Financial Results
For the three-month period ended September 30, 2021, PHX Energy Services Corp. generated strong third quarter revenue from continuing operations as demand for the Corporation’s premium technologies continued to strengthen and the industry activity continued to recover. PHX Energy recognized revenue of $93.3 million (2020 - $37 million) and PHX Energy’s consolidated activity levels for the third quarter increased by 133 percent to 5,753 days (2020 - 2,467 days). For the three-month period September 30, 2021, earnings from continuing operations were $4.2 million in the 2021-quarter (2020 - $1.6 million) and adjusted EBITDA from continuing operations was $14.1 million (2020 - $6.8 million) (see “Non-GAAP Measures”). The 2021 adjusted EBITDA is double the adjusted EBITDA in the 2020-quarter, and the Corporation achieved this level of adjusted EBITDA despite higher cash-settled share-based payments that amounted to $3.4 million (2020 - $0.9 million). Adjusted EBITDA from continuing operations, excluding the impact of cash-settled share-based payments, would be $17.5 million in the 2021 three-month period (2020 - $7.7 million). Cash-settled share-based payments rose primarily due to increases in the Corporation’s share price. Adjusted EBITDA in the third quarter of 2020 also included $1.3 million in government grants and a bad debt recovery of $0.9 million.
The Corporation’s US segment reported its second highest third quarter revenue in the Corporation’s history which represented 79 percent (2020 – 82 percent) of its third quarter consolidated revenue. The Corporation’s US revenue increased 144 percent quarter-over-quarter, with the US division generating $74 million in the 2021-quarter as compared to $30.3 million in the 2020-quarter. In comparison, the US rig count during the third quarter of 2021 increased by 100 percent to 475 average rigs running per day as compared to the 238 rigs per day in the third quarter of 2020 (Source: Baker Hughes). The improvement in the US division’s activity and revenue was mainly attributable to ongoing demand for the Corporation’s premium technologies and high-quality services and this allowed the division to protect the market share gains it had made in prior quarters as industry activity grew.
In Canada, the industry and PHX Energy’s activity levels also improved significantly quarter-over-quarter, with both seeing quadruple the number of wells drilled. The Corporation drilled 254 wells in the third quarter of 2021 (2020 – 63), a 303 percent increase, and the industry drilled 1,358 wells in the third quarter of 2021 (2020 – 335), a 305 percent improvement (Source: Daily Oil Bulletin). The Canadian division’s revenue growth was consistent with the aforementioned activity growth and during the third quarter of 2021 the Canadian segment’s revenue was $19.3 million (2020 - $6.7 million).
The Corporation continued to maintain a strong balance sheet position and reported a cash balance of $24.9 million with no bank loans outstanding as at September 30, 2021. As a result of earnings growth, for the three-month period ended September 30, 2021, the Corporation’s free cash flow from continuing operations increased to $8.7 million as compared to $2.4 million in the corresponding 2020-quarter (see “Non-GAAP Measures”).
Dividends
In light of the Corporation’s balance sheet strength and improving adjusted EBITDA margins and net earnings, in August of 2021 the Board approved an increase to the Corporation’s quarterly dividend from $0.025 per common share to $0.05 per common share effective for the dividend payable on October 15, 2021.
On September 15, 2021, PHX Energy declared a cash dividend of $0.05 per common share and $2.5 million was paid on October 15, 2021 to shareholders of record at the close of business on September 30, 2021.
Responding to COVID-19
Despite oil prices recovering to pre-pandemic levels, the Corporation continued to monitor, evaluate and adjust its business costs in-line with drilling activity in North America and will continue to implement changes as required. In addition, the Corporation will continue to review various government assistance programs available for businesses in North America. For the three-month period ended September 30, 2021 the Corporation recognized government grants of $0.1 million (2020 - $1.3 million) in the Canadian division.
PHX Energy has and will continue to diligently preserve a solid financial position and retain financial flexibility through substantial liquidity on its credit facilities. As at September 30, 2021, the Corporation has working capital of $54.9 million and approximately CAD $65 million and USD $15 million available from its credit facilities. Additional information regarding the risks, uncertainties and impact on the Corporation’s business can be found throughout this press release, including under the headings “Capital Spending”, “Operating Costs and Expenses”, “Critical Accounting Estimates” and “Outlook”.
Assets Held for Sale and Discontinued Operations
On December 10, 2020, the Corporation entered into a preliminary purchase and sale agreement with Well Tech Services Ltd. to sell the Russian division, operating under the entity Phoenix TSR LLC (“Phoenix TSR”), for 240 million Russian Rubles. The purchase and sale agreement was amended on August 31, 2021 to extend the transaction completion deadline to the first quarter of 2022. As part of the deadline extension, Well Tech Services Ltd., agreed to pay the Corporation two non-refundable deposits totaling 40 million Russian Rubles in October and November 2021 to be applied to the final purchase price.
Management expects the sale to be completed in the first quarter of 2022. Accordingly, for the nine-month period ended September 30, 2021, net assets with a carrying value of $4.4 million owned by Phoenix TSR have been classified as assets held for sale and liabilities directly associated with assets held for sale and the financial results of Phoenix TSR have been presented as discontinued operations. The decision to sell the division is not anticipated to have a significant impact on the continuing operations of the Corporation. For the three and nine-month periods ended September 30, 2021, the Russian division generated adjusted EBITDA of $0.6 million and $0.1 million, respectively (2020 - $0.6 million and $0.8 million, respectively).
