NISKU, AB, March 25, 2017 /CNW/ - Hyduke Energy Services Inc. ("Hyduke" or the "Company") (HYD – TSX) announced operating results for the year ended December 31, 2016. Hyduke's Financial Statements and Management Discussion & Analysis have been filed with regulators and are available at www.sedar.com.

Patrick Ross, Hyduke CEO stated, "Our operating results for 2016 are summarized below and should be read in conjunction with the detailed disclosure in our Audited Financial Statements and MD&A. Simply put, we survived.

"Close to three years ago we began to execute a turnaround strategy for Hyduke. One year into that strategy, the oilfield services industry entered one of the most severe down cycles it has experienced in recent times. While this downturn has slowed the pace, it has not slowed the progress.  Non-core and non-relevant businesses have been divested or shut down. We have exited redundant lease obligations, reduced administrative staff, taken wage reductions and settled long outstanding law suits and statements of claim. While our cost structure has been trimmed, we have bolstered our safety, quality, sales, marketing, and engineering capabilities. Product lines like Swift Environmental fluid management equipment, (www.swiftenv.com) have been added and our customer base has been expanded both within the oilfield and outside into additional industries.

"More recently, in anticipation of a modest recovery in oilfield services, we transitioned to the growth elements of our turnaround strategy. This initiative has included the acquisition of Western Manufacturing Ltd. to expand our manufacturing capacity, capabilities and geographic footprint. To offer our own proprietary solutions, we acquired the IP and dies for the complete line of Swift Environmental products. We expanded our Nisku capabilities to manufacture pressure vessels by obtaining our ABSA, ASME and U stamp. Our recent accreditation by the American Petroleum Institute allows us to use the API Standard 650 Monogram on our field constructed storage tanks.

"We have also taken actions to strengthen our balance sheet including raising $12 million through a private placement in February 2017 and ongoing discussions with our bankers to restructure our debt.

"The last two years have been difficult for the oilfield services industry and for Hyduke. Having survived through this downturn, Hyduke is now positioned to execute on its growth plan."

SELECTED FINANCIAL INFORMATION
(all amounts herein are in thousands)

The market for the Company's products has been weak during 2015 and 2016 as a result of a prolonged downturn in the oil and gas exploration and production industry globally and particularly in Canada caused by the collapse of world oil prices in late 2014 and continued low natural gas prices. The vast majority of the Company's customers operate in this sector which has experienced a reduction in capital expenditures from $81 billion in 2014 to $54 billion in 2015 and $37 billion in 2016. As a result, the Company's total revenue for the fiscal year ended December 31, 2016 decreased 41.5% to $12,667 from $21,671 in 2015.

While revenues have declined, the Company's focus during this downturn has been to reduce all costs as necessary while maintaining its core capabilities to ensure its viability for the eventual return of activity in the oil & gas sector. While revenues have declined from $41.0 million in 2014 to $12.7 million in 2016, the Company has managed its costs so that the loss from continuing operations during this period increased by only $0.9 million. Therefore, the Company's cost structure is now better structured to achieve profitability as revenues increase upon the return of activity in the oil & gas industry.

Consistent with the Company's focus on cost reduction, selling, general and administrative expenses decreased by 27.3% from $2,802 in 2015 to $2,036 in 2016. There were no impairments recorded on current and long term assets in 2016 compared to $477 in 2015. Net loss from continuing operations was $5,957 or ($0.19) per share in 2016 compared to net loss of $4,594 or ($0.15) per share in 2015. Negative EBITDAS of $4,671 was recorded for the year ending December 31, 2016 compared to negative EBITDAS of $3,031 in 2015.

Revenue

For the year ended December 31, 2016, the Manufacturing & Fabrication segment generated $5,694 of revenue, a decline of $5,450 or 48.9% over the prior year. The manufacturing & fabrication sector is project based with these projects being dependent on the capital budgets of the Company's customer base. Pricing pressure and lower capital spending across the oil & gas industry resulted in revenue drops in custom steel fabrication (4.7%), storage tank construction and repairs (58.7%), and oilfield equipment manufacturing (62.5%) from the year ended December 31, 2015. A number of projects the Company quoted on were delayed from 2016 into later time periods as customers reduced capital budgets with the downturn in the oil & gas sector continuing at a rate and length longer than anticipated when these capital budgets were first prepared.

Revenue levels in the Supply & Service segment are highly correlated to the number of operational drilling and well service rigs. As fewer rigs are in operation, fewer supplies, pneumatics and inspection services are required.  Overall, revenue in the segment declined $3,865 or 35.3% over 2015 levels, a decline consistent with the decline in operating drilling and service rigs.   

For the year ended December 31, 2016, negative gross margin was $3,997 or (26.8%) of revenue compared to $1,301 or (6.0%) of revenue in 2015. The gross margin in the Manufacturing & Fabrication segment dropped from (13.0%) in 2015 to (55.7%) in 2016. In addition to the decline in revenue, the segment experienced significant pricing pressure throughout 2016 resulting in reduced margins on completed work. Compounding the decline in fleet utilization and resulting demand for oilfield supplies, the Supply & Service segment also felt pricing pressure from its customers. Gross margins declined from 0.7% to (3.5%). 

Selling and distribution expenses decreased $70 or 43.7% to $91 in 2016. The decrease in costs is due to a recapture on international marketing costs from 2015, as well as a reduction in advertising and sales personnel.

