The recent announcement of the 850XE rig upgrades and the XDR 500 optimization program was the first step in the Company’s strategy to re-position Xtreme as a high-spec United States shale focused drilling contractor. The Company believes that by leveraging its heritage of technology and innovation, it can provide best in class rigs to customers in the recovering United States shale drilling market.
The Company is initiating two additional steps to further focus the organization and enhance shareholder value. These additional steps include the commencement of a substantial issuer bid to purchase Xtreme common shares (“Xtreme Shares“) and an intention to explore strategic options with respect to the eight shallower capacity AC electric XDR 200 and 300 drilling rigs.
The recent increase in US active drilling rigs has been dominated by high specification AC electric rigs. It is estimated by industry sources that since activity levels bottomed in the second quarter of 2016 that more than 80% of the increase in the rig count was in the high or super-spec segment of the market. The Company believes that the demand for deep capacity high-spec AC electric rigs will continue in the future. By the end of 2017 Xtreme will have 13 rigs that fit this category, ten XDR 500 and three 850XE rigs.
“This two-pronged plan enables us to immediately return meaningful value to Xtreme shareholders and further focus our efforts in the major US resource plays,” said Matt Porter, President and Chief Executive Officer. “We believe this plan makes best use of our strong balance sheet and cash position as it allows the Company to maintain considerable flexibility for opportunities in our core high-spec US drilling business while continuing to provide liquidity and return of capital to our shareholders.”
Substantial Issuer Bid
The Company intends to undertake a substantial issuer bid to purchase up to an aggregate of $25 million in Xtreme Shares through a Dutch Auction tender process (the “Proposed Issuer Bid“). The Proposed Issuer Bid demonstrates Xtreme’s confidence in the strength of the business and commitment to delivering shareholder value through the return of capital and enhancing liquidity to shareholders that elect to tender their Xtreme Shares. The Company believes that the growth prospects, long-term strategy and associated cash flow are not accurately reflected by the Company’s current price of Xtreme Shares.
The Board of Directors has appointed an independent committee of the Directors to set the price and details around the Proposed Issuer Bid.
XDR 200/300 Strategic Review
In addition, the Company is evaluating strategic options with respect to its four XDR 200 and four XDR 300 AC electric drilling rigs. These rigs were designed and built by Xtreme and have leading edge AC electric technology. Due to the shallower depth capacities (up to 3,500 meters) of these rigs they are ideally suited for the Canadian or international drilling markets and do not align with Xtreme’s focus on the deeper basins of the United States. The Company will continue to operate the existing three rig XDR 200 operation in Canada while strategic options are evaluated. The Company is reviewing international opportunities to deploy the rigs alongside the potential for an outright sale.
As the Company moves forward in a lower priced commodity environment, the strategy set forth improves Xtreme’s competitiveness and should ultimately enhance value to shareholders.
Currently, the Company has seven of ten XDR 500 rigs contracted and is in the process of finalizing a contract for an eighth XDR 500, which the Company anticipates to commence work later in Q2 2017.
The Company is currently in the initial stages of upgrading the three super-spec 850XE rigs with anticipated delivery of one rig in Q3 2017 and the remaining two rigs in Q4 of 2017. The first rig was recently contracted on a 24 month term contract to an operator in Oklahoma. The commercial conversations for the final two 850XE rigs remain very encouraging and Xtreme anticipates an additional rig to be contracted in the second quarter for a Q4 2017 delivery.
This news release, or documents incorporated herein, contains forward-looking information (“FLI”). FLI is typically contained in statements with words such as “anticipate”, “believe”, “estimate”, “expect”, “plan”, “schedule”, “should”, “intend”, “propose” or similar words suggesting future outcomes or an outlook. More particularly, this news release contains FLI that may relate to: demand, rig availability, growth prospects, associated cash flows, rig markets, contracting and timing related thereto, deployment, operation, marketing, financing, our intention to undertake the Proposed Issuer Bid and the terms thereof including the maximum size of the Proposed Issuer Bid, long-term strategy, strategic options, strategic expectations including the impact on Xtreme of the Proposed Issuer Bid and/or the sale of the XDR 200 and 300 AC electric drilling rigs (“XDR 200/300 Rigs“), construction, modifications and utilization of drilling rigs in the Company’s current and future fleet. Although Xtreme believes expectations reflected in such FLI are reasonable, readers should not place undue reliance on them because Xtreme can give no assurance they will prove to be correct. There are many factors that could cause FLI not to be correct, including risks and uncertainties inherent in the Company’s business.
