ACT Energy Technologies Ltd. press release
Cathedral Energy Services reports results for the three months ended March 31, 2008 and increase in 2008 capital budget to $32.3 million
TSX - Toronto Stock Exchange · Canada
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, May 7 /CNW/ - Cathedral Energy Services Income Trust (the "Trust"/TSX: CET.UN) is pleased to report its results for 2008 Q1 and increase in its 2008 capital budget. Dollars are in '000's except for day rates and per Trust Unit amounts.
FINANCIAL HIGHLIGHTS
Dollars in 000's except per Trust Unit amounts
Three months ended March 31 2008 2007 Revenues $ 46,253 $ 42,712 EBITDAS(1) $ 15,395 $ 14,412 Per Trust Unit - diluted $ 0.48 $ 0.46 Income before taxes $ 11,689 $ 11,033 Net income $ 9,917 $ 9,787 Per Trust Unit - basic $ 0.31 $ 0.32 Per Trust Unit - diluted $ 0.31 $ 0.31 Cash distributions declared per Trust Unit $ 0.21 $ 0.21 Distributable cash(1) $ 13,113 $ 13,071 Cash distributions declared $ 6,669 $ 6,530 Payout ratio(1) 51% 50% Property and equipment additions $ 3,960 $ 5,805 Weighted average Trust Units outstanding: Basic ('000) 31,707 31,030 Diluted ('000) 32,054 31,591
March 31 December 31 2008 2007 Working capital $ 21,455 $ 16,947 Long-term debt and capital lease obligations excluding current portion $ 17,421 $ 17,441 Unitholders' equity $ 82,882 $ 79,250
(1) Non-GAAP measure; see "NON-GAAP FINANCIAL MEARSURMENTS" within Management's Discussion & Analysis.
MANAGEMENT'S DISCUSSION & ANALYSIS
This Management's Discussion & Analysis ("MD&A") for the three months ended March 31, 2008 should be read in conjunction with the annual audited consolidated financial statements and notes thereto for the year ended December 31, 2007, as well as the MD&A in the Trust's 2007 Annual Report. This MD&A has been prepared as of May 7, 2008. Dollar amounts are in '000's except for day rates and per Trust Unit amounts.
FORWARD-LOOKING INFORMATION
Certain statements in this MD&A including (i) statements that may contain words such as "anticipate", "could", "expect", "seek", "may" "intend", "will", "believe", "should", "project", "forecast", "plan" and similar expressions, including the negatives thereof, (ii) statements that are based on current expectations and estimates about the markets in which the Trust/Cathedral operates and (iii) statements of belief, intentions and expectations about developments, results and events that will or may occur in the future, constitute "forward-looking statements" and are based on certain assumptions and analysis made by the Trust/Cathedral. Forward-looking statements in this MD&A include, but are not limited to, statements with respect to future capital expenditures, including the amount, nature and timing thereof; oil and natural gas prices and demand; other development trends within the oil and natural gas industry; business strategy; expansion and growth of the Trust's/Cathedral's business and operations including the Trust/Cathedral's market share and position in the oilfield service market; and other such matters. Such forward-looking statements are subject to important risks and uncertainties, which are difficult to predict and that may affect the Trust's/Cathedral's operations, including, but not limited to: the impact of general economic conditions in Canada and the United States; industry conditions, including the adoption of new environmental, safety and other laws and regulations and changes in how they are interpreted and enforced; volatility of oil and natural gas prices; oil and natural gas product supply and demand; risks inherent in the Trust's/Cathedral's ability to generate sufficient cash flow from operations to meet its current and future obligations; increased competition; the lack of availability of qualified personnel or labor unrest; fluctuation in foreign exchange or interest rates; stock market volatility; opportunities available to or pursued by the Trust/Cathedral and other factors, many of which are beyond the control of the Trust/Cathedral. The Trust's/Cathedral's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do transpire or occur, what benefits the Trust/Cathedral will derive therefrom. Subject to applicable law, the Trust disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
All forward-looking statements contained in this document are expressly qualified by this cautionary statement. Further information about the factors affecting forward-looking statements is available in the Trust's current Annual Information Form and 2007 Annual Report which has been filed with Canadian provincial securities commissions and are available on www.sedar.com.
NON-GAAP FINANCIAL MEASUREMENTS
This MD&A refers to certain financial measurements that do not have any standardized meaning within Canadian Generally Accepted Accounting Principles ("GAAP") and therefore may not be comparable to similar measures provided by other companies and/or trusts.
