Newalta Reports Fourth Quarter and Year End 2016 Results

TSX Trading Symbol: NAL

CALGARY, Feb. 23, 2017 /CNW/ - Newalta Corporation ("Newalta") (TSX:NAL) today reported results for the three and twelve months ended December 31, 2016.

FINANCIAL HIGHLIGHTS⁽¹⁾

($000s except per share data) (unaudited)		Three months ended December 31,			Twelve months ended December 31,
		2016	2015	% change	2016	2015	% change
Continuing Operations
Revenue		63,707	64,665	(1)	205,449	327,584	(37)
General & Administrative		7,690	10,659	(28)	31,060	45,464	(32)
Net loss		(75,346)	(116,697)	(35)	(158,476)	(166,027)	(5)
	- per share ($) basic and diluted	(0.85)	(2.08)	(59)	(2.02)	(2.95)	(32)
Adjusted EBITDA^(2)		11,486	6,175	86	21,852	54,614	(60)
	- per share ($)	0.13	0.11	18	0.28	0.97	(71)
Maintenance capital expenditures^(2)		4,097	1,557	163	8,152	11,900	(31)
Growth capital expenditures^(2)(3)		2,969	5,277	(44)	6,683	63,047	(89)
Dividends declared		–	3,515	(100)	–	24,600	(100)
	- per share ($)^(2)	–	0.063	(100)	–	0.438	(100)
Dividends paid		–	7,029	(100)	3,515	26,809	(87)
Weighted average shares outstanding		88,148	56,237	57	78,557	56,221	40
Shares outstanding, December 31,^(4)		88,148	56,237	57	88,148	56,237	57
Combined Operations
Revenue		63,707	64,665	(1)	205,449	369,692	(44)
Net loss		(75,346)	(126,364)	(40)	(158,465)	(183,056)	(13)
	- per share ($) basic and diluted	(0.85)	(2.25)	(62)	(2.02)	(3.25)	(38)

(1)	Refer to Newalta's Management's Discussion and Analysis and Consolidated Financial Statements for further information. References to GAAP are synonymous with IFRS and references to Consolidated Financial Statements and notes are synonymous with Financial Statements.
(2)	These financial measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers. Non-GAAP financial measures are identified and defined in our Management's Discussion and Analysis ("MD&A").
(3)	Growth capital expenditures are net of 2015 and 2016 contributions from a midstream joint venture partner for its interest in a modular processing facility.
(4)	Newalta had 88,148,148 shares outstanding as at February 23, 2017.

MANAGEMENT COMMENTARY

"Fourth quarter results continued the momentum of sequential quarterly improvements in 2016 and represents the first year-over-year improvement since the beginning of the downturn, with Adjusted EBITDA increasing by 86 percent over 2015, " said John Barkhouse, President and Chief Executive Officer.  "Our cost savings initiatives continue to drive bottom line performance, while stabilizing commodity prices and improving industry activity are beginning to increase demand for our services.

"Results for the quarter were also positively impacted by the improvements we've made in our Drilling Services business with our focus on enhanced customer value creation and increased contributions from Heavy Oil facilities, particularly our Fort McMurray facility.

"We are well positioned with the capacity inherent in our business model to leverage significant upside in a recovery environment. With the actions taken over the past two years to protect our balance sheet, including the removal of more than $60 million in annualized costs from 2014 levels, we have aligned our cost base to activity levels. Our objective, which is to maintain the current cost structure, will underpin meaningful profitability improvements as our markets recover.

"In Q1 2017, we expect to continue the trend of year-over-year increases in performance, based on improving commodity prices and increases in drilling activity over prior year. 

"For the year, we continue to anticipate annual Adjusted EBITDA of between $40 million and $55 million, based on a WTI forecast of $45 to $60 per barrel. Our outlook is underpinned by the assumption that relative oil price stability will result in improvements in activity levels. We expect to be within a range of cash flow neutrality for 2017, which is the key determinant to financial sustainability and the springboard to the positive cash flow model we envision in future years."

