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December 10, 2010

Integra Group: Interim Management Statement and Financial Highlights for the 9M 2010


Integra Group (LSE: INTE), a leading FSU-based oilfield services provider, released today its Interim Management Statement and unaudited financial highlights for the nine month period ended September 30, 2010. The financial data is based on management assessment only and has not been reviewed by external auditors.

Results for the first nine months of 2010 demonstrate a year-on-year pickup in revenues driven primarily by higher volumes of offered oilfield services and the strengthening of the ruble against the US dollar. Adjusted EBITDA margin improved due to materially better efficiency of the drilling and IPM services.

Following the divestment of the heavy drilling rig manufacturing business in August 2010, the financial results of the divested business were classified as results from discontinued operations and are excluded from 9M 2010 financial highlights and segment reporting.

9M 2010 Financial Highlights
 
• Sales increased by 13.3% to US$ 616.0 million (vs. US$ 543.7 million in 9M 2009)
• Adjusted EBITDA  increased by 25.3% to US$ 100.0 million (vs. US$ 79.8 million in 9M 2009)
  Adjusted EBITDA margin was 16.2% (vs. 14.7% in 9M 2009)
• Net cash flow provided by operating activities was US$ 37.1 million (vs. US$ 77.0 million in 9M 2009)
• Capital expenditures were US$ 36.3 million (vs. US$ 30.2 million in 9M 2009) 
• Net Debt as of December 1, 2010 amounted to US$ 116.2 million (vs. US$ 175.4 million as of December 31, 2009)

9M 2010 Operating Highlights

• 261,661 meters drilled (vs. 141,000 meters during 9M 2009)
• 2,502 workover operations conducted (vs. 2,877 workover operations during 9M 2009)
• 171 coil tubing operations (vs. 271 operations during 9M 2009)
• 189 wells completed with directional drilling service (vs. 163 wells during 9M 2009)
• 796 cementing operations (vs. 616 operations during 9M 2009)
• 246 downhole motors and 60 turbines produced (vs. 260 downhole motors and 9 turbines produced in 9M 2009)
• 7 cementing units produced (5 cementing units produced in 9M 2009)
• 575,813 seismic shot points made (vs. 601,970 seismic shot points during 9M 2009)
 
Antonio Campo, Integra Group’s Chief Executive Officer, commented,
“Our third quarter results demonstrate a continued recovery in the Russian OFS industry. We are particularly pleased that our focus on efficiency and business repositioning produced a gradual and sustainable improvement in the overall result. Higher volumes of our operations, improved efficiency and stronger ruble were the main factors contributing to better earnings in 9M 2010 despite the fact that price increases for our services were subdued. We are particularly pleased by the margin improvements in our Drilling, Workover and IPM division following a major overhaul of the management team and business processes there.
Several months ago we have finalized two strategic transactions: joining forces with Schlumberger in a seismic joint venture and divesting our heavy rig manufacturing business. Apart from reinforcing our service and technology portfolio, these transactions provided significant cash inflows, which we decided to return to shareholders in a form of a share buyback and to reduce our debt.
We are now entering into an active stage of contracting for the next year. Although the 2011 order book is far from being complete we see signs of steady growth in demand for our services across the board.”

Conference Call Dial-In Details

Date: Friday, December 10, 2010
Time: 17:00 Moscow / 14:00 London / 9:00 New York
Title: Integra Group 9M 2010 Results
Conference ID: 29819512
UK international tel.: +44 1452 569 335
USA international tel.: +1 866 655 1591

There will also be a playback facility available until December 16, 2010. The details are:

UK international tel.: +44 1452 550 000
USA international tel.: +1 866 247 4222
Access code: 29819512#

Contacts
  
Integra Group  
Andrei Machanskis 
Head of Investor Relations 
Tel. +7 495 933 0621 
amachanskis@integra.ru


Sergey Beldinsky
Head of Public Relations 
Tel. +7 495 933 0621
sbeldinsky@integra.ru

 
Discussion of the Market Environment

Oilfield services market conditions in 9M 2010 continued to improve, as better economics of the Russian oil and gas industry allowed a moderate increase in demand which resulted in higher volume of OFS operations. However, despite the gradual industry recovery, there are still areas of overcapacity in select services which put a ceiling on material pricing increases. We have observed a continued modest improvement in the upstream spending plans of our key customers in the second half of 2010, which is expected to translate into a favourable demand environment in the contracting period for 2011.

