For the three-month period ended March 31, 2017, PHX Energy (TSX:PHX) generated consolidated revenue of $61.1 million. This is a positive contrast from the challenging 2016-year, representing a 51 percent improvement over the $40.4 million generated in the first quarter of 2016 and 31 percent improvement from the $46.6 million generated in the fourth quarter of 2016. The increase in consolidated revenue was primarily the result of greater activity levels in all the Corporation's operating segments. Consolidated operating days rose by 64 percent to 6,684 days in the first quarter of 2017 versus 4,069 days in the comparable 2016-quarter and rose 32 percent over the 5,074 days in the final quarter of the 2016-year.
For the three-month period ended March 31, 2017, adjusted EBITDA (see "Non-GAAP Measures") was $4.3 million (7 percent of revenue), a 5 percent increase from the $4.1 million (10 percent of revenue) reported in the comparable 2016-period. Included in adjusted EBITDA for the first quarter of 2017 is Stream Services' ("Stream") adjusted EBITDA of negative $0.2 million (2016 - negative $0.4 million).
In the first quarter of 2017, PHX Energy reported a net loss of $7.1 million compared to a net loss of $7.4 million in the comparable 2016-period. The Corporation's continued net losses are mainly due to ongoing pricing pressures lowering day rates in each of the Corporation's operating segments, fewer occurrences of gains on disposition of drilling equipment and lower recoveries of income taxes.
As at March 31, 2017, PHX Energy had long-term debt of $12.0 million, which is $17.0 million less than at December 31, 2016, and working capital (see "Non-GAAP Measures") of $58.9 million.
On February 2, 2017, PHX Energy closed a bought deal financing for aggregate proceeds of $28.8 million. An aggregate of 7,187,500 common shares of the Corporation were issued at a price of $4.00 per common share. Concurrent with the closing of the public offering, certain directors, officers, employees and consultants of PHX Energy purchased a total of 500,000 common shares at a price of $4.00 per share on a private placement basis. The gross proceeds from the public offering and concurrent private placement totaled to approximately $30.8 million.
The proceeds from the equity financing were primarily used to reduce the outstanding loans and borrowings under the Corporation's credit facility from $35.0 million as at December 31, 2016 to $14.0 million as at March 31, 2017.
The Corporation incurred $1.8 million in capital expenditures in the first quarter of 2017, which is double the $0.9 million spent in the comparable 2016-period. With the proceeds from the equity financing, the Corporation reduced its outstanding indebtedness under its credit facility, thereby freeing up borrowing capacity that may be redrawn, as required, to fund the Corporation's ongoing capital expenditure program. The Corporation continues to anticipate spending $25.0 million on capital expenditures in the 2017-year.
As at March 31, 2017, the Corporation had commitments to purchase drilling and other equipment for $14.4 million; including $11.4 million for Velocity Real-Time Systems ("Velocity"), $2.3 million for electronic drilling recorder ("EDR") equipment and $0.7 million for motors and machinery and equipment. This additional equipment is expected to be delivered by the end of the third quarter of 2017.
The Corporation reports three operating segments on a geographical basis throughout the Canadian provinces of Alberta, Saskatchewan, British Columbia, and Manitoba; throughout the Gulf Coast, Northeast and Rocky Mountain regions of the US; and internationally, in Russia and Albania.
PHX Energy's Canadian revenue for the three-month period ended March 31, 2017 increased by 88 percent to $29.4 million from $15.6 million in the corresponding 2016-period. The improvement was primarily the result of a significantly higher volume of activity during the 2017-quarter versus the comparable 2016-period. The Canadian segment reported 4,004 operating days in the first quarter of 2017, a large increase from the 1,951 days in the 2016-period. Similarly, total industry horizontal and directional drilling activity, as measured by drilling days, increased by 98 percent in the 2017-quarter to 22,186 days from 11,192 days in the 2016-quarter (Source: Daily Oil Bulletin). The Canadian market remained highly competitive even with the increased rig counts, and as such, market pricing did not adjust with the rebound in activity. PHX Energy's average day rates declined by 11 percent to $7,009 in the 2017-quarter from $7,870 in the comparable 2016-period (excluding Stream revenue of $1.4 million).