FOURTH QUARTER AND YEAR END RESULTS

• Q4 revenue of $63.7 million was flat to prior year.
• Revenue for the year was $205.4 million, a decrease of 37% from prior year. The decline was primarily driven by reduced production waste volumes in Oilfield Facilities and a decline in mining contributions in Heavy Oil Onsite.
• Net loss in the quarter decreased 35% to $75.3 million compared to prior year. The decrease in loss was primarily driven by reduced impairment in 2016. Lower finance charges, operating expenses, restructuring and other related costs, and savings in G&A from our rationalization initiatives were partially offset by an increase in depreciation and amortization.
• Net loss for the year was reduced 5% to $158.5 million compared to prior year, driven by the same factors as the quarter and partially offset by an increase in stock-based compensation expense.
• Adjusted EBITDA for the quarter was $11.5 million compared to $6.2 million in the prior year, representing the first quarterly year-over-year improvement since the beginning of the downturn, and the third sequential quarter-over-quarter improvement in the year. The year-over-year increase was driven by Divisional EBITDA improvements of $2.3 million and G&A savings of $3.0 million, primarily due to savings from cost rationalization initiatives.
• Adjusted EBITDA for the year was $21.9 million, down $32.8 million over prior year driven by a $47.2 million decrease in Divisional EBITDA partially offset by G&A savings of $14.4 million. Factors at play throughout the latter half of 2015 carried through 2016, with producers shutting in wells, minimizing maintenance activities, and deferring projects and capital spending.
• In 2016, $27.0 million of the $32.8 million year-over-year change in Adjusted EBITDA was driven by a decline in production-driven waste volumes at our Heavy Oil and Oilfield facilities. The remainder of the decline was primarily driven by reduced contributions from mining projects and the decline in drilling activity, partially offset by cost savings realized.
• Our contract model continued to provide steady, predictable cash flow. These contracts generally are not tied directly to commodity price changes or drilling activity and provide a solid foundation for our business, particularly in depressed markets. In 2016, contracts represented 22% of our revenue.

Actions Taken To Protect Profitability and Our Balance Sheet

• In 2016, we completed cost rationalization actions which drove $21 million in annualized Adjusted EBITDA savings ($15 million in 2016) by eliminating approximately 90 positions across G&A and operations and consolidating office space. These actions, combined with our 2015 initiatives, have driven in excess of $60 million in annualized savings over 2014 levels.
• Reduced capital spending by approximately $60 million compared to 2015 levels.
• Effective October 31, 2016, we amended our Credit Facility to include a precautionary waiver on our Interest Coverage covenant for the fourth quarter of 2016 and reduced the principal borrowing amount by $10 million to $150 million. Management sought the one-time waiver as a precautionary measure given the lack of visibility to oil prices and activity levels in the near term. We were in compliance with the threshold established in the March 1, 2016, amendment and did not require the waiver in Q4.
• We exercised an option pursuant to our Credit Facility to waive the minimum Interest Coverage covenant threshold for the third quarter of 2016.
• On April 20, 2016, we closed our bought deal and private placement equity financings. The public and private offerings of common shares raised total gross proceeds of $54.2 million (net proceeds of $51.2 million). The net proceeds were used to reduce the amount drawn on our Credit Facility.
• Effective March 1, 2016, we amended the terms of our Credit Facility to extend the waiver of our Total Debt to Covenant EBITDA covenant to Q1 2018, and revised the Senior Debt to Covenant EBITDA and Interest Coverage thresholds to provide improved flexibility in the current economic environment.
• We suspended our quarterly dividend following the dividend paid to shareholders on January 15, 2016.

Heavy Oil

• In the fourth quarter, Heavy Oil revenue declined by 9% to $26.5 million and net earnings before taxes decreased to a loss of $42.2 million compared to prior year driven by Onsite operations and asset impairment. Divisional EBITDA increased by 8% over prior year to $11.6 million due to gains in cost efficiencies and improved contributions from Facilities offset by Onsite contributions.
• The fourth quarter represents the first year-over-year Divisional EBITDA improvement in Heavy Oil since the downturn began. Further, Divisional EBITDA margins improved by seven percentage points over the prior year.
• In 2016 Heavy Oil revenues decreased 38% to $90.0 million and net earnings before taxes decreased by $63.0 million to a loss of $36.9 million compared to prior year. These declines were driven by the same factors as the quarter. Divisional EBITDA decreased by 39% over prior year to $33.7 million due to reduced contributions from Onsite.

Oilfield

• In the fourth quarter, Oilfield revenue increased by 5% to $37.2 million and net loss before taxes decreased by 90% to $9.5 million compared to prior year. Divisional EBITDA increased by 24% over prior year to $7.6 million. Improved performance was driven by Drilling Services, partially offset by reduced contributions from Oilfield Facilities. Net loss before taxes improved due to impairment in 2015.
• In 2016, Oilfield revenue decreased 37% to $115.5 million compared to prior year primarily due to declines in production-driven waste volumes and drilling activity. Net loss before taxes decreased by 76% to $20.4 million compared to prior year due to impairment in 2015. Divisional EBITDA declined 57% over prior year to $19.2 million driven by lower contributions from both the Oilfield Facilities and Drilling Services business units, primarily due to reduced production waste volumes and drilling activity.

