CALGARY, Alberta, Aug. 08, 2023 (GLOBE NEWSWIRE) --
Second Quarter Highlights
- For the three-month period ended June 30, 2023, PHX Energy generated consolidated revenue of $155.6 million, the highest level of second quarter revenue on record and the third highest level of quarterly revenue in the Corporation’s history despite the second quarter being typically slow in Canada due to spring break-up. Revenue in the first quarter of 2023 and fourth quarter of 2022 are the first and second highest quarterly revenue on record, respectively.
- Earnings from continuing operations increased to $18.1 million, an increase of 41 percent over the second quarter of 2022, and adjusted EBITDA(1) from continuing operations increased to $34.8 million, which represented 22 percent of consolidated revenue(1). Earnings and adjusted EBITDA from continuing operations are the best second quarter results on record. Additionally, adjusted EBITDA is the Corporation’s second highest quarterly level in its history. Included in the 2023-quarter’s adjusted EBITDA is $2.6 million in cash-settled share-based compensation expense. Excluding cash-settled share-based compensation expense, adjusted EBITDA from continuing operations(1) in the second quarter of 2023 was $37.4 million, 24 percent of consolidated revenue(1).
- PHX Energy’s US division revenue in the second quarter of 2023 was $125 million, 19 percent higher than the second quarter of 2022 and just slightly below the records achieved in the previous two quarters. US division revenue in the 2023-quarter represented 80 percent of consolidated revenue.
- PHX Energy’s Canadian division reported $29.4 million of quarterly revenue, its highest level of second quarter revenue on record.
- The US dollar continued to have a favorable impact on the 2023-quarter’s financial results. In the 2023 three-month period, the average US dollar to Canadian dollar foreign exchange rate was 1.34 compared to 1.28 in the 2022-period. Albeit, the US dollar has weakened compared to the first quarter of 2023.
- The Corporation generated excess cash flow(2) of $25.5 million in the 2023 three-month period, after deducting for maintenance capital expenditures from asset retirements, maintenance capital expenditures from downhole equipment losses, and growth capital expenditures of $3.9 million, $3.3 million, and $4.9 million, respectively.
- In the 2023-quarter, PHX Energy paid $7.7 million in dividends which is double the dividend amount paid in the same 2022-quarter. On June 15, 2023, the Corporation declared a dividend of $0.15 per share(3) or $7.6 million, paid on July 17, 2023 to shareholders of record on June 30, 2023.
- PHX Energy delivered additional returns to shareholders through the use of its current NCIB, purchasing and cancelling 267,800 common shares for $1.6 million in the second quarter of 2023. Subsequent to June 30, 2023, the Corporation purchased and cancelled 1,242,000 common shares for $8.1 million.
- As at June 30, 2023, the Corporation had working capital(2) of $111 million and net debt(2) of $7.6 million with credit facility capacity in excess of $52 million.
