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Technicoil Corporation Reported Financial and Operating Results for the Year Ended December 31, 2009
By Benzinga Staff
March 15, 2010 6:30 PM
March 15, 2010 6:30 PM
CALGARY, ALBERTA--(Marketwire - March 15, 2010) -
NOT FOR DISTRIBUTION INTO THE UNITED STATES OR TO UNITED STATES WIRE SERVICES
Technicoil Corporation ("Technicoil" or the "Corporation") (TSX: TEC) reported financial and operating results for the year ended December 31, 2009. The Corporation's deliberate repositioning and expanded service offering resulted in record annual non-fracturing operating hours in the Well Servicing Segment. Technicoil strengthened the balance sheet in 2009, reducing long-term debt by 61%, resulting in an improvement in the Corporation's financial flexibility.
Technicoil is an oil and gas services company operating in the Western Canadian Sedimentary Basin ("WCSB"). The Corporation's business is conducted through two divisions: Well Servicing and Drilling.
SELECT FINANCIAL & OPERATING INFORMATION
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($ thousands, except Three months ended Year ended
per share data) December 31 December 31
(quarterly data % %
unaudited) 2009 2008 Change 2009 2008 Change
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Revenue $15,191 $20,700 (27%) $45,807 $62,279 (26%)
Gross margin $ 3,692 $ 6,114 (40%) $10,280 $18,620 (45%)
Gross margin % 24% 30% (20%) 22% 30% (27%)
General and
administrative costs $ 575 $ 1,063 (46%) $ 2,710 $ 3,230 (16%)
EBITDA(1) $ 3,103 $ 5,038 (38%) $ 6,977 $15,661 (55%)
Net loss $(3,440) $(5,638) (39%) $(6,377) $(3,380) 89%
Per share - basic $ (0.05) $ (0.08) (37%) $ (0.09) $ (0.05) 80%
Per share - diluted $ (0.05) $ (0.08) (37%) $ (0.09) $ (0.05) 80%
Adjusted net income
(loss)(1) $ 374 $ 1,753 (79%) $(2,563) $ 4,011 (164%)
Per share - basic $ 0.01 $ 0.02 (50%) $ (0.04) $ 0.06 (167%)
Per share - diluted $ 0.01 $ 0.02 (50%) $ (0.04) $ 0.06 (167%)
Funds flow from
operations(1) $ 2,660 $ 4,440 (40%) $ 6,165 $14,551 (58%)
Well servicing
operating hours 12,259 14,968 (18%) 40,201 46,241 (13%)
Drilling operating
days 177 315 (44%) 434 931 (53%)
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1. Readers are cautioned that EBITDA, adjusted net income (loss), funds flow
from operations, and debt to equity ratio are considered to be non-GAAP
measures that do not have standardized meanings prescribed by GAAP. See
"Definitions of Non-GAAP Measures" for the Corporation's definitions of
these measures.
OVERVIEW OF RESULTS
Technicoil exited 2009 with a solid financial position, a balanced and desirable product offering, and a team focused on adapting to changes in the market. The WCSB has undergone numerous game-changing events in recent years including the advancement of horizontal drilling techniques and the advent of multi-stage fracturing. The result of these new drilling and completion techniques has enabled exploration and production companies ("E&P companies") to develop and exploit the prolific shale gas plays in Northeastern British Columbia including the Montney and Horn River, and has also renewed interest in existing fields such as the Bakken and Cardium.
In 2009, the Corporation completed the transition of its service offering to provide more services to the prolific resource plays and oilsands opportunities which are attracting an increasingly larger proportion of the exploration and production programs of E&P companies. Previously the Corporation focused on the shallow gas plays in Southern Alberta. Technicoil's responsiveness and adaptable product offering enabled the Corporation to attain the following results:
- Strengthened the balance sheet resulting in a debt to equity ratio of 0.39:1 at December 31, 2009 in comparison with a ratio of 0.56:1 at December 31, 2008. Long-term debt (including current portion) was reduced by 61% to $8.8 million in comparison with December 31, 2008. Net debt (represented by long-term debt net of working capital) has been reduced by 73% to $1.8 million in comparison with $6.7 million at December 31, 2008;
- Reported annual revenue of $45.8 million on 40,203 well servicing operating hours and 434 drilling operating days;
- Achieved record annual operating hours from non-fracturing activities for the Well Servicing Segment of 35,846 hours, representing 89% of the segment's hours, as a result of the Corporation's expansion and success in the Montney, Horn River and Bakken resource plays and drilling support for Steam Assisted Gravity Drainage ("SAGD") operations;
- Excluding one-time charges, the Corporation returned to profitability in the fourth quarter of 2009;
- Responded swiftly to the weak economic environment by implementing cost savings measures resulting in a reduction in annual general and administrative costs and operations overhead costs of 16% and 21%, respectively;
- Recorded positive funds flow from operations and EBITDA of $6.2 million and $7.0 million, respectively, for 2009, a year represented by continued economic weakness;
- Entered into a partnership with the Bigstone Cree Nation (the "Nation") to provide, on an exclusive basis, well servicing rigs and related services for use in connection with the exploration and development of resources on the Nation's reserves and traditional lands near Wabasca, Alberta. Operations under the partnership are anticipated to commence in 2010;
- Continued to focus on safety, resulting in significantly fewer reportable safety incidents compared to industry average (source: CAODC);
- Strengthened the Corporation's ability to pursue additional non-fracturing services, and to work directly for exploration and production and other pressure pumping companies, as a result of the expiration of an operating contract with a pressure pumping company subsequent to the year end; and
- Announced, subsequent to the end of 2009, that the Corporation entered in to a definitive agreement to settle all outstanding patent and related civil litigation with an unrelated company. The settlement removes distractions from the Corporation's business activities and does not have a material impact on the assets, liabilities, or the current or future prospects of the Corporation.
