2014 Annual Report
Contents
1
3
6
Corporate Profile
President's Message
30
Management’s Discussion & Analysis
37
Financial Statements
Notes to the Financial Statements
E N E R G Y S E R V I C E S
Corporate Profile
Sedimentary
Basin with
TSX-V: CWC
CWC Energy Services Corp. is a premier oilfield
in the western
services company operating
a
Canadian
complementary suite of services including drilling
rigs, service rigs and coil tubing. CWC provides
contract drilling services and operates as CWC
Ironhand Drilling. CWC’s production services
includes service rigs and coil tubing units and
operates as CWC Well Services. The Company's
corporate office is located in Calgary, Alberta,
with operational
in Nisku, Grande
locations
Prairie, Slave Lake, Red Deer, Lloydminster,
Provost, and Brooks, Alberta and Weyburn,
Saskatchewan. The Company’s shares trade on
the TSX Venture Exchange under the symbol
“CWC”.
Market Profile
Shares outstanding
Price
Market cap
Financial Information
December 31, 2014
270.8 million
$0.43
$116.4 million
($ millions)
2014
2013
2012
Revenue
EBITDAS
Total Assets
Long-Term Debt
Net Debt
$143.7
$113.3
$112.3
$34.1
$26.2
$25.0
$275.4
$149.0
$152.7
$65.7
$28.9
$44.0
$29.5
$45.0
$31.2
Horn
River
Montney/
Deep Basin
Devonian
Slave Lake
Grande Prairie
Pekisko &
Beaverhill Lake
Heavy
Oil
Cardium
Nisku
Lloydminster
Red Deer
Provost
Viking
Calgary
AB
Bakken
Brooks
Shaunavon
Bakken
Weyburn
Spearfish
th
Suite 610, 205-5
Ave SW, Calgary, AB, T2P 2V7 T: 403.264.2177 F: 403.264.2842 www.cwcenergyservices.com
E N E R G Y S E R V I C E S
Board of Directors
Jim Reid, Chairman
Duncan Au
Daryl Austin
Gary Bentham
Wade McGowan
Management
Dean Schultz
President & CEO
Duncan Au, CA, CFA
Chief Financial Officer
Craig Flint, CA
VP Operations
Ron Sutley
VP Operations
Darwin McIntyre
(Drilling)
(Well Services - East)
VP Operations
Layne Wilk
(Well Services -West)
VP Sales & Marketing
Brian Weighill
Sales & Marketing
(Drilling)
Mike DuBois
VP
(Well Services)
VP Finance & Controller
Karen Dilon, CA
Divisions
Contract
Drilling
Production
Services
Equipment
Contract Drilling
Service Rigs
Coil Tubing
The Contract Drilling division operates under the trade name CWC Ironhand
Drilling and is comprised of 9 telescopic double drilling rigs with depths
ranging from 3,200 to 4,500 metres with an average age of 5 years. 8 of the
9 drilling rigs have top drives. All of the drilling rigs are ideally suited for
the most active depths for horizontal drilling in the WCSB. With an
operational base out of Nisku, Alberta, CWC Ironhand Drilling is ideally
positioned for the deeper depths of the WCSB.
The Production Services division operates under the trade name CWC Well
Services and is comprised of 72 service rigs and 9 coil tubing units. At
December 31, 2014, CWC is the fifth largest well servicing company offering
one of the youngest and most technologically-advanced service rig fleets in
the WCSB.
These service rigs provide completions, workovers and
abandonments with depths ranging from 1,500 to 5,000 metres and are well
positioned throughout the WCSB with operating locations in Grande Prairie,
Red Deer, Lloydminster, Provost and Brooks, Alberta and Weyburn,
Saskatchewan. CWC also operates 9 coil tubing units to a maximum capacity
of 2 inch coil and depth rating from 1,500 to 4,000 metres. CWC's coil tubing
units are ideally suited for the SAGD wells in the oilsands as well as other
parts of the WCSB. CWC’s Well Servicing division is well positioned for the
changing demands of our oil and gas customers for horizontal drilling and
deeper depth capabilities.
2013
-
71
8
2012
-
68
8
2014
9
72
9
2014
REVENUE BY DIVISION
EBITDAS BY DIVISION *
Production
Services
Contract
Drilling
Well
Servicing
Other
Oil�ield
Services
* Divisional contribution, corporate costs excluded
th
Suite 610, 205-5
Ave SW, Calgary, AB, T2P 2V7 T: 403.264.2177 F: 403.264.2842 www.cwcenergyservices.com
E N E R G Y S E R V I C E S
Highlights of 2014
President’s Message
Dear Fellow Shareholders,
I am very pleased to be able to share with you CWC
Energy Services Corp.’s (“CWC” or the “Company”)
2014 Annual Report. 2014 can best be described as a
year of transformation and significant growth for our
business resulting in record high revenue and cash
flows. However, concerns over the oversupply of oil
globally and its resultant effect on lower oil prices has
created an uncertain short-term
for our
business as reflected in our share price performance in
the last two months of 2014 and continuing into 2015.
future
In 2014, CWC continued to grow with record revenue ($143.7 million; $30.4 million increase from 2013) and
record earnings before interest, taxes, depreciation, amortization, (gain) loss on disposal of assets,
transaction costs, goodwill impairment and stock based compensation (“EBITDAS”) ($34.1 million; $7.9
million increase from 2013) primarily as a result of the acquisition of Ironhand Drilling Inc. (“Ironhand”) on
May 15, 2014.
2014 saw extreme volatility in West Texas Intermediate (“WTI”) oil prices. For the first half of 2014, WTI
stayed strong at around $90 to $100 per bbl. However, oil prices started to decrease in the latter half of 2014
as concerns over the increasing supply of oil globally took hold, in part as a result of new technologies in
horizontal drilling and multi-stage fracking opening up North American shale oil deposits that only five short
years ago were unattainable. On November 27, 2014, the Organization of Petroleum Exporting Countries
(“OPEC”) decided that they would not cut oil production in favour of letting the global market determine
the appropriate supply and demand balance and, therefore, the appropriate price for oil. After this OPEC
statement, WTI oil prices immediately fell from the mid $70’s to mid $50’s per bbl by December 31,
2014. Currently, WTI is approximately $45 per bbl and our exploration and production (“E&P”)
customers have been adjusting to the new realities by cutting their 2015 capital expenditure programs
and reducing costs including rate reductions from its’ service providers including CWC.
But before we get ahead of ourselves to discuss what 2015 might look like, let’s enjoy what CWC was
able to accomplish in 2014. On March 20, 2014, CWC announced the acquisition of Ironhand, an eight
telescopic double drilling rig company with one of the highest utilization rates in the Western Canadian
Sedimentary Basin (“WCSB”). The closing of the purchase of Ironhand on May 15, 2014 has transformed
CWC by combining a Contract Drilling division, whose drilling rigs are ideally suited for the most active
depths for horizontal drilling in the WCSB, with a best-in-class well servicing company as represented by the
Production Services division. The combination of these two divisions will provide a platform for
meaningful long-term growth opportunities to service our existing and future E&P customers with the
most relevant fleet of equipment for the longer depths and horizontal reaches of our WCSB. In August
2014, CWC purchased two shallow Class I coil tubing units to increase our ability to service E&P customers
with steam assisted gravity drainage (“SAGD”) wells. In September 2014, CWC put into service its ninth
telescopic double drilling rig with a two year customer contract.
Page 3 In October 2014, CWC put into service a new slant service rig increasing the Company’s ability to service
more heavy oil and SAGD wells. The addition of this fourth slant service rig increases CWC’s total service rig
fleet to 72, making CWC the fourth largest service rig company in the WCSB with one of the youngest and
most technologically advanced fleets in Canada compared to our competitors. In the last four years, CWC has
grown its service rig fleet by 31 rigs or 76%; more than any other service rig company in Canada during this
time. In fact since July 2011, among the six largest Canadian service rig companies, CWC is the only
company to increase its service rig fleet, while every other company has reduced the number of service rigs
it has in its Canadian fleet resulting in an increase in market share relative to the other five companies.
CWC was not only growing its drilling rig, service rig and coil tubing asset base in 2014, but it also divested
itself of non-core assets. In April 2014, CWC sold a Class III deep coil tubing unit as the market for deep
conventional coil tubing units became extremely competitive with an increased supply of new deep coil
tubing units over the last several years having an adverse affect on industry utilization and pricing. In
September 2014, CWC announced the sale of its snubbing assets and business in several separate
transactions. The sale of the Class III coil tubing unit and the snubbing assets and business has further
focused the Company on its core assets and services of drilling rigs, service rigs and shallow and
intermediate depth coil tubing units.
Concurrent with the acquisition of Ironhand, the Board of Directors (“Board”) increased the quarterly
dividend by 7.7% from $0.01625 per common share to $0.0175 per common share starting with the June
30, 2014 dividend. The declaration of future dividends is determined by the Board on a quarter-by-
quarter basis based on the sustainability of CWC’s cash flows and earnings. When OPEC decided on
November 27, 2014 not to cut the supply of oil to the global marketplace, oil prices fell quickly in a short
period of time. CWC had to react quickly to preserve cash resources as our activity level and
environment were about to be negatively impacted.
On December 23, 2014, CWC got conditional
approval from the TSX Venture Exchange (“TSXV”) to institute a dividend reinvestment plan (“DRIP”) and a
stock dividend program (“SDP”) starting with the December 31, 2014 dividend. 69.2% of CWC’s
shareholders elected to participate in the DRIP and SDP for the December 31, 2014 dividend thereby
saving CWC $3.4 million in cash dividends.
From a shareholders’ perspective, CWC’s share price performed well for the first nine months of 2014
reaching a high of $1.24 (a 49% increase from $0.83 at December 31, 2013), but fell dramatically in the last
three months of 2014 as the capital markets adjusted equity valuations for the dramatic drop in oil
prices and the anticipated slowdown that was about to take place in activity levels for all oilfield service
companies in 2015. CWC’s total return (share price appreciation and dividends) for the year ended
December 31, 2014 was (40)%; our first negative return in five years. However, from a long-term
shareholder value perspective, CWC shareholders are still up with a five year total return of 222%;
significantly higher than any other publicly traded Canadian contract drilling or well servicing company.
Page 4 Outlook For 2015
Q1 2015 started with our E&P customers coming back after the Christmas break with a mission in mind to
reduce the day and hourly rates of their oilfield service providers by 10% to 20%. CWC worked with our E&P
customers to decrease our rates, but still allow for a positive profit margin. However, regardless of the rate
reductions, the E&P companies have significantly curtailed drilling, completions, maintenance and
abandonment activity in Q1 2015 to do their part in reducing the amount of oil currently in the global
marketplace. The Canadian Association of Oilwell Drilling Contractors (“CAODC”) is forecasting 2015 drilling
rig utilization of 26% (2014: 45%). For the first two months of 2015, the CAODC drilling rig utilization was
41% compared to 68% for the same period in 2014. CWC’s revenue decreased approximately 40% in the
first two months of 2015 compared to 2014 as a result of lower activity levels and rate reductions as well as
an unusually warm winter affecting our ability to move equipment to the well site. As I write this letter in late
March, we are already in the midst of an early spring breakup. CWC believes the length of time spring
breakup will last in 2015 will be driven by economic conditions related to the price of oil rather than
environmental ones.
Given these circumstances, CWC has already implemented several cash saving initiatives aimed at preserving
our cash resources and maintaining our balance sheet strength as well as retaining our most valuable asset –
our key employees. These cash saving initiatives are intended to result in 2015 cash savings of $23.4 million
compared to 2014 and include:
The Board of Directors and senior management reducing their compensation by 9%;
Salary reductions for all employees by 4%;
Layoffs of 15% of salaried employees and 5% of field employees;
Profit share and bonus programs for all employees suspended;
Non-core well testing business suspended;
Reduction of 2015 capital expenditure budget by 26%; and
DRIP and SDP with approximately 69.2% participation rate and reduction of the quarterly dividend
to $0.005 per common share results in a cash dividend reduction of 88%.
Although CWC does not expect to be in breach of our debt covenants, as a protective measure CWC received
approval from our banking syndicate to relax certain of these debt covenants such that CWC is well
positioned to manage the current slowdown in activity levels.
In closing, I would like to express my sincere thanks to the employees of CWC for their ongoing support, hard
work and dedication. To our customers, we cherish your ongoing business and relationship and together we
will weather this storm. To my Board of Directors, thank you for your guidance and wisdom through these
choppy waters. And to all of my fellow shareholders who continue to believe and support us, we will return
to happier times for it is not the strong, but the responsive that survive.
Sincerely and submitted on behalf of the Board of Directors,
Duncan T. Au
President & Chief Executive Officer
March 25, 2015
Page 5 MANAGEMENT’S DISCUSSION AND ANALYSIS (“MD&A”)
Management’s Discussion and Analysis (“MD&A”) is a review of the results of operations and liquidity and capital resources of
CWC Energy Services Corp. (unless the context indicates otherwise, a reference in this MD&A to “CWC”, the “Company”, “we”,
“us”, or “our” means CWC Energy Services Corp.). The following discussion and analysis provided by CWC is dated March 9,
2015 and should be read in conjunction with audited annual financial statements for the year ended December 31, 2014.
Additional information regarding CWC can be found in the Company’s latest Annual Information Form (“AIF”). The audited
annual financial statements are prepared in accordance with IFRS, as issued by the International Accounting Standards Board
(“IASB”). All amounts are expressed in Canadian dollars unless otherwise noted. Additional information relating to CWC,
including the AIF, is available on SEDAR at www.sedar.com.
Highlights for the Three Months Ended December 31, 2014
•
•
•
•
•
•
•
Record revenue of $46.0 million, a 46% increase from $31.5 million in Q4 2013. Revenue increase was attributable to the
addition of the Contract Drilling segment through the acquisition of Ironhand Drilling Inc. (“Ironhand”) on May 15, 2014.
Contract Drilling had Q4 2014 revenue of $20.3 million, reflecting strong rig utilization, increased rig rates and Rig #9
being put into service in late September 2014. Revenue from Production Services of $25.7 million was $5.8 million or 19%
lower than Q4 2013 as a result of lower service rig utilization and the sale of the snubbing assets and business in
September 2014.
1
of $13.5 million, which was 78% higher than the $7.6 million in Q4 2013. The increase in EBITDAS is
Record EBITDAS
due to the addition of the Contract Drilling segment contributing in Q4 2014 as a result of the acquisition of Ironhand in
May 2014 with no corresponding contribution in Q4 2013.
Contract Drilling segment achieved industry leading rig utilization of 84% in Q4 2014, significantly higher than the
Canadian Association of Oilwell Drilling Contractors ("CAODC") industry average of 45%.
Service Rig utilization in Q4 2014 of 45% was 7% lower than Q4 2013 of 52% due to the continuation of reduced activity
from several of CWC's largest exploration and production (“E&P”) customers. The Company continued its efforts to more
broadly diversify its customer base in Q4 2014 such that reduced activity levels from any large customers would have less
of an impact on overall revenue and cash flow in the future.
Although the Company had a record Q4 and year ended 2014, the recent decline in crude oil and natural gas prices and the
reduced outlook for oilfield services activity and pricing in 2015 has resulted in CWC recording a $20.9 million goodwill
impairment charge in the Contract Drilling segment. This goodwill impairment charge has resulted in a net loss of $15.8
million in Q4 2014 compared to a net income of $2.2 million in Q4 2013.
One new drilling rig (Rig #9) and one new slant service rig (Rig #504) were put into service in Q4 2014. Construction
continued on another new telescopic double drilling rig (Rig #10), which has now been put on hold, and two new slant
service rigs: Rig #505 delivered in January 2015 and Rig #506 is expected to be delivered in Q2 2015.
On December 23, 2014 the Company implemented a Dividend Reinvestment Plan ("DRIP") and a Stock Dividend Program
("SDP") effective for the December 31, 2014 dividend paid on January 15, 2015. Holders of approximately 69.2% of
outstanding common shares elected to participate in the DRIP or SDP for the December 31, 2014 dividend.
1
Please refer to "Reconciliation of Non-IFRS Measures" section for further information.
Page 6 Highlights for the Year Ended December 31, 2014
•
•
•
•
•
•
•
•
•
Record revenue of $143.7 million for the year ended December 31, 2014, $30.4 million (27%) higher than 2013 revenue of
$113.3 million. The Contract Drilling segment contributed incremental revenue of $38.8 million as a result of the
acquisition of Ironhand on May 15, 2014. This was offset by lower revenue from the Production Services segment as a
result of the sale of the snubbing assets and business in September 2014 and reduced activity from several of CWC's
largest E&P customers resulting in lower utilization in Q3 and Q4 2014 compared to Q3 and Q4 2013.
Record EBITDAS for the year ended December 31, 2014 of $34.1 million, an increase of $7.9 million (30%) from 2013 due
primarily to the addition of the Contract Drilling segment as a result of the acquisition of Ironhand on May 15, 2014.
For the 7.5 months since its acquisition, the Contract Drilling rig utilization was 70% compared to the CAODC industry
average of 42% for the same period and 45% for year ended 2014.
Service rig utilization for the year ended December 31, 2014 of 45% was 4% lower than the year ended 2013 of 49% due
to the continuation of reduced activity from several of CWC's largest E&P customers in Q3 and Q4 2014.
Net loss for the year ended December 31, 2014 was $13.5 million, a decrease of $18.3 million compared to net income of
$4.8 million in 2013 due primarily to a $20.9 million goodwill impairment charge related to its Contract Drilling segment.
On May 15, 2014, the Company entered the contract drilling business with the acquisition of Ironhand. CWC now has a
best-in-class modern contract drilling fleet of nine telescopic double drilling rigs with depth ratings of 3,200 to 4,500
metres having an average age of five years. In conjunction with the Ironhand acquisition, CWC:
o
o
closed an equity financing for gross proceeds of $28.8 million through the issuance of 34,270,000 common shares
at $0.84 per common share; and
amended and increased its credit facility from $75 million to $100 million, plus a $25 million accordion option to
expand the credit facility to $125 million at a future date, subject to approval from the financing syndicate. The
amendments include the extension of the committed term to June 21, 2017.
The Company renewed its Normal Course Issuer Bid (“NCIB”) effective May 22, 2014, to purchase from time to time, as it
considered advisable, up to 13,520,411 of its issued and outstanding common shares through the facilities of the TSX
Venture Exchange (“TSXV”) or other recognized marketplaces. To December 31, 2014, 1,091,000 common shares have
been repurchased, returned to Treasury and cancelled.
On September 15, 2014, CWC announced the sale of its snubbing assets and business in several separate transactions for
gross proceeds of $6.5 million, thereby further focusing the Company on its core assets and services of drilling rigs, service
rigs and coil tubing.
Declared dividends of $0.06875 per common share or $17.2 million
for the year ended December 31, 2014.
Corporate Overview
CWC Energy Services Corp. is a premier oilfield services company operating in the WCSB with a complementary suite of
services including drilling rigs, service rigs and coil tubing. CWC’s Contract Drilling segment includes the results of operations
for CWC’s drilling rigs which are operated by the Company’s CWC Ironhand Drilling division. CWC’s Production Services
segment includes the results of operations for CWC’s service rigs, coil tubing units, and well testing equipment which are
operated by the Company’s CWC Well Services division. The Company's corporate office is located in Calgary, Alberta, with
operational locations in Nisku, Grande Prairie, Slave Lake, Red Deer, Lloydminster, Provost, and Brooks, Alberta and Weyburn,
Saskatchewan. The Company’s shares trade on the TSX Venture Exchange under the symbol “CWC”.
On May 15, 2014, CWC changed its name from CWC Well Services Corp. to CWC Energy Services Corp. and amalgamated with
its wholly-owned subsidiary, Ironhand Drilling Inc.
Page 7
Financial and Operational Highlights
$ thousands, except shares, per share
amounts, and margins
2014
2013
% Change
2014
2013
% Change
Three months ended
December 31,
Years ended
December 31,
FINANCIAL RESULTS
Revenue
(1)
Contract drilling
Production services
(2)
EBITDAS
EBITDAS margin (%)
(2)
Funds from operations
(2)
Net (loss) income
Net (loss) income margin (%)
Dividends declared
(3)
Per share information
Weighted average number of shares
outstanding – basic
Weighted average number of shares
outstanding – diluted
(2)
EBITDAS
EBITDAS
Net income per share - basic and diluted
Dividends declared per share
per share – basic
per share – diluted
(2)
$ thousands, except ratios
FINANCIAL POSITION AND LIQUIDITY
(2)
20,308
25,651
45,959
13,487
29%
13,487
(15,760)
(34%)
-
31,515
31,515
7,598
24%
7,598
2,196
7%
(4)
n/m
(19%)
46%
78%
5%
78%
(4)
n/m
(41%)
38,819
104,847
143,666
-
113,297
113,297
34,058
24%
26,171
23%
33,217
26,171
(13,451)
(9%)
4,863
4%
(4)
n/m
(7%)
27%
30%
1%
27%
(4)
n/m
(13%)
4,828
2,638
83%
17,171
10,461
64%
269,799,952 155,158,173
227,675,260 155,067,901
269,799,952 159,840,021
$0.05
$0.05
$0.01
$0.01625
$0.05
$0.05
($0.06)
$0.0175
227,675,260 159,634,517
$0.17
$0.16
$0.03
$0.065
$0.15
$0.15
($0.06)
$0.06875
December 31,
2014
December 31,
2013
(2)
Working capital (excluding debt)
Working capital (excluding debt) ratio
Total assets
Total long-term debt (including current portion)
Shareholders' equity
CWC entered into the contract drilling business on May 15, 2014, through the acquisition of Ironhand and results are included May 16, 2014 onward.
