Canyon Services Group Inc. Reports Second Quarter 2015

CALGARY, July 30, 2015 /CNW/ - Canyon Services Group Inc. ("Canyon" or the "Company") is pleased to announce its second quarter 2015 results.  The following results should be read in conjunction with the Management's Discussion and Analysis, the audited consolidated financial statements and notes of Canyon Services Group Inc. for the year ended December 31, 2014 and the Annual Information Form for the year ended December 31, 2014, which are available on SEDAR at www.sedar.com.

The current quarter includes the results of Canyon's pressure pumping business as well as the results of Fraction Energy Services Ltd. ("Fraction"), a leading provider of fracturing fluid management, including water sourcing, transfer, wellsite storage, fluid heating, flowback transfer and produced water storage services, which was acquired by Canyon effective July 1, 2014.

HIGHLIGHTS

The operating and financial highlights for the three and six months ended June 30, 2015 are summarized as follows:

  • On July 21, 2015, Canyon entered into a new credit facility, replacing its previous credit facility, by entering into a new extendible revolving operating credit facility (the "Facility") with a syndicate of financial institutions (the "Lenders").  Under the Facility, the total committed facilities have been increased from $90 million to $100 million and the accordion feature has been increased from $10 million to $50 million.  The accordion feature is available upon request by Canyon, subject to review and approval by the Lenders.  The Facility has a term of three years, extendible annually and includes the removal of the debt to EBITDA covenant for a period of one year. 

  • Under the Facility, Canyon now has available bank credit facilities of about $101 million, including the accordion feature (total of $150 million less $49 million drawn net of cash and cash equivalents as at June 30, 2015), allowing the Company to actively pursue growth opportunities.  Canyon maintains a strong balance sheet with a very low funded debt to EBITDA before share-based payments expense ratio of 0.53:1.00 as at June 30, 2015, significantly below the maximum of 3.00:1.00 permitted under Canyon's previous credit facility.

  • For the six months ended June 30, 2015, consolidated revenue was $198.7 million, largely unchanged from the $198.4 million earned in the comparable 2014 period.  The current period includes $24.0 million contributed by Fraction, acquired by Canyon July 1, 2014.  Consolidated EBITDA before share-based expense decreased to $8.6 million for the six months ended June 30, 2015 from $18.2 million in the 2014 period due to industry-wide reduced activity and decreased pricing.

  • Q2 2015 consolidated revenues totaled $43.2 million, down from $60.3 million in Q2 2014 due to industry-wide reduced activity resulting from the significant decline in commodity prices since mid-2014, as well as an extended seasonal spring break-up.  To mitigate the impact of reduced activity and decreased pricing, operating and input cost concessions have been realized resulting in consolidated EBITDA before share-based payments expense of negative $9.8 million in Q2 2015 compared to negative $9.2 million in Q2 2014.

  • Canyon has been working diligently since late 2014 to reduce all operating and input costs in both the pressure pumping and fluid management divisions.  In addition, Canyon is making changes to permanently reorganize and transform certain business processes with the goal of moving away from the fixed cost model for certain groups within the Company to a variable pay model in which expenses are more closely linked to revenue.  In the third quarter, Canyon will introduce an hourly rate of pay for the transportation group, replacing the existing fixed salary structure for this group. 

  • On June 24, 2015, Canyon declared a quarterly dividend of $0.075 per common share, or $5.2 million, which was paid to shareholders on July 24, 2015.  This reflects the 50% reduction in the dividend announced on May 5, 2015.  The Board will continue to regularly review the dividend payout in the context of the market for Canyon's services.

OVERVIEW OF SECOND QUARTER 2015





000's except per share, job amounts and hydraulic pumping capacity
(Unaudited)

Three Months Ended
June 30


Six Months Ended
June 30


2015

2014

2013


2015

2014

2013

Consolidated revenues

$43,159

$60,253

$27,431


$198,744

$198,448

$114,318

Loss and comprehensive loss

$(21,857)

$(15,263)

$(17,186)


$(22,939)

$(3,413)

$(8,659)

Per share-basic

$(0.32)

$(0.24)

$(0.28)


$(0.33)

$(0.05)

$(0.14)

Per share-diluted

$(0.32)

$(0.24)

$(0.28)


$(0.33)

$(0.05)

$(0.14)

EBITDA before share-based payments(1)

$(9,754)

$(9,186)

$(13,134)


$8,581

$18,246

$7,230

Funds from (used in) operations(1)

$(4,504)

$(4,071)

$(11,822)


$11,082

$19,795

$6,826

Adjusted loss  and comprehensive loss  (1)

$(18,881)

$(14,244)

$(15,555)


$(17,087)

$(1,501)

$(6,488)

Adjusted per share-basic (1)

$(0.27)