The foregoing accomplishments were attained despite the recessionary economic environment in Canada and poor industry conditions. In 2009, drilling activity in the WCSB decreased by 50% to 8,377 wells (source: Nickle's Daily Oil Bulletin), the lowest level since 1992, representing an average drilling rig utilization rate of just 24% for the year in comparison with 41% in 2008. Exploration and production companies were hampered by weak equity markets for a substantial portion of 2009, low oil prices during the first quarter, and depressed natural gas prices throughout the year. Technicoil responded to the weak economic environment in 2009 by implementing wage reductions across the organization from field staff to the Board of Directors, realigning crew configurations and closely scrutinizing discretionary spending. These measures contributed to the Corporation recording positive EBITDA of $7.0 million in 2009.
The Corporation performed an assessment for impairment on the rig fleet as a result of the continued weakness in the shallow gas and coal bed methane market, depressed natural gas prices, restricted capital spending by exploration and production companies, the general excess of rigs available to service the shallow gas market in Canada, and operating efficiencies offered by the newer equipment. As a result of the foregoing factors, an impairment charge of $5.1 million was recorded related to certain first generation hybrid drilling and coil well service rigs in the fourth quarter of 2009 resulting in a net loss of $3.4 million or $0.05 per share for the quarter. Excluding the impact of the impairment charge, the Corporation returned to profitability in the fourth quarter. The Corporation incurred a net loss for 2009 of $6.4 million or $0.09 per share in comparison with a net loss of $3.4 million or $0.05 in 2008.
FINANCIAL AND OPERATING RESULTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2009
REVENUE
The Corporation generated revenue of $15.2 million in the fourth quarter of 2009 in comparison with quarterly revenue of $20.7 million for the same period of the prior year. Revenue declines were experienced across both of the Corporation's business segments as a result of low drilling activity levels in western Canada and the resultant substantial reduction in fracturing hours, and lower Drilling Segment revenue rates. Revenue per operating hour increased by 4% for the Well Servicing Segment whereas the Drilling Segment declined by 21%.
The Corporation's Well Servicing Segment recorded 12,259 operating hours in the fourth quarter of 2009 in comparison with 14,968 hours for the comparable period of the prior year, representing a decline of 18%. Technicoil's marketing efforts for the coiled tubing rig fleet resulted in the Corporation further penetrating the rigless completion market in the Montney, Horn River and Bakken resource plays, and in higher operating hours for SAGD drilling support operations. Record quarterly non-fracturing hours achieved by the coiled tubing service fleet contributed to the Corporation recording 11,709 total non-fracturing hours by the Well Servicing Segment in the quarter, surpassing the previous record for such services established in the fourth quarter of 2008. While operating hours for the Corporation's conventional service rig fleet declined by 3% in comparison with the fourth quarter of 2008, Technicoil's utilization for these rigs continues to exceed industry levels which averaged 46% in the quarter (source: CAODC). Technicoil expanded its market for the conventional service rigs in the fourth quarter of 2009 to include SAGD completions and work performed on the Bigstone Lands which reduced the impact of lower industry activity for conventional service rigs in comparison with the prior year. Results for the Well Servicing Segment were impacted by a significant drop in fracturing activity that commenced late in the first quarter of 2009 and persisted for the balance of the year. In comparison with the fourth quarter of 2008, fracturing hours were lower by 2,912 hours.
Limited shallow gas drilling activity occurred in the WCSB basin as E&P companies restricted drilling programs, largely as a result of weak gas prices, resulted in the Drilling Segment recording only 177 operating days in the fourth quarter of 2009 in comparison with 315 operating days for the same period of the prior year. Drilling contractors reported a 39% reduction in the number of drilling operating days for wells less than 950 meters in depth in the fourth quarter of 2009 in comparison with the same quarter of 2008 (source: CAODC). Drilling activity by the Corporation in the fourth quarter included oilsands coring and the drilling of surface holes for future SAGD development wells.
GROSS MARGIN
The Corporation reported a gross margin of $3.7 million in the fourth quarter of 2009 in comparison with $6.1 million for the comparable period of the prior year. Reduced activity levels for fracturing and drilling services, combined with lower average consolidated charge-out rates, resulted in the reduction in gross margin. As a percentage of revenue, gross margin averaged 24% during the quarter in comparison with 30% for the same period of the prior year. A changing product mix, and lower fracturing and drilling operating hours over which to absorb fixed overhead costs, contributed to the reduction in gross margin percentage. In response to the weak economic environment wage reductions for field workers were implemented early in 2009 and training programs for rig crews were revamped which helped alleviate some of the margin erosion. The Corporation's variable cost structure results in labour costs being incurred only during periods when field workers are required. The Corporation's cost reduction measures contributed to a 30% reduction in operations overhead costs in the quarter relative to the same period of 2008.
