ACT Energy Technologies Ltd. press release
Cathedral Energy Services reports results for the three months ended March 31, 2009
TSX - Toronto Stock Exchange · Canada
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, May 14 /CNW/ - Cathedral Energy Services Income Trust (the "Trust"/TSX: CET.UN) is pleased to report its results for the three months ended March 31, 2009. 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 2009 2008
Revenues $ 31,368 $ 46,253
Gross margin %(1) 45% 49%
EBITDAS(1) $ 6,237 $ 15,395 Per Trust Unit - diluted $ 0.19 $ 0.48
Income before taxes $ 1,755 $ 11,689
Net income $ 1,404 $ 9,917 Basic per Trust Unit $ 0.04 $ 0.31 Diluted per Trust Unit $ 0.04 $ 0.31
Cash distributions declared per Trust Unit $ 0.15 $ 0.21
Distributable cash(1), net of one-time 2009 Q1 current tax provision of $4,168 (refer to MD&A) $ 2,347 $ 13,113
Adjusted distributable cash(1), excluding one- time 2009 Q1 current tax provision of $4,168 $ 6,515 $ 13,113
Cash distributions declared(2) $ 4,887 $ 6,669
Payout ratio(1), net of one-time 2009 Q1 current tax provision of $4,168 208% 51%
Adjusted payout ratio(1), excluding one-time 2009 Q1 current tax provision of $4,168 75% 51%
Property and equipment additions $ 4,137 $ 3,960
Weighted average Trust Units outstanding: Basic ('000) 32,582 31,707 Diluted ('000) 32,582 32,054
March 31 December 31 2009 2008
Working capital $ 14,031 $ 17,435
Long-term debt excluding current portion $ 41,677 $ 40,233
Unitholders' equity $ 89,725 $ 91,859 (1) Refer to MD&A; see "NON-GAAP MEASUREMENTS" (2) Excludes foreign taxes paid that have been allocated to Unitholders
MANAGEMENT'S DISCUSSION & ANALYSIS
This Management's Discussion & Analysis ("MD&A") for the three months ended March 31, 2009 should be read in conjunction with the annual audited consolidated financial statements and notes thereto for the year ended December 31, 2008, as well as the MD&A in the Trust's 2008 Annual Report. This MD&A has been prepared as of May 14, 2009. 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 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 MD&A 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 MD&A 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 MD&A and certain documents incorporated by reference into this MD&A 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 Trust/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/Cathedral'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 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 (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, 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);
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 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
The Trust completed the first quarter of 2009 with quarterly revenues of $31,368 compared to 2008 Q1 at $46,253. The 2009 Q1 revenues were lead by the Trust's directional drilling division which represented 65% (2008 Q1- 75%) of 2009 Q1 revenues. The decline in drilling in the oil and gas sector due to low commodity prices and the overall decline in the economy have resulted in a significant decline in revenues as compared to 2008 Q1, when the Trust achieved record quarterly revenues. The Trust's production testing and wireline divisions continue to be negatively affected by the decline in natural gas drilling in western Canada.
2009 Q1 EBITDAS was $6,237 ($0.19 per diluted Trust Unit) which represents a $9,158 or 59% decrease from $15,395 ($0.48 per diluted Trust Unit) in 2008. The Trust's net income for 2009 Q1 was $1,404 (2008 - $9,917) or $0.04 (2008 - $0.31) per diluted Trust Unit.
RESULTS OF OPERATIONS
Revenues and operating expenses
2009 Q1 2008 Q1 Change % Revenues $ 31,368 $ 46,253 $ (14,885) (32) Operating expenses (17,332) (23,587) (6,255) (27) Gross margin - $ $ 14,036 $ 22,666 $ (8,630) (38) Gross margin - % 45% 49% (4)%
Three months ended March 31, 2009 Directional Production Revenues drilling(1) Wireline testing Total Canada $ 10,793 $ 3,969 $ 3,725 $ 18,487 United States 9,556 870 2,455 12,881 $ 20,349 $ 4,839 $ 6,180 $ 31,368
Three months ended March 31, 2008 Directional Production Revenues drilling(1) Wireline testing Total Canada $ 22,511 $ 6,217 $ 4,150 $ 32,878 United States 12,012 1,363 - 13,375 $ 34,523 $ 7,580 $ 4,150 $ 46,253 (1) Including rental of related equipment
2009 Q1 revenues were $31,368 which represented a decrease of $14,885 or 32% from 2008 Q1 revenues of $46,253. The decline is primarily attributed to the decline in oil and natural gas activity in 2009 which has been caused by low commodity prices and the global recession.
