CALGARY, Nov. 4, 2015 /CNW/ - Canyon Services Group Inc. ("Canyon" or the "Company") is pleased to announce its third quarter 2015 results.  The following results should be read in conjunction with the Management's Discussion and Analysis, the audited consolidated financial statements and notes of Canyon Services Group Inc. for the year ended December 31, 2014 and the Annual Information Form for the year ended December 31, 2014, which are available on SEDAR at www.sedar.com.

The current quarter includes the results of Canyon's pressure pumping business as well as the results of Fraction Energy Services Ltd. ("Fraction"), a leading provider of fracturing fluid management, including water sourcing, transfer, wellsite storage, fluid heating, flowback transfer and produced water storage services, which was acquired by Canyon effective July 1, 2014.

HIGHLIGHTS

The operating and financial highlights for the three and nine months ended September 30, 2015 are summarized as follows:

• Q3 2015 consolidated revenues totaled $111.3 million. In the current quarter, the impact of the reduced activity and lower customer pricing was partially offset by reductions and efficiencies gained in operating and input costs, and resulted in Q3 2015 consolidated EBITDA before share-based payments expense (see Non-GAAP Measures) of $15.1 million.

• Canyon continues to reduce all operating and input costs to reduce the impact of significant decreases in activity levels and customer pricing.  We continue to work with suppliers and customers to gain concessions and economies.  Importantly, we are making changes to permanently reorganize and transform certain business processes with the goal of moving away from the fixed labour cost model for certain groups within our Company to a variable pay model so that expenses are more closely linked to activity.  Effective August 1, 2015, Canyon introduced an hourly rate for the transportation group to more closely match the compensation structure of the trucking industry.  In Q4 2015, Canyon will introduce a day rate for the majority of the field staff in its pressure pumping business which will place about 65% of the Company's consolidated workforce on a variable pay structure.

• Effective September 11, 2015, Canyon acquired, through its wholly owned subsidiary Fraction, all of the assets of a private oilfield fluid hauling business located in Grande Prairie, Alberta (the "Acquisition") for total consideration paid of $8.5 million cash, $1.0 million in Canyon common shares, plus an earn-out over two years.  The Acquisition represents a new service line for the Fluid Management division and will enhance Fraction's existing fluid storage, transfer and logistics services.

• On September 24, 2015, Canyon declared a quarterly dividend of $0.03 per common share, or $2.1 million, which was paid to shareholders on October 23, 2015.  In 2015, there have been two reductions in the quarterly dividend which will result in annualized cash savings of $33.1 million and will enable Canyon to preserve its strong balance sheet and provide the Company with additional financial flexibility to pursue organic growth prospects and potential asset acquisitions.  The Board will continue to regularly review the dividend payout in the context of the market.

• On July 21, 2015, Canyon entered into a new credit facility, replacing its previous credit facility, by entering into a new extendible revolving operating credit facility (the "Facility") with a syndicate of financial institutions (the "Lenders").  Under the Facility, the total committed facilities have been increased from $90 million to $100 million and the accordion feature has been increased from $10 million to $50 million.  The accordion feature is available upon request by Canyon, subject to review and approval by the Lenders.  The Facility has a term of three years and is extendible annually. 

• Under the Facility, Canyon now has available bank credit facilities of approximately $85 million, including the accordion feature (total of $150 million less $65 million drawn net of cash and cash equivalents as at September 30, 2015), allowing the Company to actively pursue growth opportunities.  Under the Facility, Canyon is not subject to a debt to EBITDA before share-based payments expense covenant until after June 30, 2016.  Canyon maintains a strong balance sheet with a low debt to EBITDA before share-based payments expense ratio of 1.18:1.00 as at September 30, 2015.

OVERVIEW OF THIRD QUARTER 2015

 

The current three and nine months ending September 30, 2015 includes the results of Canyon's pressure pumping business, as well as the results of Fraction Energy Services Ltd., ("Fraction") which was acquired by Canyon effective July 1, 2014.  Fraction is a leading provider of fracturing fluid management, including water sourcing, transfer, wellsite storage, fluid heating, fluid hauling, flowback transfer and produced water storage services.

