Pason Reports Third Quarter 2016 Results

CALGARY, Nov. 9, 2016 /CNW/ - Pason Systems Inc. (TSX:PSI) announced today its 2016 third quarter results.

Performance Data


Three Months Ended September 30,


Nine Months Ended September 30,



2016


2015


Change


2016


2015


Change


(CDN 000s, except per share data)

($)


($)


(%)


($)


($)


(%)


Revenue

38,633


68,468


(44)


111,619


225,310


(50)


Loss

(7,117)


(18,558)


62


(29,296)


(13,771)


(113)



Per share – basic

(0.08)


(0.22)


64


(0.35)


(0.16)


(119)



Per share – diluted                              

(0.08)


(0.22)


64


(0.35)


(0.16)


(119)


EBITDA (1)

8,347


(2,717)



5,763


48,894


(88)



As a % of revenue

21.6


(4.0)



5.2


21.7


(17)


Adjusted EBITDA (1)

8,487


24,742


(66)


15,780


76,332


(79)



As a % of revenue

22.0


36.1


(14)


14.1


33.9


(20)


Funds flow from operations

9,130


23,791


(62)


11,491


76,330


(85)



Per share – basic

0.11


0.28


(61)


0.14


0.91


(85)



Per share – diluted

0.11


0.28


(61)


0.14


0.91


(85)


Cash from operating activities

4,653


16,332


(72)


18,977


119,165


(84)


Free cash flow (1)

3,412


5,902


(42)


6,783


75,419


(91)



Per share – basic

0.04


0.07


(43)


0.08


0.90


(91)



Per share – diluted

0.04


0.07


(43)


0.08


0.90


(91)


Capital expenditures

1,377


10,769


(87)


12,886


44,284


(71)


Working capital

191,785


244,324


(22)


191,785


244,324


(22)


Total assets

438,671


541,276


(19)


438,671


541,276


(19)


Total long-term debt







Cash dividends declared

0.17


0.17



0.51


0.51



Shares outstanding end of period (#000's)

84,367


83,772


1


84,367


83,772


1


(1) Non-IFRS financial measures are defined in the Management's Discussion and Analysis section.


 

Q3 2016 vs Q3 2015

The Company generated consolidated revenue of $38.6 million in the third quarter of 2016, down 44% from $68.5 million in the same period of 2015. Continuing depressed commodity prices have led to reduced activity in the all of the company's major markets compared to the same period in the prior year.

Consolidated EBITDA was $8.3 million in the third quarter, an increase of $11.1 million from the third quarter of 2015. Included in EBITDA in the prior year is an impairment charge of $26.6 million related to excess quantities of rental equipment. Adjusted EBITDA, which adjusts for foreign exchange and certain non-recurring charges, including impairment charges, decreased to $8.5 million, down from $24.7 million in the third quarter of 2015. 

The Company recorded a net loss of $7.1 million ($0.08 per share) in the third quarter of 2016, compared to a net loss of $18.6 million ($0.22 per share) recorded in the same period in 2015. The third quarter 2015 results include an impairment charge referred to above. Cost reduction programs previously implemented and a significant decline in depreciation expense from 2015 levels also impacted the comparison of third quarter 2016 results to 2015 amounts.    

President's Message

The environment for oilfield services remained very challenging worldwide during the third quarter. US drilling activity, as measured in industry days, dropped 39% from the previous year period, and declined 53% for the first nine months of 2016. Canadian drilling activity experienced a 38% year-over-year reduction for the quarter and a 45% reduction for the first nine months. Most international markets continued to be similarly affected.

Pason's third quarter results directly reflect these declines in drilling activity. Revenue for the quarter was $38.6 million, a 44% decline from the previous year. Adjusted EBITDA was $8.5 million, compared to $24.7 million in the previous year period and free cash flow was $3.4 million. The company incurred a loss for the quarter of $7.1 million or $0.08 per share. Significant previously implemented cost reductions, and lower depreciation expenses, partially offset the revenue decline.

US and Canadian EDR market share was essentially unchanged from the previous quarter. Revenue per EDR day in the US was up 4% for the third quarter compared to the previous year, driven by higher adoption of certain products. In Canada, Revenue per EDR day was down 8% year-over-year resulting from price concessions and lower adoption of certain peripheral products.

At September 30, 2016, our cash position stood at $155 million and working capital at $192 million. There is no debt on our balance sheet. We are maintaining our quarterly dividend at $0.17 share.

In the United States, drilling activity has followed a rebound in oil prices from February's low of US$26 a barrel to more than US$45.The Baker Hughes active rig count climbed above 550 for the first time since February, up from a low of 404 in May. However, the number of active rigs is still down by more than 200 over the same period in 2015. Almost half of the active rigs are operating in Texas and most of the recent growth came in the Permian Basin.

It is likely that the second quarter of 2016 was the low point for North American drilling activity both seasonally and cyclically and that we are in an environment of gradually improving drilling activity. However, oil prices continue to be volatile and the outlook remains uncertain. We don't expect significant increases in oil company capital spending plans in the near term. We also don't expect any improvements in pricing for some time. We believe that many producers will be reluctant to significantly dial up spending levels even as crude markets show tentative signs of recovery.