$(0.23)

$(0.25)


$(0.25)

$(0.02)

$(0.10)

Adjusted per share-diluted (1)

$(0.27)

$(0.23)

$(0.25)


$(0.25)

$(0.02)

$(0.10)

Total pressure pumping jobs completed (2)

283

347

151


903

1,237

621

Consolidated pressure pumping revenue per job

$131,585

$178,028

$181,979


$195,149

$161,333

$184,389

Average fracturing revenue per job

$232,569

$275,423

$320,769


$255,162

$214,580

$261,204









Hydraulic Pumping Capacity:









Average HHP

255,500

245,500

225,500


255,500

238,000

225,500


Exit HHP

255,500

245,500

225,500


255,500

245,500

225,500

Capital expenditures

$6,053

$18,589

$2,310


$23,671

$31,871

$5,811





000's except per share amounts

(Unaudited)

As at
June 30,

2015

As at
December 31,
2014

As at
December 31,
2013

Cash and cash equivalents

$7,514

$20,613

$21,308

Working capital

$3,560

$21,880

$41,730

Total long-term financial liabilities

$46,231

$36,193

$3,096

Total assets

$534,369

$638,770

$402,707

Cash dividends declared per share

$0.225

$0.60

$0.60





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.

The current three and six months ending June 30, 2015 includes the results of Canyon's pressure pumping business, as well as the results of Fraction Energy Services Ltd., ("Fraction") which was acquired by Canyon effective July 1, 2014.  Fraction is a leading provider of fracturing fluid management, including water sourcing, transfer, wellsite storage, fluid heating, flowback transfer and produced water storage services.

In Q2 2015, industry activity across the Western Canadian Sedimentary Basin ("WCSB") was significantly lower due to continuing low commodity prices.  Current oil and natural gas prices have declined dramatically by about 50% and 40% respectively from year-ago levels, causing reduced capital expenditures by our customers, resulting in lower completions activity.  In pressure pumping, the lower industry activity led to rapidly deteriorating customer pricing levels commencing in January 2015 and resulted in current pricing levels 25% to 30% lower than those reached in Q4 2014.  In fluid management, prices have declined for this range of services by 15% to 30% compared to Q4 2014.

Once activity resumed in June following the extended spring break-up, Canyon was able to remain relatively busy with its core group of customers in both its pressure pumping and fluid management divisions. In Q2 2015, consolidated revenues decreased by 28% to $43.2 million from $60.3 million in Q2 2014, with the current quarter including a revenue contribution of $6.6 million from fluid management.  For the six months ended June 30, 2015, consolidated revenues were $198.7 million, including revenue of $24.0 million from fluid management, virtually unchanged from consolidated revenues of $198.4 million in the prior year. 

In the current quarter, the impact of the reduced activity and lower customer pricing was mostly offset by reductions and efficiencies gained in operating and input costs and by a positive contribution from the fluid management division.  As a result, Q2 2015 consolidated EBITDA before share-based payments (see Non-GAAP Measures) decreased by 6% to negative $9.8 million from negative $9.2 million in the comparable 2014 quarter.  For the six months ended June 30, 2015, consolidated EBITDA before share-based payments (see Non-GAAP Measures) decreased to $8.6 million from $18.2 million in the comparable 2014 period as severe pricing degradation set in early in the year due to lower industry-wide activity while cost efficiencies and savings did not take effect until the second quarter.

Pressure Pumping Services

In the first six months of 2015, drilling and completions activity levels are down approximately 50% (source: Nickles Energy Group) due to the sharp reduction of oil and natural gas prices.  Canyon has been able to grow its market share in the face of difficult industry activity and pricing levels and thereby maintain fairly flat revenue year over year even though prices have declined by 25% – 30% since late 2014. 

In 2015, the lower overall WCSB activity and a late post break-up start by Canyon's core customers resulted in an 18% decrease in Q2 2015 pressure pumping jobs to 283 from 347 jobs completed in Q2 2014.  Revenues decreased by 39% to $36.6 million from $60.3 million in Q2 2014.  Average fracturing revenue per job decreased 16% to $232,569 in Q2 2015 from $275,423 in Q2 2014 due primarily to lower pricing.

For the six months ended June 30, 2015, Canyon completed 903 jobs, a 27% decrease from 1,237 jobs completed in the comparable 2014 period, while revenues decreased 12% to $174.7 million for the current six month period from $198.4 million in the same period last year.  Although pricing was lower, average fracturing revenue per job increased 19% to $255,162 in the current period from $214,580 in the six months ended June 30, 2014 due to larger job sizes.