Corporate and Other

• For the three months and year ended December 31, 2016, G&A decreased 28% and 32% to $7.7 million and $31.1 million, respectively. The year-over-year improvement reflects the impact of our cost rationalization initiatives.
• Restructuring and other related costs were in a recovery position of $0.5 million in the fourth quarter, comprised of a $1.9 million non-cash recovery in onerous contracts partially offset by employee termination and other costs. For the year, $23.9 million in restructuring and other related costs were comprised of $14.7 million of non-cash onerous contracts and $9.2 million of employee termination and other costs.
• Capital expenditures for the three months and year ended December 31, 2016 were $7.1 million and $14.8 million, respectively.
• Impairment for the quarter and the year ended December 31, 2016 was $56.0 million and $60.7 million, respectively, primarily due to impairment of certain Heavy Oil assets. We are actively pursuing opportunities to redeploy these assets to other projects or within our facility network; however due to lack of certainty regarding the timing of redeployment, these assets were impaired in the quarter. This impairment in no way restricts the operating leverage opportunity available as demand for our Onsite services returns.

The following section contains forward-looking information as it outlines our Outlook for 2017. Our Outlook is based on several key assumptions including growth capital contributions, commodity prices and activity levels of the industries we serve. Changes to these assumptions could cause our actual results to differ materially. Please refer to our Forward-Looking Information later in this document. We are subject to a number of risks and uncertainties in carrying out our activities including market conditions, ability to expand the business, competition, regulation, and the ability to attract and retain personnel. A complete list of our risk factors is disclosed in our most recently filed Annual Information Form.

OUTLOOK & OPERATING LEVERAGE

Our performance over the last two years was significantly impacted by the decline in oil prices and activity levels in the oil and gas industry.  Inherent in our business model is the capacity to leverage significant upside with recovery in oil pricing and activity levels with minimal capital investment. In a sustained $60 WTI environment with associated activity levels, we would expect Adjusted EBITDA to be in the range of $100 to $140 million.

Our view is that recovery, in the form of increased activity (whether drilling, completions or production), will be driven by stability in oil and gas prices, which will enable our customers to make capital decisions to invest in the drilling and completion of new wells and reactivation of shut-in wells.  As we see activity levels recover, this will translate into increased production waste volumes being generated. Timing of recovery will vary among plays based on their cost profile.

Our operating leverage is driven by the following factors:

Crude Oil Prices

• Crude oil prices directly impact the value of the products we recover from waste.
• Commodity price stabilization generates confidence amongst producers, impacting their capital budgets, which in turn drives increased activity.

Drilling Activity

• Recovery of drilling activity will be determined by the speed at which producers deploy their capital budgets.
• Drill site performance is driven by active rigs and is the first business line to respond to changes in activity.
• Wells drilled and completed in the areas we serve drive waste volumes into our facilities.
• We anticipate the drilling activity in the areas where we operate to recover at different rates depending on the cost profile of the play, with shale play activity increasing first and Cold Heavy Oil Production with Sand ("CHOPS") being the last to recover.

Step Change

• Step – Production is primarily comprised of the net impact of production waste volumes and shifts in waste mix, and to a lesser extent, customer pricing and operational efficiencies.
  • We expect to see a lag in recovery of production waste volumes depending on the speed at which producers deploy their budgets, including turnarounds and workovers.
  • The composition of waste volumes impacts the degree of processing complexity and the amount of recoverable oil.
  • CHOPS waste volumes are also dependent on the drilling of new wells to replace production volumes lost by their naturally steep decline curves.
  • Steam-assisted gravity drainage ("SAGD") waste volumes are dependent on the number, timing and length of event-based upsets occurring in the normal course of SAGD facility operations.
  • We continue to manage our operational cost structure and collaborate with customers to provide enhanced value solutions to mitigate the impact of pricing pressure.
• Step – Other is comprised of the net impact of contributions from mining contracts and returns from growth capital.
  • Mining contributions are expected to be slower to return as producers focus on quantifying their tailing inventory and developing mitigation plans required to meet the Tailings Management Framework. We continue to work with producers to develop solutions to meet these requirements.
  • As activity recovers, we expect to realize improving returns on capital investments made in 2014 and 2015.

