ACT Energy Technologies Ltd. press release
CATHEDRAL ENERGY SERVICES CONSOLIDATION STRATEGY PRODUCES RECORD THIRD QUARTER RESULTS
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA /
CALGARY, AB , Nov. 14, 2022 /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, 2022 and 2021.
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. This news release contains references to Adjusted gross margin (gross margin plus non-cash items of depreciation and share-based compensation), Adjusted gross margin % (adjusted gross margin divided by revenues) and Adjusted EBITDA (earnings before finance costs, unrealized foreign exchange on intercompany balances, taxes, depreciation, non-recurring costs (including acquisition and restructuring costs and non-cash provision for bad debts), write-down of equipment, write-down of inventory and share-based compensation). These terms do not have standardized meanings prescribed under International Financial Reporting Standards (IFRS) and may not be comparable to similar measures used by other companies, see "Non-GAAP Measures" 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 | | | | | | | | | | 2022 | | 2021 | % change | | 2022 | | 2021 | | % change | | Revenues | $ | 107,846 | $ | 20,127 | 436 % | $ | 169,883 | $ | 38,814 | | 338 % | | Adjusted gross margin % (1) | | 31 % | | 27 % | | | 29 % | | 19 % | | | | Adjusted EBITDAS (1) | $ | 28,065 | $ | 5,433 | 417 % | $ | 37,903 | $ | 3,365 | | 1026 % | | Cash flow - operating activities | $ | 5,481 | $ | (1,800) | n/m | $ | 8,234 | $ | (4,100) | | n/m | | Free cash flow (1) | $ | 22,870 | $ | 4,169 | 449 % | $ | 25,390 | $ | 827 | | 2970 % | | Income (loss) from operating activities | $ | 15,397 | $ | 1,708 | 801 % | $ | 15,923 | $ | (5,935) | | n/m | | Basic and diluted per share | $ | 0.08 | $ | 0.02 | 300 % | $ | 0.11 | $ | (0.10) | | n/m | | Net income (loss) | $ | 8,658 | $ | 403 | 2048 % | $ | 8,077 | $ | (7,529) | | n/m | | Basic and diluted per share | $ | 0.04 | $ | 0.01 | 300 % | $ | 0.06 | $ | (0.13) | | n/m | | Equipment additions | $ | (7,730) | $ | (1,471) | 425 % | $ | (17,252) | $ | (2,799) | | 516 % | | Weighted average shares outstanding | | | | | | | | | | | | | Basic (000s) | | 197,085 | | 74,425 | | | 142,727 | | 59,920 | | | | Diluted (000s) | | 199,163 | | 75,359 | | | 145,158 | | 60,420 | | | | | | | | | | | | | September 30 | | December 31 | | | | | | | | | | | 2022 | | 2021 | | Working capital | | | | | | | | $ | 35,528 | $ | 14,117 | | Total assets | | | | | | | | $ | 336,429 | $ | 75,423 | | Loans and borrowings | | | | | | | | $ | 89,593 | $ | 6,035 | | Shareholders' equity | | | | | | | | $ | 139,701 | $ | 42,504 | | (1) Refer to "NON-GAAP MEASUREMENTS" | | | | | | | | | | | | | "n/m" = not meaningful | | | | | | | | | | | | | | | | | | | | | | | | |
2022 Q3 KEY TAKEAWAYS
Consolidated revenue of $107,846 is the highest quarterly revenue in the Corporation's history. Adjusted EBITDAS also posted a new record for any quarter in Cathedral's 24-year history, reaching $28,065 . 2022 Q3 achieved net income of $8,658 compared to $403 in 2021 Q3. Net income margin (net income divided by revenues) was over 10% for the first time in over six years. Highest level of quarterly revenue on record for the Canadian division. The highest level of revenue ever generated by the Company's US division. The Corporation generated free cash flow (see non-GAAP measurements) of $22,870 in the quarter. Cathedral significantly increased its North American footprint and cemented one of the top positions in market share for the onshore US directional drilling market with the acquisition of Altitude Energy Partners for $131,712 . Canadian directional drilling market share averaged 24.3% in 2022 Q3 vs. 17.7% one year ago. U.S. directional drilling market share grew to 6.5% in the quarter due to the AEP acquisition. As a result of the AEP acquisition, the Company closed July 2022 with loans and borrows less cash of $91,180 which has subsequently been reduced to $81,786 by September 30, 2022 . With a constructive outlook for 2023, the board has approved a preliminary net capex budget of $35,000 which will enable advance orders of strategic equipment. Subsequent to 2022 Q2, Cathedral furthered its consolidation strategy and announced the formation of a Marketing and Technology Alliance and acquisition of the operating assets and personnel of Ensign Energy Services' directional drilling business. The Marketing and Technology Alliance further differentiates Cathedral and represents a key alliance with a second major North American drilling contractor. A strengthened US dollar also positively impacted results during the third quarter.
