News Releases

CALGARY, May 7, 2015 /CNW/ - Secure Energy Services Inc. ("Secure" or the "Corporation") (TSX:SES) today announced financial and operational results for the three months ended March 31, 2015. The following should be read in conjunction with the management's discussion and analysis ("MD&A"), the condensed consolidated financial statements and notes of Secure which are available on SEDAR at www.sedar.com.

FINANCIAL AND OPERATIONAL HIGHLIGHTS FOR THE FIRST QUARTER ENDED MARCH 31, 2015

During the first quarter of 2015, oil and gas producers continued to reduce capital spending and budgets in response to the decline in crude oil and natural gas prices. First quarter drilling activity peaked in January with the active rig count continually declining throughout the quarter. In addition, spring break-up conditions occurred in early March, significantly shortening the typical length of the winter drilling season. Overall, these factors led to meters drilled declining by 38% from the first quarter of 2014, which significantly impacted results in the DS division. Accordingly, revenue in the DS division was down 42% as the division faced reduced activity and pricing pressure. However, Secure's overall revenue was only down 17%, as both the PRD and OS division revenue increased over the 2014 comparative period, offsetting the reduced revenue in DS. In the PRD division, approximately 70% of the revenue relates to production activities and are not as directly impacted by the decline in meters drilled. In the OS division, the majority of the revenue relates to project based activities that are also not directly correlated to drilling activities.

Throughout the first quarter Secure was very proactive in working with customers in order to find more efficient ways to manage their fluids and solids through more integrated offerings, volume-based contracts and reducing costs where possible. In conjunction with this process, Secure was also able to reduce the impact on margins across divisions through proactive cost management, streamlining of internal processes and cost savings initiatives where it did not impact safety, operations and environmental performance. This included incurring severance costs associated with reducing the Corporation's workforce by approximately 11% in an effort to eliminate redundant positions or positions significantly impacted by the sharp decline in activity. Secure remains focused on controlling costs while maintaining exceptional customer service.

In March, Secure strengthened its financial position by completing a bought deal equity financing raising gross proceeds of $198.0 million. Secure has consistently applied a disciplined approach to maintaining a strong balance sheet to effectively manage the business through a period of lower commodity pricing and industry activity. The Corporation is well positioned to take advantage of opportunities that may arise as a result of the downturn in the market. Secure is continuing to seek out and evaluate opportunities that will provide meaningful growth for the remainder of 2015, into 2016 and beyond.

The operating and financial highlights for the three month period ending March 31, 2015 can be summarized as follows:

REVENUE OF $169.7 MILLION FOR THE THREE MONTHS ENDED MARCH 31, 2015

• PRD division revenue (excluding oil purchase/resale) increased 10% for the three months ended March 31, 2015 up $6.2 million from the 2014 comparative period. Processing and disposal volumes increased 11% and 13% respectively, over the 2014 comparative period as demand for these services continued throughout the quarter combined with the addition of four new facilities and waste expansion at three existing facilities that were completed and commissioned subsequent to the first quarter of 2014 that contributed to the increase. The above increase to revenue was offset by the decline in drilling activity and lower crude oil prices. The price of crude declined by an average of 50% over the 2014 comparative period which had a direct impact on recovery revenues;
• OS division revenue increased 32% for the three months ended March 31, 2015 up $7.6 million from the 2014 comparative period. Increased project work from new and existing customers, four strategic acquisitions completed during 2014 which allowed OS to provide new and innovative full service solutions for fluid handling, and sustained equipment utilization throughout the three months ended March 31, 2015 drove the increase in revenue over the 2014 comparative period.