Please refer to the “Reconciliation of Non-IFRS Measures” section for further information.
Dividends declared includes dividends to common shareholders and to vested stock option holders as at the record date.
Not meaningful.
20,603
2.2:1
275,353
65,666
172,705
14,507
2.3:1
148,999
44,009
91,344
(1)
(2)
(3)
(4)
Working capital (excluding debt) and total assets have increased significantly since December 31, 2013 largely as a result of
the acquisition of Ironhand which had a fair value of net assets acquired of $128.7 million on May 15, 2014. Long term debt
(including current portion) has increased significantly since December 31, 2013 due to $26 million in debt assumed as part of
the acquisition of Ironhand offset by funds from operations and asset sales.
Shareholders’ equity has increased significantly since December 31, 2013 due primarily to the issuance of $112.8 million in
new equity. In Q2 2014, $27.4 million (net of costs) was raised through the subscription receipts offering resulting in the
issuance of 34.3 million common shares at a price of $0.84 per common share. Also in Q2 2014, $84.0 million in common
shares were issued as purchase consideration to former Ironhand shareholders with 80.8 million common shares issued at a
deemed price of $1.04 per common share based on the closing price of CWC’s common shares on the TSX Venture Exchange on
May 15, 2014. The impact of issued equity in 2014 was offset by $0.9 million in shares purchased under the normal course
issuer bid ("NCIB"), net loss of $13.5 million and total declared dividends of $17.2 million.
Page 8
Operational Overview
The acquisition of Ironhand on May 15, 2014 resulted in the aggregation of the well servicing and other oilfield services
segments into the Productions Services segment, as this acquisition shifted the Company's internal financial reporting and
operational management structure. Management concluded that the well servicing and other oilfield services segments share
similar economic characteristics and are also similar in other respects in accordance with IFRS 8.12.
Contract Drilling
Ironhand was acquired on May 15, 2014 and operations renamed CWC Ironhand Drilling representing our Contract Drilling
segment. Our Contract Drilling segment has a fleet of nine telescopic double drilling rigs with depth ratings from 3,200 to
4,500 metres, eight of nine rigs have top drives and the rig fleet has an average age of five years. All of the drilling rigs are well
suited for the most active depths for horizontal drilling in the WCSB, including the Montney, Duvernay, Cardium and other
deep basin horizons.
OPERATING HIGHLIGHTS
Drilling Rigs
September 30, 2014
December 31, 2014
June 30, 2014(1)
(2)
(3)
Number of drilling rigs
Revenue per operating day
Drilling rig operating days
(4)
Drilling rig utilization %
CAODC industry average utilization rate
9
$29,305
693
84%
45%
9
$27,715
551
75%
46%
8
$30,258
107
29%
(5)
26%
(1)
(2)
(3)
Ironhand was acquired on May 15, 2014, as such the Contract Drilling Segment includes the results for the period commencing May 16, 2014.
Number of drilling rigs at the end of the period.
Revenue per operating day is calculated based on operating days (i.e. spud to rig release basis). New drilling rigs are added based on the first day of field
service.
(4)
Drilling rig utilization is calculated based on operating days (i.e. spud to rig release basis) in accordance with the methodology prescribed by the CAODC .
New drilling rigs are added based on the first day of field service.
Calculated including ½ month of May which was 20% utilization and the month of June, which was 29% as reported by the CAODC.
(5)
CWC achieved industry leading utilization of 84% in Q4 2014 compared to the CAODC industry average of 45%. Such
utilization and the addition of Rig #9 in late September 2014 resulted in record Contract Drilling revenue of $20.3 million for
Q4 2014. For the 7.5 months ended December 31, 2014, the Contract Drilling segment achieved utilization of 70% compared
to the CAODC industry average of 42% for the same period and 45% for the year ended 2014 resulting in revenue of $38.8
million since being acquired. CWC began construction of Rig #10 in Q4 2014, a new telescopic double drilling rig with a depth
capacity of 4,500 meters, which was expected to be put into service in Q3 2015. Due to the swift and dramatic decrease in oil
prices and reduced drilling activity levels in 2015, CWC has decided to defer the continuation of building Rig #10 to beyond
2015 when management can reassess whether industry demand and conditions have improved.
Production Services
CWC is the fifth largest service rig provider in the WCSB, having a modern fleet of 72 service rigs as at December 31, 2014.
The Company’s service rig fleet consists of 41 singles, 27 doubles, and 4 slant rigs. The average age of CWC’s service rig fleet is
approximately seven years, making CWC’s fleet amongst the newest in the WCSB. Rig services include completions,
maintenance, workovers and abandonments with depth ratings from 1,500 to 5,000 metres.
CWC’s Class I, II and III coil tubing units have depth ratings from 1,500 to 4,000 metres. As at December 31, 2014, the
Company’s fleet of nine coil tubing units consist of five Class I, three Class II and one Class III coil tubing units. The market for
the Class III deep coil tubing unit has become extremely competitive with an increased supply of new deep coil tubing units
over the last several years having an adverse affect on industry utilization and pricing. In light of these competitive challenges
for CWC’s one Class III coil tubing unit, the Company has chosen to focus its sales and operational efforts on its eight Class I
and II coil tubing units which are better suited at servicing steam-assisted gravity drainage ("SAGD") wells, which are
shallower in depth and more appropriate for these coil tubing units.
Page 9
OPERATING HIGHLIGHTS
Dec 31,
2014
Sep 30,
2014
Jun 30,
2014
Three months ended
Dec 31,
Mar 31,
2013
2014
Sep 30,
2013
Jun 30,
2013
Mar 31,
2013
Service Rigs
(1)
Number of units
Hours worked
(2)
Utilization %
Revenue per hour
Coil Tubing Units
(1)
Number of units
Hours worked
(3)
Utilization %
Revenue per hour
Snubbing Units
(1)
72
28,644
45%
$790
9
2,631
32%
$825
71
26,354
42%
$756
9
2,056
29%
$894
71
20,399
33%
$752
7
1,403
22%
$784
71
37,652
61%
$820
8
4,600
64%
$967
71
33,828
52%
$786
8
2,106
29%
$1,129
71
32,190
51%
$755
8
1,833
25%
$1,074
69
17,700
29%
$746
8
1,045
14%
$1,107
68
37,689
62%
$823
8
3,285
46%
$1,209
(5)
(5)
0
0
(6)
n/m
n/m
6
0
Number of units
891
702
Hours worked
(4)
16%
13%
Utilization %
$1,666
$1,459
Revenue per hour
Number of units at the end of the period – includes units which are out of service for recertification and/or refurbishment.
Service rig utilization is calculated based on 10 hours a day, 365 days a year. New service rigs are added based on the first day of field service. Service rigs
requiring their 24,000 hour recertification and/or refurbishment and are out of service for greater than 90 days are excluded from the utilization
calculation until their first day back in field service.
Coil tubing unit utilization is calculated based on 10 hours a day, 365 days a year. New coil tubing units are added based on the first day of field service.
Snubbing unit utilization is calculated based on 10 hours a day, 365 days a year. New snubbing units are added based on the first day of field service.
During Q3 2014 snubbing had six units in operation, however the snubbing assets were sold in several transactions the last of which closed September 24,
6
220
4%
$1,218
6
1,081
20%
$1,774
6
1,214
22%
$1,868
6
1,460
27%
$1,416
6
494
11%
$1,532
(6)
(1)
(2)
(3)
(4)
(5)
2014. The information shown relates to the operating results of the snubbing assets prior to disposition.
(6)
Not meaningful.
Service rig hours and utilization decreased in Q4 2014 to 45% compared to Q4 2013 of 52% as a result of continued reduced
activity levels with several of CWC’s largest E&P customers. This reduced activity along with the sale of its snubbing assets
and business in September 2014 (Q4 2013 revenue of $1.9 million with no corresponding revenue in Q4 2014) resulted in
revenue of $25.7 million in Q4 2014 compared to $31.5 million in Q4 2013, a decrease of $5.8 million. For the year ended
2014, Production Services revenue was $104.8 million compared to 2013 of $113.3 million, a decrease of $8.5 million. CWC
continued its efforts to more broadly diversify its customer base in Q4 2014 such that reduced activity levels from any large
customers would have less of an impact on overall revenue and cash flow in the future. The Company put one new slant
service rig (Rig #504) into service during Q4 2014 and has targeted heavy oil and SAGD wells for this new rig. Q4 2014 also
saw the construction of two more slant service rigs. Rig #505 was delivered in January 2015 while Rig #506 is expected to be
delivered Q2 2015. The addition of these two new slant service rigs will help CWC establish a greater market presence with a
total of six slant service rigs capable of servicing the growing number of heavy oil and SAGD wells.
Coil tubing utilization increased in Q4 2014 to 32% compared to Q4 2013 of 29% as a result of the continued focus on SAGD
wells with CWC’s Class I and II coil tubing units. For the year ended December 31, 2014, utilization increased to 37%
compared to 2013 of 28%. In August 2014, CWC purchased two more Class I coil tubing units to increase our ability to service
E&P customers with SAGD wells. The drop in average revenue per hour in Q4 2014 of $825 and year end 2014 of $894
compared to Q4 2013 of $1,129 and year end 2013 of $1,171 is a direct result of the lower hourly rate charged on Class I and II
units compared to the Class III unit. CWC had two Class III coil tubing units for all of 2013 contributing to the higher average
hourly rate compared to only one Class III coil tubing unit for much of 2014, as CWC sold one of its two Class III units in April
2014.
On September 15, 2014, CWC announced the sale of its non-core snubbing assets and business in several separate transactions
for total gross proceeds of $6.5 million. The sale of the snubbing assets and business allows CWC to focus on its core business
of drilling rigs, service rigs and coil tubing.
Page 10
•
•
•
•
•
•
•
Outlook
The continuing volatility of commodity prices has resulted in significant reductions to the capital and operating budgets of our
E&P customers. The first two months of 2015 has seen revenue decrease in both the Contract Drilling and Production Services
segments by approximately 40% compared to the first two months of 2014 as a result of lower activity levels and rate
reductions as well as an unusually warm winter affecting our ability to move equipment to the well site. CWC expects an
earlier than normal start to, and a prolonged spring breakup as our E&P customers choose to end their drilling, completions
and production maintenance programs to conserve their cash resources until commodity prices recover. Activity levels
throughout the oilfield services industry for the remainder of 2015 are expected to be significantly lower as compared to
2014, resulting in utilization and rate reductions across all business segments. On January 22, 2015, the CAODC revised its
drilling rig industry utilization to 26% for 2015 compared to 45% in 2014. The forecast was based on WTI of US$55/bbl.
Lower activity and pricing pressure in 2015, is expected to negatively impact CWC's revenue, EBITDAS and Funds from
Operations. CWC has already begun to implement several cash saving initiatives aimed at preserving our cash resources and
maintaining our balance sheet strength as well as retaining our most valuable asset – our key employees. These cash saving
initiatives as follows are intended to reduce direct operating expenses by $2.0 million, selling and administrative expenses by
$2.2 million, capital expenditures by $3.8 million and cash dividends by $15.4 million resulting in total 2015 cash savings of
$23.4 million compared to 2014:
The Board of Directors and the senior management team have reduced their compensation by 9%;
Salaried employees have reduced their salaries by 4%;
Layoffs of 12% of salaried employees and 4% of field employees;
Profit share and bonus programs for salaried and field employees suspended for 2015;
The non-core Well Testing business will be suspended until market conditions improve;
Reductions in the 2015 capital expenditure budget by 26%; and
Establishment of DRIP and SDP with an approximately 69.2% participation rate together with an annualized dividend
policy of $0.02 per common share should result in a reduction of 2015 cash dividends by 88%.
At December 31, 2014, the Company's $100 million credit facility, which does not mature until June 21, 2017, has
ratio was 1.6:1
approximately $35 million undrawn. At December 31, 2014, CWC's Consolidated Debt to Consolidated EBITDA
with a debt covenant limit of 3.0:1. Although CWC does not expect to be in breach of this debt covenants in 2015, the Company
has proactively requested the banking syndicate to relax our financial covenants for Consolidated Debt to Consolidated
EBITDA ratio from 3.0:1 to 3.5:1 for the quarters ending December 31, 2015 and March 31, 2016, reducing to 3.25:1 for
quarters ending June 30, 2016 and September 30, 2016 and returning to 3.0:1 thereafter. The banking syndicate has agreed to
the covenant relaxation and is in the process of amending the credit agreement. Other debt covenants remain unchanged.
2
With these initiatives already being implemented, CWC is well positioned to manage the current slowdown in activity.
2
Consolidated Debt and Consolidated EBITDA are defined in the Company's Credit Facility. See Note 8 to 2014 Financial Statements.
Page 11 Discussion of Financial Results
$ thousands
2014
2013
Change $
Change %
2014
2013
Change $
Change %
Three months ended
December 31,
Year ended
December 31,
Revenue
(1)
Contract drilling
Production services
Direct operating expenses
Contract drilling
Production services
Gross margin
(2)
Contract drilling
Production services
Gross margin percentage
(2)
20,308
25,651
45,959
10,342
16,514
26,856
9,966
9,137
19,103
-
31,515
31,515
-
19,841
19,841
-
11,674
11,674
20,308
(5,864)
14,444
10,342
(3,327)
7,015
9,966
(2,537)
7,429
(3)
n/m
(19%)
46%
(3)
n/m
(17%)
35%
(3)
n/m
(22%)
64%
(3)
38,819
104,847
143,666
-
113,297
113,297
21,704
70,047
91,751
17,115
34,800
51,915
-
72,449
72,449
-
40,848
40,848
(2)
38,819
(8,450)
30,369
21,704
(2,402)
19.302
17,115
(6,048)
11,067
(3)
n/m
(7%)
27%
(3)
n/m
(3%)
27%
(3)
n/m
(15%)
27%
(3)
Contract drilling
Production services
n/a
n/a
n/a
CWC entered into the contract drilling business on May 15, 2014, through the acquisition of Ironhand and results are included May 16, 2014 onward.
Please refer to the “Reconciliation of Non-IFRS Measures” section for further information.
Not meaningful.
44%
33%
36%
49%
36%
42%
-
37%
37%
n/a
n/a
n/a
(1%)
5%
36%
36%
n/m
n/m
(1)
(2)
n/m
(3%)
(3%)
(3)
Revenue
CWC achieved record annual and fourth quarter revenue of $143.7 million and $46.0 million respectively up significantly from
the same periods in 2013. During Q4 2014, revenue increased $20.3 million from the newly acquired Contract Drilling
segment which were offset by a $5.9 million decrease in Production Services segment. Production services revenues were
lower due to reduced activity level with several of CWC’s largest E&P customers and the sale of its snubbing assets and
business in September 2014 which reduced revenue in the Production Services segment by a further $1.9 million compared to
Q4 2013. CWC continued its efforts to more broadly diversify its customer base in Q4 2014 such that reduced activity levels
from any large customers would have less of an impact on overall revenue and cash flow in the future.
The $7.0 million increase in direct operating expenses for Q4 2014 resulted from the newly acquired Contract Drilling segment
incurring $10.0 million without a corresponding expense in Q4 2013. The decrease of $3.3 million of direct operating
expenses in the Production Services segment is consistent with a decrease in revenue in Q4 2014 compared to Q4 2013 and
the variable nature of the direct operating expenses.
Many direct operating expenses are variable in nature and increase or decrease with activity levels such that changes in
operating costs generally correspond to changes in revenue or activity levels. Labour is the largest cost incurred by the
Company, the majority related to field operating employees and, as such, variable in nature. There is however a portion of our
labour costs which are fixed and do not generally reduce, even in periods of lower activity. A tight labour market and changes
to our compensation structure for field personnel increased operating costs in 2014. Some of this increase in cost relative to
revenue is driven by labour laws which require the Company to pay overtime labour rates at times when the Company is not
contractually able to pass on overtime rate premiums to our customers. The Company is attempting to improve the matching
of labour overtime costs with overtime premiums in our customer contracts. Additionally, fuel costs, which in the early part of
2014, increased the operating cost per hour, have seen a return to more manageable levels in the later part of 2014 lessening
the impact on margins.
Selling and Administrative Expenses and Transaction Costs
$ thousands
2014
2013
Change $
Change %
2014
2013
Change $
Change %
Three months ended
December 31,
Year ended
December 31,
Selling and administrative
expenses
(1)
Transaction costs
Not meaningful
5,563
53
4,076
-
1,487
53
36%
(1)
n/m
17,857
14,677
841
-
3,180
841
22%
(1)
n/m
Full year selling and administrative expenses of $17.9 million have increased $3.2 million (22%) from $14.7 million in 2013.
Similarly Q4 2014 selling and administrative expenses of $5.6 million are 36% higher than 2013. Approximately $2.5 million
(80%) of the $3.2 million full year increase and $1.2 million (80%) of the Q4 2014 increase is associated with the newly
Page 12
acquired Contract Drilling segment where there are no comparable 2013 expenses. Most selling and administrative expenses,
such as building and office rent, and office staff salaries are fixed in nature and not subject to significant fluctuation on a
quarterly basis. Other costs such as professional and legal fees can fluctuate depending on specific services received in the
period. The remainder of the year over year increase is due to the expansion into the Slave Lake area, general inflationary
increases and incremental costs of having a larger asset base.
As a result of the poor economic climate anticipated throughout 2015, the Company put in place several cost saving initiatives
in early 2015 that will reduce the future selling and administrative expenses of the Company.
Transaction costs totaling $0.8 million for the year ended 2014 relate to the acquisition of Ironhand Drilling Inc. and consist
primarily of legal, professional and regulatory fees and expenses of the acquisition which are one-time only costs.
EBITDAS
$ thousands
2014
2013
Change $ Change %
2014
2013
Change $ Change %
Three months ended
December 31,
Year ended
December 31,
(1)
EBITDAS
Contract drilling
Production services
Corporate
(1)
9,536
7,812
(3,808)
13,540
29%
-
10,124
(2,526)
7,598
24%
9,536
(2,312)
(1,282)
5,942
n/a
(2)
n/m
(23%)
51%
78%
5%
16,110
29,136
(11,188)
34,058
24%
-
35,148
(8,977)
26,171
23%
16,110
(6,012)
(2,211)
7,887
n/a
(2)
n/m
(17%)
25%
30%
1%
(1)
(2)
EBITDAS margin (%)
Please refer to the “Reconciliation of Non-IFRS Measures” section for further information.
Not meaningful
Management uses EBITDAS as a measure of the cash flow generated by the Company. Positive EBITDAS provides the cash flow
needed to grow our business through purchase of new equipment or business acquisitions, maintain the dividend, repurchase
outstanding common shares under a NCIB, and reduce outstanding long-term debt. CWC achieved record fourth quarter
EBITDAS of $13.5 million resulting from $9.5 million from the Contract Drilling segment acquired in 2014, offset by $2.3
million in lower Production Services EBITDAS and $1.3 million higher Corporate expenses. Lower EBITDAS in the Production
Services segment is consistent with the $5.9 million decrease in revenue for the current quarter. Corporate costs increased as
a result of the additional corporate staff following the acquisition of Ironhand.
EBITDAS for the year ended December 31, 2014 was $34.1 million in comparison to $26.2 million in December 31, 2013. The
$7.9 million increase year over year is a result of $16.1 million from the Company's newly acquired Contract Drilling division
which was offset by a $8.2 million year over year decrease in the Production Services and Corporate segments. The decrease
in the Production Services segment is due to declining utilization mostly in the service rig division. Corporate costs increased
as a result of the additional corporate staff following the acquisition of Ironhand.
Stock-Based Compensation
Three months ended
December 31,
Year ended
December 31,
$ thousands
2014
2013
Change $
Change %
2014
2013
Change $
Change %
Stock based compensation
210
288
(78)
(27%)
1,345
914
431
47%
Stock based compensation is primarily a function of the outstanding stock options and restricted share units (“RSUs”) being
expensed over their vesting term. As a generalization, a higher trading price for our common shares will increase the value of
stock options and RSUs at their grant date which is the value used for expensing stock based compensation. In 2014, the
Company's stock price reached a high of $1.04 in May to a low of $0.365 in December. The year over year increase in annual
stock based compensation expense is a result of the large number of options and RSU's granted in the year combined with the
higher expense associated with the options and RSU's granted in May during the Company's trading high. The decrease in the
fourth quarter expense is directly attributable to the trading lows the Company experienced at that time.
Page 13
Finance Costs
$ thousands
2014
2013
Change $ Change %
2014
2013
Change $ Change %
Three months ended
December 31,
Year ended
December 31,
Finance costs
632
481
151
31%
2,186
3,262
(1,076)
(33%)
Finance costs for the Q4 2014 are higher than the prior year quarter due primarily to an increase in the long-term debt
outstanding in the 2014 versus 2013. At December 31, 2014, total long term debt was $65.6 million compared to $44.0 million
at December 31, 2013. For the full year, finance costs have decreased $1.1 million as a result of a lower rate of interest under
the current bank facilities as compared to the facility in place prior to June 21, 2013. Prior to June 21, 2013, the Company had a
portion of its debt under a term facility bearing interest at 7.42% per annum. In addition during 2013, the company expensed
$0.9 million in cash and deferred fees to exit that facility. During 2014 the Company’s borrowings under the current bank
facilities bore interest at approximately 3.6%.
