ACT Energy Technologies Ltd. press release
Cathedral Energy Services Ltd. Reports Third Quarter Results
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA /
CALGARY, AB , Nov. 9, 2023 /CNW/ - Cathedral Energy Services Ltd.'s (the "Company" or "Cathedral") 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 the "Forward-Looking Statements" section in this news release. This news release contains references to Adjusted gross margin, Adjusted gross margin %, Adjusted EBITDAS, Adjusted EBITDAS margin %, Free cash flow and Working capital. 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 the "Non-GAAP Measures" section in this news release for definitions and tabular calculations.
THIRD QUARTER HIGHLIGHTS
The Company achieved the following 2023 Q3 results and highlights:
Industry leading active job count in Canada during the quarter. Increased U.S. activity days and job count versus 2022 Q3, despite a lower industry rig count. Revenue of $145.6 million in 2023 Q3 is the highest quarterly revenue in the Company's history and represents an increase of 26%, compared to $115.2 million in 2022 Q3. Adjusted EBITDAS of $30.1 million in 2023 Q3, an increase of 7%, compared to $28.1 million in 2022 Q3. Net income of $5.7 million in 2023 Q3, compared to $8.7 million in 2022 Q3. Cash flow - operating activities of $9.1 million in 2023 Q3, compared to $11.5 million in 2022 Q3. Free cash flow of $6.1 million in 2023 Q3, compared to $16.8 million in 2022 Q3. The Company purchased 2,434,900 common shares of Cathedral ("Common Shares") under its normal course issuer bid for a total purchase amount of $2.2 million at an average price of $0.82 per common shares. Subsequent to September 30, 2023 , the Company purchased 1,860,000 Common Shares for a total of $1.6 million at an average purchase price of $0.86 per Common Share. Loans and borrowings less cash of $71.5 million as at September 30, 2023 , compared to $69.4 million as at December 31, 2022 . The Company acquired Rime Downhole Technologies, LLC ("Rime"), a privately-held, Texas -based, engineering business that specializes in building products for the downhole measurement-while-drilling ("MWD") industry in exchange for approximately USD $41 million (refer to the "2023 Acquisition" section in this news release). The Company sees a significant opportunity for margin expansion in its U.S. business as it deploys its own MWD technology to reduce its rental expenses.
PRESIDENT'S MESSAGE
Comments from President & CEO Tom Connors :
"Despite the fact that North American industry rig counts were meaningfully lower year-over-year, particularly in the U.S., our activity levels and financial results showed continued strength in revenue and Adjusted EBITDAS and our activity levels demonstrated resiliency with stable to increasing job counts relative to the prior year. It is difficult to post growth in energy services against a backdrop of lower activity, but our resource play focus, customer mix, and high-performance offering helped to more than offset the slowdown. Size and scale remain an industry priority as our exploration and production ("E&P") clients continue to consolidate into larger entities and increasingly demand a more sophisticated offering from their service providers. In response to this continuing trend, Cathedral has grown to become the largest directional drilling service provider in Canada on a full year basis and one of the largest independent providers in the U.S.
"Our U.S. directional drilling job count remained resilient in the third quarter with an average active rig count of 54 versus a directional and horizontal land rig count that averaged 604 rigs on any given day (source: Enverus Daily Rig Count). This compares to the Baker Hughes land rig count, which was down 10% on average versus 2023 Q2 and down 15% year-over-year versus 2022 Q3. We believe that our U.S. operating entity, Altitude Energy Partners, LLC ("Altitude"), grew market share from early 2023, which is a testament to the strong leadership, operating performance and performance focus that this division continues to display. The acquisition and integration of Rime, announced on July 11, 2023 , has proceeded according to plan. We continue to target the deployment of as many as thirty newly-developed Rime MWD packages by the end of the first half of 2024. The new MWD tool is made up of Rime technology already proven, tested, and performing on a significant number of U.S. land rigs. We continue to believe we have a significant opportunity for margin expansion and bolstered margin resiliency as we deploy our internally developed technology to reduce our reliance on third party rental technology. Adding an internally developed pulse MWD system to an operation of Altitude's scale could have a meaningful impact on our financial results as 2024 progresses.
"Cathedral's Canadian directional job counts averaged approximately 42 active rigs per day for the quarter, which was generally on par with a year ago, versus an industry directional and horizontal rig count which averaged approximately 174 rigs (Source: JWN Rig Locator), which was 6% lower than the same period last year, according to the broader Baker Hughes industry rig count. We continue to leverage our technical strength, expertise, and experience in the fast-growing multi-lateral market where we anticipate attractive customer economics will continue to propel growth into the future. We are currently gearing up for a very busy winter drilling season that should see activity levels surpass those of a year ago.
