ACT Energy Technologies Ltd. press release
Cathedral Energy Services Reports Results for 2019 Q2
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
CALGARY, Aug. 8, 2019
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, Aug. 8, 2019/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, 2019and 2018. 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 June 30 | Six months ended June 30 | | | | | | | | | 2019 | 2018 | 2019 | 2018 | | | | | | Revenues | $ | 32,550 | $ | 34,973 | $ | 69,792 | $ | 75,130 | | Adjusted gross margin % (1) | 10% | 2% | 8% | 7% | | | | | | Adjusted EBITDAS (1) | $ | 479 | $ | (985) | $ | 2,353 | $ | 2,458 | | Basic and diluted per share | $ | 0.01 | $ | (0.02) | $ | 0.05 | $ | 0.05 | | As % of revenues | 1% | -3% | 3% | 3% | | | | | | Cash flow - operating activities | $ | (262) | $ | (3,731) | $ | (1,116) | $ | (1,599) | | Loss before income taxes | $ | (4,966) | $ | (4,224) | $ | (8,534) | $ | (3,879) | | Basic per share | $ | (0.10) | $ | (0.09) | $ | (0.17) | $ | (0.08) | | Loss | $ | (5,342) | $ | (2,498) | $ | (8,966) | $ | (2,204) | | Basic per share | $ | (0.11) | $ | (0.05) | $ | (0.18) | $ | (0.04) | | Equipment additions - cash basis | $ | 1,564 | $ | 4,306 | $ | 3,527 | $ | 8,780 | | Weighted average shares outstanding | | | | | | | | | | Basic (000s) | 49,468 | 49,445 | 49,468 | 49,422 | | | | | | Diluted (000s) | 49,468 | 49,478 | 49,469 | 49,538 | | | | | | | | | | | | | | | | | | | June 30 | December 31 | | | | | | | | | 2019 | 2018 | | | | | | Working capital | | | $ | 24,531 | $ | 30,599 | | | | Total assets | | | $ | 125,395 | $ | 121,770 | | | | Loans and borrowings excluding current portion | | | $ | 7,000 | $ | 7,000 | | | | Shareholders' equity | | | $ | 78,428 | $ | 89,143 | | | | | | | | | | | | | | (1) Refer to "NON-GAAP MEASUREMENTS" | | | | | | | | |
2019 Q2 KEY TAKEAWAYS
Adjusted EBITDAS increased from a loss of $(985)in 2018 Q2 to $479in 2019 Q2 due to improved adjusted gross margin.
Adjusted gross margin increased to 10% from 2% in 2018 Q2. 2018 Q2 adjusted gross margin included some non-recurring items that reduced the margin. 2019 Q2 adjusted gross margin benefited from Cathedral's focus on cost controls, in particular for equipment repairs.
Revenues decreased 7% from $34,973in 2018 Q2 to $32,550in 2019 Q2.
OUTLOOK
Since our last communication to markets in May 2019, the overall sentiment with regard to North American drilling activity for the 2019 H2 has turned further negative. The expected additional decline in drilling activity is on the backdrop of E&P companies spending within their cash flow as well as looking to allocate a portion of that cash flow to shareholder friendly initiatives such as share buybacks, dividends and debt repayment. The Canadian market has been under more stress by ongoing issues related to egress, regulatory and commodity price uncertainty.
To date, our 2019 activity levels in the U.S. have declined over the comparative period in 2018 as we re-structure our U.S. operations. As previously disclosed, in late 2019 Q1, we replaced our senior managers within the U.S. division and since then we have made additional personnel adjustments to assist in improving our financial results. We are expecting these adjustments to show in the financial results as we progress through 2019 and we have already seen improvement in our U.S. adjusted gross margin from 2019 Q1 to 2019 Q2. The U.S. market continues to be Cathedral's focus area for growth and we believe we can increase our market share based on our value added and differentiated technology – FUSION™ MWD and nDurance™ drilling motors – and overall job performance. Examples of our job performance can be viewed on the "Performance" section of our www.cathedralenergyservices.comwebsite.
With regard to the Canadian market, Cathedral expects to build on its 2019 Q2 market share gain as we progress through 2019 H2. This assessment is based upon work awarded to Cathedral. The Q2 market share gain was achieved by way of aggressive pricing in basins in which Cathedral has fit for purpose equipment that operates reliably, has low operating cost, and requires minimal, if no rentals. This allows for effective controls over our cost structure with reasonable field margins and requires no additional fixed costs. Despite the challenges within the Canadian market in the near term, Cathedral remains committed to expanding our presence in this market.
