ACT Energy Technologies Ltd. press release
CATHEDRAL ENERGY SERVICES ANNOUNCES RECORD FOURTH QUARTER AND STRONGEST ANNUAL RESULTS IN CORPORATE HISTORY
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA /
CALGARY, AB , April 14, 2023 /CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral") (TSX: CET) announces its consolidated financial results for the three months and year ended December 31, 2022 and 2021.
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. This news release contains references to Adjusted gross margin (gross margin plus non-cash items of depreciation and amortization and share-based compensation), Adjusted gross margin % (adjusted gross margin divided by revenues), Adjusted EBITDAS (earnings before finance costs, unrealized foreign exchange on intercompany balances, taxes, depreciation and amortization, non-recurring costs (including acquisition and restructuring costs and non-cash provision for bad debts), write-down of equipment, write-down of inventory and share-based compensation) and Free cash flow ( Cash flow - operating activities prior to changes in non-cash working capital, income taxes paid (refund) and non-recurring costs less property, plant and equipment additions, excluding assets acquired in business combinations, cash lease payments offset by proceeds from disposition of property, plant and equipment). These terms do not have standardized meanings prescribed under International Financial Reporting Standards (IFRS) and may not be comparable to similar measures used by other companies, see "Non-GAAP Measures" later in this news release.
KEY TAKEAWAYS FOR FISCAL 2022
Consolidated revenue of $298,401 in fiscal 2022 was a record for the Company's 25-year history and up 377% vs 2021. Adjusted EBITDAS for 2022 also posted a new record for the Company at $68,187 , which compares to $4,829 in 2021. Adjusted EBITDAS margin % was 23%, up from 8% in 2021. Net income for the year was $18,347 as compared to a loss of $8,626 in 2021 – marking a return to profitability earlier than many companies in the energy service sector. Highest level of quarterly revenue for both the Canadian and U.S. divisions, bettering the individual records set in 2022 Q3. Fourth quarter 2022 Adjusted EBITDAS of $30,284 was the highest for any quarter, exceeding the prior record of $28,065 in 2022 Q3. The Company generated Free cash flow of $20,678 in the fourth quarter demonstrating the efficiency of a business model with lower capital intensity. Cathedral significantly increased its North American footprint and cemented one of the top positions in market share for the onshore U.S. directional drilling market with the acquisition in 2022 Q3 of Altitude Energy Partners ("Altitude") for $124,112 . Cathedral also acquired U.S.-based Discovery Downhole Services in February for $20,892 . Cathedral acquired Compass Directional in Canada as well as the Canadian operating assets and personnel of Ensign Energy Services' directional drilling business. Cathedral also signed a Marketing and Technology Alliance with Ensign, the second such alliance in Cathedral's portfolio. Canadian directional drilling market share hit a new high watermark in 2022 Q4, averaging 27.8% and up from 24.3% in 2022 Q3. Cathedral's Canadian market share was 18.1% in 2021. The Company closed 2022 with loans and borrowings less cash of $69,360 as compared to $81,786 as at September 30, 2022 . The Board of Directors has approved a 2023 net capital expenditure budget of $46,000 , increased from $35,000 , which was preliminarily approved by the Board of Directors in 2022 Q4 to enable advance orders of strategic equipment for delivery in early 2023. A strengthened U.S. dollar also positively impacted results during fiscal 2022.
PRESIDENT'S MESSAGE
Comments from President & CEO Tom Connors :
The year 2022 was one of the most productive years in the Company's 25-year history. We continue to differentiate the Company by building a strategic moat around the business through size and scale in the North American directional drilling market. Expanding on our first two consolidation-focused Canadian acquisitions in 2021, Cathedral made five additional acquisitions in 2022 - three in Canada and two in the U.S. The purchase of Compass Directional and the Canadian directional drilling assets and personnel from Ensign Energy Services were the third and fourth consolidation transactions in Canada , ones that pushed the Company's 2022 Q4 directional drilling to a record market share of 27.8% - up roughly ten percent from the previous year. Compass added market share and excellent people in the Montney, Canada's most important natural gas and gas liquids play, while Ensign added key people, new clients and a Marketing and Technology Alliance with a leading land driller. The third Canadian acquisition in 2022 was the purchase of Lexa Drilling Technologies, which added promising Measurement-While-Drilling ("MWD") technology for the U.S. marketplace.