The specific measures being referred to include the following:
i) "Gross margin" - calculated as revenues less operating expenses is considered a primary indicator of operating performance;
ii) "EBITDAS" - defined as earnings before interest on long-term debt and capital lease obligations, taxes, depreciation, amortization and non-cash compensation expense; this measure is considered an indicator of the Trust's ability to generate funds flow from operations prior to consideration of how activities are financed, how the results are taxed and measured and non-cash expenses (see tabular calculation under EBITDAS);
iii) "Distributable cash" - defined as cash flow from operating activities before changes in non-cash operating working capital less required principal repayments on long-term debt and capital lease obligations and maintenance capital expenditures; distributable cash is a key performance measurement used by management, analysts and investors to evaluate the financial performance of the Trust (see tabular calculation under Distributions);
iv) "Maintenance capital expenditures" - refers to capital expenditures required to maintain existing levels of service but excludes replacement cost of lost-in-hole equipment to the extent the replacement equipment is financed from the proceeds on disposal of the equipment lost-in-hole;
v) "Payout ratio" - calculated as cash distributions declared divided by distributable cash, is an indicator of the Trust's ability to fund its distributions from the Trust's ongoing operations excluding changes in non-cash working capital (see tabular calculation under Distributions) (see distributable cash definition above); and
vi) "Funds from operations" - calculated as cash flow from operating activities before changes in non-cash operating working capital is considered an indicator of the Trust's ability to generate funds flow from operations but excluding changes in non-cash operating working capital which is financed using the Trust's bank indebtedness/line of credit facility.
OVERVIEW
The Trust completed the first quarter of 2008 with record quarterly revenues of $46,253. Prior to 2008 Q1 the quarter with the highest revenues was 2007 Q1 at $42,712. The 2008 Q1 record revenues were lead by the Trust's directional drilling division which represented 75% (2007 Q1 - 73%) of 2008 Q1 revenues. Within the oilfield service sector, the directional drilling sub-sector has been very active area with a growing number of wells being drilled directionally/horizontally. In resource plays such as the Bakken (southeast Saskatchewan) and Montney (northeast B.C.), operators are using the combination of horizontally drilled wells and multi-stage fracturing to increase reservoir recoveries and it is expected that such completion techniques will continue to expand the number of horizontal wells drilled. The Trust's production testing and wireline divisions continue to be negatively affected by the decline in natural gas drilling in western Canada.
2008 Q1 EBITDAS was $15,395 ($0.48 per diluted Trust Unit) which represents a $983 or 6.8% increase from $14,412 ($0.46 per diluted Trust Unit) in 2007. The Trust's net income for 2008 Q1 was $9,917 (2007 - $9,787) or $0.31 (2007 - $0.31) per diluted Trust Unit.
RESULTS OF OPERATIONS
Revenues - 2008 Q1 record revenues of $46,253 were the result of increased growth in the directional drilling portion of the Trust's operations. Directional drilling activity days increased 20.5% from 3,323 in 2007 Q1 to 4,005 in 2008 Q1. The average day rate received for providing directional drilling services decreased 7.6% on a quarter-over-quarter basis to $8,419 (2007 - $9,116). The decrease in the average day rate is mainly the result of industry-wide Canadian day rate decreases due to market pressures. Directional drilling activity days in the Canadian and U.S. markets were up 18.4% and 24.3%, respectively. On a quarter-over-quarter basis revenues from the production testing division are down 7.1% (2008 - $4,150; 2007 - $4,466) due mainly to pricing pressures but also a result of a decrease in demand. As previously announced the Trust is in the process of expanding its production testing business to the U.S. Rocky Mountain region with the build out of 5 production testing units. In early 2008 Q2 one production testing unit was transferred to the U.S. operations and it is expected to start generating revenues in 2008 Q2. The Trust's wireline division had a quarter-over-quarter increase in revenues of 7.3% (2008 - $7,580; 2007 - $7,066) with the increase being due to the start-up of a U.S. wireline division in 2007 Q3. In early 2008 the Trust established a second U.S. operations base for its wireline division in Dickinson, North Dakota with one wireline unit that was transferred from the Canadian operations.
Gross margin - The gross margin for 2008 Q1 was 49.0% which compares to 50.3% in 2007 Q1. The decrease is attributed to a number of factors including: i) increases in directional field labour rates; ii) increased equipment rental charges due to demand and need for specialty equipment; and iii) a decrease in the average day rate in providing directional drilling services.
