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Trican Well Service Ltd. TSX: TCW 
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Nov 03, 2008 20:25 ET
Trican- 2008 Third Quarter Results
CALGARY, ALBERTA--(Marketwire - Nov. 3, 2008) - Trican Well Service Ltd. (TSX:TCW) -
Financial Review
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Three months ended Nine months ended
Sept. 30, Sept. 30, June 30, Sept. 30, Sept. 30,
($ millions,
except per
share amounts;
unaudited) 2008 2007 2008 2008 2007
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Revenue $ 286.7 $ 228.7 $ 162.3 $ 693.3 $ 640.6
Operating income (i) 60.3 63.1 3.4 108.6 160.9
Net income (loss)
before stock-based
compensation 20.8 40.6 (11.8) 33.6 103.1
Net income (loss)
before stock-based
compensation per
share (basic) $ 0.17 $ 0.33 $ (0.10) $ 0.27 $ 0.86
(diluted) $ 0.17 $ 0.33 $ (0.09) $ 0.27 $ 0.83
Net income (loss) 18.1 37.6 (14.4) 24.9 93.7
Net income (loss)
per share (basic) $ 0.14 $ 0.31 $ (0.12) $ 0.20 $ 0.78
(diluted)$ 0.14 $ 0.30 $ (0.12) $ 0.20 $ 0.76
Funds provided by
operations(i) 54.9 61.9 9.9 87.3 89.9
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(i) See last page of Management's Discussion and Analysis.
Despite growing uncertainty regarding the global financial and economic environment, Trican delivered improved operating results in all geographic regions in the third quarter of 2008. Activity in Canada benefited from heightened interest in unconventional natural gas plays in Northeastern British Columbia and Northwestern Alberta, and in oil prospects in southern Saskatchewan. In the United States, financial results improved late in the quarter when the Company regained work lost early in the year due to sand supply disruptions. Despite inflationary and pricing pressure in Russia, financial results in that region benefited from higher equipment utilization, some positive outcomes from mid-year pricing reviews, and implementation of cost control measures.
Compared to the third quarter of 2007, revenue increased 25% to $286.7 million, with all geographic regions contributing to the growth. Operating income was down 4% to $60.3 million, reflecting year-over-year pricing weakness and cost inflation. Net income for the quarter was down $19.6 million to $18.1 million from the same period a year earlier due mainly to a $15.3 million swing in foreign exchange impacts. As a result, net income per share, excluding the impact of stock-based compensation, was $0.17 ($0.17 diluted), down 48% from $0.33 ($0.33 diluted) for the comparable period in 2007. Excluding the impact of foreign exchange losses, most of which arose from intercompany loans, and stock based compensation expense; net income per share for the quarter would have been $0.23 ($0.23 diluted) in 2008 and $0.27 (0.26 diluted) in 2007. Funds from operations were $54.9 million for the third quarter of 2008, down 12% from $61.9 million for the comparable period in 2007. The decrease was primarily a result of lower earnings.
Results from the third quarter of 2008 are significantly stronger than they were for the second quarter of the year. Revenue increased 77%, or $124.4 million over the second quarter, and includes higher revenue from all three geographic regions. Operating income was up $56.9 million to $60.3 million. Net income for the quarter was $18.1 million compared to a loss in the previous quarter of $14.4 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis (MD&A) should be read in conjunction with the unaudited interim consolidated financial statements of Trican as at, and for, the three and nine months ended September 30, 2008 and 2007 and should also be read in conjunction with the audited consolidated financial statements and MD&A contained in Trican's annual report for the year ended December 31, 2007. The interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP). This MD&A is dated November 3, 2008. Additional information, including the Company's Annual Information Form is available on SEDAR at www.sedar.com.
Trican provides a comprehensive array of specialized products, equipment and services that are used during the exploration and development of oil and natural gas reserves. Trican provides services to oil and gas producers as they maintain production on existing wells or attempt to increase production by drilling new wells. The Company's pressure pumping operations are predominantly in western Canada, Russia and the United States.
Effective January 1, 2008, we have realigned the structure of our financial reporting to better reflect the way in which management oversees the business. Formerly we provided comments on the operations and financial results of our Well Service, Production Services and Corporate Divisions. Effective January 1, we are now providing comments by our operating divisions: Canada, Russia, United States and Corporate. Algerian and Kazakhstan operations are included in the results for the Russian operations. Prior year information has been restated for comparative purposes.
COMPARATIVE QUARTERLY INCOME STATEMENTS ($ thousands, unaudited)
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Quarter-
Over-
Three months ended % of % of Quarter %
Sept. 30, 2008 Revenue 2007 Revenue Change Change
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Revenue 286,737 100.0% 228,669 100.0% 58,068 25%
Expenses
Materials and
operating 214,333 74.7% 156,550 68.5% 57,783 37%
General and
administrative 12,122 4.2% 8,995 3.9% 3,127 35%
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Operating income(i) 60,282 21.0% 63,124 27.6% (2,842) -5%
Interest expense 4,272 1.5% 2,470 1.1% 1,802 73%
Depreciation and
amortization 23,773 8.3% 16,791 7.3% 6,982 42%
Foreign exchange
(gain) / loss 7,639 2.7% (7,679) -3.4% 15,318 -199%
Other income (2,140) -0.7% (265) -0.1% (1,875) 708%
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Income before income
taxes and
non-controlling
interest 26,738 9.3% 51,807 22.7% (25,069) -48%
Provision for income
taxes 8,688 3.0% 13,068 5.7% (4,380) -34%
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Income before
non-controlling
interest 18,050 6.3% 38,739 16.9% (20,689) -53%
Non-controlling
interest (4) 0.0% 1,103 0.5% (1,107) -100%
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Net Income 18,054 6.3% 37,636 16.5% (19,582) -52%
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(i) See last page of Management's Discussion and Analysis.
CANADIAN OPERATIONS
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Three months ended,
($ thousands, Sept. 30, % of Sept. 30, % of June 30, % of
unaudited) 2008 Revenue 2007 Revenue 2008 Revenue
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Revenue 158,766 119,723 64,029
Expenses
Materials and
operating 111,011 69.9% 81,523 68.1% 64,022 100.0%
General and
administrative 5,154 3.2% 4,427 3.7% 4,274 6.7%
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Total expenses 116,165 73.2% 85,950 71.8% 68,296 106.7%
Operating income(i) 42,601 26.8% 33,773 28.2% (4,267) -6.7%
Number of jobs
Well service 5,751 5,230 2,525
Production services 823 943 615
Revenue per job
Well service 25,804 20,763 21,753
Production services 9,642 9,120 11,257
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(i) See last page of Management's Discussion and Analysis.
Operations Review
Canadian industry activity, as measured by the average number of active drilling rigs, increased 20% for the quarter relative to the same period in 2007. Demand for services was strongly influenced by the emergence of unconventional natural gas plays in western Canada and oil prospects in southern Saskatchewan. Work performed in these areas requires more fracturing services than traditional Western Canadian Sedimentary Basin well completion. We have been very active in these areas, and our significant operating capacity and technical expertise position us well to service these emerging trends. During the quarter, Trican was awarded a large multi-year fracturing contract with a major operator in the Horn River basin of Northeastern British Columbia. Also, we were successful in recovering a large technical fracturing contract that we lost last year due to price. This contract was returned to Trican because of our strong job performance and technical expertise. These are two illustrations of the strong market position Trican has earned in the deep, technical area of the basin.
Current Quarter versus Q3 2007
Revenue for the quarter increased 33%, to $158.8 million, reflecting the increase in activity and the size of fracturing jobs relative to last year.
Well service activity, which includes cementing, fracturing, deep coiled tubing and nitrogen services, represented 93% of total Canadian revenue for the quarter, up from 90% last year. This area of our operations is directly impacted by changes in industry drilling activity.
Revenue from well service activity for the quarter increased 37% to $147.7 million as the revenue per job increased 24% and the number of jobs increased 10%. The increase in revenue per job reflects the much larger fracturing jobs performed in new areas of interest within western Canada, partially offset by higher discounts that have been driven by a more competitive pricing environment.
