Essential Emerges From Waning Downturn
Essential Energy Services Trust believes the worst of the
recent downturn is over and it investigating expansion into Colombia.
Possible areas of growth include coil tubing equipment for deeper Alberta
plays and modifications to portions of its fleet to be suitable for Latin
American operations, the trust said.
The trust’s initial capital spending program for 2010 is modest at $6.2
million, comprised of $1.8 million of growth capital and $4.4 million of net
maintenance capital, intended to preserve the operating capacity of the
equipment fleet, it said when announcing its fourth-quarter results.
Essential announced Friday an agreement with a syndicate of underwriters led
by Wellington West Capital Markets Inc. to sell, on a bought
deal basis, 10 million trust units at $1.30 per unit for gross proceeds of $13
million. In addition, the trust has granted the underwriters an option to
purchase up to an additional 1.5 million trust units at the offering price
exercisable at any time prior to 5 p.m. (Calgary time) on the 30th day following
the closing of the offering for additional gross proceeds of up to $1.5
million.
The trust units will be offered in all provinces of Canada except Quebec by
way of a short form prospectus. The offering is expected to close on or about
March 31, subject to certain conditions including, without limitation, the
receipt of all necessary regulatory approvals including the approval of the
Toronto Stock Exchange.
The net proceeds will be used to fund capital spending, reduce bank
indebtedness and for general corporate purposes.
In 2009, utilization averaged 27% for Essential’s service rigs (48% in
2008), 32% for its rod rigs (48% in 2008) and 32% for its coil tubing rigs (41%
in 2008). Fourth-quarter 2009 utilization of service rigs averaged 34% (47% in
2008), 35% for rod rigs (42% in 2008) and 37% (51% in 2008).
Essential intends to shed its trust status and become a growth-oriented
corporation by the end of April, subject to unitholder and regulatory approval.
It cited removal of the uncertainty in the income trust market with the looming
January 2011 deadline before tax changes, and possible improved access to
capital as two reasons to convert.
To preserve its balance sheet, the trust eliminated its distributions in
light of the prolonged downturn in the oilfield services sector.
Throughout 2009, the trust focused on cost-cutting measures to mitigate the
impact of reduced activity levels and competitive pricing pressures. However,
even with aggressive cost cutting, it has felt the effects of the overall
decline in activity in the Western Canada Sedimentary Basin.
Notwithstanding the difficult operating conditions, Essential said it had
some success with the addition of a deep coil tubing rig and multi-stage
fracturing services which expanded its capability within the Bakken, Montney and
other resource plays.
Essential’s fourth quarter results exceeded management’s
expectations thanks to improved activity. Exploration and production companies
began their winter drilling programs in November and the programs extended them
through to the end of December, benefiting all of Essential’s service
lines.
However, this improved activity created labour challenges that the trust was
able to overcome through steps taken earlier in the year that enabled it to
retain quality personnel. In spite of improvements in utilization during the
quarter, competitive market conditions continued to downgrade pricing and
margins, it said.
As at Dec. 31, 2009, the trust had total long-term debt of $16.6 million
compared to $17.5 million as at Dec. 31, 2008.
The trust said operating results for 2009 are generally not comparable to the
results for 2008 due to the increased size, scope and geographical reach of the
operations from the Builders Energy Services Trust acquisition
in April 2008 and divestiture of the transport division. Taking these two
transactions into consideration, only about one third of the current operations
of the trust are included in the first three months of its operations in
2008.
Well servicing generated revenue of $72.4 million for 2009, compared to $96
million for the same period in 2008. The segment generated revenue of $20.2
million for the three months ended Dec. 31, 2009, compared to $31.1 million for
the same period in 2008.
Service rig utilization was well below historical levels throughout 2009,
reported Essential. During the summer months, faced with declining activity
levels and pricing pressure, the trust elected to accept lower utilization in
certain situations rather than work at prices that were uneconomic. By the end
of the fourth quarter, the trust saw an improvement in activity levels for
service rigs as improved natural gas prices and increased availability of credit
enabled exploration and production companies to increase drilling and completion
activities.
Higher activity levels on the shale plays in the Bakken region provided
Essential opportunities for coil tubing rigs given their ability to work on
horizontal wells. The trust had success redirecting some of this fleet into
Saskatchewan and British Columbia where activity levels were less affected by
the downturn.
In addition, the trust increased the service and depth capacity of its coil
tubing fleet with the introduction of a deep coil tubing rig during the latter
half of the third quarter. Capable of reaching depths up to 3 750 metres while
accommodating coil tubing up to two inches in diameter and depths up to 5 100
metres while using smaller diameter coil tubing, the deep coil tubing rig is
suited to work in the deep horizontal wells generally found in the Bakken and
Montney resource plays, as well as in the deeper Alberta plays.
Activity for Essential’s coil tubing rigs remained strong during the
fourth quarter as shale gas drilling continued to be the focus of many
exploration and production companies.
Wireline and rentals generated revenue of $39.3 million for 2009, compared to
$32 million for the same period in 2008 (prior to the completion of the Builders
transaction in April 2008, the trust did not operate a wireline and rentals
segment). The segment generated revenue of $9.9 million for the fourth quarter
of 2009, compared to $12.7 million for the same period in 2008.
Within Essential’s wireline and rentals segment, the downhole tool
operations were a focused area of growth in 2009. During the year, the trust
expanded its service offerings and introduced multi-stage fracturing service
which enables companies to stimulate horizontal wells, like those in the Bakken
and Montney resource plays, in a more cost-effective manner.
The growth in the tool operations helped offset the decline in the
trust’s tubular and pipe rentals business, which primarily offers products
related to conventional oil and gas drilling activity. The growth in the tool
operations also helped offset declines in its e-line business, where reduced
activity in the shallow gas plays in Alberta and the competitive market for
these services, because of a surplus of equipment in this service line, resulted
in extreme pricing pressure.
Through the fourth quarter, the downhole tool operations continued to be a
stabilizing presence in this segment while results for the e-line business
continued to be affected by extremely competitive market conditions. Activity in
the trust’s tubular and pipe rental business, while lower than the prior
year, improved over recent quarters as a result of the increased drilling and
completion work during the quarter.
Year *Profit Profit/ *Cash C.F./ *Revenue *Capital Distributions Distributions
Unit Flow Unit Expenditure Paid/Declared /Unit
Fourth Quarter
2009 ($1.41) $0.00 $4.37 $0.00 $30.11 $0.00 $0.00 $0.00
2008 ($15.95) ($0.27) $6.11 $0.09 $43.84 $7.34 $2.70 $0.04
2007 ($38.48) ($1.09) $3.79 $0.11 $26.74 $2.80 $6.45 $0.18
2006 $5.65 $0.19 $9.43 $0.32 $32.79 $16.30 $6.90 $0.25
Fiscal Y.T.D.
2009 ($9.48) ($0.16) $8.79 $0.15 $11.72 $7.83 $3.19 $0.00
2008 ($19.26) ($0.36) $15.99 $0.30 $127.92 $21.97 $17.66 $0.33
2007 ($36.20) ($1.12) $20.00 $0.62 $112.42 $30.95 $30.08 $0.93
2006 $12.79 $0.43 $27.22 $0.91 $96.31 $150.65 $15.96 $0.58
Notes:
2006 Year-end distribution and per unit reflects only seven months of distributions
* Millions of Dollars
| 
