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Builders Energy Services Trust TSX: BET.UN 
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May 10, 2007 17:29 ET
Builders Energy Services Trust Reports First Quarter Earnings
CALGARY, ALBERTA--(CCNMatthews - May 10, 2007) - Builders Energy Services Trust (TSX:BET.UN) ("Builders", or the "Trust") announces first quarter results for 2007.
HIGHLIGHTS
- Results from operations:
-- Funds flow from operations(1) of $16.0 million, a slight decrease from $16.9 million in the first quarter of 2006.
-- Net earnings of $9.1 million, a decrease from $11.9 million in the first quarter of 2006. On a per unit basis, net earnings decreased to $0.48 per unit diluted from $0.78 per unit diluted.
- Payout ratio(1) of 49% for the first quarter.
- Distributions were unchanged during the quarter at $0.14 per unit per month. Builders plans to maintain this distribution level throughout 2007.
REVIEW OF THE QUARTER
"Overall, we are pleased with the first quarter operating and financial results in what has been a very challenging quarter for the oilfield services sector," said Garnet Amundson, President and Chief Executive Officer. "We are seeing the benefit of our balanced services mix as our production-related and oil-related services performed well this quarter."
The industry downturn that began in the latter half of 2006 continued into the first quarter of 2007. Spring break-up started in mid-March this year, which is fairly typical, but was early relative to the late spring break-up in 2006. Lower natural gas price expectations and producers' concerns about service sector costs resulted in lower drilling utilization rates in the Western Canadian Sedimentary Basin ("WCSB"), lower demand for Builders' services, and a reduction in earnings and cash flow relative to the same period in 2006.
In light of the Canadian oilfield services sector downturn, Builders had a good first quarter, largely attributable to its balanced services mix. Builders provides both production-related and drilling-related services and is only modestly weighted toward natural gas. While natural gas drilling activity slowed down in the first quarter of 2007, oilfield services were still required for well completions and to service the approximately 200,000 producing wells in the WCSB. Oil prices remained relatively strong in the quarter and oil-related drilling activity has been less affected by the industry downturn. Builders' balanced services mix continues to be a positive attribute as it tempers the cyclicality of the sector. As a result, Builders reported a 49% payout ratio(1) for the first quarter of 2007. Builders' distribution level has been $0.14 per trust unit per month since May 2006.
The Service Rigs division had a very good quarter, with financial results exceeding first quarter 2006 results. Both the Oilfield Transport and Downhole Services & Rentals segments are exposed to natural gas drilling activity and were more impacted by the industry slowdown. Specifically, coil tubing, nitrogen services and wireline services were impacted by the slowdown in coal bed methane and shallow natural gas activity. Throughout the quarter, Builders continued to focus on managing costs in an effort to maintain margins, in spite of decreasing utilization levels.
OUTLOOK
Natural gas fundamentals are beginning to show signs of recovery. Builders expects that in the fourth quarter of 2007 producers will begin to increase their capital programs to take advantage of improving natural gas prices. Coincident with this timing, oilfield service activity is expected to begin to recover.
FINANCIAL SUMMARY
Three months ended March 31,
(Thousands, except per unit amounts) 2007 2006
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Revenue $ 62,013 $ 62,754
Gross margin(1) $ 21,180 $ 24,118
Gross margin as a percentage of revenue(1) 34% 38%
EBITDA(1) $ 16,613 $ 19,584
Funds flow from operations(1) $ 15,996 $ 16,913
Per unit - diluted $ 0.86 $ 1.11
Net earnings $ 9,068 $ 11,870
Per unit - diluted $ 0.48 $ 0.78
Distributions declared $ 7,902 $ 5,882
Per unit $ 0.42 $ 0.39
Payout ratio(1) 49% 35%
Equipment expenditures $ 7,409 $ 12,781
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Trust units:
Outstanding, end of period 18,820 15,182
Weighted average, basic 18,694 14,955
Weighted average, diluted 18,703 15,269
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(1) Funds flow from operations, payout ratio, gross margin, gross margin as
a percentage of revenue and EBITDA are non-GAAP financial measures. The
attached Management's Discussion and Analysis outlines the definition
and usefulness of these measures.
Based in Calgary, Alberta, Builders Energy Services Trust is an open-end, unincorporated investment trust providing oilfield services in western Canada through skilled staff and specialized equipment. Builders provides services to the oil and gas industry related to the ongoing servicing of producing wells and new drilling activity.
This press release may contain forward-looking statements including expectations of future cash flow and earnings. These statements are based on current expectations that involve a number of risks and uncertainties which could cause actual results to differ from those anticipated. These risks include, but are not limited to: risks associated with the oilfield services industry (e.g. demand, pricing and terms for oilfield services; current and expected oil and gas prices; exploration and development costs and delays; reserves discovery rates; pipeline and transportation capacity; weather, health, safety and environmental risks), integration of acquisitions, competition, and uncertainties resulting from potential delays or changes in plans with respect to acquisitions, development projects or equipment expenditures. Additional information on these and other factors that could affect the Trust's operations or financial results are included in the Trust's documentation and filings with Canadian securities regulatory authorities. Should one or more of these risks or uncertainties materialize, or should assumptions underlying forward-looking statements prove incorrect, actual results may vary materially from those described in this press release. The Trust does not assume any obligation to update these forward-looking statements, except as required by law.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following Management's Discussion and Analysis ("MD&A") of Builders Energy Services Trust ("Builders" or the "Trust") is an update to, and should be read in conjunction with, the annual MD&A included in the Trust's 2006 Annual Report to Unitholders. No update is provided where an item is not material or where there has been no material change from the discussion in the annual MD&A. This MD&A was prepared effective May 10, 2007.
Additional Information
Additional information regarding Builders, including the 2006 Annual Report and Annual Information Form, can be found on SEDAR at www.sedar.com.
Forward-Looking Statements
This MD&A may contain forward-looking statements including expectations of future cash flow and earnings. These statements are based on current expectations that involve a number of risks and uncertainties which could cause actual results to differ from those anticipated. These risks include, but are not limited to: risks associated with the oilfield services industry (e.g. demand, pricing and terms for oilfield services; current and expected oil and gas prices; exploration and development costs and delays; reserves discovery rates; pipeline and transportation capacity; weather, health, safety and environmental risks), integration of acquisitions, competition, and uncertainties resulting from potential delays or changes in plans with respect to acquisitions, development projects or equipment expenditures. Additional information on these and other factors that could affect the Trust's operations or financial results are included in the Trust's documentation and filings with Canadian securities regulatory authorities. Should one or more of these risks or uncertainties materialize, or should assumptions underlying forward-looking statements prove incorrect, actual results may vary materially from those described in this MD&A. The Trust does not assume any obligation to update these forward-looking statements, except as required by law.