Fracturing services, including coalbed methane fracturing, accounted for 58.4% of the Canadian well service operations revenue versus 50.1% in the third quarter of 2007. Cementing represented 28.1% of Canadian well service operations revenue versus 29.6% in the third quarter of 2007. Coiled tubing accounted for 6.1% of revenue versus 12.2% in the comparable period of 2007, while nitrogen decreased to 5.5% from 5.9%. Other services made up 1.9% of revenue in the quarter versus 2.2% for the same period last year.
Production services made up 7% of total Canadian revenue for the period, down from 10% last year. Production service activities, which include acidizing, intermediate depth coiled tubing and industrial services, are less impacted by changes in drilling activity. Revenue for the quarter decreased 6% to $11 million.
Materials and operating expenses for Canadian operations increased as a percentage of revenue to 69.9% compared to 68.1% for the same period in 2007. Higher activity levels increased operational leverage on our fixed cost structure; however, this gain was more than offset by higher fuel costs and overall margin contraction stemming from greater price discounts. General and administrative expenses increased $0.7 million, or 16%, due to higher office costs and higher profit sharing, as well as the fact that 2007 general and administrative expenses reflected a recovery of bad debt expense.
Current Quarter versus Q2 2008
Revenue increased significantly compared to the second quarter of 2008, as a result of larger job sizes and the increase in activity in western Canada. The higher revenue also reflects the typical drilling business cycle, in which activity drops sharply in the second quarter, as spring road bans limit the movement of equipment. Activity in the third quarter was strong enough that we were able to reduce our discounts on a quarterly basis for the first time since the second quarter of 2006.
Materials and operating expenses decreased as a percentage of revenue to 69.9% compared to 100.0% for the second quarter of 2008. This decrease reflects higher utilization that increased operating leverage and a slight reduction in discounts that positively impacted margins. In dollar terms, general and administrative expenses increased $0.9 million due mainly to an increase in profit sharing expense.
RUSSIAN OPERATIONS
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Three months ended,
($ thousands, Sept. 30, % of Sept. 30, % of June 30, % of
unaudited) 2008 Revenue 2007 Revenue 2008 Revenue
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Revenue 80,331 70,654 67,833
Expenses
Materials and
operating 62,724 78.1% 53,429 75.6% 58,690 86.5%
General and
administrative 1,775 2.2% 910 1.3% 1,662 2.5%
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Total expenses 64,499 80.3% 54,339 76.9% 60,352 89.0%
Operating income(i) 15,832 19.7% 16,315 23.1% 7,481 11.0%
Number of jobs 811 560 757
Revenue per job 99,150 128,238 90,067
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(i) See last page of Management's Discussion and Analysis.
Operations Review
Russian operations, which for reporting purposes include operations in Kazakhstan and Algeria, achieved strong growth in activity levels during the quarter. For the second quarter in a row, we achieved a record quarterly job count.
Additional fracturing and cementing capacity, as well as the introduction of coiled tubing services, drove higher levels of activity in the quarter relative to the same period last year.
The Company's results for the year have been negatively impacted by high domestic inflation which particularly impacted fuel and personnel costs. As a result, we undertook pricing reviews with some of our major customers and implemented a cost control program in an effort to reduce personnel, administrative and infrastructure costs. The results of these measures have contributed to stronger operating margins for the quarter.
Current Quarter versus Q3 2007
Revenue for the quarter increased 14% to $80.3 million, reflecting a 45% increase in job count partially offset by a 23% decrease in revenue per job. The higher job count was due to Trican's expanded geographical reach and additional equipment capacity in the fracturing and cementing service lines as well as the introduction of coiled tubing services. Revenue per job decreased relative to last year due to a greater proportion of cementing and coiled tubing jobs, as well as lower contract rates and slightly smaller fracturing jobs undertaken on the Yuganskneftegas project. Cementing and coiled tubing jobs typically generate lower revenue per job than fracturing jobs.
Fracturing represented 82% of total revenues for the quarter, down from 95% last year. Cementing accounted for 8% versus 5% in the previous year, and coiled tubing accounted for 10% versus nil in the third quarter of 2007. These changes illustrate Trican's expanded Russian service offering.
Materials and operating expenses for the quarter increased as a percentage of revenue to 78.1% compared to 75.6% for the same period in 2007, as lower contract rates and higher domestic inflation drove narrower margins. In dollar terms, general and administrative expenses increased $0.9 million due mainly to an increase in professional fees as well as administrative costs to support a new base in Gubkinsky.
Current Quarter versus Q2 2008
Revenue increased 18% from the prior quarter as a result of a 10% increase in revenue per job and a 7% increase in job count. Revenue per job increased from the previous quarter as a result of larger fracturing job sizes, offset partially by an increase in the proportion of cementing revenue. The number of jobs completed increased 19% due to a significant increase in cementing and coiled tubing activity.
Materials and operating expenses for the quarter decreased as a percentage of revenue to 78.1% compared to 86.5% in the second quarter of 2008. The decrease can be attributed to record activity levels which increased operating leverage, as well as positive outcomes from pricing reviews with customers and cost control measures. In dollar terms, general and administrative expenses increased $0.1 million due mainly to an increase in professional fees.
UNITED STATES OPERATIONS
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Three months ended,
($ thousands, Sept. 30, % of Sept. 30, % of June 30, % of
unaudited) 2008 Revenue 2007 Revenue 2008 Revenue
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Revenue 47,640 38,292 30,480
Expenses
Materials and
operating 38,565 81.0% 20,493 53.5% 23,686 77.7%
General and
administrative 2,965 6.2% 1,709 4.5% 2,385 7.8%
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Total expenses 41,530 87.2% 22,202 58.0% 26,071 85.5%
Operating income(i) 6,110 12.8% 16,090 42.0% 4,409 14.5%
Number of jobs 458 279 380
Revenue per job 104,017 137,248 80,212
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(i) See last page of Management's Discussion and Analysis.
Operations Review
Trican acquired Liberty Pressure Pumping LP late in the first quarter of 2007, marking the Company's entry into the US pressure pumping market. Operations early in the year were hampered by inadequate supplies of high quality fracturing proppant. We overcame the supply issues by the end of the first quarter, and by late in the third quarter, we had successfully regained the market share that had been lost due to the sand supply shortages. Trican has also secured a significant 2009 fracturing contract in the Haynesville Shale located in northwest Louisiana and east Texas.
During the quarter, Trican acquired the remaining interest of Liberty. This acquisition will help better align management objectives. Key members of Liberty's management group will remain with Trican.
Current Quarter versus Q3 2007
Revenue for the quarter increased 24% from the third quarter of 2007 to $47.6 million. A 64% increase in job count was partially offset by a 24% reduction in revenue per job. Job count was up due to increased equipment capacity compared to the third quarter of 2007. Revenue per job fell due to a 10% increase in discounts offered to customers offset partially by an increase in the size of jobs performed. An influx of operating capacity in our areas of operations has negatively impacted pricing compared to last year.
Materials and operating expenses as a percentage of revenue were 81.0% in the quarter compared to 53.5% in the prior year. The increase can be attributed mainly to margin contraction from increased discounts, but also to higher fuel, sand transportation and storage costs. In dollar terms, general and administrative expenses increased $1.3 million due to additional administrative costs associated with the addition of bases in Searcy, Arkansas and Woodward, Oklahoma.
Current Quarter versus Q2 2008
Revenue increased by 56% over the previous quarter. Job count was up 21% as we were able to regain market share. Revenue per job increased 30% due mainly to an increase in the average size of jobs performed. Revenue per job was also aided by a strengthening US dollar relative to the Canadian dollar.
Materials and operating expenses as a percentage of revenue increased to 81.0% from 77.7% in the previous quarter due to margin contraction resulting from higher discounts and sand handling and transportation costs, offset partially by increased operational leverage resulting from higher utilization of equipment.
