Canada NewsWire
CALGARY, July 30, 2019
CALGARY, July 30, 2019 /CNW/ - Secure Energy Services Inc. ("Secure" or the "Corporation") (TSX – SES) announced today its operational and financial results for the three and six months ended June 30, 2019.
The following operational and financial highlights should be read in conjunction with the Corporation's management's discussion and analysis ("MD&A") and the interim consolidated financial statements and notes thereto for the three and six months ended June 30, 2019 of Secure which are available on SEDAR at www.sedar.com.
2019 SECOND QUARTER OPERATIONAL AND FINANCIAL HIGHLIGHTS
Increasing Cash Flow Stability
Secure achieved Adjusted EBITDAi of $35.0 million during the second quarter of 2019, a 12% increase from the three months ended June 30, 2018 despite lower oil and gas activity levels. Along with the impact of the adoption IFRS 16, Leasesii on January 1, 2019, growth initiatives over the last several years to increase capacity in response to customer demand and expand production-related service offerings more than offset the impact of lower revenues associated with reduced drilling and completion related volumes and related services. Secure's focus in recent years to capture new production-based revenue and long-term contracts has provided the Corporation with greater revenue stability. This shift into higher production-based exposure and contracted volumes significantly improves the predictability of Secure's cash flows, including during the second quarter where the Corporation's results are impacted by weather conditions resulting in road bans that hamper drilling and completion activity in Canada.
Executing Growth Strategy
During the second quarter, Secure added key storage infrastructure, continuing to add to the Corporation's midstream growth strategy. At the Kerrobert terminal, Secure expanded total crude oil storage to 420,000 barrels with the completion of the construction of two 130,000 barrel tanks. Secure also acquired a 27% interest in a crude oil storage facility located in Cushing, Oklahoma, and a 51% interest in an adjacent 80-acre parcel of undeveloped land. The Cushing storage facility was constructed in 2015 and is strategically located on 10 acres of land in South Cushing with long-term connection agreements in place, ultimately providing connectivity to all major inbound and outbound pipelines in Cushing. Secure's majority investment in the 80-acre parcel of land provides the Corporation with significant optionality to develop additional midstream infrastructure in one of North America's key storage and trading hubs. Having access to multiple Canadian crude streams and well-connected infrastructure at hubs across North America will benefit our customers getting their product to market at the optimum price and significantly expands Secure's commercial revenue generating opportunities.
During the quarter, Secure also continued to identify and develop infrastructure near customer production to provide transportation and disposal solutions to customers that increase their operating netbacks and capital efficiency. In June 2019, Secure commenced construction of a new water disposal facility and produced water pipeline in the Montney region of Alberta. The facility, which is expected to be completed during the fourth quarter of 2019, has multi-year contracted volumes through facility and well dedications with an anchor tenant, providing reliable cash flows over the contract term.
Other growth and expansion capital incurred in the three months ended June 30, 2019 included progressing construction of a produced water transfer and injection pipeline in the Montney region, the addition of two new disposal wells in North Dakota at the Keene and 13 Mile facilities, completion of a second well at Tony Creek, and construction of an additional landfill cell at Willesden Green. Additionally, the Corporation increased capacity and efficiencies through various other expansion projects at the Corporation's existing facilities. Secure continues to evaluate additional opportunities relating to new infrastructure across the WCSB and North Dakota based on customer demand. In total, the Corporation invested growth and expansion capital (including acquisitions) of $46.6 million during the three months ended June 30, 2019.
Improving Financial Flexibility
During the second quarter, Secure closed an amendment to its First Lien Credit Facility, increasing the facility by $130 million and extending the maturity date by two years to June 30, 2023. The amended First Lien Credit Facility also includes an accordion feature, which, if exercised and approved by the Corporation's lenders, would increase the revolving credit facility by an additional $100 million. Secure has also entered into a new $75 million bilateral Letter of Credit Facility with two major financial institutions. As a result of the amended First Lien Credit Facility and new Letter of Credit Facility, Secure has a total credit capacity of $805 million.
At June 30, 2019, Secure's Total Debt to EBITDA ratio, as defined in the Corporation's lending agreements, was 2.3 to 1. The strength of the Corporation's balance sheet and increased credit capacity achieved in the quarter provides sufficient financial flexibility and the incremental borrowing capacity required for Secure to continue to operate efficiently, grow the business organically and execute on strategic acquisition opportunities that align with the profitable growth strategy of Secure.
