revenue contributed to a higher EBITDAS, which improved from negative $3.0 million in Q2 2007 to negative $1.5 million in Q2 2008. Quarter over quarter net loss also improved from a $4.6 million net loss in Q2 2007 to a $2.9 million net loss in Q2 2008.
Revenue and EBITDAS for the six months ended June 30, 2008 were $35.9 million and $4.3 million respectively as compared to $32.3 million of revenue and $2.2 million of EBITDAS for the six-month period in 2007. For the current six month period, CanSub reported net income of $0.1 million as compared to a net loss of $2.9 million in the six-month period in the prior year.
CanSub’s increased revenue in Q2 2008 reflected higher overall equipment utilization rates in both the Wireline and Testing divisions, despite a decrease in the number of wells drilled during the quarter in the Western Canadian Sedimentary Basin (“WCSB”). As reported by Nickles Group, there were 1,608 wells drilled (rig released) in the WCSB during Q2 2008, compared to 1,769 wells drilled during Q2 2007, a 9% decrease. The increased equipment utilization reflects CanSub’s geographic diversity, as the Company has exposure to the higher activity areas of the basin, including southeastern Saskatchewan, northeastern British Columbia and coverage throughout Alberta.
Strong commodity prices for oil and natural gas during Q2 2008 resulted in increased cash flows for many oil and gas producers, with some producers reporting increased capital expenditure programs for the second half of 2008. As a result of the anticipated improvement in industry activity levels, the Petroleum Services Association of Canada (“PSAC”), recently increased the estimated number of wells to be drilled in calendar 2008 in the WCSB from 14,500 to 16,500.
To position the Company for the anticipated industry recovery, CanSub completed a $6.5 million acquisition of wireline assets (including 5 electric line units) from an industry peer that closed on May 2, 2008. In addition, during June, CanSub announced a $14 million capital expansion program for the second half of 2008 that includes the construction of electric line and slickline units as well as production testing packages. The build program has been commenced with initial orders placed for the following equipment: five electric line units, five slickline units and four high pressure production testing packages.
To finance the acquisition of wireline assets that closed in May and the recently announced capital expansion program, CanSub completed two equity financings during the recently completed quarter. On May 1, 2008 the Company completed a private placement to employees which raised gross and net proceeds of $3.8 million. On June 24, 2008, the Company completed a bought deal financing that raised gross proceeds of $15.0 million and net proceeds of approximately $13.9 million.
During Q2 2008, CanSub further enhanced its geographic diversity by establishing new operating stations in Swift Current, Saskatchewan and Nisku, Alberta. The Nisku station will provide a central location for the Company’s increased specialty service offering.
Due to the increased production royalties that will take effect in Alberta in 2009, affected conventional oil and natural gas producers have shifted investment dollars into the neighboring provinces of British Columbia and Saskatchewan. CanSub is well positioned to continue to take advantage of this change as approximately 50% of CanSub’s equipment fleet resides in, or can service, northeast B.C. as well as southeast and other parts of Saskatchewan.
The Company’s capital expenditure program for calendar 2008 has been set at approximately $17.5 million, which includes the $14 million expansion program noted above (and excludes the $6.5 million asset package purchased in May). Approximately $14.5 million of the 2008 expenditures are planned for the second half of 2008.
Below is a summary of the changes to CanSub’s equipment fleet from March 31, 2008 to June 30, 2008
# of Wireline # of Swabbing # of Testing
Units Units packages
----------------------------------------------------------------------------
Operating fleet at
March 31, 2008 45 10 61
----------------------------------------------------------------------------
Acquisition of wireline
units on May 2, 2008 5 - -
----------------------------------------------------------------------------
Conversion of swabbing
units to wireline units 2 (2) -
----------------------------------------------------------------------------
Retirement of old
wireline unit (1) - -
----------------------------------------------------------------------------
Operating fleet at June
30, 2008 (i) 51 8 (ii) 61
----------------------------------------------------------------------------
(i) Included in the 51 operating wireline units are 29 electric line and 22
slickline units.
(ii) Comprised of 52 major testing packages plus various other testing
related equipment (ie flow-back tanks, high pressure storage tanks and
cold separators) which equate to approximately an additional 9 major
testing packages when fully utilized.
At the end of July 2008, a statement of claim in the amount of $20 million was served against CanSub and certain individuals by Halliburton Group Canada Inc., a competitor in the electric line business. The claim relates to alleged damages resulting from the hiring by CanSub of certain former Halliburton employees. CanSub has assessed the claim and believes it to be without merit and intends to aggressively defend the lawsuit.
Canadian Sub-Surface Energy Services Corp.
Management’s Discussion and Analysis
The following Management’s Discussion and Analysis (“MD&A”) is for the consolidated financial statements of Canadian Sub-Surface Energy Services Corp. (“CanSub” or “the Company”) as at and for the three and six-month periods ended June 30, 2008 and 2007. The consolidated financial statements and MD&A have been prepared taking into consideration information available as at August 6, 2008 and should be read in conjunction with the interim consolidated financial statements of the Company for the three and six-month periods ended June 30, 2008 and the audited financial statements of the Company for the year ended December 31, 2007.
