ACT Energy Technologies Ltd. press release
Cathedral Energy Services Reports Results for 2018 Q3
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
CALGARY, Nov. 8, 2018
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, Nov. 8, 2018/CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" / TSX: CET) announces its consolidated financial results for the three and nine months ended September 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 September 30 | | Nine months ended September 30 | | | | | | | | 2018 | | 2017 | | 2018 | | 2017 | | Revenues | $ | 42,570 | $ | 36,015 | $ | 117,700 | $ | 108,693 | | Adjusted gross margin % (1) | | 16% | | 18% | | 10% | | 18% | | Adjusted EBITDAS (1) | $ | 6,190 | $ | 3,909 | $ | 8,648 | $ | 13,068 | | Basic and diluted per share | $ | 0.13 | $ | 0.08 | $ | 0.17 | $ | 0.28 | | As % of revenues | | 15% | | 11% | | 7% | | 12% | | Cash flow - operating activities | $ | 1,926 | $ | 21 | $ | 327 | $ | 1,815 | | Earnings (loss) before income taxes | $ | 3,846 | $ | 1,990 | $ | (33) | $ | 6,016 | | Basic and diluted per share | $ | 0.08 | $ | 0.04 | $ | - | $ | 0.13 | | Net earnings | $ | 3,001 | $ | 1,810 | $ | 797 | $ | 4,577 | | Basic and diluted per share | $ | 0.06 | $ | 0.04 | $ | 0.02 | $ | 0.10 | | Equipment additions - cash basis | $ | 4,140 | $ | 3,518 | $ | 12,920 | $ | 7,065 | | Weighted average shares outstanding | | | | | | | | | | Basic (000s) | | 49,468 | | 48,916 | | 49,437 | | 46,836 | | Diluted (000s) | | 49,474 | | 49,035 | | 49,459 | | 46,947 | | | | | | | | | | | | | | | | | | September 30
2018 | | December 31
2017 | | Working capital | | | | | $ | 32,970 | $ | 31,016 | | Total assets | | | | | $ | 134,077 | $ | 121,630 | | Loans and borrowings excluding current portion | | | | | $ | 7,028 | $ | 46 | | Shareholders' equity | | | | | $ | 103,465 | $ | 101,391 | | | | | | | | | | | | (1) Refer to "NON-GAAP MEASUREMENTS" | | | | | | | | |
2018 Q3 KEY TAKEAWAYS
Q3 revenues increased 18% from $36,015in 2017 Q3 to $42,570in 2018 Q3 and year-to-date increased 8% from $108,693in 2017 to $117,700in 2018.
Adjusted gross margin for Q3 decreased to 16% from 18% in 2017 due to higher rentals of specialty equipment for the Canadian market.
The Company had a significant sequential increase in adjusted gross margin from an average of 7% in the first half of 2018 to 16% 2018 Q3. The sequential increase was due to reduced repair expenses in Q3 and lower equipment rentals as a result of the company having additional equipment available due to its capital expenditure program. As a result the year-to-date adjusted gross margin improved to 10% from 7% year-to-date at June 30, 2018.
Adjusted EBITDAS increased from $3,909in 2017 Q3 to $6,190in 2018 Q3, an increase of 58%. Year-to-date adjusted EBITDAS decreased from $13,068in 2017 to $8,648in 2018.
The Company continues to make investments in equipment to relieve capacity constraints and to improve equipment utilization, reliability and performance. Substantially all of these expenditures are targeted at the U.S. market.
OUTLOOK
Our financial results for 2018 Q3 were greatly improved compared to the first half of the year. In Q2 we noted that we had implemented a number of cost saving measures which started to positively impact results in late Q2. These included better controls on expenses, improving operational efficiencies and engineering improvements to our equipment to improve durability and performance and mitigate equipment repair and refurbishment costs. The on-going focus in these areas continued to positively impact our results in Q3.
In October we elected to close our Washington Pennsylvania (PA) district office and shop. Cathedral fully intends to remain active in the U.S. Northeast market, however, both motors and MWD equipment for the area will now be provisioned from our Oklahoma City, Oklahoma(OKC) facility. Our MWD equipment for all of our U.S. operations has been provided from OKC since 2016. This decision was largely based on the activity levels in the PA area compared to other regions we operate in addition to the type of drilling involved. For example, there are approximately 75 rigs currently running in the PA region (Uticaand Marcellus basins) compared to the Permian basin with approximately 490 rigs. We believe that by deploying our PA equipment to other locations it will provide us with further growth opportunities in these areas in addition to allowing us to gain cost and organizational efficiencies.
By the end of October we have deployed 92 of our next generation 7" CLAW-XT™ high performance drilling motors in our fleet. These motors generally garner premium pricing over prior generation motors and will allow us to grow our job capacity. Substantially all of this equipment has been targeted at the U.S. market. We continued to make enhancements to our motors and certain MWD equipment in Q3 aimed at reducing operating costs.