GENERAL AND ADMINISTRATIVE EXPENSE
General and Administrative ("G&A") expense was $0.6 million for the three months ended December 31, 2009, representing a 46% reduction in comparison with the fourth quarter of the prior year. As a percentage of revenue, G&A expense decreased from 5% of revenue in the fourth quarter of 2008 to 4% in the current quarter. In comparison with the fourth quarter of the prior year, compensation expense was lower by $0.2 million primarily as a result of lower employee incentive compensation, while discretionary spending in most general administrative cost categories was curtailed in response to the slowdown in industry activity. Legal costs were reduced by $0.2 million compared to the fourth quarter of the prior year as the parties involved worked towards a negotiated settlement related to the patent and civil litigation, with an agreement reached subsequent to year-end.
DEPRECIATION, AMORTIZATION AND IMPAIRMENT CHARGES
Depreciation and amortization expense was $2.4 million for the fourth quarter of 2009, consistent with the same period of the prior year. The incremental impact on depreciation expense of the 2009 capital program of $3.5 million, including the completion of the ninth conventional service rig in March 2009, offset the reduction in depreciation expense from the coil tubing service rig sold in the fourth quarter of the year. As previously discussed, the Corporation recorded a $5.1 million impairment charge in the fourth quarter of the year for certain first generation hybrid drilling and coil well service rigs. In the fourth quarter of the prior year, the Corporation recorded an impairment charge for goodwill of $7.4 million.
OTHER ITEMS
Interest on long-term debt was $0.2 million in the fourth quarter of 2009, a reduction of 23% in comparison with the same period of the prior year. Lower average drawings on the long-term debt facility, combined with lower interest rates, account for the decrease in interest expense. Drawings on the long-term debt facility averaged $10.2 million during the fourth quarter of 2009 in comparison with $22.8 million for the same period of 2008, with the average effective interest rate falling to 4.0% in comparison with 4.3% over the same period respectively. Contributing to the reduction in long-term debt in the quarter were proceeds on disposition of equipment of $2.1 million.
The Corporation's share price appreciated considerably during the fourth quarter of 2009 resulting in a stock-based compensation expense of $0.1 million related to stock options having an exercise price lower than the closing share price on December 31, 2009.
The Corporation increased the provision for bad debts by $0.3 million in the fourth quarter of 2009 bringing the year-to-date provision to $0.7 million. No similar charge was incurred in the prior year.
Income tax expense was a $1.1 million recovery in the fourth quarter of 2009 in comparison with a $0.7 million expense for the same period of 2008. The Corporation's effective tax rate in the quarter of 24.9% is lower than the statutory rate of 29% as a result of lower future tax rates in effect when temporary differences between the Corporation's accounting and tax values are anticipated to reverse, net of the impact of non-deductible items.
Technicoil incurred a net loss of $3.4 million or $0.05 per share for the fourth quarter of 2009 compared with a net loss of $5.6 million or $0.08 per share reported for the comparable period of the prior year. Excluding the impact of the asset impairment charge, the Corporation would have recorded positive net earnings for the fourth quarter of 2009 of $0.4 million.
FOR THE YEAR ENDED DECEMBER 31, 2009
REVENUE
The Corporation recorded revenue of $45.8 million in 2009 in comparison with annual revenue of $62.3 million in the prior year. Consistent with the fourth quarter results, revenue declines were experienced across both of the Corporation's business segments due primarily to lower fracturing hours and drilling activity levels combined with general downward pressure on charge-out rates. The Corporation recorded 40,201 well servicing operating hours and 434 drilling operating days in 2009 in comparison with 46,241 well servicing operating hours and 931 drilling operating days in the prior year. By segment, total revenue per operating hour declined by 3% for the Well Servicing Segment and by 12% for the Drilling Segment.
The Corporation's repositioning and marketing efforts for the coiled tubing rigs to service the prolific resource plays, including the Montney, Horn River and Bakken, and SAGD drilling support operations contributed to the Corporation achieving record annual operating hours in 2009 for non-fracturing activity by the Well Servicing Segment of 35,846 hours. These non-fracturing hours represented 89% of total operating hours for the Well Servicing Segment in 2009. A weak fracturing market arising from limited drilling activity in 2009 resulted in fracturing hours declining by 65% in the current year, contributing to the net operating hour decline for the Well Servicing Segment of 13% in comparison with the prior year. Drilling activity in the WCSB has been significantly curtailed, particularly for shallow drilling, resulting in a significant decrease in operating days for the Drilling Segment from 931 in 2008 to 434 in the current period. Operating days reported by drilling contractors in 2009 for wells less than 950 meters in depth were 47% lower than the prior year (source: CAODC).
GROSS MARGIN
The Corporation realized a gross margin of $10.3 million, or 22% of revenue in 2009, in comparison with $18.6 million, or 30% of revenue for the prior year. The lower gross margin percentage is attributable to a changing service mix, lower charge-out rates and a reduction in activity levels over which to absorb fixed overhead costs. In response to the lower industry activity, the Corporation instituted measures which helped alleviate some of the margin erosion including wage reductions for field employees in the second quarter of 2009, revised crew configurations and a revamped approach to crew training. Discretionary spending was curtailed and employee incentive programs were reduced resulting in a 21% decrease in operations overhead costs for 2009 relative to the prior year.
