CALGARY,
AB, Oct. 25, 2022 /CNW/ - Western Energy
Services Corp. ("Western" or the "Company") (TSX: WRG) announces
the release of its third quarter 2022 financial and operating
results. Additional information relating to the Company,
including the Company's financial statements and management's
discussion and analysis as at September 30,
2022 and for the three and nine months ended September 30, 2022 and 2021 will be available on
SEDAR at www.sedar.com. Non-International Financial Reporting
Standards ("Non-IFRS") measures and ratios, such as Adjusted EBITDA
and Adjusted EBITDA as a percentage of revenue, as well as
abbreviations and definitions for standard industry terms are
defined later in this press release. All amounts are
denominated in Canadian dollars (CDN$) unless otherwise
identified.
Third Quarter 2022 Operating
Results:
- Third quarter revenue increased by $25.5
million or 77%, to $58.5
million in 2022 as compared to $33.0
million in the third quarter of 2021. Contract
drilling revenue totalled $38.1
million in the third quarter of 2022, an increase of
$18.6 million or 96%, compared to
$19.5 million in the third quarter of
2021. Production services revenue was $20.4 million for the three months ended
September 30, 2022, an increase of
$6.7 million or 50%, as compared to
$13.7 million in the same period of
the prior year. In the third quarter of 2022, revenue was
positively impacted by improved demand compared to the third
quarter of 2021 as described below:
-
- In Canada, drilling rig
utilization averaged 27% in the third quarter of 2022, compared to
18% in the third quarter of 2021. The increase in activity in
the third quarter of 2022 was mainly attributable to the higher
commodity prices resulting from the war in Ukraine and the lifting of government
restrictions globally which re-opened the economy, compared to the
third quarter of 2021 when the COVID-19 pandemic reduced demand
across the industry. The Canadian Association of Energy Contractors
("CAOEC") industry average utilization of
40%1 for the third quarter of 2022
represented an increase of 1,300 basis points ("bps") compared to
the CAOEC industry average of 27% in the third quarter of
2021. Revenue per Operating Day averaged $29,283 in the third quarter of 2022, an increase
of 39% compared to the same period of the prior year, mainly due to
improved industry demand, upgrades made to the rigs, and
inflationary pressures on operating costs, including higher CAOEC
industry wages and fuel charges that are passed through to the
customer;
- In the United States ("US"),
drilling rig utilization averaged 45% in the third quarter of 2022,
compared to 13% in the third quarter of 2021, with Operating Days
improving from 98 days in 2021 to 333 days in 2022. Revenue per
Operating Day for the third quarter of 2022 averaged US$26,372, a 51% increase compared to
US$17,419 in the same period of the
prior year, mainly due to improved market conditions and changes in
rig mix, as there was more activity with the Company's higher spec
rigs which command higher day rates; and
- In Canada, service rig
utilization of 45% in the third quarter of 2022 was higher than 41%
in the same period of the prior year, mainly due to improved
activity and an increase in production work resulting from higher
commodity prices. Revenue per Service Hour averaged
$975 in the third quarter of 2022 and
was 34% higher than the third quarter of 2021, as a result of
improved market conditions which led to higher hourly rates, due to
inflationary pressures on operating costs, including higher CAOEC
industry wages and fuel charges that are passed through to the
customer. Higher pricing led to production services revenue
totaling $20.4 million in the third
quarter of 2022, an increase of $6.7
million or 50%, as compared to the same period in the prior
year.
- Administrative expenses increased by $0.6 million or 15%, to $3.3 million in the third quarter of 2022, as
compared to $2.7 million in the third
quarter of 2021, due to reduced COVID-19 government subsidies
received by the Company.
- The Company generated net income of $0.8
million in the third quarter of 2022 ($0.02 net income per basic common share) as
compared to a net loss of $10.4
million in the same period in 2021 ($13.65 net loss per basic common share).
Net income of $0.8 million in
the third quarter of 2022 represented the first time since the
first quarter of 2015, excluding the second quarter of 2022 which
had net income due to a gain on debt forgiveness, where the Company
was able to generate positive net income, as a result of improved
commodity prices and demand. The change can mainly be
attributed to a $9.8 million increase
in Adjusted EBITDA, a $3.0 million
decrease in finance costs due to the lower total debt balance, a
$0.8 million decrease in depreciation
expense due to certain assets being fully depreciated in the
period, offset partially by a $1.4
million increase in income tax expense and a $0.8 million increase in stock based compensation
expense.
- Adjusted EBITDA of $14.8 million
in the third quarter of 2022 was $9.8
million, or 195%, higher compared to $5.0 million in the third quarter of 2021.
Adjusted EBITDA was higher due to improved activity in Canada in all divisions and in the US, offset
partially by $2.0 million lower
COVID-19 related government subsidies received in 2022.
