Canyon Reports Record Q3 2011 Results and Increase to its Shareholder Dividend

CALGARY, Nov. 8, 2011 /CNW/ - Canyon Services Group Inc. (TSX: FRC) ("Canyon") is pleased to announce its third quarter 2011 results and an increase to the Company's dividend.  The following should be read in conjunction with the Management's Discussion and Analysis, the consolidated financial statements and notes of Canyon Services Group Inc. for the three and nine months ended September 30, 2011 and should also be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2010, and which are available on SEDAR at www.sedar.com.

ACCOUNTING POLICY CHANGES

On January 1, 2011, Canyon adopted International Financial Reporting Standards ("IFRS") for purposes of financial reporting, using a transition date of January 1, 2010.  Accordingly, these Interim Consolidated Financial Statements for the three and nine months ended September 30, 2011 and the comparative information for the three and nine months ended September 30, 2010, have been prepared in accordance with International Financial Reporting Standard 1, "First-time Adoption of International Financial Reporting Standards", and with International Accounting Standard 34, "Interim Financial Reporting", as issued by the International Accounting Standards Board ("IASB").

Prior to January 1, 2011, the Company prepared its interim and annual consolidated financial statements in accordance with Canadian generally accepted accounting principles ("previous GAAP").

The adoption of IFRS has not had an impact on the Company's operations, strategic decisions and funds from operations (see NON-GAAP MEASURES).  Further information on the effect of adopting IFRS is outlined in the Accounting Policies and Estimates paragraph of this MD&A.

OVERVIEW OF THIRD QUARTER AND YEAR-TO-DATE 2011

           
000's except per share and job amounts Three months ended
September 30
  Nine months ended
September 30
  2011 2010   2011 2010
Consolidated revenues $105,207 $66,462   $227,131 $130,738
Net earnings and comprehensive income $30,861 $16,947   $54,338 $29,026
   Per share-basic $0.51 $0.28   $0.90 $0.52
   Per share-diluted $0.49 $0.28   $0.87 $0.51
EBITDA before stock-based compensation(1) $46,466 $30,254   $91,337 $49,902
Funds from operations(1) $37,395 $24,371   $76,368 $43,883
Total jobs completed (2) 733 574   1,628 1,543
Consolidated average revenue per job (2) $145,801 $116,130   $141,192 $84,951
Average fracturing revenue per job $193,965 $146,605   $198,761 $118,273
Hydraulic Pumping Capacity          
   Average HHP 140,000 78,000   127,000 66,000
   Exit HHP 150,500 83,000   150,500 83,000
Capital expenditures $28,941 $15,180   $81,273 $54,752

       
000's of dollars As at
September 30, 2011
  As at
December 31, 2010
Cash balance, net of loans and borrowings (3) $5,705   $38,742
Working capital $41,787   $49,283

Note (1): See NON-GAAP MEASURES
Note (2):  Includes all jobs from each service line, specifically hydraulic fracturing; coiled tubing; nitrogen fracturing; acidizing and remedial cementing
Note (3):  Includes current and long-term portions

Canyon's revenues and earnings per share reached a quarterly record in Q3 2011 despite a slow start in the quarter due to the extremely wet conditions in the spring that extended into early July.  These conditions which were prevalent across the Western Canadian Sedimentary Basin ("WCSB") throughout the second quarter resulted in many Exploration and Production ("E&P") companies delaying drilling and completions activity to the second half of the year.  Once conditions dried in July, industry activity climbed rapidly with Canyon returning to the full equipment utilization levels experienced in Q1 2011 and resulting in September being the busiest month in the Company's history.  Overall, Canyon's revenues increased 58% to $105,207 in Q3 2011 from $66,462 in Q3 2010, with jobs completed increasing 28% to 733 from 574 quarter over quarter.  Average consolidated revenue per job increased by 26% to $145,801 in Q3 2011 from $116,130 in Q3 2010 due to the Company's continued penetration into the deeper segments of the market.

