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Press release from CNW Group

CANYON REPORTS RECORD Q3 2010 RESULTS AND PROVIDES CAPITAL EXPENDITURE GUIDANCE

Monday, November 08, 2010

CANYON REPORTS RECORD Q3 2010 RESULTS AND PROVIDES CAPITAL EXPENDITURE GUIDANCE19:47 EST Monday, November 08, 2010CALGARY, Nov. 8 /CNW/ - Canyon Services Group Inc. ("Canyon") today announced its third quarter 2010 results.  The following should be read in conjunction with the Consolidated Financial Statements and Notes of Canyon Services Group Inc. ("Canyon" or the "Company") as at and for the three and nine months ending September 30, 2010 and September 30, 2009, and should also be read in conjunction with the Audited Consolidated Financial Statements for the years ended December 31, 2009 and 2008.  Additional information relating to the Company, including the Company's Annual Information Form for the year ended December 31, 2009, is available on SEDAR at www.sedar.com.OVERVIEW OF THIRD QUARTER 2010000's except per share and job amountsThree months endedSeptember 30 Nine months  endedSeptember 30 2010 2009 2010 2009Consolidated revenues$66,461 $4,873 $130,738 $32,960Operating income (loss)(1)$34,078 $(775) $57,404 $3,633Net income (loss)$17,373 $(4,738) $29,730 $(9,183)      Per share-basic$0.29 $(0.21) $0.54 $(0.41)      Per share-diluted$0.28 $(0.21) $0.52 $(0.41)EBITDA before stock option expense (1)$30,025 $(2,134) $49,426 $(1,120)Capital expenditures$15,931 $243 $55,503 $581Long term debt$28 $16,308 $28 $16,308Working capital$48,545 $1,675 $48,545 $1,675        Total jobs completed (2)574 90 1,543 689Consolidated average revenue per job (2)$116,130 $55,268 $84,951 $47,956Note (1):  See Non-GAAP MeasuresNote (2):  Includes all jobs from each service line, specifically hydraulic fracturing; coil tubing; nitrogen fracturing; acidizing and remedial cementing.In 2010, activity levels in the pressure pumping industry across the Western Canadian Sedimentary Basin ("WCSB") have undergone a remarkable turnaround over the unprecedented collapse of activity that occurred in 2009.  Canyon achieved record total revenues of $66.5 million, almost fourteen times the revenue of $4.9 million recorded in Q3 2009.  Canyon achieved positive EBITDA (before stock option expense) in the quarter totaling $30.0 million, compared to negative $2.1 million in Q3 2009.  Average consolidated revenue per job also increased significantly to $116,130 in Q3 2010 from $55,268 in Q3 2009 mainly due to Canyon completing larger, higher-priced jobs.Underpinning the industry recovery, which began in late 2009, are technological improvements and strong oil prices leading to increased activity in emerging and established oil plays such as the Cardium and Bakken.  In addition, natural gas resource plays in Northeast British Columbia and Northwest Alberta such as the Montney and Horn River continue to be very active.  Well licenses issued in Q3 2010 were higher by 66% over the comparable quarter of 2009, while for the year-to-date, well licenses issued were 46% higher than in the first nine months of 2009.  Drilling rig utilization in Q3 2010 averaged about 43%, more than twice the depressed levels in Q3 2009, and has continued to climb to over 50% in October 2010.  The main factors leading to the industry recovery are further discussed as follows:Technological improvements have led to a major shift towards drilling wells with lengthy horizontal sections, which has led to a dramatic increase in fracturing intensity as pressure pumpers apply multi-staged fracture treatments to the horizontal sections of the well bore.  Therefore, E&P companies now require significantly more Hydraulic Horsepower ("HHP") capacity to complete the wells. The ongoing strength in oil prices has resulted in a dramatic expansion in oil and liquids-rich natural gas drilling activity.  Oil-directed activity levels alone now account for approximately 50% of WCSB activity levels, up from about 40% in 2009, with this increasing trend expected to continue into Q4 2010 and 2011.In October 2009, Canyon initiated a major capital expansion program to meet the then anticipated growing demand by E&P companies for pressure pumping services.  This capital program was funded from the net proceeds of a $50 million equity issue in October 2009 and a $47 million equity issue in April 2010.  As a result, Canyon's pressure pumping fleet has grown from 25,500 HHP to 90,500 HHP as we enter Q4, 2010, with a further 35,000 HHP to be added by January 2011, which will bring the total fleet capacity to 125,500 HHP.  This rapid growth in Canyon's pumping capacity has allowed the Company to focus on the deeper more complex areas of the WCSB and commit to larger jobs and longer-term projects.  Canyon has also benefitted from an improved pricing environment in 2010 compared to historically low prices experienced throughout 2009.Operating and Financial HighlightsThe operating and financial highlights for the three and nine months ended September 30, 2010 may be summarized as follows:Canyon's 2010 capital build program is in its final stages, pursuant to which the Company will have the newest hydraulic pressure pumping fleet in the industry with a total capacity of 125,500 HHP.  