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Press release from CNW Group

Canyon Reports Q2 2011 Results

Tuesday, August 09, 2011

Canyon Reports Q2 2011 Results21:20 EDT Tuesday, August 09, 2011CALGARY, Aug. 9, 2011 /CNW/ - Canyon Services Group Inc. (TSX: FRC) ("Canyon") is pleased to announce its second quarter 2011 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 three and six months ended June 30, 2011 and should also be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2010, and which are available on SEDAR at www.sedar.com.ACCOUNTING POLICY CHANGESOn January 1, 2011, Canyon adopted International Financial Reporting Standards ("IFRS") for purposes of financial reporting, using a transition date of January 1, 2010.  Accordingly, these Interim Consolidated Financial Statements for the three and six months ended June 30, 2011 and the comparative information for the three and six months ended June 30, 2010, have been prepared in accordance with International Financial Reporting Standard 1, "First-time Adoption of International Financial Reporting Standards", and with International Accounting Standard 34, "Interim Financial Reporting", as issued by the International Accounting Standards Board ("IASB").Prior to January 1, 2011, the Company prepared its interim and annual consolidated financial statements in accordance with Canadian generally accepted accounting principles ("previous GAAP").The adoption of IFRS has not had an impact on the Company's operations, strategic decisions and funds from operations (see NON-GAAP MEASURES).  Further information on the effect of adopting IFRS is outlined in the Accounting Policies and Estimates paragraph of this MD&A.OVERVIEW OF SECOND QUARTER AND YEAR-TO-DATE 2011        000's except per share and job amountsThree months endedJune 30 Six months endedJune 30 2011 2010 2011 2010Consolidated revenues$22,886 $22,817 $121,923 $64,276Net earnings and comprehensive income (loss)(6,639) $91 $23,477 $12,079 Per share-basic($0.11) $0.00 $0.39 $0.23 Per share-diluted($0.11) $0.00 $0.37 $0.22EBITDA before stock-based compensation(1)($3,109) $3,395 $44,869 $19,650Funds from operations(1)$1,199 $3,340 $38,973 $19,515Total jobs completed (2)159 308 895 969Consolidated average revenue per job (2)$147,078 $74,095 $137,417 $66,482Hydraulic Pumping Capacity        Average HHP125,500 69,500 123,000 60,000 Exit HHP125,500 75,500 125,500 75,500Capital expenditures$29,190 $19,686 $52,333 $39,572    000's of dollarsAs atJune 30,2011 As atDecember 31,2010Cash balance, net of loans and borrowings (3)$30,268 $38,742Working capital$31,527 $49,283    Note (1): See Non-GAAP MeasuresNote (2):  Includes all jobs from each service line, specifically hydraulic fracturing; coiled tubing; nitrogen fracturing; acidizing and remedial cementing.Note (3):  Includes current and long-term portionsQ2 2011 experienced worse than expected operating results as prolonged and extremely wet weather conditions across the Western Canadian Sedimentary Basin ("WCSB") resulted in many Exploration and Production ("E&P") companies delaying drilling and completions activity to the second half of the year.  In June 2011, normally a month that sees a return to robust activity following spring break-up, drilling rig utilization levels were lower than in June 2010 due to the inclement weather and lease conditions.  In Q2 2011, Canyon's core customers were not active in pad well project work.  This type of work is typically less impacted by spring break-up or weather conditions.  Canyon is also currently not active in the Horn River.  As a result, Canyon only completed 159 jobs in Q2 2011, about half the 308 jobs completed in Q2 2010.  Canyon was able to double the average consolidated revenue per job to $147,078 in Q2 2011 from $74,095 in Q2 2010 due to its continued focus on the deeper segments of the market.Although our customers were more weather delayed than normal in Q2, Canyon believes that its expanded equipment fleet will be fully utilized during most of the remainder of 2011 due to a demand back log for fracturing services caused by the weather related drilling delays of the second quarter, and due to the strong industry fundamentals as previously reported.  These fundamentals can be summarized as technological improvements and strong commodity prices which, for the past eighteen months, have led to increased activity in emerging and established oil and liquids rich natural gas plays such as the Cardium, Viking, Bakken, Deep Basin, Montney and Duvernay.  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.  As horizontal sections continue to lengthen and frac-stages per well continue to rise, it is expected that frac-stages per well will reach an average of approximately 10 stages per well in 2012, up from the current level of approximately 6 stages per well.  In addition, the size and the pumping rates of the average fracture have also grown significantly which when combined with the increased fracture intensity has resulted in a dramatic increase in demand for fracturing equipment and services.  