Financial Highlights
Stated in thousands of dollars except per share amounts, percentages and shares outstanding)
| Three-month periods ended June 30, | Six-month periods ended June 30, | |||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | |||||||
| Operating Results – Continuing Operations | (unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||
| Revenue | 155,618 | 126,238 | 23 | 321,641 | 235,568 | 37 | ||||||
| Earnings | 18,108 | 12,818 | 41 | 40,526 | 10,504 | 286 | ||||||
| Earnings per share – diluted | 0.35 | 0.25 | 40 | 0.77 | 0.21 | 267 | ||||||
| Adjusted EBITDA (1) | 34,802 | 25,084 | 39 | 71,804 | 31,528 | 128 | ||||||
| Adjusted EBITDA per share – diluted (1) | 0.66 | 0.49 | 35 | 1.35 | 0.63 | 114 | ||||||
| Adjusted EBITDA as a percentage of revenue (1) | 22 | % | 20 | % | 22 | % | 13 | % | ||||
| Cash Flow – Continuing Operations | ||||||||||||
| Cash flows from (used in) operating activities | 22,633 | 11,449 | 98 | 26,341 | 7,740 | 240 | ||||||
| Funds from operations (2) | 30,248 | 21,821 | 39 | 56,985 | 24,703 | 131 | ||||||
| Funds from operations per share – diluted (3) | 0.57 | 0.43 | 33 | 1.07 | 0.49 | 118 | ||||||
| Dividends paid per share (3) | 0.15 | 0.075 | 100 | 0.30 | 0.125 | 140 | ||||||
| Dividends paid | 7,656 | 3,791 | 102 | 15,292 | 6,273 | 144 | ||||||
| Capital expenditures | 12,072 | 15,214 | (21 | ) | 30,654 | 33,420 | (8 | ) | ||||
| Excess cash flow (2) | 25,508 | 9,116 | 180 | 44,743 | (2,277 | ) | n.m. | |||||
| Financial Position | Jun 30 ‘23 | Dec 31 ‘22 | ||||||||||
| Working capital (2) | 110,963 | 94,339 | 18 | |||||||||
| Net debt (2) | 7,605 | 4,484 | 70 | |||||||||
| Shareholders’ equity | 196,750 | 176,878 | 11 | |||||||||
| Common shares outstanding | 50,801,138 | 50,896,175 | n.m. | |||||||||
n.m. – not meaningful
Outlook
In the second quarter we continued to produce strong financial and operating results despite a softening market. These results are testament to our talented team and leading-edge technology that allow us to deliver the superior operational performance that Operators demand.
- We remain cautiously optimistic for the second half of 2023. We expect the softening US rig count to stabilize with the recent strengthening of oil commodity prices and tightening supply. Additionally, we anticipate the Canadian industry activity will continue to trend above the levels seen in the prior year.
- In the US we may continue to see lighter activity than 2022 and expect levels to remain relatively consistent with those seen in the second quarter. We anticipate that the premiums generated from our technology offering, particularly RSS, will continue to offset the subtle decline in activity. Additionally, we believe our motor rental and sales division will continue to see growth in the remainder of the year and these streams will also contribute to improved revenue and margins year-over-year.
- In Canada we expect our activity to continue to show an improvement over 2022 and revenues to track accordingly. The second quarter was a record spring break up period for our Canadian division and currently this division is very active.
- We believe the delivery of the additional equipment on order will be adequate to meet the volume of forecasted activity for the remainder of 2023. We will assess future capital requirements in the upcoming months for anticipated growth in 2024 and will likely place early orders for certain materials and items that still have long lead times for delivery.
- In line with our strategy to expand our Atlas sales business, we recently entered into an Atlas sales agreement with an existing international client. We have already seen an upside in the second quarter from this new business line and will continue to pursue opportunities for expansion.
- We continue to leverage our business strengths to reward our shareholders through the various mechanism of ROCS, including our base dividend program, share buy backs and the ability to trigger special dividends with excess cash. We have bought back 19% of our shares since 2017, including the purchase and cancellation of 1.5 million shares through the current NCIB thus far in 2023. Through our dividend program we have paid $36.7 million to shareholders since reinstating the program in December 2020.
Through the remainder of the year, we will continue to provide attractive shareholder returns while maintaining our balance sheet strength and funding operational growth by investing in new technology development and capital expenditures.
Michael Buker, President
August 8, 2023
Financial Results
In the second quarter of 2023, market uncertainties continued. North American drilling activity was flat compared to the same quarter in 2022 and has declined from the first quarter of 2023. Despite these market trends, PHX Energy’s consolidated revenue grew by 23 percent to $155.6 million (2022 - $126.2 million), the highest second quarter revenue on record.
For the three-month period ended June 30, 2023, in line with North American industry activity, PHX Energy’s consolidated activity levels were relatively flat at 6,526 operating days compared to 6,486 operating days in the 2022-period. The Corporation continued to leverage its premium technologies and strength in marketing and operations, and as a result, improved its average consolidated revenue per day(3) for directional drilling services by 15 percent quarter-over-quarter.
