ACT Energy Technologies Ltd. press release

Cathedral Energy Services Ltd. reports results for 2010 Q2 and 2010 Q3 dividend

2010-08-04

TSX - Toronto Stock Exchange · Canada

Aug. 4, 2010 (Canada NewsWire Group) --

/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/

CALGARY, Aug. 4 /CNW/ -

Cathedral Energy Services Ltd. (the "Company" or "Cathedral" / TSX: CET) is pleased to report its results for 2010 Q2 and 2010 Q3 dividend. Dollars are in '000's except for day rates and per share amounts.

<< FINANCIAL HIGHLIGHTS $ in 000's except per share amounts

Three months ended Six months ended June 30 June 30 2010 2009 2010 2009 Revenues (excluding discontinued operations 2010 YTD - $2,359; 2009 YTD - $7,098) $ 23,979 $ 10,654 $ 59,655 $ 37,183

Gross margin %(1) 41% 48% 46% 48%

EBITDAS from continuing operations(1) $ 2,608 $ 480 $ 14,224 $ 7,822 Per share - diluted $ 0.07 $ 0.01 $ 0.39 $ 0.23

EBITDAS(1) $ 2,415 $ (1,721) $ 12,894 $ 5,064 Per share - diluted $ 0.07 $ (0.05) $ 0.35 $ 0.15

Income (loss) before taxes and discontinued operations $ (1,739) $ (904) $ 7,352 $ 2,369

Net income (loss) $ (3,440) $ (1,484) $ 3,297 $ (80) Basic per share and diluted $ (0.09) $ (0.04) $ 0.09 $ -

Dividends declared per share $ 0.06 $ 0.12 $ 0.12 $ 0.42

Property and equipment additions $ 8,514 $ 1,839 $ 16,228 $ 5,976

Weighted average shares outstanding: Basic ('000) 36,408 34,290 36,404 33,441 Diluted ('000) 36,594 34,290 36,668 33,441

June 30 December 31 2010 2009 Working capital $ 14,077 $ 22,451

Long-term debt excluding current portion $ 34,514 $ 39,526

Shareholders' equity $ 98,174 $ 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 and six months ended June 30, 2010 should 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 August 4, 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; equipment delivery and deployment 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:

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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:

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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. and SemBioSys Genetics Inc. (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.

In 2010 Q1, 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, 2010 it completed the sale of its U.S. wireline operations. As such, for the three and six months ended June 30, 2010 the revenues and expenses for the wireline business have been included in the statements of operations and statements of cash flows as discontinued operations and the related assets are classified as held for sale in the balance sheet. 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 $2,112 cash. The Motorworks division includes 58 drilling motors, 23 drilling jars, spare mud motor power sections and shop equipment valued at $4,980. The assets of the Motorworks operations will be utilized in Cathedral's current directional drilling business, and the net sale proceeds were used to reduce bank indebtedness.

The Company completed 2010 Q2 with quarterly revenues of $23,979 and year-to-date revenues of $59,655 compared to 2009 Q2 revenues of $10,654 and 2009 year-to-date revenues of $37,183. Year-to-date revenues have increased 60% from 2009. The 2010 Q2 revenues were comprised of 74% (2009 Q2 - 81%) from the directional drilling division and 26% (2009 Q2 - 19%) from the production testing division.

2010 Q2 EBITDAS was $2,415 ($0.07 per share diluted) which represents a $4,136 increase from 2009 Q2 negative EBITDAS of $1,721 (($0.05) per share diluted). For the three months ended June 30, 2010, the Company's net loss was $3,440 (($0.09) per share diluted) as compared to a $1,484 net loss (($0.04) per share diluted) in 2009. Included in the quarter's loss for 2010 was an unrealized foreign exchange loss on intercompany balances of $945 (($0.03) per share diluted). This is compared to an unrealized foreign exchange gain on intercompany balances of $2,201 ($0.06 per share diluted) for the comparative period in 2009.