2015 has seen lower industry activity across the Western Canadian Sedimentary Basin ("WCSB") in response to continuing low commodity prices. Over the past year, global concerns around oil supply and economic growth have resulted in oil and natural gas prices declining by 52% and 28%, respectively in Q3 2015 over the comparable 2014 quarter (source: Nickles Energy Group).  In this environment of suppressed commodity pricing, the reduced exploration and production company cash flows have led to dramatic declines in drilling rig utilization, well licensing and well completions, the key indicators of industry activity across the WCSB.  In Q3 2015, WCSB drilling rig utilization averaged 26%, about half the 51% level reached in Q3 2014 (source: Nickles Energy Group).  Similarly, well licenses and completions decreased by 46% and 42% respectively in the current quarter (source: Nickles Energy Group) compared to the prior year's comparable quarter.   In pressure pumping, the lower industry activity led to rapidly deteriorating customer pricing levels commencing in January 2015 and have resulted in current pricing levels approximately 30% lower than those reached in Q4 2014.  In fluid management, prices have declined by 15% to 40% depending on the type of service, compared to Q4 2014.

In Q3 2015, Canyon's equipment fleet was able to remain relatively busy with its core group of customers in both its pressure pumping and fluid management divisions until a slowing of activity in September.  In conjunction with the previously announced staffing reductions at the end of Q1 2015,  Canyon has also right-sized its fleet to match anticipated activity over the remainder of the year which has resulted in the temporary idling of about 10% of the Company's pressure pumping equipment.  In Q3 2015 consolidated revenues totaled $111.3 million, down 46% from $204.3 million in Q3 2014 when industry activity and pricing were considerably higher.  For the nine months ended September 30, 2015, consolidated revenues were $310.1 million (including revenue of $34.8 million from fluid management), down 23% from consolidated revenues in the prior year period of $402.8 million (including revenue of $16.3 million from the fluid management business acquired July 1, 2014). 

In the current quarter, the impact of the reduced activity and lower customer pricing was partially offset by reductions and efficiencies gained in operating and input costs resulting in Q3 2015 consolidated EBITDA before share-based payments expense (see Non-GAAP Measures) of $15.1 million compared to $57.7 million in Q3 2014.  The decrease in consolidated EBITDA before share-based payments expense (see Non-GAAP Measures) from Q3 2014 is also due to the significant operating leverage that is characteristic of the pressure pumping business.  For the nine months ended September 30, 2015, consolidated EBITDA before share-based payments (see Non-GAAP Measures) is $23.7 million compared to $75.9 million in the comparable 2014 period as severe pricing degradation set in early in the year due to lower industry-wide activity while cost efficiencies and savings did not take effect until the second and third quarters.

Pressure Pumping Services

Even though 2015 year to date drilling and completions activity levels are down approximately 50% (source: Nickles Energy Group) while pricing is down by approximately 30%, Canyon was able to remain relatively busy in July and August with its core group of customers.  Activity slowed in September due to decreased customer cash flows caused by the lower oil prices as well as field issues which led to the deferral of certain projects by our customers into the fourth quarter.  In Q3 2015, Canyon completed 759 pressure pumping jobs, down 14% from 887 jobs completed in Q3 2014.  Revenues were $100.5 million for the pressure pumping division in Q3 2015, down 47% from $188.1 million in Q3 2014 due to the substantially lower pricing and job count in the industry.  Average fracturing revenue per job decreased 44% to $173,638 in Q3 2015 from $310,403 in Q3 2014 due mainly to lower pricing and job mix.

For the nine months ended September 30, 2015, Canyon completed 1,662 pressure pumping jobs compared to 2,124 for the nine months ended September 30, 2014, while revenues totaled $275.2 million, down 29% from $386.5 million in the comparable 2014 period.  Average fracturing revenue per job decreased by 14% to $217,006 in the current nine month period from $252,184 in the prior year nine month period as larger job sizes partially offset the significant pricing declines.

Fortunately, changing well and completions designs have resulted in increased fracturing intensity on a per well basis in the form of more fractures per wellbore and/or larger individual fracture designs.  One of the main predictors of service intensity for pressure pumping is the average total length in metres per well.  The industry experienced an increase of about 13% in the total metres per well drilled (source: Nickels Energy Group) in the nine months ended September 30, 2015 over the comparable 2014 period.  In addition, proppant usage per stage increased dramatically throughout 2014 and has led to 2015 year to date total proppant volumes pumped per fracturing job by Canyon increasing by 20% compared to the comparable 2014 period.  In the nine months ended September 30, 2015, average Ottawa White sand volumes pumped per fracturing job by Canyon's customers increased by 71% and represented approximately 68% of total sand pumped by Canyon.

