Strad Energy Services Announces Third Quarter Results

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| Source: Strad Energy Services Ltd.

NOT FOR DISTRIBUTION TO U.S. NEWS WIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES ("U.S.")

The news release contains “forward-looking information and statements” within the meaning of applicable securities laws. For full disclosure of the forward-looking information and statements and the risks to which they are subject, see the “Cautionary Statement Regarding Forward-Looking Information and Statements” later in this news release.

CALGARY, Alberta, Nov. 09, 2017 (GLOBE NEWSWIRE) -- Strad Energy Services Ltd., (TSX:SDY) (“Strad” or the “Company”), a North American-focused, energy services company, today announced its financial results for the three and nine months ended September 30, 2017. All amounts are stated in Canadian dollars unless otherwise noted.

THIRD QUARTER SELECTED FINANCIAL AND OPERATIONAL HIGHLIGHTS:

•      Revenue of $33.9 million increased 67% compared to $20.3 million for the same period in 2016;

•      Adjusted EBITDA(1) of $9.4 million compared to $1.2 million for the same period in 2016;

•      Net income and income per share was $0.6 million and $0.01, respectively, compared to a net loss and loss per share of $(3.7) million and $(0.09) for the same period in 2016;

•      Revenue from the energy infrastructure customer vertical for the three months ended September 30, 2017, decreased to $10.8 million or 17% from $13.0 million from the same period in 2016; 

•      During the third quarter, the Company amended and extended its credit facilities by two years to September 29, 2020.  The amendments include a return to pre-covenant relief period maximum ratio of Funded Debt to covenant EBITDA(3) of 3.0:1 and a minimum ratio of Interest Expense to covenant EBITDA(3) of 3.0:1;

•      Capital additions totaled $7.2 million during the third quarter of 2017; and

•      Total funded debt(2) to covenant EBITDA(3) ratio was 0.9 to 1 at the end of the third quarter of 2017 compared to 1.2 to 1 at the end of the second quarter of 2017.

Notes:
(1)       Earnings before interest, taxes, depreciation and amortization and other adjustments (“adjusted EBITDA”) is not a recognized measure under IFRS; see “Non-IFRS Measures Reconciliation”.
(2)       Funded debt includes bank indebtedness plus long-term debt plus current and long-term obligations under finance lease less cash.
(3)       EBITDA is based on trailing twelve months adjusted EBITDA plus share based payments, plus additional one time charges.

“Significant year-over-year improvements in our financial performance continued into the third quarter with strong results from both our Canadian and U.S. Operations,” said Andy Pernal, President and Chief Executive Officer of Strad. “We are pleased with the steady improvement in our operations south of the border and expect this trend to continue as we focus on increasing our market share and pricing. During the third quarter, the improved EBITDA performance in our Canadian Operations continued to be driven by matting rental and service on large energy infrastructure projects. On balance, our strong financial performance in 2017 and strong balance sheet have us positioned well heading into 2018 and ready to take advantage of opportunities as the macro environment continues to improve.”

“Our funded debt to EBITDA leverage ratio continued to decline during the third quarter due to the continued improvement in our adjusted EBITDA results year-over-year,” said Michael Donovan, Chief Financial Officer of Strad. “With improving market fundamentals, our focus will remain on preserving the strength of our balance sheet and maintaining the cost structure we’ve established as we continue to grow and scale the business.”

THIRD QUARTER FINANCIAL HIGHLIGHTS

($000's, except per share amounts)Three months ended September 30, Nine months ended September 30,
 2017 2016 % chg.  2017 2016 % chg. 
        
Revenue33,923 20,277 67  90,077 45,115 100 
Adjusted EBITDA(1)9,418 1,247 655  19,505 (338)nm 
Adjusted EBITDA as a % of revenue28%6%  22%(1)%  
Per share ($), basic0.16 0.03 433  0.34 (0.01)nm 
Per share ($), diluted0.16 0.03 433  0.34 (0.01)nm 
Net income (loss)598 (3,746)nm  (3,911)(13,697)nm 
Per share ($), basic0.01 (0.09)nm  (0.07)(0.36)nm 
Per share ($), diluted0.01 (0.09)nm  (0.07)(0.36)nm 
Funds from operations(2)11,397 2,881   23,000 3,839  
Per share ($), basic0.19 0.01 1,800  0.40 0.10 300 
Per share ($), diluted0.19 0.01 1,800  0.40 0.10 300 
        
Capital expenditures(3)7,233 3,215   16,967 3,806  
        
Total assets189,388 188,965   189,388 188,965  
Long-term debt18,886 25,761 (27) 18,886 25,761 (27)
Total long-term liabilities30,695 37,171 (17) 30,695 37,171 (17)
Common shares - end of period ('000's)60,013 48,379   60,013 48,379  
Weighted avg common shares ('000's)       
Basic58,844 40,493   57,531 38,123  
Diluted59,234 40,493   57,531 38,123  

Notes:

(1)      Earnings before interest, taxes, depreciation and amortization and other adjustments (“adjusted EBITDA”) is not a recognized measure under IFRS; see “Non-IFRS Measures Reconciliation”. 
(2)      Funds from operations is cash flow from operating activities excluding changes in non-cash working capital. Funds from operations is not a recognized measure under IFRS; see “Non-IFRS Measures Reconciliation”. Strad updated 2016 comparative note per Financial Statement note disclosure as 2016 funds from operations have amounts that were reclassified to conform to the current presentation of the interim consolidated statement of cash flows.
(3)      Includes assets acquired under finance lease and purchases of intangible assets.

