Strad Energy Services Announces Second Quarter Results
CALGARY, Alberta, Aug. 09, 2018 (GLOBE NEWSWIRE) -- NOT FOR DISTRIBUTION TO U.S. NEWS WIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES ("U.S.")
The news release contains “forward-looking information and statements” within the meaning of applicable securities laws. For full disclosure of the forward-looking information and statements and the risks to which they are subject, see the “Cautionary Statement Regarding Forward-Looking Information and Statements” later in this news release.
Strad Energy Services Ltd., (TSX:SDY) (“Strad” or the “Company”), a North American-focused, energy services company, today announced its financial results for the three months ended June 30, 2018. All amounts are stated in Canadian dollars unless otherwise noted.
SECOND QUARTER SELECTED FINANCIAL AND OPERATIONAL HIGHLIGHTS:
Increased U.S. revenue by 71% to $10.8 million compared with $6.3 million in Q2 2017;
Total revenue decreased 2% to $28.0 million compared to $28.5 million in Q2 2017;
Second quarter income improved to $3.9 million compared to a loss of $(2.2) million in Q2 2017, due to a deferred tax recovery of $4.3 million resulting from the recognition of a foreign exchange gain for tax purposes;
EBITDA(1,4) decreased 17% to $4.8 million compared to $5.8 million in Q2 2017;
Earnings per share improved to $0.07 as compared to loss per share of $(0.04) during the same period in 2017. The loss per share before the deferred tax recovery was $(0.01) as compared to $(0.04) for the same period in 2017;
Reduced funded debt(2) by 37% to $6.2 million at June 30, 2018, compared to $9.8 million at December 31, 2017. Funded debt(2) to covenant EBITDA(3) ratio was 0.3 : 1.0 at June 30, 2018;
Increased the 2018 capital budget by 60% from $8.0 million to $13.0 million. The increase in the capital budget is to meet the expected demand for matting related to energy infrastructure projects in Canada and the U.S.;
Capital additions totaled $6.3 million focused on increasing the Company's matting fleet and;
On July 4, 2018, the Company announced that it had obtained approval from the Toronto Stock Exchange to amend its normal course issuer bid to increase the maximum number of common shares that may be purchased thereunder to a maximum of 4,946,487 common shares. Since the inception of the NCIB, the Company purchased and canceled 2,708,920 common shares;
Notes:
Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is not a recognized measure under IFRS, and, accordingly, Strad's use of such a term may not be comparable to similarly defined measures presented by other entities; see “Non-IFRS Measures and Reconciliations”.
Funded debt includes bank indebtedness plus long-term debt plus current and long-term obligations under finance lease less cash.
Covenant EBITDA, as defined in the Company's credit facility agreement, is based on trailing twelve months adjusted EBITDA plus share based payments, plus additional one-time charges.
During the second quarter of 2018, the Company changed the method of calculation for EBITDA by no longer adjusting for gains or losses resulting from foreign exchange or the disposal of property, plant and equipment during the normal course of business. These changes have been updated for prior period balances.
"The continued momentum in our U.S. operations contributed significantly to our quarterly performance, underpinning our strong cash-flow results,” said Andy Pernal, President and Chief Executive Officer. “With our traditional markets beginning to benefit from higher WTI prices and various pipeline approvals our outlook for the second half of 2018 and into 2019 is positive, leading us to increase our growth capital investments by 60%.”
"During the quarter, we repurchased 1.5 million shares and expanded our normal course issuer bid, while at the same time increased our capital program and reduced our debt,” said Michael Donovan, Chief Financial Officer of Strad. “We will continue to allocate capital to the opportunities with the highest rates of return while remaining focused on cost discipline and balance sheet strength in 2018.”
SECOND QUARTER FINANCIAL HIGHLIGHTS
($000's, except per share amounts)
Three months ended June 30,
Six months ended June 30,
2018
2017
% Chg.
2018
2017
% Chg.
Revenue
28,035
28,494
(2
)%
56,399
56,154
nm
Net income (loss)
3,861
(2,163
)
nm
3,464
(4,512
)
nm
Per share ($), basic
0.07
(0.04
)
nm
0.06
(0.08
)
nm
Per share ($), diluted
0.07
(0.04
)
nm
0.06
(0.08
)
nm
EBITDA (1)
4,830
5,799
(17
)%
10,093
10,459
(3
)%
EBITDA as a % of revenue
17
%
20
%
18
%
19
%
Per share ($), basic
0.08
0.10
(20
)%
0.17
0.18
(6
)%
Per share ($), diluted
0.08
0.10
(20
)%
0.17
0.18
(6
)%
Cash flow from operating activities
9,644
3,031
218
%
16,123
6,572
145
%
Per share ($), basic
0.17
0.05
240
%
0.27
0.11
145
%
Per share ($), diluted
0.17
0.05
240
%
0.27
0.11
145
%
Funds from operations (2)
7,109
6,076
17
%
13,580
11,603
17
%
Per share ($), basic
0.12
0.10
20
%
0.23
0.20
15
%
Per share ($), diluted
0.12
0.10
20
%
0.23
0.20
15
%
Capital expenditures (3)
6,290
6,264
nm
11,045
9,734
13
%
Total assets
170,516
191,174
(11
)%
170,516
191,174
(11
)%
Long-term debt
6,370
20,951
(70
)%
6,370
20,951
(70
)%
Total long-term liabilities
18,052
32,979
(45
)%
18,052
32,979
(45
)%
Common shares - end of period ('000's)
57,304
60,013
57,304
60,013
Weighted average common shares ('000's)
Basic
57,623
58,059
58,664
57,669
Diluted
57,947
58,059
58,987
57,669
Notes:
Earnings before interest, taxes, depreciation and amortization (“ EBITDA”) is not a recognized measure under IFRS, and, accordingly, Strad's use of such term may not be comparable to similarly defined measures presented by other entities; see “Non-IFRS Measures and Reconciliations”. During the second quarter of 2018, the Company changed the method of calculation for EBITDA by no longer adjusting for gains or losses resulting from foreign exchange or the disposal of property, plant and equipment during the normal course of business. These changes have been updated for prior period balances.
