ACT Energy Technologies Ltd. press release
Cathedral Energy Services Reports Results for 2020 Q3
TSX - Toronto Stock Exchange · Canada
Canada NewsWire
CALGARY, AB, Nov. 12, 2020
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA /
CALGARY, AB , Nov. 12, 2020 /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, 2020 and 2019. Dollar amounts are in '000's except for WTI, day rates and 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 September 30 | Nine months ended September 30 | | | | | | | | | 2020 | 2019 | 2020 | 2019 | | | | | | Revenues | $ | 4,990 | $ | 31,185 | $ | 33,126 | $ | 100,977 | | Adjusted gross margin % (1) | 20% | 15% | 11% | 10% | | | | | | Adjusted EBITDAS (1) | $ | 84 | $ | 2,236 | $ | 319 | $ | 4,589 | | Basic and diluted per share | $ | - | $ | 0.05 | $ | 0.01 | $ | 0.09 | | As % of revenues | 2% | 7% | 1% | 5% | | | | | | Cash flow - operating activities | $ | 3,544 | $ | 6,003 | $ | 960 | $ | 4,887 | | Loss from operating activities | $ | (4,448) | $ | (3,145) | $ | (13,594) | $ | (11,518) | | Basic per share | $ | (0.09) | $ | (0.06) | $ | (0.27) | $ | (0.23) | | Impairments and direct write-downs | $ | - | $ | - | $ | (6,994) | $ | - | | Loss | $ | (5,014) | $ | (4,153) | $ | (21,419) | $ | (13,119) | | Basic per share | $ | (0.10) | $ | (0.08) | $ | (0.43) | $ | (0.27) | | Equipment additions | $ | (556) | $ | (1,794) | $ | (1,325) | $ | (5,321) | | Weighted average shares outstanding | | | | | | | | | | Basic (000s) | 49,468 | 49,468 | 49,468 | 49,468 | | | | | | Diluted (000s) | 49,468 | 49,468 | 49,468 | 49,505 | | | | | | | | | | | | | | | | | | | September 30 | December 31 | | | | | | | | | 2020 | 2019 | | | | | | Working capital | | | $ | 10,915 | $ | 20,181 | | | | Total assets | | | $ | 71,203 | $ | 106,300 | | | | Loans and borrowings excluding current portion | | | $ | 614 | $ | 6,000 | | | | Shareholders' equity | | | $ | 48,099 | $ | 68,092 | | |
| | | (1) Refer to "NON-GAAP MEASUREMENTS" |
2020 Q3 KEY TAKEAWAYS
Revenues decreased by $26,195 or 84% from $31,185 in 2019 Q3 to $4,990 in 2020 Q3;
Adjusted gross margin increased from 15% to 20% primarily due to COVID-19 related government assistance received;
Adjusted EBITDAS decreased from $2,236 in 2019 Q3 to $84 in 2020 Q3 as a result of reduced activity levels; and
Net cash (cash less bank debt) at end of 2020 Q3 was $204 .
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. The recent resurgence of COVID-19 cases has governmental bodies retracting some of the previously relaxed restrictions that allowed for the reopening of businesses. Until a COVID-19 vaccine is widely distributed, we are expecting fluctuations in the demand for oil which in turn will lead to continued volatility in oil prices.
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 or extend 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
As a result of the COVID-19 pandemic and its effect on world oil demand and resulting volatility in oil prices, the near term for the oilfield service industry is expected to continue to have a challenging outlook. After experiencing the expected trough in U.S. drilling activity in 2020 Q3, industry analysts are expecting drilling activity to improve modestly in 2020 Q4 and as we progress through 2021. Within the Canadian market, in late 2020 Q3, based upon WTI strengthening above USD$40 /bbl, our clients recommenced their drilling activities.
We continue to monitor our costs and are making further adjustments to our cost structure as warranted. In addition, management continues to evaluate and apply for U.S. and Canadian federal, state and provincial government relief programs for which Cathedral qualifies. To the end of 2020 Q3, Cathedral has recorded the benefit of $1,378 from the Canada Emergency Wage Subsidy ("CEWS") and we are pleased to see the Government of Canada has extended the program to June 2021. In 2020 Q3, we determined that 100% of our USD$750 (CAD$992) U.S. Paycheck Protection Program ("PPP") loan will be forgiven and that benefit was recorded within our financial statements in 2020 Q3. Previously, we had estimated that approximately 70% of the loan proceeds ( $525 USD ) may be forgiven, if the U.S. Treasury guidelines for forgiveness were met.
Although capital expenditures have been modest, the Company continues to make investments in additional high performance power sections for its nDurance™ line of drilling motors with the target being rentals and full package applications in the Delaware and Permian basins. In addition, Cathedral has increased the number of mud lubricated bearing sections specifically targeted for use with rotary steerable systems and high temperature applications in both Eagleford and Haynesville areas. The Company continues to operate a limited number of RapidFire™ Measurement-While-Drilling ("MWD") dual telemetry systems on a commercial basis and is planning to increase capacity primarily through cash flow and re-investment of lost-in-hole proceeds. In addition, Cathedral has implemented remote directional drilling and MWD services for an operator in the Viking formations in Canada .
