IROC Energy Services Corp. announces year end and fourth quarter 2008 results and disbands special committee
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/THIS PRESS RELEASE IS NOT FOR DISSEMINATION IN UNITED STATES OR TO ANY
UNITED STATES NEWS SERVICES/
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FINANCIAL HIGHLIGHTS
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For the 3 months For the year
ended Dec. 31, ended Dec. 31,
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(Unaudited) (Audited)
% %
2008 2007 Change 2008 2007 Change
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Revenue
- continuing
operations $17,004 $14,978 14% $65,324 $56,810 15%
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Operating costs 10,291 9,311 11% 40,439 34,669 17%
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Gross margin 6,713 5,667 18% 24,885 22,141 12%
Gross margin % 39% 38% 3% 38% 39% -3%
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General and
administrative
expenses 2,411 2,684 -10% 8,666 8,925 -3%
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EBITDAS
- continuing
operations (1) 4,302 2,983 44% 16,219 13,216 23%
Per share
diluted (1) 0.10 0.07 43% 0.37 0.30 23%
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Net earnings
(loss)
- continuing
operations 1,786 (57) 3233% 3,983 615 548%
Per share
diluted 0.04 0.00 100% 0.09 0.01 536%
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Net earnings
Per share 1,522 196 677% 2,348 2,139 10%
diluted 0.03 0.00 100% 0.05 0.05 8%
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Number of
shares
outstanding
Basic 44,304,504 44,251,080 0% 44,294,837 43,438,286 2%
Diluted 44,324,122 44,336,011 0% 44,304,653 43,533,725 2%
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(1) EBITDAS and EBITDAS per share are "NON-GAAP MEASURES". EBITDAS is
defined as "earnings before interest, taxes, depreciation and
amortization, stock-based compensation expense, foreign exchange
gains and losses and gains or losses on disposal of property and
equipment." EBITDAS and EBITDAS per share are not recognized measures
under GAAP.
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Overall 2008 was a mixed year for the oilfield service industry. The year began with expectations of reduced activity for the industry as a result of uncertainty from low natural gas pricing and continued government intervention at the federal and provincial levels. This was followed by strengthening fundamentals in the second quarter, particularly in higher natural gas pricing. During the third quarter of 2008 there was a great deal of optimism building regarding future activity in the WCSB as commodity prices, particularly oil, reached record highs and drove plans for significant increased expenditures by producers. However, with the spectacular drop in pricing for oil and natural gas and the worldwide credit crisis, the optimism quickly faded. While IROC was not immune to the effects of these events, we believe IROC is well positioned to benefit, both in the short and long-term, as a result of strategic decisions made by management and the board of directors.
During the third quarter of 2008, IROC undertook a full strategic review of its assets and operations. The first action taken as a result of the review was to sell our drilling assets, operated under our Mission Drilling division, after determining that given industry conditions these assets were not able to provide an adequate return on capital invested. This transaction resulted in gross proceeds to IROC of $33.7 million, which was applied to outstanding long-term debt, thereby providing the Company with increased financial flexibility to continue to grow our core businesses. Further focus on our core businesses was a key component of the strategic review and as such during the fourth quarter of 2008 management solicited interest for the possible sale of the assets and operations of our Oricomm and Envirocore divisions. Subsequent to the December 31, 2008 year-end IROC completed the sale of both Oricomm and Envirocore divisions for total aggregate proceeds of $8.44 million, of which $6.3 million was received in cash and the balance on assumption of notes receivable totalling $2.14 million. The cash proceeds of $6.3 million were used to further reduce IROC's outstanding long-term debt.
The benefit to IROC of divesting these three divisions is IROC is now able to better focus on its core businesses. Our largest business, Eagle Well Servicing, has proven itself to be very competitive in the market place with industry leading utilization, new equipment and technology, and competent personnel across its fleet of 36 service rigs. While the impact of reduced exploration programs is obvious, we believe that the service rig segment of the oilfield services industry will be affected less than other segments by the reductions since producers will likely want to maintain a minimum level of production.
Throughout the remainder of this release amounts are presented on a continuing operations basis to more accurately reflect the way in which IROC intends to operate on a continuing basis.
