ACT Energy Technologies Ltd. press release
Cathedral Energy Services Reports Results for 2020 Q2
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
CALGARY, AB, Aug. 13, 2020
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, AB, Aug. 13, 2020/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, 2020and 2019. 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 | | | | | | | | | 2020 | 2019 | 2020 | 2019 | | | | | | Revenues | $ | 8,841 | $ | 32,550 | $ | 28,136 | $ | 69,792 | | Adjusted gross margin % (1) | 4% | 10% | 9% | 8% | | | | | | Adjusted EBITDAS (1) | $ | (823) | $ | 479 | $ | 235 | $ | 2,353 | | Basic and diluted per share | $ | (0.02) | $ | 0.01 | $ | - | $ | 0.05 | | As % of revenues | -9% | 1% | 1% | 3% | | | | | | Cash flow - operating activities | $ | (641) | $ | (262) | $ | (2,584) | $ | (1,116) | | Loss from operating activities | $ | (4,720) | $ | (4,668) | $ | (9,146) | $ | (8,373) | | Basic per share | $ | (0.10) | $ | (0.09) | $ | (0.18) | $ | (0.17) | | Impairments and direct write-downs | $ | - | $ | - | $ | (6,994) | $ | - | | Loss | $ | (3,815) | $ | (5,342) | $ | (16,405) | $ | (8,966) | | Basic per share | $ | (0.08) | $ | (0.11) | $ | (0.33) | $ | (0.18) | | Equipment additions (recovery) - cash basis | $ | (86) | $ | 1,564 | $ | 769 | $ | 3,527 | | Weighted average shares outstanding | | | | | | | | | | Basic (000s) | 49,468 | 49,468 | 49,468 | 49,468 | | | | | | Diluted (000s) | 49,468 | 49,468 | 49,468 | 49,469 | | | | | | | | | | | | | | | | | | | June 30 | December 31 | | | | | | | | | 2020 | 2019 | | | | | | Working capital | | | $ | 18,261 | $ | 20,181 | | | | Total assets | | | $ | 83,346 | $ | 106,300 | | | | Loans and borrowings excluding current portion | | | $ | 5,935 | $ | 6,000 | | | | Shareholders' equity | | | $ | 53,864 | $ | 68,092 | | | | | | | | | | | | | | (1) Refer to "NON-GAAP MEASUREMENTS" | | | | | | | | |
2020 Q2 KEY TAKEAWAYS
Revenues decreased by $23,709or 73% from $32,550in 2019 Q2 to $8,841in 2020 Q2;
Adjusted gross margin decreased from 10% to 4% primarily due an increase in the fixed component of cost of sales on a percentage of revenue basis offset by lower field labour;
Total Adjusted EBITDAS decreased $1,302, from $479to $(823)in 2020 Q2 as a result of reduced revenues;
Net debt (secured revolving term loan less cash on hand) at end of 2020 Q2 was $1,170; and
The Company finalized an amendment to its credit facility to provide temporary covenant relief commencing 2020 Q2 and ending 2021 Q1.
COVID-19
In March 2020, the World Health Organization declared a global pandemic due to COVID-19. In response to the COVID-19 outbreak, governments around the world implemented measures to control the spread of the virus including closure of non-essential businesses and implementing travel bans and stay-at-home restrictions. These actions contributed to the material deterioration in global economy including a dramatic decline in demand for oil, which resulted in a material decrease in the price for oil. The decline in oil prices has negatively affected current and forecasted drilling activities in Cathedral's operating areas of U.S. and Canada. In response to the decline in oil prices, OPEC+ agreed to production reductions in April 2020and recently extended reductions to the end of July. In addition, North American oil and natural gas producers have shut-in production due to low oil prices. Recently governmental bodies have started to remove restrictions related to COVID-19 and gradually re-opening businesses. This has resulted in an increase in demand for crude oil and resulted in an improvement in world oil prices. Oil prices have improved significantly since the drop in early March 2020and are now in the $40 USDrange.
