CALGARY, AB, Aug. 13, 2020 /CNW/ – CES Energy Solutions Corp. (“CES” or the “Company”) (TSX: CEU) (OTC – Nasdaq Intl: CESDF) announced today the Company’s results for the three and six months ended June 30, 2020.
North America. Through these challenging and unprecedented conditions, CES continued to demonstrate its financial resilience, strong balance sheet, and commitment to preserving its industry leading position to build upon as market conditions stabilize and potentially improve in the future. Despite the challenges presented, CES’ overall liquidity position and balance sheet strength significantly improved in the second quarter, as the Company once again displayed its defensible business model and counter cyclical balance sheet at low points of the cycle.
$159.5 million during Q2 2020 and Adjusted EBITDAC of $8.2 million, and revenue of $508.9 million and Adjusted EBITDAC of $59.3 million for the six months ended June 30, 2020 (“H1 2020”). The net draw on CES’s Senior Facility declined by $92.6 million from a net draw of $92.9 million as at March 31, 2020 to $0.3 million as at June 30, 2020, driven by strong cash flow generation achieved through a combination of working capital harvest, continued inventory management, and cost containment measures. As at June 30, 2020, CES’ Total Debt was $327.5 million, of which $290.0 million related to the Company’s Senior Notes which mature on October 21, 2024, compared to Total Debt at March 31, 2020 of $426.6 million. This deleveraging trend has continued into the third quarter and currently, CES has a net cash balance of approximately $40.0 million and an undrawn Senior Facility.
CES believes that continued focus on ensuring employee safety, preserving quality of operations, balance sheet strength, and liquidity will allow the Company to best serve high quality customers during this challenging environment and continue to successfully gain attractive market share. Moreover, while some of our peers have had to take steps to reduce exposure to or withdraw from key market segments, our solid financial position will enable CES to maintain and strengthen our talent base and strategic infrastructure which will continue to improve our competitive position in a recovery.
Canada. As activity levels declined significantly during Q2 2020, CES has been able to maintain and grow its commitment to a strong and high quality customer base in both operating regions.
June 30, 2020 was significantly affected by the global economic impacts of COVID-19 and low commodity price environment, which resulted in production shut-ins, deferred completions and significant declines in drilling activity in North America.
$121.8 million compared to $236.8 million in Q2 2019, a decrease of $115.0 million or 48.6%. US revenues in the quarter were negatively impacted by lower activity levels across all operating divisions. US land drilling activity fell by 61% from Q2 2019 to Q2 2020 as operators quickly curtailed 2020 capex spending in order to preserve capital and avoid uneconomic completions. In this challenging environment, CES was able to maintain its US Drilling Fluids Market Share at 13% when compared to Q2 2019. Further, the Company realized a decline in production and frac related chemical sales as many customers reverted to production shut-ins and deferred completions during the quarter.
Canada decreased 50.5% to $37.7 million in Q2 2020, respectively, over the 2019 comparative period. Both the production chemicals and drilling fluids businesses in Canada saw significant declines in industry activity levels and experienced pricing pressure from customers. Peak drilling activity levels were considerably lower than previous year highs and rig counts in Canada began dropping in mid-March as customers curtailed spending, shut in some existing production, and scaled back drilling in order to preserve capital.
In light of the increasingly challenging global oilfield market and the initiatives acted on by the Company to right-size the business, CES recorded the following items during Q2 2020 and H1 2020, which negatively impacted net income and EBITDAC and are considered to be non-recurring:
- Within cost of sales, the Company recorded $1.2 million and $12.3 million, respectively, of inventory write-downs as certain commodity-based products were revalued to net realizable value to reflect current prices;
- Within general and administrative expenses, the Company recorded $1.5 million and $2.6 million, respectively, in additional bad debt allowances; and
- Within cost of sales and general and administrative expenses, the Company recorded $1.3 million and $2.0 million, respectively, in restructuring costs.
$8.2 million in Q2 2020, compared to $41.5 million in Q2 2019 and Adjusted EBITDAC of $59.3 million in H1 2020 compared to $85.2 million for the respective 2019 period.