FLI is based on certain factors and assumptions including, but not limited to: the assessment of current and projected future drilling and related operations, the assessment of the competitive marketplace, ongoing and future strategic business alliances, negotiations and opportunities to enter new, extend or complete existing contracts, the availability and cost of financing, currency exchange rates, timing and magnitude of capital expenditures, expenses and other variables affecting rig operation, modification and construction, the ability and commitment of vendors to provide rig equipment, services and supplies, including labor, in a cost-effective and timely manner, the issuance of applied-for patents, changes in tax structures and rates and government regulations.
Although Xtreme considers the assumptions used to prepare this news release reasonable, based on information available to management as of April 3, 2017, ultimately the assumptions may prove to be incorrect. FLI is also subject to certain factors, including risks and uncertainties, which could cause actual results to differ materially from management’s current expectations. These factors include, but are not limited to: the cyclical nature of drilling market demand, currency exchange rates and commodity prices, access to credit and to equity markets, the availability and retention of qualified personnel, vendor-provided equipment components and services, competition for customers, the market for the XDR 200/300 Rigs and the ability of Xtreme to secure an attractive price for these rigs, the Proposed Issuer Bid not occurring at all or not occurring as expected including any failure of any condition to the Proposed Issuer Bid, any inability to obtain any necessary regulatory approvals or exemptive relief in connection with the Proposed Issuer Bid, the extent to which holders of Xtreme Shares elect to tender their Xtreme Shares under the Proposed Issuer Bid, Xtreme having sufficient financial resources and working capital following completion of the Proposed Issuer Bid (including to fund Xtreme’s currently anticipated financial obligations and to pursue desirable business opportunities), the market for the Xtreme Shares at the completion of the Proposed Issuer Bid being materially less liquid than the market that exists at the time we commence it, timing around the Proposed Issuer Bid being launched and completed and the effect the Proposed Issuer Bid and/or the sale of the XDR 200/300 Rigs have on Xtreme as a whole. Other than with respect to the Proposed Issuer Bid and the XDR 200/300 Rigs sale, the foregoing and other material risks and uncertainties are discussed in our public filings at www.sedar.com, including in our MD&A and Annual Information Form.
Management’s assumptions considered the following: ongoing access to key services, supplies and equipment required to continue operating and maintaining the rigs, including fuel, continued successful performance of drilling and related equipment, expectations regarding gross margin, recruitment and retention of qualified personnel, continuation or extension of existing long-term, multi-well contracts or other contracts, revenue expectations related to shorter-term drilling opportunities, willingness and ability of customers to remit amounts owing to Xtreme in accordance with normal industry practices, and management of accounts receivable in direct relation to revenue generation.
In preparing this news release, the following risk factors were considered: fluctuations in crude oil and natural gas prices, as well as supply and demand, fluctuation in currency exchange and interest rates, financial stability of Xtreme’s customers, current and future applications for Xtreme’s proprietary technology, related services provided by, and competition from, other drilling contractors, regulatory and economic conditions in regions where Xtreme operates, environmental constraints, changes to government legislation, international trade barriers or restrictions, and, where appropriate, global economic, political and military events, as well as acts of terrorism, riots, strikes, insurrections, revolutions and civil war.
FLI contained in this news release about any prospective results of operations, financial position or cash provided by operating activities is based on assumptions about future events, including economic conditions and proposed courses of action, and on management’s assessment of relevant information currently available. Readers are cautioned such financial outlook information contained in this news release is not appropriate for purposes other than for which it is disclosed here. Readers should not place undue importance on FLI and should not rely on this information as of any other date. Except as required pursuant to applicable securities laws, Xtreme disclaims any intention, and assumes no obligation, to update publicly or revise FLI to reflect actual results, whether as a result of new information, future events, changes in assumptions, changes in factors affecting such FLI or otherwise.
The Proposed Issuer Bid referred to in this news release has not yet commenced. This news release is neither an offer to purchase nor a solicitation of an offer to sell any common shares of Xtreme. Any solicitation and the offer to purchase Xtreme common shares by Xtreme will be made pursuant to an offer to purchase, issuer bid circular, letter of transmittal and related materials that Xtreme will file with applicable securities authorities and Xtreme will distribute these materials to its shareholders. Copies of these materials will be available free of charge at www.sedar.com. These materials will contain important information about the Proposed Issuer Bid and Xtreme shareholders are urged to read them carefully, if and, when they become available.
Xtreme Drilling Corp. (“XDC” on the Toronto Stock Exchange) designs, builds, and operates a fleet of high specification AC drilling rigs featuring leading-edge proprietary technology. Currently Xtreme operates one service line – Drilling Services (XDR) under contracts with oil and natural gas exploration and production companies and integrated oilfield service providers in Canada and the United States. For more information about the Company, please visit www.xdccorp.com.
President and Chief Executive Officer
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