Pressure pumping cash flow and profitability remains highly levered to changes in activity and pricing due to the fixed cost nature of the business.  Throughout 2015, Canyon has been working with suppliers and has continued to vigorously review our internal operations and systems to reduce both variable and fixed input costs, including proppants, chemicals, third-party hauling, fuel, accommodation and labour with the goal of reducing our unit costs of delivering our services to our customers.  These cost reduction efforts have succeeded in partially offsetting the impact of significantly lower customer pricing and reduced activity.  As a result, Q3 2015 EBITDA before share-based payments expense (see Non-GAAP Measures) for the pressure pumping segment was $12.7 million, compared to $53.9 million in Q3 2014.  For the nine months ended September 30, 2015, EBITDA before share-based payments expense (see Non-GAAP Measures) was $16.1 million compared to $75.0 million for the prior year nine-month period.  The decrease in EBITDA before share-based payments expense (see Non-GAAP Measures) in the current three and nine month periods is due to sharply lower customer activity and pricing levels taking effect as early as January, while cost reductions, especially pertaining to labour, could not be implemented until the second and third quarters.

Fluid Management Services

Effective September 11, 2015, Canyon acquired, through its wholly owned subsidiary, Fraction, all of the assets (the "Assets") of a private oilfield fluid hauling business located in Grande Prairie, Alberta (the "Acquisition").  These Assets have been operating in the Grande Prairie area since 2005 and come with a dedicated client list and a committed group of employees.  Total consideration paid for the Acquisition was $8.5 million cash, $1.0 million in Canyon common shares, plus an earn-out post-closing. The Acquisition represents a new service line for the Fluid Management division and will enhance Fraction's existing fluid storage, transfer and logistics services.

For the three and nine months ended September 30, 2015, Fraction contributed $10.8 million and $34.8 million, respectively, in revenue and $3.3 million and $10.3 million, respectively, in EBITDA before share-based payments expense (see Non-GAAP Measures).  The revenue and EBITDA for the three months ended September 30, 2015 are 33% and 47% lower, respectively, than the $16.3 million and $6.2 million in revenue and EBITDA before share-based payment expense generated by Fraction for the three months ended September 30, 2014.

Industry conditions including a prolonged period of depressed commodity prices, lower drilling and completion activity and competitive pricing impacted Q3 2015 revenues and profitability in this division in comparison to Q3 2014.  While fluid containment and fluid transfer services are still required for completions, the volume of work has decreased and continued pressure on pricing remains.  Depending on the type of service, customer pricing was 15% - 40% lower than peak levels experienced in 2014.

During the quarter, Fraction worked on 114 fluid transfer and fluid containment projects of which, 85 were completed and eight are continuing into Q4 2015.  The job mix, in terms of number of jobs, was skewed towards fluid containment projects as there were a few large fluid transfer projects that were awarded in prior quarters and required most of our fluid transfer equipment and manpower for Q3 2015. 

Tank rental revenues in Q3 2015 were also lower than Q3 2014 with utilization averaging 54% in the current quarter compared to 76% in the prior year's quarter when industry activity levels were considerably higher.  The utilization rates are lower year over year due to lower industry activity but are higher quarter over quarter which is consistent with historical trends as customers begin to rent storage tanks again just before the end of break-up as they plan their winter water needs.  In addition, there has been continued pricing pressure on tank rentals as supply is significantly greater than the current demand.

Cost Reduction Measures

To address the significant decreases in industry pricing, Canyon has been working diligently to reduce all operating and input costs in both the pressure pumping and fluid management divisions particularly relating to: chemicals; proppants; fuel; third party hauling; accommodations and labour.  To date, chemical costs have been reduced by approximately 20%, and third party hauling rates have decreased by approximately 30%.  The cost of both Canadian and U.S. sourced proppants has been reduced by approximately 15% net of exchange rate fluctuations.  Minor concessions have been received from fuel suppliers in addition to the benefits of lower oil prices and accommodation costs have been reduced by about 15%.  As previously reported, Canyon reduced its permanent employee count in the pressure pumping and fluid management divisions by 22% and 15%, respectively, to match the anticipated reduced activity levels over the remainder of the year.  This resulted in the temporary idling of approximately 10% of the pressure pumping fleet to match the current environment.  In addition, all remaining employees' salaries in both divisions were rolled back between 5% and 10% with a 10% reduction of executive management salaries and directors' fees.  Various employee benefits have also been adjusted or suspended.

