News Releases

CALGARY, Aug. 13, 2013 /CNW/ - Secure Energy Services Inc. ("Secure" or the "Corporation") (TSX:SES) today announced financial and operational results for the three and six months ended June 30, 2013. The following should be read in conjunction with the management's discussion and analysis ("MD&A"), the condensed consolidated interim financial statements and notes of Secure which are available on SEDAR at www.sedar.com.

SECOND QUARTER AND YEAR TO DATE 2013 FINANCIAL AND OPERATIONAL HIGHLIGHTS

Revenue (excluding oil purchase and resale) for the three and six months ended June 30, 2013 increased 24% and 26% compared to the respective prior year periods while earnings before interest, taxes, depreciation and amortization ("EBITDA") improved 3% and 16% for the three and six months ended June 30, 2013 compared to the same periods in 2012. Financial results were influenced by a later spring break-up and by a wet June throughout the Western Canadian Sedimentary Basin ("WCSB") and North Dakota. Canadian industry activity declined quarter over quarter; wells drilled, rig count and meters drilled decreased 15%, 10% and 1% respectively.

Secure completed the acquisition of Frontline Integrated Services Ltd. ("Frontline") on April 1, 2013 and announced the acquisition of Target Rentals Ltd. ("Target") on July 2, 2013. These acquisitions expand the value chain of services the Corporation offers its customers. In addition to the acquisition of Frontline and Target, growth and expansion capital expenditures incurred during the three and six months ended June 30, 2013 totaled $36.2 million and $77.7 million respectively. The Corporation continues to seize market opportunities by executing organic growth initiatives. In order to capitalize on these continued opportunities, the Corporation has increased its capital expenditure program from $155.0 million to $195.0 million. The increased capital program is intended to add new PRD facilities, expand current facilities, develop new technologies for water and oil recycling, purchase long lead items for 2014 capital projects and for business development activities focused on future opportunities.

• ESTABLISHED ON SITE DIVISION 
   
  • The Corporation completed the acquisition of Frontline in the beginning of the second quarter. Frontline's customer offerings align with the environmental services group, previously included in the DS division, and the integrated water services group, previously included in the PRD division. Therefore, effective April 1, 2013, the On Site division was created combining these three operations. The combined operation improves customer service by ensuring the combined business units offer environmental solutions that integrate project management, on site equipment and treatment and disposal facilities. The division will offer customers a fully integrated service to manage environmental liabilities, waste collection, pipeline protection and maintenance, emergency response support, environmental equipment and environmental consulting / project management;
     
• REVENUE INCREASES 
   
  • Revenue for the three and six months ended June 30, 2013 (excluding oil purchase and resale) increased 24% to $85.5 million from $68.9 million and 26% to $232.7 million from $184.3 million as compared to the three and six months ended June 30, 2012 respectively. 
     
    • PRD division revenue (excluding oil purchase/resale) for the three months and six months ended June 30, 2013 increased 48% and 40% over the prior year comparative periods. Second quarter revenue increased due to new facility additions and expansions subsequent to the second quarter of 2012. Crude oil marketing revenue increased 64% and 240% for the three and six months ended June 30, 2013 as compared to the same periods of 2012 as a result of increased oil throughput and capitalization on market spread differential opportunities;
       
    • DS division revenue for the three and six months ended June 30, 2013 increased 1% and 15% over the comparative prior year periods. The second quarter of 2013 experienced a wet spring which limited field activity. DS Canadian market share in the second quarter of 2013 increased by seven percentage points to 34% over the second quarter of 2012, this was partially offset by a lower average revenue per operating day; and
       
    • OS division revenue for the three and six months ended June 30, 2013 increased 114% and 87% over the prior year comparative periods, due to the Frontline acquisition.
       
  • Oil purchase and resale revenue in the PRD division for the three and six months ended June 30, 2013 increased 63% to $252.3 million from $154.8 million and 35% to $428.2 million from $317.0 million as compared to the three and six months ended June 30, 2012 respectively. The increase resulted from high crude oil marketing activity at existing facilities and from the Drayton Valley, Silverdale and Dawson FST's being fully operational in the first quarter of 2013 whereas they were in start-up in the first quarter of 2012. Overall demand increased quarter over quarter.
     
