Pure Energy Services Ltd. announces Q1 2011 Financial Results and increased Capital Expenditure Budget

CALGARY, May 26, 2011 /CNW/ - Pure Energy Services Ltd. ("Pure" or "the Corporation") (TSX: PSV) is pleased to announce its financial and operating results for the three months ended March 31, 2011 ("Q1 2011").  The financial results presented for Q1 2011 and all comparative information have been prepared in accordance with International Financial Reporting Standards ("IFRS") with effect from January 1, 2010. For more information on the Corporation's transition to IFRS refer to the "Changes in Accounting Policies - Adoption of IFRS" section of this news release. Unless otherwise indicated, references in this news release to "$" or "Dollars" are to Canadian dollars.

SELECTED CONSOLIDATED FINANCIAL INFORMATION

           
(Unaudited) Three months ended March 31,
($000's, except per share amounts)   2011   2010 Change
Continuing operations          
Revenue $ 60,972 $ 42,147 45%
Gross margin $ 20,208 $ 11,127 82%
Gross margin %    33%   26% 27%
Selling, general and administrative expenses $ 5,962 $  5,006 19%
EBITDAS (1) $ 14,246 $  6,121 133%
EBITDA (1) $ 14,062 $  5,941 137%
Net earnings $ 6,959 $  1,206 477%
  Per share:          
    Basic $ 0.29 $ 0.05  480%
    Diluted $ 0.28 $ 0.05 460%
Funds flow from operations (1) $ 13,922 $  5,387 158%
Discontinued operations          
EBITDAS (1) $  - $  2,862 (100%)
Net earnings $  - $  1,427 (100%)
Total operations          
EBITDAS (1) $ 14,246 $  8,983 59%
EBITDA (1) $ 14,062 $  8,803 60%
Net earnings $  6,959 $  2,633 164%
  Per share:          
    Basic $ 0.29 $ 0.11 164%
    Diluted $ 0.28 $ 0.11 155%

(1)     Refer to "Non-IFRS Measures" section

       
(Unaudited)
($000's)
March 31, 2011 December 31, 2010 Change
Total assets $ 162,379 $ 158,209 3%
Working capital net of long-term debt $ 10,283 $ 4,685 119%

BUSINESS OVERVIEW

The Corporation provides well completion and production related oilfield services to oil and natural gas exploration and development companies in western Canada and certain regions in the United States ("US").

The Corporation's continuing operations are divided into three separate reporting segments: Canadian Completion Services ("CCS"), US Completion Services ("USCS") and Corporate Administration ("Corporate"). The CCS segment conducts operations in the Western Canadian Sedimentary Basin ("WCSB") through its two operating divisions:  wireline and frac flowback. The USCS segment conducts operations in the Rocky Mountain, North Dakota and Appalachian Basin regions of the US through its two operating divisions: wireline and frac flowback.  The Corporate segment is a cost center which includes corporate administration and other costs not specifically attributable to the CCS and USCS segments.  Operations for both the CCS and USCS segments are impacted by seasonality, with the CCS segment typically experiencing higher activity levels in the winter months and the USCS segment experiencing higher activity levels in the non winter months.

Effective October 1, 2010, the Corporation sold its drilling rig division and effective April 20, 2010 the Corporation sold its drilling equipment rental division.  As a result of these transactions, the financial results of these two divisions (which previously comprised the Corporation's Drilling segment) have been reflected as discontinued operations for the three-month periods ended March 31, 2011 and 2010.

Q1 2011 HIGHLIGHTS FROM CONTINUING OPERATIONS

As a result of the robust drilling and well completion activity levels in the WCSB and the Corporation's US operating areas, Pure posted record consolidated financial results in Q1 2011 as follows:

  • Record quarterly revenue of $61.0 million compared to the previous quarterly high of $60.5 million generated in Q4 2008
  • Record quarterly EBITDA of $14.1 million compared to the previous quarterly high of $13.3 million generated in Q1 2006

The high activity levels in both western Canada and in Pure's US operating regions continue to be driven by strong prices for oil and natural gas liquids as well as the shift to horizontal drilling (especially in many of the emerging resource plays).  Pure's Canadian operations also benefited from a late spring break-up this year, which did not arrive until early April (compared to the typical mid March timing), allowing for three full months of operations during Q1.  In Pure's US operations, high demand for frac flowback services resulted in a solid overall quarter despite the fact that Q1 has typically been the slowest quarter of the year.  Pure exited Q1 with a strong financial position as working capital exceeded long-term debt by $10.3 million and available but undrawn amounts on the Corporation's credit facilities at March 31, 2011 were approximately $40.5 million

The number of wells drilled (rig released) in the WCSB increased on a quarter over quarter basis by 8% from 3,603 in Q1 2010 to 3,898 in Q1 2011 (source: Nickles Energy Group).  In addition, the number of horizontal wells (which are typically more service intensive) rose from 33% of the total wells drilled in Q1 2010 to 48% of the total wells drilled in Q1 2011.  Rig counts in all of Pure's US operating areas continue to rise, with the most dramatic increases in North Dakota and Pennsylvania where average active rig counts in Q1 2011 were 153 and 105 respectively compared to 81 and 69 respectively in Q1 2010.  Rig counts also rose quarter over quarter in Pure's two other US operating areas of Colorado and Wyoming.

As a result of overall increased equipment utilization in Canada and the US combined with improved pricing for services, Pure posted significant increases in consolidated revenues, margins, EBITDA and net earnings in Q1 2011 compared to Q1 2010 as follows:

  • Revenue increased 45% from $42.1 million to $61.0 million
  • Gross margin increased from $11.1 million (or 26% of revenue) to $20.2 million (or 33% of revenue)
  • EBITDA increased 137% from $5.9 million to $14.1 million
  • Net earnings increased 477% from $1.2 million to $7.0 million

To take advantage of the high demand for Pure's services in both Canada and the US, the Corporation's Board of Directors recently approved an additional $22 million in capital expenditures for calendar 2011, increasing the total 2011 capital program to approximately $60 million.  The additional $22 million is comprised of $17 million for frac flowback equipment (including 6 high pressure frac flowback packages and auxiliary equipment such as high pressure pipe and line heaters) plus $5 million for wireline and fiber optic equipment.  There continues to be significant customer demand for high pressure frac flowback equipment.