Canada and the US in the second quarter, along with the implementation of a number of cost cutting measures with respect to discretionary spending, compensation, and travel and entertainment expenses. The Company expects pricing pressure and margin compression to continue in this low commodity price environment as customers are increasingly focused on managing near-term cash lifting costs. In light of the uncertainty surrounding current market conditions, as activity levels fluctuate, CES will continue to diligently manage its cost base through reductions in personnel and overhead costs, compensation levels and discretionary spending as required.
$847 per employee per week and certain additional limitations. Included within Adjusted EBITDAC, during the three months ended June 30, 2020, the Company received CEWS program benefits in the amount of $6.3 million as a reduction to wage expense with $3.3 million and $3.0 million allocated to cost of sales and general and administrative expenses, respectively. The CEWS program has been instrumental in allowing CES to mitigate further Canadian personnel reductions while navigating uncertainty surrounding the severity and duration of current market conditions. Further, in a July 17, 2020 news release from the Government of Canada, it was announced that the CEWS program would be extended until December 19, 2020. While details regarding the program are being finalized, CES expects to participate in the program through to the end of the year.
$24.9 million, compared to net income of $8.4 million in Q2 2019. Net income decreased from Q2 2019 to Q2 2020 primarily due to the factors outlined above, offset by lower interest expense due to working capital harvest, which reduced the average draw balance on the Senior Facility and a reduction in stock based compensation expense. For H1 2020, net loss was $250.6 million compared to net income of $10.6 million for the six months ended June 30, 2019. For the six month comparative periods, net loss was further impacted by a $248.9 million goodwill impairment recorded by the Company in Q1 2020 and the associated deferred income tax recovery of $14.5 million.
June 30, 2020, CES had a Net Working Capital Surplus of $301.5 million, which represents a $115.8 million reduction from $417.3 million at March 31, 2020. This reduction in working capital is primarily driven by the reduction in activity levels experienced across the Company’s operating divisions, and was further amplified by the Company’s focus on working capital optimization over the last twelve months. With this working capital harvest, CES generated $104.0 million in cash provided by operating activities during the three months ended June 30, 2020, and primarily used this cash to reduce the Company’s Total Debt position in the quarter which as outlined above, fell from $426.6 million at March 31, 2020 to $327.5 million at June 30, 2020.
$0.3 million on its Senior Facility (December 31, 2019 – $76.7 million; March 31, 2020 $92.9 million). The maximum available draw on the Senior Facility at June 30, 2020 was $170.0 million on the Canadian facility and US$50.0 million on the US facility (December 31, 2019 – $170.0 million and US$50.0 million, respectively), and the facility does not mature until September 28, 2022.
Starting in mid-March of this year, the Company acted quickly on a number of proactive measures to preserve balance sheet strength through the downturn. Among these actions were initiatives relating to capex reductions, dividend suspension, and NCIB activity:
- In Q2 2020, CES incurred only $5.1 million in capital expenditures, representing a 56.2% decrease from $11.5 million in Q2 2019 and a 59.1% decrease from $12.4 million in Q1 2020. Year-to-date, CES incurred $17.4 million in capital expenditures, representing a decrease of 17% year over year. Current capital expenditures are primarily comprised of expansion of the lab capabilities just outside of Midland, Texas. In light of challenging market conditions, the Company has suspended all non-essential capital expenditures and expects 2020 capital expenditures, excluding amounts financed through leasing arrangements, to be up to $30.0 million in 2020, compared to $45.2 million in 2019, and representing a $20.0 million or 40% reduction from the original 2020 capex plan of $50.0 million.
- The Company reduced its monthly dividend on March 12, 2020 from $0.06 per share to $0.015 per share on an annualized basis. As industry conditions continued to deteriorate, CES suspended its monthly dividend on April 16, 2020. This decision will conserve approximately $16.0 million on an annualized basis.
- CES suspended activity under the NCIB program in the second quarter of 2020 after using $4.8 million to repurchase for cancellation 2,325,277 common shares in Q1 2020. On July 16, 2020 the Company announced the renewal of its previous NCIB, which allows for the repurchase and cancellation of up to 19,025,236 common shares, being 7.5% of the public float at the time of renewal before expiry on July 20, 2021. CES has not made any purchases under its NCIB programs subsequent to June 30, 2020 and will continue to evaluate utilizing the recently renewed program as industry conditions unfold and as our share price remains at these currently attractive levels.
