TSE:ENT $
ENTREC CORPORATION ANNOUNCES 2016 FIRST QUARTER FINANCIAL RESULTS

May 11, 2016

Acheson, Alberta, Canada – ENTREC Corporation (“ENTREC” or the “Company”), an employee-owned heavy haul transportation and crane solutions provider, today announced financial results for the first quarter ended March 31, 2016.

 

 Three Months Ended

$ thousands, except per share amounts and margin percent March 31 2016  March 31 2015 
Revenue 30,613  51,085 
Gross profit 5,282  12,465 
Gross margin 17.3%  24.4%
Adjusted EBITDA(1) 1,417  7,402
Margin(1)  4.6%   14.5%
Per share(1) 0.01  0.07
Adjusted net loss(1) (6,273) (1,356)
Per share(1) (0.06)  (0.01)
Net loss (4,814)  (1,777)
Per share – basic (0.04)  (0.02) 
Per share – diluted (0.04)  (0.02)

Commodity prices for oil and natural gas continued to be very weak in the first quarter of 2016 causing a further decline in customer demand for crane and specialized transportation services throughout western Canada and in North Dakota. In addition, ENTREC continued to experience downward pricing pressure from its customers as they worked to reduce their expenditures in the current commodity environment. The Company also began to see some smaller competitors offering their services at pricing levels that no longer support a full cost recovery.

As a result of the weak commodity environment, revenue for the three months ended March 31, 2016 decreased by 40% to $30.6 million from $51.1 million in 2015. This decline reflected both reduced utilization levels for ENTREC’s equipment fleet as well as lower customer pricing. On average, the Company estimates pricing reductions negatively impacted revenue by 15-20%.

Due to the lower revenue, adjusted EBITDA also declined to $1.4 million for the quarter ended March 31, 2016 from $7.4 million in 2015. The adjusted net loss of $6.3 million compared to a loss of $1.4 million in 2015.

ENTREC’s Strategy

ENTREC’s strategy to manage its business through the current market downturn consists of four key initiatives:

    Initiative #1:     Maintain a Strong Financial Position

Managing ENTREC’s business through a market downturn like we have today starts with having a strong financial position. This financial position includes a working capital position of $15.9 million and a net tangible asset value of $113.5 million at March 31, 2016.

ABL Facility

ENTREC has a flexible $240 million asset-based credit facility (the “ABL Facility”) with a syndicate of lenders led by Wells Fargo Capital Finance Corporation Canada. The ABL Facility has no principal repayments required until its maturity in March 2019 and has no leverage covenant at March 31, 2016. The facility is supported by a modern crane and transportation fleet that, along with real estate and other equipment assets, has an estimated fair market value of $275 million. History has also shown that modern crane fleets hold their value well throughout market cycles. In addition, the facility is supported by about $26 million in accounts receivable at March 31, 2016.

As at March 31, 2016, based on ENTREC’s fleet and accounts receivable as at that date, the borrowing base under the ABL Facility was $184.2 million. ENTREC was utilizing $124.9 million of this availability giving it excess borrowing capacity of $59.3 million. There will be no leverage covenant in place if ENTREC maintains an excess borrowing capacity higher than 12.5% of the borrowing base ($23.0 million at March 31, 2016). At March 31, 2016, ENTREC’s excess borrowing capacity of $59.3 million exceeded this threshold by $36.3 million.

Eligible equipment utilized in the Company’s borrowing base calculation is valued by a third party appraiser every six months and is included in the borrowing base at an amount equal to 85% of net orderly liquidation value. During the quarter ended March 31, 2016, ENTREC’s eligible equipment was re-appraised at higher values, due largely to the appreciation in the US dollar over the past year as well as the high overall quality of its crane fleet. As a result, the Company’s excess borrowing capacity increased to $59.3 million at March 31, 2016 from $44.5 million at December 31, 2015.

To help protect against a future decrease in its excess borrowing capacity due to foreign exchange fluctuations, in March 2016, ENTREC converted approximately $100 million CAD of its ABL Facility into US Dollars. As a result of this conversion and a lower US dollar in the second half of March, the Company recognized a foreign exchange gain of $2.6 million in the quarter ended March 31, 2016.

