Victory Nickel Inc. reported financial results for the 12-month period ended Dec. 30, 2015. The company reported a consolidated net loss of $5,112,000, or $0.09 per share, for the year. This compares with a net loss of $2,416,000, or $0.04 per share, during the year ended Dec. 31, 2014.
The loss components include a gross margin loss from the company’s frac sand business of $923,000 compared to a gross margin profit of $1,222,000 for 2014, a decrease of $2,145,000. This reflects the serious decline in oil and gas drilling activity and the resulting reduction in the demand and selling price of frac sand, the company said.
General and administration expenses of $1,240,000 were down by 50 percent from 2014. This reduction was offset by a loss on the sale of equipment of $1,174,000. The temporary plant shutdown cost the company $661,000 of non-recurring cost in 2015 and net finance costs were $951,000 higher at $1,411,000 in 2015 compared with 2014.
The material drop in the price of oil over the past year has resulted in oil and gas exploration and production companies significantly decreasing their activities in our market area and putting demand for frac sand under pressure throughout the year. After coming to a full stop in the first quarter of 2015, frac sales resumed in May 2015.
The company accumulated inventory of in excess of 35,000 tons at the end of 2014 at various stages of the process and made sales of 22,488 tons of various grades of frac sand during 2015 by drawing down inventories.
The commissioning of the company’s frac sand plant in Seven Persons, Alberta, Canada, (7P Plant) was completed during the third quarter of 2014; during 2014, 109,155 tons of frac sand was produced and 88,891 tons of sand was sold.
The cost of goods sold was $3,919,000, or $174.27 per ton of frac sand sold, for the year ended Dec. 31, 2015, including an inventory write-down of $674,000, equivalent to $29.97 per ton sold, as the company wrote down inventory to net realizable value and recorded finished inventory at the lower of cost or net realizable value. Costs per ton are per dry ton, unless otherwise stated.
The year 2015 was a challenging year for most firms associated with the oil and gas industry, and Victory Nickel was no exception. As a result of the fall in the price of oil from in excess of $100 per barrel to below $30 per barrel, drill rig utilization decreased by 50 percent in Q4 2015 when compared with the same quarter of 2014. Similarly, well licenses and completions decreased by 58 percent and 59 percent respectively during the comparable quarters of 2015 and 2014, according to the Nickles Energy Group. As a direct response to the declining utilization, E&P companies reduced, cancelled or deferred capital programs. All of this has led to an unprecedented decline in the pricing of drilling and well completions and the resulting pressure on the price of frac sand.
The frac sand pricing index prepared by New York investment bank Cowen and Company indicates a price decrease of 24 percent since the highs of October 2014. The price of oil necessary to create a resurgence of demand and a return to drilling activity is yet to be understood. This period of declining activity and price decreases has necessitated that the industry step back and evaluate ways of reducing costs.
Such cost reduction measures include lengthening of both lateral and horizontal drilling, increasing the number of stages per feet and using more sand per stage. All of these changes has increased sand intensity, using more sand per well, to increase the oil flow and thereby improve the economics.
Major suppliers of frac sand have said that the long-term fundamental trends for sand demand remain favorable and that the price discounts are not sustainable in the long term. Indications are that uncompleted wells could represent a significant pent up demand for frac sand.
With all of the cutbacks in capital spending and development of projects, a case can be made for a potential and very sudden and significant increase in demand for sand while the industry catches up to increase supply. The exact timing of this is difficult to predict but this has been seen in the past as industry overreacts on the downside and gets into a catch-up situation when business improves.
The sudden negative turn of events could not have come at a more crucial time in Victory Nickel’s development and entry into the frac sand industry, the company said. Production was ramping up and could not keep up with demand but the sudden slowdown in demand required that the company temporarily suspend production at its 7P Plant. As demand returns, the company has inventory of sand at various stages of completion to enable it to immediately respond to customer needs. The 7P Plant can be restarted very quickly. The business plan has not changed; it is only deferred, the company concluded.