Creating Shareholder Value
During the quarter, Secure renewed the normal course issuer bid ("NCIB") first initiated in May 2018. During the three months ended June 30, 2019, Secure purchased and cancelled 3,070,100 common shares of the Corporation ("shares") at a weighted average price per share of $7.30 for a total of $22.4 million. Subsequent to quarter end, the Corporation has purchased 450,900 additional shares. In total, Secure has repurchased and cancelled 9,199,173 shares since May 2018, representing approximately 6% of the number of common shares outstanding at the time of commencement. The Corporation believes that, at times, the prevailing market price for Secure's shares does not reflect their underlying value.
The Corporation's operating and financial highlights for the three and six month periods ending June 30, 2019 and 2018 can be summarized as follows:
Three months ended June 30, | Six months ended June 30, | ||||||
($000's except share and per share data) | 2019 | 2018 | % change | 2019 | 2018 | % change | |
Revenue (excludes oil purchase and resale) | 138,869 | 141,249 | (2) | 316,248 | 322,947 | (2) | |
Oil purchase and resale | 654,618 | 578,674 | 13 | 1,266,121 | 1,102,421 | 15 | |
Total revenue | 793,487 | 719,923 | 10 | 1,582,369 | 1,425,368 | 11 | |
Adjusted EBITDA (1) | 34,966 | 31,158 | 12 | 90,105 | 78,965 | 14 | |
Per share ($), basic and diluted | 0.22 | 0.19 | 16 | 0.56 | 0.48 | 17 | |
Net loss attributable to shareholders of Secure | (1,678) | (6,901) | (76) | (419) | (824) | 49 | |
Per share ($), basic and diluted | (0.01) | (0.04) | (75) | - | (0.01) | 100 | |
Cash flows from operating activities | 53,926 | 74,572 | (28) | 111,228 | 107,326 | 4 | |
Per share ($), basic and diluted | 0.34 | 0.45 | (24) | 0.69 | 0.65 | 6 | |
Dividends per common share | 0.0675 | 0.0675 | - | 0.1350 | 0.1350 | - | |
Capital expenditures (1) | 48,612 | 36,263 | 34 | 72,231 | 92,844 | (22) | |
Total assets | 1,605,988 | 1,538,001 | 4 | 1,605,988 | 1,538,001 | 4 | |
Long-term liabilities | 604,610 | 457,994 | 32 | 604,610 | 457,994 | 32 | |
Common shares - end of period | 158,452,248 | 163,431,134 | (3) | 158,452,248 | 163,431,134 | (3) | |
Weighted average common shares - basic and diluted | 160,371,354 | 164,524,360 | (3) | 160,405,924 | 164,268,516 | (2) | |
(1) Refer to "Non-GAAP Measures and Operational Definitions" for further information |
Jun 30, 2019 | Threshold | % Variance | |||||
Senior Debt to EBITDA | 1.6 | 3.5 | (54) | ||||
Total Debt to EBITDA | 2.3 | 5.0 | (54) |
MIDSTREAM INFRASTRUCTURE DIVISION HIGHLIGHTS
Three months ended June 30, 2019 | Six months ended June 30, 2019 | |||||
($000's) | 2019 | 2018 | % Change | 2019 | 2018 | % Change |
Revenue | ||||||
Midstream Infrastructure (a) | 85,544 | 80,496 | 6 | 179,682 | 161,351 | 11 |
Oil purchase and resale | 654,618 | 578,674 | 13 | 1,266,121 | 1,102,421 | 15 |
Total Midstream Infrastructure division revenue | 740,162 | 659,170 | 12 | 1,445,803 | 1,263,772 | 14 |
Cost of Sales | ||||||
Midstream Infrastructure excluding items noted below | 39,419 | 37,796 | 4 | 78,656 | 71,247 | 10 |
Depreciation, depletion and amortization | 21,945 | 18,668 | 18 | 42,308 | 37,146 | 14 |
Oil purchase and resale | 654,618 | 578,674 | 13 | 1,266,121 | 1,102,421 | 15 |
Total Midstream Infrastructure division cost of sales | 715,982 | 635,138 | 13 | 1,387,085 | 1,210,814 | 15 |
Segment Profit Margin(1) | 46,125 | 42,700 | 8 | 101,026 | 90,104 | 12 |
Segment Profit Margin (1) as a % of revenue (a) | 54% | 53% | 56% | 56% | ||
(1) Calculated as revenue less cost of sales excluding depreciation and amortization. Refer to "Non-GAAP Measures and Operational Definitions" for further information |
ENVIRONMENTAL SOLUTIONS DIVISION HIGHLIGHTS