While we made substantial strides in the growth of our Canadian business with several acquisitions, the most significant moves in 2022 were made in the U.S. The July acquisition of Altitude Energy Partners, LLC for $124,112 was the largest transaction in Cathedral's history and immediately added strong market share and excellent directional drilling personnel in several key resource plays such as the Permian, U.S. Rockies, the Bakken, and Haynesville. Altitude's executive leadership, based in Houston , also became the go-forward leadership team for Cathedral's legacy U.S. directional drilling business. A key synergy and significant incremental growth opportunity going forward is the ability to replace third-party MWD equipment rentals with Cathedral-sourced technology as Altitude built a successful business while renting MWD technology from third party service providers. Altitude also provided an entry for Cathedral into the U.S. rotary steerable market – one that is outgrowing the underlying directional drilling market and one that offers a much greater revenue capture opportunity for the Company going forward. Altitude enters 2023 with 16 rotary steerable systems ("RSS"), on the way to 20 by year-end 2023.
Another significant milestone in our U.S. growth strategy was the acquisition of the operating assets of Discovery Downhole Services for $20,892 in February 2022 . Discovery's high-performance mud motor rental business and key people operate out of locations in North Dakota , Texas and Wyoming . Discovery provides a platform to expand our high-performance mud motor offering to a wider customer base by renting both direct to leading exploration and production ("E&P") customers and to our competitors that may lack the appropriate assets. Due to the demand for high performance mud motor technology, Discovery's fleet has maintained high levels of utilization, providing an attractive payback on our investment. With a common fleet of mud motors from the same original equipment manufacturer for both Discovery and Altitude, we will also benefit from operational synergies going forward.
We continue to pursue further scale through accretive transactions. Our shareholders will benefit through that expansion as we become more investible to a wider audience, drive margin expansion through lower unit costs, and further differentiate ourselves in the market through the development and sustainment of leading-edge technology. We view the companies we purchase as partners and key members of the Cathedral team with a vested interest in our continued growth and success. To encourage alignment, and enhance longer term returns, vendors take meaningful quantities of equity that vests over time. As we continue to seek out opportunities for growth, we are also always very mindful of the cyclical nature of our business and the importance of maintaining a conservative and flexible capital structure.
We continue to support organic growth initiatives in both Canada and the U.S. In Canada , we have deployed an alternative RSS tool that we believe will build an incremental market following as we build on a successful operational track record and introduce the tool to more clients and reservoir types. In the U.S., there is a sizable Adjusted EBITDAS capture opportunity within our U.S. operations as third party-rented MWD systems can get replaced with Cathedral-supplied systems. Beyond tool development, we also intend to work closely with our technology alliance partners – Precision Drilling and Ensign Energy Services. Both are attempting leading-edge solutions to better integrate directional drilling tools with the increasingly-automated operations of the drilling rig itself. The value capture arises from reducing the human footprint on a wellsite, adding margin for both the contract driller and Cathedral while contributing to reducing our carbon footprint on location.
Beyond the upside potential of executing on our company-specific strategy, we also believe in the strength of the macro backdrop in the coming years. It has become very clear that seven years of underinvestment in the global oil and natural gas business (years 2014 - 2021) is showing the underlying tightness of markets. The onset of the war in Ukraine has laid bare the vulnerabilities of global supply as countries now rush to re-order their domestic energy priorities, ones that will include the need for substantial oil and natural gas for decades at a minimum. Global LNG was already growing in importance and now its importance is accelerating. Canada will have its first major project - LNG Canada - in the coming two years while the U.S. is on pace to become the unchallenged global leader. Cathedral is extremely well-positioned to help develop the necessary supply in both major markets – an exciting long-term, organic growth opportunity. Notwithstanding the current volatility in financial markets, generally, and in the commodity markets more directly, we believe that any capital spending pullbacks by E&P companies will be relatively short-lived. The underlying supply-demand balance for oil and natural is simply too tight.
We enter 2023 – our 25 th year as a company - with a strong opportunity set in front of us. We continue to examine ways to add further size and scale in key jurisdictions and with excellent companies, where the potential to be part of a leading consolidator is an attractive next step to an established player in the space. Most importantly, I want to finish by saying a tremendous thank you to all Cathedral staff - longstanding and new - who have helped make 2022 one for the record books. Strategy is one thing, but it takes a very strong team to deliver - and you delivered in 2022. I can't wait to see what we can achieve together in 2023 and the years to follow.