In the 2023 three-month period, PHX Energy’s US division revenue grew by 19 percent to $125 million as compared to $105.4 million in the same 2022-period. Compared to the record in the first quarter of 2023, the US division’s revenue was relatively flat despite the decline in the rig count in the 2023-quarter. US operating days decreased by 7 percent from 4,707 in the second quarter of 2022 to 4,364 in the second quarter of 2023 while US average revenue per day(3) for directional drilling services improved by 18 percent quarter-over-quarter. Revenue from the Corporation’s US segment represented 80 percent of consolidated revenue in the 2023 three-month period (2022 – 83 percent).
Similar to the US division, the momentum of the strong first quarter results in Canada continued in the second quarter of 2023, and the Corporation’s Canadian division generated revenue of $29.4 million, a 49 percent increase from $19.7 million in the same 2022-quarter. Following the record revenue in the first quarter, this is the highest level of second quarter Canadian division revenue on record. In the 2023 three-month period, Canadian industry activity held steady compared to the same 2022-period while the Corporation’s Canadian operating days grew by 23 percent to 2,076 days from the 1,688 operating days in the comparable 2022-period. Average revenue per day realized by the Canadian segment also improved by 19 percent quarter-over-quarter.
Earnings from continuing operations and adjusted EBITDA(1) generated in the 2023-quarter are the best second quarter results in the Corporation’s history. For the three-month period ended June 30, 2023, earnings from continuing operations increased to $18.1 million from $12.8 million in the comparable 2022-period, an increase of 41 percent. Adjusted EBITDA from continuing operations increased to $34.8 million (22 percent of revenue) which is 39 percent higher than the adjusted EBITDA reported in the same 2022-period of $25.1 million (20 percent of revenue). Included in the 2023 three-month period adjusted EBITDA from continuing operations is cash-settled share-based compensation expense of $2.6 million (2022 - $0.7 million). For the three-month period ended June 30, 2023, excluding cash-settled share-based compensation expense, adjusted EBITDA from continuing operations(1) is $37.4 million, 24 percent of consolidated revenue (2022 - $25.8 million).
PHX Energy maintained its strong financial position and had working capital(2) of $111 million and net debt(2) of $7.6 million with available credit facilities in excess of $52 million as at June 30, 2023.
Dividends and ROCS
On June 15, 2023, the Corporation declared a dividend of $0.15 per share payable to shareholders of record at the close of business on June 30, 2023. An aggregate of $7.6 million was paid on July 17, 2023. This is double the dividend declared in the 2022-quarter.
The Corporation remains committed to enhancing shareholder returns through its Return of Capital Strategy (“ROCS”) that includes multiple options including the dividend program and the Normal Course Issuer Bid (“NCIB”).
Normal Course Issuer Bid
Pursuant to PHX Energy’s current NCIB it is entitled to purchase for cancellation, from time-to-time, up to a maximum of 3,622,967 common shares, representing 10 percent of the Corporation’s public float of common shares at the time of its approval by the TSX. The NCIB commenced on August 16, 2022, and will terminate on August 15, 2023. Pursuant to the current NCIB, 267,800 common shares were purchased by the Corporation for $1.6 million and cancelled in the second quarter of 2023. Subsequent to June 30, 2023, the Corporation purchased and cancelled 1,242,000 common shares for $8.1 million. Pursuant to the Corporation's current NCIB, the Corporation purchased in the open market through the facilities of the TSX and through other alternative Canadian trading platforms and cancelled an aggregate of 1,509,800 common shares of the Corporation at an average price paid of $6.39 per common share. For the three-month period ended June 30, 2022, the Corporation did not repurchase shares through its previous NCIB.
The Corporation has made an application to the TSX for renewal of its NCIB for a further one-year term. The anticipated renewal of the NCIB is subject to the review and approval of the TSX.
