ACT Energy Technologies Ltd. press release
Cathedral Energy Services reports results for the three and nine months ended September 30, 2007
TSX - Toronto Stock Exchange · Canada
/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, Nov. 12 /CNW/ - Cathedral Energy Services Income Trust (TSX: CET.UN) is pleased to report its results for the three and nine months ended September 30, 2007.
FINANCIAL HIGHLIGHTS $ in 000's except per Trust Unit amounts Three months ended Nine months ended September 30 September 30 2007 2006 2007 2006 Revenues $ 38,355 $ 38,041 $ 106,052 $ 102,927 EBITDA(1) $ 13,775 $ 16,010 $ 33,024 $ 39,747 Per Trust Unit - diluted $ 0.43 $ 0.51 $ 1.04 $ 1.26 Income before taxes $ 10,073 $ 12,671 $ 22,218 $ 30,106 Net Income $ 7,126 $ 11,396 $ 14,498 $ 27,221 Per Trust Unit - basic $ 0.23 $ 0.37 $ 0.46 $ 0.89 Per Trust Unit - diluted $ 0.22 $ 0.36 $ 0.46 $ 0.86 Cash distributions declared per Trust Unit $ 0.21 $ 0.20 $ 0.63 $ 0.545 Distributable Cash(2) $ 10,747 $ 14,211 $ 26,950 $ 34,683 Cash distributions declared $ 6,626 $ 6,150 $ 19,756 $ 16,655 Payout ratio(3) 62% 43% 73% 48% Property and equipment additions and corporate acquisitions: Paid or payable in cash $ 4,364 $ 6,950 $ 14,652 $ 21,988 Paid or payable in Trust Units - - - 1,500 $ 4,364 $ 6,950 $ 14,652 $ 23,488 Weighted average Trust Units outstanding: Basic ('000) 31,515 30,730 31,318 30,493 Diluted ('000) 31,734 31,478 31,735 31,580
September December 30, 2007 31, 2006 Working capital $ 14,941 $ 15,051 Long-term debt and capital lease obligations excluding current portion $ 17,471 $ 15,552 Unitholders' equity $ 75,012 $ 76,223
(1) EBITDA is defined as earnings before interest on long-term debt and capital lease obligations, taxes, non-cash compensation expense and depreciation and amortization and is provided to assist investors in determining the ability of the Trust to generate cash from operations. EBITDA does not have any standardized meaning within Canadian Generally Accepted Accounting Principles and therefore may not be comparable to similar measures presented by other companies and/or trusts.
(2) Distributable Cash is defined as cash flow from operating activities before changes in non-cash working capital less required principal repayments on long-term debt and capital lease obligations and Maintenance Capital Expenditures. Distributable Cash does not have any standardized meaning within Canadian Generally Accepted Accounting Policies ("GAAP") and therefore may not be comparable to similar measures presented by other trusts. Distributable Cash is a main performance measurement used by management, analysts and investors to evaluate the performance of the Trust.
(3) Cash distributions declared as a percentage of Distributable Cash.
MANAGEMENT'S DISCUSSION & ANALYSIS
This Management's Discussion & Analysis ("MD&A") for the three and nine months ended September 30, 2007 should be read in conjunction with the annual audited consolidated financial statements and notes thereto for the year ended December 31, 2006, as well as the MD&A in the Trust's 2006 Annual Report, and with the unaudited interim consolidated financial statements and notes thereto for the three months and nine months ended September 30, 2007. This MD&A has been prepared as of November 12, 2007. Dollar amounts are in '000's except for day rates and per Trust Unit amounts.
FORWARD-LOOKING INFORMATION
Certain statements in this MD&A including (i) statements that may contain words such as "anticipate", "could", "expect", "seek", "may" "intend", "will", "believe", "should", "project", "forecast", "plan" and similar expressions, including the negatives thereof, (ii) statements that are based on current expectations and estimates about the markets in which the Trust/Cathedral operates and (iii) statements of belief, intentions and expectations about developments, results and events that will or may occur in the future, constitute "forward-looking statements" and are based on certain assumptions and analysis made by the Trust/Cathedral. Forward-looking statements in this MD&A include, but are not limited to, statements with respect to future capital expenditures, including the amount, nature and timing thereof; oil and natural gas prices and demand; other development trends within the oil and natural gas industry; business strategy; expansion and growth of the Trust's/Cathedral's business and operations and other such matters. Such forward-looking statements are subject to important risks and uncertainties, which are difficult to predict and that may affect the Trust's/Cathedral's operations, including, but are not limited to: the impact of general economic conditions; industry conditions; government and regulatory developments; oil and natural gas product supply and demand; competition; and the Trust's/Cathedral's ability to attract and retain qualified personnel. The Trust's/Cathedral's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do transpire or occur, what benefits the Trust/Cathedral will derive therefrom. Subject to applicable law, the Trust disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
All forward-looking statements contained in this document are expressly qualified by this cautionary statement. Further information about the factors affecting forward-looking statements is available in the Trust's current Annual Information Form and Annual Report which have been filed with Canadian provincial securities commissions and are available on www.sedar.com.
