ACT Energy Technologies Ltd. press release
Cathedral Energy Services reports results for the three and six months ended June 30, 2007
TSX - Toronto Stock Exchange · Canada
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, Aug. 2 /CNW/ - Cathedral Energy Services Income Trust (TSX: CET.UN) is pleased to report its results for the three and six months ended June 30, 2007.
FINANCIAL HIGHLIGHTS
$ in 000's except per Three months ended Six months ended Trust Unit amounts June 30 June 30 2007 2006 2007 2006
Revenues $ 24,985 $ 26,204 $ 67,697 $ 64,886 EBITDA(1) $ 4,837 $ 8,370 $ 19,249 $ 23,737 Per Trust Unit - diluted $ 0.15 $ 0.27 $ 0.61 $ 0.76 Income before taxes $ 1,112 $ 5,033 $ 12,145 $ 17,435 Net Income (loss) $ (2,415) $ 4,963 $ 7,372 $ 15,825 Per Trust Unit - basic $ (0.08) $ 0.16 $ 0.24 $ 0.52 Per Trust Unit - diluted $ (0.08) $ 0.16 $ 0.23 $ 0.50 Cash distributions declared per Trust Unit $ 0.21 $ 0.185 $ 0.42 $ 0.345 Distributable income(2) $ 3,132 $ 6,251 $ 16,203 $ 20,472 Cash distributions declared $ 6,600 $ 5,667 $ 13,130 $ 10,505 Payout ratio(3) 211% 91% 81% 51% Property and equipment additions and corporate acquisitions: Paid or payable in cash $ 4,483 $ 6,255 $ 10,288 $ 15,038 Paid or payable in Trust Units - - - 1,500 $ 4,483 $ 6,255 $ 10,288 $ 16,538
Weighted average Trust Units outstanding: Basic ('000) 31,405 30,595 31,219 30,372 Diluted ('000) 31,893 31,438 31,744 31,339
June 30 December 31 2007 2006 Working capital $ 10,795 $ 15,051 Long-term debt and capital lease obligations excluding current portion $ 15,543 $ 15,552 Unitholders' equity $ 73,690 $ 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 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 and six months ended June 30, 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, and with the unaudited interim consolidated financial statements for the three and six months ended June 30, 2007. This MD&A has been prepared as of August 2, 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 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 are not limited to: the impact of general economic conditions; industry conditions; government and regulatory developments; oil and natural gas product supply and demand; competition; and the Trust's/Cathedral's ability to attract and retain qualified personnel. 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 Annual Report which have 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 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
Despite a significant decline in drilling activity in western Canada, the Trust was able to increase revenues on a Q2 year-to-date basis from $64,886 in 2006 to $67,697 in 2007 - 4.3% increase. The major items contributing to these results have been the strong performance of the U.S. operations, exposure to drilling for oil, particularly in southeastern Saskatchewan, and the provision of specialty directional drilling services that has resulted in an increase in the average day rate obtained for such services. For Q2, revenues declined $1,219 or 4.7% from $26,204 in 2006 to $24,985 in 2007. EBITDA for the six months ended June 30, 2007 was $19,249 which compares to $23,737 in 2006 - an 18.9% decrease. As a result of recording a non-cash $3,318 ($0.10 per diluted Trust Unit) provision for future income taxes related to the tax legislation included in Bill C-52, the Budget Implementation Act, 2007 (the "Bill"), that was substantively enacted in 2007 Q2 which results in the taxation of existing income and royalty trusts, other than real estate investment trusts, at effective rates similar to Canadian corporations, the Trust incurred a net loss for 2007 Q2 of $2,415 or $0.08 per diluted Trust Unit (2006 net income was $4,963 or $0.16 per diluted Trust Unit). On a 2007 Q2 year-to-date basis, the Trust's net income was $7,372 ($0.23 per diluted Trust Unit) which compares to $15,825 ($0.50 per diluted Trust Unit) in 2006.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2007
Revenues
Traditionally, Q2 results are affected by seasonal fluctuations related to spring break-up. In 2007 Q2, the seasonality factor was further impacted by lower Canadian drilling activity as a result of concerns related to natural gas commodity prices. Continued strength in the directional drilling portion of the Trust's operations resulted in 2007 Q2 revenues of $20,453 from the directional drilling division. Directional drilling activity days decreased 5.8% or 134 to 2,194, however the average day rate received for providing directional drilling services increased 10.1% on a quarter-over-quarter basis to $9,160 (2006 - $8,322). The largest portion of the increase in the average day rate is related to a shift towards providing premium services such as underbalanced and Steam-Assisted Gravity Drainage ("SAGD") drilling services as opposed to an increase in the overall base day rate. In the Canadian market the Trust's 2007 Q2 activity levels decreased by 16% which was significantly less than the overall decline in drilling activity in the Canadian market. Despite the decline in natural gas drilling in western Canada, the Trust was able to minimize the market decline from 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 $9,640 in 2007 Q2, which represents an increase of $1,139 or 13.4% 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 within the directional division.
