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Newalta Reports Third Quarter 2017 Results

TSX Trading Symbol: NAL

CALGARY, Nov. 1, 2017 /PRNewswire/ - Newalta Corporation ("Newalta") (TSX:NAL) today reported results for the three and nine months ended September 30, 2017.

FINANCIAL HIGHLIGHTS(1)


Three months ended
September 30,


Nine months ended
September 30,


($000s except per share data) (unaudited)

2017

2016

% change

2017

2016

% change

Revenue

65,914

51,311

28

184,672

141,742

30

General & Administrative

6,582

6,791

(3)

20,985

23,370

(10)

Net loss

(5,402)

(20,328)

(73)

(35,908)

(83,130)

(57)


- per share ($) basic and diluted

(0.06)

(0.23)

(74)

(0.41)

(1.10)

(63)

Adjusted EBITDA(2)

13,002

8,065

61

33,064

10,366

219


- per share ($) basic and diluted

0.15

0.09

67

0.38

0.14

171

Maintenance capital expenditures(2)

3,121

2,065

51

6,462

4,055

59

Growth capital expenditures(2)(3)(4)

781

1,697

(54)

2,763

3,714

(26)

Dividends declared

-

-

-

-

-

-

Dividends paid

-

-

-

-

3,515

(100)

Weighted average shares outstanding

88,148

88,148

-

88,148

75,337

17

Shares outstanding, September 30,(5)

88,148

88,148

-

88,148

88,148

-



(1)

Refer to Newalta's Management's Discussion and Analysis and unaudited Condensed Consolidated Financial Statements for further information. References to GAAP are synonymous with IFRS and references to Consolidated Financial Statements and notes are synonymous with Financial Statements. Unless otherwise noted, commentary and the financial results will refer to Continuing Operations.

(2)

These financial measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers. Non-GAAP financial measures are identified and defined in our Management's Discussion and Analysis ("MD&A").

(3)

Growth capital expenditures are net of 2016 contributions from a midstream joint venture partner for its interest in a modular processing facility ("MPF").

(4)

Growth capital expenditures are net of 2017 contributions from an oil marketer for its interest in a midstream services project.

(5)

Newalta had 88,148,148 shares outstanding as at October 30, 2017.

MANAGEMENT COMMENTARY

"Our third quarter results were within our guidance range and represent the fourth quarter of consecutive year-over-year improvements in the business," said John Barkhouse, President and Chief Executive Officer. "Adjusted EBITDA of $13 million for the quarter was primarily driven by continued improvement in our U.S. Drill Site business and increased demand for our Heavy Oil project work. Our performance is indicative of a stabilization in the market and we are seeing the impact of our actions to increase market share of our Drill Site business.

"We continue to see year-over-year improvements in our G&A, with third quarter and year-to-date savings of 3% and 10%, respectively. These savings demonstrate our continued focus and commitment to aggressively manage our costs as we see activity levels improve.

"Looking forward to the fourth quarter of 2017 our Adjusted EBITDA guidance range is $10 million to $13 million, which translates to a full year range of $43 million to $46 million. This full year range represents an improvement of more than 95% compared to prior year.

"We anticipate steady improvements to our business in 2018 predicated on the continuation of the recent stabilization in commodity prices and associated activity levels. Our Adjusted EBITDA guidance for full year 2018 is $50 million to $60 million based on a WTI forecast of $50 to $55 per barrel.

"We have progressed our assessment of refinancing alternatives for our $125 million November 2019 Senior Unsecured Debentures. We now have a number of options under consideration that are consistent with our focus on optimizing our capital structure, and expect to be in a position to provide further detail before the end of the first quarter of 2018."