Non-GAAP Measures
Throughout this MD&A, certain terms that are not specifically defined in Canadian Generally Accepted Accounting Principles ("GAAP") are used to analyze the operations. In addition to the primary measures of net earnings and net earnings per unit in accordance with GAAP, we believe that certain measures not recognized under GAAP assist us and the reader in assessing performance and understanding the Trust's results. Each of these measures provides the reader with additional insight into the Trust's ability to fund future distributions, principal debt repayments and capital programs. These non-GAAP measures are not recognized measures under GAAP. As a result, the method of calculation may not be comparable with other companies or Trusts. These measures should not be considered alternatives to net earnings and net earnings per unit as calculated in accordance with GAAP.
Gross margin(1) - This measure is considered a primary indicator of operating performance as calculated by revenue less operating expenses.
Gross margin as a percentage of revenue(1) - This measure is considered a primary indicator of operating performance as calculated by gross margin divided by revenue.
EBITDA(2) (Earnings before interest, income taxes, depreciation, amortization, non-controlling interest earnings and losses or gains on disposal of equipment) - This measure is considered an indicator of the Trust's ability to generate funds flow in order to meet distributions, fund required working capital, service debt, pay current income taxes and fund capital programs.
EBITDA as a percentage of revenue(2) - This measure is considered an indicator of the Trust's ability to generate funds flow as calculated by EBITDA divided by revenue.
Net maintenance capital - Equipment additions that are incurred in order to refurbish or replace previously acquired equipment less proceeds on the disposal of retired equipment. Such additions do not provide incremental increases in revenue. Net maintenance capital is a key component in understanding the sustainability of the Trust's business as cash resources retained within the Trust must be sufficient to meet net maintenance capital needs to replenish the assets for future cash generation.
Growth capital - Growth capital is capital spending which is intended to result in incremental increases in revenue. We consider growth capital to be a key measure as it represents the total expenditures on equipment expected to add incremental revenues and funds flow to the Trust.
Funds flow or funds flow from operations(3) - This measure is an indicator of the Trust's ability to generate funds flow in order to fund distributions, working capital, principal debt repayments and capital programs. Funds flow or funds flow from operations is defined as cash flow from operations before changes in non-cash operating working capital. We use this measure in assessing the Trust's operational cash flow as it provides cash generated in the period excluding the timing of non-cash operating working capital. This reflects the ability of the operations of the Trust to meet the above noted funding requirements. The most significant non-cash operating working capital component affecting cash flow is accounts receivable.
Payout ratio(4) - This ratio is defined as distributions declared expressed as a percentage of funds flow from operations. This ratio is an indicator of the Trust's ability to fund its distribution level from the Trust's ongoing operations excluding changes in non-cash working capital.
(1) Gross margin and gross margin as a percentage of revenue are reconciled from the GAAP measure, revenue, in the table "Results of Operations".
(2) EBITDA and EBITDA as a percentage of revenue are reconciled from the GAAP measure, earnings before income taxes and non-controlling interest, in the table "Results of Operations".
(3) Funds flow is reconciled from the GAAP measure, cash flow from operations, in the table "Funds Flow from Operations".
(4) Payout ratio is calculated from the non-GAAP measure, funds flow, and the GAAP measure, distributions declared, in the table "Payout Ratio".
BUILDERS OVERVIEW
Based in Calgary, Alberta, Builders is an open-end, unincorporated investment trust providing oilfield services in western Canada through skilled staff and specialized equipment. We provide services to both producing and newly drilled conventional crude oil and natural gas wells in the oil and gas industry.
Our services are offered through three operating segments: Service Rigs, Oilfield Transport and Downhole Services & Rentals. The Service Rigs segment provides production and completion services. The Oilfield Transport segment provides general oilfield hauling and rig relocation services. The Downhole Services & Rentals segment provides wireline, coil-tubing and nitrogen services, downhole tools and equipment rentals.
A fourth non-operating segment, Corporate, includes general and administrative costs and interest.
CURRENT AND COMPARATIVE PERIODS
The current period for the three months ended March 31, 2007 includes full quarter results for two acquisitions in Service Rigs, Kodiak Well Service Ltd. ("Kodiak") acquired May 8, 2006 and Murphy's Oilfield Services Ltd. ("Murphy's") acquired October 3, 2006 and two Oilfield Transport acquisitions, Prime Oilfield Hauling Ltd. ("Prime") acquired August 1, 2006 and Leachman Enterprises Ltd. ("Leachman") acquired February 1, 2006. The operations and financial results of these acquisitions have been included in the March 31, 2007 consolidated financial statements and MD&A of the Trust.
The operations and financial results of the Leachman acquisition have been included in the March 31, 2006 consolidated financial statements and MD&A of the Trust since February 1, 2006.
THE INDUSTRY
The oilfield services industry is cyclical and is significantly affected by the activity levels of producers. Typically, the first quarter of each year is the most active quarter for the industry. The first quarter of 2006 was the most active period on record in the industry due to favourable industry fundamentals and weather conditions. Relative to this record activity, the first quarter of 2007 has seen lower demand for oilfield services as a result of the following factors:
- Lower natural gas prices resulting from historically high natural gas inventory storage at the end of 2006. The lower natural gas price caused a reduction in natural gas drilling programs which represents approximately 70 percent of Western Canadian Sedimentary Basin ("WCSB") activity. The Canadian Association of Oilwell Drilling Contractors ("CAODC") estimated that drilling rig utilization rates in the first quarter of 2007 were the lowest experienced in the last four years, at 61 percent. During the first quarter of 2006, drilling rig utilization rates were 91 percent, which was one of the highest levels of drilling rig utilization rates in the history of the WCSB.
- A total of 6,000 wells were drilled in the WCSB, a 22 percent decline from the 7,600 wells drilled in 2006. The most significant aspect of this was the reduced shallow natural gas and coal bed methane activity which, in the past number of years, had been a key driver of increased activity but has declined in this lower natural gas price environment.