The directional drilling division revenues have decreased from $34,523 in 2008 to $20,349 in 2009. This decrease is the net result of: i) the 52% decrease in activity days from 4,005 in 2008 to 1,929 in 2009; and ii) the increase in the average day rate from $8,419 in 2008 to $10,253 in 2009, which was due in large part to the increase in U.S. rates due to the decline in the Canadian dollar compared with 2008 Q1. On a year-to-date basis Canadian activity days decreased from 2,500 to 1,129 and the U.S. activity days decreased from 1,505 to 800.
Expansion to the U.S. resulted in increased revenues for the Trust's production testing division. The Trust's production testing division contributed $6,180 in revenues during 2009 Q1 which is a 49% increase over 2008 revenues of $4,150. The wireline division has been affected the most by the decline in oil and natural gas activity. The wireline division generated revenues of $4,839 for 2009 Q1 which compares to $7,580 for 2008 which represents a 36% decrease.
The gross margin for 2009 Q1 was 45% compared to 49% in 2008 Q1. The decrease is attributed to a number of factors including quarter-over-quarter increases in directional field labour rates and increased equipment repairs. Labour costs as a percentage revenue increased, in spite of decreases in directional drilling labour rates which went into effect during 2009 Q1, due to the overall change in revenue mix as wireline and production testing revenues as a percentage of total revenues has increased. These divisions have historically had higher labour costs. In the current quarter the U.S. directional drilling division incurred higher repair costs than one year ago. In addition, due to the fall off in the level of activity some annual maintenance was started in Q1. This did not begin until the spring break up in Q2 of 2008.
General and administrative expenses
General and administrative expenses were $7,765 in 2009 Q1; an increase of $334 compared with $7,431 in 2008. The increase was primarily related to increased personnel and office/shop rental costs as well as costs associated with establishing international business opportunities. As a percentage of revenues, general and administrative expenses were 25% in 2009 Q1 and 16% in 2008 Q1. Recognizing the expected lower activity levels, the Trust has taken several initiatives to improve operating results and further strengthen its balance sheet. The Trust's operating entities are undertaking a detailed review of all operating costs and general and administrative expenditures and have initiated cost reductions to enhance profitability including layoff of staff and wage rollbacks ranging from 4 - 12%.
Depreciation and amortization
Depreciation for 2009 Q1 was $3,833 which compares to $2,851 in 2008 Q1. This increase is due to the increase in capital in the drilling and production testing divisions as compared with 2008 Q1, due to the expansion of the equipment fleet in 2008 Q2 to Q4 and in part due to the U.S. expansion. As a percentage of revenues, depreciation amounted to 12% for 2009 and 6% for 2008.
Interest expense
Interest expense related to long-term debt increased from $276 in 2008 Q1 to $372 in 2009 Q1 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 $99 in 2008 Q1 to $115 in 2009 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 $33 gain in 2008 Q1 to a loss of $639 in 2009 Q1 due to the fluctuations in the Canadian dollar. Upon consolidation the Trust's foreign operations are considered to be self-sustaining and therefore gains and losses due to fluctuations in the foreign currency exchange rates are recorded in other comprehensive income ("OCI") on the balance sheet as a component of equity. However, gains and losses in the Canadian entity on US denominated intercompany balances continue to be recognized in the statement of income. Included in the 2009 Q1 foreign currency loss are unrealized losses of $548 related to intercompany balances.
Unit-based compensation expense
For 2009 Q1 the Trust had unit-based compensation expense of $277 which compares to $579 for 2008 Q1. The value of the options is being amortized against income over the three-year vesting period.