Despite the industry conditions experienced throughout 2008, IROC was able to increase revenue and profitability once again. For the year ended December 31, 2008 IROC achieved the following key accomplishments:
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- Revenue from continuing operations for the year ended December 31,
2008 increased 15%, from $56.8 million to $65.3 million compared to
the same period in 2007. Revenue growth was higher as a result of
additional equipment capacity, modest pricing improvements in service
rigs, and higher product sales in Canada Tech, which was positively
affected by improved foreign exchange rates in the second half of
2008 in Canada Tech.
- EBITDAS from continuing operations for the year ended December 31,
2008 was $16.2 million or $0.37 per share compared to $13.2 million,
or $0.31 per share, in the same period of 2007, an increase of 23%.
The increase in EBITDAS for the year was driven by growth from
additional equipment capacity as noted above, pricing increases in
Canada Tech and Eagle Well Servicing, fuel surcharges to offset the
higher costs earlier in the year, cost controls implemented over
general & administrative expenses, and better exchange rates realized
on sales in Canada Tech all helped to maintain margins and
profitability overall.
- Net earnings from continuing operations of $4.0 million or $0.09 per
share compared to $0.6 million or $0.01 per share in the comparable
period of 2007. Net earnings improved as a result of the factors
noted above for increased EBITDAS as well as from a greater than 21%
drop in interest costs for debt servicing due to the significant
repayments of long-term debt made during fiscal 2008 totalling
approximately $38.5 million.
- Four of the six new service rigs being constructed were delivered and
deployed to the field during the second half of 2008. The remaining
two service rigs were completed during the first quarter of 2009 and
deployed to the field. All rigs constructed were with the original
estimated costs of construction.
- We significantly strengthened our balance sheet by reducing debt
levels with cash proceeds of $33.7 million from the sale of its
drilling rig assets and discontinued the operations of the contract
drilling services division, Mission Drilling. IROC exited fiscal 2008
with net debt of $15.2 million. Steps were taken to divest of the
Oricomm and Envirocore divisions, which were completed subsequent to
year-end (at the end of February of 2009) for a total of
$8.44 million and these transactions further strengthened the balance
sheet with cash proceeds of $6.3 million applied to outstanding
long-term debt. In addition we were not required to take any write
downs on our remaining assets.
- Our internal growth initiatives will be deferred as a minimal capital
budget will be followed for the first half of the year, with it being
revisited during the last half when management expects more clarity.
Acquisition opportunities will be addressed on an individual basis
and are expected to become more affordable as the year progresses.
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IROC's continuing operations are reported in two segments. The Drilling and Production Services segment includes well servicing and oilfield rental equipment product lines. The Technology Services segment includes the downhole tool manufacturing product line.
Eagle Well Servicing
Our growth continued through the year at Eagle with the addition of six additional service rigs, four of which were deployed by year end and two additional rigs were deployed in the first quarter of 2009. Revenues reached $44.9 million for the year, while EBITDA in the division set a new high water mark at $16.5 million. With 36 rigs in the fleet, we now have full geographic coverage of the WCSB with bases in Red Deer, Grande Prairie, Lloydminster and Estevan. We continue to incorporate the newest technologies and designs into our rigs to meet the changing needs of the industry, and we believe that our operating experience will ensure efficiencies that will set our company apart in a difficult environment. We anticipate that any movement forward in the pricing of oil will be a positive for Eagle as many jobs that typically would have been undertaken have been deferred until pricing recovers. The backlog of wells continues to grow and we expect that at some point during the year, companies will react. Management expects that service rigs operating outside of the Province of Alberta and in oil prone areas such as south-eastern Saskatchewan will be the first to recover, making Eagle an early beneficiary of any improvement in pricing.