• EBITDA OF $14.2 MILLION IN THE SECOND QUARTER AND $53.9 MILLION YEAR-TO-DATE 
   
  • For the three and six months ended June 30, 2013 EBITDA increased 3% to $14.2 million from $13.8 million and 16% to $53.9 million from $46.3 million as compared to the three and six months ended June 30, 2012. EBITDA increases in the PRD division for the second quarter were offset by lower EBITDA in the DS and OS divisions as a result of lower drilling activity from a wet spring in the WCSB and North Dakota. In the current quarter, the PRD division incurred commissioning expenses associated with the start-up of the Judy Creek and Rocky FST's. Both the PRD and DS divisions continued to heavily invest in business development, including research and development activities, to prepare for 2014 projects. The OS division incurred expenses to mobilize equipment and hire staff to start projects in the second quarter and manage increases in activity expected in the third and fourth quarters of 2013. 
     
  • Net loss for the second quarter of 2013 was $2.4 million compared to net earnings of $1.1 million in the second quarter of 2012. Net earnings decreased quarter over quarter due to: 
     
    • OS division results were impacted by wet weather that prevented projects from starting up in the second quarter. Additional expenses were incurred to mobilize equipment and staff for the expected increases in activity for the second half of this year;
       
    • Increased general and administrative expenses in the second quarter of 2013 compared to the second quarter of 2012 due to establishment of the OS division, set up of an office in Denver and higher business development expenses in order to support the increased capital expenditure programs related to organic and acquisition opportunities; and
       
    • Lower activity resulting from wet weather conditions experienced this quarter as compared to the second quarter of 2012. Wet weather decreases customer activity as projects are delayed until road access is restored.
       
• DIVERSIFICATION INTO NEW MARKETS AND NEW AREAS 
   
  • Organic expansion and growth capital totaled $77.7 million for the six months ended June 30, 2013 and include 2012 carryover capital related to the Judy Creek and Rocky FST's. Total assets as of June 30, 2013 were $824.4 million compared to $618.7 million as of June 30, 2012. Major expenditures for the six months ended June 30, 2013 included: 
     
    • Completion and commissioning of the Judy Creek and Rocky FST's;
       
    • Construction commenced on the following new facilities: 
       
      • Kaybob SWD; the facility is expected to become operational in the third quarter; 
         
      • Edson temporary SWD, which opened in the first quarter, to become an FST. The facility is expected to be operational early 2014; 
         
      • Keene and Stanley SWD facilities in North Dakota; the facilities are expected to be operational by the end of the year
         
    • Preliminary construction commenced on the 13 Mile landfill in North Dakota, the majority of the capital spend will occur in the third quarter of 2013. The landfill is expected to be complete by the end of the year;
       
    • Pre-engineering commenced on the new Saddle Hills landfill. Construction is expected to begin in the third quarter of 2013;
       
    • Expansion at the Drayton Valley and Fox Creek FST's with second treaters being added; and
       
    • Various long lead purchases for 2013 and 2014 PRD capital projects and rental equipment for the DS division. Both the PRD and DS divisions continue to heavily invest in business development, including research and development activities, to prepare for 2014 projects.
       
• SOLID BALANCE SHEET 
   
  • Secure's debt to EBITDA ratio was 1.57 as of June 30, 2013; well under the Corporation's credit facility covenant of 3.00; and 
     
  • Positive working capital of $60.5 million and available borrowings of $133.0 million.
     
• BRAZEAU SWD 
   
  • The Brazeau SWD facility was struck by lightning during the second quarter. The facility is currently closed until the repairs are completed which is expected to be sometime in the fourth quarter of this year. The estimated net book value of the damage to the facility is $2.7 million and is expected to be fully reimbursed by insurance coverage up to the replacement value of $4.4 million for all of the repair related costs.
     
• SUBSEQUENT EVENT 
   
  • On July 2, 2013 the Corporation, through its wholly owned subsidiary Marquis Alliance Energy Group Inc., announced the closing of the agreement to acquire all the issued and outstanding shares of Target Energy Rentals Ltd. ("Target") for an aggregate purchase price, including assumed debt, of $39.8 million. The purchase price was paid with $21.0 million in cash and the issuance of 1,367,047 common shares of Secure.
    
    Target was a privately owned oilfield service company headquartered in Grande Prairie, Alberta and offers equipment rental and support services in both the drilling and completions sectors. Their core service is the supply of a patented dual containment fluid storage tank system for oil based drilling fluid applications.
    
    The addition of Target's market leading dual containment fluid storage tank system strengthens Secure's integrated service offering while supporting and expanding the existing drilling fluids and rental business of the Corporation's DS division. The "Target Tank" system provides customers with a safe, environmentally responsible, cost effective solution to storing oil based drilling fluids and other sensitive fluids at the drill site.

