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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.
Financing Activities
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:
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-- through a bought deal financing and a concurrent private placement, the
Corporation issued 7,687,500 common shares for net proceeds of $29.1 million; -- the Corporation made aggregate repayments of $21.0 million on its operating facility and syndicated facility; and -- issued 91,666 common shares for proceeds of $0.1 million upon the exercise of share options./T/
Capital Resources
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.
Outlook
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.
Technology Update
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.
Michael Buker
President
May 3, 2017
Non-GAAP Measures
1) Adjusted EBITDA
Adjusted EBITDA, defined as earnings before finance expense, income taxes, depreciation and amortization, impairment losses on goodwill and intangible assets, provisions for the settlement of litigations, equity and cash-settled share-based payments, severance costs, provisions for inventory and provisions for onerous contracts, is not a financial measure that is recognized under GAAP. However, Management believes that adjusted EBITDA provides supplemental information to net earnings that is useful in evaluating the results of the Corporation's principal business activities before considering certain charges, how it was financed and how it was taxed in various countries. Investors should be cautioned, however, that adjusted EBITDA should not be construed as an alternative measure to net earnings determined in accordance with GAAP. PHX Energy's method of calculating adjusted EBITDA may differ from that of other organizations and, accordingly, its adjusted EBITDA may not be comparable to that of other companies.
The following is a reconciliation of net earnings to adjusted EBITDA:
(Stated in thousands of dollars)
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Three-month periods ended March 31, 2017 2016 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net Loss (7,143) (7,404) Add: Depreciation and amortization 10,931 14,003 Provision for (Recovery of) income taxes (1,195) (4,407) Finance expense 585 571 Impairment losses on goodwill and intangible assets - - Provision for settlement of litigations - - Equity-settled share-based payments 488 286 Cash-settled share-based payments (recoveries) 132 (149) Severance costs 342 915 Provision for inventory 300 300 Provision for onerous contracts (107) - ---------------------------------------------------------------------------- Adjusted EBITDA as reported 4,333 4,115 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------/T/
Adjusted EBITDA per share - diluted is calculated using the treasury stock method whereby deemed proceeds on the exercise of the share options are used to reacquire common shares at an average share price. The calculation of adjusted EBITDA per share on a dilutive basis does not include anti-dilutive options.
2) Funds from Operations
Funds from operations is defined as cash flows generated from operating activities before changes in non-cash working capital, interest paid, and income taxes paid. This is not a measure recognized under GAAP. Management uses funds from operations as an indication of the Corporation's ability to generate funds from its operations before considering changes in working capital balances and interest and taxes paid. Investors should be cautioned, however, that this financial measure should not be construed as an alternative measure to cash flows from operating activities determined in accordance with GAAP. PHX Energy's method of calculating funds from operations may differ from that of other organizations and, accordingly, it may not be comparable to that of other companies.
The following is a reconciliation of cash flows from operating activities to funds from operations:
(Stated in thousands of dollars)
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Three-month periods ended March 31, 2017 2016 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net cash flows from operating activities (9,896) 758 Add (deduct): Changes in non-cash working capital 13,466 2,332 Interest paid 303 438 Income taxes paid 110 56 ---------------------------------------------------------------------------- Funds from operations 3,983 3,584 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------/T/
Funds from operations per share - diluted is calculated using the treasury stock method whereby deemed proceeds on the exercise of the share options are used to reacquire common shares at an average share price. The calculation of funds from operations per share on a dilutive basis does not include anti-dilutive options.
3) Debt to covenant EBITDA Ratio
Debt is represented by loans and borrowings. Covenant EBITDA, for purposes of the calculation of this covenant ratio, is represented by net earnings for a rolling four quarter period, adjusted for finance expense, provision for income taxes, depreciation and amortization, equity-settled share-based payments, unrealized foreign exchange losses, impairment losses on goodwill and intangible assets, loss on disposition of drilling equipment, severance costs, provision for inventory obsolescence and provision for the settlement of litigations, subject to the restrictions provided in the amended credit agreement.
The debt to covenant EBITDA ratio was waived from the quarter ending December 31, 2016 to the quarter ending June 30, 2017, inclusive.
4) Working Capital
Working capital is defined as the Corporation's current assets less its current liabilities and is used to assess the Corporation's short-term liquidity.
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.
Consolidated Statements of Financial Position
(unaudited)
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March 31, December 31, 2017 2016 ---------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 2,803,840 $ 7,007,293 Trade and other receivables 59,589,339 41,552,796 Inventories 24,904,245 24,988,472 Prepaid expenses 3,389,128 2,613,716 Current tax assets 5,445,378 5,293,489 ---------------------------------------------------------------------------- Total current assets 96,131,930 81,455,766 Non-current assets: Drilling and other equipment 111,330,893 121,172,229 Goodwill 8,876,351 8,876,351 Intangible assets 26,255,645 26,302,314 Deferred tax assets 12,399,029 10,687,684 ---------------------------------------------------------------------------- Total non-current assets 158,861,918 167,038,578 ---------------------------------------------------------------------------- Total assets $ 254,993,848 $ 248,494,344 ---------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Operating facility $ 2,007,321 $ 6,031,547 Trade and other payables 35,259,006 31,194,630 ---------------------------------------------------------------------------- Total current liabilities 37,266,327 37,226,177 Non-current liabilities: Loans and borrowings 11,994,850 29,014,050 Provision for onerous contracts 2,232,000 2,300,000 Deferred income 1,533,338 1,566,671 ---------------------------------------------------------------------------- Total non-current liabilities 15,760,188 32,880,721 Equity: Share capital 267,264,497 237,539,242 Contributed surplus 7,204,047 6,817,458 Retained earnings (90,053,064) (82,910,425) Accumulated other comprehensive income 17,551,853 16,941,171 ---------------------------------------------------------------------------- Total equity 201,967,333 178,387,446---------------------------------------------------------------------------- Total liabilities and equity $ 254,993,848 $ 248,494,344 ----------------------------------------------------------------------------
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