Savings from Cost Rationalization

• Our various initiatives to right-size the organization, streamline cost structures and business processes, and rationalize office space has established a lower cost structure capable of supporting meaningful improvement in profitability in a recovery environment.
• Cost rationalization actions taken by management throughout the downturn removed in excess of $60 million in costs on an annualized basis from 2014 levels.

2017 Outlook

In 2017, we expect to see a return towards normalized quarterly seasonality. Our 2017 Outlook is based on the following assumptions:

• Improving commodity prices with less volatility than 2016
• Increased customer capital budgets over 2016 levels, driving drilling activity
• Recovery of the $4.5 million lost in 2016 from the Fort McMurray wildfires and a modest improvement in production-driven waste volumes over prior year
• Carryover of savings from cost rationalization actions taken in 2016

Our Q1 and full-year 2017 guidance ranges are:

• Revenue of $45 million to $55 million for the first quarter and $200 million to $275 million for the full year; and
• Adjusted EBITDA of $8 million to $10 million for the first quarter and $40 million to $55 million for the full year.

The following table outlines the factors we expect to impact Adjusted EBITDA performance in the first quarter and full year of 2017:

Factor	Actual^(1)	Assumption^(1)	Expected impact on Adjusted EBITDA compared to prior year period^(1)
	Q4 and Full Year 2016	Q1 and Full Year 2017	Q1 2017	2017
West Texas Intermediate (US$/bbl)	Q4: $49.16 2016: $43.19	Q1 2017: $45 – $55 2017: $45 – $60
Canadian Light Sweet (CDN$/bbl)^(2)	Q4: $60.69 2016: $52.89	Q1 2017: $60  – $70 2017: $55 – $73	$0.5M  – $1M ↑	$0.5M – $3.5M ↑
Western Canadian Select (CDN$/bbl)^(2)	Q4: $46.63 2016: $38.90	Q1 2017: $45  – $55 2017: $40 – $55	$1.5M – $2M ↑	$0.5M – $5M ↑
Drilling activity^(2) over prior year	Q4: Flat 2016: (25%)	Q1 2017: 20% – 25% 2017: 20% – 30%	$2.5M – $3M ↑	$8M – $12M ↑
Step Change^(3)	Q4: ($1.7M) 2016: ($44.2M)		$1M – $1.5M ↑	$5M – $8M ↑
Savings from cost rationalization	Q4: $5.7M 2016: $25M		$2.5M ↑	$4M – $5M↑
Adjusted EBITDA Guidance			$8M – $10M	$40M – $55M

(1)	M refers to millions.
(2)	Impact derived from annual sensitivities based on 2017 forecast performance and volumes outlined in the "Sensitivities" section of our annual 2016 MD&A. The actual impact from crude oil prices may vary with fluctuations in volumes.
(3)	This factor is expected to have an impact on our performance through the year and cannot be quantified on any linear sensitivity.

Total Debt, Capital & Cash Flow Management

Throughout the downturn, we proactively structured our business model for a "lower for longer" environment. Our equity financing, rationalization initiatives, amended Credit Facility, reduced capital spend and suspension of dividends provided us the liquidity and flexibility to operate in the sustained downturn.

We will continue to manage cash flows to ensure our financing obligations are met and spending is minimized wherever possible. Over the last two years, management has focused on moving towards a positive cash flow model. We have made significant progress in moving towards this target through proactive management of operating cash flows and cost rationalization initiatives. In 2017, we will maintain our focus on this target and expect to be within a range of cash flow neutrality for the year, subject to opportunities that may arise. Management will exercise prudent judgment in managing our capital expenditures for the year, aligned with our longer-term cash flow target.

Our amendments to certain covenants under our Credit Facility provide us with the flexibility to continue to manage our balance sheet successfully as we transition through recovery. Managing debt leverage and use of cash and capital are our highest priorities. We will remain within our debt covenants throughout 2017.

Management's Discussion and Analysis and Financial Statements
The consolidated financial statements and MD&A, which contain additional notes and disclosures, are available on SEDAR at www.sedar.com or our website at www.newalta.com under Investor Relations/Financial Reports.

