ACT Energy Technologies Ltd. press release
Cathedral Energy Services Reports Results for 2019 Q1
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
CALGARY, May 9, 2019
_/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA_/
CALGARY, May 9, 2019/CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" / TSX: CET) announces its consolidated financial results for the three months ended March 31, 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 March 31 | | | | | | 2019 | 2018 | | | | Revenues | $ | 37,242 | $ | 40,157 | | Adjusted gross margin % (1) | 7% | 12% | | | | Adjusted EBITDAS(1) | $ | 1,874 | $ | 3,443 | | Diluted per share | $ | 0.04 | $ | 0.07 | | As % of revenues | 5% | 9% | | | | Cash flow - operating activities | $ | (854) | $ | 2,132 | | Earnings (loss) before income taxes | $ | (3,568) | $ | 345 | | Basic and diluted per share | $ | (0.07) | $ | 0.01 | | Net earnings (loss) | $ | (3,624) | $ | 294 | | Basic and diluted per share | $ | (0.07) | $ | 0.01 | | Equipment additions - cash basis | $ | 1,963 | $ | 4,474 | | Weighted average shares outstanding | | | | | | Basic (000s) | 49,468 | 49,401 | | | | Diluted (000s) | 49,469 | 49,586 | | | | | | | | | | | March 31 | December 31 | | | | | 2019 | 2018 | | | | Working capital | $ | 27,554 | $ | 30,599 | | Total assets | $ | 133,393 | $ | 121,770 | | Loans and borrowings excluding current portion | $ | 7,000 | $ | 7,000 | | Shareholders' equity | $ | 84,622 | $ | 89,143 | | | | | | | | (1) Refer to "NON-GAAP MEASUREMENTS" | | | | |
2019 Q1 KEY TAKEAWAYS
Revenues decreased 7% from $40,157in 2018 Q1 to $37,242in 2019 Q1 with the decline attributed to Canadian operations which were expected.
Adjusted gross margin decreased to 7% from 12% in 2018 Q1. This decline was primarily attributed to higher equipment rentals, field labour, trucking and repairs.
Adjusted EBITDAS decreased 46% from $3,443in 2018 Q1 to $1,874in 2019 Q1. Adjusted EBITDAS margin decreased to 5% of revenues in 2019 Q1 from 9% in 2018 Q1.
Reorganized management within our U.S. business unit.
Mud lube version of our nDuranceTMmud motor bearing section has been commercialized in 2 sizes.
OUTLOOK
On a quarter-over-quarter basis, 2019 Q1 U.S. rig activity was down 3% and there are mixed views for activity levels for the balance of 2019. Take away issues in the Permian are expected to be resolved in late 2019 and into 2020. The U.S. market is expected to continue to grow its overall production and that will require an increase in oilfield services spending, including services provided by Cathedral. Industry analysts are cautiously optimistic of improved Canadian drilling activity in H2 of 2019 (in comparison to 2019 Q1 activity levels) and this coincides with post breakup work awarded to Cathedral and discussions with clients. Despite an improvement in WTI and a narrowing of WCS differential in 2019 Q1, producers have not made significant upward adjustments to their capital programs for 2019. Investors are messaging to producers that they need to live within their cash flow and use free cash flow to pay down debt as well as returning value to shareholder by way of repurchasing shares and implementing or increasing dividends.
Cathedral's senior management is disappointed with the quarterly financial results and execution within our U.S. operations. In response to these issues, we have appointed our Canadian Operations Manager, Clayton Lagore, to lead our U.S. business unit replacing both the previous Operations Manager and Sales Manager. Clayton's background has provided him with extensive knowledge of the drilling industry and general business acumen. Clayton joined Cathedral in 2006 and was appointed Canadian Operations Manager in 2008. Prior to joining Cathedral, Clayton worked with major oilfield service companies and owned and operated a number of independent directional drilling businesses which he and his teams built up and sold to larger entities. Clayton has relinquished his responsibilities for the Canadian business unit and Randy Pustanyk, our EVP, will oversee the Canadian business unit. The Company has taken advantage of certain U.S. staff departures to re-assign existing staff and this will result in a material reduction in overhead. We are expecting improved financial results for our U.S. business unit in the back half of 2019. The U.S. market is our primary focus and our intention is to continue to grow our market share.
