NISKU, AB, Aug. 12, 2016 /CNW/ - Hyduke Energy Services Inc. (HYD - TSX), announced operating results for three and six months ending June 30, 2016 and 2015.  Hyduke's Financial Statements and Management's Discussion and Analysis have been filed with regulators and are available at www.hyduke.com and at www.SEDAR.com. Following is a summary of the 2016 quarterly financial statements.  All amounts disclosed are in thousands of dollars. 

SELECTED FINANCIAL INFORMATION

Total revenue for the six months ended June 30, 2016 decreased 40.3% from $10,731 for the six months ended June 30, 2015 to $6,410.  Manufacturing & Fabrication segment revenue declined 28.0% from the levels achieved in 2015.  Through diversification into storage tanks and custom steel fabrication, the Company has been able to mitigate the decline in demand for the manufacture of oil and gas well drilling and service equipment resulting from depressed oil and gas prices and vastly reduced exploration and production company operating and capital expenditures.  A total of 60.5% of this segment's revenue in the first six months of 2016 was attributable to storage tanks and custom steel fabrication from primarily new clients to the Company compared to 1.0% of revenue in 2015.  Revenue in the Company's Supply & Service segment declined by 52.8% compared to 2015 levels entirely due to declined drilling and service rig activity.  The revenue decline for the Supply & Service segment is consistent with the decline in activity levels in the oil industry.  Per the Canadian Association of Oilwell Drilling Contractors' rig counts for the Western Canadian sedimentary basin, drilling rig activity has declined 44% - 56% and service rig activity has declined 33% - 39% year over year for each quarter of 2015 and 2016.  

For the six months ended June 30, 2016, consolidated negative gross margin was $1,789 or 27.9% of revenue compared to negative gross margin of $532 or 5.0% of revenue in 2015. Within the Supply & Service segment, contribution margin (the margin calculated solely on sales orders or work orders) remained consistent year over year, while indirect cost of sales declined 41.5% in 2016 due to a reduction in staff and variable based expenses.  Within the Manufacturing & Fabrication segment, the six month ending June 30, 2016 contribution margin declined from 31.1% in 2015 to 13.8% reflecting overcapacity in this space and reduced demand resulting in greater pricing pressure.  Indirect cost of sales declined 21.0% within the Manufacturing & Fabrication segment due to a reduction variable expenses associated with a second facility.  The second facility was acquired through the acquisition of Thunder & Lightning Welding late in 2014 and the premise was vacated in the second quarter of 2015.  General and administrative costs included in cost of sales have declined approximately 23% in the Supply & Service segment with 57% of the reduction occurring in the administration and employment component of the division.  Within the Manufacturing & Fabrication segment, general and administrative costs increased by $76 or 6.8%.  The increase is due to additional administrative and employment personnel required to manage the new operating units (storage tanks and custom steel fabrication) and increased consulting and professional fees attributable to the API monogram certification received during the second quarter of 2016. 

For the six months ended June 30, 2016, Corporate Services and parent company selling, general and administrative expenses decreased $0.5 million or 28.9% to $1.1 million.  On a year over year basis, sales and marketing expenses decreased 44.0% or $30 due to a decline in promotional and travel expenses and consulting and professional fees declined $43 or 22.9% due to a decline in legal services.  Administrative and employment expenses declined 34.7% or $340 year over year.  After normalizing for the reclassification of administrative expense to cost of sales and a decline in year over year severance costs of $280, administrative and employment expenses declined $163 in 2016 from 2015 expense levels.  Administrative staff levels have decreased by 26% year over year, remaining staff are on the federal work-sharing program and working a 25% reduced work week and executive have reduced compensation by 15-20%. 

Negative EBITDAS for continuing operations was $2,444 for the six months ended June 30, 2016, a decline of $1,279 from negative EBITDAS of $1,165 in 2015.     

