Canyon reports results for second quarter 2013

Canyon took advantage of the slow industry conditions to make investments in our staff and physical infrastructure including significantly increasing our training and staff development resulting in higher fixed operating and general and administrative costs. Our fixed operating and general and administrative costs are up almost 10% year-to-date compared to 2012.  Q2 2013 consolidated revenues decreased by 28% to $27,419 from $37,974 in Q2 2012.  Jobs completed declined by 40% to 151 in Q2 2013 from 251 in Q2 2012 due to the lower producer activity and the wet weather conditions.  As a result, Q2 2013 loss and comprehensive loss was $17,186, or $0.28 per share fully diluted, compared to a loss of $6,940, or $0.11 per share fully diluted, in Q2 2012.

NON-GAAP MEASURES

The Company's Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). Certain measures in this document do not have any standardized meaning as prescribed by International Financial Reporting Standards ("IFRS") and are considered non-GAAP measures.

EBITDA before share-based payments and funds from operations are not recognized measures under IFRS.  Management believes that in addition to profit and comprehensive income, EBITDA before share-based payments and funds from operations are useful supplemental measures as they provide an indication of the results generated by the Company's business activities prior to consideration of how those activities are financed, amortized or taxed, as well as the cash generated by the Company's business activities without consideration of the timing of the monetization of non-cash working capital items.  Readers should be cautioned, however, that EBITDA before share-based payments and funds from operations should not be construed as an alternative to profit and comprehensive income determined in accordance with IFRS as an indicator of the Company's performance.  Canyon's method of calculating EBITDA before share-based payments and funds from operations may differ from other companies and accordingly, EBITDA before share-based payments and funds from operations may not be comparable to measures used by other companies.  Canyon calculates EBITDA before share-based payments as profit and comprehensive income for the year adjusted for depreciation and amortization, equity settled share-based payment transactions, gain or loss on sale of property and equipment, finance costs and income tax expense.  Reconciliations of these non-GAAP measures to the most directly comparable IFRS measures are outlined below.

The Company describes revenue less cost of services as gross profit (loss).

EBITDA before share-based payments

Funds from Operations

QUARTERLY COMPARATIVE STATEMENTS OF OPERATIONS

Note (1): See Non-GAAP Measures.

Revenues

Weaker producer activity and pricing pressure combined with extremely wet weather conditions resulted in consolidated revenues decreasing by 28% to $27,419 in Q2 2013 from $37,974 in Q2 2012.  Jobs completed decreased by 40% to 151 in Q2 2013 from 251 in Q2 2012 due to the lower producer activity and the very wet weather.  However, the lower job count and pricing pressure was partly mitigated by higher average revenues per job.  Over 90% of Q2 2013 consolidated revenues were provided by hydraulic fracturing services with average fracturing revenue per job increasing by 57% to $320,769 from $203,759 in Q2 2012.  The increase in average fracturing revenue per job is due to the completion of larger jobs such as Duvernay shale gas wells.

Cost of services

Cost of services for the three months ended June 30, 2013 totaled $44,035 (2012: $42,534) and includes materials, products, transportation and repair costs of $23,558 (2012: $23,544), employee benefits expense of $13,053 (2012: $12,202), and depreciation of property and equipment of $7,424 (2012: $6,788).

Although the Q2 2013 job count decreased to 151 jobs from 251 in Q2 2012, materials, products, transportation and repair costs increased mostly due to the completion of larger jobs such as Duvernay shale gas wells.  The increase in employee benefits expense is mainly due to increased field staff to support equipment additions in 2012 and higher variable field pay in the quarter due to the increase in 24 hour operations.  The increase in depreciation of property and equipment is due to additional depreciation pertaining to equipment additions.

Administrative expenses

Administrative expenses for the three months ended June 30, 2013 totaled $5,551 compared to $4,276 in Q2 2012 and include employee benefits expense of $2,182 (2012: $2,086) and share-based payments expense of $1,241 (2012: $154). Administrative expenses also include depreciation of buildings and office equipment and amortization of intangibles of $367 (2012: $306).  In addition, other administrative expenses totaled $1,760 in Q2 2013 compared to $1,730 in Q2 2012.

