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Classified in: Oil industry, Business, Covid-19 virus
Subject: ERN

Western Energy Services Corp. Releases Third Quarter 2020 Financial and Operating Results


CALGARY, AB, Oct. 26, 2020 /CNW/ - Western Energy Services Corp. ("Western" or the "Company") (TSX: WRG) announces the release of its third quarter 2020 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 three and nine months ended September 30, 2020 and 2019 will be available on SEDAR at www.sedar.com.  Non-International Financial Reporting Standards ("Non-IFRS") measures, such as Adjusted EBITDA, and abbreviations and definitions for standard industry terms are included later in this press release.  All amounts are denominated in Canadian dollars (CDN$) unless otherwise identified.

Third Quarter 2020 Operating Results:

1 Source: CAODC, monthly Contractor Summary.

Year to Date 2020 Operating Results:

2 Source: CAODC, monthly Contractor Summary.

Selected Financial Information

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


Three months ended September 30


Nine months ended September 30

Financial Highlights

2020

2019

Change


2020

2019

Change

Revenue

13,438

47,067

(71%)


76,005

150,570

(50%)

Adjusted EBITDA(1)

2,270

4,968

(54%)


14,668

18,654

(21%)

Adjusted EBITDA as a percentage of revenue

17%

11%

55%


19%

12%

58%

Cash flow from operating activities

(1,560)

(592)

164%


25,712

22,797

13%

Additions to property and equipment

150

1,143

(87%)


983

5,026

(80%)

Net loss

(10,486)

(11,575)

(9%)


(33,858)

(28,781)

18%

? basic net loss per share

(0.12)

(0.13)

(8%)


(0.37)

(0.31)

19%

? diluted net loss per share

(0.12)

(0.13)

(8%)


(0.37)

(0.31)

19%

Weighted average number of shares








? basic

91,040,679

92,402,039

(1%)


91,283,205

92,338,987

(1%)

? diluted

91,040,679

92,402,039

(1%)


91,283,205

92,338,987

(1%)

Outstanding common shares as at period end

91,165,112

92,501,314

(1%)


91,165,112

92,501,314

(1%)

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










                            Three months ended September 30


Nine months ended September 30

Operating Highlights(2)

2020

2019

Change


2020

2019

Change

Contract Drilling








Canadian Operations:








Contract drilling rig fleet:








? Average active rig count

2.6

12.1

(79%)


5.8

12.6

(54%)

? End of period

49

49

-


49

49

-

Revenue per Billable Day

19,196

19,547

(2%)


21,727

21,188

3%

Revenue per Operating Day

21,723

21,571

1%


24,648

23,590

4%

Operating Days

208

1,005

(79%)


1,389

3,080

(55%)

Drilling rig utilization ? Billable Days

5%

25%

(80%)


12%

26%

(54%)

Drilling rig utilization ? Operating Days

5%

22%

(77%)


10%

23%

(57%)

CAODC industry average utilization ? Operating Days(3)

9%

23%

(61%)


16%

22%

(27%)









United States Operations:








Contract drilling rig fleet:








? Average active rig count

0.2

4.7

(96%)


0.7

4.9

(86%)

? End of period

8

8

-


8

8

-

Revenue per Billable Day (US$)

11,179(4)

19,436

(42%)


19,864(4)

  20,151(5)

(1%)

Revenue per Operating Day (US$)

20,224(4)

22,926

(12%)


24,312(4)

23,666(5)

3%

Operating Days

9

368

(98%)


158

1,129

(86%)

Drilling rig utilization ? Billable Days

2%

59%

(97%)


9%

62%

(85%)

Drilling rig utilization ? Operating Days

1%

50%

(98%)


7%

53%

(87%)









Production Services








Canadian Operations:

Well servicing rig fleet:








? Average active rig count

11.8

20.9

(44%)


13.7

18.8

(27%)

? End of period

63

63

-


63

63

-

Revenue per Service Hour

656

631

4%


696

654

6%

Service Hours

10,893

19,244

(43%)


37,427

51,388

(27%)

Service rig utilization

19%

33%

(42%)


22%

30%

(27%)

(2)

See "Defined Terms" included in this press release.

(3)

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

(4)

Excludes shortfall commitment revenue from take or pay contracts of US$0.3 million and US$5.0 million respectively, for the three and nine months ended September 30, 2020.

(5)

Excludes shortfall commitment revenue from take of pay contracts of US$1.3 million for the nine months ended September 30, 2019.