At June 30, 2016, Hyduke maintained a cash balance of $1.2 million and had a current ratio of 5.1 to 1.00 and debt to equity ratio of 0.63 to 1.00.

Total assets of $21.9 million as at June 30, 2016 represents a decrease of $5.7 million (20.7%) from December 31, 2015 and is due primarily to the collection of accounts receivable and a reduction in inventory. 

Total liabilities of $9.8 million as at June 30, 2016 represents a decrease of $2.1 million (17.4%) from December 31, 2015.  The reduction is due to the payment of accounts payables and accrued liabilities.

EXECUTIVE TRANSITION

Effective August 12, 2016 Veronica Dutchak has resigned as Chief Financial Officer to pursue other opportunities after 13 years with the company. We wish her the best in her future endeavors and thank her for her years of dedication and services. Hyduke will be entering into a multi-year consulting agreement with Ms. Dutchak to ensure she is available as required to provide direction and guidance as required. She will be replaced by Dayna Decker, CMA, who has been training under and working with Ms. Dutchak for the past three years. We are confident this will be an orderly and seamless transition.

MANAGEMENT REVIEW AND OUTLOOK

The financial results for the first six months of the 2016 fiscal year and second quarter ended June 30, 2016 reflect the highly competitive business environment for all companies involved up the upstream oil and gas supply chain in Canada due to low oil prices, low natural gas price and vastly reduced operating and capital spending by all parties: exploration and production companies, oilfield service companies, midstream operators and pipeline operators. As a manufacturer of equipment and components for all of the major sectors of the upstream oil and gas industry Hyduke is now affected by the spending and investment patterns of all these segments. As a supplier of parts and operating supplies to oil and gas well drilling and service rigs it is impossible for Hyduke to maintain historical levels of business without this equipment being active in the field.

While this appears to be entirely negative in fact it is not. Before 2015 Hyduke was almost 100% dependent upon on revenues from drilling and well servicing contractors. Due to aggressive marketing and business development activities in the past 18 months the vast majority of the business in the fabrication and manufacturing sector has come from products the company had never built before or from new clients. This includes tanks, tank servicing, production equipment, processing plant components, and business for non-oil and gas industries including Edmonton's international airport.

During the period the decision was made to close Hyduke Machining Solutions in Calgary because of continued, unsustainable operating losses and no indication when this historically profitable business unit might return to profitability. In the current market the company does not believe this unit can be sold as an ongoing business so efforts are underway to liquidate the inventory and machining equipment for the greatest possible value. The equipment itself has multi-industry applications so the intention is to turn these and the inventory assets into cash in the current fiscal year.

Efforts to liquidate dormant inventory to improve working capital proved successful in the second quarter as some previously manufacturing equipment the client could ultimately not pay for was sold resulting in a meaningful injection to working capital.

As part of its aggressive sales and business diversification activities, in the second quarter Hyduke quoted on about $65 million worth of possible manufacturing and maintenance opportunities. Each quote is carefully prepared such if the company is successful three outcomes are intended: 1) a cost of goods materially lower than sale price; 2) a realistic client delivery date to ensure the margin is maintained and the client pleased to ensure return business, and; 3) a properly designed and engineered product resulting in successful operational performance resulting in an enduring client/supplier relationship. This has not been the case for most companies supplying domestically manufacturing and fabricated oil and gas related equipment for several years. While Hyduke is facing the same economic challenges as others in the sector, it is also building for the future. To this end the company has maintained and even augmented its technical and engineering capabilities during this downturn. The re-instatement of Hyduke's API certification for drilling and well servicing components during a period of highly depressed business is but one example of the company's determination to be relevant in the current market and a greater force than in the past as the recovery unfolds.

One of the challenges all segments of an oversupplied oil and gas manufacturing and services business faces in the current market is too many players chasing too little business resulting in fixed costs being too high a percentage of total revenues, particularly with the squeezed margins clients must pursue in order to adapt their business to greatly reduced oil and gas prices. To this end Hyduke has been developing a strategy of partnering with other companies that have historically been competitors or not been clients to have Hyduke manage fixed engineering and administrative costs plus do the fabrication and manufacturing in the main Nisku facility.