As announced on October 13, 2020 , Cathedral's President, Chief Executive Officer and Interim Chief Financial Officer, P. Scott MacFarlane , has informed the Company that he intends to retire from the Company with a timeline of April 2021. The Governance Committee of the Board has begun the process of identifying potential successors for the roles of CEO and CFO of the Company. Mr. MacFarlane will work with the Board to find a replacement CEO and CFO and facilitate an orderly transition.
2020 CAPITAL PROGRAM
During the nine months ended September 30, 2020 , the Company invested $1,325 (2019 - $5,321 ) in equipment. The following table details the current period's net equipment additions:
| | | | | | Nine months ended | | | | September 30, 2020 | | | Equipment additions: | | | | Motors | $ | 730 | | MWD | 162 | | | Other | 433 | | | Total cash additions | 1,325 | | | Less: proceeds on disposal of equipment | (2,419) | | | Net equipment additions (1) | $ | (1,094) | | | | | | (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 SEPTEMBER 30
| | | | | | | Revenues | 2020 | 2019 | | | | Canada | $ | 1,328 | $ | 8,325 | | United States | 3,662 | 22,860 | | | | Total | $ | 4,990 | $ | 31,185 | | | | | | |
Revenues 2020 Q3 revenues were $4,990 , which represented a decrease of $26,195 or 84% from 2019 Q3 revenues of $31,185 .
Canadian revenues (excluding motor rental revenues) decreased to $848 in 2020 Q3 from $7,603 in 2019 Q3; an 89% decrease. This decrease was the result of: i) a 88% decrease in activity days to 116 in 2020 Q3 from 973 in 2019 Q3 and ii) a 7% decrease in the average day rate to $7,309 in 2020 Q3 from $7,813 in 2019 Q3.
There was a 64% year-over-year decline in the average active land rig count in Canada (source: Baker Hughes) which compares to Cathedral's activity decline of 89%. 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 base rates due to the limited mix of clients in 2020 Q3.
U.S. revenues (excluding motor rental revenues) decreased 85% to $3,301 in 2020 Q3 from $22,312 in 2019 Q3. This decrease was the result of: i) a 79% decrease in activity days to 346 in 2020 Q3 from 1,622 in 2019 Q3; and ii) a 31% decrease in the average day rate to $9,541 in 2020 Q3 from $13,756 in 2019 Q3 (when converted to Canadian dollars).
The average active land rig count for the U.S. was down 73% in 2020 Q3 compared to 2019 Q3 (source: Baker Hughes). The Company experienced an 85% decline in activity days resulting in a decrease in market share compared to 2019 Q3. Day rates in USD decreased 31% to $7,159 USD in 2020 Q3 from $10,422 USD in 2019 Q3. The 2020 Q3 rate is down due to a decrease in revenues from providing rotary steerable system (RSS) services which are rented from a 3rd party, reduction in base rates due to the limited mix of clients in 2020 Q3 and a reduction in certain ancillary revenues.
Motor rentals decreased in both Canada and the U.S. Combined rental revenues decreased to $842 in 2020 Q3 compared to $1,270 in 2019 Q3. The decrease is due to the decrease in drilling activity in 2020 Q3.
Government grants The Company recognized the benefit from the CEWS program of $741 (2019 - $nil) and $992 (2019 - $nil) from PPP which reduced salary expenses as follows:
Cost of sales $1,217 ; Selling, general and administrative expenses $394 ; and Technology group expenses $122 .
Gross margin and adjusted gross margin Gross margin for 2020 Q3 was -50% compared to -1% in 2019 Q3. Adjusted gross margin (see Non-GAAP Measurements) for 2020 Q3 was $1,021 or 20% compared to $4,628 or 15% for 2019 Q3.
Adjusted gross margin, as a percentage of revenue, increased due to the government assistance received and lower equipment rentals offset by increases in repairs and in the fixed component of cost of sales as a percentage of revenue (these costs decreased $3,530 , but the total increased as percentage of revenues).
Depreciation of equipment allocated to cost of sales decreased to $3,520 in 2020 Q3 from $5,000 in 2019 Q3. Depreciation included in cost of sales as a percentage of revenue was 71% for 2020 Q3 and 16% in 2019 Q3.
Selling, general and administrative ("SG&A") expenses SG&A expenses were $2,199 in 2020 Q3; a decrease of $957 compared with $3,156 in 2019 Q3. There were reductions in SG&A wages and related benefits and burdens due to a reduction in head count and wage rollbacks and the government assistance received as well as decreases in almost all categories of expenses due to efforts to reduce spending. These savings were offset by an increase in the provision for trade receivables that are slow paying of $749 (2019 Q3 - recovery of $19 ). As a percentage of revenue, SG&A was 31% in 2020 Q3 compared to 10% in 2019 Q3.
