Pason Reports its 2011 First Quarter Results

CALGARY, May 4 /CNW/ - Pason Systems Inc. (TSX: PSI) announced today its 2011 first quarter results.

Performance Data

Three Months Ended March 31, 2011 2010(1) Change
(000s, except per share data) ($) ($) (%)
       
Revenue 84,745 56,384 50
EBITDA(2) 44,729 25,390 76
  As a % of revenue 52.7 45.0 17
  Per share - basic 0.55 0.31 77
  Per share - diluted 0.55 0.31 77
Funds flow from operations(2) 39,082 20,454 91
  Per share - basic 0.48 0.25 92
  Per share - diluted 0.48 0.25 92
Earnings 17,757 7,891 125
  Per share - basic 0.22 0.10 120
  Per share - diluted 0.22 0.10 120
Capital expenditures 21,293 4,319 393
Working capital 121,536 122,235 --
Total assets 396,792 353,392 12
Total long-term debt -- -- --
Shareholders' equity 325,659 309,912 5
Market capitalization 1,288,350 931,545 38
Common shares outstanding (#)      
  Basic 81,756 81,491 --
  Diluted 82,539 81,491 1
Shares outstanding end of period (#) 81,835 81,500 --

(1) 2010 comparative figures have been restated to conform to International Financial Reporting Standards.

(2) EBITDA is defined as earnings before interest expense, income taxes, stock-based compensation expense and depreciation and amortization expense. Funds flow from operations is defined as earnings adjusted for depreciation and amortization expense, stock-based compensation expense, future income taxes and other non-cash items impacting operations as presented in the Consolidated Statements of Cash Flows. These definitions are not recognized measures under International Financial Reporting Standards, and accordingly, may not be comparable to measures used by other companies.

President's Message

Pason continued its climb back from the 2009 drilling collapse with a first quarter that matched its record results from 2008. The proliferation of North American shale drilling, first with natural gas targets, then gas with high liquids content and now more recently shale bearing oil deposits plus renewed interest in conventional oil formations drilled horizontally, have all contributed to a buoyant industry with exceptional optimism for the future. We are just beginning to see this upside with our first quarter revenue of $84.7 million up 50% from 2010. More impressively EBITDA at $44.7 million, funds flow from operations of $39.1 million and earnings of $17.8 million were up 76%, 91%, and 125%, respectively, over last year's first quarter. Earnings per diluted share was $0.22 compared to $0.10 in 2010.

Pason's U.S. business unit recorded a record quarter with revenue of $40.6 million versus $24.9 million in the prior year. Showing improving leverage, earnings from the US unit rose to $19.7 million versus $4.4 million in 2010. We continue to make progress in filling out our suite of products on each rig as shown by a solid increase in revenue per industry day to $268 compared to $206 in last year's first quarter. Industry days, at an average of 1,674 active rigs for the quarter, were up 32% from the prior year and up slightly from the prior quarter.  Our market share took a dip of three points to just under 60% over the past two quarters, while the Canadian market share actually increased by a similar amount in the first quarter. We do not believe either change, up or down, represented actual movement in market share. The drilling industry is slowly making a change to tracking activity on billed hours rather than days. In the past with days it was possible for a rig to move off an old well and spud the same day creating a double count of activity for that day. A similar overstatement occurred when a rig spudded at 1:00 am and recorded a full day. In the United States we have converted most of our rigs to the Pason Billing System that automates what was previously an error prone and cumbersome billing process. We did this at our customer's request but the initial impact is to lower our drilling days or the numerator of our market share calculation, because the US industry still reports activity on the old full day basis. In Canada, where we switched to billing on hours over a year ago, we actually got a lift because the Canadian Association of Drilling Contractors (CAODC industry days) switched to activity based on billed hours in the first quarter, effectively reducing the denominator and increasing our market share number. The point to take away from this issue though is simply that there was no underlying change to our relative competitive positions in either country.

Canadian first quarter business unit profit also experienced substantial improvement to $20.8 million from $14.8 million in 2010. Factors that contributed to this year over year improvement were the approximate 10% price increase established in the previous quarter and a very cold Canadian winter that permitted rig movement on frozen ground right to the end of March. These ideal conditions for drilling in otherwise inaccessible locations, drove a 24% increase in industry drilling days over 2010. However, with weather there is always a consequence, and the unusually cold weather that we benefited from in the first quarter will expand the duration of spring breakup in Canada, resulting in less activity than the current industry backlog of drilling prospects would have otherwise generated. Revenue per Canadian industry day was up sharply to $770 when compared to the $680 recorded last year. Clearly the fourth quarter price increase helped improve this metric but some of this lift is due to the change made by the CAODC to recording activity by billable hours. The value of our remote directional drilling facilitation product is becoming better understood each quarter with most of the early adopters having indicated a desire to continue with the product. We continue to see this product as strategic beyond just its own direct benefits. This is really the beginning of a movement to significantly increase the degree of remote management of drilling activities and success with directional drilling will lead to a number of other applications.

We spent a busy winter working with our mobile water cleaning plants. During this period we learned a substantial amount about how to improve the water cleaning technology deployed in the plants. We also discovered that no one, including our customers, has a clear idea of how to move and manage the various water sources - produced water, hydraulic fracturing flow back, water flood and new fresh water. As a result the coordination required to keep a steady flow of water coming to the plants was often challenging. Further complicating the exploration of the economic potential of cleaning oilfield water is that most companies can meet their needs today without the complication of water treatment plants. However at the same time, they feel that industry expectations will change in the future making the water cleaning plants essential. This poses a serious challenge to the entrants into the water cleaning industry. Do you continue to invest waiting for the market to be created or do you delay until that event occurs and risk being too late to deploy? At Pason, we believe we must continue to refine our technology and deployment to be ready for the market when it comes and happily we have the ability to make this investment. A number of would-be competitors, dependent on immediate cash from their water cleaning activities, have had to either shut down or suspend operations. For the second quarter we hope to add two mobile laboratory units to speed up our technology testing cycles in the field as well as add another mobile plant. We hope then to deploy two mobile plants in both Canada and the US so we can gain enough confidence in our technology, deployment skills and the future market to make a more informed investment decision. The original fixed plant from the Auxsol acquisition continues to operate in Colorado where we are earning some revenue while working out operational problems that provide useful insights for our mobile plants as well.