PRESIDENT'S MESSAGE
Comments from President & CEO Tom Connors :
Since March of 2021, we have executed on our strategy of size and scale, focused on downhole directional drilling services and our proprietary technology rental product offering. Through September 2022 , we have closed 6 transactions with a 7 th transaction in October of 2022. These transactions have consolidated the industry, resulted in financial synergies, improved financial performance due to greater size and scale as well as strengthened our executive, management and operational team. We continue to be constructive on further execution of our strategy, focused on consolidation opportunities, technology development, and internal growth.
The third quarter of 2022 was a transformational one for the Company on both sides of the Canada -US border. Financial results are now starting to reflect the power of the combination of companies and people we have brought together. Revenue and Adjusted EBITDAS both hit new all-time records for Cathedral and that is before a full quarter of contribution from the Altitude acquisition in July and the acquisition of Ensign Energy Services Inc. ("Ensign") Canadian directional drilling business unit in October of 2022.
Our CAD $131,712 acquisition of Altitude Energy Partners, which closed on July 13, 2022 , vaulted Cathedral into the position of being one of the largest independent directional drilling companies in the US. Altitude gives Cathedral roughly 9% market share in the Permian – considered widely to be one of the world's most important areas for oil and gas development. Altitude becomes the new US brand and platform for Cathedral's directional drilling business in the US alongside our US high-performance mud motor technology rental business – Discovery Downhole Services. The purchase of Altitude continued the now 15-month history by Cathedral of targeting and executing accretive, strategic acquisitions. Altitude was the sixth acquisition since July 2021 , with each one adding key pieces of regional or national market share, people and technology to make Cathedral a formidable North American technology and service company in the directional space. Altitude also gives Cathedral a sizable platform in the US Rockies as well as immediate entry into the important Haynesville natural gas play – one that will be a chief supply area for the massive build-out of US LNG. Altitude has a strong leadership team, excellent market penetration with its RSS offering and the ability to generate substantial free cash flow going forward. The valuations were in line with our previous acquisitions and we are already witnessing the accretive nature of the transaction with an excellent performance in our first quarter together.
Cathedral continued its testing of the D-Tech RSS (rotary steerable system) tool in Canada and drilled a number of successful wells. We are currently evaluating the next phase of expansion of our RSS technology in Canada . In the US, Altitude's 16 Orbit RSS tools continue to drive performance for our customers and represent a significant mix of our US revenue and increased overall revenue rates on a per day basis. We expect Cathedral's service and technology offering will continue to differentiate itself in the North American directional market.
With increased size and scale and corresponding free cash flow we anticipate being able to fund capex and further differentiate ourselves in the market with the expansion of our technology platforms and make significant progress towards further reducing our debt levels in Q4 2022 and through 2023. The board has approved a preliminary net capital expenditures budget of $35,000 for 2023 which will allow for advanced orders of strategic equipment in anticipation of continued strong demand.
In the beginning of the fourth quarter 2022, we completed another transaction and added a complementary customer base with the acquisition of the Canadian directional drilling assets of another major land driller, Ensign Energy Services Inc. In this transaction, we added some operating capacity with the addition of assets and welcomed into Cathedral some experienced key personnel. Similar to our previous acquisition of Precision's directional drilling business, Ensign's Canadian directional drilling business unit forms an excellent addition to Cathedral's existing platform and should help propel our market share in Canada above 25%. We are particularly excited about the quality of people we are gaining as well as a customer list, which is substantially additive to our own. We have also signed a Marketing and Technology alliance with Ensign that will help us build our client base and collaborate together on technology that supports the continuous improvement of drilling performance through Auto-Assisted drilling.
With the recent acquisition, we now have two strategic Marketing and Technology Alliances with both Precision Drilling and Ensign. These alliances are contributing to revenue growth, integration of directional drilling services with drill rig services, improved drilling performance, and reducing field labour costs.
Although we have been very busy in 2021 and 2022 and grown considerably, management believes that the Company still has considerable runway to build out a much larger North American technology business that has directional drilling as its core. We remained focused on our strategy and excited about the opportunity grow Cathedral into one of North America's pre-eminent directional drilling contractors.