NON-GAAP FINANCIAL MEASUREMENTS
This MD&A refers to certain financial measurements that do not have any standardized meaning within Canadian Generally Accepted Accounting Principles ("GAAP") and therefore may not be comparable to similar measures provided by other companies and/or trusts. These measures are provided to assist investors in determining the Trust's performance including its ability to generate cash from operations and to provide additional information regarding the use of its cash resources. The specific measures being referred to include the following i) "EBITDA" - defined as earnings before interest on long-term debt and capital lease obligations, taxes, non-cash compensation expense and depreciation and amortization; ii) "Distributable Cash" - defined as cash flow from operating activities before changes in non-cash working capital less required principal repayments on long-term debt and capital lease obligations and Maintenance Capital Expenditures; iii) "Gross Margin" - calculated as revenues less operating expenses; iv) "Maintenance Capital Expenditures" - refers to capital expenditures required to maintain existing levels of service but excludes replacement cost of lost-in-hole equipment to the extent the replacement equipment is financed from the proceeds on disposal of the equipment lost-in-hole; v) "Payout Ratio" - calculated as cash distributions declared divided by distributable cash and vi) "Funds From Operations" - calculated as cash flow from operating activities before changes in non-cash working capital.
OVERVIEW
Despite a significant decline in drilling activity in western Canada, the Trust was able to increase revenues on a Q3 year-to-date basis from $102,927 in 2006 to $106,052 in 2007 - 3.0% increase. The major items contributing to these results have been the strong performance of the U.S. operations, exposure to drilling for oil, particularly in southeastern Saskatchewan, and the provision of specialty directional drilling services that has resulted in an increase in the average day rate obtained for such services. For Q3, revenues increased $314 or 0.8% from $38,041 in 2006 to $38,355 in 2007. EBITDA for the nine months ended September 30, 2007 was $33,024 which compares to $39,747 in 2006 - 16.9% decrease. The Trust's net income for the nine months ended September 30, 2007 was $14,498 ($0.46 per diluted Trust Unit) which compares to $27,221 ($0.86 per diluted Trust Unit) in 2006. The 2007 year-to-date tax provision includes a non-cash $3,560 ($0.11 per diluted Trust Unit) provision for future income taxes related to the tax legislation included in Bill C-52, the Budget Implementation Act, 2007 (the "Bill"), that was substantively enacted in 2007 Q2 which results in the taxation of existing income and royalty trusts, other than real estate investment trusts, at effective rates similar to Canadian corporations.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
Revenues
In 2007 Q3, revenues increased over Q2 as operations resumed following spring breakup but remained impacted by lower Canadian drilling activity as a result of concerns related to natural gas commodity prices. Continued strength in the directional drilling portion of the Trust's operations resulted in an increase in consolidated revenues from 2006 Q3 of $38,041 to $38,355 in 2007 Q3.
The directional drilling portion of the Trust's operations contributed revenues of $28,485 in 2007 Q3 which compares to $25,674 in Q3 2006 - an increase of 10.9%. Activity increased 8.7% from 3,024 days to 3,287 days, and the average day rate received for providing directional drilling services increased 2.1% to $8,667 (2006 - $8,492). The largest portion of the increase in the average day rate is related to a shift towards providing premium services such as underbalanced and Steam-Assisted Gravity Drainage ("SAGD") drilling services as opposed to an increase in the overall base day rate. In the Canadian market the Trust's 2007 Q3 activity levels decreased by 7.9% which was significantly less than the overall decline in drilling activity in the Canadian market. Despite the decline in natural gas drilling in western Canada, the Trust was able to minimize the market decline from prior year activity levels due to the continuing strength of the Trust's client base and involvement in multi-well programs. The Rocky Mountain region of the United States is the Trust's main area of operations in the U.S. and it remains a very active area. The Trust's U.S. operations have now been expanded to provide directional drilling services in North Dakota and Michigan. The Trust's revenues from the U.S. were $10,359 in 2007 Q3, a $3,590 (53.0%) increase from 2006 revenues of $6,769. Due to demand in the U.S. market, 5 Measurement-While-Drilling ("MWD") systems were transferred to the U.S. at the end of 2007 Q1 and the Trust now has 23 MWD systems in the U.S. market. The Trust's geographic diversification, by way of providing directional drilling services in southeast Saskatchewan and U.S., has been a significant factor in its ability to organically grow its revenues within the directional drilling division.