GENERAL AND ADMINISTRATIVE EXPENSE
The Corporation recorded G&A expenses of $2.7 million in 2009, a reduction of 16% relative to the $3.2 million incurred in the prior year. As a percentage of revenue, G&A expense averaged 6% in 2009 and 5% in the prior year. In comparison with 2008, compensation expense was lower by $0.4 million primarily as a result of lower employee incentive program costs. Spending in other cost categories were also reduced in response to the weak economic environment.
DEPRECIATION, AMORTIZATION AND IMPAIRMENT CHARGES
Depreciation and amortization expense was $9.6 million in 2009 in comparison with $9.3 million in the prior year. The increase in depreciation expense is a result of the 2009 net capital program, including the completion of the ninth conventional service rig in March 2009.
As previously discussed, the Corporation recorded an asset impairment charge in 2009 related to its first generation drilling and coil well service rigs of $5.1 million. In 2008, the Corporation recorded an impairment charge for goodwill of $7.4 million.
OTHER ITEMS
The Corporation's interest on long-term debt decreased by 32% in 2009 to $0.8 million in comparison with $1.2 million in the prior year. The decrease in interest expense is attributable to the Corporation's focus on reducing long-term debt combined with lower interest rates in comparison with the prior year. The Corporation reduced long-term debt by 61%, from $22.3 million at December 31, 2008 to $8.8 million at December 31, 2009. Drawings from long-term debt facilities averaged $13.5 million during 2009 in comparison with $20.3 million for 2008, with the average effective interest rate falling to 3.8% in comparison with 5.4% over the prior year.
Stock-based compensation expense increased from $17,000 in 2008 to $98,000 in the current year as a result of the appreciation of the Corporation's stock price. At December 31, 2009 the Corporation had stock options that were in-the-money in comparison with December 31, 2008 when no stock options were in-the-money. The 2008 charge relates to the remaining amortization of stock options granted prior to May 2006 for which the Black-Scholes model was used to calculate the expense for such options.
The Corporation recorded a provision for bad debts of $0.7 million in 2009 as a result of the restricted access to capital, lower cash flows and deteriorating financial position of certain customers of the Corporation. No similar charge was recorded in the prior year.
Other income recorded in 2008 of $0.3 million primarily related to the forfeiture of a non-refundable deposit paid by a prospective purchaser of the Corporation's last remaining body-style coiled tubing service rig. No similar item was recorded in 2009.
Technicoil recorded an income tax recovery of $2.1 million for the year ended December 31, 2009 resulting in an effective tax rate of 25.1% in comparison with an income tax expense of $1.2 million for 2008.
The Corporation incurred a net loss of $6.4 million or $0.09 per share for 2009 compared with a net loss of $3.4 million or $0.05 per share for the prior year. Excluding the impact of the asset impairment charge, the net loss for 2009 would have been reduced to $2.6 million.
SEGMENTED RESULTS
WELL SERVICING SEGMENT
The Well Servicing Segment provides coiled tubing and conventional service rigs to the WCSB. Well Servicing is the largest segment of the Corporation. The key performance indicators for this segment include rig utilization, revenue and gross margin percentage. At December 31, 2009, the Corporation had a modern rig fleet comprised of 17 coiled tubing service units and nine conventional service units, with an average age of less than five years.
In the fourth quarter of 2009, the Corporation sold one coiled tubing service rig to a pressure pumping company that was party to a contract with Technicoil. The contract, which expired on February 15, 2010, was also amended as a condition of the rig sale. As the Corporation's coil service focus continues to shift to the more prolific resource plays and oilsands opportunities, Technicoil's activity levels with the pressure pumping company had diminished. The Corporation is now better positioned to market its services to, and work directly for, exploration and production companies and other pressure pumping companies as a result of the expiration of the contract.
The Corporation's coiled tubing service rigs are capable of performing a broad array of services beyond the traditional fracturing through coil applications. These expanded services include activities such as "rigless" completions and various well completion services performed on new oil and gas wells, such as perforations and drill outs. These services have typically been performed by conventional service rigs, however with the efficiencies that coiled tubing provides, a number of oil and gas companies are utilizing coiled tubing to complete some of their oil and gas wells. The Corporation's high capacity masted coiled tubing units have proven an ideal fit for this application and have enabled Technicoil to deploy its coiled tubing rigs in the Montney resource play, the Horn River basin and the Bakken. The Corporation has also been successful in deploying its coiled tubing service rigs in SAGD drilling operations. By equipping the coil with electrical line services, or "e-line", Technicoil is able to transmit a signal via an imaging tool attached to the end of the e-line to the drilling operator to guide the drilling of the producing well pair. Related benefits of the expanded conventional service work that the coiled tubing units perform include 24 hour operations and wells requiring multiple days to complete. Complementing the coiled tubing units is the Corporation's modern fleet of nine conventional service rigs, including the free standing mobile double service rig added to the fleet in the first quarter of 2009, providing services such as completions, production work, workovers and abandonments.
