CES Energy Solutions Corp. Announces Strong Q2 2021 Results

CES Energy Solutions Corp. Announces Strong Q2 2021 Results, Dividend Reinstatement and Expansion Into New Geographic Markets

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CALGARY – CES Energy Solutions Corp. announced the Company’s results for the three and six months ended June 30, 2021.

In Q2 2021 CES demonstrated strong revenues, margins, market share, and surplus free cash flow generation, underpinned by focus on strategic investments in working capital and preservation of strong balance sheet and liquidity metrics. Revenue for the quarter was $253.6 million and Adjusted EBITDAC was $32.0 million, representing a 12.6% margin as CES realized improvements throughout its business lines, including maintaining market share of 20% in its US drilling fluids division.

CES demonstrated these strong financial results as industry conditions continued to stabilize and improve during the past three quarters. CES has been able to leverage its established infrastructure, strong industry positioning and dedicated people to capitalize on these positive developments.  CES remains confident in its ability to generate strong surplus free cash flow amid an improving outlook and on August 12, 2021, the Company’s Board of Directors approved the reinstatement of its dividend on a quarterly basis. Accordingly, CES will pay a cash dividend of $0.016 per share on October 15, 2021 to the shareholders of record at the close of business on September 30, 2021. CES’ reinstated dividend returns additional value to shareholders while preserving the strength of the Company’s balance sheet and maintaining ample liquidity to fund capital allocation options including potential growth initiatives.

CES is also pleased to report expansion into two new geographic markets. Both initiatives are consistent with the Company’s previously stated strategic goals of applying our advanced chemistries with knowledgeable customers, absent large outlays of capital. AES Drilling Fluids, our US drilling fluids business, with the assistance of our global supply chain team, is actively supplying an existing CES customer in Oman. While the Oman operation is still in its early stages, this kind of project offers the type of scale that could allow CES to meaningfully expand operations into the attractive Middle East market. In addition, PureChem Services, our Canadian production chemical division, has also begun exporting production chemicals to a new customer in Nigeria.

As industry activity levels continued to improve, CES remained disciplined on capital expenditures during the quarter, while retaining substantial liquidity and balance sheet strength. CES exited the quarter with a net cash balance of $11.9 million (December 31, 2020 – $18.3 million) and Total Debt, net of cash, of $304.6 million (December 31, 2020 – $299.7 million), of which $288.0 million relates to Senior Notes which don’t mature until October 21, 2024. CES’ Senior Facility has a maximum available draw of $170.0 million on the Canadian facility and US$50.0 million on the US facility (December 31, 2020 – $170.0 million and US$50.0 million, respectively) and does not mature until September 28, 2022. Decreases in cash since December 31, 2020 were driven by strategic investments in inventory and by the repurchase of 6.8 million common shares for $10.3 million, at an average price of $1.50 per share, under the Company’s NCIB program. As of this date, the Company had a net draw on its Senior Facility of approximately $3.0 million.

In the second quarter, CES generated revenue of $253.6 million, an increase of $94.1 million or 59% compared to $159.5 million in revenue for Q2 2020. For the six months ended June 30, 2021, CES generated revenue of $514.2 million, an increase of $5.3 million or 1% from $508.9 million in the 2020 comparative period. While activity levels and industry rig counts continue to improve from the lows seen during the COVID-19 pandemic in 2020, comparative year to date results were muted as the prior year period benefited from a strong Q1 2020 generated before COVID-19 and industry headwinds materialized.

Revenue generated in the US during Q2 2021 was $175.3 million representing a sequential increase of $7.3 million or 4.3% from Q1 2021 and an increase of $53.4 million or 44% from the comparative period in 2020. US revenues were positively impacted by increased industry activity levels and the reversal of temporary production shut-ins. US land drilling activity in Q2 2021 has improved by 16% from Q2 2020 and by 16% on a sequential quarterly basis. For the six months ended June 30, 2021, revenue generated in the US decreased slightly by 2% to $343.3 million. CES continues to participate in the improved drilling environment and maintained a US Drilling Fluids Market Share of 20%, representing an increase of 7% and 5%, respectively, from the comparative 2020 periods.

Revenue generated in Canada during Q2 2021 was $78.3 million representing a sequential decrease of $14.3 million, on seasonally lower activity and associated revenue levels, from Q1 2021 and an increase of $40.7 million or 108% from the 2020 comparative period. Canadian revenues benefited from increased rig counts on improvement in land drilling activity of 298% as compared to Q2 2020 and the reversal of temporary production shut-ins. For the six months ended June 30, 2021, revenue generated in Canada increased 7% to $170.9 million.