FINANCIAL POSITION AND RATIOS

($000's except ratios)As at September 30, 2017
 As at December 31, 2016
 
   
Working capital (1)$24,138 $15,636 
Funded debt (2)23,286 29,025 
Total assets189,388 185,321 
   
Funded debt to EBITDA (3)0.9 : 1
 3.2 : 1
 

Notes:

(1)      Working capital is calculated as current assets less current liabilities.
(2)      Funded debt includes bank indebtedness plus long-term debt plus current and long-term obligations under finance lease less cash.
(3)      EBITDA is based on trailing twelve months adjusted EBITDA plus share based payments, plus additional one time charges. See “Non-IFRS Measures Reconciliation”.

THIRD QUARTER RESULTS

Strad reported an increase in revenue and adjusted EBITDA of 67% and 655%, respectively during the three months ended September 30, 2017, compared to the same period in 2016. Strad’s third quarter results were driven by increased drilling activity in the WCSB and Strad’s U.S. operating regions, in addition to increased customer pricing.  Furthermore revenue was impacted by the increase in utilization within the Canadian surface equipment product lines and both of the U.S. product lines, due to the increase in drilling activity. As a result adjusted EBITDA margin percentage increased to 28% compared to 6% in the prior year, due to increased revenue and a relatively fixed cost structure.

Revenue generated from Strad’s energy infrastructure customer vertical decreased to $10.8 million during the third quarter of 2017 compared to $13.0 million in 2016. The decrease in energy infrastructure revenue is primarily a result of lower Product sales due to a one time sale during the third quarter of 2016 that did not re-occur this year. The energy infrastructure vertical continued to be primarily driven by matting in Canada. For the nine months ended September 30, 2017, energy infrastructure revenue has totaled $30.2 million of total revenue as compared to $22.6 million.

Strad’s Canadian Operations reported an increase in revenue and adjusted EBITDA of 70% and 237%, respectively, during the three months ended September 30, 2017, compared to the same period in 2016. Increased revenue was a result of higher drilling activity and continued improved pricing within the matting vertical during the  third quarter. Additionally surface equipment utilization increased by 26% as compared to the third quarter of 2016, which contributed to the increase in revenue for the third quarter of 2017. Energy infrastructure contributed $9.4 million in revenue of the total $23.4 million revenue for the third quarter of 2017 compared to $8.8 million in revenue of $13.7 million revenue in the same period in 2016.

Strad's U.S. Operations reported an increase in revenue of 164% as compared to the same period in 2016. Rig counts in all three of Strad’s targeted U.S. resource plays were higher during the third quarter of 2017 compared to the same period in 2016. Rig counts in the Bakken, Rockies and Marcellus regions increased by 89%, 114%, and 94%, respectively resulting in increased utilization for the third quarter of 2017 as compared to the same period in 2016. Revenue for the third quarter of 2017 was also impacted by increased customer pricing as compared to the same period in 2016. Third quarter EBITDA increased for Q3 2017 to $1.8 million as compared to a loss of $0.3 million in Q3 2016, as a result of a lower cost structure in the U.S. due to our focus on reducing overhead costs and discretionary spending.

Strad's Product Sales reported a decline in revenue of 23%, primarily the result of lower in-house manufactured products and third party sales which decreased to $0.2 million and $nil, respectively, during the three months ending September 30, 2017, as compared to $0.9 million and $2.1 million during the same period in  2016. This was offset by an increase in rental fleet sales which increased to $2.6 million during the third quarter of 2017 as compared to $0.6 million in the same period in 2016.

During the third quarter of 2017, capital expenditures were $7.1 million in Canada and were related primarily to wood matting additions in Canada to support Strad's energy infrastructure customer vertical. The Company is expecting to spend the remaining $9 million of the $26 million annual capital budget in the fourth quarter of 2017, in order to continue to meet the needs of energy infrastructure clients.

RESULTS OF OPERATIONS

Canadian Operations       
 Three months ended September 30, Nine months ended September 30,
($000's)2017 2016 % chg.  2017 2016 % chg. 
         
Revenue23,366 13,730 70  63,521 27,139 134 
Operating expenses12,745 9,726 31  40,207 19,557 106 
Selling, general and administration2,081 1,462 42  4,800 3,775 27 
Share based payments57 27    205 68   
Net income2,718 2,202 23  5,849 1,951 200 
Adjusted EBITDA(1)8,484 2,515 237  18,308 3,739 390 
Adjusted EBITDA as a % of revenue36%18%   29%14%  
              
              
Capital expenditures(2)7,136 2,441    14,172 2,550   
Gross capital assets(4)165,497 147,036 13  165,497 147,036 13 
Total assets124,322 114,402 9  124,322 114,402 9 
             
             
Equipment Fleet:            
Surface equipment4,000 4,100   4,000 4,100   
Utilization %(3)29%23%  32%18%  
Matting67,700 64,800   67,700 64,800   
Utilization %56%67%  53%43%  

Notes:

(1)      Earnings before interest, taxes, depreciation and amortization and other adjustments (“Adjusted EBITDA”) is not a recognized measure under IFRS; see “Non- IFRS Measures Reconciliation”.
(2)      Includes assets acquired under finance lease and purchases of intangible assets.
(3)      Equipment utilization includes surface and matting equipment on rent only and is calculated using gross asset value.
(4)      Gross capital assets are total property, plant and equipment before impairment and depreciation expense.