Forward-looking statements
Certain statements in this MD&A including (i) statements that may contain words such as “anticipate”, “could”, “expect”, “seek”, “may” “intend”, “will”, “believe”, “should”, “project”, “forecast”, “plan” and similar expressions, including the negatives thereof, (ii) statements that are based on current expectations and estimates about the markets in which the Company operates and (iii) statements of belief, intentions and expectations about developments, results and events that will or may occur in the future, constitute “forward-looking statements” and are based on certain assumptions and analysis made by the Company. Forward-looking statements in this MD&A specifically include, but are not limited to, statements with respect to future capital expenditures, including the amount, nature and timing thereof; oil and natural gas prices and demand; other development trends within the oil and natural gas industry; business strategy; expansion and growth of the Company’s business and operations including the Company’s market share and position in the oilfield service market, use of proceeds of equity offerings and other such matters.
The forward-looking statements contained in this MD&A reflect several material factors, expectations and assumptions including, without limitation: (i) oil and natural gas production levels; (ii) commodity prices and interest rates; (iii) capital expenditure programs and other expenditures; (iv) supply and demand for oil and natural gas; (v) expectations regarding the Company’s ability to raise capital and to increase its equipment fleets through acquisitions and manufacture; (vi) schedules and timing of certain projects and the Company’s strategy for growth; (vii) the Company’s future operating and financial results, including pricing of services and activity levels in the Company’s operating regions; (viii) the Company’s ability to retain and hire qualified personnel; and (ix) treatment under governmental regulatory regimes and tax, environmental and other laws.
Financial outlook information contained in this MD&A about prospective results of operations, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on management’s assessment of the relevant information currently available. Readers are cautioned that such financial outlook information contained in this MD&A should not be used for purposes other than for which it is disclosed herein.
Such forward-looking statements are subject to important risks and uncertainties, which are difficult to predict and that may affect the Company’s operations, including but not limited to the impact of general economic conditions in Canada and the United States; industry conditions, including the adoption of new environmental, safety and other laws and regulations and changes in how they are interpreted and enforced; volatility of oil and natural gas prices; oil and natural gas product supply and demand; risks inherent in the Company’s ability to generate sufficient cash flow from operations to meet its current and future obligations; increased competition; the lack of availability of qualified personnel or labor unrest; fluctuation in foreign exchange or interest rates; stock market volatility; opportunities available to or pursued by the Company and other factors, many of which are beyond the control of the Company. The Company’s actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do transpire or occur, what benefits the Company will derive therefrom. The Company’s actual results could differ materially from those anticipated in these forward-looking statements and information as a result of both known and unknown risks, including the risk factors set forth under “Risk Factors” in this MD&A and certain documents incorporated by reference herein. Accordingly, readers should not place undue reliance upon any of the forward-looking information set out in this MD&A. All of the forward-looking statements in this MD&A are expressly qualified in their entirety by this cautionary statement.
Many of these risk factors and other specific risks and uncertainties are discussed in further detail throughout the Company’s Annual Information Form (“AIF”) and the Company’s Annual MD&A. Readers are specifically referred to the risk factors described in the AIF under “Risk Factors” and in other documents the Company files from time to time with securities regulatory authorities. Copies of these documents are available without charge from the Company or electronically on the internet on the Company’s SEDAR profile at www.sedar.com.
Business Units and Segmentation
The Company’s operations are conducted through its operating partnership and consist of two main operating divisions: Wireline and Testing. The Wireline division is comprised primarily of cased-hole wireline services (which include electric line and slickline) and also includes swabbing and well optimization. The Testing division includes primarily natural gas production testing services.
Seasonality
The Company’s Wireline and Testing operations are seasonal. The oil and gas industry is generally more active during the winter months (historically from November through March) as the movement of heavy equipment is easier over frozen ground. In the spring months, road bans and wet weather can limit the ability to move equipment and adversely impacts the Company’s revenue generating capability. Rain in the summer and fall months can also have a significant impact on the Company’s revenue. However, when equipment is not in use, crews are not required (particularly in the Testing division) and therefore operating costs normally decrease in slow operating periods.
Results of Operations
Revenues
The break-down of consolidated revenue between the Wireline and Testing divisions for the three and six-month periods ended June 30, 2008 and 2007 are as follows:
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Three Three Six Six
months months months months
ended ended ended ended
$000s June 30, June 30, % June 30, June 30, %
(unaudited) 2008 2007 change 2008 2007 change
----------------------------------------------------------------------------
Wireline 7,587 5,544 +36.9% 22,640 19,479 +16.2%
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Testing 4,956 1,738 +185.2% 13,294 12,845 + 3.5%
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Consolidated 12,543 7,282 +72.2% 35,934 32,324 +11.2%
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Q2 is typically the slowest quarter of the year for Wireline and Testing businesses operating in the WCSB as spring break-up prevents the movement of heavy equipment for a period of approximately 4 to 8 weeks depending on the region. As a result, revenues and related margins are usually the lowest during this quarter.
Revenues for both the Wireline and Testing divisions increased significantly during Q2 2008 from Q2 2007, reflecting higher overall utilization rates and strong contributions from equipment situated in the high activity areas of southeast Saskatchewan. Pricing of services in both divisions continues to be at the lower levels implemented during 2007 when the industry slow-down resulted in competitive pricing in many of CanSub’s operating areas. However, based on current prices for oil and natural gas, and an anticipated recovery in industry activity levels later in 2008, CanSub anticipates that there will be some recovery in pricing prior to year end.