With a higher volume of active rigs operating in 2017, the Canadian division continued to be a prominent player in this market, maintaining its 25 percent market share and a well-diversified client base. During the 2017-quarter, 63 percent of the Canadian division's activity was oil well drilling and 37 percent was natural gas well drilling. PHX Energy was active in the Montney, Wilrich, Bakken, Shaunavon, Duvernay, Cardium and Viking areas.
The Canadian operations' reportable segment loss before tax for the first quarter of 2017 was $2.4 million as compared to losses of $3.3 million in the 2016-quarter. The improved profitability of the Canadian segment in the 2017-quarter was primarily the result of higher activity levels as compared to prior year's quarter offset by lower intercompany revenue generated from the lease of drilling and other equipment between the Canadian and US segments.
Included in the Canadian segment's revenue for the first quarter of 2017 is $1.4 million of revenue generated by the Stream division (2016 - $0.3 million). With the commercialization of a new product line and significant expansion of Stream's capacity in late-2016, this division achieved its highest quarterly activity in the 2017-quarter since the fourth quarter of 2014. During the three-month period ended March 31, 2017, Stream achieved 1,739 operating days, strong growth over the 385 days in the respective 2016-period. Along with increased volume, average day rates for the division also rose by 16 percent to $794 in the first quarter of 2017 from $687 in the 2016 three-month period.
For the three-month period ended March 31, 2017, the Stream division incurred reportable losses before tax of $0.5 million (2016 - $1.7 million). The Stream division's losses in the 2017-period pertain mostly to depreciation expenses of $0.6 million as well as to costs associated with the expansion of the division.
In the first quarter of 2017, PHX Energy's US operations generated revenue of $26.8 million, an increase of 23 percent from $21.7 million in the 2016-quarter. This revenue growth was mainly the result of the higher industry rig count. In the first quarter of 2017, the number of horizontal and directional rigs running per day rose by 40 percent from an average of 487 horizontal and directional rigs running per day during the 2016-quarter to 681 in the 2017-quarter (Source: Baker Hughes). In comparison, the Corporation's US activity levels also rebounded as operating days increased by 27 percent to 1,990 days in the 2017-quarter from 1,564 days in the 2016-quarter. Average day rates, excluding the motor rental division in Midland, Texas and the Rocky Mountain region, slightly decreased from $13,361 in the 2016-quarter compared to $13,094 in the 2017-period.
Horizontal and directional drilling represented 91 percent of the industry's average number of rigs running on a daily basis during the first quarter of 2017, which was 3 percent greater than the percentage in the 2016-quarter. For the three-month period ended March 31, 2017, 93 percent of the US operating division's activity was oil well drilling, as measured by wells drilled and excluding the motor rental and gyro surveying divisions. During the first quarter of 2017, Phoenix USA remained active in the Permian, Eagle Ford, Bakken, Mississippian/Woodford, Marcellus, Niobrara and Utica basins.
Reportable segment loss before tax for the three-month period ended March 31, 2017 was $3.0 million compared to losses of $7.8 million in the 2016-quarter. The reduction to the segment losses in 2017 was largely the result of improved activity levels, stabilization of average day rates and lower rates charged on the intercompany lease of drilling and other equipment between the Canadian and US segments.
For the three-month period ended March 31, 2017, the Corporation's international revenue increased by 57 percent to $4.9 million from the $3.1 million generated in the 2016-period. International operating days grew by 25 percent to 691 days in the 2017-quarter from 554 days in the 2016-quarter. The increase in international activity primarily resulted from the Albanian division recording 145 operating days in the 2017-quarter, whereas this division was idle for the first quarter of 2016. In both the 2016 and 2017-quarters, the Corporation generated 8 percent of its consolidated revenue from its international operations.
PHX Energy's Russian operations continued to benefit from its diversified client base during the first quarter of 2017. For the three-month period ended March 31, 2017, the Russian division achieved operating days of 546, slightly below the 554 days recorded in the 2016-period. During the quarter, the division continued to increase activity related to measurement while drilling ("MWD") system rentals in Eastern Siberia and this trend is expected to continue in the second quarter of 2017. The Corporation further continued efforts to expand its client base in Russia performing technical qualification trials for prospective clients.
