Hyduke Energy Services Inc. Announces Third Quarter 2009 Financial Results

TSX Symbol: HYD

EDMONTON, Nov. 13 /CNW/ - Hyduke Energy Services Inc. (HYD - TSX), announced operating results for the three and nine months ended September 30, 2009. A 5% increase in revenue over the prior quarter is encouraging evidence that decreased activity levels in Western Canada have bottomed out. Additionally, a $635,000 improvement in adjusted gross margin and a $763,000 improvement in adjusted EBITDAS over the prior quarter reflect the results of aggressive cost cutting. A summary of those results is as follows:

    
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    Selected Income Statement       Three Months Ended     Nine Months Ended
           Information
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    ($000's, except per          Sept 30  June 30  Sept 30  Sept 30  Sept 30
     share data)                   2009     2009     2008     2009     2008
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    Revenue                        7,258    6,892   15,292   23,799   43,052
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    Gross margin(1)                 (274)    (299)     434      (57)   3,865
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    Gross margin (%)               (3.8%)   (4.3%)    2.8%    (0.2%)    9.0%
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    Adjusted gross margin(1)         547      (88)   1,387    1,194    5,283
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    Adjusted gross margin (%)       7.5%    (1.3%)    9.1%     5.0%    12.3%
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    EBITDAS(1)                    (1,581)  (1,728)    (875)  (4,259)      62
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    Adjusted EBITDAS(1)             (966)  (1,728)    (148)  (3,644)     788
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    Net loss                      (1,398)  (1,452)    (994)  (3,731)  (1,043)
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    Net loss per share - basic
     and diluted ($)              (0.064)  (0.066)  (0.045)  (0.170)  (0.047)
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    (1) The Company uses certain non-GAAP measures as indicators of financial
        performance and believes that these non-GAAP measures provide useful
        supplemental information to investors. Gross margin, adjusted gross
        margin, EBITDAS and adjusted EBITDAS are measures used by the Company
        that do not have a standardized meaning prescribed by GAAP. The
        Company's method of calculating these non-GAAP measures may differ
        from other companies and may not be comparable to similar measures
        presented by other companies.

        Gross margin is defined as revenue less cost of sales. Cost of sales
        includes direct materials, direct labor, variable and fixed
        manufacturing overhead, and other costs closely associated with the
        manufacture of goods; costs of service and supply inventory including
        costs required to locate the inventory in its current location;
        provisions to reduce inventory to estimated net realizable value; and
        contract loss provisions. Adjusted gross margin is defined as gross
        margin before manufacturing related amortization, provisions to
        reduce inventory to estimated net realizable value, and contract loss
        provisions. EBITDAS is defined as earnings before interest, taxes,
        depreciation and amortization, gain or loss on sale of property,
        plant and equipment, gain or loss on foreign exchange, and
        stock-based compensation. Adjusted EBITDAS is defined as EBITDAS
        before goodwill impairment charges, provisions to reduce inventory to
        estimated net realizable value, contract loss provisions and
        allowance for doubtful accounts receivable provisions.
    

Revenue levels continue to be severely negatively impacted by a significant reduction in drilling and well service activity levels in Western Canada. Well counts for 2009 are expected to be in the 8000 to 8500 range. This weak domestic market continues to keep revenues at historical lows. However, while revenue of $7.3 million for the three months ended September 30, 2009 is historically low, it does represent an increase of 5.3% or $0.4 million over the previous quarter (i.e. three months ended June 30, 2009). Management views this slight increase as an indication that activity has bottomed out and domestic revenues have begun to stabilize. For the three months ended September 30, 2009, revenue decreased 53% or $8.0 million over the same period in 2008. For the nine months ended September 30, 2009, revenues of $23.8 million represents a decrease of 45% or $19.3 million over the same period in 2008.

Gross margin of $(274) thousand for the three months ended September 30, 2009 represents an increase of 8.3% or $25 thousand over the previous quarter (i.e. three months ended September 30, 2009) and a decrease of 163% or $0.7 million on a year-over-year basis. Included in cost of sales in the three months ended September 30, 2009 is a write-down on drilling mud pump inventory of $616 thousand. Accordingly, adjusted gross margin of $547 thousand for the three months ended September 30, 2009 represents a increase of 727% or $634 thousand over the previous quarter. This increase is due to an aggressive campaign of reducing our variable and fixed plant costs. Gross margin percentage of (3.8)% for the three months ended September 30, 2009 represents an increase of 0.5% points over the gross margin percentage of (4.3)% in the previous quarter and a decrease of 6.6% points over the gross margin percentage of 2.8% on a year over year basis. Adjusted gross margin percentage of 7.5% for the three months ended September 30, 2009 represents an increase of 8.8% points over the adjusted gross margin percentage of (1.3)% in the previous quarter. Low revenue levels combined with severe pricing pressure have resulted in reduced gross margins and gross margin percentages on a year over year basis. Aggressive cost cutting measures have resulted in a significant increase in gross margins and percentages on a quarter-over-quarter basis.

