ACT Energy Technologies Ltd. press release
Cathedral Energy Services reports results for the three months ended March 31, 2007
TSX - Toronto Stock Exchange · Canada
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, May 3 /CNW/ - Cathedral Energy Services Income Trust (TSX: CET.UN) is pleased to report its record results for the three months ended March 31, 2007.
FINANCIAL HIGHLIGHTS $ in 000's except per Trust Unit amounts Three months ended March 31 2007 2006 Revenues $ 42,712 $ 38,682
EBITDA(1) $ 14,412 $ 15,367 Per Trust Unit - diluted $ 0.46 $ 0.49
Income before taxes $ 11,033 $ 12,402
Net income $ 9,787 $ 10,862 Per Trust Unit - basic $ 0.32 $ 0.36 Per Trust Unit - diluted $ 0.31 $ 0.35
Cash distributions declared per Trust Unit $ 0.21 $ 0.16
Distributable income(2) $ 13,071 $ 14,221
Cash distributions declared $ 6,530 $ 4,838
Payout ratio(3) 50% 34%
Property and equipment additions and corporate acquisitions: Paid or payable in cash $ 5,805 $ 8,783 Paid or payable in Trust Units - 1,500 $ 5,805 $ 10,283 Weighted average Trust Units outstanding: Basic ('000) 31,030 30,147 Diluted ('000) 31,591 31,193
March 31 December 31 2007 2006 Working capital $ 17,327 $ 15,051
Long-term debt and capital lease obligations excluding current portion $ 15,616 $ 15,552
Unitholders' equity $ 81,174 $ 76,223
(1) EBITDA is defined as earnings before interest on long-term debt and capital lease obligations, taxes, non-cash compensation expense and depreciation and amortization and is provided to assist investors in determining the ability of the Trust to generate cash from operations. EBITDA does not have any standardized meaning within Canadian Generally Accepted Accounting Principles and therefore may not be comparable to similar measures presented by other companies and/or trusts.
(2) Distributable income is defined as funds from operations before changes in non-cash operating working capital less required principal repayments on long-term debt and capital lease obligations and maintenance capital expenditures. Distributable income does not have any standardized meaning within Canadian Generally Accepted Accounting Policies and therefore may not be comparable to similar measures presented by other trusts. Distributable income is a main performance measurement used by management and investors to evaluate the performance of the Trust.
(3) Cash distributions declared as a percentage of distributable income.
MANAGEMENT'S DISCUSSION & ANALYSIS
This Management's Discussion & Analysis ("MD&A") for the three months ended March 31, 2007 should be read in conjunction with the annual audited consolidated financial statements and notes thereto for the year ended December 31, 2006, as well as the MD&A in the Trust's 2006 Annual Report. This MD&A has been prepared as of May 3, 2007. Dollar amounts are in '000's except for day rates and per Trust Unit amounts.
FORWARD-LOOKING INFORMATION
Certain statements in this MD&A including (i) statements that may contain words such as "anticipate", "could", "expect", "seek", "may" "intend", "will", "believe", "should", "project", "forecast", "plan" and similar expressions, including the negatives thereof, (ii) statements that are based on current expectations and estimates about the markets in which the Trust/Cathedral operates and (iii) statements of belief, intentions and expectations about developments, results and events that will or may occur in the future, constitute "forward-looking statements" and are based on certain assumptions and analysis made by the Trust/Cathedral. Forward-looking statements in this MD&A include, but are not limited to, statements with respect to future capital expenditures, including the amount, nature and timing thereof; oil and natural gas prices and demand; other development trends within the oil and natural gas industry; business strategy; expansion and growth of the Trust's/Cathedral's business and operations including the Trust/Cathedral's market share and position in the oilfield service market; and other such matters. Such forward-looking statements are subject to important risks and uncertainties, which are difficult to predict and that may affect the Trust's/Cathedral's operations, including, but not limited to: the impact of general economic conditions in Canada and the United States; industry conditions, including the adoption of new environmental, safety and other laws and regulations and changes in how they are interpreted and enforced; volatility of oil and natural gas prices; oil and natural gas product supply and demand; risks inherent in the Trust's/Cathedral's ability to generate sufficient cash flow from operations to meet its current and future obligations; increased competition; the lack of availability of qualified personnel or labor unrest; fluctuation in foreign exchange or interest rates; stock market volatility; opportunities available to or pursued by the Trust/Cathedral and other factors, many of which are beyond the control of the Trust/Cathedral. The Trust's/Cathedral's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do transpire or occur, what benefits the Trust/Cathedral will derive therefrom. Subject to applicable law, the Trust disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
All forward-looking statements contained in this document are expressly qualified by this cautionary statement. Further information about the factors affecting forward-looking statements is available in the Trust's current Annual Information Form and 2006 Annual Report which has been filed with Canadian provincial securities commissions and are available on www.sedar.com.