Convertible Debentures

On May 6, 2016, ENTREC announced that it will seek approval from the holders of its unsecured convertible debentures (the “Debentures”) to amend the terms of the Debentures. The proposed amendments include, among other things, increasing the interest rate from 7.00% to 8.50% effective October 31, 2016; decreasing the conversion price from $2.60 to $1.00 per share; and extending the maturity date from October 31, 2017 to June 30, 2021. If the proposed amendments are approved and implemented, ENTREC will also, on October 31, 2017, redeem on a pro rata basis $3.5 million of the principal amount of the amended Debentures.

For the above amendments to be approved, at least 662/3% of the principal amount of the Debentures voted must be voted in favour of the amendments at a meeting of holders of the Debentures to be held on June 6, 2016. If the proposed amendments are implemented, ENTREC will also pay a cash consent fee of $20 per $1,000 principal amount of Debentures to Debentureholders that delivered and did not withdraw valid proxies voting on the Debenture amendments.

By extending the maturity of the Debentures, ENTREC will be provided with increased financial flexibility to manage the current economic downturn as well as better capitalize on future growth opportunities in the near and medium term.

    Initiative #2:     Asset Rationalization

ENTREC remains focused on reducing its long-term debt in 2016. This will be accomplished by minimizing capital expenditures and disposing of under-utilized equipment. With a relatively new fleet, the Company will incur only minimal capital expenditures for the foreseeable future and currently expects capital expenditures for the year ending December 31, 2016 will be under $2 million.

ENTREC continues to work towards its target to achieve a minimum of $20 million in net proceeds from the disposal of under-utilized equipment in 2016. During the three months ended March 31, 2016, the Company received net proceeds of $3.9 million from the sale of equipment. Further dispositions will be achieved as the year progresses through a combination of private sales, brokered transactions and auction.

    Initiative #3:     Grow Sales Through Diversification and an Aggressive Sales Effort

ENTREC is aggressively working on a number of sales initiatives in 2016 to further diversify its customer base and take market share from competitors. These initiatives include:

• Obtaining additional long-term maintenance, repair and operation (MRO) work with existing and new clients;

• Pursuing construction project work related to infrastructure, power generation, and other industries outside oil and gas;

• Pursuing new customers from competitors and peers exiting the market;

• Acquiring new customers through a continued focus on safety and customer service;

• Cross-selling crane services to specialized transportation services clients; and

• Cross-selling specialized transportation services to crane services clients.

As part of these initiatives ENTREC is also expanding its business into new geographic markets. These plans include:

Midland Texas Expansion

In the first quarter of 2016, ENTREC expanded its operations to Midland Texas. Midland is located right in the heart of the Permian Basin – the largest oil play in the United States. ENTREC believes this organic expansion represents a great opportunity to further diversify its business into a new geographic region. The Company’s initial revenue targets are expected to be achieved from existing customers it already serves in other locations. ENTREC expects the start-up costs of the new branch will be minimal with all equipment being transferred internally from other locations.

Business Acquisitions

The Company continues to pursue specific business acquisition opportunities that are accretive to net income and fit its strategy of geographical and industry diversification.

On May 10, 2016, ENTREC acquired the business and assets of HighMark Crane Ltd. (“HighMark”). HighMark specialized in providing crane rental and operator services and industrial equipment transportation services to customers in the power transmission, mining, and commercial construction industries across Canada. The company possessed a modern equipment fleet that included nine boom trucks specifically designed to service the power transmission industry as well as several cranes, trucks, trailers and other support equipment with a fair market value of approximately $5.5 million. The acquired business is currently servicing multiple power transmission projects throughout the Provinces of Manitoba and Newfoundland & Labrador.

HighMark has a strong reputation as a leading provider of crane services to the power transmission industry right across Canada and represents a key stepping stone in ENTREC’s strategy to further diversify its business outside oil and gas. With the acquisition, ENTREC has also now expanded its operations into the Provinces of Manitoba and Newfoundland & Labrador.

Independent 3rd party appraisals assigned a fair market value of approximately $5.5 million to the HighMark equipment acquired by ENTREC. The aggregate consideration paid for the business and assets of HighMark consisted of (i) the issuance of 1,605,286 common shares of ENTREC; and (ii) $3.5 million in cash (less a holdback of $0.2 million).