2010 year-to-date EBITDAS was $12,894 ($0.35 per share diluted) which represents a $7,830 or 155% increase from $5,064 ($0.15 per share diluted) in 2009. On a 2010 year-to-date basis, the Company's net income was $3,297 ($0.09 per share diluted) as compared to an $80 net loss ($0.00 per share diluted) in 2009. Included in the 2010 year-to-date net income was an unrealized foreign exchange loss on intercompany balances of $319 (($0.01) per share diluted). This is compared to an unrealized foreign exchange gain on intercompany balances of $1,653 ($0.05 per share diluted) for the comparative period in 2009.

<< RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2010 Revenues and operating expenses

2010 Q2 2009 Q2 Change % Revenues $ 23,979 $ 10,654 $ 13,325 125 Operating expenses (14,210) (5,515) 8,695 157 Gross margin - $ $ 9,769 $ 5,139 $ 4,630 90 Gross margin - % 41% 48% (7%)

Three months ended Three months ended June 30, 2010 June 30, 2009 Direct- Produc- Direct- Produc- ional tion ional tion Revenues drilling testing Total drilling testing Total Canada $ 7,704 $ 2,512 $ 10,216 $ 3,372 $ 310 $ 3,682 United States 9,977 3,741 13,718 5,294 1,678 6,972 International 45 - 45 - - - $ 17,726 $ 6,253 $ 23,979 $ 8,666 $ 1,988 $ 10,654 >>

2010 Q2 revenues were $23,979 which represented an increase of $13,325 or 125% from 2009 Q2 revenues of $10,654. 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 and increases in horizontal multi-frac wells.

The directional drilling division revenues have increased from $8,666 in 2009 to $17,726 in 2010. This increase is the net result of: i) a 135% increase in activity days from 833 in 2009 to 1,955 in 2010; and ii) a decrease in the average day rate from $10,181 in 2009 to $8,839 in 2010, which was due in large part to the decrease in U.S. rates due to the strength in the Canadian dollar compared with 2009 Q2. In addition, overall day rates have decreased due to market pressures. Canadian activity days increase from 354 to 877 and U.S. activity days increased from 479 to 1,078.

The Company's production testing division contributed $6,253 in revenues during 2010 Q2 which is a 214% increase over 2009 revenues of $1,988. This increase is attributable in part to the year-over-year increase in production testing units from 33 in 2009 Q2 to 39 in 2010 Q2 and to the overall increase in oilfield service activities on a year-over-year basis.

The gross margin for 2010 Q2 was 41% compared to 48% in 2009 Q2. The decrease is attributed to a number of factors including increases in repairs and rental expense, both of which primarily relate to the Company's directional drilling division. Repairs have increased due to operations in demanding environments. The Company is investing in changes to its equipment which it anticipates will improve performance in these areas.

General and administrative General and administrative expenses were $7,287 in 2010 Q2, an increase of $2,747 compared with $4,540 in 2009. The increase was primarily related to increases in payroll related expenses and facility rental costs as well as other general increases due to increased activity levels. As a percentage of revenues, general and administrative expenses were 30% in 2010 Q2 and 43% in 2009 Q2.

Depreciation and amortization Depreciation for 2010 Q2 was $2,440 as compared to $3,023 in 2009 Q2. This 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, 2010 and adjusted its declining balance depreciation rates accordingly. As a percentage of revenues, depreciation amounted to 10% for 2010 and 28% for 2009.

Interest Interest expense related to long-term debt increased slightly from $299 in 2009 Q2 to $307 in 2010 Q2 due to an increase in the average level of debt outstanding and a slight increase in the effective interest rates. Other interest expense increased from $48 in 2009 Q2 to $73 in 2010 Q2; this 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 changed from a gain of $2,073 in 2009 Q2 to a loss of $1,108 in 2010 Q2 due to the fluctuations in the Canadian dollar in comparison to the U.S. 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 operations. Included in the 2010 Q2 foreign currency loss are unrealized losses of $945 related to intercompany balances as compared to unrealized gains of $2,201 in the same period in 2009.

Share-based compensation For 2010 Q2 the Company had share-based compensation expense of $655 as compared to $263 for 2009 Q2. The increase is mainly due to options issued over the past year. The value of the options is being amortized against income over the three-year vesting periods.

Gain on disposal of property and equipment During 2010 Q2 the Company had a gain on disposal of property and equipment of $362, compared to $57 in 2009 Q2. 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 Q2, the Company had a tax expense of $1,142 as compared to tax recovery of $1,603 in 2009 Q2. All of the Company's current taxes are due to taxable income of its U.S. operations.

<< RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2010 Revenues and operating expenses

2010 YTD 2009 YTD Change % Revenues $ 59,655 $ 37,183 $ 22,472 60 Operating expenses (32,215) (19,179) 13,036 68 Gross margin - $ $ 27,440 $ 18,004 $ 9,436 52 Gross margin - % 46% 48% (2%)

Six months ended Six months ended June 30, 2010 June 30, 2009 Direct- Produc- Direct- Produc- ional tion ional tion Revenues drilling testing Total drilling testing Total Canada $ 26,102 $ 7,737 $ 33,839 $ 14,165 $ 4,035 $ 18,200 United States 18,977 6,794 25,771 14,850 4,133 18,983 International 45 - 45 - - - $ 45,124 $ 14,531 $ 59,655 $ 29,015 $ 8,168 $ 37,183 >>

2010 revenues were $59,655 which represented an increase of $22,472 or 60% from 2009 revenues of $37,183. 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 and increases in horizontal multi-frac wells.

The directional drilling division revenues have increased from $29,015 in 2009 to $45,124 in 2010 or 56%. This increase is the net result of: i) a 89% increase in activity days from 2,762 in 2009 to 5,216 in 2010; and ii) a decrease in the average day rate from $10,231 in 2009 to $8,467 in 2010, which was due in large part to the decrease in U.S. rates due to the strength of the Canadian dollar compared with 2009. Overall day rates have declined on a year-over-year basis due to market pressures. Canadian activity days increased from 1,483 to 3,180 and U.S. activity days increased from 1,279 to 2,036.

The Company's production testing division contributed $14,531 in revenues during 2010 which is a 78% increase over 2009 revenues of $8,168. This increase is attributable in part to the year-over-year increase in production testing units from 33 in 2009 Q2 to 39 in 2010 Q2 and to the overall increase in oilfield service activities on a year-over-year basis.

The gross margin for 2010 was 46% compared to 48% in 2009. The decrease is attributed to a number of factors including increases in repairs and rental expense, both of which primarily relate to the Company's directional drilling division. Repairs have increased due to operations in demanding environments. The Company is investing in changes to its equipment which it anticipates will improve performance in these areas.

General and administrative General and administrative expenses were $14,127 in 2010, an increase of $3,550 compared with $10,577 in 2009. The increase was primarily related to increases in payroll related expenses and facility rental costs as well as other general increases due to increased activity levels. As a percentage of revenues, general and administrative expenses were 24% in 2010 and 28% in 2009.

Depreciation and amortization Depreciation for 2010 was $4,594 as compared to $5,901 in 2009. This 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, 2010 and adjusted its declining balance depreciation rates accordingly. As a percentage of revenues, depreciation amounted to 8% for 2010 and 16% for 2009.

Interest Interest expense related to long-term debt decreased from $665 in 2009 to $614 in 2010 due to a decrease in the average debt outstanding for the period. Other interest expense increased from $163 in 2009 to $184 in 2010; this 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 changed from a gain of $1,434 in 2009 to a loss of $432 in 2010 due to the fluctuations in the Canadian dollar in comparison to the U.S. 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 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 2010 foreign currency loss are unrealized losses of $319 related to intercompany balances as compared to unrealized gains of $1,653 in the same period in 2009.

Share-based compensation expense For 2010, the Company had share-based compensation expense of $1,345 as compared to $540 for 2009. The increase is mainly due to options issued over the past year. The value of the options is being amortized against income over the three-year vesting periods.

Gain on disposal of property and equipment During 2010 the Company had a gain on disposal of property and equipment of $1,208, as compared to $777 in 2009. 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, the Company had a tax expense of $1,471 as compared to tax recovery of $777 in 2009. All of the 2010 year-to-date current income tax provision of $734 (2009 - $4,871) relates to the Company's U.S. operations and is taxed at an effective rate of 35.5%. All of the Company's Canadian taxable income was reduced to $nil due to the utilization of tax pools and tax loss carry-forwards. The Company's future tax provision for the utilization of these pools was offset by a $555 decrease in the Company's deferred credit.