Xtreme Drilling and Coil Services Reports Q2

Xtreme Drilling and Coil Services Reports Second Quarter 2015 Financial Results

Xtreme Drilling and Coil Services Corp. (“Xtreme”, the “Company”) (TSX:XDC)announce second quarter 2015 financial and operating results. It is anticipated that filing will take place on SEDAR of unaudited Consolidated Financial Statements and Notes to the unaudited Consolidated Financial Statements as well as Management’s Discussion and Analysis for the three months ended June 30, 2015, by Friday August 7, 2015.

Q2 2015 Highlights

(amounts in thousands of Canadian dollars, unless otherwise noted)

• Adjusted EBITDA of $15.0 million in the second quarter of 2015 on total revenue of $53.7 million, a decrease from $20.8 million and $70.0 million respectively in the prior quarter.
• For the second quarter, the Drilling Segment achieved utilization of 56% on 1,072 operating days. This was comprised of a 61% utilization rate for the 16 rig US XDR fleet, 0% for the three rig Canadian XDR fleet and 99% for the two rigs operating in India. The lower utilization in the Drilling Segment for the quarter was driven by 232, or 21%, fewer operating days in the US and 82 fewer operating days in Canada as compared to the first quarter.
• For the second quarter, the Coil Services Segment achieved utilization of 61% on 379 operating days. This was comprised of a 99% utilization rate for the two XSR units in Saudi Arabia and a 50% utilization rate for the six actively marketed XSR units in the US. The US XSR units for the quarter averaged 12 operating days per month on each unit. Included in the total Coil Services utilization is one additional unit that is currently idle, but is actively being marketed internationally.
• The Drilling Segment (which includes US, Canada and India) operating profit decreased to $13.6 million in the second quarter of 2015 as compared to $16.5 million in the prior quarter. The decrease for the quarter was attributable to $11 million less in total revenue for the segment. Overall operating margin increased to 40.5% as compared to 37.5% in the first quarter of 2015. This was driven primarily by strong operating cost controls in the US and India XDR divisions during the quarter.
• The Coil Services Segment (which includes US and Saudi Arabia) operating profit was $6.8 million in the second quarter of 2015 as compared to $8.1 million in the prior quarter. This was driven primarily by $5.6 million lower revenue in the US operation on fewer operating days. Overall the Coil Services Segment achieved an operating margin of 33.6% as compared to 31.9% for the prior quarter on greater cost controls. It is anticipated that in the third quarter revenue in the US division will increase modestly.
• The Company finished the second quarter of 2015 with $127.3 million in total debt and $112.1 million in net debt (total debt less cash). The funded debt to EBITDA ratio was 1.7x and the net debt to EBITDA ratio was 1.5x. At quarter end, the Company had significant liquidity with approximately $62 million available on the revolving credit facility and $42.2 million in working capital which includes $15.2 million of cash. On a US Dollar basis, in which the Company primarily borrows, the funded debt decreased $7.0 million USD during the quarter to an ending balance of $102.7 million USD and net debt was $90.7 million on a US Dollar basis.
• Total capital expenditures were $6.0 million during the second quarter of 2015 and $15.7 million on a year to date basis. The majority of this was spent on the completion of a new XSR coiled tubing unit and continued work on the final XSR unit in this build program. The Company delivered the third new build XSR unit in June and anticipates delivering one additional new build XSR unit in October. This will bring the total to four new units from the current XSR build program. Currently the 2015 capital budget stands at $22 million which includes all sustaining, critical spare and upgrade capital for the existing fleet, as well as the requirements to complete the three XSR new build units delivered in 2015. Xtreme anticipates that 2015 capital expenditures will be funded exclusively through operating cash flow.
• The Company currently has approximately 2,000 days firmly contracted for the remainder of 2015 across the XDR and international XSR businesses. Although Xtreme has not been immune to the recent slowdown in industry activity, it is anticipated that these remaining contracted days provide revenue transparency for the year. During the second quarter the Company recognized $3.7 million in early termination revenue on take or pay contracts. Year to date Xtreme has recognized $6.6 million in early termination revenue. This has been offset by approximately $1.8 million related to additional employee and severance charges as well as $1.4 million related to non‐recurring expenses on the settlement of a lawsuit and additional property taxes in Colorado.
• Subsequent to June 30, 2015, the Company received a resolution of tax deficiency, or resolución determinante de un crédito fiscal, from the Servicio de Administracion Tributaria (“SAT”), the federal Mexican taxation authorities, in connection with the 2009 federal tax return filed by the Company’s subsidiary. The total amount of the assessment, including tax, penalty and interest, is approximately 606 million Mexican pesos (approximately $47 million CAD). The SAT is mainly contesting the deductibility of certain expenses under Mexican tax law on the basis that those expenditures were not “strictly necessary” in the undertaking of the subsidiary’s operations during that period. Based on the review of the resolution of tax deficiency, the SAT is contending that such expenses have not been supported by evidentiary matter or sufficient explanations to support the basis of “strictly necessary”.