EBITDAS of negative $1.6 million for the three months ended September 30, 2009 represents an improvement of $147 thousand over the previous quarter and a decrease of EBITDAS of $0.7 million on a year over year basis. Adjusted EBITDAS of negative $0,965 million for the three months ended September 30, 2009 represents an improvement of $763 thousand over the previous quarter. Management continues to take steps to reduce operating costs and infrastructure while minimizing any potential negative impact on revenue producing capability. The full effect of these cost reductions will be reflected over the course of the next three to six months. Management is actively monitoring anticipated activity levels to optimize the level of available human and capital resources and increase labour efficiencies where possible.

Net loss of $1.4 million or $0,064 per share for the three months ended September 30, 2009 represents a improvement of $0.1 million over prior quarter and a decrease in net income of $0.4 million over the same period in 2008. Net loss of $3.7 million or $0,170 per share for the nine months ended September 30, 2009 represents a decrease in net income of $2.7 million over the same period in 2008.

    
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      Selected Balance Sheet
           Information                                As At
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      ($000's, except ratios)       September 30   December 31   December 31
                                        2009          2008          2007
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    Total assets                          39,155        48,971        48,552
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    Total liabilities                     11,293        17,414        12,286
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    Total current assets                  27,386        36,479        33,494
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    Total current liabilities              9,507        15,187         9,871
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    Total bank indebtedness                3,886         6,975         2,243
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    Total long-term debt                   1,953         2,267         2,359
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    Total shareholders' equity            27,862        31,557        36,266
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    Current ratio (current
     assets divided by current
     liabilities)                   2.88 to 1.00  2.40 to 1.00  3.39 to 1.00
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    Debt to equity ratio
     (long-term debt divided by
     shareholders' equity)          0.07 to 1.00  0.07 to 1.00  0.07 to 1.00
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Total assets of $39.2 million as at September 30, 2009 reflects a decrease of $9.8 million from December 31, 2008. Total current asset decreases of $9.1 million relate to accounts receivable decrease of $4.3 million due to collections and a decline in activity, a net inventory and unbilled revenue decrease of $3.1 million due to a decline in activity and a decrease in income taxes recoverable of $1.4 million. Total current liabilities decrease of $5.7 million relate to a decrease in total bank indebtedness of $3.1 million from December 31, 2008 and is a result of managing working capital with an objective of reducing the level of bank indebtedness during this current economic downturn and a decrease in accounts payable of $2.6 million due to a decline in overall activity.

Net working capital (current assets less current liabilities) of $17.9 million reflects a decrease of $3.4 million from December 31, 2008 and reflects a decline in overall activity during this current economic downturn.

The Company's current ratio is 2.88 to 1.00 and debt to equity ratio is negligible at 0.07 to 1.00. The Company is focusing on managing cash flow and is working to convert current assets into cash and eliminate bank indebtedness. This balance sheet strength will allow Hyduke to weather the economic and financing challenges currently facing the Company.

OUTLOOK

Western Canadian industry results for 2009 and expectations for 2010 are among the worst years historically as measured by the number of wells drilled. The Canadian Association of Oilwell Drilling Contractors (CAODC) have forecast the number of wells to be drilled (on a completion basis) in 2010 to be 8,523 which is consistent with the poor activity realized in 2009. The Petroleum Services Association of Canada (PSAC) have forecast the number of wells to be drilled (on a rig released basis) in 2010 to be 8,000 which is consistent with the poor activity realized in 2009. These low levels of activity will continue to challenge Hyduke's domestic operations. As a result, management is currently reviewing the business units with a high proportion of domestic sales with the objective of restructuring those business units to better align their cost structures with these lower revenue expectations.

Internationally, the industry continues to experience a significant slowdown and is continuing to be depressed as a result of the worldwide credit crisis. However, Hyduke has been successful in obtaining in early October a significant drilling rig equipment order of $17.4 million for the Mexican market. This contract will allow Hyduke to return to profitability overall in Fiscal 2009 Q4 and Fiscal 2010 Q1. Hyduke continues to aggressively market its products to international markets with the objective of maintaining a steady flow of significant international projects throughout 2010. Over the past eighteen months, our sales and marketing team has conducted marketing trips to Russia, South America, North Africa, Middle East, Asia-Pacific and Latin America. As a result of these marketing trips, we are building a very extensive contact network worldwide that we are aggressively promoting our products and services to. We continue to actively quote on international proposals and continue to be encouraged by positive indications for the future. For example, during the last twelve months, we have received indication from a number of potential customers that they expect to be awarding Hyduke projects once the banking industry stabilizes and credit availability returns to the industry. A moderating aspect of developing international business is that the process of introducing Hyduke to new potential customers, developing a strong relationship, bidding on work and winning that work takes a long period of time. However, we remain committed to our strategic plan and are building on our past successes and devoting sufficient resources to adequately develop future opportunities. Over the past three years, Hyduke's international revenues have approximated 20-25% of total revenue and it is expected that the volume and proportion of international revenue will continue to grow as these international relationships are further developed.