The Company has made significant changes to its cost structure including laying off staff, reducing compensation, closing facilities, eliminating discretionary expenses, deferring tool repairs and reducing capital expenditures, to better match our cost structure to expected operating levels. The collapse in oil prices has negatively affected our client's cash flows and, as a result, in certain situations resulted in slower collection of accounts receivable and increased risk related to potential non-payment. Subject to market conditions and actual results, it is possible that the Company will be required to enter into discussions with its lender to amend the revised covenants under its credit facility.
All of these developments could have a material adverse effect on Cathedral's business, financial condition, results of operations, cash flows, ability to collect on accounts receivable and future impairments of Company assets. The duration and extent of business interruption and the financial impact cannot be reasonably determined and if it continues for an extended period, it could negatively impact Cathedral's ability to continue ongoing operations.
OUTLOOK
The COVID-19 pandemic and its macroeconomic effects continue to provide for an uncertain outlook for the oilfield service industry. Operating rig activity in U.S. and Canadaremain at record lows and improvement is expected to be sluggish. Industry experts are forecasting 2020 Q3 to be the low in the U.S. active rig count with very modest improvements in activity levels are we progress through 2020 and into 2021. In Canada, the usual spring breakup related to weather turned into an economic breakup as oil prices did not warrant further drilling activity. Recently there has been an improvement in Canadian drilling rig activity but active rigs are down 66% on a year-over-year basis.
Operationally, our team has been executing on our _Better Performance Every Day_mantra and setting record drilling results for our clients. Those successes have and are expected to be, leveraged to attract new clients.
The significant adjustments to our fixed and variable cost structure that started at the tail end of Q1 continued into Q2 as we moved to better match our costs to expected operating levels. We continue to monitor our costs and are making further adjustments to our cost structure as warranted. In 2020 Q2, we recorded the benefit of $637from the CanadaEmergency Wage Subsidy ("CEWS") and Cathedral expects to apply and receive further benefits until the program expires. In 2020 Q3, we expect to finalize the portion of the U.S. Paycheck Protection Program ("PPP") that will be forgiven. We currently estimate that approximately 70% of the loan proceeds ($525 USD) may be forgiven, if the U.S. Treasury guidelines for forgiveness are met.
Cathedral's management team continues to focus on what it can control – cost structure, improving operational efficiencies, bringing new technologies to the market and strategic sales and marketing of our offerings.
2020 CAPITAL PROGRAM
During the six months ended June 30, 2020, the Company invested $769(2019 - $3,527) in equipment. The following table details the current period's net equipment additions:
| | Six months ended | | | | June 30, 2020 | | | Equipment additions: | | | | Motors | $ | 561 | | MWD | 181 | | | Other | 27 | | | Total cash additions | 769 | | | Less: proceeds on disposal of equipment | (1,786) | | | Net equipment additions (1) | $ | (1,017) | | (1) See "NON-GAAP MEASUREMENTS" | | |
Our 2020 capital plan will be modest and we expect our proceeds on disposal of equipment to exceed cash additions. Focus of 2020 capital plan will be motor power section additions for premium lines, addition of RapidFire MWD tools and mud lube bearing motor upgrades.
RESULTS OF OPERATIONS – THREE MONTHS ENDED JUNE 30
| Revenues | 2020 | 2019 | | | | Canada | $ | 1,130 | $ | 3,651 | | United States | 7,711 | 28,899 | | | | Total | $ | 8,841 | $ | 32,550 |
Revenues2020 Q2 revenues were $8,841, which represented a decrease of $23,709or 73% from 2019 Q2 revenues of $32,550.
Canadian revenues (excluding motor rental revenues) decreased to $570in 2020 Q2 from $2,911in 2019 Q2; an 80% decrease. This decrease was the result of: i) a 79% decrease in activity days to 79 in 2020 Q2 from 375 in 2019 Q2 and ii) a 7% decrease in the average day rate to $7,217in 2020 Q2 from $7,763in 2019 Q2.
There was a 70% year-over-year decline in the average active land rig count in Canada(source: Baker Hughes) which compares to Cathedral's activity decline of 80%. Due to Cathedral's client mix, our decline was greater than the general market decline. The decrease in day rates was due to a reduction in certain ancillary revenues.
