Pure Energy Services Ltd. announces record quarterly financial results for Q3 2011 and the implementation of a quarterly dividend policy

CALGARY, Nov. 9, 2011 /CNW/ - Pure Energy Services Ltd. ("Pure" or "the Corporation") (TSX: PSV) is pleased to announce its financial and operating results for the three and nine-month periods ended September 30, 2011.  The financial results presented for Q3 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 September 30,         Nine months ended September 30,
($000's, except per share amounts)         2011   2010         Change         2011   2010         Change
Continuing operations                        
Revenue  $      65,088  $     45,996              42%  $   166,937 $      120,545               38%
Gross margin $   21,746  $    13,804              58% $     48,151 $       29,684               62%
Gross margin %               33%              30%               10%              29%               25%               16%
Selling, general and
 administrative expenses
$      5,928   $   
5,558
              7% $      17,179 $      16,073               7%
EBITDAS (1) $     15,818  $  8,246               92% $      30,972 $      13,611               128%
EBITDA (1) $     15,326 $   8,109              89% $      29,851    $   13,114               128%
Net earnings $      8,297 $  3,166              162% $     12,236 $        801              >1,000%
       Per share:                        
          Basic $    0.34 $         0.13              162%    $         0.51 $           0.04              >1,000%
          Diluted $     0.33 $    0.13              154% $             0.49 $          0.04              >1,000%
Funds flow from operations (1) $  15,473 $     7,631              103%   $    30,111 $       11,510              162%

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

             
(Unaudited)
($000's)
  September 30,
2011
  December 31,
2010
               Change
Property and equipment $       116,695 $        87,885               33%
Total assets $       192,966  $       158,209               22%
Long-term debt net of working capital $        1,024 $       (4,685)               122%

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 operating 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 (formerly described as the well testing division). 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 centre 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.

During 2010, the Corporation sold its drilling rig and drilling equipment rental divisions.  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 and nine-month periods ended September 30, 2010.

Q3 2011 HIGHLIGHTS FROM CONTINUING OPERATIONS

Pure achieved record revenue and EBITDA during Q3 2011 of $65.1 million and $15.3 million, respectively, reflecting strong operating results from both its Canadian and US operations.  The Corporation continues to experience strong demand for its services in its western Canadian and US operating regions, 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).  Robust activity levels have continued through early Q4 2011 in both regions, with the busy winter drilling season about to commence in western Canada.

Pure exited Q3 2011 in a strong financial position with long-term debt net of working capital of $1.0 million at September 30, 2011.  During October, the Corporation expanded its aggregate debt facilities from its Canadian and US lenders from the previous $52 million to $67 million.  Pure had drawn debt (excluding finance lease liabilities) of approximately $27 million at September 30, 2011 leaving $40 million available if the expanded facilities had been in place at quarter end.

The number of wells drilled (rig released) in the WCSB increased on a quarter over quarter basis by 18% from 3,266 in Q3 2010 to 3,870 in Q3 2011 (source: Nickles Energy Group).  The horizontal wells (which are typically more service intensive) as a percentage of total wells drilled, increased from 45% in Q3 2010 to 59% in Q3 2011.  Rig counts in all of Pure's US operating areas continued to rise, with the most dramatic increases occurring in North Dakota and Pennsylvania where average active rig counts in Q3 2011 were 171 and 113, respectively, compared to 128 and 89, respectively, in Q3 2010.  Rig counts increased at a more moderate pace in Pure's two other US operating areas of Colorado and Wyoming.

Consolidated revenue, gross margin, EBITDA and net earnings improved from Q3 2010 to Q3 2011 as follows:

  • Revenue increased 42% from $46.0 million to $65.1 million.
  • Gross margin increased 58% from $13.8 million to $21.7 million.  On a percentage basis, margins improved from 30% to 33%.
  • EBITDA improved 89% from $8.1 million to $15.3 million.
  • Net earnings improved from $3.2 million to $8.3 million (with current quarter earnings including $1.5 million of foreign exchange gains, net of tax).

Through the nine months ended September 30, 2011, Pure expended $33.3 million of its planned $60 million capital expenditure program for calendar 2011 ($14.6 million expended in Q3 2011).  At September 30, 2011, Pure had received 8 of the originally planned 18 frac flowback units (all of which are now deployed in the field).  Of the remaining 10 flowback units, 9 units are scheduled to be received in Q4 2011, with construction of the remaining unit postponed until 2012 (and related capital funds reallocated to the purchase of flowback automation equipment requested by customers).   The remaining $27 million of Pure's 2011 capital expenditure program is expected to be incurred during Q4 2011 and Q1 2012, with supplier delays contributing to the carry over into the early part of next year. 

DIVIDEND

As a result of Pure's growth in funds flow from operations and strong balance sheet, the Corporation's Board of Directors has approved the implementation of a dividend policy, which provides for the payment of a quarterly dividend.  The Board of Directors has declared the first quarterly dividend at a rate of $0.09 per share, payable on February 15, 2012 to shareholders of record at the close of business on January 31, 2012.    This dividend will provide another avenue of return for our shareholders.