Our International segment recorded minimal profit of $0.4 million compared to $0.7 million from 2010. However, this was a substantial improvement over the loss of $2.7 million suffered in the fourth quarter. We are seeing improving drilling activity in Argentina and Mexico. Offsetting those improvements are continuing low levels of activity in the Gulf of Mexico which impacts our offshore rentals in this unit. During the quarter we made the decision to simplify our international offering to primarily just rentals of Pason equipment. In select eastern hemisphere markets we will look for bulk sales of the Petron equipment. Because we are doing limited manufacturing for sale and more maintenance of rental systems from our Houston office there were some staff reductions that should improve margins going forward. Our progress in the Middle East has been disappointing but the former manager of our Latin America business, now working within the new revenue group, has been  active recently in this region and we still believe we can achieve meaningful activity in the Middle East.

We continue to evolve and I believe substantially improve the management of our R&D group. We are already seeing faster release rates with improving product features. Software technology acquired in the Petron purchase has been a key contributor to the product improvements. Over the next three years we plan to incur significant capital expenditures to fundamentally upgrade our electronic drilling recorder systems to make them even more robust plus provide a more flexible platform for the increasing communication and data analysis needs being demanded by our customers. The result of this investment will ensure that we continue to be technology leaders in our industry.

The future for oil and natural gas, the two commodities that drive our industry, looks very promising at present. Current oil prices provide an excellent return in most plays and the recent exploitation of oil from shale formations offers the United States the opportunity of much greater oil supply independence. Natural gas prices remain low, but significant new sources of natural gas demand in electrical generation and transportation are underway, which should eventually support a very active natural gas drilling industry. Our cash position at $100.0 million and our cash generating capability remain strong enough to support our equipment upgrade mentioned above, new business development and our dividend which the Board of Directors has set at $0.18 per share for the first half of 2011.

On behalf of the Board of Directors,

(signed)

Jim Hill

Chairman, President & Chief Executive Officer

May 3, 2011

Management's Discussion and Analysis

The following discussion and analysis has been prepared by management as of May 3, 2011 and is a review of the financial condition and results of operations of Pason Systems Inc. ("Pason" or "the Company") based on International Financial Reporting Standards ("IFRS") and should be read in conjunction with the consolidated financial statements and accompanying notes. Certain 2010 comparative figures have been restated to conform to International Financial Reporting Standards, most notably an increase in the amount recorded for stock-based compensation expense $0.5 million.

Certain information regarding the Company contained herein may constitute forward-looking statements under applicable securities laws.  Such statements are subject to known or unknown risks and uncertainties that may cause actual results to differ materially from those anticipated or implied in the forward-looking statements.

All financial measures presented in this quarterly report are expressed in Canadian dollars unless otherwise indicated.

Overview of the 2011 First Quarter

              Three Months Ended March 31,
  2011 2010(1) 2009(1)
(000s, except per share data) ($) ($) ($)
Revenue 84,745 56,384 54,175
EBITDA (2) 44,729 25,390 23,775
  As a % of revenue 52.7 45.0 43.9
  Per share - basic 0.55 0.31 0.29
  Per share - diluted 0.55 0.31 0.29
Funds flow from operations (2) 39,082 20,454 18,685
  Per share - basic 0.48 0.25 0.23
  Per share - diluted 0.48 0.25 0.23
Earnings 17,757 7,891 4,916
  Per share - basic 0.22 0.10 0.06
  Per share - diluted 0.22 0.10 0.06
Total assets 396,792 353,392 425,646
Total long-term debt -- -- --

(1) 2010 comparative figures have been restated to conform to International Financial Reporting Standards. 2009 figures are presented in accordance with the Company's previous accounting framework, Canadian generally accepted accounting principles.

(2) EBITDA is defined as earnings before interest expense, income taxes, stock-based compensation expense and depreciation and amortization expense. Funds flow from operations is defined as earnings adjusted for depreciation and amortization expense, stock-based compensation expense, future income taxes and other non-cash items impacting operations as presented in the Consolidated Statements of Cash Flows. These definitions are not recognized measures under International Financial Reporting Standards, and accordingly, may not be comparable to measures used by other companies.

Overall Performance

  Three Months Ended March 31,
  2011 2010 Change
(000s) ($) ($) (%)
Revenue      
Electronic Drilling Recorder 33,431 20,757 61
Pit Volume Totalizer 15,372 10,276 50
Communications 11,431 7,472 53
Automatic Driller 10,068 6,345 59
Total Gas System 5,324 4,127 29
Hazardous Gas Alarm System 1,476 775 91
Mobilization Income 2,204 2,144 3
Other Income 5,439 4,488 21
Total revenue 84,745 56,384 50

        Canada United States
Three Months Ended March 31, 2011 2010 2011 2010
         
EDR rental days (#) 46,100 35,700 89,100 68,000
PVT rental days (#) 45,100 34,700 62,100 43,000

Electronic Drilling Recorder

Consistent with prior years, the Pason Electronic Drilling Recorder ("EDR") remains the Company's prime product.  The EDR provides a complete system of drilling data acquisition, data networking and drilling management tools and reports at both the wellsite and customer offices.  The EDR is the base product from which all other rigsite instrumentation products are linked.  By linking these products, a number of otherwise redundant elements such as data processing, display, storage, and networking are eliminated.  This ensures greater reliability and a more robust system of instrumentation for the customer. The EDR, despite being the Company's most mature product, still generated a 61% increase in revenue due to increased pricing in both Canada and the U.S. and expanding demand by customers for EDR peripheral devices.