In Q3, Canyon's capacity averaged 75,500 HHP and has risen to 90,500 HHP as we enter Q4 2010.  A further 35,000 HHP is scheduled for delivery by January 2011.In Q3 2010, despite wet weather that dampened drilling activity, Canyon's equipment fleet was fully utilized resulting in consolidated revenues increasing almost fourteen-fold to $66.5 million from $4.9 million in Q3 2009.  For the nine months ended September 30, 2010, consolidated revenues increased to $130.7 million almost four times the $33.0 million of revenues earned in the comparable 2009 period.EBITDA before stock based compensation expense (see Non-GAAP Measures) improved dramatically to $30.0 million in Q3 2010 from a negative $2.1 million in Q3 2009, mainly due to a drastic change in Canyon's pressure pumping capacity, higher industry activity, a focus on completing larger jobs and improved pricing.  For the nine months ended September 30, 2010, EBITDA before stock based compensation expense increased to $49.4 million from negative $1.1 million in the comparable 2009 period.Net income was recorded at $17.4 million in Q3 2010, compared to a net loss of ($4.7) million in Q3 2009, while for the nine months ended September 30, 2010, net income improved to $29.7 million from a net loss of ($9.2) million in the 2009 comparable period.Jobs completed in the quarter increased significantly to 574 from 90 jobs completed in Q3 2009, while for the nine months ended September 30, 2010, jobs completed increased by 124% to 1,543 from 689 in the comparable 2009 period.Average consolidated revenue per job increased by 57% to $116,130 in Q3 2010, from $73,871 in the previous quarter and by 110% from $55,268 in Q3 2009.  This growth is due to Canyon's continuing success in expanding its market share in the deeper segments of the basin resulting in larger, higher priced jobs, and improved pricing.  For the nine months ended September 30, 2010, average consolidated revenues per job increased by 77% to $84,951 from $47,956 in the comparable 2009 period.Year-to-date 2010, approximately 80% of the consolidated total revenue is generated from operations in the deeper, more complex areas of the WCSB including Northwest Alberta and Northeast BC.Canyon's total capital expenditures for fiscal 2010 are estimated at $81.2 million.  $15.9 million was incurred in Q3 2010 bringing total capital outlays for the nine months ended September 30, 2010 to $55.5 million.  In addition to expanding Canyon's equipment capacity to 125,500 HHP, the capital program will also add an operating base in Southeast Saskatchewan.  This base is expected to be operating in late November.  The remaining $25.7 million will be funded from available cash of $25.5 million as at September 30, 2010 and funds from operations (see Non-GAAP Measures).As at September 30, 2010, the Company's available cash and credit facilities total $61.5 million.QUARTERLY COMPARATIVE STATEMENTS OF OPERATIONSQuarter EndedSeptember 30,2010 September 30,2009 (unaudited) (unaudited)    Revenues$66,461,415             $4,872,938    Expenses    Operating32,383,082 5,647,894 Selling, general and administrative4,053,775 1,359,471 Stock-based compensation expenseInterest on long-term debt1,585,57221,501 127,657151,062 Other interest1,897 26,200 Depreciation and amortization4,275,001 2,299,031Income (loss) before income taxes24,140,587 (4,738,377)     Income taxes - current5,810,670 - Income taxes-future (reduction)956,635 - 6,767,305 -Net income (loss) and comprehensive income (loss)$17,373,282 $(4,738,377)    EBITDA before stock option expense (1)$30,024,558 $(2,134,427)    Income (loss) per share:        Basic$0.29 $(0.21) Diluted$0.28 $(0.21)Note (1): See Non-GAAP Measures.RevenuesConsolidated revenues for Q3 2010 increased significantly to a record $66.5 million compared to the $4.9 million earned in Q3 2009 due to the dramatic growth of Canyon's pressure pumping equipment fleet, combined with the industry activity.  Jobs completed in the current quarter increased to 574 from 90 jobs completed in Q3 2009.  Average consolidated revenues per job increased to $116,130 in Q3 2010 from $73,871 in the previous quarter and from $55,268 in Q3 2009 due to Canyon's continuing success in expanding its market share in the deeper segments of the market which has led to larger, higher priced jobs, and to improved pricing.Operating ExpensesOperating expenses in Q3 2010 were $32.4 million, or 49% of revenues, compared to $5.6 million, or 116% of revenues, for the comparable quarter of 2009.  The increase in operating expenses is due to the seven-fold increase in jobs completed in Q3 2010 compared to Q3 2009.   In Q3 2010, the fixed component of operating costs which comprise salaries and wages for field and support staff, insurance, equipment registrations and licenses, safety training programs, laboratory, communications, and operating base costs, etc. increased by 124% over Q3 2009 as increased business activity and the additions to Canyon's equipment fleet in 2010 has necessitated additional field and support staff.  