The aggregate capital expenditures for 2011 include 18 high pressure frac flowback packages (2 of which were received during Q1 2011), of which 12 are slated for work in Canada and the remaining 6 in the US.  A portion of the total capital program is for the purchase of auxiliary equipment which is currently being rented from third parties.  The elimination of certain rented equipment will serve to reduce operating expenses and further improve margins.

OUTLOOK

Pure's management remains optimistic about industry activity levels in western Canada and the Corporation's US operating areas for the remainder of 2011 based on the strong prices for oil and natural gas liquids and the forecasted drilling and well completion programs of the Corporation's customers.  Pure continues to benefit from the high demand for its services in the emerging resource plays on both sides of the border, given the locations of the Corporation's operating facilities and the significant amount of wireline and frac flowback equipment that Pure owns that is capable of working in high pressure environments.  Improved pricing for services implemented during the latter part of 2010 and Q1 2011, in both Canada and the US, combined with acquiring equipment which had previously been rented from third party suppliers, should positively impact margins and profitability going forward.

The primary focus areas for Pure for the remainder of 2011 are as follows:

  • The recruitment and retention of staff to support the Corporation's growth.  Pure is investing significant efforts in the implementation of its "Superior Value" program which includes increased training and education programs for field and support staff to address the critical personnel issues of recruitment, retention, leadership and succession planning.  In addition, retention bonus programs, wage adjustments and other compensation plans have also been recently implemented.

  • Continuing to build the Corporation's operational infrastructure in the US.  This includes adding equipment to those areas of high activity, increasing sales and marketing efforts to expand the existing client base and increasing the local staff complement in some of the busier US operating areas.  A major step towards achieving this objective was taken in mid-May with the hiring of a Vice President of Operations for USCS who has over 30 years of cased-hole wireline experience with intermediate and senior competitors.

  • Continuing to be a leader in high pressure work in Canada and selected operating areas in the US.  With its highly trained staff and large amount of equipment capable of operating in high pressure environments, Pure is well positioned to benefit from the high demand for services in the deep basin of the WCSB and some of the emerging resource plays in western Canada and the US.

  • Evaluating acquisition opportunities in Canada and the US.  Pure will evaluate potential acquisition opportunities that provide business synergies with the Corporation's core service lines and/or the establishment of new core operating areas.

RESULTS OF CONTINUING OPERATIONS

Financial Summary By Segment

The break-down of consolidated financial results by segment for the three months ended March 31, 2011 and 2010 is as follows:

                 
(Unaudited) Three months ended March 31, 2011
($000's)  CCS USCS Corporate Consolidated
Revenue $ 43,525 $ 17,447 $ -  $  60,972
Operating expenses   27,830   12,934   -   40,764
Gross margin $ 15,695 $ 4,513 $ - $ 20,208
Gross margin %   36%   26%   -%   33%
Selling, general and administrative   3,135   1,671   1,156   5,962
EBITDAS $ 12,560 $ 2,842 $ (1,156) $ 14,246
Stock-based compensation    -   -   184   184
EBITDA $ 12,560 $ 2,842 $ (1,340) $ 14,062

                 
(Unaudited)       Three months ended March 31, 2010
($000's)   CCS USCS Corporate Consolidated
Revenue $ 31,488 $ 10,659 $ - $ 42,147
Operating expenses   22,697    8,323   -   31,020
Gross margin $ 8,791 $ 2,336 $ - $ 11,127
Gross margin %   28%   22%   -%   26%
Selling, general and administrative   2,540   1,112   1,354   5,006
EBITDAS $ 6,251 $ 1,224 $ (1,354) $ 6,121
Stock-based compensation   -   -   180   180
EBITDA $ 6,251 $ 1,224 $ (1,534) $ 5,941

DISCUSSION OF SEGMENT RESULTS - CONTINUING OPERATIONS

Canadian Completion Services ("CCS") Segment

           
(Unaudited) Three months ended March 31,
($000's)   2011   2010 Change
Revenue          
  Wireline (1) $ 25,458 $ 20,508 24%
  Frac flowback (2)   18,067   10,980 65%
  $ 43,525 $ 31,488 38%
Gross margin                   
  Wireline    $ 8,632 $ 5,595 54%
  Frac flowback (2)   7,063   3,196 121%
  $ 15,695 $ 8,791 79%
Gross margin %          
  Wireline       34%    27% 26%
  Frac flowback (2)    39%   29% 34%
    36%   28% 29%
Selling, general and administrative $ 3,135 $ 2,540 23%
EBITDAS $ 12,560 $ 6,251 101%
           
Average units during the period(3):          
  Wireline (4)   69.5   69.5 0%
  Frac flowback (2),(5)   69.5   68.0 2%
Total   139.0   137.5 1%
           
Number of jobs / days:          
  Wireline - jobs (4)   3,249   2,863 13%
  Frac flowback - days (2)   4,012   3,122 29%
Total   7,261   5,985 21%
(1)  The CCS wireline division includes the following services: electric line, slickline, swabbing, specialty logging and several other services.  The electric line and slickline services generate approximately 80% of the revenue in this division.
(2)  The frac flowback division or service line was formerly described as the well testing division or service line.
(3)  Average unit count figures reflect the average number of units in the CCS fleet including those that are both operating and parked.  Average unit count figures exclude units that have been decommissioned.
(4)  Wireline units consist of electric line and slickline units.  Wireline jobs are from these units only (and exclude jobs from the other service lines in the wireline division).  At March 31, 2011, the CCS wireline fleet consisted of 69 wireline units, comprised of 58 units in operation and 11 parked units. 
(5)  At March 31, 2011, the CCS frac flowback fleet consisted of 71 frac flowback units, comprised of 68 units in operation and 3 parked units.