CORPORATE DIVISION
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Three months ended,
($ thousands, Sept. 30, % of Sept. 30, % of June 30, % of
unaudited) 2008 Revenue 2007 Revenue 2008 Revenue
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Expenses
Materials and
operating 2,033 0.7% 1,105 0.5% 1,463 0.9%
General and
administrative 2,228 0.8% 1,949 0.9% 2,767 1.7%
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Total expenses 4,261 1.5% 3,054 1.3% 4,230 2.6%
Operating loss(i) (4,261) (3,054) (4,230)
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(i) See last page of Management's Discussion and Analysis.
Corporate Division expenses consist of salaries, stock-based compensation and office costs related to corporate employees, as well as public company costs.
Current Quarter versus Q3 2007
Corporate Division expenses were up $1.2 million from the same quarter last year due to an increase in salaries relating to the corporate restructuring, higher travel costs to support geographic expansion, and an increase in profit sharing expense.
Current Quarter versus Q2 2008
Corporate Division expenses were consistent with the previous quarter as an increase in profit sharing expense was fully offset by a recovery on "mark to market" valuation of deferred share units.
OTHER EXPENSES AND INCOME
Interest expense increased $1.8 million to $4.3 million relative to the comparable quarter in 2007, reflecting higher average debt balances.
Depreciation and amortization increased by $7.0 million for the quarter relative to the same period in 2007 as a result of investment in equipment and operations facilities.
Trican recognized a $7.6 million foreign exchange loss in the third quarter of 2008. Of this foreign exchange loss, $6.0 million results from advances to foreign subsidiaries. The offsetting gain on this intercompany advance is reflected in the change of Accumulated Other Comprehensive Income on our Balance Sheet.
Other income increased $1.9 million as a result of interest on outstanding loans.
INCOME TAXES
Trican's income tax expense decreased to $8.7 million for the quarter relative to $13.1 million for the comparable period of 2007 primarily as a result of lower earnings. The Company's effective tax rate for the quarter was 32.5%.
OTHER COMPREHENSIVE INCOME
The consolidated statement of other comprehensive income for the quarter includes $8.7 million in unrealized gains on translating the financial statements of our self-sustaining foreign operations. The change related to translating the net assets of our US and Russian operations using the current rate method, given that the subsidiaries are considered self-sustaining for Canadian GAAP purposes. The Canadian dollar weakened 4% against the US dollar, but strengthened 4% against the Russian ruble. The increase in value of our net asset position from our US subsidiaries in Canadian dollar terms more than offset the reduction in value of our Russian subsidiaries.
COMPARATIVE YEAR-TO-DATE INCOME STATEMENTS ($ thousands, unaudited)
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Year-
Over-
% of % of Year %
Nine months ended Sept. 30, 2008 Revenue 2007 Revenue Change Change
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Revenue 693,261 100.0% 640,579 100.0% 52,682 8%
Expenses
Materials and operating 547,589 79.0% 451,324 70.5% 96,265 21%
General and
administrative 37,099 5.4% 28,327 4.4% 8,772 31%
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Operating income(i) 108,573 15.7% 160,928 25.1% (52,355) -33%
Interest expense 11,459 1.7% 5,832 0.9% 5,627 96%
Depreciation and
amortization 65,226 9.4% 44,906 7.0% 20,320 45%
Foreign exchange (gain)
/ loss 381 0.1% (19,160) -3.0% 19,541 -102%
Other income (4,082) -0.6% (1,411) -0.2% (2,671) 189%
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Income before income
taxes and
non-controlling
interest 35,589 5.1% 130,761 20.4% (95,172) -73%
Provision for income
taxes 10,627 1.5% 34,470 5.4% (23,843) -69%
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Income before
non-controlling
interest 24,962 3.6% 96,291 15.0% (71,329) -74%
Non-controlling
interest 62 0.0% 2,628 0.4% (2,566) -98%
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Net income 24,900 3.6% 93,663 14.6% (68,763) -73%
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(i) See last page of Management's Discussion and Analysis.
CANADIAN OPERATIONS
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Nine months ended September % of % of Y-Over-Y
30, ($ thousands, unaudited) 2008 Revenue 2007 Revenue Change
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Revenue 379,360 363,183 4%
Expenses
Materials and operating 284,001 74.9% 258,847 71.3% 10%
General and administrative 14,954 3.9% 14,438 4.0% 6%
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Total expenses 298,955 78.8% 273,285 75.2% 10%
Operating income(1) 80,405 21.2% 89,898 24.8% -11%
Number of jobs
Well service 15,337 14,542 5%
Production services 2,256 2,231 1%
Revenue per job
Well service 22,628 22,946 -1%
Production services 11,056 9,932 11%
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(1) See last page of Management's Discussion and Analysis.
Revenue for the nine months ended September 30, 2008 increased 4% from the previous year to $379.4 million. Industry activity, as measured by the average number of active drilling rigs, increased 5.7% on a year-to-date basis relative to the same period in 2007. The increase in job count for well service work was consistent with the increase in active drilling rigs. The impact on revenue per job of larger fracturing jobs in the new areas of interest within western Canada was largely offset by higher average discounts provided to customers.
Materials and operating expenses increased as a percentage of revenue to 74.9% from 71.3% for the comparable period in 2007 as a result of higher fuel costs and overall margin contraction due to increased price competition. General and administrative costs increased $0.5 million from the prior year due to the fact that 2007 general and administrative costs included a recovery of $0.6 million bad debt expense.
RUSSIAN OPERATIONS
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Nine months ended September % of % of Y-Over-Y
30, ($ thousands unaudited) 2008 Revenue 2007 Revenue Change
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Revenue 215,706 193,543 11%
Expenses
Materials and operating 180,064 83.5% 146,711 75.8% 23%
General and administrative 5,321 2.5% 3,846 2.0% 38%
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Total expenses 185,385 85.9% 150,557 77.8% 23%
Operating income(1) 30,321 14.1% 42,986 22.2% -29%
Number of jobs 2,202 1,554 42%
Revenue per job 98,195 125,601 -22%
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(1) See last page of Management's Discussion and Analysis.
Revenue for the first nine months from Russian operations increased by 11% over the prior year to $215.7 million due to a 42% increase in job count partially offset by a 22% decrease in revenue per job. Job count has increased due to expanded equipment capacity in the fracturing and cementing service lines as well as the addition of coiled tubing services. The decrease in revenue per job relative to last year was due to lower contract rates, smaller fracturing job sizes undertaken on the Yuganskneftegas project in the second quarter, and the growth in the number of lower revenue-per-job cementing and coiled tubing jobs.
Materials and operating expenses increased as a percentage of revenue from 75.8% to 83.5% due to margin contraction caused by lower contract rates combined with inflationary pressures on fuel and personnel costs. In dollar terms, general and administrative expenses increased $1.5 million due primarily to increased personnel costs.
UNITED STATES OPERATIONS
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Nine months ended September % of % of Y-Over-Y
30, ($ thousands, unaudited) 2008 Revenue 2007 Revenue Change
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Revenue 98,195 83,853 17%
Expenses
Materials and operating 78,147 79.6% 42,426 50.6% 84%
General and administrative 7,735 7.9% 3,159 3.8% 145%
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Total expenses 85,882 87.5% 45,585 54.4% 88%
Operating income(1) 12,313 12.5% 38,268 45.6% -68%
Number of jobs 1,043 591 76%
Revenue per job 94,151 141,884 -34%
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(1) See last page of Management's Discussion and Analysis.
US revenue for the first nine months increased by 17% to $98.2 million versus the prior year due to a 76% increase in job count partially offset by a 34% decrease in revenue per job. Job count increased due to greater equipment capacity and a full nine months of operations in 2008. The majority of the reduction in revenue per job can be attributed to an increase in discounts offered to customers. The weaker US dollar relative to the Canadian dollar also played a small role.
Materials and operating expenses as a percentage of revenue were 79.6% in the quarter compared to 50.6% in the prior year. The increase can be attributed mainly to margin contraction from increased discounts, but also higher fuel and higher sand transportation and storage costs. The increase in general and administrative expenses can be attributed mainly to administrative costs to support additional bases in Searcy, Arkansas and Woodward, Oklahoma.
