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Direct costs are comprised of field and shop expenses, and include depreciation and amortization of the Corporation's equipment. For the three and six-month periods ended June 30, 2017, direct costs increased to $56.8 million and $117.6 million, respectively, from $36.3 million and $82.3 million in the comparable 2016-periods.
The increased costs for both 2017-periods was primarily due to higher activity levels, as well as the following factors:
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-- higher field expenses as increases were made in labour rates during the
first quarter; -- greater third party rental costs required to meet the increased volume of activity; and -- increased motor repair costs./T/
In the 2017-periods, the gross loss as a percentage of revenue fell to 5 percent and 2 percent, respectively, as compared to 38 percent and 23 percent in the 2016-periods. The reduced gross loss margins in 2017 are primarily the result of all operating segments being more active.
The reduction in the depreciation and amortization expense for the three and six-month periods ended June 30, 2017 was mainly the result of PHX Energy's lower level of capital spending in the 2016 and 2017-years.
Excluding depreciation and amortization, gross profit as a percentage of revenue improved to 14 percent for the three-month period ended June 30, 2017 from 12 percent in the comparable 2016-period. The more favourable second quarter margin was mainly driven by increased activity levels, partially offset by the above factors. Whereas, for the first half of 2017, gross profit as percentage of revenue excluding depreciation & amortization fell slightly to 16 percent versus 17 percent in 2016. The lower margin in the current year period is primarily the result of lower client day rates in the first quarter of 2017 and the factors listed above.
(Stated in thousands of dollars except percentages)
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Three-month periods Six-month periods ended ended June 30, June 30, 2017 2016 % Change 2017 2016 % Change ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Selling, general & administrative ("SG&A") costs 7,776 6,880 13 14,985 13,559 11 Equity-settled share-based payments (included in SG&A costs) 1,030 611 69 1,518 897 69 Cash-settled share-based payments (recoveries) (included in SG&A costs) (159) 1,099 n.m. (27) 950 n.m. Onerous contracts lease payment (70) - n.m. (177) - n.m. SG&A costs excluding equity and cash-settled share- based payments and provision for onerous contracts as a percentage of revenue 13% 20% 12% 18% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- n.m. not meaningful/T/
For the three and six-month periods ended June 30, 2017, SG&A costs rose to $7.8 million and $15.0 million, respectively, from $6.9 million and $13.6 million in the comparable 2016-periods. The higher SG&A costs for both 2017-periods are primarily the result of improved activity levels and issuance of equity settled share-based awards, partially offset by recoveries on cash-settled share-based awards.
For the three and six-month periods ended June 30, 2017, excluding equity and cash-settled share-based payments and the provision for onerous contracts, SG&A costs as a percentage of consolidated revenue were 13 percent and 12 percent, respectively. This is much improved over the 20 percent and 18 percent in the comparable 2016-periods. The more favourable percentages in both 2017-periods are mainly attributable to the greater volume of activity.
Equity-settled share-based payments relate to the amortization of the fair values of issued options of the Corporation using the Black-Scholes model. In the three and six-month periods ended June 30, 2017, equity-settled share-based payments increased by 69 percent, as compared to the corresponding 2016-periods, mainly due to a higher compensation expense related to options granted in the first quarter of 2017.
Cash-settled share-based retention awards, which are included in SG&A costs, are measured at fair value. For the three and six-month periods ended June 30, 2017, the Corporation recognized share-based compensation recoveries from the revaluation of the retention awards based on the reduction in PHX Energy's stock price during both periods.
(Stated in thousands of dollars)
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Three-month periods Six-month periods ended June 30, ended June 30, 2017 2016 % Change 2017 2016 % Change ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Research & development expense 764 225 n.m. 1,371 750 83 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------n.m. not meaningful
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Research and development ("R&D") expenditures during the three and six-month periods ended June 30, 2017 were $0.8 million (2016 - $0.2 million) and $1.4 million (2016 - $0.8 million), respectively. R&D expenditures were higher in both 2017-periods, which is mainly the result of increased R&D personnel in the current year and the receipt of scientific research and experimental development ("SR&ED") credits, which reduced the 2016-periods expense. The R&D department continues to focus on new technology development and cost-saving and reliability initiatives that will enhance and expand PHX Energy's services.