- Third quarter additions to property and equipment of
$8.5 million in 2022 compared to
$1.3 million added in the third
quarter of 2021, consisting of $7.1
million of expansion capital and $1.4
million of maintenance capital, as the Company initiated its
rig upgrade program in 2022.
- On August 2, 2022, Western
completed a share consolidation of the Company's issued and
outstanding common shares (the "Consolidation") at a ratio of one
post-consolidation common share for every 120 pre-consolidation
common shares. The Consolidation reduced the number of issued and
outstanding common shares of the Company from 4,060,663,214 common
shares to 33,838,886 common shares, and proportionate adjustments
were made to the Company's outstanding restricted share units and
options.
1 Source:
CAOEC, monthly Contractor Summary.
|
Year to Date 2022 Operating
Results:
- Revenue for the nine months ended September 30, 2022 increased by $49.3 million or 55%, to $139.6 million as compared to $90.3 million for the nine months ended
September 30, 2021. In the contract
drilling segment, revenue totalled $86.3
million for the nine months ended September 30, 2022, an increase of $34.6 million or 67%, compared to $51.7 million in the same period in 2021. In the
production services segment, revenue totalled $53.5 million for the nine months ended
September 30, 2022, as compared to
$39.1 million in the same period of
the prior year, an increase of $14.4
million or 37%. Revenue was positively impacted by improved
demand and pricing in 2022, compared to 2021 as described
below:
-
- In Canada, drilling rig
utilization averaged 23% for the nine months ended September 30, 2022, compared to 16% for the nine
months ended September 30, 2021. The
increase in activity in 2022 was mainly attributable to the higher
commodity prices resulting from the war in Ukraine, the COVID-19 vaccination rollouts and
the resulting lifting of government restrictions which re-opened
the economy, compared to 2021 when the COVID-19 pandemic reduced
demand across the industry. The CAOEC industry average utilization
of 34%2 for the nine months ended
September 30, 2022 represented an
increase of 1,100 bps compared to the CAOEC industry average of 23%
for the nine months ended September 30,
2021. Revenue per Operating Day averaged $28,002 for the nine months ended September 30, 2022, an increase of 33% compared
to the same period of the prior year, mainly due to improved
industry demand, upgrades made to the rigs, and inflationary
pressures on operating costs, including higher CAOEC industry wages
and fuel charges that are passed through to the customer;
- In the United States, drilling
rig utilization averaged 31% for the nine months ended September 30, 2022, compared to 13% in the same
period of 2021, with Operating Days improving from 287 days in 2021
to 683 days in 2022. Revenue per Operating Day for the nine months
ended September 30, 2022 averaged
US$24,421, a 59% increase compared to
US$15,404 for the nine months ended
September 30, 2021, mainly due to
improved market conditions and changes in rig mix, as there was
more activity with the Company's higher spec rigs which command
higher day rates; and
- In Canada, service rig
utilization of 42% for the nine months ended September 30, 2022 was higher than 39% for the
nine months ended September 30, 2021,
as overall activity improved, but was constrained by field crew
shortages across the industry and very cold weather in the first
quarter of 2022. Revenue per Service Hour averaged $928 for the nine months ended September 30, 2022 and was 29% higher than the
same period of 2021, as a result of improved market conditions
which led to higher hourly rates, due to inflationary pressures on
operating costs, including higher CAOEC industry wages and fuel
charges that are passed through to the customer. Higher pricing led
to production services revenue totaling $53.5 million for the nine months ended
September 30, 2022, an increase of
$14.4 million or 37%, as compared to
the same period in the prior year.
- Administrative expenses increased by $1.9 million or 25%, to $10.1 million for the nine months ended
September 30, 2022, as compared to
$8.2 million in the same period of
2021, due to lower receipts related to government subsidy programs,
as both the Canada Emergency Wage
Subsidy and Canada Emergency Rent
Subsidy programs ended in 2021 and were replaced with smaller
government subsidy programs.
- Net income of $32.4 million for
the nine months ended September 30,
2022 ($1.89 net income per
basic common share) compared to a net loss of $29.8 million in the same period in 2021
($39.17 net loss per basic common
share). The change can mainly be attributed to a $49.4 million gain on debt forgiveness related to
the Restructuring Transaction described below, a $13.6 million increase in Adjusted EBITDA, a
$3.5 million decrease in finance
costs, and a $2.1 million decrease in
depreciation expense due to certain assets being fully depreciated
in the period, offset partially by a $5.4
million increase in income tax expense.
- Adjusted EBITDA of $27.7 million
for the nine months ended September 30,
2022 was $13.6 million, or
96%, higher compared to $14.1 million
in the same period of 2021. Adjusted EBITDA was higher due to
improved activity and pricing in Canada and the US, offset partially by
$8.3 million lower COVID-19 related
government subsidies received and $0.8
million in one-time startup costs associated with
reactivating certain rigs in the Company's US rig fleet.