For the remainder of 2016, we aim to strike the optimal balance between cost control and investments in future growth. Our objective is to generate positive free cash flow before the dividend for the year. In Canada, we are experiencing increased competitive and pricing pressures. We are fully committed to holding onto our position as the service provider of choice for key operator and drilling contractor customers.

We are continuing to invest in future growth, including investing in new product development, service capabilities, infrastructure and systems, and in our international footprint. We plan to continue to allocate resources for R&D and IT and we intend to spend up to $20 million in capital expenditures in 2016. We are focusing our product development efforts on our "on-bottom" and "off-bottom" product road maps.

We are building on our strong market position and reputation, and seek opportunities where we can take advantage of our significant strengths. We believe that Pason continues to be well-positioned to maximize returns in the industry's upturn.

(signed)
Marcel Kessler
President and Chief Executive Officer
November 9, 2016

Management's Discussion and Analysis

The following discussion and analysis has been prepared by management as of November 9, 2016, 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 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 report are expressed in Canadian dollars unless otherwise indicated.

Additional IFRS Measures

In its interim condensed consolidated financial statements, the Corporation uses certain additional IFRS measures. Management believes these measures provide useful supplemental information to readers.

Funds flow from operations

Management believes that funds flow from operations, as reported in the Consolidated Statements of Cash Flows, is a useful additional measure as it represents the cash generated during the period, regardless of the timing of collection of receivables and payment of payables. Funds flow from operations represents the cash flow from continuing operations, excluding non-cash items. Funds flow from operations is defined as net income adjusted for depreciation and amortization expense, non-cash stock-based compensation expense, deferred taxes, and other non-cash items impacting operations.

Cash from operating activities

Cash from operating activities is defined as funds flow from operations adjusted for changes in working capital items.

Non-IFRS Financial Measures

These definitions are not recognized measures under IFRS, and accordingly, may not be comparable to measures used by other companies. These Non-IFRS measures provide readers with additional information regarding the Company's ability to generate funds to finance its operations, fund its research and development and capital expenditure program, and pay dividends.

Revenue per EDR Day

Revenue per EDR day is defined as the daily revenue generated from all products that the Company has on rent on a drilling rig that has the Company's base EDR installed. This metric provides a key measure on the Company's ability to increase production adoption and evaluate product pricing.

EBITDA

EBITDA is defined as net income before interest expense, income taxes, stock-based compensation expense, depreciation and amortization expense, and gains on disposal of investments.

Adjusted EBITDA

Adjusted EBITDA is defined as EBITDA, adjusted for foreign exchange, impairment of property, plant, and equipment, restructuring costs, and other items which the Company does not consider to be in the normal course of continuing operations.

Free cash flow

Free cash flow is defined as cash from operating activities plus proceeds on disposal of property, plant, and equipment, less capital expenditures, and deferred development costs.

Overall Performance


Three Months Ended September 30,


Nine Months Ended September 30,



2016


2015


Change


2016


2015


Change


(000s)

($)


($)


(%)


($)


($)


(%)


Revenue














Electronic Drilling Recorder (1)

16,200


29,722


(45)


46,817


98,014


(52)



Pit Volume Totalizer/ePVT

5,011


8,933


(44)


14,832


30,679


(52)



Communications (1)

3,799


6,236


(39)


10,388


19,383


(46)



Software

2,665


4,672


(43)


7,587


15,253


(50)



AutoDriller

2,259


4,943


(54)


6,542


16,457


(60)



Gas Analyzer

2,804


4,985


(44)


8,281


16,511


(50)



Other

5,895


8,977


(34)


17,172


29,013


(41)


Total revenue

38,633


68,468


(44)


111,619


225,310


(50)


(1)

A portion of the Company's Communications revenue was reclassified to EDR revenue to better reflect the nature of such revenue. 2015 comparative figures have been reclassified to conform with 2016 presentation. (Q3 2016 - $1,016 and YTD 2015 - $2,981).

 

Electronic Drilling Recorder (EDR) and Pit Volume Totalizer (PVT) rental day performance for Canada and the United States is reported below:

Canada


Three Months Ended September 30,


Nine Months Ended September 30,


2016

2015

Change


2016

2015

Change


#

#

(%)


#

#

(%)

EDR rental days

10,500

17,000

(38)


29,900

51,600

(42)

PVT rental days

9,600

15,900

(40)


27,600

48,600

(43)



















United States


Three Months Ended September 30,


Nine Months Ended September 30,


2016

2015

Change


2016

2015

Change


#

#

(%)


#

#

(%)

EDR rental days

23,800

46,000

(48)


67,400

159,200

(58)

PVT rental days

18,100

33,800

(46)


51,500

121,100

(57)

 

Electronic Drilling Recorder (EDR)

The Pason EDR remains the Company's primary 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 wellsite 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. Revenue generated from the EDR decreased 45% for the third quarter and 52% for the first nine months of  2016 compared to the corresponding period in 2015. This decrease is attributable to the industry slowdown, lower product adoption of certain EDR peripheral devices, and pricing pressures from customers. Industry activity in the US market decreased 39% in the third quarter of 2016 compared to the corresponding period in 2015 (53% on a year-to-date basis), while third quarter Canadian rig activity decreased 38% compared to the same period in 2015 (45% on a year-to-date basis). Canadian EDR days, which includes non-oil and gas-related activity,  decreased 38% in the third quarter of 2016 from 2015 levels (42% on a year-to-date basis), while US EDR days decreased by 48% from the third quarter of 2015 (58% on a year-to-date basis).