  The Company strongly disagrees with the SAT’s position and will vigorously contest the resolution of tax deficiency. The SAT in its assessment has disallowed 77% of the Company’s normal course operating expenses for 2009, none of which were previously contested in the Company’s 2008 tax filing. In total the contemplated assessment of $47 million CAD is on $85 million CAD of revenue for the period. In addition, the Company has not operated in Mexico since the first quarter of 2010. Currently, with the assistance of an external Mexican legal and tax counsel, the Company is preparing the necessary documentation to file an administrative claim in August 2015 with the SAT. Although the Company cannot predict or provide assurance as to the ultimate outcome, management firmly believes that it has sufficient documentation to support the deductibility of the expenses under Mexican tax law.

Selected Quarterly Financial Information

OUTLOOK

As commodity prices remained depressed in the second quarter, activity levels continued to deteriorate. The active rig count in the US decreased to 859 rigs from 1,028 at the end of the first quarter per industry sources. In Xtreme’s core US XDR operating areas of the DJ Basin in Colorado and the Williston Basin in North Dakota the active rig count decreased to 36 from 43 active rigs and to 63 from 86 active rigs respectively during the second quarter. US XSR activity levels have historically been highly correlated to the rig count in the Eagle Ford and Permian of South and West Texas. In the Eagle Ford the rig count decreased from 93 to 66 active rigs at the end of the second quarter and remained flat at 178 rigs in the non-vertical Permian market. In addition to the rig count, the XSR business is currently influenced by the growing backlog of drilled but uncompleted wells. It is estimated that the inventory of uncompleted wells is in excess of 2,500 in the core operating areas of the Eagle Ford and Permian. Due to this backlog of work it is anticipated that the Company’s activity levels will increase in the XSR completions segment before the XDR drilling business.

With the speed and severity of the downturn, many of Xtreme’s customers have not been able to provide much visibility for activity levels over the coming quarters. With the level of uncertainty regarding the bottom and eventual improvement in oil and gas prices, many operators are focused on execution and cost containment. In the United States and Canada certain drilling contractors have driven prices to below cash operating costs in order to gain market share. This is not sustainable nor a business tactic that Xtreme will participate in. However, in this challenging environment the Company has had success in winning business by providing a value to customers based on performance. The Company’s technology has enabled oil and gas operators to be more efficient in their operation and ultimately decrease cost per barrel or mcf produced. Performance based contracts have been a positive for the Company as they offer the potential to earn above market rates while delivering a drilled well to the customer faster and within their cost estimates.

Xtreme currently has 11 of 21 XDR drilling rigs earning revenue in the United States, Canada and India with a 12^th rig scheduled to commence operations by the end of August. In this difficult operating environment, utilization is lower than prior periods; however, it is certainly better than the broader industry. The combination of Xtreme’s all AC electric fleet and strong operating performance may allow for higher than industry utilization through this downturn. Due to the previously discussed uncertainty many request for quotations today are either single or multi well in duration. Most operators are not willing to commit to term drilling contracts and it will likely stay that way for the remainder of 2015. The Company continues to evaluate opportunities internationally for idled XDR rigs. Currently the Company has active bids to move additional rigs into India. The results of these tenders should be known in the near future. Overall, the fact that Xtreme has some of the only AC electric rigs as well as established infrastructure in India makes it an ideal market to focus on strategic expansion.

Due to the backlog of uncompleted wells in the Eagle Ford and Permian the Company anticipates that demand for the US XSR coiled tubing business will continue to increase through the remainder of 2015. Activity levels were relatively volatile during the second quarter with April being the slowest month of the year as operators adjusted frac schedules. The challenge for management has been to right size the staffing and cost structure for a business that has significant short term fluctuations in demand. Currently Xtreme has staffed and is actively marketing five of the seven available XSR units in the United States. Activity levels will dictate when the two idled units will be placed back into service along with the final new build XSR unit which is expected to be delivered in October.

The US XSR division completed its first coiled tubing frac job in the second quarter of 2015. This job was unique in that it combined an initial frac beginning at the toe of the well through our 2 5/8″ coiled tubing and then after reaching a specified point in the horizontal, switched and fraced the remainder of the well down the annulus, or around the coil. This is a unique example of an operator utilizing Xtreme’s patented AC technology and large diameter coiled tubing to optimize the completion and ultimately production from the well. Along with continuing to focus on the growing re-frac market, the Company is leveraging its technology and success of coiled tubing drilling (CTD) developed in Saudi Arabia into the US market. It is anticipated that the Xtreme’s first US CTD job will commence in October. Along with this job the Company has several additional inquiries both domestically and internationally. In an environment where operators will be forced to adapt new technology to optimize drilling and completion processes, Xtreme is ideally positioned to help drive this innovation in the industry.