Three months ended June 30, 2019 | Six months ended June 30, 2019 | |||||
($000's) | 2019 | 2018 | % Change | 2019 | 2018 | % Change |
Revenue | ||||||
Environmental Solutions | 16,027 | 26,043 | (38) | 45,699 | 58,207 | (21) |
Cost of Sales | ||||||
Environmental Solutions excluding depreciation and amortization | 13,371 | 21,100 | (37) | 38,035 | 46,629 | (18) |
Depreciation and amortization | 2,453 | 2,236 | 10 | 4,990 | 4,633 | 8 |
Total Environmental Solutions division cost of sales | 15,824 | 23,336 | (32) | 43,025 | 51,262 | (16) |
Segment Profit Margin (1) | 2,656 | 4,943 | (46) | 7,664 | 11,578 | (34) |
Segment Profit Margin (1) as a % of revenue | 17% | 19% | 17% | 20% | ||
(1) Calculated as revenue less cost of sales excluding depreciation and amortization. Refer to "Non-GAAP Measures and Operational Definitions" for further information |
TECHNICAL SOLUTIONS DIVISION HIGHLIGHTS
Three months ended June 30, 2019 | Six months ended June 30, 2019 | |||||
($000's) | 2019 | 2018 | % Change | 2019 | 2018 | % Change |
Revenue | ||||||
Technical Solutions | 37,298 | 34,710 | 7 | 90,867 | 103,389 | (12) |
Cost of Sales | ||||||
Technical Solutions excluding depreciation and amortization | 33,270 | 31,988 | 4 | 76,790 | 87,304 | (12) |
Depreciation and amortization | 6,194 | 5,313 | 17 | 11,869 | 10,486 | 13 |
Total Technical Solutions division cost of sales | 39,464 | 37,301 | 6 | 88,659 | 97,790 | (9) |
Segment Profit Margin (1) | 4,028 | 2,722 | 48 | 14,077 | 16,085 | (12) |
Segment Profit Margin (1) as a % of revenue | 11% | 8% | 15% | 16% | ||
(1) Calculated as revenue less cost of sales excluding depreciation and amortization. Refer to "Non-GAAP Measures and Operational Definitions" for further information |
OUTLOOK
Secure's outlook for oil and gas activity levels in the second half of 2019 remains conservative in light of ongoing macro-economic factors affecting the Canadian energy sector. Producers are continuing to be cautious with spending, impacting new drilling and completion related volumes and demand for related services. Despite a difficult operating environment, Secure has demonstrated consistent growth over the past several years. The Corporation continues to find new and innovative ways to help our customers and deliver energy to the world, so people and communities thrive. Over the past two years, Secure has strategically invested in midstream infrastructure in high impact resource plays located near customer production, significantly increased the Corporation's exposure to production-based revenues and entered into long-term contracts for increased reliability of future cash flows. Secure expects that these factors will mitigate the impact reduced year over year activity levels will have on the Corporation's financial results in 2019.
Secure's strategy remains focused on what is in the Corporation's control: help our customers by challenging what's possible. By doing midstream differently, Secure can work with customers to identify opportunities and integrated solutions where the Corporation can add value by increasing customer operating netbacks and improving capital efficiency. The industry fundamentals driving the success of Secure's core operations remain unchanged:
These factors are expected to result in the need for additional facilities to meet incremental requirements for processing and disposal capacity. Secure has made significant capital investments to ensure the business is well positioned to capture new demand. By offering exceptional customer service and owning and operating midstream facilities near customer production, Secure expects these trends will drive more volumes to the Corporation's midstream facilities.