Also, Q3 2009 fixed operating costs were reduced with staff reduction and wage rollbacks in response to industry conditions.Selling, General and Administrative ExpensesSelling, general and administrative expenses increased to $4.1 million in Q3 2010 from $1.4 million in Q3 2009 primarily due to the increases in sales and marketing expenses and a generally more active business environment.  In Q3 2010, additional compensation has also been accrued for management and employees in accordance with the Company's annual incentive compensation arrangements.  In 2009, corporate results did not warrant any additional compensation.Stock-Based Compensation ExpenseStock-based compensation expense represents the value assigned to the granting of options and incentive-based units under the Company's Share Purchase Option Plan and Stock Based Compensation Plan respectively, using the Black-Scholes model.  For Q3 2010, $0.4 million (2009 - $0.2 million) was charged to expenses and included in contributed surplus in respect of these two plans.  In addition, obligations for payments under the Company's Deferred Share Unit Plan are accrued as stock-based compensation expense over the vesting period.   The accrued liability increases or decreases with fluctuations in the price of the Company's common shares, with a corresponding increase or decrease in the stock-based compensation expense.  This expense totaled $1.2 million for Q3 2010 (Q3 2009 negative $47 thousand) and is included in accounts payable and accrued liabilities.EBITDA (See Non-GAAP Measures)In Q3 2010, the increased utilization, the focus on completing larger, higher-priced jobs, improved pricing and the operating leverage available in a high fixed cost structure has resulted in EBITDA before stock based compensation expense of $30.0 million, significantly higher than the negative amount of $2.1 million recorded in Q3 2009.  The Q3 2010 EBITDA before stock based compensation expense of $30.0 million consists of income before income taxes of $24.1 million, plus depreciation and amortization of $4.3 million, plus interest on long-term debt and other interest of $23 thousand, plus stock-based compensation expense of $1.6 million.  The comparable Q3 2009 EBITDA before stock based compensation expense of negative $2.1 million consists of loss before income taxes of ($4.7) million, plus depreciation and amortization of $2.3 million, plus interest on long-term debt and other interest of $0.2 million, plus stock-based compensation expense of $0.1 million.Interest ExpenseInterest on long-term debt and other interest was $23 thousand for Q3 2010, compared to $0.2 million for Q2 2009.   The decrease is due to lower debt levels following repayment of $20 million in Q4 2009 from the net proceeds of the October 2009 equity financingDepreciation ExpenseDepreciation expense was recorded at $4.3 million in Q3 2010, compared to the $2.3 million recorded in Q2 2009.  The increase is mostly due to additional depreciation pertaining to 2010 equipment additions.  Commencing with Q1 2010, Canyon reassessed the salvage value estimate for certain fracturing equipment resulting in additional depreciation expense of $0.1 million in the quarter.Income Tax ExpenseAt the expected combined income tax rate of 28.0%, the net income before income taxes for Q3 2010 of $24.1 million would have resulted in an expected income tax expense of $6.8 million, equaling the actual income tax.  The expected income tax expense was not impacted by the effect of the future tax benefit of obligations for payments under the Company's Deferred Share Unit Plan or the effect of other non-deductible expenses and future tax rate differences.   Net Income (Loss) and Comprehensive Income (Loss) and Income (Loss) per ShareNet comprehensive income totaled $17.4 million for Q3 2010, compared to net comprehensive loss of ($4.7) million in Q3 2009.  The increase in net comprehensive income for Q3 2010 is due to the significant increase in Canyon's fracturing services as discussed above.For the quarter ended September 30, 2010, basic and diluted income per share was $0.29 and $.28 respectively, compared to basic and diluted loss per share of ($0.21) recorded in Q3 2009.2010 YEAR-TO-DATE COMPARATIVE STATEMENTS OF OPERATIONSYear To DateSeptember 30, 2010 September 30, 2009 (Unaudited) (Unaudited)    Revenues$130,737,828 $32,959,966    Expenses    Operating73,333,472 29,326,472 Selling, general and administrative7,978,373 4,753,899 Stock-based compensation expenseInterest on long-term debt2,928,21566,314 721,793464,217 Other interest37,742 57,138 Depreciation and amortization9,856,895 6,888,935Income (loss) before income taxes36,536,817 (9,252,488) Income taxes - current5,810,670 - Income taxes-future (reduction)996,202 (69,550) 6,806,872 (69,550)Net income ( loss)$29,729,945 ($9,182,938)    EBITDA before stock option expense(1)$49,425,983 $(1,120,405)    Income (Loss) per share:    Basic$0.54 ($0.41) Diluted$0.52 ($0.41)Note (1): See Non-GAAP Measures.RevenuesConsolidated revenues for the nine months ended September 30, 2010 increased four-fold to $130.7 million from $33.0 earned in the comparable 2009 period.  Jobs completed in the nine months ended September 30, 2010 totaled 1,543, a 124% increase from the 689 jobs completed in the nine months ended September 30, 2009.  