 

Financial Position at (stated in thousands)

September 30, 2020


December 31, 2019

September 30, 2019

Working capital

5,603


7,031

13,762

Property and equipment

466,370


511,052

578,834

Total assets

488,470


550,537

617,943

Long term debt

226,719


228,274

232,722

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 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.  Stoneham's division, Western Oilfield Services, provides well servicing operations in the United States.  Financial and operating results for Horizon and Stoneham are included in Western's contract drilling segment, while financial and operating results for Eagle, Aero, and Western Oilfield Services 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 rigs3, 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 fourth largest well servicing company in Canada, based on the CAODC registered rigs4, with a fleet of 63 rigs operating through Eagle.  Additionally, Western Oilfield Services operates three well servicing rigs in the Bakersfield area of California in the US.  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 and nine months ended September 30, 2020 and 2019.


Three months ended September 30

                  Nine months ended September 30


2020

2019

Change

2020

2019

Change

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







 

Crude Oil







West Texas Intermediate (US$/bbl)

40.93

56.47

(28%)

38.31

57.04

(33%)

Western Canadian Select (CDN$/bbl)

42.41

58.38

(27%)

32.98

60.26

(45%)








Natural Gas







30 day Spot AECO (CDN$/mcf)

2.21

0.98

126%

2.05

1.53

34%








Average foreign exchange rates(2)







US dollar to Canadian dollar

1.33

1.32

1%

1.35

1.33

2%

(1)       See "Abbreviations" included in this press release.

(2)       Source: Sproule September 30, 2020 Price Forecast, Historical Prices.



West Texas Intermediate ("WTI") on average declined by 28% and 33% for the three and nine months ended September 30, 2020 respectively, compared to the same periods in the prior year.  Similarly, pricing on Western Canadian Select ("WCS") crude oil decreased by 27% and 45% for the three and nine months ended September 30, 2020 respectively, compared to the same periods in the prior year.  Crude oil prices in 2020 for both Canada and the US were impacted by the ongoing COVID-19 pandemic.  Crude oil prices reached historical lows during the nine months ended September 30, 2020, which significantly impacted the demand for the Company's services.  Natural gas prices in Canada strengthened in 2020, as the 30 day spot AECO price improved by 126% and 34% respectively, for the three and nine months ended September 30, 2020, compared to the same periods of the prior year.  The US dollar to the Canadian dollar foreign exchange rate strengthened in both the three and nine months ended September 30, 2020, compared to the same periods of the prior year, which had a slightly positive effect on the cash flows of Western's Canadian customers, when selling US dollar denominated commodities.

3 Source: CAODC Contractor Summary as at October 26, 2020.

4 Source: CAODC Fleet List as at October 26, 2020.

In the United States, industry activity decreased in 2020.  As reported by Baker Hughes Company5, the number of active drilling rigs in the United States decreased by approximately 69% to 266 rigs at September 30, 2020, as compared to the same period in the prior year.  The unprecedented low demand as a result of the COVID-19 pandemic has had a significant impact on industry activity in both the US and in Canada.  Prior to the COVID-19 pandemic, there were also 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 in Canada and the US.  The number of active rigs in the WCSB decreased to historical lows in the second quarter of 2020 with only 16 active rigs in mid-June and improved to only 71 active rigs at September 30, 2020, compared to 147 active rigs at September 30, 2019.  The CAODC6 reported that for drilling in Canada, the total number of Operating Days in the WCSB decreased by approximately 34% and 65% respectively, for the three and nine months ended September 30, 2020 as compared to the same periods in the prior year.

Outlook

Currently, 11 of Western's drilling rigs and 21 of Western's well servicing rigs are operating.  With the ten drilling rigs currently working in Canada, Western's Canadian market share has improved to approximately 12% of total rigs working.  One of Western's 57 drilling rigs is under a term take or pay contract, which is expected to expire in 2021.  These contracts each typically generate between 250 and 350 Billable Days per year.

Due to decreased activity levels as a result of the unprecedented demand destruction and low commodity price environment associated with the COVID-19 pandemic, Western's capital budget for 2020 remains unchanged and is expected to total approximately $2 million, mainly related to maintenance capital.  Western believes the 2020 capital budget provides a prudent use of cash resources to manage its balance sheet.  Western will continue to manage its operations in a disciplined manner and make required adjustments to its capital program as customer demand changes.  