As the downturn continues more companies are looking at their own situation and contacting Hyduke to explore joint solutions to the industry's common problem. There has been more progress in this area in the past two months than the past year. At the same, Hyduke continues to seek strategic partnerships or acquisitions in same or similar business that could be more effective with a business combination of some kind. Hyduke's TSX listing and the credibility of its executive team and board of directors give the company much more financial flexibility than a private owner/operator may have in the current market environment.

On the cash management side Hyduke continues to do whatever it can to conserve cash and maintain the strongest possible balance sheet and financial flexibility. In the second quarter the company reached an agreement with its senior secured lender to waive all major covenants until its term loan matures in the third quarter of 2017. Continued attempts to liquidate excess inventory and minimize losses from all non-performing activities have allowed Hyduke to report a very strong working capital position as at June 30, 2016 relative to its sales, operating margins and cash flow from operations.

It is impossible to write optimistically about the largely unknown future of Canada's upstream oil and gas industry and therefore the future of Hyduke at this time. However, there were two developments in Q2 that give the company confidence the worst is behind us.

First, revenue in the manufacturing and fabrication division was higher in the second quarter of 2016 than in the second quarter of 2015. This means that the aggressive pursuit of new business is proving successful. The second is the sales of operating supplies for well servicing rigs in particular in the second quarter was surprisingly busy given the low price of oil in the first quarter of the year. This indicates that with the improvement in oil prices from the multi-year lows in February was causing operators to get back in the field and repair their wells to get production back on stream. This was not the case in the first quarter.

Management and the board of directors wishes to thank our dedicated staff, trusted and respected vendors and our debt and equity capital providers for their patience and support as Hyduke does everything possible to manage its way through what is now clearly the most significant downturn and challenging business environment in the company's history. Together we can make this work.

Forward Looking Statements
This report contains certain forward-looking statements under the heading "Outlook" and elsewhere concerning future events or the Company's operations, anticipated financial performance, business prospects and strategies of Hyduke.  Forward-looking information typically contains statements with words such as "anticipate", "believe", "estimate", "expect", "plan", "intend" or similar words suggesting future outcomes or outlooks on, without limitation, estimates of business activity, supply and demand for the Company's products, the estimated amounts and timing of capital expenditures, anticipated future debt levels, or other expectations, beliefs, plans, objectives, assumptions or statements about future events or performance.  Readers are cautioned not to place undue reliance on forward-looking information. By its nature, forward-looking information involves numerous assumptions, inherent risks and uncertainties both general and specific that may cause actual future results to differ materially from those contemplated and contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur.  These factors may affect anticipated earnings or assets and include, but are not limited to: industry activity levels, market liquidity, customer credit risk, competition, oil and gas prices, product liability, fixed price contracts, development of new products, uninsured and underinsured losses, access to additional financing, source of supply of raw material and third party components, availability of key personnel, agreements and contracts, government regulations, foreign exchange exposure, interest rate risk, international scope of operations, environmental health and safety regulations and Hyduke's anticipation of and success in managing the risks implied by the foregoing.  The Company cautions that the foregoing list of important factors is not exhaustive.  The Company believes that the expectations reflected in the forward-looking statements are reasonable, but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this report should not be unduly relied upon.  The forward-looking statements in this report speak only as of the date of this report.  Hyduke undertakes no obligation to update publicly or otherwise revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required pursuant to applicable securities legislation.

About Hyduke

Trading on the TSX under the symbol "HYD," Hyduke Energy Services Inc. is an engineering-driven fabricator, assembler and supplier of equipment and services to the oil and gas industry as well as the construction and transportation sectors.

The TSX has not reviewed and does not accept responsibility for the adequacy or accuracy of this News Release.

SOURCE Hyduke Energy Services Inc.