ClearStream Energy Services Inc. announced its results for the three and nine months ended September 30, 2021. All amounts are in Canadian dollars and expressed in thousands of dollars unless otherwise noted.
“Higher activity levels in the third quarter resulted in revenues increasing by 12.5% from the second quarter as we completed several turnaround projects for our customers. Gross profit margin also improved to 11.2% in the third quarter from 10.8% in Q2 2021 and 9.9% in Q3 2020,” said Yves Paletta, Chief Executive Officer.
“The continued rise in global energy demand and commodity prices is providing strong fundamentals for our customers in the oil and gas industry. While we have seen an increase in bidding activity for our services, our customers continue to take a cautious approach to operational spending as evidenced by the reduction in new project awards and contract renewals in Q3 2021 compared to prior quarters. We expect activity levels to moderate in the fourth quarter before resuming their recovery in 2022, with several turnaround projects already scheduled for the second quarter,” added Mr. Paletta.
HIGHLIGHTS
• Revenues for the three months ended September 30, 2021 were $108.6 million, representing an increase of $7.9 million or 7.8% from Q3 2020 and an increase of $12.0 million or 12.5% from Q2 2021.
• Gross profit margin for the three months ended September 30, 2021 was 11.2%, as compared to 9.9% in Q3 2020 and 10.8% in Q2 2021.
• Adjusted EBITDAS for the three months ended September 30, 2021 was $6.0 million, representing an increase of $0.4 million or 8.0% from Q3 2020 and an increase of $1.6 million or 34.3% from Q2 2021.
• Selling, general and administrative expenses for the three months ended September 30, 2021 were $7.3 million, representing an increase of $2.7 million or 57.7% from Q3 2020 and an increase of $0.7 million or 10.9% from Q2 2021.
• Liquidity remained strong with total cash and available credit facilities of $42.2 million at September 30, 2021.
• New project awards and contract renewals were $46 million for the three months ended September 30, 2021 and $9 million for the month of October 2021. Approximately 80% of that work is expected to have been completed within Q3 and continuing throughout the next 12 months.
Maintenance and Construction Services
Activity levels for maintenance and construction services in the third quarter increased from the second quarter of 2021, as turnaround activities were scheduled and executed during this quarter. Revenues from maintenance and construction services in Q3 2021 were 13.9% higher than Q2 2021 and 4.9% higher than Q3 2020.
We continue to focus on consolidating various scopes of work with existing or new customers by adding additional services in order to to enable more efficient execution and lower costs for our customers on each work site.
Wear Technology Overlay Services
The recovery in activity levels that we experienced in the first half of 2021 continued in Q3 2021 with revenues up 6.1% from Q2 2021 and 56.0% from the pandemic low experienced in Q3 2020. With the continued rise in global energy demand and commodity prices, we are seeing customers in the oil sands operating at full production levels, which has increased the demand for wear technology overlay services.
Environmental Services
We continue to actively pursue opportunities with our customers in order to secure funding under the federal and provincial programs for the closure and reclamation of oil and gas wells, pipelines and facilities in British Columbia, Alberta and Saskatchewan. We expect the pace at which funding under these programs is released to accelerate in 2022. In addition, we are seeing oil and gas companies increase their own expenditures for reclamation and remediation activities.
THIRD QUARTER 2021 FINANCIAL RESULTS
2021 SUMMARY RESULTS COMMENTARY
Revenue for the three and nine months ended September 30, 2021 was $108,647 and $287,447 compared to $100,755 and $308,591 for the same periods in 2020, representing an increase of 7.8% and decrease of 6.9%. The decrease in revenue for the nine months ended September 30, 2021, in comparison to the same period in 2020, was driven by a strong first quarter in 2020, which was largely unaffected by the COVID-19 pandemic, partially offset by improvements in the second and third quarters of 2021. The stabilization of the business that started in Q2 2021 continued in Q3 2021 with revenue increasing by 7.8% from Q3 2020.
Gross profit for the three and nine months ended September 30, 2021 was $12,124 and $30,610 compared to $9,965 and $25,314 for the same periods in 2020, representing an increase of 21.7% and 20.9%. Gross profit margin for the three and nine months ended September 30, 2021 was 11.2% and 10.6% compared to 9.9% and 8.2% for the same periods in 2020 and 10.8% for the three months ended June 30, 2021. As it became clear that the COVID-19 pandemic and other market conditions were going to have longer term impacts on our activity levels and margins across the whole business, we took immediate steps to adjust our cost structures. These mitigation measures have improved operational flexibility and reduced the fixed costs associated with ClearStream's operations as shown by the increase in gross profit margins.
Selling, general and administrative (“SG&A”) expenses for the three and nine months ended September 30, 2021 were $7,302 and $19,856, in comparison to $4,631 and $16,063 for the same periods in 2020, representing an increase of 57.7% and 23.6%. As a percentage of revenue, SG&A expenses for the three and nine months ended September 30, 2021 were 6.7% and 6.9% compared to 4.6% and 5.2% for the same periods in 2020. The increase in SG&A expenses relative to 2020 is largely due to investments being made in 2021 to support our enterprise systems and digital strategy. These investments, which will extend into 2022, will drive longer-term efficiencies and increase our cost competitiveness. Also, SG&A expenses in the comparative periods were lower due to the cost reduction initiatives that were adopted in response to reduced operational volumes and macro-economic uncertainty created by the COVID-19 pandemic. As our business has recovered and stabilized, certain elements of these cost reductions have been reversed in order to support the increased volume of work in 2021.