North America, reduced production levels, deferred completions, downward pressure on margins, and some customers potentially experiencing formal restructurings and bankruptcies. The high level of uncertainty surrounding the magnitude and duration of this downturn has resulted in customers announcing material reductions to their capital spending and shutting in existing production, therefore resulting in a corresponding reduction in demand for the Company’s products and services. Although several producers have started bringing shut-in production back on-stream, CES has undertaken significant steps to rationalize its cost structure and will take additional appropriate actions as necessary. During the second quarter of 2020, CES applied for and received $6.3 million in funding from the Canadian Federal Government’s CEWS program thereby mitigating further personnel reductions while we navigate through this downturn.
$152.7 million from December 31, 2014 to June 30, 2016, and was able to reduce Total Debt outstanding, fully pay down the Senior Facility, and grow cash balances through the end of Q2 2016 to $111.1 million. During the second quarter of 2020, CES harvested $103.7 million of working capital reducing the Senior Facility from a net draw of $92.9 million as at March 31, 2020 to a net draw of $0.3 million. Currently, the Company’s Senior Facility is undrawn and the Company has a net cash balance of $40.0 million as working capital harvest has continued in Q3 2020.
August 2019, CES successfully amended and extended its Senior Facility to September 2022. In October 2017, CES successfully re-financed and reduced its coupon on its previously outstanding $300.0 million Senior Notes by issuing new 6.375% Senior Notes which mature in October 2024. This provides the Company with an additional level of financial stability during the ongoing COVID-19 crisis and the related deterioration of the global crude oil market.
$30.0 million. CES will adjust these levels as required as conditions continue to unfold.
CES continues to believe that coming out of this downturn it can further grow its share of the oilfield consumable chemical markets in which it competes. CES also believes that competitor consolidations and business failures will provide further opportunities for CES in a recovery scenario. CES sees the consumable chemical market increasing its share of the oilfield spend as operators continue to: drill longer reach laterals and drill them faster; expand and optimize the utilization of pad drilling; increase the intensity and size of their fracs; and require increasingly technical and specialized chemical treatments to effectively maintain existing cash flow generating wells and treat growing production volumes and water cuts from new wells.
CES’ strategy is to utilize its decentralized management model; its vertically integrated manufacturing model; its problem solving through science approach; its patented and proprietary technologies; and its superior people and execution to increase market share. By being basic in the manufacture of the consumable chemicals it sells, CES continues to be price competitive and a technology leader. Operators require increasingly technical solutions and deeper customer-centric coverage models to meet their needs. CES believes that its unique value proposition makes it the premier independent provider of technically advanced consumable chemical solutions to the North American oilfield.
In its core businesses, CES will focus on profitably growing market share, controlling costs and managing working capital, developing or acquiring new technologies and making strategic investments as required to position the business to capitalize on current and future opportunities. CES remains committed to the safety of our employees, support of our customers, defense of our strong financial position, and preservation of shareholder value. CES’ counter cyclical leverage model and capital light business will continue to demonstrate our resiliency to weather this challenging business environment while preparing the Company to excel as headwinds subside. The suspension of CES’ dividend, accompanied by implemented cost reduction initiatives, will continue to preserve the strength of the Company’s balance sheet while maintaining liquidity to fund existing operations and potential growth initiatives. CES will be protective of its balance sheet and prudent with its capital allocation, particularly in the current low oil price environment, and will revisit utilizing the recently renewed NCIB.
9:00 am MT (11:00 am ET) on Friday, August 14, 2020.