E&P companies now require significantly more hydraulic horsepower ("HHP") capacity for longer periods of time to complete their programs.The ongoing strength in oil prices has resulted in a dramatic expansion in oil and natural gas liquids ("NGL") focused drilling activity, including emerging plays such as Duverney and Slave Point oil.  Oil and liquids-directed drilling activity now accounts for approximately 70% of the wells being drilled in the WCSB, up from about 50% in 2010. This trend is 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 in 2011 to date.  Well licenses issued in Q2 2011 were approximately 3,223, unchanged from 3,272 issued in Q2 2010, with licensing activity particularly strong in the Cardium, Viking, Bakken and Montney formations.  Drilling rig utilization in Q2 2011 averaged 24% compared, up from the 22% average achieved in Q2 2010.Canyon's pressure pumping fleet has grown from 25,500 HHP in 2009 to 125,500 HHP at the beginning of 2011.  All equipment built since 2009,  is heavy duty specification, suitable for deployment in the deep basin where pumping pressures, rates and durations have increased significantly.  Canyon's $82 million 2011 capital program will add a further 50,000 HHP, bringing the Company's fleet to 175,500 HHP by the end of 2011.  Canyon has started receiving delivery of the first equipment units. In May 2011, Canyon announced its initial capital expenditure program for 2012 at $90 million which will grow its equipment fleet to in excess of 225,000 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 equipment intensive projects.NON-GAAP MEASURESThe Company's interim consolidated financial statements have been prepared in accordance with IFRS. Certain measures in this document do not have any standardized meaning as prescribed by IFRS and are considered non-GAAP measures.EBITDA before stock-based compensation and funds from operations are not recognized measures under IFRS.  Management believes that in addition to net earnings, EBITDA before stock-based compensation 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 EBITDA before stock-based compensation and funds from operations should not be construed as an alternative to net earnings determined in accordance with IFRS as an indicator of the Company's performance.  Canyon's method of calculating EBITDA before stock-based compensation and funds from operations may differ from other companies and accordingly, EBITDA before stock-based compensation 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 IFRS measures are outlined below.In Q1 2011, Canyon described revenue less cost of services as Operating income.  In Q2 2011 and going forward, the Company describes revenue less cost of services as Gross profit.EBITDA before stock-based compensation         Three months endedJune 30 Six months endedJune 30000's of dollars2011 2010 2011 2010EBITDA before stock-based compensation($3,109) $3,395 $44,869 $19,650Add (Deduct):       Depreciation and amortization(5,167) (3,350) (10,013) (6,211)Finance costs(88) (55) (168) (135)Equity-settled share based payment transactions(872) (283) (2,790) (1,313)Income taxes2,597 384 (8,421) 88Net earnings (loss)($6,639) $91 $23,477 $12,079Funds from Operations        Three months endedJune 30 Six months endedJune 30000's of dollars20112010 2011 2010Funds from operations$1,199$3,340 $38,973 $19,515Add (Deduct) non-cash operating items:      Depreciation and amortization(5,167)(3,350) (10,013) (6,211)Future income taxes(1,775)384 (2,699) 88Gain/loss on sale of property & equipment(24)- 6 -Equity-settled share based payment transactions(872)(283) (2,790) (1,313)Net earnings (loss)($6,639)$91 $23,477 $12,079Operating and Financial HighlightsThe operating and financial highlights for the three and six months ended June 30, 2011 may be summarized as follows:Canyon's equipment fleet has almost doubled to average 125,500 HHP in Q2 2011 from 69,500 HHP in Q2 2010Canyon's $82 million 2011 capital program is on schedule and on budget and will result in Canyon expanding its fracturing equipment fleet by 40% to 175,500 HHP by year end.In May 2011, Canyon announced its initial capital expenditure program for 2012 at $90 million, consisting of 50,000 HHP, blenders, associated sand handling and storage equipment, three deep coil tubing units, nitrogen equipment and miscellaneous other support equipment and facilities. Following completion of this program in 2012, Canyon's pumping capacity will grow to in excess of 225,000 HHP.In June 2011, Canyon replaced its existing $36 million bank credit facilities with  new three year committed revolving extendible credit facilities totaling $60 million.Canyon remains in a very strong financial position with available cash of $32.9 million in addition to available credit facilities of $60.0 million as at June 30, 2011.Average consolidated revenue per job increased by 99% to $147,078 in Q2 2011 from $74,095 in Q2 2010 due to Canyon's continued focus on the deeper segments of the basin resulting in larger jobs augmented by improved industry pricing.  