ACT Energy Technologies Ltd. press release
Cathedral Energy Services Reports Results for 2018 Q2
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
CALGARY, Aug. 9, 2018
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, Aug. 9, 2018/CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" / TSX: CET) announces its consolidated financial results for the three and six months ended June 30, 2018and 2017. Dollars in 000's except per share amounts.
This news release contains "forward-looking statements" within the meaning of applicable Canadian securities laws. For a full disclosure of forward-looking statements and the risks to which they are subject, see "Forward-Looking Statements" later in this news release.
FINANCIAL HIGHLIGHTS Dollars in 000's except per share amounts
| | Three months ended June 30 | Six months ended June 30 | | | | | | | | | | 2018 | 2017 | 2018 | 2017 | | | | | | | Revenues | $ | 34,973 | $ | 34,355 | $ | 75,130 | $ | 72,678 | | | Adjusted gross margin % (1) | 2% | 15% | 7% | 19% | | | | | | | Adjusted EBITDAS (1) | $ | (985) | $ | 2,363 | $ | 2,458 | $ | 9,159 | | | | Basic and diluted per share | $ | (0.02) | $ | 0.05 | $ | 0.05 | $ | 0.20 | | | As % of revenues | -3% | 7% | 3% | 13% | | | | | | Cash flow - operating activities | $ | (3,731) | $ | 2,362 | $ | (1,599) | $ | 1,794 | | | Earnings (loss) before income taxes | $ | (4,224) | $ | 54 | $ | (3,879) | $ | 4,026 | | | | Basic and diluted per share | $ | (0.09) | $ | - | $ | (0.08) | $ | 0.09 | | Net earnings (loss) | $ | (2,498) | $ | 186 | $ | (2,204) | $ | 2,767 | | | | Basic and diluted per share | $ | (0.05) | $ | - | $ | (0.04) | $ | 0.06 | | Equipment additions - cash basis | $ | 4,306 | $ | 2,511 | $ | 8,780 | $ | 3,547 | | | Weighted average shares outstanding | | | | | | | | | | | | Basic (000s) | 49,445 | 48,916 | 49,422 | 45,779 | | | | | | | Diluted (000s) | 49,478 | 49,023 | 49,538 | 45,917 | | | | | | | | | June 30 | December 31 | | | | | | | | | | 2018 | 2017 | | | | | | | | | | | | | | | | | | Working capital | | | $ | 30,983 | $ | 31,016 | | | | | Total assets | | | $ | 128,887 | $ | 121,630 | | | | | Loans and borrowings excluding current portion | | | $ | 5,534 | $ | 46 | | | | | Shareholders' equity | | | $ | 101,596 | $ | 101,391 | | | | | | | | | | | | | | | | (1) Refer to "NON-GAAP MEASUREMENTS" | | | | | | | | | |
2018 Q2 KEY TAKEAWAYS
Q2 revenues increased 2% from $34,355in 2017 Q2 to $34,973in 2018 Q2 and year-to-date increased 3% from $72,678in 2017 to $75,130in 2018.
Adjusted gross margin decreased to 2% from 15% in 2017 Q2 and to 7% in 2018 year-to-date from 19% in 2017. This decline was due to non-recurring items including credits to certain customers, higher equipment repairs, due to a more demanding drilling environment and to a lesser extent upgrading the Company's existing equipment fleet.
Adjusted EBITDAS decreased from $2,363in 2017 Q2 to a loss of $(985)in 2018 Q2. Year-to-date adjusted EBITDAS decreased from $9,159in 2017 to $2,458in 2018.
The Company continues to make investments in equipment to relieve capacity constraints and to improve equipment utilization, reliability and performance.
OUTLOOK
The second quarter of 2018 continued to be challenging for Cathedral compared to the prior year. Canadian operations were impacted by low activity levels associated with spring break-up. In the U.S., equipment repair expenses continued to be a challenge along with some one-time operational issues with customers that resulted in un-paid work being done on certain jobs. As noted in previous quarters, expense escalation in the U.S. has been a challenge coupled with the difficulty of implementing corresponding customer price increases for our services in an intensely competitive environment.
In Q1 we implemented a number of cost saving measures which started to positively impact results in late Q2. These included better controls on rental expenses, trucking and continued focus on labor costs and efficiencies. In Q2 we implemented a number of engineering improvements to our equipment to improve durability and performance which should mitigate equipment repair and refurbishment costs in future quarters. We continue to focus on all expense categories impacting our business.
In 2018 we have increased our capital program for new equipment significantly compared to prior years. The objectives with our expanded capital program are to achieve higher drilling performance, reduce operating costs and grow our job capacity. Our main focus with Capital expenditure program has been on drilling motors as they currently provide the biggest performance differentiator in the market. To the end of Q2 we have added 45 new power sections for our next generation 7" CLAW-XT™ high performance motors with a similar amount to be deployed in Q3. In addition, we anticipate delivery of new 5-1/2" motors by the end of Q3 targeted specifically for 6-3/4" holes sizes in rotary steerable application rentals. Substantially all of this equipment is targeted at the U.S. market.