Canada Tech
A number of positives happened during the year in our downhole tool design, manufacturing and sales operations at Canada Tech. First and foremost, the Canadian dollar weakened appreciably against the US dollar late in the year. The resulting affect on our bottom line was significant with approximately 79% of our total sales in the division being denominated in US dollars. The continued refinement of our processes, the introduction of new products and continued development of tools for specific applications all contributed to improved results for Canada Tech in 2008. Revenues of $15.5 million and EBITDA of $2.9 million were posted despite a noticeable pull back on capital expenditures by oil and gas companies in Canada and around the world during the later stages of the year. As we work through the beginning of 2009 we are seeing some of the deferred purchases of our products beginning to make their way back into the market. Longer term international producers continue to exhibit not only an interest but a need for our products and should prove to provide some revenue stability during the coming quarters. On the negative side, we continue to see weakness in the Canadian market as existing inventories are utilized and new purchases continue to be deferred.
Aero Rental Services
Despite less than favourable operating conditions, Aero has performed admirably during 2008. Increased revenues and establishing positive cash flow were the primary goals at the beginning of the year and each of those was accomplished. Small inventory additions were made to address specific requirements of our customers, and increased market penetration and brand recognition began to take hold in our pressure control business. Management understands the need to grow this division as further margin efficiencies can only be gained through bringing additional equipment and product lines to market so that Aero can take advantage of our existing infrastructure. Aero, despite its size, is seen as an important component of our growth strategy. The dismal environment in Alberta currently has put some smaller rental companies in peril and it is the intent of management to be active in their acquisition where appropriate. While our other business lines will grow during periods of greater activity, given the financial and operational risk involved, the expansion in Aero's business is best executed during slower times when assets can be secured for better pricing. The long term viability of the business will be achieved by having the appropriate equipment at the proper time in order to take advantage of increasing activity, which is the current strategy we hope to execute during the current downturn and into the next part of the cycle.
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Highlights for the Fourth Quarter:
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Despite the decline in overall economic activity in the fourth quarter of 2008, IROC was able to increase revenues on it service rig fleet and rental equipment and again achieved higher than industry average utilization rates on the service rigs. The increases in revenues were offset in part by increases in labour costs, fuel costs and the cost of materials and other consumables in running and maintaining the service rigs and rental equipment. Pricing increases were implemented at the beginning of the fourth quarter in response to the CAODC decision to increase field personnel wages. The downturn in activity brought about by the decline in economic conditions, including a significant decline in commodity prices for oil and gas and the worldwide credit crisis, has lead to substantial pricing pressure and lower utilization in all oilfield related services.
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- IROC's revenue from continuing operations for the fourth quarter
ended December 31, 2008 increased 14%, from $15 million to
$17 million compared to the same period in 2007. Revenue increased
year over year for the three month period primarily as a result of
additional equipment capacity from internal growth initiatives in
service rigs.
- During the second quarter we announced additional expansion of our
service rig fleet with the construction of 6 new freestanding double
service rigs. The first of the six rigs was delivered and deployed to
the field during September 2008 with another three rigs deployed
during the fourth quarter. The remaining two rigs were completed
during the first quarter of 2009 and have been deployed to the field.
The utilization of the service rigs was slightly higher during the
fourth quarter of 2008 at 54% as compared to 52% in the same period
in 2007 which contributed to the positive results.
- EBITDAS from continuing operations for the three months ended
December 31, 2008 was $4.3 million or $0.10 per share, compared to
$3.0 million, or $0.07 per share, in the same period of 2007, an
overall increase of 44%. The increase in EBITDAS for the quarter was
driven by growth from additional equipment capacity as noted above,
pricing increases in Eagle Well Servicing, cost controls implemented
over general & administrative expenses, and better exchange rates
realized on sales in Canada Tech all helped to maintain margins and
profitability overall. EBITDAS as a percentage of revenue was 25.3%
and 19.9% for the three months ended December 31, 2008 and 2007,
respectively.
- The Company recorded net earnings from continuing operations of
$1.8 million, or earnings of $0.04 per share, for the three months
ended December 31, 2008 compared to net earnings of $0.1 million for
the comparable period for 2007. The increase in the net earnings for
the three months ended December 31, 2008 compared to 2007 is due to
lower interest costs for debt servicing due to significant debt
reductions in the September and October of 2008 where by long-term
debt was decreased by approximately $38.5 million compared to the
balance at January 1, 2008.
