ACT Energy Technologies Ltd. press release

CATHEDRAL ENERGY SERVICES REPORTS RESULTS FOR 2022 Q2

2022-08-15

TSX - Toronto Stock Exchange · Canada

Canada NewsWire

/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA /

CALGARY, AB , Aug. 15, 2022 /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, 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 share-based compensation), Adjusted gross margin % (adjusted gross margin divided by revenues) and Adjusted EBITDA (earnings before finance costs, unrealized foreign exchange on intercompany balances, taxes, depreciation, 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). 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.

FINANCIAL HIGHLIGHTS Dollars in 000's except per share amounts

| | Three months ended June 30 | Six months ended June 30 | | | | | | | | | | 2022 | | 2021 | | 2022 | | 2021 | | Revenues | $ | 27,652 | $ | 7,322 | $ | 62,037 | $ | 18,687 | | Adjusted gross margin % (1) | | 19 % | | -6 % | | 24 % | | 11 % | | Adjusted EBITDAS (1) | $ | 2,865 | $ | (2,477) | $ | 9,838 | $ | (1,540) | | Cash flow - operating activities | $ | 4,511 | $ | (1,892) | $ | 2,753 | $ | (2,300) | | Income (loss) from operating activities | $ | (1,885) | $ | (5,483) | $ | 526 | $ | (7,643) | | Basic per share | $ | (0.01) | $ | (0.10) | $ | - | $ | (0.15) | | Net income (loss) | $ | (2,824) | $ | (5,846) | $ | (581) | $ | (7,932) | | Basic per share | $ | (0.02) | $ | (0.11) | $ | (0.01) | $ | (0.15) | | Equipment additions - cash basis | $ | 6,218 | $ | 737 | $ | 9,522 | $ | 1,328 | | Weighted average shares outstanding | | | | | | | | | | Basic (000s) | | 129,200 | | 54,935 | | 110,353 | | 52,547 | | Diluted (000s) | | 131,898 | | 55,721 | | 112,969 | | 52,873 | | | | | | | | June 30 | | December 31 | | | | | | | | 2022 | | 2021 | | Working capital | | | | | $ | 21,342 | $ | 14,117 | | Total assets | | | | | $ | 123,373 | $ | 75,423 | | Loans and borrowings, current and long-term | | | | | $ | 9,170 | $ | 6,035 | | Shareholders' equity | | | | | $ | 82,190 | $ | 42,504 |

2022 Q2 KEY TAKEAWAYS

Revenue increased by $20,330 in 2022 Q2 compared to 2021 Q2, representing growth of 278%; Adjusted EBITDAS increased to $2,865 in 2022 Q2 from negative ($2,477) in 2021 Q2, an improvement of $5,342 ; 2022 Q2 had a loss of ($2,824) compared to a loss of ($5,846) in 2021 Q2, representing meaningful improvement amidst the normal seasonality of Canadian Q2 low activity; Canadian market share tallied over 15% in 2022 Q2 vs. approximately 7% one year ago and was the highest level for a second quarter in many years; The Company completed one of the first bought deals in the Canadian energy business since 2017, raising gross proceeds of over $26,000 via a syndicate of Canadian investment dealers; The Company purchased 91% of LEXA Drilling Technologies and added highly regarded members of the management team with the proven technical expertise and track record of Axel Schmidt as SVP Engineering and Technology and a wealth of industry specific financial knowledge and experience with Chad Robinson , who subsequently accepted the role of Chief Financial Officer in the third quarter; Expanded into a strategic gas market in the Montney and added a complementary customer base with the completion of our fifth acquisition, Compass Directional, in the quarter; and Subsequent to 2022 Q2, the Company acquired Altitude Energy Partners for approximately $128,000 CAD. With a presence in most major basins in the US and a 7% market share, the acquisition of Altitude significantly expands the Company's US footprint and establishes it as one of the larger providers of directional services in North America with an enhanced management and sales team.