Reportable segment loss from international operations for the three-month period March 31, 2017 was $0.6 million, which is $0.1 million less than the loss of $0.7 million reported in the comparable 2016-period. The improvement in the international operations' profitability in the 2017-quarter was mainly due to the recommencement of the Albanian operations.
PHX Energy used net cash in investing activities of $2.4 million for the three-month period ended March 31, 2017 as compared to net cash generated of $1.4 million in the 2016-period. In the first quarter of 2017, the Corporation received proceeds of $1.4 million (2016 - $2.6 million) from the disposition of capital equipment, primarily related to the involuntary disposal of drilling equipment in well bores, and the recognition of a $0.1 million gain on disposition of drilling equipment (2016 - $1.2 million). Additionally, the Corporation spent $1.8 million on capital expenditures in the first quarter of 2017 (2016 - $0.9 million). These expenditures included:
During the three-month period ended March 31, 2017, the Corporation acquired intangible assets with a total cost of $0.5 million (2016 - $0.2 million), most of which related to development costs.
The change in non-cash working capital balances of $1.5 million use of cash for the three-month period ended March 31, 2017, relates to the net change in the Corporation's trade payables that are associated with the acquisition of capital assets. This compares to a $0.1 million use of cash for the three-month period ended March 31, 2016.
The Corporation reported cash flows generated from financing activities of $8.1 million in the three-month period ended March 31, 2017 as compared to cash used of $9.7 million in the comparable 2016-period. In the 2017-quarter:
As of March 31, 2017, the Corporation had $10.0 million drawn on its syndicated facility, $2.0 million drawn on its Canadian operating facility and USD $1.5 million on its US operating facility. As at March 31, 2017, PHX Energy exceeded the minimum liquidity required under the amended credit agreement as the Corporation had $2.8 million in cash-on-hand and $44.9 million available to be drawn from its credit facilities. The credit facilities are secured by substantially all of the Corporation's assets.
As at March 31, 2017, the Corporation was in compliance with all its financial covenants.
Cash Requirements for Capital Expenditures
Historically, the Corporation has financed its capital expenditures and acquisitions through cash flows from operating activities, debt and equity. The 2017 capital budget remains at $25.0 million. These planned expenditures are expected to be financed from a combination of one or more of the following: cash flow from operations, the Corporation's unused credit facilities or equity, if necessary. However, if a sustained period of market uncertainty and financial market volatility persists in 2017, the Corporation's activity levels, cash flows and access to credit may be negatively impacted, and the expenditure level would be reduced accordingly.
Conversely, if future growth opportunities present themselves, the Corporation would look at expanding this planned capital expenditure amount.
The positive industry trends that began to materialize at the end of 2016 continued into the first quarter of 2017. Rig counts continued to increase across North America as commodity prices remained relatively stable. As a result, in all operating segments PHX Energy achieved higher revenue and activity levels during the first quarter of 2017.
The volume of active rigs in the Canadian market exceeded expectations, peaking at 350 rigs running per day. PHX Energy's Canadian division capitalized on this trend and was active on 25 percent of all horizontal and directional wells drilled in Canada during the first quarter. This accomplishment can be attributed to the strength of our marketing and operational teams. The Corporation anticipates this strong performance will continue throughout 2017, although as expected, the spring break-up in western Canada will affect second quarter activity levels.
The US market continues to see an increase in active rigs with over 850 rigs currently operating as compared to 410 rigs a year ago. In the first of quarter 2017, the US division experienced moderate growth and the Corporation is focused on increasing these gains in future quarters, specifically in the Permian basin which is the most active region in North America. PHX Energy believes that with the continued rollout of differentiating technology further opportunities will materialize for its US division.
Activity in PHX Energy's international operations remained steady in the 2017-quarter. The Russian division was impacted by the seasonal slowdown of activity due to cold weather. Today activity has already increased from the first quarter and the Corporation anticipates future growth in 2017 with the addition of new contracts. PHX Energy's Albanian division, which resumed operations late in 2016, remained active through the first quarter and activity is projected to continue through the remainder of the year.