As at September 30, 2011, Canyon's pressure pumping fleet has grown six-fold to 150,500 HHP from 25,500 HHP in 2009, and upon completion of the Company's $82 million 2011 capital program the fleet is expected to exit 2011 at 175,500 HHP.  In May 2011, Canyon announced its initial capital expenditure program for 2012 at $90 million.  This will grow its equipment fleet by a further 50,000 HHP to in excess of 225,000 HHP by the summer of 2012.  This rapid growth in Canyon's pumping capacity has allowed the Company to focus on the deeper more complex areas of the WCSB and commit to larger jobs and longer-term, equipment intensive projects.  All equipment added by Canyon since 2009 is heavy duty specification, suitable for deployment in the deep basin where pumping pressures, rates and durations have increased significantly.

With the return to robust activity in Q3 2011, Canyon believes that its expanded equipment fleet will be fully utilized during the remainder of 2011 due to a demand back log for fracturing services caused by the weather related drilling delays of the second quarter, and due to the robust industry activity.  Industry fundamentals summarized as technological improvements and high oil and natural gas liquids ("NGLs") prices, have led to increased activity in emerging and established oil and liquids rich natural gas plays such as the Cardium, Viking, Bakken, Deep Basin, Montney and Duvernay.  Technological improvements have led to a major shift towards drilling wells with lengthy horizontal sections, which has provided the opportunity to increase fracturing intensity as multi-staged fracture programs are applied to the horizontal sections of the well bore.  As horizontal sections continue to lengthen and frac-stages per well continue to rise, it is expected that frac-stages per well will reach an average of approximately 10 stages per well in 2012, up from the current level of approximately 6 stages per well.  In addition, the size and the pumping rates of the average fracture have also grown significantly which, when combined with the increased fracture intensity, has resulted in a dramatic increase in demand for fracturing equipment and services.

To date, oil and NGL prices continue to support the dramatic expansion in oil and liquids rich natural gas focused drilling activity, including emerging plays targeting the Duvernay shale and Slave Point oil.  Oil and liquids directed drilling activity now accounts for over 70% of the wells being drilled in the WCSB, up from approximately 50% in 2010. Well licenses issued in Q3 2011 were approximately 4,260, an increase of 9% over the 3,915 issued in Q3 2010, with licensing activity particularly strong in the Cardium, Viking, Bakken and Montney formations.  Well licenses issued in the nine months ended September 30, 2011 increased 27% to 13,148 compared to the comparable 2010 period.  Drilling rig utilization in Q3 2011 averaged 57%, up from the 41% average achieved in Q3 2010, while for the nine months ended September 30, 2011 drilling rig utilization averaged 49% across the WCSB compared to 39% in the comparable 2010 period.  Canyon expects activity levels to remain robust for the remainder of 2011.

NON-GAAP MEASURES

The Company's Condensed Interim Consolidated Financial Statements have been prepared in accordance with IFRS. Certain measures in this document do not have any standardized meaning as prescribed by IFRS and are considered non-GAAP measures.

EBITDA before stock-based compensation and funds from operations are not recognized measures under IFRS.  Management believes that in addition to net earnings, EBITDA before stock-based compensation and funds from operations are useful supplemental measures as they provide an indication of the results generated by the Company's business activities prior to consideration of how those activities are financed, amortized or taxed, as well as the cash generated by the Company's business activities without consideration of the timing of the monetization of non-cash working capital items.  Readers should be cautioned, however, that EBITDA before stock-based compensation and funds from operations should not be construed as an alternative to net earnings determined in accordance with IFRS as an indicator of the Company's performance.  Canyon's method of calculating EBITDA before stock-based compensation and funds from operations may differ from other companies and accordingly, EBITDA before stock-based compensation and funds from operations may not be comparable to measures used by other companies.  Reconciliations of these nON-GAAP measures to the most directly comparable IFRS measures are outlined below.

In Q1 2011, Canyon described revenue less cost of services as Operating income.  In Q2 2011 and going forward, the Company describes revenue less cost of services as Gross profit.