PRESIDENT'S MESSAGE

Comments from President & CEO Tom Connors :

The second quarter of 2022 was an exciting time for the company as the benefits of our consolidation strategy continue to bear fruit with improved results and the completion of two additional key acquisitions. Cathedral posted the best top line in a second quarter since 2019 and the highest level of adjusted EBITDAS since the second quarter of 2014. The power of the Company's consolidation strategy is now showing itself in quarterly results, a trend we expect to continue as Cathedral gains a full quarter from Compass in Q3 and almost a full quarter from Altitude. On a pro forma basis, the inclusion of six acquisitions materially increases the EBITDA and free cash flow profile of Cathedral and positions the Company with a larger market profile which is more appealing to a broader audience of investors.

In order to ensure we are positioned to offer the most-competitive technology possible, we completed the purchase of LEXA Drilling Technologies, our first acquisition in the quarter, and fourth in twelve months. LEXA brings to the company a team of highly-capable people led by Axel Schmidt and Chad Robinson who were integral in growing one of Cathedral's largest Canadian competitors – Pacesetter Directional. Axel Schmidt built a reputation for being one of the foremost developers of downhole drilling technology in Western Canada and was subsequently named Senior Vice President, Engineering and Technology. Chad had the extensive financial background the company needed as it becomes a major, independent, North American Directional Drilling company. Chad has since been appointed CFO of the Company.

Adding a complementary customer base and expanding our footprint in the highly-strategic Montney and Deep-Basin plays, Cathedral also completed the acquisition of Compass Directional, which has been a leading directional drilling company in the Canadian market since 1998. These two natural gas and liquids-focused areas represent the backbone of growth in western Canadian natural gas supply for the next decade principally driven by the LNG Canada project with related drilling activity starting up in 2023. The two acquisitions have key elements in common. They both bring a combination of accomplished people, excellent technology capability and strategic clients that will help the Company remain a top performer in Canadian market share going forward.

Post Q2-2022, Cathedral completed its sixth and largest acquisition in twelve months with the purchase of Altitude Energy Partners for approximately $128,000 CAD. Altitude represents the largest acquisition in the Company's more-than-20-year history and provides a major platform for US growth in the quarters and years to come. Furthermore, Altitude instantly positions Cathedral as one of the largest independent directional drilling companies in North America . Altitude gives extensive geographic coverage of the US land drilling market, highlighted by its 9% market share in the most important U.S. play - the Permian. Altitude continues the trend of accretive acquisitions by Cathedral in key areas, where the highly-experienced management team joins the Company with significant equity going forward. More broadly, the seven-year downturn from 2014-2021 has created an imperative to become a large, focused supplier of services to an increasingly consolidated E&P sector. Size and scale have never mattered as much as they do today and Cathedral has used this as the organizing principle behind its acquisition strategy over the last year.

The management team of Cathedral believes that balance sheet strength is paramount, which is why the emphasis over the next several quarters will be to bring net debt levels down markedly. Operating cash flows are expected to exceed capital spending needs by a considerable margin such that improvements in leverage ratios will be quickly noticeable. The Company also continues to execute on its 2022 capital plan and strategically invest in areas that bring value to our customers and our business such as the addition of four rotary steerable systems for the Canadian market. With our combined strategy of growth through consolidation, differentiation through technology, and a fervent focus on operational excellence, the Company expects the culmination of those efforts will generate high levels of free cash flow, a strong balance sheet, and a robust Company into the future.

Finally, I want to take this opportunity to thank the many employees from Cathedral who have made these results and acquisitions happen and welcome our new partners from LEXA, Compass and Altitude. We will be much stronger with your contributions going forward.

2022 ACQUISITIONS

The purchase price allocation related to the acquisition is preliminary and may be subject to adjustments, which may be material, pending completion of final valuations. In a business combination, it generally takes time to obtain the information necessary to measure fair values of assets acquired and liabilities assumed. Changes in the provisional measurements of assets and liabilities acquired may be recorded as part of the purchase price allocation as new information is obtained, until the final measurements are determined no later than 12 months after the acquisition date. The Company is still in the process of identifying the assets acquired and liabilities assumed and assessing the fair value allocations relating to the inventory and intangible and capital assets acquired. Fair value is estimated using the latest available information as at the date of the financial statements. As a result, these preliminary allocations may change.

