ACT Energy Technologies Ltd. press release

Cathedral Energy Services reports results for 2010 Q1, updated 2010 capital budget and 2010 Q2 dividend

2010-05-05

TSX - Toronto Stock Exchange · Canada

May 5, 2010 (Canada NewsWire Group) --

/NOT FOR DISSEMINATION IN THE UNITED STATESOF AMERICA/

Cathedral Energy Services Ltd. (the "Company" or "Cathedral" / TSX: CET) is pleased to report its results for 2010 Q1, updated 2010 capital budget and 2010 Q2 dividend. Dollars are in '000's except for day rates and per share amounts.

<< FINANCIAL HIGHLIGHTS

Dollars in 000's except per share amounts

Three months ended March 31 2010 2009 Revenues (excluding discontinued operations 2010 - $1,927; 2009 - $4,839) $ 35,676 $ 26,529

Gross margin %(1) 50% 48%

EBITDAS(1) from continuing operations $ 11,616 $ 7,342 Per share - diluted $ 0.32 $ 0.23

EBITDAS(1) $ 10,479 $ 6,785 Per share - diluted $ 0.29 $ 0.21

Income before taxes and discontinued operations $ 9,091 $ 3,273

Net income $ 6,737 $ 1,404 Basic per share $ 0.19 $ 0.04 Diluted per share $ 0.18 $ 0.04

Dividends declared per share $ 0.06 $ 0.15

Property and equipment additions $ 7,714 $ 4,137

Weighted average shares outstanding: Basic ('000) 36,400 32,582 Diluted ('000) 36,726 32,582

March 31 December 31 2010 2009 Working capital $ 23,854 $ 22,451

Long-term debt excluding current portion $ 39,519 $ 39,526

Shareholders' equity $ 101,758 $ 97,422 (1) Refer to MD&A; see "NON-GAAP MEASUREMENTS" >>

MANAGEMENT'S DISCUSSION & ANALYSIS

This Management's Discussion & Analysis ("MD&A") for the three months ended March 31, 2010should be read in conjunction with the annual audited consolidated financial statements and notes thereto for the year ended December 31, 2009, as well as the MD&A in the 2009 Annual Report of Cathedral Energy Services Ltd. ("the Company" / "Cathedral"). This MD&A has been prepared as of May 5, 2010. Dollar amounts are in '000's except for day rates and per share amounts.

FORWARD LOOKING STATEMENTS

This MD&A 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 MD&A contains forward-looking statements relating to: access to capital; projected capital expenditures and commitments and the financing thereof; expected proceeds on disposal of wireline and other property and equipment; equipment delivery dates; establishment of new operating bases; customer commitments; 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 MD&A 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:

>

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 MD&A 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 MD&A 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 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.

The specific measures being referred to include the following:

>

OVERVIEW

The Company 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"). The Reorganization was completed on December 18, 2009(see 2009 Annual Report for further details). As a result of the application of the continuity of interests method of accounting, certain terms such as shareholders'/unitholders', dividends/distributions and share-based/unit-based may be used interchangeably throughout this MD&A.

During the quarter, the Company made the decision to discontinue its operations of the wireline division. On March 31, 2010, it closed its Canadian slickline operations and on April 20, 2010it completed the sale of its U.S. wireline operations. As such, for the three months ended March 31, 2010and the related assets are classified as held for sale and the revenues and expenses for the wireline business have been included in the statements of operations and statements of cash flows as discontinued operations. The 2009 figures have been reclassified to be consistent with this presentation.

On April 20, 2010, the Company closed the sale of its U.S. based electric wireline business to Pure Energy Services Ltd. ("Pure") in exchange for the operating assets of Pure's Motorworks division and approximately $2,100cash. The Motorworks division includes 58 drilling motors, 23 drilling jars, spare mud motor power sections and shop equipment valued at approximately $5,000. The assets of the Motorworks operations will be utilized in Cathedral's current directional drilling business, and the net sale proceeds will be used to reduce bank indebtedness.

The Company completed the first quarter of 2010 with quarterly revenues of $35,676compared to 2009 Q1 at $26,529. The 2010 Q1 revenues were comprised of 77% (2009 Q1 - 77%) from the directional drilling division and 23% (2009 Q1 - 23%) from the production testing division.

2010 Q1 EBITDAS was $10,479($0.29per share - diluted) which represents a $3,694or 54% increase from $6,785($0.21per share - diluted) in 2009. 2010 Q1 EBITDAS from continuing operations was $11,616($0.32per share - diluted) an increase of $4,274or 58% increase from $7,342($0.23per share - diluted) in 2009 Q1. The Company's net income for 2010 Q1 was $6,737(2009 - $1,404) or $0.18(2009 - $0.04) per share - diluted.