EBITDA before stock-based compensation

             
000's of dollars Three months ended
September 30
  Nine months ended
September 30
  2011 2010   2011   2010
EBITDA before stock-based compensation $46,466 $30,254   $91,337   $49,902
Add (Deduct):            
Depreciation and amortization (5,824) (4,645)   (15,838)   (10,856)
Finance costs (133) (72)   (302)   (208)
Equity-settled share based payment transactions 1,557 (1,870)   (1,233)   (3,181)
Income taxes (11,205) (6,720)   (19,626)   (6,631)
Net earnings (loss) $30,861 $16,947   $54,338   $29,026

Funds from Operations

           
000's of dollars Three months ended
September 30
  Nine months ended
September 30
  2011 2010   2011   2010
Funds from operations $37,395 $24,371   $76,368   $43,883
Add (Deduct) non-cash operating items:            
Depreciation and amortization (5,824) (4,645)   (15,838)   (10,856)
Deferred tax expense (2,221) (909)   (4,919)   (820)
Loss on sale of property & equipment (46) -   (40)   -
Equity-settled share based payment transactions 1,557 (1,870)   (1,233)   (3,181)
Net earnings (loss) $30,861 $16,947   $54,338   $29,026

Operating and Financial Highlights

The operating and financial highlights for the three and nine months ended September 30, 2011 may be summarized as follows:

  • Canyon's revenues increased 58% to a record $105,207 in Q3 2011 from $66,462 in Q3 2010.  For the nine months ended September 30, 2011, revenues increased 74% to $227,131 from $130,738 in the comparable 2010 period.

  • Approximately 90% of Q3 2011 consolidated revenues were provided by hydraulic fracturing services from projects completed in the resource plays of Northwest Alberta and Northeast British Columbia.

  • Jobs completed across all services increased 28% to 733 from 574 quarter over quarter.

  • Average consolidated revenue per job increased by 26% to $145,801 in Q3 2011 from $116,130 in Q3 2010 due to the Company's continued focus on the deeper segments of the basin.

  • Average revenue per fracturing job increased by 32% to $193,965 in Q3 2011 from $146,605 in Q3 2010.

  • EBITDA before stock-based compensation expense (see NON-GAAP MEASURES) increased 54% to $46,466 in Q3 2011 from $30,254 in Q3 2010, while for the nine months ended September 30, 2011 EBITDA before stock-based compensation expense increased 83% to $91,337 from $49,902 in the comparable period of 2010.

  • In Q3 2011, net earnings and comprehensive income increased 82% to a record $30,861 ($0.49 per share, diluted) from $16,947 ($0.28 per share, diluted) in Q3 2010.  For the nine months ended September 30, 2011 net earnings and comprehensive income increased 87% to $54,338 ($0.87 per share, diluted) from $29,026 ($0.51 per share, fully diluted) in the comparable 2010 period.

  • Canyon's equipment fleet has almost doubled to average 140,000 HHP in Q3 2011 from 78,000 HHP in Q3 2010.

  • Canyon expects to exit 2011 with an equipment fleet of 175,500 HHP following completion of the $82 million 2011 capital program. This represents a 40% increase in equipment capacity from the 125,500 HHP at year end 2010.

  • In July 2011, Canyon paid its semi-annual dividend of $0.05 per common share.

  • Canyon remains in a very strong financial position with available cash of $8.7 million in addition to available undrawn credit facilities of $60.0 million and working capital of $41.8 million as at September 30, 2011.

QUARTERLY COMPARATIVE STATEMENTS OF OPERATIONS

       
000's of dollars except per share amounts
(Unaudited)
Three Months Ended September 30
  2011   2010
Revenues $105,207   $66,462
Cost of services (58,128)   (36,592)
Gross profit 47,079   29,870
Administrative expenses (4,880)   (6,132)
Results from operating activities 42,199   23,738
Finance costs (133)   (71)
Profit before income tax 42,066   23,667
Income tax expense (11,205)   (6,720)
Net earnings and comprehensive income $30,861   $16,947
EBITDA before stock-based compensation(1) $46,466   $30,254
Earnings per share:      
      Basic $0.51   $0.28
      Diluted $0.49   $0.28

Note (1): See Non-GAAP Measures.