The Canadian business unit saw increased competition during the third quarter, including continued pricing pressure and the introduction and commercialization of a new EDR offering from an existing competitor. The Company does not believe these factors had a significant effect on the number of EDR days billed in the quarter.

The Pason EDR was installed on 53% of active land rigs in the US during the first nine months of 2016, compared to 58% in the same period  of  2015. This change in market share was primarily driven by changes in the mix of active customers and regions.

For purposes of market share, the Company uses the number of EDR days billed and oil and gas drilling days as reported by accepted industry sources.

The Company's International business unit is experiencing the same market conditions as the North American market except for Argentina, where drilling activity has not been impacted to the same degree seen in North America,and the Middle East, where the Company is realizing an increase in its share of net income from its Saudi Arabia joint venture as a result of a continuing increases in rig count and market penetration.

Pit Volume Totalizer (PVT) and Enhanced Pit Volume Totalizer (ePVT)

The ePVT 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. PVT revenue for the first nine months of 2016 was impacted by the decline in rig count activity, offset partially with continued customer adoption of the new ePVT. During the three months ended September 30, 2016, the ePVT was installed on 91% of rigs with a Pason EDR in Canada and 76% in the US, compared to 94% and 74% respectively, in the same period of 2015.

Communications

Pason's Communications revenue comes from a number of communication service offerings, including providing customers with bandwidth through the Company's automatically-aiming satellite system and terrestrial networks. This system provides reliable high-speed wellsite communications for email and web application management tools. Pason displays all data in standard forms on its DataHub web application, 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 among oilfield service companies, drilling contractors, and operators). The Company complements its satellite equipment with High Speed Packet Access (HSPA), a high-speed wireless ground system which provides automatic fail-over between satellite and terrestrial networks to achieve greater reliability in its service offering.

Communications revenue decreased by 39% in the third quarter of 2016 compared to the same period in 2015 due to the industry slowdown, offset by an increase in customer adoption of new communication solutions rolled out in the Canadian and US markets.

Software

The Pason DataHub is the Company's data management system that collects, stores, and displays drilling data, reports, and real-time information from drilling operations. The DataHub provides access to data through a number of innovative applications or services, including:

  • Live Rig View (LRV), which provides advanced data viewing, directional drilling, and 3D visualization of drilling data in real time via a web browser.
  • LRV Mobile, which allows users to access their data on mobile devices, including iPhone, iPad, BlackBerry, and Android.
  • WITSML, which provides seamless data sharing with third-party applications, enhancing the value of data hosted by Pason.
  • Additional specialized software, including directional offerings.

During the third quarter of 2016, 98% of the Company's Canadian customers and 89% of customers in the US were using all or a portion of the functionality of the DataHub, compared to 97% and 86% respectively in 2015.

AutoDriller

Pason's AutoDriller is used to maintain constant weight on the drill bit while a well is being drilled. During the nine months ended September 30, 2016, the AutoDriller adoption rates continue to decline and the Company anticipates this to continue due in most part to the drop in the number of mechanical rigs being deployed.

Gas Analyzer

The Pason Gas Analyzer measures the total hydrocarbon gases (C1 through C4 and CO2) exiting the wellbore, and then calculates the lag time to show the formation depth where the gases were produced. The Gas Analyzer provides information about the composition of the gas, and further calculates geologic ratios from the gas composition to assist in indicating the type of gas, natural gas liquid, or oil in the formation. During the third quarter of 2016, the Gas Analyzer was installed on 58% of Canadian and 31% of US land rigs operating with a Pason EDR system, compared to 62% and 26% for the Canadian and US segments respectively in the prior year period.

Other

Other is comprised mostly of the rental of service rig recorders in Latin America, the Electronic Choke Actuator, Hazardous Gas Alarm products, Mobilization revenue, sales of sensors and other systems sold by 3PS.