During 2019 Q2, we continued testing of our patented "Double Bend"" motor design and test results are promising. This motor design is expected to significantly reduce drag, stick slip and rotary torque as well as extending the length of laterals that can be drilled with a conventional bottom hole assembly ("BHA") as compared to using a rotary steerable system ("RSS"). The ability to drill longer laterals with a conventional BHA is expected to result in significant savings to Cathedral's clients. We will continue seek additional testing opportunities as we move toward commercialization of this tool. In addition, Cathedral has constructed prototype quantities of its mud lubricated bearing section targeted to hotter wellbores and short run applications where it is better suited and more cost effective than oil sealed bearing sections.
With regard to MWD technology, we continue to be on track to introduce our next generation FUSION™ Dual Telemetry (DT) tool in 2019. In addition, a priority is to improve the data rates of our previously commercialized FUSION Linear Pulse ("LP") tool. Further increases in the speed at which surveys are transmitted on FUSION LP are anticipated in Q3.
Despite a challenging 2019 H1, we are both optimistic and confident about our prospects for the balance of 2019 and beyond. We will continue to focus on what we can control – cost controls, improving operational efficiencies and strategic sales and marketing of our offerings.
2019 CAPITAL PROGRAM
During the six months ended June 30, 2019, the Company invested $3,527(2018 - $8,780) in equipment. The following table details the current period's net equipment additions:
| | | | | | Six months ended | | | | June 30, 2019 | | | Equipment additions: | | | | Motors | $ | 1,765 | | MWD | 1,598 | | | Other | 164 | | | Total cash additions | 3,527 | | | Less: proceeds on disposal of equipment (excluding capital lease settlements) | (4,881) | | | Net equipment additions (1) | $ | (1,354) | | (1)See "NON-GAAP MEASUREMENTS" | | |
Cathedral's 2019 capital budget approved by the Board of Directors in December 2018was for net equipment additions of approximately $4,000and $1,700of intangible additions related to technology development. For fiscal 2019, it is expected that the net equipment additions will be $nil or a net recovery (proceeds on disposal of equipment greater than additions). Subject to operating results and industry outlook, equipment lost-in-hole will be replaced and funded from the proceeds received.
RESULTS OF OPERATIONS – THREE MONTHS ENDED JUNE 30
Effective January 1, 2019, the Company adopted IFRS 16 Leases ("IFRS 16") (see discussion under "New and Future Accounting Policies"). As a result of this new accounting policy, which was adopted retrospectively without restatement of comparative results, expenditures which previously were reported as cost of sales ("COS") or selling, general and administrative ("SG&A") expenses are now classified as lease debt obligation repayments and interest expense and the related right of use asset is depreciated against net income on a straight-line basis. As interest and depreciation are excluded from Adjusted EBITDAS (refer to Non-GAAP measurements), Adjusted EBITDAS for the three months ended June 30, 2019was higher in comparison to 2018 in the amount of $800. Previously this $800was classified as rent expense (being $662in COS amounts and $138in SG&A amounts).
| | | | | | | Revenues | 2019 | 2018 | | | | Canada | $ | 3,651 | $ | 4,465 | | United States | 28,899 | 30,508 | | | | Total | $ | 32,550 | $ | 34,973 |
Revenues2019 Q2 revenues were $32,550, which represented a decrease of $2,423or 7% from 2018 Q2 revenues of $34,973.
Canadian revenues (excluding motor rental revenues) decreased to $2,911in 2019 Q2 from $3,396in 2018 Q2; a 14% decrease. This decrease was the result of: i) a 7% decrease in activity days to 375 in 2019 Q2 from 404 in 2018 Q2 and ii) an 8% decrease in the average day rate to $7,763in 2019 Q2 from $8,406in 2018 Q2.
The average active land rig count in Canadawas down 21% in 2019 Q2 compared to 2018 Q2 (source: Baker Hughes). Cathedral's activity days were down 7%. The decrease in day rates was due to a reduction in base rates related to market pressures.