Discussion of the Group’s Financial Results

Following the divestment of the heavy drilling rig manufacturing business (ZAO URBO) in August 2010, the financial results of this asset are now classified as results from discontinued operations and are excluded from 9M2010 financial highlights and segment reporting. Financial result from disposal of property, plant and equipment are excluded from Adjusted EBITDA calculation from 3Q 2010.

Consolidated sales during 9M 2010 increased by 13.3% to US$ 616.0 million compared to US$ 543.7 million during 9M 2009. Of this, an increase of 5.8% was due to business factors, such as increase in the volume of operations, specifically in land drilling, technology services and seismic services (Russia only) driven by increased exploration and development spending by our key customers. An increase of 7.5% was due to appreciation of the Russian ruble.

Adjusted EBITDA increased by 25.3% to US$ 100.0 million from US$ 79.8 million. An increase of 17.8% resulted from the increase in the volume of operations, significant increase in the profitability of our drilling operations, decrease in certain costs of sales due to efficiency measures undertaken, non-recurrence of severance payments related to headcount reduction and restructuring of the drilling business incurred in 2009, and an increase of 7.5% resulted from the strengthening of the Russian ruble. Adjusted EBITDA margin increased to 16.2% in 9M 2010 compared to 14.7% in 9M 2009 reflecting a higher proportional increase in sales than in cost of sales due to implemented efficiency measures, as well as the non-recurrence of severance payments related to 2009 headcount reductions. The increase in profitability in Drilling, Workover and IPM, and Technology Services was partially offset by weaker profitability in the Formation Evaluation segment due to completion of two major contracts in Kazakhstan. Sequentially, Adjusted EBITDA margin in 3Q 2010 increased to 18.8% from 17.2% in 2Q 2010.


Discussion of Segment Financial Results
 
Following the completion of the sale of ZAO URBO, Integra Group discontinued reporting under the OFS Equipment Manufacturing segment and merged the results of operations of the remaining manufacturing assets with its Technology Services segment. The Group has also reallocated direct selling, general and administrative expenses of business segments from the corporate/holding company level to respective business segments. The corresponding restatement of 9M 2009 and 2Q 2010 results was made for comparison purposes. This reclassification does not affect the Group’s Adjusted EBITDA and affects segment reporting only.
  

  Drilling, Workover & IPM Technology Services  Formation Evaluation  Other revenue, overheads and eliminations  Total Group
 
Revenue (in US$ million)
 
9M 2009  262.3 129.0 145.8 6.6 543.7
 
9M 2010  283.3 169.1 171.7 (8.1) 616.0
 
Chg, (%) 8.0% 31.1% 17.8% n/a 13.3%
Adj. EBITDA (in US$ million)
 
9M 2009  20.9 36.6 41.3 (19.0)  79.8
 
9M 2010  40.9  51.8 29.3 (22.0) 100.0
 
Chg, (%) 95.7%  41.5% (29.1%)   n/a 25.3%
Adj. EBITDA Margin (%)
 
9M 2009  8.0% 28.4% 28.3% n/a  14.7%
 
9M 2010  14.4% 30.6% 17.1% n/a 16.2%


Drilling, Workover & IPM
• In the Drilling, Workover & IPM segment, 9M 2010 revenue increased by 8.0% compared to 9M 2009. The increase in sales was primarily driven by  an increase in the volume of drilling services provided due to higher demand, and strengthening of the ruble against the US dollar, which was partially offset by lower IPM and workover volumes, which were affected by bad weather in 1Q 2010. Adjusted EBITDA margin increased to 14.4% from 8.0% in 9M 2009 primarily due to materially better efficiency of the drilling and IPM services in 9M 2010 following major changes in the process management of this segment. Sequentially, 3Q 2010 adjusted EBITDA margin increased to 20.9% from 15.3% in 2Q 2010.

Technology Services
• In the Technology Services segment, 9M 2010 revenue increased by 31.1% compared to 9M 2009. The increase in sales resulted from an increase in demand for cementing and directional drilling services, a sharp increase in well logging and perforation services, increased production of drilling tools and cementing complexes, which is reported under this segment from 3Q 2010, and stronger ruble. Revenues from coil tubing operations also increased due to higher complexity of a reduced  number of completed operations. Adjusted EBITDA margin in 9M 2010 increased to 30.6% from 28.4% in 9M 2009 due to a moderate improvement in efficiency in all technology services, except in the drilling tools manufacturing subsegment, where profitability was flat. Sequentially, 3Q 2010 adjusted EBITDA margin declined to 30.8% from 33.0% in 2Q 2010 due to declining profitability in the production of cementing complexes on lower volumes (business included in Technology Services segment from 3Q 2010). 