On the MWD front we will be rolling out our new Cathedral Linear Pulser add-on to our FUSION™ Measurement-While-Drilling (MWD) platform in Q3. This technology will be our main MWD pulse telemetry platform going forward and will reduce our deployment and repair costs as we are currently dependent on third party suppliers with our existing linear pulse telemetry platform. Upgrades to our existing FUSION MWD platform equipment, which are aimed at improving MWD performance and reliability continue to be implemented in our operations. Our FUSION MWD platform provides plug and play capability to use electromagnetic or pulse telemetry either stand-alone or combined to provide Dual Telemetry (DT) capability. The FUSION MWD platform performance capabilities are further augmented using our downhole power generator (EMc2™). Progress on our next generation Dual Telemetry (DT) MWD tool remains on track for launch in 2019.
Despite a challenging first half of 2018, we are both optimistic and confident about our prospects for the remainder of 2018 and beyond.
2018 CAPITAL PROGRAM
During the six months ended June 30, 2018the Company invested $8,780(2017 - $3,547) in equipment and expended $820in new technology development primarily related to MWD systems.
| The following table details the current period's net equipment additions: | | | | | | Six months ended | | | | | June 30, 2018 | | | | Equipment additions: | | | | | | Motors | $ | 5,157 | | | MWD | 3,214 | | | | Other | 409 | | | Total cash additions | 8,780 | | | | Less: proceeds on disposal of equipment (excluding capital lease settlements) | (6,814) | | | | Net equipment additions (1) | $ | 1,966 | | | (1)See "NON-GAAP MEASUREMENTS" | | | |
Cathedral's current 2018 capital budget totals $18,900, which includes $1,555for intangible additions. The total net equipment additions is estimated to be approximately $10,500.
The Company is monitoring capital expenditure levels in the context of customer equipment requirements, replacement of equipment lost-in-hole and available cash flow and will adjust its capital program accordingly. Delivery lead times on capital items, including component parts for self-constructed assets, range from 60 to 180 days.
RESULTS OF OPERATIONS – THREE MONTHS ENDED JUNE 30
| | | | | | | Revenues | 2018 | 2017 | | | | | | | | | | Canada | $ | 4,465 | $ | 4,914 | | | | | | | | United States | 30,508 | 29,441 | | | | | | | | | | Total | $ | 34,973 | $ | 34,355 |
Revenues2018 Q2 revenues were $34,973, which represented an increase of $618or 2% from 2017 Q2 revenues of $34,355.
Canadian revenues (excluding motor rental revenues) decreased to $3,396in 2018 Q2 from $4,143in 2017 Q2; an 18% decrease. This decrease was the result of: i) a 24% decrease in activity days to 404 in 2018 Q2 from 533 in 2017 Q2; net of ii) an 8% increase in the average day rate to $8,406in 2018 Q2 from $7,773in 2017 Q2.
The average active land rig count in Canadawas down 8% in 2018 Q2 compared to 2017 Q2 (source: Baker Hughes). Cathedral's activity levels relative to the industry were impacted by the scope of customer drilling programs and their geographical areas. The 2018 Q2 day rate is higher than recent rates, however, during spring break-up, with the limited operating days, pricing with one or two clients can skew the average day rate significantly.
U.S. Directional Drilling revenues (excluding motor rental revenues) increased to $29,832in 2018 Q2 from $29,243in 2017 Q2; a 2% increase. This increase was the result of: i) a 2% increase in activity days to 2,573 in 2018 Q2 from 2,531 in 2017 Q2; and ii) a minor increase in the average day rate to $11,594in 2018 Q2 from $11,554in 2017 Q2 (when converted to Canadian dollars). However, specific one-time credits related to performance issues with certain U.S. clients reduced the day rate by $501CAD.
The average active land rig count for the U.S. was up 20% in 2018 Q2 compared to 2017 Q2 (source: Baker Hughes). The Company experienced a 2% increase in activity days that resulted in a decrease in market share in the period. This decrease in market share was largely due to equipment constraints starting in 2017 that the Company has been working to resolve with its capital budget program as well as certain clients altering the timing and scope of their drilling programs. Day rates in United StatesDollars ("USD") increased to $8,969 USDin 2018 Q2 from $8,588 USDin 2017 Q2; a 4% increase. The increase in day rates was due to general increases in customer pricing. The 2018 Q2 day rate in USD has declined in the first two quarters of 2018 due to customer mix and scope of work that the Company believes is not indicative of a longer term trend.