General and administrative expenses - General and administrative expenses increased from $6,932 in 2007 Q1 to $7,431 in 2008 Q1 - an increase of $499. The increase was primarily related to increased personnel and office/shop rental costs as well as an overall increase in activity levels for the directional drilling division and costs associated with pursuing international business opportunities. As a percentage of revenues, general and administrative expenses were 16.1% in 2008 Q1 and 16.2% in 2007 Q1.
Depreciation and amortization - Depreciation for 2008 Q1 was $2,851 which compares to $2,756 in 2007 Q1. Despite the amount of capital expenditures on the Trust's depreciable asset base over the past 12 months depreciation on a quarter-over-quarter did not increase significantly due to the change in accounting method for foreign currency translation of the Trust's U.S. operations. As a percentage of revenues, depreciation amounted to 6.2% for 2008 and 6.5% for 2007.
Interest expense - Interest expense related to long-term debt and capital leases increased from $263 in 2007 Q1 to $276 in Q1 2008 due to the combined net effect of: i) an increase in the average level of debt outstanding; and ii) a decrease in the effective interest rate on the related debt. Other interest expense, which increased marginally on a quarter-over-quarter basis from $96 in 2007 Q1 to $99 in 2008 Q1, relates mainly to interest charges on use by the Trust of its bank indebtedness/line of credit facility.
Foreign exchange gain/loss - The Trust's foreign exchange gain/loss has changed from a $47 loss in 2007 Q1 to a $33 gain in 2008 Q1. Effective January 1, 2008, the Trust changed the classification of its U.S. operations to self-sustaining (as opposed to fully integrated) resulting in the financial statements being translated using the current rate method as opposed to the temporal method.
Non-cash compensation expense - For 2008 Q1 the Trust had non-cash compensation expense of $579 which compares to $360 for 2007 Q1. The value of the options is being amortized against income over the three-year vesting period. The increased non-cash compensation expense reflects the increase in the value attributed to the options.
Gain on disposal of property and equipment - During 2008 Q1 the Trust had a gain on disposal of property and equipment of $226, which compares to a loss of $3 in 2007 Q1. The Trust's gains are mainly due to recoveries of lost-in-hole equipment costs including previously expensed depreciation on the related assets. The timing of lost-in-hole recoveries is not in the control of the Trust and therefore can fluctuate significantly from quarter-to-quarter.
Taxes - For 2008 Q1, the Trust had a tax expense of $1,772 (effective tax rate of 15.2%) which compares to $1,246 (effective tax rate of 11.3%) in 2007 Q1. The increase in the effective tax rate is due to a lower portion of the Trust's pre-tax income is being allocated to unitholders and therefore the corporate entities within the Trust structure are incurring the related tax.
LIQUIDITY AND CAPITAL RESOURCES
The Trust's principal source of liquidity is cash generated from operations. The Trust also has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity. At March 31, 2008, the Trust had an operating line of credit with a major Canadian bank in the amount of $12,500 (December 31, 2007 - $12,500) of which $9,370 (December 31, 2007 - $6,030) was drawn. In addition, the Trust has a non-reducing revolving term loan facility in the amount of $25,000 (December 31, 2007 - $25,000) of which $17,000 (December 31, 2007 - $17,000) was drawn as at March 31, 2008. In addition, at March 31, 2008, the Trust had obligations under capital leases in the amount of $402 (December 31, 2007 - $451) and other long-term debt of $304 (December 31, 2007 - $283).
Operating activities - Cash flow from operating activities for the three months ended March 31, 2008 was $6,882 (2007 - $9,775) a decrease of $2,893. Funds from operations (before changes in non-cash operating working capital) increased from $13,164 in 2007 Q1 to $13,299 in 2008 Q1. On a quarter-over-quarter basis the Trust's investment in non-cash operating working capital increased $3,028 and this is the main contributing factor to the decrease on cash flow from operations. The Trust has a strong working capital position at March 31, 2008 at $21,455 which compares to $16,947 at December 31, 2007.
Investing activities - Cash used in investing activities for the three months ended March 31, 2008 amounted to $3,510 which compares to $3,026 for the same period in 2007. During 2008 Q1 the Trust invested an additional $3,960 (2007 - $5,805) in property and equipment with the main additions being expansion of the overall mud motor and drill collar fleet, MWD components which will be used in the 2008 build out of 10 EM-MWD systems, and progress payments on the construction of a mud motor facility in Nisku, Alberta. At March 31, 2008, the Trust's operating entities had 78 MWD systems, 19 production testing units and 27 wireline units.