The increase in revenues in the PRD and OS divisions for the three months ended March 31, 2015 were offset by the following:

• DS division revenue decreased 42% for the three months ended March 31, 2015 down $49.8 million from the 2014 comparative period. The 41% decline in rig count and 38% decline in meters drilled over the 2014 comparative period had a direct impact on revenues for the quarter. This resulted in a 46% decrease in operating rig days for the DS division which was slightly offset by a 2% increase in revenue per operating day over the 2014 comparative period. DS division market share in Canada for the first quarter of 2015 was 29% compared to 31% in the first quarter of 2014. The change in market share is driven by timing of when the Corporation's customers discontinued drilling programs in the current quarter given the commodity environment. Revenue from fluids and solids equipment decreased 21% from the 2014 comparative period as a result of decreased utilization of the available equipment fleet stemming from decreased industry activity;
• Oil purchase and resale revenue in the PRD division for the three months ended March 31, 2015 decreased by 39% from the 2014 comparative period. The price of crude declined by an average of 50% over the 2014 comparative period which directly reduces oil purchased and resold during the quarter. Oil purchase/resale service revenue and expense are a direct offset however, they are expected to decrease significantly as a result of the lower price of crude oil in 2015.

ADJUSTED EBITDA OF $40.2 MILLION FOR THE THREE MONTHS ENDED MARCH 31, 2015

• For the three months ended March 31, 2015, adjusted EBITDA of $40.2 million decreased by $16.5 million compared to the first quarter of 2014. The decrease is directly attributed to the reduction in meters drilled which significantly impacted the DS division results and the decline in commodity prices over the 2014 comparative period impacting oil recovery revenues in the PRD division. Offsetting these decreases are the following: increased processing and disposal volumes at PRD facilities as these services are less reliant upon rig count and meters drilled, the addition of new facilities and expansions at existing facilities since the first quarter of 2014 in PRD, and increased projects work combined with the acquisitions completed during 2014 in the OS division.

ADJUSTED NET EARNINGS OF $1.0 MILLION FOR THE THREE MONTHS ENDED MARCH 31, 2015

• For the three months ended March 31, 2015, the decrease of $22.0 million in adjusted net earnings resulted from the factors discussed above regarding adjusted EBITDA in conjunction with increased depreciation and amortization in all three divisions. The increased depreciation and amortization resulted from the Corporation executing the largest organic capital program in 2014 increasing the depreciable assets base, and completion of eight strategic acquisitions in 2014 increasing the intangible assets value required to be amortized. This increase is partially offset by a change in the estimated useful life of property, plant and equipment at PRD facilities effective January 1, 2015. Secure reassessed each significant component of all its property, plant and equipment based on the current condition of the assets taking into consideration the operating history of the assets.

2015 ORGANIC CAPITAL BUDGET

• Secure's initial 2015 capital budget of $225.0 million has subsequently been revised to a range of $100.0 million to $150.0 million of committed capital for 2015. Total capital expenditures for the three months ended March 31, 2015 were $44.4 million including both growth and expansion capital. Major expenditures include:
  • Three facilities were completed and commissioned in the first quarter of 2015: Tulliby Lake FST, 13 Mile FST conversion, and the Rycroft FSR;
  • Pre-development for new facility locations including long lead items;
  • Various expansions at existing facilities to increase capacity;
  • Drilled two disposal wells; and
  • Rental equipment for specific OS division projects.

STRONG FINANCIAL POSITION

• On March 24, 2015, the Corporation completed a bought deal common share financing, issuing a total of 13,515,370 common shares of the Corporation at a price of $14.65 per common share for gross proceeds of $198.0 million. The proceeds of the offering will be used by the Corporation to fund capital expenditures, for strategic acquisition opportunities, and/or general working capital purposes.
• Secure's debt to trailing twelve month EBITDA ratio was 1.4 as of March 31, 2015 compared to 2.0 as at
  December 31, 2014.
• As at March 31, 2015, the Corporation had $437.9 million available under its credit facility.