Canyon does not view the reduction of input costs as a one-time exercise and is continuing to work with suppliers and customers to gain concessions and economies.  More importantly, we have made and will continue to make changes to permanently reorganize and transform certain business processes with the goal of permanently reducing our cost of delivering our services.  Canyon is also moving away from the fixed labour cost model for certain groups within our Company to a variable pay model so that labour expenses are more closely linked to revenue.  The pressure pumping industry has historically experienced significant volatility of cash flows due to the fact that approximately 75% of fixed operating costs are salaried field positions.  This lack of flexibility in our previous cost structure caused cash flow losses during low activity periods.  Any successful changes Canyon can make to move towards a variable cost structure will aid in reducing cash flow volatility during periods of low activity levels.  For example, effective August 1, 2015, Canyon introduced an hourly rate for the transportation group to more closely match the compensation structure of the trucking industry.  In Q4 2015, Canyon will introduce a day rate for the majority of the field staff in its pressure pumping business which will place about 65% of the Company's consolidated workforce on a variable pay structure.

Dividend

The Board of Directors (the "Board") continuously reviews the long-term capital structure of the Company and its corresponding dividend policy each fiscal quarter.  In May 2015, the Board determined that a 50% reduction to Canyon's dividend was prudent in the context of the continuing industry uncertainty.  Effective for the July 2015 payment, Canyon's quarterly dividend was reduced to $0.075 per common share.  In September, the Board determined that a further reduction of the quarterly dividend to $0.03 per common share was prudent given the continuing degradation of industry conditions.  Effective for the October 2015 payment, Canyon's quarterly dividend was reduced to $0.03 per common share.  These two reductions in the quarterly dividend will result in annualized cash savings of $33.1 million and will enable Canyon to preserve its strong balance sheet and provide the Company with additional financial flexibility to pursue organic growth prospects and potential asset acquisitions.  The Board will continue to regularly review the dividend payout in the context of the market.

NON-GAAP MEASURES

The Company's Condensed Consolidated Interim Financial Statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). Certain measures in this document do not have any standardized meaning as prescribed by IFRS and are considered Non-GAAP Measures.

EBITDA before share-based payments, funds from operations, and adjusted income (loss) and comprehensive income (loss) and adjusted per share amounts are not recognized measures under IFRS.  Management believes that in addition to income (loss) and comprehensive income (loss), the following measures are useful to help assess the results of the Company.

Adjusted EBITDA before share-based payments

Canyon calculates EBITDA before share-based payments as income and comprehensive income (loss) for the year adjusted for depreciation and amortization, equity settled share-based payment transactions, gain or loss on sale of property and equipment, finance costs, foreign exchange (gain) loss, income tax (recovery) expense, gain on business combination and goodwill impairment. 

EBITDA before share-based payments is a useful supplemental measure as it provides an indication of the cash results generated by the Company's principal business activities prior to consideration of how those activities are financed and how the results are taxed.

Funds from operations

Funds from operations refers to cash flow from operations before changes in non-cash working capital and taxes.

Funds from operations is a measure of liquidity based on cash generated by the Company's activities without consideration of the timing of the monetization of non-cash working capital items or payment of taxes.  Management believes that funds from operations provides investors with an indication of cash available for capital commitments, debt repayments, payment of taxes, and other expenditures.

Adjusted income (loss) and comprehensive income (loss)

Adjusted income (loss) and comprehensive income (loss) is calculated as income (loss) and comprehensive income (loss) plus amortization expense on intangibles, gain on business combination, goodwill impairment and share-based payment transactions. 

Adjusted per share basic and diluted income (loss) per share are calculated as adjusted income (loss) and comprehensive income (loss) divided by weighted average basic and diluted shares outstanding.

These measures provides investors with results generated by the Company's business activities in the normal course of business, not taking into account share-based payments expense, one-time items or amortization of intangibles which are not reflective of operational activity.

Readers should be cautioned, however, that the above metrics should not be construed as an alternative to income (loss) and comprehensive income (loss) determined in accordance with IFRS as an indicator of the Company's performance.  Canyon's method of calculating these metrics may differ from other companies and accordingly, they may not be comparable to measures used by other companies. 

Reconciliations of these Non-GAAP Measures to the most directly comparable IFRS measures are outlined below.

Adjusted EBITDA before share-based payments

 

Funds from Operations

 

Adjusted Income (Loss) and Comprehensive Income (Loss)

 

QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS

 

Pressure Pumping Services

Revenue

In Q3 2015, Canyon completed 759 pressure pumping jobs, down 14% from 887 jobs completed in Q3 2014 although industry activity levels were approximately a half of prior year's levels.  Commodity prices remained low throughout the quarter, which coupled with reduced industry activity, has led to sharply lower customer pricing.  We estimate pricing is 30% lower than Q4 2014 levels.  As a result, pressure pumping revenues were $100.5 million, 47% down from $188.1 million in Q3 2014.  With fracturing revenues accounting for over 90% of total pressure pumping revenues, average fracturing revenue per job decreased 44% to $173,638 in Q3 2015 from $310,403 in Q3 2014 due to job mix and lower pricing.

