Trican Well Service adjusts spending in response to twin industry challenges
Trican Well Service Ltd. has announced that in response to current business conditions it will be reducing capital and operating expenditures.
In a statement, Trican has announced: "We are reducing the Company's 2020 full-year outlook. We are also providing an update on first quarter results, including our current financial position and describing the potential effect of the current market uncertainty on non-cash accounting items.
"As concerns around COVID-19 have progressed, our employee health and safety has been a prime concern. We implemented numerous measures in mid-March to protect both our field and office employees while ensuring business continuity. COVID-19, combined with OPEC crude oil production increases, will have a significant effect on our business results. However, having aggressively deleveraged since 2015, we are well positioned to withstand the impact this commodity price cycle will have on activity levels.
"Trican's strong financial position has been achieved through maintaining cost and capital discipline while providing exceptional service to our long-standing clients. Therefore, our strategy remains unchanged despite this downturn. We will continue to provide safe, high-quality and efficient service to our clients while aggressively managing our costs. Trican will adjust available operating capacity, targeting positive operating cash flow, regardless of the level of demand for our services. This disciplined strategy will allow us to maintain a strong balance sheet during these uncertain times and be positioned well coming out of this downturn.
"The sharp decline in activity has been particularly hard on our people and we are doing all we can to retain the significant operational experience in our company within the realities of a significant decline in demand for our services. The Federal Government of Canada announced a new wage subsidy program recently, and we will assess how this program can be utilized to reduce the impact of this downturn on our staffing levels going forward.
"The following key cost and discretionary spending plan adjustments were implemented in late March:
- Reduction of personnel costs including overhead (fixed operating overhead and administrative) by approximately 50% (consisting of salary reductions, layoffs and job sharing).
- Reduction of staffed equipment levels by approximately 50%.
- Reduction of capital expenditures to only necessary sustaining expenditures reflective of reduced levels of activity.
- 20% reduction to Executive and Board of Directors' cash compensation.
- Reduction in discretionary costs in all categories.
"While these cost reductions have been significant, we will continue to look at all aspects of our business for further business optimization and cost reduction opportunities in these uncertain market times."
Update to 2020 Full Year Outlook
The impact of COVID-19 and OPEC crude oil production increases (collectively "Market Events") has caused an oversupply of crude oil. This has resulted in a significant decline in crude oil prices and, therefore, significant uncertainty for customers' activity plans, Trican states.
"Our customers have already reduced capital expenditure plans and we anticipate they will continue to adjust their programs downward if oil prices remain weak. Despite weak oil prices, AECO natural gas prices have shown some resiliency as a result of enhancements to certain natural gas transmission lines and supply agreements combined with reduced natural gas storage levels. Although the relative stability in natural gas prices is cushioning some of the oil related activity drop, we are anticipating that industry activity will drop by approximately 50% in the second half of the year. Consequently, we have reduced our hydraulic fracturing crew count by half to four active crews (Q1 2020: eight) and will adjust our cement and coiled tubing business by similar levels. We will continue to monitor our clients' plans going forward and will adjust our active and staffed fleet to any future changes.
"We are committed to right sizing our fleet and adjusting costs to market conditions, managing our capital spending, and maintaining a healthy balance sheet that will position the Company well in the future. Given already depressed pricing levels for our services, Trican will be unable to grant further price reductions. Therefore, we expect to park additional equipment fleets rather than operate at negative operating cash flow levels."
Q1 2020 Business Update
The following provides an update on certain items in relation to Trican's first quarter 2020 results and financial position and is not intended to provide a complete summary of first quarter 2020 financial results. Complete first quarter results are not yet finalized and are anticipated to be released before markets open on May 14, 2020.
Activity and Revenue
"Q1 2020 largely aligned with our expectations, although the Market Events described above did cause some job cancellations in late March. Our eight Fracturing crews, 22 Cementing units and nine Coiled Tubing spreads were essentially fully booked through January, February and the first half of March. This level of activity should result in revenue from continuing operations for Q1 in the range of $190 million to $194 million before considering potential adjustments resulting from changes to our allowance for doubtful accounts estimates ("AFDA") (see AFDA section described below). Excluding the effect of AFDA adjustments, and anticipated severance costs (see Cost Reduction section below), Trican had anticipated adjusted EBITDA margins from continuing operations of 12% to 13% in Q1 2020, an improvement from 9% in Q4 2019 and 11% in Q1 2019."
Cost Reduction Efforts
"Trican has always adjusted its active equipment complement and supporting infrastructure to reflect changing market conditions and the recent Market Events are no exception. As previously described, Trican has reduced its anticipated active equipment to currently anticipated activity levels. In addition to adjusting our equipment complement, we have already made the corresponding adjustments to our infrastructure and support costs. We expect Q1 severance costs of approximately $4 million."
"The speed and severity of recent Market Events required Trican to evaluate the Company's expected credit losses in relation to first quarter operations. While the Company has historically not experienced significant credit losses, nor has the Company identified any specific first quarter 2020 bad debt expenses as of the date of this News Release, the Company expects to increase the AFDA provision given these uncertain market conditions by approximately $5 million (representing approximately 3% of Q1 revenues)."
"Trican estimates the following related to its financial position at March 31, 2020:
- Cash balances exceeding $23 million (December 31, 2019: $ 7 million);
- Positive working capital, excluding cash and assets / liabilities Held for Sale, of more than $100 million (December 31, 2019: $97 million); and
- Loans and borrowings of $48 million (December 31, 2019: $46 million).
Trican's current financial position will be further strengthened by a typical seasonal second quarter cash inflow from working capital. Furthermore, we believe our financial position provides a competitive advantage that ensures our equipment maintenance and customer service remain at industry-leading levels."
"International Financial Reporting Standards require companies to perform an assessment of the carrying value of cash generating units containing non-financial assets when there are significant indicators of potential impairment. Trican believes that recent Market Events are an indicator that an impairment assessment be undertaken. Given the precipitous decline in industry activity and our revised projections for 2020, an impairment charge during Q1 2020 is likely. The magnitude of the charge will not be known until further work is done in conjunction with the preparation of our Q1 results, but the amount is not expected to affect the value of the Company's tangible assets."
Capital Expenditures and Divestitures
"As we described in our Annual MD&A, we previously anticipated similar levels of capital spending in 2020 relative to 2019. With the decline in activity, our capital expenditures will be adjusted downward to reflect lower overall activity and are expected to represent less than 4% of annual 2020 revenues. Our current financial position affords the Company the flexibility to ensure critical maintenance capital expenditures to sustain our equipment so we can provide exceptional customer service.
The recent Market Events may limit our ability to monetize surplus and / or obsolete assets, including those assets classified as Held for Sale as at December 31, 2019. We will continue to look for opportunities to sell redundant property and equipment, but our financial position will allow us to wait for the market conditions which will provide the best value to our shareholders."
Normal Course Issuer Bid ("NCIB")
"We are not currently repurchasing shares available under the Company's NCIB program. We may restart purchases at the Board's discretion. As at March 31, 2020, Trican had 266,731,435 common shares outstanding."
"As highlighted above, this year will be extremely challenging for our industry and Trican. Our strategy remains unchanged despite this downturn. We will continue to provide safe, high-quality and efficient service to our clients while aggressively managing our costs. Trican will adjust available operating capacity, targeting positive operating cash flow, regardless of the level of demand for our services. This disciplined strategy will allow us to maintain a strong balance sheet during these uncertain times and be positioned well coming out of this downturn."