In Q2 2008, Wireline divisional revenue amounted to $7.6 million. Of that amount, $6.3 million was related solely to the wireline fleet, which averaged 46 units in operation during the period. The remaining $1.3 million of revenue was attributed to swabbing and well optimization services. The wireline units completed approximately 1,069 jobs during the current quarter at an average per job revenue of approximately $5,849. This per job revenue was lower than the Q1 2008 average of $6,395 as wireline units in southern Alberta and Saskatchewan had more available operating days during the quarter as spring break-up ended earlier in these areas than in the northern regions. Work done in the southern regions is generally on shallower, less complex wells which have lower related revenues.
In the comparable Q2 2007 period, Wireline divisional revenue amounted to $5.5 million. Of that amount, $4.5 million was attributed solely to the wireline fleet which averaged 41 units in operation. Swabbing and well optimization services comprised the remaining $1.0 million in revenue. The wireline units completed approximately 808 jobs at an average per job revenue of $5,625. The higher per job revenue reported in Q2 2008 of $5,849 partially reflects the increased number of “Specialty Service” jobs completed during Q2 2008. CanSub has recently increased its Specialty Services offering capability by acquiring additional specialty tools as part of the acquisition of assets that closed on May 2, 2008.
Testing division revenue amounted to $5.0 million in Q2 2008 as compared to only $1.7 million in Q2 2007. CanSub had an in-service fleet of 61 testing packages during both periods. The quarter over quarter increase of approximately $3.3 million was attributed to a general increase in utilization rates in all of the Company’s operating areas. A portion of CanSub’s clients continued to do testing work through break-up during the current period, partially reflecting the increased natural gas prices. In contrast, many clients during Q2 2007 shut down operations during spring break-up due to the weaker natural gas prices at that time. CanSub also received a significant revenue contribution from testing packages recently moved into the busy areas of southeastern Saskatchewan. Approximately 15% of CanSub’s Testing fleet is now operating in Saskatchewan.
During calendar 2007, the Testing division experienced the greatest adverse impact from the industry slow-down as this service is geared towards new natural gas well completions. Pricing for services in this division remain at low levels, but is expected to recover later in 2008 as current natural gas prices are providing some optimism about overall activity levels in the near term.
Gross Margins (refer to Non-GAAP measures below)
The break-down of gross margins between the Wireline and Testing divisions during the current and prior periods is as follows:
----------------------------------------------------------------------------
Three Three Six Six
months months months months
ended ended ended ended
$000s June 30, June 30, % June 30, June 30, %
(unaudited) 2008 2007 change 2008 2007 change
----------------------------------------------------------------------------
Gross Margins:
----------------------------------------------------------------------------
Wireline (346) (687) +49.6% 4,856 3,702 +31.2%
----------------------------------------------------------------------------
Testing 953 (489) +294.9% 3,661 3,049 +20.1%
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Consolidated 607 (1,176) +151.6% 8,517 6,751 +26.2%
----------------------------------------------------------------------------
Gross Margin %
----------------------------------------------------------------------------
Wireline (4.6%) (12.4%) +63.2% 21.4% 19.0% +12.9%
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Testing 19.2% (28.1%) +168.3% 27.5% 23.7% +16.0%
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Consolidated 4.8% (16.1%) +130.0% 23.7% 20.9% +13.5%
----------------------------------------------------------------------------
As noted in the revenue discussion, Q2 is typically the slowest quarter of the year resulting in reduced revenues and margins. In addition, repairs and maintenance and annual inspection work is regularly performed on equipment while not active, further reducing margins.
Consolidated gross margins were positive $0.6 million for Q2 2008 compared to negative $1.2 million in Q2 2007, an improvement of $1.8 million. Most of the improvement (approximately $1.4 million) was attributed to the Testing division and primarily reflects the significant quarter over quarter revenue increase in that division of $3.2 million (or 185%). Although Wireline margins showed an overall improvement, the current quarter margins were negatively impacted by start-up costs associsted with new field stations established in Swift Current, Saskatchewan and Nisku, Alberta.
Pricing for many of CanSub’s services remain at competitive exit 2007 rates. However, CanSub is optimistic that a recovery in industry activity levels during the second half of 2008 will lead to some pricing recovery prior to year end.
For calendar 2008, CanSub has been able to reduce operating costs, optimize operations and preserve margins by implementing the following in the latter part of 2007:
– Negotiating discounts from suppliers.
– Moving equipment to higher activity areas such as northeast British Columbia and southeast Saskatchewan to increase utilization.
– Re-positioning station managers and some office personnel to work in the field.
– Identifying niche, specialty service markets for both the Wireline and Testing divisions to increase equipment utilization.
One of the largest components of operating expenses are the wages of CanSub’s field employees. CanSub has structured the compensation of most of its field employees so that all or a portion of the wage is variable. As a result, when industry activity levels are slower, the exposure to high fixed components is reduced. When activity levels are more robust, and the Company generates more revenue, compensation amounts increase. In the Wireline division, most of the field employees are paid based on a base wage plus a percentage of the field revenue they generate. In the Testing division, almost all field compensation is variable, as the field employees are paid on a day rate basis.