Depreciation
$ thousands
Depreciation
Contract drilling
Production services
Corporate
(1)
Not meaningful
Three months ended
December 31,
Year ended
December 31,
2014
2013
Change $ Change %
2014
2013
Change $ Change %
2,179
3,449
121
5,749
-
3,749
100
3,849
2,179
(300)
21
1,900
(1)
n/m
(8%)
21%
49%
4,782
14,263
498
19,543
-
14,946
472
15,418
4,782
(683)
26
4,125
(1)
n/m
(5%)
6%
27%
Depreciation for drilling rigs and service rigs are based on hours of work. As such, an increase or decrease in hours worked
for an individual drilling or service rig results in an increase or decrease in depreciation expense for that individual drilling or
service rig. There can be significant variation in the historical cost basis for our service rigs based on type of rig and our
newest service rigs, which have the highest cost and depreciation rate per hour, also typically have higher utilization. Coil
tubing and well testing units are depreciated straight line resulting in consistent depreciation expense regardless of utilization
or hours of use. The increase in depreciation in Q4 2014 of $1.9 million is a direct result of $2.2 million in depreciation related
to the newly acquired Contract Drilling segment with no corresponding depreciation expense in the prior year quarter offset
by $0.3 million decrease in the Production Services segment as a result of lower activity levels for the service rigs in Q4 2014
compared to Q4 2013. On an annual basis, depreciation increased $4.1 million; $4.8 million related to Contract Drilling which
was offset by a $0.7 million decrease in the Production Services Segment. The year over year decrease in Production Services
was a result of the lower activity in the year on the service rig equipment subject to depreciation on a unit-of-production basis.
Gain on Disposal of Equipment
$ thousands
2014
2013
Change $ Change %
2014
2013
Change $ Change %
Three months ended
December 31,
Year ended
December 31,
Gain on disposal of
equipment
Not meaningful
(1)
(4)
(46)
42
(1)
n/m
(246)
(171)
(75)
(1)
n/m
Management continually monitors the asset mix and equipment needs and invests and divests assets as needed to optimize
our operations. During 2014, the snubbing assets and business was divested in several separate transactions for gross
proceeds of $6.5 million resulting in a gain on disposal of equipment of $0.2 million. In addition, in Q2 2014 a Class III coil
tubing unit was disposed of for proceeds of $0.9 million resulting in a gain on disposal of $0.1 million.
Income Taxes
$ thousands
Three months ended
December 31,
2014
2013
Year ended
December 31,
2014
2013
Net (loss) income before income taxes
Deferred income tax expense
Deferred income tax expense as a % of net (loss) income before income taxes
Expected statutory income tax rate
(13,980)
1,780
(13%)
25%
3,026
830
27%
25%
(10,491)
2,960
(28%)
25%
6,748
1,885
28%
25%
The effective tax for the Company in Q4 and full year of -13% and -28% are impacted by the goodwill impairment in the
Contract Drilling segment of $20.9 million
The impairment is not deductible for income tax purposes and as such is added
back to net (loss) income before income taxes in arriving at deferred income tax expense. Without the impairment in the
.
Page 14
quarter, deferred income tax expense as a percentage of net income before taxes would be 26% for Q4 and 28% for full year
2014.
Income taxes are a function of taxable income and are calculated differently than accounting income. Differences between
accounting income and taxable income include such things as the non-taxable portion of capital gains, the non-deductible
portion of capital losses, items which are not deductible for income tax purposes such as gains or losses on disposal of fixed
assets, stock based compensation, differences between income tax estimates and actual tax filings, goodwill impairment, and
other differences. Additionally, the recognition or de-recognition of certain tax credits or pool balances can occur based on the
assessment of the ability of the Corporation to realize the benefits of such tax balances or credits in the future. The difference
between the actual income tax rate and the expected income tax rate in both the current year and prior year periods is due to
these types of items. The Company has substantial tax pools and non-capital losses available to reduce future taxable income
such that no cash taxes are expected to be payable through 2017.
Net (Loss) Income and Comprehensive (Loss) Income
$ thousands
2014
2013
Change $ Change %
2014
2013
Change $ Change %
Three months ended
December 31,
Year ended
December 31,
Net (loss) income and
comprehensive (loss)
income
(15,760)
2,196
(17,956)
(818%)
(13,451)
4,863
(18,314)
(377%)
Net (loss) income and comprehensive (loss) income decreased $18.0 million in Q4 2014 compared to Q4 2013 and $18.3
million year over year as a result of record revenue and EBITDAS attributed to the newly acquired Contract Drilling segment,
offset by a $20.9 million goodwill impairment in Q4 2014. In both the current year and the prior year ended December 31, the
Company had certain nonrecurring costs which adversely effected the net income reported. In the current year to date net
(loss) income and comprehensive (loss) income, transaction costs of $0.8 million relating to the Ironhand acquisition were
expensed. In 2013, the Company expensed $0.9 million in cash and deferred fees in connection with the cancellation of a credit
facility with less favorable terms.
Liquidity and Capital Resources
The Company’s liquidity needs in the short term and long term can be sourced in several ways including: funds from
operations, borrowing against existing debt credit facilities, new debt instruments, equity issuances and proceeds from the
sale of assets. Cash inflows are used to repay outstanding amounts on the Company's debt credit facility, fund capital
requirements and pay dividends. At December 31, 2014, the Company's $100 million credit facility, which does not mature
until June 21, 2017, has approximately $35 million undrawn.
During the year ended December 31, 2014, the Company earned funds from operations of $33.2 million, $7.0 million higher
than 2013 on strong operational results. In addition, the Company realized proceeds of $7.5 million (2013: $1.2 million) from
the Q3 2014 disposal of the snubbing assets and business and the Q2 2014 sale of a class III coil tubing unit. On April 10, 2014
the Company closed a bought deal financing of 34,270,000 common shares for gross proceeds of $28.8 million (net: $26.8
million). Also on May 15, 2014, pursuant to a plan of arrangement the Company issued 80,785,158 common shares in
exchange for shares of Ironhand.
As at December 31, 2014 the Company had positive working capital excluding debt of $20.6 million (Please refer to the
"Reconciliation of Non-IFRS Measures" section for further information.
During the year ended December 31, 2014 the Company used its available funds to acquire Ironhand, purchase $28.8 million
in additional equipment and to maintain its current equipment, pay $14.5 million in dividends to investors, and repurchase
approximately 1.0 million common shares under its NCIB program. As noted above, the acquisition of Ironhand on May 15,
2014 was financed with a combination of new equity and borrowing under the debt credit facility.
On May 15, 2014, the Company amended its syndicated debt credit facility. The amendments included the addition of a fourth
Canadian financial institution to the syndicate, an increase in the credit facility to $100.0 million, and an extension of the
committed term to June 21, 2017. All other terms of the credit facility remain substantially the same or more favorable to the
Company than was the case prior to the amendments, including the continued availability of the $25 million accordion. No
principal payments are required under the credit facility until June 21, 2017, at which time any amounts outstanding are due
and payable. As at December 31, 2014, drawings under the credit facility totaled $65.7 million. The credit facility is secured by
a general security agreement covering all of the assets of the Company and a first charge security interest covering all assets of
the Company. Under the terms of the credit facility, the Company is required to comply with certain financial covenants. As of
December 31, 2014, the Company is in compliance with each of those financial covenants.
Page 15
At December 31, 2014, CWC's Consolidated Debt to trailing 12 month EBITDA ratio was 1.6:1 with a debt covenant limit of
3.0:1. In response to the expected drop in CWC’s EBITDA for 2015 and 2016, our banking syndicate has agreed to relax our
financial covenants for Consolidated Debt to EBITDA ratio from 3.0:1 to 3.5:1 for the quarters ending December 31, 2015 and
March 31, 2016, reducing to 3.25:1 for quarters ending June 30, 2016 and September 30, 2016 and returning to 3.0:1
thereafter. Other debt covenants remain unchanged.
As funds from operations are expected to decline during the downturn currently being experienced, the Company has focused
on cost-saving initiatives, reduction of capital expenditures and reduction of the dividend paid to shareholder. As noted in the
Outlook section, the company has taken significant and immediate steps to ensure the Company has sufficient liquidity to
cover future financial obligations.
Capital Requirements:
Over the past three years the Company has been increasing its asset base of drilling rigs and service rigs. Given the Company’s
relatively young fleet of equipment many capital expenditures are discretionary in nature and are incurred with a view to
increase the size and revenue generating capacity of the business as opposed to being required in order to maintain the
current business operations. In 2014, the Company initiated a plan that would result in spending approximately $3.0 million
annually over the next several years to recertify the oldest of its service rigs due for their Level IV recertification. With the
current downturn the Company has decided to delay the program to preserve cash flows. Because these recertifications are
based on hours of service, the reduced activity currently being experienced in 2015 will prolong the time before
recertification is required. Once utilizations return to normal, the program will be reinstated to ensure the effective
management of the Company's cash flows as well as ensure that future operations are not negatively impacted by rigs
"houring out". As at December 31, 2014, the Company has capital spending plans as noted in the section titled “Capital
Expenditures”. Additional discretionary capital expenditures will be required in order to continue to grow the Company’s
assets and revenue in the future. It is anticipated future cash requirements for capital expenditures will be met through a
combination of funds generated from operations and bank debt from the Company’s existing credit facility as required.
However, additional funds may be raised by additional bank debt, other forms of debt, the sale of assets, or the issue of equity.
CWC may require additional financing in the future to implement its strategies and business objectives. It is possible that such
financing will not be available, or if available, will not be available on favorable terms. If CWC issues any shares in the future to
finance its operations or implement its strategies, the current shareholders of CWC may incur a dilution of their interest.
Common Shares, Outstanding Share Data, Dividends and Normal Course Issuer Bid
The following table summarizes outstanding share data and potentially dilutive securities:
March 9, 2015
December 31, 2014
December 31, 2013
Common shares
Stock options
Restricted share units
279,045,330
12,620,012
1,990,000
270,762,224
13,020,012
2,065,000
155,323,066
8,307,012
1,600,000
On December 23, 2014, the Company introduced a DRIP and SDP as a prudent cash resource measure given the volatility and
uncertainty in the oil price environment. Eligible shareholders may elect to participate in the DRIP or SDP. Participation in
the DRIP or the SDP is optional and will not affect shareholders' cash dividends unless they elect to participate in the DRIP or
SDP. The adoption of the DRIP and SDP provides CWC with additional cash resources while ensuring that it continues to
maintain its balance sheet flexibility allowing for the payment of a cash or stock dividend. 69.2% of the common shares
outstanding elected to participate in the DRIP and SDP, as a result, on January 15, 2015, 7,982,080 and 301,026 common
shares were issued under the DRIP and SDP respectively, resulting in a total cash savings of $3.3 million. Shares issued under
DRIP and SDP have a dilutive effect to shareholders that elect to receive a cash dividend.
On April 10, 2014, CWC issued a total of 34,270,000 subscription receipts at a price of $0.84 per subscription receipt for
aggregate gross proceeds of $28.8 million. On May 15, 2014, contemporaneous with the closing of the acquisition of Ironhand,
each subscription receipt was converted to one common share of CWC. $18.2 million of the net proceeds from the April 10,
2014 subscription receipt offering were used to satisfy the cash portion of the purchase consideration for the Ironhand
acquisition with the remainder used towards extinguishing the bank debt of Ironhand under its former banking facility which
was repaid in full and cancelled on May 15, 2014.
On May 15, 2014, CWC acquired Ironhand pursuant to a plan of arrangement whereby all of the issued and outstanding
common shares of Ironhand were exchanged for common shares of CWC or cash. The aggregate purchase consideration
consisted of 80,785,158 common shares of CWC and $18.2 million in cash.
Page 16
The following table summarizes dividends declared or paid since December 31, 2013:
Record Date
Declaration Date
Payment Date
November 13, 2013
March 5, 2014
May 15, 2014
August 14, 2014
November 12, 2014
March 9, 2015
December 31, 2013
March 31, 2014
June 30, 2014
September 30, 2014
December 31, 2014
March 31, 2015
January 15, 2014
April 15, 2014
July 15, 2014
October 15, 2014
January 15, 2015
April 15, 2015
Dividend per Common Share
$0.01625
$0.01625
$0.01750
$0.01750
$0.01750
$0.00500
The declaration of dividends is determined on a quarter by quarter basis by the Board of Directors and is based on the
sustainability of its cash flows and earnings in the future.
The Company’s previous normal course issuer bid (“NCIB”) expired on March 31, 2014. From January 1, 2014 to March 31,
2014, no common shares were purchased under the NCIB. The Company renewed its NCIB effective May 22, 2014, to
purchase from time to time, as it considered advisable, up to 13,520,411 of its issued and outstanding common shares through
the facilities of the TSX Venture Exchange (“TSXV”) or other recognized marketplaces. The price that the Company will pay for
any common share under the NCIB will be the prevailing market price on the TSXV or such other recognized marketplace at
the time of such purchase. During Q3 2014, 597,500 common shares were purchased under the NCIB for total proceeds
including commissions of $0.6 million. Of these 597,500 common shares, 547,500 common shares were returned to treasury
and cancelled as at September 30, 2014. In Q4 2014, a further 493,500 common shares were repurchased under the NCIB.
These remaining 543,500 common shares were returned to treasury and cancelled in Q4 2014. The NCIB expires on May 21,
2015.
Capital Expenditures
The Board of Directors approved a 2014 capital expenditure budget of $45.6 million consisting of $31.2 million in growth
capital and $14.4 million of maintenance and infrastructure capital. The growth capital consists of:
•
•
•
two new telescopic double drilling rigs complete with top drives (Rig #9 & 10);
three new slant service rigs; and
two Class II coil tubing units.
As at December 31, 2014, the Company has spent $28.8 million of the $45.6 million 2014 capital expenditure budget and taken
delivery of:
•
•
•
one new telescopic double drilling rig (Rig #9);
one new slant service rig (Rig #504); and
two Class II coil tubing units (Unit #10 & 11).
During December 2014, the Company announced a 2015 capital budget of $14.6 million comprised of $9.1 million in growth
capital and $5.5 million of maintenance capital. As a result of reduced industry activity, the Board of Directors has reduced the
2015 capital expenditure budget by $3.8 million to $10.8 million. This revised 2015 capital expenditure budget of $10.8
million is comprised of $6.1 million in growth capital and $4.7 million in maintenance capital.
Of the 2015 growth capital, slant service Rig #505 was delivered in January 2015 while slant service Rig #506 is expected to
be delivered during Q2 2015.
Page 17
Commitments and Contractual Obligations
CWC’s contractual financial obligations as at December 31, 2014 are summarized as follows:
Payments due by period
Between 4 and
5 years
Between 1 and
3 years
Next 12
months
Greater than 5
years
Contractual obligations:
Bank Loan
Finance lease liabilities
Operating lease payments
Total contractual obligations
$
-
201
1,490
$
65,657
215
3,065
$
-
-
613
$
$
1,691
$
68,937
$
613
$
-
-
-
-
$
Total
65,657
416
5,168
$
71,241
Under the terms of the Company’s amended credit facility, the Bank Loan is due in full on June 21, 2017. The Company is
committed to monthly payments of interest and bank charges until June 21, 2017. Management believes that, despite the
lower activity levels anticipated for its services combined with the cost-saving initiatives planned for 2015, there will be
sufficient cash flows generated from operations to service the interest on the debt, finance the required maintenance capital of
the Company and maintain a dividend payment to its shareholders.
Summary and Analysis of Quarterly Data
$ thousands, except per share amounts
2014
2013
Three months ended
Dec.
31
Sept.
30
June
30
March
31
Dec.
31
Sept.
30
June
30
March
31
Revenue
EBITDAS
45,959
38,846
20,488
38,373
31,515
28,559
14,845
38,378
13,540
9,886
1,176
9,456
7,598
7,578
(269)
11,265
Net (loss) income
(15,760)
2,246
(3,182)
3,245
2,196
1,629
(3,844)
4,883
Net (loss) income per share: basic and diluted
(0.06)
0.01
(0.01)
0.02
0.01
0.01
(0.02)
0.03
Total assets
Total long-term debt
Shareholders' equity
275,353 288,011
60,313
172,705 193,151
65,666
277,679 151,661
43,547
92,202
51,324
195,851
148,999 150,522
46,225
91,537
44,009
91,344
144,604 157,262
42,634
98,969
42,279
92,440
The table above summarizes CWC’s quarterly results for the previous eight financial quarters. All of CWC’s operations are
carried out in western Canada. The second quarter is typically expected to be the weakest financial and operating quarter for
the Company due to ground conditions being impacted by spring breakup. The ability to move heavy equipment in the
Canadian crude oil and natural gas fields is dependent on weather conditions. As warm weather returns in the spring, the
winter’s frost comes out of the ground rendering many secondary roads incapable of supporting the weight of heavy
equipment until they have thoroughly dried out. The duration of this spring breakup has a direct impact on the Company’s
activity levels. In addition, many exploration and production areas in northern Canada are accessible only in winter months
when the ground is frozen enough to support equipment. As a result, late March through May is traditionally the Company’s
slowest time, and as such the revenue, operating costs, and financial results of the Company will vary on a quarterly basis.
Through the eight quarters presented, the amount of revenue and net (loss) income, adjusted for the effects of seasonality
have fluctuated primarily due to changes in the utilization of our equipment generally and the increase in the number of
drilling rigs, service rigs and coil tubing units over the period as detailed in the section titled “Operational Overview”.
Other significant impacts have been a result of:
•
•
Q4 2014 represented another record revenue quarter for CWC since the Company's inception. The Contract Drilling
segment, acquired in the second quarter of 2014 represented 44% of the Company's fourth quarter revenues;
Q4 2014 saw revenue in the Production Services segment decline on a year over year basis by 19%. Of the $5.9
million decrease in revenue, $1.9 million is a result of a decrease in the snubbing assets and business as it was sold in
Page 18
•
•
•
•
•
•
•
•
Q3 2014 with the remaining $4.0 million decline in revenue a result of reduced activity level with several of CWC’s
largest E&P customers. Q4 2014 service rig utilization declined by 7% compared to Q4 2013;
Q4 2014 net loss includes $20.9 million goodwill impairment. Goodwill arose on the purchase of Ironhand in Q2
2014. At the time of purchase, the current economic downturn had not yet emerged and all indications were that
CWC would continue to grow the Contract Drilling segment with the completion of Rig #9 and building an additional
Rig #10 in 2015. In Q1 2015, revised predictions of lower drilling activity were released by CAODC and PSAC and
analysts were predicting that 2015 would be a significantly challenging year for oilfield service companies. Although
the Company anticipates the decline in the Contract Drilling segment revenue to be less than others in the industry,
the anticipated decline was sufficient to indicate an impairment to the Goodwill;
Q3 2014 represented the first full three month period with the Contract Drilling segment which represented 39% of
the Company’s Q3 revenue;
Q3 2014 included a gain on disposal of equipment of $0.2 million in net income as a result of the sale of the snubbing
assets and business;
Q2 2014, $0.8 million in transaction costs were incurred relating to the acquisition of Ironhand;
Q3 2013, $0.7 million for impairment of a coil tubing unit not completed due to the manufacturer going into
receivership;
Q2 2013, an increase in the precipitation levels in the spring of 2013 led to a prolonged spring breakup compared to
recent years resulting in a larger decline in seasonal activity levels than in previous years;
Q2 2013, $0.9 million of finance costs were incurred to terminate debt facilities prior to their expiry; and
The increase to total assets and shareholders’ equity reflects the acquisition of Ironhand and related equity financing.
Ironhand was acquired for a total purchase consideration of $128.7 million.
Critical Accounting Estimates and Judgments
This MD&A of the Company’s financial condition and results of operations is based on the financial statements which are
prepared in accordance with IFRS. The preparation of the financial statements requires that certain estimates and judgments
be made with respect to the reported amounts of revenue and expenses and the carrying amounts of assets and liabilities.
These estimates are based on historical experience and management’s judgment. Anticipating future events involves
uncertainty and consequently the estimates used by management in the preparation of the financial statements may change as
future events unfold, additional experience is acquired or the Company’s operating environment changes. In many cases the
use of judgment is required to make estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in
the period in which the estimates are revised and in any future periods affected. Further details of the nature of these
estimates and assumptions may be found in the relevant notes to the financial statements.
Management considers the following to be the most significant of the judgments, apart from those involved in making
estimates, made in preparation of the financial statements:
Determination of cash generating units
For the purpose of assessing impairment of tangible and intangible assets, assets are grouped at the lowest level for which
there are separately identifiable cash flows (cash-generating units or “CGU’s”). The grouping of assets into CGU’s requires
management exercise significant judgment.