Share-based payments expense represents the value assigned to the granting of options and incentive-based units under the Company's Share Purchase Option Plan and Stock Based Compensation Plan respectively, using the Black-Scholes model.  For Q2 2013, $922 (Q2 2012 - $926) was charged to expenses and included in contributed surplus in respect of these two plans.  In addition, obligations for payments under the Company's Deferred Share Unit Plan are accrued as share-based payments expense over the vesting period.  The accrued liability increases or decreases with fluctuations in the price of the Company's common shares, with a corresponding increase or decrease in the share-based payments expense.  In Q2 2013, share-based payments expense was $319 (Q2 2012 a reduction of $772) for the Company's Deferred Share Unit Plan to reflect changes in the price of the common shares of the Company.

EBITDA before share-based payments (See Non-GAAP Measures)

In Q2 2013, EBITDA before share-based payments (see NON-GAAP MEASURES) was negative $13,146 compared to negative $1,552 in the comparable 2012 quarter.  As previously discussed, reduced producer activity and pricing pressure resulted in the decreased EBITDA.

Finance costs

Finance costs include interest on finance lease obligations and automobile loans and totaled $162 in Q2 2013 (Q2 2012: $235).

Income Tax Expense

At the expected combined income tax rate of 25%, the loss before income tax for Q2 2013 of $22,329 would have resulted in an expected recovery of $5,582, compared to the actual income tax recovery of $5,143. The actual income tax recovery was reduced by non-deductible expenses.

Loss and comprehensive loss and loss per share

Loss and comprehensive loss totaled $17,186 in Q2 2013 compared to $6,940 in Q2 2012. As previously discussed, the increased loss is mostly due to reduced producer activity across the industry and pricing pressure, as well as the very wet weather conditions in the quarter.

Basic and diluted loss per share were $0.28 and $0.28, respectively, for the three months ended June 30, 2013 compared to basic and diluted loss per share of $0.11 and $0.11 respectively for the comparable 2012 quarter.

SIX MONTHS TO JUNE 30, 2013 COMPARATIVE STATEMENTS OF OPERATIONS

Note (1): See Non-GAAP Measures.

Revenues

Weaker producer activity and pricing pressure resulted in consolidated revenues decreasing by 34% to $114,368 in the six months ended June 30, 2013 from $173,909 in the 2012 comparable period.  Jobs completed decreased by 48% to 621 in the six months ended June 30, 2013 from 1,185 in the 2012 comparable period due to the lower producer activity.  Over 90% of consolidated revenues in the six months ended June 30, 2013 were provided by hydraulic fracturing services with average fracturing revenue per job increasing by 17% to $261,204 from $222,404 in the 2012 comparable period.  The increase in average fracturing revenue per job is due to the completion of larger jobs such as Duvernay shale gas wells.

Cost of services

Cost of services for the six months ended June 30, 2013 totaled $113,617 (2012: $122,988) and includes materials, products, transportation and repair costs of $66,433 (2012: $77,143), employee benefits expense of $32,412 (2012: $32,269), and depreciation of property and equipment of $14,772 (2012: $13,576).

The decrease in materials, products, transportation and repair costs is mostly due to the lower job count in both Q1 and Q2 2013 compared to the prior year comparable periods, partially offset by the completion of larger jobs in 2013, such as Duvernay shale gas wells.  The increase in depreciation of property and equipment is due to additional depreciation pertaining to equipment additions.

Administrative expenses

Administrative expenses for the six months ended June 30, 2013 totaled $11,074 compared to $9,812 in the 2012 comparable period and include employee benefits expense of $4,899 (2012: $5,070) and share-based payments expense of $2,152 (2012: $1,096). Administrative expenses also include depreciation of buildings and office equipment and amortization of intangibles of $724 (2012: $604).  In addition, other administrative expenses totaled $3,299 in the six months ended June 30, 2013 compared to $3,042 in the 2012 comparable period.  The decrease in employee benefits expense is mostly attributable to lower sales commissions due to the lower job count partially offset by staff additions to support the increased scale of Canyon's operations.  The increase in other administrative expenses is mainly due to costs associated with systems' upgrades.