Capital Spending
In the second quarter of 2023, the Corporation spent $12.1 million in capital expenditures, of which $4.9 million was spent on growing the Corporation’s fleet of drilling equipment, $3.9 million was spent to replace retired assets, and $3.3 million was spent to replace equipment lost downhole during drilling operations. With proceeds on disposition of drilling and other equipment of $8.6 million, the Corporation’s net capital expenditures(2) for the 2023-quarter were $3.5 million. Capital expenditures in the 2023-quarter were primarily directed towards Atlas High Performance motors (“Atlas”), Velocity Real-Time systems (“Velocity”), and PowerDrive Orbit Rotary Steerable Systems (“RSS”). PHX Energy funded capital spending primarily using proceeds on disposition of drilling equipment, cash flows from operating activities, and its credit facilities when required.
(Stated in thousands of dollars)
| Three-month period ended June 30, | Six-month period ended June 30, | |||
| 2023 | 2023 | |||
| Growth capital expenditures | 4,931 | 14,885 | ||
| Maintenance capital expenditures from asset retirements | 3,860 | 8,718 | ||
| Maintenance capital expenditures from downhole equipment losses | 3,281 | 7,051 | ||
| 12,072 | 30,654 | |||
| Deduct: | ||||
| Proceeds on disposition of drilling equipment | (8,589 | ) | (21,007 | ) |
| Net capital expenditures(2) | 3,483 | 9,647 | ||
The approved capital expenditure budget for the 2023-year, excluding proceeds on disposition of drilling equipment, is $61.5 million, which includes $11.5 million of carryover from the 2022 budget. Of the total expenditures, $38.5 million is expected to be allocated to growth capital and the remaining $23 million is expected to be allocated towards maintenance of the existing fleet of drilling and other equipment and replacement of equipment lost downhole during drilling operations. The maintenance capital amount could increase throughout the year should there be more downhole equipment losses than forecasted. These increases would likely be funded by proceeds on disposition of drilling equipment.
As at June 30, 2023, the Corporation has capital commitments to purchase drilling and other equipment for $28.4 million, $21.5 million of which is growth capital and includes $20.7 million for performance drilling motors and $0.8 million for other equipment. Equipment on order as at June 30, 2023 is expected to be delivered within 2023.
The Corporation currently possesses approximately 680 Atlas motors, comprised of various configurations including its 5.13", 5.25", 5.76", 6.63", 7.12", 7.25", 8" and 9" Atlas motors, 113 Velocity systems, and 51 PowerDrive Orbit RSS, the largest independent fleet in North America.
Sale and Licensed Use of Atlas Motors
On May 3, 2023, PHX Energy entered into a sales agreement for the sale and licensed use of its Atlas High Performance Drilling Motors. PHX Energy will be providing a fleet of Atlas motors to a purchaser in the US market (referred to as the “Purchaser”). Under the agreement, the Purchaser must exclusively use components manufactured by the Corporation for the maintenance of their fleet of Atlas motors. PHX Energy anticipates delivering a fleet of Atlas motors amounting to $3.8 million to the Purchaser by the third quarter of 2023 and anticipates ongoing orders for parts to maintain their fleet throughout the remainder of the year. In addition, the Purchaser could potentially place subsequent orders for additional Atlas motors in the latter part of the year. In the 2023 three-month period, $3.2 million of motors and parts were sold as part of this agreement.
On July 27, 2023, PHX Energy agreed upon the sale and licensed use of its Atlas High Performance Drilling Motors to an existing international client. PHX Energy will be providing a fleet of Atlas motors and parts amounting to approximately $5 million with delivery anticipated to be completed by the end of 2023.
Supply Chain and Inventory
Inflation and shortages related to the products and services required within the energy sector, including those within the Corporation’s supply chain, continued in the second quarter 2023 although it had less of an impact. Due to these shortages, lead times remain extended and turn-around times for servicing the Corporation’s premium technologies remain longer than usual. Inflationary pressures also carried through 2023 and the resulting overall cost increases continued to negatively impact the Corporation’s margins.
PHX Energy has remained diligent and proactive with efforts to lessen the supply chain disruptions’ impact on its operations. Specifically, the Corporation continues to maintain higher minimum safety stock levels and take advantage of pre-ordering materials to manufacture technology and obtain bulk discounts. These supply chain strategies continue to result in higher inventory levels, which have increased by 8 percent from $63.1 million at the end of 2022 to $68.4 million at June 30, 2023. Higher inventory levels were also partly due to lower than forecasted activity in the 2023-quarter. The Corporation continues to pursue pricing increases where it deems necessary to mitigate the impact of inflationary costs and to protect its margins.