Revenue for the three months ended September 30, 2017, of $23.4 million increased 70% compared to $13.7 million for the same period in 2016. Increased revenue during the quarter was primarily a result of increased pricing in the matting product line as well as higher rig counts, which increased by approximately 73%, as compared to the third quarter of 2016. Also impacting the third quarter results was an increase of 26% in utilization in the surface equipment product line as compared to the prior year. Furthermore only one month of results from the acquisition of Redneck Oilfield Services Ltd. and Raptor Oilfield Services Ltd. was included in the third quarter of 2016 results, whereas a full quarter was included for 2017. September 30, 2017.

During the third quarter, revenue from energy infrastructure projects was $9.4 million or 40% of total revenue for Canadian Operations as compared to $8.8 million or 64% of total Canadian Operations revenue in the third quarter of 2016. The overall increase in revenue year-over-year is primarily due to improved matting pricing, offset by lower utilization rates during the third quarter.

During the third quarter, Strad’s matting fleet increased to approximately 67,700 mats at September 30, 2017, compared to approximately 64,800 mats as at September 30, 2016. New mats acquired during the quarter were deployed to support a top tier energy infrastructure customer on a pipeline project. Third quarter matting utilization decreased to 56% compared to 67% in the same period of 2016 due to drier than normal summer weather conditions. However, the decline in utilization was more than offset by pricing improvements year-over-year. During the third quarter, Strad’s surface equipment fleet decreased to approximately 4,000 pieces, slightly down from 4,100 pieces as at September 30, 2016. Surface equipment utilization increased by 26% during the third quarter of 2017, compared to the same period in 2016, due primarily to the increase in drilling activity.

Adjusted EBITDA for the three months ended September 30, 2017, of $8.5 million, increased 237% compared to $2.5 million for the same period in 2016. Adjusted EBITDA as a percentage of revenue, for the three months ended September 30, 2017, increased to 36% compared to 18% for the same period in 2016.  The increase in EBITDA is driven primarily by the increase in revenue during the second quarter of 2017 as well as a relatively fixed cost structure.

Revenue for the nine months ended September 30, 2017, of $63.5 million increased 134% compared to $27.1 million for the same period in 2016. Increased drilling activity and energy infrastructure projects were the primary drivers of increased revenue year-over-year.

During the nine months ended September 30, 2017, revenue from energy infrastructure projects was approximately $24.1 million or 38% of total revenue for Canadian Operations as compared to $15.4 million or 57% of total Canadian Operations revenue in the same period of 2016. Increased pricing and an earlier start to the matting season for energy infrastructure projects are the primary drivers of increased revenue year-over-year.

Adjusted EBITDA for the nine months ended September 30, 2017, of $18.3 million, increased 390% compared to $3.7 million for the same period in 2016. Adjusted EBITDA as a percentage of revenue, for the nine months ended September 30, 2017, increased to 29% compared to 14% for the same period in 2016.

Operating expenses for the three and nine months ended September 30, 2017, of $12.8 million and $40.2 million increased 31% and 106%  compared to $9.7 million and $19.6 million for the same period in 2016. The increase in operating expenses during the first nine months of 2017 is a result of increased activity levels and fleet size, as well as an increase in third party expenses, as compared to the same period in 2016. The increase in overall expenses is consistent with the increase in drilling activity and energy infrastructure projects that have occurred year to date for 2017.

Selling, general and administrative costs ("SG&A") for the three and nine months ended September 30, 2017, of $2.1 million and $4.8 million, respectively, increased 42% and 27% compared to $1.5 million and $3.8 million for the same period in 2016. SG&A costs increased over the three and nine months as a result of the first quarter 2017 acquisition of Got Mats? as well as the third quarter 2016 acquisition of Redneck Oilfield Services and Raptor Oilfield Services. 

        
U.S. Operations       
 Three months ended September 30, Nine months ended September 30,
($000's)2017  2016  % chg.  2017  2016  % chg. 
                  
Revenue7,776  2,950  164  19,094  10,251  86 
Operating expenses4,925  2,403  105  13,643  8,848  54 
Selling, general and administration993  858  16  2,750  3,355  (18)
Share based payments14  14     46  34    
Net loss(1,621) (4,028) nm  (8,238) (13,107) nm 
Adjusted EBITDA(1)1,844  (325) nm  2,655  (1,986) nm 
Adjusted EBITDA as a % of revenue24% (11)%    14% (19)%   
                  
                  
Capital expenditures(2)21  774     2,694  1,214    
Gross capital assets(4)129,472  143,462  (10) 129,472  143,462  (10)
Total assets64,070  73,341  (13) 64,070  73,341  (13)
                  
                  
Equipment Fleet:                 
Surface equipment2,000  2,000     2,000  2,000    
Utilization %(3)29% 15%    26% 16%   
Matting17,600  13,100  34  17,600  13,100  34 
Utilization %(3)32% 14%    26% 15%   

Notes:

(1)      Earnings before interest, taxes, depreciation and amortization and other adjustments (“Adjusted EBITDA”) is not a recognized measure under IFRS; see “Non-IFRS Measures Reconciliation”.
(2)      Includes assets acquired under finance lease and purchases of intangible assets.
(3)      Equipment utilization includes surface and matting equipment on rent only and is calculated using gross asset value.
(4)      Gross capital assets are total property, plant and equipment before impairment and depreciation expense.

Revenue for the three months ended September 30, 2017, increased 164% to $7.8 million from $3.0 million for the same period in 2016. The increase in revenue is due to a combination of higher surface equipment and matting utilization rates and modestly higher customer pricing resulting from increased drilling activity when compared to the same period in 2016. Average rig counts in the Bakken, Rockies and Marcellus regions increased by 89%, 114%, and 94%, respectively, during the third quarter of 2017 compared to the same period in 2016.