OUTLOOK

Pure's management remains optimistic about industry activity levels in western Canada and its US operating areas for the remainder of 2011 and through the first half of 2012.  Oil and natural gas liquid prices continue to be strong and drilling rig counts on both sides of the border show no signs of decreasing in the near term.    Management will have more clarity as to industry conditions in the longer term, when Pure's customers announce their 2012 capital expenditure plans later in 2011.

Pure's primary areas of focus for the remainder of 2011 and through early 2012 are as follows:

  • Completion of the 2011 capital expenditure program and deployment of the related equipment.  Pure continues to work closely with suppliers to ensure that equipment construction programs are completed on time and on budget.  The Corporation is also working closely with its customers to schedule deployment of this new equipment to the field.

  • 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 important personnel issues of recruitment, retention, leadership and succession planning.  In addition, retention bonus programs, wage adjustments and other compensation plans have been implemented.

  • Continuing to build the Corporation's operational infrastructure in the US.  This includes adding equipment to 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 Corporation's busier US operating areas.

  • Continuing to be a leader in high pressure work in Canada and selected operating areas in the US.  With our highly trained staff and large fleet of equipment capable of operating in high pressure environments, Pure continues 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.

  • Evaluating opportunities for organic growth into new geographic markets, particularly in the US.

RESULTS OF CONTINUING OPERATIONS

Financial Summary by Segment

The break-down of consolidated financial results by segment for the three and nine-month periods ended September 30, 2011 and 2010 is as follows:

           
(Unaudited)       Three months ended September 30, 2011
($000's)    CCS   USCS   Corporate   Consolidated
Revenue  $        36,613  $        28,475  $        -  $        65,088
Operating expenses              25,073              18,269               -               43,342
Gross margin  $        11,540  $        10,206  $        -  $        21,746
Gross margin %               32%               36%               -%               33%
Selling, general and administrative               2,726              2,023              1,179               5,928
EBITDAS  $        8,814  $        8,183  $       (1,179)  $        15,818
Stock-based compensation               -               -               492               492
EBITDA  $        8,814  $        8,183  $       (1,671)  $        15,326
                 
                 
                 
(Unaudited)       Three months ended September 30, 2010
($000's)     CCS   USCS   Corporate   Consolidated
Revenue  $        28,831  $        17,165  $        -  $        45,996
Operating expenses              19,359              12,833               -               32,192
Gross margin  $        9,472  $        4,332  $        -  $        13,804
Gross margin %               33%               25%                -%                      30%
Selling, general and administrative              2,782              1,341              1,435               5,558
EBITDAS  $        6,690  $        2,991  $       (1,435)  $        8,246
Stock-based compensation               -               -              137               137
EBITDA  $        6,690 $        2,991    $     (1,572)  $        8,109
                 
                 
                 
(Unaudited)       Nine months ended September 30, 2011
($000's)    CCS   USCS   Corporate   Consolidated
Revenue  $        98,529   $      68,408  $        -  $        166,937
Operating expenses              72,664              46,122               -               118,786
Gross margin  $        25,865  $        22,286  $        -  $        48,151
Gross margin %               26%               33%               -%               29%
Selling, general and administrative               8,389              5,354              3,436               17,179
EBITDAS  $        17,476  $        16,932    $     (3,436)  $        30,972
Stock-based compensation               -               -              1,121               1,121
EBITDA  $        17,476 $       16,932  $       (4,557)  $        29,851
                 
                 
                 
(Unaudited)       Nine months ended September 30, 2010
($000's)     CCS   USCS   Corporate   Consolidated
Revenue  $        76,309  $       44,236  $        -  $        120,545
Operating expenses              57,810              33,051               -              90,861
Gross margin  $        18,499   $      11,185  $        -  $        29,684
Gross margin %               24%              25%                -%                    25%
Selling, general and administrative               7,791              4,124              4,158              16,073
EBITDAS  $       10,708    $     7,061    $     (4,158)    $     13,611
Stock-based compensation               -               -              497              497
EBITDA $       10,708   $     7,061    $     (4,655)  $       13,114
               

DISCUSSION OF SEGMENT RESULTS - CONTINUING OPERATIONS

Canadian Completion Services ("CCS") Segment              
(Unaudited) Three months ended September 30,   Nine months ended September 30,
($000's)   2011   2010   Change   2011   2010   Change
Revenue                                                                         
  Wireline (1)    $     21,739 $        18,387              18% $        57,057  $       49,200              16%
  Frac flowback (2)              14,874              10,444              42%              41,472              27,109              53%
    $      36,613   $      28,831               27%  $       98,529  $       76,309              29%
Gross margin                                                                          
  Wireline     $      6,493   $      5,761              13%    $     12,287 $        10,937              12%
  Frac flowback (2)              5,047              3,711              36%              13,578              7,562              80%
     $     11,540  $       9,472              22%   $     25,865     $    18,499              40%
Gross margin %                                                                                                   
  Wireline                 30%              31%              (3%)              22%              22%              -%
  Frac flowback (2)              34%              36%              (6%)              33%              28%              18%
               32%              33%              (3%)              26%              24%              8%
Selling, general and
 administrative
   $     2,726   $      2,782              
(2%)
   $    8,389 $        7,791              8%
EBITDAS  $       8,814  $       6,690              32% $        17,476  $       10,708              63%
                         