Management considers the following to be the most significant of the estimates made in preparation of the financial
statements:
Impairment of tangible and intangible assets
Tangible and intangible assets are reviewed annually with respect to their useful lives, or more frequently, if events or changes
in circumstances indicate that the assets might be impaired. If any such indication exists, the recoverable amount of the asset
is estimated in order to determine the extent of the impairment loss, if any. Recoverable amount is the higher of fair value less
costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value
using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for
which the estimates of future cash flows have not been adjusted. As a result, any impairment losses are a result of
management’s best estimates of expected revenue, expenses and cash flows at a specific point in time. These estimates are
subject to measurement uncertainty as they are dependent on factors outside of management’s control. In addition, by their
nature impairment tests involve a significant degree of judgment as expectations concerning future cash flows and the
selection of appropriate market inputs are subject to considerable risks and uncertainties.
Page 19
Depreciation and amortization
Depreciation of property and equipment and intangible assets is carried out on the basis of the estimated useful lives of the
related assets. Assessing the reasonableness of the estimated useful lives of property and equipment and intangibles requires
judgment and is based on currently available information, including historical experience by the Company. Additionally, the
Company may consult with external equipment builders or manufacturers to assess whether the methodologies and rates
utilized are consistent with their expectations. Changes in circumstances, such as technological advances, changes to the
Company’s business strategy, changes in the Company’s capital strategy or changes in regulations may result in the actual
useful lives differing from the Company’s estimates. A change in the remaining useful life of a group of assets, or their
expected residual value, will affect the depreciation rate used to amortize the group of assets and thus affect depreciation
expense as reported in the Company’s results of operations. These changes are reported prospectively when they occur.
Stock based compensation
Compensation expense associated with stock options granted is based on various assumptions, using the Black-Scholes option-
pricing model, to produce an estimate of compensation. This estimate may vary due to changes in the variables used in the
model including interest rates, expected life, expected volatility, expected dividends, expected forfeitures and share prices.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which were
fully transferable with no vesting restrictions. This option valuation model requires the input of highly subjective assumptions
including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different
from those of traded options and because changes in the subjective input assumptions can materially affect the calculated fair
value, such value is subject to measurement uncertainty.
Stock-based compensation expense is also provided for RSUs. The number of stock options and RSUs expected to vest is
expensed on a graded vested basis over the vesting period of the stock options and RSUs. The number of stock options and
RSUs that actually vest could differ from those estimates and any changes are recognized prospectively when they occur as an
increase or decrease in compensation expense.
Allowance for doubtful accounts receivable
The allowance for doubtful accounts are reviewed by management on a regular basis. Accounts receivable are considered for
impairment on a case-by-case basis when they are past due or when objective evidence is received that a customer will
default. The Company takes into consideration the customer’s payment history, their credit worthiness and the current
economic environment in which the customer operates to assess impairment. The Company’s historical bad debt expenses
have not been significant and are usually limited to specific customer circumstances. However, given the cyclical nature of the
oil and natural gas industry along with the current economic operating environment, a customer’s ability to fulfill its payment
obligations can change suddenly and without notice. The assessment of the credit worthiness of a customer requires
management to use significant judgment. The estimation of the allowance for doubtful accounts is subject to measurement
uncertainty.
Income taxes
The Company uses the liability method of accounting for income taxes. Under this method, deferred income tax assets and
liabilities are recorded based on temporary differences between the carrying amount of an asset or liability and its tax base.
Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally
recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available
against which those deductible temporary differences can be utilized. The carrying amount of deferred tax assets is reviewed
at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be
available to allow all or part of the asset to be recovered. The Company’s operations are complex and computation of the
provision for income taxes involves tax interpretations, regulations and legislation that are continually changing. Any changes
in the estimated amounts are recognized prospectively in the statement of income and comprehensive income.
New Accounting Pronouncements
Effective January 1, 2014, the Company adopted the following accounting standards or revisions thereto:
IAS 36 - Impairment of Assets - Amendments of IAS 36 require entities to disclose the recoverable amount of an impaired Cash
Generating Unit ("CGU"). The Company assessed the effect of IAS 36 on its financial results and financial position and will
adopt these disclosures in the annual financial statements.
IFRIC 21 - Levies - Interpretation of IAS 37, Provisions, Contingent Liabilities and Assets - sets out criteria for the recognition
of a liability, one of which is the requirement for the entity to have a present obligation as the result of a past event. The
interpretation clarifies that the obligation that gives rise to the liability to pay a levy is the activity described in the relevant
Page 20
legislation that triggers the payment of the levy. The Company assessed the effect of IFRIC 21 on its financial results and
statement of financial position and has determined there is no material impact.
On adoption, these standards had no impact on the recognition or measurement of the balances recorded in the Company’s
financial statements.
A number of new standards, amendments to standards and interpretations have been issued by the IASB and are not yet
effective for the year ended December 31, 2014. The new standards, amendments to standards and interpretations have not
been applied in preparing these condensed interim financial statements. None of these are expected to have a significant
effect on the consolidated financial statements, except for:
IFRS 15, Revenue from Contracts with Customers, which provides guidance on revenue recognition and relevant disclosures.
The standard provides a single, principles based five-step model to be applied to all contracts with customers. IFRS 15 was
issued in May 2014 and applies to annual reporting periods beginning on or after January 1, 2017, with early adoption
permitted under IFRS. The Company has not yet assessed the impact this standard will have on the financial statements.
Related Party Transactions
The Company is controlled by Brookfield Capital Partners Ltd. ("Brookfield"). Brookfield indirectly beneficially owns or
exercises control or direction over approximately 67% of the issued and outstanding common shares. On May 15, 2014,
pursuant to a plan of arrangement under the Business Corporations Act (Alberta), the Company acquired all of the issued and
outstanding shares of Ironhand to enter the contract drilling business. Ironhand was indirectly controlled by Brookfield and
two of the Company's directors who were also directors of Ironhand. All transactions with related parties were measured and
recorded at the exchange amount which is equivalent to fair value. Fair value is defined as the transaction amount with
unrelated parties under similar terms and conditions.
The Company is related to Brookfield by virtue of control, and therefore also may be related to certain of Brookfield’s affiliates.
During 2014, the Company had revenue totaling $0.3 million in the normal course of business with companies under common
control. The terms and conditions of these transactions were no more favourable than those available, or which might
reasonably be expected to be available, in similar transactions with non-related companies on an arm's length basis.
During 2014, the Company used the legal services of a firm in which the spouse of one of its directors is a partner in relation to
the federal temporary foreign worker program. Amounts were billed based on normal market rates for such services.
CEO and CFO Certifications
The CEO and CFO of TSX Venture Exchange listed companies, such as CWC, are not required to certify they have designed
internal control over financial reporting, or caused it to be designed under their supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with IFRS. Instead, an optional form of certification has been made available to TSX Venture Exchange listed companies and
has been used by CWC’s certifying officers for the December 31, 2014 annual filings. The certification reflects what the
Company considers to be a more appropriate level of CEO and CFO certification given the size and nature of the Company’s
operations. This certification requires that the certifying officer’s state:
•
•
•
They have reviewed the annual financial report and MD&A;
That, based on their knowledge, they have determined there is no untrue statement of a material fact, or any
omission of material fact required to be stated which would make any statement not misleading in light of the
circumstances under which it was made within the annual filings; and
That based upon their knowledge, the annual filings, together with the other financial information included in the
annual filings, fairly present in all material respects the financial condition, financial performance and cash flows
of the Company as of the date and for the periods presented in the annual filings.
Page 21
Risks and Uncertainties
Certain activities of the Company are affected by factors that are beyond its control or influence. Additional risks and
uncertainties that management may be unaware of, or that they determine to be immaterial may also become important
factors which affect the Company. Along with the risks discussed in this MD&A, other business risks faced by the Company
may be found under “Risk Factors” in the Company’s most recent Annual Information Form which is available under the
Company’s profile at www.sedar.com or by contacting the Company.
CWC’s various businesses are generally tied in large part to the oil and gas exploration and production industry in Western
Canada. CWC’s businesses are sensitive to and will be affected by changing industry conditions in the oil and gas industry
including changes in the level of demand, changes in pricing levels, changes in legislation or in regulation relating to
exploration, development, production, refining, transportation, or marketing in the oil and gas industry. The following is a
summary of certain risk factors relevant to CWC’s business. All of these risk factors could negatively impact CWC’s revenue,
margins and cash flow.
Operational Risks
Demand and prices for CWC’s products and services depend upon the level of activity in the Canadian oil and gas exploration
and production industry which in turn depends on the level of oil and gas prices, expectations about future oil and gas prices,
the cost of exploring for, producing and delivering oil and gas, the discovery rate of new oil and gas reserves, available pipeline
and other oil and gas transportation capacity, worldwide weather conditions, political, military, regulatory and economic
conditions and the ability of oil and gas companies to raise capital. The level of activity in the Canadian oil and gas exploration
and production industry is volatile. No assurances can be given that current levels of oil and gas exploration and production
activities will continue or that demand for the Company’s services will continue to reflect the level of activity in the industry
generally. Industry conditions will continue to be influenced by numerous factors over which the Company will have no
control. Prices for oil and gas are expected to continue to be volatile and to affect the demand for and pricing of the Company’s
products and services. A material decline in oil or gas prices or Canadian oil and gas industry activity could have a material
adverse affect on the Company’s business, results or operations and prospects.
The Company’s operations are subject to hazards inherent in the oilfield service industry, such as explosions, fires and spills
that can cause personal injury or loss of life, damage to or destruction of property, equipment and the environment and
suspension of operations. In addition, claims for loss of oil and gas production, damage to formations, damage to facilities and
business interruptions can occur. While the Company maintains insurance coverage that it believes to be adequate and
customary in the industry, there can be no assurances that insurance proceeds will be available or sufficient or that CWC will
be able to maintain adequate insurance in the future at rates considered reasonable. The single occurrence of a significant
uninsured claim or a claim in excess of the insurance coverage limits maintained by the Company could have a material
adverse effect on the Company’s business, results of operation and prospects.
Oilfield Service Industry Risks
There are many risks inherent in the oilfield services industry, which even a combination of experience, knowledge and careful
evaluation may not be able to overcome. CWC’s success will depend on the ability of CWC’s customers to select and acquire
suitable producing properties or undeveloped exploration prospects. The marketability of any oil and natural gas acquired or
discovered by CWC’s customers will be affected by numerous factors beyond the control of such customers. These factors
include market fluctuations, the price of crude oil, the price of natural gas, the supply and demand for oil and natural gas, the
proximity and capacity of oil and natural gas pipelines and processing equipment, and government regulations, including
regulations relating to prices, taxes, royalties, land tenure, allowable production, the import and export of oil and natural gas,
and environmental protection. The effect of these factors cannot be accurately predicted.
Hazards such as unusual or unexpected geological formations, pressures, blow-outs, fires or other conditions may be
encountered in servicing operating wells. CWC will have the benefit of insurance maintained by it, however, CWC may become
liable for damages arising from pollution, blowouts or other hazards against which it cannot insure or against which it may
elect not to insure because of high premium costs or other reasons.
Seasonal Nature of CWC’s Business
The Company’s operations are carried on generally in Western Canada. The ability to move heavy equipment in the Western
Canadian oil and natural gas fields is dependent on weather conditions. As warm weather returns in the spring, the winter’s
frost comes out of the ground rendering many secondary roads incapable of supporting the weight of heavy equipment until
they have thoroughly dried out. The duration of this “spring breakup” has a direct impact on the Company’s activity levels. In
addition, many exploration and production areas in northern Canada are accessible only in winter months when the ground is
frozen enough to support equipment. The timing of freeze-up and spring breakup affects the ability to move equipment in and
Page 22
out of these areas. As a result, mid March through May is traditionally the Company’s slowest time, and as such, the operating
results of the Company will vary on a quarterly basis.
Equipment and Technology Risks
Complex drilling programs for the exploration and development of remaining conventional and unconventional oil and natural
gas reserves in North America places high demands on drilling rigs, service rigs, coil tubing units and related equipment.
CWC’s ability to deliver equipment and services that are more efficient than equipment and services offered by its competitors
is critical to continued success. There is no assurance that competitors will not achieve technological improvements that are
more advantageous, timely or cost effective than improvements developed by CWC.
The ability of CWC to meet customer demands in respect of performance and cost will depend upon continuous improvements
in operating equipment and there can be no assurance that CWC will be successful in its efforts in this regard or that it will
have the resources available to meet this continuing demand. Failure by CWC to do so could have a material adverse effect on
CWC’s business, financial condition, results of operations and cash flows. No assurances can be given that competitors will not
achieve technological advantages over CWC.
In the future, the Company may seek patents or other similar protections in respect of particular tools, equipment and
technology; however, the Company may not be successful in such efforts. Competitors may also develop similar tools,
equipment and technology to those of the Company thereby adversely affecting the Company’s competitive advantage in one
or more of its businesses. Additionally, there can be no assurance that certain tools, equipment or technology developed by
the Company may not be the subject of future patent infringement claims or other similar matters which could result in
litigation, the requirement to pay licensing fees or other results that could have a material adverse effect on the business,
results of operations and financial condition of the Company.
Price Competition and Cyclical Nature of the Oilfield Services Business
The contract drilling, service rig and coil tubing businesses are highly competitive with numerous industry participants.
Management believes pricing and rig availability are the primary factors considered by CWC’s potential customers in
determining which drilling rig, service rig or coil tubing contractor to select. Management believes other factors are also
important. Among those factors are:
•
•
•
•
•
•
•
the capabilities and condition of drilling rigs, service rigs or coil tubing units;
the quality of service and experience of crews;
the safety record of the contractor and the particular drilling rig, service rig, or coil tubing unit ;
the offering of ancillary services;
the ability to provide equipment adaptable to, and personnel familiar with, new technologies;
the mobility and efficiency of the drilling rigs, service rigs, or coil tubing units; and
marketing relationships.
The drilling and service rig industry historically has been cyclical and has experienced periods of low demand, excess rig
supply, and low day or hourly rates, followed by periods of high demand, short rig supply and increasing day or hourly rates.
Periods of excess rig supply intensify the competition in the industry and often result in rigs being idle. There are numerous
drilling rig, service rig and coil tubing unit suppliers in each of the markets in which CWC operates. In all of those markets, an
oversupply of equipment can cause greater price competition. Drilling rig and service rig companies compete primarily on a
regional basis, and the intensity of competition may vary significantly from region to region at any particular time.
CWC provides oil and natural gas services primarily to the field operation locations of oil and natural gas exploration and
production companies located in western Canada. The oil and natural gas services business in which CWC operates is highly
competitive. To be successful, CWC must provide services that meet the specific needs of its clients at competitive prices. The
principal competitive factors in the markets in which CWC operates are service quality and availability, reliability and
performance of equipment used and of qualified people to perform its services, technical knowledge and experience and
reputation for safety and price. CWC will compete with several regional competitors that are both smaller and larger than it is.
These competitors offer similar services in all geographic regions in which CWC operates. As a result of competition, CWC may
be unable to continue to provide its present services or to acquire additional business opportunities, which could have a
material adverse affect on CWC’s business, financial condition, results of operations and cash flows.
Drilling Rig, Service Rig and Coil Tubing Units Construction Risks
When CWC contracts for the construction of a drilling rig, service rig or coil tubing unit, the cost of construction of the rig or
coil tubing units and the timeline for completing the construction are estimated at that time. Actual costs of construction may,
however, vary significantly from those estimated as a result of numerous factors, including, without limitation, changes in
input costs such as the price of steel; variations in labour rates; and, to the extent that component parts must be sourced from
other countries, fluctuations in exchange rates. In addition, several factors could cause delays in the construction of a drilling
rig, service rig or coil tubing unit, including, and without limitation, shortages in skilled labour and delays or shortages in the
Page 23
supply of component parts. Construction delays may lead to postponements of the anticipated date for deployment of the
newly constructed rig or coil tubing unit into operation and any such postponement could have a negative effect on cash flows
generated from operations, of which the effect may be material.
Equipment and Parts Availability
The Company’s ability to expand its operations and provide reliable service is dependent upon timely delivery of new
equipment and replacement parts from fabricators and suppliers. A lack of skilled labour to build equipment combined with
new competitors entering the oilfield service sector has resulted in increased order times on new equipment and increased
uncertainty surrounding final delivery dates. Significant delays in the arrival of new equipment from expected dates may
impact future growth and the financial performance of the Company. CWC attempts to mitigate this risk by maintaining strong
relations with key fabricators and suppliers.
Capital Overbuild in the Drilling Rig and Service Rig Industry
Because of the long life nature of drilling rig and service rig equipment and the lag between the moment a decision to build a
rig is made and the moment the rig is placed into service, the number of rigs in the industry does not always correlate to the
level of demand for those rigs. Periods of high demand often spur increased capital expenditures on rigs, and those capital
expenditures may exceed actual demand. This capital overbuild could cause CWC’s competitors to lower their rates and could
lead to a decrease in rates in the oilfield services industry generally, which would have a material adverse affect on the
revenue, cash flows and earnings of CWC.
Dependence on Suppliers
The ability of the Company to compete and grow will be dependent on the Company having access, at a reasonable cost and in
a timely manner, to equipment, parts, components and consumables. Failure of suppliers to deliver such equipment, parts,
components and consumables at a reasonable cost and in a timely manner would be detrimental to the Company’s ability to
maintain existing customers and expand its customer list. No assurances can be given that the Company will be successful in
maintaining its required supply of equipment, parts, components and consumables.
The Company’s ability to provide services to its customers is also dependent upon the availability at reasonable prices of raw
materials which the Company purchases from various suppliers, most of whom are located in Canada or the United States.
Alternate suppliers exist for all raw materials. In periods of high industry activity periodic industry shortages of certain
materials have been experienced and costs may be affected. In contrast, periods of low industry activity levels may cause
financial distress on a supplier, thus limiting their ability to continue to operate and provide the Company with necessary
services and supplies.
Management maintains relationships with a number of suppliers in an attempt to mitigate this risk. However, if the current
suppliers are unable to provide the necessary raw materials, or otherwise fail to deliver products in the quantities required,
any resulting delays in the provision of services to the Company’s customers could have a material adverse effect on the
Company’s results of operations and the Company’s financial condition.
Dependence on Key Personnel
CWC’s future performance and development will depend to a significant extent on the efforts and abilities of its executive
officers and key management personnel, and on the ability to attract and retain qualified field staff. The loss of the services of
one or more of its management team could harm the Company. Also CWC’s success largely depends on the Company’s
continuing ability to attract, develop and retain skilled employees in all areas of its business. The ability of the Company to
expand its services is dependent upon its ability to attract additional qualified employees. The ability to secure the services of
additional personnel is constrained in times of strong industry activity.
Risks of Interruption and Casualty Losses
CWC’s operations are, or will be, subject to many hazards inherent in the well workover and completion industry, including
blowouts, cratering, explosions, fires, loss of well control, loss of hole, damaged or lost drilling equipment and damage or loss
from inclement weather or natural disasters and reservoir damage. Any of these hazards could result in personal injury or
death, damage to or destruction of equipment and facilities, suspension of operations, environmental damage, damage to the
property of others and damage to producing or potentially productive oil and natural gas formations. Generally, drilling rig,
service rig and coil tubing contracts provide for the division of responsibilities between a drilling rig, service rig, or coil tubing
unit provider and its customer, and CWC will seek to obtain indemnification from its customers by contract for certain of these
risks. CWC will also seek protection through insurance. However, CWC cannot ensure that such insurance or indemnification
agreements will adequately protect it against liability from all of the consequences of the hazards described above. The
occurrence of an event not fully insured or indemnified against, or the failure of a customer or insurer to meet its
indemnification or insurance obligations, could result in substantial losses. In addition, insurance may not be available to
cover any or all of these risks, or, even if available, may not be adequate. Insurance premiums or other costs may rise
significantly in the future, so as to make such insurance prohibitively expensive or uneconomic.
Page 24
Merger and Acquisition Activity
Merger and acquisition activity in the oil and gas exploration and production sector may impact demand for CWC’s services as
customers focus on reorganizing their business prior to committing funds to exploration and development projects. Further,
in any merger or acquisition transaction the resulting or acquired company may have preferred supplier relationships with
oilfield service providers other than CWC.
Future Capital Requirements and Future Sales of Common Shares by CWC
CWC may require additional financing in the future to implement its strategies and business objectives. It is possible that such
financing will not be available, or if available, will not be available on favorable terms. CWC may issue additional common
shares in the future, which may dilute a shareholder’s holdings in CWC or negatively affect the market price of our common
shares. CWC’s articles permit the issuance of an unlimited number of common shares. The directors of CWC have the
discretion to determine the price and the terms of issue of further issuances of common shares, subject to applicable law. Also,
additional common shares will be issued by CWC on the exercise of stock options granted pursuant to CWC’s stock option plan,
or pursuant to its restricted share unit plan.
Capital and Financial Markets
As future capital expenditures and potential acquisitions will need to be financed out of cash generated from operations,
through debt or, if available, equity offerings, the Company’s ability to access new capital is dependent on, among other
factors, the overall state of capital markets generally, and the appetite for investments in the energy industry and the
Company’s securities specifically. All of these factors could have a negative effect on CWC’s ability to obtain new capital on
acceptable terms, or at all and this could have a material adverse effect on our operations and share price.
Government Regulation
CWC operations are subject to a variety of federal, provincial and local laws, regulations and guidelines, including laws and
regulations related to health and safety, the conduct of operations, the manufacture, management, transportation and disposal
of certain materials used in the Company’s operations. Changes in any such laws, regulations or guidelines could have a
material adverse effect on the CWC operations.