During the third quarter, revenue from energy infrastructure projects was $0.4 million or 6% of total revenue for U.S. Operations compared to $1.1 million or 37% in the same period of 2016. The decrease in revenue from energy infrastructure projects is due to fewer projects in 2017 compared to the same period in 2016.

The U.S. matting fleet increased to 17,600 mats as at September 30, 2017, compared to 13,100 mats as at September 30, 2016. The addition of mats during the first three quarters of 2017 was to support the increase in U.S. energy infrastructure customers. The U.S. surface equipment fleet remained consistent with surface equipment of 2,000 pieces at September 30, 2017, compared to September 30, 2016.

Adjusted EBITDA for the three months ended September 30, 2017, increased to $1.8 million compared to $(0.3) million for the same period in 2016. Adjusted EBITDA as a percentage of revenue, for the three months ended September 30, 2017, was 24% compared to (11)% for the same period in 2016. The increase in both adjusted EBITDA and adjusted EBITDA as a percentage of revenue is primarily due to increased drilling activity levels which resulted in higher utilization and modestly improved customer pricing in the third quarter of 2017 compared to the same period of 2016.

Revenue for the nine months ended September 30, 2017, increased 86% to $19.1 million from $10.3 million for the same period in 2016. The increase in revenue for the nine months ended September 30, 2017 can be attributed to higher surface equipment and matting utilization rates due to increased drilling activity levels across all of our U.S. operating regions and modestly higher customer pricing as compared to the same period in 2016. In addition, energy infrastructure revenue as a percentage of total revenue increased to 9.4% or $1.8 million during the nine months ended September 30, 2017 compared to 10.7% or $1.1 million in the same period of 2016.

Adjusted EBITDA for the nine months ended September 30, 2017, increased to $2.7 million compared to $(2.0) million for the same period in 2016. Adjusted EBITDA as a percentage of revenue, for the nine months ended September 30, 2017, was 14% compared to (19)% for the same period in 2016. The increase in both adjusted EBITDA and adjusted EBITDA as a percentage of revenue is primarily due to the increase in revenue during the first nine months of 2017 in addition to a relatively fixed cost structure. 

Operating expenses for the three and nine months ended September 30, 2017, of $4.9 million and $13.6 million, respectively,  increased 105% and 54% compared to $2.4 million and $8.8 million for the same period in 2016. The increase in operating expenses during the first nine months of 2017 is a result of increased activity levels. 

SG&A costs for the three and nine months ended September 30, 2017, of $1.0 million and $2.8 million increased 16% and decreased 18% respectively compared to $0.9 million and $3.4 million for the same period in 2016. The change in SG&A expenses is due to cost reductions implemented by management including staff reductions and reductions in discretionary spending.

        
Product Sales       
 Three months ended September 30, Nine months ended September 30,
($000's)2017  2016  % chg.  2017  2016  % chg. 
                  
Revenue2,781  3,597  (23) 7,462  7,725  (3)
Operating expenses2,673  3,240  (18) 5,747  6,701  (14)
Selling, general and administration52  24  117  151  44  243 
Net loss(417) (160) nm  (691) (706) nm 
Adjusted EBITDA(1)60  333  (82) 1,569  980  60 
Adjusted EBITDA as a % of revenue2% 9%    21% 13%   
                  
                  
Capital expenditures(2)      25     
Total assets104  137  (24) 104  137  (24)

Notes:

(1)      Earnings before interest, taxes, depreciation and amortization and other adjustments (“Adjusted EBITDA”) is not a recognized measure under IFRS; see “Non- IFRS Measures Reconciliation”.
(2)      Includes assets acquired under finance lease and purchases of intangible assets.

Product Sales are comprised of in-house manufactured products sold to external customers, third party equipment sales to existing customers and sales of equipment from Strad’s existing fleet to customers.

Revenue for the three months ended September 30, 2017, decreased 23% to $2.8 million from $3.6 million for the same period in 2016, resulting primarily from lower in-house manufactured products and third party sales. During the three months ended September 30, 2017, Product Sales consisted of $2.6 million of rental fleet sales, $0.2 million of in-house manufactured products and $nil of third party equipment sales compared to $0.6 million, $0.9 million and $2.1 million, respectively, during the same period in 2016.

During the third quarter, revenue from energy infrastructure projects was $1.0 million or 33% of total revenue compared to $3.2 million or 88% of total revenue in the same period of 2016. The decrease in revenue year-over-year is due to one-time sales during the third quarter of 2016 that did not re-occur in 2017. Product sales vary from quarter to quarter and are dependent on project timing and customer demands.

Adjusted EBITDA for the three months ended September 30, 2017, decreased to $0.1 million from $0.3 million for the same period in 2016. Adjusted EBITDA as a percentage of revenue, for the three months ended September 30, 2017, was 2% compared to 9% for the same period in 2016. The decrease in adjusted EBITDA is due to one-time costs of $0.2 million that were recorded for three months ended September 30, 2017, as compared to the same period in 2016.

Revenue for the nine months ended September 30, 2017, decreased 3% to $7.5 million from $7.7 million for the same period in 2016, resulting primarily from lower in-house manufactured equipment sales year over year. During the nine months ended, September 30, 2017, Product Sales consisted of $5.5 million of rental fleet sales, $1.3 million of in-house manufactured products and $0.6 million of third party equipment sales compared to $1.3 million, $2.4 million and $3.9 million, respectively, during the same period in 2016. 

During the nine months ended September 30, 2017, revenue from energy infrastructure projects was $4.2 million or 56% of total revenue compared to $6.1 million or 79% of total revenue in the same period of 2016. Revenue decreased year-over-year due to one time sales to energy infrastructure customers in the third quarter of 2016.