Pure operates the largest frac flowback fleet and one of the largest wireline fleets in the WCSB.  A significant portion of the Corporation's equipment fleet at March 31, 2011 (28 of the 69 wireline units and 35 of the 71 frac flowback units) is capable of operating in the high pressure environments encountered in many of the emerging resource plays in western Canada.  Pure's exposure to these areas, in combination with exposure to the conventional Cardium, Viking and Bakken oil plays, has contributed to the robust equipment utilization rates experienced in Q1 2011.

As a result of increased equipment utilization and improved pricing, the CCS segment realized revenue during Q1 2011 of $43.5 million, a significant increase over the $31.5 million recorded in Q1 2010.  Wireline division revenue increased by $5.0 million (or 24%) quarter over quarter reflecting increased equipment utilization (jobs were up 13%) and higher pricing.  Pure continues to see strong demand for cased-hole wireline services in Western Canada.

The frac flowback division recorded a more significant revenue increase as revenue rose $7.1 million (or 65%) on a quarter over quarter basis reflecting the 29% increase in days worked combined with higher average revenue per day.  In addition to pricing increases, the higher revenue per day reflects the impact of two large projects in the Horn River region of British Columbia during Q1 2011.  Both projects involved fracturing fluid recovery and flow testing for multi-well drilling programs targeting shale gas and ran from October 2010 through early February 2011.  One of the projects involved 5 high pressure testing packages working at one location.  These projects had significant amounts of auxiliary equipment (i.e. high pressure pipe, line heaters, etc.) which led to high overall daily revenues and associated margins.  A portion of the auxiliary equipment was redeployed to other client work in February and March 2011.  Pure's frac flowback business also benefited from the increased horizontal well activity in Q1 2011 as the average number of days equipment and crews are working on client location is typically higher for horizontal wells compared to vertical wells.

The higher utilization rates and improved pricing for both the wireline and frac flowback divisions resulted in the significant improvement in CCS' blended margins from 28% in Q1 2010 to 36% in Q1 2011.  The wireline business (which has a high fixed cost component) can realize strong incremental margins with higher equipment utilization.  The frac flowback business (which has a primarily variable cost structure) can see margins increase with improvements in pricing and additional billings for the use of auxiliary equipment.  The higher pricing for both the wireline and frac flowback divisions was partially offset by increased staff costs (resulting from a tightening labour market).

Selling, general and administrative expenses ("SG&A") in CCS increased from $2.5 million in Q1 2010 to $3.1 million in Q1 2011 reflecting the effects of higher activity levels in the current quarter, combined with increased wage expense.  As a percentage of revenue, SG&A improved from 8% of revenue in Q1 2010 to 7% of revenue in Q1 2011.

During May 2011, CCS established a new field station in Bonnyville, Alberta to meet customer demands in the area primarily related to heavy oil work.  To accommodate the equipment demands for this station plus demands from other stations, CCS is in the process of refurbishing 4 wireline units that were previously parked to bring them into operating condition.

US Completion Services ("USCS") Segment

           
(Unaudited) Three months ended March 31,
($000's)   2011   2010 Change
Revenue          
  Wireline $ 5,209 $ 3,268 59%
  Frac flowback (1)   12,238   7,391 66%
  $ 17,447 $ 10,659 64%
Gross margin          
  Wireline    $ 335 $ 712 (53%)
  Frac flowback (1)   4,178   1,624 157%
  $ 4,513 $ 2,336 93%
Gross margin %          
  Wireline       6%   22% (73%)
  Frac flowback (1)    34%   22% 55%
    26%   22% 18%
Selling, general and  administrative $ 1,671 $ 1,112 50%
EBITDAS $ 2,842 $ 1,224 132%
           
Average units available during the period(2):          
  Wireline (3)   17.0   7.0 143%
  Frac flowback (1), (4)    42.0   39.0 8%
Total   59.0   46.0 28%
           
Number of jobs / days:          
  Wireline - jobs   541   477 13%
  Frac flowback - days (1)   2,254   1,719 31%
Total    2,795   2,196 27%
(1) The frac flowback division or service line was formerly described as the well testing division or service line.
(2) Average unit count figures reflect the average number of units in the USCS fleet including those that are both operating and parked.  Average unit count figures exclude units that have been decommissioned.
(3) The USCS wireline fleet consists solely of electric line units.  At March 31, 2011 the USCS wireline fleet consisted of 17 wireline units, comprised of 12 units in operation and 5 parked units. 
(4) At March 31, 2011, the USCS frac flowback fleet consisted of 42 frac flowback units, all of which were in operation. 

Drilling rig counts and associated well completion activity levels during Q1 2011 increased over the comparable Q1 2010 period in all of USCS' operating areas including North Dakota (Bakken Basin), Pennsylvania (Marcellus Shales), Colorado (Piceance Basin) and Wyoming (Pinedale Anticline field).  As a result of these increased activity levels, the frac flowback division posted strong results in Q1 2011 which led to overall improvements in revenues, blended margins and EBITDA for the USCS segment as a whole in Q1 2011 compared to Q1 2010.  The strong frac flowback results were tempered by the results of the wireline division where gross margins were significantly eroded from Q1 2010 to Q1 2011.

The frac flowback division recorded a quarter over quarter revenue increase of $4.8 million (66%) and gross margin increased from 22% in Q1 2010 to a robust 34% in Q1 2011.  All frac flowback operating areas posted quarter over quarter increases in revenues reflecting increased equipment utilization (with days worked up 31% and testing units up 8%) and improved pricing.  The Pennsylvania operations (which were established in late 2009) benefited from a guaranteed revenue contract for the use of 4 high pressure testing packages plus associated pipe and auxiliary equipment which commenced in January 2011.  The frac flowback division is facing a shortage of local personnel to crew equipment which is in high demand, particularly in North Dakota and Pennsylvania.  As a result, significant costs have been incurred to temporarily mobilize staff from other operating areas which has negatively impacted margins.  USCS' management is focusing on recruiting, and training, local candidates in these areas to address this issue.