Selling, general and administrative expenses
The Company’s selling, general and administrative expenses (“SG&A”) are recorded on a consolidated basis and not broken out for each division as the two divisions share the same management team as well as accounting, administration and sales staff.
----------------------------------------------------------------------------
Three Three Six Six
months months months months
ended ended ended ended
$000s June 30, June 30, % June 30, June 30, %
(unaudited) 2008 2007 change 2008 2007 change
----------------------------------------------------------------------------
Selling, general and
admin expenses 2,149 1,852 +16.0% 4,259 4,590 -7.2%
----------------------------------------------------------------------------
SG&A expenses were approximately 16% higher in Q2 2008 than the comparable quarter of the prior year. This increase partially reflects higher sales expenses due to additional staff added to CanSub’s sales team during the quarter, combined with increased sales commissions from the higher sales level. CanSub’s management continues to closely monitor all SG&A expenses.
Stock-based compensation expense
----------------------------------------------------------------------------
Three Three Six Six
months months months months
ended ended ended ended
$000s June 30, June 30, % June 30, June 30, %
(unaudited) 2008 2007 change 2008 2007 change
----------------------------------------------------------------------------
Stock-based
compensation expense 256 344 -25.6% 527 674 -21.8%
----------------------------------------------------------------------------
Stock-based compensation expense in Q2 2008 and the six months ended June 30, 2008 was lower than the comparable periods of the prior year mainly due to the reduction in expense related to the approximately 124,000 options that were forfeited during Q2 2008 (see “Stock Option” section below).
Depreciation and amortization expense
----------------------------------------------------------------------------
Three Three Six Six
months months months months
ended ended ended ended
$000s June 30, June 30, % June 30, June 30, %
(unaudited) 2008 2007 change 2008 2007 change
----------------------------------------------------------------------------
Depreciation 1,971 2,133 -7.6% 3,950 3,931 +0.5%
----------------------------------------------------------------------------
Amortization - 618 n/a - 1,334 n/a
----------------------------------------------------------------------------
Total 1,971 2,751 -28.4% 3,950 5,265 -25.0%
----------------------------------------------------------------------------
Depreciation expense (which relates to depreciation of the Company’s property and equipment) amounted to $2.0 million during Q2 2008. The decrease from the Q2 2007 expense of $2.1 million primarily reflects the 3% decrease in the declining balance rate at which field equipment (an asset category within property and equipment) is depreciated. During Q1 2008, the Company reduced the declining balance depreciation rate on field equipment from 15% to 12%. In management’s opinion, the 12% rate provides a better estimate of the useful life of these types of assets. The decreased depreciation from the revised rate for the field equipment was partially offset by higher overall depreciation expense from the larger property and equipment base during Q2 2008.
Amortization expense (which relates to amortization of the Company’s intangible assets) was nil for the six months ended June 30, 2008. During Q4 2007, a full impairment loss was taken on all of the Company’s intangible assets, leaving nil balances for these assets at the December 31, 2007 balance sheet date. As a result, there will be no future amortization expense from the intangible assets acquired during 2007 and prior years.
Interest expense
----------------------------------------------------------------------------
Three Three Six Six
months months months months
ended ended ended ended
$000s June 30, June 30, % June 30, June 30, %
(unaudited) 2008 2007 change 2008 2007 change
----------------------------------------------------------------------------
Interest on
long-term debt 341 360 -5.3% 834 725 +15.0%
----------------------------------------------------------------------------
Other interest 57 - n/a 57 - n/a
----------------------------------------------------------------------------
Total interest 398 360 +10.6% 891 725 +22.9%
----------------------------------------------------------------------------
Total interest expense for Q2 2008 and for the six months ended June 30, 2008 was higher than interest expense incurred in the comparable periods of the prior year primarily due to a net increase in the average total debt balances (comprised of operating loan, long-term debt and capital lease obligations). At the end of June 2008, CanSub applied net proceeds of the bought deal financing of approximately $14 million against long-term debt.
Current tax expense (recovery)
During the six months ended June 30, 2008, CanSub incurred a net current tax expense of $0.1 million. This expense was planned in order to utilize expiring investment tax credits (“ITC’s”) of $0.1 million. The utilization of these credits resulted in nil cash taxes payable for the period.
Future income tax expense (reduction)
The Company recognized a reduction of future income taxes of $1.4 million for Q2 2008 resulting in a reduction of $1.5 million for the six months ended June 30, 2008. The future income tax expense is typically impacted by net timing differences between amounts for tax and accounting and draw-downs of the deferred credit.
Net Earnings (loss)
The Company recorded a net loss of $2.9 million in Q2 2008 ($0.14 per share – basic and diluted) and net earnings of $0.1 million for the six months ended June 30, 2008 ($0.01 per share – basic and diluted). This compares to a net loss of $4.6 million during Q2 2007 ($0.24 per share -basic and diluted) and a net loss of $2.9 million ($0.15 per share – basic and diluted) for the six months ended June 30, 2007.
