ENTREC Announces 2015 Second Quarter Financial Results

ACHESON, ALBERTA–(Marketwired – Aug. 12, 2015) – ENTREC Corporation (“ENTREC” or the “Company“) (TSX:ENT), an employee-owned integrated crane solutions provider, today announced financial results for the second quarter ended June 30, 2015.

Revenue for the quarter ended June 30, 2015 decreased by 28% to $38.2 million from $52.9 million in 2014. On a year-to-date basis, revenue declined by 22% to $89.3 million from $114.9 million in 2014. With the decline in crude oil prices and depressed natural gas environment, ENTREC experienced a reduction in demand for its crane and specialized transportation services. In addition, the Company also experienced downward pricing pressure from its customers as they worked to reduce their operating and capital expenditures in response to the current commodity environment. On average, ENTREC estimates these pricing reductions negatively impacted revenue by approximately 10-15%.

Adjusted EBITDA declined to $4.6 million for the quarter ended June 30, 2015 from $11.2 million in 2014. The lower adjusted EBITDA margin reflected reduced equipment utilization levels as well as lower pricing. ENTREC’s adjusted net loss of $5.6 million for the three months ended June 30, 2015 compared to adjusted net income of $1.5 million in 2014. Also contributing to a higher adjusted net loss in the quarter was a $1.7 million deferred income tax provision related to the Government of Alberta’s recent decision to increase its corporate income tax rate by 20% to 12.0% from 10.0% previously.

Industry Outlook and ENTREC’s Response

With the decline in crude oil prices, activity levels in the oil and gas industry for both cranes and specialized transportation services have been negatively affected. There also remains significant uncertainty as to the magnitude and timing of any future recovery in commodity 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.

ENTREC’s 2015 business plans and capital expenditure program reflect this new reality. After fulfilling previous capital expenditure commitments and taking delivery of this equipment in the first half of 2015, the Company has curtailed future capital expenditures until the industry outlook improves. In addition, ENTREC remains focused on controlling costs, minimizing discretionary expenditures, and rationalizing operations where practical. As part of this initiative, the Company consolidated the Calgary operations branch location into its Acheson headquarters location in the first quarter of 2015. In the second quarter, the Company also consolidated its Dawson Creek branch into its Fort St. John facility. ENTREC has also been working extensively with many of its suppliers to reduce their pricing in the current market environment and have achieved cost savings from these efforts.

In conjunction with the Calgary branch closure the Company initially reduced its salaried (non-billable) workforce by about 15% in the first quarter of 2015. In the second quarter, the Company further reduced its salaried (non-billable) workforce by another 10% to align its workforce with current activity levels. In addition, the Company instituted temporary wage reductions for all salaried staff, effective April 1, 2015. The wage reductions ranged from 5% for non-management staff to 15% for directors and senior management. Many salaried employees were also offered the opportunity to work reduced work weeks on a temporary basis, which has resulted in savings of up to 20% for these employees.

All of these measures have allowed the Company to significantly reduce its overhead costs, while also improving operating efficiency. With the benefit of these current cost reduction initiatives, the Company estimates it will have reduced ongoing indirect and general and administrative expenditures by approximately $9 million on an annual basis. The Company also continues to closely assess its operating costs and will make further cost reductions as necessary to ensure expenses continue to be aligned with activity levels.

Balance Sheet Remains Well-Positioned

Despite the current challenging commodity environment, ENTREC’s business remains well-capitalized and well-positioned to weather the downturn. Specific current highlights of the Company’s financial position include a working capital position of $31 million and a net tangible asset value that approximates $104 million at June 30, 2015.

In addition, the Company has a very flexible $240 million asset-based credit facility (the “ABL Facility”). The ABL Facility has no principal repayments required until its maturity in March 2019 and has no leverage covenant as at June 30, 2015. The facility is supported by a very modern crane and transportation fleet that, along with real estate and other equipment assets, has an estimated fair market value of approximately $284 million. History has also shown that modern crane fleets hold their value well throughout market cycles. In addition, the facility is supported by approximately $40 million in accounts receivable at June 30, 2015.