Average units during the period (3)                        
  Wireline (4)              68.0              68.0               -%              68.8              69.3   (1%)
  Frac flowback (2), (5)              68.5              69.5              (1%)              69.0               69.0              -%
Total              136.5              137.5              (1%)              137.8              138.3   -%
                         
Number of jobs / days                        
  Wireline - jobs (4)              2,737              2,518              9%              7,075              6,733              5%
  Frac flowback - days (2)              2,912              2,357              24%              8,395              7,004              20%
Total              5,649              4,875              16%              15,470              13,737              13%

(1)  The CCS wireline division includes the following primary services: electric line, slickline, swabbing and specialty logging.  The electric line and slickline services generate approximately 80% of annual revenue in this division.
(2)  The frac flowback division was formerly described as the well testing division.
(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 September 30, 2011, the CCS wireline fleet consisted of 67 wireline units, comprised of 60 units in operation and 7 parked units. 
(5)  At September 30, 2011, the CCS frac flowback fleet consisted of 68 frac flowback units, all of which were in operation. From October 1, 2010 to September 30, 2011, CCS added 6 new units, transferred 2 units to USCS and sold/ decommissioned 6 units.

 

Pure operates the largest frac flowback fleet and one of the largest wireline fleets in the WCSB.  A significant portion of the CCS equipment fleet at September 30, 2011 (35 of the 67 wireline units and 35 of the 68 frac flowback units) is capable of operating in the high pressure environments encountered in many of the emerging resource plays in western Canada.  With a large capacity of high pressure equipment, CCS has taken advantage of the high levels of drilling activity in these emerging resource plays as well as the conventional oil plays.

The number of wells drilled (rig released) in western Canada during the current quarter increased by 18% on a quarter over quarter basis (3,870 wells drilled in Q3 2011 compared to 3,266 in Q3 2010), with the number of horizontal wells climbing from 45% of the total wells drilled in Q3 2010 to 59% in Q3 2011.

The frac flowback division recorded a significant revenue increase of $4.4 million (or 42%) in Q3 2011 compared to Q3 2010 due to:

  • Increased equipment utilization, as reflected by the 24% increase in the number of days worked and the same average unit count in both periods;
  • Improved pricing; and
  • Increased high pressure work which has a higher associated daily revenue rate as it typically involves the use of a significant amount of auxiliary equipment (such as high pressure pipe and line heaters) which add to the daily billing rate.

The gross margin percentage for the frac flowback division in Q3 2011 of 34% was 2% lower than the 36% margins realized in Q3 2010.  This reflected the significant training expenses incurred during the current quarter for the new hires required for the new frac flowback units and the busier workloads expected this winter.  In addition, increased wages for existing employees also impacted margins.

Wireline division revenue rose by 18% on a quarter over quarter basis, reflecting increased equipment utilization and improved pricing.  Expected utilization levels for Q3 2011 were not reached until the end of July as the extremely wet weather during Q2 delayed work in some operating areas.

Gross margins on a percentage basis for Q3 2011 of 30% were slightly lower than the 31% margins posted in the prior period Q3, despite the higher revenue level.  This primarily reflected the higher costs associated with a larger operating infrastructure in the current quarter (including increased operating and support staff), and higher employee wages.

On a year to date basis, revenues were up in 2011 compared to 2010 for both the frac flowback and wireline divisions, reflecting increased equipment utilization and improved pricing.  Gross margin percentages for frac flowback (a high variable cost business) of 33% were higher than the 28% realized in the prior year period, reflecting increased pricing that more than offset the increased employee costs.  Gross margin percentages for the wireline division (a high fixed cost business) of 22% were in line with the prior year as costs in the current period associated with a larger operating infrastructure and increased wages offset the higher revenue levels.

Selling, general and administrative ("SG&A") expenses in Q3 2011 were in line with Q3 2010; however, the prior year period included $0.3 million in severance expenses related to a management restructuring.  On a dollar basis, SG&A has increased on a quarter over quarter and year over year basis reflecting the higher activity levels.  SG&A expenses as a percentage of sales improved from 8.6% in the prior year third quarter (excluding the one-time severance expense) to 7.4% in the current quarter due to the significantly higher revenue levels.  On a year to date basis, SG&A expenses improved from 9.8% in the prior year (after adjusting for the one-time severance expense) to the 8.5% recorded in 2011.

US Completion Services ("USCS") Segment                
(Unaudited) Three months ended September 30,   Nine months ended September 30,
($000's)   2011   2010   Change   2011   2010   Change
Revenue                                                                        
  Wireline $        8,721 $        6,463               35%   $      20,324   $      16,289               25%
  Frac flowback (1)              19,754              10,702               85%              48,084              27,947               72%
    $      28,475  $       17,165               66%  $       68,408   $      44,236               55%
Gross margin                                                                          
  Wireline      $      1,706 $        1,076               59%   $      3,141 $        3,081               2%
  Frac flowback (1)              8,500              3,256              161%              19,145              8,104              136%
    $      10,206 $        4,332              136%   $      22,286     $    11,185               99%
Gross margin %                                                                                                   
  Wireline                 20%              17%              18%              15%              19%              (21%)
  Frac flowback (1)              43%              30%              43%              40%              29%              38%
               36%              25%              44%              33%              25%              32%
Selling, general and
 administrative
$        2,023 $        1,341              
51%
    $    5,354   $      4,124              30%
EBITDAS    $     8,183 $        2,991              174%    $     16,932   $      7,061              140%
                         