FINANCIAL RESULTS

  • Q3 2017 revenue of $65.9 million increased by 28% compared to prior year, driven primarily by an increase in U.S. Drill Site utilization and customer demand for project work in Heavy Oil Onsite.
  • Year-to-date revenue increased 30% to $184.7 million from $141.7 million in prior year, driven primarily by an increase in U.S. Drill Site utilization and drilling and production related waste volumes at our Canadian Oilfield Facilities.
  • Net loss for the quarter was $5.4 million compared to $20.3 million in prior year. The year-over-year improvement was driven primarily by a recovery in restructuring and other, improved contributions from Drill Site and a reduction in stock-based compensation expense.
  • Year-to-date net loss improved from $83.1 million in the prior year to $35.9 million, driven by the same factors as the quarter as well as no impairment in 2017.
  • Adjusted EBITDA for the quarter was $13.0 million compared to $8.1 million in prior year. The year-over-year increase was driven primarily by Divisional EBITDA improvements of $4.7 million.
  • Year-to-date Adjusted EBITDA was $33.1 million, an increase of $22.7 million over prior year. The increase was driven by Divisional EBITDA improvements of $20.3 million and G&A savings of $2.4 million.
  • Effective March 31, 2017, we amended and extended the terms of our Credit Facility to extend the waiver of our Total Debt to Covenant EBITDA covenant to Q2 2019 and to revise the Senior Debt to Covenant EBITDA and Interest Coverage covenant thresholds.
  • Our contract model continued to provide predictable cash flow. These contracts are of varying lengths, generally are not tied directly to commodity price changes or drilling activity and provide a solid foundation for our business, particularly in depressed markets. On a trailing-twelve month ("TTM") basis, contracts represented 19% of our revenue.

Heavy Oil

  • Third quarter, year-over-year improvements in Heavy Oil were primarily driven by Onsite project work, with revenue up 23% to $26.0 million, a net earnings before taxes improvement of $3.1 million to $3.7 million and a 26% Divisional EBITDA increase to $10.1 million. Net earnings before taxes were also impacted by a decrease in depreciation and amortization.
  • Year-to-date, Heavy Oil revenue increased by 8% over prior year to $68.6 million driven by the same factors as the quarter. Net earnings before taxes increased by 20% to $6.4 million primarily due to increased contributions from Onsite. Divisional EBITDA increased 15% over prior year due to improvements in contributions from Onsite, increased commodity prices and savings from cost efficiencies, partially offset by lower contributions from production related activities.

Oilfield

  • In the third quarter, Oilfield revenue increased 32% to $39.9 million and net earnings before taxes improved by $1.3 million to $0.7 million compared to prior year, driven by performance in both the Drilling Services and Facilities business units. Divisional EBITDA increased by 39% over prior year to $9.5 million primarily as a result of improved drilling activity.
  • Year-to-date, Oilfield revenue increased by 48% over prior year to $116.1 million due to the same factors as the quarter. Net earnings improved by 163% over prior year to $6.8 million primarily due to increased contributions from the business units and decreased restructuring and other expenses. Divisional EBITDA increased by 147% over prior year to $28.7 million due to the same factors as the quarter.

Corporate and Other

  • Capital expenditures for the three and nine months ended September 30, 2017 were $3.9 million and $9.2 million, respectively, an increase of 4% and 19% over prior year. Expenditures for the quarter and year-to-date have been primarily focused on maintenance projects.
  • G&A decreased 3% and 10% to $6.6 million and $21.0 million, respectively, for the three and nine months ended September 30, 2017. The year-over-year improvement was driven by our disciplined approach to maintaining the benefit of the cost rationalization initiatives taken throughout the downturn.
  • Restructuring and other recovery for the three and nine months ended September 30, 2017, were $6.1 million and $2.2 million compared to expenses of $2.4 million and $31.9 million in prior year. The current year recovery is primarily comprised of a decrease to the non-cash decommissioning liabilities related to inactive sites.

The following section contains forward-looking information as it outlines our Outlook for 2017 and 2018. Our Outlook is based on several key assumptions including growth capital contributions, commodity prices and activity levels in the oil and gas industry. Changes to these assumptions could cause our actual results to differ materially. Please refer to our Forward-Looking Information later in this document. We are subject to a number of risks and uncertainties in carrying out our activities including market conditions, ability to expand the business, competition, regulation, and the ability to attract and retain personnel. A complete list of our risk factors is disclosed in our most recently filed Annual Information Form.