Cost of services

Cost of services for the three months ended September 30, 2015 totaled $94.8 million (2014: $141.1 million) and included materials, products, transportation and repair costs of $65.8 million (2014: $98.4 million), employee benefits expense of $18.2 million (2014: $31.6 million), and depreciation of property and equipment of $10.8 million (2014: $11.1 million).

• Materials, products, transportation and repair costs decreased by 33% in Q3 2015 when compared to Q3 2014 mainly due to lower activity and input cost reductions, as previously discussed. 
• Employee benefits expense has decreased by 42% in Q3 2015 due to a reduction in the permanent employee count and a company-wide wage rollback as a result of decreased activity. 
• Depreciation of property and equipment has remained relatively flat year over year.  In 2014, Canyon added 30,000 Hydraulic Horsepower of pumping capacity, coiled tubing equipment, transportation and logistics equipment, nitrogen and cement and acid equipment. While additional equipment was added to Canyon's fleet throughout 2014, the increased asset base for amortization expense was offset by a change in the expected useful life of coiled tubing, nitrogen and cementing equipment which reduced the depreciation expense of these assets.

Administrative expenses

Administrative expenses for the three months ended September 30, 2015 totaled $5.9 million (2014: $5.2 million) and included employee benefits expense of $2.6 million (2014: $2.9 million), share-based payments expense of $1.5 million (2014: $0.7 million) and other administrative expenses of $1.2 million (2014: $1.4 million).

Administrative expenses increased due to the $0.8 million increase in share-based payments expense as a result of the modification of the Share Purchase Option Plan as discussed in Note 16(a) of the Condensed Consolidated Interim Financial Statements.  The decrease in employee benefits expense was mainly attributable to the wage and benefits rollbacks and a reduced number of staff, as previously discussed.  The decrease in other administrative expenses is mainly the result of lower professional, consulting and travel costs.  Administrative expenses also include depreciation of buildings and office equipment and amortization of intangibles of $0.6 million (2014: $0.3 million).

EBITDA before share-based payments (See Non-GAAP Measures)

In Q3 2015, pressure pumping contributed $12.7 million of EBITDA before share-based payments expense (see Non-GAAP Measures) compared to $53.9 million in the comparable 2014 quarter.  As previously discussed, lower customer pricing due to decreased industry-wide activity levels and competitive pricing led to the decrease. 

Fluid Management Services

Revenue

The fluid management services business, acquired July 1, 2014, contributed $10.8 million of revenue to Canyon in Q3 2015.  The lower WCSB industry activity, along with a prolonged period of low commodity prices has led to sharply lower pricing for these services of between 15% - 40% in comparison to Q3 2014, depending on the service.  Lower pricing coupled with lower industry activity resulted in fluid management revenue decreasing by 33% from $16.3 million in Q3 2014 to $10.8 million in Q3 2015.

Cost of services

Cost of services for the three months ended September 30, 2015 totaled $8.2 million (2014: $9.6 million) and included materials, products, transportation and repair costs of $3.4 million (2014: $5.2 million), employee benefits expense of $2.7 million (2014: $3.1 million), and depreciation of property and equipment of $2.1 million (2014: $1.3 million).

• Materials, products, transportation and repair costs decreased by 35% in Q3 2015 when compared to Q3 2014, mainly due to lower activity and input cost reductions, as previously discussed. 
• Employee benefits expense has decreased by 13% in Q3 2015 due to a company-wide wage rollback as a result of decreased activity.  Employee costs have not been reduced to the extent that pricing levels have eroded due to the labour intensive nature of certain of our services.
• The increase in depreciation expense for the division is due to equipment additions in late 2014 and 2015.  The 2015 additions included the purchase of the fluid transport assets effective September 11, 2015.

Administrative expenses

Administrative expenses for the three months ended September 30, 2015 totaled $1.4 million and includes employee benefits expense and other administrative expenses.  Administrative expenses decreased by 19% from $1.8 million in Q3 2014 to $1.4 million in Q3 2015.  The decrease is largely the result of wage and benefit rollbacks and a reduced number of staff, as previously discussed.

The amortization expense of $1.5 million relates to the amortization of customer relationships and non-competition agreements related to the acquisition of Fraction.

EBITDA before share-based payments (See Non-GAAP Measures)

Q3 2015 EBITDA before share-based payments (see Non-GAAP Measures) totaled $3.3 million, or 30% of revenue.  This is a decrease of 47% in comparison to Q3 2014 and is due to lower pricing and decreased activity levels, as previously discussed.