Average units available
 during the period (2)
                       
  Wireline (3)              17.5              17.0              3%              17.3              12.7              36%
  Frac flowback (1), (4)              46.0              40.3              14%              44.0              39.9              10%
Total              63.5              57.3              11%              61.3              52.6              17%
                         
Number of jobs / days                        
  Wireline - jobs              976              797              22%              2,305              2,286              1%
  Frac flowback - days (1)              3,126              2,349              33%              8,272              6,384              30%
Total              4,102              3,146              30%               10,577              8,670              22%

(1)      The frac flowback division was formerly described as the well testing division.
(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 September 30, 2011 the USCS wireline fleet consisted of 19 wireline units, all of which were in operation. 
(4)      At September 30, 2011, the USCS frac flowback fleet consisted of 47 frac flowback units, all of which were in operation.  From October 1, 2010 to September 30, 2011, USCS added 3 new units, received 2 units transferred from CCS and brought 1 previously decommissioned unit back into operation.

Drilling rig counts during Q3 2011 increased over the comparable Q3 2010 period in all of USCS' operating areas including North Dakota, Pennsylvania, Colorado and Wyoming.  As a result of these increased activity levels, both the frac flowback and wireline divisions posted improved results during Q3 2011 with the USCS segment achieving record EBITDA for the quarter of $8.2 million.

The frac flowback division posted record quarterly revenue in Q3 2011 as all operating areas recorded increased revenue compared to the comparable period in 2010, reflecting increased equipment utilization (with days worked up 33% and flowback units up 14%) and significantly improved pricing.  Gross margins for the division were a robust 43% during Q3 2011 reflecting the higher pricing, which was partially offset by increased employee costs.  Frac flowback operations continue to face shortages of local personnel to crew equipment, particularly in North Dakota and Pennsylvania.  To address this issue, USCS management has implemented recruitment and training programs to attract local candidates in these areas and retention programs to retain existing employees.

The wireline division also posted record quarterly revenue, as the Q3 2011 revenue of $8.7 million significantly exceeded the $6.5 million of revenue posted in Q3 2010 (a 35% increase).  The increased revenue was attributed to higher equipment utilization in the current quarter (i.e. 22% increase in job count from the same amount of wireline units) combined with improved pricing.   Wireline gross margin percentages improved 3% on a quarter over quarter basis (20% margin in Q3 2011 compared to 17% margin in Q3 2010) reflecting improved pricing offset by the following:

  • Restructuring costs associated with the movement of crews and equipment out of the Wyoming area (where work has been done on a rotational basis for only one client) to the busier area of North Dakota and newly established base in Pennsylvania;
  • Higher infrastructure costs (including increased operations and support staff) required to meet the anticipated higher workloads; and
  • Start-up costs for the new Pennsylvania base.

On a year to date basis, frac flowback revenue in 2011 of $48.1 million was 72% higher than the prior year period reflecting higher utilization rates and better pricing.  The higher pricing contributed to the significant margin improvement from 29% of revenue in 2010 to 40% of revenue in 2011.

The wireline division recorded revenue of $20.3 million on a year to date basis, which was 25% higher than the revenue of $16.3 million recorded in the nine-month period in the prior year.  Although the job count was essentially the same in both periods, a combination of improved pricing and change in the job mix (more work done on multi stage horizontal well projects leading to higher average revenue per job) resulting in the higher revenue in the current period.  The wireline job count for the 2011 nine-month period was negatively impacted by the flooding in North Dakota during Q2 and delays in the drilling and completion programs of a significant customer in Colorado in Q1 (with this customer providing the expected work from Q2 through early Q4).

SG&A expenses of $2.0 million recognized in Q3 2011 increased by 51% over the $1.3 million in SG&A recorded in Q3 2010 reflecting the significantly higher activity levels in the current period.  On a percentage of revenue basis, SG&A has improved from 7.8% in Q3 2010 to 7.1% in the current quarter.  On a year to date basis, SG&A has improved from 9.3% in the prior year nine-month period to 7.8% in the current period.

A primary focus for USCS in 2011 has been the continued expansion of the wireline division.  A major step toward this objective was achieved through the recent hiring of a Vice President of Operations for USCS and a General Manager for the wireline division, both of whom have over 30 years of cased hole wireline experience with mid size and senior companies.  In addition, equipment and staff have been reallocated to areas where USCS can obtain better utilization and economic returns.  During October 2011, wireline operations were further expanded with the opening of a base in Fort Lupton, Colorado to service the DJ basin.

 OTHER EXPENSES (INCOME) - CONTINUING OPERATIONS            
(Unaudited)       Three months ended September 30,         Nine months ended September 30,
($000's)   2011              2010   Change   2011              2010   Change
Stock-based compensation $        492  $       137              259%  $      1,121 $        497               126%
Depreciation and amortization  $       4,183    $     3,352               25%   $      11,186  $       9,368               19%
Finance costs (1) $       302 $        776               (61%)   $     774   $      2,251              (66%)
Other (income) (2) $       (2,358)   $      (689)              (242%) $        (1,885)     $    (1,000)              (89%)

(1)     Finance costs include interest on long-term debt and operating loans.
(2)     Other income includes foreign exchange (gains) losses and (gains) losses on sale of property and equipment.

