CES Energy Solutions Corp. Announces Results for the First Quarter Ended March 31, 2019 and Declares Cash Dividend
CES Energy Solutions Corp. ("CES" or the "Company") (TSX:CEU.TO) (OTC - Nasdaq Intl: CESDF) is pleased to report on its financial and operating results for the three months ended March 31, 2019. Further, CES announced today that it will pay a cash dividend of $0.005 per common share on June 14, 2019 to the shareholders of record at the close of business on May 31, 2019.
Commenting on the quarter, Tom Simons, CES' President and Chief Executive Officer said, "First quarter 2019 results represent improvements in key focus areas for the Company and a good start to 2019. Revenue and Adjusted EBITDAC increased year-over-year as the Company's significant US operations and associated infrastructure have expanded. In Canada, we continue to be the market leader in a challenging environment and remain disciplined on cost structure while ensuring the business maintains the scalability to grow into its infrastructure. In the quarter, we reduced the draw on our senior facility and remained active in our NCIB share repurchase program. With margins improving from prior quarter, significant capex largely completed, and reduced levels of working capital, CES continues to increase free cash flow generation from all business lines and is well positioned to capitalize on existing and improving industry trends in key markets."
CES generated $333.0 million in revenue in Q1 2019, representing a record first quarter result for the Company, and achieved Adjusted EBITDAC of $43.7 million in Q1 2019, both of which represent increases over Q1 2018.
Revenue generated in the US was $224.9 million in Q1 2019, or 68% of the Company's total revenue in the quarter, and represented an increase of 25% over the 2018 comparative period. The year-over-year increase in US revenues was driven by CES' improving market share, completed investments in US infrastructure and operations, improvement in the drilling fluids business and increased production chemical related activity, particularly in the Permian Basin.
Revenue generated in Canada was $108.1 million in Q1 2019, or 32% of the Company's total revenue in the quarter, and represented a decrease of 11% versus the 2018 comparative period. The Canadian oil and gas industry continued to face headwinds in Q1 2019 with government mandated production curtailments and winter drilling activity that was significantly lower than Q1 2018, negatively impacting both production chemical and drilling fluids revenues in the current quarter.
On January 1, 2019, the Company adopted IFRS 16 "Leases" using the modified retrospective approach, therefore comparative information has not been restated. The adoption of IFRS 16 resulted in the addition of $19.9 million in right of use assets and corresponding lease obligations on January 1, 2019. For the three months ended March 31, 2019, the impact of IFRS 16 on Adjusted EBITDAC was an increase of $1.4 million, whereas the impact on net income was a decrease of $0.2 million as the reduction in cost of sales and general and administrative expenses was offset by higher depreciation expense and finance costs. Further details are included in the "Significant Accounting Policies" section in the Company's MD&A for the three months ended March 31, 2019.
In Q1 2019, CES recorded Gross Margin of $69.2 million or 20.8% of revenue, compared to Gross Margin of $70.6 million or 23.5% of revenue generated in Q1 2018. In Q1 2019, CES recorded Gross Margin (excluding depreciation) of $81.8 million or 24.6% of revenue, compared to Gross Margin (excluding depreciation) of $80.2 million or 26.7% of revenue generated in Q1 2018. Throughout 2018 and into Q1 2019, cost inflation on significant inputs has outpaced the combination of CES' operating leverage gains and CES' current ability to pass cost increases through to customers. As was evidenced from Q4 2018 to Q1 2019, CES believes that as it increases sales in areas such as the Permian and the Deep Basin, CES will realize improved operating leverage from its expanded infrastructure, and its innovative technologies and superior service culture should improve margins going forward. Net income for Q1 2019 was $2.2 million compared to $13.3 million in Q1 2018.
Q1 2019 Adjusted EBITDAC was $43.7 million, representing 13.1% of revenue, versus $42.5 million in Q1 2018 or 14.1% of revenue. Excluding the $1.4 million increase resulting from the adoption of IFRS 16, Adjusted EBITDAC in Q1 2019 would have been $42.3 million, representing 12.7% of revenue. In Q4 2018, CES achieved Adjusted EBITDAC of $42.1 million, which represented 12.1% of quarterly revenue. When compared to prior quarter, Q1 2019 Adjusted EBITDAC as a percentage of revenue benefited from revenue mix, internal cost improvement initiatives, and isolated price increases.