CES achieved Adjusted EBITDAC of $32.0 million in Q2 2021, representing an increase of $23.8 million or 292% over $8.2 million in Q2 2020. Adjusted EBITDAC as a percentage of revenue of 12.6% achieved in Q2 2021 represented a significant improvement from the 5.1% recorded in Q2 2020 as the Company benefited from improved competitive positioning, the reversal of certain production shut-ins in both the US and Canada, improving drilling activity, increased market share, and realization of cost reduction measures which were undertaken in Q2 2020 to right size the business. Q2 Adjusted EBITDAC of $32.0 million represented a modest decrease from Q1 Adjusted EBITDAC of $34.4 million despite the normal seasonally low activity levels associated with Q2 in Canada. For the six months ended June 30, 2021, CES achieved Adjusted EBITDAC of $66.4 million, compared to $59.3 million in the comparative 2020 period as a result of higher period over period revenues.

Net income for the three months ended June 30, 2021 was $6.7 million compared to a net loss of $24.9 million in Q2 2020. Net income for the period benefited from higher activity levels and associated revenues, lower interest expense in the quarter due to lower debt levels, and the recognition of a $3.1 million (2020 – $6.3 million) benefit from the CEWS program. Net income for the six months ended June 30, 2021 was $11.8 million compared to a net loss of $250.6 million for the comparative 2020 period. Net loss for the three and six months ended June 30, 2020 was impacted by $4.0 million and $12.9 million, respectively, of inventory valuation write-downs, additional bad debt allowances and restructuring costs recorded in light of the challenging global oilfield market. For the six months ended June 30, 2020, net loss was further impacted by a $248.9 million goodwill impairment.

Outlook

There has been increased economic and industry optimism in the first half of 2021 as governments worldwide have been distributing COVID-19 vaccines leading to lifting restrictions, spurring demand for fossil fuels above 2020 levels, and resulting in favorable oil and gas prices underpinned by a constructive supply and demand balance. As the global economic recovery continues to gain momentum, increased activity and demand have led to improving commodity prices, production levels and drilling activity. CES remains cautiously optimistic with its outlook for the remainder of the year and expects elevated upstream activity across North America albeit below pre-COVID levels. Due to improving industry conditions, in late 2020 and in H1 2021 CES re-assessed the cost structure reductions undertaken during 2020, leading to the reversal of salary rollbacks and investment in people and operations to support improving activity levels throughout the divisions.

CES believes it will continue to benefit from its asset light, consumable chemical business model and its ability to maintain a prudent cost structure in this dynamic industry activity environment. CES’ counter cyclical leverage model was tested during the pandemic and demonstrated its ability to remain resilient despite declines in industry activity. As industry activity has continued to improve, the Company made modest investments in working capital, and will continue to focus on working capital optimization and balance sheet strength and liquidity as the year progresses. CES has proactively managed both the duration and the flexibility of its debt. In August 2019, CES successfully amended and extended its Senior Facility to September 2022. In October 2017, CES successfully re-financed and reduced its coupon on its previously outstanding $300.0 million Senior Notes by issuing new 6.375% Senior Notes, which mature in October 2024.

CES expects 2021 capital expenditures to be up to $30.0 million, of which $10.0 million is expansion and $20.0 million is maintenance. CES plans to continue its disciplined and prudent approach to capital expenditures in 2021 and will adjust its plans as required to support growth throughout divisions as conditions continue to unfold.

CES’ underlying business model is capex light and asset light, enabling generation of significant surplus free cash flow. As our customers increasingly regulate their business models to maintain spending within cash flows, we believe that CES will be able to leverage its established infrastructure, business model, and nimble customer-oriented culture to deliver superior products and services to the industry. CES demonstrated this ability during the depths of the downturn and expects to continue doing so as industry conditions continue to stabilize. CES also believes that competitor consolidations and business failures will provide further opportunities for CES in this recovery scenario. CES sees the consumable chemical market increasing its share of the oilfield spend as operators continue to: drill longer reach laterals and drill them faster; expand and optimize the utilization of pad drilling; increase the intensity and size of their fracs; and require increasingly technical and specialized chemical treatments to effectively maintain existing cash flow generating wells and treat growing production volumes and water cuts from new wells.

CES’ strategy is to continue to use its decentralized management model; its vertically integrated manufacturing model; its problem solving through science approach; its patented and proprietary technologies; and its superior people and execution to increase market share. By being basic in the manufacture of the consumable chemicals it sells, CES’ vertically integrated business model enables it to be price competitive and a technology leader. Operators require increasingly technical solutions and deeper customer-centric coverage models to meet their needs. CES believes that its unique value proposition makes it the premier independent provider of technically advanced consumable chemical solutions to the North American oilfield.

In its core businesses, CES will focus on profitably growing market share, controlling costs and managing working capital, developing or acquiring new technologies and making strategic investments as required to position the business to capitalize on current and future opportunities.

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