Highlights for the PRD division included:

• Revenue from processing, recovery and disposal for the three months ended June 30, 2013 increased 48% to $36.0 million from $24.2 million for the three months ended June 30, 2012. Revenue from processing, recovery and disposal for the six months ended June 30, 2013 increased 40% to $80.3 million from $57.5 million for the six months ended June 30, 2012. The 48% increase for the three months ended June 30, 2013 and the 40% increase for the six months ended June 30, 2013 relate to the following: 
   
  • New facility additions and expansions subsequent to the second quarter of 2012 which include: the addition of three SWD facilities in the US; the completion of Fox Creek landfill in December 2012; the completion of the new Edson temporary water injection facility in January 2013; the commissioning of the Rocky and Judy Creek FST's in the second quarter of 2013 ("new facilities and expansions"); and 
     
  • Increased demand for the Corporation's products and services. 
     
• Revenue from processing activity was higher for both the three and six months ended June 30, 2013 as processing volumes increased by 57% and 42% respectively, over the comparable periods in 2012. In addition, disposal volumes increased by 48% and 42% respectively. The majority of the increase in disposal volume resulted from the addition of the three PRD facilities in the US subsequent to the second quarter of 2012. The remainder of the increases in revenue from both processing and disposal for the three and six months ended June 30, 2013 relate to higher volumes received at the Corporation's existing facilities (excluding volumes from new facilities added after the second quarter of 2012). A significant portion of the increase relates to the addition of the new US SWD facilities (DRD Saltwater Disposal LLC ("DRD") acquisition and the completion of Crosby SWD) in North Dakota in the second half of 2012. 
   
• Revenue from the sale of oil recovered through waste processing, crude oil handling, marketing and terminalling increased by 70% and 48% for the three and six months ended June 30, 2013 compared to the same periods in 2012. The amount of recovery revenue increased as a result of increased processing volumes from the addition of new facilities and expansions subsequent to the second quarter of 2012. A large portion of the 70% increase in recovery revenue for the three months ended June 30, 2013 is a result of the Corporation's ability to capitalize on crude oil marketing opportunities at its FST's. Crude oil marketing revenue increased by 64% and 240% for the three and six months ended June 30, 2013 compared to the same periods of 2012. Increased oil throughput at the Corporation's pipeline connected FST's in conjunction with the Corporation's ability to capitalize on market spread differential opportunities (including maximizing crude oil marketing opportunities available by shipping crude oil via rail) throughout the quarter and year to date has led to the significant increases in revenue from this service line as compared to the same periods of 2012. In addition, the Corporation's Dawson FST was fully operational in 2013, whereas it was in the startup phase in the 2012 comparable periods.
   
• Operating expenses from PRD services for the three and six months ended June 30, 2013 increased 40% and 35% respectively, as compared to the same periods in 2012. The increase in operating expenses for the three and six months ended June 30, 2013 compared to the same respective periods in 2012 relate to the new facilities and expansions added organically, the acquisition of DRD in July 2012, and the increases in both processing and disposal volumes at the Corporation's existing facilities. Additional expenses were incurred in the second quarter of 2013 related to commissioning of the Judy Creek and Rocky FST's. Revenue for the three and six months ended June 30, 2013 increased 48% and 40%, respectively, which is consistent with the 40% and 35% increases in operating expenses over the comparable periods of 2012. 
   
• Operating margin as a percentage of revenue from PRD services was 57% for the three months ended June 30, 2013 compared to 55% for the same period of 2012. Operating margin as a percentage of revenue was 62% for the six months ended June 30, 2013 compared to 61% for the same period in 2012. The 2% impact to operating margin for the three months ended June 30, 2013 and the 1% impact to operating margins for the six months ended June 30, 2013 is a result of improvements in operating efficiencies, increases in crude oil marketing activities at the Corporation's pipeline connected FST's and from volumes managed by rail. 
   
• General and administrative ("G&A") expenses for the three months ended June 30, 2013 increased 145% to $5.7 million from $2.3 million in the comparative period in 2012. G&A expenses for the six months ended June 30, 2013 increased 116% to $10.7 million from $5.0 million in the comparative period in 2012. Wages and salaries increased 158% and 143% for the three and six months ended June 30, 2013, respectively.
  Additional employees were hired to support expanded operations as well as to further growth opportunities. The division continued to heavily invest in business development to prepare for 2014 projects. 