In Q1 2019, CES incurred $9.4 million in capital expenditures compared to $15.8 million for the three months ended March 31, 2018, excluding amounts reimbursed through insurance proceeds. Current quarter capital expenditures were primarily comprised of fleet additions, lab equipment and field equipment to support higher US activity levels and associated headcount. The Company has completed its significant infrastructure build out in the US and Canada to optimize existing operations and support growth in key markets.
CES continues to maintain a prudent balance sheet and is well positioned to capitalize from existing operations and potential growth opportunities in key markets. At March 31, 2019, CES had a net draw of $132.1 million on its Senior Facility (December 31, 2018 - $161.5 million). The decrease was primarily driven by working capital returning to the balance sheet and free cash flow generation offset by opportunistic share repurchases through CES' NCIB program. The maximum available draw on the Senior Facility at March 31, 2019 was $180.0 million on the Canadian facility and US$40.0 million on the US facility (December 31, 2018 - $180.0 million and US$40.0 million, respectively). At March 31, 2019, CES was in compliance with the terms and covenants of its Senior Facility. As at the date hereof, the Company had a net draw of approximately $130.0 million on its Senior Facility. In October 2017, CES successfully re-financed and reduced its coupon on its $200.0 million Senior Notes by issuing new 6.375% Senior Notes which have an extended maturity into October 2024, providing a stable long-term tranche of debt to withstand potential industry volatility.
CES continues to see improvement in its financial performance and the Company's Board of Directors and management believe that the market price of CES' common shares do not reflect their underlying value. On July 17, 2018, the Company began a normal course issuer bid ("NCIB") to repurchase for cancellation up to 24,587,978 common shares. The NCIB will terminate on July 16, 2019 or such earlier date as the maximum number of common shares are purchased pursuant to the NCIB or the NCIB is completed or is terminated at the Company's election. Since inception of the NCIB and up to March 31, 2019, the Company has repurchased 5,160,500 common shares at an average price of $3.99 per share for a total amount $20.6 million, representing 21% of total shares available to repurchase. Subsequent to March 31, 2019, the Company has repurchased 822,400 additional common shares at a weighted average price per share of $2.78 per share for a total amount of $2.3 million.
CES also announces changes to the executive management team of its Canadian Production Chemicals division, PureChem. Effective May 9, 2019, Ken Zinger, currently President of Canadian Drilling Fluids and Chief Operating Officer will also assume leadership of Canadian Production Chemicals in his new role as President of Canadian Operations. Ken will assume the PureChem leadership position formerly held by Jason Waugh, who is leaving the Company. Senior management and operations of Canadian Production Chemicals remain otherwise unchanged.
"On behalf of the Company, we would like to thank Jason Waugh for his hard work and contributions over the last several years, particularly in growing CES' PureChem division in Canada and assembling a high quality team to carry the division forward. Employees, customers and shareholders have benefited from his service to the Company and we wish Jason all the best in his future endeavors", said Tom Simons, CES' President and Chief Executive Officer. "Ken Zinger has been an integral part of the Company's growth since 2006, and we are confident in Ken's leadership in this expanded role as PureChem continues to grow into its infrastructure and gain market share in Canada."
CES continues to be optimistic about its prospects for 2019 and beyond. CES' infrastructure buildout in both the US and Canada was largely completed in 2018 and this strategy has positioned the Company to take advantage of the opportunities ahead. CES believes that over time it can continue to grow its share of the oilfield consumable chemical markets in which it competes. CES also sees the consumable chemical market increasing its share of the oilfield spend as operators continue to: drill longer reach laterals and drill them faster; expand and optimize the utilization of pad drilling and cube development techniques; increase the intensity and size of their fracs; and require increasingly technical and specialized chemical treatments to effectively maintain existing cash flow generating wells and treat growing production from new wells.