NON-GAAP FINANCIAL 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 and/or trusts. These measures are provided to assist investors in determining the Trust's ability to generate cash from operations and to provide additional information regarding the use of its cash resources. The specific measures being referred to include the following i) "EBITDA" - defined as earnings before interest on long-term debt and capital lease obligations, taxes, non-cash compensation expense and depreciation and amortization; ii) "distributable income" - defined as cash flow from operations before changes in non-cash operating working capital less required principal repayments on long-term debt and capital lease obligations and maintenance capital expenditures; iii) "gross margin" - calculated as revenues less operating expenses; iv) "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 v) "payout ratio" - calculated as cash distributions declared divided by distributable income.
OVERVIEW
The first quarter of 2007 reflected the continued growth of the Trust. In contrast to the general decline in oilfield activity experienced throughout the industry as result of reduced oil and gas prices and unfavourable weather conditions in Western Canada; the Trust completed 2007 Q1 with record revenues. Revenues in the first quarter increased $4,030 from $38,682 in 2006 to $42,712 in 2007. 2007 Q1 EBITDA was $14,412 which represents a $955 or 6.2% decrease from $15,367 in 2006. The Trust's net income for 2007 Q1 was $9,787 (2006 - $10,862) or $0.31 (2006 - $0.35) per diluted Trust Unit.
RESULTS OF OPERATIONS
Revenues - 2007 Q1 record revenues of $42,712 were the result of increased growth in the directional drilling portion of the Trust's operations. Directional drilling activity days increased 11.4% or 340 to 3,323. In addition, the average day rate received for providing directional drilling services increased 10.6% on a quarter-over-quarter basis to $9,116 (2006 - $8,239). The increase in the average day rate is the result of day rate increases as well as a shift towards providing premium services such as underbalanced and Steam-Assisted Gravity Drainage ("SAGD") drilling services. In the Canadian market the Trust's 2007 Q1 activity levels approximated that of the comparable period in 2006. Despite the decline in natural gas drilling in Western Canada, the Trust was able to maintain prior year activity levels due to the continuing strength of the Trust's client base and involvement in multi-well programs. The Rocky Mountain region of the United States remains a very active area and the Trust's U.S. operations have now been expanded into North Dakota. The Trust's revenues from the U.S. were $10,725 in 2007 Q1, which represents an increase of $3,865 or 56% on a quarter-over-quarter basis. Due to demand in the U.S. market, 5 Measurement-While-Drilling ("MWD") systems were transferred to the U.S. at the end of Q1 and the Trust now has 23 MWD systems in the U.S. market. The Trust's geographic diversification, by way of providing directional drilling services in southeast Saskatchewan and U.S., has been a significant factor in its ability to organically grow its revenues.
The effect of reduced natural gas drilling expenditures in the Western Canada market resulted in lower revenues for both of the Trust's production testing and wireline divisions. The Trust's production testing division, Tier One, contributed $4,466 in revenues during 2007 Q1 which is a 13.3% decline from 2006 Q1 revenues. Advance Wireline and Xtreme Wireline combined to generate revenues of $7,066 for 2007 Q1 compared to $8,191 for 2006 Q1, a 13.7% quarter-over-quarter decline.
