Hyduke Energy Services Announces Third Quarter 2017 Financial Results

Announced Date :  Nov 14, 2017


Hyduke Energy Services Inc. (Hyduke Energy Services) has announced operating results for the nine months ended September 30, 2017 and 2016.
The nine month period ended September 30, 2017 showed a 451% increase in revenues to $26,070. For the three months ended September 30, 2017, the Manufacturing & Fabrication segment generated $13,029 of revenue, an 1125% increase over the same period in the prior year. Approximately 40% of the third quarter increase reflects revenues from acquisitions and 60% from increased revenues from organic growth. The organic growth reflects increased revenues related to the AltaGas project, oil sands projects and the diversification of its products and services to include the manufacture and repair of storage tanks and custom steel fabrication.

Consistent with the increase in operating drilling and service rigs, Supply & Service revenue increased 77% to $8,243 during the nine months of 2017 compared to the same period of 2016, and 41% to $2,652 for the three month period. The sector experienced an overall increase in activity resulting from an increase in oil prices in addition to a longer winter drilling season compared to the early spring break up experienced in 2016. These factors resulted in an increase in demand for oilfield supplies, pneumatics and inspection services.

Gross margin (see "Non-GAAP Measures") for the three months ended September 30, 2017 was $1,497 or 9.8% compared to gross margin of $331 (11.4% of revenue) in the third quarter of 2016. The increased gross margin reflects a combination of increased revenues, operating efficiencies, and price improvements offset by some increases in SG&A costs.

SG&A expenses for the nine months ended September 30, 2017 was $6,825, an increase of 156% compared to $4,062 for the nine months ended September 30, 2016. The three month period ending September 30, 2017 increased 137%, or $1,671, over the same period in 2016. SG&A costs from the Company's acquisitions account for approximately 57% of this increase. The remaining increase is comprised of the removal of employee wage rollbacks and additional staff for the AltaGas project.

Negative EBITDAS from continuing operations was $1,214 for the nine months ended September 30, 2017 compared to a negative EBITDAS of $768 in the same period of 2016.

Depreciation and amortization of $365 increased from $163 in the third quarter of 2016. The increase in the expense was due to the property, plant, and equipment acquired with the business acquisitions.

Stock based compensation was $29 compared to $17 in the third quarter of 2016.

The Company recorded $161 in interest charges during the third quarter of 2017, a decrease of $17 from 2016. The decrease is due to the payout of the term loan in August 2017.

Continuing operations net loss for Q3/17 was $(1,797) compared to a loss of $(1,072) in Q3/16.

MANAGEMENT REVIEW AND OUTLOOK

The third quarter and first nine months of the current fiscal year were a combination of success and challenges.

On the positive side, due to acquisitions, new contract wins in the process and production facilities sector of the upstream and downstream oil and gas industry, and activity improvements in conventional oilfield activity, total sales in the first nine months ended September 30 were over three times higher than the same period in the 2016 fiscal year. In the third quarter, revenue exceeded $15 million for the first time since the third quarter of 2013. With the exception of the BW Rig supply business, the majority of the revenue Hyduke has generated in 2017 is from customers and industry sectors the company has never worked for before. 

However, the financial results indicate the marketplace for certain product lines remains extremely competitive resulting in continuing challenged gross margins. Combined with higher fixed costs for sales, general and administration expenses because of the acquisitions and the reversal of wage rollbacks in prior year's cuts in the second quarter, the EBITDA gain over the first nine months was only marginal and for Q3 the EBITDA loss was higher than in the prior year.

Management continues to take the necessary measures to restore positive cash flow as a first step to sustainable profitability.

A major event in the third quarter was the refinancing of the Company's long-term debt whereby a loan due in August of 2017 was replaced with a multi-year mortgage on its real estate assets which matures in 2043. This gives the Company enhanced financial flexibility and certainty and allows management to place more focus on operations.

Another major event in the third quarter was the hiring of two key members of the senior executive team in the positions of Chief Financial Officer and Vice-President of Operations. Based in Edmonton, Jimmie Yeung and Boyd Mahon respectively have decades of experience in financial management in a diverse range of industries and manufacturing, fabrication and assembly of major capital assets, primarily in Hyduke's key focus areas of upstream, midstream and downstream oil and gas. The marketing team in Calgary has been refocused to ensure it is selling the entire Hyduke product and service suite to the vast range of clients headquartered in that city.

Divisionally, four of five major business units are meeting or exceeding expectations. BW Rig, a provider of operating supplies to drilling and service rigs, is performing positively as expected due to increased field activity in western Canada. Opportunities to expand BW into new geographical markets continue to be investigated. Avalanche Metal, the new manufacturing division in Kelowna, is enjoying its highest levels of activity since 2014. Avalanche operates in a lower cost labor market than Alberta hence the Company is continuing to send Avalanche more business. Hyduke's main fabrication facility in Nisku is steady having completed some interesting new equipment components for the oil sands tailing pond cleanup operations of a major bitumen miner. The AltaGas project on Ridley Island on Canada's west coast, which kicked off major operations in July, is unfolding as planned.

The major obstacle to improved operating margins is related to the Western Manufacturing acquisition. This company was in severe financial difficulty when Hyduke purchased the capital and inventory assets at cost effective April 1, 2017. The company had been in survival mode for some time and had a backlog of projects quoted at prices too low to cover all costs. Hyduke has discontinued quoting any new business below an acceptable gross margin and has made significant reductions in fixed costs as Western is integrated into Hyduke's administrative, management and marketing infrastructure.

Eliminating operating losses at Western was a significant focus of the Company in Q3 as it restructured its long-term debt and augmented its senior executive team. It will be the primary objective for the remainder of the 2017 fiscal year and until the issue is resolved. Field production tank manufacturing is a very competitive business but Western has some fundamental strengths, one being its location in the heart of the Montney natural gas and liquids play. Of the 209 active drilling rigs in western Canada on November 7 according to the JWN Rig Locator, 132 or 63% are operating in PSAC activity areas B2, A2, A6 and A7 which encompasses all of the Montney and the increasingly attractive Duvernay play to the east and south. Virtually all of these wells are focused on liquids production which requires tankage.

The Company continues to explore new business opportunities in new markets and with new customers. In the past nearly 100% of Hyduke's business came entirely from drilling and well servicing contractors. Today the client base includes some of Canada's largest and most respected oil and gas producing and midstream companies. This gives the Company credibility with a growing range of clients looking for a reliable and trustworthy supplier with capacity, engineering, integrity and a transparent commitment to safety.

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