Based on the recent appraisals of the HighMark fleet, ENTREC’s stock was issued at a value of $1.22 per share, which was based on the fair market value of ENTREC’s assets less its liabilities (excluding deferred income taxes) as at December 31, 2015. The cash consideration issued in the transaction was limited to an amount that would not exceed the additional borrowing base capacity created under ENTREC’s ABL Facility by the additional equipment acquired.

For financial reporting purposes, the common shares issued in the transaction will be recorded at a deemed price of $0.30 per share, being the market price of ENTREC’s common shares as traded on the Toronto Stock Exchange immediately prior to the acquisition.

    Initiative #4:     Cost Reductions

In this business environment, ENTREC remains completely focused on controlling costs, minimizing discretionary expenditures, and rationalizing operations wherever practical. In the first quarter of 2016, the Company implemented an initial cost reduction plan with a target to reduce its operating costs by $7 million on an annual basis. This plan included the following initiatives:

• 15% reduction in salaried (non-billable) staff – completed January/February 2016;

• Revised overtime rules for hourly employees;

• Reduced travel costs;

• Facility subleases and rent concessions; and

• Reduction in fixed equipment costs associated with 2016 equipment disposals.

With continuing weakness in ENTREC’s end markets, the Company has now increased its annual cost reduction target to $13 million on an annual basis. The incremental cost savings will be achieved through the following additional initiatives:

• Further 15% reduction in salaried (non-billable) staff – completed April 2016;

• Wage reductions for all hourly employees;

• Reduction in employer pension plan contributions; and

• Elimination and modification of certain employee allowances and benefits.

The Company also continues to closely assess its operating costs and will make further cost reductions as necessary to ensure its expenses continue to align with activity levels.

2016 Operational Outlook

Given the uncertainties in the oil and gas end markets ENTREC serves, the Company’s outlook remains weak for the remainder of fiscal 2016. Downward pricing pressure from customers together with lower demand for its services supporting oil and natural gas exploration and production activities will continue to negatively impact its financial results. In addition, there remains significant uncertainty overall as to the magnitude and timing of any future recovery in oil and natural gas prices and in how future changes in these prices will impact activity levels in the oil and gas industry and, in particular, the Alberta oil sands region.

Helping to partially offset the lower demand for ENTREC’s services has been ongoing construction project work for its rough terrain cranes. ENTREC expects many of these assets will remain well-utilized over the next three to six months. The Company also continues to establish its presence in the market for MRO work in the Alberta oil sands region – which is typically less susceptible to changes in near-term commodity prices, and should continue to provide a steady demand for ENTREC’s services over the next year and beyond. This work could contribute to over 20% of ENTREC’s consolidated revenue in fiscal 2016.

ENTREC is also pursuing a number of power and infrastructure projects, which will help to diversify its revenue outside oil and gas. The Company’s recent expansion into Manitoba and Newfoundland & Labrador, through its acquisition of HighMark, strongly positions ENTREC to capture more power-related opportunities.

The Company is growing its presence in the Permian Basin through its newly established location in Midland, Texas. ENTREC believes that as oil prices recover, this area will be one of the first regions in North America to experience higher oilfield activity levels due to lower production costs for producers.

ENTREC remains well-positioned in northwest British Columbia to support the region’s industrial activity, including the potential future construction of LNG facilities. Unfortunately, due to current commodity prices, there is considerable uncertainty whether any LNG projects will eventually obtain final investment decisions. Note that demand for ENTREC’s services related to natural gas exploration and production in northeast British Columbia could also be impacted by final investment decisions on the construction of proposed LNG facilities. Positive final investment decisions should accelerate the demand for its services, while negative or delayed decisions could adversely impact relevant natural gas-related activity.

ENTREC is also closely monitoring developments related to the forest fires in the Fort McMurray area and are pleased to report that its employees are all safe and that ENTREC’s shop and yard has incurred only minimal fire damage. While the Company expects its revenue in the region will be negatively affected in the short-term due to the shutdown of most customer operations in the region, ENTREC is actively engaged in supporting the firefighting efforts and expects to be an active participant in the eventual reconstruction efforts.

