Western Energy Services Corp. (“Western” or the “Company”) announces the release of its third quarter 2024 financial and operating results. Additional information relating to the Company, including the Company’s financial statements and management’s discussion and analysis (“MD&A”) as at September 30, 2024 and for the three and nine months ended September 30, 2024 and 2023 will be available on SEDAR+ at www.sedarplus.ca. Non-International Financial Reporting Standards (“Non-IFRS”) measures and ratios, such as Adjusted EBITDA, Adjusted EBITDA as a percentage of revenue, revenue per Operating Day, revenue per Service Hour and Working Capital, as well as abbreviations and definitions for standard industry terms are defined later in this press release. All amounts are denominated in Canadian dollars (CDN$) unless otherwise identified.
Operational and Financial Highlights
Three Months Ended September 30, 2024
Financial Highlights:
Third quarter revenue of $58.3 million in 2024 was $3.3 million (or 6%) higher than the third quarter of 2023, as higher contract drilling revenue in Canada, was offset partially by lower contract drilling revenue in the US and lower production services revenue.
The Company incurred a net loss of $1.2 million in the third quarter of 2024 ($0.04 net loss per basic common share) as compared to a net loss of $1.3 million in the third quarter of 2023 ($0.04 net loss per basic common share) as higher Adjusted EBITDA and other items were offset by decreases in stock based compensation expense and finance costs.
Adjusted EBITDA of $11.4 million in the third quarter of 2024 was $0.4 million (or 4%) higher compared to $11.0 million in the third quarter of 2023 due to higher drilling revenue in Canada, which was offset partially by lower production services activity in Canada, the continued slowdown of drilling activity in the US, higher operating costs and higher administrative costs due to one-time reorganization costs in the third quarter of 2024.
Third quarter additions to property and equipment of $8.2 million in 2024 compared to $7.3 million in the third quarter of 2023, consisting of $5.2 million of expansion capital related to rig upgrades and $3.0 million of maintenance capital.
On August 7, 2024, the Company made a voluntary $10.0 million repayment on its Second Lien Facility (as defined in this press release) through available cash on hand and a draw on the Company’s Credit Facilities (as defined in this press release).
Operational Highlights:
In Canada, Operating Days of 1,115 in the third quarter of 2024 were 232 days (or 26%) higher compared to 883 days in the third quarter of 2023. Drilling rig utilization in Canada was 36% in the third quarter of 2024, compared to 28% in the same period of the prior year, mainly due to improved demand for the Company’s upgraded rig fleet.
Revenue per Operating Day in Canada averaged $31,141 in the third quarter of 2024, a decrease of 2% compared to the same period of the prior year mainly due to changes in rig mix, which were offset partially by higher day rates and lower third party recoveries.
In the US, drilling rig utilization averaged 36% in the third quarter of 2024, compared to 34% in the third quarter of 2023, due to the change in the number of marketed rigs in 2023, as Operating Days decreased from 249 days in the third quarter of 2023 to 229 days in the third quarter of 2024.
Revenue per Operating Day in the US for the third quarter of 2024 averaged US$28,429, an 8% decrease compared to US$30,898 in the same period of the prior year, mainly due to changes in rig mix.
In Canada, service rig utilization was 31% in the third quarter of 2024, compared to 33% in the same period of the prior year, as Service Hours decreased by 10% to 12,525 hours from 13,984 hours in the same period of the prior year, as customers deferred work to later in the year as capital budgets are fully utilized.
Revenue per Service Hour averaged $979 in the third quarter of 2024 and was 3% lower than the third quarter of 2023, due to area specific rig requirements.
Nine Months Ended September 30, 2024
Financial Highlights:
Revenue for the nine months ended September 30, 2024, decreased by $13.8 million (or 8%), to $163.4 million compared to $177.2 million in the same period of 2023, as revenue was negatively impacted by lower activity in contract drilling in the US due to lower commodity prices in the first and third quarters of 2024 and lower third party recoveries in Canada, but positively impacted by higher production services activity in 2024.
The Company incurred a net loss of $4.9 million for the nine months ended September 30, 2024 ($0.14 net loss per basic common share) as compared to a net loss of $4.7 million in the same period in 2023 ($0.14 net loss per basic common share). The change can mainly be attributed to a decrease in stock based compensation expense, finance costs, and an increase in income tax recovery, which were partially offset by a decrease in Adjusted EBITDA and other items.
Administrative expenses for the nine months ended September 30, 2024 were $2.9 million higher than the same period of 2023, due to higher employee related costs including one-time reorganization costs of $2.8 million incurred in 2024.
