Industry Activity and Operations Overview
Against the backdrop of an industry quarter that was essentially flat year-over-year, Enerchem's revenues increased by 186% when compared to the same quarter last year and by 56% for the first half of 2008 versus the same period in 2007.
These increases reflect a significant increase in sales volume over the comparative periods in 2007 and are also a function of higher prices charged for our finished products as we attempt to remain aligned with the rise in crude oil prices. These results also reflect our effort to improve our plant output and efficiency as well as maximize our finished goods sales. We believe that having both manufacturing and distribution capability provides us with a competitive advantage in this price driven commodity market.
Throughout the quarter we have also concentrated on maximizing production out of our Slave Lake facility and increasing our storage capacity in order to be better prepared to meet the seasonal requirements of our clients. As a result, we have built up finished goods inventory over the quarter, which is reflected on the balance sheet at June 30, 2008, by the approximately $2.0 million increase in inventory over the $8.7 million in inventory at the end of the first quarter of 2008 and $4.8 million over the $5.8 million of inventory at the end of 2007.
For both the second quarter and the year-to-date of 2008 we have posted a loss of $1.1 million. This result includes a provision for restructuring costs of $850,000 relating to the consolidation of our accounting and administrative offices from Leduc to Calgary, Alberta. The consolidation is expected to be completed by October 31, 2008. The net loss for both periods also reflects the effects of margin compression associated with the increase in feedstock costs caused by the dramatic rise in commodity prices. However, with the return to operation of our Sundre plant in the third quarter of this year, we anticipate lowering overall production costs and increased leverage on our fixed cost structure.
Over the reporting quarter of 2008 industry activity continued to track below 2007 levels with a 3% drop in wells drilled on a completion basis (3,148 compared to 3,232 in the second quarter of 2007); the year-to-date decline is 17% (8,134 compared to 9,822 in 2007). (1) Rig utilization rates improved slightly quarter-over-quarter (19% compared to 17%), but trail 2007 year-to-date utilization rates at 38% vs. 39%. It has become somewhat commonplace to report that weather affected the second quarter; it did again this year, particularly in June which provided the industry with only two weeks of productive activity.
There are some indications that the cycle's downward movement may have moderated. During this reporting quarter the Petroleum Services Association of Canada ("PSAC") increased its forecast for wells drilled on a rig-released basis in 2008 by 2,000 wells. In addition, although natural gas prices have weakened in recent weeks, US natural gas storage for the week of July 18th was estimated to be tracking about 11% below this time last year and slightly below the five year average. Provided that natural gas prices remain above economically viable levels, we see this trend, together with the approximately 60% year-over-year reduction (July import figures) in LNG imports into North America, as positive for the Western Canadian natural gas producers and therefore gas drilling in this region. -- www.cnxmarketlink.com
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