Depreciation and Amortization Expense

Depreciation and amortization expense increased from $3.4 million in Q3 2010 to $4.2 million in Q3 2011.  This increase reflected an increase in the average net book values of property and equipment from $86.3 million in Q3 2010 to $108.6 million in Q3 2011.  The increased depreciation expense on a year to date basis also reflects an increase in average net book values of property and equipment.

Finance Costs

Finance costs of $0.3 million in Q3 2011 were significantly lower than the $0.8 million recorded in Q3 2010 reflecting the decrease in average drawn debt balances (approximately $27.6 million in Q3 2011 compared to $59.8 million in Q3 2010).  The debt reduction over the past year primarily reflects the $33.5 million in net proceeds received from the sale of the drilling rig division in Q4 2010.  Finance costs on a year to date basis are also significantly lower due to the significant reduction in Pure's drawn debt.

Other income

Other income in Q3 2011 was solely comprised of $2.4 million in foreign exchange gains, while other income in Q3 2010 was comprised of gains on sale of property and equipment of $0.8 million offset by foreign exchange losses of $0.1 million.  The foreign exchange gains recognized in the current quarter related primarily to gains recognized by Pure's wholly-owned US subsidiary, Pure Energy Services (USA), Inc. ("Pure USA"), on Canadian dollar denominated debt owing to the parent.  Repayment terms were formalized for this debt on July 31, 2011.  As a result of the formalized repayment plan, foreign exchanges gains or losses related to this debt are no longer deferred through the accumulated other comprehensive income ("AOCI") and, commencing August 1, are recognized in net earnings.  The Q3 2011 foreign exchange gain recorded by Pure USA resulted from a strengthening of the US dollar relative to the Canadian dollar from July 31, 2011 (where 1 USD = $0.96 CDN) to September 30, 2011 (where 1 USD = $1.05 CDN).

Other income for the nine-month period ended September 30, 2011 of $1.9 million was comprised of a $2.1 million foreign exchange gain (reflecting the aforementioned gain recorded in Q3 2011) offset by a $0.2 million loss on sale of property and equipment.  The nine-month 2010 other income amount of $1.0 million relates almost entirely to gains on sale of property and equipment.

INCOME TAX EXPENSE - CONTINUING OPERATIONS

Pure recorded a total income tax expense for the nine-months ended September 30, 2011 of $7.5 million on net earnings before income taxes of $19.8 million, resulting in a blended Canadian/US effective income tax rate of approximately 38%.  The US and Canadian jurisdictions have effective income tax rates of approximately 41% and 33% respectively when including the impact of expenses not deductible for tax purposes.

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

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

           
(Unaudited) Three months ended Sept 30,   Nine months ended Sept 30,
($000's)   2011   2010   2011   2010
Revenue $        - $        7,116 $        - $        21,658
Operating expenses               -              5,794              -              17,135
Gross margin              -              1,322               -              4,523
Selling, general and administrative              -               267              -               918
Depreciation and amortization              -               673              -              2,097
Impairment of property held for sale              -               613              -               613
Other expenses (income)              -               9              -              (149)
Earnings (loss) before income taxes              -              (240)              -              1,044
Deferred income tax expense (reduction)              -              (75)              -              250
Net earnings (loss)   $      -   $      (165) $       -  $       794

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.  Effective April 20, 2010, the drilling equipment rentals division was sold to an industry peer in exchange for the peer's US wireline operations.  As a result of the sale of these two divisions (which formerly comprised the Corporation's Drilling segment), the related financial results have been classified as discontinued operations for the three and nine-month periods ended September 30, 2010.

SUMMARY OF QUARTERLY RESULTS (1)

The interim period shown below for 2009 is presented in accordance with the former Canadian Generally Accepted Accounting Principles ("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
Q3
IFRS
Q2
IFRS
Q1
IFRS
Q4
IFRS
Q3
IFRS
Q2
IFRS
Q1
GAAP
Q4
Continuing operations                
Revenue 65,088 40,877 60,972 55,128 45,996 32,402 42,147 29,936
Gross margin 21,746 6,197 20,208 17,316 13,804 4,753 11,127 3,783
Gross margin % 33% 15% 33% 31% 30% 15% 26% 13%
Selling, general and
 administrative expenses
5,928 5,289 5,962 6,379 5,558 5,509 5,006 4,532
EBITDAS 15,818 908 14,246 10,937 8,246 (756) 6,121 (749)
EBITDA 15,326 463 14,062 10,792 8,109 (936) 5,941 (1,067)
Net earnings (loss) 8,297 (3,020) 6,959 4,416 3,166 (3,571) 1,206 (3,143)
Earnings (loss) per share                
  Basic 0.34 (0.12) 0.29 0.19 0.13 (0.15) 0.05 (0.13)
  Diluted 0.33 (0.12) 0.28 0.18 0.13 (0.15) 0.05 (0.13)
Funds flow from operations 15,473 716 13,922 10,532 7,631 (1,508) 5,387 (1,371)
Discontinued operations                
Net earnings (loss) - - - (46) (165) (468) 1,427 (2)
Total operations                
Earnings (loss) per share                
  Basic 0.34 (0.12) 0.29 0.18 0.13 (0.17) 0.11 (0.13)
  Diluted 0.33 (0.12) 0.28 0.18 0.12 (0.17) 0.11 (0.13)

(1)      The periods in 2009 and 2010 have been adjusted to reflect the reclassification of balances related to the discontinued drilling rig, drilling equipment rental and well fracturing operations.