During the first quarter of 2011, the EDR was installed on 97% of all active rigs in Canada and just under 60% of the rigs in the U.S.

In Canada, until the start of 2011, industry days used to calculate market share were based upon a twenty-four hour period.  As a result, since the adoption of the Company's new billing policy described below, Canada was reporting slightly lower market share figures than was actually the case. Starting in 2011, the industry drilling day now recognizes these partial days and brings this method of activity reporting is line with how the Company bills.  This has increased the Company's calculated market share for the first quarter.

In the U.S. the opposite impact is occurring. The Company is tracking EDR rental days under the new partial billing method but the industry days that are reported are still calculated on a twenty-four hour basis. The Company's calculated U.S. market share for the first quarter of 2011 was 59% but management believes this is understated by almost three points because of the inconsistency between Pason's method of tracking rental days and how the industry calculates drilling days.

The method in which the Company bills its customers has impacted both the Canadian and U.S. market share figures. Previously, the Company billed for an entire days worth of rentals regardless of whether the equipment was activated for the entire twenty-four hour period or not. To address customer concerns, the Company implemented a change to bill in increments, recognizing the fact that during the initial start up or tear down of a rig the equipment is only utilized a portion of the day.

This partial billing process has been in place in Canada since 2009 and was rolled out to the U.S. market beginning in 2011.

The Company believes that there was no underlying change to the Company's relative competitive position in either country.

Pit Volume Totalizer

The Pit Volume Totalizer ("PVT") is Pason's proprietary solution for the detection and early warning of "kicks" that are caused by hydrocarbons entering the wellbore under high-pressure and expanding as they migrate to the surface.  Revenue increases for this product were in line with the rise in drilling days in North America, and revenue was enhanced by further penetration in the U.S. During the first quarter of 2011, the PVT was installed on 98% of rigs with a Pason EDR in Canada and 70% in the U.S., compared to 97% and 63%, respectively, in 2010.

Communications

Pason's communications rental revenue is derived from the Company's automatic aiming satellite system.  This system provides high-speed wellsite communications for email and web application management tools.  Pason displays all data in standard forms on its Internet DataHub, although if customers require greater analysis or desire to have the information transferred to another supplier's database, data is available for export from the Pason DataHub using WITSML (a specification for transferring data amongst oilfield service companies, drilling contractors and operators).  During 2010, the Company began complimenting its satellite equipment with High Speed Packet Access ("HSPA"), a high speed wireless ground system that requires  lower capital cost, less service and lower cost per internet kilobyte, benefiting company margins. In Canada, HSPA has been installed on 70% of the rigs, ramping up to 100% throughout the year. The Company was providing communications services on most of the rigs with a Pason EDR in both Canada and the U.S.

Total Gas System

The Pason Total Gas System ("TGAS") measures the total hydrocarbon gases (C1 through C5) exiting the wellbore, and then calculates the lag time to show the formation depth where the gases were produced.  This complex system provides a more accurate gas sample than competitor systems. Pason's TGAS was installed on 38% of Canadian and 17% of U.S. land rigs operating with a Pason EDR system in the first quarter of 2011.

Automatic Driller

Pason's Automatic Driller ("ADR") is used to maintain constant weight on the drill bit while a well is being drilled. During the first three months of 2011, Pason's ADR was installed on 74% of Canadian and 44% of U.S. land rigs (compared to 33% in 2010 in the U.S.) operating with a Pason EDR system.

Hazardous Gas Alarm System

Pason's Hazardous Gas Alarm System monitors both lower explosive limit gases (LEL) and H2S where both readings and an alarm system are integrated with the EDR.  During the first three months of 2011, Pason's Hazardous Gas Alarm System was installed on 16% of Canadian rigs, a consistent ratio compared to prior periods, and 6% of U.S. land rigs operating with a Pason EDR system, an increase from 2% of U.S. land rigs in the same period in 2010.

Discussion of Operations

United States Operations

Three months ended March 31, 2011 2010 Change
(000s) ($) ($) (%)
Revenue      
  Electronic Drilling Recorder 19,153 10,797 77
  Pit Volume Totalizer 7,620 4,897 56
  Communications 4,179 2,187 91
  Automatic Driller 4,828 2,432 99
  Total Gas System 1,884 1,296 45
  Hazardous Gas Alarm System 327 126 160
  Mobilization Income 1,532 1,849 (17)
  Other Income 1,038 1,338 (22)
Total Revenue 40,561 24,922 63
Operating costs 15,565 15,375 1
Depreciation and amortization 5,287 5,176 --
Segment operating profit 19,709 4,371 351

U.S. segment revenue rebounded sharply with a 63% increase over the 2010 comparable period (71% increase when measured in USD), which compared very favourably with U.S. drilling industry days that were up 32% over the first quarter of 2010.  First quarter revenue, when measured in USD, was a record for any first quarter at USD $41.1 million.

Performing better than the market increase is a result of the following factors:

  • Better pricing. Prices, which were increased by approximately 30% in the second quarter of 2010, held steady throughout the balance of 2010 and into 2011. The net impact of average weighted pricing, when comparing the first quarter of 2011 to the first quarter of 2010, was to increase revenue by approximately 28% in USD, or an increase of 21% when measured in Canadian dollars.
  • More products on each rig.  Revenue was increased by more products on each rig, primarily with gains in PVT and ADR rentals, which contributed to approximately a 10% revenue gain.

The factors explained above resulted in first quarter revenue per industry day of $268 (USD$272) in 2011 compared to $206 (USD$198) in 2010 and $233 (USD$185) in 2009. Segment profit, as a percentage of revenue, was 49%, a significant improvement over the 18% and 12% realized in the first quarters of 2010 and 2009, respectively.