Funds from operations is cash flow from operating activities excluding changes in non-cash working capital. Funds from operations is not a recognized measure under IFRS; see “Non-IFRS Measures and Reconciliations”.
Includes assets acquired under finance lease and purchases of intangible assets.
FINANCIAL POSITION AND RATIOS
($000's except ratios)
As at June 30, 2018
As at December 31, 2017
Working capital(1)
15,327
19,617
Funded debt(2)
6,183
9,768
Total assets
170,516
174,821
Funded debt to EBITDA(3)
0.3 : 1.0
0.4 : 1.0
Notes: (1)Working capital is calculated as current assets less current liabilities. (2)Funded debt includes bank indebtedness plus long-term debt plus current and long-term obligations under finance lease. (3) EBITDA is based on trailing twelve months adjusted EBITDA plus share based payments, plus severance and transaction costs.
SECOND QUARTER RESULTS
Strad reported a decrease in revenue and EBITDA of 2% and 17%, respectively during the three months ended June 30, 2018, compared to the same period in 2017. During the three months ended June 30, 2018, Strad reported net income of $3.9 million compared to a net loss of $(2.2) million, due to certain tax transactions in the U.S. that resulted in the recognition of a deferred tax recovery of $4.3 million. Strad’s second quarter results were impacted by decreased drilling activity in Strad’s Canadian operating regions. Decreased average rig counts in western Canada led to reduced operating activity and revenue from our Canadian Operations. Fewer energy infrastructure projects were taking place in 2018, due to project timing, as compared to 2017, which further impacted Canadian revenue. However, higher rig counts in all three of the U.S. operating regions, resulted in increased revenue year-over-year from our U.S. Operations offsetting a portion of the Canadian Operations decline. Total company EBITDA margin percentage decreased to 17% compared to 20% in the prior year.
During the second quarter of 2018, the Company changed its previous method of calculating EBITDA, by no longer adjusting for gains or losses on foreign exchange or on the sale of property, plant and equipment that occur during the normal course of business.
For the three months ended June 30, 2018, Strad's U.S. Operations reported an increase in revenue and EBITDA of 71% and 256% as compared to the same period in 2017. Net income from U.S. Operations increased from a loss of $(2.1) million in the second quarter of 2017 to income of $4.6 million in the second quarter of 2018. This increase is due to certain tax transactions in the U.S. that resulted in the recognition of a deferred tax recovery of $4.3 million. Rig counts in the Bakken, Marcellus and Rockies regions increased year-over-year by 24%, 13%, and 5% respectively, resulting in increased drilling activity and utilization for the second quarter of 2018 as compared to the same period in 2017. Revenue for the second quarter of 2018 was also impacted by improved customer pricing as compared to the same period in 2017. Second quarter EBITDA increased to $2.4 million, as compared to $0.7 million in the same period of 2017, as a result of the increase in revenue and a lean cost structure in the U.S. due to our focus on reducing overhead costs and discretionary spending.
Strad’s Canadian Operations reported a decrease in revenue, EBITDA and net income of 22%, 47% and 74%, respectively, during the three months ended June 30, 2018, compared to the same period in 2017. The decrease in revenue was a result of decreased surface equipment and matting utilization, which declined to 23% and 29%, respectively, as compared to 28% and 63% in the same period in 2017. Further impacting the decline in revenue during the second quarter of 2018 was the decrease in drilling activity and fewer matting projects as compared to the same period in 2017. This was offset by continued improved customer pricing during the second quarter of 2018.
Revenue generated from Strad’s energy infrastructure customer vertical decreased to $8.2 million during the second quarter of 2018 compared to $11.0 million in 2017. The decrease in energy infrastructure revenue is a result of fewer matting jobs during the second quarter of 2018, primarily due to the timing of projects in 2018, as compared to the same period in 2017. The energy infrastructure customer vertical continued to be primarily driven by matting in Canada.
During the second quarter of 2018, capital expenditures were $3.9 million in Canada, $0.4 million in Corporate and $2.0 million in the U.S. These were related primarily to wood matting additions in Canada and the U.S., which were acquired to prepare for and to support the energy infrastructure projects expected to begin during the second half of 2018.
During the second quarter of 2018, the Company decided to remove Product Sales as a reportable segment. This decision was a result of the Company no longer manufacturing in-house products.
RESULTS OF OPERATIONS
Canadian Operations
Three months ended June 30,
Six months ended June 30,
($000's)
2018
2017
% chg.
2018
2017
% chg.