“Over the longer-term, our competitive position continues to be positive,” commented John M. Stevens, ENTREC’s President & CEO. “Despite short-term uncertainties and challenges, we are well-positioned geographically, with a complete range of crane and specialized transportation services in each of our key markets across western Canada, North Dakota, and now in west Texas and Manitoba. We also continue to be an industry leader in customer service and safety, which will be key contributors to our success in the long-term. While we expect 2016 will be a challenging period from an operating perspective, we continue to aggressively manage our costs and remain well-positioned to capture future growth opportunities as industry fundamentals improve”.

A complete set of ENTREC’s most recent financial statements and Management’s Discussion and Analysis will be filed on SEDAR (www.sedar.com) and posted on the Company’s website (www.entrec.com).

About ENTREC

ENTREC is an employee-owned heavy haul transportation and crane solutions provider to the oil and natural gas, construction, petrochemical, mining and power generation industries. ENTREC is listed on the Toronto Stock Exchange under the symbol ENT.

Consolidated Statements of Financial Position
As at
(thousands of Canadian dollars)

March 31
2016
$

December 31
2015
$

     

ASSETS

   

Current assets

   

Cash

136

148

Trade and other receivables

25,600

28,366

Income taxes receivable

549

307

Inventory

2,325

2,374

Prepaid expenses and deposits

1,626

2,559

 

30,236

33,754

Non-current assets

   

Long-term deposits and other assets

102

91

Property, plant and equipment

235,401

246,158

Intangible assets

2,154

2,457

Deferred income taxes

2,110

2,019  
     

Total assets

270,003

284,479

     

LIABILITIES AND SHAREHOLDERS’ EQUITY

   

Current liabilities

   

Trade and other payables

8,989

10,868

Notes payable

2,294

2,294

Current portion of deferred leasehold inducements

609

609

Current portion of long-term debt

932

1,051

Current portion of obligations under finance lease

1,552

1,911

 

14,376

16,733

Non-current liabilities

   

Deferred leasehold inducements

9,632

9,784

Long-term debt

128,163

133,763

Obligations under finance lease

1,204

1,653

Convertible debentures

22,353

21,927

Deferred income taxes

18,199

19,513

Total liabilities

193,927

203,373

     

Shareholders’ equity

   

Share capital

132,317

132,275

Contributed surplus

9,595

9,589

Deficit

(67,325)

(62,511)

Accumulated other comprehensive income 

1,489

1,753

Total shareholders’ equity

76,076

81,106

     

Total liabilities and shareholders’ equity

270,003

284,479

 

 

Consolidated Statements of Loss

 Three Months Ended

(thousands of Canadian dollars, except per share amounts)

March 31,
2016
$

March 31,
2015
$

Revenue

30,613

51,085

Direct costs

 25,331

38,620

     

Gross profit

 5,282

12,465

     

Operating expenses

   

General and administrative expense

 4,511

5,729

Depreciation of property, plant and equipment

 6,383

 6,574

Amortization of intangible assets

 306

 283

Share-based compensation

 48

 232

Loss (gain) on disposal of property, plant and equipment

953

 (198)

 

 12,201

 12,620

     

Loss before finance items and income taxes

 (6,919)

 (155)

     

Finance items

   

Finance costs

 2,177

 2,281

Foreign exchange gain on long-term debt

 (2,632)

 –

Gain on change in fair value of embedded derivative

 (8)

 

 (455)

 2,273

     

Loss before income taxes

 (6,464)

 (2,428)

     

Income taxes

   

Current

 (243)

(62)

Deferred

 (1,407)

 (589)

 

 (1,650)

 (651)

     

Net Loss

 (4,814)

 (1,777)

     

Loss per share – basic

(0.04)

 (0.02)

Loss per share – diluted

(0.04)

 (0.02)

 

First Quarter Financial Results Conference Call

ENTREC will host a conference call to discuss its 2016 first quarter results tomorrow, May 12, 2016 at 9:00 am (MDT) (11:00 am Eastern). The call can be accessed by dialling toll-free: 1-866-226-1793 or 416-340-8061 (GTA and International).