Testing of our mud lube version of our nDurance™ bearing section has been very successful and this has resulted in Cathedral commercializing our mud lube bearing section in 2 sizes. Introducing a mud lube bearing assembly, in addition to our sealed bearing design, is aimed at increasing reliability and reducing operating costs in specific applications (Permian, Eagleford and Haynesville) where downhole temperatures are higher and which negatively impacts performance of traditional oil seal bearing designs. The Company will be able to modify existing assets, at a minimal cost, to build out quantities as required, negating the need for significant capital investment.
Our patented "Double Bend" and "Double Pad" motor designs are currently in field testing. Both motor designs are based upon substantially the same principles and are 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. The ability to drill longer laterals with a conventional BHA is expected to result in significant savings to Cathedral's clients. We have a number of U.S. operators that are interested in testing this new technology and we will continue to seek additional testing opportunities.
With regard to MWD technology, we continue to be on track to introduce our next generation FUSION(tm) 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 Q2 and Q3.
On behalf of Management and the Board of Directors, we would like to thank Jay Zammitfor his contributions to Cathedral over the past twenty years. Commencing with Cathedral as private company, Jay has contributed his experience and sage advice over these many years. Jay began his association as a securities lawyer and then in 2003 joined the Board of Directors. After over two decades of service, Jay has made the decision to reduce his work load, pursue personal interests and thus is retiring from the Cathedral board. Management and the Board of Directors would like to take a moment to thank Jay for all he has done as a member of the board including his role on various committees. His contributions will be missed.
2019 CAPITAL PROGRAM
During the three months ended March 31, 2019, the Company invested $1,963(2018 - $4,474) in equipment. The following table details the current period's net equipment additions:
| | | | | | Three months ended | | | | March 31, 2019 | | | Equipment additions: | | | | Motors | $ | 965 | | MWD | 930 | | | Other | 68 | | | Total cash additions | 1,963 | | | Less: proceeds on disposal of equipment (excluding capital lease settlements) | (3,962) | | | Net equipment additions (1) | $ | (1,999) | | (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. 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 MARCH 31
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 ("SGA") 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 2019 was higher in comparison to 2018 in the amount of $825. Previously this $825was classified as rent expense (being $683in COS amounts and $142in SGA amounts).
| | | | | | | | | | | Revenues | | | | | 2019 | 2018 | | | | Canada | | | | | $ | 7,364 | $ | 10,637 | | United States | | | | | 29,878 | 29,520 | | | | Total | | | | | $ | 37,242 | $ | 40,157 |
Revenues2019 Q1 revenues were $37,242, which represented a decrease of $2,915or 7% from 2018 Q1 revenues of $40,157.
Canadian revenues (excluding motor rental revenues) decreased to $6,446in 2019 Q1 from $9,698in 2018 Q1; a 34% decrease. This decrease was the result of: i) a 31% decrease in activity days to 874 in 2019 Q1 from 1,272 in 2018 Q1 and ii) an 3% decrease in the average day rate to $7,375in 2019 Q1 from $7,624in 2018 Q1.
The average active land rig count in Canadawas down 37% in 2019 Q1 compared to 2018 Q1 (source: Baker Hughes). Cathedral's activity levels were roughly in line with this decline. The decrease in day rates was due to a reduction in equipment damage recoveries and lower net base rate related to market pressures.