Importantly, in the first half of 2015, the completion of larger jobs partially offset the impact of reduced activity and lower pricing.  Specifically, changing well designs have resulted in increased fracturing intensity on a per well basis in the form of more fractures per wellbore and/or larger fracture designs.  One of the main predictors of service intensity for pressure pumping is the average total length in metres per well.  The industry experienced an increase of about 15% in the total metres per well drilled (source: Nickels Energy Group) in the six months ended June 30, 2015 over the comparable 2014 period.  In addition, proppant usage per stage increased dramatically throughout 2014 and has led to 2015 year to date total proppant volumes pumped per fracturing job by Canyon increasing by 60% compared to the comparable 2014 period.  Also contributing to Canyon's increasing fracturing revenue per job was the increased use of "Ottawa White" sand which is typically sold at higher prices than domestic sand.  In the six months ended June 30, 2015, average Ottawa White sand volumes pumped per fracturing job by Canyon's customers increased by 168% and represented approximately 70% of total sand pumped.

Pressure pumping cash flow and profitability remains highly levered to changes in activity and pricing due to the fixed cost nature of the business.  Since Q4 2014, Canyon has been working with suppliers to reduce both variable and fixed input costs, including proppants, chemicals, third-party hauling, fuel, accommodation and labour.  These cost reduction efforts have succeeded in partially offsetting the impact of significantly lower customer pricing and reduced activity.  As a result, Q2 2015 EBITDA before share-based payments expense for the pressure pumping segment was negative $10.4 million, compared to negative $7.9 million in Q2 2014 although revenues have declined by 39% to $36.6 million.  For the six months ended June 30, 2015, EBITDA before share-based payments expense was $3.4 million compared to $21.1 million for the prior year six-month period.  The decrease in EBITDA before share-based payments expense in the current six month period is due to sharply lower customer activity and pricing levels taking effect as early as January, while cost reductions, especially pertaining to labour, could not be implemented until the second quarter.

Fluid Management Services

For the three and six months ended June 30, 2015 Fraction contributed $6.6 million and $24.0 million, respectively, in revenue and $1.5 million and $7.0 million, respectively, in EBITDA before share-based payments expense (see Non-GAAP Measures).

Industry conditions including lower completion activity, decreased pricing and the seasonal spring break-up impacted Q2 2015 revenues and profitability in this division.  This year's break-up was longer than expected with the prolonged road bans preventing the Company from accessing customer sites in order to provide services.  As a result, a number of fluid management projects were pushed into Q3 2015.  In addition, depending on the type of service, customer pricing was 15% - 30% lower than peak levels experienced in 2014 which further reduced revenue and EBITDA before share-based payments.

During the quarter, Fraction worked on 67 fluid transfer and fluid containment projects, of which 62 were completed and five are continuing into Q3 2015.  The job mix was largely skewed toward lease site fluid management and fluid containment projects as road bans prevented the Company from mobilizing equipment to site for large scale fluid transfer projects that the Company was awarded.  These fluid transfer projects were pushed into Q3 2015.

Tank rental revenues in Q2 2015 were also lower than Q1 2015.  For the quarter, utilization averaged 38% compared to 58% for Q1 2015.  The utilization rates for Q2 2015 are consistent with historical trends and not unexpected as customers return storage tanks just before the start of spring break-up and begin to rent them again just before the end of break-up.  As a result, utilization rates tend to decrease in March and pick back up towards the end of June.

Cost Reduction Measures

To mitigate the significant decreases in industry pricing, Canyon has been working diligently to reduce all operating and input costs in both the pressure pumping and fluid management divisions including chemicals, proppants, fuel, third party hauling, accommodations and labour.  To date, chemical costs have been reduced by about 15%, and third party hauling rates have decreased by approximately 30%.  The cost of both Canadian and US sourced proppants has been reduced by approximately 10% net of exchange rate fluctuations.  Minor concessions have been received from fuel suppliers due to lower oil prices and accommodation costs have been reduced by about 15%.  As previously reported, Canyon reduced its permanent employee count in the pressure pumping and fluid management divisions by 22% and 15%, respectively, in late March to match the anticipated reduced activity levels over the remainder of the year.  In addition, all remaining employees' salaries in both divisions were rolled back between 5% and 10% with a 10% reduction of executive management salaries and directors' fees.

Canyon does not view the reduction of input costs as a one-time exercise and is continuing to work with suppliers and customers to gain concessions and economies.  More importantly, we are making changes to permanently reorganize and transform certain business processes with the goal of moving away from the fixed cost model for certain groups within our Company to a variable pay model in which expenses are more closely linked to revenue.  The pressure pumping industry has historically experienced significant volatility of cash flows due to the fact that approximately 75% of Canyon's fixed operating costs are salaried field positions.  This lack of flexibility in our cost structure causes cash flow losses during low activity periods.  Any changes we can make to move towards a variable cost structure will aid in reducing cash flow volatility during periods of low activity levels.  For example, in the third quarter, Canyon will introduce an hourly rate for the transportation group to more closely match the compensation structure of the trucking industry.