The wireline division reported increased revenue of $1.9 million on a quarter over quarter basis, which reflected the increased revenue from North Dakota during the quarter (this station was just established in Q1 2010) offset by a net revenue decline in the other operating stations.  However, overall equipment utilization was significantly lower than the prior period (i.e. jobs up 13% on increased unit count of 143%) due partly to the continuing reliance on a few large customers in Colorado and Wyoming.  The major customer in Colorado did not start its 2011 drilling and completion programs until March due to delays in getting a fracturing supplier, and in Wyoming, Pure remained on a rotational basis with several other wireline companies for one major customer.  As a result of the low revenue level in these areas (in relation to the equipment and staff complement), Pure realized overall gross margins of only 6% for the wireline division in Q1 2011.  To address the revenue and gross margin issues in this division, the USCS segment is focusing on the following:

  • Strengthening the wireline management team.  A major step was recently taken toward this objective through the hiring in mid-May of a Vice President of Operations for USCS who has significant cased-hole wireline experience.

  • Expansion and diversification of the wireline client base, especially, in those areas where the revenue stream is dependent on a few major customers.  The additional and/or more regular revenue streams will be required to improve margins in the high fixed cost wireline business.

  • Expansion into new operating areas with high activity levels.  As a result of customer requests, a wireline base is being established in Pennsylvania (where several jobs have already been completed) which should increase the overall utilization of the wireline fleet and crews.

In addition to focusing on margin improvement in the wireline business, USCS' management continues to focus on improving margins in the frac flowback business by:

  • Repositioning of crews from areas of lower utilization to areas of higher utilization; and

  • Reducing equipment rental expenses.  The USCS segment has allocated a portion of its 2011 capital expenditure budget to the purchase of equipment such as high pressure pipe and sand traps (used in the frac flowback business) to reduce the amount of equipment that is currently being rented from third party suppliers.

OTHER EXPENSES - CONTINUING OPERATIONS

   
(Unaudited)       Three months ended March 31,
($000's) 2011 2010 Change
Stock-based compensation $ 184 $ 180 2%
Depreciation and amortization $ 3,385 $ 2,896 17%
Other expenses          
  (Gain) loss on sale of  property and equipment $ 89 $ (165) 154%
  Foreign exchange (gain) loss $ 119 $ 16 644%
Finance costs          
  Interest on long-term debt $ 117 $ 590 (80%)
  Interest on finance lease liabilities $ 100 $ 123 (19%)
  Interest on operating leases $ 15 $ 5 200%

Depreciation and Amortization Expense

Depreciation and amortization expense increased from $2.9 million in Q1 2010 to $3.4 million in Q1 2011.  This increase reflected a quarter over quarter increase in the average net book values of property and equipment from $75.4 million in Q1 2010 to $90.0 million in Q1 2011.

Finance Costs

Finance costs, which were comprised of aggregate interest expense of $0.2 million in Q1 2011, were significantly lower than the aggregate interest of $0.7 million recorded in Q1 2010 reflecting the decrease in average drawn debt balances (approximately $19.0 million in Q1 2011 compared to $57.2 million in Q1 2010).  The debt reduction reflected the $33.5 million in net proceeds received from the sale of the drilling rig division in Q4 2010, combined with funds flow from operations exceeding capital expenditures incurred over the past twelve months.

INCOME TAX EXPENSE - CONTINUING OPERATIONS

Pure recorded a total income tax expense from continuing operations in Q1 2011 of $3.3 million on net earnings before income tax of $10.2 million, resulting in a blended Canadian/US income tax rate of approximately 32%.  The blended Canadian/US income tax rate reflects the non-deductibility of certain expenses for tax purposes. 

In determining the income tax rates to be applied to interim period net earnings, the Corporation uses an estimated annual income tax rate for each of the Canadian and US jurisdictions and applies these rates to jurisdictional interim earnings before income tax.

As at year end December 31, 2010, the Corporation had non-capital losses and deferred expense pools available to reduce future taxable income in Canada and the US of approximately $65 million and $38 million, respectively.

RESULTS OF DISCONTINUED OPERATIONS

The net earnings (loss) from discontinued operations for the three-month periods ended March 31, 2011 and 2010 were as follows:

         
(Unaudited) ($000's) 2011 2010
Revenue $ - $ 12,307
Operating expenses   -   9,079
Gross margin   -   3,228
Selling, general and administrative   -   366
Depreciation and amortization   -   986
Other expenses   -   (7)
Earnings before income taxes   -   1,883
Deferred income tax expense    -   456
Net earnings $ - $ 1,427

Effective October 1, 2010, the Corporation sold its drilling rig division assets and operations to a private investment group for net proceeds of $33.5 million.  The drilling equipment rentals division was sold on April 20, 2010 in exchange for an industry peer's US wireline operations.  As a result of the sale of these two divisions, the related financial results have been classified as discontinued operations under the Drilling segment for the three-month periods ended March 31, 2011 and 2010.

SUMMARY OF QUARTERLY RESULTS (1)

The interim periods shown below for 2009 are presented in accordance with former Canadian GAAP. The interim periods for 2010 and 2011 are presented in accordance with IFRS.

