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Classified in: Oil industry, Business
Subject: ERN

Western Energy Services Corp. Releases Fourth Quarter and Year End 2018 Financial and Operating Results


CALGARY, Feb. 13, 2019 /CNW/ - Western Energy Services Corp. ("Western" or the "Company") (TSX: WRG) announces the release of its fourth quarter and year end 2018 financial and operating results.  Additional information relating to the Company, including the Company's financial statements and management's discussion and analysis as at and for the years ended December 31, 2018 and 2017 will be available on SEDAR at www.sedar.com.  Non-International Financial Reporting Standards ("Non-IFRS") measures and abbreviations for standard industry terms are included in this press release.  All amounts are denominated in Canadian dollars (CDN$) unless otherwise identified.

Fourth Quarter 2018 Operating Results:

2018 Operating Results:

 

Selected Financial Information








(stated in thousands, except share and per share amounts)









                     Three months ended December 31


Year ended December 31

Financial Highlights

2018

2017

    Change


2018

2017

Change

Revenue

63,133

66,515

(5%)


236,410

238,175

(1%)

Operating Revenue(1)

57,806

59,255

(2%)


215,818

218,988

(1%)

Gross Margin(1)

12,677

15,886

(20%)


50,535

58,310

(13%)

Gross Margin as a percentage of Operating Revenue

22%

27%

(19%)


23%

27%

(15%)

Adjusted EBITDA(1)

7,916

10,067

(21%)


31,616

35,695

(11%)

Adjusted EBITDA as a percentage of Operating Revenue

14%

17%

(18%)


15%

16%

(6%)

Cash flow from operating activities

5,022

(800)

(728%)


33,231

24,641

35%

Capital expenditures

6,102

5,912

3%


19,960

18,132

10%

Net loss

(9,530)

(4,974)

92%


(41,060)

(37,445)

10%

? basic net loss per share

(0.10)

(0.06)

67%


(0.45)

(0.48)

(6%)

? diluted net loss per share

(0.10)

(0.06)

67%


(0.45)

(0.48)

(6%)

Weighted average number of shares








? basic

92,305,208

88,812,216

4%


92,224,585

77,601,827

19%

? diluted

92,305,208

88,812,216

4%


92,224,585

77,601,827

19%

Outstanding common shares as at period end

92,305,542

92,175,598

-


92,305,542

92,175,598

-

(1)  See "Non-IFRS measures" included in this press release.


Three months ended December 31


Year ended December 31

Operating Highlights(1)

2018

2017

Change


2018

2017

Change

Contract Drilling








Canadian Operations:








Contract drilling rig fleet:








? Average active rig count

18.1

21.6

(16%)


19.2

20.6

(7%)

? End of period

50

50

-


50

50

-

Operating Revenue per Billable Day

19,622

18,807

4%


18,922

17,558(3)

8%

Operating Revenue per Operating Day

21,973

21,100

4%


20,984

19,446(3)

8%

Operating Days

1,487

1,774

(16%)


6,328

6,801

(7%)

Drilling rig utilization ? Billable Days

36%

43%

(16%)


38%

41%

(7%)

Drilling rig utilization ? Operating Days

32%

38%

(16%)


35%

37%

(5%)

CAODC industry average utilization ? Operating Days(2)

28%

28%

-


29%

29%

-









United States Operations:








Contract drilling rig fleet:








? Average active rig count

4.9

4.0

23%


3.4

3.1

10%

? End of period

7

6

17%


7

6

17%

Operating Revenue per Billable Day (US$)

19,756

18,038

10%


20,227

19,198

5%

Operating Revenue per Operating Day (US$)

22,183

21,265

4%


22,586

22,338

1%

Operating Days

403

313

29%


1,121

969

16%

Drilling rig utilization ? Billable Days

79%

75%

5%


57%

61%

(7%)

Drilling rig utilization ? Operating Days

71%

63%

13%


51%

52%

(2%)









Production Services








Well servicing rig fleet:








? Average active rig count

18.8

17.0

11%


16.5

17.2

(4%)

? End of period

66

66

-


66

66

-

Service rig Operating Revenue per Service Hour

667

708

(6%)


683

673

1%

Service Hours

17,247

15,650

10%


60,337

62,946

(4%)

Service rig utilization

28%

26%

9%


25%

26%

(4%)

(1)

See "Non-IFRS Measures" included in this press release.