The first quarter was also a promising start to the 2017-year for the Corporation's Stream division, as it operated at maximum capacity, propelling quarterly activity levels to the highest volumes since 2014. This success can be attributed to the launch of the new DataStream EDR product line and Stream differentiating itself by providing a higher level of service in line with PHX Energy's core business philosophy. The Corporation is encouraged by Stream's improved results as it continues to gain traction as a reputable competitor in the oilfield services EDR market. With the Corporation expanding Stream's capacity to 50 systems by the end of the second quarter, all indications are that the division will continue to capture Canadian market share as the industry picks up momentum after the spring break-up period. PHX Energy will continue to leverage existing resources and relationships to support the expansion of this division, including its entrance into the US market anticipated in the second quarter, to achieve greater margins.
Despite the positive momentum in North America rig counts, challenges remain related to the pricing environment. During the downturn that persisted over the past number of years, the directional drilling sector has been over supplied. This has intensified competition, which along with the falling commodity prices, drove pricing in 2016 to the lowest levels in the Corporation's 20-year history. The Corporation has begun to engage in pricing discussions with clients and is seeing improvements in certain drilling regions, however, a more material change is required to normalize operating margins and profitability. PHX Energy is cautiously optimistic that day rates will incrementally increase throughout 2017 and will continue to be disciplined in its approach to financial management and all spending.
PHX Energy remains focused on its strategy of bringing industry leading and differentiating technology to the market. PHX Energy's flagship MWD system, Velocity, continues to operate at maximum capacity as Velocity provides several advantages over the industry standard MWD technology, including unified telemetry, which is the ability to transmit downhole information to surface in two different modes. Due to the continued demand for this technology in the first quarter of the year, the Corporation is adding 30 Velocity systems to our existing capacity, for a total job capacity of 65 Velocity systems by the end of the third quarter of 2017.
During the first quarter of 2017, PHX Energy field tested its new performance drilling motor technology. The revolutionary design of this robust performance drilling motor is rated for a higher flow rate, pressure and torque output. The result is a performance drilling motor that the Corporation feels will be in a class of its own, exceeding the drilling capabilities of any competing product. The Corporation currently has a small fleet of these motors for testing purposes and will increase capacity once the design has been validated.
PHX Energy has been operating its Connect surface system in Canada since the fourth quarter of 2016. Connect is a web-based interface that allows personnel in remote drilling centers immediate access to pertinent directional drilling information from the rig site. The Corporation has multiple clients leveraging Connect in Canada and plans to launch this product to select US clients in the second quarter of 2017. The Corporation views Connect as a key piece of technology which is integral to its long-term strategy. When packaged together with the Velocity Real-Time System, the DataStream EDR platform and the Corporation's Prism drilling optimization center, PHX Energy will offer a unique solution that will create well site intelligence that drives drilling efficiencies and superior performance.
About PHX Energy Services Corp.
The Corporation, through its directional drilling subsidiary entities, provides horizontal and directional drilling technology and services to oil and natural gas producing companies in Canada, the US, Russia and Albania. PHX Energy also provides electronic drilling recorder ("EDR") technology and services.
PHX Energy's Canadian directional drilling operations are conducted through Phoenix Technology Services LP. The Corporation maintains its corporate head office, research and development, Canadian sales, service and operational centres in Calgary, Alberta. In addition, PHX Energy has a facility in Estevan, Saskatchewan. PHX Energy's US operations, conducted through the Corporation's wholly-owned subsidiary, Phoenix Technology Services USA Inc. ("Phoenix USA"), is headquartered in Houston, Texas. Phoenix USA has sales and service facilities in Houston, Texas; Denver, Colorado; Casper, Wyoming; Midland, Texas; Bellaire, Ohio; and Oklahoma City, Oklahoma. Internationally, PHX Energy has sales offices and service facilities in Albania and Russia, and administrative offices in Nicosia, Cyprus; Dublin, Ireland; and Luxembourg City, Luxembourg.
PHX Energy markets its EDR technology and services in Canada through its division, Stream Services, which has an office and operations center in Calgary, Alberta. EDR technology is marketed worldwide outside Canada through its wholly-owned subsidiary Stream Services International Inc.
SOURCE: PHX Energy Services Corp.
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