Newalta Reports First Quarter 2017 Results

TSX Trading Symbol: NAL

CALGARY, May 9, 2017 /PRNewswire/ - Newalta Corporation ("Newalta") (TSX:NAL) today reported results for the three months ended March 31, 2017.

FINANCIAL HIGHLIGHTS⁽¹⁾

MANAGEMENT COMMENTARY

"Our solid first quarter performance reflects both improving market conditions and our focus on operational excellence and customer driven, value-added solutions," said John Barkhouse, President and Chief Executive Officer. "Profitability continued to improve with Divisional EBITDA margins of 30%, up 11 percentage points over the prior year."

"We are seeing recovery play out in our markets as we expected, beginning with improved drilling activity driving higher utilization in our U.S. and Canadian drilling services businesses and increased drilling waste volumes to our Canadian Oilfield Facilities. We are also starting to see an increase in our project work, particularly in Heavy Oil, as the relative stability in oil prices has begun to increase customer demand.   We expect these positive year-over-year recovery trends to continue in the quarters ahead.

"Our outlook for the year remains unchanged with anticipated annual Adjusted EBITDA of between $40 million and $55 million, based on a WTI forecast of $45 to $60 per barrel. We continue to work towards our target of being within a range of cash flow neutrality for the year and driving towards the positive cash flow model we envision in future years.  With the actions taken to establish a lower cost structure, we remain well positioned to realize significant operating leverage and deliver strong increases in performance as our markets recover."

FIRST QUARTER RESULTS

• Q1 2017 revenue of $60.8 million increased by 25% compared to prior year, driven primarily by an increase in U.S. Drill Site utilization and drilling-related waste volumes in Canadian Oilfield Facilities.
• Net loss for the quarter was $14.5 million compared to $41.2 million in the prior year. The year-over-year improvement was driven by increased contributions from Oilfield operations and reductions in restructuring and other expense, impairment, and G&A, partially offset by a decrease in income tax recovery and an increase in depreciation and amortization.
• Adjusted EBITDA for the quarter was $10.5 million compared to nil in the prior year. The year-over-year increase was driven by Divisional EBITDA improvements of $8.5 million and G&A savings of $1.9 million.
• Effective March 31, 2017, we amended and extended the terms of our Credit Facility to extend the waiver of our Total Debt to Covenant EBITDA covenant to Q2 2019 and to revise the Senior Debt to Covenant EBITDA and Interest Coverage covenant thresholds.
• Our contract model continued to provide predictable cash flow. These contracts generally are not tied directly to commodity price changes or drilling activity and provide a solid foundation for our business, particularly in depressed markets. On a trailing-twelve month ("TTM") basis, contracts represented 20% of our revenue.

Heavy Oil

• In the first quarter, Heavy Oil revenue decreased by 6% to $21.5 million and net earnings before taxes decreased 30% to $1.8 million compared to prior year driven primarily by Onsite operations. Divisional EBITDA increased by 16% over prior year to $8.4 million due to improved commodity prices and cost efficiencies. Divisional EBITDA margins improved by seven percentage points over the prior year.

Oilfield

• In the first quarter, Oilfield revenue increased by 53% to $39.3 million and net earnings before taxes increased 167% to $4.2 million compared to prior year driven by improved performance in both the Facilities and Drilling Services business units. Divisional EBITDA increased by $7.4 million to $9.6 million over prior year as a result of improved drilling activity, commodity prices and savings from cost efficiencies. Divisional EBITDA margins improved by 16 percentage points over the prior year.

Corporate and Other

• Capital expenditures for the three months ended March 31, 2017 were $2.2 million, a decrease of 19% over prior year.
• For the three months ended March 31, 2017, G&A decreased 20% to $7.5 million, reflecting the impact of our cost rationalization initiatives taken in 2016.
• Restructuring and other expense for the three months ended March 31, 2017, was $0.7 million compared to $22.1 million in the prior year. The current year expense is primarily comprised of an increase to the non-cash decommissioning liabilities related to inactive sites due to a change in discount rate.

The following section contains forward-looking information as it outlines our Outlook for 2017. Our Outlook is based on several key assumptions including growth capital contributions, commodity prices and activity levels in the oil and gas industry. Changes to these assumptions could cause our actual results to differ materially. Please refer to our Forward-Looking Information later in this document. We are subject to a number of risks and uncertainties in carrying out our activities including market conditions, ability to expand the business, competition, regulation, and the ability to attract and retain personnel. A complete list of our risk factors is disclosed in our most recently filed Annual Information Form.