"Cathedral has a keen focus on generating high levels of free cash flow through the balance of 2023 and through 2024 with a target of reducing Loans and borrowings to less than 0.5x Adjusted EBITDAS by year-end 2024. A strong balance sheet will always be a priority as we continue to build size and scale going forward. In preparation for an active winter in Canada and a steadily improving rig count in the U.S. in 2024 the board has approved a preliminary capital budget of $15 million to allow for delivery of items with longer lead times and the timely build-out of our own MWD technology in the first half of the year" concluded Mr. Connors.
ORGANIZATIONAL UPDATE
Cathedral announces that James R. (J.R.) Boyles has resigned as a director effective November 10, 2023 , to re-join the management team of Cathedral's subsidiary, Altitude. Mr. Boyles is an original founder of Altitude where he held the role of CEO from March 2016 until he resigned from that role and was appointed executive chairman in January 2020 . He joined the Cathedral board of directors shortly after the Company's July 2022 acquisition of Altitude. We are delighted to have J.R. re-join the Company in a management capacity, his history with Altitude combined with his operational expertise and positive energy will be a significant benefit to Altitude and we welcome his interest in returning on a full-time basis to support this important business unit. Mr. Boyles added: "I am excited about contributing to the Cathedral group by returning to a full-time role with Altitude. Cathedral and its group of companies have world class operations and a disciplined growth strategy and I am excited to help with its continued growth." Cathedral's board of directors has a search firm retained and is currently conducting a North American-wide search for new board of director candidates.
FINANCIAL HIGHLIGHTS
Canadian dollars in 000's except for otherwise noted
| | Three months ended September 30, | Nine months ended September 30, | | | | | 2023 | 2022 | 2023 | 2022 | | | | | | | | Revenues (2) | $ 145,591 | $ 115,184 | $ 399,878 | $ 179,865 | | Gross margin % (2) | 23 % | 26 % | 19 % | 21 % | | Adjusted gross margin % (1)(2) | 31 % | 34 % | 27 % | 32 % | | Adjusted EBITDAS (1) | $ 30,106 | $ 28,066 | $ 63,515 | $ 37,917 | | Adjusted EBITDAS margin % (1) | 21 % | 24 % | 16 % | 21 % | | Cash flow - operating activities (2) | $ 9,128 | $ 11,456 | $ 53,395 | $ 16,840 | | Free cash flow (1)(2) | $ 6,085 | $ 16,814 | $ 10,372 | $ 8,326 | | Net income | $ 5,650 | $ 8,658 | $ 8,861 | $ 8,077 | | Per share - basic and diluted | $ 0.02 | $ 0.04 | $ 0.04 | $ 0.06 | | Weighted average shares outstanding: | | | | | | Basic (000s) | 244,574 | 197,085 | 235,978 | 142,726 | | Diluted (000s) | 267,449 | 199,163 | 245,957 | 145,158 |
| As at | September 30, 2023 | December 31, 2022 | | | | | | Working capital, excluding current portion of loans and borrowings (1) | $ 70,334 | $ 60,447 | | Total assets | $ 412,566 | $ 353,990 | | Loans and borrowings | $ 82,721 | $ 80,535 | | Shareholders' equity | $ 181,344 | $ 153,897 |
| (1) | Refer to the "Non-GAAP Measures" section | | (2) | Refer to the "Reclassifications" section in this news release. |
OUTLOOK
Global oil prices rose considerably in the third quarter while U.S. natural gas prices also showed signs of strengthening. This combination will add considerably to the free cash flow of our North American E&P clients and may lead to a gradual increase in land rig counts throughout 2024. Specifically, West Texas Intermediate ("WTI") oil prices started 2023 Q3 just under U.S. $70.00 per barrel and peaked at over $94.00 per barrel late in the quarter – more than a 30% intra-quarter move. U.S. NYMEX natural gas prices began the quarter at approximately U.S. $2.70 per million cubic feet ("mmbtu") and nearly eclipsed U.S. $3.00 per mmbtu by quarter's end – slightly more than a 10% move. More importantly, the oil market futures curve has tipped decidedly into backwardation looking out the next few years – a sign that oil market futures traders see a tight supply and demand balance in the foreseeable future. The futures curve for U.S. natural gas has a twelve-month strip price well above U.S. $3.00 per mmbtu – another sign of renewed optimism around this critical growth commodity going forward.