Revenue
17,251
22,176
(22
)%
36,915
44,615
(17
)%
Operating expenses
12,556
14,701
(15
)%
26,410
30,381
(13
)%
Selling, general and administration
1,624
1,385
17
%
3,196
2,819
13
%
Share based payments
65
65
nm
120
148
nm
(Gain) on disposal of property, plant and equipment
(385
)
(111
)
nm
(469
)
(192
)
nm
Foreign exchange (gain) loss
50
(183
)
nm
52
(270
)
nm
Net income
394
1,528
(74
)%
1,307
2,857
(54
)%
EBITDA(2)
3,341
6,319
(47
)%
7,606
11,726
(35
)%
EBITDA as a % of revenue
19
%
28
%
21
%
26
%
Capital expenditures(3)
3,910
5,776
(32)
%
8,089
7,061
15
%
Total assets
105,542
122,595
105,542
122,595
Energy infrastructure revenue
7,824
9,971
(22
)%
13,461
17,876
(25
)%
Energy infrastructure revenue as a % of revenue
45
%
45
%
36
%
40
%
Equipment Fleet:
Surface equipment fleet at period end(4)
4,190
4,170
nm
4,190
4,170
nm
Average surface equipment fleet(5)
4,060
4,010
nm
4,030
3,990
nm
Average utilization %(6)
23
%
28
%
30
%
34
%
Matting fleet at period end(4)
71,000
64,200
11
%
71,000
64,200
11
%
Average matting fleet(5)
69,200
61,000
13
%
68,600
59,900
15
%
Average utilization %(6)
29
%
63
%
27
%
52
%
Rig Counts(7)
Western Canadian Basin
103
113
(9)
%
187
205
(9
)%
Notes:
Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is not a recognized measure under IFRS, and, accordingly, Strad's use of such term may not be comparable to similarly defined measures presented by other entities; see “Non-IFRS Measures and Reconciliations”. During the second quarter of 2018, the Company changed the method of calculation for EBITDA by no longer adjusting for gains or losses resulting from foreign exchange or the disposal of property, plant and equipment during the normal course of business. These changes have been updated for prior period balances.
Includes assets acquired under finance lease and purchases of intangible assets.
Surface equipment and matting fleet balances are as at June 30, 2018 and 2017.
Surface equipment and matting fleet balances are averages for the three months ended June 30, 2018 and 2017.
Equipment utilization includes surface and matting equipment on rent only and is calculated using gross asset value.
Source: Baker Hughes "North America Rotary Rig Count". Rig Counts are average rig counts for the period.
Revenue for the three months ended June 30, 2018, of $17.3 million decreased 22% compared to $22.2 million for the same period in 2017. Decreased revenue during the quarter was primarily a result of lower rig counts, which decreased by 9% year-over-year. This led to decreased operating activity in the WCSB and lower utilization rates for both matting and surface equipment, as compared to the same period in 2017. This was offset by improved customer pricing for both matting and surface equipment by 38% and 8% compared to the three months ended June 30, 2017.
During the second quarter, revenue from energy infrastructure projects was $7.8 million or 45% of total revenue for Canadian Operations as compared to $10.0 million or 45% of total Canadian Operations revenue in the second quarter of 2017. The overall decrease in revenue during the second quarter of 2018 is primarily due to fewer energy infrastructure jobs carried over from the prior quarter, in addition to delayed start dates for energy infrastructure projects, as compared to the same period in 2017.
During the second quarter, Strad’s matting fleet increased to 71,000 mats at June 30, 2018, compared to 64,200 mats as at June 30, 2017 to meet the expected increase customer demand. Second quarter matting utilization decreased to 29% compared to 63% in the same period of 2017 due to the increased fleet size as compared to the second quarter of 2017, as well as timing of energy infrastructure projects during 2018 compared to 2017.
Net income for the three months ended June 30, 2018, of $0.4 million, decreased 74% compared to $1.5 million for the same period in 2017. The decrease in net income is driven primarily by the decrease in revenue during the second quarter of 2018.
EBITDA for the three months ended June 30, 2018, of $3.3 million, decreased 47% compared to $6.3 million for the same period in 2017. EBITDA as a percentage of revenue, for the three months ended June 30, 2018, decreased to 19% as compared to 28% during the same period in 2017. The decrease in EBITDA is driven primarily by the decrease in revenue during the second quarter of 2018. EBITDA related to product sales for the three months ended June 30, 2018 decreased to $(0.1) million compared to $1.0 million in the same period of 2017.
Revenue for the six months ended June 30, 2018, of $36.9 million decreased 17% compared to $44.6 million for the same period in 2017. Decreased revenue during the quarter was primarily a result of lower rig counts, which decreased by 9% year-over-year. This led to decreased operating activity in the Western Canadian Sedimentary Basin and lower utilization rates for both matting and surface equipment, as compared to the same period in 2017. This was offset by improved customer pricing for both matting and surface equipment by 62% and 17% during the period, as compared to the same period in 2017.
During the first half of 2018, revenue from energy infrastructure projects was $13.5 million or 36% of total revenue for Canadian Operations as compared to $17.9 million or 40% of total Canadian Operations revenue in the same period of 2017. The overall decrease in revenue during the second quarter of 2018 is primarily due to a slower start to the matting season as a result of the longer winter, in addition to fewer energy infrastructure projects, as compared to the same period in 2017.
EBITDA for the six months ended June 30, 2018, of $7.6 million, decreased 35% compared to $11.7 million for the same period in 2017. EBITDA as a percentage of revenue, for the six months ended June 30, 2018, decreased to 21% as compared to 26% in 2017. The decrease in EBITDA is driven primarily by the decrease in revenue during the first half of 2018.
Net income for the six months ended June 30, 2018, of $1.3 million, decreased 54% compared to $2.9 million for the same period in 2017. The decrease in net income is driven primarily by the decrease in revenue during the first half of 2018.
Operating expenses for the three and six months ended June 30, 2018, of $12.6 million and $26.4 million decreased 15% and 13% compared to $14.7 million and $30.4 million for the same period in 2017. The decrease in operating expenses for the second quarter of 2018, as compared to the second quarter of 2017, is due to a decrease in matting related service work.