CORPORATE DIVISION
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Nine months ended September % of % of Y-Over-Y
30, ($ thousands, unaudited) 2008 Revenue 2007 Revenue Change
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Expenses
Materials and operating 5,377 0.8% 3,340 0.5% 61%
General and administrative 9,089 1.3% 6,884 1.1% 32%
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Total expenses 14,466 2.1% 10,224 1.6% 41%
Operating loss(1) (14,466) (10,224) 41%
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(1) See last page of Management's Discussion and Analysis.
Corporate Division expenses were up $4.2 million compared to last year due an increase in salaries relating to the corporate restructuring and higher travel costs to support geographic expansion.
OTHER EXPENSES AND INCOME
Interest expense increased $5.6 million to $11.5 million relative to the comparable period in 2007 as a result of higher average debt balances.
Depreciation and amortization increased by $20.3 million compared to 2007 as a result of investment in equipment and operations facilities, the addition of Liberty's operations, and the amortization of intangible assets associated with the Liberty and CBM Solutions acquisitions.
A $0.4 million foreign exchange loss resulted from a strengthening US dollar relative to the Canadian dollar on our US dollar net monetary liabilities which was largely offset by gains on intercompany advances.
Other income increased $2.7 million as a result of interest on a loan issued to an unrelated third party.
INCOME TAXES
Trican's income tax expense decreased to $10.6 million for the year relative to $34.5 million for the comparable period of 2007 primarily as a result of lower earnings. The Company's effective tax rate for the first quarter was 29.9%.
OTHER COMPREHENSIVE INCOME
The consolidated statement of other comprehensive income for the first nine months includes $22.2 million in unrealized gains on translating the financial statements of our self-sustaining foreign operations. The change related to translating the net assets of our US and Russian operations using the current rate method, given that the subsidiaries are considered self-sustaining for Canadian GAAP purposes. The Canadian dollar weakened 7% and almost 3% respectively against the US dollar and the Russian ruble, increasing the value of our net asset position in these subsidiaries in Canadian dollar terms.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Funds provided by operations during the quarter decreased to $54.9 million from $61.9 million in the third quarter of last year primarily as a result of lower earnings.
At September 30, 2008, Trican had working capital of $194.9 million versus $146.7 million at September 30, 2007.
Investing Activities
Capital expenditures for the quarter totaled $28.7 million compared with $42.7 million for the same period in 2007.
During the first nine months of the year, Trican paid $19.1 million to increase our ownership in Liberty Pressure Pumping to 100%. Trican also paid $3.4 million to increase our ownership in R-Can Services Ltd. by 0.6% to 98.8%.
Trican had a number of ongoing capital projects at the end of the third quarter, and we estimate that we will require $40 million of additional investment to complete them. Management is currently reviewing these projects in light of market conditions and will cancel any non-essential items.
Financing Activities
On February 15, 2008, we expanded the syndicated $120 million (or US dollar equivalent) three year extendible revolving acquisition and capital expenditure Term Credit Facility to $220 million (or US dollar equivalent) until November 17, 2008, at which time the facility will be reduced to $120 million. Other than the facility amount, terms of this facility were unchanged.
Trican is in the process of negotiating two demand revolving facilities and an increase to our current operating line. We expect that these facilities will be in place by November 17, 2008. When complete, we expect total additional financing available under these new facilities to be approximately $100 million.
As at October 31, 2008, Trican had 125,553,767 common shares and 9,250,116 employee stock options outstanding.
BUSINESS RISKS
A complete discussion of business risks faced by Trican may be found under "Management's Discussion and Analysis" in our 2007 Annual Report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING DURING THIRD QUARTER 2008
There have been no changes in Trican's internal controls over financial reporting during the period ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
INTERNATIONAL FINANCIAL REPORTING STANDARDS UPDATE FOR THE THIRD QUARTER 2008
The Canadian Accounting Standards Board has confirmed that use of International Financial Reporting Standards (IFRS) will be required for years beginning on or after January 1, 2011 for profit-oriented publicly accountable entities. Therefore, the Company must be in a position to report its results and comparatives in accordance with IFRS beginning January 1, 2011. The Company is assessing the potential impacts of this transition and developing its project plan accordingly.
CHANGE IN ACCOUNTING POLICIES
Inventories
Effective January 1, 2008, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") section 3031, "Inventories," which replaced CICA section 3030 of the same name. This section provides new guidance on the recognition, measurement, and disclosure of inventories which include: the elimination of the LIFO method of accounting for inventory; the requirement to measure inventories at the lower of cost and net realizable value; the reversal of previous write-downs to net realizable value when there is a subsequent increase in the value of inventories; and the inclusion of spare parts inventory not consumed as part of the regular maintenance program as property and equipment. In addition, disclosure requirements have been enhanced. Inventory policies, carrying amounts, amounts recognized as an expense, write-downs and the reversals of write-downs are now required to be disclosed. The revised guidance requires the Company to determine the proportion of the spare parts inventories that are not consumed as part of regular maintenance and include as property and equipment.
Financial Instruments
Effective January 1, 2008, the Company adopted CICA section 3862, "Financial Instruments - Disclosures" and CICA section 3863, "Financial Instruments - Presentation," which replaced CICA section 3861, "Financial Instruments - Disclosure and Presentation." Section 3862 outlines the disclosure requirements for financial instruments and non-financial derivatives. This guidance prescribes an increased importance on risk disclosures associated with recognized and unrecognized financial instruments and how such risks are managed. Specifically, section 3862 requires disclosure of the significance of financial instruments on the Company's financial position. In addition, the guidance outlines revised requirements for the disclosure of qualitative and quantitative information regarding exposure to risks arising from financial instruments. The presentation requirements under section 3863 are relatively unchanged from section 3861. Refer to Note 7, "Financial Instruments - Disclosures" for the additional disclosures under section 3862.
Capital Management Disclosures
Effective January 1, 2008, the Company adopted CICA section 1535, "Capital Disclosures." This new guidance requires disclosure about the Company's objectives, policies and processes for managing capital. These disclosures include a description of what the Company manages as capital, the nature of externally imposed capital requirements, how the requirements are incorporated into the Company's management of capital, whether the requirements have been complied with, or consequence of noncompliance and an explanation of how the Company is meeting its objectives for managing capital. In addition, quantitative disclosures regarding capital are required. Refer to Note 8, "Capital Management Disclosures.
OUTLOOK
Activity in all of our areas of operations continues to be strong as we move into the last quarter of the year. We have been successful in winning major contracts with operators developing unconventional gas plays in both our US and Canadian operations. Our Russian operations continue to support active exploration and development programs and we have recently witnessed an increase in demand for our cementing and coiled tubing services. We expect activity levels in our Canadian operations to remain strong for the balance of the year and into the winter drilling season and our US and Russian Operations to remain strong until the New Year. Contracts for work relating to customer's 2009 drilling programs in Russia are currently being tendered and we will have greater visibility on our work scope, as the fourth quarter unfolds. 2009 activity in the US will be dependent on our customers capital budgets which are expected to be finalized in the fourth quarter.
However, recent commodity price weakness and the ongoing uncertainty created by the upheaval in the financial markets have introduced a higher degree of uncertainty around the demand for services in 2009. We expect North American demand will be strongly influenced by near-term natural gas prices, the strength of our customers' balance sheets and their ability to secure credit. Demand in Russia will be influenced by near term oil prices as well as ongoing credit availability.
Our customers are currently reviewing their budgets for 2009 and we expect to have a better understanding of their plans as we approach year-end. Until we gain better clarity on the demand for services, we plan to maintain a conservative capital program for 2009 as we continue to manage our business to meet near-term demand for services.