Income tax amounts
The Company had the following estimated tax amounts available at June 30, 2008 to apply against future taxable income: non-capital losses of $11.0 million and unclaimed scientific research and development expenditures (“SRED”) of $9.4 million. In addition, the Company had approximately $1.4 million in investment tax credits which may be claimed against taxes otherwise payable for federal purposes and expire between 2009 and 2014. These tax amounts are subject to review and assessment by the taxation authorities.
Share Capital
On May 1, 2008, the Company issued 2.2 million Class A common shares to employees in a non-brokered private placement resulting in gross proceeds of $3.8 million. On June 24, 2008, the Company issued 4.6 million Class A common shares in connection with a bought deal financing for gross proceeds of $15.0 million. The Company had 26,123,742 shares outstanding at August 6, 2008.
Stock Options
For the six months ended June 30, 2008, the Company granted 492,000 options (462,000 which were in Q2 2008) and 211,163 were forfeited (124,163 which were in Q2 2008) for a net increase of 280,837 options. At June 30, 2008, the Company had 1.9 million options outstanding with an average exercise price of $3.83.
Liquidity and Capital Resources
The Company recorded negative cash flow from operations (before changes in non-cash working capital) of $1.9 million for Q2 2008 as compared to negative cash flow from operations of $3.4 million in Q2 2007. The increase in cash flow primarily reflects the increased revenues and gross margins in Q2 2008 (see Revenue and Gross Margin analysis above) and the reduction in SG&A expenses.
As at June 30, 2008, the Company had a working capital deficiency of $2.0 million and long-term debt (i.e. long-term portion of long-term debt and capital leases) of $5.5 million for a net debt position of $7.5 million. The Company has the following two credit facilities:
a) a $15 million operating loan facility to finance the Company’s working capital requirements; and
b) a $30 million committed, term facility to be used for the acquisition of capital assets. Advances under this facility are repayable over a five year term with blended monthly payments of principal and interest. During June, 2008, CanSub applied $14 million against outstanding advances on this facility. As a result, initially calculated repayments on those advances for years four and five were eliminated and the net advance on the facility at June 30, 2008 is now scheduled to be fully repaid by the end of calendar 2010.
At June 30, 2008, the Company had outstanding balances of $3.5 million on the operating loan facility and $10.0 million on the committed, term facility. Amounts available to be drawn under the operating loan facility are limited to 75% of marginable accounts receivable. Based on the margin requirements, an additional $3.4 million of operating loan was available to be drawn at June 30, 2008.
Amounts available to be drawn under the committed, term facility are limited to 50% of the net book value of property and equipment on the Company’s balance sheet less assets pledged as security for the Company’s capital lease obligations. Based on the marginable fixed assets at June 30, 2008, an additional 16.4 million was available to be drawn on this facility. Amounts the Company is eligible to draw under both facilities are subject to CanSub meeting all related loan covenants and margin requirements. At June 30, 2008 CanSub was in compliance with these restrictions.
The Company believes that its available credit facilities and cash flow from operating activities will provide sufficient capital resources to fund near term capital expenditures and on-going operations. The Company’s management continues to evaluate its capital and operational spending programs in response to industry conditions.
Investing Activities
The Company’s net capital expenditures (ie acquisitions net of proceeds from disposals) for property and equipment during Q2 2008 amounted to $8.0 million. Of this amount, $6.5 million was for the acquisition of wireline assets from an industry peer that closed on May 2, 2008. This asset “package” included five electric line units, along with various specialty tools and auxiliary equipment. The chart below provides a summary of the changes to CanSub’s equipment fleet during 2008.
----------------------------------------------------------------------------
# of Wireline # of Swabbing # of Testing
Units Units packages
----------------------------------------------------------------------------
Operating fleet at
December 31, 2007 44 10 61
----------------------------------------------------------------------------
Additions during Q1 2008 1 - -
----------------------------------------------------------------------------
Additions during Q2 2008 5 - -
----------------------------------------------------------------------------
Conversion of swabbing units
to electric line units 2 (2) -
----------------------------------------------------------------------------
Retirement of old wireline
unit (1) - -
----------------------------------------------------------------------------
Operating fleet at June 30, 2008 51 8 61
----------------------------------------------------------------------------
The 51 wireline units in operation at June 30, 2008 were comprised of 29 electric line units and 22 slickline units. The Testing fleet was comprised of 52 major testing packages plus various other testing related equipment (ie flow-back tanks, high pressure storage tanks and cold separators) which equate to approximately an additional 9 major testing packages when fully utilized.
At the end of Q2 2008, CanSub announced a $14 million capital expansion program in conjunction with the the $15 million bought deal financing that closed on June 24, 2008. CanSub has commenced the build program with initial orders placed for the following equipment: five electric line units, five slickline units and four high pressure testing packages. Total capital expenditures for calendar 2008 (excluding the $6.5 million asset package acquired on May 2, 2008) are planned at approximately $17.5 million.
Financing Activities
Financing activities during Q2 2008 consisted of the employee private placement financing that closed on May 1, 2008 for net proceeds of $3.8 million and the bought deal financing that closed June 24, 2008 for net proceeds of $13.9 million (total net proceeds of $17.7 million for the quarter). During Q2 2008, the Company had advances of $3.0 million from its long-term debt facility and repayments on this facility of $15.0 million for net repayments of $12.0 million. $13.9 million of the repayments were from proceeds of the bought deal financing that closed at the end of the quarter. In addition, CanSub also made $0.6 million in repayments on the Company’s capital lease obligations during Q2 2008.