Dividend

The Board of Directors (the "Board") continuously reviews the long-term capital structure of the Company and its corresponding dividend policy each fiscal quarter.  In May 2015, the Board determined that a 50% reduction to Canyon's dividend was prudent in the context of the continuing industry uncertainty.  Therefore, effective for the July 2015 payment, Canyon's quarterly dividend was reduced to $0.075 per common share providing estimated annualized cash savings of $20.6 million.  The reduction in the quarterly dividend payout will enable Canyon to preserve its strong balance sheet and provide the Company with additional financial flexibility to pursue organic growth prospects and asset acquisitions, should such attractive opportunities arise.  The Board will continue to regularly review the dividend payout in the context of the market for Canyon's services. 

NON-GAAP MEASURES

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

EBITDA before share-based payments, funds from operations, and adjusted profit (loss) and comprehensive income (loss) and adjusted per share amounts are not recognized measures under IFRS.  Management believes that in addition to profit (loss) and comprehensive income (loss), the following measures are useful to help assess the results of the Company.

Adjusted EBITDA before share-based payments

Canyon calculates EBITDA before share-based payments as profit (loss) and comprehensive income (loss) for the period adjusted for depreciation and amortization, equity settled share-based payment transactions, gain or loss on sale of property and equipment, finance costs, foreign exchange (gain) loss and income tax expense (recovery). 

EBITDA before share-based payments is a useful supplemental measure as it provides an indication of the cash results generated by the Company's principal business activities prior to consideration of how those activities are financed and how the results are taxed.

Funds from operations

Funds from operations refers to cash flow from operations before changes in non-cash working capital and taxes.

Funds from operations is a measure of liquidity based on cash generated by the Company's activities without consideration of the timing of the monetization of non-cash working capital items or payment of taxes.  Management believes that funds from operations provides investors with an indication of cash available for capital commitments, debt repayments, payment of taxes, and other expenditures.

Adjusted profit (loss) and comprehensive income (loss)

Adjusted profit (loss) and comprehensive income (loss) is calculated as profit (loss) and comprehensive income (loss) plus amortization expense on intangibles and share-based payment transactions.  This provides investors with results generated by the Company's business activities in the normal course of business, not taking into account share-based payments expense, one-time items or amortization of intangibles which are not reflective of operational activity. Amounts per share are calculated using weighted average shares outstanding, consistent with the calculation of earnings (loss) per share.

Readers should be cautioned, however, that the above metrics should not be construed as an alternative to profit (loss) and comprehensive income (loss) determined in accordance with IFRS as an indicator of the Company's performance.  Canyon's method of calculating these metrics may differ from other companies and accordingly, they 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.

Adjusted EBITDA before share-based payments





000's
(Unaudited)

Three Months Ended

June 30

Six Months Ended
June 30


2015

2014

2015

2014

Loss and comprehensive loss

$(21,857)

$(15,263)

$(22,939)

$(3,413)

Add (Deduct):





Depreciation and amortization

14,339

9,892

30,175

19,706

Finance costs

854

70

1,387

251

Foreign exchange (gain) loss

(274)

(100)

1,290

268

Share-based payment transactions

1,471

1,006

2,842

1,886

Gain on sale of property and equipment

(199)

(26)

(150)

(16)

Income tax recovery

(4,088)

(4,765)

(4,024)

(436)

EBITDA before share-based payments

$(9,754)

$(9,186)

$8,581

$18,246

Funds from Operations




000's
(Unaudited)

Three Months Ended

June 30

Six Months Ended
June 30


2015

2014

2015

2014

Net cash from operating activities

$8,878

$8,934

$32

$10,989

Add (Deduct):





Income tax paid (received)

(17)

-

8,808

-

Change in non-cash working capital related to operating activities

(19,160)

(18,090)

(2,976)

6,738

Current tax recovery

5,795

5,085

5,218

2,068

Funds from operations

$(4,504)

$(4,071)

$11,082

$19,795

Adjusted Loss and Comprehensive Loss





000's
(Unaudited)

Three Months Ended

June 30

Six Months Ended

June 30


2015

2014

2015

2014

Loss and comprehensive loss

$(21,857)

$(15,263)

$(22,939)

$(3,413)

Amortization expense on intangibles

1,505

13

3,010

26

Share-based payment transactions

1,471

1,006

2,842

1,886

Adjusted loss  and comprehensive loss

$(18,881)

$(14,244)

$(17,087)

$(1,501)

Adjusted per share-basic

$(0.27)

$(0.23)

$(0.25)

$(0.02)

Adjusted per share-diluted

$(0.27)

$(0.23)