Additional information regarding certain material risks and uncertainties, and their impact on the Corporation’s business can be found throughout this Press Release, including under the headings “Capital Spending”, “Operating Costs and Expenses”, “Segmented Information” and “Outlook”.
Shares Held in Trust
For the three-month period ended June 30, 2023, the Corporation equity settled a portion of its outstanding Retention Awards (“RA”) granted under its Retention Award Plan (the “RAP”). Pursuant to RA settlements, 53,594 common shares were released from the independent trustee in the 2023-quarter to settle $0.4 million in RAP liabilities. The independent trustee acquires common shares on the open market from time-to-time for the potential settlement of future share-based compensation obligations of the Corporation. For the three-month period ended June 30, 2023, the trustee did not repurchase common shares. As at June 30, 2023, 3,301 common shares were held in trust for purposes of the RAP.
Non-GAAP and Other Financial Measures
Throughout this Press Release, PHX Energy uses certain measures to analyze financial performance, financial position, and cash flow. These Non-GAAP and other specified financial measures do not have standardized meanings prescribed under Canadian generally accepted accounting principles (“GAAP”) and include Non-GAAP Financial Measures and Ratios, Capital Management Measures and Supplementary Financial Measures (collectively referred to as “Non-GAAP and Other Financial Measures”). These non-GAAP and other specified financial measures include, but are not limited to, adjusted EBITDA, adjusted EBITDA per share, adjusted EBITDA as a percentage of revenue, gross profit as a percentage of revenue excluding depreciation and amortization, selling, general and administrative (“SG&A”) costs excluding share-based compensation as a percentage of revenue, funds from operations, funds from operations per share, excess cash flow, net capital expenditures, net debt, and working capital. Management believes that these measures provide supplemental financial information that is useful in the evaluation of the Corporation’s operations and are commonly used by other oil and natural gas service companies. Investors should be cautioned, however, that these measures should not be construed as alternatives to measures determined in accordance with GAAP as an indicator of PHX Energy’s performance. The Corporation’s method of calculating these measures may differ from that of other organizations, and accordingly, such measures may not be comparable. Please refer to the “Non-GAAP and Other Financial Measures” section of this Press Release for applicable definitions, rationale for use, method of calculation and reconciliations where applicable.
Revenue
The Corporation generates revenue primarily through the provision of directional drilling services which includes providing equipment, personnel, and operational support for drilling a well. Additionally, the Corporation generates revenue through the rental and sale of drilling motors and associated parts, particularly Atlas. Recently, the revenue generated from the rental and sale of motors has grown and this is expected to continue in future periods.
(Stated in thousands of dollars)
| Three-month periods ended June 30, | Six-month periods ended June 30, | |||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | |
| Directional drilling services | 140,970 | 120,101 | 17 | 297,062 | 223,518 | 33 |
| Motor rental | 11,427 | 6,137 | 86 | 20,669 | 12,050 | 72 |
| Sale of motor equipment and parts | 3,221 | - | n.m. | 3,910 | - | n.m. |
| Total revenue | 155,618 | 126,238 | 23 | 321,641 | 235,568 | 37 |
n.m. – not meaningful
In the second quarter of 2023, PHX Energy’s consolidated revenue was $155.6 million, a 23 percent increase compared to the $126.2 million in the second quarter of 2022 and a 6 percent decrease compared to the $166 million in the first quarter of 2023. A decrease from the first quarter to the second quarter is typical due to Canadian spring break up and additionally wildfires in Alberta also affected the Corporation’s Canadian drilling activity in the 2023-quarter. For the six-month period ended June 30, 2023, the Corporation generated consolidated revenue of $321.6 million, an increase of 37 percent as compared to the same 2022-period which generated consolidated revenue of $235.6 million. Higher revenue in both the 2023 three and six-month periods was mainly driven by stronger average consolidated revenue per day(3) realized through increased capacity in the Corporation’s fleet of high performance technologies, the cumulative impact of previous and recent pricing increases carried out to mitigate the effects of inflationary costs, and the strengthening of the US dollar relative to the 2022-quarter.