OUTLOOK & OPERATING LEVERAGE

Our performance throughout 2015 and 2016 was significantly impacted by the decline in oil prices and activity levels in the oil and gas industry. Inherent in our business model is the capacity to leverage significant upside with minimal capital investment as oil pricing and activity levels improve.

Our view is that increased activity (whether drilling, completions or production) will continue to be driven by stability in oil and gas prices, which enables our customers to make capital decisions to invest in the drilling and completion of new wells and reactivation of shut-in wells. Timing of activity level improvement, which translates into increased generation of production waste volumes, will vary among plays based on their cost profile.

Our operating leverage is driven by the following factors:

Crude Oil Prices

  • Crude oil prices directly impact the value of the products we recover from waste.
  • Commodity price stabilization generates confidence amongst producers, impacting their capital budgets, which in turn drives increased activity.

Drilling Activity

  • Recovery of drilling activity is determined by the pace at which producers deploy their capital budgets.
  • Drill Site performance is driven by active rigs and is the first business line to respond to changes in activity.
  • Wells drilled and completed in the areas we serve drive waste volumes into our facilities.
  • As drilling activity increases, we expect to realize improving returns on our capital investments made in 2014 and 2015.
  • We anticipate drilling activity in the areas where we operate to recover at different rates depending on the cost profile of the play, with shale play activity increasing first and CHOPS being the last to improve.
  • As utilization of assets improve, we expect price elasticity will follow.

Step Change

  • Primarily comprised of the net impact of production waste volumes and shifts in waste mix, net impact of contributions from Onsite contracts and, to a lesser extent, customer pricing and operational efficiencies.
  • We expect to see lagging increases in production waste volumes tied to the pace at which producers deploy their budgets, including turnarounds and workovers.
  • The composition of waste volumes impacts the degree of processing complexity and the amount of recoverable oil.
  • CHOPS waste volumes are also dependent on the drilling of new wells to replace production volumes lost through their naturally steep decline curves.
  • SAGD waste volumes are dependent on the number, timing and length of event-based upsets occurring in the normal course of SAGD facility operations.
  • Mining contributions are expected to be slower to return as producers focus on developing mitigation plans required to meet the Tailings Management Framework. We continue to work with producers to develop solutions to meet these requirements.
  • As production activity increases, we expect to realize improving returns on our capital investments made in 2014 and 2015.
  • We continue to manage our operational cost structure and collaborate with customers to provide enhanced value solutions.

Savings from Cost Rationalization

  • Our various initiatives to right-size the organization, streamline cost structures and business processes, and rationalize office space have established a lower cost model capable of supporting meaningful improvement in profitability with increasing activity in the markets we serve.
  • Cost rationalization actions taken by Management throughout the downturn removed in excess of $60 million in costs on an annualized basis from 2014 levels.

Outlook

Our outlook for Q4 2017 is based on our expectation of year-over-year trends including:

  • Flat commodity prices
  • Strengthened drilling and completions activity
  • Production related activity slightly down driven by:
    • Reduction in midstream services
    • Lower event-based SAGD volumes
    • Increased waste volumes at our Oilfield Facilities
    • Incremental improvements in CHOPS waste volumes
  • Disciplined focus on maintaining the benefits of our cost rationalization initiatives

Our Q4 and full-year 2017 guidance ranges are:

  • Revenue of $55 million to $65 million for the fourth quarter and $240 million to $250 million for the full year; and
  • Adjusted EBITDA of $10 million to $13 million for the fourth quarter and $43 million to $46 million for the full year.

The following table outlines the factors we expect to impact Adjusted EBITDA performance in the fourth quarter of 2017:

Factor

Actual(1)

Assumption(1)

Expected impact on Adjusted EBITDA

compared to prior year period(1)

Q3 2017

Q4 and Full Year 2017

Q4 2017

2017

West Texas Intermediate (US$/bbl)

Q3: $48.17

Q4 2017: $45 – $50
2017: $47 – $50



Canadian Light Sweet (CDN$/bbl)(2)

Q3: $57.07

Q4 2017: $54 – $60
2017: $58 – $61

$0.5M ↓– $0M

$1M – $1.5M ↑

Western Canadian Select (CDN$/bbl)(2)

