ACT Energy Technologies Ltd. press release

CATHEDRAL ENERGY SERVICES LTD. REPORTS RESULTS FOR 2011 Q1 AND 2011 Q2 DIVIDEND

2011-05-10

TSX - Toronto Stock Exchange · Canada

May 10, 2011 (Canada NewsWire Group) --

/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/

CALGARY, May 10 /CNW/ - Effective January 1, 2011, Cathedral Energy Services Ltd. ("the Company" / "Cathedral") began reporting its financial results in accordance with International Financial Reporting Standards ("IFRS"). Prior year comparatives have been restated from amounts issued under the previous Canadian Generally Accepted Accounting Principles ("CGAAP") to reflect results as if the Company had always prepared its financial statements using IFRS including the reclassification of costs previously classified as general and administrative expenses under CGAAP to cost of sales under IFRS. Please see additional information regarding IFRS entitled "Adoption of IFRS - 2010 Quarterly Results" and Note 15 ("Explanation of transition to IFRS") in the notes to the condensed consolidated interim financial statements which will be filed on SEDAR.com.

FINANCIAL HIGHLIGHTS

Dollars in 000's except per share amounts

| | | | | | | | | Three months ended March 31 | | | | | | | 2011 | 2010 | | | | | Revenues | $ | 54,849 | $ | 39,281 | | | | | | | | | | Adjusted gross margin % (1) | | 33% | | 37% | | | | | | | | | | EBITDAS from continuing operations (1) | $ | 14,525 | $ | 12,005 | | | | Diluted per share | $ | 0.38 | $ | 0.33 | | | | | | | | | EBITDAS (1) | $ | 14,808 | $ | 10,966 | | | | Diluted per share | $ | 0.39 | $ | 0.30 | | | | | | | | | Funds from continuing operations (1) | $ | 13,933 | $ | 11,490 | | | | Diluted per share | $ | 0.37 | $ | 0.31 | | | | | | | | | Earnings from continuing operations before income taxes | $ | 10,691 | $ | 9,406 | | | | | | | | | | Net earnings | $ | 8,117 | $ | 5,366 | | | | Basic per share | $ | 0.22 | $ | 0.15 | | | Diluted per share | $ | 0.21 | $ | 0.15 | | | | | | | | | Dividends declared per share | $ | 0.06 | $ | 0.06 | | | | | | | | | | Property and equipment additions | $ | 12,858 | $ | 7,714 | | | | | | | | | | Weighted average shares outstanding | | | | | | | | Basic (000s) | | 36,834 | | 36,400 | | | Diluted (000s) | | 38,080 | | 36,842 | | | | | | | | | | March 31 2011 | December 31 2010 | | | | | | | | | | | | Working capital | $ | 26,294 | $ | 19,516 | | | | | | | | | | Loans and borrowings excluding current portion | $ | 40,319 | $ | 35,435 | | | | | | | | | | Total shareholders' equity | $ | 119,494 | $ | 112,191 | | | (1) Refer to "NON-FRS 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, among other things, : access to capital; projected capital expenditures and commitments and the financing thereof; equipment delivery and deployment dates; rental versus purchase decision; natural gas prices; future declines in natural gas drilling will be redirected to oil and liquid-rich natural gas plays; customer commitments; financial results; activity levels; commencement of Venezuela operations; expected effect of an extended breakup period 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 including Venezuela; the ability of the Company to realize the benefit of its conversion from an income trust to a corporation; risks associated with the formation of Cathedral's joint venture company in Venezuela which is required prior to commencement of Venezuela operations, some of which are out of the control of Cathedral; risks associated with Venezuela joint venture company being awarded work by the Venezuela state run oil and natural gas corporation; changes under governmental regulatory regimes and tax, environmental and other laws in Canada, United States ("U.S.") and Venezuela; 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-IFRS MEASUREMENTS

This news release refers to certain non-IFRS measurements that do not have any standardized meaning within IFRS and therefore may not be comparable to similar measures provided by other companies. Management utilizes these non-IFRS measurements to evaluate Cathedral's performance.

The specific measures being referred to include the following:

i) "Adjusted gross margin" - calculated as gross margin plus non-cash items (depreciation and share-based compensation); is considered a primary indicator of operating performance (see tabular calculation on the following page);

ii) "Adjusted gross margin %" - calculated as adjusted gross margin divided by revenues; is considered a primary indicator of operating performance (see tabular calculation on the following page);

iii) "EBITDAS" - defined as earnings before finance costs, unrealized foreign exchange on intercompany balances, unrealized foreign exchange due to hyper-inflation accounting, taxes, depreciation and share-based compensation; 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 (see tabular calculation on the following page);

iv) "EBITDAS from continuing operations" - defined as earnings before finance costs, unrealized foreign exchange on intercompany balances, unrealized foreign exchange due to hyper-inflation accounting, taxes, depreciation and share-based compensation excluding the portion due from discontinued operations in each component of the calculation; is considered an ongoing 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 (see tabular calculation on the following page);

v) "EBITDAS from discontinued operations" - defined as earnings before finance costs, unrealized foreign exchange on intercompany balances, unrealized foreign exchange due to hyper-inflation accounting, taxes, depreciation and share-based compensation from discontinued operations of the Company's former wireline division in each component of the calculation;

vi) "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

vii) "Funds from continuing operations" - calculated as cash provided by operating activities before changes in non-cash working capital, cash flow from discontinued operations and income taxes paid less current tax expense is considered an indicator of the Company's ability to generate funds flow from operations on an after tax basis but excluding changes in non-cash working capital which is financed using the Company's operating loan (see tabular calculation on the following page).