                 
  2011 2010 2009
(Unaudited)
($000's, except  per share amounts)
IFRS
Q1
IFRS
Q4
IFRS
Q3
IFRS
Q2
IFRS
Q1
GAAP
Q4
GAAP
Q3
GAAP
Q2
Continuing operations                
Revenue 60,972 55,128 45,997 32,401 42,147 29,936 27,479 12,675
Gross margin 20,208 17,316 13,804 4,753 11,127 3,783 3,571 (1)
Gross margin % 33% 31% 30% 15% 26% 13% 13% -%
Selling, general and administrative expenses 5,962 6,387 5,558 5,502 5,006 4,532 4,632 3,615
EBITDAS 14,246 10,929 8,246 (749) 6,121 (749) (1,061) (3,616)
EBITDA 14,062 10,784 8,109 (929) 5,941 (1,067) (1,295) (3,696)
Net earnings (loss) 6,959 4,406 3,166 (3,561) 1,206 (3,143) (3,333) (4,933)
Earnings (loss) per share:                
  Basic 0.29 0.19 0.13 (0.15) 0.05 (0.13) (0.14) (0.29)
  Diluted 0.28 0.18 0.13 (0.15) 0.05 (0.13) (0.14) (0.29)
Funds flow from operations 13,922 10,523 7,624 (1,492) 5,387 (1,371) (1,305) (4,394)
Discontinued operations                
Net earnings (loss) - (39) (164) (475) 1,427 (2) (1,971) (14,721)
Total operations                
Earnings (loss) per share:                
  Basic 0.29 0.18 0.13 (0.17) 0.11 (0.13) (0.22) (1.18)
  Diluted 0.28 0.18 0.12 (0.17) 0.11 (0.13) (0.22) (1.18)
(1) The periods in 2009 have been adjusted to reflect the reclassification of balances related to the discontinued drilling rig, drilling equipment rental and well fracturing operations.

The impact of a global recession during the fall of 2008 led to significantly reduced oil and natural gas prices and reduced access to debt and equity markets for the Corporation's customers.  As a result of these factors, industry activity levels declined sharply in both Canada and the US commencing in Q4 2008 and continuing through Q1 2009.  During Q2 2009, the impact of lower industry activity in both Canada and the US was further exacerbated by the seasonal activity decline in the Corporation's Canadian and North Dakota operations associated with spring break-up conditions that prevented the movement of equipment for the majority of the quarter. In response to the lower activity levels and competitive pricing pressure for the Corporation's services experienced in Q1 and Q2 of 2009, the Corporation undertook a number of cost cutting measures such as staff reductions and wage rollbacks intended to reduce operating costs. These cost cutting measures helped to mitigate some of the impact of the margin compression caused by the lower activity levels and reduced pricing for services.

On June 22, 2009 the Corporation acquired Canadian Sub-Surface Energy Services Corp. ("CanSub") and merged its Canadian completions operations with CanSub, creating one of the largest wireline and frac flowback service providers in the WCSB.

Activity levels and pricing continued to be depressed in both Canada and the US during Q3 2009, resulting in a continued strain on Pure's revenue and margins.  Pure's financial position was further challenged by the $20.8 million of long-term debt assumed as part of the CanSub acquisition.  As part of an effort to refocus the Corporation's operations and strengthen the balance sheet, Pure sold its well fracturing assets effective August 14, 2009 for net proceeds of $38.8 million.  The financial results for the well fracturing operations have been disclosed as discontinued operations in the chart above.

Activity levels in Canada during Q4 2009 improved over Q3 2009, due in part to the typical increase for winter drilling and completion activities but also due to higher commodity prices for oil and natural gas. In addition, many of the Corporation's customers benefited from the infusion of capital from equity offerings completed during Q3 and Q4 2009, as capital markets became more receptive to oil and natural gas exploration and development companies. The drilling rig division posted improved utilization rates of 47% in Q4 2009 compared to the 34% posted in Q4 2008. Activity levels for Q4 2009 in the CCS segment's wireline and frac flowback divisions also realized improved equipment utilization rates over Q4 2008. However, margins for both the Drilling and CCS segments remained constrained due to the continuing competitive pricing for these services. In the US, equipment utilization rates also improved in Q4 2009 over the Q3 2009 levels, but similar to Canada, competitive pricing continued to constrain margins.

Drilling and completion activity levels in Canada continued to recover in Q1 2010, due to the improved commodity prices and improved financial position of Pure's customers.  During Q1 2010, the Corporation's Canadian equipment fleets (CCS and Drilling segments) realized significantly higher utilization rates than the comparable Q1 2009 period.  However, margins in both of these Canadian segments continued to be constrained by competitive pricing levels carried over from 2009.  For CCS' operations, the negative impact of the lower pricing was partially offset by a streamlining of operating costs achieved through the full integration of CanSub's operations.  In the USCS segment, revenues and gross margins improved over Q4 2009 due to higher equipment utilization as the active rig count increased in some of the segment's core operating areas.  However, gross margins remained constrained due to the impact of competitive pricing that was implemented in the second half of 2009 as well as additional costs incurred in Q1 2010 to staff up in several of the segment's growing core operating areas in North Dakota and Pennsylvania.

During Q2 2010, the robust oil prices and stabilized natural gas prices resulted in a further recovery in drilling and completion activity levels in both Canada and the US.  As a result of the improved equipment utilization rates, Pure recorded improved revenue and margins for all operating segments in Q2 2010 over the comparable Q2 2009.  The strengthening activity levels allowed Pure to implement modest price increases for some of its services at the end of Q2 2010 and into Q3 2010 with the target of further improving margins over the second half of 2010.

On April 20, 2010, Pure acquired the US wireline assets and operations of an industry peer (including 10 wireline units) in exchange for Pure's non-core "Motorworks" drilling equipment rentals division and a cash payment of $2.4 million.  As a result of this transaction, the Corporation's US wireline fleet expanded from 8 units to 17 units with the remaining wireline unit being added to the Canadian wireline fleet.  The objective of this acquisition was to increase the US wireline capability to attract and retain more of the large customers operating in the Corporation's core US operating areas.  As a result of the sale of Motorworks, the drilling equipment rental division financial results have been classified as discontinued operations in the chart above.

