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Press release from CNW Group

CANYON SERVICES GROUP INC. (TSX:FRC) REPORTS RECORD FOURTH QUARTER AND YEAR ENDED 2010 RESULTS

Monday, March 07, 2011

CANYON SERVICES GROUP INC. (TSX:FRC) REPORTS RECORD FOURTH QUARTER AND YEAR ENDED 2010 RESULTS21:20 EST Monday, March 07, 2011CALGARY, March 7 /CNW/ - Canyon Services Group Inc. ("Canyon") today announced its fourth quarter 2010 and year 2010 results.  The following should be read in conjunction with the Management's Discussion and Analysis, the consolidated financial statements and notes of Canyon Services Group Inc. for the year ended December 31, 2010 which are available on SEDAR at www.sedar.com.OVERVIEW OF FOURTH QUARTER AND YEAR ENDED 2010     000's except per share and job amountsThree months endedDecember 31 Year endedDecember 31 2010 2009 2010 2009Consolidated revenues$85,153 $13,972 $215,891 $46,932Operating income (1)$43,622 $3,260 $101,026 $6,894Net income (loss)$24,623 ($1,876) $54,353 ($11,059)  Per share-basic$0.41 ($0.05) $0.96 ($0.42)  Per share-diluted$0.40 ($0.05) $0.93 ($0.42)EBITDA (1)$40,228 $1,367 $89,654 $247Funds from (used in) operations(1)$31,888 $1,253 $75,399 ($389)Capital expenditures$25,345 $16,029 $80,848 $16,610Long term debt(3)$116 $288 $116 $288Working capital$50,363 $17,442 $50,363 $17,442        Total jobs completed (2)651 291 2,194 980Consolidated average revenue per job (2)$131,576 $48,494 $98,785 $48,279Hydraulic Pumping Capacity         Average HHP96,000 25,500 74,000 25,500  Exit HHP110,500 38,000 110,500 38,000Note (1): See Non-GAAP MeasuresNote (2): Includes all jobs from each service line, specifically hydraulic fracturing; coiled tubing; nitrogen fracturing; acidizing and remedial cementingNote (3): Includes current and long-term portionsIn 2010, activity levels in the pressure pumping industry across the Western Canadian Sedimentary Basin ("WCSB") recovered significantly from the unprecedented collapse of activity that occurred in 2009.  In the fourth quarter of 2010, Canyon achieved record total revenues of $85.2 million, six times the revenue of $14.0 million recorded in Q4 2009.  EBITDA in the quarter was $40.2 million, compared to $1.4 million in Q4 2009.  Average consolidated revenue per job also increased significantly to $131,576 in Q4 2010 from $48,494 in Q4 2009 mainly due to larger jobs and improved industry pricing.The annual financial results were similarly strong with 2010 revenues recorded at $215.9 million, almost five times the revenues of $46.9 million in 2009.  Annual 2010 EBITDA was $89.7 million compared to $0.2 million in 2009.  Average consolidated revenue per job doubled to $98,785 in 2010 compared to $48,279 in 2009.Underpinning the industry recovery, which began in late 2009, were technological improvements and strong oil and liquids prices leading to increased activity in emerging and established oil plays such as the Cardium, Viking and Bakken.  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 multi-staged fracture treatments are applied to the horizontal sections of the well bore.  We estimate the WCSB now requires an average of more than five fracs per well compared to an average one frac per well during the historically high oil field activity levels experienced in 2005 / 2006.  In addition, the size of the average fracture has also grown significantly which when combined with the increased fracture intensity results in a dramatic increase in demand for fracturing equipment and services.  Exploration and Production ("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 natural gas liquids ("NGL") focused drilling activity.  Oil-directed activity levels alone now account for more than 60% of WCSB activity levels, up from about 40% in 2009, with this increasing trend expected to continue over the next few years. In addition, natural gas resource plays in Northeast British Columbia and Northwest Alberta such as the Montney were also very active.  Well licenses issued were 44% higher in the 2010 year compared to 2009, with licensing activity particularly strong in the Cardium, Viking, Bakken and Montney formations.  