Non-IFRS Financial Measures

Adjusted EBITDA is defined as earnings before interest, income taxes, depreciation, amortization, loss (gain) on disposal of property, plant and equipment, foreign exchange loss (gain) on long-term debt, change in fair value of embedded derivative, share-based compensation, impairment of long-lived assets, and non-recurring business acquisition and integration costs. In addition to net income, Adjusted EBITDA is a useful measure as it provides an indication of the financial results generated by ENTREC’s principal business activities prior to consideration of how these activities are financed or how the results are taxed in various jurisdictions and before certain non-cash expenses. Adjusted EBITDA also illustrates what ENTREC’s EBITDA is, excluding the effect of non-recurring business acquisition and integration costs. Adjusted EBITDA margin is calculated as adjusted EBITDA divided by revenue. Per share amounts are calculated as adjusted EBITDA divided by the basic weighted average number of shares outstanding during the period.

Adjusted net (loss) income is calculated excluding the after-tax amortization of acquisition-related intangible assets, impairment of long-lived assets, notional interest accretion expense arising from convertible debentures, foreign exchange loss (gain) on long-term debt and the change in fair value of the embedded derivative related to such convertible debentures. These exclusions represent non-cash charges the Company does not consider indicative of ongoing business performance. ENTREC also believes the elimination of amortization of acquisition-related intangible assets provides management and investors an improved view of its business results by providing a degree of comparability to internally developed intangible assets for which the related costs are expensed as incurred. Adjusted (loss) earnings per share are calculated as adjusted net (loss) income divided by the basic weighted average number of shares outstanding during the applicable period.

Net tangible asset value is calculated as shareholders’ equity, excluding intangible assets, and adjusted for the difference between the Company’s estimate of fair market value and book value for property, plant and equipment.

Please see ENTREC’s Management Discussion & Analysis for the three months ended March 31, 2016 for reconciliations of adjusted EBITDA and adjusted net (loss) income to net (loss) income, the most directly comparable financial measure calculated and presented in accordance with IFRS as well as a reconciliation of net tangible asset value to shareholders’ equity, as presented in accordance with IFRS.

Forward-looking Statements

This press release contains forward-looking statements which reflect ENTREC’s current beliefs and are based on information currently available to ENTREC. These statements require ENTREC to make assumptions it believes are reasonable and are subject to inherent risks and uncertainties. Actual results and developments may differ materially from the results and developments discussed in the forward-looking statements as certain of these risks and uncertainties are beyond ENTREC’s control.