The wet weather and the lack of pad well project work by our core customers resulted in Canyon completing only 159 jobs in Q2 2011 compared to 308 jobs in Q2 2010.Higher average revenues per job across fewer jobs completed resulted in Canyon's Q2 2011 revenues totaling $22.9 million, unchanged from Q2 2010 revenues of $22.8 million.For the six months ended June 30, 2011, Canyon's revenues totaled $121.9 million (on 895 jobs completed), a 90% increase over the revenues of $64.3 million (on 969 jobs completed) achieved in the comparable 2010 period.Higher fixed costs associated with the increased pumping capacity, infrastructure and staffing resulted in increases of $3.2 million in fixed operating costs, $1.8 million in administrative expenses and $2.1 million in depreciation expenses in Q2 2011 over Q2 2010.  As a result, with revenues unchanged quarter over quarter, there was a net loss of ($6.6) million, or ($0.11) per share fully diluted, in Q2 2011 compared to net earnings of $0.1 million in Q2 2010.For the six months ended June 30, 2011, net earnings have almost doubled to $23.5 million (or $0.37 per share diluted) from $12.1 million (or $0.22 per share diluted) in the comparable 2010 period.Fracturing demand in the WCSB continues to grow on both a per well basis and overall as the numbers of wells drilled increases in fracturing intensive plays.The full equipment utilization levels experienced by Canyon in Q1 2011 are expected to return early in the second half of the year once weather conditions permit.In July 2011, Canyon paid its semi-annual dividend of $0.05 per common share.QUARTERLY COMPARATIVE STATEMENTS OF OPERATIONS    Quarter EndedJune 30, 2011 June 30, 2010000's of dollars except per share amounts(Unaudited) (Unaudited)Revenues$22,886 $22,817Cost of services(27,506) (20,615)Gross profit (loss)(4,620) 2,202Administrative expenses(4,528) (2,440)Results from operating activities(9,148) (238)Finance costs(88) (55)Profit (loss) before income tax(9,236) (293)Income tax expense2,597 384Net earnings (loss) and comprehensive income (loss)($6,639) $91EBITDA before stock-based compensation(1)($3,109) $3,395Earnings per share:         Basic($0.11) $0.00      Diluted($0.11) $0.00Note (1): See Non-GAAP Measures.RevenuesIn Q2 2011, revenues totaled $22,886, almost unchanged from $22,817 earned in Q2 2010.  Normally, the second quarter is characterized by spring break-up which lasts from mid-March to the beginning of June, but this year extremely wet weather conditions lasting well into July led to E&P companies delaying their drilling and completions programs to the second half of 2011.  In addition, Canyon's core customers were not active in pad well project work.  As a result, Canyon completed only 159 jobs in Q2 2011 compared to 308 jobs completed in Q2 2010.  Average consolidated revenues per job increased to $147,078 in Q2 2011 from $74,095 in Q2 2010 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.Cost of servicesCost of services for the three months ended June 30, 2011 totaled $27,506 (2010: $20,615) and includes employee benefits expense of $8,972 (2010: $5,634), depreciation of property and equipment of $4,894 (2010: $3,166).  Cost of services also includes a fixed operating cost component which increased by $3.2 million in Q2 2011 over Q2 2010 as a result of additional staff and infrastructure for Canyon's increased business and expanded equipment fleet which averaged 125,500 HHP in the current quarter compared to an average of 69,500 HHP in Q2 2010.The increase in depreciation of property and equipment is mostly due to additional depreciation pertaining to 2010 and 2011 equipment additions.Administrative expensesAdministrative expenses for the three months ended June 30, 2011 totaled $4,528 (2010: $2,440) and includes employee benefits expense of $1,637 (2010: $1,037), depreciation of buildings and office equipment and amortization of intangibles of $274 (2010: $184), and stock-based compensation expense of $872 (2010: $283).  The increase is also attributable to the increases in sales and marketing expenses, and the increased number of employees resulting from a higher volume of business in 2011.Stock-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 Q2 2011, $0.6 million (Q2 2010 - $0.3 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 $0.4 million for Q2 2011 (Q2 2010 - $0.1 million) and is included in accounts payable and accrued liabilities.EBITDA before stock-based compensation (See Non-GAAP Measures)In Q2 2011, the impact of the extremely wet weather conditions and an increased fixed cost structure to support Canyon's expanded equipment fleet resulted in negative EBITDA before stock-based compensation of $3.1 million, compared to positive $3.4 million in Q2 2010.Finance costsFinance costs include interest on finance lease obligations and automobile loans and total $88 in Q2 2011 (Q2 2010: $55).Income Tax ExpenseAt the expected combined income tax rate of 26.5%, the loss before income tax for Q2 2011 of $9.2 million would have resulted in an expected income tax recovery of $2.4 million, compared to the actual income tax recovery of $2.6 million.  The expected income tax recovery was increased by $0.2 million as a result of investment tax credits claimed for the prior year, and by $0.1 million for future tax rate differences, offset by $0.1 million for non-deductible expenses.Net earnings (loss) and comprehensive income (loss) and earnings (loss) per shareNet earnings (loss) and comprehensive income (loss) totaled ($6.6) million for Q2 2011, compared to $0.1 million in Q2 2010.  