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Canyon Services Group Third Quarter Results

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   |    Monday,December 01,2014

Canyon Services Group Inc. has announced its third quarter 2014 results.

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

Highlights

The operating and financial highlights for the three and nine months ended September 30, 2014 are summarized as follows:

• Q3 2014 represents a record quarter with revenues reaching $204.5 million compared to $81.1 million in Q3 2013, an increase of 152%. For the nine months ended September 30, 2014, consolidated revenues were $402.9 million, a 106% increase over $195.4 million recorded in the comparable period of 2013.
• The increased revenues combined with Canyon's considerable operating leverage in its pressure pumping business and the inclusion of Fraction resulted in consolidated EBITDA before share based payments improving to $57.7 million in the current quarter from $14.2 million in Q3 2013 and consolidated income and comprehensive income increasing to $31.7 million in Q3 2014 from $3.9 million in Q3 2013. For the nine months ended September 30, 2014 consolidated EBITDA before share based payments increased to $75.9 million from $21.5 million, while consolidated income and comprehensive income increased to $28.3 million from a loss and comprehensive loss of $4.8 million for the comparable 2013 period.
• Effective July 1, 2014, Canyon acquired Fraction, a leading provider of water and fracturing fluid logistics, containment, transfer and storage for the oil and gas industry in NW Alberta and NE British Columbia. In Q3 2014, Fraction contributed $16.3 million to consolidated revenue, $6.2 million to consolidated EBITDA before stock-based compensation expense and $3.6 million to consolidated income and comprehensive income.
• Effective July 14, 2014, Canyon acquired four deep coiled tubing packages which included twin fluid pumpers, BOPs, injectors and three cranes from a Canadian oilfield services company for approximately $19.7 million. This acquisition has increased Canyon's deep coiled tubing fleet to 11 packages.
• Including the purchase of the Assets but excluding the purchase of Fraction, Canyon's 2014 capital budget is estimated at $107 million. This amount includes fracturing equipment consisting of 30,000 Hydraulic Horsepower (HHP) in pumping capacity as well as miscellaneous support equipment such as sand logistics equipment, a high rate blender and transportation equipment, coiled tubing equipment including the Assets described above, nitrogen and cement and acid equipment, expansion of Canyon's Grande Prairie operating base and storage tanks and water transfer equipment for the Fraction business.
• On September 25, 2014, Canyon declared a quarterly dividend of $0.15 per common share, or $10.3 million, which was paid to shareholders on October 24, 2014.
• Canyon remains in a very strong financial position. As at September 30, 2014, Canyon had available credit facilities combined with positive working capital totaling $100 million.
• The Board of Directors of the Company has approved a 2015 capital budget of $63 million. This amount includes $43 million for the construction of 25,000 HHP of new fracturing equipment along with additional blending, sand management, logistics and miscellaneous support equipment. In addition, this capital budget includes $12 million for ongoing annual maintenance capital plus $8 million of fluid management services equipment.

Pressure Pumping Services

Canyon's equipment fleet was essentially fully utilized for most of Q3 2014 resulting in jobs completed and revenues earned increasing by 60% and 132% respectively compared to Q3 2013. Pressure pumping revenues in the current quarter totaled a record $188.2 million from 887 jobs completed compared to $81.1 million from 553 jobs in the comparable quarter of 2013. For the nine months ended September 30, 2014, pressure pumping revenues increased by 98% to $386.7 million compared to $195.4 million in the comparable 2013 period, while jobs completed increased by 81% to 2,124 from 1,174 over the same periods.

We estimate that overall industry activity in the Western Canadian Sedimentary Basin ("WCSB") as measured by total meters drilled increased by approximately 10% percent in Q3 2014 year over year. This increasing trend in industry activity has been evident since late 2013 and is driven by several factors including changing well designs resulting in customers' growing preference for drilling wells with longer horizontal sections and increased fracturing intensity on a per well basis. In addition, more favourable Canadian/US exchange rates, E&P companies' improved access to capital markets to fund capital programs over the first half of 2014 and, until recently, strong commodity prices led to the increased activity. As a result, the key industry indicators such as well licensing, drilling rig utilization and well completions have been strong year to date and continue to point to a positive outlook for the upcoming winter season. Well licensing for service-intensive deep wells drilled in NW Alberta and NE British Columbia increased by approximately 14% in Q3 2014 compared to Q3 2013, and by about 11% for the nine months ended September 30, 2014. Drilling rig utilization increased to about 52% in Q3 2014 compared to 46% for Q3 2013, and to 48% from 44% on a year to date basis.

Although well completions were relatively flat in Q3 2014 and for the year to date compared to the prior year comparable periods, total meters completed increased by approximately 10% compared to Q3 2013 and by 11% for the year to date. Also, natural gas well completions have increased by about 30% for the year to date partially due to LNG related delineation drilling. The trend over the past 18 months of significantly increased fracturing intensity has resulted in Canyon completing much larger jobs in 2014 compared to 2013. Our customers have continued to apply greater fracturing intensity to their wells via an increase to the number of stages on a per well basis and/or larger fractures per stage. Third quarter proppant volumes pumped by Canyon increased by 137% compared to Q3 2013, and by 127% for the nine months ended September 30, 2014 compared to 2013. In addition, the growing trend by customers to use more expensive "Ottawa" sand rather than domestic sand has also contributed to increased revenue per job. In Q3 2014, average fracturing revenue per job increased by 49% to $310,403 in Q3 2014 from $208,524 in Q3 2013 due predominantly to increased job size. Overall, pricing and cost recovery had a modest impact on revenue per job and revenues in Q3 2014 and was approximately 5% higher than Q1 2014 levels and 10% higher than Q3 2013.

Pressure pumping cash flow and profitability remains highly levered to changes in revenue due to the fixed cost nature of the business. The increased activity and revenues led to significantly improved margins in Q3 2014 compared to the comparable quarter of 2013 and compared to Q1 2014. (The second quarter is not comparable as it experiences our annual spring break up and is therefore characterized by much lower industry-wide activity). In Q3 2014, EBITDA before stock-based compensation expense from pressure pumping was $53.9 million, or 29% of revenues, compared to $15.9 million or 20% of revenues in the comparable 2013 quarter. The increased scale of operations has also significantly increased EBITDA before stock-based compensation expense from pressure pumping to $75.0 million, or 19% of revenues, for the nine months ended September 30, 2014 from $25.6 million or 13% of revenues for the comparable 2013 period.

Fluid Management Services

Fraction was acquired by Canyon effective July 1, 2014 and continues as a wholly owned and independent operating subsidiary. Fraction is a leading provider of water and fracturing fluid logistics, containment, transfer and storage for the oil and gas industry in NW Alberta and NE British Columbia. The acquisition of Fraction complements Canyon's current offering of services to our customers.