Discussion of Operations

United States Operations


Three Months Ended September 30,


Nine Months Ended September 30,



2016


2015


Change


2016


2015


Change


(000s)

($)


($)


(%)


($)


($)


(%)


Revenue














Electronic Drilling Recorder (1)

10,041


19,120


(47)


28,111


64,135


(56)



Pit Volume Totalizer/ePVT

2,902


4,908


(41)


8,252


17,949


(54)



Communications (1)

1,831


2,887


(37)


4,548


9,148


(50)



Software

1,829


3,062


(40)


4,924


10,321


(52)



AutoDriller

955


2,383


(60)


2,537


8,208


(69)



Gas Analyzer

1,428


2,383


(40)


4,103


8,342


(51)



Other

3,332


5,408


(38)


9,860


18,041


(45)


Total revenue

22,318


40,151


(44)


62,335


136,144


(54)


Operating costs

12,653


17,250


(27)


38,647


61,600


(37)


Depreciation and amortization

5,243


7,862


(33)


17,479


25,874


(32)


Segment operating profit

4,422


15,039


(71)


6,209


48,670


(87)


(1)

A portion of the Company's Communications revenue was reclassified to EDR revenue to better reflect the nature of such revenue. 2015 comparative figures have been reclassified to conform with 2016 presentation. (Q3 2015 - $795 and YTD 2015 - $2,366).

 


Three Months Ended September 30,

Nine Months Ended September 30,


2016

2015

2016

2015


$

$

$

$

Revenue per EDR day - USD


652


628


632


642

Revenue per EDR day - CAD


851


822


836


809

 

US segment revenue decreased by 44% in the third quarter of 2016 over the 2015 comparable period (46% decrease when measured in USD). For the first nine months, revenue decreased by 54% (58% decrease when measured in USD).

Industry activity in the US market during the third quarter of 2016 decreased 39% from the prior year, and 53% for the first nine months. US market share was 52% for the third quarter of 2016 compared to 61% during the three months ended September 30, 2015, primarily driven by changes in the mix of active customers and regions.

EDR rental days decreased by 48% for the quarter ended September 30, 2016, over the same time period in 2015, while revenue per EDR day in the third quarter of 2016 increased to US$652, an increase of US$24 over the same period in 2015. This increase is due to an uptick on adoption of certain key products, combined with continued customer acceptance of enhanced communication solutions, offset by selective pricing discounts on certain products.

For the first nine months, EDR rental days decreased 58%, while revenue per EDR day decreased by US$12 to US$632.

The decrease in industry activity, combined with a drop in market share accounted for the drop in revenue for both the quarter and nine months ended September 30, 2016.

Operating costs decreased by 27% in the third quarter relative to the same period in the prior year. When measured in USD, operating costs decreased 29% as the business unit continues to identify and implement changes to its fixed cost structure to meet the challenging business environment while maintaining customer service. The Company announced in the first quarter of 2016 that it would be closing its US business unit office in Golden, Colorado and consolidating all activities to its Houston, Texas office. This consolidation was completed in the third quarter of 2016.

Depreciation expense for the first nine months of 2016 decreased 33% over 2015 amounts, largely due to the asset impairment charges recorded in prior years and a significantly lower capital program.

Segment profit decreased by $10.6 million in the third quarter of 2016 compared to the corresponding period in 2015. Operating profit is down 87% for the nine months ending September, 2016 compared to 2015 levels.

Canadian Operations


Three Months Ended September 30,


Nine Months Ended September 30,



2016


2015


Change


2016


2015


Change


(000s)

($)


($)


(%)


($)


($)


(%)


Revenue














Electronic Drilling Recorder (1)  

4,030


6,814


(41)


11,717


21,339


(45)



Pit Volume Totalizer/ePVT

1,734


2,945


(41)


5,093


8,969


(43)



Communications (1)

1,676


2,901


(42)


4,864


8,701


(44)



Software

778


1,490


(48)


2,474


4,516


(45)



AutoDriller

796


1,482


(46)


2,201


4,669


(53)



Gas Analyzer

1,111


2,084


(47)


3,261


6,073


(46)



Other

630


1,107


(43)


1,970


3,156


(38)


Total revenue

10,755


18,823


(43)


31,580


57,423


(45)


Operating costs (2)

3,817


6,821


(44)


13,136


23,729


(45)


Depreciation and amortization

6,203


9,447


(34)


20,116


28,408


(29)


Segment operating profit (loss)

735


2,555


(71)


(1,672)


5,286



(1)

A portion of the Company's Communications revenue was reclassified to EDR revenue to better reflect the nature of such revenue. The 2015 comparative figures have been reclassified to conform with the 2016 presentation. (Q3 2015 - $200 and YTD 2015 - $580).

(2)

Certain expenses previously recorded in Other Expenses are now included as a business unit cost, to better reflect the nature of such costs. The 2015 comparative figures have been reclassified to conform with the 2016 presentation (Q3 2015 - $565 and YTD - $1,770).

 


Three Months Ended September 30,

Nine Months Ended September 30,


2016

2015

2016

2015


$

$

$

$

Revenue per EDR day - CAD


1,011


1,095


1,039


1,100

 

Canadian segment revenue decreased by 43% for the quarter ended September 30, 2016 compared to the same period in 2015. This drop is the result of a 38% decrease in the number of drilling industry days in the third quarter compared to 2015 levels.

EDR rental days decreased 38% in the third quarter of 2016 compared to 2015 (42% for the first nine months of 2016).

Revenue per EDR day decreased by $84 to $1,011 during the third quarter of 2016 compared to 2015, resulting from selective price discounts on certain products and lower product adoption on certain peripheral products, offset by higher adoption of key products. Revenue per EDR day for the first nine months of 2016 was $1,039, down $61 from the same period in 2015.