In the US, CES' infrastructure is largely built out to meet anticipated growing production chemical and drilling fluid needs in the key basins. In the Permian Basin, the Kermit, Texas mud plant expansion has been designed to double capacity over 2017 levels, and has enabled the Company to take on new work and continue to grow market share. In addition, Catalyst's current platform is setup to capitalize on growing production and higher levels of activity in the Permian Basin, which CES believes will be even more pronounced in 2019 as several pipeline projects are on track to add significant offtake capacity. Further, CES continues to recruit top talent in this highly competitive region. CES plans to expand its barite grinding capabilities in the US, further adding to the Company's competitive positioning and operating leverage.
In Canada, market conditions continue to face headwinds due to current takeaway capacity constraints and lack of consistent market access, which caused wide price differentials and relatively low natural gas prices, and government mandated production curtailments. As a result, Canadian oil and gas operators pared back capital programs for 2019 and winter drilling activity was muted. Price differentials were positively impacted in late 2018 by the mandatory crude oil production curtailments established by the Alberta Government, however customers remain cautious on capital programs in H2 2019. CES believes that its current Canadian business is well positioned to weather these persistent market challenges through its scalable Canadian drilling fluids business model and through improved financial contribution from its PureChem production chemical division as it realizes ongoing structural efficiency gains and grows into its infrastructure.
CES' strategy is to utilize its decentralized management model; its vertically integrated manufacturing model; its problem solving through science approach; its patented and proprietary technologies; and its superior people and execution to increase market share. The downturn made many middlemen, or competitors who are simply resellers of other company's products, redundant. By being basic in the manufacture of the consumable chemicals it sells, CES continues to be price competitive and a technology leader. Recent competitor consolidations and business failures will provide further opportunities for CES as operators require increasingly technical solutions and deeper customer-centric coverage models to meet their needs. CES believes that its unique value proposition makes it the premier independent provider of technically advanced consumable chemical solutions to the North American oilfield.
CES' balance sheet is well positioned to capitalize on robust oilfield activity levels in the US and weather the current decline in industry activity in Canada. In October 2017, CES successfully re-financed and reduced its coupon on its $300.0 million Senior Notes by issuing new 6.375% Senior Notes which have an extended maturity into October 2024. In 2019, it is expected that EBITDAC will materially exceed the sum of cash expenditures on interest, taxes, and capital expenditures, allowing for free cash flow to be returned to shareholders through CES' monthly dividend and recently implemented NCIB.
As CES' infrastructure buildout in both the US and Canada was largely completed in 2018, absent acceptable return expansionary capital projects, such as the buildout of the northeast US barite facility, CES expects capital expenditures in 2019 to return to levels below 2017-2018 levels. CES' business model, capital structure and free cash flow generation attributes continue to permit prudent capital allocation to one or a combination of: investment in current operations, debt reduction, opportunistic share repurchases, dividends and acquisitions.
CES will continue to assess organic and M&A opportunities that will improve CES' competitive position and enhance profitability. Any acquisitions must meet CES' stringent financial and operational metrics. In its core businesses, CES will focus on profitably growing market share, controlling costs, developing or acquiring new technologies and making strategic investments as required to position the business to capitalize on growing activity levels and increasing intensity.
Conference Call Details
With respect to the fourth quarter and annual results, CES will host a conference call / webcast at 9:00 am MT (11:00 am ET) on Friday, May 10, 2019.
