For the year ended December 31, 2012, the Company reported operating costs of $20.6 million as compared to $20.4 million in the prior year. As a percentage of revenue, 2012 operating costs increased 22% over 2011 reflecting the increased costs incurred to hire and retain additional qualified field staff to operate equipment added to the fleet, the repair and maintenance of equipment in anticipation of increased activity and repairs resulting from drilling in harsh environments, additional expense for larger diameter coiled tubing charges resulting from harsh down hole conditions decreasing the life of certain larger diameter coiled tubing strings, the inefficiencies caused by weight re-distribution during spring break-up, the reliance on third party transportation services in the first quarter of 2012 and higher costs experienced in the fourth quarter as the Company incurred additional personnel costs due to unanticipated standby days in the field and costs to transfer equipment.
Lower activity levels since the first quarter of 2012 resulted in the Company reporting higher costs as a percentage of revenue due to the fixed cost structure required to ensure personnel are available to operate the equipment and additional costs incurred for rotating personnel from outside western Canada. Over the past few years, the biggest challenge facing the Company has been the ability to hire enough qualified personnel to operate the equipment in the field. These cost increases were partially offset by savings realized in third party transportation as a result of new equipment received in the second quarter of 2012. Due to increased operating costs as a percentage of revenue and lower than anticipated activity levels, the Company is continuing to review its cost structures and has implemented cost reduction initiatives in the fourth quarter of 2012 with additional cost reductions planned to coincide with spring break-up.
The Company exited 2012 with six coiled tubing units plus one reel trailer capable of 2-3/8" deep coil applications, seven nitrogen pumpers and three fluid pumpers. The Company took delivery of its new 2- 3/8" deep coil reel trailer at the end of October 2012. Three of the coiled tubing units and one reel trailer are classified as "deep" coil units. The Company is capable of running up to six coiled tubing jobs concurrently.
Liquidity and Capital Resources
At December 31, 2012 the Company had $0.7 million drawn on its operating line and had negative working capital of $7.8 million as compared to cash of $2.1 million and positive working capital of $6.4 million as at December 31, 2011. The significant reduction in working capital is partially attributed to the reclassification of the $8.8 million balance outstanding in loans and borrowings to current liabilities as a result of the Company not meeting all of its debt covenants. The Company is required to record the entire balance outstanding as a current liability, similar to the reclassification in the second quarter as the lender does not issue waivers for a twelve month period. In addition to this reclassification, the reduction in cash and working capital reflects the decrease in accounts receivable as a result of lower operational activity and the collection of amounts owing from customers.
In March 2013, the Company finalized a credit facility with a private Canadian asset-based lender. Proceeds from this facility were used to retire its previous credit facility with a Canadian chartered bank and provide funding for working capital purposes. The new credit facility includes a demand revolving facility of up to $4.0 million and a demand non-revolving term loan from which the Company drew the entire $12.0 million. The initial term of the credit facility is for a period of 12 months at an interest rate of 18% per annum with an option to extend for an additional six month period. The facility contains no financial covenants, is subject to normal and customary terms and conditions for a facility of this kind, and is secured by a first ranking security interest in all present and after acquired property of the Company. The Company has maintained its day-to-day banking at the Canadian chartered bank along with its outstanding letter of credit and credit cards.
Overall, 2012 was a challenging year for the oil and gas industry and the Company. The first half of the year featured a very early spring breakup followed by an extremely wet spring and summer. The second half of 2012 saw completion expenditures reduced, especially in the fourth quarter as customers reacted to a significant drop in oil prices which had occurred at the end of the second quarter. Oil pricing differentials and a lack of pipeline capacity dogged the entire industry throughout 2012. Although there will not likely be relief from the effects of a lack of pipeline capacity this year, commodity prices have recovered significantly to date from the lows seen at the start of the second half of 2012. Winter projects that were deferred to the first quarter of 2013 have in fact resumed. First quarter revenues will be somewhat lower than for the comparative period of 2012, but they are significantly higher on a sequential basis. Early in 2013 the Company established strong relationships with a number of larger producers, which should lead to more stable operations in 2013. The Company has very moderate capital expenditures planned and have undertaken a number of cost saving measures. Given an improved operating environment and an ongoing focus on cost management, the Company anticipates a stronger year ahead.
Additional information can be found on SEDAR at www.sedar.com or the Company web site at www.leaderenergy.com. The number of common shares issued and outstanding at the date hereof is 29,388,021 which does not include 2,763,000 unexercised stock options and 4,400,000 share purchase warrants.
This press release contains certain statements or disclosures relating to the Company that are based on the expectations of the Company as well as assumptions made by and information currently available to the Company which may constitute forward-looking information under applicable securities laws. All such statements and disclosures, other than those of historical fact, which address activities, events, outcomes, results or developments that the Company anticipates or expects may, or will occur in the future (in whole or in part) should be considered forward-looking information.
Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this news release.
Leader Energy Services Ltd.
President & CEO
Leader Energy Services Ltd.
CFA Executive VP & Director
Leader Energy Services Ltd.
Graham Reid, CA
VP Finance & CFO
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