- Increased competition in the oilfield services sector from additional equipment added to industry fleets over the past several years. This larger fleet is now competing for reduced new well activity resulting in price and utilization pressures in some of the services which Builders offers.
- Producers' sentiment in Canada that oilfield services pricing is too high, resulting in reduced pricing and oilfield services activity and reduced producers' capital budgets for the WCSB.
Compounding the industry slowdown, spring break-up started in mid-March this year, compared to an extended winter drilling season in 2006 during which spring break-up did not arrive until April, which is exceptionally late. A significant slowdown in the industry occurs during spring break-up each year, as wet and muddy conditions as well as road bans make it difficult to move heavy equipment in and out of well sites.
On a positive note, total well completions of 6,600 in the WCSB, per the CAODC, during the first quarter of 2007 improved relative to the same period in 2006 by six percent. The increase in well completions resulted from extensive 2006 drilling activity. Production services also continued to be a stable source of income for certain oilfield service companies, including Builders. The 200,000 producing wells in the WCSB continued to require production services throughout the first quarter of 2007. As well, oil pricing and its related activity continued to remain strong throughout the current quarter.
SELECTED FINANCIAL INFORMATION
Three months ended Three months ended
(Thousands, except per unit amounts) March 31, 2007 March 31, 2006
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Revenue $ 62,013 $ 62,754
Gross margin $ 21,180 $ 24,118
Gross margin as a percentage of
revenue 34% 38%
EBITDA $ 16,613 $ 19,584
EBITDA as a percentage of revenue 27% 31%
Net earnings: $ 9,068 $ 11,870
Per unit - basic $ 0.49 $ 0.79
Per unit - diluted $ 0.48 $ 0.78
Funds flow from operations: $ 15,996 $ 16,913
Per unit - basic $ 0.86 $ 1.13
Per unit - diluted $ 0.86 $ 1.11
Payout ratio 49% 35%
Cash distributions to Unitholders: $ 7,902 $ 5,882
Per unit $ 0.42 $ 0.39
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As at As at
March 31, 2007 December 31, 2006
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Total assets $333,776 $323,033
Operating line of credit and total
long-term debt $ 68,917 $ 54,872
Unitholders' equity $218,781 $213,546
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OVERVIEW
Deteriorating industry fundamentals from the record first quarter of 2006 has resulted in a more competitive environment in 2007. Our financial results for the first quarter of 2007 are relatively consistent with the first quarter of 2006, despite growth in our equipment base. Our balanced services mix and geographic diversification has allowed us to generate relatively strong first quarter funds flow during a period when oilfield services pricing and utilization rates were under pressure.
We have continued to focus our efforts on integrating the businesses in each of our operating segments. Key areas of concentration continue to be:
- Further broadening our customer base through an enhanced and collaborative emphasis on sales activity across all divisions.
- Continued proactive management of costs including the review and implementation of cost efficiencies.
- Implementation of incentive and people-oriented programs to retain and attract key staff while allowing staff reductions through attrition.
- Disciplined pricing decisions on oilfield services in an effort to meet customer expectations while preserving acceptable margins.
Overall results were as we anticipated, given the reduction in industry fundamentals, with the exception of a slightly early spring break-up. Compared to the first quarter of 2006, when industry levels were near full utilization, 2007 results have declined but were partially offset by a full quarter of operations from acquisitions closed in 2006 in our Service Rigs and Oilfield Transport segments. Our Service Rigs segment performed very well in the first quarter of 2007 and exceeded 2006 levels, while our other segments showed declines.
- Net earnings decreased by $2.8 million (to $9.1 million from $11.9 million).
- Funds flow from operations decreased by $0.9 million (to $16.0 million from $16.9 million).
- Distributions increased by $0.01 per unit per month commencing May 2006 (to $0.14 per unit per month from $0.13 per unit per month) which contributed to an increase in the payout ratio to 49 percent for the three months ended March 31, 2007.
RESULTS OF OPERATIONS
Three months ended Three months ended
(Thousands, except per unit amounts) March 31, 2007 March 31, 2006
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Revenue by segment:
Service Rigs $ 23,979 $ 14,970
Oilfield Transport 16,691 17,769
Downhole Services & Rentals 21,343 30,015
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Revenue 62,013 62,754
Operating expenses 40,833 38,636
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Gross Margin 21,180 24,118
Gross margin as a percentage of revenue 34% 38%
General and administrative and other
cash expenses 4,567 4,534
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EBITDA 16,613 19,584
EBITDA as a percentage of revenue 27% 31%
Depreciation and amortization 5,476 3,766
Interest 938 475
Loss (gain) on disposal of equipment (14) 14
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Earnings before income taxes and
non-controlling interest 10,213 15,329
Income tax expense 878 2,778
Non-controlling interest 267 681
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Net earnings $ 9,068 $ 11,870
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Per unit - basic $ 0.49 $ 0.79
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Per unit - diluted $ 0.48 $ 0.78
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Our revenue remained relatively unchanged for the first quarter of 2007 compared to 2006 as the growth in our operations during 2006 from four acquisitions and new equipment additions were offset by the impact of the industry slowdown. The Service Rigs segment performed very well as revenues increased for the first quarter of 2007 over 2006 as a result of long-term customer relationships and an experienced sales team, increases in demand for completion services and operational growth through equipment and acquisitions. Drilling rig utilization reductions, primarily driven by reduced shallow gas activity in central and southern Alberta combined with a relatively shorter winter drilling season, resulted in reductions in revenue for both our Oilfield Transport and Downhole Services & Rentals segments. The early spring break-up in southern Alberta was particularly challenging for our Oilfield Transport segment. All of our segments experienced pricing pressures as lower utilization levels made the oilfield services industry more competitive.
Gross margin and EBITDA for the quarter decreased as a result of the reduction in industry activity levels and the earlier onset of spring break-up compared to 2006. In addition, earnings before income taxes and non-controlling interest and net earnings for the quarter were further impacted by increased depreciation and amortization reflecting the acquisitions and growth capital investment in the Service Rigs and Oilfield Transport segments in 2006.
Gross margin and EBITDA percentages have declined from 2006 due to pricing pressure from our customers and overall lower utilization rates.