Selling, general and administrative expenses ("SG&A") for the three and six months ended June 30, 2018, of $1.6 million and $3.2 million increased 17% and 13% compared to $1.4 million and $2.8 million for the same period in 2017. SG&A costs increased over the three and six months ended June 30, 2018, as a result of increased headcount for 2018, resulting in increased costs related to salaries and benefits. Further impacting the increase in SG&A for the three and six months ended June 30, 2018, are increased IT services associated with technology enhancements.
U.S. Operations
Three months ended June 30,
Six months ended June 30,
($000's)
2018
2017
% chg.
2018
2017
% chg.
Revenue
10,784
6,318
71
%
19,484
11,539
69
%
Operating expenses
7,446
4,807
55
%
12,601
8,873
42
%
Selling, general and administration
1,282
861
49
%
2,503
1,757
42
%
Share based payments
15
14
nm
28
32
nm
(Gain) on disposal of property, plant and equipment
(339
)
(37
)
nm
(3
)
(35
)
nm
Foreign exchange loss
—
—
nm
3
—
nm
Net income (loss)
4,612
(2,056
)
nm
4,499
(4,263
)
nm
EBITDA(2)
2,379
669
256
%
4,352
920
373
%
EBITDA as a % of revenue
22
%
11
%
22
%
8
%
Capital expenditures(3)
1,981
488
306
%
2,151
2,673
(20
)%
Total assets
64,762
67,188
64,762
67,188
Energy infrastructure revenue
352
1,013
(65
)%
698
1,517
(54
)%
Energy infrastructure revenue as a % of revenue
3
%
16
%
4
%
13
%
Equipment Fleet:
Surface equipment fleet at period end(4)
1,910
1,930
nm
1,910
1,930
nm
Average surface equipment fleet(5)
1,930
2,010
nm
1,990
2,010
nm
Average utilization %(6)
51
%
25
%
49
%
25
%
Matting fleet at period end(4)
21,200
18,500
15
%
21,200
18,500
15
%
Average matting fleet(5)
18,900
18,300
3
%
18,600
17,000
9
%
Average utilization %(6)
32
%
29
%
30
%
24
%
Rig Counts (7)
Bakken
56
45
24
%
52
41
27
%
Marcellus
79
70
13
%
78
66
18
%
Rockies
65
62
5
%
68
57
19
%
Notes:
Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is not a recognized measure under IFRS, and, accordingly, Strad's use of such term may not be comparable to similarly defined measures presented by other entities; see “Non-IFRS Measures and Reconciliations”. During the second quarter of 2018, the Company changed the method of calculation for EBITDA by no longer adjusting for gains or losses resulting from foreign exchange or the disposal of property, plant and equipment during the normal course of business. These changes have been updated for prior period balances.
Includes assets acquired under finance lease and purchases of intangible assets.
Surface equipment and matting fleet balances are as at June 30, 2018 and 2017.
Surface equipment and matting fleet balances are averages for the three months ended June 30, 2018 and 2017.
Equipment utilization includes surface and matting equipment on rent only and is calculated using gross asset value.
Source: Baker Hughes "North America Rotary Rig Count". Rig Counts are average rig counts for the period.
Revenue for the three months ended June 30, 2018, increased 71% to $10.8 million from $6.3 million for the same period in 2017. The increase in revenue is due to a combination of higher surface equipment and matting utilization rates of 51% and 32% as compared to 25% and 29% in the same period of 2017, as well as improved customer pricing in both surface equipment and matting of 24% and 32%, respectively, as compared to the three months ended June 30, 2017. The improvements in utilization and customer pricing is driven by the increased drilling activity when compared to the same period in 2017. Average rig counts in the Bakken, Marcellus and Rockies regions increased by 24%, 13%, and 5%, respectively, during the second quarter of 2018 compared to the same period in 2017.
During the second quarter, revenue from energy infrastructure projects decreased to $0.4 million as compared to $1.0 million in the same period of 2017. Energy infrastructure revenue as a percentage of total revenue decreased to 3%, compared to 16% in the same period of 2017. The decrease in energy infrastructure revenue is primarily due to fewer projects in 2018 compared to the same period in 2017.
The U.S. matting fleet as at June 30, 2018, increased to 21,200 mats compared to 18,500 mats during the same period in 2017. The increase in mats during 2018 is to support future expected demand for U.S. customers.
Net income for the three months ended June 30, 2018, increased to $4.6 million compared to a loss of $(2.1) million for the same period in 2017. The significant decrease in net loss is primarily due to certain tax transactions in the U.S. that resulted in the recognition of a deferred tax recovery of $4.3 million. The remainder of the change is due to higher revenue and lower depreciation expense.
EBITDA for the three months ended June 30, 2018, increased to $2.4 million compared to $0.7 million for the same period in 2017. EBITDA as a percentage of revenue, for the three months ended June 30, 2018, was 22% compared to 11% for the same period in 2017. The significant increase in both EBITDA and EBITDA as a percentage of revenue is primarily due to higher revenue. EBITDA related to product sales for the three months ended June 30, 2018 decreased to $(0.2) million compared to $0.1 million in the same period of 2017.
Revenue for the six months ended June 30, 2018, increased 69% to $19.5 million from $11.5 million for the same period in 2017. The increase in revenue is due to a combination of higher surface equipment and matting utilization rates of 49% and 30% as compared to 25% and 24% for the same period of 2017. Further driving improved revenue is increased customer pricing in both surface equipment and matting, which increased by 34% and 56%, as compared to the six months ended June 30, 2017. The improvements in utilization and customer pricing is driven by the increased drilling activity when compared to the same period in 2017. Average rig counts in the Bakken, Marcellus and Rockies regions increased by 27%, 18%, and 19%, respectively, during the second quarter of 2018 compared to the same period in 2017.
