SECURE Energy Announces Strong 2020 Discretionary Free Cash Flow of $96 Million
CALGARY, AB, Feb. 25, 2021 – SECURE ENERGY Services Inc. (“SECURE”) (TSX: SES) reported today its operational and financial results for the three and twelve months ended December 31, 2020, highlighted by 2020 discretionary free cash flowi of $95.8 million.
The following press release should be read in conjunction with the Corporation’s management’s discussion and analysis (“MD&A”) for the three and twelve months ended December 31, 2020, and the audited consolidated financial statements and notes thereto for the years ended December 31, 2020 and 2019 which are available on SEDAR at www.sedar.com.
SECURE is also pleased to announce the publication of our second comprehensive sustainability report, which can be found on the Corporation’s website. The 2020 Sustainability Report features the Corporation’s performance in 2020 related to critical environmental, social and governance issues and highlights our commitments to sustainability, the positive impacts made by our ongoing initiatives, and information on how we continue to refine our sustainability strategies and processes.
Financial and operational highlights
- Completed organizational restructuring resulting in an expected $40 million reduction to cost of sales and general and administrative expenses on an annualized basis;
- Increased segment profit margini as a percentage of revenue in both the Midstream Infrastructure and Environmental and Fluid Management segments from prior year;
- Generated discretionary free cash flow of $95.8 million;
- Reduced debt outstanding on the Corporation’s credit facilities by $54.9 million;
- Completed construction of the East Kaybob oil pipeline, the Corporation’s second oil gathering system, providing SECURE with long-term fees-for-service from pipeline tariffs, and reliable volumes at the Fox Creek facility;
- Reduced scope 1 greenhouse gas emissions for the fourth consecutive year, both on an absolute and intensity basis;
- Extended the existing $130 million second lien credit facility by one year to July 31, 2022.
2020 was a year marked by unprecedented challenges for the oil and gas industry. The impact of the COVID–19 pandemic on the demand for oil was exacerbated by over supply concerns stemming from failed negotiations between OPEC+ countries on production curtailments. The result of these factors was a dramatic drop in crude oil and liquids pricing beginning in March 2020 which had deep negative consequences on producer cash flows. SECURE’s customers responded by reducing capital investment, temporarily shutting in production and employing the highest degree of vigilance on operating costs. In May 2020, crude oil and liquids pricing started to recover, with steady improvements throughout the remainder of the year. However, on average, benchmark crude oil prices in 2020 remained 31% lower than the prior year.
Resilient financial results
The strategies employed by SECURE over the past several years to increase the stability of the Corporation’s cash flows, including the addition of oil and water pipelines underpinned by long-term contracts, crude oil storage, production chemicals and recurring environmental project work, helped reduce the impact of low drilling and completion activity on the Corporation’s results in 2020. The Corporation recorded Adjusted EBITDAi of $136.2 million for the year ended December 31, 2020, a decrease of 24% compared to 2019. This reflects the level of SECURE’s production and contracted volumes and the significant measures taken during the year to reduce operating and general and administrative (“G&A”) expenses to adjust the Corporation’s cost structure to levels consistent with activity levels, including:
- Reduced personnel costs by approximately 25%. Measures taken to reduce personnel costs included modified work schedules, job sharing, salary reductions and layoffs. SECURE expects annualized savings in excess of $40 million as a result of the Corporation’s leaner organizational structure, the majority of which is expected to endure even as activity levels increase.
- Utilized the Canadian Federal Government’s wage subsidy program to reduce the impact of the downturn on our staff. In total in 2020, the Corporation recorded a $23.9 million recovery in cost of sales and G&A expenses, primarily associated with the wage subsidy program.
- Restricted discretionary spending and suspended all non-essential travel for SECURE employees.
Also as a result of these cost containment measures, the following results were achieved during 2020:
- Reduced overall G&A expenses (excluding depreciation, depletion and amortization and share-based compensation) by $28.2 million, or 37%, from the prior year. As a percentage of revenue (excluding oil purchase and resale), G&A expenses were 10% for the year ended December 31, 2020, down from 12% in the prior year.
- Increased Adjusted EBITDA margini to 30%, up from 29% in the prior year.
- Increased the Midstream Infrastructure segment’s profit margin as a percentage of revenue (excluding oil purchase and resale) to 62%, up from 61% in the prior year.
- Increased the Environmental and Fluid Management segment’s profit margin as a percentage of revenue to 23%, up from 20% in the prior year.
With these results, the Corporation demonstrated that SECURE’s Midstream Infrastructure and production-based service offerings deliver strong cash flows that are sustainable at the low commodity prices and activity levels faced in 2020.
Solid balance sheet
Maintaining a strong balance sheet has always been a key priority for the Corporation. SECURE took additional steps in 2020 to maximize discretionary free cash flow and direct these funds towards debt reduction to best position the Corporation for long-term success:
- Reduced total capital expenditures by 47% from 2019, to $71.3 million. $53.0 million of the total spend related to growth and expansion capital, incurred primarily to construct the East Kaybob oil pipeline, a light oil and condensate gathering system underpinned by 15-year commitments from multiple producers, aligning with our underlying strategy to increase the stability of our cash flows through long-term fee for service contracts. The Corporation also incurred $9.1 million of sustaining capital.
- Reduced the monthly dividend from $0.0225 (2.25 cents) to $0.0025 (0.25 cents) effective May 1, 2020. This reduction of the dividend results in annualized cash savings of approximately $38 million. Following the June 2020 monthly dividend, the Corporation moved to a quarterly dividend, with the first payment of $0.0075 (0.75 cents) per common share made in October 2020.
- Minimized counterparty risk and optimized working capital. The Corporation has a robust credit review process and worked closely with customers this year to ensure timely collection of receivables. As a result of these diligent procedures, the Corporation’s credit losses in 2020 were in line with low historic averages. At December 31, 2020, the Corporation’s working capital (current assets less accounts payable and accrued liabilities) was $63.8 million, down from $125.3 million at December 31, 2019.
During the year ended December 31, 2020, the Corporation extended the existing $130 million second lien credit facility (“Second Lien Facility”) by one year to July 31, 2022. There have been no changes to the remaining terms, conditions and covenants of the Second Lien Facility. The Corporation also entered into interest rate swaps to fix the interest rate for the Second Lien Facility at 5.5%. The extended term reduces near-term liquidity risk and provides the Corporation with increased financial flexibility.
The following table outlines SECURE’s Senior and Total Debt to trailing twelve-month EBITDA ratiosii at December 31, 2020, compared to the covenant thresholds outlined in our credit facility agreements.
Dec 31, 2020
Senior Debt to EBITDA
Total Debt to EBITDA
SECURE will continue to focus on managing the Corporation’s financial position throughout 2021. Strong line of sight for significant discretionary free cash flow in 2021 will provide increased flexibility for continued debt repayment, opportunistic share repurchases, and midstream infrastructure growth in a manner consistent with SECURE’s business strategy.
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