Outlook
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The outlook for 2009 remains uncertain. The global financial crisis is affecting all industries and has led to a significant fall in oil and gas commodity pricing from the highs seen in the third quarter of 2008. The effects of this, while difficult to predict with any high degree of certainty, appear to have hindered the ability for oil and gas producers to access debt or equity markets to finance their operations. As such, it appears most producers have substantially reduced their capital spending plans for fiscal 2009 with a focus on balance sheet preservation and matching spending with realistic cash flows. Increased spending by producers will only begin again when producers see sustained periods of higher natural gas and oil prices. Any positive change in commodity pricing will positively affect our outlook with any movement in oil providing the most immediate increase in utilization. Management is pleased with how our assets are positioned and will continue to monitor activity to ensure that they are deployed as efficiently as possible.
IROC was able to substantially strengthen its balance sheet through the disposition of Mission Drilling, Oricomm and Envirocore division assets, thereby providing greater flexibility in a time of uncertainty in our business. Going forward we feel that we have positioned IROC very well on a number of fronts. Actions have been taken to put our balance sheet into proper shape, appropriate asset rationalizations have been made, administrative costs have been cut, our equipment is best in class, opportunity exists for us to continue to grow and management continues to remain focused on growing shareholder value. We understand that we are in a cyclical business and therefore need to manage the down side of the cycle just as we need to during better times.
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Special Committee
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In August 2008 our board of directors formed a committee of certain independent directors (the "Special Committee") to review the strategic alternatives available to the Company to enhance shareholder value. The dispositions of the Mission Drilling, Oricomm and Envirocore divisions were each mandated and completed as part of the of the strategic review. On March 26, 2009 the board of directors determined that the Special Committee had successfully completed the review in the context of current market conditions and the board moved that the Special Committee be disbanded.
Publicly reported information for IROC Energy Services Corp. is available at www.sedar.com.
About IROC Energy Services Corp.
IROC Energy Services Corp. is an Alberta oilfield services company that, through the IROC Energy Services Partnership, provides a diverse range of products, services and equipment to the oil and gas industry that are among the newest and most innovative in the WCSB. IROC combines cutting-edge technology with depth of experience to deliver a product and services offering in three core areas: Well Servicing & Equipment, Downhole Temperature & Pressure Monitoring Tools, and Rental Services. For more information on IROC Energy Services Corp. visit our website at www.iroccorp.com.
Cautionary Statements
Certain statements contained in this press release may constitute forward looking statements concerning, among other things, expected revenues, expected expenses, profits, developments and strategies for IROC's operations all of which are subject to certain risks, uncertainties and assumptions. These forward looking statements are identified by their use of terms and phrases such as "anticipate", "continue", "estimate", "expect", "may", "will", "projected", "should", "believe" and other similar terms and phrases. By its nature, such forward looking information involves known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward looking statements. These risks include, but are not limited, to the risks associated with the oil and gas industry generally, fluctuating prices in crude oil and natural gas, changes in drilling activity, general global economic, political and business conditions, weather conditions, regulatory changes and availability of products, qualified personnel and manufacturing capacity and raw materials. If any of these uncertainties materialize, or if assumptions are incorrect actual results may vary materially from those expected. IROC relies on litigation protection for any forward looking statements.
This press release is not for dissemination in United States or to any United States news services. The Common Shares of IROC have not and will not be registered on the United States Securities Act of 1933, as amended (the "United States Securities Act") or any state securities laws and are not offered or sold in the United States or to any US person except in certain transactions exempt from the registration requirements of the United States Securities Act and applicable state securities laws.