Operating costs decreased by 44% in the third quarter of 2016 relative to the same period in 2015 (45% on a year-to-date basis), primarily due to a drop in activity combined with cost control initiatives implemented by all of the business units.  

Depreciation expense decreased by approximately 34% and 29% for the three and nine months periods ended September 30, 2016, due to prior year's impairment charges and lower capital expenditures.

The third quarter operating income of $0.7 million is a decrease of $1.8 million from the prior year. Segment operating loss for the first nine months of 2016 is $1.7 million, compared to a profit of $5.3 million in the prior year.

International Operations


Three Months Ended September 30,


Nine Months Ended September 30,



2016


2015


Change


2016


2015


Change


(000s)

($)


($)


(%)


($)


($)


(%)


Revenue








Electronic Drilling Recorder (1)

2,129


3,788


(44)


6,989


12,540


(44)



Pit Volume Totalizer/ePVT

375


1,080


(65)


1,487


3,761


(60)



Communications (1)

292


448


(35)


976


1,534


(36)



Software

58


120


(52)


189


416


(55)



AutoDriller

508


1,078


(53)


1,804


3,580


(50)



Gas Analyzer

265


518


(49)


917


2,096


(56)



Other

1,933


2,462


(21)


5,342


7,816


(32)


Total revenue

5,560


9,494


(41)


17,704


31,743


(44)


Operating costs (2)

4,362


7,233


(40)


14,081


23,178


(39)


Depreciation and amortization

3,483


1,950


79


7,274


7,297



Segment operating (loss) profit

(2,285)


311



(3,651)


1,268



(1)

A portion of the Company's Communications revenue was reclassified to EDR revenue to better reflect the nature of such revenue.The  2015 comparative figures have been reclassified to conform with the 2016 presentation. (Q3 2015 - $21 and YTD 2015 - $35).

(2)

Certain expenses previously recorded in Other Expenses are now included as a business unit cost, to better reflect the nature of such expenses. The 2015 comparative figures have been reclassified to conform with the 2016 presentation (Q3 2015 - $77 and YTD 2015 - $455).

 

The market forces impacting the Company's US and Canadian segments also exist in the majority of the Company's International markets.

Revenue in the International operations segment decreased 41% in the third quarter of 2016 compared to the same period in 2015. Impacting the comparison of third quarter results of 2016 to the prior year was the devaluation of the Argentinian peso, which occurred in the fourth quarter of 2015. For the first nine months of 2016 revenue decreased $14.0 million, or 44%.

During the third quarter of 2016 the Company recorded a $1.4 million charge to recognize obsolete inventory. This charge is included in depreciation expense.

The segment operating loss was $2.3 million for the third quarter of 2016, compared to a small operating profit in the corresponding period in 2015. The year-to-date loss was $3.7 million compared to a profit of $1.3 million in the prior year.

Corporate Expenses


Three Months Ended September 30,

Nine Months Ended September 30,


2016


2015


Change

2016


2015


Change

(000s)

($)


($)


(%)

($)


($)


(%)

Other expenses






Research and development

5,358


7,288


(26)

17,615


25,431


(31)

Corporate services

3,956


5,134


(23)

12,360


15,040


(18)

Stock-based compensation

1,457


808


80

4,657


4,596


1

Other







Restructuring costs



10,861


2,572


322


Foreign exchange loss (gain)

96


904


(89)

(2,227)


(1,555)


43


Impairment charge


26,555



26,555



Gain on sale of investment




(2,290)



Other (1)

44



1,383


(134)


Total corporate expenses

10,911


40,689


(73)

44,649


70,215


(36)

(1)

 Certain expenses previously recorded in Other Expenses are now included as a business unit cost, to better reflect the nature of such expenses. The 2015 comparative figures have been reclassified to conform with the 2016 presentation (Q3 2015 - $642 and YTD 2015 - $2,225).

 

In the first quarter of 2016, the Company initiated additional cost reduction initiatives to address the prolonged downturn in oil and gas drilling activity. These actions included further staff reductions and office space consolidation.  As a result, the Company recorded a restructuring charge of $10,861 in the first quarter, which is comprised of $6,028 for employee termination and other staff-related costs, an onerous lease obligation charge of $3,682, which is calculated at the present value of the expected net cost of continuing with the lease after adjusting for sublease rentals, and the write-off of leasehold improvements and other related costs totaling $1,151. A similar initiative was completed in the second quarter of 2015 and a restructuring charge of $2,572 was recorded. In the third quarter 2015 results include an impairment charge related to excess quantities of equipment totaling $26,555.   

Q3 2016 vs Q2 2016

Consolidated revenue was $38.6 million in the third quarter of 2016 compared to $27.2 million in the second quarter of 2016, an increase of $11.4 million or 42%. The third quarter of the year is usually stronger compared to the second quarter due to the seasonality of the Canadian drilling activity. Activity in the WCSB showed only modest seasonal improvements as a result of wet weather in many parts and continued cautious spending from operators. The Canadian segment earned revenue of $10.8 million in the third quarter as compared to $5.0 million in the second quarter of 2016, an increase of $5.8 million. Revenue in the US market increased by $5.9 million, from $16.4 million in the second quarter of 2016 to $22.3 million in the third quarter of 2016. The US land rig count increased by approximately six rigs per week during the third quarter. US market share was consistent at 52%. The International segment experienced a revenue decrease of $0.2 million.