General and administrative expenses decreased 26.3% or $696 to $1,945 in 2016. This decrease is a direct result of the Company's focus on cost reduction and is largely due to a headcount reduction of approximately 15% of administrative employees combined with a reduction in hours of work for some employees and wage reductions of 10%-40%. In addition, there was a reduction in certain discretionary administrative costs, including professional fees.

Negative EBITDAS for continuing operations was $4,671 for 2016, a decrease of $1,640 from negative EBITDAS of $3,031 in 2015. The decrease in EBITDAS was largely the result of the reduced revenue and margin erosion resulting from pricing pressures due to the competitive nature of the fabrication business during the extended downturn in the oil and natural gas industry.  

The Company recorded $583 in interest charges during 2016, up $111 from 2015. The increase is due to the amendment to the term loan in June 2016, which increased the interest rate by 4.15%. Throughout the year, the Company made repayments of $788 under its term loan and $178 under its finance lease obligations. Four finance leases were retired during the year.

Continuing operations net loss of $5,957 is $1,363 lower than the net loss of $4,594 in 2015. Loss per share from continuing operations was $0.19 compared to a loss per share of $0.15 in 2015. 

As at December 31, 2016, the Company had negative working capital because its term debt of $6,866 becomes due in August 2017 and thus is classified as current, was in breach of certain covenants on its term debt, and was unable to draw on its revolving debt facility as it was in breach of financial covenants. Subsequent to year end, the Company closed an equity financing for net proceeds of $11,983 and obtained an amendment to its term debt such that it is now not in breach of covenants. The Company recognizes that to stabilize its capital structure in the long term it also needs to assess the replacement of its long-term debt facility and amendment of its revolving facility to remove any covenant breaches and is in discussions with lenders to do so. There is however no certainty that these discussions will be successful.

MANAGEMENT REVIEW AND OUTLOOK

Due to the continuation of low oil & natural gas prices, 2016 saw additional reductions in capital expenditures by exploration and production (E&P) companies globally. In Canada capital expenditures fell from $81 billion in 2014 to $54 billion in 2015 and $37 billion in 2016.  This was also reflected in rig count in Canada which fell from 370 in 2014 to 184 in 2015 to 120 in 2016. These reductions impacted Hyduke's business both in terms of volume of activity and pricing.

Late in 2016 the E&P industry began to show signs of increased activity as commodity prices increased and stabilized. Drilling rig activity in Q4 2016 was 172 average rigs drilling daily (Q4 2015 – 168) and averaged 275 in January/February 2017 (188 in the same period of 2016). A number of E&P companies in Canada have increased 2017 capital expenditure budgets as compared to 2016. There is cautious optimism that commodity prices will remain at or near levels allowing sufficient cash flows to E&P companies to maintain these increased capital expenditure budgets throughout the year.

As discussed earlier, Hyduke has focused on cost reductions over the last two years while maintaining its core skill sets. As such, the Company believes that it has achieved a cost structure and maintained productive capacity that can profitably address this increase in industry activity. The closing of the equity financing in February 2017 has strengthened the balance sheet and allows the Company to assess potential acquisitions that add productive capacity, customer base, geographic footprint, and/or proprietary product lines. It is the Company's intention to achieve growth through identifying such appropriate acquisitions at good value and through organic growth of its core businesses. The Company's BW Rig Supply business has already experienced a significant increase in revenues compared to 2016 as both drilling rig and service rig activity has increased in Alberta so far in Q1 2017.

The Company has expanded its fabrication capabilities beyond only the construction of drilling rigs to now include structural steel, tanks, pressure vessels and certain proprietary components thus diversifying our customer base and revenue potential. The addition of industry qualifications during the year (such as API 650) has allowed the Company to demonstrate both its technical capabilities and commitment to quality to an expanded set of customers resulting in Hyduke being added as a qualified vendor to many more companies.

The Company believes that the combination of increased industry activity, the Company's quality capabilities, an improved cost structure and a stronger balance sheet will allow Hyduke to grow its revenues and profitability through 2017. Concurrently, the Company will look to renegotiating its debt agreements to solidify its balance sheet during the year. While Hyduke is currently in discussions to do so, there is no certainty that such discussions will be successful.

Additional information relating to Hyduke is available under the Company's profile on SEDAR website at www.sedar.com and www.hyduke.com

Forward looking information

This news release contains forward-looking information relating to the expectations of management that the integration process will lead to improvements in operations and efficiency for both Western and Hyduke. Such forward-looking information is subject to important risks, uncertainties and assumptions. The results or events predicated in this forward-looking information may differ materially from actual results or events. As a result, you are cautioned not to place undue reliance on this forward-looking information.

Forward-looking information is based on certain factors and assumptions regarding, among other things, general assumptions respecting the business and operations of Hyduke and economic factors. While the Company considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect.

Forward looking-information is subject to certain factors, including risks and uncertainties that could cause actual results to differ materially from what is currently expected. These factors include but are not limited to risks associated with the failure of the Company to obtain the benefits of integration; volatility in market prices for oil and natural gas; and the general economic conditions in Canada.

You should not place undue importance on forward-looking information and should not rely upon this information as of any other date. While the Company may elect to, the Company is under no obligation and does not undertake to update this information at any particular time, except as required by law.

About Hyduke

Trading on the TSX under the symbol "HYD," Hyduke Energy Services Inc. is a supplier of equipment and services to the oil and gas drilling and well servicing industry. 

The TSX has not reviewed and does not accept responsibility for the adequacy or accuracy of this News Release.

SOURCE Hyduke Energy Services Inc.