Revenues

In Q3 2011, revenues increased 58% to $105,207 from $66,462 in Q3 2010, while jobs completed increased 28% to 733 from 574 quarter over quarter.  Average consolidated revenues per job increased 26% to $145,801 in Q3 2011 from $116,130 in Q3 2010 due to Canyon's continuing success in expanding its market share in the deeper segments of the market resulting in large jobs, and improved year-over-year pricing.  Approximately 90% of Q3 2011 consolidated revenues were provided by hydraulic fracturing services from projects completed in the resource plays of Northwest Alberta and Northeast British Columbia.

Cost of services

Cost of services for the three months ended September 30, 2011 totaled $58,128 (2010: $36,592) and includes employee benefits expenses of $14,736 (2010: $8,236), depreciation of property and equipment of $5,477 (2010: $4,437), and other operating expenses such as materials, products, transportation and repair costs of $37,915 (2010: $23,919).

The increase in employee benefits expense is due to the additional staff for Canyon's expanded equipment fleet.  The increase in depreciation of property and equipment is mostly due to additional depreciation pertaining to equipment additions.

Administrative expenses

Administrative expenses for the three months ended September 30, 2011 decreased to $4,880 from $6,132 in Q3 2010 mainly due to a reduction to stock-based compensation expense in respect of the Company's Deferred Share Unit Plan due to a lower price for the Company's common shares on September 30, 2011.  Administrative expenses include employee benefits expense of $4,273 (2010: $2,956), depreciation of buildings and office equipment and amortization of intangibles of $347 (2010: $208), and a decrease to stock-based compensation expense of $1,557 (2010: an increase of $1,870).  In addition, other administration expenses increased to $1,817 in Q3 2011 from $1,098 in Q3 2010 due to the Company's increased business.  The increase in employee benefits expense is due to the increased number of employees resulting from a higher volume of business in 2011.  In Q3 2011, additional compensation of $1.7 million (2010: $1.5 million) was accrued for management and employees in accordance with the Company's annual incentive compensation arrangements.

Stock-based compensation expense represents the value assigned to the granting of options and incentive-based units under the Company's Share Purchase Option Plan and Stock Based Compensation Plan respectively, using the Black-Scholes model.  For Q3 2011, $0.6 million (Q3 2010 - $0.5 million) was charged to expenses and included in contributed surplus in respect of these two plans.  In addition, obligations for payments under the Company's Deferred Share Unit Plan are accrued as stock-based compensation expense over the vesting period.   The accrued liability increases or decreases with fluctuations in the price of the Company's common shares, with a corresponding increase or decrease in the stock-based compensation expense.  In Q3 2011, the accrued liability was decreased by $2.2 million as a result of a lower price for the common shares, with an offsetting reduction in stock-based compensation expense. In Q3 2010, $1.4 million was charged to expenses for the Company's Deferred Share Unit Plan and included in accounts payable and accrued liabilities.

EBITDA before stock-based compensation (See NON-GAAP MEASURES)

In Q3 2011, EBITDA before stock-based compensation (see NON-GAAP MEASURES) increased 54% to $46,466 from $30,254 in Q3 2010 due to strong market conditions resulting in full utilization of Canyon's expanded equipment fleet.

Finance costs

Finance costs include interest on finance lease obligations and automobile loans and total $133 in Q3 2011 (Q3 2010: $71).

Income Tax Expense

At the expected combined income tax rate of 26.5%, the profit before income tax for Q3 2011 of $42,066 results in the actual income tax expense of $11,205.

Net earnings and comprehensive income and earnings per share

Net earnings and comprehensive income increased 82% to $30,861 for Q3 2011, from $16,947 in Q3 2010 as Canyon's increased equipment capacity was fully utilized for most of the quarter.