PRD DIVISION OPERATING HIGHLIGHTS

Highlights for the PRD division included:

• Processing: For the three months ended March 31, 2015, processing volumes increased 11% from the comparative period in 2014. The increase in volumes and revenue is a result of an increase in overall demand for the PRD division's services and the addition of new facilities and expansions at current facilities subsequent to the first quarter of 2014 which include: completion of the Edson and Keene FSTs in April 2014, Stanley FST in July 2014, Brazeau FST in December 2014, and the Tulliby Lake and 13 Mile FSTs in March 2015.
• Recovery: Recovery revenues from water and waste processing for the three months ended March 31, 2015 decreased by 18% from the 2014 comparative period. The decrease in recovery revenue for the three months ended March 31, 2015 is a primarily a result of the decline in oil prices. Accordingly, revenue from the sale of oil recovered through waste processing was impacted by the decline in oil prices. In addition, crude oil differentials were not favorable during the first quarter, which limited the Corporation's ability to fully utilize its rail transloading facilities and capitalize on crude oil marketing opportunities at its pipeline connected FSTs.
• Disposal: Secure's disposal volumes for the three months ended March 31, 2015 increased by 13% from the comparative period of 2014. The increase in volumes is related to increased demand, the addition of the Tulliby Lake Landfill in November 2014, and other landfill expansions.
• Oil purchase/resale service: Revenue from oil purchase and resale services for the three months ended March 31, 2015 decreased 39% to $196.9 million from $320.6 million in the comparative period of 2014. The price of crude declined by an average of 50% over the 2014 comparative period which directly reduces oil purchased and resold during the quarter. Oil purchase/resale service revenue and expense are a direct offset however, it is expected to decrease significantly as a result of the lower price of crude oil in 2015.
• Operating margin as a percentage of revenue for the three months ended March 31, 2015 was 52% compared to 63% in the comparative period of 2014. The 11% decrease for the three months ended March 31, 2015 relates to a 5% margin impact as a result of reduced recovered oil sales, upfront commissioning costs for new facilities, and price discounts provided to customers on bundled service offerings leveraging all three of Secure's operating divisions. The remaining 6% margin impact related to fixed costs associated with rail car leases as tightened differentials during the quarter were not favourable to optimize the use of the rail transloading facilities.
• General and administrative ("G&A") expenses for the three months ended March 31, 2015 increased 30% to $7.2 million from $5.6 million in the comparative period of 2014. The increase in G&A over the 2014 comparative period is a result of non-recurring severance costs of $0.7 million and additional employees to support the opening of new facilities and organic growth at existing facilities both in Canada and the U.S. G&A less non-recurring items was 9% of revenue, consistent with the 2014 comparative period.

DS DIVISION OPERATING HIGHLIGHTS

Highlights for the DS division included:

• The decrease in revenue for the three months ended March 31, 2015 is the result of a 46% decrease in the drilling fluids service line and a 21% decrease in the fluids and solids control equipment service line from the 2014 comparative period. The decrease in both service lines is directly attributed to the 41% decline in rig count and a 38% decline in meters drilled from the 2014 comparative period as well as providing customer price discounts.
• A significant portion of DS customers drill using oil based drilling fluids. The cost of the drilling fluid is correlated with the price of oil, therefore a portion of the decline in revenue is associated with the drop in the value of the oil based drilling fluid sold to the customer. Finally, drilling activity peaked in January with spring break-up occurring in early March which shortened the winter drilling season therefore, significantly reducing customer activity in the first quarter.
• The DS division market share in Canada for the three months ended March 31, 2015 was 29%, down from 31% in the 2014 comparative period. The change in market share is driven by timing of when the Corporation's customers discontinued drilling programs in the current quarter given the commodity environment. Revenue per operating day increased 2% to $7,362 for the three months ended March 31, 2015 from $7,253 in the 2014 comparative period as wells that were drilled in the period were horizontal and directionally drilled therefore more technically challenging requiring more costly drilling fluids, resulting in higher product usages, increased probability of lost circulation events and a higher usage of specialty chemicals. Offsetting the increase in revenue per operating day was a 46% decrease in operating rig days to 7,408 days versus 13,838 days in the 2014 comparative period.
• The fluids and solids equipment revenue is driven by the size of the available equipment fleet, utilization, and rental rates in any given period. The decrease in the fluids and solids equipment revenue for the three months ended March 31, 2015 over the 2014 comparative period, is due to a decrease in the utilization of the equipment fleet resulting from a slowdown in industry activity combined with pricing pressure on rental rates.
• Operating margin for the three months ended March 31, 2015 was 22%, down from 26% in the 2014 comparative period. The 4% decrease in margin is due to price discounts given to customers to reflect the depressed price of crude oil, losses realized on oil based drilling fluids and the higher cost of specialty chemical purchased from the U.S. The margin above for the three months ended March 31, 2015 excludes the impact of $3.5 million of non-recurring operating costs for severance and the non-cash inventory impairment.
• G&A expense for the three months ended March 31, 2015 increased 1% from the comparative period of 2014. The increase is due to non-recurring severance costs. G&A less non-recurring items as a percentage of revenue was 10%, up 4% from the 2014 comparative period. The DS division continues to evaluate and re-align processes to create efficiencies, and as a result have laid off a number of employees and consultants.