(2)

Source:  The Canadian Association of Oilwell Drilling Contractors ("CAODC").  The CAODC industry average is based on Operating Days divided by total available days.

(3)

Excludes shortfall commitment revenue from take or pay contracts of $6.4 million for the year ended December 31, 2017.

 





Financial Position at (stated in thousands)

December 31, 2018

December 31, 2017

Change

Working capital

15,739

62,866

(75%)

Property and equipment

615,395

652,828

(6%)

Total assets

667,295

760,504

(12%)

Long term debt

222,258

265,219

(16%)

 

Western is an oilfield service company focused on three core business lines: contract drilling, well servicing and oilfield rental equipment services.  Western provides contract drilling services through its division, Horizon Drilling ("Horizon") in Canada, and its wholly owned subsidiary, Stoneham Drilling Corporation ("Stoneham") in the United States ("US").  Western provides well servicing and oilfield rental equipment services in Canada through its wholly owned subsidiary Western Production Services Corp. ("Western Production Services").  Western Production Services' division, Eagle Well Servicing ("Eagle") provides well servicing operations, while its division, Aero Rental Services ("Aero") provides oilfield rental equipment services.  Financial and operating results for Horizon and Stoneham are included in Western's contract drilling segment, while financial and operating results for Eagle and Aero are included in Western's production services segment.         

Western has a drilling rig fleet of 57 rigs specifically suited for drilling complex horizontal wells.  Western is currently the fourth largest drilling contractor in Canada, based on the CAODC registered rigs, with a fleet of 49 rigs operating through Horizon.  Of the Canadian fleet, 23 are classified as Cardium class rigs, 19 as Montney class rigs and seven as Duvernay class rigs.  As compared to the Cardium class rigs, the Montney class rigs have a larger hookload, while the Duvernay class rigs have the largest hookload allowing the rig to support more drill pipe downhole.  Additionally, Western has eight drilling rigs operating through Stoneham in the US, including six Duvernay class rigs.  Western is also the fifth largest well servicing company in Canada with a fleet of 66 rigs operating through Eagle.  Western's oilfield rental equipment division, which operates through Aero, provides oilfield rental equipment for hydraulic fracturing services, well completions and production work, coil tubing and drilling services.

Crude oil and natural gas prices impact the cash flow of Western's customers, which in turn impacts the demand for Western's services.  The following table summarizes average crude oil and natural gas prices, as well as average foreign exchange rates, for the three months ended December 31, 2018 and 2017 and for the years ended December 31, 2018 and 2017.





Three months ended December 31

Year ended December 31


2018

2017

Change

2018

2017

Change

Average crude oil and natural gas prices(1)(2)














Crude Oil







West Texas Intermediate (US$/bbl)

59.32

55.28

7%

64.95

50.81

28%

Western Canadian Select (CDN$/bbl)

33.91

49.10

(31%)

49.97

49.49

1%








Natural Gas







30 day Spot AECO (CDN$/mcf)

1.61

1.67

(4%)

1.53

2.23

(31%)








Average foreign exchange rates(2)







US dollar to Canadian dollar

1.32

1.27

4%

1.30

1.30

-



(1)

See "Abbreviations" included in this press release.                                                                        

(2)

Source: Bloomberg

 

WTI on average improved by 7% and 28% for the three months and year ended December 31, 2018 respectively, compared to the same periods in the prior year.  However, pricing on Canadian crude oil collapsed in the fourth quarter of 2018, resulting in record differentials.  As a result, the price for Western Canadian Select ("WCS") decreased by 31% for the three months ended December 31, 2018, as compared to the same period in the prior year, while on a year over year basis WCS improved by only 1%.  The United States dollar to Canadian dollar foreign exchange rate remained constant year over year, though the weakening of the Canadian dollar in the fourth quarter of 2018 had a slightly positive effect on the cash flows of Western's Canadian customers, when selling United States dollar denominated commodities.  Natural gas prices declined for both the three months and year ended December 31, 2018, as the 30 day spot AECO price decreased by 4% and 31% respectively, over the same periods of the prior year, however fourth quarter 2018 average AECO prices improved by 28% as compared to the third quarter of 2018.       