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 Transaction 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. The transaction will materially increase the Company's U.S. revenues and add a high-quality customer base of oil and gas producers and directional drilling companies active in all the major U.S. land basins.

Cathedral paid $18,160 in cash funded by a new term loan from its existing bank along with funds raised in a common share private placement and issued 5,254,112 common shares (the "Consideration Shares"). The shares were valued at $0.52 for accounting purposes (total of $2,732 ). In addition to a 4-month statutory hold period on the Consideration Shares, the parties have agreed to contractual restrictions on resale as follows: 25% are restricted until February 10, 2023 ; a further 25% of are restricted until August 10, 2023 ; and a further 50% are restricted until February 10, 2024 , subject to certain exceptions. Additionally, Cathedral assumed the leases at the three operating locations for lease liabilities of $1,579 . Total consideration paid was $22,471 .

While the purchase and sale agreement was structured as an asset sale, the Company has accounted for this transaction as a business combination. The amounts below are based on management's preliminary estimates of fair value at the time of preparation of these financial statements based on the best available information. Amendments may be made to these amounts as the values subject to estimation are finalized. The Company has allocated the purchase price as:

Inventory $3,283 Right of use asset $1,579 ; and Equipment $17,609 .

To date, the Company has expensed $95 in costs related to the Transaction.

For the period of February 10 to June 30, 2022 , the assets acquired generated revenues of $12,181 and operating income before depreciation and interest of $6,357 . Revenues for the period of January 1 to February 9, 2022 were $2,286 and operating profit before depreciation and interest for that period was $717 .

LEXA Drilling Technologies Inc.

On June 20, 2022 , the Company purchased 90.98% of LEXA Drilling Technologies Inc. ("LEXA"), a Calgary -based, downhole technology company for equity consideration in Cathedral. LEXA is focused on the development and commercialization of high data rate positive pulse MWD technology. They are also focused on developing technology that enhances and enables drilling automation through remote downhole directional equipment. The addition of high-performance pulse technology to Cathedral's industry leading electromagnetic technology will further strengthen the performance of Cathedral's existing MWD platform.

In exchange for 90.98% of the shares of LEXA, its technology and products in development, Cathedral issued 1,612,891 common shares, which will be subject to a four-month hold period. The shares were valued at $0.63 for accounting purposes (total of $1,016 ).

The Company has accounted for this transaction as a business combination. The amounts below are based on management's preliminary estimates of fair value at the time of preparation of these financial statements based on the best available information. Amendments may be made to these amounts as the values subject to estimation are finalized. The Company has allocated the purchase price as:

Cash $70 ; Net working capital $180 ; Deferred tax liability ($109) ; Intangibles $1,052 ; and Non-controlling interest ($177)

The deferred tax liability was subsequently offset by the benefit of unrecorded tax attributes.

To date, the Company has not expensed any costs related to the Transaction.

A director of Cathedral, Mr. Rod Maxwell , owns the remaining shares equating to 9.02% of LEXA, which were not purchased as part of the Transaction. Mr. Maxwell abstained from voting on the Transaction in accordance with Cathedral's corporate governance policies. On July 19 2022, the Company purchased the remaining 9.02% shares of LEXA by issuing 159,836 common shares of Cathedral.

As part of the transaction, Mr. Axel Schmidt has joined Cathedral as Senior Vice President, Engineering and Technology while Mr. Chad Robinson has joined as Chief Financial Officer. LEXA also brings an experienced engineering and development team.

Prior to the acquisition, Cathedral was the only revenue source for LEXA so there are no revenues or operating profit before depreciation and interest to report.

Compass Directional Services

On June 22 , 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.

As part of the Transaction, Cathedral has retained key Compass personnel under employment contracts to ensure a seamless customer service experience, successful integration and long-term alignment with Cathedral's strategy.

