ACT Energy Technologies Ltd. press release

Cathedral Energy Services reports results for 2008 Q4 and the year ended December 31, 2008

2009-03-05

TSX - Toronto Stock Exchange · Canada

/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/

CALGARY, March 5 /CNW/ - Cathedral Energy Services Income Trust (the "Trust" / TSX: CET.UN) is pleased to report its results for 2008 Q4 and the year-end December 31, 2008. Dollars are in '000's except for day rates and per Trust Unit amounts.

FINANCIAL HIGHLIGHTS Three months ended Years ended December 31 December 31 2008 2007 2008 2007

Revenues $ 50,506 $ 39,054 $ 178,928 $ 145,106

EBITDAS(1) $ 13,932 $ 13,707 $ 50,873 $ 46,731 Per Trust Unit - diluted $ 0.43 $ 0.43 $ 1.57 $ 1.47

Income before taxes $ 9,086 $ 9,772 $ 34,594 $ 31,990

Net income $ 9,737 $ 10,365 $ 30,139 $ 24,863 Per Trust Unit - basic $ 0.30 $ 0.33 $ 0.94 $ 0.79 Per Trust Unit - diluted $ 0.30 $ 0.33 $ 0.93 $ 0.78

Cash distributions declared per Trust Unit $ 0.21 $ 0.21 $ 0.84 $ 0.84

Distributable cash (1) $ 10,795 $ 12,043 $ 39,791 $ 38,993

Cash distributions (2) $ 6,842 $ 6,649 $ 27,094 $ 26,405

Payout ratio (1) 63% 55% 68% 68%

Property and equipment additions $ 21,054 $ 5,205 $ 47,618 $ 19,857

Weighted average Trust Units outstanding: Basic ('000) 32,582 30,652 32,215 31,402 Diluted ('000) 32,582 31,836 32,463 31,781

December December 31 2008 31 2007

Working capital $ 17,435 $ 16,947

Long-term debt and capital lease obligations excluding current portion $ 40,233 $ 17,441

Unitholders' equity $ 91,859 $ 79,250 (1) see "NON-GAAP MEASUREMENTS" (2) Excludes foreign taxes paid that have been allocated to Unitholders

FORWARD-LOOKING INFORMATION

Certain statements in this news release 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 news release specifically 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/Cathedral's business and operations including the Trust/Cathedral's market share and position in the oilfield service market; and other such matters.

The forward-looking statements contained in this news release reflect several material factors, expectations and assumptions including, without limitation: (i) oil and natural gas production levels; (ii) commodity prices and interest rates; (iii) capital expenditure programs and other expenditures by the Trust/Cathedral and its customers; (iv) supply and demand for oil and natural gas; (v) expectations regarding the Trust's/Cathedral's ability to raise capital, generate cash flow and to increase its equipment fleets through acquisitions and manufacture; (vi) schedules and timing of certain projects and the Trust's/Cathedral's strategy for growth; (vii) the Trust's/Cathedral's future operating and financial results; (viii) the Trust's/Cathedral's ability to retain and hire qualified personnel; and (ix) treatment under governmental regulatory regimes and tax, environmental and other laws.

Financial outlook information contained in this news release about prospective results of operations, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on management's assessment of the relevant information currently available. Readers are cautioned that such financial outlook information contained in this news release and certain documents incorporated by reference into this news release should not be used for purposes other than for which it is disclosed herein.

Such forward-looking statements are subject to important risks and uncertainties, which are difficult to predict and that may affect the Trust/Cathedral's operations, including, but not limited to: the impact of general economic conditions in Canada, the United States and Internationally; 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 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 labour unrest; fluctuation in foreign exchange or interest rates; foreign currency controls; 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/Cathedral 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 which has been filed with the applicable Canadian provincial securities commissions and is available on www.sedar.com.

NON-GAAP MEASUREMENTS

This news release 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 (see tabular calculation under Results of Operations);

ii) "Gross margin %" - calculated as gross margin divided by revenues is considered a primary indicator of operating performance (see tabular calculation under Results of Operations);

iii) "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);

iv) "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);

v) "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;

vi) "Payout ratio" - calculated as cash distributions 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

vii) "Funds from operations" - calculated as cash flow from operating activities before changes in non-cash working capital is considered an indicator of the Trust's ability to generate funds flow from operations but excluding changes in non-cash working capital which is financed using the Trust's bank indebtedness/line of credit facility.

OVERVIEW

Despite a significant decrease in oilfield services activity during the fourth quarter of 2008, the Trust was able to achieve record annual revenues in 2008. On a year-over-year basis, revenues increased $33,822 or 23.3% to $178,928 from $145,106 in 2007. Much of this increase was due to the directional drilling business in the U.S. EBITDAS for the year ended December 31, 2008 was $50,873 while the comparative figure for 2007 was $46,731, a combined increase of $4,142 or 8.9%. The disproportionate increase in EBITDAS (8.9%) versus the increase in revenues (23.3%) was due mainly to the increase in operating expenses which has also caused the decline in gross margin percentage. For the year ended December 31, 2008, net income was $31,139 ($0.93 per diluted Trust Unit) compared to $24,863 ($0.78 per diluted Trust Unit) for 2007. Considering the decline in market activity in the second half of 2008, management is pleased with the operating results for the year.