U.S. revenues (excluding motor rental revenues) decreased 4% to $28,544in 2019 Q2 from $29,832in 2018 Q2. This decrease was the net result of: i) a 22% decrease in activity days to 2,013 in 2019 Q2 from 2,573 in 2018 Q2; net of ii) a 22% increase in the average day rate to $14,180in 2019 Q2 from $11,594in 2018 Q2 (when converted to Canadian dollars). 2018 Q2 had specific one-time credits related to performance issues with certain U.S. clients which reduced the day rate by $501CAD.
The average active land rig count for the U.S. was down 4% in 2019 Q2 compared to 2018 Q2 (source: Baker Hughes). The Company experienced an 22% decline in activity days resulting in a decrease in market share compared to 2018 Q2. This decline was related to reductions in client's drilling programs to stay within their cash flow as well as some operational issues. Day rates in USD increased 18% to $10,595 USDin 2019 Q2 from $8,969 USDin 2018 Q2. In addition to the customer credits discussed above that reduced the 2018 Q2 rate, the 2019 Q2 rate is up due to premiums on certain high performance motors and increase in revenues from providing Rotary Steerable System ("RSS") services which are rented from a 3rdparty.
Motor rentals decreased in both Canadaand U.S. Combined rental revenues decreased to $1,096in 2019 compared to $1,746a 37% decrease. The reduction is related to changes in rental customers drilling programs.
Gross margin and adjusted gross margin Gross margin for 2019 Q2 was -5% compared to -6% in 2018 Q2. Adjusted gross margin (see Non-GAAP Measurements) for 2019 Q2 was $3,249or 10% compared to $631or 2% for 2018 Q2.
Adjusted gross margin, as a percentage of revenue, increased due to higher revenue day rates as 2018 Q2 had negative impact of customer credits. Additionally, repairs were down significantly from 2018 Q2.
Depreciation of equipment allocated to cost of sales increased to $4,976in 2019 Q2 from $2,573in 2018 Q2 due to changes in estimate of useful life made effective October 1, 2018. Depreciation included in cost of sales as a percentage of revenue was 15% for 2019 Q2 and 7% in 2018 Q2.
Selling, general and administrative expenses ("SG&A")SG&A expenses were $3,031in 2019 Q2; a decrease of $676compared with $3,707in 2018 Q2. As a result of the implementation of IFRS 16 there was a decrease of $138related to amounts previously classified as rent, but currently classified as lease repayments and interest. Additionally, there were reductions in SG&A wages and related benefits and burdens. As a percentage of revenue, SG&A was 9% in 2019 Q2 compared to 11% in 2018 Q2.
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. Total technology group costs were $908in 2019 Q2; an increase of $49compared with $859in 2018 Q2. The portion of total technology group costs related to new product development was $269and this amount has been capitalized as intangible assets (2018 Q2 - $232). Technology group costs not related to new product development were $639in 2019 Q2; an increase of $12compared with $627in 2018 Q2. Technology group costs increased primarily due to wage increases.
Gain on disposal of equipmentDuring 2019 Q2, the Company had a gain on disposal of equipment of $757compared to $2,576in 2018 Q2. 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 2019 Q2, the Company received proceeds on lost-in-hole recoveries from clients of $919(2018 Q2 - $3,074).
Finance costs Finance costs consist of interest expenses on operating loans, long-term debt and bank charges of $139for 2019 Q2 versus $99for 2018 Q2. The change was due to increase in average debt levels outstanding in 2019 Q2.
Finance costs lease liability In 2019 Q2 there was $256related to IFRS 16 (2018 Q2 - $nil) (see discussion under "New and Future Accounting Policies").
Provision for settlementIn 2019 Q2, the Company made a settlement offer in respect of a wage and hour complaint (the "Complaint") that was filed against the Company's wholly owned U.S. subsidiary. The Complaint alleged that employees of the previously disposed Production Testing and Flowback division were entitled to recover unpaid or incorrectly calculated overtime wages under the Fair Labor Standards Act ("FLSA"). A settlement agreement is in the process of being finalized and requires court approval to be effective.
Foreign exchange The Company had a foreign exchange gain of $483in 2019 Q2 compared to a loss of $(392)in 2018 Q2 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 2019 Q2 foreign currency loss are unrealized gain of $516(2018 Q2 - loss of $401) related to intercompany balances.