During the first half of 2018, revenue from energy infrastructure projects was $0.7 million or 4% of total revenue for U.S. Operations, compared to $1.5 million or 13% in the same period of 2017.The decrease in revenue from energy infrastructure projects is primarily due to fewer matting jobs for the period ending June 30, 2018, as compared to the same period in 2017.
Net income for the six months ended June 30, 2018, increased to $4.5 million compared to a loss of $(4.3) million for the same period in 2017. The increase in net income is primarily due to certain tax transactions in the U.S. that resulted in the recognition of a deferred tax recovery of $4.3 million. The remainder of the change is due to higher revenue.
EBITDA for the six months ended June 30, 2018, increased to $4.4 million compared to $0.9 million for the same period in 2017. EBITDA as a percentage of revenue, for the six months ended June 30, 2018, was 22% compared to 8% for the same period in 2017. The significant increase in both EBITDA and EBITDA as a percentage of revenue is primarily due to higher revenue and a lean cost structure.
Operating expenses for the three and six months ended June 30, 2018, of $7.4 million and $12.6 million, increased 55% and 42% as compared to $4.8 million and $8.9 million for the same period in 2017. The increase in operating expenses during the three and six months ended June 30, 2018, is a result of increased activity levels due to the increase in average rig counts.
SG&A costs for the three and six months ended June 30, 2018, of $1.3 million and $2.5 million increased 49% and 42% compared to $0.9 million and $1.8 million for the same period in 2017. The change in SG&A expenses for the second quarter of 2018 is due to the increased head count for 2018, resulting in increased costs related to salaries and benefits.
OUTLOOK
During the second quarter, economic and market conditions remained relatively strong as the North American energy sector continues to recover from the downturn experienced in recent years. Robust West Texas Intermediate (“WTI”) prices and a pro-investment political environment have led to a resurgence of the oil and gas market in the United States. While the Permian Basin has attracted the most investment, drilling activity increased around other basins where Strad has operations. Rig counts in the Bakken, Marcellus and Rockies regions have all increased year-over-year and we remain well positioned to capitalize on opportunities in these areas.
A strong balance sheet has allowed Strad to repurchase 2.7 million common shares to June 30, 2018. Subsequent to the quarter, we obtained approval from the TSX to increase the number of common shares that the Company can purchase for cancellation under its Normal Course Issuer Bid (“NCIB”), to 4.9 million common shares. We will continue to evaluate all options to create value for shareholders, including the repurchase of additional common shares.
Geographic diversification between the United States and Canada continues to benefit the Company as our U.S. Operations contributed $2.4 million in EBITDA for the quarter, an increase of 256% from the prior year. The EBITDA increase is a result of improved customer pricing and higher drilling activity in all three of our U.S. operating regions. To date, U.S. results have been driven primarily by equipment rentals, throughout the rest of 2018 and onward we will focus on expanding our matting offerings in the U.S.
The timing of major infrastructure projects impacted our second quarter results relative to 2017. Canadian operations experienced a year-over-year decline in both revenue and EBITDA of 22% and 47% respectively. Revenue from our energy infrastructure vertical totaled $7.8 million for the second quarter compared to $10.0 million in 2017. In 2017, several major projects were awarded in the first half of the year while larger infrastructure projects in 2018 are expected to be awarded throughout the third and fourth quarter. While the investment climate has been challenging for the Oil and Gas sector in Canada over the past few years, recent announcements provide some renewed optimism for 2018 and early 2019. The commitment by the Federal government to purchase and complete the Trans Mountain Expansion Project increases the likelihood that the initiative will be completed, albeit uncertainty still exists regarding the timing of the construction. The LNG Canada project is expected to make a final investment decision in the second half of the year, which would become the largest active infrastructure project in Canada. These projects, as well as the Coastal Gaslink project which is a sub-set of the LNG Canada project, could provide significant opportunity for the Company if they are approved and move forward in 2019.
Consistent with our focus on the energy infrastructure vertical, the Board approved an incremental increase of the capital budget to $13.0 million to expand our fleet to meet expected customer demand. During the second quarter we invested $5.3 million in the matting fleet. Total capital spending for the quarter was $6.3 million, with year to date spending totaling $11.0 million. In addition to matting, capital spending primarily centered around technology initiatives to drive further efficiencies throughout our operations. We continue to evaluate the size of our capital program on an ongoing basis, and will make additional strategic investments to the extent opportunities justify additional spending.
Our strong balance sheet and free cash flow continue to provide Strad the flexibility to evaluate many alternatives to create shareholder value, including both organic growth opportunities or strategic acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
($000's)
June 30, 2018
December 31, 2017
Current assets
29,800
31,899
Current liabilities
14,473
12,282
Working capital(1)
15,327
19,617
Banking facilities
Operating facility
—
—
Syndicated revolving facility
6,370
10,776
Total facility borrowings
6,370
10,776
Total credit facilities(2)
48,500
48,500
Unused credit capacity
42,130
37,724
Notes:
Working capital is calculated as current assets less current liabilities, as derived from the Company's consolidated statement of financial position.
Facilities are subject to certain limitations on accounts receivable, inventory, and net book value of fixed assets and are secured by a general security agreement over all of the Company's assets. As at June 30, 2018, Strad had access to $48.5 million of credit facilities.