Adjusted EBITDA for the nine months ended September 30, 2017, increased to $1.6 million from $1.0 million for the same period in 2016. Adjusted EBITDA as a percentage of revenue, for the nine months ended September 30, 2017, was 21% compared to 13% for the same period in 2016.

Operating expenses for the three and nine months ended September 30, 2017, of $2.7 million and $5.7 million decreased 18% and 14% compared to $3.2 million and $6.7 million for the same period in 2016. Operating expenses vary with individual transactions and business activity levels.

OUTLOOK

Our trend of improved year-over-year financial performance continued into the third quarter on the strength of our Canadian matting business, improved customer pricing and our relatively fixed cost structure. Average rig count improvements in the WCSB and our U.S operating regions resulted in higher utilization of our equipment and matting rental fleets and higher customer pricing year-over-year.

In Canada, customer pricing for our matting continued to improve from the second quarter as favorable supply and demand market conditions continued into the third quarter. The third quarter has historically been the peak for matting utilization due to late summer, early fall drilling programs commencing and more energy infrastructure projects tend to begin during the summer construction period. Matting utilization typically begins to decline in the fourth quarter as the ground starts to freeze, reducing the need for matting in drilling locations as well as summer construction projects winding down. We expect to see this trend continue during the fourth quarter of 2017 with a portion of the utilization decline offset by smaller energy infrastructure projects that build through the winter months.

For the fifth consecutive quarter in a row, we reported improved financial results from our U.S. Operations both sequentially and year-over-year, driven primarily by improved average rig counts in our operating regions and modest increases in customer prices from historically low levels.

During the third quarter, we continued to execute on our strategic priorities including continued growth of the energy infrastructure customer vertical, continued focus on increasing our size and scale, and maintaining our lean cost structure. Revenue generated by energy infrastructure customers accounted for 32% of total revenue, 40% of Canadian Operations revenue, 5% of U.S. Operations revenue and 37% of Product Sales revenue during the third quarter.  

Year-to-date in 2017, we have deployed $17 million of our planned $26 million 2017 capital program with a focus on organic growth with $14.2 million of the capital spending being allocated primarily to our Canadian matting fleet to meet strong demand. We plan to continue investing in our matting fleet throughout the remainder of 2017 to ensure we are positioned to meet forecasted demand during the first quarter of 2018.     

Looking ahead to the remainder of 2017 and into 2018, we anticipate demand for our Canadian surface equipment to remain steady during the fourth quarter before increasing in the first quarter of 2018 in conjunction with the winter drilling season. Although many of our customers have yet to finalize their 2018 budgets, we have some indications that demand for our equipment and services during the first quarter could meet or exceed average 2017 levels. We expect the normal decline in demand for our Canadian matting fleet during the fourth quarter as summer energy infrastructure projects come to a conclusion and the ground begins to freeze. However, in keeping with the normal historical trend for our matting business, we anticipate demand increasing again mid to late first quarter of 2018.  

For the remainder of 2017 and early 2018, we expect to see continued improvement in our U.S. financial results as pricing increases and higher utilization rates combined with a low cost structure continue to drive improved profitability. For 2018, we will continue our focus on increasing prices for our products where market economic conditions allow, and managing our lean cost structure to ensure the efficiencies gained over the past two years are maintained. Capital allocation and balance sheet preservation in 2018 will continue to be top priorities to ensure we maintain flexibility and are well positioned to take advantage of opportunities that arise as market fundamentals continue to slowly improve.

LIQUIDITY AND CAPITAL RESOURCES

($000's)September 30, 2017
 December 31, 2016
 
       
       
Current assets$40,021 $31,852 
Current liabilities15,883 16,216 
Working Capital(1)24,138 15,636 
   
Banking facilities  
Operating facility3,626 1,478 
Syndicated revolving facility18,886 26,501 
Total facility borrowings22,512 27,979 
   
Total credit facilities(2)48,500 48,500 
Unused credit capacity25,988 20,521 

Notes:

(1)      Working capital is calculated as current assets less current liabilities.
(2)      Facilities are subject to certain limitations on accounts receivable, inventory, and net book value of fixed assets and are secured by a general security agreement over all of the Company's assets. As at June 30, 2017, Strad had access to $48.5 million of credit facilities.

As at September 30, 2017, working capital was $24.1 million compared to $15.6 million at December 31, 2016. The change in current assets is a result of a 44% increase in accounts receivable to $35.2 million for the third quarter of 2017 compared to $24.4 million for the fourth quarter of 2016. The increase in accounts receivable is due to an increase in matting and surface equipment related revenue, as well as delays in customer payments during the third quarter as compared to the fourth quarter of 2016. Inventory decreased by 10% to $3.5 million at September 30, 2017, from $3.9 million at December 31, 2016, and prepaid expenses decreased 13% to $1.0 million at September 30, 2017 from $1.1 million at December 31, 2016. The decrease in inventory and prepaids relates to the normal course of business.

The change in current liabilities is a result of a 15% decrease in accounts payable and accrued liabilities to $11.8 million at September 30, 2017, compared to $13.9 million at year end.  Bank indebtedness increased to $3.6 million at the end of the third quarter compared to $1.5 million for the fourth quarter of 2016.

Funds from operations for the three months ended September 30, 2017, increased to $11.4 million compared to $0.3 million for the three months ended September 30, 2016. Capital expenditures totaled $7.2 million for the three months ended September 30, 2017. Strad's total facility borrowing decreased by $5.5 million for the three months ended September 30, 2017, compared to the fourth quarter of 2016. Management monitors funds from operations and the timing of capital additions to ensure adequate capital resources are available to fund Strad’s capital program.