In Q3 we rolled out the first set of Cathedral Linear Pulser tools as an add-on to our FUSION™ Measurement-While-Drilling (MWD) platform. 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 capacity constrained existing linear pulse telemetry platform. We are also continuing to deploy upgrades to our existing Dual Telemetry (DT) MWD tool in our operations which are aimed at improving our MWD equipment performance and reliability. In Q4 we will be implementing an add-on device to our motors to allow logging drilling bit RPM. This additional downhole information coupled with analysis by our Drilling Engineering team provides another means to help our customers improve their drilling performance. This additional downhole information will also contribute to further development of our motor technology.
Through having additional equipment to deploy into 2019 and our continued focus on technology and our capabilities to improve drilling performance we are confident we are well positioned for the remainder of 2018 and into 2019.
2018 CAPITAL PROGRAM
During the nine months ended September 30, 2018the Company invested $12,920(2017 - $7,065) in equipment and $1,235(2017 - $326) in new technology development primarily related to MWD systems.
The following table details the current period's net equipment additions:
| | | | | | Nine months ended September 30, 2018 | | | Equipment additions: | | | | Motors | $ | 7,403 | | MWD | | 5,053 | | Other | | 464 | | Total cash additions | | 12,920 | | Less: proceeds on disposal of equipment (excluding capital lease settlements) | | (10,471) | | Net equipment additions (1) | $ | 2,449 | | (1)See "NON-GAAP MEASUREMENTS" | | |
Cathedral's current 2018 capital budget totals $18,900, which includes $1,650for intangible additions. The total net capital additions is estimated to be approximately $8,400. 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 SEPTEMBER 30
| | | | | | | Revenues | | 2018 | | 2017 | | | | | | | | Canada | $ | 7,876 | $ | 9,186 | | | | | | | | United States | | 34,694 | | 26,829 | | | | | | | | Total | $ | 42,570 | $ | 36,015 | | | | | | |
Revenues2018 Q3 revenues were $42,570, which represented an increase of $6,555or 18% from 2017 Q3 revenues of $36,015.
Canadian revenues (excluding motor rental revenues) decreased to $7,697in 2018 Q3 from $7,978in 2017 Q3; a 14% decrease. This decrease was the result of: i) a 15% decrease in activity days to 953 in 2018 Q3 from 1,120 in 2017 Q3; net of ii) a 13% increase in the average day rate to $8,076in 2018 Q3 from $7,123in 2017 Q3.
The average active land rig count in Canadawas up 1% in 2018 Q3 compared to 2017 Q3 (source: Baker Hughes). Cathedral's activity levels relative to the industry were impacted by the scope of its customer drilling programs and their geographical focus relative to the overall industry. The increase in day rates was due to general increases in customer pricing.
U.S. Directional Drilling revenues (excluding motor rental revenues) increased to $34,669in 2018 Q3 from $26,630in 2017 Q3; a 30% increase. This increase was the result of: i) an 18% increase in activity days to 2,634 in 2018 Q3 from 2,233 in 2017 Q3; and ii) a 10% increase the average day rate to $13,162in 2018 Q3 from $11,926in 2017 Q3 (when converted to Canadian dollars).
The average active land rig count for the U.S. was up 13% in 2018 Q3 compared to 2017 Q3 (source: Baker Hughes). The Company experienced an 18% increase in activity days resulting in a slight increase in market share compared to 2017 Q3. The market share increase was due to the efforts of sales and marketing staff and improved performance on client jobs. Day rates in United StatesDollars ("USD") increased to $10,069 USDin 2018 Q3 from $9,520 USDin 2017 Q3; a 6% increase. The increase in day rates was due to general increases in customer pricing and increased equipment damage recoveries.
Motor rentals in Canadaand the U.S. declined to $205in 2018 Q3 compared to $1,408in 2017 Q3 primarily as a result of reduced motor rentals from Canadian customers in 2018 Q3 resulting from a temporary pause in their Canadian drilling programs.
Gross margin and adjusted gross margin Gross margin for 2018 Q3 was 9% compared to 10% in 2017 Q3. Adjusted gross margin (see Non-GAAP Measurements) for 2018 Q3 was $6,688or 16% compared to $6,516or 18% for 2017 Q3.
Adjusted gross margin, as a percentage of revenue, decreased due to higher equipment rentals and to a lesser extent higher equipment repairs and an increase in the fixed component of cost of sales. The rental expense increase in the quarter was higher primarily due to rentals of specialty equipment for the Canadian market. Repairs increased in part due to a more demanding drilling environment experienced in 2018 Q3. The increase in the fixed component of cost of sales was mostly attributable to increased office and shop payroll and other labour related costs.
Depreciation allocated to cost of sales decreased to $2,627in 2018 Q3 from $2,748in 2017 Q3. Depreciation included in cost of sales as a percentage of revenue was 6% for 2018 Q3 and 8% in 2017 Q3.