Financing activities - Cash used in financing activities for the three months ended March 31, 2008 amounted to $2,205 which compares to $6,829 in 2007 Q1. Distributions paid to Unitholders for 2008 Q1 totaled to $6,650 (2007 $8,056). The quarter-over-quarter decrease is the net result of: i) the payment of a "special" $0.05 per Trust Unit cash distribution declared in December 2006 ($1,549) and paid in 2007 Q1 - there was no such "special" cash distribution paid in 2008 Q1; and ii) an increase in the number of Trust Units outstanding due to the exercise of Trust Unit options. The Trust's "regular" monthly distribution has been at $0.07 per Trust Unit since September 2006. Cash distributions paid have been financed from cash flow from operations and management currently expects future cash distributions will also be financed from cash flow from operations. For the three months ended March 31, 2008 financing cash inflows resulted from: i) $1,133 (2007 - $1,359) cash received on the exercise of Trust Unit options, ii) a $47 (2007 - $173) increase in new long-term debt; and iii) a $3,340 (2007 - $195 repayment) draw on the Trust bank indebtedness/line of credit facility. Offsetting these inflows was a cash outflow of $75 (2007 - $110) repayment of long-term debt and capital lease obligations. At May 7, 2008, the Trust had 32,162,190 Trust Units and 2,208,196 Trust Unit options outstanding.
Contractual obligations - In the normal course of business, the Trust incurs contractual obligations and those obligations are disclosed in the Trust's MD&A for the year ended December 31, 2007. As at March 31, 2008, the Trust has a commitment to purchase approximately $5,681 of property and equipment.
CONTROLS AND PROCEDURES
Management is responsible for establishing and maintaining adequate disclosure controls and internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable, but not absolute, assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with GAAP. Internal control over financial reporting may not prevent or detect fraud or misstatements because of limitations inherent in any system of internal control. There were no significant changes in the design or effectiveness of the Trust's disclosure controls or internal controls over financial reporting in the first quarter of 2008.
CHANGE IN FOREIGN CURRENCY TRANSLATION
Previously, the Trust's U.S. operations were classified as integrated operations and were translated using the temporal method with all translation gains (losses) included in the determination of net income for the current period. Effective January 1, 2008, the Trust changed the classification of its U.S. operations to self-sustaining resulting in the financial statements being translated using the current rate method as opposed to the temporal method. Under the current rate method of translation, revenues and expenses of the subsidiary are translated at the rates in effect at the time of the transactions while assets and liabilities are translated at the current exchange rate in effect at the balance sheet date. Upon consolidation of the U.S. operations, gains and losses due to fluctuations in the foreign currency exchange rates are deferred on the balance sheet as a separate component of Other Comprehensive Income ("OCI"). Accumulated other comprehensive income (loss) forms part of Unitholders' equity. This change in foreign currency translation has been applied prospectively and resulted in a foreign exchange loss of $1,894 being deferred and recorded as OCI as at January 1, 2008.
NEW ACCOUNTING POLICIES
Effective January 1, 2008, The Trust adopted the Canadian Institute of Chartered Accountants ("CICA") section 3031, "Inventories", section 1535, "Capital Disclosures", and section 3861, "Financial Instruments - Disclosure and Presentation". These standards have been adopted prospectively. For the three months ended March 31, 2008, the adoption of these standards did not have an effect on the Trust's results, financial position or cash flows but additional disclosures have been provided in the notes to the interim financial statements.
BUSINESS RISKS
The MD&A for the year ended December 31, 2007, which is included in the Trust's 2007 Annual Report, includes an overview on business risks associated with the Trust and its operating entities. Those business risks remain in effect as at March 31, 2008.
DISTRIBUTIONS
The Administrator of the Trust reviews the level and nature of distributions (cash, in-kind or a combination of cash and in-kind) on an on-going basis giving consideration to current performance, historical and future trends in the business, the expected sustainability of those trends and enacted tax legislation which will affect future taxes payable as well as required long-term debt repayments, maintenance capital expenditures required to sustain performance and future growth capital expenditures. Despite the seasonality of the Trust's business, it is the Trust's policy to pay consistent distributions throughout the year. The Trust's operations in western Canada are subject to seasonality as activity levels in the oilfield services industry are generally lower during "spring breakup" which normally commences in late March and continues through to May (mainly in the Q2 of the fiscal year). The net result of the Trust's policy to pay consistent distributions throughout the year despite the seasonality of its operations is that in Q2 cash distributions declared may exceed net income, cash flow from operating activities and/or distributable cash for the quarter.