Adjusted EBITDA of $31.9 million for the nine months ended September 30, 2024 was $2.5 million (or 7%) lower compared to $34.4 million in the same period of 2023 and included one-time reorganization costs of $2.8 million. After normalizing for the one-time reorganization costs, Adjusted EBITDA for the nine months ended September 30, 2024 would have totalled $34.7 million, an increase of $0.3 million from the same period in the prior year. Adjusted EBITDA in 2024 was comparable to the prior year as lower drilling activity in Canada and the US was partially offset by improved activity in production services.
Year to date 2024 additions to property and equipment of $15.8 million compared to $19.2 million in the same period of 2023, consisting of $10.0 million of expansion capital related to rig upgrades and $5.8 million of maintenance capital.
On March 22, 2024, the Company extended the maturity of its $35.0 million syndicated revolving credit facility (the “Revolving Facility”) and its $10.0 million committed operating facility (the “Operating Facility” and together the “Credit Facilities”) from May 18, 2025 to the earlier of (i) six months prior to the maturity date of the Second Lien Facility (as defined in this press release) which is currently November 18, 2025, or (ii) March 21, 2027 if the Second Lien Facility is extended. The total commitments under the Credit Facilities are unchanged and there were no changes to the Company’s financial covenants, which are described in the Company’s third quarter 2024 MD&A under “Liquidity and Capital Resources”.
Operational Highlights:
In Canada, Operating Days of 2,724 days for the nine months ended September 30, 2024 were 18 days (or 1%) lower compared to 2,742 days for the nine months ended September 30, 2023. Drilling rig utilization in Canada was 29% for the nine months ended September 30, 2024, compared to 30% in the same period of the prior year, mainly due to customers cancelling or deferring their programs into the latter part of 2024, as a result of lower natural gas prices throughout 2024.
Revenue per Operating Day in Canada for the nine months ended September 30, 2024 averaged $32,373, which was 1% lower than the same period of the prior year mainly due to lower third party recoveries in 2024.
In the US, drilling rig utilization averaged 28% for the nine months ended September 30, 2024, compared to 39% in the same period of the prior year, with Operating Days decreasing from 843 days in the nine months ended September 30, 2023 to 546 days in the same period of 2024 due to lower industry activity.
Revenue per Operating Day in the US for the nine months ended September 30, 2024, averaged US$29,904, a 7% decrease compared to US$32,038 in the same period of the prior year, mainly due to higher day rates which were offset by lower third party recoveries in 2024 and higher mobilization revenue in 2023.
In Canada, service rig utilization of 36% for the nine months ended September 30, 2024 was higher than 33% in the same period of the prior year with Service Hours increasing by 5% from 42,081 hours in 2023 to 44,368 hours in 2024.
Revenue per Service Hour averaged $1,023 for the nine months ended September 30, 2024 and was 1% lower than the nine months ended September 30, 2023.
Business Overview
Western is an energy services company that provides contract drilling services in Canada and in the US and production services in Canada through its various divisions, its subsidiary, and its first nations relationships.
Contract Drilling
Western markets a fleet of 41 drilling rigs specifically suited for drilling complex horizontal wells across Canada and the US. Western is currently the fourth largest drilling contractor in Canada, based on the CAOEC registered drilling rigs1.
Production Services
Production services provides well servicing and oilfield equipment rentals in Canada. Western operates 63 well servicing rigs and is the second largest well servicing company in Canada based on CAOEC registered well servicing rigs2.
Business Environment
Crude oil and natural gas prices impact the cash flow of Western’s customers, which in turn impacts the demand for Western’s services. The following table summarizes average crude oil and natural gas prices, as well as average foreign exchange rates, for the three and nine months ended September 30, 2024 and 2023.
West Texas Intermediate (“WTI”) on average decreased for the three months ended September 30, 2024 by 9% compared to the three months ended September 30, 2023, whereas for the nine months ended September 30, 2024, WTI was consistent with the same period in the prior year. Pricing on Western Canadian Select (“WCS”) crude oil decreased by 9% for the three months ended September 30, 2024, compared to the same period of the prior year, whereas for the nine months ended September 30, 2024, WCS increased by 5%. In the third quarter of 2024, crude oil prices were impacted by weakening global demand, while the nine months ended September 30, 2024 was impacted ongoing geopolitical conflicts in Eastern Europe and the Middle East. Natural gas prices in Canada declined in 2024 due to lower demand, as the 30-day spot AECO price decreased by 73% and 51% respectively, for the three and nine months ended September 30, 2024, compared to the same periods of the prior year. Additionally, the US dollar to the Canadian dollar foreign exchange rate for the three and nine months ended September 30, 2024 strengthened by 1% for both periods, compared to the same periods in the prior year.