U.S. revenues (excluding motor rental revenues) increased slightly to $29,426in 2019 Q1 from $29,131in 2018 Q1; a 1% increase. This increase was the net result of: i) a 9% decrease in activity days to 2,269 in 2019 Q1 from 2,498 in 2018 Q1; and ii) an 11% increase in the average day rate to $12,969in 2019 Q1 from $11,662in 2018 Q1 (when converted to Canadian dollars).
The average active land rig count for the U.S. was up 9% in 2019 Q1 compared to 2018 Q1 (source: Baker Hughes). The Company experienced a decline in activity days resulting in a decrease in market share compared to 2018 Q1. These declines were 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 6% to $9,756 USDin 2019 Q1 from $9,231 USDin 2018 Q1 due to increase in recoveries of 3rdparty equipment rentals from clients.
Motor rentals in Canadadeclined slightly while U.S. rentals increased. Combined rental revenues increased to $1,370in 2019 compared to $1,328a 3% increase.
Gross margin and adjusted gross margin Gross margin for 2019 Q1 was negative compared to 6% in 2018 Q1. Adjusted gross margin (see Non-GAAP Measurements) for 2019 Q1 was $2,596or 7% compared to $4,762or 12% for 2018 Q1.
Adjusted gross margin, as a percentage of revenue, decreased due to higher equipment rentals, field labour, trucking and repairs. The field labour increased due to industry pressures to retain staff. Rentals increased primarily due to rental of RSS (rotary steerable systems), most of which was rebilled to customers as discussed previously in U.S. day rate section.
Depreciation of equipment allocated to cost of sales increased to $4,445in 2019 Q1 from $2,215in 2018 Q1 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 12% for 2019 Q1 and 6% in 2018 Q1.
Selling, general and administrative expenses ("SG&A")SG&A expenses were $3,855in 2019 Q1; an increase of $28compared with $3,827in 2018 Q1. As a result of the implementation of IFRS 16 there was a decrease of $142related to amounts previously classified as rent, but currently classified as lease repayments and interest. Depreciation increased $672on the related right of use assets set up under IFRS 16.
Additionally, there were reductions in SG&A wages and related benefits and burdens. As a percentage of revenue, SG&A was 10% in 2019 Q1 compared to 10% in 2018 Q1.
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 $982in 2019 Q1; an increase of $151compared with $831in 2018 Q1. The portion of total technology group costs related to new product development was $230and this amount has been capitalized as intangible assets (2018 Q1 - $230). Technology group costs not related to new product development were $752in 2019 Q1; an increase of $151compared with $601in 2018 Q1. Technology group costs increased primarily due to wage increases.
Gain on disposal of equipmentDuring 2019 Q1, the Company had a gain on disposal of equipment of $2,793compared to $3,008in 2018 Q1. 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 Q1, the Company received proceeds on lost-in-hole recoveries from clients of $3,962(2018 Q1 - $3,775).
Finance costs Finance costs consist of interest expenses on operating loans, long-term debt and bank charges of $143for 2019 Q1 versus $45for 2018 Q1. The change was due to increase in average debt levels outstanding in 2019 Q1.
Finance costs lease liability Beginning in 2019 Q1, there was $262related to IFRS 16 (2018 Q1 - $nil) (see discussion under "New and Future Accounting Policies").
Foreign exchange The Company had a foreign exchange gain of $542in 2019 Q1 compared to a loss of $(697)in 2018 Q1 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 Q1 foreign currency loss are unrealized gain of $527(2018 Q1 - loss of $669) 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 Q1 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 effective rates based upon the statutory rates of 27% for Canadaand 23% for the U.S.
LIQUIDITY AND CAPITAL RESOURCES
OverviewOn an annualized basis, the Company's principal source of liquidity is cash generated from operations and proceeds from equipment lost-in-hole. In addition, the Company has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity. Cash flow - operating activities in 2019 Q1 decreased to a loss of $(854)from $2,132in 2018 Q1. This decrease was primarily due to decreased net earnings and the positive impact of changes in working capital in 2018 Q1. This use of cash reduced the Company's cash balances.