- Year to date 2022 additions to property and equipment of
$26.5 million compared to
$4.8 million added in the same period
of 2021, consisting of $22.1 million
of expansion capital and $4.4 million
of maintenance capital, as the Company initiated its rig upgrade
program in 2022.
- On May 18, 2022, Western
completed a recapitalization and debt restructuring transaction to
restructure a portion of its outstanding debt and raise new capital
(the "Restructuring Transaction").
-
- As part of the Restructuring Transaction, on May 18, 2022, Western completed a rights offering
to holders of its common shares on April 19,
2022 to subscribe for additional common shares (the "Rights
Offering"), resulting in the issuance of an aggregate of 16,407,229
(1,968,867,475 pre-consolidation) common shares in the capital of
the Company at a price of $1.92 per
share for aggregate gross proceeds of approximately $31.5 million. As the Rights Offering was fully
subscribed, Western did not utilize a standby commitment whereby
G2S2 Capital Inc. ("G2S2"), Armco Alberta Inc. ("Armco") and MATCO
Investments Ltd. ("Matco"), each a significant shareholder of the
Company, agreed to acquire any common shares not subscribed for
under the Rights Offering.
- $100.0 million of the principal
amount owing to Alberta Investment Management Corporation
("AIMCo"), the lender under Western's second lien term loan
facility (the "Second Lien Facility"), was converted into
16,666,667 (2,000,000,000 pre-consolidation) common shares at a
conversion price of $6.00 per common
share (the "Debt Exchange"), resulting in AIMCo holding
approximately 49.7% of the common shares following closing of the
Restructuring Transaction. In addition, $10.0 million of the proceeds from the Rights
Offering was paid by Western to AIMCo to further reduce the
principal amount outstanding under the Second Lien Facility, with
the remaining $21.5 million of the
proceeds, net of expenses of the Restructuring Transaction, used to
upgrade the Company's rig fleet.
- Concurrent with the Debt Exchange and the repayment of
$10.0 million of the principal amount
of the Second Lien Facility, the Second Lien Facility was amended
to provide for an extension of the maturity of the remaining
principal amount of the Second Lien Facility from January 31, 2023 to May
18, 2026; and an increase in the interest rate from 7.25% to
8.5%.
- In addition, as part of the Restructuring Transaction, the
senior secured credit facilities (the "Credit Facilities") of the
Company were amended as of May 18,
2022, including amendments to (a) extend the maturity of the
Credit Facilities from July 1, 2022
to May 18, 2025, (b) reduce the
amount available under the Credit Facilities from $60.0 million to $45.0
million, and (c) revise certain financial covenants.
Details on the Restructuring Transaction are
contained in Western's short form prospectus dated April 11, 2022
and related documents filed under Western's SEDAR profile on
www.sedar.com.
- On June 13, 2022, Western was the
first drilling and well servicing contractor to become Climate
Smart certified by the emissions reduction evaluation firm Radicle
Group Inc. ("Radicle") a BMO Financial Group company. As part of
Western's journey through Radicle's intensive Climate Smart
greenhouse gas ("GHG") inventory training and certification
process, the Company has taken on the challenge of documenting,
reporting, and creating an action plan to reduce its climate
footprint.
Using 2018 as its base year, Western completed four annual
organizational GHG inventories, which account for direct operating
emissions (Scope 1), indirect emissions from purchased electricity
(Scope 2) and indirect emissions not counted in the previous scopes
(Scope 3) to be Climate Smart certified through to 2021. As
contract drilling is part of its core business, Western believes
that annual meters drilled is a key operating metric and as an
intensity metric, tonnes of CO2 per meter drilled (tCO2/m) can be
used to measure the Company's environmental value. Through the
certification process, Western identified a 30% reduction in CO2
intensity per meter drilled in 2021 compared to 2018 base year, due
to regularly increasing operational productivity and the commitment
to retrofitting alternative fuel technology on our rigs. The
Company's 44% increase in meters drilled per day since 2018, fuel
efficient rig design, and the continuous adoption of dual fuel
technology are tangible ways that Western continues to help its
customers meet their Scope 1 reduction targets. The Company remains
committed to advancing its environmental, social, and governance
reporting and providing solutions that are impactful to our
stakeholders and the environment.
2 Source:
CAOEC, monthly Contractor Summary.