The continued decline in natural gas drilling expenditures in the western Canada market resulted in lower revenues for both of the Trust's production testing and wireline divisions. The Trust's production testing division, Tier One, contributed $2,875 in revenues during 2007 Q3 which is a 35.5% decline from 2006 Q3 revenues. Advance Wireline and Xtreme Wireline combined to generate revenues of $6,404 for 2007 Q3 compared to $7,067 for 2006 Q3, a 9.4% decrease. Late in 2007 Q2, one wireline unit was transferred from the Canadian operations to the newly formed U.S. division of Advance Wireline but revenue generating operations did not commence until 2007 Q3. A second wireline unit was transferred to the US in 2007 Q3.
Gross Margin
The Gross Margin for 2007 Q3 was 51.5% which compares to 55.2% in 2006 Q3. The decrease is attributed to a number of factors including: i) shift to providing more horizontal drilling services (versus directional) which provide a lower Gross Margin than from directional drilling; ii) increases in directional field labour rates; iii) increase in wireline field labour costs as a percentage of revenues due to the fixed nature of a portion of these labour charges; and iv) offsetting the previous items was an increase in the average day rate for directional drilling services.
General and administrative expenses
General and administrative expenses increased from $5,607 in 2006 Q3 to $6,533 in 2007 Q3 - an increase of $926 (16.5%). The increase was primarily related to increased personnel, office/shop rental costs, increased directional drilling activity in the U.S., costs related to the set-up of the U.S. wireline division and approximately $300 of professional fees incurred in 2007 Q3 related to an aborted corporate acquisition. As a percentage of revenues, general and administrative expenses were 17.0% in 2007 Q3 and 14.7% in 2006.
Depreciation and amortization
Depreciation for 2007 Q3 was $3,110 which compares to $2,849 in 2006 Q3. This increase is related to expansion of the Trust's depreciable asset base over the past 12 months. As a percentage of revenues, depreciation amounted to 8.1% for 2007 and 7.5% for 2006.
Interest expense
Interest expense related to long-term debt and capital leases increased from $236 in 2006 Q3 to $269 in Q3 2007 due to the combined effect of: i) an increase in the average level of debt outstanding; and ii) a marginal increase in the effective interest rate on the related debt. Other interest expense has decreased on a quarter-over-quarter basis due to decreased utilization of the Trust's operating line of credit.
Foreign exchange
The Trust's foreign exchange gain/loss increased from a gain of $1 in 2006 Q3 to a $302 loss in 2007 Q3. The increased foreign exchange loss is due to: i) the U.S. dollar weakening against the Canadian dollar to a larger extent in 2007 Q3 versus 2006 Q3; and ii) an overall increase in the Trust's U.S. operations which has resulted in an increase in the Trust's net monetary assets that are denominated in U.S. dollars.
Non-cash compensation expense
For 2007 Q3 the Trust had non-cash compensation expense of $323 which compares to $254 for the comparable quarter in 2006. The value of Trust Unit options is being amortized against income over their three-year vesting period.
Gain on disposal of property and equipment
During 2007 Q3 the Trust had a gain on disposal of property and equipment of $973, which compares to $760 in 2006 Q3. These gains are mainly due to recoveries of lost-in-hole equipment costs including previously expensed depreciation on the related assets. The timing of lost-in-hole recoveries is not in the control of the Trust and therefore can fluctuate significantly from quarter-to-quarter.
Taxes
For 2007, the Trust had a tax expense of $2,947 (effective tax rate of 29.3%) which compares to $1,275 (effective tax rate of 10.1%) in 2006. The 2007 Q3 tax provision includes a $316 adjustment to the 2007 Q2 tax adjustment related to the substantive enactment of the previously announced changes to the taxation of income and royalty trusts, other than real estate investment trusts. Removing the 2007 Q3 adjustment noted above the effective tax rate for 2007 Q3 is 26.1%. The adjusted effective tax rate has increased from 10.1% in 2006 to 26.1% in 2007 due to the continuing growth in the U.S. operations which are taxed at a higher rate.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
Revenues
2007 Q3 year-to-date revenues were $106,052 which represented an increase of $3,125 or 3.0% over 2006 Q3 year-to-date revenues of $102,927. Ongoing activity reductions in the Canadian markets were offset by continued growth and expansion in the U.S. operations. The U.S. Q3 year-to-date revenues increased from $22,131 in 2006 to $30,722 in 2007, a 38.8% increase.
