Allis-Chalmers Reports Second Quarter Results

Allis-Chalmers Energy announced results for the three and six months ended June 30, 2009. Allis-Chalmers reported a net loss for the second quarter of 2009 of $90,000, or $0.00 per diluted share, compared to net income of $10.6 million, or $0.30 per diluted share in the second quarter of 2008. Revenues for the second quarter of 2009 decreased 31.0% to $112.5 million compared to $163.1 million for the second quarter of 2008.

Results in the second quarter of 2009 include a pre-tax gain of $26.4 million on debt extinguishment associated with the repurchase of $74.8 million of senior notes and non-routine and restructuring charges totaling $8.6 million. These charges include a $3.2 million addition to the allowance for bad debts, $1.6 million in restructuring charges consisting of severance payments and the closing of certain yard locations, a $2.6 million non-cash loss on an asset disposition and inventory writedowns and $1.2 million of customer credits.

Allis-Chalmers reported a net loss for the first six months of 2009 of $2.7 million, or $0.08 per diluted share, compared to net income of $18.6 million, or $0.53 per diluted share for the first six months of 2008. Results for the first six months of 2009 include a pre-tax gain of $26.4 million from the extinguishment of debt and non-routine and restructuring charges totaling $10.6 million. The charges include a $3.6 million addition to the allowance for bad debts, $1.8 million in restructuring charges consisting of severance payments and the closing of certain yard locations, a $3.2 million non-cash loss on asset dispositions and inventory writedowns and $2.0 million of customer credits.

Adjusted EBITDA was $35.0 million for the second quarter of 2009, compared to $46.2 million for the second quarter of 2008. Adjusted EBITDA for the second quarter of 2009 would have been $17.2 million excluding the $26.4 million gain and the $8.6 million in non-routine and restructuring charges. For the first six months of 2009 Adjusted EBITDA was $64.5 million compared to $88.0 million for the first six months of 2008. Adjusted EBITDA would have been $48.7 million in the first six months of 2009 excluding the $26.4 million gain and the $10.6 million in non-routine and restructuring charges. EBITDA and Adjusted EBITDA are non-GAAP financial measures that are not necessarily comparable from one company to another and additional information and discussion regarding EBITDA and Adjusted EBITDA are provided later in this release.

In June 2009, as previously announced, Allis-Chalmers strengthened its balance sheet and improved its liquidity by raising approximately $125.6 million in gross equity proceeds through a back-stopped common stock rights offering and a new convertible perpetual preferred stock issue. Allis-Chalmers reduced outstanding debt by approximately $113.0 million at the end of the second quarter of 2009, including a $74.8 million reduction of its outstanding senior notes and all outstanding borrowings under the $90.0 million revolver, and increased cash on hand by approximately $40.0 million. Net debt, after cash on hand, was reduced to $439.4 million at the end of the second quarter of 2009 from $584.1 million at the end of the first quarter of 2009. Allis-Chalmers estimates that interest expense will decrease by approximately $8.6 million annually.

Micki Hidayatallah, Allis-Chalmers' Chairman and Chief Executive Officer, stated, "The worldwide economic downturn, the decrease in natural gas prices in the U.S., and the impact of the credit and liquidity squeeze on our customers resulted in the U.S. rig count dropping by 52% as of June 30, 2009 compared to June 30, 2008. The weak market environment has had a significant impact on our domestic operations resulting in a severe deterioration in both equipment utilization and pricing."

Mr. Hidayatallah also stated, "With operations in Argentina, Brazil and Bolivia, our Drilling and Completion segment has shown more stability and better visibility than the U.S. market, but rig utilization is down 12% to 15% and pricing has deteriorated by 5% to 10%. In this environment it has been difficult to recover increases in wages, fuel, labor and other costs resulting from very high inflationary trends in Argentina. The weakening of the Argentine peso has also impacted revenues. Finally, while our Brazilian operations have performed above expectations, we suffered the total loss of a rig from a blow-out. The rig was insured, but the insurance proceeds will be $1.9 million less than the book value of the rig."

