NISKU, AB, Nov. 14, 2016 /CNW/ - Hyduke Energy Services Inc. (HYD - TSX), announced operating results for three and nine months ending September 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 nine months ended September 30, 2016 decreased 42.2% from $16,134 for the nine months ended September 30, 2015 to $9,323. Manufacturing & Fabrication segment revenue declined 40.6% 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 58.3% of this segment's revenue in the first nine months of 2016 was attributable to storage tanks and custom steel fabrication from primarily new clients to the Company compared to 16.7% of revenue in 2015. Revenue in the Company's Supply & Service segment declined by 45.1% 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 40% - 56% and service rig activity has declined 33% - 39% year over year for each quarter of 2015 and 2016.  

For the nine months ended September 30, 2016, consolidated negative gross margin was $2,263 or 24.3% of revenue compared to negative gross margin of $643 or 4.0% 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. Within the Manufacturing & Fabrication segment, the nine months ending September 30, 2016 contribution margin declined from 33.0% in 2015 to 14.3% reflecting overcapacity in this space and reduced demand resulting in greater pricing pressure. Indirect cost of sales declined 28.2% 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 21.4% in the Supply & Service segment with 47.1% of the reduction occurring in the administration and employment component of the division. Within the Manufacturing & Fabrication segment, general and administrative costs increased by $64 or 3.9%. 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 nine months ended September 30, 2016, Corporate Services and parent company selling, general and administrative expenses decreased $0.7 million or 30.0% to $1.5 million. On a year over year basis, sales and marketing expenses decreased 37.0% or $38 due to a decline in promotional and travel expenses and consulting and professional fees declined $74 or 28.8% due to a decline in legal services. Administrative and employment expenses declined 34.0% or $458 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 $320, administrative and employment expenses declined $410 in 2016 from 2015 expense levels. Administrative staff levels have decreased by 15.0% 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 10-30%. 

Negative EBITDAS for continuing operations was $3,212 for the nine months ended September 30, 2016, a decline of $1,579 from negative EBITDAS of $1,633 in 2015.    

At September 30, 2016, Hyduke maintained a cash balance of $1.4 million and had a current ratio of 1.1 to 1.00 and debt to equity ratio of 0.94 to 1.00.

Total assets of $20.3 million as at September 30, 2016 represents a decrease of $7.3 million (26.5%) 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 September 30, 2016 represents a decrease of $2.1 million (17.3%) from December 31, 2015. The reduction is due to the payment of accounts payables and accrued liabilities.

MANAGEMENT REVIEW AND OUTLOOK

The third quarter and first nine months of the current fiscal year remained a very challenging business environment for Hyduke, its clients and almost all companies operating in Canada's upstream oil and gas industry. The Company maintained positive liquidity by continuing to liquidate non-core assets and by shutting down operations consuming working capital that were no longer core to Hyduke's long term plans. This put the focus on the two core business segments of supplies and fabrication. Proceeds from the sale of the assets of Hyduke Machining Solutions augmented working capital and allowed the Company to further reduce long-term debt. Since oil prices began falling in late 2014 Hyduke has reduced long term debt by over $788 from $7,655 to $6,867.

Besides responsible management of working capital by every possible means, Hyduke's recovery strategy has had two main foundations; aggressive client diversification in the fabrication division and enhancement of quality, engineering and safety performance to differentiate the Company from competitors as a preferred vendor to the broadest number of potential customers. This was essential because a recovery of Hyduke's core business of building and maintaining drilling and service rigs seemed unlikely anytime soon. The result on a YTD basis has been working for 95 new clients and preparing quotations for another 82. It is unlikely that few if any of Hyduke's competitors have been able to make material improvements to operating practices during this prolonged industry recession. At September 30 the Company had gone 835 days without a Lost Time Accident and its TRIF rating has been at zero for the past year. This has given clients which have never before considered Hyduke to be a top tier vendor the confidence to permit the Company to submit bids for their business.

Without an upturn in business these significant process improvements would not be material. However, starting late in Q3 the impact of higher oil and natural gas prices began to have a measurable impact on revenue. The BW Rig supply division has moved into positive divisional operating cash flow (all direct costs covered and now contributing to a pro-rata share of corporate SG&A) for the first time this year. The fab division is not yet covering all direct cost causing the company to report a negative gross margin. However, new orders for new clients continue to come in and some core clients in the drilling and well servicing business are returning to complete and/or refurbish equipment as demand increases in the field. While this trend is not likely to be significant enough for Hyduke to generate positive EBITDA in the fourth quarter, should commodity prices not return to the depressed levels of the first half of the year 2017 should yield continued improvement.

