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Pason Systems Looks Internationally to Offset Domestic Volatility

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Pason Systems Inc. has announced its 2015 second quarter results.

President's Message

• The second quarter is usually the weakest for Pason due to the seasonality of Canadian drilling activity. More importantly, the full impact of the downturn caused by low oil prices has adversely impacted Pason's financial results in the second quarter.
• On June 25, 2014, the price for West Texas Intermediate (WTI) oil was US$106.50. Since reaching that peak, the oil price has declined sharply with the Organization of Petroleum Exporting Countries (OPEC) and North American shale fighting for market share. Oil bottomed out at US$43.46 on March 26 this year before recovering to above US$55 by the beginning of June. As I write this message, it is again below US$45.
• Operators looking to conserve cash in this lower oil price environment, particularly in the United States and in Canada, have cut capital expenditures, staffing levels, and existing operations. Land drilling activity in North America is down more than 50% compared to one year ago. As a result, we have experienced a severe contraction in revenue and margins.
• Pason generated revenue of $57.4 million in the second quarter of 2015, down 45% from $103.9 million in the same period of 2014. The continued slowdown in oil and gas drilling activity, combined with a reduction in product adoption for certain products and pricing pressure from customers, contributed to the decrease in revenue. EBITDA was $7.5 million in the second quarter, a decrease of $38.5 million from the second quarter of 2014. Pason recorded a net loss of $9.4 million ($0.11 per share), a decrease of $27.0 million from the net income of $17.6 million in the same period last year.
• Over the last several months, we responded to this challenging environment by taking the necessary steps to ensure Pason remains a strong and viable company by reducing our capital expenditures and lowering operating costs. Our capital expenditure plan for 2015 is $65 million compared to $121 million in 2014. 
• We reduced our staffing levels (employees and contractors) by 20% which resulted in the Company recording a restructuring charge of $2.6 million in the second quarter of 2015 (for a run-rate savings of approximately $15.0 million per annum) and cut back on discretionary spending. We are closely monitoring the industry outlook to determine if, and when, further operating (including excess satellite bandwidth) and capital reductions may be required.
• It is encouraging that we have been able to defend our market share in all core markets and that declines in revenue per EDR day have been relatively modest, attesting to the value of our product suite and our pricing power.
• Based on what we know today, it looks unlikely that industry activity, and Pason's results, will rebound as quickly as they did in the last downturn six years ago. Analysts are calling for an oil price of approximately US$60 for 2016 to 2018. As operators look to conserve cash, new capital expenditures will likely be delayed or canceled. This will particularly affect offshore and heavy oil projects. North American shale, with its enormous resources, scalability, and flexible development, will be more resilient but also very volatile. Shale developments will also expand internationally in regions like the Vaca Muerte, in Argentina.
• At current oil prices, new North American shale developments are operating at, or below, break-even, despite the fact that costs have fallen around US$20/barrel over the last year as drilling and completions efficiency has increased (and operators have received significant pricing concessions from service companies). We therefore expect that the emphasis on efficiency and pricing will persist going forward.
• Implications for Pason are twofold: 1) more than ever, we are focusing efforts to develop and market products and services that create significant and visible value, either by saving costs, or by increasing revenue for our customers; and 2) we are strengthening our market presence in OPEC countries, with a focus on the Middle East.

It is clear that we need to continue to invest in future growth, including investments in new product development, in service capabilities, in infrastructure and systems, and in our international footprint as outlined below:

• International Footprint: We are increasing our international footprint, including our Saudi joint venture, and we recently opened a small business development office in Dubai.
• On June 30, 2015, our cash position stood at $195.3 million and working capital at $227.0 million. There is no debt on the balance sheet. We are maintaining our quarterly dividend at $0.17 per share.