Selling, general and administrative expenses ("SG&A")SG&A expenses were $3,457in 2018 Q3; a decrease of $572compared with $4,029in 2017 Q3. As a percentage of revenue, SG&A was 8% in 2018 Q3 compared to 11% in 2017 Q3. SG&A decreased primarily due to U.S. state sales taxes on intercompany equipment rentals which were significantly higher in 2017 Q3. Cathedral's Canadian entity owns all Cathedral's downhole drilling equipment and rents it to the U.S. entity and is subject to state sales tax on these amounts
Technology group expensesTechnology 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 activities spent on new product development are capitalized as intangible assets. Technology group expenses were $513in 2018 Q3; a decrease of $60compared with $573in 2017 Q3. Expenses decreased due to a higher proportion of the group's activity being on new product development. In 2018 Q3, $268of technology group expenses related to new product development were capitalized as intangible assets (2017 Q3 - $nil).
Gain on disposal of equipmentDuring 2018 Q3, the Company had a gain on disposal of equipment of $3,250compared to $1,907in 2017 Q3. 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 Q3, the Company received proceeds on lost-in-hole recoveries of $3,872(2017 Q3 - $2,546).
Finance costs Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $118for 2018 Q3 versus $129for 2017 Q3.
Foreign exchange The Company had a foreign exchange gain of $674in 2018 Q3 compared to $1,059in 2017 Q3 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 Q3 foreign currency gains are unrealized gain of $624(2017 Q3 - $1,142) related to intercompany balances.
Income taxFor 2018 Q3, the Company had an income tax expense of $845compared to $173in 2017 Q3.
The 2018 Q3 effective tax rate excluding adjustments for prior periods was 22%. The effective tax rate is impacted by one legal entity having pre-tax income and the other having 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 – NINE MONTHS ENDED SEPTEMBER 30
| | | | | | | Revenues | | 2018 | | 2017 | | | | | | | | Canada | $ | 22,977 | $ | 24,567 | | | | | | | | United States | | 94,723 | | 84,126 | | | | | | | | Total | $ | 117,700 | $ | 108,693 |
Revenues2018 revenues were $117,700, which represented an increase of $9,007or 8% from 2017 revenues of $108,693.
Canadian revenues (excluding motor rental revenues) decreased to $20,790in 2018 from $21,428in 2017; a 3% decrease. This decrease was the result of: i) a 15% decrease in activity days to 2,629 in 2018 from 3,076 in 2017; net of ii) an 14% increase in the average day rate to $7,908in 2018 from $6,966in 2017.
The average active land rig count in Canadawas down 5% in 2018 compared to 2017 (source: Baker Hughes). Cathedral's lower activity levels relative to the industry were impacted by the scope of its customer drilling programs and geographical focus relative to the overall industry The increase in day rates was due to general increases in customer pricing.
U.S. Directional Drilling revenues (excluding motor rental revenues) increased to $93,632in 2018 from $83,451in 2017; a 12% increase. This increase was the result of: i) a 5% increase in activity days to 7,705 in 2018 from 7,329 in 2017; and ii) a 7% increase in the average day rate to $12,152in 2018 from $11,386in 2017 (when converted to Canadian dollars).
The average active land rig count for the U.S. was up 21% in 2018 compared to 2017 (source: Baker Hughes). The Company experienced a 5% increase in activity days relative to the industry 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 extended into 2018 Q3. The Company's investment in new equipment as well as client changes in the timing and scope of their drilling programs resulted in an improvement in market share in 2018 Q3. Day rates in USD increased to $9,430 USDin 2018 from $8,707 USDin 2017; an 8% increase. The increase in day rates was primarily due to customer price increases.
Motor rentals in Canadaand the U.S. declined slightly to $3,277in 2018 compared to $3,814in 2017 primarily as a result of reduced motor rentals from Canadian customers in 2018 Q3 resulting from a temporary pause in their Canadian drilling programs.
Gross margin and adjusted gross margin Gross margin for 2018 was 4% compared to 11% in 2017. Adjusted gross margin (see Non-GAAP Measurements) for 2018 was $12,081or 10% compared to $20,075or 18% 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 1% of the decrease in adjusted gross margin.
The remaining decrease in adjusted gross margin was primarily from increased equipment repairs in 2018 Q1 and Q2. 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 2% 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.
The Company had a significant sequential increase in adjusted gross margin from an average of 7% in the first half of 2018 to 16% 2018 Q3. The sequential increase was due to reduced repair expenses in Q3 and lower equipment rentals as a result of the company having additional equipment available due to its capital expenditure program. As a result the year-to-date adjusted gross margin improved to 10% from 7% year-to-date at June 30, 2018.
Depreciation allocated to cost of sales decreased to $7,415in 2018 from $8,128in 2017. Depreciation included in cost of sales as a percentage of revenue was 6% for 2018 and 8% in 2017.
Selling, general and administrative expenses ("SG&A")SG&A expenses were $10,991in 2018; an increase of $95compared with $10,896in 2017. As a percentage of revenue, SG&A was 9% in 2018 compared to 10% 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 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 activities spent on new product development are capitalized as intangible assets. Technology group expenses were $1,741in 2018; an increase of $102compared with $1,639in 2017. Technology group expenses increased primarily due to wage increases, including the reinstatement of previous wage rollbacks and new staff additions. In 2018, an additional $729of 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 $8,834compared to $5,198in 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 $10,471(2017 - $6,417).
Finance costs Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $262for 2018 versus $527for 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.