Basic and diluted earnings per share were $0.51 and $0.49, respectively earned in Q3 2011 compared to basic and diluted earnings per share of $0.28 and $0.28, respectively earned in Q3 2010.

YEAR-TO-DATE COMPARATIVE STATEMENTS OF OPERATIONS

 
000's of dollars except per share amounts
(Unaudited)
Nine Months Ended September 30
  2011   2010
Revenues $227,131   $130,738
Cost of services (138,067)   (83,138)
Operating income 89,064   47,600
Administrative expenses (14,798)   (11,735)
Results from operating activities 74,266   35,865
Finance costs (302)   (208)
Profit before income tax 73,964   35,657
Income tax expense (19,626)   (6,631)
Net earnings and comprehensive income $54,338   $29,026
EBITDA before stock-based compensation(1) $91,337   $49,902
Earnings per share:      
      Basic $0.90   $0.52
      Diluted $0.87   $0.51

Note (1): See Non-GAAP Measures.

Revenues

For the nine months ended September 30, 2011, revenues increased 74% to $227,131 from $130,738 in the comparable 2010 period, while jobs completed increased to 1,628 from 1,543 over the same periods.  Average consolidated revenues per job increased 66% to $141,192 for the nine months ended September 30, 2011 from $84,951 in the comparable 2010 period due to Canyon's continuing success in expanding its market share in the deeper segments of the market resulting in large jobs, augmented by improved year-over-year industry pricing.  Approximately 90% of consolidated revenues for the nine months ended September 30, 2011 were provided by hydraulic fracturing services from projects completed in the resource plays of Northwest Alberta and Northeast British Columbia.

Cost of services

Cost of services for the nine months ended September 30, 2011 totaled $138,067 (2010: $83,138) and includes employee benefits expense of $37,309 (2010: $20,372), depreciation of property and equipment of $14,963 (2010: $10,282) and other operating expenses such as materials, products, transportation and repair costs of $85,795 (2010: $52,484).

The increase in employee benefits expense is due to the additional staff for Canyon's expanded equipment fleet.  The increase in depreciation of property and equipment is mostly due to additional depreciation pertaining to equipment additions.

Administrative expenses

Administrative expenses for the nine months ended September 30, 2011 totaled $14,798 (2010: $11,735) and includes employee benefits expense of $7,651 (2010: $5,086), depreciation of buildings and office equipment and amortization of intangibles of $875 (2010: $574), and stock-based compensation expense of $1,233 (2010: $3,181).  In addition, other administration expenses increased to $5,039 for the nine months ended September 30, 2011 from $2,894 in the comparable 2010 period due to the Company's increased business.  The increase in employee benefits expense is mainly attributable to the increased number of employees resulting from a higher volume of business. As discussed above in the Quarterly Comparative Results of Operations, additional compensation was accrued for management and employees in accordance with the Company's annual incentive compensation arrangements.

Stock-based compensation expense represents the value assigned to the granting of options and incentive-based units under the Company's Share Purchase Option Plan and Stock Based Compensation Plan respectively, using the Black-Scholes model.  For the nine months ended September 30, 2011, $1.7 million (2010 - $1.0 million) was charged to expenses and included in contributed surplus in respect of these two plans.  In addition, obligations for payments under the Company's Deferred Share Unit Plan are accrued as stock-based compensation expense over the vesting period.   The accrued liability increases or decreases with fluctuations in the price of the Company's common shares, with a corresponding increase or decrease in the stock-based compensation expense.  For the nine months ended September 30 2011, the accrued liability was decreased by $0.5 million (2010: an increase of $2.2 million) as a result of a lower price for the common shares on September 30, 2011, with an offsetting reduction in stock-based compensation expense.