2022 ACQUISITIONS
The purchase price allocation related to the acquisition is preliminary and may be subject to adjustments, which may be material, pending completion of final valuations. In a business combination, it generally takes time to obtain the information necessary to measure fair values of assets acquired and liabilities assumed. Changes in the provisional measurement s of assets and liabilities acquired may be recorded as part of the purchase price allocation as new information is obtained, until the final measurements are determined no later than 12 months after the acquisition date. The Company is still in the process of identifying the assets acquired and liabilities assumed and assessing the fair value allocations relating to the inventory and intangible and capital assets acquired. Fair value is estimated using the latest available information as at the date of the financial statements. As a result, these preliminary allocations may change.
A summary of the acquisitions for the year are as follows:
| | | Discovery | | Compass | | LEXA | | Altitude | | Total | | Consideration: | | | | | | | | | | | | Cash | $ | 18,160 | $ | 4,000 | $ | - | $ | 87,245 | $ | 109,405 | | Common shares | | 2,732 | | 4,315 | | 1,117 | | 36,867 | | 45,031 | | Lease liabilities assumed | | 1,579 | | 240 | | - | | 2,354 | | 4,173 | | Deferred tax liabilities assumed | | - | | 647 | | 109 | | 5,245 | | 6,001 | | Total consideration | $ | 22,471 | $ | 9,202 | $ | 1,226 | $ | 131,711 | $ | 164,610 | | Allocation of purchase price | | | | | | | | | | | | Working capital | $ | 3,283 | $ | 444 | $ | 250 | $ | 13,568 | $ | 17,545 | | Equipment | | 17,609 | | 8,518 | | - | | 45,393 | | 71,520 | | Right of use assets | | 1,579 | | 240 | | - | | 2,354 | | 4,173 | | Intangibles | | - | | - | | 976 | | 34,433 | | 35,409 | | Goodwill | | - | | - | | - | | 35,963 | | 35,963 | | Total | $ | 22,471 | $ | 9,202 | $ | 1,226 | $ | 131,711 | $ | 164,610 | | | | | | | | | | | | |
LEXA Drilling Technologies Inc.
The Company purchased the shares of LEXA Drilling Technologies Inc. ("LEXA"), a Calgary -based, downhole technology company for equity consideration in Cathedral. LEXA is focused on the development and commercialization of high data rate positive pulse MWD technology. They are also focused on developing technology that enhances and enables drilling automation through remote downhole directional equipment. The addition of high-performance pulse technology to Cathedral's industry leading electromagnetic technology will further strengthen the performance of Cathedral's existing MWD platform. As part of the transaction, Mr. Axel Schmidt has joined Cathedral as Senior Vice President, Engineering and Technology while Mr. Chad Robinson has joined as Chief Financial Officer. LEXA also brings an experienced engineering and development team.
On June 20, 2022 , the Company acquired 90.98% of the shares of LEXA, its technology and products in development, Cathedral issued 1,612,891 common shares, which are subject to a four-month hold period. On July 19, 2022 , the Company acquired the remaining 9.02% of the shares of LEXA in exchange for 159,836 common shares from Rod Maxwell , a director of Cathedral. These shares are also subject to a four-month hold period.
The Company has accounted for this transaction as a business combination. The amounts below are based on management's preliminary estimates of fair value at the time of preparation of these financial statements based on the best available information. Amendments may be made to these amounts as the values subject to estimation are finalized. The Company has allocated the purchase price as:
Cash $70 ; Net working capital $180 ; Deferred tax liability ($109) ; and Intangibles $976 ;
The deferred tax liability was subsequently offset by the benefit of unrecorded tax attributes.
To date, the Company has not expensed any costs related to the Transaction. Prior to the acquisition, Cathedral was the only revenue source for LEXA so there are no revenues or operating profit before depreciation and interest to report.
Altitude Energy Partners, LLC
On July 14 , the Company through its wholly owned U.S. subsidiary, CET Flight Holdco, Inc., closed its acquisition of Altitude Energy Partners, LLC ("Altitude") through payment of cash in the amount $87,245 and the issuance of 67,031,032 common shares in of Cathedral. Additionally, the Company assumed lease liabilities and a deferred tax liability. Total consideration was $131,711 .
Altitude was a privately-held, U.S.-based, directional drilling services business with headquarters in Wyoming , executive leadership based in Houston , and significant operations in Texas , most prominently in the Permian Basin. The Company continues to use the Altitude name and brand in the US. Further, the Altitude management team and its people will lead and operate Cathedral's existing US directional drilling business.