As at June 30, 2015, based on ENTREC’s fleet and accounts receivable as at that date, the borrowing base under the ABL Facility was $193.4 million. The Company was utilizing $151.5 million of this availability giving it excess borrowing capacity of $41.9 million. There will be no leverage covenant in place if ENTREC maintains an excess borrowing capacity higher than 12.5% of the borrowing base ($24.2 million at June 30, 2015). At June 30, 2015, ENTREC’s excess borrowing capacity of $41.9 million exceeded this threshold by $17.7 million.

2015 Operational Outlook

Given the uncertainties discussed above, ENTREC’s outlook continues to be weak for the remainder of 2015. Lower demand and pricing for the Company’s services supporting oil and natural gas exploration and production activities will continue to impact its financial results in the short-term. In addition, the Company is cautious of the potential negative impact of customer decisions to slow-down or postpone work on construction projects in the Alberta oil sands region. In particular, the scope of a large oil sands and power construction project is currently under review by the customer, which could negatively impact the Company’s financial results in the coming months.

With ENTREC’s growing crane fleet, the Company is establishing a stronger presence in the market for maintenance, repair and operation (“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 its services this year and beyond. This work contributes 15 to 20% of ENTREC’s consolidated revenue and this percentage could increase in the future.

In the second quarter of 2015, the Company saw activity levels in northwest British Columbia decline as the aluminum smelter revitalization project in Kitimat wound down. ENTREC expects to continue supporting this project at significantly reduced activity levels as 2015 progresses. However, the Company remains well positioned to support the region’s growing industrial activity, including the potential future construction of LNG facilities. Note that demand for ENTREC’s services in northeast British Columbia could also be impacted by final investment decisions on the construction of proposed LNG facilities in northwest British Columbia. Positive final investment decisions should accelerate the demand for ENTREC’s services, while negative or delayed decisions could adversely impact relevant natural gas-related activity. In June 2015, Pacific Northwest LNG announced its conditional approval of a potential $36 billion terminal in the Prince Rupert region. The approval remains subject to a positive environmental assessment by the federal government.

Overall, the Company expects the remainder of 2015 will continue to be challenging for the oil and gas industry. At this time, it is very difficult to accurately predict the potential impact that the recent crude price volatility will have on ENTREC’s business as the remainder of 2015 proceeds. With continued weakness in commodity prices for oil and natural gas, the Company expects ongoing lower utilization levels for its fleet, as well as lower pricing, which will continue to hamper financial results. As a result, the Company expects its revenue and adjusted EBITDA margins for fiscal 2015 will be notably lower than in fiscal 2014.

“Over the longer-term, our overall competitive position continues to be positive,” commented John M. Stevens, ENTREC’s President and CEO. “Despite short-term uncertainties and challenges, we are well-positioned geographically, with the right equipment fleet, and a complete range of crane and specialized transportation services in each of our key markets across western Canada and in North Dakota. While we expect 2015 to continue to be a challenging year from an operating perspective, we are aggressively managing our costs through this period and remain well-positioned to capture future growth opportunities as industry fundamentals improve.”

2015 capital expenditure program

ENTREC’s 2015 capital expenditure program consists of the following components:

During the six months ended June 30, 2015, ENTREC made capital expenditures of $25.1 million, consisting of $11.6 million in growth capital expenditures and $13.5 million in maintenance capital expenditures. Offsetting these expenditures were proceeds on disposal of $5.7 million, resulting in net capital expenditures of $19.4 million for the six months.

With a relatively new and modern fleet, ENTREC expects to incur minimal maintenance capital expenditures for the foreseeable future, until industry conditions improve. ENTREC’s maintenance capital expenditures in 2015 considered primarily of assets it had previously committed to purchasing in 2014, prior to the industry decline.

The 2015 growth capital expenditures included the notable addition of an LR 1750 crawler crane. With a 750-ton lifting capacity, this crane is now the largest in ENTREC’s fleet and is currently being utilized on an oil sands and power construction project. Growth capital expenditures also included the addition of all-terrain mobile cranes, which are highly flexible units utilized in serving all industries, including MRO work in the Alberta oil sands, industrial construction, and conventional and unconventional oil and natural gas.

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).