In addition, the oil and gas industry in general is subject to extensive government policies and regulations, which result in
additional cost and risk for industry participants or parties, such as CWC, that service the industry. Royalty rates, other laws
or government incentive programs relating to the oil and gas industry generally may in the future be changed or interpreted in
a manner that adversely affects the Company and our shareholders.
Environmental Protection
CWC, is subject to various environmental laws and regulations enacted in most jurisdictions in which the Company operates,
which primarily govern the manufacture, processing, importation, transportation, handling and disposal of certain materials
used in the Company’s operations. CWC believes that all CWC’s business lines are currently in compliance with such laws and
regulations. CWC’s customers are subject to similar laws and regulations, as well as limits on emissions into the air and
discharges into surface and sub-surface waters. While regulatory developments that may follow in subsequent years could
have the effect of reducing industry activity, CWC cannot predict the nature of the restrictions that may be imposed. CWC may
be required to increase operating expenses or capital expenditures in order to comply with any new restrictions or
regulations.
Historically, environmental protection requirements have not had a significant financial operational effect on capital
expenditures, earnings or competitive position of the Company. Environmental protection requirements are not presently
anticipated to have a significant effect on such matters in the future.
The services provided by CWC, in some cases, involve flammable products being pumped under high pressure. To address
these risks, CWC has developed and implemented safety and training programs. In addition, comprehensive insurance and
risk management program has been established to protect CWC’s assets and operations. CWC also complies with current
environmental requirements and maintains an ongoing participation in various industry-related committees and programs.
The Company has established procedures to address compliance with current environmental laws and regulations and
monitors its practices concerning the handling of environmentally hazardous materials. However, there can be no assurance
that the Company’s procedures will prevent environmental damage occurring from spills of materials handled by the Company
or that such damage has not already occurred. On occasion, substantial liabilities to third parties may be incurred. The
Company may have the benefit of insurance maintained by it or the operator; however the Company may become liable for
damages against which it cannot adequately insure or against which it may elect not to insure because of high costs or other
reasons.
Page 25
Climate Change Legislation
In recent years, a number of initiatives relating to climate change have been proposed through domestic legislation and
international agreements (such as the Kyoto Protocol and the United Nations Framework Convention on Climate Change).
Many of these initiatives require nations to reduce their emissions of carbon dioxide and other greenhouse gases. Reductions
in greenhouse gases from oil and gas producers may be required which could result in, amount other things, increased
operating and capital expenditures for those producers which may make certain production of crude oil or natural gas by
those producers uneconomic, resulting in reductions in such production and resulting decrease in the demand for the
Company’s services. The Company is unable to predict the impact, if any, of any such climate change initiatives, both current
and future, on the Company.
Third Party Credit Risk
CWC may be exposed to third party credit risk through its contractual arrangements with other parties. In the event such
entities fail to meet their contractual obligations to the Company, such failures could have a material adverse effect on the
Company.
Failure to Realize Anticipated Benefits of Acquisitions
The Company makes acquisitions of businesses and assets in the ordinary course of business. Achieving the benefits of
acquisitions depends in part on successfully consolidating functions, retaining key employees and customer relationships and
integrating operations and procedures in a timely and efficient manner. Such integration may require substantial management
effort, time and resources, may divert management’s focus from other strategic opportunities and operational matters and
ultimately the Company may fail to realize anticipated benefits of acquisitions.
CWC May Make Dispositions of Businesses and Assets in the Ordinary Course of Business
Management continually assesses the value and contribution of services provided and assets required to provide such
services. In this regard, non-core assets are periodically disposed of, so that CWC can focus its efforts and resources more
efficiently. Depending on the state of the market for such non-core assets, certain non-core assets of CWC, if disposed of, could
be expected to realize less than their carrying value on the financial statements of CWC.
Tax Matters
The taxation of companies is complex. In the ordinary course of business, CWC is subject to ongoing audits by tax authorities.
While CWC believes that its tax filing positions are appropriate and supportable, it is possible that tax matters, including the
calculation and determination of revenue, expenditures, deductions, credits and other tax attributes, taxable income and taxes
payable, may be reviewed and challenged by the tax authorities. In addition, the tax filing positions of businesses acquired by
CWC may be reviewed and challenged by the tax authorities. If such challenge were to succeed, it could have a material
adverse affect on CWC’s tax position. Further, the interpretation of, and changes in, tax laws, whether by legislative or judicial
action or decision, and the administrative policies and assessing practices of taxation authorities, could materially adversely
affect CWC’s tax position. As a consequence, CWC is unable to predict with certainty the effect of the foregoing on CWC’s
effective tax rate and earnings.
CWC regularly reviews the adequacy of its tax provisions and believes that it has adequately provided for those matters.
Should the ultimate outcomes materially differ from the provisions, CWC’s effective tax rate and earnings may be affected
positively or negatively in the period in which the matters are resolved. CWC intends to mitigate this risk through ensuring
tax staff is well trained and supervised and that tax filing positions are carefully scrutinized by management and external
consultants, as appropriate.
There can be no assurance that income tax laws or the interpretation thereof in any of the jurisdictions in which CWC operates
will not be changed or interpreted or administered in a manner which adversely affects CWC, its subsidiaries and its
shareholders. In addition, there is no assurance that the Canada Revenue Agency, or a provincial or foreign tax agency
(collectively the “Tax Agencies”) will agree with the manner in which CWC or its subsidiaries calculate their income or taxable
income for tax purposes or that any of the Tax Agencies will not change their administrative practices to the detriment of CWC
or its shareholders (or both).
Vulnerability to Market Changes
Fixed costs, including costs associated with leases, labour costs and depreciation will account for a significant portion of the
Company’s costs and expenses. As a result, reduced utilization of equipment and other fixed assets resulting from reduced
demand, equipment failure, weather or other factors could significantly affect financial results.
Alternatives to and Changing Demand for Petroleum Products
Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural
gas, and technological advances in fuel economy and energy generation devices could reduce the demand for crude oil and
other liquid hydrocarbons. The Company cannot predict the impact of changing demand for oil and natural gas products, and
Page 26
any major changes may have a material adverse effect on the Company’s business, financial condition, results of operations
and cash flows.
Interest Rate Risk
The Company is exposed to interest rate price risk as its bank loan has floating interest rate terms. However, the floating
interest rate terms do give rise to interest rate cash flow risk as interest payments are recalculated as the market rates change.
Management currently does not see this risk as significant due to Canada’s history of reasonably stable interest rates and their
expectations of future interest rates.
Conflicts of Interest
Certain of the directors and officers of the Company are also directors and officers of other oil and natural gas exploration
and/or production entities and oil and natural gas services companies, and conflicts of interest may arise between their duties
as officers and directors of the Company and as officers and directors of such other companies. Such conflicts must be
disclosed in accordance with, and are subject to such other procedures and remedies as apply under, the Canada Business
Corporations Act.
Legal Proceedings
The Company is involved in litigation from time to time in the ordinary course of business. No assurance can be given as to the
final outcome of any legal proceedings or that the ultimate resolution of any legal proceedings will not have a material adverse
effect on the Company.
Forward-Looking Information may Prove Inaccurate
Investors are cautioned not to place undue reliance on forward-looking information. By its nature, forward-looking
information involves numerous assumptions, known and unknown risks and uncertainties, of both a general and specific
nature, that could cause actual results to differ materially from those suggested by the forward-looking information or
contribute to the possibility that predictions, forecasts or projections will prove to be materially inaccurate.
Forward-Looking Information
This MD&A contains certain forward-looking information and statements within the meaning of applicable Canadian securities legislation. Certain statements
contained in this MD&A, including everything contained in the section titled “Outlook” and including statements which may contain such words as
“anticipate”, “could”, “continue”, “should”, “seek”, “may”, “intend”, “likely”, “plan”, “estimate”, “believe”, “expect”, “will”, “objective”, “ongoing”, “project” and
similar expressions are intended to identify forward-looking information or statements. In particular, this MD&A contains forward-looking statements
including management’s assessment of future plans and operations, planned level of capital expenditures, expectations as to changes in activity levels,
expectations on the sustainability of future cash flow and earnings and the ability to pay dividends, expectations with respect to oil and natural gas prices and
price levels necessary for increases in oil and natural gas activity levels, activity levels in various areas, continuing focus on cost saving measures, expectations
regarding the level and type of drilling and production and related drilling and well services activity in the WCSB, expectations regarding entering into long
term drilling contracts, and expectations regarding the business, operations and revenue of the Company in addition to general economic conditions.
Although the Company believes that the expectations and assumptions on which such forward-looking information and statements are based are reasonable,
undue reliance should not be placed on the forward-looking information and statements because the Company can give no assurances that they will prove to
be correct. Since forward-looking information and statements address future events and conditions, by their very nature they involve inherent risks and
uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited
to, the risks associated with the drilling and oilfield services sector (ie. demand, pricing and terms for oilfield drilling and services; current and expected oil
and gas prices; exploration and development costs and delays; reserves discovery and decline rates; pipeline and transportation capacity; weather, health,
safety and environmental risks), integration of acquisitions, including the Ironhand Acquisition, competition, and uncertainties resulting from potential delays
or changes in plans with respect to acquisitions, development projects or capital expenditures and changes in legislation, including but not limited to tax laws,
royalties and environmental regulations, stock market volatility and the inability to access sufficient capital from external and internal sources and the
inability to pay dividends. Accordingly, readers should not place undue reliance on the forward-looking statements. Readers are cautioned that the foregoing
list of factors is not exhaustive. Additional information on these and other factors that could affect the Company’s financial results are included in reports on
file with applicable securities regulatory authorities and may be accessed through SEDAR at www.sedar.com. The forward-looking information and
statements contained in this MD&A are made as of the date hereof and the Company undertakes no obligation to update publicly or revise any forward-
looking information or statements, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws. Any
forward-looking statements made previously may be inaccurate now.
Page 27
Reconciliation of Non-IFRS Measures
$ thousands except share and per share amounts
NON-IFRS MEASURES
Three months ended
December 31,
Year ended
December 31,
2014
2013
2014
2013
(15,760)
2,196
(13,451)
4,863
EBITDAS:
Net (loss) income
Add:
Depreciation
Finance costs
Transaction costs
Deferred income tax expense
Goodwill Impairment
Stock based compensation
EBITDAS
Gain on sale of equipment
EBITDAS per share – basic(1)
EBITDAS per share – diluted(1)
EBITDAS margin (EBITDAS/Revenue)
(1)
(1)
Weighted average number shares outstanding - basic
Weighted average number shares outstanding - diluted
Funds from operations:
Cash flows from operating activities
Funds from operations
Add (deduct): Change in non-cash working capital
(2)
5,749
632
53
1,780
20,880
210
(4)
13,540
$0.05
$0.05
29%
269,799,952
269,799,952
9,425
4,062
13,487
Gross margin:
Revenue
Gross margin (3)
Gross margin percentage
Less: Direct operating expenses
(3)
$ thousands
Working capital (excluding debt):
Current assets
Less: Current liabilities
Working capital (excluding debt)
Add: Current portion of long term debt
Working capital (excluding debt) ratio
(4)
(4)
Net debt:
Long term debt
Net debt (5)
Less: Current assets
Add: Current liabilities
45,959
26,856
19,103
42%
December 31, 2014
38,405
(18,003)
201
20,603
2.2:1
65,465
(38,405)
18,003
28,860
3,849
481
-
830
-
288
(46)
7,598
$0.05
$0.05
24%
155,158,173
159,840,021
19,543
2,186
841
2,960
20,880
1,345
(246)
34,058
$0.15
$0.15
24%
227,675,260
227,675,260
15,418
3,262
-
1,885
-
914
(171)
26,171
$0.17
$0.16
23%
155,067,901
159,634,517
5,904
1,694
7,598
31,515
19,841
11,674
37%
34,998
(1,781)
33,217
25,200
971
26,171
143,666
91,751
51,915
36%
December 31, 2013
113,297
72,449
40,848
36%
25,353
(11,031)
185
14,507
2.3:1
43,824
(25,353)
11,031
29,502
(1)
(2)
EBITDAS (Earnings before interest and finance costs, income tax expense, depreciation, amortization, (gain) loss on disposal of asset, transaction costs,
goodwill impairment and stock based compensation) is not a recognized measure under IFRS. Management believes that in addition to net earnings,
EBITDAS is a useful supplemental measure as it provides an indication of the Company’s ability to generate cash flow in order to fund working capital,
service debt, pay current income taxes, pay dividends, repurchase common shares under the Normal Course Issuer Bid, and fund capital programs.
Investors should be cautioned, however, that EBITDAS should not be construed as an alternative to net (loss) income and comprehensive (loss) income
determined in accordance with IFRS as an indicator of the Company’s performance. CWC’s method of calculating EBITDAS may differ from other entities
and accordingly, EBITDAS may not be comparable to measures used by other entities. EBITDAS margin is calculated as EBITDAS divided by revenue and
provides a measure of the percentage of EBITDAS per dollar of revenue. EBITDAS per share is calculated by dividing EBITDAS by the weighted average
number of shares outstanding as used for calculation of earnings per share.
Funds from operations is not a recognized measure under IFRS. Management believes that in addition to cash flow from operations, funds from
operations is a useful supplemental measure as it provides an indication of the cash flow generated by the Company’s principal business activities prior
to consideration of changes in working capital. Investors should be cautioned, however, that funds from operations should not be construed as an
alternative to cash flow from operations determined in accordance with IFRS as an indicator of the Company’s performance. CWC’s method of calculating
funds from operations may differ from other entities and accordingly, funds from operations may not be comparable to measures used by other entities.
Funds from operations is equal to cash flow from operations before changes in non-cash working capital items related to operations.
Page 28
(3)
(4)
(5)
Gross margin is calculated from the statement of comprehensive income as revenue less direct operating costs and is used to assist management and
investors in assessing the Company’s financial results from operations excluding fixed overhead costs. Gross margin percentage is calculated as gross
margin divided by revenue. The Company believes the relationship between revenue and costs expressed by the gross margin percentage is a useful
measure when compared over different financial periods as it demonstrates the trending relationship between revenue, costs and margins. Gross
margin and gross margin percentage are non-IFRS measures and do not have any standardized meaning prescribed by IFRS and may not be comparable
to similar measures provided by other companies.
Working capital (excluding debt) is calculated based on current assets less current liabilities excluding the current portion of long-term debt. Working
capital (excluding debt) is used to assist management and investors in assessing the Company’s liquidity. Working capital (excluding debt) does not have
any meaning prescribed under IFRS and may not be comparable to similar measures provided by other companies. Working capital (excluding debt)
ratio is calculated as current assets divided by the difference of current liabilities less the current portion of long term debt.
Net debt is not a recognized measure under IFRS and does not have any standardized meaning prescribed by IFRS and may not be comparable to similar
measures provided by other companies. Management believes net debt is a useful indicator of a company’s debt position.
Page 29
CWC ENERGY SERVICES CORP.
Financial Statements
For the years ended December 31, 2014 and 2013
Page 30 Management’s report
To the Shareholders of CWC Energy Services Corp.:
The accompanying financial statements of CWC Energy Services Corp. are the responsibility of management
and have been approved by the Board of Directors. The financial statements have been prepared in
accordance with International Financial Reporting Standards as issued by the International Accounting
Standards Board and, where appropriate, reflect management’s best estimates and judgments. Management
is responsible for the accuracy, integrity and objectivity of the financial statements within reasonable limits of
materiality.
The Audit Committee is appointed by the Board of Directors, with all of its members being independent
directors. The Audit Committee meets with management, as well as with the external auditors, to satisfy
itself that management is properly discharging its financial reporting responsibilities and to review the
financial statements and the auditor’s report. The Audit Committee reports its findings to the Board of
Directors for consideration in approving the financial statements for presentation to the shareholders. The
external auditors have direct access to the Audit Committee of the Board of Directors.
The financial statements have been audited independently by KPMG LLP on behalf of the Company in
accordance with generally accepted auditing standards. Their report outlines the nature of their audit and
expresses their opinion on the financial statements.
(signed) “Duncan Au”
(signed) “Craig S. Flint”
Duncan Au
President and Chief Executive Officer
Calgary, Alberta
March 9, 2015
Craig Flint
Chief Financial Officer
Calgary, Alberta
March 9, 2015
Page 31
KPMG LLP
205-5th Avenue SW
Suite 3100, Bow Valley Square 2
Calgary AB
T2P 4B9
Telephone (403) 691-8000
Fax (403) 691-8008
www.kpmg.ca
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of CWC Energy Services Corp.
We have audited the accompanying consolidated financial statements of CWC Energy Services Corp., which
comprise the statements of financial position as at December 31, 2014 and December 31, 2013, the
consolidated statements of comprehensive income (loss), changes in equity and cash flows for the years then
ended, and notes, comprising a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements
in accordance with International Financial Reporting Standards, and for such internal control as management
determines is necessary to enable the preparation of consolidated financial statements that are free from
material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We
conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on our judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to
fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s
preparation and fair presentation of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies
used and the reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated
financial position of CWC Energy Services Corp. as at December 31, 2014 and December 31, 2013, and its
consolidated financial performance and its consolidated cash flows for the years then ended in accordance
with International Financial Reporting Standards.
Chartered Accountants
Calgary, Canada
March 9, 2015
Page 32 CWC ENERGY SERVICES CORP.
STATEMENTS OF FINANCIAL POSITION
As at December 31, 2014 and December 31, 2013
December 31,
(Stated in thousands of Canadian dollars)
2014
ASSETS
Current
Cash
Accounts receivable
Inventory
Prepaid expenses and deposits
Property and equipment
Intangibles
Goodwill
LIABILITIES
Current
Accounts payable and accrued liabilities
Dividend payable
Current portion of long-term debt
Deferred tax liability
Long-term debt
SHAREHOLDERS' EQUITY
Share capital
Contributed surplus
Deficit
See accompanying notes to the financial statements.
Approved on behalf of the board:
(signed) "Gary Benthan"
(signed) "Duncan Au"
Gary Bentham, Director
Duncan Au, Director
Note
2013
$
$
$
69
34,826
2,335
1,175
38,405
218,910
1,390
16,648
275,353
13,064
4,738
201
18,003
19,180
65,465
102,648
219,677
6,546
(53,518)
172,705
$
275,353
5
6
6
10
8
9
8
10
10
$
$
$
202
22,359
2,392
400
25,353
123,646
-
-
148,999
8,322
2,524
185
11,031
2,800
43,824
57,655
108,184
6,056
(22,896)
91,344
$
148,999
Page 33
CWC ENERGY SERVICES CORP.
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except per share amounts
2014
Revenue
Expenses
Direct operating expenses
Selling and administrative expenses
Stock based compensation
Finance costs
Transaction costs
Depreciation
Gain on disposal of equipment
Goodwill impairment
Net (loss) income before income taxes
Deferred income tax expense
Note
$ 143,666
2013
$ 113,297
13
10
8
7
6
91,751
17,857
1,345
2,186
841
19,543
(246)
20,880
154,157
(10,491)
2,960
72,449
14,677
914
3,262
-
15,418
(171)
-
106,549
6,748
1,885
$
4,863
Net (loss) income and comprehensive (loss) income
9
$ (13,451)
(Loss) earnings per share
Basic and diluted
See accompanying notes to the financial statements.
$
(0.06)
10
$
0.03
Page 34
CWC ENERGY SERVICES CORP.
STATEMENTS OF CHANGES IN EQUITY
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars
except share amounts
Number of
Shares
Share
Capital
Contributed
Surplus
Deficit
Total
Equity
Balance – January 1, 2013
Note
Net income and comprehensive income
Stock based compensation expense
Exercise of stock options
Stock options settled in cash
Settlement of restricted share units
Cancellation of common shares purchased
under normal course issuer bid
Balance – December 31, 2013
Dividends declared
10
10
10
10
10
10
154,915,899
$ 108,001
$
-
-
661,667
-
185,000
-
-
355
-
131
(439,500)
-
(303)
-
155,323,066
$ 108,184
$
Net (loss) and comprehensive (loss)
Stock based compensation expense
Issued common shares for acquisition
Issued for cash
Exercise of stock options
Settlement of restricted share units
Cancellation of common shares purchased
under normal course issuer bid
Balance – December 31, 2014
Dividends declared
See accompanying notes to the financial statements.
-
-
10
7
80,785,158
10 34,270,000
10
880,000
10
595,000
-
-
84,017
27,470
419
471
10
10
(1,091,000)
-
(884)
-
5,762
-
793
(155)
(190)
(131)
(23)
-
6,056
-
1,200
-
-
(182)
(471)
(57)
-
$ (17,298)
4,863
-
-
-
-
$ 96,465
4,863
793
200
(190)
-
-
(10,461)
$ (22,896)
(326)
(10,461)
$ 91,344
(13,451)
-
-
-
-
-
-
(17,171)
(13,451)
1,200
84,017
27,470
237
-
(941)
(17,171)
270,762,224
$ 219,677
$ 6,546
$ (53,518) $ 172,705
Page 35 CWC ENERGY SERVICES CORP.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars
Operating activities:
Net (loss) income from operations
Adjustments for:
Stock based compensation expense
Finance costs
Depreciation
Impairment of goodwill
(Gain) loss on disposal of equipment
Deferred income tax expense
Changes in non-cash working capital balances
Operating cash flow
Investing activities:
Business acquisition
Purchase of equipment
Proceeds on disposal of equipment
Investing cash flow
Financing activities:
Retirement of long-term debt
Increase (repayment) of long-term debt
Finance costs paid
Interest paid
Finance lease repayments
Common shares issued for cash
Common shares purchased for cancellation
Common shares issued on exercise of options
Stock options settled in cash
Dividends paid
Financing cash flow
(Decrease) increase in cash during the year
Cash, beginning of year
Cash, end of year
See accompanying notes to the financial statements
.