The majority of the 2010 revenue in the "Other" caption relates to geological services revenue. During the early part of 2010 the Company ceased providing manned geological services.

The strengthening margin in the U.S. segment was aided by the Company's cost structure, which is largely fixed. This is evident from the fact that operating costs in the quarter were essentially flat as compared to the first three months of 2010 while revenue increased 63%. All significant expense categories saw very little change from one year to the other.

Canadian Operations

Three months ended March 31, 2011 2010 Change
(000s) ($) ($) (%)
Revenue      
  Electronic Drilling Recorder 12,197 8,986 36
  Pit Volume Totalizer 6,914 4,890 41
  Communications 7,204 5,216 38
  Automatic Driller 4,672 3,699 26
  Total Gas System 3,181 2,360 35
  Hazardous Gas Alarm System 830 473 75
  Mobilization Income 266 274 --
  Other Income 1,825 706 159
Total Revenue 37,089 26,604 40
Operating costs 10,756 6,768 59
Depreciation and amortization 5,540 5,022 10
Segment operating profit 20,793 14,814 40

Canadian segment revenue rose 40%, which was a significant increase over the change in the number of Canadian drilling industry days. The improvement in revenue was due in to an increase in EDR rental days of 29% and improved pricing. Prices were reduced by approximately 20% in the second quarter of 2009 and did not rise again until a 10% price increase was applied in the fourth quarter of 2010. The net impact of average weighted pricing, when comparing the first quarter of 2011 to 2010, was an increase to revenue by approximately 8%.

The factors explained above resulted in first quarter revenue per industry day of $770 in 2011 compared to $680 in 2010 and $768 in 2009.

Segment profit, as a percent of revenue, was 56%, similar to the same period in 2010 and much better than the 40% realized in the first three months of 2009. The profit for the first quarter was negatively impacted by the following factors which reduced operating profit:

  • Total legal costs were $1.8 million as the Canadian trial for the ADR lawsuit took place in February, 2011.
  • $0.7 million of net expenses relating to water treatment.
  • Repair cost increases of $0.7 million over the similar period in 2010 due to increased rig activity.

Taking these factors into account, all other operating costs increased 11% year over year, which is more in line with the Company's fixed cost structure, and is much smaller than the 40% increase in revenue.

International Operations

Three months ended March 31, 2011 2010 Change
(000s) ($) ($) (%)
Revenue      
  Electronic Drilling Recorder 2,081 974 107
  Pit Volume Totalizer 838 489 71
  Communications 48 69 (30)
  Automatic Driller 568 214 165
  Total Gas System 259 471 (45)
  Hazardous Gas Alarm System 319 176 81
  Mobilization Income 406 21 1,833
  Other Income 2,576 2,444 5
Total Revenue 7,095 4,858 45
Operating costs 4,560 2,992 52
Depreciation and amortization 2,118 1,150 84
Segment operating profit 417 716 (42)

Revenue in the International operations improved 45% from the first quarter of 2010, however, operating profit declined by $0.3 million. A number of factors influenced these results:

  • At the close of 2010, the Company purchased the distribution rights and operating companies of its Latin American partner. This contributed approximately $2.3 million in additional revenue year over year.
  • Operating profit in the South America countries was $0.5 million higher in the first quarter of 2011 compared to the same period 2010, as the Company now benefits from 100% of the operating results.
  • Drilling activity in Mexico collapsed during the second half of 2010. This reduction in active rig count reduced profits by $0.4 million from 2010 to 2011. So far in 2011, the active rig count has increased month over month and the Company anticipates that this will lead to better operating results in the latter half of this year.
  • Australia was hit by record flooding in late 2010, and while things are improving, the rig count is still off from 2010 first quarter levels. This resulted in a loss of $0.4 million in the quarter compared to a profit of $0.4 million in 2010's first quarter.
  • Our International segment includes Pason Offshore, which represents the offshore portion of the business acquired from Petron. The rental portion of this business unit was significantly impacted by the reduction in Gulf of Mexico drilling activity caused by the BP oil spill. In addition, the decision was made to only offer a rental solution in the Company's international operations, using legacy Pason equipment, with some Petron software to meet this need. Only a small amount of equipment will be sold to meet replacement part needs on its installed base of prior sales as well as to meet the needs of drilling contractors who insist on a purchased solution. As a result of this decision, Offshore will provide support services to other International markets, whether operated by a local partner or directly by Pason. This change in focus has reduced losses by approximately $0.6 million from 2010 levels.

Summary of Quarterly Results

Three Months Ended(1) Jun 30, 2009 Sep 30, 2009 Dec 31, 2009 Mar 31, 2010 Jun 30, 2010 Sep 30, 2010 Dec 31, 2010 Mar 31, 2011
(000s, except per share data) ($) ($) ($) ($) ($) ($) ($) ($)
Revenue 22,251 28,422 41,013 56,384 51,031 68,653 73,494 84,745
EBITDA(2) 994 8,261 13,620 25,390 21,512 34,606 36,016 44,729
  Per share - basic 0.01 0.10 0.17 0.31 0.26 0.42 0.44 0.55
  Per share - diluted 0.01 0.10 0.17 0.31 0.26 0.42 0.44 0.55
Funds flow from operations(2) 3,058 7,373 12,238 20,454 18,764 26,856 27,899 39,082
  Per share - basic 0.04 0.09 0.15 0.25 0.23 0.33 0.34 0.48
  Per share - diluted 0.04 0.09 0.15 0.25 0.23 0.33 0.34 0.48
(Loss) earnings (8,706) (4,200) 2,480 7,891 6,157 11,901 10,525 17,757
  Per share - basic (0.11) (0.05) 0.03 0.10 0.08 0.15 0.13 0.22
  Per share - diluted (0.11) (0.05) 0.03 0.10 0.08 0.15 0.13 0.22

(1) 2010 comparative figures have been restated to conform to International Financial Reporting Standards. 2009 figures are presented in accordance with the Company's previous accounting framework, Canadian generally accepted accounting principles.