|
Selected Financial
Information
|
|
|
|
|
|
|
|
|
(stated in
thousands, except share and per share amounts)
|
|
|
|
|
|
Three months
ended September 30
|
|
Nine months ended September 30
|
|
Financial
Highlights
|
2022
|
2021
|
Change
|
|
2022
|
2021
|
Change
|
|
Revenue
|
58,483
|
32,960
|
77 %
|
|
139,552
|
90,315
|
55 %
|
|
Adjusted
EBITDA(1)
|
14,799
|
5,009
|
195 %
|
|
27,688
|
14,097
|
96 %
|
|
Adjusted EBITDA as a
percentage of revenue(1)
|
25 %
|
15 %
|
67 %
|
|
20 %
|
16 %
|
25 %
|
|
Cash flow from (used
in) operating activities
|
6,854
|
(2,524)
|
(372 %)
|
|
22,039
|
8,395
|
163 %
|
|
Additions to property
and equipment
|
8,470
|
1,331
|
536 %
|
|
26,520
|
4,759
|
457 %
|
|
Net income
(loss)
|
818
|
(10,397)
|
(108 %)
|
|
32,415
|
(29,791)
|
(209 %)
|
|
– basic
and diluted net income (loss) per
share(2)
|
0.02
|
(13.65)
|
(100 %)
|
|
1.89
|
(39.17)
|
(105 %)
|
|
Weighted average number
of shares(2)
|
|
|
|
|
|
|
|
|
–
basic
|
33,839,658
|
761,664
|
4,343 %
|
|
17,120,283
|
760,520
|
2,151 %
|
|
–
diluted
|
33,839,658
|
761,664
|
4,343 %
|
|
17,120,936
|
760,520
|
2,151 %
|
|
Outstanding common
shares as at period end
|
33,841,318
|
764,002
|
4,329 %
|
|
33,841,318
|
764,002
|
4,329 %
|
|
(1)
|
See "Non-IFRS measures"
included in this press release.
|
(2)
|
On August 2, 2022, the
Company's issued and outstanding common shares were consolidated at
a ratio of one post consolidation
common share for every 120 pre-consolidation common shares. The
comparative 2021 balances have been restated to reflect the 120:1
consolidation ratio.
|
|
|
|
Three months ended September
30
|
Nine months ended September 30
|
Operating Highlights(3)
|
|
2022
|
2021
Change
|
2022
|
2021
|
Change
|
Contract Drilling
|
|
|
|
|
|
|
|
|
|
Canadian Operations:
|
|
|
|
|
|
|
|
|
|
Contract drilling rig
fleet:
|
|
|
|
|
|
|
|
|
|
– Average
active rig count
|
9.9
|
|
9.0
|
|
10 %
|
|
8.5
|
8.0
|
|
6 %
|
|
– End of
period
|
37(5)
|
|
49
|
|
(24 %)
|
|
37(5)
|
49
|
|
(24 %)
|
|
Operating
Days
|
909
|
|
824
|
|
10 %
|
|
2,312
|
2,185
|
|
6 %
|
|
Revenue per Operating
Day
|
29,283
|
|
20,999
|
|
39 %
|
|
28,002
|
21,035
|
|
33 %
|
|
Drilling rig
utilization
|
27 %
|
|
18 %
|
|
50 %
|
|
23 %
|
16 %
|
|
44 %
|
|
CAOEC industry average
utilization – Operating Days(4)
|
40 %
|
|
27 %
|
|
48 %
|
|
34 %
|
23 %
|
|
48 %
|
|
|
|
|
|
|
|
|
|
|
|
United States Operations:
|
|
|
|
|
|
|
|
|
|
Contract drilling rig
fleet:
|
|
|
|
|
|
|
|
|
|
|
|
– Average
active rig count
|
3.6
|
|
1.1
|
|
227 %
|
|
2.5
|
1.1
|
|
127 %
|
|
– End of
period
|
8
|
|
8
|
|
-
|
|
8
|
8
|
|
-
|
|
Operating
Days
|
333
|
|
98
|
|
240 %
|
|
683
|
287
|
|
138 %
|
|
Revenue per Operating
Day (US$)
|
26,372
|
|
17,419
|
|
51 %
|
|
24,421
|
15,404
|
|
59 %
|
|
Drilling rig
utilization
|
45 %
|
|
13 %
|
|
246 %
|
|
31 %
|
13 %
|
|
138 %
|
|
|
|
|
|
|
|
|
|
|
|
|
Production Services
|
|
|
|
|
|
|
|
|
|
|
Well servicing rig
fleet:
|
|
|
|
|
|
|
|
|
|
|
|
– Average
active rig count
|
28.4
|
|
25.6
|
|
11 %
|
|
26.4
|
24.7
|
|
7 %
|
|
– End of
period
|
63
|
|
63
|
|
-
|
|
63
|
63
|
|
-
|
|
Service
Hours
|
18,492
|
|
16,685
|
|
11 %
|
|
51,635
|
48,277
|
|
7 %
|
|
Revenue per Service
Hour
|
975
|
|
727
|
|
34 %
|
|
928
|
717
|
|
29 %
|
|
Service rig
utilization
|
45 %
|
|
41 %
|
|
10 %
|
|
42 %
|
39 %
|
|
8 %
|
|
(3)
See "Defined Terms" included in this press release.
|
(4)
Source: The CAOEC monthly Contractor Summary. The CAOEC
industry average is based on Operating Days divided by total
available drilling days.
|
(5)
During the first quarter of 2022, 12 drilling rigs were
deregistered with the CAOEC.
|
Financial Position
at (stated in thousands)
|
September 30,
2022
|
|
December 31,
2021
|
September 30,
2021
|
Working
capital
|
21,439
|
|
2,224
|
607
|
Total assets
|
475,651
|
|
456,003
|
460,872
|
Long term
debt
|
127,639
|
|
226,884
|
228,263
|
Business Overview
Western is an energy services company that provides contract
drilling services in Canada and
the US and production services in Canada through its various divisions, its
subsidiary, and first nations joint ventures.