Quarterly Conference Call
Management will hold a conference call on February 24, 2017 at 11:00 a.m. (ET) to discuss Newalta's performance for the quarter. To participate in the teleconference, please call 647-427-7450 or toll free 1-888-231-8191. To access the simultaneous webcast, please visit www.newalta.com. For those unable to listen to the live call, a taped broadcast will be available at www.newalta.com and, until midnight on Friday, March 3, 2017 by dialing 855-859-2056 and using the pass code 60570847.

About Newalta
Newalta is a leading provider of innovative engineered environmental solutions that enable customers to reduce disposal, enhance recycling and recover valuable resources from oil and gas exploration and production waste streams. We simplify the critical challenges of sustainable environmental practices through the use of advanced processing capabilities deployed through a differentiated business model. We serve customers onsite directly at their operations and through a network of locations throughout North America. Our proven processes and excellent record of safety make us the first-choice provider of sustainability-enhancing services for oil and gas customers. With a highly skilled team of people, a two-decade track record of innovation and a commitment to commercializing new solutions, Newalta is positioned for sustained future growth and improvement. We are Sustainability Simplified^TM. Newalta trades on the TSX as NAL. For more information, visit www.newalta.com.

The press release contains certain statements that constitute forward-looking information. Please refer to the section below, "Forward-Looking Information", for further discussion of assumptions and risks relating to this forward looking information.

This press release contains references to certain financial measures, including some that do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers. Non-GAAP financial measures are identified and defined in our MD&A.

FORWARD-LOOKING INFORMATION

Certain statements contained in this document constitute "forward-looking information" as defined under applicable securities laws. When used in this document, the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "estimate", "expect", "potential", "strategy", "target" and similar expressions, as they relate to Newalta Corporation and the subsidiaries of Newalta Corporation, or their management, are intended to identify forward-looking information. In particular, forward-looking information included or incorporated by reference in this document includes information with respect to:

• future operating and financial results;
• business prospects and strategy including related timelines;
• capital expenditure programs and other expenditures;
• realization of anticipated benefits from the sale of the Industrial Division including the ability to reinvest the net proceeds of disposition in a timely and efficient manner;
• realization of anticipated benefits of growth capital investments, acquisitions, divestitures and our innovation and process development initiatives;
• realization of anticipated benefits from the implementation of cost rationalization initiatives including the anticipated value and sustainability of the cash savings from such initiatives;
• anticipated industry activity levels;
• anticipated commodity prices;
• expected demand for our services;
• expected expansion opportunities for our business;
• the amount of dividends declared or payable in the future;
• our projected cost structure; and
• expectations and implications of changes in legislation.

Expected future financial and operating performance and related assumptions are set out under "Outlook & Operating Leverage". 

Such information reflects our current views with respect to future events and are subject to certain risks, uncertainties and assumptions, including, without limitation:

• strength of the oil and gas industry, including drilling activity;
• general market conditions;
• fluctuations in commodity prices for oil and the price we receive for our recovered oil;
• fluctuations in interest rates and exchange rates;
• financial covenants in our debt agreements that may restrict our ability to engage in transactions or to obtain additional financing;
• success of our growth, acquisition and innovation and process development strategies including integration of businesses and processes into our operations and potential liabilities from acquisitions;
• our ability to secure future capital to support and develop our business, including the issuance of additional common shares;
• the highly regulated nature of the environmental services and waste management business in which we operate;
• dependence on our senior management team and other operations management personnel with waste industry experience;
• the competitive environment of our industry in Canada and the United States;
• possible volatility of the price of, and the market for, our common shares, and potential dilution for shareholders in the event of a sale of additional shares;
• potential operational and safety risks and hazards, obtaining insurance for such risks and hazards on reasonable financial terms and potential failure of meeting customer safety standards;
• the seasonal nature of our operations;
• risk of pending and future legal proceedings;
• risk to our reputation;
• our ability to attract, retain and integrate skilled employees;
• open access for new industry entrants and the general unprotected nature of technology used in the waste industry;
• costs associated with operating our landfills; and
• such other risks or factors described from time to time in reports we file with securities regulatory authorities.

By its nature, forward-looking information involves numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking information will not occur. Many other factors could also cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking information and readers are cautioned that the foregoing list of factors is not exhaustive. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking information prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected. Furthermore, the forward-looking information contained in this document is made as of the date of this document and, in each case, is expressly qualified by this cautionary statement. Unless otherwise required by law, we do not intend, or assume any obligation, to update any such forward-looking information.

SOURCE Newalta Corporation

Investor Relations, 1-855-506-9010, [email protected]

Related Links

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