Western Energy Services Corp. announces the release of its second quarter 2021 financial and operating results.
Second Quarter 2021 Operating Results:
• Second quarter revenue increased by $9.6 million (or 87%) to $20.4 million in 2021 as compared to $10.8 million in the second quarter of 2020. In the contract drilling segment, revenue totalled $11.9 million in the second quarter of 2021, an increase of $4.8 million (or 68%) compared to $7.1 million in the second quarter of 2020, which included US$4.5 million of shortfall commitment revenue. In the production services segment, revenue totalled $8.6 million for the three months ended June 30, 2021, as compared to $3.8 million in the same period of the prior year, an increase of $4.8 million (or 128%). While the ongoing COVID-19 pandemic continues to impact revenue in the contract drilling and production services segments in the second quarter of 2021, demand improved compared to 2020 as described below:
o Drilling rig utilization in Canada averaged 9% in the second quarter of 2021, compared to no rigs working in the second quarter of 2020 due to the COVID-19 pandemic. The increase in activity in the second quarter of 2021 was mainly attributable to the improved demand, compared to the second quarter of 2020 when the COVID-19 pandemic caused demand destruction across the industry. The Canadian Association of Energy Contractors (“CAOEC”) industry average utilization of 15%1 for the second quarter of 2021 represented an increase of 1,100 basis points (“bps”) compared to the CAOEC industry average of 4% in the second quarter of 2020, mainly due to higher demand resulting from the ongoing COVID-19 vaccination rollouts and the lifting of government restrictions. Western’s market share, represented by the Company’s Operating Days as a percentage of the CAOEC’s total Operating Days in the Western Canadian Sedimentary Basin (“WCSB”), improved to 6.2% for the second quarter of 2021, as compared to limited activity in the same period of 2020. Revenue per Operating Day averaged $22,218 in the second quarter of 2021, reflecting current market rates;
o In the United States (“US”), drilling rig utilization averaged 21%, as two rigs worked in the second quarter of 2021, compared to 1% Drilling Rig Utilization in the second quarter of 2020, with Operating Days improving from 7 days in 2020 to 151 days in 2021. Revenue per Operating Day for the second quarter of 2021 was US$14,312 reflecting current spot market rates; and
o In Canada, service rig utilization of 19% in the second quarter of 2021 was higher than 9% in the same period of the prior year, as 2020 demand was impacted significantly by the COVID-19 pandemic. Revenue per Service Hour of $683 in the second quarter of 2021 was 4% higher than the second quarter of 2020. Higher utilization led to production services revenue totalling $8.6 million in the second quarter of 2021, an increase of $4.8 million (or 128%), as compared to the same period in the prior year.
• Administrative expenses increased by $0.1 million (or 6%) to $2.3 million in the second quarter of 2021, as compared to $2.2 million in the second quarter of 2020, mainly due to lower amounts received related to the Canada Emergency Wage Subsidy (“CEWS”) from the Government of Canada and higher employee related costs.
• The Company incurred a net loss of $12.9 million in the second quarter of 2021 ($0.14 per basic common share) as compared to a net loss of $8.0 million in the same period in 2020 ($0.09 per basic common share). The change can mainly be attributed to a $3.1 million decrease in income tax recovery, a $1.8 million decrease in Adjusted EBITDA and a $1.7 million decrease in other items which mainly consisted of foreign exchange gains in the second quarter of 2020, offset partially by a $1.8 million decrease in depreciation expense due to certain assets being fully depreciated in the period, as well as the impact to depreciation of asset impairments in previous quarters.
• Second quarter Adjusted EBITDA in 2021 was lower than the same period of the prior year and totalled $2.2 million, compared to $4.0 million in the second quarter of 2020. Adjusted EBITDA was lower due to a shortfall commitment received in the United States of US$4.5 million in 2020, which was offset partially by improved activity in Canada, an increase of $1.6 million in CEWS received and headcount reductions in 2020.
• Second quarter 2021 additions to property and equipment of $2.6 million compared to $0.3 million incurred in the second quarter of 2020 and consist of $0.6 million of expansion capital and $2.0 million of maintenance capital.