U.S. revenues (excluding motor rental revenues) decreased 74% to $7,456in 2020 Q2 from $28,544in 2019 Q2. This decrease was the result of: i) a 69% decrease in activity days to 627 in 2020 Q2 from 2,013 in 2019 Q2; and ii) a 16% decrease in the average day rate to $11,892in 2020 Q2 from $14,180in 2019 Q2 (when converted to Canadian dollars).
The average active land rig count for the U.S. was down 67% in 2020 Q2 compared to 2019 Q2 (source: Baker Hughes). The Company experienced a 60% decline in activity days resulting in an increase in market share compared to 2019 Q2. Day rates in USD decreased 19% to $8,551 USDin 2020 Q2 from $10,595 USDin 2019 Q2. The 2020 Q2 rate is down due to a decrease in revenues from providing rotary steerable system (RSS) services which are rented from a 3rd party and a reduction in certain ancillary revenues.
Motor rentals decreased in both Canadaand the U.S. Combined rental revenues decreased to $815in 2020 Q2 compared to $1,096in 2019 Q2. The decrease is due to the decrease in drilling activity in 2020 Q2.
Government grantsThe Company recognized the benefit from the CanadaEmergency Wage Subsidy ("CEWS") program of $637(2019 - $nil) which reduced salary expenses as follows:
Cost of sales $261; Selling, general and administrative expenses $264; and Technology group expenses $112.
Gross margin and adjusted gross marginGross margin for 2020 Q2 was -36% compared to -5% in 2019 Q2. Adjusted gross margin (see Non-GAAP Measurements) for 2020 Q2 was $342or 4% compared to $3,249or 10% for 2019 Q2.
Adjusted gross margin, as a percentage of revenue, decreased due to the increase in the fixed component of cost of sales as a percentage of revenue (these costs decreased $2,960, but the total increased as percentage of revenues) offset slightly by lower field labour and inspection expense.
Depreciation of equipment allocated to cost of sales decreased to $3,540in 2020 Q2 from $4,976in 2019 Q2. Depreciation included in cost of sales as a percentage of revenue was 40% for 2020 Q2 and 15% in 2019 Q2.
Selling, general and administrative ("SG&A") expensesSG&A expenses were $1,814in 2020 Q2; a decrease of $1,296compared with $3,110in 2019 Q2. There were reductions in SG&A wages and related benefits and burdens due to a reduction in head count and wage rollbacks as well as decreases in almost all categories of expenses due to efforts to reduce spending. As a percentage of revenue, SG&A was 21% in 2020 Q2 compared to 10% in 2019 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.
Technology group expenses were $205in 2020 Q2; a decrease of $355compared with $560in 2019 Q2. The portion of total technology group costs related to new product development in 2019 Q2 was $269and this amount has been capitalized as intangible assets (2020 Q2 - $nil). In light of the current market, Cathedral has consolidated its MWD repairs and, as part of this realignment, combined our Technology Group and MWD repair department. This has resulted in a reduction in overall head count of the combined group and will result in limited new product development in the near term.
Gain on disposal of equipmentDuring 2020 Q2, the Company had a gain on disposal of equipment of $515compared to $757in 2019 Q2. These gains mainly related 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 2020 Q2, the Company received proceeds on disposal of equipment of $610(2019 Q2 - $919).
Finance costsFinance costs consist of interest expenses on operating loans, long-term debt and bank charges of $89for 2020 Q2 versus $139for 2019 Q2.
Finance costs lease liabilityThe lease liability interest decreased slightly to $239from $256.
Foreign exchangeThe Company had a foreign exchange gain of $1,107in 2020 Q2 compared to a gain of $483in 2019 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 2020 Q2 foreign currency loss are unrealized gain of $1,104(2019 Q2 - gain of $516) related to intercompany balances.
Income taxIn 2019 Q2, 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, where there are losses in the Canadian entity that are not recognized as deferred taxes the effective tax rate is not meaningful. Income tax expense is booked based upon expected annualized rates using the statutory rates of 25.5% for Canadaand 23% for the U.S.