http://www.cesenergysolutions.com/” data-reactid=”66″>North American toll-free: 1-(800)-319-4610
International / Toronto callers: (416)-915-3239
Link to Webcast: http://www.cesenergysolutions.com/
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||
|
($000s, except per share amounts) |
2020 |
2019 |
%Change |
2020 |
2019 |
%Change |
|
Revenue |
||||||
|
United States |
121,819 |
236,776 |
(49)% |
349,776 |
461,669 |
(24)% |
|
Canada |
37,674 |
76,161 |
(51)% |
159,164 |
184,256 |
(14)% |
|
Total Revenue |
159,493 |
312,937 |
(49)% |
508,940 |
645,925 |
(21.2)% |
|
Net (loss) income |
(24,911) |
8,361 |
nmf |
(250,630) |
10,559 |
nmf |
|
per share – basic |
(0.09) |
0.03 |
nmf |
(0.95) |
0.04 |
nmf |
|
per share – diluted |
(0.09) |
0.03 |
nmf |
(0.95) |
0.04 |
nmf |
|
Adjusted EBITDAC(2) |
8,174 |
41,528 |
(80.3)% |
59,303 |
85,241 |
(30)% |
|
Adjusted EBITDAC(2)% of Revenue |
5.1 % |
13.3 % |
(8.1)% |
11.7 % |
13.2 % |
(1.5)% |
|
Cash provided by operating activities |
104,028 |
63,428 |
64 % |
116,364 |
115,263 |
1 % |
|
Funds Flow From Operations (2) |
293 |
30,814 |
(99)% |
44,817 |
67,108 |
(33.2)% |
|
Capital expenditures |
||||||
|
Expansion Capital (2) |
3,882 |
7,702 |
(50)% |
10,722 |
15,567 |
(31)% |
|
Maintenance Capital (2) |
1,178 |
3,841 |
(69)% |
6,699 |
5,378 |
25 % |
|
Total capital expenditures |
5,060 |
11,543 |
(56)% |
17,421 |
20,945 |
(17)% |
|
Dividends declared |
— |
3,993 |
(100)% |
2,948 |
7,988 |
(63)% |
|
per share |
— |
0.0150 |
(100)% |
0.0113 |
0.0300 |
(63)% |
|
Common Shares Outstanding |
||||||
|
End of period |
264,883,808 |
265,738,759 |
264,883,808 |
265,738,759 |
||
|
Weighted average – basic |
263,715,927 |
266,719,773 |
263,213,649 |
266,432,313 |
||
|
Weighted average – diluted |
263,715,927 |
273,085,762 |
263,213,649 |
272,576,812 |
||
|
As at |
||||||
|
Financial Position ($000s) |
June 30, 2020 |
March 31, 2020 |
%Change |
December 31, 2019 |
%Change |
|
|
Total assets |
852,955 |
1,072,067 |
(20)% |
1,219,772 |
(30)% |
|
|
Long-term financial liabilities(1) |
304,056 |
402,036 |
(24)% |
385,865 |
(21)% |
|
|
Total Debt(2) |
327,484 |
426,560 |
(25)% |
407,631 |
(20)% |
|
|
Working Capital Surplus(2) |
301,444 |
417,291 |
(28)% |
369,628 |
(18)% |
|
|
Net Debt(2) |
26,040 |
9,269 |
181 % |
38,003 |
(31)% |
|
|
Shareholders’ equity |
468,581 |
515,446 |
(9)% |
679,310 |
(31)% |
|
|
Notes: |
|
1Includes the Senior Facility, the Senior Notes, and lease obligations. |
|
2CES uses certain performance measures or operational definitions that are not recognizable under International Financial Reporting |
the United States (“US”), including Permian, Eagleford, Bakken, Marcellus and Scoop/Stack, as well as in the Western Canadian Sedimentary Basin (“WCSB”) with an emphasis on servicing the ongoing major resource plays; Montney, Duvernay, Deep Basin and SAGD. In the US, CES operates under the trade names AES Drilling Fluids (“AES”), JACAM Chemicals (“JACAM”), Catalyst Oilfield Services (“Catalyst”) and Superior Weighting Products (“Superior Weighting”). In Canada, CES operates under the trade names Canadian Energy Services, PureChem Services (“PureChem”), StimWrx Energy Services Ltd. (“StimWrx”), Sialco Materials Ltd. (“Sialco”), and Clear Environmental Solutions (“Clear”).
Western Canada and the US. The Canadian Energy Services and AES brands are focused on the design and implementation of drilling fluids systems and completion solutions sold directly to oil and gas producers. The Superior Weighting brand custom grinds minerals including barite, which is the weighting agent utilized in most drilling fluid systems.
Clear is a complimentary business division that supports the operations and augments the product offerings in the WCSB. Clear is CES’ environmental division, providing environmental consulting, water management and water transfer services, and drilling fluids waste disposal services primarily to oil and gas producers active in the WCSB.