In the United States, improved market conditions in 2018 have led to a corresponding increase in the demand for oilfield services.  As reported by Baker Hughes, a GE Company, the average number of active drilling rigs in the United States increased approximately 18% in 2018 as compared to 2017.  However, market conditions in Canada did not improve.  Higher WTI prices were largely offset by increased differentials on Canadian crude oil, which hit record highs in the fourth quarter of 2018, prior to narrowing upon the announcement of mandatory crude oil production curtailments by the Government of Alberta.  This intervention increased market uncertainty, so the higher pricing did not correspond to higher activity.  Additionally, the continued industry concerns over market access, increased regulation, and the prevailing customer preference to return cash to shareholders, or pay down debt, rather than grow production have resulted in a decrease in industry activity in Canada.  The CAODC reported that for drilling in Canada, the total number of Operating Days in the WCSB decreased by approximately 3% in 2018 as compared to 2017.

Outlook

Currently, 27 of Western's drilling rigs are operating.  Six of Western's 57 drilling rigs (or 11%) are under long term take or pay contracts, with three expected to expire in 2019, two expected to expire in 2020 and one expected to expire in 2021.  These contracts each typically generate between 250 and 350 Billable Days per year.

Western's capital budget for 2019 remains unchanged and is expected to total $15 million with $2 million allocated for expansion capital and $13 million for maintenance capital.  Western believes the 2019 capital budget provides a prudent use of cash resources and will allow it to maintain its premier drilling and well servicing rig fleets, while remaining responsive to customer requirements.  Western will continue to manage its operations in a disciplined manner and make required adjustments to its capital program as customer demand changes.  

Mandated crude oil production cuts in Alberta and uncertainty surrounding takeaway capacity related to the timing of construction on the Trans Mountain pipeline expansion and the Keystone XL pipeline, have resulted in the announced capital budgets for Western's Canadian customers decreasing year over year in 2019 compared to 2018.  As such, activity levels in Canada are expected to decrease in 2019.  Controlling fixed costs and maintaining balance sheet flexibility are priorities for the Company, as prices for Western's services remain below historical levels.  However, Western's variable cost structure and a prudent capital budget will aid in preserving balance sheet strength.  Given the outlook for oilfield services in Canada, Western is proactively looking to deploy existing assets in Canada into more active resource plays in the United States.  Early in 2019, Western transferred a Duvernay class drilling rig from Canada to the Permian Basin in the United States, increasing the United States drilling rig fleet to eight rigs.  As at December 31, 2018, Western had $11.9 million drawn on its $60.0 million Credit Facilities, which mature on December 17, 2021 and currently has $213.4 million outstanding on its Second Lien Facility, which matures on January 31, 2023.   

Oilfield service activity in Canada will be affected by the development of resource plays in Alberta and northeast British Columbia which will be impacted by pipeline construction, environmental regulations, and the level of investment in Canada.  Currently, the largest challenges facing the oilfield service industry are limited take away capacity, continued customer spending constraints relative to historical levels, as a result of low natural gas prices and differentials on Canadian crude oil, and the increasing challenge of staffing field crews, particularly in the well servicing division.  Western's rig fleet is well positioned to benefit from the recently approved liquefied natural gas project in British Columbia.  It is also Western's view that its modern drilling and well servicing rig fleets, reputation, and disciplined cash management provide a competitive advantage which will enable the Company to manage through the current oilfield service environment.

Non-IFRS Measures

Western uses certain measures in this press release which do not have any standardized meaning as prescribed by International Financial Reporting Standards ("IFRS").  These measures, which are derived from information reported in the consolidated financial statements, may not be comparable to similar measures presented by other reporting issuers.  These measures have been described and presented in this press release in order to provide shareholders and potential investors with additional information regarding the Company.  These Non-IFRS measures are identified and defined as follows:

Operating Revenue

Management believes that Operating Revenue is a useful supplemental measure as it provides an indication of the revenue generated by Western's principal operating activities, excluding flow through third party charges such as rig fuel, which at the customer's request may be paid for initially by Western, then recharged in its entirety to Western's customers.  The closest IFRS measure would be revenue.

Gross Margin

Management believes that Gross Margin is a useful supplemental measure as it provides an indication of the results generated by Western's principal operating activities prior to considering administrative expenses, depreciation and amortization, stock based compensation, how those activities are financed, the impact of foreign exchange, how the results are taxed, how funds are invested, and how non-cash items and one-time gains and losses affect results.  The closest IFRS measure would be net income.