As at September 30, 2017, the Company’s syndicated banking facility consists of an operating facility with a maximum principal amount of $7.0 million CAD and $5.0 million USD, and a $36.5 million CAD syndicated revolving facility, both of which are subject to certain limitations on accounts receivable, inventory and net book value of fixed assets and are secured by a general security agreement over all of the Company’s assets. As at September 30, 2017, the Company had access to the maximum credit facilities. The syndicated banking facility was extended and amended during the third quarter of 2017 and will mature on September 29, 2020. These amendments include a return to pre-covenant relief period maximum ratio of Funded Debt to covenant EBITDA of 3.0:1 and a minimum ratio of Interest Expense to covenant EBITDA of 3.0:1. The syndicated banking facility bears interest at bank prime plus a variable rate, which is dependent on the Company’s funded debt to covenant EBITDA ratio.

Based on the Company's funded debt to covenant EBITDA ratio, the interest rate on the syndicated credit facility is bank prime plus 1.25% on prime rate advances and at the prevailing rate plus a stamping fee of 2.25% on bankers' acceptances. For the three months ended September 30, 2017, the overall effective rates on the operating facility and revolving facility were 5.44% and 5.27%, respectively. As of September 30, 2017, $3.6 million was drawn on the operating facility and $18.9 million was drawn on the revolving facility. Required payments on the revolving facility are interest only.

As at September 30, 2017, the Company was in compliance with all of the financial covenants under its credit facilities.

The relevant definitions related to the financial debt covenant ratio terms as set forth in the Company's syndicated banking facility are as follows:
•         Funded debt includes bank indebtedness plus long-term debt plus current and long-term obligations under finance lease less cash.
•         Covenant EBITDA is based on trailing twelve months adjusted EBITDA plus share based payments, plus additional one-time charges.
•         Interest expense ratio is calculated as the ratio of trailing twelve months adjusted EBITDA plus share based payments to trailing twelve months interest expense on loans and borrowings.

The above noted definitions are not recognized under IFRS and are provided strictly for the purposes of the financial covenant calculation.

   
Financial Debt CovenantsAs at September 30, 2017
 As at December 31, 2016
 
Funded debt to EBITDA ratio (not to exceed 3.0:1)      
Funded debt$23,286 $29,025 
Covenant EBITDA25,157 9,119 
Ratio0.9 3.2 
   
EBITDA to interest coverage ratio (no less than 3.0:1)  
Covenant EBITDA$25,157 $9,119 
Interest expense1,584 1,557 
Ratio15.9 5.9 
     

NON-IFRS MEASURES RECONCILIATION

Certain supplementary measures in this MD&A do not have any standardized meaning as prescribed under IFRS and, therefore, are considered non-IFRS measures. These measures are described and presented in order to provide shareholders and potential investors with additional information regarding the Company’s financial results, liquidity and its ability to generate funds to finance its operations. These measures are identified and presented, where appropriate, together with reconciliations to the equivalent IFRS measure. However, they should not be used as an alternative to IFRS, because they may not be consistent with calculations of other companies. These measures are further explained below.

Earnings before interest, taxes, depreciation and amortization and other adjustments (“adjusted EBITDA”) is not a recognized measure under IFRS. Management believes that in addition to net income, adjusted EBITDA is a useful supplemental measure as it provides an indication of the results generated by the Company’s principal business activities prior to consideration of how those activities are financed or how the results are taxed. Adjusted EBITDA is calculated as net income (loss) plus interest, finance fees, taxes, depreciation and amortization, loss on disposal of property, plant and equipment, loss on foreign exchange, less gain on foreign exchange and gain on disposal of property, plant and equipment. Segmented adjusted EBITDA is based upon the same calculation for defined business segments, which are comprised of Canadian Operations, U.S. Operations and Product Sales.

Funds from operations are cash flow from operating activities excluding changes in non-cash working capital. It is a supplemental measure to gauge performance of the Company before non-cash items. Working capital is calculated as current assets minus current liabilities. Working capital, cash forecasting and banking facilities are used by Management to ensure funds are available to finance growth opportunities.

Funded debt is calculated as bank indebtedness plus long-term debt plus current and long-term portion of finance lease obligations less cash from syndicate institutions.

Reconciliation of Funds from Operations

($000's)    
 Three months ended September 30,Nine months ended September 30,
 2017
 2016
 2017
 2016
 
   
Net cash generated from operating activities$4,223 $(1,867)$10,795 $7,814 
Less:    
Changes in non-cash working capital(1)(7,174)(4,748)(12,205)3,975 
Funds from Operations11,397 2,881 23,000 3,839 

Notes:

(1)      Prior period comparative funds from operations have amounts that were reclassified to conform to the current presentation of the interim consolidated statement of cash flows. See note 17 of the unaudited interim consolidated financial statements.

