ACT Energy Technologies Ltd. press release

Cathedral Energy Services Ltd. reports results for 2009 Q4 and the year ended December 31, 2009, updated 2010 capital budget and 2010 Q1 dividend

2010-03-03

TSX - Toronto Stock Exchange · Canada

CALGARY, Mar. 3, 2010 (Canada NewsWire Group) -- /CNW/ -- Cathedral Energy Services Ltd. (the "Company" or "Cathedral" / TSX: CET) is pleased to report its results for 2009 Q4 and the year-end December 31, 2009, updated 2010 capital budget and 2010 Q1 dividend. Dollars are in '000's except for day rates and per share amounts.

FINANCIAL HIGHLIGHTS Three months ended Years ended December 31 December 31 2009 2008 2009 2008 Revenues $ 26,695 $ 50,506 $ 94,520 $ 178,928 Gross margin %(1) 46% 42% 45% 45% EBITDAS(1) $ 5,864 $ 13,554 $ 16,652 $ 50,468 Per share - diluted $ 0.16 $ 0.43 $ 0.48 $ 1.57 Income before taxes $ 1,096 $ 9,086 $ 2,001 $ 34,594 Net income $ 2,236 $ 9,737 $ 5,281 $ 30,139 Per share - basic $ 0.06 $ 0.30 $ 0.15 $ 0.94 Per share - diluted $ 0.06 $ 0.30 $ 0.15 $ 0.93 Property and equipment additions $ 1,614 $ 21,054 $ 8,923 $ 47,618 Weighted average shares outstanding: Basic ('000) 36,238 32,582 34,841 32,215 Diluted ('000) 36,400 32,582 34,857 32,463 December December 31 2009 31 2008 Working capital $ 22,451 $ 17,435 Long-term debt excluding current portion 39,526 40,233 Shareholders' equity 97,422 91,859 (1) see "NON-GAAP MEASUREMENTS"

FORWARD LOOKING STATEMENTS

This news release contains certain forward-looking statements and forward-looking information (collectively referred to herein as "forward-looking statements") within the meaning of applicable Canadian securities laws. All statements other than statements of present or historical fact are forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as "anticipate", "achieve", "believe", "plan", "intend", "objective", "continuous", "ongoing", "estimate", "outlook", "expect", "may", "will", "project", "should" or similar words suggesting future outcomes. In particular, this news release contains forward-looking statements relating to: access to capital; projected capital expenditures and commitments and the financing thereof; financial results; activity levels; technology advances; and dividends. The Company believes the expectations reflected in such forward-looking statements are reasonable as of the date hereof but no assurance can be given that these expectations will prove to be correct and such forward-looking statements should not be unduly relied upon.

Various material factors and assumptions are typically applied in drawing conclusions or making the forecasts or projections set out in forward-looking statements. Those material factors and assumptions are based on information currently available to the Company, including information obtained from third party industry analysts and other third party sources. In some instances, material assumptions and material factors are presented elsewhere in this news release in connection with the forward-looking statements. You are cautioned that the following list of material factors and assumptions is not exhaustive. Specific material factors and assumptions include, but are not limited to:

the performance of the Company's businesses, including current business and economic trends; oil and natural gas commodity prices and production levels; capital expenditure programs and other expenditures by the Company and its customers: the ability of the Company to retain and hire qualified personnel; the ability of the Company to obtain parts, consumables, equipment, technology, and supplies in a timely manner to carry out its activities; the ability of the Company to maintain good working relationships with key suppliers; the ability of the Company to market its services successfully to existing and new customers; the ability of the Company to obtain timely financing on acceptable terms; currency exchange and interest rates; risks associated with foreign operations; the ability of the Company to realize the benefit of its conversion from an income trust to a corporation; changes under governmental regulatory regimes and tax, environmental and other laws; and a stable competitive environment.

Forward-looking statements are not a guarantee of future performance and involve a number of risks and uncertainties some of which are described herein. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause the Company's actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the risks identified in this news release and in the Company's Annual Information Form under the heading "Risk Factors". Any forward-looking statements are made as of the date hereof and, except as required by law, the Company assumes no obligation to publicly update or revise such statements to reflect new information, subsequent or otherwise.

All forward-looking statements contained in this news release are expressly qualified by this cautionary statement. Further information about the factors affecting forward-looking statements is available in the Company's current Annual Information Form and Annual Report which have been filed with Canadian provincial securities commissions and are 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.

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, non-cash compensation expense and unrealized foreign exchange gain/loss; this measure is considered an indicator of the Company'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. The definition of EBITDAS was changed in 2009 Q2 to adjust for unrealized foreign exchange gain/loss. Comparative amounts presented have been restated to the new calculation (see tabular calculation under EBITDAS); 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; and v) "Funds from operations" - calculated as cash flow from operating activities before changes in non-cash working capital is considered an indicator of the Company's ability to generate funds flow from operations but excluding changes in non-cash working capital which is financed using the Company's bank indebtedness/line of credit facility.