$(0.25)

$(0.02)

QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS



000's except per share amounts

(Unaudited)

Three Months Ended
June 30


2015


2014

Revenue

$43,159


$60,253

Cost of services

(59,829)


(73,313)

Gross loss 

(16,670)


(13,060)

Administrative expenses

(7,389)


(7,011)

Amortization expense

(1,505)


(13)

Results from operating activities

(25,564)


(20,084)

Finance costs

(854)


(70)

Foreign exchange gain

274


100

Gain on sale of property and equipment

199


26

Loss before income tax

(25,945)


(20,028)

Income tax recovery

4,088


4,765

Loss and comprehensive loss 

$(21,857)


$(15,263)

EBITDA before share-based payments(1)

$(9,754)


$(9,186)

Loss per share:





Basic

$(0.32)


$(0.24)


Diluted

$(0.32)


$(0.24)

Note (1):

See Non-GAAP Measures

Pressure Pumping Services:



000's except per share amounts

(Unaudited)

Three Months Ended

June 30


2015


2014

Revenue

$36,560

100%


$60,253

100%

Cost of services

(54,178)

(148%)


(73,313)

(122%)

Gross loss

(17,618)

(48%)


(13,060)

(22%)

Administrative expenses

(4,617)

(13%)


(5,348)

(9%)

Amortization expense

(5)

(0%)


(13)

(0%)

Results from operating activities

(22,240)

(60%)


(18,421)

(31%)

Add non-cash items:






Depreciation and amortization

10,974

30%


9,892

16%

Share-based payments expense

851

2%


664

1%

EBITDA before share-based payments(1)

$(10,415)

(28%)


$(7,865)

(13%)

Note (1):

See Non-GAAP Measures.

Revenue

The lower WCSB activity together with a longer than expected spring break-up resulted in an 18% decrease in Q2 2015 pressure pumping jobs to 283 from 347 jobs completed in Q2 2014.  In addition, the reduced industry activity has led to sharply lower customer pricing which we estimate at about 25% to 30% lower than Q4 2014 levels.  As a result, pressure pumping revenues decreased by 39% to $36.6 million from $60.3 million in Q2 2014.  With fracturing revenues accounting for over 90% of total pressure pumping revenues, average fracturing revenue per job decreased 16% to $232,569 in Q2 2015 from $275,423 in Q2 2014 due to job mix and lower pricing.

Cost of services

Cost of services for the three months ended June 30, 2015 totaled $54.2 million (2014: $73.3 million) and included materials, products, transportation and repair costs of $29.0 million (2014: $45.4 million), employee benefits expense of $14.2 million (2014: $18.5 million), and depreciation of property and equipment of $11.0 million (2014: $9.4 million).

  • Materials, products, transportation and repair costs decreased by 36% in Q2 2015 when compared to Q2 2014 mainly due to lower activity and input cost reductions, as previously discussed.
  • Employee benefits expense has decreased by 21% Q2 2015 due to a reduction in the permanent employee count and a company-wide wage rollback as a result of decreased activity.
  • The increase in depreciation of property and equipment to $11.0 million in Q2 2015 from $9.4 million in Q2 2014 was mainly due to the addition of equipment to Canyon's fleet throughout 2014 particularly in the second half of the year. In 2014, Canyon added 30,000 Hydraulic Horsepower of pumping capacity, coiled tubing equipment, transportation and logistics equipment, nitrogen and cement and acid equipment.

Administrative expenses

Administrative expenses for the three months ended June 30, 2015 totaled $4.6 million (2014: $5.3 million) and included employee benefits expense of $1.8 million (2014: $2.6 million), share-based payments expense of $0.9 million (2014: $0.7 million) and other administrative expenses of $1.3 million (2014: $1.6 million).

The decrease in employee benefits expense was mainly attributable to the wage and benefits rollbacks and reduced headcount, as previously discussed.  The decrease in other administrative expenses is mainly the result of lower professional, consulting and travel costs.  Administrative expenses also include depreciation of buildings and office equipment and amortization of intangibles of $0.6 million (2014: $0.5 million).

EBITDA before share-based payments (See Non-GAAP Measures)

In Q2 2015, EBITDA before share-based payments expense (see Non-GAAP Measures) decreased by 32% to negative $10.4 million from negative $7.9 million in the comparable 2014 quarter.  As previously discussed lower customer pricing due to decreased industry-wide activity levels and a longer than expected spring break-up led to the decrease. 