As at June 30, 2018, working capital was $15.3 million compared to $19.6 million at December 31, 2017. The change in current assets is a result of an 8% decrease in accounts receivable to $24.0 million for the second quarter of 2018 compared to $26.0 million for the fourth quarter of 2017. The decrease in accounts receivable is due to the decrease in Canadian Operations revenue. Inventory increased by 45% to $2.6 million at June 30, 2018, from $1.8 million at December 31, 2017. The increase in inventory is due to the build-up of wood mat inventory, which are available for sale to customers or if client demand increases, can be transferred to the Company's fleet. Prepaid expenses increased 40% at June 30, 2018, as compared to December 31, 2017. The increase in prepaids relates to the normal course of business.
The change in current liabilities is a result of a 20% increase in accounts payable and accrued liabilities to $14.3 million at June 30, 2018, compared to $11.9 million at year end. The increase in accounts payable is primarily due to the timing of payments made for the second quarter of 2018.
Cash flow from operating activities for the six months ended June 30, 2018, increased to $16.1 million compared to $6.6 million for the six months ended June 30, 2017, due to a lower net loss, increased cash generated from used fleet sales, and lower non-cash working capital. Funds from operations for the three months ended June 30, 2018, increased to $7.1 million compared to $6.1 million for the three months ended June 30, 2017. Capital expenditures totaled $6.3 million for the three months ended June 30, 2018. Management monitors funds from operations and the timing of capital additions to ensure adequate capital resources are available to fund Strad’s capital program.
As at June 30, 2018, the Company’s syndicated banking facility consists of an operating facility with a maximum principal amount of $7.0 million CAD and $5.0 million USD, and a $36.5 million CAD syndicated revolving facility, both of which are subject to certain limitations on accounts receivable, inventory, and net book value of fixed assets and are secured by a general security agreement over all of the Company’s assets. As at June 30, 2018, the Company had access to the maximum credit facilities. The syndicated banking facility will mature on September 29, 2020. The syndicated banking facility bears interest at bank prime plus a variable rate, which is dependent on the Company’s funded debt to covenant EBITDA ratio.
Based on the Company's funded debt to covenant EBITDA ratio, the interest rate on the syndicated credit facility is bank prime plus 0.50% on prime rate advances and at the prevailing rate plus a stamping fee of 1.50% on bankers' acceptances. For the three months ended June 30, 2018, the overall effective rates on the operating facility and revolving facility were 3.88% and 4.03%, respectively. As of June 30, 2018, $nil was drawn on the operating facility and $6.4 million was drawn on the revolving facility. Required payments on the revolving facility are interest only.
As at June 30, 2018, the Company was in compliance with all of the financial covenants under its credit facilities.
The relevant definitions related to the financial debt covenant ratio terms as set forth in the Company's syndicated banking facility are as follows:
Funded debt includes bank indebtedness plus long-term debt plus current and long-term obligations under finance lease, less cash.
Covenant EBITDA is based on trailing twelve months adjusted EBITDA plus share based payments, plus additional one-time charges.
Interest expense ratio is calculated as the ratio of trailing twelve months adjusted EBITDA plus share based payments to trailing twelve months interest expense on loans and borrowings.
The above noted definitions are not recognized under IFRS and are provided strictly for the purposes of the financial covenant calculation.
Financial Debt Covenants
As at June 30, 2018
December 31, 2017
Funded debt to EBITDA ratio (not to exceed 3.0:1)
Funded debt
6,183
9,768
Covenant EBITDA
24,499
25,339
Ratio
0.3
0.4
EBITDA to interest coverage ratio (no less than 3.0:1)
Covenant EBITDA
24,499
25,339
Covenant Interest expense
622
1,225
Ratio
39.4
20.7
NON-IFRS MEASURES AND RECONCILIATIONS
Certain supplementary measures in this Press Release do not have any standardized meaning as prescribed under IFRS and, therefore, are considered non-IFRS measures. These measures are described and presented in order to provide shareholders and potential investors with additional information regarding the Company’s financial results, liquidity and its ability to generate funds to finance its operations. These measures are identified and presented, where appropriate, together with reconciliations to the equivalent IFRS measure. However, they should not be construed as alternative measures to IFRS measures, and they may not be consistent with calculations of other companies. These measures are further explained below.
Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is not a recognized measure under IFRS. Management believes that in addition to net income (loss), EBITDA is a useful supplemental measure as it provides an indication of the results generated by the Company’s principal business activities prior to consideration of how those activities are financed or how the results are taxed. As of June 30, 2018, the Company implemented changes to its method of calculating EBITDA, which no longer includes adjustments for gains and losses due to foreign exchange or disposal of property, plant and equipment that occur during the normal course of business. EBITDA is now calculated as net income (loss) before interest, taxes, and depreciation and amortization. Segmented EBITDA is based upon the same calculation for defined business segments, which are comprised of Canadian Operations and U.S. Operations. The Company’s method of calculating EBITDA may differ from that of other organizations and, accordingly, its EBITDA may not be comparable to that of other companies.
Funds from operations are cash flow from operating activities excluding changes in non-cash working capital. Funds from operations is a non-IFRS measure commonly used in the energy services industry to assist in measuring a company's ability to finance its capital programs, debt repayments and other financial obligations. Funds from operations is not intended to represent net cash generated from operating activities or other measures of financial performance in accordance with IFRS. It is a supplemental measure to gauge performance of the Company before non-cash items. Working capital is calculated as current assets minus current liabilities, as derived from the Company's consolidated statement of financial position. Working capital, cash forecasting, and banking facilities are used by Management to ensure funds are available to finance growth opportunities.
Funded debt is calculated as bank indebtedness plus long-term debt plus current and long-term portion of finance lease obligations less cash from syndicate institutions.