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Year ended December 31
($ thousands except for revenue
per operating hour) 2009 2008 Variance % Change
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Well servicing revenue $ 38,818 $ 45,828 $ (7,010) (15%)
Operating expenses 29,115 30,615 (1,500) (5%)
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Gross margin $ 9,703 $ 15,213 $ (5,510) (36%)
Gross margin % 25% 33% (8%) (24%)
Utilization %(1) 41% 49% (8%) (16%)
Operating hours 40,201 46,241 (6,040) (13%)
Revenue per operating hour $ 966 $ 991 $ (25) (3%)
Number of wells serviced during
the period 1,348 2,416 (1,068) (44%)
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(1) Utilization % for the Corporation's well servicing rigs is defined as
the number of operating hours for the period divided by the number of
rig days for the period multiplied by ten hours a day calculated from
the date of possession.
The Corporation reported revenue for the Well Servicing Segment of $38.8 million in 2009 on 40,201 operating hours in comparison with revenue of $45.8 million on 46,241 operating hours in the same period of the prior year. Revenue rates realized in 2009 averaged $966 per operating hour in comparison with $991 per operating hour in 2008, a decrease of 3% per hour. The decline in average revenue per operating hour is a result of downward pressure on rates and a higher proportion of conventional service work relative to fracturing through coil services. Revenue rates in the Well Servicing Segment have stabilized and even improved relative to the downward pressures encountered earlier in 2009.
Technicoil achieved a number of milestones in 2009 for the Well Servicing Segment. The Corporation reported record annual operating hours for non-fracturing services of 35,846 hours, an increase from the prior record established a year earlier of 33,731 hours. Non-fracturing hours accounted for 89% of total well servicing hours in 2009, an increase from 73% in the prior year.
The Corporation's coiled tubing rig fleet services the Montney, Horn River and Bakken resource plays, continues to expand the SAGD drilling support operations, and is poised to penetrate other target markets such as the Cardium resource play which is being redeveloped as a result of horizontal drilling and multi-stage fracturing. Non-fracturing operating hours performed by the coiled tubing service fleet increased by 36% in 2009 relative to the prior year. Low drilling activity in Southern Alberta resulted in a significant reduction in fracturing activity performed by the Corporation's coiled tubing rigs in 2009. In comparison with 2008, fracturing hours were lower by 8,153 hours, or 65%.
The Corporation's conventional rig fleet entered new markets in 2009. In the fourth quarter the Corporation commenced a SAGD completion program in the Athabasca region of Alberta and deployed one rig on the Bigstone Cree Nation's Lands as a result of the partnership formed in 2009 with the Nation. These new markets helped partially alleviate the impact of the general reduction in industry activity levels in 2009. Technicoil again achieved utilization levels for the conventional service rigs in excess of industry utilization rates, which averaged 40% in 2009 (source: CAODC).
The Well Servicing Segment recorded a gross margin of $9.7 million or 25% of revenue in 2009 in comparison with $15.2 million or 33% of revenue for the same period of 2008. The decrease in gross margin is primarily a result of fewer operating hours and an increase in operating costs per hour. The increase in per hour operating costs is attributable to higher labour costs relative to 2008 due to wage increases in the fall of 2008, which were partially rolled back earlier in 2009, and an increase in the number of crew standby days. The increased proportion and complexity of the non-fracturing work performed in Northeastern British Columbia contributed to the lower gross margin as this work tends to have more standby days with crew travel and equipment mobilization requirements.
DRILLING SEGMENT
The Drilling Segment provides hybrid drilling rigs to the WCSB. Results of the Drilling Segment tend to be more variable than the Well Servicing Segment due in part to seasonal restrictions on moving equipment and fluctuations in drilling programs of exploration and production companies. The key performance indicators for this segment include rig utilization, revenue and gross margin percentage. At December 31, 2009 the Corporation had six drilling rigs available with an average age of less than five years. The Corporation's hybrid drilling rigs are capable of drilling with both jointed pipe or coiled tubing. The majority of activity for these rigs is drilling shallow natural gas wells, heavy oil drilling, oilsands coring and shallow directional drilling.
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Year ended December 31
($ thousands except for revenue
per operating day) 2009 2008 Variance % Change
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Drilling revenue $ 6,989 $ 16,451 $ (9,462) (58%)
Operating expenses 6,412 13,044 (6,632) (51%)
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Gross margin $ 577 $ 3,407 $ (2,830) (83%)
Gross margin % 8% 21% (13%) (62%)
Utilization %(1) 20% 43% (23%) (53%)
Operating days 434 931 (497) (53%)
Revenue per operating day $ 16,104 $ 17,670 $ (1,566) (9%)
Number of wells completed during
the period 185 375 (190) (51%)
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(1) Utilization % for the Corporation's drilling rigs is defined as the
number of spud to rig release days for the period divided by the number
of rig days for the period calculated from the date of possession.
Drilling activity in the WCSB in 2009 represented the lowest number of wells drilled and equipment utilization since 1992 (source: Nickle's Daily Oil Bulletin). Industry rig utilization averaged just 24% in 2009 resulting in only 8,377 wells drilled in the year. This compares with average utilization rates of 41% in 2008, a year when 16,894 wells were drilled. With North American gas storage levels reaching near full capacity during the injection season in the last half of 2009 and limited economic activity to drive industrial demand, gas prices remained weak throughout 2009. The majority of drilling activity in the WCSB in 2009 was directed towards deeper horizontal wells that the Corporation's rigs are not capable of performing which contributed to the Corporation's utilization rate being lower than industry average as there was limited shallow gas drilling in 2009.