Formation Evaluation
• In the Formation Evaluation segment, 9M 2010 revenue increased by 17.8% compared to 9M 2009. The growth resulted from an increase in the volume of seismic surveys conducted in Russia which was triggered by improving demand and strengthening of the ruble against the US dollar. Revenue from seismic services offered in Kazakhstan was flat, albeit on lower volume of shot points due to the completion of two major contracts. Adjusted EBITDA margin declined to 17.1% in 9M 2010 from 28.3% in 9M 2009 due to lower pricing in Russia, completion of high-margin vibrator projects in Kazakhstan reflected in the results for the 9M 2009, and launch delays on certain projects in Russia. Sequentially, 3Q 2010 adjusted EBITDA decreased to 12.3% from 15.7% in 2Q 2010 due to entering into the low season in the Russian seismic operations in the third quarter of the year.

Discussion of Group’s Current Financial Position, Cash Flows and Liquidity

Net cash generated from operating activities in 9M 2010 declined to US$ 37.1 million compared to US$ 77.0 million in 9M 2009 which primarily resulted from higher cash earnings of the business being offset by an outflow to working capital which was triggered by the overall growth in business volumes.

Free cash flow (defined as net cash generated from operating activities, less purchases of property, plant and equipment) was positive at US$ 0.8 million in 9M 2010, compared to positive US$ 46.8 million in 9M 2009 due to lower cash flow from operating activities and higher capital expenditures.

As of December 1, 2010 the Group had about US$ 163.6 million of gross debt (down from US$ 212.7 million of gross debt as of December 31, 2009), including US$ 20.2 million of debt payable in the next 12 months. Net debt as of December 1, 2010 amounted to US$ 116.2 million, down from US$ 175.4 million as of December 31, 2009 due to significant cash inflows from the divestment of heavy drilling rig manufacturing business and from entering into a seismic joint venture with WesternGeco (Schlumberger).

On 28 October 2010 the Group launched a program to repurchase its GDRs in an aggregate amount of up to US$ 25 million with subsequent cancellation of underlying shares for each GDR purchased in the program.

Order book update

As of December 6, 2010, the total order book, which includes the value of business to be delivered in 2010 contracted and won in tenders, was US$ 792.6 million (RR 24.6 billion). Of this amount, estimated value of signed contracts was US$ 771.9 million (RR 23.9 billion) and US$ 616.0 million had already been recognized in 9M 2010 as revenue.

2010 Order book (as of December 6, 2010)

FX 31RR/$ Contracts signed* Tenders won, contracts to be signed  Total order book
 
  US$ (m) RR (bn)  US$ (m)  RR (bn)  US$ (m)  RR (bn)
Drilling, Workover & IPM  372.4 11.5 -     - 372.4  11.5
Technology Services   207.2  6.4 1.8  0.1  209.0 6.5 
Formation Evaluation  189.8   5.9  19.0  0.6 208.8  6.5
Other 2.4 0.1  - 2.4  0.1
TOTAL 771.9 23.9  20.7 0.6 792.6  24.6 

 *Signed contracts may be subject to renegotiation of volumes and/or other terms or even cancellation, and both signed contracts and tenders won may not proceed as originally planned at all.

Some of the information in this press release may contain projections or other forward-looking statements regarding future events or the future financial performance of Integra Group. You can identify forward-looking statements by terms such as “expect,” “believe,” “anticipate,” “estimate,” “intend,” “will,” “could,” “may” or “might,” or the negative of such terms or other similar expressions. These statements are only predictions and actual events or results may differ materially. Integra Group does not intend to or undertake any obligation to update these statements to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Many factors could cause the actual results to differ materially from those contained in Integra Group’s projections or forward-looking statements, including, among others, general economic and market conditions, Integra Group’s competitive environment, risks associated with operating in Russia, rapid technological and market change, and other factors specifically related to Integra Group and its operations.
 
This document does not constitute or form part of any offer or invitation to sell or issue, or any solicitation of any offer to purchase or subscribe for, any securities of Integra Group, nor shall any part of it nor the fact of its distribution form part of or be relied on in connection with any contract or investment decision relating thereto, nor does it constitute a recommendation regarding the securities of Integra Group.