Service Rigs
This segment performed very well in the first quarter of 2007, despite current industry conditions, and exceeded our 2006 results for existing operations as well completions continued at a pace exceeding the first quarter of 2006. According to the CAODC, total well completions of 6,600 in the WCSB during the first quarter of 2007 improved relative to the same period in 2006 by six percent. Revenue was $24.0 million and net earnings before taxes and non-controlling interest was $7.7 million, increases of $9.0 million (60 percent) and $2.2 million respectively (41 percent) from the first quarter of 2006. Our revenue increased by $1.4 million as a result of growth capital expenditures in 2006 and increases in total well completions. The Kodiak and Murphy's acquisitions increased our 2007 first quarter revenue by $7.6 million versus 2006.
Equipment utilization during the three months ended March 31, 2007, although strong, was lower than the first quarter of 2006. Industry service rig utilization rates were reduced relative to 2006, due to the decline in industry fundamentals and the increase in available service rigs in western Canada, with the CAODC estimating that available service rigs averaged 962 rigs in the first quarter of 2006 compared to 1,020 rigs in 2007.
Oilfield Transport
Oilfield activity related to heavy oil in eastern Alberta and conventional crude oil activity in northwestern Alberta contributed to our profitability. The Prime acquisition and an additional month of operations from the February 1, 2006 Leachman acquisition contributed $4.5 million to our 2007 first quarter revenue. However, during the first quarter of 2007 portions of our Oilfield Transport operations were affected by the industry slowdown and spring break-up which occurred earlier in 2007 than the unseasonably late break-up in 2006. This slowdown in natural gas drilling activity reduced utilization rates at both our pipe hauling operation in central Alberta and the rig moving business in southeastern Alberta. Revenue for the segment was $16.7 million, a decrease of $1.1 million (6 percent) from $17.8 million in 2006.
The decline in earnings before income taxes and non-controlling interest from $3.8 million to $1.1 million for the first quarter of 2006 and 2007, respectively, reflects a slight decrease in revenue, increased operating costs and depreciation and amortization associated with the acquisitions of Prime and Leachman in 2006 and depreciation and amortization related to growth capital in this segment throughout 2006.
Downhole Services & Rentals
Our downhole tools business continued to provide strong operating results throughout the first quarter of 2007 largely driven by heavy oil activity in eastern Alberta. Some businesses, however, in our Downhole Services & Rentals segment were adversely impacted by the reduction in coal bed methane and shallow natural gas well activity in central Alberta. This led to a significant reduction in utilization rates, especially for our coil tubing and nitrogen services, and to a lesser extent for our wireline services, all located in central Alberta. In addition, our rental business, which is heavily reliant on drilling rig utilization, has been adversely impacted by the reduction in drilling rig activity in central Alberta.
Revenue for the Downhole Services & Rentals segment for the three months ended March 31, 2007 was $21.3 million and net earnings before taxes and non-controlling interest was $6.1 million, decreases of $8.7 million (29 percent) and $3.5 million (36 percent), respectively, from the same period in 2006.
Corporate
Interest expense for the three months ended March 31, 2007 has increased as a result of higher average debt outstanding combined with an increase in the prime lending rate. Interest rates on our operating line of credit and term acquisition loan facility averaged 6.50 percent for the first quarter of 2007, compared with 5.51 percent in the first quarter of 2006.
Unit-based compensation, which includes the unit option plan ("Option Plan") and the cash-based long term incentive plan ("LTIP") is included within general and administrative expenses and amounted to $0.3 million and $0.1 million, respectively, for the first quarter of 2007.
On May 10, 2007 there were 1,392,450 LTIP units outstanding, none of which were exercisable.
Income Taxes
Our Trust structure includes certain subsidiaries which are subject to the payment of corporate income taxes. Current income tax expense decreased $2.6 million from the same period in 2006 as a result of the restructuring of certain operations of the Trust on January 1, 2007. Builders expects to pay only a nominal amount of corporate income taxes in respect of its 2007 operations.
FINANCIAL RESOURCES AND LIQUIDITY
During the quarter, our funds flow from operations was $16.0 million. The funds flow and our credit facilities were used to finance non-cash working capital, distributions and equipment expenditures. Our expectations are that during the second quarter of 2007 we will collect a significant portion of the first quarter's increase in non-cash working capital, which is mainly comprised of accounts receivable, and these funds will be used to finance our current level of distributions, equipment expenditures and repay a portion of our credit facilities.
Funds Flow from Operations
Three months ended Three months ended
(Thousands, except per unit amounts) March 31, 2007 March 31, 2006
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Cash flow from operations $ 2,938 $ 12,407
Add back:
Changes in non-cash operating
working capital 13,058 4,506
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Funds flow from operations $ 15,996 $ 16,913
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Per unit - basic $ 0.86 $ 1.13
Per unit - diluted $ 0.86 $ 1.11
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Funds flow from operations for the three months ended March 31, 2007 of $16.0 million decreased by $0.9 million from the $16.9 million reported in the first quarter of 2006, due to weaker industry fundamentals, partially offset by the effect of the 2006 acquisitions and equipment expenditures.
Payout Ratio
Three months ended Three months ended
(Thousands, except per unit amounts) March 31, 2007 March 31, 2006
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Funds flow from operations(1) $ 15,996 $ 16,913
Distributions:
Paid 5,267 3,908
Payable 2,635 1,974
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Distributions declared $ 7,902 $ 5,882
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Total distributions per unit $ 0.42 $ 0.39
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Payout ratio 49% 35%
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(1) Funds flow from operations is a non-GAAP measure and is reconciled from
the most relevant GAAP measure, cash flow from operations, in the
"Funds Flow from Operations" table.
Commencing with the May 2006 distribution, we increased our monthly cash distribution by eight percent to the current monthly distribution of $0.14 per Trust unit ($0.42 per quarter). As at March 31, 2006, our monthly cash distribution was $0.13 per Trust unit ($0.39 per quarter).
Distributions declared for the three months ended March 31, 2007 have increased significantly from the relative period in 2006, reflecting the May 2006 distribution increase combined with the Trust unit issuances for the August 2006 Trust unit prospectus offering, Trust unit consideration for the 2006 acquisitions of Leachman, Kodiak, Prime and Murphy's, the conversion of Exchangeable shares during 2007 and 2006 and the exercise of Trust unit options.