OVERVIEW

Cathedral Energy Services Ltd. (the "Company" or "Cathedral") is incorporated under the Business Corporations Act (Alberta) (the "Act"). The Company was created as a result of the conversion of Cathedral Energy Services Income Trust (the "Trust") to a corporation pursuant to a Plan of Arrangement under the Act, entered into by various entities including the Trust, Cathedral Energy Services Ltd. ("CES") and SemBioSys Genetics Inc. ("SBS") (the "Reorganization").

Upon closing of the Reorganization on December 18, 2009, the Company became the operator of the business of the Trust and its subsidiaries and the existing management and board of directors of CES, plus one director of SBS, became the management and board of directors of the Company. The Reorganization resulted in the Unitholders of the Trust becoming shareholders of the Company with no changes to the underlying business operations. The Company did not acquire any additional business carried on by SBS. The former business of SBS is being carried on by a new entity named SemBioSys Genetics Inc. ("New SBS") which is owned by the former shareholders of SBS.

Prior to the closing of the Reorganization, the consolidated financial statements included the accounts of the Trust, its subsidiaries and partnerships, all of which were wholly owned. Subsequent to the Reorganization, the consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. The Company is considered a continuation of the Trust and these consolidated financial statements follow the continuity of interests method of accounting. Under the continuity of interests method of accounting the transfer of assets, liabilities and equity from the Trust to the Company are recorded at their net book values as at December 18, 2009.

As a result of the application of the continuity of interests method of accounting, certain terms such as shareholders'/unitholders' and share-based/unit-based may be used interchangeably throughout this news release.

UPDATED 2010 CAPITAL PROGRAM

For 2010, the Board of Directors of the Company has approved an updated capital budget of $20,650 including approximately $7,200 for maintenance capital and $3,800 allocated to the new head office and operations centre located in Calgary, which was purchased in 2008. The maintenance capital includes the retro-fit and upgrades to downhole tools. The balance of the 2010 capital program relates mainly to the purchase and integration of resistivity (logging while drilling "LWD") equipment and additional production testing equipment. These capital expenditures are expected to be financed by way of cash flow from operations and the Company's credit facility.

DIVIDENDS

It is the intent of the Company to pay quarterly dividends to shareholders. Directors will review the amount of dividends on a quarterly basis with due 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. The Directors have approved a 2010 Q1 dividend in the amount of $0.06 per share which will have a date of record of March 31, 2010 and a payment date of April 15, 2010.

RESULTS OF OPERATIONS

Overview

The Company completed 2009 with revenues of $94,520 compared to 2008 at $178,928. The 2009 revenues were lead by the Company's directional drilling division which represented 69% (2008 - 76%) of total revenues with the remainder composed of production testing division at 18% (2008 - 10%) and wireline division at 13% (2008 - 14%) of total 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.

2009 EBITDAS was $16,652 ($0.48 per share - diluted) which represents a $33,816 or 67% decrease from $50,468 ($1.55 per share - diluted) in 2008. 2009 EBITDAS is net of one-time charges in the amount of $1,130 of which $453 related to its restructuring of electric line ("E-Line") division and $677 related to the conversion to a corporation.

Revenues and operating expenses 2009 2008 Change % Revenues $ 94,520 $ 178,928 $ (84,408) (47) Operating expenses 52,128 98,614 (46,486) (47) Gross margin - $ $ 42,392 $ 80,314 $ (37,922) (47) Gross margin - % 45% 45% 0% Revenues Year ended December 31, 2009 Directional Production drilling testing Wireline Total Canada $ 40,596 $ 8,806 $ 6,524 $ 55,926 United States 24,161 8,536 5,897 38,594 $ 64,757 $ 17,342 $ 12,421 $ 94,520 Revenues Year ended December 31, 2008 Directional Production drilling testing Wireline Total Canada $ 71,886 $ 13,348 $ 18,356 $ 103,590 United States 64,113 3,773 7,452 75,338 $ 135,999 $ 17,121 $ 25,808 $ 178,928

2009 revenues were $94,520 which represented a decrease of $84,408 or 47% from 2008 revenues of $178,928. 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. However, during 2009 commodity prices for both oil and natural gas rose, which resulted in higher activity levels as the year progressed.

The directional drilling division revenues have decreased from $135,999 in 2008 to $64,757 in 2009; a 52% decrease. This decrease is the net result of: i) the 54% decrease in activity days from 14,766 in 2008 to 6,836 in 2009; and ii) the increase in the average day rate from $9,022 in 2008 to $9,275 in 2009, which were caused in large part to the increase in U.S. day rates due to the change in foreign exchange rate for the Canadian dollar relative to the U.S. dollar. Canadian activity days decreased from 7,843 to 4,595 and U.S. activity days decreased from 6,923 to 2,241.

The directional drilling division started the year with 59 Measurement-While-Drilling ("MWD") systems in Canada, 35 in the United States and 4 for international operations. It ended 2009 with 62 MWD systems in Canada, 30 in the United States and 4 for international operations. The Company continuously reviews the demand for its services and shifts equipment among its markets accordingly.