Related Party Transactions
The only significant related party transaction during During Q2 2008 was the $3.8 million private placement to employees (including certain officers but excluding directors) noted above. Any minor related party transactions were in the normal course of business at market rates. Material related party transactions during fiscal 2007 are outlined in the notes to the audited December 31, 2007 financial statements.
Quarterly Financial Summary
The financial results of the Company's last eight fiscal quarters are
summarized below.
(in thousands of dollars, except per share amounts or as otherwise noted)
----------------------------------------------------------------------------
(Unaudited) Three-month Three-month Three-month Three-month
period ended period ended period ended period ended
June 30, 2008 Mar 31, 2008 Dec 31, 2007 Sept 30, 2007
----------------------------------------------------------------------------
Revenue 12,543 23,391 16,312 17,533
----------------------------------------------------------------------------
Cash Flow (1) (1,940) 5,307 1,465 2,170
----------------------------------------------------------------------------
Cash Flow from
Operations 2,977 (1,774) 2,426 (896)
----------------------------------------------------------------------------
EBITDAS (1) (2) (1,542) 5,800 1,968 2,690
----------------------------------------------------------------------------
EBITDAS as a % of
revenue (12.3%) 24.8% 12.1% 15.3%
----------------------------------------------------------------------------
Net Earnings (loss) (2,933) 3,068 (21,024) (830)
----------------------------------------------------------------------------
Net Earnings (loss)
per share - basic ($0.14) $0.16 ($1.09) ($0.04)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Unaudited) Three-month Three-month Three-month Three-month
period ended period ended period ended period ended
June 30, 2007 Mar 31, 2007 Dec 31, 2006 Sept 30, 2006
----------------------------------------------------------------------------
Revenue 7,282 25,042 19,611 20,625
----------------------------------------------------------------------------
Cash Flow (1) (3,370) 4,867 4,110 5,002
----------------------------------------------------------------------------
Cash Flow from
Operations 4,918 4,022 4,077 (1,542)
----------------------------------------------------------------------------
EBITDAS (1) (2) (3,010) 5,189 4,360 5,228
----------------------------------------------------------------------------
EBITDAS as a %
of revenue (41.8%) 20.7% 22.2% 25.3%
----------------------------------------------------------------------------
Net Earnings (loss) (4,597) 1,714 1,616 2,192
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Net Earnings (loss)
per share - basic ($0.24) $0.09 $0.08 $0.12
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(1) Refer to the "Non-GAAP measures" section below for details.
(2) EBITDAS means earnings before interest, taxes, depreciation,
amortization, and excludes stock based compensation expense. Refer to
the section below titled "Reconciliation of Cash Flow and EBITDAS to
Net Earnings".
(3) Results in the various quarters are subject to seasonality. See above
section titled "Seasonality".
Trends in quarterly results
In a typical calendar period, the first and fourth quarters (during winter season) are the busiest for the oilfield service industry as the movement of heavy equipment is easier over frozen ground. The second quarter (during spring) is typically the slowest quarter as road bans and wet weather can limit the ability to move equipment and adversely impacts the Company’s revenue producing capability. The third quarter (summer / early fall) can be negatively impacted by wet weather and availability of personnel and is usually less active than the winter quarters but more active than the second quarter.
During Q3 2006 activity levels in the oil and natural gas industry were robust primarly due to strong natural gas prices. This translated into high utilization rates for CanSub’s equipment resulting in revenue of $20.6 million, net earnings of $2.2 million and an EBITDAS percentage of 25.3%. However, during Q4 2006, many oil and natural gas producers began reducing well drilling activities, due to weakening natural gas prices combined with increased costs to drill and complete wells. This slow-down negatively impacted CanSub’s equipment utilization rates in Q4 2006 where the Company posted revenue of $19.6 million, net earnings of $1.6 million and EBITDAS of 22.2%. The Company’s results for each of the quarters during 2007 were negatively impacted by the continued slow-down in drilling activity caused primarily by the continued weakness in natural gas prices. Activity levels at the end of 2007 were also negatively impacted by the announcement by the Alberta government in October 2007 that royalties would be increased for oil and natural gas production commencing in 2009. Many producers slowed down drilling activity in Alberta during that period while they assessed the financial impact on their operations.
Due to the lower activity levels during 2007, CanSub and its competitors were forced to reduce prices for their services to maintain equipment utilization rates which adversely affected revenues, gross margins, net earnings and EBITDAS percentages during those periods. In addition, the Company’s establishment of new field locations in northern Alberta and northeastern British Columbia during 2007 further reduced gross margins and EBITDAS percentages.
At the end of 2007, to address the impact of reduced operating margins, CanSub implemented the cost cutting measures noted in the above section titled “Gross Margins”. These measures were partly responsible for CanSub realizing an improvement in gross margin and EBITDAS percentages in Q1 2008 (as compared to Q1 2007). During Q2 2008, as a result of strengthening natural gas prices, CanSub’s equipment utilization rates were higher than the corresponding Q2 2007 (particularly in the Testing division) which resulted in improvements in revenue, gross margins and gross margin percentage, net earnings and EBITDAS percentage.