During the three months ended March 31, 2007, cash flow from operations was less than distributions by $5.0 million due to an increase in our non-cash operating working capital. We expect that our non-cash operating working capital, which is mainly comprised of accounts receivable, will decrease in the second quarter of 2007 as accounts receivable are collected. A portion of these accounts receivable collections will be used to fund our second quarter distributions. Distributions declared during the three months ended March 31, 2006 were funded through cash flow from operations.
Equipment Expenditures
Three months ended Three months ended
(Thousands) March 31, 2007 March 31, 2006
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Equipment expenditures:
Service Rigs $ 1,792 $ 1,993
Oilfield Transport 3,347 3,406
Downhole Services & Rentals 1,823 7,292
Corporate 447 90
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Investment in equipment 7,409 12,781
Proceeds on disposal of equipment (988) (222)
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Net equipment expenditures $ 6,421 $12,559
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We incurred $6.4 million in net equipment expenditures during the three months ended March 31, 2007, a decrease of $6.1 million from the same quarter of 2006. The current quarter's net equipment expenditures is comprised of $4.1 million in growth capital, $1.5 million in net maintenance capital and $0.8 million for information systems, operational facilities and leasehold improvements. This reduced level of equipment expenditures reflects the reduction in industry activity in 2007.
Trust Units and Non-controlling Interest
During the three months ended March 31, 2007 the following transactions occurred:
- 352,773 (2006 - 368,638) Trust units were issued in exchange for 289,028 (2006 - 335,965) Series A Exchangeable shares.
- 14,670 (2006 - 38,817) Trust units were issued on exercise of Trust unit options.
As at May 10, 2007, there were 18,884,017 Trust units and 1,346,327 Trust unit options outstanding. Of the 1,346,327 Trust unit options, 630,718 were exercisable of which 487,279 were "in-the-money".
As at May 10, 2007, there were 294,495 Series A Exchangeable shares outstanding that were convertible at a ratio of 1.2702 per share into 374,068 Trust units.
Credit Facilities and Other Long-term Debt
The operating line of credit and the term acquisition loan facility expire on May 30th, 2007 and we expect the facilities to be renewed for another year. Since the term date occurs within one year, as at March 31, 2007, $17.6 million of the acquisition facility has been recognized as part of the current portion of long-term debt in current liabilities. As at March 31, 2007, all financial debt covenants were satisfied and all banking requirements were up to date. We do not anticipate any financial resources or liquidity issues will restrict our future operating, investing or financing activities.
SUMMARY OF QUARTERLY DATA
Three months ended
(Thousands, except per Mar. 31, Dec. 31, Sept. 30, June 30,
unit amounts) 2007 2006 2006 2006
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Revenue $ 62,013 $ 51,799 $ 50,422 $ 34,590
Net earnings 9,068 5,242 6,554 3,978
Per-unit - basic 0.49 0.28 0.39 0.26
Per-unit - diluted 0.48 0.28 0.38 0.25
Funds flow from
operations 15,996 9,418 11,852 5,719
Per-unit - basic 0.86 0.51 0.71 0.37
Per-unit - diluted 0.86 0.51 0.70 0.36
Distributions per unit $ 0.42 $ 0.42 $ 0.42 $ 0.41
Payout ratio 49% 82% 61% 112%
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Three months ended
(Thousands, except per Mar. 31, Dec. 31, Sept. 30, June 30,
unit amounts) 2006 2005 2005 2005
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Revenue $ 62,754 $ 50,772 $ 37,164 $ 17,303
Net earnings 11,870 7,220 4,960 83
Per-unit - basic 0.79 0.53 0.39 0.01
Per-unit - diluted 0.78 0.52 0.38 0.01
Funds flow from
operations 16,913 12,544 9,234 2,532
Per-unit - basic 1.13 0.93 0.73 0.24
Per-unit - diluted 1.11 0.90 0.71 0.22
Distributions per unit $ 0.39 $ 0.39 $ 0.37 $ 0.36
Payout ratio 35% 44% 51% 150%
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The increase in the second and third quarter results of 2006 relative to the comparative quarters are mainly due to strong oilfield services demand, and growth in our operations and cash flow from acquisitions and equipment expenditures. During the fourth quarter of 2006, relative to the comparative quarter, our net earnings and funds flow were impacted by a downturn in activity levels resulting from wet weather and a reduction in drilling activity as a result of weakening prices for natural gas. During the first quarter of 2007, relative to the comparative quarter, our revenues, net earnings and funds flow were impacted by reduced drilling utilization rates created by high natural gas storage levels, an increase in oilfield services equipment in the WCSB and the earlier arrival of spring break-up.
The second quarter of both 2006 and 2005 were impacted by the annual spring break-up, which leaves many secondary roads temporarily incapable of supporting the weight of heavy equipment and results in restrictions in the level of oilfield service activity. As a result of the seasonality of operations, funds flow in the first quarter of each year has been substantially more than the distributions declared, which is expected. This excess funds flow was used to partially finance the distributions in the second quarter. As utilization levels increase during the third quarter, funds flow is primarily used to finance increases in non-cash working capital and distributions.
ACCOUNTING POLICIES
Effective January 1, 2007, we adopted Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1530, Comprehensive Income; CICA Handbook Section 3855, Financial Instruments - Recognition and Measurement; and CICA Handbook Section 3861, Financial Instruments - Disclosure and Presentation. These new standards changed requirements for the disclosure and presentation and the recognition and measurement of financial instruments, the treatment of financing costs and a new statement referred to as comprehensive income.
In accordance with the provisions of these new standards, we performed an analysis of our financial instruments as at January 1, 2007. These financial instruments consist of accounts receivable, bank indebtedness, operating line of credit, accounts payable and accrued liabilities, distributions payable and long-term debt. The financial instruments were reviewed to determine whether they should be categorized as held for trading, available for sale, held to maturity, loans and receivables or other. Those financial instruments categorized as held for trading or available for sale would be subsequently measured at their fair value at each reporting period. Subsequent measurement of gains or losses for held for trading financial instruments would be recognized in net earnings while those categorized as available for sale would be recognized in other comprehensive income. Those financial instruments categorized as held to maturity, loans and receivables or other would be initially recorded at amortized cost and subsequently measured using the effective interest rate method at each reporting period.
Given management's intent and the nature of the Trust's financial instruments, it was determined that our financial assets would be categorized as loans and receivables and that our financial liabilities would be categorized as other. As the carrying value of the Trust's financial instruments as at January 1, 2007 were consistent with the amortized cost using the effective interest rate method, no adjustments were required to their carrying values or recognized as other comprehensive income. As new financial instruments are acquired, an evaluation of management's intent and the nature of the item will be performed to determine the correct financial instrument categorization and subsequent measurement of any gains or losses.