The North American land rig count has been weaker than many industry observers have been forecasting – both in the U.S. and Canada. As we stated in our 2023 Q2 MD&A Outlook section, a group of six energy service equity analysts (Source: ATB Capital Markets, BMO Capital Markets, National Bank Financial, Peters & Co, Stifel, TD Securities) forecast a bottoming of the U.S. land rig count sometime in 2023 Q3 and then a turn higher in 2023 Q4 as improved E&P cash flows allowed drilling budgets to start being replenished. This group of analysts also forecast continued growth through 2024. The updated consensus outlook from this group suggests that the average U.S. land rig count forecast will fall to approximately 616 rigs in 2023 Q4 from an average of 630 rigs in 2023 Q3. Given the current count of under 600 active U.S. land rigs, this would imply a meaningful move higher in the final two months of 2023. Further, this group of analysts continues to forecast continuing growth in U.S. land drilling in each of the four quarters of 2024 (2024 Q1 average of 646 rigs, rising to 661, 676 and 683 rigs sequentially).
In Canada , the same group of six research analysts sees 2023 Q4 average active rigs numbering 178 rigs vs 181 rigs in 2023 Q3 – likely due to end-of-year E&P budget exhaustion. More encouragingly, in 2024, this group forecasts that the average first quarter Canadian drilling count will be 217 rigs as compared to 199 rigs in 2023 Q1, growth of 9% year-over-year. Through all four quarters of 2024, the Canadian drilling rig count is forecast to grow by 8% year-over-year. This contrasts with the full-year 2024 U.S. land rig forecast that is expected to fall by 0.9% year-over-year.
A recovery in drilling activity may be slower in the U.S. market as some private E&P players remain cautious. In Canada , drilling has accelerated as major producers begin to line up reserves and production volumes to supply the roughly 2 billion cubic feet ("bcf") per day LNG Canada project, which is set to begin exporting natural gas volumes in 2025. The build-out of various new U.S. LNG facilities also continues at a steady pace. In fact, U.S. natural gas export volumes are set to rise to nearly 21 bcf per day by the end of 2025 from just over 13 bcf per day today (Source: Energy Information Administration, U.S. Liquefaction Capacity Workbook, June 29, 2023 ). By 2027, a further 4.3 bcf per day of export capacity will come online based on current projects under construction (Source: EIA). This will result in almost a doubling of U.S. gas export volumes within four years. The growth in U.S. LNG export capacity is a reason we remain optimistic about consistent levels of oilfield service activity in the long-term.
Finally, Cathedral is also encouraged by a number of developments that should improve the longer-term outlook for Canadian oil and natural gas. Both the Trans Mountain oil pipeline and the Coastal Gaslink natural gas pipeline are set to be completed in 2024 and receive line pack and first export volumes over the course of the next twelve to eighteen months.
2023 ACQUISITION
On July 11, 2023 , Cathedral, through a wholly-owned subsidiary, acquired Rime, a privately-held, Texas -based, engineering business that specializes in building products for the downhole MWD industry (the "Rime acquisition") in exchange for approximately USD $41 million (approximately CAD $54.1 million ) comprised of: (a) the payment of USD $21 million in cash (approximately CAD $28 million ); and (b) the issuance of principal amount of USD $20 million (approximately CAD $26.4 million ) of subordinated exchangeable promissory notes ("EP Notes") that are exchangeable into a maximum of 24,570,000 common shares in the capital of Cathedral ("EP Shares") at a deemed price of CAD $1.10 per common share. In accordance with IAS 32 and IFRS 13, the EP notes were determined to be a compound instrument and, accordingly, recognized at the fair value for its respective debt component of $23.4 million and equity component of $1.2 million totaling $24.6 million .
The EP Notes have a three-year term and accrue interest payable quarterly at a rate of 5% per annum. Any time prior to expiry of the EP Notes, if the 20-day volume weighted average trading price of the common shares of Cathedral ("Common Shares") equals or exceeds CAD $1.10 per Common Share, Cathedral may cause the exchange of the EP Notes for Common Shares. Cathedral and the holders of the EP Notes may agree to an earlier exchange of the EP Notes into Common Shares. In addition to the statutory hold periods applicable to the EP Shares under Canadian and U.S. securities laws, the parties agreed to contractual restrictions on resale of any EP Shares as follows: 33% of the EP Shares are restricted until July 11, 2024 ; a further 33% of the EP Shares are restricted until July 11, 2025 ; and a further 34% of the EP Shares are restricted until July 11, 2026 , subject to certain exceptions contained in the terms governing the EP Notes. In connection with the Rime acquisition, the Company entered into a three-year term credit facility (the "Credit Facility"), replacing its existing credit facility with its syndicate of lenders led by ATB Financial ("ATB") - refer to the "Liquidity and capital resources" section in this news release.