The Company recorded a net loss in the third quarter of 2016 of $7.1 million ($0.08 per share) compared to a loss of $11.3 million ($0.13 per share) in the second quarter of 2016.

Sequentially, EBITDA increased from a negative $2.2 million in the second quarter of 2016 to $8.3 million in the third quarter of 2016. Adjusted EBITDA, which adjusts for foreign exchange and certain non-recurring charges, increased from a negative $1.5 million in the second quarter of 2016 to $8.5 million in the third quarter. Funds flow from operations increased from a negative $1.0 million in the second quarter of 2016 to $9.1 million in the third quarter of 2016.

Third Quarter Conference Call

Pason will be conducting a conference call for interested analysts, brokers, investors and media representatives to review its third quarter 2016 results at 9:00 am (Calgary time) on Thursday, November 10, 2016. The conference call dial-in number is 1-888-231-8191 or 1-647-427-7450. You can access the seven-day replay by dialing 1-855-859-2056 or 1-416-849-0833, using password 82116078.

Pason Systems Inc. is a leading global provider of specialized data management systems for drilling rigs. Our solutions, which include data acquisition, wellsite reporting, remote communications, and web-based information management, enable collaboration between the rig and the office. 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, 2015, is available on SEDAR at www.sedar.com or on the Company's website at www.pason.com.

Condensed Consolidated Interim Balance Sheets

As at


September 30, 2016

December 31, 2015

(CDN 000s) (unaudited)


($)

($)

Assets




Current





Cash and cash equivalents


154,598

195,846


Trade and other receivables


37,208

48,613


Prepaid expenses


4,302

3,719


Income taxes recoverable


13,770

17,468


Total current assets


209,878

265,646

Non-current





Property, plant and equipment


165,378

201,436


Intangible assets and goodwill


52,733

57,643


Deferred tax assets


10,682

4,900


Total non-current assets


228,793

263,979

Total assets


438,671

529,625

Liabilities and equity




Current





Trade payables and accruals


14,524

18,454


Stock-based compensation liability


3,569

2,220


Total current liabilities


18,093

20,674

Non-current





Stock-based compensation liability


3,891

3,059


Onerous lease obligation


2,811


Deferred tax liabilities


11,592

16,444


Total non-current liabilities


18,294

19,503

Equity





Share capital


134,474

128,067


Share-based benefits reserve


23,639

23,367


Foreign currency translation reserve


64,019

85,603


Retained earnings


180,152

252,411


Total equity


402,284

489,448

Total liabilities and equity


438,671

529,625

 

Condensed Consolidated Interim Statements of Operations


Three Months Ended
September 30,


Nine Months Ended
September 30,


2016

2015


2016

2015

(CDN 000s, except per share data) (unaudited)

($)

($)


($)

($)







Revenue

38,633

68,468


111,619

225,310

Operating expenses







Rental services

18,087

27,534


58,844

95,560


Local administration

2,745

3,770


7,020

12,947


Depreciation and amortization

14,929

19,259


44,869

61,579


35,761

50,563


110,733

170,086







Operating profit

2,872

17,905


886

55,224

Other expenses







Research and development

5,358

7,288


17,615

25,431


Corporate services

3,956

5,134


12,360

15,040


Stock-based compensation expense

1,457

808


4,657

4,596


Restructuring and other expense (income)

140

27,459


10,017

25,148


10,911

40,689


44,649

70,215







Loss before income taxes

(8,039)

(22,784)


(43,763)

(14,991)


Income tax recovery

(922)

(4,226)


(14,467)

(1,220)

Net loss

(7,117)

(18,558)


(29,296)

(13,771)

Loss per share







Basic

(0.08)

(0.22)


(0.35)

(0.16)


Diluted

(0.08)

(0.22)


(0.35)

(0.16)

 

Condensed Consolidated Interim Statements of Other Comprehensive Income


Three Months Ended
September 30,


Nine Months Ended
September 30,


2016

2015


2016

2015

(CDN 000s) (unaudited)

($)

($)


($)

($)

Net loss

(7,117)

(18,558)


(29,296)

(13,771)

Items that may be reclassified subsequently to net income:







Foreign currency translation adjustment                   

3,281

25,119


(21,584)

49,249

Total comprehensive (loss) income

(3,836)

6,561


(50,880)

35,478

 

Condensed Consolidated Interim Statements of Changes in Equity


Share Capital

Share-Based

Benefits

Reserve

Foreign

Currency

Translation

Reserve

Retained

Earnings

Total Equity

(CDN 000s) (unaudited)

($)

($)

($)

($)

($)

Balance at January 1, 2015

113,827

12,927

32,807

323,962

483,523


Net loss

(13,771)

(13,771)


Dividends

(42,650)