Year to Date 2021 Operating Results:
• Revenue for the six months ended June 30, 2021, decreased by $5.3 million (or 8%) to $57.4 million as compared to $62.7 million for the six months ended June 30, 2020. Contract drilling revenue totalled $32.2 million in 2021, a decrease of $9.1 million (or 22%) as compared to $41.3 million in 2020. Production services revenue totalled $25.4 million for the six months ended June 30, 2021, as compared to $21.4 million in the same period of the prior year, an increase of $4.0 million (or 19%). The ongoing COVID- 19 pandemic continues to impact revenue in the contract drilling and production services segments as described below:
o Drilling rig utilization in Canada averaged 15% for the six months ended June 30, 2021, compared to 13% for the six months ended June 30, 2020, a 200 bps increase. The increase in activity in 2021 was mainly attributable to the improved demand, compared to the first half of 2020 when the COVID-19 pandemic caused demand destruction across the industry. The CAOEC industry average of 21%2 for six months ended June 30, 2021, represented an increase of 100 bps compared to the CAOEC industry average of 20% for the six months ended June 30, 2020, mainly due to higher demand as a result of the success of the COVID-19 vaccine rollout and the lifting of government restrictions. Western’s market share, represented by the Company’s Operating Days as a percentage of the CAOEC’s total Operating Days in the WCSB, improved to 7.5% for the first half of 2021, as compared to 6.5% in the first half of 2020. Revenue per Operating Day decreased by 16% for the six months ended June 30, 2021, as compared to the same period of the prior year, as current market rates weakened in the period;
o In the United States, drilling rig utilization averaged 13%, as two rigs worked in 2021, compared to 10% in the same period of 2020, reflecting a 27% increase in Operating Days. Revenue per Operating Day for the six months ended June 30, 2021, decreased by 41% to US$14,366, as compared to the same period of the prior year, as current spot market rates weakened in the period; and
o In Canada, service rig utilization of 28% for the six months ended June 30, 2021 was higher than the same period of the prior year due to improved industry demand. Lower production and completion activity was offset by increased abandonment work as a result of government incentives. Revenue per Service Hour of $712 for the six months ended June 30, 2021 was consistent with the same period of 2020. Improved utilization led to production services revenue totalling $25.4 million for the six months ended June 30, 2021, an increase of $4.0 million (or 19%), as compared to the same period in the prior year.
• Administrative expenses decreased by $0.5 million (or 9%) to $5.4 million for the six months ended June 30, 2021, as compared to $6.0 million in the same period of the prior year, mainly due to lower employee related costs as a result of headcount reductions and a focus on cost management.
• The Company incurred a net loss of $19.4 million for the six months ended June 30, 2021 ($0.21 per basic common share) as compared to a net loss of $23.4 million in the same period in 2020 ($0.26 per basic common share). The change can mainly be attributed to the 2020 impairment of $11.5 million and a $3.9 million decrease in depreciation expense due to certain assets being fully depreciated in the period, as well as the impact to depreciation of asset impairments in previous quarters, which were offset partially by a $6.2 million decrease in income tax recovery, a $3.3 million decrease in Adjusted EBITDA, and a $2.0 million decrease in other items.
• Adjusted EBITDA for the six months ended June 30, 2021 was lower than the same period of the prior year and totalled $9.1 million, compared to $12.4 million in the same period of 2020. Adjusted EBITDA in 2021 was lower due to US$4.5 million of shortfall commitment revenue received in 2020 with none in 2021, which was partially offset by improved activity in Canada and the US, and an increase in the CEWS of $5.0 million along with headcount reductions in 2020.
• Year to date 2021 additions to property and equipment of $3.4 million compared to $0.8 million incurred in the same period of 2020 and consist of $0.6 million of expansion capital and $2.8 million of maintenance capital.
Business Overview Western is an energy services company that provides contract drilling services and production services in Canada and the United States through its various divisions, subsidiaries, and first nations joint venture.
Contract Drilling Services Western operates a fleet of 57 drilling rigs specifically suited for drilling complex horizontal wells across Canada and the US. Western is currently the fourth largest drilling contractor in Canada, based on the CAOEC registered drilling rigs3.
Production Services Production Services provides well servicing and oilfield equipment rentals primarily in Canada. Western operates 66 well servicing rigs and is the third largest well servicing company in Canada based on CAOEC registered well servicing rigs4.
Western’s contract drilling and well servicing rig fleets comprise the following:
West Texas Intermediate (“WTI”) on average improved significantly by 137% and 67% for the three and six months ended June 30, 2021 respectively, compared to the same periods in the prior year. Similarly, pricing on Western Canadian Select (“WCS”) crude oil increased by 199% and 120% respectively, for the three and six months ended June 30, 2021, compared to the same periods in the prior year. Crude oil prices in 2020 for both Canada and the US were impacted by the COVID-19 pandemic. In 2021, pricing has improved as demand for crude oil recovers, as vaccine rollouts continue worldwide, and OPEC continues to maintain production cuts. Natural gas prices in Canada also strengthened in 2021, as the 30-day spot AECO price improved by 53% and 54% respectively, for the three and six months ended June 30, 2021, compared to the same periods of the prior year. Offsetting this increase in pricing, the US dollar to the Canadian dollar foreign exchange rate weakened in the three and six months ended June 30, 2021, compared to the same periods of the prior year, which impacted the cash flows of Western’s Canadian customers, when selling US dollar denominated commodities.