(Stated in thousands of dollars)
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Three-month periods Six-month periods ended June 30, ended June 30, 2017 2016 % Change 2017 2016 % Change ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Finance expense 428 527 (19) 1,013 1,099 (8) ---------------------------------------------------------------------------- ----------------------------------------------------------------------------/T/
Finance expenses relate to interest charges on the Corporation's long-term and short-term bank facilities. For the three and six-month periods, finance charges decreased to $0.4 million (2016 - $0.5 million) and $1.0 million (2016 - $1.1 million) respectively. The reduction in finance charges in both 2017-periods was primarily due to lower levels of borrowings compared to the prior year periods, partially offset by additional financing charges and higher fixed pricing on borrowings.
(Stated in thousands of dollars)
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Three-month periods Six-month periods ended ended June 30, June 30, 2017 2016 2017 2016 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Loss (Gain) on disposition of drilling equipment (94) 426 (241) (779) Foreign exchange losses (gains) 83 125 255 (226) Provision for (Recovery of) bad debts 24 (96) 252 (66) ---------------------------------------------------------------------------- Other expense (income) 13 455 266 (1,071) ---------------------------------------------------------------------------- ----------------------------------------------------------------------------/T/
During the three and six-month periods ended June 30, 2017, the Corporation recognized gains on the disposition of drilling equipment of $0.1 million (2016 - $0.4 million loss) and $0.2 million (2016 - $0.8 million). Gains from the disposition of drilling equipment typically result from insurance programs undertaken whereby proceeds for the lost equipment are at current replacement values, which are higher than the respective equipment's book value. Losses typically result from any asset retirements that were made before the end of the equipment's useful life and self-insured downhole equipment losses.
For the three and six-month periods ended June 30, 2017, the Corporation incurred foreign exchange losses of $0.1 million (2016 - $0.1 million) and $0.3 million (2016 - $0.2 million gain), respectively. These losses resulted mainly from the settlement of Canadian-denominated intercompany payables in the Corporation's Russian operations and the revaluation of Canadian-denominated intercompany payables in the US.
During the three and six-month periods ended June 30, 2017, the Corporation recognized provisions for bad debts of $24,000 (2016 - $0.1 million recovery) and $0.3 million (2016 - $0.1 million recovery), respectively. Provisions for bad debt in the 2017-quarter relate mainly to accounts receivable in the Corporation's US segment.
(Stated in thousands of dollars, except percentages)
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Three-month periods Six-month periods ended ended June 30, June 30, 2017 2016 2017 2016 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Provision for (Recovery of) income taxes (1,521) (4,622) (2,716) (9,029) Effective tax rates 13% 26% 13% 30% ---------------------------------------------------------------------------- ----------------------------------------------------------------------------/T/
The recovery of income taxes for the three and six-month period ended June 30, 2017 was $1.5 million and $2.7 million, respectively, as compared to $4.6 million and $9.0 million in the comparable 2016-periods. The expected combined Canadian federal and provincial tax rate for 2017 is 27 percent. The effective tax rate in the 2017-periods were lower than the expected rate mainly as a result of the effect of tax rates in foreign jurisdictions.
Segmented Information
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.