The following tables provide reconciliations from IFRS measurements to non-IFRS measurements referred to in this news release:

Adjusted gross margin

| | | | | | | | | Three months ended March 31 | | | | | | | | 2011 | | 2010 | | | Gross margin | $ | 14,899 | $ | 12,310 | | | Add non-cash items included in cost of sales: | | | | | | | | Depreciation | | 3,379 | | 2,303 | | | Share-based compensation | | 64 | | 78 | | | | | | | | | Adjusted gross margin | $ | 18,342 | $ | 14,691 | | | | | | | | | | Adjusted gross margin % | | 33% | | 37% | |

EBITDAS

| | | | | | | | | Three months ended March 31 | | | | | | | | 2011 | | 2010 | | | Earnings from continuing operations before income taxes | $ | 10,691 | $ | 9,406 | | | Add (deduct): | | | | | | | | Depreciation included in cost of sales | | 3,379 | | 2,303 | | | Depreciation included in selling, general and administrative expenses | | 49 | | 80 | | | Share-based compensation included in cost of sales | | 64 | | 78 | | | Share-based compensation included in selling, general and administrative expenses | | 378 | | 661 | | | Unrealized foreign exchange gain on intercompany balances | | (471) | | (463) | | | Unrealized foreign exchange gain due to hyper-inflation accounting | | - | | (510) | | | Finance costs | | 435 | | 450 | | EBITDAS from continuing operations | | 14,525 | | 12,005 | | | EBITDAS from discontinued operations | | 283 | | (1,039) | | | EBITDAS | $ | 14,808 | $ | 10,966 | |

Funds from continuing operations

| | | | | | | | | Three months ended March 31 | | | | | | | | 2011 | | 2010 | | | Cash flow from operating activities | $ | 7,545 | $ | 2,532 | | | Add (deduct): | | | | | | | | Cash flow from discontinued operations | | - | | 1,060 | | | Changes in non-cash operating working capital | | 5,728 | | 7,564 | | | Income taxes paid | | 321 | | 3 | | | Current tax (expense) recovery | | 339 | | 331 | | Funds from continuing operations | $ | 13,933 | $ | 11,490 | |

OVERVIEW

The Company completed the first quarter of 2011 with revenues of $54,849 compared to 2010 Q1 at $39,281. The 2011 Q1 revenues were comprised of 76% (2010 Q1 - 79%) from the directional drilling division and 24% (2010 Q1 - 21%) from the production testing division.

2011 Q1 EBITDAS was $14,808 ($0.39 per share - diluted) which represents a $3,842 or 35% increase from $10,966 ($0.30 per share - diluted) in 2010 Q1. 2011 Q1 EBITDAS from continuing operations was $14,525 ($0.38 per share - diluted) an increase of $2,520 or 21% from $12,005 ($0.33 per share - diluted) in 2010 Q1. The Company's net earnings for 2011 Q1 was $8,117 (2010 - $5,366) or $0.21 (2010 - $0.15) per share - diluted.

RESULTS OF OPERATIONS

| | | | | | | | | | | | | | | | | Three months ended March 31, 2011 | | Three months ended March 31, 2010 | | | | | | | | | | | | Revenues | | Directional drilling | Production testing | Total | | Directional drilling | Production testing | Total | | | | | | | | | | | | | | | | | | | | | | Canada | $ | 31,003 | $ | 8,769 | $ | 39,772 | | $ | 21,800 | $ | 5,226 | $ | 27,026 | | | | | | | | | | | | | | | | | United States | | 10,570 | | 4,507 | | 15,077 | | | 9,202 | | 3,053 | | 12,255 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | $ | 41,573 | $ | 13,276 | $ | 54,849 | | $ | 31,002 | $ | 8,279 | $ | 39,281 |

Revenues and gross margin

2011 Q1 revenues were $54,849 which represented an increase of $15,568 or 40% from 2010 Q1 revenues of $39,281. The increase was primarily attributed to the focus on horizontal, multi-stage fracturing technology to complete conventional and unconventional resource plays in both Canada and the U.S. which has allowed for continued strength in activity levels for the oilfield services sector. Demand for Cathedral's services has also been driven by both oil and liquids-rich natural gas plays.