During Q3 2010, due to the strengthening drilling and completion activity levels in both western Canada and Pure's operating areas in the US, the Corporation realized strong equipment utilization rates and improved pricing for the majority of its service offerings.  As a result, the Corporation realized significantly increased revenues, margins and net earnings from continuing operations compared to Q3 2009.

On October 1, 2010, the Corporation sold its drilling rig division for net proceeds of $33.5 million, all of which was used to pay down debt.  As a result of this sale, the drilling rig division has been classified as discontinued operations in the chart above.  This transaction significantly improved Pure's financial position as the Corporation exited year end December 31, 2010 with working capital exceeding long-term debt by $4.7 million.  A year earlier, on December 31, 2009, the Corporation's long-term debt exceeded its working capital by $37.2 million.

During Q4 2010, the CCS segment posted significantly improved revenue and gross margins over the comparable Q4 2009 period as the number of wells drilled (rig released) in western Canada increased by 52% on a quarter over quarter basis (from 2,665 in Q4 2009 to 4,061 in Q4 2010).  The higher activity levels allowed Pure to implement additional pricing increases which positively impacted margins.  However, a portion of these pricing increases were needed to absorb rising labour costs which reflected a tightening labour market.  For the USCS segment, the strong activity levels in Q4 2010 in the core operating areas of North Dakota and Pennsylvania were offset by lower activity levels in Wyoming and Colorado (as two major clients in these areas delayed work until 2011).  As a result of a lack of available field staff in the busy North Dakota and Pennsylvania regions, staff from other areas were brought in to crew equipment which negatively impacted margins.  Both of these factors negatively impacted revenue and margins for USCS during Q4 2010.

During Q1 2011, drilling and completion levels continued to be robust in the WCSB and in certain of Pure's US operating areas reflecting the strong prices for oil and natural gas liquids.  In addition, increased horizontal drilling activity contributed to the increased demand for Pure's services.  The resulting high equipment utilization and improved pricing (for both wireline and frac flowback in CCS and frac flowback in USCS) resulted in record consolidated quarterly revenue and EBITDA of $61.0 million and $14.1 million respectively for Pure in Q1 2011.  Both CCS and USCS segments recorded quarter over quarter increases in revenue, gross margins, margin percentage, EBITDA and net earnings.  The strong frac flowback financial results in the USCS segment were tempered by the results for the US wireline division which posted gross margins in Q1 2011 of only 6%.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2011, Pure's working capital exceeded long-term debt by $10.3 million, an improvement of $5.6 million over the December 31, 2010 amount of $4.7 million.  The improvement primarily reflects the funds flow from operations during Q1 2011 of $13.9 million less capital expenditures of $7.1 million. Capital expenditures in Q1 2011 were primarily for: 2 high pressure testing packages received in Q1 2011, wireline tools and auxiliary equipment, fiber optic data gathering equipment, line heaters (to replace rented equipment in the CCS frac flowback division) and progress payments for 5 frac flowback packages and downhole wireline equipment being constructed.

In May 2011, in response to the strong industry activity levels, Pure's Board of Directors approved an increase in the Corporation's 2011 capital expenditure program from $38 million (previously announced in January) to $60 million.  The additional $22 million is comprised of $17 million for frac flowback equipment (including 6 high pressure frac flowback packages plus auxiliary equipment such as high pressure pipe and line heaters) plus $5 million for wireline and fiber optic equipment.  There continues to be significant customer demand for high pressure frac flowback equipment.

In addition to Pure's capital expenditure program for 2011, the Corporation has the following operating lease commitments, purchase commitments and debt commitments over the next five years:

   
  Payments for years ending March 31,
Contractual Obligations                        After
(Unaudited) ($000's)   Total   2012   2013   2014   2015   2015
Long-term debt obligations (1) $ 18,189 $ 5,462 $ 5,992 $ 3,607 $ 2,530 $ 598
Purchase commitments (2)   5,944   5,944   -   -    -   -
Operating leases   28,234   5,110   5,099   5,221   3,998   8,806
Total contractual obligations $ 52,367 $ 16,516 $ 11,091 $ 8,828 $ 6,528 $ 9,404
(1) Long-term debt obligations represent balances outstanding at March 31, 2011 under the US Term Loan, US revolving loan and liabilities under finance leases.  There were no amounts outstanding under the Canadian Revolving Facility at that date.
(2) Purchase commitments represent commitments made by the Corporation to third party suppliers for future purchases of equipment as of March 31, 2011.

At March 31, 2011, Pure had aggregate available but undrawn credit facilities of approximately $40.5 million broken down as follows: Canadian Revolving Facility - $25.0 million; Canadian Operating Facility - $15.0 million; and US Revolving Loan - $0.5 million.  The Corporation believes that its available credit facilities, combined with funds flow from operations, will provide sufficient capital resources to fund the 2011 capital expenditure program and ongoing operations.  Pure's management continues to evaluate its capital and operational spending programs in response to industry conditions.

SHARE CAPITAL

As at May 25, 2011, the Corporation had 24.2 million shares outstanding and 2.0 million options outstanding, of which 46,000 were vested.

CHANGES IN ACCOUNTING POLICIES

Adoption of IFRS

The Corporation has prepared its March 31, 2011 condensed consolidated interim financial statements in accordance with IFRS 1, First-time Adoption of International Financial Reporting Standards, and with IAS 34, Interim Financial Reporting, as issued by the International Accounting Standards Board (IASB). Previously, the Corporation prepared its financial statements in accordance with Canadian GAAP. The adoption of IFRS has not had a material impact on the Corporation's operations and strategic decisions. The Corporation's IFRS accounting policies are provided in Note 3 to the March 31, 2011 condensed consolidated interim financial statements. In addition, Note 13 to the March 31, 2011 condensed consolidated interim financial statements presents reconciliations between the Corporation's 2010 Canadian GAAP results and the 2010 IFRS results. The reconciliations include: the consolidated statements of financial position as at January 1, 2010, March 31, 2010, December 31, 2010 and the consolidated statements of earnings and comprehensive income for the periods ended March 31, 2010 and December 31, 2010.