Technology group expenses Technology group expenditures are related to supporting and upgrading existing technology as well as new product development. 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 $77 in 2020 Q3; a decrease of $371 compared with $448 in 2019 Q3. The portion of total technology group costs related to new product development in 2019 Q3 was $295 and this amount was capitalized as intangible assets (2020 Q3 - $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 equipment During 2020 Q3, the Company had a gain on disposal of equipment of $344 compared to $859 in 2019 Q3. 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 Q3, the Company received proceeds on disposal of equipment of $633 (2019 Q3 - $1,009 ).
Finance costs Finance costs consist of interest expenses on operating loans, long-term debt and bank charges of $113 for 2020 Q3 versus $139 for 2019 Q3.
Finance costs lease liability The lease liability interest decreased slightly to $223 from $249 .
Foreign exchange The Company had a foreign exchange gain of $614 in 2020 Q3 compared to a loss of $(279) in 2019 Q3 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 Q3 foreign currency loss are unrealized gain of $611 (2019 Q3 - loss of $250 ) related to intercompany balances.
Income tax In 2019 Q3, Cathedral derecognized $13,059 of 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 Canada and 23% for the U.S.
RESULTS OF OPERATIONS – NINE MONTHS ENDED SEPTEMBER 30
| | | | | | | Revenues | 2020 | 2019 | | | | Canada | $ | 9,794 | $ | 19,340 | | United States | 23,332 | 81,637 | | | | Total | $ | 33,126 | $ | 100,977 | | | | | | |
Revenues 2020 revenues were $33,126 , which represented a decrease of $67,852 or 67% from 2019 revenues of $100,977 .
Canadian revenues (excluding motor rental revenues) decreased to $7,363 in 2020 from $16,960 in 2019; a 57% decrease. This decrease was the result of: i) a 55% decrease in activity days to 1,005 in 2020 from 2,222 in 2019 and ii) a 4% decrease in the average day rate to $7,327 in 2020 from $7,633 in 2019.
There was a 32% year-over-year decline in the average active land rig count in Canada (source: Baker Hughes) which compares to Cathedral's activity decline of 55%. 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 72% to $22,461 in 2020 from $80,282 in 2019. This decrease was the result of: i) a 69% decrease in activity days to 1,838 in 2020 from 5,904 in 2019; and ii) a 10% decrease in the average day rate to $12,221 in 2020 from $13,598 in 2019 (when converted to Canadian dollars).
The average active land rig count for the U.S. was down 51% in 2020 compared to 2019 (source: Baker Hughes). The Company experienced a 69% decline in activity days resulting in a decrease in market share compared to 2019. Day rates in USD decreased 12% to $9,008 USD in 2020 from $10,225 USD in 2019. The 2020 rate is down due to a decrease in revenues from providing rotary steerable system (RSS) services which are rented from a 3rd party, a reduction in certain ancillary revenues and change in client mix.
Motor rentals increased slightly in Canada but decreased in the U.S. Combined rental revenues decreased to $3,301 in 2020 compared to $3,735 in 2019. The combined decrease was due to lower industry activity.
Government grants The Company recognized the benefit from the CEWS program of $1,378 (2019 - $nil) and $992 (2019 - $nil) from PPP which reduced salary expenses as follows:
Cost of sales $1,478 ; Selling, general and administrative expenses $659 ; and Technology group expenses $233 .
Gross margin and adjusted gross margin Gross margin for 2020 was -24% compared to -4% in 2019. Adjusted gross margin (see Non-GAAP Measurements) for 2020 was $3,670 or 11% compared to $10,473 or 10% 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 $8,236 , but the total increased as percentage of revenues).
Depreciation of equipment allocated to cost of sales decreased to $11,436 in 2020 from $14,421 in 2019. Depreciation included in cost of sales as a percentage of revenue was 35% for 2020 and 14% in 2019.
Selling, general and administrative ("SG&A") expenses SG&A expenses were $6,823 in 2020; a decrease of $3,375 compared with $10,198 in 2019. There were reductions in SG&A wages and related benefits and burdens due to a reduction in head count and wage rollbacks and the government assistance received as well as decreases in almost all categories of expenses due to efforts to reduce spending. These savings were partially offset by an increase in the provision for trade receivables that are slow paying of $794 (2019 - recovery of $110 ). As a percentage of revenue, SG&A was 19% in 2020 compared to 10% in 2019.
Technology group expenses Technology group expenditures are related to supporting and upgrading existing technology as well as new product development. 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 $812 in 2020; a decrease of $871 compared with $1,683 in 2019. The portion of total technology group costs related to new product development in 2020 was $195 and this amount has been capitalized as intangible assets (2019 - $794 ). 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 equipment During 2020, the Company had a gain on disposal of equipment of $1,863 compared to $4,409 in 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 $2,419 (2019 - $5,890 ).