The directional drilling division revenues have increased from $31,002 in 2010 to $41,573 in 2011. This increase is the result of: i) a 23% increase in activity days from 3,261 in 2010 to 4,026 in 2011; and ii) an increase in the average day rate from $9,350 in 2010 Q1 to $10,221 in 2011 Q1 - 9% increase. For 2010 Q4, the average day rate was $10,100. On year-over-year basis, Canadian day rates have increased 14% and this increase is attributable to a combination of passing on increased field labour rates to customers and general rate increases. U.S. day rates have increased slightly in U.S. dollars but declined 3% when converted to Canadian dollars. The day rates disclosed in this news release reflect revenue as classified under IFRS - see notes to financial statements for explanation of changes in revenue classifications. Canadian activity days increased from 2,303 to 2,888 and U.S. activity days increased from 958 to 1,138.

The Company's production testing division contributed $13,276 in revenues during 2011 Q1 which is a 60% increase over 2010 revenues of $8,279. This increase is attributable to the overall increase in testing units from 35 at the end of 2010 Q1 to 56 at the end of 2011 Q1, plus an increase in oilfield service activities on a year-over-year basis.

The gross margin for 2011 Q1 was 27% compared to 31% in 2010 Q1. Under IFRS, cost of sales includes the non-cash expenses for a portion of depreciation and share-based compensation. As shown above, these non-cash expenses total $3,443 for 2011 Q1 and $2,381 for 2010 Q1. Adjusted gross margin for 2011 Q1 is $18,342 (33%) compared to $14,691 (37%) for 2010 Q1.

The decline in adjusted gross margin of 4% is attributed to the combined effects of:

| i) | increase in labour costs. Field labour rates have increased and such increases have not been fully compensated for by revenue increases. Startup costs have been incurred with respect to Houston operations facility and training of field staff for future Venezuela operations. Additional operating administrative staff positions were added to accommodate growth; | | ii) | increase in repairs and maintenance costs due to timing of repairs as there was a backlog of repair work from 2010 that were completed in 2011 Q1; and | | iii) | an increase in specialized equipment rentals. These rentals related to specialized equipment needs of certain clients in both divisions. The Company regularly reviews the equipment being rented and if there is a broad base demand will purchase equipment. If the demand for the equipment is not supported for purchase, it will continue to rent as needed. |

Depreciation allocated to cost of sales increased from $2,303 in 2010 Q1 to $3,379 in 2011 Q1 due to capital additions in the period from 2010 Q2 to 2011 Q1. Depreciation included in cost of sales as a percentage of revenue was 6% in both quarters.

For 2011 Q1 the Company had share-based compensation included in cost of sales of $64 compared to $78 recognized in 2010 Q1. The value of the options is being amortized against income over the three-year vesting periods.

Selling, general and administrative expenses ("SG&A")

SG&A were $5,192 in 2011 Q1; an increase of $718 compared with $4,474 in 2010 Q1. As a percentage of revenue, these costs were 9% in 2011 Q1 and 11% in 2010 Q1. Under IFRS, SG&A includes the non-cash expenses for a portion of depreciation and share-based compensation. These non-cash expenses total $427 for 2011 Q1 and $741 for 2010 Q1. SG&A net of these non-cash items were 2011 Q1 $4,765 and 2010 Q1 $3,733, an increase of $1,032. Staffing costs increased $954; this increase was primarily related to staff additions for research and development department, staff positions added to accommodate growth, wage increases for existing staff as well as changes in variable compensation. The staffing costs included in SG&A relate to executives, sales, accounting, human resources, payroll, safety, research and development and related support staff. The remaining increase of $78 relates to several items, none of which was significant individually.

Depreciation allocated to SG&A decreased slightly from $80 in 2010 Q1 to $49 in 2011 Q1 due to aging assets and less depreciation under the declining balance method of depreciation.

For 2011 Q1 the Company had share-based compensation included in SG&A of $378 compared to $661 recognized in 2010 Q1. The value of the options is being amortized against income over the three-year vesting periods.

Gain on disposal of property and equipment

During 2011 Q1 the Company had a gain on disposal of property and equipment of $931 which compares to $846 in 2010 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.

Foreign exchange gain

The Company's foreign exchange gain has decreased from a $1,174 in 2010 Q1 to $488 in 2011 Q1 due to the fluctuations in the Canadian dollar compared to U.S. dollars and Venezuelan bolivars. 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 2011 Q1 foreign currency gain are unrealized gains of $471 (2010 Q1 - $463) related to intercompany balances.

Finance costs

Finance costs consist of interest expenses on operating loan, loans and borrowings and bank charges of $435 for 2011 Q1 and $450 for 2010 Q1. Interest expense related to revolving term loan decreased from $307 in 2010 Q1 to $249 in 2011 Q1 due to the decrease in the average level of debt outstanding. Interest on operating loan, which increased marginally on a year-over-year basis from $112 in 2010 Q1 to $145 in 2011 Q1, due to increased average balance outstanding on the operating loan on a year-over-year basis. Interest on finance lease liabilities was $23 in 2011 Q1 compared to $22 in 2010 Q1. Other interest which consists of bank charges, non-deductible interest and other minor interest charges was $18 in 2011 Q1 compared to $9 in 2010 Q1.