ACT Energy Technologies Ltd. press release
Cathedral Energy Services reports results for the three and six months ended June 30, 2008
TSX - Toronto Stock Exchange · Canada
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, Aug. 6 /CNW/ - Cathedral Energy Services Income Trust (the "Trust"/TSX: CET.UN) is pleased to report its results for the three and six months ended June 30, 2008. Dollars are in '000's except for day rates and per Trust Unit amounts.
FINANCIAL HIGHLIGHTS $ in 000's except Three months ended Six months ended per Trust Unit amounts June 30 June 30 2008 2007 2008 2007 Revenues $ 29,483 $ 24,985 $ 75,736 $ 67,697
EBITDAS(1) $ 4,632 $ 4,837 $ 20,027 $ 19,249 Per Trust Unit - diluted $ 0.14 $ 0.15 $ 0.62 $ 0.61
EBITDAS(1) as a % of revenue 16% 19% 26% 28%
Income before taxes $ 797 $ 1,112 $ 12,486 $ 12,145
Net Income (loss) $ 189 $ (2,415) $ 10,106 $ 7,372 Per Trust Unit - basic $ 0.01 $ (0.08) $ 0.32 $ 0.24 Per Trust Unit - diluted $ 0.01 $ (0.08) $ 0.31 $ 0.23
Cash distributions declared per Trust Unit $ 0.21 $ 0.21 $ 0.42 $ 0.42
Distributable cash(1) $ 2,038 $ 3,132 $ 15,152 $ 16,203
Cash distributions declared $ 6,770 $ 6,660 $ 13,439 $ 13,130
Payout ratio(1) 332% 211% 89% 81%
Property and equipment additions $ 7,475 $ 4,483 $ 11,435 $ 10,288
Weighted average Trust Units outstanding: Basic ('000) 32,178 31,405 31,943 31,219 Diluted ('000) 32,849 31,893 32,464 31,744
June December 30 2008 31 2007
Working capital $ 13,071 $ 16,947 Long-term debt and capital lease obligations excluding current portion $ 17,365 $ 17,441 Unitholders' equity $ 79,712 $ 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 and six months ended June 30, 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, and with the unaudited interim consolidated financial statements for the three months and six months ended June 30, 2008. This MD&A has been prepared as of August 6, 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 unit-based 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 second quarter of 2008 with solid quarterly revenues of $29,483 and year-to-date revenues of $75,736. The second quarter is traditionally the weakest period of the year and while industry activity levels showed moderate recovery, weather continued to affect activity levels. Within the oilfield service sector, the directional drilling sub-sector has been a 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 2008 Q2 revenues were lead by the Trust's directional drilling division which represented 82% (2007 Q2 - 82%) of 2008 Q2 total revenues. The Trust's U.S. drilling division grew significantly over the 2007 Q2 period, generating period revenues 51% higher than in 2007 and on a year-to-date basis increasing revenues by 31% over 2007. The Trust's production testing and wireline divisions continue to be negatively affected by the decline in natural gas drilling in western Canada. 2008 Q2 EBITDAS was $4,632 ($0.14 per diluted Trust Unit) which represents a $205 or 4% decrease from $4,837 ($0.15 per diluted Trust Unit) in 2007. On a 2007 Q2 year-to-date basis, the Trust's net income was $10,106 ($0.31 per diluted Trust Unit) which compares to $7,372 ($0.23 per diluted Trust Unit) in 2007.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2008
Three months ended June 30, 2008 Directional Production Revenues drilling(1) Wireline testing Total Canada $ 9,832 $ 2,803 $ 1,037 $ 13,672 United States 14,515 1,296 - 15,811 $ 24,347 $ 4,099 $ 1,037 $ 29,483
Three months ended June 30, 2007 Directional Production Revenues drilling(1) Wireline testing Total Canada $ 10,926 $ 3,079 $ 1,340 $ 15,345 United States 9,640 - - 9,640 $ 20,566 $ 3,079 $ 1,340 $ 24,985 (1) (including rental of related equipment)
2008 Q2 revenues of $29,483 were the result of increased growth in the directional drilling portion of the Trust's operations offset by the traditional seasonal fluctuations related to spring break-up. Directional drilling activity days increased 26.6% from 2,194 in 2007 Q2 to 2,777 in 2008 Q2. The average day rate received for providing directional drilling services decreased 6.2% on a quarter-over-quarter basis to $8,591 (2007 - $9,160). The decrease in the average day rate is mainly the result of industry-wide Canadian day rate decreases due to market pressures. While directional drilling activity days in Canada decreased 3.6%, the U.S. activity increased 55.8% due to additional equipment, increased activity levels within the existing client base supplemented by the expansion of the current client base. For 2008 Q2 U.S. activity days represented 62.4% of total activity compared to 50.7% of total activity during the same period in 2007. On a quarter-over-quarter basis revenues from the production testing division are down 22.6% due mainly to pricing pressures but also a result of a decrease in activity levels. 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 6 production testing units. In early 2008 Q2 one production testing unit was transferred to the U.S. operations and it started to generate revenues in late July 2008. The Trust's wireline division had a quarter-over-quarter increase in revenues of 33.1% 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.
Gross margin - The gross margin for 2008 Q2 was 40.8% which compares to 44.2% in 2007 Q2. The decrease is attributed to number of factors including: i) a decrease in the average day rate in providing directional drilling services; ii) increased directional field labour rates and iii) equipment repair charges due to the increase in the quarter-over-quarter activity levels in the U.S.
General and administrative expenses - General and administrative expenses increased from $6,082 in 2007 Q2 to $7,591 in 2008 Q2 - an increase of $1,509. The increase was primarily related to i) increased personnel; ii) office/shop rental costs; iii) increase in activity levels for the U.S. directional drilling division; and iv) costs associated with pursuing international business opportunities. As a percentage of revenues, general and administrative expenses were 25.7% in 2008 Q2 and 24.3% in 2007 Q2.