STRATEGIC OVERVIEW AND PROGRESS TO DATE
With the completion of a very active and productive year in 2022, it is valuable to review Cathedral's ongoing strategic vision and plan which has allowed for such a dramatic turnaround in the size, scale and financial performance of the Company. Shareholders must note that Cathedral shares had been trading at $0.19 the day prior to February 8, 2021 , the date of the appointment of the new CEO. The Company had just completed the 2020 fiscal year, in which it would eventually report revenue of around $40,500 and Adjusted EBITDAS of roughly nil. At that point, Cathedral had survived the brutal, seven-year energy downcycle of 2014 - 2021 (compounded by the effects of COVID-19). The Company needed a new strategy to vault itself back into a position of relevance to our E&P client base as well as to investors who increasingly demand liquidity in their investment portfolios.
In a cyclical business, the urgency to achieve our mission of size and scale early in the cycle and harvest later in the cycle was imperative. These past two years, we have focused on actively executing our strategy and delivering on our plan by completing multiple accretive acquisitions in both Canada and the U.S. – the two most important land drilling markets for a Canadian-based energy services company. The global energy and energy services sectors have made it very clear that size and scale matter more than ever.
A slow depletion of tier-one drillable inventory, after so many years of underinvestment, has led E&P companies to combine in order to maximize their production efficiencies, improve their balance sheets and return capital to shareholders. The same E&P companies have demanded, in turn, that energy services companies maximize the efficiencies of their own product, service and technology offerings which further requires, or is best served with the benefits of scale.
After two years, we still believe we have more to accomplish and we are proud of the value we have created for shareholders as our strategy bears fruit. Since 2021, we have also grown our analyst coverage from one to five investment banks covering Cathedral, who are now forecasting over $500,000 in 2023 revenue and Adjusted EBITDAS over $130,000 . The most visible measure of success of a public company is its equity value per share, and many shareholders have enjoyed tremendous appreciation in their shareholdings since 2021. Indeed, a recent report from one of the covering investment banks put Cathedral as the top performing Canadian energy service investment since February 8, 2021 . We are excited about our prospects and opportunities to add further growth and significant scale to our business as we execute on our mission. We are confident that we have the right team and the right strategy in place to continue to deliver shareholder value, again in 2023 and onwards.
Specific highlights of the strategic vision include:
The existing board recognized the changing industry dynamics and hired its new President and Chief Executive Officer in February 2021 to lead the initiative to transform Cathedral into a dominant industry player. Since February 2021 , Cathedral has completed seven acquisitions and a $26,500 bought deal financing. Cathedral exited 2021 with $4,800 Adjusted EBITDAS, exited 2022 with $68,200 Adjusted EBITDAS, and is forecasted by industry analysts to potentially surpass $130,000 Adjusted EBITDAS in 2023. The Company has established a large U.S. footprint and experienced management team. Management teams are aligned with equity and material ownership in the business. Over 70% of revenue is expected to come from the U.S. market in 2023. The Company has a dominant share of the Canadian market, averaging almost 28% in 2022 Q4. Canadian acquisitions made us stronger by enhancing our management depth and experience. Generated higher levels of free cash flow and steady margin improvement in all markets. Established as a leading industry consolidator. A plan that has delivered industry-leading results to date (see chart, source: Stifel Research, Bloomberg) with a pipeline of potential opportunities for accretive transactions that, if they transpire, could transform the business yet again.
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FINANCIAL HIGHLIGHTS
Dollars in 000's except per share amounts