Average consolidated revenues per job increased to $84,951 in the three quarters ending September 30, 2010 from $47,956 in the comparable period in 2009.  The increase in revenues, jobs and average consolidated revenues per job is due to the dramatic growth of Canyon's pressure pumping equipment fleet and the much improved operating environment across the well stimulation industry, as discussed above.Operating Expenses Operating expenses for the first nine months ended September 30, 2010 increased by 150% to $73.3 million from $29.3 million in the comparable period of 2009 mainly due to the increased job count and a corresponding higher fixed operating cost component.  The 150% increase in operating costs does not match the 297% increase in revenues due to the fixed component which includes salaries and wages for field and support staff, insurance, licenses and registrations for the equipment fleet, safety, laboratory, communications, and operating base costs, etc.  Fixed operating costs increased by 55% in the nine months ended September 30, 2010 over the comparable 2009 period as Canyon added staff and equipment to match the increase in activity.  The 2009 period was impacted by significant cost cutting measures implemented in response to the decreased level of activity in the industry, consisting mostly of staff reductions and wage and benefit rollbacks. Selling, General and Administrative ExpensesSelling, general and administrative expenses increased to $8.0 million in the nine months ended September 30, 2010 from $4.8 million in the comparable 2009 period mostly due to additional sales and engineering staff and the reversal of wage and benefit reductions implemented in March 2009.  As discussed above in the Quarterly Comparative Results of Operations, additional compensation has also been accrued for management and employees in accordance with the Company's annual incentive compensation arrangements.  In 2009, corporate results did not warrant any additional compensation.  Management expects that SG&A will grow at a low rate as the Company's operating activities continue to expand, as much of the back-office infrastructure necessary to support expanded operational activities is already in place.Stock-Based Compensation ExpenseStock-based compensation expense represents the value assigned to the granting of options and incentive-based units under the Company's Share Purchase Option Plan and Stock Based Compensation Plan respectively, using the Black-Scholes method.  For the nine months ended September 30, 2010, $0.8 million (2009 $0.5 million) was charged to expenses and included in contributed surplus in respect of these two plans   In addition obligations for payments under the Company's Deferred Share Unit Plan are accrued as stock-based compensation expense over the vesting period.  Fluctuations in the price of the Company's common shares change the accrued stock-based compensation and are recognized when they occur.  This expense totaled $2.2 million for the nine months ended September 30, 2010 (2009 - $0.2 million) and included in accounts payable and accrued liabilities.EBITDA (See NON-GAAP MEASURES)For the nine months ended September 30, 2010, EBITDA before stock-based compensation expense was $49.4 million, significantly higher than the negative $1.1 million of EBITDA before stock based compensation expense recorded in the comparable 2009 period.  The leading factors for the increase are higher utilization, the focus on completing larger, higher-priced jobs, improved pricing and the operating leverage available in a high fixed cost structure. For the nine months ended September 30, 2010, EBITDA before stock based compensation expense of $49.4 million consists of income before income taxes of $36.5 million, plus depreciation and amortization of $9.9 million, plus interest on long-term debt and other interest of $0.1 million, plus stock-based compensation expense of $2.9 million.  The EBITDA before stock based compensation expense for the nine months ended September 30, 2009, of negative $1.1 million consists of loss before income taxes of $(9.3) million, plus depreciation and amortization of $6.9 million, plus interest on long-term debt and other interest of $0.5 million and stock based compensation expense of $0.7 million.Interest ExpenseInterest on long-term debt and other interest decreased to $0.1 million for the nine months ended September 30, 2010 compared to $0.5 million for the comparable 2009 period.  The decreased interest expense is due to lower debt levels following repayment of $20 million from the net proceeds of the October 2009 equity financing.Depreciation ExpenseDepreciation expense was $9.9 million for the first three quarters of 2010, up from $6.9 million recorded in the first three quarters of 2009.  The increase is mostly due to additional depreciation pertaining to 2010 equipment additions.  Commencing with Q1 2010, Canyon reassessed the salvage value estimate for fracturing equipment resulting in additional depreciation expense of $0.3 million in the period to September 30, 2010.Income Tax ExpenseAt the expected combined income tax rate of 28%, income before income taxes for the first nine months of 2010 of $36.5 million would have resulted in income tax expense of approximately $10.2 million compared to actual income tax expense of $6.8 million.   