Depreciation and amortization - Depreciation for 2008 Q2 was $3,019 which compares to $2,943 in 2007 Q2. Despite a significant 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 10.2% for 2008 and 11.8% for 2007.
Interest expense - Interest expense related to long-term debt and capital leases decreased from $260 in 2007 Q2 to $243 in 2008 Q2 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 $66 in 2007 Q2 to $76 in 2008 Q2, 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 $237 loss in 2007 Q2 to a $32 loss in 2008 Q2. Effective January 1, 2008, the Trust changed the classification of its U.S. operations to self-sustaining (as opposed to integrated) resulting in the financial statements being translated using the current rate method as opposed to the temporal method (refer to changes in accounting policies section).
Unit-based compensation expense - For 2008 Q2 the Trust had unit-based compensation expense of $573 which compares to $522 for 2007 Q2. The value of the options is being amortized against income over the three-year vesting period.
Gain on disposal of property and equipment - During 2008 Q2 the Trust had a gain on disposal of property and equipment of $314, which compares to a gain of $187 in 2007 Q2. 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 - In 2007 Q2, tax legislation included in Bill C-52, the Budget Implementation Act, 2007 (the "Bill"), was substantively enacted and resulted in the taxation of exiting income and royalty trusts at effective rates similar to Canadian corporations. The substantive enactment of the Bill resulted in the recognition of future income tax amounts based on estimated net taxable temporary differences leading the initial recognition of a non-cash future income tax expense and net future income tax liability of $3,318. For 2008 Q2, the Trust had a tax expense of $608 which compares to $209 (after removing the adjustment noted above).
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2008
Six months ended June 30, 2008 Directional Production Revenues drilling(1) Wireline testing Total Canada $ 32,343 $ 9,020 $ 5,187 $ 46,550 United States 26,527 2,659 - 29,186 $ 58,870 $ 11,679 $ 5,187 $ 75,736
Six months ended June 30, 2007 Revenues Directional Production drilling(1) Wireline testing Total Canada $ 31,383 $ 10,145 $ 5,806 $ 47,334 United States 20,363 - - 20,363 $ 51,746 $ 10,145 $ 5,806 $ 67,697 (1) (including rental of related equipment)
2008 Q2 year-to-date revenues were $75,736 which represented an increase of $8,039 or 11.9% over 2007 Q2 year-to-date revenues of $67,697. Ongoing activity reductions in the Canadian markets for production testing and wireline services were offset by continued growth and expansion in the U.S. operations.
The directional drilling division revenues have increased from $51,746 in 2007 to $58,870 in 2008. This increase is the net result of: i) an increase in activity days from 5,517 in 2007 to 6,782 in 2008; and ii) a decrease in the average day rate from $9,134 in 2007 to $8,489 in 2008. On a year-to-date basis Canadian activity days increased from 3,194 to 3,544 as did the U.S. activity days which increased 2,323 to 3,237. The U.S. Q2 year-to-date revenues increased 43.3% on a year-over-year basis.
The continued slowdown in natural gas drilling expenditures in the western Canada market resulted in lower revenues for both of the Trust's production testing and wireline divisions. The Trust's production testing division contributed $5,187 in revenues during 2008 Q2 year-to-date which is a 10.7% decline from 2007 revenues of $5,806. The wireline division generated revenues of $11,679 for 2008 Q2 year-to-date which compares to $10,145 for 2007 which represents a 15.1% increase; this increase was the result of the expansion of wireline operations to the U.S. commencing in 2007 Q3.
Gross margin - The gross margin (revenues less operating expenses) for 2008 was 45.8%, which compares to 48.0% in 2007. The decrease is attributed to number of factors including: i) a decrease in the average day rate in providing directional drilling services; ii) increased directional field labour rates and iii) equipment repair charges due to the increase in the year over year activity levels in the U.S.
General and administrative expenses - General and administrative expenses increased from $13,014 in 2007 to $15,022 in 2008 - an increase of $2,008. The increase was primarily related to i) increased personnel; ii) office/shop rental costs; iii) increase in activity levels for the U.S. directional drilling division; and iv) costs associated with pursuing international business opportunities. Offsetting these increases was a $214 decline in bad debt expense provision. As a percentage of revenues, general and administrative expenses were 19.8% in 2008 and 19.2% in 2007.
Depreciation and amortization - Depreciation and amortization for 2008 was $5,870 compared to $5,699 in 2007. The $171 increase is related to the Trust's investment in property and equipment over the past 12 months. Despite a significant 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 and amortization amounted to 7.8% for 2008 and 8.4% for 2007.
Interest expense - Interest on long-term debt has decreased from $523 in 2007 to $519 in 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 decreased on a year-over-year basis from $162 in 2007 Q2 to $175 in 2008 Q2, relates mainly to interest charges on use by the Trust of its bank indebtedness/line of credit facility.
Foreign exchange - The Trust's foreign exchange loss has decreased from $284 in 2007 to a gain of $1 in 2008. Effective January 1, 2008, the Trust changed the classification of its U.S. operations to self-sustaining (as opposed to integrated) resulting in the financial statements being translated using the current rate method as opposed to the temporal method (refer to changes in accounting policies section).
Unit-based compensation expense - Unit-based compensation expense for 2008 was $1,152 which compares to $882 in 2007. The Trust Unit options granted are valued using the Black-Scholes option pricing model and such value is being amortized against income over their three-year vesting period.
Gain on disposal of property and equipment - During 2008 Q2 YTD the Trust had a gain on disposal of property and equipment of $540 which compares to $184 in 2007. These 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 and year-to-year basis.