Reconciliation of Adjusted EBITDA

($'000's)    
 Three months ended September 30,
 Nine months ended September 30,
 
 2017
  2016  2017  2016 
             
Net income (loss):$598 $(3,746)$(3,911)$(13,697)
Add (deduct):    
Depreciation and amortization7,359 4,930 21,314 14,594 
Gain on disposal of PP&E(6)(35)(234)(496)
Deferred income tax (recovery) expense(244)(33)(231)206 
Financing fees58 44 204 138 
Interest expense301 318 1,156 718 
(Gain) loss on foreign exchange(15)17 (160)(416)
Current income tax recovery1,367 (248)1,367 (1,385)
Adjusted EBITDA9,418 1,247 19,505 (338)


Reconciliation of quarterly non-IFRS measures    
($'000's)    
 Three months ended
  Sep 30, 2017  Jun 30, 2017  Mar 31, 2017  Dec 31, 2016 
             
Net loss:$598 $(2,163)$(2,347)$(3,105)
Add (deduct):    
Depreciation and amortization7,359 7,572 6,383 7,610 
Gain on disposal of PP&E(6)(150)(78)(105)
Deferred income tax (recovery) expense(244)(102)116 (403)
Financing fees58 73 73 43 
Interest expense301 419 436 415 
(Gain) loss on foreign exchange(15)(58)(87)123 
Current tax (recovery) expense1,367   204 
Adjusted EBITDA9,418 5,591 4,496 4,782 


 Three months ended
  Sep 30, 2016  Jun 30, 2016  Mar 31, 2016  Dec 31, 2015 
             
Net loss:$(3,746)$(6,958)$(2,994)$(8,316)
Add (deduct):    
Depreciation and amortization4,930 4,516 5,149 7,126 
Gain on disposal of PP&E(35)(268)(193)(99)
Deferred tax expense (recovery)(33)1,438 (1,201)(4,033)
Financing fees44 47 47 34 
Interest expense318 157 244 427 
Loss (gain) on foreign exchange17 3 (437)216 
Current tax recovery(248)(918)(217)(677)
Impairment loss   7,822 
Adjusted EBITDA1,247 (1,983)398 2,500 


Reconciliation of funded debt  
($'000's)  
   
 Nine months ended September 30, 2017
 Year ended December 31, 2016 
      
Bank indebtedness, net of cash on hand at syndicate banks$3,626 $1,478 
Long term debt18,886  26,501 
Current and long term obligations under finance lease774  1,046 
Total Funded Debt23,286  29,025 
      

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS

Certain statements and information contained in this press release constitute forward-looking information and statements within the meaning of applicable securities laws. The use of any of the words “expect”, “plan”, “continue”, “estimate”, “anticipate”, “potential”, “targeting”, “intend”, “could”, “might”, “should”, “believe”, “may”, “predict”, or “will” and similar expressions are intended to identify forward-looking information or statements. More particularly, this press release contains forward-looking statements concerning future capital expenditures of the Company, including its 2017 capital budget, and funding thereof, changes and expectations in margins to be experienced by Strad, anticipated cash flow, debt, anticipated demand for the Company’s products and services over the balance of 2017 and into 2018, drilling activity in North America, pricing of the Company’s products and services and expectations for the remainder of 2017 and into 2018 and potential for improved profitability, and the potential for growth and expansion of certain components of the Company's business, including further additions to our matting fleet, anticipated benefits from cost reductions and timing thereof, manufacturing capacity to meet anticipated demand for the Company’s products, and expected exploration and production industry activity including the effects of industry trends on demand for the Company's products. These statements relate to future events or to the Company’s future financial performance and involve known and unknown risks, uncertainties and other factors that may cause the Company’s actual results, levels of activity, performance or achievements to be materially different from future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.

Various assumptions were used in drawing the conclusions or making the projections contained in the forward-looking statements throughout this press release. The forward-looking information and statements included in this press release are not guarantees of future performance and should not be unduly relied upon. Forward-looking statements are based on current expectations, estimates and projections that involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated and described in the forward-looking statements. Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information or statements. In addition to other material factors, expectations and assumptions which may be identified in this press release and other continuous disclosure documents of the Company referenced herein, assumptions have been made in respect of such forward-looking statements and information regarding, among other things: the Company will continue to conduct its operations in a manner consistent with past operations; the general continuance of current industry conditions; anticipated financial performance, business prospects, impact of competition, strategies, the general stability of the economic and political environment in which the Company operates; exchange and interest rates; tax laws; the sufficiency of budgeted capital expenditures in carrying out planned activities; the availability and cost of labour and services and the adequacy of cash flow; debt and ability to obtain financing on acceptable terms to fund its planned expenditures, which are subject to change based on commodity prices; market conditions and future oil and natural gas prices; and potential timing delays. Although Management considers these material factors, expectations and assumptions to be reasonable based on information currently available to it, no assurance can be given that they will prove to be correct. 

Readers are cautioned that the foregoing lists of factors are not exhaustive. Additional information on these and other factors that could affect the Company's operations and financial results are included in reports on file with the Canadian Securities Regulatory Authorities and may be accessed through the SEDAR website (www.sedar.com) or at the Company's website. The forward-looking statements and information contained in this press release are expressly qualified by this cautionary statement. The Company does not undertake any obligation to publicly update or revise any forward looking statements or information, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

THIRD QUARTER EARNINGS CONFERENCE CALL

Strad Energy Services Ltd. has scheduled a conference call to begin promptly at 8:00 a.m. MT (10:00 a.m. ET) on Friday, November 10th 2017.

The conference call dial in number is 1-844-388-0561, followed by Conference ID code 97352803

The conference call will also be accessible via webcast at www.stradenergy.com

A replay of the call will be available approximately one hour after the conference call ends until Friday, November 17th, 2017, at 1:00pm ET. To access the replay, call 1-855-859-2056, followed by pass code 97352803.