The continued decline in 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 $1,340 in revenues during 2007 Q2 which is a 39.9% decline from 2006 Q2 revenues. Advance Wireline and Xtreme Wireline combined to generate revenues of $3,079 for 2007 Q2 compared to $4,228 for 2006 Q2, a 27.2% quarter-over-quarter decline. Late in 2007 Q2, one wireline unit was transferred from the Canadian operations to the newly formed U.S. division of Advance Wireline but revenue generating operations did not commence until 2007 Q3. A second wireline unit will be transferred to the U.S. operation in mid 2007 Q3.
Gross margin
The gross margin for 2007 Q2 was 44.2% which compares to 50.2% in 2006 Q2. The decrease is attributed to a 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; and iv) 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 $5,311 in 2006 Q2 to $6,082 in 2007 Q2 - an increase of $771. The increase was primarily related to increased personnel and office/shop rental costs. As a percentage of revenues, general and administrative expenses were 24.3% in 2007 Q2 and 20.3% in 2006
Depreciation and amortization
Depreciation for 2007 Q2 was $2,943 which compares to $2,577 in 2006 Q2. 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 11.8% for 2007 and 9.8% for 2006.
Interest expense
Interest expense related to long-term debt and capital leases increased from $226 in 2006 Q2 to $260 in Q2 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
The Trust's foreign exchange loss increased from $66 in 2006 Q2 to $237 in 2007 Q2. The increased foreign exchange loss is due to: i) the U.S. dollar weakening against the Canadian dollar to a larger extent in 2007 Q2 versus 2006 Q2; and ii) an overall increase in the Trust's U.S. operations which has resulted in an increase in the Trust's net monetary assets that are denominated in U.S. dollars.
Non-cash compensation expense
For 2007 Q2 the Trust had non-cash compensation expense of $522 which compares to $534 for the comparable quarter in 2006. The value of Trust Unit options is being amortized against income over their three-year vesting period.
Gain on disposal of property and equipment
During 2007 Q2 the Trust had a gain on disposal of property and equipment of $187, which compares to $710 in 2006 Q2. These gains are mainly due to recoveries of lost-in-hole equipment costs including previously expensed depreciation on the related assets. The timing of lost-in-hole recoveries is not in the control of the Trust and therefore can fluctuate significantly from quarter-to-quarter.
Taxes
In 2007 Q2 tax legislation included in Bill C-52, the Budget Implementation Act, 2007 (the "Bill"), was substantively enacted and this will result in the taxation of existing income and royalty trusts, other than real estate investment trusts, at effective rates similar to Canadian corporations. Substantive enactment of the Bill resulted in the recognition of future income tax amounts based on estimated net taxable temporary differences of $10,533 which are expect to reverse after 2010 and for which no tax has previously been recorded in the Trust's financial statements. Accordingly, a non-cash future income tax expense and net future income tax liability of $3,318 ($0.10 per diluted Trust Unit) were recognized in 2007 Q2. In the Trust's 2007 Q1 MD&A this amount was estimated to be approximately $3,800.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2007
Revenues
2007 Q2 year-to-date revenues were $67,697 which represented an increase of $2,811 or 4.3% over 2006 Q2 year-to-date revenues of $64,886. Ongoing activity reductions in the Canadian markets were offset by continued growth and expansion in the U.S. operations.