Commitments and obligations
The Company, through the conduct of its operations, has undertaken certain contractual obligations. As at June 30, 2008, CanSub’s contractual obligations were as follows:
Contractual
Obligations Carrying Contractual 0 - 12 1 -2 2 - 5 5+
($000's) Amount Cash Flows Months Years Years Years
----------------------------------------------------------------------------
Purchase commitments 7,000 (7,000) (7,000) - - -
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Operating Loan 3,450 (3,450) (3,450) - - -
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Long-term debt(1) 9,954 (10,553) (5,104) (2,552) (2,897) -
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Capital lease
obligations(1) 1,597 (1,633) (1,379) (248) (6) -
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Operating lease
obligations 23,096 (23,096) (3,982) (2,837) (7,455) (8,822)
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(1) Contractual cash flows include principal plus interest
Off balance sheet financing arrangements
Other than the vehicle, equipment and facility operating leases described in the commitments note in the financial statements for the period ended June 30, 2008 there are no material off balance sheet financing arrangements.
Use of estimates and assumptions
The financial statements of the Company have been prepared by management in accordance with Canadian Generally Accepted Accounting Principals (“GAAP”). The timely preparation of these financial statements in conformity with Canadian GAAP requires that management make estimates and assumptions and use judgment regarding the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. The most significant are estimates for depreciation and amortization, stock based compensation and other components of employee compensation and valuation of future income tax assets. The financial statements have, in management’s opinion, been prepared within reasonable limits of materiality and within the framework of the Company’s accounting policies.
New accounting pronouncements
On January 1, 2008, the Company adopted the following sections of the Canadian Institute of Chartered Accountants (“CICA”) Handbook: Section 1535 – “Capital Disclosures” and Section 3862 – “Financial Instruments – Disclosures”.
The adoption of these new standards has had no material impact on the Company’s current or prior period net earnings or cash flows. However, the Company has expanded its disclosure related to these items in the June 30, 2008 interim financial statements (see notes related to Capital Management and Financial Risk Management).
Risks and Uncertainties
A complete discussion on the business risks and uncertainties faced by the Company may be found under the “Risk Factors” section in the Corporation’s Annual Information Form which is available under the Corporation’s profile at www.sedar.com.
Evaluation of Disclosure Controls and Procedures
Management has designed disclosure controls and procedures to provide reasonable assurance that material information relating to the Company is made known to the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) on a timely basis in order for the Company to comply with its disclosure and financial reporting obligations and in order to safeguard assets. The CEO and CFO have concluded that the Company’s disclosure controls and procedures, as at June 30, 2008 were designed and operating effectively in providing reasonable assurance that material information is accumulated and made known to them on a timely basis.
Evaluation of Internal Controls over Financial Reporting
The Company’s CEO and CFO are responsible for designing internal controls over financial reporting (“ICFR”) or causing them to be designed under their supervision in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
The Company has assessed the design of its internal controls over financial reporting as at June 30, 2008. Based on this assessment, the Company’s CEO and CFO have concluded that the Company’s ICFR is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
As required, the Company records complex and non-routine transactions. These are sometimes extremely technical in nature and require an in-depth understanding of GAAP. To address this risk, the Company consults with third party advisors as needed in connection with the recording and reporting of complex and non-routine transactions. Management does not expect that the internal controls over financial reporting would prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
There were no material changes to the Company’s internal controls over financial reporting that occurred during the most recently completed interim period that has materially affected, or is reasonably likely to materially affect, the Company’s ICFR.
Conversion from Canadian GAAP to International Financial Reporting Standards (“IFRS”)
In February 2008, the CICA Accounting Standards Board (“AcSB”) confirmed the changeover to IFRS from Canadian GAAP will be required for publicly accountable enterprises effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The AcSB issued the “omnibus” exposure draft of IFRS with comments due by July 31, 2008, wherein early adoption by Canadian entities is also permitted. The Canadian Securities Administrators (“CSA”) has also issued Concept Paper 52-402, which requested feedback on the early adoption of IFRS as well as the (continued) use of US GAAP by domestic issuers. The eventual changeover to IFRS represents changes due to new accounting standards. The transition from current Canadian GAAP to IFRS is a significant undertaking that may materially affect the Company’s reported financial position and results of operations.
The Company is in the early stages of development of its IFRS changeover plan, which will include project structure and governance, resourcing and training, analysis of key GAAP differences and a phased plan to assess accounting policies under IFRS as well as potential IFRS exemptions. The Company plans to complete its project scoping, which will include a timetable for assessing the impact on data systems, internal controls over financial reporting, and business activities, such as financing and compensation arrangements, prior to year end December 31, 2008.
Outlook
Current natural gas prices combined with robust oil prices have provided optimism with regards to a recovery in drilling activity in the WCSB. CanSub has positioned itself for a recovery in activity levels by expanding its wireline fleet with the acquisition of 5 wireline units during Q2 2008 and will be further building out its wireline and production testing fleets during the second half of 2008 as part of the $14 million capital expansion plan announced during June. CanSub further enhanced its geographic diversity during Q2 2008 by establishing new operating locations to take advantage of busier areas in the basin.
To facilitate the Company’s growth going forward, CanSub completed two financings during Q2 2008 which resulted in net proceeds of approximately $17.7 million. These funds enabled the Company to complete the asset acquisitions during Q2 2008 and will be used to finance the capital expansion program for the remainder of 2008.