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Consolidated Balance Sheets
December 31, 2008 and 2007
(expressed in thousands of dollars)
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2008 2007
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Assets
Current assets:
Cash $ 1 $ 1
Accounts receivable 13,128 13,433
Inventory 4,130 5,442
Prepaid expenses and deposits 452 359
Income taxes receivable 72 -
Assets of discontinued operations 3,615 4,949
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21,398 24,184
Intangible assets 4,487 5,347
Property and equipment 64,759 58,579
Goodwill 6,850 6,850
Assets of discontinued operations 7,170 42,693
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$ 104,664 $ 137,653
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Liabilities and Shareholders' Equity
Current liabilities:
Operating loan $ 4,716 $ 3,421
Accounts payable and accrued liabilities 6,393 5,229
Income taxes payable - 190
Current portion of long-term debt 4,891 6,831
Liabilities of discontinued operations 472 781
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16,472 16,452
Long-term debt and debentures 20,116 56,457
Future income taxes 4,132 3,481
Shareholders' equity:
Share capital 51,591 51,547
Warrants - 828
Contributed surplus 3,526 2,409
Retained earnings 8,827 6,479
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63,944 61,263
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$ 104,664 $ 137,653
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Consolidated Statement of Income, Comprehensive Income, and Retained
Earnings
Years ended December 31, 2008 and 2007
(expressed in thousands of dollars)
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2008 2007
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Revenue $ 65,324 $ 56,810
Expenses:
Operating 40,439 34,669
General and administrative 8,666 8,925
Stock-based compensation 265 462
Depreciation and amortization 7,692 7,326
Interest on callable debt and long-term debt 2,915 3,427
Interest and accretion on debentures 624 943
Other interest 382 596
Loss (gain) on disposal of property and
equipment (73) (131)
Foreign exchange (gain) loss (697) 317
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60,213 56,534
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Earnings before income taxes from continuing
operations 5,111 276
Income taxes (recovery):
Current (45) (139)
Future 1,173 (200)
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1,128 (339)
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Net income and comprehensive income from continuing
operations 3,983 615
Net income (loss) and comprehensive income from
discontinued operations (1,635) 1,524
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Net income and comprehensive income 2,348 2,139
Retained earnings, at beginning of year 6,479 4,340
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Retained earnings, at end of year $ 8,827 $ 6,479
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Earnings per share from continuing operations:
Basic $ 0.09 $ 0.01
Diluted $ 0.09 $ 0.01
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Earnings (loss) per share from discontinued
operations:
Basic $ (0.04) $ 0.04
Diluted $ (0.04) $ 0.04
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Earnings per share:
Basic $ 0.05 $ 0.05
Diluted $ 0.05 $ 0.05
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Weighted average number of shares outstanding:
Basic 44,294,837 43,438,286
Diluted 44,304,653 43,533,725
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Consolidated Statements of Cash Flows
Years ended December 31, 2008 and 2007
(expressed in thousands of dollars)
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2008 2007
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Cash flows from operating activities:
Net earnings (loss) from continuing
operations $ 3,983 $ 615
Items not affecting cash:
Depreciation and amortization 7,692 7,326
Future income taxes 1,173 (200)
Stock-based compensation 265 462
Non-cash accretion on debentures 256 383
Loss (gain) on disposal of property and
equipment (73) (131)
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13,296 8,455
Changes in non-cash working capital balances 1,520 1,179
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14,816 9,634
Discontinued operations:
Funds provided by discontinued operations 2,925 5,028
Changes in non-cash working capital balances
of discontinued operations 1,025 (1,793)
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18,766 12,869
Cash flows from investing activities:
Proceeds on disposal of property and
equipment - discontinued operations 32,171 1,323
Purchase of property and equipment - continuing
operations (13,148) (21,641)
Purchase of property and equipment -
discontinued operations (1,706) (2,746)
Business acquisitions, net of cash acquired - (1,000)
Proceeds on disposal of property and
equipment - continuing operations 548 1,887
Change in non-cash working capital balances 906 (1,547)
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18,771 (23,724)
Cash flows from financing activities:
Repayment of long-term debt (31,536) (56,741)
Repayment of debentures (7,000) -
Operating loan advances 1,295 (2,673)
Loan commitment fees (340) (469)
Issue of common shares 44 12
Issue of long-term debt - 70,726
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(37,537) 10,855
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Increase in cash during the year - -
Cash, beginning of year 1 1
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Cash, end of year $ 1 $ 1
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SOURCE: IROC Energy Services Corp.
IROC Energy Services Corp., Mr. Thomas M. Alford, President and CEO, Telephone: (403)
263-1110, email: investorrelations@iroccorp.com
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