Summary of Quarterly Results
($ millions, except per 2008 2007 2006
share amounts; unaudited) Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
----------------------------------------------------------------------------
Revenue 286.7 162.3 244.2 195.8 228.7 139.4 272.5 208.3
Net income / (loss) 18.1 (14.4) 21.2 18.2 37.6 0.9 55.1 35.3
Earnings / (loss) per
share
Basic 0.14 (0.12) 0.18 0.15 0.31 0.01 0.47 0.31
Diluted 0.14 (0.12) 0.18 0.15 0.30 0.01 0.46 0.30
----------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
This document contains statements that constitute forward-looking statements within the meaning of applicable securities legislation. These forward-looking statements include, among others, the Company's prospects, expected revenues, expenses, profits, expected developments and strategies for its operations, and other expectations, beliefs, plans, goals, objectives, assumptions, information and statements about possible future events, conditions, results of operations or performance. These forward-looking statements are identified by their use of terms and phrases such as "anticipate," "achieve", "achievable," "believe," "estimate," "expect," "intend", "plan", "planned", and other similar terms and phrases. Forward-looking statements are based on current expectations, estimates, projections and assumptions that involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated. These risks and uncertainties include: fluctuating prices for crude oil and natural gas; changes in drilling activity; general global economic, political and business conditions; weather conditions; regulatory changes; and availability of products, qualified personnel, manufacturing capacity and raw materials. If any of these uncertainties materialize, or if assumptions are incorrect, actual results may vary materially from those expected.
- Trican makes reference to operating income, net income before stock-based compensation expense and funds from operations. These are measures that are not recognized under Canadian generally accepted accounting principles (GAAP). Management believes that, in addition to net income, operating income, net income before stock-based compensation expense, net income before stock-based compensation expense per share and funds from operations are useful supplemental measures. Operating income provides investors with an indication of earnings before depreciation, taxes and interest. Net income before stock-based compensation expense provides investors with information on net income excluding the non-cash affect of stock-based compensation expense. Funds from operations provide investors with an indication of cash available for capital commitments, debt repayments and other expenditures. Investors should be cautioned that operating income, net income before stock-based compensation expense, and funds from operations should not be construed as an alternative to net income determined in accordance with GAAP as an indicator of Trican's performance. Trican's method of calculating operating income, net income before stock-based compensation expense and funds from operations may differ from that of other companies and accordingly may not be comparable to measures used by other companies.
Headquartered in Calgary, Alberta, Trican is a multinational provider of a comprehensive array of specialized products, equipment and services used during the exploration and development of oil and gas reserves. Trican services customers in Canada, Russia, Kazakhtan, the United States and Algeria. These countries have some of the world's most active pressure pumping markets.
CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------
September 30, December 31,
(Stated in thousands of dollars; unaudited) 2008 2007
----------------------------------------------------------------------------
ASSETS
Current assets
Cash and short-term deposits $ 17,600 $ 23,370
Accounts receivable 220,886 138,226
Income taxes recoverable 10,210 5,651
Inventory 106,572 93,209
Prepaid expenses 20,529 15,576
----------------------------------------------------------------------------
375,797 276,032
Property and equipment 603,203 555,104
Intangible assets (note 3) 37,590 40,659
Future income tax assets 17,096 1,070
Other assets 24,946 8,782
Goodwill (note 3) 191,150 167,417
----------------------------------------------------------------------------
$ 1,249,782 $ 1,049,064
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank loans (note 5) $ - 15,584
Accounts payable and accrued liabilities 100,255 70,529
Deferred consideration (note 3) 1,982 2,146
Dividend payable - 6,123
Current income taxes payable 3,636 -
Current portion of long-term debt (note 6) 75,000 -
----------------------------------------------------------------------------
180,873 94,382
Long-term debt (note 6) 225,990 188,810
Future income tax liabilities 71,051 67,531
Deferred consideration (note 3) 1,982 4,292
Non-controlling interest (note 3) 813 10,380
Shareholders' equity
Share capital (note 4) 247,265 196,165
Contributed surplus 14,114 20,675
Retained earnings 564,852 546,211
Accumulated other comprehensive income (57,158) (79,382)
----------------------------------------------------------------------------
769,073 683,669
----------------------------------------------------------------------------
$ 1,249,782 $ 1,049,064
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
----------------------------------------------------------------------------
Three Three Nine Nine
Months Months Months Months
(Stated in thousands, Ended Ended Ended Ended
except per share amounts; Sept. 30, Sept. 30, Sept. 30, Sept. 30,
unaudited) 2008 2007 2008 2007
----------------------------------------------------------------------------
Revenue $ 286,737 $ 228,669 $ 693,261 $ 640,579
Expenses
Materials and operating 214,333 156,550 547,589 451,324
General and administrative 12,122 8,995 37,099 28,327
----------------------------------------------------------------------------
Operating income 60,282 63,124 108,573 160,928
Interest expense on long-term
debt and bank loans 4,272 2,470 11,459 5,832
Depreciation and amortization 23,773 16,791 65,226 44,906
Foreign exchange (gain)/loss 7,639 (7,679) 381 (19,160)
Other income (2,140) (265) (4,082) (1,411)
----------------------------------------------------------------------------
Income before income taxes and
non-controlling interest 26,738 51,807 35,589 130,761
Provision for current income taxes 6,047 963 22,788 75,524
Provision for future income taxes 2,641 12,105 (12,161) (41,054)
----------------------------------------------------------------------------
Income before non-controlling
interest 18,050 38,739 24,962 96,291
Non-controlling interest (4) 1,103 62 2,628
----------------------------------------------------------------------------
Net income $ 18,054 $ 37,636 $ 24,900 $ 93,663
----------------------------------------------------------------------------
Earnings per share
Basic $ 0.14 $ 0.31 $ 0.20 $ 0.78
Diluted $ 0.14 $ 0.30 $ 0.20 $ 0.76
----------------------------------------------------------------------------
Dividend per share $ - $ - $ 0.05 $ 0.05
----------------------------------------------------------------------------
Weighted average shares
outstanding - basic 125,491 122,025 124,448 120,163
Weighted average shares
outstanding - diluted 125,978 124,689 125,281 123,585
----------------------------------------------------------------------------
----------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME
----------------------------------------------------------------------------
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Stated in thousands, unaudited) 2008 2007 2008 2007
----------------------------------------------------------------------------
Net Income $ 18,054 $ 37,636 $ 24,900 $ 93,663
Other comprehensive income
Unrealized gains/(losses) on
translating financial statements
of self-sustaining foreign
operations 8,723 (28,756) 22,224 (69,848)
----------------------------------------------------------------------------
Other comprehensive income $ 26,777 $ 8,880 $ 47,124 $ 23,815
----------------------------------------------------------------------------
----------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS AND ACCUMULATED OTHER
COMPREHENSIVE INCOME
----------------------------------------------------------------------------
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
(Stated in thousands of dollars; Sept. 30, Sept. 30, Sept. 30, Sept. 30,
unaudited) 2008 2007 2008 2007
----------------------------------------------------------------------------
Retained earnings, beginning of
period $ 546,798 $ 496,554 $ 546,211 $ 446,606
Dividend - (10) (6,259) (6,089)
Net income 18,054 37,636 24,900 93,663
----------------------------------------------------------------------------
Retained earnings, end of period $ 564,852 $ 534,180 $ 564,852 $ 534,180
----------------------------------------------------------------------------
Accumulated other comprehensive
income, beginning of period $ (65,881) $ (48,229) $ (79,382) (7,137)
Unrealized gains/(losses) on
translating financial statements
of self-sustaining foreign
operations 8,723 (28,756) 22,224 (69,848)
----------------------------------------------------------------------------
Accumulated other comprehensive
income, end of period $ (57,158) $ (76,985) $ (57,158) $(76,985)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
CONSOLIDATED CASH FLOW STATEMENTS
----------------------------------------------------------------------------
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
(Stated in thousands, except per Sept. 30, Sept. 30, Sept. 30, Sept. 30,
share amounts; unaudited) 2008 2007 2008 2007
----------------------------------------------------------------------------
Cash Provided By / (Used In):
Operations
Net income $ 18,054 $ 37,636 $ 24,900 $ 93,663
Charges to income not involving
cash:
Depreciation and amortizatin 23,773 16,791 65,226 44,906
Future income tax provision 2,641 12,105 (12,161) (41,054)
Non-controlling interest (4) 1,103 62 2,628
Stock-based compensation 2,734 2,970 8,739 9,448
(Gain)/loss on disposal of
property and equipment 30 78 42 (123)
Gain on revaluation of deferred
consideration (555) - (555) -
Realized foreign exchange gain
from financing activities - - - (9,270)
Unrealized foreign exchange
(gain)/loss 8,222 (8,760) 1,006 (10,268)
----------------------------------------------------------------------------
Funds provided by operations 54,895 61,923 87,259 89,930
Net change in non-cash working
capital from operations (45,742) (48,054) (72,135) 25,058
----------------------------------------------------------------------------
Net cash provided by operating
activities 9,153 13,869 15,124 114,988
Investing
Purchase of property and equipment (28,740) (42,671) (96,678) (127,022)
Proceeds from the sale of property
and equipment 165 29 287 1,028
Purchase of other assets - - (1,319) -
Issuance of loan (678) - (13,639) -
Business acquisitions, net of cash
acquired (13,183) (339) (22,470) (256,079)
Payment of deferred consideration - - (1,166) -
Net change in non-cash working
capital from the purchase of property
and equipment 950 (121) 3,008 (1,194)
----------------------------------------------------------------------------
(41,486) (43,102) (131,977) (383,267)
Financing
Net proceeds from issuance of share
capital 5,604 3,333 34,746 19,165
Net issuance of long-term debt 34,543 28,996 89,416 193,386
Partnership distribution - - (1,046) (427)
Dividend paid (6,259) (6,089) (12,382) (11,849)
----------------------------------------------------------------------------
33,888 26,240 110,734 200,275
Effect of exchange rate changes on
cash 155 (833) 349 (1,606)
----------------------------------------------------------------------------
Increase/(decrease) in cash and
short-term deposits 1,710 (3,826) (5,770) (69,610)
Cash and short-term deposits,
beginning of period 15,890 28,926 23,370 94,710
----------------------------------------------------------------------------
Cash and short-term deposit, end of
period $ 17,600 $ 25,100 $ 17,600 $ 25,100
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental information
Income taxes paid 5,905 15,765 23,711 86,876
Interest paid 4,272 2,470 9,939 5,832
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2008 (Unaudited)
The Company's interim financial statements do not conform in all respects to the requirements of generally accepted accounting principles for annual financial statements. The Company's interim financial statements should be read in conjunction with the most recent annual financial statements. The Company's interim financial statements follow the same accounting policies and methods of their application as of the most recent annual financial statements, except where any change has been noted in the interim financial statements.