As a result of adoption of these new accounting standards the following adjustments were made as of January 1, 2007:
- The name of the consolidated statement of operations and accumulated net earnings was changed to the consolidated statement of operations, comprehensive income and accumulated net earnings in accordance with the new CICA Handbook Section 1530, Comprehensive Income.
- A decrease of $0.5 million in deferred charges and $0.2 million in the related future income tax liability with a corresponding reduction in accumulated net earnings. Deferred charges as at December 31, 2006 consist of costs associated with the establishment of debt agreements. Previously, deferred financing charges were deferred and amortized using the straight-line method over the anticipated term of repayment with amortization included in amortization expense. Effective from January 1, 2007, such costs are expensed as incurred in accordance with the new CICA Handbook Section 3855, Financial Instruments - Recognition and Measurement. As required, Section 3855 has been prospectively adopted.
OUTLOOK
We anticipate a prolonged spring break-up this year as a result of slow producer activity combined with heavy winter snowfalls in the northern part of the WCSB, which will impact the length of road bans and the ability to get into well sites in many areas. In addition, April 2007 weather was not conducive to industry activity with unusual periods of snow, rain and cool weather which extends break-up conditions. Expectations are that our southern Alberta service rigs, rig moving and wireline services will be the first to recommence operations as drier spring conditions are normally more prevalent in this area of the WCSB. Oilfield services are cyclical and second quarter results are seasonally the weakest of the year as road bans and wet, muddy conditions resulting from the spring thaw and snow melt make it difficult, if not impossible, to access certain well-sites to provide oilfield services. A period of dry, warm weather early in the spring could reduce the impact of the spring break-up on our operating results.
Natural gas fundamentals are beginning to show signs of recovery. The natural gas storage overhang, that started in 2006, has declined with colder weather near the end of the winter heating season. As a result, the forward curve for natural gas prices has begun to strengthen. While there is currently a lower demand for oilfield services, expectations are that 19,100 wells are to be drilled during 2007, an 18 percent reduction relative to the 23,200 drilled wells during 2006. Oilfield service equipment is also still required to maintain the 200,000 existing producing wells in the WCSB that typically need servicing and attention throughout the year. As well, the price of oil remains relatively high and oil drilling in the WCSB is relatively stable. Expectations are that by the fourth quarter of 2007, E&P producers will begin to increase their capital programs to take advantage of improving production margins resulting from natural gas pricing increases. Coincident with this timing, oilfield service activity is expected to begin to recover.
Our ability to finance through public or private offerings of Trust units continues to be impacted by the proposed "Tax Fairness Plan" legislation. There has not been an update to the October 31, 2006 announcement as to the timing of the proposed legislation. We expect to maintain our trust status for the foreseeable future until the proposed legislation has passed into law at which time we will assess the impact on our strategy.
We plan to increase the 2007 capital program from $12 million to $21 million with the addition of three new service rigs and related equipment. We will use our Brooks fabrication facilities to construct the service rigs and expect to deploy them in the third and fourth quarter of 2007 and the first quarter of 2008. The high utilization of service rigs that we experienced in the first quarter of 2007 is expected to continue in the latter half of 2007 and into 2008. We will continue to re-evaluate the 2007 capital program throughout the year in relation to industry conditions and business opportunities.
Our strategy is one of growth through internal expansion, acquisitions and mergers. While current industry conditions are expected to temporarily constrain large scale organic growth and acquisitions, we continue to believe the oilfield services industry is ripe for consolidation. As a result we continue to consider and evaluate potential merger opportunities.
We have established an oilfield services operation that is balanced in both oil and natural gas activity and drilling-related and production-related activity across the WCSB and through the current industry downturn we are seeing the benefits of this strategy. Throughout 2007, we expect to generate sufficient cash flow to maintain our current distribution level of $0.14 per Trust unit per month.
BUILDERS ENERGY SERVICES TRUST
CONSOLIDATED BALANCE SHEETS
(unaudited)
As at As at
(Thousands) March 31, 2007 December 31, 2006
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Assets
Current assets
Accounts receivable $ 49,942 $ 40,835
Inventory 6,277 5,753
Prepaid expenses and deposits 3,273 2,359
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59,492 48,947
Equipment 162,912 161,260
Intangible assets 17,634 18,327
Goodwill 93,738 94,015
Deferred charges (note 3) - 484
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$ 333,776 $ 323,033
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Liabilities
Current liabilities
Bank indebtedness $ 1,576 $ 236
Operating line of credit 2,275 2,650
Accounts payable and accrued liabilities 14,676 20,112
Distributions payable (note 9) 2,635 2,583
Income taxes payable - 1,525
Current portion of long-term debt (note 4) 19,457 11,432
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40,619 38,538
Long-term debt (note 4) 47,185 40,790
Future income tax liability (note 3) 23,001 22,278
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110,805 101,606
Non-controlling interest (note 5) 4,190 7,881
Unitholders' Equity
Trust units (note 6) 214,199 210,083
Contributed surplus (note 7) 3,627 3,345
Accumulated net earnings 52,895 44,156
Accumulated distributions (note 9) (51,940) (44,038)
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218,781 213,546
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$ 333,776 $ 323,033
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See accompanying notes to unaudited consolidated interim financial
statements
BUILDERS ENERGY SERVICES TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS, COMPREHENSIVE INCOME AND ACCUMULATED
NET EARNINGS
(unaudited)
Three months ended March 31,
(Thousands, except per unit amounts) 2007 2006
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Revenue $ 62,013 $ 62,754
Operating expenses 40,833 38,636
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21,180 24,118
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Expenses
General and administrative (note 8) 4,408 4,349
Depreciation 4,783 3,244
Amortization 693 522
Interest on long-term debt 876 390
Other 207 284
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10,967 8,789
Earnings before income taxes and
non-controlling interest 10,213 15,329
Income tax expenses
Current - 2,631
Future 878 147
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878 2,778
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Earnings before non-controlling interest 9,335 12,551
Non-controlling interest earnings (note 5) 267 681
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Net earnings and comprehensive income (note 3) $ 9,068 $ 11,870
Accumulated net earnings, beginning of period 44,156 16,512
Prospective adoption of new accounting
standard (note 3) (329) -
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Accumulated net earnings, end of period $ 52,895 $ 28,382
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Net earnings per unit (note 10)
Basic $ 0.49 $ 0.79
Diluted $ 0.48 $ 0.78
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See accompanying notes to unaudited consolidated interim financial
statements
BUILDERS ENERGY SERVICES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended March 31,
(Thousands) 2007 2006
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Operating activities
Net earnings and comprehensive income $ 9,068 $ 11,870
Items not affecting cash:
Depreciation and amortization 5,476 3,766
Future income tax expense 878 147
Unit-based compensation (note 8) 321 435
Non-controlling interest earnings (note 5) 267 681