The directional drilling division revenues have increased from $69,621 in 2006 to $78,872 in 2007. This increase is the result of: i) a 5.7% increase in activity days from 8,334 in 2006 to 8,804 in 2007; and ii) a 7.2% increase in the average day rate from $8,354 in 2006 to $8,959 in 2007. The decrease in Canadian activity days from 5,686 to 5,267 was more than offset by the growth in U.S. activity days from 2,648 to 3,537.
The continued decline in natural gas drilling expenditures in the western Canada market resulted in lower revenues for both of the Trust's production testing and wireline divisions. The Trust's production testing division, Tier One, contributed $8,681 in revenues during 2007 Q3 year-to-date which is a 26.7% decline from 2006 revenues of $11,838. Advance Wireline and Xtreme Wireline combined to generate revenues of $16,549 for 2007 Q3 year-to-date which compares to $19,486 for 2006 which represents a 15.1% decline.
Gross Margin
The Gross Margin for 2007 was 49.3%, which compares to 53.3% in 2006. The decrease is attributed to a number of factors including: i) shift to providing more horizontal drilling services (versus directional) which provide a lower Gross Margin than from directional drilling; ii) increases in directional field labour rates; iii) increase in wireline field labour costs as a percentage of revenues due to the nature of a portion of these labour charges; and iv) offsetting the previous items was an increase in the average day rate for directional drilling services.
General and administrative expenses
General and administrative expenses increased from $16,180 in 2006 to $19,547 in 2007 - an increase of $3,367. The increase was mainly related to the Trust's directional/horizontal drilling business and the contributing factors to that increase were the result of increased personnel and office/shop rental costs as well as an overall increase in directional drilling activity level in the Rocky Mountain region of the U.S. Other items contributing to the overall increase were costs related to the set-up of the U.S. wireline division in 2007 and approximately $300 of professional fees incurred in 2007 Q3 related to an aborted corporate acquisition. As a percentage of revenues, general and administrative expenses were 18.4% in 2007 and 15.7% in 2006.
Depreciation and amortization
Depreciation and amortization for 2007 was $8,809 compared to $7,755 in 2006. The $1,054 increase is related to the Trust's investment in property and equipment over the past 12 months. As a percentage of revenues, depreciation and amortization amounted to 8.3% for 2007 and 7.5% for 2006.
Interest expense
Interest on long-term debt has increased from $672 in 2006 to $792 in 2007. The major factor contributing to this increase is an increase in the average level of debt outstanding. Other interest expense has decreased mainly due to a decline in the utilization of the Trust's operating line of credit.
Foreign exchange
The Trust's foreign exchange loss has increased from $57 in 2006 to $586 in 2007. The increased foreign exchange loss is due to: i) the U.S. dollar weakening against the Canadian dollar to a larger extent in 2007 Q3 year-to-date versus 2006 Q3 year-to-date; and ii) an overall increase in the Trust's U.S. operations which has resulted in an increase in the Trust's net monetary assets that are denominated in U.S. dollars.
Non-cash compensation expense
Non-cash compensation expense for 2007 was $1,205 which compares to $1,214 in 2006. The Trust Unit options granted are valued using the Black-Scholes option pricing model and such value is being amortized against income over their three-year vesting period.
Gain on disposal of property and equipment
For the nine months ended September 30, 2007 the Trust had a gain on disposal of property and equipment of $1,157 which compares to $1,470 in 2006. These gains are mainly due to recoveries of lost-in-hole equipment costs, including previously expensed depreciation on the related assets. The timing of lost-in-hole recoveries is not in the control of the Trust and therefore can fluctuate significantly from quarter-to-quarter and year-to-year basis.
Taxes
For 2007, the Trust had a tax expense of $7,720 (effective tax rate of 34.8%) which compares to $2,885 (effective tax rate of 9.6%) in 2006. The 2007 tax provision includes a cumulative non-cash adjustment of $3,560 ($0.11 per diluted Trust Unit) related to the substantive enactment of the previously announced changes to the taxation of income and royalty trusts, other than real estate investment trusts. Removing the 2007 adjustment noted above the effective tax rate for 2007 Q3 year-to-date is 18.7%. Included in the 2006 Q3 year-to-date provision is a reduction in the overall tax provision of $517 related to enacted income tax rate decreases. If this income tax rate adjustment is eliminated the effective tax rate for 2006 Q3 year-to-date is 11.3%. The adjusted effective tax rate has increased from 11.3% in 2006 to 18.7% in 2007 due to the continuing growth in the U.S. operations which are taxed at a higher rate.