On November 2 the Petroleum Services Association of Canada (PSAC) held its 2017 Drilling Activity Forecast event in Calgary.  PSAC estimated a modest 5.7% increase in wells drilled on a "rig released" basis, 4,175 in 2017 compared to 3,950 this year. PSAC's outlook is based on more stable commodity prices than in 2016 with WTI averaging US$52 a barrel next year and a C$2.50 average AECO spot price for gas. WTI closed at a multi-year low of US$26.19 on February 11. If natural gas averages C$2.50 this is almost three times the spot market lows endured earlier in 2016. These are material commodity price gains. Combined with reduced service costs and improved efficiency, this is permitting exploration and production companies to resume spending on production maintenance and reserve replacement.

Peters & Co. Limited predicted 5,300 wells with an average of 176 rigs drilling every day for the year. This would be a significant increase from 2016. The Canadian Association of Petroleum Producers (CAPP) released a drilling estimate of 4,900 wells for 2017. Peters & Co. estimated operating costs and sustaining capital in oil sands alone will exceed $40 billion in 2017 for the first time ever. CAPP sees conventional oil and gas investment increasing sharply next year to $22.1 billion from only $17.5 billion in 2016, a 26% improvement. This is meaningful for Hyduke's historic and new customer base.

At the present time the signal from Hyduke's core drilling clients is they will be busier this winter than last. JuneWarren Nickles Rig Locator reported 184 active rigs on November 8, the highest number since February of this year. The sales activity at BW Rig has been supported primarily by the service rig sector. The Canadian Association of Oilwell Drilling contractors reported that service rig activity in Q3 averaged 24% utilization, the same as in Q1 which is traditionally the busiest. This is up sharply for only 18% in Q2. On November 11 the Daily Oil Bulletin reported October well licenses issued as 747, a monthly high for 2016 and about 1/3 higher than the previous two months.

In September Hyduke's Board of Directors held a two-day strategic retreat to discuss and review all options for the Company. This included expanding the board of directors to bring in more corporate finance and mergers and acquisition experience and improved financial management processes for monitoring cash flow, fabrication margins and bidding win/loss ratios. While no single plan of action was adopted, two directors were assigned to work with the CEO to examine expansion, acquisition and sectoral consolidation opportunities with a view to expanding business and spreading fixed costs across a larger revenue base in order to accelerate the Company's return to positive gross margins and positive operating cash flow. Detailed analysis of multiple opportunities in several sectors are underway. Because the Company is operating with its core management team slimmed down as much as possible, this permits simultaneous focus on core operations and growth opportunities.

As is often the case in the upstream oil and gas industry, two geopolitical events could shape Hyduke's future in ways not fully understood at the time of writing. 

The much-anticipated meeting of OPEC at the end of November will determine whether the organization will return to supply management which has successfully stabilized and increased oil prices in the past. The world appears to be well-supplied with oil at present however the amount by which supply exceeds demand continues to decline. OPEC's decision will determine whether oil prices stabilize in the short term or next year. A failure by OPEC to do anything at this meeting to restrain output would likely have a negative impact on oil prices in late 2016 and early 2017.

The other unanticipated event was the election of Donald Trump as the next President of the U.S. Trump and the Republican Party have been public supporters of the Keystone XL pipeline. Market access to tidewater has been an over-arching impediment to continued investment in expansion of oil sands production in Canada in the past few years and have caused a material oil price differential between Canadian and world crude. Keystone's proponent TransCanada Corporation has already announced it is reviewing restarting the project. While this will have no material impact on Hyduke in the short term, it is a major positive development for the future of oil sands investment. As part of its client diversification program, Hyduke in the past two years has done more oil sands support fabrication than at any time in its history ensuring the Company is poised to benefit from expansion should the trajectory of future investment change direction.

Hyduke continues to face challenges until such time it is generating a positive cash flow from operations. However, the macro-economic environment in which the company operates has undergone a positive change of direction for the first time in two years. This permits us to remains cautiously optimistic.

Again, we thank our employees, vendors, debt capital providers and shareholders for their patience and support as we navigate through the most difficult operating environment in the Company's history.  

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.