NON-IFRS MEASURES

EBITDA, EBITDAS and funds flow from operations do not have standardized meanings prescribed by IFRS. Management believes that, in addition to net earnings (loss), EBITDA and EBITDAS are useful supplemental measures. EBITDA and EBITDAS are provided as measures of operating performance without reference to financing decisions, depreciation or income tax impacts, which are not controlled at the operating management level. EBITDAS also excludes stock-based compensation expense as it is also not controlled at the operating management level. Investors should be cautioned that EBITDA and EBITDAS should not be construed as alternatives to net earnings (loss) determined in accordance with IFRS as an indicator of the Corporation's performance. The Corporation's method of calculating EBITDA and EBITDAS may differ from that of other entities and accordingly may not be comparable to measures used by other entities. See section titled "Reconciliation of EBITDA and EBITDAS to Net Earnings (Loss)" below.

Funds flow from operations is defined as cash from operating activities before changes in non-cash working capital, as presented on the Corporation's statement of cash flows. Funds flow from operations is a measure that provides investors with additional information regarding the Corporation's liquidity and its ability to generate funds to finance its operations. Funds flow from operations does not have a standardized meaning prescribed by IFRS and may not be comparable to similar measures provided by other entities.

RECONCILIATION OF EBITDA AND EBITDAS TO NET EARNINGS (LOSS) - CONTINUING OPERATIONS

     
(Unaudited)   Three months ended March 31,
($000's, from continuing operations)     2011   2010
Earnings before income tax   $ 10,237 $ 2,476
Add: Depreciation and amortization      3,385   2,896
  Finance costs (1)      232   718
  Other expenses(2)     208   (149)
EBITDA   $ 14,062 $ 5,941
Add:  Stock-based compensation expense     184   180
EBITDAS   $ 14,246 $ 6,121
(1) Finance costs include interest on long-term debt, interest on operating loans and interest on finance lease liabilities.
(2) Other expenses include foreign exchange (gain) loss, and (gain) loss on sale of property and equipment.

FORWARD-LOOKING STATEMENTS

This document contains certain forward-looking statements and other information that are based on the Corporation's current expectations, estimates, projections and assumptions made by management in light of its experience and perception of historical trends, current conditions, anticipated future developments and other factors believed by management to be relevant.

All statements and other information contained in this document that address expectations or projections about the future are forward-looking statements. Some of the forward-looking statements may be identified by words such as "may", "would", "could", "will", "intends", "targets", "expects", "believes", "plans", "anticipates", "estimates", "continues", "maintains", "projects", "indicates", "outlook", "proposed", "objective" and other similar expressions. These statements speak only as of the date of this document. 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 or not such results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to, the factors discussed in the "Risks and Uncertainties" section in the most recent Annual Information Form, Information Circular, quarterly reports, material change reports and news releases. The Corporation cannot assure investors that actual results will be consistent with the forward-looking statements and readers are cautioned not to place undue reliance on them. The forward-looking statements are provided as of the date of this document and, except as required pursuant to applicable securities laws and regulations, the Corporation assumes no obligation to update or revise such statements to reflect new events or circumstances.

The forward-looking statements and information contained in this document reflect several major factors, expectations and assumptions of the Corporation, including without limitation, that the Corporation will continue to conduct its continuing operations in a manner substantially consistent with past operations; the general continuance of current or, if applicable, assumed industry conditions; the continuance of existing (and in certain circumstances, the implementation of proposed) taxation, royalty and regulatory regimes; the continuance of current or future increased pricing for the Corporation's services; certain commodity prices and other cost assumptions; certain conditions regarding oil and natural gas supply, demand and storage in North America; the continued availability of adequate debt and/or equity financing and cash flow from the Corporation's operations to fund its capital and operating requirements as needed; and the extent of its liabilities. Many of these factors, expectations and assumptions are based on management's knowledge and experience in the industry and on public disclosure of industry participants and analysts relating to anticipated exploration and development programs of oil and natural gas producers, the effect of changes to regulatory, taxation and royalty regimes, expected active rig counts and industry equipment utilization in the WCSB and the US Rocky Mountain, North Dakota and Appalachian Basin regions and other matters. The Corporation believes that the material factors, expectations and assumptions reflected in the forward-looking statements and information are reasonable; however, no assurances can be given that these factors, expectations and assumptions will prove to be correct.

In particular, this document contains forward-looking information pertaining to the following: ability to manage costs in response to industry activity levels; success of marketing programs; capital expenditure programs; ability to move equipment within operating locations; availability of debt financing and ability to renew the Corporation's existing credit facilities, at acceptable terms; supply and demand for oilfield services and industry activity levels; oil and natural gas prices; oil and natural gas drilling activity; treatment under governmental royalty programs or regimes; collection of accounts receivable; operating risk liability; expectations regarding market prices and costs; expansion of services and operations in Canada and the US; the integration of assets and personnel from acquisitions; increases in the pricing for the Corporation's services and impact on gross margins; reduction of debt levels; net working capital levels; the amount and timing of recognition of income tax recoveries, income tax losses and deferred expense pools; future customer work; expected levels of the Corporation's sales, general and administrative expenses; ability to crew equipment; availability of local employees for the Corporation's field operations; the reduction of rented equipment and reduction in operating expenses (and improved gross margins); and competitive conditions.