Reconciliation of Funds from Operations ($000's)
Three months ended June 30,
Six months ended June 30,
2018
2017
2018
2017
Net cash generated from operating activities
9,644
3,031
16,123
6,572
Less:
Changes in non-cash working capital
2,535
(3,045
)
2,543
(5,031
)
Funds from Operations
7,109
6,076
13,580
11,603
Reconciliation of EBITDA ($000's)
Three months ended June 30,
Six months ended June 30,
2018
2017
2018
2017
Net income (loss):
3,861
(2,163
)
3,464
(4,512
)
Add (deduct):
Depreciation and amortization
5,240
7,572
10,672
13,955
Income tax (recovery) expense
(4,428
)
(102
)
(4,390
)
14
Interest expense
157
492
347
1,002
EBITDA(1)
4,830
5,799
10,093
10,459
Reconciliation of quarterly non-IFRS measures
($'000's)
Three and six months ended
Jun 30, 2018
Mar 31, 2018
Dec 31, 2017
Sep 30, 2017
Net income (loss):
3,861
(397
)
(3,364
)
598
Add (deduct):
Depreciation and amortization
5,240
5,432
8,918
7,359
Income tax (recovery) expense
(4,428
)
38
(653
)
1,123
Interest expense
157
190
158
359
EBITDA(1)
4,830
5,263
5,059
9,439
Three and six months ended
Jun 30, 2017
Mar 31, 2017
Dec 31, 2016
Sep 30, 2016
Net loss:
(2,163
)
(2,347
)
(3,105
)
(3,746
)
Add (deduct):
Depreciation and amortization
7,572
6,383
7,610
4,930
Income tax (recovery) expense
(102
)
116
(199
)
(281
)
Interest expense
492
509
458
362
EBITDA(1)
5,799
4,661
4,764
1,265
Reconciliation of funded debt
($'000's)
Six months ended June 30, 2018
Year-ended December 31, 2017
Bank indebtedness (cash) at syndicate banks
(573
)
(1,626
)
Long term debt
6,370
10,776
Current and long term obligations under finance lease
386
618
Funded Debt
6,183
9,768
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS
Certain statements and information contained in this press release constitute forward-looking information and statements within the meaning of applicable securities laws. The use of any of the words “expect”, “plan”, “continue”, “estimate”, “anticipate”, “potential”, “targeting”, “intend”, “could”, “might”, “should”, “believe”, “may”, “predict”, or “will” and similar expressions are intended to identify forward-looking information or statements. More particularly, this press release contains forward-looking statements concerning future capital expenditures of the Company, including its 2018 capital budget, planned allocations of capital expenditures, and funding thereof, by way of cash flow, anticipated cash flow, debt, anticipated demand for the Company’s products and services in 2018 and anticipated revenue allocations amongst our service offerings, drilling activity in North America, pricing of the Company’s products and services and expectations for 2018 and potential for improved profitability, and the potential for growth and expansion of certain components of the Company's business, including further additions to our matting fleet, anticipated benefits from cost reductions and timing thereof, manufacturing capacity to meet anticipated demand for the Company’s products, and expected exploration and production industry activity including the effects of industry trends on demand for the Company's products. These statements relate to future events or to the Company’s future financial performance and involve known and unknown risks, uncertainties and other factors that may cause the Company’s actual results, levels of activity, performance or achievements to be materially different from future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.
Various assumptions were used in drawing the conclusions or making the projections contained in the forward-looking statements throughout this press release. The forward-looking information and statements included in this press release are not guarantees of future performance and should not be unduly relied upon. Forward-looking statements are based on current expectations, estimates and projections that involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated and described in the forward-looking statements. 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. In addition to other material factors, expectations and assumptions which may be identified in this press release and other continuous disclosure documents of the Company referenced herein, assumptions have been made in respect of such forward-looking statements and information regarding, among other things: the Company will continue to conduct its operations in a manner consistent with past operations; the general continuance of current industry conditions; anticipated financial performance, business prospects, impact of competition, strategies, the general stability of the economic and political environment in which the Company operates; exchange and interest rates; tax laws; the sufficiency of budgeted capital expenditures in carrying out planned activities; the availability and cost of labour and services and the adequacy of cash flow; debt and ability to obtain financing on acceptable terms to fund its planned expenditures, which are subject to change based on commodity prices; market conditions and future oil and natural gas prices; and potential timing delays. Although Management considers these material factors, expectations and assumptions to be reasonable based on information currently available to it, no assurance can be given that they will prove to be correct.
Readers are cautioned that the foregoing lists of factors are not exhaustive. Additional information on these and other factors that could affect the Company's operations and financial results are included in reports on file with the Canadian Securities Regulatory Authorities and may be accessed through the SEDAR website (www.sedar.com) or at the Company's website. The forward-looking statements and information contained in this press release are expressly qualified by this cautionary statement. The Company does not undertake any obligation to publicly update or revise any forward looking statements or information, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.
This press release shall not constitute an offer to sell, nor the solicitation of an offer to buy, any securities in the United States, nor shall there be any sale of securities mentioned in this press release in any state in the United States in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.
SECOND QUARTER EARNINGS CONFERENCE CALL
Strad Energy Services Ltd. has scheduled a conference call to begin promptly at 8:00 a.m. MT (10:00 a.m. ET) on Friday, August 10, 2018.
The conference call dial in number is 1-844-388-0561, followed by Conference ID code 8942668
The conference call will also be accessible via webcast at www.stradenergy.com
A replay of the call will be available approximately after the conference call ends until Friday, August 17th, 2018, at 1:00 p.m. ET. To access the replay, call 1-855-859-2056, followed by pass code 8942668.