(2)  EBITDA is defined as earnings before interest expense, income taxes, stock-based compensation expense and depreciation and amortization expense. Funds flow from operations is defined as earnings adjusted for depreciation and amortization expense, stock-based compensation expense, future income taxes and other non-cash items impacting operations as presented in the Consolidated Statements of Cash Flows. These definitions are not recognized measures under International Financial Reporting Standards, and accordingly, may not be comparable to measures used by other companies.

Variations in Pason's quarterly financial results are due in part to the seasonality of the oil and gas service industry in Canada, which is somewhat offset by the less seasonal nature of U.S. and International operations.  The first quarter is generally the strongest quarter for the Company due to strong activity in Canada when location access is best during the winter.  The second quarter is always the slowest due to spring break up in Canada when many areas are not accessible due to ground conditions, and therefore, do not permit the movement of heavy equipment.  Activity generally increases in the third quarter, depending on the year, as ground conditions have often improved and location access becomes available; however, a rainy summer can have a significant adverse effect on drilling activity.  By the fourth quarter, often the Company's second strongest quarter, access to most areas in Canada become available with ground freezing.  Consequently, the performance of the Company may not be comparable quarter to consecutive quarter and should be considered on the basis of results for the whole year, or by comparing results in a quarter with results in the same quarter for the previous year.

Current Quarter versus Q1 2010
The active rig count in both Canada and the U.S. improved significantly over the first quarter of 2010, resulting in significant gains in all of the Company's key metrics. Revenue increased 50%, EBITDA was up 76% and funds flow from operations almost doubled over last year.

Net earnings increased to $17.8 million or $0.22 per share compared to $7.9 million or $0.10 per share in the first quarter of 2010. The net earnings increase would have been higher if not for the following items:

  • Increase in legal expenses of $1.6 million in 2011 relating to the Canadian trial of the ADR lawsuit.
  • Net expenses related to the water cleaning initiative were $1.2 million for the first quarter of 2011.
  • Stock-based compensation expense increased by $3.6 million compared to the first quarter of 2010 as a result of an increase in the Company's share price, which impacts the fair value of options granted under the Black-Scholes option pricing model.
  • As required by generally accepted accounting principles, gains and losses from foreign exchange changes relating to monetary assets and liabilities must be taken into earnings in the period in which they occurred.  The strengthening Canadian dollar against the U.S dollar resulted in a foreign exchange loss of $1.7 million. The equivalent amount in the first quarter of 2010 was a slight gain of $0.1 million.

Current Quarter versus Q4 2010
The Company's first quarter is usually its strongest due in part to the seasonality of the Canadian market while the fourth quarter is generally the second strongest quarter. Revenue rose 15% to $84.7 million, funds flow from operations was up 40% to $39.1 million and earnings increased 69% compared to the fourth quarter of 2010.  Earnings per share were $0.22 versus $0.13 in the last quarter of 2010.

This improvement was primarily driven by the Canadian segment, which realized an operating profit of $20.8 million compared to a profit of $12.4 million in the last quarter of 2010. This is mostly attributable to an increase in drilling days of 31% and the benefit of a full quarter of the price increase that was put in place in the fourth quarter of 2010.

In addition to the increase in the Canadian business unit, the Company's International segment realized an operating profit of $0.4 million versus a loss of $2.7 million in the fourth quarter of 2010. This improvement is a combination of the following factors:

  • Improvement in the operating results at Pason Offshore business unit of approximately $2.0 million, relating to increased revenue and a reduction in operating and amortization costs.
  • Continual improvement in the Mexico market and the fact that the Company now realizes 100% of the operating results generated in Latin America added additional profit of close to $1.0 million.

Also impacting the comparison to 2010 fourth quarter results is that in the fourth quarter of 2010 assets related to the 2009 purchase of Petron Industries were written down by $5.5 million as well as the foreign exchange loss due to the strengthening Canadian dollar was $1.7 million higher in the fourth quarter of 2010 compared to the first three months of 2011.

Liquidity and Capital Resources

At March 31, 2011, the Company's liquidity position and improvement over the prior year is detailed in the table below.

Three months ending March 31, 2011 2010(1) Change
(000s) ($) ($) (%)
Cash 99,929 106,214 (6)
Working Capital 121,536 122,235 --
Funds flow from operations 39,082 20,454 91
Capital expenditures 21,293 4,319 393
As a % of funds flow 54.5 21.1 158

(1) 2010 comparative figures have been restated to conform to International Financial Reporting Standards.

The Company's cash balance was down slightly from the prior year end, despite increases in dividends, capital expenditures and the repurchase of Latin American rights in 2010.  In addition to higher cash flow from operating activities the Company benefited from greater exercise of Company stock options, which totalled $1.4 million for the first quarter of 2011 compared to $0.1 million in the first 3 months of 2010.

Contractual Obligations

  Less than 1 year 1 - 3 years Thereafter Total
(000s) ($) ($) ($) ($)
Operating leases 4,135 5,419 3,865 13,419

Contractual obligations relate to minimum future lease payments required primarily for operating leases for certain facilities and vehicles.

During the first three months of 2011 the Company purchased 0.7 million stock options for a total cash consideration of $2.2 million.

At March 31, 2011, the Company had no capital lease obligations, and other than the operating leases detailed above, it has no off-balance sheet arrangements.

The Company has a $5.0 million committed revolving credit facility available.  At March 31, 2011, no amount had been drawn on the facility.

Disclosure of Outstanding Share and Options Data

As at May 3, 2011, there were 81.9 million common shares and 4.9 million options issued and outstanding.