North America: two in Houston, Texas; two in Midland, Texas; one in Sterling, Kansas; and one in each of Calgary, Alberta; Grand Prairie, Alberta; Carlyle, Saskatchewan; and Delta, British Columbia. In the US, CES’ main chemical manufacturing and reacting facility is located in Sterling, Kansas with additional low-temperature reacting and chemical blending capabilities just outside of Midland, Texas and chemical blending capabilities in Sonora, Texas. In Canada, CES has a chemical manufacturing and reacting facility located in Delta, British Columbia with additional chemical blending capabilities located in Carlyle, Saskatchewan, Nisku, Alberta, and Grand Prairie, Alberta. CES also leverages third party partner relationships to drive innovation in the consumable fluids and chemicals business.
Canada and the US; expectations regarding the performance or expansion of CES’ operations and working capital optimization; expectations regarding end markets for production chemicals and drilling fluids in Canada and the US; expectations regarding the impact of production curtailment policies; expectations regarding demand for CES’ services and technology; investments in research and development and technology advancements; access to debt and capital markets and cost of capital; expectations regarding capital allocation including the use of surplus free cash flow, the purchase of CES’ common shares by CES pursuant to the NCIB, debt reduction through the repayment of the Company’s Senior Facility or repurchases of the Company’s Senior Notes, investments in current operations, issuing dividends, or market acquisitions; CES’ ability to continue to comply with covenants in debt facilities; and competitive conditions.
Canada, and internationally; geopolitical risk; fluctuations in demand for consumable fluids and chemical oilfield services, the severity of the downturn in oilfield activity; the severity of the decline in activity in the Permian, the WCSB, and other basins in which the Company operates; a decline in frac related chemical sales; a decline in operator usage of chemicals on wells; an increase in the number of customer well shut-ins; a shift in types of wells drilled; volatility in market prices for oil, natural gas, and natural gas liquids and the effect of this volatility on the demand for oilfield services generally; the declines in prices for natural gas, natural gas liquids, oil, and pricing differentials between world pricing; pricing in North America and pricing in Canada; impacts of production level decisions among OPEC+ members and the potential demand impacts of COVID-19; competition, and pricing pressures from customers in the current commodity environment; the degree and severity of the COVID-19 pandemic, including government laws and regulations implemented in response to the pandemic and the resulting impact on the demand for oil and natural gas; government support programs implemented in response to the COVID-19 pandemic and potential changes to the qualification criteria and amount of available support; political and societal unrest that may impact CES’ operations as well as impact the market for oil and natural gas generally; currency risk as a result of fluctuations in value of the US dollar; liabilities and risks, including environmental liabilities and risks inherent in oil and natural gas operations; sourcing, pricing and availability of raw materials, consumables, component parts, equipment, suppliers, facilities, and skilled management, technical and field personnel; the collectability of accounts receivable, particularly in the current low oil and natural gas price environment; ability to integrate technological advances and match advances of competitors; ability to protect the Company’s proprietary technologies; availability of capital; uncertainties in weather and temperature affecting the duration of the oilfield service periods and the activities that can be completed; the ability to successfully integrate and achieve synergies from the Company’s acquisitions; changes in legislation and the regulatory environment, including uncertainties with respect to oil and gas royalty regimes, programs to reduce greenhouse gas and other emissions, carbon pricing schemes, and regulations restricting the use of hydraulic fracturing; pipeline capacity and other transportation infrastructure constraints; government mandated production curtailments; reassessment and audit risk and other tax filing matters; changes and proposed changes to US policies including the potential for tax reform, and possible renegotiation of international trade agreements and the implementation of the Canada-United States-Mexico Agreement; international and domestic trade disputes, including restrictions on the transportation of oil and natural gas and regulations governing the sale and export of oil, natural gas and refined petroleum products; divergence in climate change policies between the US and Canada; potential changes to the crude by rail industry; changes to the fiscal regimes applicable to entities operating in the US and the WCSB; supply chain disruptions including those caused by global pandemics or disease or from political unrest and blockades; access to capital and the liquidity of debt markets; fluctuations in foreign exchange and interest rates; CES’ ability to maintain adequate insurance at rates it considers reasonable and commercially justifiable; and the other factors considered under “Risk Factors” in CES’ Annual Information Form for the year ended December 31, 2019 dated March 12, 2020, and “Risks and Uncertainties” in CES’ MD&A for the three and six months ended June 30, 2020, dated August 13, 2020.
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SOURCE CES Energy Solutions Corp.
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