Q3: $47.91

Q4 2017: $43 – $47
2017: $46 – $49

Flat

$1M ↑

Drilling activity(2) over prior year

Q3: 32%

Q4 2017: 35% – 40%
2017: 32% – 33%

$4.5M – $5M ↑

$16M – $16.5M ↑

Step Change(3)

Q3: $0.1M


$6M - $4.5M ↓

$3M – $1.5M ↓

Savings from cost rationalization

Q3: $0.7M


$0.5M – $1M ↑

$6M – $6.5M ↑

Adjusted EBITDA Guidance



$10M $13M

$43M $46M



(1)

M refers to millions.

(2)

Impact derived from annual sensitivities based on forecast performance and volumes outlined in the "Sensitivities" section of our 2016 Annual Report and may be adjusted for expected volumes. The actual impact from crude oil prices may vary with fluctuations in volumes.

(3)

This factor is expected to have an impact on our performance through the year and cannot be quantified on any linear sensitivity.

Total Debt, Capital & Cash Flow Management

Throughout the downturn, we proactively structured our business model for the environment. Our Q2 2016 equity financing, rationalization initiatives, amended Credit Facility, reduced capital spend and suspension of dividends provided us the liquidity and flexibility to operate in the sustained downturn.

We will continue to manage cash flows to ensure our financial obligations are met and in a manner that is consistent with our cost rationalization initiatives. Since the beginning of the downturn, Management has focused on moving towards a positive cash flow model and we have made significant progress through proactive management of operating cash flows and cost rationalization initiatives. Through 2017, we have continued to make progress towards our near-term financial objective of cash flow neutrality however, we expect a net cash outflow closer to a range of $10 million to $20 million for the year after the impact of working capital changes, cash costs for financing, onerous lease payments and capital expenditures. Moving into 2018 we will continue to maintain our focus on cash flow and exercise prudent judgment in managing our capital expenditures, in alignment with our longer-term target of positive cash flow.

Effective March 31, 2017, we amended and extended the terms of our Credit Facility to extend the waiver of our Total Debt to Covenant EBITDA covenant to Q2 2019 and to revise the Senior Debt to Covenant EBITDA and Interest Coverage covenant thresholds. These amendments provide us with the flexibility to continue to manage our balance sheet as our performance improves. Managing debt leverage and use of cash and capital are our highest priorities. We expect to remain within our debt covenants for the fourth quarter of 2017 and throughout 2018.

We have progressed our assessment of refinancing alternatives for our $125 million November 2019 Senior Unsecured Debentures and have a number of options under consideration that are consistent with our focus on optimizing our capital structure.

2018 Outlook

Looking forward to 2018, we anticipate our annual revenue to range between $235 million and $260 million, and annual Adjusted EBITDA between $50 million and $60 million, based on a WTI forecast of $50 to $55 US$/bbl. Further, we expect to manage G&A in line with 2017 levels.

Management's Discussion and Analysis and Financial Statements

The condensed consolidated financial statements and MD&A, which contain additional notes and disclosures, are available on SEDAR at www.sedar.com or our website at www.newalta.com under Investor Relations/Financial Reports.

Quarterly Conference Call
Management will hold a conference call on November 2, 2017 at 11:00 a.m. (ET) to discuss Newalta's performance for the quarter. To participate in the teleconference, please call 647-427-7450 or toll free 1-888-231-8191. To access the simultaneous webcast, please visit www.newalta.com. For those unable to listen to the live call, a taped broadcast will be available at www.newalta.com and, until midnight on Thursday, November 9, 2017, by dialing 855-859-2056 and using the pass code 96101928.

About Newalta
Newalta is a leading provider of innovative engineered environmental solutions that enable customers to reduce disposal, enhance recycling and recover valuable resources from oil and gas exploration and production waste streams. We simplify the critical challenges of sustainable environmental practices through the use of advanced processing capabilities deployed through a differentiated business model. We serve customers onsite directly at their operations and through a network of locations throughout North America. Our proven processes and excellent record of safety make us the first-choice provider of sustainability-enhancing services for oil and gas customers. With a highly skilled team of people, a two-decade track record of innovation and a commitment to commercializing new solutions, Newalta is positioned for sustained future growth and improvement. We are Sustainability SimplifiedTM. Newalta trades on the TSX as NAL. For more information, visit www.newalta.com.