Gross margin - The gross margin for 2007 Q1 was 50.3% which compares to 53.5% in 2006 Q1. The decrease is attributed to number of factors including: i) shift to providing more horizontal drilling services (versus directional) which provide a lower gross margin than from directional drilling; ii) increases in directional field labour rates; iii) increase in wireline field labour costs as a percentage of revenues due to the continuation of the Trust's build out of its wireline fleet and related field staff that will enable the Trust to take advantage of increased activity levels; iv) increased MWD rental costs in the U.S.; v) increased motor repair costs related to an upgrade to a component to meet specific drilling requirements in the U.S; vi) commencement of general equipment repairs earlier in the year due to the early spring breakup; and vii) offsetting the previous items was an increase in the average day rate for directional drilling services.
General and administrative expenses - General and administrative expenses increased from $5,262 in 2006 Q1 to $6,932 in 2007 Q1 - an increase of $1,670. The increase was primarily related to increased personnel and office/shop rental costs as well as an overall increase in activity levels. As a percentage of revenues, general and administrative expenses were 16.2% in 2007 Q1 and 13.6% in 2006 Q1.
Depreciation and amortization - Depreciation for 2007 Q1 was $2,756 which compares to $2,329 in 2006 Q1. This increase is related to expansion of the Trust's depreciable asset base over the past 12 months. As a percentage of revenues, depreciation amounted to 6.5% for 2007 and 6.0% for 2006.
Interest expense - Interest expense related to long-term debt and capital leases increased from $210 in 2006 Q1 to $263 in Q1 2007 due to the combined net effect of: i) an increase in the average level of debt outstanding; and ii) a decrease in the effective interest rate on the related debt.
Foreign exchange gain/loss - The Trust's foreign exchange gain/loss decreased from an $8 gain in 2006 Q1 to a loss of $47 in 2007 Q1. Despite the fact the Canadian/United States exchange rate at the start of 2007 Q1 and the end of 2007 Q1 remained approximately equal there were fluctuations during the quarter that contributed to the $47 loss experienced in 2007 Q1.
Non-cash compensation expense - For 2007 Q1 the Trust had non-cash compensation expense of $360 which compares to $426 for the comparable quarter in 2006. The value of the options is being amortized against income over the three-year vesting period.
Gain on disposal of property and equipment - There were no disposals of property and equipment in 2006 Q1 while in 2007 Q1 the Trust had a $3 loss on disposal of miscellaneous equipment.
Taxes - For Q1 2007, the Trust had a tax expense of $1,246 (effective tax rate of 11.3%) which compares to $1,540 (effective tax rate of 12.4%) in Q1 2006. The decline in the effective tax rate is due to a higher portion of the Trust's pre-tax income being allocated to unitholders.
LIQUIDITY AND CAPITAL RESOURCES
The Trust's principal source of liquidity is cash generated from operations. The Trust also has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity. At March 31, 2007, the Trust had an operating line of credit with a major Canadian bank in the amount of $12,500 (December 31, 2006 - $12,500) of which $6,265 (December 31, 2006 - $6,460) was drawn. In addition, the Trust has a non-reducing revolving term loan facility in the amount of $25,000 (December 31, 2006 - $25,000) of which $15,000 (December 31, 2006 - $15,000) was drawn as at March 31, 2007. In addition, at March 31, 2007, the Trust had obligations under capital leases in the amount of $600 (December 31, 2006 - $664) and other long-term debt of $298 (December 31, 2006 - $171).
Operating activities - Cash flow from operating activities for the three months ended March 31, 2007 was $9,775 (2006 - $8,137) a increase of $1,638 or 20.1%. The Trust has a strong working capital position at March 31, 2007 at $17,327 which compares to $15,051 at December 31, 2006.
Investing activities - Cash used in investing activities for the three months ended March 31, 2007 amounted to $3,026 compared to $7,650 for the same period in 2006. During 2007 Q1 the Trust invested an additional $5,805 (2006 - $8,783) in property and equipment with the main additions being 4 wireline units, 2 explosive loading magazines, auxiliary wireline equipment, expansion of mud motor and drill collar fleet in the U.S., auxiliary production testing equipment for critical sour gas work and MWD components which will be used to build systems for the Canadian market and thereby replacing those transferred to the U.S. At March 31, 2007, the Trust's operating entities had 68 MWD systems, 19 production testing units and 25 wireline units. Fluctuations in non-cash working capital related to investing activities are a function of when proceeds on disposal of property and equipment are received and when payments for property and equipment purchases are made.