The following table provides a reconciliation of revenue under IFRS, as disclosed in the consolidated statements of operations and comprehensive income, to Operating Revenue and Gross Margin:






Three months ended December 31


Year ended December 31

(stated in thousands)

2018

2017


2018

2017

Operating Revenue






Drilling

44,498

45,906


165,684

166,660

Production services

13,283

13,362


50,345

52,456

Less: inter-company eliminations

25

(13)


(211)

(128)


57,806

59,255


215,818

218,988

Third party charges

5,364

7,260


20,629

19,187

Less: inter-company eliminations

(37)

-


(37)

-

Revenue

63,133

66,515


236,410

238,175

Less: operating expenses

(66,675)

(66,933)


(251,378)

(245,352)

Add:






Depreciation ? operating

16,161

16,238


65,097

65,227

Stock based compensation ? operating

58

66


406

260

Gross Margin

12,677

15,886


50,535

58,310

 

Adjusted EBITDA

Management believes that earnings before interest and finance costs, taxes, depreciation and amortization, other non-cash items and one-time gains and losses ("Adjusted EBITDA") is a useful supplemental measure as it provides an indication of the results generated by the Company's principal operating segments similar to Gross Margin but also factors in the cash administrative expenses incurred in the period.  The closest IFRS measure would be net income. 

Operating Earnings (Loss)

Management believes that Operating Earnings (Loss) is a useful supplemental measure as it provides an indication of the results generated by the Company's principal operating segments similar to Adjusted EBITDA but also factors in the depreciation expense incurred in the period.  The closest IFRS measure would be net income.

The following table provides a reconciliation of net loss under IFRS, as disclosed in the consolidated statements of operations and comprehensive income, to earnings before interest and finance costs, taxes, depreciation and amortization ("EBITDA"), Adjusted EBITDA and Operating Loss:






Three months ended December 31


Year ended December 31

(stated in thousands)

2018

2017


2018

2017

Net loss

(9,530)

(4,974)


(41,060)

(37,445)

Add:






Finance costs

4,603

5,598


19,050

21,950

Income tax recovery

(3,641)

(6,842)


(13,634)

(18,555)

Depreciation ? operating

16,161

16,238


65,097

65,227

Depreciation ? administrative

270

284


1,084

1,213

EBITDA

7,863

10,304


30,537

32,390

Add:






Stock based compensation ? operating

58

66


406

260

Stock based compensation ? administrative

96

397


772

1,689

Other items

(101)

(700)


(99)

1,356

Adjusted EBITDA

7,916

10,067


31,616

35,695

Subtract:






Depreciation ? operating

(16,161)

(16,238)


(65,097)

(65,227)

Depreciation ? administrative

(270)

(284)


(1,084)

(1,213)

Operating Loss

(8,515)

(6,455)


(34,565)

(30,745)

 

Net Debt

Management believes that Net Debt is a useful supplemental measure as it provides an indication of the Company's total debt after incorporating cash and cash equivalents.  The closest IFRS measure would be long term debt.

The following table provides a reconciliation of long term debt under IFRS, as disclosed in the consolidated balance sheets to Net Debt:






(stated in thousands)



December 31, 2018

December 31, 2017

Long term debt



222,258

265,219

Current portion of long term debt



1,822

475

Less: cash and cash equivalents



(3,960)

(48,825)

Net Debt



220,120

216,869

 

Defined Terms:

Average active rig count (contract drilling): Calculated as drilling rig utilization ? Billable Days multiplied by the average number of drilling rigs in the Company's fleet for the period.

Average active rig count (production services): Calculated as service rig utilization multiplied by the average number of service rigs in the Company's fleet for the period.

Billable Days:  Defined as Operating Days plus rig mobilization days.

Drilling rig utilization ? Operating Days (or "Drilling Rig Utilization"):  Calculated based on Operating Days divided by total available days.

Drilling rig utilization ? Billable Days:  Calculated based on Billable Days divided by total available days.

Operating Days:  Defined as contract drilling days, calculated on a spud to rig release basis.

Service Hours:  Defined as well servicing hours completed.