<< RESULTS OF OPERATIONS

Revenues and operating expenses

2010 Q1 2009 Q1 Change % Revenues (excluding discontinued operations 2010 $1,927; 2009 - $4,839) $ 35,676 $ 26,529 $ 9,147 34 Operating expenses (18,005) (13,664) 4,341 32 Gross margin - $ $ 17,671 $ 12,865 $ 4,806 37 Gross margin - % 50% 48% 2%

Three months ended Three months ended March 31, 2010 March 31, 2009 Direct- Produc- Direct- Produc- ional tion ional tion Revenues drilling testing Total drilling testing Total Canada $ 18,398 $ 5,225 $ 23,623 $ 10,793 $ 3,725 $ 14,518 United States 9,000 3,053 12,053 9,556 2,455 12,011 $ 27,398 $ 8,278 $ 35,676 $ 20,349 $ 6,180 $ 26,529 >>

2010 Q1 revenues were $35,676which represented an increase of $9,147or 34% from 2009 Q1 revenues of $26,529. The increase is primarily attributed to the strengthening demand for oil drilling services, an increased focus on shale gas drilling and operations related to the unconventional gas and oil plays. Since the third quarter 2009, the Company has experienced, on a quarter-over-quarter basis, a sequential improvement in operating activities across all of its service areas in both Canadaand the U.S. In Canada, the market has improved as we are seeing old areas being redeveloped (i.e. Cardium) and new zones being discovered (i.e. Duvernay) which are predominately employing the use of horizontal, multi-stage fracturing technology and this work is beneficial to both the directional drilling and production testing divisions of the Company.

The directional drilling division revenues have increased from $20,349in 2009 to $27,398in 2010. This increase is the net result of: i) a 69% increase in activity days from 1,929 in 2009 to 3,261 in 2010; and ii) a decrease in the average day rate from $10,253in 2009 to $8,244in 2010, which was due in large part to the decrease in U.S. rates due to the increase in exchange rate for the Canadian dollar compared with 2009 Q1 and due in part in reduction in drilling rates to remain competitive. For 2009 Q4, the average day rate was $8,517. Canadian activity days increased from 1,129 to 2,303 and U.S. activity days increased from 800 to 958.

The Company's production testing division contributed $8,278in revenues during 2010 Q1 which is a 34% increase over 2009 revenues of $6,180. This increase is attributable to the overall increase in oilfield service activities on a year-over-year basis.

The gross margin for 2010 Q1 was 50% compared to 48% in 2009 Q1. This slight increase is primarily attributed to the net effect of a 1.5% decline in labour costs, a 0.5% decrease in repairs and a 1% increase in equipment rentals. Labour costs as a percentage of revenue decreased due to changes in labour rates made throughout 2009. In 2009 Q1 the U.S. directional drilling division incurred higher repair costs, this division did not experience the same level of repairs. The Company's production testing division incurred additional equipment rentals in order to complete all of its work engagements.

General and administrative expenses

General and administrative expenses were $6,840in 2010 Q1; an increase of $803compared with $6,037in 2009. The increase was primarily related to increases in payroll related expenses as well as other general increases due to the increased activity levels.

Depreciation and amortization

Depreciation for 2010 Q1 was $2,154which compares to $2,878in 2009 Q1. This slight decrease is due to in part the declining balance depreciation method used by the Company and is expected as its assets get older. In addition, the Company reviewed its estimate of useful lives of assets as at January 1, 2010and adjusted its declining balance depreciation rates accordingly. As a percentage of revenues, depreciation amounted to 6% for 2010 and 11% for 2009.

Share-based compensation expense

For 2010 Q1 the Company had share-based compensation expense of $690compared to $277recognized in 2009 Q1. The increase is mainly due to options issued in the quarter. The value of the options is being amortized against income over the three-year vesting periods.

Interest expense

Interest expense related to long-term debt decreased from $366in 2009 Q1 to $307in 2010 Q1 due to the decrease in the average level of debt outstanding. Other interest expense, which decreased marginally on a year-over-year basis from $115in 2009 Q1 to $111in 2010 Q1, 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 $639loss in 2009 Q1 to a gain of $676in 2010 Q1 due to the fluctuations in the Canadian dollar. Upon consolidation the Company'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 U.S. denominated intercompany balances continue to be recognized in the statement of income. Included in the 2010 Q1 foreign currency gain are unrealized gains of $626related to intercompany balances.

Gain on disposal of property and equipment

During 2010 Q1 the Company had a gain on disposal of property and equipment of $846which compares to $720in 2009 Q1. The Company'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 Company and therefore can fluctuate significantly from quarter-to-quarter.