Financing activities - Cash used in financing activities for the three months ended March 31, 2007 amounted to $6,829 which compares to $1,971 in Q1 2006. Distributions paid to Unitholders for 2007 Q1 totaled to $8,056 (2006 $4,512). The quarter-over-quarter increase in distributions paid are related to a combination of: i) increases in the per Trust Unit "regular" distribution level; ii) the payment of a "special" $0.05 per Trust Unit cash distribution declared in December 2006 ($1,549); and iii) an increase in the number of Trust Units outstanding. Since January 2006 the Trust has increased its per Trust Unit distribution level from $0.06 per Trust Unit to $0.07 per Trust Unit for March 2007 - a 16.7% increase. Cash distributions paid have been financed from cash flow from operations and management currently expects future cash distributions will also be financed from cash flow from operations. For the three months ended March 31, 2007 financing cash inflows resulted from: i) $1,359 (2006 - $1,526) cash received on the exercise of Trust Unit options, and ii) an $173 increase in new long-term debt. Offsetting these inflows were cash outflows of: i) a $195 reduction in bank indebtedness (2006 - cash provided by bank indebtedness was $1,195); and ii) a $110 (2006 - $180) repayment of long-term debt and capital lease obligations. At May 3, 2007, the Trust had 31,375,022 Trust Units and 2,540,001 Trust Unit options outstanding.
Contractual obligations - In the normal course of business, the Trust incurs contractual obligations and those obligations are disclosed in the Trust's MD&A for the year ended December 31, 2006. As at March 31, 2007, the Trust has a commitment to purchase approximately $3,689 of property and equipment.
CONTROLS AND PROCEDURES
Management is responsible for establishing and maintaining adequate disclosure controls and internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable, but not absolute, assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with GAAP. Internal control over financial reporting may not prevent or detect fraud or misstatements because of limitations inherent in any system of internal control. There were no significant changes in the design or effectiveness of the Trust's disclosure controls or internal controls over financial reporting in the first quarter of 2007.
CHANGES IN ACCOUNTING POLICIES
Effective January 1, 2007, The Trust adopted the Canadian Institute of Chartered Accountants ("CICA") section 3855, "Financial Instruments - Recognition and Measurement", section 3865, "Hedges", and section 1530, "Comprehensive Income". These standards have been adopted prospectively. For the 3 months ended March 31, 2007, the adoption of these standards did not have an effect on the Trust's consolidated financial statements. A general summary of these accounting standards were included in the Trust's 2006 annual MD&A.
BUSINESS RISKS
The MD&A for the year ended December 31, 2006, which is included in the Trust's 2006 Annual Report, includes an overview on business risks associated with the Trust and its operating entities. Those business risks remain in effect as at March 31, 2007.
TAXATION OF TRUSTS IN CANADA
On October 31, 2006, the Federal Government of Canada announced proposed tax changes that, if enacted, will result in the taxation of existing income and royalty trusts, other than real estate investment trusts, at effective rates similar to Canadian corporations commencing in 2011. If the legislation and tax rates are enacted in their current draft form, we expect to begin recording future tax assets and liabilities related to temporary differences that are expected to reverse after 2010. Our preliminary estimate of the unrecognized temporary differences outstanding as of March 31, 2007 is approximately $12,000, the tax-effected value of which would be approximately $3,800 assuming an effective tax rate of about 32%. Recording the tax liabilities related to these temporary differences based on this estimate would result in the Trust recording a charge to future income tax expense and an increase in long-term future tax liabilities of approximately $3,800.
DISTRIBUTABLE INCOME
Distributable income is calculated as follows:
Three months ended March 31 2007 2006 Cash flows from operating activities $ 9,775 $ 8,137 Add: - changes in non-cash operating working capital(1) 3,389 6,379 Less: - required principal repayments on long-term debt and capital lease obligations (93) (180) maintenance capital expenditures - (115) Distributable income $ 13,071 $ 14,221 Cash distributions declared $ 6,530 $ 4,838 Payout ratio 50% 34%
(1) Changes in non-cash operating working capital have been added back as such changes are financed using the Trust's bank indebtedness/line of credit facility. In addition, if changes in non-cash operating capital were excluded it would introduce cash flow variability and affect underlying cash flow from operating activities.