In the United States, industry activity improved in the second quarter of 2021. As reported by Baker Hughes Company5 , the number of active drilling rigs in the United States increased by approximately 81% to 475 rigs at June 30, 2021, as compared 263 rigs at June 30, 2020. However, the ongoing COVID-19 pandemic continues to have an impact on industry activity in both the US and in Canada in 2021. Prior to the COVID-19 pandemic, there were also continued industry concerns over market access, increased regulation, and the prevailing customer preference to return cash to shareholders, or pay down debt, rather than grow production through the drill bit in Canada and the US. The number of active rigs in the Western Canadian Sedimentary Basin (“WCSB”) improved to 139 active rigs at June 30, 2021, compared to 18 active rigs at June 30, 2020. The CAOEC6 reported that for drilling in Canada, the total number of Operating Days in the WCSB increased by approximately 276% for the three months ended June 30, 2021 compared to the same period in the prior year. For the six months ended June 30, 2021, the total number of Operating Days in the WCSB were consistent with the same period of the prior year.
Outlook Due to increased activity levels in 2021 as a result of a successful COVID-19 vaccine rollout and the lifting of government restrictions, coupled with limited maintenance capital spending on the rig fleet in prior years, Western has increased its capital budget for 2021 by $2 million to approximately $8 million. The revised capital budget is expected to be comprised of $7 million of maintenance capital and $1 million of expansion capital, with $5 million allocated to the contract drilling segment and $3 million allocated to the production services segment. Western believes the revised 2021 capital budget provides a prudent use of cash resources to manage its balance sheet. Western will continue to manage its operations in a disciplined manner and make required adjustments to its capital program as customer demand changes. Currently, 11 of Western’s drilling rigs and 20 of Western’s well servicing rigs are operating.
While crude oil prices reached historical lows in 2020 due to the demand destruction caused by the COVID-19 pandemic, in the first half of 2021, crude oil prices began to recover. However, uncertainty now exists concerning the timing of COVID-19 vaccine distribution and the potential impact of COVID-19 variants on possible future government restrictions, both of which have an impact on demand in the near term. The precise duration and extent of the adverse impacts of the current macroeconomic environment and the COVID-19 pandemic on Western’s customers, operations, business and global economic activity remains highly uncertain at this time. Additionally, the January 2021 executive order by the President of the United States cancelling the permit that had allowed construction of the Keystone XL pipeline, the uncertain timing of completion of construction on the Trans Mountain pipeline expansion, as well as uncertainty regarding the in service date of the Enbridge Line 3 pipeline replacement and the threatened shutdown of Enbridge Line 5, have all resulted in continued uncertainty regarding takeaway capacity. However, activity levels in Canada and the United States in 2021 are expected to be marginally higher than 2020 levels. Controlling fixed costs, maintaining balance sheet strength and flexibility and managing through the unprecedented market downturn are priorities for the Company, as prices and demand for Western’s services remain below historical levels. Western continues to identify further opportunities to streamline its support structure and implement additional cost control measures. Going forward, Western expects that its variable cost structure, and prudent capital budget, will aid in preserving its balance sheet.
As at June 30, 2021, Western had no amounts drawn on its $60.0 million credit facilities, consisting of its $50.0 million syndicated first lien credit facility (the “Revolving Facility”) and its $10.0 million committed operating facility (the “Operating Facility” and together the “Credit Facilities”), which mature on July 1, 2022. Western had drawn $12.5 million on its HSBC Bank Canada (“HSBC”) six-year committed term non-revolving facility with the participation of Business Development Canada (“BDC” and together the “HSBC Facility”), which matures on December 31, 2026. Western currently has $211.8 million outstanding on its second lien secured term loan facility (the “Second Lien Facility”), which matures on January 31, 2023.
Oilfield service activity in Canada will be affected by the development of resource plays in Alberta and northeast British Columbia which will be impacted by pipeline construction, environmental regulations, and the level of investment in Canada. In the short term, the largest challenges facing the oilfield service industry are ongoing liquidity concerns due to reduced customer spending caused by the demand destruction from the COVID-19 pandemic and limited take away capacity. In the medium term, Western’s rig fleet is well positioned to benefit from the LNG Canada liquefied natural gas project now under construction in British Columbia. It remains Western’s view that its modern drilling and well servicing rig fleets, reputation, and disciplined cash management provide a competitive advantage which will enable the Company to manage through the current challenging oilfield service environment.