The income tax expense was increased by $0.2 million as a result of the effect of stock-based compensation expense and other non-deductible expenses, reduced by $0.4 million for future tax rate differences, and reduced by $3.2 million as a result of the effect of a decrease in a future income tax valuation allowance.Net Income (Loss) and Comprehensive Income (Loss) and Income (Loss) per ShareNet income and comprehensive income totaled $29.7 million for the nine months ended September 30, 2010 compared to a net loss and comprehensive loss of ($9.2) million for the comparable period of 2009.  The significant improvement in net income and comprehensive income in 2010 is primarily due to increased activity levels and revenues resulting from a significant increase in demand by E&P companies for well stimulation services as discussed above.Basic income per share for the nine months ended September 30, 2010 was $0.54 (diluted - $0.52) compared to the basic and diluted loss per share of ($0.41) and ($0.41) in the comparable period of 2009.2011 CAPITAL EXPENDITURE GUIDANCE Canyon is pleased to announce a capital expenditure program of approximately $55 million for 2011 as the Company continues its strategy of expanding its operations across the Western Canadian Sedimentary Basin.  The capital will be allocated among approximately 25,000 HHP, blenders, associated sand handling and storage equipment, two deep coil tubing units and miscellaneous other support equipment and facilities.  Following completion of this program in the second half of 2011, the pumping capacity of the Company's fracturing equipment fleet will grow to in excess of 150,000 HHP.FORWARD-LOOKING STATEMENTSThis document contains certain forward-looking information and statements within the meaning of applicable securities laws.  The use of any of the words "expect", "anticipate", "continue", "estimate", "guidance", "objective", "ongoing", "may", "will", "project", "should", "believe", "plans", "intends", "budget", "strategy" and similar expressions are intended to identify forward-looking information or statements.  In particular, but without limiting the foregoing, this document contains forward-looking information and statements pertaining to the following: future oil and natural gas prices; future results from operations; future liquidity and financial capacity and financial resources; future costs, expenses and royalty rates; future interest costs; future capital expenditures; future capital structure and expansion; the making and timing of future regulatory filings; and the Company's ongoing relationship with major customers.The forward-looking information and statements contained in this document reflect several material factors and expectations and assumptions of the Company including, without limitation: that the Company will continue to conduct its operations in a manner consistent with past operations; the general continuance of current or, where applicable, assumed industry conditions; the continuance of existing (and in certain circumstances, the implementation of proposed) tax, royalty and regulatory regimes; certain commodity price and other cost assumptions; the continued availability of adequate debt and/or equity financing and cash flow to funds its capital and operating requirements as needed; and the extent of its liabilities.  The Company believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable but no assurance can be given that these factors, expectations and assumptions will prove to be correct.The forward-looking information and statements included in this document are not guarantees of future performance and should not be unduly relied upon.  Such information and statements involve 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 or statements including, without limitation: changes in commodity prices; changes in the demand for or supply of the Company's services; unanticipated operating results; changes in tax or environmental laws, royalty rates or other regulatory matters; changes in the development plans of third parties; increased debt levels or debt service requirements; limited, unfavourable or a lack of access to capital markets; increased costs; a lack of adequate insurance coverage; the impact of competitors; reliance on industry partners; and certain other risks detailed from time to time in the Company's public disclosure documents (including, without limitation, those risks identified in this document and the Company's Annual Information Form).The forward-looking information and statements contained in this document speak only as of the date of the document, and none of the Company or its subsidiaries assumes any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws.For further information: Brad Fedora, President & CEO Or Barry O'Brien, Vice President, Finance & CFOCanyon Services Group Inc.    Canyon Services Group Inc.Suite 1600, 510-5th Street S.W.   Suite 1600, 510-5th Street S.W.Calgary, Alberta, T2P 3S2    Calgary, Alberta, T2P 3S2Phone:  403-290-2491   Phone:  403-290-2478Fax: 403-355-2211    Fax: 403-355-2211