The reduced levels of industry activity experienced in 2009 and forecast for 2010 are severely negatively impacting revenue levels in Hyduke's Life Cycle Management businesses such as repair and maintenance, inspections and certification, and consumables. We continue to focus on increasing market share through marketing Hyduke's Life Cycle Management and Single Source Supplier platforms to customers. These platforms benefit customers by offering continued support throughout the useful life of their equipment and by offering a wide array of consistent, reliable services from a single source.

Overall, management recognizes that we are operating in a very challenging economic environment. The impact of the downturn in the worldwide credit markets precipitated a global economic slowdown. Continued weakness in North American natural gas prices is resulting in an increased focus on cost control in both capital and operating budgets for companies in our industry sector. Management is responding to these challenging conditions. We have experienced significant operating losses over the past year and recent quarter that are primarily due to reductions in revenue levels due to a severe industry downturn. As detailed in prior MD&A's, we have implemented, and will continue to implement, a number of cost cutting initiatives. We have reduced staffing levels by over 50% from December 31, 2008 to November 13, 2009, with the exception of our business units working on the recently won Mexican contract. We have implemented salary and wage rollbacks ranging from 10% to 25%. We have temporarily suspended company contributions to Hyduke's retirement plan and certain aspects of Hyduke's benefit plan. Many of our staff are taking voluntary unpaid leave and reduced work weeks. We are accessing the EI work-share benefits program. We have halted all non-critical capital expenditures. Additionally, we continue to review all our business lines in order to develop a re-structuring plan which will reduce the current level of operating losses. The full effects of these cost cutting steps will continue to show in the financial results for the remainder of 2009 and into 2010.

Hyduke's strong working capital position and low debt load in relation to equity will be a factor in protecting the Company from a prolonged downturn as well as allow the Company to pursue viable financing alternatives should conventional operating line lending become restricted.

Forward Looking Statements

This report contains certain forward-looking statements relating, but not limited to, operations, anticipated financial performance, business prospects and strategies of Hyduke. Forward-looking information typically contains statements with words such as "anticipate", "believe", "estimate", "expect", "plan", "intend" or similar words suggesting future outcomes or outlooks on, without limitation, estimates of business activity, supply and demand for the Company's products, the estimated amounts and timing of capital expenditures, anticipated future debt levels, or other expectations, beliefs, plans, objectives, assumptions or statements about future events or performance. Readers are cautioned not to place undue reliance on forward-looking information. By its nature, forward-looking information involves numerous assumptions, inherent risks and uncertainties both general and specific that may cause actual future results to differ materially from those contemplated and contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur. These factors may affect anticipated earnings or assets and include, but are not limited to: industry activity levels, market liquidity, customer credit risk, competition, oil and gas prices, product liability, fixed price contracts, development of new products, uninsured and underinsured losses, access to additional financing, source of supply of raw material and third party components, availability of key personnel, agreements and contracts, government regulations, foreign exchange exposure, interest rate risk, international scope of operations, environmental health and safety regulations and Hyduke's anticipation of and success in managing the risks implied by the foregoing. The Company cautions that the foregoing list of important factors is not exhaustive. Hyduke undertakes no obligation to update publicly or otherwise revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required pursuant to applicable securities legislation.

About Hyduke

Hyduke is an integrated oilfield services company with over thirty years experience in the manufacture, repair and distribution of oilfield equipment and supplies in Canada and worldwide. Hyduke specializes in providing customized, integrated solutions to the drilling and well service industries including:

    
    -   Turn-Key Equipment - drilling rig and service rig packages including
        in-house design, engineering and drafting, major component
        procurement and overall project management;

    -   Life Cycle Management - inspection, certification, service, repair
        and supply services throughout the operating life of the drilling or
        well service rig; and

    -   Single Source Supply - providing new capital equipment, repair and
        maintenance on existing capital equipment and supply of operating
        consumables.
    

Hyduke is headquartered in Nisku, Alberta and has facilities in Edmonton, Calgary, Nisku, Leduc, Red Deer and Lloydminster, Alberta.

Hyduke operates in three operating segments. The Drilling Equipment segment includes manufacture and repair of land-based drilling rigs and drilling rig structures, supply and repair of drilling rig equipment, procurement and distribution of drilling supplies, supply and service of pneumatic controls, engineering and design of drilling rigs and inspection and certification of drilling rig equipment. The Well Service Equipment segment includes manufacture and repair of well service rigs, mobile and skid mounted pump units and other well service equipment, procurement and distribution of well servicing supplies, supply and service of pneumatic controls, engineering and design of well service rigs and inspection and certification of well service equipment. The Other Oilfield Services segment includes manufacture and distribution of cased hole and overburden drill bits and drilling systems, custom and production machining services, industrial sandblasting, painting and collision repair and distribution and repair of truck-mounted equipment including cranes, winches and dump boxes.

    
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    The TSX has not reviewed and does not accept responsibility for the
    adequacy or accuracy of this News Release.
    

%SEDAR: 00008371E

SOURCE Hyduke Energy Services Inc.

For further information: For further information: Gordon R. McCormack, CA, President and Chief Executive Officer, (780) 955-0355; Veronica Dutchak, CA, Chief Financial Officer, (780) 955-0355


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