The directional drilling division revenues have increased from $43,946 in 2006 to $50,387 in 2007. This increase is the result of: i) an increase in activity days from 5,310 in 2006 to 5,517 in 2007; and ii) an increase in the average day rate from $8,275 in 2006 to $9,134 in 2007. The decrease in Canadian activity days from 3,435 to 3,194 were more than offset by the growth in U.S. activity days from 1,875 to 2,323. The U.S. Q2 year-to-date revenues increased from $15,361 in 2006 to $20,363 in 2007, a 32.6% increase.
The continued decline in 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 $5,806 in revenues during 2007 Q2 year-to-date which is a 21.3% decline from 2006 revenues of $7,382. Advance Wireline and Xtreme Wireline combined to generate revenues of $10,145 for 2007 Q2 year-to-date which compares to $12,417 for 2006 which represents an 18.3% decline.
Gross margin
The gross margin (revenues less operating expenses) for 2007 was 48.0%, which compares to 52.2% in 2006. The decrease is attributed to a 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; and iv) 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 $10,573 in 2006 to $13,014 in 2007 - an increase of $2,441. The increase was related to the Trust's directional/horizontal drilling business and the contributing factors to that increase were the result of increased personnel and office/shop rental costs as well as an overall increase in directional drilling activity levels both in western Canada and the Rocky Mountain region of the U.S. As a percentage of revenues, general and administrative expenses were 19.2% in 2007 and 16.3% in 2006.
Depreciation and amortization
Depreciation and amortization for 2007 was $5,699 compared to $4,906 in 2006. The $793 increase is related to the Trust's investment in property and equipment over the past 12 months. As a percentage of revenues, depreciation and amortization amounted to 8.4% for 2007 and 7.6% for 2006.
Interest expense
Interest on long-term debt has increased from $436 in 2006 to $523 in 2007. The major factor contributing to this increase is that late in 2006 Q3 the Trust accessed an additional $3,000 of its available non-reducing revolving term loan facility; proceeds of which were used to finance the Trust's acquisition of land and buildings. Other interest expense has increased mainly due to the increased utilization of the Trust's operating line of credit.
Foreign exchange
The Trust's foreign exchange loss has increased from $58 in 2006 to $284 in 2007. The increased foreign exchange loss is due to: i) the U.S. dollar weakening against the Canadian dollar to a larger extent in 2007 Q2 versus 2006 Q2; and ii) an overall increase in the Trust's U.S. operations which has resulted in an increase in the Trust's net monetary assets that are denominated in U.S. dollars.
Non-cash compensation expense
Non-cash compensation expense for 2007 was $882 which compares to $960 in 2006. The Trust Unit options granted are valued using the Black-Scholes option pricing model and such value is being amortized against income over their three-year vesting period.
Gain on disposal of property and equipment
During 2007 Q2 YTD the Trust had a gain on disposal of property and equipment of $184 which compares to $710 in 2006. These gains are mainly due to recoveries of lost-in-hole equipment costs, including previously expensed depreciation on the related assets. The timing of lost-in-hole recoveries is not in the control of the Trust and therefore can fluctuate significantly from quarter-to-quarter and year-to-year basis.
Taxes
For 2007, the Trust had a tax expense of $4,773 (effective tax rate of 39.3%) which compares to $1,610 (effective tax rate of 9.2%) in 2006. As noted in the above discussion under the result of operations for the three months ended June 30, 2007, the 2007 Q2 tax provision includes a non-cash adjustment of $3,318 ($0.10 per diluted Trust Unit) related to the substantive enactment of the previously announced changes to the taxation of income and royalty trusts, other than real estate investment trusts. Removing the 2007 Q2 adjustment noted above the effective tax rate for 2007 Q2 year-to-date is 12.0% which is higher than the 2006 effective tax rate of 9.2% due to the continuing growth in the U.S. operations which are taxed at a higher rate.