Examples of forward-looking statements in this press release and the key assumptions and risk factors involved in such statements include, but are not limited to the following: (a) the anticipation of upcoming amendments to ENTREC’s Debentures including the expected terms of the amendments, the expected effective date of the amendments, the expected benefits of the amendments, and the proposed redemption on October 31, 2017, on a pro rata basis, of $3.5 million of the principal amount of the Debentures conditional on the proposed amendments being approved and implemented (there can be no guarantee that the proposed amendments will be successfully completed and any such amendments remain subject to the approval of Debenture holders and the TSX); (b) ENTREC’s initial expectation that capital expenditures for the year ending December 31, 2016 will be under $2 million (this expectation is based on the assumption that ENTREC will not encounter circumstances where additional capital expenditures are required such as the requirement to service new or existing customer contracts); (c) ENTREC’s target to achieve a minimum of $20 million in net proceeds from the disposal of under-utilized equipment in 2016 (this target is based on the assumption the Company will be able to successfully source buyers for certain units within its equipment fleet at anticipated prices and that the terms of such disposals will be acceptable to ENTREC); (d) ENTREC’s plans to further diversify its customer base and take market share from competitors (this plan is subject to a number of risks, as described in ENTREC’s MD&A for the three months ended March 31, 2016 with the risks most likely to affect this plan including volatility of the oil and natural gas sector, economy and cyclicality, and competition); (e) ENTREC’s ability to achieve its initial revenue targets in Midland, Texas (ENTREC’s ability to achieve these targets is also subject to a number of the same risk factors as described above); (f) ENTREC’s pursuit of potential business acquisitions (the Company’s ability to complete any identified business acquisition is dependent on certain expectations and assumptions, including, among others: (i) the results of the due diligence review of the businesses proposed to be acquired being satisfactory; (ii) the ability of the parties to agree to the terms of a definitive agreement; (iii) ENTREC’s ability to obtain the necessary financing to complete any proposed business acquisition; and (v) ENTREC’s ability to receive the various approvals required); (g) ENTREC’s estimate that its 2016 cost reduction initiatives will reduce its operating costs by a further $13 million on an annual basis (this estimate is contingent on the Company’s ability to fully execute its cost reduction plan, the execution of which is dependent on a number of factors, including future changes in overall economic conditions, workforce availability and ENTREC’s ability to sublease certain facilities and receive concessions from landlords on anticipated terms); (h) ENTREC’s expectation that 2016 will be a very challenging year for the oil and gas industry with ongoing downward pricing pressure from customers along with lower demand for its services supporting oil and natural gas exploration and production activities continuing to negatively impact its financial results (this expectation is based on the assumption that reduced activity and customer pricing will continue in 2016 due to low crude prices); (i) ENTREC’s belief that many of its rough terrain cranes will remain well-utilized over the next three to six months (this belief is contingent on the customer projects to which these cranes are assigned continuing as planned); (j) ENTREC’s anticipation that its MRO work in the Alberta oil sands region will be less susceptible to changes in near-term commodity prices and could contribute to over 20% of its consolidated revenue in 2016 (this anticipation is based on the assumption that the Company’s MRO customers will continue to utilize its services for their ongoing operational activities in the Alberta oil sands and that these activity levels remain comparable with 2015 (this assumption is subject to a number of risks of which the risks most likely to affect this assumption include volatility of the oil and natural gas sector, Alberta oil sands exposure, economy and cyclicality, and competition); (k) ENTREC’s belief that the acquisition of HighMark strongly positions the Company to capture more power-related opportunities (this belief is subject to a number of risks and uncertainties including economy and cyclicality and competition); (l) ENTREC’s expectation that as oil prices recover, the Permian Basin will be one of the first regions in North America to experience higher oilfield activity levels due to lower production costs for producers (this expectation is subject to the assumption that oil prices will rise at some time in the future and that oil producers in the region will achieve sufficient economic returns in order to increase their activity levels); (m) ENTREC’s anticipation of the potential future construction of LNG facilities in northwest British Columbia and its ability to benefit from such projects (however these projects remain subject to a number of significant risks and uncertainties, no company has yet issued unconditional final investment decisions on these projects, and ENTREC will experience competition from other crane and heavy haul transportation service providers for these projects); (n) ENTREC’s belief that the future demand for its services related to natural gas exploration and production in northeast B.C. could also be impacted by final investment decisions on the construction of proposed LNG facilities (this belief is based on the key assumption that positive final investment decisions will accelerate natural gas drilling and completion activity in northeast B.C.); and (o) ENTREC’s expectation that its revenue in the Fort McMurray region will be negatively affected in the short-term due to the shutdown of most customer operations in the region and that it expects to be an active participant in the eventual reconstruction efforts. This expectation is based on a number of key assumptions, including how long customer operations are affected by the fires and ENTREC’s ability to obtain work to support reconstruction efforts once they proceed.

Consequently, all of the forward-looking statements made in this press release are qualified by these cautionary statements and other cautionary statements or factors contained herein, and there can be no assurance that the actual results or developments will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, ENTREC. These forward-looking statements are made as of the date of this press release. Except as required by applicable securities legislation, ENTREC assumes no obligation to update publicly or revise any forward-looking statements to reflect subsequent information, events, or circumstances.

For further information, please contact:

John M. Stevens – President & CEO

Telephone: (780) 960-5625

Jason Vandenberg – CFO

Telephone: (780) 960-5630

www.entrec.com

Related Content

ENTREC 2015 Second Quarter Investor Conference Call and Webcast

July 14, 2015

ENTREC 2015 Second Quarter Investor Conference Call and Webcast July 14, 2015 Acheson, Alberta, Canada – ENTREC Corporation (“ENTREC”) intends […]

Read More
ENTREC ANNOUNCES 2015 SECOND QUARTER FINANCIAL RESULTS

August 12, 2015

ENTREC ANNOUNCES 2015 SECOND QUARTER FINANCIAL RESULTS August 12, 2015 Acheson, Alberta, Canada – ENTREC Corporation (“ENTREC” or the “Company”), […]

Read More
ENTREC 2015 Third Quarter Investor Conference Call and Webcast

October 22, 2015

ENTREC 2015 Third Quarter Investor Conference Call and Webcast October 22, 2015 Acheson, Alberta, Canada – ENTREC Corporation (“ENTREC”) intends […]

Read More