RESULTS OF OPERATIONS - 2008 COMPARED TO 2007

Revenues and operating expenses 2008 2007 Change % Revenues $ 178,928 $ 145,106 $ 33,822 23 Operating expenses (98,614) (73,482) 25,132 34 Gross margin $ 80,314 $ 71,624 $ 8,690 12 Gross margin 44.9% 49.4% (4.5%)

Year ended December 31, 2008 Directional Production Revenues drilling(1) Wireline testing Total Canada $ 71,886 $ 18,356 $ 13,348 $ 103,590 United States 64,113 7,452 3,773 75,338 $ 135,999 $ 25,808 $ 17,121 $ 178,928

Year ended December 31, 2007 Directional Production Revenues drilling(1) Wireline testing Total Canada $ 69,854 $ 20,892 $ 12,051 $ 102,797 United States 41,519 790 - 42,309 $ 111,373 $ 21,682 $ 12,051 $ 145,106 (1) Including rental of related equipment

For 2008 the Trust generated record annual revenues of $178,928 representing an increase of 23.3% over 2007 revenues. The increase was mainly a result of: i) a 1.9% increase in the average day rate for directional drilling services to $9,022 per day (2007 - $8,857) and ii) a 20.3% increase in directional drilling activity days to 14,766 activity days (2007 - 12,274 days).

Canadian directional drilling revenues increased 2.9% to $71,886 in 2008 from $69,854 in 2007. The Trust's 2008 drilling activity days increased to 7,843 days from 7,270 days in 2007, an increase of 7.9%. At the end of 2008 Q3, the drilling days for the Canadian division had increased by 14.7% but due to a slowdown in oil and gas activities in 2008 Q4 the annual increase for 2008 was reduced to 7.9%. The average Canadian day rate has decreased by 4.2%. The Canadian directional drilling division started the year with 55 Measurement-While-Drilling ("MWD") systems and ended the year with 59 MWD systems.

In the U.S., the Rocky Mountain region is the Trust's main area of operations and it experienced significant activity growth in 2008. U.S. directional drilling revenues increased by 54.4% to $64,113 from $41,519. The Trust's activity days in the U.S. increased from 5,004 days in 2007 to 6,923 days in 2008, an increase of 38.3%. The average U.S. day rate increased 11.9% in part due to the strengthening of the U.S. dollar in comparison to Canadian dollar. Due to increased demand in the U.S. market, the number of MWD systems was increased from 23 at the end of 2007 to 35 at the end of 2008.

Advance Wireline and Xtreme Wireline combined to generate revenues of $25,808 for 2008 compared to $21,682 for 2007, a 19.0% increase. The Canadian division began the year with 25 wireline units, had 1 unit return to service after major repairs and transferred an additional 3 units to the U.S. to end the year at 23 wireline units. In Canada, the revenues declined by 12.1% to $18,356 in 2008 from $20,892 in 2007 due to the transfer of units to the U.S. combined with a decline in activity levels.

Late in 2007 Q2, one wireline unit was transferred from the Canadian operations to form the U.S. division of Advance Wireline but revenue generating operations did not commence until 2007 Q3. The U.S. division ended 2007 with 2 wireline units and ended 2008 with 5 wireline units. As a result of the 2008 expansion and operations for an entire year, the U.S. wireline division generated $7,452 in revenues for 2008; an increase of $6,662 from 2007 of $790. In Q1 of 2009 another wireline unit was transferred to the U.S. operations from the Canadian fleet.

The Trust's production testing division, Tier One, contributed $17,121 in revenues during 2008 representing a 42.1% increase from 2007 revenues of $12,051. The division added 2 units in Canada to end the year at 21 units, which contributed to the 10.7% increase in Canadian revenues to $13,348 in 2008 from 2007 of $12,051. One additional production testing unit will be added to the Canadian fleet in 2009 Q1. The production testing division in Canada was adversely affected by the decline in natural gas drilling in 2008. The Trust began production testing operations in the U.S. during 2008 Q3 with 1 production testing unit expanding to 8 units at December 31, 2008; 5 additional units will be added to the U.S. fleet in the first half of 2009. The U.S. division had revenues of $3,773 in 2008.

The gross margin for 2008 was 44.9%, which compares to 49.4% in 2007. The decrease is attributed to a number of factors, but mainly is the result of an increase in the labour costs in all divisions. There was a significant increase in labour costs that began in Q3 of 2007 and continued into 2008 due to the high demand for labour in both Canada and the U.S. for oil and gas field workers. This has caused a 2.9% decline in the gross margin. Another factor contributing to the decline is an increase in the cost of motor and other equipment repairs in the drilling division.