Service rig utilization:  Calculated based on Service Hours divided by available hours, being 10 hours per day, per well servicing rig, 365 days per year.

Contract Drilling Rig Classifications:

Cardium class rig: Defined as any contract drilling rig which has a total hookload less than or equal to 399,999 lbs (or 177,999 daN). 

Montney class rig: Defined as any contract drilling rig which has a total hookload between 400,000 lbs (or 178,000 daN) and 499,999 lbs (or 221,999 daN).

Duvernay class rig: Defined as any contract drilling rig which has a total hookload equal to or greater than 500,000 lbs (or 222,000 daN).

Abbreviations:


Forward-Looking Statements and Information

This press release contains certain statements or disclosures relating to Western that are based on the expectations of Western as well as assumptions made by and information currently available to Western which may constitute forward-looking information under applicable securities laws.  All information and statements contained herein that are not clearly historical in nature constitute forward-looking information, and words and phrases such as "may", "will", "should", "could", "expect", "intend", "propose", "anticipate", "believe", "estimate", "plan", "potential", "continue", "working to", or the negative of these terms or other comparable terminology are generally intended to identify forward-looking information.  Such information represents the Company's internal projections, estimates or beliefs concerning, among other things, an outlook on the estimated amounts and timing of capital expenditures, anticipated future debt levels and revenues or other expectations, beliefs, plans, objectives, assumptions, intentions or statements about future events or performance.  This information involves 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.

In particular, forward-looking information in this press release includes, but is not limited to, statements relating to commodity pricing; the future demand for and utilization of the Company's services and equipment; the pricing for the Company's services and equipment; the terms of existing and future drilling contracts in Canada and the US and the revenue resulting therefrom (including the number of Operating Days typically generated from the Company's contracts); the Company's expansion and maintenance capital plans for 2019; the Company's liquidity needs including the ability of current capital resources to cover Western's financial obligations and the 2019 capital budget; the use and availability of the Company's Credit Facilities; pricing for Western's services and impact on Adjusted EBITDA; the Company's ability to maintain certain covenants under its Credit Facilities; expectations as to the increase in crude oil transportation capacity through pipeline development; expectations as to the benefits of the proposed liquefied natural gas expansion in British Columbia; the future deployment of rigs; the potential impact of changes to environmental laws and regulations and the price on carbon emissions; the expectation of continued investment in the Canadian crude oil and natural gas industry; the development of Alberta and British Columbia resource plays; expectations relating to producer spending and activity levels for oilfield services, and the Company's ability to find and maintain enough field crew members.

The material assumptions in making the forward-looking statements in this press release include, but are not limited to, assumptions relating to: demand levels and pricing for oilfield services; demand for crude oil and natural gas and the price and volatility of crude oil and natural gas; pressures on commodity pricing; the continued business relationships between the Company and its significant customers; the Company's competitive advantage; crude oil transport and pipeline approval and development; the Company's ability to finance its operations; the effects of seasonal and weather conditions on operations and facilities; the competitive environment to which the various business segments are, or may be, exposed in all aspects of their business and the Company's competitive position therein; the ability of the Company's various business segments to access equipment (including spare parts and new technologies); changes in laws or regulations; currency exchange fluctuations; the ability of the Company to attract and retain skilled labour and qualified management; the ability to retain and attract significant customers; the ability to maintain a satisfactory safety record; and general business, economic and market conditions.

Although Western believes that the expectations and assumptions on which such forward-looking statements and information are based on are reasonable, undue reliance should not be placed on the forward-looking statements and information as Western cannot give any assurance that they will prove to be correct.  Since forward-looking statements and information address future events and conditions, by their very nature they involve inherent risks and uncertainties.  Actual results could differ materially from those currently anticipated due to a number of factors and risks.  These include, but are not limited to, the risk that recent improvements in commodity pricing may not continue, and other general industry, economic, market and business conditions.  Readers are cautioned that the foregoing list of risks, uncertainties and assumptions are not exhaustive.  Additional information on these and other risk factors that could affect Western's operations and financial results are discussed under the heading "Risk Factors" in Western's Annual Information Form which may be accessed through the SEDAR website at www.sedar.com.  The forward-looking statements and information contained in this press release are made as of the date hereof and Western does not undertake any obligation to update publicly or revise any forward-looking statements and information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.

SOURCE Western Energy Services Corp.


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