Contract Drilling Services
Western operates a fleet of 45 drilling rigs specifically suited
for drilling complex horizontal wells across Canada and the US. Western is currently
the fourth largest drilling contractor in Canada, based on the CAOEC registered drilling
rigs3. In the first quarter of 2022,
Western deregistered 12 drilling rigs with the CAOEC, all of which
can be reactivated at a later date.
Production Services
Production Services provides well servicing and oilfield
equipment rentals in Canada.
Western operates 63 well servicing rigs and is the third largest
well servicing company in Canada
based on CAOEC registered well servicing rigs4. During
the fourth quarter of 2021, the Company sold three well servicing
rigs that operated in the United
States.
Western's contract drilling and well servicing rig fleets
comprise the following:
Nine months ended
September 30
|
|
Drilling
rigs
|
|
|
|
|
|
|
|
|
Well servicing
rigs
|
|
|
|
|
|
2022
|
|
|
|
2021
|
|
|
|
2022
|
2021
|
|
Rig
class(1)
|
Canada
|
US
|
Total
|
|
Canada
|
US
|
Total
|
|
Mast
type
|
Total
|
Total
|
|
Cardium
|
11
|
2
|
13
|
|
23
|
2
|
25
|
|
Single
|
30
|
33
|
|
Montney
|
19
|
-
|
19
|
|
19
|
-
|
19
|
|
Double
|
25
|
25
|
|
Duvernay
|
7
|
6
|
13
|
|
7
|
6
|
13
|
|
Slant
|
8
|
8
|
|
Total
|
37
|
8
|
45
|
|
49
|
8
|
57
|
|
|
63
|
66
|
|
(1)
See "Defined Terms" included in this press release.
|
Business Environment
Crude oil and natural gas prices impact the cash flow of
Western's customers, which in turn impacts the demand for Western's
services. The following table summarizes average crude oil and
natural gas prices, as well as average foreign exchange rates, for
the three and nine months ended September
30, 2022 and 2021.
|
Three
months ended September 30
|
Nine months ended September
30
|
|
2022
|
2021
|
Change
|
2022
|
2021
|
Change
|
Average crude oil
and natural gas prices(1)(2)
|
|
|
|
|
|
|
Crude
Oil
|
|
|
|
|
|
|
|
West Texas Intermediate
(US$/bbl)
|
91.56
|
70.56
|
30 %
|
98.09
|
64.82
|
51 %
|
Western Canadian Select
(CDN$/bbl)
|
93.53
|
71.77
|
30 %
|
105.55
|
65.40
|
61 %
|
|
|
|
|
|
|
|
Natural
Gas
|
|
|
|
|
|
|
30 day Spot AECO
(CDN$/mcf)
|
4.62
|
3.72
|
24 %
|
5.70
|
3.39
|
68 %
|
|
|
|
|
|
|
|
Average foreign
exchange rates(2)
|
|
|
|
|
|
|
US dollar to Canadian
dollar
|
1.31
|
1.26
|
4 %
|
1.28
|
1.25
|
2 %
|
(1) See "Abbreviations" included in this press
release.
(2) Source: Sproule September 30, 2022 Price Forecast,
Historical Prices.
|
West Texas Intermediate on average improved by 30% and 51% for
the three and nine months ended September
30, 2022, respectively, compared to the same periods in the
prior year. Similarly, pricing on Western Canadian Select
crude oil increased by 30% and 61%, respectively, for the three and
nine months ended September 30, 2022,
compared to the same periods in the prior year. In 2022, pricing
increased due to the war in Ukraine which caused significant price
volatility, as well as improved demand for transportation fuels
combined with tight supplies of crude oil. Natural gas prices in
Canada also strengthened in 2022
due to the same factors, as the 30-day spot AECO price improved by
24% and 68% for the three and nine months ended September 30, 2022, compared to the same periods
of the prior year. Additionally, the US dollar to the
Canadian dollar foreign exchange rate for the three and nine months
ended September 30, 2022 strengthened
by 4% and 2%, respectively, compared to the same periods of the
prior year.