Despite stable crude oil prices in 2024 in the US, industry drilling activity weakened in the US. As reported by Baker Hughes Company3, the number of active drilling rigs in the US decreased by approximately 6% to 587 rigs as at September 30, 2024, as compared to 623 rigs at September 30, 2023 and averaged 586 rigs during the third quarter of 2024, compared to 649 rigs in the third quarter of 2023. Similarly, the average number of active drilling rigs in the US decreased by approximately 15% in the nine months ended September 30, 2024 to average 604 rigs compared to 709 rigs in the same period of 2023. In Canada there were 223 active rigs in the Western Canadian Sedimentary Basin (“WCSB”) at September 30, 2024, compared to 190 active rigs as at September 30, 2023, representing an increase of approximately 17%; however, the CAOEC4 reported that for drilling in Canada, the total number of Operating Days in the WCSB for the three months ended September 30, 2024, were 11% higher than the same period in the prior year. Similarly, for the nine months ended September 30, 2024, the total number of Operating Days in the WCSB were 6% higher than the same period of the prior year.
Outlook
In 2024, commodity prices are being impacted in the short term by concerns surrounding demand from continued uncertainty concerning the ongoing conflicts in Ukraine and in the Middle East. Events such as these contribute to the volatility of commodity prices. The precise duration and extent of the adverse impacts of the current macroeconomic environment and global economic activity on Western’s customers and operations remains uncertain at this time. Additionally, the threatened shutdown and relocation of a portion of the Enbridge Line 5 pipeline and the challenge and notice of civil claim related to the Blueberry River First Nations agreement in British Columbia by the Treaty 8 nations, have contributed to continued uncertainty regarding takeaway capacity and resource development. However, the Trans Mountain pipeline expansion commenced operations as of May 1, 2024 bringing much needed takeaway capacity to the market. The Trans Mountain pipeline project, the Coastal GasLink pipeline project, which is mechanically complete and expected to be online in 2025, and the LNG Canada liquefied natural gas project in British Columbia, now more than 85% complete and expected to be online in 2025, may contribute to increased industry activity. Controlling fixed costs, maintaining balance sheet strength and flexibility, repaying debt and managing through a volatile market are priorities for the Company, as prices and demand for Western’s services are expected to continue to improve. Western will continue to manage its costs in a disciplined manner and make required adjustments to its capital program as customer demand changes. Currently, 14 of Western’s drilling rigs and 15 of Western’s well servicing rigs are operating.
As at September 30, 2024, Western had $6.0 million drawn on its Credit Facilities and $5.0 million outstanding on its committed term non-revolving facility (the “HSBC Facility”), which matures on December 31, 2026. As at September 30, 2024, Western had $88.5 million outstanding on its second lien secured term loan with Alberta Investment Management Corporation (the “Second Lien Facility”), which matures on May 18, 2026. Western will continue to focus its efforts on debt reduction going forward.
Energy service activity in Canada will be affected by volatile commodity prices, the continued development of resource plays in Alberta and northeast British Columbia, ongoing pipeline completions that will increase takeaway capacity, environmental regulations, and the level of investment in Canada. With Western’s upgraded drilling rigs, the Company is well positioned to be the contractor of choice to supply drilling rigs in a tightening market. Western is also active with three fit for purpose drilling rigs in the Clearwater formation in northern Alberta. In the short term, the largest challenges facing the energy service industry are volatile commodity prices and the restrained growth in customer drilling activity due to their continuing preference to return cash to shareholders through share buybacks, increased dividends and repayment of debt, rather than grow production. If commodity prices stabilize for an extended period, then as customers strengthen their balance sheets by reducing debt levels, we expect that drilling activity will increase. In the medium term, Western’s rig fleet is well positioned to benefit from the increased drilling and production services activity expected to be generated by the LNG Canada liquefied natural gas project and the Trans Mountain pipeline expansion. The total rig fleet in the WCSB has decreased from 439 drilling rigs at September 30, 2023 to 384 drilling rigs as of October 29, 2024, representing a decrease of 55 drilling rigs, or 13%, which reduces the supply of drilling rigs for such projects. It remains Western’s view that its upgraded drilling rigs and modern well servicing rigs, reputation for quality and capacity of the Company’s rig fleet, and disciplined cash management provides Western with a competitive advantage.