Loss (gain) on disposal of equipment (14) 14
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15,996 16,913
Changes in non-cash operating working
capital (note 11) (13,058) (4,506)
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2,938 12,407
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Financing activities
Issue of Trust units, net of issue
costs (note 6) 119 339
Distributions paid (7,850) (5,809)
Repayment of operating line of credit (375) (5,700)
Increase in long-term debt 15,000 14,500
Repayment of long-term debt (580) (710)
Other - (16)
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6,314 2,604
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Investing activities
Equipment (7,409) (12,781)
Business acquisitions - (5,417)
Proceeds on disposal of equipment 988 222
Changes in non-cash investing working
capital (note 11) (4,171) 459
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(10,592) (17,517)
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Decrease in cash (1,340) (2,506)
Cash (bank indebtedness), beginning
of period (236) 1,461
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Bank indebtedness, end of period $ (1,576) $ (1,045)
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Supplementary cash flow information
Income taxes paid $ 1,525 $ 1,063
Interest paid $ 962 $ 506
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See accompanying notes to unaudited consolidated interim financial
statements
BUILDERS ENERGY SERVICES TRUST
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As at and for the period ended March 31, 2007
(All tabular amounts in thousands unless otherwise stated, except for per unit amounts)
1. Nature of the Organization
Builders Energy Services Trust (the "Trust" or "Builders") is an open-end unincorporated investment trust governed by the laws of the Province of Alberta and created pursuant to a Declaration of Trust dated November 29, 2004. The Trust commenced operations on January 25, 2005. The principal undertaking of the Trust is to engage in oilfield services, indirectly, through three operating segments: Oilfield Transport, Service Rigs and Downhole Services & Rentals.
2. Significant Accounting Policies
The interim consolidated financial statements of the Trust have been prepared by management in accordance with Canadian generally accepted accounting principles and are consistent with those set out in the audited consolidated financial statements for the year ended December 31, 2006, except as described in note 3. These interim consolidated financial statements do not include all disclosures provided in the December 31, 2006 financial statements and should be read in conjunction with the Trust's consolidated annual financial statements for the year ended December 31, 2006. In management's opinion, these interim consolidated financial statements include all adjustments to present fairly such information.
3. Adoption of New Accounting Policies
Effective January 1, 2007, Builders adopted Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1530, Comprehensive Income; CICA Handbook Section 3855, Financial Instruments - Recognition and Measurement; and CICA Handbook Section 3861, Financial Instruments - Disclosure and Presentation. These new standards changed requirements for the disclosure and presentation and the recognition and measurement of financial instruments, the treatment of financing costs and a new statement referred to as comprehensive income.
In accordance with the provisions of these new standards, the Trust performed an analysis of its financial instruments as at January 1, 2007. The Trust's financial instruments consist of accounts receivable, bank indebtedness, operating line of credit, accounts payable and accrued liabilities, distributions payable and long-term debt. The financial instruments were reviewed to determine whether they should be categorized as held for trading, available for sale, held to maturity, loans and receivables or other. Those financial instruments categorized as held for trading or available for sale would be subsequently measured at their fair value at each reporting period. Subsequent measurement of gains or losses for held for trading financial instruments would be recognized in net earnings while those categorized as available for sale would be recognized in comprehensive income. Those financial instruments categorized as held to maturity, loans and receivables or other would be initially recorded at amortized cost and subsequently measured using the effective interest rate method.
Given management's intent and the nature of the Trust's financial instruments, it was determined that the Trust's financial assets would be categorized as loans and receivables and that its financial liabilities would be categorized as other. As the carrying value of the Trust's financial instruments as at January 1, 2007 were consistent with the amortized cost using the effective interest rate method, no adjustments were required to their carrying values or recognized in comprehensive income. As new financial instruments are acquired an evaluation of management's intent and the nature of the item will be performed to determine the correct financial instrument categorization and subsequent measurement of any gains or losses.
As a result of adoption of these new accounting standards the following adjustments were made as of January 1, 2007:
- The name of the consolidated statement of operations and accumulated net earnings was changed to the consolidated statement of operations, comprehensive income and accumulated net earnings in accordance with the new CICA Handbook Section 1530, Comprehensive Income.
- A decrease of $0.5 million in deferred charges and $0.2 million in the related future income tax liability with a corresponding reduction in accumulated net earnings. Deferred charges as at December 31, 2006 consist of costs associated with the establishment of debt agreements. Previously, financing charges were deferred and amortized using the straight-line method over the anticipated term of repayment with amortization included in amortization expense. As at January 1, 2007, such costs are expensed as incurred in accordance with the new CICA Handbook Section 3855, Financial Instruments - Recognition and Measurement. As required, Section 3855 has been prospectively adopted.
4. Long-term Debt
As at As at
March 31, 2007 December 31, 2006
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Term acquisition loan $ 63,495 $ 48,495
Term debt and capital leases 3,147 3,727
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66,642 52,222
Less: current portion of long-term debt 19,457 11,432
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Long-term debt $ 47,185 $ 40,790
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5. Non-controlling Interest
Three months ended
March 31, 2007
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Securities Amount
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Balance, beginning of period 589 $ 7,881
Conversion to Trust units (note 6) (289) (3,958)
Earnings attributable to non-controlling
interest - 267
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Balance, end of period 300 $ 4,190
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Exchange ratio, end of period 1.2536
Trust units issuable upon conversion, end of
period 376
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6. Trust Units
Three months ended
March 31, 2007
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Units Amount
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Balance, beginning of period 18,453 $ 210,083
Conversion of Exchangeable shares (note 5) 353 3,958
Exercise of Trust unit options for cash
(note 8) 14 140
Fair value of exercised Trust unit options
(note 7) - 39
Issue costs - (21)
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Balance, end of period 18,820 $ 214,199
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7. Contributed Surplus
Three months ended
March 31, 2007
----------------------------------------------------------------------------
Balance, beginning of period $ 3,345
Unit option plan unit-based compensation expense, net
of forfeitures (note 8) 321
Fair value of exercised Trust unit options (note 6) (39)
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Balance, end of period $ 3,627
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8. Unit-based Compensation
Recognized in general and administrative expense, unit-based compensation is comprised of the Trust unit option plan ("Option Plan") and the cash-settled long term incentive plan ("LTIP").