Pure's business is seasonal in nature with Canadian operations experiencing a slow-down in activity in Q2 of each year due to spring break-up in western Canada, and US operations typically experiencing slower activity in the colder winter months.  In addition, the business is cyclical as a result of industry activity levels that are highly correlated to oil and natural gas prices which affect the cash flow of the Corporation's customers and their ability to obtain debt and equity financing.

As a result of the global recession during the fall of 2008, oil and natural gas prices were significantly reduced and Pure's customers faced limited access to capital markets.  The resulting drop in activity levels during 2009 led to reduced revenues and net earnings for the Corporation during 2009, including the Q4 2009 period noted above.  Improved commodity prices (particularly for oil and natural gas liquids) during 2010 and continuing through 2011, in combination with an increased access to capital and increased cash flows for Pure's customers, have led to improved activity levels for Pure, and increased revenues and net earnings in 2010 and through the first three quarters of 2011.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2011, Pure's net debt (long-term debt net of working capital) was $1.0 million, which was in line with the $0.6 million of net debt at June 30, 2011.  The primary items that affected net debt during Q3 2011 were cash flow of $15.5 million, offset by capital expenditures of $16.6 million (of which $2.0 million related to finance leases).

For the nine-month period ended September 30, 2011, Pure expended $33.3 million (excluding finance leases) of the approximately $60 million capital expenditure program planned for 2011.  The Q3 2011 capital expenditures of $14.6 million were primarily for:

  • Final payments for 3 high pressure frac flowback units received during the quarter plus progress payments for an additional 9 high pressure units under construction
  • Frac flowback auxiliary equipment
  • Acquisition of 2 wireline units in the US
  • Electric line tools and equipment
  • Fiber optic equipment

The remaining $27 million of Pure's 2011 capital expenditure program will be spent over Q4 2011 and Q1 2012 as supplier delays have contributed to the carryover of some capital items into next year.

The Corporation has the following operating lease commitments, purchase commitments and debt commitments over the next five years:

       
  Payments for years ending September 30,
Contractual Obligations                        After
(Unaudited) ($000's)   Total   2012   2013   2014   2015   2015
Long-term debt obligations (1) $       25,146 $       3,069 $       4,631 $       11,600 $       2,043 $       3,803
Purchase commitments (2)               21,753              21,753               -                -               -               -
Operating leases              28,210              5,973              5,555               5,116              3,928              7,638
Total contractual obligations $       75,109   $    30,795   $     10,186 $       16,716   $     5,971 $      11,441

(1)      Long-term debt obligations represent balances outstanding at September 30, 2011.  The related repayment terms of these
obligations are based on the terms of the expanded debt facilities established in October 2011.
(2)      Purchase commitments represent commitments made by the Corporation to third party suppliers for future purchases of equipment
as of September 30, 2011.

During October 2011, the Corporation expanded the aggregate lending facilities from its Canadian and US lenders to approximately $67 million (Canada - $45 million plus US - $22 million) from the previous aggregate amount at June 30, 2011 of approximately $52 million (Canada - $40 million plus US - $12 million).

The Canadian lending facilities now include a $20 million operating loan (which represents a $5 million increase over the previous $15 million operating loan facility) and a $25 million, three year extendible revolving loan, which replaces the previous $25 million extendible facility that was scheduled to mature on October 31, 2011.

The US lending facilities now include a USD $5 million, three year revolving facility that replaces a previous revolving facility of USD $2.5 million that was scheduled to mature on June 16, 2012.  The US facilities also include a USD $17 million equipment financing facility which operates as a revolving facility until September 30, 2012, at which time any outstanding amounts on the facility are converted to a term loan which is repayable over a five year period.  The new equipment financing facility essentially replaces a previous term loan which had an outstanding balance at September 30, 2011 of USD $9 million and a June 2015 maturity date.

If the new debt facilities had been in place at September 30, 2011, the Corporation would have had aggregate available, but undrawn, facilities of approximately $40 million (Canada - $27 million plus US - $13 million).  The Corporation was in compliance with all of its debt covenants at September 30, 2011.

The Corporation believes that its available debt facilities, combined with funds flow from operations, will provide sufficient capital resources to fund the remaining 2011 capital expenditure program and ongoing operations.  The current global economic concerns (including the sluggish US economy and the sovereign debt issues in several European countries) could have a negative impact on market confidence, which in turn could potentially lower the demand for energy products as well as the Corporation's services and also reduce the Corporation's access to capital.  Pure's management continues to monitor and control its capital and operational spending programs in response to these market conditions.