The amounts below are based on management's preliminary estimates of fair value at the time of preparation of these financial statements based on the best available information. Amendments may be made to these amounts as the values subject to estimation are finalized. The Company has allocated the purchase price as:
Working capital $13,568 ; Equipment $45,393 ; Right of use asset $2,354 ; Intangibles $34,433 ; and Goodwill $35,963 .
The intangibles assets consist of customer relationships, non-compete agreements, brand names and an assembled workforce and will be amortized over periods from 1 to 6 years.
As the acquiring entity, Flight, is incorporated in the U.S. and its functional currency is USD, these amounts will be revalued at current rates at each reporting period.
To date, the Company has expensed $1,022 in costs related to the Transaction.
For the period of July 14 to September 30, 2022 , the acquired entity generated revenues of $60,958 and operating income before interest of $5,540 . Revenues for the period of January 1 to July 13, 2022 were $102,954 USD and operating profit for that period was $14,263 USD .
SUBSEQUENT EVENTS
On October 27, 2022 the Company announced its acquisition of the operating assets and personnel of Ensign's Canadian directional drilling business (the "Transaction") in exchange for 7,017,988 common shares of Cathedral. In addition to a 4-month statutory hold period on these shares, the parties have agreed to customary contractual restrictions on resale. Ensign did not own any securities of Cathedral prior to the transaction. Post-closing, Ensign owns approximately 3.15% of Cathedral's issued and outstanding common shares on a non-diluted basis.
As part of the Transaction, Cathedral and Ensign entered into a Marketing and Technology Alliance ("the Marketing Alliance") which will help support and expand the customer base of both companies in the Canadian market.
RESULTS OF OPERATIONS – THREE MONTHS ENDED SEPTEMBER 30
The Company has 2 operating segments based on its geographic operating locations of Canada and U.S. and a non-operating segment, for joint corporate costs ("Corporate services"). The Company determines its reportable segments are based on internal information regularly reviewed by management to allocate resources and assess performance. The Corporate services segment is comprised of costs which are managed on a group basis and are not allocated to the operating segments. The Corporate services segment primarily consists of general and administrative expenses, foreign exchange gains (losses), interest expenses and acquisition and reorganization costs.
| Revenues | | 2022 | | 2021 | | Canada | $ | 36,520 | $ | 16,118 | | United States | | 71,326 | | 4,009 | | Total | $ | 107,846 | $ | 20,127 | | Cost of sales | $ | (83,557) | $ | (18,131) | | Gross margin | $ | 24,289 | $ | 1,996 | | Gross margin % | | 23 % | | 10 % | | Adjusted gross margin (1) | $ | 33,633 | $ | 5,365 | | Adjusted gross margin % (1) | | 31 % | | 27 % | | Income (loss) before income taxes | | | | | | Canada | $ | 6,986 | $ | 2,030 | | United States | $ | 9,765 | $ | (463) | | Corporate services | | (8,006) | | (1,164) | | Total | $ | 8,745 | $ | 403 | | (1) Refer to "NON-GAAP MEASUREMENTS" | | | | | | | | | | |
Revenues and cost of sales 2022 Q3 revenues were $107,846 , which represented an increase of $87,719 or 436% from 2021 Q3 revenues of $20,127 .
Gross margin for 2022 Q3 was 23% compared to 10% in 2021 Q3. Adjusted gross margin (see Non-GAAP Measurements) for 2022 Q3 was $33,633 or 31% compared to $5,365 or 27% for 2021 Q3.
Adjusted gross margin, as a percentage of revenue, increased due to lower field labour and a reduction in fixed costs as percentage of revenue partially offset by increased repairs and third party equipment rental costs.
Depreciation of equipment allocated to cost of sales increased to $9,116 in 2022 Q3 from $3,337 in 2021 Q3 due to the acquisitions in 2021 and 2022. Depreciation included in cost of sales as a percentage of revenue was 8% for 2022 Q3 and 17% in 2021 Q3.
Canadian segment
Canadian revenues increased to $36,520 in 2022 Q3 from $16,118 in 2021 Q3, an increase of $20,402 or 127%. This increase was the result of: i) a 77% increase in activity days to 1,436 in 2022 Q3 from 1,875 in 2021 Q3 and ii) a 28% increase in the average day rate to $11,030 in 2022 Q3 from $8,596 in 2021 Q3.
Based on publicly disclosed Canadian drilling and directional drilling days, Cathedral's market share for 2022 Q3 was 24.3% compared to 17.7% in 2021 Q3. Day rates in 2023 Q3 increased as 2021 Q3 was negatively impacted by lower drilling activity during COVID-19.