Second Quarter Conference Call

ENTREC will host a conference call and webcast to discuss its 2015 second quarter financial results tomorrow, August 13, 2015 at 9:00 am Mountain Time (11:00 am Eastern). The call can be accessed by dialing toll-free: 1-866-852-2121 or 416-340-9531 (GTA and International).

The conference call will also be available via webcast within the Investors section of ENTREC’s website at: www.entrec.com.

About ENTREC

ENTREC is an employee-owned integrated 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.

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, change in fair value of embedded derivative, share-based compensation, 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, notional interest accretion expense arising from convertible debentures, and the change in fair value of the embedded derivative related to the 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 earnings (loss) per share are calculated as adjusted net (loss) income divided by the basic weighted average number of shares outstanding during the applicable period.

Please see ENTREC’s Management Discussion & Analysis for the three and six months ended June 30, 2015 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.

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 such forward-looking statements in this press release relate to, but are not limited to: estimate that recent cost reduction initiatives will reduce on-going indirect and general and administrative expenditures by approximately $9 million on an annual basis; understanding that modern crane fleets have historically held their value well through market cycles; belief that ENTREC’s business remains well-capitalized and well-positioned to weather the downturn; the current fact that ENTREC’s ABL Facility has no principal repayments required until its maturity in March 2019; expectation lower demand for ENTREC’s services supporting oil and natural gas exploration and production activities will continue to negatively impact financial results in the short-term; caution on the potential negative impact of customer decisions to slow-down or postpone work on construction projects in the Alberta oil sands region; anticipation that the Company’s MRO work in the Alberta oil sands region will be less susceptible to changes in near-term commodity prices and continue to provide a steady demand for services this year and beyond; expectation that ENTREC will continue to support the aluminum smelter project at significantly reduced levels as 2015 progresses; belief that the future demand for ENTREC’s services in northeast B.C. and northwest B.C. could be impacted by final investment decisions on the construction of proposed LNG facilities in northwest B.C.; expectation that 2015 will be a challenging year for the oil and gas industry; estimate that overall revenue and adjusted EBITDA margin for fiscal 2015 will be notably lower than in fiscal 2014;and plans to execute a 2015 capital expenditure program of $21 million, net of disposal proceeds.

ENTREC’s forward-looking statements involve a number of significant assumptions. Key assumptions utilized in developing forward-looking statements related to ENTREC’s growth and revenue expectations, its sufficient capitalization to weather the downturn, and its principal repayment requirements under the ABL Facility include achieving its internal revenue, net income and cash flow forecasts for 2015 and beyond. Key assumptions involved in preparing ENTREC’s internal forecasts include, but are not limited to, its expectations and estimates that: demand for crane services on certain awarded oil sands construction projects continues during the remainder of 2015; there are reduced activity levels in 2015 due to lower crude prices; during the current economic downturn in the oil and gas industry, ENTREC will be able to maintain a minimum 12.5% borrowing base excess under its ABL Facility such that there will be no required principal repayment under the ABL Facility until its maturity in March 2019; should the planned development of LNG facilities proceed, certain customers will choose to use ENTREC’s services; ENTREC will be able to retain key personnel and attract additional high-quality personnel to support its planned revenue; there are no significant unplanned increases in ENTREC’s cost structure, including those costs related to fuel and wages; market interest rates remain similar to current rates; there is no prolonged period of inclement weather that impedes or delays the need for crane and specialized transportation services; the competitive landscape in western Canada for crane and specialized transportation services does not materially change during the remainder of 2015; and there is no material adverse change in overall economic conditions.

Achieving these forecasts largely depends on a number of factors beyond ENTREC’s control including several of the risks discussed further under “Business Risks” in ENTREC’s Management Discussion & Analysis for the three and six months ended June 30, 2015. The business risks that are most likely to affect ENTREC’s ability to achieve its internal revenue, net income and cash flow forecasts for 2015 and beyond are the volatility of the oil and gas industry, its exposure to the Alberta oil sands, workforce availability, weather and seasonality, availability of debt and equity financing, and competition. These risk factors are interdependent and the impact of any one risk or uncertainty on a particular forward-looking statement is not determinable.

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.

ENTREC Corporation
John M. Stevens
President & CEO
(780) 960-5625

ENTREC Corporation
Jason Vandenberg
CFO
(780) 960-5630
www.entrec.com