Revenue reported for the Drilling Segment in 2009 of $7.0 million compares with $16.5 million in the prior year. The reduction in revenue is due primarily to fewer operating days, 434 in 2009 comparison with 931 in the prior year, and reductions in drilling day rates as a result of competitive pressures and lower pass-through items. The Corporation modified some drilling equipment in 2009 to broaden the nature of work performed to include the drilling of larger diameter surface holes for a SAGD development site. The time efficiencies of Technicoil's drilling rigs enabled the customer to reduce costs for this portion of their project.
The Corporation's average revenue per operating day of $16,104 declined by 9% compared with $17,670 in 2008. The Corporation's revenue per operating day includes revenues from supporting services, many of which are pass-through cost items charged to the customer such as fuel and crew subsistence. Excluding pass-through items, revenue per operating day decreased by only 1% in comparison with 2008. Depending on the individual contract, these items may or may not be provided directly by the customer, thus they can significantly skew the average revenue per operating day rate.
The Drilling Segment recorded a gross margin of $0.6 million in 2009 compared with a gross margin of $3.4 million in the prior year. Low activity and revenue rates account for the majority of the reduction in gross margin. The Corporation implemented a number of measures in 2009 to combat the downward pressure on rates and low activity levels including wage rollbacks, smaller crew configurations and a revamped approach to crew training. These measures helped alleviate some of the margin erosion.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's primary sources of liquidity and capital resources are funds generated from continuing operations and banking facilities. The Corporation expects to generate sufficient cash from operations to fund liabilities as they become due and finance planned investing activity throughout 2010. Additional liquidity, if necessary, is available under the Corporation's operating facility and revolving term facility. The Corporation's credit facilities are comprised of a $4 million operating facility and a $31 million committed revolving term facility. Technicoil's credit facilities mature on May 29, 2010 and are extendable at the banks' option in May of each year. To the extent the revolving facility is not renewed, the outstanding balance becomes payable over a two year period, based on a two year amortization schedule. The credit facilities require the Corporation to maintain certain covenants. The Corporation was in compliance with the covenants at December 31, 2009 and as at March 15, 2010.
The Corporation's financial position strengthened significantly in 2009. In comparison with December 31, 2008, long-term debt including the current portion was reduced by 61% to $8.8 million as at December 31, 2009 from $22.3 million as at the prior year-end. Net debt, represented by long-term debt net of working capital, was reduced by 75% to $1.8 million in comparison with $6.7 million as at December 31, 2008. As at March 15, 2010 Technicoil had 72,683,848 common shares issued and outstanding and 3,660,333 options issued and outstanding of which 1,895,667 were vested.
Operating Activities
Cash flow from operating activities was $13.2 million in 2009 compared with $10.8 million for the same period of the prior year. A reduction in working capital requirements due to a decrease in accounts receivable more than offset lower operating results.
Financing Activities
The Corporation prudently managed the balance sheet during 2009 resulting in a reduction in long-term debt of $13.5 million. No share transactions were completed in 2009.
Investing Activities
The Corporation invested $3.5 million in equipment during 2009. The majority of the capital invested relates to the modification of existing equipment to penetrate and expand in new markets including the Montney and Horn River and to support SAGD drilling operations. In addition, the Corporation completed its ninth conventional service rig, a free-standing mobile double rig, in the first quarter of the year. During 2009 the Corporation disposed of some redundant pressure control equipment and a coiled tubing service rig for combined proceeds of $2.3 million resulting in a net gain on sale of $0.2 million. Proceeds on disposition were used to partially fund the 2009 capital program and reduce long-term debt.
OUTLOOK
The outlook for 2010 brings more optimism than the challenging environment the Corporation operated in during 2009, a period which was overshadowed by the global economic recession, restricted access to capital, and volatile commodity prices. Drilling rig utilization in the WCSB in the first quarter of 2010 has increased from levels during the fourth quarter of 2009. For the first two months of 2010, an average of 543 drilling rigs were active in comparison with only 416 rigs for the same period of the prior year. Crude oil prices have improved from the low US$30/barrel range in February 2009 to hold steady in the US$70/barrel to US$80/barrel range.
While these are encouraging signs, a key difference between the winter 2010 and pervious winter drilling programs remains the absence of any meaningful shallow gas development, a domain historically dominated by the larger producers. The Corporation does not expect the shallow gas market to recover in the near-term. The advent of horizontal drilling and multiple fractures in the lateral section has redefined the industry. The future of the WCSB currently lies in the development of the Horn River, Montney, Cardium, Lower Shaunavon and Bakken plays (collectively the "Resource Plays"), and in the oilsands region. Not only has there been a shift away from shallow gas, a growing proportion of development is oriented towards oil, with three of the aforementioned plays being high quality oil plays. The fundamentals for oil are stronger than gas due in part to a global market. North American gas storage levels remain at historical highs and industrial demand has yet to show any sustainable signs of recovery.