Corporate

This segment consists of costs incurred to operate a public company, including corporate management, head office costs, corporate share-based payment expenses and professional fees.

Administrative expenses

Administrative expenses for the three months ended September 30, 2015 totaled $1.5 million compared to $2.8 million in Q3 2014 and include employee benefits expense, share-based payments, and other head office administrative expenses.  The decrease in administrative expenses is mainly due to wage rollbacks implemented effective April 1, 2015, as previously discussed.  In addition, administrative expenses in Q3 2014 included $0.7 million in legal, professional and other fees related to the acquisition of Fraction.

Other items – three months ended September 30, 2015

Finance costs and foreign exchange loss

Finance costs remained relatively flat in Q3 2015 in comparison to Q3 2014 and totaled $0.6 million in Q3 2015 (2014: $0.7 million).  Finance costs include interest on loans, finance lease obligations and automobile loans.

In Q3 2015 the Company recorded a foreign exchange loss of $0.8 million compared to $0.6 million in Q3 2014.  The increase is due to fluctuations in the Canadian dollar versus the U.S. dollar exchange rate in relation to the purchase of U.S. sourced proppants.

Gain on business combination

On September 11, 2015, the Company acquired the assets of a privately held fluid transportation company. The total consideration paid was $9.5 million which consisted of 0.2 million Canyon common shares issued at $5.04 per share and cash consideration of $8.5 million.  The net identifiable assets totaled $10.0 million which resulted in a gain of $0.5 million.  The gain on business combination arose due to depressed commodity prices which allowed the Company to purchase the business for less than fair value.

Goodwill impairment

At the end of each reporting period, Canyon conducts a review of its carrying value for each of its cash generating units ("CGU") for indicators of impairment.  As a result of the volatility in commodity prices, as well as the slower than anticipated recovery in oilfield services activity, the Company tested its Fluid Management Services CGU for impairment.  As a result of the impairment test performed in Q3 2015, the Company recorded a goodwill write-down of $18.9 million in the Fluid Management Services segment. 

Income tax recovery

At the expected combined income tax rate of 26%, the loss before income tax for Q3 2015 would have resulted in an income tax recovery of $0.7 million after adjusting the Q3 2015 loss before income tax of $21.7 million for the $18.9 million goodwill impairment, which is in line with the expected recovery of $0.8 million.  The recovery is due to a loss in the quarter in comparison to net income in Q3 2014 which resulted in a tax expense.

EBITDA before share-based payments (See Non-GAAP Measures)

In Q3 2015, Canyon recorded consolidated EBITDA before share-based payments (see Non-GAAP Measures) of $15.1 million in comparison to $57.7 million recorded in the comparable 2014 quarter.  The decrease is due to the overall lower activity levels across the WCSB and significantly lower customer pricing, as previously discussed.

Income (loss) and comprehensive income (loss) and income (loss) per share

Loss and comprehensive loss was $20.9 million in Q3 2015 in comparison to income and comprehensive income of $30.6 million in Q3 2014.  The loss in Q3 2015 in comparison to income in Q3 2014 is mainly due to the goodwill impairment of $18.9 million, as well as the aforementioned reduced industry-wide activity and lower pricing.

Basic and diluted loss per share was $0.30 for the three months ended September 30, 2015 compared to basic and diluted income per share of $0.45 and $0.44, respectively, for the comparable 2014 quarter.

NINE MONTHS ENDED SEPTEMBER 30, 2015 CONSOLIDATED STATEMENTS OF OPERATIONS

 

Pressure Pumping Services

Revenue

Pressure pumping revenues for the nine months ended September 30, 2015 totaled $275.2 million compared to $386.5 million earned in the nine months ended September 30, 2014, a decrease of 29%.  Canyon completed 1,662 pressure pumping jobs for the nine months ended September 30, 2015 compared to 2,124 jobs completed in the prior year nine month period, a decrease of 22%.  Average fracturing revenue decreased by 14% to $217,006 in the current nine month period from $252,184 in the prior year nine month period as larger job sizes partially offset the significant pricing declines.

Cost of services

Cost of services for the three months ended September 30, 2015 totaled $281.0 million (2014: $329.0 million) and included materials, products, transportation and repair costs of $184.6 million (2014: $221.5 million), employee benefits expense of $63.1 million (2014: $77.6 million), and depreciation of property and equipment of $33.3 million (2014: $29.9 million).