OS DIVISION OPERATING HIGHLIGHTS

Highlights for the OS division included:

• Projects revenue for the three months ended March 31, 2015 increased due to the acquisition completed in April 2014 which added a new geographic area and increased customer base. In addition, there was an increase in demolition projects completed that contributed to increased revenues over the 2014 comparative period.
• IFS revenue increased for the three months ended March 31, 2015 as a direct result of the acquisition completed in February 2014 combined with an additional acquisition completed in August 2014 which added a new geographic area, and an increased customer base. Sustained equipment utilization during a period of slower industry activity and the increased offering of complementary services, has positively impacted IFS revenues.
• Environmental services revenue decreased for the three months ended March 31, 2015 as the revenue from this service line has a higher correlation to oil and gas drilling activity which was impacted by the decline in rig count of 41% from the 2014 comparative period.
• For the three months ended March 31, 2015, operating margins increased to 31% from 28% in the 2014 comparative period. The operating margin for the OS division is expected to fluctuate depending on the volume and type of projects undertaken and the blend of business between remediation and reclamation projects, demolition projects, pipeline integrity projects, site clean-up, and other services in any given period. The increase in margin over the 2014 comparative period is a result of an increase in demolition projects which contribute higher margins combined with the acquisition of the two rentals based businesses in February and August 2014, which typically achieve higher margins.
• G&A expenses for the three months ended March 31, 2015 increased 35% to $2.2 million from $1.6 million in the comparative period of 2014. G&A expenses increased due to the four acquisitions completed in 2014, an increase in activity and operations in the division, and costs associated with moving to a new OS division office. G&A is expected to fluctuate based on the growth and activity of the division. G&A as a percentage of revenue was 7%, consistent with the 2014 comparative period.

OUTLOOK

The significant decline in oil and gas prices affected drilling and completions activity in the first quarter and it is expected that it will continue to influence activity levels for the remainder of the year. Adjustments were made by the Corporation in the first quarter in order to react to the anticipated activity levels for the year, which included working with customers in order to find more efficient ways to manage their fluids and solids through more integrated offerings, volume-based contracts and reducing costs where possible. In the second quarter, Secure expects that the typical spring break up period where oil and gas activity is affected by road bans will be extended for a longer period as customers who slowed down during the winter drilling season are less likely to ramp back up with drilling and completion activities in this current commodity environment. There is a potential that some of the drilling and completion activity that typically begins in June depending on weather, gets deferred to either the third or fourth quarter. As a result, the second quarter will likely be impacted by both the uncertainty of weather conditions and the potential for producers not to ramp up drilling and completion activities.