Income taxIn 2018 Q4, Cathedral derecognized $13,059of deferred tax assets due to a recent history of tax losses within Cathedral's Canadian entity. As a result of this, for periods like 2019 Q2 where there are losses in the Canadian entity that are not recognized the effective tax rate is not meaningful. Income tax expense is booked based upon expected annualized rates using the statutory rates of 26.5% for Canadaand 23% for the U.S.
RESULTS OF OPERATIONS – SIX MONTHS ENDED JUNE 30
Adjusted EBITDAS for the six months ended June 30, 2019was higher in comparison to 2018 in the amount of $1,625as a result of IFRS 16 changes discussed previously. Previously this $1,625was classified as rent expense (being $1,345in COS amounts and $280in SG&A amounts).
| | | | | | | Revenues | 2019 | 2018 | | | | Canada | $ | 11,015 | $ | 15,102 | | United States | 58,777 | 60,028 | | | | Total | $ | 69,792 | $ | 75,130 |
Revenues2019 revenues were $69,792, which represented a decrease of $5,338or 7% from 2018 revenues of $75,130.
Canadian revenues (excluding motor rental revenues) decreased to $9,357in 2019 from $13,093in 2018; a 29% decrease. This decrease was the result of: i) a 25% decrease in activity days to 1,249 in 2019 from 1,676 in 2018 and ii) an 4% decrease in the average day rate to $7,492in 2019 from $7,812in 2018.
The average active land rig count in Canadawas down 32% in 2019 compared to 2018 (source: Baker Hughes). Cathedral's activity levels were down 25%. The decrease in day rates was due to a reduction in base rates related to market pressures.
U.S. revenues (excluding motor rental revenues) decreased 2% to $57,970in 2019 from $58,963in 2018. This decrease was the net result of: i) a 16% decrease in activity days to 4,282 in 2019 from 5,071 in 2018; net of ii) a 16% increase in the average day rate to $13,538in 2019 from $11,628in 2018 (when converted to Canadian dollars). 2018 had specific one-time credits related to performance issues with certain U.S. clients reduced the day rate by $254CAD.
The average active land rig count for the U.S. increased 1% in 2019 compared to 2018 (source: Baker Hughes). The Company experienced a 16% decline in activity days resulting in a decrease in market share compared to 2018. This decline was related to reductions in client's drilling programs to stay within their cash flow as well as some operational issues. Day rates in USD increased 12% to $10,150 USDin 2019 from $9,098 USDin 2018. In addition to the customer credits discussed above that reduced the 2018 rate, the 2019 rate is up due to premiums on certain high performance motors and increase in revenues from providing RSS services which are rented from a 3rdparty.
Motor rentals decreased in both Canadaand U.S. Combined rental revenues decreased to $2,465in 2019 compared to $3,073, a 20% decrease. The reduction is related to changes in rental customers drilling programs.
Gross margin and adjusted gross margin Gross margin for 2019 was -5% compared to 0% in 2018. Adjusted gross margin (see Non-GAAP Measurements) for 2019 was $5,845or 8% compared to $5,393or 7% for 2018.
Adjusted gross margin, as a percentage of revenue, increased due to higher revenue day rates as 2018 had negative impact of customer credits. Additionally, repairs were down significantly from 2018.
Depreciation of equipment allocated to cost of sales increased to $9,421in 2019 from $4,788in 2018 due to changes in estimate of useful life made effective October 1, 2018. Depreciation included in cost of sales as a percentage of revenue was 13% for 2019 and 6% in 2018.
Selling, general and administrative expenses ("SG&A")SG&A expenses were $6,886in 2019; a decrease of $648compared with $7,534in 2018. As a result of the implementation of IFRS 16 there was a decrease of $280related to amounts previously classified as rent, but currently classified as lease repayments and interest. Additionally, there were reductions in SG&A wages and related benefits and burdens. As a percentage of revenue, SG&A was 10% in 2019 compared to 10% in 2018.
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. Total technology group costs were $1,890in 2019; an increase of $201compared with $1,690in 2018. The portion of total technology group costs related to new product development was $499and this amount has been capitalized as intangible assets (2018 - $462). Technology group costs not related to new product development were $1,391in 2019; an increase of $163compared with $1,228in 2018. Technology group costs increased primarily due to wage increases.
Gain on disposal of equipmentDuring 2019, the Company had a gain on disposal of equipment of $3,550compared to $5,584in 2018. 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 2019, the Company received proceeds on lost-in-hole recoveries from clients of $4,881(2018 - $6,849).