QIS Update #4 2015 - March 25th 2015
Included in this update:
- Dalmac Energy releases third quarter financial results
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Dalmac Energy Inc. (DAL:TSX-V)
Current Price: $0.21 (coverage commenced Nov 15/11 - $0.37)
Dalmac Energy Inc. has announced its third quarter financial results for the three and nine month periods ended January 31, 2015.
The third quarter was impacted by falling oil prices which fell about 50% from the summer of 2014. Dalmac's revenues from fluid transfers and well stimulation services consequently decreased by 7% from $10.3M to $9.5M on the quarter. The year to date revenues also slipped 7% from $27.2M to $25.4M. Service operations were affected by many customers electing to take an early Christmas break and did not resume fully until about the middle of January. Concurrent with the break, the oil and gas service industry was requested to take a 10-20% rate cut from almost all of the company’s major customers.
The net operating income for Q3'15 before loss on disposition of assets was $130K and $198K for the nine months ended January 31, 2015. The net loss for the quarter after disposition of assets was $120K as compared to a net income of $229K in Q3'14. The YTD'15 net loss was $267K as compared to $153K at the same period in the previous year.
Quarterly Gross Margin as a percentage of revenue came in at 24% which was on par with last year. The year to date GM increased by 3% to 26% from the same period in the previous year. The YTD increase in GM is a reflection of management's commitment towards maintaining appropriate staffing and utilization levels which is pared to our needs and to the circumstances envisioned in an overly quick and changing market. Dalmac has elected to take a proactive and prudent approach toward the capitalization of repairs and maintenance to more accurately determine the fair market value of its assets given the state of the oil and gas sector. Management chose not to capitalize several expenses which were capitalized in previous years which had an immediate impact on the bottom line for Q3'15 but which will reduce or eliminate potential losses on the disposition of equipment. The gross margin in Q3'15 was impacted by repair and maintenance expenses of $1.6M as compared to $1.4M in Q3'14. Furthermore, the capitalized portion of repairs and maintenance decreased by 76% or $518K. Had Dalmac opted not to take a more conservative approach towards capitalization, the gross margin for the quarter would have been closer to 29%. The decision to expense these items along with the loss on sale of assets of $250K not only reduced Dalmac's gross margin, but resulted in a decrease of approximately $768K in net income for the quarter. Even though the condition of the company’s asset equipment has never been in better shape, management will endeavour to keep an eye on the repair and maintenance process so as to keep necessary expenditures more on par with the revenue stream.
|LATEST FINANCIAL RESULTS (000s)|
|3 Mos. Ended Jan. 31||9 Mos. Ended Jan. 31|
|Income Tax Recovery
(as at Jan. 31, 2015)
|Current Assets||$ 8,960,485|
Dalmac's overall general and administrative expenses increased by about 5% on the quarter and remained relatively even on the year to date. The quarter over quarter increase is primarily due to professional fees and office expenses. Apart from amortization the next largest expense category was wages, benefits and salaries which increased 7% to $642K on the quarter and decreased 8% to $2.0M for the year to date. Long term debt (excluding finance leases) decreased by 17% to $10.4M.
The continuing volatility of commodity prices is putting pressure on many E&P producers to make significant reductions to their capital and operating budgets. Drilling rig utilizations, which serve as a barometer of oilfield activity, witnessed a 40% drop in the first two months of 2015 as compared to the same time last year. Compounding the problems associated with lower activity levels, rate reductions, an usually warm winter and what seems to be an earlier than normal start to the spring breakup season, Dalmac is also expecting to see a reduction in drilling, completions and production maintenance expenditures as E&P producers strive to conserve their cash until commodity prices recover. The current CAODC forecast of a 26% drilling rig utilization for 2015 as compared to 46% for 2014 correspondingly implies lower activity levels in the oilfield services industry for this year as compared to last. Given that Dalmac generates about 70% of its revenue from fluid transfer services which will invariably continue as long as the wells are in production, the company will be hard pressed not to avoid the impact of rate reductions demanded by the E&P producers which is currently in the vicinity of 10-15% off existing rates. Management also anticipates that there will be ongoing drilling and completions activity in the company’s area of operations in which Dalmac is expecting to get its share of the activity but that too will probably be more price sensitive than in the past. In responding to rate cuts requested by its customers, Dalmac is working in concert with them to expand activity levels by applying selective weighted discounts to varied underutilized service equipment.
Dalmac intends to move the dial on revenue growth by increasing the utilization of underperforming assets by featuring them as a value add in to the company’s broad range products and services while continuing to represent itself as a one-stop shop. This demonstrates Dalmac’s desire of being a value added business partner which is dedicated to helping its customers achieve their targeted goals.
In order to deal with the aforementioned developments properly, Dalmac is proactively engaging several other cash saving initiatives targeted towards preserving our cash resources and maintaining balance sheet strength as well as addressing the company’s most valuable asset – its key employees.
While the Canadian oil and gas industry continues to deal with the impact of lower energy pricing, management is confident that Dalmac will continue to deliver solid shareholder value while striving to be a leading provider of well stimulation and fluid management services to the energy sector.
QIS Capital: While margins and net income were lower than we had earlier anticipated, the decision to expense some repair and maintenance items instead of capitalizing them along with the loss on sale of assets of $250K resulted in a decrease of approximately $768K in net income for the quarter. We are also starting to see some of the effects of the falling oil price on the service industry. While Dalmac is protected much more than most service companies due to its regional advantage and focus on fluid hauling, we do expect to see some pricing pressure and limited activity. Management indicated during the conference call that they are expecting to see some resulting downward pressure on wages but this was just starting. Dalmac is also focusing on marketing opportunities with its existing client base to mitigate the downside effect of underutilized equipment by cross selling some of its other equipment. Dalmac continues to reduce its debt load by selling excess equipment and being proactive in paying down debt. The company’s shares have moved down to the $0.21 level which represents only 37.5% of net book value of $0.56 per share. Dalmac continues to generate excess cash flow.
Disclaimer: This article is for informational purposes only. The information contained within this article should not be construed as offering investment advice. Those seeking direct investment advice should consult a qualified, registered, investment professional. BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 Mcf: 1bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. The company profiled assumes no liability for the information presented. This is not a direct or implied solicitation to buy or sell securities. Readers are advised to conduct their own due diligence prior to considering buying or selling any stock. The author(s) owns directly or indirectly 156,500 shares and 200,000 options of Dalmac Energy Inc. QIS Capital may have a financial relationship with these companies and may trade in the stocks mentioned. No stock exchange has approved or disapproved of the information contained herein. Copyright © 2003 - 2015 QIS Capital Corporation.