Overall, Secure continues to estimate a reduction in annual consolidated revenues of 15 -20% over the 2014 comparative period, including some operating margin impact. In the PRD division, Secure continues to anticipate revenue to be consistent with 2014, with the potential to be above 2014 levels by 5-10%. Secure expects reduced drilling and completion activities, and the decline in recovered oil sales due to lower crude oil prices, will be offset by additional revenue contribution from facilities commissioned in 2014 and early 2015. The OS division anticipates environmental services, water management, pumping and storage solutions revenue to be reduced by approximately 10-15% from 2014. Finally, revenue in the DS division is expected to decline proportionally to the reduction in meters drilled, therefore the Corporation expects revenue to be down approximately 45-50% from 2014. The long-term trend of increased meters drilled per well should help the DS division when activity ramps up again. In addition, all divisions will likely have an approximate 5% impact to operating margins based on activity levels, price discounts, and commodity pricing.

Following the bought deal offering completed in the first quarter, the Corporation is well positioned in the current commodity environment. Maintaining a strong balance sheet has always been a priority of Secure as this allows Secure to effectively manage the business through a period of lower commodity pricing and industry activity, and provides Secure with the ability to take advantage of opportunities that may arise as a result of the downturn in the market. Secure is continuing to seek out and evaluate opportunities that will provide accretive growth to the Corporation in 2015 and beyond. The 2015 organic capital program has been revised to a range of $100.0 million to $150.0 million committed capital for 2015. The strong balance sheet not only enables Secure to continue with its organic capital program, it also enables Secure to pursue acquisitions of producer and third party facilities that complement Secure's network. Acquisition of complementary services that help the customer with integrated solutions will be part of Secure's capital plans for 2015.

Secure's strategy remains focused on lowering the customer's costs by providing them integrated solutions that achieve cost reductions. By combining multiple services and focusing on new and innovative ways to offer solutions, Secure's customers will be able to gain capital efficiencies drilling, completing and producing their reserves.

Secure is committed to investing in research and development projects and initiatives to continually expand the value chain of services offered to customers and to provide innovative solutions to reduce waste in the drilling and production processes. Both the water recycling technology that allows producers to recycle and reuse flowback water, and the solids processing technology for the recovery of hydrocarbons are in the final stages of economic feasibility. The results to date are positive and Secure is looking forward to evaluating how these new technologies will help Secure's customers reduce costs and gain environmental benefits in the future.

FINANCIAL STATEMENTS AND MD&A

The condensed consolidated financial statements and MD&A of Secure for the three and months ended March 31, 2015 are available immediately on Secure's website at www.secure-energy.com. The condensed consolidated financial statements and MD&A will be available tomorrow on SEDAR at www.sedar.com.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this document constitute "forward-looking statements" and/or "forward-looking information" within the meaning of applicable securities laws (collectively referred to as forward-looking statements). When used in this document, the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "estimate", "expect", and similar expressions, as they relate to Secure, or its management, are intended to identify forward-looking statements. Such statements reflect the current views of Secure with respect to future events and operating performance and speak only as of the date of this document. In particular, this document contains or implies forward-looking statements pertaining to: corporate strategy; goals; general market conditions; the oil and natural gas industry; activity levels in the oil and gas sector, including market fundamentals and the impact to each division on revenue and operating margins, drilling levels, commodity prices for oil, natural gas liquids ("NGLs") and natural gas; industry fundamentals for the second, third and fourth quarters of 2015; capital forecasts and spending by producers; demand for the Corporation's services; expansion strategy; the impact of the reduction in oil and gas activity on 2015 activity levels; revenue and operating margin for the PRD, DS and OS divisions; the amount of the revised 2015 capital program; the amounts of the PRD, DS and OS divisions' proposed 2015 capital budgets and the intended use thereof; debt service; capital expenditures; completion of facilities; the impact of new facilities on the Corporation's financial and operational performance; future capital needs; access to capital; acquisition strategy; anticipated commissioning of the water recycling at South Grande Prairie FST, and the recovery of hydrocarbons technology.