Strad Energy Services Ltd. Interim Consolidated Statement of Financial Position (Unaudited)
(in thousands of Canadian dollars)
As at June 30, 2018
As at December 31, 2017
$
$
Assets
Current assets
Cash
573
1,859
Trade receivables
23,970
26,038
Inventories
2,635
1,818
Prepaids and deposits
987
707
Other assets
1,347
1,289
Income taxes receivable
288
188
29,800
31,899
Non-current assets
Property, plant and equipment
139,197
141,917
Intangible assets
1,218
556
Income tax receivable
177
278
Deferred income tax assets
124
171
170,516
174,821
Liabilities
Current liabilities
Accounts payable and accrued liabilities
14,305
11,937
Current portion of obligations under finance lease
168
345
14,473
12,282
Non-current liabilities
Long-term debt
6,370
10,776
Obligations under finance lease
218
273
Deferred income tax liabilities
11,464
11,567
Total liabilities
32,525
34,898
Equity
Share capital
148,007
154,763
Contributed surplus
12,914
12,736
Accumulated other comprehensive income
20,971
22,635
Deficit
(43,901
)
(50,211
)
Total equity
137,991
139,923
Total liabilities and equity
170,516
174,821
Strad Energy Services Ltd. Interim Consolidated Statement of Income (Loss) and Comprehensive Income (Loss) For the three and six months ended June 30, 2018 and 2017 (Unaudited)
(in thousands of Canadian dollars, except per share amounts)
Three months ended June 30,
Six months ended June 30,
2018
2017
2018
2017
$
$
$
$
Revenue
28,035
28,494
56,399
56,154
Expenses
Operating expenses
20,002
19,508
39,011
39,254
Depreciation
5,196
7,507
10,583
13,823
Amortization of intangible assets
44
41
89
84
Amortization of long term assets
—
24
—
48
Selling, general and administration
3,793
3,245
7,549
6,526
Share-based payments
95
150
178
287
Gain on disposal of property, plant and equipment
(729
)
(150
)
(477
)
(227
)
Foreign exchange loss (gain)
44
(58
)
45
(145
)
Interest expense
157
492
347
1,002
Loss before income tax
(567
)
(2,265
)
(926
)
(4,498
)
Income tax (recovery) expense
(4,428
)
(102
)
(4,390
)
14
Income (loss) for the period
3,861
(2,163
)
3,464
(4,512
)
Other comprehensive income (loss)
Items that may be reclassified subsequently to net income
Cumulative translation adjustment
1,118
(1,704
)
2,680
(2,339
)
Deferred tax expense on foreign exchange gain
(4,344
)
—
(4,344
)
—
Total comprehensive income (loss)
635
(3,867
)
1,800
(6,851
)
Income (loss) per share:
Basic
$0.07
($0.04
)
$0.06
($0.08
)
Diluted
$0.07
($0.04
)
$0.06
($0.08
)
Strad Energy Services Ltd. Interim Consolidated Statement of Cash Flow For the three and six months ended June 30, 2018 and 2017 (Unaudited)
(in thousands of Canadian dollars)
Six months ended June 30,
2018
2017
$
$
Cash flow provided by (used in)
Operating activities
Net income (loss) for the period
3,464
(4,512
)
Adjustments for items not affecting cash:
Depreciation and amortization
10,672
13,955
Deferred income tax (recovery) expense
(4,400
)
14
Share-based payments
178
287
Interest expense and finance fees
347
1,002
Unrealized foreign exchange loss (gain)
94
(264
)
Gain on disposal of property, plant and equipment
(477
)
(227
)
Book value of used fleet sales in operating activities
3,702
1,348
Changes in items of non-cash working capital
2,543
(5,031
)
Net cash generated from operating activities
16,123
6,572
Investing activities
Purchase of property, plant and equipment
(10,298
)
(9,734
)
Proceeds from sale of property, plant and equipment
1,395
627
Purchase of intangible assets
(747
)
—
Cash paid on business acquisition
—
(2,750
)
Cash assumed on business acquisition
—
322
Changes in items of non-cash working capital
793
(361
)
Net cash generated used in investing activities
(8,857
)
(11,896
)
Financing activities
Repayment of long-term debt
(4,406
)
(10,857
)
Repayment of finance lease obligations (net)
(250
)
(548
)
Share issue costs
—
(1,025
)
Normal course issuer bid
(3,910
)
—
Interest expense and finance fees
(347
)
(1,002
)
Issuance of common shares
—
15,000
Changes in items of non-cash working capital
2
(28
)
Net cash generated from (used in) financing activities
(8,911
)
6,847
Effect of exchange rate changes on cash and cash equivalents
359
862
Increase (decrease) in cash and cash equivalents
(1,286
)
2,385
Cash and cash equivalents (including bank indebtedness) - beginning of year
1,859
(1,109
)
Cash and cash equivalents (including bank indebtedness) - end of period
573
1,276
Cash paid for income tax
—
—
Cash paid for interest
254
509
ABOUT STRAD ENERGY SERVICES LTD.
Strad is a North American energy services company that provides rental equipment and matting solutions to the oil and gas and energy infrastructure sectors. Strad focuses on providing complete customer solutions in Canada and the United States.
Strad is headquartered in Calgary, Alberta, Canada. Strad is listed on the Toronto Stock Exchange under the trading symbol “SDY”.
For more information, please contact:
Strad Energy Services Ltd.
Andy Pernal
President and Chief Executive Officer
(403) 775-9202
Fax: (403) 232-6901
email: apernal@stradenergy.com
Strad Energy Services Ltd.
Michael Donovan
Chief Financial Officer
(403) 775-9221
Fax: (403) 232-6901
email: mdonovan@stradenergy.com
www.stradenergy.com