Working capitalAt March 31, 2019the Company had working capital of $27,554(December 31, 2018- $30,599). $2,048of the decrease in working capital relates to increase in current portion of lease liabilities due to the adoption of IFRS 16.
Credit facility The Company's credit facility (the "Facility") consists of a $5 millionoperating facility and a $15 millionextendible revolving credit facility and expires December 31, 2020. The Facility is secured by a general security agreement over all present and future personal property. The Facility provides a definition of EBITDA ("Credit Agreement EBITDA") to be used in calculation of financial covenants.
The financial covenants associated with the amended Facility are:
Consolidated funded debt to consolidated Credit Agreement EBITDA ratio shall not exceed 3.0:1; and Consolidated interest coverage ratio shall not be less than 2.5:1.
The Facility bears interest at the financial institution's prime rate plus 0.75% to 2.25% or bankers' acceptance rate plus 1.75% to 3.00% with interest payable monthly. Interest rate spreads for the Facility depend on the level of funded debt compared to the 12 month trailing Credit Agreement EBITDA. The Facility provides a means to lock in a portion of the debt at interest rates through bankers' acceptance ("BA") based on the interest rate spread on the date the BA was entered into.
Compliance with Facility covenants
Based on current available information, Cathedral expects to comply with all covenants for the next twelve months.
At March 31, 2019, the Company had drawn $7,000of its revolving credit facility, $nil of its operating facility and had $5,036in cash. At March 31, 2019, the Company had consolidated funded debt of $2,804which includes five outstanding letters of credit ("LOC") which are included in the funded debt calculation. For the trailing twelve months ended March 31, 2019, Credit Agreement EBITDA was $12,357.
The calculation of the financial covenants under the Facility as at March 31, 2019is as follows:
| Covenant | Actual Ratio | Required Ratio | | Consolidated funded debt to consolidated Credit Agreement EBITDA ratio | 0.2:1 | 3.0:1 (maximum) | | Consolidated interest coverage ratio | 22.8:1 | 2.5:1 (minimum) |
Contractual obligationsIn the normal course of business, the Company incurs contractual obligations and those obligations are disclosed in the Company's annual financial statements for the year ended December 31, 2018.
As at March 31, 2019, the Company's commitment to purchase equipment is approximately $762. Cathedral anticipates expending these funds in 2019 Q2 and Q3.
The Company has issued the following five LOC:
two securing rent payments on property leases and renew annually with the landlords. The first LOC is $700CAD for the first ten years of the lease and then reduces to $500for the last five years of the lease. The second LOC is currently for $542 USDand increases annually based upon annual changes in rent; $75 USDissued for U.S. workers compensation coverage; and two securing the Company's corporate credit cards in the amounts of $75CAD and $175 USD.
Share capitalAt May 9, 2019, the Company has 49,468,117 common shares and 2,959,500 options outstanding with a weighted average exercise price of $1.03.
NEW AND FUTURE ACCOUNTING POLICIES
i) The Company has adopted IFRS 16 Leases ("IFRS 16") effective January 1, 2019.
The Company utilized the modified retrospective approach in application of the standard. This resulted in the recognition of a lease liability and a corresponding recognition of a right-of-use asset. The Company has chosen to recognize the right-of-use asset on January 1, 2019at a value equal to the related liability of the lease. The Company also used the exemption for any capital leases recognized prior to January 1, 2019under the previous standards and to only apply IFRS 16 to contracts that were previously identified as leases. As such, the Company did not apply the standard to any contracts not previously identified as containing a lease. Exemptions were utilized for short-term leases where the term is 12 months or less and for leases of low value items. As well, the classification of cash flows were impacted as the presentation of operating lease payments previously shown as operating cash flows will be split into financing (principal portion) and financing (interest portion) cash flows under IFRS 1616.