SHARE CAPITAL

As at November 8, 2011, the Corporation had 24.3 million shares outstanding and 2.0 million options outstanding, of which 0.4 million were vested.

FINANCIAL INSTRUMENTS

The Corporation's financial instruments are comprised primarily of cash and cash equivalents, trade and other receivables, trade and other payables, operating loans and long-term debt.

The fair value of cash and cash equivalents, trade and other receivables, and trade and other payables approximate their carrying amounts due to their short-terms to maturity (the majority have terms less than 90 days). The Corporation's operating loan and long-term debt (other than the finance lease liabilities) bear interest at floating market interest rates.  The fair value of the Corporation's operating loan and long-term debt approximate their carrying amounts as floating market interest rates and the margins charged by the Corporation's lenders reflect current credit spreads.  The Corporation's finance lease liabilities carry a mix of fixed and variable rates of interest and the fair value approximates carrying value.

CHANGES IN ACCOUNTING POLICIES

Adoption of IFRS

Effective January 1, 2011, the Corporation commenced preparing its financial statements in accordance with IFRS. For period ends prior to that date, 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 condensed consolidated interim financial statements for the three month periods ended March 31, 2011 and 2010. In addition, Note 14 to the condensed consolidated interim financial statements for the three and nine-month periods ended September 30, 2011 and 2010 provides the following reconciliations between the Corporation's 2010 Canadian GAAP results and the 2010 IFRS results: the consolidated statements of financial position as at January 1, 2010, September 30, 2010 and December 31, 2010; and the consolidated statements of net earnings (loss), comprehensive income (loss) and cash flows for the three and nine-month periods ended September 30, 2010.

RISKS AND UNCERTAINTIES

A complete discussion of risks faced by the Corporation may be found under "Risk Factors" in the Corporation's Annual Information Form dated March 15, 2011 which is available under the Corporation's profile at www.sedar.com.

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 Sept 30,   Nine months ended Sept 30,
($000's)   2011   2010   2011   2010
Earnings (loss) before income taxes $       13,199 $       4,670 $       19,776 $       2,495
Add: Depreciation and amortization               4,183              3,352              11,186               9,368
  Finance costs (1)               302               776              774               2,251
  Other expenses (income) (2)               (2,358)              (689)              (1,885)              (1,000)
EBITDA $       15,326   $     8,109 $      29,851  $      13,114
Add:  Stock-based compensation expense               492              137               1,121               497
EBITDAS  $      15,818   $    8,246  $      30,972    $    13,611
(1)  Finance costs include interest on long-term debt, operating loans and finance lease liabilities.
(2)   Other expenses (income) include foreign exchange (gains) losses and (gains) losses 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; certain presumptions relating to the prices of the Corporation's services and its costs of 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 Corporation's US operating 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; amount and timing of 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, natural gas liquids 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 for the Corporation's services and the impact of these changes on gross margins; expansion of services and operations in Canada and the US; the integration of assets and personnel from acquisitions; long-term debt net of working capital levels; the amount and timing of recognition of income tax recoveries, income tax losses and deferred expense pools; the effect of implementation of IFRS on the Corporation's financial reports and related accounting policies; 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 corresponding reduction in operating expenses (and improved gross margins); and competitive conditions.

Consolidated Statements of Financial Position

           
(Unaudited)
($000's)
              As at
            September 30,
2011
  As at
December 31,
2010
Assets        
Current Assets        
  Cash and cash equivalents  $       4,854 $       4,599
  Trade and other receivables               48,803               37,748
  Inventories                2,989               2,523
  Deposits and prepaid expenses               2,289               1,741
  Current assets of discontinued operations                -               63
        58,935        46,674
Non-Current Assets                       
  Property and equipment                 116,695               87,885
  Deferred tax assets                 17,336               23,650
   $       192,966 $       158,209
Liabilities and Shareholders' Equity        
Current Liabilities        
  Operating loan     $        9,872 $       3,194
  Trade and other payables               24,941               22,358
  Current portion of long-term debt                 5,584               5,488
  Current liabilities of discontinued operations                -               60

Non-Current Liabilities
              40,397                31,100
  Long-term debt                   19,562               10,889
                59,959               41,989
Shareholders' Equity        
  Share capital                 122,448              121,156
  Contributed surplus                 5,587               4,904
  Accumulated other comprehensive income (loss)                492               (2,084)
  Retained earnings (deficit)               4,480              (7,756)
                133,007              116,220
   $       192,966    $    158,209

Consolidated Statements of Net Earnings (Loss)

                     
(Unaudited)   Three months ended Sept 30, Nine months ended Sept 30,
($000's, except per share amounts)     2011   2010   2011   2010
Revenue    $  65,088 $  45,996 $  166,937 $  120,545
Operating expenses       43,342   32,192   118,786   90,861
Gross margin      21,746   13,804   48,151   29,684
                   