The purchase price allocation was recognized at fair value under IFRS 3 Business combinations as follows:
| As at | | | | | July 11, 2023 | | | | | | | | | Consideration: | | | | | | | Cash | | | | | $ 27,954 | | Exchangeable promissory notes | | | | | 24,632 | | Total consideration | | | | | $ 52,586 | | | | | | | | | Purchase price allocation: | | | | | | | Cash | | | | | $ 528 | | Inventory | | | | | 7,119 | | Other net working capital | | | | | 3,373 | | Property, plant and equipment | | | | | 3,817 | | Intangible assets | | | | | 35,850 | | Right-of-use assets | | | | | 492 | | Goodwill | | | | | 1,899 | | Lease obligations | | | | | (492) | | Total purchase price allocation | | | | | $ 52,586 |
2022 ACQUISITIONS
In 2022, the Company executed five strategic acquisitions as detailed below:
U.S.- based company, Altitude in July 2022 for total consideration of $124.1 million , comprised of a cash payment of $87.2 million and a common share issuance of $36.9 million , with the purchase price allocated primarily to working capital, property, plant and equipment, intangible assets and goodwill; U.S.- based operations, Discovery Downhole Services ("Discovery") in February 2022 for total consideration of $20.9 million , comprised of a cash payment of $18.2 million and a common share issuance of $2.7 million , with the purchase price allocated primarily to inventory and property, plant and equipment; LEXA Drilling Technologies Inc. ("Lexa") in June 2022 for total consideration of $1.8 million in exchange for intangible assets; Compass Directional Services ("Compass") in June 2022 for total consideration of $8.3 million , comprised of a cash payment of $4 million and a common share issuance of $4.3 million , with the purchase price allocated primarily to inventory and property, plant and equipment; and the Canadian directional drilling business of Ensign Energy Services ("Ensign") in October 2022 for total common share consideration of $6 million with the purchase price allocated primarily to inventory and property, plant and equipment.
In addition to the assets acquired as described above, there were certain other minor working capital, right-of-use assets and lease liabilities, and deferred tax liabilities recognized as part of the purchase price allocations.
RECLASSIFICATIONS
The Company has changed the presentation of certain figures in the comparative period as follows:
i) Lost-in-hole proceeds and gain on disposal of equipment - reimbursements collected from customers related to lost-in-hole equipment and the corresponding derecognition of the property, plant and equipment ("PP&E") were: a) reclassified from proceeds on disposal of property, plant and equipment to revenues, b) recognized as a write-off of PP&E at the net book value of the equipment and c) included in the Company's cash flows - operating activities rather than cash flows - investing activities on the condensed consolidated statement of comprehensive income and the condensed consolidated statement of cash flows.
The Company has changed its judgement regarding equipment lost-in-hole events that are contracted with its customers in that these events are now considered to be part of its ordinary business activities. The changes are reflected in the current and prior periods, as described above.
ii) Cash paid on acquisition - cash paid on acquisition, net of cash acquired has been presented in aggregate rather than allocated to the individual net assets acquired on the condensed consolidated statement of cash flows.
These reclassifications are summarized below:
Condensed Consolidated Statement of Comprehensive Income (Excerpt)
| | Three months ended September 30, 2022 | | Nine months ended September 30, 2022 | | | | | | | Reported | Adjustment | Adjusted | | Reported | Adjustment | Adjusted | | | | | | | | | | | Revenue (1)(2) | $ 107,846 | $ 7,338 | $ 115,184 | | $ 169,883 | $ 9,982 | $ 179,865 | | Cost of sales (1) | (83,557) | (2,046) | (85,603) | | (139,490) | (2,058) | (141,548) | | Gross margin (1) | 24,289 | 5,292 | 29,581 | | 30,393 | 7,924 | 38,317 | | | | | | | | | | | Write-off of PP&E (1) | — | (857) | (857) | | — | (1,486) | (1,486) | | (Loss) gain on disposal of
PP&E (1) | $ 4,435 | $ (4,435) | $ — | | $ 6,555 | $ (6,438) | $ 117 |
| (1) | Related to adjustment i) Lost-in-hole proceeds and gain on disposal of equipment, as described above. | | (2) | The adjusted revenue related to the Canada segment of $1.5 million and $2.9 million and the U.S. segment of $5.8 million and $7.1 million for the three and nine months ended September 30, 2022, respectively. |