OUTLOOK & OPERATING LEVERAGE

Our performance in the last two years was significantly impacted by the decline in oil prices and activity levels in the oil and gas industry. Inherent in our business model is the capacity to leverage significant upside with recovery in oil pricing and activity levels with minimal capital investment.

Our view is that recovery, in the form of increased activity (whether drilling, completions or production), will be driven by stability in oil and gas prices, which enables our customers to make capital decisions to invest in the drilling and completion of new wells and reactivation of shut-in wells. As we see activity levels recover, this will translate into increased production waste volumes being generated. Timing of recovery will vary among plays based on their cost profile.

Our operating leverage is driven by the following factors:

Crude Oil Prices

• Crude oil prices directly impact the value of the products we recover from waste.
• Commodity price stabilization generates confidence amongst producers, impacting their capital budgets, which in turn drives increased activity.

Drilling Activity

• Recovery of drilling activity will be determined by the speed at which producers deploy their capital budgets.
• Drill site performance is driven by active rigs and is the first business line to respond to changes in activity.
• Wells drilled and completed in the areas we serve drive waste volumes into our facilities.
• As drilling activity recovers, we expect to realize improving returns on our capital investments made in 2014 and 2015.
• We anticipate the drilling activity in the areas where we operate to recover at different rates depending on the cost profile of the play, with shale play activity increasing first and CHOPS being the last to recover.

Step Change

• Primarily comprised of the net impact of production waste volumes and shifts in waste mix, net impact of contributions from mining contracts and, to a lesser extent, customer pricing and operational efficiencies.
• We expect to see a lag in recovery of production waste volumes depending on the speed at which producers deploy their budgets, including turnarounds and workovers.
• The composition of waste volumes impacts the degree of processing complexity and the amount of recoverable oil.
• CHOPS waste volumes are also dependent on the drilling of new wells to replace production volumes lost through their naturally steep decline curves.
• SAGD waste volumes are dependent on the number, timing and length of event-based upsets occurring in the normal course of SAGD facility operations.
• Mining contributions are expected to be slower to return as producers focus on developing mitigation plans required to meet the Tailings Management Framework. We continue to work with producers to develop solutions to meet these requirements.
• As production activity recovers, we expect to realize improving returns on our capital investments made in 2014 and 2015.
• We continue to manage our operational cost structure and collaborate with customers to provide enhanced value solutions to mitigate the impact of pricing pressure.

Savings from Cost Rationalization

• Our various initiatives to right-size the organization, streamline cost structures and business processes, and rationalize office space have established a lower cost model capable of supporting meaningful improvement in profitability in a recovering environment.
• Cost rationalization actions taken by Management throughout the downturn removed in excess of $60 million in costs on an annualized basis from 2014 levels.

2017 Outlook

In 2017, we expect to see a return towards normalized quarterly seasonality. Our 2017 Outlook is based on the following assumptions:

• Improving commodity prices with less volatility than in 2016
• Increased customer capital budgets over 2016 levels, driving drilling and completions activity
• Recovery of the $4.5 million lost in 2016 from the Fort McMurray wildfires and a modest improvement in production-driven waste volumes over prior year
• Carryover of savings from cost rationalization actions taken in 2016

Our Q2 and full-year 2017 guidance ranges are:

• Revenue of $50 million to $60 million for the second quarter and $200 million to $275 million for the full year; and
• Adjusted EBITDA of $8 million to $10 million for the second quarter and $40 million to $55 million for the full year.

The following table outlines the factors we expect to impact Adjusted EBITDA performance in the second quarter and full year of 2017:

Total Debt, Capital & Cash Flow Management

Throughout the downturn, we proactively structured our business model for the environment. Our Q2 2016 equity financing, rationalization initiatives, amended Credit Facility, reduced capital spend and suspension of dividends provided us the liquidity and flexibility to operate in the sustained downturn.

We will continue to manage cash flows to ensure our financing obligations are met and spending is minimized wherever possible. Over the last two years, management has focused on moving towards a positive cash flow model and have made significant progress through proactive management of operating cash flows and cost rationalization initiatives. Through 2017, we will maintain our focus on being within a range of cash flow neutrality for the year, subject to opportunities that may arise. Further, we will exercise prudent judgment in managing our capital expenditures for the year, aligned with our longer-term cash flow target.

Effective March 31, 2017, we amended and extended the terms of our Credit Facility to extend the waiver of our Total Debt to Covenant EBITDA covenant to Q2 2019 and to revise the Senior Debt to Covenant EBITDA and Interest Coverage covenant thresholds.  These amendments provide us with the flexibility to continue to manage our balance sheet as we transition through recovery. Managing debt leverage and use of cash and capital are our highest priorities. We expect to remain within our debt covenants throughout the remainder of 2017.