Gross margin and adjusted gross margin Gross margin for 2018 Q2 was negative compared to 7% in 2017 Q2. Adjusted gross margin (see Non-GAAP Measurements) for 2018 Q2 was $631or 2% compared to $5,073or 15% for 2017 Q2.
Adjusted gross margin, as a percentage of revenue, decreased due to higher equipment repairs, higher equipment rentals and specific one-time credits related to performance issues with certain U.S. clients. Rental expenses in the quarter were higher primarily due to specialty equipment rentals that were billed through to clients with a lower mark-up than typical margins. 4% of the decrease in adjusted gross margin was attributable to the impact of the specialty equipment rental margins and the credits on U.S. work.
The remaining decrease in adjusted gross margin was from increased equipment repairs. Repairs increased in part due to a more demanding drilling environment and to a lesser extent upgrades being made to the Company's existing equipment fleet. In addition, there was an increase in the fixed component of cost of sales that were 3% higher on a percentage of revenue basis in 2018 Q2 compared to 2017 Q2. This increase was mostly attributable to office and shop payroll and other labour related costs.
Depreciation allocated to cost of sales decreased to $2,573in 2018 Q2 from $2,774in 2017 Q2. Depreciation included in cost of sales as a percentage of revenue was 7% for 2018 Q2 and 8% in 2017 Q2.
Selling, general and administrative expenses ("SG&A")SG&A expenses were $3,707in 2018 Q2; a decrease of $2compared with $3,709in 2017 Q2. As a percentage of revenue, SG&A was 11% in 2018 Q2 compared to 11% in 2017 Q2.
Technology group expensesTechnology group expenses were $627in 2018 Q2; an increase of $226compared with $401in 2017 Q2. Technology group expenses are related to new product development and supporting and upgrading existing technology. Technology group expenses consist of salaries and related benefits and burdens as well as shop supplies. Technology group expenses increased primarily due to wage increases, including the reinstatement of previous wage rollbacks, and staff additions. In 2018 Q2, an additional $231of technology group expenses related to new product development were capitalized as intangible assets (2017 Q2 - $nil).
Gain on disposal of equipmentDuring 2018 Q2, the Company had a gain on disposal of equipment of $2,576compared to $1,277in 2017 Q2. These gains mainly relate to equipment lost-in-hole. Proceeds from clients on lost-in-hole equipment are based on amounts specified in service agreements and, in most cases; these proceeds exceed the net book value of the equipment and result in a gain. The timing of lost-in-hole recoveries is not in the control of the Company and therefore can fluctuate significantly from quarter-to-quarter. In 2018 Q2, the Company received proceeds on lost-in-hole recoveries of $2,859(2017 Q2 - $1,621).
Finance costs Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $99for 2018 Q2 versus $96for 2017 Q2.
Foreign exchange The Company had a foreign exchange loss of $(392)in 2018 Q2 compared to a gain of $699in 2017 Q2 due to the fluctuations of the Canadian dollar relative to the U.S. dollar. The Company's foreign operations are denominated in USD and therefore, upon consolidation, gains and losses due to fluctuations in the foreign currency exchange rates are recorded as other comprehensive income 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 comprehensive income (loss). Included in the 2018 Q2 foreign currency gains are unrealized loss of $401(2017 Q2 - gain of $682) related to intercompany balances.
Income taxFor 2018 Q2, the Company had an income tax recovery of $1,726compared to a recovery of $149in 2017 Q2. Included in the 2018 Q2 provision was recoveries of $361related to provisions of prior periods (2017 Q2 recovery of $93).
The 2018 Q2 effective tax rate excluding adjustments for prior periods was 32%. The 2018 Q2 rate is higher than anticipated as one legal entity has pre-tax income and the other has pre-tax losses. Income tax expense is booked based upon expected annualized effective rates based upon the statutory rates of 27% for Canadaand 23% for the U.S.
RESULTS OF OPERATIONS – SIX MONTHS ENDED JUNE 30
| Revenues | 2018 | 2017 | | | | | | | | | | Canada | $ | 15,102 | $ | 15,380 | | | | | | | | United States | 60,028 | 57,298 | | | | | | | | | | Total | $ | 75,130 | $ | 72,678 |
Revenues2018 revenues were $75,130, which represented an increase of $2,452or 3% from 2017 revenues of $72,678.
Canadian revenues (excluding motor rental revenues) decreased to $13,093in 2018 from $13,450in 2017; a 3% decrease. This decrease was the result of: i) a 14% decrease in activity days to 1,676 in 2018 from 1,956 in 2017; net of ii) an 14% increase in the average day rate to $7,812in 2018 from $6,876in 2017.
The average active land rig count in Canadawas down 8% in 2018 compared to 2017 (source: Baker Hughes). The 2018 day rate increase was consistent with the quarter-over-quarter increases the Company has been able to achieve beginning in 2017 Q1.