2014
Note
$ (13,451)
2013
10
9
11
10
10
10
10
1,345
2,186
19,543
20,880
(246)
2,960
33,217
1,754
34,971
(18,189)
(28,788)
7,528
(39,449)
-
(4,943)
(229)
(2,029)
(240)
26,995
(941)
238
-
(14,506)
4,345
(133)
202
69
$
$
4,863
914
3,262
15,418
-
(171)
1,885
26,171
(971)
25,200
-
(11,440)
1,208
(10,232)
(14,250)
13,329
(414)
(2,851)
(186)
(126)
-
(190)
(10,078)
(14,766)
202
-
202
$
Page 36 CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
1.
Reporting entity
Business Corporations Act
th
(Alberta).
CWC Energy Services Corp. (“CWC” or the “Company”) is incorporated under the
On May 15, 2014 CWC changed its name from CWC Well Services Corp. to CWC Energy Services Corp. and
amalgamated with its wholly owned subsidiary, Ironhand Drilling Inc. (note 7). The address of the Company’s head
Avenue SW, Calgary, Alberta, Canada. The Company is an oilfield services company
office is Suite 755, 255 – 5
providing drilling and production services to oil and gas exploration and development companies throughout the
Western Canadian Sedimentary Basin (“WCSB”). The Company's common stock is listed and traded on the TSX
Venture Exchange under the symbol CWC. Additional information regarding CWC’s business is available in CWC’s
most recent Annual Information Form available on SEDAR at www.sedar.com, or on the Company’s website
www.cwcenergyservices.com, or by contacting the Company at the address noted above.
Basis of presentation
2.
Statement of compliance
(a)
These financial statements have been prepared in accordance with International Financial Reporting Standards
(“IFRS”).
These financial statements were approved by the Board of Directors on March 9, 2015.
(b)
The financial statements have been prepared on the historical cost basis.
Basis of measurement
Functional and presentation currency
(c)
These annual financial statements are presented in Canadian dollars, which is the Company’s functional currency.
All financial information presented in Canadian dollars has been rounded to the nearest thousand except where
otherwise noted.
(d)
Effective January 1, 2014, the Company adopted the following accounting standards or revisions thereto:
New standards, amendments and interpretations
IAS 36 - Impairment of Assets - Amendments of IAS 36 require entities to disclose the recoverable amount of
an impaired Cash Generating Unit ("CGU"). The Company adopted these disclosures, as applicable, in these
financial statements.
IFRIC 21 - Levies - Interpretation of IAS 37, Provisions, Contingent Liabilities and Assets - sets out criteria for
the recognition of a liability, one of which is the requirement for the entity to have a present obligation as the
result of a past event. The interpretation clarifies that the obligation that gives rise to the liability to pay a
levy is the activity described in the relevant legislation that triggers the payment of the levy. The Company
assessed the effect of IFRIC 21 on its financial results and statement of financial position and has determined
there is no material impact.
Use of estimates and judgments
(e)
The preparation of the financial statements in conformity with IFRS requires that certain estimates and judgments be
made with respect to the reported amounts of revenue and expenses and the carrying amounts of assets and
liabilities. These estimates are based on historical experience and management’s judgment. Anticipating future
events involves uncertainty and consequently the estimates used by management in the preparation of the financial
statements may change as future events unfold, additional experience is acquired or the Company’s operating
environment changes. In many cases the use of judgment is required to make estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are
recognized in the period in which the estimates are revised and in any future periods affected. Further details of the
nature of these estimates and assumptions may be found in the relevant notes to the financial statements.
Page 37
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
Management considers the following to be the most significant of the judgments, apart from those involved in making
estimates, made in preparation of the financial statements:
Determination of cash generating units
For the purpose of assessing impairment of tangible and intangible assets, assets are grouped at the lowest level for
which there are separately identifiable cash flows (cash-generating units or “CGU’s”). The grouping of assets into
CGU’s requires management exercise significant judgment.
Management considers the following to be the most significant of the estimates made in preparation of the financial
statements:
Impairment of tangible and intangible assets
Tangible and intangible assets are reviewed annually with respect to their useful lives, or more frequently, if events or
changes in circumstances indicate that the assets might be impaired. If any such indication exists, the recoverable
amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Recoverable
amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future
cash flows are discounted to their present value using a discount rate that reflects current market assessments of the
time value of money and the risks specific to the asset for which the estimates of future cash flows have not been
adjusted. As a result, any impairment losses are a result of management’s best estimates of expected revenue,
expenses and cash flows at a specific point in time. These estimates are subject to measurement uncertainty as they
are dependent on factors outside of management’s control. In addition, by their nature impairment tests involve a
significant degree of judgment as expectations concerning future cash flows and the selection of appropriate market
inputs are subject to considerable risks and uncertainties.
Depreciation and amortization
Depreciation of property and equipment and intangible assets is carried out on the basis of the estimated useful lives
of the related assets. Assessing the reasonableness of the estimated useful lives of property and equipment and
intangibles requires judgment and is based on currently available information, including historical experience by the
Company. Additionally, the Company may consult with external equipment builders or manufacturers to assess
whether the methodologies and rates utilized are consistent with their expectations. Changes in circumstances,
such as technological advances, changes to the Company’s business strategy, changes in the Company’s capital
strategy or changes in regulations may result in the actual useful lives differing from the Company’s estimates. A
change in the remaining useful life of a group of assets, or their expected residual value, will affect the depreciation
rate used to amortize the group of assets and thus affect depreciation expense as reported in the Company’s results of
operations. These changes are reported prospectively when they occur.
Stock based compensation
Compensation expense associated with stock options granted is based on various assumptions, using the Black-
Scholes option-pricing model, to produce an estimate of compensation. This estimate may vary due to changes in
the variables used in the model including interest rates, expected life, expected volatility, expected dividends,
expected forfeitures and share prices.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which
were fully transferable with no vesting restrictions. This option valuation model requires the input of highly
subjective assumptions including the expected stock price volatility. Because the Company’s stock options have
characteristics significantly different from those of traded options and because changes in the subjective input
assumptions can materially affect the calculated fair value, such value is subject to measurement uncertainty.
Stock-based compensation expense is also provided for RSUs. The number of stock options and RSUs expected to
vest is expensed on a graded vested basis over the vesting period of the stock options and RSUs. The number of
stock options and RSUs that actually vest could differ from those estimates and any changes are recognized
prospectively when they occur as an increase or decrease in compensation expense.
Page 38
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
Allowance for doubtful accounts receivable
The allowance for doubtful accounts are reviewed by management on a regular basis. Accounts receivable are
considered for impairment on a case-by-case basis when they are past due or when objective evidence is received that
a customer will default. The Company takes into consideration the customer’s payment history, their credit
worthiness and the current economic environment in which the customer operates to assess impairment. The
Company’s historical bad debt expenses have not been significant and are usually limited to specific customer
circumstances. However, given the cyclical nature of the oil and natural gas industry along with the current
economic operating environment, a customer’s ability to fulfill its payment obligations can change suddenly and
without notice. The assessment of the credit worthiness of a customer requires management to use significant
judgment. The estimation of the allowance for doubtful accounts is subject to measurement uncertainty.
Income taxes
The Company uses the liability method of accounting for income taxes. Under this method, deferred income tax
assets and liabilities are recorded based on temporary differences between the carrying amount of an asset or liability
and its tax base. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred
tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that
taxable profits will be available against which those deductible temporary differences can be utilized. The carrying
amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no
longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. The
Company’s operations are complex and computation of the provision for income taxes involves tax interpretations,
regulations and legislation that are continually changing. Any changes in the estimated amounts are recognized
prospectively in the statement of income and comprehensive income.
Comparative figures
(f)
Certain comparative amounts have been reclassified to conform to the current period's presentation.
Significant accounting policies
3.
The accounting policies set out below have been applied consistently to all periods presented in these financial
statements.
Inventory
(a)
Inventory consists mainly of operating supplies, consumables and repair parts. Inventory is stated at the lower of
cost or net realizable value. The cost of inventory is accounted for on a weighted average basis and includes
expenditures incurred in acquiring the inventory, and other costs incurred in bringing them to their existing location
and condition. Net realizable value is the estimated selling price in the ordinary course of business, less the
estimated costs of completion and selling expenses.
Business combinations
(b)
The Company uses the acquisition method to account for business acquisitions. The Company measures goodwill as
the fair value of the consideration transferred, less the net recognized amount (generally fair value) of the identifiable
assets acquired and liabilities assumed, all measured as of the acquisition date. When the excess is negative, a gain
on acquisition is recognized immediately in net income. Goodwill is allocated as of the date of the business
combination to the CGU and groups of CGU's that are expected to benefit from the business combination and
represents the lowest level within the entity at which the goodwill is monitored for internal management purposes,
which can be no higher than the operating segment level. Goodwill is not amortized and is tested for impairment
annually. Additionally, goodwill is reviewed at each reporting date to determine if events or changes in
circumstances indicate that the asset might be impaired, in which case an impairment test is performed. Goodwill is
measured at cost less accumulated impairment losses. Transaction costs, other than those associated with the issue
of debt or equity securities, that the Company incurs in connection with a business combination are expensed as
incurred and recognized in other items within net income.
Page 39
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
Property and equipment and depreciation
(c)
Property and equipment are recorded at cost less accumulated depreciation and accumulated impairment losses.
Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed
assets includes the following:
•
•
the cost of materials and direct labour; and
any other costs directly attributable to bringing the assets to a working condition for their intended
use.
Costs of replacing a component of property and equipment is capitalized only when it is probable that the future
economic benefits associated with the component will flow to the Company. The carrying amount of the
replacement component is derecognized. Cost of routine repairs and maintenance is expensed as incurred.
When parts of an item of property and equipment have different useful lives, they are accounted for as separate items
(major components) of property and equipment.
Any gain or loss on disposal of an item of property and equipment (calculated as the difference between the net
proceeds from disposal and the carrying amount of the item) is recognized in profit or loss.
Items of property and equipment are depreciated from the date that they are inspected and determined to be ready
for field use, or in respect of internally constructed assets, from the date that the asset is completed or ready for use.
Depreciation is recorded annually over the estimated useful lives of the assets using the following deprecation
methods and rates:
Assets
Drilling rigs and related equipment
Production equipment – service rigs
and Level IV recertifications
Production equipment – Coil, Snubbing units
Support equipment
Miscellaneous equipment
Method
Unit of production with residual values
up to-20%
Unit of production with residual values
up to-20%
Straight-line with residual values of up
to-20%
Straight-line with residual values of up
to-15%
Straight-line with no residual value
Rate
1,500 to 5,000 operating
days
24,000 operating hours
10 years
2 to 10 years
3 to 5 years
Intangible assets acquired in business combinations consist of trade names which are amortized over five years and
customer contracts which are amortized over the remaining contractual term of up to two years.
Assets under construction are not depreciated until they are available for use. Leased assets are depreciated over
the shorter of the lease term and their useful lives unless it is reasonably certain that the Company will obtain
ownership by the end of the lease term. Land is not depreciated.
Depreciation method, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.
Impairment of non-financial assets excluding inventories and deferred tax assets
(d)
Non-financial assets excluding inventories and deferred tax assets are assessed at the end of each reporting period to
determine if any indication of impairment exists. If any such indication exists, the Company estimates the
recoverable amount of the asset. An impairment loss is recognized if the carrying amount of an asset or CGU
exceeds its recoverable amount.
The recoverable amount of an asset or CGU is the greater of its value in use (“VIU”) and its fair value less costs to sell
(“FVLCS”). In assessing VIU, the estimated future cash flows are discounted to their present value using a pre-tax
discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or
Page 40
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
CGU. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that
generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGU’s.
Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs are allocated
first to reduce the carrying amount of goodwill, if any, allocated to the CGU (group of CGUs), and then to reduce the
carrying amounts of the other assets in the CGU (group of CGUs) on a pro rata basis.
An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to
the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined,
net of depreciation or amortization, if no impairment loss had been recognized.
CWC’s corporate assets, which do not generate separate cash inflows, are allocated to the CGU’s on a reasonable basis
for impairment testing purposes.
Financial instruments
(e)
Financial assets include accounts receivable and marketable securities (if any). The Company determines the
classification of its financial assets at initial recognition and records the assets at their fair value. Subsequently,
financial assets are carried at fair value or amortized cost less impairment charges. Where non-derivative financial
assets are carried at fair value, gains and losses on remeasurement are recognized directly in equity unless the
financial assets have been designated as being held at fair value through profit or loss, in which case the gains and
losses are recognized directly in net earnings.
All financial liabilities are initially recognized at fair value net of transaction costs and subsequently carried at
amortized cost. The Company determines the classification of its financial liabilities at initial recognition.
The Company initially recognizes accounts receivable on the date that they originate. All other financial assets
(including assets designated at fair value through profit or loss) are recognized initially on the trade date at which it
becomes a party to the contractual provisions of the instrument.
The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it
transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially
all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial
assets that is created or retained is recognized as a separate asset or liability.
The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire.
Financial assets and liabilities are offset and the net amount presented in the statement of financial position when,
and only when, there is a legal right to offset the amounts and intends either to settle on a net basis or to realize the
asset and settle the liability simultaneously.
Financial assets at fair value through profit or loss
A financial asset is classified as at fair value through profit or loss if it is classified as held for trading or is designated
as such on initial recognition. Financial assets are designated as at fair value through profit or loss if the Company
manages such investments and makes purchase and sale decisions based on their fair value in accordance with the
Company’s documented risk management or investment strategy. Attributable transaction costs are recognized in
profit or loss as incurred. Financial assets at fair value through profit or loss are measured at fair value and changes
therein, which takes into account any dividend income, are recognized in profit or loss.
Financial assets designated as at fair value through profit or loss comprise equity securities that would otherwise
would have been classified as available for sale.
Page 41
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
Loans and receivables
Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active
market. Such assets are recognized initially at fair value plus any directly attributable transactions costs.
Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest
method, less any impairment losses.
Cash
(f)
Cash comprises cash balances that are subject to an insignificant risk of changes in their fair value, and are used by the
Company in the management of its short-term commitments.
Common shares
(g)
Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares are
recognized as a deduction from equity, net of any tax effects.
When share capital recognized as equity is repurchased, the amount of the consideration paid, which includes directly
attributable costs, net of any tax effects, is recognized as a deduction from equity. Repurchased shares are returned
to treasury and cancelled no more than six months from repurchase.
Provisions
(h)
A provision is recognized in the financial statements when the Company has an obligation, whether existing or
potential as a result of a past event and it is probable that an outflow of economic benefits will be required to settle
the obligation. If the obligation is determined to be material, then the estimated amount of the provision is
determined by discounting the expected future cash outflows. At December 31, 2014 and December 31, 2013 there
were no provisions recognized in the financial statements.
Revenue recognition
(i)
The Company’s services are provided based upon orders and contracts with customers that include fixed or
determinable prices and are based upon daily, hourly or contracted rates. Contract terms do not include the
provision for post-service obligations. Revenue is recognized when services are rendered and when collectability of
the consideration is probable and when the amount of revenue can be measured reliably.
(j)
At inception of an arrangement, the Company determines whether such an arrangement is or contains a lease. This
will be the case if the following two criteria are met:
Leases
•
•
the fulfillment of the arrangement is dependent on the use of a specific asset or assets; and
the arrangement contains a right to use the asset(s).
At the inception or on reassessment of the arrangement, the Company separates payments and other consideration
required by such an arrangement into those for the lease and those for other elements on the basis of their relative
fair values. If the Company concludes for a finance lease that it is impracticable to separate the payments reliably,
then an asset and a liability are recognized as amount equal to the fair value of the underlying asset. Subsequently,
the liability is reduced as payments are made and an imputed finance cost on the liability is recognized using the
Company’s incremental borrowing rate.
Leasing contracts are classified as either finance or operating leases.
The Company classifies a lease as a finance lease if it transfers substantially all of the risks and rewards of ownership
to the lessee. Upon the initial recognition of the lease asset it is measured at an amount equal to the lower of its fair
value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is
accounted for in accordance with the accounting policy applicable to that asset. Minimum lease payments made
under finance leases are apportioned between the finance lease and the reduction of the outstanding liability. The
finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest
on the remaining balance of the liability.
Page 42
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
Other leases are operating leases and are not recognized in the Company’s statement of financial position.
Payments made under operating leases are recognized in the statement of comprehensive income on a straight-line
basis over the term of the lease.
Dividends
(k)
Dividends on shares are recognized in the Company’s financial statements in the period in which the dividends are
declared and approved by the Board of Directors of the Company.
Finance costs
(l)
Finance costs encompass interest expense on financial liabilities and accretion expense on debt issuance costs and are
recognized in profit or loss in the period in which they are incurred using the effective interest method.
Foreign currency transactions
(m)
These financial statements are presented in Canadian dollars, which is the functional and reporting currency of the
Company. Transactions in foreign currency are translated at exchange rates at the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into the
functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the
difference between amortized cost in the functional currency at the beginning of the year and the amortized cost in
foreign currency translated at the exchange rate at the end of the year. Non-monetary assets are translated into
Canadian dollars at the exchange rate prevailing on the date of acquisition.
Income Tax
(n)
Tax is recognized in profit or loss, except to the extent that it relates to a business combination or items recognized in
other comprehensive income or directly in equity.
Current tax is the expected tax on taxable income less adjustments to prior periods using tax rates enacted, or
substantively enacted as at the reporting date in jurisdictions where the Company operates.
Deferred income taxes are recognized based on temporary differences arising between the tax value of assets and
liabilities and their carrying amounts in the financial statements. Deferred tax liabilities are not recognized if they
arise from the initial recognition of goodwill and are not accounted for if they arise from the initial recognition of an
asset or liability in a transaction other than a business combination that at the time of the transaction affects neither
accounting nor taxable income. Deferred income taxes are calculated on the basis of the tax laws enacted or
substantively enacted as at the reporting date and apply to when the related deferred income tax asset is realized or
the deferred income tax liability is settled.
Current and deferred income tax assets and liabilities are offset when there is a legally enforceable right to settle on a
net basis and when such assets and liabilities relate to income taxes imposed by the same taxation authority.
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences to the extent
that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets
are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax
benefit will be realized.
Employee costs
(o)
Short term employee benefit obligations are measured on an undiscounted basis and are expensed as the related
service is provided. A liability is recognized for the amount expected to be paid under the bonus plan when a
present legal or constructive obligation to pay this amount as a result of past service provided by the employee and
the obligation can reasonably be estimated.
Termination benefits are recognized as an expense when the Company is demonstrably committed, without realistic
possibility of withdrawal to a formal detailed plan to either terminate employment before the normal retirement date,
Page 43
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination
benefits for voluntary redundancies are recognized as an expense if the Company has made an offer of voluntary
redundancy, it is probable that the offer will be accepted and the number of acceptances can be measured reliably.
If benefits are payable more than twelve months after the reporting date, then they are discounted to their present
value.
Under the Company’s stock option plan described in note 10, options to purchase common shares are granted to
directors, officers and employees. The fair value of common share purchase options is calculated at the date of grant
using the Black-Scholes option pricing model and that value is recorded as compensation expense over the vesting
period of the option with an offsetting credit to contributed surplus. Upon exercise of the share purchase options: i)
if shares are issued from treasury, consideration paid together with the amount previously recognized in contributed
surplus is recorded as an increase in common share capital, or ii) if a cash payment is made to the participant,
contributed surplus is reduced by the amount of the cash payment. It is the Company’s intent to settle future
common share purchase options by means of the issue of shares from treasury.
Under the Company’s restricted share unit plan described in note 10, restricted share units (“RSUs”) are granted to
directors, officers and employees. The fair value of RSUs is calculated at the date of grant using the market price of
the common shares and that value is recorded as compensation expense over the vesting period of the RSU with an
offsetting credit to contributed surplus. Upon settlement of the RSUs: i) if shares are issued from treasury, share
capital is increased and contributed surplus is decreased by the amount previously expensed for stock based
compensation for the RSUs, or ii) if common shares are purchased in open market purchases or purchases pursuant to
private transactions with third parties, the amount paid for such purchases is recorded as a reduction in contributed
surplus, or iii) if a cash payment is made to the participant, contributed surplus is reduced by the amount of the cash
payment. It is the Company’s intent to settle future RSUs by means of the issue of shares from treasury.
The Company estimates future forfeitures for both stock options and RSUs and expenses stock options and RSUs
based on the Company’s estimate of stock options and RSUs expected to reach vesting. Any difference between the
number of stock options and RSUs expected to vest and the number of stock options and RSUs which actually vest is
accounted for as a change in estimate when those stock options or RSUs become vested or are forfeited before vesting.
The Company has a dividend bonus plan to compensate stock option holders for dividends paid on common shares.
