NISKU, AB, April 2, 2018 /CNW/ - Hyduke Energy Services Inc. ("Hyduke" or the "Company") (HYD – TSX) announced operating results for the year ended December 31, 2017. Hyduke's Financial Statements and Management Discussion & Analysis have been filed with regulators and are available at www.sedar.com.

Unless otherwise stated, tabular amounts presented are expressed in thousands of Canadian dollars and per-share figures in dollars per weighted average common share.

SELECTED FINANCIAL INFORMATION

(all amounts herein are in thousands)

 

The market for the Company's products was weak during 2015 and 2016 resulting from a prolonged downturn in the oil and gas exploration and production industry globally and particularly in Canada caused by the collapse of world oil prices in late 2014 and continued low natural gas prices. Beginning in late 2016 and accelerating 2017, an upturn in oil and gas exploration, development and production spending was experienced. The number of active drilling rigs in Canada in the first nine months of 2017 nearly doubled compared to the same period in 2016. In addition, the Company completed two acquisitions in late Q1/17 and early Q2/17 adding to its manufacturing and fabrication footprint. As a result, the Company's revenues increased 238.3% during the year. Increases were achieved in both the Manufacturing segment and Supply segment.

Revenue

 

The year ended December 31, 2017 showed a 238.3% increase in revenues to $42,848. The Manufacturing & Fabrication segment generated $32,479 of revenue, a 470.4% increase over prior year. Approximately 44% of the increase reflects revenues from acquisitions and 56% from increased revenues from organic growth. The organic growth reflects increased revenues related to the AltaGas Ltd. ("AltaGas") Ridley Island Propane Export Terminal project, oil sands projects and the diversification of its products and services to include the manufacture and repair of storage tanks and custom steel fabrication.

Consistent with the increase in operating drilling and service rigs, Supply & Service revenue increased 62.1% to $11,471 during 2017 compared to 2016. The sector experienced an overall increase in activity resulting from an increase in oil prices in addition to a longer winter drilling season compared to the early spring break up experienced in 2016. These factors resulted in an increase in demand for oilfield supplies, pneumatics and inspection services.

2017 Gross profit remains under pressure to -$558 (-1.3% of revenue) compares to negative $75 for 2016. The acquisitions did not perform as well as the Company's core businesses during the year due to integration activities. These companies also experienced significant downturns in 2015 and 2016. Therefore, management has been focused on introducing improved processes and company-wide operating efficiencies, which it expects will result in improved profitability in future years.

SG&A expenses for the year ended December 31, 2017 was $8,138, an increase of 53.9% compared to $5,289 for the year 2016. SG&A costs from the Company's acquisitions account for approximately 69% of this increase. The remaining increase is comprised of the removal of employee wage rollbacks and additional staff for the AltaGas project.

Negative EBITDAS for continuing operations was $9,005 for the year of 2017 compared to a negative EBITDAS of $4,671 in 2016.

The decrease of EBITDAS was mainly due to $1,380 inventory write down, $1,382 intangible asset amortization and impairment, $1,045 revenue write off related to acquisition, and $243 working capital adjustment.

Depreciation and amortization of $1,452 increased from $666 in 2016. The increase in the expense was due to the property, plant, and equipment acquired with the business acquisitions.

Stock based compensation was $166 compared to $62 in 2016.

The Company recorded $663 in interest charges during 2017, an increase of $80 from 2016. The increase is due to the utilization of the available revolving demand loan and higher interest rates, comparing to 2016, on the term loan that matured on August 11, 2017.

Continuing operations net loss for 2017 was $11,307 compared to a loss of $5,957 in 2016.

As at December 31, 2017, the Company had working capital of $3,194. The Company has invested $1,798 in additional working capital (largely accounts receivable and unbilled revenue) during the year of 2017. The Company reached an agreement with its revolving debt provider to amend covenants to initially provide access to $1.5 million of the revolving line and was able to draw on this from the third quarter. The Company expects that the financing of increased working capital will continue to be instrumental to its growth strategy and will continue to work with its revolving debt provider to seek increases to this facility to support the Company's growth in working capital. Without these increases or alternative funding sources, liquidity will continue to be an issue impacting the Company's ability to grow.

The Company recognizes that to stabilize its capital structure it needed to replace its long-term debt facility. On August 11, 2017, the Company closed an $8.5 million debt financing pursuant to which $6.5 million was advanced on closing. The $6.5 million, together with $0.5 million from cash, was used to pay the term debt maturing August 15, 2017 in full (see Note 7 of the December 31, 2017 financial statements).

MANAGEMENT REVIEW AND OUTLOOK

The 2017 fiscal year ended December 31, 2017 was a combination of executing the multi-year retooling of Hyduke's customer base and business model, accompanied by unexpected commercial challenges.