Accounting Changes

Convergence with International Financial Reporting Standards

Canada's Accounting Standards Board ratified a plan that resulted in Canadian GAAP being converged with IFRS on January 1, 2011.  The Company was required to report its financial results under IFRS effective January 1, 2011, with quarterly comparatives for 2010.  Management completed a detailed assessment, with involvement and input from the Company's Board of Directors (including the Audit Committee) and its external auditors. The Company focused primarily on the areas with the highest potential impact to the Company: including the choices under IFRS 1 (First Time Adoption), capital assets, impairment of assets and stock-based compensation. The areas with the greatest impact were the retroactive application of IFRS and stock-based compensation expense.

A more detailed explanation of the impact of the adoption of IFRS can be found in note 21 to the Condensed Consolidated Interim Financial Statements at March 31, 2011 which will be posted on SEDAR.com.

Critical Accounting Estimates

The preparation of the consolidated financial statements requires that certain estimates and judgments be made with respect to the reported amounts of revenue and expenses and the carrying value of assets and liabilities.  These estimates are based on historical experience and management's judgments, and as a result, the estimates used by management involve uncertainty and may change as additional experience is acquired.

Depreciation and Amortization

The accounting estimates that have the greatest impact on the Company's financial statements are depreciation and amortization.  Depreciation of the Company's capital assets includes estimates of useful lives.  These estimates may change with experience over time so that actual results could differ significantly from these estimates.

Carrying Value of Capital Assets

The carrying amounts of the Company's non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. Judgments and assessments are made to determine whether an event has occurred that indicates a possible impairment. If any such indication exists, then the asset's recoverable amount is estimated. For goodwill, and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year.

Risk and Uncertainty

Pason has implemented a Risk Management framework that helps the Company manage the reality that future events, decisions or actions may cause undesirable effects.  The framework takes a value-based approach to identifying, prioritizing, communicating, mitigating and monitoring risks and aligns this with the organizations appetite for risk considering our culture, strategy and objectives.

Although a framework can help the Company to manage its risks the Company's performance is subject to a variety of risks and uncertainties.  Although the risks described below are the risks that we believe are material, there may also be risks of which we are currently unaware, or that we currently regard as immaterial based upon the information available to us.  Interested parties should be aware that the occurrence of the events described in these risk factors, could have a material adverse effect on our business, operating results and financial condition.

Operating Risks

Pason derives the majority of its revenue from the rental of instrumentation and data services to oil and gas companies and drilling contractors in Canada, the U.S., Australia and Latin America.  The demand for our products is directly related to land-based or offshore drilling activity funded by energy companies' capital expenditure programs.  A substantial or extended decline in energy prices or diversion of funds to large capital programs could adversely affect capital available for drilling activities directly impacting Pason's revenue.

Commodity Prices

Prices for crude oil and natural gas fluctuate in response to a number of factors beyond Pason's control. Factors which affect prices include but are not limited to; the actions of the Organization of Petroleum Exporting Countries, world economic conditions, government regulation, political stability in the Middle East and elsewhere, the foreign supply of crude oil, the price of foreign imports, the availability of alternate fuel sources and weather conditions.  Any of these can reduce the profits of energy companies reducing the amount of drilling activity.

Seasonality

Drilling activity in Canada is seasonal due to weather that limits access to leases in the spring and summer, making the first and last quarters of each year the peak level of demand for Pason's services due to the higher level of drilling activity.  The length of the drilling season can be shortened due to warmer winter weather or rainy seasons. Pason can offset some of this risk, although not eliminate it, through continued growth in the U.S. and internationally where activity is less seasonal.

Proprietary Rights

Pason relies on innovative technologies and products to protect its competitive position in the market. To protect Pason's intellectual property the company employs trademarks, patents, employment agreements and other measures to protect trade secrets and confidentiality of information.  Pason also believes that due to the rapid pace of technological change in the industry, technical expertise, knowledge and innovative skill, combined with an ability to rapidly develop, produce, enhance and market products, also provides protection, in maintaining a competitive position.

Litigation

The Company is involved in various claims and litigation arising in the normal course of business.  While the outcome of these matters is uncertain and there can be no assurance that such matters will be resolved in Pason's favour, the Company does not currently believe that the outcome of any pending or threatened proceedings related to these or other matters, or the amounts which the Company may be required to pay by reason thereof, would individually or in the aggregate have a material adverse impact on its financial position, results of operations or liquidity.

Credit Risk

Pason is exposed to credit risk to the extent that its customers, operating primarily in the oil and natural gas industry, may experience financial difficulty and would be unable to meet their obligations.  However, Pason has a large number of customers on both the Operator and Contractor side, which minimizes exposure to any single customer.

Availability of Qualified Personnel

Due to the specialized and technical nature of Pason's business, Pason is highly dependent on attracting and retaining qualified or key personnel.  There is competition for qualified personnel in the areas where Pason operates, and there can be no assurance that qualified personnel can be attracted or retained to meet the growth needs of the business.  To mitigate this risk Pason has a Human Resources Manager and continues to engage the services of recruiters to improve recruiting effectiveness.

Alternative Energies and Reduction of Green House Gases

There continues to be extensive discussions at all levels of government worldwide and by the public concerning the burning of fossil fuels and the impact this may have on the global environment.  A number of countries have publicly committed to further advance the reduction of greenhouse gas emissions.  Though it is much too early to determine the impact on the oil and gas industry the global response to these initiatives may lead to, among other things, increased focus on fuel conservation measures, additional research into renewable resources and stringent limits on the amount of carbon dioxide emissions.  The availability of alternative fuel sources, reductions in global consumption or government regulations aimed at reducing the use of fossil fuels could negatively impact energy companies, which could in turn reduce the available capital for drilling programs, thereby impacting demand for associated drilling rig rental instrumentation.

International Operations

Over 90% of Pason's revenues are generated in North America, which limits exposure to risks and uncertainties in foreign countries. Pason's assets outside of North America may be adversely affected by changes in governmental policy, social instability or other political or economic developments beyond Pason's control, including expropriation of property, cancellation or modification of contract rights and restrictions on repatriation of cash.  Pason has undertaken to mitigate these risks where practical and considered warranted.