U.S. Directional Drilling revenues (excluding motor rental revenues) increased to $58,963in 2018 from $56,821in 2017; a 4% increase. This increase was the result of: i) a 1% decrease in activity days to 5,071 in 2018 from 5,096 in 2017; and ii) a 4% increase in the average day rate to $11,628in 2018 from $11,150in 2017 (when converted to Canadian dollars). However, specific one-time credits related to performance issues with certain U.S. clients reduced the day rate by $254CAD.
The average active land rig count for the U.S. was up 26% in 2018 compared to 2017 (source: Baker Hughes). The Company experienced a 1% decrease in activity days that resulted in a decrease in market share over this period. This decrease in market share was largely due to equipment constraints starting in 2017 that the Company has been working to resolve with its capital budget program as well as certain clients altering the timing and scope of their drilling programs. Day rates in USD increased to $9,098 USDin 2018 from $8,350 USDin 2017; a 9% increase. The increase in day rates was primarily due to customer price increases. U.S. day rates have declined sequentially the first two quarters of 2018 due to customer mix and scope of work that the Company believes is not indicative of a longer term trend.
Gross margin and adjusted gross margin Gross margin for 2018 was under 1% compared to 11% in 2017. Adjusted gross margin (see Non-GAAP Measurements) for 2018 was $5,393or 7% compared to $13,559or 19% for 2017.
Adjusted gross margin, as a percentage of revenue, decreased due to higher equipment repairs, higher equipment rentals and specific one-time credits related to performance issues with certain U.S. clients in Q2. Rental expenses were adversely impacted by specialty equipment rentals in Q2 that were billed through to clients with a lower mark-up than typical margins. The impact of these rentals and the credits on U.S. work caused 2% of the decrease in adjusted gross margin.
The remaining decrease in adjusted gross margin was from increased equipment repairs. Repairs increased in part due to a more demanding drilling environment and to a lesser extent upgrades being made to the Company's existing equipment fleet. In addition, there was an increase in the fixed component of cost of sales that were 3% higher on a percentage of revenue basis in 2018 compared to 2017. This increase was mostly attributable to office and shop payroll and other labour related costs.
Depreciation allocated to cost of sales decreased to $4,788in 2018 from $5,380in 2017. Depreciation included in cost of sales as a percentage of revenue was 6% for 2018 and 7% in 2017.
Selling, general and administrative expenses ("SG&A")SG&A expenses were $7,534in 2018; an increase of $667compared with $6,867in 2017. As a percentage of revenue, SG&A was 10% in 2018 compared to 9% in 2017. SG&A increased primarily due to wage increases, including the reinstatement of previous wage rollbacks, increased U.S. health benefits and to a lesser extent, staff additions offset by lower U.S. state sales tax expenditures. Staffing costs included in SG&A include executive, sales, accounting, human resources, payroll, safety and related support staff.
Technology group expensesTechnology group expenses were $1,228in 2018; an increase of $162compared with $1,066in 2017. Technology group expenses are related to new product development and supporting and upgrading existing technology. Technology group expenses consist of salaries and related benefits and burdens as well as shop supplies. Technology group expenses increased primarily due to wage increases, including the reinstatement of previous wage rollbacks, and staff additions. In 2018, an additional $461of technology group expenses related to new product development were capitalized as intangible assets (2017 - $nil).
Gain on disposal of equipmentDuring 2018, the Company had a gain on disposal of equipment of $5,584compared to $3,291in 2017. These gains mainly relate to equipment lost-in-hole. Proceeds from clients on lost-in-hole equipment are based on amounts specified in service agreements and, in most cases; these proceeds exceed the net book value of the equipment and result in a gain. The timing of lost-in-hole recoveries is not in the control of the Company and therefore can fluctuate significantly from quarter-to-quarter. In 2018, the Company received proceeds on lost-in-hole recoveries of $6,599(2017 - $3,871).
Finance costs Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $144for 2018 versus $398for 2017. The decrease in finance costs relate to the reduction of amounts drawn on the Company's credit facility. In 2017 Q1, the Company finalized the sale of its Flowback and Production Testing ("F&PT)" assets, raised funds through a private placement of shares and repaid the outstanding long-term debt.
Foreign exchange The Company had a foreign exchange loss of $(1,089)in 2018 compared to a gain of $917in 2017 due to the fluctuations of the Canadian dollar relative to the U.S. dollar. The Company's foreign operations are denominated in USD and therefore, upon consolidation, gains and losses due to fluctuations in the foreign currency exchange rates are recorded as other comprehensive income 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 comprehensive income (loss). Included in the 2018 foreign currency gains are unrealized loss of $1,070(2017 - gain of $874) related to intercompany balances.