To counter market conditions, Allis-Chalmers has taken the following steps:

  • Decreased domestic work force by 50% to approximately 600 as compared to 1,200 on December 31, 2008.
  • Converted much of the fixed direct labor costs to a job day-rate bonus.
  • Closed unprofitable operating locations and reduced administrative and supervisory personnel in remote locations. Certain administrative and accounting functions were centralized and consolidated in Houston to increase efficiencies and reduce costs.
  • Established a new account management system for its sales force which emphasizes both accountability and financial incentives. Allis-Chalmers will reward salesmen who expand and diversify its customer base and plans to increase market share with incentives for customers that use fully integrated services.
  • Established a strategy to redeploy assets to locations with the highest utilization rates at a reasonable price. Domestic markets in which Allis-Chalmers is concentrating include the Marcellus, Haynesville and Eagle Ford shales. Internationally, marketing efforts for the redeployment of assets emphasize Columbia, Mexico, Brazil, the Middle East and the North African region.
  • Conserve cash and maximize liquidity. Capital expenditures have been limited to maintenance and to those firm commitments for equipment made in 2008. Inventory levels are being reduced, credit analysis and receivables collection efforts have been intensified and where appropriate payables payment terms have been extended.

Mr. Hidayatallah concluded, "In the first half of the year in an extremely difficult environment we internally generated $43 million of operating cash flow after interest, reduced our domestic workforce by over 50% and strengthened our balance sheet. At the end of the quarter, we had cash on hand of approximately $59 million. In the second half of 2009, we intend to enhance revenues with the redeployment of assets and the implementation of our new sales account management system. In 2010 we will endeavor to increase international revenues from 57% of total revenues to approximately 70% of total revenues as a strategic objective. We believe that this strategy will increase gross margins and operating profit and should enable us to be profitable on a net income basis in 2010."

Segment Results for Second Quarter 2009

  • Oilfield Services. Revenues for the quarter ended June 30, 2009 for the Oilfield Services segment were $29.5 million, a decrease of 57.1% compared to $68.7 million in revenues for the quarter ended June 30, 2008. The Oilfield Services segment reported a loss from operations of $10.3 million for the second quarter of 2009 compared to income from operations of $13.1 million in the second quarter of 2008. The Oilfield Services segment revenues and operating income for the second quarter of 2009 decreased compared to the second quarter of 2008 due to weak market conditions which resulted in decreased demand for services, decreased utilization of equipment and personnel and significant pricing pressure for all services. The loss from operations in the second quarter of 2009 includes $5.3 million in non-routine and restructuring charges. Additionally, depreciation and amortization expense for the Oilfield Services segment increased by $1.5 million, or 24.7%, in the second quarter of 2009 compared to the second quarter of the previous year, due to capital expenditures completed during 2008.
  • Drilling and Completion. Revenues for the quarter ended June 30, 2009 for the Drilling and Completion segment were $67.8 million, a decrease from $69.8 million in revenues for the quarter ended June 30, 2008. Income from operations decreased to $403,000 in the second quarter of 2009 compared to $9.4 million in the second quarter of 2008, due to a $1.9 million non-cash loss on an asset disposition, reduced rig utilization and rig rates in Argentina, increased labor and other expenses and $329,000 of restructuring charges. Profit margins in Argentina were adversely affected by labor and other cost increases which could not be readily recovered from customers under current market conditions. Additionally, workforce reductions in response to market conditions are difficult to implement in the labor environment in Argentina. Depreciation and amortization increased $2.1 million, or 60.7%, in the second quarter of 2009 compared to the second quarter of 2008. The increase in depreciation and amortization expense was the result of the addition of new rigs in Argentina in 2008 and the acquisition of BCH in Brazil at the end of 2008. The 2.9% decrease in revenues in the second quarter of 2009 compared to the second quarter of 2008 would have been greater except for the acquisition of BCH at the end of 2008 which contributed $10.0 million of revenues in the second quarter of 2009.
  • Rental Services. Revenues for the quarter ended June 30, 2009 for the Rental Services segment were $15.2 million, a decrease from $24.7 million in revenues for the quarter ended June 30, 2008. Income from operations decreased to $588,000 in the second quarter of 2009 compared to $9.3 million in the second quarter of 2008. The decrease in revenues and income from operations is due to the decrease in utilization of rental equipment, and decreased pricing due to weak market conditions. The decrease in income from operations in the second quarter of 2009 is also due to $1.1 million of non-routine and restructuring charges. Depreciation and amortization expense for the Rental Services segment increased $600,000 or 8.8% in the second quarter of 2009 compared to the second quarter of 2008 due to capital expenditures made during 2008.
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