| | Three months ended December 31 | | Year ended December 31 | | | | | | 2022 | 2021 | % change | 2022 | 2021 | % change | | | | | | | | | | Revenues | $ 128,518 | $ 23,710 | 442 % | $ 298,401 | $ 62,524 | 377 % | | | | | | | | | | Adjusted gross margin % (1) | 28 % | 17 % | | 28 % | 18 % | | | | | | | | | | | Adjusted EBITDAS (1) | $ 30,284 | $ 1,132 | 2,575 % | $ 68,187 | $ 4,829 | 1,312 % | | | | | | | | | | Adjusted EBITDAS margin % (1) | 24 % | 5 % | | 23 % | 8 % | | | | | | | | | | | Cash flow - operating activities | $ 14,360 | $ 601 | 2,289 % | $ 23,960 | $ (3,499) | n/m | | | | | | | | | | Free cash flow | $ 20,678 | $ (1,685) | n/m | $ 42,462 | $ (2,150) | n/m | | | | | | | | | | Net income (loss) | $ 10,270 | $ (1,097) | n/m | $ 18,347 | $ (8,626) | n/m | | | | | | | | | | Basic and diluted per share | $ 0.05 | $ (0.01) | | $ 0.11 | $ (0.13) | | | | | | | | | | | Weighted average shares outstanding | | | | | | | | Basic (000s) | 221,475 | 80,197 | | 162,551 | 65,031 | | | Diluted (000s) | 226,564 | 81,425 | | 166,129 | 65,740 | | | | | | | | | | | | | | | December 31 | December 31 | | | | | | | 2022 | 2021 | | | | | | | | | | | Working capital | | | | $ 44,712 | $ 14,117 | | | | | | | | | | | Total assets | | | | $ 353,990 | $ 75,423 | | | | | | | | | | | Loans and borrowings, excluding current portion | | | | $ 64,800 | $ 5,035 | | | | | | | | | | | Shareholders' equity | | | | $ 153,897 | $ 42,504 | |
| (1) Refer to "NON-GAAP MEASUREMENTS" "n/m" = not meaningful |
2022 ACQUISITIONS
A summary of the acquisitions for the year ended December 31, 2022 are as follows:
| | Discovery | Compass | LEXA | Altitude | Ensign | Total | | Consideration: | | | | | | | | Number of shares issues | 5,254,112 | 6,253,475 | 1,772,727 | 67,031,032 | 7,017,988 | 87,329,334 | | Issue price | $ 0.52 | $ 0.69 | $ 0.63 | $ 0.55 | $ 0.85 | | | Common shares | $ 2,732 | $ 4,315 | $ 1,117 | $ 36,867 | $ 5,965 | $ 50,996 | | Settlement of technology license from pre- existing relationship | - | - | 644 | - | - | 644 | | Cash | 18,160 | 4,000 | - | 87,245 | - | 109,405 | | Total consideration | $ 20,892 | $ 8,315 | $ 1,761 | $ 124,112 | $ 5,965 | $ 161,045 | | Allocation of purchase price | | | | | | | | Cash | $ - | $ - | $ 70 | $ 4,754 | $ - | $ 4,824 | | Inventory | 3,301 | 444 | - | 8,768 | 1,790 | 14,303 | | Other net working capital | - | - | 291 | (1,068) | - | (777) | | Property, plant and equipment | 17,591 | 8,518 | - | 43,667 | 4,175 | 73,951 | | Right of use assets | 1,579 | 316 | - | 2,354 | - | 4,249 | | Lease liabilities assumed | (1,579) | (316) | - | (2,354) | - | (4,249) | | Intangibles | - | - | 1,574 | 35,720 | - | 37,294 | | Goodwill | - | - | - | 37,753 | - | 37,753 | | Deferred tax liability | - | (647) | (174) | (5,482) | - | (6,303) | | Total | $ 20,892 | $ 8,315 | $ 1,761 | $ 124,112 | $ 5,965 | $ 161,045 |
As discussed in the following LEXA section, the consideration and value of intangibles was increased $644 due to the settlement of a technology license ageement due to a pre-existing relationship.
Discovery Downhole Services
On February 10, 2022 , the Company announced the closing of Cathedral's acquisition of the operating assets of Discovery Downhole Services ("Discovery"). The acquisition includes the operating assets and non-executive personnel of Discovery's U.S.- based, high-performance mud motor technology rental business with operations in North Dakota , Texas , and Wyoming.
Cathedral paid $18,160 in cash consideration funded by a new term loan and issued 5,254,112 common shares for a total consideration of $20,892 . In addition to a four-month statutory hold period on the common shares, the parties have agreed to contractual restrictions on resale as follows: 25% are restricted until February 10, 2023 ; a further 25% are restricted until August 10, 2023 ; and a further 50% are restricted until February 10, 2024 , subject to certain exceptions.
For the period from February 10, 2022 to December 31, 2022 , the assets acquired generated revenues of $31,841 and operating income before depreciation and interest of $14,357 . For the period from January 1, 2022 to February 9, 2022 revenue was $2,286 and operating profit before depreciation and interest was $717 .
The Company has expensed $147 in costs related to this transaction.
Compass Directional Services
On June 22, 2022 , the Company acquired the operating assets of Compass Directional Services Ltd. ("Compass"). Compass is a privately-owned, Canadian directional drilling business operating in the Western Canadian Sedimentary Basin, with a focus on the high-activity Montney and Deep Basin plays.
Cathedral paid $4,000 in cash consideration and issued 6,253,475 common shares for a total consideration of $8,315 . The common shares are subject to contractual restrictions of resale as follows: 25% are restricted until June 22, 2023 ; a further 25% are restricted until December 22, 2023 ; and a further 50% are restricted until June 22, 2024 , subject to certain exceptions.