Revenue increased by 238% from $12,667 for the year ended December 31, 2016 to $42,848 in fiscal 2017. This was primarily due to new business from clients Hyduke has never dealt with before including major infrastructure equipment for oil sands tailings pond cleanup, a large capacity propane export facility on the Pacific coast, the entry into storage tank and production equipment manufacturing in the most active conventional oil and gas development region in Canada in northwest Alberta and  northeast B.C., and a new manufacturing and fabrication business in the interior of B.C. serving entirely new customers and markets.

Rapid growth into entirely new businesses in new markets also presented new operating and cash management challenges. As a result, the operating loss increased by 51% to $11,688 in the 2017 fiscal year compared to $7,764 in the prior year.

For the first time a significant portion of the manufacturing and fabrication revenue was generated not in Hyduke's Nisku manufacturing facility but in other facilities a significant distance from head office or on a remote third-party site. Hyduke emerged from the multi year contraction period 2013 to 2016 – where revenue declined annually from over $100 million (which has been restated to reflect Hyduke's exit from several legacy business units) to only 12% of that amount four years later - with a diminished workforce.

Hyduke faced the challenge of profitably managing Western Manufacturing Ltd. ("Western") in Hythe, Alberta, acquired March 9, 2017. The Company purchased the shares of Western under what appeared to be attractive terms. 

What Hyduke acquired with Western was an order book of contracts bid during a highly competitive period resulting in materially lower gross profits. The goodwill associated with Western's substantial client base in the region had been eroded due to issues that took place before Hyduke acquired the company.

Therefore, the Company has made the decision to wind down the Western operation from its historic form. This includes moving out of the rented facility at Hythe at March 31, 2018 and terminating the majority of the personnel. Hyduke will continue to support this market from a smaller facility in Grande Prairie which will be shared with a new location for the BW Rig division.

In the third quarter of 2017 Hyduke hired a new vice-president of operations and a new chief financial officer.

The business outlook for the rest of the year is a combination of opportunity and uncertainty.

Upstream oil and gas capital expenditures in Canada for 2018 are going in a different direction than cash flow from production. In its weekly upstream industry macro-analysis released March 26, 2018, ARC Energy Research Institute estimated in 2018 production should be at an all-time record levels of nearly 7.5 million barrels of oil equivalent per day. Because of higher production volumes and higher oil and natural gas liquids prices, ARC estimates after tax cash flow from existing production will increase from $26.2 billion in 2016 to $48.3 billion in 2018. This is a $22.1 billion or 77% increase in the funds oil and gas producing companies have for reinvestment including capital expenditures.

However, in the same report ARC estimates capital expenditures on conventional oil and gas and oil sands development will total $42.7 billion, a 5% or $2.3 billion decline from 2017. This reflects eroding investment confidence in the upstream oil and gas industry in Canada due to external factors such as depressed bitumen and natural gas prices due to market access problems, higher taxation and increasingly complex regulatory approval processes. The challenges the industry faces in improving market access are daily front-page news. The Canadian Association of Petroleum Producers addressed this issue in February of this year when it publicly announced its concerns about the competitiveness of investment in the Canadian upstream oil and gas industry compared to other jurisdictions.

This dynamic between increased production and cash flow for investment without commensurate reinvestment in Canada indicates that producers and midstream operators will still have cash to invest in maintenance, production enhancement and market growth. With its new business model away from its legacy business model, Hyduke is positioned to capture business it would not have otherwise.

Additional information relating to Hyduke is available under the Company's profile on SEDAR website at www.sedar.com and www.hyduke.com

Forward looking information

This news release contains forward-looking information relating to the expectations of management that the integration process will lead to improvements in operations and efficiency for both Western and Hyduke. Such forward-looking information is subject to important risks, uncertainties and assumptions. The results or events predicated in this forward-looking information may differ materially from actual results or events. As a result, you are cautioned not to place undue reliance on this forward-looking information.

Forward-looking information is based on certain factors and assumptions regarding, among other things, general assumptions respecting the business and operations of Hyduke and economic factors. While the Company considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect.

Forward looking-information is subject to certain factors, including risks and uncertainties that could cause actual results to differ materially from what is currently expected. These factors include but are not limited to risks associated with the failure of the Company to obtain the benefits of integration; volatility in market prices for oil and natural gas; and the general economic conditions in Canada.

You should not place undue importance on forward-looking information and should not rely upon this information as of any other date. While the Company may elect to, the Company is under no obligation and does not undertake to update this information at any particular time, except as required by law.

About Hyduke

Trading on the TSX under the symbol "HYD," Hyduke Energy Services Inc. is a supplier of equipment and services to the oil and gas drilling and well servicing industry. 

The TSX has not reviewed and does not accept responsibility for the adequacy or accuracy of this News Release.

SOURCE Hyduke Energy Services Inc.

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