Management's Discussion and Analysis and Financial Statements

The condensed consolidated financial statements and MD&A, which contain additional notes and disclosures, are available on SEDAR at www.sedar.com or our website at www.newalta.com under Investor Relations/Financial Reports.

Quarterly Conference Call
Management will hold a conference call on May 10, 2017 at 11:00 a.m. (ET) to discuss Newalta's performance for the quarter. To participate in the teleconference, please call 647-427-7450 or toll free 1-888-231-8191. To access the simultaneous webcast, please visit www.newalta.com. For those unable to listen to the live call, a taped broadcast will be available at www.newalta.com and, until midnight on Wednesday, May 17, 2017 by dialing 855-859-2056 and using the pass code 92431408.

About Newalta
Newalta is a leading provider of innovative engineered environmental solutions that enable customers to reduce disposal, enhance recycling and recover valuable resources from oil and gas exploration and production waste streams. We simplify the critical challenges of sustainable environmental practices through the use of advanced processing capabilities deployed through a differentiated business model. We serve customers onsite directly at their operations and through a network of locations throughout North America. Our proven processes and excellent record of safety make us the first-choice provider of sustainability-enhancing services for oil and gas customers. With a highly skilled team of people, a two-decade track record of innovation and a commitment to commercializing new solutions, Newalta is positioned for sustained future growth and improvement. We are Sustainability Simplified^TM.Newalta trades on the TSX as NAL. For more information, visit www.newalta.com.

The press release contains certain statements that constitute forward-looking information.  Please refer to the section below, "Forward-Looking Information", for further discussion of assumptions and risks relating to this forward looking information.

This press release contains references to certain financial measures, including some that do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers. Non-GAAP financial measures are identified and defined in our MD&A.

FORWARD-LOOKING INFORMATION

Certain statements contained in this document constitute "forward-looking information" as defined under applicable securities laws.  When used in this document, the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "estimate", "expect", "potential", "strategy", "target" and similar expressions, as they relate to Newalta Corporation and the subsidiaries of Newalta Corporation, or their management, are intended to identify forward-looking information.  In particular, forward-looking information included or incorporated by reference in this document includes information with respect to:

• future operating and financial results;
• business prospects and strategy including related timelines;
• capital expenditure programs and other expenditures;
• realization of anticipated benefits of growth capital investments, acquisitions, divestitures and our innovation and process development initiatives;
• realization of anticipated benefits from the implementation of cost rationalization initiatives including the anticipated value and sustainability of the cash savings from such initiatives;
• anticipated industry activity levels;
• anticipated commodity prices;
• expected demand for our services;
• expected expansion opportunities for our business;
• the amount of dividends declared or payable in the future;
• our projected cost structure; and
• expectations and implications of changes in legislation.

Expected future financial and operating performance and related assumptions are set out under "Outlook & Operating Leverage". 

Such information reflects our current views with respect to future events and are subject to certain risks, uncertainties and assumptions, including, without limitation:

• strength of the oil and gas industry, including drilling activity;
• general market conditions;
• fluctuations in commodity prices for oil and the price we receive for our recovered oil;
• fluctuations in interest rates and exchange rates;
• financial covenants in our debt agreements that may restrict our ability to engage in transactions or to obtain additional financing;
• success of our growth, acquisition and innovation and process development strategies including integration of businesses and processes into our operations and potential liabilities from acquisitions;
• our ability to secure future capital to support and develop our business, including the issuance of additional common shares;
• the highly regulated nature of the environmental services and waste management business in which we operate;
• the competitive environment of our industry in Canada and the United States;
• possible volatility of the price of, and the market for, our common shares, and potential dilution for shareholders in the event of a sale of additional shares;
• dependence on our senior management team and other operations management personnel with waste industry experience;
• potential operational and safety risks and hazards, obtaining insurance for such risks and hazards on reasonable financial terms and potential failure of meeting customer safety standards;
• the seasonal nature of our operations;
• risk of pending and future legal proceedings;
• risk to our reputation;
• our ability to attract, retain and integrate skilled employees;
• open access for new industry entrants and the general unprotected nature of technology used in the waste industry;
• costs associated with operating our landfills; and
• such other risks or factors described from time to time in reports we file with securities regulatory authorities.

By its nature, forward-looking information involves numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking information will not occur.  Many other factors could also cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking information and readers are cautioned that the foregoing list of factors is not exhaustive.  Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking information prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected.  Furthermore, the forward-looking information contained in this document is made as of the date of this document and, in each case, is expressly qualified by this cautionary statement.  Unless otherwise required by law, we do not intend, or assume any obligation, to update any such forward-looking information.

SOURCE Newalta Corporation