North American toll-free: 1-(855)-327-6838
International / Toronto callers: (416)-915-3239
Link to Webcast: http://www.cesenergysolutions.com/
Three Months Ended March 31, ($000s, except per share amounts) 2019 2018 % Change Revenue United States 224,892 179,462 25 % Canada 108,096 120,856 (11 %) Total Revenue 332,988 300,318 11 % Gross Margin 69,155 70,605 (2 %) as a percentage of revenue 20.8 % 23.5 % (3 %) Gross Margin (excluding depreciation) 81,841 80,166 2 % as a percentage of revenue 24.6 % 26.7 % (2 %) Net income 2,198 13,250 (83 %) per share - basic 0.01 0.05 (80 %) per share - diluted 0.01 0.05 (80 %) Adjusted EBITDAC 43,713 42,489 3 % Adjusted EBITDAC % of Revenue 13.1 % 14.1 % (1 %) Cash provided by operating activities 51,835 23,575 120 % Funds Flow From Operations 36,294 34,084 6 % Capital expenditures Expansion Capital 7,865 12,461 (37 %) Maintenance Capital 1,537 3,382 (55 %) Total capital expenditures 9,402 15,843 (41 %) Dividends declared 3,995 2,010 99 % per share 0.0150 0.0075 100 % Common Shares Outstanding End of period 266,968,576 268,424,065 (0.5 %) Weighted average - basic 266,141,659 268,178,300 (0.8 %) Weighted average - diluted 272,078,943 274,569,434 (0.9 %) As at Financial Position ($000s) March 31, December 31, % Change 2019 2018 Total assets 1,289,372 1,321,809 (2 %) Working Capital Surplus 417,392 435,251 (4 %) Long-term debt 426,422 455,591 (6 %) Long-term financial liabilities 457,256 473,980 (4 %) Net Debt 60,124 53,586 12 % Shareholders' equity 685,085 697,570 (2 %)
Includes long-term portion of the deferred acquisition consideration, the Senior Facility, the Senior Notes, and lease obligations.
CES uses certain performance measures or operational definitions that are not recognizable under International Financial Reporting Standards ("IFRS"). These performance measures include net income (loss) before interest, taxes, depreciation and amortization, finance costs, other gains and losses, and stock-based compensation ("EBITDAC"), Adjusted EBITDAC, Gross Margin (excluding depreciation), Funds Flow From Operations, Working Capital Surplus, Net Debt, Expansion Capital and Maintenance Capital. Management believes that these measures provide supplemental financial information that is useful in the evaluation of CES' operations. Readers should be cautioned, however, that these measures should not be construed as alternatives to measures determined in accordance with IFRS as an indicator of CES' performance. CES' method of calculating these measures may differ from that of other organizations and, accordingly, these may not be comparable. Please refer to the Non-GAAP Measures section and Operational Definitions Section of CES' MD&A for the three months ended March 31, 2019 for additional details regarding the calculation of these measures.
IFRS 16 was adopted January 1, 2019 using the modified retrospective approach; therefore, comparative information has not been restated. The adoption of IFRS 16 resulted in the addition of $19.9 million in lease obligations on January 1, 2019. Refer to "Significant Accounting Policies" in CES' MD&A for the three months ended March 31, 2019.
Business of CES
CES is a leading provider of technically advanced consumable chemical solutions throughout the life-cycle of the oilfield. This includes total solutions at the drill-bit, at the point of completion and stimulation, at the wellhead and pump-jack, and finally through to the pipeline and midstream market. At the drill-bit, CES' designed drilling fluids encompass the functions of cleaning the hole, stabilizing the rock drilled, controlling subsurface pressures, enhancing drilling rates, and protecting potential production zones while conserving the environment in the surrounding surface and subsurface area. At the point of completion and stimulation, CES' designed chemicals form a critical component of fracturing solutions or other forms of remedial well stimulation techniques. The shift to horizontal drilling and multi-stage fracturing with long horizontal well completions has been responsible for significant growth in the drilling fluids and completion and stimulation chemicals markets. At the wellhead and pump-jack, CES' designed production and specialty chemicals provide down-hole solutions for production and gathering infrastructure to maximize production and reduce costs of equipment maintenance. Key solutions include corrosion inhibitors, demulsifiers, H2S scavengers, paraffin control products, surfactants, scale inhibitors, biocides and other specialty products. Further, specialty chemicals are used throughout the pipeline and midstream industry to aid in hydrocarbon movement and manage transportation and processing challenges including corrosion, wax build-up and H2S.
CES operates in several basins throughout the United States ("US"), including Permian, Eagleford, Bakken and Marcellus, as well as in the Western Canadian Sedimentary Basin ("WCSB") with an emphasis on servicing the ongoing major resource plays. In the US, CES operates under the trade names AES Drilling Fluids ("AES"), Superior Weighting Products ("Superior Weighting"), JACAM Chemicals ("JACAM"), and Catalyst Oilfield Services ("Catalyst"). In Canada, CES operates under the trade names Canadian Energy Services, PureChem Services ("PureChem"), StimWrx Energy Services Ltd. ("StimWrx"), Sialco Materials Ltd. ("Sialco"), and Clear Environmental Solutions ("Clear").