In the United States, industry
activity improved in the third quarter of 2022. As reported
by Baker Hughes Company5, the number of
active drilling rigs in the United
States increased by approximately 45% to 765 rigs as at
September 30, 2022, as compared to
528 rigs at September 30, 2021. There
were 215 active rigs in the Western Canadian Sedimentary Basin
("WCSB") at September 30, 2022,
compared to 164 active rigs as at September
30, 2021. The CAOEC6 reported
that for drilling in Canada, the
total number of Operating Days in the WCSB increased by
approximately 37% for the three months ended September 30, 2022, compared to the same period
in the prior year. For the nine months ended September 30, 2022, the total number of Operating
Days in the WCSB were 40% higher than the same period of the prior
year. Despite improved commodity prices, there remains
continued service industry concerns over the prevailing customer
preference to return cash to shareholders, or pay down debt, rather
than grow production through the drill bit thereby limiting
industry drilling activity.
3 Source: CAOEC Contractor Summary as
at October 25, 2022.
|
4 Source: CAOEC Fleet List as at
October 25, 2022.
5
Source: Baker Hughes Company, 2022 Rig Count monthly press
releases.
6
Source: CAOEC, monthly Contractor Summary.
|
Outlook
In 2022, crude oil prices reached their highest levels since
2014, due to recovering demand as governments eased COVID-19
restrictions, the initiation of the Russian invasion of
Ukraine and ongoing supply
constraints. Uncertainty still persists concerning the ongoing war
in Ukraine causing further
volatility in crude oil prices and tight supply. The precise
duration and extent of the adverse impacts of the current
macroeconomic environment, including the war in Ukraine and potential COVID-19 variants on
Western's customers, operations, business and global economic
activity, remains uncertain at this time. Additionally, the delayed
timing of completion of construction on the Trans Mountain pipeline
expansion and the threatened shutdown of Enbridge Line 5, have
contributed to continued uncertainty regarding takeaway capacity.
However, activity levels for the remainder of 2022 are expected to
be higher than 2021 levels as a result of increased capital
spending by Western's customers. Controlling fixed costs,
maintaining balance sheet strength and flexibility and managing
through a post-pandemic market are priorities for the Company, as
prices and demand for Western's services continue to improve.
Due to improved activity in 2022 and the closing of the
Restructuring Transaction, Western's board of directors has
approved an updated capital budget for 2022 of $37 million, comprised of $25 million of expansion capital and $12 million of maintenance capital, with
$32 million allocated to the contract
drilling segment and $5 million
allocated to the production services segment. Substantially
all of the net proceeds from the Rights Offering are being used to
upgrade the Company's drilling rig fleet which will drive further
improvements in both utilization and pricing through all industry
cycles. Western will continue to manage its costs in a disciplined
manner and make required adjustments to its capital program as
customer demand changes. Currently, 17 of Western's drilling rigs
and 25 of Western's well servicing rigs are operating.
As at September 30, 2022, Western
had $7.0 million drawn on its
$45.0 million Credit Facilities. As
described previously, subsequent to December
31, 2021, the Company amended the terms of its Credit
Facilities, including extending the maturity date and amending its
financial covenants. Western currently has $11.6 million outstanding on its HSBC Bank Canada
six-year committed term non-revolving facility with the
participation of Business Development Canada (the "HSBC Facility"),
which matures on December 31, 2026.
Western currently has $107.4 million
outstanding on its Second Lien Facility. As previously announced on
May 18, 2022, the Company closed its
Rights Offering and Debt Restructuring Transaction, resulting in
reduced debt levels, as well as the extension of the maturity date
of the Second Lien Facility and the Credit Facilities. The Debt
Restructuring Transaction resulted in a $100.0 million decrease in the principal amount
owing under the Second Lien Facility, resulting from the Debt
Exchange and the repayment of $10.0
million of the principal amount of the Second Lien Facility
using proceeds from the Rights Offering, which will reduce the
Company's finance costs on a go forward basis. The remaining net
proceeds from the Rights Offering are being invested in capital
upgrades on its drilling rig fleet.
Oilfield service activity in Canada will be affected by the continued
development of resource plays in Alberta and northeast British Columbia which will be impacted by
continued pipeline construction, environmental regulations, and the
level of investment in Canada. In
the short term, the largest challenges facing the oilfield service
industry are a lack of qualified field personnel and the restrained
growth in customer drilling activity due to the continuing
preference to return cash to shareholders through share buybacks,
increased dividends and repayment of debt, rather than grow
production. If commodity prices remain high for an extended period
and as customers strengthen their balance sheets and satisfy
shareholders, we expect that drilling activity will continue to
increase. In the medium term, Western's rig fleet is well
positioned to benefit from the LNG Canada liquefied natural gas
project now under construction in British
Columbia. It remains Western's view that its upgraded
drilling rigs and modern well servicing rigs, reputation for
quality, and disciplined cash management provides Western with a
competitive advantage.