Conference Call Details

The Company will hold the quarterly conference call on Friday, August 7, 2015 at 10:00 am MDT, 11:00 am CT.

Tom Wood, Chief Executive Officer, will host the conference call with participation from Matt Porter, President and Chief Financial Officer, and will answer questions from analysts and investors.

To participate in the conference call, please dial in as follows approximately ten minutes before the start time in your time zone.

+1 800-396-7098 (North America Toll‐Free) or +1 416-340-8530 (Alternate)

Webcast link: http://www.gowebcasting.com/6629

An audio replay of the call will be available until Friday, August 14, 2015. To access the replay, call +1-800‐408‐3053 or +1-905‐694‐9451 and enter pass code 7599171.

Reader Advisory

This news release contains forward-looking statements (“FLS”). The use of the words “may”, “believe”, “could”, “would”, “might”, “will be taken”, “occur” or “be achieved” and similar expressions identify FLS. More particularly, this news release contains statements that may relate to contracting, marketing, financing, construction, modifications, deployment, operation, utilization of drilling rigs in the Company’s current and future fleet. Although Xtreme believes expectations reflected in these FLS are reasonable, readers should not place undue reliance on them because Xtreme can give no assurance they will prove to be correct. There are many factors that could cause FLS not to be correct, including risks and uncertainties inherent in the Company’s business.

These statements are based on certain factors and assumptions including, but not limited to: the assessment of current and projected future operations; ongoing and future strategic business alliances, negotiations and opportunities to enter new, extend or complete existing contracts; the availability and cost of financing; foreign currency exchange rates; timing and magnitude of capital expenditures; expenses and other variables affecting rig operation, modification and construction; the ability and commitment of vendors to provide rig component equipment, services and supplies, including labor, in a cost-effective and timely manner; the issuance of applied-for patents; changes in tax rates; and government regulations. Although Xtreme considers the assumptions used to prepare this news release reasonable, based on information available to management as of August 6, 2015, ultimately the assumptions may prove to be incorrect.

Forward-looking statements are also subject to certain factors, including risks and uncertainties, which could cause actual results to differ materially from management’s current expectations. These factors include, but are not limited to: the cyclical nature of drilling market demand, foreign currency exchange rates, and commodity prices; access to credit and to equity markets; the availability of qualified personnel; vendor-provided rig components; and, competition for customers.

Management’s assumptions considered the following: compliance with the terms of the Company’s current and proposed new credit facility; ongoing access to key supplies and components required to continue operating and maintaining equipment, including fuel; continued successful performance of drilling and related equipment; expectations regarding gross margin; recruitment and retention of qualified personnel; continuation or extension of existing long-term or multi-well contracts; revenue expectations related to shorter-term drilling opportunities; willingness and ability of customers to remit amounts owing to Xtreme in accordance with normal industry practices; and management of accounts receivable in direct relation to revenue generation.

In preparing this news release, management considered the following risk factors: fluctuations in crude oil and natural gas prices, supply and demand; fluctuation in foreign currency exchange and interest rates; financial stability of Xtreme’s customers; current and future applications for Xtreme’s proprietary technology; competition from other drilling contractors; regulatory and economic conditions in regions where Xtreme operates; environmental constraints; changes to government legislation; international trade barriers or restrictions; and, where appropriate, global political and military events.

Financial outlook information contained in this news release about prospective results of operations, financial position or cash provided by operating activities is based on assumptions about future events, including economic conditions and proposed courses of action, and on management’s assessment of relevant information currently available. Readers are cautioned such financial outlook information contained in this news release is not appropriate for purposes other than for which it is disclosed here. Readers should not place undue importance on FLS and should not rely on this information as of any other date. Except as required pursuant to applicable securities laws, Xtreme disclaims any intention, and assumes no obligation, to update publicly or revise FLS to reflect actual results, whether as a result of new information, future events, changes in assumptions, changes in factors affecting such FLS or otherwise, or to explain any material difference between subsequent actual events and such FLS.

About Xtreme

Xtreme Drilling and Coil Services Corp. (“XDC” on the Toronto Stock Exchange) designs, builds, and operates a fleet of high specification drilling rigs and coiled tubing well service units featuring leading-edge proprietary technology including AC high capacity coil injectors, deep re-entry drilling capability, modular transportation systems and continuous integration of in-house advances in methodologies.

Currently Xtreme operates two service lines: Drilling Services (XDR) and Coil Services (XSR) under contracts with oil and natural gas exploration and production companies and integrated oilfield service providers in Canada, the United States, Saudi Arabia and India. For more information about the Company, please visit www.xtremecoil.com.