RESULTS OF OPERATIONS – SIX MONTHS ENDED JUNE 30
| Revenues | 2020 | 2019 | | | | Canada | $ | 8,466 | $ | 11,015 | | United States | 19,670 | 58,777 | | | | Total | $ | 28,136 | $ | 69,792 |
Revenues2020 revenues were $28,136, which represented a decrease of $41,656or 60% from 2019 revenues of $69,792.
Canadian revenues (excluding motor rental revenues) decreased to $6,515in 2020 from $9,357in 2019; a 30% decrease. This decrease was the result of: i) a 29% decrease in activity days to 889 in 2020 from 1,249 in 2019 and ii) a 2% decrease in the average day rate to $7,329in 2020 from $7,492in 2019.
There was a 14% year-over-year decline in the average active land rig count in Canada(source: Baker Hughes) which compares to Cathedral's activity decline of 29%. Due to Cathedral's client mix, our decline was greater than the general market decline. The decrease in day rates was due to a reduction in certain ancillary revenues.
U.S. revenues (excluding motor rental revenues) decreased 67% to $19,160in 2020 from $57,970in 2019. This decrease was the result of: i) a 65% decrease in activity days to 1,492 in 2020 from 4,282 in 2019; and ii) a 5% decrease in the average day rate to $12,842in 2020 from $13,538in 2019 (when converted to Canadian dollars).
The average active land rig count for the U.S. was down 41% in 2020 compared to 2019 (source: Baker Hughes). The Company experienced a 65% decline in activity days resulting in an increase in market share compared to 2019. Day rates in USD decreased 7% to $9,437 USDin 2020 from $10,150 USDin 2019. The 2020 rate is down due to a decrease in revenues from reduction in certain ancillary revenues and change in client mix.
Motor rentals increased in Canadabut decreased in the U.S. Combined rental revenues decreased very slightly to $2,460in 2020 compared to $2,465in 2019.
Government grantsThe Company recognized the benefit from the CEWS program of $637(2019 - $nil) which reduced salary expenses as follows:
Cost of sales $261; Selling, general and administrative expenses $264; and Technology group expenses $112.
Gross margin and adjusted gross marginGross margin for 2020 was -19% compared to -5% in 2019. Adjusted gross margin (see Non-GAAP Measurements) for 2020 was $2,649or 9% compared to $5,845or 8% for 2019.
Adjusted gross margin, as a percentage of revenue, increased due to decrease in repairs, field labour and inspection expenses offset by the increase in the fixed component of cost of sales as a percentage of revenue (these costs decreased $4,706, but the total increased as percentage of revenues).
Depreciation of equipment allocated to cost of sales decreased to $7,916in 2020 from $9,421in 2019. Depreciation included in cost of sales as a percentage of revenue was 28% for 2020 and 13% in 2019.
Selling, general and administrative ("SG&A") expensesSG&A expenses were $4,624in 2020; a decrease of $2,418compared with $7,042in 2019. There were reductions in SG&A wages and related benefits and burdens due to a reduction in head count and wage rollbacks as well as decreases in almost all categories of expenses due to efforts to reduce spending. As a percentage of revenue, SG&A was 16% in 2020 compared to 10% in 2019.
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 $735in 2020; a decrease of $500compared with $1,235in 2019. The portion of total technology group costs related to new product development in 2020 was $195and this amount has been capitalized as intangible assets (2019 - $499). In light of the current market, Cathedral has consolidated its MWD repairs and, as part of this realignment, combined our Technology Group and MWD repair department. This has resulted in a reduction in overall head count of the combined group and will result in limited new product development in the near term.
Gain on disposal of equipmentDuring 2020, the Company had a gain on disposal of equipment of $1,519compared to $3,550in 2019. These gains mainly related 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 2020, the Company received proceeds on disposal of equipment of $1,786(2019 - $4,881).
Finance costsFinance costs consist of interest expenses on operating loans, long-term debt and bank charges of $118for 2020 versus $282for 2019.
Finance costs lease liabilityThe lease liability interest decreased slightly to $477from $518.
Provision for settlementIn 2019, the Company made a settlement 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.
Foreign exchangeThe Company had a foreign exchange loss of $1,329in 2020 compared to a gain of $1,025in 2019 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 2020 foreign currency loss are unrealized loss of $1,360(2019 - gain of $1,043) related to intercompany balances.