Additionally, customers continue to seek cost effective transportation solutions for water, oil and condensate volumes. Employing the Corporation's approach of doing midstream differently, Secure has created strategic partnerships with customers leading to the recent development of the Kerrobert crude oil pipeline system and the ongoing construction of two produced water transfer pipelines. These feeder pipelines create value for Secure through fixed fee-for-service revenues and reliable volumes delivered to our facilities, and for our customers through lower transportation costs and higher operating netbacks.
The continued growth and development of the Corporation's midstream business, highlighted in the second quarter with the addition of storage infrastructure expanding Secure's strategic footprint at key North American crude hubs, provides Secure with the ability to offer customers market access flexibility to optimize pricing.
Secure's Technical and Environmental Solutions divisions offer significant torque to the Corporation's cash flows with increased commodity prices, improved producer spending and higher activity levels. Additionally, offering a suite of solutions across the energy life cycle creates synergies with the core business.
With the strength of the Corporation's balance sheet, experienced management team and proven track record, Secure is well positioned to execute on its growth strategy and respond with solutions to the market's requirements. The amendments to the Corporation's First Lien Credit Facility and the new Letter of Credit Facility during the second quarter increased the Corporation's total credit capacity to $805 million, providing financial flexibility and the borrowing capacity available for Secure to continue to operate efficiently and execute on the Corporation's growth and capital investment strategy. The Corporation has visible continued growth and expects to incur approximately $115 million of total growth and expansion capital in 2019 (acquisition and organic) depending on the outcome of various opportunities in development, such as regulatory approvals, development permits and other operating agreements. The current capital plan for the second half of the year includes completing the produced water transfer and injection pipelines in the Montney region; completing the new Montney water disposal facility and feeder pipeline; optimizing capabilities and increasing processing and disposal capacity at various other facilities, including additional disposal wells; and purchasing equipment to support existing services.
REPORTING CHANGES
The Corporation adopted International Financial Reporting Standard 16, Leases ("IFRS 16") as at the effective date of January 1, 2019 which replaced IAS 17, Leases ("IAS 17"). The new standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value.
The Corporation elected the modified retrospective transition approach, which provides lessees a method for recording existing leases at adoption with no restatement of prior period financial information. Under this approach, a lease liability was recognized at January 1, 2019 in respect of leases previously classified as operating leases, measured at the present value of the remaining lease payments, discounted using the lessee's incremental borrowing rate at transition. The associated right-of-use assets were measured at amounts equal to the respective lease liabilities, subject to certain adjustments allowed under IFRS 16.
Adoption of the new standard at January 1, 2019 resulted in the recording of additional right-of-use assets and lease liabilities of $33.4 million and $35.9 million, respectively, related to office space, warehouses, surface land, rail cars and certain heavy equipment. The new standard did not materially impact consolidated net income as the depreciation of right-of-use assets and interest and finance costs related to the lease liabilities recognized under IFRS 16 were mostly offset by reductions in operating lease expense, which were previously recognized in cost of sales and general and administrative expenses. The adoption of IFRS 16 had no impact on cash flows.
FINANCIAL STATEMENTS AND MD&A
The Corporation's condensed consolidated financial statements and notes thereto for the three and six months ended June 30, 2019 and 2018 and MD&A for the three and six months ended June 30, 2019 and 2018 are available immediately on Secure's website at www.secure-energy.com. The condensed consolidated financial statements and MD&A will be available tomorrow on SEDAR at www.sedar.com.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this document constitute "forward-looking statements" and/or "forward-looking information" within the meaning of applicable securities laws (collectively referred to as forward-looking statements). When used in this document, the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "estimate", "expect", and similar expressions, as they relate to Secure, or its management, are intended to identify forward-looking statements. Such statements reflect the current views of Secure with respect to future events and operating performance and speak only as of the date of this document. In particular, this document contains or implies forward-looking statements pertaining to: key factors driving the Corporation's success; the Corporation's expected 2019 Adjusted EBITDA; the impact of new facilities, new service offerings, potential acquisitions, and prior year acquisitions on the Corporation's future financial results; demand for the Corporation's services and products; growth and expansion strategy; the Corporation's ability to continue to grow the business organically and execute on strategic growth opportunities based on current financial position; the oil and natural gas industry in Canada and the U.S., including 2019 and 2020 activity levels, spending by producers and the impact of this on Secure's activity levels; future pipeline development in Canada; industry fundamentals driving the success of Secure's core operations, including increased outsourcing of midstream work by producers, drilling, completion and production trends, opportunities relating to crude oil logistics, well density and economics for pipeline connecting production volumes to midstream facilities, and global oil and gas demand; the Corporation's proposed 2019 capital expenditure program including growth and expansion and sustaining capital expenditures, and the timing of completion for projects, in particular the new Montney water disposal facility; debt service; future capital needs and how the Corporation intends to fund its operations, working capital requirements, dividends and capital program; access to capital; and the Corporation's ability to meet obligations and commitments and operate within any credit facility restrictions.