For the three and nine months ended September 30, 2021, Adjusted EBITDAS was $5,973 and $12,653 compared to $5,531 and $10,047 for the same periods in 2020. As a percentage of revenue, Adjusted EBITDAS was 5.5% and 4.4% for the three and nine months ended September 30, 2021 compared to 5.5% and 3.3% for the same periods in 2020. Adjusted EBITDAS as a percentage of revenue increased for the nine months ended due to gross profit margin increases being realized in both the Maintenance and Construction Services segment and the Wear Technology Overlay Services segment.
Income from government subsidies includes the Canada Emergency Wage Subsidy ("CEWS") and the Canada Emergency Rent Subsidy ("CERS") received from the Government of Canada to assist with the payment of employee wages and rent as a result of the impact of the COVID-19 pandemic. During the three and nine months ended September 30, 2021, the Company qualified for both CEWS and CERS and recorded total subsidies of $143 and $11,313 compared to $14,905 and $23,481 for both comparative periods in 2020. The amount of subsidies reported in the third quarter of 2021 was lower than the first and second quarters of 2021 as the application for the third quarter will not be submitted until the fourth quarter.
Loss from continuing operations for the three months ended September 30, 2021, was $2,227 compared to income of $9,685 for the same period in 2020. Loss from continuing operations for the nine months ended September 30, 2021 was $9,300 compared to income of $1,716 for the same period in 2020. The income variance was driven by the government subsidies received in 2020 and 2021 and the recovery of the share-based compensation and other long-term incentive plans in 2020, offset by the impairment of right-of-use assets in 2021 and goodwill in 2020.
LIQUIDITY AND CAPITAL RESOURCES
ClearStream has an asset-based lending facility (the “ABL Facility”) comprised of (i) a revolving credit facility providing for maximum borrowings up to $15.0 million (the “Revolving Facility”) and (ii) a term loan facility providing for maximum borrowings of up to $40.5 million (the “Term Loan Facility”). The Revolving Facility matures on March 31, 2022 and the Term Loan Facility matures 180 days thereafter. As at September 30, 2021, the Company had $12.0 million of available capacity under the Revolving Facility, $40.5 million drawn on the Term Loan Facility and $30.2 million of cash on hand.
The Company anticipates that its liquidity (cash on hand and available credit facilities) and cash flow from operations will be sufficient to meet its short-term contractual obligations, maintain compliance with its financial covenants, and maintain a positive cash position through September 30, 2022.
As at September 30, 2021 and December 31, 2020, issued and outstanding share capital included 109,992,668 common shares, 127,735 Series 1 preferred shares, and 40,111 Series 2 preferred shares.
The Series 1 preferred shares (having an aggregate value of $127.735 million) are convertible at the option of the holder into common shares at a price of $0.35/share and the Series 2 preferred shares (having an aggregate value of $40.111 million) are convertible into common shares at a price of $0.10/share.
The Series 1 and Series 2 preferred shares have a 10% fixed cumulative preferential cash dividend payable when the Company has sufficient monies to be able to do so, including under the provisions of applicable law and contracts affecting the Company. The board of directors of the Company does not intend to declare or pay any cash dividends until such times as the Company's balance sheet and liquidity position supports the payment. As at September 30, 2021, the accrued and unpaid dividends on the Series 1 and Series 2 shares totaled $55.6 million. Any accrued and unpaid dividends are convertible in certain circumstances at the option of the holder into additional Series 1 and Series 2 preferred shares.
OUTLOOK
For our customers in the oil and gas industry, the continued rise in global energy demand and commodity prices is providing strong fundamentals. While these customers are prioritizing debt repayment and returns to shareholders in the short-term, we expect that they will begin to increase their spending on both maintenance projects (to increase operational reliability) and capital projects (to maintain/expand productive capacity) later in 2022.
We have seen an increase in bidding activity for our services, which we consider a leading indicator of future activity levels. We expect activity levels to moderate in the fourth quarter before resuming their recovery in 2022, with several turnaround projects already scheduled for the second quarter.
With energy transition and environmental considerations becoming increasingly important for all stakeholders in the energy sector, we expect that our customers will focus on improving their operational processes for greater efficiencies and reliability, which aligns well with our service offerings.
To better support our customers, ClearStream has continued to add new service offerings that encompass the full asset lifecycle and is now offering a suite of more than 40 services. Through the extensive regional coverage provided by our 18 operating facilities, we believe that ClearStream is well-positioned to consolidate further multiple services required at various operating sites while generating efficiencies and cost reductions for its customers. During 2021, we added three new operating facilities: Fox Creek, Alberta; Drayton Valley, Alberta; and Swift Current, Saskatchewan.
ClearStream's business model continues to prove its resilience as we are working closely with our customers everyday in helping them to effectively manage their operations.