Share-based payments expense represents the value assigned to the granting of options and incentive-based units under the Company's Share Purchase Option Plan and Stock Based Compensation Plan respectively, using the Black-Scholes model.  For the six months ended June 30, 2013, $1,921 (Q2 2012 - $1,688) was charged to expenses and included in contributed surplus in respect of these two plans.  In addition, obligations for payments under the Company's Deferred Share Unit Plan are accrued as share-based payments expense over the vesting period.  The accrued liability increases or decreases with fluctuations in the price of the Company's common shares, with a corresponding increase or decrease in the share-based payments expense.  For the six months ended June 30, 2013, share-based payments expense was $230 (2012 a reduction of $592) for the Company's Deferred Share Unit Plan to reflect changes in the price of the common shares of the Company.

EBITDA before share-based payments (See Non-GAAP Measures)

For the six months ended June 30, 2013, EBITDA before share-based payments (see NON-GAAP MEASURES) was $7,280 compared to $56,462 in the comparable 2012 period.  As previously discussed, reduced producer activity and pricing pressure resulted in the decreased EBITDA.

Finance costs

Finance costs include interest on finance lease obligations and automobile loans and totaled $318 for the six months ended June 30, 2013 (2012: $396).

Income Tax Expense

At the expected combined income tax rate of 25%, the loss before income tax for the six months ended June 30, 2013 of $10,641 would have resulted in an expected recovery of $2,660, compared to the actual income tax recovery of $1,982.  The actual income tax recovery was reduced by non-deductible expenses.

Profit (Loss) and comprehensive income (loss) and earnings (loss) per share

Loss and comprehensive loss totaled $8,659 for the six months ended June 30, 2013 compared to profit and comprehensive income of $30,227 in the 2012 comparable period. As previously discussed, the loss is mostly due to reduced producer activity across the industry and pricing pressure, as well as the very wet weather conditions in the second quarter.

Basic and diluted loss per share were $0.14 and $0.14, respectively, for the six months ended June 30, 2013 compared to basic and diluted earnings per share of $0.49 and $0.48 respectively for the comparable 2012 period.

FORWARD-LOOKING STATEMENTS

This document contains certain forward-looking information and statements within the meaning of applicable securities laws.  The use of any of the words "expect", "anticipate", "continue", "estimate", "objective", "ongoing", "may", "will", "should", "believe", "plans" and similar expressions are intended to identify forward-looking information or statements.  In particular, but without limiting the foregoing, this document contains forward-looking information and statements pertaining to the following: future oil and natural gas prices; future results from operations; future liquidity and financial capacity and financial resources; future costs, expenses and royalty rates; future interest costs; future capital expenditures; future capital structure and expansion; the making and timing of future regulatory filings; and the Company's ongoing relationship with major customers.

The forward-looking information and statements contained in this document reflect several material factors and expectations and assumptions of the Company including, without limitation: that the Company will continue to conduct its operations in a manner consistent with past operations; the general continuance of current or, where applicable, assumed industry conditions; the continuance of existing (and in certain circumstances, the implementation of proposed) tax, royalty and regulatory regimes; certain commodity price and other cost assumptions; the continued availability of adequate debt and/or equity financing and cash flow to funds its capital and operating requirements as needed; and the extent of its liabilities.  The Company believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable but no assurance can be given that these factors, expectations and assumptions will prove to be correct.

The forward-looking information and statements included in this document are not guarantees of future performance and should not be unduly relied upon.  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 including, without limitation: changes in commodity prices; changes in the demand for or supply of the Company's services; unanticipated operating results; changes in tax or environmental laws, royalty rates or other regulatory matters; changes in the development plans of third parties; increased debt levels or debt service requirements; limited, unfavourable or a lack of access to capital markets; increased costs; a lack of adequate insurance coverage; the impact of competitors; reliance on industry partners; attracting and retaining skilled personnel and certain other risks detailed from time to time in the Company's public disclosure documents (including, without limitation, those risks identified in this document and the Company's Annual Information Form).

The forward-looking information and statements contained in this document speak only as of the date of the document, and none of the Company or its subsidiaries assumes any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws.

SOURCE Canyon Services Group Inc.