Expansion to the U.S. resulted in increased revenues for the Company's production testing division. The Company's production testing division contributed $17,342 in revenues during 2009 which is a 1% increase over 2008 revenues of $17,121. The division began the year with 21 units in Canada and 8 units in the U.S. and ended with 21 units in Canada and 14 in the U.S.

The wireline division generated revenues of $12,421 for 2009 compared to $25,808 for 2008 which represents a 52% decrease. In mid-June 2009, the Company re-organized its wireline operations to focus its Canadian operations on providing slickline services and to concentrate its electric line ("E-Line") services in the U.S. The division began the year with 23 units in Canada and 5 units in the U.S. It ended 2009 with 14 units in Canada and 10 units in the U.S.

The gross margin for 2009 was 45% unchanged from 45% in 2008. There were no significant changes in direct costs as a percentage of revenue basis from 2008 to 2009. The Company undertook a detailed review of all operating costs and general and administrative expenditures and reduced costs to enhance profitability including layoff of staff and wage rollbacks. Included in operating expenses is $307 of costs associated with the restructuring of the Company's wireline operations.

General and administrative expenses

General and administrative expenses were $26,083 in 2009; a decrease of $4,980 compared with $31,063 in 2008. As a percentage of revenues, general and administrative expenses were 28% in 2009 and 17% in 2008. Recognizing the expected lower activity levels, the Company initiated several measures to improve operating results and further strengthen its balance sheet. As a result, the Company reduced costs to enhance profitability including the elimination of annual bonuses for 2009, laying off of staff and wage rollbacks. Included in the 2009 general and administrative expenses were $146 related to restructuring of the Company's wireline operations. In addition, $677 of fees related to the conversion to a corporation were included in general and administrative expenses for 2009.

Depreciation and amortization

Depreciation for 2009 was $15,343 which compared to $13,416 in 2008. This increase is due to the expansion of the equipment fleet since 2008 Q2. During 2009, approximately $2,809 (2008 - Nil) of property and equipment was temporarily removed from service and therefore no depreciation has been recorded on these assets. As a percentage of revenues, depreciation amounted to 16% for 2009 and 7% for 2008.

Interest expense

Interest expense related to long-term debt increased from $1,158 in 2008 to $1,258 in 2009 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 decreased from $422 in 2008 to $290 in 2009 and relates mainly to interest charges on use by the Company of its bank indebtedness/line of credit facility.

Foreign exchange gain/loss

The Company's foreign exchange gain/loss has changed from a $94 loss in 2008 to a gain of $3,340 in 2009 due to the fluctuations in the Canadian dollar in comparison to the U.S. dollar. The Company's U.S. 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 U.S. denominated intercompany balances continue to be recognized in the statement of operations. Included in the 2009 foreign currency gain are unrealized gains of $3,682 (2008 - $405) related to intercompany balances.

Share-based compensation expense

For 2009, the Company had share-based compensation expense of $1,732 compared to $1,705 for 2008. The value of the options is being amortized against income over the three-year vesting periods. In October 2009, insiders of the Company forfeited all of the outstanding 1,303,334 options, resulting in share based compensation expense of $794 (2008 - nil). On October 13, 2009, non-insider optionees with vested or unvested out-of-the-money options were invited to reduce the exercise price of their share options to $3.81, which equaled the Trust Unit price on the last trading day immediately before the date of the modification. In exchange for this reduction in the exercise price, longer vesting terms were established with due consideration of the original expiry date which did not change. A total of 1,034,003 options were re-priced. The unrecognized compensation costs from the original grant are recognized over the remainder of the original requisite service period and the incremental compensation costs for the modified share options are recognized over the new requisite service period.

Gain on disposal of property and equipment

During 2009 the Company had a gain on disposal of property and equipment of $975 compared to $2,138 in 2008. For 2008, the Company's gains were 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 Company and therefore can fluctuate significantly from quarter-to-quarter. For 2009, the gains are mainly due to the disposal of E-Line wireline equipment that was not transferred to the United States as part of the re-organization of its wireline operations.

Taxes

For 2009, the Company had a tax recovery of $3,280 compared to tax expense of $4,455 in 2008. A significant portion of the current income taxes for 2008 relates to U.S. operations. As profitability of these operations has fallen dramatically, so has the current income tax expense. Included in the 2009 net tax recovery is $958 net tax expense related to tax on an internal reorganization related to ownership of assets. At the beginning of 2009 Q1 the Company's U.S. subsidiary sold the majority of its operating assets to the Company's Canadian operating entity, as part of an internal reorganization related to ownership of operating assets within the Company. 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 Company's U.S. subsidiary leases the majority of its operating equipment from its Canadian parent company. The future tax recovery for 2009 relates to reversal of timing differences on U.S. taxes (see comments above) and the remaining future tax recovery is attributable to adjustments related to the future taxation of SIFT income in Canada (prior to conversion to a corporation) and a tax benefit recognized on the conversion from a trust to a corporation.