Foreign Exchange Exposure

The Company operates internationally and is primarily exposed to exchange risk relative to the U.S. dollar.   The Canadian operations are exposed to currency risk on U.S. denominated financial assets and liabilities with fluctuations in the rate recognized as foreign exchange gains or losses in the Consolidated Statements of Operations.  The Company's self-sustaining foreign subsidiaries expose the Company to exchange rate risk on the translation of their financial assets and liabilities to Canadian dollars for consolidation purposes.  Adjustments arising when translating the foreign subsidiaries into Canadian dollars are reflected in the Consolidated Statements of Comprehensive Income (Loss) as unrealized foreign currency translation adjustments.  The Company has not hedged either one of these risks.

First Quarter Conference Call and Annual General Meeting

Pason will be conducting a conference call for interested analysts, brokers, investors and media representatives to review its first quarter results at 9:00 a.m. (Calgary time) on Thursday, May 5th, 2011.  The conference call dial-in number is 1-888-231-8191, conference ID # is 56725469.  You can access the 7-day replay by dialing 1-800-642-1687, password 56725469.

Shareholders are also invited to attend the Company's Annual General Meeting on Monday, May 9th, 2011 at 3:30 p.m. (Calgary time) in the offices of Pason Systems Inc., 6120 Third Street S.E., Calgary, Alberta.

Pason is a leading international provider of specialized rental and sold oilfield instrumentation systems for use on land and offshore rigs.  The Company's tightly integrated package of products and services, including data acquisition, wellsite reporting software, remote communications and Internet information management tools, maximizes rig uptime and minimizes operating costs.

Pason's common shares trade on the Toronto Stock Exchange under the symbol PSI.  Additional information, including the Company's Annual Report and Annual Information Form for the year ended December 31, 2010, is available on SEDAR at www.sedar.com or on the Company's website at www.pason.com.

Condensed Consolidated Interim Financial Statements

Condensed Consolidated Interim Balance Sheets

         
As at,   March 31, 2011 December 31, 2010
January 1, 2010
(000s) (unaudited)   ($) ($) ($)
Assets        
Current        
  Cash and cash equivalents   99,929 110,400 109,849
  Trade and other receivables   84,233 79,880 39,102
  Prepaid expenses   1,008 1,489 1,416
  Income taxes recoverable   -- -- 2,928
  Total current assets   185,170 191,769 153,295
Non-current        
  Property, plant and equipment   165,798 161,882 169,012
  Intangible assets   38,610 38,588 27,195
  Deferred tax assets   7,214 9,843 4,771
  Total non-current assets   211,622 210,313 200,978
Total assets   396,792 402,082 354,273
Liabilities and Equity        
Current        
  Trade payables, accruals and provisions   48,039 51,398 29,780
  Income taxes payable   2,213 9,021 --
  Stock-based compensation liability   13,382 11,645 3,994
  Dividend payable   -- 13,890 11,408
  Total current liabilities   63,634 85,954 45,182
Non-current        
  Stock-based compensation liability   2,760 1,360 1,644
  Deferred tax liabilities   4,739 5,084 2,524
  Total non-current liabilities   7,499 6,444 4,168
Equity        
  Share capital   76,695 75,040 71,864
  Contributed surplus   13,021 13,228 15,139
  Accumulated other comprehensive loss   (9,278) (6,048) --
  Retained earnings   245,221 227,464 217,920
  Total equity   325,659 309,684 304,923
Total liabilities and equity   396,792 402,082 354,273
         
      

Certain 2010 comparative figures have been restated to conform to International Financial Reporting Standards.

Condensed Consolidated Interim Statements of Operations

       
Three months ended March 31,   2011 2010
(000s, except per share data) (unaudited)   ($) ($)
Revenue      
  Equipment rentals and other   84,745 56,384
Operating expenses      
  Rental services   26,773 23,213
  Local administration   4,108 1,922
  Depreciation and amortization   12,945 11,348
    43,826 36,483
Operating profit   40,919 19,901
Other expenses      
  Research and development   3,859 3,849
  Corporate services   3,162 1,850
  Stock-based compensation   5,447 1,814
  Manufacturing and distribution   388 211
  Foreign exchange and other   1,726 (51)
    14,582 7,673
Income before income taxes   26,337 12,228
  Income taxes   8,580 4,337
Net income   17,757 7,891
Earnings per share      
  Basic   0.22 0.10
  Diluted   0.22 0.10
       

Certain 2010 comparative figures have been restated to conform to International Financial Reporting Standards.

Condensed Consolidated Interim Statements of Comprehensive Income

       
Three months ended March 31,   2011 2010
(000s) (unaudited)   ($) ($)
Net income   17,757 7,891
Other comprehensive loss      
  Foreign currency translation adjustment   (3,230) (3,154)
Total comprehensive income   14,527 4,737
       

Certain 2010 comparative figures have been restated to conform to International Financial Reporting Standards.

Condensed Consolidated Interim Statements of Changes in Equity

             
      Share Capital Contributed Surplus Accumulated
Other
Comprehensive Loss
Retained Earnings Total Equity
(000s) (unaudited)   ($) ($) ($) ($) ($)
Balance at January 1, 2010   71,864 15,139 -- 217,920 304,923
  Net income   -- -- -- 7,891 7,891
  Other comprehensive loss   -- -- (3,154) -- (3,154)
  Exercise of stock options   154 -- -- -- 154
  Options exercised that were previously expensed   19 (19) -- -- --
  Stock-based compensation expense   -- 98 -- -- 98
Balance at March 31, 2010   72,037 15,218 (3,154) 225,811 309,912
  Dividends   -- -- -- (26,930) (26,930)
  Net income   -- -- -- 28,583 28,583
  Other comprehensive loss   -- -- (2,894) -- (2,894)
  Exercise of stock options   2,582 -- -- -- 2,582
  Options exercised that were previously expensed   421 (421) -- -- --
  Stock-based compensation expense   -- (1,569) -- -- (1,569)
Balance at December 31, 2010   75,040 13,228 (6,048) 227,464 309,684
  Net income   -- -- -- 17,757 17,757
  Other comprehensive loss   -- -- (3,230) -- (3,230)
  Exercise of stock options   1,442 -- -- -- 1,442
  Options exercised that were previously expensed   213 (213) -- -- --
  Stock-based compensation expense   -- 6 -- -- 6
Balance at March 31, 2011   76,695 13,021 (9,278) 245,221 325,659
             

Certain 2010 comparative figures have been restated to conform to International Financial Reporting Standards.