(42,650)


Other comprehensive income

49,249

49,249


Exercise of stock options

8,230

(1,128)

7,102


Expense related to vesting of options

1,158

1,158


Reclassification of equity settled options

11,673

11,673

Balance at September 30, 2015

122,057

24,630

82,056

267,541

496,284


Net loss

(841)

(841)


Dividends

(14,289)

(14,289)


Other comprehensive income

3,547

3,547


Exercise of stock options

6,010

(2,043)

3,967


Expense related to vesting of options

780

780

Balance at December 31, 2015

128,067

23,367

85,603

252,411

489,448


Net loss

(29,296)

(29,296)


Dividends

(42,963)

(42,963)


Other comprehensive loss

(21,584)

(21,584)


Exercise of stock options

6,407

(1,954)

4,453


Expense related to vesting of options

2,226

2,226

Balance at September 30, 2016

134,474

23,639

64,019

180,152

402,284

 

Condensed Consolidated Interim Statements of Cash Flows


Three Months Ended
September 30,

Nine Months Ended
September 30,


2016

2015

2016

2015

(CDN 000s) (unaudited)

($)

($)

($)

($)

Cash from (used in) operating activities






Net loss

(7,117)

(18,558)

(29,296)

(13,771)

Adjustment for non-cash items:






Depreciation and amortization

14,929

19,259

44,869

61,579


Impairment loss

26,555

26,555


Gain on sale of investment

(2,290)


Stock-based compensation

1,457

808

4,657

4,596


Non-cash restructuring costs

4,833


Deferred income taxes

35

(3,488)

(10,941)

(3,057)


Unrealized foreign exchange (gain) loss and other

(174)

(785)

(2,631)

2,718

Funds flow from operations

9,130

23,791

11,491

76,330

Movements in non-cash working capital items:






(Increase)/decrease in trade and other receivables

(12,470)

(2,665)

5,620

75,519


(Increase) decrease in prepaid expenses

(1,713)

(2,432)

(709)

284


Decrease in income taxes recoverable

13,927

188

10,344

808


Decrease in trade payables, accruals and stock-based compensation liability

(2,575)

(452)

(2,114)

(21,859)


Effects of exchange rate changes

(1,148)

6,222

1,158

3,864

Cash generated from operating activities

5,151

24,652

25,790

134,946


Income tax paid

(498)

(8,320)

(6,813)

(15,781)

Net cash from operating activities

4,653

16,332

18,977

119,165

Cash flows from (used in) financing activities






Proceeds from issuance of common shares

1,331

1,568

4,453

5,609


Payment of dividends

(14,342)

(14,238)

(42,963)

(42,650)

Net cash used in financing activities

(13,011)

(12,670)

(38,510)

(37,041)

Cash flows (used in) from investing activities






Additions to property, plant and equipment

(718)

(8,672)

(9,513)

(37,702)


Development costs

(659)

(2,097)

(3,373)

(6,582)


Proceeds on disposal of investment and property, plant and equipment

136

339

692

3,627


Changes in non-cash working capital

992

1,489

(699)

(5,764)

Net cash used in investing activities

(249)

(8,941)

(12,893)

(46,421)

Effect of exchange rate on cash and cash equivalents

1,223

8,140

(8,822)

17,554

Net (decrease) increase in cash and cash equivalents

(7,384)

2,861

(41,248)

53,257

Cash and cash equivalents, beginning of period

161,982

195,254

195,846

144,858

Cash and cash equivalents, end of period

154,598

198,115

154,598

198,115

 

Operating Segments

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

Three Months Ended September 30, 2016

Canada

United States

International

Total


($)

($)

($)

($)

Revenue

10,755

22,318

5,560

38,633

Rental services and local administration

3,817

12,653

4,362

20,832

Depreciation and amortization

6,203

5,243

3,483

14,929

Segment operating profit (loss)

735

4,422

(2,285)

2,872

Research and development




5,358

Corporate services




3,956

Stock-based compensation




1,457

Other expenses




140

Income tax recovery




(922)

Net Loss




(7,117)

Capital expenditures

247

1,148

(18)

1,377

Goodwill

24,634

2,600

27,234

Intangible assets

25,141

158

200

25,499

Segment assets

128,006

259,184

51,481

438,671

Segment liabilities

25,165

5,845

5,377

36,387






Three Months Ended September 30, 2015










Revenue

18,823

40,151

9,494

68,468

Rental services and local administration

6,821

17,250

7,233

31,304

Depreciation and amortization

9,447

7,862

1,950

19,259

Segment operating profit

2,555

15,039

311

17,905

Research and development




7,288

Corporate services




5,134

Stock-based compensation




808

Other expense




27,459

Income tax recovery




(4,226)

Net loss




(18,558)

Capital expenditures

8,562

813

1,394

10,769

Goodwill

24,790

2,600

27,390

Intangible assets

30,175

698

1,481

32,354

Segment assets

203,411

291,788

46,077

541,276

Segment liabilities

25,624

13,435

5,933

44,992

 


Nine Months Ended September 30, 2016

Canada

United States

International

Total


($)