Canada
(Stated in thousands of dollars)
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Three-month periods ended Six-month periods ended June 30, June 30, 2017 2016 % Change 2017 2016 % Change ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Revenue 13,450 5,832 131 42,892 21,452 100 Reportable segment loss before tax (5,247) (7,320) (28) (4,479) (10,559) (58) ---------------------------------------------------------------------------- ----------------------------------------------------------------------------/T/
For the three-month period ended June 30, the Corporation's Canadian revenue grew from $5.8 million in 2016 to $13.5 million in 2017. The recovery in the industry rig count continued during Canadian spring break-up, with substantially more rigs operating in 2017 than in the prior year. PHX Energy's Canadian segment reported 1,699 operating days, up from 663 days in the 2016-quarter. This is consistent with the industry's performance as horizontal and directional drilling activity, as measured by drilling days, increased from 3,301 days in the 2016-quarter to 10,729 days in the 2017-quarter (Source: Daily Oil Bulletin). In the second quarter of 2017, there was an increased proportion of jobs requiring fewer rig site personnel which caused the average day rate (excluding Stream revenue) to fall by 11 percent to $7,535 from $8,420 in the 2016-quarter.
During the second quarter of 2017, oil drilling, as measured by drilling days, represented approximately 51 percent of PHX Energy's Canadian activity and the Corporation remained active in the Montney, Wilrich, Bakken, Shaunavon, Duvernay, Cardium and Viking areas.
For the six-month period ended June 30, 2017, the Corporation recognized revenue of $42.9 million, double the $21.5 million of revenue earned in the 2016-period. The increased revenue in the first half of 2017 was primarily the result of the higher rig count in the Canadian market. The Corporation's operating days grew from 2,614 days in the first half of 2016 to 5,703 days in 2017. This is consistent with Canadian industry activity, as the number of reported horizontal and directional drilling days grew to 32,792 days for the first half of 2017 as compared to 14,493 days in 2016 (Sources: Daily Oil Bulletin). In the six-month period ended June 30, 2017, oil drilling represented approximately 60 percent of PHX Energy's Canadian activity (2016 - 45 percent). In the first half of 2017, PHX Energy saw its average day rates (excluding Stream revenue) decline by 11 percent to $7,166 from $8,010 in 2016, as a result of market conditions and an increased proportion of jobs requiring fewer rig site personnel.
For the three and six-month periods ended June 30, 2017, the reportable segment loss before tax was $5.2 million (2016 - $7.3 million) and $4.5 million (2016 - $10.6 million). The improved margins for both 2017-periods was primarily due to the significant recovery of activity levels as compared to the 2016-periods.
Stream Services
Included in the Canadian segment's revenue for the three and six-month periods ended June 30, 2017 is $0.7 million (2016- $0.2 million) and $2.0 million (2016 - $0.5 million), respectively, of revenue generated by the Stream division. For the second quarter, Stream grew its operating days by 71 percent from 500 days in 2016 to 854 days in 2017. Along with the growth in activity level, average day rates for the division also rose by 53 percent to $761 in the second quarter of 2017, up from $498 in the 2016-quarter.
For the three and six-month periods ended June 30, 2017, the Stream division incurred reportable losses before tax of $1.3 million (2016 - $1.8 million) and $1.7 million (2016 - $3.5 million). The Stream division's losses in both 2017-periods pertain mostly to depreciation expenses of $0.6 million and $1.2 million, respectively, as well as the costs associated with the continued expansion of the division.
United States
(Stated in thousands of dollars)
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Three-month periods ended Six-month periods ended June 30, June 30, 2017 2016 % Change 2017 2016 % Change ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Revenue 35,206 17,381 103 62,021 39,120 59 Reportable segment loss before tax (4,011) (6,803) (41) (10,180) (14,608) (30) ---------------------------------------------------------------------------- ----------------------------------------------------------------------------/T/
For the three-month period ended June 30, 2017, the US segment generated revenue of $35.2 million which is twice the $17.4 million generated in the 2016-period. PHX Energy's US operating days grew by 89 percent to 2,404 days in the 2017-quarter from 1,275 days in the 2016-quarter. Average day rates, excluding the Corporation's US motor rental division, rose by 7 percent to $14,315 in the 2017-quarter compared to $13,441 in the 2016-period, with the 2017 rates being assisted by the strengthening of the US dollar. In US dollars, the average day rates were relatively consistent quarter-over-quarter.
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