General and administrative expenses

2008 2007 Change % General and administrative expenses $ 31,063 $ 25,774 $ 5,289 21

General and administrative expenses increased from $25,774 in 2007 to $31,063 in 2008, an increase of $5,289. The increase was mainly related to the expansion of operations. As a percentage of revenues, general and administrative expenses were 17.4% in 2008 and 17.8% in 2007. Approximately 45% of the overall increase in general and administrative expenses relates to the start-up of the U.S. production testing division, operating the U.S. Wireline division for a full year, and the establishment of operations in Venezuela. The remaining increases are due to the expansion of operations in the year as evidenced by the increase in revenues.

Depreciation and amortization

2008 2007 Change % Depreciation and amortization $ 13,416 $ 12,054 $ 1,362 11

This increase is related to the Trust's investment in property and equipment over the past 12 months including 20 MWD systems, mud motors and drill collars to complement the increase in MWD systems and the purchase of 7 production testing units. As a percentage of revenues, depreciation and amortization amounted to 7.5% for 2008 and 8.3% for 2007. Despite the increase in the Trust's depreciable asset base over the past 12 months, depreciation on a year-to-year basis did not increase as much as otherwise anticipated due to the change in the accounting method for foreign currency translation of the Trust's U.S. operations (refer to Change in Foreign Currency Translation section).

Interest

2008 2007 Change % Interest - long-term debt and capital lease obligations $ 1,158 $ 1,084 $ 74 7 Interest - other $ 422 $ 404 $ 18 4

The main contributing factor to the increase in interest related to long-term debt and capital lease obligations is an increase in the average level of debt outstanding on a year-over-year basis, net of declines in the prime interest rate during the year.

Foreign exchange loss

2008 2007 Change % Foreign exchange loss $ 94 $ 492 $ (398) (81)

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 Change in Foreign Currency Translation section).

Unit-based compensation expense

2008 2007 Change % Unit-based compensation expense $ 1,705 $ 1,603 $ 102 6

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

2008 2007 Change % Gain on disposal of property and equipment $ 2,138 $ 1,777 $ 361 20

The gain on disposal of property and equipment can vary significantly from year-to-year as almost all of the disposals relate to downhole equipment lost-in-hole. Cathedral recovers lost-in-hole equipment costs including previously expensed depreciation on the related assets.

Taxes

2008 2007 Change % Taxes $ 4,455 $ 7,127 $ (2,672) (37)

For 2008, the Trust has a tax expense of $4,455 (effective tax rate of 12.9%) which compares to $7,127 (effective tax rate of 22.3%) in 2007. The 2007 tax provision included a cumulative non-cash adjustment of $2,754 (expense) related to the substantive enactment of the previously announced changes to the taxation of income and royalty trusts, other than real estate investment trusts. Removing the 2007 adjustment noted above the effective tax rate for 2007 was 13.7%. In comparing the adjusted 2007 effective tax rate (13.7%) to the 2008 effective tax rate (12.9%), the decrease is mainly attributable to the net result of the continuing growth in the U.S. operations which are taxed at a higher rate and a reduction to future income tax liability for changes in effected tax rates.

Other Comprehensive Income

2008 2007 Change % Unrealized foreign exchange gain on translation of self-sustaining foreign operations $ 3,326 $ - $ 3,326 n/a

Other comprehensive income ("OCI") is comprised entirely of the unrealized foreign currency translation gain of the Trust's U.S. self-sustaining subsidiary and reflects the changing value of the Canadian dollar compared to the U.S. dollar.

LIQUIDITY AND CAPITAL RESOURCES

The Trust's principal source of liquidity is cash generated from operations and its credit facility. The Trust also has the ability to fund liquidity requirements through the issuance of debt and/or equity. At December 31, 2008, the Trust had an operating line of credit with a major Canadian bank in the amount of $20,000 (2007 - $12,500) of which $15,406 (2007 - $6,030) was drawn. The Trust has a revolving term loan facility in the amount of $45,000 (2007 - $25,000) of which $40,000 (2007 - $17,000) was drawn as at December 31, 2008. In addition, at December 31, 2008, the Trust had obligations under capital leases in the amount of $222 (2007 - $451) and other long-term debt of $218 (2007 - $283).

Operating activities

Cash flow from operating activities decreased from $39,729 in 2007 to $36,143, a decrease of $3,586 or 9.0%. Funds from operations (see Non-GAAP Measurements) for 2008 were $40,824 which compares to $39,693 for 2007; a marginal increase of $1,131. The Trust has a strong working capital position at December 31, 2008 at $17,435 which compares to $16,947 at the end of 2007.

Investing activities

Cash used in investing activities for the year ended December 31, 2008 amounted to $40,134 compared to $16,607 in 2007. During 2008 the Trust invested an additional $47,618 (2007 - $19,857) in property and equipment. For 2008 the significant property and equipment additions included purchase of land and building for a new Calgary facility, 20 MWD systems, purchase of 10 production testing units and an expansion of the overall mud motor and drill collar fleet to complement the increased directional drilling job capability as well as to reduce equipment rentals. The capital asset additions were funded by a combination of the Trust's cash flow from operations, advances under long-term debt, proceeds from disposal of property and equipment and proceeds on exercise of Trust Unit options. Fluctuations in non-cash working capital related to investing activities are a function of when proceeds on disposal of property and equipment are received and when payments for property and equipment purchases are made.