The economics of oil and gas development are influenced by royalty regimes. The Saskatchewan and British Columbia royalty structures are currently more favourable in comparison with Alberta, thus encouraging development. On March 11, 2010, the Alberta government announced that it will make changes to the province's royalty framework, including a reduction of the maximum royalty rate for oil wells from 50% to 40% and a reduction of the maximum royalty rate for natural gas wells from 50% to 36%. These changes will take effect on January 1, 2011. Changes to the royalty regime may have an impact on the exploration and development plans of companies and accordingly the demand for the Corporation's services in Alberta.
Today, a majority of the Corporation's equipment is capable of and presently services segments other than the shallow gas regions of the WCSB including all five of the dominant Resource Plays and the oilsands. This has been a deliberate repositioning and expansion of the service capabilities of Technicoil. This repositioning will enable Technicoil to prosper when markets recover.
The Corporation's financial position is strong and credit facilities are in place providing financial flexibility to pursue business opportunities as they arise. Technicoil will remain focused on running the business efficiently, will continue to pursue opportunities to diversify its service offering, and will continue to be focused on safety and operational excellence.
DEFINITIONS OF NON-GAAP MEASURES
This MD&A contains references to certain financial measures and associated per share data that do not have any standardized meaning prescribed by Canadian GAAP and therefore may not be comparable to similar measures presented by other issuers. These measures are computed on a consistent basis for each reporting period and include EBITDA, adjusted net income (loss), funds flow from operations, and debt to equity ratio. These non-GAAP measures are identified and defined as follows:
"EBITDA" or earnings before interest, taxes, depreciation and amortization, and impairment of property, plant and equipment and goodwill, is a measure of the Corporation's operating profitability. Management believes EBITDA provides investors with a measure of results generated by the Corporation's principal business activities prior to consideration of how these activities are financed, taxed or depreciated. The Corporation calculates EBITDA as follows:
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($ thousands) 2009 2008 2007
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Net (loss) income before income
tax $ (8,517) $ (2,184) $ 1,502
Add: Depreciation and amortization 9,615 9,288 8,329
Impairment of property, plant
and equipment 5,085 - -
Interest on goodwill - 7,391 -
Interest on long-term debt 794 1,166 1,459
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EBITDA $ 6,977 $ 15,661 $ 11,290
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"Adjusted net income (loss)" is used by management to analyze net income prior to the effect of the impairment of property, plant and equipment and goodwill, and is not intended to represent net income as calculated in accordance with Canadian GAAP. The Corporation calculates adjusted net income (loss) as follows:
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($ thousands) 2009 2008 2007
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Net (loss) of income $ (6,377) $ (3,380) $ 2,545
Add: Impairment of property, plant
and equipment 5,085 - -
Impairment of goodwill - 7,391 -
Less: Tax impact of above items
Interest on goodwill (1,271) - -
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Adjusted net income (loss) $ (2,563) $ 4,011 $ 2,545
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"Funds flow from operations" is defined as cash from operating activities before changes in non-cash working capital from operating activities. Management believes funds flow from operations is a measure that provides investors additional information regarding the Corporation's liquidity and its ability to generate funds to finance its operations. The Corporation calculates funds flow from operations as follows:
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($ thousands) 2009 2008 2007
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Cash flow from operating
activities $ 13,185 $ 10,805 $ 10,367
Add (deduct):
Net change in non-cash working
capital from operations (7,020) 3,704 2,462
Net change in non-cash working
capital from acquisition - 42 (2,126)
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Funds flow from operations $ 6,165 $ 14,551 $ 10,703
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"Debt to equity ratio" is defined as total liabilities, including current liabilities, long-term debt and future income taxes, divided by shareholders' equity. Management believes the debt to equity ratio provides investors additional information regarding how the assets of the Corporation are financed. The Corporation calculates the debt to equity ratio as follows:
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($ thousands) 2009 2008 2007
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Current liabilities $ 10,122 $ 10,076 $ 9,129
Long-term debt 6,201 19,048 20,927
Future income taxes 9,155 11,195 9,946
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Total liabilities $ 25,478 $ 40,319 $ 40,002
Shareholders' equity $ 65,713 $ 72,090 $ 75,241
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Debt to equity ratio (total
liabilities divided by
shareholders' equity) 0.39:1 0.56:1 0.53:1
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FORWARD-LOOKING STATEMENTS
This MD&A contains forward-looking statements within the meaning of securities laws, including the "safe harbour" provision of Canadian securities legislation. Forward-looking statements or information are often, but not always, identified by the use of words such as "anticipate", "expect", "plan", "forecast", "target", "project", "seek", "may", "intend", "will", "should", "could", "believe", "estimate", "predict" or similar expressions, statements that are based on current expectations and estimates about the markets in which the Corporation operates or statements of the Corporation's belief, intentions and expectations about developments, results and events which will, or may occur in the future. Such forward-looking statements are based on Technicoil's current beliefs, as well as certain assumptions made by, and information currently available to, Technicoil concerning statements with respect to future capital expenditures, including the amount and nature thereof; oil and gas prices and demand; other development trends of the oil and gas industry; business strategy; expansion and growth of the Corporation's business and operations, including the Corporation's market share and position in the oilfield service markets; the ability to obtain financing on acceptable terms, and other such matters. In addition, other written or oral statements which constitute forward-looking statements may be made from time to time by and on behalf of the Corporation. Although management considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect.