i) Trust unit options
Three months ended
March 31, 2007
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Weighted
Average
Trust Unit Exercise Price
Options (Per Unit)
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Outstanding, beginning of period 1,461 $ 12.11
Issued 5 10.79
Exercised (14) 10.00
Forfeitures (25) 12.56
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Outstanding, end of period 1,427 $ 12.12
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Exercisable, end of period 668 $ 10.98
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The Trust recorded unit-based compensation expense in respect of the Option Plan of $0.3 million for the three months ended March 31, 2007 (2006 - $0.4 million) with a corresponding increase to contributed surplus. The amount of unit-based compensation expense has been reduced for Trust unit options forfeited during the period prior to vesting.
ii) Long term incentive plan
On January 8, 2007, the Trust granted 1,400,450 LTIP units at an exercise price of $10.59 per LTIP unit. The Trust recorded unit-based compensation expense in respect of cash-based LTIP of $0.1 million for the three months ended March 31, 2007 with a corresponding increase to accounts payable. As at March 31, 2007, the 1,400,450 granted LTIP units had a weighted average exercise price of $10.31 per unit and nil were exercisable.
9. Accumulated Distributions and Distributions Payable
Three months ended
March 31, 2007
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Per Unit Amount
----------------------------------------------------------------------------
Accumulated distributions, beginning of
period $ 44,038
Distributions declared and paid $ 0.28 5,267
Distributions declared and payable 0.14 2,635
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Accumulated distributions, for the period $ 0.42 7,902
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Accumulated distributions, end of period $ 51,940
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10. Net Earnings Per Unit
Three months ended Three months ended
March 31, 2007 March 31, 2006
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Numerator:
Basic and diluted net earnings $ 9,068 $ 11,870
Denominator:
Weighted average units for basic
net earnings 18,694 14,955
Options convertible to units 9 314
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Weighted average units for diluted
net earnings 18,703 15,269
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Net earnings per unit:
Basic $ 0.49 $ 0.79
Diluted $ 0.48 $ 0.78
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11. Changes in Non-cash Working Capital
Components of changes in non-cash operating working capital are as follows:
Three months ended Three months ended
March 31, 2007 March 31, 2006
----------------------------------------------------------------------------
Accounts receivable $ (9,107) $ (7,156)
Inventory (524) (251)
Prepaid expenses and deposits (914) (906)
Trade accounts payable and accrued
liabilities (1,222) 2,239
Income taxes payable (1,291) 1,568
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$ (13,058) $ (4,506)
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Components of changes in non-cash investing working capital are as follows:
Three months ended Three months ended
March 31, 2007 March 31, 2006
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Equipment accounts payable and
accrued liabilities $ (774) $ (661)
Acquisition consideration payable
subsequent to closing (729) 1,120
Acquired accounts payable and income
taxes payable (2,668) -
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$ (4,171) $ 459
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12. Seasonality of Operations
The Trust's operations are carried out in western Canada. The oilfield services industry's ability to move heavy equipment in exploration and production areas is dependent on weather conditions. With the onset of spring, melting snow together with frost coming out of the ground renders many secondary roadways incapable of supporting heavy equipment until sufficient time has passed for them to dry out. In addition, certain areas in Canada are typically only accessible during winter months, when the surface is frozen enough to support the heavy equipment. As a result, the activity levels of the Trust are directly impacted by this seasonality, whereby activity is traditionally higher in the first and fourth quarters of the year and lower in the second and third quarters.
13. Segmented Information
The Trust has three operating segments: Service Rigs, Oilfield Transport and Downhole Services & Rentals; and a non-operating segment: Corporate.
Selected financial information by operating segments and Corporate is as follows:
As at and for the three months ended March 31, 2007
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Downhole
Service Oilfield Services &
Rigs Transport Rentals Corporate Consolidated
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Revenue $ 23,979 $ 16,691 $ 21,343 $ - $ 62,013
Earnings (loss)
before income
taxes and
non-controlling
interest $ 7,696 $ 1,095 $ 6,109 $ (4,687) $ 10,213
Goodwill &
intangible
assets $ 27,546 $ 33,192 $ 50,634 $ - $ 111,372
Total assets $ 112,972 $ 98,123 $ 120,769 $ 1,912 $ 333,776
Equipment
expenditures $ 1,792 $ 3,347 $ 1,823 $ 447 $ 7,409
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As at and for the three months ended March 31, 2006
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Downhole
Service Oilfield Services &
Rigs Transport Rentals Corporate Consolidated
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Revenue $ 14,970 $ 17,769 $ 30,015 $ - $ 62,754
Earnings (loss)
before income
taxes and
non-controlling
interest $ 5,477 $ 3,826 $ 9,567 $ (3,541) $ 15,329
Goodwill &
intangible
assets $ 13,399 $ 18,449 $ 52,336 $ - $ 84,184
Total assets $ 59,579 $ 71,570 $ 128,172 $ 1,242 $ 260,563
Equipment
expenditures $ 1,993 $ 3,406 $ 7,292 $ 90 $ 12,781
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14. Comparative Amounts
Certain comparative amounts have been reclassified to conform to the current period's presentation.
The TSX has not reviewed and does not accept responsibility for the adequacy or accuracy of this news release.
For more information, please contact
Builders Energy Services TrustGarnet K. Amundson
President and Chief Executive Officer
(403) 296-0344
Email: IR-BEST@BuildersEnergy.com
or
Builders Energy Services Trust
John W. Nearing
Vice President, Finance and Chief Financial Officer
(403) 296-0344
Email: IR-BEST@BuildersEnergy.com
or
Builders Energy Services Trust
Karen Perasalo
Manager, Finance and Investor Relations
(403) 296-0344
Email: IR-BEST@BuildersEnergy.com