The press release contains certain statements that constitute forward-looking information. Please refer to the section below, "Forward-Looking Information", for further discussion of assumptions and risks relating to this forward looking information.

This press release contains references to certain financial measures, including some that do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers. Non-GAAP financial measures are identified and defined in our MD&A.

FORWARD-LOOKING INFORMATION

Certain statements contained in this document constitute "forward-looking information" as defined under applicable securities laws. When used in this document, the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "estimate", "expect", "potential", "strategy", "target" and similar expressions, as they relate to Newalta Corporation and the subsidiaries of Newalta Corporation, or their management, are intended to identify forward-looking information. In particular, forward-looking information included or incorporated by reference in this document includes information with respect to:

  • future operating and financial results;
  • business prospects and strategy including related timelines;
  • capital expenditure programs and other expenditures;
  • realization of anticipated benefits of growth capital investments, acquisitions, divestitures and our innovation and process development initiatives;
  • realization of anticipated benefits from the implementation of cost rationalization initiatives including the anticipated value and sustainability of the cash savings from such initiatives;
  • the availability to us of financing alternatives, including those that may permit the refinancing of our November 2019 debentures prior to their maturity and the timing of such refinancing, if any;
  • our capital structure objectives;
  • anticipated industry activity levels;
  • anticipated commodity prices;
  • expected demand for our services;
  • expected expansion opportunities for our business;
  • the amount of dividends declared or payable in the future;
  • our projected cost structure and cash flow management activities; and
  • expectations and implications of changes in legislation.

Expected future financial and operating performance and related assumptions are set out under "Outlook & Operating Leverage". Such information reflects our current views with respect to future events and are subject to certain risks, uncertainties and assumptions, including, without limitation:

  • strength of the oil and gas industry, including drilling activity;
  • general market conditions;
  • fluctuations in commodity prices for oil and the price we receive for our recovered oil;
  • fluctuations in interest rates and exchange rates;
  • financial covenants in our debt agreements that may restrict our ability to engage in transactions or to obtain additional financing;
  • effectiveness of our cash flow management activities and cost rationalization initiatives;
  • success of our growth, acquisition and innovation and process development strategies including integration of businesses and processes into our operations and potential liabilities from acquisitions;
  • our ability to secure future capital to support and develop our business, including the issuance of additional common shares;
  • our ability to secure alternative financing, if needed and including financing that may permit the refinancing of our November 2019 debentures prior to their maturity, at all or on terms acceptable to us and consistent with our capital structure objectives;
  • the highly regulated nature of the environmental services and waste management business in which we operate;
  • the competitive environment of our industry in Canada and the United States;
  • possible volatility of the price of, and the market for, our common shares, and potential dilution for shareholders in the event of a sale of additional shares;
  • dependence on our senior management team and other operations management personnel with waste industry experience;
  • potential operational and safety risks and hazards, obtaining insurance for such risks and hazards on reasonable financial terms and potential failure of meeting customer safety standards;
  • the seasonal nature of our operations;
  • timing and term of contracts for our services;
  • risk of pending and future legal proceedings;
  • risk to our reputation;
  • our ability to attract, retain and integrate skilled employees;
  • open access for new industry entrants and the general unprotected nature of technology used in the waste industry;
  • costs associated with operating our landfills; and
  • such other risks or factors described from time to time in reports we file with securities regulatory authorities.

By its nature, forward-looking information involves numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking information will not occur. Many other factors could also cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking information and readers are cautioned that the foregoing list of factors is not exhaustive. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking information prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected. Furthermore, the forward-looking information contained in this document is made as of the date of this document and, in each case, is expressly qualified by this cautionary statement. Unless otherwise required by law, we do not intend, or assume any obligation, to update any such forward-looking information.

SOURCE Newalta Corporation