For the three and six-month period ended June 30, 2023, average consolidated revenue per day(3) for directional drilling services increased by 15 percent and 20 percent, respectively. Average consolidated revenue per day increased to $21,603 in the 2023 three-month period from $18,782 in the same 2022-period and increased to $20,515 in the 2023 six-month period from $17,086 in the same 2022-period.
During the second quarter of 2023, the US industry rig count averaged 700 rigs operating per day, which is only 2 percent greater than the average of 687 rigs in the second quarter of 2022. US rig count has been decreasing since the fourth quarter of 2022 and is 6 percent lower in the second quarter of 2023 compared to the average of 742 rigs in the first quarter of 2023. In Canada, the average rig count for the 2023 three-month period increased 4 percent to 117 rigs from 113 rigs in the second quarter of 2022 (Source: Baker Hughes, North American Rotary Rig Count, Jan 2000 – Current, https://rigcount.bakerhughes.com/na-rig-count). In comparison, the Corporation’s consolidated operating days were relatively flat at 6,526 days in the second quarter of 2023 compared to 6,486 days in the second quarter of 2022. For the six-month period ended June 30, 2023, consolidated operating days increased by 9 percent to 14,480 from 13,281 days in the corresponding 2022-period.
PHX Energy’s revenue from motor rentals grew by 86 percent to $11.4 million in the 2023-quarter from $6.1 million in the same 2022-quarter and increased by 72 percent to $20.7 million in the 2023 six-month period from $12.1 million in the same 2022-period. Higher motor rental revenue in both 2023-periods primarily resulted from the continued focus on marketing Atlas technology as a stand-alone product line and expanded capacity in the Corporation’s Atlas motor fleet.
In the 2023-quarter, PHX Energy sold $3.2 million in Atlas motors and parts. With the two sales agreements in place, the Corporation expects to grow this business line in future periods.
Operating Costs and Expenses
(Stated in thousands of dollars except percentages)
| Three-month periods ended June 30, | Six-month periods ended June 30, | ||||||||||||
| 2023 | 2022 | % Change | 2023 | 2022 | % Change | ||||||||
| Direct costs | 119,870 | 100,520 | 19 | 251,858 | 192,466 | 31 | |||||||
| Depreciation & amortization drilling and other equipment (included in direct costs) | 9,621 | 7,823 | 23 | 18,938 | 15,099 | 25 | |||||||
| Depreciation & amortization right-of-use asset (included in direct costs) | 827 | 849 | (3 | ) | 1,235 | 1,685 | (27 | ) | |||||
| Gross profit as a percentage of revenue excluding depreciation & amortization(1) | 30 | % | 27 | % | 28 | % | 25 | % | |||||
Direct costs are comprised of field and shop expenses, costs of motors and parts sold, and include depreciation and amortization of the Corporation’s equipment and right-of-use assets. For the three-month period ended June 30, 2023, direct costs increased by 19 percent to $119.9 million from $100.5 million in the 2022-period. For the 2023 six-month period, direct costs increased by 31 percent to $251.9 million from $192.5 million in the same 2022-period. Higher direct costs in both 2023 periods were mainly driven by greater depreciation and amortization expenses on drilling and other equipment, higher motor repairs associated with growth in motor rental activity, greater costs of motors and parts sold, and increased overall costs related to personnel, repair parts, and equipment rentals as a result of inflation and activity growth in the first half of 2023. The Corporation’s depreciation and amortization on drilling and other equipment increased by 23 percent and 25 percent, respectively, in the 2023 three and six-month periods due to the volume of fixed assets acquired as part of PHX Energy’s capital expenditure program in the first half of 2023.
In the three and six-month periods of 2023, gross profit as a