The Company's Canadian operations and to a lesser extent Russian operations are seasonal in nature with the highest activity in the winter months (first and fourth fiscal quarters) and the lowest activity during spring break-up (second fiscal quarter) due to road weight restrictions and reduced accessibility to remote areas.
NOTE 1 - CHANGES IN ACCOUNTING POLICIES
Inventories
Effective January 1, 2008, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") section 3031, "Inventories," which replaced CICA section 3030 of the same name. This section provides new guidance on the recognition, measurement, and disclosure of inventories which include: the elimination of the LIFO method of accounting for inventory; the requirement to measure inventories at the lower of cost and net realizable value; the reversal of previous write-downs to net realizable value when there is a subsequent increase in the value of inventories; and the inclusion of spare parts inventory not consumed as part of the regular maintenance program as property and equipment. In addition, disclosure requirements have been enhanced. Inventory policies, carrying amounts, amounts recognized as an expense, write-downs and the reversals of write-downs are now required to be disclosed. The revised guidance requires the Company to determine the proportion of the spare parts inventories that are not consumed as part of regular maintenance and include as property and equipment.
Financial Instruments
Effective January 1, 2008, the Company adopted CICA section 3862, "Financial Instruments -Disclosures" and CICA section 3863, "Financial Instruments - Presentation," which replaced CICA section 3861, "Financial Instruments - Disclosure and Presentation." Section 3862 outlines the disclosure requirements for financial instruments and non-financial derivatives. This guidance prescribes an increased importance on risk disclosures associated with recognized and unrecognized financial instruments and how such risks are managed. Specifically, section 3862 requires disclosure of the significance of financial instruments on the Company's financial position. In addition, the guidance outlines revised requirements for the disclosure of qualitative and quantitative information regarding exposure to risks arising from financial instruments. The presentation requirements under section 3863 are relatively unchanged from section 3861. Refer to Note 7, "Financial Instruments - Disclosures" for the additional disclosures under section 3862.
Capital Management Disclosures
Effective January 1, 2008, the Company adopted CICA section 1535, "Capital Disclosures." This new guidance requires disclosure about the Company's objectives, policies and processes for managing capital. These disclosures include a description of what the Company manages as capital, the nature of externally imposed capital requirements, how the requirements are incorporated into the Company's management of capital, whether the requirements have been complied with, or consequence of noncompliance and an explanation of how the Company is meeting its objectives for managing capital. In addition, quantitative disclosures regarding capital are required. Refer to Note 8, "Capital Management Disclosures."
NOTE 2 - SEGMENTED INFORMATION
The Company has changed the structure of its internal organization in a manner that caused the composition of its reportable segments to change. Trican has evolved over the past 10 years from a Canadian focused pressure pumping company to an international company with pressure pumping operations in Canada, Russia and the United States.
The new changes have resulted in 3 geographic regions: Canada, Russia (which includes Kazakhstan and Algeria), and the United States. Each geographic region has a general manager that is responsible for the operation and strategy of their region's business. Personnel working within the particular geographical region report to the General Manager; the General Manager reports to the corporate executive. The change in internal organization was complete for January 1, 2008. The corresponding information for prior period has been restated to reflect this change.
The Company provides a comprehensive array of specialized products, equipment, services and technology to customers through three operating divisions:
- Canadian Operations provides cementing, fracturing, deep coiled tubing, nitrogen, geological, acidizing, intermediate depth coiled tubing and industrial services which are performed on new and existing oil and gas wells.
- Russian Operations provides cementing, fracturing, deep coiled tubing, and nitrogen services which are performed on new and existing oil and gas wells.
- United States Operations provides fracturing and nitrogen services which are performed on new and existing oil and gas wells.
Corporate Division expenses consist of salary expenses, stock-based compensation and office costs related to corporate employees, as well as public company costs.