Taxes

For 2010 Q1, the Company had a tax expense of $329as compared to $826in 2009 Q1. All of the Company's Canadian taxable income was reduced to $Nil due to the utilization of tax pools and tax loss carry-forwards.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal source of liquidity is cash generated from operations. The Company also has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity. At March 31, 2010, the Company had an operating line of credit with a major Canadian bank in the amount of $20,000(December 31, 2009- $20,000) of which $4,917(December 31, 2009- $2,181) was drawn. In addition, the Company has a non-reducing revolving term loan facility in the amount of $45,000(December 31, 2009- $45,000) of which $39,500(December 31, 2009- $39,500) was drawn as at March 31, 2010. In addition, at March 31, 2010, the Company had other long-term debt of $180(December 31, 2009- $234).

Operating activities

Cash flow from operating activities for the three months ended March 31, 2010decreased from $12,304in 2009 to $1,780, a decrease of $10,524or 86%. This decrease reflects a further investment in working capital in the amount of $8,108. Funds from continuing operations (see Non-GAAP Measurements) for 2010 were $10,795which compares to $2,631for 2009 an increase of $8,164. This increase was caused mainly by the increase on earnings due to increased activity levels. The Company has a working capital position at March 31, 2010at $23,854which compares to $22,451at December 31, 2009.

Investing activities

Cash used in investing activities for the three months ended March 31, 2010amounted to $5,420which compares to $5,335for the same period in 2009. During 2010 Q1 the Company invested an additional $7,714(2009 - $4,137) in property and equipment with the main additions being deposits made for resistivity (logging while drilling) equipment and three additional production testing units. At March 31, 2010, the Company's operating entities had 96 MWD systems and 35 production testing units. On April 20, 2010, the Company closed the sale of its U.S. wireline business including 10 electric line wireline units. The Company has 14 slickline wireline units which are classified as held for sale.

Financing activities

Cash from financing activities for the quarter ended March 31, 2010amounted to $2,682as compared to cash used by financing activities of $11,386in 2009 Q1. During 2010 Q1, the Company made repayments of other long-term debt of $54(2009 - $55). Advances on bank indebtedness for 2010 Q1 were $2,736(2009 - repayments of $6,966). The Company received advances of long-term debt in the amount of $Nil (2009 - $1,500). Dividends paid in 2010 Q1 were $Nil (2009 - $5,865). The dividends declared in 2010 Q1 were paid April 15, 2010. As at March 31, 2010, the Company was in compliance with all covenants under its credit facility. At May 5, 2010, the Company has 36,405,361 shares and 3,081,969 share options outstanding.

Contractual obligations

In the normal course of business, the Company incurs contractual obligations and those obligations are disclosed in the Company's MD&A for the year ended December 31, 2009. As at March 31, 2010, the Company has a commitment to purchase approximately $5,647of property and equipment.

UPDATED 2010 CAPITAL PROGRAM

For 2010, the Board of Directors of the Company has approved an updated capital budget of $29,380(excluding the $5,000of directional drilling equipment acquired in the asset swap with Pure). Included in the 2010 capital budget is approximately $7,710for maintenance capital and $3,800allocated 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, 8 Electro-Magnetic Measurement-While-Drilling ("EM-MWD") systems, 5 pulse MWD systems and 6 high pressure production testing units. These capital expenditures are expected to be financed by way of cash flow from operations, proceeds on the disposal of wireline and other property and equipment and the Company's credit facility. The Company anticipates proceeds from the disposal of wireline and other property and equipment to be approximately $8,500including approximately $2,100related to the asset swap transaction with Pure.

DIVIDENDS

It is the intent of the Company to pay quarterly dividends to shareholders. The Board of 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 Q2 dividend in the amount of $0.06per share which will have a date of record of June 30, 2010and a payment date of July 15, 2010.

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 Company's disclosure controls or internal controls over financial reporting in the first quarter of 2010.

NEW ACCOUNTING POLICIES

In February, 2008, the CICA confirmed that the use of International Financial Reporting Standards ("IFRS") will be required in Canadafor publicly accountable profit oriented enterprises for fiscal years beginning on or after January 1, 2011. The Company will be required to report using IFRS beginning January 1, 2011.

The Company's IFRS project plan has four phases: education, analysis, design and implementation and testing. The Company is continuing the process of education for all levels of the organization and has completed the analysis phase during which it identified specific significant differences between Canadian GAAP and IFRS. The Company is in the design phase in which it is determining its policies and procedures for IFRS. This phase will be completed and the Company will move into the implementation and testing phase in 2010 Q2 & Q3.