Fluid Management Services:



000's except per share amounts

(Unaudited)

Three Months Ended

June 30


2015


2014

Revenue

$6,599

100%


$-

-%

Cost of services

(5,651)

(86%)


-

-%

Gross profit

948

14%


-

-%

Administrative expenses

(1,373)

(21%)


-

-%

Amortization expense

(1,500)

(23%)


-

-%

Results from operating activities

(1,925)

(29%)


-

-%

Add non-cash items:






Depreciation and amortization

3,365

51%


-

-%

Share-based payments expense

84

1%


-

-%

EBITDA before share-based payments(1)

$1,524

23%


$-

-%

Note (1):

See Non-GAAP Measures.

Revenue

The fluid management services business, acquired July 1, 2014, contributed $6.6 million of revenue to Canyon in Q2 2015.  This is lower than the prior quarter revenues of $17.4 million due to annual spring break-up conditions and lower industry-wide activity.

Cost of services

Cost of services for the three months ended June 30, 2015 totaled $5.7 million and includes materials, products, transportation and repair costs of $2.1 million, employee benefits expense of $1.7 million, and depreciation of property and equipment of $1.9 million.

Administrative expenses

Administrative expenses for the three months ended June 30, 2015 totaled $1.4 million and includes employee benefits expense, depreciation of buildings and office equipment and amortization of intangibles and other administrative expenses.  The amortization expense of $1.5 million relates to the amortization of customer relationships and non-competition agreements pursuant to the acquisition of Fraction.

EBITDA before share-based payments (See Non-GAAP Measures)

Q2 2015 EBITDA before share-based payments (see Non-GAAP Measures) totaled $1.5 million, or 23% of revenue.

Corporate:



000's except per share amounts

(Unaudited)

Three Months Ended
June 30


2015


2014

Revenue

$  -


$  -

Administrative expenses

(1,399)


(1,663)

Results from operating activities

(1,399)


(1,663)

Add non-cash item:





Share-based payments expense

536


342

EBITDA before share-based payments(1)

$(863)


$(1,321)

Note (1):

See Non-GAAP Measures.

This segment consists of costs incurred to operate a public company, including corporate management, head office costs, corporate share-based payment expenses and professional fees.

Administrative expenses

Administrative expenses for the three months ended June 30, 2015 totaled $1.4 million compared to $1.7 million in Q2 2014 and include employee benefits expense, share-based payments, and other head office administrative expenses.  The decrease in administrative expenses is mainly due to wage rollbacks implemented effective April 1, 2015, as previously discussed.

Other Items – Quarterly Consolidated Statement of Operations:

Finance costs and foreign exchange gain

Finance costs include interest on loans, finance lease obligations and automobile loans and totaled $0.9 million in Q2 2015 (2014: $0.1 million), with the increase mainly attributable to the increase in loans and borrowings used to partially fund the Company's capital program in the second half of 2014 and in 2015. 

In Q2 2015 the Company recorded a foreign exchange gain of $0.3 million compared to $0.1 million in Q2 2014.  The increase is due to fluctuations in the Canadian dollar versus the U.S. dollar exchange rate in relation to the purchase of U.S. sourced proppants.

Income tax recovery

At the expected combined income tax rate of 26%, the loss before income tax for Q2 2015 of $25.9 million would have resulted in an income tax recovery of $6.7 million, compared to the actual income tax recovery of $4.1 million.  The decrease in the actual income tax recovery was due to the impact of non-deductible expenses as well as an increase in the corporate income tax rate in Alberta.

EBITDA before share-based payments (See Non-GAAP Measures)

In Q2 2015, Canyon recorded consolidated EBITDA before share-based payments (see Non-GAAP Measures) of negative $9.8 million, down 6% from $9.2 million recorded in the comparable 2014 quarter.  As previously discussed, the reductions and savings achieved in input and operating costs combined with a contribution of $1.5 million in EBITDA before share-based payments expense from the fluid management division largely offset the impact of lower activity and pricing on revenues in the quarter.

Loss and comprehensive loss and loss per share

Loss and comprehensive loss increased to $21.9 million in Q2 2015 from a loss and comprehensive loss of $15.3 million in Q2 2014 mainly due to the aforementioned lower pricing, reduced industry-wide activity, higher depreciation charges related to capital additions in the second half of 2014 and amortization expense related to intangible assets arising pursuant to the acquisition of Fraction.

Basic and diluted loss per share was $0.32 for the three months ended June 30, 2015 compared to basic and diluted loss per share of $0.24 for the comparable 2014 quarter.