The Company’s cost cutting and optimization measures undertaken during the latter part of 2007 have enabled CanSub to preserve margins and increase cash flow over the past 3 quarters. If a sustained recovery in activity levels is realized in the WCSB, the Company anticipates a recovery in pricing levels which should improve operating margins and cash flow.
The Company’s management continues to closely monitor industry activity, including evaluating growth opportunities that make sense strategically. Given the Company’s strong client base, geographical spread across the WCSB and diversification of services, CanSub is well positioned to respond to an industry turnaround, anticipated during the second half of 2008.
RECONCILIATION OF CASH FLOW AND EBITDAS TO NET EARNINGS
----------------------------------------------------------------------------
(Unaudited) Three months Three months Six months Six months
ended June ended June ended June ended June
In $000's 30, 2008 30, 2007 30, 2008 30, 2007
----------------------------------------------------------------------------
Net earnings (loss) (2,933) (4,597) 135 (2,883)
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Add back (deduct):
----------------------------------------------------------------------------
Depreciation and
amortization expense 1,971 2,751 3,950 5,265
----------------------------------------------------------------------------
Future income tax
expense (reduction) (1,431) (1,886) (1,539) (1,577)
----------------------------------------------------------------------------
Impairment loss on
equipment 197 - 197 -
----------------------------------------------------------------------------
(Gain) loss on disposal
of capital assets - 18 - 18
----------------------------------------------------------------------------
Stock-based
compensation expense 256 344 527 674
----------------------------------------------------------------------------
Investment tax credit
utilized - - 97 -
----------------------------------------------------------------------------
Cash Flow (1) (1,940) (3,370) 3,367 1,497
----------------------------------------------------------------------------
Long-term and other
interest expense 398 360 891 725
----------------------------------------------------------------------------
Current tax expense
(recovery) - - 97 (43)
----------------------------------------------------------------------------
Utilization of
investment tax credit - - (97) -
----------------------------------------------------------------------------
EBITDAS (1) (1,542) (3,010) 4,258 2,179
----------------------------------------------------------------------------
(1) Refer to "Non-GAAP Measures" section below.
NON-GAAP MEASURES
Cash Flow represents cash provided by operations excluding the impact of cash provided by (used in) non-cash working capital changes. The cash provided by (used in) operations figure is reflected in the Company’s statement of cash flows. EBITDAS represents earnings before interest, income taxes, depreciation, amortization and stock-based compensation expense and is a widely used financial indicator in the oilfield services sector to compare performance between peers. EBITDAS is provided as a measure of operating performance without reference to financing decisions and income tax impacts, which are not controlled at the operating management level. The EBITDAS measure is also used by the Company to determine bonuses for operating management and assessing divisional performance . Gross Margin represents revenue less operating expenses and is another financial indicator used in the oilfield services sector to assess performance of the business at the field level. Gross Margin will vary quarter over quarter in relation to the seasonality of the Company’s business. Cash Flow and EBITDAS are not measures determined in accordance with Canadian Generally Accepted Accounting Principals (“GAAP”) and should not be construed as an alternative to net earnings or cash provided by operations. These measures as presented may not be comparable to similarly titled measures of other companies.
Financial Statements of
CANADIAN SUB-SURFACE ENERGY SERVICES CORP.
For the three and six months ended June 30, 2008
(unaudited)
CANADIAN SUB-SURFACE ENERGY SERVICES CORP.
Consolidated Balance Sheets
(In thousands of dollars)
(Unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, December 31,
2008 2007
----------------------------------------------------------------------------
Assets
Current assets:
Accounts receivable $ 11,716 $ 13,531
Deposits and other 2,002 888
Inventory 325 348
---------------------------------------------------------------------------
14,043 14,767
Property and equipment 56,160 50,809
Future income tax asset (note 8) 9,724 9,442
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$ 79,927 $ 75,018
----------------------------------------------------------------------------
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Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 6,510 $ 7,860
Operating loan (note 6) 3,450 -
Current portion of long-term debt (note 7) 4,674 3,862
Current portion of obligations under capital
leases 1,347 2,091
Income taxes payable - 27
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15,981 13,840
Long-term debt (note 7) 5,280 19,319
Obligations under capital leases 250 675
Deferred credit (note 8) 5,278 6,723
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26,789 40,557
Shareholders' equity:
Share capital (note 9) 65,608 47,593
Contributed surplus (note 9) 5,166 4,639
Deficit (17,636) (17,771)
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53,138 34,461
Contingencies and commitments (note 10)
----------------------------------------------------------------------------
$ 79,927 $ 75,018
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See accompanying notes to consolidated financial statements.
On behalf of the Board:
Signed "Darshan Kailly" Signed "Bill Tobman"
-------
For more information, please contact
Canadian Sub-Surface Energy Services Corp.
Brad Gabel
President & CEO
(403) 262-3247
Email: [email protected]
or
Canadian Sub-Surface Energy Services Corp.
Chris Martin
Vice President, Finance & CFO
(403) 262-3247
Email: [email protected]Major Newsire & Press Release Distribution with Basic Starting at only $19 and Complete OTCBB / Financial Distribution only $89
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