The JACAM, Catalyst, PureChem, and Sialco brands are vertically integrated manufacturers of advanced specialty chemicals. In addition to being basic in the manufacture of oilfield chemicals, JACAM, Catalyst, and PureChem have expanding distribution channels into the oilfield. The StimWrx brand provides near matrix stimulation and remediation of oil, gas, and injection wells in Western Canada and the US. The Canadian Energy Services and AES brands are focused on the design and implementation of drilling fluids systems and completion solutions sold directly to oil and gas producers. The Superior Weighting brand custom grinds minerals including barite, which is the weighting agent utilized in most drilling fluid systems.
Clear is a complimentary business division that supports the operations and augments the product offerings in the WCSB. Clear is CES' environmental division, providing environmental consulting, water management and water transfer services, and drilling fluids waste disposal services primarily to oil and gas producers active in the WCSB.
CES continues to invest in research and development of new technologies and in the top-end scientific talent that can develop and refine these technologies. CES operates eight separate lab facilities across North America: two in Houston, Texas; two in Midland, Texas; one in Sterling, Kansas; and one in each of Calgary, Alberta; Grand Prairie, Alberta; Carlyle, Saskatchewan; and Delta, British Columbia. In the US, CES' main chemical manufacturing and reacting facility is located in Sterling, Kansas with additional low-temperature reacting and chemical blending capabilities just outside of Midland, Texas and chemical blending capabilities in Sonora, Texas. In Canada, CES has a chemical manufacturing and reacting facility located in Delta, British Columbia with additional chemical blending capabilities located in Carlyle, Saskatchewan, Nisku, Alberta, and Grand Prairie, Alberta. CES also leverages third party partner relationships to drive innovation in the consumable fluids and chemicals business.
Except for the historical and present factual information contained herein, the matters set forth in this press release, may constitute forward-looking information or forward-looking statements (collectively referred to as "forward-looking information") which involves known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of CES, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking information. When used in this press release, such information uses such words as "may", "would", "could", "will", "intend", "expect", "believe", "plan", "anticipate", "estimate", and other similar terminology. This information reflects CES' current expectations regarding future events and operating performance and speaks only as of the date of the press release. Forward-looking information involves significant risks and uncertainties, should not be read as a guarantee of future performance or results, and will not necessarily be an accurate indication of whether or not such results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking information, including, but not limited to, the factors discussed below. The management of CES believes the material factors, expectations and assumptions reflected in the forward-looking information are reasonable but no assurance can be given that these factors, expectations and assumptions will prove to be correct. The forward-looking information contained in this document speaks only as of the date of the document, and CES assumes no obligation to publicly update or revise such information to reflect new events or circumstances, except as may be required pursuant to applicable securities laws or regulations. The material assumptions in making forward-looking statements include, but are not limited to, assumptions relating to demand levels and pricing for the oilfield consumable chemical offerings of the Company; fluctuations in the price and demand for oil and natural gas; anticipated activity levels of the Company's significant customers; commodity pricing; general economic and financial market conditions; the successful integration of recent acquisitions; the Company's ability to finance its operations; levels of drilling and other activity in the WCSB, the Permian and other US basins, the effects of seasonal and weather conditions on operations and facilities; changes in laws or regulations; currency exchange fluctuations; the ability of the Company to attract and retain skilled labour and qualified management; and other unforeseen conditions which could impact the Company's business of supplying oilfield consumable chemistry to the Canadian and US markets and the Company's ability to respond to such conditions.