SIX MONTHS ENDED JUNE 30, 2015 CONSOLIDATED STATEMENTS OF OPERATIONS



000's except per share amounts

(Unaudited)

Six Months Ended
June 30


2015


2014

Revenue

$198,744


$198,448

Cost of services

(203,864)


(187,892)

Gross (loss) profit

(5,120)


10,556

Administrative expenses

(16,306)


(13,876)

Amortization expense

(3,010)


(26)

Results from operating activities

(24,436)


(3,346)

Finance costs

(1,387)


(251)

Foreign exchange loss

(1,290)


(268)

Gain on sale of property and equipment

150


16

Loss before income tax

(26,963)


(3,849)

Income tax recovery

4,024


436

Loss and comprehensive loss 

$(22,939)


$(3,413)

EBITDA before share-based payments(1)

$8,581


$18,246

Loss per share:





Basic

$(0.33)


$(0.05)


Diluted

$(0.33)


$(0.05)

Note (1):

See Non-GAAP Measures

Pressure Pumping Services:



000's except per share amounts

(Unaudited)

Six Months Ended

June 30


2015


2014

Revenue

$174,742

100%


$198,448

100%

Cost of services

(186,228)

(107%)


(187,892)

(95%)

Gross (loss) profit

(11,486)

(7%)


10,556

5%

Administrative expenses

(10,384)

(6%)


(10,247)

(5%)

Amortization expense

(10)

(0%)


(26)

(0%)

Results from operating activities

(21,880)

(13%)


283

0%

Add non-cash items:






Depreciation and amortization

23,589

14%


19,706

10%

Share-based payments expense

1,689

1%


1,102

1%

EBITDA before share-based payments(1)

$3,398

2%


$21,091

11%

Note (1):

See Non-GAAP Measures.

Revenue

Pressure pumping revenues for the six months ended June 30, 2015 decreased by 12% to $174.7 million compared to $198.4 million earned in the six months ended June 30, 2014.  Jobs completed decreased by 27% to 903 for the six months ended June 30, 2015 from 1,237 jobs completed in the prior year comparable period.  The percentage decrease in revenues did not match the percentage decrease in the job count due to Canyon completing larger jobs as previously discussed.  This is evident in the average fracturing revenue per job which increased by 19% to $255,162 in the six months ended June 30, 2015 from $214,580 in the six months ended June 30, 2014, as job sizes more than offset the impact of lower pricing. 

Cost of services

Cost of services for the three months ended June 30, 2015 totaled $186.2 million (2014: $187.9 million) and included materials, products, transportation and repair costs of $120.0 million (2014: $124.0 million), employee benefits expense of $43.7 million (2014: $45.1 million), and depreciation of property and equipment of $22.5 million (2014: $18.8 million).

Materials, products, transportation and repair costs decreased by 3% for the six months ended June 30, 2015 compared to the six months ended June 30, 2014.  These costs did not decrease in line with revenues mainly due to larger job sizes and the increase in the usage of more expensive "Ottawa White" sands by customers as previously discussed. 

Employee benefits expense has decreased by 3% for the six months ended June 30, 2015 in comparison to the six months ended June 30, 2014.  In 2014 staff levels increased over the second half of the year to handle the increase in 24 hour operations and higher activity.  These higher staff levels were maintained through to the end of Q1 2015 as Canyon was busy to mid-March.  Q2 2015 employee benefits expense decreased by 21% compared to Q2 2014 as the aforementioned staff reductions were implemented at the end of March.

The increase in depreciation of property and equipment for the six months ended June 30, 2015 in comparison to the six months ended June 30, 2014 is due to the addition of equipment to Canyon's fleet particularly in the second half of 2014 and accelerated depreciation relating to the replacement of a number of pump components.  This was partially offset by a change in the expected useful life of coiled tubing, nitrogen and cementing equipment which reduced the depreciation expense of these assets.

Administrative expenses

Administrative expenses for the six months ended June 30, 2015 totaled $10.4 million compared to $10.2 million for the six months ended June 30, 2014 and included employee benefits expense of $4.8 million (2014: $5.0 million) and share-based payments expense of $1.7 million (2014: $1.1 million).  The decrease in employee benefits expense was mainly attributable to wage and benefits rollbacks implemented at the beginning of Q2 2015. 

Administrative expenses also include depreciation of buildings and office equipment and amortization of intangibles of $1.1 million (2014: $0.9 million).  In addition, other administrative expenses totaled $2.8 million for the six months ended June 30, 2015 compared to $3.2 million for the six months ended June 30, 2014.

EBITDA before share-based payments (See Non-GAAP Measures)

For the six months ended June 30, 2015, EBITDA before share-based payments (see Non-GAAP Measures) decreased by 84% to $3.4 million from $21.1 million in the comparable 2014 period.  As previously discussed lower customer pricing due to decreased industry-wide activity levels more than offset input cost reductions in the period. 

Fluid Management Services:



000's except per share amounts

(Unaudited)

Six Months Ended

June 30


2015


2014

Revenue

$24,002

100%


$-

-%

Cost of services

(17,636)

(73%)


-

-%

Gross profit

6,366

27%


-

-%

Administrative expenses

(3,015)

(13%)


-

-%

Amortization expense

(3,000)

(12%)


-

-%

Results from operating activities

351

2%


-

-%

Add non-cash items:






Depreciation and amortization

6,586

27%


-

-%

Share-based payments expense

101

0%


-

-%

EBITDA before share-based payments(1)

$7,038

29%


$-

-%

Note (1):

See Non-GAAP Measures.