• Materials, products, transportation and repair costs decreased by 17% for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.  These costs did not decrease in line with revenues mainly due to larger job sizes and the increase in the usage of more expensive "Ottawa White" sands by customers as previously discussed. 
• Employee benefits expense has decreased by 19% for the nine months ended September 30, 2015 in comparison to the nine months ended September 30, 2014.  In 2014 staff levels increased over the second half of the year to handle the increase in 24 hour operations and higher activity.  These higher staff levels were maintained through to the end of Q1 2015 as Canyon was busy to mid-March.  Q3 2015 employee benefits expense decreased by 42% compared to Q3 2014 as the aforementioned staff reductions were implemented at the end of March.
• The increase in depreciation of property and equipment for the nine months ended September 30, 2015 in comparison to the nine months ended September 30, 2014 is due to the addition of equipment to Canyon's fleet particularly in the second half of 2014 and accelerated depreciation relating to the replacement of a number of pump components.  This was partially offset by a change in the expected useful life of coiled tubing, nitrogen and cementing equipment which reduced the depreciation expense of these assets.

Administrative expenses

Administrative expenses for the nine months ended September 30, 2015 totaled $16.3 million compared to $15.5 million for the nine months ended September 30, 2014 and included employee benefits expense of $7.7 million (2014: $7.9 million) and share-based payments expense (see Non-GAAP Measures) of $3.2 million (2014: $1.8 million).  The decrease in employee benefits expense was mainly attributable to wage and benefits rollbacks implemented at the beginning of Q3 2015. 

Administrative expenses also include depreciation of buildings and office equipment of $1.7 million (2014: $1.4 million).  In addition, other administrative expenses totaled $3.7 million for the nine months ended September 30, 2015 compared to $4.4 million for the nine months ended September 30, 2014.

EBITDA before share-based payments (See Non-GAAP Measures)

For the nine months ended September 30, 2015, EBITDA before share-based payments (see Non-GAAP Measures) contributed by pressure pumping was $16.1 million compared to $75.0 million in the comparable 2014 period.  As previously discussed lower customer pricing due to decreased industry-wide activity levels more than offset input cost reductions in the period. 

Fluid Management Services

Revenue

The fluid management services business contributed $34.8 million of revenues to Canyon for the nine months ended September 30, 2015.  Water access restrictions in the northern regions of the WCSB were lifted in December 2014, which resulted in increased activity levels for the segment in the first half of 2015.  This was offset by a prolonged break-up as well as decreased customer pricing, as previously discussed.

Cost of services

Cost of services for the nine months ended September 30, 2015 totaled $25.8 million and includes materials, products, transportation and repair costs of $11.3 million, employee benefits expense of $8.9 million, and depreciation of property and equipment of $5.6 million.

Administrative expenses

Administrative expenses for the Corporate segment for the nine months ended September 30, 2015 totaled $4.4 million and includes employee benefits expense and other administrative expenses. 

The amortization expense of $4.5 million relates to the amortization of customer relationships and non-competition agreements pursuant to the acquisition of Fraction.

EBITDA before share-based payments (See Non-GAAP Measures)

For the nine months ended September 30, 2015 EBITDA before share-based payments totaled $10.3 million in the fluid management services segment, or 30% of revenue.

Corporate

This segment consists of costs incurred to operate a public company, including corporate management, head office costs, corporate share-based payment expenses and professional fees.

Administrative expenses

Administrative expenses in the Corporate segment for the nine months ended September 30, 2015 totaled $4.4 million compared to $6.5 million in Q3 2014 and include employee benefits expense, share-based payments, and other corporate office administrative expenses.  The decrease in administrative expenses is mainly due to lower employee benefits expense as a result of wage rollbacks and staff reductions in 2015.  In addition, there was $0.7 million of acquisition costs related to the acquisition of Fraction in 2014.

Other Items – Nine months ended September 30, 2015 Statement of Operations

Finance costs and foreign exchange loss

Finance costs include interest on loans, finance lease obligations and automobile loans and totaled $2.0 million for the nine months ended September 30, 2015 (2014: $1.0 million), with the increase mainly attributable to the increase in loans and borrowings used to partially fund the Company's capital program in the second half of 2014 and in 2015.

For the nine months ended September 30, 2015 the Company recorded a foreign exchange loss of $2.1 million compared to $0.9 million for the nine months ended September 30, 2014.  The increase is due to the declining Canadian dollar versus the U.S. dollar exchange rate during the year to date mostly in relation to the purchase of U.S. sourced proppants.

Gain on business combination

On September 11, 2015, the Company acquired the assets of a privately held fluid transportation company. The total consideration paid was $9.5 million which consisted of 0.2 million Canyon common shares issued at $5.04 per share and cash consideration of $8.5 million.  The net identifiable assets totaled $10.0 million which resulted in a gain on business combination of $0.5 million. 