Forward-looking statements concerning expected operating and economic conditions are based upon prior year results as well as the assumption that levels of market activity and growth will be consistent with industry activity in Canada and the U.S. and similar phases of previous economic cycles. Forward-looking statements concerning the availability of funding for future operations are based upon the assumption that the sources of funding which the Corporation has relied upon in the past will continue to be available to the Corporation on terms favorable to the Corporation and that future economic and operating conditions will not limit the Corporation's access to debt and equity markets. Forward-looking statements concerning the relative future competitive position of the Corporation are based upon the assumption that economic and operating conditions, including commodity prices, crude oil and natural gas storage levels, interest and foreign exchange rates, the regulatory framework regarding oil and natural gas royalties, environmental regulatory matters, the ability of the Corporation and its subsidiaries to successfully market their services and drilling and production activity in North America will lead to sufficient demand for the Corporation's services including demand for oilfield services for drilling and completion of oil and natural gas wells, that the current business environment will remain substantially unchanged, and that present and anticipated programs and expansion plans of other organizations operating in the energy industry may change the demand for the Corporation's services and its subsidiaries' services. Forward-looking statements concerning the nature and timing of growth are based on past factors affecting the growth of the Corporation, past sources of growth and expectations relating to future economic and operating conditions. Forward-looking statements in respect of the costs anticipated to be associated with the acquisition and maintenance of equipment and property are based upon assumptions that future acquisition and maintenance costs will not significantly increase from past acquisition and maintenance costs.
Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether such results will be achieved. Readers are cautioned not to place undue reliance on these statements as a number of factors could cause actual results to differ materially from the results discussed in these forward-looking statements, including but not limited to those factors referred to under the heading "Risk Factors" in the AIF for the year ended December 31, 2018 and also includes the risks associated with the possible failure to realize the anticipated synergies in integrating the assets acquired in prior year acquisitions with the operations of Secure. Although forward-looking statements contained in this document are based upon what the Corporation believes are reasonable assumptions, the Corporation cannot assure investors that actual results will be consistent with these forward-looking statements. The forward-looking statements in this document are expressly qualified by this cautionary statement. Unless otherwise required by law, Secure does not intend, or assume any obligation, to update these forward-looking statements.
NON-GAAP MEASURES AND OPERATIONAL DEFINITIONS
The Corporation uses accounting principles that are generally accepted in Canada (the issuer's "GAAP"), which includes International Financial Reporting Standards ("IFRS"). Certain supplementary measures in this document do not have any standardized meaning as prescribed by IFRS. These measures are intended as a complement to results provided in accordance with IFRS. The Corporation believes these measures provide additional useful information to analysts, shareholders and other users to understand the Corporation's financial results, profitability, cost management, liquidity and ability to generate funds to finance its operations. However, they should not be used as an alternative to IFRS measures because they do not have a standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other companies. See the management's discussion and analysis available at www.sedar.com for further details, including reconciliations of the Non-GAAP measures and additional GAAP measures to the most directly comparable measures calculated in accordance with IFRS.
ABOUT SECURE ENERGY SERVICES INC.
Secure is a TSX publicly traded integrated energy business with midstream infrastructure, environmental and technical solutions divisions providing industry leading customer solutions to upstream oil and natural gas companies operating in western Canada and certain regions in the United States ("U.S.").
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i Refer to the "Non-GAAP Measures and Operational Definitions" section herein |
ii Refer to the "Reporting Changes" section herein for more information on Secure's adoption of IFRS 16. Secure anticipates the impact of the new standard to result in an increase of approximately $12 to $14 million to Adjusted EBITDA for the 2019 year |
SOURCE SECURE Energy Services Inc.
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