Highlights for the DS division included:

• Revenue from the DS Division for the three months ended June 30, 2013 increased 1% to $41.0 million from $40.7 million for the three months ended June 30, 2012. Revenue for the six months ended June 30, 2013 increased 15% to $134.3 million from $117.2 million for the six months ended June 30, 2012. Overall DS revenue was relatively flat from the second quarter of 2012 to the second quarter of 2013 as the combined 5% increase in the drilling fluids service line revenue was offset by the 41% decrease in revenue for the equipment rentals service line due to lower US revenue as a result of a decrease in rig activity in North Dakota, and a more competitive environment that resulted in lower pricing. Major drivers for the drilling fluids service line revenue increase of 5% are due to a higher proportion of SAGD activity, increased US based revenue, the addition of Imperial Drilling Fluids Engineering ("IDF") in the third quarter of 2012 and increased volumes of oil based drilling fluids. For the six months ended June 30, 2013, drilling fluids service revenue increased 17% from the six months ended June 30, 2012. The same factors increasing revenue in the second quarter comparative periods apply to the six month period increase. 
   
• WCSB market share for the three and six months ended June 30, 2013 increased by seven percentage points to 34% from 27% and increased four percentage points to 32% from 28% as compared to the three and six months ended June 30, 2012. The CAODC average monthly rig count for Western Canada provides the basis for market share calculations. Operating rig days for the second quarter of 2013 were 4,697 compared to 4,396 for the second quarter of 2012. 
   
• Revenue per operating day for the three and six months ended June 30, 2013 decreased 5% to $6,690 from $7,073 and increased 11% to $6,036 from $5,437 as compared to the three and six months ended June 30, 2012. The drop in revenue per day for the second quarter of 2013 compared to the second quarter of 2012 was due to a reduction in the number of lost circulation events in 2013 versus 2012. Mitigating the reduction in lost circulation events were increases in SAGD activity (more complex wells requiring more costly drilling fluids). The increase in revenue per operating day for the six months ended June 30, 2013 compared to the six months ended June 30, 2012 was due to an increase in the proportion of SAGD wells relative to the six month period in 2012. 
   
• For the three months ended June 30, 2013 operating margin was $7.6 million or 19% of revenue compared to $8.7 million or 21% of revenue for the three months ended June 30, 2012. Equipment rentals margins were impacted by lower utilization rates while drilling fluids service line operating margins remained consistent on a quarter over quarter basis. 
   
• G&A expense for the three months ended June 30, 2013 decreased 7% to $4.8 million from $5.2 million in the comparable period of 2012. As a percentage of revenue, G&A expenses were 12% for the second quarter of 2013 compared to 13% for the second quarter of 2012 and are in line with management expectations. The division continued to heavily invest in research and development activities to prepare for 2014 projects.

Highlights for the OS division included:

• Revenue for the three and six months ended June 30, 2013 increased 114% to $8.6 million from $4.0 million and 87% to $18.1 million from $9.7 million compared to the three and six months ended June 30, 2012 respectively. Increases in the quarter and year-to-date are due to the acquisition of Frontline effective April 1, 2013 and from increases in environmental services. Environmental services revenue increased in part due to increased third party pass through revenue generated from remediation projects. An extremely wet spring lowered field activity in the WCSB resulting in lower activity levels in all service lines in the division. 
   
• Operating expenses for the three and six months ended June 30, 2013 increased 211% to $8.4 million from $2.7 million and 162% to $15.9 million from $6.1 million compared to the three and six months ended June 30, 2012 respectively. Operating expense increases in the quarter and year-to-date are due to the acquisition of Frontline effective April 1, 2013. Second quarter 2013 operating expenses in Frontline include certain costs to prepare for higher activity levels in the third and fourth quarter therefore reducing margins to breakeven levels. A number of projects expected to start in the second quarter were delayed due to the wet weather conditions experienced in June. 
   
• G&A expenses for the three and six months ended June 30, 2013 of $1.5 million and $2.7 million increased compared to $0.9 million and $1.9 million for the three and six month periods ending June 30, 2012. G&A expenses increased due to the Frontline acquisition, increases in environmental services through the startup of the "CleanSite" business in the third quarter of 2012, and expenses incurred to mobilize equipment and hire staff to start projects in the second quarter, and manage increases in activity expected in the third and fourth quarters of 2013. 