Condensed Consolidated Statements of Financial Position

               
(Unaudited)
($000's)
March 31,
2011
December 31,
2010
January 1,
2010
Assets            

Current assets            
  Cash and cash equivalents $ 2,409 $ 4,599 $ 1,986
  Trade and other receivables   43,313   37,066   23,297
  Income taxes receivable   14   682   532
  Inventories    2,593   2,523   2,887
  Deposits and prepaid expenses   1,766   1,741   2,002
  Current assets of discontinued operations    -   63   446
Non-current assets    50,095   46,674   31,150
  Property and equipment     92,092   87,885   116,091
  Non-current assets held for sale    -   -   6,266
  Deferred tax assets      20,192   23,650   26,380
  $ 162,379 $ 158,209 $ 179,887
Liabilities and Shareholders' Equity            
Current liabilities            
  Operating loan    $ - $ 3,194 $  -
  Trade and other payables   21,623   22,358   15,275
  Current portion of long-term debt      5,462   5,488   3,308
  Current liabilities of discontinued operations    -   60   110
    27,085   31,100   18,693
             
Non-current liabilities            
  Long-term debt       12,727   10,889    49,658
    39,812   41,989   68,351
Shareholders' equity            
  Share capital     121,346   121,156   120,913
  Contributed surplus      5,024   4,904   4,344
  Accumulated other comprehensive income (loss)     (3,006)   (2,084)   -
  Deficit    (797)   (7,756)   (13,721)
     122,567   116,220   111,536
  $ 162,379 $ 158,209 $ 179,887

Condensed Consolidated Statements of Net Earnings
For the three months ended March 31,

         
(Unaudited)
($000's)
2011 2010
Revenue  $ 60,972 $ 42,147
Operating expenses    40,764   31,020
Gross margin   20,208   11,127
         
Selling, general and administrative      5,962   5,006
Stock-based compensation    184   180
Depreciation and amortization     3,385   2,896
Other expenses     208   (149)
Finance costs     232   718
Earnings before income taxes    10,237   2,476
Income taxes         
  Current tax expense    53   -
  Deferred tax expense    3,225   1,270
    3,278   1,270
Net earnings from continuing operations   6,959   1,206
Net earnings from discontinued operations    -   1,427
Net earnings $ 6,959 $ 2,633
         
Earnings per share from continuing operations         
  Basic $ 0.29 $ 0.05
  Diluted   0.28   0.05
Earnings per share from discontinued operations         
  Basic   $ - $ 0.06
  Diluted   -   0.06
Earnings per share         
  Basic  $ 0.29 $ 0.11
  Diluted    0.28   0.11

Condensed Consolidated Statements of Comprehensive Income
For the three months ended March 31,

         
(Unaudited)
($000's)
2011 2010
  Net earnings $ 6,959 $ 2,633
  Other comprehensive income:        
    Foreign currency translation adjustment    (922)   (996)
    (922)   (996)
  Comprehensive income $ 6,037 $ 1,637

Condensed Consolidated Statements of Cash Flows
For the three months ended March 31,

         
(Unaudited)
($000's)
2011 2010
Operating activities    
  Net earnings from continuing operations  $ 6,959 $ 1,206
  Items not involving cash from continuing operations:        
    Depreciation and amortization   3,385   2,896
    Stock-based compensation    184   180
    (Gain) loss on sale of property and equipment   89   (165)
    Deferred income tax expense   3,225   1,270
    Unrealized foreign exchange loss    80   -
    13,922   5,387
  Changes in non-cash working capital balances from continuing operations   (7,192)   (11,152)
Net operating cash flows from continuing operations    6,730   (5,765)
Net operating cash flows from discontinued operations    -   621
Net operating cash flows   6,730   (5,144)
Investing activities        
  Purchases of property and equipment      (7,088)    (2,272)
  Proceeds from sale of property and equipment    24   888
  Proceeds from sale of assets under finance lease   195   28
  Changes in non-cash working capital balances    578   -
  Discontinued operations     -   39
Net investing cash flows   (6,291)   (1,317)
Financing activities        
  Borrowings from (repayment of) operating loans   (3,194)   7,184
  Proceeds from long-term debt   1,975   1
  Repayment of long-term debt   (1,473)   (658)
  Issue of share capital, net of share issuance costs   126   -
  Discontinued operations     -   (23)
Net financing cash flows   (2,566)   6,504
Increase (decrease) in cash and cash equivalents   (2,127)   43
Effect of translation on foreign currency cash and cash equivalents   (63)   (73)
Cash and cash equivalents, beginning of period    4,599   1,986
Cash and cash equivalents, end of period $ 2,409 $ 1,956

Condensed Consolidated Statements of Changes in Equity
For the three months ended March 31, 2011 and March 31, 2010

                       
(Unaudited)   Share Contributed     Total
($000's)   Capital Surplus AOCI* (Deficit) Equity
Balance at January 1, 2011   $ 121,156 $ 4,904 $ (2,084) $ (7,756) $ 116,220
Common shares issued under stock option plan     190   (64)   -   -   126
Stock-based compensation     -   184   -   -   184
Net earnings     -    -    -   6,959   6,959
Other comprehensive income (loss)     -    -   (922)   -   (922)
Balance at March 31, 2011   $ 121,346 $ 5,024 $ (3,006) $ (797) $ 122,567

* AOCI represents Accumulated other comprehensive income (loss)


                       
(Unaudited)   Share Contributed     Total
($000's)   Capital Surplus AOCI*       (Deficit) Equity
Balance at January 1, 2010   $ 120,913 $ 4,344 $ - $ (13,721) $ 111,536
Common shares issued under stock option plan     -   -   -   -    -
Stock-based compensation     -   180    -   -   180
Net earnings     -     -     -   2,633   2,633
Other comprehensive income (loss)      -   -   (996)   -   (996)
Balance at March 31, 2010   $ 120,913 $ 4,524 $ (996) $ (11,088) $ 113,353

* AOCI represents Accumulated other comprehensive income (loss)

 

 

 

 

For further information:

Kevin Delaney
Chief Executive Officer
E-mail:  kdelaney@pure-energy.ca

Chris Martin
Chief Financial Officer
E-mail:  cmartin@pure-energy.ca

Address: 10th Floor, 333 - 11th Avenue S.W.
  Calgary, AB
  T2R 1L9
 
Phone:  (403) 262-4000
Fax:  (403) 262-4005

Profil de l'entreprise

Pure Energy Services Ltd.

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