Drilling rig utilization increased in Q4 2010 to average approximately 50% compared to an average of 43% in the previous quarter and 33% in Q4 2009. In October 2009, Canyon initiated a recapitalization and corresponding major capital expansion program to meet the then anticipated growing demand by our customers for pressure pumping services.  As a result, Canyon's pressure pumping fleet has grown from 25,500 HHP in 2009 to 125,500 HHP in Q1 2011.  All equipment built since 2009, about 80% of Canyon's current fleet, is heavy duty specification, suitable for deployment in the deep basin where pumping pressures, rates and durations have increased significantly.  For 2011, Canyon has announced a $68 million capital program to add a further 50,000 HHP of capacity along with ancillary equipment and infrastructure, bringing the Company's fleet to 175,500 HHP by the end of 2011.  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. NON-GAAP MEASURESThe Company's Consolidated Financial Statements are prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") and are reported in Canadian currency.Operating income is defined as revenue less operating expenses.  EBITDA means earnings before interest, taxes, depreciation and amortization and is equal to net income (loss) plus income taxes, stock-based compensation expense, other interest, interest on long-term debt and depreciation and amortization.  Funds from operations is defined as cash provided by Canyon's operating activities before the net change in non-cash operating assets and liabilities.  Operating income, EBITDA and funds from operations are not recognized measures under GAAP.  Management believes that in addition to net income (loss), operating income, EBITDA and funds from operations are useful supplemental measures as they provide an indication of the results generated by the Company's business activities prior to consideration of how those activities are financed, amortized or taxed, as well as the cash generated by the Company's business activities without consideration of the timing of the monetization of non-cash working capital items.  Readers should be cautioned, however, that operating income, EBITDA and funds from operations should not be construed as an alternative to net income (loss) determined in accordance with GAAP as an indicator of the Company's performance.  Canyon's method of calculating operating income, EBITDA and funds from operations may differ from other companies and, accordingly, operating income, EBITDA and funds from operations may not be comparable to measures used by other companies.  Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures is outlined below.Operating Income     Three months endedDecember 31 Year  endedDecember 31 2010 2009 2010 2009Operating income$43,622,011 $3,260,091 $101,026,367 $6,893,585Add (Deduct):       Selling, general and administrative(3,394,394) (1,892,690) (11,372,767) (6,646,589)Stock-based compensation(2,422,258) (560,775) (5,350,473) (1,282,568)Interest on long-term debt(27,296) (361,792) (93,610) (826,009)Other Interest(1,265) (6,705) (39,007) (63,843)Depreciation and amortization(3,674,879) (2,314,524) (13,531,774) (9,203,459)Income taxes(9,478,685) - (16,285,557) 69,550Net income (loss)$24,623,234 ($1,876,395) $54,353,179 ($11,059,333)        EBITDA  Three months endedDecember 31 Year endedDecember 31 2010 2009 2010 2009EBITDA before stock compensation expense$40,227,617 $1,367,401 $89,653,600 $246,996Add (Deduct):       Depreciation and amortization(3,674,879) (2,314,524) (13,531,774) (9,203,459)Interest on long-term debt(27,296) (361,792) (93,610) (826,009)Other interest(1,265) (6,705) (39,007) (63,843)Stock-based compensation(2,422,258) (560,775) (5,350,473) (1,282,568)Income taxes(9,478,685) - (16,285,557) 69,550Net income (loss)$24,623,234 ($1,876,395) $54,353,179 ($11,059,333)        Funds from Operations     Three months endedDecember 31 Year endedDecember 31 2010 2009 2010 2009Funds from (used in) operations$31,887,823 $1,253,096 $75,399,080 $(388,664)Add (Deduct) non-cash operating items:       Depreciation and amortization(3,674,879) (2,314,524) (13,531,774) (9,203,459)Loss on disposal of assets(63,133) - (63,133) -Deferred financing costs- (254,192) - (254,192)Future income taxes(1,104,319) - (2,100,521) 69,550Stock-based compensation(2,422,258) (560,775) (5,350,473) (1,282,568)Net income (loss)$24,623,234 ($1,876,395) $54,353,179 ($11,059,333)        Operating and Financial HighlightsThe operating and financial highlights for the three and twelve months ended December 31, 2010 may be summarized as follows:Canyon has the newest hydraulic pressure pumping fleet in the industry with a total capacity of 110,500 HHP as at December 31, 2010, increasing to 125,500 HHP in Q1 2011 following completion of its 2010 capital program.  