Goodwill impairment

At the end of each reporting period, Canyon conducts a review of its carrying value for each of its cash generating units ("CGU") for indicators of impairment.  As a result of the volatility in commodity prices, as well as the slower than anticipated recovery in oilfield services activity, the Company tested its Fluid Management Services CGU for impairment.  As a result of the impairment test performed, the Company recorded a goodwill write-down of $18.9 million in the Fluid Management Services segment. 

Income tax recovery

At the expected combined income tax rate of 26%, the loss before income tax for the nine months ended September 30, 2015 of $29.7 million (before the goodwill impairment expense which is not subject to tax) would have resulted in an income tax recovery of $7.7 million, compared to the actual income tax recovery of $4.8 million.  The decrease in the actual income tax recovery was due to the impact of non-deductible expenses as well as an increase in the corporate income tax rate in Alberta.

EBITDA before share-based payments (See Non-GAAP Measures)

For the nine months ended September 30, 2015 Canyon recorded consolidated EBITDA before share-based payments (see Non-GAAP Measures) of $23.7 million compared to $75.9 million for the nine months ended September 30, 2014.  As previously discussed, the decreased EBITDA before share-based payments expense is due to significantly lower industry-wide activity and resulting pricing pressure partially offset by the addition of Fraction, which contributed $10.3 million in EBITDA before share-based payments for the nine months ended September 30, 2015.

Income (loss) and comprehensive income (loss) and income (loss) per share

The aforementioned reduced industry-wide activity and resulting lower pricing, as well as the goodwill impairment expense resulted in a loss and comprehensive loss totaling $43.8 million for the nine months ended September 30, 2015 compared to income and comprehensive income of $27.2 million for the nine months ended September 30, 2014.

Basic and diluted loss per share was $0.64 for the nine months ended September 30, 2015 compared to basic and diluted income per share of $0.42 and $0.41, respectively, for the comparable 2014 period.

RESIGNATION OF DIRECTOR

The Board would also like to announce the retirement of Mr. Stan Grad from Canyon's board of directors.  The Board would like to thank Mr. Grad for his distinguished tenure as the longest serving Board member in the Company's history.  Mr. Grad was a founder of Canyon and was an integral part of its success over the last 11 years as a trusted advisor and mentor throughout his tenure and his contributions will be missed by the Board and management.  Mr. Grad's official resignation will become effective immediately as he looks forward to pursuing his many personal interests. 

FORWARD-LOOKING STATEMENTS

This document contains certain forward-looking information and statements within the meaning of applicable securities laws.  The use of any of the words "expect", "anticipate", "continue", "estimate", "objective", "ongoing", "may", "will", "should", "believe", "plans" and similar expressions are intended to identify forward-looking information or statements.  In particular, but without limiting the foregoing, this document contains forward-looking information and statements pertaining to the following: future oil and natural gas prices; future results from operations; future liquidity and financial capacity and financial resources; future costs, expenses and royalty rates; future interest costs; future capital expenditures; future capital structure and expansion; the making and timing of future regulatory filings; and the Company's ongoing relationship with major customers.

The forward-looking information and statements contained in this document reflect several material factors and expectations and assumptions of the Company including, without limitation: that the Company will continue to conduct its operations in a manner consistent with past operations; the general continuance of current or, where applicable, assumed industry conditions; the continuance of existing (and in certain circumstances, the implementation of proposed) tax, royalty and regulatory regimes; certain commodity price and other cost assumptions; the continued availability of adequate debt and/or equity financing and cash flow to funds its capital and operating requirements as needed; and the extent of its liabilities.  The Company believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable but no assurance can be given that these factors, expectations and assumptions will prove to be correct.

The forward-looking information and statements included in this document are not guarantees of future performance and should not be unduly relied upon.  Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information or statements including, without limitation: changes in commodity prices; changes in the demand for or supply of the Company's services; unanticipated operating results; changes in tax or environmental laws, royalty rates or other regulatory matters; changes in the development plans of third parties; increased debt levels or debt service requirements; limited, unfavourable or a lack of access to capital markets; increased costs; a lack of adequate insurance coverage; the impact of competitors; reliance on industry partners; attracting and retaining skilled personnel and certain other risks detailed from time to time in the Company's public disclosure documents (including, without limitation, those risks identified in this document and the Company's Annual Information Form).

The forward-looking information and statements contained in this document speak only as of the date of the document, and none of the Company or its subsidiaries assumes any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws.

SOURCE Canyon Services Group Inc.