United
(Stated in Canadian Russian States
thousands) Operations Operations Operations Corporate Total
----------------------------------------------------------------------------
Three months
ended September
30, 2008
----------------------------------------------------------------------------
Revenue 158,766 80,331 47,640 $ - $ 286,737
Operating
income (loss) 42,601 15,832 6,110 (4,261) 60,282
Interest
expense - - - 4,272 4,272
Depreciation
and amortization 10,896 6,748 6,090 39 23,773
Assets 513,489 287,337 407,629 41,327 1,249,782
Goodwill 22,436 13,120 155,594 - 191,150
Capital
expenditures 14,972 3,601 10,167 - 28,740
Goodwill
expenditures - - 7,134 - 7,134
----------------------------------------------------------------------------
Three months
ended September
30, 2007
----------------------------------------------------------------------------
Revenue $ 119,723 $ 70,654 $ 38,292 $ - $ 228,669
Operating
income (loss) 33,773 16,315 16,090 (3,054) 63,124
Interest
expense - - - 2,470 2,470
Depreciation
and amortization 9,436 3,490 3,865 - 16,791
Assets 501,988 206,522 308,079 25,103 1,041,692
Goodwill 22,831 10,216 136,272 - 169,319
Capital
expenditures 4,996 22,981 14,694 - 42,671
Goodwill
expenditures - - 339 - 339
----------------------------------------------------------------------------
United
(Stated in Canadian Russian States
thousands) Operations Operations Operations Corporate Total
----------------------------------------------------------------------------
Nine months
ended September
30, 2008
Revenue $ 379,360 $ 215,706 $ 98,195 $ - $ 693,261
Operating
income (loss) 80,405 30,321 12,313 (14,466) 108,573
Interest
expense - - - 11,459 11,459
Depreciation
and
amortization 30,758 17,805 16,550 113 65,226
Assets 513,489 287,337 407,629 41,327 1,249,782
Goodwill 22,436 13,120 155,594 - 191,150
Capital
expenditures 36,843 22,355 37,310 170 96,678
Goodwill
expenditures 301 2,988 10,613 - 13,902
----------------------------------------------------------------------------
Nine months
ended September
30, 2007
----------------------------------------------------------------------------
Revenue $ 363,183 $ 193,543 $ 83,853 $ - $ 640,579
Operating
income (loss) 89,898 42,986 38,268 (10,224) 160,928
Interest
expense - - - 5,832 5,832
Depreciation
and
amortization 26,987 9,166 8,753 - 44,906
Assets 501,988 206,522 308,079 25,103 1,041,692
Goodwill 22,831 10,216 136,272 - 169,319
Capital
expenditures 29,573 56,926 40,523 - 127,022
Goodwill
expenditures 11,600 4,879 160,888 - 177,367
----------------------------------------------------------------------------
The Company's operations are carried on in three geographic locations:
Canada, Russia and the United States. Corporate expenses have been allocated
to the appropriate region for the purposes of this analysis:
United
(Stated in thousands) Canada Russia(1) States Total
----------------------------------------------------------------------------
Three months ended September 30,
2008
----------------------------------------------------------------------------
Revenue $ 158,766 $ 80,331 $ 47,640 $ 286,737
Operating income 38,581 15,660 6,041 60,282
Property and equipment 305,014 122,828 175,361 603,203
Goodwill 22,436 13,120 155,594 191,150
----------------------------------------------------------------------------
Three months ended September 30,
2007
----------------------------------------------------------------------------
Revenue $ 119,722 $ 70,655 $ 38,292 $ 228,669
Operating income 31,023 16,086 16,015 63,124
Property and equipment 324,758 99,164 116,823 540,745
Goodwill 22,831 10,216 136,272 169,319
----------------------------------------------------------------------------
United
(Stated in thousands) Canada Russia(1) States Total
----------------------------------------------------------------------------
Nine months ended September 30,
2008
----------------------------------------------------------------------------
Revenue $ 379,360 $ 215,706 $ 98,195 $ 693,261
Operating income 66,643 29,797 12,133 108,573
Property and equipment 305,014 122,828 175,361 603,203
Goodwill 22,436 13,120 155,594 191,150
----------------------------------------------------------------------------
Nine months ended September 30,
2007
----------------------------------------------------------------------------
Revenue $ 363,183 $ 193,543 $ 83,853 $ 640,579
Operating income 80,444 42,468 38,016 160,928
Property and equipment 324,758 99,164 116,823 540,745
Goodwill 22,831 10,216 136,272 169,319
----------------------------------------------------------------------------
(1) includes operations in Kazakhstan and Algeria
NOTE 3 - ACQUISITIONS
During the first quarter and pursuant to an agreement amended in March 2007, the Company increased its ownership interest in R-Can Services Limited (R-Can) by 0.6% to 98.8%. The Company paid $3.4 million for this acquisition, increasing goodwill by $3.0 million and reducing non-controlling interest by $0.4 million.
During the second quarter, the Company, through a wholly owned U.S. subsidiary, increased its ownership interest in Liberty Pressure Pumping LP (Liberty) by 1.8% to 95.0%. The Company paid $5.9 million for this acquisition, increasing goodwill by $3.4 million and reducing non-controlling interest by $2.5 million.
During the third quarter, the Company, through a wholly owned U.S. subsidiary, acquired the remaining 5% ownership interest in Liberty Pressure Pumping LP (Liberty). The Company paid $13.2 million for this acquisition, increasing goodwill by $7.2 million and reducing non-controlling interest by $6.0 million.
2007 Acquisitions
During the quarter ended March 31, 2007, the Company completed the following acquisitions:
(a) The Company acquired 93.2% of Liberty Pressure Pumping LP's (Liberty) assets, a provider of pressure pumping services in Texas. Headquartered in Denton Texas, Liberty provides stimulation services used in the development and completion of oil and gas wells. Liberty management will retain a 6.8% interest and the Company will acquire the remaining interest over three years at a price based upon an agreed methodology. The acquisition of Liberty was recorded using the purchase method with results of operations of Liberty included in the consolidated financial statements as of March 9, 2007. The Company has finalized the purchase price equation for this acquisition.
The purchase price equation is as follows:
Cost of Acquisition (Stated in thousands):
Cash $ 233,908
Common shares issued out of treasury 82,973(a)
Transaction costs 3,854
----------------------------------------------------------------------------
$ 320,735
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Allocated (Stated in thousands):
Goodwill $ 161,024(b)
Property and equipment 100,488
Other intangibles 34,604
Accounts receivable 30,186
Cash 7,186
Prepaid expenses, inventory and other 4,809
Accounts payable and accrued liabilities (8,435)
Non-controlling interest (9,127)
----------------------------------------------------------------------------
$ 320,735
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(a) 4,008,864 shares at a price of $20.70 per share which was based on the
weighted average share price for the two days preceding and two days
following the announcement date of February 2, 2007.
(b) Goodwill has been attributed to the U.S. Operations reporting segment
and is considered to be deductible for tax purposes.
(b) The Company acquired all of the shares of CBM Solutions Ltd. (CBM Solutions) and increased its ownership interest in R-Can Services Limited (R-Can) by 1.2% to 98.2%.
- Headquartered in Calgary Alberta, CBM Solutions specializes in the provision of geological and engineering services for unconventional gas wells, including gas content analysis, reservoir characterization and consulting services for coalbed methane and shale gas wells. The acquisition of CBM Solutions in March 2007 was recorded using the purchase method with results of operations of CBM Solutions included in the consolidated financial statements from the effective date of acquisition. In addition to the amounts disclosed below, contingent consideration may be paid for each calendar year ended 2007, 2008, 2009, 2010, and 2011 based upon financial results for that year. The Company has finalized the purchase price equation for this acquisition.
- Pursuant to an agreement entered into in June 2004 with the remaining shareholder of R-Can, the Company increased its ownership percentage to 98.2% through the purchase of 1,208 common shares.
The purchase price equation of the aforementioned transactions is as
follows:
Cost of Acquisition (Stated in thousands):
Cash and transaction costs $ 25,503
Deferred consideration 6,438(a)
----------------------------------------------------------------------------
$ 31,941
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Allocated (Stated in thousands):
Goodwill $ 19,998(b)
Other intangibles 15,400
Equipment 242
Future income tax liability (4,273)
Non-controlling interest 574
----------------------------------------------------------------------------
$ 31,941
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(a) Deferred consideration consists of $3.5 million in cash and 152,772
common shares of the Company paid equally on the first, second and third
anniversary of the closing date.
(b) $15.1 of goodwill has been attributed to the Canadian Operations
reporting segment with the remaining $4.9 million attributed to Russian
Operations and is not considered deductible for tax purposes.
NOTE 4 - SHARE CAPITAL
Authorized:
The Company is authorized to issue an unlimited number of common shares and preferred shares, issuable in series.
Issued and Outstanding - Common Shares:
----------------------------------------------------------------------------
(stated in thousands, except share amounts) Number of Amount
Shares
----------------------------------------------------------------------------
Balance, December 31, 2007 122,450,382 $196,165
Exercise of stock options 3,028,283 34,746
Compensation expense relating to options
exercised 15,300
Issuance out of treasury, net of share issuance
costs 50,852 1,054
----------------------------------------------------------------------------
Balance, September 30, 2008 125,529,517 $247,265
----------------------------------------------------------------------------
The securities convertible into common shares of the Company are as follows:
September 30, December 31,
2008 2007
----------------------------------------------------------------------------
Securities convertible into common shares:
Employee stock options 9,289,066 9,863,531
----------------------------------------------------------------------------
NOTE 5 - BANK LOANS
The Company has a $30 million (or US dollar equivalent) demand Operating Credit Facility with a Canadian chartered bank. The Operating Facility is unsecured and bears interest at the bank's prime rate, U.S. base rate, Bankers' Acceptance rate or at LIBOR plus 0 to 125 basis points, dependent on the Company's ratio of debt-to-EBITDA. This facility is subject to covenants that are typical for this type of arrangement. At September 30, 2008, nil was drawn on the Operating Facility.