Cathedral paid $4,000 in cash; and issued 6,253,475 common shares. The shares were valued at $0.69 for accounting purposes (total of $4,315 ). These shares will be subject to contractual restrictions with portions vesting at various periods over two years. Additionally, Cathedral assumed the leases at two locations for lease liabilities of $316 . Total consideration paid was $8,631 .

Inventory $444 Right of use asset $316 ; Deferred tax liability ($647) ; and Equipment $8,518 .

The deferred tax liability was subsequently offset by the benefit of unrecorded tax attributes.

To date, the Company has expensed $4 in costs related to the Transaction.

Additionally, 1,389,664 shares were issued on an escrow arrangement and are subject to contractual restrictions over four years with ¼ of the shares vesting each year on the anniversary of the purchase. These shares are registered to Cathedral's 100% owned subsidiary, 2438155 Alberta Ltd., and are classified as Treasury shares and will be recognized as compensation when vested.

As the acquired assets were integrated into Cathedral's existing directional drilling operations it is impracticable to breakout the revenue and profit or loss of the acquired assets since the acquisition.

SUBSEQUENT EVENTS

On July 14 , the Company closed its acquisition of Altitude Energy Partners, LLC ("Altitude") through a cash amount of $62,675 USD ( $81,409 CAD) and the issuance of 67,031,032 common shares in of Cathedral. The shares will be valued at $0.69 for accounting purposes (total of $46,251 CAD) for a total value of approximately $127,660 CAD. The total acquisition value is still being determined.

Altitude is a privately-held, U.S.-based, directional drilling services business with headquarters in Wyoming , executive leadership based in Houston , and significant operations in Texas , most prominently in the Permian Basin.

Following the completion of the acquisition, the Company plans to continue to use the Altitude name and brand in the US. Further, the Altitude management team and its people will lead and operate Cathedral's existing US directional drilling business. Mr. Lee Harns , the current President and CEO of Altitude, will remain as President of the business unit. Joining Mr. Harns will be Tyler Clark , the current COO, and Alex Bougaieff , the current CFO, along with several other key long-standing employees and the entire Altitude operational team. In addition, Mr. J.R. Boyles, a director and founder of Altitude, will be appointed to Cathedral's board of directors

In connection with this transaction, the Company amended its banking agreement with ATB Financial as lead arranger and administrative agent, with Canadian Western Bank, HSBC Bank Canada and The Toronto Dominion Bank to provide the Company with committed financing by way of a three-year $99,000 credit facility available at closing comprised of a $74,000 term loan, a $15,000 revolving borrowing base loan and a $10,000 revolving line.

On July 19 2022, the Company purchased the remaining 9.02% shares of LEXA were acquired on the same terms as previously disclosed.by issuing 159,836 common shares of Cathedral.

RESULTS OF OPERATIONS – THREE MONTHS ENDED JUNE 30

| Revenues | 2022 | 2021 | | Canada | $ 13,091 | $ 3,207 | | United States | 14,561 | 4,115 | | Total | $ 27,652 | $ 7,322 |

Revenues 2022 Q2 revenues were $27,652 , which represented an increase of $20,330 or 278% from 2021 Q2 revenues of $7,322 .

Canadian revenues (excluding motor rental revenues) increased to $12,214 in 2022 Q2 from $3,012 in 2021 Q2; a 306% increase. This increase was the result of: i) a 218% increase in activity days to 1,442 in 2022 Q2 from 453 in 2021 Q2 and ii) a 27% increase in the average day rate to $8,470 in 2022 Q2 from $6,649 in 2021 Q2.

Based on publicly disclosed Canadian drilling and directional drilling days, Cathedral's market share for 2022 Q2 was 15.4% compared to 7.3% in 2021 Q2. Day rates increased due to an overall increases in day rates along with client mix changes.

U.S. revenues (excluding motor rental revenues) increased 35% to $4,700 in 2022 Q2 from $3,471 in 2021 Q2. This increase was the result of: i) an 18% increase in activity days to 498 in 2022 Q2 from 421 in 2021 Q2; and ii) a 14% increase in the average day rate to $9,439 in 2022 Q2 from $8,245 in 2021 Q2 (when converted to Canadian dollars).