Under the terms of the plan option holders of vested, in-the-money options are entitled to a bonus payment equal to
the dividend amount grossed up to negate the tax consequences of receiving employment income versus dividend
income. These amounts are accrued at each dividend declaration date and paid out annually, at the time of option
exercise or on termination of employment, whichever event occurs first.
Per share amounts
(p)
Basic per share amounts are calculated using the weighted average number of common shares outstanding during the
period. Diluted per share amounts are calculated considering the effects of all dilutive potential common shares.
The Company’s dilutive potential common shares assumes that all dilutive stock options and restricted share units are
exercised and the proceeds obtained on the exercise of dilutive stock options would be used to purchase common
shares at the average market price during the period. The weighted average number of common shares outstanding
is then adjusted accordingly
Segmented information
(q)
The operating divisions are grouped into two distinct reporting segments: Contract Drilling and Production Services
and are supported by the Corporate reporting segment. The reporting segments share common economic
characteristics and are differentiated by the type of service provided and customer needs. The reporting segments
financial results are reviewed regularly by the Company’s senior management. Senior management makes decisions
about resource allocation and assesses segment performance based on the internally prepared segment information.
The Company has changed its reportable operating segments to reflect the addition of contract drilling as an
operating segment as more fully described in note 12.
Page 44
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
New accounting standards not yet effective
(r)
A number of new standards, amendments to standards and interpretations have been issued by the IASB and are not
yet effective for the year ended December 31, 2014. The following new standards, amendments to standards and
interpretations have not been applied in preparing these financial statements.
IFRS 15, Revenue from Contracts with Customers, which provides guidance on revenue recognition and
relevant disclosures. The standard provides a single, principles based five-step model to be applied to all
contracts with customers. IFRS 15 applies to annual reporting periods beginning on or after January 1, 2017,
with early adoption permitted under IFRS. The Company has not yet assessed the impact this standard will
have on the financial statements.
Determination of fair values
4.
A number of the Company’s accounting policies and disclosures require the determination of fair value, for both
financial and non-financial assets and liabilities.
The carrying amounts for cash, accounts receivable, accounts payable and accrued liabilities and dividends payable
approximate fair value due to their short-term nature. The fair value of long-term debt approximates its carrying
value as the debt bears interest at floating rates and the credit spreads approximate current market rates.
Fair values have been determined for measurement and/or disclosure purposes based on the following methods.
When applicable, further information about the assumptions made in determining fair values is disclosed in the notes
specific to that asset or liability.
Property and equipment
(a)
The fair value of property and equipment recognized as a result of a business combination is the estimated amount for
which a property could be exchanged on the date of acquisition between a willing buyer and a willing seller in an
arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably. The fair value
of equipment, fixtures and fittings is based on the market approach and cost approaches using quoted market prices
for similar items when available and depreciated replacement cost when appropriate. Depreciated replacement
cost estimates reflect adjustments for physical deterioration as well as functional and economic obsolescence.
Inventories
(b)
The net realizable value of inventories is determined based on the estimated selling price in the ordinary course of
business less cost and a reasonable profit margin.
Share based compensation transactions
(c)
The fair value of employee stock options is measured using the Black-Scholes option pricing model. Measurement
inputs include the share price on measurement date, the exercise price of the instrument, the expected volatility, the
weighted average expected life of the instruments, the expected dividends, the expected forfeiture rate, and the risk-
free interest rate (based on government bonds). Service and non-market performance conditions are not taken into
account in determining fair value.
The fair value of RSUs issued is determined on the grant date based on the market price of the common shares on the
grant date.
Fair value hierarchy
(d)
Financial instruments that are measured subsequent to initial recognition at fair value are grouped in Levels 1 to 3
based on the degree to which the fair value is observable:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2 – Inputs other than quote prices that are observable for the asset or liability either directly or
indirectly; and
Page 45
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
Level 3 – Inputs that are not based on observable market data.
The Company did not have any financial instruments that were required to be classified in Level 1, 2 or 3 as at
December 31, 2014.
Property and equipment
5.
Costs
Balance, January 1, 2014
Acquisition through business combination
Additions
Disposals
Balance, December 31, 2014
Accumulated depreciation
Balance, January 1, 2014
Depreciation
Disposals
Balance, December 31, 2014
Net book value
Balance, December 31, 2014
Costs
Balance, January 1, 2013
Additions
Disposals
Balance, December 31, 2013
Accumulated depreciation
Balance, January 1, 2013
Depreciation
Disposals
Balance, December 31, 2013
Net book value
Contract
drilling
equipment
Production
services
equipment
Other
equipment
Total
$
-
92,611
12,282
(144)
104,749
$
204,608
-
16,778
(16,153)
205,233
$
-
4,554
(11)
4,543
81,300
14,529
(9,004)
86,825
1,418
124
96
-
1,638
1,080
262
-
1,342
$
206,026
92,735
29,156
(16,297)
311,620
82,380
19,345
(9,015)
92,710
$
100,206
$
118,408
$
296
$
218,910
Contract
drilling
equipment
Production
services
equipment
Other
equipment
Total
$
-
-
-
-
-
-
-
-
$
$
195,036
11,388
(2,565)
203,859
$
1,998
169
-
2,167
197,034
11,557
(2,565)
206,026
67,434
14,946
(1,534)
80,846
1,062
472
-
1,534
68,496
15,418
(1,534)
82,380
Balance, December 31, 2013
$
-
$
123,013
$
633
$
123,646
At December 31, 2014, property and equipment includes equipment under finance leases which are recorded at cost
totaling $887 (December 31, 2013: $750), less accumulated depreciation of $476 (December 31, 2013: $455).
Page 46
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
6.
Goodwill and intangible assets
Cost
Balance, December 31, 2013
Acquisition through business combination (note 7)
Balance, December 31, 2014
Accumulated amortization
Balance, December 31, 2013
Amortization of intangible assets
Goodwill impairment
Balance, December 31, 2014
Net book value
Balance, December 31, 2013
Balance, December 31, 2014
Goodwill
Intangible
assets
$
$
-
37,528
37,528
-
1,588
1,588
-
-
20,880
20,880
-
198
-
198
$
$
- $
16,648 $
-
1,390
For the purposes of impairment testing, goodwill has been allocated to the Company's contract drilling CGU as it arose
on the purchase of Ironhand Drilling Inc., which became the Company's contract drilling division.
The recoverable amount of this CGU was based on value in use, estimated using discounted cash flows. The fair value
of measurement was categorized as Level 3 fair value based on the inputs in the valuation technique used.
The key assumptions used in the estimation of the recoverable amount are set out below. The values assigned to the
key assumptions represent management's assessment of future trends in the relevant industries and have been based
on historical data from both external and internal sources.
2014
13%
2.5%
15%
After tax discount rate
Terminal value growth rate
Budgeted Earnings Before Interest Taxes Depreciation and
Amortization ("EBITDA") growth rate (average of next five years)
The discount rate was a post-tax measure estimated based on the historical industry average weighted average cost of
capital, with a possible debt leveraging of 30% at a market interest rate of 2.3%. The pre-tax discount rate is 16%.
The cash flow projections included specific estimates for five years and a terminal growth rate thereafter. The
terminal growth rate was determined based on management's estimate of the long-term compound annual EBITDA
growth rate, consistent with the assumptions that a market participant would make.
•
Budgeted EBITDA was estimated taking into account past experience, adjusted as follows:
•
•
revenue growth was projected taking into account the significant drop in drilling activity levels
expected to occur in 2015;
revenue growth was projected for years 2016 onward taking into account the Contract Drilling's
segment history of having above industry average utilizations; and
revenue growth for rate per day was based on commodity price outlooks.
Page 47
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
7.
Business acquisition
On May 15, 2014, CWC acquired Ironhand Drilling Inc. (“Ironhand”) pursuant to a plan of arrangement whereby all of
the issued and outstanding common shares of Ironhand were exchanged for aggregate cash consideration of $18,189
and 80,785,158 common shares of CWC at an ascribed price of $1.04 per share, based on the trading price of CWC at
closing.
The Ironhand acquisition enabled the Company to continue its growth strategy and enter the contract drilling services
business in western Canada. At closing, Ironhand's fleet consisted of eight telescopic double drilling rigs with depth
ratings from 3,200 to 4,500 metres with a ninth rig under construction. Seven of these eight rigs have top drives.
All of the drilling rigs are ideally suited for the most active depths for horizontal drilling in the WCSB.
The fair value of consideration transferred at the acquisition date consisted of:
Cash
Common shares
Assumption of bank debt
Total consideration
Amount
$ 18,189
84,017
26,542
$ 128,748
This acquisition has been accounted for using the acquisition method on May 15, 2014, whereby the assets acquired
and the liabilities assumed were recorded at their fair values with the surplus of the aggregate consideration relative
to the fair value of the identifiable net assets recorded as goodwill. The Company assessed the fair values of the net
assets acquired based on management’s best estimate of market value, which takes into consideration the condition of
the assets acquired, current industry conditions and the discounted future cash flows expected to be received from
the assets as well as the amount it is expected to cost to settle the outstanding liabilities. Subsequent to the
acquisition date, Ironhand’s operating results have been included in CWC’s revenue, expenses and capital spending.
The fair value of consideration transferred for the Ironhand acquisition was allocated on the basis of the fair value of
the net assets acquired as at May 15, 2014 as follows:
(1)
Amount
10,792
92,735
1,588
37,528
(13,895)
128,748
Net working capital
Property and equipment
Intangibles – trade name and customer contracts
Goodwill
Deferred income tax liability
Total fair value of net assets acquired
Net working capital included no cash and trade receivables in the contractual amount and fair value of $12,031, all
$
$
(1)
of which was expected to be collected.
The Company estimates that had the acquisition closed on January 1, 2014, $60.5 million of revenue for the year
ended December 31, 2014 would have been attributable to Ironhand’s assets. Included in this estimated amount is
$38.8 million of revenue recognized by the Company subsequent to the acquisition date relating to Ironhand’s assets.
The Company estimates that had the acquisition closed on January 1, 2014, ($8.4) million of net loss for the year
ended December 31, 2014 would have been attributable to Ironhand’s assets. Included in this estimated amount is
($11.1) million of net loss recognized by the Company subsequent to the acquisition date relating to Ironhand’s assets
and an impairment of goodwill of $20.9 million.
The Company assessed the acquisition for intangible assets and concluded that customer relationship and the
Ironhand Drilling trade name, which is being retained, met the criteria for recognition as intangible assets. The
trade name was valued using the relief-from-royalty method and the customer contracts were valued using the multi-
period excess earnings method.
Page 48
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
Goodwill on the Ironhand acquisition is attributable to the price paid for Ironhand’s newly constructed modern
drilling rig fleet complete with trained and assembled workforce in competitive market conditions. None of the
goodwill recognized is expected to be deductible for income tax purposes. CWC’s share price on March 18, 2014, the
day prior to the announcement of the acquisition was $0.88 per share. The share price on the closing date, which
was the price CWC was required to use to value the shares issued for the acquisition was $1.04 per CWC share.
The Company incurred costs related to the acquisition of Ironhand of $0.8 million relating to due diligence as well as
external legal and advisory fees, which were expensed in the period incurred.
This transaction was a related party transaction for CWC. The Company is controlled by Brookfield Capital Partners
Ltd. ("Brookfield"). Brookfield indirectly beneficially owns or exercises control or direction over approximately
67% of the issued and outstanding common shares. On May 15, 2014, pursuant to a plan of arrangement under the
Business Corporations Act (Alberta), the Company acquired all of the issued and outstanding shares of Ironhand
Drilling Inc. ("Ironhand") to enter the contract drilling business. Ironhand was indirectly controlled by Brookfield
and two of the Company's directors were also directors of Ironhand. Transactions with related parties were measured
and recorded at the exchange amount which is equivalent to fair value. Fair value is defined as the transaction amount
with unrelated parties under similar terms and conditions.
Loans and borrowings
8.
The following table provides information with respect to amounts included in the statement of financial position
related to loans and borrowings:
December 31,
2014
Current liabilities:
Current portion of finance lease liabilities
Non-current liabilities:
Bank Loan
Finance lease liabilities
Financing fees
Total loans and borrowings
$
$
$
$
$
201
201
65,657
215
(407)
65,465
65,666
December 31,
2013
$
$
$
$
$
185
185
44,041
119
(336)
43,824
44,009
The Company has a credit facility with a syndicate of four Canadian financial institutions (the “Credit Facility”). The
Credit Facility provides the Company with a $100 million extendible revolving term facility (the “Bank Loan”) and
other credit instruments. The Bank Loan is for a committed term until June 21, 2017 (the “Maturity Date”). No
principal payments are required under the Bank Loan until the Maturity Date, at which time any amounts outstanding
are due and payable. The Company may, on an annual basis, request the Maturity Date be extended for a period not
to exceed three years from the date of the request. If a request for an extension is not approved by the banking
syndicate, the Maturity Date will remain unchanged.
(1)
The Bank Loan bears interest based on a sliding scale pricing grid tied to the Company’s trailing Consolidated debt to
ratio from a minimum of the bank’s prime rate plus 0.75% to a maximum of the bank’s prime
Consolidated EBITDA
rate plus 2.25% or from a minimum of the bankers acceptances rate plus a stamping fee of 1.75% to a maximum of the
bankers acceptances rate plus a stamping fee of 3.25%. Standby fees under the Bank Loan range between 0.39%
and 0.73%. Interest and fees under the Bank Loan is payable monthly. The Company has the option to borrow
funds denominated in either Canadian or United States dollars under the Credit Facility. Borrowings under the Bank
Loan are limited to an aggregate of 75% of accounts receivable outstanding less than 90 days plus 60% of the net
book value of property and equipment less certain priority payables. As at December 31, 2014, $100 million was
Page 49
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
available for immediate borrowing under the $100 million Bank Loan facility and $65.7 million was outstanding
(December 31, 2013: $44.0 million). The Bank Loan has an accordion feature which provides the Company with an
ability to increase the maximum borrowings to up to $125 million, subject to the approval of the lenders. The Bank
Loan is secured by a security agreement covering all of the assets of the Company and a first charge Security Interest
covering all assets of the Company. Effective December 31, 2014 the applicable rates under the Bank Loan are: bank
prime rate plus 1.0%, bankers acceptances rate plus a stamping fee of 2.0%, and standby fee rate of 0.45%.
(2)
Under the terms of the Credit Facility, the Company is required to comply with the following financial covenants:
Actual
December 31,
2014
1.63:1.00
0.26:1.00
9.41:1.00
Consolidated Debt
Consolidated Debt
Consolidated Adjusted Cash Flow
Consolidated EBITDA is calculated as net income(loss) plus finance costs, plus current and deferred income taxes, plus depreciation, plus stock
based compensation, plus any non recurring losses or impairment losses, minus any non recurring gain, plus any expenses related to corporate or
business acquisitions with all amounts being for the twelve month period ended the calculation date. EBITDA is adjusted to reflect the inclusion
of material acquisitions or material dispositions on a pro forma basis for the twelve month period ended the calculation date.
(2)
Covenant limits
3.00:1.00 or less
0.50:1.00 or less
1.15:1.00 or more
to Consolidated EBITDA
to Capitalization
to Consolidated Finance Obligations
(5)
(3)
(1)
(2)
(4)
(1)
(3)
(4)
Consolidated Debt is calculated as total loans and borrowings as shown in the schedule above adjusted to remove any financing fees included.
Capitalization is calculated as Consolidated Debt plus Shareholders’ Equity as at the calculation date.
Consolidated Adjusted Cash Flow is calculated as Consolidated EBITDA minus amounts paid for transaction costs, dividends or share repurchases
in the twelve month period ended the calculation date.
(5)
Consolidated Finance Obligations is calculated as finance costs plus scheduled principal payments on debt including scheduled principal
payments under finance leases minus accretion of finance fees included in finance costs for the twelve month period ended the calculation date.
Obligations under finance leases are primarily for leased automobiles with an expected term of three years and a one
year minimum term. Interest rates on finance leases are specific to each leased asset, are fixed for the lease term
and vary between 4.4% and 5.3% per annum.
Financing fees consist of commitment fees and legal expenses relating to the Credit Facility and are being amortized
using the effective interest rate method over the term of the Credit Facility. Financing fees of $158 were amortized
and included in finance costs during the year ended December 31, 2014 (year ended December 31, 2013: $410).
Income taxes
9.
The provision for income taxes differs from that which would be expected by applying statutory rates. A
reconciliation of the difference is as follows:
2014
Years ended December 31,
Earnings before income taxes
Combined federal and provincial income tax rate
Expected income taxes
Increase (decrease) resulting from:
Non-deductible items
Income tax effect of income tax rate change
Goodwill impairment
Stock based compensation
Other
$
(10,491)
25%
(2,623)
24
-
5,220
300
39
2,960
$
2013
$
$
6,748
25%
1,687
34
-
198
(34)
1,885
Page 50
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
The deferred income tax liability is comprised of:
Deferred tax assets
Non capital losses
Share issue costs
Finance lease liabilities
Other
Deferred tax liabilities:
Property and equipment
Other
December 31,
2014
$
10,744(1)
352
206
84
11,386
(30,566)
-
(30,566)
(19,180)
$
December 31,
2013
$
11,500
(1)
-
160
132
11,792
(14,584)
(8)
(14,592)
(2,800)
(1)
Net deferred income tax liability
The Company has $43.0 million of non capital loss carry forwards for income tax purposes which are available for application against future
$
taxable income. These non capital loss carry forwards expire between 2027 and 2033.
All changes in deferred income tax temporary differences were recognized in income in the years ended December 31,
2014 and 2013.
Share capital
10.
Authorized
(a)
Unlimited number of common voting shares without par value.
Unlimited number of preferred shares without par value.
Common shares
(b)
On April 10, 2014, CWC issued a total of 34,270,000 subscription receipts at a price of $0.84 per subscription receipt
for aggregate gross proceeds of $28,809 ($27,470 after deduction of $1,814 in share issue costs plus deferred income
taxes of $475). On May 15, 2014, contemporaneous with the closing of the acquisition of Ironhand, each
subscription receipt was converted to one common share of CWC and 80,785,158 common shares were issued to the
shareholders of Ironhand.
Normal course issuer bid
(c)
The Company has a program to purchase its common shares from time to time in accordance with the normal course
issuer bid procedures under Canadian securities laws. Pursuant to the issuer bid, CWC is allowed to purchase for
cancellation up to 13,520,411 of its issued and outstanding common shares at prevailing market prices on the TSX
Venture Exchange or other recognized marketplaces during the 12-month period ending May 21, 2015. During the
year ended December 31, 2014, the Company purchased 1,091,000 shares for consideration of $941 including
commissions.
Stock options
(d)
The Company has a stock option plan which allows the Company to issue options to purchase common shares at
prevailing market prices on the date of the option grant. The aggregate number of stock options and RSUs
outstanding is limited to a maximum of ten percent of the outstanding common shares. The Company has granted
stock options to directors, officers and key employees. Stock options vest annually over three years from the date of
grant as employees or directors render continuous service to the Corporation and have a maximum term of five years.
The Company may choose to settle stock options for the intrinsic value of the stock option on the exercise date, but
the Company has no current intention or obligation to do so.
Page 51
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
The following table summarizes changes in the number of stock options outstanding:
Number of
options
Weighted
average exercise
price
Balance at January 1, 2013
Granted
Exercised for cash
Exercised for common shares
Expired
Forfeited – unvested
Balance at December 31, 2013
Granted
Exercised for common shares
Expired
Forfeited – unvested
Balance at December 31, 2014
9,530,348
600,000
(409,994)
(661,667)
(285,001)
(466,674)
6,550,000
8,307,012
(880,000)
-
(957,000)
13,020,012
$
$
0.38
0.75
0.31
0.30
1.78
0.35
0.85
0.37
0.29
-
0.35
0.54
The following table summarizes information about stock options outstanding as at December 31, 2014:
Exercise price
Number of
options
outstanding
5,120,012
3,000,000
1,450,000
200,000
250,000
3,000,000
13,020,012
Weighted average
remaining life (years)
contractual
0.7
5.0
1.9
3.6
2.4
4.4
2.8
Weighted
average
exercise price
$ 0.25
$ 0.45
$ 0.60
$ 0.75
$ 0.80
$ 1.04
$ 0.54
Number of
options
exercisable
5,120,012
-
1,450,000
200,000
166,667
-
6,936,679
$ 0.25
$ 0.45
$ 0.60
$ 0.75
$ 0.80
$ 1.04
$ 0.25- 0.80
The fair value of stock options is estimated as at the grant date using the Black-Scholes option pricing model, with the
following weighted average assumptions used for stock options issued during the years ended December 31:
2014
Risk free interest rate (%)
Expected life (years)
Expected volatility (%)
Expected forfeiture rate (%)
Expected dividend per share
$
0.8%
5.0
64%
0%
0.07
2013
1.69%
5.0
54%
0%
$ -
The weighted average fair value of the stock options issued during the year ended December 31, 2014 was $0.20 (year
ended December 31, 2013 - $0.36). For the year ended December 31, 2014, stock-based compensation expense
relating to stock options totaled $468 (year ended December 31, 2013: $434).