EBITDA before stock-based compensation (See NON-GAAP MEASURES)

For the nine months ended September 30, 2011, the increased utilization, the focus on completing larger, higher-priced jobs, improved pricing and the operating leverage available in a high fixed cost structure has resulted in EBITDA before stock-based compensation increasing by 83% to $91,337 from $49,902 in the comparable 2010 period of 2010.

Finance costs

Finance costs include interest on finance lease obligations and automobile loans and total $302 in the nine months ended September 30, 2011(2010: $208).

Income Tax Expense

At the expected combined income tax rate of 26.5%, the profit before income tax for the nine months ended September 30, 2011 of $73,964 results in the actual income tax expense of $19,626.

Net earnings and comprehensive income and earnings per share

Net earnings and comprehensive income increased 87% to $54,338 for the nine months ended September 30, 2011 from $29,026 in the comparable period of 2010.  The increase in net earnings is due to the significant increase in Canyon's fracturing services as discussed above.

For the nine months ended September 30, 2011, basic and diluted earnings per share was $0.90 and $0.87 respectively, compared to basic and diluted earnings per share of $0.52 and $0.51 earned in the comparable period of 2010.

INCREASE TO SHAREHOLDER DIVIDEND

The Board of Directors has approved an increase and change to its dividend policy.  Canyon has increased its dividend from $0.10 per share per annum to $0.25 per share per annum to be paid quarterly commencing January 2012.

FORWARD-LOOKING STATEMENTS

This document contains certain forward-looking information and statements within the meaning of applicable securities laws.  The use of any of the words "expect", "anticipate", "continue", "estimate", "guidance", "objective", "ongoing", "may", "will", "project", "should", "believe", "plans", "intends", "budget", "strategy" and similar expressions are intended to identify forward-looking information or statements.  In particular, but without limiting the foregoing, this document contains forward-looking information and statements pertaining to the following: future oil and natural gas prices; future results from operations; future liquidity and financial capacity and financial resources; future costs, expenses and royalty rates; future interest costs; future capital expenditures; future capital structure and expansion; the making and timing of future regulatory filings; and the Company's ongoing relationship with major customers.

The forward-looking information and statements contained in this document reflect several material factors and expectations and assumptions of the Company including, without limitation: that the Company will continue to conduct its operations in a manner consistent with past operations; the general continuance of current or, where applicable, assumed industry conditions; the continuance of existing (and in certain circumstances, the implementation of proposed) tax, royalty and regulatory regimes; certain commodity price and other cost assumptions; the continued availability of adequate debt and/or equity financing and cash flow to funds its capital and operating requirements as needed; and the extent of its liabilities.  The Company believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable but no assurance can be given that these factors, expectations and assumptions will prove to be correct.

The forward-looking information and statements included in this document are not guarantees of future performance and should not be unduly relied upon.  Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information or statements including, without limitation: changes in commodity prices; changes in the demand for or supply of the Company's services; unanticipated operating results; changes in tax or environmental laws, royalty rates or other regulatory matters; changes in the development plans of third parties; increased debt levels or debt service requirements; limited, unfavourable or a lack of access to capital markets; increased costs; a lack of adequate insurance coverage; the impact of competitors; reliance on industry partners; attracting and retaining skilled personnel and certain other risks detailed from time to time in the Company's public disclosure documents (including, without limitation, those risks identified in this document and the Company's Annual Information Form).

The forward-looking information and statements contained in this document speak only as of the date of the document, and none of the Company or its subsidiaries assumes any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws. 

SOURCE Canyon Services Group Inc.

For further information:

Brad Fedora  Or               Barry O'Brien
President and CEO    Vice President, Finance and CFO
 
Canyon Technical Services Ltd      Canyon Technical Services Ltd
2900 Bow Valley Square III     2900 Bow Valley Square III
255 - 5 Avenue SW     255 - 5 Avenue SW
Calgary, Alberta, T2P 3G6     Calgary, Alberta, T2P 3G6
Phone:  403-290-2491     Phone:  403-290-2478
Fax: 403-355-2211        Fax: 403-355-2211

 

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Canyon Services Group Inc.

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