NOTE 6 - LONG-TERM DEBT
September 30, December 31,
(Stated in thousands) 2008 2007
----------------------------------------------------------------------------
Notes payable $105,990 $98,810
Equipment and acquisition loan 195,000 90,000
----------------------------------------------------------------------------
$300,990 $188,810
Less: current portion 75,000 -
----------------------------------------------------------------------------
$225,990 $188,810
----------------------------------------------------------------------------
Equipment and Acquisition Loan
On February 15, 2008, the Company expanded the $120 million (or U.S. dollar equivalent) three year extendible revolving acquisition and capital expenditure Term Credit Facility to $220 million (or U.S. dollar equivalent) until November 17, 2008, at which time the facility will be reduced to $120 million. Terms of this facility were unchanged.
NOTE 7 - FINANCIAL INSTRUMENTS - DISCLOSURES
The Company is exposed to financial risks arising from its financial assets and liabilities. The financial risks include market risk relating to interest rates and foreign exchange rates, credit risk and liquidity risk.
Market risk
Market risk, the risk that the fair value or future cash flows of financial assets or liabilities will fluctuate due to movements in market rates, is comprised of the following:
Interest rate risk
The Company partially mitigates its exposure to interest rate changes by maintaining a mix of both fixed and floating rate debt.
An increase or decrease in interest expense for each one percent change in interest rates on floating rate debt would have amounted to $0.5 million for the three months ended September 30, 2008 and $1.2 million for the nine months ended September 30, 2008.
Foreign exchange rate risk
As the Company operates primarily in North America and Russia, fluctuations in the exchange rate between the U.S. dollar/Canadian dollar and Russian ruble/Canadian dollar can have a significant effect on the fair value or future cash flows of the Company's financial assets and liabilities.
Canadian entities are exposed to currency risk on foreign currency denominated financial assets and liabilities with adjustments recognized as foreign exchange gains and/or losses in the consolidated statement of operations.
Foreign entities with a domestic functional currency expose the Company to currency risk on the translation of these entities' financial assets and liabilities to Canadian dollars for consolidation. For instance, our operations in Russia have a ruble functional currency, and adjustments arising when translating this foreign entity into Canadian dollars are reflected in the consolidated statements of other comprehensive income as unrealized gains or losses on translating financial statements of self-sustaining foreign operations.
Foreign entities are exposed to currency risk on financial assets and liabilities denominated in currencies other than their functional currency with adjustments recognized in the consolidated statement of operations. For instance, our operation in Russia whose functional currency is ruble will incur foreign exchange gains and/or losses on financial assets and liabilities denominated in currencies other than the ruble.
As at, and for the quarter ending September 30, 2008, the Company has not hedged any of its exposure to the U.S. dollar or the Russian ruble. The Company mitigates exposure to the U.S./Canadian exchange rate by maintaining a mix of both U.S. dollar and Canadian dollar debt.
For the period ended September 30, 2008, fluctuations in the value of foreign currencies would have had the following impact on net income and other comprehensive income:
Impact
to Other
Impact to Comprehensive
(stated in thousands of dollars) Net Income Income
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1% increase in the value of the U.S. dollar (423) 3,007
1% decrease in the value of the U.S. dollar 423 (3,007)
1% increase in the value of the Russian ruble 451 695
1% decrease in the value of the Russian ruble (451) (695)
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Credit risk
Credit risk refers to the possibility that a customer or counterparty will fail to fulfill its obligations and as a result, create a financial loss for the Company.
Customer
The Company's accounts receivables are predominantly with customers who explore for and develop natural gas and petroleum reserves and are subject to normal industry credit risks that include fluctuations in oil and natural gas prices and the ability to secure adequate debt or equity financing. The Company assesses the credit worthiness of its customers on an ongoing basis as well as monitoring the amount and age of balances outstanding. Accordingly, the Company views the credit risks on these amounts as normal for the industry. The carrying amount of accounts receivable represents the maximum credit exposure on this balance.
Payment terms with customers vary by region and contract; however, standard payment terms are 30 days from invoice date. Historically, industry practice allows for payment up to 70 days. The Company considers its accounts receivable at September 30, 2008 excluding doubtful accounts to be aged as follows:
(Stated in thousands) September 30, 2008
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Current (0 - 30 days from invoice date) $134,908
1 - 30 days past due 63,640
31 - 60 days past due 15,899
Greater than 60 days past due 9,066
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Total $223,513
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Provision for doubtful accounts 2,627
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The Company's allowance for doubtful accounts increased $1.0 million compared to December 31, 2007. The Company's objectives, processes and policies for managing credit risk have not changed from the previous year.
Counterparties
Counterparties to financial instruments expose the Company to credit losses in the event of non-performance. Counterparties to cash transactions are limited to high credit quality financial institutions. The Company does not anticipate non-performance that would materially impact the Company's financial statements.
Liquidity risk
Liquidity risk is the risk the Company will encounter difficulties in meeting its financial liability obligations. The Company manages its liquidity risk through cash and debt management. In managing liquidity risk, the Company has access to a wide range of funding at competitive rates through capital markets and banks. As at September 30, 2008, the Company had available unused committed bank credit facilities in the amount of $55.0 million plus cash, accounts receivable, and income tax recoverable of $17.6 million, $220.9 million and $10.2 million, respectively, for a total of $303.7 million available to fund the cash outflows relating to its financial liabilities. The Company believes it has sufficient funding through the use of these facilities to meet foreseeable borrowing requirements.
The timing of cash outflows relating to financial liabilities are outlined
in the table below:
(Stated in beyond 5
thousands) 1 year 2-3 years 4-5 years years Total
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Accounts payable 100,255 - - - 100,255
Deferred
consideration 1,982 1,982 - - 3,964
Current tax
payable 3,636 - - - 3,636
Long-term debt 75,000 120,000 26,498 79,492 300,990
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$ 180,873 $ 121,982 $ 26,498 $ 79,492 $ 408,845
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Included in the Company's total long-term debt obligations of $301.0 million at September 30, 2008 are $195.0 million in obligations related to Bankers' Acceptances.
NOTE 8 - CAPITAL MANAGEMENT
The Company's strategy is to carry a capital base to maintain investor, creditor and market confidence and to sustain future development of the business. The Company seeks to maintain a balance between the level of long-term debt and shareholders' equity to ensure access to capital markets to fund growth and working capital given the cyclical nature of the oilfield services sector. On an historical basis, the Company maintained a conservative ratio of long-term debt to total capitalization. The Company may occasionally need to increase these levels to facilitate acquisition or expansionary activities.
As at September 30, 2008 and December 31, 2007 these ratios were as follows:
(Stated in thousands, except
ratios) September 30, 2008 December 31, 2007
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Long-term debt $ 300,990 $ 188,810
Shareholders' equity 769,073 683,669
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Total capitalization $ 1,070,063 $ 872,479
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Long-term debt to Total
capitalization 0.28 0.22
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NOTE 9 - COMPARATIVE FIGURES
Comparative figures have been restated to conform to current period's presentation.
A conference call has been scheduled on Tuesday, November 4, 2008 at 9:00 a.m. MT (11:00 a.m. ET) to discuss the Company's results for the Third Quarter 2008.
To access the conference call, contact the conference call operator at 1-877-677-0837 (North America) or 416-695-6616 (outside North America) 15 minutes prior to the call's start time and ask for the "Trican Well Service Ltd. - Third Quarter 2008 Conference Call".
A replay of the conference call will be available until November 11, 2008 by dialing 1-800-408-3053 (North America) or 416-695-5800 (outside North America). Playback passcode: 3272056.
The conference call will be archived on Trican's website at www.trican.ca.
For more information, please contact
Trican Well Service Ltd.Murray Cobbe
President and CEO
(403) 266-0202
(403) 237-7716 (FAX)
Email: mcobbe@trican.ca
or
Trican Well Service Ltd.
Michael Kelly
Vice President, Finance & Administration and CFO
(403) 266-0202
(403) 237-7716 (FAX)
Email: mkelly@trican.ca
or
Trican Well Service Ltd.
2900, 645 - 7th Avenue S.W.
Calgary, Alberta T2P 4G8
Website: www.trican.ca