Canyon commenced 2010 with 38,000 HHP and averaged 74,000 HHP for the year.In Q4 2010, Canyon's equipment fleet was fully utilized, resulting in record consolidated revenues of $85.2 million in Q4 2010, a six-fold increase over the $14.0 million of revenues in Q4 2009.  For the year ended December 31, 2010, consolidated revenues increased to $215.9 million almost five times the $46.9 million of revenues earned in 2009.EBITDA (see Non-GAAP Measures) improved dramatically to $40.2 million in Q4 2010 from $1.4 million in Q4 2009, mainly due to a drastic increase in Canyon's pressure pumping capacity, higher industry activity, a focus on completing larger jobs and improved pricing.  There was a similar improvement in EBITDA for the year ended December 31, 2010 with $89.7 million recorded for the year compared to $0.2 million in 2009.Net income was recorded at $24.6 million in Q4 2010, compared to a net loss of ($1.9) million in Q4 2009, while for the year ended December 31, 2010, net income improved to $54.4 million from a net loss of ($11.1) million in 2009.Jobs completed in the quarter increased significantly to 651 from 291 jobs completed in Q4 2009, while for the year ended December 31, 2010, jobs completed increased by 124% to 2,194 from 980 in 2009.Average consolidated revenue per job increased by 171% to $131,576 in Q4 2010, from $48,494 in Q4 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 jobs.  For the year ended December 31, 2010, average consolidated revenues per job increased by 105% to $98,785 from $48,279 in 2009.For the 2010 year, approximately 83% of the consolidated total revenue (and 49% of consolidated jobs) was 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 were $80.8 million of which $76.3 million and $4.5 million related to the 2010 and 2011 capital programs, respectively.  To complete Canyon's 2010 capital program approximately $4.9 of approved expenditures will be incurred in early Q1 2011, bringing the Company's equipment fleet to 125,500 HHP.  Please refer to "Capital Expenditures" below.Canyon's 2010 capital program included the addition of an operating base in Southeast Saskatchewan, which commenced operations in December 2010 to focus on servicing customers active in the Bakken oil play.In November 2010, Canyon announced its 2011 capital expenditure program with a subsequent announcement in January 2011 increasing the program to a total capital budget of $68 million for the year.  This capital program consists of 50,000 HHP, associated blenders, sand handling, transportation and storage equipment, two deep coiled tubing units and miscellaneous other support equipment and facilities.  Canyon anticipates funding the capital expansion program from existing cash and funds from operations (see NON-GAAP MEASURES).In November 2010, Canyon announced that commencing in 2011 the Company will pay an annual dividend to shareholders of $0.10, payable semi-annually.  On January 28, 2011, the first semi-annual dividend of $0.05 per common share was paid to shareholders of record on January 14, 2011, totaling $3.0 million.As at December 31, 2010, the Company's available cash is $41.2 million and the available credit facilities total $36.0 million.QUARTERLY COMPARATIVE STATEMENTS OF OPERATIONSQuarter EndedDecember 31, 2010 December 31, 2009 (Unaudited) (Unaudited)Revenues$85,152,966 $13,972,096Expenses:    Operating41,530,955 10,712,005 Selling, general and administrative3,394,394 1,892,690 Stock-based compensation expense2,422,258 560,775 Interest on long-term debt27,296 361,792 Other Interest1,265 6,705 Depreciation and amortization3,674,879 2,314,524Income (loss) before income taxes34,101,919 (1,876,395) Income taxes - current8,374,366 - Income taxes-future (reduction)1,104,319 - 9,478,685 -Net income (loss)$24,623,234 ($1,876,395)EBITDA(1)$40,227,617 $1,367,401Income (loss) per share:    Basic$0.41 ($0.05) Diluted$0.40 ($0.05)Note (1): See Non-GAAP Measures.RevenuesConsolidated revenues for Q4 2010 increased significantly to a record $85.2 million, a six-fold increase over the $14.0 million earned in Q4 2009, due to the dramatic growth of Canyon's pressure pumping equipment fleet, combined with the improved industry activity.  