INCREASE IN 2013 CAPITAL PROGRAM

Secure's board of directors has approved the addition of $40 million to Secure's 2013 organic capital budget, increasing the budget from approximately $155.0 million to approximately $195.0 million. The 2013 capital expenditure program consists of the following:

PRD division

• 2012 carry over capital of Rocky and Judy Creek FST's ($15 million); 
   
• Growth capital consisting of seven new PRD facilities in 2013 ($115 Million): 
   
  • Three FST's (Edson, Kindersley and Keene);
     
  • Two SWD's (Kaybob and Stanley); and
     
  • Two Landfills (Saddle Hills and 13 Mile) 
     
• Expansion capital ($37 million) consisting of: 
   
  • Landfill cells at Fox Creek, SGP, Pembina and Willesden Green; 
     
  • Second treaters at Fox Creek and Drayton valley; 
     
  • Additional disposal wells at both 13 Mile and Obed; 
     
  • Oil and water recycling initiatives; and 
     
  • Various operational upgrades 
     
• Sustaining capital ($3M); and 
   
• Long leads ($10 million) for 2014 projects 

DS and Onsite divisions

• $15 million for various rental and site equipment

OUTLOOK

Oil and gas industry fundamentals during the second quarter have improved from the fourth quarter of 2012 and the first quarter of 2013. Commodity prices have increased, heavy oil differentials between world and North American pricing have narrowed and oil transportation bottlenecks have been partially relieved. Expectations are that oil and gas producer capital spending will slowly increase over the next few quarters which in turn will improve activity for oil and gas service providers. In additions, several projects that were delayed by the wet spring are expected to be completed in the second half of the year. Despite the less than optimal field conditions in the second quarter, meters drilled in Canada held relatively constant decreasing by only 1% in the second quarter of 2013 compared to the second quarter of 2012. The number of WCSB horizontal wells licensed in the first half of the year increased to 71% of the total wells licensed in 2013; this is a 5 percentage point increase over the first half of 2012. The relative steady number of meters drilled and continued emphasis on horizontal drilling are positive indicators for the Corporation as it is anticipated these factors create demand for the Corporation's products and services. Secure is well positioned to take advantage of the expected industry upswing through its expanded geographic and service offerings.

The acquisition of Frontline this quarter and the recently announced purchase of Target, brings new growth platforms that complement the Corporation's existing PRD and DS divisions. The management teams of Frontline and Target are experienced with proven capabilities to manage growth. The financial strength of Secure will provide the capital necessary to grow the new operations. The Corporation is excited to apply the environmental and integrated water capabilities existing within Secure to the new groups to expand the value chain of services provided to our customers.

Capital expenditures for the six months ended June 30, 2013 of $84.9 million are reflective of the continued execution of the Corporation's strategy. Capital expenditures on new facilities such as the Kindersley FST, the conversion of the Edson SWD to an FST and construction of the Corporation's first landfill in the US are expected to enhance financial and operational performance going forward. The list of organic opportunities contains several other projects that reflect the ability of Secure to take advantage of market potential that exists today. The Corporation is increasing the 2013 capital expenditure budget from the previously announced total of $155.0 million to $195.0 million to start these projects. The added capital will be deployed in Canada and the US primarily for new growth and expansion projects and long lead items for 2014 projects. The Corporation is well positioned to fund its expanded 2013 capital program with available debt capacity from its credit facilities and cash flow from operations.

Managing growth in a prudent manner ensures the Corporation's strong balance sheet is maintained. Secure has a focused strategy of constructing and expanding facilities and services in key under-serviced capacity constrained markets. A solid balance sheet provides the leverage and flexibility to execute this strategy. It also provides the strength to ensure the dividend program that began in May continues to generate returns to shareholders while continuing to provide Secure the ability to invest in growth and expansion opportunities.

FINANCIAL STATEMENTS AND MD&A

The condensed consolidated financial statements and MD&A of Secure for the three and six months ended June 30, 2013 are available immediately on Secure's website at www.secure-energy.ca. 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 news release 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 news release. In particular, this news release contains forward-looking statements pertaining to: general market conditions; the oil and natural gas industry; activity levels in the oil and gas sector, including drilling levels; commodity prices for oil, natural gas liquids ("NGLs") and natural gas; the increase in the first six months of 2013 operating days; demand for the Corporation's services; expansion strategy; the amounts of the PRD, DS and OS divisions' 2013 expanded capital budgets and the intended use thereof; debt service; capital expenditures; completion of facilities; future capital needs; access to capital; acquisition strategy; the Corporation's capital spending on the new Rocky Mountain House and Judy Creek, Alberta full service terminals; capital spending on the Kindersley, Saskatchewan FST; capital spending on the Kaybob, Alberta SWD; expansion of the new Edson, Alberta SWD to a FST; the construction of landfills at Saddle Hills and Fox Creek, Alberta; the construction of the landfill at 13 Mile in North Dakota; and capital spending on the Keene and Stanley water disposal facilities in North Dakota; oil purchase and resale revenue; and the closing of the acquisition of Target Rentals Ltd.

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, United States, and internationally 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 favorable 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 subsidiary 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 subsidiary's 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 annual information form ("AIF") for the year ended December 31, 2012. Although forward-looking statements contained in this news release 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 news release 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