Restricted share unit plan
(e)
The Company has a restricted share unit plan which allows the Corporation to issue RSU’s which are redeemable for
common shares at future vesting dates. The aggregate number of RSUs and stock options outstanding is limited to a
maximum of ten percent of the outstanding common shares. The Corporation has granted RSU’s to officers and key
employees. RSUs vest annually over three years from the date of grant as employees or directors render continuous
service to the Company and have a maximum term of the end of the third year following their grant date. The
Company may choose to settle RSUs for the intrinsic value of the RSUs on the settlement date, but the Company has no
current intention or obligation to do so.
Page 52
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
The following table summarizes changes in the number of Restricted Share Units (“RSU’s”) outstanding:
Number of RSU’s
Weighted
average fair value
at issue date
Balance at January 1, 2013
Granted
Redeemed for common shares
Forfeited – unvested
Balance at December 31, 2013
Granted
Redeemed for common shares
Forfeited - unvested
Balance at December 31, 2014
660,000
1,230,000
(185,000)
(105,000)
1,315,000
1,600,000
(595,000)
(255,000)
2,065,000
$ 0.71
0.83
0.71
0.71
0.62
0.80
0.56
0.83
$ 0.75
Issue date fair
value
Weighted
The following table summarizes information about RSU’s outstanding as at December 31, 2014:
average exercise
price ($)
n/a
Weighted average
remaining life (years)
contractual
2.7
Number of RSU’s
outstanding
$0.39 - $1.04
2,065,000
Number of RSU’s
exercisable
-
For the year ended December 31, 2014, stock-based compensation expense relating to RSU’s totaled $732 (year ended
December 31, 2013: $359).
(Loss) earnings per share
(f)
Year ended December 31,
The following table reconciles the common shares used in computing earnings per share for the periods noted:
2014
Weighted average common shares outstanding – basic
Dilutive stock options
Dilutive Restricted Share Units
Weighted average common shares outstanding – diluted
227,675,260
-
-
227,675,260
2013
155,067,901
4,359,372
207,244
159,634,517
Outstanding stock options and RSU’s are currently the only instruments which could potentially dilute earnings per
share. For the year ended December 31, 2014, 13,020,012 stock options and 2,065,000 RSU's (year ended
December 31, 2013: 1,333,359 and 1,230,000 RSU's) were not included in the computation of net (loss) income per
common share because to do so would be anti-dilutive.
Dividends
Declaration Date
(g)
Record Date
The Company has made the following dividend payments in the past two fiscal years:
Payment Date
Dividend per Common share
February 7, 2013
May 9, 2013
August 14, 2013
November 13, 2013
March 5, 2014
August 14, 2014
November 12, 2014
March 9, 2015
March 29, 2013
June 28, 2013
September 30, 2013
December 31, 2013
March 31, 2014
September 30, 2014
December 31, 2014
March 31, 2015
April 15, 2013
July 15, 2013
October 15, 2013
January 15, 2014
April 15, 2014
October 15, 2013
January 15, 2015
April 15, 2015
$0.01625
$0.01625
$0.01625
$0.01625
$0.01625
$0.01750
$0.01750
$0.00500
On March 9, 2015, the Company declared dividends of $0.00500 per common share to shareholders of record on
March 31, 2015 to be paid on April 15, 2015.
Page 53
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
On December 23, 2014, the Company introduced a Dividend Reinvestment Program ("DRIP") and Stock Dividend
Program ("SDP"). Eligible shareholders may elect to participate in the DRIP or SDP or continue to receive a cash
dividend beginning with the December 31, 2014 quarterly dividend paid on January 15, 2015. 69.2% of the
common shares outstanding as at December 31, 2014, elected to participate in the DRIP and SDP, as a result, on
January 15, 2015, 7,982,080 and 301,026 common shares were issued under the DRIP and SDP respectively.
Contributed surplus
(h)
Contributed surplus comprises amounts paid in by equityholders. Contributed surplus in the form of surplus paid in
by equityholders includes premiums on shares issued, any portion of the proceeds of issue of shares without par value
not allocated to share capital, gain on forfeited shares, proceeds arising from shares donated by equityholders, credits
resulting from redemption or conversion of shares at less than the amount set up as share capital, and any other
contribution by equityholders in excess of amounts allocated to share capital. Contributed surplus also includes
increases and decreases in equity as a result of share based payments under the Company’s stock option and RSU
plans.
Supplemental cash flow information
11.
Change in non-cash working capital items:
Accounts receivable
Inventory
Prepaid expenses and deposits
Accounts payable and accrued liabilities
Working capital acquired
12.
Operating segments
Years ended December 31
2014
$ (12,467)
57
(775)
4,147
10,792
$ 1,754
2013
$
$
(963)
145
(199)
46
-
(971)
The Company operates in the western Canadian oilfield service industry through its production services and contract
drilling segments. The production services segment provides well services to oil and gas exploration and
production companies through the use of service rigs, coil tubing units, snubbing units and production testing
equipment. The contract drilling segment provides drilling rigs and related ancillary equipment to oil and gas
exploration and production companies. The production services segment combines what was previously reported
as the well servicing and other oilfield services segments in prior period financial statements. The acquisition of
Ironhand on May 15, 2014 resulted in the aggregation of the well servicing and other oilfield services segments, as
this acquisition shifted the Company's internal financial reporting and operational management structure and
Management concluded that the well servicing and other oilfield services segments share similar economic
characteristics and are also similar in other respects in accordance with IFRS 8.12.
Management uses net income before depreciation and income taxes (“segment profit”) as included in the management
reports reviewed by key management personnel and the board of directors to measure performance at a segment
basis. Segment profit is used to measure performance as management believes this is the most relevant measure in
evaluating the results of our segments relative to each other and other entities that operate within the respective
industries.
The Corporate segment captures general and administrative expenses associated with supporting each of the
reporting segments operations, plus costs associated with being a public company. Also, included in the Corporate
segment is interest expense for debt servicing, income tax expense and other amounts not directly related to the two
primary segments.
Page 54
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
The amounts related to each industry segment are as follows:
For the year ended December 31, 2014
Revenue
Direct operating expenses
Selling and administrative expenses
Stock based compensation
Finance costs
Transaction costs
Goodwill impairment
(Gain) loss on disposal of equipment
Net (loss) income before depreciation and taxes
Depreciation
Net (loss) income before tax
Income tax expense
Net (loss) income
Capital expenditures
As at December 31, 2014
Property and equipment
Intangibles
Goodwill
Contract
Drilling
$ 38,819
Production
Services
$ 104,847
Corporate
-
$
Total
$ 143,666
21,704
1,005
-
-
-
20,880
39
(4,809)
4,782
(9,591)
-
(9,591)
70,047
9,946
-
-
-
(285)
25,139
14,263
10,876
-
10,876
-
6,906
1,345
2,186
841
-
-
(11,278)
498
(11,776)
2,960
(14,736)
91,751
17,857
1,345
2,186
841
20,880
(246)
9,052
19,543
(10,491)
2,960
(13,451)
12,282
16,778
96
29,156
100,206
1,390
16,648
118,408
-
-
296
-
-
218,910
1,390
16,648
For the year ended December 31, 2013
Contract
Drilling
Production
Services
Corporate
Total
Revenue
$
-
$ 113,297
$
-
$ 113,297
Direct operating expenses
Selling and administrative expenses
Stock based compensation
Finance costs
Gain on disposal of equipment
Net income (loss) before depreciation and taxes
Depreciation
Net income (loss) before tax
Deferred income tax expense
Net income (loss)
Capital expenditures
As at December 31, 2013
-
-
-
-
-
-
-
-
-
-
-
72,449
9,838
-
-
(171)
31,181
14,927
16,254
-
16,254
-
4,839
914
3,262
-
(9,015)
491
(9,506)
1,885
(11,391)
72,449
14,677
914
3,262
(171)
22,166
15,418
6,748
1,885
4,863
11,388
169
11,557
Property and equipment
-
123,013
633
123,646
Page 55
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
13.
Expenses by nature
For the year ended
December 31, 2014
Direct
operating
expenses
Selling
and
admini-
strative
expenses
Stock
based
compen-
Sation
Finance
and
Transact
ion costs
Gain on
sale of
equip-
ment
Goodwill
impair-
ment
$ -
-
$
Deprec-
iation
expense
$ -
-
-
-
$ 56,304
$ 10,343
$ 1,345
$
35,447
-
-
-
-
-
5,227
2,287
-
-
-
-
-
-
-
-
-
841
2,186
-
-
19,543
-
-
-
-
-
Total
$ 67,992
35,447
5,227
2,287
19,543
841
2,186
-
-
-
-
-
-
-
-
$ 91,751
-
-
$ 17,857
-
-
$ 1,345
-
-
$ 3,027
-
-
$19,543
(246)
$ (246)
-
20,880
(246)
20,880
$20,880 $ 154,157
For the year ended
December 31, 2013
Direct
operating
expenses
Selling
and
admini-
strative
expenses
Stock
based
compen-
Sation
Finance
costs
Deprec-
iation
expense
Gain on
sale of
equip-
ment
Goodwill
impair-
ment
Total
$ 50,082 $ 8,430
$ 914
$ -
$ -
$ -
$ -
$ 59,426
22,367
-
-
-
-
-
4,314
1,933
-
-
-
-
-
-
-
-
-
-
-
-
3,262
-
-
15,418
-
-
-
-
-
-
-
-
-
-
-
22,367
4,314
1,933
15,418
3,262
(1)
December 31,
other operating expenses consists of the following:
-
$ 72,449
-
$ 14,677
-
$ 914
-
$ 3,262
-
$ 15,418
Repairs and maintenance
Operating supplies and consumables
Fuel
Travel and subsistence
License, registration and permits
Certification and inspection
Equipment rental
Other
(171)
$ (171)
2014
-
$ -
(171)
$ 106,549
$
$
12,152
10,304
6,445
1,999
1,632
1,456
1,116
343
35,447
2013
$
$
5,121
6,841
3,760
1,934
1,182
2,002
977
550
22,367
Page 56
(1)
Personnel expenses
Other operating
expenses
Other selling and
administrative
expenses
Facility expenses
Depreciation expense
Transaction costs
Finance costs
Gain on sale of
equipment
Total
Goodwill impairment
(1) see table below
(1)
Personnel expenses
Other operating
expenses
Other selling and
administrative
expenses
Facility expenses
Depreciation expense
Finance costs
Gain on sale of
Total
equipment
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
14.
Commitments and contingencies:
As at December 31, 2014, the Company has lease commitments and other contractual obligations as follows:
Next 12
months
Between 1
and 3 years
Payments due by period
Between 4
and 5 years
Greater than
5 years
Contractual obligations:
Bank Loan
Finance lease liabilities
Operating lease payments
Total contractual
obligations
$
-
201
1,490
$
65,657
215
3,065
$
$
-
-
613
$
1,691
$
68,937
$
613
$
-
-
-
-
Total
$
65,657
416
5,168
$
71,241
Operating leases relate primarily to buildings and lands leased for use in day to day operating activities. In the
normal course of business the Company makes short term commitments for the purchase and delivery of new items of
property and equipment.
The Company is party to legal proceedings and claims that arise during the ordinary course of business. It is the
opinion of the Company that the ultimate outcome of these matters will not have a material effect upon the Company’s
financial position, results of operations, or cash flows.
Related parties
15.
Of the total outstanding shares of the Company, 67% are directly or indirectly owned by Brookfield Capital Partners
Ltd. (the “Fund”), a private equity fund managed by Brookfield Asset Management Inc. (“Brookfield”), and the entities
that constitute the Fund. The Company is related to Brookfield by virtue of control, and is therefore also related to
Brookfield’s affiliates. During 2014, the Company had revenue totaling $250 ($140 in accounts receivable as at
December 31, 2014) in the normal course of business with companies under common control. The terms and
conditions of these transactions were no more favourable than those available, or which might reasonably be
expected to be available, in similar transactions with non-related companies on an arm's length basis.
During 2014, the Company used the legal services of a firm in which the spouse of one of its directors is a partner in
relation to the federal temporary foreign worker program. Amounts were billed based on normal market rates for
such services.
The acquisition of Ironhand on May 15, 2014, was a related party transaction as disclosed in note 7.
Key management personnel include the Company’s directors and officers. The following table summarizes
compensation provided to key management personnel for the years ended:
December 31,
2014
Short term employee benefits (including directors’ fees)
Share based payments (stock options and RSU’s)
Termination benefits
Total compensation to key management including directors and officers
$
2,279
932
200
3,411
$
December 31,
2013
$
1,802
745
-
2,542
$
Certain executive officers are subject to a mutual term of notice of three months. On resignation at the Company’s
request, they are entitled to termination benefits of 12 to 24 months gross salary.
The Board of Directors of the Company has a Compensation and Corporate Governance Committee which
recommends compensation for directors and key executives of the Company for review and approval by the entire
Board of Directors.
Page 57
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
16.
Financial risk management
The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk
management framework. The Company’s audit committee is also responsible for developing and monitoring the
Company’s risk management policies. The committee reports regularly to the Board of Directors on its activities.
The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to
set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies
and systems are reviewed regularly to reflect changes in market conditions and the Company’s activities. The
Company, through its policies and procedures and training, aims to develop a disciplined and constructive control
environment in which all employees understand their roles and obligations.
The Company has designated its financial instruments as follows: cash equivalents (if any) are classified as held for
trading and measured at fair value, accounts receivable are classified as loans and receivables which are measured at
amortized cost; accounts payable and accrued liabilities long-term debt and loans and borrowings are classified as
other financial liabilities which are also measured at amortized cost; the fair values of the cash, accounts receivable
and accounts payable and accrued liabilities approximate their carrying values due to their short-term nature; the fair
value of the Company's long-term debt and loans and borrowings approximate their carrying values due to the
floating interest rate terms or the terms reflecting current market conditions.
The Company has exposure to credit risk, liquidity risk and market risk as follows:
Credit risk
a)
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to
meet its contractual obligations, and arises principally from the Company’s receivables from customers. The
carrying amount of accounts receivable represents the maximum exposure to credit risk as at December 31, 2014 and
December 31, 2013.
Accounts receivable includes balances from a large number of customers primarily operating in the oil and gas
industry. The Company assesses the credit worthiness of its customers on an ongoing basis as well as monitoring
the amount and age of balances outstanding.
The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer,
however, management also considers the demographics of the Company’s customer base. Currently, majority of the
Company’s sales are concentrated within the Western Canadian Sedimentary Basin (“WCSB”). This concentration is
common amongst companies in the industry.
The Company has a credit policy under which each new customer is analyzed individually for creditworthiness before
the Company begins to provide services to the customer and prior to offering standard payment terms and conditions.
The Company’s review includes external ratings, when available, as well as contacting credit references and
evaluating banking information provided by the customer. Purchase limits are established for each new customer,
Customers that fail to meet the Company’s benchmark
which represents the maximum open amount.
creditworthiness may be required to provide a cash deposit for part or all of the anticipated job cost until they have
sufficient payment history with the Company. Under some circumstances the Company may lien a customer’s
location where the services were provided.
Page 58
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
The following table details the age of the outstanding trade accounts receivable and the related allowance for doubtful
accounts:
December 31,
2014
Trade accounts receivable:
1 to 30 days outstanding – not past due
31 to 90 days outstanding
>90 days overdue
Allowance for doubtful accounts
$
19,624
13,535
2,391
(724)
$ 34,826
The change in the allowance for doubtful accounts for the years ended December 31 is as follows:
358
404
(38)
724
$
$
2014
Balance as at January 1:
Additional allowance
Amounts used (recoveries)
Balance as at December 31
December 31,
2013
$
$
$
$
13,724
8,158
835
(358)
22,359
2013
127
250
(19)
358
Accounts receivable are considered for impairment on a case-by-case basis when they are past due or when objective
evidence is received that a customer will default. The Company records a specific bad debt allowance when
management considers that the expected recovery is less than the actual amount receivable. Recoveries are the
result of amounts which were previously determined to be uncollectable being collected in a period subsequent to a
bad debt allowance being recorded.
Liquidity risk
b)
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The
Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to
meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or
risking damage to the Company’s reputation.
The Company has undrawn capacity under its Bank Loan to provide liquidity to meet contractual obligations (see note
8 and 17).
The following table summarizes contractual maturities for non-derivative financial instruments December 31, 2014:
Years ended December 31
2015
$ 13,064
4,738
201
$ 18,003
2016
$ -
-
-
$ -
2017
$ -
-
65,440
$ 65,440
2018
$ -
-
-
-
$
2019 and
beyond
$ -
-
25
25
$
Accounts payable and accrued liabilities
Dividend payable
Long-term debt
Market risk
c)
Market risk is the risk of changes in market prices, such as commodity prices, foreign currency exchange rates, and
interest rates will affect the net earnings or the value of financial instruments. The objective of managing market
risk is to control market risk exposures within acceptable limits, while maximizing returns. Market risks to which
the Company is subject include:
Foreign currency risk
Foreign currency exchange rate risk is the risk that the fair value or future cash flows will fluctuate as a result of
changes in foreign exchange rates. The Company does not engage in significant foreign currency denominated
transactions and exposure to foreign currency risk is negligible.
Page 59
CWC ENERGY SERVICES CORP.
NOTES TO THE FINANCIAL STATEMENTS
For the years ended December 31, 2014 and 2013
Stated in thousands of Canadian dollars except share and per share amounts
Interest rate risk
Interest rate risk is the risk that future cash flow will fluctuate as a result of change in market interest rates.
The Company is exposed to interest rate fluctuations on its operating loan and long-term debt both of which bear
interest at floating market rates.
For the year ended December 31, 2014, if the prime interest rate
increased/decreased by 1%, with all other variables held constant, net income would have been $650 lower/higher
(2013 – $446). The Company has not entered into any interest rate swaps or other financial arrangements that
mitigate the Company’s exposure to interest rate fluctuations.
Commodity price risk
The Company is not directly exposed to commodity price risk as it does not have any contracts that are directly based
on commodity prices, however, many of the Company's suppliers of parts for the equipment used by the Company
purchase those supplies in US currency and are exposed to commodity price risk which poses an indirect risk to the
Company as their pricing reflects these fluctuations. A change in commodity prices, specifically oil and natural gas
prices could have a material impact on cash flows of the Company’s customers and could therefore affect the demand
for our products or services from these customers. However, given that this is an indirect influence, the financial
impact for the Company of changing oil and natural gas prices is not reasonably determinable.
Capital management
17.
The Company’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence
and to sustain future development of the business. The Company strives to maintain a balance between debt and
equity to ensure the continued access to capital markets to fund growth and ensure long-term viability. The
Company continually assesses the cash flow from operations to make decisions regarding required capital
maintenance, growth capital and dividends to ordinary shareholders. When those cash flows are not anticipated to
be sufficient, the Company then assesses the impact on its capital structure of funding through additional debt.
The Company manages its capital structure and makes adjustments to it in accordance with the aforementioned
objectives, as well as in light of changes in economic conditions. In order to maintain or adjust its capital structure,
the Company may, but is not limited to, issue new shares, issue new debt, issue new debt replacing existing debt with
different characteristics, adjust the dividend paid to ordinary shareholders, or purchase shares for cancellation
pursuant to normal course issuer bids.
The Company monitors capital using a key financial metric of debt-to-equity ratio, which is not a recognized measure
under IFRS and, therefore, is unlikely to be comparable to similar measures of other companies. For the purpose of
this calculation, debt includes operating loans, current portion of long-term debt, and long-term debt, and
shareholders’ equity includes share capital, contributed surplus and deficit. The Company may be required to
increase this from time to time as a result of expansion activities. The Company was in compliance with all
externally imposed capital requirements as at December 31, 2014 and 2013.
The following table provides the debt-to-equity ratios as at:
Long-term debt
Shareholders’ equity
Debt-to-equity ratio
December 31,
2014
65,666
$
172,705
0.38
December 31,
2013
$
44,009
91,344
0.48
There has been no change in how the Company manages capital during the year ended December 31, 2014.
Page 60
Directors
Corporate Secretary
Corporate Information
James L. Kidd
Auditors
Burnet, Duckworth & Palmer LLP
2
Jim Reid
, Chairman
1
Duncan T. Au
Daryl Austin
Gary L. Bentham
Wade McGowan
Audit Committee
1.
Dean Schultz
2.
1, 2
1,2
Compensation and Corporate Governance Committee
Officers
President & Chief Executive Officer
Duncan T. Au, CA, CFA
Chief Financial Officer
Craig Flint, CA
Vice President, Operations (Drilling)
Ron Sutley
Vice President, Operations (Well Services - East)
Darwin McIntyre
Vice President, Operations (Well Services - West)
Layne Wilk
Vice President Sales & Marketing (Drilling)
Brian Weighill
Vice President Sales & Marketing (Well Services)
Mike DuBois
Vice President, Finance & Controller
Karen Dilon, CA
KPMG LLP
Bankers
ATB Financial
National Bank
HSBC Bank Canada
Canadian Western Bank
Legal Counsel
Burnet, Duckworth & Palmer LLP
Transfer Agent
Computershare Limited
Corporate Office
610, 205 – 5th Avenue SW
Calgary, Alberta T2P 2V7
Phone: (403) 264-2177
Fax: (403) 264-2842
Website: www.cwcenergyservices.com
Email: info@cwcenergyservices.com
Stock Exchange Listing
TSX Venture: CWC
Page 61 E N E R G Y S E R V I C E S TSX-V: CWC
Suite 610, 205 – 5th Ave SW
www.cwcenergyservices.com
Calgary, Alberta, Canada T2P 2V7