Forward-looking statements concerning expected operating and economic conditions are based upon prior year results as well as the assumption that increases in market activity and growth will be consistent with industry activity in Canada, and the U.S. and growth levels in similar phases of previous economic cycles. Forward-looking statements concerning the availability of funding for future operations are based upon the assumption that the sources of funding which the Corporation has relied upon in the past will continue to be available to the Corporation on terms favourable to the Corporation and that future economic and operating conditions will not limit the Corporation's access to debt and equity markets. Forward-looking statements concerning the relative future competitive position of the Corporation are based upon the assumption that economic and operating conditions, including commodity prices, crude oil and natural gas storage levels, interest rates, the regulatory framework regarding oil and natural gas royalties, environmental regulatory matters, the ability of the Corporation and its subsidiaries' to successfully market their services and drilling and production activity in North America will lead to sufficient demand for the Corporation's services and its subsidiaries' services including demand for oilfield services for drilling and completion of oil and natural gas wells, that the current business environment will remain substantially unchanged, and that present and anticipated programs and expansion plans of other organizations operating in the energy service industry will result in increased demand for the Corporation's services and its subsidiary's services. Forward-looking statements concerning the nature and timing of growth are based on past factors affecting the growth of the Corporation, past sources of growth and expectations relating to future economic and operating conditions. Forward-looking statements in respect of the costs anticipated to be associated with the acquisition and maintenance of equipment and property are based upon assumptions that future acquisition and maintenance costs will not significantly increase from past acquisition and maintenance costs.

Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether such results will be achieved. Readers are cautioned not to place undue reliance on these statements as a number of factors could cause actual results to differ materially from the results discussed in these forward-looking statements, including but not limited to those factors referred to and under the heading "Business Risks" and under the heading "Risk Factors" in the Corporation's AIF for the year ended December 31, 2014. Although forward-looking statements contained in this document are based upon what the Corporation believes are reasonable assumptions, the Corporation cannot assure investors that actual results will be consistent with these forward-looking statements. The forward-looking statements in this document are expressly qualified by this cautionary statement. Unless otherwise required by law, Secure does not intend, or assume any obligation, to update these forward-looking statements.

Non GAAP Measures and Operational Definitions

ABOUT SECURE ENERGY SERVICES INC.

SECURE is a TSX publicly traded energy services company that provides safe and environmentally responsible fluids and solids solutions to the oil and gas industry.

The Corporation operates three divisions:

Processing, Recovery and Disposal Division ("PRD"): The PRD division owns and operates midstream infrastructure that provides processing, storing, shipping and marketing of crude oil, oilfield waste disposal and recycling. Specifically these services are clean oil terminalling and rail transloading, custom treating of crude oil, crude oil marketing, produced and waste water disposal, oilfield waste processing, landfill disposal, and oil purchase/resale service. Secure currently operates a network of facilities throughout western Canada and in North Dakota, providing these services at its full service terminals, landfills, stand-alone water disposal facilities, and rail transloading facilities.

Drilling Services Division ("DS"): The DS division provides equipment and chemicals for building, maintaining, processing and recycling of drilling and completion fluids. The drilling fluids service line comprises the majority of the revenue for the division which includes the design and implementation of drilling fluid systems for producers drilling for oil, bitumen and natural gas. The DS division focuses on providing products and systems that are designed for more complex wells, such as medium to deep wells, horizontal wells and horizontal wells drilled into the oil sands.

OnSite Division ("OS"): The operations of the OS division include environmental services which provide pre -drilling assessment planning, drilling waste management, remediation and reclamation assessment services, laboratory services, and "CleanSite" waste container services; integrated fluid solutions which include water management, recycling, pumping and storage solutions; and projects which include pipeline integrity (inspection, excavation, repair, replacement and rehabilitation); demolition and decommissioning and reclamation and remediation of former wellsites, facilities, commercial and industrial properties.