Revenue

The fluid management services business contributed $24.0 million of revenues to Canyon for the six months ended June 30, 2015.  Water access restrictions in the northern regions of the WCSB were lifted in December 2014 which resulted in increased activity levels for the segment in the first half of 2015.

Cost of services

Cost of services for the six months ended June 30, 2015 totaled $17.6 million and includes materials, products, transportation and repair costs of $7.8 million, employee benefits expense of $6.2 million, and depreciation of property and equipment of $3.6 million.

Administrative expenses

Administrative expenses for the six months ended June 30, 2015 totaled $3.0 million and includes employee benefits expense, depreciation of buildings and office equipment and other administrative expenses.  The amortization expense of $3.0 million relates to the amortization of customer relationships and non-competition agreements pursuant to the acquisition of Fraction.

EBITDA before share-based payments (See Non-GAAP Measures)

For the six months ended June 30, 2015 EBITDA before share-based payments totaled $7.0 million in the fluid management services segment, or 29% of revenue.

Corporate:



000's except per share amounts

(Unaudited)

Six Months Ended
June 30


2015


2014

Revenue

$ -


$ -

Administrative expenses

2,907


3,629

Results from operating activities

(2,907)


(3,629)

Add non-cash item:





Share-based payments expense

1,052


784

EBITDA before share-based payments(1)

$(1,855)


$(2,845)

Note (1):

See Non-GAAP Measures.

This segment consists of costs incurred to operate a public company, including corporate management, head office costs, corporate share-based payment expenses and professional fees.

Administrative expenses

Administrative expenses for the six months ended June 30, 2015 totaled $2.9 million compared to $3.6 million in Q2 2014 and include employee benefits expense, share-based payments, and other head office administrative expenses.  The decrease in administrative expenses is mainly due to lower employee benefits expense as a result of wage rollbacks and staff reductions in 2015.

Other Items – Six months ended June 30, 2015 Statement of Operations:

Finance costs and foreign exchange loss

Finance costs include interest on loans, finance lease obligations and automobile loans and totaled $1.4 million for the six months ended June 30, 2015 (2014: $0.3 million), with the increase mainly attributable to the increase in loans and borrowings used to partially fund the Company's capital program in the second half of 2014 and in 2015.

For the six months ended June 30, 2015 the Company recorded a foreign exchange loss of $1.3 million compared to $0.3 million for the six months ended June 30, 2014.  The increase is due to the declining Canadian dollar versus the U.S. dollar exchange rate during the year to date mostly in relation to the purchase of U.S. sourced proppants.

Income tax recovery

At the expected combined income tax rate of 26%, the loss before income tax for the six months ended June 30, 2015 of $27.0 million would have resulted in an income tax recovery of $7.0 million, compared to the actual income tax recovery of $4.0 million.  The decrease in the actual income tax recovery was due to the impact of non-deductible expenses as well as an increase in the corporate income tax rate in Alberta.

EBITDA before share-based payments (See Non-GAAP Measures)

For the six months ended June 30, 2015 Canyon recorded consolidated EBITDA before share-based payments (see Non-GAAP Measures) of $8.6 million, down 53% from $18.2 million for the six months ended June 30, 2014.  As previously discussed, the decreased EBITDA before share-based payments expense is due to significantly reduced industry-wide-activity and resulting pricing pressure partially offset by the addition of Fraction which contributed $7.0 million in EBITDA before share-based payments for the six months ended June 30, 2015.

Loss and comprehensive loss and loss per share

The aforementioned reduced industry-wide activity and resulting lower pricing resulted in a loss and comprehensive loss totaling $22.9 million for the six months ended June 30, 2015 compared to loss and comprehensive loss of $3.4 million for the six months ended June 30, 2014.

Basic and diluted loss per share was $0.33 for the six months ended June 30, 2015 compared to basic and diluted loss per share of $0.05 for the comparable 2014 period.

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", "objective", "ongoing", "may", "will", "should", "believe", "plans" 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, President and CEO, Canyon Services Group Inc., 2900 Bow Valley Square III, 255 - 5 Avenue SW, Calgary, Alberta, T2P 3G6, Phone: 403-290-2491, Fax: 403-355-2211; Or: Barry O'Brien, Vice President, Finance and CFO, Canyon Services Group Inc., 2900 Bow Valley Square III, 255 - 5 Avenue SW, Calgary, Alberta, T2P 3G6, Phone: 403-290-2478, Fax: 403-355-2211

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