In particular, this press release contains forward-looking information pertaining to the following: the certainty and predictability of future cash flows and earnings; expectations that EBITDAC will exceed the sum of expenditures on interest, taxes and capital expenditures; expectations of non-acquisition capital expenditures in 2019; expectations regarding the impact of increased operating leverage on margins going forward; the sufficiency of liquidity and capital resources to meet long-term payment obligations; potential M&A opportunities; CES' ability to increase or maintain its market share, including expectations that PureChem and JACAM will increase market share in the oilfield consumable chemical market, that Catalyst will increase market-share of production and specialty chemicals in the Permian Basin, and that AES will increase drilling fluids market share in the Permian Basin; optimism with respect to future prospects for CES; expectations regarding the timing of completion of pipeline projects in the Permian Basin; expectations regarding the timing and cost for completion of expansions at JACAM, Catalyst and AES facilities; impact of CES' vertically integrated business model on future financial performance; expectations regarding challenges in the Canadian market and near term opportunities in the US market; CES' ability to leverage third party partner relationships to drive innovation in the consumable fluids and chemicals business; supply and demand for CES' products and services, including expectations for growth in CES' production and specialty chemical sales, expected growth in the consumable chemicals market and the impact of such increased sales on operating leverage; industry activity levels; commodity prices; development of new technologies; expectations regarding CES' growth opportunities in Canada and the US; expectations regarding the performance or expansion of CES' operations; expectations regarding the impact of production curtailment policies in Alberta; expectations regarding the diversification of operations away from the drill-bit; expectations that competitor consolidation and business failures will provide future opportunities to CES; expectations regarding demand for CES' services and technology; impacts of pricing differentials for oil between Canada and the United States; investments in research and development and technology advancements; access to debt and capital markets and cost of capital; the purchase of CES' common shares by CES pursuant to the NCIB; the potential means of funding dividends and the NCIB; CES' ability to continue to comply with covenants in debt facilities; and competitive conditions.
CES' actual results could differ materially from those anticipated in the forward-looking information as a result of the following factors: general economic conditions in the US, Canada, and internationally; geopolitical risk; fluctuations in demand for consumable fluids and chemical oilfield services, and any downturn in oilfield activity; a decline in activity in the Permian, the WCSB, and other basins in which the Company operates; a decline in frac related chemical sales; a decline in operator usage of chemicals on wells; an increase in the number of customer well shut-ins; a shift in types of wells drilled; volatility in market prices for oil, natural gas, and natural gas liquids and the effect of this volatility on the demand for oilfield services generally; the declines in prices for natural gas, natural gas liquids, oil, and pricing differentials between world pricing; pricing in North America; and pricing in Canada; competition, and pricing pressures from customers in the current commodity environment; currency risk as a result of fluctuations in value of the US dollar; liabilities and risks, including environmental liabilities and risks inherent in oil and natural gas operations; sourcing, pricing and availability of raw materials, consumables, component parts, equipment, suppliers, facilities, and skilled management, technical and field personnel; the collectability of accounts receivable, particularly in the current low oil and natural gas price environment; ability to integrate technological advances and match advances of competitors; ability to protect the Company's proprietary technologies; availability of capital; uncertainties in weather and temperature affecting the duration of the oilfield service periods and the activities that can be completed; the ability to successfully integrate and achieve synergies from the Company's acquisitions; changes in legislation and the regulatory environment, including uncertainties with respect to oil and gas royalty regimes, programs to reduce greenhouse gas and other emissions, carbon pricing schemes, and regulations restricting the use of hydraulic fracturing; pipeline capacity and other transportation infrastructure constraints; reassessment and audit risk and other tax filing matters; changes and proposed changes to US policies including the potential for tax reform, and possible renegotiation of international trade agreements and the implementation of the Canada-United States-Mexico Agreement; international and domestic trade disputes, including restrictions on the transportation of oil and natural gas and regulations governing the sale and export of oil, natural gas and refined petroleum products; divergence in climate change policies between the US and Canada; potential changes to the crude by rail industry; changes to the fiscal regimes applicable to entities operating in the US and the WCSB; access to capital and the liquidity of debt markets; fluctuations in foreign exchange and interest rates; CES' ability to maintain adequate insurance at rates it considers reasonable and commercially justifiable; and the other factors considered under "Risk Factors" in CES' Annual Information Form for the year ended December 31, 2018 and "Risks and Uncertainties" in CES' MD&A dated May 9, 2019.
For further information, please contact:
Tom Simons Anthony Aulicino President and Chief Executive Officer Chief Financial Officer CES Energy Solutions Corp. CES Energy Solutions Corp. (403) 269-2800 (403) 269-2800
Or by email at: firstname.lastname@example.org
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