Strad Energy Services Ltd.   
Interim Consolidated Statement of Financial Position
   
(Unaudited)   
    
(in thousands of Canadian dollars)As at September 30, 2017  As at December 31, 2016 
 $  $ 
Assets   
Current assets   
Cash  369 
Trade receivables35,228  24,460 
Inventories3,482  3,890 
Prepaids and deposits966  1,111 
Income tax receivable345  2,022 
 40,021  31,852 
Non-current assets   
Property, plant and equipment146,462  150,622 
Intangible assets567  665 
Long term assets1,812  2,023 
Deferred income tax assets526  159 
Total assets189,388  185,321 
    
Liabilities   
Current liabilities   
Bank indebtedness3,626  1,478 
Accounts payable and accrued liabilities11,762  13,893 
Current portion of obligations under finance lease495  845 
 15,883  16,216 
Non-current liabilities   
Long-term debt18,886  26,501 
Obligations under finance lease279  201 
Deferred income tax liabilities11,530  10,321 
 46,578  53,239 
Equity   
Share capital155,054  135,935 
Contributed surplus12,613  12,243 
Accumulated other comprehensive income22,114  26,963 
Deficit(46,971) (43,059)
Total equity142,810  132,082 
Total liabilities and equity189,388  185,321 


    
Strad Energy Services Ltd.   
Interim Consolidated Statement of Loss and Comprehensive Loss   
For the three and nine months ended September 30, 2017 and 2016   
(Unaudited)   
    
 Three months ended September 30, Nine months ended September 30,
  2017  2016   2017   2016 
 $
    $        $     $  
Revenue 33,923   20,277   90,077   45,115 
Expenses       
Operating expenses 20,343   15,369   59,597   35,106 
Depreciation 7,295   4,864   21,118   14,248.212 
Amortization of intangible assets 42   43   126   275.117 
Amortization of long term assets 22   23   70   71.185 
Selling, general and administration 4,080   3,610   10,605   10,176 
Share-based payments 82   51   370   170.865 
Gain on disposal of property, plant and equipment (6)  (35)  (234)  (496)
Foreign exchange (gain) loss (15)  17   (160)  (416)
Finance fees 58   44   204   138 
Interest expense 301   318   1,156   718 
Loss before income tax 1,721   (4,027)  (2,775)  (14,876)
Current income tax recovery 1,367   (248)  1,367   (1,385)
Deferred income tax expense (recovery) (244)  (33)  (231)  206 
Loss for the period 598   (3,746)  (3,911)  (13,697)
        
Other comprehensive loss       
Items that may be reclassified subsequently to net loss       
Cumulative translation adjustment (2,510)  618   (4,849)  (5,004)
Total comprehensive loss for the period (1,912)  (3,128)  (8,760)  (18,701)
        
        
Loss per share:       
Basic$0.01  ($0.09)  ($0.07)  ($0.36)
Diluted$0.01  ($0.09)  ($0.07)  ($0.36)


  
Strad Energy Services Ltd. 
Interim Consolidated Statement of Cash Flow 
For the nine months ended September 30, 2017 and 2016 
(Unaudited) 
  
(in thousands of Canadian dollars)Nine months ended September 30,
 2017  2016 
    (revised) 
Cash flow provided by (used in)$  $ 
      
Operating activities   
Loss for the period(3,911) (13,697)
Adjustments for items not affecting cash:   
Depreciation and amortization21,314  14,594 
Deferred income tax expense(231) 231 
Current income tax (recovery) expense1,367   
Share-based payments370  171 
Interest expense and finance fees1,360  856 
Unrealized foreign exchange gain(495) (379)
Gain on disposal of property, plant and equipment(234) (496)
Book value of used fleet sales in operating activities3,460  2,559 
Changes in items of non-cash working capital(12,205) 3,975 
Net cash generated from operating activities10,795  7,814 
    
Investing activities   
Purchase of property, plant and equipment(16,967) (3,806)
Proceeds from sale of property, plant and equipment790  367 
Purchase of intangible assets(34) (65)
Cash paid on business acquisition(2,750)  
Cash assumed on business acquisition322  196 
Changes in items of non-cash working capital117  157 
Net cash (used in) generated from investing activities(18,522) (3,151)
    
Financing activities   
Proceeds on issuance of long-term debt5,307  20,000 
Repayment of long-term debt(12,919) (9,739)
Repayment of long-term debt assumed in business acquisition  (12,995)
Repayment of finance lease obligations (net)(790) (453)
Issuance of shareholder loan (net of repayments)304  (94)
Interest expense and finance fees(1,360) (856)
Issuance of common shares15,000   
Share issue costs(1,025)  
Changes in items of non-cash working capital(76) 10 
Net cash generated from (used in) financing activities4,441  (4,127)
Effect of exchange rate changes on cash and cash equivalents769  (750)
Increase in cash and cash equivalents(2,517) (214)
    
Cash and cash equivalents – beginning of year(1,109) (2,874)
Cash and cash equivalents – end of period(3,626) (3,088)
    
Cash paid for income tax   
Cash paid for interest203  706 
 

ABOUT STRAD ENERGY SERVICES LTD.

Strad is a North American energy services company that provides rental equipment and matting solutions to the oil and gas and energy infrastructure sectors.  Strad focuses on providing complete customer solutions in Canada and the United States.

Strad is headquartered in Calgary, Alberta, Canada. Strad is listed on the Toronto Stock Exchange under the trading symbol “SDY”.

For more information, please contact:

Strad Energy Services Ltd. 
Andy Pernal 
President and Chief Executive Officer 
(403) 775-9202 
Fax: (403) 232-6901
email: apernal@stradenergy.com 

Strad Energy Services Ltd.
Michael Donovan
Chief Financial Officer 
(403) 775-9221
Fax: (403) 232-6901
email: mdonovan@stradenergy.com 

www.stradenergy.com