Non-IFRS Measures and
Ratios
Western uses certain financial measures in this press release
which do not have any standardized meaning as prescribed by
International Financial Reporting Standards ("IFRS"). These
measures and ratios, which are derived from information reported in
the condensed consolidated financial statements, may not be
comparable to similar measures presented by other reporting
issuers. These measures and ratios have been described and
presented in this press release in order to provide shareholders
and potential investors with additional information regarding the
Company. The non-IFRS measure and ratio used in this press release
is identified and defined as follows:
Adjusted EBITDA
Earnings before interest and finance costs, taxes, depreciation
and amortization, other non-cash items and one-time gains and
losses ("Adjusted EBITDA") is a useful supplemental measure as it
is used by management and other stakeholders, including current and
potential investors, to analyze the Company's principal business
activities. Adjusted EBITDA provides an indication of the
results generated by the Company's principal operating segments,
which assists management in monitoring current and forecasting
future operations, as certain non-core items such as interest and
finance costs, taxes, depreciation and amortization, and other
non-cash items and one-time gains and losses are removed. The
closest IFRS measure would be net income (loss) for consolidated
results.
Adjusted EBITDA as a percentage of revenue is a non-IFRS
financial ratio which is calculated by dividing Adjusted EBITDA by
revenue for the relevant period. Adjusted EBITDA as a
percentage of revenue is a useful supplemental measure as it is
used by management and other stakeholders, including current and
potential investors, to analyze the profitability of the Company's
principal operating segments.
The following table provides a reconciliation of net income
(loss), as disclosed in the condensed consolidated statements of
operations and comprehensive income, to Adjusted EBITDA:
|
Three months ended
September 30
|
Nine months
ended September 30
|
(stated in
thousands)
|
2022
|
2021
|
2022
|
2021
|
Net income
(loss)
|
818
|
(10,397)
|
32,415
|
(29,791)
|
Income tax expense
(recovery)
|
1,013
|
(357)
|
3,035
|
(2,419)
|
Income (loss) before
income taxes
|
1,831
|
(10,754)
|
35,450
|
(32,210)
|
Add
(deduct):
|
|
|
|
|
Gain on debt
forgiveness
|
-
|
-
|
(49,357)
|
-
|
Depreciation
|
9,744
|
10,475
|
29,652
|
31,761
|
Stock based
compensation
|
795
|
39
|
1,135
|
219
|
Finance
costs
|
2,946
|
5,851
|
11,428
|
14,944
|
Other
items
|
(517)
|
(602)
|
(620)
|
(617)
|
Adjusted
EBITDA
|
14,799
|
5,009
|
27,688
|
14,097
|
|
|
|
|
|
Defined Terms:
Average active rig count (contract drilling): Calculated
as drilling rig utilization multiplied by the average number of
drilling rigs in the Company's fleet for the period.
Average active rig count (production services):
Calculated as service rig utilization multiplied by the average
number of service rigs in the Company's fleet for the period.
Drilling rig utilization: Calculated based on
Operating Days divided by total available days.
Operating Days: Defined as contract drilling days,
calculated on a spud to rig release basis.
Service Hours: Defined as well servicing hours
completed.
Service rig utilization: Calculated as total
Service Hours divided by 217 hours per month per rig multiplied by
the average rig count for the period as defined by the CAOEC
industry standard.
Contract Drilling Rig Classifications:
Cardium class rig: Defined as any contract drilling rig
which has a total hookload less than or equal to 399,999 lbs (or
177,999 daN).
Montney class rig:
Defined as any contract drilling rig which has a total hookload
between 400,000 lbs (or 178,000 daN) and 499,999 lbs (or 221,999
daN).
Duvernay class rig:
Defined as any contract drilling rig which has a total hookload
equal to or greater than 500,000 lbs (or 222,000 daN).
Abbreviations:
- Barrel ("bbl");
- Basis point ("bps"): A 1% change equals 100 basis points
and a 0.01% change is equal to one basis point;
- Canadian Association of Energy Contractors ("CAOEC");
- DecaNewton ("daN");
- International Financial Reporting Standards ("IFRS");
- Pounds ("lbs");
- Thousand cubic feet ("mcf"); and
- Western Canadian Sedimentary Basin ("WCSB").
Forward-Looking Statements and
Information
This press release contains certain forward-looking statements
and forward-looking information (collectively, "forward-looking
information") within the meaning of applicable Canadian securities
laws, as well as other information based on Western's current
expectations, estimates, projections and assumptions based on
information available as of the date hereof. All information
and statements contained herein that are not clearly historical in
nature constitute forward-looking information, and words and
phrases such as "may", "will", "should", "could", "expect",
"intend", "anticipate", "believe", "estimate", "plan", "predict",
"potential", "continue", or the negative of these terms or other
comparable terminology are generally intended to identify
forward-looking information. Such information represents the
Company's internal projections, estimates or beliefs concerning,
among other things, an outlook on the estimated amounts and timing
of additions to property and equipment, anticipated future debt
levels and revenues or other expectations, beliefs, plans,
objectives, assumptions, intentions or statements about future
events or performance. This 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 information.