Condensed Consolidated Interim Statements of Cash Flows

       
Three months ended March 31,   2011 2010
(000s) (unaudited)   ($) ($)
Cash flows from operating activities      
  Net income   17,757 7,891
Adjustment for non-cash items:      
  Depreciation and amortization   12,945 11,348
  Stock-based compensation   3,868 1,028
  Deferred income taxes   3,144 351
  Unrealized foreign exchange loss (gain)   1,368 (164)
    39,082 20,454
Movements in working capital      
  Increase in trade and other receivables   (5,392) (13,855)
  Decrease in prepaid expenses   458 155
  Increase in income taxes   4,086 4,374
  (Decrease) increase in trade payables, accruals and provisions   (995) 3,586
  Increase in stock-based compensation liability   1,518 416
  Effects of exchange rate changes   973 1,172
    648 (4,152)
Cash generated from operating activities   39,730 16,302
   Income tax paid   (10,900) --
Net cash from operating activities   28,830 16,302
Cash flows used in financing activities      
  Proceeds from issuance of common shares under the option plan   1,442 154
  Purchase of stock options   (2,243) --
  Payment of dividends   (13,890) (11,408)
Net cash used in financing activities   (14,691) (11,254)
Cash flows used in investing activities      
  Additions to property, plant and equipment   (19,367) (3,347)
  Deferred development costs, net of investment tax credits received   (1,926) (972)
  Proceeds on disposal of property, plant and equipment   -- 12
  Business acquisitions, net of cash acquired   -- (2,829)
  Changes in non-cash working capital   (2,087) (367)
Net cash used in investing activities   (23,380) (7,503)
Effect of exchange rate changes on cash   (1,230) (1,180)
Net decrease in cash and cash equivalents   (10,471) (3,635)
Cash and cash equivalents, beginning of period   110,400 109,849
Cash and cash equivalents, end of period   99,929 106,214
       

Certain 2010 comparative figures have been restated to conform to International Financial Reporting Standards.

Operating Segments

The Company operates in three geographic segments: Canada, the United States and Internationally (Latin America, Offshore and the Eastern Hemisphere). The amounts related to each segment are as follows:

         
Three Months Ended March 31, 2011 Canada United States International Total
  ($) ($) ($) ($)
Revenue 37,089 40,561 7,095 84,745
Operating costs 10,756 15,565 4,560 30,881
Depreciation and amortization 5,540 5,287 2,118 12,945
Segment operating profit 20,793 19,709 417 40,919
Research and development       3,859
Corporate services       3,162
Stock-based compensation       5,447
Manufacturing and distribution       388
Foreign exchange and other       1,726
Income taxes       8,580
Earnings       17,757
Capital expenditures 8,784 9,439 3,070 21,293
Goodwill -- 5,546 2,600 8,146
Intangible assets 18,321 5,567 6,576 30,464
Segment assets 162,650 174,649 59,493 396,792
Segment liabilities 43,709 17,475 9,949 71,133
         
         
Three Months Ended March 31, 2010 Canada United States International Total
  ($) ($) ($) ($)
Revenue 26,604 24,922 4,858 56,384
Operating costs 6,768 15,375 2,992 25,135
Depreciation and amortization 5,022 5,176 1,150 11,348
Segment operating profit 14,814 4,371 716 19,901
Research and development       3,849
Corporate services       1,850
Stock-based compensation       1,814
Manufacturing and distribution       211
Foreign exchange and other       (51)
Income taxes       4,337
Earnings       7,891
Capital expenditures 1,958 1,182 1,179 4,319
Goodwill -- 5,796 -- 5,796
Intangible assets 13,217 7,815 2,676 23,708
Segment assets 187,082 112,210 54,100 353,392
Segment liabilities 29,345 12,032 2,163 43,540

  Canada United States International Total
  ($) ($) ($) ($)
As at January 1, 2010        
Capital expenditures 11,838 3,687 5,968 21,493
Goodwill -- 5,972 -- 5,972
Intangible assets 12,888 8,335 -- 21,223
Segment assets 181,979 149,008 23,286 354,273
Segment liabilities 38,850 9,400 1,100 49,350
         
As at December 31, 2010        
Capital expenditures 18,192 22,545 9,427 50,164
Goodwill -- 5,676 2,600 8,276
Intangible assets 13,562 5,990 10,760 30,312
Segment assets 169,309 163,483 69,290 402,082
Segment liabilities 63,223 15,421 13,754 92,398

 

SOURCE Pason Systems Inc.

For further information:

Jim Hill 
Chairman, President and CEO 
Phone: (403) 301-3401 
Fax: (403) 301-3499
E-mail: jim.hill@pason.com 








David Elliott
Chief Financial Officer
Phone: (403) 301-3441
Fax: (403) 301-3499
E-Mail: david.elliott@pason.com

 


Custom Packages

Browse our custom packages or build your own to meet your unique communications needs.

Start today.

CNW Membership

Fill out a CNW membership form or contact us at 1 (877) 269-7890

Learn about CNW services

Request more information about CNW products and services or call us at 1 (877) 269-7890