Gain on disposal of property and equipment
During 2009 Q1 the Trust had a gain on disposal of property and equipment of $720, which compares to $226 in 2008 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 2009 Q1, the Trust had a tax expense of $351 (effective tax rate of 20%) as compared to $1,772 (effective tax rate of 15.2%) in 2008 Q1. At the beginning of 2009 Q1 the Trust's U.S. subsidiary sold the majority of its operating assets to the Trust's Canadian operating entity, Cathedral Energy Services Limited Partnership, as part of an internal reorganization related to ownership of operating assets within the Trust. This transaction created a one-time current tax expense in the amount of $4,168 (current taxable income was created mainly due to U.S. recaptured tax depreciation) and a recovery of future taxes in the amount of $3,210; for a net tax cost of $958. Subsequent to this transaction, the Trust's U.S. subsidiary leases the majority of its operating equipment from Cathedral Energy Services Limited Partnership. Excluding the one-time tax effect of this inter-company sale of assets the Trust had a tax recovery of $607 which relates to a change in effective tax rates.
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, 2009, the Trust had an operating line of credit with a major Canadian bank in the amount of $20,000 (December 31, 2008 - $20,000) of which $8,440 (December 31, 2008 - $15,406) was drawn. In addition, the Trust has a non-reducing revolving term loan facility in the amount of $45,000 (December 31, 2008 - $45,000) of which $41,500 (December 31, 2008 - $40,000) was drawn as at March 31, 2009. In addition, at March 31, 2009, the Trust had other long-term debt of $385 (December 31, 2008 - $440).
Operating activities
Cash flow from operating activities for the three months ended March 31, 2009 increased from $6,882 in 2008 to $12,304, an increase of $5,422 or 79%. Funds from operations (see Non-GAAP Measurements) for 2009 were $2,543 which compares to $13,299 for 2008, a decrease of $10,756. This decrease was caused mainly by a reduction on earnings due to reduced activity levels as well as a one-time current tax expense on the transfer of assets discussed above. The Trust has a working capital position at March 31, 2009 at $14,031 which compares to $17,435 at December 31, 2008.
Investing activities
Cash used in investing activities for the three months ended March 31, 2009 amounted to $5,335 which compares to $3,510 for the same period in 2008. During 2009 Q1 the Trust invested an additional $4,137 (2008 - $3,960) in property and equipment with the main additions being for the acquisition of 4 production testing units. The Trust's initial 2009 capital budget (including $3.6 million deferred from 2008) was for a total of $20.6 million. In light of the expected lower activity levels for 2009, management has significantly reduced its capital budget. The revised 2009 capital expenditure program is $8,800 including approximately $500 of maintenance capital. At March 31, 2009, the Trust's operating entities had 98 MWD systems, 33 production testing units and 28 wireline units.
Financing activities
Cash used by financing activities for the quarter ended March 31, 2009 amounted to $11,386 which compares to $2,205 in 2008 Q1. During 2009 Q1, the Trust received advances of long-term debt in the amount of $1,500 (2008 - $47). Repayments of other long-term debt in 2009 Q1 amounted to $55 (2008 - $75). Repayments of bank indebtedness for 2009 Q1 were $6,966 (2008 - advance of $3,340). As at March 31, 2009, the Trust was in compliance with all covenants under its credit facility. During 2009 Q1 the Trust received cash inflows of $Nil (2008 - $1,133) on the exercise of Trust Unit options. At May 14, 2009, the Trust had 32,582,022 Trust Units and 2,940,763 Trust Unit options outstanding.
Distributions paid to Unitholders for 2009 Q1 totaled to $5,865 (2008 - $6,650). The quarter-over-quarter decrease is mainly the result of reducing the Trust's "regular" monthly distribution from $0.07 per Trust Unit where it had been since September 2006 to $0.04 per Trust Unit commencing in February 2009. Cash distributions paid have been financed from cash flow from operations and bank indebtedness. Management currently expects cash distributions for 2009 (on an annualized basis) will also be financed from cash flow from operations.