In particular, forward-looking information in this press release
includes, but is not limited to, statements relating to: commodity
pricing; the future demand for the Company's services and
equipment, in particular, the expectation of improved activity
levels in 2022 as a result of increased capital spending by
Western's customers; the potential continued impact of the COVID-19
pandemic on Western's customers, operations, business and global
economic activity; the potential impact of the current conflict in
Ukraine on commodity prices and
the demand for Western's services; the pricing for the Company's
services and equipment; the Company's expected total capital budget
for 2022, including the allocation of such budget; the Company's
liquidity needs including the ability of current capital resources
to cover Western's financial obligations; the use, availability and
sufficiency of the Company's Credit Facilities; the Company's
ability to maintain certain covenants under its Credit Facilities;
the repayment of the Company's debt; maturities of the Company's
contractual obligations with third parties; the use of proceeds
from the Rights Offering; expectations as to the benefits of the
LNG Canada natural gas project in British
Columbia on the Company and its rig fleet; the expectation
of continued investment in the Canadian crude oil and natural gas
industry; the development of Alberta and British
Columbia resource plays; expectations relating to producer
spending and activity levels for oilfield services; the Company's
ability to maintain a competitive advantage, including the factors
and practices anticipated to produce and sustain such advantage;
and the Company's ability to find and maintain enough field crew
members.
The material assumptions that could cause results or events to
differ from current expectations reflected in the forward-looking
information in this press release include, but are not limited to:
demand levels and pricing for oilfield services; demand for crude
oil and natural gas and the price and volatility of crude oil and
natural gas; pressures on commodity pricing; the continued business
relationships between the Company and its significant customers;
crude oil transport, pipeline and LNG export facility approval and
development; that all required regulatory and environmental
approvals can be obtained on the necessary terms and in a timely
manner, as required by the Company; liquidity and the Company's
ability to finance its operations; the effectiveness of the
Company's cost structure and capital budget; the effects of
seasonal and weather conditions on operations and facilities; the
competitive environment to which the various business segments are,
or may be, exposed in all aspects of their business and the
Company's competitive position therein; the ability of the
Company's various business segments to access equipment (including
spare parts and new technologies); global economic conditions and
the accuracy of the Company's market outlook expectations for 2022
and in the future; the impact, direct and indirect, of the COVID-19
pandemic and geo-political events, including the war in
Ukraine on Western's business,
customers, business partners, employees, supply chain, other
stakeholders and the overall economy; changes in laws or
regulations; currency exchange fluctuations; the ability of the
Company to attract and retain skilled labour and qualified
management; the ability to retain and attract significant
customers; the ability to maintain a satisfactory safety record;
that any required commercial agreements can be reached; that there
are no unforeseen events preventing the performance of contracts
and general business, economic and market conditions.
Although Western believes that the expectations and assumptions
on which such forward-looking information is based on are
reasonable, undue reliance should not be placed on the
forward-looking information as Western cannot give any assurance
that such will prove to be correct. By its nature,
forward-looking information is subject to inherent risks and
uncertainties. Actual results could differ materially from
those currently anticipated due to a number of factors and
risks. These include, but are not limited to, the ongoing
impact of the COVID-19 pandemic and geo-political events, including
the war in Ukraine on global
demand and prices for oil and gas, including the impact on demand
for Western's services; volatility in market prices for crude oil
and natural gas and the effect of this volatility on the demand for
oilfield services generally; reduced exploration and development
activities by customers and the effect of such reduced activities
on Western's services and products; political, economic, and
environmental conditions in Canada, the United
States, Ukraine and
globally; supply and demand for oilfield services relating to
contract drilling, well servicing and oilfield rental equipment
services; changes to laws, regulations and policies; failure of
counterparties to perform or comply with their obligations under
contracts; regional competition and the increase in new or upgraded
rigs; the Company's ability to attract and retain skilled labour;
Western's ability to obtain debt or equity financing and to fund
capital operating and other expenditures and obligations; the
potential need to issue additional debt or equity and the potential
resulting dilution of shareholders; the Company's ability to comply
with the covenants under the Credit Facilities, HSBC Facility and
the Second Lien Facility and the restrictions on its operations and
activities if it is not compliant with such covenants; Western's
ability to protect itself from "cyber-attacks" which could
compromise its information systems and critical infrastructure;
disruptions to global supply chains; and other general industry,
economic, market and business conditions. Readers are
cautioned that the foregoing list of risks, uncertainties and
assumptions are not exhaustive. Additional information on
these and other risk factors that could affect Western's operations
and financial results are discussed under the headings "Risk
Factors" in Western's annual information form for the year
ended December 31, 2021, which may be
accessed through the SEDAR website at www.sedar.com.
The forward-looking statements and information contained in this
news release are made as of the date hereof and Western does not
undertake any obligation to update publicly or revise any
forward-looking statements and information, whether as a result of
new information, future events or otherwise, unless so required by
applicable securities laws. Any forward-looking statements
contained herein are expressly qualified by this cautionary
statement.
SOURCE Western Energy Services Corp.