Selling, general and administrative       5,928   5,558    17,179   16,073
Stock-based compensation      492   137    1,121   497
Depreciation and amortization      4,183   3,352    11,186   9,368
Finance costs      302   776      774   2,251
Other expenses (income)       (2,358)   (689)   (1,885)   (1,000)
Earnings before income taxes      13,199   4,670   19,776   2,495
Income Taxes                               
  Current tax recovery       -   (150)    -   (150)
  Deferred tax expense      4,902   1,654    7,540   1,844
       4,902    1,504   7,540   1,694
Net Earnings from Continuing Operations     8,297    3,166    12,236   801
Net Earnings (Loss) from Discontinued Operations      -     (165)   -   794
Net Earnings   $  8,297 $  3,001 $  12,236 $  1,595
Earnings per share from continuing operations                   
  Basic   $  0.34 $  0.13 $  0.51 $  0.04
  Diluted      0.33      0.13    0.49   0.04
Earnings (Loss) per share from discontinued operations                             
   Basic     $           - $  - $       - $          0.03
  Diluted     -     (0.01)   -   0.03
Earnings Per Share                             
   Basic    $  0.34 $  0.13 $  0.51 $  0.07
  Diluted     0.33   0.12   0.49   0.07

Consolidated Statements of Comprehensive Income

                 
(Unaudited) Three months ended Sept 30, Nine months ended Sept 30,
($000's)   2011   2010   2011   2010
Net Earnings   $  8,297 $  3,001 $  12,236 $  1,595
Other comprehensive income (loss), net of tax                
  Foreign currency translation adjustment    3,475   (1,227)   2,523   (846)
  Realized foreign exchange loss   -   -   53   -
    3,475   (1,227)   2,576   (846)
Comprehensive Income $ 11,772 $ 1,774 $ 14,812 $ 749

Consolidated Statements of Cash Flows

         
(Unaudited)   Three months ended
Sept 30,
Nine months ended
Sept 30,
($000's)     2011   2010   2011   2010
Operating Activities                  
  Net Earnings from continuing operations   $ 8,297 $  3,166 $ 12,236 $  801
  Non-cash items from continuing operations                  
    Depreciation and amortization     4,183   3,352   11,186   9,368
    Stock-based compensation      492   137   1,121   497
    (Gain) loss on sale of property and equipment     2   (748)   173   (986)
    Deferred income tax expense     4,902   1,654   7,540   1,844
    Unrealized foreign exchange loss (gain)      (2,403)   70   (2,145)   (14)
      15,473   7,631   30,111   11,510
  Changes in non-cash working capital balances from continuing operations     (15,904)   (8,604)   (11,633)   (10,605)
Net operating cash flows from continuing operations     (431)   (973)   18,478   905
Net operating cash flows from discontinued operations     -   (438)   -   3,674
Net Operating Cash Flows     (431)   (1,411)   18,478   4,579
Investing Activities                  
  Purchases of property and equipment      (14,560)   (2,541)   (33,266)   (10,778)
  Proceeds from sale of property and equipment     443   5,660   1,338   7,226
  Business acquisition     -   -   -   (2,367)
  Changes in non-cash working capital balances      600   (1,565)   2,884   (970)
  Discontinued operations     -   (729)   -   (1,095)
Net Investing Cash Flows     (13,517)   825   (29,044)   (7,984)
Financing Activities                  
  Borrowings from operating loans     9,872               2,268   6,678   7,469
  Proceeds from long-term debt     8,000   -   9,975   12,329
  Repayment of long-term debt     (3,184)   (1,412)   (6,778)   (15,699)
  Issue of share capital, net of share issuance costs     160   44   854   44
  Discontinued operations     -   (16)   -   (84)
Net Financing Cash Flows     14,848   884   10,729   4,059
Increase In Cash and Cash Equivalents     900   298   163   654
Effect of translation on foreign currency cash and cash  equivalents     169   (86)   92   (79)
Cash and Cash Equivalents, Beginning of Period     3,785   2,349   4,599   1,986
Cash and Cash Equivalents, End of Period   $  4,854 $  2,561 $  4,854 $  2,561

Consolidated Statements of Changes in Equity

             
(Unaudited)
($000's)
  Share
Capital
Contributed
Surplus
AOCI* Retained
Earnings
(Deficit)
Total
Equity
Balance at January 1, 2011   $  121,156 $  4,904 $  (2,084) $  (7,756) $  116,220
Common shares issued under  stock option plan     1,292   (438)   -   -   854
Stock-based compensation     -   1,121   -   -   1,121
Net Earnings     -   -   -   12,236   12,236
Other comprehensive income (loss)     -   -   2,576   -   2,576
Balance at Sept 30, 2011   $  122,448 $  5,587 $  492 $  4,480 $  133,007
* AOCI represents Accumulated other comprehensive income (loss)
               
(Unaudited)
($000's)
  Share
Capital
Contributed
Surplus
AOCI* (Deficit) Total
Equity
Balance at January 1, 2010   $  120,913 $  4,344 $  - $  (13,721) $  111,536
Common shares issued under stock option plan     67   (23)   -   -   44
Stock-based compensation     -   497   -   -   497
Net Earnings     -   -   -   1,595   1,595
Other comprehensive income (loss)     -   -   (846)   -   (846)
Balance at Sept 30, 2010   $  120,980 $  4,818 $  (846) $  (12,126) $  112,826
* 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: 
Fax: 
(403) 262-4000
(403) 262-4005

Profil de l'entreprise

Pure Energy Services Ltd.

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