During the quarter Canyon's equipment fleet averaged 96,000 HHP and was fully utilized, resulting in 651 jobs completed compared to 291 in the prior year's quarter.  Average consolidated revenues per job increased to $131,576 in Q4 2010 from $48,494 in Q4 2009 due to Canyon's continuing success in expanding its market share in the deeper segments of the market resulting in large jobs, augmented by improved industry pricing.Operating ExpensesOperating expenses in Q4 2010 were $41.5 million compared to $10.7 million for the comparable quarter of 2009.  The almost four-fold increase in operating expenses is due to increased staff required for the larger number of jobs and significantly increased volumes of materials.  As a percentage of revenues operating expenses declined to 49% in Q4 2010 compared to 77% in Q4 2009 due to the fixed component which averaged 9% of revenues in the current quarter compared to 21% in Q4 2009. Selling, General and Administrative ExpensesSelling, general and administrative expenses increased to $3.4 million in Q4 2010 from $1.9 million in Q4 2009 primarily due to the increases in sales and marketing expenses, number of employees and a more active business environment.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 Q4 2010, $0.2 million (Q4 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 $2.2 million for Q4 2010 (Q4 2009 - $0.4 million) and is included in accounts payable and accrued liabilities.EBITDA (See Non-GAAP Measures)In Q4 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 of $40.2 million, significantly higher than the $1.4 million recorded in Q4 2009. Interest ExpenseInterest on long-term debt and other interest was $29 thousand for Q4 2010, compared to $0.4 million for Q4 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 $3.7 million in Q4 2010, compared to the $2.3 million recorded in Q4 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 Q4 2010 of $34.1 million would have resulted in an expected income tax expense of $9.5 million, equaling the actual income tax.  The expected income tax expense was increased by $0.1 million as a result of the effect of stock-based compensation expense and other non-deductible expenses, and reduced by $0.1 million for future tax rate differences.   Net Income (Loss) and Income (Loss) per ShareNet income totaled $24.6 million for Q4 2010, compared to net loss of ($1.9) million in Q4 2009.  The increase in net income for Q4 2010 is due to the significant increase in Canyon's fracturing services as discussed above.For the quarter ended December 31, 2010, basic and diluted income per share was $0.41 and $0.40 respectively, compared to basic and diluted loss per share of ($0.05) recorded in Q4 2009.2010 YEAR-TO-DATE COMPARATIVE STATEMENTS OF OPERATIONSYear To DateDecember 31, 2010 December 31, 2009 (Unaudited) (Unaudited)Revenues$215,890,794 $46,932,062Expenses    Operating114,864,427 40,038,477 Selling, general and administrative11,372,767 6,646,589 Stock-based compensation expense5,350,473 1,282,568 Interest on long-term debt93,610 826,009 Other interest39,007 63,843 Depreciation and amortization13,531,774 9,203,459Income (loss) before income taxes70,638,736 (11,128,883) Income taxes - current14,185,036 - Income taxes-future (reduction)2,100,521 (69,550) 16,285,557 (69,550)Net income ( loss)$54,353,179 ($11,059,333)EBITDA(1)$89,653,600 $246,996Income (Loss) per share:    Basic$0.96 ($0.42) Diluted$0.93 ($0.42)Note (1): See Non-GAAP Measures.RevenuesConsolidated revenues for the year ended December 31, 2010 increased almost five-fold to $215.9 million from $46.9 earned in 2009.  Jobs completed in the 2010 year totaled 2,194, a 124% increase from the 980 jobs completed in 2009.  