For the third quarter of 2013 Essential Energy Services Ltd. (“Essential”) reported EBITDA of $17.1 million, down from $19.3 million in Q3/12. The EBITDA decrease is largely attributed to start-up costs to expand the downhole tool business into the United States and the absence of EBITDA from the drilling rig operations that was included in Q3/12 results. Our drilling division was sold in November 2012. Removing these items, EBITDA was relatively flat to last year – which is similar to general industry activity. On a year-to-date basis, EBITDA was $45 million.
From an industry perspective, in addition to wet weather at the beginning of the quarter, exploration and production companies were cautious with their capital spending as the oil price differential continued to be volatile and equity capital markets were slow, making it difficult for producers to raise capital. Overall industry activity was comparable to Q3/12.
Results by Business
Coil Well Service - Revenue from our coil well service division was flat compared to Q3/12. Our total deep coil tubing utilization decreased from 79% in Q3/12 to 73% in Q3/13. The masted deep coil tubing fleet performed very well as utilization increased from 100% in Q3/12 to 112% in Q3/13 and revenue was positively impacted by our larger fleet of fluid and nitrogen pumpers quarter-over-quarter. More than offsetting this was a decrease in the conventional deep coil tubing fleet which experienced utilization at 27%. This was well below management’s expectations and reflects growing competition in the 2” coil tubing market. We hope to see improvement in fourth quarter utilization of conventional deep rigs but still expect it to be below Q4/12.
We were excited to put into service our first Generation 3 masted deep coil tubing rig in September. This is the first of an extensive build program of 12 Generation 3 and 4 masted deep coil tubing rigs that are expected to go into service between now and 2016.
Service rigs - Service rig utilization in the quarter was 50%, an increase from 45% in Q3/12. This is very good utilization relative to the largest competitors in the sector, but still, from a service line industry perspective, below what we would hope to see at this time of year. Grande Prairie and Fort St. John saw improved utilization in the quarter and demand continued for service rigs on SAGD operations. In the last week we took delivery of two new service rigs, bringing Essential’s total new service rigs in 2013 to four. These rigs high-grade the fleet as we retired three rigs to date in 2013 and plan to retire one more in the fourth quarter.
Downhole Tools & Rentals - Our downhole tools segment performed well in the quarter with revenue increasing 7% from Q3/12. This increase is primarily due to demand for our Tryton multi-stage fracturing system (“Tryton MSFS®”). Gross margin decreased slightly in Q3/13 due to the cost to expand this business into the U.S. Our U.S. tool operation is at very early stages with nominal revenue earned in the third quarter.
Pricing for all of our service lines remained intact during the quarter. We do not anticipate price reduction pressures between now and break up in the spring of 2014. We also do not anticipate any price increase opportunities in our primary service lines until industry conditions strengthen, other than our belief that the new Generation 3 and 4 masted deep coil tubing rigs are expected to command a higher price in return for the increased capacity, functionality and technical improvements that will benefit our customers.
Capital - 2013
On October 23, 2013 we announced a $5 million increase in the 2013 capital spending budget, to $50 million. The increase is for deposits and progress payments payable in 2013 for certain assets included in the 2014 capital budget. As noted, we took delivery of one Generation 3 masted rig in September and expect delivery of a second Generation 3 masted rig and two Generation 4 masted rigs in the fourth quarter.
We are excited about adding these rigs to our fleet. They have the capability to work on long-reach horizontal wells and are well-suited to work in deep, high pressure basins including the Montney, Horn River and Duvernay. These basins are expected to supply gas for the proposed liquefied natural gas (“LNG”) export facilities in British Columbia. In addition, customers are drilling in the Duvernay for oil.
Our equipment is well-timed for LNG demand, but we feel confident that this new state-of-the-art technology will work actively in the Western Canadian Sedimentary Basin on long-reach horizontal wells even if LNG development experiences delays.
Capital - 2014
Continuing on the theme of focusing our capital spending on assets that can service deep, long-reach horizontal wells we announced a $50 million capital spending budget for 2014, comprised of $33 million of growth capital and $17 million for maintenance capital. Spending will be directed toward one Generation 3 and three Generation 4 masted rigs, one quintiplex fluid pumper, one rod rig and rental equipment. Statement of Claim
A Statement of Claim was filed on October 23, 2013 by Packers Plus Energy Services Inc. against Essential in Federal Court. The Statement of Claim alleges products and methods associated with the Tryton MSFS® infringe a patent issued to Packers Plus Energy Services Inc. Essential believes the suit is without merit and will actively defend against the allegations. Outlook
Management continues to focus on a number of growth initiatives and opportunities:
- Masted deep coil tubing rigs. As noted, we took delivery of one new masted rig in the third quarter and we expect to take delivery of three new masted rigs by the end of the year. We have key customers that are anxious to put this equipment to work. The Generation 3 rig that went into service in September has been working in the Montney with 5,500 m of 2 3/8” coil. We see the demand for the Generation 3 and 4 equipment growing, and have focused our 2014 capital spending budget toward these rigs.
- LNG. There continues to be growing optimism on investment focused on the Montney, Horn River and Duvernay basins to develop reserves to provide natural gas to the proposed LNG export facilities. Such development would increase the demand for oilfield services to complete and service these wells. We believe Essential is one of the service companies that will benefit from LNG development. These wells generally will be deep, high pressure wells that will require larger diameter coil tubing to complete. Our new masted rigs and our associated pumper fleet will be very well-suited for completion of these wells.
- Organic expansion of our tool business into the U.S. We have established three field locations, hired local tool hands, started building inventory and have commenced operations. This is in the very early stages of operations.
- SAGD completions and well maintenance work. The SAGD market is projected to continue to grow. With our SAGD capable service rigs we can participate in this growth. We have three rigs that are working in this area, often on a 24-hour a day basis. With the new rigs that we have added in 2013, we have a total of six service rigs that are SAGD capable and available to work. This is attractive as it is typically steady, 24 hour, project work. While we had hoped to deploy the three new rigs into the SAGD market this year, that has not happened yet, but we will continue to work toward this in 2014.
Our balance sheet remains strong with debt at the end of September of $40 million. This has increased to $45 million at November 6, 2013.
President and CEO
Essential Energy Services Ltd.
November 7, 2013
Refer to Forward-Looking Statements and Information in the November 6, 2013 news release
® MSFS is a registered trademark of Essential Energy Services Ltd.