Capital Spending
During the third quarter of 2021, the Corporation spent $6.8 million in capital expenditures (2020 - $1.8 million), which were primarily used to expand its fleet of premium technologies, specifically Velocity Real-Time System (“Velocity”), PowerDrive Orbit Rotary Steerable System (“RSS”), and Atlas High Performance Motors (“Atlas”) to meet the growing demand for its drilling equipment. Of the total capital expenditures in the 2021-quarter $3.5 million was spent on growing the Corporation’s fleet of drilling equipment and the remaining $3.3 million was spent on maintenance of the current fleet of drilling and other equipment. For the nine-month period ended September 30, 2021, the Corporation spent $24.2 million in capital expenditures (2020 - $22.1 million). Of the total capital expenditures in the 2021-period, $15.9 million was spent on growing the Corporation’s fleet of drilling equipment and the remaining $8.3 million was spent on maintenance. The Corporation funded capital spending through funds from operations and cash and cash equivalents on hand.
On November 3, 2021 PHX Energy’s Board of Directors (the “Board”) approved a second increase to the 2021 capital expenditure program from $35 million to $43 million. This increase is in addition to the preliminary 2022 budget of $30 million approved by the Board on August 4, 2021 and is primarily dedicated to growing and maintaining the Velocity, RSS and Atlas fleets to meet increased demand anticipated in the last quarter of 2021 and through 2022.
As at September 30, 2021, the Corporation has commitments to purchase drilling and other equipment for $37.9 million. Of the purchases, $14.1 million are expected to be delivered by the end of the fourth quarter with the remaining $23.8 million anticipated to be delivered by the end of the first quarter of 2022. In light of global supply chain disruptions, the Corporation has been proactive in securing machinery and drilling equipment in order to capitalize on current and foreseeable market conditions. Commitments include $15.1 million for Velocity systems, $21.9 million for performance drilling motors primarily relating to Atlas, and $0.9 million for other machinery and equipment. Of the $37.9 million capital expenditure commitments, $24.2 million is anticipated to be spent on growing the Corporation’s fleet of high-performance equipment.
The Corporation currently possesses approximately 442 Atlas motors, comprised of various configurations including its 5.13", 5.76", 7.12”, 7.25”, 8" and 9" Atlas motors, 93 Velocity systems, and 33 PowerDrive Orbit RSS, the largest independent fleet in North America.
Technology Partnership
In the first quarter of 2021, the Corporation announced it had entered into a technology partnership with National Energy Services Reunited Corp. (“NESR”). Pursuant to the partnership, PHX Energy will provide its premium downhole technology for use in NESR’s directional drilling operations in the Middle East and North Africa (“MENA”) regions. Access to NESR’s international markets is anticipated to provide opportunities to further extend the global reach and reputation of the Corporation’s high-performance technologies and equipment. Velocity was certified as part of the qualification process in the second quarter and in the third quarter the Corporation successfully obtained certification for Atlas as well. With the successful qualification of both state-of-the-art technologies, NESR is now eligible to participate in the tendering process with Atlas and Velocity. Based on preliminary drilling results during the qualification process, the Corporation is optimistic that the tenders will be successful and through its partnership will be an active supplier in the region. It is anticipated that the tender process will take some time and the Corporation is expecting to increase activity levels in the region in the 2022-year.
Shares Held in Trust
In the second quarter of 2021, the Corporation amended its cash-settled share-based compensation program to permit the settlement of retention and performance awards with, at the option of the Corporation, either cash or common shares acquired by an independent trustee in the open market from time to time for such purposes. If common shares are used to settle awards, an additional multiplier to the award value of 1.25 times is applied. Common shares acquired by the independent trustee in the open market are held in trust for the potential settlement of retention and performance award values and are netted out of share capital, including the cumulative purchase cost, until they are distributed for future settlements. For the three-month period ended September 30, 2021, the trustee purchased 589,741 common shares for a total cost of $2.8 million. As at September 30, 2021, 1,376,280 common shares are held in trust.
Investments
On July 20, 2021, PHX Energy announced a strategic investment of $3 million in a geothermal power developer, DEEP Earth Energy Production Corp. (“DEEP”). DEEP is currently developing a geothermal power facility in southern Saskatchewan which stands to become the first major geothermal power facility in Canada. The investment in DEEP provides an opportunity for the Corporation to diversify the business as management continues to focus on strategies to ensure long term sustainable growth for the business. PHX Energy’s investment in DEEP includes an option for an additional $3.5 million equity upon the exercise of warrants held by the Corporation. Exercise of the warrants, which expires in three years, is at the discretion of the Corporation.
Normal Course Issuer Bid
During the third quarter of 2021, the Toronto Stock Exchange (“TSX”) approved the renewal of PHX Energy’s Normal Course Issuer Bid (“NCIB”) to purchase for cancellation, from time-to-time, up to a maximum of 3,679,797 common shares, representing 10 percent of the Corporation’s public float of common shares as at August 6, 2021. The NCIB commenced on August 16, 2021 and will terminate on August 15, 2022. Purchases of common shares are to be made on the open market through the facilities of the TSX and through alternative trading systems. The price which PHX Energy is to pay for any common shares purchased is to be at the prevailing market price on the TSX or alternate trading systems at the time of such purchase.
Pursuant to the current NCIB, in the three-month period ended September 30, 2021, 500,000 common shares were purchased by the Corporation and cancelled.