Average consolidated revenues per job for the year ended December 31, 2010 increased by 105% to $98,785 from $48,279 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 which began and ended the year at about 38,000 HHP and 110,500 respectively, and the much improved operating environment across the well stimulation industry, as discussed above.Operating Expenses Operating expenses for the year ended December 31, 2010 were $114.9 million compared to $40.0 million for 2009.  The increase in operating expenses is due to larger, more costly jobs necessitating increased volumes of materials and manpower, as well as due to the significant increase in the number of jobs completed in the current year.  The approximate three-fold increase in operating costs does not match the almost five-fold increase in revenues due to the fixed component which averaged 11% of revenues in 2010 compared to 28% of revenues in 2009. Selling, General and Administrative ExpensesSelling, general and administrative expenses increased to $11.4 million in the year ended December 31, 2010 from $6.6 million in 2009 primarily due to increases in sales and marketing expenses, the addition of sales and engineering staff and the reversal of wage and benefit reductions implemented in March 2009.  Additional compensation of approximately $1.6 million has also been accrued for management and employees in accordance with the Company's 2010 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 under the Company's Share Purchase Option Plan, incentive-based units under the Company's Stock Based Compensation Plan and warrants granted upon acceptance of the Company's offer of employment by the President and Chief Executive Officer in September 2007.  These options, incentive based units and warrants were valued using the Black-Scholes method.  For the year ended December 31, 2010, $1.0 million (2009 $0.9 million) was charged to expenses and included in contributed surplus in respect of these 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 $4.4 million for the year ended December 31, 2010 (2009 - $0.4 million) and included in accounts payable and accrued liabilities.EBITDA (See NON-GAAP MEASURES)For the year ended December 31, 2010, EBITDA was $89.7 million, significantly higher than the $0.2 million of EBITDA recorded in the 2009 year.  The leading factors for the increase are higher utilization, the focus on completing larger, more costly jobs, improved pricing and the operating leverage available in a high fixed cost structure. Interest ExpenseInterest on long-term debt and other interest decreased to $0.1 million for the year ended December 31, 2010 compared to $0.9 million for the 2009 year.  The decreased interest expense is due to lower debt levels following repayment of $20 million in Q4 2009 from the net proceeds of the October 2009 equity financing.Depreciation ExpenseDepreciation expense was $13.5 million for the year ended December 31, 2010, up from $9.2 million recorded in the 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 $0.4 million in the year to December 31, 2010.Income Tax ExpenseAt the expected combined income tax rate of 28%, income before income taxes for the year ended December 31, 2010 of $70.6 million would have resulted in income tax expense of approximately $19.8 million compared to actual income tax expense of $16.3 million.   The income tax expense was increased by $0.3 million as a result of the effect of stock-based compensation expense and other non-deductible expenses, reduced by $0.6 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 Income (Loss) per ShareNet income totaled $54.4 million for the year ended December 31, 2010 compared to a net loss of ($11.1) million for the 2009 year.  The significant improvement in net 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 year ended December 31, 2010 was $0.96 (diluted - $0.93) compared to the basic and diluted loss per share of ($0.42) for the year ended December 31, 2009.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 and CEO  Canyon Technical Services Ltd    Suite 1600, 510-5th Street S.W.   Calgary, Alberta, T2P 3S2   Phone:  403-290-2491   Fax: 403-355-2211     Or Barry O'Brien Vice President, Finance and CFO Canyon Technical Services Ltd Suite 1600, 510-5th Street S.W. Calgary, Alberta, T2P 3S2 Phone:  403-290-2478 Fax: 403-355-2211