QIS Update #18 2013 - August 8th 2013
Included in this update:
- Dalmac releases audited annual financial statements for fiscal 2013
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Dalmac Energy Inc. (DAL:TSX-V)
Current Price: $0.48 (coverage commenced Nov 15/11 - $0.37)
Dalmac Energy Inc. has announced its fourth quarter and annual financial results for the fiscal year ended April 30, 2013.
Revenues for the YE'13 increased 16% to $41.3M as compared to $35.7M in the previous year. The increase in revenues was largely due to strong commodity prices and increased production, drilling, and fracturing activity. Dalmac further responded to this growing demand by investing $10.2M in new equipment purchases and upgrades during the course of the year. The bulk of this investment was brought on stream during the course of Q4'13. The first half of YE'13 was off to a good start until transportation logistics affecting the shipping of oil and gas was bottlenecked with oversupply. The increased production led to an overloading of pipeline facilities which in turn put further pressure on spot pricing and a subsequent scaling back on production. Given Dalmac's degree of preparation and commitment to readiness for engaging the previously scheduled workover projects, the subsequent postponement of the aforementioned had a diluting affect on profit margins. These developments culminated in what translates to a decrease of net income by 46% to $1.4M as compared to $2.6M in the previous year.
The transportation problems and logistics have since eased off and the movement of feedstock began moving once again enroute to the refineries for processing. The easing of the bottlenecks along with the US economic recovery has led to a narrowing of the differential between West Texas and Brent Crude pricing to within $2.00/bbl. Also the steep spot market discounting for pipeline access has subsided considerably due in a large part to increased rail shipments.
The inevitable consequence of the aforementioned, served not only to put negative pressure on industry utilizations but also on Dalmac's Q4'13 results. Apart from the usual spring break up conditions in which the company traditionally finds itself, Q4'13 was hammered with a torrential down pour of rain which made the roads even more impassible and ultimately led to delays of many scheduled drilling and well servicing programs. As the ground conditions begin to dry up, activity levels are expected to rebound to forecasted levels. These developments resulted in decreased Q4'13 net income by about 116% or $797K as compared to the same quarter in the previous year.
|LATEST FINANCIAL RESULTS (000s)|
|3 Mos. Ended Apr. 30||Year Ended Apr. 30|
(as at Apr. 30, 2013)
|Current Assets||$ 12,312,136|
Gross margins were directly impacted by product sales mix, utilizing rental equipment to meet increasing demand, labour and training costs, and repairs and maintenance. Dalmac's gross margins for YE'13 dropped by 6% for the year and 9% on the quarter. EBITDAS was also down 19% to $5.2M for the year end and 40% to $1.1M for the quarter. The company is expecting that on a going forward basis the margins will rebound back to the low thirties percent.
The YE'13 expenses increased 13% or $1.0M to $8.5M while Q4'13 expenses increased 3% or $62K to $2.3M from the comparable periods in the previous year. As a result of increased capital expenditures, amortization increased $367K or 7% to $2.4M on the year and $163K or 31% to $683K for the quarter. Stock-based compensation increased $75K or 64% to $192K on the year and decreased $2K or 5% to $49K for the quarter.
Beginning in Q4'13 and carried over to Q1'14 the company has been successful in raising its charge out rates by 10% across the board. This will directly help maintain the forecasted higher profit margins.
After allowing for a slight drop in industry wide activity due to transportation and distribution bottlenecks, Dalmac still managed to produce record revenues for YE'13. The crude oil bottlenecks, which were the root cause for much of the slowdown in oil and gas activity now seems to be on the verge of disappearing. According to the Alberta Department of Energy, the various developments which are easing off the flow restrictions include such things as pipeline reversals and increased rail shipments from Oklahoma to the US east coast. These developments are allowing for more Alberta oil to work its way through the Cushing Oklahoma hub and down to the Gulf Coast refineries. The chief remaining factor which is curtailing a further breakout in oilfield activity is the wet weather. Many of Dalmac’s customers are suggesting that as soon as the ground dries up it will be full steam ahead. Another recent positive development for the oil and gas industry is the differential between Brent crude and WTI which has narrowed from $20/bbl to $2/bbl. This is a result of improved confidence in not only the US economy but also the global economy and improved transportation of crude oil feedstock to Gulf coast refineries. This not only contributes to improved supply access for crude oil but also translates to better pricing for Canadian producers.
Another important factor is the expansion of the Alberta Synthetic Crude oil refining capacity. Much of the natural gas now being produced will be needed for the development of this refining expansion and this will limit what can be sold on the world market. It is estimated that Alberta will need to double its production over the next 5 years just to keep exports at the current levels. In addition, the recent mergers and acquisitions of Canadian companies by entities such as China National Offshore Oil Corporation and Petronas seem to indicate an increased movement of natural gas to Asian markets which currently account for 63% of the total world LNG demand. The recent mergers, acquisitions and joint ventures which are targeting the liquids-rich plays in Alberta are expected to continue into the future. Approximately 80% of the wells drilled in 2012 targeted crude oil or bitumen and nearly 50% of the remaining wells targeted liquids-rich natural gas in the Deep Basin region along the foothills of Alberta.
The upshot of all this translates to more demand for Dalmac's services. The company is well situated and prepared to take advantage of the growing activity in the western Alberta oil and gas sector.
Although the current activity levels will invariably continue to foster conditions of a short labour supply and higher wage costs, Dalmac is confident in its ability to continue to attract, train and retain qualified personnel. The company expects that staffing issues will be resolved over time and any wage increases will be more than offset by higher charge out rates and better operating efficiencies.
Dalmac is expecting that its recent $10.2 million investment in new equipment and upgrades will be fully utilized by the current surge of oilfield activity and production requirements. Dalmac remains confident that its initiatives, coupled with the surging activity in the energy sector, will continue to translate into higher revenues and earnings on a going forward basis.