By their very nature, such forward-looking statements are subject to important risks and uncertainties that predictions, projections, forecasts and other forward-looking statements will not be achieved. Readers are cautioned not to place undue reliance on these statements as a number of important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations and anticipations, estimates and intentions expressed in such forward-looking statements. These factors include, without limitation: the impact of general economic conditions; industry conditions, including the adoption of new environmental, tax, royalty and other laws and regulations and changes in how they are interpreted and enforced; volatility of oil and gas prices; oil and gas product supply and demand; inadequate insurance coverage; risks inherent in the Corporation's ability to generate sufficient cash flow from operations to meet its current and future obligations; increases in debt service charges; the Corporation's ability to access external sources of debt and equity capital; increased competition; counterparty risk; the lack of availability of qualified personnel or management; labour unrest; fluctuations in foreign exchange or interest rates; stock market volatility; opportunities available to, or pursued by, the Corporation and other factors, many of which are beyond the control of the Corporation.
Further information regarding these factors may be found under the heading "Risks and Uncertainties" in the MD&A of the Corporation for the year ended December 31, 2009 and in the Corporation's most recent Annual Information Form, Information Circular, quarterly reports, material change reports and news releases. The Corporation's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what benefits, including the amount of proceeds, the Corporation will derive therefrom. The Corporation disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Any forward-looking information contained herein is expressly qualified by this cautionary statement. The forward-looking statements in this document are provided for the limited purpose of enabling current and potential investors to evaluate an investment in the Corporation. Readers are cautioned that such statements may not be appropriate, and should not be used for other purposes.
TECHNICOIL CORPORATION
Consolidated Balance Sheets
Years ended December 31, 2009 and 2008
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(Thousands) 2009 2008
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Assets
Current assets:
Cash $ - $1,198
Accounts receivable 11,562 18,665
Income taxes receivable 134 12
Inventory 2,231 2,210
Prepaid expenses and other current assets 579 377
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14,506 22,462
Intangible assets 369 1,002
Property, plant and equipment 76,316 88,945
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$ 91,191 $ 112,409
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Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness $740 $ -
Accounts payable and accrued liabilities 6,828 6,824
Current portion of long-term debt 2,554 3,252
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10,122 10,076
Long-term debt 6,201 19,048
Future income taxes 9,155 11,195
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25,478 40,319
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Shareholders' equity:
Share capital 51,491 51,491
Contributed surplus 2,197 2,197
Retained earnings 12,025 18,402
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65,713 72,090
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$ 91,191 $ 112,409
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TECHNICOIL CORPORATION
Consolidated Statements of Operations and Retained Earnings
Years ended December 31, 2009 and 2008
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(Thousands, except per share data) 2009 2008
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Revenue $ 45,807 $ 62,279
Operating expenses 35,527 43,659
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Gross margin 10,280 18,620
General and administrative expenses 2,710 3,230
Bad debt expense 662 -
Stock-based compensation 98 17
Depreciation and amortization 9,615 9,288
Impairment of property, plant and equipment 5,085 -
Impairment of goodwill - 7,391
Gain on sale of assets (216) -
Interest on long-term debt 794 1,166
Other expenses (revenue) 49 (288)
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Net loss before income tax (8,517) (2,184)
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Income tax (recovery) expense:
Current (100) (39)
Future (2,040) 1,235
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(2,140) 1,196
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Net loss and comprehensive loss (6,377) (3,380)
Retained earnings, beginning of year 18,402 21,782
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Retained earnings, end of year $ 12,025 $ 18,402
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Loss per share:
Basic $ (0.09) $ (0.05)
Diluted $ (0.09) $ (0.05)
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TECHNICOIL CORPORATION
Consolidated Statements of Cash Flows
Years ended December 31, 2009 and 2008
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(Thousands) 2009 2008
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Cash provided by (used in):
Operating activities:
Net loss for the year $ (6,377) $ (3,380)
Add (deduct) non-cash items:
Depreciation and amortization 9,615 9,288
Impairment of property, plant and equipment 5,085 -
Impairment of goodwill - 7,391
Gain on sale of assets (216) -
Stock-based compensation 98 17
Future income tax (reduction) (2,040) 1,235
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6,165 14,551
Net change in non-cash working capital from
operations 7,020 (3,704)
Net change in non-cash working capital from
acquisition - (42)
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Cash flow from operating activities 13,185 10,805
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Financing activities:
Common shares issued - 212
Net repayment of revolving term loans (13,545) (2,200)
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Cash flow from financing activities (13,545) (1,988)
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Investing activities:
Acquisition of property, plant and equipment (3,477) (6,897)
Proceeds on sale of property, plant and equipment 2,255 62
Business acquisition, net of cash acquired - 50
Net change in non-cash working capital from the
purchase of property, plant and equipment (356) (1,222)
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Cash flow from investing activities (1,578) (8,007)
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Net (decrease) increase in cash (1,938) 810
Cash, beginning of year 1,198 388
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Cash (bank indebtedness), end of year $ (740) $ 1,198
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Cash income taxes recovered $ 5 $ 1,647
Cash interest paid $ 542 $ 1,143
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