The decrease for Q2 2011 is due to the impact on revenues of reduced industry activity caused by the extreme wet weather conditions across the WCSB as discussed above.For the second quarter ended June 30, 2011, basic and diluted earnings (loss) per share were ($0.11) compared to basic and diluted earnings per share of $0.00 recorded in Q2 2010.SIX MONTHS TO JUNE 30, 2011 COMPARATIVE STATEMENTS OF OPERATIONS    Period EndedJune 30, 2011 June 30, 2010000's of dollars except per share amounts(Unaudited) (Unaudited)Revenues$121,923 $64,276Cost of services(79,939) (46,545)Operating income41,984 17,731Administrative expenses(9,918) (5,605)Results from operating activities32,066 12,126Finance costs(168) (135)Profit before income tax31,898 11,991Income tax expense(8,421) 88Net earnings and comprehensive income$23,477 $12,079EBITDA before stock-based compensation(1)$44,869 $19,650Earnings per share:         Basic$0.39 $0.23      Diluted$0.37 $0.22Note (1): See Non-GAAP Measures.RevenuesConsolidated revenues for the six months ended June 30, 2011 increased by 90% to $121,923, from the $64,276 earned in the comparable 2010 period, due to the dramatic growth of Canyon's pressure pumping equipment fleet, combined with the improved industry activity.  During the six months ended June 30, 2011 Canyon's equipment fleet averaged 123,000 HHP, resulting in 895 jobs completed compared to 969 in the prior year period.  Average consolidated revenues per job increased by 107% to $137,417 in the six months ended June 30, 2011 from $66,482 in the prior year's comparable period 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.Cost of servicesCost of services for the six months ended June 30, 2011 totaled $79,939 (2010: $46,545) and includes employee benefits expense of $22,573 (2010: $12,136), depreciation of property and equipment of $9,485 (2010: $5,845).  As a percentage of revenues cost of services declined to 66% of revenue in the six months ended June 30, 2011 compared to 72% in comparable 2010 period mainly due to the fixed component of cost of services and due to improved pricing across the industry.The increase in employee benefits expense is due to the additional staff for Canyon's expanded equipment fleet.  The increase in depreciation of property and equipment is mostly due to additional depreciation pertaining to 2010 and 2011 equipment additions.Administrative expensesAdministrative expenses for the six months ended June 30, 2011 totaled $9,918 (2010: $5,605) and includes employee benefits expense of $3,378 (2010: $2,130), depreciation of buildings and office equipment and amortization of intangibles of $528 (2010: $366), and stock-based compensation expense of $2,790 (2010: $1,313).  The increase is also attributable to the increases in sales and marketing expenses, and the increased number of employees resulting from a higher volume of business.Stock-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 the six months ended June 30, 2011, $1.1 million (2010 - $0.3 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 $1.7 million for the six months ended June 30, 2011(2010 - $1.1 million) and is included in accounts payable and accrued liabilities.EBITDA before stock-based compensation (See Non-GAAP Measures)For the six months ended June 30, 2011, 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 of $44.9 million, over twice the $19.7 million recorded in comparable 2010 period.Finance costsFinance costs include interest on finance lease obligations and automobile loans and total $168 in the six months ended June 30, 2011(2010: $136).Income Tax ExpenseAt the expected combined income tax rate of 26.5%, the profit before income tax for the six months ended June 30, 2011 of $31.9 million would have resulted in an expected income tax expense of $8.4 million, compared to the actual income tax expense of $8.3 million.  The expected income tax expense was decreased by $0.2 million as a result of investment tax credits claimed for the prior year, and by $0.2 million for future tax rate differences, and increased by $0.3 million for non-deductible expenses.Net earnings and comprehensive income and earnings per shareNet earnings and comprehensive income totaled $23.5 million for the six months ended June 30, 2011, compared to $12.1 million in the 2010 comparable period.  The increase in net earnings is due to the significant increase in Canyon's fracturing services as discussed above.For the six months ended June 30, 2011, basic and diluted earnings per share was $0.39 and $0.38 respectively, compared to basic and diluted earnings per share of $0.23 and $0.22 recorded in the 2010 comparable period.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; attracting and retaining skilled personnel 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      Or    Barry O'Brien Vice President, Finance and CFO Canyon Technical Services Ltd 2900 Bow Valley Square III   255 - 5 Avenue SW   Calgary, Alberta, T2P 3G6   Phone:  403-290-2491   Fax: 403-355-2211               Canyon Technical Services Ltd 2900 Bow Valley Square III 255 - 5 Avenue SW Calgary, Alberta, T2P 3G6 Phone:  403-290-2478 Fax: 403-355-2211