The significant decrease in crude oil prices in 2020 resulting from the COVID-19 pandemic and international price war has caused increased uncertainty in global markets.  Low crude oil demand associated with the COVID-19 pandemic continues to have a significant impact on Western's customers.  The precise duration and extent of the adverse impacts of the current macroeconomic environment and the COVID-19 pandemic on Western's customers, operations, business and global economic activity remains highly uncertain at this time.  Additionally, continued uncertainty surrounding takeaway capacity related to the timing of completion of the construction on the Trans Mountain pipeline expansion and the delays associated with the Keystone XL pipeline, as well as the in service date of the Enbridge Line 3 pipeline replacement, has resulted in 2020 capital budgets for Western's Canadian customers decreasing considerably year over year.  As such, activity levels in Canada and the United States are expected to be significantly lower for the remainder of 2020, compared to 2019 levels.  Controlling fixed costs, maintaining balance sheet flexibility and managing through the unprecedented market downturn are priorities for the Company, as prices and demand for Western's services remain below historical levels.  Since the beginning of the year, Western temporarily reduced its salaried workforce, reduced cash compensation for the remaining employees, reduced planned capital expenditures, and continues to identify opportunities to further streamline its support structure.  Going forward, Western's variable cost structure, and prudent capital budget, will aid in preserving its balance sheet. 

As at September 30, 2020, Western had $11.0 million drawn on its $60.0 million credit facilities, consisting of its $50.0 million syndicated first lien credit facility (the "Revolving Facility") and its $10.0 million committed operating facility (the "Operating Facility" and together the "Credit Facilities"), which mature on December 17, 2021.  Western currently has $209.6 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.  In the short term, the largest challenges facing the oilfield service industry are ongoing liquidity concerns as a result of the reduced customer spending caused by the demand destruction from the COVID-19 pandemic and limited take away capacity.  In the medium term, Western's rig fleet is well positioned to benefit from the LNG Canada liquefied natural gas project now under construction in British Columbia.  It remains 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 challenging 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 condensed 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.  The Non-IFRS measure used in this press release is identified and defined as follows:

5 Source: Baker Hughes Company, 2020 Rig Count monthly press releases.

6 Source: CAODC, monthly Contractor Summary.

Adjusted EBITDA

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 is used by management and other stakeholders, including current and potential investors, to analyze the Company's principal business activities.  Adjusted EBITDA provides an indication of the results generated by the Company's principal operating segments, which assists management in monitoring current and forecasting future operations, as certain non-core items such as interest and finance costs, taxes, depreciation and amortization, and other non-cash items and one-time gains and losses are removed.  The closest IFRS measure would be net loss for consolidated results.

The following table provides a reconciliation of net loss, as disclosed in the condensed consolidated statements of operations and comprehensive income, to Adjusted EBITDA:


Three months ended September 30


Nine months ended September 30

(stated in thousands)

2020

2019


2020

2019

Net loss

(10,486)

(11,575)


(33,858)

(28,781)

Income tax recovery

(3,547)

(3,657)


(11,781)

(14,986)

Loss before income taxes

(14,033)

(15,232)


(45,639)

(43,767)

Add (deduct):






  Depreciation

11,811

15,471


36,954

48,319

  Stock based compensation

84

145


319

459

  Finance costs

4,430

4,676


13,582

14,052

  Other items

(22)

(92)


(2,048)

(409)

  Impairment of property and equipment

-

-


11,500

-

Adjusted EBITDA

2,270

4,968


14,668

18,654

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", "anticipate", "believe", "estimate", "plan", "potential", "continue", "looking 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 additions to property and equipment, 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 the Company's services and equipment, in particular, in light of the low commodity price environment associated with the international price war and the COVID-19 pandemic; 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 Billable Days typically generated from such contracts and expected expiration dates of such contracts); the Company's expansion and maintenance capital plans for 2020 and its ability to make changes thereto in response to customer demands; the Company's liquidity needs including the ability of current capital resources to cover Western's financial obligations, working capital requirements and the 2020 capital budget; the potential forgiveness of a portion of the Company's PPP loan; expectations as to the increase in crude oil transportation capacity through pipeline development; expectations as to the benefits of the LNG Canada natural gas project in British Columbia on the Company and its rig fleet; the future deployment or retirement of rigs and other existing assets; the potential impact of changes to laws, governmental and environmental regulations; 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; the Company's approach to management of its budget and operations; the Company's ability to maintain a competitive advantage to enable it to manage the current oilfield service environment; the Company's ability to find and maintain enough field crew members; and the possibility of the Company recommencing purchases of common shares under the Bid.

The material assumptions in making the forward-looking statements in this press release include, but are not limited 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 effectiveness of the Company's cost structure and capital budget; 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); assumptions with respect to global economic conditions and the accuracy of the Company's market outlook expectations for 2020 and in the future; the Company's expectations regarding the impacts, direct and indirect, of the COVID-19 pandemic on our business, customers, business partners, employees, supply chain, other stakeholders and the overall economy; 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 the low commodity price environment will be sustained for an indefinite period, the impact of the COVID-19 pandemic and the resulting effects on economic conditions, restrictions imposed by public health authorities or governments, fiscal and monetary responses by governments and financial institutions and disruptions to global supply chains 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 for the year ended December 31, 2019 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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