($)

($)

($)

Revenue

31,580

62,335

17,704

111,619

Rental services and local administration

13,136

38,647

14,081

65,864

Depreciation and amortization

20,116

17,479

7,274

44,869

Segment operating (loss) profit

(1,672)

6,209

(3,651)

886

Research and development




17,615

Corporate services




12,360

Stock-based compensation




4,657

Other expenses




10,017

Income tax recovery




(14,467)

Net loss




(29,296)

Capital expenditures

2,930

9,806

150

12,886

Goodwill

24,634

2,600

27,234

Intangible assets

25,141

158

200

25,499

Segment assets

128,006

259,184

51,481

438,671

Segment liabilities

25,165

5,845

5,377

36,387






Nine Months Ended September 30, 2015










Revenue

57,423

136,144

31,743

225,310

Rental services and local administration

23,729

61,600

23,178

108,507

Depreciation and amortization

28,408

25,874

7,297

61,579

Segment operating profit

5,286

48,670

1,268

55,224

Research and development




25,431

Corporate services




15,040

Stock-based compensation




4,596

Other income




25,148

Income tax recovery




(1,220)

Net loss




(13,771)

Capital expenditures

19,467

15,982

8,835

44,284

Goodwill

24,790

2,600

27,390

Intangible assets

30,175

698

1,481

32,354

Segment assets

203,411

291,788

46,077

541,276

Segment liabilities

25,624

13,435

5,933

44,992

 

Other Expenses (Income)


Three Months Ended September 30,


Nine Months Ended September 30,


2016

2015


2016

2015


($)

($)


($)

($)

Foreign exchange loss (gain)

96

904


(2,227)

(1,555)

Impairment loss

26,555


26,555

Gain on sale of investment


(2,290)

Restructuring costs


10,861

2,572

Other

44


1,383

(134)

Other expenses (income)

140

27,459


10,017

25,148

 

In the first quarter of 2016, the Company initiated additional cost reduction initiatives to address the prolonged downturn in oil and gas drilling activity. These actions included further staff reductions and office space consolidation.  As a result, the Company recorded a restructuring charge of $10,861 in the first quarter, which is comprised of $6,028 for employee termination and other staff-related costs, an onerous lease obligation charge of $3,682, which is calculated at the present value of the expected net cost of continuing with the lease after adjusting for sublease rentals, and the write-off of leasehold improvements and other related costs totaling $1,151. The current portion of the onerous lease provision is included in trade payables and accruals while the non-current portion is separately disclosed on the Condensed Consolidated Interim Balance Sheet.  A similar initiative was completed in the second quarter of 2015 and a restructuring charge of $2,572 was recorded.  In addition, the third quarter 2015 results include an impairment charge related to excess quantities of equipment totaling $26,555.  

Pason Systems Inc.

Pason Systems Inc. is a leading global provider of specialized data management systems for drilling rigs. Our solutions, which include data acquisition, wellsite reporting, remote communications, and web-based information management, enable collaboration between the rig and the office. Pason's common shares trade on the Toronto Stock Exchange under the symbol PSI.TO.

Certain information regarding the Company contained herein may constitute forward-looking information under applicable securities law. The words "anticipate", "expect", "believe", "may", "should", "will", "estimate", "project", "outlook", "forecast" or other similar words are used to identify such forward-looking information and statements. Forward-looking statements in this document may include statements, express or implied regarding the anticipated business prospects and financial performance of Pason; expectations or projections about future strategies and goals for growth and expansion; expected and future cash flows and revenues; and expected impact of future commitments. These forward-looking statements are based upon various underlying factors and assumptions, including the state of the economy and the oil and gas exploration and production business, in particular; the Company's business prospects and opportunities; and estimates of the financial and operational performance of Pason.

Forward-looking information and 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 information and statements. Risk factors that could cause actual results or events to differ materially from current expectations include, among others, the ability of Pason to successfully implement its strategic initiatives and whether such strategic initiatives will yield the expected benefits, the operating performance of Pason's assets and businesses, the price of energy commodities, competitive factors in the energy industry, changes in laws and regulations affecting Pason's businesses, technological developments, and general economic conditions.

Readers are cautioned not to place undue reliance on forward-looking statements as there can be no assurance that the plans, intentions or expectations upon which they are placed will occur. Such forward looking statements, although considered reasonable by management as of the date hereof, may prove to be incorrect and actual results may differ materially from those anticipated. Forward-looking statements contained in this press release are expressly qualified by this cautionary statement.

Additional information on risks and uncertainties and other factors that could affect Pason's operations or financial results are included in Pason's reports on file with the Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com) or through Pason's website (www.pason.com). Furthermore, any forward looking statements contained in this news release are made as of the date of this news release, and Pason does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as expressly required by securities law.

SOURCE Pason Systems Inc.

For further information: For more information about Pason Systems Inc., visit the company's website at www.pason.com or contact: Marcel Kessler, President and CEO, 403-301-3400, marcel.kessler@pason.com; Jon Faber, Chief Financial Officer, 403-301-3400, jon.faber@pason.com

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